47
Dealing with a Resource Shock: Political Economy Analysis and Its Impacts in Mongolia
An initial payoff of the engagement was achieved in July 2010 when parliament passed a Fiscal Stability Law. The law imposed the following constraints: (a) it limits the structural fiscal deficit to 2 percent of gross domestic product (GDP), stipulates that excess revenue is to be saved in a stabilization fund, and limits the growth of expenditures to the nonmineral GDP growth rate; (b) a debt rule creates an overall ceiling on borrowing at 40 percent of GDP; and (c) annual budget and budget amendments must abide by the Medium-Term Fiscal Framework (which in turn must follow the fiscal rules). An important caveat, however, was that the decision-making MPs left themselves considerable flexibility: key provisions of the law were to come into effect only in 2013, that is, after the subsequent elections in 2012 and by the time a new governing coalition would have been formed. Over the following two years, politicians made ample use of the flexibility: in 2011, government spending expanded by 61 percent and the fiscal balance again worsened (see figure 2.5) despite the return of high rates of growth and rapidly growing government revenue. In 2012, in the six months leading up to the end-of-June elections, government spending rose by a further 57 percent (year on year) as civil servants’ wages were raised by more than 50 percent, cash handouts were stepped up, and capital expenditures were brought forward.14 As noted above, the 2012 elections yielded a parliament with no single party holding a clear majority. The Democratic Party (which now combined several of the parties that in 2008 had formed the MDC into a single party) emerged as the largest party and formed a coalition with several smaller parties. The Government’s Action Plan for 2012–16 (equivalent to a coalition agreement) endorsed adherence to fiscal stability, as did the proposed budget for 2013. However, various other policies, such as moving some spending—via a newly Figure 2.5 Overall Fiscal Balance, 2000–12 9 7 Percent of GDP
5 3 1 0 –1 –3 –5
12 20
11 20
10 20
09
08
20
20
07
06
20
20
05 20
03
04 20
01
02
20
20
20
20
00
–7
Year Source: IMF Mongolia Country Reports, various years. Note: GDP = gross domestic product.
Problem-Driven Political Economy Analysis • http://dx.doi.org/10.1596/978-1-4648-0121-1