Bank of Mongolia should brace for impact of runaway growth, says IMF

The Bank of Mongolia should do more to avoid losing control of the country's rapidly growing economy, as inflation creeps up and financial stability risks rise, the International Monetary Fund (IMF) said yesterday.

Aided by a recent mining boom, Mongolia's economy grew 12.5% in 2012 and is expected to deliver a similar performance this year. The CIA World Factbook currently ranks it as the third fastest-growing country in the world.

At the conclusion of its Article IV consultation with Mongolia, a statement by the IMF noted the country's rapid growth and said medium-term prospects remain "promising". However, "expansionary macro policies are likely to put pressure on inflation and the balance of payments in the period ahead"．

Further risks derive from the uncertain external environment. The IMF said all emerging markets are likely to be hit by the reversal of expansionary monetary policy in advanced economies, while China, a major investor in the mining sector, is expected to shift from investment-led to consumption-led growth. "Mongolia needs to change course to avoid becoming highly exposed to these external shocks," the review said.

Much of the burden of these changes falls to the central bank. The Bank of Mongolia has been pursuing expansionary monetary policy to counterbalance the effects of declining foreign investment and export earnings, and the IMF warned of a "rapid credit growth" in recent months.

The review urged the central bank to tighten policy, or at least to back off its stimulus measures. "We welcome the Bank of Mongolia's intention to phase out these programmes over time," the Fund said.

The Bank of Mongolia must also turn its hand to financial stability risks, the IMF said. The review praised the central bank for its handling of the recent failure of Savings Bank, but said efforts should be made to strengthen banking supervision and the country's provisioning regime.

The IMF also pushed for action by the government, recommending a package of fiscal tightening, and telling law-makers to press ahead with new investment legislation, which will make the environment for domestic and foreign investors "more predictable and transparent".