Abstract
Selected Issues
Making Mongolia’s Fiscal Framework Fit for the Future1
The conduct of fiscal policy in Mongolia has recently improved, but over a longer horizon, it suffered from high volatility and deficits. Aware of these challenges, the authorities adopted a comprehensive framework of fiscal rules in 2013 but adherence to the rules has been uneven. Options to enhance the effectiveness of the fiscal rules include recalibrating and streamlining the existing rules and strengthening enforcement mechanisms. Unlike in other resource-rich countries, the fiscal policy framework should abstract from Mongolia’s mineral wealth because Mongolia still has high public debt and its mineral reserves are highly uncertain.
1. Predictable and sustainable fiscal policy is crucial for unlocking Mongolia’s significant economic potential. Mongolia is a small, resource-dependent economy with large economic potential (see IMF 2017). Unlocking this potential to create jobs and economic opportunities for all Mongolians is the country’s overarching challenge. In pursuit of this goal, one important step will be to improve the conduct of fiscal policy. In the past, fiscal policy has exacerbated the volatility of the international commodity cycle, leading to large deficits and rapid rise in public debt. Mongolia adopted a comprehensive fiscal rules framework in 2013, but its effectiveness has been mixed.
2. This paper reviews the current framework and presents simple options to strengthen the fiscal rules. Section A presents stylized facts about Mongolia’s fiscal policy performance compared to other resource-rich countries. Section B and C review and assess Mongolia’s fiscal framework, and present options for improvement. Section D discusses why Mongolia’s mineral wealth should not be a factor in the recommended revamp of the framework. Section E concludes by summarizing the three recommendations towards building a more resilient and robust fiscal framework—a framework fit for the future.
A. Stylized Facts About Fiscal Policy: High Volatility, Deficits and Debt
3. Stylized fact: volatility in public spending has been high, driven by large swings in public investment. In the period from 1990 to 2018, the rolling five-year standard deviation of growth of public expenditure in Mongolia has been significantly higher than the median standard deviation in a comprehensive sample of resource-rich countries (see chart; country sample is from IMF 2012). Zooming into spending categories reveals that Mongolia has especially suffered from large swings in public investment; volatility in current spending, in contrast, has been average. To illustrate, public investment increased by almost four percentage points of GDP in 2016, one of the largest increases in public investment in the sample of resource-rich countries since 1990s. This increase was followed by an equally large decline in 2017 in response to acute threats to fiscal sustainability. Public investment has displayed a strong and positive relationship with commodity prices over the past decade (see chart). The procyclical behavior of public investment therefore helps explain high overall volatility in public spending. This finding is important: cross-country experience suggests that volatility harms economic activity, lowering average growth in the short run and also damaging long-run potential (IMF 2015). Volatility creates uncertainty, which undermines consumer demand and investment in new structures and technology.
Real Expenditure Volatility
(5-year rolling SD; In percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Real Expenditure Volatility
(5-year rolling SD; In percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Real Expenditure Volatility
(5-year rolling SD; In percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.
Public Investment and Commodity Prices
(Growth; In percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Public Investment and Commodity Prices
(Growth; In percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Public Investment and Commodity Prices
(Growth; In percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.4. Stylized fact: high deficits have fueled public debt, most recently following the global decline in commodity prices in 2013–14. Mongolia’s primary deficit reached 13 percent of GDP in 2016, its highest level in recent history. The ratio of public debt to GDP peaked at 87 percent of GDP in the same year, well above prudent debt thresholds. Even after a significant fiscal consolidation over the past two years, Mongolia’s public debt was among the highest of resource-rich countries (only Bahrain and the Republic of Congo had higher debt levels at the end of 2018). With high public debt, Mongolia’s ability to withstand future swings in commodity prices is limited. And commodity price volatility is an empirical reality—the historic volatility of a Mongolia-specific commodity price index (a weighted average of coal and copper prices) suggests that the index will change (either increase or decrease) by 50 percent from its current level over the next three years with a 15 percent probability. Creating buffers that will allow protecting public spending, and by implication the Mongolian economy, against this downside scenario is an important objective for the conduct of fiscal policy.
Primary Balance
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Primary Balance
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Primary Balance
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.
Public Debt
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Public Debt
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.Public Debt
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: Mongolian authorities and IMF staff.5. The two previous stylized facts suggest that Mongolia stands to gain significantly from reducing spending volatility and keeping public debt on a sustainable path. Building fiscal space by reducing public debt will allow Mongolia to weather short-run declines in mining revenue and to protect public investment that can stimulate jobs and growth. Prudent spending and primary surpluses in the years ahead would help bring public debt back in line with levels of peer resource-rich countries. The next section takes a fresh look at Mongolia’s experience with its fiscal rules framework aimed at guaranteeing sustainable and predictable fiscal policies.
B. Mongolia’s Experience with Fiscal Rules
6. Mongolia passed the Fiscal Stability Law (FSL) in 2010 to enhance the conduct of fiscal policy. The FSL aimed to make fiscal policy more predictable in the face of volatile mining revenue and ensure debt sustainability. Three fiscal rules became effective in 2013, addressing the deterioration in the fiscal position after the GFC. The law requires the budget proposal for each fiscal year to comply with the rules. The FSL was an important first step towards improving the conduct of fiscal policy.
7. The FSL obliges the budget to comply with three fiscal rules. The parameters of the rules at the time the FSL was approved were as follows:
i. Expenditure Rule. The growth rate of total nominal expenditure is not to exceed whichever is higher: the growth rate of non-mining nominal GDP in the budget year (projection) or the average growth rate of non-mining nominal GDP over the previous 12 years.
ii. Structural Fiscal Balance Rule. The structural balance must be equal to or stronger than a deficit of 2 percent of GDP. The structural balance is defined as the overall balance minus cyclical revenues on major minerals. Cyclical revenues are those which stem from prices above a 16-year average (previous 12 years, the budget year and projected prices in the next 3 years). If actual mining revenues are above the structural level, the positive difference would be saved in the Fiscal Stabilization Fund.
iii. Debt Rule. The present value (PV) of government debt should not exceed 40 percent of GDP after 2014 (higher debt ceilings were set in 2011–2013). At the time of adoption, public debt stood at 31 percent of GDP. To calculate the NPV of public debt, the law discounts all future interest and principal payments of concessional public debt by using an interest rate of 5 percent.
General Government Debt (NPV)
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities; and Staff estimates.General Government Debt (NPV)
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities; and Staff estimates.General Government Debt (NPV)
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities; and Staff estimates.8. The effectiveness of the law has been uneven. For most of the period since 2013, governments have not complied with the original parameters in the law, either because of overly loose budget submissions or significantly weaker than budgeted outturns. To accommodate this, Parliament adjusted the parameters in the laws, making four amendments to the debt limit and the structural deficit ceiling in the 2015–17 period. In 2016, the debt ceiling was lifted permanently from 40 percent to 60 percent in present value terms. In addition, fiscal performance suffered from off-budget quasi-fiscal spending by the Development Bank of Mongolia and Bank of Mongolia, which further aggravated consolidated fiscal deficits and debt. The non-compliance and frequent revisions have compromised the credibility of the rules and led to costly volatility in expenditures and sharp increases in public debt.
Structural Fiscal Balance: Rule vs. Actual
(in percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities; KPMG audit report and Staff estimatesStructural Fiscal Balance: Rule vs. Actual
(in percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities; KPMG audit report and Staff estimatesStructural Fiscal Balance: Rule vs. Actual
(in percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities; KPMG audit report and Staff estimates9. Three critical challenges have beleaguered the FSL. First, the original calibration of the rules was not internally consistent. The operational expenditure rule has a cyclical component that is tied to projected non-mining nominal GDP growth. When past or projected growth is high, the expenditure rule allows a level of spending that is too loose to reach the other targets under realistic assumptions. Second, there were loopholes to the laws in the form of quasi-fiscal spending by SOEs, including DBM and BOM. And third, the rules lack a specific procedure by which Parliament is required to adjust subsequent budgets to account for past slippages.
Expenditure Growth: Rule vs. Actual
(in percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities and Staff estimatesExpenditure Growth: Rule vs. Actual
(in percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities and Staff estimatesExpenditure Growth: Rule vs. Actual
(in percent)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Mongolian authorities and Staff estimatesC. Options to Strengthen the Fiscal Rules Framework
10. Although the basic structure of the FSL remains sound, there is scope to streamline and strengthen the rules. This can help with monitoring, communication, and achieving rapid debt reduction. Several changes could be considered going forward.
11. First, A debt ceiling of 50 percent of GDP in nominal terms seems more appropriate for Mongolia. This anchor was calibrated to ensure safe levels of public debt under most adverse scenarios, and further adjusted to reflect Mongolia’s significant share of concessional lending. An FAD template was applied to Mongolia, which calibrates debt anchors for low income countries using stochastic simulations on historical shocks. This methodology suggests a debt anchor of 45 percent of GDP to be sufficient in providing buffers against adverse shocks in the medium term. Considering Mongolia’s substantial share of concessional lending, the debt anchor is adjusted upward to 50 percent of GDP. The proposed anchor is appropriately tighter than the current debt ceiling of 60 percent of GDP in PV terms, given Mongolia’s vulnerability to commodity price and exchange rate shocks.
Mongolia Debt Dynamics
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: FAD Debt Anchor template and Staff estimates.Mongolia Debt Dynamics
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: FAD Debt Anchor template and Staff estimates.Mongolia Debt Dynamics
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Source: FAD Debt Anchor template and Staff estimates.12. Second, expenditure ceilings should ensure rapid debt reduction towards 50 percent of GDP and operate as an automatic stabilizer thereafter. Public debt is still elevated at 73 percent of GDP at end-2018, notwithstanding the authorities’ success in tightening fiscal policies since 2017 and reducing public debt by 13 percentage points. To bring debt to the safe level, the priority of fiscal policy in the next five years should be rapid debt reduction.
Transition period (2020–2024). Based on the current macro projections, nominal expenditure growth should be capped at 13 percent—significantly below the long-run average growth rate of non-mining nominal GDP—to reach the debt anchor of 50 percent of GDP by 2024.
Steady state (i.e. when debt is below 50 percent of GDP). Growth of public expenditure should be capped by long-run average of historical non-mining nominal GDP. The revised rule removes the cyclical factor in the original expenditure rule and allows automatic stabilizers to operate.
13. Third, the structural balance rule could be suspended. With the debt ceiling as the fiscal anchor and expenditure rule providing operational guidance, the structural balance rule imposes little additional constraint on government spending. In fact, the government can adjust structural revenue projections to meet the deficit target with little scrutiny as there has been no independent body (such as a Fiscal Council) that examines the validity of the technical assumptions. In addition, the structural balance rule is difficult to communicate to the public, challenging to monitor, and can postpone fiscal adjustment at a time of falling commodity prices, as structural revenues and hence structural balance will appear better than actual fiscal balance.
14. Fourth, transfers to the Future Heritage Fund could be suspended until debt reaches the debt anchor. The FHF was set up in 2016 to serve as a sovereign wealth fund.2 The law governing the FHF requires the state budget to make deposits to the fund from four sources: i) dividends on the public shares of mining-sector SOEs; ii) 65 percent of mineral royalty payments excluding transfers to the Fiscal Stabilization Fund; iii) 20 percent of excess mineral revenues relative to the budgeted amount; and iv) investment income. Annual inflows are estimated at 2–3 percent of GDP. According to the law, no withdrawal from the Fund, other than management fee, is allowed until 2030. With public debt still above 70 percent of GDP and low investment returns worldwide, starting a SWF now is not consistent with comprehensive asset-liability management of the government’s balance sheet as a whole. As a resource-rich country, Mongolia needs to save for future generations, but debt reduction should take priority at the current juncture (see discussion on PIH analysis below).
15. Extending the coverage of public debt in the fiscal rules to SOEs can help monitor and control state contingent liabilities. Quasi-fiscal lending by DBM was a main contributor to the debt buildup in 2013–2016. Under the Fund’s EFF-supported arrangement, such activities have been curtailed in 2017–2019, following the adoption of new the Banking and the DBM laws. However, the authorities have recently announced intentions to embark on a series of mega projects through SOEs to overhaul Mongolia’s infrastructure (e.g. roads, railroads, power plants and coal-washing plants). These projects may impose significant fiscal risks, despite its potential positive impact on trade balance and long-term growth. Data availability on SOE debt is uneven at the moment, but there are ongoing efforts to include key SOEs in the GFS reporting. The debt anchor could be adjusted after SOE data become available.
16. A successful implementation of the revised fiscal rules would benefit from a more independent Fiscal Council. The recently created Fiscal Council could play an important role in building the credibility of the revised fiscal rules by: (i) issuing an independent assessment of government’s budget assumptions; (ii) assessing eventual deviations from the fiscal rules; and (iii) recommending corrective measures in case budget outturns significantly deviate from the limits set by the fiscal rules. The FSL contains an escape clause that allows for a temporary suspension of the fiscal rules under two types of negative shocks: a sharp fall in commodity prices and a projected recession. As of now, it is up to the government to declare that the conditions for a temporary suspension of the rules are met. However, the FSL does not stipulate the length of the suspension nor any correction mechanism for the immediate period after the suspension when the limits are presumably still out of reach. The fiscal council is well placed to fill this void. Specifically, the council could analyze the reasons for deviating from the fiscal rules to recommend to the government: (i) an appropriate timeframe for suspending the application of the fiscal rules; (ii) and appropriate corrective fiscal actions to restore compliance. For the sake of transparency and accountability, the Council would submit these opinions to the government. The government in turn would respond publicly to the Council’s opinion and subsequently submit revised fiscal plans to parliament.
D. A Fiscal Rules Framework Without Considering Mongolia’s Mineral Wealth?
17. Mongolia has vast mineral wealth that would typically guide fiscal policy. The fiscal rules framework proposed in this paper emphasizes fiscal sustainability viewed through the lens of public debt. But the proposal does not contain an explicit reference to Mongolia’s mineral wealth, which could be substantial (IMF 2017). Typically, countries with significant natural resource revenues would incorporate the expected income from expected future resource flows when developing fiscal policy (IMF 2012). Mongolia’s mineral wealth could generate revenues far into the future and could therefore be brought into the government’s intertemporal budget constraint.
18. The Permanent Income Hypothesis (PIH) is the standard way to incorporate mineral wealth into the design of fiscal policy. The PIH calculates fiscal balance targets that are consistent with the government’s intertemporal budget constraint over the very long run. The calculation of these targets typically proceeds in three steps: (i) putting a nominal value on all of Mongolia’s proven mineral wealth (even if most of it is still underground); (ii) calculating total wealth, the sum of mineral wealth and current financial assets (international reserves and government deposits) and liabilities (public debt); and (iii) creating an annuity from this notional amount of total wealth that is constant over time, which can serve to finance a permanent budget deficit of the same magnitude as the annuity (see Annex for more details about the methodology and assumptions).
19. However, Mongolia is ill-suited to use this approach to guide fiscal policy. Standard PIH estimates would risk suggesting deficit targets that would lead to spiraling public debt in the near and medium term. Mongolia has two features that prevent the PIH from producing reliable fiscal anchors.
i. Uncertainty. The quantities and time-profile of mineral extraction are highly uncertain. Specifically, it is unclear how much of Mongolia’s mineral wealth can be extracted in a commercially viable manner; the existence of substantial mineral deposits on Mongolian territory itself, on the other hand, is not in doubt. To illustrate, estimates of proven reserves of coal range from 3 to 162 billion metric tons, depending on assumptions about future coal prices and costs of extraction. Mongolia’s coal may therefore run out in 20 years or last for several centuries. Using conservative estimates would basically mean that mineral wealth will run out soon and therefore should not play a dominant role in the conduct of fiscal policy. Conversely, a higher estimate of mineral wealth can unleash destabilizing debt dynamics (see next paragraph).
ii. High debt. The PIH can suggest deficit targets that are weaker than current debt-stabilizing balances. The result would be to put public debt, which is already very high, on an explosive path. This is true even if over the very long run the PIH-derived deficits would be consistent with the government’s intertemporal budget constraint. This problem is particularly likely to arise if one uses more optimistic estimates of total mining reserves as they would imply mining revenue long into the distant future. In other words, the PIH is not fit for purpose to deal with countries where public debt is already high and debt reduction is an important near-term fiscal policy objective. To illustrate this point, remember that Mongolia’s projected public debt will be just below 60 percent of GDP in 2024, according to current projections. The primary balance that would stabilize debt at this level is about 0.5 percent of GDP, assuming that effective interest rates and nominal GDP are at their long-run averages. The PIH, on the other hand, would suggest an average primary balance target of 0 percent (when using the intermediate estimate of Mongolia’s total mineral wealth). Primary balance targets would be even weaker if mineral wealth was assumed to be higher, as higher mineral wealth implies larger sustainable fiscal deficits. Because of the gap between debt-stabilizing and targeted deficits, public debt could become unsustainable over a 50-year horizon.
Coal Reserves
(In billion of metric ton)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: NSO, Ministry of Mining.Coal Reserves
(In billion of metric ton)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: NSO, Ministry of Mining.Coal Reserves
(In billion of metric ton)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: NSO, Ministry of Mining.
Public Debt Under Permanent Income Hypothesis
(Percent of Nominal GDP; Resource wealth spent in 70 years)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Country authorities; and Fund staff estimates and projections.Public Debt Under Permanent Income Hypothesis
(Percent of Nominal GDP; Resource wealth spent in 70 years)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Country authorities; and Fund staff estimates and projections.Public Debt Under Permanent Income Hypothesis
(Percent of Nominal GDP; Resource wealth spent in 70 years)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Country authorities; and Fund staff estimates and projections.E. Conclusion
20. Mongolia will benefit significantly from reducing volatility in public spending and bringing down public debt to safe levels. As a commodity exporter and a young democracy, Mongolia is highly vulnerable to both external shocks (including commodity price fluctuations and changes in demand from China) and domestic political cycles. Reducing fiscal vulnerabilities by building buffers and increasing the predictability of fiscal policy will be essential to prevent boom-bust cycles in the future, and therefore should be the overarching goal of fiscal policy at present.
21. The existing rules-based fiscal framework can be strengthened to help achieve that goal. Improvements suggested in this paper focus on: (i) recalibrating the fiscal rules, centered on a more prudent debt ceiling, a simple expenditure rule that facilitates debt reduction over the medium term and a suspension of the structural balance rule; (ii) including key SOEs in public debt coverage, and (iii) enhancing the enforcement of the fiscal rules with the help of an independent Fiscal Council and guided by a legally binding correction mechanism. These reforms would help to achieve the ambitious objective of bringing down public debt to 50 percent of GDP by 2024. At that point, Mongolia will have built a significant safety cushion to dampen with the vagaries of the international commodity cycle, which creates the necessary conditions for a more predictable and sustainable fiscal policy. These structural improvements in turn will be a crucial milestone in Mongolia’s quest to generate jobs and economic opportunity for all Mongolians.
References
International Monetary Fund, 2012, “Macroeconomic Policy Frameworks for Resource Rich Developing Countries.”
International Monetary Fund, 2015, Fiscal Monitor: The Commodities Roller Coaster. Washington, DC, October.
International Monetary Fund, 2017, Mongolia: 2017 Article IV Consultation—Staff Report, IMF Country Report No. 11/140.
International Monetary Fund, 2018, “Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability.” IMF Staff Discussion Note SDN/18/04.
International Monetary Fund, 2018, “How to Calibrate Fiscal Rules A Primer.”
Annex I. Assumptions for PIH Calculation
The table at the end of the annex summarizes the assumptions underlying the PIH calculation labelled “medium reserves” in paragraph 19. This particular application of the PIH assumes 37 billion tons of unexplored coal reserves (towards the lower end of the range of existing estimates of unexplored coal reserves) and a time horizon of 70 years to spend the entirety of Mongolia’s resource wealth—a finite horizon for spending resource wealth can be appropriate if countries have large development needs, as in the case of Mongolia (IMF 2012).
Several assumptions about macroeconomic parameters are necessary to translate the quantity of underground mineral resources into an estimate of financial wealth, which can then be related to fiscal policy. To start with, assumptions about the evolution over time of mineral prices, production, and the exchange rate underpin the calculation of the total value of export revenue stemming from extracting and selling minerals between now and the distant future. In addition, as only a fraction of the export revenue ends up in the coffers of the government (mainly through royalties, corporate income tax, and dividends from state-owned enterprises), the calculation needs to assume a sharing rule to allocate export revenue to the budget. Assumptions about inflation and interest rates are required to discount back into the present future mineral revenue. Finally, assumptions about sustainable growth rates of the non-mining economy and population growth are necessary to translate the notional amount of total wealth into a constant annuity, which can be constant in real terms, as a share of non-mining GDP or on a per-capita basis.
Under the assumptions, the PIH suggests a constant non-mining primary balance (that is, fiscal balances without mining revenue and interest rate costs) of -4.3 percent of non-mining GDP. If deficits are constant in real terms (growing with inflation) or on a per-capita basis (growing with inflation and population growth), the PIH-consistent deficit path starts out higher and gradually decline towards -2 percent of non-mining GDP.
Non-Mining Primary Deficit under PIH
(In percent of non-mining GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Country authorities; and Fund staff estimates and projections.Non-Mining Primary Deficit under PIH
(In percent of non-mining GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Country authorities; and Fund staff estimates and projections.Non-Mining Primary Deficit under PIH
(In percent of non-mining GDP)
Citation: IMF Staff Country Reports 2019, 298; 10.5089/9781513541208.002.A003
Sources: Country authorities; and Fund staff estimates and projections.Those assumptions are empirically calibrated on recent macroeconomic trends of the Mongolian economy. This approach may or may not be appropriate, in so far as the past may or may not be a good guide for the future. Long-run macroeconomic parameters are always surrounded by large uncertainty. It is therefore easy to imagine a preference for more conservative or more aggressive assumptions. And any change in assumptions will lead to different fiscal balance targets. As a caveat though, bear in mind that the PIH calculations abstract from Mongolia’s existing public debt and do not force the fiscal balance targets to be above the debt-stabilizing fiscal balances—this omission can lead to destabilizing debt dynamics, as discussed in paragraph 19.
Assumptions for PIH Calculation
Assumptions for PIH Calculation
| (Percent, unless otherwise indicated) | |||
| Mineral sector | |||
| Recovery rate coal (cumulative extraction until 2100/proven reserves) | 48.7 | ||
| Recovery rate copper (cumulative extraction to 2100/proven reserves) | 100.0 | ||
| Coal production growth | 3.0 | ||
| Copper production growth | 0.1 | ||
| Domestic consumption growth of coal | 1.0 | ||
| Domestic consumption growth of copper | 0 | ||
| Nominal increase in copper and coal prices | 3.0 | ||
| Interest rates, inflation, exchange rate | |||
| Nominal interest rate MNT | 10.0 | ||
| Nominal interest rate USD | 4.0 | ||
| GDP deflator inflation | 6.0 | ||
| Real interest rate MNT | 3.8 | ||
| Real interest rate USD | 2.1 | ||
| Annual exchange rate change MNT/USD | 3.0 | ||
| Real sector | |||
| Real GDP growth | 3.0 | ||
| Real non-mineral GDP growth | 3.0 | ||
| Population growth | 1.0 | ||
| Fis cal sector | |||
| Share of mineral revenues to budget | 17.0 | ||
| PIH parameters | |||
| Time to reach PIH post WEO projections (years) | 5 | ||
| Time horizon for modified PIH (years) | 70 | ||
Assumptions for PIH Calculation
| (Percent, unless otherwise indicated) | |||
| Mineral sector | |||
| Recovery rate coal (cumulative extraction until 2100/proven reserves) | 48.7 | ||
| Recovery rate copper (cumulative extraction to 2100/proven reserves) | 100.0 | ||
| Coal production growth | 3.0 | ||
| Copper production growth | 0.1 | ||
| Domestic consumption growth of coal | 1.0 | ||
| Domestic consumption growth of copper | 0 | ||
| Nominal increase in copper and coal prices | 3.0 | ||
| Interest rates, inflation, exchange rate | |||
| Nominal interest rate MNT | 10.0 | ||
| Nominal interest rate USD | 4.0 | ||
| GDP deflator inflation | 6.0 | ||
| Real interest rate MNT | 3.8 | ||
| Real interest rate USD | 2.1 | ||
| Annual exchange rate change MNT/USD | 3.0 | ||
| Real sector | |||
| Real GDP growth | 3.0 | ||
| Real non-mineral GDP growth | 3.0 | ||
| Population growth | 1.0 | ||
| Fis cal sector | |||
| Share of mineral revenues to budget | 17.0 | ||
| PIH parameters | |||
| Time to reach PIH post WEO projections (years) | 5 | ||
| Time horizon for modified PIH (years) | 70 | ||
By Robert Blotevogel (FAD), Rui Xu (APD), and Buyankhishig Khulan (APD).
The FHF was the successor to the Human Development Fund that was terminated in 2016. As a result, it inherited 1 trillion MNT debt from the HDF to the state budget. Buoyant fiscal revenues in 2017 and 2018 allowed FHF to pay down all the debt by June 2019. Transfers in 2H2019 will accumulate in the FHF.
