Mongolia’s Fiscal Stress Test

An economic slowdown exposes the cracks in the country’s mega-project finance strategy.

Mongolia’s government is finding out the hard way that development ambitions don’t insulate a country from fiscal gravity. The first quarter of 2025 delivered a reality check: GDP growth slowed sharply to 2.4%, down from 7.9% the same period last year.

The mining sector, long the locomotive of the economy, barely moved the needle. Coal exports, the largest foreign exchange earner, fell both in volume and value.

In the first four months of 2025, coal export values dropped from $3 billion to $1.7 billion. Instead, services and agriculture picked up the slack, though not enough to meet expectations.

That’s a problem. Major institutions still forecast growth between 6% and 7% for the full year, betting on a rebound in agriculture, a construction surge tied to infrastructure projects, and higher copper output from Oyu Tolgoi.

A sluggish Q1 puts pressure on the government to show progress fast on its 14 so-called “mega-projects,” including a long-delayed oil refinery, a hydropower plant, and major rail and energy infrastructure.

The headline story is a familiar one: commodity dependence, weak diversification, and the high-stakes gamble of infrastructure-led growth. But the latest twist is how the government is responding to the fiscal squeeze by pushing legislation that would bypass normal budgetary controls to fast-track foreign-funded projects. It’s a bold move that may solve one problem, but risks creating another.

The bill in question, supported by over 40 MPs, aims to sidestep Mongolia’s tight annual cap on the use of foreign loans (currently ₮1.5 trillion ~ $420m) by exempting a list of strategically important mega-projects. The logic is straightforward: with project financing already approved and sitting idle, faster drawdown should reduce costly delays, bring projects online sooner, and generate the revenue needed to repay the loans. This is especially appealing for assets like the oil refinery and the Erdeneburen hydropower plant, which could cut import bills and boost energy security.

On paper, this looks like pragmatic problem-solving. But it also raises red flags. Mongolia’s public finances are already under pressure. The trade surplus has shrunk to a three-year low. The balance of payments swung to a $614 million deficit in March. Inflation remains high. In this context, loosening borrowing controls, even for loans that are already approved, risks undermining the country’s credibility with investors and creditors.

Moreover, the government’s reliance on state-owned enterprises like Erdenes Mongol to carry out quasi-fiscal activities without clear oversight has created a shadow debt problem. Erdenes Mongol is emblematic of a wider issue: the gap between official fiscal targets and real fiscal exposure. The draft 2026–2028 framework claims a zero fiscal balance and declining debt-to-GDP ratio, but these goals look increasingly implausible if transparency continues to erode.

That erosion isn’t inevitable. There’s room for compromise. Parliament could approve exemptions for a smaller number of projects with the clearest economic rationale and strongest governance mechanisms. But bypassing scrutiny altogether under the guise of “strategic importance” will likely backfire.

State administrative reform offers some hope. The plan to cut government headcount by 15% (excluding essential services like health and education) and increase efficiency through digital tools is sensible, if implemented well. But savings here will take time and will not offset the large capital needs tied to mega-projects.

Mongolia presents long-term potential in copper, critical minerals, agriculture, and infrastructure, but short-term risks are increasing. Opaque borrowing and inflated expectations could lead to overreach. Ulaanbaatar's key challenge is balancing fiscal discipline with growth.