Nowadays we hear and read a lot of analysis on the economic situation in the developed world. What we hear and read a lot less about is the effects of the current economic and financial crisis in developing countries. As I have taken a special interest in economic, social, and political developments in the Mongolian Republic I can provide you with a glimpse on how life is on the other side of the Ural Mountain Range. Actually you have to go beyond the Altai Mountain Range as well in order to reach Mongolia. I took that particular trip on the Trans-Siberian Railroad in 2005 and arrived in time to see Nambariin Enkhbayar become the President of Mongolia. The train ride was an experience that I warmly recommend.
Now there is a new President in office, as Tsakhiagiin Elbegdorj has taken office since the election held in late May 2009. President Elbegdorj is among those heads of state, like US President Barack Obama, that enters office in the midst of the worst financial crisis since the 1930s. That is the general Western understanding, but in the East crisis has followed quite another pattern. In the Far East, of which Mongolia at least is a geographical part, crisis tend to originate from the political sector of society, rather than from the economy. That means that in the minds of Mongolians the worst crisis in the remote past was the purges of the communists against the old power structures in Mongolia and the fact that this tended to affect a lot of people.
Nevertheless, the present crisis has been hitting Mongolia far worse than most other countries. Mongolia differs from other countries in the respect that it has been hit by the crisis, not via the financial sector, but through the so called commodity channel. The Mongolian economy is basically based in three sectors hearding (and the products derived from that practice), mining and crude oil. The main source of income for Mongolia, exports of copper, fell with 65 percent, from April 2008 to March 2009. The other commodities, like coal, cashmere and crude oil, also fell to a much lower level than the previous year.
The period right before the current down-turn, the booming years of 2003-2007, meant modest surpluses in public finance, but this proved insufficient to absorb the effects of the economic down-turn. During the peak year of 2007 the revenues from the mining sector was as high as 15 percent of GDP. The non-mining sector of the economy fell to a deficit of 15 percent in 2008. The effect of the economy is that shrinking revenues from the mining sector is supposed to pay for a growing deficit in the non-mining sector. Furthermore, wages and salaries increased rapidly between 2006 and 2008, and further increased the budget deficit. On top of this Mongolia experienced the highest inflation rate in East Asia, no less than 33 percent in August 2008. The Mongolian finance policy of loose monetary policies led to a boom on the credit market, leading to a massive increase of non-performing loans (NPLs). This, in turn led negative real interest rates on local currency deposits and resulted in flight of capital into other currencies and markets, where the interest rates could be as high as 12 to 18 percent. In the second quarter of 2009 the budget deficit peaked with 15 percent of GDP.
The Mongolian Government led by MPRP Prime Minister Sanj Bayar has been presenting an action plan to its development partners, during spring 2009. The IMF approved an 18 month Stand-By Arrangement of USD 229 million to assist Mongolia to adjust to the external shock and to stabilize the economy. The World Bank approved USD 60 million as single-tranche development policy credits for 2009 and 2010. The Asian Development Bank provided USD 60 million and Japan UDS 50 million. Together this contributed to no less than USD 130 million during 2009 to fill in the gaps and balance the Mongolian economy.
This has affected the bulk of Mongolian society as firms and companies have lain off their personnel as constructions and investment has soured. The registered part of unemployment reached almost 4 percent in July 2009. Unofficial estimates of the unemployment rate consider it as high as 21-26 percent. At the same time as unemployment has risen, the increase in wages and salaries has meant that the inequality rate has actually risen.
In the aftermath of economic crisis and social downturn follows crime increase, social and psychic problems. There are reports on increased consumption of alcohol, gender-based violence and abuse of children following the economic down-turn. As inequality rises the increased crime rate and social problems affect those at the bottom of Mongolian society in general and those living in the bigger cities, as Ulaanbaatar, Darkhan and Erdenet, in particular.
This article paints a rather dull picture of the present state of the Mongolian economy and I would like to end it pointing at the loans and aid from the international organization and foreign donor community has succeeded in filling in the gaps at least for this year.
Now there is a new President in office, as Tsakhiagiin Elbegdorj has taken office since the election held in late May 2009. President Elbegdorj is among those heads of state, like US President Barack Obama, that enters office in the midst of the worst financial crisis since the 1930s. That is the general Western understanding, but in the East crisis has followed quite another pattern. In the Far East, of which Mongolia at least is a geographical part, crisis tend to originate from the political sector of society, rather than from the economy. That means that in the minds of Mongolians the worst crisis in the remote past was the purges of the communists against the old power structures in Mongolia and the fact that this tended to affect a lot of people.
Nevertheless, the present crisis has been hitting Mongolia far worse than most other countries. Mongolia differs from other countries in the respect that it has been hit by the crisis, not via the financial sector, but through the so called commodity channel. The Mongolian economy is basically based in three sectors hearding (and the products derived from that practice), mining and crude oil. The main source of income for Mongolia, exports of copper, fell with 65 percent, from April 2008 to March 2009. The other commodities, like coal, cashmere and crude oil, also fell to a much lower level than the previous year.
The period right before the current down-turn, the booming years of 2003-2007, meant modest surpluses in public finance, but this proved insufficient to absorb the effects of the economic down-turn. During the peak year of 2007 the revenues from the mining sector was as high as 15 percent of GDP. The non-mining sector of the economy fell to a deficit of 15 percent in 2008. The effect of the economy is that shrinking revenues from the mining sector is supposed to pay for a growing deficit in the non-mining sector. Furthermore, wages and salaries increased rapidly between 2006 and 2008, and further increased the budget deficit. On top of this Mongolia experienced the highest inflation rate in East Asia, no less than 33 percent in August 2008. The Mongolian finance policy of loose monetary policies led to a boom on the credit market, leading to a massive increase of non-performing loans (NPLs). This, in turn led negative real interest rates on local currency deposits and resulted in flight of capital into other currencies and markets, where the interest rates could be as high as 12 to 18 percent. In the second quarter of 2009 the budget deficit peaked with 15 percent of GDP.
The Mongolian Government led by MPRP Prime Minister Sanj Bayar has been presenting an action plan to its development partners, during spring 2009. The IMF approved an 18 month Stand-By Arrangement of USD 229 million to assist Mongolia to adjust to the external shock and to stabilize the economy. The World Bank approved USD 60 million as single-tranche development policy credits for 2009 and 2010. The Asian Development Bank provided USD 60 million and Japan UDS 50 million. Together this contributed to no less than USD 130 million during 2009 to fill in the gaps and balance the Mongolian economy.
This has affected the bulk of Mongolian society as firms and companies have lain off their personnel as constructions and investment has soured. The registered part of unemployment reached almost 4 percent in July 2009. Unofficial estimates of the unemployment rate consider it as high as 21-26 percent. At the same time as unemployment has risen, the increase in wages and salaries has meant that the inequality rate has actually risen.
In the aftermath of economic crisis and social downturn follows crime increase, social and psychic problems. There are reports on increased consumption of alcohol, gender-based violence and abuse of children following the economic down-turn. As inequality rises the increased crime rate and social problems affect those at the bottom of Mongolian society in general and those living in the bigger cities, as Ulaanbaatar, Darkhan and Erdenet, in particular.
This article paints a rather dull picture of the present state of the Mongolian economy and I would like to end it pointing at the loans and aid from the international organization and foreign donor community has succeeded in filling in the gaps at least for this year.
Sources: UB Post September 15 2009; UB Post September 8 2009.
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