According to the quarterly of the 2008 first half year of the Bank of Mongolia, inflation rise, which started from the second half of 2007, is spreading around the world and is also affecting Mongolia.

Economy affected by unfavorable and mostly supply side adverse impacts such as disruption of supply of some imported goods and worldwide price increase influences an environment, where relatively big portion of consumer basket consists of imported goods. The BOM is implementing its monetary policy by considering the above factors. It is now the main objective of the Bank of Mongolia not to feed the inflation by monetary growth and to ensure better co-ordination of the monetary policy with the fiscal policy.
                Nationwide Consumer Price Inflation has been 18.8 percent from the beginning of the year. In June, inflation was 0.3 percent, which shows a decrease in the growth of inflation. The Bank of Mongolia took the following measures of monetary policy to reduce inflation: the Bank of Mongolia gradually increased its policy rate; the Bank of Mongolia raised its reserves requirement. This resulted in a lower excess reserves at the interbank market and banks selected their borrowers more carefully; the Bank of Mongolia introduced swap transaction between MNT and USD at the interbank market to allow banks manage their liquid foreign assets efficiently, in more flexible ways; the Bank of Mongolia worked towards making the implementation of monetary policy more transparent and improve information exchange between the Bank of Mongolia and the Ministry of Finance; and Banks started to implement the Liquidity risk management guidance, which has been introduced by the Bank of Mongolia
                As a result of these measures, growth rate of monetary aggregates is slowing down. Annual growth of M2 decreased from 49 percent to 27 percent in the first half of 2008, while for M1 its growth decreased from 65 percent to 25 percent. The growth rate of total loans outstanding reduced from 68 percent to 60 percent.
                There is some information indicating that our trading partners' inflation may go down. In addition, internal food supply may improve due to favorable weather conditions that support crops and vegetables, and the good pasture could be boosting meat supply. Thus, we may expect lower inflation from now on.
                Difference export and import resulted in a foreign trade deficit of USD 60.0 million. While price of our major mineral export products has been increasing, the main import items' price such as oil, wheat, rice, fertilizer and equipments prices has risen even bigger. Hence, export price index increased by 11.6 percent and import price index increased by 31.4 percent.
                From the beginning of the year, the nominal exchange rate of tugrug against the USD appreciated by MNT 12. Both the real and nominal exchange rates of tugrug against the currencies of neighboring countries, which make up most of the weight in international trade, have depreciated. From the beginning of the year, the net international foreign reserves reached a level of USD 953 million. Statistics show that the net international reserves usually accumulate in the second half of the year.
                In 2008, inter-bank market transactions have been more active due to decreased exc that the capital adequacy of the Mongolian banking sector is competitive compared with that of international standard.
                Banks have been urged to improve their liquidity risk management. The Bank of Mongolia introduced "Liquidity risk management guidance for commercial banks" in accordance with best international practices.

 

Source: Montsame
Aug 6, 2008