Identifier
Created
Classification
Origin
08ULAANBAATAR287
2008-06-13 07:08:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Ulaanbaatar
Cable title:
IMF: HIGH INFLATION THREATENS MONGOLIA'S ECONOMIC PROGRESS
how-toVZCZCXRO8350 RR RUEHCN RUEHGH RUEHVC DE RUEHUM #0287/01 1650708 ZNR UUUUU ZZH R 130708Z JUN 08 FM AMEMBASSY ULAANBAATAR TO RUEHC/SECSTATE WASHDC 2268 INFO RUEHUL/AMEMBASSY SEOUL 3421 RUEHOO/CHINA POSTS COLLECTIVE RUEHFR/AMEMBASSY PARIS 0086 RUEHBK/AMEMBASSY BANGKOK 1850 RUEHLO/AMEMBASSY LONDON 0320 RUEHML/AMEMBASSY MANILA 1797 RUEHBK/AMEMBASSY BANGKOK 1851 RUEHKO/AMEMBASSY TOKYO 3095 RUEHSH/AMCONSUL SHENYANG 0547 RUEHVK/AMCONSUL VLADIVOSTOK 0313 RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC RHEHAAA/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 0418
UNCLAS SECTION 01 OF 02 ULAANBAATAR 000287
SIPDIS
SENSITIVE
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: HIGH INFLATION THREATENS MONGOLIA'S ECONOMIC PROGRESS
REF: A) ULAANBAATAR 0116, B) ULAANBAATAR 0276, C) ULAANBAATAR 0686,
ULAANBAATA 00000287 001.2 OF 002
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION
UNCLAS SECTION 01 OF 02 ULAANBAATAR 000287
SIPDIS
SENSITIVE
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: HIGH INFLATION THREATENS MONGOLIA'S ECONOMIC PROGRESS
REF: A) ULAANBAATAR 0116, B) ULAANBAATAR 0276, C) ULAANBAATAR 0686,
ULAANBAATA 00000287 001.2 OF 002
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION
1. (SBU) SUMMARY: According to the IMF's 2008 Article IV
Consultation report, Mongolia's recent economic performance has been
impressive, mainly due to high mineral prices, but inflation
threatens stability and continued growth. GDP growth has averaged
more than 9% per annum since 2004, and per capita income has more
than doubled. The budget has recorded three consecutive years of
surplus, the public debt burden has been cut sharply, the external
current account is in surplus, and international reserves have
reached record levels. The IMF recommends a tightening of both
fiscal and monetary policy to curb inflation and establishing a
transparent, stable and investment-friendly mining regime to exploit
the country's vast reserves. END SUMMARY.
2. (SBU) According to the IMF, high mineral prices have re-energized
plans to exploit very large untapped deposits of copper, gold, coal,
uranium and other minerals. If mining at the Oyu Tolgoi copper and
gold deposit begins in 2011, as scheduled, the IMF predicts real GDP
growth will be around 7-9% in 2008-10, and will rise to 12-14% in
2011-12. Other large mining projects, not included in this
prediction, give significant upside potential to this outlook.
However, the IMF warns that in order to unlock this wealth, the GOM
will need to take disciplined fiscal and monetary policy action to
combat inflation and to create a stable macroeconomic environment.
It will be equally important to have transparent, stable and
internationally competitive investment regimes. The Parliamentary
elections in June 2008 are adding to the political difficulty of
this task.
FISCAL POLICY RECOMMENDATIONS
--------------
3. (U) The IMF stressed that fiscal policy should be tightened to
curb inflation and they welcomed the GOM's decision not to proceed
with additional spending this year. They believe the GOM should aim
at maintaining a modest fiscal surplus in 2008, instead of the
budgeted GDP deficit. The GOM can achieve this by containing the
wage bill, preventing low-priority capital spending, and
consolidating targeted welfare programs. With the volatility
inherent with a large mining sector, the IMF recommended that the
GOM reduce the non-mineral deficit over the medium term, with a
separate limit on the expenditure-to-GDP ratio and make few
exceptions for non-concessionary loans, and only once inflation is
under control.
MONETARY POLICY SUGGESTIONS
--------------
4. (U) The IMF recommended that Mongolia's monetary policy be
directed at reducing inflation and suggested that the BOM consider a
further moderate interest rate increase to reduce the likelihood of
a more abrupt tightening in the future. The IMF concluded that the
real exchange rate is currently somewhat undervalued, and that
greater exchange rate flexibility would enhance the economy's
flexibility and reduce inflation.
BANKING SUPERVISION
--------------
5. (U) The IMF found the BOM's framework for banking supervision to
be generally well developed, but said rapid growth of the banking
sector could hinder the BOM's ability to spot emerging problems.
Going forward, it said, the BOM should continue to upgrade the
supervisory framework by monitoring large exposures and improving
ULAANBAATA 00000287 002.2 OF 002
the supervision of liquidity and operational risks of banks. The IMF
also encouraged the authorities to monitor the size and nature of
private capital flows, while maintaining an open capital account
regime.
Minton
SIPDIS
SENSITIVE
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: HIGH INFLATION THREATENS MONGOLIA'S ECONOMIC PROGRESS
REF: A) ULAANBAATAR 0116, B) ULAANBAATAR 0276, C) ULAANBAATAR 0686,
ULAANBAATA 00000287 001.2 OF 002
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION
1. (SBU) SUMMARY: According to the IMF's 2008 Article IV
Consultation report, Mongolia's recent economic performance has been
impressive, mainly due to high mineral prices, but inflation
threatens stability and continued growth. GDP growth has averaged
more than 9% per annum since 2004, and per capita income has more
than doubled. The budget has recorded three consecutive years of
surplus, the public debt burden has been cut sharply, the external
current account is in surplus, and international reserves have
reached record levels. The IMF recommends a tightening of both
fiscal and monetary policy to curb inflation and establishing a
transparent, stable and investment-friendly mining regime to exploit
the country's vast reserves. END SUMMARY.
2. (SBU) According to the IMF, high mineral prices have re-energized
plans to exploit very large untapped deposits of copper, gold, coal,
uranium and other minerals. If mining at the Oyu Tolgoi copper and
gold deposit begins in 2011, as scheduled, the IMF predicts real GDP
growth will be around 7-9% in 2008-10, and will rise to 12-14% in
2011-12. Other large mining projects, not included in this
prediction, give significant upside potential to this outlook.
However, the IMF warns that in order to unlock this wealth, the GOM
will need to take disciplined fiscal and monetary policy action to
combat inflation and to create a stable macroeconomic environment.
It will be equally important to have transparent, stable and
internationally competitive investment regimes. The Parliamentary
elections in June 2008 are adding to the political difficulty of
this task.
FISCAL POLICY RECOMMENDATIONS
--------------
3. (U) The IMF stressed that fiscal policy should be tightened to
curb inflation and they welcomed the GOM's decision not to proceed
with additional spending this year. They believe the GOM should aim
at maintaining a modest fiscal surplus in 2008, instead of the
budgeted GDP deficit. The GOM can achieve this by containing the
wage bill, preventing low-priority capital spending, and
consolidating targeted welfare programs. With the volatility
inherent with a large mining sector, the IMF recommended that the
GOM reduce the non-mineral deficit over the medium term, with a
separate limit on the expenditure-to-GDP ratio and make few
exceptions for non-concessionary loans, and only once inflation is
under control.
MONETARY POLICY SUGGESTIONS
--------------
4. (U) The IMF recommended that Mongolia's monetary policy be
directed at reducing inflation and suggested that the BOM consider a
further moderate interest rate increase to reduce the likelihood of
a more abrupt tightening in the future. The IMF concluded that the
real exchange rate is currently somewhat undervalued, and that
greater exchange rate flexibility would enhance the economy's
flexibility and reduce inflation.
BANKING SUPERVISION
--------------
5. (U) The IMF found the BOM's framework for banking supervision to
be generally well developed, but said rapid growth of the banking
sector could hinder the BOM's ability to spot emerging problems.
Going forward, it said, the BOM should continue to upgrade the
supervisory framework by monitoring large exposures and improving
ULAANBAATA 00000287 002.2 OF 002
the supervision of liquidity and operational risks of banks. The IMF
also encouraged the authorities to monitor the size and nature of
private capital flows, while maintaining an open capital account
regime.
Minton