ULAANBAATAR, Aug 24 (Reuters) - Mongolia’s budget deficit stands at 20.6 percent of gross domestic product, far higher than previously estimated despite a series of austerity measures designed to plug the country’s finances, the finance minister said.
A new government elected in June is facing an economic crisis, reflected by a precipitous drop in the tugrik currency, as it attempts to reverse four years of slow growth and dropping foreign investment that it says the previous administration tried to manage with out-of-control spending and borrowing.
With foreign exchange reserves dwindling to low levels, members of Prime Minister Jargaltulga Erdenebat’s government met visiting International Monetary Fund officials last week.
Mongolia’s new finance minister, Battogtokh Choijilsuren, said off-budget accounts had pushed the cash-strapped country’s budget deficit well above the 4 percent limit set by law. Previously, the government had estimated the deficit to be 3.4 percent of GDP.
Choijilsuren told parliament on Tuesday the deficit now stood at 20.6 percent of GDP, and submitted an amended budget for 2016 that would trim it to 18.2 percent.
The new budget took into account social welfare programs put into place by the previous administration and other off-the-books spending. It also included more tepid projections for government revenue as the country’s coal and copper exports reap smaller profits with prices of commodities sagging and slower growth in China, the main consumer of those goods.
“The expected revenue performance for Mongolia is less than planned,” a report on the Mongolian parliament website quoted Choijilsuren as saying.
Dale Choi, an analyst with Mongolian Metals and Mining, wrote in an emailed note that Mongolia would likely amend the law that caps the deficit at 4 percent of GDP.
The last government, in office from 2012 to 2016, made lavish promises of affordable homes and new infrastructure on the back of 2010-2012 mining boom. Controversial legislation and disputes with investors such as Anglo-Australian miner Rio Tinto Ltd over the Oyu Tolgoi copper-gold mine kept those dreams out of reach, however.
Rio Tinto last May went ahead with the construction of a $5.6 billion expansion after resolving the dispute over taxes and costs, but revenue has suffered in 2016 from lower-quality ore dug out of the open-pit mine.
Fitch Ratings on Tuesday said public finances continued to pose a challenge while the tugrik plunged 20 percent from the end of June. Standard & Poor’s on August 19 downgraded Mongolia by one notch to ‘B-‘.
Meanwhile, Mongolia may face harsh cutbacks in government spending. The Human Development Fund, which has distributed cash widely to Mongolians since 2009, may receive less government money since funding is tied to copper revenue, said Choi.
“I think it’s a luxury the state cannot afford. Now going forward, I think it’s important to target the transfer to people who really need it,” Choi said. (Editing by John Ruwitch and Simon Cameron-Moore)