From Natural Resource Boom to Sustainable Economic Growth: Lessons for Mongolia

IMF Working Papers, April 30, 2015

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Some resource-rich developing countries are in the process of harnessing immense mining resources towards inclusive growth and prosperity.
Tapping into natural resources can be challenging because of:
- large front-loaded investment,
- volatile capital flows,
- exposure to global commodity markets.
Public investment is needed to remove often-large infrastructure gaps and unlock economic potential.
Excessively rapid fiscal outlays can push the economy to its limit of absorptive capacity and increase macro-financial vulnerabilities.
This paper applies a structural model-based approach to analyze macroeconomic impacts of different public investment strategies on fiscal and non-fiscal variables.

The analysis utilizes a structural model-based approach.
The model evaluates macroeconomic impacts of different public investment strategies on key variables such as:
- debt,
- consumption,
- sovereign wealth fund,
- real exchange rates.
The model is applied to Mongolia as a case study.

Fiscal policy adjustment is required to maintain macroeconomic and external stability.
Moderating infrastructure investment is necessary to avoid exceeding absorptive capacity and to limit macro-financial vulnerabilities.
Optimizing investment efficiency is needed to boost long-term sustainable growth for Mongolia.

Moderate the pace of infrastructure investment to align with the economy’s absorptive capacity.
Optimize investment efficiency (improve the efficiency level/index of public investment projects).
Implement fiscal policy adjustments and fiscal consolidation where appropriate to support debt sustainability and stability.
Use a sovereign wealth fund and other fiscal instruments prudently as part of managing resource revenues and macroeconomic stabilization.