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Mongolia : The World Bank Called for Tighter Economic Policies to Restore Economic Stability

July 4, 2014

In its newly released Mongolia Economic Update, the World Bank said that the Mongolian economy is facing challenges from the large balance of payments pressure and high inflation. The World Bank underscored that the economic vulnerability will likely continue under the current growth-oriented policies and urged that monetary and fiscal policies be tightened in order to restore economic stability and maintain financial soundness.

Three years of growth-oriented economic policies have successfully supported double-digit economic growth but also led to large economic imbalances. The Government and monetary authorities implemented strong economic stimulus measures in 2013 as the country gradually was losing growth momentum amidst falling foreign investment and the weakening global minerals market. Expansionary policies relying on quantitative easing and external debt-financing contributed to the country maintaining double-digit economic growth last year despite the weakening external environment. The policy-induced high growth, however, also came with significant balance of payments pressure and high inflation. The current account deficit remained close to 30 percent of GDP in 2013 for the third consecutive year, while the foreign direct investment (FDI) in 2013 dropped to half of its level from the year before. Double-digit inflation continued since mid-2013 and picked up to 13.7 percent in May.

In 2014, the economy is undergoing an adjustment in response to the large external and internal imbalances. Domestic demand is now under growing pressure from high inflation and continued currency depreciation. Inflation rate exceeded nominal household income growth in the first quarter according to the World Bank s estimation. Annual economic growth is expected to soften to 9.5 percent in 2014 reflecting waning domestic demand. Considering the still high domestic credit growth and currency depreciation, inflation will likely remain at a double-digit level for the remainder of the year. saidTaehyun Lee, World Bank Senior Economist.

Large balance of payments pressure will likely persist in 2014. The current account deficit will likely narrow in 2014 due to weak imports and stronger copper exports. However, surplus of capital and financial account is also dropping amidst further dampening of the FDI. The overall external financing gap of the balance of payments is easing this year compared with the year before but the financing gap of the first five months still remained high, reaching over five percent of expected annual GDP of 2014. The international reserve level in May declined to US$1.6 billion, down by 61 percent from its peak at the end of 2012. The reserve level is still enough to cover around three months of imports and the bilateral currency swap line with neighboring China will be able to provide a significant buffer.

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Source: TendersInfo (India)

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