ID :
139950
Mon, 08/30/2010 - 18:43
Auther :
Shortlink :
http://m.oananews.org//node/139950
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MONGOLIA QAURTERLY ECONOMIC UPDATE ISSUED BY WORLD BANK
(continuation)
FISCAL DEVELOPMENTS
The trend improvement in the fiscal balance stalled as government expenditures increased in step with mineral-related revenues…
Mongolia's economy is currently rebounding strongly after experiencing a sudden and severe downturn in 2008 and 2009. After the large fiscal shock, caused by the collapse in commodity prices in July of 2008, fiscal balances had been on an improving trend since mid-2009. This improvement was supported mainly by efforts to contain fiscal spending and higher fiscal revenues, caused by rising copper prices and a wider economic recovery. However, the trend improvement in the fiscal deficit, as measured by the 12 month rolling fiscal deficit stalled since December 2009, as government spending has picked up. Total expenditures on a cumulative year-to-date basis in May were up 42 per cent on the similar period in the previous year. The bulk of the increase was accounted for by a rise in current government spending, notably transfers.
The improvement in public finances compared to last year and the rise in revenues in line with commodity prices have led to growing pressures for increased government spending. One round of cash transfers has already taken place in February with MNT 70,000 distributed per person. This is to be followed by another round of MNT 50,000 per person to be distributed in the remaining five months of the year, alongside a 30 per cent increase in government sector wages and pensions which will take effect from October 1st.
Meanwhile, in July, the parliament approved government proposed amendments to the original 2010 budget which envisaged a substantial increase in government expenditures. The amended budget proposal put forward a 4.5 percent of GDP increase in spending on top of the originally approved budget for 2010, on the back of a revised projected increase in revenues of 3.1 per cent of GDP. As part of the amendments, overall spending is set to increase by 11.6 per cent relative to the amount originally budgeted. Spending on wages and salaries, goods and services and domestic investment spending rise by 7.7 per cent, 13.9 per cent and 17.8 per cent respectively. (Together, these three items amounted to about 60 per cent of public spending in 2009). Overall, the fiscal deficit would deteriorate from 5 per cent of GDP to 6.4 per cent.
As approved, the 2010 budget amendments, coupled with the expansionary fiscal stance in the Mid-Term Budget Framework (MTBF), would set the stage for a return to macroeconomic instability through pro-cyclical fiscal policy and to a fresh bout of extremely high inflation. There remain significant financing pressures in the near term, not least due to banking restructuring costs on the expenditure side, and the expiration of the Windfall Profits Tax in 2011 on the revenue side. Donor funding is drying up too.
Under the MTBF for 2011-2013, the government plans to increase the stimulus to the economy with cash and non cash distribution to every citizen, supplying around MNT 4 trillion from the Human Development Fund for this purpose. To accommodate this and other expenditures, the MTBF also projects further expansion of fiscal expenditure to almost 51 per cent of GDP in 2011. Although the government has announced that it intends to issue a substantial amount of debt later in the year on international capital markets, capital flows to emerging markets have dropped sharply amidst the financial market volatility arising from the Euro area's sovereign debt troubles. As a result debt financing on commercial terms may prove costly for a low-rated sovereign like Mongolia.
Accordingly, the agenda for continued fiscal consolidation remains extremely important for Mongolia. The adoption of, and adherence to, the Fiscal Stability Law recently passed by the Parliament will be key in Mongolia's efforts to constrain fiscal spending to prudent and sustainable levels, and also
for managing the huge revenue inflows expected from the Oyu Tolgoi mine from 2016 onwards. The law targets a structural budget deficit (along the lines of Chile's structural balance rule) of 4 per cent of GDP in 2011, falling to 2 per cent by 2013. It also restrains expenditure growth to not more than the rate at
which the economy is growing. Through the creation of a fiscal stability fund, a portion of revenues expected from the OT project will be invested overseas, helping to mitigate the negative Dutch Disease effects that large inflows of foreign exchange can bring.
(to be continued)
FISCAL DEVELOPMENTS
The trend improvement in the fiscal balance stalled as government expenditures increased in step with mineral-related revenues…
Mongolia's economy is currently rebounding strongly after experiencing a sudden and severe downturn in 2008 and 2009. After the large fiscal shock, caused by the collapse in commodity prices in July of 2008, fiscal balances had been on an improving trend since mid-2009. This improvement was supported mainly by efforts to contain fiscal spending and higher fiscal revenues, caused by rising copper prices and a wider economic recovery. However, the trend improvement in the fiscal deficit, as measured by the 12 month rolling fiscal deficit stalled since December 2009, as government spending has picked up. Total expenditures on a cumulative year-to-date basis in May were up 42 per cent on the similar period in the previous year. The bulk of the increase was accounted for by a rise in current government spending, notably transfers.
The improvement in public finances compared to last year and the rise in revenues in line with commodity prices have led to growing pressures for increased government spending. One round of cash transfers has already taken place in February with MNT 70,000 distributed per person. This is to be followed by another round of MNT 50,000 per person to be distributed in the remaining five months of the year, alongside a 30 per cent increase in government sector wages and pensions which will take effect from October 1st.
Meanwhile, in July, the parliament approved government proposed amendments to the original 2010 budget which envisaged a substantial increase in government expenditures. The amended budget proposal put forward a 4.5 percent of GDP increase in spending on top of the originally approved budget for 2010, on the back of a revised projected increase in revenues of 3.1 per cent of GDP. As part of the amendments, overall spending is set to increase by 11.6 per cent relative to the amount originally budgeted. Spending on wages and salaries, goods and services and domestic investment spending rise by 7.7 per cent, 13.9 per cent and 17.8 per cent respectively. (Together, these three items amounted to about 60 per cent of public spending in 2009). Overall, the fiscal deficit would deteriorate from 5 per cent of GDP to 6.4 per cent.
As approved, the 2010 budget amendments, coupled with the expansionary fiscal stance in the Mid-Term Budget Framework (MTBF), would set the stage for a return to macroeconomic instability through pro-cyclical fiscal policy and to a fresh bout of extremely high inflation. There remain significant financing pressures in the near term, not least due to banking restructuring costs on the expenditure side, and the expiration of the Windfall Profits Tax in 2011 on the revenue side. Donor funding is drying up too.
Under the MTBF for 2011-2013, the government plans to increase the stimulus to the economy with cash and non cash distribution to every citizen, supplying around MNT 4 trillion from the Human Development Fund for this purpose. To accommodate this and other expenditures, the MTBF also projects further expansion of fiscal expenditure to almost 51 per cent of GDP in 2011. Although the government has announced that it intends to issue a substantial amount of debt later in the year on international capital markets, capital flows to emerging markets have dropped sharply amidst the financial market volatility arising from the Euro area's sovereign debt troubles. As a result debt financing on commercial terms may prove costly for a low-rated sovereign like Mongolia.
Accordingly, the agenda for continued fiscal consolidation remains extremely important for Mongolia. The adoption of, and adherence to, the Fiscal Stability Law recently passed by the Parliament will be key in Mongolia's efforts to constrain fiscal spending to prudent and sustainable levels, and also
for managing the huge revenue inflows expected from the Oyu Tolgoi mine from 2016 onwards. The law targets a structural budget deficit (along the lines of Chile's structural balance rule) of 4 per cent of GDP in 2011, falling to 2 per cent by 2013. It also restrains expenditure growth to not more than the rate at
which the economy is growing. Through the creation of a fiscal stability fund, a portion of revenues expected from the OT project will be invested overseas, helping to mitigate the negative Dutch Disease effects that large inflows of foreign exchange can bring.
(to be continued)
