Optimal policies for managing oil revenue stabilization funds: An illustration using Saudi Arabia. (August 2020)

• Record Type: Journal Article
• Authors: AlKathiri, Nader; Atalla, Tarek N.; Murphy, Frederic; Pierru, Axel
• Is Part Of: Resources policy. Volume 67(2020)
• Publication Date: 2020-08
• Subjects: Oil -- Stabilization fund -- Welfare -- Regime switching -- Sovereign wealth fund -- Dynamic programming; Q43 -- E21 -- C61; Mines and mineral resources -- Periodicals; Ressources minérales -- Périodiques; Ressources naturelles -- Gestion -- Périodiques; Environnement -- Politique gouvernementale -- Périodiques; 333.8
• DOI: 10.1016/j.resourpol.2020.101686
• Languages: English
• ISSNs: 0301-4207

Abstract

Abstract: We develop an analytical approach that offers insights into how governments can better manage an oil-revenue stabilization fund. The model maximizes the expected intertemporal utility of households and consists of decisions that are a function of the fund level and oil revenue. We apply our approach to Saudi data, noting that the government deposits and reserve at the Saudi Arabian Monetary Agency have historically served as a buffer to decouple the Saudi government budget from oil revenue fluctuations. Results from our model match intuition: the larger the fund, the smaller the additions during periods of high revenues and the bigger the withdrawals during periods of low revenues. We also show that the fund can be partitioned into tranches with different asset durations rather than being solely invested in short-term assets. Our results indicate that the boundary between an oil-revenue stabilization fund and a sovereign wealth fund is not a bright line. Highlights: We develop a model for optimally managing an oil-revenue stabilization fund. Decisions consider future revenue uncertainty and the current size of the fund. The optimal policy derived has properties that satisfy common sense. We show how to partition the fund into tranches with different durations. The boundary between stabilization and sovereign wealth funds is not a bright line.