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Country Assistance Plans - Mongolia : I. Country Performance Assessment
Country Performance AssessmentA. Economic Performance Assessment1. The Mongolian economy continued to be affected adversely in 1999 by exogenous factors, most notably the after-effect of economic instability in the Russian Federation and the continued low international prices for Mongolia’s main exports (copper, cashmere, and gold). During the first five months of 2000 these prices rebounded, however, and the country’s terms of trade improved by 3.6 percent. Real GDP growth reached an estimated 3.5 percent in 1999, the same figure registered in the previous year, continuing the trend of unstable but positive real GDP growth rates for five consecutive years since 1994. Growth in GDP in 2000 is anticipated to be about 3 percent. The extensive dependence on exports of primary commodities means that even small changes in the international market prices of these commodities can affect GDP growth significantly. During the winter of 1999-2000, Mongolia suffered its most severe winter in three decades. Nearly 10 percent of total livestock was lost, affecting 20 percent of the total population and pushing increasing numbers into poverty, especially in rural areas. Other areas of the economy, however, have continued to grow on balance during the first five months of 2000, being led by especially strong growth in the transportation sector, which was up 15 percent over the corresponding period in 1999. 2. Inflation, which declined to 6 percent in the 12 months ending December 1998, picked up and reached 10 percent in the 12 months ending in December 1999. The main factors contributing to the rising inflationary pressures in 1999 were the disruption of oil supplies from Russia and increased world prices for petroleum products, as well as increased domestic prices for food items, particularly meat products. Inflation accelerated during the first half of 2000, largely because of the high price of meat following herd losses during the severe winter. Overall prices rose by 15.4 percent compared to the corresponding period in 1999, and meat prices rose by 47 percent. Monetary aggregates have also grown significantly. The money supply increased by 32 percent in 1999 and by another 28 percent in the first five months of 2000, increases that significantly exceeded program targets set in the IMF Poverty Reduction and Growth Facility (PRGF) program and resulted in the IMF’s decision to let the PRGF program lapse. Thus far, the main effect of the increased money supply has been to increase imports, rather than fuel inflation. But inflationary pressures can be expected to mount if corrective measures are not taken. 3. The trade balance improved in 1999 as a result of a decline in exports (6.7 percent decrease from 1998) and a bigger decline in imports (19.1 percent decrease from 1998). Consequently, the trade balance was reduced from a deficit of $120.1 million in 1998 to a deficit of $40 million in 1999. This change was partly a result of depreciation of the tugrik during the year, which fell by 18.9 percent against the US dollar in 1999, compared with 10.9 percent in 1998. The current account balance also improved in 1999, as it registered a surplus of 1.6 percent of GDP, from a deficit of 7 percent of GDP in 1998. With these developments, gross international reserves at $155.9 million increased to 17 weeks of imports at the end of 1999, compared with 11 weeks of imports at the end of 1998. In the first half of 2000—the trade deficit decreased slightly to $52 million compared to $55 million in the first half of 1999.The surge in imports was fueled by the monetary expansion and an appreciation of the currency. 4. Fiscal performance improved in 1999, as the full impact of new revenue measures introduced in mid-1998 became effective, and additional revenue measures were introduced in mid-1999. In May 1998, the Government announced a package of tax expenditure measures, including an increase in the value added tax (VAT) rate from 10 to 13 percent effective in September, and an increase in petroleum excise taxes. These measures were intended to yield budgetary saving of about 2 percentage points of GDP on an annual basis. Additional revenue-raising measures, adopted by the Parliament in May 1999, included a uniform import duty of 5 percent and an excise tax on beer, with the expected revenue impact of 1 percent of GDP in 1999. 5. Tax revenues increased to 21 percent of GDP in 1999, compared with 19 percent of GDP in 1998. However, privatization receipts remained substantially below expectations, as the Government’s efforts in this regard were met with political resistance from the Parliament. As a result, total revenues and grants increased slightly to 29.7 percent of GDP in 1999, compared with 29.4 percent of GDP in 1998. Mainly by cutting current expenditure, the Government managed to reduce total expenditure to 39.4 percent of GDP in 1999, compared with 42 percent of GDP in 1998. This resulted in an improvement of the overall fiscal balance from a deficit of 12.5 percent of GDP in 1998 to a deficit of 9.7 percent of GDP in 1999. Although the excise tax on beer was repealed in January 2000, revenue growth in the first five months of 2000 slightly exceeded targets, and expenditures were less than targets, resulting in a deficit reduction of 11 billion tugriks. However, net borrowing by the Government from the domestic banking system increased by 7.2 billion tugriks, most of which was used to pay pension arrears. Military expenditures amounted to 1.9 percent of GDP in 1999. 6. Fiscal performance in 2000 weakened. As a result, the budget deficit rose to about 10.5 percent of GDP. This was considerably higher than the 8.5 percent agreed to under the lapsed IMF PRGF program. Moreover, the Government accumulated additional arrears of $2.4 million on its bonds held by commercial banks during the first half of the year. External arrears from 1999 of $12.5 million have also not been cleared. The outstanding stock of Government arrears was 2 to 3 percent of GDP by August 2000. 7. As a result of the weak fiscal and monetary performance, an IMF review scheduled for May 2000 was not completed, and the Poverty Reduction and Growth Facility (PRGF) program lapsed. A subsequent IMF mission in September was fielded to negotiate a new program. However, this mission encountered unexpected difficulties, the most important of which was the realization that the approved 2000 budget deviated from the budget agreed with the IMF under the lapsed program. There was agreement in September that expenditures could not be further compressed, and might even have to increase in order to clear Government arrears, and that the deficit would have to be closed by increasing Government revenues. However, there were significant differences of opinion between the IMF mission and the Government on how to raise revenues. A further IMF mission was fielded in December 2000 to continue the negotiations following Parliament's approval of the 2001 budget, which provides for a significant reduction in the budget deficit to 7.4 percent of GDP. 8. Macroeconomic management and the performance of the economy in 1999 was satisfactory despite the difficult international economic environment, in particular the oil price shock. However, during the first half of 2000, macroeconomic management slipped in the lead up to the parliamentary elections. The primary slippage was in the growth of monetary aggregates and domestic credit to the Government, which vastly exceeded IMF PRGF targets. The repeal of the excise tax on beer also resulted in decreased tax revenues, as would a tax package currently before Parliament that would reduce the VAT from 13 to 10 percent. As a result of these developments, the PRGF program has lapsed. Early actions by the new Government have signalled its intention to re-establish fiscal stability. The passage of the 2001 budget with a reduced deficit is a positive first step.
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