Commodity wealth demands a fiscal balancing act

Commodity booms are easy to celebrate but hard to manage. For resource-rich economies, commodity windfalls—if managed well—can finance investment, strengthen public finances and lift growth (Figure 1A). Poorly managed, they can trigger a spending spree that leads to higher debt, rising inflation and an eventual bust. Whether a boom delivers lasting gains or sets the stage for the next bust depends critically on how fiscal policy is managed. The past quarter century makes the point clearly. In emerging market and developing economies (EMDEs), the commodity supercycle of the 2000s helped many exporters deliver stronger growth, improve fiscal balances, and reduce debt. The 2010s were much less favorable: commodity prices weakened and debt rose. Then the 2020s brought the pandemic, supply disruptions, Russia’s invasion of Ukraine, higher inflation and borrowing costs, trade tensions, and conflict in the Middle East. By 2025, median government debt in commodity-exporting EMDEs had nearly doubled from its 2010 level (Figure 1B). Commodity prices and economic growth move in tandem in commodity-exporting EMDEs, where median government debt has nearly doubled over the past fifteen years. Today, the stakes extend far beyond the next boom or bust. Around 1.2 billion young people in EMDEs are set to reach working age between 2025 and 2035. Creating productive jobs for this generation is a defining development challenge. For many commodity-exporting EMDEs, home to nearly half of this youth wave, sound fiscal management is about much more than stabilizing budgets: it is also about creating the conditions for jobs, investment, and growth. The task is becoming harder because commodity markets themselves are changing. The energy transition and new technologies are reshaping demand for raw materials. Lower fossil fuel use could erode an important revenue source for energy exporters, while electrification, renewable energy, and digital infrastructure are boosting demand for metals and critical minerals. Yesterday’s fiscal frameworks cannot simply be carried into tomorrow. Our latest study, Fiscal Policy in Commodity Exporters: A Balancing Act, provides the World Bank Group’s first comprehensive assessment of these fiscal challenges across commodity-exporting EMDEs. It traces fiscal outcomes since 2000, examines fiscal procyclicality and volatility and their consequences for growth, analyzes the implications of the energy transition for metal and oil exporters, and brings these strands together into a practical menu of policy options. The topic has an enduring appeal, because commodity dependence remains pervasive: about two-thirds of EMDEs, and roughly 90 percent of low-income countries, rely heavily on commodities. Too often, fiscal policies in these economies tend to amplify commodity shocks instead of cushioning them: they are more procyclical and more volatile than in other EMDEs, with real economic costs (Figures 2A and 2B). Commodity exporters face a double fiscal challenge: policy is both more procyclical and more volatile than in commodity importers. In the average commodity-exporting EMDE, procyclical fiscal policy has made commodity price shocks more than one-fifth worse. Advanced-economy commodity exporters have tended to do the opposite: they use fiscal policy to dampen the shocks. The risks also vary by country: energy exporters rely most heavily on resource revenues, while agricultural exporters are especially susceptible to spending practices that increase debt and amplify the shock (Figure 3A). This fiscal volatility weakens investment and growth, leaving less room to create productive jobs. So, what should policymakers do? The first priority is to put some distance between government spending and the ups and downs of commodity prices. A growing number of countries have adopted fiscal rules (Figure 3B). These rules set numerical limits on deficits, debt, spending, or revenues, with the goal of improving fiscal sustainability. But rules on paper are not enough. They must be credible, enforceable, flexible, embedded in medium-term frameworks, and supported by transparent budgets and independent oversight. Our study finds that such frameworks work best when backed by strong institutions, implementation capacity, and sustained political commitment. Commodity exporters rely heavily on resource revenues, while fiscal rules have become increasingly common. Sovereign wealth funds can also stabilize public finances by saving windfall revenues during booms and creating room to support activity during slumps. But they work best when integrated with the budget and protected from political pressure. The broader lesson is simple: institutions matter at least as much as instruments. The second priority is to turn temporary resource income into lasting productive capacity. Stronger non-resource revenues can make budgets less vulnerable to commodity prices, while commodity windfalls can finance well-chosen investments in infrastructure, human capital, technology, and stronger institutions. This matters for jobs: across EMDEs, stronger investment growth tends to go hand in hand with stronger employment growth, while macroeconomic stability helps preserve the fiscal space needed for productive employment. Different exporters face different challenges. Metal exporters may enjoy substantial new revenues as the energy transition advances, but they should avoid turning those windfalls into permanent spending. Oil and gas exporters face the opposite challenge: they should rely less on fossil-fuel revenues and diversify their economies. In either case, the goal is the same: convert volatile and exhaustible resource income into productive capacity, more diversified economies, and more and better jobs. Several country examples provide reasons for optimism. Chile’s structural balance rule is often regarded as a good example of a commodity-linked framework which adjusts fiscal targets for the economic cycle and long-run copper prices. Savings accumulated during the 2000s commodity boom were later drawn down after the global financial crisis and again during the pandemic. Botswana also saved its resource revenues and used them to cushion downturns. These experiences show that procyclicality is not destiny and commodity dependence need not become a curse. With credible institutions, prudent saving, stronger revenues, and sustained investment in people and productive capacity, commodity exporters can turn volatility into resilience and resource wealth into durable development. That is the balancing act commodity exporters face: difficult, certainly, but achievable.