Mongolia’s economy won plaudits in 2023, performing well with a robust 7% expansion owing to strong exports, particularly record coal shipments to China. The country was able to boost its FX reserves and post a positive balance of payments (BoP).
However, the BoP performance was not necessarily a simple case of good news, as export prices were subject to inflation, and demand for imports was low.
Credit: ADB
This year, the BoP is expected to return to negative territory.
Credit: ADB
Mongolia’s winter season has been devastatingly harsh. Some 7mn heads of livestock were recorded as perished by mid-April, victims of the pitiless “dzud”, a natural disaster that periodically strikes the country, combining the effects of a summer drought with those of a subsequent harsh winter. There are fears that the final livestock death toll could amount to 16mn or more. Around 40% of the population is still dependent on livestock herding for their livelihood. Herders are suffering huge financial losses.
This year, to date, 3.6mn animals have been born to herders. So, there will very likely be a net loss of livestock. The devastating weather has also caused overall agricultural production to drop by 8.9%. Consequently, government tax revenue from herding and the agricultural sector will contract.
The recovery from the dzud will take time. The Asian Development Bank (ADB) expects Mongolia’s economy to slow for most of this year, but sees it picking up towards the end of the year because of increased mining exports, with such exports accounting for around 28% of the economy. GDP is expected to grow by 4.1% this year. That’s quite a decline compared to last year’s 7%.
Since April 2020, the national currency, the tughrik (MNT), has lost 30% of its value against the dollar, making imported products very expensive for Mongolians.Credit: ADB
Inflation, which stood at over 10% in 2023, is projected to remain very high at just under 10%. For the average Mongolian, last year’s inflation was painful. Food prices increased by an average of 12.2%, while meat prices rose by 16.2%. Substantial housing inflation persists, with housing prices increasing by 9.1% in March.
However, so far this year, overall inflation has run close to 7%. It is relatively early in the year, so it is possible that Mongolia will defy the inflation forecast. The downside is that inflation last year caused the current account to go positive; this year, it will most likely fall back into deficit.
Planned government expenditure is set to increase by 21.8%, to fund, among other things, hiked salaries for civil servants. This injection of cash is expected to raise consumption among the population. However, with reduced tax revenue, the government debt may increase.
The government is undertaking transportation infrastructure investment as well as expanding the mining sector, although overall investment will decrease. At the same time, exports are expected to rise this year. Copper, one of Mongolia’s principal exports, is seeing price increases as it is one of the metals necessary for electric vehicle (EV) batteries. Copper futures are selling at the highest price since 2022. The fast expansion of EV production in China should help to boost Mongolia’s copper exports.
The central bank benchmark interest rate was in April cut from 13% to 12%, but given high inflation, additional cuts will not be possible in the months ahead. The prevailing high rate will place downward pressure on borrowing and on the economy in general.Credit: ADB
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