Will economic overheating add to the summer sun?

By S.Bold-Erdene

At the beginning of the year the Mongol Bank, the central bank of Mongolia, dismissed the warning of the World Bank and the IMF that inflation could cross 20 per cent and expressed its confidence that it could be kept under double-digit rates. Since the Mongol Bank did not elaborate the basis of its confidence many thought they were just making the right political noises, but so far they have succeeded in keeping inflation in check. The latest figures, for the period until the end of April, put inflation at 5.5% which is 3 per cent lower than in the same period last year and 2.5 per cent less than in the previous month.

Economic analysts, however, do no give much credence to these figures. They say these mask the reality, which would erupt before long. For example, the World Bank feels that the drop in inflation was because of lower meat prices, made possible by the adequate stock of meat arranged by the state. Meat constitutes 40 per cent of the food basket in a Mongolian household.

Petrol and electricity prices rose in April, and there may be more such rise in the summer, making the hot days even hotter. Salary raises and cash inflows continue to feed inflationary trends. The World Bank noted that the expansionary 2011 budget, with provision for large cash handouts, would show their effect on prices in the second half of 2011. The drastic rise in money supply will overheat the small Mongolian economy from the inside as the summer sun burns Mongolia.  

As against the 5.5 per cent inflation in April, we have to remember that the March rate was 7.9 per cent, which was higher than the core inflation rate. This core inflation rate is usually low because it includes  prices of goods and services that are regulated by the government and are thus kept artificially low. In Mongolia, these include university tuition fees, petroleum or bus ticket prices etc. The meat price dropped in April because of the state supply. 

Money supply in March rose by 67% year-on-year, with a wave of inflows from abroad. Government revenue increased a lot, but so did expenditure. Let’s take an example. Income from tax on production of the three main minerals increased 3 times y-o-y, contributing to the 9.9% rise in GDP. Many fear this way the budget deficit will end up at 20 per cent of GDP.

Last autumn, the Government increased wages and pensions, raised minimum wages and decided to pay MNT500,000 for each student’s tuition from the state budget. Such spending  never stops. In addition, the Development Bank will sell bonds worth MNT800 billion in the domestic market. Our small market cannot offer enough buyers, so foreign investors and the Mongol Bank will end up holding most of these bonds.

Among further inflows slated are advance payment from the companies chosen for Tavan Tolgoi, the money they will spend on developing the deposit, USD2.3 billion of investment in Oyu Tolgoi, amounts raised by mining companies at IPOs, and the income from increasing exports of copper, coal and other commodities.

While the Government spends money like water, the private sector helps bring in financing from abroad.. The World Bank reports that the private sector’s loans from abroad and from commercial banks increased by 66 percent in the last quarter of 2010, compared to the previous three. The private sector, including banks, is responsible for 50 per cent of Mongolia’s foreign debt.

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