The global downturn has hit Mongolia hard, predominantly due to the slump in mineral prices which returned the prices of Mongolia's main exports to their 2004 levels (Figure 1). In particular the price of copper fell 60 percent to $3500/tonne in March from $8700/tonne in April 2008.

The shock to the budget was especially severe, because during the "boom" years, the budget had become more and more dependent on revenues from mining - at its peak, mining revenues contributed nearly 40 percent to total revenues. As mining revenues went up, overall expenditures rose dramatically. To get a sense of how fiscally unsustainable such a rising expenditure trend could be in the event of a collapse of the mining revenues, we exclude all mining-related revenues from the budget to arrive at the "non-mining fiscal balance". This non-mining balance went into a very large 15 percent of GDP deficit in 2008.
When the mining revenues then collapsed, and not enough savings had been set aside during the "boom", the government's fiscal position became precarious during the "bust". Spending had to be cut drastically, and/or revenues had to be raised. Since raising revenues during an economic downturn is inherently difficult, the government had to cut spending.

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