VZCZCXRO2200
RR RUEHLMC RUEHVC RUEHVK
DE RUEHUM #0365/01 2070851
ZNR UUUUU ZZH
R 250851Z JUL 08 ZDS CTG RUEHSD 0014 2160103
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC 2396
INFO RUEHMO/AMEMBASSY MOSCOW 2394
RUEHBJ/AMEMBASSY BEIJING 6306
RUEHUL/AMEMBASSY SEOUL 3516
RUEHKO/AMEMBASSY TOKYO 3187
RUEHBY/AMEMBASSY CANBERRA 0321
RUEHVC/AMCONSUL VANCOUVER 0140
RUEHVK/AMCONSUL VLADIVOSTOK 0323
RUEHNE/AMEMBASSY NEW DELHI 0232
RUEHHK/AMCONSUL HONG KONG 0894
RUEHOT/AMEMBASSY OTTAWA 0701
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC
RUCNDT/USMISSION USUN NEW YORK 0694
RUEKJCS/SECDEF WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC

UNCLAS SECTION 01 OF 02 ULAANBAATAR 000365 
 
C O R R E C T E D  C O P Y  (REMOVE ERRONEOUS PASSING INSTRUCTIONS) 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE, USTR, EXIM, OPIC 
STATE PASS PEACE CORPS 
STATE FOR EAP/CM, EAP/EX, AND EB/IFD/OMA 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PGOV ETRD EINV MG
SUBJECT: Mongolia's Inflation Continues to Rise During First Half of 
2008; Hits 32.6% Year-on-Year 
 
REF: A) ULAANBAATAR 0116, B) ULAANBAATAR 0276, C) ULAANBAATAR 0287 
 
ULAANBAATA 00000365  001.2 OF 002 
 
 
SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) SUMMARY:  Mongolia's national consumer price index was up a 
staggering 18.8% in the first six months of 2008.  Ulaanbaatar, with 
its large contingent of urban poor, has been hit the hardest, with 
an overall inflation rate of 23% and a food price increase of 47.3%. 
 Although much of the inflation continues to be caused by external 
factors -- fuel and food prices beyond Mongolia's control -- the 
Government of Mongolia (GOM) has contributed to domestic inflation 
by pursuing expansionist monetary and social policies.  The GOM has 
also done little to relieve transportation bottlenecks that cause 
inflation-inducing shortages.  Fiscal discipline and restraint are 
called for in the near term, but the GOM seems disinclined, this 
being an election year, to control spending. END SUMMARY. 
 
¶2. (SBU) In the first six months of 2008, the overall inflation rate 
in Mongolia was 18.8%.  Year-on-year inflation from June 2007 to 
June 2008 saw prices spike 32.6%.  However, June 2008 prices rose 
only 0.3% compared to an average of 3.7% per month for the first 
five months of 2008.  While June's low inflation seems encouraging, 
it can mostly be attributed to wheat subsidies.  Across the country, 
food prices soared 38.7% in the first half of 2008 and 54.6% since 
June 2007. 
 
Inflation in the Capital 
------------------------ 
 
¶3. (SBU) Urban inflation rates have been particularly pronounced. 
In Ulaanbaatar (UB), the overall inflation rate was 23.8% in the 
first six months of 2008.  In UB, food prices jumped 47.3% in the 
first half of 2008.  (One major factor has been flour prices, which 
have almost doubled since June 2007.)  Like other East Asian 
countries, food and energy costs in the capital have skyrocketed, 
but other goods and services -- including housing, health and 
clothing -- have seen sharp increases, too. Housing rentals have 
risen 25% year on year.  Costs of services have also surged, 
especially hospital services, which have increased by 81.4% percent 
in 2008 alone. 
 
Home-Grown Inflationary Pressures 
--------------------------------- 
 
¶4. (SBU) While global fuel and food costs explain a portion of 
Mongolia's inflationary pressures, two home-grown issues add to the 
problem, according to local experts.  The past year has seen a 
substantial increase in the money supply caused by GOM subsidies, as 
well as two increases in GOM employee wages and capital inflows into 
the mining sector.  Also problematic are bottlenecks in the economy. 
 Mongolia's expanding economy increasingly demands more foreign 
products, evidenced by a 95.2% increase in imports since June 2007. 
These imports have forced food from Russia and China, on which 
Mongolia relies, to compete for space on Mongolia's inadequate road 
and rail network. These circumstances have created a situation where 
supply of transport cannot meet demand, compounding existing global 
inflation. 
 
Challenges Facing New Government 
-------------------------------- 
 
¶5. (SBU) National parliamentary elections were held on June 29, and 
the new government's main challenge, once formed, will be to balance 
further economic and mineral development with the need to control 
inflation.  However, other than price-distorting subsidies (which 
 
ULAANBAATA 00000365  002.2 OF 002 
 
 
the GOM can ill afford), no immediate relief for inflation is seen 
in the near term.  The Millennium Challenge Compact's goal of 
modernizing the rail network and the GOM's domestic agriculture 
campaign will help, but only over several years.  Partial relief 
might come from disciplined fiscal and monetary policies, but that 
sort of discipline has been in short supply in the GOM in recent 
years. 
MINTON