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CAN TANZANIA AVOID THE RESOURCE CURSE? : A Focus on Journalists’ and CSOs Role for Monitoring

Accountability in the Extractive Sector Management

By Prof Handley Mpoki Mafwenga,

Ph.D, MSc, LLM, MBA, PGDTM, ADTM, LLB, AICSA(UK)Macro-Fiscal Policy, Advocacy & Tax Expert[Gov-URT]

Ministry of Energy and Minerals [TMAA]Workshop for Financial and Business Journalists

7th April, 2015 Ledger Plaza Bahari Beach Hotel in Dar es Salaam Tanzania

• The Resource Curse or the Paradox of Plenty is where Countries and regions with an abundance of natural resource, especially highly-valued raw materials such as Oil and Gas, tend to have lower economic growth and worse development outcomes (rise poverty, inequality and weakened public services). A country with an export-driven, natural resources sector, generates large revenues for government, leads paradoxically (Unexpectedly) to economic stagnation and political instability.

LESSON: (1) Countries with High in natural resources and low in growth are Gabon, Nigeria (from the 50 richest countries in the world in the 1970s to among the top poorest in the world) and ZambiaLESSON: (2) More than half of Mozambicans live in poverty, Despite huge natural resources potential . This indicates NR benefits the the multinationals and the political elite.”

1.0: MEANING OF THE RESOURCE CURSE 1.0: INTRODUCTION

Why a Country could be economically dependent on Oil and Minerals? When its main source of public revenue is the sale of raw materials on international markets. A significant input of foreign investment and technology is usually required to exploit such resources, and investment on this scale is only available through powerful MNCs.

1.0: MEANING OF THE RESOURCE CURSE 1.0: INTRODUCTION

RESOURCE CURSE MECHANISMS 1.0: INTRODUCTION

1)Dutch Disease model focuses on a shift in demand from investors

LESSON: (1) Gabon, produces about 300,000 barrels of oil a day. “It’s covered with tropical rainforest, but it’s hard to find bananas which they are mostly imported from Cameroon. Gabon has a relatively strong agricultural sector, but a focus on oil exports has undermined prospects for sustainable development.LESSON: (2) Zambia in nominal terms, its exchange rate appreciated by 15 per cent in the first quarter of 2008 compared to its level in the first quarter of 2005 attributable to an oil boom. The boom in prices caused a substantial appreciation of the Kwacha, which, combined with a liberalised trading regime, served to undercut agricultural production. Zambia had no capital controls, lowered trade tariffs and adopted a flexible exchange rate

RESOURCE CURSE MECHANISMS

2) Centralized political economy models analyse the incentives and constraints of the government.

Frameworks assume that “rents are the source of the resource curse”. resource rents cause inefficiency and dysfunctional Behavior in countries with weak institutions “Rent cycling theory” “Economic growth requires recycling rents via markets rather than via patronage. In high-rent countries the natural resource stimulates a political contest to capture ownership, whereas in low-rent countries the government must motivate people to create wealth”, [pursuing comparative advantage, promoting equality, and fostering civil society].LESSON: Gabon are likely to see the effects of declining high-rent reserves relatively soon.


3. Vulnerability • This is caused by high commodity price volatility.

[Countries of natural resource wealth are particularly prone to “boom and bust cycles” (Spending Effects)]

Why is the Problem?Resource are moving in response to genuine demand pressures however, if it leaves the economy with a less diversified export structure there will be more vulnerable to the volatility in natural resource prices A boom in the natural resource sector caused either by a rise in the world price of the resource or by a new deposits recovery leads to increased income for the country which, in turn brings about increased imports and domestic absorption for both tradables and non-tradables.


• NRW may encourage countries to engage in ‘excessive’ borrowing. [resources as collateral for debt ]

• Unexpected [Uncertainty] resource revenue

causes pressure for the revenue administration to spend even when there are non-viable projects [in the time of Fiscal deficit], or there is lack of absorptive capacity or causes to boom and bust cycles (upward and downward adjustment of expenditure) Since oil, and gas mineral and production are highly volatile, most resource-dependent governments exhibit “pro-cyclical fiscal policy,” a tendency to increase spending when revenues go up and decrease spending when revenues decline(Figure 2)


FIGURE 2: PRO-CYCLICAL FISCAL POLICY

• Macroeconomic stability: Budget volatility

• Gas revenues likely to increase volatility

• PFM improvements – particularly project appraisal

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Growth in government revenue

Source: World Economic Outlook database

Resource Boom affects the rest of the economy through two channels 1.The Resource Movement Effects: An increase in

energy price raises the value of the Marginal product of labour in the energy sector and pushes the equilibrium wage rate up, bringing about a movement of labour from both the manufacturing and non-tradable sectors to the energy sector. The result is a tightening of the other tradable sectors

Why Mobility of Labour and Other inputs ? The sectors are competing for the skilled labour and other inputs because Skilled Labour and other inputs are scarce

What will be the effects?The domestic prices will go up and thereby undercutting the competitiveness of the tradable goods sector (Export-and import substituting goods)

IMPACTS OF RESOURCE BOOM IN THE ECONOMY

CAN TANZANIA AVOID THE RESOURCE CURSE? 1. YES: By Reducing The level of corruption and

poor governance LESSON (1) NIGERIA prevailing level of corruption

and poor governance still remain high, has estimated country to have lost $380 billion to corruption and waste between 1960 and 1999. Since then, the situation may have worsened, even under civilian rule, albeit there are so many efforts by Economic and Financial Crime Commission (EFCC), Independent Corrupt Practices and related offences Commission (ICPC), Transparency International, World Bank and many other organisations to reduce it.

LESSON: (2) Guinea made several contracts under previous administrations in a context of corruption that led to disadvantageous terms. In 2012 the began a systematic review of contracts for the exploitation of its bauxite and iron deposits. In 2011 Guinea promulgated a new mining code that conforms to international best practice and promotes transparency and good governance.

Solution: Increase anticorruption efforts• Tighten rules on lobbying ; Improve rule of

law; Improve monitoring of human rights; Further embed democratic procedures and institutions; Increase monitoring of all levels of the government, civil service (including police and army) and judiciary; Better define property rights of all those in resource extraction area (often indigenous peoples)

• [Corruption = authority + Discretionary powers + Responsibility- Accountability ]

CAN TANZANIA AVOID THE RESOURCE CURSE?

CAN TANZANIA AVOID THE RESOURCE CURSE? 2. No: Due To The Volatility [Effects In The

Estimation Of Revenue Levels]Tanzania May NOT Accurately Estimate Revenue Levels, Plan, Budget And Execute Expenditures Due To The Volatility Of Resource Revenues Linked To Commodity Prices And Lack Of Special Expertise And Industry Knowledge Which May Not Be Sufficiently Available In TanzaniaLESSON: Nigeria in 2006, estimated earning of about $36 billion each year from the extensive petroleum industry; other estimates put current annual earnings at over $45 billion. however, in 50 years of increasing oil and gas production, Nigeria remains among the poorest in the world with poor social infrastructure

3. YES: Through DiversificationDiversify the economy away from oil based to other sectors such as investment in agriculture and transforming manufacturing etc building industries including tradable services such as information technology, transport and transit services so as preserving them from being crowded out by the oil sector maximize the supply chain within the resource sector; either through domestic upstream linkages between different resource industries, or through strengthening links between the resource base and downstream processing industries.


CAN TANZANIA AVOID THE RESOURCE CURSE? LESSON: (1) Angola, and Chad–oil-producers with an undiversified economy– are ranked amongst the most impoverished countries according to the headcount ratio, 64 % or more of the population is below the poverty line. But other oil-rich countries which have had success in diversifying their economies rank better in terms of poverty rates, such as Indonesia and Malaysia Lesson: (2) Nauru enjoyed very high GDP per capita after independence due to its rich phosphate deposits. In anticipation of the exhaustion of the deposits, substantial investments were made in trust funds to help cushion the transition and provide for Nauru’s economic future. However, because of heavy spending from the trust funds, including some wasteful investment activities, the government moved to a situation of virtual bankruptcy.

CAN TANZANIA AVOID THE RESOURCE CURSE? 4. YES: By combining sound fiscal and monetary

policies to militate against the resource curse.Combined policies help to protect the domestic economy from the volatility of commodity revenue and generate budget stability. LESSON: Botswana adopted sound macroeconomic

policies and spends its windfalls wisely to fight against the Dutch Disease. Owing to its fiscal discipline, Botswana was able to avoid wasteful spending during boom periods and borrowing during busts, and this raised its GDP rapidly from the 25th poorest countries in 1966 to an upper-middle income country within 30 years.

Volatility has several negative effects on growth. The exchange rate appreciates during boom cycles with high international commodity prices, and depreciates during bust cycles or recessions. It negatively affects budgetary discipline, control of public finances and long term plans

CAN TANZANIA AVOID THE RESOURCE CURSE? 5. YES: By adopting the Intergenerational equity and allocation of

natural resources theory[Invest in Investing], Creating a Sovereign Wealth Fund

Creation of Natural Resource Funds (NRFs) I.E Stabilisation Fund (reduce the effect of resource price volatility on the economy and improve budget predictability by stabilising spending patterns) and Savings Fund (ensure a proportion of the wealth will be available for future generations even after the natural resources have been fully exhausted).LESSON: (1) Alaska permanent Fund [saves earnings from the state's oil sector and distribute half of the investment earnings on an equal per capita basis, citizens know how to spend their money better than does their government] State Petroleum Fund in Norway, Venezuela’s Stabilisation Investment Fund, Kuwait Reserve FundsLESSON: (2) Botswana's “Pula Fund,” built on earnings from the sale of diamonds, invested entirely in securities denominated in other currencies, as a sinking fund to offset the depletion of diamonds and as a buffer to smooth economic fluctuations.

KEY DESIGN ELEMENTS OF A SWF FOR TANZANIA WILL DEPEND ON THE POLICY OBJECTIVE(S) THE FUND IS

MANDATED TO ACHIEVEPOTENTIAL POLICY OBJECTIVE

DESCRIPTION

Stabilization To ensure counter-cyclical fiscal policy that can mitigate the impact of highly volatile commodity prices on fiscal revenues

Precautionary To hedge against extraordinary shifts in the fiscal situation of a country (e.g. natural disasters, blow-outs, war, etc.)

Inter-generational Saving

To set aside revenue for future generations or future needs of current generations (e.g. future pension liabilities)

To ensure intergenerational equityInvestment To develop long-term fiscal sustainability

(generate alternative non-resource revenues)

To support local or national economic development

For lack sufficient current opportunities for domestic investment or consumption expenditure that provide the same current benefits as financial investment

CAN TANZANIA AVOID THE RESOURCE CURSE? 5. YES: Through Public involvement, private domestic

investment, transparency and accountabilityTransparency and accountability is achieved by public involvement in the management of revenues in order to address the consequences of reliance on external rents. International Non-governmental Organisations ( INGOs), World bank, IMF and recently Extractive Industry Transparency Initiatives (EITI)The EI is advised to comply with International Standards of Conduct with regard to labor standards, to avoid corrupt practices, and to return a fair share of the rents of natural resource exploitation to populations affected by the exploitation.

5. YES: Through enhancing CSR and Local ContentThe responsibility of multinationals in ensuring CSR—embedded in the Ruggie principles—in company codes of conduct ; and enhancing Local ContentLESSON: (1) Angola has a relatively long history with oil and gas (more than 30 years) compared to other African countries, however local employment and local content remain surprising lowLesson: (2) Norway: From the start of oil extraction

in the late 1960s, Norway went from initially very low levels of local content, with virtually all upstream and downstream activities undertaken by international oil companies and their existing supply chains, to local content that three decades later exceeded 70%, now closer to 50%.

The theory “no taxation without representation.”• Norway’s accelerated growth from the 1970s

coincided with the discovery of oil.


6. YES: By Strengthening the institutional capacity [Avoiding the Weak Institutional Performance]

• These challenges of managing natural resource wealth in the context of developing economies may be characterized by weak institutions, including poor PFM systems, pressures to spend within a short-term horizon, and lack of capacity. Weak institutions, particularly rule of law and control of corruption, allow for wasteful spending and oppressive governments.

LESSON (1) In Equatorial Guinea, extraordinary weakness of government institutions and the deficiency of social programs make it less likely that the government will be able to buy the acquiescence of the population


LESSON (2) in Mozambique Corruption and the entanglement of the political elite in business dealings and government tenders remain a persistent problem in Mozambique. The 2011 Transparency International Corruption Perceptions Index assigns the country a ranking of 2.7 on a scale of zero to 10, where zero indicates a highly corrupt score and 10 indicates a clean score

Mozambique has low levels of institutional capacity and it will therefore be necessary for the government to build strong institutions to prevent corruption, and to provide a platform for dialogue between the government and the citizenry, and between the government and opposition parties.


7. YES: By Implementing a Sound Framework in Fiscal Rules

• A fiscal rule is a multi-year constraint on overall government finances defined by a numerical target. Fiscal rules can act as a commitment mechanism, binding successive governments to a long-term budgetary target and therefore a long-term vision of public financial management.

• They discourage overspending and waste by limiting a government’s ability to grow expenditures too quickly. They encourage governments to employ “counter-cyclical fiscal policy” to mitigate the negative effects of revenue volatility

• Enhance the credibility of a government’s commitment to stable fiscal policy, thereby stimulating private investment.


LESSON: Chile’s fiscal rules can provide a good example of sound fiscal policy. In Chile, the structural fiscal balance rule makes it possible for the government to implement counter-cyclical policies, with the ability to run deficits during recessions and build surpluses during expansions. The rule, which includes stock and flow elements, is organized to target a ‘structural’ fiscal surplus rate (SFSR) of 1% of trend GDP.


Deposit Rules

Withdrawal Rules

National Resource Funds

Foreign investment Domestic Expenditure

Investment Rules [stocks, bonds, derivatives, real estates or infrastructure; stabilization fund

assets/saving fund assets]

FISCAL RULES All Extractive Sector and

Related Payments

Streams To Be Deposited

specify how often withdrawals can be made, where they

must go, the amount of

any transfer and whether they need to

be approved by parliament.


8. YES: By strengthening Natural Resource Revenue Forecasting [The macro-fiscal policy framework ]• Enhance the ability to design and assess medium to

long term fiscal frameworks and even to formulate annual budgets. This should be in tandem with the adoption of the bottom-up models for individual natural resource projects.

• Adopt a stable and predictable investment climate for the gas sector to prosper; which may involve to respect contracts and property rights [existing production sharing agreements]; Create confidence to investor that they will retain possession.


9. YES: By Investing in human capital to enhance Skill base

• Evaluate which percentage of Tanzanian population is deemed to be skilled; Invest in education and infrastructure to increase competitiveness of other sectors and Construct a structural realization of benefits from the local value chain to overcome the challenge.


9. YES: By Using Derivative Instruments/Hedging strategy

The revenue volatility associated with commodity income can be reduced by hedging the price risk. Commodities can be sold forward thus locking in the price and thereby providing certainty as to the revenue. However, this requires strong governance frameworks and institutions with market knowledge.


CONCLUSION Managing NRNR revenues is essentially about deciding (1) ‘what to spend’ and (2) ‘what to save’, and ‘when’? (1) Central to the expenditure question is avoiding such outcomes as ‘stop-go’ public spending, unsustainable ‘boom-based’ foreign borrowing, Dutch disease effects, a shift to consumption rather than productive investment, exchange rate appreciation, and rent seeking, corruption, and a disincentive to private sector investment. (2) The ‘savings’ question is both about short- and medium-term stabilisation of fiscal budgets, and long-term saving for intergenerational equity.

THANK YOU FOR YOUR KIND ATTENTION

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