Mongolia's Economic Outlook: Pursuing Diversity & Stability

Mongolia, a nation rich in natural resources, is proactively steering its economy towards greater diversity and resilience amidst a complex global landscape. In a recent interview, Byadran Lkhagvasuren, Governor of the Bank of Mongolia, shed light on the country's ambitious economic strategy, highlighting both the promising growth projections and the cautious approach adopted by the central bank to ensure enduring stability.

Mongolia's Growth Trajectory in 2025: A Balanced Outlook

The economic horizon for Mongolia in 2025 appears largely positive, with projections indicating a robust growth rate of approximately 5% to 6%. This optimistic forecast is underpinned by several key drivers. Primarily, the expansion of copper production from the Oyu Tolgoi underground mine is expected to provide significant impetus. Additionally, a crucial recovery in the agricultural sector, following the substantial losses incurred during the preceding winter, is anticipated to contribute positively. Complementing these sectors, steady expansion in the service and construction industries further solidifies the growth outlook.

However, this optimism is tempered with a degree of caution. Global economic uncertainties and persistent geopolitical tensions cast a shadow over export markets and could potentially dampen investor sentiment. The performance of commodity markets presents a mixed picture; while copper prices are demonstrating strong upward momentum, coal, another vital export, has experienced notable volatility, impacting the nation's reserves earlier in the year. Domestically, inflationary pressures continue to be a concern, alongside climate-related risks, such as the recurring "dzud" – extreme winter conditions leading to widespread livestock mortality. In response, the central bank maintains a conservative stance, prepared to deploy a comprehensive suite of policy instruments, including monetary, macroprudential, and regulatory measures, to safeguard both price and financial stability. Emphasizing fiscal prudence and robust economic diversification, the central bank aims to mitigate reliance on volatile commodities. Despite these challenges, the overall economic outlook remains positive, a sentiment reinforced by a stable credit outlook that reflects international confidence in Mongolia's medium-term potential.

Fortifying Foreign Exchange Reserves: A Pillar of Stability

Mongolia's foreign exchange reserve position has demonstrated remarkable strength, reaching a record high of US $5.68 billion as of August 2025. This substantial figure provides import coverage for approximately six months, establishing a vital buffer against potential external shocks. The journey to this robust position, however, was not without its trials.

Navigating Market Pressures

The first half of 2025 saw reserves come under considerable pressure. Weaker commodity prices, particularly for coal, combined with global trade tensions and generally softer market conditions, contributed to this strain. Yet, a significant turnaround was observed from July onwards. The recovery was driven by a combination of factors:

• Stronger global copper prices.
• Increased income from sophisticated reserve management activities, including gold monetization.
• More resilient demand from key trading partners, notably ASEAN economies, which helped offset a dip in demand from the US.
• Successful securing of additional external funding by Mongolia's financial sector from international markets, a testament to sustained investor confidence in the nation's long-term prospects.

Looking ahead, ensuring long-term stability necessitates a concerted effort to reduce the economy's dependence on a narrow range of commodities. Government initiatives focused on diversifying mining exports, enhancing critical infrastructure, and improving the overall investment climate are deemed crucial for sustained resilience.

Strategic Policy Rate Adjustment to Counter Inflation

The decision to increase the policy rate earlier this year was a proactive measure in response to accelerating inflation. Inflation surged in the latter half of 2024 and has persistently remained above 8%, exceeding the central bank's target band. While global supply-side shocks, such as commodity price volatility and disruptions in supply chains, played a role, a significant concern was the persistently elevated core inflation, signaling robust domestic demand. Furthermore, substantial wage growth witnessed in recent years has added to these inflationary pressures. Against this backdrop, the Bank of Mongolia initiated a tightening of its monetary policy stance at the beginning of 2025. The primary objective of this measure is to rein in inflation, bring it back within the target range, stabilize inflationary expectations, and uphold financial stability across the economy.

Balancing Fiscal and Monetary Agendas

When queried about the equitable balance between fiscal and monetary policy, Governor Lkhagvasuren clarified the central bank's distinct mandate. As a central bank, its role is not to assess or dictate fiscal policy choices, but rather to conduct monetary policy effectively within the prevailing fiscal environment. The core responsibility remains safeguarding price and financial stability, irrespective of the government's fiscal stance.

While acknowledging that an alignment between fiscal and monetary policies can amplify their collective impact, the Bank of Mongolia operates as a neutral institution. Its fundamental role is to strategically deploy available tools to manage inflation, firmly anchor economic expectations, and foster sustainable growth for the nation.

Deepening Engagement with ASEAN: A Strategic Imperative

Mongolia's increasing emphasis on more active engagement with ASEAN countries is a strategically sound decision. ASEAN economies represent some of the fastest-growing regions globally, characterized by dynamic markets and deepening regional integration. Strengthening ties with this influential bloc offers multifaceted benefits:

• Expanded export markets for Mongolian products.
• Diversified investment flows into the Mongolian economy.
• Opportunities for technology transfer and innovation.
• Enhanced financial cooperation, contributing to greater economic resilience.

On the central banking front, Mongolia is an active and contributing member of the SEACEN (Southeast Asian Central Banks) community. Its commitment to regional dialogue and capacity building was recently underscored by hosting the SEACEN Human Capital Conference and Course for Central Bankers in Ulaanbaatar, a testament to its dedication to fostering stronger regional financial ties and knowledge exchange. Through these strategic engagements, Mongolia aims to build a more diversified, robust, and globally integrated economy.