World Bank will give away 120 million US$ funding to Mongolia in next 4 years
Arshad M. Sayed, Country Manager, World Bank and Genevieve Boyreau, Country Economist, World Bank have their visions and views towards the Mongolia Economy outlook.
Mongolia made some mistakes in distributing its revenue and expenses when copper commodity price was high.
Q: World Bank conducted research on expense and financial management of Mongolia. What was the main achievements and mistakes in our budget planning? What will be the main focus?
Genevieve.B: We analyzed the budget policy of Mongolia in 2003-2008. As for the achievements, Mongolia advanced in the field of legislating the budget expenditure and financial sector management. It is big step and progress. Also it established internal monitoring system in relationship with the budget performance. But as for the mistakes and deadlocks, it failed to establish good system for budget planning and it surely helps deepening of impacts of the economy recession. As for the countries which rely heavily on the mineral resource, their main problem is to stabilize their expense and revenue that must be evenly and punctually distributed per each year. Therefore, Mongolia made mistake when distributing revenue and expense.
Commodity price boom continued for three years. It used much fund that is formed from the windfall tax into social welfare programs such as children money and investment. But now copper price is drastically fallen. Those programs that were funded by the Development Fund must be terminated. But today troublesome situation was formed to stop them. It is called “asymmetric effect”. It is easy to increase expense when revenue is high enough, but it is hard to decrease expenditure when revenue is limited or fallen. The biggest hindrance and deadlock in the financial management system of Mongolia is to precisely and efficiently exercise financial rules. It is time to establish or compose the rule to effectively spend the revenue. We made research and evaluation on the budget issues of education, health, social welfare and agricultural sectors. Each sector has problem. Let’s take an example, Mongolia has spent notable portion of its GDP on social programs. It is positive example for other countries to spend certain portion of GDP in social welfare, health and education. But there is an issue of how the budget is effectively used? For example, there is fixed expense in the education sector such as heating. But schools have old building and they lost so much heat. Therefore, their fixed expense is increased and accumulated year after year. It is necessary to list expense by their priority. I think it is necessary to focus mainly on current expenditures. The reason why is that it is important to expect or see the result in mid-term when effectively use and maintain the capital that was created by the investment.
Q: Mongolia is affected by the crisis. As for the last year, budget loss was 5% of GDP. Foreign currency reserve is decreased, therefore it devalues MNT. What is the right policy for Mongolia in this situation?
Arshad M. Sayed: Quite many countries that rely on mineral resource such as Canada, South Africa, Australia have problem in their economy. In other words, they have same problem that we have here in Mongolia. In this case, it is important to stabilize currency exchange rate turbulence. Two things must be considered when considering budget expenditure cut. One. How to increase its revenue within the framework of the budget policy. Two. How to effectively cut the expenditure. It is important to determine which expenses that can sustain medium to long term growth, must be kept. But unnecessary investments, cost based on the consumption and ineffective social welfare programs must be halted.
Q: World Bank advised to decrease budget expenditure. It is hard to cut budget which was expanded almost by three times in last three years. It is good to balance expenditure and revenue. But will it have negative impact on market?
Arshad M. Sayed: Before starting on it, it is better to comment on the facing issues and problems of the fiscal management of the budget. In the issue of budget planning, the organization in charge of decision making on prioritize economy sectors has weak voice. In other words, it can’t make selection. Also as for the rights and duties of the policy making bodies, there are so many uncertainties. For example, there is no precise distribution of power of the Government and Parliament on budget implementation. Finally, there is so weak interrelation between government institutions. Mid-term budget planning has to be made and it will be the budget law. But this connection between these two procedures was lost. Therefore, World Bank advice is mainly focused on improvement on budget financial management and development of legal environment. But we don’t advise to cut this and that expenditures. Because without improvement in management, any cut in budget is no effective in long run. In order to reach certain result and achievement, we should set certain rule in budget. In this sense, there have to be certain clauses or provisions in the law to paralyze Parliament’s unexpected change in the budget proposal made by the Government. Actually, if the policy frame is correct, its outcome will be correct. Right at the moment, cut in expenditures will be the best solution. We are also advising to cut ineffective social welfare programs that can’t help in the economy growth and creating productivity in the future.
to be continued