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  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

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© 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 Board, or IMF management.

ABSTRACT: 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.

RECOMMENDED CITATION: Ruzzante, M., and N. Sobrinho (2022): “The ‘Fiscal Presource Curse’: Giant Discoveries and Debt Sustainability,” IMF Working Paper WP/22/10

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Title Page

WORKING PAPERS

The ‘Fiscal Presource Curse’:

Giant Discoveries and Debt Sustainability

Prepared by Matteo Ruzzante and Nelson Sobrinho1

Contents

  • I Introduction

  • II Data

    • A Definition and Sources

      • Resource Discoveries

      • Government Debt

      • Fiscal Stress and Debt Distress Episodes

      • Political Institutions and Governance

    • B Stylized Facts

  • III Methodology

  • IV Results

    • A Predictability Tests

      • Granger Causality Test

      • Joint Significance

    • B Baseline Specification

    • C Heterogeneity

    • D Robustness

      • Alternative Measures of Government Debt

      • Alternative Measures of Discovery

      • Alternative Controls

      • Alternative Samples

      • Alternative Country Groupings

      • Other Specifications

  • V Conclusion

    • References

    • Figures

    • Tables

  • Online Appendix

  • A Data Sources and Construction

    • A.I Government Debt

    • A.II Governance Indicator

  • B Descriptive Statistics

  • C Public Debt Trajectory in Selected Examples

  • D Coefficient Estimates

  • E Heterogeneity

  • F Cumulative Responses

  • G Robustness

  • LIST OF FIGURES

  • 1 Temporal Distribution of Giant Discoveries

  • 2 Geographical Distribution of Giant Discoveries

  • 3 Impact of Giant Discoveries on Government Debt

  • 4 Impact of Giant Discoveries on Probability of Fiscal Crises

  • 5 Impact of Giant Discoveries on Probability of External Debt Distress

  • 6 Impact of Giant Discoveries on Government Debt – Heterogeneity by Quality of Political Institutions and Governance

  • B1 Temporal Distribution of Fiscal Stress and Debt Distress Episodes

  • B2 Giant Discoveries By Country

  • B3 Giant Discoveries by Type of Mineral

  • B4 Public Debt and Haircuts in Restructurings

  • B5 Government Debt Patterns for the Baseline Sample, 1970–2015

  • C1 The “Fiscal Presource Curse” in Mozambique and Low-Income Countries

  • C2 Absence of the “Fiscal Presource Curse” in Botswana

  • C3 Curse or No Curse in Guyana?

  • E1 Impact of Giant Discoveries on Government Debt – Heterogeneity by Quality of Political Institutions and Type of Discovery

  • E2 Impact of Giant Discoveries on Government Debt – Heterogeneity by Governance and Type of Discovery

  • G1 Impact of Giant Discoveries on Government Net Debt

  • G2 Impact of Giant Discoveries on Government Financial Assets

  • G3 Impact of Giant Discoveries on Government Debt at the Intensive Margin

  • G4 Impact of Giant Oil and Gas Discoveries’ Net Present Value on Government Debt

  • G5 Impact of Giant Discoveries on Government Debt – Controlling for Covariates

  • G6 Impact of Giant Discoveries on Government Debt – Subsample of Discoverers

  • G7 Impact of Giant Discoveries on Government Debt between 1970 and 2000

  • G8 Impact of Giant Discoveries on Government Debt between 1980 and 2010

  • G9 Impact of Giant Discoveries on Government Debt – Lags: p = 2, q = 10

  • G10 Impact of Giant Discoveries on Government Debt – Lags: p = 1, q = 15

  • G11 Impact of Giant Discoveries on Government Debt – Lags: p = 1, q = 20

  • G12 Impact of Giant Discoveries on Government Debt – With Quadratic Trend

  • G13 Impact of Giant Discoveries on Government Debt in Advanced Economies

  • G14 Impact of Giant Discoveries on Government Debt in Emerging Economies

  • G15 Impact of Giant Discoveries on Government Debt in Developing Economies

  • LIST OF TABLES

  • 1 Granger Causality Tests of Discovery Predictability

  • 2 Likelihood Ratio Tests of Discovery Predictability

  • 3 Cumulative Impact of Giant Discoveries on Government Debt

  • B1 Descriptive Statistics and Data Sources

  • D1 Dynamic Panel Distributed Lag Model Estimates

  • C2 Linear Probability Model Estimates – Fiscal Crises

  • C3 Linear Probability Model Estimates – External Debt Distress

  • F1 Cumulative Impact of Giant Discoveries on Government Debt – Alternative Debt Measures

  • F2 Cumulative Impact of Giant Discoveries on Government Debt – Alternative Discovery Measures

  • F3 Cumulative Impact of Giant Discoveries on Government Debt – Alternative Samples

  • F4 Cumulative Impact of Giant Discoveries on Government Debt – Alternative Lag Specifications

  • F5 Cumulative Impact of Giant Discoveries on Government Debt – Alternative Regression Specifications

*

Ruzzante: Northwestern University, 2211 Campus Dr, Evanston, IL 60208, United States. Sobrinho: International Monetary Fund, 700 19th Street NW, Washington, DC 20431, United States.

1

We thank the valuable feedback from participants of the AFR Fiscal Network seminar and referees of the African Department’s Research Advisory Group at the IMF. Our special thanks to Tim Willems for very useful suggestions and guidance, and to the office of the IMF’s Executive Director for Saudi Arabia and all IMF country teams who reviewed the paper (especially the Chile, Ghana, Guyana, Mozambique, Nigeria, and Uganda teams) for valuable suggestions and corrections. We also thank Cian Allen, Julie Bousquet, Xiangming Fang, Pranav Gupta, Jonas Guthoff, Metodij Hadzi-Vaskov, Nir Klein, Oana Luca, Amine Mati, Monique Newiak, and Mahvash Qureshi for their comments on earlier versions of the paper. All remaining errors are ours.

The 'Fiscal Presource Curse': Giant Discoveries and Debt Sustainability
Author: Matteo Ruzzante and Nelson Sobrinho