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Mongolia’s Strong Growth Set to Continue, Inflation a Concern

ULAANBAATAR, MONGOLIA (2 April 2008) – Mongolia’s strong economic growth is likely to continue on the back of the anticipated expansionary fiscal policy fueled by continued high international prices for Mongolia’s main export commodities and more stable growth of the financial sector, according to a major Asian Development Bank (ADB) report released today.

ADB’s flagship annual economic publication, Asian Development Outlook 2008 (ADO) forecasts economic trends in the region. The ADO projects that growth of Mongolia’s Gross Domestic Product (GDP) will slow slightly in 2008, to 9.5%, and to 9.0% in 2009. GDP grew at 9.9% in 2007, the highest rate in 3 years.

Mongolia’s strong growth in 2007 was underpinned by solid contributions from all sectors, particularly higher livestock production and booming services which contributed 3.7 and 3.6 percentage points to GDP growth, respectively. Despite higher global prices for copper, gold and coal, and continued foreign investment in minerals, mining output rose only marginally.

The current account is expected to show a surplus equal to 2% of GDP in the forecast period due to strong mineral exports and remittance inflows, and as recent spikes in the cost of imports dissipate, the ADO says.

“Inflation pressures are likely to persist as the Government struggles to sterilize expected large capital inflows into mining and high export earnings resulting from the international commodity price boom. Additional public spending in advance of parliamentary elections in the middle of this year could add to these pressures” warns the ADO. The Central Bank’s inflation targeting policy, together with Government measures aimed at stabilizing food and petroleum prices, are expected to lower inflation from the high end-2007 level of 15.1%, though the year-average rate is projected to remain elevated at 10.5% in 2008 and 9.5% in 2009, up from the 2007 average of 9.0%.

The ADO notes that a persistent challenge for Mongolia is to balance pressures to distribute gains from mineral development with the need to control inflation and encourage investment in the wider economy. Significant investment is required in social and physical infrastructure to help develop new sources of growth, given the narrow base of the economy.

The report projects a positive growth outlook for Mongolia, assuming that major export commodity prices will remain relatively high, weather conditions are favorable, and economic growth in PRC, Mongolia’s main export market, remains robust.