Discussions at the Bank of Mongolia's recent international conference emphasized the need for improved alignment between monetary and fiscal policies to address high inflation. The event, marking the bank's centennial, brought attention to how these policies can operate in concert while adhering to their respective mandates.
The Bank of Mongolia, one of Asia's oldest central banks, has played a significant role in transitioning Mongolia from a centrally planned economy to a market-based system. It established a two-tier banking system in 1991 and introduced elements of an inflation targeting framework in 2013. However, its journey toward full-fledged inflation targeting is not yet complete due to limited operational independence and the influence of fiscal policies on monetary outcomes.
Improving government policies is crucial for controlling inflation. Granting greater independence to the central bank could be beneficial, as it currently lacks autonomy typical of advanced economies with inflation targeting frameworks. Parliament holds constitutional authority over monetary policy, approving targets and guidelines annually.
Mongolia's economy heavily relies on mining exports, which constitute about 90 percent of exports and nearly a third of government revenue. This dependency leads to procyclical budget spending that aligns with commodity prices, contributing to economic cycles and inflation surges.
To avoid such procyclical fiscal policies, the government should adopt prudent spending during favorable economic conditions by adhering to fiscal rules. This approach would prevent overheating and help build fiscal buffers for downturns without threatening debt sustainability.
In an economy influenced by commodity markets, the government's role is vital in supporting the central bank's inflation objectives. Monetary policy is most effective when aligned with fiscal measures, steering output and prices together.
When inflation is high, tighter fiscal policy should complement tighter monetary policy. Such coordination can prevent excessive interest rate hikes by the central bank, reducing burdens on borrowers and financial stability risks.
Additionally, developing a domestic securities market can support monetary policy objectives. The government's reliance on external borrowing has led to a decline in domestic debt securities available for monetary operations. Restarting domestic issuance will aid liquidity management and enhance monetary transmission through benchmark bond yields.
Policymakers can draw inspiration from Mongolian horse racing traditions for better coordination between monetary and fiscal measures—a strategy that could benefit Mongolia's economy and its people.
"Angana Banerji is a deputy division chief and Mongolia mission chief in the IMF’s Asia and Pacific Department," stated Angana Banerji. "Thomas Helbling, a Deputy Director in the IMF’s Asia Pacific Department oversees the IMF’s work on Mongolia."