By D.Munkhchimeg
While it is undeniable that budget of 2012 has put some positivity into the lives of Mongolians, it might be more difficult to question the viability of the governments inflation target and economic growth projections.
An Election Ploy
The two major parties have committed to not promising cash handouts ahead of the 2012 elections, in addition to discontinuing the program thereafter. Even though the government plans to raise the salaries and pensions for civil servants by 53 percent next year. The proposed budget also maintains the monthly allowance of MNT 21'000 that every citizen receives, at least through the first half of the year, while pensioners and disabled people would receive payments of MNT 1 million. Moreover, the government would pay students MNT 500'000 each towards tuition fees and issue all students with MNT 70'000 stipends each month.
Finally, the budget of 2012 has become the largest one in Mongolian history. It has established a record by planning to produce expenses of MNT 7.1 trillion (39.5 percent of GDP), while the government revenue is expected to be MNT 6.4 trillion (35.4 percent of GDP). The projected deficit is 4.1 percent of GDP.
"This is obviously an election budget," says D.Byambasuren, former prime minister. "According to the Fiscal Stability Law the budget deficit cannot be set at 2 percent from 2013. However, the government already had huge deficits in 2010 and 2011 in order to fulfill the political promises. The budget of 2012 is clearly an election ploy and it might destroy a country's economy".
At the 2008 parliamentary elections, the Mongolian Democratic Party offered MNT 1 million for every citizen, while the Mongolian People's Revolutionary Party offered an even higher MNT 1.5 million. But we should keep in mind that this idea of policy wasn't new for Mongolians. In 2007, the ruling power decided to impose 68 percent windfall profit tax on copper and gold mines, as politicians sought to raise the cash needed to meet promises made to voters in 2004.
"The distribution of cash handouts is not effective in the long term, and it can only succeed in increasing the inflation rate", Stevem Barmett, chief of the IMF working group says, "Ont the other hand, investment into the health and infrastructure can bring benefits in the long term". Mongolia imports the majority of its foods and consumer goods from China and is totally reliant on the imports of petrol from Russia. Such a situation clearly shows that cash handouts distributed by the government will be put into the economies of our two neighboring countries.
Down With Optimism
According to the Ministry of Finance, GDP will expand 19.4 percent next year. Can Mongolia save its rapid economic development in spite of the cash handouts and pay raises? In fact, the country's budget capability depends on coal, copper and gold prices. According to the draft budget, copper price is expected to be at USD 9760 per ton next year, while gold price is estimated at USD 1723 per ounce. It is unclear how the Ministry of Finance has made such optimistic forecasts. Analysts have revised down their base metals price forecasts for next year as the global economic outlook remains fragile, a recent Reuter's poll showed. The survey of 23 analysts averaged copper at USD 8950 a ton next year; down 10,5 percent from a forecast price in a July poll
So, we have a generous handout underbudget of 2012. But the declining prices for copper, which have sunk around 30 percent since early August, might put at risk the 2011 spending proposed in the governments budget bill experts warned. If the world economy growth remains weak, the risk is that the budget deficit and growth will be worse than the government is expecting.
"Mongolia's economic outlook depends heavily on global macroeconomic factors: the current uncertainty and poor growth prospects for the global economy are cause for concern. If there is another global recession, Mongolia's small, open economy will be affected," the World Bank pointed out in its Mongolia Quarterly Economic Update, August 2011.
"I is too risky that the 2012 budget established record government expenses at a time when the Mongolian economy is overheating and the global economic outlook is worsening. Should international commodity prices fall sharply Mongolia's exports and budget revenues would both be budget revenues would both be hit hard," said Steven Barnett. "The policies to address both high and rising inflation and to lessen vulnerabilities are clear: restrain fiscal "spending and tighten monetary policy".
His view is that Mongolia's Central bank will continue to tighter policy is playing out following the bank's 25 basis point hike to 11.75percent in August. It is highly unlikely that times of high interest rate loans will foresee an expansion of domestic production in Mongolia."
The budget spending must be low and stable, D.Jargalsaikhan pointed out in his article. "We should not forget that the budget growth is caused by the growth of price of some minerals in the international market, which means we did not create this growth ourselves"
The budget spending must be low and stable, D.Jargalsaikhan pointed out in his article. "We should not forget that the budget growth is caused by the growth of price of some minerals in the international market, which means we did not create this growth ourselves"
