Mongolia’s Budget Boom

The government is riding high on the back of a commodity-fueled surge. With its revenue swelled by 29% in the first nine months of 2024, driven largely by coal exports, it would be easy to conclude that the country is on an unstoppable trajectory toward prosperity.

Beneath these numbers—a GDP on the rise and a budget surplus of 1.5 trillion MNT—loom critical challenges that, if ignored, could derail the country’s progress.

The International Monetary Fund (IMF) has taken notice.

In its most recent assessment, the IMF issued a sober warning to Mongolian policymakers: make the most of the current boom, but manage it wisely. Public debt, now at 47% of GDP, is certainly lower than in recent years, and gross official reserves stand at a comfortable $4.7 billion. However, rapid credit growth, persistent core inflation, and looming fiscal deficits threaten to upend the delicate balance Mongolia has achieved.

The biggest threat to Mongolia’s economic future may be one of its own making. The government’s ambitious investment agenda, aimed at diversifying beyond raw material exports, could overstretch the country’s resources. The 2025 budget deficit is projected to hit 1.9 trillion MNT (~ $567 million), as expenditures climb to 37% of GDP.

The IMF’s caution against expansionary fiscal policies is well-timed: unchecked spending risks inflating an already high credit market, further pressuring inflation, which the central bank is struggling to contain with a 10% policy rate.

Mongolia is taking steps to address its vulnerability to the boom-and-bust cycle. However, successful implementation of reforms and consistent commitment to fiscal discipline will be crucial to avoiding the familiar trap of debt accumulation followed by painful adjustments.

Mega-projects—such as those focused on processing raw materials—are central to the government's plan. These initiatives, however, are fraught with uncertainty. They require vast capital, effective governance, and strong private sector buy-in, none of which are guaranteed.

The reliance on coal exports, while lucrative for now, is also a long-term gamble. Global efforts to reduce carbon emissions could leave Mongolia scrambling to replace coal revenues in the future. To mitigate this risk, Mongolia has ramped up efforts to diversify trade partners. Prime Minister’s recent outreach to Pakistan at the Shanghai Cooperation Organization summit and the President’s visits to Central Asian nations demonstrate a strategy to expand beyond its traditional markets in China and Russia

Despite these risks, Mongolia’s state-owned mining giant, Erdenes Tavan Tolgoi (ETT), offers a glimmer of hope. ETT posted a record profit of 3.5 trillion MNT (about $1 billion) in 2023, driven by strong sales and aggressive debt repayment. The government’s plan to list ETT on the stock exchange could unlock significant value, not only for the 3.4 million Mongolians who hold shares but also for international investors eyeing Mongolia’s rich resource base. But listing the company is not without its challenges—delays, governance reforms, and market conditions must be navigated carefully.

The state’s handling of ETT could set the tone for the broader economy. If done right, it could demonstrate Mongolia’s ability to manage its resources strategically, attracting foreign investment and boosting the nation’s financial reputation. But missteps could erode confidence and send the message that Mongolia is ill-prepared for the complexities of modern markets.

The challenge for Mongolia is striking the right balance. On one hand, it must seize the opportunity of the current boom to make strategic investments in infrastructure and energy - areas that remain underfunded yet critical for long-term prosperity. On the other hand, fiscal prudence is essential to avoid overheating the economy and ensuring stability in the years to come. While Mongolia’s current mining-driven boom could be sustained in the short to medium term, possibly for the next 2 to 5 years, long-term growth will require reducing dependence on coal exports and making substantial progress in economic diversification

The upcoming debate on the 2025 budget is Mongolia’s chance to show that it can walk this tightrope. Policymakers must prioritize transparency, effective resource management, and the fostering of a stable investment climate. Most importantly, Mongolia must look beyond coal. Diversifying its economy—through value-added processing, boosting human capital, and attracting responsible foreign investment—is the only way to ensure that today’s prosperity is not tomorrow’s missed opportunity.