The Government of Mongolia - External Partners Technical Meeting S.Bayartsogt, Minister of Finance Ulaanbaatar 30 th October, 2009 1
Content: Current economic situation Stabilization program Fiscal sustainability Possible challenges to the program implementation Budget draft for 2010 Conclusion 2
1. Current economic situation World economic indicators: Even though total world output increased by 4.6 percent annually during 2003-2007, the world output is expected to be negative due to the current financial and economic crises. In particular, economic growth of developed countries is forecasted to drop by 3.5 percent in 2009. 3
1. Current economic situation World trade, employment: Because of the decline in world total production, unemployment rate of the countries gone up dramatically and world trade decreased significantly in 2008-2009. 4
1. Current economic situation Price indices of the main commodities: Since 2008, the price of main export commodity of our country, namely copper, has been collapsed that led to a dramatic decline in tax revenue as well as an increase in trade balance s deficit. Index = 100 /as for January of 2004/ 5
1. Current economic situation Economic growth of Mongolia, and its projection : 12 10 8 6 4 2 0 7,3 8,6 10,2 8,9 1,4 2005 2006 2007 2008 2009* 2010* Economic growth Baseline economic growth in 2010 Targeted economic growth in 2010 2010 2010 7,4 4,5 In 2008, the nominal GDP of Mongolia reached to 6.1 trillions MNT that increased by 8.9 percent as compared with a year ago. However, by preliminary estimation, GDP growth is expected to be 1.4 percent in 2009. 6
Inflation rate/by year-on-year, percentage/: Inflation rate As a consequences of an expansion in the economy over the period of 2007-2008, the inflation rate raised to 22.1 percent. Nevertheless, the inflation rate has been gradually declining as for the September, 2009 and became 2.1 percent. The inflation rate is targeted to be not higher than 8 percent in 2010. 7
Net international reserves, in changes The amount of net international reserves had been declined since July of 2008; however, it has been accumulated since March of 2009 and reached more than 900 million USD in September of this year. 8
Annual average exchange rate of MNT vs. USD 1600,0 1500,0 1400,0 1300,0 1200,0 1100,0 1441,7 1418,0 1205,2 1169,3 1179,5 1170,4 2005 2006 2007 2008 2009* 2010** MNT against USD Exchange rate of MNT against USD remained relatively stable until 2008 From the beginning of 2009, the exchange rate declined sharply The first nine month average exchange rate of MNT vs. USD is 1441.7 The exchange rate is forecasted to appreciate in 2010, reaching annual average of 1418.0 9
As a result of sharp increase in inflation in 2007 and 2008 coupled with MNT depreciation in 2009, the construction sector experienced serious decline. The supply was decreased and the expenses were increased. Due to the financial and economic crises, the expectation of decline in real household income and economy slowdown was built. Thus, it led to a demand contraction in the construction sector. Furthermore, the performance of the mortgage and construction loans, which occupies significant amount in the overall loan portfolio of the banking sector, deteriorated, resulting in sharp increase in the total non-performing loans 10
Fiscal Indicators: General Budget, 2008 In Blsof MNT 3 000,0 2 500,0 2 000,0 1 500,0 1 000,0 500,0 0,0-500,0 Total Total Overall Balance Revenue Expenditure In Bls of MNT 3 000,0 2 500,0 2 000,0 1 500,0 1 000,0 500,0 0,0-500,0-1 000,0 General Budget, 2009 Total Total Overall Balance Revenue Expenditure Due to decline in the commodity price, the budget was amended in 2008 to implement contractionary fiscal policy in order to decrease public expenditure. However, the expected revenue truncated by 326 billion MNT, resulting in fiscal deficit of 296 billion MNT As a result of decline in budget revenue, the budget was amended in 2009 to decrease budget expenditure and to determine more efficient financing sources. However, the expected outturn of 2009 budget revenue is forecasted to come short by 109 billion MNT 11
To ensure fiscal stability and ease the balance of payment deficit, the Government of Mongolia agreed to implement Stand-by program with the IMF in March, 2009. The program was approved by the IMF Board of Directors on April 1, 2009. In the scope of Stand-by program: IMF provide funding of 153.3 million SDR (approximately 230.0 million USD) for 18 months to ease the balance of payment deficit World Bank, ADB, and the Government of Japan committed to finance 60, 60.0 and 50.0 million USD to cover the budget deficit 12
2. Stabilization Program Mission of Stand-by Arrangement program: To ensure the fiscal stability To improve the soundness of financial and banking sector To maintain flexible exchange rate To channel social welfare funds to targeted groups 13
2. Stabilization Program IMF World Bank ADB The Government of Japan Financing type Program loan Program loan Program loan Grant Program loan Committed amount /million USD/ 2009 financing /million USD/ 2010 financing /million USD/ 229.0 60.0 43.1 16.9 50.0 133.3 41.7 40.7-30.0 95.7 20 3.1 16.9 20 The government of UAE committed to provide 25 million USD in concessional loans, while the government of USA committed to grant 10 million USD in order to assist the implementation of the program The government of Australia granted 4 million USD in October of 2009 14
2. Stabilization program Net international reserves of BOM (million USD) Net domestic asset of BOM (billion MNT) Net bank credit to General government (billion MNT) New nonconcessional external debt maturing in 1 year or more (million USD) New nonconcessional external debt maturing in less than 1 year (million USD) Accumulation of new external payment arrears (million USD) Accumulation of domestic payment arrears (million USD) General government fiscal deficit (billion MNT) 04/30/2009 06/30/2009 09/30/2009 Target Outcome Target Outcome Target Outcome 335.0 441.0 315.0 475.0 537.0 902.7-32.0-287.0 14.0-243.0-302.0... 105.0 82.0 156.0-25.0-69.0... 200.0 0.0 200.0 100.0 200.0 190.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 250.0 144.0 325.0 248.0 315.0 332.5 15
2. Stabilization program Process Date Outcome To make amendments to the relevant laws to require ERDENET to make tax payments in local currency 06/30/2009 Establishment of screen-based system for inter-bank foreign exchange transactions. 06/30/2009 The Law that requires all transactions to be made in local currency was ratified on July 9, 2009. Omitted as a result of establishment of open currency trade by BOM Announce restructuring options of Anod bank based on external audit assessment A comprehensive review of transfer programs resulting in a revision of the relevant laws to streamline transfer programs and safeguard the social safety. Submission to the parliament of a revised banking law and other pertinent laws and legislations The submission to parliament of Fiscal Responsibility Law consistent with recommendations of Fund technical assistance. 06/30/2009 12/31/2009 06/30/2009 12/31/2009 The external audit was completed in April, 2009. Working group established by the Government ratified reform plan on June, 2009. The plan is being implemented. Submitted to the Parliament on July 24, 2009. The Ministry of Finance has developed a draft law and plan to submit it to the Parliament. 16
3. Fiscal Sustainability 30,0 25,0 20,0 15,0 10,0 5,0 0,0 The Fiscal instability creates the following negative outcomes: The increased budget expenditure caused by the price increase of mineral resources The significant budget expansion due to the political promises Real Expenditure Growth and Core Inflation 2001 2002 2003 2004 2005 2006 2007 2008 2009 Core inflation (eop) 60,0 50,0 40,0 30,0 20,0 10,0 0,0-10,0-20,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 Real Expenditure Growth and Core Inflation 2001 2002 2003 2004 2005 2006 2007 2008 2009 Core inflation (eop) 12,0 10,0 8,0 6,0 4,0 2,0 0,0-2,0-4,0-6,0-8,0-10,0 17
3. Fiscal Sustainability Fiscal instability is exposed through the macroeconomic instability and the country s inability to overcome the financial crisis. The main instruments to maintain the fiscal stability are the realistic budget, financial planning and its fundament would be determined by legal framework of the fiscal system based on the fiscal responsibility and transparency. 18
3. Fiscal Sustainability It will work for Parliament, Government, Ministry of Finance and political parties to be involved in election. The special requirements at macro levels will be put in place by the law: Structural revenue: General budget to be estimated by the structural revenue. Fiscal balance: To implement the objective that the general budget to have a balance of no less than zero. Expenditure limit: To follow the principle that the expenditure growth not to exceed 2 percentage points of the GDP. Debt: To follow the principle that the overall debt not to exceed 40 percentage points of the GDP and to decrease year by year. Temporary exceptions to these special requirements occur if the budget revenue decreases by 1/5 of the GDP or more or costs to eliminate negative impacts of natural disasters or national emergency situation exceed 5 times the sum of the Government reserve fund and the Contingency fund budgets. Fiscal stability instrument or the Stability Fund: Fund management Fund resource from positive fluctuations of prices Limited usage for budget stability measures Monitoring and reporting Revenue which exceeds the 5 percent of the GDP 19
4. Possible challenges to the program implementation The Government under the program has a commitment to reform the social welfare system and restrain the practice of universal welfare benefits. Spending the prepayments of the Oyu Tolgoi agreement on social welfare is a measure against this policy. Loans to be made for the support of the construction sector and the provision of housing to civil servants will increase the overall budget expenditure and the overall deficit. 20
The 2010 draft budget includes the total revenue of 2,306.0 billion MNT, total expenditure of 2,664.6 billion MNT, and overall deficit of 358.6 billion MNT or 5.0 percent of the GDP. Of the total deficit, 433.7 billion MNT accounts for Central budget deficit. The central budget deficit of 433.7 billion MNT is planned to be covered by 92.2 billion MNT of program loans from international financial institutions and countries under the SBA, 109.2 billion MNT of project loans financed by foreign aid, and 141.5 billion MNT from Contingency part of the Development Fund. The remaining shortage of financing is planned to be covered through an issuance of domestic Government bond of 82.1 billion MNT. 21
In billions of MNT 500 400 366,3 460 400,5 452,5 300 200 133,3 100 58,1 59,3 0 2004 2005 2006 2007 2008 2009* 2010** In 2010, total 452.5 billion MNT is budgeted for investment projects to support the real sector of the economy. Considering the significance of infrastructure and social sector investments in encouraging production and services and creating favorable condition for businesses and education, 45 and 28 percents of the total investments are budgeted for infrastructure and social sector, respectively. 22
Since the initiation of the SBA in April of this year, main economic indicators of the economy have improved and signs of growth have begun to appear in some sectors. As of 30 September 2009, the general budget deficit has reached 332.5 billion MNT, of which 164.2 billion MNT has been financed through the concessional loans made by international financial institutions and countries under the SBA. Thanks to proper macroeconomic policy implementation, the Government of Mongolia is committed to meet the quantitative and qualitative targets specified under the SBA to be met by the end of September. 23
The Government of Mongolia is committed to meet the obligations under the SBA with the IMF. They include: 1. Work is being done to have the Fiscal Sustainability Law passed by the Parliament to improve the fiscal regime and ensure the fiscal stability in the mid- and long-term. 2. Work is being done to develop the unified organic law of budget that comprises the General Budget Law and the Public Sector Management and Finance Law to implement comprehensive reform on fiscal fundamental issues and establish efficient budget planning, execution, reporting, and monitoring systems. 3. We are committed to initiate the social welfare reform and meet the obligations under the SBA. 24
Thank you for attention. 25