Fiscal Vulnerabilities in Commodity Exporting Countries and the Role of Fiscal Policy

Abstract

This series is produced by the Macroeconomics, Trade, and Investment (MTI) Global Practice of the World Bank. The papers in this series aim to provide a vehicle for publishing preliminary results on MTI topics to encourage discussion and debate. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. Citation and the use of material presented in this series should take into account this provisional character.

Monetary policy of commodity-dependent economies

“…Commodity price swings remain associated with substantial volatility of GDP growth, consumption, investment and fiscal revenue in commodity-exporting emerging economies, in contrast to advanced economies. Furthermore, commodity price shocks are often persistent, complicating the fiscal policy response to shocks given the potential trade-offs between ensuring short-term macroeconomic stabilization and long-term fiscal and debt sustainability (Richaud et al, 2019). Commodity price fluctuations are an essential determinant of the business cycle in commodity-exporting emerging economies, in contrast to advanced commodity-exporting economies, and are associated with high investment and consumption volatility.…”

“…Among commodity exporters, dependence on commodity exports is exceptionally high for oil exporters. On average, commodity exports account for 35 per cent of total exports in non-oil exporting emerging economies considered moderately dependent and 58 per cent among highly dependent ones (Richaud et al, 2019).…”

Commodity Markets: Evolution, Challenges, and Policies

“…By some estimates, terms-of-trade shocks account for up to half of their business cycle fluctuations (Kose 2002). Because the commodity composition of imports is much more diverse than that of exports, export price shocks generally have a much larger impact on the terms of trade, and the domestic economy, than do import shocks (Di Pace, Juvenal, and Petrella 2021; Richaud et al 2019). Prospects for these commodity-reliant economies depend significantly on the type of commodity they export.…”

“…The macroeconomic performance and progress on poverty reduction in commodity-exporting EMDEs historically has varied in line with commodity price cycles. This is especially so for low-income countries that rely on a narrow set of commodities (Richaud et al 2019).…”

“…can go toward less productive purposes, whereas fiscal consolidation during price collapses exacerbates the depth of a recession (Frankel 2011;Medas and Zakharova 2009). Such procyclicality can have lasting negative effects on growth, because public investment, such as infrastructure spending, is typically the first element of public spending to be cut (Richaud et al 2019). For example, after the 2014-16 commodity price collapses, the sharp decline in fiscal revenues forced abrupt cuts in government spending that exacerbated the economic slowdowns (Stocker et al 2018).…”