Investing Volatile Oil Revenues in Capital-Scarce Economies: An Application to Angola

By Christine J. Richmond, Irene Yackovlev, Susan S. Yang

June 12, 2013

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Christine J. Richmond, Irene Yackovlev, and Susan S. Yang Investing Volatile Oil Revenues in Capital-Scarce Economies: An Application to Angola, (USA: International Monetary Fund, 2013) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Natural resource revenues are an increasingly important financing source for public investment in many developing economies. Investing volatile resource revenues, however, may subject an economy to macroeconomic instability. This paper applies to Angola the fiscal framework developed in Berg et al. (forthcoming) that incorporates investment inefficiency and absorptive capacity constraints, often encountered in developing countries. The sustainable investing approach, which combines a stable fiscal regime with external savings, can convert resource wealth to development gains while maintaining economic stability. Stochastic simulations demonstrate how the framework can be used to inform allocations between capital spending and external savings when facing uncertain oil revenues. An overly aggressive investment scaling-up path could result in insufficient fiscal buffers when faced with negative oil price shocks. Consequently, investment progress can be interrupted, driving up the capital depreciation rate, undermining economic stability, and lowering the growth benefits of public investment.

Subject: Commodities, Expenditure, Oil, Oil prices, Oil, gas and mining taxes, Prices, Public investment spending, Taxes

Keywords: Adjustment cost, Africa, Angola, Depreciation rate, Developing countries, DSGE models, Gas and mining taxes, Global, Government spending, Investment adjustment cost parameter, Investment basket, Investment efficiency, Investment path, Investment scaling-up decision, Investment spending, Natural, Oil, Oil prices, Oil revenue flow, Public investment, Public investment spending, Resource, Resource-rich, Revenue volatility, Stabilization fund, Sub-Saharan Africa, Sustainable investing approach, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/147
Stock No:

WPIEA2013147
ISBN:

9781484393000
ISSN:

1018-5941

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