Mongolia

Gross Domestic Product (GDP) growth accelerated to an unprecedented 17.3 percent in 2011 from 6.4 percent in 2010 and the unemployment rate fell from 13 percent in 2010 to 9 percent in 2011. However, real... Show More + wages for unskilled workers in the urban informal sector are starting to fall as the inflation rate reached 11.1 percent year-on-year in December. Sharply rising government spending is the root cause of overheating: government spending rose by 56 percent in 2011 and is budgeted to rise by a further 32 percent this year, fueled by sharply rising resource revenues. This pro-cyclical fiscal policy could result in another 'boom-and-bust' cycle Mongolia experienced before, particularly as the global economy could face a substantial slowdown in growth due to the continuing European sovereign debt crisis, and which could result in a sharp drop in mineral prices and subsequently government revenues There have been major legislative developments in 2011 and early 2012 aimed at strengthening policy institutions and frameworks. The Integrated Budget Law (IBL) was passed in December 2011: this organic budget law contains measures to support fiscal sustainability and the successful implementation of the Fiscal Stability Law. It also strengthens the public investment framework by requiring feasibility studies and alignment with national priorities for projects to be included in the Public Investment Program and the budget. The Social Welfare Law was passed in early January. This mandates the provision of a targeted poverty benefit replacing the existing system of universal cash transfers. To ensure macroeconomic stability and to prevent a hard landing for the economy in case of an adverse external shock, Mongolia needs to adhere strictly to prudent fiscal policies as set out in the FSL and IBL and tightening both fiscal and monetary policy to reduce inflation, take macro-prudential action to reduce systemic risks in the banking sector and maintain a flexible exchange rate that will act as the first buffer in any external shock materializes. These are uncertain times for Mongolia. The economy faces growing headwinds from the global economic environment, while the looming elections increase domestic uncertainty. Until a substantial amount of savings has accumulated in the stabilization fund, Mongolia remains strongly exposed to volatility in commodity prices. Show Less -

The Mongolian economy is experiencing rapid growth in 2011 the second quarter saw the economy growing at a whopping 17.3 percent year on year, compared to 9.9 percent in the first quarter. Transportation... Show More + and construction grew at 39.9 percent and 38.4 percent, respectively, while retail and wholesale trade grew at 24.7 percent, with Mongolians spending more on consumption as a result of higher incomes. The mining and manufacturing sectors recorded respectable growth rates of 8.3 and 12.9 percent yoy in the second quarter, respectively. Reflecting the higher growth, unemployment declined from 13 percent in December 2010 to 8.7 percent in June. Informal labor markets for unskilled workers are also booming, with real wages nearly doubling between December 2010 and June 2011. Mongolia's economic outlook depends heavily on global macroeconomic factors: the current uncertainty and poor growth prospects for the global economy are cause for concern. If there is another global recession, Mongolia's small, open economy will be affected. In that case, China's policy reaction will be crucial for Mongolia. Show Less -

The economy continues to recover with most sectors rebounding strongly from the sharp drop in output late 2008 and early 2009. Preliminary estimates suggest that real Gross Domestic Product (GDP) grew... Show More + by 6.1 percent year-on-year in 2010, following an outturn of minus 1.3 percent in 2009. However, winter arrived in Mongolia with the agriculture sector still feeling the impact from last year's dzud. The sector has now experienced double-digit contractions for the third quarter in a row. The exchange rate against the US dollar has been slowly appreciating back to the pre-crisis level. In December 2010, the average monthly exchange rate against the US$ appreciated by 3.0 percent, compared to the previous month, or 15 percent compared to December 2009. The latest survey conducted in informal labor markets in December 2010 revealed a reduction in number of casual workers by about 40 percent compared to September due to the seasonal closure of construction labor markets, and reduced outdoor sales activities due to cold weather. Mongolia has made significant progress in improving budget transparency, but there is still considerable room for improvement. Finally, although Mongolia's laws are easily accessible online and court processes are generally impartial and transparent, the predictability of court decisions is limited and the courts, enforcement and registration agencies are often perceived as corrupt by the public. Show Less -

In the first quarter of 2010, the trend improvement in the fiscal deficit stalled somewhat as the positive impact on the deficit of improving revenues has been offset by expanding expenditures. The overall... Show More + fiscal balance of recent months has been stable, after the strong improvement in the fourth quarter of 2009. Despite improved revenue performance there has been an offsetting rise in expenditures. There is a worry that rather than seeing the accumulation of fiscal savings in a process of sustained consolidation, expenditures will continue to rise in step with revenues, risking a return to the boom-and-bust cycle of the pre-crisis years. Most recently, in March, the 12-month rolling deficit deteriorated slightly to 5.2 percent of Gross Domestic Product (GDP), despite improved revenue generation. On the 12-month rolling basis, total revenue was equivalent to 34.7 percent of GDP while total expenditure and net lending amounted to 39.9 percent of GDP. Revenue performance has improved markedly since September 2009. For example, in March, 2010, the annual growth in total revenue and grants was 66 percent in nominal terms and 61 percent in real terms. Reflecting the recovery in real economic activities, imports and favorable commodity prices, strong annual growth in March was seen in corporate income tax, the windfall profit tax (12 times higher), VAT (Value Added Tax-up 63 percent), customs duties (up 39 percent) and royalties (more than double). Show Less -

Mongolia has staged an impressive recovery from the steep recession of late 2008 and early 2009. Moreover, the economic recovery is becoming broad-based. Strong demand for copper and coal from China are... Show More + fuelling the recovery, and are also helping to substantially improve the external balance. And imports are up by 55 percent in August on a year-on-year basis. The exception is the agriculture sector, due to the devastating impact of the dzud during the winter months, which wiped out substantial numbers of livestock. Fiscal balances have improved strongly in step with mineral-related revenues. Mongolia's public finances are improving: on a 12 month rolling basis, the fiscal deficit fell to just 0.4 percent of Gross Domestic Product (GDP), down from 10.6 percent in August last year. Excluding net lending, the budget balance swung into a small surplus of 0.8 percent of GDP, its first since October 2008. The International Monetary Fund (IMF) board concluded its final review of the standby arrangement on September 9th. The final review (a combined 5th and 6th) would have allowed the disbursement of US$46.4 million (two tranches). But the Mongolian authorities will not draw on the last two tranches, as the international reserves of the central bank are at an all time high, while the exchange rate has appreciated by 9 percent since the start of the year. Initially, the recovery was led by transport and communication and the mining sector. However, manufacturing and wholesale and retail trade sectors grew strongly since the first quarter of this year. Industrial production also rebounded at the end of 2009 and has since remained strong, growing by 25.5 percent yoy (on a 3-month moving average basis) in August. Show Less -

The economic rebound in recent quarters has been stronger than expected and the economy is showing signs of overheating. These signs are show up in rising inflation, especially of those goods and services... Show More + which are in strong demand, but cannot easily be imported or whose local supply cannot readily be increased to meet the growing demand. Gross Domestic Product (GDP) growth reached 20.8 percent year-on-year (yoy) in Q3, following an outturn of 17.3 percent in Q2. Growth for the year as a whole will likely hit 15 percent, if not more, up from 6.4 percent in 2010, and is being pushed by infrastructure spending as Mongolia develops its vast mineral wealth. Show Less -

The recent worsening of the financial crisis in the US and the contagion to the world real economy are adding pressures for Mongolia to address macroeconomic imbalances. In particular, the fall in copper... Show More + prices and the shortage of liquidities worldwide will imply a slowdown of global economic growth, lower copper prices, and reduced foreign direct investment (FDI). The implications for Mongolia, a larger current account deficit, much lower government revenues, and continued large investment needs, will pose significant policy challenges for the new government to maintain growth while lowering inflation. Fiscal tightening will be a key to prevent inflation from permanently affecting expectations and to reduce the current account deficit. This includes no further increase in public wages, no further increase in universal cash transfers, and a prioritized investment program limited to what the absorptive capacity of the economy can bear. Fiscal space should be kept for a targeted social safety net to protect the most vulnerable. Reducing inflation is always painful, but the slower the authorities react, the more protracted the process is, with deeper impact in economic activity, employment and poverty. Show Less -

Real Gross Domestic Product (GDP) growth rate was 9.9 percent in 2007. Economic growth has been primarily driven by agriculture (which contributed 3.4 percentage points to economic growth), and services... Show More + (which contributed 4.3 percentage points). In the agriculture sector, the December 2007 annual livestock census reported an increase of 15 percent of livestock from 34.8 to 40.3 mln livestock, with the number of goats, sheep and cattle increasing by 18, 15 and 14 percent respectively. While most of the foreign direct investment (FDI) coming into Mongolia continues to go to mining, its value-added only grew by only 1.7 percent this year (mainly came from coal extraction). On the non-bank side, the financial regulatory commission has been making efforts to improve the legal and regulatory framework, however, its weak institutional capacity and resource constraints continue to be a major impediment in effective supervision. Several key laws relating to the financial sector need to be finalized. Efforts have been made towards resolving immediate issues relating to the closed savings and credit cooperatives, developing the insurance industry and developing a framework and institutions to develop the mortgage market. However, several laws and enabling regulation still need to put in place before benefits of increase in financial sector efficiency (lower cost of financing) can be fully realized. Show Less -

This paper includes the following headings: recent economic developments; impact of increases on world food and oil prices on economic growth and consumption; recent policy developments; special focus:... Show More + private sector development; challenges - constraints to economic growth need to be addressed; looking ahead; improving the Investment Climate (IC) and competitiveness; economic diversification; addressing infrastructure bottlenecks and encouraging global supply chains; and private sector development and labor market issues. Show Less -

Mineral prices held up well since the last monthly update. And economic growth in China, Mongolia's main export destination, continues to be strong, fueled by a massive fiscal and monetary stimulus package.... Show More + In Mongolia, however, depressed economic conditions made the trade deficit narrow further, as imports continue to fall faster than exports (on a 12-month rolling basis). Industrial production continues to contract, particularly in the manufacturing sector, with Mongolia facing a sharp Gross Domestic Product (GDP) growth slow down for 2009 as a whole. The fiscal balance remains under pressure despite a slight improvement in the 12-month rolling fiscal balance in September. Given the limited financing options available, the next two to three years will require a continued fiscal effort to bring the budget back to a sustainable path. New fiscal management legislation designed to support this effort will be presented to parliament. The second annual public Economic Policy Conference (EPC) and a high-level workshop between parliamentarians and international experts aimed to build a better understanding as to why and how Mongolia was so badly affected by the recent boom and bust cycle and what types of reforms could be implemented to create a stronger framework for both the financial sector, as well as fiscal management. Show Less -