Abstract
This 2005 Article IV Consultation highlights that Mongolia’s overall economic performance was stronger than expected and broad based in 2004 and early 2005. Sectoral contributions to high growth included a rebound in the livestock sector from harsh winter shocks of 2000–01 and strong mining exploration and exports, boosted by a favorable environment of unusually high copper and gold prices. After several years of moderation, however, inflation has accelerated, reaching 17½ percent through June 2005, as prices of fuels and meat have increased sharply in the past twelve months.
This statement outlines developments since the staff report was issued. The reported information does not affect the thrust of the staff appraisal.
Fiscal and monetary developments over the past two months remained broadly consistent with the trends in the first half of the year.
According to the latest available fiscal data, revenues continue to perform strongly across the whole array of taxes and the stock of net domestic bank financing has been reduced by 3¼ percent of GDP in the first eight months of the year. If spending discipline is maintained, the overall deficit could remain below 2 percent of GDP in 2005.
Monetary aggregates continued to grow rapidly. Broad money grew by 28 percent, year-on-year, at end-August, and reserve money growth accelerated, reflecting the continued accumulation of net international reserves. After issuing extra central bank bills in July, the Bank of Mongolia has not taken further steps to tighten monetary policy.
As anticipated in the staff report, inflation is finally slowing down. The annual headline inflation rate declined to 11½ percent at end-August, from 17½ percent at end-June, while core inflation also slowed to 5 percent year-on-year, from close to 9 percent at end-June. Underlying this favorable movement is the waning of supply shocks in the meat and vegetables markets, and broad stability in other components of the index, including petroleum products, whose domestic prices did not move between June and August. Further increases in the price of petroleum products imported from Russia have already been announced, which would bring Mongolia’s prices closer into line with world market levels. Nevertheless, inflation for the year as a whole is still expected to be contained to the staff projection of 10 percent.
Separately, Mongolia’s main Russian supplier of refined products has announced that it would no longer sell to Mongolian importers after September. While other suppliers are expected to fill this void, the move has the potential to cause temporary supply disruptions and could lead to higher domestic prices.