WASHINGTON Nov 28 (Reuters) - Mongolia's economic policies are "too expansionary" and are creating inflationary pressures, the International Monetary Fund warned on Monday, calling for further rate hikes.
In an appraisal of Mongolia's booming economy, the IMF welcomed recent monetary policy tightening. But it said it was not enough to contain rising inflationary pressures and economic overheating.
It said food price volatility "has disguised" underlying inflationary momentum, firmly in double digits.
A rapid acceleration in bank lending has put Mongolia's financial system "under stress" and the IMF urged the authorities to manage risks proactively to prevent problems from building up.
The country relies on a wealth of gold, copper, coal and other minerals to attract foreign investment, driving construction and growth.
"Mongolia has a bright economic future," the IMF said. But it added: "Success, however, will depend on a shift in approach in managing the economy. At present, macroeconomic policies are too expansionary."
Any additional spending in 2011 would fuel more overheating, drive up inflation and undermine credibility in the government's fiscal policies, the IMF said.
It said a medium-term budget framework included a sharp cut in spending in 2013. "It would be much better to plan for a smoother path of spending," it added.
The country's state-owned development bank posed "significant fiscal risks," the IMF said, emphasizing that it should not be used "as a vehicle for off-budget spending" and should be operated on commercial terms and with greater transparency.
The bank provides loans for infrastructure development, industry, energy projects and roads. (Reporting by Lesley Wroughton; Editing by Dan Grebler)