Mongolia's Inflation Continues to Rise During First Half of

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000365 C O R R E C T E D C O P Y (REMOVE ERRONEOUS PASSING INSTRUCTIONS) SENSITIVE SIPDIS STATE PASS FEDERAL RESERVE, USTR, EXIM, OPIC STATE PASS PEACE CORPS STATE FOR EAP/CM, EAP/EX, AND EB/IFD/OMA E.O. 12958: N/A TAGS: ECON EFIN PGOV ETRD EINV MG SUBJECT: Mongolia's Inflation Continues to Rise During First Half of 2008; Hits 32.6% Year-on-Year REF: A) ULAANBAATAR 0116, B) ULAANBAATAR 0276, C) ULAANBAATAR 0287 ULAANBAATA 00000365 001.2 OF 002 SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION ¶1. (SBU) SUMMARY: Mongolia's national consumer price index was up a staggering 18.8% in the first six months of 2008. Ulaanbaatar, with its large contingent of urban poor, has been hit the hardest, with an overall inflation rate of 23% and a food price increase of 47.3%. Although much of the inflation continues to be caused by external factors -- fuel and food prices beyond Mongolia's control -- the Government of Mongolia (GOM) has contributed to domestic inflation by pursuing expansionist monetary and social policies. The GOM has also done little to relieve transportation bottlenecks that cause inflation-inducing shortages. Fiscal discipline and restraint are called for in the near term, but the GOM seems disinclined, this being an election year, to control spending. END SUMMARY. ¶2. (SBU) In the first six months of 2008, the overall inflation rate in Mongolia was 18.8%. Year-on-year inflation from June 2007 to June 2008 saw prices spike 32.6%. However, June 2008 prices rose only 0.3% compared to an average of 3.7% per month for the first five months of 2008. While June's low inflation seems encouraging, it can mostly be attributed to wheat subsidies. Across the country, food prices soared 38.7% in the first half of 2008 and 54.6% since June 2007. Inflation in the Capital -------------- ¶3. (SBU) Urban inflation rates have been particularly pronounced. In Ulaanbaatar (UB),the overall inflation rate was 23.8% in the first six months of 2008. In UB, food prices jumped 47.3% in the first half of 2008. (One major factor has been flour prices, which have almost doubled since June 2007.) Like other East Asian countries, food and energy costs in the capital have skyrocketed, but other goods and services -- including housing, health and clothing -- have seen sharp increases, too. Housing rentals have risen 25% year on year. Costs of services have also surged, especially hospital services, which have increased by 81.4% percent in 2008 alone. Home-Grown Inflationary Pressures -------------- ¶4. (SBU) While global fuel and food costs explain a portion of Mongolia's inflationary pressures, two home-grown issues add to the problem, according to local experts. The past year has seen a substantial increase in the money supply caused by GOM subsidies, as well as two increases in GOM employee wages and capital inflows into the mining sector. Also problematic are bottlenecks in the economy. Mongolia's expanding economy increasingly demands more foreign products, evidenced by a 95.2% increase in imports since June 2007. These imports have forced food from Russia and China, on which Mongolia relies, to compete for space on Mongolia's inadequate road and rail network. These circumstances have created a situation where supply of transport cannot meet demand, compounding existing global inflation. Challenges Facing New Government -------------- ¶5. (SBU) National parliamentary elections were held on June 29, and the new government's main challenge, once formed, will be to balance further economic and mineral development with the need to control inflation. However, other than price-distorting subsidies (which ULAANBAATA 00000365 002.2 OF 002 the GOM can ill afford),no immediate relief for inflation is seen in the near term. The Millennium Challenge Compact's goal of modernizing the rail network and the GOM's domestic agriculture campaign will help, but only over several years. Partial relief might come from disciplined fiscal and monetary policies, but that sort of discipline has been in short supply in the GOM in recent years. MINTON