Statement by IMF Staff at the Conclusion of the 2011 Article IV Consultation and
Press Release No. 11/24
Post-Program Monitoring Discussion with Mongolia
February 1, 2011
An International Monetary Fund (IMF) mission, led by Steven Barnett, visited Mongolia during January 20 – February 1, 2011, to hold discussions for the 2011 Article IV consultation and Post-Program Monitoring. The mission met with the Mongolian authorities, private sector, and academics to discuss macroeconomic developments and policies since Mongolia’s successful completion of the country’s Stand-By Arrangement (SBA) last year. At the conclusion of the visit, Mr. Barnett made the following statement:
“Mongolia is in the midst of a robust economic recovery and growth this year is projected to top 10 percent, fueled by a continued surge in mineral exports, strong private sector activity, and a highly expansionary fiscal policy. The economy is showing signs of overheating with inflation already too high and likely to reach 20 percent before the end of the year.
“The large increase in fiscal spending this year will actually do more economic harm than good. 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. Therefore, the 2011 budget should be amended to reduce spending substantially.
“There are limits to what monetary policy can achieve if budget spending this year is not scaled back. 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.
“The flexible exchange rate regime has been working well over the past 1½ years and international reserves are at an all time high. Moreover, the nominal appreciation that took place last year helped to tighten monetary conditions and reduced the increase in inflation. Looking forward, the flexible exchange rate regime will continue to be well suited for the Mongolian economy.
“The Mongolian economy 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, including (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.
“I would like to express our sincere appreciation to the Mongolian authorities and non-government representatives for their hospitality and the productive and candid nature of our discussions.”