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GTAP Resource #4433

"Uncertainty and Optimal budget price rules from resource windfalls: A DSGE Analysis"
by Dissou, Yazid

In this study, we analyze the economic implications of budget price rules associated with the public revenue from natural resources in a developing country in the presence of uncertainty on export prices. We ask how budget price rules should be set in these countries that are facing high spending pressures in a context of very high volatile mineral revenue. Several low-income developing countries (like Uganda and Niger) are recently emerging as mineral exporters. With a low capacity to hedge or stabilize revenue, budget benchmark price rules are increasingly being used as simple ways to manage and allocate mineral revenue over time. The experiences of Norway for oil and Chile for copper illustrate the outcomes of well-defined fiscal rules. In that setting, Nigeria adopted in 2004 a fiscal rule for oil revenue, whereby any revenue in excess of the benchmark level for budgetary use are transferred into the “Excess Crude Account (ECA)” for future use. In the same vein, in Timor-Leste, the Petroleum Fund Law defines the estimated sustainable income (ESI) as 3 percent of the country’s petroleum wealth based on an assumed reference price.
These two features are potentially appealing in their applications to developing countries - a well-defined and conservative budget price rule that is monitored publicly or by stakeholders may substitute for weak institutions; in turn, the more transparent mechanism may make it easier to plan long term, achieving the necessary savings for future generations and guarding against unsustainable consumption in the present.
Even so, when mineral revenue (or its underlying export price) is volatile, reserves are finite, and spending pressures are high, it is still not easy to set the optimal budget price rules. Moreover, in practice, they may not be well chosen. As more and more developing countries are finding and producing oil, there is a renewed interest about resource windfalls in recent studies.
The most common problem associ...

Resource Details (Export Citation) GTAP Keywords
Category: 2014 Conference Paper
Status: Published
By/In: Presented at the 17th Annual Conference on Global Economic Analysis, Dakar, Senegal
Date: 2014
Created: Dissou, Y. (4/14/2014)
Updated: Dissou, Y. (6/13/2014)
Visits: 866
- Dynamic modeling
- Economic development
- Economic growth
- Africa (West)

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