Wednesday, February 17, 2016

Despite Commodities Boom Years, Mongolia Still Faces Capacity Gap

Editor’s note: This article is part of an ongoing WPR series on the impact of falling oil and commodities prices on resource-exporting countries.

As a commodities-exporting country deeply linked to the Chinese market, Mongolia faces heightened risks from the current commodities slump and China’s economic slowdown. In an email interview, Jonathan Berkshire Miller, director of the Council on International Policy, discusses the impact of the commodities slump on Mongolia.

WPR: How important are commodities for Mongolia’s economy, and what effect have falling commodities prices had on public spending and, by consequence, political stability?

Jonathan Berkshire Miller: Commodities, and their prices, remain a critical valve for the Mongolian economy. After years of soaring economic growth, the Mongolian economy has precipitously cooled over the few past years with a sharp decline in GDP growth and a looming deficit of foreign direct investment (FDI). Indeed, Ulaanbaatar remains heavily dependent on the mining sector for its economic fortunes, which have been battered over the past three years due to the sinking price of coal as global supply outpaced demand. But while the demand for coal is once again slated to surpass supply in the coming years, Mongolia’s FDI numbers remain low. The fall in prices has impacted public spending on critical infrastructure and filling crucial capacity gaps.

In addition to these issues, the government is also struggling, under the brunt of decreased revenue, to keep up a steady flow of fuel subsidies to offset the cost of energy. Energy costs have an effect more broadly, but it is especially acute toward businesses and large consumers of energy in Mongolia. That said, the last budget, approved in November 2015, for the most part did not touch fuel subsidies and social welfare benefits. Going forward, however, it will be difficult for Ulaanbataar to maintain this position if growth continues to be limited.

WPR: How effectively did Mongolia use the revenue windfalls of the commodities boom to develop infrastructure and address poverty and social welfare issues?

Miller: During its boom years, Mongolia did take significant efforts to develop its infrastructure, especially in the “key need” areas such as energy, water, transportation and telecommunications. The problem is that the need and capacity gap is so large that these efforts, spearheaded by both the private and public sector, remain insufficient. Infrastructure capacity remains poor in Mongolia, and while there have been improvements, universal access to water and especially electricity remains a distant goal. In addition to the lack of potable water supply, there are also major infrastructure issues with regard to access of adequate sewage collection and waste disposal. Ulaanbaatar similarly lacks the necessary infrastructure on railways and roads, critical for the transit of goods. The problem of transportation infrastructure needs to be addressed in order to facilitate commodity trade between Mongolia and its two neighbors, China and Russia.

On social welfare issues, the government has a well-established system, but it has underperformed due to a poor targeting strategy. According to the World Bank’s most recent report, the poorest 20 percent of people in Mongolia received 34 percent of total social welfare transfers, while approximately 30 percent of the benefits were received by the richest two quintiles. This standard lags behind other countries in Central Asia and Europe. ?

WPR: What steps has Mongolia taken to diversify its economy, and how effective have they been?

Miller: Diversification of the Mongolian economy is desperately needed in order to reduce its exposure to commodity price shocks. While it will be impossible to eliminate this exposure, lessening the blow is achievable with more diversification. Right now, Mongolia remains highly vulnerable due to its export dependence. Mining continues to dominate the export sector and represents a large share of the Mongolian GDP. The government has been looking at diversifying and recognizes the need to skirt the “resource curse.” Some targeted areas have been effective, especially in sectors such as agriculture and tourism, which account for a combined 25 percent of Mongolia’s GDP. Ulaanbaatar should focus even more efforts on boosting tourism, especially as an eco-tourism location. On agriculture, there is a need for new capacity on biotechnology as well as for learning best practices from international companies. Diversification of its energy supply is another area of interest, with the question of potentially looking at nuclear power in the future.

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