Mongolia’s economy in 2024 a very mixed bag

Mongolia’s economy in 2024 a very mixed bag
Mongolia's gross economic reserves. Sources: Bank of Mongolia. External sector statistics; Asian Development Bank estimates. / ADB
By Antonio Graceffo in Ulaanbaatar May 8, 2024

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

Mongolia’s economic health will depend on increased investment from abroad, coupled with shared expertise. Climate-related investment will expand this year, but the country faces several hurdles in this sphere, including a lack of relevant institutional experience.

Another issue is the country’s dependence on fossil fuel and fossil fuel exports. The ADB is working to help Mongolia develop renewable energy. The country boasts an estimated renewable resources equivalent of 2,600 gigawatts, enough to meet the nation’s energy demand. Replacing coal with renewable energy would have the added benefit of reducing air pollution in Ulaanbaatar, one of the leading causes of health problems in the capital, particularly among children. However, there are significant obstacles preventing Mongolia’s green transition, including pressure from the mining sector.

With coal forming much of the backbone of the Mongolian economy and the mining sector the economic engine, dirty carbon is difficult to abandon.

Additionally, Mongolia has an extremely small tax base. The population only amounts to 3.39mn people, a third of whom are children. Most working Mongolians are low earners, and significant swathes of the population are exempt from paying taxes. Consequently, mining profits paid to the government account for more than 25% of the national budget. Shutting down the mines to go green would be eliminating a crucial source of revenue.

Credit: ADB

Mongolians know that eventually, their natural resources will run out. At the same time, green energy pressure from the international community will mount, and in due course the money taps connected with mining will run dry. So, the government is tasked with finding the best ways to invest in the present for economic security in the future.

On April 19, the Mongolian parliament approved the establishment of a sovereign wealth fund (SWF) to invest mining sector revenues in providing for the future of Mongolian citizens. Under the new legislation, three funds have been created, each with its own mandate. They are: the National Development Fund responsible for both medium and long-term economic development, the National Savings Fund that will oversee health and education, and Funds for Future Generations, which will add to reserves held at Mongolbank, the central bank.

The World Bank reports that the experience of other countries with SWFs has been mixed. Some have been very successful and have helped to fund economic development—examples of successful SWFs include Kuwait Investment Authority (KIA), Singapore's Temasek Holdings, Qatar Investment Authority (QIA), China Investment Corporation (CIC) and Government Pension Fund Global (Norway). Other SWFs, however, have been less successful. They have become sources of corruption and opportunities for patronage, empowering and enriching a small minority of elites who profit from a country’s natural resource exports.

Unfortunately, Mongolia has a history of corruption and embezzlement of public funds, something that destroys public trust in the government’s ability to manage an SWF fairly. US authorities lately alleged that Mongolia’s former prime minister Sukhbaatar Batbold purchased luxury real estate in New York with stolen mining funds. Perhaps the most egregious example of corruption came to light in late 2022 when it was revealed that as much as $11bn to $13bn of proceeds earned on coal sold to China were diverted into the pockets of politicians and cronies. Big crowds emerged on the streets and squares of Ulaanbaatar to protest.

Dependence on giant neighbour China always creates tremendous risk for the Mongolian economy. If China buys less coal or copper, Mongolia’s export revenues decline. The same is true when commodity prices decrease globally. Over the past year, a trend of factory gate price deflation has materialised in China, with industrial activity winding down. So far this year, prices have picked up a bit, but only at a slow rate. As China’s industrial activity gains, its mega-sized economy will of course need to purchase more coal from Mongolia to generate electricity for factories, such as steel plants.

Such increased coal sales may be good news, but in order to secure its economic future, Mongolia needs to wean itself off coal earnings and dependence on China. While an SWF may help in this regard, it would have to be funded, with government operating revenues diverted towards investment. And the investments would have to be large enough and well managed enough to bring permanent improvements in the Mongolian economy.

This is all possible, but it will take time, as well as dedicated, honest management of Mongolia’s resource revenues.

Antonio Graceffo, PhD, China-MBA, is an economist and China analyst. He has spent over 20 years living in Asia, including seven years in China, three in Taiwan and four in Mongolia. He conducted post-doctoral studies in international trade at the School of Economics, Shanghai University, and holds a PhD from Shanghai University of Sport, and a China-MBA from Shanghai Jiaotong University. Antonio has authored seven books on Asia, with a focus on the Chinese economy.