Saturday, April 19, 2014

IMF laments disappointing performance of some countries despite natural wealth

Published:

Resource-rich countries perform more poorly on the human development index than do non-resource-rich countries.

The International Monetary Fund, IMF, has expressed disappointment in the poor performance in investment, savings and economic welfare of some countries, despite being blessed with abundant natural wealth.

“The fundamental goal of resource-rich economies should be to transform their exhaustible natural resources into assets—human, domestic, and private capital and foreign financial assets—that will generate future income and support sustained development. But the record is mixed. Several of these countries lack such basic infrastructure as roads, railways, ports, and electricity as a result of insufficient and inefficient investment spending,” the organisation said.

According to the IMF in a report titled “Too Much of a Good Thing?” released this month, some of these resource-rich countries have relatively little savings, despite their natural possessions due to varying reasons ranging from exposure to volatile prices of their resources to challenges that come with easy money.

“A number of resource-rich countries have saved relatively little of the income from their natural resources and, after adjusting for the depletion of these resources, may indeed have negative net saving rates. Partly as a result of low savings, investment, and growth, many resource-rich developing countries face endemic poverty. Indeed, they often do less well than non-resource-rich developing countries when assessed against standard poverty and other social indicators.”

A chart in the report highlighted that resource-rich countries perform more poorly on the human development index than do non-resource-rich countries.

“Various arguments have been made to explain the disappointing performance in some countries with abundant natural wealth. One is that the natural resource sector chokes off other export sectors by driving up prices and undermining competitiveness. Another is that the economy’s exposure to volatile prices exacerbates the difficulties of economic policy making. Yet another explanation is that easy money from the natural resource sector creates governance challenges and could contribute to weak institutions, a risk of conflicts, and an adverse investment climate” the organisation said.

In addition, the organisation said countries that export natural resources, particularly oil, must deal with considerable volatility in export prices.

“The result is that government revenues have, on average, been 60 per cent more volatile in resource-rich countries, and spending volatility has been even greater” the organisation said.

Fate of naturally endowed countries

The IMF expressed concern on the fate of the countries that are just discovering natural resources, especially given the poor performance of some of the countries that have discovered such resources earlier.

“Uganda discovered 3.5 billion barrels of oil in the past few years. And Mozambique recently confirmed huge amounts of coal and natural gas reserves, with further discoveries expected in the near future. Will these countries be able to reap the benefits from their newfound natural resource wealth? Or are they bound to fall prey to the same failed policies that have too often plagued other resource-rich developing countries?” the organisation said.

“Those failures underscore a hard reality”, IMF said, adding that without good policy frameworks, especially for taxing and spending, resource-rich countries can easily squander their natural riches.

In some countries, like Nigeria, oil extraction has been a source of economic activity and fiscal revenues for several generations, while others, like Timor-Leste, rich in oil and gas, are relative newcomers to the practice, according to IMF. Yet others have recently discovered resources, such as Uganda, or will soon see an increase in extraction, for example, of iron ore in Guinea and Liberia.

“In some countries extraction will decline significantly within a couple of decades as the resource is exhausted, while in others the current rates could continue for many generations”, it said.

Way Forward

Natural resources are a critical component of many countries’ export and government revenues. For example, they account for an important share of total exports in nearly half of the countries in sub-Saharan Africa. But, despite their resource abundance, the IMF says these countries’ economic growth performance has been mixed.

For natural resource riches to drive growth and reduce poverty, the organisation said countries must balance spending now with investing in the future. Many developing countries are endowed with exhaustible natural resources—such as oil, gas, minerals, and precious gems—that, if properly managed, could help them reduce poverty and sustain growth.

New approaches to resource management—using the revenues to boost domestic savings and investment, and avoiding boom-bust cycles by smoothing spending from volatile revenues—can help countries avoid the policy mistakes of the past. Recent improvements in macroeconomic management, combined with fresh analytical thinking that takes account of the specific circumstances of developing countries, offer hope that natural resource revenues can drive poverty reduction and growth, the IMF said.

Although it may be optimal to increase current spending somewhat to alleviate pressing poverty needs, experts say poor countries should save the bulk of their resources and invest them in the domestic economy.

The IMF said it has developed a set of tools for practical policy analysis that takes into account the specific characteristics of resource-rich developing countries. These tools take into account the use of fiscal rules that help smooth revenue volatility and assess long-term fiscal sustainability, the impact of natural resource flows on a country’s balance of payments, and the macroeconomic implications of saving-investment scaling-up scenarios”.

One tool, designed to help policymakers determine how much and how quickly to scale up public investment, is the “sustainable investing tool”. The tool takes into account the linkage between investment and growth and makes such assumptions as the rate of return on public capital. It also captures the key macroeconomic issues facing resource-rich developing countries by weighing several factors that can undermine the growth benefits of public investment.

The sustainable investing tool has been applied in several countries, including Angola, Azerbaijan, Kazakhstan, Mozambique, and Turkmenistan, the IMF said. Although the tool is designed to capture country-specific characteristics, the results can inform general policy discussions on macroeconomic stability while countries are investing volatile resource revenues.

“The purpose of the tool is to help resource-rich developing countries avoid the pitfalls of investing resource revenues and, ultimately, escape the “natural resource curse” that has plagued many resource-rich developing countries,” IMF said.

GTBank SME MarketHub campaign