Minister of Finance Ch.Khurelbaatar, who had persisted against the fiscal amendment before the parliamentary election, presented the amendment to the 2020 state budget at Wednesday’s irregular session. The amendment almost doubles the previously approved fiscal deficit to a record-shattering 3.8 trillion MNT.
By the end of the first half of 2020, revenue of the state budget amounted to 4.43 trillion MNT, 1.2 trillion MNT lower than projected. With no idea how the global COVID-19 pandemic will play out, the government decided to amend the state budget to reflect additional costs for COVID-19 relief action plan and restructuring of the government.

To increase revenue, the amended budget will focus on taking prompt action to substantially boost exports and accelerate digital transition, while cutting down on non-urgent expenses.

According to the minister, fiscal revenue is now projected at 10.7 trillion MNT, down by 2.1 trillion MNT, and expenditure at 14.6 trillion MNT, up by 704.9 billion MNT. The leaves Mongolia with a fiscal deficit of 3.8 trillion MNT this year, which is equivalent to 9.9 percent of the country’s GDP.

“Fiscal revenue is currently cut by 2.1 trillion MNT. By the end of the year, the state budget deficit is estimated to reach 3.8 trillion MNT. This is equivalent to 10 percent of the Mongolian GDP. We will cover 1.6 trillion MNT of the total deficit with external loans and grants,” Ch.Khurelbaatar stated at the session.

The massive deficit is mainly attributed to additional health costs, actions for safeguarding jobs and supporting businesses, and monthly cash allowances to children, commonly referred to as children’s money. In particular, health costs has been raised by 115 billion MNT to prevent health risks to the public amid the pandemic.

This includes 71 billion MNT for purchase of facemask, protective gear and medical equipment; 22 billion MNT for seasonal influenza vaccines; and 22.2 billion MNT for overtime pay for public workers (from the National Emergency Management Office, General Police Department, General Agency for Specialized Inspection etc.) who are coming in contact with COVID-19 affected or suspected individuals.

Details of other costs are as follows:

• The government will continued to pay children’s money, which has been raised from 20,000 MNT to 100,000 MNT, until the end of the year. This requires 300 billion MNT for 1.25 million children.
• Welfare benefits for 60,000 pensioners and 13,300 children with disabilities has been raised to 100,000 MNT. This requires 22 billion MNT.
• Monthly food stamps of 32,000 MNT will be given out to 124,000 people in urgent need of food support.
• To maintain the 10 percent social insurance premium rate (5 percent by employers and 5 percent by employee), the government will need to exempt 144.4 billion MNT in premiums of 552,300 individuals. (Social insurance premiums have been deferred until October 1, 2020. Previously, the social insurance premium rate was 10 percent each for employer and employee.)
• The government will continue to exempt 105,000 entities with annual income below 1.5 billion MNT from income tax.
• The government will resume customs duty exemption for COVID-19 diagnostic tools, relevant medication, equipment and facemasks.

To reduce the fiscal deficit, some expenses that are not urgent have been cut down. These include:

• 513.6 billion MNT was cut from fiscal investment by removing 119 projects that haven’t signed a contract and postponing financing for 344 delaying projects. But additional 16 billion MNT has been projected to conduct urgently needed feasibility studies and blueprints as well as to repair bridges and roads damaged by flood.
• 118.2 billion MNT was cut from current costs that can be delayed, including appointment and purchase of furniture. However, the government will fully provide pensions, benefits and overtime pay of people working at hospitals, police, border, and emergency departments.
• Government organizations are prohibited to increase staffing through restructure unless it is required for newly-opened hospitals, kindergartens and schools.

During the session, lawmaker S.Odontuya expressed her frustration with the high state budget deficit.

“We’ve never approved a state budget with such a high deficit before. You’re using COVID-19 as an excuse. We’ve talked about amending the state budget before the election on numerous occasions but the ruling party didn’t comply to focus on the election. Things like building museum statues that are absolutely unnecessary were included in the amendment. Was it necessary to demolish the Natural History Museum next to Sukhbaatar Square? Instead, another school, kindergarten or hospital should have been built.”

She proposed to adjust budget allocation depending on population density of districts, soums and provinces. For example, the 2020 state budget approved 1.2 million MNT for Khentii Province’s budget per capital, while Uvs Province’s is 900,000 MNT per capita and Bayangol District’s is 300,000 MNT per capita.

Lawmaker Ts.Munkh-Orgil supported the amendment but asked the finance minister whether the fiscal deficit could have been reduced further.

Minister Ch.Khurelbaatar responded, “Regarding the 3.8 trillion MNT deficit, we looked at whether the economy would shrink post COVID-19. Most countries are expecting their economy to decline in 2020 before recovering next year. If we continue to shrink our economy, our economy will face even higher deficit. Considering this, we projected the state budget deficit at 3.8 trillion MNT.”

Digitalization to cut costs

Finance Minister Ch.Khurelbaatar introduced a couple of ways the government plans to cut expenses. One of them is to adopt innovation solutions and digitalize government operations and services.

Digital transition is expected to not only speed up state services and reduce costs but also stop unnecessary person-to-person contact which could lead to health risks amid the pandemic. It also aims to eliminate bureaucracy and corruption in state services and make them more accessible to the public.

In the near-term, government plans to introduce e-health as an integrated health network for public and private hospitals, e-care to provide 17 types of health care services and incentives, general wage system for public workers, general human resource management system, e-monitoring for agricultural incentives, platform for webinars and e-meetings, and an online system for making complaints, applications and requests.

Government to issue 1.2 trillion MNT bond

Minister Ch.Khurelbaatar assured that a large portion of the fiscal deficit will be covered by external funding and shared the government’s plan to issue a 1.2 trillion MNT bond to cut down deficit.

“The government is planning to release a bond of 1.2 trillion MNT. Securities will be offered to the public through blockchain-based platform. The platform is already ready for launch. Sometimes when bonds are released too early, they require interests. We must release it at the right time,” the minister.

Mongolia receives foreign loans of 299 million USD

When lawmaker D.Dorjkhand enquired about the exact amount of money Mongolia has received through foreign loans and grants, Ch.Khurelbaatar responded that 299 million USD has been transferred in the form of fiscal support.

In particular, Mongolia received 100 million USD from the World Bank, 100 million USD from the Asian Development Bank and 99 million USD from the International Monetary Fund. The government is currently in negotiation to receive more financing from Japan International Cooperation Agency and Asian Infrastructure Investment Bank, according to the finance minister.

Ch.Khurelbaatar added, “People and organizations who give financing are very prudent and strict. The Ministry of Finance is auditing all necessary work and reporting on the source of inflow funds and spending.”

Concerns over state budget

Economists fear that continuing to distribute children’s money will flatten the welfare system. They stressed that it is unnecessary to hand out 100,000 MNT to children from wealthy families for another four months and should be instead used to safeguard jobs, improve health care and support businesses.

Another concern is the blockchain-based bond. The ministry hasn’t offered much information about this solution, which was initiated to offset the fiscal deficit. This is a relatively new trading instrument that is said to ensure transparency across bond placement, enables the confidentiality of transactions, as well as reduce expenses of the bond issuer. However, it is complex and requires a resilient blockchain setup, which Mongolia doesn’t have much experience in. Moreover, the finance minister was reluctant to offer detailed information about the bond and its issue date, which suggests that it will be a while before we see the bond launch.

To sum up, Mongolia has amended its state budget, following suit of many countries as COVID-19 threatens public health systems and economies worldwide. Now, the country expects to face a deficit of 3.8 trillion MNT this year. This is a huge debt that will ultimately have to be paid by taxpayers one way or another. Our biggest hope now lies on the mining sector and foreign trade, which seem to be recovering in recent months.