A. Consumption and Savings/Investment Decisions

11. For RRDCs deciding on the tradeoff between consuming now and saving for future generations, some frontloading of consumption spending may be welfare-improving (Figure 3). For a country on a typical development path, future generations are expected to have higher non-resource income than current generations. In that case, it may be optimal to tilt consumption out of resource inflows toward presently poor generations because an additional “unit” of consumption for the present generation has a higher marginal utility (added value).⁵ It follows that for such countries consumption rules based on the PIH (see Box 2) or on the bird-in-hand approach (which allows only interest income from already extracted resources to be consumed) would not be optimal. This is because neither strategy allows for frontloading of consumption spending: the first exhibits perfect consumption smoothing across generations, and the second actually backloads consumption spending.

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Incremental Consumption from a Resource Windfall Using Various Criteria¹

When standards of living are expected to rise over time, it is optimal to shift incremental consumption spending afforded by a natural resource windfall forward to benefit presently poorer generations.

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

¹ Stylized example based on Collier et al. (2010), p. 93.

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12. To have a lasting impact on development, part of the natural resource revenues needs to be saved and invested. Other things being equal, optimal savings rates from resource windfall inflows are higher when returns on savings are higher and the resource windfall is relatively shortlived. Except for some extreme examples, for there to remain any permanent consumption increment the savings rate would approach 100 percent of resource flows as the time-to-depletion date nears (Venables, 2012). Intuitively, the income from saved resources gradually grows larger and will eventually fully cover consumption spending as resource flows dwindle, thus avoiding discrete (and undesired) jumps in the intertemporal consumption profile.⁶

13. Scaling up domestic investment financed by natural resource wealth is likely to be part of an optimal strategy for many RRDCs.⁷ The decision on how much to consume and save/invest needs to be considered in addition to the question of where to invest.⁸ For RRDCs, the optimal allocation is likely to have a significant domestic investment component. Capital-scarce developing countries could have high returns on capital, but limited (if any) access to international capital markets, and their own financial markets are relatively shallow. Of course, allowance would need to be made to cover maintenance and other recurrent costs for a higher domestic capital stock.

14. Boosting domestic spending may cause the economy to bump into short- to medium-term constraints.⁹ The increase in domestic demand (consumption and domestic investment) may run into supply bottlenecks that push up the price of non-traded goods. This, in turn, could create inflationary pressures and possibly also adversely impact the non-resource tradable sector (Dutch disease).¹⁰ The domestic output response may be delayed because of the need to install more “home-grown” (i.e., non-traded) capital (van der Ploeg and Venables, 2010). Plans to ramp up investment spending may also reveal bottlenecks at the microeconomic level: Gupta et al. (2011) found that weaknesses in project implementation, project selection, and budgeting lower the efficiency of investments.

15. If bottlenecks are a concern, then it may be advisable to take a gradual approach and save more of the windfall in financial assets, even if only temporarily. The increase in (non-tradable) consumption spending would need to be tempered while the domestic capital stock is being built up (Figure 4). Similarly, more of the windfall would then be “parked” in a foreign asset development fund while investment capacity is built domestically (van der Ploeg and Venables, 2010). A measured approach allows for building up capacity to manage investment, a process dubbed “investing in investment” (Collier, 2011). Berg et al. (2012) propose a “sustainable investing” approach, in which public investment is scaled up gradually in line with institutional and absorptive capacity constraints. They show that sustainable investing can minimize the impact of volatile commodity prices on the domestic economy, mitigate Dutch disease, and reduce the costs of absorptive capacity constraints.

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Incremental Consumption and Saving / Investment of a Resource Windfall

Ramping up productive domestic investment would be part of an optimal development strategy, though the desired speed of scaling up will depend on factors like absorptive capacity.

(Stylized example).

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

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16. The importance to RRDCs of sound institutions cannot be overemphasized. Resource wealth can undermine institutions by promoting rent-seeking and corruption, risking dissipation of government savings and poor investment quality. Resource-rich countries with stronger economic and political institutions tend to have better macroeconomic and growth performance (van der Ploeg, 2011; Arezki and Brueckner, 2011; Arezki et al., 2011).

17. The political economy and institutional framework of RRDCs can pose severe challenges for effectively scaling up public investment. Among them are (i) multiple powerful groups pushing for redistribution of a windfall when institutions are weak (the “voracity effect”; Lane and Tornell, 1998, Arezki and Brueckner, 2010); (ii) pressures to earmark investments to the geographic areas where resources are extracted; and (iii) investments by oil or mining parastatals and public-private partnerships in resource-for-infrastructure deals that are not integrated into the budget or not fully transparent (Barma et al., 2012). Governments need some type of commitment mechanism (institutionalized savings rules) to support incentives for saving resource revenues; otherwise there is a possibility that their savings may merely transfer spending power to a bad successor (Collier, 2012). Making credible mechanisms such as fiscal responsibility laws or constitutional amendments is difficult where enforcement mechanisms, such as an independent judiciary, are weak. Thus, RRDC-tailored fiscal frameworks and improvements in the management of public investment need to be part of a continuous process of building up institutions and take into account political economy constraints and incentives.

18. Implications: Chapters III.A and V will elaborate how the principles discussed above can in practice be factored into macroeconomic frameworks, in the form of fiscal policy frameworks and rules and model-based tools.

B. Dealing with Uncertainty and Volatility

19. Swings in commodity revenue complicate macroeconomic management.¹¹ Commodity price swings can be large, long-lasting (even permanent), and asymmetric.¹² These characteristics make it hard to forecast prices and complicate the task of policy makers trying to assess whether a shock is permanent or temporary—hence whether to choose adjustment or smoothing. There may also be uncertainty and volatility in the volume of output and exports, possibly due to technical difficulties, accidents, strikes, sociopolitical unrest, and global demand shifts.

20. Revenue volatility creates a motive to save some of the resources for precautionary reasons. Prudent policymakers may wish to build up a liquidity fund in good times that can be tapped to smooth consumption spending when resource inflows fall short. The optimal size of such a liquidity buffer would be larger when revenue volatility is high and more persistent, and if society exhibits more prudence (dislikes consumption swings more). The optimal buffer will also be larger when consumption out of resource revenue is higher (Figure 5).¹³

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Incremental Consumption and Saving from an Uncertain Resource Windfall

Uncertainty about future resource flows may call for cautious spending plans and create a precautionary savings motive.

(Stylized example).

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

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21. In practice, policy makers may wish to build liquidity buffers based on a tolerable degree of tail-risk uncertainty. Full self-insurance can be very expensive, especially when weighed against pressing development needs, and may also be very hard to achieve, for example when shocks are large and permanent. A more pragmatic approach would be to use a value-at-risk (VaR) or a model-based approach to assess the adequacy of buffers (Box 3). These methods yield the minimum liquidity buffer required to absorb a tail-end adverse price shock across a spectrum of price paths over a period of time.

Box 3.

Approaches to Assessing the Adequate Size of a RRDC Stabilization Buffer

Value-at-Risk and model-based approaches can be used to assess whether a stabilization fund under a given fiscal framework can provide a sufficient liquidity buffer to protect spending.

The Value-at-Risk (VaR) approach estimates the minimum required size of a stabilization buffer that can absorb tail risk in resource revenue volatility, to ensure that—with a given degree of confidence—the buffer is unlikely to be fully depleted (thus not require spending cuts) over the forecast horizon.

The size of the stabilization buffer depends on the stochastic properties of the revenue volatility (and assumptions on shock persistence), the desired forecast horizon, and the desired degree of confidence to avoid buffer depletion. Buffer size also depends on the budget rule determining fund inflows and outflows. For example, an application to Republic of Congo utilizes an oil price-based budget rule (Supplement 2 III.A). Cross-country simulations suggest that employing an 8-year moving average of oil prices (5 historical years and 3 years forward projection) would strike a reasonable balance between oil price forecasting errors (which generate volatility for the stabilization fund) and reference price volatility (which generate resource revenue and potentially fiscal spending volatility). The VaR approach has also been applied to Nigeria by Bartsch (2006).

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Size of Stabilization Fund Under Baseline and Aggressive Scaling up Scenario

(In percent of GDP, average and 95 percent confidence interval)

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

Source: IMF staff estimates.

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The DSGE model-based approach links fiscal policy and the macroeconomy to determine the confidence that a spending path can be maintained given forecasted resource revenue volatility, while accounting for macroeconomic feedback effects and tradeoffs. For a specified fiscal path, the fund is drawn down when the fiscal balance is in deficit or, if fund balances are depleted, spending is cut to maintain fiscal sustainability. Large fiscal adjustments through cuts in investment spending could adversely affect non-resource growth (Supplement 1, Chapter I.C, Supplement 2, Chapter III.B).

In an application to Angola, oil price paths are simulated from the historical distribution, and a gradual investment scaling up scenario is compared to a more aggressive scenario. A smaller stabilization fund is built under the aggressive scaling up scenario, with about a 30 percent probability that the fund is inadequate to prevent future spending cuts, and a worse outcome for non-oil GDP (since the volatile investment rates—stemming from the fund’s frequent inability to protect spending from the shocks—are associated with lower investment returns).

While less information is needed to implement the VaR approach, the model-based approach has a richer economic structure. More public investment can increase non-oil growth, but imply less stabilization fund savings, and thus leave spending (including investment) vulnerable to future shocks. The investment, however, can also generate more fiscal space to absorb future shocks because of potentially higher non-resource revenue. Taking these macroeconomic channels into account can help assess the adequacy of a stabilization buffer.

22. RRDCs might also use market-based instruments to manage commodity price volatility. Countries can enter into over-the-counter forward contracts to lock in prices, or hedge price risk with financial instruments such as options. While several countries have used market-based hedging instruments—Mexico, for example, has purchased put options on oil to insure against downside price risk—these are still relatively under-utilized by developing countries. Several factors may explain why they are not used more often, among them the facts that these contracts can be technically complex, costly, hard to communicate to stakeholders, and politically risky.¹⁴

23. RRDCs also need to take into account uncertainty in the return on investment.

Policymakers rightfully worry about volatility and uncertainty of resource revenue. But the return on saving/investing is risky too, and could even be negative in some instances. The lower expected risk-adjusted returns may slow the speed at which investment spending should be ramped up, while also prompting policymakers to invest relatively more in safe assets or repay debt faster.¹⁵

24. The presence of both uncertainty and volatility calls for a holistic approach to natural resource management. Given uncertain and volatile resource revenue flows, policy makers need to find the appropriate balance between consumption spending and savings. Spending can be safeguarded by setting aside a precautionary liquidity buffer. Additional savings can be used to pay down debt, ramp up domestic investment spending, or invest in external financial assets for future generations—for example, when absorptive capacity constraints make it impossible to invest faster.

A. Analytical Framework

29. The fiscal framework for RRDCs should set out additional indicators on resource use, fiscal rules to manage price volatility in the short term, and should establish fiscal sustainability benchmarks. The importance of exhaustibility issues is a function of the length of the reserve horizon. In countries, with long reserve horizons, the main focus in the short to medium term should be on managing revenue volatility and avoiding fiscal procyclicality. In countries with shorter reserve horizons, having a benchmark for fiscal sustainability that takes into account resource exhaustibility is also a key concern for fiscal policy formulation. As elaborated below, the sustainability benchmark serves as an anchor for the medium- to long-term fiscal framework while smoothing of resource revenues through different mechanisms can help mitigate externally driven volatility in the short to medium term.

30. For RRDCs with short reserve horizons, the key fiscal indicator to assess the fiscal stance is the non-resource primary balance (NRPB).²¹ As a measure of the macrofiscal stance, the NRPB²² identifies the impact of government operations on domestic demand, since resource revenues typically originate abroad.²³ A higher non-resource primary deficit would indicate an expansionary fiscal stance.²⁴ Setting fiscal policy on the basis of this indicator can help delink fiscal policy from the volatility of resource revenues and, as explained below, facilitates an explicit link to the sustainability framework for countries with limited reserve horizons (see also Supplement 2, Chapter I.B). By contrast, the overall fiscal balance can shift abruptly as a result of the volatility of natural resource prices. A massive fiscal expansion would not be detected by the overall balance after a spike in natural resource prices and revenues.

31. Targeting a “structural” primary balance—defined as the primary balance excluding the cyclical component of resource revenues²⁵—is an important complement to the NRPB in RRDCs with long reserve horizons. In these countries, resource revenues can be decomposed into a structural and a cyclical component using various approaches, including a price-based smoothing rule as elaborated below. The structural primary balance is equal to the NRPB plus the structural component of resource revenues. In this manner, the structural primary balance target could be set to ensure a sustainable fiscal policy framework, and the smoothing rule would delink expenditures from externally-driven volatility in commodity prices. The structural balance approach allows for the sustainability of fiscal policy to be assessed in a similar manner as non-resource-rich countries.

Countries with Relatively Short Reserve Horizons

32. Countries with relatively short reserve horizons should rely on the NRPB as a fiscal anchor. This is the case for two reasons. First, countries that smooth the overall balance rather than the NRPB would need to adjust spending abruptly when resource revenues are exhausted, which would have disruptive effects on economic activity and the provision of public services. The second reason relates to sustainability issues that would arise if the NRPB were not used as the fiscal anchor. With forward-looking markets, pressures in countries running a large non-resource primary deficit could arise well ahead of the time when resources are actually exhausted. Preventing this outcome is best achieved through an NRPB rule. As elaborated below, such a rule is usually anchored around a sustainability benchmark but it can also be used in combination with an expenditure growth or price-based smoothing rule to manage short-term volatility.

Non-resource Primary Balance Rules

33. An NRPB is particularly appropriate in countries with shorter reserve horizons where issues of exhaustibility should figure more prominently. The target for the NRPB can be set in a variety of ways. As noted in Chapter II, in the traditional PIH framework, preservation of wealth requires that the government consumes each year the implicit real return on financial wealth already accumulated and the implicit return on the net present value of future resource revenues. While the PIH approach is a model for the optimal path for consumption, the Fund has typically made a simplifying assumption that equates consumption with total spending (IMF, 2012). In practice, the NRPB rule in the standard PIH approach could be set in two possible ways:

• Consistent with the “bird-in-hand” approach, the NRPB would be set at a level that is equal to the real rate of return on the accumulated financial assets.

• The other approach is consistent with the traditional PIH. The NRPB would be set at a level that is consistent with both accumulated and expected financial wealth, basically treating resource wealth in the ground as “virtual” financial wealth and computing the present value by assuming an implicit rate of return. This implies calculation of the value of the resources in the ground and the associated resource revenues that will accrue to the government in the future (see Supplement 2, Chapter I.B).

34. As noted in Chapter II, the PIH approach is excessively restrictive for RRDCs and alternative frameworks for calibrating the path of NRPBs are needed. This can be achieved through alternative sustainability frameworks—as discussed below—which provide greater flexibility to accommodate a scaling up of public investment relative to the PIH approach (see Supplement 2, Chapter I.B). Unlike the PIH, such approaches involve determining optimal paths for public investment and the NRPBs based on absorptive capacity and smoothing government consumption depending on the country’s cyclical position.²⁶ This includes an analysis of inflation, real exchange rates and interest rates, to ensure that the fiscal stance is consistent with desired demand management. Specialized models (e.g., dynamic stochastic general equilibrium models, financial programming), which are already being used by some RRDCs, can help support this analysis. The “FARI” cash flow model developed by the IMF’s Fiscal Affairs Department (FAD) can also be used to forecast resource revenues (see Supplement 2, Chapter II.C, Box 2 and Daniel et al., 2010). Adopting a fiscal framework based on an NRPB rule also mitigates short-run volatility since resource revenues are fully excluded from the target path.

35. These alternative sustainability approaches should aim for a relatively smooth path of current spending to avoid potentially abrupt adjustments when resource revenues are exhausted. Anchoring the fiscal framework to a sustainable path of NRPBs would help ensure this outcome. In this way, current expenditure could increase in a sustainable manner relative to the PIH baseline so that future adjustment would not require a consolidation in government consumption, which may be economically disruptive and adversely affect priority spending on socially sensitive programs.

Countries with Long Reserve Horizons

36. Though for this group of countries exhaustibility is not the primary concern, they are still faced with cyclical and sustainability issues. Cyclical issues arise when resource revenues induce spending increases, generating a fiscal impulse as measured by changes in the NRPB that is large in relation to existing supply (potential output). This occurs when expenditure patterns follow natural resource prices closely, thus reinforcing economic cycles. Sustainability issues arise when these countries spend more than their expected long-term resource revenues. This can occur when they extrapolate temporary increases in prices and hence “misprice” their resource wealth and/or fail to maintain appropriate fiscal buffers to sustain current spending levels.²⁷ All this can lead to the boom-bust cycles so often seen in resource-rich countries. A useful approach to address sustainability issues in these countries is to target the structural primary balance.

Structural Primary Balance Rules Based on Price Smoothing (Price-based rules)

37. A price-based smoothing rule is a suitable approach to compute structural resource revenues.²⁸ This is the case for two reasons:

• To the extent that a country derives an increasingly large part of its fiscal revenues from natural resources, excluding resource revenues from fiscal targets (as an NRPB rule would do) will be less intuitive for policy makers and more questionable economically since more economic activity would be excluded from fiscal indicators. An NRPB rule can also create the misperception of a worsening fiscal situation when countries expand their capital budgets in response to rising resource revenues, even when the scaling up of investment is consistent with macroeconomic stability.

• A price-based rule can mitigate the transmission of externally-driven resource price volatility, which can result in a procyclical fiscal stance. A price-based smoothing rule does not offer a direct link to sustainability benchmarks but it can help support solvency through “prudent” forecasting of structural revenues by deliberately under-projecting the sustainable resource price.²⁹

38. A key decision is the reference price used to compute structural resource revenues.

Two approaches are possible: the reference or benchmark commodity price could be set by using an automatic formula or by an independent committee. In practice, the former approach is more common. Chile is an exception where an independent committee of experts makes a judgment on medium- to long-term reference prices. In most developing countries, however, limited institutional capacity and lack of a deep pool of independent experts suggest that price-based rules should rely on automatic formulas. Both approaches can bolster credibility and protect fiscal policy from the pressures of the political cycle.

39. The choice of price formula reflects a tradeoff between a preference for smoothing expenditures and a need to adjust to changes in price trends (Figure 6). Budgets relying on price formulas with a short backward-looking horizon will better track changes in prices, but may be associated with more volatile spending envelopes that could fuel procyclical fiscal policy. In contrast, budgets relying on price rules with long backward-looking formulas would have smoother expenditure paths, but might systematically under- or over-shoot actual revenues if price trends change (e.g., see the red line in Figure 6).³⁰

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Real Primary Expenditure Growth¹

(Percent change, year-on-year)

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

Source: IMF staff estimates. ^{1The numbers associated with the price rules correspond to the number of years in the past, present, and future used in the smoothing calculation (see footnote 30).}

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40. In practice, the price smoothing formula can take a number of possible specifications and may operate as either a fiscal rule or a budgeting procedure to forecast resource revenues. For example,

• Mongolia uses a 16-year moving average of mineral prices (prices of the past 12 years and projected prices for the current and the next 3 years). The formula attaches a high weight to previous prices, providing stability in the revenue forecast while allowing for a gradual incorporation of forward-looking price expectations so that the revenue forecast adjusts gradually to new trends.

• Mexico uses a weighted-average of the 10-year historical average of oil prices (25 percent weight), the short-term futures price (50 percent weight but multiplied by a prudence factor of 0.84 determined on the basis of the standard deviation of oil prices), and medium-term futures prices (25 percent weight). This specification places a higher weight on forward-looking market-based prices, which should be more responsive to changes in price trends but less smooth for revenue forecasting.

• Trinidad and Tobago relies on a simple average of oil prices for the last 5 years, the current year, and the futures prices for the next 5 years. This formula represents an intermediate specification between full historical smoothing, and capturing more forward-looking prices.

• Ghana’s petroleum revenue legislation projects revenues on the basis of a 7-year moving average of benchmark oil prices, including three projected years. Similar to Trinidad and Tobago, this formulation is an intermediate case between full historical smoothing and incorporating forward-looking expectations.

41. The formula needs to be evaluated over time to make sure that it is generating an appropriate level of financial savings (Figure 7). As noted above, a price formula based on a slow-moving average may better smooth expenditure but at the cost of possibly large discrepancies between projected and actual revenues. For a given expenditure path, such forecast errors will either generate excessive savings when prices are rising fast (e.g., blue line in text chart) or will need to be absorbed by financial buffers when prices decline unexpectedly. These buffers would likely need to be larger when resource dependency is higher.³¹ For example, VaR simulations for the Republic of Congo suggest that its buffers need to be sizable (e.g., 48 percent of non-oil GDP) to maintain a smooth government spending path over the medium term (see Supplement 2, Chapter III.A).

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Cumulative Financial Savings¹

(In percent of non-resource GDP)

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

Source: IMF staff estimates. ^{1The numbers associated with the price rules correspond to the number of years in the past, present, and future used in the smoothing calculation (see footnote 30).}

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Expenditure Growth Rules

42. An expenditure growth rule can help to limit procyclicality (Figure 8). The rule can be formulated to limit the growth of government spending in nominal or real terms, or as a percent of non-resource GDP. Such a rule is desirable to guide the scaling up of public investment where there are absorptive capacity constraints (Berg and others, 2012) and where the volatility of resource windfalls requires precautionary savings (van der Ploeg, 2011). It also helps smooth out volatility when used in combination with a price-based rule because it sets floors and ceilings for expenditure growth that can limit fiscal procyclicality. This rule is more effective if it complements an overall balance rule (like the one in Peru, where the expenditure growth rule has been critical in keeping fiscal policy prudent) or a structural rule (as in Mongolia starting in 2013).³² Relative to a simple structural primary balance rule, the expenditure growth rule generates a more predictable increase in spending. Adjustments to expenditure growth limits should ideally be informed by an analysis of absorptive capacity. Also, special treatment may need to encompass a wider category of growth-enhancing and priority spending (e.g., education and health), and care should be taken to avoid fragmentation of the budget or creation of parallel budgets. The approach adopted by Botswana (based on the Sustainable Budget Index) essentially stipulates that resource revenues are to be used for public investment and recurrent spending on health and education.

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Real Primary Expenditure Growth¹

(Percent change, year-on-year)

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

Source: IMF staff estimates.¹The numbers associated with the price rules correspond to the number of years in the past, present, and future used in the smoothing calculation (see footnote 30).

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43. To accommodate a preference for investment expenditure, higher growth limits could be set for capital than for current expenditures. This is done in Peru, where the limit on current expenditure growth was linked to the growth of (non-mineral) GDP and the limit on growth of capital expenditure was removed during the global financial crisis to promote expenditures with a higher multiplier. While there is merit in this approach, there are also risks in that it provides incentives to camouflage recurrent expenditure as capital expenditure; it also ignores the fact that many outlays classified as current spending can have significant capital formation-type effects (e.g., health and education).

Setting Sustainability Benchmarks

44. The fiscal framework should be guided by an assessment of fiscal sustainability— whether a government can sustain current spending, tax, and other policies in the long run without threatening its solvency or defaulting on its liabilities or expenditure commitments. While all countries need to ensure the sustainability of their fiscal framework, this issue is particularly important in countries with a relatively short reserve horizon, and calls for a special framework (see Supplement 2, Chapter I.B for a detailed discussion). In countries with long horizons, these sustainability assessments are useful in focusing attention on the need for intertemporal fiscal savings decisions. Assessments should recognize that there is uncertainty about the amount of reserves, because new discoveries are made continually. The best option would be to utilize ranges or probabilities for the reserve horizon. In addition, maintaining a smooth path of current expenditure to avoid the need for a difficult consolidation in future government consumption is an important aspect of the sustainability assessments. The rest of this section explores two approaches that could be used to guide longer-term considerations: a modified version of the PIH approach and a revised DSA methodology (see Table 1 on fiscal frameworks).³³

Table 1.

Fiscal Frameworks for Resource-Rich Countries

Table 1.

Fiscal Frameworks for Resource-Rich Countries

		Indicator/framework	Definition/objective
Fiscal policy indicators		Overall fiscal balance	Total revenues minus total spending. Indicates net financial position (i.e., whether government is accumulating or reducing financial wealth). This indicator is also useful to assess financial vulnerability.
		Non-resource primary fiscal balance	Overall fiscal balance, excluding resource revenues, spending associated with the development of the resource sector, and interest payments. Useful to measure the fiscal stance (i.e., whether fiscal policy is being pro cyclical or counter cyclical). It can help to delink fiscal policy from revenue volatility.
Fiscal policy anchor/rule
	Resource horizon
	Long
		Price-based rule (structural primary balance rule with price smoothing)	Aims to determine expenditure levels on the basis of smoothed resource revenue for a given fiscal target. A smoothed estimate of resource revenue is used to determine the expenditure envelope. Helps insulate spending from price volatility.
		Expenditure growth rule	Sets a limit on the growth of government spending. Useful to limit the procyclicality of fiscal policy and in cases of absorptive capacity constraints (e.g., overheating, large current account deficits). Usually used in combination with a price-based rule.
	Short	Non-resource primary balance rule	Set in line with long-term sustainability benchmarks and calibrated in the short term depending on cyclical conditions.
Long-term fiscal sustainability benchmarks		Modified PIH	Deviates from the traditional PIH by allowing a scaling up of investment over the medium term, but followed by a scaling down of spending after the “scaling up” period in order to preserve net financial wealth at the PIH level. It does not consider the growth impact or replacement and recurrent costs associated with additional investments.
		Fiscal sustainability framework (modified DSA)	Based on a debt sustainability framework. Aims to stabilize net resource wealth (over the longer term) at a level lower than the PIH, or MPIH, would imply, while allowing scaling up of expenditures. Considers the growth impact and the replacement and recurrent costs associated with additional investment.

View Table

Table 1.

Fiscal Frameworks for Resource-Rich Countries

		Indicator/framework	Definition/objective
Fiscal policy indicators		Overall fiscal balance	Total revenues minus total spending. Indicates net financial position (i.e., whether government is accumulating or reducing financial wealth). This indicator is also useful to assess financial vulnerability.
		Non-resource primary fiscal balance	Overall fiscal balance, excluding resource revenues, spending associated with the development of the resource sector, and interest payments. Useful to measure the fiscal stance (i.e., whether fiscal policy is being pro cyclical or counter cyclical). It can help to delink fiscal policy from revenue volatility.
Fiscal policy anchor/rule
	Resource horizon
	Long
		Price-based rule (structural primary balance rule with price smoothing)	Aims to determine expenditure levels on the basis of smoothed resource revenue for a given fiscal target. A smoothed estimate of resource revenue is used to determine the expenditure envelope. Helps insulate spending from price volatility.
		Expenditure growth rule	Sets a limit on the growth of government spending. Useful to limit the procyclicality of fiscal policy and in cases of absorptive capacity constraints (e.g., overheating, large current account deficits). Usually used in combination with a price-based rule.
	Short	Non-resource primary balance rule	Set in line with long-term sustainability benchmarks and calibrated in the short term depending on cyclical conditions.
Long-term fiscal sustainability benchmarks		Modified PIH	Deviates from the traditional PIH by allowing a scaling up of investment over the medium term, but followed by a scaling down of spending after the “scaling up” period in order to preserve net financial wealth at the PIH level. It does not consider the growth impact or replacement and recurrent costs associated with additional investments.
		Fiscal sustainability framework (modified DSA)	Based on a debt sustainability framework. Aims to stabilize net resource wealth (over the longer term) at a level lower than the PIH, or MPIH, would imply, while allowing scaling up of expenditures. Considers the growth impact and the replacement and recurrent costs associated with additional investment.

45. Modified PIH. The MPIH approach can help accommodate a more front-loaded spending path than a traditional PIH framework. Instead of preserving financial wealth over time, the MPIH allows financial assets to be drawn down for a few years during the scaling up period. The drawdown would be offset by fiscal adjustment in the future to rebuild financial assets to the same level as under the traditional PIH.³⁴ This approach does not explicitly account for the potential impact of the scaling up on growth and non-resource revenues. Over time, if the scaling up of investment is yielding “fiscal returns” (i.e., increasing non-resource revenues), the need for fiscal adjustment to compensate for the initial scaling up would be reduced, and could be eliminated. In contrast, if higher public investment does not have a lasting impact on growth, the MPIH provides a measure of the potential need for future adjustment to mitigate a permanent loss of wealth that could be welfare-reducing for future generations.³⁵

• Application to Timor Leste. Timor-Leste’s PIH approach has some of these features, in that the government is required to justify to parliament spending that is higher than a PIH benchmark. The authorities are frontloading capital spending over the next two decades to improve infrastructure. To facilitate efficient management of the investment program, the government has created institutions that are responsible for project appraisal, procurement, and monitoring within the budget process. This can help ensure that the process of scaling up investment has the expected benefits and provides some reassurance that the MPIH approach is appropriate.

46. Fiscal sustainability framework. This framework explicitly takes into account the intertemporal budget constraint and incorporates ex ante the expected impact of higher investment on growth and non-resource revenues.³⁶ Fiscal sustainability can be consistent with an NRPB that allows a drawdown of government wealth (using those assets to build human and physical capital) and eventually stabilizes it at a lower level than the PIH or the MPIH. Lower financial wealth will generate a lower stream of income to the budget than in the PIH-based framework, which will result in a higher NRPB consistent with fiscal sustainability. However, fiscal spending can still be stabilized at a higher level because higher growth will have “fiscal returns” in the form of larger non-resource revenues. The net wealth stabilization level would be country-specific.³⁷ This contrasts with standard frameworks, including the PIH and MPIH that focus on preserving the full amount of financial wealth. The sustainable investment tool can be used to help inform scaling up decisions in line with long-term sustainability and short-term absorptive capacity constraints (see below).

• Application to the Republic of Congo. The Congo staff team simulated a scaling up of investment sufficient to raise the stock of infrastructure capital to the middle income country average, taking into account absorptive capacity constraints and the efficiency of investment. The exercise demonstrated that it was possible to both scale up investment and ensure long-term fiscal sustainability because government wealth is stabilized in the post-scaling up period at about 400 percent of non-oil GDP, lower than current levels and than under the PIH. The result is significantly higher per capita income growth (see Table 2 and Supplement 2, Chapter III.A).

  Table 2.

  Republic of Congo: Selected Economic Indicators Under the Standard PIH and the FSF Scenarios

  

  Source: IMF staff estimates.

  ¹Data for 2017 report the average forecast of 2013-17, and 2032 report the average forecast of 2018-32.

  Table 2.

  Republic of Congo: Selected Economic Indicators Under the Standard PIH and the FSF Scenarios

  	Standard-PIH		Fiscal Sustainability Framework
  	2017	2032	2017	2032
  Per Capita GDP (in U.S. dollars)	2,992	2,571	3,868	4,872
  Real GDP (annual percent change)1	-1.7	2.3	5.1	3.9
  Public Capital Spending (in percent non-oil GDP)	6.8	17.3	23.8	9.1
  Cumulative Capital Spending (in billions of U.S. dollars)	4.6	26.5	18.8	40.9
  Non-Resource Primary Balance (NRPB)	-14.9	-14.9	-28.7	-3.5
  Net Financial Assets (in billions of U.S. dollars)	30.2	135.2	18.2	100.8

  Source: IMF staff estimates.

  ¹Data for 2017 report the average forecast of 2013-17, and 2032 report the average forecast of 2018-32.

  View Table

  Table 2.

  Republic of Congo: Selected Economic Indicators Under the Standard PIH and the FSF Scenarios

  	Standard-PIH		Fiscal Sustainability Framework
  	2017	2032	2017	2032
  Per Capita GDP (in U.S. dollars)	2,992	2,571	3,868	4,872
  Real GDP (annual percent change)1	-1.7	2.3	5.1	3.9
  Public Capital Spending (in percent non-oil GDP)	6.8	17.3	23.8	9.1
  Cumulative Capital Spending (in billions of U.S. dollars)	4.6	26.5	18.8	40.9
  Non-Resource Primary Balance (NRPB)	-14.9	-14.9	-28.7	-3.5
  Net Financial Assets (in billions of U.S. dollars)	30.2	135.2	18.2	100.8

  Source: IMF staff estimates.

  ¹Data for 2017 report the average forecast of 2013-17, and 2032 report the average forecast of 2018-32.

47. These frameworks are particularly concerned with ensuring that resource revenues are used more for public investment than for government consumption. Although conceptually the long-run sustainability approaches would suggest focusing on the stability of the non-resource current balance, it is not advisable to use this indicator as a fiscal anchor because it does not on its own satisfy the intertemporal budget constraint,³⁸ it may be associated with budget fragmentation, and it is likely to generate incentives for creative accounting in the form of shifting current spending into the capital budget. At the same time, the attention to public investment is a necessary element of the approach. This would require a dialogue with the authorities on what is truly “investment.” For example, if staff’s view is that a particular “investment” is best treated as consumption, or is likely to be unproductive, they should advise the authorities to reclassify this spending and/or assume that its long-term impact on growth is negligible.

48. The choice between sustainability frameworks depends on the assessed impact of public investment on both growth and non-resource revenues. While this is subject to great uncertainty, it is necessary to adopt frameworks that generate a dialogue on how public investment plans will impact growth and future sustainability. Where the productivity of public investment is highly uncertain, the MPIH might be an appropriately prudent approach. In other cases, where there is greater confidence in the positive impact of investment, the FSF would seem to provide a better sustainability framework. In this case, the sustainable investment tool could be used to inform choices about alternative investment scaling up paths, accounting for the full macroeconomic effects (see Box 4).

49. There are various ways to assess the effectiveness of public investment. The Public Investment Management Index or PIMI (see Dabla-Norris et al., 2011)—when available—can be used to evaluate which of the four stages of the public investment management process (project appraisal, selection, implementation, and evaluation) is a bottleneck and needs to be strengthened before scaling up public investment.³⁹ The cross country estimates of growth effects of public capital can further guide policy makers, including the public investment stage that has the most impact on growth (e.g., Gupta et al., 2011). While it is difficult to get robust estimates of country-specific rates of return on public investment, some information is available from multilateral and bilateral sources (e.g., World Bank and donor projects; see Supplement 1, Chapter I.A). These assessments of the rate of return are clearly necessary when resource revenues are used to finance a scaling up of public investment. In any case, the fiscal frameworks discussed here will also create demand for more and better information.

50. How best to build productive assets may vary among RRDCs. Certain types of current expenditure, such as education spending to build human capital, can yield returns similar to public investment, and should be a high priority in some RRDCs. Similarly, some types of capital investment, for example on hospitals and schools, cannot be productive without associated recurrent outlays on operations and maintenance. Furthermore, RRDCs are a heterogeneous group: in fragile states, for instance, public spending on the security and justice sectors may have a growth return as high as building infrastructure.

51. For higher investment and the resulting growth to have a beneficial impact on the NRPB, it is essential that RRDCs improve their non-resource tax policy and administration.⁴⁰ There is evidence that rising resource revenues create disincentives for RRDCs to mobilize non-resource revenues (see Bornhorst, Gupta, and Thornton 2009). Failure to capture fiscal returns from higher growth would compromise the assessment of long-term sustainability.

52. In this context, it is also critical to put in place indicators to track the use of natural resource revenues. While an “optimal” strategy for the use of resource wealth might be to target higher public investment, it is not possible given the fungibility of financial resources to establish a dollar-to-dollar link between the use of natural resources and capital expenditures.

• Two simple indicators worth considering are (i) the share of public investment in total spending and (ii) the ratio of the increase in public investment to the increase in resource revenues, both as a percent of non-resource GDP.

• For countries where resource revenues are expected to increase over time, the expectation is that the share of public investment in total spending rises over time. Where resource revenues are expected to remain constant or decline, the challenge would be to maintain the share of investment in total spending until major infrastructure gaps are closed. Similarly, the second indicator would provide a measure of the extent to which additional resource revenues are used to expand capital spending.

• In addition to the above, monitoring changes in public consumption (through the non-resource current balance) and the overall balance, in terms of the increase in resource revenues, would provide a picture of consumption and financial savings associated with increments in resource revenues.

53. Setting a baseline to assess the evolution of these indicators may not always be straightforward. For countries where natural resources have recently been discovered, the appropriate baseline would be the pre-resource period. For more mature resource-rich countries, setting the baseline could be more difficult. Three options are: the pre-resource period, a pre-resource boom year (e.g., 2004 before the surge in oil prices began), or (if the first two options are not feasible) the current year. The justification for the last is that the country is committed to following a new framework going forward.

B. Fiscal Institutions

54. RRDCs should be equipped with well-designed fiscal institutions that support scaling up of public investment while maintaining sound fiscal policies. Among these institutions should be well-designed and transparent public financial management (PFM) systems (see Supplement 2, Chapter I.B); as well as special fiscal institutions, such as natural resource funds and independent forecasting bodies, to ensure prudent planning and utilization of resource revenues. The PFM system should be sufficiently robust to

• provide reasonable forecasts for natural resource prices, production, and fiscal revenues and analyze risks related to the central scenario;

• carry out medium-term budget planning;

• facilitate investment project appraisal, selection, and implementation to ensure that resource revenues, and other funding if any, are used to support long-term economic development;

• integrate cash and liability management to minimize financing costs and ensure a single route between the budget and any natural resource fund; and

• ensure transparency in the collection and utilization of natural resource revenues, and of other available resources, through appropriate fiscal accounting, reporting, and audit.

55. The issues of how much of the above needs to be set out in a fiscal responsibility law (FRL) or constitution will depend on the circumstances and the legal and administrative traditions of the country. Most countries opt to codify the rules and institutional arrangements for natural resource management in some form of legislation (e.g., the organic budget law), but the degree of detail varies considerably. In general, best practice is to be clear about the objectives, institutions, and reporting arrangements for natural resource management and to guard against over-prescription, in particular with regard to the amounts of revenue flowing into or out of funds, to ensure that these rules do not come into conflict with wider macrofiscal objectives and undermine the credibility of the law.

56. Fiscal transparency and good governance should be given prominence when fiscal institutions are established. In countries that do not have relatively inclusive political institutions, scaling up public investment (which is assumed to be welfare-enhancing given capital scarcity) might be counterproductive because the budget process does not necessarily reflect broader social preferences. Since this is a relatively common situation in resource-rich countries, it is essential that application of the code of good practices on fiscal transparency be monitored closely. This involves several issues, including an assessment of the clarity of the roles and responsibilities of different government entities; establishment of an open budget process; public availability of information; and assurances of data integrity.⁴¹

C. Managing Natural Resource Funds

57. Natural resource funds allow policy makers to deal with resource revenue volatility, meet development needs, and save for future generations. Thus, asset management strategies will be informed by one or more macrofiscal objectives:

• Stabilization: to insulate the budget and economy from volatile commodity prices;

• Savings: to transfer wealth across generations or across time (e.g., pension funds); and

• Development: to allocate resources to priority socioeconomic projects.⁴²

58. Resource funds should be seen as complementary policy tools, not the main fiscal policy instrument. These funds are not a substitute for fiscal policy, and potentially complicated rules governing flows between the budget and resource funds are not conducive to effective fiscal policy management. Specifically, the accumulation of financial assets in a fund for self-insurance and/or intergenerational objectives should be derived from actual fiscal surpluses and the government’s cash management strategy.⁴³

59. Resource fund flows should be integrated into the budget process to ensure its integrity and protect its role as the mechanism for setting expenditure priorities and allocating public resources. Resource flows should not be entrusted with independent spending authority, and all their inflows and outflows should go through the budget.

60. Resource funds are a key component of asset and liability management.⁴⁴ The design of resource funds should therefore be considered in a holistic manner that takes into account the government’s broad fiscal, balance of payments, and financial objectives. Key fiscal objectives include maintaining adequate liquidity to stabilize budget execution over time, funding capacity that is adequate to finance future budgeted development projects, and financing buffers adequate to cover possible future longer-term liabilities.

61. Funds with flexible inflow and outflow rules tend to be more effective than those that follow fixed rules (e.g., those linked to a threshold resource price or to a proportion of resource revenues). An example of a flexible fund is Chile’s stabilization fund, which operates as the “mirror image” of the structural balance rule: it receives fiscal surpluses associated with the fiscal rule during the boom years; and those surpluses are then used to support counter-cyclical fiscal policies when the fiscal position shifts to deficits. At the same time, it is important to consider the introduction of some “withdrawal brake” rules that limit the depletion of the funds in any single year. They can protect the fund from political pressures that can lead to its depletion, especially during electoral years. São Tomé and Príncipe, for example, limits withdrawals from the fund in any single year to a maximum of 20 percent of the accumulated assets.

62. The design and operational considerations underpinning the funds can vary with country circumstances and capacity levels. Practices might also evolve over time to adjust to new macroeconomic and financial market realities (Supplement 1, Chapter IV). When institutional capacity is weak, especially with regard to PFM, it is advisable for RRDCs to maintain only one natural resource fund that has two separate portfolios, each set up to meet one of the two objectives (one for stabilization and one for savings/development) along with a well-specified asset management framework.

• Pooling resources in a single fund helps countries to minimize financing costs, maximize returns on pooled savings, and avoid the complexities and asset-liability management rigidities associated with managing transfers from and to the budget by multiple funds.

• Two portfolios increase flexibility to cope with multiple financial objectives (e.g., facilitate portfolio design, investment implementation, and performance evaluation) and foster greater transparency in the purpose, investment objectives, and implementation of each portfolio for public stakeholders. To deal with unexpected adverse economic circumstances (such as a significant economic downturn or an abnormal drop in revenue), it is important to ensure that the asset allocation strategies of (and between) various portfolios are flexible enough to ensure that withdrawals for government’s liquidity needs can be met without incurring higher day-today borrowing or other financial costs.

• In RRDCs with well-developed institutional capacity, more than one fund could be set up to increase flexibility to cope with multiple financial objectives, especially long-term savings goals. Such a strategy would be justified to increase accountability for the management of financial resources by providing a more explicit link to the relevant strategic asset allocation framework. However, this approach requires careful design to avoid inconsistencies between asset and liability management (the “below the line”) with the actual conduct of fiscal policy (the “above the line”).

A. External Assessments for Natural Resource Producers

72. Traditional methodologies to assess external stability, including those of the Consultative Group on Exchange Rates (CGER) developed at the Fund, have been modified to incorporate characteristics of resource-rich economies.⁵⁰ Box 5 discusses extensions of the macroeconomic balance (MB) and the ERER approaches for resource-rich economies. The external sustainability (ES) approach, which does not rely on econometric estimations, is used to compute the medium-term current account balance that stabilizes a country’s net foreign assets (NFA), and has also been customized for resource-rich economies (Bems and de Carvalho, 2009b).

73. The customized ES approach might not be suitable for assessing external sustainability in capital-scarce RRDCs, since it does not account for optimal investment decisions. ES models suggest that natural resource exporting countries should have larger current account surpluses, higher NFA, and more appreciated real exchange rates than non-resource economies, particularly in boom times, due to both consumption smoothing and high precautionary savings to manage high revenue volatility (Bems and de Carvalho, 2009a, 2009b; Thomas, Kim, and Aslam, 2008). To address these gaps a new calibrated model-based approach incorporating investment decisions can be used to help inform the current account norm analysis for RRDCs, complementing current CGER methodologies.⁵¹

B. Incorporating Characteristics of RRDCs in CA Dynamics—A Model-Based Approach

74. This new analytical tool tracks CA dynamics following natural resource windfalls, with explicit consideration of several important characteristics of RRDCs. At the core is a neoclassical model of a small open economy with public and private investment, augmented by several “frictions”—investment inefficiencies, absorptive capacity constraints, and limits to borrowing.⁵² Five scenarios illustrate the impact of a resource windfall on the dynamics of several macroeconomic variables: (i) high international capital mobility; (ii) low capital mobility due to external borrowing constraints; (iii) borrowing and absorptive capacity constraints; (iv) borrowing constraints that can be relaxed after resource windfalls⁵³; and (v) an expected adverse shock to oil output.

75. When external borrowing is constrained, the analytical tool suggests that the optimal response to a natural resource windfall implies a smaller CA surplus compared to a PIH-type case (Figure 11). The stylized benchmark of high capital mobility corresponds to a PIH world in which most of the resource windfall is saved as external financial assets, which generate substantial CA surpluses with negligible effects on non-resource output and the capital stock. However, in reality RRDCs do face external borrowing constraints, so investment opportunities are foregone, and resource windfalls can relax financing constraints. In this scenario private and public investments accelerate, non-oil production picks up, consumption spending is frontloaded, and the CA surplus is smaller than in the PIH-type case.

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Dynamics of a Resource Windfall: Impact of External Borrowing Constraints

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

Source: IMF staff simulations.

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76. Limited absorptive capacity may warrant a slower windfall-induced pace for scaling up investment spending, thus creating larger CA surpluses (Figure 12). When these constraints are present, it may be optimal to consume more at first, accumulate less capital, and increase financial savings. As a result, the current account would show relatively larger surpluses—though still smaller than in a PIH-type setting because investment spending would increase.⁵⁴

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Dynamics of a Resource Windfall: Impact of Absorptive Capacity Constraints

Citation: Policy Papers 2012, 070; 10.5089/9781498339995.007.A001

Source: IMF staff simulations.

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77. The possibility of future adverse oil shocks may call for buffer-stock savings, and therefore CA surpluses. Consumption will be lower before the shock, reflecting the buffer-stock savings effect, since agents will save for bad times. These additional savings will also translate into lower external debt and increased private and public investment. The overall impact, though, is an increase in the short- to medium-term CA surplus.

78. An application to CEMAC provides a quantitative demonstration of the role of investment dynamics and absorptive capacity constraints in deriving CA benchmarks. The framework is calibrated with data from the oil-rich, infrastructure-poor CEMAC region and is simulated for 2011-16. For this period, the simulation delivers a benchmark CA that has a surplus below what would be estimated by the external sustainability approach. The reason is that the return on private and public capital is calibrated to be higher than the interest rate paid on foreign assets, which makes it optimal to invest domestically rather than save abroad. If instead higher capacity constraints or worse investment inefficiencies are assumed, a more gradual scaling up of investment might be advisable, so that CA surplus benchmarks would be higher (and the deficit smaller) than under base case assumptions. This underscores the need for judgment in estimating CA norms.

79. The previous analysis abstracts from two features that affect CA dynamics in RRDCs. First, commodity price volatility may call for precautionary savings, which would tend to improve the CA balance (Bems and Carvalho, 2011). Without such prudence, countries might borrow excessively in boom years and run into difficulties in bust years. Second, capital-scarce RRDCs that accumulate capital that is mostly foreign-owned may be more likely to run CA deficits. FDI may be an important financing source for CA deficits while both resource and non-resource sectors are developing, while royalty payments may cause the CA balance to deteriorate in the future.

80. This section’s simple analytic framework—accounting for optimal consumption and investment behavior and RRDC characteristics—can be used to inform analysis of CA benchmarks, complementary to other IMF methodologies. Results indicate that these features can matter for CA dynamics, yielding CA benchmarks with lower surpluses (or higher deficits) after natural resource windfalls compared to a PIH-type framework. However, these effects are moderated (and the CA balance is higher) when absorptive capacity constraints lead to lower investment. The next step will be implementing additional country pilots and using the experience gained to further refine the tool.

A. Future Work

91. A second phase of the work initiated for this paper is planned. Staff intends to create a practical tool kit to guide the work of mission teams and country authorities, with strategies for TA and training. This would need to be flexible so that it can be tailored to country circumstances. Opportunities to link with the World Bank on this agenda will also be explored.⁶⁰

92. The proposed new frameworks and tools will be further developed and piloted:

• Fiscal frameworks and rules. The Excel templates with steps for assessing long-run fiscal sustainability and analyzing tradeoffs associated with alternative short-run fiscal rules and anchors will be further refined, adapted to specific country circumstances, and piloted.

• Complementary fiscal indicators. The indicators will be calculated and analyzed in a few country case studies (including, for example, cases of a new resource discovery, a resource revenue windfall, and a non-boom revenue growth period for a mature producer). Operational guidelines for use of these indicators in RRDC staff reports would be prepared as a future step.

• Sustainable investing tool. The model will be extended to allow for the possibility of financing investment by borrowing. Additional country applications will be piloted (particularly for a country with a short reserve horizon), and usage could be promoted through development of a user-friendly “front end” (interface to the specialized software) and internal training.

• External sustainability model. Additional country applications and further work on taking the model to the data will be undertaken, with the model tailored to country-specific circumstances. To analyze the impact of resource price volatility, uncertainty will be introduced into the model more systematically.

93. In the next stages of the work, staff will also (i) examine the multidimensional and hard-to-quantify “absorptive capacity” concept and develop country-specific proxies; (ii) build a crosscountry database of variables for RRDCs (for example, reserves and reserve horizon, actual and projected resource revenue by main component, non-resource GDP, and the investment strategy of resource funds in terms, e.g., of strategic asset allocation characteristics and governance structures); and (iii) further analyze short-run macroeconomic management challenges, such as the optimal size of stabilization funds, and the implications of policy mixes for the volatility of key macroeconomic aggregates.

B. Issues for Discussion

• Do Directors agree that the distinct characteristics of RRDCs (e.g., credit constraints and capital scarcity) make the traditional consumption-saving/investment frameworks inadequate? Do Directors agree that it is optimal for RRDCs to save part of their natural resource revenues in domestic real assets, with a focus on scaling up public investment in order to enhance the economy’s productive capacity, and that governments should aim for a relatively smooth path of current spending to avoid abrupt consolidations in future public consumption (which could have a detrimental impact on domestic economic activity and the delivery of key public services)?

• Do Directors agree that, in view of exhaustibility of natural resources, the assessment of fiscal sustainability is important for all RRDCs and is especially critical for countries with short reserve horizons? Do Directors support the proposed fiscal sustainability benchmarks to guide a possible of public spending scaling up?

• Do Directors support fiscal frameworks that seek to delink government expenditure from externally-driven volatility?

• Do Directors agree that resource funds should be managed transparently within a properly formulated asset and liability management framework managed according to country circumstances and capacity levels? Do Directors also agree that deposits and withdrawals from resource funds should be integrated in the budget to avoid fragmentation in expenditure prioritization, and effective fiscal management?

• Do Directors agree that external sector assessments should take into account the need for scaling up public investment?