Key Findings –
The 2013 budget approved by the Parliament on November 15, 2012 has an important implication as the first annual fiscal plan prepared under the fully effective Fiscal Stability Law (FSL). The budget proclaims that the Government will be committed to the FSL by setting the structural fiscal deficit at 2 percent. While this is a progress toward a more sound fiscal policy, the budget also has significant potential risks of undermining the goal of the FSL with optimistic revenue projections and expansionary spending plans.
- Total revenue is projected to increase by 28.9 percent from the 2012 budget, reaching MNT 7,258 billion. However, the rate of increase in total revenue is likely to reach 40 percent compared to the 2012 revenue outturn. The revenue projections are potentially over-estimated, given the revenue shortfalls in 2012 and the inclusion of controversial extra revenue (MNT 445 billion) expected from re-negotiating the 2009 OT (Oyu Tolgoi mine) investment agreement. Potential revenue shortfall may reach up to 6 percent of GDP.
- Total expenditure and net lending is planned to rise by 17.9 percent from the 2012 budget, reaching MNT 7,444.6 billion. Much of the increase relates to a sharp increase in capital expenditure of 44.7 percent. Despite the large increase in capital expenditure, a reduction in capital repairs adds to concerns about maintaining the quality of the new and existing capital investments. The spending plan of the current budget is yet to include two new spending elements that could have significant adverse impact on the fiscal outlook: (i) Price Stabilization Program (MNT 718 billion) and (ii) the use of proceeds from the sovereign bond issue of USD 1.5 billion.
- The structural balance is projected to reach 2 percent of GDP, the maximum level set by the FSL. This is clearly a progress to be noted. However, the fiscal target is likely to be hard to achieve, given the potential revenue shortages and the two new spending components that will eventually have to be added to the budget. Exact fiscal impact from the additional spending components remains uncertain at this stage. However, we expect that the fiscal deficit may reach over 6 percent and the magnitude could be larger depending on how the extra spending plans unfold.
The fiscal imbalance would be much higher if off-budget financing operations were included in the fiscal outlook of the budget. The fiscal burden from off-budget financing through the Development Bank of Mongolia (DBM) announced in 2012 is estimated to be over 4 percent of GDP in 2013. Large scale off-budget financing operations will significantly undermine the effectiveness of prudential rules of the FSL and likely add to the overheating pressures from the on-budget fiscal activities.
The recent involvement of the Bank of Mongolia (BoM) in the Price Stabilization Program and the ambiguity on the use of sovereign bond proceeds are adding to concerns on growing tendency to bypass the FSL. Participation of the BoM in the Government’s price stabilization measures through providing a subsidized financing is beyond the traditional role of monetary authorities. Clear plan for the exit of the central bank needs to be drawn up to disconnect the possibility of it turning into another off-budget financing vehicle. While it is a sign of growing interest from global financial markets in Mongolian economy, the new bond issue could become a significant fiscal risk without prudent plans to use the proceeds. It must be noted that the recent bond issue cannot be an off-budget financing channel and that the receipt and the use of the proceeds need to be properly recorded in the budget. The Government also needs to take adequate time and extra caution to select and appraise projects to be financed by the proceeds, considering the financial cost of the external borrowing and economy’s capacity constraint.