Public Investment in a Developing Country Facing Natural Resource Depletion

This paper analyses the trade-offs between savings, debt, public investment and capital sustainability in a developing country with looming oil exhaustibility concerns. We find that an optimal policy that maximises welfare and preserves capital and fiscal sustainability involves a moderate scaling-up of public investment in the short term. Alternative public investment paths are shown not to be optimal as they either create risks to capital and fiscal sustainability or do not fully harness the oil revenue windfall. We also show that there are large welfare gains for low-income countries from structural reforms that improve the efficiency of public investment and the project selection process. Finally, the paper highlights the fiscal and debt sustainability risks from volatile oil prices and inadequate fiscal adjustment.