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Fiscal Management of Oil Resources in Booms and Busts

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Hilde C. Bjørnland - BI Norwegian Business School
ERF Conference on “Arab Oil Exporters: Coping with a New Global Oil Order”

Kuwait, November 26-27, 2017
www.erf.org.eg

Published in: Government & Nonprofit
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Fiscal Management of Oil Resources in Booms and Busts

  1. 1. Fiscal Management of Oil Resources in Booms and Busts Hilde C. Bjørnland Centre for Applied Macro- and Petroleum Economics (CAMP) BI Norwegian Business School Norges Bank Arab Oil Exporters: Coping with a New Global Oil Order November 26-27, 2017, AFESD, Kuwait Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 1 / 17
  2. 2. Key question How should resource-rich countries manage commodity price uncertainty? huge costs associated with the large and unpredictable swings in commodity prices if not well managed, the volatility can destabilize the domestic economy and undermine long-term growth. Recent fall in commodity prices is an opportune moment to review how fiscal policy can be strengthened to manage resource wealth. Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 2 / 17
  3. 3. Long term perspective Sound resource allocation is crucial Policy need to take into account that resources will eventually be exhausted. If not invested, country will be poorer as it consumes the natural wealth Management of natural resource wealth should be seen as part of a strategy for sustainable, inclusive and broad based growth Fiscal framework should lead to efficient and effective allocation of resources Allocation between competing ends. I.e., accumulate financial assets, scale up public infrastructure, or invest in people through education and health Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 3 / 17
  4. 4. From procyclical fiscal policy, 1960-1999... Figure I. Country correlations between the cyclical components of the real government expenditure and real GDP. 1960-1999 Switzerland Finland UnitedKingdom France Australia Austria Jamaica Sweden Congo,Dem.Rep.of Greece Sudan UnitedStates Kuwait Spain Japan Belgium Canada Italy Yemen Denmark Netherlands Korea Ireland Colombia SriLanka NewZealand ElSalvador Uganda UnitedArabEmirates Panama Tanzania Mexico India Gambia Angola Brazil China Norway Zambia Thailand Honduras Egypt Bolivia Mozambique Ecuador Chile Uruguay Jordan Argentina Germany Haiti Congo,Rep.of CostaRica Pakistan Indonesia Venezuela HongKong Ghana Libya Senegal Morocco Turkey Kenya Malaysia Tunisia Portugal Algeria Nicaragua Guatemala Togo Madagascar Philippines Iran DominicanRep. Qatar Nigeria Bangladesh Côted'Ivoire Mali Bahrain Paraguay Myanmar Niger Peru SaudiArabia Gabon SierraLeone Oman TrinidadandTobago SyrianArabRep. Cameroon Botswana Azerbaijan SouthAfrica -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 Notes: Dark bars are OECD countries and light ones are non-OECD countries. The cyclical components have been estimated using the Hodrick-Prescott Filter. A positive (negative) correlation indicates procyclical (countercyclical) fiscal policy. Real government expenditure is defined as central government expenditure and net lending deflated by the GDP deflator. Source: World Economic Outlook and International Financial Statistics (IMF). Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 4 / 17
  5. 5. ... to more countercyclical fiscal policy, 2000-2009 Figure II. Country correlations between the cyclical components of the real government expenditure and real GDP. 2000-2009 Norway Bolivia Canada Australia Nigeria Malaysia Turkey CostaRica Chile SaudiArabia Spain Algeria Japan Finland Korea HongKong UnitedKingdom Zambia SyrianArabRep. Germany Ireland Botswana Denmark Libya Indonesia Austria Netherlands Philippines Belgium Côted'Ivoire Paraguay Italy UnitedArabEmirates Bahrain Yemen Morocco Oman ElSalvador Uganda Argentina Egypt Cameroon France Ecuador Portugal Colombia Sudan Gambia Honduras Switzerland Greece Mozambique Sweden SouthAfrica Kuwait Guatemala Madagascar Congo,Rep.of Gabon Thailand Mali Niger Pakistan SierraLeone Haiti India Jamaica NewZealand Nicaragua Bangladesh DominicanRep. Azerbaijan Angola SriLanka Qatar Ghana Venezuela Jordan China TrinidadandTobago Tunisia Myanmar Kenya Senegal Iran Uruguay Togo Mexico Panama Peru Tanzania Congo,Dem. UnitedStates Brazil -1.2 -1 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 Notes: Dark bars are OECD countries and light ones are non-OECD countries. The cyclical components have been estimated using the Hodrick-Prescott Filter. A positive (negative) correlation indicates procyclical (countercyclical) fiscal policy. Real government expenditure is defined as central government expenditure and net lending deflated by the GDP deflator. Source: World Economic Outlook and International Financial Statistics (IMF). Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 5 / 17
  6. 6. Commodity producers - key questions to answer Has fiscal policy become more countercyclical in commodity rich economies? Growth rates have also been very high globally last decade(s) - driving up both economic activity and oil prices. Does the fiscal framework adopted in resource rich economy shelter the economies from oil price fluctuations? Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 6 / 17
  7. 7. Evaluation in commodity rich economies The adoption of a fiscal framework is no proof in itself that fiscal policy works to insulate the economy from commodity price fluctuations What works in theory may not always work in practice Rule can be too lax, or rule is not followed Other shocks can be driving up oil prices. Need to evaluate how fiscal policy has evolved over time in response to changing economic conditions that affects the commodity price, see Bjørnland and Thorsrud (2015) and Bjørnland, Casarin, Lorusso and Ravazzolo (2017). Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 7 / 17
  8. 8. Does adopting the fiscal rule shelter the economy? Bjørnland and Thorsrud (2015) Do oil price changes affect fiscal policy in the oil exporting countries? Does the adoption of fiscal rules shelter the countries from oil price fluctuations? Focus on the response of government policy to oil price changes in Norway. As empirical framework we use a time varying parameter Bayesian factor model. Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 8 / 17
  9. 9. Prime example - Norway Sovereign wealth fund established in the mid 1990s - all windfall gains saved in the fund Fiscal rule established 2001 - government can on average spend 4 % of the fund (the expected real return) every year: 1 Smooth spending from the oil wealth. A gradual phase in should stabilise economic developments over time, thereby insulating the economy from Dutch disease 2 Stabilises the fiscal impulse over and above longer term smoothing by allowing deviations from the 4 percent rule to counteract large cyclical variations in economic activity or sharp swings in the value of the fund - i.e., operate counter-cyclical Explicitly defined in terms of the structural non-oil balance, allowing full effect of the automatic fiscal stabilisers Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 9 / 17
  10. 10. Norway: Effect of an oil price shock on the public sector, a year after the shock Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 10 / 17
  11. 11. Relative impulse responses World activity shock Oil price shock Note: The figure reports the response, across time and horizons, of value added in the public sector relative to the response in the mainland economy (non-oil, non-public). A value above zero indicates that the public sector responds more positively to the given shock than the mainland economy as a whole. Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 11 / 17
  12. 12. Prime example - Norway - reconsidered Bjørnland and Thorsrud (2015) find that for Norway: Following an oil price shock, fiscal policy has become more (not less), pro-cyclical after the implementation of the fiscal rule Further, fiscal policy has not effectively insulated the economy from an oil price shock. Has in periods exacerbated the effects. Following a global activity shock, the picture is somewhat more nuanced, with some components of public spending being counter-cyclical or a-cyclical the last decade. Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 12 / 17
  13. 13. What is going on? 4% of a big Fund is a lot of money The inflow to the fund has grown at a time when the oil price has been increasing ⇒ Return (take out) from Fund has been highly correlated with the oil price. The government has now revised the rule down to 3% this year. Note: Spending rule in the National Budget 2013 - spending rule in the National budget from 2001 Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 13 / 17
  14. 14. Expansionary and contractionary fiscal policy Bjørnland, Casarin, Lorusso and Ravazzolo (2017) . Is there a difference between expansive and contractionary fiscal policies following oil price fluctuations? Does the adoption of fiscal rules shelter the countries from oil price fluctuations? Focus on the response of fiscal policy to oil price changes in the 15 largest oil exporting countries. As empirical framework we use a time varying panel data model for mixed frequency data. We find larger volatility in the contraction regime than in the expansion. Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 14 / 17
  15. 15. Contraction probabilities Saudi Arabia Quatar Q1-1991 Q1-2001 Q1-2011 0 0.2 0.4 0.6 0.8 1 -15 -10 -5 0 5 10 15 Contraction GDP Q1-1991 Q1-2001 Q1-2011 0.2 0.3 0.4 0.5 0.6 0.7 0.8 -20 -10 0 10 20 Contraction GDP Canada Norway Q1-1973 Q1-1983 Q1-1993 Q1-2003 Q1-2013 0 0.2 0.4 0.6 0.8 1 -6 -4 -2 0 2 4 6 Contraction GDP Q1-1985 Q1-1995 Q1-2005 Q1-2015 0 0.2 0.4 0.6 0.8 1 -5 0 5 10 15 Contraction GDP Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 15 / 17
  16. 16. Volatility estimates for Saudi Arabia Tot. Government Exp / GDP Non-Oil Revenues / GDP 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 Contraction Expansion 0 1 2 3 4 5 6 0 0.5 1 1.5 Contraction Expansion Oil Revenues / GDP Public Employment 0 1 2 3 4 5 6 7 0 0.2 0.4 0.6 0.8 1 1.2 1.4 Contraction Expansion 0.5 1 1.5 2 2.5 3 3.5 4 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 Contraction Expansion Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 16 / 17
  17. 17. Conclusions and policy recommendations Management of natural resource wealth should be seen as part of a strategy for sustainable, inclusive and broad based growth Oil exporting countries have a higher volatility during contractions Although the fiscal rule has not managed to entirely shelter the Norwegian economy from oil price fluctuations, the goal of saving resource revenue for future usage has been accomplished. From a policy point of view, the implications of the findings in Bjørnland and Thorsrud (2015) or Bjørnland, Casarin, Lorusso and Ravazzolo (2017) highlight the strengths and weaknesses of the fiscal framework adopted in resource rich economies. Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 17 / 17

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