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This paper was prepared for the Conference on Fiscal Policy and Macroeconomic Performance organized by the Central Bank of Chile on October 21-22, 2010. We gratefully acknowledge useful comments by Lennart Erickson, Enrique Flores, Javier García-Cicco, Mark Horton, Nicolás Magud, Paolo Mauro, Hunter Monroe, and Teresa Ter-Minassian. Mauricio Villafuerte and Pablo Lopez-Murphy are staff members of the Fiscal Affairs Department. Rolando Ossowski is a former staff member of the International Monetary Fund. The views expressed herein are those of the authors and should not be attributed to the IMF, its Executive Board, or its management.
Appendix I provides a detailed description of the workings of the fiscal rules and funds implemented in the sample countries.
The price of oil used in this paper is the IMF World Economic Outlook (WEO) basket of oil prices, which is a simple average of the prices for Brent, Dubai, and West Texas Intermediate grades.
The coverage of the fiscal accounts refers to the nonfinancial public sector (NFPS) (i.e., including national resource companies) for Bolivia, Ecuador, Mexico, and Venezuela; the general government for Chile; and the central government for Peru (national definition that includes regional governments, which are the beneficiaries of the canon minero) and Trinidad and Tobago. Part of the operating expenditure of Venezuela’s national oil company (PDVSA) has been imputed as nonresource spending to capture the company’s extensive quasi-fiscal spending.
Throughout this paper, the term “oil” is used as a substitute for the more encompassing terms “hydrocarbon” or “petroleum”; gas is the more important resource in Bolivia and Trinidad and Tobago.
Some OECs record oil revenue net of implicit or explicit domestic fuel subsidies. Resource revenue dependency ratios would be higher if “gross” oil revenue figures were used (together with higher nonoil spending in the form of fuel subsidies).
Argentina, Brazil, Colombia, Costa Rica, Dominican Republic, Guatemala, Nicaragua, Panama, Paraguay, and Uruguay.
In some countries, the increases in resource revenues during the recent boom were also due to changes in fiscal regimes aimed at increasing government take (e.g., Chile and Venezuela) and nationalizations (e.g., Bolivia, Ecuador, and Venezuela).
Mexico was an exception because of the strong recovery that followed the Tequila crisis in the mid 1990s.
For instance, a lower nonresource deficit in nominal terms might come hand in hand with a higher nonresource deficit-to-GDP ratio if, as a result of a decline in international resource prices, nominal GDP falls proportionally more than the nonresource deficit. Barnett and Ossowski (2003) provide examples.
In a major recent study of crude oil prices, Hamilton (2008) finds that the statistical evidence is consistent with the view that the price of oil in real terms seems to follow a random walk without drift. He notes that to predict the price of oil one quarter, one year, or one decade ahead it would not be at all naïve to offer as forecast the current price—though he emphasizes the enormous uncertainty surrounding such forecasts.
This approach is therefore closer to Di Bella (2009), who also relied on the change in the NRPB to assess the fiscal stance in the short run but scaled it in percent of total GDP instead of NRGDP. As discussed above, this can lead to spurious estimated effects as changes in the ratio could be mainly driven by changes in the denominator resulting from changes in resource prices.
We use the standard smoothing parameter for annual time series λ = 100.
An alternative method would be to use the production function approach (Giorno and others, 1995). However, estimates of the cycle based on this method require the availability of reliable data on the use of labor and capital stocks for the nonresource sector. As regards the decomposition of a series into a trend and a cyclical component, the methodologies include: the Beveridge-Nelson approach, the unobservable component approach, the Baxter-King filter, and the Hodrick-Prescott filter. Each of them entails some advantages and drawbacks. We chose the Hodrick-Prescott filter because it is simple, transparent, and continues to be the most commonly used filter in empirical studies and policy analysis.
We assume that εr = 1 and εg = 0 for all countries. The approach assumes that no major tax policy changes took place. Most studies in developing countries assume that εg = 0 mainly because of the absence of extended unemployment insurance schemes. We assume that εr = 1 following Vladkova-Hollar and Zettelmeyer (2008) who estimate nonresource income elasticities controlling for changes in tax structure and find that they are close to unity in most cases.
We follow Fedelino, Ivanova, and Horton (2009) in linking the change in canrpb (i.e., the fiscal impulse) to changes in the NROG to assess the cyclicality of the fiscal response. In contrast, Alberola and Montero (2006) study the link between fiscal impulses and the level of the output gap. We find the former approach more appealing, in part because the estimation of the direction of changes in output gaps is arguably more reliable than the estimation of the specific level of the output gap.
In this paper, we follow the literature on the cyclical behavior of fiscal policy, which implicitly assumes that output shocks drive fiscal policy. However, some authors (e.g., Rigobon, 2004) claim that fiscal policy shocks drive output and not the other way around, suggesting that the conventional wisdom of procyclical fiscal policy in developing countries might not be well founded. These reverse causality considerations might be particularly relevant in some NRECs where nonresource economic activity is dominated by government spending. However, Ilzetzki and Vegh (2008) rely on a battery of econometric tests to show that causality goes in both directions. In addition, they show that the evidence of procyclical fiscal policy in developing countries is robust to endogeneity considerations.
We computed the cumulative change in the NROG and the cumulative fiscal impulse during 2003-08.
The sample of countries comprises Algeria, Angola, Azerbaijan, Cameroon, Congo, Gabon, Indonesia, Iran, Kazakhstan, Libya, Russia, Sudan, and Timor Leste.
The average size of the resource sector in LAC NRECs is 16 percent of GDP compared to 43 percent in the comparator group. The average resource revenue-to-GDP ratio is 8 percent of GDP in LAC NRECs compared to 19 percent in the comparator group.
This asymmetry of fiscal policy has been documented for a large sample of developing and advanced countries by Balassone and Kumar (2007). It could suggest that political economy factors that result in strong spending pressures in good times might have played a more important role than financing constraints in explaining the cyclical behavior of fiscal policy.
This exercise may have become more relevant in the wake of the recent global financial crisis and the tightening of financing conditions, as it assumes that the estimated fiscal deficits and gross financing requirements must be financed out of the government’s financial assets and, by association, out of public sector external assets. This assumption, however, might be considered extreme for some countries with relatively developed domestic financial markets.
Dependence on resource revenues in the sample countries increased on average from 20 percent of total fiscal revenue in 2003 to 26 percent in 2009.
Projected 2010 fiscal figures were used in this exercise and in the next section to avoid making analytical assessments of fiscal vulnerability and long-term fiscal sustainability based on the unsettled conditions prevailing in 2009.
Admittedly, an automatic reduction in shared resource revenue would just transfer the fiscal adjustment to other levels of government (e.g., Bolivia, Venezuela). However, the extent to which this is effective depends on the ability of the government to resist pressures for offsetting transfers and the ability of other beneficiary public entities to adjust to lower transfers.
In some countries, government deposits are the main counterpart of international reserves on the balance sheet of central banks.
In Chile and Trinidad and Tobago savings in their resource funds are separate from the stock of international reserves held by the central bank.
An extension, particularly relevant for the countries with fixed exchange rates regimes, is to measure the implied coverage of public external assets (i.e., central banks’ net international reserves plus resource funds) in terms of months of imports of goods and services. In Ecuador, this external vulnerability indicator would fall to below two months of imports.
See IMF, Regional Economic Outlooks, various issues, and Fernandez-Arias and Montiel (2009) for a more thorough discussion.
See for example Fernández-Arias and Montiel (2009) for a recent application to Latin American countries. Reinhart, Rogoff, and Savastano (2003) provide a discussion of debt “tolerance” in Latin America.
The ratio of proven reserves to production at the end of 2009 was less than 15 years for Mexico and Trinidad and Tobago, less than 40 years for Chile, Ecuador and Peru, and more than 50 years for Bolivia and Venezuela.
Similar judgments about intertemporal welfare choices are made in the debt sustainability analysis (DSA) for other countries but are usually not made explicit. For example, the stabilization of the public debt in percent of GDP has major implications for the intertemporal allocation of taxes and public spending. See Barnett and Ossowski (2003) for a formal derivation, Maliszewski (2009) and van der Ploeg (2008) for comparative assessments, and Carcillo, Leigh, and Villafuerte (2007) for a specific application.
Reserves, production profiles, and government takes can also change substantially over time with price changes, as documented by the literature on the so-called “expropriation cycles” (see for example Hogan and Sturzenegger, 2010).
This sustainability analysis has a “static” dimension in that it focuses on the fiscal position in one specific year at a time based on the information then available. A “sustainability gap” can be closed in subsequent years in various ways, including through higher nonresource revenue, reductions in spending, or changes in the fiscal regime of the resource sector. These factors can only be captured explicitly in a dynamic setting.
As indicated earlier, domestic fuel subsidies, despite being sizable in several countries, were not included in the NRPB due to the difficulty of obtaining reliable estimates over time in several countries and different fiscal accounting treatment across countries.
Under the perpetuity approach all countries were running unsustainable fiscal policies in 2010.
This analysis assumes that domestic fuel subsidies are eliminated at some point in the future. Otherwise, the fiscal adjustment needed would be larger, and in some cases substantially so. For instance, in Ecuador these subsidies are estimated to have amounted to more than 8 percent of NRGDP in 2008.
Fiscal rules are defined here as standing commitments to specified numerical targets for some key budget aggregates. Unlike fiscal rules, fiscal guidelines are not legally binding. This is the case in Chile. In what follows, however, for simplicity reference will be made to Chile’s “fiscal rule”.
Most nonrenewable resource stabilization funds around the world have rigid price- or revenue-contingent deposit and withdrawal rules, whereby deposits and withdrawals depend on the realization of an outcome (resource price or revenue) relative to a specified trigger. In contrast, most savings funds have rigid non-contingent deposit rules which typically require the annual deposit of a fixed share of revenues into the fund. Finally, some financing funds have flexible operational mechanisms more closely aligned with overall balances.
For a general review of international experience with fiscal rules and NRFs in NRECs and econometric analysis of their effectiveness, see Ossowski and others (2008). Bacon and Tordo (2006) provide a detailed operational review of many oil funds. Arezki and Ismail (2010) evaluated econometrically some aspects of the effectiveness of fiscal rules in OECs, and Shabsigh and Ilahi (2007) of oil funds.
An analysis of the link between the presence of fiscal rules and/or NRFs in OECs around the world and the degree of fiscal policy procyclicality during the recent oil price cycle based on Villafuerte and López-Murphy (2010) does not show statistically significant differences in the fiscal policy responses of countries with such mechanisms and countries without them.
In 2009-10, the return on accrued financial assets were also adjusted in line with the long-term interest rate.
The operation of an oil export revenue hedge mechanism (a put option) protected government finances against downside price risks.