Angola Workshop on Oil Revenue Management Appropriate Fiscal Responses to the Rapid Accumulation of Oil Revenues By Francisco G. Carneiro May - 2006 The World Bank - Angola Structure of the Presentation • Background and main challenges • Government actions to relaunch the economy • Administration of oil revenues • Appropriate fiscal responses • Summary of recommendations Background: The Most Challenging Issues Facing Angola in the Near Future A Country Rich in Natural Resources Receitas do Petróleo sob Diferentes Cenários de Preços Na Ausência de Novas Descobertas Regime (All) 60000 Sum of Gross Rev $M 50000 High price 40000 Base price Base High Low Figure 1: Angola's Official Diamond Exports Low price 20000 7,000,000 10000 900 800 6,000,000 5,000,000 1990 1995 2000 2005 2010 2015 2020 2025 Carats 0 2030 Year 3,000 600 4,000,000 500 3,000,000 400 300 2,000,000 200 1,000,000 2,500 100 0 2,000 0 Carats 1,500 1,000 500 Current production Pending production 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 - US$ million US$ million 700 1000 b/d US$ million Price 30000 The Evolution of World Prices 1974 1980 1971 1981 World Price of Crude Oil since 1861 1998 120.00 100.00 $/barrel 80.00 60.00 40.00 20.00 Source: BP Statistical Review of World Energy $ 2004 Median Mean Median = $18.18 Mean = $24.28 2006 2001 1996 1991 1986 1976 1966 1961 1956 1951 1946 1941 1936 1931 1926 1921 1916 1911 1906 1901 1896 1891 1886 1881 1876 1871 1866 1861 0.00 Association Between Resource Concentration and Conflict Bannon, Ian and P. Collier (2003), “Natural Resource and conflict: What We Can Do” in Natural Resources and Violent Conflict, Bannon, Ian. and Paul Collier (eds.), Washington DC: World Bank Low-Base Social Indicators Indicadores Sociais e de Pobreza Indicador População (em milhões) População 20 anos População abaixo da linha de pobreza Expectativa de vida ao nascer Taxa de mortalidade dos 0 aos 5 anos ( por 1000 nascimentos) Taxa de preval ência do VIH/SIDA População que sabe onde fazer um teste do VIH População que sabe pelo menos 3 maneiras de se evitar a infec ção pelo VIH Taxa de analfabetismo adulta Taxa de mortalidade maternal Taxa líquida de escolarização ( 1ª -4ª classe) Classificação no IDH (entre 177 países) Classificação PIB/capita (entre 177 países) Coeficiente de Gini (1995) Coeficiente de Gini (2001) Fonte: ECP. A Posição de Angola 14.7 60% 68% 42.4 250 3.9% 23% 17% 33% 1800 56% 166 128 0.54 0.62 Dealing with an Appreciating Exchange Rate Angola has experienced a more sustained real appreciation of the effective exchange rate since 2003 than its oil-producing neighbors. 240 Real Effective Exchange Rate (Index 100=Jan00) 220 Angola Cameroon Chad Congo, Rep. of Equatorial Guinea Gabon Nigeria 200 180 160 140 120 100 Nov-05 Jun-05 Jan-05 Aug-04 Mar-04 Oct-03 May-03 Dec-02 Jul-02 Feb-02 Sep-01 Apr-01 Nov-00 Jun-00 Jan-00 80 What the Government is Doing Repairing Infrastructure Job Creation Relaunching the Economy Improving Service Delivery Social Stability Causal Factors • Technical Factors: – “Paradox of Plenty” – Volatility of revenues • Political Factors: – Diminished governance – Under-investment in capacity Governance Indicator Governance and Transparency United Kingdom Malaysia Norway Colombia Gabon Algeria Russia Cameroon Nigeria Kuwait Mexico Iran Ecuador Venezuela Azerbaijan Angola Weak Governance 160 Countries Strong governance Source for data: http://www.worldbank.org/wbi/governance/govdata2001.htm. This chart shows estimates of control of corruption for 160 countries during 2000/01, with selected countries indicated for illustrative purposes. The vertical bars show the likely range of Governance indicators, and the midpoints of these bars show the most likely value for each country. The length of these ranges varies with the amount of information available for each country. Colors are assigned according to the following criteria: Red, less than 30% of overall countries rank worse; Yellow, between 30% and 70%; Green, over 70% . Countries’ relative positions in no way reflect the official views of the World Bank or the International Monetary Fund. Weak Institutional Capacity • National Tax Department (DNI) – USD $10 billion in revenues (2004) – > 30 companies – > 60 contracts – 6 professional staff Sector Management Assessment • World class reserves with robust pre-tax economics • Up-to-date legal and contractual regime • Acceptable post-tax returns • Very significant production build-up, but with significant mid-term peaking…. The Way Forward The way forward requires: 1. Better capacity to forecast revenues 2. Appropriate fiscal policies 3. Some form of a stabilization fund (conta de reserva do Tesouro) Different Price and Revenue Scenarios 45000 regime (All) Sum of TotalGov. Take $M 40000 82.00 High price 35000 72.00 30000 US$ million 62.00 52.00 42.00 32.00 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Low 54.00 40.00 39.44 38.89 38.33 37.78 37.22 36.67 36.11 35.56 35.00 Base 54.00 56.00 52.00 47.00 43.00 40.00 39.00 38.00 37.00 36.00 35.00 High 54.00 76.00 72.00 67.00 63.00 60.00 59.00 58.00 57.00 56.00 55.00 25000 Base price 20000 15000 10000 Low price 5000 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 price Different Price Scenarios base high low Corresponding Revenues Year Different Price and Revenue Scenarios Total Government Revenues (US$ million) Past revenues at historical prices 1990 - 1994 10,247 1995 - 1999 12,119 2000 - 2004 24,251 Future revenues under three price scenarios Base Price High Price Low Price 2005 – 2009 99,930 152,358 74,301 2010 - 2014 95,016 175,672 86,805 2015 - 2019 50,239 94,850 48,232 2020 - 2024 21,556 41,922 21,256 2025 - 2029 5,772 11,748 5,714 Fiscal Policy Response 1600 1400 Assumptions: 1200 Base price scenario US$ 1000 Population grows at 2.9% annually. 800 Financial assets yield 5% annually. 600 400 Adjusted government revenue is discounted at 10%. $169 200 Adjusted government revenue per capita Projected government revenue per capita 29 20 27 20 25 20 23 20 21 20 19 20 17 20 15 20 13 20 11 20 09 20 07 20 Ye a r 0 Interest on accumulated savings per capita Permanent Expenditure per capita The essential idea is to convert uncertain per capita future oil revenues into a conservative estimate of what might be spent per capita in perpetuity, based on those future revenues and on accrued savings and interest from their early investment. The result of such a policy is a dramatic smoothing of expenditure, which addresses both Dutch Disease and expenditure volatility concerns, and a transfer of wealth to future years to cover resource exhaustion concerns. Permanent Expenditure Levels under Different Assumptions Discount Rate Price Scenarios 5% 10% 15% Low 182 136 107 Base 220 169 136 High 385 292 232 US$ per capita, assuming that population grows by 2.9% annually and that financial assets yield 5% Practical and Political Considerations • Need for agreement on assumptions • Institutional capacity requirements • Popular opposition current savings/deferred expenditures Economic Policy Objectives • Manage the impact of an appreciating real exchange rate • Agree on a strategy to absorb oil windfall with a view to move to an MTEF • Build international reserves/the oil reserve account as buffers against the foreign exchange/fiscal impact of revenue volatility • Promote rapid and bold improvements in procurement practices Options to Deal with the Effects of Appreciation of the Currency Reduce Costs • Detailed analysis of the structure of production costs is essential • Use of oil revenues for productive investment (e.g., infrastructure) can lower domestic costs for the entire economy • Do not try to fight against the appreciating trend Institutional Options to Manage the Windfall Box E.1: Elements of a Revenue Management Framework for Angola Revenue consolidation and collection The collection of all petroleum related revenues are consolidated through the oil reserve account Revenues are accounted for according to agreed and transparent accounting guidelines Revenues are published in an accessible and timely manner Define savings and consumption Transfers from the oil reserve account to the budget are based on the agreed savings/expenditure rules. The rules are clear, predictable, and public, do not depend on administrative or political discretion for their application In the development of guidelines for savings and consumption, macroeconomic and sustainability concerns are paramount Institutionalize the transfer mechanism Transfers from the revenue collecting authority to the budget and the oil reserve account follow predefined rules and occur automatically, independent of administrative or political discretion Account management Management of the funds is based on clear, transparent, agreed, and predictable rules, which allocate clear responsibilities and reporting requirements. The BNA is designated as the operational (day-to-day) manager for the account. The rules for investing the account’s assets must be clear, agreed and published. Fund assets should to a large extent be invested abroad and in safe instruments The BNA reports on performance of the oil reserve account and asset allocation according to a preset schedule, and the reports are made public in an accessible way A high level oversight committee (key ministries plus qualified external advisers) must be established. The oil reserve account, its management, and guidelines must be subject to rigorous transparency requirements There should be a cap limiting the resources accumulated ex-ante to avoid political economy problems. Summary of the Recommendations Improve Governance • Adopt best practice policies to manage natural resources • Invest in institutional capacity • Improve transparency • Consolidate macroeconomic stability Strong political commitment to guarantee the success of the reforms