Evaluation of Mongolian Fiscal Policies:
CPIA Approach [1]
I. Introduction
A. Background and Justification of The Paper
This paper analyzes the Mongolian fiscal policies during the period of 2001 through 2008. Hence, it does not reflect the current situation after 2008 of Mongolian fiscal and economic performances arising from the recent volatile change of international prices of mineral resources particularly copper and gold. To understand the context of this paper, it would be useful to briefly review what has happened after 2008 in connection with before 2008, which will be done in the next paragraph.
Mongolian economy and public finance had been doing well, or rather booming, until the middle of 2008 thanks to the rising prices of minerals particularly copper which was and is the main export of Mongolia. In September 2008, however, the international financial crisis or the subprime crisis, hit the world, and the copper price fell substantially. As a result, Mongolian mineral export values fell and the government revenue related to minerals was reduced. Consequently, overall balance of public finance for 2008 was minus 4.9% of GDP (IMF 2010c, p.6). This deficit was mainly financed by the quick expenditure cut by the government and international assistances from IMF, the World Bank, Asian Development Bank, Japan and others. In early 2009, Mongolian economy and public finance were in deep trouble. It was projected that the government would not be able to finance 2009 budget, and actually the overall fiscal balance was minus 5.4% of GDP for the entire year of 2009 (ditto). This was also financed by the same international assistance. The GDP growth rate was minus 1.6% in 2009 (IMF 2010c. p.13). With this background, starting from the end of 2008, the government of Mongolia took strong policy measures to stabilize the economy and shore up the public finance. Looking at the world economy, the international financial crisis bottomed out in March 2009, i.e., USA and World economy started to grow. Its effect on Mongolia was felt in 2010. In 2010, Mongolian economy has started to grow thanks to new investments in its mineral sector [4], rebound of international mineral prices in particular copper price, and increasing coal export (IMF 2010c, p.3). In addition to these, we would add the effect of substantially expanded public expenditures in 2010, whose size was 61.2% of GDP (IMF 2011c, p.6). The GDP grew at 6.1% in 2010 (IMF 2011c, p.16).
Despite above development in the economy and public finance after 2008, we feel that the basic concerns resulting from this analysis based on data 2001-2008 remain relevant and almost the same concerns exist even at present in 2011. Both the Mongolian fortune and trouble are coming from its mineral resource revenues. If we take out the disturbing effects of international mineral prices on the public finance, status of fiscal policies seems roughly to be almost same before and after 2008.
B. Purpose
The purpose of this paper is to assess the fiscal policy of Mongolian government during the period of 2001 through 2008. In particular, the paper’s interests are on fiscal sustainability, fiscal impact on economic growth, and pro-cyclicality of budgets.
C. Method of Analysis
In order to achieve the purpose above, we assess the above three aspects of Mongolian fiscal policies (sustainability, economic impact, and pro-cyclicality) using the “Section 2 Fiscal Policy” assessment method of the Country Policy and Institutional Assessment (hereinafter CPIA) approach by IDA (an organization within the World Bank to assist the poorest countries).
The CPIA approach by IDA is the framework to assess the quality of a country’s policy and institutional framework. More concretely, it refers to the framework of poverty reduction, sustainable growth, and the effective use of development assistance from IDA to a particular country. Since our purpose is to assess the fiscal policies, however, this paper uses only the part of fiscal policy assessment of CPIA approach. Hence, only the “Section 2 Fiscal Policy” part of CPIA approach is used as an analysis method of this paper. The Fiscal Policy section is listed in Appendix A of this paper. Since the section does not clearly define the assessment criteria and their measurement methods (refer to Appendix A), we have developed detailed assessment criteria and their measurement methods [5] based on the general principle of the Fiscal Policy section of the CPIA. We call them the Fiscal Policy Performance Measurement (FPPM) indicators, which is explained below. These indicators were used in this paper to assess the performance of fiscal policies of Mongolian government.
The set of FPPM indicators are listed in Table 1 below. Since the Fiscal Policy assessment is called “Criteria 2” in CPIA, we call our indicators as “Sub-Criteria (SC)”. As clear from Table 1, Sub-Criteria (SCs) are expressed in negative form such as “un-sustainability of fiscal policy.” The rating system of each sub-criterion is also developed based on the Section 2 of CPIA (refer to Appendix A). The lowest score 1 indicates the worst quality of fiscal policy performance, and the highest score 6 indicates the best quality of performance. Their detail is explained below.
As you see in Table 1, the SC set in principle measures the fiscal policy performances with respect to (1) short and medium-term sustainability of fiscal policies (SC-A) and (2) fiscal impacts on macro-economy (SC-B). Though it is not indicated in the CPIA, we have added one more sub-criteria (3) pro-cyclicality of fiscal policies because it is important for the current Mongolian fiscal policies. The pro-cyclicality criterion is introduced as the last part of SC-B. Sub-Criterion A (SC-A) is further divided into four sub-criteria: (1) fiscal impact on debt sustainability (SC-A1a); (2) sustainability (positive or negative) of primary balance (SC-A1b); (3) flexibility of fiscal policy adjustment against external shocks (SC-A2); and (4) adequate provision of infrastructure budget (SC-A3). Sub-Criterion B is further divided into six sub-criteria: (1) inflationary fiscal policy or not (SC-B1); (2) impact on crowding out of private investment (SC-B2); (3) impact on external balances (SC-B3); (4) marginal productivity (efficiency) of government spending (SC-B4a); (5) distortions introduced by taxes to finance government spending (SC-B4b); and (6) pro- or counter-cyclicality of fiscal policy (SC-B5). Each SC is explained in the next paragraph. Rating scale 1 through 6 is concretely defined in the explanation of SC-A1a below.
SC-A: sustainability of fiscal policy. This sub-criterion intends to measure and assess the soundness of fiscal policy regarding the fiscal condition itself. The primary concern about the fiscal condition is, of course, its sustainability. The sustainability is typically represented by its debts taking into consideration the country’s monetary and exchange rate policies. This can be measured by the following two sub-criteria SC-A1a and SC-A1b.
Table 1. Fiscal Policy Performance Measurement Indicators
Criteria
|
Sub-Criteria
|
Description (negative description)
Rate is 1 if the most negative, and 6 if the most positive →
|
Rate
|
2
|
A
|
Un-sustainability of Fiscal Policy
| |
A1
|
Narrow un-sustainability of fiscal policy
| ||
A1a
|
Negative fiscal impact on debt sustainability = Continuous increase (decrease) in Debt/GDP ratio (related to the Criterion 3 of CPIA which this paper does not cover)
|
( )
| |
A1b
|
Fiscal imbalance = unsustainable (=minus) primary balance = “fiscal exp. including interest payments” > fiscal rev.
|
( )
| |
A2
|
Inflexible adjustment against external shocks (=no budget amendment or no adjustment in implementation)
|
( )
| |
A3
|
Insufficient provision of public goods including infrastructure for medium-term economic growth (=insufficient budget and its realization)
|
( )
| |
B
|
Negative Impact on Growth =Negative Fiscal Impact on Macroeconomy
| ||
B1
|
Inflationary fiscal policy and performance
|
( )
| |
B2
|
Fiscal performance or policy creating crowding out
|
( )
| |
B3
|
Fiscal performance or policy creating external imbalance
|
( )
| |
B4
|
Fiscal performance or policy being anti-economic growth
| ||
B4a
|
Low marginal productivity of gov. spending
|
( )
| |
B4b
|
Large distortions introduced by taxes to finance gov. spending
|
( )
| |
B5
|
Pro-cyclical fiscal policy (as against counter-cyclical)
|
( )
|
Note: Sub-criteria were developed by Hiroshi UENO based p.7 of CPIA 2007 Assessment Questionnaire, by OPCS, WB, Dec. 19, 2007.
SC-A1: narrow sustainability of fiscal policy. This SC intends to measure debt problem and primary balance which may create the problem of accumulating debt.
SC-A1a: debt/GDP ratio. SC-A1a intends to measure the degree at which the fiscal policy results in continuous increase in debt/GDP ratio. The rating 1 through 6 are in principle defined based on the historical performance with respect to the sub-criterion. The rating for SC-A1a is 1 (= the worst condition), if for a prolonged period, fiscal policy has contributed to unsustainable public debt; 2 = fiscal balance is likely to lead (or already leading) to the increase the debt/GDP ratio; 3 = sporadic efforts to address the deficit and the debt through fiscal policy have been made but not maintained consistently, or implemented through ad-hoc measures that cannot be maintained (such as unrealistic cuts in real wages, or cuts in public investments with high long-term returns); 4 = fiscal policy has been consistent with debt sustainability, but there have been occasional slippages, and fiscal balance was sometimes reached at the expense of reducing public goods/services provision; 5 = fiscal policy has been consistent with debt sustainability, and fiscal balance has been financed in a non-inflationary way and has been consistent with adequate credit for the private sector and the sustainable path of public debt; 6 = the best condition = for an extended period, fiscal policy has been supporting debt sustainability, and the primary surplus has been managed to maintain a stable and low debt/GDP ratio [6].
SC-A1b: primary balance. SC-A1b intends to measure how bad the primary balance is. Or alternatively, it measures whether or not the fiscal policy results in creating financing deficits that cannot be adequately financed. Debt is a cumulative deficits. For debt analysis, the expenditures should include off-budget government spending and contingency liabilities such as government guarantees to any non-governmental entities.
SC-A1b intends to measure the degree at which the primary balance has been being managed well to ensure the fiscal sustainability. The primary balance is “all fiscal revenues excluding borrowings (domestic and international)” minus “fiscal expenditures excluding interest payments and principal repayment of debts.” That is, the primary balance is the fiscal balance assuming out all the outstanding debts and new borrowings. Its rating is 1, if the primary balance has been managed worst, being always large minus and getting worse; and 6 = the best management, the primary balance being always zero or plus.
SC-A2: the degree of flexible adjustment to shocks. SC-A2 intends to measure the degree at which public expenditures/revenues can be adjusted to absorb shocks when needed. The rating is as follows: 1 = have been inflexible in adapting to shocks; and 6 = the expenditures/revenues have been adequately adjusted to shocks without jeopardizing the quality and quantity of public goods/services.
SC-A3: provision of public goods. One of the main purposes of fiscal expenditure is to provide public goods (soft and hard) to the people. SC-A3 intends to measure the degree at which public goods/services have been provided. It intends to measure whether the provision, including infrastructures, is consistent with the medium term economic growth plan. The rating is as follows: 1 = the worst = the provision has been greatly insufficient to support the medium term growth; and 6 = the provision has been adequate to support the medium term growth.
SC-B: fiscal impacts on macro-economy. Though PER [7] intends to assess the fiscal impact on socio-economic conditions, CPIA Criterion 2 concentrates only on macro-economic stability or imbalances. For this purpose, we developed the SCs as follows.
SC-B1: fiscal impact on inflation. The rating is as follows: 1 = the worst impact = for a prolonged period, the fiscal policy has been contributing to the high inflation; 2 = fiscal balance will likely to lead (or is already leading) to inflation; and 6 = for an extended period, the fiscal policy has been supporting zero or low inflation (less than 3% per annum).
SC-B2: crowding out. This intends to measure how fiscal policy or performance is contributing to crowding out of private investments. The rating is as follows: 1 = for a prolonged period, public borrowings (through floating government bonds) have been crowding out private investments because of shortage of savings and resulting high interest rates; and 6 = for an extended period, the fiscal policy has not been crowding out the private investments.
SC-B3: external imbalance. This intends to measure how fiscal policy or performance affecting external imbalances of a country, particularly current account deficits. The rating is as follows: 1 = for a prolonged period, the fiscal policy has been contributing to high current account deficits; and 6 = for an extended period, the fiscal policy has not been contributing to current account deficit.
SC-B4: impact on economic growth. This intends to measure how fiscal policy or performance is working against economic growth. This can be measured by the following two SCs.
SC-B4a: efficiency/marginal-productivity of public spending. This intends to measure the degree at which the marginal productivity of government spending is, as compared to the productivity of private sector investment. That is, if a public spending is used for an unproductive and/or inefficient use, then its productivity is less than that of the private sector. Also, if the size of government expenditures increases, the marginal productivity of its additional spending goes down as compared to that of the private sector. 1 = for a prolonged period, the productivity/efficiency of the public spending has not been as productive as the private sector; 6 = for an extended period, the productivity/efficiency of the public spending has been more than or as productive as the private sector.
SC-B4b: distortions introduced by taxes. This intends to measure the degree at which the distortions introduced by the tax collection creates. A government has to collect taxes to provide public goods for the people, if not borrowing. More taxes on income will reduce the incentives to work, and more taxes on interests will reduce the savings and consequently reduce the available capital. Export taxes reduce export volumes. The rating is as follows: 1 = for a prolonged period, taxes (for examples, on income and interest) have been high/large and increasing.
SC-B5: Pro-cyclicality versus counter-cyclicality. This intends to measure the degree at which a fiscal policy is pro-cyclical or counter-cyclical. This is not included in CPIA criteria, but this is necessary because of the behavior of the Mongolian fiscal policies. The rating is as follows: 1 = for a prolonged period, policy responses to shocks have been very pro-cyclical; and 6 = for an extended period, policy responses to shocks have been very counter-cyclical.
II. Assessment of Fiscal Policy of Mongolian Government Using CPIA
A. Sustainability of Fiscal Policy
A1. Narrow Fiscal Sustainability
A1a. Fiscal Impact on Debt Sustainability (SC-A1a)
According to the statistics of debt and government expenditures for last 8 years (2001-8), the fiscal policy of the government did not make negative effects on the debt to GDP ratio (Table 1 below). The debt to GDP ratio has been decreasing on a continuous base from 2001 to 2008. From this point view, the debt sustainability has been improving well and the score of rating could be 5.
This good performance, however, was achieved mainly by huge increase in mineral related revenues. If one excludes the mineral revenues, the non-mineral primary balances (Figure 2 below) have been always minus and have been increasing from minus 0.6% of GDP in 2005 to minus 14.9% of GDP in 2008, with occasional improvements. This minus 15% of GDP in 2008 is alarming. In fact in the late 2008, international mineral prices collapsed, the mineral related revenues plummeted, and the government of Mongolia found it difficult to honor all the expenditures they planned for 2008. The government decided to borrow about US$205 million for the period of 2009-10 (IMF Country Report 09/130, p.12). This borrowing will bring the debt/GDP ratios in 2009 and 2010 up to about 47% and 48% respectively (ditto, p.19). Even with mineral related revenues, the debt/GDP ratio will go up and hence the suggested score of rating would be 3. If without the mineral related revenues, the primary balance would certainly deteriorate and the debt/GDP ratio would go up. Hence, the suggested score would be 2 without the mineral related revenues (see the past performance in Figure 2). Taking accounts of all these, the overall score for this criterion is 2.5.
The suggested score: 2.5
Table 1. Debt to GDP ratio and Government Expenditure
| |||||||||
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
| ||
1
|
Debt/GDP ratio
|
90.1
|
84.3
|
85.8
|
72.3
|
59.0
|
44.9
|
38.9
|
35.2
|
2
|
Government Expenditure (% in GDP)
|
43.9
|
39.0
|
34.9
|
33.5
|
27.2
|
33.3
|
38.0
|
40.2
|
Source: IMF Country Report No.08/201, July 2008 (p.47); World Bank, Mongolia Quarterly, January 2009 (p.17); IMF Country Report No.09/130; IMF Country Report No. 09/254, August 2009
| |||||||||
A1b. Fiscal Balance (Primary Balance) (SC-A1b)
The fiscal balance was sustainable with a reasonable or low rate of deficits, even with some short-term surpluses during the period of 2001-2005. However, the dramatic increase in the government expenditure starting from 2006 will create a problem of shortage in funding to finance the expanded expenditures in the medium term. The surpluses of the primary balance for 2005, 2006 and 2007 (Figure 2 below) are mainly caused by the mineral price hike in the world market. This can be seen from the Figure 2, where the primary and non-mineral primary balances are compared. During the all years of 2002-2007 the non-mineral balance of the government was in deficit. Consequently, the fall in mineral prices has reflected in the negative primary balance of -4.5% of GDP in 2008.
With the same reasons cited in the previous A1a section, the suggested score for this criterion is 2.5.
The suggested score: 2.5
Sources: NSO, The Socio-Economic Indicators for 2008; IMF, Country Report No.08/201, July 2008 (p.47); World Bank (2009), Mongolia Quarterly, January 2009 (p.17); IMF (2009b) Country Report No. 09/254, August 2009.
A2. Fiscal Flexibility (SC-A2)
If we take into account the last two budget amendments from 2007 and 2008 (Table 2 below), the government made amendments whenever the revenue and expenditure tendency and market condition changes. It shows the flexibility of the budget policy.
The suggested score: 4.0
Table 2. Fiscal Amendments 2001-2008
| |||
Fiscal Amendments
|
Comments
|
The Reason of the Amendment
| |
1
|
Amendment Oct, 2008
|
Increased the revenue by MNT 2.2 bln; cut the expenditure by MNT 131 bln. (1)
|
To limit the inflationary effect;
|
2
|
Amendment 2007
|
Increased the revenue by MNT 319 bln; increased the expenditure by MNT 409 bln. (2)
|
To make an adjustment on expenditure basing on good performance of revenue side;
|
Source: (1) “The Law about the Amendment on Budget Law for 2008”, October 2008; (2) “The Performance of the Budget of 2007”, both by Ministry of Finance, 2008 .
Note: MNT stands for MonGolian Togrog that is the national currency. Its annual average exchange rates (nominal) are Tg/US$ 1,102, 1,166 and 1,348 for 2001, 2008, and 2010 respectively (Source: National Statistical Office of Mongolia, Mongolian Statistical Yearbooks, 2001-2010).
| |||
A3. Provision of Public Goods/Services (SC-A3)
This sub-criterion measures whether sufficient budget was allocated to support the planned medium term economic growth. The government kept the ratio of capital expenditure/GDP between 3 to 10%, which is not so high, for last 8 years (Figure 3). But the fiscal performance statistics for last 8 years show that there are two different periods in the fiscal performance of Mongolian government. These two periods should be taken separately in the analyses.
The first is the period from 2001 to 2005. According to fiscal statistics, the government did decrease its total expenditure down to 27 percent of GDP while maintaining the capital expenditure share in GDP to support the medium term growth. This is good trend of fiscal policy in terms of infrastructure provision.
The second period is from 2006 to 2008. The government started to raise its capital expenditure in response to the sudden gains from windfall revenues from mineral exports, and the capital expenditure was doubled in 2007 to compare to the previous year in terms of share in GDP. Since the public capital expenditure in general supports the growth of the economy, this expansion of capital expenditure is a good sign for the medium term economic growth.
We may argue that this jump in capital expenditure in the second period can be interpreted as negative to the medium term growth since it led to a large expansion in the total fiscal expenditure (Figure 3). But this issue of large government expenditure should not be addressed in this section but be addressed elsewhere, since this section evaluates only the level of public goods provision. We also have a concern that capital expenditures seem not all to be used for highly productive projects, but again this topic should not be addressed in this section since it will be analyzed in SC-B4a. Though it is good that the capital expenditures increased, we have some information and concern about that the execution capacity of the economy and the government to absorb this increased capital investment may have not been enough.
To sum up, though the amount increased, there is some concerns about misallocation and insufficient implementation of the increased budget. Hence, the rating score is 4.
Suggested Score: 4.0
B. Fiscal Impact on Growth and Macroeconomy
B1. Inflationary Fiscal Policy and Performance (SC-B1)
In addition to the lax monetary policy of the Bank of Mongolia, the rapid increase in the government expenditures in 2006 and 2007 (Figure 3 above) supported the high inflations in 2007 and 2008 (Figure 4 below). Main causes of the increased government expenditures are the increases in (1) government wage bills, (2) social transfer, and (3) capital expenditures during the period of 2006 through 2008. The high inflations in 2007 and 2008 are mainly explained by domestic factors, not by the outside factors such as rise in imported goods prices (WB, Quarterly Report, Oct 2008).
Two concerns about the expansionary fiscal policies are the huge increases (1) in public wages and salaries and (2) in pension payments. Partially contributed by these expansionary fiscal policies. the share of wages and salaries within the total household disposable income in Mongolia increased from 29.4% in 2004 to 39.8% of GDP in 2007 (Table 3 below). Similarly, the share of pensions and allowances increased from 8.3% in 2004 to 15.3% in 2007 (NSO, Statistical Bulletin 2007). In total, both account for 37.7% in 2004 and 55.1% in 2007, which is a huge increase in their shares. This certainly contributed to high inflations in 2007 and 2008.
Table 3. Composition of Monthly Average Income per Household (in percent)
| |||||
2004
|
2005
|
2006
|
2007
| ||
1
|
Total Income
|
100
|
100
|
100
|
100
|
2
|
Wages and Salaries
|
29.4
|
38.8
|
37.8
|
39.8
|
3
|
Pensions and Allowances
|
8.3
|
10.3
|
11.4
|
15.3
|
4
|
Income from household businesses
|
31.1
|
30.5
|
30.0
|
27.3
|
5
|
Other
|
31.2
|
20.4
|
20.8
|
17.6
|
Source: NSO, Statistical Bulletin 2007 (Section 20).
Again, as in the previous section, we need to distinguish the two periods. In the period up to 2005, the continuously shrinking government expenditure did not initiate the inflationary effect in the economy. However, the government started to expand its expenditure from 2006, and the growth rate of government expenditure was 22.4%, 14.1% and 5.8% respectively in 2006, 2007 and 2008. This sudden increase in the government expenditure probably was reflected in the high inflation rates in 2007 and 2008 (figure 4 below).
Suggested Score: 2.0
B2. Crowding Out (SC-B2)
Crowding out is related to the amount of public bond issued. According to Table 4 below, Mongolian Parliament gave permissions for the government to issue bonds every year except for 2004 and 2008. The size of the permitted amount of bond has increased from MNT 10 billion [8] in 2001 to MNT 300 billion in 2009, and was about MNT 91 billion per year on average during the period of 2001-2009. The main purposes of issuing bond were to adjust money supply and to overcome cyclical shortages in the budget.
The government, however, has actually issued bond in amount less than the permitted limit by the Parliament. The bonds actually issued by the Government were 1.6% (2004), 0.6% (2005), 1.3% (2006), 0.9% (2007), and 0.02% (2008) of GDP (Table 5 below). These shares in GDP are small and decreasing. Hence, there is no need for concern with crowding out.
Suggested score: 5.0
Table 4. Parliament Decisions for Permission to Issue Government Bond (2001-2009)
Table 5. Bond Issued by Government of Mongolia (2004-2008)
B3. Effects of Fiscal Policy or Performance on External Imbalance (SC-B3)
Table 6 below shows that the fiscal policy for last three years (2006-8) was expansionary. It supported the consumption through lowering income tax and disbursing the windfall tax revenue (revenue related to mineral exports) as social transfer and wage increases. Current Mongolian economy, where the consumption is more oriented to imports, the increase of domestic demand resulted in the growth of imports. During the last three years, the imports grew much faster than the exports including minerals (Table 6 and Figure 5 below). The import of 75% of GDP in 2008 is alarming. Because of this high imports, we observe the high trade imbalance equal to -22.3 percent of GDP in 2008 (Table 6 and Figure 5). The expanding public expenditure and growing GDP seem to be the major sources of external imbalance.
Suggested Score: 2.0
Table 6. External Trade and Government Expenditure (in percent of GDP)
| |||||||||
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
| ||
1
|
Imports
|
62.6
|
59.2
|
57.1
|
56.3
|
53.0
|
48.0
|
55.7
|
74.8
|
2
|
Petroleum imports
|
8.6
|
9.8
|
11.6
|
13.1
|
13.4
|
14.4
|
18.5
| |
3
|
Imports (excluding petroleum)
|
50.6
|
47.3
|
44.7
|
39.9
|
34.6
|
41.3
|
56.3
| |
4
|
Exports
|
50.1
|
41.2
|
43.3
|
48.1
|
46.3
|
49.1
|
50.1
|
52.5
|
5
|
Nonmineral exports
|
18.8
|
19.2
|
17.5
|
13.6
|
13.3
|
10.7
|
20.9
| |
6
|
Trade Balance
|
-12.4
|
13.1
|
-12.8
|
-8.3
|
-5.2
|
1.8
|
1.5
|
-22.3
|
7
|
Government Expenditure
|
43.9
|
39.0
|
34.9
|
33.5
|
27.2
|
33.3
|
38.0
|
40.2
|
Source: IMF, Country Report No.08/201, July 2008 (p.47); World Bank (2009).
| |||||||||
B4. Fiscal Policy or Performance Creating Anti-economic Growth
B4a. Marginal Productivity of Government Spending (SC-B4a)
With the rise of mineral export prices the Government gained the extra revenue equal to more than 10 percent of GDP in 2006, and more than 14 percent in 2007 (IMF 2008a, Country Report No.08/200). That revenue was spent mainly (1) to increase the government wage bill, (2) to make social transfer universal, and (3) to increase capital expenditure (Figure 6 below). In general, the windfall income was used for poorly targeted social spending.
In addition, the size of the public expenditures has been expanding steadily from about 27% of GDP in 2005 to about 40% of GDP in 2008 (Figure 2 above). 40% is too high as compared to its GDP per capita at US$ 1,981 in 2008 (IMF 2009a, Country Report 09/130, Table 1 on p.19). Coupled with the low implementation capacity at executing ministries, this large size of expenditures will certainly reduce the marginal productivity of government spending.
Suggested Score: 2.0
B4b. Large Distortions by Taxes to Finance Government Spending (SC-B4b)
The tax burden has been declined in Mongolia, with significant lowering rates for personal income tax, corporate tax and VAT starting from January 2007. Hence, there is not much distortionary effect from taxes.
Suggested Score: 5.0
B5. Pro-cyclical vs. Counter-cyclical Adjustment of Fiscal Policy (SC-B5)
As shown on Table 3 in Section A2 above, the government was and is quite flexible in responding to shocks. As we saw in Section A2, however, the flexibility was used in a pro-cyclical way which may create an unstable condition for economic growth.
The budget amendment in 2007 (Table 2 above) was the expansionary amendment being based on the rising revenue trend from mineral exports. In contrast to this expansionary adjustment, the fiscal amendment of October 2008 (Table 2 above) was a belt tightening one because of the sharp decline in revenues caused by the fall international mineral prices after the US subprime financial crisis. The government, at the same time, wanted to limit the inflationary effect of the budget. As illustrated by these, the fiscal policy was flexible quickly responding to environmental changes, but the problem is that the responses were done in a pro-cyclical way, as a consequence exacerbating the economic and fiscal fluctuations.
Suggested score: 2.0
III. Overall Scores and Conclusions
The purpose of this paper is to assess the fiscal policy of Mongolian government employing the method of Fiscal Policy Performance Measurement (FPPM) based on the “Section 2 Fiscal Policy” of the CPIA approach by IDA. The following table (Table 7) summarizes the assessment results of final scores on the fiscal policy of Mongolian government during the period 2001 through 2008.
Based on the scores in Table 7 and simply taking averages, the fiscal policy of Mongolia is assessed to be at score 3.3 in terms of the sub-criterion A “fiscal sustainability”, at score 2.9 in terms of the sub-criterion B “impact on macroeconomy”, and at score 3.1 in terms of the overall rating. According to the CPIA guideline [9] the rating of 3.1 illustrates the sporadic efforts of the government to manage macroeconomic imbalances, but implemented without maintaining the consistency, i.e. employed temporary measures. The policy, in general, is insufficient to support the medium term growth.
The evaluation results show there are four major problems and two minor policy problems. The four major problems are all related to the bad fiscal impacts on the macro-economy (SC-B), which are as follows. (1) The expansionary fiscal policies in the past have been building up pressures towards higher inflation (SC-B1). (2) The expansionary fiscal policies also have been encouraging larger consumption, then larger importation, resulting in trade deficits. And the non-mineral trade deficits are becoming much larger than the overall deficit where non-mineral deficits have been masked by the huge increase in mineral export receipts (SC-B3). This fiscal effect, coupled with the up-valuation of the real exchange rate, is damaging domestic non-mineral manufacturing industries. (3) It seems there was the low marginal productivity of government spending, because the spending expansion was made mainly in such sectors as increase in civil servant salaries and increase in social security such as child payments and pensions (SC-B4a). It is good to have capital expenditures rising, but a concern is that
Table 7. The Scores on Fiscal Policy Performance Measurement (2001-2008)
CPIA Criteria
|
Sub-Criteria
|
Description (negative description, 1=negative, 6=positive)
|
Scores
| |
2-Fiscal Policy
|
A
|
Sustainability of Fiscal Policy
|
3.3
| |
A1a
|
Fiscal Impact on Debt Sustainability
|
2.5
| ||
A1b
|
Fiscal Balance (Primary Balance)
|
2.5
| ||
A2
|
Fiscal Flexibility
|
4.0
| ||
A3
|
Provision of Public Goods
|
4.0
| ||
B
|
Fiscal Impact on Growth and Macroeconomy
|
2.9
| ||
B1
|
Inflationary Fiscal Policy and Performance
|
2.0
| ||
B2
|
Crowding Out
|
5.0
| ||
B3
|
Fiscal Performance or Policy towards External Imbalances
|
2.0
| ||
B4
|
Fiscal Performance or Policy towards Anti-economic Growth
|
3.5
| ||
B4a
|
Marginal Productivity of Government Spending
|
(2.0)
| ||
B4b
|
Large Distortions Introduced by Taxes to Finance Government Spending
|
(5.0)
| ||
B5
|
Pro-cyclical vs. Counter-cyclical Adjustment of Fiscal Policy
|
2.0
| ||
Overal Scores on Fiscal Policy
|
3.1
| |||
Note: Sub-criteria were developed by Hiroshi Ueno based on p.7 of CPIA 2007 Assessment Questionnaire, by OPCS, WB, Dec. 20, 2007.
the allocational and implementational efficiency of this capital expenditure might not have been high. And (4): fiscal policies have been pro-cyclical rather than counter-cyclical, resulting in wide fluctuations in the economy and budget (SC-B5).
The two minor problems are both related to the sustainability of fiscal policies (SC-A). These are SC-A1a and SC-A1b. (1) The non-mineral primary balance of the budget has been always minus and increasing, and hence the fiscal impact on debt sustainability is quite negative (SC-A1a). In other word, the government debt is sustainable not because of good fiscal policies but because of rapidly increasing mineral revenues. (2) With exactly the same reason as (1) above, the non-mineral primary balance has always been negative, and even the overall primary balance including mineral revenues has been decreasing and has become minus 4.5% of GDP in 2008. Fiscal policy has been expansionary, accommodating all revenue increases from mineral related revenues. Hence, fiscal policy has been negative to fiscal balances in terms of non-mineral primary balances.
IV. Policy Implications
The past expansionary fiscal policy was the major cause of the recent collapse (starting towards the end of 2008 and continued to 2009) of the national budgets. Not to repeat this mistake, policy implications of above analyses are as follows.
(1) In our draft of this paper in March 2010, we recommended for Mongolian Parliament to approve the draft Fiscal Stability Law [10] proposed by the Ministry of Finance. We now know the Parliament approved the law in the summer of 2010 (IMF 2011c, p.6). This law is expected to be able to stop the pro-cyclical and expansionary budgets. If we look at the draft translation of the law, however, it seems the law lacks the limit on the budget size, even though it has the limit on the size of debt. If it is so, it is a big problem. This point needs to be further examined with the official translation of the law.
(2) Revenues from mineral resources is better be separated from the general revenues and general budget in order (a) to avoid pro-cyclical budgets and “resource curse” and to achieve counter-cyclical budgets, through saving during mineral boom years and spending it at bust years, (b) to prepare for the future period of resource depletion, and (c) to smoothen the budget level over the period of many years beyond medium term of 3 years.
(3) The existing Human Development Fund (formerly called Development Fund) is better be modified to become a full-fledged Stabilization Fund in order to collect all the mineral related revenues and to manage it in accordance with the three purposes stated in above (2).
(4) The appreciating real exchange rate suggests there exists Dutch disease. Under the pressure of Dutch disease, government expenditure is better give priorities to (a) hard and soft infrastructures to assist those economic sectors and people who are disadvantaged by the Dutch disease, such as agriculture and livestock sector, non-mining manufacturing sector including small-and-medium enterprises, and ordinary transportation sector, (b) diversification of industries, particularly for export diversification as Indonesia did in the past, and (c) upgrading human resources to assist industrial diversification and to prepare for the future resource depletion.
(5) Under the counter-cyclical fiscal policy, the expansionary expenditures at the time of economic downturn are better be used for three purposes: (a) for augmenting the government revenues, (b) for supporting industries that are adversely affected by the downturn, and (c) rescuing and supporting the individual victims of the downturn.
Appendix A: Fiscal Policy Assessment Method in CPIA of IDA
Source: p.7 of World Bank (2007).
References
ADB (Asian Development Bank) (2003), Mongolia: Economic Update, Asian Development Bank Paper, April 2003 (available at: http://www.adb.org).
BOM (2009), Bank of Mongolia monthly Bulletin, February 2009, (available at: http://www.mongolbank.mn).
GOM (Government of Mongolia) (2007), The Law about the Development Fund of Mongolia, February 2007, Ulaanbaatar, Mongolia
GOM (Government of Mongolia) (2009), Budget Laws of Mongolia for 2000-2009 (available at: http://parliament.mn/ )
IMF (2008a), Country Report No. 08/200, 2008.
IMF (2008b), Country Report No. 08/201, July 2008.
IMF (2009a), Country Report No. 09/130, 2009.
IMF (2009b), Country Report No. 09/254, August 2009.
IMF (2010a), Mongolia: 2009 Article IV Consultation, third Review under Stand-By Arrangement, Staff Report”, February.
IMF (2010b), Mongolia: Fourth Review under the Stand-By Arrangement and Request for Modification of Performance Criteria, March.
IMF (2010c), Mongolia: Fifth and Sixth Review under the Stand-By Arrangement and Rephasing of Purchases, September.
IMF (2011c), Mongolia: 2011 Article IV Consultation-Staff Report; Staff Supplement, March.
MOF (Ministry of Finance) (2008), The Law about the Amendment on Budget Law for 2008, October 2008.
MOF (Ministry of Finance) (2008), The Performance of the Budget of 2007, Ministry of Finance, 2008
NSO (National Statistical Office of Mongolia) (2002-2011), Mongolian Statistical Yearbooks, 2001-2010, July, 2002-2011.
NSO (National Statistical Office of Mongolia)(2007), Statistical Bulletin 2007, Mongolia
NSO (2008), The Socio-Economic Indicators for 2008, Ulaanbaatar, Mongolia
WB (World Bank) (2005), Country Policy and Institutional Assessments, 2005 Assessment Questionnaire, by OPCS, WB, Dec. 20, 2005
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WB (2008), Mongolia Quarterly, October 2008.
WB (2009), Mongolia Quarterly, January 2009
[1] This paper is one of the results of Joint Study between Japanese and Mongolian researchers on Mongolian fiscal system and policies. The Joint Study and this paper were supported by (1) the Grant-in-Aid for Scientific Research of the Japan Society for the Promotion of Science, Category: Scientific Research (C), Project Number 19530256 (FY2007-2009), and (2) Nanzan University Pache Research Subsidy I-A-2 for the 2009 academic year. We would like to express our deep gratitude to both of them. Authors are also grateful for quite useful comments made by Mr. Manduul NYAMANDELEG, Fiscal Policy Officer, Ministry of Finance, Government of Mongolia, Mongolia, who is a member of the Joint Study and an author of another Joint Study paper.
[4] In particular, the start of new investment in the Oyu Tolgoi copper-and-gold mining has helped the economy
[5] Sub-criteria were developed by Hiroshi Ueno based p.7 of CPIA 2007 Assessment Questionnaire, by OPCS, WB, December 19, 2007.
[6] This should also be assessed by the “Criteria 3: Debt Policy” of CPIA. But this is beyond the scope of this paper.
[7] PER stands for the Public Expenditure Review, which is undertaken routinely by the World Bank to assess the performance of public financial policies and institutions of any developing country government.
[8] MNT stands for MonGolian Togrog that is the national currency. Its annual average exchange rates (nominal) were MNT/US$ 1,102, 1,166 and 1,348 for 2001, 2008, and 2010 respectively (Source: National Statistical Office of Mongolia, Mongolian Statistical Yearbooks, 2001-2010).
[9] Country Policy and Institutional Assessments, 2007 Assessment Questionnaire, by OPCS, WB, Dec. 19, 2007
[10] The law is called Fiscal Stability Law by the unofficial translation of the law into English by the Government of Mongolia. But IMF (for example its 2010a, 2011c) is calling it Fiscal Responsibility Law. Since Fiscal Responsibility Law seems to be an old name of the law and since the translation by GOM uses Stability, this paper uses the name of Fiscal Stability Law.
1 comment:
A good work. we needed this analysis. Thank you
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