Cyclicality of fiscal behavior in developing oil-producing countries: an empirical review

Cyclicality of fiscal behavior in developing oil-producing countries: an empirical review

Oil price volatility has increased in recent years, where these large, unpredictable swings have a major impact on fiscal balances in developing oil-producing economies. This paper examines the cyclicality of fiscal behaviour in 28 developing oil-producing countries (OPCs) during 1990–2009.

Since the OPCs are not a homogenous group, the author divides them into groups in order to observe whether their fiscal policies show different patterns by groups. Consequently, after testing five fiscal measures—government expenditure, consumption, investment, non-oil revenue and non-oil primary balance—the results suggest that all of the five fiscal variables are strongly pro-cyclical. Also, the results are not uniform across income groups: expenditure is pro-cyclical in the low and middle-income countries, while it is countercyclical in the high-income countries.

On the other hand, the document points that political and institutional factors, as well as financing constraints, play a role in the cyclicality of fiscal policies in the OPCs. In this respect, fiscal policy tends to be affected by the external financing constraints in the middle- and high-income groups. However, the quality of institutions and political structure appear to be more significant for the low-income group.

 All things considered, the paper concludes that it is imperative for OPCs to formulate effective countercyclical fiscal policies by which they can smooth government expenditure, decouple it from the volatile oil revenues and prevent boom-and-bust cycles.