Hilde C. Bjørnland - BI Norwegian Business School ERF Conference on “Arab Oil Exporters: Coping with a New Global Oil Order” Kuwait, November 26-27, 2017 www.erf.org.eg

1. Fiscal Management of Oil Resources in Booms and Busts
Hilde C. Bjørnland
Centre for Applied Macro- and Petroleum Economics (CAMP)
BI Norwegian Business School
Norges Bank
Arab Oil Exporters: Coping with a New Global Oil Order
November 26-27, 2017, AFESD, Kuwait
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 1 / 17

2. Key question
How should resource-rich countries manage commodity price
uncertainty?
huge costs associated with the large and unpredictable swings in
commodity prices
if not well managed, the volatility can destabilize the domestic
economy and undermine long-term growth.
Recent fall in commodity prices is an opportune moment to review
how fiscal policy can be strengthened to manage resource wealth.
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 2 / 17

3. Long term perspective
Sound resource allocation is crucial
Policy need to take into account that resources will eventually be
exhausted. If not invested, country will be poorer as it consumes the
natural wealth
Management of natural resource wealth should be seen as part of a
strategy for sustainable, inclusive and broad based growth
Fiscal framework should lead to efficient and effective allocation of
resources
Allocation between competing ends. I.e., accumulate financial assets,
scale up public infrastructure, or invest in people through education
and health
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 3 / 17

4. From procyclical fiscal policy, 1960-1999...
Figure I. Country correlations between the cyclical components
of the real government expenditure and real GDP. 1960-1999
Switzerland
Finland
UnitedKingdom
France
Australia
Austria
Jamaica
Sweden
Congo,Dem.Rep.of
Greece
Sudan
UnitedStates
Kuwait
Spain
Japan
Belgium
Canada
Italy
Yemen
Denmark
Netherlands
Korea
Ireland
Colombia
SriLanka
NewZealand
ElSalvador
Uganda
UnitedArabEmirates
Panama
Tanzania
Mexico
India
Gambia
Angola
Brazil
China
Norway
Zambia
Thailand
Honduras
Egypt
Bolivia
Mozambique
Ecuador
Chile
Uruguay
Jordan
Argentina
Germany
Haiti
Congo,Rep.of
CostaRica
Pakistan
Indonesia
Venezuela
HongKong
Ghana
Libya
Senegal
Morocco
Turkey
Kenya
Malaysia
Tunisia
Portugal
Algeria
Nicaragua
Guatemala
Togo
Madagascar
Philippines
Iran
DominicanRep.
Qatar
Nigeria
Bangladesh
Côted'Ivoire
Mali
Bahrain
Paraguay
Myanmar
Niger
Peru
SaudiArabia
Gabon
SierraLeone
Oman
TrinidadandTobago
SyrianArabRep.
Cameroon
Botswana
Azerbaijan
SouthAfrica
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
Notes: Dark bars are OECD countries and light ones are non-OECD countries. The cyclical components have been estimated using the Hodrick-Prescott Filter. A positive (negative) correlation indicates procyclical (countercyclical)
fiscal policy. Real government expenditure is defined as central government expenditure and net lending deflated by the GDP deflator.
Source: World Economic Outlook and International Financial Statistics (IMF).
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 4 / 17

5. ... to more countercyclical fiscal policy, 2000-2009
Figure II. Country correlations between the cyclical components
of the real government expenditure and real GDP. 2000-2009
Norway
Bolivia
Canada
Australia
Nigeria
Malaysia
Turkey
CostaRica
Chile
SaudiArabia
Spain
Algeria
Japan
Finland
Korea
HongKong
UnitedKingdom
Zambia
SyrianArabRep.
Germany
Ireland
Botswana
Denmark
Libya
Indonesia
Austria
Netherlands
Philippines
Belgium
Côted'Ivoire
Paraguay
Italy
UnitedArabEmirates
Bahrain
Yemen
Morocco
Oman
ElSalvador
Uganda
Argentina
Egypt
Cameroon
France
Ecuador
Portugal
Colombia
Sudan
Gambia
Honduras
Switzerland
Greece
Mozambique
Sweden
SouthAfrica
Kuwait
Guatemala
Madagascar
Congo,Rep.of
Gabon
Thailand
Mali
Niger
Pakistan
SierraLeone
Haiti
India
Jamaica
NewZealand
Nicaragua
Bangladesh
DominicanRep.
Azerbaijan
Angola
SriLanka
Qatar
Ghana
Venezuela
Jordan
China
TrinidadandTobago
Tunisia
Myanmar
Kenya
Senegal
Iran
Uruguay
Togo
Mexico
Panama
Peru
Tanzania
Congo,Dem.
UnitedStates
Brazil
-1.2
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
Notes: Dark bars are OECD countries and light ones are non-OECD countries. The cyclical components have been estimated using the Hodrick-Prescott Filter. A positive (negative) correlation indicates procyclical (countercyclical)
fiscal policy. Real government expenditure is defined as central government expenditure and net lending deflated by the GDP deflator.
Source: World Economic Outlook and International Financial Statistics (IMF).
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 5 / 17

6. Commodity producers - key questions to answer
Has fiscal policy become more countercyclical in commodity rich
economies?
Growth rates have also been very high globally last decade(s) - driving
up both economic activity and oil prices.
Does the fiscal framework adopted in resource rich economy shelter
the economies from oil price fluctuations?
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 6 / 17

7. Evaluation in commodity rich economies
The adoption of a fiscal framework is no proof in itself that fiscal
policy works to insulate the economy from commodity price
fluctuations
What works in theory may not always work in practice
Rule can be too lax, or rule is not followed
Other shocks can be driving up oil prices.
Need to evaluate how fiscal policy has evolved over time in response
to changing economic conditions that affects the commodity price,
see Bjørnland and Thorsrud (2015) and Bjørnland, Casarin, Lorusso
and Ravazzolo (2017).
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 7 / 17

8. Does adopting the fiscal rule shelter the economy?
Bjørnland and Thorsrud (2015)
Do oil price changes affect fiscal policy in the oil exporting countries?
Does the adoption of fiscal rules shelter the countries from oil price
fluctuations?
Focus on the response of government policy to oil price changes in
Norway.
As empirical framework we use a time varying parameter Bayesian
factor model.
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 8 / 17

9. Prime example - Norway
Sovereign wealth fund established in the mid 1990s - all windfall gains
saved in the fund
Fiscal rule established 2001 - government can on average spend 4 %
of the fund (the expected real return) every year:
1 Smooth spending from the oil wealth. A gradual phase in should
stabilise economic developments over time, thereby insulating the
economy from Dutch disease
2 Stabilises the fiscal impulse over and above longer term smoothing by
allowing deviations from the 4 percent rule to counteract large cyclical
variations in economic activity or sharp swings in the value of the fund
- i.e., operate counter-cyclical
Explicitly defined in terms of the structural non-oil balance, allowing
full effect of the automatic fiscal stabilisers
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 9 / 17

10. Norway: Effect of an oil price shock on the public sector, a
year after the shock
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 10 / 17

11. Relative impulse responses
World activity shock Oil price shock
Note: The figure reports the response, across time and horizons, of value added
in the public sector relative to the response in the mainland economy (non-oil,
non-public). A value above zero indicates that the public sector responds more
positively to the given shock than the mainland economy as a whole.
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 11 / 17

12. Prime example - Norway - reconsidered
Bjørnland and Thorsrud (2015) find that for Norway:
Following an oil price shock, fiscal policy has become more (not less),
pro-cyclical after the implementation of the fiscal rule
Further, fiscal policy has not effectively insulated the economy from
an oil price shock. Has in periods exacerbated the effects.
Following a global activity shock, the picture is somewhat more
nuanced, with some components of public spending being
counter-cyclical or a-cyclical the last decade.
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 12 / 17

13. What is going on? 4% of a big Fund is a lot of money
The inflow to the fund has grown at a time when the oil price has
been increasing ⇒ Return (take out) from Fund has been highly
correlated with the oil price.
The government has now revised the rule down to 3% this year.
Note: Spending rule in the National Budget 2013 - spending rule in the National budget
from 2001
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 13 / 17

14. Expansionary and contractionary fiscal policy
Bjørnland, Casarin, Lorusso and Ravazzolo (2017)
.
Is there a difference between expansive and contractionary fiscal
policies following oil price fluctuations?
Does the adoption of fiscal rules shelter the countries from oil price
fluctuations?
Focus on the response of fiscal policy to oil price changes in the 15
largest oil exporting countries.
As empirical framework we use a time varying panel data model for
mixed frequency data.
We find larger volatility in the contraction regime than in the
expansion.
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 14 / 17

15. Contraction probabilities
Saudi Arabia Quatar
Q1-1991 Q1-2001 Q1-2011
0
0.2
0.4
0.6
0.8
1
-15
-10
-5
0
5
10
15
Contraction GDP
Q1-1991 Q1-2001 Q1-2011
0.2
0.3
0.4
0.5
0.6
0.7
0.8
-20
-10
0
10
20
Contraction GDP
Canada Norway
Q1-1973 Q1-1983 Q1-1993 Q1-2003 Q1-2013
0
0.2
0.4
0.6
0.8
1
-6
-4
-2
0
2
4
6
Contraction GDP
Q1-1985 Q1-1995 Q1-2005 Q1-2015
0
0.2
0.4
0.6
0.8
1
-5
0
5
10
15
Contraction GDP
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 15 / 17

16. Volatility estimates for Saudi Arabia
Tot. Government Exp / GDP Non-Oil Revenues / GDP
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Contraction
Expansion
0 1 2 3 4 5 6
0
0.5
1
1.5
Contraction
Expansion
Oil Revenues / GDP Public Employment
0 1 2 3 4 5 6 7
0
0.2
0.4
0.6
0.8
1
1.2
1.4
Contraction
Expansion
0.5 1 1.5 2 2.5 3 3.5 4
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
Contraction
Expansion
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 16 / 17

17. Conclusions and policy recommendations
Management of natural resource wealth should be seen as part of a
strategy for sustainable, inclusive and broad based growth
Oil exporting countries have a higher volatility during contractions
Although the fiscal rule has not managed to entirely shelter the
Norwegian economy from oil price fluctuations, the goal of saving
resource revenue for future usage has been accomplished.
From a policy point of view, the implications of the findings in
Bjørnland and Thorsrud (2015) or Bjørnland, Casarin, Lorusso and
Ravazzolo (2017) highlight the strengths and weaknesses of the fiscal
framework adopted in resource rich economies.
Hilde C. Bjørnland Fiscal Management of Oil Resources ERF - AFESD 2017 17 / 17