IMF prescribes strategies to cope with low oil prices

The International Monetary Fund (IMF) has prescribed strategies to help crude oil and other commodity-dependent countries to cope with declining export revenues.

The IMF said in a study titled: “How to Adjust to a Large Fall in Commodity Prices,” released recently that the strategy should include steps to achieve sustainable fiscal targets and identify the source of financing to smooth the adjustment process, where possible.

It advised that coverage of government should be broad to avoid shifting fiscal problems to other levels of government.

The report noted that given that fiscal slippages can come from state-owned enterprises (SOEs), including national oil companies, expanding targets to the whole public sector is advisable.

According to the study, countries that are more dependent on commodity-related revenue will be more vulnerable to shocks. “For example, oil exporters that tend to be the most dependent on resources experienced a massive shift from large budget surpluses, averaging 41⁄2 percent of GDP in 2012, to deficits of 101⁄4 percent of Gross Domestic Product (GDP) in 2015. In heavily commodity-dependent economies, large commodity price shocks can also trigger problems in other vulnerable sectors, which may require faster/larger adjustment to be able to man- age contingent liabilities.”

It hinted that other resource-rich countries with more diversified economies and tax bases are better prepared to weather commodity-related shocks.

IMF said that countries with little or no buffers face hard policy choices when hit by a sudden fall in commodity prices. “A large up-front fiscal adjustment will be needed for those countries that face large financing gaps, limited access to capital markets, or rapidly rising debt.  Governments will likely turn to expenditures that are easier to cut or increase existing fees and taxes.

“This may unavoidably lead to a contraction of economic activity. To try to minimise it, the priority should be on measures that have low fiscal multipliers and address the excesses of the boom.

“For example, by postponing new spending initiatives, cutting low-quality projects and expenditures linked to imports, and expanding tax bases. Low-income countries will likely need to rely on greater donor and international financial institution support while gradually adjusting,” it added.