Natural resource revenue, spending strategies and economic growth in Niger

Abstract

In this paper, we use a recursive dynamic computable general equilibrium (CGE) model to examine spending strategies in Niger, a resource-rich, low-income country that has a windfall gain from mineral export revenue. The recent literature on Dutch disease describes alternative policy rules to manage the income flow from the expected natural resource revenue, which can either be spent to raise immediate consumption or on public infrastructure to increase future productivity. We simulate four strategies. As a conservative strategy, Niger can spend only the interest earned on revenue in a sovereign wealth fund (bird-in-hand strategy); alternatively, it can borrow to spend now and repay with expected natural resource revenue. The key to the benefits of significant mineral revenue lies with the productivity and supply responses of spending. If significant output gain is assured, the different spending strategies have very similar effects on real consumption. Dutch disease, the overshooting of relative prices of non-tradable sector or the shrinking share of traded sectors in the economy, is also ameliorated with greater supply flexibility. Growth paths of alternative spending strategies differ markedly in timing and pattern, however, when spending does not raise productivity. The more aggressive spending plan may result in a boom–bust cycle if fiscal adjustments and debt repayments are necessary for any significant borrowing against future revenue and productivity gains are not realized.