Mongolia Economic Growth Rebounds Strongly in Q2, Yet Fiscal Strains Mount

Mongolia’s economic growth reached 5.6% in the second quarter, more than doubling from 2.4% in the first. The headline figure is a political boon for Prime Minister Gombojavyn Zandanshatar as he enters contentious budget talks. The recovery rests on shaky foundations with fragile revenues, rising fiscal deficits and a lack of new investment.

The growth surge owed much to a sharp rebound in agriculture, which added 3.6 percentage points after several years of contraction from harsh winters. Construction contributed another percentage point, helped by stepped-up municipal infrastructure spending. For Zandanshatar the timing is fortuitous. Stronger output provides a narrative of stability that bolsters his standing ahead of parliamentary debates on the 2026 budget.

The fiscal picture tells a different story. In the first seven months of 2025, the state budget showed a ₮1.3 trillion ($361 million) deficit as revenues fell 6.1%. A rebound in coal salesin August offered short-term relief but it reflected market swings rather than policy shifts. 

Coal’s contribution remains vulnerable to global demand fluctuations, particularly in China which is Mongolia’s dominant buyer. The volatility underscores the danger of leaning on commodities to finance day-to-day spending.

At the same time the government is pressing ahead with ambitious but thinly funded projects including plans for new Kharkhorum and Hunnu city developments. Economists warn such ventures could stoke imports, strain currency reserves and divert capital from more productive uses. 

Weaknesses in infrastructure planning underline the gap between ambition and execution. High-profile projects are often launched without a clear strategy for financing, integration, or long-term demand. They generate headlines and political credit in the short run, yet risk saddling the economy with underused assets and rising fiscal strain.

The recovery in agriculture could be evidence that Mongolia is edging toward diversification. Yet the base effect in agriculture is misleading. Output is rebounding from previous weather-related slumps rather than signaling a durable structural shift. Construction momentum relies on public spending, mainly in Ulaanbaatar, that may be hard to sustain under fiscal pressure. The main export earner coal remains hostage to external prices and demand.

The pattern is familiar. Mongolia has repeatedly enjoyed bursts of growth from commodity exports only to see fiscal imbalances widen and structural reforms delayed. Privatization and large-scale foreign investment remain stalled. Despite rhetoric about diversification the economy continues to depend heavily on a handful of commodity exports, leaving it exposed to global cycles.

The danger is that today’s gains lull policymakers into complacency. Zandanshatar may claim credit for headline growth and a temporary fiscal reprieve but neither substitutes for reforms that can attract stable capital, develop value-added industries and strengthen fiscal discipline.

Mongolia now faces a narrow window. The second quarter expansion and the August coal windfall provide political breathing space but the underlying weaknesses of deficits, investment gaps and commodity dependence persist. Without credible reform the country risks sliding back into its familiar boom and bust rhythm, trading short-term relief for long-term fragility.