Mongolia’s path to economic revival

Mongolia’s government has announced a ‘comprehensive’ plan to help its economy rebound from the shock of the pandemic, but it contains no policies designed specifically to reduce poverty, Ariun-Erdene Bayarjargal writes.

Though pandemics do not ‘die’, COVID-19 is likely to fade away from central focus in 2022. As the world transitions into post-pandemic life and into a new normal, policymakers are now looking at recovery options for economies hit hard by the pandemic. Mongolia is no exception.

Mongolia’s economy contracted by 5.3 per cent in 2020, the largest decline in last two decades, but a strong return on exports helped the economy to rebound in the first half of 2021.

High commodity prices, particularly of mining products, in the world market led to a positive balance of trade despite raw volume of exports decreasing. The International Monetary Fund’s Mongolia outlook indicates growth is expected to be 7.5 per cent in 2022.

Alongside this expectation of strong growth, though, is inflation. Supply-chain disruption induced by border closures caused annual inflation to reach 13.4 per cent as of December last year, and hikes in food and fuel prices have also contributed to inflation.

Consequently, the Bank of Mongolia has shifted to a tighter monetary policy, raising its policy rate by 0.5 points from its historic low level of six per cent at the end of January and increasing reserve requirements.

In terms of vaccines, the government of Mongolia managed to secure vaccines for its population by taking an advantage of its proximity to two large vaccine-producing countries in China and Russia.

By the end of January 2022, over 60 per cent of the adult population had received at least one dose of a vaccine. However this vaccination rate, which is among the highest for lower-middle income countries, has not translated into socio-economic normality, and difficult economic conditions continue to affect the livelihoods of many Mongolians.

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Like many other countries, in 2020 the government adopted a generous set of fiscal measures to ease the impact of the pandemic on households. These steps included quintupling child allowance money, doubling food stamp allowance, and substantially raising social welfare payments for the vulnerable.

The total size of the package including tax exemptions and support to small and medium businesses reached 7.5 per cent of gross domestic product (GDP) in total by August 2020.

Further lockdowns caused income losses to households and firms in 2021, and the government continued the relief package by distributing a cash handout of 300 thousand Mongolian Tögrög (US$104) to every citizen, costing the budget equivalent to 2.5 per cent of the country’s GDP.

Overall, 2.4 million people received social assistance, with child allowance money making up 49.6 per cent of assistance received. Of households affected by economic shocks related to COVID-19 pandemic, those employed in low-skilled and/or informal sectors, those with limited economic security, and those living just above the national poverty line were disproportionately impacted and remain at a high risk of falling into poverty.

One micro-simulation analysis by the World Bank indicates the poverty rate could have increased between 5.4 and 7.9 percentage points compared to the pre-COVID-19 projections in the absence of the government’s mitigation policy.

Although these relief programs helped many households retain their income, their rapid withdrawal could create significant difficulties in the wake of increasing inflation. The challenge Mongolia faces now is that it has limited fiscal capacity but must continue supporting its people as the economy recovers. On top of this, further expansionary fiscal policy could lead to currency pressures, exacerbating inflation.

The COVID-19 pandemic has changed the structure and conditions of Mongolia’s labour market. The country’s labour force participation rate is more than two percentage points below 2019 levels as of the third quarter of 2021.

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The service sector, which employs the largest share of workers on casual basis of any industry, was hit hard by the pandemic and the recovery has been slow due to mobility restrictions. Job losses were inevitable in a sector where workers were mostly ineligible for social security payments and other benefits, like paid leave.

This has made marginal income losses even larger among the poor. Women were affected disproportionately too, as they make up the majority of workforce in the service sector, and many were forced out of the labour force to care for children during lockdowns.

Studies have shown that the poor are more vulnerable to unemployment and inflation shocks than the rich, and Mongolia’s situation is no different. There is no doubt the pandemic has exacerbated the vulnerability of certain groups and widened inequality in the country.

Mongolia, like other countries, is shifting from policies focused on short-term economic relief towards accelerating recovery and building resilience. The parliament of Mongolia announced its plan, dubbed the ‘New Revival Policy’, at the end of December 2021, in addition to a four-year plan approved by the government in February 2021.

It focuses on medium-term development issues and outlines improving labour force participation, but it contains a glaring omission – a concrete plan for reducing poverty.

The ‘comprehensive plan’ will cost roughly $3.4 billion, or approximately a quarter of the country’s 2020 GDP in current prices.

The New Revival Policy is on top of this plan and extends this amount to more than $30 billion in the long run. With the government’s yearly revenue in 2021 reaching only $5 billion, it is not at all certain where the fiscal space to finance these programs is coming from in the long term.

While the plan does address issues related to improving youth employment and skills development, along with supporting small and medium businesses, it isn’t acceptable for there to be no specific action outlined for tackling poverty and inequality.

Of course, the government must adopt an integrated and fiscally viable approach to boost medium-term economic prospects and job creation, but it also needs to take specific action to tackle the socio-economic issues facing the Mongolian people, and poverty and inequality are the biggest of these problems.