as guarantees) from what was expected at the time of the budget or other forecast (Allen and Vani 2013; Cebotari and others 2009; Petrie 2013). Government and business plans often focus on a particular outcome (the plan, or central scenario), and other possible outcomes are “deviations” from that scenario. General fiscal risks arise from the volatility of macroeconomic variables—such as the growth rate, inflation, the exchange rate, interest rates, and (notably in RRCs) resource revenues—and other large exogenous events. For example, the growth rate may affect revenues and expenditures; the public debt may be affected by the depreciation of the currency or by increases in interest r ates. Specific risks are narrower and bear on public finance through more specific channels. For example, debt guarantees may require the government to pay if specific events occur. Resource Revenue Dependence and General Fiscal Risks Fiscal policy in RRCs must consider the enormous volatility and uncertainty of resource revenue. These factors are a key fiscal risk affecting public finances in countries dependent on resource revenues. Yet in many countries, the shortterm horizons of annual budgets do not give adequate weight to resource revenue risks in the medium term and sometimes even in the short t erm. This factor contributes to the procyclical expenditure patterns described in the previous section, which in turn exacerbate fiscal vulnerabilities to downturns, that is, to the risk of a fiscal crisis. During booms, spending often adjusts to available current revenue without a full understanding of the risks g enerated. In particular, some expenditure programs, once created or increased, are difficult to reverse (hysteresis). These programs include entitlement programs, public sector wages and employment, and multiyear capital projects that give rise to future recurrent e xpenditures. As spending grows, the probability of large and costly fiscal adjustments in the future increases. This is because the nonresource fiscal position becomes more exposed to shocks as a result of both the increase in spending during the boom and the future increases in spending needed to operate the new investments. Annual budgets that ignore risk and uncertainty—and that are not linked to medium- and long-term policies and plans—can create additional spending hysteresis and new multiyear spending c ommitments. These factors can entrench rigidities, exacerbate fiscal risks, and ultimately undermine fiscal discipline. As a practical matter, fiscal vulnerability to resource shocks increased during the long resource price boom of 2004–14 in a number of RRCs, despite the surge in resource prices. This increase was mainly due to large expenditure increases. Additional factors that may have played a role, depending on the country, include the appreciation of the currency in real terms, which reduced the domestic purchasing power of resource revenue, and a low responsiveness of nonresource revenue to rising nonresource GDP, which would contribute to the deterioration of NRBs. Between 2004 and 2014, the fiscal positions of many countries became more exposed to oil price downturns, and a number of countries were ill prepared to withstand the oil price shock of 2014–15. By 2014, many oil-exporting countries were running fiscal deficits despite elevated oil p rices. Specifically, the median 108
Balancing Petroleum Policy