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ECONOMIC GROWTH IN 2012 WILL BE 25.6%, GDP WILL REACH 14.4B USD AND PER CAPITA WOULD BE 5362USD

According to Government of Mongolia(open-government.mn) on October 26,2011, Prime Minister S. Batbold has said in 2012 draft budget speech in Parliament

  • Mongolia has become middle income country from low income country and credit rating has advanced
  • It is being estimated that GDP per capita in 2012 will be 6.4M MNT or 5362 USD.(Exchange rate implied is 1193.58MNT per USD)
  • It is being estimated that economic growth in 2012 will be 25.6% and GDP of Mongolia will reach 18 trillion MNT(14.4B USD)
  • 45.6% of the economy will be service sector and 43.4% of the economy will be industrial sector
  • We should not forget that dependence on few mineral commodities prices is risky

 

Four key goals of 2012 draft budget

  • Equalization of income from natural resources through taxation and other policy
  • Economic policy aimed at human development
  • Fundamental economic infrastructure such as railroads, automobile roads and power plants
  • Lowest cost financing sources will be obtained

 

Regarding budget revenues

  • Equalized budget revenues for 2012 are estimated at 6.4 trillion MNT(5.3 billion USD) or 36% of GDP
  • 2 trillion MNT(1.6B USD) from those or 31% of total revenues are estimated to come in from mining sector
  • Remaining 4.4 trillion MNT(3.6B USD) or 59% of total revenues are estimated to come in from other economic sectors
  • Government will submit amendment to law on official tax on income of enterprises in order to levy tax on both resident and non-resident taxpayers in Mongolia
  • Currently Mongolia has double taxation treaties with total of 35 countries. 72% of those have been established in 1991-1997, period of weak economic growth in Mongolia. With expansion of economy and increase in FDI into mining,  foreign companies are taking advantage of some weaknesses of those treaties and increasingly escaping from paying taxes. Government will review all double taxation treaties and if they are detrimental to national interests of Mongolia will revoke them. In particular because a clause that is non-existent in international double taxation standard is introduced in double taxation treaties with Netherlands and Luxembourg foreign mining companies by a way to establishing head company in those countries are not paying at all tax on transfers of dividends income. This should be fixed shortly
  • Also international standard of levying tax on income source will be introduced

 

Regarding current budget expenditures

  • 4.6 trillion MNT(3.8 B USD) or 2/3 of total budget expenditures will be spent aiming at ensuring goals of action program of the Government such as targeted transfers and so on.

Regarding budget investment

  • Mongolia is planning to borrow 566.2B MNT(472M USD) from donor countries and international financial organizations in 2012. 494B MNT from those will be spent on investment expenditures
  • Total capital expenditures from the budget in 2012 will reach 2.4 trillion MNT (2B USD)
  • Total investment in 2012 from state budget is to be record 1.5 trillion MNT(1.25B USD)
  • 87.1% of total budget investment will be spent on construction of buildings and facilities,3.7% on capital repairs,9.2% to purchase equipment

 

Regarding Human Development Fund

  • 1.5M MNT bounty to every citizen will be fully implemented
  • It has been decided to issue in cash 500 thousand MNT from 1.5M MNT bounty. In draft 2012 budget is to spend 358.4B MNT(298M USD) and implement this goal fully
  • Remaining 1M MNT is to be spend in draft 2012 budget as follows
  • 1MNT in cash to 334.2 thousand MNT to seniors and developmentally challenged citizens – 334.2B MNT
  • Tuition payments to 170 thousand students – 83.6 billion MNT
  • Health service payments to 5 thousand citizens – 5 billion MNT
  • Residential purchase prepayment to 100 thousand citizens – 100 billion MNT
  • In distributing 1M MNT to remaining 2.2M citizens a convertible Government bond will be issued on certain share of TT mining project, sold to investors and funds accumulated in Human Development Fund. Choice of converting to cash will be provided to citizens. These shares will be guaranteed to by liquid capital and citizens will have full possibility of cashing it by selling back to Government

 

Equalized budget revenues of 2012 draft budget will be 6.4 trillion or 35.4% of GDP, total expenditures will be 7.1 trillion MNT or 39.5% of GDP and total budget deficit will be 740.9 billion MNT or 4.1% of GDP.

 

Conclusion

 

  • Rather than contending with overheating and inflationary pressures, macroeconomic policies have returned to the boom-bust approach that culminated in the last crisis in 2009. Furthermore, this heightened domestic risks of macroeconomic instability comes at a time when the global economic outlook is weak. Should international commodity prices fall sharply Mongolia’s exports and budget revenues would both be hit hard.
  • The policies to address both high and rising inflation and to lessen vulnerabilities are clear: restrain fiscal spending and tighten monetary policy.
  • The 2011 budget already included a sharp increase in spending of around 30 percent. This is a key factor behind the current overheating. Now the government has proposed a further increase in current budget expenditures spending of 1.5 trillion MNT in 2012. Such an increase will be highly risky and ill-advised. GDP growth in the third quarter already exceeded 16 percent and imports have risen by more than 2.5 times. Further fiscal spending would only add to fuel to this overheating economy at a time when it least needs it.

 

  • in the 2012 budget, spending should have been kept at or below the level that parliament already approved in the medium-term budget framework.
  • Good thing is that government introducing finally a targeted system of social transfers.
  • On the expenditure side, there is a very large increase in expenditures proposed in 2012. Such large increase in public expenditures risks throwing Mongolia back to a pro-cyclical fiscal stance.
  • To counteract this tendency, the Fiscal Stability Law (FSL), passed in 2010, locked in counter-cyclical policies. However, because the core of the FSL—the structural balance of minus 2 percent of GDP—only starts in 2013, risks exist concerning its implementation, especially with elections around the corner in 2012. The FSL was supported by a large majority in parliament and will assist Mongolia in avoiding the typical pitfalls of growth for resource rich countries, especially the Dutch Disease. In the Netherlands, the Dutch Disease was eventually ―cured through a similarly broad-based political agreement centered on fiscal and wage restraint. If the Dutch example holds a lesson, it would be for Mongolia’s parliament to hold the course to implementing the letter and the spirit of the law , and to pass a supportive new budget law in the fall session.

 

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Dale Choi

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