Angola Workshop on Oil Revenue Management The World Bank - Angola Appropriate Fiscal Responses to the Rapid Accumulation of Oil Revenues By Francisco G. Carneiro May

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 1000 b/d

The Evolution of World Prices

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

Dealing with an Appreciating Exchange Rate

What the Government is Doing Relaunching the Economy Job Creation Repairing Infrastructure Improving Service Delivery Social Stability

Causal Factors Technical Factors: –Paradox of Plenty –Volatility of revenues Political Factors: –Diminished governance –Under-investment in capacity

160 Countries Strong governance Weak Governance Source for data: 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. Governance Indicator Angola Nigeria Ecuador Cameroon Azerbaijan Russia Iran Algeria Venezuela Gabon Colombia Mexico Malaysia Kuwait United Kingdom Norway Governance and Transparency

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 US$ million Low price Base price High price Different Price ScenariosCorresponding Revenues

Different Price and Revenue Scenarios Total Government Revenues (US$ million) Past revenues at historical prices , , ,251 Future revenues under three price scenarios Base PriceHigh PriceLow Price 2005 – ,930152,35874, ,016175,67286, ,23994,85048, ,55641,92221, ,77211,7485,714

Fiscal Policy Response 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. Assumptions: Base price scenario Population grows at 2.9% annually. Financial assets yield 5% annually. Adjusted government revenue is discounted at 10%. US$ $169

Permanent Expenditure Levels under Different Assumptions Discount Rate Price Scenarios5%10%15% Low Base High 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

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