Optimal Fiscal Management of Resource Windfalls

Resource windfalls create significant challenges for fiscal management, particularly in low-income countries. On the one hand, there are huge pressures to spend—these countries usually suffer from a lack of access to public services, especially in infrastructure, which generates a wide range of externalities. On the other, however, poor countries also suffer from weak governance and absorption constraints, which militate in favor of spending less today and saving more, most notably by parking resources in a sovereign fund and spending them—or the income that they generate—gradually over time. But are the “corner solutions” (spending it all, or saving it all), as advocated by some, optimal? Recent analytical research suggests not. If governments are concerned with minimizing volatility in the economy, measured in term of the volatility of private consumption (a measure of welfare) and either the nonresource primary balance or a more general index of macroeconomic stability (which accounts for the volatility of the real exchange rate), then neither full spending nor full saving is optimal in response to resource windfalls.

Agénor, P-R. "Optimal Fiscal Management of Resource Windfalls", Ferdi Policy brief B130, December 2015