I. Managing Oil Wealth1
Mauritania is expected to become an oil producer in 2006 and is preparing to face new challenges arising in the context of managing potentially substantial oil revenues. Based on the experience of selected oil–exporting countries, this chapter provides an overview of these challenges and typical policy responses, and presents two long-term macroeconomic scenarios under different oil price and recoverable reserves assumptions.
1. Mauritania can benefit substantially from the forthcoming oil production. If skillfully managed, oil revenue will help the country accelerate its modernization, durably reduce poverty, and spread the benefits to future generations, well beyond the time at which the known oil resources are expected to be exhausted (in about 20 years). This will require proper handling of challenges facing most oil–exporting countries posed by the volatility, uncertainty, and possibly short-lived nature of oil revenues. Mauritania also faces the risk that the easing of financial constraints will reduce the broad-based commitment to its reforms program and detract it from achieving sustainable development and poverty reduction. The authorities can address these challenges and mitigate this risk by putting in place an efficient and transparent framework for the management of oil wealth before production begins.
2. This chapter discusses the challenges of managing the expected oil revenues and policy options, based largely on lessons that can be drawn from the experience of other oil–exporting countries. Many countries successfully used their nonrenewable resources to modernize their economies and improve their peoples’ welfare. Other countries’ experience shows that, if these resources are not adequately managed, high dependence on oil revenues may become an impediment to long–term growth, because of macroeconomic and institutional factors. The policy options that are discussed in this chapter focus on: (a) the institutional framework and the policies that ensure a transparent collection and use of oil revenue, and a sound financial asset management; and (b) the macroeconomic policies that ensure stability, preserve competitiveness, and promote growth.
3. The remainder of this chapter is organized as follows: Section B describes the nascent hydrocarbon sector in Mauritania. Section C attempts to identify the key economic management issues in oil–exporting countries through a discussion of relevant economic theory and a review of country experiences. Section D discusses coordinated policy responses and fiscal policy options in oil exporting countries. Section E discusses the key lessons from the experience with oil funds. Section F addresses the relevant transparency and governance issues. Section G presents medium– to long-term scenarios for Mauritania under different oil price and recoverable reserves assumptions. Section H concludes by outlining sound principles for oil wealth management in Mauritania.
B. The Hydrocarbon Sector in Mauritania
4. Mauritania will become an oil exporter in 2006 for about 20 years. Successful exploration and appraisal drilling programs carried out offshore in the past few years, have established Mauritania as a new and potentially significant hydrocarbon producer. Mauritania’s discovered hydrocarbon reserves are so far estimated at 400–600 million barrels of crude oil and 1–2 trillion cubic feet of gas. On a per capita basis, Mauritania’s estimated oil reserves are close to that of Chad, Nigeria, or Yemen, but much lower than in the Republic of Congo, Angola, Equatorial Guinea, or Azerbaijan (Table 1).
|Oil reserves||Average daily||Population||Per capita|
|of barrels||of years||in 1000s||millions||(in barrels)|
|Republic of Congo||7,300||69||290||3.0||2,433|
5. The bulk of discovered hydrocarbon reserves is located in five offshore fields:
- Chinguetti, discovered in 2001, will be Mauritania’s first producing oil field (Figure 1).2 Development drilling has already started and effective production is expected during the second quarter of 2006. The first phase of the field development is expected to cost about US$600 million; the second phase (to be completed in 2008) a further US$150 million. The field is estimated to contain about 120 million barrels of recoverable oil,3 sufficient to support a production initially peaking at 75,000 barrels/day and gradually declining over eight years. Chinguetti has been declared commercially viable in June 2004;
- Banda, field discovered in 2002, is expected to hold up to 100 million barrels of recoverable oil and to contain significant amounts of gas, up to one trillion cubic feet. Further appraisal work on the Banda gas discovery is continuing with a development decision possible by 2007;
- Pelican discovered in 2003, is estimated to contain around one trillion cubic feet of gas;
- Tiof discovered in 2003, could contain about 280 million barrels of recoverable oil;
- Tevet discovered in 2004, could contain 40–100 million barrels of recoverable oil.
6. Offshore oil and gas exploration and development activities have been conducted by several consortia, amongst which the one led by Woodside (Australia) is the main operator. 4 Offshore exploration and exploitation permits have been negotiated with Mauritania according to a production sharing contract (PSC) model, whose main parameters are detailed in Box 1.
Figure 1.2004–05 Mauritanian Drilling Program: Location of Initial Exploration and Appraisal Wells
Box 1.Legal Framework for Offshore Petroleum Exploration and Production Activities: the Production Sharing Contract (PSC) Model5
The general principles defining the legal and fiscal regime of petroleum exploration and production, including production sharing between the State and oil companies, were established in a 1988 Ordinance (88–151). All individual production sharing contracts are based on a uniform model elaborated in 1994 and are consistent with the general mining code and applicable tax legislation.
According to the PSC model, up to 50 percent of production in the shallow water areas (less than 300 meters) and up to 60 percent in the deep water areas (more than 300 meters) can be channeled towards cost recovery, the remaining ‘profit’ oil is then shared with the government. Depending on the level of production, the participating companies are entitled to 50–60 percent and 50–70 percent of the profit oil in shallow and deep water areas respectively. The contractor’s net profits are subject to a profit tax of 40 percent in shallow water and 25 percent in deep water areas. In each case, the contractor is also committed to pay a series of (relatively small) production bonuses. The PSC model provisions for gas production are broadly the same as for deep water oil production.
The government does not participate in exploration; however, in the event of a commercial discovery it has the option to participate in a field’s development–the government can take a stake of 12 or 16 percent, depending upon the project’s projected peak production level.6 From the effective date the government must pay its share of development costs and reimburse 150 percent of (pro rata) sunk exploration costs. The exclusive production authorization runs for 25 years and development activities must commence within six months from the approval.
A number of PSCs has been signed for exploration/production areas located in eight Mauritania’s offshore blocks. The Woodside–led consortium signed PSCs covering areas A, B, and C within Blocks 2–6 (Figure 1). Most significant oil discoveries to date (Chinguetti, Tiof, and Tevet) are located in deep water areas covered by PSC-B, and a promising gas and oil discovery (Banda) was made within the shallow water area covered by PSC-A. Dana-led consortium signed PSCs covering Blocks 1, 7, and 8 located south and north of Blocks 2–6 and made a major gas discovery (Pelican) in Block 7 (north of Block 6).
C. Country Experience and Economic Theory in Managing Natural Resources
7. Empirical research suggests that a majority of countries with large natural resource wealth lags behind comparable countries in terms of real GDP growth (see for instance Sachs and Warner 2001). This finding holds independently of trends in commodity prices, climatic variables, or other growth impediments. It applies not only to oil–dependent countries like Cameroon, Congo, Nigeria, and Venezuela, but also to producers of other minerals, such as Zambia (copper). These countries have become increasingly reliant on natural resources over time as indicated by the steadily growing share of oil, gas, or other commodities in their exports. Compared with countries of similar per capita income, many oil–producing countries, notably in sub–Saharan Africa, performed disappointingly also from a social development perspective. For instance, in spite of their natural resource wealth, the Human Development Index reached by some oil–exporting countries is close to or below the average for sub-Saharan Africa (Table 2). The ‘oil curse’ is not a fatality, however, as evidenced by the high long-term growth of Indonesia, Botswana, Malaysia, and Australia, and their decreasing dependence on natural resources.
|Resource–Rich Developing Countries|
|Republic of Congo||0.45||0.54||0.53||0.53||0.49||-7|
|Congo, Dem. Rep.||0.41||0.43||0.41||0.38||.0.37||-12|
|Other Developing Countries|
|Sub–Saharan African countries||…||…||…||…||0.47||…|
8. Several studies have analyzed possible reasons why abundance of oil or other natural resources can turn into a curse (Karl,1999). The origins of the ‘oil curse’ are threefold: (a) the Dutch disease; (b) poor fiscal policies in coping with volatile oil revenues, raising sustainability issues; and (c) negative effects of ‘rent–seeking’ behavior–exacerbated by the dominance of extractive industries–on institutions, governance, and political processes.7
9. The Dutch disease theory has been developed in the 1980s to describe the possible deindustrialization in the aftermath of a natural resource discovery. The discovery may trigger a boom that raises the real effective exchange rate of the country (either through increases in domestic prices and costs or through an appreciation of the domestic currency on the foreign exchange market), making manufacturing goods (or other tradable goods) less profitable, and leading to the absolute or relative decline of the industries producing them.8 When the boom ends and revenues from natural resource disappear, these weakened industries are not able to generate alternative fiscal and foreign exchange revenues, leaving no choice but economically painful and politically difficult adjustments.
10. Fluctuations in oil revenue can induce macroeconomic volatility and reduce investment and growth. This process typically originates in pro–cyclical spending policies, which destabilize aggregate demand and exacerbate uncertainty. Also, large swings in expenditure reduce its quality and efficiency, in part because of institutional and social constraints on the retrenchment of most current spending programs once they are put in place. Failure to utilize natural resource revenues to reduce budgets deficits over the medium term is common and often accompanied by a tendency to spend inefficiently. In several oil–exporting countries (Algeria, Nigeria, Republic of Congo, and Venezuela), budget deficits widened and external borrowing continued to rise during the oil booms of the 1970s and 1980s. Later, these countries found it difficult to reverse the unsustainable expenditure growth. The windfall associated with the natural resource can also sideline the need to restructure the underdeveloped or overgrown but inefficient sectors. Subsidies to these sectors, which were easy to finance during the boom, became a drag on the budget when revenues from the booming industry declined (Gylfason, 2001).
11. Oil revenue flows, highly concentrated in a few institutions and often controlled by a small number of individuals, create incentives and opportunities for rent–seeking, giving rise to diversion of funds, waste of resources, and suboptimal growth.9 The risk of corruption is significant in countries where property rights are not well protected, the judiciary system is inefficient, and law enforcement is lax (Leite and Weidmann, 1999). Poor oil revenue management can also contribute to violent conflicts and undermine human development.
D. Fiscal and Other Economic Policy Issues in New Oil–Exporting Countries10
12. Fiscal policy is the key instrument in addressing macroeconomic challenges facing new oil–exporting countries. Sound fiscal policy would target sustainable balances, while limiting spending volatility and coping with Dutch disease. Appropriate coordination with monetary and exchange rate policies would be needed, while fiscal rules (although difficult to design) and medium–term expenditure frameworks can help.
Fiscal sustainability issues
13. A standard fiscal sustainability criterion, which targets the primary fiscal deficit that keeps public debt–to–GDP ratio constant, is of limited relevance for oil-exporting countries. Its application would lead to large spending swings and could result in an explosive debt dynamic or painful adjustment after the oil resource is exhausted. This consideration is particularly relevant for Mauritania, where the horizon for oil reserves depletion may not exceed 20 years.
14. Sustainability in natural resource–rich countries should be assessed on the basis of government net wealth. This approach is appropriately wider in scope than the debt–based fiscal sustainability analysis, and since it allows for inter-generational equity considerations, it can serve national objectives of preserving the value of oil wealth over time and across generations. The focus on wealth preservation also allows for decoupling the oil extracting decision from immediate fiscal policy considerations. The decision as to whether and when to extract oil becomes essentially a matter of portfolio choice between classes of assets, and is expected to be guided mostly by return comparisons. For instance, favorable oil price trends may lead a government to convert oil wealth into financial assets, irrespective of its desired fiscal policy stance or momentary financing requirements.
15. By analogy with households’ permanent income theory, a fiscal policy that keeps government wealth constant over time requires that the level of “spending” be limited to the expected permanent income originating from government wealth. Adjusted to an oil exporting country context, the permanent income approach would impose a limit on the nonoil primary deficit.11
16. Uncertainties about the future oil prices and production call for precautionary savings in addition to what would fiscal sustainability require. In particular, low–income countries need relatively high precautionary savings because their access to international capital markets is limited and hedging is unavailable or costly. Changes in oil price projections are usually amplified in oil government wealth calculations, in part because the design of PSCs, such as the ones used in Mauritania, makes the bulk of government oil revenues dependant on the residual profit oil (Box 1). Sharp drops in oil prices may even lead to the obsolescence of the oil reserves that were previously considered commercially viable. When price-driven fluctuations in government oil wealth are large, the determination of sustainable nonoil primary deficits may change dramatically between two consecutive fiscal years, limiting the operational significance of a purely wealth-based approach. A cautious response to this challenge would be to base long-term fiscal policy on the assumption that oil price fluctuations may in the future render the oil wealth value equal to zero, a solution that Norway has adopted for the management of its oil revenue.
17. In practice, the oil wealth preservation principle may be difficult to apply, given its various interpretations (depending on the definition of a country’s wealth and capital) and the impact of expected physical and human capital accumulation on long–term growth. A more operational version of sustainability would consist in allocating public spending over time with a view to saving enough oil revenue to avoid large fiscal tightening in the post–oil period. A spectrum of fiscal policy (nonoil revenue and expenditure) paths may be consistent with such long–term “smoothing”. In countries such as Mauritania, where lowering tax pressure would be considered inappropriate, oil revenues would be used to raise expenditures from the pre-oil level. The optimal spending path—the profile of which may vary–will depend on analytical (e.g., the assessed or supposed impact of public spending on growth) and socio-political considerations, as well as implementation capacity constraints.
18. Arguments in favor of frontloading expenditures in low–income countries stress: (a) the need to support the objective of quickly alleviating poverty; (b) the view that social marginal returns on public capital spending are potentially high; and (c) the likelihood that development assistance on concessional terms may become unavailable in the later stages of the oil boom (Mauritania could graduate from IDA by 2010).
19. Arguments against expenditure front loading emphasize; (a) capacity constraints on the management of rapidly expanding expenditures, which may compromise their efficiency; (b) the need to build up precautionary savings in the initial stages of the oil boom (as oil reserves decline, uncertainty about the value of the remaining oil wealth drops); and (c) the need to protect the budget against the possible accumulation of contingent liabilities, including pension liabilities, whose future costs are also subject to a large degree of uncertainty.
20. Additional factors may influence the design of a sustainable long–term fiscal policy for Mauritania. Sustainability could be based on a broader definition of government wealth, which would encompass not only expected revenues from extractive industries (hydrocarbon, gold, copper, and iron ore), but also expected revenues from two other categories of “quasiexhaustible” resources: external assistance, especially grants, which are expected to decline with Mauritania’s increasing prospects for graduating from IDA, and fishing, which may not sustain a steady share of revenue in the future. The expected decline of these wealth components would favor a more conservative fiscal policy stance (see section G).
21. Overall, absorptive capacity permitting, some degree of expenditure frontloading is justified in Mauritania on developmental and social grounds. Nonetheless, if international oil prices stay at their present level, government savings could also build up rapidly so as to reach predetermined objectives. These objectives should be carefully crafted so that oil price drops can be smoothly absorbed and public spending can be maintained in the post–oil era.
Short–term fiscal and macroeconomic coordination issues
22. Short–term considerations cannot be ignored in the design of appropriate fiscal policy for oil–exporting countries. Care should be taken that fiscal policy does not generate additional macroeconomic instability and public spending volatility. Both considerations militate in favor of decoupling government spending from oil price fluctuations and strengthen the need for focusing on the nonoil balance. Unlike the overall fiscal balance, the nonoil budget balance is immune to temporary oil revenue fluctuations, and therefore better gauges the fiscal policy stance.
23. Macroeconomic volatility (including real exchange rate fluctuations) is damaging to investment and growth, especially when it derives from fiscal and monetary conditions. Large changes in public spending entail costs of adjusting to domestic demand and real exchange rate instability and increased risk for investment. In Mauritania, where the economy is not yet well–diversified, with two commodities accounting for most export and government revenues, fiscal policy can be strongly pro–cyclical if booms in these sectors trigger increases in government spending because of the higher revenue they generate. The emergent oil sector may exacerbate this feature, which underscores the need to smooth the fiscal impulse over time (particularly the spending on nontradable goods). As oil–exporting country experience often shows, spending levels should be cautiously adjusted to sharp rise of oil incomes, irrespective of sustainability considerations (Gelb and Associates, 1988).
24. Public spending volatility reduces the quality and efficiency of public spending (as the 2003–04 fiscal expansion episode in Mauritania seems to indicate). A hasty undertaking of large–scale public spending programs may exceed the government’s planning, implementation, and management capacities, and also put fiscal sustainability at risk—if subsequent drop in oil prices warrant deep spending cuts, they may be difficult to implement.
25. Asset management and monetary policy. Special attention needs to be devoted to the management of government assets (or debt). No direct macroeconomic impact is to be expected from the savings of government oil revenue abroad. However, the accumulation of government deposits in the banking sector (or the reduction of government’s domestic debt) may have an expansionary impact similar to that of government spending, through reduction in domestic interest rates, especially if capital mobility remains limited. Monetary policy should aim at offsetting the interest rate effect and containing inflationary pressures. Monetary tightening may also be needed to offset the private demand response to oil price fluctuations (including pro–cyclical investment and real or perceived wealth effects).
26. Dutch disease and exchange rate policy. Many oil–exporting countries maintain fixed exchange rate regimes, which may be appropriate if most oil revenues accrue to the government and sound fiscal and asset management policies adequately insulate the economy from the vagaries of world oil prices (Box 2). However, when some degree of real exchange rate appreciation is unavoidable, depending mostly on the expected increase in government (direct and indirect) spending on nontradables, a more flexible exchange rate regime may be more appropriate. Coupled with adequate sterilization, it would allow for a nominal exchange rate appreciation, therefore preventing the real exchange appreciation to take effect through higher domestic inflation.
27. Finally, oil booms may trigger a wave of private capital inflows as confidence in the local currency rises. Since Mauritania until recently experienced episodes of large capital outflows, the reversal is likely when remaining economic uncertainties will be dissipated. In countries with quasi–fixed exchange rate regime and little developed financial systems, sterilization policies may be inefficient, leaving the policymakers with only one instrument, fiscal policy, to maintain macroeconomic stability, which raises the issue of compatibility between the short–term macro–management and the country’s long–term fiscal objectives.
Box 2Exchange Rate Policy and Monetary Policy Responses to Oil Booms
Many oil–exporting countries maintain fixed exchange rate regimes. Most oilproducing countries in the Middle East have pegged their currencies to the U.S. dollar or a basket of currencies, leaving no room for adjustment in case of oil price shocks. Norway also pursues exchange rate stability but at the same time promotes negotiated wage flexibility to better absorb oil price shocks.
Oil booms usually lead to some degree of real exchange rate appreciation, depending on the fiscal stance. Under a floating exchange rate regime, the conversion of petro–dollars into local currency may lead to a nominal exchange rate appreciation. Under a fixed exchange rate, unsterilized sales of petro–dollars would increase the money stock, eventually leading to a price increase. Under both exchange rate regimes, the exchange rate would thus appreciate in real terms and the prices of imported goods relative to the prices of domestically produced goods would fall.
The key challenge for the central bank will be to strike a balance between price stability and nominal appreciation. Some amount of sterilized intervention may be appropriate both to slow the rate of real exchange rate appreciation and provide more time for the traded goods sector to adjust and for foreign exchange reserves to be replenished. Sterilization may, however, crowd out the private sector, hence the need for coordination with fiscal policy.
28. Fiscal rules may be useful to promote transparent public choices and help insulate fiscal policy from political pressures, although they cannot substitute for transparent and sustainable long–term fiscal policy. Moreover, their credibility in restricting discretionary spending rests on strong governance and democratic institutions. A fiscal rule is typically defined as a permanent constraint on fiscal policy (Kopits and Symansky, 1998). Successful fiscal rules, however, incorporate contingency mechanisms that allow for some accommodation of exogenous shocks, to which Mauritania is particularly exposed.
29. Several oil–exporting countries use a balanced budget rule under smoothed oil price assumptions. Under such rule, surpluses would be accumulated during periods of higher oil prices and/or production, and deficits accommodated during periods of lower oil prices and/or production. The rule helps smooth public spending over time (provided that revisions to oil price assumptions are also smoothed) and can be easily monitored and understood by the public, but does not necessary lead to fiscal sustainability. Even if oil price assumptions are deliberately conservative (as it is the case in Kazakhstan and Republic of Congo)12 and thereby ensure that the government can generate savings, fiscal sustainability (even as defined in ¶17) may or may not be achieved.
30. Fiscal rules, if any, should be based on the nonoil primary balance, as explained above. Strict sustainability consideration implies that the size of the nonoil primary deficit should be limited to the expected permanent income (PI) from oil wealth,13 effectively smoothing government spending over time. However, the PI rule does not fully prevent fiscal policy volatility that would be caused by frequent revisions in oil wealth projections (depending on world oil price and oil production assumptions).
31. The choice of limiting further fiscal volatility and accumulating higher precautionary savings requires the bird–in–hand (BIH) rule,a stricter version of the PI rule, which limits the nonoil primary deficit to the expected revenue from existing government assets excluding the part of oil wealth that has not yet been converted into financial assets. The BIH rule eliminates volatility from changes in oil price expectations; only changes in the (projected) rate of return on financial assets may affect the fiscal policy stance.
32. Medium–term expenditure frameworks (MTEF) are helpful instruments to ensure smooth and efficient government spending, especially in new oil–exporting countries such as Mauritania, which are exposed to strong pressures for immediate spending of highly volatile revenues. MTEFs provide governments with opportunities to analyze thoroughly the composition of their spending plans to ensure that these stay within the country’s absorption capacity limits, and to secure enough spending for capital projects. Investment in infrastructure and human capital accumulation can support private sector development and the competitiveness of the nonoil sector, and therefore help offset the negative effects of an appreciated real exchange rate.
E. Oil Funds
33. Oil funds are a salient feature of oil producing countries. Several country examples are listed in Box 3, including Kazakhstan’s National Fund and Norway’s State Petroleum Fund (two savings and stabilization funds). The experience with oil funds has been mixed: they contributed (marginally) to the improvement in fiscal policy conduct or higher savings in some cases (Davies et. al., 2001), but often resulted in the fragmentation of fiscal policy and asset management. The case for oil funds mostly rests on political economy arguments.
Box 3Selected Examples of Oil Funds
In Azerbaijan the State Oil Fund (SOFAZ) was established in 1999 as an extrabudgetary savings fund. Asset management regulations require that financial assets be kept offshore in highly rated banks, but a portion is also invested in local investment projects. A conservative expenditure policy over the years has ensured a steady growth of savings in the fund.
The National Fund of the Republic of Kazakhstan (NFRK) was created in 2001 as both a stabilization and savings (off–budget) fund. Kazakhstan deposits excess revenue (resulting from applying generally conservative budget reference prices) to the fund; revenue shortfalls can also be compensated by transfers from the fund. The NFRK is domiciled in the National Bank of Kazakhstan, which is responsible for managing its assets on behalf of the government.
Oil wealth in Norway is managed through the State Petroleum Fund (SPF), a savings fund established in 1990. The SPF is integrated in the budget and incorporates a BIH rule that is designed to preserve oil wealth for future generations in per capita terms. The government’s net oil income flows directly into the SPF, from which an annual transfer is made to the treasury to meet the nonoil deficit in the budget. The nonoil deficit is limited by law and cannot exceed the projected SPF income. SFP funds are invested in low–risk foreign securities, sovereign or similar.
In Sudan, the Oil–Revenue Savings Account (OSA) was established in 2002 at the Central Bank of Sudan as a savings and stabilization fund, and integrated into the medium–term budget framework in 2003. The nonoil deficit set in the budget is covered with oil revenue projected at a (conservative) oil price.
Issues in designing oil funds
34. The typical rationale for establishing an oil fund is to set aside a portion of oil revenue for specific purposes or provide visibility and credibility to the implementation of a fiscal rule. In countries where pressing social and infrastructure needs compete with savings objectives, a savings fund provides an explicit mechanism in support of a long–term financial strategy (Bartsch et al. 2004). Oil funds are also often viewed as a strategy to deter political interest groups from making claims on the resources and pressing for pro–cyclical fiscal policy. However, this strategy is not always successful: oil funds have sometimes led to dual budget systems or extrabudgetary spending procedures that have been particularly susceptible to governance problems. Also, since money is fungible, a government could be making contributions to the savings or stabilization funds but still be borrowing elsewhere to avoid expenditure cuts; in this case, oil receipts are not saved but merely mortgaged.
35. Oil funds cannot substitute for good fiscal policy and oil revenue can be well managed without formal funds. Countries can build up large financial savings, keep expenditure insulated from oil price swings, and implement a long–term prudent fiscal policy within a general budget framework. In particular, the budget process can address oil price risks without a formal stabilization fund, by building a cushion of government liquidity and introducing explicit contingencies.
36. Oil funds do not require to be separate institutions. These could be financing funds where the balance reflects the government saving of its oil wealth. Oil funds should be coherently integrated into the budget process, operating as government accounts. Integrated funds allow greater coherence in budgetary planning and more effective expenditure control than separate funds. Specifically, integrated funds enhance transparency by ensuring that the oversight applied to the budget is equally applied to the use of oil funds’ resources.
37. Oil funds should be established by law. Their operating procedures, including rules for transfers to and from the budget, the authority under which they are set up, their internal and external oversight (including audits) should be specified and approved by the parliament. Oil fund rules governing accumulation and withdrawal should however incorporate some flexibility for the sake of fiscal management. Inflows and outflows rules can easily be overwhelmed by market price changes, as the experience shows, many oil funds’ collapsed under the prolonged drop in oil prices of the 1980s.
Implications for Mauritania
38. The Mauritanian authorities intend to save a portion of oil revenue into three funds: a stabilization fund, a savings fund, and a development assistance fund. The stabilization fund aims to smooth fluctuations in the oil–related resources available to the budget and would also be mobilized in case of natural disasters. The savings fund would build assets for future generations and would be used to finance public spending after oil production ends. The development assistance fund would be used to help other nations’ development, but it will be operational only if the production of oil is sufficiently high. Details on how resources will be moved in and out of these funds are not yet available, although the authorities insist that specific arrangements will reflect the priorities set up in the PRSP and will be in line with the MTEF.
39. Mauritania’s objectives could be attained with a single financing fund. The envisaged multiple funds system may add complexity and rigidity for uncertain gain. Considerations for sustainability, absorption capacity, and implementation should determine each year the appropriate fiscal policy, with all remaining balances to be transferred to (or out of) the fund. Concerns regarding the transparency, legal status, and management efficiency could be addressed by delegating to the BCM the responsibility of the fund’s asset management, under parliamentary oversight and—where appropriate—with the use of international asset managers.
F. Transparency and Governance
40. Transparency and accountability are essential components of a sound oil revenue management. The high concentration of oil revenues and their large share in total budget revenues will make their use prone to corruption and rent seeking. A democratic debate on fiscal policy and spending priorities enables safeguards against corruption and the waste of public resources. It should lead to the establishment of a properly–designed institutional framework for oil wealth management, which is key for good governance. Experience shows that the institutional framework needed to guarantee transparency should be comprehensive, and include appropriate safeguards concerning the transparency of the activities of any government–owned national oil company.
41. There are well–established practices ensuring that the management of oil revenues (including oil fund operations) remains transparent and accountable.14 All oil-revenue related operations should be subject to disclosure procedures, based on explicit guidelines, and free from political interference. Accountability is best ensured by regular audits, which should be submitted to parliament. Consistently with international standards of regarding the supervision and audit of revenue management, all audit reports should be published.
42. Mauritania’s adhesion to the Extractive Industry Transparency Initiative (EITI), an initiative launched in 2002 by the United Kingdom and supported by several bilateral donors and international institutions (including the Fund and the World Bank) would be a significant step toward the establishment of oil revenue transparency. Several natural resource–exporting developing countries, including Azerbaijan, Ghana, the Kyrgyz Republic, and Nigeria are already working on implementing the EITI proposals.15
G. Medium–to Long–Term Scenarios for Mauritania
43. The opportunities opening up before Mauritania in the wake of oil discoveries can be illustrated with the use of macroeconomic scenarios. The two (baseline and lowcase) scenarios presented here derive from principles and trade–offs discussed in Section D.16 The frontloading of expenditure in both scenarios reflects the overriding need to deal with developmental challenges. Gradual rather than rapid augmentation of public expenditure over the medium term reflects the presence of widely acknowledged absorption capacity limits and enables the build–up of savings from the beginning. The additional spending is principally directed toward physical and human capital accumulation (mainly in the form of outlays on public infrastructure) to set the stage for sustainable private sector growth. The emphasis on savings—and the extent to which oil revenues allow for a sustainable shift in the primary balance once oil production has ended—varies depending on the expected revenues. The main difference between the two scenarios consists in the estimated present value of Mauritania’s oil wealth, which depends on oil price and reserve assumptions. In the baseline (high) case, oil revenues are sufficient to target a significant permanent primary deficit to be financed from the revenue on accumulated assets. In the low–case, oil revenues are expected to be insufficient to sustain an equally high level of savings without compromising development needs, as a result, asset accumulation is limited to a precautionary cushion. In both cases, sustainability is demonstrated by the absence of a downward adjustment in the after–oil period. Both scenarios take into account growth spillovers and a certain degree of real exchange rate appreciation (Dutch disease) entailed by spending of oil receipts.
44. Given the intended technology to be used in the extraction of offshore oil reserves, the recoverable oil is assumed to be depleted by 2025. Under the baseline scenario, oil wealth is estimated at about US$6.0 billion (equivalent to 4 times the 2004 GDP) implying a permanent income of about US$300 million per annum. This estimate is based on the following key assumptions: (a) recoverable oil reserves of about 600 millions barrels;(b) international oil prices broadly in line with projections under the World Economic Outlook, as of February 2005 (US$46 per barrel in 2006); (c) a discount rate of 5 percent;(d) average extraction costs of US$10 per barrel; and (e) production levels rising from roughly 21 million barrels in 2006 to about 52 million barrels by 2010 and declining gradually thereafter until oil is depleted (Table 3). Under the low–case scenario, only oil reserves of Chinguetti and Tiof about (420 million barrels) are taken into account and world oil prices are kept at US$25 per barrel in real terms (i.e., at constant 2005 prices).
|Oil production (in million barrels)1/||20.9||23.1||39.4||43.5||52.4||36.1||21.7||6.2||0.0|
|World oil price (US$ per barrel)2/||42.8||40.0||38.8||38.0||37.8||42.2||47.2||51.6||52.7|
|Real GDP (percentage change)||26.7||7.7||14.4||7.1||7.8||1.1||3.0||2.4||2.7|
|Nonoil real GDP (percentage change)3/||12.8||7.6||7.6||8.0||5.5||3.9||4.0||4.0||4.0|
|Per capita primary expenditure|
|in current U.S. dollars||184||208||239||273||314||328||339||354||358|
|in constant U.S. dollars||181||200||225||252||285||269||252||243||241|
|GNP Per capita GDP in U.S. dollars||941||993||1,122||1,197||1,429||1,396||1,482||1,544||1,553|
|(In millions of U.S. dollars, unless otherwise indicated)|
|Budget revenue from oil||199||201||508||528||550||723||456||124||0.0|
|Exports of oil||895||926||1,528||1,652||1,977||1,523||1,023||320||0.0|
|Net financial assets of the government||-341||-256||51||270||463||2,365||3,774||4,183||4,094|
|(In percent of nonoil GDP)|
|Interest on net government assets||-2.3||-1.9||-1.4||-0.8||-0.1||1.9||2.7||2.5||2.4|
|Budget revenue from oil||9.0||8.3||19.2||18.1||17.3||17.2||8.3||1.8||0.0|
|Primary nonoil balance||-1.7||-4.4||-7.4||-10.7||-11.8||-9.2||5.6||-3.1||-2.5|
|Overall fiscal balance||5.0||2.0||10.4||6.6||5.3||9.9||5.3||1.2||-0.1|
|LOW CASE SCENARIO|
|Oil production (in million barrels)4/||20.9||23.1||36.5||32.0||38.0||21.6||13.1||3.7||0.0|
|World oil price (US$ per barrel)5/||25.9||26.5||27.1||27.7||28.3||31.7||35.5||38.8||39.7|
|Real GDP (percentage change)||23.9||6.4||10.7||1.4||6.6||0.9||2.3||2.3||2.4|
|Nonoil real GDP (percentage change)3/||10.9||6.0||4.8||5.6||4.8||3.2||3.0||3.0||3.0|
|Per capita primary expenditure|
|In current U.S. dollars||178||187||193||203||229||238||248||264||271|
|In constant U.S. dollars||175||180||182||188||207||195||184||182||182|
|GNP per capita GDP in U.S. dollars||836||888||991||977||1,140||1,164||1,198||1,252||1,267|
|(In millions of U.S. dollars, unless otherwise indicated)|
|Budget revenue from oil||126||137||225||205||253||166||147||38||0.0|
|Exports of oil||543||614||990||885||1,076||684||465||145||0.0|
|Net financial assets of the government||-412||-359||-234||-177||-95||13||43||131||126|
|(In percent of nonoil GDP)|
|Budget revenue from oil||5.8||5.8||9.0||7.7||8.7||4.4||3.1||0.7||0.0|
|Primary nonoil balance||-1.7||-3.0||-3.5||-5.0||-5.7||-4.0||-1.4||0.3||0.6|
|Overall fiscal balance||1.7||0.7||3.7||1.2||2.0||-0.3||1.0||0.5||0.2|
Assuming recoverable reserves of 600 million barrels.
February 2005 World Economic Outlook assumptions.
Including expected production of copper and gold.
Assuming recoverable reserves of 420 million barrels.
Based on a constant 2005 price of US$25 per barrel.
Assuming recoverable reserves of 600 million barrels.
February 2005 World Economic Outlook assumptions.
Including expected production of copper and gold.
Assuming recoverable reserves of 420 million barrels.
Based on a constant 2005 price of US$25 per barrel.
45. The medium– to long–term economic outlook under the baseline scenario is appreciably favorable. Oil production is projected to peak at some 150,000 barrels per day around 2010. The booming exports and government revenues are expected to almost triple the per capita income in 20 years. Real GDP is projected to grow by an annual average of 12 percent in 2006–10 driven mainly by growth in oil production, but also by the expansion of other mining activities. Thereafter, average nonoil GDP growth rate is projected at 4 percent per annum in real terms, given the assumption that further structural reforms will bolster productivity.
46. Under the baseline scenario, Mauritania is expected to accumulate sizable foreign assets (Figure 2). Fiscal policy is assumed to be geared toward increasing budgetary expenditures so as to accelerate investment in physical infrastructure and human capital, while simultaneously building up financial assets that will allow the country to sustain a higher level of public expenditures after the oil reserves are exhausted. Poverty–reducing programs are expected to be frontloaded with a view to accelerating the achievement of Mauritania’s PRSP goals. The resulting sharp increase in per capita primary spending in constant terms (rising from US$181 in 2006 to US$285 in 2010) is reflected in the widening of the nonoil deficit through 2010 (Figure 3). Fiscal sustainability is ensured under the baseline scenario provided that nonoil primary balance remains below 2.5 percent of nonoil GDP after the depletion of oil in 2024.
Figure 2Mauritania: Oil Revenues, Financial Assets, and Expenditure
Source: IMF staff projections.
Figure 3Mauritania: Baseline Scenario Fiscal Projections
Source: IMF staff projections
47. In the low–case scenario, with oil wealth (and permanent income) assumed to be two–thirds of that in the baseline scenario, there is less room for expansionary fiscal policy. Per capita primary fiscal spending, in constant U.S. dollar terms, is projected to rise somewhat less significantly than in the baseline scenario (from US$175 in 2006 to US$207 in 2010) and then gradually reverse to its initial level by 2025. As a result, the nonoil real GDP is projected to grow by about 3 percent a year as compared with 4 percent under the baseline scenario. A nonoil primary deficit of 3 to 5 percent of nonoil GDP could be sustained in the period 2007–15, but would need to be gradually eliminated by 2025. At the same time, priority accorded to Mauritania’s development objectives significantly limits the opportunity to accumulate foreign assets.
48. Both scenarios feature some degree of Dutch disease, the “gravity” of which varies depending on the size of the fiscal impulse. Average real effective exchange rate appreciates by 2–3 percent per annum in the baseline scenario and to a somewhat lesser degree in the low–case scenario.
H. Summary and Conclusions
49. Starting in 2006, Mauritania is expected to benefit from a significant oil revenue windfall. At the same time, it faces steep challenges in managing the oil wealth so as to ensure the development of the nonoil sector and avoid the misuse of oil revenues. In order to realize the full potential inherent in the “oil promise,” Mauritania’s policies should be guided by the following principles:
- Fiscal policy formulation should rely on the nonoil primary balance concept to deal properly with volatility and sustainability issues.
- The frontloading of public expenditure in the oil era, while justified on developmental grounds, should be consistent with absorption capacity limits and reasonable precautionary and long–term savings objectives.
- The management of oil savings needs to be transparent, fully integrated with the budget, and governed by sound principles. Mauritania’s precautionary and long–term savings objectives can be achieved with a single financing fund.
- Some degree of Dutch disease is unavoidable. Appropriate government asset management (abroad), pro–growth public spending, and structural policies can offset its impact on competitiveness, while increased exchange rate flexibility will help contain inflationary pressures.
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