Oil Revenues and Fiscal Policy
Fiscal Affairs Department
International Monetary Fund
The PRMPS/COCPO Training Workshop
The World Bank
The views in this presentation are those of the authors and should not be attributed to
the International Monetary Fund, its Executive Board, or its management.
Oil Revenues and Fiscal Policy
Challenges posed by oil revenue
Fiscal policy and macroeconomic stability
The non-oil primary balance
Fiscal policy and intergenerational issues
Oil-Producing Countries Differ
Importance of oil in the economy and fiscal accounts
Development of the non-oil economy
Maturity of the oil industry / oil production horizon
Ownership of oil industry
Fiscal regime for the oil sector
Financial position of the government and the public sector
(gross and net debt, liquidity)
Quality of institutions
Petroleum Revenues and
Uncertainty and Instability Stabilization
Uncertainty about value of Stabilize by total expenditure
resource and timing of and revenue management,
revenues not by reliance on ―stable‖
Instability caused by volatility taxes
of oil prices General economic stability
Taxes must respond robustly Reduces investors’ risk premia
to realised outcomes Avoids disruption of projects
Strengthens negotiating &
Vital to poverty reduction
Crude Oil Spot Prices, 1970-2006 1/
A Rollercoaster Ride
Real oil prices
U.S. dollars per barrel
20 Nominal oil prices
1970 1975 1980 1985 1990 1995 2000 2005
Sources: IMF, World Economic Outlook (Washington, various issues); and IMF staff estimates.
1/ Average of U.K. Brent, Dubai, and West Texas Intermediate. Real oil prices deflated by the US CPI (December 2005 = 100.)
Guidelines for Stability
Keep public sector demand in line with sustainable rate of capacity growth
Save excess petroleum revenues abroad
Use conservative price forecasts
Save foreign assets in boom periods, use in downturns
No need to “fine tune” the economy
Rely on automatic stabilizers
Oil funds are no substitute for sound fiscal management.
The Non-oil Primary Balance
Key fiscal indicator in petroleum exporters.
Derived from the overall fiscal balance, excluding oil-
related revenues & expenditures and net interest.
Ideally, should include explicit or imputed expenditure on
petroleum product subsidies if applicable.
Analytical importance of the non-oil primary balance:
Reasonable indicator of domestic government demand
Measure of injection of oil revenue into the economy
Measure of fiscal effort and underlying fiscal policy stance
Key input into fiscal sustainability and intertemporal analysis
Size of the Non-oil Primary Deficit
Some factors to take into account:
government wealth, including oil in the ground and net
accumulated financial assets—sustainability
In some petroleum exporters, large non-oil primary deficits
are sustainable and do not pose vulnerability concerns.
In others there may be a need to reduce the non-oil primary
deficit due to vulnerability and sustainability considerations.
In all cases, the non-oil primary deficit should be consistent
with macroeconomic stability objectives.
Smoothing Fiscal Policy:
Fiscal Considerations (1)
Costly and inefficient to adjust spending rapidly and
The level of spending should be determined in light of its
likely quality and the capacity to execute it efficiently.
The sudden creation or enlargement of spending programs
Increases in spending may exceed the government’s planning,
implementation, and management capacity waste.
Spending should not rise faster than transparent and careful
procurement practices will allow.
Smoothing Fiscal Policy:
Fiscal Considerations (2)
Spending typically proves difficult to contain or
streamline following expansions. Expenditure
becomes entrenched and takes a life of its own.
Drastic spending cuts may lead to social instability,
discouraging investment and reducing future
The Non-oil Primary Balance
Focus on the non-oil primary balance helps develop constituencies in support
of prudent policies, thereby contributing to a less procyclical and more long
term-oriented fiscal policy.
This balance should be highlighted in budget documents used in
parliamentary and public discussion.
A clear presentation of the non-oil primary balance helps:
Make the use of oil revenue more transparent
Delineate policy choices more clearly
Example: Norway’s budget.
Long-Run Oil and Fiscal Dynamics:
Trajectory of Net Government Wealth
Total net wealth per capita
(In 1997 U.S. dollars)
1998 2003 2008 2013 2018 2023 2028 2033 2038
Oil wealth Residual oil in the ground Financial assets
A Path for Use of Oil Revenues:
The Concept The Calculation
Current consumption limited Petroleum reserve data &
to maintain wealth for future production profiles
generations Production cost or state take
Output price forecasts
Sustainable use – resources
converted to other income- Real interest rate
producing financial assets Population growth rate
A guideline with uncertainties Subtract discounted present value
(adjusted for population growth)
Advantage of making
from total real revenues
intergenerational equity an
Purposes Links with Fiscal Policy
Stabilization– shield economy Oil funds are no substitute for good
from revenue instability fiscal management; important
producers operate without oil funds
Savings – wealth for future
(UK, Saudi Arabia, Indonesia,
generations Australia, Russia)
Precautionary – if projects are Important features
uncertain or absorptive 1. Consolidated budget framework
capacity is in doubt 2. Liquidity constraint on the budget
3. Limits on domestic investment by the
Types of Oil Funds, by Objective
Stabilization Funds Savings Funds Precautionary Funds
Receive all revenues & inject Fixed percentage of Assign all or part of
regular amounts to budget petroleum revenues revenues to fund in early
[Papua New Guinea – [Alberta, Alaska] stages of petroleum
wound up 2000] development
Petroleum revenues in Percentage of total Goal to ensure financial
excess of forecast budget government revenue viability if revenues are
amount [Oman] [Kuwait] lower than expected
Finance deficit or receive Net government revenues Guards against poor
surplus [Norway] (budget surplus) [Norway] absorptive capacity
Receive deposits above a Recent examples in
reference price; can Azerbaijan and Timor-Leste
withdraw when below floor [now a Norway-type fund]
price [Chile, Venezuela until
Types of Oil Fund,
by Operational Rules
Mainly stabilization objectives
Deposit and withdrawal depend on rigid exogenous triggers, usually oil prices or fiscal
Triggers: multiyear (fixed/moving average) or intra-annual (relative to budget oil price)
Examples: Venezuela Macroeconomic Stabilization Fund (1998 rules), Iran
Mainly savings objectives
A fixed share of revenues or oil revenues is deposited in the oil fund. Various rules (or
discretion) for withdrawals
Example: Kuwait Reserve Fund for Future Generations
Both stabilization and savings objectives
Net oil revenue is deposited in the fund. The fund automatically finances the budget’s
non-oil deficit through a reverse transfer.
Example: Norway Government Pension Fund
Potential for poor management with or without oil fund: Key
elements for efficiency of oil fund –
Regular public disclosure
Accountability to elected representatives
Independent audit of activities
Clear investment strategy – majority foreign assets
―Benchmarking‖ of desired investment returns
Competition in appointment of investment managers
Oil Funds, PFM, and Transparency
Oil funds should not have the authority to spend
avoid dual budgets: all spending should be transparently on budget.
Oil revenues should not be earmarked for specific
there should be genuine competition for fiscal resources.
Avoid separate oil fund institutional frameworks
Stringent mechanisms to ensure good governance,
transparency, and accountability are critical
clarity of rules, disclosure, audit, and performance evaluation
The Need to Distinguish
Oil Funds from Fiscal Rules
Oil funds are sometimes confused with fiscal rules.
Oil funds do not constrain fiscal policy—unless the
government is liquidity-constrained.
Fiscal Rules in Oil-Producing Countries
Attempt to insulate fiscal policy from political pressures.
By placing restrictions or limits on fiscal variables (such as deficits,
expenditure, debt), rules seek to constrain fiscal policy.
Design of fiscal rules in oil producers must take into account their specific
fiscal characteristics (oil volatility; expanded concept of sustainability).
Rules should aim at decoupling expenditure and the non-oil deficit from
the short-term volatility of oil revenues. But many oil producers are
liquidity-constrained—can these countries afford to decouple spending in
A sound fiscal management framework is a necessary (not sufficient)
condition for the success of a fiscal rule.
Fiscal rules are no stronger than the will of the political class to abide by
MTEFs can help limit the extent of short-run spending responses to
rapidly-changing oil revenues.
They can allow a better appreciation of future spending implications of
current policy decisions—including future recurrent costs of capital
Public Expenditure Extra-budgetary funds
Management Better mobilization of public support?
No special rules for expenditure Simulate market conditions?
from petroleum revenues Disadvantages
Loss of central control and budget
Consistent base data
Budget preparation procedures Resource allocation distortion
Entrenching old priorities
Budget execution system
Barrier to reallocation at the margin
Cash planning and management
Potential transparency concerns
Attempts in special circumstances proved
difficult (Chad example)
Target smooth responses of expenditure to oil revenues and prudent non-
oil primary balances.
Fiscal consolidation may be needed to reduce vulnerability and strengthen
Pay attention to the non-oil primary balance and scaling factors.
Establish sound budgetary systems.
Have a long-term horizon.
Enhance fiscal transparency, so that everybody can see how oil revenue is