Mongolia's Strong Growth Set to Moderate, Vulnerabilities Remain

ULAANBAATAR, MONGOLIA (6 April 2005) - After nearly doubling to 10.6% in 2004, Mongolia's economic growth rate is likely to average 7% over the next three years, according to a major ADB report released today.

Mongolia's strong growth in 2004 was underpinned by higher livestock production, investment in the mining and mineral sectors, and surging commodity prices, says the Asian Development Outlook 2005 (ADO), the annual flagship ADB publication that forecasts economic trends in the region.

"Growth has picked up in recent years, but remains vulnerable due to the economy's narrow base," the report says. "Sound monetary and fiscal policy actions, a healthy financial sector, and further private sector development are crucial for sustaining growth and generating employment."

Although economic growth is helping raise living standards, poverty remains persistent - with 36% of the population living below the national poverty line equivalent of $0.75 a day. Unemployment also is high at 14.2% of the workforce. The Government aims to reduce poverty by maintaining macroeconomic stability, further liberalizing the economy, and improving public services.

High transportation costs, insufficient infrastructure, and limited access to credit are obstacles to Mongolia's competitiveness. A large body of legislation aimed at developing the private sector has yet to be fully implemented. Interest rates remain high and loan terms are short, which hinders the growth of small businesses in particular.

While Mongolia is affected by the end of the Multifiber Arrangement this year, a new bilateral trade agreement with the US could help offset losses, the report says. The economy depends heavily on the performance of three export products - minerals, cashmere and textiles, which together account for more than 80% of total exports.

Construction and services are projected to grow in line with the rapid development of the capital city. There is potential for increased copper exports to the People's Republic of China (PRC) and animal product exports to the Russian Federation, although the report warns that high global copper prices are unlikely to be maintained. Tourism is likely to grow further as tourism infrastructure improves.

Mongolia's budget deficit is expected to remain below 3.5% of GDP, due to strong tax revenues from the mining sector and moves to discourage tax avoidance, ADO says.

Inflationary pressures caused by high oil prices may ease following a new agreement to buy oil at lower prices from Kazakhstan. The lower oil prices and tighter monetary policy may keep inflation to around 5% over the next three years, down from 11% in 2004.

The report projects a positive growth outlook for Mongolia assuming that external demand for Mongolia's products rise further; prices of gold, copper, and cashmere remain strong; weather conditions are favorable; the economies of the PRC and Russian Federation continue to grow; and Mongolia itself stays politically stable.

Read the full ADO report.
Read the full country chapter.