## Tighter Fiscal Policy Can Help Mongolia Control Inflation

_IMF News, November 26, 2024_

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## Bibliographic details
- Authors: Angana Banerji, Thomas Helbling November
- Published: November 26, 2024

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### Background and context
- Article authors: Angana Banerji and Thomas Helbling.
- Publication date: November 26, 2024.
- Discussion at the Bank of Mongolia’s recent international conference marking its centennial highlighted alignment of monetary and fiscal policies to tackle high inflation.
- Historical milestones cited:
  - The Bank established a two-tier banking system in 1991.
  - The fixed exchange rate was scrapped in 1993.
  - Elements of an inflation targeting framework were introduced in 2013.

### Inflation drivers and fiscal vulnerabilities
- Mining exports constitute about 90 percent of exports.
- Nearly a third of government revenue comes from the mining industry.
- Government spending often follows the business cycle in an economy deeply tied to global commodity markets, producing procyclical fiscal policies that fuel boom-and-bust cycles and surges in inflation.
- Reliance on external borrowing reduced the domestic pool of debt securities available for monetary policy operations; planned domestic securities issuances were deferred, causing a sharp decline in available government securities for the Bank’s operations.

### Monetary policy constraints and institutional issues
- The Bank of Mongolia’s journey toward full-fledged inflation targeting remains incomplete.
- Two obstacles identified:
  - A lack of operational independence for the Bank of Mongolia.
  - Significant fiscal influence on monetary policy outcomes because of the large share of government in the economy.
- Institutional specifics limiting autonomy:
  - Parliament has constitutional authority over monetary, financial, and credit policy.
  - Lawmakers approve the central bank’s inflation target and other monetary policy guidelines annually.
  - The Bank is required to provide specific kinds of government-mandated lending to the private sector.
- Operational workaround and risks:
  - Unable to use government securities for monetary operations like most other central banks, the Bank has relied on issuing its own bills to absorb excess liquidity.
  - The high interest costs of issuing its own bills are weakening the Bank’s balance sheet and could hinder monetary policy operations down the road.

### Policy recommendations and prescriptions
- Grant the Bank of Mongolia greater independence from the government, including eliminating requirements for the Bank to provide specific kinds of government-mandated lending to the private sector.
- Align fiscal policy with monetary policy objectives, especially when inflation is high:
  - When inflation is high, fiscal policy should also be tighter to assist tighter monetary policy.
  - Synchronization can prevent the central bank from having to raise interest rates to very high levels, reducing disproportionate burdens on borrowers and limiting risks to financial stability.
- Implement countercyclical fiscal discipline:
  - Avoid procyclical spending by sticking to fiscal rules.
  - Maintain spending discipline during commodity booms to prevent overheating, keep inflation in check, and build fiscal buffers for downturns without imperiling debt sustainability.
- Restart issuance of government domestic securities to:
  - Help the central bank better manage liquidity.
  - Develop the domestic debt market.
  - Improve monetary transmission by establishing benchmark bond yields.

### Key findings and implications
- Better monetary-fiscal coordination—working together but independently—can help win the fight against inflation and foster economic stability and growth for years to come.
- In an economy heavily influenced by commodity market swings, the government shares responsibility for helping the central bank achieve its inflation objectives.
- A robust domestic securities market supports effective monetary operations and reduces reliance on central-bank-issued bills that strain the Bank’s balance sheet.

*Angana Banerji is a deputy division chief and Mongolia mission chief in the IMF’s Asia and Pacific Department. Thomas Helbling is a Deputy Director in the IMF’s Asia Pacific Department and oversees the IMF’s work on Mongolia.*

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## References

- [IMF STAFF VISIT SUMMARY](https://www.imf.org/en/News/Articles/2024/10/14/mcs-mongolia-concluding-statement-of-the-2024-imf-staff-visit)
- [PRESS RELEASE](https://www.imf.org/en/News/Articles/2023/10/04/pr23335-mongolia-imf-executive-board-concludes-2023-article-iv-consultation-with-mongolia)
- [MONGOLIA AND THE IMF](https://www.imf.org/en/Countries/MNG)
- [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2024/11/26/cf-tighter-fiscal-policy-can-help-mongolia-control-inflation_