World Bank suggests diversifying the Mongolian economy

WB representatives meet to review the regional report on Monday

In their East Asia and Pacific Update, World Bank underlined that Mongolia needs to focus on implementing sustainable and smart policies for diversifying the nation’s economy.

World Bank (WB) noted that if Mongolia’s economy keeps weakening, the country will face a significant economic recession.

World Bank economists suggested that Mongolia discuss the economic difficulties domestically, but not to resolve the issue by expanding budgets. They warn that if the current business environment distortion and policies on social welfare are not revised immediately, Mongolia will continue seeing financial risk and crisis.

World Bank highlighted that Mongolia’s economy faces short-term challenges from a fragile external environment and large external debt repayments with limited policy buffers. World Bank said that Mongolia’s mining GDP grew 13 percent on the back of strong production at the Oyu Tolgoi mine. Non-mining GDP declined by 0.8 percent, reflecting subdued domestic demand. Growth in agriculture was maintained at 10.7 percent. Manufacturing growth slowed to 1.3 percent, and wholesale and retail services and construction growth fell by 3.6 percent and 1.4 percent respectively.

Exports dropped 36 percent in the last quarter of 2015, followed by a 30.4 percent decline in January. Total imports fell by 19.5 percent in January, following a 21 percent drop in the three previous months, with oil product imports halving. Sharp import compression turned the current account into a 24 million USD surplus in January, from a deficit of 130 million USD in the previous three months, according to the WB’s report.

The balance of payments recorded a 21.7 million USD surplus in January, following a 95.6 million USD deficit in the last three months of 2015. World Bank believes that a moderate current account surplus and a currency swap facility with China helped ease the balance of payments pressure in January.

Foreign direct investment toward Mongolia remained weak, displaying a 26.7 million USD net inflow in January. Gross international reserves declined to nearly 1.2 billion USD in February from 1.3 billion USD at the end of 2015, indicating escalating balance of payments pressure in February. The MNT rate depreciated by 2.5 percent against the USD in the first three months of 2016, following highly limited movement in the last four months of 2015.

The WB report also underlined that the nation’s budget revenues declined by 5.4 percent compared to 2014 amid slowing growth and falling imports. Facing continued pressure on balance of payments and revenues, the government announced that a 250 million USD five-year loan had been secured through a syndicated loan facility in March. Outlook growth is projected to slow to 0.7 percent in 2016. Non-mining production will gradually recover with OT’s second-phase investment. Mining production is projected to decline due to weaker external demand and lower-grade ores to be tapped by the OT mine.

Inflation is expected to stay moderate amid a slow recovery in demand and lower oil prices. Weak growth in key labor-intensive sectors, such as construction and retail services, would have adverse welfare impacts, particularly among wagedependent urban households, according to the WB report.

World Bank says that priority should be given to reducing external and fiscal vulnerabilities by deepening policy adjustment. The fiscal policy should stay the course on reducing the budget deficit and managing the public debt at a sustainable level. Monetary policy should stay focused on maintaining price stability, avoiding quasi-fiscal programs, and reducing external vulnerabilities by allowing a flexible exchange rate adjustment and safeguarding reserve buffers.

The East Asia and Pacific Update noted that weak economic prospects in the near term indicate the growing risk that many households close to the poverty line may slide back into poverty. To preserve poverty gains under tight fiscal constraints, the WB says it is important to redesign social safety nets to mitigate adverse impacts on the newly poor and the vulnerable.