Source: World Bank                   Date: 27 October, 2010

In its latest Mongolia Quarterly Economic Update, the World Bank notes that Mongolia’s impressive recovery from the steep recession of late 2008 and early 2009 is now 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. However, price pressures are unlikely to abate in the coming months. The 30 percent wage and pension increase for public sector employees 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. 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.

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 present session of 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.