Primer: Fiscal Rules and Natural Resource Funds

An explicit financial rule dictating the amounts spent and saved each year by government can guide the long-term decision to save.” – Natural Resource Charter, Precept 7 “One strategy to address revenue volatility is to form a fund with surplus revenues to accumulate foreign assets in boom times, and liquidate those assets when revenues fall.

KEY MESSAGES

• Natural resource funds (a subset of sovereign wealth funds) can help governments respond to some of the macro-economic challenges of natural resource wealth by setting aside or investing some or all of natural resource revenues in foreign or other assets.
• To be effective, funds must have clear objectives, and their deposit, withdrawal and investment rules must be aligned with those objectives. Potential objectives can include smoothing expenditures, savings, mitigating Dutch disease, earmarking for public investment, ring fencing and political leverage.
• Stabilization funds can help smooth budget expenditures and savings funds can set aside revenues until they can be spent more efficiently or create an endowment for future generations.
• Fiscal rules for natural resource funds dictate how much a government deposits into and withdraws from the fund each year. Which fiscal rules a government applies should take into account the overall fund objective and the amount of savings or expenditures necessary to meet that objective in the country context.
• Natural resource funds are most effective when they are subject to independent external oversight and publish regular reports on investments, activities and managers.