Summary of WP/94/137: “Fiscal Policy Sustainability in Oil-Producing Countries”

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

Abstract

Authors of Working Papers are normally staff members of the Fund or consultants, although on occasion outside authors may collaborate with a staff member in writing a paper. The views expressed in the Working Papers or their summaries are, however, those of the authors and should not necessarily be interpreted as representing the views of the Fund. Copies of individual Working Papers and information on subscriptions to the annual series of Working Papers may be obtained from IMF Publication Services, International Monetary Fund, 700 19th Street, Washington, D.C. 20431. Telephone: (202) 623-7430 Telefax: (202) 623-7201 This compilation of summaries of Working Papers released during July-December 1994 is being issued as a part of the Working Paper series. It is designed to provide the reader with an overview of the research work performed by the staff during the period.

The need for meaningful, yet easily calculable, indicators of fiscal sustainability has long been recognized. Conventionally defined measures of the government deficit and public debt may misstate both government solvency and the sustainability of a given fiscal policy because they focus on only a portion of government assets and liabilities and have a narrow time perspective--generally a single budget year. A number of economists have called for a forward-looking balance sheet approach to analyzing fiscal sustainability that would focus on maintaining a desired level of government net worth over the long term. In this view, net worth would encompass the whole range of government assets and liabilities, including, for example, the expected stream of income from the exploitation of exhaustible natural resources.

This paper proposes that such an approach is particularly useful for assessing the sustainability of fiscal policies in countries in which a significant share of government revenue is derived from petroleum exploitation. Political and growth pressures often push governments in these countries into a cycle of “stop-go” fiscal policies, dictated by the swings in international petroleum prices. Taking a long view is especially important to help these countries avoid this policy pitfall.

The paper argues that for countries in which a significant proportion of government revenue is derived from the exploitation of an exhaustible natural resource, fiscal policy sustainability can best be assessed within a permanent income framework that takes into account total government wealth, including the imputed wealth from reserves of natural resources. Using this framework, the paper takes a sample of six countries in which government revenue from petroleum extraction is significant and draws conclusions about the sustainability of their fiscal policies during 1980-92.

Working Paper Summaries (WP/94/77 - WP/94/147)
Author: International Monetary Fund