Mongolia has experienced a series of economic booms and busts over the last decade, driven mainly by commodity swings but aggravated by excessive borrowing during boom times. Only few years after a balance of payment crises culminating in an IMF bailout in 2009, the prospects of massive revenues from giant copper and coal investments fueled a new spending spree. Between 2011 and 2016, government salaries, infrastructure costs and cash transfers spiraled. But when commodity prices fell again, the country was left facing renewed short-term financial pressures amid growing public debt. The government recently returned to the IMF to negotiate another bailout agreement.

The opportunities and challenges created by the mining sector highlight the need for careful planning and a solid policy framework that promotes economic sustainability. The Mongolian government took multiple important steps in this direction. In 2010, Mongolia’s parliament adopted a set of fiscal rules as part of the Fiscal Stability Law setting ceilings on expenditure growth, structural budget deficits and on the stock of government debt. In 2017, the government is establishing a new sovereign wealth fund, the Future Heritage Fund, to accumulate a proportion of natural resource revenues for future generations.

But are these rules meeting their objectives? NRGI analysts have built a Mongolian macro-fiscal model in order to monitor progress and analyze challenges.

  (Click to enlarge.)

The model was developed to project a baseline scenario of the country’s economy and describe how different shocks or policy changes would impact the trajectory of key macroeconomic and fiscal variables over a 30-year horizon.

Macro-fiscal models with similar aims have been regularly built by public agencies, international organizations and by the private sector. However, this model has a number of innovative features that make it distinct.

• Macroeconomic models are used regularly in OECD economies; far fewer have been used in developing countries. Difficulties in obtaining reliable data, more limited resources to build and maintain such tools, and less experience in how they can be best used might all be potential contributing reasons for this. One aim of this tool is to support regular analysis of Mongolia’s economic sustainability.
• Most such models do not adequately address the significance and particularities of the natural resource sector. While many other sectors experience volatility, changes in expansion plans, tax terms, or the delays in mining mega-projects can have very large ramifications. By incorporating simplified financial models from the country’s five largest mines, this model bridges the growing repository of financial models of mines, such as the open model of the Oyu Tolgoi mine and macroeconomic models.
• Most such macroeconomic models are not publicly available. While some include a description of the model, main equations employed, key results and some parameters describing the robustness of the results, in very few instances is the full model made public. This model is open to wider reuse, scrutiny and adaptation.
• Most such models are made with proprietary and hard-to-access software. The computationally heavy nature of modeling has led to a flourishing of dedicated tools for experts. These tools are both expensive and difficult to learn. This model is available in Microsoft Excel format and with a user-friendly interface, so that it can reach new users inexperienced with macroeconomic models.

This model was built using data from a variety of government, company and international sources collected throughout 2016. All data used is presented in the spreadsheet. It was also informed by a series of meetings with experts in Mongolia in November 2016 to refine calculations and clarify assumptions. Nevertheless, some uncertainties and data gaps remain, most importantly regarding the financial details of the largest mines in the country as well as contingent liabilities of the state. The model is also subject to errors and overlooked information.

For questions or to provide feedback on this model:

Dorjdari Namkhaijantsan
Mongolia manager
dorjdari@resourcegovernance.org

David Mihalyi
Economic analyst
dmihalyi@resourcegovernance.org

This model is available under a Creative Commons Attribution (open) License.