OIL REVENUES AND ECONOMIC MANAGEMENT IN SELECTED OIL YEILD COUNTRIES EXPERIENCE

OIL REVENUES AND ECONOMIC MANAGEMENT IN

SELECTED OIL YEILD COUNTRIES EXPERIENCE

 

Dr. Alshadli Ahmed Edwick	Hekmet Masoud Almakedmi
Teaching Staff member at the Faculty of Economic and political science, the University of Tripoli, Libya	Teaching Staff member at the Faculty of Economic and political science, the University of Tripoli, Libya

 

ABSTRACT :

Oil receipts play a crucial role in hydrocarbon exporting countries acting as a catalyst for economic development and generate jobs for youths. These countries are heavily reliance on oil revenue, which constitutes more than 80% per cent of the balance of payments and between 30% - 60% of GDP. However, this heveay dependence on oil exports makes these economies vulnerable to volatility of oil prices, which are difficult to predict. The structural change, which occurs in oil markets through price chocks and the subsequent direct effect on these economies, may cause cuts in developments plans and programmes, employment shrinkage and short-term suffering.

This paper look into the performance of different oil producing countries over the last few decades, through concentration on the strategies and policies, which are pursued by these countries in terms of fiscal, employment policy and economic reform, which are undertake by each country, the paper also investigate the difficult fiscal and macroeconomics challenges that reliance on oil revenues poses for policy makers.

Keywords: oil receipts hydrocarbon, economic development, reliance, dependence, vulnerable, volatility

 

INTRODUCTION: Oil-exporting countries encounter special challenges in control and managing their economies. Oil and gas like other minerals, are non-renewable. Oil prices and revenues are highly volatile and hard to forecast and predict. Furthermore, the reserves in a particular country may become depleted over the lifetime of a generation or two, even if reserves may be discovered elsewhere, so that the global reserves can be maintained. The exhaustibility of oil reserves and the high concentration of revenues flowing from the oil sector may produce rent-seeking behavior and may lead to a problem with long-term fiscal policy. The fact that oil is a non-renewable source of energy raises complex issues of sustainability and intergenerational resource allocation. A country that has depleted its reserves over the time span of a generation or so encounter the choices of letting that generation use up the oil wealth for its own benefit or giving future generations a share in these resources. Obviously, this is possible only by transformation of the non-renewable resource into a renewable one. It is clear that many countries have had hardships in addressing the challenges posed by oil-reliance. Notably, the growth performance of many oil exporting has been disappointing and dissatisfaction, despite the huge natural resources.

This paper concentrates on the policies that have been carrying out by the oil-exporting countries. In addition to a survey of countries’ strategies and experiences in managing their oil dependence, the main purposes are: (i) to give an overview of the general policy in oil producing countries (ii) to describe actual practice in the countries. Clearly, oil exporting countries are not all the same. These are considerable various not  just in the relative importance of oil to the economy but also in the size of oil reserves, maturity of the oil industry, ownership and taxation structure in the oil sector, stage of development of the  non- oil economy and the government’s financial position.

LONG TERM-CHALLENGES

The biggest confront, which encounters these countries, is how to use and deal besides manage the wealth wisely and prudently without squandering and wasting the proceeds. Oil is exhaustible and it is, therefore, inevitable that oil earning will, at some point, dry up. Therefore, focusing first on the long run, a key challenge for fiscal policy is deciding how to allocate government wealth (including oil wealth) across the generations. This challenge reflects a concern for intergenerational equity and financial prudence. The preservation of wealth requires that consumption in each period be limited to stable income or, in this case the implicit return on government wealth. The government of an oil-dependent country, however, is faces with significant uncertainty relating to its oil wealth. The volatility of oil revenue, because of swing in oil prices, is problematic, especially for short-run macro-fiscal management. However, it is the uncertainty about wealth itself, which stems from uncertainties about such issues as the future path of oil prices, the size of the oil reserves, and the cost of extracting them, that is most important for long-term considerations. Moreover, domestic debt would be put on a sustained downward trend, thus providing greater fiscal space for productive spending. Given the close interdependence of the public sector and the budget, speedy structural reform and privatization of state enterprises would help reduce subsidies and enforce market competition. Askari and (Jaber 1999) conclude that, the biggest challenge to face oil–producing countries is how to preserve a high level of saving during the pre-depletion period and invest these in high-yielding, diversified assets. The crucial challenges are to use oil revenues to achieve optimum growth and diversification without undue inflationary pressures and to spread the benefit of oil income over the largest segment of the population. Furthermore, the government requires a decrease in the share of oil in total revenue.

According to (Stiglitz, 2003) to overcome these challenges, the government should improve budget transparency by requiring that the Ministry of Financing provide information to Parliament and the public about the basis for the draft budget’s revenue and expenditure estimates, as well as greater line-term detail about proposed expenditure. To take one example, the central challenge, which faced the Oman economy recently for example, was to forge a path of development that ensured steady growth in real income per capita along with sustainable fiscal and external sector adjustment (Martey, 2003).  The Oman high oil-dependency profile is resulting in greater vulnerability to changed oil prices (Treichel, 2003). believes that fiscal policy has essential role through economic policies, which can directly influence the growth rate of a country. The role of fiscal policy has been assessed as an important factor contributing to growth. The impact of fiscal policy on the long-term growth rate of a country can be analyzed by considering separately the influences of tax policy and expenditure policy (Amuzher, 1983), noted that the economic problem encountered by the oil-exporting countries is how best to transform a dormant pool of valuable but depleting able oil reserves into a flow of present and future income needed to raise their standard of living. The most public debate, which faces oil-producing countries, is management of their petroleum wealth in a long-term perspective. While it is true that issues such as ‘what shall we do when the oil runs out?’’ pop up from time to time, the perspective is one of preserving and industry, or perhaps even an industrial relic, rather than of investing oil revenues and making oil wealth permanent (Rognaldur, 2001 ).

OIL PRICE VOLATILITY

 Oil price instability and fluctuation from month-to-month (in some cases from day- to-day) due to temporary changes in global economic and political conditions that affect the supply and demand for oil in world market, besides, there are some factors, which may affect the prices, such as extracting and transport costs. Several factors were behind the recent spike in prices including unexpectedly large growth and a number of supply constraints. This has translated into substantial windfalls for oil producers the world over. See Table.1 The volatility of oil prices in recent years has brought these major challenges into sharper focus.

Table: 1 Some Oil Producers Countries’ GDP at Market Prices (m$) 2010-2015

year	2010	2011	2012	2013	2014
Algeria	161,197	199,386	207,485	208,767	228,285
Iran	463,971	564,459	418,913	380,348	404,132
Iraq	138,517	185,750	216,044	229,327	223,508
Libya	74,804	34,707	81,915	65,516	41,148
Nigeria	363,361	409,239	455,327	509,133	561,600
Saudi Arabia	526,611	669,507	733,956	744,336	752,459
Venezuela	271,961	297,637	208,380	218,433	205,787

Source; OPEC Annual Statistical Bulletin, 2015

Davis et al (2003) state that this volatility can translate into significant fluctuations in fiscal revenue based on sustainability consideration; government spending should not be dependent on changes in oil prices. However, this needs to be interpreted carefully, because wealth itself is not known with certainty (Barnett and Ossoski, 2002).

BASIC DIFFERENCES

The oil exporting countries are not all the same seeing table 1. There are considerable differences not just in the relative importance of oil to the economy but also in the size of oil reserves, maturity of the oil industry ownership and taxation structure. Additionally, the oil sector, stage of development of non-oil economy, and the government’s financial position are also sources of divergence.

Besides, oil-producing countries clearly differ from other developing countries that are dependent on single raw material exports. The two essential characteristics are economic dependence on depleting resources and the public possession of that resource. The secondary features are the unique properties of petroleum as a raw material and the characteristics of the world oil market. The oil exporting developing countries differ from many other developing countries in their heavy dependence on single commodity export, which serves as the principal source of government revenues and foreign exchange receipts.

An increasing number of developing countries are (particularly those in the more advanced category), while traditionally dependent on agricultural exports, and have now significant diversified their economies. By all these criteria, the oil-producing developing countries show greater reliance on a single resource (see Table.2)

Table: 2 Some Oil Exports’ Countries’ Value of Exports (m$) 2010-2014

year	2010	2011	2012	2013	2014
Algeria	61,971	77,668	77,123	69,659	60,040
Iran	112,788	144,874	107,409	91,793	98,981
Iraq	52,483	83,226	94,392	89,742	85,298
Libya	48,672	19,060	61,026	46,018	15,186
Nigeria	77,409	93,676	95,360	95,118	83,897
Saudi Arabia	251,143	364,699	388,401	375,873	372,829
Venezuela	65,745	92,811	97,340	88,962	80,663

Source; OPEC Annual Statistical Bulletin, 2015

POLICY OPTION STRATEGIES

The ability to absorb unanticipated cash flow shocks depends on the robustness of the government’s financial position. Strong fiscal and financial positions provide the government of oil-producing countries with room to manoeuvre during oil price downturns. In particular, the government can accommodate cash-flow fluctuation through a mix of adjustment and financing. By doing so, the government can afford to pursue short-run fiscal strategies that avoid fiscal instability and help insulate the domestic economy from oil revenues volatility. Moreover, when the government can smooth expenditure and the non-oil balance in the face of cash-flow volatility, the use of oil revenue can be successfully decoupled from current earnings enhancing the stabilization role of fiscal policy.

In countries that are unable to accommodate oil revenue fluctuations because of financial constraints related to sustainability and other policy concerns, a key policy objective should be to pursue fiscal strategies aimed at breaking the procyclical response of expenditure to volatile oil prices, including the use of hedging instrument to help reduce oil receipts uncertainty and volatility.

A regularly feature of fiscal policy in many oil-producing countries has been the inability to rein in public expenditure at times of rising oil prices. Expenditure has subsequently proven difficult to reduce during oil price downturns. There may also have been the belief that the oil price decline would be short-lived, prompting the temptation to ride out the downturn. Thus, when government are unable to generate fiscal surpluses during periods of rising oil prices that would permit the budget to withstand adverse oil shocks without falling into deficits that lead to sustainability concerns, fiscal policy tends to transmit oil volatility to the rest of the economy.

Lack of financing during the price downturns, in turn eventually forces governments to undertake sharp and disruptive fiscal contractions, at a time when the economy can least afford them. Countries where external financing is limited, and available domestic financing fluctuations with shifts in sentiment toward the domestic currency, are particularly vulnerable. Therefore, to protect the oil proceeds and subsequently the budget deficit, many countries have established a saving or stabilization fund as a part of solution of the problem oil revenues instability and fluctuations.

DIVERSIFICATION DILEMMA

Economic diversification implies that a country will gain more from diversification process if output in the economic emerging sectors correlated with output in the rest of the economy. This implies that producing diversification is not just about moving the economy into new sectors. Rather, it is about moving the economy toward sectors whose fortunes are not directly tied to the rest of the economy. When a country suffers from HIGH unemployment and excess capacity, diversification can increase national income without drawing away resources from existing sectors. Resources that were previously idle become employed in the new sector. Thus, diversification, if correctly undertaken, can lead to not only a larger share of the pie, but a larger pie itself. This qualification, however, reinforces the concept that there are diminishing returns to diversification.

The crucial question is how the oil producing countries respond to the challenges of managing this wealth in correct way and conducting their petroleum wealth. Have they built up investment funds and are they embarking on economic diversification or have they used up all the rent immediately for the benefit of future generations? The advantages of this diversification strategy would be twofold. Firstly, it would make the country better able to enter more high-value-added industries thus boosting income from the extraction of its non-renewable resources. Secondly, the economy is n o larger as vulnerable to change in hydrocarbon prices as it was in the past. Most policymakers in oil exporter countries have illusions and believe that oil prices will never change. Countries should diversify their economy, wherever they have the comparative advantage particular.

FROM DEPENDENCE TO DIVERSIFICATION

DIVERSIFICATION OF INDUSTRY POLICY

In their efforts to achieve a sustainable future level of consumption and improve standards of living, oil-exporting developing countries have a very strong incentive to diversify their economy away from oil receipts. It is perhaps this incentive, more than any other countries, which provides those countries with the motivation to develop healthy non-oil sectors. However, a number of other important justifications do exist for the adoption of this objective. The dependence on oil exposes these countries to the risk of fluctuating hydrocarbon prices see Table.3. Volatility in oil prices lead to considerable variation in the terms of trade of oil exporting countries.

Besides, reducing the economy’s vulnerability to oil prices changes, diversification allows the country to mitigate the effects of a capital-intensive oil sector on employment. A number of oil producing developing countries, especially high absorbing ones possess a large, relatively low-skilled labor force. Accepting the need for diversification, nevertheless, an essential question remains. What types of industry should be promoted in order to achieve successful diversification? From an economic perspective, one could argue that oil-exporting countries should invest in industries that are compatible with their respective factor endowments and comparative advantages. Moreover, investing in education and encouraging the inflow to technology, these countries can create a dynamic comparative advantage that would allow them to break away from their natural constraints.

Table: 3 Some Oil Producers Countries’ Value of Petroleum Exports    (m$) 2010-2014

year	2010	2011	2012	2013	2014
Algeria	40,113	52,883	49,993	44,462	40,639
Iran	72,228	114,751	101,468	61,923	53,652
Iraq	51,589	83,006	94,103	89,402	84,303
Libya	47,245	18,615	60,188	44,445	14,897
Nigeria	67,025	87,839	94,642	89,314	76,925
Saudi Arabia	214,897	309,446	329,327	314,080	285,139
Venezuela	62,317	88,131	93,569	85,603	77,775

Source; OPEC Annual Statistical Bulletin, 2015

CONSUMPTION VARIABILITY

One of the chief benefits of production diversification is that it reduces consumption variability. Governments could smooth consumption perfectly over time by borrowing and saving, depleting or accumulating financial assets, adjusting the labour supply and by borrowing. For the economy as a whole, consumption smoothing would imply running a current account deficit, when national income is temporarily high. Thus, in an ideal maximize expected profits, without any concern for risk.

Thus, efforts to diversify economic base production should be seen as part of a larger problem-the inability of government and countries to increase and smooth production. Production diversification is more useful when governments and authorities cannot fully insure themselves against income shocks. Hence, decreasing volatility should be regarded as an important goal of diversification.

COUNTRIES EXPERIENCES

LIBYA

Hydrocarbons have long dominated the Libyan economy, accounting for more than 70 percent of GDP, more than 95 percent of exports, and approximately 90 percent of government revenue. With about 3.5 percent of the world’s proven crude oil reserves, Libya has a prominent position in the international energy market. Before the revolution, its output 1.77 million barrels per day of crude oil (equivalent to 2 percent of global output) and close to 0.2 million barrels-equivalent of natural gas. As a consequence of the conflict, crude oil production fell to 22,000 barrels per day in July 2011, although output was restored rapidly in the last quarter of 2011 to half the pre-conflict level. Non-hydrocarbon economic activity was affected by the destruction of infrastructure and production facilities, disruptions to banking activity.

The loss of hydrocarbon income during the conflict reduced Libya’s current account surplus. Exports declined from $48.9billion in 2010 to 19.2 billion in 2011, while imports dropped from $24.6 billion to 14.2 billion during the same period, as a result, the current account surplus narrowed from 21 percent of GDP in 2010 to less than 4.5 percent of GDP in 2011.

Overall, in light of diminished fiscal and external buffers, the Libyan authorities face significant short-term challenges. While   responding to urgent social demands remains a priority, ensuring macroeconomic stability and maintaining investor confidence require policy coordination among various institutions. A peaceful political transition, underpinned by commitment to good governance and the rule of law, is essential to securing economic progress.

Wage increase implemented by the previous regime will raise the wage bill from 9 percent of GDP in 2010 to about 19 Percent of GDP in 2012. A high level of public- sector wages will reduce the incentive for individuals to seek to employment in the private sector and will undermine efforts to advance economic diversification. Libya is overly dependent on hydrocarbons. Although non-hydrocarbon economic activity was growing at a rapid pace before the conflict , it still account for no more than 30 percent of GDP and a negligible part of total exports. The latest measures of export diversification show that Libya scores poorly compared to other hydrocarbon-dependent economy in the region.

Libya has depended heavily on oil receipt. Over the past three decades, it has gone through a far-reaching social and economic despite the huge amounts of funding, which have been spent, on the development process. Directing to diversify and aim for self-sufficiency besides generate jobs opportunities for Libyan youth. New development challenges appear over coming decades will test their ability to reconcile traditional institutions with the requirements of a modern economy in an increasingly competitive global environment.

The Libyan government embarked on a massive investment programme, with priority given to basic infrastructure, aiming to transfer part of the windfall to the population at large, as well as to future generations. Libya initiated programmes to build up domestic industrial capacity, boosted by very generous subsidies (Auty, 2001).

However, the state generally has not been able to translate the huge investment in infrastructure and human resource development into vigorous, self-sustained private sector growth. Instead, the efficiency of investment has been steadily declining, reflecting poor screening of the economy viability of projects.

According to, (Ottman and Karlberg, 2007) that Libya highly depended on one commodity, which has caused severe dislocation in the Libyan economy before as its price plummeted at crucial points in the 1980s and 1990s severely affecting and delaying Libyan ambitious socio-economic development plans. The new Libyan mindset must focus on ways and means of drastically reducing country’s dangerous reliance on only one commodity, at the same time dropping the subsidy mentality. It must ensure that an effective strategy for reducing the inefficient and overstaffed public sector is drawn up implemented, at the same time gradually achieving genuine economic diversification.

This can, in part be successfully accomplished by privatizing a wide range of inefficient government-owned companies, as the Libyan government currently doing, albeit slowly. Another way of achieving rapid diversification could be taking a long hard look at the petroleum sector itself. 

By successfully and promptly dealing with these critical public sector and diversification issues, the Libyan government can ensure that future  generation of Libyan can be guaranteed the comforts of the present  generation. The form agenda initiated in 2009 must continue to implement and execute the strategies and policies of economic diversification and public sector reform vital for Libya’s economic diversification.

Keenan, (2002) stated that tourism sector can play a crucial and core role in Libya economy. In global terms, the tourism and leisure industry has emerged as one of the fastest growing contributors to many economies, whether mature or emerging. Second and demographic trends, not only in western countries but also, in Asia and the Middle East. Promote wealthier populations, shorter working hours, affordable air travel and obsessions with healthy outdoor, lifestyle as driver for the tourist boom. In the new millennium, the growth of the international tourism industry is projected to be very significant.

For many years, because of the US and UN sanction, Libyan has been terra incognita to many westerns. At the same time, a growing number of informed travelers and writers have privately celebrated the historical and breathtaking wealth of Libyan landscape. As one writer has commented ‘for so long maligned by a myopic western media as a   pariah at the odds with the world, Libya surprises almost everyone who sets foot in the country’ (Ham, 2002).

In Libya’s case, there can be no doubt about its tourist credentials. Apart from its 1,970 Km of unsullied Mediterranean beaches, the country presently contains five worlds Heritage Sites. Added to the World Heritage List between 1982 and 1986, the first is Tadrat Acacus which is situated in the mountainous region near Libya’s south-west border, east of the city of Ghat. The second is Cyrene not yet even fully excavated and located in the Gabel Akdar region containing some remarkable relies from the Greco-Roman  period, the Third is Leptis Magna, known locally is Lebdah, located on the coast 120 Km east of Tripoli of Tripoli, which is one of the most extensive archeological sites in the Mediterranean.

Tourism promotes across the country have also developed nature-oriented tourism projects such as exploring the Libyan desert  geological formations and wildlife and the underwater exploration of the Mediterranean. Across the country, tourism revenues amount ,05 per cent of their gross domestic product  and many account  for up 2 per cent of domestic employment , while  the indirect  impact of tourism spending in certainly much greater.

A EXTENSIVE PLAN CALLS FOR SUSTAINED COMMITMENT

Libya has an opportunity to break with the past, modernizes the infrastructure of its economic, and creates private-sector employment opportunities for its citizens. Bolstered by its sizeable natural resource wealth and the recovery of the hydrocarbon sector, a post-revolution revival in the country’s economic activity should be rapid once the security situation normalizes. But Libya will also need a sustained commitment to comprehensive reforms and improve to achieve and accomplish its potential.

It is crucial that Libya advance structural reforms to support private-sector growth, economic diversification, and the creation of employment for its young and growing labour force. Enhancing access to finance for entrepreneurs by developing the nascent financial sector will go a long way to create new employment opportunities and foster the growth of the non-hydrocarbon economy such measures need to go hand in hand with strengthening the education system and increasing human capital. The transition to a new inclusive Libya will undoubtedly be challenging.

NORWAY

If the increase in the cash flow is taken into the economy through expenditure or reduced taxes in the central government budget, aggregate domestic demand will be affected. Higher expenditure requires that an increase in the oil price should accrue to the fund and be invested abroad.

  Thus, rather than affecting the domestic economy, the increase in the cash flow would be invested abroad through a petroleum fund. Similarly, a fall in the oil price would not affect the domestic economy, but would result in lower accumulation of foreign assets, building the fund ensure that several generations will enjoy the benefits of Norway Petroleum wealth. 

The Petroleum Fund can be invested into two main types of instruments-bonds and equities. Government bonds are a relatively safe investment, but the return is low. The government invests revenues from oil in foreign securities in order to share the oil receipts fairly between the present generation and the future generation, as well to shield the domestic economy from the windfalls.

Economic policies are generally sound. Norway has a solid financial position for the government which reflects to a large extend the more fundamental long-run policy objectives of spreading, high government saving rates and the build-up of foreign assets resisting potential damage to the non-oil tradable sector.

VENEZUELA

Oil revenue has shaped Venezuela politics for decades, creating a rentier state legitimized by patronage and entrenched constituencies, whose continued loyalty is attached directly to state expenditure funded by oil rents. Economic performances have been influenced by oil revenue volatility. Transitory oil price increases have led to increased government spending.

Following the sudden large oil windfalls after 1973, Venezuela embarked on a policy of extensive expansion of the state’s involvement in the economy. The oil industry and large-scale state investment in capital-intensive projects in steel, aluminum, iron ore, and energy were made as part of the drive to diversify the economy and reduce import dependency. Despite massive overspending, the government and state enterprises were able to obtain foreign credits without difficulty. Despite modest reforms, the country’s fiscal position became increasingly fragile and, faced with oil price downturn of 1982-83 the government was unable to meet its debt obligations (Mommer, 1998, ).

Pressures to take on board even more government workers, to create jobs for the unemployed have strengthened as foreign investors have increasingly fled Venezuela. The overall budget balance has continued to fluctuate widely alongside the price of oil (Nissen and Welsh, 1994).

NIGERIA

Oil is the main source of revenue in Nigeria. Oil accounted for more than 90% of its exports, and 25% of its Gross Domestic Product (GDP), and 80% of its public revenues in 2006. After so-called first charges are withheld, gross oil revenue is divided between the central government and sub-national government. Thus, a small oil price increase can have a large impact. Nigerian reliance on oil production for income generation clearly has serious implications for its economic development management.

Nigeria has been ruled by military dictatorship for the past three decades. While proceeds were flowing, considerable sums were poured into

Expenditure but huge amounts also went into largely and wasteful industry projects, from which billions have of dollars appeared to have been, embezzled (Isham et al, 2004).

Nigeria is unable to accommodate oil revenue fluctuations due to financial constraints related to sustainability and others concern. A key policy objective should be to pursue fiscal strategies aimed to breaking the procylical response of expenditure to volatile oil prices. This would imply eliminating expansionary fiscal policy bias during an oil boom, and critically, targeting prudent non-oil fiscal balances and reducing the non-oil fiscal deficit over time. This would place the government in a better position to deal with oil market volatility, and increase the likehood that it can weather temporary oil shocks without drastic short-run fiscal adjustment. A strong financial position is also essential to allow for an orderly adjustment to catastrophic oil shocks, that turn out to be long lasting, such as the oil market collapse in 1986.

RECOMMENDATIONS 

Higher oil revenues provide oil producing countries an opportunity to increased public spending on priority economic and social goals or, when appropriate distortive taxes, Libya,  for instance has a relatively strong financial position , a sustainable fiscal position ( taking into account  oil reserves  in the grounds and net financial liabilities), and a reasonable  capacity to identify and implement good spending  programmes, so an increase in the non-oil fiscal deficit  could be appropriate provided it does not lead to excessive demand pressures.

 

OIL REVENUES SHOULD SUPPORT DIVERSIFICATION PROCESS

In meeting these conditions a significant part of the oil windfall could be used to finance additional high quality expenditure, such as investment in key infrastructure, and efficient social spending. In Libya, important infrastructure gaps hamper the development process of the non-oil sector. Part of the windfall could be used to finance productive investment and public infrastructure, with the government should develop a stock of projects from which the highest yielding ones could select.

ECONOMIC PRESSURES NEEDED FOR RESTRUCTURES REFORMS.

The oil windfall could be also facilitating pushing ahead with reform agendas and tackling those structure problems that are serious implement to growth. For example, in the tax system, the civil service, pension system, labour market, and public enterprises, in particular it could help finance a social safety net to protect vulnerable groups from the impact of such reforms, Libya with a significant skills mismatch between the windfall to find education reforms and training programmes aimed at reducing such mismatches.  Libya should give high priority to undertaking expenditure that does not require significant, permanent commitments.

FOSTERING THE ROLE OF FISCAL POLICY

The formulation of an overall policy in response to the problem of oil price volatility may be aided by medium- term expenditure framework. One of the important fiscal policy lessons to emanate from these experiences is that government spending levels should be adjusted cautiously in relation to sharp rise in oil income.  A medium-term expenditure framework can help improve spending responses to changing oil revenues, multi -year expenditure planning    allows better appreciations of the future spending implications of present policy decisions including the recurrent costs of capital spending, thus helping petroleum exports to avoid some of the mistakes of the past.  Rising oil revenues makes the formulations of a medium-term expenditure framework all the more urgent. Libya, with sustainability concerns and a precarious financial position should save more of the oil windfall. Higher oil prices provide an opportunity for Libya to strengthen its financial position reduce vulnerabilities, and improve confidences.

THE URGENT NEED FOR A SAVING FUND IN LIBYA

Downturns should be prepared for through sufficient financing capacity. Budgets should incorporate cushions, in case the external environment turns out to be less favourable than anticipated, as well as, transparent and well-specified mechanisms to deal with revenue windfalls and shortfalls. The government should also strive to build adequate liquidity, taking into account risk and the cost of liquidity.  

The Libyan government relies heavily on oil revenues and should be encouraged to explore the scope of other incomes to hedge their budgetary oil price risk. Hedging can help the government managing oil price risk by making oil revenues streams more stable and predictable. Libya should be encouraged to start building up technical capacity and put in place sound and transparent institutional arrangements to exploit efficiently hedging opportunities over time, as the market develops, it may be possible for Libya to expand and protect its saved reserves likely to remain constrained by market size, especially beyond the short-term horizon.

CONCLUSION

This paper has investigate on fiscal policy, economic management and performance in a number of oil exporters, emphasizing the issues of long term saving, short to medium-term stabilization and the effective use to rent income. While these are different objectives, they are all part of good economic and fiscal management, and countries that have been able to do well in one area have typically been able to do well in others. The consequences are mixed.

However, oil exporters’ economic performance has with few exceptions been poor. Since the first oil booms, evidence has accumulated on better technical approaches toward managing resource rents, especially rents from geographically concentrated oil and hard-mineral resources, as well as on the high cost, and failure to use rents well to support a broader process of development. Surpluses should be invested abroad, to reduce the risk of politicization. Integration of oil funds with the regular budget avoids the risk of competing decisions on spending and facilitates accountability and oversight.

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