Managing volatility: Fiscal policy, debt management and oil revenues in the Republic of Congo

Assessing fiscal sustainability – i.e. considering whether or not a country can maintain its current fiscal policies without running into solvency problems and possible default – requires projections on a government's future revenue stream, expenditures and contingent liabilities within a macroeconomic framework. Such an exercise is always subject to uncertainty. In commodity-rich countries dependent upon resource revenues, this is intensified by unpredictable and volatile commodity prices. The paper applies a framework for fiscal sustainability and managing uncertainty to Congo. Congo is rapidly building up its production and export capacity and can expect to be a substantial energy producer for several decades to come. Its major challenge is how to manage the hump shaped nature of its oil windfall and how to ensure fiscal sustainability when the oil windfall is gone. The paper analyzes explicitly the effects of uncertainty through stochastic analysis allowing for Value-at-Risk assessments. Furthermore, using an active debt feedback rule, the paper provides an example of how fiscal policy can be used to actively manage debt, in this particular case to reduce its volatility. Such a fiscal policy rule, leading to tightening fiscal policy whenever negative debt shocks occur, can greatly reduce the variance of future debt outcomes and thereby lower the riskiness of the economic environment in Congo without on average increasing the expected burden of fiscal policy.