The Effectiveness of Natural Resources Funds: Evidence from Colombia

This study analyzes the impact of natural resource funds (NRF) on municipal fiscal results in Colombia, using an instrumental variable approach. It specifically analyzed the case of the Oil Savings and Stabilization Fund (FAEP). The results suggest that a 1 percent increase in royalty revenue caused a 0.2 percent increase in gross capital formation (GCF) expenses and that this effect was cancelled out by FAEP participation. We also find that neither resource revenue windfalls nor participation in the FAEP had any impact on operating expenses nor on tax revenues, and that resource revenues have had impact on capital expenses other than GCF, but FAEP participation did not. Although we find that FAEP was indeed effective in reining in GFC expenses, the results suggest that other factors, such as subnational fiscal rules, could have had a strong effect on operating and other investment spending. Countries should thus consider a range of instruments to promote fiscal discipline and smooth out spending, including regulation and NRFs, in the face of natural resource revenue windfalls.