POST-PANDEMIC RECOVERY IS GATHERING STEAM

After four successive quarters of economic contraction, the sharp uptick in GDP of the second quarter of 2022 largely reflects an acceleration of the ongoing economic recovery in the non-mining sector, especially agriculture. The year-long contraction in mining GDP due to border disruptions slowed due to easing cross-border trade. Nevertheless, Mongolia’s external imbalances are widening, the report said.

The deterioration was initially driven by higher global prices for imported food and fuel and an export contraction due to border closures prompted by China’s zero-COVID policy. Global prices and export bottlenecks have eased recently, with the latter reflecting the government’s determined efforts to ensure the safe passage of cross-border trade. Yet, external balances have continued to worsen because of rising imports related to infrastructure and construction projects and the release of pent-up demand for consumer durables and services financed by savings accumulated during the pandemic.

In addition, reflecting off-take barter agreements, a large share of export revenues of Erdenes Tavan Tolgoi, a major Mongolian state-owned enterprise, is being used to finance large investment projects by Chinese construction companies in Mongolia, thereby restricting foreign exchange inflows and boosting import growth. Together, these factors, along with capital outflows, increasing deposit dollarization, and tighter global financial conditions have exacerbated exchange rate pressures, which depreciated by 17.5 percent year-to-date by end-September. Gross international reserves continue to decline, standing at a precarious 2.8 billion USD in late September, which is well below desirable levels.