Abstract
This Selected Issues paper on Bolivia reports that it has experienced major increases in its gas reserves, production, and exports. Not only have their levels increased significantly, but also there have been extensive regulatory changes, which range from the privatization of the mid-1990s to the increase in the government’s tax take from the hydrocarbons industry. The government has reached new agreements with foreign oil companies that will allow foreign companies to continue recovering part of their old investments.
V. Long-Term Management of Hydrocarbons Resources1
A. Introduction
1. Driven by high levels of foreign direct investment, the Bolivian natural gas sector has undergone a major transformation in the past decade. Only in the last three years natural gas exports have increased threefold and currently represent almost half of total exports, accounting for about 15 percent of GDP. Domestic consumption of natural gas is still relatively limited, but is expected to grow in coming years.
2. With the recent increase in natural gas royalties, Bolivia’s fiscal accounts have moved towards a high degree of dependency on hydrocarbons-based revenue. Hydrocarbons-related receipts (11 percent of GDP) represent about one-third of public-sector revenue, up sharply from a few years ago. While the rise in export volumes and the energy price environment have played a role, most of the increase in hydrocarbons-based revenue has stemmed from changes in the legal framework for the sector. The Hydrocarbons Law of 2005 and the Nationalization Decree of 2006 have resulted in a much higher government take. Since May 2007, under the new operating contracts with foreign energy companies, such revenue is collected through Bolivia’s oil company (YPFB).2
3. The strength in hydrocarbons-based revenue is expected to continue for an extended period given the level of reserves and expected additional investments in production in the medium term. This is predicated on Bolivia’s energy-importing neighbors’ interest in maintaining the level of natural gas purchases (Brazil) and/or raising them significantly to address emerging energy bottlenecks (Argentina). Moreover, while production is expected to increase, the information on reserves indicates that Bolivia can count on this resource for the next 50-60 years, depending on the expansion of domestic consumption and the continuation of exploration activities.
4. Accordingly, the availability of hydrocarbons resources poses policy issues not only for the short/medium term3 but also for the long term. In particular, given the magnitude of the proven and probable reserves of natural gas, and the expected production path in the long run, it is important to design a long-term fiscal strategy for the optimal management of these resources. Such a strategy should be consistent with a sustainable use of hydrocarbons resources over a well-defined time horizon, striking an appropriate balance between current public policy objectives (notably, poverty reduction) and intergenerational equity considerations.
5. This Chapter discusses possible strategies for the long-term management of hydrocarbons resources. Based on an assessment of the outlook for the production and prices of natural gas and crude oil, we derive alternative fiscal spending paths with different degrees of sustainability. Such spending paths could be used by the authorities to calibrate fiscal spending in a way that does not deplete the resources, or does so in a gradual manner, allowing future generations to benefit from the country’s energy wealth. The remainder of the Chapter is organized as follows: section B describes briefly the analytical principles underlying the identified strategies; section C presents the main results of the baseline estimates and some sensitivity calculations; and section D concludes.
B. Analytical Underpinnings
6. As other countries with large endowments of natural resources, Bolivia is confronted with the challenge of managing the revenues derived from those resources in a sustainable manner. An optimal long-term fiscal strategy needs to both plan for cyclical swings and incorporate decisions regarding the life span for resource utilization. A fiscal framework that explicitly spells out such decisions has the advantage of minimizing the possibility of drastic policy reversals and their attendant adverse social consequences. Therefore, Bolivia’s fiscal policy should aim at an appropriately calibrated use of energy wealth over time.
7. The specification of long-term fiscal policy paths is underpinned by a partial equilibrium model. In such a model, the government would set its expenditure levels so as to maximize a social welfare function, on a permanent basis, subject to an intertemporal budget constraint and a transversality condition, as follows:4
Where, G represents the level of primary government expenditure, U(.) is a well-behaved social welfare function and β is the intertemporal discount factor. B represents the stock of debt while T and Z are non-hydrocarbons and hydrocarbons revenue, respectively. Assuming β (1+r) = 1, the optimal solution is a constant level of G:
Which implies that the government’s optimal policy would be to set its primary expenditure levels in such a way that the nonhydrocarbons deficit (i.e. G* –T + r. Bt-1) is equivalent to the yield of the present value of the stream of hydrocarbons revenues until period N (when the resource is depleted). From a permanent income hypothesis perspective, this result supports a government behavior that aims at preserving the level of wealth provided by the natural resource while spreading its benefits over time.
8. While this formulation assumes implicitly that the size of the nonhydrocarbons economy is unchanged over time, lifting such assumption for the purpose of long-run fiscal sustainability analysis can be easily implemented with similar results. Specifically, the optimal level of primary government spending as a share of nonhydrocarbons GDP would be:5
Where γ is the rate of growth of the non-hydrocarbons GDP, and all other low case variables have the same meaning as before but are expressed as a share of non-hydrocarbons GDP.
C. Sustainable Fiscal Position and Sensitivity Analysis
9. This section presents baseline simulations of a sustainable fiscal policy for Bolivia under the framework outlined above. The outcome of the exercise is a level of nonhydrocarbons primary deficit that is sustainable in the sense that, taking into account its projected hydrocarbons-generated revenue, the net asset position of the public sector converges to a stable level over the long term. In addition, several sensitivity exercises are conducted to test the possible reaction of the main results to changes in exogenous variables. Finally, an exercise for different paths of hydrocarbons-financed fiscal spending that could serve a medium term policy guide is also shown.
Main Baseline Assumptions
Volumes and prices of natural gas. Identical to those in the baseline medium-term macroframework scenarios presented in the staff report. Production levels are assumed constant after 2012. The assumed long-run oil price is US$50 per barrel and natural gas prices move in tandem with oil prices.
Hydrocarbons reserves. Using the latest official estimates for 2005 as the initial base, a path is derived based on actual and projected production flows. Reserves are risk-weighted by an assumed probability of successful exploitation, applying a 100 percent weight to proven reserves, 60 percent to probable reserves, and 20 percent to possible reserves.
Basic parameters. Nonhydrocarbons GDP growth (γ) = 2.5 percent. Nonhydrocarbons revenue (τ) = 23 percent of nonhydrocarbons GDP. Real interest rate (r) = 5 percent. The tax take on hydrocarbons = 50 percent of production.
Hydrocarbons: Volumes of Production and Prices
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: Fund Staff calculations.Hydrocarbons: Volumes of Production and Prices
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: Fund Staff calculations.Hydrocarbons: Volumes of Production and Prices
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: Fund Staff calculations.10. A key ingredient for the calculation of the sustainable fiscal position is that, at the expected production levels, the current reserves of natural gas would last for 52 years.6 Full utilization by the public sector of these resources while reserves last would imply a nonhydrocarbons primary deficit of 8¼ percent of nonhydrocarbons GDP (about 7½ percent of total GDP), with an average overall fiscal surplus of 4½ percent of nonhydrocarbons GDP (about 4 percent of total GDP). However, such a fiscal strategy would result in a deteriorating net asset position over the long term. In contrast, the calculations suggest that, if consumption of those resources were spread over the long-term—say, over the next 100 years—the net asset position would stabilize following an initial phase of asset build-up. To this end, the public sector nonhydrocarbons primary deficit would have to be a little under 6 percent of the nonhydrocarbons GDP (about 5¼ percent of GDP), and the average overall fiscal surplus would be 5¼ percent of nonhydrocarbons GDP.7 This more sustainable fiscal path implies keeping primary spending at around 29 percent of the nonhydrocarbons GDP, about 1½ percentage points lower than in 2006.
11. Maintaining a sustainable level of nonhydrocarbon primary deficit would be consistent with declining overall fiscal surpluses during the next century. This fiscal position would allow for a continuous accumulation of net public assets (i.e., the net public debt would be negative) for the next 50 years. Afterwards, once natural gas reserves had been exhausted, net assets would decrease gradually and stabilize at a level around 150 percent of nonhydrocarbons GDP, and the primary balance—initially in surplus—would converge to a sustainable deficit. (Figures 2 and 3).
Sustainable Primary Balances and Net Assets
(In percent of nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Sustainable Primary Balances and Net Assets
(In percent of nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Sustainable Primary Balances and Net Assets
(In percent of nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Baseline Sustainable Fiscal Aggregates
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: Fund staff estimates and simulations.Baseline Sustainable Fiscal Aggregates
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: Fund staff estimates and simulations.Baseline Sustainable Fiscal Aggregates
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: Fund staff estimates and simulations.12. To analyze the sensitivity of these results to exogenous shocks, optimistic and pessimistic scenarios have been assumed for four key variables: long terms oil and natural gas prices, interest rates, real nonhydrocarbons GDP growth, and hydrocarbons reserves. The results are intuitive: negative permanent shocks imply that smaller levels of the nonhydrocarbons fiscal deficit are needed, and vice versa. For instance, oil prices at a 40 percent lower level than baseline would require a permanent adjustment of 1½ percentage points of nonhydrocarbons GDP to the nonhydrocarbons deficit. Conversely, long-term oil prices in the range of US$70 dollars would make deficits 1½ percentage points higher than the baseline sustainable. In the event of lower nonhydrocarbons GDP growth, the sustainable nonhydrocarbons fiscal deficit turns is lower in nominal terms, but higher as a share of GDP (Table1).
Sensitivity Analysis of the Sustainable Non-hydrocarbons Primary Deficit
(In percent of Nonhydrocarbons GDP)
Sensitivity Analysis of the Sustainable Non-hydrocarbons Primary Deficit
(In percent of Nonhydrocarbons GDP)
| Low | Baseline | High | |
|---|---|---|---|
| Long-term crude oil prices | 4.2 | 5.7 | 7.3 |
| Real interest rate | 3.1 | 5.7 | 7.0 |
| Non-hydrocarbons GDP growth | 9.1 | 5.7 | 2.3 |
| Hydrocarbons reserves | 5.0 | 5.7 | 6.0 |
Sensitivity Analysis of the Sustainable Non-hydrocarbons Primary Deficit
(In percent of Nonhydrocarbons GDP)
| Low | Baseline | High | |
|---|---|---|---|
| Long-term crude oil prices | 4.2 | 5.7 | 7.3 |
| Real interest rate | 3.1 | 5.7 | 7.0 |
| Non-hydrocarbons GDP growth | 9.1 | 5.7 | 2.3 |
| Hydrocarbons reserves | 5.0 | 5.7 | 6.0 |
13. The evolution of the stock of net public assets is also sensitive to exogenous shocks. Negative shocks lead to lower accumulation of net assets and therefore the sustainable spending path turns out lower. For instance, under the low oil prices simulation, the stock of net assets in percent of nonhydrocarbons GDP would be 50 percentage points lower than baseline at its peak. The path of the stock of net assets is also sensitive to the assumption on reserves. Departing from the baseline assumption about hydrocarbons reserves—which uses a risk-weighted average—and assuming that only proven reserves would come into production, leads to an accumulation of net public assets that would peak about 20 years earlier (i.e., natural gas production would stop after 30 years) and therefore to lower sustainable spending. Similarly, if proven, probable, and possible reserves were all confirmed and viable at 100 percent of the current estimates, then net asset accumulation would last for about 25 years beyond the baseline result. (Figure 4)
Net Assets Sensitivity to Exogenous Oil shocks
(In percent of nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: IMF Staff estimates and simulationsNet Assets Sensitivity to Exogenous Oil shocks
(In percent of nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: IMF Staff estimates and simulationsNet Assets Sensitivity to Exogenous Oil shocks
(In percent of nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Source: IMF Staff estimates and simulations14. These sensitivity results imply that, if the fiscal authorities adopted a rule that maintained a constant level of spending, they would need to continuously assess the nature of exogenous shocks that might hit the economy. To the extent that such shocks were of a transitory nature, the fiscal impact could be managed with minimal departures from the targeted level of spending. However, if such shocks were permanent, the overall fiscal strategy would have to be adjusted.
Hydrocarbons Revenue as a Reserve Fund
15. To complement the results from the optimization model, additional simulations have been performed looking more narrowly at the durability of hydrocarbons wealth as a revenue source. The present value of the flow of hydrocarbons revenues under baseline assumptions for the next 50+ years—the country’s wealth from this resource—is equivalent to about US$30 billion, roughly three times the 2006 GDP. To proceed with this additional exercise, this present value treated as a financial asset that needs to be managed by fiscal authorities.
16. The path for use of hydrocarbons resources can be devised by fiscal authorities in several ways. Under permanent income principles, the authorities could follow a utilization profile that keeps the endowment constant forever. In the baseline case, this would lead to a sustainable use of about 12 billion bolivianos per year, which would correspond to a decreasing spending path in proportion of the GDP, from 13 percent to 1 percent of the GDP per year over the next 100 years. The authorities could also opt for a constant level of spending out hydrocarbons resources in percent of GDP; such sustainable spending would be about 6¾ percent of nonhydrocarbons GDP (about 6 percent of total GDP) per year (Figure 5).
Sustainable Hydrocarbons- Financed Spending
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Sustainable Hydrocarbons- Financed Spending
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Sustainable Hydrocarbons- Financed Spending
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
17. Alternatively, the authorities might consider preferable to exhaust the country’s endowment within a predetermined period of time. 8 In that case, the path of fiscal spending from the hydrocarbons wealth would vary widely, depending on the chosen timeframe. Under baseline parameters, a constant spending of hydrocarbons resources of 7¼ percent on nonhydrocarbons GDP (about 6¾ percent of total GDP) per year would be sustainable for 100 years, while a spending level of 12½ percent of nonhydrocarbons GDP (about 11½ percent of total GDP) would deplete the endowment in about 30 years (Figure 6).
Alternative Profiles of Hydrocarbons-Financed Spending with Fund Depletion
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Alternative Profiles of Hydrocarbons-Financed Spending with Fund Depletion
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
Alternative Profiles of Hydrocarbons-Financed Spending with Fund Depletion
(In percent of Nonhydrocarbons GDP)
Citation: IMF Staff Country Reports 2007, 249; 10.5089/9781451805833.002.A005
D. Concluding Remarks
18. Bolivia has seen substantial changes in its hydrocarbons sector over the past decade, with far-reaching impacts on its economy, and now faces the challenge of managing optimally the enlarged fiscal envelope derived from hydrocarbons resources. Optimal rules suggest that, for intergenerational equity considerations, and to forestall the need for sudden policy reversals in the event of adverse shocks, the fiscal authorities should implement a long-term strategy that spreads the benefits from the hydrocarbons resources over a long period of time. The endowment from hydrocarbons, estimated at about US$30 billion, is significant and its benefits can be extended well beyond the depletion of the existing reserves of natural gas (50+ years at the expected production rates).
19. Baseline estimations suggest that the use of hydrocarbons resources implied by the current and projected fiscal stance are broadly sustainable from an intergenerational equity perspective. Specifically, if the national objective were to use hydrocarbons resources for about 100 years, the 2006 nonhydrocarbons deficit would be about right. However, a reduction of 1–1.5 percent of GDP in public sector spending compared to 2006 would be required to put the use of hydrocarbons on a permanently sustainable level. The fiscal authorities could take advantage of the current environment to set long term goals for the use of the country’s endowment and adopt mechanisms to enforce and manage the resources optimally. International experience in this area points to the establishment of stabilization funds and fiscal rules that help guide the overall fiscal policy, especially give then potential for permanent adverse exogenous shocks to the economy.9
References
Barnett, Steven, and Rolando Ossowski, 2003, “Operational Aspects of Fiscal Policy in Oil-Producing Countries,” in Fiscal Policy Formulation and Implementation in Oil-Producing Countries, ed. by Jeffrey Davis, Rolando Ossowski, and Annalisa Fedelino (Washington: International Monetary Fund), pp. 45– 81.
Capra, Khaterina, and Pablo Evia, 2007, “Fondo de Estabilizacion,” Revista Analisis Economico, Vol. 22. (Bolivia: Unidad de Analisis de Politicas Sociales y Economicas), pp. 59– 74.
Catena, Marcelo, and Fernando Navajas, 2006, “Oil and debt Windfalls and Fiscal Dynamics in Bolivia,” Economic and Social Study Series RE1-06-003 (Washington: Inter-American Development Bank).
Davis, Jeffrey, Rolando Ossowski, James Daniel, and Steven Barnett, 2003, “Stabilization and Savings Funds for Nonrenewable Resources: Experience and Fiscal Policy Implications,” in Fiscal Policy Formulation and Implementation in Oil-Producing Countries, ed. by Jeffrey Davis, Rolando Ossowski, and Annalisa Fedelino(Washington: International Monetary Fund), pp. 273– 315.
De Carvalho Filho, Irineu, 2007, “Medium-Term Fiscal Sustainability in Trinidad and Tobago,” IMF Staff Country Report 07/8 (Washington: International Monetary Fund), pp. 2– 14.
Leigh, Daniel, and Jan-Peter Olters, 2006, “Natural Resource Depletion, Habit Formation, and Sustainable Fiscal Policy: Lessons from Gabon,” IMF Staff Country Report 06/232 (Washington: International Monetary Fund), pp. 4– 21.
Pivovarsky, Alexander, 2006, “Assessing Fiscal Performance under Dollarization and Policy Challenges of Securing Long-Run Debt Sustainability,” IMF Staff Country Report 06/103 (Washington: International Monetary Fund), pp. 27– 42.
Velculescu, Delia, and Saqib Rizavi, 2005, “Trinidad and Tobago: The Energy Boom and Proposals for a Sustainable Fiscal Policy,” IMF Working Paper WP/05/197 (Washington: International Monetary Fund).
Prepared by Mario Mansilla.
Royalties on natural gas production increased from 18 percent to 50 percent. Under the new operating contracts recently put in place, revenue after royalties is subject to a distribution between YPFB and the service operators, depending on an agreed schedule for each gas field, which depends mainly on investment costs. In addition operating companies are subject to the corporate income tax.
See Chapter I on Dutch disease issues in this volume.
This analysis is based on Barnett and Ossowski (2003).
Although crude oil production is not negligible, most of hydrocarbons revenues in Bolivia are derived from natural gas production. Oil reserves estimated as at end-2005 imply that they could last beyond the end of this century.
For the purpose of this chapter the “long-term” horizon is assumed to be 100 years.
Such a strategy needs to be considered in the context of the necessary macroeconomic stability.
See Davis et.al. (2003) for the operational implications and effectiveness of nonrenewable resource funds. Capra and Evia (2007) discuss possible scenarios for the implementation of a reserve fund in Bolivia.
