Neil Saker, IMF`s resident representative in Ulaanbaatar held a press session today. He talked about the IMF-supported program that worked closely with Government of Mongolia.
"The program is in two main components. One is the stabilization of the current problems. The second one is laying the policies for long-term economic growth. I would say that we are very optimistic about Mongolia`s longer term future.
We have worked closely with the Government and especially with the Ministry of Finance and the Bank of Mongolia on devising policies that will restore stability and lay the foundations for growth in the future. The key parts of the program are reducing fiscal deficits, stabilizing the debt and strengthening the banking system. All these measures will allow interest rates to fall over time and for the banks to start lending again to support growth.
At the core of the program is a fiscal adjustment. This is absolutely necessary because the deficit last year was 17% and that`s far too high and that`s leading debt to be very high. Mongolia is now paying very high amounts in interest payments when it could be spending that money on health, education and social programs.
So we fully support the Government`s fiscal adjustment path that cuts the deficit from 17 percent last year to around about 10 and a half riskier and then aiming for a balanced budget by the early 2020s. We worked very closely with the Government officials on the policies and the numbers that would underline this fiscal adjustment. The most of the adjustment is on the expenditure side. Most on expenditure are cutting capital projects. I think the framework for appraising which projects should go ahead will be strengthened. So there is space for cutting back some of these projects. We also measure on cutting current spending including the size of the public sector through natural attrition.
The revenue measures, almost all of them aimed at the richer people in Mongolia and the poorer people will see no real tax increases at all.
Two third of the fiscal adjustment is on the expenditure side and one-third is on the revenue side. But is also very important to note that for reasons of fairness and equity. We agreed that no cuts would be made to social spending and the revenue measures would be more protected the poorest people. The revenue measures, almost all of them aimed at the richer people in Mongolia and the poorer people will see no real tax increases at all.
It is very important to note that VAT has not been increased. It is being kept up at the current level. Then on income tax, a number of new tax rates have been introduced about these will the higher tax rates will only come in for those people who earn very high-income levels. So the average person will not see any increase in income tax. The type of system is now what we call as a progressive tax system is found in every country in the world. It is very unusual for the country to have separate taxation system. All the tax increases and the expenditure measures were fully discussed and agreed with the government officials and we can say that the program is a joint program and has taken on the best advice from all parties.
We are very optimistic that the program will succeed in stabilizing the situation and the benefits of it will be that the exchange rate will become much more stable, inflation will be low and interest rates will fall and the banks will become stronger. Because they will support the economic recovery with loans particularly to the SMEs. Successful implementation of the program will allow Mongolia to attain its very strong potential. We see growth at around 8 percent in the medium term and that will be very good for raising living standards into the future".
Following his speech, he answered the questions.
-Last week`s Board meeting delayed Mongolia`s request due to the provision of the Parliament resolution. Board of IMF said that they need time to assess the situation. When can we expect the IMF to complete its review of the resolution?
-We are very optimistic that this issue will be resolved and we can move ahead with the program hopefully within coming weeks.
-It seems like the MPP caucus has agreed to make changes to the resolution but we believe that this clause covers other issues not related to the investment contract?
-I am not aware of that.
-Regarding the tax increases, the Finance Minister said that it was the joint decision of the Government of Mongolia and IMF. However, IMF resident representative also said that the IMF did not push for this kind of tax increases. So which party is saying the truth?
-I think we have already said that the program is a joint program. It was agreed at the technical level by our staff and the Government staff and at the policy level. We fully support Government`s actions.
-This clause having the FDI money going through the domestic banks is not really specific from Mongolia and many other countries who have require these conditions but Mongolia made a mistake when didn`t cover this issue in its investment contract with Rio Tinto. So why the IMF is not going against Rio Tinto for putting this kind of complaints?
-We have no particular views or issues at in terms of corporate disputes so we`re not involved in that at all. Our main issue is on the longer term growth outlook and that means the business environment and the investment climate needs to be very good to attract the foreign investors. We hope that Mongolia will have one of the best investment climates in the world and that will attract investment and that will support sustainable economic growth.
-You said that tax increases mostly focused on more on the wealthier people. However, there is a possibility to increase the taxes on gold producers and there are a number of initiatives to increase it. Why didn`t you recommend increasing this kind of taxes? Because lots of minerals are exported without paying taxes.
-I think one issue there is the higher tax on gold for less incentive there is for the gold producers to declare their output. In the past, I think those was issues we had. By having more competitive tax rate seems to have led to much more gold production and increases in the royalties to the Government. We also note that the mineral prices have increased quite a bit in recent months and that has been very positive increasing revenues for the Government.
-What is the IMF position regarding the specific clause of the Parliament resolution? Does it have to be removed or changed?
-As I said, we are looking implications of the clause and assessing the impact at the macroeconomic level. My colleagues are doing at the moment so I can`t be a savior or anything on that.
Neil Saker, IMF`s resident representative in Ulaanbaatar held a press session today. He talked about the IMF-supported program that worked closely with Government of Mongolia.
"The program is in two main components. One is the stabilization of the current problems. The second one is laying the policies for long-term economic growth. I would say that we are very optimistic about Mongolia`s longer term future.
We have worked closely with the Government and especially with the Ministry of Finance and the Bank of Mongolia on devising policies that will restore stability and lay the foundations for growth in the future. The key parts of the program are reducing fiscal deficits, stabilizing the debt and strengthening the banking system. All these measures will allow interest rates to fall over time and for the banks to start lending again to support growth.
At the core of the program is a fiscal adjustment. This is absolutely necessary because the deficit last year was 17% and that`s far too high and that`s leading debt to be very high. Mongolia is now paying very high amounts in interest payments when it could be spending that money on health, education and social programs.
So we fully support the Government`s fiscal adjustment path that cuts the deficit from 17 percent last year to around about 10 and a half riskier and then aiming for a balanced budget by the early 2020s. We worked very closely with the Government officials on the policies and the numbers that would underline this fiscal adjustment. The most of the adjustment is on the expenditure side. Most on expenditure are cutting capital projects. I think the framework for appraising which projects should go ahead will be strengthened. So there is space for cutting back some of these projects. We also measure on cutting current spending including the size of the public sector through natural attrition.
The revenue measures, almost all of them aimed at the richer people in Mongolia and the poorer people will see no real tax increases at all.
Two third of the fiscal adjustment is on the expenditure side and one-third is on the revenue side. But is also very important to note that for reasons of fairness and equity. We agreed that no cuts would be made to social spending and the revenue measures would be more protected the poorest people. The revenue measures, almost all of them aimed at the richer people in Mongolia and the poorer people will see no real tax increases at all.
It is very important to note that VAT has not been increased. It is being kept up at the current level. Then on income tax, a number of new tax rates have been introduced about these will the higher tax rates will only come in for those people who earn very high-income levels. So the average person will not see any increase in income tax. The type of system is now what we call as a progressive tax system is found in every country in the world. It is very unusual for the country to have separate taxation system. All the tax increases and the expenditure measures were fully discussed and agreed with the government officials and we can say that the program is a joint program and has taken on the best advice from all parties.
We are very optimistic that the program will succeed in stabilizing the situation and the benefits of it will be that the exchange rate will become much more stable, inflation will be low and interest rates will fall and the banks will become stronger. Because they will support the economic recovery with loans particularly to the SMEs. Successful implementation of the program will allow Mongolia to attain its very strong potential. We see growth at around 8 percent in the medium term and that will be very good for raising living standards into the future".
Following his speech, he answered the questions.
-Last week`s Board meeting delayed Mongolia`s request due to the provision of the Parliament resolution. Board of IMF said that they need time to assess the situation. When can we expect the IMF to complete its review of the resolution?
-We are very optimistic that this issue will be resolved and we can move ahead with the program hopefully within coming weeks.
-It seems like the MPP caucus has agreed to make changes to the resolution but we believe that this clause covers other issues not related to the investment contract?
-I am not aware of that.
-Regarding the tax increases, the Finance Minister said that it was the joint decision of the Government of Mongolia and IMF. However, IMF resident representative also said that the IMF did not push for this kind of tax increases. So which party is saying the truth?
-I think we have already said that the program is a joint program. It was agreed at the technical level by our staff and the Government staff and at the policy level. We fully support Government`s actions.
-This clause having the FDI money going through the domestic banks is not really specific from Mongolia and many other countries who have require these conditions but Mongolia made a mistake when didn`t cover this issue in its investment contract with Rio Tinto. So why the IMF is not going against Rio Tinto for putting this kind of complaints?
-We have no particular views or issues at in terms of corporate disputes so we`re not involved in that at all. Our main issue is on the longer term growth outlook and that means the business environment and the investment climate needs to be very good to attract the foreign investors. We hope that Mongolia will have one of the best investment climates in the world and that will attract investment and that will support sustainable economic growth.
-You said that tax increases mostly focused on more on the wealthier people. However, there is a possibility to increase the taxes on gold producers and there are a number of initiatives to increase it. Why didn`t you recommend increasing this kind of taxes? Because lots of minerals are exported without paying taxes.
-I think one issue there is the higher tax on gold for less incentive there is for the gold producers to declare their output. In the past, I think those was issues we had. By having more competitive tax rate seems to have led to much more gold production and increases in the royalties to the Government. We also note that the mineral prices have increased quite a bit in recent months and that has been very positive increasing revenues for the Government.
-What is the IMF position regarding the specific clause of the Parliament resolution? Does it have to be removed or changed?
-As I said, we are looking implications of the clause and assessing the impact at the macroeconomic level. My colleagues are doing at the moment so I can`t be a savior or anything on that.