Following the recent dismissal of the government, Mongolia came close to being left without a parliament. The parliament was supposed to be dismissed if they were not able to ratify the 2015 state budget by November 14.
The state budget was approved in a panic, at the last minute, after the parliamentarians – having held their second meeting the day before – combined their third and fourth meetings on the day of the deadline. The meeting was attended by 45 members of parliament (59 percent of its membership) and the budget was approved by 38 members (83.9 percent of the vote).
Last year the state budget was approved in the same way, barely within the deadline, and it was amended six months later. This time, both the ruling authorities and the opposition “gave their word” to amend the state budget with the new Prime Minister early next year. It gives the impression that the state budget will be approved quarterly rather than annually, and the parliament will spend all their time discussing the budget.
The parliament increased 2015 budget expenditure to 7.5 trillion MNT despite the projected revenue of the 2014 amended budget falling short by one trillion MNT. Yet, it is amusing that the members of parliament are talking up how they have made deep cuts to spending. Although they planned to keep the budget deficit at around two percent of GDP, the current deficit is nearly 10 percent of GDP. Nevertheless, the parliament is saying that the budget deficit will be 1.81 percent of GDP next year. There is not a small gap, but a huge difference between what the authorities are saying and what they are actually doing.
The 2015 state budget, which is for a year when an economic crisis is expected, has been approved after shallow, dispersed cuts in spending. These cuts in spending can only scratch the surface, just like a white patch appearing even when the shallowest cut is made to a red-skinned radish.
The state budget is a reflection of not only how the economy is doing, but also how skilled, capable, and enthusiastic the members of parliament are. As the political parties that form the parliament do not differ greatly in ideology and have an attitude that is shaped by election goals and terms, a more populist budget tends to be approved when an election year approaches.
Firstly, a good assessment should be done on how the state budget was approved and why 2014′s revenue fell short as much as it did. Afterwards, a careful analysis based on research should be conducted to determine economic conditions and trends, both nationally and internationally. Only then can sound principles be applied when deciding on budget cuts or increases. If the discussion skips all those steps, discussing spending becomes an impossible task and produces a budget that is approved in a panic, after working day and night. Our state budget is still approved in this fashion.
Next year’s state budget needs to include every possible measure aimed at reacting to the imminent economic crisis, mitigate the causes of inflation, stop the decline of the tugrug, and minimize budget deficit.
It has become an important, timely step that the budget discussions this year focused on creating accumulation, which would help settle external debt starting in 2017; and reducing administrative costs by making 345 deputy, vice, and consultant positions redundant to remove duplication of functions. However, this cut in spending is not enough. When possible, the public budget should be spent on procuring goods and services produced in Mongolia. For instance, if government organizations are to purchase new furniture in their offices, there could be a requirement that the furniture is made in Mongolia.
In order to cut the current 14 percent inflation rate in half, the new government will need to have another look at the factors that are making prices go up.
Although the number of government employees is not to be raised, their salaries will be increased, as a total of 380 billion MNT was budgeted for their pay. It will hit the private sector hard. The inflation rate could grow again as the private sector tries to keep up with government organizations to increase the salaries of their employees. In order to stop tugrug decline, we should attract more foreign investment and refuse the printing of more currency. Accurate price indicators should be delivered to the market to reduce trade deficits. Monetary policy should be in alignment with fiscal policy.
The current demand for mortgages is largely coming from lower income residents seeking cheaper apartments. However, construction companies build apartment blocks for people with higher income for greater profit. Trying to deliver the undeliverable promise of keeping the eight percent mortgage program going, construction companies have been building more apartments that are expensive, which has increased imports.
There are approximately 35,000 apartments from 217 projects for sale in Ulaanbaatar today. Apartment sales have shrunk to a level five times lower than last year. This means that properties worth at least 3.5 billion USD are not in circulation as unsold properties. If such big loans expire, there will be an increased amount of bad loans, which could mean that loan collateral would be sold at lower rates. It could drastically increase risk in the banking sector.
Another market indicator is price restrictions for consumer products such as fuel, meat, flour, and rice. The government has been keeping prices from going up by providing soft loans to suppliers. It does not make consumers, who are convinced that the prices will not go up, reduce their spending by, for instance, using public transportation to save money spent on fuel for cars. The continuous increase in car imports is having negative effects on the balance of trade. If the government turns state-owned companies into shareholding companies through the stock exchange and stops restricting the price of electric power, the market will eventually be regulated by supply and demand.
Laws needs to be passed to allow social insurance fees to be kept in a dedicated fund and private pension funds to be established. A certain part of these funds should also be allowed on the capital market. It is time to stop providing social care in such a broad-based manner and focus resources on those who really need them.
The approved budget plan projects that 1.1 trillion MNT, which is 15 percent of budget revenue, will come from the mining sector. Approximately 324 billion MNT is expected to come from Oyu Tolgoi’s open cut and underground mining operations. Therefore, there is a need to speed up this project. Citizens expect the new government to do a lot of work to reduce budget pressure, increase private sector involvement in the economy, and improve the efficiency of public services.