From Resource Booms to Debt Risks: World Bank Urges Commodity Exporters to Rethink Fiscal Policy

Commodity-exporting developing economies face rising debt and economic volatility, making stronger fiscal rules, diversified revenues and prudent management of resource windfalls increasingly critical. The World Bank says better institutions, international support and productive investment can turn commodity wealth into sustainable growth while creating a more stable environment for private investment.

Commodity-exporting developing economies are facing a difficult challenge: natural resources can generate large revenues, but they can also expose government budgets to sharp global price swings. The World Bank Group's Fiscal Policy in Commodity Exporters: A Balancing Act, prepared by its Prospects Group in the Development Economics Vice Presidency and edited by Garima Vasishtha, finds that stronger institutions, better fiscal planning and more diversified economies are essential if commodity wealth is to support long-term development.

About two-thirds of emerging market and developing economies depend significantly on commodities, while the share rises to around 90 percent among low-income countries. Energy exporters are particularly exposed because commodity revenues account for about 53 percent of total government revenue on average, compared with roughly 14 percent for metal exporters and 11 percent for agricultural exporters.

Rising debt is reducing fiscal room

Many commodity exporters benefited from the commodity boom of the 2000s, when higher prices improved government revenues and helped reduce debt. But those gains weakened after the global financial crisis, the 2014-16 oil-price collapse and the COVID-19 pandemic.

By 2025, median government debt among commodity-exporting emerging and developing economies had reached about 51 percent of GDP, compared with roughly 30 percent in 2010.

Tax collection is another weakness. Median tax revenue in commodity exporters averaged around 12 percent of GDP between 2000 and 2024, compared with about 16-17 percent in other developing economies. This makes governments more dependent on unpredictable resource revenues.

The report warns that governments often increase spending when commodity prices rise and are then forced to cut spending when prices fall. This procyclical approach can make economic booms stronger and downturns more painful.

During the 2003-08 commodity boom, fiscal policy increased the impact of commodity-price shocks on output in the average commodity-exporting developing economy by more than 20 percent. Primary government spending has also been around 40 percent more volatile in commodity exporters than in commodity-importing economies.

Better fiscal rules can support growth

The World Bank argues that fiscal policy should act as a shock absorber rather than amplify commodity cycles.

Its analysis suggests that if the average commodity-exporting developing economy adopted policies closer to those used in advanced economies in areas such as fiscal rules, exchange-rate flexibility and capital-account openness, fiscal-policy volatility could fall from about 11.4 percent to 8.8 percent.

That improvement could raise annual per capita GDP growth from around 1.6 percent to 1.8 percent. Over a long period, even a 0.2 percentage point annual improvement can produce significant development gains.

Governments have already started strengthening fiscal frameworks. By the end of 2024, 50 of 94 commodity-exporting developing economies had at least one fiscal rule, with 112 rules in operation. Budget-balance and debt rules were the most common.

But rules alone are not enough. They work best when backed by transparent budgets, strong enforcement, independent fiscal councils and clear political commitment.

Sovereign wealth funds can also help governments save windfall revenues during commodity booms and use them during downturns. However, poorly governed funds can create new risks if withdrawals are politically driven or disconnected from national budgets.

Energy transition brings winners and risks

The global energy transition could reshape the outlook for commodity exporters.

Metal and critical-mineral producers may benefit from rising demand linked to batteries, renewable energy, electricity grids and new technologies. But higher revenues could also create another boom-and-bust cycle if governments rapidly increase spending.

The report highlights the importance of institutional quality through the experience of copper exporters. In a comparison of Chile and Peru, the impact of metal-price changes on government revenue was about 40 percent stronger in Chile, while the impact on expenditure was around half as large. This suggests that strong fiscal institutions can prevent higher revenues from automatically becoming higher spending.

Oil exporters face the opposite challenge. Falling long-term demand for fossil fuels could weaken government income. For these economies, expanding non-oil taxation, controlling expenditure and developing new industries are becoming increasingly important.

Governments, partners and businesses all have a stake

For policymakers, the main recommendation is to avoid treating temporary commodity windfalls as permanent income. Governments should save part of boom-time revenues, strengthen tax systems and direct more public spending toward infrastructure, education, health, technology and other productive investments.

International development partners can support this transition through technical assistance, concessional financing, debt-management support, better tax administration and stronger public financial-management systems.

Private-sector investors also have much to gain from stronger fiscal systems. Stable policies, better infrastructure and lower sovereign risk can improve the environment for mining, energy, finance, technology and manufacturing investment.

But weak fiscal management can create risks such as sudden tax changes, currency instability, delayed government payments and cuts in public investment.

The report's central message is simple: natural resources do not automatically create prosperity. Countries benefit most when they save during good times, protect essential spending during downturns, strengthen institutions and use temporary commodity wealth to build a more diversified and productive economy.