Countries and Regions

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Country Strategy and Program Update 2005-2006: Mongolia

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I. Current Development Trends and Issues

The most noteworthy developments in Mongolia since the latest country strategy and program update (CSPU) are the parliamentary elections in late June 2004 and the resolution of the pre-1991 debt to the former Soviet Union. The 11.4 billion transferable ruble debt was taken to be equivalent to the same amount in US dollars. The Russian Federation agreed to write off 98% of debt for an immediate cash payment of the balance of $250 million. Mongolia was able to handle this payment in part by drawing down its foreign exchange reserves. Election spending and the need to service domestic debt created by the Russian debt settlement will exert pressure on the budget in the short term.

A. Recent Political and Social Developments

2. Preliminary results of parliamentary elections on June 27 indicate the ruling Mongolia People’s Revolutionary Party won 36 of 76 seats, a sharp drop from the 72 seats it had held since 2000. The coalition of opposition parties took 36 seats. According to Mongolia’s constitution, any party or coalition controlling a simple majority can form a new government. The final result will depend on how the four remaining seats align with the major parties.

B. Economic Assessment and Outlook

3. Owing to strong agricultural performance and a buoyant services sector, the economy grew by 5.5% in 2003. Agriculture, which still employs over 40% of the work force, grew by 4.5%, the first rise since 1999, as weather conditions improved after several harsh winters. In contrast, industrial expansion was disappointing at 0.9% due to weakness in the production of textiles and metal ores. Rapid development in Ulaanbaatar led to 8.0% growth in construction, and services increased by 8.6%. The regional outbreak of severe acute respiratory syndrome (SARS) reduced the gross domestic product (GDP) by an estimated 0.2 percentage points, mainly in the areas of tourism, transportation, and trade. Preliminary industrial growth data indicate continued growth in the first quarter of 2004. SARS also had an impact on consumer prices. Prices of imported food items from the People’s Republic of China (PRC) increased sharply in the spring, pushing inflation up. However, moderate price rises in the second and third quarters brought down inflation to 4.7% by year-end. Money supply rose by 49.7% in response to faster economic growth and financial deepening. The fiscal deficit narrowed to 3.6% of GDP from 5.6% in 2002 as revenues exceeded the International Monetary Fund (IMF) target. In April 2004 the fiscal budget recorded a surplus after tax revenues rose markedly.

4. Total trade increased to $1.45 billion in 2003, with merchandise exports up by 11.1% as a result of higher exports of gold, copper, and cashmere. This represented a turnaround from a 0.2% growth in exports in 2002. Imports also rose significantly by 7.0% in 2003, triggered by a growing demand for capital goods and food items. The trade deficit declined from 20.5% of GDP in 2002 to 18.9%. The current account deficit narrowed to 14.9% of GDP from 15.9%, while the overall balance of payments recorded an unusual deficit, reflecting the Russian debt’s payment. Attracted by promising new gold prospects, foreign direct investment strengthened by 94% to $113 million. Total trade performance in the first quarter of 2004 was strong.

5. In 2003, the total external debt increased from 88.3% to 103.7% of GDP, reflecting the resolution of the Russian debt. Since most of the debt consists of loans from multilateral or bilateral sources on concessional terms, the debt situation remains manageable. However, the new borrowing required to partially cover the Russian debt repayment increased the service ratio from 4.8% in 2002¹ of exports to 34%. Overall, cancellation of the pre-1991 Russian debt is welcomed as it removes a considerable financial burden from Mongolia and is likely to raise confidence among foreign companies and foster investments. But concerns are raised on the short-term impact of the settlement in terms of macroeconomic stability in an election year, particularly in regard to fiscal stability and debt sustainability. Economic performance continued to be strong in the first quarter of 2004. Amendment of the 2004 budget to include provisions for interest costs and repayments of the debt incurred to settle the Russian debt will be necessary.

6. Projections about the economy rely on assumptions about the weather and commodity prices. Economic growth is expected to be close to 6% in 2005–2006. Manufacturing and mining are set to grow, helped by higher quality standards for cashmere production and meat processing and the start-up of a new significant gold mine. Construction and services are projected to expand in line with rapid development in the capital city. Tourism’s recovery from a 21% drop in 2003, largely caused by SARS, will contribute to growth in the services sector. Detailed country economic, poverty and social, and environment indicators are provided in Tables A1.2, A1.3, and A.1.4.

C. Implication(s) for Country Strategy and Program

7. To support the achievement of the millennium development goals (MDGs), ADB must continue to help promote economic growth for job creation and improve the provision of essential services for the poor. Persistent poverty remains a major concern in the country’s developmental path; a situation demanding focused ADB interventions. In light of the concessional nature of the stock of debt, Mongolia should be able to manage the increased servicing burden created by the Russian debt settlement. A new country strategy and program (CSP) is under preparation² to provide an updated framework to further identify and target future ADB interventions. The new CSP will take account of the significant recent demographic changes, accelerated rural to urban migration, structural changes in the economic system and new capacity building needs. More importantly, the new CSP will seek to address Mongolia’s persistent high levels of poverty.

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