July 2012
With the election behind us, the Human Development Fund in its present form is all set to receive a make-over, and we shall have fresh discussions on new approaches to social welfare and new uses for the Fund. Work on the 2013 budget will also have to begin without delay.
The last issue of the Mongolian Mining Journal carried a comparative analysis of the action plans of political parties. Now that the Democratic Party has won the majority of seats in Parliament, readers will recall that its plan promised to revise the basic ideas underlying the current social welfare policy. It wants to create jobs and give out stocks to the people instead of distributing cash and to establish a Pension Fund where mining revenue will accrue.
What is the likelihood of this policy being successfully implemented? The Democratic Party is set to become the ruling party at a time when the market environment is turning unstable. Rebounding from the economic crisis in 2008, raw material prices reached a high in 2010-2011, but now they are dropping again. In 2011, the mining industry contributed more than MNT1 trillion to the budget through 17 kinds of taxes and fees. Total mining output reached MNT3 trillion in 2011, a large year-on-year increase. Foreign investment in the mining sector reached MNT4 trillion, which was 85 per cent of the total direct investment in Mongolia.
The 2011 figures were big as they are from the peak year of an economic growth cycle. Now the world market records a fall in the demand for raw commodities, a development that has a direct impact on the Mongolian economy, especially its mining industry. Faced with this downturn, Parliament and the Government, both controlled by the Democratic Party, could very well opt for a no-frill and frugal budget for the coming year.
The declining demand is directly related to the drop in China’s annual economic growth from 8 per cent and to the largest economies of Europe performing their worst in the last three years. We have been hearing of how the situation has led to our neighbouring countries cutting down on public spending.
When President V.Putin announced his “New Budget Policy” in a keynote speech at the Kremlin on June 28, the Russian press lost no time in calling it a “ready-for-crisis budget” and a “frugal budget”. Putin well remembers that the Russian Reserve Fund had gone empty during the crisis in 2008. Oil exports are a major source of revenue for Russia and prices have been falling in the last few months, with dire implications for the health of the Russian economy. Putin has asked the Ministry of Finance to base its revenue estimates on oil price calculated at an average of the last five years. If actual prices are more, the extra revenue would be accumulated in the Reserve Fund, but if they are less, the Reserve Fund would have to make up for the loss. The present budget of Russia calculates oil price at $115 a barrel, but when Putin’s suggestion is followed, it will be $95.
Not just Russia, countries around the globe are preparing for a crisis. And we can reveal to our readers that the Human Development Fund of Mongolia has a zero balance right now.
All the money that had gone into it was distributed to the people by the MPP, when it was the ruling party, and it is carrying on with its promise made before the last election even after the present one has been decided.
We can only hope that our policy makers quickly realise the threat posed by the country’s lack of any funds to fall back upon at a time when raw material prices are falling and the European and Chinese economies are weakened. There should be no delay in implementing the Budget Stability Law in 2013 and in ensuring that mining revenue goes into the Stability Fund. What oil and gas are to Russia, minerals are to Mongolia, and Russia’s experience teaches us that the Stability Fund alone cannot get us through a crisis. It is true that direct foreign investment dramatically increased, but this always carries the risk that this would quickly flow out when the economy loses its gloss.
In such a situation, the Democratic Party must not forget, as it celebrates its electoral success, that hard “political work” lies ahead, including forming the new Government and choosing the best people to run the ministries. And then it will have to present to the nation the Government’s action plan for its four-year term.
The mining sector should be prepared for some harsh measures, such as a rise in the coal exports – mentioned in the DP campaign – and some hard times, stemming from both external and domestic factors.