Fiscal Options for Absorbing a Windfall of Natural Resource Revenues – A CGE Model of Oil Discovery in Uganda

Jan 2017 | 186

Authors: Thomas Hierons Thomas McGregor

The current debate about the optimal management of foreign exchange windfalls is highly relevant to low income countries such as Uganda, having recently discovered vast hydrocarbon reserves. Using a Computable General Equilibrium (CGE) model for Uganda this paper analyses three broad policy options for the use of oil revenues, increasing i) private consumption, ii) private investment, and iii) public infrastructure investment. The model allows for learning-by-doing in tradables, increasing returns to public infrastructure and the use of an Oil Fund held abroad. The fund allows government to smooth expenditure programs over the medium-term. When public infrastructure is biased towards tradables, a smooth expenditure profile yields higher economic growth than high expenditure skewed to the present. The government’s discount rate plays a key role in determining the optimal use and management of oil revenues. More impatient governments will be inclined to increase current expenditure at the cost of future generations’ welfare and negative distributional implications for poor households. Lower discount rates align the political incentives with respect to inter-temporal welfare and the long-run growth path of the economy.

JEL Codes: E62, O11, O13, O23, Q32

Keywords: Fiscal Policy, natural resources, economic development, Dutch-disease, CGE model, Uganda

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