OECD - Using Extractive Revenues for Sustainable Development

Non-renewable natural resource revenues can make an important contribution to harnessing inclusive growth and sustainable development, provided that resource revenues are appropriately managed to smooth revenue flows throughout the price cycle and effectively spent domestically to transform finite natural resource revenues into long-standing and productive development gains. Since 2013, the OECD Development Centres Policy Dialogue on Natural Resource-based Development has fostered peer-learning and experience sharing on trade-offs, advantages and disadvantages of natural resource revenue management and spending mechanisms to use natural resource revenues to support the implementation of the 2030 Sustainable Development Agenda, drawing lessons from country experiences. The first challenge for policy makers is to reconcile long-term development and intergenerational equity objectives with the need to manage the volatility and uncertainty of exhaustible resource revenues. The establishment of a clear and consistent fiscal policy framework coupled with a commitment to sound macroeconomic management of natural resource revenues with properly sized stabilisation funds can help to insulate the economy from price, production or other external shocks and ensure medium- and long-term fiscal sustainability that supports long-term development objectives. In order to achieve the desired objectives, stabilisation funds need to be integrated into the budget through clear rules regarding the deposit of natural resource revenues, and the withdrawal of money for use in government spending and investment. Stabilisation funds provide a financial buffer when commodity markets collapse and revenues from natural resources decline. The investment management and governance of stabilisation funds need to support their budget stabilisation objectives. This means designing stabilisation funds to be fit for purpose with adequate human resourcing in relation to the level of risk taken to achieve their policy objectives, investment decision making that is free from political influence, and clear mechanisms providing transparency and accountability. As a source of precautionary savings, stabilisation funds should be invested in safe foreign assets to ensure sufficient liquidity to counter price volatility. Stabilisation funds are not effective vehicles for helping satisfy domestic capital needs, particularly in capital-starved developing economies where domestic assets are likely to be highly correlated with commodity prices given the structure of resource-dependent economies. Beyond the appropriate level of precautionary savings necessary to provide a financial buffer to ensure fiscal sustainability over time, resource-rich countries need to manage the trade-off between investing in the domestic economy or abroad, and saving for future generations. The country-specific development needs and circumstances should be reflected in how this trade-off is managed. The fiscal rules can be designed to favour current and medium-term expenditure of natural resource revenues or accumulate wealth for future generations in a savings fund in a manner that is consistent with national priorities and absorptive capacity constraints. When prioritising domestic investment, spending mechanisms that encourage procyclicality in public expenditures should be avoided as this exacerbates the effects of commodity price volatility on the economy. Earmarking can encourage procyclicality and constrain budgetary flexibility, leading to inefficiency and over or underinvestment in certain public services. Without concomitant stabilisation mechanisms, direct distribution through cash transfers is also highly procyclical and may divert revenues from priority investments at scale such as in infrastructure, health, and education. At the same time, targeted cash-transfer schemes that operate through the government budget may be useful to smooth the transition for gradually phasing out fossil fuel subsidies, which tend to be poorly targeted and inefficient, yet popularly supported and thus often difficult to reform. Policy makers need to ensure the quality and efficiency of public investment spending to translate natural resource wealth into productive capital accumulation, leading to broader development gains. Strategic investment funds can help natural resource-rich countries manage long-term financing challenges and shrinking fiscal space, while balancing policy and commercial objectives. This can be done by leveraging private capital to kick-start productive growth and development, through reinforcing, renewing and reorganising state assets, crowding-in investments, catalysing new economic opportunities and supporting local financial-market development. With their double bottom-line objective, whereby all investment decisions must fulfil market-based risk and return criteria, and produce positive development outcomes, strategic investment funds offer a possible tool for resource-rich countries to catalyse economic development, alongside conventional spending via the budget. Such funds are most effective as part of a clear government investment policy that establishes the priorities, criteria and targets for investment, coupled with some level of co-ordination across government levels and different agencies to avoid duplication of public investment. Effectiveness is also supported by the capacity to build a professional and capable investment team to further scrutinise the financial and economic feasibility and sustainability of public investment projects, coupled with adherence to accepted standards of disclosure and transparency. However, experience with such funds in developing countries is still limited.