Mongolian Inflation and Tugrik Devaluation

During the Covid-19 pandemic, Mongolia’s economy has contracted due to lockdowns within the country and closures of its border with China, resulting in a decrease in exports and shortages and price increases on imports. During this period, Mongolia’s central bank adopted an expansionary monetary policy, printing money, cutting interest rates, and injecting liquidity. This drove down the value of the tugrik, and left public debt at 81% of GDP by the end of 2021.

Nearly two and a half years since the beginning of the pandemic, the Chinese border is still mostly closed, due to Beijing’s zero-Covid policy. Meanwhile, the war in Ukraine has driven up gas and energy prices, and this has had a profound impact on the prices of almost all goods in Mongolia. At the same time, the tugrik is losing value against the US dollar on world currency markets. To protect their savings from devaluation, Mongolians are scrambling to convert their cash into dollars, but dollars are in short supply.

Mongolia entered 2022 carrying two years of relatively negative economic indicators. According to the Asian Development Bank (ADB), Mongolia’s economy contracted by 4.6% in 2020 and grew by only 1.4% in 2021. Raw materials exports, largely copper and coal, recovered during the first quarter of 2021, but then petered out in the final three quarters of the year, as demand from China fell. The service sector rebounded, although not fully, as domestic Covid-19 restrictions were lifted. The manufacturing sector stagnated, and construction contracted, because of supply chain disruptions. Agriculture also regressed, as a result of harsh weather and animal disease outbreaks.

Investment recovered, but coal inventories increased, as a result of a decrease in exports to China. In 2019, accumulated inventory only accounted for 8.9% of GDP, but in 2021, inventories increased to 13.4%.

A combination of Covid-19 restrictions, pessimistic economic outlook, and inflation has driven down real household incomes, while suppressing household consumption. Consequently, final consumption decreased by 4% in 2021, largely because of a 6.6% decline in household consumption. The global increase in commodity prices should have helped Mongolia, but continuing border restrictions imposed by China reduced Mongolia’s exports, nullifying any benefit Mongolia could have gained from higher prices. In 2021, total employment decreased by 5%, with 60,000 jobs lost.

Now, in 2022, Mongolia is facing currency devaluation and price inflation. Galsanbat Narantogtoh, a manager at Uran Uurgach LLC, explained: “Our country imports most of its goods from foreign countries. All imports are paid for in foreign currency, so everything is getting more expensive. It’s getting more difficult to live on the same salary.”

Roughly half of the goods in the Mongolian Consumer Price Index (CPI), used to measure inflation, are imported. Headline inflation, the inflation rate reflected by the basket of goods that Mongolians need in everyday life, reached 14.4% year on year by March 2022.

“Inflation is very high when it comes to products, and even meat and flour are getting very expensive. Along with food, other products such as home appliances and other non-food items have also increased,” reported Bilguun, a department head at Golomt Bank.

The price inflation that Mongolians now face comes from a number of sources. The first is that the tugrik has lost value against the dollar and imports have to be paid for in dollars. Bilguun attributed the loss of value to the government’s MNT 10 Trillion Comprehensive Plan for Health Protection and Economic Recovery. “With this program, the government printed a lot of money in Mongolia. For one or two years, it may seem like we’ve been fed by the government, but this has caused the tugrik to go in a long-term downward spiral,” resulting in a greater number of tugriks being required to pay for the same quantity of goods, he said.

Another cause of rising prices in Mongolia is factory gate inflation, or the producer price index (PPI). All over the world, prices of energy and raw materials have increased, driving up the PPI and this the cost of manufacturing goods. In China, the PPI grew by 8.3% year-over-year in April.

Higher-priced products have become even more expensive because of China’s lockdown regimen. Turbold, an employee at Oortsogiin Hondii, a non-bank financial institution, said that “the Chinese are purposefully holding up shipments at the border. This is making things very difficult here. Grocery prices have almost doubled because of the Chinese.” Only a small quantity of containers are allowed to cross the border each day, causing shortages and driving up prices of consumer goods. Additionally, increased energy costs have resulted in higher transportation costs. These factors combine to push up prices at grocery stores.

Apart from food, one of the most important daily necessities is gasoline, which, as of mid-April, was up 64.2% year-on-year. According to Turbold, the increase in local gas prices comes from a combination of factors. The depreciation of the tugrik has made gas imported from Russia more expensive, he said. Even if gas prices had remained the same, Mongolians would still have had to pay more tugriks for it, because gas is priced in dollars. However, the actual cost has risen because of the war in Ukraine. Mongolians are therefore feeling the crunch on two fronts.

Taking all of these factors into consideration, The World Bank forecast Mongolia’s 2022 GDP growth at 2.5%. ADB projected 2.3% growth in 2022 and 5.6% in 2023.

FocusEconomics takes a more optimistic position, expecting 4.7% in 2022 and 6.3% in 2023. It is important to note, however, that FocusEconomics arrived at the 4.7% number after downgrading their 2022 projection by 1.6%, as a result of first quarter financial data. If lockdowns in China continue, if the Ukraine war is not resolved quickly, or if gas prices go higher, the economic outlook for Mongolia will worsen.

“It doesn’t seem like it’ll stop any time soon. Every day, the Mongolian tugrik is rising by 5, 10, or 15 tugriks against other currencies,” lamented Bilguun.

By Antonio Graceffo, Ph.D., China-MBA with research assistance from
Khangal Odbayar, Tengis Enkh-Amgalan, Suldbayar Nasanbat, and Nomintuul Batsaikhan