The International Monetary Fund has said that Nigeria and other resource-rich economies that face enormous challenges due to drop in commodities prices can adopt right tax policies to address the short fall in revenue.
In its latest Fiscal Monitor, the IMF examines how countries can tax and spend wisely so that their oil, gas and metals support strong and stable economic development.
It said fiscal policy can either calm or magnify the effects of volatile commodity prices on the domestic economy, stating that in many countries, large swings in commodity prices have resulted in large fluctuations in public expenditures and, in turn, exacerbated economic volatility.
Director of the IMF’s Fiscal Affairs Department, Vítor Gaspar said, “The right reforms can make a difference. Improved fiscal frameworks and policies can help ensure that natural resources are truly a blessing for resource-rich countries.
“So how can countries tame the commodities roller coaster? The report outlines how more stable expenditures can give a smoother ride, how well-planned public investment can help a steady economic climb, and how fiscal frameworks can lay the track for the long-term future.
“The experience of recent decades shows that many countries find it difficult to manage volatility around commodities. Their public expenditure tends to significantly accelerate during price upswings and fall during downswings.
“This is how fiscal policy can play a major role in transmitting commodity price volatility to the domestic economy. Macroeconomic instability, in turn, hampers sustainable growth.
“The latest commodity price cycle illustrates the point. Many countries saw a massive increase in budget revenues during the 2003-08 revenue windfall, exceeding 200 percent of 2002 GDP in some cases, which financed enormous increases to expenditures.
“There are cases in which the size of the budget more than tripled. In contrast, other countries did build large fiscal buffers during the years of high commodity prices.
“With the latest sharp fall in commodity prices, most countries will have to cut expenditures, in some cases by large amounts. However, those with fiscal buffers will be able to apply the brakes at a more gradual pace and cushion the impact on the economy.
“Designing an appropriate long-term strategy to manage natural resources is a complex task. If the wealth is simply consumed, the country will become poorer as the natural resources are depleted. Well-designed strategies promote economic development by investing, for example, in infrastructure. Investment in people is as important, namely by achieving strong health and education outcomes. These decisions are complicated due to the need to manage the high uncertainty of resource prices and commodities reserves.
“Indeed, many resource-rich countries used a significant share of the recent windfall to boost capital spending, as well as expenditures on health and education. For example, public investment grew by more than 15 percent a year (at constant prices) in 2000-08.
“Good policies are needed to ensuring that large increases in public investment and social spending deliver strong growth dividends. Namely, scaling up of public investment needs to be done at a pace that allows space for private investment and takes into account supply bottlenecks. Countries should build financial buffers to avoid costly “stop-go” cycles. Furthermore the pace of public investment should be consistent with the country’s institutional capacity, to ensure projects are wisely selected and efficiently implemented. The same holds for health and education. It is of paramount importance that social spending is effective and efficient.
“The Fiscal Monitor stresses the importance of developing a comprehensive fiscal framework to better manage public finances amid high uncertainty.”
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