Sunday, April 6, 2014

ADB warns Mongolia of external imbalances

A new report by Asian Development Bank (ADB) forecasts Mongolia’s economic growth to reach 9.5 percent in 2014, driven by the start of copper production at the Oyu Tolgoi open pit mine last year and 10 percent in 2015.

“Rapidly declining foreign direct investment, falling coal exports, compounded by highly expansionary fiscal and monetary policy have created balance-of-payment (BOP) pressures. While the depreciation of the MNT has already stabilized the current account deficit, relieving BOP pressures, stabilizing the MNT and containing inflation will require a tightening of economic policy to rein in domestic demand growth.

Mongolia’s economic prospects also remain highly vulnerable to economic trends in the PRC and the global economy, while current policies offer little buffers to cope with possible external shocks,” the report said.
According to the ADB report, developing Asia will extend its steady economic growth in 2014 as higher demand from recovering advanced economies will be dampened somewhat by moderating growth in the People’s Republic of China.

ADB’s annual economic publication, Asian Development Outlook 2014 (ADO), released this month, forecasts developing Asia will achieve gross domestic product (GDP) growth of 6.2 percent in 2014, and 6.4 percent in 2015. The region grew 6.1 percent in 2013.

“The recovery in the major industrial economies is gaining momentum. Combined GDP growth in the United States, the euro area, and Japan is expected to pick up to 1.9 percent in 2014 from one percent in 2013 before strengthening further to 2.2 percent in 2015. Growth in the PRC is expected to moderate. The economy slowed to 7.7 percent in 2013 on impacts from tightened credit growth, pared industrial overcapacity, deepening local government debt, rising wages, currency appreciation, and the continuing shift in the government’s development priorities away from quantity toward quality. These factors persist and China’s growth is forecast to slow to 7.5 percent in 2014 and 7.4 percent in 2015,” said the ADO.
The report also warned that China’s sudden efforts to curb credit exchange might skid Mongolia’s rapid economic growth.

“While risks to the international outlook have eased, three areas warrant close monitoring. First, if efforts in China to curb credit expansion are too abrupt and excessively undermine growth, a deeper slowdown could drag down prospects for its trade partners, including Mongolia. Second, data on the recovery in the major industrial economies have been mixed; pointing to the possibility that demand for the region’s goods from these countries may be softer than envisaged. And third, a further shock to global financial markets from changes in US monetary policy cannot be ruled out,” the report said.

Widening income gaps threaten Asia’s poverty reduction efforts

The ADO said that widening income gaps are undermining decades of successful poverty reduction in developing Asia, meaning governments should proactively use fiscal policy to close gaps and promote more inclusive growth.

“Fiscal policy can and should play a bigger role in promoting inclusive growth in Asia,” said ADB’s Deputy Chief Economist Juzhong Zhuang. “Asian policy makers must act now to integrate inclusion targets into their budget planning to transition to a path where the benefits of growth are broadly shared.”

The report said that international experience shows that public spending can reduce income inequality. Government spending on education and health care, for example, broadens access for the poor to these vital services and helps level the playing field. “Making infrastructure affordable and accessible allows the poor to take better advantage of the opportunities that come with improved education and health.”

“Many regional economies have scope to direct more public resources toward this type of spending. But this capacity may not last as rising costs associated with aging societies and environmental pressures will squeeze fiscal space in coming decades. Asia’s revenue base remains small by global standards: During the 2000s, the ratio of tax revenue to GDP averaged 17.8 percent in developing Asia, well below the global average of 28.6 percent,” the report emphasized.

Options to raise revenue include broadening the base for personal income tax and value-added tax, enlarging corrective taxes and nontax revenues, and introducing naturally progressive taxes on property, capital gains, and inheritance, the report said.
ADO said that policy actions must support efforts to raise revenue and these should include systematically incorporating equity objectives into fiscal policy, preferably over a medium-term horizon; upgrading government fiscal data to better track public programs and assess their effectiveness; leveraging information and communication technologies to improve tax administration; and considering public–private partnerships in social infrastructure to help extend the reach of education and health care services.

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