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Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model

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  • Melina, Giovanni
  • Yang, Shu-Chun S.
  • Zanna, Luis-Felipe

Abstract

Policymakers in resource-rich developing countries often face complicated fiscal choices to manage natural resource revenues. While investing resource revenues in public capital may promote economic growth, spending without saving or borrowing against future revenues can expose the economy to debt sustainability risks. This paper presents the Debt, Investment, Growth, and Natural Resources (DIGNAR) model for analyzing the macroeconomic and debt sustainability effects of scaling up public investment in resource-rich developing countries. It captures pervasive problems of these countries that may be aggravated during scaling-ups, including investment inefficiency and limited absorptive capacity. It also allows for flexible fiscal specifications: investment can be jointly financed by resource revenues and debt; a resource fund may be used as a buffer; and distorting fiscal adjustments are subject to feasibility constraints. The application to an average low-income country shows that, when fiscal adjustment is implementable, a delinked public investment approach combined with the resource fund – such that government spending is a-cyclical with respect to resource revenues – can reduce macroeconomic instability relative to a spend-as-you-go approach. However, even with the fund, ambitious frontloading public investment plans combined with more borrowing can induce debt sustainability risks, especially with declining investment efficiency or when future resource revenues turn out to be lower than expected.

Suggested Citation

  • Melina, Giovanni & Yang, Shu-Chun S. & Zanna, Luis-Felipe, 2016. "Debt sustainability, public investment, and natural resources in developing countries: The DIGNAR model," Economic Modelling, Elsevier, vol. 52(PB), pages 630-649.
  • Handle: RePEc:eee:ecmode:v:52:y:2016:i:pb:p:630-649
    DOI: 10.1016/j.econmod.2015.10.007
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    Cited by:

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    2. Giovanni Melina & Yi Xiong, 2013. "Natural Gas, Public Investment and Debt Sustainability in Mozambique," IMF Working Papers 13/261, International Monetary Fund.
    3. Debi Prasad Bal & Badri Narayan Rath, 2016. "Is Public Debt a Burden for India?," Economic Papers, The Economic Society of Australia, vol. 35(2), pages 184-201, June.
    4. Li, Bin Grace & Gupta, Pranav & Yu, Jiangyan, 2017. "From natural resource boom to sustainable economic growth: Lessons from Mongolia," International Economics, Elsevier, vol. 151(C), pages 7-25.
    5. International Monetary Fund, 2015. "Islamic Republic of Mauritania; Selected Issues Paper," IMF Staff Country Reports 15/36, International Monetary Fund.
    6. Elkhan Sadik-Zada, Andrea Gatto & Andrea Gatto, 2019. "Determinants of the Public Debt and the Role of the Natural Resources: A Cross-Country Analysis," Working Papers 2019.04, Fondazione Eni Enrico Mattei.
    7. repec:eee:ecosys:v:43:y:2019:i:1:p:77-98 is not listed on IDEAS
    8. World Bank Group, 2016. "Kenya Country Economic Memorandum," World Bank Other Operational Studies 24008, The World Bank.
    9. Arthelo P. PALMA, 2016. "Truth Behind Economic Performance, Natural Resources and Attracting Foreign Direct Investment," Expert Journal of Economics, Sprint Investify, vol. 4(2), pages 68-77.
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    11. Devarajan, Shantayanan & Dissou, Yazid & Go, Delfin S. & Robinson, Sherman, 2014. "Budget rules and resource booms : a dynamic stochastic general equilibrium analysis," Policy Research Working Paper Series 6984, The World Bank.
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    14. Yehenew Endegnanew & Dawit Tessema, 2019. "Public Investment in Bolivia: Prospects and Implications," IMF Working Papers 19/151, International Monetary Fund.
    15. Joseph E. Gagnon, 2014. "Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do," Policy Briefs PB14-17, Peterson Institute for International Economics.

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