Economic Growth

The reform measures undertaken by the Government at the initial stage of the transition has led to the stabilization of the economic situation and recovery of the economy since 1993. The GDP growth rate increased to 2.3 per cent in 1994 from a decline of 9.5 per cent in 1992, and has remained positive since then. Importantly, the industrial sector (including the mining sector), which consistently declined at a rate of about 6 per cent per annum revived, delivering 20 per cent growth in 2002. The change brought up the share of this sector in GDP to 26.6 per cent. In the same period, the major economic sector, agriculture, failed to realize its growth potential.

The winters and springs of 1999-2002 brought extreme harsh climatic changes: droughts and excessive snowfalls led to Dzud, which took a heavy toll on livestock. The total herd of 33.6 million heads of livestock in 1999 was reduced to 26.1 million in 2001, and 23.9 million by 2002. As a result, agricultural pro-duction fell, economic growth slowed and many thousands of herders were hit hard, and left without any sources of income. However, real GDP growth, which was depressed to 1 percent in 2001 by large weather-related losses in livestock, recovered to 5,3 per cent in 2003. Such economic growth was sustained by robust performance in the industrial and service sectors. According to an Asian Development Bank report released on April 2003, Mongolia's economy is expected to strengthen also in 2003 and 2004 as mining and labor-intensive industries become important sources of economic expansion.

Price

In order to enable a complete transformation into a market economy, in September 1996, prices of the State-controlled electricity, energy, heating, fuel as well as some selected consumer products and services were totally liberalized. Following price liberalization and tight fiscal and monetary policy pursued over the decade, the inflation rate has declined from triple digits to single digits. Inflation has declined gradually since 1993; it reached 66.3 per cent in 1994, averaged 27 per cent between 1995 and 1999. The year-on-year rate of inflation, after having been restrained to 8 per cent as of end-2001, fell to 4,8 per cent in 2003, reflecting mainly the stabilization of food prices, and the strong currency.

Balance of Payments

Mongolia's overall balance of payments was largely favorable during 2002-2003. As demand in major export markets slackened and world copper and cashmere prices declined, export performance was lackluster over the last years. With import growth remaining buoyant, the trade deficit widened from about 15 per cent of GDP in 2000 to more than 20 per cent of GDP in 2003. A sharp increase in official transfers helped finance the surge in imports associated with dzud relief efforts during 2001. The balance of payments continued to be underpinned by buoyant emigrant's remittances, increasing foreign direct investment and other private influxes. At the end of 2003, the net international reserves held by the Bank of Mongolia were US$ 275 million, which was equal to 17.4 weeks of imports. Compared to 2002, net international reserves had increased by 73.2 millions. The increase in reserves was partly due to an expansion in gold sales and the increase in gold prices, as well as increases in receipts from interest payments on deposits held outside the country.

Fiscal Policy and Government Finances

The budgetary and tax policy of the Government in recent years has aimed at the stabilisation of the macro economy, limitation of the portion of the public sector financed from domestic financial resources and promotion of the private sector. Within this framework a package of activities has been undertaken to create sustainable sources of budget revenues, to expand the revenue scope, to optimise the composition of budget expenditures, and to restrict inefficient expenditure and financing. Significant progress has been made over the last two years towards strengthening fiscal transparency and accountability. The new effective system for the monitoring and control over budget entities' arrears was established in 2002. The rationalisation of intergovernmental fiscal relations was one of the key priorities of Government policy in recent years. As a result of these measures, the overall fiscal deficit in 2003 was equal to 4.6 percent of GDP, an improvement of 1.7 that paved the way for financial stabilisation.

Monetary Policy and Monetary Aggregates

A tight monetary policy has been continuously pursued aimed at providing an appropriate growth of monetary aggregates, to reduce the inflation rate, and to ensure a stable tugrig rate.
Interest rates are used as one of the key tools of monetary policy in Mongolia. In conjunction with a drastic drop in the inflation rate, the Mongol Bank has pursued a consistent policy towards the reduction of its securities' rate. As a result of policy measures aimed at deepening financial intermediaries and increasing confidence in the banks, savings deposits by individuals in the national currency reached 435.0 billion tugrigs at the end of 2003, 3.5 times more than in 2000. This prevalence of national deposits over foreign currency deposit represented a major turnaround, demonstrating exchange stability and confidence in the national currency and moreover, continuing overall improvement in banking services.
The Bank of Mongolia (BOM) has pursued a flexible exchange rate regime since 1998, and limited intervention to smoothing excessive fluctuations. In order to maintain stability of the nominal exchange rate, the policy focus for the last two years was on improving the efficiency of inter-bank operations related to foreign exchange.

Unemployment

Due to economic growth decline during the transition period, unemployment has been rising continually. The average unemployment rate from 1996 to 2001 was 5.6 per cent. At the end of 2002 the unemployment rate reached 3.6 per cent, decreasing by 2 percent compared with the average of 1996-2001. At the end of March, 2004 the number of registered unemployed was 36.4 thousand increasing by 2.1 percent or 736 persons compared to the same period the previous year.

Private sector

As a result of successive and decisive policies of the Government, the private sector has become a prevailing sector in the economy from 1995. Due to restructuring and privatisation programs the private sector expanded. As of 2003 private companies accounted for over 75 per cent of the GDP of the country. Moreover, the sector has made a tangible contribution to the country's exports. In 1996 private companies accounted for 41,8 percent of total exports, but by 2003 they accounted for 70 percent. Today there are about forty thousand private entities. Two thousand of these entities are foreign-invested companies. The private sector dominates the agricultural sector, accounting for almost 30 per cent of GDP in 2003. This growth has continued through the 1990s as the collapse of state industry has led many people to engage in herding and other informal sector activities.

However, this sector has lost its growth potential due to Dzud and animal diseases during the last three years. These statistics may understate the informal sector, which by some estimates contributes up to 30 per cent of GDP. Private sector activity in this group includes gold mining and other mineral extraction, and processing of cashmere and other animal materials and food. Apart from the sweeping political and economical changes, in the country such negative trends as disparities between urban and rural areas, the rich and the poor, increase of poverty and unemployment also became apparent. However, the Government is taking major initiatives to improve the nation's economic situation. One of the most important decisions of the Government related to promoting the business sector was the reduction of maximum rate of corporate income tax from 40 to 30 percent. The reform process continued to deepen and spread across all sectors of the economy during the year of 2003.

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