Mongolia Inflation

Mongolia Inflation to be kept at 1-digit percentage

The Mongolian Parliament approved basic guidelines for the 2009 State Monetary Policy on November 13, 2008.
The main objective in the 2009 Monetary Policy is to reduce inflation and Parliament accordingly set a target to keep inflation at a 1-digit percentage during 2009. Although the Bank of Mongolia had proposed maintaining it at 12 percent during 2009, 10 percent during 2010 and reducing it to 6.5 percent during 2011, lawmakers were tasked to keep it at a 1 digit percentage during 2009, The Mongolian President further suggested keeping inflation at not more than 7 percent during 2009. The 2009 State Monetary Policy was thus approved by Parliament at its first discussion since legislators considered that the Monetary Policy should be clear before discussing basic socio-economic development guidelines and the State Budget for 2009. Some lawmakers said it would be necessary to observe a tight monetary policy during 2009 despite its negative influence on economic growth, whilst the majority believed that a policy to promote national production would enhance economic growth. MP G.Zandanshatar noted that inflation had risen because, on the demand side, large increases in civil service wages, social welfare spending, increased money availability and bank credit, all spurred rapid growth in spending and, on the supply side, increased prices on imports, particularly food and petroleum products, and transportation bottlenecks at borders, placed additional upward pressure on prices. These factors generate expectations for heightened inflation. He said the plan to keep inflation at a 1-digit percentage would create more positive expectations.

MP N. Ganbyamba blamed Parliament decisions for the high inflation, saying "High inflation in the country is due to Parliament's incorrect policy, for example an increase in Budget expenditures in parallel with increased revenue from high prices obtained for mineral products. If we maintain a policy to shrink Budget expenditures, in particular administrative spending, it is possible to keep inflation to a 1-digit number. Next year's inflation will therefore depend on how the 2009 budget is approved and how much can be saved on administrative expenditure." In general, the lawmakers had attempted to integrate the Monetary Policy with the State Budget policy. Legislators had also decided to establish a legal framework for savings insurance. Mr. A. Batsukh, President of the Bank of Mongolia was briefed about the approved Monetary Policy and agreed that it would be possible to keep inflation at a 1-digit percentage provided policy targets were maintained and previous mistakes were not repeated. The Bank President went on to say that the present inflation rate was 27 percent compared to 34 percent in September and October, 2008, and would decrease further by the end of the year.


Continuing Mr. Batsukh said, "Parliament's discussion of the Monetary Policy has proceeded interestingly but, when we drafted the Policy in August and September, the situation was different to what it is today. At that point, we had two tasks, namely, to reduce inflation and maintain stability in the banking and 'financial sector. However, we set an extra task, i.e., to maintain an economic growth-oriented policy within the Monetary Policy. The Central Bank initiated this extra task to sustain economic growth in light of the need to balance (recover) reduced revenue due to price drops for gold and copper." The Bank of Mongolia announced a 0.5 point reduction in its policy rate on November 14, setting an annual rate of 9.75 percent. According to this announcement, the Bank had previously increased its policy rate because of rapidly rising inflation during the last 16 months. The Bank confirmed that inflation measured by the Consumer Price Index reached a level of 27.9 between October 2007 and October 2008, 23.2 percent since the beginning of the year, which represents 1.1 point decline in October.

Data from the National Statistical Committee shows no future inflation increase trend but, as there are reduced factors for inflation, the Central Bank decided to reduce its policy rate. The economic situation is changing, prices obtained for Mongolia's main export products are diminishing and the economic growth of Mongolia's main trade partners is slowing down. Exchange rates on Mongolia's national currency against foreign currency also increased last week, but this fluctuation do not reflect the fundamentals of the market and will not impact inflation in adverse manner.

B.Ooluun
THE MONGOL MESSENGER