Country briefing note <download pdf file>
Strong mining sector supports double-digit growth rates
- Mongolia's strong mining activities helped the country to achieve double-digit growth at 12.3% in 2012. However, growth rate was lower than the rate of 17.3% recorded in 2011, due to drop off of coal and copper exports to China .
- Off-setting the weaker demand from China was the increase in agricultural output. Recovering from the dzud of 2009/2010, the agricultural sector expanded by over 21% in 2012.
- The development of the mining sector financed by foreign direct investment (FDI) led to improvements in living standards and reduction in poverty.
- The economy's prospects are promising as copper and coal production are set to expand considerably over the next few years. In 2013, the economy is projected to grow at 15.5%.
Return of double-digit inflation remains a major challenge
- Inflation accelerated to 16% in April 2012 before receding to 14.4% in November 2012. Inflation for the year as a whole was 14.3%, much higher than the 9.2% recorded in 2011. The roots of high inflation are to be found in high food (notably meat) prices and an expansionary fiscal policy which has led to demand-side pressures in an already overheating economy.
- To combat rising inflation, the policy rate on the central bank's bills was increased twice by 50 basis points in March and April 2012, to 13.75%. The draft monetary policy for 2013 that the central bank of Mongolia, or Mongolbank, introduced in October 2012 is aimed at keeping inflation below 8% by the end of 2013. The Monetary Policy Council was also established to ensure financial stability.
Increased fiscal expenditure as spending on infrastructure development and social protection rises
- Fiscal policy was expansionary in order to build physical infrastructure and strengthen the provision of social services. This has resulted in higher inflation and a higher current account deficit. However, government spending is expected to move in a more countercyclical manner after the Fiscal Stability Law, passed in 2012, takes effect in 2013.
Current account deficit remains high
- The current account deficit slightly increased in 2012 as imports of consumption goods rose rapidly as a result of domestic demand pressures.
Increased uncertainty over new Foreign Investment Law
- FDI increased by around 40% in 2012, year-on-year. However, there are growing concerns over the newly implemented Foreign Investment Law which restricts foreign ownership of companies to 49% in strategic industries including mining.
Future outlook and policy challenges
- Mongolia's heavy reliance on China as the destination of over 85% of exports is a key vulnerability. In order to achieve product and market diversification, investing in transport infrastructure to improve connectivity is an urgent priority.
- Mongolia is also a very climate sensitive economy, with many households relying on income from the livestock sector. For this reason, the Government of Mongolia is taking a series of measures to enhance environmental sustainability. For example, Mongolia tightened the national standard for air pollution emissions from coal-fired power plants in 2011. However, outdated technologies and power plants, as well as increasing major emissions from informal settlements (gers) and mobile air pollution sources (old cars), still pose significant challenges. In 2013, the Ministry of Environment and Green Development will develop a Green Development Roadmap with assistance from ESCAP.