Identifier
Created
Classification
Origin
08ULAANBAATAR116
2008-03-17 01:44:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:  

IMF: 17% INFLATION THREATENS MONGOLIA'S ECONOMIC STABILITY

Tags:  ECON EFIN PGOV ETRD EINV MG 
pdf how-to read a cable
VZCZCXRO6342
RR RUEHCN RUEHGH RUEHVC
DE RUEHUM #0116/01 0770144
ZNR UUUUU ZZH
R 170144Z MAR 08
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 1966
INFO RUEHUL/AMEMBASSY SEOUL 3229
RUEHOO/CHINA POSTS COLLECTIVE
RUEHFR/AMEMBASSY PARIS 0072
RUEHBK/AMEMBASSY BANGKOK 1734
RUEHLO/AMEMBASSY LONDON 0287
RUEHML/AMEMBASSY MANILA 1660
RUEHBK/AMEMBASSY BANGKOK 1735
RUEHKO/AMEMBASSY TOKYO 2914
RUEHSH/AMCONSUL SHENYANG 0474
RUEHVK/AMCONSUL VLADIVOSTOK 0240
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGV/USMISSION GENEVA 0377
UNCLAS SECTION 01 OF 03 ULAANBAATAR 000116 

SIPDIS

SENSITIVE
SIPDIS

STATE PASS FEDERAL RESERVE, USTR, EXIM, OPIC
STATE PASS PEACE CORPS
STATE FOR EAP/CM, EAP/EX, AND EB/IFD/OMA
TREASURY FOR TTYANG; PASS IMF, WORLD BANK USEDS
MANILA AND LONDON PASSS TO ADB, EBRD USEDS
BANGKOK FOR USAID RDMA

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ETRD EINV MG
SUBJECT: IMF: 17% INFLATION THREATENS MONGOLIA'S ECONOMIC STABILITY

Ref: 07 Ulaanbaatar 0686

ULAANBAATA 00000116 001.2 OF 003


SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.

UNCLAS SECTION 01 OF 03 ULAANBAATAR 000116

SIPDIS

SENSITIVE
SIPDIS

STATE PASS FEDERAL RESERVE, USTR, EXIM, OPIC
STATE PASS PEACE CORPS
STATE FOR EAP/CM, EAP/EX, AND EB/IFD/OMA
TREASURY FOR TTYANG; PASS IMF, WORLD BANK USEDS
MANILA AND LONDON PASSS TO ADB, EBRD USEDS
BANGKOK FOR USAID RDMA

E.O. 12958: N/A
TAGS: ECON EFIN PGOV ETRD EINV MG
SUBJECT: IMF: 17% INFLATION THREATENS MONGOLIA'S ECONOMIC STABILITY

Ref: 07 Ulaanbaatar 0686

ULAANBAATA 00000116 001.2 OF 003


SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: According to the IMF Article IV Consultation
mission that visited Ulaanbaatar last week, Mongolia's macroeconomic
stability is threatened by rapidly rising inflation, measured at 17%
in January and climbing. Prices are being pushed upward by
increased government spending, rapid growth of money supply and
credit, high international prices and the sinking value of the
national currency. Government efforts to fight inflation have so far
proven unsuccessful, and with Parliamentary elections set for late
June, the GOM is unlikely to heed the IMF's advice to cut back on
wage increases and welfare transfer programs. Meanwhile, the
Central Bank is considering raising capital adequacy requirements of
commercial banks to as high as 15% and doubling the minimum capital
requirement to US$13.7 million, to rein in lending and money
creation. The de-facto pegging of the tugrik to the U.S. dollar has
limited the Central Bank's ability to fight inflation in other
areas. The local IMF office will close in 2009 due to IMF budget
cuts. END SUMMARY.

IMF TEAM COMPLETES ARTICLE IV CONSULTATIONS
--------------


2. (U) Rapidly rising inflation is threatening Mongolia's
macroeconomic stability, according to the IMF Article IV
Consultation mission that concluded its visit on March 11. The IMF
mission urged Mongolia to make reducing inflation its top priority.


INFLATION AT 17.5%; COULD REACH 20%
--------------


3. (SBU) Inflation reached 17.5% in January, up 2.4% from December

2007. IMF reps said price increases were due, among other factors,
to large increases in government spending for civil-service wages
and social-welfare outlays, especially in the final quarter of 2007;

rapid growth in broad money supply and banking-system credit;
soaring import prices, particularly for food and petroleum products;
and transportation bottlenecks at the borders. Prices for food and
nonalcoholic beverages, which rose 4%, were a major contributor to
the CPI's overall increase. Some economists predict that the rate
could top 20% before possibly cooling in the autumn.

GOM EFFORTS TO STABILIZE PRICES
--------------


4. (SBU) The GOM has worked to stabilize prices of main products
such as food and fuel through subsidies and tax breaks, but to no
avail. Despite continued subsidies and a stabilization agreement
with Russia on fuel imports, petrol is expected to increase by
US$0.17 to US$0.27 per liter from the current US$1 at the pump,
according to import companies. Vendors say GOM exemption on VAT for
domestically produced meat is failing to make up for increasing fuel
and transport prices.

GOM SPENDING ADDS TO INFLATION
--------------


5. (SBU) According to the IMF, increased government spending has
aggravated inflationary pressures, and it urged the GOM to avoid
further increases in civil-service employment wages or the
introduction of any new spending programs. But few expect
Mongolia's politicians to exercise fiscal discipline as the
elections approach. In a meeting with the DCM and Econ/Coml Chief,

ULAANBAATA 00000116 002.2 OF 003


IMF mission leader Roger Kronenberg said GOM officials seemed to
take seriously the IMF's advice that proposed revisions to the 2008
budget -- calling for increased spending and a stimulus program
providing Togruk 50,000 (US$43) to every Mongolian -- could
exacerbate inflationary pressures. But once the IMF team departed,
the proposed stimulus plan of the ruling Mongolian People's
Revolutionary Party was back on the agenda. So was a convoluted
Democratic Party scheme that would deliver US$1,000 to every
Mongolian from mining profits.

BUDGET SURPLUS JUST TOO TEMPTING TO THE GOM
--------------


6. (SBU) Higher than expected revenues from high commodity prices
and recent tax reforms (Mongolia now has some of the lowest income
tax rates in Asia) have allowed the government to avoid a large
deficit (beyond the GOM's traditional annual 3% deficit target),and
Mongolia has experienced a budget surplus for three years running.
Rather than desperately spend its way into deficit territory through
mid-year budget revisions, the GOM was encouraged by the IMF to keep
its eye on longer-term economic fundamentals. The IMF suggested
that the GOM maintain a modest budget surplus in 2008, to prevent
high inflationary expectations from becoming firmly entrenched.

MONEY SUPPLY GROWING TOO
--------------


7. (SBU) The IMF mission also recommended that the GOM slow the
growth of money supply to bring inflation down quickly. According
to the Bank of Mongolia, money supply has reached 2,337 billion
Togruk (US$2 billion),an increase of 50.2% over the past 12 months.
Mongol Bank explained that money supply suddenly grew in the last
month of the quarter, despite otherwise being lower. The increased
supply of money has been due to government spending on social
purposes, such as increased wages and pensions. In particular,
there has been a dramatic increase in child allowances and
allowances for newlywed couples. State employees were also given
increased wages and salaries in the first and fourth quarter of

2007. Of the whole annual budget expenditure, 50.4%, or 881.9
billion Togruks (US$753 million),was distributed in the final
quarter.

CREDIT EXPANDING
--------------


8. (SBU) The rapid growth of credit is also stoking inflationary
fires. Loans issued by Mongolian banks grew 68% over the previous
year. At a recent luncheon for the Mongolian Bankers Association,
Central Bank Governor Batsukh casually floated the idea of raising
the capital-adequacy requirement of commercial banks from 10% to
12%. Another Central Bank employee suggested it could be raised to
15% and then informed Econoff that the Bank was considering doubling
the minimum capital requirement from 8 billion Togruks (US$6.8
million) to 16 billion Togruks (US$13.6 million). This tightening
of banking regulation is expected to slow the rate of lending (and
hence the growth of money) and perhaps weed out two or three of the
sector's weaker banks, to provide greater stability.

EXCHANGE RATE ADJUSTMENTS LIMITED DUE TO PEG TO US$
-------------- --------------


9. (SBU) The IMF mission also recommended reintroducing greater
exchange-rate flexibility, in tandem with monetary policy, to help
bring inflation down, facilitate adjustments to external shocks, and
maintain external stability. The value of the Togruk has remained
stable against the U.S. dollar at 1,170 Togruk/US$1. Like the

ULAANBAATA 00000116 003.2 OF 003


greenback, its value has been decreasing on international exchange
markets, adding further pressure on imports. The IMF recently
re-classified Mongolia's exchange-rate arrangement to a conventional
peg, which acknowledges the de-facto peg of the Mongolian Togruk
within margins of plus or minus 1% against the US dollar. This has
limited the flexibility of the BOM's monetary policy in addressing
inflation.

HARD TO ARGUE WITH ECONOMIC SUCCESS
--------------


10. (U) Mongolia's economic performance in recent years has been
strong. Real GDP growth measured 9.9% in 2007. High copper and gold
prices have strengthened the economy, as has strong investment in
the mining and construction sectors. Public debt has been sharply
reduced, and the Bank of Mongolia is posting a record level
international reserves. Per-capita income has doubled since 2004.

LOCAL RESIDENT OFFICE A BUDGET CUT VICTIM - EVENTUALLY
-------------- --------------


11. (SBU) Kronenberg confirmed that the IMF's local resident office
was being cut as part of the IMF's belt-tightening. The current IMF
ResRep would stay in place and the office would remain open until
his term expires in 2009. In other news, Kronenberg himself is
retiring from the IMF. He noted that working on Mongolia for the
past 12 years had been one of his "bright spots."
Minton