Wednesday, February 29, 2012

Mongolia: Economic Boom Brings Inflation Woes

Mongolia: Economic Boom Brings Inflation Woes

by Pearly Jacob

Originally published by

A mining boom helped Mongolia’s economy grow by an eye-popping 17.3 percent in 2011, according to government statistics. But while investors’ hopes are riding high at the news, there is little rejoicing among the country’s lower-income households for whom rapid growth means worrisome inflation.

At his shoe stand in Ulaanbaatar’s suburban Narantuul Market, Mongolia’s largest, Amgalan Batdorj is leery when it comes to the mining boom. With his customers worried about higher living costs, he has had to cut his prices to keep sales up. "My customers are middle- to lower-income people. Most of us [traders] here haven't dared increase prices with people worrying more about food prices," he said.

Inflation last year topped 10 percent, according to Mongolia’s Central Bank. The World Bank says rising food prices have disproportionately hit the poorest, for whom real wages fell by 13 percent.

In an ironic twist, government schemes intended to share the country's wealth are believed to be stoking inflation and hurting the poorest, say economists. During the 2008 parliamentary election campaign, members of the governing coalition promised 21,000 tugriks (about $16) would be distributed each month to every man, woman and child in Mongolia.

Along with transfers for health insurance and student tuitions, the monthly cash handouts come from the government’s Human Development Fund (HDF), an ambitious trust designed to bring Mongolia's development indicators on par with advanced industrial countries by 2020. The 2011 HDF budget stipulated a total of 805 billion tugriks (over $600 million) for distribution, equaling nearly 40 percent of state expenditures according to UN figures.

"Analytically, it is challenging to directly link the cash handouts with inflation. But [the cash] is increasing aggregate demand and this … we can deduce is contributing to inflation," says Tuvshintugs Batdelger from the National University of Mongolia’s Economic Research Institute (ERI).

Despite an increase of cash circulation and state handouts, the government reports Mongolia's poverty rate grew to 40 percent in 2011 from 35 percent in 2008. "This is a clear indication that cash handouts are doing nothing to address poverty and Mongolia's growth is not inclusive," said Batdelger.

With parliamentary elections slated for this summer, concerns about inflation are increasingly entering the public discourse. On January 20, a crowd of 600 protestors took to the streets after fuel importers introduced a 17 percent hike in petrol and diesel prices.

Some observers feel a growing restlessness among lower income groups is compounded by the government’s difficulty in comprehending the mechanics of growth. In December, teachers went on nationwide strike to demand higher salaries. In response, Ulaanbaatar promised a 53 percent salary increase for all government employees, including teachers. The International Monetary Fund reports that government spending jumped 50 percent in real terms in 2011. That spending is expected to push inflation up to 15.5 percent in 2012, warns the Economist Intelligence Unit.

A massive salary hike for state-sector employees could simply create another cycle of price increases without helping average people understand what is happening, says Otgochuluu Chuluuntseren, director of the Economic Policy and Competitiveness Research Center (ECRC), a think tank. "Inflation gets increasingly politicized as elections loom, and it often becomes a tool in political campaigns with politicians offering more money to solve immediate problems," he said.

Batdorj, the shoe seller, says the government should be concentrating on long-term goals, like job creation. "It would be much better if the government used the money to build factories and support people who want to open businesses. We need more jobs,” he said. But, of course, he’s not going to turn the cash down: "If I don't collect it, I think it will go to some politician's pocket anyways.”

Though politicians passed a new election law in December 2011 that prohibits cash promises during campaigns, observers say succumbing to popular demands could be tempting as the election draws near.

"The government recognizes better social safety nets, like proper health care and targeted welfare distribution, are necessary. But considering the immense amount of infrastructure required to implement such schemes and the promises they've made in the past, cash distribution is by far an easier option," said Batdelger from the National University of Mongolia.

Editor's note:
Pearly Jacob is a freelance journalist based in Ulaanbaatar.