Economic imbalance leads to Mongolia crisis
Choijilsuren Battogtokh, finance minister of Mongolia, said in a national television address earlier this month that his country is now “in a deep state of economic crisis.” He said Mongolia has reached a point where the country cannot afford to pay the salaries and running costs of government departments. He noted that Mongolia’s ratio of government debt- to- GDP is estimated to reach 78 percent, much higher than the budget target of 55 percent. Besides, Mongolian central bank’s net foreign reserves are -$ 429 million. The heaped debts of the government undoubtedly aggravate the anxiety of investors.
According to Bloomberg, Mongolia’s tugrik became the world’s worst- performing currency among 154 currencies with a 7.8 percent drop in August. Since the beginning of 2016, the tugrik has declined by more than 11 percent. In order to stabilize the currency, Mongolia’s central bank has raised its benchmark interest rate to a record high of 15 percent. The Mongolian currency has plummeted nearly 60 percent over the past five years.
Such drastic devaluation of currency and heavy debt loads have given rise to capital flight and panic buying. After Battogtokh’s speech, the Mongolian government bonds tumbled the most on record and the country had its credit- rating cut to junk, striking another blow to its shattered economy. In the first half of this year, over 60,000 out of 130,000 registered companies have suspended their business or closed down, and the economic growth has come to a halt.
The Mongolian economy has been on the edge of a cliff. What has made Mongolia, which used to enjoy the highest GDP growth rate across the world, mired into such a daunting economic crisis?
Mongolia’s over- reliance on mining has caused the severe imbalance in its economic structure and the lack of impetus for development. Mongolia is rich in natural resources, but due to its underdeveloped industry and finance sectors, the country is heavily dependent on imported foreign technologies.
Mining is the pillar of Mongolian economy, accounting for 80- 90 percent of its total exports. The country’s GDP growth reached an unprecedented 17.3 percent in 2011 thanks to its abundant coal reserves. However, given the unbalanced economic structure and low risk resistance capacities, the prosperity of the Mongolian economy was very shortlived.
Affected by the global financial crisis, the recent years have witnessed sharp declines in bulk commodity prices and economic slowdown. Besides, China, the biggest export destination of Mongolia, has shrunk its demands. Therefore, the Mongolian economy suffered serious hits.
In addition, Mongolia is plagued by severe corruption and poor administration. There is frequent political squabbling and lack of continuity in government policies. In 2012, when domestic nationalism rose, the Mongolian government passed the controversial Strategic Entities Foreign Investment Law to restrict foreign investment in sectors like mining, which greatly frustrated foreign investors and led to the withdrawal of foreign capital.
In view of the economic predicament, high expectations have been placed on the new government formed by the People’s Party after a landslide victory in the parliamentary election in June to find a way out of the economic doldrums. Mongolian Prime Minister Jargaltulgyn Erdenebat recently announced a plan for economic recovery including attracting foreign investment, supporting the development of smalland- medium sized enterprise and reducing public expenditure.
The new government has presented to the public its confidence in future economic development. But if it really wants to revive the depressing economic prospects and resume the past achievements, it must transform its unbalanced single product economic structure and make more endeavors to develop a variety of industries including manufacturing, service, tourism and finance.
Mongolia has a unique strategic position as China’s neighboring country. Despite an economic slowdown, the Chinese economy remains full of vitality. If Mongolia could realize economic transformation in a timely manner, it can take a ride on the express train of China’s development.