The World Bank says Mongolia's economic growth in the first three quarters of 2012 dived to 11 to 12 percent from more than 17 percent in 2011.
Although Mongolia's medium-term economic prospects are promising, with growth expected to stay in double digits, the economy faces significant risks in the near term at a time when the global economic outlook is uncertain and China's economic growth is slowing, experts say.
Mongolia's economy was highly dependent on commodity exports, such as coal and copper, which made it highly exposed to external economic shocks, the experts said.
Mongolia's exports of mineral products had already slowed this year. According to a quarterly economic update released by the World Bank, Mongolia's exports fell 39 percent year on year in August, the largest fall since mid-2009, driven mainly by a drop in exports to China.
A bigger fall in exports than imports had also widened the country's trade deficit.
Statistics released by the National Statistical Office of Mongolia show the country's trade deficit exceeded 2 billion U.S. dollars in the first nine months of 2012, up 45.3 percent on the same period last year.
The widening deficit has led to the depreciation of Mongolian tugrik, forcing the central bank to intervene in international foreign exchange markets.
This, in turn, had resulted in a steady decline in foreign exchange reserves, which were now at a two-year low of 1.4 billion dollars, according to the World Bank.
Surging inflation has been another big threat to the healthy development of the Mongolian economy, experts say.
Although inflation had slightly eased from a peak of 17.8 percent for the capital city of Ulan Bator and 16 percent for Mongolia in April, it remained high at 15.1 percent for Ulan Bator and 14.8 percent for Mongolia in September.
High food prices, notably for meat, and expansionary fiscal policy are the main reasons for the high inflation, the experts say, warning that, unless the government reins in its spending, it will be hard to control inflation.
The World Bank suggested the Mongolian government adopt a more conservative fiscal policy to cool the overheating economy and take measures to improve the country's infrastructure and promote long-term growth through investments in social sectors.
Maintaining the floating exchange rate was also very important for Mongolia's economic stability by serving as a buffer to external economic shocks, the World Bank said.
In the long run, the country needs to further diversify its economy and foster more pillar industries, including agriculture, tourism and other value-added processing industries to reduce its dependence on the mining sector and promote sustainable development, the experts say.
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