S OV EREIGN WEALT H FUND SECRETARIAT W O RLD BANK GROUP Case Study: World Bank Engagement with Mongolia’s Sovereign Wealth Fund This case study was prepared by Adam B. Robbins, consultant, FCMNB, and Gregory Smith, Economist, Africa PREM. February 2014 | Number 85818 Mongolia is currently experiencing a rapid economic transformation generated by vast mineral discoveries. Starting in the past decade, a boom in mining exploration confirmed the existence of large mineral deposits— notably copper, uranium, oil, coal, iron ore, and gold. Investments are turning these into world-class mineral projects: Oyu Tolgoi (OT) is likely to become one of the five largest copper and gold mines in the world; the Tavan Tolgoi (TT) mine has potential to supply high quality coking coal for more than 100 years. The share of mining in GDP was 20 percent in 2012, twice the rate of a decade before. While Mongolia is not newly “resource rich,” it has a track cyclicity of Mongolia’s mineral-based economy. The country is record including exporting coal, copper, gold and crude oil. urbanizing rapidly as Mongolians abandon nomadic, pastoral The scale of the recent developments is rapidly transforming lifestyles, and move to Ulaanbaatar to participate in the mineral Mongolia’s economy, bringing both development opportunities economy. and challenges for the country. Deepened dependence on mineral wealth exposes Mongolia to the “resource curse,” and a host of Mongolia’s Resource Economy and Mineral Boom macroeconomic challenges, such as Dutch Disease and revenue Through the early 1990s Mongolia’s economy contracted volatility. Beginning in 2008, the World Bank and Mongolia following the loss of support from the Soviet Union. Mongolia have worked together to improve the country’s mineral revenue enacted the Minerals Law in 1997, which helped attract private management framework, drafted and passed a rule-based fiscal investment to the sector, and through 2002 Mongolia’s Ministry policy law, maintained dialogue of fiscal policy, and pursued the of Mining issued almost 3,000 exploration licenses, covering design of an effective Sovereign Wealth Fund (SWF). almost 30 percent of the country’s territory. The issuance of these licenses, combined with gradually appreciating global commodity Background prices, led to an influx of foreign direct investment (FDI). FDI Mongolia is a large, sparsely populated, land-locked county spiked from less than $10 million annually through the early directly north of China and south of Russia. Population totals 1990s to $844 million at the peak of the first mineral boom, 2.79 million, about half of whom live in the capital and only in 2008 (a set of economic data appears in the Appendix 1). large city, Ulaanbaatar. Only a small portion of the country’s Investment in the mining sector drove rapid growth in GDP and land is arable, and Mongolians are traditionally nomadic herders; mineral exports. Total exports, which had been slowly growing approximately 30 percent of the current population is nomadic or because expansion of the non-mineral economy, began to surge semi-nomadic. Mongolia’s democracy is vibrant, and punctuated in 2003 and increased nearly five-fold to over $1.844 billion at by populist instability, which is driven by the election cycle and the boom’s peak. The SWF Secretariat consists of staff from across the World Bank currently engaged with SWFs in client countries. The Secretariat was set up in November 2012 by the World Bank’s Financial and Private Sector Development (FPD), Treasury (TRE), Sustainable Development (SDN) and Poverty Reduction and Economic Management (PREM) groups, and is housed within FPD’s Capital Markets Practice. http s://c olla b ora tion.world b a nk.org/groups /s wf 1 During the 2003-2008 mineral boom, the government became • Second, natural resources run out; they are exhaustible. The increasingly reliant on mineral rents, which peaked at 30 percent benefits must be made to last by transferring some (and not of GDP in 2006. The influx of government revenue precipitated all) wealth to future generations. a period of euphoric spending, including public sector salary • Third, Mongolia will be selling most of its copper, coal, oil and increases, infrastructure investments, and growing social transfer other minerals abroad. This has implications for the domestic schemes. Political cycles also influenced spending decisions, as economy in terms of how the non-mining sector competes staggered, quadrennial parliamentary and presidential elections and in terms of macroeconomic stability. both elicited promises of increased spending from candidates • Fourth, the exploitation of natural resources can be a source across the political spectrum. of corruption and inefficiency. Mongolia needs to deliver value for money when investing and spending tax payers’ and Economic Downturn and International Intervention mining revenues. The 2008 financial crisis and ensuing global economic downturn Mongolia’s rapid growth and history of boom and bust cycles halted Mongolia’s mineral boom. The price of Mongolia’s requires prioritization of a shift towards improved fiscal discipline. principal export, copper, collapsed from a 2007 price in excess Controlling inflation, which peaked at 25 percent in 2008, and of $8,000 per ton to approximately $2,500 per ton. Declines has reached double digits in three of the last five years (2008–12), in external demand from major trading partners, particularly has remained a key challenge. The government has intervened to China, the destination of 92 percent of Mongolia’s exports, control prices via the Price Stabilization Program, which may doubly harmed the country’s economy. A current account surplus limit price increases. Consequently, projections suggest inflation of 4 percent of GDP eroded into current account deficits of 12 may slowly decline. The April 2013 Mongolia Economic Update percent of GDP in 2008 and 7 percent in 2009. Mongolia’s fiscal projects: “Inflation is expected to slow down moderately in position deteriorated as well: while Mongolia had run surpluses 2013 but will likely remain in the low double digits, given the of 2–3 percent from 2005–2007, the fiscal position turned continuous expansionary fiscal policy… Demand side pressure is sharply negative, with deficits of 4.9 and 5.4 percent in 2008 expected to continue to build up and put pressure on inflation, and 2009. Facing this and other macroeconomic challenges, the due to the recent monetary easing and continuous fiscal stimulus IMF approved an 18-month Stand-By Agreement for Mongolia through large budget deficit and off-budget financing.”2 worth $229 million in balance-of-payments support in 2009. Mongolia’s inflation constitutes a component of a larger economic This intervention, combined with donor support and a rebound problem, so called “Dutch Disease,” a phenomenon named after in global commodity prices, helped restore stability to the the economic challenges faced by the Netherlands following Mongolian economy in 2010. But the crisis exposed weaknesses the discovery of North Sea oil and gas in the 1960s and 1970s. across several sectors of Mongolia’s economy, and also created “Dutch Disease” leads to appreciation of the real exchange rate an opportunity to address underlying challenges. In the fiscal caused by the inflow of foreign currency from increasing natural sector, the crisis exposed the reliance on mineral revenue and resource exports, which drive up the prices of non-tradable goods vulnerability to mineral price fluctuations, as well as politically and services. This real currency appreciation directly harms the motivated spending and inefficient investment. In the social competitiveness of exporting firms and firms that compete with sector, the crisis demonstrated the need for a social safety net to imports. Indirect harms also result as labor and capital shift insulate the population from boom and bust cycles, which could from the lagging traded sectors, towards now more profitable also function as an automatic stabilizer. non-traded sectors. In Mongolia’s case, non-mineral exports were growing prior to the mineral boom through the late 1990s into the early 2000s, but they have declined as mineral exports Challenges Facing Mongolia have surged, causing the real exchange rate to appreciate (see Mongolia, like most countries dependent on the export of chart in Appendix 1). To preserve the vitality of its non-mineral minerals, faces four key challenges (see Smith 20131): sectors, Mongolia must minimize Dutch Disease through the • First, natural resource revenues are volatile and uncertain. sterilization of mineral revenues and increased savings. Global prices can change to great extent, without warning and are almost impossible to project reliably. 1 See: http://blogs.worldbank.org/eastasiapacific/mongolia-needs-better-roads- 2 See: http://www.worldbank.org/content/dam/Worldbank/document/EAP/ schools-and-hospitals-so-why-all-this-talk-about-saving-for-the-future; accessed 18 Mongolia/MQU_April_2013_en.pdf, accessed 18 September 2013. September 2013. http s://c olla b ora tion.world b a nk.org/groups /s wf 2 Key Areas of World Bank Support While the Mongolian Parliament passed the FSL in 2010, it Concerns about recent and pro-cyclical expenditure hikes, fiscal was scheduled only to take effect in January 2013. Nonetheless deficits and off-budget spending have promoted some concern the budget achieved a 0.5 percent fiscal surplus in 2010, as about fiscal discipline and heighten vulnerability to fluctuations expenditures were reduced and mineral prices recovered. In in global mineral prices. Consequently, World Bank teams are 2011 and 2012 mineral revenues continued to increase, but looking for ways to build government and public support for expenditures increased more rapidly, leading to fiscal deficits of more disciplined fiscal policy. 4.8 percent of GDP in 2011 and 8.4 percent of GDP in 2012. Projections suggest that the trend of structural fiscal deficits may The World Bank’s intervention has been composed of several continue, despite the requirements of the FSL as it comes into multi-year projects. Key among them is the Economic Capacity force. Building Technical Assistance Credit (ECTAC), active 2004–12, According to the April 2013 Mongolia Economic Update: “The and Multi-Sectoral Technical Assistance Project (MTAP), which current revenue projection of the [2013] budget was made based on began in 2010. The MTAP targets areas key to Mongolia’s growth the over-estimated revenue forecast of the 2012 budget and is again and recovery from the 2008-2009 crisis, including fiscal policy likely to overestimate revenue by 15-20 percent… The World Bank and management, social protection, the financial sector, and the projects an overall budget deficit to reach 6 percent of GDP and the mining sector. The fiscal policy focus included “Strengthening structural deficit at over 7 percent due to the revenue shortage…” the institutional capacity and organizational arrangements of Furthermore, these deficit projections do not include off-budget MOF and NDIC for strategic planning and policy analysis, financing operations, such as the Price Stabilization Program, in order to ensure the Recipient’s fiscal sustainability and lending from the Development Bank of Mongolia, or spending compliance with the Fiscal Stability Law.” Since the IMF and the of the proceeds from the $1.5 billion Chinggis bond offering. World Bank jointly intervened during the 2008 crisis, MTAP’s Once those items are incorporated, projected fiscal deficit rises fiscal policy engagement included close coordination with IMF. to 13 percent of GDP, suggesting that the FSL will be unlikely This section will focus on three key areas of support since the to be met in its first year. 2008–09 financial crisis, namely: (i) the Fiscal Stability Law, (ii) effective sovereign wealth fund design, and (iii) promoting fiscal Effective Sovereign Wealth Fund Design discipline and efficiency of public expenditure. The World Bank has been supporting the Mongolian government to improve the design of their Sovereign Wealth The Fiscal Stability Law Fund. The MTAP and Governance Partnership Facility provided The World Bank and IMF assisted the government in designing funds to support the Ministry of Finance with this task. Central and passing a Fiscal Stability Law (FSL).3 The IMF’s Fiscal Affairs to support has been involvement of experts from Chile and in Department provided extensive technical advice alongside the organizing an international conference on SWFs (see Appendix World Bank team’s effort through the MTAP and ECTAC 3). Policy dialogue was extended to discussion of the objectives projects. The FSL drew upon the experiences of other mineral- of the fund and its governance. exporting developing countries, particularly Chile, but also Having identified appropriate economic policy objectives, World Botswana and South Africa. The technical assistance, combined Bank advisors working with the government have proposed three with the movement toward political consensus for implementing sovereign wealth funds, each to meet one of the clearly defined a more robust fiscal and mineral revenue management framework, economic policy goals described above, sterilization, savings, and led to the passage of the law by Parliament in July 2010. The pension reserves. The funds are: FSL attempted to impose budget discipline and delink fiscal • A Fiscal Stability Fund, which was established concurrently policy from mineral revenue fluctuations. The FSL has three key with the Fiscal Stability Law in 2010, to stabilize volatile elements: one, a ceiling on the structural deficit of 2 percent mineral revenue and smooth the government’s revenue stream of GDP; two, a cap on expenditure growth based on the non- mineral GDP growth rate; and three, net present value of public • A Future Generations Fund, with a long-term investment horizon, to convert a portion of Mongolia’s mineral wealth to debt cannot exceed 40 percent of GDP (a detailed description of financial wealth for the benefit of future generations the Fiscal Stability Law appears in the Appendix 2). • A Pension Reserve Fund, also with a long-term investment 3 One of four key laws passed between June 2010 and January 2012, including: Integrated Budget Law 2011, Public Procurement Law of Mongolia, 2011 and horizon, which serves as a financial reserve to guarantee public Social Welfare Law, 2012. pension obligations http s://c olla b ora tion.world b a nk.org/groups /s wf 3 These funds draw upon the Chilean SWF model, which relies Such exchange played a key role in reforming Mongolia’s fiscal upon three funds integrated into fiscal policy via a rule that limits framework and developing a natural resource management deficits, and governs contributions and withdrawals from the policy. Key components of the South-South knowledge exchange funds. Similarly, these funds will be integrated into Mongolia’s included economic policy conferences in Mongolia jointly fiscal policy via the Fiscal Stability Law, with clearly prescribed hosted by the World Bank and the Government of Mongolia, contribution and withdrawal rules. Panama, Colombia, and and study tours to Washington, DC and to mineral-exporting other countries have also adopted rule based fiscal policies with developing countries. Support was provided through the MTAP integrated SWFs that perform counter-cyclical functions. and ECTAC projects and through the Governance Partnership Facility (GPF). Promoting Fiscal Discipline and Efficiency of Public Expenditure The South-South exchange provided knowledge from a number of mineral-exporting developing countries, but the non-technical Without fiscal discipline there can be no accumulation of wealth, aspects were perhaps more important. A World Bank Note on no saving and therefore no effective stabilization tool or SWF. the topic asserts: “political commitment to the fiscal reforms was Resources are instead spent fully and often leveraged for further greatly facilitated and deepened by the South-South exchange. debt fuelled expenditure. Through the economic monitoring Looking back, this stands out as a critical component of the and updates the country team is able to provide commentary budget support operations.” It is estimated that roughly half on macroeconomic policy and help reach out to audience via of all MPs participated in the study trips or seminars hosted in television interviews (that the country office regularly conducts Mongolia, significantly shifting the political debate. The study with Reuters Mongolia), the press and social media. During the trips and direct exchange with peers in countries facing similar month of its launch the Mongolia Economic Update April 2013 challenges contextualized Mongolia’s economic challenges, was one of the World Bank’s most accessed documents covering demonstrated how solutions can be enacted, and their long-term the East Asia Region. impacts. Furthermore, efforts are made to improve the quality of expenditure. A key area is infrastructure, where there are Governance Support extensive investment needs, particularly in transportation, Strengthening governance so that citizens can benefit from the sanitation, and water infrastructure. Increasing mineral revenue country’s mineral wealth has been a key focus of the World and Mongolia’s ability to raise funds in the global capital markets Bank’s engagement in Mongolia. Governance work has included (as the US$1.5 billion Chinggis bond offering demonstrates) all aspects of the mineral value chain in Mongolia—from will allow the country to address these needs, but efforts are the issuance of mining licenses, to extraction, to collection needed to improve public investment management. In response, of revenues, to government expenditures, and eventually, the Bank has supported the creation of a central procurement investment of windfall revenues. Resources from the World agency (CPA), which will remove procurement authority Bank’s Governance and Anti-Corruption funds have supported from individual ministries. The CPA will professionalize the this work. The Governance Assistance Project focuses on procurement process, and implement a formalized bidding strengthening public finance management, so that mineral and bid evaluation process. The new procurement structure revenues are used efficiently. And a GPF grant supports capacity will also separate contract procurement and implementation, building for local institutions, including civil society, an as implementation will remain under the individual ministries’ independent think-tank, Parliament’s research department, and authority. Recommendations for reform have also been discussed ongoing policy outreach events related to fiscal policy. Finally, with the government under the MTAP project and published in the GPF grant also supports the South-South cooperation, policy note and blog format.4 discussed above. Widening the Debate Features of World Bank Support To communicate directly with the public, and to create There were several features that characterized the World Bank’s a constituency for disciplined fiscal policy outside of the support to the SWF and wider extractives management work government, the Bank Tweets (see Appendix 4) and blogs on in Mongolia. The first is use of South-South cooperation. Mongolia-related topics in both English and Mongol.5 Blogging 4 See: http://blogs.worldbank.org/eastasiapacific/road-to-prosperity-five-ways- has been highly successful, with an extremely high following mongolia-can-improve-the-quality-of-its-infrastructure-spending and http:// www.worldbank.org/en/news/feature/2013/02/27/mongolia-improving-public- 5 For example see a post on the design of an effective SWF: http://blogs.worldbank. investments-to-meet-the-challenge-of-scaling-up-infrastructure; accessed org/eastasiapacific/mongolia-needs-better-roads-schools-and-hospitals-so-why-all- September 2013. this-talk-about-saving-for-the-future; accessed September 2013. http s://c olla b ora tion.world b a nk.org/groups /s wf 4 despite a population of only 2.7 million. By doing so, the Lesson 2: Introducing new participants can gradually shift Bank may be able to legitimize the idea of fiscal discipline as the political consensus a beneficial policy option, in and of itself, and independent of As current political incentives for policymakers favor spending on the tumultuous political environment. The importance of social local infrastructure projects, and impede legislation supporting media and direct communication with the public via the internet fiscal restraint or long-term saving, World Bank efforts have and other electronic channels will only grow in the future, and is focused on altering political incentives, particularly through already becoming an important channel for participation in the introducing new participants into the consensus process. On domestic policy discussion. the local level, the Bank is working to seed independent think- tanks in Mongolia. These efforts have two key aims: (i) to better inform the economic and mining policy debate to enable Lessons from Recent World Bank Support more sustainable and development-oriented policies; and (ii) to While fiscal policy in Mongolia continues to evolve, and strengthen transparency and accountability across the extractive outcomes remain uncertain, one can nonetheless draw several industry value chain. While the results of these tactics are yet to lessons from the World Bank’s engagement in Mongolia, and the be determined, it demonstrates a novel long-term effort to shift SWF establishment process. political consensus toward sustainable policy. Lesson 1: Aim for politically feasible policy outcomes The introduction of new participants to the policy discussion The FSL Law, passed by Mongolia’s parliament in 2009, and due via South-South cooperation has clearly improved policy to take effect in 2013, reflects good international practice. Similar implementation. From the FSL, to later efforts to establish a rule-based fiscal policy has proven successful in implementing series of SWFs well integrated into fiscal policy, South-South counter-cyclical fiscal policy in Chile, and has been replicated in cooperation, including study trips and multiple conferences other countries, including Panama, Colombia, and others. The hosted in Mongolia, has and will continue to play a large role in technical aspects of the FSL have transferred easily to Mongolia, informing and influencing Mongolia’s economic policy. but the political incentives to implement the Mongolian law are yet to exist. For members of parliament, political and Lesson 3: The Bank can amplify its voice in the political business incentives outweigh arguments in favor of stricter fiscal process via social media discipline. The Mongolia case has demonstrated the importance of direct communication with the public via the internet and social media. Whether or not the FSL will be adhered to in a technical sense The Bank has taken several steps to reach out to policymakers remains to be seen, but ongoing off-budget spending through and the public to enhance political consensus for disciplined, rule the Development Bank of Mongolia means that principles of the based fiscal-policy. Within a political environment “characterized FSL will certainly be circumvented. In response to these political by periods of instability, with legislative gridlock, delays in impediments, World Bank projects now aim for more politically appointment of the prime minister and intense competition feasible objectives, particularly transparency and spending between parties” and “general instability as groups compete for efficiency. Fiscal discipline remains an important, but long-term access to and control over resources,”6 the World Bank has taken goal; consequently, short-term achievements in expenditure steps to amplify its voice as an external expert participant. efficiency and small steps towards forming a political consensus for fiscal discipline have taken precedence. 6 “Background Briefing for Mongolia’s Fiscal Policy and SWF” available at: http:// documents.worldbank.org/curated/en/2013/05/17713620/effective-sovereign- wealth-fund-management-mongolia-principles-apply; accessed 21 January 2014. http s://c olla b ora tion.world b a nk.org/groups /s wf 5 Bibliography Hasnain, Z. et al. 2013. Mongolia: Improving public investments to World Bank Blog. See: http://blogs.worldbank.org/ meet the challenge of scaling up infrastructure, EASPR. eastasiapacific/mongolia-needs-better-roads-schools-and- hospitals-so-why-all-this-talk-about-saving-for-the-future. Hasnain, Z. “Road to prosperity: five ways Mongolia can improve the quality of its infrastructure spending,” East Asia & van den Brink, R., A. Sayed, E. Aninat, E. Parrado, Z. Hasnain, Pacific on the rise (blog). February 27, 2013. http://blogs. and T. Khan. 2010. South-South Cooperation: How Mongolia worldbank.org/eastasiapacific/road-to-prosperity-five-ways- learned from Chile on Managing a Mineral-Rich Economy. mongolia-can-improve-the-quality-of-its-infrastructure- PREM note. spending. van den Brink, R., A. Sayed, S. Barnett, E. Aninat, E. Parrado, Ianchovichina, E. and S. Gootu. 2007. “Growth Diagnostics for a Z. Hasnain, and T. Khan. 2012. South-South Cooperation: Resource-Rich Transition Economy: The case of Mongolia.“ How Mongolia Learned from Chile on Managing a Mineral- Policy Research Working Paper No. 4396, World Bank, Rich Economy. Economic Premise No. 90, World Bank Washington, DC. September 2012. See: http://siteresources.worldbank.org/ EXTPREMNET/Resources/EP90.pdf; accessed September Isakova A., A. Plekhanov, and J. Zettelmeyer. 2012. “Managing 2013. Mongolia’s resource boom” Working Papers 138. European Bank for Reconstruction and Development, Office of the van den Brink, R., and T. Khan. “The Dutch Disease: Some Lessons Chief Economist. from Mongolia.” An eye on East Asia and Pacific, January 01, 2012. See: http://documents.worldbank.org/curated/ Lee, T. and G. Smith. 2013. “Effective Sovereign Wealth Fund en/2012/01/16218221/dutch-disease-some-lessons- Management in Mongolia: What Principles Apply?” mongolia (accessed September 7, 2013). Conference note. See: http://www-wds.worldbank.org/ external/default/WDSContentS erver/WDSP/IB/2013/05/ World Bank. 2009. Mongolia Consolidating the Gains, Managing 15/000442464_20130515125148/Rendered/PDF/776970 Booms and Busts, and Moving to Better Service Delivery: A WP0Mongo0Box0342041B00PUBLIC0.pdf. Public Expenditure and Financial Management Review. PREM. Maino, R., M. Imam, and T. Ojima. 2013. “Macroprundential Policies for a Resource Rich Economy: The Case of World Bank. 2013a. Highlights of the 2013 Budget and the Fiscal Mongolia.” IMF Working Paper WP/13/18. Outlook. PREM (2012). Smith, G. 2013. “Mongolia Needs Better Roads, Schools and World Bank. 2013b. Mongolia Economic Update. EASPR. Hospitals: So Why All This Talk Of Saving For The Future?” http s://c olla b ora tion.world b a nk.org/groups /s wf 6 Appendix 1: Table of Economic Data Indicator Name 2003 2004 2005 2006 2007 GDP (current US$) 1,595,297,301 1,992,066,759 2,523,359,941 3,414,053,251 4,234,894,168 GDP growth (annual %) 7.00 10.63 7.25 8.56 10.25 GNI per capita, PPP (current international $) 2330 2620 2830 3150 3490 Mineral rents (% of GDP) 6.68 13.84 16.45 30.28 26.31 Current account balance (% of GDP) 3.34 6.49 4.06 PPP conversion factor (GDP) to market exchange 0.28 0.30 0.35 0.42 0.46 rate ratio Official exchange rate (LCU per US$, period 1147 1185 1205 1180 1170 average) Inflation, consumer prices (annual %) 5.13 8.24 12.72 5.10 9.05 Foreign direct investment, net inflows 131,500,000 92,900,000 184,600,000 343,980,000 372,754,400 (BoP, current US$) Exports of goods and services (current US$) 835,170,833 1,210,933,058 1,482,963,088 2,029,424,724 2,524,608,800 Indicator Name 2008 2009 2010 2011 2012 GDP (current US$) 5,623,236,708 4,583,834,427 6,200,357,070 8,761,426,371 10,271,393,281 GDP growth (annual %) 8.90 -1.27 6.37 17.51 12.28 GNI per capita, PPP (current international $) 3800 3680 3710 4360 5100 Mineral rents (% of GDP) 20.02 17.68 21.72 17.25 Current account balance (% of GDP) -12.27 -7.46 -14.29 -31.51 PPP conversion factor (GDP) to market exchange 0.55 0.45 0.66 0.67 rate ratio Official exchange rate (LCU per US$, period 1166 1438 1266 1358 average) Inflation, consumer prices (annual %) 25.06 6.28 9.48 14.98 Foreign direct investment, net inflows 844,697,950 623,609,218 1,691,421,732 4,714,590,859 (BoP, current US$) Exports of goods and services (current US$) 3,037,505,792 2,304,660,243 3,391,588,818 5,462,024,638 5,231,737,046 Appendix 2: Key Elements of the Fiscal Stability Law 1. A ceiling on the structural deficit of 2 percent of GDP. The structural deficit is defined as total expenditures minus structural revenues, with the latter calculated by using the moving average price of major minerals—currently copper and coal—over 16 years (past 12 years, current year, and future three years). This helps to insulate the budget from commodity price volatility and prevents fiscal policy from transmitting the shocks to the rest of the economy. 2. A cap on expenditure growth based on the non-mineral GDP growth rate and determined as the greater between its 12-year moving average value and the budget year’s GDP growth rate. Spending growth that is too fast can have negative consequences in terms of overheating and inflation, and is also difficult to manage without reductions in quality and efficiency. This provision is meant to prevent excessive spending growth when structural revenue is growing fast, and also takes effect in 2013. 3. Net present value of public debt cannot exceed 40 percent of GDP. The provision takes effect starting in 2014, with a transition period specified for the preceding years, and is meant to safeguard against the government borrowing excessively against future wealth. Source: World Bank Economic Premise Number 90 and based on the Fiscal Stability Law (passed June 24, 2010). http s://c olla b ora tion.world b a nk.org/groups /s wf 7 Appendix 3: Mongolian SWF Conference, March 2013 In Ulaanbaatar over 100 high-level policy makers and Parliament members gathered to discuss options for Mongolia’s design of an effective SWF. Experiences of natural resource management were shared between practitioners from Mongolia and Norway, Chile, Botswana, Timor-Leste, Trinidad and Tobago and Abu Dhabi. The following principles—garnered from international experience—can help guide Mongolia towards the design of an effective SWF that is right for the Mongolian context. 1. Make objectives clear and design the SWF accordingly. Different types of SWF have been developed for different reasons (for example economic stability, to meet pension liabilities; and inter-generational savings). A SWF is not a silver bullet and should not be over-burdened with too many objectives. 2. Keep it simple and evolve over time. Managing fiscal instruments and enhancing institutions is an iterative and incremental process and a lot will be learned along the way. Start with something straight forward (for example, keep investments simple and low risk at first) and increase sophistication as financial skills and lessons are gained). Some SWF do invest domestically—the merits of which are currently being debated—but this should be approached carefully as there are significant risks. 3. Integrate the SWF with a disciplined fiscal policy. A SWF is not sufficient on its own to stabilize an economy; it must be combined with a commitment to fiscal discipline. All expenditures should also be kept on-budget and the recent proliferation of off-budget expenditures should be reversed. A country like Mongolia should of course invest domestically, but investment should occur through the budget and any fiscal surplus should be accumulated in the SWF. 4. Build political and public support for saving. Public debates and consultations on the topic should be encouraged to ensure sufficient buy-in for the SWF over-time. 5. Transparency and accountability are key factors for success. The rules for and operations of the SWF must be made clear to stakeholders through regular and widely available reporting. Both the legislature and the public should be able to view and understand the SWF’s business, to ensure widespread support. Ideas from other countries include: a Citizen’s guide to the budget, quarterly reports published on websites in local language and English, brochures, websites, public lectures (in schools and universities), and regular press statements. 6. Invest in the SWF only in times of fiscal surplus. It does not make sense to borrow in order to accumulate financial assets in the SWF as returns from the saving may be lower than the cost of the borrowing. Source: Lee, T. and G. Smith. 2013. “Effective Sovereign Wealth Fund Management in Mongolia: What Principles Apply?” World Bank Conference Note. Appendix 4: Widening the Debate on Social Media Note: translates to “Better roads, schools and hospitals are needed in #Mongolia: so why talk about saving for future?” 7 7 See: https://twitter.com/WorldBankMGL; accessed 18 September 2013. http s://c olla b ora tion.world b a nk.org/groups /s wf 8 Appendix 5: What Does Mongolia Export? 2.6B 2.4B Coal; briquettes 2.2B Coal: briquettes 2.0B 1.8B 1.6B Zinc ores Value (USD) Molybdenum ores 1.4B 1.2B Gold content 1.0B 800M 600M Women’s suits, not knit Iron ores and concentrates Sweaters, pullovers, sweatshirts, etc. 400M Feldspar Wool or animal hair, combed Gold 200M 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year Source: The Observatory of Economic Complexity. http://atlas.media.mit.edu/explore/stacked/export/mng/all/show/1998.2010.1/ http s://c olla b ora tion.world b a nk.org/groups /s wf 9