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INFO RUEHUL/AMEMBASSY SEOUL 3403
RUEHOO/CHINA POSTS COLLECTIVE
RUEHFR/AMEMBASSY PARIS 0082
RUEHBK/AMEMBASSY BANGKOK 1835
RUEHLO/AMEMBASSY LONDON 0316
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RUEHKO/AMEMBASSY TOKYO 3077
RUEHSH/AMCONSUL SHENYANG 0537
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RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHGV/USMISSION GENEVA 0409
RUCNDT/USMISSION USUN NEW YORK 0620

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000276 
 
C O R R E C T E D  C O P Y  (PARA NUMBERING) 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/EX AND EB/IFD/OMA 
STATE PASS FEDERAL RESERVE, USTR, EXIM, OPIC 
STATE PASS PEACE CORPS 
TREASURY FOR TTYANG; PASS IMF, WORLD BANK USEDS 
MANILA AND LONDON PASSS TO ADB, EBRD USEDS 
BANGKOK FOR USAID RDMA 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PGOV ETRD EINV MG
SUBJECT: FINANCE MINISTER OUTLINES INFLATION GOALS, TACTICS; DONORS 
CONFER ON MONGOLIA'S RESPONSES 
 
Ref: A) 07 Ulaanbaatar 0686; B) Ulaanbaatar 0116; 
C) Ulaanbaatar 0221 
 
ULAANBAATA 00000276  001.4 OF 004 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION. 
 
¶1. (SBU) SUMMARY: On May 15, Finance Minister Ulaan outlined the 
Government of Mongolia's (GOM) assessment of the growing inflation 
problem, Mongolia's worst since 1996.  He outlined the GOM's 
responses to higher petroleum, meat, and flour prices.  The 
following week, in response to a GOM request, partner/donor 
organizations met to come up with advice on how the country can 
fight inflation, which in April stood at 26.4% compared to the same 
period last year. Food prices alone rose 44.4% during the same 
period.  Donors agreed that the GOM needs to reduce its spending on 
welfare and wage increases for civil servants while supporting the 
most disadvantaged Mongolians through well-designed subsidies. 
USAID, which has encouraged the GOM to reduce and make more 
transparent its massive subsidies to the energy sector, felt the 
inflation crisis adds momentum to calls for a reduction in these 
subsidies.  All participants in the meeting agreed that proposed GOM 
measures to create a food-stamp-like program were good steps, as 
were measures to cut import and VAT taxes.  However, there was 
concern that bureaucracy and election fever would dull 
implementation of these efforts.  END SUMMARY. 
 
FINANCE MINISTER LAYS OUT ANTI-INFLATION GOALS 
--------------------------------------------- - 
 
¶2. (SBU) Finance Minister Ch. Ulaan outlined the extent of the 
inflation problem and GOM actions at the UNDP's monthly donor 
meeting on May 15 (then-Charge and USAID Director attended). 
Minister Ulaan began by noting he'd just come from Parliament where 
MPs were discussing a Democratic Party (DP) motion to dismiss the 
Minister of Food and Agriculture for failing to keep his promise 
regarding flour price increases.  He said Prime Minister Bayar had 
outlined a plan to address inflation which included: 1) a review of 
the flow of goods to ensure adequate supplies to reduce pressure on 
prices, 2) develop price stabilization methods for implementation, 
and, 3) review prospects for limiting the impact of oil price 
increases, recognizing the GOM could not continue to provide 
subsidized prices having already spent Tugruk 12.3 billion (about 
US$11 million) between November 2007 and March 15, 2008, when the 
GOM ceased subsidizing local fuel distributors. 
 
DEALING WITH HIGH PETROLEUM PRICES: 
SEEK NEW SOURCES, SUBSTITUTE AND SUBSIDIZE 
------------------------------------------ 
 
¶3. (SBU)  Regarding petroleum prices, Mongolia would seek to expand 
and diversify its petroleum sources.  President Enkhbayar had 
visited the Gulf states in 2007 for this purpose, hoping to lessen 
Mongolia's near total dependence on Russia for its petroleum supply. 
 Ulaan said the GOM planned to review whether it could discontinue 
exporting its small domestic oil production (about 200,000 barrels 
per year) or trade it for refined product, since Mongolia has no 
refinery capacity.  Ulaan hoped in the long-run that additional 
petroleum discoveries would be made in Mongolia, enabling it to be 
self-sufficient, including developing refinery capacity.  (Note:  We 
understand a small, used refinery is being assembled north of 
Ulaanbaatar, but have no details on when it might become 
operational.  End Note.)   Ulaan said controversy swirled around 
Rosneft's proposal to maintain sub-market prices for its petroleum 
sales to Mongolia in return for permission to establish 100 gas 
stations (see ref C).  He said the deal would require changing 
Mongolia's law which prohibited any firm from controlling more than 
 
ULAANBAATA 00000276  002.4 OF 004 
 
 
10% of the market, but that the GOM had been thinking of 
liberalizing this sector to encourage competition, lower prices, and 
better service.  And, the GOM would also give greater attention to 
alternative energy supplies, such as wind and solar energy. 
 
MONGOLIA NEEDS MORE WHEAT,FLOUR; SEEKS SELF-SUFFICIENCY, DONATIONS, 
AND BUFFER STOCKS 
--------------------------------------------- 
 
¶4. (SBU) Turning to flour prices, Minister Ulaan said growing demand 
for wheat and flour greatly outstripped both domestic production and 
imports.  He noted flour alone constituted 40% of the local diet. 
The GOM had set self-sufficiency in wheat product as a goal to be 
achieved by 2010 and had allocated Tugruk 90 billion (about US$76 
million) from its budget for this purpose.  The GOM also planned to 
pay subsidies of T80,000 per metric ton to domestic 
farmers/producers.   Russia had offered to provide 15,000 MT of 
flour and 100,000 MT of wheat at discount prices.  He said this 
year's snows and rains improved prospects for this autumn's harvest, 
following last year's drought. The GOM was considering constructing 
grain storage silos around the country to give it some buffer stock 
capacity to address short-term shortages and thereby stabilize 
prices.  The GOM would also seek to barter/exchange food or other 
goods with neighboring Russia and China.   He said Mongolia is 
dependent on imports for most food products, including for example 
sugar and rice, and so was susceptible to the rising cost of food 
worldwide. 
 
40 MILLION ANIMALS SO WHY HIGH MEAT PRICES? 
-------------------------------------------- 
 
¶5. (SBU) Minister Ulaan said meat prices had risen from Tugruk 1,000 
to 1,500 per kilo to Tugruk 1,300 to 3,500; he and others were 
surprised by this given Mongolians own 40 million sheep, goats, 
cows, camels, and horses.  He said the GOM's ability to stockpile 
beef to influence short-term prices was limited by a lack of storage 
capacity.  Nonetheless, between 
November 2007 and March 2008, the GOM had accumulated 7,000 MT of 
meat, which has been released for sale at subsidized prices in the 
poorer areas of UB and elsewhere.  Ulaan was concerned that 
inflation and high food prices had exacerbated a growing income gap. 
 
 
MINISTER'S Q&A SESSION: INFLATION'S IMPACT ON THE POOR, EDUCATION, 
HEALTH CARE, TRANSPORTATION, CONSERVATION 
--------------------------------------------- -------- 
 
¶6. (SBU) During a wide-ranging question and answer session, Minister 
Ulaan admitted that a portion of Mongolia's inflation was 
home-grown, generated by government spending and both personal and 
commodity subsidies.  The FRG Ambassador stressed that subsidizing 
oil prices simply delayed inevitable consumer price hikes.  The 
Asian Development Bank (ADB) rep urged the GOM to develop effective 
targeting of subsidies to the nation's poorest population.  The 
World Health Organization rep expressed concern about the impact on 
the poor of the 30% increase in transportation costs and the even 
higher increase in health care costs.  Some reps urged the GOM to 
pay more attention to energy and heat conservation; Ulaan retorted 
that the GOM had significantly reduced it SUV fleet by 300 vehicles 
and was looking at using hybrids. 
 
GOM ASKS DONORS' ADVICE ON INFLATION RESPONSES 
--------------------------------------------- - 
 
¶7. (SBU) A week later, post's USAID Country Rep and Econoff attended 
 
ULAANBAATA 00000276  003.4 OF 004 
 
 
a donor meeting hosted by the World Bank on May 23 to discuss 
formulation of a united response to the GOM's call for advice on how 
to combat Mongolia's record high inflation rate.  At 26.4% this rate 
is now the highest in East Asia and Mongolia's highest rate since 
¶1996. (Note: Although several donor organizations reported receiving 
similar requests for assistance, the Embassy and a few other donors 
present at the meeting said they had not been contacted by the GOM 
in this regard.  End Note.) 
 
GOVERNMENT'S SPENDING NEEDS TO BE REDUCED 
----------------------------------------- 
 
¶8. (SBU) Participants generally agreed with the IMF rep's assessment 
that the best way to address the high rate of GOM spending (which 
contributed to the inflationary crisis) would be for the GOM to 
reduce its spending on civil-service wage increases and to cut back 
on subsidies.  Instead, they argued, targeted subsidies should be 
used to help the country's poorest citizens deal with soaring fuel 
and food prices.  Otherwise, the participants said, the GOM should 
allow market forces to determine prices. 
 
OPPORTUNITY TO REFORM ENERGY SECTOR 
----------------------------------- 
 
¶9. (SBU) The USAID Country Rep opined that the current inflation 
crisis, and the need to introduce well-designed and targeted subsidy 
programs, may present an opportunity for the GOM to halt its current 
energy and heating subsidies to the general public in urban areas. 
(Comment: The GOM's current subsidization of energy users at large 
has led to under-investment in operations and maintenance of the 
existing generation, transmission and distribution systems.  This 
should be replaced by a subsidy program, made explicit in the annual 
state budget, that targets the vulnerable segments of society and 
which is administered by the Ministry of Social Welfare.  This would 
allow the energy sector to start operating on a commercial basis, by 
raising and collecting heating and electricity tariffs that cover 
the costs of service delivery, and to meet the country's future 
energy and heating needs. End Comment.) 
 
GOM'S STRATEGY: TAX CUTS AND FOOD STAMPS 
---------------------------------------- 
 
¶10. (SBU) According to the World Bank, the GOM's current strategy to 
battle price increases includes legislation aimed at providing food 
cards to children (much like the U.S. food stamp program), and the 
reduction of import taxes and VAT on imported food items.  The ADB 
rep called the GOM's action plan so far a disappointment, but 
conceded that the GOM lacks the capacity to develop and implement a 
policy of targeted subsidies. 
 
INFLATION REDUCES LIQUIDITY, TUGRIKS DISAPPEARING 
--------------------------------------------- ----- 
 
¶11. (SBU) In discussing some of the causes behind the rising 
inflation, the IMF reported that Mongolia's capacity to absorb 
increased GOM spending has hit a wall.  The GOM had doled out wage 
increases of 80% to 90% to civil servants over the past two years. 
The Government's current budget surplus stands at 1% of GDP.  Some 
commercial banks have been forced to tighten their loan portfolios, 
complaining that the Bank of Mongolia's move to raise reserve rates 
by 50 basis points has sucked up too much liquidity.  The IMF rep 
countered that the banks themselves are to blame, as they 
over-exposed themselves with frenzied lending over the past two 
years.  (Note: Commercial banks' collective loan portfolios grew by 
nearly 70% last year.  End Note.) The IMF rep also said liquidity is 
 
ULAANBAATA 00000276  004.4 OF 004 
 
 
drying up because inflation has led to a slowdown in loan 
repayments.  The sudden dearth of liquidity has reduced demand for 
Bank of Mongolia (BOM) bonds.  Nevertheless, the BOM is expected to 
further tighten fiscal purse strings later this year. 
 
ELECTIONS, BUREAUCRACY MAKE QUICK ACTION DIFFICULT 
--------------------------------------------- ------ 
 
¶12. (SBU) Participants agreed that the matter is urgent, as high 
food prices threaten to push larger segments of Mongolia's 
population into poverty.  Over 30% of Mongolians live in poverty and 
spend more that 40% of their incomes on food.  Long-term planning on 
fighting inflation is nearly impossible, as June 29 Parliamentary 
elections are only weeks away and quick government action would be 
stymied by parliamentary bureaucracy (and the absence of most MPs, 
who are out campaigning).  The World Bank argued that even if the 
GOM fails to act before the elections, immediate donor activity is 
necessary to push the agenda forward and to spark debate that would 
carry past the elections and could be taken up by less distracted 
minds. 
 
¶13. (SBU) The group agreed to meet again in the coming month to 
discuss progress on addressing the issue. 
 
Minton