Natural Resource Boom for Niger: from Public Investment to Sustainable Economic Growth1

International Monetary Fund. African Dept.

doi:10.5089/9781498323789.002.A002

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Natural Resource Boom for Niger: from Public Investment to Sustainable Economic Growth¹

Author: International Monetary Fund. African Dept.

Publication Date:: 11 Mar 2015

eISBN:: 9781498323789

Language:: English

Keywords:: ISCR; CR; Niger; food; reducing income inequality; investment; food crisis; banking financing; Brazil economy; A. economic growth; GDP ratio; Public investment spending; Natural resources; Agricultural commodities; Food security; West Africa; Sub-Saharan Africa; Global; North Africa; Africa; investment plan; revenue boom; investment-growth nexus; infrastructures project; natural resource sector

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Niger’s medium to long term economic prospects are favorable, given its mineral resources endowment and the ongoing mining extraction, which will turn the country into a natural resource exporter. However, the projected boom in the natural resource revenues poses a policy need in terms of designing a sustainable public investment path for the country. This selected issue summarizes the analytical results from a DSGE model tailored to resource-abundant small-open developing countries, with the purpose of assessing debt sustainability and growth impacts from large public investment scaling-ups in the face of a natural resource revenue boom.

Abstract

Niger’s medium to long term economic prospects are favorable, given its mineral resources endowment and the ongoing mining extraction, which will turn the country into a natural resource exporter. However, the projected boom in the natural resource revenues poses a policy need in terms of designing a sustainable public investment path for the country. This selected issue summarizes the analytical results from a DSGE model tailored to resource-abundant small-open developing countries, with the purpose of assessing debt sustainability and growth impacts from large public investment scaling-ups in the face of a natural resource revenue boom.

1. Large foreign direct investment (FDI) from China and France in new oil and uranium mining projects are taking place in Niger, transforming the country into a natural resource exporter and accelerating the realization of the country’s potential stemming from its natural resource endowment. The new Azelik uranium mine, a relatively small uranium mine, began operating in 2011. An integrated oil project (including an oil field and a refinery) started in 2012. The new Imouraren uranium will begin production at around 2019-20 when prices reach a level that would make the mine profitable. Natural resource outcome contributes to 12.3 percent of total GDP in 2013, and is projected to double as a share of GDP in 2020, while total government revenue from natural resources is expected to increase by about 2 percent of GDP.

2. The projected boom in the natural resource revenues poses the policy need in designing feasible and sustainable public investment paths for Niger, given the limited availability of financing options of this country. Unlike developed economies, Niger does not have a variety of domestic financing options for its public investment and infrastructures projects. The relatively underdeveloped financial system in the country has been an obstacle to its sound and well-functioning domestic debt market. Moreover, the country has not yet established a well-functioned sovereign wealth fund to save against revenue volatility in ensuring intergenerational equity, and to address future financial needs from large investment scaling-ups.

3. To assess different public investment paths and analyze the consequent debt sustainability issues, we adopt a DSGE model that combines resource revenue and financial market frictions in a natural-resource rich capital-scarce economy. The model builds on frameworks developed in Araujo et al (2013), Buffie et al (2012), Berg et al. (2013), and Melina et al. (2013), in analyzing natural resource management for developing countries. The model captures the investment-growth nexus, as well as financial constraints, investment efficiencies and absorptive capacity constraints. It also accommodates various fiscal arrangements and borrowing options, and offers critical thinking and helps to inform the authorities about the tradeoffs involved in investing resource revenues to boost growth while maintaining fiscal sustainability and macroeconomic stability.

4. The model has most of the relevant developing country features, and is carefully tailored and calibrated to the Niger economy. The model includes large share of poor households that do not have access to financial markets. Public investment, subject to inefficiencies and absorptive capacity constraints, produces public capital, which enters production functions in both the traded and non-traded sectors. The natural resource sector produces resource GDP and generates resource revenue for the government. The government has limited financing options, in particular, concessional debt, external commercial debt, and consumption VAT tax. Fiscal adjustments through tax rates and government non-capital expenditures may be constrained by ceilings and floors, where debt sustainability could become an issue. The model is calibrated using the historical data of Niger and parameters widely accepted in the literature.

5. The simulation considers two different public investment plans.

In the baseline public investment plan (left charts in Figure 1), public investment awaits the natural resource revenue boom. Public investment as a percentage of GDP gradually increases until it reaches its peak of 19 percent of GDP in 2026 and stays at the peak for 5 years before it gradually goes back to the current level.
As comparison, the aggressive public investment plan (right charts in Figure 1) assumes that the public investment scaling up plan is more front-loaded and resembles the pattern in the natural resource revenue. In this scenario, public investment as a percentage of GDP reaches the same peak in 6 years (one half of the time in the baseline case).

6. The development of the oil and mining sector presents opportunities but also risks, especially as the production of the natural resources are frequently subject to shocks. We consider two alternative scenarios of resource revenue inflows.

Under the baseline natural resource GDP scenario (left charts in Figure 2), oil production is estimated to increase from its current level of 18,000 barrels per day to its peak at 80,000 barrels per day by 2019, and stays at the peak for 10 years. Uranium production is projected to gradually increase from its current level of 4639 metric tons per year and reach its peak at 10300 metric tons per year in 2019.
The adverse natural resource GDP scenario (right charts in Figure 2) uses the same projections for future natural resource prices, but considers the situation where the productions of the natural resources are delayed and the quantities are much lower than anticipated. In this scenario, the quantity of oil production increases much more slowly and reaches the peak at 26,400 barrels per day in 2024. The uranium production only slightly increasing over the coming 8 years and reaches its peak at 4400 metric tons per year before it rapidly declines to the current level.

7. Our analysis also considers the tradeoff of scaling up investment, financed through consumption tax, or alternatively, financed through commercial debt. In Figures 1 and 2, the blue solid lines represent the tax-financed scenarios, and the red dashed lines represent the debt-financed scenarios. To finance lumpy public investment, policy considerations on scaling up investment should be given to smooth tax rate and to borrow through debt within the country’s fiscal space. In evaluating the return to public investment projects, account should be taken of the increase in distortive taxes that will be needed to service the increment to public debt.

8. The simulations suggest that the economy would benefit from the relatively more aggressive investment scaling-up. Although the debt increase may be less pronounced with the benchmark investment plan in the short run, the aggressive investment plan would increase the public capital stock and raise output gradually, which offsets the increase in public debt in the short run so that the debt-to-GDP ratio declines in the long run. Also, no sovereign wealth fund has yet been well-established to smooth consumption, to save against revenue volatility in ensuring intergenerational equity and to address future financial needs from large investment scaling-ups. Our results show that an investment plan, whose pattern resembles the inflows of the natural resource revenues, would be also preferable considering the restrictions.

9. Meanwhile, cautions must be made under both baseline and aggressive plans that downside risks from the uncertainty of the natural resources extraction could undermine the macroeconomic effects of the investment. In the adverse scenario where the projections of the natural resource production are much lower, both the baseline and aggressive plans imply undesirably high levels of debt or painful tax adjustments in the long run. The reduction in private consumption and investment are also more severe than those in the baseline scenario.

10. In sum, our results highlight the need of public investment scaling-up for additional infrastructure in Niger. With clearly identified infrastructure needs, the public investment would be favorable for both the long-term growth and debt sustainability. However, when making the fiscal policy decisions, the authorities should also take into account the risks to the debt position due to the uncertainties of the commodity prices and the rate of extraction of the natural resources.

Appendix. Key Model Equations

The economy features three sectors: natural resource production, nontraded goods production and traded goods production. Since the natural resource sector employs a small and stable fraction of labor force and a large part of investment is financed by foreign investment, we assume that natural resource production follows an exogenous process described by

\begin{matrix} \frac{\tilde{y} o, t}{\tilde{y} o} = {(\frac{\tilde{y} o, t - 1}{\tilde{y} o})}^{ρ y o} & \exp (ε_{t}^{y o}) \end{matrix},

where $ρ_{y o} \in (0, 1)$ is an auto-regressive coefficient and $ε_{t}^{y o} ~ i i d N (0, σ_{y o}^{2})$ is the natural resource production shock. Due to the small open economy assumption the international natural resource price is taken as given and evolves according to

\begin{matrix} \frac{\tilde{p} o, t}{\tilde{p} o} = {(\frac{\tilde{p} o, t - 1}{\tilde{p} o})}^{ρ p o} & \exp (ε_{t}^{p o}) \end{matrix},

where $ρ_{p o} \in (0, 1)$ is an auto-regressive coefficient and $ε_{t}^{p o} ~ i i d N (0, σ_{p o}^{2})$ is the resource price shock. The government collects natural resource revenues from its production

t_{t}^{o} = τ^{o} S_{t} {\tilde{p}}_{o, t} {\tilde{y}}_{o, t},

where τ^o is royalty tax rate that can be made time-varying, if necessary. s_t is the relative price of traded goods to the consumption basket. Assuming that the law of one price holds for traded goods implies that s_t also corresponds to the real exchange rate.

Firms in both nontraded and traded sectors produce according to a Cobb-Douglas production function using labor, private capital and public capital

y_{i, t} = z_{i} {(k_{i, t - 1})}^{1 - α_{i}} {L_{i, t}}^{α_{i}} {k_{G, t - 1}}^{α_{G}},

where z_i is a total factor productivity scale parameter, k_i is the sectoral-specific private capital, L_i is the sectoral-specific labor, k_G is the public capital, at is the labor share of sectoral income and α_G is the output elasticity with respect to public capital, i ∈ {N, T} represents nontraded or traded sector.

We explicitly model inefficiency in the public sector. Effective investment is given by

{\tilde{g}}_{t}^{I} = \in (g_{t}^{I}) g_{t}^{I},

where $g_{t}^{I}$ is government public investment expenditure, and ∊ ∈ (0,1] governs the efficiency of public investment. The law of motion of public capital is given by

k_{G, t} = (1 - δ_{G, t}) k_{G, t - 1 + {\tilde{g}}_{t}^{I}},

δ_G,t captures the time-varying depreciation rate due to lack of maintenance on existing public capital.

References

Araujo, J., Li, B. G., Poplawski-Ribeiro, M., Zanna, L.-F., 2013, “Current Account Norms in Natural Resource Rich and Capital Scare Economies” IMF Working Paper No. 13/80, (Washington: International Monetary Fund).
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Buffie, E.F., Berg, A., Patillio, C., Portillo, R., Zanna, L.-F., 2012, “Public Investment, Growth and Debt Sustainability: Putting Together the Pieces” IMF Working Paper No. 12/177, (Washington: International Monetary Fund).
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Berg, A., Portillo, R. Yang, S.-C. S., Zanna, L.-F., 2013, “Public Investment in Resource Abundant Developing Countries” IMF Economic Review 61 (1), 92–129.
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Melina, G., Yang, S.-C. S., Zanna, L.F., 2014, “Debt Sustainability, Public Investment and Natural Resources in Developing Countries: the DIGNAR Model” IMF Working Paper No. 14/50, (Washington: International Monetary Fund).
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Prepared by Grace Bin Li (RES) and Hou Wang (RES/SPR).

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