imported inputs and consumer goods, re- inforcing the need for structural reforms. MONGOLIA Key conditions and challenges Table 1 2021 Recent developments Mongolia’s recovery remained subdued in Population, million 3.3 2021 despite high commodity prices, as After a strong economic rebound in early GDP, current US$ billion 15.5 COVID-related restrictions on cross-bor- 2021, the recovery stalled in the last three GDP per capita, current US$ 4647.3 der traffic imposed by China especially quarters due to trade disruptions. Growth a 28.4 National Official Poverty Rate during H2 weighed on exports and dis- consequently was disappointing, reaching a 32.7 rupted imports of production inputs and only 1.4 percent following the contraction Gini index b 103.4 consumer goods. While domestic activities of 4.4 percent in 2020. Economic growth School enrollment, primary (% gross) Life expectancy at birth, years b 69.9 were supported by continued fiscal relief was mainly supported by a strong re- Total GHG Emissions (mtCO2e) 62.4 and stimulus measures as well as a roll- bound of coal mining in Q1, significant im- back of mobility restrictions enabled by provement in copper ore grade, and recov- Source: WDI, Macro Poverty Outlook, and official data. a/ National Statistics Office. Most recent value (2018). high vaccination rates, the economy re- ery in the services sector. In contrast, the b/ Most recent WDI value (2019). mains below its pre-pandemic level and manufacturing sector stagnated, and con- far from its potential. Meanwhile, sus- struction contracted significantly, amid tained policy support has eroded fiscal supply shortages caused by border disrup- After posting 1.4 percent real GDP space, and public debt – already high be- tions. Agriculture also contracted reflect- growth in 2021, growth will remain mod- fore COVID-19 – has increased sharply, ing an outbreak of foot-and-mouth disease now standing at 92 percent of GDP (in- and harsh weather conditions. est at 2.5 percent this year. Despite con- cluding the central bank’s liability under Despite continued income support, private tinued policy support and higher com- the People’s Bank of China swap line). consumption declined as COVID-19 re- modity prices, the recovery is dragged Public debt risks are further aggravated by strictions constrained mobility, rising in- down by protracted logistical bottlenecks sizable contingent liabilities including the flation weighed on real incomes, and Development Bank of Mongolia’s external households increased precautionary sav- and the effects of the war in Ukraine. Ad- bond (US$800 million). External pressures ing amid persistent uncertainty. Invest- ditional significant risks include infla- could be compounded by rising fuel prices ment recovered strongly, but this was tionary pressures, dwindling fiscal space, associated with the war in Ukraine as well mainly driven by a build-up of coal in- and widening external imbalances. Amid as tighter global financing conditions that ventories as exports to China were stalled could complicate the rollover of upcoming due to border frictions. FDI and subsidized the modest recovery, poverty will only fall large foreign debt repayments. Rapidly ac- loans under the government stimulus pro- back to pre-COVID levels in 2023. celerating inflation and the appreciation of gram also supported private investment in real exchange rate are further constraining the mining and services sectors. available policy space. The pandemic ex- Following two years of expansionary fiscal acerbated vulnerabilities associated with policies, policy space has eroded with per- Mongolia’s limited diversification of trade sistent fiscal imbalances threatening sus- and trading partners and overreliance on tainability. Public spending increased in FIGURE 1 Mongolia / Real GDP growth and contributions to FIGURE 2 Mongolia / Actual and projected poverty rates real GDP growth and real GDP per capita Percent, percentage points Poverty rate (%) Real GDP per capita (millions constant LCU) 25 40 10 20 9 35 15 8 30 10 7 25 6 5 20 5 0 15 4 -5 3 -10 10 2 -15 5 1 -20 0 0 2017 2018 2019 2020 2021 2022f 2023f 2024f 2010 2012 2014 2016 2018 2020 2022 2024 Final consumption Gross capital formation International poverty rate Lower middle-income pov. rate Net exports Real GDP growth Upper middle-income pov. rate Real GDP pc Sources: National Statistics Office and World Bank. Source: World Bank. Notes: see Table 2. MPO 1 Apr 22 2021 mostly driven by the generous but to above 6 percent in 2023-2024, as the un- poorly targeted Child Money Program derground mining phase of OT becomes (CMP). The headline budget deficit Outlook operational during H2 2023. Poverty mea- nonetheless narrowed to 3.1 percent of sured at the poverty line recommended for GDP amid a one-off tax arrears collection Economic growth is projected to remain lower-middle income countries ($3.20 (2.3 percent of GDP). The budget deficit is modest at 2.5 percent in 2022. This forecast PPP) is projected to return to the pre- projected to increase in 2022, driven by in- reflects the impact of the war in Ukraine COVID level in 2023. creases in capital spending, the continua- through higher prices of imported food, Risks are significant and tilted to the tion of some COVID-related stimulus mea- fuel and fertilizers coupled with lingering downside. In a downside scenario, eco- sures, and a discretionary pension increase border frictions with China. Coal exports nomic growth could fall to 0.7 percent in (of around 1.5 percent of GDP). Mean- are expected to only recover towards the 2022 if border restrictions with China per- while, the financing of the CMP through end of the year when border frictions with sist throughout the year, and if the war the Future Heritage Fund has weakened China may ease, following investments in in Ukraine leads to persistently higher en- the fiscal framework and long-term sus- upgrading border crossing and logistics fa- ergy prices and tighter global liquidity. tainability. Public debt is expected to in- cilities and an anticipated gradual loosen- Moreover, rising food inflation pressure crease and fiscal buffers to further erode. ing of COVID-related restrictions. As labor could prompt poverty to remain above the Inflation accelerated sharply to 14.2 per- market conditions improve with the re- pre-COVID level as the urban poor spends cent (y/y) by February 2022, due to supply opening of the economy, domestic de- nearly 40 percent of their consumption on bottlenecks amid border closures as well mand is expected to recover driven by con- food. Heightened risks put a premium on as accelerating credit growth. Substantial tinued government support, rising invest- preserving macroeconomic policy space. real exchange rate appreciation and weak ment and strengthening household con- Better targeting fiscal measures to the poor exports led to a widening current account sumption. The recent agreement with Rio would help contain fiscal imbalances and deficit and the erosion of gross internation- Tinto over Mongolia’s largest copper mine, preserve valuable policy space in view of al reserves from over 7 months (in Oyu Tolgoi (OT), will continue to support significant risks. Once the recovery is more mid-2021) to 3.7 months of imports as of steady FDI inflows. While the anticipated entrenched, Mongolia should shift to- February 2022. The erosion of confidence drop in the quality of OT mining output wards fiscal consolidation to ensure exter- related to the war in Ukraine and the per- - following last year’s improvement - will nal and public debt sustainability. Struc- sistent border frictions fueled increasing weigh on mining output this year, the ac- tural reforms, including measures to re- demand for foreign exchange, prompting celeration of investments will provide duce trade and transport costs, and facil- banks to ration FX liquidity. This has start- short-term support to the construction and itate foreign investment and domestic en- ed to affect some import payments. To services sectors and expand mining capac- trepreneurship, would help lay the foun- stem these pressures the central bank ity in the long run. Over the medium-term, dation for more diversified and hence raised its policy rate by 250 basis points. economic growth is expected to accelerate more resilient growth in the medium term. TABLE 2 Mongolia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 5.5 -4.4 1.4 2.5 5.8 6.8 Private Consumption 5.8 2.1 -6.5 8.9 7.6 7.0 Government Consumption 12.3 14.6 5.3 5.3 5.8 6.1 Gross Fixed Capital Investment 14.0 -21.1 14.0 16.3 17.5 16.2 Exports, Goods and Services 12.0 -5.3 -14.5 4.0 18.0 17.1 Imports, Goods and Services 8.6 -15.5 9.6 5.7 17.5 17.8 Real GDP growth, at constant factor prices 5.1 -3.9 0.0 2.5 5.8 6.8 Agriculture 5.2 5.8 -5.5 3.0 4.1 5.5 Industry 3.1 -4.4 -2.8 1.2 7.9 6.1 Services 6.4 -6.5 3.6 3.0 5.1 7.6 Inflation (Consumer Price Index) 7.3 3.7 7.1 10.5 7.5 6.8 Current Account Balance (% of GDP) -15.2 -4.3 -12.7 -15.6 -13.8 -11.6 Net Foreign Direct Investment (% of GDP) 16.4 12.2 13.1 12.6 11.8 11.1 Fiscal Balance (% of GDP) 1.4 -9.4 -3.1 -4.8 -4.8 -4.4 a Debt (% of GDP) 68.4 77.3 79.5 83.6 81.7 80.0 Primary Balance (% of GDP) 3.6 -6.8 -1.1 -2.8 -1.9 -1.1 b,c International poverty rate ($1.9 in 2011 PPP) 0.5 0.6 0.6 0.6 0.6 0.6 b,c Lower middle-income poverty rate ($3.2 in 2011 PPP) 4.6 5.5 5.5 5.4 4.9 4.3 b,c Upper middle-income poverty rate ($5.5 in 2011 PPP) 26.0 26.9 26.9 26.7 25.4 24.0 GHG emissions growth (mtCO2e) 6.9 1.3 3.5 4.3 5.3 5.6 Energy related GHG emissions (% of total) 41.7 40.8 41.7 42.1 43.3 44.7 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Debt excludes contingent liabilities (DBM bond of 5% of GDP) and central bank's liability under the PBOC swap line (12% of GDP) by 2021. b/ Calculations based on EAPPOV harmonization, using 2016-HSES and 2018-HSES.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. c/ Projection using annualized elasticity (2016-2018) with pass-through = 1 based on GDP per capita in constant LCU. MPO 2 Apr 22