IMF official: Budget should not be revised
Steven Barnet, the head of an IMF working group, answered our correspondent’s questions.
-The IMF started the Stand By program in Mongolia to help the country deal with the global financial crisis. Why is the program ending, and why is the IMF closing its Permanent Representative Office in Mongolia?
-The IMF working group has discussed the Stand By program and has decided to close the permanent representative office. There are two reasons. First, the Mongolian economy has recovered from the crisis rather quickly, thanks to good macroeconomic decisions by the government. Also, the economy has benefitted from strong copper prices and the commencement of two large coal mining projects. The closing of the Permanent Representative Office is related to budgetary issues at the IMF. Mongolian issues will now be handled through the Tokyo office.
-Economists say that, while the Mongolian economy is rapidly developing because of the mining sector, there are many risks. What is your advice?
-The working group has exchanged opinions with many people involved in this issue. There are possible risks to the economy, such as overheating and inflation. Besides, the domestic economy can still be negatively affected by the worsening of the global economy. If the price of raw material were to plummet, Mongolia’s budget and exports would be negatively affected. That is why the IMF working group believes Mongolia should limit state spending and strengthen its monetary policy.
-The Government is submitting a draft proposal to parliament that would increase state spending. What do you think of that?
The IMF working group believes revising the budget is unnecessary. The mineral resources sector accounts for two-thirds of Mongolia’s economy, and it has grown 30 percent. If the budget is revised, state spending would increase by 6.5 percent of GDP for three months. That would increase inflation, but not economic growth in those three months.
-What can be done to reduce state spending? What can be cut?
-Well, that’s a difficult question. It is clear that allocating allowances to citizens increases inflation. Therefore, the monthly payments of MNT 21,000 should be allocated differently. The money should be allocated to vulnerable people, and the remaining capital should be spent for building new schools and kindergartens or apartment and road construction. The Government and Parliament should reliably schedule expenses to guarantee macroeconomic stability.
-The IMF is advising the Government to reduce expenses. Do you think the Government will follow that advice?
-The Government receives economic recommendation and takes measures along those lines. Food prices are fluctuating dramatically because of supply issues. Inflation is rising. The IMF working group approves of the Mongol Bank’s interest increase, and advises further increases to reduce inflation. The budget should not be revised because it is not the proper macroeconomic policy.
-What about the Development Bank (DB) issue?
-The Government’s global bond issue was a good decision, but spending that revenue is a significant issue. If that money is spent for projects that would have an economic benefit, that would be the right decision. Remember, interest will accrue on those bonds. If the DB’s capital is spent on road projects, no cash will be earned. That would mean the DB’s money would be going in the wrong direction.
-Does Mongolia have a risk of a natural resource “curse”?
-Yes, Mongolia is at risk for a natural resource curse. Other countries have experienced this curse when their state spending increases too much and salaries rise too fast. Salary increase should follow production growth. In the worst case, Mongolia’s non-mineral resource sectors will see their income much reduced.
-The IMF started the Stand By program in Mongolia to help the country deal with the global financial crisis. Why is the program ending, and why is the IMF closing its Permanent Representative Office in Mongolia?
-The IMF working group has discussed the Stand By program and has decided to close the permanent representative office. There are two reasons. First, the Mongolian economy has recovered from the crisis rather quickly, thanks to good macroeconomic decisions by the government. Also, the economy has benefitted from strong copper prices and the commencement of two large coal mining projects. The closing of the Permanent Representative Office is related to budgetary issues at the IMF. Mongolian issues will now be handled through the Tokyo office.
-Economists say that, while the Mongolian economy is rapidly developing because of the mining sector, there are many risks. What is your advice?
-The working group has exchanged opinions with many people involved in this issue. There are possible risks to the economy, such as overheating and inflation. Besides, the domestic economy can still be negatively affected by the worsening of the global economy. If the price of raw material were to plummet, Mongolia’s budget and exports would be negatively affected. That is why the IMF working group believes Mongolia should limit state spending and strengthen its monetary policy.
-The Government is submitting a draft proposal to parliament that would increase state spending. What do you think of that?
The IMF working group believes revising the budget is unnecessary. The mineral resources sector accounts for two-thirds of Mongolia’s economy, and it has grown 30 percent. If the budget is revised, state spending would increase by 6.5 percent of GDP for three months. That would increase inflation, but not economic growth in those three months.
-What can be done to reduce state spending? What can be cut?
-Well, that’s a difficult question. It is clear that allocating allowances to citizens increases inflation. Therefore, the monthly payments of MNT 21,000 should be allocated differently. The money should be allocated to vulnerable people, and the remaining capital should be spent for building new schools and kindergartens or apartment and road construction. The Government and Parliament should reliably schedule expenses to guarantee macroeconomic stability.
-The IMF is advising the Government to reduce expenses. Do you think the Government will follow that advice?
-The Government receives economic recommendation and takes measures along those lines. Food prices are fluctuating dramatically because of supply issues. Inflation is rising. The IMF working group approves of the Mongol Bank’s interest increase, and advises further increases to reduce inflation. The budget should not be revised because it is not the proper macroeconomic policy.
-What about the Development Bank (DB) issue?
-The Government’s global bond issue was a good decision, but spending that revenue is a significant issue. If that money is spent for projects that would have an economic benefit, that would be the right decision. Remember, interest will accrue on those bonds. If the DB’s capital is spent on road projects, no cash will be earned. That would mean the DB’s money would be going in the wrong direction.
-Does Mongolia have a risk of a natural resource “curse”?
-Yes, Mongolia is at risk for a natural resource curse. Other countries have experienced this curse when their state spending increases too much and salaries rise too fast. Salary increase should follow production growth. In the worst case, Mongolia’s non-mineral resource sectors will see their income much reduced.
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