Hedging commodity price risks in Papua New Guinea

g L S )7 C/ oy, Research, and External Affairs WC PAPERS Debt and International Flnance International Economics Department The World Bank August 1 991 WPS 749 Hedging Commodity Price Risks in Papua New Guinea Stijn Claessens and Jonathan Coleman With increasing awareness of commodity price risks and with technical assistance - strategic advice and assistance in institu- tion building and skills training - -developing countries such as Papua New Guinea can learn to use market-based commodity- linked financial instruments to improve their economic manage- ment. The Policy. Research. and Extemal Affairs Complcx distnbics PRE Working Papers todisscminatethe findings of work in progress and to cneouragc the exchange of ideas among lIank staff and all others interested in development issues. These pipems tany the names of the authors, reflect only their views, and should be uscd and cited accordingly. The findings, interprctations, and conclusions are the authors' own. Thcy should not be attributed to the World Bank, its Board of Directors, its management, ur any of iLts member countries.  i Policy, Research, and External Affairs Debt and Inte;,iational Finance WPS 749 'Ibijis paper - - a joint product ol tic Debt andi Internaitional Finance and International Trade Divisions, Inteniational Economics Departiicit - is part of a larger clfort in PRE to stu(y' the use of financial ins.ruilcints to mTanagc thc exictrnal exposures ol devcloping couIInties. Copies are ava&lable free from the World Bank, 1818 1I Street NW, Washington, DC 20433. Please contact Sarah Lipscomb, room S7-062, cxtension 33718 (31 palges, wiih figoures and tables). Papua New Guinea faces substantial exposure to export earnings, short-tcrni hledging tools, such price Iluctuaitionis for its major ptiimalr) coiminocd- as options and lutures, could be used effectively. ifv exports: gold, copper, cotiee, Cocoa, logs, Claessens and Colemani design specific financial anlld palmn oil. Its existinig conmmodily uisk strategies that Papua New Guinea could use, and managcnient schemics its ninii-eral slabili/.ation demonstiratc the gains to be made from active futind and agricultural commiillodit) funds -- are risk management. cosily, provide only li iitied protectlion against hlec intpat of fluctuations in comtnodit) prices, Tle lcessons leIarIIe(d IItc not unique. Many aInd arc unablc o l)rovidce protection foI loIIg developing countries are hcavily depen(lent on pcriods, primary cominodities for foreign exchange, and thcir econlomic developmcnt has suffered from (ilaesscris arid Coleman show thlat ma-rkct- thc resultinig risks and instabilities. With in- hased financial instirumienits ate better suiled tO ct-casinig awareness of these risks and with manage exteinal price risk for a countii) that is a technical assistance - strategic advice and pric l taker in wvorld comimiiodity markets. T his is assistanlce in institution building and skills especially itic case forI mineral and cnergy price training - developing countries can learn to use iisks where f'inanicial instrum tcits (such as finanicial instruments to improve their economic comin modity swaps) exist for hedging export management. ea1nin1gs over long periods. For agricultural I'IhC PRE Workinig Paper Setiie dissmniinales the f-indings of uNork under way in the Bank's lPolicy, Rcsearch. and External Al faiis Complex. An ohjeclivc ftiiescries is to ge thetsc findings out quickly, cven ir presentalions are less than fullt pxlished. The finndings, interpretations, and conclusio', in these papers do not necessarily represent OrfiCial Bank policy. Piodu(ced by ihe lPRE Dissemiiination Center  Table of Contents 1. Introduction .......... ...........1 2. Background: Importance of External Risk Management to the PNG Economy .1 2.1. Importance of Primary Commodities to the PNG Economy .2 2.2. Nature of Primary Commodity Value Fluctuations .4 23. Problems Created by Commodity and Other Price Instability .6 3. Existing Commodity Risk Management Mechanisms . . .7 3.1. Mineral and Energy Price Risk ..7 3.1.1. Taxation and MRSF .7 3.12. Mineral Resources Development Corporation (MRDC) Rules .9 3.2. Private Corporations ..10 3.3. Agricultural Commodity Boards ..10 4. Impact of Commodity Price Fluctuations on Economic Stability in PNG . .12 4.1. Tax Revenues.12 4.2. MRSF.13 4.3. MRDC and the Private Sector.14 5. Risk Management Schemes and Their Costs and Benefits.15 T.1. Stabilization Funds ................ .......................... 15 5.2. Other Instrument s 16 6. Financial instruments to Manage Risk ..17 6.1. Commodity Futures.17 6 t.2. Commodity Options .18 6.t3. Commodity Swaps .18 7. Mineral and Energy Price Risk Management Strategies .19 8. Agricultural Stabilization Funds.26 9. Conclusions ........ ................................................................... 29 R eferences ................................................................................................................................................................... 30 Appendix . .... 31 Thc authors would like to thank Ron Duncan for his vcry useful comments and World Bank staff in AS5CO for their contributions to this paper.  1. Q IIDf Papua New Guiuea (PNG) faces substantial exposure to price fluctuations of its major primary commodity exports. Existing commodity risk management schemes provide limited protection against the impact of commodity price fluctuations, have high cost, and are not able to provide protection over long time periods. (e.g., the agricultural stabilization funds are effectively exhausted). This paper shows that financial instruments available in developed capital markets are better suited to manage the external risk of PNG than existing schemes, and are less costly. This is especially true for mineral and energy price risks where financial instruments exist for hedging over long maturities. This paper shows how these instruments could be used by PNG. For the agricultural stabilization funds, short-term hedging tools could be used effectively, and, for illustration, a simple hedging strategy is developed for the coffee fund, The paper is organized as follows. In section 2, the importance of primary commodities to PNG is discussed, as well as its exposure to volatile international commodity prices. In section 3, existing commodity risk management mechanisms are discussed, and in section 4, the exposure of economic stability to past commodity price fluctuations is quantified. In section 5, a general overview of risk management schemes and their costs and benefits is presented, and section 6 discusses some specific financial instruments applicable to PNG for external risk management. Risk management strategies for the mineral and energy sectors are developed in section 7, and for the agricultural stabilization funds in section 8. Conclusions of the study are drawn in section 9. 2. Backaround: Importance of External Risk Management to the PNG Econom! This section describes why external risk management is of primary importancc to the PNG economy. First, PNG is highly dependent on the cxports of primary commodities for forcign cxchange carnings, govcrnmcnt revenues, and employmcnt. Second, PNG is a price takcr in the world markcLs of its major primary commodity cxports. During the 1970s and 1980s period thcsc markets have bccn highly volatilc, with  2 large intra-year and inter-year fluctuations in prices, and thus a major source of instability in the PNG economy. Third, PNG's debt structure exposes it to both exchange rate and interest rate risks. Therefore, the use of commodity, interest rate, and currency risk management instruments would be of considerable value by reducing these exposures. 2.1. Motane of Primary CoModities to the PNG Econom The performance of the PNG economy is determined largeiy by the strength of the export sector which is composed mainly of mineral and treecrop exports (see also Table 2.1). These are crucial to the economy in terms of foreign exchange earnings, government revenues, employment, and external debt servicing. However, agricultural production is the major source of employment in PNG. Within this sector, coffee and logs dominate, with the importance of cocoa, copra and cocc.nut oil, and palm oil declining since the mid-1980s. Thbe importance of primary commodities in export earnings is illustrated in Table 2.1. In 1989, almost 70% of the total export earnings of PNG were obtained from the exports of gold and copper compared with less than 50% in 1985. It is projected that the mineral sector will continue to dominate in the early 1990s, contributing a little less than two-thirds of total export earnings in the 1990-1992 period. Outside the mineral sector, logs and coffee contribute the most to export earnings. In 1989, coffee and logs contributed 10.9% and 6.6%, respectively, with cocoa and palm oil at 3% to 4% and copra 1.4%. These proportions are forecast to remain fairly stable in the early 1990s period. The minerals sector makes a large contribution to governmcnt revenues through corporation income taxcs, dividend withholding taxes, and dividends from government equity in mineral prcjects. In addition, there are the import duties and payroll taxes paid by the mining corporations. In total the mineral sector providcd 20% of govcrnment revenues in 1989, and by the end of the decade their share is forecast to rise to over 35%.  3 Tabl 2.1. Contnbuion of Maior Primary PgmModiyEWs to Total Emrt pamin.NG. t. Commodity 1985 1986 1987 1988 1989 1990 1991 1992 Percent Minerals 46S 60.9 61.7 70.6 69.0 6S5 64.1 64.7 Gold 25A 402 413 36.4 25.1 31.2 34.3 40.1 Copper 21.1 20.7 20.2 34.2 43.9 34.3 29.8 24.6 Nonmintemls 535 39.1 383 29A 31.0 345 3S.9 353 Cocoa 75 63 5.3 35 3.8 3.2 2.6 2.6 Coffee 13.4 IS4 16S 9.4 10.9 9.2 7.2 6.9 Copra 5.1 2.0 1.0 1.3 1A 135 IA 1.2 LOP 7.7 5.7 6.9 7.6 6.6 8.9 10.1 9.6 Palm Oil 73 3.9 2.8 1.7 3.1 4.3 5A S.6 Other 12.3 5.8 S.8 5.9 5.2 7.4 12.2 9.4 Source: Based on Table H in Annex Vil of IMP, 1990. Although less important than the mineral sector, the agricultural sector makes a significant contnibution to government revenues though direct taxation of company income, taxes on agricultural exports, and profits from government equity in agricultural projects (e.g, oil palm estates). In addition, there are the indirect taxes imposed on imported agricultural inputs, as weil as the taxes paid by individuals earning agricultural incomes, and the excise taxes levied on items such as fuel, beer, and cigarettes purchased with incomes generated from agriculture. It is estimated, for example that the contribution to total government revenues of the coffee sector alone is as much as 10% (see Brogan and Rewenyi (forthcoming)). The mining sector generates few opportunities for employment in PNG. Most of the capital used in the mines is technologically advanced and is imported. The two major mines, BCL and OTML, together cmploy about only 6,000 people (many of whom are expatriates) which is about 0.3% of thc labor force. The labor force in PNG (estimated to be 1.8 million in 1987) is primarily employed in agriculturc. Within the formal sector, agriculture is the most important source of cmployment, taking about 20% of the labor forcc. Whilc the terms of trade havc movcd against the agricultural exports of PNG sincc the mid-1960s, rcal  4 consumption and investment have been maintained by overseas borrowing. As a result, cxternal debt has increased dramatically from less than $200 per capita in 1970 to more than $1,200 currently. The debt service to exports ratio is currently at about 30%. In the 1988 government budget, and interest paymtents alone made up almost 7% of total expenditures. External debt (servicing) has further been influenced by two external factors: intermational interest rates and cross-currency exchange rates. The influence of movements in international interest rates on PNG's debt service obligations has been relatively small compared to many other developing countries, since a considerable part of PNG"s long-term debt is of a fixed rate nature (approximately 45 percent). Still, a change of one percentage point in the interest rate alters debt service by about $13 miUion. The influence of exchange rate movements on the level of ntebt measured in US dollars has been large since a significant part of PNG's debt is in non-dollar currencies (approximately 60 percent). Over the period 1985 to 1989 the absolute value of the currency valuation effect on debt stock has, on average, been about $72 million annually or about 3 percent of the debt stock (see also the Appendix). 2.2 Nature of Primaa Commodity _alue Eluctation The instabilily of export revenues of primary commodities is associated with fluctuations in both quantities produced and prices. Indexes of the value, volume and unit value of the major primary commoditics of PNG between 1985 and 1989 and projections for 1990 to 1992 are reported in Table 2.2. Also reported in Table 2.2 are the coefficients of variation (CV) (the ratio of standard deviation to the mean) which provide a crude measure of instability. The CV for the index of the value of mineral exports for the 1985-1992 period is almost 20%, indicating that cxport value is quitc unstable. The value of copper exports is espccially variable with a CV of 36.5%, while the CV of gold was 19.0%. Also, copper prices werc highly unstable, recording a CV of 24.4%. The index of the value of nonmincral exports was more stable than the mineral index, with a CV of 14.4%. The most important commodities--logs and coffcc--reported CVs of 20.6% and 34.5%, rcspectively, which arc both lower  S than the CVs for the other major commodity exports, except for gold. Ta le 2.2 P-n Mew -uinea: -zMEW Value. Volume. and Unait Value, b Maie CommOdity. 19951992 Commodly 1985 1986 1987 1998 1989 1990" 199177 199277 C$'1 YAks Minerals 68 9S 86 131 128 100 96 111 19.3 Gold 78 132 122 141 98 100 108 14S 19.0 Copper S9 62 54 121 156 100 8S so 36.5 Nonminerals 152 124 109 109 116 100 96 107 14.4 Cocoa 229 20S 1SS 134 148 100 81 94 345 Coffee 139 169 164 123 144 100 77 84 26.3 Copra 327 133 67 104 117 100 91 91 59.9 Logs 83 65 71 116 90 100 111 121 20.6 Palm Oil 167 93 S8 47 88 100 122 143 37.2 Volume Minerals 81 11S 104 136 118 100 108 129 14S Gold 72 125 115 124 102 100 110 149 188 COpper 90 1OS 94 146 133 100 106 110 16.4 Nonminerals 82 83 86 91 92 100 100 106 8.9 cocoa 83 82 80 78 115 100 92 103 111 Coffee 68 64 76 87 87 100 87 90 13.7 Copra 135 IS0 131 117 104 100 88 89 17.9 LOP 87 90 93 114 95 100 112 lS 11.0 Palm Oil 70 78 72 48 76 100 118 129 29.3 Uoint Value Minerals 84 83 83 96 108 100 89 86 95 Gold 108 106 106 114 96 100 98 97 5.6 Copper 66 59 57 83 117 100 80 73 24.4 Nonminerals 185 149 127 120 126 100 96 101 22.3 cocoa 276 250 194 172 129 100 88 91 39.9 Coffee 204 264 216 141 166 100 89 93 38.1 Copra 242 89 51 89 113 100 103 103 47.7 Lop 95 72 76 102 95 100 99 103 11.9 Palm Oil 239 119 81 98 116 100 103 111 38.0 Source: Based on Table iii in Annex VII of IMF, 1990. I/ Projections. 2/ Coctficient of Variation. With thc cxccpzion of gold and logs, thc unit value variability of each export commodity in the table  6 is greater than its production variability. This reflects the high degree of instability of intcrnational agricultural commodities prices. Also of interest is the fact that the commodity unit values have declined over the period, especially for coffeeand cocoa. The dependence of PNG on primary commodities will be strengthened with expected developments in the energy sector. Oil export earnings could amount to as much as one-third of mineral export earnings by the year 2000, equivalent to 25% of total export earnings. With greater dependence on oil cxports the economy of PNG will open itself to risks associated with fluctuating oil prices. Recent events have been a reminder that oil prices are highly unpredictable which suggests that risk management instruments to lower these risk will be of great importa-ice in the future . 2.3 Probems Created by Cmm-odity and Other Price Instability The previous section clearly demonstrates that commodity price, exchange rate and interest rate instability has had and will continue to have major impacts on PNG's macroeconom; through its cash-flow effects on export earnings and the relative burden of debt service. The impact of volatile external prices does not, however, limit itself to its contemporaneous effect on cash-flows but also impacts on production and investment decisions. For PNG, the problems involved in developing the non-mining sector of the economy can, in part, be traced back to the large dependence on mineral exports and the volatility in mineral prices. In times of high mineral prices and high real exchange rates, the international competitiveness of the non-mining sector deteriorates and little investment occurs. However, in periods when mineral prices and the real exchange rate fall, the non-mining sector may still not develop, as investors realize the situation can casily revcrse itself in the future, rendering investments in the non-mining sector possibly unprofitable. Ilistorically, the CV of oil prices has bccn hctwcen 20% and 30%.  7 3. Exslin CommadiAisk Mananemet Mechaisms In this section the linkages between the commodity sectors and other sectors of the economy are explored in greater detail and a description of the important institutions and mechanisms through which commodity prices affect the economy is provided. There are three main entities which bear the risks associated with fluctuating commodity prices. These are (i) the Government of PNG (GOPNG); (U) the private corporations that operate in these sectors; and (iii) the agricultural marketing boards for coffee, cocoa, copra, and palm oiL We discuss the allocation of mineral and energy price risks first, followed by agricultural price risks, and the specific risk management schemes in place in each sector. 3.1. Minera and E Price Risk The GOPNG is affected by price changes in tdie form of tax revenues channeled through the Mineral Resource Stabilization Fund (MRSF), and through the, Mineral Resource Development Corporation (MRDC) (through its equity stak. n mines and energy projects and its responsibility for raising the necessary funds to rinance the equity participation in new projects). 3.1.1. Taxation and The structure of mineral resource taxation in PNG reflects the authorities' objective of providing adequate incentives to producers while ensuring that the government is able to secure most of any windfall profits (see further Coopers and Lybrand (1989)). The tax regime in place for both the mining and the pctrolcum projects places a heavy tax burden on the more profitable operations while minimizing tax requirements from marginal projects. Mining cnterprises arc subject to an effectivc tax rate of 46%. Highly profitable operations are subject to an additional profits tax (APT), which can result in marginal rates of a;;nost 65%. The mining APT is payable when the project shows a return on investmcnt abovc a specificed rate. As a result of the APT, the government's revenues increascs sharply in periods of high commodity prices.  8 Petroleum projects are subject a company tax rate of 5;9%. The APT for the petrel' -um .ndustry is payable at a rate of 50% once the project has achieved a 27% nominal rate of return after income tax. The Mineral Resource Stabilization Fund (MRSF) was established by an A.., of Parliament in 1974, with the objective of reducing the impact of fluctuations in mineral revenues or. the government budget. Under this legislation, all dividends in state shareholdings, companv income taxes, and dividend withholding taxes (identified above) from all designated mining operations must be paid into the MRSF. The assets of the MRSF are held by the Central Banik of PNG (BPNG) which invests them in securities abroad, primarily in the form of interest-bearing deposits and central bank securities. The surplus funds, managed BPNG, constitute the main source of reserves. Drawdowns from the MRSF are determined on i;- basis of recommendations submitted to the Board of Management of the MRSP. The general rule for withdrawal is that the amount to be drawn down should ensure that the Fund is sustainable in terms of real purchasing power over the next five years (see also Guest (1987)). The Board of the MRSF is bound to make forecasts of future receipts for eight years ahead and (implicitly) for inflation forecasts for five years ahead. The commodity prices implicit in tke forecasts should not vary more than 10 percent from the historical moving-average of commodity prices (20 years for copper prices, the preceding year for gold and silver). In practice there has been considerable flexibility in the operation of the MRSF and a revision made to the MRSF Act in 1987 allows the government greater discretion than before. This, while providing greater flexibility in the use of mineral revenues, carries the risk of larger increases being allowed in drawdowns and expenditures in anticipation of future growth in these revenues. The contributions to and drawdowns from the MRSF have varied substantially over the past decadc. The degree of stabilization the MRSF has provided can be quantified by comparing the Cv of its outflows over the pcriod 1980-1988 (45%) with the CV of revcnues (56%). This suggcsts that very little stabilization of the government's budget has taken place by placing MRSF  9 between tax receipts and inflows in the budget: only a relative reduction of about 20%2. The result is to be expecced given the implicit use of the moving avera2-e price with short time periods (one year for gold and silver) as an indicator of the future price and the (recent) flexibility in the rules. 3.1X Min:rp1Kesources l)pnentCorporation (MRDC) Ruiles The govermment has followed a policy of taking an equity share in all major mineral projects. Although these investments have been characterized by a high degree of risk, there has been popular support for the principle that the government should maintain a share in the ownership and control of projects involved in exploiting nonrenewable resources. The equity-participation in new mineral projects has taken place lusing the MRDC as a vehicle. In the case of mining projects, the govermment has reserved the right to take an equity share ok tip to 30%, although in most projects to date it has taken a 20% share. The expectation is that, in some form or another, the state, provinces and landowners will, through MRDC, retain an equity stake in the mining projects. For petroleum projects, the government reserves the right to take d 22.5% carried interest. MRDC has financed its equity participation in the different projects in a variety of ways from deferred payback on future dividends--in which case the foreign investors effectively provides the financing--to loans obtained through external commercial borrowing (with a government guarantee)3. More re ently, MRDC has relied on foreign financing. MRDC receives their dividends on its equity stake and pays any excess of dividends over financing costs to the r[FP. Through its participation, MRDC is exposed to commodity price risk since its expenses (interest and principal payments on foreign loans) are not dependent on commodity prices whereas its rcvcnucs are. The substantial level of government equity in new mines ^nvisaged over the next few years will This result is conflrmcd by the analysis of Guest, which dcrivcs thc similar result that the NIRSI has reduced the instability of mineral revenues by only 30 percent. 31'frcctively, the Departmcnt of Financc and Planning (DI') has arrangcd the financing under its nanc and thcn passcd it on to %IRDC.  10 require large amounts of new financing, (commercial external borrowings) which arc estimatcd to amount to about $500 million in 1991 and 1992. This will greatly increase MRDC's exposure. 3.2. Prinate Corrations Foreign companies operating mines in PNG are exposed to commodity price risks through thc impact of price changes on the cash-flow derived from the mines (dividend remittances and other transler payments to the parent company). Most foreign firms have put in place some risk management program to protect cash- flow streams to parents against commodity price swings. It a-ioears, however, that the risk manage:mnit is dlone at the parent, off-shore level, i.e. net profit remittances received by the parent from the subsidiary are hcdlged at the off-shore level, leaving export receipt and taxes exposed. This implies that much of the commodity price exposure remains at the subsidiary level and consequently that the PNG economy remains ecposed to fluctuations in the price of its main exports. 33. Abr,icultural Commodity Boards Given the importance of agricultural commodity exports to the economy and the volatility of international prices, stabilization schemes have been established in PNG since the 1940s for the impor.iant export crops in Papua New Guinea (PNG) -- namely cocoa, coffee, copra and palm oil. The four schlciiems zirc similar in design (see Figure 1). A threshold pr;ie is determined equal to a ten-year moving averate 1 F(F)l prices, adjusted for inflation. Then a buffer zone is set at 5% above and below the thrcshold price in wvhich no bounties or levies apply. When the current FOB price is more than 5% above the threshold price, levies are imposed on producers at 50% of the difference between the threshold price and the current FOB pricc. The levy revenues are paid into a commodity stabilization fund. When the current FOB price is more than 5"s, below the threshold price, bounties are paid to growers at 50% of the difference between thc curreint I01)B prrice and the threshold price. Bounties are paid out of the stabilization fund.  11 price/ton/ Farner Figure 1 ~ ~ ~ ~ ~ ~ ~ ~ the Unt_ recently,_-he9schemes5were succeSfulinstabilizing of thresoold prices..w.i.dn ......'..-' 4 jj / ~~~~leuyg A obUt uFfer / 1 3 ~~~~~bounty m// no levy zone Figure I Until recently, the schemes were successful in stabilizing producer prices. Howcvcr, in ilic midl- aInd late-1980s, commodity prices fell in real terms, so that current FOB priccs were consistently below thc tlhrcslold price. As a result, subsidy payments were made to growers over an extended period. This lcd to thc eventual exhaustion of the cocoa, copra and palm oil funds, and the coffee fund is expected to run out carly in 1991. To prolong price support, the funds were kept solvent through government financial contributions, commiiier-ciall bank loans and STABEX transfers. In response to these problems, in November 1989 the government decided to implement it number of interim measures which would provide support to the agricultural export sectors while a new approach to pricc stabilization was found. The objective of these new measures is to give price protection to growers while thiv adjust to lower international prices without the support of bounty payments from the stabilization funds. Instead of establishing a threshold price based on a long-run moving average, support durinig the atlisltlllct pcriod is based on the difference between the estimated costs of production and the international price. T'h. level of price support will decline over an adjustment period of about three to five years dcpendiing on ihc commodity. By the end of this period producers will face international priccs. The loans used to finanec pricc support payments are to be repaid by the commodity boards from cxport rcvenues when the international pl ice exceeds the support price.  12 The rationale for this policy is that without such a scheme agricultural incomes would decline substantially with a significant proportion of the estatc sector going out of business. With support, as well as initiatives to improve productivity, such as extension and research, the sectors will be able to adjust to low prices and to gain international competitiveness, as well as being in a position to repay existing loans. 4. Impact of Commodity Price Fluctuations on Economic Stability in PN(G In this section we provide empirical estimates of the magnitude by which each institution is affccted by commodity price risk. We identify the following parties: tax revenues, MRSF, MRDC, and the private sector. 4.1 Tax Revenues Historically, PNG's total tax revenues have been very sensitive to variations in commodity prices. This can be estimated by running the regression: (1) t a + ,Pt1 + -YPt2 + ... + error where TRt are percent changes in tax revenues in period t, and Pt, are percent changes in the prices of relevant commodities (e.g., copper and gold)4. From these regression cquations, the clasticity of tax revenues with respect to the copper price (both expressed in percentage annual changes of dollar values) over the period 1976- 1988 was about 0.25 (with a t-statistic of 3.3 and a R2 of 0.56). The clasticity with respect to gold prices was about 0.18 over the same period, but not significant. A similar regrcssion was done for export earnings. Thc elasticity of export earnings with respect to copper prices was about (1.18 (with a t-statistic of 1.37 and a R2 (if "Scc further G(emmill (1985) and Kolb (1985) on how to cslimnatc thcsc sensitIvifics.  13 0.135). The elasticity with respect to gold prices was about 0.738 over the same period (t=2.84, R2 = .45)5. These results suggest that the exposure of tax revenues to export prices is quite different from the relationship between export earnings and export prices in the case of the gold price, but similar in the case of the copper price. Since the average share of copper and gold in export earnings over the 1976-1988 period was about 25% and 30% respectively, these elasticities indicate also that movements in volumes cxported have partly offset the effects of price movements in the case of copper exports and exacerbated those movements in the case of gold exports. 42 MRSF Similar regressions were performed for the dividend stream on the government's share in the mining projects accruing to MRSF. The elasticity for gold was 1.22 (R2 = 0.28, t = 2.06) and for copper 0.72 (R2 = 0.05, t= 0.77). The regression coefficients for the annual levels of dolar dividends (in millions) on the level of prices for the period 1981-1988 were 0.076 for gold (RG = .43, t=2.14) and 0.005631 for copper (R2 = .42, t=2.11). Since the last regression is in levels, the coefficients measure the exposure of the dividend stream to prices and can be interpreted as the quantity of physical commodities 'received' by the government each year. These quantities are equal to 2.56 tons of gold (converting ounces to tons) and 5,631 tons of copper (or 8 percent of gold exports and 2.5 percent of copper exports). Regarding future price sensitivities, the World Bank (1989) reports results for two scenarios: in scenario I the price of gold is 15% lower than in the base case and the price of oil stagnates in rcal terms; in scenario 2 the price of gold rises proportional to international inflation. The diffecrcnce in thc currcnt account between thcse two scenarios is 7.5 percent of GDP and in the fiscal balance is 6.7 perccnt of GD?, indicating thc largc scnsitivity of both aggregates to international commodity pricc movements. ' Ovcr a longcr period the elasticity of cxport earnings with respect to copper priecs is 0.54 (with a t-statistic of 2.97), and the clasticitv with respect to gold prices is 0.64 (with a t-statistic of 2.11).  14 43 MlDQCadlhe Private ScLtor Sensitivity scenaros regarding future prices can also be performed on the profitability and resulting tax revenues in the case of an individual mining operation. This was done for a mine similar to the recently opened Porgera mine, which largely produces gold. Based on production estimates, costs of production, and current tax regulations profits, tax receipts and dividends paid abroad (the excess cash-flow after subtracting the government's share) are calcuated under different gold price assumptions. Present values of Dividends and Taxes