Do Fiscal Rules Foster Fiscal Discipline in Resource-Rich Countries?

DoFiscalRulesFosterFiscalDisciplineinResource-RichCountries? AblamEstelApeti,OlivierBasdevant,andVéroniqueSalinsWP/23/88 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 APR ©2023InternationalMonetaryFundWP/23/88 IMFWorkingPaper FiscalAffairsDepartment DoFiscalRulesFosterFiscalDisciplineinResource-RichCountries?PreparedbyAblamEstelApeti,OlivierBasdevant,andVéroniqueSalins* AuthorizedfordistributionbyNikolayGueorguievApril2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Thispaperinvestigatestheperformanceoffiscalrulesinresource-richcountries(RRC).Usingpaneldatafor57commodityexportingcountriesfrom1976to2021,wefindthatfiscalrules:(i)reducetheprocyclicalityofrealpublicexpenditureswithtermsoftradeinoilexportingcountries,and(ii)improvenon-resourceprimarybalancesinallRRC,especiallyduringtermsoftradeupturns.Therules’designmatters. Addressingtheprocyclicalityofpublicexpenditureswithterms-of-tradecanbeachievedwithexpenditurerules,and,foroil-exporters,revenuerules(althouglimiteddataonthelattercallsfortakingtheresultscautiously).Toimprovenon-resourcefiscalbalances,debtrulesandfiscalbalancerulesareshowntohaveapositiveimpact,especiallyinoilexportingcountries.Wefurtherinvestigatetheeffectoffiscalrulesandotherfeaturesofthefiscalframeworkthroughcasestudies(forBotswana,Mongolia,andTimor-Leste).Thesecaseshighlightthatevenwhenfiscalrulesarenotfullycompliedwith,theyleadtosomedegreeoffiscaldiscipline.Thecasestudiesalsohighlighttheimportanceofthequalityoffiscalframeworks:frequentrevisions,lackofcomplianceorlowstringencyoftherulescansignificantlyhampertheireffectiveness. RECOMMENDEDCITATION:AblamEstelApeti,OlivierBasdevant,andVéroniqueSalins.2023.“DoFiscalRulesFosterFiscalDisciplineinResource-RichCountries?.”IMFWorkingPaperWP/23/88.InternationalMonetaryFund,Washington,DC. JELClassificationNumbers: E62,H60,Q32 Keywords: Fiscalrules,resourcerichcountries,fiscaldiscipline Author’sE-MailAddress: aapeti@IMF.org;obasdevant@IMF.org;vsalins@IMF.org. *TheauthorswouldliketothankNikolayGueorguiev,AbdelhakSenhadji,RaphaelLam,HamidDavoodi,FazeerSheikRahimandtheparticipantsofanIMF’sseminarattheFiscalAffairsDepartmentforhelpfulcommentsandsuggestions.TheauthorsaregratefultoDáneaTrejoCarcamoandDestinyJohnsonAmandaforeditorialassistance. WORKINGPAPERS DoFiscalRulesFosterFiscalDisciplineinResource-RichCountries? PreparedbyAblamEstelApeti,OlivierBasdevant,andVéroniqueSalins Contents Glossary4 Introduction5 StylizedFacts:CommonChallengesAffectingtheConductofFiscalPolicyinResource-RichCountries ..............................................................................................................................................................................6 DescriptionofDataUsed9 EstimationMethodology9 Model1:ProcyclicalityofPublicExpenditures9 Model2:FiscalDiscipline11 Results12 Model1ConfirmstheProcyclicalityofExpendituresandtheCounter-CyclicalRoleofFiscalRules13 Model2showsthatthePresenceofFiscalRulesImproveNon-ResourcePrimaryFiscalBalances13 InvestigatingtheEffectivenessofFiscalRulesAcrossDifferentTypes15 InvestigatingifFiscalRulesAreMoreEffectiveDuringTerm-of-TradeUpturns17 CountryCases19 RulesAreUsuallySetUpasaMixofFormalandIndicativeOnes19 RulesCanHaveaPositiveImpactonFiscalDisciplineEveniftheyAreNotFullyCompliedWith,ButNon-ComplianceandDesignFlawsCanUnderminetheSustainabilityoftheFiscalFramework20 SomeLessons:StrengtheningtheDesignofFiscalRulesandIncentivesforCompliance21 Conclusion:ShouldRRCAdoptFiscalRules?22 References24 AnnexI.TestingSelectionBias27 AnnexII.ResultsFromGMMEstimations29 AnnexIII.Data31 AnnexIV.AdditionalInformationonCountryCases32 Botswana:MakingFiscalRulesMoreEffectiveGuidesofFiscalPolicy32 Mongolia:MakingRulesMoreBinding32 Timor-Leste:Balancingdevelopmentneedsfinancingandfiscalsustainability34 FIGURES 1.CommodityPricesCo-Movement7 2.DifficultyinForecastingCommodityPrices:TheCaseofOilPrices7 3.OilExportersareMoreDependentonCommodityRevenuethanOtherCommodityExporters7 4.Nigeria:Co-MovementofTermofTradeandCommodityPrices,2000–218 5.Nigeria:ExpenditureProcyclicality,2000–218 6.FiscalRulesAdoption,1975–20218 7.Timor-Leste:FundRevenuesandWithdrawals21 8.Timor-Leste:TotalGovernmentBalance21 TABLES 1.FiscalPolicyProcyclicalityandFiscalRules13 2.FiscalDisciplineandFiscalRules:FixedEffectsOLSEstimations14 3.FiscalDisciplineandFiscalRules:GMMEstimations15 4.FiscalPolicyProcyclicalityandFiscalRulesDesign16 5.PrimaryBalanceandTerm-of-TradeIndexGrowth:EffectsbyRulesDesign17 6.RealExpenditureGrowthDuringTerm-of-TradeIndexRiseandFall18 7.Non-resourcePrimaryBalancesDuringTerm-of-TradeIndexRiseandFall18 Glossary BBR Budg