Representatives of the International Monetary Fund (IMF), World Bank (WB), Ministry of Finance and Mongol Bank made a report on the nation’s current economic condition, possible risks and opportunities from their point of view.
Permanent representative of IMF to Mongolia Neil Saker: There are some positive results in the macro-economic regulations
Currently, we can’t say that Mongolia is facing an economic recession. It is true that there were some difficulties in recent years. Foreign economy and market environment are not pleasant for the country. Everyone knows that there was a sharp decrease in copper and coal prices. Moreover, foreign direct investment (FDI) has drastically dropped. All these factors had very negative influence on the nation’s economic condition. Last year, increase in state budget expenditure impacted the balance of payments. But now I think that the policy environment has improved from before.
Policy makers understood the economic condition very well, and they are implementing an integrated plan for a wide-range of macro changes. Fully fulfilling the plan will definitely improve the situation in the next few years. FDI, which has a crucial role in the economy, is almost frozen. This also slows down the economic growth. Generally, main economic drivers are slowing. Inflation is also expected to decrease. I recommend drawing FDI by advancing the investment environment. The government of Mongolia also understands this issue.
We can say that there are some positive results in the macro-economic regulation. Currency demand has also decreased. In other word, there will be less pressure on exchange rates and foreign currency reserves.
In the last few months, exchange rate was comparatively stable. Starting investments of the mega projects, improving the investment environment, and continuous implementation of the integrated plan for macroeconomics will bring positive results in the nation’s economy. It will also bring FDI to Mongolia, and create sustainable and healthy economic condition.
Head of the Economic Policy Department of the Ministry of Finance, G.Batkhurel: Finance Ministry looks to ways to compensate budget deficit
Mongolia’s economic growth has been slowing down since 2014. FDI has drastically decreased, slowing down the economy. During this time, the cabinet decided to work on a plan to prevent potential crisis and overcome economic difficulties. The plan was approved by Parliament, and approval of the plan opened up possibilities for overcoming the crisis. Even though only few months have passed since the plan was put into action, there are already some positive results. For example, in the first quarter of 2015, foreign trade income had increased, reaching 370 million USD. This result positively influenced the balance of payments. Also MNT exchange rate has stabilized, slightly strengthening its value.
Although our ministry faced some challenges, on the other side we see them as possibilities. We improved budget structure with a more realistic plan for the budget expenditure. Budget revenue assumptions are also “down to earth”.
Even today, prices of some raw materials have not recovered well to fully generate budget revenues in the foreign market. But amending the budget and decreasing its expenditure will bring positive effects in the total budget balance. Every year, the state budget is approved to be equal to certain amount of the nominal price to GDP. Regarding this year, the budget was approved equal to five percent of GDP. This erases problems in financing the budget deficit. Currently, Mongolia is doing this by trading government bonds in the domestic market, but this solution is comparatively high in cost.
Therefore, this solution will not benefit the private sector. In other words, commercial banks will have to purchase government bonds instead of issuing loans. Loans are investment for the private sector. This is not a good solution, so the Finance Ministry is aiming to change this structure. In the first quarter of 2015, government bonds worth only 30 billion MNT were traded domestically. This figure is low compared to the budget deficit. Even though financing the budget deficit is challenging, we are comparing many financing possibilities. Currently, issues on amending the 2015 budget is under discussion. We are studying the experiences of other countries on improving the budget deficit and budget balance.
Permanent Representative of WB to Mongolia James Anderson: Sharp drop in investment was a big challenge for Mongolia
Sudden decrease of FDI was a big challenge for sure. The government had to work in a condition where economic growth, import, and FDI have all decreased. The most important thing is to focus on steps and take measures to ensure the nation’s economic growth.
The New Government for Solutions was established five or six month ago, but they started talking honestly and openly about difficulties. They recognized previous decisions that impacted the sudden decrease of FDI, and started taking measures to improve the investment environment and fix prior mistakes.
I think that the new government is implementing sustainable laws on budget, reducing budget expenditure and generating real assessments on the current situation. Therefore, the objectives are more based on reality and achievable. But now the most vital thing is to implement the plan in real life. Some objectives are already being implemented, while others are to be implemented soon. It is important to plan things based on real calculations of revenue.
The macroeconomic management issue can’t be considered finished. This issue will also arise in the future. Especially for Mongolia, where the economy is greatly dependent on the natural resource sector, the macroeconomy is crucial.
As for the investment environment, I think that the government started giving positive signals to foreign and domestic markets. The cabinet recognized that prior decisions impacted the weakening trust of investors, and commenced real steps for advancing the current condition.
It is obvious that Mongolia wants to fix mistakes from the previous decisions, but it can be explained from many sides.
Firstly, state officials are pursuing short-term profits, and rushing too much to establish big agreements and negotiations. But this is not the main point. The most crucial thing is to create a condition for drawing long-term investment. Mongolia needs time for creating trust, recover confidence, and impress foreigners.
Advisor to the Governor of Mongol Bank S.Bold: Economic condition is stable and positive
Reviewing the macroeconomic and monetary policies that have been implemented in the last two years will show that these measures were taken to prevent potential crisis in the nation’s economy in 2013. In a country where structure has problems, that is reliant on few sectors and lack a diversified economy, implementing measures to address these issues was needed. The response measure is choosing a policy on stabilizing the nation’s economy.
The pressure on the income of the public was mitigated. Therefore, we prevented creating unstable conditions in the finance sector, namely prevented losing bank liquidity and capital adequacy ratio. We commenced a long-term sustainable saving policy.
While reviewing the macroeconomic indicators of the first four months of 2015, it shows positive results and principal changes.
There have been great changes in the foreign trade balance and current balance of payments. This result is expected to be maintained in the future. It means that the economy will still grow, even though FDI has stopped. Inflation is expected to decrease to the targeted level.
Foreign currency reserves are also stable and able to supply import demands for six months. Last month, the currency exchange market was stable without any interference from Mongol Bank. We overcame the most difficult period, and the basic condition for a healthy and sustainable growth has been created.
We could say that the long-term economic trends of Mongolia are positive, but we will face short-term challenges. In a challenging situation like this, FDI will not improve. We should use other resources, ways and methods to stimulate economic growth. In particular, portfolio and other investments. By doing this, we will be able to maintain a balanced economic growth in the short term. Of course, at the same time we have to keep taking measures to bring FDI. FDI will boost the nation’s economy for sure.