ECONOMY
Over the past 20 years, Mongolia has transformed itself from a socialist country to a vibrant multiparty democracy with a booming economy. Mongolia is at the threshold of a major transformation driven by the exploitation of its vast mineral resources and the share of mining in GDP today stands at 20 percent, twice the ratio of a decade ago. The economic growth rate is estimated at 12.5 percent in 2013, compared to 6.4 percent GDP growth in 2010. GDP is expected to grow at a double digit rate over the period from 2013 to 2017.
This economic growth has translated into some benefits for the people of Mongolia. Poverty has been on a downward trend over the past decade. Most recently, it decreased from 38.7 percent in 2010 to 27.4 percent in 2012. Substantial progress has also been made in regard to several Millennium Development Goals (MDGs) at the national level, though significant regional disparities prevail.
To ensure sustainable and inclusive growth, Mongolia will need to strengthen institutional capacity to manage public revenues efficiently and limit the effects of Dutch Disease; allocate its resources effectively among spending, investing, and saving; reduce poverty; and offer equal opportunities to all its citizens in urban and rural areas. It needs to do this in a manner which protects the environment and intergenerational equity.
Mongolia is challenged by significant external imbalances because foreign direct investment has declined rapidly and some mineral exports remain weak. Growth is forecast to moderate in 2014 and remain broadly stable in 2015, inflation to decline, and the current account balance to improve over the next 2 years, assuming appropriate policies. The major policy priority is to address pressures on the balance of payments and foreign exchange reserves.
Growth was boosted by highly expansionary fiscal and monetary policies to compensate for the marked slowdown in coal exports and mine development financed through foreign direct investment (FDI), which have been the drivers of growth in recent years. Strong economic growth has helped reduce the poverty rate by more than 11 percentage points in the past 2 years, to 27% in 2012.
Industrial production increased by 20.1% in 2013, contributing 5.1 percentage points to economic growth, driven by construction, which expanded by 66%, boosted by monetary and fiscal stimulus. Mining output expanded by 20.7%, thanks to the ramp-up of copper production at the vast Oyu Tolgoi mine, which started in June 2013. Services expanded by 10.0%, contributing 4.3 percentage points to economic growth. Favorable weather allowed agriculture to expand by 13.5%, contributing 2.0 percentage points.
Domestic consumption was the main driver of economic growth from the expenditure side, increasing by 16.3% in constant prices and contributing 13.7 percentage points to growth.
Medium-term prospects remain promising, with growth expected in the double digits after a dip in 2014, given Mongolia’s potential to develop its natural resources. Economic growth is forecast at 9.5% in 2014, driven in particular by the start of copper production at the Oyu Tolgoi open pit in June of last year. Growth in non-mineral output is expected to be held back by the tighter economic policy, which will be needed to reduce high domestic demand and so relieve balance of payments (BOP) pressures. In particular, the overall budgetary deficit including off-budget outlays is expected to be lower than in 2013, as the Development Bank of Mongolia curtails investment expenditure and as BOM liquidity injections are expected to begin their phaseout this year.
Economic growth is expected to pick up slightly to 10% in 2015, spurred by further development in mining, including the possible development of the Oyu Tolgoi underground mine and an expansion of coal production from the Tavan Tolgoi mine.
Source: ADB. 2014. Asian Development Outlook 2014. Manila.