Mongolia: World Bank welcomes policy adjustment measures, calls for fiscal discipline while protecting the poor

Mongolia: World Bank welcomes policy adjustment measures, calls for fiscal discipline while protecting the poor

Mongolia: World Bank welcomes policy adjustment measures, calls for fiscal discipline while protecting the poor

The FINANCIAL -- Mongolia’s budget deficit widened sharply in the first seven months of 2016. Budget expenditures increased by 33 percent while budget revenues declined by 3.3 percent, compared with the same period last year, according to the World Bank’s latest Mongolia Economic Brief, released on September 3.

The World Bank projects that the budget deficit will reach over 18 percent of GDP by the end of 2016, without corrective measures. The report cautioned that government debt, including sovereign guarantees, will reach over 90 percent of GDP under the current trend.

The report welcomed the swift measures announced by the new government to address the growing fiscal risks, and called for strong fiscal and monetary policy adjustment to address increasing fiscal and balance of payments risks.

“The recent announcement of the fiscal situation including off-budget expenditures was a significant step toward a credible fiscal consolidation,” said James Anderson, World Bank Country Manager for Mongolia. “The growing budget deficit and rising government debt, however, highlight the need for further actions to make the fiscal path sustainable.”

The report noted that significant liquidity has been provided by the central bank to the government, and cautioned that continued central bank financing of the government deficit could exacerbate macroeconomic vulnerability.

“The most pressing challenge facing the Central Bank is to disengage monetary policy from fiscal activities and safeguard international reserves,” said Taehyun Lee, World Bank Senior Economist and lead author of the report. “The recent decision of the Central Bank to raise the policy rate helped ease exchange rate volatility. Monetary policy, however, will face difficult challenges if the budget deficit continues to remain high, and rely on central bank funding.”

The World Bank also cautioned that falling mineral exports and large public debt repayments would add growing challenges to the fiscal account and the balance of payments in 2017 – challenges that could be mitigated by strong fiscal and macroeconomic management.

At the same time, the report emphasized the importance of protecting the most poor and vulnerable during fiscal adjustment.

“Measures to constrain expenditures and bolster revenues are needed, yet the plight of the poor needs to be considered in selecting the specific policies,” said Anderson. “Mongolia’s generous system of social welfare transfers could protect the poor more if programs targeting the poor were funded and expanded.”