Mongolia's economic policies are “too expansionary” and are creating inflationary pressures, the International Monetary Fund (IMF) warned this week, calling for hikes in interest rates.

In an appraisal of Mongolia's booming economy, the IMF welcomed recent monetary policy tightening, but said it was not enough to contain rising inflationary pressures and economic overheating. Food price volatility “has disguised” underlying pressures and economic overheating, it said. A rapid acceleration in bank lending has put Mongolia's financial system “under stress” and the IMF urged authorities to manage risks pro-actively to prevent problems from building up.

“Mongolia has a bright economic future,” the IMF said, but added: “Success, however, will depend on a shift in approach in managing the economy. At present, macroeconomic policies are too expansionary.”

Any additional spending in 2011 would fuel more overheating, drive up inflation, and undermine credibility in the government's fiscal policies, the IMF said. A medium-term budget framework with a share cut in spending in 2013 would effect a “smoother path of spending.”

The country's state-owned Development Bank posed “significant fiscal risks,” and should not be used “as a vehicle for off-budget spending.” The IMF also encouraged the Development Bank’s commercial use with greater transparency. The bank provides loans for infrastructure development, industry, energy projects, and roads.