Speech

High-Level Conference on the Macroeconomic Outlook for Mongolia, Opening Remarks, Naoyuki Shinohara, Deputy Managing Director, International Monetary Fund

June 25, 2014

As prepared for delivery

Your Excellency the Prime Minister; Honorable Ministers, Vice Ministers, and Members of Parliament; Bank of Mongolia Governor; distinguished foreign invitees; Ladies and Gentlemen—it is a great pleasure for me to be with you today at this very important, high-level conference on Mongolia’s macroeconomic outlook. I’d like to thank the Ministry of Finance, the Ministry of Economic Development, the Bank of Mongolia, and the World Bank, who have joined with us to organize and cosponsor this event.

Our conference will provide an opportunity for Mongolian policymakers from both executive and legislative branches to come together, and to discuss economic policy options for Mongolia to ensure macroeconomic stability and sustained high growth into the future. We will also have the opportunity to hear from a number of senior policymakers from other countries who will share their experiences and suggestions with us.

As we all know, Mongolia has a glorious history, and its future carries huge promise as well, thanks to a unique combination of an industrious people, a large and beautiful country in a strategic location, and abundant natural resources. As always, with opportunity comes challenge, and we are here today to exchange views, in an open and productive way, about how best to address the challenges facing Mongolia today as it goes about realizing its great potential.

This is my second time in Mongolia. The first time was 15 years ago. Since then, this country has achieved remarkable economic development. In fact, in recent years, Mongolia has been one of the world’s fastest-growing economies, vaulting into the ranks of middle-income countries in just a few years. This growth was earlier driven by large investment in the mining sector, spearheaded by large amounts of FDI, but as these have dropped, growth has relied increasingly on fiscal and monetary stimulus. More recently, growth has declined, but it remains very rapid by international comparison.

Mongolia has a state-of-the-art fiscal framework for dealing with natural resource revenues, which is designed to help avoid the boom-bust cycles that so many other resource-rich economies have fallen into. It should also, over time, help the country accumulate savings for future generations. Since this framework was put in place a couple of years ago, on-budget fiscal activity has been managed carefully to comply with its requirements, that is, the on-budget deficit has been kept within the Fiscal Stability Law’s limit of 2 percent of GDP. The authorities deserve to be commended for that. However, at the same time substantial off-budget activity, the off-budget spending via the Development Bank of Mongolia, has emerged, and the consolidated fiscal deficit (including both on-budget and off-budget spending) has been significantly larger than the limits under the framework at around 10 percent of GDP. A key question is therefore how to shape overall fiscal policy in a manner that is consistent with the overall objectives of the fiscal framework, allowing sufficient space for needed development and social spending while safeguarding the key goals of macroeconomic stability, debt sustainability, and intergenerational equity.

Together with increased off-budget fiscal spending, monetary policy has also been eased to support growth, ease supply bottlenecks, and help broaden home ownership. While these policies have served to hold up growth, they have also contributed to rising balance of payments pressures, with foreign reserves at the Bank of Mongolia declining and the togrog depreciating, which in turn has pushed up inflation. How best to calibrate monetary policy so as to achieve the objectives of growth, low inflation, external balance and financial stability will be a key challenge for the Bank of Mongolia going forward.

Mongolia’s promise, and its challenge, is to capitalize on its resources and deliver improved living standards to all of its people, in an inclusive and sustainable manner. A key question to ask is what kind of growth path, supported by what kind of policies, is most likely to deliver on the country’s promise of prosperity in a sustainable manner, with minimal risks and vulnerabilities to unforeseeable shocks. Choosing the right path must take into account the global outlook and potential spillovers to Mongolia. China’s growth is slowing, and its commodity demand may soften further in the coming years. Advanced economies are slowly looking toward an exit from unconventional monetary policy, with the risk that emerging market economies may face much more difficult and turbulent global financial markets in the coming years. What is the best way for Mongolia to prepare itself for these potential challenges, while still pressing ahead with its development efforts?

These are some of the challenging questions. But, let me stop here, as we have a full morning ahead of us, and I’m sure many of the speakers will take up some of these themes in their contributions. I want to thank you all for your attendance today, and thank again the Mongolian authorities for their kind invitation for me to visit. I look forward to the rest of the morning, and hope it will prove to be a useful input to the policymaking process.