The 'Fiscal Presource Curse': Giant Discoveries and Debt Sustainability

January 21, 2022

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Matteo Ruzzante, and Nelson Sobrinho. The 'Fiscal Presource Curse': Giant Discoveries and Debt Sustainability, (USA: International Monetary Fund, 2022) accessed November 24, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper investigates the dynamic impact of natural resource discoveries on government debt sustainability. We use a ‘natural experiment’ framework in which the timing of discoveries is treated as an exogenous source of within-country variation. We combine data on government debt, fiscal stress and debt distress episodes on a large panel of countries over 1970-2012, with a global repository of giant oil, gas, and mineral discoveries. We find strong and robust evidence of a ‘fiscal presource curse’, i.e., natural resources can jeopardize fiscal sustainability even before ‘the first drop of oil is pumped’. Specifically, we find that giant discoveries, mostly of oil and gas, lead to permanently higher government debt and, eventually, debt distress episodes, specially in countries with weaker political institutions and governance. This evidence suggest that the curse can be mitigated and even prevented by pursuing prudent fiscal policies and borrowing strategies, strengthening fiscal governance, and implementing transparent and robust fiscal frameworks for resource management.

Subject: Commodities, Debt sustainability, Environment, External debt, Natural resources, Non-renewable resources, Oil, Public debt

Keywords: A.II governance indicator, Debt distress episode, Debt measure, Debt sustainability, Fiscal policy, Giant discovery, Global, Government financial assets, Mines, Natural resources, Non-renewable resources, Oil, Political institutions, Resource curse

Publication Details

Pages:

77
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2022/010
Stock No:

WPIEA2022010
ISBN:

9781616358990
ISSN:

1018-5941

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