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Managing Resource Revenue in the C ontext of Increasing Commodity Price Volatility

Managing Resource Revenue in the C ontext of Increasing Commodity Price Volatility . Yanchun Zhang Office of Development Studies, UNDP International Conference: Avoiding the Resource Curse -- Managing Extractive Industries for Human Development Ulaanbaatar, Mongolia, 20 October 2011.

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Managing Resource Revenue in the C ontext of Increasing Commodity Price Volatility

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  1. Managing Resource Revenue in the Context of Increasing Commodity Price Volatility Yanchun Zhang Office of Development Studies, UNDP International Conference: Avoiding the Resource Curse -- Managing Extractive Industries for Human Development Ulaanbaatar, Mongolia, 20 October 2011

  2. Outline • Motivation • Commodity price volatility • Managing resource revenue in the context of increasing commodity price volatility • Policy options for resource-rich developing countries

  3. Motivation Many developing economies still depend heavily on commodities; Recent commodity booms provide a boost to resource-rich economies but managing resource revenue is very challenging; It is even more challenging for resource-rich economies to build resilience and mitigate the negative impacts of commodity busts.

  4. II. Commodity Price Volatility

  5. Oil and Metal Prices Oil Copper Gold Silver

  6. III. Managing Resource Revenue in the Context of Increasing Commodity Price Volatility

  7. Natural Resource Management • The goal of natural resource management: • Effective utilization of resource revenues that would promote sustainable and inclusive economic development; • Securing the greatest social and economic benefit for current and future citizens and contributing to a sustained increase in standards of living.

  8. Natural Resource Management: Decision Chain Source: Own adaptation based on Collier (2010) and Natural Resource Charter (2010). To secure the greatest social and economic benefit of natural resources, a comprehensive approach to address every stage of the decision chain is required.

  9. Revenue Collection • Effective taxation: • Audit and account certification procedures (to tackle: tax evasion, corruption, secret foreign accounts). • Designing the tax structure contingent on changing circumstances and on the span of extraction: • Chile: efficient tax reform in the 2000’s (shifting to royalties) raised more revenues; • Mongolia: temporary Windfall Profits Tax (2006 to 2011) took advantage of rises in gold and copper prices.

  10. Revenue Spending and Savings • Spend or Save? Where to Spend? Where to Save? • LICs immediate poverty alleviation: redistributing wealth through direct conditional / unconditional cash transfers: • Issue of sustainability (unpredictable revenues and consumption habits hard to reverse). • Foreign borrowing: cautiously borrowing in anticipation of revenue flows / paying off outstanding debts in high revenue periods: • Strategy adopted by Chile in the early 2000s. • During booms: identifying priority public spending areas (targeted and sustainable).

  11. Fiscal Institutions and Policy Instruments • Policies and institutional mechanisms: • Fiscal rules: • Mongolia’s Fiscal Stability Law 2010; • Chile’s Fiscal Responsibility Bill 2006. • Stabilization funds (designed to stabilize revenue flows and implicitly expenditure): • Chile’s Fund for Social and Economic Stabilization (FESS); • Stabilization Fund of the Russian Federation; • National Fund of the Republic of Kazakhstan (NFRK). • Market-based financial instruments: • Options: • Mexico’s hedge against oil price volatility.

  12. Good Example • The Mexican Federal Government received $5.1 billion for the fiscal year 2009 as a result of the oil hedge program guarantying an average price of US$70 per barrel for the year. • The windfall was transferred to the Federal Government to compensate the fall in the Federal Government’s revenues. Source: Financial Times, September 7th, 2009.

  13. Bad Examples • Mexico: • Inadequate assumptions and missed reforms resulted in the near collapse of the economy in the summer of 1982. • Nigeria: • Inadequate public and fiscal policies exacerbated the impact of high commodity price volatility (from 1970s to 2000s). • Zambia: • 22% of government revenue loss between 2009 and 2010 due to dropping copper and cobalt prices.

  14. IV. Policy Options for Resource-Rich Developing Countries

  15. Policy Recommendations • Several policy implications stand out for resource-rich developing countries to manage resource revenue: • Institutions and governance need to be strengthened; • An effective and efficient tax system is critical for revenue collection; • Countercyclical fiscal policies and institutional framework make a big difference in planning savings and spending.

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