Key Questions on Mongolia

The priorities in the Mongolian government’s economic program are to reduce the fiscal deficit and maintain spending discipline, as loose fiscal policy in the past was a major driver of Mongolia’s current economic difficulties. Also, the authorities plan to reform financial sector and to increase future economic growth by promoting economic diversification, especially in the agriculture and tourism sectors. Importantly, their program will make sure that the most vulnerable are protected by making sure social safety nets are in place.

The Mongolian authorities are determined to protect the most vulnerable groups of the population. In this regard, they plan to better target social programs. For example, the Child Money Program will be extended and narrowed to the poorest 40 percent of households, while the savings will be used entirely to increase spending on the better-targeted food stamp program. Also, to boost revenue, personal income tax will be made more progressive, so only rates on higher income households will be increased.

More than three-quarters of the fiscal reforms in the authorities’ program comes from reducing spending, since Mongolia’s fiscal accounts stand out in international comparison more for their high expenditure than for low revenue. That said, there needs to be a balance between spending and revenue for Mongolia to strengthen its finances. Revenues are below international averages, and thus the program includes limited tax increases as well. These increases, however, are designed in a way to improve the efficiency and equity of the tax system, and the burden will mostly be borne by richer segments of the population—some excises are being increased and the income tax is being made more progressive.

The loans in this package replace much more expensive and shorter-term borrowings that the government would otherwise have to do. In addition, under the program, the authorities are reducing the deficit substantially, and thus Mongolia’s debt is expected to fall quite substantially.

A flexible exchange rate helps mitigate external shocks, strengthen reserves, and preserve competitiveness. It makes the economy stronger and more resilient.

The authorities’ program focuses on policies to reduce this dependency over time. On the one hand, it includes measures to bolster discipline at every stage of the budget process and fix the problems that have derailed fiscal policy in the past. These include a new law to strengthen the independence and commercial orientation of the Development Bank of Mongolia, limits on the powers of the cabinet and of parliament to increase spending without providing for necessary resources, improvements to the public investment program, a stronger framework for public-private partnerships, and a new fiscal council to provide independent views on the budget.

On the other hand, the program also focuses on fostering diversification to create jobs and achieve more inclusive growth. Sustainable mining will remain the bedrock of the economy, but with its 60 million livestock, Mongolia is also well positioned to develop its meat and dairy exports, as well as its already well-known cashmere sector. Tourism is another area of substantial opportunity. Encouraging regional integration through better infrastructure will also stimulate new growth sources and deepen links with Mongolia’s dynamic neighbors.