World Bank report: continued policy reforms needed to mitigate external risks

November 10, 2015

Ulaanbaatar, November 10, 2015 – Continued fiscal consolidation and sound monetary policies, along with a revitalization of foreign investment, are needed to help Mongolia weather external risks, the World Bank said in its latest Mongolia Economic Update.

According to the newly released report, Mongolia’s long-term economic prospects remain promising but the economy faces short-term challenges, with limited policy buffers to address imbalances in the economy and debt repayments beginning in 2017. With the possibility that external risks in commodity markets and growth of trading partners, the report said it was important that the Mongolian government stay committed to its policy reforms.

“The measures that the Government has taken over the past year were necessary to strengthen the resiliency of the economy and reduce the balance of payments risks. At the same time, falling commodity prices and other risks call for further efforts,” said James Anderson, World Bank Country Manager for Mongolia. “The key to a successful adjustment of the economy is to ensure the credibility of policy adjustment. Maintaining reform momentum and a stable investment environment is needed to build a solid footing for stable and sustainable growth, while girding against possible shocks.”

Economic growth slowed to 3.0 percent in the first half of 2015 amid declining exports from a continued weakening of the commodity market and slower growth in the key export market of China. Mongolia’s annual GDP growth is expected to slow to 2.3 percent for all of 2015, the report said.

“The revised forecast reflects weaker crop harvests and slower industrial production data in the third quarter,” explained Taehyun Lee, World Bank Senior Economist, who said growth could slow further in 2016. “Mining production is expected to decline in 2016-17 amid the weak commodity market conditions. The non-mining sector of the economy will likely remain weak in early 2016, but a recovery in foreign investment would support the industries supplying goods and services needed for large scale mining investment projects.”

The report noted that while growth has slowed, subdued domestic demand has contributed to a significant improvement in the current account balance and to lower inflation. The current account deficit is expected to narrow to around 5 percent of GDP this year, from 11.7 percent last year.

A recovery in foreign investment would help policy reforms get implemented with fewer adverse consequences and would also mitigate the balance of payments risk. Revitalizing foreign investments would require implementing stable and predictable policies and regulations on investment, the World Bank report said.

The World Bank acknowledged the commitment of the government to policy reforms, but urged the country to continue and deepen those reforms. These include the fiscal consolidation efforts, reducing the budget deficit, drawing on realistic revenue projections and in line with the Fiscal Stability Law, and consolidating off-budget expenditures. It also suggested that including the commercial portfolio of the Development Bank of Mongolia would strengthen the credibility and the effectiveness of the fiscal consolidation plan. Quasi-fiscal programs financed by the Bank of Mongolia, the report argued, should be phased out and transferred to the government.

A monetary policy that is focused on reducing external imbalances, combined with a flexible exchange rate, would help ease underlying pressures on the exchange rate and safeguard foreign exchange reserves, the report said, thus helping the economy better absorb shocks.

In a special section analyzing Mongolia’s social welfare transfer programs, the report found that the programs are relatively generous compared to other countries. The report presented options for further strengthening the social welfare programs, making poverty reduction a key objective. Mongolia’s poverty rate declined from 27.4 percent in 2012 to 21.6 percent in 2014, although many remain near the poverty line.

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