Mongolia’s economy received high marks in 2023, posting solid growth of 7%, driven by strong exports, particularly record coal shipments to China. The country was able to increase its foreign exchange reserves and achieve a positive balance of payments (BoP).
However, the performance of the BoP was not always simply good news, as export prices were affected by inflation and demand for imported goods was also low.
Credit: ADB
BoP is expected to return to negative territory this year.
Credit: ADB
Winter in Mongolia is devastatingly harsh. By mid-April, approximately 7 million livestock deaths were recorded. It is a victim of the merciless ‘dzud’ natural disaster that regularly strikes the country, combining the effects of a summer drought followed by a harsh winter. It is feared that the final livestock death toll could reach more than 16 million people. Approximately 40% of the population still makes a living from livestock farming. Pastoralists are suffering huge economic losses.
So far this year, 3.6 million animals have been born to pastoralists. Therefore, a net loss of livestock is very likely to occur. Overall agricultural production also fell by 8.9% due to the devastating weather. As a result, government tax revenues from the livestock and agriculture sectors will shrink.
Recovery from sudo takes time. The Asian Development Bank (ADB) expects Mongolia’s economy to slow for much of this year, but expects the economy to recover towards the end of the year due to an increase in mining exports, which account for about 28% of the economy. GDP is expected to grow by 4.1% this year. This is a significant decrease compared to last year’s 7%.
Since April 2020, the value of the country’s currency, Tughluq (MNT), has fallen by 30% against the dollar, making imported products extremely expensive for Mongolians.Credit: ADB
Inflation was over 10% in 2023 and is expected to remain very high at just under 10%. For the average Mongolian, last year’s inflation was painful. Food prices rose by an average of 12.2%, and meat prices by 16.2%. Significant housing inflation continues, with house prices rising 9.1% in March.
But so far this year, overall inflation has been close to 7%. Since it is relatively early in the year, there is a possibility that Mongolia could defy inflation expectations. The downside is that last year’s inflation made the current account positive. There is a high possibility that it will fall into the red again this year.
Planned government spending is expected to increase by 21.8% to pay for things such as raising salaries for civil servants. This cash injection is expected to increase national consumption. However, a decrease in tax revenues could result in an increase in government debt.
The government is committed to investing in transport infrastructure and expanding the mining sector, although overall investment will decline. At the same time, exports are expected to increase this year. Copper, one of Mongolia’s main exports, is rising in price as it is one of the metals needed for electric vehicle (EV) batteries. Copper futures are selling at their highest since 2022. China’s rapid expansion of EV production should contribute to an increase in Mongolia’s copper exports.
The central bank’s benchmark interest rate was lowered from 13% to 12% in April, but given the high inflation rate, further rate cuts will not be possible in the coming months. Current high interest rates will put downward pressure on borrowing and the economy in general.Credit: ADB
Mongolia’s economic health depends on increased foreign investment and sharing of expertise. Climate-related investments are expected to grow this year, but the country faces several hurdles, including a lack of experience among relevant institutions in this area.
Another issue is the country’s dependence on fossil fuels and fossil fuel exports. ADB is working to support renewable energy development in Mongolia. The country has an estimated 2,600 gigawatts worth of renewable resources, enough to meet the country’s energy needs. Replacing coal with renewable energy would also have the added benefit of reducing air pollution in the capital Ulaanbaatar, which is one of the main causes of health problems, especially among children. However, there are significant obstacles impeding Mongolia’s green transition, including pressure from the mining sector.
Dirty carbon will be difficult to abandon because coal forms much of the backbone of Mongolia’s economy and the mining sector is the economic engine.
Furthermore, Mongolia’s tax base is extremely small. The population is only 3.39 million people, one-third of whom are children. Most working Mongolians have low incomes, and a significant portion of the population is exempt from paying taxes. As a result, mining profits paid to the government account for more than 25% of the national budget. Closing mines to protect the environment would eliminate an important source of income.Credit: ADB
Mongolians know that their natural resources will eventually be depleted. At the same time, pressure from the international community for green energy will increase, and eventually the money taps connected to the mines will dry up. Governments are therefore tasked with finding the best way to invest in the present for future economic security.
On April 19, Mongolia’s parliament approved the establishment of a sovereign wealth fund (SWF) that will invest profits from the mining sector to provide for the future of the Mongolian people. Under the new law, three funds were established, each with its own powers. They are the National Development Fund, which is responsible for medium- and long-term economic development, the National Savings Fund, which oversees health care and education, and the Fund for Future Generations, which is added to the reserves of the central bank, the Bank of Mongolia.
The World Bank reports that other countries’ experiences with SWFs have been mixed. Examples of SWFs that have been highly successful and are funding economic development include Kuwait Investment Authority (KIA), Singapore’s Temasek Holdings, Qatar Investment Authority (QIA), China Investment Corporation (CIC), and the Global Pension Fund. (Norway) etc. . However, his other SWFs have been less successful. They have become a source of corruption and an opportunity for patronage, empowering and enriching a small elite that profits from the country’s natural resource exports.
Unfortunately, Mongolia has a history of corruption and embezzlement of public funds, destroying public confidence in the government’s ability to fairly manage SWFs. U.S. authorities recently alleged that Mongolia’s former prime minister, Sukhbaatar Batbold, bought luxury real estate in New York with stolen mining funds. Perhaps the most egregious example of corruption came at the end of 2022, when it was revealed that as much as $11 billion to $13 billion of the proceeds from coal sold to China had been diverted to the personal pockets of politicians and their cronies. It came to light. Large crowds took to the streets and squares of Ulaanbaatar to protest.
Dependence on its huge neighbor China always poses great risks to Mongolia’s economy. If China reduces its purchases of coal and copper, Mongolia’s export earnings will decline. The same applies if commodity prices decline globally. Over the past year, industrial activity has subsided in China, and a deflationary trend in factory prices has materialized. So far this year, prices have risen slightly, but at a slow pace. As China’s industrial activity picks up, the giant economy will naturally need to buy more coal from Mongolia to generate electricity for its steel mills and other factories.
While this increase in coal sales may be good news, to secure its economic future Mongolia needs to wean itself from coal revenues and dependence on China. SWFs may be helpful in this regard, but require government operating revenues to be channeled into investments to raise funds. And investments need to be of sufficient scale and well-managed to bring lasting improvements to Mongolia’s economy.
All of this is possible, but it will take time and require dedicated and honest management of Mongolia’s resource revenues.
Dr. Antonio Gracefo, China MBA is an economist and China analyst. He spent more than 20 of his years in Asia, of which he spent seven years in China, three years in Taiwan, and four years in Mongolia. He was a postdoctoral fellow in international trade at the School of Economics, Shanghai University, received his PhD from Shanghai Sports University, and a China MBA from Shanghai Jiao Tong University. Antonio has written seven of his books on Asia, with a focus on the Chinese economy.