Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons From the Republic of Congo

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.In a number of oil producing countries, oil revenue accounts for the majority of government revenue, but is expected to be depleted in a relatively short time frame. Ensuring that fiscal policy is on a sustainable path is thus a high priority, but political and social adjustment costs create incentives to delay fiscal consolidation. This paper estimates how the permanently sustainable non-oil primary deficit (PSNOPD) depends on the speed of consolidation, using an optimization model with habit formation. Realism is added by allowing for negative growth-adjusted interest rates during a temporary period of catch-up growth. Applied to the Republic of Congo, this approach leads to the following conclusions: (i) the current fiscalpolicy stance is unsustainable; (ii) social adjustment costs justify spreading the bulk of the adjustment over five years; and (iii) the slower the adjustment, the lower the PSNOPD level. JEL Classification Numbers: E6, H5, Q3

Fiscal Vulnerability and Sustainability in Oil-Producing Sub-Saharan African Countries

“…Barnett and Ossowski (2003) developed a model based on Freidman's notion of permanent income to show how a government could solve a dynamic optimization problem to determine a constant real expenditure path that could help achieve long-term fiscal sustainability. This model has been used by a number of other researchers (for example, Leigh and Olters, 2006;Carcillo, Leigh, and Villafuerte, 2007;and Olters, 2007) to assess fiscal sustainability in several oil-producing sub-Saharan countries. In it simplest form, the government chooses a tax and spending policy to maximize a social welfare function, subject to an intertemporal budget constraint and a no-Ponzi-game condition (which simply restricts the terminal stock of government bonds):…”

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