Catch-Up Growth, Habits, Oil Depletion, and Fiscal Policy: Lessons from the Republic of Congo
AbstractIn 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.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 07/80.
Date of creation: 01 Apr 2007
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This paper has been announced in the following NEP Reports:
- NEP-AFR-2007-05-04 (Africa)
- NEP-ALL-2007-05-04 (All new papers)
- NEP-DEV-2007-05-04 (Development)
- NEP-ENE-2007-05-04 (Energy Economics)
- NEP-MAC-2007-05-04 (Macroeconomics)
- NEP-PBE-2007-05-04 (Public Economics)
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