Mongolia’s path to economic recovery
The Mongolian government has announced a “comprehensive” plan to help its economy rebound from the shock of the pandemic, but it contains no policies designed specifically to reduce poverty, writes Ariun-Erdene Bayarjargal.
Although pandemics do not “die”, COVID-19 is likely to fade from central attention in 2022. As the world transitions to post-pandemic life and a new normal, policymakers are now considering options for recovery for economies hit hard by the pandemic. Mongolia is no exception.
Mongolia’s economy contracted 5.3% in 2020, the biggest decline in two decades, but a strong rebound in exports helped the economy rebound in the first half of 2021.
High prices for commodities, especially mining products, in the world market resulted in a positive trade balance despite the decline in gross export volume. The International Monetary Fund’s outlook for Mongolia indicates that growth is expected to be 7.5% in 2022.
Alongside this expectation of strong growth, however, is inflation. Disruption to the supply chain induced by border closures pushed annual inflation to 13.4% in December last year, and rising food and fuel prices also contributed to the ‘inflation.
As a result, the Bank of Mongolia adopted a tighter monetary policy, raising its policy rate by 0.5 points from its historically low level of 6% at the end of January and increasing the reserve requirement.
In terms of vaccines, the government of Mongolia has managed to secure vaccines for its population by taking advantage of its proximity to two major vaccine-producing countries in China and Russia.
By the end of January 2022, more than 60% of the adult population had received at least one dose of the vaccine. However, this vaccination rate, which is among the highest among lower-middle-income countries, has not translated into socio-economic normalcy, and difficult economic conditions continue to affect people’s livelihoods. many Mongols.
Like many other countries, the government adopted a generous set of tax measures in 2020 to mitigate the impact of the pandemic on households. These measures included a fivefold increase in family allowances, a doubling of food stamps and a substantial increase in social benefits for the vulnerable.
The total size of the package, including tax exemptions and support for small and medium enterprises, reached 7.5% of total gross domestic product (GDP) in August 2020.
Further closures led to income losses for households and businesses in 2021, and the government continued the relief program by distributing cash assistance of 300,000 Mongolian Tögrög (US$104) to each citizen, costing the budget equivalent to 2.5% of the country’s GDP.
Overall, 2.4 million people received social assistance, with family allowances accounting for 49.6% of the assistance received. Among households affected by economic shocks related to the COVID-19 pandemic, those employed in low-skilled and/or informal sectors, those with limited economic security, and those living just above the poverty line national level have been disproportionately affected and remain at high risk of falling into poverty.
A micro-simulation analysis by the World Bank indicates that the poverty rate could have increased between 5.4 and 7.9 percentage points compared to pre-COVID-19 projections in the absence of the poverty mitigation policy. government.
Although these assistance programs have helped many households maintain their income, their rapid withdrawal could create significant hardship in the wake of rising inflation. The challenge Mongolia currently faces is that it has limited fiscal capacity but must continue to support its people as the economy recovers. On top of that, a new expansionary fiscal policy could put pressure on currencies, exacerbating inflation.
The COVID-19 pandemic has changed the structure and conditions of the Mongolian labor market. The country’s labor force participation rate is more than two percentage points below 2019 levels in the third quarter of 2021.
The service sector, which employs the largest share of casual workers of any industry, has been hit hard by the pandemic and recovery has been slow due to mobility restrictions. Job losses were inevitable in an industry where most workers were denied social security benefits and other benefits, such as paid vacations.
This made marginal income losses even greater among the poor. Women have also been disproportionately affected, as they make up the majority of the workforce in the service sector, and many have been forced out of the workforce to care for children during the lockdowns.
Studies have shown that the poor are more vulnerable to unemployment and inflation shocks than the rich, and Mongolia’s situation is no different. There is no doubt that the pandemic has exacerbated the vulnerability of certain groups and deepened inequalities in the country.
Mongolia, like other countries, is shifting from policies focused on short-term economic relief to accelerating recovery and building resilience. Mongolia’s parliament announced its plan, dubbed the “New Recovery Policy”, in late December 2021, in addition to a four-year plan approved by the government in February 2021.
It focuses on medium-term development issues and describes improving labor market participation, but it contains one glaring omission – a concrete plan to reduce poverty.
The “global plan” will cost about $3.4 billion, or about a quarter of the country’s GDP in 2020 at current prices.
The new stimulus policy adds to that plan and extends that amount to more than $30 billion over the long term. With annual government revenues in 2021 only reaching $5 billion, it is not at all certain where the fiscal space is coming from to fund these long-term programs.
OAlthough the plan addresses issues related to improving youth employment and skills development, as well as supporting small and medium-sized enterprises, it is not acceptable that no specific action is defined to combat poverty and inequality.
Of course, the government must adopt an integrated and financially viable approach to boost medium-term economic prospects and job creation, but it must also take specific measures to tackle the socio-economic problems facing the people. Mongolian, and poverty and inequality are the biggest of these problems.