Abstract
This Selected Issues paper discusses fiscal sustainability and capital expenditures for Equatorial Guinea. The paper formulates a permanent income hypothesis model and estimates it using data on oil revenues from Equatorial Guinea. The first methodology is based on a standard permanent income model, using a 50-year time horizon and real rate of return of 2 percent. The paper then extends the model to incorporate a feedback effect from capital spending to non-oil GDP growth, and shows its implications for fiscal sustainability.
I. Fiscal Sustainability and Capital Expenditures: The Case of Equatorial Guinea1
A. Summary
1. This paper formulates a permanent income hypothesis model and estimates it using data on oil revenues from Equatorial Guinea. The first methodology is based on a standard permanent income model, using a 50 year time horizon and real rate of return of 2 percent. The annuity in each year is assessed in two different ways, the first being, keeping the annuity constant in real terms and the second, keeping the annuity constant as a percent of GDP. In the second part of the paper I extend the model to incorporate a feedback effect from capital spending to non-oil GDP growth, and I show its implications for fiscal sustainability.
B. Discussion
2. Resource-rich countries are faced with the policy decision of how much to spend and how much to save from their non-renewable resources. Many countries with non-renewable resources have begun to accumulate assets in the form of Sovereign Wealth Funds (SWFs). Other countries have instead channeled most of the their wealth in both current and capital spending.
3. There is a large body of literature which points to a “resource curse” in countries with substantial hydrocarbon or mineral resources. This literature points to two main factors for lower long-term growth in these economies. The first factor is the slower growth of the non-oil sector once the oil resources are discovered, which is also known as “Dutch disease.” The second factor is the political factor from the weakened governance that usually accompanies such discoveries especially in low income countries (LICs). In this paper I focus on the first factor.
4. The literature on growth in low-income countries has not reached a consensus on the exact set of variables which affect non-resource based growth. However, a number of cross-country regressions have shown that institutions, geographic location and physical capital are important sources of economic growth.
5. Recent studies have emphasized the lack of public investment in infrastructure and other physical capital as an impediment to growth. However, the role of public investment in infrastructure and physical capital as well as human capital has been controversial. Some researchers have found evidence that public investment as a percentage of GDP in low-income countries has not been lower than in other parts of the world. However, researchers have found evidence that the stock of infrastructure does affect positively growth.
6. Over the last decade the “resource curse” view of growth in resource-rich countries has largely dominated the discussion. Most papers on resource-rich countries are empirical in nature and have emphasized the slower growth in these countries, compared to non-resource rich countries. A famous paper by Sachs and Warner (1995) makes this point. However, numerous studies following their paper have found this correlation to be not as robust, though the basic puzzle of slow growth in these countries has remained. Yet, consistent explanation has not been provided though a myriad of factors abound such, political strife, voracity effects, “Dutch disease” and high volatility of resource income.
7. Little research has focused on what has worked rather than what has not worked. While the consensus view has been that countries need to follow a more balanced approach to spending from the oil revenues, little attention has been paid as to how this spending should relate to growth in the non-oil GDP. This paper attempts to provide a more unified model of growth based on permanent income model and capital spending induced growth.
8. Equatorial Guinea has taken steps to manage effectively its oil reserves and the income derived from it. Figure 1.1 shows that Equatorial Guinea has managed to save a substantial amount of its oil revenues since 2000. Its overall balance shows a surplus starting in 2001. However, as oil revenues have grown, non-oil revenues have stagnated and coupled with growing expenditures, the non-oil primary deficit has remained high, as seen in Figure 1.2.
Equatorial Guinea: Overall Fiscal Balance, Gross Official Foreign Reserves, 2000-08
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Sources: Equatoguinean authorities; and IMF staff estimates.Equatorial Guinea: Overall Fiscal Balance, Gross Official Foreign Reserves, 2000-08
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Sources: Equatoguinean authorities; and IMF staff estimates.Equatorial Guinea: Overall Fiscal Balance, Gross Official Foreign Reserves, 2000-08
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Sources: Equatoguinean authorities; and IMF staff estimates.
Equatorial Guinea: Non-oil Primary Deficit (percent of non-oil GDP), 2000-08
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Sources: Equatoguinean authorities; and IMF staff estimates.Equatorial Guinea: Non-oil Primary Deficit (percent of non-oil GDP), 2000-08
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Sources: Equatoguinean authorities; and IMF staff estimates.Equatorial Guinea: Non-oil Primary Deficit (percent of non-oil GDP), 2000-08
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Sources: Equatoguinean authorities; and IMF staff estimates.9. Although the authorities’ fiscal policy has saved a large part of the oil windfall in Equatorial Guinea, this has not been guided by a consistent long-term framework. The authorities have publicly stated that their policy will follow a permanent income model based on long-term sustainability, yet short-term fiscal policy has prescribed capital expenditures which are much higher than sustainable levels. The new Public Investment Plan (PIP) for the years 2008–10 budgets a sharp increase in public capital expenditures
10. This paper analyzes the fiscal spending of Equatorial Guinea from its hydrocarbon revenues and attempts to provide a useful benchmark. The main fiscal indicator is the non-oil primary balance, which is the indicator used in resource-rich countries. The main reason is that the overall fiscal balance may not tell the whole story (see Barnett and Ossowski, 2003). Overall balances may improve due to higher oil revenues, which may be misinterpreted as fiscal consolidation. Moreover, in countries in which oil production has a rapid decline profile, the oil GDP maybe very volatile while the non-oil part is relatively more stable.
11. The sustainable fiscal policy which I will focus on is the one based on the Permanent Income Hypothesis Model. The model is based on the assumption that economic agents are averse to changes in consumption and would prefer a constant consumption profile over a volatile one, even if the net present value is the same. There are similar reasons while a country should not have a volatile spending profile. In particular, adjusting spending rapidly is costly and inefficient. Moreover, certain types of spending such as public investment need a predictable budget in order for the projects to be planned and completed. Finally, a rapid increase and decrease of spending may result in bottlenecks in the economy and drive up consumption prices, which then would have to readjust when the spending boom finishes.
12. Previous papers have estimated permanent income models for Equatorial Guinea, keeping the annuity constant in real terms (see Franken, 2006). In this paper, I add two new dimensions to this analysis. First, I also estimate a version of the model in which the annuity is kept constant as a percentage of GDP, since this may be a better measure to distribute oil revenues over time, given growth in population and in real GDP. The second extension attempts to account for the fact that different patterns of spending the oil revenues will result in different public capital spending paths and therefore will have different effects on non-oil GDP.
13. The permanent income hypothesis suggests that the government spends only the “permanent” part of its revenues and saves the rest, which will in turn sustain the government in times of low temporarily low revenues, or when the oil resources are exhausted
14. Let’s first start with the government’s budget constraint. It says that the present value of the government’s revenues should equal the present value of its expenditures. In other words:
where
15. The permanent income fiscal policy is such a policy which prescribes a constant annuity from the oil revenues. In other words the fiscal policy which we are interested in is the one which assumes that there is a constant spending, i.e. “annuity”, of D each period, that still satisfies the government’s present value budget constraint:
In the first version of the model, I compute a constant annuity in real terms. The variables shown above represent the inflation-adjusted values and not the nominal terms.
16. Previous authors have pointed out that the annuity from the oil revenues is better computed as a percent of GDP (see Clausen, 2008). Thus, in a modified version of the model, I compute the value of the annuity, when it is constant as a percent of GDP. In this second version of our model I define the constant annuity as a percent of GDP as,
17. The results from the benchmark exercises show the target non-oil primary deficits and the projected non-oil primary deficits. The projected non-oil primary deficit for 2009, as shown in Table 1.1, is 73.1 percent while the permanent income model’s annuity is only 21 percent. Figure 1.3 shows the evolution of asset holdings under both scenarios, the one with annuity constant in real terms, and the second one with annuity constant as percent of GDP.
Equatorial Guinea: Medium-Term Fiscal Framework - Budgets vs. Targets
Petroleum revenue projections are based on staff assumptions for government intake and projected oil price from WEO.
The projections for government expenditures assume capital expenditures declining as a percent of GDP after 2009 and current expenditures increasing as a percent of GDP (see Table 9b).
Expenditure based on the Permanent Income Model is equal to an annuity from oil revenues plus non-oil revenue for that year (excluding interest earned).
The annuity is computed by distributing evenly in real terms until 2060 all the oil revenues, assuming 2 percent real return on assets.
The annuity is computed by distributing evenly in terms of GDP until 2060 all the oil revenues, assuming 2 percent real return on assets. Oil GDP projection is based on oil production profile from the authorities. Non-oil GDP, which includes the manufacturing of oil derivatives, is projected to grow at an average annual rate of 3.5 percent in real terms, excluding the manufacturing of derivatives, whose projection is based on data from the authorities.
The difference between the two specifications reflects the projected decline in real GDP in the long term as oil and natural gas production declines (absent a significantly improved non-oil economy), reducing future spending.
Equatorial Guinea: Medium-Term Fiscal Framework - Budgets vs. Targets
| Non-oil primary balance | Overall balance | ||||||
|---|---|---|---|---|---|---|---|
| 2009 | 2012 | 2020 | 2009 | 2012 | 2020 | ||
| (percent of non-oil GDP) | (percent of GDP) | ||||||
| Price of oil based on WEO (US$ per barrel) | 101 | 103 | 103 | 101 | 103 | 103 | |
| Baseline scenario - assumes real return of 2 percent on financial investments. | |||||||
| 1. Fiscal balance based on staff projections for revenues1 and current projections for expenditures.2 | −73.1 | −41.7 | −24.7 | 3.2 | 4.7 | −7.7 | |
| 2. Fiscal balance based on staff projections for revenues and following a permanent income model for expenditures,3 kept constant in real terms.4 | −21.1 | −16.9 | −12.8 | 20.0 | 14.8 | 1.0 | |
| 3. Fiscal balance based on staff projections for revenues5 and following a permanent income model for expenditures, kept constant in terms of GDP.6 | −22.5 | −17.8 | −9.9 | 19.5 | 14.4 | 3.0 | |
Petroleum revenue projections are based on staff assumptions for government intake and projected oil price from WEO.
The projections for government expenditures assume capital expenditures declining as a percent of GDP after 2009 and current expenditures increasing as a percent of GDP (see Table 9b).
Expenditure based on the Permanent Income Model is equal to an annuity from oil revenues plus non-oil revenue for that year (excluding interest earned).
The annuity is computed by distributing evenly in real terms until 2060 all the oil revenues, assuming 2 percent real return on assets.
The annuity is computed by distributing evenly in terms of GDP until 2060 all the oil revenues, assuming 2 percent real return on assets. Oil GDP projection is based on oil production profile from the authorities. Non-oil GDP, which includes the manufacturing of oil derivatives, is projected to grow at an average annual rate of 3.5 percent in real terms, excluding the manufacturing of derivatives, whose projection is based on data from the authorities.
The difference between the two specifications reflects the projected decline in real GDP in the long term as oil and natural gas production declines (absent a significantly improved non-oil economy), reducing future spending.
Equatorial Guinea: Medium-Term Fiscal Framework - Budgets vs. Targets
| Non-oil primary balance | Overall balance | ||||||
|---|---|---|---|---|---|---|---|
| 2009 | 2012 | 2020 | 2009 | 2012 | 2020 | ||
| (percent of non-oil GDP) | (percent of GDP) | ||||||
| Price of oil based on WEO (US$ per barrel) | 101 | 103 | 103 | 101 | 103 | 103 | |
| Baseline scenario - assumes real return of 2 percent on financial investments. | |||||||
| 1. Fiscal balance based on staff projections for revenues1 and current projections for expenditures.2 | −73.1 | −41.7 | −24.7 | 3.2 | 4.7 | −7.7 | |
| 2. Fiscal balance based on staff projections for revenues and following a permanent income model for expenditures,3 kept constant in real terms.4 | −21.1 | −16.9 | −12.8 | 20.0 | 14.8 | 1.0 | |
| 3. Fiscal balance based on staff projections for revenues5 and following a permanent income model for expenditures, kept constant in terms of GDP.6 | −22.5 | −17.8 | −9.9 | 19.5 | 14.4 | 3.0 | |
Petroleum revenue projections are based on staff assumptions for government intake and projected oil price from WEO.
The projections for government expenditures assume capital expenditures declining as a percent of GDP after 2009 and current expenditures increasing as a percent of GDP (see Table 9b).
Expenditure based on the Permanent Income Model is equal to an annuity from oil revenues plus non-oil revenue for that year (excluding interest earned).
The annuity is computed by distributing evenly in real terms until 2060 all the oil revenues, assuming 2 percent real return on assets.
The annuity is computed by distributing evenly in terms of GDP until 2060 all the oil revenues, assuming 2 percent real return on assets. Oil GDP projection is based on oil production profile from the authorities. Non-oil GDP, which includes the manufacturing of oil derivatives, is projected to grow at an average annual rate of 3.5 percent in real terms, excluding the manufacturing of derivatives, whose projection is based on data from the authorities.
The difference between the two specifications reflects the projected decline in real GDP in the long term as oil and natural gas production declines (absent a significantly improved non-oil economy), reducing future spending.
Equatorial Guinea: Oil Revenues, Annuity, and Asset Accumulation based on a Permanent Income Model
(percent of GDP)
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Source: IMF staff calculations.Equatorial Guinea: Oil Revenues, Annuity, and Asset Accumulation based on a Permanent Income Model
(percent of GDP)
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Source: IMF staff calculations.Equatorial Guinea: Oil Revenues, Annuity, and Asset Accumulation based on a Permanent Income Model
(percent of GDP)
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Source: IMF staff calculations.18. There is a large literature which examines the link between government spending and more specifically capital spending and economic growth. A number of studies have examined the link between government spending and economic growth as well as the composition of government spending and economic growth. In particular, cross-country studies, such as Easterly and Rebelo (1993), find that investment in infrastructure and communication is correlated with growth. Other studies such as Gupta et. al. (2005) find that fiscal consolidation and reduction in total government outlays is beneficial for growth in a cross-country study.
19. Among the many challenges in answering the question of whether government spending affects GDP growth is the fact that there is heterogeneity across countries not only in terms of spending, with some countries being more efficient at building public infrastructure and roads, but also in terms of raising revenues, or in some cases borrowing on the international markets. The differences can be large. For example, Equatorial Guinea, which has saved a significant amount of its past oil revenues, receives on average 4 percent interest rate on its deposits at BEAC. Gabon, which is a member of the CEMAC, has issued a bond, which has a yield higher than 10 percent. Clearly, the success of a public investment program, whose implicit rate of return is 4 percent is much different than one whose rate is 10 percent.
20. In the first section of this paper, I have formulated a permanent income model for Equatorial Guinea and have compared it to the current spending policies of the government. The model takes the level of GDP as given and compares the government expenditure policy with the policy based on a permanent income model, using the non-oil primary deficit as the main variable of comparison. A major drawback of that analysis is that it assumes that government spending, and in particular government capital expenditures, have no bearing on the growth of non-oil GDP. While, this makes it easier to compare the permanent income model to current policies, it is clearly a strong assumption. In the case of Equatorial Guinea, budget executions show that the government spent close to 50 percent of non-oil GDP on public investment in 2007 alone and it is on track to spend a similar amount for 2008. Moreover, almost all of the government capital expenditures are related to the nonoil economy, such as roads, ports, buildings, and vehicles as well as oil derivatives, which are part of the non-oil GDP. Thus, while the productivity of government capital would be hard to estimate, it is unlikely that its usefulness is zero and that it does not contribute at all to the growth in non-oil GDP.
21. In 1999, capital expenditures were 39.1 billion CFA francs, while current expenditures were 46 billion CFA francs. Starting in 2000, however, capital expenditures have consistently grown much faster than current expenditures and in 2007, they have reached 929 billion CFA francs, while current expenditures were 214 billion CFA francs, almost four times less. Similarly, for 2008 the current projections is for capital expenditures to reach 1,300 billions CFA francs. Equatorial Guinea is unique among the countries in the region, both in terms of the ratio between current and capital expenditures, but also the ratio f capital expenditure to its non-oil GDP (see Table 1.2).
Equatorial Guinea: Public Expenditure Indicators 2005–07 (3-year average)
Equatorial Guinea: Public Expenditure Indicators 2005–07 (3-year average)
| Current expenditure (percent of non-oil GDP) | Capital expenditure (percent of non-oil GDP) | Non-oil GDP growth (percent change) | |
|---|---|---|---|
| Cameroon | 13.0 | 3.4 | 4.1 |
| Chad | 14.8 | 13.5 | 3.7 |
| Gabon | 33.3 | 9.0 | 2.6 |
| Republic of Congo | 50.6 | 24.1 | 2.3 |
| Equatorial Guinea | 18.0 | 60.3 | 33.3 |
| Equatorial Guinea, excluding oil derivatives | 27.6 | ||
Equatorial Guinea: Public Expenditure Indicators 2005–07 (3-year average)
| Current expenditure (percent of non-oil GDP) | Capital expenditure (percent of non-oil GDP) | Non-oil GDP growth (percent change) | |
|---|---|---|---|
| Cameroon | 13.0 | 3.4 | 4.1 |
| Chad | 14.8 | 13.5 | 3.7 |
| Gabon | 33.3 | 9.0 | 2.6 |
| Republic of Congo | 50.6 | 24.1 | 2.3 |
| Equatorial Guinea | 18.0 | 60.3 | 33.3 |
| Equatorial Guinea, excluding oil derivatives | 27.6 | ||
22. The increases for 2008 and the proposed increase for 2009 for capital expenditures have continued the trend. Equatorial Guinea has adopted a version of the above-described Permanent Income Model as a guiding benchmark for its fiscal policy and it is therefore important to bring the capital expenditures of the government into this model. The main argument for treating capital expenditures differently from current expenditures is that they augment the capital stock and thus contribute to the increase in GDP. Given the large amount of capital spending proposed for 2009, 2,000 billion CFA francs, equivalent to US$ 4.5 billion, it is important to evaluate whether these capital expenditure outlays bring a positive return to the country as opposed to if they were invested in some income generating assets.
23. I follow the literature on public spending and growth which has attempted to account directly for public capital spending and its effect on economic activity. Similarly, to Aschauer (1989) and Gramlich (1994), I take a very stylized view of the role that the public capital plays in the economy. In particular, I posit that the economy-wide production function is of the Cobb-Douglas form, though not restricted to constant returns to scale, and that the public capital and private capital are direct substitutes. The reasons for these simplifications are twofold. Firstly, the Equatoguinean economy has little private investment outside hydrocarbons, and public investment is a direct substitute for private investment. For example, public investment in Equatorial Guinea includes housing, roads, ports and airports as well as capital or subsidies for fishing, farming and transportation. Secondly, estimating a more complicated production function would not be feasible due to the small sample size.
24. I use the same permanent income model as in the above section, augmented to include a feedback rule from capital into non-oil GDP. I also focus on the non-oil economy and the oil economy is treated as an exogenous stream of revenues. The current expenditures are also fixed in real terms, not as a percentage of non-oil GDP, while non-oil revenues are fixed in real terms as well. In evaluating different policy outcomes, I assume that if the authorities are to follow the permanent income rule, the reduction in public spending will come entirely from capital spending. While in general these may be strong assumptions, in the case of Equatorial Guinea, these are reasonable assumptions, given the fact that current spending has grown very slowly, while the increase in public expenditures has come almost entirely from the public investment program. Moreover, most of the variation in government spending comes from variation in capital expenditures.
25. In order to estimate a national production function, I need an estimate for the stock of capital and the stock of labor, which includes human capital. The total public investment stock is estimated by adding up public capital expenditures starting in 1996 and assuming a real rate of depreciation of 8 percent, which is similar to the United States. Given the very small amount of public investment in 1996, which is around 3 billions CFA francs compared to 970 billions CFA francs in 2007, this seems like a reasonable approximation. The total labor stock is hard to estimate, given the poor population and employment statistics. However, I assume that the labor stock grows by 2 percent annually, which is the population growth rate for Equatorial Guinea. Finally, I assume that private investment in the non-oil economy is equal to the depreciation of the private capital stock and therefore does not add to the capital stock over the estimation period.
26. The basic model I use is similar to Aschauer (1989). I posit the following government production function:
where At is the total factor productivity at time t, and
I can then now estimate the above regression, using Equatoguinean data on government capital expenditure and non-oil GDP. The results of the above regression are presented in Table 1.3.
Equatorial Guinea: Regression Results From Economy-wide Production Function
Equatorial Guinea: Regression Results From Economy-wide Production Function
| Coefficients | Standard Error | t Stat | P-value | |
|---|---|---|---|---|
| Intercept | 2.785 | 0.295 | 9.433 | 0.000 |
| coefficient on log capital stock | 0.446 | 0.068 | 6.602 | 0.000 |
| coefficient on log labor | 3.520 | 0.862 | 4.082 | 0.001 |
Equatorial Guinea: Regression Results From Economy-wide Production Function
| Coefficients | Standard Error | t Stat | P-value | |
|---|---|---|---|---|
| Intercept | 2.785 | 0.295 | 9.433 | 0.000 |
| coefficient on log capital stock | 0.446 | 0.068 | 6.602 | 0.000 |
| coefficient on log labor | 3.520 | 0.862 | 4.082 | 0.001 |
27. The predicted values vs. actual values is presented in Figure 1.4, which shows that the estimated Cobb-Douglas function has a relatively good fit. Next, using these estimates, I redo the analysis of the permanent income model. There are several important caveats to be noted. First, I assume that if the government were to follow the permanent income rule, the reduction in total government expenditures comes only from capital expenditures. Therefore, current spending is taken as given in both simulations, the one with the projected government spending and the one which follows the permanent income rule. A second caveat is that, the non-oil revenues are the same regardless of the growth of the non-oil GDP. This assumption, of course, can be relaxed since non-oil revenues can be thought of as a percentage of non-oil GDP. However, for the purposes of this model, both current spending and non-oil revenues are fixed. I thus simulate the Permanent Income Model using the same assumptions for inflation and return on assets abroad as in the previous section. I have established from our regression that in the endogenous capital model, higher capital spending will lead to higher non-oil GDP growth. Therefore in Table 1.4, I perform two simulations of the model: the first one in which the government follows the current capital spending policies (line 1) and the second one which provides the targets that the government needs to adhere to for achieving a sustainable fiscal policy (line 2). In both cases, the capital spending feeds into the non-oil GDP (unlike in Table 1.1, where the projection and the targets assume the same nonoil GDP and thus the sharp cuts implied in capital spending to achieve the target do not affect non-oil GDP). In the first case, using current capital spending, I get a slightly different nonoil GDP as compared to Table 1.1, since in this simulation the non-oil GDP point estimate is slightly higher based on the Cobb-Douglas regression and thus for 2012 we have a non-oil deficit of 38.5 percent of non-oil GDP. In the second simulation, the one which the government should follow, the non-oil GDP is lower than lines 2 and 3 in Table 1.1, reflecting lower capital spending. To achieve the target, the government must spend less and therefore non-oil GDP does not grow as fast. However, the benchmark non-oil deficit is higher than implied by the permanent income rule in Table 1.1. The capital feedback through its reduction of non-oil GDP, in effect, makes the annuity from oil revenues worth more compared to the non-oil economy, and the sustainable non-oil deficit is linked to this annuity (see Clausen, 2008, for a mathematical derivation). The actual spending is lower but it is higher relative to non-oil GDP.
Equatorial Guinea: Actual Non-oil GDP vs. Predicted Non-oil GDP
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Equatorial Guinea: Actual Non-oil GDP vs. Predicted Non-oil GDP
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Equatorial Guinea: Actual Non-oil GDP vs. Predicted Non-oil GDP
Citation: IMF Staff Country Reports 2009, 099; 10.5089/9781451816020.002.A001
Equatorial Guinea: Medium-Term Fiscal Framework - Budgets vs. Targets
Petroleum revenue projections are based on staff assumptions for government intake and projected oil price from WEO.
The projections for government expenditures assume capital expenditures declining as a percent of GDP after 2009 and current expenditures increasing as a percent of GDP.
Expenditure based on the Permanent Income Model is equal to an annuity from oil revenues plus non-oil revenue for that year (excluding interest earned).
Equatorial Guinea: Medium-Term Fiscal Framework - Budgets vs. Targets
| Non-oil primary balance | |||
|---|---|---|---|
| 2009 | 2012 | ||
| Price of oil based on WEO (US$ per barrel) | 101 | 103 | |
| Baseline scenario - assumes real return of 2 percent on financial investments. | |||
| 1. Fiscal balance based on staff projections for revenues1 and current projections for expenditures.2 | −73.1 | −38.5 | |
| 2. Fiscal balance based on staff projections for revenues and following a permanent income model for expenditures,3 kept constant in real terms.4 | −44.9 | −35.5 | |
Petroleum revenue projections are based on staff assumptions for government intake and projected oil price from WEO.
The projections for government expenditures assume capital expenditures declining as a percent of GDP after 2009 and current expenditures increasing as a percent of GDP.
Expenditure based on the Permanent Income Model is equal to an annuity from oil revenues plus non-oil revenue for that year (excluding interest earned).
Equatorial Guinea: Medium-Term Fiscal Framework - Budgets vs. Targets
| Non-oil primary balance | |||
|---|---|---|---|
| 2009 | 2012 | ||
| Price of oil based on WEO (US$ per barrel) | 101 | 103 | |
| Baseline scenario - assumes real return of 2 percent on financial investments. | |||
| 1. Fiscal balance based on staff projections for revenues1 and current projections for expenditures.2 | −73.1 | −38.5 | |
| 2. Fiscal balance based on staff projections for revenues and following a permanent income model for expenditures,3 kept constant in real terms.4 | −44.9 | −35.5 | |
Petroleum revenue projections are based on staff assumptions for government intake and projected oil price from WEO.
The projections for government expenditures assume capital expenditures declining as a percent of GDP after 2009 and current expenditures increasing as a percent of GDP.
Expenditure based on the Permanent Income Model is equal to an annuity from oil revenues plus non-oil revenue for that year (excluding interest earned).
28. It is important to note that in the capital feedback model, the level of capital spending is allowed to affect non-oil GDP to the same extent and with the same efficiency as in the past, meaning future public investment projects are assumed to be as efficient and as growth-inducing as the past ones. While this is clearly a strong assumption, the results show that even such a strong assumption cannot justify the current level of projected capital spending, and that such a fiscal policy if not corrected in due course is unsustainable.
C. Conclusion
29. I have analyzed the fiscal policy of Equatorial Guinea using two versions of the Permanent Income Hypothesis model. In the first model, I assume that fiscal policy, and more specifically capital expenditures do not affect significantly the rate of growth on nonoil GDP. In this version, the current fiscal policy is shown to have much higher non-oil primary deficits than a sustainable fiscal policy derived under a permanent income rule. In the second version of the model, I allow for government capital expenditures to affect the rate of non-oil GDP, by estimating an economy-wide Cobb-Douglas production function. My analysis indicates, however, that even if capital expenditures are as efficient and growth inducing in the future as they were in the past, when Equatorial Guinea had little public capital and infrastructure, the fiscal policy is still unsustainable and cannot be justified based on its effect on non-oil growth. Moreover, absent any corrective measures, such fiscal policies are clearly unsustainable, even if capital spending is assumed to affect non-oil GDP growth.
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Dimitre Milkov, African Department
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Appendix I. Data and Variable Definitions
| REER = | Real effective exchange rate;3 |
| TOT = | Terms of trade of goods; |
| CGR = | Government consumption as a share of GDP; |
| INV = | Investment as a share of GDP; |
| PROD = | Technological progress index; and |
| OPEN = | Openness. |
The source of the data for Equatorial Guinea is IMF staff calculations and the source of data for the CEMAC region is IMF (2008).
