Challenges in Fiscal and Monetary Policies in Mongolia

herausgegeben von: Hiroyuki Taguchi, Takeshi Osada, Osamu Ito, Koki Hirota

Verlag: Springer Nature Singapore

Buchreihe : New Frontiers in Regional Science: Asian Perspectives

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

Einloggen, um Zugang zu erhalten

Über dieses Buch

This book provides quantitative evidence on the issues in fiscal and monetary policies in Mongolia and presents necessary policy recommendations for policymakers and academic circles. Mongolia belongs to a natural resource-based, transition economy and thus has faced the risk of the so-called resource curse—including the “Dutch Disease” and immaturity in market-based systems, particularly in financial markets. Consequently, reformations of resource allocation and policy governance in fiscal and monetary fields have been required. So far, however, there have been only a very limited number of quantitative studies in the Mongolian economy among the vast literature of Asian studies.

This book applies scientific approaches to address fiscal and monetary issues, such as data-oriented and econometric methods (a structural vector auto-regression model, a spatial econometric model, and panel estimation with fixed effects, among others). In this manner, the book enriches empirical evidence in academic literature and also contributes to evidence-based policymaking. All the authors are young leaders of government officials in the Ministry of Finance, Financial Regulatory Commission, and National Statistics Office in Mongolia, who have been trained in academic research methodologies at Saitama University, Japan, on JICA-JDS scholarships. Thus, academic researchers and policymakers will be prominent members of the target audience for this work.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Analysis of the “Dutch Disease” Effect and Public Financial Management of the Mongolian Economy

Abstract

This study aims to analyze whether the Mongolian economy has been suffering from the “Dutch disease” or not by employing a vector autoregression (VAR) model with quarterly data from 2000 to 2017 of the National Statistical Office, Mongolia (NSO). Our results show that the Mongolian economy has probably been suffering from the “Dutch Disease” through the resource movement effect in that the mining sector boom has crowded out manufacturing activities. Moreover, our results indicate that the mining sector boom has not contributed to or even deteriorated the capital accumulation effect that alleviates the Dutch disease. Therefore, the Government of Mongolia should strengthen its public financial management to avoid the resource “curse.” Moreover, the current natural resource funds, named the “Future Heritage Fund” of Mongolia, could be one of the successful solutions for the Dutch disease. Conversely, the “fiscal stabilization fund” needs reform and independence from political pressures. Hence, as a policy recommendation, resource revenues should be utilized for education projects, human resource development, and economic infrastructure to accumulate capital and promote economic diversification and the future development of Mongolia.

Ganzorig Bulgankhuu

Chapter 2. Enhancement in Governance Capacity of the Sovereign Wealth Funds of Mongolia

Abstract

The purpose of this study is to examine the learnings from past Mongolian wealth management, particularly in sovereign wealth fund (SWF) activities, to explore the key development features of governance of selected SWF best practices, and to identify appropriate and prudent policy implications for strengthening fund management.

From international experiences, it is recommended that the government institutions, which can help stabilize the economy and exchange rate and flatten the inflation rate over generations, are the key to sustainable development in resource-rich countries. Sovereign wealth funding is a modern approach to sustainable development. In resource-rich countries, in particular, it is considered to prevent the Dutch disease and rent-seeking caused by limited democracy, poor fiscal discipline, and corruption of bureaucracy. The study involves quantitative and qualitative methods to answer a research question using a strengths, weaknesses, opportunities, and threats (SWOT) analysis and regression analysis. The selection of case studies is based on SWF indicators (scale of the fund, transparency, and accountability rate) and the country’s resource similarities that contributed significantly to the government budget. This study covers Norwegian and Chilean cases and investigates the main factors behind the success of SWF management. After obtaining the key concepts and principles for the success of SWF, we examine the Mongolian case and investigate the main reasons for its failure. Subsequently, the pros and cons of the Mongolian SWF in terms of internal and external factors are studied using SWOT analysis. The quantitative analysis is conducted in two batches of statistical estimation techniques to (1) examine the relationship between governance indicators and the scale of SWF and (2) verify the assumption that the SWF can contribute to the government’s fiscal activities. We believe that natural resources contribute to well-being, poverty elimination, job creation, and prosperity through fiscal income. Resource-rich countries should be concerned about how resource revenues drive other forms of capital that can achieve sustainable development. However, there are several challenges related to governing issues and development difficulties arising from capacity building in developing nations. Several studies indicate that resource-rich countries tend to fail in capacity building, thus causing vulnerable economies and weak social development over generations, particularly in emerging and developing countries. However, not all endowed nations have resource-management problems. Some have achieved sound resource management, which enables them to provide good public service and social benefits on a transparent base, develop innovative and modern technology, improve productive capacity, and increase revenue from surplus for safe and responsible management for future generations. In this study, we address the importance of SWF strengthening through sound governance, attempt to clarify the current situation of SWFs in Mongolia, and suggest further improvements. Mongolia, a natural resource-rich country, can convert wealth into well-being if wealth management is significantly improved. Due to the democratic regime, the nation has the potential to implement good international practices and introduce them into national wealth management under effective and efficient governance. The Government of Mongolia has established several sovereign funds through policy reforms to achieve the international organizations’ requirements for the sustainable stabilization of the economy. Some funds are terminated early due to weak governance and legislation, while others achieve their initial objectives by updating policy and legal documents through reforms. The main challenges of SWF management are political interference in decision-making; weak institutional capacity, including human capital, technology, industry standards, and internal ethical guidelines; and poor transparency performance. The failures of previous SWFs were due to unclear rules for its mission and unclear delegation from owners to managers, inadequate design and governance, excess withdrawal by political decisions, lack of operational freedom (political interference), and mismanagement (to finance directly to government expenditure). This study analyzes the measures of national governance correlated with the scale of SWF to provide evidence suggesting that countries with a higher (lower) degree of government effectiveness tend to accumulate more (less) wealth for generations. We also present an empirical analysis of how the growth in SWF asset accumulation contributes to national fiscal balance fluctuations. We show that if nations accumulate more financial wealth from government revenue surplus, the fiscal deficit tends to fluctuate in a stable manner.

Naranchimeg Luvsansharav

Chapter 3. Government Financial Support for Small- and Medium-Sized Enterprises (SMEs) in Mongolia

Abstract

This study aims to examine the current state of policy support for small- and medium-sized enterprises (SMEs) in Mongolia. Accordingly, it identifies implications regarding policy actions and recommendations for the Mongolian government based on the Government of Japan’s SME-supporting measures from a historical perspective. Regardless of the different functions of SMEs implemented in these countries, Japan has faced various critical economic conditions. Thus, Mongolia could learn lessons from Japan’s past experience and enhance the contribution of its SME industry. The research was conducted using qualitative and quantitative approaches, and descriptive and spatial econometric methods were adopted. In Japan, priority industries were heavily supported following World War II, when it tried to minimize war-driven economic devastation. After a successful economic reconstruction process, priority industries matured and were able to operate by themselves. Therefore, the Government of Japan shifted its attention to SME-supporting policies more aggressively. The framework for supporting the SME sector was built during the reconstruction period and held a huge domestic financing capacity. Additionally, it financially supported the Government of Japan and implemented other measures for SMEs through management, fiscal, commerce, and regional frameworks. The Government of Japan formulated the SME-supporting policy according to the national development policy, and its characteristics were changed according to the development state of the economy. One of the reasons for the success of these policies was the Fiscal Investment and Loan Program. Through this system, the Government of Japan supported weak sectors and regions, successfully avoided bottlenecks, and achieved nationwide balanced development. The solution to many of the problems in Mongolia could lie in the establishment and promotion of SMEs, especially in the creation of a policy framework that helps build a balanced development structure in accordance with the “regional development strategy” and improves educational and financial capacity. Nurturing and growing this important segment could help Mongolia diversify its economy away from its dependence on mining-based exports. Similar to many other countries, access to finance for SMEs remains a major issue. SMEs face a wide range of difficulties in accessing finance, including high-interest rates, collateral requirements, size and maturity of loans, and complex application procedures. Along with the commercial bank loan, the Government of Mongolia and other international organizations are implementing a loan program to support SMEs in large cities and rural areas. However, the share of the project loan amount to the total outstanding loans was 3.5% in 2018. Considering that the commercial bank penetration rate in local areas is very low, access to subsidized loans for local SMEs is limited. According to the data used in this study, SMEs from 122 soums (a total of 339 soums) have bank loans amounting to a total of 397.8 trillion MNT, of which the bank loans of SMEs operating in Ulaanbaatar city account for 89.4%. Therefore, there is a significant concentration of SME financing activity in Ulaanbaatar city. However, SMEs operating in regional areas have extremely limited access to additional financial services. In this study, the excessive concentration of economic activity and SMEs in the capital city of Ulaanbaatar has been examined and verified using the spatial econometric method. The spatial econometric method has been applied in theoretical econometrics and is getting more attention from researchers. Using this method, we identify the spatial interaction (spatial autocorrelation) and structure (spatial heterogeneity) in regression models for cross-sectional and panel data. The results obtained from the spatial statistical analysis clearly verify the statistically significant concentration of SMEs in the capital city of Ulaanbaatar and its neighboring areas. The neighboring area of Ulaanbaatar shows the highest economic performance. Following the theoretical concept of the key features of the spatial econometric approach, the coefficient of the spatial lag of output (sales revenue) identifies the magnitude of output spillover from the neighboring provinces. The spatial lag model affirms that there exists a positive spatial externality of output with a magnitude of 0.24, and the output spillover is revealed as a key factor of the SME concentration in the area surrounding the capital city and induces firms to locate closer to each other. Therefore, the firms operating in these areas can increase their output or sales revenue. In the spatial error model, the coefficient of the spatial error model λ affirms that there exists an indirect influence, a magnitude of 0.7, operating through the spatially linked error terms. Accordingly, this outcome reveals that the firms operating in these areas can indirectly affect other firms. Considering the empirical results, the Government of Mongolia needs to address the concentration of the economic activity in the central city and mining-based provinces to achieve balanced development across the country. Nationwide balanced development is vital for the sustainable development of the country, as seen in Japan’s development history.

Naranzul Tsaschikher

Chapter 4. Macroprudential Policy to Manage Systemic Risk Deriving from Financial Institutions in Mongolia

Abstract

This study presents a measurement model of systemic risk in the frontier market that fully employs financial statement data. The Financial Times Stock Exchange survey notes that frontier markets exist in more than 150 countries. The sum of systemic risk in the frontier markets can hinder economic stability in terms of a herd of risk. Frontier markets are likely to imply unpredicted systemic risk if we think based on previous lessons learned from being unable to foresee the early signals of the Lehman Brothers shock. The reasons for the rarely studied systemic risk in these markets might be that the markets are systemically unimportant, and there is a lack of publicly available data access. Therefore, I gave it my best shot to capture systemic risk in the frontier market entirely using financial statement data. It is sometimes said that the frontier market is systemically not important because of its small size; however, the research argued that the interconnection between financial institutions is highly likely to raise systemic risk even if it is small. The fact is the majority of financial institutions in developed, emerging, and frontier markets are deeply interconnected with each other via a network. For instance, the financial market in Mongolia is representative of frontier markets. As a financial regulatory aspect, financial conglomerates are increasing and deepening their interconnection in bank-dominated and underdeveloped capital markets. Hence, the intuition is to capture the systemic uncertainty behind increasing conspiracies in financial conglomerates to negatively impact financial stability. To accomplish this, the methodology measures financial institutions’ contribution to systemic risk. Financial institutions’ contribution to systemic risk can be computed by the systemic expected shortfall. The systemic expected shortfall would be dependent on the marginal expected shortfall and can be explained by financial leverage and liabilities as the predicting power increases. Moreover, financial statements are situational mirrors of financial institutions. Based on these assumptions, we empirically measured the time and cross-dimensions of systemic risk using financial statement data. Potential variables from financial statements were tested to identify variables that could forecast systemic risk. Stock returns and capital market data have been frequently experimented with in previous literature, and financial statement data of frontier markets are new for systemic risk measurement. As a result of the analysis, the systemic expected shortfall could explain cross-dimension systemic risk, which is financial institutions’ contribution to systemic risk. Subsequently, the time series of the marginal expected shortfall can forecast the amount of systemic risk in the next two periods. Eventually, macroprudential policy, a policy tool for systemic risk, can be easily developed after forecasting financial institutions’ contribution to systemic risk.

Narantuya Natsagdorj

Chapter 5. Inflation Targeting and Pass-Through Effect in Mongolia

Abstract

This study aims to provide empirical evidence on the relationship between inflation targeting and the pass-through effect from exchange rate to consumer prices in Mongolia. The study estimates a vector-autoregressive model and examines the impulse responses of consumer prices to the exchange rate shock for the pre- and post-inflation targeting periods. Our empirical analysis confirmed the existence of a pass-through effect during the pre-inflation targeting period and loss of a pass-through effect during the post-inflation targeting period. The loss may originate from the “forward-looking” monetary policy rule in Mongolian inflation targeting, which manages the expectations of domestic agents such that they are less inclined to change prices in response to a given exchange rate shock.

Bolortuya Jambaldorj

Chapter 6. Stock Market Development and Macroeconomic Policies in Mongolia

Abstract

Numerous factors directly or indirectly affect the stock market. This study aims to investigate the adverse impacts of fiscal policy and monetary policies on the Mongolian stock market by using monthly data over January 2003 to December 2017 and by applying a vector-autoregressive (VAR) model. Fiscal crowding-out effect and an inordinate policy rate were anticipated to lower the stock price and stock traded value. Our empirical analysis indicates that stock price and stock traded value respond negatively to shocks in policy rate and government securities traded value, respectively. Basically, accumulated government debt and an inordinate policy rate have crowded out private investments in the stock market and lowered stock prices by increasing the riskiness of stocks or reducing the firms’ net worth, which is consistent with the main predictions of this study. Therefore, to improve the contribution of the stock market toward sustainable economic growth, governments need to implement macro-prudent and sound economic policies for the long run. When government securities are considered as fiscal policy tools, governments can reduce accumulated government debt and obtain the normalization of domestic bond yield by improving tax-based financing rather than government debt financing. Regarding monetary policy, it is crucial to obtain the benchmark policy rate among Asian economies by addressing significant factors affecting high policy rate including macroeconomic conditions, balance of payments, exchange rate fluctuations, financial intermediation, and deposit holders base.

Enkhbaatar Namjil

Chapter 7. Development Stage of the Bond Market in Mongolia Among Asian Countries

Abstract

This study aims to address the issue of bond market development by investigating the determinants of bond market development with a focus on Asian economies and by identifying the impediment factors to prevent its development in the Mongolian economy. This study contributes to the literature by enriching evidence of the determinants of bond market development with a focus on Asian economies with common characteristics such as those highly dependent on banking. Particularly, while only few studies have been conducted on an individual economy’s bond market, the strategic contribution is to identify Mongolia-specific factors to prevent bond market development among Asian economies. The estimation result shows that the two manageable variables, namely, bureaucracy quality and level of interest rate, are major determinants for both public and private bond market development in Asian economies. Moreover, these determinants are the main factors for preventing the Mongolian bond market from developing.

Bolormaa Ganbold

Titel: Challenges in Fiscal and Monetary Policies in Mongolia
herausgegeben von: Hiroyuki Taguchi
Takeshi Osada
Osamu Ito
Koki Hirota
Verlag: Springer Nature Singapore
Electronic ISBN: 978-981-19-9365-7
Print ISBN: 978-981-19-9364-0
DOI: https://doi.org/10.1007/978-981-19-9365-7