This year, government revenues have plunged by double-digit percentages in more than 20 countries that depend on natural resources. This is mostly due to drops in the prices of oil, gas and some minerals, as well as occasional production stoppages. Oil’s crash amid the coronavirus pandemic means that Kazakhstan, for example, is expecting fiscal revenues to decline by 20 percent, while Algeria, Nigeria and Oman are expecting a whopping 40 percent falloff. (See table below.)
Previously, we suggested policies that government officials could adopt in response. For instance, we suggested that governments facing liquidity crises could borrow from institutional investors or even the central bank. Those with large sovereign wealth funds could consider spending some of their savings. And we suggested restructuring debt in the few countries where price and production shocks are already causing insolvencies.
Gold-, iron ore- and uranium-dependent countries—such as Burkina Faso, the Kyrgyz Republic, Mali, Niger and Tanzania—are experiencing weaker-than-expected growth due to the global crisis, but less of a relative drop in fiscal revenues than most other resource-dependent countries. That is because prices of these commodity prices either rose as a result of pandemic containment measures or, in the case of iron ore, recovered quickly. But governments dependent on commodities like oil, gas, copper, zinc and cobalt have suffered.
Many governments facing liquidity challenges have borrowed. Some loans have been low- or even near zero-interest, meaning that the crisis will not cause large amount of taxpayer money to flow to bond investors or foreign governments. Peru and Chile, which have managed public finances relatively well over the last decade, have qualified for cheap loans from private investors at interest rates as low as 1.6 percent since the crisis started. Both are also drawing on a no-conditionality multi-billion dollar line of credit from the International Monetary Fund at about 0.1 percent interest. This line of credit is only available for governments that have adequate “fiscal space,” meaning they saved or paid down debt during the boom years. It has paid to be prudent over the last decade.
However, resource-dependent countries also feature heavily in the lists of those that have most indebted themselves since the coronavirus pandemic began, and with the highest debt service costs this year and next. Many resource-dependent countries—such as Angola, Democratic Republic of the Congo, Republic of Congo and Zambia—entered the crisis with excessive debt levels, despite years of historically high resource revenues. In fact, oil-rich African countries have borrowed twice as much (as a percentage of GDP) than non-producers over the last decade.
These and others are paying premiums just to refinance existing debt. Sovereign spreads have increased by 0.7-2.0 percent in Angola, Gabon and Nigeria since January. For some, increased debt servicing costs could soon spiral out of control, requiring painful debt restructuring, leading to cuts to social services and public investments. So far, among resource-dependent countries, only Ecuador has officially defaulted this year, though several other countries, like the Kyrgyz Republic, have restructured their Chinese loans. Gabon, Mozambique, Republic of Congo, Suriname and Zambia are on the verge.
The IMF and the G-20 have provided some relief. Bolivia, Cameroon, Ecuador, Ghana, Kyrgyz Republic, Mongolia, Myanmar, Nigeria, Papua New Guinea and Tunisia are among those that have accessed the IMF’s emergency liquidity facilities with minimal or no conditions, albeit for relatively meagre sums. The G-20 has proposed an eight-month suspension of repayment on loans from bilateral and commercial creditors extended to mostly African countries, totalling up to USD 19.6 billion in debt relief this year. Private sector creditors have not yet participated, though they still might.
Emerging economies are not the only ones facing tough times. Decades of mismanagement means that Alberta, an oil-rich Canadian province, will indebt itself to the tune of USD 15 billion this year, more than the value of its sovereign wealth fund, established in 1976.
Fiscal responses to the crisis in selected resource-dependent countries
|Country||Main mineral exports||National government fiscal resource dependence (2018 or most recent; lower estimate)||Export dependence||Estimated drop in fiscal revenues from projected in FY 2020||Primary fiscal response|
|Algeria||Oil and gas||40%||95%||-40%||Spending cuts|
|DRC||Coblt, copper||55%||90%||-35%||Debt, IFI support|
|Ghana||Oil and gas, gold||18%||53%||-4%||Debt, IFI support|
|Guyana||Gold, aluminium, oil and gas||11%||51%||-||Debt|
|Kazakhstan||Oil and gas||35%||89%||-21%||SWF|
|Mongolia||Copper, coal||24%||91%||-||Debt, IFI support|
|Nigeria||Oil and gas||41%||94%||-40%||Debt, IFI support|
|Norway||Oil and gas||21%||72%||-13%||SWF|
|Oman||Oil and gas||79%||75%||-40%||Spending cuts, debt, SWF|
|Peru||Copper, gold, zinc||8%||63%||-||SWF, debt|
|Russia||Oil and gas||48%||70%||-18%||SWF, debt|
|Saudi Arabia||Oil and gas||67%||75%||-||SWF, tax increases|
|Venezuela||Oil and gas, gold||n/a||96%||-||Spending cuts|
IFI: international financial institution; SWF: sovereign wealth fund
A role for central banks?
Governments with minimal access to foreign credit and without a well capitalized domestic banking sector to support the government are generally relying on their last resort: their central bank. Central banks in Bolivia, DRC, Ghana, Guyana, Iraq and Myanmar are among those that are buying large amounts of government debt, raising fears that “debt monetization” will lead to runaway inflation. Central banks regularly buy and sell government debt to manage interest rates and exchange rates. But some commentators fear central banks are buying too much government debt given the inflationary risks and possible future effects on interest rates.
These fears are largely unfounded. Inflation is largely a function of inflation expectations. If the central bank purchases government debt denominated in the local currency as a temporary emergency measure, but commits to responsible and predictable monetary policy once the crisis is over (as the central banks of Ghana and Myanmar have done), expectations will not substantially change. In many countries, exceptionally high unemployment will put downward pressure on wages even when the lockdowns are relaxed. In such places the probability of deflation is higher than the probability of inflation, at least in the short-to-medium term. Some prices could rise temporarily, like those for some foods, but this will be due to frictions in specific markets, not debt monetization.
Some low- or middle-income resource-rich country governments have limited access to international financial markets. Their traditional bilateral aid donors are facing their own crises. Multilateral donors’ internal rules hinder them from providing appropriate levels of financial support. In such places, central bank financing could be the best remaining option in the short term. That said, maintaining high levels of central bank deficit financing post-crisis could lead to inflation or exchange rate depreciation over the longer run. Debt monetization is a more viable policy response principally in countries with credible central banks operating floating exchange rates.
Out of options
Then there are the resource-dependent countries that have managed their public finances so poorly that they have almost no options left. Algeria and Venezuela, which spent all their sovereign wealth fund savings before the pandemic and indebted themselves heavily during the boom years, have had to cut spending drastically. Algeria’s government, which cut its budget by 50 percent, is postponing public investments indefinitely, though protecting social spending; however foreign reserves are likely to run out in 2021, likely leading to greater unrest or repression. Venezuela’s has become a full-blown humanitarian crisis. Soap and disinfectants are virtually non-existent in hospitals, mass migration is underway and there are chronic water shortages.
Opportunities in crisis
Some governments—even some that have the fiscal space to maintain current spending levels for years—have used the coronavirus crisis to raise taxes or cut subsidies. Saudi Arabia just tripled its new value-added tax from 5 to 15 percent. Algeria and Tunisia may follow suit with tax increases of their own. Nigeria, Libya, Tunisia and Venezuela have already reduced fuel subsidies since the start of the pandemic, while authorities in Dubai (UAE) and Sudan are making similar plans. Kuwait, Myanmar and Oman are each cutting budgets by 10 percent this year, despite having the fiscal space to maintain or even increase spending.
A handful of countries with savings in large sovereign wealth funds have not had to cut public services, raise taxes, indebt themselves to other governments or private banks, or risk currency devaluation. Botswana, Chile, Kazakhstan, Norway, Russia, Timor-Leste and Trinidad and Tobago are among those who prepared well for a crisis such as the global pandemic, saving a portion of resource wealth while keeping debt levels relatively low. They are likely to emerge from the crisis with stronger economies and in better shape to innovate that most resource-rich countries. (More on that in an upcoming post...)
Andrew Bauer is a consultant at the Natural Resource Governance Institute (NRGI).