INVESTING VOLATILE OIL REVENUES IN CAPITAL-SCARCE ECONOMIES: AN APPLICATION TO ANGOLA

CSAE conference paper: Natural resource revenues are an increasingly important financing source for public investment in many developing economies. Investing volatile resource revenues, however, subjects an economy to macroeconomic instability. This paper applies to Angola the fiscal framework developed in Berg et al. (2012) that incorporates investment inefficiency and absorptive capacity constraints, often encountered in developing countries. The sustainable investing approach, which combines a stable fiscal regime with external savings, can convert resource wealth to development gains while maintaining economic stability. Stochastic simulations demonstrate how the framework can be used to inform allocations between capital spending and external savings in facing uncertain oil revenues. An overly aggressive scaling-up path could render insufficient fiscal buffer. Consequently, negative oil shocks can interrupt investment progress and drive up the capital depreciation rate, disturbing economic stability and lowering the growth benefits of public investment.