Alcoa website as of February 22, 2005:www.alcoa.com/suriname/en/news/news_release/mining.asp
Davis, Jeffrey; Ossowski, Rolando; Daniel, James, and Barnett, Steven, 2001, “Stabilization and Savings Funds for Nonrenewable Resources. Experience and Fiscal Policy Implications,” IMF Occasional Paper 205.
Martin, Dougal, 2001,“Macroeconomic Developments During the 1990s” in:, van Dijck, Pitou (Ed.), “Suriname. The Economy. Prospects for Sustainable Development”, Kingston.
Prepared by Tobias Roy.
For an analysis of the monetary impact of volatile aluminum prices, see the chapter on Monetary and Exchange Rate Policy.
For a description of commodity-price induced macroeconomic cycles in the 1990s, see Martin (2001). According to Martin, an alumina price boom typically led to an increase in direct tax revenue and a second-round increase in indirect taxes as imports rose. Inflation remained low as the exchange rate faced appreciation pressures. During an alumina price bust, falling revenue from direct and international trade taxes widened the fiscal deficit, triggering a round of monetary fiscal financing, devaluation and inflation, which would then depreciate the real exchange rate and deflate real wages.
The real effective exchange rate impact of preponderant mining exports—commonly referred to as “Dutch disease”—leads to elevated relative prices of nontradables compared to tradables. The resulting structural bias favors nontradable services and a large public sector.
Information provided on the website of Alcoa.
See the chapter on the gold mining sector.
In principle, there is a tradeoff in achieving both goals. Revenue stabilization typically chooses a long-term benchmark world price for mining output, and complete revenue stabilization may end up depleting the fund in case of a durable downward shift in world market prices. The nonstationary behavior of prices for mining output, resulting in sudden, but pervasive regime shifts in the price structure, has indeed contributed to the breakdown of many stabilization funds (see the discussion in Davis, Ossowski, et al., 2001, page 4 ff.). To account for such regime shifts, successful stabilization funds would need to incorporate a forward-looking policy rule.
In Norway, all fiscal revenue from oil is transferred to the State Petroleum Fund (SPF), which, in turn, transfers back financing to cover the overall fiscal deficit. The SPF operates without oil benchmark prices for determining net transfers, and asset management has been delegated to a separate unit within the central bank, which relies on professional investment companies to manage the equity portfolio of the fund. While this design allows for a substantial degree of fiscal flexibility, it both requires and facilitates a medium- to long-term budgeting process. A transparent asset management policy facilitates public assessment of the fiscal stance and fosters confidence in the fund and in public finances.
Established in 1985, Chile’s copper stabilization fund operates on the basis of a reference copper price, which is determined by the authorities and has in the past followed the 10–year moving average of global copper prices. Transfer rules are symmetric around the reference price, and Davis, Ossowski, et al., 2001, found a negative correlation between copper export earnings and expenditure. However, given the comparatively strong fiscal framework and recent improvements in the budgetary process, the fund may become redundant as a separate institutional arrangement (see the IMF’s ROSC on Fiscal Transparency in Chile, 2003, p. 27).
Botswana ran large budget surpluses, in particular during the 1990s, and deposited a substantial part of mineral revenues with the central bank, which manages the country’s external assets in a long-term and a short-term fund. The budget surpluses effectively sterilized the monetary impact of the external reserves accumulation by the central bank: The banking system’s net external assets exceeded monetary liabilities by a factor of 2½ in 2003.
Frequent rule changes for the operations of the fund led to transfers from the fund that varied almost as much as the resource revenues themselves. In addition, the fund was not well integrated with overall fiscal policy, as budget expenditure was partly financed with debt operations outside the fund (see Davis, Ossowski, et al., 2001, p. 26).
The fiscal rule should be applied to all new formal gold mining operations, including those that are not yet foreseen.