Saturday, August 27, 2011

FRL in Mongolia - some of the Ceilings

Mongolia's FRL appears interesting;
  1. The floor of structural balance is the deficit of 2 percent of GDP. The structural balance is calculated by using the moving average price of major minerals—currently copper and coal—over 16 years (past 12 years, current year, and future three years). This provision takes effect in 2013.
  2. The ceiling of expenditure growth is the non-mineral GDP growth rate, determined as the greater between its 12-year moving average value and the budget year’s GDP growth rate. This provision takes effect in 2013.
  3. Net present value of public debt cannot exceed 40 percent of GDP. This excludes any borrowing in which the government has agreed to contribute into the paid-in capital of a foreign invested mining entity and which is repayable from the future profits of the entity. The provision takes effect from 2014, with a transition period specified for the preceding years.

IMF's view on Mongolia's fiscal framework;

Medium-term fiscal framework. A sound fiscal policy is necessary for ensuring that Mongolia’s mineral wealth leads to lasting prosperity for all Mongolians. In practical terms, this means managing public spending growth in a way that (i) helps smooth economic growth (through a counter-cyclical fiscal policy); (ii) leaves room for the private sector to thrive; and (iii) provides buffers to insulate the budget—and the economy—against a downturn in global commodity prices. The adoption of the Fiscal Responsibility Law last year was a landmark achievement in this regard. However, the 2011 budget is a big step backwards. The Fiscal Responsibility Law will succeed only if it is strictly adhered to in letter and spirit; failure to do so will undermine its credibility and limits its effectiveness in preventing a recurrence of the policy driven, boom-bust cycles that Mongolia has experienced in the past. Compliance will entail expenditure restraint in the coming years, for example, by keeping spending
roughly frozen in real terms in order to reach the 2013 structural deficit target. Moreover, it is equally important not to circumvent the law by using off-budget vehicles or government guarantees that would, in effect, undo the economic benefits of adhering to the law and come
with the additional costs of an increase in fiscal risks and a loss of transparency. The Development Bank, public-private partnerships, and public guarantees are sources of such quasi-fiscal risk and, if such operations are to proceed, need to be managed prudently and in line with international good practices.

Strengthening the MTEF Process in Mongolia

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