Jan. 18 – Mongolia’s economy, which grew almost 21 percent in the last quarter of 2011, risks contraction along with a global downturn in commodity prices partly due to a surge in state spending, according to the International Monetary Fund.
Government spending, which jumped 50 percent in real terms to 6.3 trillion tugrik (US$4.6 billion) last year, is on course to accelerate inflation to an average 18.7 percent in 2012, according to an IMF report.
“That may drive up borrowing costs and cut the profitability of mining projects, Mongolia’s biggest industry,” Steven Barnett, IMF’s head of Mongolia coverage told reporters, while adding that local wages are estimated to rise 80 percent over three years through 2012.
Mongolia’s budget for 2012 “would set an all time record for expenditure growth,” the World Bank’s lead Mongolia Economist Rogier van den Brink said in his blog posting on the bank’s web site in December.
Inflation in December rose by 2 percent in comparison with November, and by 10.2 percent compared with December 2010, the Mongolian National Statistics Committee (NSC) data says.
NSC officials stated to journalists that inflation in January 2012 would be higher than in December 2011 due to price increases for food and services.
According to experts, a continued foreign investment boom in Mongolia is not guaranteed for 2012, and the risks to the global economy (and especially to China’s economy – Mongolia’s main importer) will continue to grow.
Investor enthusiasm for Mongolia has declined since last summer as Europe’s Sovereign Debt Crisis has deepened and concerns about resource nationalism grow.
Last September, a group of 20 Mongolian lawmakers called for a revision of the Oyu Tolgoi mine accord with global mining giant Rio Tinto and partner Canadian Ivanhoe Mines Ltd., which had taken six years to conclude. Lawmakers from both the ruling Mongolian People’s Party (Mongol Ardyn Khuv’sgalt Nam) and Mongolian Democratic Party (Ardchilsan Nam) demanded the government increase Mongolia’s stake in the investment agreement made with mining on October 6, 2009.
According to its web site, the US$7 billion Oyu Tolgoi, which contains one of the world’s biggest copper-gold deposits, is expected to begin commercial production of copper, gold and silver concentrate in early 2013.
The next parliamentary election is scheduled in June, 24, 2012, which means that both political parties will try to weigh in on the ongoing talks around revision of the Oyu Tolgoi mine accord.
The CIA estimates that more that 36 percent of Mongolia’s population lives below the poverty line, with an annual per capita income of US$2,900.
During the last parliamentary campaigns in 2009, the opposition Democratic Party promised each Mongolian a 1 million tugrik (US$696) “share of treasure.” The successor to the former Communist Party, the ruling Mongolian People’s Revolutionary Party, subsequently topped the DP’s largesse, promising that each Mongolian would receive from the “country’s profit” a 1.5 million tugrik (US$1,043) grant.
With Rio Tinto and Ivanhoe expecting to produce 1.2 billion pounds of copper, 3 million ounces of silver and 650,000 ounces of gold per year from Oyu Tolgoi, surely they can revise their agreement somewhat to allow Mongolia’s citizens to have a larger “share of treasure.” At the same time, according to the latest edition of the country’s Election Law, no payment to the public during the election campaign will be allowed this year.
