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Wednesday, July 6, 2011

Mongolia Briefing is a magazine and daily news service about doing business in Mongolia. We cover topics relating to the Mongolian economy, the market in Mongolia, foreign direct investment and Mongolian law and tax. It is written in-house by the foreign investment professionals at Dezan Shira & Associates

Mongolia’s 2012 State Budget Largest in History

Feb. 8 – Mongolia has set a record for the largest budget in the history of the country at MNT4.63 trillion, amounting to more than half of GDP, which experts’ identify not only as a sign of economic development, but also as a symptom of election syndrome.

“We have to mobilize all of our resources to fully fulfill the election promises,” Prime Minister S. Batbold said when presenting a draft budget to Parliament last fall.

Mongolia’s legislative elections will be held in June 2012.

Originally, the state budget for 2012 was set to spend as much as MNT7.1 trillion, exceeding its revenue by MNT740.9 billion.

High draft budget expenditures led the International Monetary Fund and Asian Development Bank to criticize the proposal. Therefore, Mongolia’s Parliament decided to cut expenditures by MNT900 billion, and then cut it again by some MNT1 trillion following a recommendation from the central bank.

The approved budget projects revenues of MNT4.63 trillion and expenditures of MNT 4.86 trillion.

But even after cutting expenditures, the cabinet plans to fulfill its election promises to double salaries and will increase the salaries and pensions of civil servants by 53 percent, which will cost about MNT450 billion, according to Finance Minister S. Bayartsogt.

In 2011, Mongolia’s Parliament stipulated that roughly US$567 million from the Human Development Fund (initial capital for HD Fund was drawn from the mine project Oyo Tolgoy), should be distributed to all citizens for health insurance and to students for tuition fees, with about US$15 per citizen for cash payouts. Although the per capita amount is small, the amount distributed in 2010 was 16 percent of the state budget and almost 40 percent in 2011.

According to both the IMF and World Bank, the 2011 allocation was too expansionary, and a cause of the high 14 percent inflation rate.

Both the Asian Development Bank and the Economist Intelligence Unit are predicting a 2012 growth rate of 15 percent, and inflation to reach 17 percent by the end of 2012.

This year, HD Funds are scheduled to be distributed in June, when Mongolia will have its Parliamentary elections, so many observers believe the distribution plans are once again most likely exaggerated campaign promises designed to attract votes.

Per capita GDP in Mongolia has more than tripled to US$2,200 in 2010 from US$638 in 2004. However, at the same time, an estimated 30 percent of the country’s population was still living below the official poverty line as of last year.

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