Transcript ppt - Center for Economic and Social Development

Center for Economic and Social Development (CESD)
The specific goals are;
To analyze the management of resource revenue in Azerbaijan;
To examine different facets of revenue management specifically
looking at each countries' resource fund, and their savings and
stabilization mechanisms, investments abroad ;
To find out how resource revenues impact regional integration in
CAREC;
To outline the best practices for managing resource revenues which
can be applied to other CAREC countries;
To develop policy recommendations for the management of
resource revenues to the government of Azerbaijan.
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To analyze how much of the oil revenues should be saved
(invested) or spent bearing in mind the potential for economic
overheating, and other Dutch disease ramifications. Where
should these savings be placed?
To list the best practices from Azerbaijan and Kazakhstan
regarding to oil revenue management.
To determine how much of the saving and the stabilization
functions each funds should assume, and what are the
implications for the funds’ asset management strategy.
To determine the costs and benefits of domestic and foreign
investment, and develop the funds' strategies for diversification.
How much of the oil revenues should be invested domestically,
and under which circumstances? Should the funds invest in
corporate equities or in government T-bills and bonds?
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The historical record of managing resource revenues has been
extensively researched and extensively reviewed (e.g., van der Ploeg,
2007).
Cross-country evidence suggests that countries can escape the resource
curse (Sachs and Warner, 2007) and turn the windfall revenue into a
boon if they have good institutions (Mehlum, Moene and Torvik,
2006), are open to international trade (Arezki and van der Ploeg, 2008),
or have well-developed financial systems (van der Ploeg and
Poelhekke, 2008).
Macroeconomic effects of commodity booms in cross-country studies,
so it is useful to examine the dynamics more explicitly. Collier and
Goderis (2007, 2008) use global data from 1960 onwards and find that,
for the first few years following an increase in the price of commodity
exports, non-resource output does indeed increase relative to what it
would otherwise have been; people become more productive.
Our main sources of data will be bulletins and reports from government bodies, specifically the State
Statistical Committees and the Oil Funds in both Azerbaijan and Kazakhstan. In addition to
official data, reports from international and local organizations will be considered. An information
bank has already been established by CESD and we will rely on information already collected in the
bank which are following;
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Asian Development Bank (Key Indicators, etc.),
National Statistic Committees of Azerbaijan and Kazakhstan (official data on oil and non-oil
sectors),
Eastern Bloc Energy Ltd. (CIS and Eastern European Energy Databook, etc.),
International Energy Agency (Energy Balances of Non-OECD Countries, Natural Gas Market
Review, World Energy Outlook, World Energy Statistics, etc.),
IMF (International Financial Statistics, Directions of Trade Statistics, etc.),
Oil and Gas Journal,
UNCTAD (Commodity Price Statistics, Handbook of Statistics, World Investment Report, etc.),
World Bank (Doing Business, World Development Indicators, etc.),
United Nations Economic Commission for Europe, UNECE Countries in Figures (comparative
figures of CIS countries).
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The delay in the shift to the life-cycle permanent income
model by governments leads to the expansion of state
budget expenditures tounproductive sectors of the economy,
and lowers the budget deficit of the non-oil sector, thus
leaving more burdens on future generations.
When the inflow of foreign currency coming from oil
exportation peaks in Azerbaijan, the indirect negative
effects will outpace the direct positive effects, to the extent
that overall economic indicators (for example, rapidly
growth GDP, positive remainder of payment balance) are
ultimately expressed in negative figures (increase of deficit
of the non-oil sector, of the foreign debt, high level of
inflation rate).
Project Progress
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Preface
Executive Summary
Introduction
Azerbaijan economy and oil revenues
Anatomy of the Oil Inflows
Is the economy ready for oil windfalls?
Income tracking of State Oil Fund of Azerbaijan Republic
Methodology
Oil Savings and Reserve Management Frameworks
International practices
Norway
Venezuela
Oman
Kuwait
Macroeconomic cost of fiscal volatility
Medium-term budgeting
Long-run fiscal stance
Benchmarking
Permanent income
Other models
Oil price sensitivity and income uncertainty
Evaluation of alternative models and adjustments
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Fiscal rules, hedging and other strategy components
Rationale for funds
Possible functions of the funds
Budget or Fund
Saving or stabilization
How much risk
Management strategy for the fund
Saving or investments
Domestic investment and risks
Asset management practices
Institutional arrangements
Governance, Transparency, and Accountability
Policy Implications
VI. Conclusion
References
Annexes
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Permanent Income” Approach
◦ Determine amount that can be spent forever
◦ A useful attempt to impose fiscal discipline
◦ Given oil production, assumed oil price profiles
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Risk is not considered
Develop analytical framework which:
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Builds on Permanent Income approach
Supports fiscal prudence
Is simple to explain conceptually
Accounts explicitly for Risk
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“Dutch disease”
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A lack of focus on the non-oil economy
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Poor governance and inefficient spending
◦ Resource wealth often associated with weak government
institutions
◦ Budget fragmentation and “fiscal gimmickry” may hamper
spending efficiency
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Saving (e.g. Alaska Permanent Fund, Kuwait Reserve
Fund for Future Generations)
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Stabilization (Chile Copper Stabilization Fund,
Venezuela Macroeconomic Stabilization Fund)
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Financing (Kuwait General Reserve Fund, Norwegian
State Pension Fund, Timor-Leste Petroleum Fund)
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Aim to reduce the impact of volatile revenue on the
government and the economy.
Inflows and outflows are typically contingent on
whether the petroleum revenue or price is “high” or
“low,” compared to some historical average or predetermined threshold.
The idea is that the fund would receive money from the
budget when petroleum revenue is particularly strong
and pay out to the budget when petroleum revenue is
particularly weak.
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By reducing the uncertainty of petroleum revenue for the budget,
stabilization funds aim to make budgetary spending more stable and
predictable.
But:
 Also suffer from the fungibility problem. Governments could make
payments to the fund when the petroleum price is high, but may not reduce
expenditure if they borrow elsewhere.
 Rules of inflows and outflows may become inappropriate if based on rigid
petroleum price thresholds.
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Demonstrated approach with respect to financial asset
management is highly conservative
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More liberal spending of oil revenues is inconsistent
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Need to develop a consistent and disciplined approach
to risk
◦ Value at Risk Models are in common usage among Financial
Risk Management Professionals