Angola Workshop on Oil Revenue Management

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AngolaWorkshop on Oil Revenue Management
Appropriate Fiscal Responses to the Rapid
Accumulation of Oil Revenues
By Francisco G. CarneiroMay - 2006
The World Bank - Angola
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Structure of the Presentation

• Background and main challenges
• Government actions to relaunch the economy
• Administration of oil revenues
• Appropriate fiscal responses
• Summary of recommendations

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Background The Most Challenging Issues Facing
Angola in the Near Future
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A Country Rich in Natural Resources
Receitas do Petróleo sob Diferentes Cenários de
Preços Na Ausência de Novas Descobertas
1000 b/d
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The Evolution of World Prices
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Association Between Resource Concentration and
Conflict
Bannon, Ian and P. Collier (2003), Natural
Resource and conflict What We Can Do in Natural
Resources and Violent Conflict, Bannon, Ian. and
Paul Collier (eds.), Washington DC World Bank
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Low-Base Social Indicators
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Dealing with an Appreciating Exchange Rate
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What the Government is Doing
Job Creation
Repairing Infrastructure
Relaunching the Economy
Improving Service Delivery
Social Stability
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Causal Factors

• Technical Factors
• Paradox of Plenty
• Volatility of revenues
• Political Factors
• Diminished governance
• Under-investment in capacity

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Governance and Transparency
United Kingdom
Malaysia
Norway
Colombia
Gabon
Governance Indicator
Algeria
Russia
Cameroon
Nigeria
Kuwait
Mexico
Iran
Ecuador
Venezuela
Azerbaijan
Angola
160 Countries
Weak Governance
Strong governance
Source for data http//www.worldbank.org/wbi/gove
rnance/govdata2001.htm. This chart shows
estimates of control of corruption for 160
countries during 2000/01, with selected countries
indicated for illustrative purposes. The
vertical bars show the likely range of Governance
indicators, and the midpoints of these bars show
the most likely value for each country. The
length of these ranges varies with the amount of
information available for each country. Colors
are assigned according to the following criteria
Red, less than 30 of overall countries rank
worse Yellow, between 30 and 70 Green, over
70 . Countries relative positions in no way
reflect the official views of the World Bank or
the International Monetary Fund.
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Weak Institutional Capacity

• National Tax Department (DNI)
• USD 10 billion in revenues (2004)
• gt 30 companies
• gt 60 contracts
• 6 professional staff

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Sector Management Assessment

• World class reserves with robust pre-tax
  economics
• Up-to-date legal and contractual regime
• Acceptable post-tax returns
• Very significant production build-up, but with
  significant mid-term peaking.

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The Way Forward

• The way forward requires
• Better capacity to forecast revenues
• Appropriate fiscal policies
• Some form of a stabilization fund (conta de
  reserva do Tesouro)

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Different Price and Revenue Scenarios
High price
Base price
US million
Low price
Different Price Scenarios
Corresponding Revenues
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Different Price and Revenue Scenarios
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Fiscal Policy Response
Assumptions Base price scenario Population grows
at 2.9 annually. Financial assets yield 5
annually. Adjusted government revenue is
discounted at 10.
US
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The essential idea is to convert uncertain per
capita future oil revenues into a conservative
estimate of what might be spent per capita in
perpetuity, based on those future revenues and on
accrued savings and interest from their early
investment. The result of such a policy is a
dramatic smoothing of expenditure, which
addresses both Dutch Disease and expenditure
volatility concerns, and a transfer of wealth to
future years to cover resource exhaustion
concerns.
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Permanent Expenditure Levels under Different
Assumptions
US per capita, assuming that population grows by
2.9 annually and that financial assets yield 5
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Practical and Political Considerations

• Need for agreement on assumptions
• Institutional capacity requirements
• Popular opposition current savings/deferred
  expenditures

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Economic Policy Objectives

• Manage the impact of an appreciating real
  exchange rate
• Agree on a strategy to absorb oil windfall with
  a view to move to an MTEF
• Build international reserves/the oil reserve
  account as buffers against the foreign
  exchange/fiscal impact of revenue volatility
• Promote rapid and bold improvements in
  procurement practices

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Options to Deal with the Effects of Appreciation
of the Currency

• Reduce Costs
• Detailed analysis of the structure of production
  costs is essential
• Use of oil revenues for productive investment
  (e.g., infrastructure) can lower domestic costs
  for the entire economy
• Do not try to fight against the appreciating
  trend

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Institutional Options to Manage the Windfall
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Summary of the Recommendations

• Improve Governance
• Adopt best practice policies to manage natural
  resources
• Invest in institutional capacity
• Improve transparency
• Consolidate macroeconomic stability

Strong political commitment to guarantee the
success of the reforms