Gross Domestic Product (GDP) growthaccelerated to an unprecedented 17.3 percent in 2011 from6.4 percent in 2010 and the unemployment rate fell from 13percent in 2010 to 9 percent in 2011. However, real wagesfor unskilled workers in the urban informal sector arestarting to fall as the inflation rate reached 11.1 percentyear-on-year in December. Sharply rising government spendingis the root cause of overheating: government spending roseby 56 percent in 2011 and is budgeted to rise by a further32 percent this year, fueled by sharply rising resourcerevenues. This pro-cyclical fiscal policy could result inanother 'boom-and-bust' cycle Mongolia experiencedbefore, particularly as the global economy could face asubstantial slowdown in growth due to the continuingEuropean sovereign debt crisis, and which could result in asharp drop in mineral prices and subsequently governmentrevenues There have been major legislative developments in2011 and early 2012 aimed at strengthening policyinstitutions and frameworks. The Integrated Budget Law (IBL)was passed in December 2011: this organic budget lawcontains measures to support fiscal sustainability and thesuccessful implementation of the Fiscal Stability Law. Italso strengthens the public investment framework byrequiring feasibility studies and alignment with nationalpriorities for projects to be included in the PublicInvestment Program and the budget. The Social Welfare Lawwas passed in early January. This mandates the provision ofa targeted poverty benefit replacing the existing system ofuniversal cash transfers. To ensure macroeconomic stabilityand to prevent a hard landing for the economy in case of anadverse external shock, Mongolia needs to adhere strictly toprudent fiscal policies as set out in the FSL and IBL andtightening both fiscal and monetary policy to reduceinflation, take macro-prudential action to reduce systemicrisks in the banking sector and maintain a flexible exchangerate that will act as the first buffer in any external shockmaterializes. These are uncertain times for Mongolia. Theeconomy faces growing headwinds from the global economicenvironment, while the looming elections increase domesticuncertainty. Until a substantial amount of savings hasaccumulated in the stabilization fund, Mongolia remainsstrongly exposed to volatility in commodity prices.
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