Mongolian economy expected to grow 2.5% in 2022

AKIPRESS.COM – After a strong initial rebound, Mongolia’s economic recovery stalled in the last three quarters of 2021, and growth prospects for 2022 are expected to remain modest. Following a contraction of 4.4% in 2020 and growth of 1.4% in 2021, the World Bank’s latest economic update on Mongolia projects the economy to grow by 2.5% in 2022, reflecting ongoing border frictions with China and the impact of the war in Ukraine.

Despite continued political support and rising commodity prices, economic growth is being held back by prolonged trade disruptions and logistical bottlenecks related to border closures. Headline inflation rose sharply to 14.4% (y/y) in March 2022, weighing on real incomes and household consumption. The war in Ukraine has amplified external risks, leading to increased demand for foreign currency and further erosion of international reserves, the report says.

The report notes that the main drivers of growth included the recovery of the services sector and a short-lived rebound in the mining sector in the first quarter of 2021. On the demand side, domestic investment was the main driver of growth, supported by a substantial accumulation of mineral stocks. . However, private consumption contracted by 4% in 2021, despite the government’s stimulus program. The report also notes that disruptions in bilateral trade with China in 2021 hampered mining exports and the import of vital inputs for domestic production.

In the medium term, the report projects that economic growth will accelerate to over 6% in 2023-2024, as the underground mining phase of Mongolia’s largest copper mine, Oyu Tolgoi (OT), is expected to become operational. during the second half of 2023.

Policy space is increasingly tight after two years of expansionary fiscal policies, with persistent fiscal imbalances threatening long-term sustainability, the report says. Public spending increased in 2021, driven mainly by generous but poorly targeted social programs. Meanwhile, public debt, including the central bank swap agreement, has risen sharply to around 92% of GDP in 2021, due to significant COVID-related fiscal measures to support the economy.

The overall budget deficit nevertheless narrowed to 3.1% of GDP – with a one-off collection of tax arrears (2.3% of GDP) and the financing of the Child Money program through the Future Heritage Fund, which has weakened the fiscal framework and long-term sustainability. .

“Mongolia is currently facing strong headwinds, including an economic slowdown, high inflation, growing fiscal and external imbalances, and a heavy debt burden,” said Andrei Mikhnev, World Bank country director for Mongolia. . “Growing instability and heightened risks call for adjustments to macroeconomic policies, including monetary policy adjustments to return to a credible inflation anchor, strengthening the central bank’s operational independence, to stabilize debt and better target social programs.In addition, Mongolia also needs to implement structural reforms to help lay the foundations for more diversified and therefore more resilient growth in the medium term.

The report stresses that monetary policy must return to a credible inflation anchor, raise interest rates further, reduce quasi-fiscal activity and allow the exchange rate to absorb adverse external shocks. Fiscal consolidation is necessary to stabilize debt and ensure external and public debt sustainability. Importantly, fiscal measures better targeted to the poor can help contain fiscal imbalances and maintain support for the most vulnerable households. The report also notes the need for structural reforms, including measures to reduce trade and transport costs, facilitate foreign investment, and promote domestic entrepreneurship that would help boost medium-term growth.

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