Forward-looking approach for fiscal sustainability: a case of Egypt, Indonesia, Kuwait, Saudi Arabia and the United Arab Emirates

Conventionally, fiscal sustainability is measured by many indicators, such as overall balance and debt stock. In a case where most revenues are generated from an exhaustible resource, such as oil, the conventional measure is no longer a valid indicator for fiscal sustainability. Since oil represents a wealth asset, a permanent income approach should be considered to assess the sustainability issue. Accordingly, this paper makes an attempt to measure fiscal sustainability for a number of oil-producing countries. The countries are selected in such a way as to reflect: (a) the degree of oil dependency, where Saudi Arabia and Egypt are the most and least oil-dependent respectively; and (b) the degree of economic diversification in oil-producing countries, where Indonesia and Egypt are the most diversified and Saudi Arabia, Kuwait and the United Arab Emirates are the least diversified. By applying a forward-looking balance sheet approach, the paper shows that the level of the calculated fiscal sustainability differs from the conventional measure i.e. overall balance. The degree of difference reflects, among other things, the period under analysis, extraction horizon and the stage of economic diversification. Copyright 2005 Organization of the Petroleum Exporting Countries.