Mongolia’s economy: Yesterday, today, and tomorrow

Let us begin by taking a quick look at the present state of the Mongolian economy. The GDP of Mongolia dropped by 4.2% in the first quarter of 2009 and by another 1.3% in the second, clearly testifying to a downturn. For ten days early in August the Ministry of Finance conducted a joint analysis of economic trends of Mongolia with the IMF and concluded that the real GDP growth at the end of the year would be 0.5%. It was 8.9% in 2008. The sharp fall is an indirect result of the world economic crisis and a direct one of lower output in the manufacturing and construction sectors.

The Central Bank has revealed that money supply at the end of July 2009 was 3.9% less that what it was in the same period last year. All 16 banks report less and fewer loans to individuals and businesses since the beginning of 2009. Bad debts account for 13.7% of the total outstanding loan amount, and stands at MNT352.9 billion, which is MNT278.4 billion or 4.7 times more than in the corresponding period last year. This is the most important cause for the instability of the financial sector. 

Both the budget deficit and the foreign trade deficit have been rising since the beginning of the year, which resulted in a weakening of the MNT and rise in prices. At the end of July, the unemployment rate was 29.4% more than in the same period of 2008. This is another example of how the depression has been squeezing sectors in the real economy.

Beginning at the end of 2008 and well into the new year, the Government took several measures and managed to halt the slide of the MNT. This was imperative to plug the budget deficit, an eligibility condition for loans from the IMF and other international financial institutions and individual donor countries. The MNT has remained stable but the year so far has been marked by an economic slowdown, and the budget deficit has deepened dramatically. At the end of July the deficit reached MNT281 billion and is projected to reach MNT320 billion at year-end. The volume of loans has also decreased and if the trend is not reversed in the next quarter, we may see a serious economic recession.

The National Statistics Office has said the rate of inflation from January to July 2009 was 4.9% higher than in the same period last year. USD75 million received as the first-stage loan under the IMF Stand-By Program can be credited with stabilizing the MNT. The balance of foreign trade continued to show a deficit but there has been a relative improvement following the rise in gold and copper prices. 

The fall in the growth rate in two consecutive quarters signals a challenge of a structural nature. Business activities have slowed down, loans have been hard to get, and unemployment has increased. All this, and other factors, have led to a fall in the budget revenue. The cumulative effect has made the situation critical. The cycle must be reversed with the help of correct monetary and budget policies and also of other methods.

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