August, 2009 - This shock hit Mongolia harder than other copper producers, because of the country’s particular combination of expansive fiscal and monetary policies, a fixed exchange rate and an overheated financial sector at the time of the copper price collapse. In the Update, we compare Mongolia’s performance during the copper price collapse with that of the other major copper exporters: Chile, Peru, Papua New Guinea and Zambia.

The government’s initial slow and inappropriate response led to a period of macroeconomic instability around the end of the year. However, the government took strong policy actions at the beginning of 2009 to address the crisis. Based on the commitment shown by these actions, the country subsequently benefited from substantial financial assistance from its key development partners (IMF, ADB, Japan and the World Bank).

The latest developments show that the fiscal balance remains under pressure, as revenues continue to drop, due to the slowdown in growth, consumption, imports and commodity prices, whereas public expenditures remain constant, leading to a 12-month rolling fiscal deficit of 9.8 percent of GDP in July. The 12-month rolling trade deficit has narrowed to $0.6 billion in July, after peaking at $1 billion in February. This narrowing is caused by the economic downturn, which has seen imports (mainly industrial goods) drop faster than exports (mainly copper and gold). The rolling 4-quarter current account deficit now stands at 15.2 percent of GDP at the end of the second quarter. It is mainly financed by inflows of foreign direct investment and loan disbursements under the Stand-By Arrangement with the IMF.