QUASI-FISCAL AND FISCAL POLICIES REMAIN TOO LAX

Parliament’s repeated extension of the Pandemic Law to end-2022 continues to undermine Mongol Bank’s monetary policy tightening by compelling it to inject significant liquidity via its quasi-fiscal operations and by impeding the interest rate channel of monetary policy transmission. As forewarned, the full cash payment of the expanded child money support in the 2022 supplementary budget is also adding to inflationary and exchange rate pressures by boosting import demand. Though budget execution is likely to be better than planned due to higher mineral revenues from stronger commodity prices, the non-mineral primary balance – a more appropriate measure of underlying fiscal policy – continues to record a significant deficit. Moreover, the acceleration of delayed capital expenditure execution by end-year is likely to boost imports, exchange rate and inflationary pressures.

IMF gave the report’s outlook section “Fragile Recovery, Major Risks” title and for good reasons.

“The recovery is expected to continue in second half of 2022 and 2023, assuming that the disruptions from border closures are largely resolved by end-2022. Coal export production is likely to resume following the depletion of accumulated inventories. The start of Oyu Tolgoi’s underground mine production in the first half of 2023 should provide a significant economic boost. The continued release of pent-up domestic demand will likely support growth in the near term, though the net impact will be small given Mongolia’s high import dependence. However, domestic private sector activity is likely to be increasingly constrained by persistently high inflation and decelerating credit growth due to increasing bank risk aversion amid high economic uncertainty and deteriorating liquidity resulting from the drawdown of pandemic savings. Real GDP growth is thus forecast to reach 2.5 percent in 2022 and rise to 4 percent in 2023, mainly on account of mining sector contributions. Medium-term forecasts continue to envisage above-potential growth due to the normalization of copper and coal exports,” the report reads.