Fiscal policy in oil and gas-exporting economies: Good times, bad times and ugly times

Abstract

We study the cyclicality of fiscal policy to oil and gas revenue in emerging and developing energy-exporting countries. We build a unique oil and gas fiscal revenue database for 30 countries and develop a novel framework to identify various kinds of asymmetry in the response of public expenditure to oil and gas revenue. To explore asymmetries that may occur during revenue cycles, we distinguish between high and low oil and gas revenue regimes, as well as between positive and negative revenue shocks. Using an unbalanced panel over the period 2000–2020, we find that fiscal policy is procyclical in general but neutral when confronted with high but declining revenue, possibly influenced by policymakers' optimistic view that revenue will quickly recover. Moreover, we find the greatest level of procyclicality when revenue is low but increasing. This situation may follow periods of fiscal tightening where governments face greater social pressure to catch up with higher spending. Our results also suggest that financial openness increases procyclicality in low revenue regimes only, and that during these periods, IMF programs are associated with expenditure reductions regardless of improvements or deteriorations of oil and gas revenue.