Gabon: Selected Issues
Author: International Monetary Fund
Publication Date:
20 Jun 2006
eISBN:
9781451813999
Language:
English
Keywords:
ISCR; CR; price; fuel price subsidy; Gabon; oil GDP; oil revenue; GDP terms; government expenditure; oil price; Oil; Oil prices; gas and mining taxes; Sub-Saharan Africa; spending level
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Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. This chapter has sought to estimate the sustainable long-term non-oil primary deficit and the optimal adjustment path toward that level. The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. The reform of fuel price subsidies in Gabon is necessary to facilitate pro-poor economic growth.

Abstract

Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. This chapter has sought to estimate the sustainable long-term non-oil primary deficit and the optimal adjustment path toward that level. The banks’ inability to monitor effectively the quality of their loan portfolios, paired with the high interest-rate floor on deposits, are key factors behind the very low degree of financial intermediation. The reform of fuel price subsidies in Gabon is necessary to facilitate pro-poor economic growth.

II. Natural Resource Depletion, Habit Formation, and Sustainable FiscalPolicy:Lessons from Gabon1

A. Introduction

Oil revenue currently comprises 60 percent of tax receipts in Gabon, but reserves are expected to be exhausted within three decades. Ensuring that fiscal policy is on a sustainable path is therefore a high priority. Doing so will prevent a situation in which the authorities would be forced to adjust fiscal policy rapidly as oil production is declining—a policy reaction that typically occurs to the detriment of the most disadvantaged segments of society. In combining fiscal adjustment with structural reforms aimed at diversifying the economy and strengthening governance, Gabon’s economy would be prepared for the postoil era.

This paper seeks to estimate the sustainable long-run non-oil primary deficit and the optimal adjustment path towards that level. The analysis is based on a model of intertemporal social-welfare optimization that takes into account (i) adjustment costs in the form of habit formation and (ii) differential rates on sovereign debt and financial assets. Introducing habits—the notion that consumers become addicted to the level of consumption enjoyed in previous periods—is important in the context of fiscal policy design as it directly addresses the social, political, and institutional constraints on the speed of fiscal adjustment. Allowing for different interest rates on debt and assets introduces further realism into the analysis of optimal fiscal policy and debt management.

Three main conclusions emerge from the analysis. First, Gabon’s current fiscal deficit cannot be maintained in the future. The permanently sustainable non-oil primary deficit, estimated at 5.0 percent of non-oil GDP, is well below the 2005 level of 12.1 percent.2 Second, due to habit formation, the optimal policy spreads the bulk of the adjustment over three to five years, rather than making the single adjustment that standard permanent-income models prescribe. A phased adjustment is preferable to an abrupt fiscal contraction as it eases the pain on habit-forming households and thus increases the political acceptability of the needed adjustment. Third, the interest-rate differential between sovereign debt and financial assets creates an incentive to front-load adjustment and pay off net debt sooner than in the absence of the spread. In addition, given the uncertainty about future economic conditions, precautionary motives offer further incentive for front-loading the fiscal adjustment and targeting a smaller long-run deficit. For instance, a reversal of real oil prices to the 2000–05 US$30/bbl average would reduce the permanently sustainable primary deficit to 3¾ percent of non-oil GDP.

The remainder of the paper is structured as follows. Section B compares Gabon’s economic performance to that of other oil-producing countries. Section C describes the analytical framework and calibrates the model to fit Gabon’s economy. In Section D, the permanently sustainable primary deficit is estimated and the optimal adjustment path towards this level simulated, starting from the one in 2005. Section E discusses extensions to the analysis, while Section F summarizes the results and concludes.

B. Background

Oil-producing countries have tended to encounter considerable difficulty in formulating fiscal policies that would help them to transform natural-resource wealth into other forms of capital. Laying the economic foundation for high and sustainable rates of non-oil growth has been a continuing challenge, reflected in the generally disappointing economic performance of resource-based economies. Economists have designated these “empirical regularities” (Hausmann and Rigobon 2003) as the “natural resource curse” (Sachs and Warner 1995)—typically explained as the result of increased rent-seeking behavior, reduced incentives for economic reforms, and the real appreciation of the domestic currency, leading to a country’s loss of international competitiveness and a gradual process of deindustrialization (“Dutch disease”).

The growth performance of Gabon and other oil-producing countries has, in general, been inferior to that of non-resource-dependent countries with comparable per capita income. After three decades of oil production, Gabon’s economy remains highly vulnerable to sudden changes in international markets. The volatility of oil prices has led to successive episodes of large, often wasteful public investments followed by deep economic crises. These, in turn, have been accompanied by large fiscal imbalances and the accumulation of domestic and external payment arrears. The variability in oil prices and the resultant stop-and-go approach to funding public investments have impeded a forward-looking, more longterm approach to economic policy management and, consequently, shortened the planning horizons of private companies in the country’s non-oil sectors. As a result, non-oil growth, on a per capita basis, has been negative in every year during 1998–2003 and only marginally positive in 2004-05.

Gabon’s relatively high per capita GDP belies its generally poor social indicators, which tend to be more in line with those of low-income countries in sub-Saharan Africa. Other oil-exporters with similar levels of per capita income—US$6,400 ± US$600 in purchasepower parity (PPP) terms—also have development indicators well below those of comparable countries without natural-resource endowments (as measured by the UNDP’s Human Development Index). 3 In Table II.1, the average index for the four oil exporters, 0.714, would rank them 108th out of 177 countries, considerably lower than the 0.762 average (79th rank) for countries not endowed with oil. With the former group, Gabon ranks last, with an index of 0.635 (123rd rank). Increasing rent-seeking behavior could be one explanation: the corruption perception indices compiled by Transparency International show that oil exporters average 2.8 (i.e., equivalent to the 97th rank out of 158 countries—twenty places below the other countries in the same income group). This corroborates findings that weak governance is an important explanatory variable for the slow growth in resource-rich economies (Leite and Weidmann 1999).

Table II.1.

Oil Production and Socio-Economic Development

article image

Source: UNDP, 2005, Human Development Report 2005, pp. 219-22.

Index between 10 (least corrupt) and 0 (most corrupt). Source: Transparency International, 2005, Corruption Perceptions Index 2005.

Countries with fiscal petroleum revenue accounting for at least 20 percent of total fiscal revenue in 2004.

In percent of non-oil GDP. Sources: Various IMF reports. Fiscal data for Panama are 2002.

C. Theoretical Framework

Intertemporal optimization with habit formation lies at the core of the paper’s analysis. The section starts by describing the standard Friedman (1957) permanent-income hypothesis (PIH) model used to analyze fiscal sustainability in countries with finite oil reserves. Once the PIH model been explained and solved, it is shown how the optimal fiscal policy changes with the introduction of habits. According to the PIH, agents

According to the PIH, agents are forward-looking and optimal policy is defined as a path of government spending that smoothes consumption over time and is consistent with the intertemporal budget constraint. The optimal spending level depends on a number of factors, among them the future path of oil and non-oil tax revenues and the real interest rate. In the model, the government chooses an expenditure policy that maximizes a social-welfare function subject to an intertemporal budget constraint and a transversality condition.4

The model

Allowing the government to choose both the tax rate and the spending level is equivalent to rewriting the problem in terms of the primary deficit; see Barnett and Ossowski (2003). The problem, then, can be solved in a two stage process:(i) an intertemporal decision (determining the size of the primary deficit); and (ii) an intra-temporal decision (determining the optimal allocation of the given deficit between spending and taxes, where the marginal benefit of spending equals the marginal cost of taxation). Since this paper focuses on intertemporal sustainability, the problem is expressed solely in terms of spending, treating the tax rate as exogenous. The government’s problem can thus be written as follows:5

(1)max{Gs}Σs=t∞βs−t.U(Gs),
(2)s.t.Bt=R.Bt−1+Gt−Tt−Zt,and
(3)lims→∞Bt+s=0,

where Bt is government debt at the end of period t; R = 1 + r, with r being the long-run interest rate (assumed to be constant); and Gt the level of primary government expenditure. As the low quality of public investment in Gabon, thus far, gives capital expenditure the characteristic of recurrent expenditure,6 this paper treats all primary government expenditure as consumption and develops a model in which households derive utility from all government spending, even when it does not increase productivity. Non-oil revenue is denoted by Tt, oil revenue by Zt. The discount factor is β = ( 1 +δ)-1 < 1, where δ is the rate of time preference (the degree of impatience). It is assumed that there is no uncertainty about the future.

First, a solution is obtained based on the assumption of constant non-oil GDP. The government’s problem yields a solution in the form of the following Euler equation:

(4)UG(Gt)=β∙R∙UG(Gt+1),

where UG( Gt ) denotes the marginal utility of spending in period t. Assuming that β ∙ R = 1 (or, equivalently, δ = r),7 it follows that UG ( Gt ) = UG(Gt+1 ). This implies that government spending is constant: Gt = Gt+1 = G. Combining equation (4) with (2) and (3) yields the optimal level of government spending:

(5)G*=T+rR∙Σs=tN(1R)s−t∙Zs−r∙Bt−1,

where N is the date at which oil revenue dries up. Equation (5) implies that the optimal policy is to set spending equal to permanent income, i.e., to the return on the present discounted value of all future oil and non-oil revenues.

Introducing non-oil growth complicates the algebra but does not change the form of the solution. Non-oil GDP is now assumed to grow at rate γ > 0, i.e., Yt=1 = (1 + γ)∙ Yt. Following Barnett and Ossowski (2003) and Tersman (1991), the government’s problem is expressed in terms of non-oil GDP. Therefore, g=GY is the ratio of spending to non-oil GDP, and the budget constraint becomes

(6)bt=R1+γ∙bt−1+gt−τt−zt,

where τ denotes the ratio of non-oil revenue to non-oil GDP, and z and b the ratios to non-oil GDP of oil revenue and debt, respectively. Utility is also expressed in terms of non-oil GDP terms so that U=U(g). The standard assumption that the interest rate is higher than the non-oil growth rate (r > γ) is imposed to keep the sustainability question interesting.8 Solving the model with non-oil growth implies a path for government spending that is analogous to the one in equation (5), i.e., a constant spending level in terms of non-oil GDP, as shown in equation (6):9

(7)g*=τ+r−γR∙Σs=tN(1+γR)−(s−t)∙zs−r−γ1+γ∙bt−1.

Introducing habit formation into the model has the advantage of greater realism with regard to the speed at which fiscal policy can adjust to macroeconomic shocks. Habit formation was developed in the consumption literature to capture the idea that consumption is addictive—i.e., the amount of utility derived from consumption today depends negatively on how much was consumed yesterday.10

Formally, introducing habits implies altering the utility function so that current-period utility depends not only on current spending, but also on past spending. Specifically, the utility function becomes U(gt, ht ) rather than U(gt), where ht represent the current stock of habits. Solving the government’s problem yields Euler equation

(8)Ug(gt,ht)+Uh(gt+1,ht+1)=R∙β∙[Ug(gt+1,ht+1)+β∙Uh(gt+2,ht+2)],

where Ug (gt, ht)denotes the marginal utility of an additional unit of spending in this period and Uh (gt+1, ht+1) the marginal utility of stronger habits in the next period (due to higher spending today). A popular formulation of habit formation in the literature is the “subtractive formulation” (Constantinides 1990, Campbell and Cochrane 1999, and Uribe 1999),

(9)U(gt,ht)=V(gt−α∙ht),

where α ε[0,1] denotes habit strength, and current-period spending, gt, yields lower utility the stronger the habits, ht. A simple specification of the habit stock is ht = gt-1, i.e., the current habit stock is simply equal to the level of spending in the previous period. Combining the Euler equation (7) with the intertemporal budget equation yields, after a number of algebraic manipulations, the following optimal path for government spending:

(10)gt*=(1−αR)∙[τ+r−γR∙Σs=tN(1+γR)−(s−t)∙zs−r−γ1+γ∙bt−1]+αR∙gt−1.

Equation (10) shows that, with habit formation, spending is a linear combination of the last period’s level and the PIH spending level. With habits, if the previous period’s spending is higher than current permanent income, then current spending adjusts gradually to the permanent-income level at a rate of (1− α) per period. Without habits (α = 0), the optimal policy is to adjust abruptly to the PIH level in a single period.

Model calibration

To simulate a baseline path for adjusting fiscal policy a over the medium term, this subsection calibrates the model to fit the relevant features of Gabon’s economy. Once a baseline scenario is simulated, sensitivity tests are conducted on all the parameters of the model. To establish the baseline projection for future real oil revenue requires projections for the real oil price and the volume of oil production. The baseline projection for oil prices is based on the December 2005 World Economic Outlook (IMF 2005) projections for 2006-11, according to which most of the recent oil price increases are expected to be maintained.11 For the period 2011-30, real oil prices are projected to follow the forecasts published in the Annual Energy Outlook 2006 of the Energy Information Administration, which have the real price gradually increase to US$57 per barrel (bbl) in 2030.12 An alternative price path, under which real oil prices decline to the average 2000-05 level of US$30/bbl by 2030 is also considered (Figure II.1).

Figure II.1
Figure II.1

Gabon: Oil Production Profile and World Oil Prices, 2005-45

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A002

As for future oil output, Gabon has proven oil reserves of 2.02 billion barrels.13 In the absence of further discoveries, annual oil production is expected to decline from its current level by about one-half in twenty years and be exhausted in about thirty years (Figure II.1).14 Multiplying the predicted production volumes by the real price path produces a forecast for real oil GDP (Figure II.2), along with the three alternative paths used in the sensitivity analysis (25 percent higher reserves, 25 percent lower reserves, and a lower long-run oil price). The discount for Gabonese crude oil relative to the Brent crude price is assumed to remain constant at 5 percent (equivalent to the average discount during 2000-04); the exchange rate is held constant at CFAF 500 per US$1; and fiscal oil revenues, as in recent years, remain at 35.9 percent of oil GDP. The non-oil tax rate is kept constant at 23.2 percent. It is also assumed that the long-run real interest rate equals 3 percent, which broadly reflects the current yields of 10-year treasury bonds in industrialized countries minus inflation. While a 3 percent real interest rate is a standard value in the literature, obtaining this yield would require institutional changes to Gabon’s fiscal oil fund Fonds pour les générations futures, FFG), which currently earns a mere 1.6 percent nominal rate.15 The non-oil growth rate, γ, is set at 2 percent, the average of the last ten years. The habit-strength parameter, α, is set at 0.7, which is within the range of estimates in the literature.16 Table II.2 summarizes the assumptions underpinning the baseline simulation.

Figure II.2.
Figure II.2.

Gabon: Real Oil GDP Profiles, 2005-45

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A002

Table II.2.

Baseline Assumptions

article image

These represent the actual values realized in 2005.

D. Results and Sensitivity Tests

In simulating the optimal adjustment path, starting from the 2005 non-oil primary deficit level of 12.1 percent of non-oil GDP, three main results emerge:17

  • First, the current level of the non-oil primary deficit is not sustainable. If the nonoil primary deficit is maintained at the 2005 level of 12.1 percent of non-oil GDP, debt will eventually explode. With baseline assumptions, the permanently sustainable nonoil primary deficit is estimated to be 5.0 percent of non-oil GDP. That the 2005 deficit is unsustainable is a robust result from sensitivity tests on all the parameters in the model (Table II.3). For example, even if total reserves were to increase by 25 percent relative to the baseline, the sustainable deficit would rise to 6.5 percent of non-oil GDP, still well below the actual 2005 level. If the tax take on oil GDP rises by 10 percentage points to 46 percent, the sustainable non-oil primary deficit would increase to 6.7 percent of non-oil GDP, also well below the current level.

  • Second, the optimal path involves spreading the bulk of the adjustment over the initial 3–5 year period. Under baseline parameters, the non-oil deficit would decline by 4.6 percentage points to 7.5 percent by 2008, which would be 65 percent of the total adjustment required. By 2010, with the non-oil deficit at 6.2 percent of non-oil GDP, 83 percent of the required adjustment would be completed. Figure II.3 shows that substantial overall primary surpluses occur during the oil period—needed by the government to pay off debt and accumulate sufficient financial assets. From a fraction of the returns on those assets, it then finances the non-oil deficit in the post-oil period. By contrast, a strategy of stabilizing net debt at a positive level would not be consistent with running a permanent deficit in the post-oil era. As oil reserves are exhausted, the primary surpluses decline and converge to the permanently sustainable level of 5.0 percent of GDP in 2036, the year when oil revenue is assumed to dry up. The adjustment path depends, however, on the strength of habits. Figure II.4 shows the optimal path for three alternative values of the habit strength parameter that are within the range of empirical estimates in the literature.

  • Third, a risk-averse policymaker would have a strong motive for a faster adjustment than is recommended under baseline assumptions, given their uncertainty. Figure II.5 shows the upper and lower bounds of the simulations conducted for the sensitivity analysis (given a long-term price of US$57/bbl); they suggest that, should conditions change, the sustainable deficit could be below the baseline of 5.0 percent of non-oil GDP. For example, should the oil price revert to US$30/bbl over the medium term, the permanently sustainable level would be only 3.8 percent of non-oil GDP. If the government’s effective oil tax take declines by 10 percentage points to 26 percent (e.g., because production in Gabon’s maturing oil fields becomes less profitable, production-sharing agreements become more generous), the sustainable deficit would be only 3.3 percent of non-oil GDP. The most critical assumption, with the highest downside risks, is the real interest rate. Following the literature on precautionary savings, the appropriate response of a riskaverse policymaker to greater uncertainty about future revenue would be to increase savings.18 To insure against a deterioration in conditions, front-loading fiscal adjustment would therefore be advisable. However, neither uncertainty nor different degrees of risk aversion are formally analyzed the model in this paper.

Table II.3.

Sensitivity Analysis

article image
Figure II.3.
Figure II.3.

Gabon: Optimal Adjustment Path Under Baseline Parameters, 2000-45

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A002

Figure II.4.
Figure II.4.

Gabon: Sensitivity Analysis on Habit Strength and the Optimal Adjustment Path, 2000-45

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A002

Figure II.5.
Figure II.5.

Gabon: Sensitivity Analysis and Estimated Permanently Sustainable Non-Oil Primary Balance

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A002

E. Extensions

The speed of adjustment to a permanently sustainable primary deficit is a function of a number of additional considerations. Either including an interest-rate spread between public debt and oil fund assets or adjusting the government’s objective function to guarantee stability in real per capita expenditure would lead to an acceleration in adjustment. By contrast, relaxing the assumption of government spending being only consumption can have the opposite effect.

Introducing a spread between the interest rate on sovereign debt and the interest rate on financial assets creates a further incentive to run a smaller non-oil deficit in the short-run. The objective would be to pay off debt sooner. Formally, the solution to the government’s portfolio problem now involves two first-order conditions (Barnett and Ossowski 2003). Returning, for expositional simplicity, to the simple PIH model without habits or non-oil growth, the first-order conditions become:

(11)UG(Gt)=β∙Rdebt∙UG(Gt+1),and
(12)UG(Gt)=β∙R∙UG(Gt+1).

where Rdebt > R, and R =1 + r is the gross interest rate on assets as before. Equation (11) holds in the initial period if there is positive debt—if B > 0. Since Rdebt > R, and R · β =1 as before, it holds that Rdebt · β > 1 and, by implication, Gt+1 > Gt. This means that government spending is increasing. Since there is debt initially, for this increasing spending to be sustainable, the initial non-oil deficit must be smaller than in the model without the interest-rate spread. Once debt has been paid off, i.e., once B ≤ 0 and net asset accumulation begins, equation (12) holds, implying—as before—a constant path for expenditure; see equation (5).

When the interest-rate spread is incorporated into the model with non-oil growth and habit formation, the optimal adjustment path shows deficits that are smaller in the short run but larger in the long run. A simulation based on a spread of 50 basis points (Figure II.6) suggests that the optimal path would include a more rapid repayment of debt—i.e., a higher degree of saving. The government would start to accumulate net assets earlier, thereby increasing the stock of financial wealth and the permanently sustainable fiscal deficit.

Figure II.6.
Figure II.6.

Gabon: Introducing a Debt-Asset Interest Rate Spread, 2000-45

Citation: IMF Staff Country Reports 2006, 232; 10.5089/9781451813999.002.A002

If the policy objective is redefined to include constant spending in real per capita terms, the adjustment must be faster. Adding population growth to the model and re-expressing the objective function in terms of spending per capita implies a lower net real interest rate (i.e., the interest rate, r, minus non-oil growth, γ, and population growth) and a lower optimal sustainable primary deficit. Intuitively, the higher the population growth rate, the more wealth will be needed to keep spending per capita constant.

By contrast, incorporating public investment into this model framework could imply higher fiscal deficits in the first years of fiscal adjustment. Two possible extensions of the basic Barnett-Ossowski framework have been discussed. First, if individuals derive utility from government consumption in one period and public investments over several periods, oil discoveries—increasing sustainable government consumption—would immediately increase the government’s capital stock with which to provide households a steady consumption stream. Second, if government expenditure is modeled as productive investments, it would affect the economy’s production function in periods ahead, calling for a standard portfolio decision between financial and physical (social) assets. Barnett and Ossowski’s (2003) basic condition

(13)r=τ∙Y′(Kt+1),

states that governments—modeled in their conduct analogously to the way firms operate—should invest in all projects that will pay for themselves (irrespective of whether the country is endowed with oil reserves). This would imply that, with a tax rate of 23.2 percent and an interest rate of 3 percent, as the simulations assume, the rate of return on public investment would have to exceed 12.9 percent.19

F. Concluding Remarks

Efficiency and equity reasons suggest placing a high priority on ensuring that fiscal policy is on a sustainable path. At this critical juncture of Gabon’s history, the authorities have the choice between consciously deciding on a voluntary, gradual policy adjustment towards a sustainable fiscal-policy stance or continuing with current policies until the declining oil production or unexpectedly falling prices impose a large and rapid contraction in fiscal policies a few years later. As Gabon’s history has shown, the effects of boom-and-bust cycles are mostly felt by the already disadvantaged segments in society, skewing Gabon’s income distribution even further.

Against this background, this chapter has sought to estimate the sustainable long-run non-oil primary deficit and the optimal adjustment path towards that level. The analysis—based on a model of intertemporal social-welfare optimization with habit formation—has yielded three main conclusions.

  • The authorities need to tighten fiscal policy to be able to smoothen government spending over time. The permanently sustainable non-oil primary deficit, estimated at 5.0 percent of non-oil GDP, is well below the level of 12.1 percent of non-oil GDP in 2005.

  • The bulk of the adjustment can be spread over three to five years. In taking into consideration the “addictive” nature of consumption (habits), the analysis suggests a gradual adjustment of the primary non-oil balance to the permanently sustainable level rather than a single, abrupt adjustment that standard permanent-income models prescribe.

  • The government should consider paying off expensive debt as soon as possible. The existence of an interest-rate spread between sovereign debt and financial assets yields an optimal policy path that front-loads fiscal adjustment, thereby increasing the permanently sustainable primary deficit in the long run. Moreover, uncertainty regarding future economic conditions provides a risk-averse policymaker with further precautionary motives for accelerating fiscal adjustment.

Having analyzed the narrow topic of a level of government spending that can be maintained even after oil reserves have been exhausted, reforms need to be complemented to ensure the increase in its quality In order to be able to attain its GPRSP objectives, public expenditure need to “crowd in” private investments, implying that effectiveness of government spending needs to increase over time as well. Improvement in public financial management would provide assurances that government spending (including investment) will be able to generate adequate growth and social payoffs. An economic program in Gabon would therefore need to include elements that ensure (i) a phased adjustment of the primary non-oil balance to a permanently sustainable level; (ii) reforms to the management of FFG assets; (iii) a rapid repayment of foreign debt; and (iv) structural reforms aimed at improving the design and quality of public investments.

References

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1

Prepared by Daniel Leigh and Jan-Peter Olters. The authors gratefully acknowledge valuable comments from Steven Barnett, Mark De Broeck, Manmohan Kumar, Roger Nord, Anton op de Beke, Rolando Ossowski, Gonzalo Pastor, Mauricio Villafuerte, and participants in an AFR seminar on February 17, 2006 and a Ministry of Finance-organized seminar in Libreville, Gabon, on March 8, 2006. Any errors are our own.

2

This figure excludes expenditure on fuel subsidies and restructuring costs; see Chapter IV. The non-oil primary deficit of 12 percent of non-oil GDP in 2005 happens to coincide with the average deficit during 2000–05.

3

Gabon’s GNI per capita, on a PPP basis, is substantially lower than its GDP per capita on a PPP basis, because a large share of private oil companies’ profits are remitted abroad. For example, the World Bank WDI report a GDP per capita for Gabon of US$6,717 in 2004, on a PPP basis, as compared to a GNI per capita of US$5,600 in 2004, also on a PPP basis.

4

For details on the theoretical and empirical difficulties surrounding the concept of a social welfare function, see Olters (2004) and the literature cited therein.

5

The notation here follows Barnett and Ossowski (2003).

6

For details, see Chapter V.

7

Assuming either β ∙ R > 1 or β ∙ R <1 implies that government spending either declines to zero or explodes. The conventional approach is to exclude these two possibilities and assume instead that β ∙ R = 1.

8

If the net real interest rate is negative (r − γ < 0), it is not necessary to run primary surpluses to reduce the debt-to-GDP ratio to zero.

9

A rule that would keep the absolute spending level constant would imply that the size of government (spending as a share of GDP) shrinks to zero over time. More plausibly, the rule in equation (6) implies that government size converges to 29 percent of GDP.

10

In the context of fiscal policy, habit formation can also be interpreted as reflecting institutional and political adjustment costs faced by policymakers (for instance, cutting the public-sector wage bill abruptly may not be politically feasible). Applying habit formation to fiscal policy, Velculescu (2004) shows that the optimal fiscal response to a permanent negative shock is to spread the necessary policy adjustment over a number of periods.

11

An inflation rate of 2 percent per year is used to convert the oil prices into real terms.

12

This long-run price level is about US$21 higher than the projected price in the Annual Energy Outlook 2005 edition.

13

This estimate is reported by a number of agencies, including the IEA and the U.S. Geological Survey.

14

For an analysis of the uncertainty of future oil production in Gabon, see World Bank (2006).

15

Reforms that would help to raise the return on public savings could involve bringing the FFG closer in line with the Norway State Petroleum Fund, which secured an average annual real return, net of management costs, of 4.3 percent (Norges Bank 2005).

16

For estimates of the habit formation parameter, see Fuhrer (2000) and Gruber (2001).

17

An Excel file that replicates all the simulation results presented in the paper is available upon request and can readily be adapted and applied to other countries with exhaustible energy resources.

18

See Deaton (1992) and Carroll (2000) for discussions of the precautionary savings motive.

19

Note that public investment can potentially yield “fiscal dividends” through three channels: (i) direct financial returns, such as tolls; (ii) fiscal returns from growth (tax revenue, provided the growing sectors can be taxed and the marginal tax rate is sufficiently high); and (iii) lower debt ratios. However, if public investment is of low quality, these “fiscal dividends” may not accrue and net debt will increase. This latter characterizes the experience of Gabon thus far.

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Gabon: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2006: Issue 232
Publisher:
International Monetary Fund
ISBN:
9781451813999
ISSN:
1934-7685
Pages:
88
DOI:
https://doi.org/10.5089/9781451813999.002
  • View in gallery

    Gabon: Oil Production Profile and World Oil Prices, 2005-45

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    Gabon: Real Oil GDP Profiles, 2005-45

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    Gabon: Optimal Adjustment Path Under Baseline Parameters, 2000-45

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    Gabon: Sensitivity Analysis on Habit Strength and the Optimal Adjustment Path, 2000-45

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    Gabon: Sensitivity Analysis and Estimated Permanently Sustainable Non-Oil Primary Balance

  • View in gallery

    Gabon: Introducing a Debt-Asset Interest Rate Spread, 2000-45

Gabon: Oil Production Profile and World Oil Prices, 2005-45

Gabon: Real Oil GDP Profiles, 2005-45

Gabon: Optimal Adjustment Path Under Baseline Parameters, 2000-45

Gabon: Sensitivity Analysis on Habit Strength and the Optimal Adjustment Path, 2000-45

Gabon: Sensitivity Analysis and Estimated Permanently Sustainable Non-Oil Primary Balance

Gabon: Introducing a Debt-Asset Interest Rate Spread, 2000-45