Economic growth decelerated in Mongolia in 2014 reflecting a drop in foreign direct investment. Inflation required monetary tightening, but the current account deficit moderated. Fiscal deficits remained high, and international reserves continued to shrink. Growth is forecast sharply lower in 2015 and 2016, with lower inflation but current account deficits persisting or widening. A major policy challenge is to implement prudent macroeconomic management that retains sufficient scope for productive investment and social protection.
|Selected economic indicators (%) - Mongolia||2015||2016|
|Current Account Balance (share of GDP)||-8.0||-15.0|
Source: ADB estimates.
Despite a substantial increase in mining output, growth in Mongolia’s gross domestic product (GDP) slowed to 7.8% in 2014 from 11.6% in 2013. Foreign direct investment continued to fall, and the sizeable monetary stimulus that kept growth high in the previous year became increasingly difficult to maintain in light of pressures from inflation and the balance of payments (BOP). As value added in mining increased by 24.2%, reflecting the first full year of production at the vast Oyu Tolgoi copper and gold mine, industrial production expanded by 16.1% and contributed 4.8 percentage points to GDP growth. This came despite a 16.3% drop in coal production.
Agriculture remained a driver of growth, rising by 14.4% with favorable weather. Growth in services slowed to 4.8%, however, as plunging mine investment took its toll. Agriculture and services each contributed 1.5 percentage points to GDP growth, while the contribution from industry other than mining was negligible.
Despite robust growth expected in agriculture and expanded extraction at Oyu Tolgoi, albeit less than in 2014, GDP growth is forecast to slow to 3.0% in 2015 as falling prices for exports are felt and as monetary and fiscal policy are tightened to contain inflationary and BOP pressures. Industrial production will grow more slowly than in 2014 as a credit squeeze affects construction and real estate, and as lower export prices pressure mine operators. Services are projected to grow only marginally as other economic activity slows. Assuming a stable external environment and the resumption of major investment in mining in 2015, economic growth should recover to 5.0% in 2016 even with the continuation of restrictive fiscal and monetary policies.
Excerpted from the Asian Development Outlook 2015.