World Bank says Mongolia’s recovery impressive and broad-based

The World Bank’s Quarterly Economic Update says Mongolia has staged an impressive recovery from the steep recession of late 2008 and early 2009. Moreover, the economic recovery is becoming broad-based. Strong demand for copper and coal from China are fuelling the recovery, and are also helping to substantially improve the external balance. And imports are up by 55 percent in August on a year-on-year basis. The exception is the agriculture sector, due to the devastating impact of the dzud during the winter months, which wiped out substantial numbers of livestock.

Consumer prices show a rise in the headline inflation to 11.1 percent in August, following a dip to 8.8 percent the previous month. Rising core prices (which exclude volatile food and energy prices) contributed to half the increase in the headline number, with the remainder accounted for mainly by rising food prices. Price pressures are unlikely to abate in the coming months. First, the recent export ban in Russia and weather disasters elsewhere have led to a resurgence in the international prices of grains, which are mostly imported by Mongolia. These rose by 7.6 percent on the month in August. Second, the 30 percent wage and pension increase for public sector employees planned for October and the cash transfers currently taking place will help to keep demand side inflation pressures strong.

Fiscal balances have improved strongly in step with mineral-related revenues. Mongolia’s public finances are improving: on a 12 month rolling basis, the fiscal deficit fell to just 0.4 percent of GDP, down from 10.6 percent in August last year. Excluding net lending, the budget balance swung into a small surplus of 0.8 percent of GDP, its first since October 2008. In large part this recovery reflects the support to government revenues from buoyant commodity prices. The bulk of the increase in revenues was accounted for by the Windfall Profits Tax and domestic corporate and indirect tax revenues, reflecting the underlying improvement in the economy and the recovery in commodity prices.

However, as fiscal balances improved, pressures to increase spending also mounted. One round of cash transfers to redistribute the mining wealth has already taken place: MNT 70,000 per person in February. This is being followed by another round of MNT 10,000 per person per month beginning in August and lasting until December. Meanwhile, in July, parliament had approved government proposed amendments to the original 2010 budget which envisaged a substantial increase in government expenditures.

As the elections of 2012 draw closer, spending pressures will amplify even further. Fortunately, Parliament recently passed a Fiscal Stability Law, which forces 2011 revenues to be based on a long-term copper and coal price trend, and starts setting the resulting savings aside in a stabilization fund. The law targets a structural budget deficit (along the lines of Chile’s structural balance rule) of 4 percent of GDP in 2011, falling to 2 percent by 2013. It also puts a ceiling to debt (at no more than 40 percent of GDP) and restrains expenditure growth to not more than the rate at which the economy is growing.

The IMF Board concluded its final review of the Stand By Arrangement on September 9. The final review (a combined 5th and 6th) would have allowed the disbursement of US$46.4 million (two tranches). But the Mongolian authorities will not draw on the last two tranches, as the international reserves of the Central Bank are at an all time high, while the exchange rate has appreciated by 9 percent since the start of the year.

In the banking sector, NPLs and loans with principal in arrears as a share of total outstanding loans fell to 17% in August from a peak of 25% in Nov 2009. But current levels are still very high. The recent increase in inflation is rapidly bringing real interest rates down, and may lead to a return to negative real interest rates, particularly on deposits. Meanwhile, concentration of bank lending has increased with the 50 largest borrowers accounting for almost 30 percent of total loans (roughly MNT 863 billion).

In the fall session, Parliament is expected to debate and enact a number of important reform laws, continuing the post-crisis reform agenda. This includes a banking sector capacity strengthening and capital support program which contains, as a last resort tool, a stand-by bank recapitalization facility with proper covenants to protect the public funds. Parliament will also debate a social welfare reform law which would set the stage for the introduction of a targeted means-tested poverty benefit, replacing the formerly universal transfers. Passage of the law is also linked to the last tranches of the budget support operations of the ADB and Japan. Finally, Parliament is also expected to adopt a new Organic Budget Law which will lay out a new process of budget management, including improvements in public investment planning, and fiscal decentralization. For 2011 and 2012, in the run-up to elections, the challenge for Parliament will be to implement and adhere to the landmark laws it will have passed in the wake of the crisis, and to avoid the temptations of unsustainable increases in spending.

Comments

Popular posts from this blog