Coronavirus in Kyrgyzstan Log in  
Mongolia|economy|April 20, 2022 / 02:07 PM
Mongolia's economy projected to grow by 2.5% in 2022

AKIPRESS.COM - After a strong initial rebound, Mongolia’s economic recovery stalled in the last three quarters of 2021, and the growth outlook for 2022 is expected to remain modest. Following a contraction of 4.4 percent in 2020 and 1.4 percent growth in 2021, the World Bank’s latest Mongolia Economic Update projects that the economy will grow by 2.5 percent in 2022, reflecting lingering border frictions with China and the impact of the war in Ukraine.

Despite continued policy support and higher commodity prices, economic growth is dragged down by protracted trade disruptions and logistical bottlenecks amid border closures. Headline inflation rose sharply by 14.4 percent (y/y) by March 2022, weighing down real incomes and household consumption. The war in Ukraine amplified external risks resulting in increased demand for foreign exchange, and further erosion of international reserves, says the report.

The report notes that main drivers of growth included recovery in the service sector and a short-lived rebound of the mining sector in Q1 2021. On the demand side, domestic investment was the key driver of growth, underpinned by a substantial buildup of mineral inventories. However, private consumption contracted by 4 percent 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.

Over the medium-term, the report projects economic growth to accelerate to above 6 percent 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 constrained after two years of expansionary fiscal policies, with persistent fiscal imbalances threatening long-term sustainability, says the report. Public spending increased in 2021, driven mainly by generous but poorly targeted welfare programs. Meanwhile, public debt, including the central bank’s swap agreement, increased sharply to about 92 percent of GDP in 2021, driven by large COVID-related fiscal measures to support the economy.

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

“Mongolia is currently facing strong headwinds, including an economic slowdown, high inflation, widening fiscal and external imbalances and high debt burden,” said Andrei Mikhnev, World Bank Country Manager for Mongolia. “Mounting instability and heightened risks call for adjustments in macroeconomic policies, including monetary policy adjustments to return to a credible inflation anchor, strengthening the central bank’s operational independence, fiscal consolidation to stabilize debt, and better targeting of welfare programs. In addition, Mongolia also needs to implement structural reforms to help lay the foundation for more diversified and hence more resilient growth in the medium term.”

The report highlights that monetary policy needs to return to a credible inflation anchor, raise interest rates further, curtail 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 that better target the poor can help contain fiscal imbalances and sustain support to the most vulnerable households. The report also notes the need for structural reforms including measures to reduce trade and transport costs, facilitating foreign investment, and promoting domestic entrepreneurship that would help strengthen growth in the medium term.

All rights reserved

© AKIpress News Agency - 2001-2022.

Republication of any material is prohibited without a written agreement with AKIpress News Agency.

Any citation must be accompanied by a hyperlink to akipress.com.

Our address:

299/5 Chingiz Aitmatov Prosp., Bishkek, the Kyrgyz Republic

e-mail: english@akipress.org, akipressenglish@gmail.com;

Follow us: