Asia-Pacific: Feeling the Pinch from Lower Commodity Prices

Lower commodity prices are hurting revenues in resource-rich Asia-Pacific countries

Sound fiscal regime and improved tax administration capacity can help reduce impact of revenue losses

Fiscal transparency and interagency cooperation also key

The conference on ‘Natural Resource Taxation in the Asia-Pacific Region’ was held from August 11-13 in Jakarta. The conference—co-hosted by the Ministry of Finance of the Republic of Indonesia and the IMF’s Fiscal Affairs Department and supported by the IMF’s Managing Natural Resource Wealth Topical Trust Fund—brought together 90 senior government officials from resource-rich countries in the region, international experts, and IMF staff.

Getting the most from extractive industries

The conference addressed a central question: how to structure and administer a fiscal regime for extractive industries (EI) that, taking account of a country’s particular circumstances, allows governments to retain a reasonable share of revenues, while at the same time remaining attractive to private investors?

The prospect of substantial profits makes EI especially attractive to governments as a potential source of revenue. However, before this revenue potential can be realized, resource-rich countries need to ensure the fiscal regime is attractive enough to private investors or state-owned companies to encourage them to explore, develop, and produce, given the large upfront capital investments needed and the inherent uncertainty over future commodity prices and project costs. In addition, an efficient fiscal regime—including clear rules, well-allocated responsibilities, adequate institutional capacity, and transparency of the resource revenue management process—is vital.

Extractive industries’ big role

For many countries in the region, EI activity is well established and represents an important share of total exports and government revenue (see Figure). For example, Indonesia has historically played an important role in the development of the petroleum industry, and was the pioneer in the use of production-sharing contracts dating back to the 1960s. The EI sector today contributes significantly to Indonesia’s budget, with combined revenues from the oil, gas, mining, and coal sectors reaching $28 billion in 2014, or 24 percent of total government revenue.

Currently embarking on reforms in the petroleum sector, Indonesian officials candidly shared their experiences, lessons learned, and future hopes for the EI sector...