According to World Bank’s latest Quarterly Report, Mongolia’s economic growth in Q2 was slowed to 11% from 16.5% in Q1 largely due to decline in exports of coal to China. However, the economy will have grown in double digits in 2012 as a whole.
Although Mongolia’s medium term prospects look promising as the OT and Tavan Tolgoi (TT) mines go into production, with significant economic growth, it may face significant risks in the near term, as reflected in the steep drop in exports in July and August. These risks reflect an uncertain global economic outlook and slowing growth in China, and pro-cyclical fiscal policy over the past three years with large increases in government spending contributing to high inflation and pressure on the balance of payments. Any delay in commercial production at the OT mine could also impact the near term growth projections.
As stated in the WB report, inflation has eased slightly in recent months, but remains persistently high, due to high food prices and expansionary fiscal policy, leading to demand side pressures in an already overheating economy. There has been significant increase in food prices, particularly meat.
World Bank recommends to policymakers to be cautious given the macroeconomic risks and the expected continued slow growth of the global economy. It is advised that the immediate requirement is a more conservative fiscal policy stance and that government spending does not increase faster than the GDP and is prioritized in a way that unlocks infrastructure bottlenecks and promotes long-term growth through investments in social sectors.