“Despite improvement in external climate and increased policies to support demand, the recovery in the local economy is still expected to be slow in 2021. Inflation is forecast to rise further as supply-side factors affecting inflation fade and oil prices rise on world markets,” Mongol Bank said in its new Inflation Report for the first quarter of 2021.
The impact of supply and demand fac- tors on inflation is likely to increase in the coming months. In February 2021, inflation reached 2.6 percent nationwide and 2 percent in Ulaanbaatar. Although meat prices spiked more than anticipated in February, the supply-side or cost-push inflation trending to remain low until the end of the first quarter due to a 75 percent reduction in the price of coal briquette. However, the new report warned that supply-side inflation may start accelerating from the second quarter due to the following reasons:
1. The effect of the base period on fuel prices, which is reducing inflation by around 1 percentage point, will fade.
2. Expiration of the government’s decision to sell coal briquette at a discounted price (effective on April 1, 2021).
In terms of demand factors, inflation is forecast to gradually increase as economic activities are stimulated through policy and restrictions ease thanks to vaccination rollout. Inflation is expected to remain within the central bank’s target range (6 percent ± 2 percent) this year, provided that no sharp supply-side price fluctuations occur in the future.
In the report, GDP growth was projected to reach 6.1 percent in 2021. The mining sector is expected to play a key role in this, with growth of around 16 percent. This illustrates positive outlook for this year’s growth after Mongolia’s economy faced the worst economic fall in the past 30 years due to the outbreak of COVID-19 pandemic last year. Mongolia’s GDP hit below 0 at -5.3 percent in 2020, the deepest decline since the tough market transition in the 1990s. The economy is expected to near pre-pandemic levels as it expands by 6 percent this year.
In 2021, the mining sector will intensify due to increased mineral exports, while the negative impact of the pandemic on the non-mining sector will be higher than expected, as underlined in the report. The resurge of COVID-19 cases in Ulaanbaatar led the government to impose a lockdown between February 11 and 23, and this likely made growth in the non-mining sector sluggish in the first quarter of the year. The sector is unlikely to recover in the second quarter due to delays in controlling the spread of the virus.
As for the mining sector, it is projected to grow strongly in 2021 as long as there are no major outbreaks in the border areas and exports resume normally. The report highlighted that the turn of events for the economy would depend on the timing of the control of the domestic COVID-19 infection.
Mongol Bank underscored two factors that could boost economic growth. It expects the global vaccination rollout and positive changes in the global economy to help the Mongolian economy recovery. The economic stimulus program is also expected to accelerate growth. International organizations have similar expectations in this regard.
“As part of the government’s economic stimulus measures, policy loans are expected to support investment and recovery in non-mining sectors. In addition, the recovery of the global economy and higher commodity prices will support other sectors that are highly dependent on mining, such as FDI, mining and transportation,” the report read.
The central bank concluded that Mongolia’s economic recovery would depend greatly on how the spread of the COVID-19 pandemic managed in Mongolia and elsewhere, as well as the immunization coverage.
