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Matteo Ruzzante and Nelson Sobrinho
This paper investigates the dynamic impact of natural resource discoveries on government debt sustainability. We use a ‘natural experiment’ framework in which the timing of discoveries is treated as an exogenous source of within-country variation. We combine data on government debt, fiscal stress and debt distress episodes on a large panel of countries over 1970-2012, with a global repository of giant oil, gas, and mineral discoveries. We find strong and robust evidence of a ‘fiscal presource curse’, i.e., natural resources can jeopardize fiscal sustainability even before ‘the first drop of oil is pumped’. Specifically, we find that giant discoveries, mostly of oil and gas, lead to permanently higher government debt and, eventually, debt distress episodes, specially in countries with weaker political institutions and governance. This evidence suggest that the curse can be mitigated and even prevented by pursuing prudent fiscal policies and borrowing strategies, strengthening fiscal governance, and implementing transparent and robust fiscal frameworks for resource management.
Matteo Ruzzante and Nelson Sobrinho

, including advanced economies and most middle income- and low-income countries (MICs and LICs). We also rely on multiple data sources for constructing comprehensive measures of fiscal stress and debt distress episodes as well as political institutions and governance. To estimate the impact of giant discoveries on government debt, we employ a dynamic panel distributed lag model. This framework allows to explore the dynamic relationship between discoveries and debt trajectory over different time horizons. We treat the timing of discovery events as an exogenous source of

Matteo Ruzzante and Nelson Sobrinho

Copyright Page © 2022 International Monetary Fund WP/22/10 IMF Working Paper African Department The ‘Fiscal Presource Curse’: Giant Discoveries and Debt Sustainability Prepared by Matteo Ruzzante and Nelson Sobrinho * Authorized for distribution by Boileau Loko January 2022 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate . The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive

Mr. Rabah Arezki

would be the Middle Eastern oil-producing nations. About 260 billion barrels of oil in the Middle East cannot be burned if the world is to reach its warming goal. In addition to the oil, equipment and other capital used to explore and exploit those reserves could also become stranded. And the amount of potentially stranded assets is growing. Recent giant discoveries of oil and gas (Egypt, Israel, Lebanon) are expanding the list of countries whose oil and gas assets may never make it out of the ground. With so many countries exposed to the risk of stranded assets, it

effects of a giant oil and gas discovery on IMF projections. Purple line shows the effects on actual growth. Quality of institutions is based on Polity IV database. Since 1988 there have been 236 giant discoveries (larger than 500 million barrels) covering 46 countries (see map). These discoveries are significant—the potential value of each averaging 1.4 percent of a country’s GDP. GROWTH, ON AVERAGE, SYSTEMATICALLY LAGS IMF PROJECTIONS AND. FOR SOME COUNTRIES. FALLS . The textbook says that a discovery should increase output, and hence growth, as the

Mr. Rabah Arezki and Ritwik Banerjee

recipient country announces a giant discovery. Moreover, there is nothing to suggest that donors maintain the level of aid until production begins and then scale back—there is no statistically significant difference five years after an announcement. Shutting down foreign aid flows could undermine efforts to improve governance in recipient countries . Because studies have found that democracies are likely to receive more aid, we test whether the political characteristics of recipient countries—such as their level of democracy—induce more aid after giant oil

Mr. Frederik G Toscani
This paper studies the impact of natural resource extraction in Latin America and the Caribbean (LAC) from a number of angles. First, we exploit a novel dataset on the universe of giant oil and gas discoveries in the region to trace out the cyclical response of macroeconomic variables to discoveries over the short- and medium-run. Second, we use non-stationary panel data techniques to look at the long-run (trend) relationship between GDP per capita and the value of oil and gas production—our results imply that the recent fall in prices could depress GDP per capita by several percentage points. Last, we use Bolivia, which discovered huge gas reserves in the late 1990s, as a case study to apply the cross-country results and to study the impact of discoveries at the subnational level.
Mr. Frederik G Toscani

Rigolini (2015) find that gold mines in Peru reduce local poverty. 5 Our results on the differential impact of metal mining and natural gas production fit well with the above results for Brazil and Peru. III. Data This paper combines data from a number of sources. In this section, we briefly discuss the key sources and data construction. Discovery Data Data on oil and gas discoveries is from Horn (2014) . A giant discovery is defined as a discovery of an oil and/or gas field that contains at least a total of 500 million barrels of ultimately

Mr. Rabah Arezki, Valerie A Ramey, and Liugang Sheng
This paper explores the effect of news shocks on the current account and other macroeconomic variables using worldwide giant oil discoveries as a directly observable measure of news shocks about future output ? the delay between a discovery and production is on average 4 to 6 years. We first present a two-sector small open economy model in order to predict the responses of macroeconomic aggregates to news of an oil discovery. We then estimate the effects of giant oil discoveries on a large panel of countries. Our empirical estimates are consistent with the predictions of the model. After an oil discovery, the current account and saving rate decline for the first 5 years and then rise sharply during the ensuing years. Investment rises robustly soon after the news arrives, while GDP does not increase until after 5 years. Employment rates fall slightly for a sustained period of time.
Mr. Rabah Arezki, Valerie A Ramey, and Liugang Sheng

view that it is more and more difficult to discover new oil fields. 21 Figure V presents the distribution of the logarithm of the size of giant oil discoveries measured in million barrels of ultimately recoverable oil equivalent. It shows that there is significant heterogeneity in the size of oil discoveries. Figure 5. The Size Distribution of Giant Oil Discoveries: 1970-2012 Note : The figure presents the logarithm of million barrels of ultimately recoverable oil equivalent for giant discoveries in our sample. Table 2. The Spatial and Temporal