Source: Montsame                         Date: 10 February, 2010

A statement issued by an International Monetary Fund (IMF) mission after a visit to Mongolia says that the country “is in the midst of a robust economic recovery and growth this year is projected to top 10 percent”,but warns that “the large increase in fiscal spending this year will actually do more economic harm than good”. The IMF team held talks with Mongolian authorities, the private sector, and academics on macroeconomic developments and policies since Mongolia's successful completion of the Stand-By Arrangement (SBA) last year.

The statement calls the current fiscal policy “highly expansionary” and warns that the economy is showing “signs of overheating with inflation already too high and likely to reach 20 percent before the end of the year”.  It says, “The Government expenditure already amounts to nearly two-thirds of the non-mineral economy and the 35 percent spending increase in this year's budget will generate much more demand than can plausibly be met by an increase in domestic production. As a result, any immediate benefits of higher spending will be dissipated through higher inflation, faster real exchange rate appreciation that draws in imports and hurts local producers, and ultimately a crowding out of private sector activity.  International experience also shows that such high inflation -- particularly given its concentration in staple food items -- will have an especially hard impact on the poor.” It says, unequivocally and bluntly, “The 2011 budget should be amended to reduce spending substantially.”

Asserting that “there are limits to what monetary policy can achieve if budget spending this year is not scaled back”, the IMF team feels that nonetheless, the Central Bank should be “more proactive in fighting inflation and promptly initiate a tightening cycle, starting with an up-front hike in interest rates. The central bank policy rate is already negative in real terms and will become even more so as inflation rises.”

It feels the flexible exchange rate regime “has been working well” and is “well suited for the Mongolian economy” which “has a bright future, as development of the mineral sector will lead to a substantial growth and an opportunity to spread prosperity to all Mongolian citizens. Such prosperity, however, is not guaranteed and will require structural reforms -- with a top priority being introduction of a targeted poverty benefit-and disciplined macroeconomic policies”. These include:

(i)   containing fiscal spending pressures and strictly adhering to the fiscal stability law;

(ii)  gearing monetary policy toward containing inflation, including by timely adjusting interest rates in line with the evolving price pressures;

(iii)  maintaining a flexible exchange rate regime; and

(iv) safeguarding the banking system through prudential regulation and supervision. Pursuing such a combination of policies would leave Mongolia well poised to ensure that its mineral wealth translates into strong, sustained, and equitable growth.