Public Disclosure Authorized MONGOLIA ECONOMIC UPDATE From Relief to Recovery Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized February 2021 Mongolia InfraSAP Infrastructure for Connectivity and Economic Diversification
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02 MONGOLIA ECONOMIC UPDATE
From Relief to Recovery
February 2021 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
CONTENTS
ACKNOWLEDGMENTS VI EXECUTIVE SUMMARY VII
I. ECONOMIC PERFORMANCE AND PROSPECTS 1 A. Recent Economic Developments 2 A1. Output contracted sharply during the first nine months of 2020 2 A2. Inflation moderated notably, reflecting subdued domestic demand and lower oil prices 7 A3. The COVID-19 shock affected the structure and conditions of the labor market 8 A4. The budget deficit widened sharply in 2020 but is expected to narrow in 2021 10 A5. External pressures considerably eased following notable current account adjustment 15 A6. Monetary conditions have eased, but risks in the banking sector are building as asset 18 quality deteriorates B. Outlook and Risks 23
II. COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA 29 A. Channels of COVID-19 Shocks to Households 30 B. Impacts on Employment and Labor Income 32 C. Impacts on Non-labor Income 38 D. Potential Impacts on Poverty 39 E. Potential Mitigation Impacts of Policy Responses 43 References 47
II CONTENTS
BOXES Box I.1. The government’s measures to contain the COVID-19 pandemic 3 Box I.2. Government fiscal relief measures to alleviate the economic impact of the COVID-19 pandemic 12 Box I.3. Summary of the 2021 budget 14 Box I.4. The Bank of Mongolia’s measures to mitigate the impact of COVID-19 19 Box I.5. Medium-term Banking Sector Strengthening Program for 2020-2023 26 Box I.6. Global and regional outlook and risks 27 Box II.1. Mongolia COVID-19 Household Response Phone Survey 32 FIGURES Figure ES.1. Mongolia: Key Indicators X Figure ES.2. Mongolia: Key Indicators (continued) XI Figure I.1. Output contraction was mostly driven by the mining and services sectors 4 Figure I.2. Steady growth of private consumption was not enough to compensate sharp drop in investment 4 Figure I.3. Exports were hit hard in H1 but quickly recovered 5 Figure I.4. Imports were also affected by subdued domestic demand and lower oil prices 5 Figure I.5. Mining output fell sharply in H1 but recovered strongly 6 Figure I.6. The services sector explained most of the contraction in non-mining output 6 Figure I.7. Inflation moderated amid lower oil prices and subdued domestic demand … 7 Figure I.8. …and compounded by the contraction of domestic credit 7 Figure I.9. The COVID-19 pandemic has put some jobs at risk... 8 Figure I.10. …thereby reversing declining trends of the unemployment rate 8 Figure I.11. Relevance of cash transfers for people currently out of work increased in H1 2020 9 Figure I.12. For unemployed, main source of income support shifted in Q2 2020 9 Figure I.13. Government revenue has declined in all categories… 10 Figure I.14. …while government spending soared driven by social welfare spending and public investment 10 Figure I.15. The revenue shortfall was exacerbated by huge spending… 11 Figure I.16. …reversing the fiscal surplus trajectory of the past three years 11 Figure I.17. COVID-19 fiscal relief measures 12 Figure I.18. Mongolia’s fiscal relief package is one of the highest among EAP countries 12 Figure I.19. Income support and tax exemptions dominated fiscal relief measures 12 Figure I.20. The deficit widened sharply in 2020 but is expected to narrow notably in 2021 13 Figure I.21. The revenue projections in the 2021 budget are moderately optimistic … 13 Figure I.22. Current account adjustment was enough to ease external pressures 15 Figure I.23. Current account surplus in recent months is unprecedented in Mongolia’s recent history 15 Figure I.24. Exports were hit hard in H1 but have recovered quickly 16 Figure I.25. Import compression has largely been driven by lower fuel and capital goods imports 16 Figure I.26. FX reserves recovered strongly after a sharp fall in H1, supported by eased current account 17 adjustment and gold purchases… Figure I.27. …and the exchange rate stabilized in H2 after a moderate depreciation in the first half. 17 Figure I.28. The tugrug depreciation was moderate compared to Mongolia’s structural peers... 17 Figure I.29. …supported by FX interventions by the BoM, particularly in the first half of 2020 17 Figure I.30. The monetary policy rate was lowered to a historical low to revive credit growth 18 Figure I.31. However, banks have been reluctant to lend despite having sizable excess reserves 18 Figure I.32. Corporate loans issuance has been declining across sectors 20 Figure I.33. Banks have also tightened new loan issuance to individuals, entrepreneurs, and SMEs 20
III MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Figure I.34. Loan quality has deteriorated notably… 21 Figure I.35. …mainly in the mining, construction, and trade sectors 21 Figure I.36. Provisions to loans of risky sectors seem low 22 Figure I.37. Banks should also take hefty charges as the COVID-19 inpact intensifies 22 Figure I.38. The liquidity of the banking system has remained steady... 22 Figure I.39. …however, the banking system remains vulnerable to risk of currency mismatch 22 Figure I.40. The government debt-to-GDP ratio is estimated to have risen in 2020 in many selected peers 24 Figure I.41. The size of external bonds maturing during 2022-24 is significant 26 Figure I.42. Real GDP growth (percent) 27 Figure I.43. World commodity price forecast (Index=nominal U.S. dollars, 2016=100) 27 Figure I.44. East Asia and Pacific country forecasts 28 Figure II.1. Authorities tightened containment measures as the number of COVID-19 cases increased 31 Figure II.2. Transmission channels of COVID-19 impacts to households 31 Figure II.3. More than half of workers who worked pre-pandemic stopped working by the second lockdown 33 Figure II.4. Large shares of workers in the industry and private services sectors faced employment disruptions 33 Figure II.5. Share of workers in affected sectors in 2019 34 Figure II.6. The number of carried passengers in 2020 declined during the first and second lockdowns 35 Figure II.7. The number of tourists in 2020 was considerably lower than in previous years 35 Figure II.8. The mobility of people to get certain services was significantly affected by government restrictions 35 Figure II.9. Lower-skilled individuals working in the informal sectors are most vulnerable 36 Figure II.10. Non-farm business owners were hit severely 36 Figure II.11. Employment and income losses across welfare distribution 37 Figure II.12. Urban workers were more likely to stop working in 2020 38 Figure II.13. Percent of households receiving a remittance, 2018 39 Figure II.14. Share of remittance to total household income (among households that received a remittance) 39 Figure II.15. Projected poverty rates 41 Figure II.16. Projected number of poor people 41 Figure II.17. Consumption growth incidence (% change of per capita consumption from 2018 to 2020) 41 Figure II.18. Average welfare loss from 2018 to 2020 by poverty status 41 Figure II.19. Poverty headcount by location (%) 42 Figure II.20. Distribution of the poor by location 42 Figure II.21. Distribution of the poor by economic sector 42 Figure II.22. Share of population living in households receiving CMP, 2018 43 Figure II.23. Shares of CMP and other household income sources, 2018 43 Figure II.24. CMP additional benefits as share of per capita consumption, 2020 45 Figure II.25. Welfare changes with CMP additional benefits compared to pre-COVID case, 2020 45 Figure II.26. Poverty headcount rates with and without policy responses, 2020 45 Figure II.27. Perception of usefulness of government assistance 46 TABLES Table ES.1. Key macroeconomic indicators XII Table I.1. Mongolia: Improvements in the overall fiscal balance in 2021 (% of GDP) 14 Table I.2. Key macroeconomic indicators 25 Table II.1. Overview of HRPS Rounds 1–3 32 Table II.2. GDP growth and inflation assumptions 40 Table II.3. Government responses to COVID-19 (Social protection-related measures) 44
IV ABBREVIATIONS
MONGOLIA – GOVERNMENT FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 31, 2020) Currency Unit = Tugrug (MNT) US$1.00 = MNT 2,850
ABBREVIATIONS
ADB Asian Development Bank BoM Bank of Mongolia CMP Child Money Program CPI consumer price index EAP East Asia and Pacific EMDEs emerging market and developing economies FDI foreign direct investment FX foreign exchange GDP gross domestic product GIR gross international reserves HRPS Household Response Phone Survey HSES Household Socio-Economic Survey H1 first half of the year H2 second half of the year IMF International Monetary Fund LFS Labor Force Survey LLP loan loss provisions MoF Ministry of Finance MPC Monetary Policy Committee NPLs nonperforming loans NSO National Statistics Office OxCGRT Oxford COVID-19 Government Response Tracker Q1 first quarter of the year Q2 second quarter of the year Q3 third quarter of the year Q4 fourth quarter of the year SEC State Emergency Commission SMEs small and medium-sized enterprises y/y year-over-year
V MONGOLIA ECONOMIC UPDATE From Relief to Recovery
ACKNOWLEDGMENTS
This edition of the Mongolia Economic Update (MEU) The findings, interpretations, and conclusions expressed was prepared by Jean Pascal Nganou (Senior Economist), in this update are those of the World Bank staff and do Davaadalai Batsuuri (Economist), Undral Batmunkh not necessarily reflect the views of the Executive Board (Research Analyst), Maheshwor Shrestha (Economist), of the World Bank or the governments they represent. and Ikuko Uochi (Economist). Sebastian Eckardt For information about the World Bank and its activities (Lead Economist), Ibrahim Saeed Chowdhury (Senior in Mongolia, please visit https://www.worldbank.org/ Economist), and Eka T. Vashakmadze (Senior Economist) en/country/mongolia. For questions and comments provided constructive comments. The MEU was on the content of this publication, please contact Jean prepared under the direction of Martin Raiser (Country Pascal Nganou ([email protected]). The cutoff Director), Hassan Zaman (Regional Director), Deepak date for this edition of the MEU is December 31, 2020. Mishra (Practice Manager), and Andrei Mikhnev (Country Manager). The team is grateful to Sukhchimeg Tumur (Program Assistant) and Indra Baatarkhuu (External Affairs Officer) for their support on administrative and communication affairs. Each edition of the MEU consists of two parts. Part I discusses recent economic developments and presents the medium-term economic outlook, and Part II focuses on a specific theme. The theme for this edition is the socioeconomic impacts of COVID-19 on households, based on the recent Household Phone Survey. The MEU is intended for a wide audience, including policymakers, business leaders, financial market participants, and the community of analysts and professionals engaged in Mongolia.
VI EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
Recent Economic Developments declining employment, employment increased in some sectors such as information technology, as demand Strict implementation of social distancing, mobility for online services increased. Overall, the labor force restrictions, and quarantine measures have helped participation rate shrank by 1.1 percent in September Mongolia contain the worst health effects of the 2020 from a year ago and the unemployment rate COVID-19 pandemic, though the country remains in slightly edged up in Q3 2020, reflecting weakening the midst of a significant outbreak. While the swiftness labor market conditions. However, sizable policy of these measures was key to containing the pandemic, support partially mitigated the impact of COVID-19 their strictness is taking a significant toll on the and encouraged firms to limit layoffs and opt for economy. Particularly, the unavoidable strict lockdown reduced working hours instead. At the same time, measures from mid-November 2020 in response to the generous income support and the lack of adequate domestic transmission of the pandemic have reduced and affordable childcare service during the closure mobility and stalled economic activity. However, by of schools partly contributed to declining labor force bringing the pandemic under control, these measure participation. are not only saving precious lives but are also expected to facilitate a swifter and robust recovery. The pandemic-induced economic crisis has been severe. Households from various segments of the income The economic impact of the COVID-19 pandemic has distribution were affected by COVID-19-related shocks, been severe and widespread. In the first nine months with those employed in the low-skilled informal of 2020, the Mongolian economy contracted by 7.3 sectors, with limited economic buffers or job protection, percent, one of the worst contractions since the 1990s. and those living just above the national poverty line, at The mining sector was affected significantly by a sharp greater risk of falling below the poverty line. The latest decline in demand for key commodities and border Household Response Phone Surveys (HRPS) jointly closures with China. The services sector was also hit conducted by the National Statistics Office of Mongolia hard due to mobility restrictions and falling incomes. In and World Bank reveal that household labor income fact, firm-level surveys indicate that the impact of the was affected by the pandemic shock, as many people COVID-19 shock was most severe for small and young stopped working due to business closures or faced firms, and for enterprises in the manufacturing, tourism, a reduction in working hours, particularly under the trade, transportation, construction, and education second nationwide lockdown in mid-November. The sectors. However, generous economic support provided government’s generous direct transfers to households by the government has so far prevented a wave of helped partially mitigate the negative income shock. A business closures. poverty micro-simulation analysis, using the Household The COVID-19 shock also affected the structure and Socio-Economic Survey from 2018 and latest GDP conditions of the labor market. While some sectors growth forecasts, indicates that without mitigating including hospitality and entertainment experienced measures, approximately 195,000 to 260,000 more
VII MONGOLIA ECONOMIC UPDATE From Relief to Recovery
people could have been pushed into poverty as a result violating the Law on Central Bank, which prohibits the of the pandemic, bringing the poverty rate up to 33.6 Bank of Mongolia from engaging in these activities. The percent in 2020 from 28.4 percent in 2018. In fact, the looser policy stance followed a period of tightening analysis shows that the quintupling of benefits under starting in late 2018, which helped slow credit growth the Child Money Program during May 2020–July 2021, and stabilize inflation, giving the central bank some on its own would be enough to bring poverty incidence room to relax when the pandemic hit. Nonetheless, below the pre-COVID level (see Part II for details). monetary policy space continues to be limited by the country’s relatively weak external position. The external position improved substantially faster than initially expected, mainly supported by the With respect to the financial sector, despite the notable current account adjustment. After a sharp relaxation of macroprudential regulations and buffers, deterioration in the early months of 2020, pressures banks remain cautious in issuing loans. In 2020, notably eased in the second half of the year, and the domestic credit contracted by about 5 percent (year- current account even recorded a surplus amid a quick over-year) compared to growth of 5.1 percent in 2019. recovery of exports and persistent imports compression While a sizable portion of this contraction is explained (due to lower demand for capital and intermediate by the authorities’ decision to write off the pension goods and declining service fees). Meanwhile, despite loans in January 2020, issuance of new loans remained a fall in foreign direct investment and sizable private subdued due to heightened perceptions of risk, sector external repayments, the balance of payments deteriorating asset quality, and significant currency improved, with the authorities taking advantage of mismatches (including deposit dollarization). Moreover, improved financing conditions to refinance external regulatory forbearance may be hiding more serious debt. The Mongolian tugrug depreciated moderately problems in the financial sector and thus complicates and the level of foreign exchange reserves reached a full assessment of financial sector stability. a historical high of US$4.5 billion, supported also by higher gold purchases by the authorities. Outlook and Risks The cost of fiscal relief measures is estimated to be Recovery in the post-pandemic period is likely to be slow over 9 percent of GDP.1 Fiscal imbalances had started and erratic. Following an estimated contraction of 5.2 to emerge in early 2020 prior to the introduction of percent in 2020, the Mongolian economy is expected COVID-19-related measures, with the government’s to grow by 4.3 percent in 2021, as the authorities take decision to increase wages and pensions and to control of the pandemic, stimulus measures prop up write off pension loans. Fiscal imbalances widened domestic demand, the adverse impact of the global significantly further between April and December economy recedes, businesses and consumers adjust 2020, as the effects of the pandemic intensified. The to the new norm of living with the pandemic, and a budget deficit reached 9.5 percent of GDP in 2020, its vaccine is introduced. However, the recovery is subject highest level since 2016, amid a large revenue shortfall to risks of (i) a sharp rise in domestic COVID-19 cases and sizable fiscal relief (spending) measures. Overall, that could trigger stricter and prolonged lockdowns; (ii) the authorities’ fiscal response has provided adequate the potential for further global waves of the virus that support to firms and households, but the size of the would worsen the domestic and external environment; deficit has raised questions over its sustainability. (iii) possible financial instability as regulatory forbearance is withdrawn and the underlying fragile Monetary policy was loosened to fight the economic condition of bank balance sheets is revealed; (iv) impact of the pandemic through policy rate cuts, weather-related shocks (for example, a harsh winter, increased banking sector liquidity, and the introduction which could hit the agriculture sector); and (v) the of regulatory forbearance. Moreover, the monetary likelihood of new spending and overstretched public authorities engaged in quasi-fiscal activities, thus finances in the run-up to the presidential election.
1 It includes the extension of some measures which are expected to be implemented until July 2021. But it does not include the government’s recent decision on exempting utilities fees for households and enterprises. VIII EXECUTIVE SUMMARY
Mongolia, like other countries, will need to transition Finally, Mongolia should adopt an integrated and from policies focused on short-term economic relief fiscally sustainable approach to boosting medium- to accelerating recovery and building resilience. The term economic prospects and job creation. Such challenge Mongolia faces in this regard is that the an integrated approach would place the highest fiscal space to continue the generous support policies emphasis on leveraging private sector investment in enacted during 2020 is quite limited, while their rapid the mining and non-mining sectors to create higher- withdrawal as long as the economy remains weakened productivity jobs and sustainable income opportunities by public-health-related mobility restrictions could for Mongolians. These efforts would be complemented create significant difficulties for households and firms. by better-prioritized and targeted government The government’s fiscal consolidation plan takes investments in infrastructure and a more efficient and this into account by committing to medium-term fiscally affordable social safety net. They would also adjustment but keeping current support measures in require continued attention to the generation of skills place until the summer of 2021. This plan will need required for successful employment, and addressing the to be implemented, as further fiscal expansion beyond possible losses of human capital, particularly among what has been agreed in the 2021 budget could erode the poor, as a result of repeated school closures. While confidence, lead to currency pressures and capital over the coming year government policy will need to outflows, and require harsher austerity measures to remain attentive to national and global developments reestablish macroeconomic control. Mongolia has in the management of the pandemic and react flexibly so far managed to avoid a repeat of the traditional to any downside risks, the rollout of vaccines raises the macro boom-and-bust cycles. It should cherish this prospect that policy efforts can gradually return to this achievement. Further exchange rate flexibility could critical medium-term agenda. help cushion additional external shocks and thereby preserve the limited domestic policy room. Another priority is to prevent the COVID-19 shock from undermining financial stability. While a swift policy response was welcome and necessary, the extension of regulatory forbearance would further reduce transparency around the underlying quality of banking sector balance sheets, while delaying the necessary adjustments in the real sector. The COVID-19 shock has left scars among companies and some may not be able to survive. They should be allowed to close and their resources reallocated to other, more profitable ventures. Banks play a key role in facilitating this reallocation of resources, but excessive forbearance may lock funds in poor investment decisions made in the past, increasing the long-run costs of the shock to the economy. Relatedly, Mongolia’s efforts to implement structural reforms in the banking sector should gain traction. Key elements of these reforms include the strengthening of capital buffers and improved corporate governance of banks (including ongoing reforms in ownership structure of banks), both of which would be facilitated by the gradual exit from COVID-19 related regulatory forbearance.
IX MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Figure ES.1. Mongolia: Key Indicators Figure ES.1. Mongolia: Key Indicators
Strict containment measures have helped Mongolia However, relative to some of its regional peers, the
check the spread in most of 2020 number of confirmed infections has surged since November 2020 Stringency of government measures and cases of COVID‐19 Cumulative reported cases of COVID‐19 60 New COVID‐19 cases Stringency index 100 1600 Fiji Cambodia 90 50 1400 Lao PDR Mongolia 80
cases Papua New Guinea Vietnam 70 1200
19 40 ‐ 60 index 1000 30 50 COVID 800
40 600 New 20 Stringency 30 400 20 10 10 200 0 0 0 20 20 20 20 20 20 20 20 20 20 20 20 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul-20 Jan Jun Oct Apr Jan-20 Jan-21 Feb Sep Jun-20 Dec Aug Oct-20 Apr-20 Feb-20 Nov Sep-20 Mar Dec-20 Mar-20 May Aug-20 Nov-20 May-20 Source: Oxford University (OxCGRT). Source: Oxford University (OxCGRT). Note: The stringency index measures the stringency of government containment measures, including school and workplace closings and restrictions on gatherings in response to the COVID‐19. Higher value indicates more stringent measures.
Exports were significantly affected in H1, but have …while the hard‐hit nontradeable services sector has recovered quickly… been slow to recover Quarterly real exports of goods and services (y/y change) Supply contribution to GDP growth, percentage points
10% 19.6% 16.3% 9.0% 8.8% 5%
0% Mining -2.7% -5.8% -5% Non-mining industry Services -10% Agriculture -36.1% GDP growth -15% Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20
Sources: NSO; World Bank staff estimates. Sources: NSO; World Bank staff estimates.
Government provided sizable fiscal relief package… …which supported household consumption Demand contribution to GDP growth, percentage points 12 Household consumption Gross capital formation Additional health-related spending Public consumption Net exports 10 Quasi-fiscal operations GDP growth 25% 8 Additional spending and revenue measures 15% 6 5%
Percent of GDP 4 -5%
2 -15%
-25% 0 IDN PHL LAO THA MYS CHN Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 KHM VNM MNG MMR Sources: MoF; World bank (2020); World Bank staff Sources: NSO; World Bank staff estimates. estimates.
X 12
EXECUTIVE SUMMARY
Figure ES.2. Mongolia: Key Indicators (continued) Figure ES.2. Mongolia: Key Indicators (con�nued)
With subdued infla�on, the monetary policy rate However, banks with excess liquidity have been reached a historic low reluctant to lend… Core inflation (y/y, %): RHS Credit growth (y/y, %): LHS Excess reserves and loan growth in the banking sector Policy rate: RHS Excess reserves to deposit ra�o (%): RHS 28 30% 40% 25 12 Domes�c credit growth (y/y): LHS 25% 35% 22 19 10 20% 30% 16 15% 25% 13 8 10 6 10% 20% 7 5% 15% 4 4 1 0% 10% -2 2 -5 -5% 5% -8 0 -10% 0% 0 9 8 0 9 0 0 9 9 8 8 7 7 0 0 9 9 8 8 7 7 2 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 -20 -19 -18 -20 -19 -18 ------r r r r c c c c n- 2 n- 1 n- 1 p p p n n n n a a a a e e e e u u u u u u u J J J J J J J Se p Se p Se p Se p D D D D S e S e S e De c De c De c Mar- 2 Mar- 1 M M M M Sources: BoM; World Bank staff es�mates. Sources: BoM; World Bank staff es�mates. Note: RHS = right-hand side; LHS = le�-hand side. Note: RHS = right-hand side; LHS = le�-hand side.
…mainly explained by a deteriora�on in the loan The banking system remains exposed to risk of quality and rising NPLs currency mismatch NPLs and past-due loans in percent of total outstanding Currency mismatch is defined by difference in dollariza�on loans of deposits (bank’s liabili�es) and credits (bank’s assets) 12 33% FX deposit/total deposits: LHS FX loans/total loans: LHS 2,830 28% MNT/USD: RHS 2,780
9 NPLs (% of Total Loans) 2,730 Past Due Loans (% of Total Loans) 23% 2,680 2,630 18% 6 2,580 2,530 13% 2,480 3 8% 2,430 9 0 9 9 0 0 9 0 0 9 8 0 9 8 -19 -20 - 1 - 2 - 1 - 2 -20 -19 -18 l- 1 l- 2 t- 2 t- 1 t- 1 r-2 0 r-1 9 v-1 9 v-2 0 p p n- 2 n- 1 n- 1 g-2 0 g-1 9 g-1 8 u u c c c p p o o J J u u u u u u Ja n Ja n J J J O O O A A S e S e Feb-20 Feb-19 De c De c De c Mar- 1 Mar- 2 N N A A A Ma y Ma y Sources: BoM; World Bank staff es�mates. Sources: BoM; World Bank staff es�mates. Note: RHS = right-hand side; LHS = le�-hand side. Note: RHS = right-hand side; LHS = le�-hand side. Current account surplus in recent months has …while the exchange rate has stabilized following contributed to reserves accumula�on… easing of external pressures Current account balance and FX reserves Exchange rate: Tugrug (Spot rate, Index, Dec 31, 2015=100)
400 Current account balance (LHS, million US$) 5.0 145 MNT/US$ Gross international reserves (RHS, billion US$) 200 4.5 140 MNT/CNY 4.0 135 0 3.5 130 Depreciation -200 3.0 125 -400 2.5 120
-600 2.0 115 1.5 110 -800 1.0 105 -1000 0.5 100 -1200 0.0 95 6 7 8 9 0 -15 -16 -17 -18 -19 -20 n- 1 n- 1 n- 1 n- 1 n- 2 u u u u u Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 Q1-18 Q3-18 Q1-19 Q3-19 Q1-20 Q3-20 J J J J J De c De c De c De c De c De c
Sources: BoM; World Bank staff es�mates. Sources: BoM; World Bank staff es�mates. Note: FX = foreign exchange; RHS = right-hand side; LHS = le�-hand side.
13 XI
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Table ES.1. Key macroeconomic indicators 2016 2017 2018 2019 2020e 2021f 2022f Annual percent change unless indicated otherwise Real GDP growth, at constant market prices 1.4 5.4 7.0 5.0 -5.2 4.3 5.4 Private Consumption -2.2 5.4 12.4 9.9 2.0 3.6 4.5 Government Consumption 10.6 -1.8 -0.8 11.5 17.5 -5.1 1.6 Gross Fixed Capital Formation 0.5 35.6 21.3 23.5 -16.3 9.0 10.0 Exports, Goods and Services 13.8 14.8 24.0 9.1 -5.0 13.4 7.4 Imports, Goods and Services 12.7 24.8 30.9 22.3 -9.0 14.1 8.4 Real GDP growth, at constant factor prices 1.2 5.3 7.2 5.2 -5.2 4.3 5.4 Agriculture 6.2 1.8 4.5 8.4 10.8 5.0 6.0 Industry (incl mining) -0.4 0.7 7.9 3.1 -11.0 6.3 5.4 Services 1.1 7.7 4.7 5.8 -5.7 2.5 5.2 Inflation (CPI, end-period) 0.9 6.4 8.1 5.2 2.3 5.0 7.0 Current account balance (% of GDP) -6.3 -10.2 -16.8 -15.4 -3.3 -7.7 -8.3 Financial and Capital account (% of GDP) 7.6 24.5 17.4 21.1 9.2 11.8 13.2 Net Foreign Direct Investment (% of GDP)* 1.1 12.7 16.3 16.5 12.5 14.0 15.0 Fiscal Balance (% of GDP)** -15.3 -3.8 2.6 1.4 -9.5 -2.7 -1.9
Primary Balance (% of GDP) -10.1 0.4 5.8 3.7 -6.9 -0.3 0.1 Debt (% of GDP)*** 87.6 84.7 72.6 69.0 79.4 77.7 73.0
* In 2016, net FDI number excluded the transactions of Oyu Tolgoi-2 project financing in May–June 2016. ** Development Bank of Mongolia (DBM) spending is excluded from fiscal balance and monitored separately. ***General government debt data exclude SOE debt and central bank liability from People’s Bank of China swap line.
XII I. ECONOMIC PERFORMANCE AND PROSPECTS
A. Recent Economic Developments 2 B. Outlook and Risks 23
1 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
I. ECONOMIC PERFORMANCE AND PROSPECTS
A1. Output contracted sharply during the first nine months of 2020 RECENT The COVID-19 crisis has triggered a global economic shock of unprecedented magnitude, causing synchronized collapses in ECONOMIC economic activity across the world. In particular, economic conditions DEVELOPMENTS in the East Asia and Pacific (EAP) region deteriorated sharply due to the pandemic-related lockdowns. Although the Chinese economy is recovering at a brisk pace, recovery in the rest of the region is expected to be subdued and fragile as disruptions to economic activity were more acute than expected. The pandemic has caused a heavy toll of deaths and illness, plunged millions into poverty, and may depress economic activity and incomes for a prolonged period. Furthermore, the pandemic has exacerbated the risks associated with debt accumulation as debt levels have reached historic highs and financial market stress builds.
The COVID-19 health crisis quickly escalated into deep economic turmoil in Mongolia, affecting businesses, households, and government revenue. This manifested itself through four key channels: (i) the government’s containment measures have had a direct and immediate adverse impact on small businesses and household income, weighing on already weakening domestic economic activity (see box I.1); (ii) the mining sector has been hard hit by weaker Chinese demand, compounded by self-imposed border closures, a drop in commodity prices, and greater risk aversion of investors; (iii) the services sector (including tourism and transportation), which accounts for about 40 percent of the Mongolian economy, was affected by the containment measures; and (iv) unforeseen revenue shortfalls and increased spending on health care and social protection further exacerbated fiscal pressures.
2 ECONOMIC PERFORMANCE AND PROSPECTS
Box I.1. The government’s measures to contain the COVID-19 pandemic
The Government of Mongolia, through the State Emergency Commission (SEC), which is tasked with handling emer- gencies at the national level, introduced throughout 2020 a series of restrictions to contain the risk of COVID-19. These include: • Border closures: All travel (air, road, and railway) from or through China was banned since February 1, 2020. Cross-border passenger transportation of all forms ceased starting March 10. Mongolia’s borders have remained closed for passengers, with the exception of Mongolian nationals arriving through special chartered flights organized by the government. Upon arrival, passengers are subject to a 21-day mandatory strict quarantine to limit the risks of domestic contagion. Hygiene protocols were elevated on the trucks transporting consumer items imported from Russia. • Suspension of exports: Exports of coal and crude oil were suspended during February 10–March 2, in an at- tempt to minimize the risk of infection of truck drivers over the Mongolia-China border. Although the official suspension was lifted as scheduled, export did not return to its regular pace until August, when the government introduced the Green Gate program, which aimed to accelerate truck transportation through improved customs clearance and proper implementation of hygiene protocols. • Suspension of educational activities: All activities of schools, kindergartens, universities, vocational centers, production centers, and training centers were suspended from January 27 to September 1. Online/TV schooling was provided for students until September 21, when in-class education resumed. • Restriction of services and community activities: Bars, cafés, and restaurants were instructed during mid-Febru- ary to July 2020 to close at 10:00 p.m. rather than the usual 4:00 a.m. In early May, nightclubs and karaoke bars were banned from operating, and in early March, the government suspended community activities including meetings, trainings, sport competitions, travel, arts, cultural activities, cinema, driving courses, and game center activities. These restrictions have been gradually loosened since then. • Introduction of a strict lockdown when the first domestic contagion was recorded on November 11, 2020: Ulaanbaatar and several other regions remained in strict lockdown between November 11 and December 14. During this period, the sale of alcohol was prohibited, pedestrian and automobile movement in the city was restricted to grocery, health care, and other essential services only, public transportation service was limited, travel between regions was prohibited, and charter flights were suspended. During the lockdown, the authori- ties traced the domestic infections and conducted PCR (polymerase chain reaction) tests of a sample of house- holds. On December 14, when the strict lockdown ended, a number of economic activities that could enforce social distancing were allowed to reopen. Passenger travel between towns remains conditional on PCR testing. In-class educational activities have been suspended since November 11, and TV schooling resumed. • After a temporary loosening, a strict lockdown was reintroduced in the city of Ulaanbaatar starting December 14: An accelerating number of COVID-19 cases in the city triggered the authorities to introduce a strict lockdown until January 11, 2021. Unlike in the preceding lockdown, delivery services were restricted within the city. Due to consequences on economic activities, starting January 11, the strict lockdown has been loosened step by step.
Source: Compiled from various government websites.
3 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Mongolia’s economy is facing one of its most severe quarters of 2020 from 9.9 percent in the same period cinema, driving courses, and game center activities. These restrictions have been gradually loosened contractions triggeredsince then. by the outbreak and associated in 2019. Household consumption growth slowed to 6.1 precautionary Introductionmeasures. The of COVID-19a strict lockdown shock came when at the firstpercent domestic (y/y) contagionduring this was period recorded from on9.5 November percent one 11, a time when Mongolia’s2020: Ulaanbaatar economy and was several already other facing regions remainedyear ago, in as strict COVID-19-related lockdown between restriction November measures 11 and a slowdown - December particularly 14. in During the second this period, half (H2) the of sale ofaffected alcohol private was prohibited,spending on pedestrian retail trade, and travel, automobile leisure, 2019 - mostly movementdriven by weaker in the citycommodity was restricted prices toand grocery, and health recreational care, and activities. other essential The Household services only, Response public the deterioratingtransportation quality of locallyservice produced was limited, copper, travel a betweenPhone regionsSurvey indicateswas prohibited, that the and pandemic charter flightshas led were to suspended. During the lockdown, the authorities traced the domestic infections and conducted PCR key mineral export. Hit by the COVID-19 shock through significant deceleration in labor income, particularly (polymerase chain reaction) tests of a sample of households. On December 14, when the strict lockdown both domesticended, and external a number channels, of economic Mongolia’s activities real that couldamong enforce the self-employed social distancing and were household allowed to business reopen. GDP contractedPassenger by 7.3 travel percent between (year-over-year towns remains [y/y]) conditional owners on (see PCR part testing. II for In‐ class details). educational However, activities household have in the first ninebeen months suspended of 2020 since (figure November I.1), 11,its and worst TV schoolingconsumption resumed. and income were supported by, among contraction sinceAfter the a temporary economic loosening,transition a periodstrict lockdownin others, was reintroduced the wage/pension in the city increase, of Ulaanbaatar the write starting off of early 1990s. December Although the14: An contraction accelerating was number broad- of COVIDpension‐19 loans,cases andin the COVID-19-related city triggered the income authorities support to introduce a strict lockdown until January 11, 2021. Unlike in the preceding lockdown, delivery services based, it was significantly felt in the mining sector measures. Meanwhile, government consumption were restricted within the city. Due to consequences on economic activities, starting January 11, the (-20.7 percent,strict y/y). lockdown Output has in been non-mining loosened industry step by step.expanded by 11.7 percent, mainly reflecting COVID-19- fell by 3.7 percent (y/y), while services contracted by 7 related spending. percentSource: in the Compiled same period. from various Meanwhile, government the agriculturewebsites. sector was the key driver of growth, as it expanded Investment, especially in the private sector, plummeted, by 11.3Mongolia’s percent (y/y),economy supported is facing by favorable one of weather its most severepulling contractionsdown growth triggered on the bydemand the outbreak side. The and conditions.associated The precautionary adverse impact measures. of a weaker The globalCOVID ‐19 contributionshock came ofat grossa time capital when formation Mongolia’s to economyGDP growth was economyalready was facing exacerbated a slowdown by a sharp―particularly fall in domestic in the secondturned halfsignificantly (H2) of negative2019―mostly (-14.3 percentagedriven by points)weaker commodity prices and the deteriorating quality of locally produced copper, a key mineral export. Hit by economic activities due to the authorities’ containment during January–September 2020, from +10 percentage the COVID‐19 shock through both domestic and external channels, Mongolia’s real GDP contracted by 7.3 measures, including the exports ban. points a year ago. This is mainly explained by a percent (year‐over‐year [y/y]) in the first nine monthscombination of 2020 (figure of factors I.1), including its worst declining contraction commodity since the On economic the demand transition side, although period in finalearly 1990s. consumption Although prices, the contraction weakening wasdomestic broad demand,‐based, andit was deteriorating significantly growthfelt moderatedin the mining during sector January–September (‐20.7 percent, y/y). 2020, Output investor in non‐ miningconfidence. industry In fact, fell byforeign 3.7 percent direct investment (y/y), while it remainedservices acontracted key driver by of 7growth percent (figure in the same I.2). period.Final (FDI) Meanwhile, flows, which the agriculture account for sector about was70 percent the key of driver the consumptionof growth, grew as itby expanded 7.1 percent by (y/y) 11.3 in percentthe first (y/y), three supportedgross capital by favorable formation, weather fell by conditions. over 20 percent The adverse (y/y) impact of a weaker global economy was exacerbated by a sharp fall in domestic economic activities due to the authorities’ containment measures, including the exports ban. Figure I.1. Output contraction was mostly driven by Figure I.2. Steady growth of private consumption was theFigure mining I.1. and Output services contraction sectors was mostly driven by Figurenot enough I.2. Steady to compensate growth of privatesharp drop consumption in investment was
theSupply mining contribution and services to GDP growth, sectors percentage points not enoughDemand contributionto compensate to GDP sharp growth, drop percentage in investment points Supply contribution to GDP growth, percentage points Demand contribution to GDP growth, percentage points Household consumption Gross capital formation Mining Non-mining industry 15% Public consumption Net exports Services Agriculture GDP growth 10% 25%
5% 15% 0% 5% -5% -5% -10% -15% -15% -25% Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20
Sources: NSO; World Bank staff estimates. Sources: NSO; World Bank staff estimates. Sources: NSO; World Bank staff estimates. Sources: NSO; World Bank staff estimates. On the demand side, although final consumption growth moderated during January–September 2020, it remained a key driver of growth (figure I.2). Final consumption grew by 7.1 percent (y/y) in the first
16 4
three quarters of 2020 from 9.9 percent in the same periodECONOMIC in 2019. PERFORMANCEHousehold consumption AND PROSPECTS growth slowed to 6.1 percent (y/y) during this period from 9.5 percent one year ago, as COVID‐19‐related restriction measures affected private spending on retail trade, travel, leisure, and recreational activities. The Household Response Phone Survey indicates that the pandemic has led to significant deceleration in to US$1.2 billion during January–September. Moreover, to boost exports through the Green Gate program.2 labor income, particularly among the self‐employed and household business owners (see part II for totaldetails). outstanding However, loans household in the banking consumption sector, a and key incomeIn addition, were insupported Q3 2020, by, gold among exports others, reached the their sourcewage/pension of financing increase, of domestic the writeoff investment, of pension contracted loans, andhighest COVID peak‐19 since‐related 2008, income as the supportcentral bankmeasures. provided byMeanwhile, over 5 percent government (y/y) amid consumptionthe ongoing deterioration expanded by 11.7soft percent,loans to goldmainly miners reflecting (0.3 percent COVID ‐of19 GDP‐related during ofspending. loan quality. Meanwhile, the accelerated execution January-October). of public investment projects was not sufficient to offsetInvestment, the slump especially in private in investment. the private sector, plummeted,Imports pulling also down contracted growth on significantly the demand side. amid The weaker contribution of gross capital formation to GDP growthdomestic turned significantlydemand and negative lower oil(‐14.3 prices. percentage As a net Exportspoints) wereduring hit January–September hard in the first 2020,half butfrom recovered +10 percentage importer points of energy, a year Mongolia ago. This benefited is mainly from explained declining quicklyby a combination (figure I.3). of Infactors the includingfirst nine declining months commodity of 2020, global prices, oil prices. weakening Real imports domestic of goods demand, and servicesand exportsdeteriorating of goods investor and services confidence. contracted In fact, by 8foreign percent direct fell investment by 8 percent (FDI) (y/y) flows, during which January-September account for about 2020 in70 real percent terms, ofthe the largest gross decline capital since formation, the 2009 fell global by over 20compared percent to(y/y) an expansionto US$1.2 billionof 23.2 during percent January– a year ago financialSeptember. crisis. Moreover, In fact, in totalthe same outstanding period ofloans 2019, in realthe banking(figure sector, I.4). a keyThe source import of financing compression of domestic is supported by, exportsinvestment, expanded contracted by 15.1 bypercent. over 5 The percent contraction (y/y) amid was the amongongoing others, deterioration subdued of loan purchase quality. of Meanwhile, capital goods mostthe acceleratedsignificant in execution coal and crudeof public oil (which investment accounted projects (mostly was not reflecting sufficient tolower offset private the slump investment), in private lower forinvestment. 45 percent of the total export in 2019) following oil prices, and reduction in imported consumer goods weakerExports demand were hit from hard China in the and first the half temporary but recovered ban quicklytriggered (figure by COVID-19-related I.3). In the first nine precautionary months of measures2020, onexports exports of ingoods February-March and services to contracted contain the by risk8 percent of (for in realexample, terms, cancellation the largest of decline the official since celebrationthe 2009 of COVID-19.global financial Moreover, crisis. copper In fact, exports in the (24 samepercent period of total last year,the 2020 real lunarexports new expanded year and reducedby 15.1 economic percent. activityThe exportscontraction in 2019) was most contracted significant significantly, in coal and especiallycrude oil (whichin retail accounted trade and for other 45 percent services). of Meanwhile,the total export imports inin the 2019) first following quarter weaker (Q1) demand due to from a sharp China fall and in the prices oftemporary services also ban declinedon exports sharply, in February–March partly due to weaker to ascontain theтүүхий эдийн үнэ өссөн COVID-19 the risk of shock COVID suppressed‐19. ,Moreover, цар тахлаас урьдчилан сэр global copper demand. exports demand (24гийлэх арга хэмжээ суларсан percent for transportation of total exports services in 2019) , (mainly Засгийн газраас contracted triggered 1 However,significantly,экспортыг сэргээх exports especially recovered “inНогоон гарц the quickly, first quarter particularly” хөтөлбөрийг хэрэгжүүлсэнтэй холбоотой байв (Q1) in due byto a travel sharp restrictions fall in prices and as limited the .Covid Үүний сацуу truck‐19 activities),shock2020 thesuppressed thirdоны quarter3 дугаар global (Q3), demand. улиралд mainly However, алтны driven экспорт by exports increasing 2008recovered оноос and quickly, reduction хойш particularly оргилдоо in overseas хүрсin thetourismэн third нь Төв andquarter банкнаас international (Q3), алт mainlyолборлогч компаниуда driven by increasing commodityд хөнгөлөлттэй зээл prices, the gradual(эхний 10easing сард ДНБ‐ий of COVID‐190.3 preventive хувьтай тэнцэх measures,) олгосонтой and commodity prices, the gradual easing of COVID-19 consultancy services (particularly in the mining sector). the government’sхолбоотой. initiative to boost exports through the Green Gate program.1 In addition, in Q3 2020, preventive measures, and the government’s initiative gold exports reached their highest peak since 2008, as the central bank provided soft loans to gold miners (0.3 percentЗураг I.3. of Экспорт эхний хагас жилд хүнд GDP during January–October). Зураг I.4. Дотоодын эрэлт суларч, түлш шатахууны Figureцохилтод орсон ч хурдацтай сэргэв I.3. Exports were hit hard in H1 but quickly үнэ буурсан нь импортод нөлөөлөвFigure I.4. Imports were also affected by subdued FigurerecoveredБүтээгдэхүүн I.3. Exports, үйлчилгээний улирлын бодит экспорт were hit hard in H1 but quickly FigureБүтээгдэхүүн domesticI.4. Imports demand, үйлчилгээний улирлын бодит импорт were also and affected lower oil by prices subdued recovered(жилийн өөрчлөлт ) domestic(жилийн өөрчлөлт demand and) lower oil prices QuarterlyQuarterly real exports real exports of goods of goods and services and services (y/y) (y/y) Quarterly realQuarterly imports realof goods imports and of services goods and (y/y) services (y/y) 19.6% 31.6% 16.3% 19.6% 25.2%31.6% 9.0% 16.3% 8.8% 25.2% 19.9% 9.0% 8.8% 19.9% 12.4% 12.4% -2.7% -5.8% -2.7% -5.8%
-2.6% -2.6% -5.2% -5.2% -36.1% -36.1% -17.4% -17.4%
Q1-19Q1-19 Q2-19 Q2-19 Q3-19 Q3-19 Q4-19 Q4-19 Q1-20 Q1-20 Q2-20 Q2-20 Q3-20 Q3-20 Q1-19Q1-19 Q2-19 Q2-19 Q3-19 Q3-19 Q4-19 Q4-19 Q1-20 Q1-20 Q2-20 Q2-20 Q3-20 Q3-20
Source: Source: Source:Эх сурвалж NSO. NSO. : ҮСХ. Эх сурвалжSource: NSO. NSO. : ҮСХ.
1 The Дотоодын эрэлт суларчGreen Gate initiative introduced, түлш шатахууны үнэ буурснаар импорт мэдэгдэхүйц агшив by the government has helped the gradual recovery of coal and copper exports.. Эрчим хүчний цэвэр импортлогч улсын хувьд дэлхийн зах зээлд нефтийн үнэ буур17 сан нь Монгол Улсад ашигтай байв. Бүтээгдэхүүн, үйлчилгээний бодит импорт 2019 оны эхний 3 улиралд 23.2 хувиар өсөж байсан бол 2020 оны эхний 3 улиралд жилийн 8 хувиар агшжээ (зураг I.4). Импортын агшилтад үндсэн хөрөнгийн худалдан авалт багассан (хувийн хөрөнгө оруулалт буурсны илрэл), нефтийн үнэ буурсан, хэрэглээний барааны импорт цар тахалтай холбоотойгоор (2020 оны цагаан сарыг тэмдэглэхгүй байх 2 The Greenшийдвэр гарч жижиглэн худалдаа болон үйлчилгээний бусад салбарт Gate initiative introduced by the government has helped the gradual recovery of coal and copper идэвхжил суларсан exports. ) агшсан нь тус тус нөлөөлжээ. Үйлчилгээний импорт мөн ялгаагүй буурсан нь тээврийн үйлчилгээний эрэлт 5 суларсан (зорчих хөдөлгөөн болон ачаа тээвэрт тавьсан хязгаарлалтаас шалтгаалан), гадаад аялал жуулчлал болон гадаадын зөвлөх үйлчилгээ (ялангуяа уул уурхайн секторт) багассантай холбоотой юм. Уул уурхайн салбарын үйлдвэрлэл ялангуяа 2020 оны эхний хагаст огцом буурсан ч хурдацтай сэргэв. 2020 оны эхний хагаст нүүрс олборлолт жилийн 49 хувиар, экспорт нь жилийн 52.1 хувиар тус тус буурчээ.2 Тус салбар ийнхүү унасан нь Хятадын эрэлт муудсан, эрх баригчдын зүгээс цар тахлын эсрэг авсан арга хэмжээтэй холбоотой.3, 4 Мөн хугацаанд түүхий нефтийн олборлолт өмнөх оны мөн үеэс 70 хувиар агшжээ. 2020 оны эхний хагаст зэсийн үйлдвэрлэл 8 хувиар буурсан нь Оюу толгойн баяжмал дахь зэсийн агууламж муудсан, дэлхийн зах зээлийн үнэ буурсны илэрхийлэл
1 Засгийн газрын “Ногоон гарц” санаачилга нь нүүрс, зэсийн экспортыг алгуур сэргээхэд тус дэм болов. 2 2019 оны уул уурхайн экспортын 45 хувийг нүүрс бүрдүүлж байв. 3 Урьдчилан сэргийлэх арга хэмжээтэй холбоотойгоор 2‐3 дугаар сард экспорт зогссон нь уул уурхайн бүтээгдэхүүний үйлдвэрлэл огцом унахад нөлөөлөв. 4 2019 онд нүүрсний үйлдвэрлэл 1.9 хувиар өсөж 50.8 сая тонн, нүүрсний экспорт 2 хувиар өсөж 36.5 сая тоннд тус тус хүрсэн нь түүхэн дээд амжилт байв.
19
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Mining sector output contracted sharply, especially in Non-mining output also contracted notably, as the As aAs net a net ImportsH1 2020,Imports alsobut recovered alsocontracted contracted quickly. significantly Insignificantly H1 2020, amid production amid weaker weaker domesticservices domestic demand sector demand was and significantly andlower lower oil prices. oil hit prices. by COVID-19- importerimporter of energy, of energy, Mongolia Mongolia benefited benefited from from declining declining global global oil prices. oil prices. Real Real imports imports of goods of goods and servicesand services of coal contracted by 49 percent (y/y), while its volume of related precautionary measures. After recording fell byfell 8 by percent 8 percent (y/y) (y/y) during during January–September January–September 2020 2020 compared compared to an to expansion an expansion of 23.2 of 23.2 percent percent a year a year exports contracted by 52.1 percent (y/y).3 Weak demand growth of 6.7 percent (y/y) in 2019, non-mining GDP ago ago(figure (figure I.4). I.4).The Theimport import compression compression is supported is supported by, amongby, among others, others, subdued subdued purchase purchase of capital of capital from China and the COVID-19-related precautionary contracted by 3.7 percent (y/y) in the first nine months goodsgoods (mostly (mostly reflecting reflecting lower lower private private investment), investment), lower lower oil prices, oil prices, and andreduction reduction in imported in imported consumer consumer goodsmeasuresgoods triggered of triggered the authoritiesby COVID by COVID‐ 19largely‐related‐19 ‐relatedexplain precautionary theprecautionary weak measuresof measures 2020 (figure(for (forexample, I.6).example, The cancellation servicescancellation ofsector, the of officialthe mainly official trade 4,5 celebrationperformance.celebration of the Meanwhile,of 2020the 2020 lunar crude lunar new oil new year production year and andreduced wasreduced economicand economic transportation, activity activity in retail declinedin retail trade trade significantly and andother other services). (by services). 13 to Meanwhile,downMeanwhile, by about imports 70 importspercent of services (y/y)of services during also the alsodeclined same declined period. sharply, sharply, 25partly percent), partly due due toreflecting weaker to weaker demandits strong demand for link transportationfor with transportation the mining servicesCopperservices production (mainly (mainly triggered contracted triggered by by travel by8 percent travel restrictions inrestrictions H1 2020, and andlimitedsector. limited truck Mainly truck activities), explained activities), and by and reduction reduced reduction productionin overseas in overseas of tourismreflectingtourism and the andinternational declining international quality consultancy consultancyof copper services from services the (particularly Oyu (particularly textiles, in the in manufacturing miningthe mining sector). sector). output contracted by 6.6 Tolgoi mines and lower international prices.6 However, percent (y/y) in the same period from 9.2 percent Miningthe outputMining sector contraction sector output output of contracted the miningcontracted sector sharply, sharply, decelerated especially especially ingrowth H1 in 2020, H1a year 2020, but ago. butrecovered9 Despite recovered the quickly. accelerated quickly. In H1 Inexecution 2020,H1 2020, productionto 5.2production percent of coal(y/y) of coal contractedin Q3 contracted (figure by I.5).49 by percent This49 percent was (y/y), mainly (y/y), while whileof its public volume its volume investment of exports of exports projects contracted contracted and theby 52.1 resumptionby 52.1 percent percent of (y/y).(y/y).3 Weak3 Weak demand demand from from China China and andthe COVIDthe COVID‐19‐related‐19‐related precautionary precautionary measures measures of the of authoritiesthe authorities driven by strong gold production following higher a subsidized housing program by the BoM since April largelylargely explain explain the weakthe weak performance. performance.4,5 Meanwhile,4,5 Meanwhile, crude crude oil production oil production was wasdown down by about by about 70 percent 70 percent prices, and the Bank of Mongolia (BoM)’s program 2019, the construction sector also contracted by 6.3 (y/y)(y/y) during during the thesame same period. period. Copper Copper production production contracted contracted by 8by percent 8 percent in H1 in 2020,H1 2020, reflecting reflecting the the to support gold production and exports.7, 8 Moreover, percent (y/y) in the same period from expansion (8 decliningdeclining quality quality of copper of copper from from the theOyu OyuTolgoi Tolgoi mines mines and andlower lower international international prices. prices.6 However,6 However, the the coal production also recovered in the same period percent) in 2019, with a fall in both residential and outputoutput contraction contraction of the of miningthe mining sector sector decelerated decelerated to 5.2 to percent 5.2 percent (y/y) (y/y) in Q3 in (figure Q3 (figure I.5). I.5).This Thiswas wasmainly mainly drivensupporteddriven by strong byby thestrong gold government’s gold production production efforts following following to boost higher coalhigher prices, prices,industrial and andthe building Bankthe Bank of activity Mongolia of Mongolia (the latter(BoM)’s (BoM)’s mainly program due program to to the to supportexports,support gold including gold production production through and the and exports. Green exports. Gate7,8 Moreover, 7,8 initiative Moreover, coalslowdown coalproduction production in the also development alsorecovered recovered of in the the in Oyu samethe Tolgoi same period mine’s period supportedwithsupported China. by the by government’sthe government’s efforts efforts to boost to boost coal coalexports,underground exports, including including project). through through In the contrast, Greenthe Green expansion Gate Gate initiative initiative in the withwith China. China. Figure I.5. Mining output fell sharply in H1, but Figure I.6. The services sector explained most of FigurerecoveredFigure I.5. Mining I.5 strongly. Mining output output fell sharply fell sharply in H1, in but H1, but FigureFigurethe I.6. contractionThe I.6. servicesThe services in sector non-mining sector explained explained output most most of the of the recoveredrecovered strongly strongly contractioncontraction in non in‐ nonmining‐mining output output ContributionsContributions to mineral to to mineral mineral output output output (y/y, (y/y, percentage(y/y, percentage percentage points) points) points) ContributionsContributionsContributions to non to to‐ mineralnon non-mineral‐mineral output output (y/y, (y/y,percentage(y/y, percentage percentage points) points) points)
20% 20% 10% 10%
10% 10% 5% 5% 0% 0%
-10% -10% 0% 0% AgricultureAgriculture -20% -20% Others Others Gold Gold ServicesServices -5% -5% Net taxesNet taxes Iron oreIron ore Crude oilCrude oil Non-mineralNon-mineral industries industries -30% -30% CopperCopper Coal Coal Non-miningNon-mining GDP growth GDP growth Mining MiningGDP growth GDP growth -40% -40% -10% -10% Q1-18 Q2-18 Q1-18 Q3-18 Q2-18 Q4-18 Q3-18 Q1-19 Q4-18 Q2-19 Q1-19 Q3-19 Q2-19 Q4-19 Q3-19 Q1-20 Q4-19 Q2-20 Q1-20 Q3-20 Q2-20 Q3-20 Q1-18 Q2-18 Q1-18 Q3-18 Q2-18 Q4-18 Q3-18 Q1-19 Q4-18 Q2-19 Q1-19 Q3-19 Q2-19 Q4-19 Q3-19 Q1-20 Q4-19 Q2-20 Q1-20 Q3-20 Q2-20 Q3-20 Sources:Sources:Sources: NSO; World NSO;World BankWorld Bank staff Bankstaff estimates. estimates.staff estimates. Sources:Sources: NSO; NSO; NSO;World World World Bank Bank Bankstaff staff estimates staffestimates. estimates
NonNon‐mining‐mining output output also alsocontracted contracted notably, notably, as the as servicesthe services sector sector was wassignificantly significantly hit byhit COVID by COVID‐19‐‐19‐ relatedrelated precautionary precautionary measures. measures. After After recording recording growth growth of 6.7 of percent6.7 percent (y/y) (y/y) in 2019, in 2019, non ‐nonmining‐mining GDP GDP
3 Coal3 exportsCoal exports accounted accounted for 45 for percent 45 percent of total of totalmineral mineral exports exports in 2019. in 2019. 4 As a4 partAs a ofpart the of precautionary the precautionary measures, measures, the export the export ban during ban during February–March February–March contributed contributed to a sharp to a sharp fall in fall mineral in mineral output. output. 5 In 2019,5 In 2019, coal productioncoal production and export and export grew grewby 1.9 by percent 1.9 percent and 2 and percent, 2 percent, respectively, respectively, to reach to reach historically historically high levelshigh levels (that (thatis, is, 50.83 Coal million50.8 exports million tonsaccounted andtons 36.5 forand 45 million36.5 percent million tons, of total tons,respectively). mineral respectively). exports in 2019. 6 6 4 AsThe a part copperThe of copperthe export precautionary export unit priceunit measures, pricefell by thefell about export by about 14.3ban during percent14.3 February–Marchpercent during during the contH1 the 2020ributed H1 2020following to a sharpfollowing fallthe in collapse themineral collapse output.in global in global prices prices amid amidthe the impact5 In 2019,impact of coal the ofproduction COVID the COVID‐19 and shock‐ 19export shock on grew the on bycommodity the 1.9 commoditypercent market.and 2 market.percent, respectively, to reach historically high levels (that is, 50.8 million tons and 36.5 6 7 GoldThe 7copper Goldproduction exportproduction unitgrew price grewby fell35 by percentby 35 about percent (y/y)14.3 percent (y/y)in the in firstduring the nine first the monthsH1nine 2020 months followingof 2020. of 2020. the collapse in global prices amid the impact of the COVID-19 8shock 8on the commodity market. 7 TheGold Bankproduction The Bankof Mongolia grewof Mongolia by 35has percent also has provided also(y/y) inprovided the soft first loans softnine loans tomonths gold to of mininggold 2020. mining companies, companies, which which may havemay havealso contributed also contributed to boosting to boosting gold gold production.8 The production.Bank of Mongolia has also provided soft loans to gold mining companies, which may have also contributed to boosting gold production. 9 The contraction in the textile industry, which represents nearly 14 percent of manufacturing production, is mainly attributed to weakened business activity, especially in the cashmere industry. 19 19 6
contractedcontracted by 3.7by 3.7percent percent (y/y) (y/y) in the in thefirst first nine nine months months of 2020of 2020 (figure (figure I.6). I.6). The The services services sector, sector, mainly mainly tradetrade and and transportation, transportation, declined declined significantly significantly (by (by13 to13 25to percent),25 percent), reflecting reflecting its strongits strong link link with with the the miningmining sector. sector. Mainly Mainly explained explained by reducedby reduced production production of textiles, ofECONOMIC textiles, manufacturing manufacturing PERFORMANCE output output AND contracted PROSPECTScontracted by by 6.6 6.6percent percent (y/y) (y/y) in thein thesame same period period from from 9.2 9.2percent percent growth growth a year a year ago. ago.8 Despite8 Despite the theaccelerated accelerated executionexecution of public of public investment investment projects projects and and the theresumption resumption of a of subsidized a subsidized housing housing program program by theby theBoM BoM sinceagriculturesince April April 2019, sector 2019, the accelerated theconstruction construction to 11.3 sector percent sector also also during contracted contracted have by also 6.3by 6.3percentcontributed percent (y/y) to(y/y) inlow thein inflation thesame same period as period Mongolia from from is expansionexpansion (8 percent)(8 percent) in 2019,in 2019, with with a fall a fallin bothin both residential residential and and industrial industrial building building activity activity (the (the latter latter January–September 2020, up from 8.4 percent in 2019, a net oil importer. Moreover, the government decision mainlymainly due due to theto theslowdown slowdown in thein thedevelopment development of theof theOyu Oyu Tolgoi Tolgoi mine’s mine’s underground underground project). project). In In reflecting relatively favorable weather conditions and to reduce the price of coal briquettes also significantly contrast,contrast, expansion expansion in the in theagriculture agriculture sector sector accelerated accelerated to 11.3 to 11.3 percent percent during during January–September January–September 2020, 2020, higher survival rates of livestock. Finally, net taxes contributed to moderate inflation through end-2020. up fromup from 8.4 8.4percent percent in 2019, in 2019, reflecting reflecting relatively relatively favorable favorable weather weather conditions conditions and and higher higher survival survival rates rates contracted by 8.4 percent (y/y) amid subdued domestic However, food price inflation remained high at 8.5 of livestock.of livestock. Finally, Finally, net nettaxes taxes contracted contracted by 8.4 by 8.4percent percent (y/y) (y/y) amid amid subdued subdued domestic domestic demand demand and and import import demand and import compression (mainly a sharp fall percent at end-2020 (8.3 percent at end-2019) amid compressioncompression (mainly (mainly a sharp a sharp fall fallin imports in imports of passenger of passenger cars cars and and mining mining‐sector‐sector‐related‐related capital capital goods). goods). in imports of passenger cars and mining-sector-related the lockdowns and panic buying. capital goods). A2.A2. Inflation Inflation moderated moderated notably, notably, reflecting reflecting subdued subduedWith domestic subdued domestic demand inflation, demand and the and lowermonetary lower oil policypricesoil prices rate was WeakeningWeakening domestic domestic demand demand largely largely contributed contributed to moderate toreduced moderate inflationto ainflation historic in 2020. inlow 2020. Inflationto mitigateInflation moderated themoderated economic to to 2.3A2. 2.3percent Inflation percent in November in Novembermoderated 2020, 2020, notably, down down from reflecting from 5.2 5.2percent percent impactin 2019 in 2019 ofon the theon thebackCOVID-19 back of muted of shock. muted domestic Reflectingdomestic demand demand weaker pressuressubduedpressures following domestic following plummeting plummeting demand private private and investment investmentlower and and domesticdecelerating decelerating demand, private private core consumption consumption inflation growth moderated growth (figure (figure to 0.2 I.7).oilI.7). pricesSupply Supply side side factors, factors, such such as lower as lower global global oil prices,oil prices, havepercent have also also at contributed end-2020 contributed to from low to 4.2low inflation percentinflation as (y/y)Mongolia as Mongolia at end- is ais net a netoil importer.oil importer. Moreover, Moreover, the thegovernment government decision decision to reduceto reduce the theprice price of coalof coal briquettes briquettes also also Weakening domestic demand largely contributed to 2019 (figure I.8). Moreover, domestic credit contracted significantlysignificantly contributed contributed to moderate to moderate inflation inflation through through end end‐2020.‐2020. However, However, food food price price inflation inflation remained remained moderate inflation in 2020. Inflation moderated to in March as banks’ risk aversion toward new loans highhigh at 8.5 at 8.5percent percent at end at end‐2020‐2020 (8.3 (8.3 percent percent at end at end‐2019)‐2019) amid amid the thelockdowns lockdowns and and panic panic buying. buying. 2.3 percent in December 2020, down from 5.2 percent increased amid heightened market uncertainty Within With 2019 subdued subdued on the inflation, backinflation, of the muted the monetary monetary domestic policy policy demand rate rate was was reducedtriggered reduced to by a to historicthe a historic COVID-19 low low to shock. mitigate to mitigate This the also the economic contributed economic impactpressuresimpact of followingtheof the COVID COVID plummeting‐19 ‐shock.19 shock. Reflecting private Reflecting investment weaker weaker domestic domesticto the demand, falling demand, core core core inflation inflation inflation moderatedtrend. moderated The to authorities0.2to 0.2 percentandpercent decelerating at end at end‐2020 private‐2020 from from consumption 4.2 4.2percent percent (y/y) growth (y/y) at end (figure at end‐2019 ‐2019 (figureconsequently (figure I.8). I.8). Moreover, cut Moreover, the policy domestic domestic rate by credit a totalcredit contracted of contracted 500 basis inI.7). Marchin Supply March as side banks’as factors, banks’ risk such risk aversion as aversion lower toward global toward oilnew prices, new loans loans increasedpoints increased in 2020 amid amidto heightened6 percent, heightened a historicmarket market low. uncertainty uncertainty triggeredtriggered by theby theCOVID COVID‐19 ‐shock.19 shock. This This also also contributed contributed to the to thefalling falling core core inflation inflation trend. trend. The The authorities authorities consequentlyconsequently cut cutthe thepolicy policy rate rate by aby total a total of 500 of 500 basis basis points points in 2020 in 2020 to 6 to percent, 6 percent, a historic a historic low. low. Figure I.7. Inflation moderated amid lower oil Figure I.8. …and compounded by the contraction FigurepricesFigure I.7 and. I.7Inflation subdued. Inflation moderated domestic moderated demand…amid amid lower lower oil prices oil prices Figure Figureof I.8 domestic. I.8…and. …and compounded credit compounded by the by thecontraction contraction of of andand subdued subdued domestic domestic demand… demand… domesticdomestic credit credit y/y change y/y change y/y changey/y change y/y changey/y change Core inflationCore inflation (y/y): RHS(y/y): RHS 30% 30% 12% 12% CreditCredit growth growth (y/y): LHS(y/y): LHS PolicyPolicy rate: RHS rate: RHS 12% 12% 20% 20% 10% 10% 22% 22% 10% 10% 10% 10% 8% 8% 8% 8% 0% 0% 6% 6% 12% 12% 6% 6% Fuel price:Fuel price:LHS LHS -10% -10% 4% 4% 4% 4% DomesticDomestic demand: demand: LHS LHS 2% 2% -20% -20% 2% 2% HeadlineHeadline inflation inflation (UB): RHS(UB): RHS 2% 2%
-30% -30% 0% 0% -8% -8% 0% 0% Q1-18 Q2-18 Q1-18 Q2-18 Q3-18 Q4-18 Q3-18 Q4-18 Q1-19 Q1-19 Q2-19 Q3-19 Q2-19 Q3-19 Q4-19 Q1-20 Q4-19 Q1-20 Q2-20 Q3-20 Q2-20 Q3-20 Jun-19 Jun-19 Jun-20 Jun-20 Oct-18 Oct-18 Oct-19 Oct-19 Oct-20 Oct-20 Apr-19 Apr-19 Apr-20 Apr-20 Feb-19 Feb-19 Feb-20 Feb-20 Dec-18 Dec-18 Dec-19 Dec-19 Dec-20 Dec-20 Aug-18 Aug-18 Aug-19 Aug-19 Aug-20 Aug-20 Sources:Sources: NSO NSO Bulletin; Bulletin; World World Bank Bank staff staff estimates. estimates. Sources:Sources: BoM; BoM; World World Bank Bank staff staff estimates. estimates. Sources: NSO Bulletin; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Note:Note: Domestic Domestic demand demand is defined is defined as the as sumthe sum of final of final Note:Note: RHS RHS= right = right‐hand‐hand side; side; LHS LHS= left =‐ handleft‐hand side. side. Note: Domestic demand is defined as the sum of final consumption Note: RHS = right-hand side; LHS = left-hand side. consumptionconsumption and andinvestment investment from from national national accounts accounts data. data. and investment from national accounts data. RHS = right-hand side; RHS RHS= right = right‐hand‐hand side; side; LHS LHS= left =‐ handleft‐hand side. side.
LHS = left-hand side.
8 The8 Thecontraction contraction in the in textilethe textile industry, industry, which which represents represents nearly nearly 14 percent 14 percent of manufacturing of manufacturing production, production, is mainly is mainly attributed attributed to to weakenedweakened business business activity, activity, especially especially in the in cashmerethe cashmere industry. industry. 19 19
7 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
A3. The COVID-19 shock affected the require relatively lower skilled labor compared to structure and conditions of the labor sectors such as information technology (IT), finance, education, and health, and therefore workers in these A3.market The COVID ‐19 shock affected the structure and conditions of the labor market fields had lower job security and limited opportunity TheA3.The COVID TheCOVID-19 COVID‐19 pandemic pandemic‐19 shock hashas affected ledled toto job jobthe losses lossesstructure in in several andto work conditionssectors from andhome. of labor theIn contrast, laborforce participation marketduring the pandemic, rate (LFPR) markedTheseveral COVID thesectors ‐19lowest pandemicand levellabor has inforce aled decade. participationto job losses According ratein several tothe officialsectors health sector NSOand labor sawdata, a forcesubstantial at end participation‐September rise in employment. rate 2020, (LFPR) total employmentmarked(LFPR) marked the increased lowest the lowest level by level 20,400 in ina adecade. decade.(1.7 percent, AccordingAccording y/y) torelativeFurthermore, official to NSO a yearemployment data, ago. at While end in the‐September sizable trade andCOVID 2020,IT sectors‐19 total‐related reliefemploymentto official measures NSOincreased to firmsdata, by atoverall 20,400 end-September might (1.7 percent, have 2020,contributed y/y) total relativeincreased to to this a during year outcome, ago. this While period, the sizable difference partly explainedCOVID in‐ 19level by‐related the of skills 9 requiredreliefemployment measures for different increased to firms sectors by overall 20,400 may might (1.7 explain percent, have the contributed y/y) ups anddigital downs to transformationthis inoutcome, employment ofthe economic difference across activities, sectors. in level including Inof fact,skills the 11 mining,requiredrelative construction, to for a different year ago. manufacturing, sectors While may sizable explain agriculture, COVID-19- the ups and andtrade. downs entertainment In in the employment meantime, sectors the across labor all postedsectors. force (employment 9a In year fact,‐on the ‐year declinemining,related in relief construction,their measures employment manufacturing, to firms as of overall September agriculture, might 2020have and +(figure unemployment)entertainment I.9) amid decreased sectors the lockdowns all by posted1 percent and a inyear precautionarythe‐on same‐year measuresdeclinecontributed in by their tothe this authorities.employment outcome, the Moreover, asdifference of September inthis level could 2020of also (figureperiod, be explained andI.9) theamid number bythe the lockdownsof fact those that out and theof the industrialprecautionary labor force sectors requiremeasuresskills requiredrelatively by the for lowerauthorities. different skilled sectors Moreover, labor may compared explain this could the to also sectorsincreased be explained such by 4as percent.by information the fact This that indicates technology the industrial that finding(IT), sectors finance, a education,requireups and downsrelatively and in health, employment lower andskilled across therefore labor sectors. compared workers10 In fact, to insectors jobthese has such becomefields as information had more lower difficult technologyjob and security that (IT), and somefinance, limitedof the opportunityeducation,the mining, toand construction, work health, from manufacturing, andhome. therefore In contrast, agriculture, workers during in the unemployedthese pandemic, fields moved had the outhealthlower of the jobsector labor security sawforce. a substantialand limited rise opportunityand entertainment to work sectors from allhome. posted In contrast, a year-on-year during the pandemic, the health sector saw a substantial rise in employment. Furthermore, employment in the tradeUnemployment and IT sectors rates increased moderately during increased this in period,Q3 2020. partly indecline employment. in their employmentFurthermore, as employment of September in 2020 the trade and IT sectors increased during10 this period, partly explained by the digital transformation of economicDespite activities, the sharp including output trade. contraction, In theunemployment meantime, the explained(figure I.9) by the amid digital the transformation lockdowns and of economicprecautionary activities, including trade.10 In the meantime, the labor force (employment + unemployment) decreasedrates by 1 were percent relatively in the stable same inperiod, H1 2020,and the partly number labormeasures force by (employmentthe authorities. + Moreover, unemployment) this could decreased also by 1 percent in the same period, and the number of those out of the labor force increased by 4 percent.supported This indicates by the sizable that finding income asupport job has measures. become12 more of those out of the labor force increased by 4 percent. This indicates that finding a job has become more difficultbe explained and that by somethe fact of thatthe unemployedthe industrial movedsectors out of the labor force. difficult and that some of the unemployed moved out of the labor force. FigureFigure I.9 I.9.. The The COVID COVID-19‐19 pandemic pandemic has putput some some FigureFigure I.10. I.10. …thereby …thereby reversingreversing declining declining trends trends of of Figurejobs at I.9 risk.... The COVID‐19 pandemic has put some Figurethe unemploymentI.10. …thereby ratereversing declining trends of jobsjobs at at risk... risk... thethe unemployment unemployment rate rate Change in employment (Q3 2020–Q3 2019, y/y percent Unemployment rate by gender Change inChange employment in employment (Q3 2020–Q3 (Q3 2020–Q3 2019, 2019, y/y percent Unemployment rateUnemployment by gender rate by gender change) y/y percent change) change) 15% 15% Unemployment rate Unemployment rate Total 1.7% Total 1.7% Health Health 45%45% MaleMale FinanceFinance 38%38% 12% InfoInfo & communication & communication 17% 12% FemaleFemale EducationEducation 11% TradeTrade 10% TransportationTransportation 6%6% ManufacturingManufacturing -1%-1% ConstructionConstruction -2%-2% 9%9% AgricultureAgriculture -2%-2% PublicPublic admin/defense admin/defense -5%-5% MiningMining -5%-5% WaterWater & utilities & utilities -6% -6% 6% AdministrativeAdministrative -14%-14% 6% Household activities Household activities -18%-18% Hospitality -25% Hospitality -25% Science -34% Science -34% Electricity -35% Electricity -35% 3% Entertainment -42% 3% Entertainment -42% Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Sources: NSO Bulletin; World Bank staff estimates. Sources: NSO Bulletin; World Bank staff estimates. Sources:Sources: NSO Bulletin; Bulletin; World World Bank Bankstaff estimates. staff estimates. Sources:Sources: NSO NSO Bulletin; Bulletin; World World Bank staff Bank estimates. staff estimates.
Unemployment rates moderately increased in Q3 2020. Despite the sharp output contraction, Unemployment rates moderately increased in Q3 2020. Despite the sharp output contraction, unemployment rates were relatively stable in H1 2020, partly supported by the sizable income support unemployment11 rates were relatively stable in H1 2020, partly supported by the sizable income support measures.11 However, unemployment moderately increased to 7.3 percent in Q3, up from 6.6 in H1 (figure measures.I.10).12 The However, rise in unemployment unemployment was moderately faster for men increased than for to women, 7.3 percent as more in Q3, women up from dropped 6.6 in H1out (figure of I.10).12 The rise in unemployment was faster for men than for women, as more women dropped out of the labor force, thus reducing the number of women actively seeking jobs. the labor force, thus reducing the number of women actively seeking jobs. 10 Measures include exemptions on tax, social security contributions, and use of the unemployment insurance fund to support firms that did not lay off workers. 11 However, according to the latest Household Response Phone Survey by NSO and World Bank, the strict lockdown since mid-November 2020 may have caused significant disruptions of employment in the private sectors (see Part II for details). 9 12 MeasuresMeasures include include exemptions exemptions on tax, on social tax, security social contributions, security contributions, and use of the andunemployment use of the insurance unemployment fund to support insurance firms that fund did tonot support lay off 9 Measuresfirmsworkers. that includedid not layexemptions off workers. on tax, social security contributions, and use of the unemployment insurance fund to support 10 firms8 However, that did notaccording lay off toworkers. the latest Household Response Phone Survey by NSO and World Bank, the strict lockdown since mid‐ 10 NovemberHowever, according2020 may haveto the caused latest significant Household disruptions Response of Phone employment Survey in by the NSO private and Worldsectors Bank,(see Part the II strict for details). lockdown since mid‐ 11 November Measures 2020 include may have exemptions caused onsignificant tax, social disruptions security contributions, of employment and inuse the of privatethe unemployment sectors (see insurancePart II for fund details). to support 11 firms that did not lay off workers. Measures12 include exemptions on tax, social security contributions, and use of the unemployment insurance fund to support firms There that didwere not 92,600 lay off unemployed workers. people in September, up from 83,700 people in H1 2020. 12 There were 92,600 unemployed people in September, up from20 83,700 people in H1 2020. 20
ECONOMIC PERFORMANCE AND PROSPECTS
However, unemployment moderately increased to 7.3 childcare responsibilities. This is more relevant to percent in Q3, up from 6.6 in H1 (figure I.10).13 The rise women, who traditionally bear the responsibility of in unemployment was faster for men than for women, caregiver. Also, the generous increase of social welfare as more women dropped out of the labor force, thus benefits coupled with other relief measures increased reducing the number of women actively seeking jobs. the financial means of eligible households and hence may have reduced the need to look for employment GenerousGenerous income income support support is is likely likely to to have have contributed contributed to to the the moderate moderate impact impact of of the the pandemic pandemic on on labor labor Generous income support is likely to have contributed (figure I.11). Still, family support remains the main markettomarket the moderateconditions conditions impact (see (see Part ofPart the II IIfor forpandemic details). details). onA A moderate labormoderate rise rise in in unemployment unemployment and and shrinking shrinking labor labor force force participation during times of severe economic crisis oftensource reflect of income the fact assistance that people for peoplebelieve currentlyit would outbe participationmarket conditions during (see times Part ofII forsevere details). economic A moderate crisis often reflect the fact that people believe it would be harder to find employment and they stop looking for jobs.of work. With In COVID 2019,‐ 19about spreading 85 percent so easily, of the peopleunemployed may harderrise in to unemployment find employment and and shrinking they stop labor looking force for jobs. With COVID‐19 spreading so easily, people may havehave stopped stopped looking looking for for a ajob job to to reduce reduce the the risk risk of of contractingindicated contracting that the thefinancial virus. virus. Closing supportClosing kindergartens fromkindergartens family members and and participation during times of severe economic crisis schoolsschools may may have have also also discouraged discouraged unemployed unemployed parents parents wasfrom from their looking looking main for forsource a ajob job dueof due income. to to increased increased This share household household declined often reflect the fact that people believe it would be andand childcare childcare responsibilities. responsibilities. This This is is more more relevant relevant to to women, women,in Q2 2020 who who traditionally to traditionally 80 percent, bear bearwhile the the about responsibility responsibility 14 percent of of of harder to find employment and they stop looking for caregiver.caregiver. Also, Also, the the generous generous increase increase of of social social welfare welfarethe benefitsunemployed benefits coupled coupled reported with with that other otherthey mainlyrelief relief measures relymeasures on cash jobs. With COVID-19 spreading so easily, people may increasedincreased the the financial financial means means of of eligible eligible households households and andtransfers hence hence and may may social have have welfare reduced reduced benefits the the need need (figure to to look I.12). look for for employmenthaveemployment stopped (figure looking (figure I.11). forI.11). a Still, jobStill, tofamily family reduce support support the risk remains remains of the the main main source source of of income income assistance assistance for for people people currentlycontractingcurrently out outthe of virus.of work. work. Closing In In 2019, 2019, kindergartens about about 85 85 percentand percent schools of of the the unemployed unemployed indicated indicated that that financial financial support support from from familymayfamily have members members also discouraged was was their their unemployedmain main source source parents of of income. income. from This This share share declined declined in in Q2 Q2 2020 2020 to to 80 80 percent, percent, while while aboutlookingabout 14 14 for percent percent a job of dueof the the to unemployed unemployed increased household reported reported that and that they they mainly mainly rely rely on on cash cash transfers transfers and and social social welfare welfare benefitsbenefits (figure (figure I.12). I.12). Figure I.11. Relevance of cash transfers for people Figure I.12. For unemployed, main source of Figure I.11. Relevance of cash transfers for people Figure I.12. For unemployed, main source of income Figurecurrently I.11 out. Relevance of work increasedof cash transfers in H1 2020 for people Figureincome I.12. For support unemployed, shifted inmain Q2 source2020 of income currentlycurrently out out of of work work increased increased in in H1 H1 2020 2020 supportsupport shifted shifted in in Q2 Q2 2020 2020 ShareShareShare of of people people reportingreporting reporting cash cash cash benefits/social benefits/social benefits/social welfare welfare welfare as asmain as Y/yY/y change changeY/y change in in main main in mainsource source source of of income ofincome income support support support for for for unemployed mainmain source source of of income incomesource support of support income support unemployedunemployed people people people
15%15% UnemployedUnemployed OutOut of oflabor labor force force 6 6 FamilyFamily support support 13%13% 4 4 CashCash benefits/social benefits/social welfare welfare 11%11% 2 2
9%9% 0 0
7%7% -2-2 Percentage points Percentage points
5%5% -4-4
-6 3%3% -6 Q1 Q2 Q1-19Q1-19 Q2-19 Q2-19 Q3-19 Q3-19 Q4-19 Q4-19 Q1-20 Q1-20 Q2-20 Q2-20 Q1 Q2
Sources:Sources: NSO NSO (LFS (LFS 2019, 2019, 2020); 2020); World World Bank Bank staff staff estimates. estimates. Sources:Sources: NSO NSO (LFS (LFS 2019, 2019, 2020); 2020); World World Bank Bank staff staff estimates. estimates. Sources: NSO (LFS 2019, 2020); World Bank staff estimates. Sources: NSO (LFS 2019, 2020); World Bank staff estimates. A4.A4. The The budget budget deficit deficit widened widened sharply sharply in in 2020 2020 but but is is expected expected to to narrow narrow in in 2021 2021 TheThe decline decline in in economic economic activity activity and and forgone forgone revenue revenue linked linked to to selected selected COVID COVID‐19‐19 relief relief measures measures led led toto a alarge large overall overall revenue revenue shortfall shortfall in in 2020. 2020. Total Total revenue revenue declined declined by by 13 13 percent percent (y/y) (y/y) in in 2020, 2020, reflecting reflecting weakerweaker mineral mineral revenue, revenue, subdued subdued consumption, consumption, income income losses, losses, and and tax tax relief relief measures measures (figure (figure I.13). I.13).1313 TaxTax revenue revenue fell fell by by 12.8 12.8 percent percent (y/y), (y/y), while while non non‐tax‐tax revenue revenue contracted contracted by by 12.6 12.6 percent percent (y/y). (y/y). Notably, Notably, thethe corporate corporate income income tax, tax, social social security security contributions, contributions, and and the the value value‐added‐added tax, tax, which which together together accountedaccounted for for 61 61 percent percent of of overall overall tax tax revenue, revenue, contracted contracted by by 15.8 15.8 percent percent (y/y), (y/y), 19.6 19.6 percent, percent, and and 11.2 11.2 percent,percent, respectively, respectively, amid amid the the COVID COVID‐19‐19‐related‐related relief relief measures measures and and the the fall fall in in mineral mineral sector sector revenue. revenue. TheThe personal personal income income tax tax fell fell by by 7.2 7.2 percent percent (y/y), (y/y), reflecting reflecting tax tax relief relief and and income income losses losses amid amid the the COVID COVID‐ ‐ 1919‐related‐related precautionary precautionary measures measures and and moderate moderate labor labor market market pressures. pressures. Excise Excise and and customs customs duties duties also also declined.declined. In In fact, fact, as as the the revenue revenue shortfall shortfall had had already already reached reached 3.9 3.9 percent percent of of projected projected 2020 2020 GDP GDP by by July July 2020,2020, a aseries series of of revenue revenue‐enhancing‐enhancing measures measures (for (for example, example, collection collection of of tax tax arrears, arrears, and and tax tax prepayment prepayment 13 There were 92,600 unemployed people in September, up from 83,700 people in H1 2020. fromfrom major major state state‐owned‐owned enterprises) enterprises) were were sanctioned sanctioned under under the the 2020 2020 supplementary supplementary budget. budget. 9
13 13In In fact, fact, the the revenue revenue shortfall shortfall had had already already reached reached 3.9 3.9 percent percent of of projected projected 2020 2020 GDP GDP by by July July 2020 2020 when when the the authorities authorities were were consideringconsidering the the 2020 2020 supplementary supplementary budget. budget. 2121
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
A4. The budget deficit widened sharply in duties also declined. In fact, as the revenue shortfall had 2020 but is expected to narrow in 2021 already reached 3.9 percent of projected 2020 GDP by July 2020, a series of revenue-enhancing measures (for The decline in economic activity and forgone revenue example, collection of tax arrears, and tax prepayment linked to selected COVID-19 relief measures led to a from major state-owned enterprises) were sanctioned large overall revenue shortfall in 2020. Total revenue under the 2020 supplementary budget. declined by 13 percent (y/y) in 2020, reflecting weaker mineral revenue, subdued consumption, income losses, Meanwhile, measures to minimize the economic and and tax relief measures (figure I.13).14 Tax revenue fell social impact of the COVID-19 crisis drove a surge in by 12.8 percent (y/y), while non-tax revenue contracted spending. Total budget spending rose by 22.1 percent by 12.6 percent (y/y). Notably, the corporate income tax, (y/y) in 2020 following 24 percent growth in 2019 social security contributions, and the value-added tax, (figure I.14). Social protection and welfare spending which together accounted for 61 percent of overall tax increased by 128.7 percent (y/y) in 2020 due to crisis revenue, contracted by 15.8 percent (y/y), 19.6 percent, response measures (mainly the sharp increase in and 11.2 percent, respectively, amid the COVID-19- benefits of the Child Money Program) (see box I.2). related relief measures and the fall in mineral sector Health spending increased by 27 percent (y/y) in the revenue. The personal income tax fell by 7.2 percent same period. Meantime, capital spending execution (y/y), reflecting tax relief and income losses amid was stronger than in the previous years (8.3 percent), the COVID-19-related precautionary measures and reflecting the government’s efforts to support the moderate labor market pressures. Excise and customs economy by boosting domestic demand.15
FigureFigureFigure I.13 I.13.. I.13Government Government. Government revenue revenue revenue has has declined has declined declined across across Figure FigureFigure I.14. I.14…while I.14.. …while …while government government government spending spending soared soared driven allacross categories…all categories…all categories… drivendrivenby by social social by socialwelfare welfare welfare spending spending spending and and public publicand investmentpublic investmentinvestment BudgetBudget revenue, revenue, y/yBudget change y/y revenue, change y/y change BudgetBudget spending, spending, y/y change Budgety/y change spending, y/y change Goods &Goods Services & Services InterestInterest payment payment Sub & TransfersSub & Transfers Direct mineralDirect mineral revenue revenue CIT CIT PIT PIT VAT VAT Capex Capex Net LendingNet Lending Wages Wages
Excise &Excise Custom & Custom Other taxesOther taxes Total spendingTotal spending Non-TaxNon-Tax revenue revenue Total revenueTotal revenue 43.3% 43.3% 40% 40% 34.2% 34.2%
27.1% 27.1% 40% 40%
19.5% 19.5% 23.9% 23.9%22.1% 22.1% 20% 20% 20% 20%
2.7% 2.7%
0% 0% 0% 0% -2.9% -2.9% -5.3% -5.3% -2.1% -2.1% -13.0% -13.0% -5.9% -5.9% -20% -20% -20% -20% 20152015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e 20152015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e Sources:Sources: MoF; MoF; World MoF;World Bank World Bank staff Bankstaff estimates. estimates.staff estimates. Sources:Sources:Sources: MoF; MoF; MoF;World World World Bank Bank Bankstaff staff estimates.staff estimates. estimates. Note: Note:CIT CIT = = corporate CITcorporate = corporate income income tax; income tax;PIT =PIT tax;personal = PITpersonal =income personal income tax; incomeVAT tax; = tax; VATvalue-added =VAT value = value‐tax.added‐added tax. tax.
Meanwhile,Meanwhile, measures measures to minimize to minimize the economicthe economic and andsocial social impact impact of the of COVIDthe COVID‐19 crisis‐19 crisis drove drove a surge a surge in spending.in spending. Total Total budget budget spending spending rose rose by 22.1 by 22.1 percent percent (y/y) (y/y) in 2020 in 2020 following following 24 percent 24 percent growth growth in 2019 in 2019 (figure(figure I.14). I.14). Social Social protection protection and welfareand welfare spending spending increased increased by 128.7 by 128.7 percent percent (y/y) (y/y) in 2020 in 2020 due dueto crisis to crisis responseresponse measures measures (mainly (mainly the sharpthe sharp increase increase in benefits in benefits of the of Childthe Child Money Money Program) Program) (see (seebox boxI.2). I.2). HealthHealth spending spending increased increased by 27 by percent 27 percent (y/y) (y/y) in the in samethe same period. period. Meantime, Meantime, capital capital spending spending execution execution was wasstronger stronger than than in the in previousthe previous years years (8.3 (8.3percent), percent), reflecting reflecting the government’sthe government’s efforts efforts to support to support the the economy14 In fact,economy the by revenue boosting by shortfallboosting domestic had domesticalready demand. reached demand. 3.914 percent 14 of projected 2020 GDP by July 2020 when the authorities were considering the 2020 supplementary budget. 15 In fact, the increased social transfers and higher health spending were partly compensated by government capital expenditure cuts worth 0.6 Thepercentage Thefiscal pointsfiscal deficit of deficitGDP increased in the increased 2020 supplementary significantly significantly budget. owing owing to revenue to revenue losses losses and andspending spending needs needs to fight to fight the the pandemic.pandemic. The budgetThe budget deficit deficit reached reached 9.5 percent 9.5 percent of GDP of GDP in 2020, in 2020, its highest its highest level level since since 2016 2016 (figures (figures I.15 I.15 and10 andI.16). I.16).15 The15 threeThe three years years of fiscal of fiscal consolidation consolidation that thathelped helped to rebuild to rebuild sizable sizable buffers buffers also alsocontributed contributed to theto government’sthe government’s efforts efforts to cope to cope with with the COVIDthe COVID‐19 shock‐19 shock in the in earlythe early months months of 2020. of 2020.16 In 16contrast In contrast to to whatwhat was wasobserved observed during during the 2015–16the 2015–16 economic economic slowdown, slowdown, the governmentthe government had hadno pressing no pressing need need to to borrowborrow from from either either domestic domestic or international or international markets markets in the in firstthe firstfive fivemonths months of 2020. of 2020. However, However, since since JuneJune 2020, 2020, government government requests requests for donor for donor financing financing have have intensified, intensified, including including additional additional budget budget support support totalingtotaling US$550 US$550 million million from from the Internationalthe International Monetary Monetary Fund Fund (IMF), (IMF), Asian Asian Development Development Bank Bank (ADB), (ADB), AsianAsian Infrastructure Infrastructure Investment Investment Bank, Bank, and andJapan, Japan, disbursed disbursed in H2 in 2020. H2 2020.
14 In fact,14 In thefact, increased the increased social social transfers transfers and higher and higher health health spending spending were werepartly partly compensated compensated by government by government capital capital expenditure expenditure cuts worthcuts worth 0.6 percentage 0.6 percentage points points of GDP of inGDP the in 2020 the 2020supplementary supplementary budget. budget. 15 In fact,15 In thefact, 2020 the 2020budget budget amendment amendment (August (August 2020) 2020) exhibits exhibits a widening a widening of the of overall the overall fiscal fiscaldeficit deficit from froman initial an initial target target of 2.4 of 2.4 percentpercent of GDP of toGDP 9.9 to percent 9.9 percent of GDP. of GDP. 16 The16 prudent The prudent fiscal fiscalpolicy policy followed followed by the by authorities the authorities during during 2017–19 2017–19 created created some some fiscal fiscalspace space and led and to led the to accumulation the accumulation of of sizablesizable cash reservescash reserves of about of about MNT MNT2.7 billion 2.7 billion (over (over7 percent 7 percent of GDP) of GDP)at end at‐2019. end‐2019. 22 22
ECONOMIC PERFORMANCE AND PROSPECTS
The fiscal deficit increased significantly owing to plans to bring back the fiscal deficit within 2 percent of revenue losses and spending needs to fight the GDP (figure I.20). A projected rebound in revenues (3.4 pandemic. The budget deficit reached 9.5 percent of percentage points of GDP) and substantial spending GDP in 2020, its highest level since 2016 (figures I.15 cuts (4.6 percentage points of GDP) are estimated to and I.16).16 The three years of fiscal consolidation that support the sharp improvement in the fiscal stance in helped to rebuild sizable buffers also contributed to the 2021. The underlying assumptions of the 2021 budget government’s efforts to cope with the COVID-19 shock include, among others, strong economic recovery (7.2 in the early months of 2020.17 In contrast to what was percent in 2021), modernization/renovation of customs observed during the 2015 - 16 economic slowdown, and border points, digitalization of tax administration, the government had no pressing need to borrow from improved governance of state-owned enterprises, and either domestic or international markets in the first five introduction of a new tax on livestock headcount (see months of 2020. However, since June 2020, government box I.3). It also considers a reduction of total spending requests for donor financing have intensified, including mainly reflecting the expiry of major COVID-19-related additional budget support totaling US$550 million relief/stimulus measures (except the Child Money from the International Monetary Fund (IMF), Asian Program) and a moderate reduction of the capital Development Bank (ADB), Asian Infrastructure budget relative to the 2020 supplementary budget. Investment Bank, and Japan, disbursed in H2 2020. In addition, a substantial increase of accumulation in the fiscal stabilization and future heritage funds, After a surging deficit in 2020, the 2021 budget similar to their levels in 2019, is also estimated under plans to return to fiscal consolidation. The 2020 the 2021 budget. Finally, after an increase in 2020, the supplementary budget exhibited a widening of the government expects that the debt-to-GDP ratio will overall fiscal deficit from an initial target of 2.4 percent resume its downward trajectory in 2021- 22 based on of GDP to 9.9 percent of GDP. However, the 2021 budget these fiscal policy assumptions.
Figure I.15. The revenue shortfall was exacerbated Figure I.16. …reversing the fiscal surplus trajectory Figure I.15. The revenue shortfall was exacerbated by Figure I.16. …reversing the fiscal surplus trajectory byFigure huge I.15spending. The revenue … shortfall was exacerbated by Figureof the I.16 past. …reversing three years the fiscal surplus trajectory Figurehuge I.15 spending. The revenue … shortfall was exacerbated by Figureof theI.16 .past …reversing three years the fiscal surplus trajectory huge spending … of the past three years hugeBudget spending revenue … and expenditures of theOverall past andthree primary years budget balances Budget revenueBudget and revenue expenditures and expenditures Overall and primaryOverall budgetand primary balances budget balances Budget revenue andRevenue expenditures (% of GDP) Expenditures (% of GDP) Overall and Overall primary budget balancebudget (% balancesof GDP) Primary budget balance (% of GDP) RevenueRevenue (% of GDP)(% of GDP) ExpendituresExpenditures (% of GDP)(% of GDP) Overall Overall budget budget balance balance (% of GDP)(% of GDP) Primary Primary budget budget balance balance (% of GDP)(% of GDP) 5.8 40 5.8 5.8 3.7 40 2.6 40 3.71.4 3.7 37 2.60.3 2.6 0.2 1.4 1.4 37 37 0.2 0.2 0.3 0.3 32 31 32 31 32 32 31 31 32 32 31 31 -1.7 -3.0 31 -1.7 -1.7 -3.8 28 -4.0 -3.0 28 28 31 31 -4.0 -3.0 -3.8 28 28 -4.0 -3.8 28 28 28 28 -6.9 26 -6.9 -6.9-9.5 26 26 24 24 24 -11.2 -9.5 -9.5 -11.2 -11.2 -15.3 -15.3 -15.3 2015 2016 2017 2018 2019 2020e 20152015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e 2014 2015 2016 2017 2018 2019 2020e 20142014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Sources:Sources: MoF; MoF; World World Bank Bank staff staffestimates. estimates. Sources:Sources: MoF; MoF; World World Bank Bank staff staffestimates. estimates.
Box I.2. Government fiscal relief measures to alleviate the economic impact of the COVID‐19 pandemic Box BoxI.2. GovernmentI.2. Government fiscal fiscal relief relief measures measures to alleviate to alleviate the economicthe economic impact impact of the of COVIDthe COVID‐19 pandemic‐19 pandemic The government’s COVID‐19 relief package, totaling about MNT 3.6 trillion (over 9 percent of GDP), was rolled The government’s COVID‐19 relief package, totaling about MNT 3.6 trillion (over 9 percent of GDP), was rolled The outgovernment’s in three phases.COVID‐ 19The relief government package, totalingresponse about is primarily MNT 3.6 focusedtrillion (over on supporting 9 percent ofhouseholds GDP), was rolledand firms out in three phases. The government response is primarily focused on supporting households and firms out particularlyin three phases. affected The by thegovernment economic response downturn, is andprimarily on small focused and medium on supporting‐sized enterprises households (SMEs) and to firms cushion particularly16 In particularlyfact, the 2020affected budgetaffected by amendment the by economicthe (Augusteconomic 2020)downturn, downturn,exhibits anda widening andon small on of thesmall and overall andmedium fiscal medium deficit‐sized‐ sizedfrom enterprises an enterprises initial target (SMEs) of(SMEs) 2.4 to percent cushion to cushionof GDP to 9.9 percentloss of of GDP. income and avoid mass unemployment and bankruptcies. This includes over 3 percent of GDP in tax relief 17 loss of income and avoid mass unemployment and bankruptcies. This includes over 3 percent of GDP in tax relief loss The measuresof prudent income fiscal andand policy 6avoid percent followed mass of byunemployment GDP the authoritiesin increased during and social 2017–19 bankruptcies. transfers created some and This fiscalhigher includes space health overand led spending 3 topercent the accumulation (figure of GDP I.17). inof sizabletax relief cash reserves measuresof aboutmeasures MNT and 2.7 and6trillion percent 6 (overpercent of7 percent GDP of GDP inof increasedGDP) in increasedat end-2019. social social transfers transfers and andhigher higher health health spending spending (figure (figure I.17). I.17).
Figure I.17. COVID‐19 fiscal relief measures FigureFigure I.17. I.17COVID. COVID‐19 fiscal‐19 fiscal relief relief measures measures 11 Tax relief measures (over 3% of GDP) Spending measures (over 6% of GDP) Tax reliefTax reliefmeasures measures (over (over3% of 3% GDP) of GDP) SpendingSpending measures measures (over (over6% of 6% GDP) of GDP) SSC exemptions 2 Increase in CMP 4.4 Increase in CMP 4.4 SSC exemptionsSSC exemptions 2 2 Increase in CMP 4.4 Increase in health spending 0.7 PIT exemptions 0.5 IncreaseIncrease in health in healthspending spending 0.7 0.7 Cash transfer to herders PIT exemptionsPIT exemptions 0.5 0.5 0.5 Cash transferCash transfer to herders to herders 0.5 CIT exemptions (turnover < MNT1.5 0.5 0.16 Increase in social welfare pension 0.15 CIT exemptionsCIT exemptions (turnover (turnoverbn) < MNT1.5 < MNT1.5 Increase in social welfare pension 0.16 0.16 Increase in social welfare pension 0.15 0.15 bn) bn) Wage subsidies for employers 0.13 PIT/CIT exemption if rent has been 0.07 Wage Wagesubsidies subsidies for employers for employers0.13 0.13 PIT/CITPIT/CIT exemption exemption iflowered rent ifhas rent been has been 0.07 0.07 Increase in govt's emergency fund 0.1 loweredlowered Increase in govt's emergency fund Waiving late payment penalties for Increase in govt's emergency fund 0.1 0.1 0.03 Interest subsidies for cashmere producers 0.07 WaivingWaiving late payment late paymentPIT/SSC penalties penalties for for 0.03 0.03 InterestInterest subsidies subsidies for cashmere for cashmere producers producers0.07 0.07 PIT/SSCPIT/SSC Doubling food stamp allowance 0.04 VAT exemption (Medical & Food) 0.02 DoublingDoubling food stamp food stampallowance allowance0.04 0.04 VAT exemptionVAT exemption (Medical (Medical & Food) & Food)0.02 0.02 Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Sources:Note: MoF; In percent World Bankof GDP. staff CIT estimates. = corporate income tax; CMP = Child Money Program; PIT = personal income tax; SSC = social Note: In percent of GDP. CIT = corporate income tax; CMP = Child Money Program; PIT = personal income tax; SSC = social Note:security In percent contribution; of GDP. CIT VAT = corporate = value‐added income tax. tax; CMP = Child Money Program; PIT = personal income tax; SSC = social securitysecurity contribution; contribution; VAT =VAT value = value‐added‐added tax. tax.
Mongolia’s fiscal relief measures are among the largest in the region. The optimal size of any support package Mongolia’s fiscal relief measures are among the largest in the region. The optimal size of any support package Mongolia’sis contingent fiscal reliefon the measures severity ofare the among outbreak the largest and a country’sin the region. initial The conditions optimal size(such of as any the support state of package the health is contingent on the severity of the outbreak and a country’s initial conditions (such as the state of the health is contingentsector, commodity on the severity dependence, of the outbreakfiscal and andmonetary a country’s space initialand degree conditions of informality, (such as theto name state a of few). the Withhealth these sector, commodity dependence, fiscal and monetary space and degree of informality, to name a few). With these sector,caveats, commodity Mongolia’s dependence, support fiscalpackage and inmonetary response space to the and crisis degree is relatively of informality, higher to than name the a averagefew). With size these of fiscal caveats, Mongolia’s support package in response to the crisis is relatively higher than the average size of fiscal caveats,measures Mongolia’s announced support to datepackage in developing in response EAP, to estimatedthe crisis is at relatively around 5 higher percent than of GDPthe average(figure I.18). size ofNearly fiscal two ‐ measures announced to date in developing EAP, estimated at around 5 percent of GDP (figure I.18). Nearly two‐ measuresthirds announcedof these relief to datemeasures in developing were directed EAP, estimated at individuals at around to mitigate 5 percent the impact of GDP of (figure income I.18). loss Nearly for households two‐ thirds of these relief measures were directed at individuals to mitigate the impact of income loss for households thirds(figure of these I.19). relief Such measures measures were were directed broad‐based, at individuals using social to mitigate insurance the to impact protect of formal income sector loss for workers households and social (figure I.19). Such measures were broad‐based, using social insurance to protect formal sector workers and social (figureassistance I.19). Such to supportmeasures the were poor broad and vulnerable.‐based, using social insurance to protect formal sector workers and social assistanceassistance to support to support the poorthe poor and andvulnerable. vulnerable.
23 23 23
FigureFigure I.15. I.15 The. revenueThe revenue shortfall shortfall was wasexacerbated exacerbated by byFigure Figure I.16. I.16 …reversing. …reversing the fiscalthe fiscal surplus surplus trajectory trajectory hugehuge spending spending … … of theof pastthe pastthree three years years BudgetBudget revenue revenue and expenditures and expenditures OverallOverall and primary and primary budget budget balances balances RevenueRevenue (% of GDP) (% of GDP) ExpendituresExpenditures (% of GDP) (% of GDP) Overall Overall budget budget balance balance (% of GDP) (% of GDP) Primary Primary budget budget balance balance (% of GDP) (% of GDP) 5.8 5.8 40 40 3.7 3.7 2.6 2.6 1.4 1.4 37 37 0.2 0.2 0.3 0.3 32 32 31 31 32 32 31 31 -1.7 -1.7-3.0 31 31 -4.0 -3.0 -3.8 28 28 -4.0 -3.8 28 28 28 28 -6.9 -6.9 26 26 -9.5 24 24 -9.5 -11.2 -11.2
MONGOLIA ECONOMIC UPDATE From Relief to Recovery -15.3 -15.3 20152015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e 20142014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e
Sources:Sources: MoF; MoF; World World Bank Bank staff staffestimates. estimates. Sources:Sources: MoF; MoF; World World Bank Bank staff staffestimates. estimates. Box I.2. Government fiscal relief measures to alleviate the economic impact of the COVID-19
pandemic
Box I.2.Box Government I.2. Government fiscal fiscal relief relief measures measures to alleviate to alleviate the economicthe economic impact impact of the of COVIDthe COVID‐19 pandemic‐19 pandemic
TheThe government’s government’s COVID-19 COVID relief‐19 relief package, package, totaling totaling about about MNT MNT3.6 trillion 3.6 trillion (over (over 9 percent 9 percent of GDP), of GDP), was rolled was rolled out in three phases.The government’s18 The government COVID response‐19 relief is primarilypackage, focusedtotaling on about supporting MNT 3.6 households trillion (over and 9 firms percent particularly of GDP), affectedwas rolled out in three phases. The Thegovernment government response response is primarily is primarily focused focused on supportingon supporting households households and andfirms firms by the economicout in three downturn, phases. and on small and medium-sized enterprises (SMEs) to cushion loss of income and avoid particularlyparticularly affected affected by the by economicthe economic downturn, downturn, and andon small on small and andmedium medium‐sized‐sized enterprises enterprises (SMEs) (SMEs) to cushion to cushion mass unemployment and bankruptcies. This includes over 3 percent of GDP in tax relief measures and 6 percent of GDP loss ofloss income of income and avoidand avoid mass mass unemployment unemployment and bankruptcies.and bankruptcies. This Thisincludes includes over over 3 percent 3 percent of GDP of GDPin tax in relief tax relief in increased social transfers and higher health spending (figure I.17). measuresmeasures and 6and percent 6 percent of GDP of GDPin increased in increased social social transfers transfers and higherand higher health health spending spending (figure (figure I.17). I.17). Figure I.17. COVID-19 fiscal relief measures FigureFigure I.17. I.17COVID. COVID‐19 fiscal‐19 fiscal relief relief measures measures Tax relief measures (over 3% of GDP) Spending measures (over 6% of GDP) Tax reliefTax measuresrelief measures (over (over3% of 3% GDP) of GDP) SpendingSpending measures measures (over (over6% of 6% GDP) of GDP)
IncreaseIncrease in CMP in CMP 4.4 SSC exemptionsSSC exemptions 2 2 4.4 IncreaseIncrease in health in healthspending spending 0.7 0.7 PIT exemptionsPIT exemptions 0.5 0.5 Cash transferCash transfer to herders to herders 0.5 0.5 CIT exemptionsCIT exemptions (turnover (turnover < MNT1.5 < MNT1.5 Increase in social welfare pension 0.15 0.16 0.16 Increase in social welfare pension 0.15 bn) bn) Wage subsidies for employers 0.13 PIT/CIT exemption if rent has been Wage subsidies for employers 0.13 PIT/CIT exemption if rent has been0.07 lowered 0.07 lowered IncreaseIncrease in govt's in emergencygovt's emergency fund fund0.1 0.1 Waiving late payment penalties for Waiving late payment penalties for Interest subsidies for cashmere producers 0.07 0.03 0.03 Interest subsidies for cashmere producers 0.07 PIT/SSCPIT/SSC DoublingDoubling food stamp food stampallowance allowance0.04 0.04 VAT exemptionVAT exemption (Medical (Medical & Food) & Food)0.02 0.02
Sources:Sources: MoF; MoF; World World Bank Bank staff staffestimates. estimates. Sources:Note: MoF;Note: In percentWorld In percent Bank of GDP. staff of GDP. estimates.CIT = CITcorporate = corporate income income tax; CMP tax; CMP= Child = Child Money Money Program; Program; PIT = PITpersonal = personal income income tax; SSC tax; = SSC social = social Note:security In percentsecurity contribution; of contribution;GDP. CIT VAT= corporate =VAT value = incomevalue‐added‐added tax; tax. CMP tax. = Child Money Program; PIT = personal income tax; SSC = social security contribution; VAT = value-added tax. Mongolia’sMongolia’s fiscal fiscal relief relief measures measures are amongare among the largestthe largest in the in region.the region. The optimalThe optimal size ofsize any of supportany support package package Mongolia’s fiscal relief measures are among the largest in the region. The optimal size of any support package is is contingentis contingent on the on severitythe severity of the of outbreakthe outbreak and anda country’s a country’s initial initial conditions conditions (such (such as the as statethe state of the of healththe health contingent on the severity of the outbreak and a country’s initial conditions (such as the state of the health sector, sector,sector, commodity commodity dependence, dependence, fiscal fiscal and monetaryand monetary space space and degreeand degree of informality, of informality, to name to name a few). a few). With With these these commodity dependence, fiscal and monetary space and degree of informality, to name a few). With these caveats, caveats,caveats, Mongolia’s Mongolia’s support support package package in response in response to the to crisisthe crisis is relatively is relatively higher higher than than the averagethe average size sizeof fiscal of fiscal Mongolia’s support package in response to the crisis is relatively higher than the average size of fiscal measures measuresmeasures announced announced to date to date in developing in developing EAP, EAP, estimated estimated at around at around 5 percent 5 percent of GDP of GDP(figure (figure I.18). I.18). Nearly Nearly two ‐two‐ announced to date in developing EAP, estimated at around 5 percent of GDP (figure I.18). Nearly two-thirds of these thirdsthirds of these of these relief relief measures measures were were directed directed at individuals at individuals to mitigate to mitigate the impactthe impact of income of income loss forloss households for households relief measures were directed at individuals to mitigate the impact of income loss for households (figure I.19). Such (figure(figure I.19). I.19). Such Such measures measures were were broad broad‐based,‐based, using using social social insurance insurance to protect to protect formal formal sector sector workers workers and socialand social measuresassistanceassistance were to broad-based, support to support the using poorthe poor andsocial vulnerable.and insurance vulnerable. to protect formal sector workers and social assistance to support the poor and vulnerable.
Figure I.18. Mongolia’s fiscal relief package is one of Figure I.19. Income support and tax exemptions theFigure highestFigure I.18 .among Mongolia’s I.18. Mongolia’s EAP countries fiscal relieffiscal reliefpackage package is one is oneFigure Figure dominatedI.19. Income I.19. Incomefiscal support relief support and measures tax and exemptions tax exemptions of theof highest the highest among among EAP countries EAP countries dominated23 dominated23 fiscal relieffiscal reliefmeasures measures
12% 12% 10% 10% AdditionalAdditional health-related health-related spending spending Firms - RevenueFirms - Revenuemeasures measures 9% 9% Quasi-fiscalQuasi-fiscal operations operations Firms - AdditionalFirms - Additional spending spending on revenue on supportrevenue support 10% 10% 8% 8% AdditionalAdditional spending spending and revenue and measuresrevenue measures IndividualsIndividuals - Revenue - Revenuemeasures measures 7% 7% 8% 8% 6% 6% IndividualsIndividuals - Additional - Additional spending spending on income on support income support 6% 6% 5% 5% 4% 4% Percent of GDP Percent of GDP 4% 4% Percent of GDP Percent of GDP 3% 3% 2% 2% 2% 2% 1% 1% 0% 0% 0% 0% MNG THAMNG CHN THA IDN CHN PHL IDN MYS PHL KHM MYS VNM KHM MMR VNM LAO MMR LAO MNG THAMNG CHN THA IDN CHN PHL IDN MYS PHL KHM MYS VNM KHM MMR VNM MMR
Sources:Sources: Sources:MoF; MoF; World World MoF; Bank WorldBank 2020b; 2020b; Bank World 2020b; World Bank WorldBank staff staffestimates. Bank estimates. staff estimates. Note: DataNote: are Data as areof Septemberas of September 12, 2020. 12, Data2020. refer Data torefer general to general government, government, except except for Indonesia, for Indonesia, Malaysia, Malaysia, and the and the Note: Data are as of September 12, 2020. Data refer to general government, except for Indonesia, Malaysia, and the Philippines, which referPhilippines, to Philippines, central which government whichrefer to refer only. central to Income central government and government revenue only. support Incomeonly. measuresIncome and revenue and include revenue support direct support transfer measures measures payments; include include reduction direct directtransfer or deferral transfer of paymentpayments;payments; commitments; reduction reduction orforegone deferral or deferralrevenue of payment fromof payment tax commitments; cuts, commitments; credits, foregoneand exemptions; foregone revenue revenueand from other tax from financial cuts, tax credits, cuts, assistance credits, and exemptions; to and individuals exemptions; and and firms. and other financialother financial assistance assistance to individuals to individuals and firms. and firms.
MongoliaMongolia has limited has limited headroom headroom to provide to provide further further fiscal fiscalrelief relief(and to(and boost to boosteconomic economic recovery). recovery). In terms In termsof of 18 It includesgovernment thegovernment extension debt of sustainability, debtsome sustainability,measures Mongolia which Mongoliaare expectedcompares compares to beunfavorably implemented unfavorably to until other to July othercountries. 2021. countries. But Governmentit does Governmentnot include debt the as debt government’s a share as a share recent decisionof on GDP exemptingof accounts GDP utilitiesaccounts for fees about for for about households70 percent 70 percent and at enterprises. end at‐2019, end ‐ 2019,compared compared to the to 40 the percent 40 percent average average for emerging for emerging markets markets and developingand developing economies economies (EMDEs). (EMDEs). Moreover, Moreover, banks’ banks’ excess excess liquidity liquidity was estimatedwas estimated MNT MNT7.7 trillion 7.7 trillion in in 12 NovemberNovember 2020, 2020,of which of which central central bank billbank holdings bill holdings by banks by bankswas around was around MNT 5.4MNT trillion, 5.4 trillion, indicating indicating sizable sizable room room for domesticfor domestic debt issuance. debt issuance. Given Givenlarge externallarge external debt (over debt 60(over percent 60 percent of GDP of compared GDP compared to the to 40 the percent 40 percent EMDE EMDE average),average), borrowing borrowing in foreign in foreign currency currency is still isnot still a favorablenot a favorable option. option. Finally, Finally, tapping tapping into the into Fiscal the FiscalStability Stability Fund Fund could couldnot provide not provide enough enough fiscal spacefiscal spaceto mitigate to mitigate the impact the impact of the of pandemic, the pandemic, considering considering declining declining coal prices. coal prices. In fact,In thefact, Fiscal the FiscalStability Stability Fund’s Fund’s liquid liquidpart is part estimated is estimated at MNT at 150MNT billion 150 billion (0.4 percent (0.4 percent of GDP) of GDP)as of asend of‐ end‐ November.November.
Sources:Sources: MoF; World MoF; WorldBank 2020b; Bank 2020b; World WorldBank staff Bank estimates. staff estimates.
After Aftera surging a surging deficit deficit in 2020, in 2020, the 2021the 2021budget budget plans plans to return to return to fiscal to fiscalconsolidation. consolidation. The 2020The 2020 supplementarysupplementary budget budget exhibited exhibited a widening a widening of the of overall the overall fiscal fiscaldeficit deficit from anfrom initial an initial target target of 2.4 of percent 2.4 percent of GDPof toGDP 9.9 to percent 9.9 percent of GDP. of GDP.However, However, the 2021 the 2021budget budget plans plansto bring to bringback backthe fiscal the fiscaldeficit deficit within within 2 2 percentpercent of GDP of GDP(figure (figure I.20). I.20).A projected A projected rebound rebound in revenues in revenues (3.4 percentage(3.4 percentage points points of GDP) of GDP)and and substantialsubstantial spending spending cuts (4.6 cuts percentage (4.6 percentage points points of GDP) of GDP)are estimated are estimated to support to support the sharp the sharp improvement improvement in thein fiscal the fiscalstance stance in 2021. in 2021. The underlying The underlying assumptions assumptions of the of 2021 the 2021budget budget include, include, among among others, others, strong strong economiceconomic recovery recovery (7.2 percent(7.2 percent in 2021), in 2021), modernization/renovation modernization/renovation of customs of customs and borderand border points, points, digitalizationdigitalization of tax of administration, tax administration, improved improved governance governance of state of ‐stateowned‐owned enterprises, enterprises, and introduction and introduction of of a newa taxnew on tax livestock on livestock headcount headcount (see box(see I.3). box ItI.3). also It considersalso considers a reduction a reduction of total of totalspending spending mainly mainly reflectingreflecting the expirythe expiry of major of major COVID COVID‐19‐related‐19‐related relief/stimulus relief/stimulus measures measures (except (except the Childthe ChildMoney Money Program)Program) and a and moderate a moderate reduction reduction of the of capital the capital budget budget relative relative to the to 2020 the 2020supplementary supplementary budget. budget. In In addition,addition, a substantial a substantial increase increase of accumulation of accumulation in the in fiscal the fiscalstabilization stabilization and future and future heritage heritage funds, funds, similar similar to theirto theirlevels levels in 2019, in 2019, is also is estimatedalso estimated under under the 2021 the 2021budget. budget. Finally, Finally, after afteran increase an increase in 2020, in 2020, the the governmentgovernment expects expects that the that debt the‐ debtto‐GDP‐to ‐ratioGDP willratio resume will resume its downward its downward trajectory trajectory in 2021–22 in 2021–22 based based on on thesethese fiscal fiscalpolicy policy assumptions. assumptions.
24 24
ECONOMIC PERFORMANCE AND PROSPECTS
Mongolia has limited headroom to provide further fiscal relief (and to boost economic recovery). In terms of government debt sustainability, Mongolia compares unfavorably to other countries. Government debt as a share of GDP accounts for about 70 percent at end-2019, compared to the 40 percent average for emerging markets and developing economies (EMDEs). Moreover, banks’ excess liquidity was estimated MNT 7.7 trillion in November 2020, of which central bank bill holdings by banks was around MNT 5.4 trillion, indicating sizable room for domestic debt issuance. Given large external debt (over 60 percent of GDP compared to the 40 percent EMDE average), borrowing in foreign currency is still not a favorable option. Finally, tapping into the Fiscal Stability Fund could not provide enough fiscal space to mitigate the impact of the pandemic, considering declining coal prices. In fact, the Fiscal Stability Fund’s liquid part is estimated at MNT 150 billion (0.4 percent of GDP) as of end-November.
Sources: MoF; World Bank 2020b; World Bank staff estimates.
The revenue projections in the 2021 budget are the government plans to improve the capacity at the moderately optimistic. At 7 percent, the growth border posts and accelerate digitalization to reduce red assumption in the 2021 budget appears ambitious tape. However, this is likely to be optimistic amid the given the ongoing strict lockdown at the start of 2021. preventive public health measures still in place and It is, however, achievable, assuming a strong recovery of continued worries about the rise in infection rates in mining exports and successful domestic containment major markets. Moreover, the budget assumes that tax of COVID-19. While commodity price assumptions are administration reforms (simplification, digitalization, broadly in line with the projections of international international taxation issues) will bring an additional institutions, export projections may be optimistic. In MNT 1.1 trillion in revenue (1.5 percentage points of particular, the 2021 budget assumes that coal export GDP), contributing to 44 percent of the total expected volumes will increase to 42 million tons next year, a revenue increase (figure I.21). However, the successful 15 percent rise from the historically high level (36.6 and timely implementation of these measures may be million tons) achieved in 2019. To achieve this target, challenging in a context dominated by the pandemic.
FigureFigure I.20. I.20The. Thedeficit deficit widened widened sharply sharply in in2020 2020 but is FigureFigure I.21.I.21. TheThe revenue projections inin thethe 20212021 Figurebut is I.20expected expected. The deficit to to narrow narrow widened notably notably sharply in in2021 2021in 2020 but is Figure budgetI.21budget. The are revenue moderately projections optimistic… in the 2021 expectedIn percent to narrow of GDP notably in 2021 budgetRevenue are moderately to increase optimistic… by 3.4 percentage points of GDP in In percent of GDP Revenue to increase by 3.4 percentage points of GDP in 2021. In percent of GDP Overall balance Primary balance Revenue2021. to increase by 3.4 percentage points of GDP in Overall balance Primary balance 2021. 6% 6% 3% 3% 3%0% 3% 1% 1% 0% 1% 1%
-2% -4% -2% -4% -7% -7% -10% -11% -10% -11% -15% -15% 2016 2017 2018 2019 2020 Suppl 2021 Plan 2016 2017 2018 2019 2020 Suppl 2021 Plan
Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Sources:Sources: MoF; World World Bank Bank staff staff estimates. estimates. Sources:Sources: MoF; MoF; World World Bank Bank staff staff estimates. estimates. The revenue projections in the 2021 budget are moderately optimistic. At 7 percent, the growth The revenueassumption projections in the 2021 in thebudget 2021 appears budget ambitious are moderately given the optimistic. ongoing strict At lockdown7 percent, at the the growthstart of 2021. assumptionIt is, inhowever, the 2021 achievable, budget appears assuming ambitious a strong given recovery the ongoing of miningstrict lockdown exports atand the successful start of 2021. domestic It is, however,containment achievable, of COVID ‐assuming19. While commoditya strong recovery price assumptions of mining areexports broadly and in linesuccessful with the domestic projections of containmentinternational of COVID institutions,‐19. While export commodity projections price assumptions may be optimistic. are broadly In particular, in line with the the 2021 projections budget assumesof internationalthat coal institutions, export volumes export will projections increase to may 42 millionbe optimistic. tons next In particular,year, a 15 percentthe 2021 rise budget from assumesthe historically that coalhigh export level volumes(36.6 million will increasetons) achieved to 42 million in 2019. tons To nextachieve year, this a 15 target, percent the rise government from the historicallyplans to improve high levelthe capacity(36.6 million at the tons) border achieved posts andin 2019. accelerate To achieve digitalization this target, to reduce the government red tape. However, plans to improve this is likely to the capacitybe optimistic at the border amid the posts preventive and accelerate public digitalizationhealth measures to reduce still in red place tape. and However, continued this worries is likely about to 13 the be optimisticrise in infectionamid the rates preventive in major public markets. health Moreover, measures the still budget in place assumes and continued that tax worries administration about the reforms rise in (simplification,infection rates digitalization,in major markets. international Moreover, taxation the budget issues) assumes will bring that antax additionaladministration MNT reforms1.1 trillion in (simplification,revenue (1.5digitalization, percentage international points of GDP), taxation contributing issues) to will 44 percentbring an of additional the total expected MNT 1.1 revenue trillion increasein revenue(figure (1.5 percentageI.21). However, points the of successfulGDP), contributing and timely to 44implementation percent of the of total these expected measures revenue may increasebe challenging (figurein I.21). a context However, dominated the successful by the pandemic. and timely implementation of these measures may be challenging in a context dominated by the pandemic. Box I.3. Summary of the 2021 budget Box I.3. Summary of the 2021 budget The 2021 budget is based on optimistic macroeconomic assumptions. It assumes (i) real economic growth of ‐1 The 2021percent budget in is2020 based and on 7.2 optimistic percent inmacroeconomic 2021; (ii) strong assumptions. demand for It coal assumes and relatively (i) real economic higher production growth of of ‐1 copper percentconcentrate; in 2020 and (iii)7.2 continuationpercent in 2021; of tax (ii) reformsstrong demand in 2021; for and coal (iv) and inflation relatively of 7higher percent production in 2021, ofin copperline with the concentrate;monetary (iii) policycontinuation guidelines. of tax The reforms revenue in projections 2021; and and (iv) correspondinginflation of 7 percentexpenditure in 2021, plans in are line shown with inthe table I.1. monetary policy guidelines. The revenue projections and corresponding expenditure plans are shown in table I.1.
Table I.1. Mongolia: Improvements in the overall fiscal balance in 2021 (% of GDP) Table I.1. Mongolia: Improvements in the overall fiscal balance in 2021 (% of GDP) 2020 Supplementary 2021 Plan Diff 2020 Supplementary 2021 Plan Diff Revenues 27.7 31.1 3.4 Revenues Stabilization & Heritage Funds 27.7 2.6 31.1 3.2 3.4 0.6 Stabilization Tax Revenues & Heritage Funds 2.6 22.9 3.2 25.5 0.6 2.6 Tax Revenues Non‐Tax Revenues 22.9 2.3 25.5 2.5 2.6 0.2 Non‐TaxExpenditures Revenues 2.3 37.7 2.5 33.0 0.2 ‐4.6 Expenditures Recurrent spending 37.7 26.3 33.0 23.3 ‐4.6 ‐3.0 Recurrent o.w. spending Wages and Salaries 26.3 6.9 23.3 5.7 ‐3.0 ‐1.1 o.w. WagesGoods and & SalariesServices 6.9 5.9 5.7 4.8 ‐1.1 ‐1.2 Goods &Others Services (incl. Social Spending) 5.9 13.5 4.8 12.8 ‐1.2 ‐0.7 Others Capital (incl. Social spending Spending) 13.5 8.8 12.8 8.4 ‐0.7 ‐0.4 Capital spending 8.8 8.4 ‐0.4 25 25
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Box I.3. Summary of the 2021 budget
The 2021 budget is based on optimistic macroeconomic assumptions. It assumes (i) real economic growth of -1 percent in 2020 and 7.2 percent in 2021; (ii) strong demand for coal and relatively higher production of copper concentrate; (iii) continuation of tax reforms in 2021; and (iv) inflation of 7 percent in 2021, in line with the monetary policy guidelines. The revenue projections and corresponding expenditure plans are shown in table I.1.
Table I.1. Mongolia: Improvements in the overall fiscal balance in 2021 (% of GDP) 2020 Supplementary 2021 Plan Diff Revenues 27.7 31.1 3.4 Stabilization & Heritage Funds 2.6 3.2 0.6 Tax Revenues 22.9 25.5 2.6 Non-Tax Revenues 2.3 2.5 0.2 Expenditures 37.7 33.0 -4.6 Recurrent spending 26.3 23.3 -3.0 o.w. Wages and Salaries 6.9 5.7 -1.1 Goods & Services 5.9 4.8 -1.2 Others (incl. Social Spending) 13.5 12.8 -0.7 Capital spending 8.8 8.4 -0.4 Interest Payments 2.5 2.7 0.2 Overall balance -9.9 -1.9 8.0 Primary balance -7.4 0.8 8.2 Source: MoF.
Key highlights of the 2021 budget: • Return to a fiscal sustainability path after a substantial hike in the fiscal deficit in 2020 driven by a sharp revenue shortfall and a rise in public spending to mitigate the impact of COVID-19 crisis. • Fiscal improvements mainly supported by: o Higher mineral revenue, reflecting the positive prospect in commodity prices and ambitious export targets. o Stronger economic recovery leading to higher tax revenue under existing and new policies. o Rolling back (expiry) of COVID-19-related spending measures and other recurrent spending, and rationalization of capital expenditures to compensate for the substantial increase in social spending (mainly the Child Money Program) planned in H1 2021. o Improvement in the overall balance of over US$1 billion (8 percentage points of GDP) and a primary deficit of over US$1.1 billion (8.2 percentage points) compared with the 2020 supplementary budget. • Ambitious but achievable growth assumptions depending on recovery in mining exports. • Revenue projections are predicated on successive implementation of tax administration reforms (simplification, digitalization, international taxation issues including introduction of transfer pricing and renovation of customs capacity). • Assuming successful containment of the pandemic, recurrent spending related to COVID-19 measures are planned to be scaled down. • No growth assumed in the size of the civil service, the wage bill, or pensions. • Partial extension of top-up on benefits of the Child Money Program entails sizable fiscal burden (about 2.2 percent of GDP).
14 ECONOMIC PERFORMANCE AND PROSPECTS
• Capital expenditure allocation (8.4 percent of GDP) slightly declined from 2020 supplementary budget - largely to complete ongoing projects. It remains higher than in the pre-COVID years (which were significantly expansionary). • Interestingly, many projects that were included in the 2020 budget for reconstruction have been scaled down for renovation, with substantial cost savings (these include the state drama theater, state opera house, and national library). However, there is room for further rationalization and reprioritization of the current public investment program. The capital expenditure execution rate has generally averaged about 80 percent over the past three years. • Commitment to budget credibility as overall budget envelope is consistent with the 2020 Medium-Term Fiscal Framework.
Sources: MoF; 2020 budget document; World Bank staff illustrations.
A5. External pressures considerably pressures were reduced thanks to a remarkable current eased following notable current account account adjustment. Lower FDI (which contracted by about 30 percent [y/y] in 2020) and the private sector adjustment external debt payment (US$500 million in May 2020) Despite lower capital inflows and large private sector accounted for the narrower financial account surplus despite official sector support from development debt repayments, external pressures eased considerably amid exports recovery and imports compression. partners including ADB, IMF, AIIB, the World Bank and In 2020, Mongolia’s balance of payments recorded Japan.19 In contrast, weak domestic demand and the 17 froma surplus development of US$787 partners million (figureincluding I.22). ADB, IMF,Despite AIIB, a quick the Worldrecovery Bank of exports and Japan.have resulted In contrast, in a remarkable weak from development partners including ADB, IMF, AIIB, the World Bank and Japan.17 In contrast, weak domestic demand and the quick recovery of exportscurrent have resultedaccount adjustment.in a remarkable current account narrower domestic surplus ofdemand the financial and the quick account, recovery external of exports have resulted in a remarkable current account adjustment. adjustment. FigureFigure I.22 I.22.. Current Current accountaccount adjustmentadjustment waswas Figure FigureI.23. Current I.23. Current account account surplus surplus in recent in recent months months is enough toFigure ease I.22 external. Current pressures account adjustment was Figureis unprecedented I.23. Current inaccount Mongolia’s surplus recent in recent history months is enough toenough ease external to ease external pressures pressures unprecedentedunprecedented in Mongolia’s in Mongolia’s recent recent history history External accountsExternalExternal (millionaccounts accounts US$) (million (million US$) US$) MonthlyMonthly currentMonthly current account current account balance account balance (millionbalance (million (millionUS$, US$, 3 mma)US$, 3 mma) 3 mma)
CA (mn US$) CA (mn US$)FA & KA (mnFA US$) & KA (mn US$)BoP (mn US$)BoP (mn US$) Trade BalanceTrade Balance CurrentCurrent Transfers Transfers IncomeIncome Balance Balance ServicesServices CurrentCurrent Account Account 3,000 3,000 2,615 2,615 2,615 2,615 400 2,065 2,065 400 2,000 2,000 1,460 1,460 300 300 1,220 1,220 200 200 1,000 681 1,000 681 453 453 100 100 (18) 786.9 (18) 0 786.9 0 0 0 (142) -100 (142) (433) -100 -1,000 (700) -1,000 (433) -200 (700) (1,155) -200 -2,000 (1,155) -300 -2,000 -300 (2,207) (2,162) -400 -3,000 (2,207) (2,162) -400 Jun-18 Jun-19 Jun-20
2016 2017 2018 2019 2020 Oct-18 Oct-19 Oct-20 Apr-18 Apr-19 Apr-20 Feb-18 Feb-19 Feb-20
-3,000 Dec-18 Dec-19 Dec-20 Aug-18 Aug-19 Aug-20 Jun-20 Jun-19 Jun-18 Oct-20 Oct-19 2016 2017 2018 2019 2020 Oct-18 Apr-20 Apr-19 Apr-18 Feb-20 Feb-19 Feb-18 Dec-20 Dec-19 Dec-18 Aug-20 Aug-19 Sources: BoM; World Bank staff estimates. Source: BoM.Aug-18 Note Note: Sources: BoM; BoM; World World: CA Bank = current Bank staff estimates.staff account; estimates. KA = capital account; FA =Source: Source: BoM. 3 BoM. mma = three‐month moving average. Note: CA = financialcurrent account; and KA BOP= capital = Balance account; of payments. FA = Note: 3 mma = three‐month moving average. Note: CA = current account; KA = capital account; FA = financial Note: 3 mma = three-month moving average. account;financial and account; BOP = Balance and BOP of payments. = Balance of payments. Improvement in the trade balance drove the current account adjustment. The current account deficit Improvementnarrowed in the to US$433trade balance million indrove 2020 the from current US$2.1 account billion in adjustment. 2019. In fact, The the currentcurrent account posteddeficit a narrowedsurplus to US$433 of US$530 million million in 2020 during from May–December, US$2.1 billion which in 2019.is unprecedented In fact, the in current the past accountdecade (figure posted I.23). a surplus ofImport US$530 compression million during supported May–December, by weaker whichdomestic is unprecedented demand and lower in the oil past prices decade contributed (figure I.23).to the current account adjustment, coupled with the relatively quick recovery of exports (figures I.24 and Import compression18,19,20 supported by weaker domestic demand and lower oil prices contributed to the 19 The recentI.25). sovereign bond Moreover, issuance (US$600 lower million profits in late repatriation September) by andthe government declining did service not have payments a sizable direct (for impact example, on the country’s travel currentexternal position account as the proceedsadjustment, were used coupled mainly to paywith off existingthe relatively public debts. Inquick contrast, recovery it had significant of exports implications (figures on market I.24 expectations and 18,19,20restrictions and limited truck activities) also played an important role in the improved current account I.25).regarding immediate Moreover, pressure of lowerexternal liquidityprofits and repatriation exchange rate depreciation. and declining service payments (for example, travel balance. Furthermore, the BoM’s gold purchase, which reached a historically high level of 23 metric ton restrictions and limited truck activities) also played an important role21 in the improved current account in 2020, significantly supported the export recovery (figure I.24). 15 balance. Furthermore, the BoM’s gold purchase, which reached a historically high level of 23 metric ton in 2020, significantly supported the export recovery (figure I.24).21
17 The recent sovereign bond issuance (US$600 million in late September) by the government did not have a sizable direct impact on the country’s external position as the proceeds were used mainly to pay off existing public debts. In contrast, it had significant implications on market expectations regarding immediate pressure of external liquidity and exchange rate depreciation. 17 The recent18 Importssovereign were bond also issuance severely (US$600affected bymillion friction in atlate main September) border ports by thewith government Russia and China. did not Since have the a first sizable domestic direct contagion impact on the country’sof the external virus, all position transportation as the proceeds through thewere main used borders mainly wereto pay ceased, off existing and publicthere hasdebts. been In contrast,an increasing it had congestion significant of implicationsmerchandise on market andexpectations traffic on theregarding other side immediate of the border. pressure Without of external customs liquidity clearance, and these exchange items rate are notdepreciation. recorded as imports, 18 Imports weredespite also having severely already affected been paid by frictionfor. Since at the main friction border is not ports expected with Russiato be resolved and China. soon, Since the importsthe first are domestic likely to contagionbe recorded of the virus,in lateall Januarytransportation or February through 2021. the main borders were ceased, and there has been an increasing congestion of merchandise19 Theand government’s traffic on the efforts other toside boost of theexports border. by accelerating Without customs coal transportation clearance, theseat the itemskey border are not posts recorded with China as imports, have also despite havingsupported already the been recovery paid offor. exports. Since the friction is not expected to be resolved soon, the imports are likely to be recorded 20 in late January Exports or February declined 2021. by 45.3 percent (y/y) in the first four months of 2020, but contraction eased significantly to 0.6 percent by 19 The government’sDecember 2020efforts amid to easing/expiryboost exports of bysome accelerating precautionary coal measures, transportation recovery at in the Chinese key borderdemand posts and commodity with China prices have (mainly also supported copperthe recovery prices), of and exports. a surge in gold exports. 21 To support gold mining, the BoM provided soft loans of MNT 110 billion (US$42 million) to gold miners under the “Gold‐2” 20 Exports declined by 45.3 percent (y/y) in the first four months of 2020, but contraction eased significantly to 0.6 percent by program. December 2020 amid easing/expiry of some precautionary measures, recovery in Chinese demand and commodity prices (mainly copper prices), and a surge in gold exports. 27 21 To support gold mining, the BoM provided soft loans of MNT 110 billion (US$42 million) to gold miners under the “Gold‐2” program.
27
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Improvement in the trade balance drove the current Current account adjustment, specifically a surge in account adjustment. The current account deficit gold purchases by the BoM, led to a strong recovery narrowed to US$433 million in 2020 from US$2.1 billion in reserves after a significant drop during January– in 2019. In fact, the current account posted a surplus May. Due to the sharp drop in exports, the current of US$530 million during May–December, which is account deficit widened in H1 2020 compounded by unprecedented in the past decade (figure I.23). Import declining capital inflows (mainly FDI) and large private compression supported by weaker domestic demand sector external debt repayments, resulting in a drain and lower oil prices contributed to the current account on foreign exchange reserves (figure I.26). However, adjustment, coupled with the relatively quick recovery reserves recovered significantly in H2 2020 amid the of exports (figures I.24 and I.25).20, 21, 22 Moreover, lower current account adjustment, disbursement from some profits repatriation and declining service payments (for donors, and extensive gold purchases by the BoM. In example, travel restrictions and limited truck activities) fact, gross international reserves reached a historically also played an important role in the improved current high level of US$4.5 billion (equivalent to over eight account balance. Furthermore, the BoM’s gold purchase, months of imports) at end-2020, up from US$4.3 which reached a historically high level of 23 metric ton billion in 2019. in 2020, significantly supported the export recovery (figure I.24).23
Figure I.24. Exports were hit hard in H1, but have Figure I.25. Import compression has largely been Figurerecovered I.24Figure. Exports quickly I.24. Exports were hit were hard hit in hard H1, inbut H1, have but have FigureFiguredriven I.25. I.25Import by. lowerImport compression fuel compression and capital has has largely goods largely been imports been recoveredrecovered quickly quickly drivendriven by lower by lower fuel fueland and capital capital goods goods imports imports Contribution to growth (y/y, percentage points) Contribution to growth (y/y, percentage points) ContributionContribution to growth to (y/y,growth percentage (y/y, percentage points) points) ContributionContribution to growth to growth (y/y, (y/y, percentage percentage points) points) ConsumptionConsumption IndustrialIndustrial & Intermediate & Intermediate 20% 20% CapitalCapital goods goods FuelsFuels OthersOthers TotalTotal imports imports growth growth 10% 10% 10% 10%
0% 0% 5% 5%
-10% -10%Gold Gold 0% 0% Copper Copper -20% -20% -5% -5% Coal Coal -30% -30% Crude oil Crude oil -10% -10% -40% Others -40% Others -15% Total exports growth -15% -50%Total exports growth -50% -20% -20% Jul-19 Jul-20 Jan-20 Jun-19 Jun-20 Oct-19 Oct-20 Apr-20 Feb-20 Sep-19 Sep-20 Dec-19 Dec-20 Mar-20 Aug-19 Aug-20 Nov-19 Nov-20 May-20 Jul-19 Jul-20 Jul-19 Jul-20 Jan-20 Jun-19 Jun-20 Oct-19 Oct-20 Apr-20 Jan-20 Feb-20 Sep-19 Sep-20 Jun-19 Jun-20 Dec-19 Dec-20 Oct-19 Oct-20 Apr-20 Mar-20 Feb-20 Aug-19 Aug-20 Nov-19 Nov-20 Sep-19 Sep-20 Dec-19 Dec-20 May-20 Mar-20 Aug-19 Aug-20 Nov-19 Nov-20 May-20 Jul-19 Jul-20 Jan-20 Jun-19 Jun-20 Oct-19 Oct-20 Apr-20 Feb-20 Sep-19 Sep-20 Dec-19 Dec-20 Mar-20 Aug-19 Aug-20 Nov-19 Nov-20 May-20 Sources: NSO; BoM; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Sources: NSO; BoM; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Sources: NSO;Note: BoM;Coal, copperWorld Bankand gold staff accounted estimates. for 75 percent of Sources: BoM; World Bank staff estimates. Note: Coal, copper and gold accounted for 75 percent of total Note: Coal,total copper export and proceeds gold accounted in 2020. for 75 percent of totalexport export proceeds proceeds in 2020. in 2020. Current account adjustment, specifically a surge in gold purchases by the BoM, led to a strong recovery Currentin account reserves adjustment, after a significant specifically drop aduring surge January–May. in gold purchases Due toby the the sharp BoM, drop led toin aexports, strong therecovery current in reservesaccount after deficit a significant widened indrop H1 2020 during compounded January–May. by declining Due to capital the sharp inflows drop (mainly in exports, FDI) and the large current private accountsector deficit external widened debt in H1 repayments, 2020 compounded resulting in by a decliningdrain on foreign capital exchange inflows (mainly reserves FDI) (figure and I.26). large However, private sector externalreserves debt recovered repayments, significantly resulting in H2 in 2020 a drain amid on theforeign current exchange account reserves adjustment, (figure disbursement I.26). However, from reservessome recovered donors, significantly and extensive in goldH2 2020purchases amid by the the current BoM. In account fact, gross adjustment, international disbursement reserves reached from a historically high level of US$4.5 billion (equivalent to over eight months of imports) at end‐2020, up from some20 Imports donors, were also and severely extensive affected bygold friction purchases at main border by portsthe withBoM. Russia In fact, and China. gross Since international the first domestic reserves contagion reached of the virus, a all historicallytransportationUS$4.3 throughhigh billion level the main inof 2019.borders US$4.5 were billion ceased, (equivalentand there has been to anover increasing eight congestion months of ofmerchandise imports) and at traffic end ‐on2020, the other up side from of the US$4.3border. Without billion customs in 2019. clearance, these items are not recorded as imports, despite having already been paid for. Since the friction is not expected to be resolved soon,Figure the imports I.26 .are FX likely reserves to be recordedrecovered in late strongly January orafter February a 2021.Figure I.27. …and the exchange rate stabilized in H2 21 The government’ssharp effortsfall in to H1, boost supported exports by byaccelerating eased current coal transportation afterat the akey moderate border posts depreciation with China have in also the supported first half the recovery of exports.Figure I.26. FX reserves recovered strongly after a Figure I.27. …and the exchange rate stabilized in H2 22 account adjustment and gold purchases… Exportssharp declinedfall in H1, by 45.3 supported percent (y/y) by in eased the first current four months of 2020,after but acontraction moderate eased depreciation significantly to in 0.6 the percent first byhalf December 2020 amid easing/expiryGross of some international precautionary reserves measures, (GIR) recovery (billion in ChineseUS$) demand andExchange commodity rate: prices Tugrug (mainly (Spot copper rate, prices), Index, and Dec a surge 31, 2015=100)in gold expor ts. 23 Toaccount support goldadjustment5.0 mining, the andBoM providedgold purchases… soft loans of MNT 110 billion (US$42 million) to gold miners under the “Gold-2” program. 145 MNT/US$ Gross international4.5 reserves (GIR) (billion US$) Exchange rate: Tugrug (Spot rate, Index, Dec 31, 2015=100) 140 MNT/CNY 16 5.0 4.0 145 135 MNT/US$ 4.5 3.5 Depreciation 130 140 MNT/CNY 4.0 3.0 135 125 3.5 2.5 Depreciation 130 120 2.0 115 3.0 125 1.5 110 2.5 120 1.0 105 2.0 115 0.5 100 1.5 110 0.0 95 1.0 105 100
0.5 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Jun-17 Jun-18 Jun-19 Jun-20 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Sep-17 Sep-18 Sep-19 Sep-20 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-17 Mar-18 Mar-19 Mar-20 0.0 95 Source: BoM. Source: BoM. Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sep-16 Sep-17 Sep-18 Sep-19 Sep-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Jun-17 Jun-18 Jun-19 Jun-20 Note: FX = foreign exchange. Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Sep-17 Sep-18 Sep-19 Sep-20 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Mar-17 Mar-18 Mar-19 Mar-20
Source: BoM. Source: BoM. Note: FXThe = foreigntugrug exchange. depreciated moderately against the US dollar in 2020 supported by foreign exchange (FX) interventions. In nominal terms, the tugrug depreciated by 4.2 percent against the U.S. dollar and by 11.2 The tugrugpercent depreciated against the moderately Chinese RMB against in 2020 the (figure US dollarI.27). The in 2020depreciation supported of the by tugrug foreign was exchange smaller in (FX) 2020 relative to the exchange rates of Russia and Kazakhstan (figure I.28). Such moderate depreciation was interventions. In nominal terms, the tugrug depreciated by 4.2 percent against the U.S. dollar and by 11.2 percent against the Chinese RMB in 2020 (figure I.27). The depreciation of the tugrug was smaller in 2020 relative to the exchange rates of Russia and Kazakhstan29 (figure I.28). Such moderate depreciation was
29
FigureFigure I.24. Exports I.24. Exports were werehit hard hit inhard H1, in but H1, have but have FigureFigure I.25. Import I.25. Import compression compression has largely has largely been been recoveredrecovered quickly quickly drivendriven by lower by lower fuel and fuel capital and capital goods goods imports imports ContributionContribution to growth to growth (y/y, percentage (y/y, percentage points) points) ContributionContribution to growth to growth (y/y, percentage (y/y, percentage points) points) ConsumptionConsumption IndustrialIndustrial & Intermediate & Intermediate 20% 20% Capital goodsCapital goods Fuels Fuels Others Others Total importsTotal growthimports growth 10% 10% 10% 10%
0% 0% 5% 5%
-10% -10% Gold Gold 0% 0% Copper Copper -20% -20% -5% -5% Coal Coal -30% -30% Crude oilCrude oil -10% -10%
-40% -40% Others Others -15% -15% Total exportsTotal growth exports growth -50% -50% -20% -20%ECONOMIC PERFORMANCE AND PROSPECTS Jul-20 Jul-20 Jul-19 Jul-19 Jan-20 Jan-20 Jun-20 Jun-20 Jun-19 Jun-19 Oct-20 Oct-20 Oct-19 Oct-19 Apr-20 Apr-20 Feb-20 Feb-20 Sep-20 Sep-20 Sep-19 Sep-19 Dec-20 Dec-20 Dec-19 Dec-19 Mar-20 Mar-20 Aug-20 Aug-20 Aug-19 Aug-19 Nov-20 Nov-20 Nov-19 Nov-19 May-20 May-20 Jul-20 Jul-20 Jul-19 Jul-19 Jan-20 Jan-20 Jun-20 Jun-20 Jun-19 Jun-19 Oct-20 Oct-20 Oct-19 Oct-19 Apr-20 Apr-20 Feb-20 Feb-20 Sep-20 Sep-20 Sep-19 Sep-19 Dec-20 Dec-20 Dec-19 Dec-19 Mar-20 Mar-20 Aug-20 Aug-20 Aug-19 Aug-19 Nov-20 Nov-20 Nov-19 Nov-19 May-20 May-20 Sources:Sources: NSO; BoM; NSO; WorldBoM; WorldBank staff Bank estimates. staff estimates. Sources:Sources: BoM; WorldBoM; WorldBank staff Bank estimates. staff estimates. Note: Coal,Note: copper Coal, copper and gold and accounted gold accounted for 75 forpercent 75 percent of of Thetotal tugrug exporttotal export depreciatedproceeds proceeds in 2020. moderately in 2020. against the US the intervention of the BoM, which continued to sell dollar in 2020 supported by foreign exchange (FX) foreign exchange on the domestic market. In fact, BoM’s interventions.CurrentCurrent account In account nominal adjustment, adjustment, terms, the specifically tugrug specifically depreciated a surge a surge in gold ingross purchasesgold foreign purchases by exchange the by BoM, the interventions BoM, led to led a strong to (excluding a strong recovery recovery direct byin 4.2 reserves percentin reserves afteragainst aftera thesignificant aU.S. significant dollar drop and dropduring by 11.2 during January–May.percent January–May. FX purchasesDue toDue the to from sharp the large sharp drop mining dropin exports, in companies) exports, the current the reached current againstaccountaccount the deficit Chinese deficit widened RMB widened in in H1 2020 in2020 H1 (figure 2020compounded compounded I.27). by The declining byUS$2.63 declining capital billion capital inflows in inflows2020, (mainly close (mainly FDI) to and theFDI) largeUS$2.87 and largeprivate billion private depreciationsectorsector external of external the debt tugrug repayments,debt was repayments, smaller resulting in 2020 resulting in relative a drain in a drain onin foreign on 2019 foreign exchange (figure exchange reservesI.29). reserves (figureNonetheless, (figure I.26). I.26). However, with However, moderate toreserves the exchangereserves recovered recoveredrates ofsignificantly Russia significantly and inKazakhstan H2 in 2020 H2 2020(figureamid amidthe inflation,current the current account the accountreal adjustment, effective adjustment, exchange disbursement disbursement rate depreciated from from I.28).some Suchsome donors, moderate donors, and extensive and depreciation extensive gold was purchasesgold supported purchases by the by by BoM. theby BoM. overIn fact, 3 In percent grossfact, gross international(y/y) byinternational November reserves 2020.reserves reached reached a a historicallyhistorically high levelhigh levelof US$4.5 of US$4.5 billion billion (equivalent (equivalent to over to sevenover seven months months of imports) of imports) at end at‐2020, end‐2020, up from up from US$4.3FigureUS$4.3 billionI.26. FXbillion in reserves 2019. in 2019. recovered strongly after Figure I.27. …and the exchange rate stabilized a FiguresharpFigure I.26fall .in FX I.26 H1, reserves. FXsupported reserves recovered byrecovered eased strongly current strongly after aafter Figure a Figure inI.27 H2. …and I.27after. …andthe a moderate exchange the exchange depreciation rate stabilized rate stabilized in in the H2 in H2 accountsharpsharp fall adjustment in fallH1, in supported H1, and supported gold by purchases…eased by eased current current after aafter firstmoderate a halfmoderate depreciation depreciation in the in first the half first half accountaccount adjustment adjustment and gold and purchases… gold purchases… Gross international reserves (GIR) (billion US$) Exchange rate: Tugrug (Spot rate, Index, Dec 31, 2015=100) Gross internationalGross international reserves reserves (GIR) (billion (GIR) (billion US$) US$) ExchangeExchange rate: Tugrug rate: Tugrug (Spot rate,(Spot Index, rate, Index,Dec 31, Dec 2015=100) 31, 2015=100) 5.0 5.0 145 145 MNT/US$MNT/US$ 4.5 4.5 140 140 MNT/CNYMNT/CNY 4.0 4.0 135 135 3.5 3.5 DepreciationDepreciation 130 130 3.0 3.0 125 125 2.5 2.5 120 120 2.0 2.0 115 115 1.5 1.5 110 110 1.0 1.0 105 105 0.5 0.5 100 100 0.0 0.0 95 95 supported by the intervention of the BoM, which continued to sell foreign exchange on the domestic Jun-16 Jun-16 Jun-17 Jun-17 Jun-18 Jun-18 Jun-19 Jun-19 Jun-20 Jun-20 Sep-16 Sep-16 Sep-17 Sep-17 Sep-18 Sep-18 Sep-19 Sep-19 Sep-20 Sep-20 Dec-15 Dec-15 Dec-16 Dec-16 Dec-17 Dec-17 Dec-18 Dec-18 Dec-19 Dec-19 Dec-20 Dec-20 Jun-17 Jun-17 Jun-18 Jun-18 Jun-19 Jun-19 Jun-20 Jun-20 Mar-16 Mar-16 Mar-17 Mar-17 Mar-18 Mar-18 Mar-19 Mar-19 Mar-20 Mar-20 Sep-17 Sep-17 Sep-18 Sep-18 Sep-19 Sep-19 Sep-20 Sep-20 Dec-16 Dec-16 Dec-17 Dec-17 Dec-18 Dec-18 Dec-19 Dec-19 Dec-20 Dec-20 market.supported In Mar-17 fact, by Mar-17 BoM’s theMar-18 intervention grossMar-18 Mar-19 foreign Mar-19 of the exchangeMar-20 BoM,Mar-20 which interventions continued (excludingto sell foreign direct exchange FX purchases on the domestic from large miningSource:market. companies)Source: BoM. In BoM.fact, BoM’sreached gross US$2.63 foreign billion exchange in 2020, interventionsSource: Source:close BoM. BoM.to (excluding the US$2.87 direct billion FX purchases in 2019 from(figure large I.29). Source:Note: BoM. FXNote: = foreign FX = foreign exchange. exchange. Source: BoM. Nonetheless, Note:mining FX = foreign companies) with exchange. moderate reached inflation, US$2.63 the billion real effectivein 2020, closeexchange to the rate US$2.87 depreciated billion inby 2019 over (figure3 percent I.29). (y/y) by NovemberNonetheless, 2020. with moderate inflation, the real effective exchange rate depreciated by over 3 percent (y/y) Theby tugrugThe November tugrug depreciated depreciated2020. moderately moderately against against the US the dollar US dollar in 2020 in 2020supported supported by foreign by foreign exchange exchange (FX) (FX) In nominal In nominal terms, terms, the tugrug the tugrug depreciated depreciated by 4.2 by percent 4.2 percent against against the U.S. the dollar U.S. dollar and by and 11.2 by 11.2 interventions.Figureinterventions. I.28. The tugrug depreciation was moderate Figure I.29. …supported by FX interventions by the Figurepercentpercent I.28 against. The against tugrugthe Chinese the depreciation Chinese RMB RMBin 2020was in moderate 2020(figure (figure I.27). I.27).TheFigure depreciation The I.29 depreciation. …supported of the of tugrug bythe FX tugrug interventionswas smaller was smaller in by 2020 thein 2020 comparedcomparedFigure to I.28to Mongolia’s Mongolia’s. The tugrug structural depreciation peers...peers... was moderate BoM,FigureBoM, particularly I.29 particularly. …supported in inthe the by first FXfirst interventionshalf half of 2020of 2020 by the relativecomparedrelative to the to to exchange the Mongolia’s exchange rates structural ratesof Russia of peers... Russia and Kazakhstanand KazakhstanBoM, (figure particularly (figure I.28). I.28).Such in the Suchmoderate first moderatehalf of depreciation 2020 depreciation was was NominalNominal exchange exchange rate rate per per US$ US$ (y/y (y/y change,change, end-2020) end‐2020) The BoM’s netThe FX salesBoM’s andnet FX MNT/US$ sales and MNT/US$ Nominal exchange rate per US$ (y/y change, end‐2020) The BoM’s net FX sales and MNT/US$ 3.5 TheThe BoM's BoM's netnet sales ofof foreignforeign exchange exchange (bn (bn US$): US$): LHS LHS 3100 Russia 19.2% 28 283.5 28503100 Russia 19.2% MNT/USD (eop): RHS 2850 MNT/USD (eop): RHS 2734 2900 Kazakhstan 10.3% 3 2734 2900 Kazakhstan 10.3% 3 2643 2643 2700 South Africa 4.8% 2490 2700 South Africa 4.8% 2490 2.52.5 24272427 2.872.87 2500 MongoliaMongolia 4.2% 2.63 2.632500 4.2% 1.9 1.9 1.8 Botswana 1.2% 22 1.8 2300 Botswana 1.2% 1.6 2300 1.6 1.5 19961996 1.5 IndonesiaIndonesia 0.9%0.9% 2100 2100 1.51.5 18881888 1.2 MalaysiaMalaysia -1.7% -1.7% 11 1900 1900 11 1659 Chile Chile -3.9% -3.9% 1.2 1700 1700 Japan Japan-5.0% -5.0% 0.5 1392 0.5 1392 0.1 1500 China -6.2% 0.1 1500 China -6.2% 0 1300 Euro -8.2% 0 1300 Euro -8.2% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sources: https://www.x‐rates.com/; BoM; World Bank staff Sources: BoM; World Bank staff estimates. Sources:Sources: https://www.x-rates.com/; BoM; World Bank staff estimates. Sources:Sources: BoM; World Bank staff estimates. estimates. https://www.x ‐rates.com/; BoM; World Bank staff Note: The BoM; BoM’s World gross Bank FX sales staff exclude estimates. its direct FX purchases Note: The BoM’s gross FX sales exclude its direct FX purchases from estimates. Note:from largeThe BoM’s mining gross companies, FX sales which exclude started its in direct June FX2018. purchases eop large mining companies, which started in June 2018. eop = end-of- from= end large‐of‐period; mining RHS companies, = right‐hand which side; startedLHS = left in‐ handJune side.2018. eop period; RHS = right-hand side; LHS = left-hand side. = end‐of‐period; RHS = right‐hand side; LHS = left‐hand side.
A6. Monetary conditions have eased, but risks in the banking sector are building as asset A6. Monetaryquality deteriorates conditions have eased, but risks in the banking sector are building as asset quality deteriorates Prior to the onset of the COVID‐19 pandemic, monetary policy focused on addressing unsustainable17 Priorcredit to the growth onset through of the COVIDmacroprudential‐19 pandemic, measures. monetary As inflation policy was focused well within on addressing the BoM’s unsustainable target of 8 creditpercent growth in 2018–19,through themacroprudential BoM focused on measures. addressing Asunsustainable inflation was credit well growth within (particularly the BoM’s household target of 8 percentloans) in 2018–19,and external the imbalancesBoM focused with on aaddressing mix of contractionary unsustainable monetary credit growth and macroprudential (particularly household policy 24 loans)measures. and external In fact, imbalances the rapid creditwith aexpansion mix of contractionaryin 2017–18 was monetarychanneled andmainly macroprudential to households, andpolicy measures.consequently,22 In fact, the the household rapid credit debt‐ toexpansion‐income ratio in 2017–18 was estimated was channeled to have reached mainly as tohigh households, as about 70 and percent at end‐2018, up from an average of 39 percent in 2012. As a result of macroprudential measures, consequently, the household debt‐to‐income ratio was estimated to have reached as high as about 70 broad money growth and domestic credit growth fell from 23 percent and 26.5 percent, respectively, in percentDecember at end ‐2018,2018, to up 7 frompercent an and average 5.1 percent of 39 percentin December in 2012. 2019 As (figure a result I.30). of macroprudential measures, broad money growth and domestic credit growth fell from 23 percent and 26.5 percent, respectively, in DecemberIn 2020, 2018, the monetaryto 7 percent policy and stance 5.1 percent shifted in toward December mitigating 2019 the(figure economic I.30). impact of the pandemic. Since March 2020, the BoM lowered its policy rate four times by a cumulative 500 basis points to 6 In 2020,percent, the monetarya historical policylow (figure stance I.30). shifted The goal toward was to mitigating reduce market the economic interest rates impact and boostof the domestic pandemic. Sincedemand March in2020, the medium the BoM term. lowered The BoM its haspolicy also rate been four trying times to nudge by a bankscumulative to use their500 excessbasis points liquidity to 6 percent,to support a historical economic low activities(figure I.30). by making The goal it relatively was to unattractivereduce market for banks interest in the rates short and run boost to passively domestic demanddeposit in the funds medium with the term. central The bank BoM in hasthe formalso ofbeen central trying bank to bills.nudge Moreover, banks to the use central their bank excess reduced liquidity to supportthe reserve economic requirement activities ratio, by makingand introduced it relatively a longer unattractive‐term liquidity for banksinstrument in the to short further run encourage to passively deposit funds with the central bank in the form of central bank bills. Moreover, the central bank reduced the reserve24 These include requirement macroprudential ratio, measures and introduced aimed at limiting a longer the debt‐term‐to‐income liquidity ratio ofinstrument individual borrowers to further from asencourage high as 100 percent to 60 percent, reducing the maturity on non‐mortgage household loans, and raising the risk weight on unhedged foreign currency borrowing. 22 These include macroprudential measures aimed at limiting the debt‐to‐income ratio of individual borrowers from as high as 100 percent to 60 percent, reducing the maturity on non‐mortgage30 household loans, and raising the risk rating on unhedged foreign currency borrowing. 29
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
A6. Monetary conditions have eased, but medium term. The BoM has also been trying to nudge risks in the banking sector are building as banks to use their excess liquidity to support economic activities by making it relatively unattractive for banks asset quality deteriorates in the short run to passively deposit funds with the Prior to the onset of the COVID-19 pandemic, central bank in the form of central bank bills. Moreover, monetary policy focused on addressing unsustainable the central bank reduced the reserve requirement ratio, credit growth through macroprudential measures. and introduced a longer-term liquidity instrument to As inflation was well within the BoM’s target of8 further encourage banks to lend their excess liquidity. percent in 2018–19, the BoM focused on addressing In addition, the BoM reengaged with the government’s unsustainable credit growth (particularly household subsidized mortgage program, introduced a freeze loans) and external imbalances with a mix of on mortgage loan repayments, engaged in several contractionary monetary and macroprudential policy asset purchasing programs, and provided soft loans to measures.24 In fact, the rapid credit expansion in banks to support non-mineral export industries and 2017–18 was channeled mainly to households, and SMEs. In total, these measures are estimated to cost consequently, the household debt-to-income ratio was around 3 percent of GDP, while the effective cost of estimated to have reached as high as about 70 percent other regulatory measures could not be estimated at end-2018, up from an average of 39 percent in 2012. (see box I.4). As a result of macroprudential measures, broad money The impact of the monetary policy easing was growth and domestic credit growth fell from 23 percent mitigated by a credit contraction amid the pandemic. and 26.5 percent, respectively, in December 2018, to 7 Broad money growth accelerated to 16 percent (y/y) in percent and 5.1 percent in December 2019 (figure I.30). December, from its recent low of 1.6 percent in April In 2020, the monetary policy stance shifted toward 2020. However, domestic credit growth remained in mitigating the economic impact of the pandemic. negative territory while banking sector excess reserves continued to increase gradually (figure I.31). The banksSince March to lend 2020, their the excess BoM lowered liquidity. its policyIn addition, rate four the BoM reengaged with the government’s subsidized overall economic contraction, rising nonperforming mortgagetimes by a cumulativeprogram, introduced500 basis points a freeze to 6 percent,on mortgage loan repayments, engaged in several asset loans, and risk aversion due to heightened uncertainty purchasinga historical lowprograms, (figure and I.30). provided The goal soft was loans to to reduce banks to support non‐mineral export industries and SMEs.market In interest total, rates these and measures boost domestic are estimated demand in to the cost aroundmade banks 3 percent reluctant of GDP, to lend while and thecompanies effective reluctant cost of other regulatory measures could not be estimated (see box I.4). Figure I.30. The monetary policy rate was lowered Figure I.31. However, banks have been reluctant to Figureto a historical I.30. The lowmonetary to revive policy credit rate growth was lowered Figurelend I.31 despite. However, having banks sizable have excess been reservesreluctant to to a historical low to revive credit growth lend despite having sizable excess reserves Money supply,Money domesticsupply, domestic credit, credit, and policy and policy rate rate Domestic creditDomestic and banks credit excess and banks reserves excess reserves Excess reserves to deposit ratio (%): RHS 30% 40% M2 growth (y/y): LHS Domestic credit growth (y/y): LHS 30% Bank loan growth (y/y): LHS 15% 25% 35% Policy rate: RHS 20% 30% 20% 15% 25% 10% 10% 20% 10% 5% 15% 5% 0% 0% 10% ‐5% 5% -10% 0% ‐10% 0% 17 17 17 18 18 18 19 19 19 20 20 20 17 18 19 20 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jun-19 Jun-20 Jun Jun Jun Jun Sep-18 Sep-19 Sep-20 Dec-18 Dec-19 Dec-20 Sep Sep Sep Sep Dec Dec Dec Dec Mar-19 Mar-20 Mar Mar Mar Mar
Sources:Sources: BoM;BoM; World World Bank Bank staff staff estimates. estimates. Sources:Sources: BoM; BoM; World World BankBank staffstaff estimates. estimates. Note:Note: RHS == right-hand right‐hand side; side; LHS LHS = left-hand = left‐ handside. side. Note:Note: RHS RHS = right = right-hand‐hand side; side; LHS == left-hand left‐hand side. side.
The impact of the monetary policy easing was curtailed by a credit contraction amid the pandemic. Broad money growth accelerated to 16 percent (y/y) in December, from its recent low of 1.6 percent in April24 These 2020. include macroprudentialHowever, domestic measures aimed credit at limiting growth the debt-to-income remained ratio in a of negativeindividual borrowers trajectory from as while high as 100the percent banking to 60 percent,sector reducing the maturity on non-mortgage household loans, and raising the risk weight on unhedged foreign currency borrowing. excess reserves continued to increase gradually (figure I.31). Interestingly, the overall economic contraction,18 rising nonperforming loans, and risk aversion due to heightened uncertainty largely explained the persistence of credit contraction, despite some support from monetary policy easing. This provides the BoM the justification to pursue banking sector clean up to prevent a long balance sheet stagnation.
Box I.4. The Bank of Mongolia’s measures to mitigate the impact of COVID‐19
The Monetary Policy Committee (MPC) of the Bank of Mongolia (BoM) met six times since the start of the COVID‐ 19 pandemic in February 2020. Several decisions were taken by the MPC aimed at boosting credit growth, relieving the debt burden, and supporting liquidity of the banking system. These include:
Reducing the policy rate sequentially from 11 percent to 6 percent, over meetings held in March, April, September, and November 2020. As the inflation outlook remained within the central bank’s target, reduction of the policy rate was intended to relieve the financing costs of banks, support financial intermediation, and stimulate domestic demand. Relaxing the condition of repo financing instruments to support liquidity of the banks. The MPC narrowed the interest rate corridor by 200 basis points, which effectively reduced the interest rate on the short‐term repo instrument. In September, the maturity of the longer‐term repo instrument was temporarily extended from 90 days to 180 days and its interest rate reduced from 16 percent to 11 percent. Consequently, banks could borrow from the BoM at a lower rate and for a longer term. Releasing more liquidity to the banking system by reducing the required reserve ratio on domestic currency liabilities by 4.5 percentage points to 6 percent in March. As a result, an estimated MNT 730 billion was released to the market. Promoting incentives to reduce interest rates on FX deposits and discourage deposit dollarization by reducing remunerationa provided to banks by the amount equivalent to their FX deposits and interest‐ bearing FX current accounts. In addition to applying higher reserve requirements on FX liabilities, this
30
ECONOMIC PERFORMANCE AND PROSPECTS
Box I.4. The Bank of Mongolia’s measures to mitigate the impact of COVID-19
The Monetary Policy Committee (MPC) of the Bank of Mongolia (BoM) met six times since the start of the COVID-19 pandemic in February 2020. Several decisions were taken by the MPC aimed at boosting credit growth, relieving the debt burden, and supporting liquidity of the banking system. These include: • Reducing the policy rate sequentially from 11 percent to 6 percent, over meetings held in March, April, September, and November 2020. As the inflation outlook remained within the central bank’s target, reduction of the policy rate was intended to relieve the financing costs of banks, support financial intermediation, and stimulate domestic demand. • Relaxing the condition of repo financing instruments to support liquidity of the banks. The MPC narrowed the interest rate corridor by 200 basis points, which effectively reduced the interest rate on the short-term repo instrument. In September, the maturity of the longer-term repo instrument was temporarily extended from 90 days to 180 days and its interest rate reduced from 16 percent to 11 percent. Consequently, banks could borrow from the BoM at a lower rate and for a longer term. • Releasing more liquidity to the banking system by reducing the required reserve ratio on domestic currency liabilities by 4.5 percentage points to 6 percent in March. As a result, an estimated MNT 730 billion was released to the market. • Promoting incentives to reduce interest rates on FX deposits and discourage deposit dollarization by reducing remunerationa provided to banks by the amount equivalent to their FX deposits and interest-bearing FX current accounts. In addition to applying higher reserve requirements on FX liabilities, this measure was intended to support the stability of the financial system by addressing the growing currency mismatch. • Allowing the restructuring and extension of the maturity of consumer loans of troubled borrowers for up to 12 months and later extending the deadline to the end of the year. These measures are intended to reduce monthly payments of troubled borrowers and support private consumption.b • Purchasing assets and providing concessional loans. The BoM purchased municipal bonds to support its mortgage program (MNT 100 billion) targeting civil servants at the COVID-19 frontline; provided repo loans to banks to indirectly support loans for non-mineral exports and SMEs (MNT 230 billion), and directly provided concessional funding for gold companies under the “Gold-2” program (MNT 110 billion).
Under its supervisory function, the BoM made temporary changes to its regulations, effective until the end of 2020. These include: • Loosening the asset classification regulation starting in March so that borrowers’ credit history is not affected. Consumer and mortgage loans that are in arrears for less than 90 days will be considered normal (the regular cutoff is 15 days), those in arrears for 91 to 120 days will be considered past due (the regular cutoff is 90 days), and those that missed payments for over 121 days would be considered nonperforming. • Reducing the liquidity ratio for banks from 25 percent to 20 percent, so that banks could reduce their liquid assets and create room for issuing loans. • Encouraging banks to reduce their transaction fees and removing FX deposits from the insurance coverage to discourage deposit dollarization.
19 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Under the framework of a Parliamentary resolution to support the economy amid COVID-19, passed on April 29, the BoM took the following measures: • Allowing the freezing of payments of the subsidized mortgage program and extending its maturity for up to six months (later extended by eight more months). The subsidized mortgage borrowers were given a one-time option to restructure their loans without any interest accrual on their balance starting May 1. As of June 19, 38,270 borrowers had restructured their loans and delayed payments of MNT 121 billion MNT. In November, the freeze period was extended by eight more months and is expected to delay payments of MNT 310 billion. • Continuing to finance the subsidized mortgage program. As agreed under the IMF Extended Fund Facility program and the World Bank’s Economic Management Support Operation series, BoM financing of the subsidized mortgage program ended on January 1, 2020. However, the Law on Pandemic Preparedness and Response of April 2020 reauthorized BoM’s financing of the program, which currently amounts to about MNT 245 billion.
Source: BoM. Note: a. The BoM provides some remuneration to banks for their assets held at the central bank in accordance with the reserve requirement. b. The option to restructure is usually not restricted by the BoM. However, loans issued before January 1, 2019, were not capped by the ceiling of 60 percent set on the debt-service-to-income ratio and a 30-month term limit. Restructuring these loans would have violated either one of these restrictions. The BoM therefore provided a one-time pardon on the term limit of 30 months to reduce the debt burden of households. to invest – explaining the limited impact of monetary rapidly, weakening income of households and lower policy easing on credit growth. A thorough clean-up profitability of the corporates have curtailed their of bank balance sheets post crisis may be needed to potential to borrow, as well. According to the NSO’s encourage fresh lending activity and thus support the survey, 64.2 percent of firms reported an income loss recovery. over 50 percent due to the COVID-19 shock. Corporate loan issuance has been declining in all sectors and The credit contraction was prolonged as consumers seems most severe in key sectors such as construction, and small businesses were severely hit by the COVID-19 trade, transportation, manufacturing, and mining (figure shock. Domestic credit contracted by about 5 percent in I.32). In addition to tighter conditions and weakening 2020, marking a contraction of 10 consecutive months. decliningdeclining in in all all sectors sectors and and seems seems most most severe severe in in key key income,sectors sectors thesuch such decelerating as as construction, construction, preference trade, trade, of householdstransportation, transportation, for While banks have tightened their loan issuance to manufacturing,manufacturing, and and mining mining (figure (figure I.32). I.32). In In addition additiondurable to to tighter tighter goods conditions conditions such as cars and and may weakening weakening have contributed income, income, tothe the corporates and households as loan quality deteriorated deceleratingdecelerating preference preference of of households households for for durable durable goods goodsdeclining such such loan as as cars issuancecars may may (figurehave have contributed contributedI.33). to to declining declining loanloan issuance issuance (figure (figure I.33). I.33). Figure I.32. Corporate loans issuance has been Figure I.33. Banks have also tightened new loan FiguredecliningFigure I.32 I.32 .across Corporate. Corporate sectors loans loans issuance issuance has has been been FigureFigureissuance I.33 I.33. Banks. toBanks individuals, have have also also entrepreneurs, tightened tightened new new and loan loan SMEs decliningdeclining across across sectors sectors issuanceissuance to to individuals, individuals, entrepreneurs, entrepreneurs, and and SMEs SMEs CorporateCorporateCorporate loans loans loans issuance issuance issuance (a (a 12 12-month12‐month‐month rollingrolling rolling sum, sum, y/y) y/y) y/y) IndividualIndividualIndividual loans loans issuance loans issuance issuance (a (a 12 12 ‐(amonth‐ month12-month rolling rolling rolling sum, sum, sum, y/y) y/y) y/y) Agriculture Salary and pension backed 70%70% Agriculture Salary and pension backed MiningMining 50%50% DepositDeposit backed backed loans loans 60%60% ManufacturingManufacturing CreditCredit card card 50%50% ConstructionConstruction OthersOthers TradeTrade 40%40% 30%30% EntrepreneursEntrepreneurs and and SMEs SMEs TransportationTransportation HouseholdHousehold loan loan 30%30% OtherOther 20%20% CorporateCorporate loans loans 10%10% 10%10% 0%0% -10%-10% -10%-10% -20%-20% -30%-30% -30%-30% Jun-20 Jun-19 Oct-20 Oct-19 Jun-20 Jun-19 Apr-20 Apr-19 Feb-20 Feb-19 Oct-20 Oct-19 Jun-20 Jun-19 Apr-20 Apr-19 Feb-20 Feb-19 Dec-20 Dec-19 Dec-18 Oct-20 Oct-19 Jun-20 Jun-19 Apr-20 Apr-19 Feb-20 Feb-19 Dec-20 Dec-19 Dec-18 Aug-20 Aug-19 Oct-20 Oct-19 Apr-20 Apr-19 Feb-20 Feb-19 Dec-20 Dec-19 Dec-18 Aug-20 Aug-19 Dec-20 Dec-19 Dec-18 Aug-20 Aug-19 Aug-20 Aug-19 Sources: BoM; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Sources:Sources: BoM; BoM; World World Bank Bank staff staff estimates. estimates. Sources:Sources: BoM; BoM; World World Bank Bank staff staff estimates estimates
AssetAsset quality quality of of the the banking banking system system has has deteriorated deteriorated notably, notably, reflecting reflecting the the impact impact of of the the pandemic. pandemic. 20TheThe nonperforming nonperforming loans loans (NPLs) (NPLs) of of commercial commercial banks banks reached reached MNT MNT 2 2trillion trillion by by December, December, a a10 10 percent percent increaseincrease relative relative to to end end‐2019.‐2019. The The NPL NPL ratio ratio (nonperforming (nonperforming loans loans to to total total outstanding outstanding loans) loans) increased increased toto 11.7 11.7 percent percent in in December December from from 10.1 10.1 percent percent in in December December 2019 2019 (figure (figure I.34). I.34). Past Past‐due‐due loans loans have have been been increasingincreasing more more rapidly. rapidly. The The amount amount of of past past‐due‐due loans loans reached reached about about MNT MNT 1.3 1.3 trillion trillion from from MNT MNT 816 816 billionbillion in in December December 2019. 2019. The The ratio ratio of of past past‐due‐due loans loans to to total total loans loans jumped jumped to to 7.4 7.4 percent percent in in December December fromfrom 4.5 4.5 percent percent at at end end‐2019.‐2019. Problematic Problematic loans loans (NPLs (NPLs and and past past‐due‐due loans) loans) are are likely likely to to rise rise once once forbearanceforbearance on on recognition recognition of of these these loans loans expires expires as as planned planned by by July July 2021. 2021. According According to to the the BoM, BoM, as as of of DecemberDecember 2020, 2020, about about 45 45 percent percent of of total total loans loans in in the the banking banking sector sector were were affected affected by by the the pandemic, pandemic, whilewhile 60 60 percent percent of of them them were were restructured restructured by by freezing freezing interest interest payments payments and/or and/or principal. principal. Consequently, Consequently, thethe actual actual size size of of problematic problematic loans loans (both (both NPLs NPLs and and past past‐due‐due loans) loans) could could reach reach as as high high as as 37 37 percent percent of of totaltotal loans. loans. Across Across sectors, sectors, the the mining mining sector sector claimed claimed the the highest highest proportion proportion of of loans loans affected affected by by the the COVIDCOVID‐19‐19 shock shock (46 (46 percent), percent), followed followed by by construction construction (38 (38 percent), percent), trade trade (35 (35 percent), percent), and and real real estate estate (26(26 percent) percent) (figure (figure I.35). I.35).
3232
ECONOMIC PERFORMANCE AND PROSPECTS
Asset quality of the banking system has deteriorated The adequacy of loan loss provisions (LLP) for both notably, reflecting the impact of the pandemic. corporate and individual loans is uncertain.25 As of The nonperforming loans (NPLs) of commercial December 2020, LLP for corporate loans stood at MNT banks reached MNT 2 trillion by December, a 10 1.2 billion. This covers over 80 percent of NPLs and percent increase relative to end-2019. The NPL ratio around half of the value of problematic loans (NPLs (nonperforming loans to total outstanding loans) + past due loans), (figure I.36). The LLP coverage increased to 11.7 percent in December from 10.1 of problematic loans for the mining, construction, percent in December 2019 (figure I.34). Past-due loans manufacturing, and trade sectors ranged between 33 have been increasing more rapidly. The amount of past- and 77 percent, while these sectors combined account due loans reached about MNT 1.3 trillion from MNT for about 70 percent of total problematic loans. 816 billion in December 2019. The ratio of past-due Meanwhile, 51 percent of the value of problematic loans to total loans jumped to 7.4 percent in December loans issued to individuals is currently covered by from 4.5 percent at end-2019. Problematic loans (NPLs provisions (figure I.37). The weakest provisioned loans and past-due loans) are likely to rise further once are car loans. forbearance on identification of these loans expires as planned by July 2021. According to the BoM, as of The banking system remains liquid. The liquidity ratio September 2020, over 20 percent of total loans in (liquid assets to total assets) has been trending up the banking sector were affected by the pandemic, since June 2020 and reached 40.6 percent in December and additional loans may become problematic once 2020, its highest in the past two years (figure I.38). regulatory forbearance is scaled back. Across sectors, Bank reserves stood at 15.9 percent of total deposits the mining sector claimed the highest proportion of in December 2020, above the reserve requirement loans affected by the COVID-19 shock (46 percent), ratios (15 percent for FX deposits and 6.5 percent for followed by construction (38 percent), trade (35 MNT deposits). However, this is a reduction from 25.6 percent), and real estate (26 percent) (figure I.35). percent in April 2020 mainly due to a steady increase in FX deposits (denominator) until September 2020.26 Figure I.34. Loan quality has deteriorated Figure I.35. …mainly in the mining, construction, and notably…Figure I.34. Loan quality has deteriorated notably… tradeFigure sectors I.35. …mainly in the mining, construction, Figure I.34. Loan quality has deteriorated Figure I.35. …mainly in the mining, construction, and NPLs and past‐due loans in percent to outstanding loans Increaseand trade of problematic sectors loans by sector (in billions of MNT) NPLs notably…and past-due loans in percent to outstanding loans trade sectors 12% 700 NPLs and past‐due loans in percent to outstanding loans IncreaseIncrease of problematicof problematic loans loansNew by NPLs by sector sector and past-due(in (in billions billions loans of ofsince MNT) MNT) Dec 2019
12% 700 600 NewOutstanding NPLs and past-due NPLs and loans past-due since Dec loans 2019 in Dec 2019 10% 600 500 Outstanding NPLs and past-due loans in Dec 2019 10% Past-due loans 500 Past-due loans 400 8% NPLs 400 8% NPLs 300 300 6% 6% 200 200 100 4% 4% 100
0 0 Jul-19 Jul-20 Jul-19 Jul-20 Jan-19 Jan-20 Jan-19 Jan-20 Sep-19 Sep-20 Sep-19 Sep-20 Mar-19 Mar-20 Nov-19 Nov-20 Mar-19 Mar-20 May-19 May-20 Nov-19 Nov-20 May-19 May-20 MiningMining Construction Construction Trade Trade Real estate Real estate Agriculture Agriculture
Sources: BoM; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Sources: BoM;Sources: World BoM; Bank World staff Bank estimates. staff estimates. Sources:Sources: BoM; BoM; World Bank Bank staff staff estimates. estimates.
There are limited provisions for pandemic‐related loan losses, as loan loss provisions (LLP) remain low There are limited provisions for pandemic‐related23 loan losses, as loan loss provisions (LLP) remain low for both corporate and individual loans.23 As of December 2020, LLP for corporate loans stood at MNT for both1.2 corporate billion. Although and individual this covers loans. over 80 Aspercent of December of NPLs, it 2020,is equivalent LLP for to corporateonly half of loansthe problematic stood at MNT 1.2 billion.loans Although (NPLs + past this‐due covers loans) over (figure 80 I.36). percent The LLP of shareNPLs, of it problematic is equivalent loans to for only the mining,half of construction, the problematic loans (NPLsmanufacturing, + past‐due and loans) trade (figure sectors I.36). ranged The betweenLLP share 33 of and problematic 77 percent, loans while for these the mining,sectors combined construction, 25 The provisionaccount coverage for aboutratio is used 70 topercent determine of how total banks problematic are protected from loans. possi bleMeanwhile, losses on nonperforming only 51 percent credits. of the problematic manufacturing,26 The consistent increase and in thetrade FX deposits sectors since Marchranged 2020 wasbetween reversed in 33 October and 2020. 77 From percent, a peak of 31while percent these in September sectors 2020, the combined FX accountdeposit - loans totalfor depositabout issued ratio 70to reached individualspercent 25.7 percent of is totalcurrently in December problematic covered2020, its level by loans. inprovisions March– Meanwhile,April 2020.(figure I.37). only The 51 weakest percent provisioned of the problematic loans are car loans. loans issued to individuals is currently covered by provisions (figure I.37). The weakest provisioned21 loans are car loans.Figure I.36. Provisions to loans of risky sectors seem Figure I.37. Banks should also take hefty charges as low the COVID‐19 impact intensifies Figure I.36Sectoral. Provisions assessment to of loans corporate of risky loans, sectorsDecember seem 2020 FigureHousehold I.37 loans. Banks and SMEshould loans, also December take hefty2020 charges as
low Problematic loans (% of total loans in each sector) the80% COVID‐19 impact intensifies 69% Sectoral assessment of corporateLLP (% of problematic loans, December loans in each sector) 2020 Household70% loans and62% SME loans, December 2020 100% 87% 56% Problematic loans (% of total loans in each sector) 80%60% 51% 77% 69% 80% 68% 50% 44% LLP (% of problematic loans52% in each sector) 70% 62% 50% 48% 100% 60% 56% 87% 40% 40% Problematic loans (% of total loans in each category) 33% 60% 51% 77% 54% 30% 80% 40% 49% LLP (% of problematic loans in each category) 68% 50% 44% 52% 20% 14% 15% 50%20% 31% 33% 33% 48% 32% 60% 40% 9% 9% 7% 19% 40% 13% Problematic loans (% of total loans in each category) 33% 10% 0% 54% 30% 40% 49% 0% LLP (% of problematic loans in each category) Total Others Credit card Salary & Car loans 20% 14% 15% 20% 31% 33% 33% 32% pension 9% 9% backed loans7% 19% 13% 10% 0% Sources: BoM; World Bank staff estimates. 0% Note: Problematic loans = NPLs + past‐due loans. Total Others Credit card Salary & Car loans pension backed loans The banking system seems to remain liquid. The liquidity ratio (liquid assets to total assets) has been Sources:trending BoM; World up since Bank June staff 2020 estimates. and reached 40.6 percent in December 2020, its highest in the past two years Note: Problematic(figure I.38). loans Bank = NPLsreserves + past stood‐due atloans. 15.9 percent of total deposits in December 2020, above the reserve requirement ratios (15 percent for FX deposits and 6.5 percent for MNT deposits). However, this is a The banking system seems to remain liquid. The liquidity ratio (liquid assets to total assets) has been trending up since June 2020 and reached 40.6 percent in December 2020, its highest in the past two years 23 (figure I.38). The provisionBank reserves coverage ratio stood is used at to 15.9 determine percent how banks of total are protected deposits from in possible December losses on 2020,nonperforming above credits. the reserve requirement ratios (15 percent for FX deposits and33 6.5 percent for MNT deposits). However, this is a
23 The provision coverage ratio is used to determine how banks are protected from possible losses on nonperforming credits. 33
FigureFigure I.34 I.34. .Loan Loan quality quality has has deteriorated deteriorated FigureFigure I.35. I.35. …mainly …mainly in in the the mining, mining, construction, construction, and and notably…notably… tradetrade sectors sectors NPLsNPLs and and past past‐due‐due loans loans in in percent percent to to outstanding outstanding loans loans IncreaseIncrease of of problematic problematic loans loans by by sector sector (in (in billions billions of of MNT) MNT)
12%12% 700700 NewNew NPLs NPLs and and past-due past-due loans loans since since Dec Dec 2019 2019
600600 OutstandingOutstanding NPLs NPLs and and past-due past-due loans loans in in Dec Dec 2019 2019 10%10% Past-duePast-due loans loans 500500
400400 8%8% NPLsNPLs
300300 6%6% 200200
4%4% 100100
00 Jul-19 Jul-19 Jul-20 Jul-20 Jan-19 Jan-19 Jan-20 Jan-20 Sep-19 Sep-19 Sep-20 Sep-20 Mar-19 Mar-19 Mar-20 Mar-20 Nov-19 Nov-19 Nov-20 Nov-20 May-19 May-19 May-20 May-20 MiningMining Construction Construction Trade Trade Real Real estate estate Agriculture Agriculture
Sources:Sources: BoM; BoM; World World Bank Bank staff staff estimates. estimates. Sources:Sources: BoM; BoM; World World Bank Bank staff staff estimates. estimates.
ThereThere are are limited limited provisions provisions for for pandemic pandemic‐related‐related loan loan losses, losses, as as loan loan loss loss provisions provisions (LLP) (LLP) remain remain low low forfor both both corporate corporate and and individual individual loans. loans.2323 As As of of December December 2020, 2020, LLP LLP for for corporate corporate loans loans stood stood at at MNT MNT 1.21.2 billion. billion. Although Although this this covers covers over over 80 80 percent percent of of NPLs, NPLs, it it is is equivalent equivalent to to only only half half of of the the problematic problematic loansloans (NPLs (NPLs + + past past‐due‐due loans) loans) (figure (figure I.36). I.36). The The LLP LLP share share of of problematic problematic loans loans for for the the mining, mining, construction, construction, manufacturing,manufacturing, andand tradetrade sectorssectors rangedranged betweenbetween 3333 andand 7777 percent,percent, whilewhile thesethese sectorssectors combinedcombined accountaccountMONGOLIA for for about about ECONOMIC 70 70 percent percent UPDATE of of total total From problematic problematicRelief to Recovery loans. loans. Meanwhile, Meanwhile, only only 51 51 percent percent of of the the problematic problematic loansloans issued issued to to individuals individuals is is currently currently covered covered by by provisions provisions (figure (figure I.37). I.37). The The weakest weakest provisioned provisioned loans loans areare car car loans. loans. Figure I.36. Provisions to loans of risky sectors Figure I.37. Banks should also take hefty charges FigureFigure I.36 I.36. .Provisions Provisions to to loans loans of of risky risky sectors sectors seem seem FigureFigure I.37 I.37. .Banks Banks should should also also take take hefty hefty charges charges as as lowlowseem low thetheas COVID COVID the COVID-19‐19‐19 impact impact impact intensifies intensifies intensifies SectoralSectoralSectoral assessment assessment assessment of of corporateof corporate corporate loans, loans, December December 2020 2020 2020 HouseholdHouseholdHousehold loans loans and and loans SME SME and loans, loans, SME loans,December December December 2020 2020 2020
ProblematicProblematic loans loans (% (% of of to totaltal loans loans in in each each sector) sector) 80%80% 69%69% LLPLLP (% (% of of problematic problematic loans loans in in each each sector) sector) 70%70% 62%62% 100%100% 87%87% 56%56% 60%60% 51%51% 77%77% 80%80% 68%68% 50%50% 44%44% 52%52% 50%50% 48%48% 60%60% 40%40% 40%40% ProblematicProblematic loans loans (% (% of of tota total loansl loans in in each each category) category) 33%33% 54%54% 30%30% 40%40% 49%49% LLPLLP (% (% of of problematic problematic loans loans in in each each category) category) 20%20% 14%14% 15%15% 20%20% 31%31% 33%33% 33%33% 32%32% 9%9% 9%9% 7%7% 19%19% 13%13% 10%10% 0%0% 0%0% Total Total Others Others Credit Credit card card Salary Salary & & Car Car loans loans pensionpension backedbacked loans loans
Sources:Sources: BoM; BoM; World World Bank Bank staff staff estimates. estimates. Sources: BoM; World Bank staff estimates. Note:Note: Problematic Problematic loans loans = = NPLs NPLs + + past past‐due‐due loans. loans. Note: Problematic loans = NPLs + past-due loans.
TheThe banking banking system system seems seems to to remain remain liquid. liquid. The The liquidity liquidity ratio ratio (liquid (liquid assets assets to to total total assets) assets) has has been been However, the risk of currency mismatch remains high in mounting external pressures, particularly in the first half trendingtrending up up since since June June 2020 2020 and and reached reached 40.6 40.6 percent percent in in December December 2020, 2020, its its highest highest in in the the past past two two years years the banking system. The share of foreign liabilities in of the year. Deposit dollarization has declined somewhat (figure(figure I.38). I.38). Bank Bank reserves reserves stood stood at at 15.9 15.9 percent percent of of total total deposits deposits in in December December 2020, 2020, above above the the reserve reserve the banking system is almost triple the size of foreign in recent months amid an improving current account requirementrequirement ratiosratios (15(15 percentpercent forfor FXFX depositsdeposits andand 6.56.5 percentpercent forfor MNTMNT deposits).deposits). However,However, thisthis isis aa assets, which exposes banks to high risks of currency balance and sequential policy measures by the BoM, mismatch. In fact, FX deposits reached 31 percent of including setting higher reserve requirements on FX total deposits in September 2020, the highest rate in deposits and removing its insurance coverage in case 2323 Thetwo The provision years,provision while coverage coverage FX loans ratio ratio were is is used used 9 percentto to determine determine of total how how loans banks banks are areof protected protectedbank failures from from (seepossible possible box lossesI.4). losses Nevertheless, on on nonperforming nonperforming the large credits. credits. gap (figure I.39). Credit risk associated with exchange rate3333 between deposit dollarization and credit dollarization fluctuation is now relatively moderate as banks have in times of an uncertain external environment exposes significantly tightened their condition for FX loans banking system balance sheets to significant fluctuations over the past few years. In contrast, households and in the exchange rate. reductioncorporates fromhave ramped25.6 percent up their in FX April deposits 2020 following mainly due to a steady increase in FX deposits (denominator) reduction from 2425.6 percent in April 2020 mainly due to a steady increase in FX deposits (denominator) until Septemberuntilreduction September 2020. from 25.6 2020. percent24 in April 2020 mainly due to a steady increase in FX deposits (denominator) Figureuntil I.38. SeptemberThe liquidity 2020. of the24 banking system Figure I.39. …however, the banking system remains Figurehas remained I.38Figure. The steady... I.38 liquidity. The liquidity of the ofbanking the banking system system FigureFigurevulnerable I.39 I.39. …however,. …however, to risk ofthe thecurrency banking banking mismatch system system remainsremains has remainedFigurehas remained steady... I.38. The steady... liquidity of the banking system vulnerableFigurevulnerable I.39 to . risk to…however, risk of ofcurrency currency the banking mismatch mismatch system remains has remainedLiquid assets/total steady...Liquid assets/total asset (%) asset (%) 33% vulnerable33% FX deposit/totaltoFX riskdeposit/total of deposits:currency deposits: LHS LHS mismatch 39% 39% Bank reserves/depositsBankLiquid reserves/deposits assets/total (%) asset (%) (%) 33% FX loans/totalFX loans/totaldeposit/total loans: loans: deposits: LHS LHS LHS 2,8302,830 39% MNT/USD:FX loans/total RHS loans: LHS 2,830 Bank reserves/deposits (%) 28% 28% MNT/USD: RHS 2,7802,780 34% 34% 28% MNT/USD: RHS 2,780 2,7302,730 34% 2,730 23% 2,680 29% 23% 2,680 29% 23% 2,680 29% 2,630 2,630 18% 2,630 24% 18% 2,580 24% 18% 2,580 24% 2,580 2,530 19% 13% 2,530 13% 2,530 19% 19% 13% 2,480 2,4802,480 14% 8% 2,430 14% 14% 8% 8% 2,4302,430 Jun-20 Jun-19 Jun-18 Oct-20 Oct-19 Oct-18 Apr-20 Apr-19 Jun-20 Jun-19 Feb-20 Feb-19 Oct-20 Oct-19 Apr-20 Apr-19 Dec-20 Dec-19 Dec-18 Feb-20 Feb-19 Dec-20 Dec-19 Aug-20 Aug-19 Aug-18 Aug-20 Aug-19 Jun-20 Jun-19 Jun-18 Oct-20 Oct-19 Oct-18 Apr-20 Apr-19 Jun-20 Jun-19 Feb-20 Feb-19 Oct-20 Oct-19 Apr-20 Apr-19 Dec-20 Dec-19 Dec-18 Feb-20 Feb-19 Dec-20 Dec-19 Jun-18 Jun-19 Jun-20 Aug-20 Aug-19 Aug-18 Oct-18 Oct-19 Oct-20 Aug-20 Aug-19 Apr-19 Apr-20 Jun-19 Jun-20 Feb-19 Feb-20 Oct-19 Oct-20 Apr-19 Apr-20 Dec-18 Dec-19 Dec-20 Feb-19 Feb-20 Dec-19 Dec-20 Aug-18 Aug-19 Aug-20 Aug-19 Sources: BoM; World Bank staff estimates.Aug-20 Sources: BoM; World Bank staff estimates. Sources: BoM;Sources: World BoM; Bank World staff Bank estimates. staff estimates. Sources:Sources:Note: BoM; FX BoM; deposits World World Bank of Bank firms staff staff andestimates. estimates. households are considered Sources: BoM; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Note:liabilitiesNote: FX depositsFX fordeposits banks, of whileoffirms firms FX and loansand households arehouseholds assets of arebanks.are considered liabilitiesNote: FX depositsfor banks, of firmswhile andFX loanshouseholds are assets are considered of banks. liabilities liabilitiesRHS = for right banks,‐hand while side; LHSFX loans= left‐ handare assets side. of banks. RHSfor banks, = right while‐hand FX side; loans LHS are = assets left‐hand of banks. side. RHS =RHS right = right-hand‐hand side; side; LHS LHS = =left left-hand‐hand side. However, risk of currency mismatch remains high in the banking system. The share of foreign liabilities 22 inHowever, the banking risk of system currency is almost mismatch triple remains the size high of inforeign the banking assets, system.which exposes The share banks of foreign to high liabilities risks of However,in riskthe bankingof currency system mismatch is almost remains triple the high size in of the foreign banking assets, system. which Theexposes share banks of foreign to high liabilities risks of in the bankingcurrency system mismatch. is almost In fact, triple FX deposits the size reached of foreign 31 percent assets, of which total depositsexposes in banks September to high 2020, risks the of currencyhighest rate mismatch. in two years, In fact, while FX FXdeposits loans werereached 9 percent 31 percent of total of loanstotal (figuredeposits I.39). in SeptemberCredit risk associated2020, the currency mismatch. In fact, FX deposits reached 31 percent of total deposits in September 2020, the withhighest exchange rate in tworate years, fluctuation while FXis nowloans relatively were 9 percent moderate of total as banksloans (figurehave significantly I.39). Credit tightened risk associated their highest ratewithcondition inexchange two for years, FX rate loans while fluctuation over FX the loans pastis now were few relatively years. 9 percent In moderatecontrast, of total households as loans banks (figure have and I.39).significantlycorporates Credit have tightenedrisk rampedassociated their up with exchangetheircondition FX depositsrate for fluctuationFX loansfollowing over ismounting the now past relatively fewexternal years. pressures,moderate In contrast, particularly as households banks inhave the and firstsignificantly corporates half of the havetightened year. ramped However, their up conditiontheirdeposit for FX FX depositsdollarization loans over following thehas pastdeclined mounting few inyears. external recent In pressures,monthscontrast, amid particularlyhouseholds an improving in and the firstcorporatescurrent half ofaccount the have year. balance ramped However, and up their FX depositsdepositsequential dollarization following policy measures mounting has declined by the external BoM, in recent including pressures, months setting particularly amid higher an improvingreserve in the requirements first current half of account the on year.FX depositsbalance However, and deposit sequentialremovingdollarization its policy insurance has measures declined coverage by inthe inrecent BoM, case ofincluding months bank failures settingamid (see higheran boximproving reserveI.4). Nevertheless, requirements current accountthe onlarge FX gapbalancedeposits between andand sequentialdepositremoving policy dollarization itsmeasures insurance byand coverage the credit BoM, in dollarization caseincluding of bank setting in failures times higher (seeof an box reserve uncertain I.4). Nevertheless, requirements external theenvironment on large FX depositsgap betweenexposes and deposit dollarization and credit dollarization in times of an uncertain external environment exposes removingbanking its insurance system balancecoverage sheets in case to significantof bank failures fluctuations (see box in the I.4). exchange Nevertheless, rate. the large gap between banking system balance sheets to significant fluctuations in the exchange rate. deposit dollarization and credit dollarization in times of an uncertain external environment exposes
banking systemB. Outlook balance andsheets Risks to significant fluctuations in the exchange rate. B. Outlook and Risks The Mongolian economy is expected to recover moderately from the pandemic, as the latest outbreak B. OutlookThehas addedMongolian and considerable Riskseconomy uncertainty.is expected toMongolia recover ismoderately expected tofrom have the experienced pandemic, asits the first latest recession outbreak in a decadehas added in 2020considerable as real GDPuncertainty. is estimated Mongolia to contract is expected by 5.2 to percent have experienced (table I.2). 25its Mongolia first recession trails inthe a 25 The MongolianPhilippines,decade ineconomy 2020 Thailand, as isreal andexpected GDP Malaysia, is estimatedto recoverwhich are to moderately thecontract other byeconomies from5.2 percent the projected pandemic, (table toI.2). be as most theMongolia latest impacted outbreaktrails in the has addedPhilippines,EAP considerable region (box Thailand, I.6). uncertainty. The and mining Malaysia, and Mongolia whichservices are issectors, theexpected other particularly, economies to have are experiencedprojected expected to to be beits most severelyfirst impacted recession hit by inweak thein a decade inEAPexternal 2020 region demandas (box real I.6). GDPand The COVIDis mining estimated‐19 and containment services to contract sectors, measures. by particularly, 5.2 However,percent are expected (tablereal GDP I.2). to growth 25be Mongoliaseverely is projected hit trails by weak theto Philippines,externalaccelerate Thailand, demand to about and and Malaysia, 5 percentCOVID ‐which 19in 2021–22,containment are the supported other measures. economies by a However,renewed projected drivereal GDP ofto investmentbe growth most impactedis inprojected the mining in theto accelerate to about 5 percent in 2021–22, supported by a renewed drive of investment in the mining EAP regionsector (box (compounded I.6). The mining by andhigher services‐grade sectors,ore and particularly,increased production are expected of gold) to be despite severely delay hit by in weak the sector (compounded by higher‐grade ore and increased production of gold) despite delay in the external demand and COVID‐19 containment measures. However, real GDP growth is projected to accelerate to about 5 percent in 2021–22, supported by a renewed drive of investment in the mining sector (compounded24 The consistent increaseby higher in the‐ FXgrade deposits ore since and March increased 2020 was reversedproduction in October of 2020.gold) From despite a peak ofdelay 31 percent in the in 24 SeptemberThe consistent 2020, theincrease FX deposit in the― FXtotal deposits deposit since ratio March reached 2020 25.7 was percent reversed in December in October 2020, 2020. its levelFrom in a March–April peak of 31 percent2020. in September25 Our estimate 2020, of the real FX GDP deposit growth―total for deposit 2020 contrasts ratio reached squarely 25.7 with percent overoptimistic in December growth 2020, assumptionsits level in March–April of the 2021 2020. budget, 25 whichOur consideredestimate of a real 1 percent GDP growth contraction for 2020 in 2020 contrasts and 7.2 squarely percent with growth overoptimistic in 2021 (see growth box I.3). assumptions of the 2021 budget, which considered a 1 percent contraction in 2020 and 7.2 percent growth in 2021 (see box I.3). 24 The consistent increase in the FX deposits since March 2020 was34 reversed in October 2020. From a peak of 31 percent in September 2020, the FX deposit―total deposit ratio reached 25.7 percent34 in December 2020, its level in March–April 2020. 25 Our estimate of real GDP growth for 2020 contrasts squarely with overoptimistic growth assumptions of the 2021 budget, which considered a 1 percent contraction in 2020 and 7.2 percent growth in 2021 (see box I.3).
34
ECONOMIC PERFORMANCE AND PROSPECTS
B. Outlook and Risks OUTLOOK AND The Mongolian economy is expected to recover moderately from the pandemic, as the latest outbreak has added considerable uncertainty. RISKS Mongolia is expected to have experienced its first recession in a decade in 2020 as real GDP is estimated to contract by 5.2 percent (table I.2).27 Mongolia trails the Philippines, Thailand, and Malaysia, which are the other economies projected to be most impacted in the EAP region (box I.6). The mining and services sectors, particularly, are expected to be severely hit by weak external demand and COVID-19 containment measures. However, real GDP growth is projected to accelerate to about 5 percent in 2021-22, supported by a renewed drive of investment in the mining sector (compounded by higher-grade ore and increased production of gold) despite delay in the production schedule of Oyu Tolgoi’s underground development.28 Private investment backed by FDI and domestic credit (mainly corporate loans) will remain a key contributor to growth in 2021-22, especially in mining, manufacturing, and transport services. Private consumption will also support growth in the medium term. Monetary policy is expected to be tightened in the medium term as inflation and external sector pressures re-emerge. Inflation moderated in 2020 driven by weak domestic demand, lower imports, and negative credit growth. However, it will pick up gradually in 2021–22, while exceeding the BoM’s medium-term target as economic activity recovers.29 Moreover, relatively higher fiscal spending in 2020 compared to the previous two years and the expected recovery of domestic credit could generate inflationary pressures in 2021.30 Our base case is built on the continued commitment of the monetary authorities to price stability keeping inflation within the central bank’s target, which would eventually help lower inflation expectations. Interventions in the foreign exchange market are expected to be limited to smoothing excessive volatility, allowing more flexibility in exchange rate movements, and rebuilding international reserves. Further policy rate cuts are unlikely as the external environment remains uncertain and the central bank’s policy rate is already at a historical low (6 percent). In addition, the reserve requirement ratio stands at 6.5 percent, its lowest level since the 2008–09 global financial crisis, leaving little room for decreasing it further to induce liquidity into the financial system. Recently introduced monetary policy tools such as long-term repo transactions (which has availed MNT 230 billion to banks in Q4 2020 and up to MNT 250 billion
27 Our estimate of real GDP growth for 2020 contrasts squarely with overoptimistic growth assumptions of the 2021 budget, which considered a 1 percent contraction in 2020 and 7.2 percent growth in 2021 (see box I.3). 28 This increase in the gold production outlook is the result of initiatives implemented by Oyu Tolgoi that have brought the higher-grade gold-bearing ore from the South West pit forward into 2020 and 2021. The plan also allows for copper production growth of 315 percent from 2022 to 2028 as well as gold production growth of 140 percent in the same time frame. 29 Through the approval of 2021 monetary policy guidelines, the BoM reduced its inflation target rate for 2021–23 to 6 percent, with a +/-2-percentage- point band. 30 IMF 2012. 23 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
is expected in Q1 2021) could put further pressure on amount to approximately over 9 percent of GDP, which the domestic FX market amid weak FX inflows.31, 32 was financed mainly by external concessional lending and a drawdown of the government’s deposits in the Further loan forbearance by the BoM could lead to sovereign wealth fund. With a sizable revenue shortfall unintended effects including on economic growth in the and fiscal relief measures, government debt is estimated medium term. As indicated earlier, the asset quality of to have risen in 2020 before declining gradually starting several banks has been threatened amid diminishing from 2021. However, Mongolia’s debt ratio remains high corporate earnings over the past few months. In are projected to decline to 2 percent of GDP during among2021–23 comparators from 2.6 percent(figure I.40). of GDP in 2020 and 2.3 addition,percent the in forbearance 2019.31 measures could be masking a significant amount of problematic loans as discussed above.After By a September rise in 2020, 2020, the over government 20 percent debt of ‐ theto‐ GDP Figure I.40. The government debt-to-GDP ratio isFigure estimated I.40. Theto have government risen in debt2020‐to in‐GDP many ratio is bankingratio sector is expected loan book to haddecline been again reportedly in the impacted outer years selectedestimated peers to have risen in 2020 in many selected by COVID-19.with favorable Therefore, debt advancing dynamics bank in reformspart driven would by a peers be criticalcyclical to recovery. support growth Before in the the mediumCOVID‐19 term outbreak, as GovernmentGovernment debt (in percent debt (in of percent GDP) of GDP) 100 severalbroadly banks, prudent especially fiscal management those exposed in 2017–19 to sector- led to Chile a sharp reduction in government debt, giving the distressed loans, lower earnings, and insufficient capital, 80 China government some room to craft a fiscal response. The may be vulnerable. Kazakhstan combination of increased spending and an expected 60 The decline 2021 in budget revenue and collection the is medium-term estimated to widen fiscal the Malaysia 40 frameworkfiscal deficit for 2021 considerably - 23 are broadlyand lead consistent to an increase with in Mongolia government debt. The three phases of stimulus fiscal consolidation and the debt reduction objective. 20 Peru The packages government’s combined Medium-Term amount to Fiscalapproximately Framework over 9 Philippines projectspercent an overall of GDP, budget which deficit was of 1.5financed percent mainlyof GDP, by 0
2011 2012 2013 2014 2015 2016 2017 2018 2019 Russia external concessional lending and a drawdown of the 2020f 2021f 2022f on average, in 2021-23. However, under less optimistic government’s deposits in the sovereign wealth fund. Sources: revenue projections, we project that the overall Sources: IMF IMF 2020; 2020; World World Bank staffBank estimates. staff estimates. With a sizable revenue shortfall and fiscal relief fiscal deficit would average about 1.9 percent ofGDP measures, government debt is estimated to have risen in 2020 before declining gradually starting from during 2021-23. Financial support from multilateral 2021. However, Mongolia’s debt ratio remains high among comparators (figure I.40). and bilateral donors would be necessary to ensure Risks
sustainable financing of the deficit. InterestTable I.2 .payments, Key macroeconomic There is a indicators large band of uncertainty around the baseline reflecting projected concessional financing, are projected 2016forecast, 2017 with2018 both upside2019 2020eand downside 2021f risks.2022f In the to decline to 2 percent of GDP during 2021–23 from 2.6 near term, Annual the percent biggest change risk unless is the indicated inability otherwise to contain Real GDP growth, at constant market prices 33 1.4 5.4 7.0 5.0 ‐5.2 4.3 5.4 percent of GDP in 2020 and 2.3 percent in 2019. the latest outbreak, resulting in a prolonged lockdown. Private Consumption ‐2.2 5.4 12.4 9.9 2.0 3.6 4.5 After a rise in 2020, the government debt-to-GDP ratio This would take a significant toll on public health and Government Consumption 10.6 ‐1.8 ‐0.8 11.5 17.5 ‐5.1 1.6 is expected to decline again in the outer years with the economy in the coming months. Other risks to the Gross Fixed Capital Formation 0.5 35.6 21.3 23.5 ‐16.3 9.0 10.0 favorable debt dynamics in part driven by a cyclical growth outlook include the impact of further waves Exports, Goods and Services 13.8 14.8 24.0 9.1 ‐5.0 13.4 7.4 recovery. Before the COVID-19 outbreak, broadly of the COVID-19 global pandemic on commodity Imports, Goods and Services 12.7 24.8 30.9 22.3 ‐9.0 14.1 8.4 prudent fiscal management in 2017–19 led to a sharp prices (especially coal and copper), a relaxation of Real GDP growth, at constant factor prices 1.2 5.3 7.2 5.2 ‐5.2 4.3 5.4 reduction in government debt, giving the government the government’s commitment to reforms after the Agriculture 6.2 1.8 4.5 8.4 10.8 5.0 6.0 some room to craft a fiscal response. The combination of COVID-19 pandemic, weather-related shocks (drought/ Industry (incl mining) ‐0.4 0.7 7.9 3.1 ‐11.0 6.3 5.4 increased spending and an expected decline in revenue floods, a harsh winter), and limited progress on banking Services 1.1 7.7 4.7 5.8 ‐5.7 2.5 5.2 collection is estimated to widen the fiscal deficit sector reforms (box I.5). A downside scenario of the Inflation (CPI, end‐period) 0.9 6.4 8.1 5.2 2.3 5.0 7.0 considerably and lead to an increase in government outlook could materialize if the impact of COVID-19 Current account balance (% of GDP) ‐6.3 ‐10.2 ‐16.8 ‐15.4 ‐3.3 ‐7.7 ‐8.3 debt. The three phases of stimulus packages combined persists in advanced economies exacerbated by trade Financial and Capital account (% of GDP) 7.6 24.5 17.4 21.1 9.2 11.8 13.2 Net Foreign Direct Investment (% of GDP)* 1.1 12.7 16.3 16.5 12.5 14.0 15.0 31 The recent renewal of the border bottleneck with China following the domestic contagion of the COVID-19 in Mongolia is an additional external sector pressure.Fiscal In Balance fact, coking (% coalof GDP)** prices in China recently soared to a four-year‐15.3 high‐ 3.8after Mongolia’s2.6 first 1.4local transmission‐9.5 of‐2.7 the COVID-19‐1.9 by mid- November 2020 resulted in emergency measures. These measures have slowed operations at the border crossings. Some traders have recently continued to lift MongolianPrimary coal Balance prices after (% notingof GDP) firm coking coal demand from Chinese‐10.1 end-users.0.4 5.8 3.7 ‐6.9 ‐0.3 0.1 32 The MonetaryPublic Policy Debt Committee (% of GDP)*** decided on December 18th that up to MNT87.6 250 billion84.7 in funding72.6 would69.0 be provided79.4 to non-mining77.7 exporters73.0 and SMEs in Q1 2021. 33 One key feature*In 2016, of thethe government’snet FDI number debt excluded management the transactions strategy is ofto Oyusubstitute Tolgoi ‐expensive2 project financingdomestic indebt May–June with concessional 2016. borrowing and foreign debt obtained through** Development refinancing Bank on ofpreferential Mongolia terms,(DBM) resultingspending in is excludeda considerable from fiscaldecline balance ni interest and paymentsmonitored in separately. 2017-18. 24 31 One key feature of the government’s debt management strategy is to substitute expensive domestic debt with concessional borrowing and foreign debt obtained through refinancing on preferential terms, resulting in a considerable decline in interest payments in 2017–18. 36
ECONOMIC PERFORMANCE AND PROSPECTS
Table I.2. Key macroeconomic indicators 2016 2017 2018 2019 2020e 2021f 2022f Annual percent change unless indicated otherwise Real GDP growth, at constant market prices 1.4 5.4 7.0 5.0 -5.2 4.3 5.4 Private Consumption -2.2 5.4 12.4 9.9 2.0 3.6 4.5 Government Consumption 10.6 -1.8 -0.8 11.5 17.5 -5.1 1.6 Gross Fixed Capital Formation 0.5 35.6 21.3 23.5 -16.3 9.0 10.0 Exports, Goods and Services 13.8 14.8 24.0 9.1 -5.0 13.4 7.4 Imports, Goods and Services 12.7 24.8 30.9 22.3 -9.0 14.1 8.4 Real GDP growth, at constant factor prices 1.2 5.3 7.2 5.2 -5.2 4.3 5.4 Agriculture 6.2 1.8 4.5 8.4 10.8 5.0 6.0 Industry (incl mining) -0.4 0.7 7.9 3.1 -11.0 6.3 5.4 Services 1.1 7.7 4.7 5.8 -5.7 2.5 5.2 Inflation (CPI, end-period) 0.9 6.4 8.1 5.2 2.3 5.0 7.0 Current account balance (% of GDP) -6.3 -10.2 -16.8 -15.4 -3.3 -7.7 -8.3 Financial and Capital account (% of GDP) 7.6 24.5 17.4 21.1 9.2 11.8 13.2 Net Foreign Direct Investment (% of GDP)* 1.1 12.7 16.3 16.5 12.5 14.0 15.0 Fiscal Balance (% of GDP)** -15.3 -3.8 2.6 1.4 -9.5 -2.7 -1.9 Primary Balance (% of GDP) -10.1 0.4 5.8 3.7 -6.9 -0.3 0.1 Public Debt (% of GDP)*** 87.6 84.7 72.6 69.0 79.4 77.7 73.0 *In 2016, the net FDI number excluded the transactions of Oyu Tolgoi-2 project financing in May–June 2016. ** Development Bank of Mongolia (DBM) spending is excluded from fiscal balance and monitored separately. ***General government debt data exclude SOE debt and the central bank liability from the People’s Bank of China swap line. uncertainty between the United States and China. These used its available monetary and fiscal space to offset the events could severely cripple global demand, the price negative economic impacts of the COVID-19 pandemic. of key export commodities (particularly copper), and However, with the Bank of Mongolia’s policy rate now financial markets. Additionally, weather-related shocks at a historically low level, monetary policy space is (including potential risk of the dzud34) could affect limited to stimulate the economy if the pandemic non-mining exports (for example, meat and cashmere) persists. In addition, other monetary policy tools such and thus adversely impact the income of poor and as quantitative easing measures (including the recent vulnerable herders. Finally, the failure to gradually introduction of a long-term repo instrument) could return to fiscal discipline, as foreseen in the 2021 decrease the BoM’s space for further liquidity support. budget, could precipitate a deterioration in investor and After a sharp rise in 2020 largely driven by the COVID-19 consumer confidence and derail the incipient recovery. response package, government debt is expected to Inadequate recapitalization of the banking sector could remain elevated and thus erode the existing fiscal space. exacerbate these risks and furthermore affect planned Therefore, rebuilding fiscal buffers is a key priority in the official sector support. On a positive note, the Financial medium term. Action Task Force removed Mongolia from the list of External financing pressures could reemerge in the countries with inadequate protection against money medium term. Although exports are expected to laundering and terrorist financing, commonly referred to recover notably in 2021–22, an expected renewed as the “grey list.” This would positively affect FDI inflows drive in imports of investment-related merchandise and and boost the credibility of the financial sector. services will likely keep the current account in the red A shrinking fiscal and monetary space could pose in the coming years. Unless further external financing challenges to the Mongolian economy if the COVID-19 is timely and successfully mobilized, a higher current pandemic continues throughout 2021. Mongolia has account deficit could easily translate into a deficit in
34 Dzud “is a Mongolian term for a severe winter in which large number of livestock die, primarily due to starvation due to being unable to graze, in other cases directly from the cold” (https://en.wikipedia.org/wiki/Zud_(Mongolia). 25 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Box I.5. Medium-term Banking Sector Strengthening Program for 2020–2023
On January 29, 2020, the Economic Standing Committee of the Parliament passed a resolution that authorized the Bank of Mongolia to implement the Medium-Term Banking Sector Strengthening Program for 2020–23. The program has five main objectives with detailed actions and expected outcomes: 1. To reduce ownership concentration of the banking sector and improve its governance, the BoM shall, among others, require banks to change their form from limited liability companies (LLCs) to joint stock companies (JSCs), limit the sum of shares with voting rights and offer some shares to the public, and make necessary changes in the legal framework to ensure the rights of the minority stakeholders. As a result, banks’ shareholding structure would be more diversified, and bank funding sources could be improved with public participation and oversight. 2. To continue enhancing the banking supervision and regulatory instruments to international standards, the BoM shall introduce prudential ratios conforming with the Basel standards, establish a legal framework for risk-based supervision, and collaborate with relevant authorities for effective enforcement. An expected outcome is a flexible risk-based banking supervision regulatory environment. 5. To provide specialized banking licenses with requirements tailored to their operations and business 3. To successfully complete the International Monetary Fund (IMF) Extended Fund Facility Program, the BoM shall 5. models,To provide the specialized BoM shall buildbanking an effectivelicenses withlegal requirementsframework to issuetailored specialized to their bankingoperations licenses, and business support ensure that banks raise their additional capital in full from legitimate sources, take necessary actions on banks models,introduction the BoMof FinTech shall build to the an banking effective sector, legal andframework modify theto issue supervisory specialized methodology banking licenses, accordingly. support that failed to meet the capital requirement, and make an effort to reach an agreement with the IMF to complete introduction of FinTech to the banking sector, and modify the supervisory methodology accordingly. theSources: sixth review. BoM; minutesAs a result, of the the Economic resilience Standing and soundness Committee of meeting the banking on January system 29, will2020. be improved, and long-term
economicSources: growth BoM; minutes will be of sustained. the Economic Standing Committee meeting on January 29, 2020. A shrinking fiscal and monetary space could pose challenges to the Mongolian economy if the COVID‐ 4. To enhance the effectiveness of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), the BoM 19 pandemic continues throughout 2021. Mongolia has used its available monetary and fiscal space to shallA shrinking enhance thefiscal AML/CFT and monetary regulatory spaceframework could for pose banks challenges and the effectiveness to the Mongolian of its supervision economy with if relevant the COVID ‐ offset the negative economic impacts of the COVID‐19 pandemic. However, with the Bank of Mongolia’s authorities,19 pandemic support continues correspondent throughout banking 2021. relationships Mongolia of banks, has used and improveits available requirements monetary and and supervision fiscal space of to policy rate now at a historically low level, monetary policy space is limited to stimulate the economy if the bankoffset shareholders the negative and theireconomic paid-in impacts capital. of the COVID‐19 pandemic. However, with the Bank of Mongolia’s policypandemic rate nowpersists. at a historicallyIn addition, low other level, monetary monetary policy spacetools issuch limited as toquantitative stimulate the easing economy measures if the 5. To provide specialized banking licenses with requirements tailored to their operations and business models, the (includingpandemic thepersists. recent In introduction addition, other of a longmonetary‐term repo policy instrument) tools such could as quantitativedecrease the easing BoM’s measuresspace for BoMfurther shall liquiditybuild an effective support. legal After framework a sharp to rise issue in specialized 2020 largely banking driven licenses, by the support COVID introduction‐19 response of FinTech package, to(including the banking the sector, recent and introductionmodify the supervisory of a long methodology‐term repo accordingly.instrument) could decrease the BoM’s space for governmentfurther liquidity debt support. is expected After to a sharpremain rise elevated in 2020 and largely thus drivenerode bythe the existing COVID fiscal‐19 response space. Therefore, package, Sources: rebuildinggovernmentBoM; minutes fiscal of debt the buffers Economic is expected is Standing a key to priority Committee remain in meetingelevatedthe medium on Januand aryterm. thus 29, 2020.erode the existing fiscal space. Therefore, rebuildingExternal financing fiscal buffers pressures is a key could priority reemerge in the medium term. the balanceExternalin ofthe payments. medium financing Despite, term. pressures Althoughthe extension could exports reemerge of swap are FigureFigure I.41 .I.41. The Thesize ofsize external of external bonds bonds maturing maturing during 2022–24 is significant lines withinexpected the the People’s medium to recover Bank term. of notably Although China in and 2021–22,exports successful arean Figure I.41. The size of external bonds maturing during Paymentduring schedule 2022–24 of key is sovereign significant bonds (million US$) refinancingexpected of immediate torenewed recover payments notablydrive of ininUS$570 2021–22,imports million, anof 2022–24 is significant a total of expectedinvestmentUS$2.1 billion renewed‐related in sovereign drivemerchandise externalin imports debt and isof PaymentPayment scheduleO/W schedule refinanced of key of sovereignthrough key sovereignthe "Nomad" bonds bonds bond(million (US$600 (million US$) mn) US$) still due investmentservices during 2021–24 will‐ relatedlikely keep (figure themerchandise I.41).current35 In account addition, and in O/WGovernment refinanced international through the bonds "Nomad" bond (US$600 mn) delayed implementationtheservices red willin the likely ofcoming ongoingkeep theyears. reformscurrent Unless (includingaccount further in Government international bonds fiscal consolidationtheexternal red infinancing the and coming isthe timely years. banking and Unless successfully sector) further and a mobilized, a higher current account deficit 200 less effectiveexternal response financing to the is timelypandemic and couldsuccessfully affect could easily translate into a deficit in the Mongolia’smobilized, sovereign a ratings higher andcurrent reduce account the odds deficit of 200 balancecould easily of payments. translate Despite, into a deficitthe extension in the refinancing under favorable conditions. Although gross 800 balanceof swap linesof payments. with the People’sDespite, theBank extension of China reserves reached a historically high level of US$4.5 370 600 600 ofand swap successful lines with refinancing the People’s of Bank immediate of China 800 billion (over eight months of imports) at end-2020, and 370 600 600 paymentsand successful of US$570 refinancing million, a totalof immediate of US$2.1 130 it is expectedbillionpayments to in remain sovereign of US$570 at that external million, level adebtin total the is of mediumstill US$2.1 due 33 term, it is billionduringstill below in2021–24 sovereign 100 percent (figure external of I.41).the debtIMF’s In is Assessingaddition, still due 2021130 2022 2023 2024 Sources: MoF; BoM; World Bank staff estimates. Reserve Adequacydelayedduring 2021–24 metricimplementation (a (figureratio between I.41).of ongoing33 100In addition,and reforms 150 Sources: MoF;2021 BoM; World2022 Bank staff estimates.2023 2024 36 percent isdelayed(including considered implementation adequate).fiscal consolidation of ongoing and reforms the Sources: MoF; BoM; World Bank staff estimates. (includingbanking sector) fiscal and consolidation a less effective andresponse the to the pandemic could affect Mongolia’s sovereign ratings 35 The People’sbankingand Bank reduce of China sector) swapthe and lineodds with a less theof BoM refinancingeffective was renewed response under for another favorableto three the years. pandemic conditions.Also, no largecould repayments Although affect ofMongolia’s the gross public reservesdebt sovereign are due reacheduntil ratings2022, a partly thanks historicallyto a successful issuancehigh level of a US$600 of US$4.5 million billioninternational (over bond seven in September months 2020 of(with imports) a maturity atof 5.5 end years‐2020, with a and5.1 percent it is coupon).expected This to issuance (i) helpedand reaffirmreduce market the sentimentodds of toward refinancing Mongolia; (ii) underhelped repurchase favorable three-fourths conditions. of a US$500 Although million bond gross due inreserves 2021, and one-fifthreached of a a US$1.0 billionremainhistorically bond due atin 2022; that high and levellevel (iii) contributed inof theUS$4.5 mediumto inter billionest savings term, (over of approximatelyit seven is still months below US$27 ofmillion100 imports) percentper year, ataccording ofend the‐ 2020,to IMF’sthe government. and Assessing it is expected Reserve to 36 The assessingAdequacy reserve adequacy metric metric (a ratio reflects between potential 100 balance-of-payments and 150 percent FX liquidity is considered needs in adverse adequate). circumstances34 and is used to assess the adequacy of FXremain reserves at against that potential level in FX theliquidity medium drains (see term, IMF 2016). it is still below 100 percent of the IMF’s Assessing Reserve Adequacy metric (a ratio between 100 and 150 percent is considered adequate).34 26 Box I.6. Global and regional outlook and risksa
Box I.6. Global and regional outlook and risksa
33 The People’s Bank of China swap line with the BoM was renewed for another three years. Also, no large repayments of the public debt are due until 2022, partly thanks to a successful issuance of a US$600 million international bond in September 2020 33 The People’s Bank of China swap line with the BoM was renewed for another three years. Also, no large repayments of the (with a maturity of 5.5 years with a 5.1 percent coupon). This issuance (i) helped reaffirm market sentiment toward Mongolia; (ii) public debt are due until 2022, partly thanks to a successful issuance of a US$600 million international bond in September 2020 helped repurchase three‐fourths of a US$500 million bond due in 2021, and one‐fifth of a US$1.0 billion bond due in 2022; and (with a maturity of 5.5 years with a 5.1 percent coupon). This issuance (i) helped reaffirm market sentiment toward Mongolia; (ii) (iii) contributed to interest savings of approximately US$27 million per year, according to the government. helped repurchase three‐fourths of a US$500 million bond due in 2021, and one‐fifth of a US$1.0 billion bond due in 2022; and 34 The assessing reserve adequacy metric reflects potential balance‐of‐payments FX liquidity needs in adverse circumstances and (iii) contributed to interest savings of approximately US$27 million per year, according to the government. is used to assess the adequacy of FX reserves against potential FX liquidity drains (see IMF 2015). 34 The assessing reserve adequacy metric reflects potential balance‐of‐payments FX liquidity needs in adverse circumstances and is used to assess the adequacy of FX reserves against potential 38FX liquidity drains (see IMF 2015). 38
ECONOMIC PERFORMANCE AND PROSPECTS
Box I.6. Global and regional outlook and risksa
The massive shock triggered by the COVID-19 pandemic and shutdown measures to contain it have plunged the global economy into a severe contractionb (figure I.42). In advanced economies, precautionary social distancing and stringent lockdowns in response to surging COVID-19 cases triggered an unprecedented collapse in the demand and supply of services in mid-2020, and the ensuing recovery has been dampened by a substantial resurgence of COVID-19 cases. The health and economic crisis triggered by COVID-19 caused emerging markets and developing economies (EMDE) output to shrink by an estimated 2.6 percent in 2020 - the worst rate since at least 1960. Excluding the recovery in China, the contraction in EMDE output in 2020 is estimated to have been 5 percent, reflecting recessions in over 80 percent of EMDEs-a higher share than during the global financial crisis, when activity shrank in about a third of EMDEs. The severity of the shock to EMDEs was uneven, depending on the intensity of pandemic-related domestic disruptions and the spillovers from the global recession. The worst-hit economies were those with extended periods of lockdowns combined with large domestic outbreaks or domestic policy uncertainty, and those that rely heavily on tourism and travel. Global economic output is expected to expand by 4 percent in 2021 but remain below pre-pandemic projections by more than 5 percent. This outlook is predicated on proper pandemic management and effective vaccination limiting the community spread of COVID-19 in many countries, and on continued monetary policy accommodation accompanied by diminishing fiscal support. Global growth is projected to moderate to 3.8 percent in 2022, weighed down by the pandemic’s lasting damage to potential growth. Although aggregate EMDE growth is envisioned to firm to 5 percent in 2021 and to moderate to 4.2 percent in 2022, the improvement largely reflects China’s expected rebound. Absent China, the recovery across EMDEs is anticipated to be far more muted, averaging 3.5 percent in 2021–22, as the pandemic’s lingering effects continue to weigh on consumption and investment. Despite the recovery, aggregate EMDE output in 2022 is expected to remain 6 percent below its pre-pandemic projection. The pandemic is expected to leave lasting scars on productivity, including through its effect on the accumulation of physical and human capital, which will exacerbate the downward trend in potential growth.
Figure I.42. Real GDP growth (percent) Figure I.43. World commodity price forecast (Index=nominal U.S. dollars, 2016=100)
Crude Oil Coking Coal Copper Gold
World Advanced economies Emerging market and developing countries
Sources: World Bank 2021; Consensus forecast. Sources: World Bank 2021; Consensus forecast.
Investment in EMDEs collapsed in 2020, following a decade of persistent weakness. Some recovery of investment growth is expected to expand in 2021 but will not be sufficient to offset the 2020 loss. Based on the experience of past epidemics, investment is likely to remain weak for several years following the COVID-19 pandemic. A supportive policy environment will be key to laying the groundwork for an investment rebound in EMDEs. The COVID-19 shock has triggered a surge in debt levels and has exacerbated debt-related risks in EMDEs, where even before the pandemic, a rapid debt buildup had raised concerns about debt sustainability and the possibility of financial crisis.
27 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Most commodity prices rebounded in the second half of 2020; however, the pickup in oil prices lagged the broader recovery in commodity prices due to the prolonged impact of the pandemic on global oil demand. Oil prices are forecast to remain close to current levels and average US$44 per barrel in 2021 before rising to US$50 per barrel in 2022. The main risk to this forecast relates to the evolution of the pandemic, with oil demand particularly susceptible to lockdown measures and reduced mobility; however, positive vaccine news has reduced this risk somewhat. Base metal prices were, on net, broadly flat in 2020, as sharp falls in the first half of the year were followed by a strong recovery in the second half due to rising demand from China. Prices are expected to increase 5 percent in 2021 alongside the expected rebound in global demand (figure I.43). Agricultural prices rose 4 percent in 2020, largely driven by supply shortfalls and stronger-than-expected demand in edible oils and meals. Some regions experienced localized food price spikes, and a decline in household incomes, particularly among the poorest populations, has increased the risk of food insecurity. Agricultural prices are forecast to see a further modest increase in 2021.
After a sharp slowdown to 0.9 percent in 2020, output in East Asia and Pacific (EAP) is projected to Figure I.44. East Asia and Pacific country forecasts expand 7.4 percent in 2021, to a level still around Real GDP growth (at market prices, y/y) 3 percent below pre-pandemic projections (figure I.44). Growth in China is projected to accelerate to 7.9 percent this year, reflecting the release of pent-up demand and a quicker-than-expected resumption of production and exports. Growth is expected to slow to 5.2 percent in 2022, well below its pre-pandemic potential rate, leaving output about 2 percent below pre-pandemic projections. In the rest of the region, the recovery is expected to be more protracted. Following last year’s contraction, output in the region excluding China is expected to expand by 4.9 percent in 2021 and 5.2 percent in 2022, to a level around 7.5 percent below pre-pandemic projections, with Source: World Bank 2021. significant cross-country variations.
While global growth is projected to recover in 2021, it will be weaker if a protracted pandemic requires an extension of control measures, the COVID-19 vaccine procurement and distribution are delayed, and a prolonged disruption to economic activity exacerbates financial stress resulting in a widespread financial and debt crises. For instance, fiscal measures have replaced a proportion of lost incomes and mitigated default risk, loan guarantees have helped keep businesses afloat, and liquidity provision by central banks has kept the financial system functional. However, if the impact of the pandemic continues to grow, financial crises may follow, resulting in a collapse in lending, a longer global recession, and a slower recovery. Even if the global financial system avoids a crisis, the debt accumulated in response to the pandemic may weigh on growth in the longer run.
Sources: World Bank 2020b; 2021. Note: a. This box draws heavily on World Bank (2021). b. World Bank 2021.
28 PERFORMANCE AND PROSPECTS
II. COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA
A. Channels of COVID-19 Shocks to Households 32 B. Impacts on Employment and Labor Income 34 C. Impacts on Non-labor Income 40 D. Potential Impacts on Poverty 41 E. Potential Mitigation Impacts of Policy Responses 45 29 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
II. COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA37
A. Channels of COVID-19 Shocks to some businesses remain closed and other containment Households measures continue as of end-January 2021.38
Mongolia went into nationwide lockdown for the Despite fewer confirmed cases in Mongolia than in second time on November 12, 2020. At the beginning neighboring countries, the household-level shocks of the COVID-19 outbreak, the Government of Mongolia caused by COVID-19 may be long-lasting and took early and decisive measures to prevent the disproportionally affect the poor and vulnerable. The inflow of COVID-19, including closures of its borders poor and vulnerable generally have limited resources and all schools (figure II.1). As confirmed cases grew to protect themselves and are therefore likely to be globally, greater travel restriction measures have been most exposed to the negative impacts of many shocks. imposed: the Trans-Siberian Railway and all inbound COVID-19-related shocks are no exception, and given international flights were suspended and the border their breadth and persistence, they have the potential with Russia was closed. The government also canceled to threaten the sustainability of poverty reduction Mongolia’s national Lunar New Year celebrations efforts. While the poverty rate in Mongolia declined and restricted travels in Ulaanbaatar and all 21 during 2016–18, the speed of poverty reduction has aimags (provinces). As these prompt containment and slowed, and much of the population is still clustered mobility restriction measures appeared to have been just above the national poverty line. When a shock hits, effective in preventing the local spread of COVID-19 these vulnerable households can easily fall back into in Mongolia, the government gradually lifted strict poverty while the poor can sink into deeper poverty. measures from May 31 and schools reopened on COVID-19-related shocks may lead to adverse effects September 1, 2020. However, in mid-November, after on various dimensions of household well-being the first locally transmitted cases were verified, the through various transmission channels. Figure II.2 government imposed a strict nationwide lockdown, illustrates how the effects of COVID-19 are transmitted and while strict containment measures were lifted, at the household and individual level. The impact of
37 This chapter was prepared by Ikuko Uochi (Economist) and Lydia Kim (Consultant) of the Poverty and Equity Global Practice at the World Bank. 38 As of January 31, 2021, 1,779 cases were confirmed (https://coronavirus.jhu.edu/region/mongolia). 30
II. COVID ‐19 IMPACTS ON HOUSEHOLDS IN MONGOLIA35
A. Channels of COVID‐19 Shocks to Households Mongolia went into nationwide lockdown for the second time on November 12, 2020. At the beginning of the COVID‐19 outbreak, the Government of Mongolia took early and decisive measures to prevent the inflow of COVID‐19, including closures of its borders and all schools (figure II.1). As confirmed cases grew globally, greater travel restriction measures have been imposed: the Trans‐Siberian Railway and all inbound international flights were suspended and the border with Russia was closed. The government also canceled Mongolia’s national Lunar New Year celebrations and restricted travels in Ulaanbaatar and all 21 aimags (provinces). As these prompt containment and mobility restriction measures appeared to have been effective in preventing the local spread of COVID‐19 in Mongolia, the government gradually lifted strict measures from May 31 and schools reopened on September 1, 2020. However, in mid‐ COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA November, after the first locally transmitted cases were verified, the government imposed a strict nationwide lockdown, and while strict containment measures were lifted, some businesses remain closed and other containment measures continue as of end‐January 2021.36 Figure II.1. Authorities tightened containment measures as the number of COVID-19 cases increased Figure II.1. Authorities tightened containment measures as the number of COVID‐19 cases increased StringencyStringency of government of government measures measures to to contain contain COVID COVID-19‐19 andand confir confirmedmed COVID-19 COVID ‐cases19 cases 60 100 New COVID-19 cases Stringency index 90 50 80
70 40 60 New COVID-19 cases
30 50 Stringency index
40 20 30
20 10 10
their breadth0 and persistence, they have the potential to threaten the sustainability of poverty0 reduction efforts. While the poverty rate in Mongolia declined during 2016–18, the speed of poverty reduction has slowed, and much of the population is still clustered just above the national poverty line. When a shock hits,Source: these Oxford vulnerable University (OxCGRT).households can easily fall back into poverty while the poor can sink into deeper Source:Note: Oxford University (OxCGRT). poverty. The stringency index measures the stringency of government containment measures, including school and workplace Note:closings The stringency and restrictions index measures on gatherings the stringency in response of government to COVID cont‐19.ainment Higher measures, values indicate including more school stringent and workplace measures. closings and restrictions on gatherings in response to COVID-19. Higher values indicate more stringent measures. COVID‐19‐related shocks may lead to adverse effects on various dimensions of household well‐being throughDespite variousfewer confirmed transmission cases channels. in Mongolia Figure than II.2 in illustrates neighboring how countries, the effects the of household COVID‐19 ‐arelevel transmitted shocks COVID-19atcaused the household can by COVID be divided ‐and19 may individual into be economiclong ‐level.lasting andThe and socialimpact disproportionally ofto COVID service‐19 affect deliverycan thebe dividedpoor disruptions and into vulnerable. economic in health, The and education, poor social impacts.impacts.and vulnerableThe Theeconomic economic generally impact impact have is furtherlimited is further dividedresources divided into to protectintoand labor themselvessocial income, protection. andnon are‐labor This therefore income,section likely ofand the to price bereport most shocks will laboronexposed income, consumption. to non-labor the negative Given income, the impacts relatively and ofprice many limited shocks shocks. number on COVID primarilyof ‐COVID19‐related focus‐19 infections shocks on the are economic in no Mongolia, exception, aspects households and of COVID-19given are consumption.more likely Given to be the impacted relatively by limitedindirect number economic of shocks.shocks The at social the household impacts of level the pandemicand explore are how mainly the COVID-19related infections to service in delivery Mongolia, disruptions households in health,are more education, impacts and of social COVID-19 protection. are translated This section from of the aggregate report 35 This chapter was prepared by Ikuko Uochi (Economist) and Lydia Kim (Consultant) of the Poverty and Equity Global Practice at likelywillthe to Worldprimarily be impacted Bank. focus by on indirect the economic economic aspects shocks. ofThe COVID shocks‐19 shocks to households at the household and individuals level and and explore estimate how the socialthe36 As impactsimpacts of January of 31, COVIDthe 2021, pandemic ‐1,77919 are cases translated are were mainly confirmed from related ( https://coronavirus.jhu.edu/region/mongoliaaggregate potential shocks toeffects households of COVID-19 and). individuals on the poverty and estimaterate. the potential effects of COVID‐19 on the poverty rate. 41 Figure II.2. Transmission channels of COVID-19 impacts to households Figure II.2. Transmission channels of COVID‐19 impacts to households
Direct: lost earnings to illness Labor income Indirect: earnings/employ- ment shocks Household Coping Strategies: Economic • Reduced total impact food/education/health Remittance consumption COVID-19 • Household labor/entering Shocks on Non-labor income households work force Public transfers • Use saving, borrowing • Selling assets • Risk pooling Price changes and • Government assistance and goods’ shortage other aids, etc. Consumption Out of pocket cost of health care Social impact Service disruption
Sources: Modified based on World Bank (2020a). Sources: Modified based on World Bank (2020a).
B. Impacts on Employment and Labor Income The COVID‐19 Household Phone Response Survey (HRPS) shows that the pandemic caused significant31 disruptions in employment (box II.1).37 Almost 19 percent of workers who had been working pre‐crisis38 had stopped working by the end of May 2020, with two‐thirds out of work due to COVID‐19‐related issues such as mandated business closures, quarantine, or other reasons caused by mobility restrictions. Between June and September, some recovery in employment was visible, as nearly half of those who had
37 Respondents who “stopped working” in the HRPS refers to those who did not work for permanent or temporary reasons during the week preceding the survey, while they had worked in previous rounds or pre‐pandemic. Please note that the definition of “stopped working” in the HRPS is different from the definition of unemployment in the Labor Force Survey, which refers to a person who is actively looking for a job during the last 30 days preceding the survey and is ready to start to work but is unable to find work. 38 In the HRPS, pre‐crisis and pre‐pandemic are defined as before January 27, 2020. 42
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
B. Impacts on Employment and Labor other reasons caused by mobility restrictions. Between Income June and September, some recovery in employment was visible, as nearly half of those who had been out The COVID-19 Household Phone Response Survey of work by late May had returned to work by early (HRPS) shows that the pandemic caused significant September. However, with the rise in COVID-19 cases disruptions in employment (box II.1).39 Almost 19 in early November and stricter containment measures, percent of workers who had been working pre-crisis40 the share of individuals working pre-crisis who were no had stopped working by the end of May 2020, with longer working rose to 51 percent by early December two-thirds out of work due to COVID-19-related issues 2020 (figure II.3). such as mandated business closures, quarantine, or
Box II.1. Mongolia COVID-19 Household Response Phone Survey
To explore transmission channels of COVID-19 shocks to households, the analysis in this report uses data from three rounds of the Mongolia COVID-19 Household Response Phone Survey (HRPS). The HRPS was jointly implemented by the National Statistics Office of Mongolia (NSO) and the World Bank with the aim of monitoring the economic and social impacts of the pandemic at the household level. The HRPS drew a subsample of 2,000 households from the nationally representative 2018 Household Socio-Economic Survey (HSES) and aimed to monitor and collect information from the same households across multiple rounds. The first round took place from May 22 to 29, 2020; the second from August 31 to September 7, 2020; and the third from December 3 to 15, 2020. The second lockdown occurred in mid-November to December 2020, which overlaps with the reference period for the third round of the HRPS. Comparison of the third-round results to other rounds in the HRPS or to any other surveys would be sensitive considering the timing and intensity of the containment measures. As the HRPS was phone-based, the sample is representative of households that have access to a telephone. Out of 16,454 households sampled in the 2018 HSES, 95.1 percent had a valid working phone number. Sampling weights were constructed to ensure unbiased estimates from the sample,a and the sample distribution of the HRPS is similar to that of the 2018 HSES on key household characteristics such as location, education level of household head, and poverty status. The HRPS questionnaire covers a range of topics, including knowledge and behavior associated with COVID-19, employment, family business, herders’ livelihood, income, access to food and basic services, methods of coping with the crisis, and safety nets.
Table II.1. Overview of HRPS Rounds 1–3
Round 1 Round 2 Round 3 Data collection period May 22 to 29, 2020 August 31 to September 7, December 3 to 15, 2020 2020 Implementation method Computer-assisted telephone interviewing (CATI) Number of respondents 1,333 households 1,212 households 1,147 households Response rate 66.7 percent (out of 90.9 percent (out of 1,333 94.6 percent (out of 1,212 2,000 households households interviewed in households interviewed in sub-sampled from Round 1) Round 2) 2018 HSES)
Sources: HPRS Rounds 1, 2, and 3; https://www.worldbank.org/en/country/mongolia/brief/monitoring-covid-19-impacts-on-households-in-mongolia. Note: a. Himelein 2014.
39 Respondents who “stopped working” in the HRPS refers to those who did not work for permanent or temporary reasons during the week preceding the survey, while they had worked in previous rounds or pre-pandemic. Please note that the definition of “stopped working” in the HRPS is different from the definition of unemployment in the Labor Force Survey, which refers to a person who is actively looking for a job during the last 30 days preceding the survey and is ready to start to work but is unable to find work. 40 In the HRPS, pre-crisis and pre-pandemic are defined as before January 27, 2020. 32 COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA
While the majority of these shocks to employment been particularly affected.41 Shares of those who appear to have been temporary, poorer workers were stopped working by December 2020 among the more likely to face long-term job losses. About 6 out industry sectors - namely, manufacturing, utilities, of 10 respondents to the HRPS who stopped working construction, and mining - reached 70 percent (figure between June and December 2020 indicated that they II.4). In particular, the construction and manufacturing had a job to return to once stringent containment sectors were heavily affected by the lockdown that measures have been lifted. Although this likelihood is occurred in mid-November to December 2020, which similar across the welfare distribution, poorer workers overlaps with the reference frame for the third round have been significantly more likely to face long-term of the HRPS. As many construction sites and factories unemployment: Among those who were working pre- reopened once mobility restrictions eased, disruptions pandemic, 21 percent of workers in the bottom 40 of in employment in the industry sector are likely to the welfare distribution had stopped working by June be temporary: nearly two out of three of those who and continued to be unemployed by December, while stopped working in the industry sector reported they just 11 percent of those in the top 60 had. have a job to return to. Private service sectors such as accommodation, restaurants, and transportation, as Although the employment impacts of the crisis have well as retail trade and other services (for example, extended across most economic sectors, industry, personal services and recreation/entertainment), tourism, hospitality, transportation, and trade have have also faced sizable employment shocks. While a
FigureFigure II.3. II.3. More More than than half half of workersof workers who who worked worked pre ‐ FigureFigure II.4. II.4. Large Large shares shares of of workers workers in in the the industry pandemicpre-pandemicFigure II.3. stopped More stopped thanworking half working byof workersthe secondby the who second lockdown worked pre ‐ Figureindustryand privateII.4. and Large services private shares services sectorsof workers facedsectors in theemployment faced lockdownpandemic stopped working by the second lockdown industryemploymentdisruptions and private disruptions services sectors faced Employment status change for those working pre‐pandemic employmentShare of workers disruptions who stopped working between EmploymentEmployment status status change change for for those those working working pre-pandemic pre‐pandemic ShareShare of workers of workers who stoppedwho stopped working working between between JanJan and and Dec Dec 2020, 2020, by by subsector subsector Jan and Dec 2020, by subsector
Private sector services 40 32 72 Private sector services 40 32 72
Industry 43 27 70 Industry 43 27 70
Other services 36 30 66 Other services 36 30 66
RetailRetail trade trade 34 34 26 26 60 60
PublicPublic admin, admin, education, education, 20 2015 1535 35 healthhealth
Agriculture 11 22 32 Agriculture 11 22 32
0 50 100 0 50 100 percent of respondents working pre-crisis percent of respondents working pre-crisis
not working but have a job to return to not working but have a job to return to not working and don't have a job to return to not working and don't have a job to return to
Sources:Sources: HRPS HRPS Rounds Rounds 1 and 1 and 3; World 3; World Bank Bankstaff estimates.staff estimates. Note: Industry includes mining, manufacturing, utilities, and Sources:Note: Industry HRPS includesRounds mining,1 and 3;manufacturing, World Bank utilities, staff estimates. and constru ction;construction;Note: private Industry sector private services includes sector include mining, services accommodation manufacturing, include accommodation and food utilities, services, and communication, finance, real estate and transportation. Other services includeandconstruction; food other services, service private activities;communication, sector arts, services entertainment, finance, include real a ndaccommodation estate recreation; and activities of households as employers; and activities of extraterritorial organizations.transportation.and food services, Other communication,services include other finance, service real activities; estate and arts,transportation. entertainment, Other and services recreation; include activities other of service households activities; as employers; and activities of extraterritorial organizations. arts, entertainment, and recreation; activities of households 41 These sectors are referred to as “affected sectors,” and workers engaged inas these employers; sectors are and referred activities to as of“affected extraterritorial workers” in organizations. this report. Although the employment impacts of the crisis have extended across most economic sectors, industry, 39 33 Althoughtourism, the hospitality, employment transportation, impacts of andthe tradecrisis have beenextended particularly across affected.most economic Shares sectors, of those industry, who tourism,stopped hospitality, working by transportation, December 2020 and among trade the have industry been particularlysectors―namely, affected. manufacturing,39 Shares of utilities, those who stoppedconstruction, working and by miningDecember―reached 2020 70among percent the (figureindustry II.4). sectors In particular,―namely, themanufacturing, construction utilities,and construction,manufacturing and sectors mining were―reached heavily 70affected percent by the(figure lockdown II.4). thatIn particular,occurred inthe mid construction‐November to and December 2020, which overlaps with the reference frame for the third round of the HRPS. As many manufacturing sectors were heavily affected by the lockdown that occurred in mid‐November to construction sites and factories reopened once mobility restrictions eased, disruptions in employment in December 2020, which overlaps with the reference frame for the third round of the HRPS. As many the industry sector are likely to be temporary: nearly two out of three of those who stopped working in constructionthe industry sites sector and reported factories they reopened have a job once to return mobility to. restrictionsPrivate service eased, sectors disruptions such as accommodation, in employment in therestaurants, industry sector and transportation, are likely to be as temporary: well as retail nearly trade andtwo otherout of services three of(for those example, who personal stopped services working in theand industry recreation/entertainment), sector reported they have have also a job faced to return sizable to. employment Private service shocks. sectors While sucha large as share accommodation, of those restaurants,working in and these transportation, service sectors as hadwell stoppedas retail workingtrade and between other services January (forand example,December personal 2020, these services andemployment recreation/entertainment), disruptions likely happenedhave also duringfaced sizablethe strict employment second lockdown, shocks. and While more a than large half share of those of those working in these service sectors had stopped working between January and December 2020, these employment disruptions likely happened during the strict second lockdown, and more than half of those
39 These sectors are referred to as “affected sectors,” and workers engaged in these sectors are referred to as “affected workers” in this report.
39 These sectors are referred to as “affected sectors,” and workers44 engaged in these sectors are referred to as “affected workers” in this report. 44
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
large share of those working in these service sectors decline of carried passengers, and another nationwide had stopped working between January and December lockdown from November 2020 halted the steady 2020, these employment disruptions likely happened recovery of passenger railway use that began over during the strict second lockdown, and more than the summer. Travel restrictions critically impacted half of those out of work have a job to return to.42 In tourism-related sectors (such as accommodations contrast, workers employed in the agriculture, public and restaurants), retail businesses, transportation, administration, health, and education sectors are by far and other services (such as personal services and less affected. Even under the second lockdown, only recreation). The number of tourists entering Mongolia about one-third of those were out of work. However, more than halved in the first quarter of 2020 compared once farmers and herders lose a job, they are less likely to the same period of 2019. It further declined to less to be able to return to the same job even after the than 10,000 people during the peak tourist season lockdown is lifted. in the second and third quarters (figure II.7). As 70 percent of tourists came to the country during the Two out of three workers who stopped working bet- second and third quarters in recent years, a prolonged ween January and December 2020 were employed in decline in tourism flows worsened the impact on the the aforementioned affected sectors. In 2019, about tourism sector. half of workers in Mongolia (48 percent of the employed population or 557,000 people) were engaged in the COVID-19-related mobility restrictions and disruptions affected sectors (figure II.5). However, among workers also decreased domestic private consumption in
who experienced job losses between the 40 onset of transportation, retail, hospitality, and other services, out theof crisiswork and have December a job 2020, to return almost 1.4to. times In thiscontrast, including workers personal employed services and in recreation.the agriculture, Figure II.8 public administration,share was from health, the affected and education sectors. Overall, sectors nearly are 3 by exhibitsfar less Googleaffected. mobility Even data,under which the second indicate lockdown, how onlyin about 10 workers one‐ whothird faced of those disruptions were were out employed of work. in However, busy certain once farmerstypes of andlocations herders are losecompared a job, to they a are less industries,likely to beand able 6 in 10to inreturn services. to the same job even afterfive-week the lockdown period from is lifted.early January to February 2020. Two out of three workers who stopped working betweenThe data January show a andsignificant December decline 2020 in the were number employed of Tourism-related service sectors were severely hit due trips to retail and recreation places, grocery stores, in the aforementioned affected sectors. In 2019, about half of workers in Mongolia (48 percent of the to early and prolonged travel restrictions. As shown and transportation stations during February to April employed population or 557,000 people) were engaged in the affected sectors (figure II.5). However, in figure II.6, the first lockdown, during which the and again during November to December 2020. In amongGovernment workers of who Mongolia experienced suspended job all losses international between particular, the onset a sharp of the drop crisis in visits and to Decemberthese places is2020, visible almost 1.4 timesflights, this road share and was rail from travel, the and affected closed sectors. nonessential Overall,in the lastnearly week 3 in of 10 February workers and who in mid-November, faced disruptions werebusinesses employed last in industries, February resulted and 6 in 10 a significantin services. when the government restricted nonessential travel
Figure II.5. Share of workersFigure in affectedII.5. Share sectors of workers in 2019 in affected sectors in 2019
Manufacturing Construction Mining Utilities Retail trade Transportation Other services Accommodations, restaurants Not affected
8 653 14 5 4 3 52
0 10 20 30 40 50 60 70 80 90 100 Percent of employed workers
Sources:Sources: NSO; NSO; LFS LFS 2019; 2019; WorldWorld Bank Bank staff staff estimates. estimates.
Tourism‐related service sectors were severely hit due to early and prolonged travel restrictions. As 42 While more than 60 percent of those working in services sectors including accommodation and restaurants, retail trade, transportation, professional or showntechnical in activities,figure real II.6, estate, the finance, first insurance, lockdown, information, duringand communication which had the stopped Government working by December of 2020, Mongolia previous rounds suspended of the HRPS all internationalshow that job lossesflights, were relativelyroad and small inrail these travel, sectors until and September closed 2020, nonessential before lockdown measures businesses were put inlast place. February resulted in a significant34 decline of carried passengers, and another nationwide lockdown from November 2020 halted the steady recovery of passenger railway use that began over the summer. Travel restrictions critically impacted tourism‐related sectors (such as accommodations and restaurants), retail businesses, transportation, and other services (such as personal services and recreation). The number of tourists entering Mongolia more than halved in the first quarter of 2020 compared to the same period of 2019. It further declined to less than 10,000 people during the peak tourist season in the second and third quarters (figure II.7). As 70 percent of tourists came to the country during the second and third quarters in recent years, a prolonged decline in tourism flows worsened the impact on the tourism sector.
40 While more than 60 percent of those working in services sectors including accommodation and restaurants, retail trade, transportation, professional or technical activities, real estate, finance, insurance, information, and communication had stopped working by December 2020, previous rounds of the HRPS show that job losses were relatively small in these sectors until September 2020, before lockdown measures were put in place. 45
COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA
Figure II.6. The number of carried passengers in Figure II.7. The number of tourists in 2020 was 2020Figure declined II.6.Figure The during number II.6. The the of number carriedfirst and ofpassengers carried second passengers inlockdowns 2020 in 2020 Figure considerably II.7. Figure The number II.7. lower The of number tourists than ofin in tourists previous2020 was in 2020years was declined duringdeclined the during first and the second first and lockdowns second lockdowns considerablyconsiderably lower than lower in previous than in years previous years 600 600 300 300 Flight RailwayFlight Railway 261 261 500 500 250 250229 229
400 400 200 200
142 142 300 300 150 132150 132 98 98 99 99 200 200 100 Figure II.6. The number of carried passengers in 2020 Figure70 II.7.100 The70 number75 of 75tourists in 2020 was declined during the first and second lockdowns considerably lower than in previous36 years 50 36 100 (thousands) tourists of Number 50
100 (thousands) tourists of Number 600 7 10 7 10 300 Number of carried passengers (thousands) passengers carried of Number 0 (thousands) passengers carried of Number 0 Flight Railway 0 0 261 500 250 229 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Jul-19 Jul-20 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Jul-19 Jul-20 Jan-19 Jan-20 Jan-19 Jan-20 Sep-19 Sep-20 Mar-19 Mar-20 Nov-19 Nov-20 Sep-19 Sep-20 May-19 May-20 Mar-19 Mar-20 Nov-19 Nov-20 May-19 May-20 400 Sources:Sources: NSO; NSO; WorldSources: World Bank NSO; Bank staff World staff estimates. estimates.Bank staff estimates. 200 Note:Note: Number Number ofNote: passengers of Numberpassengers includes of passengers includes both both domestic includes domestic andboth andinternational domestic international and travel. international travel. travel. 142 300 150 132 98 99 200 and COVIDordered‐19COVID ‐relatedbusiness‐19 mobility‐related and restrictionsschoolmobility closures.restrictions and disruptions Despite and disruptions also(figure decreased also100 decreased II.9, domestic70 panel domestic private b).75 consumption private Without consumption in appropriate in policy
transportation,transportation, retail, hospitality, retail, hospitality, and other and services, other services,including including personal personalservices andservices recreation. and recreation. Figure36 Figure an increase in mobility between April and November, responses50 and aid, these small firms are likely to face
100 (thousands) tourists of Number II.8 exhibitsII.8 Googleexhibits mobility Google data,mobility which data, indicate which howindicate busy how certain busy types certain of locationstypes of locationsare compared are compared to a 10 to a COVID-19-related disruptions have continued having a significant operating constraints as 7 their access to five (thousands) passengers carried of Number ‐0weekfive period‐week from period early from January early to January February to February2020. The 2020. data Theshow data a0 significant show a significant decline in decline the number in the number detrimentalof trips to ofeffect retail trips and onto retail recreationlivelihoods and recreation places, - particularly grocery places, stores, groceryduring and stores, transportationfinance and transportation is relatively stations during stations limited, February during and their Februaryto April employers to April might Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Jul-19 Jul-20 Jan-19 Jan-20 Sep-19 Sep-20 Mar-19 Mar-20 Nov-19 Nov-20 and again duringMay-19 November to DecemberMay-20 2020. In particular, a sharp drop in visits to these places is visible the second lockdownand again duringin November November 2020 to December - in the retail, 2020. In particular,have to a lay sharp off drop employees in visits to or these reduce places working is visible hours. hospitality,Sources:in the last NSO; personalin week the World last of Bank services,Februaryweek staff of estimates.Februaryand and in recreation mid and‐November, in mid sectors,‐November, when theWage when government workersthe government restricted in the restricted nonessential trade and nonessential hospitalitytravel travel sectors and ordered business and school closures. Despite an increase in mobility between April and November, whichNote: are Number concentratedand ofordered passengers inbusiness urban includes andareas. both school domestic closures. and international Despite arean increase travel. also less in mobility likely between to be given April and employee November, benefits COVID‐19COVID‐related‐19 disruptions‐related disruptions have continued have continued having a havingdetrimental a detrimental effect on effect livelihoods on livelihoods―particularly―particularly during theduring second the lockdownsecond lockdown in November in November 2020―in 2020 thesuch ―retail,in the as hospitality, socialretail, insurancehospitality, personal and personalservices, paid services, leaveand (figure and II.9, TheCOVID affected‐19‐related service mobility sectors restrictions are characterized and disruptions by also decreased domestic private consumption in recreationrecreation sectors, which sectors, are which concentrated are concentrated in urban areas.in urban panel areas. c). Moreover, workers in the affected sectors relativelytransportation, high informality retail, hospitality, and low and otherskill services,levels, including personal services and recreation. Figure II.8 exhibits Google mobility data, which indicate how busygenerally certain have types lower of locations levels ofare education compared compared to a renderingFigure workersII.8.Figure The mobility II.8.in theseThe of mobility people sectors ofto people getmore certain to vulnerable get services certain was services significantly was significantly affected by affected government by government fiverestrictions‐week period from early January to February 2020. Theto others data show working a significant in sectors decline characterized in the number by greater to negative employmentrestrictions shocks. Over half of workers of trips 3to‐day retail moving 3and‐day average recreation moving of average Mongolia’s places, of Mongolia’s mobility grocery data mobility stores, at specific data andformality, at locationstransportation specific (%suchlocations change as stations public(% from change the administration, during baseline) from the February baseline) education, to April real in retail trade and transportation are self-employed and again100 during100 NovemberRetail &to recreation DecemberRetail & recreation 2020. In particular,estate, a sharp and finance. drop in visits Workplace to these closures places is visible and business (figure II.9, panel a). Grocery In & thepharmacyGrocery trade & pharmacy sector and in in the last80 week 80of February and in mid‐November, whendisruptions the government endanger restricted their nonessential business travel continuity, the accommodation and Transit restaurant stationsTransit stations sector, where, and ordered60 business60 and school closures. Despite an increaseand without in mobility job between security, low-skilledApril and November, and informal respectively,COVID‐1940 ‐related 44 percent disruptions and 70 have percent continued of workers having a detrimental effect on livelihoods―particularly 40 workers face a higher risk of losing their job and labor during the20 second lockdown in November 2020―in the retail, hospitality, personal services, and are paid employees,20 more than three-quarters are income sources. workingrecreation for 0small sectors, firms0 which with are fewer concentrated than 50 employees in urban areas. -20 -20 Figure II.8. The mobility of people to get certain services was significantly affected by government -40 -40
Figure Percentage change from baseline II.8. The mobility of people to get certain services was significantly affected by government restrictions restrictions Percentage change from baseline -60 -60 3‐day moving3-day averagemoving average of Mongolia’s of Mongolia’s mobility mobility data data at specificat specific locations locations (%(% change from from the the baseline) baseline) -80 -80 Feb-20 Mar-20Feb-20 Apr-20 Mar-20 May-20 Apr-20 Jun-20 May-20 Jul-20 Jun-20 Aug-20 Jul-20 Sep-20 Aug-20 Oct-20 Sep-20 Nov-20 Oct-20 Dec-20 Nov-20 Dec-20 100 Retail & recreation Sources: Google Community Mobility Report (as of December 30, 2020). Sources: Google CommunityGrocery & pharmacyMobility Report (as of December 30, 2020). Note: The80 baseline is the median value for the corresponding day of the week during the five‐week period Jan 3–Feb 6, 2020. Note: The baseline isTransit the medianstations value for the corresponding day of the week during the five‐week period Jan 3–Feb 6, 2020. 60
The affected40 The affectedservice sectorsservice aresectors characterized are characterized by relatively by relatively high informality high informality and low andskill lowlevels, skill levels, rendering workers in these sectors more vulnerable to negative employment shocks. Over half of 20 rendering workers in these sectors more vulnerable to negative employment shocks. Over half of
0
-20 46 46
-40 Percentage change from baseline -60
-80 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Sources:Sources: Google Google Community Community Mobility Mobility Report Report (as of December (as of December 30, 2020). 30, 2020). Note: The baseline is the median value for the corresponding day of the week during the five‐week period Jan 3–Feb 6, 2020. Note: The baseline is the median value for the corresponding day of the week during the five-week period Jan 3–Feb 6, 2020.
The affected service sectors are characterized by relatively high informality and low skill levels, 35 rendering workers in these sectors more vulnerable to negative employment shocks. Over half of
46
workers in retail trade and transportation are self‐employed (figure II.9, panel a). In the trade sector and in the accommodation and restaurant sector, where, respectively, 44 percent and 70 percent of workers are paid employees, more than three‐quarters are working for small firms with fewer than 50 employees (figure II.9, panel b). Without appropriate policy responses and aid, these small firms are likely to face significant operating constraints as their access to finance is relatively limited, and their employers might have to lay off employees or reduce working hours. Wage workers in the trade and hospitality sectors are also less likely to be given employee benefits such as social insurance and paid leave (figure II.9, panel c). Moreover,MONGOLIA workers ECONOMIC in the UPDATE affected From sectors Relief generally to Recovery have lower levels of education compared to others working in sectors characterized by greater formality, such as public administration, education, real estate, and finance. Workplace closures and business disruptions endanger their business continuity, and without job security, low‐skilled and informal workers face a higher risk of losing their job and labor incomeFigure sources.II.9. Lower-skilled individuals working in the informal sectors are most vulnerable Figure II.9. LowerPanel A.‐skilled individuals working in thePanel informal B. sectors are most vulnerable Panel C. Type of employment Enterprise size of wage workers Wage workers with social insurance Panel A. Type of employment Panel B. Enterprise size of wage workers Panel C. Wage workers with social insurance
Trade 44 55 Trade 43 33 24 Trade 71
Hotels, 70 30 restaurants Hotels, restaurants 38 53 8 Hotels, restaurants 63
Transportation 21 19 58 Transportation 9 31 61 Transportation 88
All non-farm 29 41 28 All non-farm All non-farm sectors 16 40 44 86 sectors sectors workers in retail trade and transportation are self‐employed (figure0 20 II.9, 40 panel 60 80 a). 100 In the trade sector and 0 20 40 60 80 100 0 20 40 60 80 100 in the accommodation and restaurant sector, where, respectively,wage(public) 44 percentwage(private) and 70 percent of workers less than 10 10-50 50 and more are paid employees, more than three‐quarters are workingself-employed for small firmsOthers with fewer than 50 employees (figure II.9, panel b). Without appropriate policy responses and aid, these small firms are likely to face significant operating constraints as their access Sources:to finance NSO; is relatively HSES 2018; limited, LFS 2018; and theirWorld employers Bank staff might estimates. Sources: NSO; HSES 2018; LFS 2018; World Bank staff estimates. have to lay off employees or reduce working hours. Wage workers in the trade and hospitality sectors are also less likely to be given employee benefits such as social insurance and paid leave (figure II.9, panel c). 2020. Among businesses that were still operating over Moreover, workers in the affected sectors generallyDespiteDespite have considerable considerable lower levels negative of educationnegative impacts compared impacts on employment to onothers Figure II.10. Non‐farm business owners were hit severely working in sectors characterized by greaterin employmentformality, particular such sectors, asin public particularthe administration, pandemic sectors, has education, led theto real even this period, income losses were significant, particularly Reduction in household income between December 2019 and estate, and finance. Workplace closures and business disruptions endanger their business continuity, and morepandemic widespread has led reductions to even inmore labor widespread income. Nearly December during 2020 the second lockdown, in which more than half without job security, low‐skilled and informal workers face a higher risk of losing their job and labor 6reductions out of 10 households in labor income. in Mongolia Nearly engaged 6 out of 10in labor 100of non-farm businesses experienced a 60 percent loss income sources. experiencedhouseholds a indecrease Mongolia in incomeengaged from in thislabor source or more in income compared 87to the same time in the Figure II.9. Lower‐skilled individuals working in theexperienced informal sectors a aredecrease most vulnerable in income from this Panel A. Type of employment Panel B. Enterprisecompared size of wage to workers the samePanel period C. Wage ofworkers previous with social year insurance (figure 80previous year. II.10).source Households compared with to the non-farm same businessesperiod of were 68 Trade 44 55 previous year (figure II.10). TradeHouseholds with Although57 nonagricultural sectors have been more Trademost likely43 33 to24 be affected, with almost71 9 out of 10 60 Hotels, non‐farm businesses were most likely to be likely to experience employment shocks, disruptions 70 30 Hotels, restaurantsparticipating38 53 households8 Hotels, suffering restaurants reductions63 in income income restaurants affected, with almost 9 out of 10 participating in supply chains and contractions in external demand from this source. According to the Household Response 40 36 Transportation 21 19 58 Transportationhouseholds9 31 61 suffering Transportationreductions in income Phone Survey (HRPS), by June 2020, more88 than 40 for livestock products have led to significant earnings All non-farm from this source. According to the Household 29 41 28 All non-farm All non-farm losses among rural herders. Most herders and farmers sectors 16 40 44 86 20 sectorspercentResponse of households Phone Survey operating (HRPS),sectors non-farm by June 2020,businesses 0 20 40 60 80 100 of source specified with households of Percent continued to work in the initial months of the pandemic, pre-pandemic0 20 40 60 80 had 100 temporarily or permanently0 20 40 60 80 100closed wage(public) wage(private) more than 40 percent of households operating less than 10 10-50 50 and more 0with very few reporting that they stopped working from self-employed Others theirnon ‐business,farm businesses and closures pre continued‐pandemic into Decemberhad JanuaryTotal labor to June. Wages However, employment Non-farm Agriculture disruptions in Sources: NSO; HSES 2018; LFS 2018; World Bank staff estimates.temporarily or permanently closed their income business agriculture have increased since then: By December business,Figure II.10. and Non-farm closures business continued owners wereinto hit Sources:2020, NSO, HRPS a third Round of 3; individuals World Bank staff who estimates. had been working Despite considerable negative impacts onDecember severely 2020. Among businesses that were Note: The sample is restricted to households with the specified employment in particular sectors, thestill Figure operating II.10. Non over‐farm this business period, owners income were hit lossesseverely source inof income agriculture for each before category the for the pandemic last 12 months. were no longer ReductionReduction in household in income household between income December between 2019 and pandemic has led to even more widespreadwere December significant, 2020December 2019particularly and December during 2020 the working. In addition, two out of three households reductions in labor income. Nearly 6 out of 10 100 engaged in agricultural activities experienced a households in Mongolia engaged in labor 87 experienced a decrease in income from this significant decline in agricultural income in 2020 80 47 68 (figure II.10). Many herders depend on the harvest source compared to the same period of previous year (figure II.10). Households with 57 60 of cashmere, which is the most lucrative livestock non‐farm businesses were most likely to be income product. However, contractions in the global demand affected, with almost 9 out of 10 participating 36 households suffering reductions in income 40 for cashmere that have coincided with the peak season from this source. According to the Household for harvesting cashmere has resulted in significant Response Phone Survey (HRPS), by June 2020, 20 Percent of households with specified source of of source specified with households of Percent negative impacts on herders’ cash income. Negative more than 40 percent of households operating non‐farm businesses pre‐pandemic had 0 income shocks to rural herders are particularly Total labor Wages Non-farm Agriculture temporarily or permanently closed their income business detrimental because income growth among this group business, and closures continued into Sources:Sources: NSO, NSO, HRPS HRPS Round Round 3; 3; World World Bank Bank staffstaff estimates. was the biggest driver of the recent poverty reduction December 2020. Among businesses that were Note:Note: The The sample sample is restrictedis restricted to householdsto households with with the the specified specified (between 2016 and 2018). still operating over this period, income losses sourcesource of ofincome income for for each each category category for for the the last last 12 months. were significant, particularly during the 36 47
COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA
While poor workers were more likely to experience distribution between June and December 2020, employment losses43 during the first half of 2020, both particularly during the second lockdown, when most employment and income losses were felt similarly businesses were ordered to close. across the welfare distribution during the second lockdown. Although poor households are more likely Given high participation among the wealthy in retail to work in agriculture - which was less affected by the trade and non-farm businesses, mandated closures had pandemic in terms of employment losses compared a significant impact on employment among the top to other sectors - engagement in low-skilled jobs in quintiles in the latter half of 2020. While the wealthy the above-mentioned affected sectors, particularly may have been less vulnerable to job losses during manufacturing, utilities, mining, and personal services, the first half of 2020, income losses were generally is also high among poorer workers. Generally, about felt across the welfare distribution throughout the two in three workers in the bottom 20 percent of the year, and more than half of households in all welfare welfare distribution are employed in low-skilled jobs.44 quintiles faced income losses in 2020 (figure II.11, Workers at the top of the welfare distribution are more panel B). Lower external and internal demand, business likely to have formal job protection or skilled jobs in closures, and reduced work hours have resulted in services that may be more amenable to working from lower wages and/or business profits throughout the home such as professions in public administration, distribution. The HRPS data indicate that, generally, finance, and other professional jobs. Indeed, workers the wealthy suffered greater percentage and absolute at the bottom of the welfare distribution, namely the losses than poorer households, although the marginal bottom 20 percent, were significantly more likely effect per tugrug on well-being is likely to be higher to face job losses between January and June 2020, for poorer households. This implies that the economic when mobility restrictions were still low and business contraction in 2020 has so far had a widespread impact closures were not mandated by the government across the welfare distribution. (figure II.11, panel A). However, disruptions in employment were more widespread across the
Figure II.11. Employment and income losses across welfare distribution FigureFigure II.11. II.11. Employment Employment and incomeand income losses losses across across welfare welfare distribution distribution PanelPanelPanel A. A. Stopped Stopped A. Stopped workingworking working due toto due COVID-19COVID to COVID‐19 ‐19 PanelPanelPanel B. Income B. B. Income Income loss loss between loss between between Dec Dec 2019 Dec 2019 2019and and Dec andDec 2020 Dec2020 2020 80 80 80 80 Jan - JunJan 2020 - Jun 2020Jun - DecJun 2020 - Dec 2020 70 70 69 69
60 60 58 58 60 60 54 54 54 54 53 53 50 50
36 36 40 40 40 40 31 31 29 29 27 27 30 30 25 25 Percent workers of Percent Percent workers of Percent 19 19 20 20 15 15 12 12 13 13 20 20 9 9 10 10 Percent of households with labor income labor with households of Percent 0 0 0 income labor with households of Percent 0 Q1 (poorest)Q1 (poorest) Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q1 Q1 Q2Q2 Q3 Q3 Q4 Q4 Q5 Q5 (wealthiest)(wealthiest) (poorest) (poorest) (wealthiest) (wealthiest)
Sources:Sources:Sources: NSO; NSO; HRPS NSO;HRPS 2020 HRPS2020 Rounds 2020Rounds 1 Roundsand 1 3;and World 1 3; and World Bank 3; Worldstaff Bank estimates. Bankstaff estimates.staff estimates. Note: TheNote: The sample sample The insample panelin panel Ain is panel restrictedA is restricted A is to restricted respondents to respondents to whorespondents were who the same werewho across werethe same roundsthe sameacross 1 and across rounds3. Panel rounds 1A anduses 1 3.those and Panel 3.who Panel A stopped uses A thoseuses wor kingthose who due who tostopped COVID-19-relatedstopped working working duereasons todue suchCOVID to as COVID ‐workplace19‐related‐19‐ relatedand reasons school reasons closur suches, suchas quarantine, workplace as workplace and and stay-at-home schooland school closures, orders closures, under quarantine, the quarantine, government’s and stayand containment‐ atstay‐home‐at‐home measures.ordersorders under under the government’s the government’s containment containment measures. measures.
Geographically,Geographically, urban urban households households have have been been FigureFigure II.12. II.12. Urban Urban workers workers were were more more likely likely to stop to stop more likely to face the economic repercussions of more likely to face the economic repercussions ofworking working in 2020 in 2020 COVIDCOVID‐19. ‐19.Employment Employment in thein thehighly highly affected affected sectorssectors is concentrated is concentrated in urban in urban areas: areas: 82 percent 82 percent 50 50 43 Employment losses include temporary work disruptions under nationwide lockdowns due to COVID-19. 44of NSO those andof thethose workingWorld workingBank 2020;in these Worldin these Banksectors 2018. sectors live livein urban in urban 40 40 40 40 36 36 areas,areas, mainly mainly Ulaanbaatar, Ulaanbaatar, which which is significantly is significantly 37 higherhigher than than the overallthe overall share share (62 percent)(62 percent) among among 30 30 all workers.all workers. Those Those living living in Ulaanbaatar in Ulaanbaatar or Aimag or Aimag
centerscenters were were at least at least 1.9 and 1.9 3.9and times 3.9 times more more likely likely 18 18 20 20 to stopto stop working working between between January January and andDecember December 2020 than those living in Soum centers and the 9 9 2020 than those living in Soum centers and the 10 10 countryside,countryside, respectively respectively (figure (figure II.12). II.12). In In Percent of respondents working pre-crisis working Percent respondents of Percent of respondents working pre-crisis working Percent respondents of
particular,particular, poor poor workers workers residing residing in urban in urban areas areas 0 0 are moreare more likely likely to be to engaged be engaged in informal, in informal, part ‐part‐ UlaanbaatarUlaanbaatar Aimag center Aimag center Soum center Soum center Countryside Countryside
time,time, and andsmall small businesses businesses in the in affectedthe affected sectors sectors Sources: Sources: NSO; NSO;HRPS HRPS2020 2020Round Round 3; World 3; World Bank Bankstaff staff and areand thusare thusexposed exposed to a tohigher a higher risk ofrisk job of losses job losses estimates. estimates. thanthan their their wealthier wealthier counterparts. counterparts. Note:Note: Ulaanbaatar Ulaanbaatar and aimag and aimag centers centers are considered are considered urban. urban. Due Dueto far to‐ reachingfar‐reaching impacts impacts across across various various sectors, sectors, the pandemicthe pandemic has affectedhas affected similarly similarly women women and and menmen in terms in terms of the of likelihoodthe likelihood of being of being out ofout work. of work. Compared Compared to men, to men, women women are moreare more likely likely to work to work in servicein service sectors sectors such such as education, as education, health, health, personal personal services, services, and hospitality,and hospitality, while while men men are moreare more likely likely to workto work in industry in industry sectors sectors such such as construction as construction and andmining. mining. As the As economicthe economic impacts impacts of COVID of COVID‐19 have‐19 have beenbeen extensive extensive across across multiple multiple industry industry and serviceand service sectors, sectors, both both women women and menand men have have faced faced job losses. job losses. The HRPSThe HRPS also alsosuggests suggests that thatfemale female‐headed‐headed households households have have been been similarly similarly likely likely to experience to experience income income losseslosses as male as male‐headed‐headed households. households. Also,Also, under under the COVIDthe COVID‐19 pandemic,‐19 pandemic, unemployed unemployed and andinactive inactive individuals individuals face facefurther further difficulties difficulties in in searchingsearching for afor job, a job,leading leading to a togreater a greater likelihood likelihood of sinking of sinking into intodeeper deeper poverty. poverty. Even Even without without the the COVIDCOVID‐19 pandemic,‐19 pandemic, poverty poverty headcount headcount rates rates for unemployed for unemployed and economicallyand economically inactive inactive individuals individuals were were significantlysignificantly higher higher compared compared to the to employedthe employed or retiree or retiree population. population. The poorThe poor and nearand near‐poor,‐poor, who whohave have low levelslow levels of human of human capital, capital, are less are likelyless likely to be to able be ableto meet to meet labor labor market market needs needs and oftenand often face facedifficulties difficulties in findingin finding a job. a Beingjob. Being unemployed unemployed or economically or economically inactive inactive means means no labor no labor income, income, translating translating into intolower lower 49 49
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Geographically, urban households have been Also, under the COVID-19 pandemic, unemployed more likely to face the economic repercussions of and inactive individuals face further difficulties in COVID-19. Employment in the highly affected sectors searching for a job, leading to a greater likelihood is concentrated in urban areas: 82 percent of those of sinking into deeper poverty. Even without the Figure II.11. Employment andworking income losses in these across welfare sectors distribution live in urban areas, mainly COVID-19 pandemic, poverty headcount rates for Panel A. Stopped working due to COVID‐19 Panel B. Income loss between Dec 2019 and Dec 2020 80 Ulaanbaatar, which is significantly higher than the unemployed and economically inactive individuals 80 Jan - Jun 2020 Jun - Dec 2020 70 overall share (62 percent) among69 all workers. Those were significantly higher compared to the employed or
60 58 living in Ulaanbaatar60 54 or Aimag54 centers53 were at least retiree population. The poor and near-poor, who have 50 1.9 and 3.9 times more likely to stop working between low levels of human capital, are less likely to be able 36 40 40 31 29 27 January and December 2020 than those living in Soum to meet labor market needs and often face difficulties 30 25
Percent workers of Percent 19 20 15 centers and the countryside, respectively (figure II.12). in finding a job. Being unemployed or economically 12 13 20 9 10 In particular, poor workers residing in urban areas inactive means no labor income, translating into lower
0 income labor with households of Percent 0 Q1 (poorest) Q2 Q3 Q4 Q5are more likelyQ1 to beQ2 engaged Q3 in Q4 informal, Q5 part-time, consumption and a higher chance of staying in poverty. (wealthiest) (poorest) (wealthiest) and small businesses in the affected sectors and are The COVID-19 pandemic can exacerbate the already Sources: NSO; HRPS 2020 Rounds 1 and 3; World Bank staff estimates. Note: The sample in panel A is restricted to respondentsthus who exposed were the same to acrossa higher rounds risk1 and of3. Panel job Alosses uses those than who their devastating situation and high poverty rates for this stopped working due to COVID‐19‐related reasons suchwealthier as workplace counterparts. and school closures, quarantine, and stay‐at‐home segment of the population. orders under the government’s containment measures.
Geographically, urban households have beenFigure II.12. Urban workers were more likely to C. Impacts on Non-labor Income Figure II.12. Urban workers were more likely to stop more likely to face the economic repercussions ofstop working working in 2020 in 2020 COVID‐19. Employment in the highly affected Remittances are a critical income source for recipient 50 sectors is concentrated in urban areas: 82 percent households, but their inflows are expected to fall of those working in these sectors live in urban 40 areas, mainly Ulaanbaatar, which is significantly 40 36 during the COVID-19 pandemic. According to the 2018 higher than the overall share (62 percent) among 30 HSES, 18 percent of households received some sort of all workers. Those living in Ulaanbaatar or Aimag private remittance in the last 12 months prior to the centers were at least 1.9 and 3.9 times more likely 18 20 to stop working between January and December pre-crisis survey. In Mongolia, most remittances are domestic 9 2020 than those living in Soum centers and the 10 transfers: only 2 percent of households received private countryside, respectively (figure II.12). In Percent of respondents working pre-crisis working Percent respondents of transfers from abroad. By consumption levels, wealthier particular, poor workers residing in urban areas
Percent of respondents working 0 are more likely to be engaged in informal, part‐ Ulaanbaatar Aimag center Soum center Countryside households are more likely to receive remittances, with time, and small businesses in the affected sectorsSources: Sources: NSO; HRPSNSO; 2020HRPS Round 2020 3;Round World 3; Bank World staff Bank estimates. staff 24 percent of households in the wealthiest quintile and are thus exposed to a higher risk of job losses estimates. Note: Ulaanbaatar and aimag centers are considered urban. receiving remittances, while only about 14 percent than their wealthier counterparts. Note: Ulaanbaatar and aimag centers are considered urban. of the bottom 40 percent of households receiving Due to far‐reaching impacts across various sectors, the pandemic has affected similarly women and them (figure II.13). However, as shown in figure II.14, men in terms of the likelihood of being out ofDue work. to Comparedfar-reaching to men, impacts women across are more various likely sectors,to work the in service sectors such as education, health, personal services, and hospitality, while men are more likely regardless of household welfare level, remittances are pandemic has affected similarly women and men in to work in industry sectors such as construction and mining. As the economic impacts of COVID‐19 have a critical income source for all remittance-receiving been extensive across multiple industry and serviceterms sectors, of the bothlikelihood women of and being men haveout offaced work. job losses.Compared households, accounting for one-quarter to one-third of The HRPS also suggests that female‐headed householdsto men, womenhave been are similarly more likely likely to experience to work income in service losses as male‐headed households. their total household income. The COVID-19 disruptions sectors such as education, health, personal services, can significantly affect the employment status of Also, under the COVID‐19 pandemic, unemployedand hospitality, and inactive whileindividuals men face are further more difficulties likely to in work searching for a job, leading to a greater likelihood of sinking into deeper poverty. Even without the migrant workers, and, thus, inflow of remittances. The in industry sectors such as construction and mining. COVID‐19 pandemic, poverty headcount rates for unemployed and economically inactive individuals were impact might be long-lasting if businesses where significantly higher compared to the employedAs or theretiree economic population. impacts The poor and of near COVID-19‐poor, who have have been migrant workers are engaged do not improve quickly. low levels of human capital, are less likely to beextensive able to meet across labor marketmultiple needs industry and often and face service difficulties sectors, in finding a job. Being unemployed or economically inactive means no labor income, translating into lower For the poor and vulnerable recipient households that both women and men have faced job losses. The HRPS heavily rely on remittances and have little savings or also 49 suggests that female-headed households have assets to buffer themselves, the remittance impacts been similarly likely to experience income losses as will compound their existing vulnerabilities. male-headed households.
38
consumptionconsumption andand aa higherhigher chancechance ofof stayingstaying inin poverty.poverty. TheThe COVIDCOVID‐‐1919 pandemicpandemic cancan exacerbateexacerbate thethe alreadyalready devastatingdevastating situationsituation andand highhigh povertypoverty ratesrates forfor thisthis segmentsegment ofof thethe population.population.
C.C. ImpactsImpacts onon NonNon‐‐laborlabor IncomeIncome RemittancesRemittances areare aa criticalcritical incomeincome sourcesource forfor recipientrecipient households,households, butbut theirtheir inflowsinflows areare expectedexpected toto fallfall duringduring thethe COVIDCOVID‐‐1919 pandemic.pandemic. AccordingAccording toto thethe 20182018 HSES,HSES, 1818 percentpercent ofof householdshouseholds receivedreceived somesome sortsort ofof privateprivate remittanceremittance inin thethe lastlast 1212 monthsmonths priorprior toto thethe survey.survey. InIn Mongolia,Mongolia, mostmost remittancesremittances areare domesticdomestic transfers:transfers: onlyonly 22 percentpercent ofof householdshouseholds receivedreceived privateprivate transferstransfers fromfrom abroad.abroad. ByBy consumptionconsumption levels,levels, wealthierwealthier householdshouseholds areare moremore likelylikely toto receivereceive remittances,remittances, withwith 2424 percentpercent ofof householdshouseholds inin thethe wealthiestwealthiest quintilequintile receivingreceiving remittances,remittances, whilewhile onlyonly aboutabout 1414 percentpercent ofof thethe bottombottom 4040 percentpercent ofof householdshouseholds receivingreceiving themthem (figure(figure II.13).II.13). However,However, asas shownshown inin figurefigure II.14,II.14, regardlessregardless ofof householdhousehold welfarewelfare level, level, remittances remittances are are a a critical critical income income source source for for all all remittance remittance‐‐receivingreceiving households, households, accounting accounting forfor oneone‐‐quarterquarter toto oneone‐‐thirdthird ofof theirtheir totaltotal householdhousehold income.income. TheThe COVIDCOVID‐‐1919 disruptionsdisruptions cancan significantlysignificantly affectaffect thethe employmentemployment statusstatus ofof migrantmigrant workers,workers, and,and, thus,thus, inflowinflow ofof remittances.remittances. TheThe impactimpact mightmight bebe longlong‐‐lastinglasting ifif businessesbusinesses wherewhere migrantmigrant workersworkers areare engagedengaged dodo notnot improveimprove quickly.quickly. ForFor thethe poorpoor andand vulnerablevulnerable recipient recipient householdshouseholds that that heavily heavily rely rely on on remittances remittances and and have have little little savingssavings or or assets assets to to buffer buffer themselves,themselves, thethe remittanceremittance impactsimpacts willwill compoundcompound theirtheir existingexisting vulnerabilities.vulnerabilities. OtherOther nonnon‐‐laborlabor income,income, notablynotably publicpublic transfers,transfers, representsrepresents anan importantimportant shareshare ofof householdhousehold incomeincome forfor the the poor. poor. Although Although labor labor income income accounts accounts for for more more than than 60 60 percent percent of of household household income income for for the the poor, poor, oneone‐‐thirdthird ofof theirtheir incomeincome comescomes fromfrom socialsocial transferstransfers suchsuch asas childchild money,money, otherother socialsocial protectionprotection programs,programs, andand pensions.pensions.4343 AccordingAccording toto thethe HRPSHRPS (Round(RoundCOVID - 3),193), IMPACTS onlyonly 33 percentpercent ON HOUSEHOLDS ofof socialsocial assistanceassistance IN MONGOLIA recipientsrecipients havehave facedfaced disruptionsdisruptions inin receivingreceiving governmentgovernment assistanceassistance underunder thethe pandemic.pandemic. FigureFigure II.13.II.13. PercentPercent ofof householdshouseholds receivingreceiving aa FigureFigure II.14.II.14. ShareShare ofof remittanceremittance toto totaltotal householdhousehold remittance,remittance,Figure II.13. 20182018 Percent of households receiving a incomeincomeFigure (among (amongII.14. Share householdshouseholds of remittance thatthat to receivedtotalreceived household aa remittance, 2018 remittance)remittance)income (among households that received a remittance)
3030 40%40% 35%35% 2525 30%30% 2020 25%25% 1515 20%20% 24.024.0 33%33% 15%15% 30%30% remittance remittance 1010 18.318.3 26%26% 27%27% 27%27% 14.314.3 14.214.2 15.515.5 10%10% 55 household income income household income household 5%5%
Percent of households receiving receiving households of Percent receiving households of Percent 00 0%0% Q1Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q1Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Average shares Average shares of remittance to total Average shares of remittance to total IncomeIncome distribution distribution from from lowest lowest to to highest highest IncomeIncome distribution distribution from from lowest lowest to to highest highest Sources: NSO, HSES 2018; World Bank staff estimates. Sources:Sources:Note: ErrorNSO, NSO, bars HSES HSES in figures 2018; 2018; show World World 95 Bank percentBank staff staffconfidence estimates. estimates. intervals. Note:Note: Error Error bars bars in in figures figures show show 95 95 percent percent confidence confidence intervals. intervals. Other non-labor income, notably public transfers, in 2020 for the baseline scenario and a 50 percent represents an important share of household income decline for all quarters in 2020 for the lower-case D.D. PotentialPotential ImpactsImpacts onon PovertyPoverty for the poor. Although labor income accounts for more scenario. The employment-output elasticities used as ThisThisthan sectionsection 60 percent assessesassesses of household thethe potentialpotential income impactsimpacts for the ofof the poor,the COVIDCOVID inputs‐‐1919 pandemicpandemicinto the simulation onon thethe nationalnational are calculated povertypoverty based headcountheadcount on raterateone-third byby adaptingadapting of their incomeaa macromacro comes‐‐micromicro from simulationsimulation social transfers model.model. 44information44 TheThe ADePTADePT of sectoral macromacro GDP‐‐micromicro growth simulationsimulation and employment combinescombines macroeconomicmacroeconomicsuch as child money, projectionsprojections other social andand protection householdhousehold programs, welfarewelfare andandchanges profileprofile between fromfrom 2010 thethe latest latestand 2018, householdhousehold and the surveypopulationsurvey4545 andand and pensions.45 According to the HRPS (Round 3), only growth forecasts are based on the latest UN World
4343 NSO3NSO percent and and World World of socialBank Bank 2020. 2020. assistance recipients have faced Population Prospects (2019). 4444 The disruptionsThe microsimulation microsimulation in receiving model model government used used in in this this report reportassistance is is outlined outlined under in in Olivieri Olivieri et et al. al. (2014). (2014). 4545 HSEStheHSES pandemic. 2018 2018.. The simulation results suggest that without mitigation measures there would be an increase of 5.9 to 7.9 D. Potential Impacts on Poverty 5050 percentage points in the national poverty rate in 2020, compared to the pre-COVID forecast. This is equivalent This section assesses the potential impacts of to adding approximately 195,000 to 260,000 people the COVID-19 pandemic on the national poverty into poverty (figures II.15 and II.16). Even without the headcount rate by adapting a macro-micro simulation COVID-19 pandemic, the recent increasing food prices model.46 The ADePT macro-micro simulation combines placed great stress on poorer households, slowing macroeconomic projections and household welfare the speed of poverty reduction between 2019 and and profile from the latest household survey47 and then 2020 under the pre-COVID case.48 With deteriorating incorporates microsimulation assumptions related to economic forecasts under the COVID-19 pandemic, the labor market, non-labor income, and price changes the poverty rate would go up to 31.7 and 33.6 percent to project distributional and poverty effects of these in the baseline and lower case, respectively, meaning assumptions. Table II.2. summarizes GDP and price that over 1 million people in Mongolia would be under projections for three scenarios: (i) pre-COVID case the poverty line. The impacts of COVID-19 would last (business as usual), (ii) baseline case, and (iii) lower beyond the current pandemic and will not be easily case. The baseline and lower-case scenarios also recovered. With the projected slower-paced recovery, incorporate adverse remittance flow in the simulation, the baseline case simulation results suggest that with assuming a 50 percent decline for two quarters poverty rate of 2022 would not go back to the level
45 NSO and World Bank 2020. 46 The microsimulation model used in this report is outlined in Olivieri et al. (2014). 47 HSES 2018. 48 The poverty line in the simulation was adjusted by the difference in food and non-food inflation rates. Since the ratio of food consumption to total consumption in the poverty line is 51 percent, which is significantly higher than the ratio of food items in the CPI basket (26 percent), higher food price inflation relative to non-food inflation would shift the poverty line upward, pushing remo people under the poverty line. 39 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Table II.2. GDP growth and inflation assumptionsа
(1) Pre-COVID Case (business as usual) 2018 2019 F 2020 E 2021 E 2022 E Agriculture 4.5% 4.5% 4.4% 4.4% 5.0% Industry including mining 7.9% 3.4% 3.1% 5.6% 5.7% Services 4.7% 6.8% 6.2% 6.2% 6.7% Total 7.2% 5.8% 5.3% 5.6% 5.8% (2) Baseline Case 2018 2019 2020 E 2021 E 2022 E Agriculture 4.5% 8.4% 10.8% 5.0% 6.0% Industry including mining 7.9% 3.1% -11.0% 6.3% 5.4% Services 4.7% 5.8% -5.1% 2.9% 5.2% Total 7.2% 5.2% -5.2% 4.3% 5.4% (3) Lower Case 2018 2019 2020 E 2021 E 2022 E Agriculture 4.5% 8.4% 9.4% 4.0% 5.0% Industry including mining 7.9% 3.1% -12.2% 2.9% 3.9%
Services 4.7% 5.8% -7.9% 1.6% 3.0% Total 7.2% 5.2% -7.1% 2.4% 3.5% Inflation (YoY) for pre-COVID case 2018 2019 2020 E 2021 E 2022 E Total CPI 8.1% 5.2% 7.0% 8.0% 8.5% Food CPI 9.1% 8.3% 11.0% 9.0% 8.6% Non-Food CPI 7.8% 4.2% 5.6% 7.6% 8.5% Inflation (YoY) for Baseline and lower cases 2018 2019 2020 E 2021 E 2022 E Total CPI 8.1% 5.2% 2.3% 5.0% 7.0% Food CPI 9.1% 8.3% 8.5% 8.0% 8.2% Non-Food CPI 7.8% 4.2% 0.1% 4.0% 6.6%
Note: a. The pre-COVID case was based on forecasts from the Mongolia Economic Update (as of January 2020), whose 2019 GDP was a forecast since the final 2019 GDP figure was not published at that time. Baseline and lower cases are the latest World Bank forecasts provided as of January 18, 2021.
40
MongoliaMongolia would would be be under under the the poverty poverty line. line. The The impacts impacts of of COVID COVID‐19‐19 would would last last beyond beyond the the current current pandemicpandemic and and will will not not be be easily easily recovered. recovered. With With the the projected projected slower slower‐paced‐paced recovery, recovery, the the baseline baseline case case simulationsimulation results results suggest suggest that that poverty poverty rate rate of of 2022 2022 would would not not go go back back to to the the level level of of 2018, 2018, and and nearly nearly 1 1 millionmillion people people would would remain remain in inpoverty. poverty. Given Given the the limited limited share share of of remittance remittance‐receiving‐receiving households, households, the the overalloverall impacts impacts of of remittances remittances are are relatively relatively limited. limited.COVID Without Without -19 IMPACTSadverse adverse impactsON impacts HOUSEHOLDS in inremittances, remittances, IN MONGOLIA the the poverty poverty ratesrates are are projected projected to to increase increase by by 5.5 5.5 to to 6.4 6.4 percentage percentage points points in inthe the baseline baseline and and lower lower‐case‐case scenarios, scenarios, respectively.respectively.
Figure Figure II.15. II.15. Projected Projected poverty poverty poverty rates rates rates FigureFigureFigure II.16. II.16.II.16. Projected Projected number numbernumber of of of poor poor poor people people people
36 36 1,2001,200 33.633.6 32.832.8 1,0981,098 1,0841,084 34 34 1,0461,046 31.331.3 1,1001,100 32 32 1,0001,000 30 30 31.731.7 1,0351,035 30.530.5 1,0071,007 28 28 900900 959959 28.728.7 26 26 28.428.4 905905 800800 871871 26.926.9 841841 24 24 25.825.8 796796 Number of poor (thousands) poor of Number (thousands) poor of Number 700700 22 22 24.124.1 746746 National Poverty headcount rate (%) rate headcount Poverty National (%) rate headcount Poverty National 20 20 22.322.3 600600 20182018 2019E2019E 2020F 2020F 2021F 2021F 2022F 2022F 20182018 2019E2019E 2020F 2020F 2021F 2021F 2022F 2022F (actual)(actual) (actual)(actual)
Pre-covidPre-covid BaselineBaseline LowerLower case case Pre-covidPre-covid BaselineBaseline LowerLower case case
Source:Source: World World World Bank Bank Bank staff staff staffestimates estimates estimates (ADePT (ADePT (ADePTsimulation). simulation). simulation). Source:Source:Source: WorldWorld World Bank Bank Bank staff staff estimatesstaff estimates estimates (ADePT (ADePT simulation).(ADePT simulation). simulation). Note:Note: Impacts Impacts Impacts ofof COVID-19-related ofCOVID COVID‐19‐19‐related‐related mitigation mitigation mitigation responses responses responses by the by by the the Note:Note:Note: ImpactsImpacts Impacts of of COVID-19-related ofCOVID COVID‐19‐19‐related‐related mitigation mitigation mitigation responses responses responsesby the by by governmentgovernment were were not not includednot included included in the in povertyinthe the poverty povertyprojection. projection. projection. thegovernmentthe government government were not were includedwere not innot the included povertyincluded projection. in inthe the poverty poverty projection.projection. of 2018, and nearly 1 million people would remain in among the poorest population group that would poverty. Given the limited share of remittance-receiving expect a consumption decline by 18 percent between Thehouseholds,The welfare welfare impact the impact overall on on the the impactspoor, poor, particularly particularly of remittances among among the2018 the “new “newand poor,”2020 poor,” under would would the be lower-casebe significantly significantly scenario higher higher (figure than than thatarethat observedrelatively observed limited.in in the the rest Withoutrest of of the theadverse population. population. impacts The Thein COVID COVIDII.17).‐19‐ 19 As economic economic a result, impacts the impacts depth would andwould severity affect affect households of households poverty acrossremittances,across all all income income the poverty classes, classes, rates but but are the theprojected relative relative to welfare increasewelfare impact, impact,would with with worsen, the the absence absence with anof of effective increase effective mitigation of mitigation 3.4 percentage policies, policies, isby ishighest 5.5highest to among 6.4 among percentage the the poorest poorest points population inpopulation the baseline group group and that that wouldpoints would expectin expect the poverty a consumptiona consumption gap, and 1.9 decline declinepercentage by by 18 points18 percent percent in betweenlower-casebetween 2018 2018scenarios, and and 2020 respectively. 2020 under under the the lower lower‐case‐case scenario scenariothe (figure poverty (figure II.17). severityII.17). As Asindex. a result,a result, Among the the the depth depth poor and population, and severity severity ofof poverty poverty would would worsen, worsen, with with an an increase increase of of 3.4 3.4 percentage percentagenotably points the points “new in inthe poor,” the poverty poverty who became gap, gap, and andpoor 1.9 1.9in percentage 2020 percentage due pointsThepoints welfare in inthe the impactpoverty poverty on severity theseverity poor, index. index.particularly Among Among among the the poor poor topopulation, population,the COVID-19 notably notably economic the the “newshocks, “new poor,” poor,”would who be who severely became became poorthepoor “new in in2020 poor,”2020 due would due to to bethe thesignificantly COVID COVID‐19‐19 economichigher economic than shocks,that shocks, affected. would would be Their be severely severely welfare affected. affected. would Their decline Their welfare welfare significantly would would declineobserveddecline significantly significantlyin the rest ofbecause becausethe population. they they would would The beCOVID-19 be forced forced to to decreasebecause decrease they their their would per per capitabe capita forced consumption consumption to decrease by theirby 27 27 toper to 31 31 percenteconomicpercent from fromimpacts 2018 2018 would to to 2020 2020affect in in realhouseholds real terms terms (figure across (figure II.18).all II.18). capita consumption by 27 to 31 percent from 2018 to income classes, but the relative welfare impact, with 2020 in real terms (figure II.18). the absence of effective mitigation policies, is highest
FigureFigureFigure II.17.II.17. II.17. ConsumptionConsumption Consumption growth growthgrowth incidence incidenceincidence (% (%(%change FigureFigureFigure II.18.II.18. II.18. AverageAverage Average welfarewelfare welfare lossloss loss fromfrom from 20182018 2018 toto to 20202020 byby changechangeof per ofof capita perper capitacapitaconsumption consumptionconsumption from 2018 fromfrom to 2020) 20182018 toto povertypoverty2020 status statusby poverty status 2020)2020)
55 baselinebaseline lowerlower 0%0% 00 -5%-5% -4%-4% -6%-6% -5-5 -10%-10% -7%-7% -7%-7% -15%-15% -10-10 -20%-20% 2020 2020
-15-15 -25%-25% Percent change from 2018 from change Percent 2018 from change Percent -30%-30% -27%-27% -20-20 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 5252 -35%-35% -31%-31% Average welfare loss from 2018 to Average welfare loss from 2018 to richest richest
poorest poorest newnew poorpoor alreadyalready poorpoor restrest ofof popoulationpopoulation pre-covidpre-covid baselinebaseline lowerlower
Source:Source:Source: WorldWorld World Bank BankBank staff staffstaff estimates estimatesestimates (ADePT (ADePT(ADePT simulation). simulation).simulation). Note:Note:Note: ImpactsImpacts Impacts of ofof COVID-19-related COVIDCOVID‐‐1919‐‐relatedrelated mitigation mitigationmitigation responses responsesresponses by the governm byby ent thethe were governmentgovernment not included wereinwere the povertynotnot includedincluded projection. inin Consumption thethe povertypoverty in 2018 projection.projection. ConsumptionConsumptionwas adjusted to inin 2020 20182018 price waswas levels. adjustedadjusted New poor toto 20202020 are those priceprice who levels.levels. were NewnotNew poor poorpoor before areare the thosethose COVID-19 whowho werepandemicwere notnot but poorpoor became beforebefore poor thethe during COVIDCOVID the pandemic.‐‐1919 pandemicpandemic butbutAlready becamebecame poor poorpoor are those duringduring who the thewere pandemic.pandemic. already poor Already Alreadypre-COVID. poorpoor areare thosethose whowho werewere alreadyalready poorpoor prepre‐‐COVID.COVID. 41 UrbanUrban householdshouseholds areare moremore likelylikely toto bebe adverselyadversely affectedaffected thanthan thosethose inin ruralrural areas.areas. WhileWhile thethe simulatedsimulated povertypoverty raterate forfor 20202020 inin thethe countrysidecountryside remainsremains atat thethe samesame levellevel fromfrom thethe prepre‐‐COVIDCOVID toto thethe lowerlower‐‐casecase scenario,scenario, itit wouldwould significantlysignificantly increaseincrease inin otherother locationslocations ofof thethe nationnation (figure(figure II.19).II.19). InIn particular,particular, povertypoverty incidenceincidence inin thethe AimagAimag centerscenters wouldwould reachreach thethe highesthighest levels,levels, risingrising fromfrom 2828 percentpercent inin thethe prepre‐‐COVIDCOVID casecase toto 3838 percentpercent inin thethe lowerlower‐‐casecase scenario.scenario. Indeed,Indeed, nearlynearly threethree‐‐quartersquarters ofof thethe “new“new poor,”poor,” whowho fellfell underunder thethe povertypoverty lineline duedue toto thethe COVIDCOVID‐‐1919 shocks,shocks, areare fromfrom eithereither thethe capitalcapital citycity oror AimagAimag centerscenters (figure(figure II.20)II.20) AsAs aa result,result, underunder thethe lowerlower‐‐casecase scenario,scenario, moremore thanthan 200,000200,000 peoplepeople inin urbanurban areasareas wouldwould bebe newlynewly addedadded toto thethe existingexisting poor,poor, whilewhile 74,00074,000 peoplepeople fellfell intointo povertypoverty inin ruralrural areas.areas. FigureFigure II.19.II.19. PovertyPoverty headcountheadcount byby locationlocation
4040 3838 3636 3535 3535 3333 3333 3232 3030 3030 3030 3030 2929 2929 3030 2828 3434 2626 2626 3232 2525 2828 2323 2626 Poverty headcount rate rate (%) headcount Poverty rate (%) headcount Poverty 2020 20182018 20202020 prepre covidcovid 20202020 basebase 20202020 lowerlower
UlaanbaatarUlaanbaatar AimagAimag centercenter SoumSoum centercenter CountrysideCountryside NationalNational
Source:Source: WorldWorld BankBank staffstaff estimatesestimates (ADePT(ADePT simulation).simulation). Note:Note: ImpactsImpacts ofof COVIDCOVID‐‐1919‐‐relatedrelated mitigationmitigation responsesresponses byby thethe governmentgovernment werewere notnot includedincluded inin thethe povertypoverty projections.projections.
NearlyNearly twotwo‐‐thirdsthirds ofof “new“new poor”poor” attributableattributable toto thethe COVIDCOVID‐‐1919 shocksshocks areare fromfrom thethe servicesservices sectors.sectors. WhileWhile thethe COVIDCOVID‐‐1919 shocksshocks havehave affectedaffected aa widewide rangerange ofof economiceconomic activities,activities, thethe intensityintensity ofof thethe impactsimpacts waswas notnot thethe samesame acrossacross thethe sectors.sectors. FigureFigure II.21II.21 showsshows thethe distributiondistribution ofof thethe “new“new poor”poor” andand “already“already poor”poor” whowho alreadyalready livelive underunder thethe povertypoverty lineline inin thethe prepre‐‐COVIDCOVID scenarioscenario byby employmentemployment sectors.sectors. BeforeBefore thethe COVIDCOVID‐‐1919 outbreak,outbreak, thethe shareshare ofof thethe poorpoor waswas relativelyrelatively uniformuniform acrossacross allall sectors,sectors, butbut thethe projectedprojected economiceconomic contractioncontraction clearlyclearly pushespushes moremore serviceservice workersworkers intointo poverty.poverty. InIn turn,turn, asas thethe limitedlimited aggregateaggregate impactsimpacts areare projectedprojected inin thethe agricultureagriculture sectorsector underunder thethe COVIDCOVID‐‐1919 scenarios,scenarios, onlyonly 66 percentpercent ofof thethe newnew poorpoor inin thethe baselinebaseline andand lowerlower‐‐casecase scenarioscenario areare linkedlinked toto agriculture.agriculture.
5353
Figure II.17. Consumption growth incidence (% Figure II.18. Average welfare loss from 2018 to 2020 by change of per capita consumption from 2018 to poverty status 2020)
5 baseline lower 0% 0 -5% -4% -6% -5 -10% -7% -7% MONGOLIA ECONOMIC UPDATE From Relief to Recovery -15% -10 -20% 2020
-15 -25% Percent change from 2018 from change Percent Urban households are more likely to be adversely Nearly two-thirds-30% -27% of “new poor” attributable to the -20
2 3 4 5 6 7 8 9 -35% -31%
affected than those in rural areas. While the simulated COVID-19Average welfare loss from 2018 to shocks are from the services sectors. While richest poverty rate poorest for 2020 in the countryside remains the COVID-19new shocks poor havealready affectedpoor rest a of wide popoulation range of pre-covid baseline lower at the same level from the pre-COVID to the lower- economic activities, the intensity of the impacts was caseSource: scenario, World Bankit would staff estimatessignificantly (ADePT increase simulation). in other not the same across the sectors. Figure II.21 shows the Note: Impacts of COVID‐19‐related mitigation responses by the government were not included in the poverty projection. locations of the nation (figure II.19). In particular, distribution of the “new poor” and “already poor” who Consumption in 2018 was adjusted to 2020 price levels. New poor are those who were not poor before the COVID‐19 pandemic povertybut became incidence poor during in the the Aimag pandemic. centers Already would poor reach are those already who were live already under poorthe povertypre‐COVID. line in the pre-COVID the highest levels, rising from 28 percent in the pre- scenario by employment sectors. Before the COVID-19 UrbanCOVID householdscase to 38 percent are more in the likely lower-case to be adverselyscenario. affectedoutbreak, than the share those of in the rural poor areas. was relatively While the uniform simulated povertyIndeed, nearlyrate for three-quarters 2020 in the of countryside the “new poor,” remains who at acrossthe same all level sectors, from but the thepre ‐COVID projected to the economic lower ‐case scenario,fell under itthe would poverty significantly line due to the increase COVID-19 in shocks,other locations contraction of the clearly nation pushes (figure more II.19). service In particular, workers into poverty incidenceare from either in the the Aimag capital citycenters or Aimag would centers reach (figure the highestpoverty. levels, In turn, rising as from the limited 28 percent aggregate in the impacts pre‐COVID II.20) As a result, under the lower-case scenario, more are projected in the agriculture sector under the case to 38 percent in the lower‐case scenario. Indeed, nearly three‐quarters of the “new poor,” who fell than 200,000 people in urban areas would be newly COVID-19 scenarios, only 6 percent of the new poor under the poverty line due to the COVID‐19 shocks, are from either the capital city or Aimag centers (figure added to the existing poor, while 74,000 people fell in the baseline and lower-case scenario are linked to II.20) As a result, under the lower‐case scenario, more than 200,000 people in urban areas would be newly into poverty in rural areas. agriculture. added to the existing poor, while 74,000 people fell into poverty in rural areas. Figure II.19. Poverty headcount byFigure location II.19. Poverty headcount by location
40 38 36 35 35 33 33 32 30 30 30 30 29 29 30 28 34 26 26 32 25 28 23 26 Poverty headcount rate rate (%) headcount Poverty 20 2018 2020 pre covid 2020 base 2020 lower
Ulaanbaatar Aimag center Soum center Countryside National
Source: Source: World Bank Bank staff staff estimates estimates (ADePT (ADePT simulation). simulation). Note:Note: ImpactsImpacts of of COVID-19-related COVID‐19‐related mitigation mitigation responses responses by the governm by entthe were government not included were in the notpoverty included projections. in the poverty projections.
NearlyFigure two II.20.‐thirds Distribution of “new of the poor” poor by attributable location Figure to the II.21. COVID Distribution‐19 shocks of the poorare byfrom economic the services sector sectors. Figure II.20. Distribution of the poor by location Figure II.21. Distribution of the poor by economic While the COVIDFigure‐19 II.20. shocks Distribution have of affected the poor bya wide location range Figure of economic II.21. Distribution activities, of the thepoor intensityby economic of sector the impacts sector 60 70 66 was not the same across theAlready sectors. poor (2020 Figure pre-covid) II.21 shows the Alreadydistribution poor (2020 pre-covid) of the “new poor”64 and “already 60 70 66 Already poor (2020 pre-covid) Already poor (2020 pre-covid) 64 poor” who already49 49 live underNew the poor (2020poverty baseline) line in the pre‐COVIDNew poor scenario (2020 baseline) by employment sectors. Before 50 60 49 49 New poor (2020 baseline) New poor (2020 baseline) the COVID‐19 outbreak,50 the Newshare poor (2020 of lower)the poor was relatively60 Newuniform poor (2020 acrosslower) all sectors, but the projected 41 New poor (2020 lower) New poor (2020 lower) 41 50 economic40 contraction clearly pushes more service workers50 into poverty. In turn, as the limited aggregate 40 38 impacts are projected in the agriculture sector under40 the COVID‐19 scenarios, only 6 percent38 of the new 3440 30 34 30 25 30 poor in the baseline and 24lower‐25case scenario are linked to agriculture.28 2830 22 24 30 28 28 22 30 19 19 19 1918 19 19 18 20 20 20 20 Distribution of the poor the of Distribution poor) of total (% Distribution of the poor the of Distribution poor) of total (% 10 10 7 7 7 7 6 6 Distribution of the poor (% of total poor) total (% of poor the of Distribution 5310 poor) total (% of poor the of Distribution 10 6 6
0 0 0 0 Ulaanbaatar AimagUlaanbaatar center SoumAimag center Soum Countryside center Countryside AgricultureAgriculture IndustryIndustry ServicesServices
Source: World World BankSource: Bank staff staff World estimates estimates Bank (ADePT staff (ADePT estimates simulation). simulation). (ADePT simulation). Source: WorldSource: Bank World staff Bank estimates staff estimates (ADePT (ADePT simulation). simulation). Note: Impacts of COVID‐19‐related mitigation responses by Note: Impacts of COVID‐19‐related mitigation responses by Note: Impacts Impacts of ofCOVID-19-related COVID‐19‐related mitigation mitigation responses responses by the governm by entNote: were Impacts not included of COVID in the‐ poverty19‐related projections. mitigation responses by the government were not included in the poverty the government were not included in the poverty the government were not included in the poverty the government were not included in the poverty projections projections. projections projections. 42 E. Potential Mitigation Impacts of Policy Responses E. Potential Mitigation Impacts of Policy Responses There is an immediate need to increase the resilience of the poor (including “new poor”) and vulnerable There is an householdsimmediate thatneed are to severelyincrease affected the resilience under ofthe the ongoing poor (includingand prolonged “new shocks. poor”) The and Government vulnerable of householdsMongolia that are responded severely quicklyaffected and under implemented the ongoing a series and of measuresprolonged to shocks.mitigate negativeThe Government welfare impacts of Mongolia respondedunder the quicklyCOVID‐19 and pandemic, implemented which ainclude series ofallowance measures increases to mitigate in the negative Child Money welfare Program, impacts food under the COVIDstamps,‐19 and pandemic, other employment which include and socialallowance welfare increases benefits in(table the ChildII.3).47 MoneyIn this Program,section, using food the stamps, andmicrosimulation other employment results, theand potential social welfaremitigation benefits impacts of(table these II.3). policy47 responsesIn this section, on household using welfarethe 48 microsimulationwill be results, examined. the potential mitigation impacts of these policy responses on household welfare 48 will be examined. Table II.3. Government responses to COVID‐19 (Social protection‐related measures) Original Increased Table II.3. Government responses to COVID‐19 (Socialbenefit protection size ‐related measures)Time frame Number of Program Eligibility criteria amount Original(monthly, to apply Beneficiaries Increased(MNT) benefit sizeMNT) Time frame Number of Program Eligibility criteria amount 1 Child Money Program (CMP) Children age 0–18 (monthly,20,000 100,000 to applyApr 1, 2020–Beneficiaries1,144,630 (MNT) MNT) July 1, 2021 1 Child Money2 SocialProgram Welfare (CMP) Pension Children age(1) 0–18Seniors (not 20,000 188,000100,000 288,000 Apr 1, May2020– 1–Dec 1,144,6303,140 (goes for the following groups): eligible for SI pension), July 1, 202131, 2020 F55+/M60+ 2 Social Welfare Pension (1) Seniors (not 188,000 288,000 May 1–Dec 3,140 (2) Dwarf individual 188,000 288,000 May 1–Dec 106 (goes for the following groups): eligible for SI pension), 31, 2020 age 16+ 31, 2020 F55+/M60+(3) Disabled persons 188,000 288,000 May 1–Dec 36,486 (2) Dwarf individualage 16+ 188,000 288,000 May 1–Dec31, 2020 106 age 16+ 31, 2020 (3) Disabled persons 188,000 288,000 May 1–Dec 36,486 age 16+ 31, 2020 47 As of November 23, 2020. The monthly increased benefit amount for children in the Food Stamp Program decreased from MNT 16,000 to the original benefit amount of MNT 8,000 from November 1, 2020. While the extension of additional benefits for the adult Food Stamp Program was not announced, the program continued at least until the end of 2020. In addition to these social 47 As of Novemberprotection 23, 2020. measures, The monthly the Government increased of benefit Mongolia amount has implemented for children other in the COVID Food‐ 19Stamp‐related Program responses, decreased including from exemptions MNT 16,000 to the oforiginal social securitybenefit contributions, amount of MNT utility 8,000 payment, from andNovember personal 1, income 2020. tax.While the extension of additional benefits for the 48 Due to the difficulties identifying “children (under age 16) in need for permanent care” in HSES, the response impact of “children adult Food Stamp Program was not announced, the program continued at least until the end of 2020. In addition to these social for permanent care” is not examined in this analysis. protection measures, the Government of Mongolia has implemented other COVID‐19‐related responses, including exemptions of social security contributions, utility payment, and personal income tax.54 48 Due to the difficulties identifying “children (under age 16) in need for permanent care” in HSES, the response impact of “children for permanent care” is not examined in this analysis.
54
COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA
(4) Orphan children, 188,000 288,000 May 1–Dec 14,219 under age 18 31, 2020
The Child Money Program (CMP) is the largest social E. Potential Mitigation Impacts(5) Single of Policy parent w/4+ 188,000 288,000 May 1–Dec 12 Responses children(4) under Orphan age children, 18 protection 188,000 program 288,000 and coversMay31, more1–Dec 2020 than 14,21990 percent under(4) Orphan age 18 children, of the poor188,000 in Mongolia.288,000 51 TheMay31, 2020 CMP 1–Dec provides 14,219 20,000 3 Childrenunder under age age 18 16 188,000 288,000 May31, 2020 1–Dec 10,243 ThereChildren is an underimmediate age 16 need in need to increase the(5) resilience Single parent w/4+tugrug 188,000per child (under288,000 age 18)May per1–Dec month and12 covers for permanent care in need of permanent 31, 2020 of the poor (including “new poor”) and children(5) vulnerable Single under parent age w/4+ 1880 percent188,000 of all children.288,000 As ofMay31, 2018, 2020 1–Dec about 9212 percent care children under age 18 31, 2020 4households Food Stamp3 thatChildren Program are under severely age 16 in affectedneed(1) Poor Childrenunder HHs: Adults underthe age 16of the16,000 188,000poor population 32,000288,000 lives MayMay in households1–Dec1, 2020– 10,243 with118,748 CMP 3 Children under age 16 in need Children under age 16 188,000 288,000 May 1–Dec 10,243 ongoing and for prolonged permanent shocks.care The Governmentin need of permanent of benefits (figure II.22). 31,As 2020 less wealthy households for permanent care (2) Poorcarein HHs: need Children of permanent 8,000 16,000 May31, 20201–Nov 123,189 Mongolia responded4 Food Stamp quickly Program and implemented(1)care Poor a series HHs: Adults tend to16,000 have more32,000 children, May the1, 1, 20202020–poor are 118,748more likely 4 Food Stamp Program (1) Poor HHs: Adults 16,000 32,000 May 1, 2020– 118,748 Sources:of measures https://www.legalinfo.mn/ to mitigate negative law/details/15358?lawid=15358welfare impacts(2) Poor under HHs: Children to receive, http://hudulmur8,000 higher levels16,000‐halamj.gov.mn/ of CMPMay 1–Novbenefits. compared123,189 to the COVID-19 pandemic, which include (2) allowance Poor HHs: Childrenbetter-off 8,000 households. 16,000 The CMPMay1, accounts 2020 1–Nov for 123,18910 percent 1, 2020 increases inSources: the https://www.legalinfo.mn/ Child Money Program,law/details/15358?lawid=15358 food stamps, , http://hudulmur‐halamj.gov.mn/. The Child MoneySources: https://www.legalinfo.mn/Program (CMP) is law/details/15358?lawid=15358the largest socialof protectionhousehold, http://hudulmur income program‐halamj.gov.mn/ for andthe bottomcovers. 20more percent than of 90 and other employment and social49 welfare benefits households (figure II.23). percent ofThe the Child poor Money in Mongolia. Program (CMP) The CMP is the provides largest social 20,000 protection tugrug perprogram child and (under covers age more 18) thanper month90 (table II.3).49 In this section, using the microsimulation and coversThe 80 Child percent Money of Programall children. (CMP)49 As Theis theof CMP 2018,largest provides aboutsocial 20,000 protection92 percenttugrug programper of child the (underand poor covers agepopulation 18)more per than month lives 90 in percent of the poor in Mongolia. 49 householdsresults, theandpercent potentialwith covers CMP of mitigationthe80 benefits percentpoor in impacts Mongolia.(figureof all children. of II.22). these The As policyAsCMP lessof provides 2018, wealthy about 20,000 households 92 tugrugpercent per tendof child the to (underpoor have population age more 18) children,per lives month in the 50 poorresponses are morehouseholds andon household coverslikely to with80 receive welfarepercent CMP benefits higher willof allbe (figure children.levelsexamined. II.22).of AsCMP ofAs benefits2018,less wealthy about compared households92 percent to bettertendof the to ‐ pooroffhave households. morepopulation children, lives The the inCMP poorhouseholds are more with likely CMP to receivebenefits higher (figure levels II.22). of As CMP less benefits wealthy compared households to bettertend to‐off have households. more children, The CMP the accounts forpoor 10 are percent more likely of household to receive higher income levels for of the CMP bottom benefits 20 compared percent to of better households‐off households. (figure The II.23). CMP Figure accountsII.22. Share for of10 population percent of householdliving in income for the bottomFigure II.23.20 percent Shares of of households CMP and other (figure household II.23). Figure II.22.accounts Share offor population 10 percent livingof household in income forFigure the bottom II.23. Shares 20 percent of CMP of households and other household(figure II.23). income householdsFigure receiving II.22. Share CMP, of population2018 living in Figureincome II.23. sources, Shares of 2018 CMP and other household income householdshouseholdsFigure receiving II.22. receiving CMP,Share of2018 CMP,population 2018 living in sources,sources,Figure 2018 II.23. 2018 Shares of CMP and other household income 96households receiving CMP, 2018 sources, 2018 100 92100 96 100 100 3 3 3 92 5 5 3 3 3 7 7 100 8696 86 100 1010 88 5 5 90 90 8392 83 15 155 3 3 3 37 3 8 7786 77 80 111110 1111 16516 90 83 73 80 15 143 14 80 80 73 71 8 8 3113 7771 80 5511 8 116 1 114 1 80 73 65 108 6 83 8 8 9 70 65 71 10 6 5 1 1 9 70 60 5 158 8 70 65 58 60 5 10 156 15 13 149 60 58 15 13 14 60 58 60 135 15 15 13 60 13 14 50 42 40 13 50 42 40 4050 42 40 50 52 52 49 40 40 20 44 30 5050 5252 5252 49 49 20 20 44 44 30 2030 0 20 20 10 Q1 Q2 Q3 Q4 Q5 0 0 100 Q1 Q2 Q3 Q4 Q5
10 CMP receiving households in % of population wage farm business 2 3 4 5 6 7 8 9 Q1 Q2 Q3 Q4 Q5 0
% of population in households receiving CMP receiving households in % of population childwage money pensionfarm otherbusiness public transfers 0 2 3 4 5 6 7 8 9 richest % of population in households receiving CMP receiving households in % of population wage farm business 2 3 4 5 6 7 8 9
poorest capitalchild money remittancespension other public transfers
richest child money pension other public transfers poorest capital remittances
Sources: richest Sources: NSO; 2018 HSES; World Bank staff estimates. NSO; 2018 HSES; World Bank staff estimates. poorest capital remittances Sources: Sources: NSO; 2018 HSES; World Bank staff estimates. NSO; 2018 HSES; World Bank staff estimates. Sources:Sources: NSO; 2018 HSES; World Bank staff estimates. Sources:Sources: NSO; 2018 HSES; World Bank staff estimates. NSO; 2018 HSES; World Bank staff estimates. NSO; 2018 HSES; World Bank staff estimates. Additional CMP benefits provided by the government would mitigate the COVID‐19 welfare loss for the poor.Additional In response CMP benefits to COVID provided‐19, the by government the government expanded would CMP’s mitigate monthly the COVID benefit‐19 level welfare from loss 20,000 for theto Additional100,000poor. CMP Inbenefits tugrug response per provided tochild COVID for 15‐by19, months the the governmentgovernment from April expanded1, would 2020 to mitigate CMP’sJuly 1, 2021,monthly the which COVID benefit is ‐equivalent19 level welfare from to 20,000lossa cost for ofto the 3.0100,000 percent tugrug of GDP. per50 child The foradditional 15 months CMP from benefits April would1, 2020 increase to July 1,per 2021, capita which consumption is equivalent of the to apoorest cost of poor. In response to COVID50‐19, the government expanded CMP’s monthly benefit level from 20,000 to 100,000 tugrugpopulation3.0 percent per childgroup of GDP. forby 30,000 15 The months additional tugrug from on CMP average, April benefits 1, accounting 2020 would to increase forJuly 36 1, to 2021,per 38 percentcapita which consumption of istheir equivalent average of the per to poorest capitaa cost of consumptionpopulation50 group (figure by II.24). 30,000 The tugrug CMP on compensation average, accounting amount forwould 36 tocompletely 38 percent mitigate of their welfare average losses per capita due 3.0 percentconsumption of GDP. The (figure additional II.24). The CMP CMP benefitscompensation would amount increase would per completely capita consumption mitigate welfare of lossesthe poorest due populationto group the COVID by 30,000‐19 shocks tugrug for the on bottom average, 40 accounting(figure II.25). forIn the 36 lower to 38‐ casepercent scenario, of their for example, average without per capita effectiveto the COVID mitigation‐19 shocks measures, for the the bottom poorest 40 group’s(figure II.25).consumption In the lower would‐case decline scenario, by nearly for example, 20 percent without from consumptiontheeffective pre(figure‐COVID mitigation II.24). consumption The measures, CMP level, compensation the poorestbut with group’s additional amount consumption CMP would benefits, completely would their decline consumption mitigate by nearly welfare 20is projectedpercent losses from to due to the COVIDexpandthe‐ 19pre byshocks‐COVID 11 percent. consumptionfor the By bottom contrast, level, 40 additional but (figure with CMP additionalII.25). benefits In theCMP are lower benefits, not sufficient‐case their scenario, toconsumption recover for COVID example, is projected‐19 welfare without to effective mitigationlossesexpand for by the 11measures, toppercent. 50. By the contrast, poorest additional group’s CMP consumption benefits are would not sufficient decline to byrecover nearly COVID 20 percent‐19 welfare from the pre‐COVIDlosses consumption for the top 50. level, but with additional CMP benefits, their consumption is projected to expand by 11 percent. By contrast, additional CMP benefits are not sufficient to recover COVID‐19 welfare 49 Based on household‐level data (population weighted) from HSES 2018. 5049 Based on household‐level data (population weighted) from HSES 2018. losses49 for the GDP top is based 50. on nominal 2019 figure (Source: NSO). As of November50 GDP 23, is 2020. based The on monthlynominal increased 2019 figure benefit (Source: amount NSO). for children in the Food Stamp Program decreased from MNT 16,000 to the original benefit amount of MNT 8,000 from November 1, 2020. While the extension of additional benefits for the adult Food Stamp Program was not announced, 55 the program continued at least until the end of 2020. In addition to these social protection55 measures, the Government of Mongolia has implemented other 49 COVID-19-related responses, including exemptions of social security contributions, utility payment, and personal income tax. 50Based Due to on the household difficulties ‐identifyinglevel data “children (population (under weighted)age 16) in need from for HSESpermanent 2018. care” in HSES, the response impact of “children for permanent care” 50 isGDP not examinedis based inon this nominal analysis. 2019 figure (Source: NSO). 51 Based on household-level data (population weighted) from HSES 2018. 55 43
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
Table II.3. Government responses to COVID-19 (Social protection-related measures)
Original benefit Increased Time frame to Number of Program Eligibility criteria size (monthly, amount apply beneficiaries MNT) (MNT) 1 Child Money Program Children age 0–18 20,000 100,000 Apr 1, 2020– 1,144,630 (CMP) July 1, 2021 2 Social Welfare Pension (1) Seniors (not eligible 188,000 288,000 May 1–Dec 3,140 (goes for the following for SI pension), F55+/ 31, 2020 groups): M60+ (2) Dwarf individual age 188,000 288,000 May 1–Dec 106 16+ 31, 2020
(3) Disabled persons age 188,000 288,000 May 1–Dec 36,486 16+ 31, 2020 (4) Orphan children, 188,000 288,000 May 1–Dec 14,219 under age 18 31, 2020 (5) Single parent w/4+ 188,000 288,000 May 1–Dec 12 children under age 18 31, 2020 3 Children under age 16 in Children under age 16 in 188,000 288,000 May 1–Dec 10,243 need for permanent care need of permanent care 31, 2020 4 Food Stamp Program (1) Poor HHs: Adults 16,000 32,000 May 1, 2020– 118,748 (2) Poor HHs: Children 8,000 16,000 May 1–Nov 1, 123,189 2020 Sources: https://www.legalinfo.mn/law/details/15358?lawid=15358, http://hudulmur-halamj.gov.mn/.
Additional CMP benefits provided by the government As a result, with the government’s mitigation measures, would mitigate the COVID-19 welfare loss for the poor. poverty is expected to fall below the pre-COVID level in In response to COVID-19, the government expanded both the baseline and lower-case scenarios. As shown CMP’s monthly benefit level from 20,000 to 100,000 in figure II.26, taking into account the additional tugrug per child for 15 months from April 1, 2020 to CMP benefits, the 2020 simulated poverty rate for July 1, 2021, which is equivalent to a cost of 3.0 percent the baseline and lower-case scenarios would drop to of GDP.52 The additional CMP benefits would increase 22.3 and 23.9 percent, respectively. While additional per capita consumption of the poorest population allowances on the social welfare pension and Food group by 30,000 tugrug on average, accounting for 36 Stamp Program would have little effect on overall to 38 percent of their average per capita consumption poverty given their limited coverage of the poor, those (figure II.24). The CMP compensation amount would interventions to reach different vulnerable groups completely mitigate welfare losses due to the are critical. By combining these policy responses, the COVID-19 shocks for the bottom 40 (figure II.25). In simulation results suggest that potential welfare loss the lower-case scenario, for example, without effective among poor households would be eliminated and mitigation measures, the poorest group’s consumption poverty rates return to below the pre-COVID level. would decline by nearly 20 percent from the pre-COVID consumption level, but with additional CMP benefits, their consumption is projected to expand by 11 percent. By contrast, additional CMP benefits are not sufficient to recover COVID-19 welfare losses for the top 50.
52 GDP is based on nominal 2019 figure (Source: NSO). 44
Figure II.24. CMP additional benefits as share of per Figure II.25. Welfare changes with CMP additional capita consumption, 2020a benefits compared to pre‐COVID case, 2020
40
20 35 Baseline Lower Baseline + CMP Lower + CMP
15 30 COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA 10 25 5 20 e 2020 pre-COVID case 15 0 FigureFigureFigure II.24. II.24. CMPII.24. CMP additionalCMP additional additional benefits benefits benefits as as share shareas share of of per perof FigureFigureFigure II.25. II.25. II.25. Welfare WelfareWelfare changes changeschanges withwith with CMP CMP additionaladditional additional a a capitacapita perconsumption, consumption,10 capita consumption, 2020 2020a 2020 benefitsbenefitsbenefits-5 compared compared compared to toto pre prepre-COVID‐COVID‐COVID case, case, 2020 20202020
40 5 -10 40case the uncompensated from % change % change from th Baseline Lower 20-15 Baseline + CMP Lower + CMP 35 0 Baseline Lower 20 Baseline + CMP Lower + CMP 35 2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9 15 15 30 richest richest
30 poorest poorest 10 25 10 Source:25 World Bank staff estimates (AdePT simulation). Source: World Bank staff estimates (AdePT simulation). 5 Note:20 a. CMP recipients are based on information from the HSES 5 20 e 2020 pre-COVID case
2018. e 2020 pre-COVID case 15 0 15 0
10 -5 As a result,10 with the government’s mitigation measures, poverty-5 is expected to fall below the pre‐COVID As shown in figure II.26, taking into account the level in5 both the baseline and lower‐case scenarios. -10 % change from the uncompensated case the uncompensated from % change 5 -10 % change from the uncompensated case the uncompensated from % change % change from th
additional CMP benefits, the 2020 simulated poverty rate for% change from th the baseline and lower‐case scenarios would 0 -15
-15 2 3 4 5 6 7 8 9
0 2 3 4 5 6 7 8 9 2 3 4 5 6 7 8 9
drop to 22.3 and2 23.93 percent,4 5 respectively.6 7 8 9 While additional allowances on the social welfare pension richest richest poorest and Food Stamp Program would have little effect on overall poverty given their limited coverage ofrichest the poorest richest poorest poor, thosepoorest interventions to reach different vulnerable groups are critical. By combining these policy Source:Source: World World Bank Bank staff staff estimates estimates (AdePT (AdePT simulation). simulation). Source:Source: World World Bank Bank staff staff estimates estimates (AdePT (AdePT simulation). simulation). responses,Source: World the Bank simulation staff estimates results (AdePT simulation). suggest that potentialSource: welfare World Bankloss staff among estimates poor (AdePT households simulation). would be Note:Note: a. a. CMP CMP recipients recipients are are based based on on information information from from the the HSES HSES Note: a. CMP recipients are based on information from the HSES 2018.
eliminated2018. and poverty rates return to below the pre‐COVID level.
2018.
Figure II.26. Poverty headcount rates with and without policy responses, 2020a AsAs a a result, result,Figure with withII.26. the thePoverty government’s government’s headcount rates mitigation mitigation with and measures, measures,without policy poverty poverty responses, is is expected expected 2020a to to fall fall below below the the pre pre‐COVID‐COVID levellevel in in both both the the baseline baseline and and lower lower‐case‐case scenarios. scenarios. As As shown shown in in figure figure II.26, II.26, taking taking into into account account the the additional40 CMP benefits, the 2020 simulated poverty rate for the baseline and lower‐case scenarios would additional CMP benefits, the 2020 simulated poverty rate for the baseline33.6 and lower33.4‐case33.4 scenarios would dropdrop to to 22.3 22.3 and and 23.9 23.9 percent, percent,31.7 respectively. respectively.31.5 While While31.5 additional additional allowances allowances on on the the social social welfare welfare pension pension 30 25.8 23.9 23.4 andand Food Food Stamp Stamp Program Program would would have 22.3have little little effect effect on on overall 21.7overall poverty poverty given given their their limited limited coverage coverage of of the the poor,poor, those those20 interventions interventions to to reach reach different different vulnerable vulnerable groups groups are are critical. critical. By By combining combining these these policy policy responses,responses, the the simulation simulation results results suggest suggest that that potential potential welfare welfare loss loss among among poor poor households households would would be be 10 eliminatedeliminated 2020 poverty rates (%) and and poverty poverty rates rates return return to to below below the the pre pre‐COVID‐COVID level. level. 0 a FigureFigure II.26. II.26. Poverty Poverty headcount headcount rates rates with with and and without without policy policy responses, responses, 2020 2020a Base Lower pre-COVID Base + FSP responses Base + SWP Base + CMP responses Lower +Lower FSP Base + All SP Lower + SWP 40 Lower + CMP 40 33.6 33.4 33.4 Lower + All SP 31.7 31.5 31.5 33.6 33.4 33.4 Source: World Bank staff estimates31.7 (ADePT simulation);31.5 31.5 Source:30 World25.8 Bank staff estimates (ADePT simulation); 30 25.8 23.9 23.4 Note:Note: a. a.All All beneficiary beneficiary and pre-COVID pre‐COVID allowance22.3 allowance level information level information of each21.7 program of each is based program on the isHSES based 23.92018. on the HSES 2018. 23.4 22.3 21.7 CMPCMP20 = Child = Child Money Money Program;Program; FSP FSP = Food = Food Stamp Stamp Program; Program; SWP = Soci SWPal Welfare = Social Pension. Welfare Pension. 20
10 10 2020 poverty rates 2020 poverty rates (%) The 2020 poverty rates (%) HRPS results also suggested that COVID‐19‐related government assistance has generally been 0 helpful0 in mitigating negative economic impacts of the pandemic for beneficiary households, Base Base particularly the poor. Among households receiving any type of Lower government assistance, 35 percent Lower pre-COVID Base + FSP
expressed that the aid completely made up for the negativeresponses repercussions of the crisis, while another 57 Base + SWP Base + CMP pre-COVID Base + FSP responses Lower +Lower FSP responses Base + All SP Base + SWP Base + CMP Lower + SWP responses Lower + CMP Lower +Lower FSP Base + All SP Lower + All SP Lower + SWP Lower + CMP percent said that it partially offset impacts (figure II.27). These numbers are largely driven by theLower + All SP ability
Source:Source: World World Bank Bank staff staff estimates estimates (ADePT (ADePT simulation); simulation); Note:Note: a. a. All All beneficiary beneficiary and and pre pre‐COVID‐COVID allowance allowance level level information information56 of of each each program program is is based based on on the the HSES HSES 2018. 2018. CMP = Child Money Program; FSP = Food Stamp Program; SWP = Social Welfare Pension. CMP = Child Money Program; FSP = Food Stamp Program; SWP = Social Welfare Pension.
TheThe HRPS HRPS results results also also suggested suggested that that COVID COVID‐19‐19‐related‐related government government assistance assistance has has generally generally been been helpfulhelpful inin mitigatingmitigating negativenegative economiceconomic impactsimpacts ofof thethe pandemicpandemic forfor beneficiarybeneficiary households,households, particularlyparticularly the the poor. poor. Among Among households households receiving receiving any any type type of of government government assistance, assistance, 35 35 percent percent expressedexpressed that that the the aid aid completely completely made made up up for for the the negative negative repercussions repercussions of of the the crisis, crisis, while while another another45 57 57 percentpercent said said that that it it partially partially offset offset impacts impacts (figure (figure II.27). II.27). These These numbers numbers are are largely largely driven driven by by the the ability ability
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MONGOLIA ECONOMIC UPDATE From Relief to Recovery
The HRPS results also suggested that COVID-19- COVID-19-related disruptions have been ongoing and related government assistance has generally been might have escalated since the government imposed helpful in mitigating negative economic impacts of the second lockdown measures in mid-November, and the pandemic for beneficiary households, particularly the actual impacts on household welfare need to be the poor. Among households receiving any type of closely monitored. The estimated potential impacts government assistance, 35 percent expressed that the on poverty in this report are based on the latest aid completely made up for the negative repercussions available macroeconomic forecasts, distributional of the crisis, while another 57 percent said that it and price assumptions. Once the macroeconomic partially offset impacts (figure II.27). These numbers are forecasts and other model assumptions are revised, largely driven by the ability of the CMP to partially or the microsimulation results need to be updated fully offset the negative income shocks that households accordingly. have experienced since the crisis began. While most of both poor and non-poor CMP recipients expressed that the transfers were beneficial, poor recipients were 6 percent more likely to indicate that the aid completely or partially mitigated the effects of the crisis.
Figure II.27. Perception of usefulness of government assistance
Percent of beneficiary households
Any government assistance 35 57 6
Child Money Completely mitigated Program 37 56 3 4 Partially mitigated
Other Direct Has not mitigated Cash Transfers 18 60 8 14 Not affected by COVID-19
Source: World Bank staff estimates (HRPS Round 2).
46 REFERENCES
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47 MONGOLIA ECONOMIC UPDATE From Relief to Recovery
MONGOLIA ECONOMIC UPDATE From Relief to Recovery
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