Economic growth accelerated in 2004 and 2005 (up from 5.6 percent in 2003 to 10.6 percent in 2004 and an estimated 6.2 percent in 2005), thanks to sustained favorable weather conditions, higher commodity prices in the world market, especially those for gold and copper, greater capital inflows and expansion in the livestock, transportation and telecommunications sectors. Foreign direct investment (FDI) continued, particularly into the banking, mining, and textile sectors (estimated to be US$93 million in 2004 and US$110 million in 2005). A recovery in the agricultural sector and continued robust growth in the mining and service sectors also helped. Meanwhile, the processing industry was stagnant and the manufacturing sector was very seriously affected by the expiration of the Agreement on Textiles and Clothing at the beginning of 2005 that led to closures of textile and garment firms and relocation of their activities to China. Textile industry value added decreased by 41 percent in 2005. |
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Given the favorable conditions in the mining and livestock sectors, total exports increased by 21percent in 2005 while imports increased by 12.5 percent. Hence the trade deficit fell from 9.4 percent in 2004 to 5 percent of GDP in 2005. With sustained capital inflows, including private investment and official capital inflows, net international reserves have almost doubled (from US$ 164 million to US$ 298 million as of end 2005, which is equivalent to about 13.5 weeks of imports). The togrog/US dollar exchange rate depreciated at the margin in 2005 by 1 percent, although, over the past 12 months, the nominal and real effective exchange rates have remained stable. Meanwhile, inflationary pressures which emerged in the economy in 2004 (estimated to be at 11 percent) were contained to an estimated single-digit level of 9.5 percent in 2005. A tightening of monetary policy in the second half of 2005 helped contain inflation. Broad money grew at a rate of 20.3 and 31.4 percent (estimate) in 2004 and 2005 respectively. Fiscal consolidation has continued in 2005. The overall government deficit fell from 6 percent in 2002 to 1.4 percent in 2004 and to an estimated 2.7 percent budget surplus in 2005. This improved fiscal performance is due to the boom in copper and gold prices that resulted in a jump in government revenues (tax and profit from the state-owned copper company), but also to improved budget execution. In addition, deployment of the Government Financial Management Information System (GFMIS) contributed towards better fiscal discipline and tighter budgetary controls. Total government revenue (including grants) reached 37.5 percent of GDP in 2005 while total expenditures were reduced from 41.7 in 2004 to 34.9 percent of GDP in 2005. The authorities have been successful in avoiding any large overruns in public expenditures so as to keep the fiscal budget in check. However, this has been made possible by a reduction of the envisaged public investment program and much needed recurrent expenditures. Capital expenditures have decreased as a proportion of GDP from 6.7 percent in 2003 to 3.9 percent in 2005. In addition, capital maintenance expenditures have decreased even more rapidly, with a share in total capital expenditures going from 12 percent in 2000 to 5.3 percent in 2005 and a planned 2.7 percent in 2006. Mongolia’s public external debt remains high but sustainable (at about US$1.38 billion in 2005, equivalent to 74 percent of GDP and about 45 percent of GDP in NPV terms). Public domestic debt remains very limited (4.5 percent of GDP at end-2005). All foreign loans are concessional, implying a low risk and cost for the Government as of 2005. A Debt Sustainability Analysis was jointly conducted by the IMF and the World Bank in June 2005. After the settlement of the pre-1991 Russian Debt, which was equivalent to 10 times GDP, the outstanding stock of external debt was equivalent to 91 percent of GDP as of end-2004 and 55 percent in net present value terms, placing Mongolia at a moderate risk of debt distress over the medium term. Under the baseline scenario of sustained economic growth and fiscal deficit of 3 percent range financed solely by concessional loans, Mongolia’s external debt ratios would decline substantially in the long term. However, stress tests suggest the debt could become unsustainable if there were especially negative terms of trade shocks. Moreover, this does not allow for large scale non-concessional loans. Mongolia and China reached a framework agreement at end 2005 on a package loan of US$300 millions to be extended at concessional terms. Back to top
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