After its third quarterly review of Mongolia“s economic performance under the 18-month Stand-By Arrangement (SBA), the IMF emphasized the good progress on the macroeconomic stabilization made thus far and the positive economic growth outlook for 2010, driven by the spillover effects of the Oyu Tolgoi mining investment. At the same time, the IMF also stressed the need for continued fiscal adjustment and discipline, adherence to the flexible exchange rate and a monetary policy geared towards maintaining low inflation, and for the authorities to deal proactively with problems in the banking sector. 

Mongolia is experiencing winter conditions that are even more severe than usual, leading to large livestock losses that will have a significant impact on the well-being of vulnerable households. There is potential for the disaster to place considerable strain on the existing relief system, fodder supplies, and donor resources. While this is likely to have an adverse impact on agricultural GDP in the first quarter of 2010, initial estimates show GDP growth rebounded in the fourth quarter of 2009. The growth of 3.9 percent year-on-year follows three consecutive quarters of contraction, with Q3 down 4 percent. As a result, GDP contracted by 1.6 percent as a whole in 2009.

A particularly strong recovery in Q4 was seen in the transport and communication sector. Construction and wholesale and retail trade sectors continued to contract. The recovery in the external sector continues, with annual export growth turning positive in November and December, supported by strong growth in China and buoyant commodity prices. In 2009 as a whole exports fell 25 percent. This was less than the level of import contraction, down 34 percent for the year as a whole, and as a consequence the 12-month trade deficit has improved to around USD230 million, down from over USD1 billion in late 2008 and early 2009.

Preliminary fiscal data show a full-year deficit for 2009 of 5.4 percent of GDP, below the 5.8 percent target in the June 2009 budget amendment. Revenues in 2009 were down 7.5 percent on 2008 in nominal terms with expenditure restraint leading to a 5.7 percent lower figure than in 2008. Capital expenditures and subsidies contracted particularly sharply relative to 2008. The fiscal stability law, a key component in improving the policy framework for managing future fiscal revenues associated with Mongolia’s mineral resouces, was submitted to Parliament in early January for discussion and approval.

In the banking sector, total lending growth remains flat as real lending rates on loans increased to 19 percent in December from 17 percent in November. The ratio of non-performing loans to total loans stabilized in December but remains at almost 23 percent. A sustained proactive approach from policy-makers to the ongoing solvency problems in the sector is required in order to ensure a timely recovery in the provision of credit, which is a key pillar in supporting the recovery in economic activity, and in order to limit the potential fiscal cost associated with any government support.