World Bank cautions on Mongolia’s spiralling deficit

5 May 16

The World Bank has recommended that Mongolia implement spending controls after its budget deficit in the first three months of 2016 reached two-thirds of the annual target.

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Coal truck in Mongolia

Falling commodity prices have dampened the impact of the discovery of vast reserves of high-grade coal and other commodities in Mongolia.

 

The bank said a large revenue shortfall and rising expenditures had led to the rapidly spiralling deficit, and that commodity exports were likely to offer no respite due to continued weak prices.

James Anderson, World Bank country director for Mongolia, said the country needs to strengthen its fiscal position now to remain within “sensible limits” of fiscal stability.

Between January and March this year, Mongolia’s deficit reached just over $306m – an almost fourfold increase on the $72m accumulated over the same period last year.

This equates to 2.6% of annual gross domestic product. The annual deficit target is 4% of GDP.

While budget expenditure increased by 24.4% over the same period due to increases in interest payments on government debt, purchases of goods and social welfare spending, revenue collections have fallen.

After decades of poverty and sluggish development, the discovery of vast reserves of high-grade coal, copper and gold the economy began to boom.

This had been expected to triple the country’s economy by 2020 and push millions of its people into the global middle class, according to the OECD. But mining revenues have taken a severe blow amid the commodity price slump, with royalties plummeting by 73% compared to a year ago.

This is likely also to cause of a decline in corporate tax revenues, which have halved compared to last year.

The bank said most consumption and import-related taxes are also exhibiting sluggish growth, reflecting this subdued economic activity in both the mining and non-mining sectors. Overall revenues fell by 11% year-on-year following a 3% annual decline over 2015.

While the government has managed to raise $750m through syndicated loans and sovereign bonds, the bank said spending control measures are needed to contain the deficit.

“Overall revenue collections are likely to remain far weaker than the annual budget plan unless the commodity market significantly improves in the near future,” the banks Mongolia Economic Brief said.

“Spending increases at the current rate would make it difficult to contain the deficit... without abrupt spending cuts in the latter half of the year.”

The bank said pressure on the balance of payments – a $125m deficit by February this year – is likely to increase in 2017, with falling exports and large public debt repayments due in the coming year. 

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