Mongolia’s Economy Rebounds Despite Falling Royalties and Rising Inflation

Mongolia’s economy grew a robust 5.9 percent in the first nine months, exceeding forecasts that anticipated a muted year for mining. The growth, however, reveals a deeper challenge.

Agriculture, not mining, powered the expansion, while a key revenue source declined sharply and inflation persisted.

The surprising momentum stemmed from agriculture, which surged 33.8 percent in value added after last year’s severe winter storm, known as a “zud.” This rebound contributed 3.4 percentage points to overall growth, driven by improved grazing conditions and higher meat and dairy output.

Herders, not miners, carried the economy, highlighting a recovery reliant on weather patterns rather than structural reform. This dependence on weather carries persistent risk. Government forecasts for the upcoming winter indicate a “very high risk” of zud in about 3 percent of the territory, and “high risk” in another 22 percent, underscoring the sector’s inherent vulnerability.

While the broader non-mining economy accounts for nearly 87 percent of nominal output, it generates only 7.2 percent of exports. This imbalance underscores Mongolia’s continued dependence on a commodity cycle that shapes its fiscal health and external position. Mining itself saw only modest growth after a strong 2023.

Household consumption further complicates the picture. Real spending rose 9.7 percent despite uncomfortably high inflation. This spending likely reflects wage adjustments, rising bank deposits, and renewed confidence. The consumer strength may also stem from fiscal transfers and salary hikes, carrying a risk that rising inflation expectations could quickly erode optimism.

The nation’s fiscal accounts already signal a shift. Last year’s surplus has vanished, giving way to a 1.6 trillion MNT deficit (~$445m) as revenues softened and expenditures climbed.

Mineral royalties, a primary revenue source, plummeted 45 percent, and income tax receipts also dipped. Gains in social security, property tax, and value-added tax have failed to offset the mining revenue decline. Crucially, current spending continues to outpace capital investment, with equipment spending falling, which signals weakening support for productivity growth.

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Monetary indicators suggest caution rather than exuberance. Broader money supply, which includes all bank deposits, expanded due to an increase in local currency deposits.

However, the most liquid forms of money, such as cash and checking accounts, grew slowly. This suggests households are parking funds in savings accounts rather than spending or investing, a sign of public nerves rather than an overheating economy.

Diversification efforts remain slow, despite potential in areas like cashmere processing. Only 8.4 percent of raw cashmere becomes finished goods, yet combing (i.e. processing) can double margins. The potential for value addition exists, but policy action remains insufficient in spite of financial incentives like “White Gold” targeting the cashmere sector.

The economic path ahead is challenging. Inflation is drifting upward as public sector wage hikes enter the system. Fiscal buffers are thin, and mining revenues remain unreliable. While current growth appears strong due to favorable weather and resilient household spending, a more durable export base and reined-in structural spending habits are crucial. Without these, the country remains vulnerable to the next economic downturn, particularly given the recurring risks to its agricultural sector.