MONGOLIA ECONOMIC UPDATE From Relief to Recovery February 2021 Mongolia InfraSAP Infrastructure for Connectivity and Economic Diversification This report is a product of the staff of the International Bank for Reconstruction and Development / The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the World Bank, the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this report. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. 02 02 MONGOLIA ECONOMIC UPDATE From Relief to Recovery February 2021 MONGOLIA ECONOMIC UPDATE From Relief to Recovery CONTENTS ACKNOWLEDGMENTS VI EXECUTIVE SUMMARY VII I. ECONOMIC PERFORMANCE AND PROSPECTS 1 A. Recent Economic Developments 2 A1. Output contracted sharply during the first nine months of 2020 2 A2. Inflation moderated notably, reflecting subdued domestic demand and lower oil prices 7 A3. The COVID-19 shock affected the structure and conditions of the labor market 8 A4. The budget deficit widened sharply in 2020 but is expected to narrow in 2021 10 A5. External pressures considerably eased following notable current account adjustment 15 A6. Monetary conditions have eased, but risks in the banking sector are building as asset 18 quality deteriorates B. Outlook and Risks 23 II. COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA 29 A. Channels of COVID-19 Shocks to Households 30 B. Impacts on Employment and Labor Income 32 C. Impacts on Non-labor Income 38 D. Potential Impacts on Poverty 39 E. Potential Mitigation Impacts of Policy Responses 43 References 47 II CONTENTS BOXES Box I.1. The government’s measures to contain the COVID-19 pandemic 3 Box I.2. Government fiscal relief measures to alleviate the economic impact of the COVID-19 pandemic 12 Box I.3. Summary of the 2021 budget 14 Box I.4. The Bank of Mongolia’s measures to mitigate the impact of COVID-19 19 Box I.5. Medium-term Banking Sector Strengthening Program for 2020-2023 26 Box I.6. Global and regional outlook and risks 27 Box II.1. Mongolia COVID-19 Household Response Phone Survey 32 FIGURES Figure ES.1. Mongolia: Key Indicators X Figure ES.2. Mongolia: Key Indicators (continued) XI Figure I.1. Output contraction was mostly driven by the mining and services sectors 4 Figure I.2. Steady growth of private consumption was not enough to compensate sharp drop in investment 4 Figure I.3. Exports were hit hard in H1 but quickly recovered 5 Figure I.4. Imports were also affected by subdued domestic demand and lower oil prices 5 Figure I.5. Mining output fell sharply in H1 but recovered strongly 6 Figure I.6. The services sector explained most of the contraction in non-mining output 6 Figure I.7. Inflation moderated amid lower oil prices and subdued domestic demand … 7 Figure I.8. …and compounded by the contraction of domestic credit 7 Figure I.9. The COVID-19 pandemic has put some jobs at risk... 8 Figure I.10. …thereby reversing declining trends of the unemployment rate 8 Figure I.11. Relevance of cash transfers for people currently out of work increased in H1 2020 9 Figure I.12. For unemployed, main source of income support shifted in Q2 2020 9 Figure I.13. Government revenue has declined in all categories… 10 Figure I.14. …while government spending soared driven by social welfare spending and public investment 10 Figure I.15. The revenue shortfall was exacerbated by huge spending… 11 Figure I.16. …reversing the fiscal surplus trajectory of the past three years 11 Figure I.17. COVID-19 fiscal relief measures 12 Figure I.18. Mongolia’s fiscal relief package is one of the highest among EAP countries 12 Figure I.19. Income support and tax exemptions dominated fiscal relief measures 12 Figure I.20. The deficit widened sharply in 2020 but is expected to narrow notably in 2021 13 Figure I.21. The revenue projections in the 2021 budget are moderately optimistic … 13 Figure I.22. Current account adjustment was enough to ease external pressures 15 Figure I.23. Current account surplus in recent months is unprecedented in Mongolia’s recent history 15 Figure I.24. Exports were hit hard in H1 but have recovered quickly 16 Figure I.25. Import compression has largely been driven by lower fuel and capital goods imports 16 Figure I.26. FX reserves recovered strongly after a sharp fall in H1, supported by eased current account 17 adjustment and gold purchases… Figure I.27. …and the exchange rate stabilized in H2 after a moderate depreciation in the first half. 17 Figure I.28. The tugrug depreciation was moderate compared to Mongolia’s structural peers... 17 Figure I.29. …supported by FX interventions by the BoM, particularly in the first half of 2020 17 Figure I.30. The monetary policy rate was lowered to a historical low to revive credit growth 18 Figure I.31. However, banks have been reluctant to lend despite having sizable excess reserves 18 Figure I.32. Corporate loans issuance has been declining across sectors 20 Figure I.33. Banks have also tightened new loan issuance to individuals, entrepreneurs, and SMEs 20 III MONGOLIA ECONOMIC UPDATE From Relief to Recovery Figure I.34. Loan quality has deteriorated notably… 21 Figure I.35. …mainly in the mining, construction, and trade sectors 21 Figure I.36. Provisions to loans of risky sectors seem low 22 Figure I.37. Banks should also take hefty charges as the COVID-19 inpact intensifies 22 Figure I.38. The liquidity of the banking system has remained steady... 22 Figure I.39. …however, the banking system remains vulnerable to risk of currency mismatch 22 Figure I.40. The government debt-to-GDP ratio is estimated to have risen in 2020 in many selected peers 24 Figure I.41. The size of external bonds maturing during 2022-24 is significant 26 Figure I.42. Real GDP growth (percent) 27 Figure I.43. World commodity price forecast (Index=nominal U.S. dollars, 2016=100) 27 Figure I.44. East Asia and Pacific country forecasts 28 Figure II.1. Authorities tightened containment measures as the number of COVID-19 cases increased 31 Figure II.2. Transmission channels of COVID-19 impacts to households 31 Figure II.3. More than half of workers who worked pre-pandemic stopped working by the second lockdown 33 Figure II.4. Large shares of workers in the industry and private services sectors faced employment disruptions 33 Figure II.5. Share of workers in affected sectors in 2019 34 Figure II.6. The number of carried passengers in 2020 declined during the first and second lockdowns 35 Figure II.7. The number of tourists in 2020 was considerably lower than in previous years 35 Figure II.8. The mobility of people to get certain services was significantly affected by government restrictions 35 Figure II.9. Lower-skilled individuals working in the informal sectors are most vulnerable 36 Figure II.10. Non-farm business owners were hit severely 36 Figure II.11. Employment and income losses across welfare distribution 37 Figure II.12. Urban workers were more likely to stop working in 2020 38 Figure II.13. Percent of households receiving a remittance, 2018 39 Figure II.14. Share of remittance to total household income (among households that received a remittance) 39 Figure II.15. Projected poverty rates 41 Figure II.16. Projected number of poor people 41 Figure II.17. Consumption growth incidence (% change of per capita consumption from 2018 to 2020) 41 Figure II.18. Average welfare loss from 2018 to 2020 by poverty status 41 Figure II.19. Poverty headcount by location (%) 42 Figure II.20. Distribution of the poor by location 42 Figure II.21. Distribution of the poor by economic sector 42 Figure II.22. Share of population living in households receiving CMP, 2018 43 Figure II.23. Shares of CMP and other household income sources, 2018 43 Figure II.24. CMP additional benefits as share of per capita consumption, 2020 45 Figure II.25. Welfare changes with CMP additional benefits compared to pre-COVID case, 2020 45 Figure II.26. Poverty headcount rates with and without policy responses, 2020 45 Figure II.27. Perception of usefulness of government assistance 46 TABLES Table ES.1. Key macroeconomic indicators XII Table I.1. Mongolia: Improvements in the overall fiscal balance in 2021 (% of GDP) 14 Table I.2. Key macroeconomic indicators 25 Table II.1. Overview of HRPS Rounds 1–3 32 Table II.2. GDP growth and inflation assumptions 40 Table II.3. Government responses to COVID-19 (Social protection-related measures) 44 IV ABBREVIATIONS MONGOLIA – GOVERNMENT FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 31, 2020) Currency Unit = Tugrug (MNT) US$1.00 = MNT 2,850 ABBREVIATIONS ADB Asian Development Bank BoM Bank of Mongolia CMP Child Money Program CPI consumer price index EAP East Asia and Pacific EMDEs emerging market and developing economies FDI foreign direct investment FX foreign exchange GDP gross domestic product GIR gross international reserves HRPS Household Response Phone Survey HSES Household Socio-Economic Survey H1 first half of the year H2 second half of the year IMF International Monetary Fund LFS Labor Force Survey LLP loan loss provisions MoF Ministry of Finance MPC Monetary Policy Committee NPLs nonperforming loans NSO National Statistics Office OxCGRT Oxford COVID-19 Government Response Tracker Q1 first quarter of the year Q2 second quarter of the year Q3 third quarter of the year Q4 fourth quarter of the year SEC State Emergency Commission SMEs small and medium-sized enterprises y/y year-over-year   V MONGOLIA ECONOMIC UPDATE From Relief to Recovery ACKNOWLEDGMENTS This edition of the Mongolia Economic Update (MEU) The findings, interpretations, and conclusions expressed was prepared by Jean Pascal Nganou (Senior Economist), in this update are those of the World Bank staff and do Davaadalai Batsuuri (Economist), Undral Batmunkh not necessarily reflect the views of the Executive Board (Research Analyst), Maheshwor Shrestha (Economist), of the World Bank or the governments they represent. and Ikuko Uochi (Economist). Sebastian Eckardt For information about the World Bank and its activities (Lead Economist), Ibrahim Saeed Chowdhury (Senior in Mongolia, please visit https://www.worldbank.org/ Economist), and Eka T. Vashakmadze (Senior Economist) en/country/mongolia. For questions and comments provided constructive comments. The MEU was on the content of this publication, please contact Jean prepared under the direction of Martin Raiser (Country Pascal Nganou (jnganou@worldbank.org). The cutoff Director), Hassan Zaman (Regional Director), Deepak date for this edition of the MEU is December 31, 2020. Mishra (Practice Manager), and Andrei Mikhnev (Country Manager). The team is grateful to Sukhchimeg Tumur (Program Assistant) and Indra Baatarkhuu (External Affairs Officer) for their support on administrative and communication affairs. Each edition of the MEU consists of two parts. Part I discusses recent economic developments and presents the medium-term economic outlook, and Part II focuses on a specific theme. The theme for this edition is the socioeconomic impacts of COVID-19 on households, based on the recent Household Phone Survey. The MEU is intended for a wide audience, including policymakers, business leaders, financial market participants, and the community of analysts and professionals engaged in Mongolia. VI EXECUTIVE SUMMARY EXECUTIVE SUMMARY Recent Economic Developments declining employment, employment increased in some sectors such as information technology, as demand Strict implementation of social distancing, mobility for online services increased. Overall, the labor force restrictions, and quarantine measures have helped participation rate shrank by 1.1 percent in September Mongolia contain the worst health effects of the 2020 from a year ago and the unemployment rate COVID-19 pandemic, though the country remains in slightly edged up in Q3 2020, reflecting weakening the midst of a significant outbreak. While the swiftness labor market conditions. However, sizable policy of these measures was key to containing the pandemic, support partially mitigated the impact of COVID-19 their strictness is taking a significant toll on the and encouraged firms to limit layoffs and opt for economy. Particularly, the unavoidable strict lockdown reduced working hours instead. At the same time, measures from mid-November 2020 in response to the generous income support and the lack of adequate domestic transmission of the pandemic have reduced and affordable childcare service during the closure mobility and stalled economic activity. However, by of schools partly contributed to declining labor force bringing the pandemic under control, these measure participation. are not only saving precious lives but are also expected to facilitate a swifter and robust recovery. The pandemic-induced economic crisis has been severe. Households from various segments of the income The economic impact of the COVID-19 pandemic has distribution were affected by COVID-19-related shocks, been severe and widespread. In the first nine months with those employed in the low-skilled informal of 2020, the Mongolian economy contracted by 7.3 sectors, with limited economic buffers or job protection, percent, one of the worst contractions since the 1990s. and those living just above the national poverty line, at The mining sector was affected significantly by a sharp greater risk of falling below the poverty line. The latest decline in demand for key commodities and border Household Response Phone Surveys (HRPS) jointly closures with China. The services sector was also hit conducted by the National Statistics Office of Mongolia hard due to mobility restrictions and falling incomes. In and World Bank reveal that household labor income fact, firm-level surveys indicate that the impact of the was affected by the pandemic shock, as many people COVID-19 shock was most severe for small and young stopped working due to business closures or faced firms, and for enterprises in the manufacturing, tourism, a reduction in working hours, particularly under the trade, transportation, construction, and education second nationwide lockdown in mid-November. The sectors. However, generous economic support provided government’s generous direct transfers to households by the government has so far prevented a wave of helped partially mitigate the negative income shock. A business closures. poverty micro-simulation analysis, using the Household The COVID-19 shock also affected the structure and Socio-Economic Survey from 2018 and latest GDP conditions of the labor market. While some sectors growth forecasts, indicates that without mitigating including hospitality and entertainment experienced measures, approximately 195,000 to 260,000 more VII MONGOLIA ECONOMIC UPDATE From Relief to Recovery people could have been pushed into poverty as a result violating the Law on Central Bank, which prohibits the of the pandemic, bringing the poverty rate up to 33.6 Bank of Mongolia from engaging in these activities. The percent in 2020 from 28.4 percent in 2018. In fact, the looser policy stance followed a period of tightening analysis shows that the quintupling of benefits under starting in late 2018, which helped slow credit growth the Child Money Program during May 2020–July 2021, and stabilize inflation, giving the central bank some on its own would be enough to bring poverty incidence room to relax when the pandemic hit. Nonetheless, below the pre-COVID level (see Part II for details). monetary policy space continues to be limited by the country’s relatively weak external position. The external position improved substantially faster than initially expected, mainly supported by the With respect to the financial sector, despite the notable current account adjustment. After a sharp relaxation of macroprudential regulations and buffers, deterioration in the early months of 2020, pressures banks remain cautious in issuing loans. In 2020, notably eased in the second half of the year, and the domestic credit contracted by about 5 percent (year- current account even recorded a surplus amid a quick over-year) compared to growth of 5.1 percent in 2019. recovery of exports and persistent imports compression While a sizable portion of this contraction is explained (due to lower demand for capital and intermediate by the authorities’ decision to write off the pension goods and declining service fees). Meanwhile, despite loans in January 2020, issuance of new loans remained a fall in foreign direct investment and sizable private subdued due to heightened perceptions of risk, sector external repayments, the balance of payments deteriorating asset quality, and significant currency improved, with the authorities taking advantage of mismatches (including deposit dollarization). Moreover, improved financing conditions to refinance external regulatory forbearance may be hiding more serious debt. The Mongolian tugrug depreciated moderately problems in the financial sector and thus complicates and the level of foreign exchange reserves reached a full assessment of financial sector stability. a historical high of US$4.5 billion, supported also by higher gold purchases by the authorities. Outlook and Risks The cost of fiscal relief measures is estimated to be Recovery in the post-pandemic period is likely to be slow over 9 percent of GDP.1 Fiscal imbalances had started and erratic. Following an estimated contraction of 5.2 to emerge in early 2020 prior to the introduction of percent in 2020, the Mongolian economy is expected COVID-19-related measures, with the government’s to grow by 4.3 percent in 2021, as the authorities take decision to increase wages and pensions and to control of the pandemic, stimulus measures prop up write off pension loans. Fiscal imbalances widened domestic demand, the adverse impact of the global significantly further between April and December economy recedes, businesses and consumers adjust 2020, as the effects of the pandemic intensified. The to the new norm of living with the pandemic, and a budget deficit reached 9.5 percent of GDP in 2020, its vaccine is introduced. However, the recovery is subject highest level since 2016, amid a large revenue shortfall to risks of (i) a sharp rise in domestic COVID-19 cases and sizable fiscal relief (spending) measures. Overall, that could trigger stricter and prolonged lockdowns; (ii) the authorities’ fiscal response has provided adequate the potential for further global waves of the virus that support to firms and households, but the size of the would worsen the domestic and external environment; deficit has raised questions over its sustainability. (iii) possible financial instability as regulatory forbearance is withdrawn and the underlying fragile Monetary policy was loosened to fight the economic condition of bank balance sheets is revealed; (iv) impact of the pandemic through policy rate cuts, weather-related shocks (for example, a harsh winter, increased banking sector liquidity, and the introduction which could hit the agriculture sector); and (v) the of regulatory forbearance. Moreover, the monetary likelihood of new spending and overstretched public authorities engaged in quasi-fiscal activities, thus finances in the run-up to the presidential election. 1 It includes the extension of some measures which are expected to be implemented until July 2021. But it does not include the government’s recent decision on exempting utilities fees for households and enterprises. VIII EXECUTIVE SUMMARY Mongolia, like other countries, will need to transition Finally, Mongolia should adopt an integrated and from policies focused on short-term economic relief fiscally sustainable approach to boosting medium- to accelerating recovery and building resilience. The term economic prospects and job creation. Such challenge Mongolia faces in this regard is that the an integrated approach would place the highest fiscal space to continue the generous support policies emphasis on leveraging private sector investment in enacted during 2020 is quite limited, while their rapid the mining and non-mining sectors to create higher- withdrawal as long as the economy remains weakened productivity jobs and sustainable income opportunities by public-health-related mobility restrictions could for Mongolians. These efforts would be complemented create significant difficulties for households and firms. by better-prioritized and targeted government The government’s fiscal consolidation plan takes investments in infrastructure and a more efficient and this into account by committing to medium-term fiscally affordable social safety net. They would also adjustment but keeping current support measures in require continued attention to the generation of skills place until the summer of 2021. This plan will need required for successful employment, and addressing the to be implemented, as further fiscal expansion beyond possible losses of human capital, particularly among what has been agreed in the 2021 budget could erode the poor, as a result of repeated school closures. While confidence, lead to currency pressures and capital over the coming year government policy will need to outflows, and require harsher austerity measures to remain attentive to national and global developments reestablish macroeconomic control. Mongolia has in the management of the pandemic and react flexibly so far managed to avoid a repeat of the traditional to any downside risks, the rollout of vaccines raises the macro boom-and-bust cycles. It should cherish this prospect that policy efforts can gradually return to this achievement. Further exchange rate flexibility could critical medium-term agenda. help cushion additional external shocks and thereby   preserve the limited domestic policy room. Another priority is to prevent the COVID-19 shock from undermining financial stability. While a swift policy response was welcome and necessary, the extension of regulatory forbearance would further reduce transparency around the underlying quality of banking sector balance sheets, while delaying the necessary adjustments in the real sector. The COVID-19 shock has left scars among companies and some may not be able to survive. They should be allowed to close and their resources reallocated to other, more profitable ventures. Banks play a key role in facilitating this reallocation of resources, but excessive forbearance may lock funds in poor investment decisions made in the past, increasing the long-run costs of the shock to the economy. Relatedly, Mongolia’s efforts to implement structural reforms in the banking sector should gain traction. Key elements of these reforms include the strengthening of capital buffers and improved corporate governance of banks (including ongoing reforms in ownership structure of banks), both of which would be facilitated by the gradual exit from COVID-19 related regulatory forbearance. IX MONGOLIA ECONOMIC UPDATE From Relief to Recovery   Figure ES.1. Mongolia: Key Indicators Figure ES.1. Mongolia: Key Indicators      Strict containment measures have helped Mongolia  However, relative to some of its regional peers, the  check the spread in most of 2020   number of confirmed infections has surged since  November 2020  Stringency of government measures and cases of COVID‐19   Cumulative reported cases of COVID‐19  60 New COVID‐19 cases Stringency index 100 1600 Fiji Cambodia 90 50 1400 Lao PDR Mongolia New COVID‐19 cases 80 Papua New Guinea Vietnam 70 1200 Stringency index 40 60 1000 30 50 800 40 600 20 30 400 20 10 10 200 0 0 0 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Oct-20 Jan‐20 Feb‐20 Mar‐20 Apr‐20 May‐20 Jun‐20 Jul‐20 Aug‐20 Sep‐20 Oct‐20 Nov‐20 Dec‐20   Source: Oxford University (OxCGRT).  Source: Oxford University (OxCGRT).   Note: The stringency index measures the stringency of government  containment measures, including school and workplace closings  and restrictions on gatherings in response to the COVID‐19. Higher  value indicates more stringent measures.      Exports were significantly affected in H1, but have  …while the hard‐hit nontradeable services sector has  recovered quickly…   been slow to recover  Quarterly real exports of goods and services (y/y change)  Supply contribution to GDP growth, percentage points  10% 19.6% 16.3% 9.0% 8.8% 5% 0% Mining -2.7% -5.8% -5% Non-mining industry Services -10% Agriculture -36.1% GDP growth -15% Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20     Sources: NSO; World Bank staff estimates.  Sources: NSO; World Bank staff estimates.      Government provided sizable fiscal relief package…  …which supported household consumption    Demand contribution to GDP growth, percentage points  12 Household consumption Gross capital formation Additional health-related spending Public consumption Net exports 10 Quasi-fiscal operations GDP growth 25% 8 Additional spending and revenue measures Percent of GDP 15% 6 5% 4 -5% 2 -15% -25% 0 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 LAO IDN KHM MMR MNG CHN VNM THA PHL MYS   Sources: MoF; World bank (2020); World Bank staff  Sources: NSO; World Bank staff estimates.  estimates.    X 12    EXECUTIVE SUMMARY Figure ES.2. Mongolia: Key Indicators (continued) Figure ES.2. Mongolia: Key Indicators (con�nued) With subdued infla�on, the monetary policy rate However, banks with excess liquidity have been reached a historic low reluctant to lend… Core inflation (y/y, %): RHS Credit growth (y/y, %): LHS Excess reserves and loan growth in the banking sector Policy rate: RHS 28 Excess reserves to deposit ra�o (%): RHS 30% 40% 25 12 Domes�c credit growth (y/y): LHS 22 25% 35% 19 10 20% 30% 16 13 8 15% 25% 10 10% 20% 6 7 4 5% 15% 4 1 0% 10% -2 2 -5 -5% 5% -8 0 -10% 0% Dec-18 Dec-19 Dec-20 Jun-18 Sep-18 Jun-19 Sep-19 Jun-20 Sep-20 Mar-19 Mar-20 Mar-17 Dec-17 Mar-18 Dec-18 Mar-19 Dec-19 Mar-20 Dec-20 Jun-17 Sep-17 Jun-18 Sep-18 Jun-19 Sep-19 Jun-20 Sep-20 Sources: BoM; World Bank staff es�mates. Sources: BoM; World Bank staff es�mates. Note: RHS = right-hand side; LHS = le�-hand side. Note: RHS = right-hand side; LHS = le�-hand side. …mainly explained by a deteriora�on in the loan The banking system remains exposed to risk of quality and rising NPLs currency mismatch NPLs and past-due loans in percent of total outstanding Currency mismatch is defined by difference in dollariza�on loans of deposits (bank’s liabili�es) and credits (bank’s assets) 12 33% FX deposit/total deposits: LHS FX loans/total loans: LHS 2,830 28% MNT/USD: RHS 2,780 9 NPLs (% of Total Loans) 2,730 Past Due Loans (% of Total Loans) 23% 2,680 2,630 18% 6 2,580 2,530 13% 2,480 3 8% 2,430 May-19 Sep-19 Nov-19 May-20 Sep-20 Nov-20 Jan-19 Mar-19 Jul-19 Jan-20 Mar-20 Jul-20 Dec-18 Dec-19 Dec-20 Aug-18 Apr-19 Aug-19 Apr-20 Aug-20 Jun-19 Jun-20 Jun-18 Feb-19 Feb-20 Oct-18 Oct-19 Oct-20 Sources: BoM; World Bank staff es�mates. Sources: BoM; World Bank staff es�mates. Note: RHS = right-hand side; LHS = le�-hand side. Note: RHS = right-hand side; LHS = le�-hand side. Current account surplus in recent months has …while the exchange rate has stabilized following contributed to reserves accumula�on… easing of external pressures Current account balance and FX reserves Exchange rate: Tugrug (Spot rate, Index, Dec 31, 2015=100) 400 Current account balance (LHS, million US$) 5.0 145 MNT/US$ Gross international reserves (RHS, billion US$) 4.5 140 MNT/CNY 200 4.0 135 0 Depreciation 3.5 130 -200 3.0 125 -400 2.5 120 -600 2.0 115 1.5 110 -800 1.0 105 -1000 0.5 100 -1200 0.0 95 Q1-15 Q3-15 Q1-16 Q3-16 Q1-17 Q3-17 Q1-18 Q3-18 Q1-19 Q3-19 Q1-20 Q3-20 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Sources: BoM; World Bank staff es�mates. Sources: BoM; World Bank staff es�mates. Note: FX = foreign exchange; RHS = right-hand side; LHS = le�-hand side. 13 XI MONGOLIA ECONOMIC UPDATE From Relief to Recovery Table ES.1. Key macroeconomic indicators 2016 2017 2018 2019 2020e 2021f 2022f Annual percent change unless indicated otherwise Real GDP growth, at constant market prices 1.4 5.4 7.0 5.0 -5.2 4.3 5.4 Private Consumption -2.2 5.4 12.4 9.9 2.0 3.6 4.5 Government Consumption 10.6 -1.8 -0.8 11.5 17.5 -5.1 1.6 Gross Fixed Capital Formation 0.5 35.6 21.3 23.5 -16.3 9.0 10.0 Exports, Goods and Services 13.8 14.8 24.0 9.1 -5.0 13.4 7.4 Imports, Goods and Services 12.7 24.8 30.9 22.3 -9.0 14.1 8.4 Real GDP growth, at constant factor prices 1.2 5.3 7.2 5.2 -5.2 4.3 5.4 Agriculture 6.2 1.8 4.5 8.4 10.8 5.0 6.0 Industry (incl mining) -0.4 0.7 7.9 3.1 -11.0 6.3 5.4 Services 1.1 7.7 4.7 5.8 -5.7 2.5 5.2 Inflation (CPI, end-period) 0.9 6.4 8.1 5.2 2.3 5.0 7.0 Current account balance (% of GDP) -6.3 -10.2 -16.8 -15.4 -3.3 -7.7 -8.3 Financial and Capital account (% of GDP) 7.6 24.5 17.4 21.1 9.2 11.8 13.2 Net Foreign Direct Investment (% of GDP)* 1.1 12.7 16.3 16.5 12.5 14.0 15.0 Fiscal Balance (% of GDP)** -15.3 -3.8 2.6 1.4 -9.5 -2.7 -1.9 Primary Balance (% of GDP) -10.1 0.4 5.8 3.7 -6.9 -0.3 0.1 Debt (% of GDP)*** 87.6 84.7 72.6 69.0 79.4 77.7 73.0 * In 2016, net FDI number excluded the transactions of Oyu Tolgoi-2 project financing in May–June 2016. ** Development Bank of Mongolia (DBM) spending is excluded from fiscal balance and monitored separately. ***General government debt data exclude SOE debt and central bank liability from People’s Bank of China swap line. XII I. ECONOMIC PERFORMANCE AND PROSPECTS A. Recent Economic Developments 2 B. Outlook and Risks 23 1 MONGOLIA ECONOMIC UPDATE From Relief to Recovery I. ECONOMIC PERFORMANCE AND PROSPECTS A1. Output contracted sharply during the first nine months of 2020 RECENT The COVID-19 crisis has triggered a global economic shock of unprecedented magnitude, causing synchronized collapses in ECONOMIC economic activity across the world. In particular, economic conditions DEVELOPMENTS in the East Asia and Pacific (EAP) region deteriorated sharply due to the pandemic-related lockdowns. Although the Chinese economy is recovering at a brisk pace, recovery in the rest of the region is expected to be subdued and fragile as disruptions to economic activity were more acute than expected. The pandemic has caused a heavy toll of deaths and illness, plunged millions into poverty, and may depress economic activity and incomes for a prolonged period. Furthermore, the pandemic has exacerbated the risks associated with debt accumulation as debt levels have reached historic highs and financial market stress builds. The COVID-19 health crisis quickly escalated into deep economic turmoil in Mongolia, affecting businesses, households, and government revenue. This manifested itself through four key channels: (i) the government’s containment measures have had a direct and immediate adverse impact on small businesses and household income, weighing on already weakening domestic economic activity (see box I.1); (ii) the mining sector has been hard hit by weaker Chinese demand, compounded by self-imposed border closures, a drop in commodity prices, and greater risk aversion of investors; (iii) the services sector (including tourism and transportation), which accounts for about 40 percent of the Mongolian economy, was affected by the containment measures; and (iv) unforeseen revenue shortfalls and increased spending on health care and social protection further exacerbated fiscal pressures. 2 ECONOMIC PERFORMANCE AND PROSPECTS Box I.1. The government’s measures to contain the COVID-19 pandemic The Government of Mongolia, through the State Emergency Commission (SEC), which is tasked with handling emer- gencies at the national level, introduced throughout 2020 a series of restrictions to contain the risk of COVID-19. These include: • Border closures: All travel (air, road, and railway) from or through China was banned since February 1, 2020. Cross-border passenger transportation of all forms ceased starting March 10. Mongolia’s borders have remained closed for passengers, with the exception of Mongolian nationals arriving through special chartered flights organized by the government. Upon arrival, passengers are subject to a 21-day mandatory strict quarantine to limit the risks of domestic contagion. Hygiene protocols were elevated on the trucks transporting consumer items imported from Russia. • Suspension of exports: Exports of coal and crude oil were suspended during February 10–March 2, in an at- tempt to minimize the risk of infection of truck drivers over the Mongolia-China border. Although the official suspension was lifted as scheduled, export did not return to its regular pace until August, when the government introduced the Green Gate program, which aimed to accelerate truck transportation through improved customs clearance and proper implementation of hygiene protocols. • Suspension of educational activities: All activities of schools, kindergartens, universities, vocational centers, production centers, and training centers were suspended from January 27 to September 1. Online/TV schooling was provided for students until September 21, when in-class education resumed. • Restriction of services and community activities: Bars, cafés, and restaurants were instructed during mid-Febru- ary to July 2020 to close at 10:00 p.m. rather than the usual 4:00 a.m. In early May, nightclubs and karaoke bars were banned from operating, and in early March, the government suspended community activities including meetings, trainings, sport competitions, travel, arts, cultural activities, cinema, driving courses, and game center activities. These restrictions have been gradually loosened since then. • Introduction of a strict lockdown when the first domestic contagion was recorded on November 11, 2020: Ulaanbaatar and several other regions remained in strict lockdown between November 11 and December 14. During this period, the sale of alcohol was prohibited, pedestrian and automobile movement in the city was restricted to grocery, health care, and other essential services only, public transportation service was limited, travel between regions was prohibited, and charter flights were suspended. During the lockdown, the authori- ties traced the domestic infections and conducted PCR (polymerase chain reaction) tests of a sample of house- holds. On December 14, when the strict lockdown ended, a number of economic activities that could enforce social distancing were allowed to reopen. Passenger travel between towns remains conditional on PCR testing. In-class educational activities have been suspended since November 11, and TV schooling resumed. • After a temporary loosening, a strict lockdown was reintroduced in the city of Ulaanbaatar starting December 14: An accelerating number of COVID-19 cases in the city triggered the authorities to introduce a strict lockdown until January 11, 2021. Unlike in the preceding lockdown, delivery services were restricted within the city. Due to consequences on economic activities, starting January 11, the strict lockdown has been loosened step by step. Source: Compiled from various government websites. 3 MONGOLIA ECONOMIC UPDATE From Relief to Recovery   Mongolia’s economy is facing one of its most severe quarters of 2020 from 9.9 percent in the same period cinema,  driving  courses,  and  game  center  activities.  These  restrictions  have  been  gradually  loosened  contractions triggered since then. by   the outbreak and associated in 2019. Household consumption growth slowed to 6.1 precautionary measures. The COVID-19  Introduction  of  a  strict  lockdown  when  the  first shock came at percent   domestic during this (y/y)  contagion   was period  recorded from  on 9.5 percent one   November   11,  a time when Mongolia’s economy was already facing year 2020:  Ulaanbaatar  and  several  other  regions  remained  in  strict  lockdown  between  November ago, as COVID-19-related restriction measures   11  and  a slowdown -December particularly   14. in  During the second   this  period, half (H2)   theof   sale  of   alcohol affected   was  prohibited, private spending on   pedestrian retail trade,   and   automobile leisure,   travel, movement   in   the 2019 - mostly driven by weaker commodity prices and   city   was   restricted   to   grocery,   health   care,   and   other and recreational activities. The Household Response   essential   services   only,   public  transportation  service  was  limited,  travel  between  regions  was  prohibited,  and  charter  flights  were  the deteriorating quality of locally produced copper, a Phone Survey indicates that the pandemic has led to suspended.  During  the  lockdown,  the  authorities  traced  the  domestic  infections  and  conducted  PCR  key mineral export. Hit by the COVID-19 (polymerase chain reaction) tests of a sample of shock through significant  households. deceleration  On December in 14, labor  when income,  the strict particularly  lockdown  both domesticended, and external channels, Mongolia’s real among the   a  number  of  economic  activities  that  could  enforce  social  distancing  were  allowed  to self-employed and household business   reopen.  GDP contracted percent by 7.3  travel Passenger (year-over-year  between  towns remains [y/y]) owners  conditional  on  PCRpart (see  testing. II for details).  In‐class However,  educational household  activities  have  in the first nine been  suspended months of 2020  since  November (figure I.1), its  11,  and TV schooling worst consumption  resumed. and  income were supported by, among contraction Afterthe  since   a  temporary economic   loosening, transition   a  strict  lockdown period in   was  reintroduced others, the wage/pension   in  the  city   of  Ulaanbaatar increase, the write  starting off of   December   14: early 1990s. Although the contraction was broad-  An   accelerating   number   of   COVID ‐ 19   cases   in   the pension loans, and COVID-19-related income support   city   triggered   the   authorities   to  introduce  a  strict  lockdown  until  January  11,  2021.  Unlike  in  the  preceding  lockdown,  delivery  services  based, it was significantly felt in the mining sector measures. Meanwhile, government consumption were  restricted  within  the  city.  Due  to  consequences  on  economic  activities,  starting  January  11,  the  (-20.7 percent, stricty/y). Output  has  lockdown in  beennon-mining  loosened industry  step by step. expanded   by 11.7 percent, mainly reflecting COVID-19- fell by 3.7 percent (y/y), while services contracted by 7 related spending. percentSource:  Compiled in the same period. from various Meanwhile, government websites.  the  agriculture sector was the key driver of growth, as it expanded Investment, especially in the private sector, plummeted, Mongolia’s by 11.3 percent  (y/y),economy supported  is  facing   one  ofweather by favorable   its  most  severe pulling down growth   contractions on the   triggered   by demand   the  outbreak side. The   and  associated  precautionary conditions. The adverse impact of a weaker global  measures.  The  COVID ‐ 19  shock contribution   came   ofat   a   gross time  when capital  Mongolia’s formation to  economy GDP growth  was  already  facing  a  slowdown―particularly  in  the  second   half turned significantly negative (-14.3 percentage points)     (H2)   of   2019 ― mostly   driven   by   weaker economy was exacerbated by a sharp fall in domestic commodity  prices  and  the  deteriorating  quality  of  locally produced  copper,  a during January–September   key  mineral 2020, from +10   export. percentage   Hit  by  economic activities due to the authorities’ containment the COVID‐19 shock through both domestic and external points  channels, a year Mongolia’s  ago. This is  real  GDP explained mainly contractedby  by a 7.3  measures, including the exports ban. percent (year‐over‐year [y/y]) in the first nine months   of   combination of factors including declining commodity   2020   (figure   I.1),   its   worst   contraction   since   the economic   transition  period On the demand side, although final consumption  in   early  1990s.  Although weakening was  the contraction prices, domestic  broad ‐based, and demand, it was  significantly  deteriorating felt  in  the  mining  sector growth moderated during January–September 2020,  ( ‐ 20.7  percent,  y/y).  Output  in   non ‐ mining  industry investor confidence. In fact, foreign direct investment   fell  by  3.7  percent  (y/y), while  services a it remained contracted key driver  by  percent of 7growth  same  in theI.2). (figure  period. Final  Meanwhile, (FDI) flows, which account for  sector  the agriculture about 70  was  the key percent of driver the   of   growth,   as  it   expanded   consumption grew by 7.1 percent (y/y) in the first three by   11.3   percent   (y/y),   supported   by   favorable   weather gross capital formation, fell by over 20 percent (y/y)   conditions.   The   adverse   impact of a weaker global  economy was exacerbated by a sharp fall in  domestic economic activities due  to the authorities’ containment measures, including the exports ban.  Figure I.1. Output contraction was mostly driven by Figure I.2. Steady growth of private consumption was the mining and services sectors Figure I.1. Output contraction was mostly driven by  Figure not enough  I.2. Steady to compensate  growth of private sharp drop in investment  consumption  was  the mining and services sectors  not enough to compensate sharp drop in investment   Supply contribution to GDP growth, percentage points Demand contribution to GDP growth, percentage points   Supply contribution to GDP growth, percentage points  Demand contribution to GDP growth, percentage points  Household consumption Gross capital formation 15% Mining Non-mining industry Public consumption Net exports Services Agriculture GDP growth 10% 25% 5% 15% 0% 5% -5% -5% -10% -15% -15% Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 -25% Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20     Sources: NSO; World Bank staff estimates.  Sources: NSO; World Bank staff estimates.  Sources: NSO; World Bank staff estimates. Sources: NSO; World Bank staff estimates. On the demand side, although final consumption growth moderated during January–September 2020,  it  remained  a  key  driver  of  growth  (figure  I.2).  Final  consumption  grew  by  7.1  percent  (y/y)  in  the  first  16  4   three  quarters  of  2020  from  9.9  percent  in  the  same  period   in  2019.  PERFORMANCE ECONOMIC Household  consumption AND PROSPECTS   growth  slowed  to  6.1  percent  (y/y)  during  this  period  from  9.5  percent  one  year  ago,  as  COVID‐19‐related  restriction measures affected  private spending on retail trade, travel, leisure,  and recreational activities.  The Household Response Phone Survey indicates that the pandemic has led to significant deceleration in  2 to US$1.2 billion during January–September. Moreover, to boost exports through the Green Gate program. labor  income,  particularly  among  the  self‐employed  and  household  business  owners  (see  part  II  for  total details).outstanding   However, loans in the banking   household   consumption sector,  a and key  income   were  in In addition, Q3 2020, supported   by, gold   among exports reached   others,   the their   source of financing of domestic investment, contracted wage/pension  increase,  the  writeoff  of  pension  loans,  and  COVID‐19‐related  income  support  measures.  highest peak since 2008, as the central bank provided by over 5 percent Meanwhile, (y/y) amid   government the ongoing deterioration   consumption   expanded  by  11.7 soft  percent, loans to   gold mainly miners   reflecting (0.3 percent  COVID‐ of 19GDP ‐related during  of loan quality. spending.   Meanwhile, the accelerated execution January-October). of public investment projects was not sufficient to Investment, offset the slump  especially in private  ininvestment.  the private sector, plummeted, Imports  pulling also  down contracted  growth on significantly  the demand amid  side. weaker The  contribution  of  gross  capital  formation  to  GDP  growth domestic demand and   turned  significantly lower   oil   negative (‐14.3 prices.   percentage As a net   points) were Exports during hit hard in the first half  January–September  2020,but from recovered +10 percentage importer of energy,  points  a year Mongolia  ago. This benefited  is mainly from  explaineddeclining   quickly by  a  combination  of  factors  including  declining  commodity  prices,  weakening  domestic  demand,  and  (figure I.3). In the first nine months of 2020, global oil prices. Real imports of goods and services deteriorating exports of goods  investor and services  confidence. contracted  In fact, by  8 foreign percent  directfell  investment by 8 percent  (FDI)  flows, (y/y) during which  account for about January-September   2020 in70   percent real terms,   of the   the   gross largest   capitalsince decline   formation, the 2009   fell   by  over  20 global   percent to compared (y/y)an  expansion to  US$1.2  billion of 23.2   during percent   January– a year ago September. financial crisis.  Moreover, In fact, in  the total  outstanding same period of  loans 2019,  in  the banking real (figure  sector, I.4). The  a key  source import  of financing compression  of is  domestic by, supported investment,  contracted exports expanded by 15.1 percent. The contraction was by   over  5  percent  (y/y)   amid   the  ongoing   deterioration among others, subdued purchase of capital goods  of  loan  quality.  Meanwhile,   the   accelerated   execution most significant in coal and crude oil (which accounted   of   public   investment   projects   was   not   sufficient   to (mostly reflecting lower private investment), lower   offset   the   slump   in   private   investment.  for 45 percent of the total export in 2019) following oil prices, and reduction in imported consumer goods weaker Exports demand  were hit from  hard China  in the and  first the  half temporary  but recovered ban  quickly triggered  (figure by COVID-19-related  I.3). In the first nine precautionary  months of  measures 2020,  onexports exports   of ingoods   and  servicesto February-March   contracted contain the   by risk 8  percentof   in  real (for   terms, example,   the  largestof cancellation   decline the official   since   the  2009  of celebration global  financial COVID-19. Moreover,   crisis.   In  fact, copper exports   in  the (24  same percent   period of total   last  year, the 2020   real lunarexports new   expanded year and   by  15.1economic reduced   percent. activity The    contraction exports in 2019)  was most  significant contracted  in coal and significantly,  crude oil (which especially in retail  accounted trade and  for  45 percent other services).  of Meanwhile, the total export imports  in   2019)   following   weaker in the first quarter (Q1) due to a sharp fall in prices   demand   from   China   and   the   temporary   ban   on   exports of services also declined sharply, partly due to weaker   in   February–March   to   contain   түүхий  the   risk эдийн    of   COVID үнэ  as the COVID-19 shock suppressed global demand. ‐ өссөн 19.  ,Moreover,   цар  тахлаас   copper урьдчилан   exports   (24   сэргийлэх percent   of арга    total хэмжээ    demand for transportation services (mainly triggered exports суларсан  in   2019) ,     contracted Засгийн    газраас  significantly, экспортыг сэргээх   especially However, exports recovered quickly, particularly in   “in   the Ногоон гарц   first   quarter ”   (Q1)   due   to    хөтөлбөрийг хэрэгжүүлсэнтэй холбоотой байв a   sharp   fall   in   prices by travel restrictions and limited truck activities),     as   the  . Covid 1 ‐  Үүний сацуу 19   shock   2020 оны  3   дугаар  suppressed global  demand. улиралд    However, алтны  экспорт    exports 2008 recovered   оноос    quickly, хойш    particularly оргилдоо   хүрсэн  in  the  third нь  Төв    quarter банкнаас   (Q3),  алт  the third quarter (Q3), mainly driven by increasing and reduction in overseas tourism and international mainly   driven   by   increasing   commodity   prices,  the олборлогч компаниудад хөнгөлөлттэй зээл  (эхний  10 сард ДНБ‐ий  0.3 хувьтай тэнцэх) олгосонтой    gradual   easing   of   COVID ‐ 19   preventive   measures,  and  commodity prices, the gradual easing of COVID-19 consultancy services (particularly 1 in the mining sector). холбоотой.     initiative  to  boost  exports  through  the  Green  Gate  program.   In  addition,  in  Q3  2020,  the  government’s preventive measures, and the government’s initiative gold exports reached their highest peak since 2008, as the central bank provided soft loans to gold miners  Зураг I.3. (0.3 percent  Экспорт эхний хагас жилд хүнд   of  GDP during January–October).   Зураг I.4. Дотоодын эрэлт суларч, түлш шатахууны  цохилтод орсон ч хурдацтай сэргэв Figure I.3. Exports were hit hard in H1 but   quickly үнэ буурсан нь импортод нөлөөлөв Figure I.4. Imports were also affected   by subdued Бүтээгдэхүүн Figure  I.3. Exports recovered , үйлчилгээний улирлын бодит экспорт   were hit hard in H1 but quickly  Бүтээгдэхүүн Figure   , үйлчилгээний улирлын бодит импорт  I.4. Imports domestic  were also demand and affected  by lower oil  subdued  prices (жилийн өөрчлөлт recovered  )  (жилийн өөрчлөлт domestic  demand and  lower oil prices  )  Quarterly Quarterly real exports  real exports of goods  of goods  (y/y)(y/y) and services  and services   Quarterly Quarterly real imports real imports of goods  andof goods and  services services  (y/y)  (y/y) 19.6% 31.6% 16.3% 19.6% 25.2% 31.6% 9.0% 16.3% 8.8% 25.2% 19.9% 9.0% 8.8% 19.9% 12.4% 12.4% -2.7% -5.8% -2.7% -5.8% -2.6% -2.6% -5.2% -5.2% -36.1% -36.1% -17.4% -17.4% Q2-19 Q2-19 Q1-19 Q1-19 Q4-19 Q4-19 Q3-19 Q3-19 Q1-20 Q1-20 Q2-20 Q2-20 Q3-20 Q3-20 Q2-19 Q2-19 Q1-19 Q1-19 Q4-19 Q4-19 Q3-19 Q3-19 Q1-20 Q1-20 Q2-20 Q2-20 Q3-20 Q3-20         Source: NSO. Эх сурвалж Source: NSO. : ҮСХ.  Source: NSO.NSO.: ҮСХ.  Эх сурвалж Source:                                                                1  Green Gate initiative introduced The Дотоодын эрэлт суларч  by the government has helped the gradual recovery of coal and copper exports. , түлш шатахууны үнэ буурснаар импорт мэдэгдэхүйц агшив . Эрчим хүчний  цэвэр импортлогч улсын хувьд дэлхийн зах зээлд нефтийн үнэ буурсан нь Монгол Улсад ашигтай  17  байв. Бүтээгдэхүүн, үйлчилгээний бодит импорт 2019 оны эхний 3 улиралд 23.2 хувиар өсөж байсан  бол  2020  оны  эхний  3  улиралд  жилийн  8  хувиар  агшжээ    (зураг  I.4).  Импортын  агшилтад  үндсэн  хөрөнгийн худалдан авалт багассан (хувийн хөрөнгө оруулалт буурсны илрэл), нефтийн үнэ буурсан,    хэрэглээний барааны импорт цар тахалтай холбоотойгоор (2020 оны цагаан сарыг тэмдэглэхгүй байх  2 The Green Gate initiative introduced by the government has helped the gradual recovery of coal and copper exports. шийдвэр гарч жижиглэн худалдаа болон үйлчилгээний бусад салбарт идэвхжил суларсан) агшсан нь   тус  тус  нөлөөлжээ.  Үйлчилгээний  импорт  мөн  ялгаагүй  буурсан  нь  тээврийн  үйлчилгээний  эрэлт  5 суларсан  (зорчих хөдөлгөөн болон ачаа тээвэрт тавьсан хязгаарлалтаас шалтгаалан), гадаад аялал  жуулчлал болон гадаадын зөвлөх үйлчилгээ (ялангуяа уул уурхайн секторт) багассантай холбоотой  юм.   Уул  уурхайн  салбарын  үйлдвэрлэл  ялангуяа  2020  оны  эхний  хагаст  огцом  буурсан  ч  хурдацтай  MONGOLIA ECONOMIC UPDATE From Relief to Recovery         Mining sector output contracted sharply, especially in Non-mining output also contracted notably, as the Imports Imports   also contracted    also   contracted   significantly   significantly   amid   weaker   amid   weaker   domestic   domestic   demand   demand   and   andlower   lower  oil   prices. oil  prices.   As  a   As   net  a  net  H1 2020, but recovered quickly. In H1 2020, production services sector was significantly hit by COVID-19- importer importer  of energy, of energy,  Mongolia  Mongolia  benefited  benefited  from  declining  from  declining  global  oil prices.  global  oil prices.  Real  imports  Real  imports  of goods  of goods and services  and services     of coal contracted by 49 percent (y/y), while its volume of related precautionary measures. After recording fell fell by  8  percent  by  8 percent  (y/y)  during  (y/y)  January–September  during  January–September  2020  2020  compared  compared  to an  to  an expansion  expansion  of 23.2  of 23.2  percent  percent  a year      a year exports contracted by 52.1 percent (y/y).3 Weak demand growth of 6.7 percent (y/y) in 2019, non-mining GDP (figure ago ago   I.4).  I.4).   (figure The  The import   import   compression   compression   is  supported   is  supported   by,  among by,  among   others,  others,  subdued   subdued   purchase  purchase   of  capital   of  capital     from China and the COVID-19-related precautionary contracted by 3.7 percent (y/y) in the first nine months goods  (mostly goods  (mostly  reflecting  reflecting  lower  private  lower  investment),  private  investment),  lower  lower  oil prices,  oil prices,  and and reduction reduction  in imported  in imported  consumer  consumer     measures goodsgoods of   triggered   triggered the  authorities by  COVID   by  COVID largely ‐19 ‐related ‐19‐relatedexplain   the   precautionary weak   measures precautionary 2020   (figure of  measures (for  (for I.6). example, The   example, services   cancellation   cancellation sector,  of  the mainly thetrade   of  official       official performance. celebration celebration 4,5  of the Meanwhile,  of  2020 the 2020  lunar crude new  lunar oil  new  year production  and and  year reduced was  reduced and  economic  economictransportation,  activity  activity  in retail declined  in retail  trade significantly  trade  and and other  other (by 13  services).  services). to     down by about Meanwhile, Meanwhile, 70   imports percent   imports  (y/y) of  services   of  services during  also the   also same declined  declinedperiod.   sharply,   sharply,  25 partly percent),   partly   due  due toreflecting   weaker   to  weaker  its strong demand   demand link   for with   transportation for the mining   transportation     Copper services services production   (mainly   (mainly contracted   triggered   triggered   by by 8 percent   travel   by   travel  in   restrictions H1 2020, restrictions   and  and sector. limited   limited Mainly   truck   truck   activities), explained   activities),   and by  and reduced reduction  reduction  production in  overseas   in  overseas of     reflecting tourism tourism  and the  and declining international  internationalquality of  consultancy copper services  consultancy from the (particularly  services Oyu (particularly textiles,  in the manufacturing  in the mining   mining  sector). output  sector).     contracted by 6.6 Tolgoi mines and lower international prices.6 However, percent (y/y) in the same period from 9.2 percent Mining Mining the output   sector   sector contraction  output   output of  contractedcontracted the  mining   sharply, sector   sharply,   especially decelerated   especially   in   H1 growth   in   2020, H1   2020, a year   but ago.   but recovered   recovered 9 Despite   quickly. the   quickly. accelerated   In  H1   In H1  2020,   2020, execution     production production to 5.23 percent  of coal contracted  of  coal  contracted  by 49 (y/y) in Q3 (figure I.5). This was mainly  by  percent  49 percent  (y/y),  (y/y),  while  its volume  while  its volume  of exports  of exports of public investment projects and the resumption of  contracted contracted  by 52.1  by 52.1 percent      percent 3 (y/y). (y/y).   Weak   Weak  demand   demand   from   China   from   and  and   China the  COVIDthe  COVID ‐19‐related ‐19‐related   precautionary   precautionary   measures   measures   of  the the  authorities   of  authorities     driven by strong gold production following 4,5 4,5 higher a subsidized housing program by the BoM since April largely largely  explain  explain  the  weak the weak  performance.  performance.  Meanwhile,  Meanwhile,  crude  crude  oil production  oil production  was was down  down by about  by about  70 percent  70 percent     prices, and the Bank of Mongolia (BoM)’s program 2019, the construction sector also contracted by 6.3   during (y/y)(y/y)   the  the   during same   same   period.  period.  Copper   Copper    7,production production     contractedcontracted   by    8   by percent   8   percent   in   H1   in   2020, H1     2020,   reflecting reflecting   the   the  to support gold production and exports. 8 Moreover, percent (y/y) in the same period from 6expansion (8 declining declining   quality   quality   of  copper   of  copper   from   the  the   from Oyu Tolgoi    Oyu   Tolgoi  mines   mines  and  and lower   international   lower   international   prices.   prices.6   However,   However,   the  the  coal production also recovered in the same period percent) in 2019, with a fall in both residential and output output  contraction  contraction  of the  of  mining the mining  sector  decelerated  sector  decelerated  to 5.2  to  percent  5.2 percent  (y/y)  in Q3  (y/y)  in  Q3 (figure  (figure  I.5). I.5).This  This was was mainly      mainly supported driven driven  by   by  strongby the strong government’s   gold   gold   production   production efforts   following to boost   following   higher  coal higher  prices, industrial   prices,  and  and the building   Bank the  Bank   ofactivity   Mongolia (the  latter   of  Mongolia (BoM)’s mainly   (BoM)’s   program due   programto the   to     to  exports, support support including   gold   gold   production through   production   andthe exports.   andGreen Gate   exports. initiative   Moreover,   Moreover, 7,8 7,8   coal slowdown production    coal   production in the development   also recovered   also   recovered of   in the   the   inOyu  same the Tolgoi   period   same mine’s       period with China. supported supported  by the  by  government’s the government’s  efforts  to boost  efforts  to boost  coal  coal underground exports,  exports,  including  including project).  through In  through contrast,  the  Green the Green expansion  Gate  initiative  Gate in the      initiative  China. withwith      China. Figure I.5. Mining output fell sharply in H1, but Figure I.6. The services sector explained most of Figure Figure  I.5. Mining recovered  I.5.  output  Mining strongly  fell sharply  output  in H1,  fell sharply in but  H1,   but  Figure  I.6. contraction Figure the  I.6.  services The The services  sector in  sector  explained non-mining  explained  most output  of the  most  of   the  recovered recovered  strongly  strongly       contraction contraction  in non in‐ mining  non  output ‐mining    output   Contributions Contributions Contributions to mineral  to mineral  to output  mineral  output  (y/y,  output(y/y, percentage  percentage (y/y, points)  points)  percentage  points)   Contributions   Contributions Contributions  to non to  to ‐  non-mineral non ‐mineral mineral output  (y/y, (y/y, output  output (y/y,percentage  percentage percentage points)  points)    points)   20% 20% 10% 10% 10% 10% 5% 5% 0% 0% -10% -10% 0% 0% Agriculture Agriculture -20% -20% Others Others Gold Gold Services Services -5% -5% Net taxes Net taxes Iron ore Iron ore Crude oil Crude oil -30% -30% Non-mineral Non-mineral industries industries CopperCopper Coal Coal Non-mining Non-mining GDP growth GDP growth GDP growth Mining Mining GDP growth -10% -10% -40% -40% Q1-18 Q1-18 Q2-18 Q2-18 Q3-18 Q3-18 Q4-18 Q4-18 Q1-19 Q1-19 Q2-19 Q2-19 Q3-19 Q3-19 Q4-19 Q4-19 Q1-20 Q1-20 Q2-20 Q2-20 Q3-20 Q3-20 Q1-18 Q1-18 Q2-18 Q2-18 Q3-18 Q3-18 Q4-18 Q4-18 Q1-19 Q1-19 Q2-19 Q2-19 Q3-19 Q3-19 Q4-19 Q4-19 Q1-20 Q1-20 Q2-20 Q2-20 Q3-20 Q3-20         Sources: Sources: Sources: NSO; World  NSO;  NSO; World  Bank World  Bank staff   Bank staff staff estimates.  estimates. estimates. Sources: Sources:  NSO; Sources: World   NSO; NSO;  Bank  World World   Bank Bank staff staff staff  estimates  estimates estimates. NonNon ‐mining   output ‐mining   output   also contracted    also   contracted   notably,   notably,   as  the   as  services the  services   sector   was   sector   was significantly   significantly hit   hit   by   by  COVID   COVID ‐19‐ ‐19‐ related   precautionary related   precautionary   measures.   measures.   After   recording   After   growth   recording   growth   of  6.7   of  percent   (y/y) 6.7  percent   in  2019,   (y/y)   in  2019,   non ‐non mining   GDP ‐mining       GDP                                                                                                                           3  exports 3 Coal Coal exports  accounted  accounted  for 45  percent  45 percent  for  of total  of total mineral  exports  mineral exports  in 2019.    in 2019.       4 As a4 As a  of   part part  of  the  the precautionary  precautionary  measures,  the export  measures,  ban during  the export  ban during  February–March  contributed  February–March  to a sharp  contributed  to a sharp  fall  fall in  mineral  output.  output.  in mineral       5  In  2019, 5  In  2019, coal  production   coal  production   and  export   and  export   grew by  1.9   grew   percent   by   1.9  percent   and  2   and   percent,   respectively,   2  percent,   to  reach   respectively,   to  reach   historically   historically high  levels   high  levels is,    is,    (that  (that 50.8 3  million  tons and 50.8 million tons  and million  36.5  tons,  tons, respectively). 36.5 million    respectively).   Coal exports accounted for 45 percent of total mineral exports in 2019. 4  The    6 The  copper 6 copper   export   export   unit  price fell  by unit  price   about   fell   14.3  percent 14.3  percent   by  about   during   during   the  H1   2020   H1  2020   the   following following   the  collapse   in  global   the  collapse   in  global   prices   amid   prices the    the    amid As a part of the precautionary measures, the export ban during February–March contributed to a sharp fall in mineral output. impact 5 impact In 2019, of  the coal  COVID  of  the COVID production ‐19  shock and ‐19  shock export  on  on  the grew commodity  by percent market. 1.9 commodity  the and 2  market.    percent,    respectively, to reach historically high levels (that is, 50.8 million tons and 36.5 The 7copper  export  unit by fell price by about 14.3 percent during the months H1 2020  following   collapse     the in global prices amid the impact of the COVID-19 6 7  Gold production  Gold productiongrew 35   grew  by percent  35  (y/y)  percent in the  (y/y)  first  in  the  first  nine nine of 2020.  months  of 2020. shock8on the commodity market. 8 7  The    The Bank   of   Bank Mongolia  of     has Mongolia  also  has    also provided  provided  soft  loans  soft Gold production grew by 35 percent (y/y) in the first nine months of 2020.    to loans gold to  mining  gold  mining       companies, which companies,   may   which   have also contributed may have  to boosting  also contributed  gold  gold   to boosting The production. Bank of Mongolia production. 8   has also provided soft loans to gold mining companies, which may have also contributed to boosting gold production. 9 The contraction in the textile industry, which represents nearly 14 percent of manufacturing production, is mainly attributed to weakened business activity, especially in the cashmere industry. 19  19  6   contracted contracted   by  3.7 by  3.7   percent percent   (y/y)   (y/y)   in  the  in    first the   nine   first   months   nine   months   of   2020 of  2020   (figure   (figure   I.6).   The   I.6).   The   services   services   sector,   sector,   mainly   mainly     trade   and trade   transportation,   and   transportation,   declined   declined   significantly   significantly   (by 13  to   (by 13   25 25  percent), to  percent),   reflecting   reflecting its  strong   its  strong   link   with   link   the   with   the  miningmining   sector.   sector.   Mainly   Mainly   explained   explained by  reduced   by  reduced   production   production   of  textiles,   of   textiles, ECONOMIC   manufacturing   manufacturing PERFORMANCE   output   output AND   contractedcontracted  PROSPECTS   by   by  8 8 6.6 6.6   percent percent   (y/y)   in  the   (y/y) in    the same   same   period   period   from   from  9.2    9.2 percent  percent   growth   growth   a  year   a  year   ago.   ago.   Despite   Despite   the    accelerated the   accelerated     execution execution  of public  of public  investment  investment  projects  projects  and  the    and the resumption  resumption  of a  of  a subsidized  subsidized  housing  housing  program  program  by  the by  the BoM  BoM     since   since April     April 2019,   2019,   the   the   construction agriculture sector accelerated to 11.3 percent during   construction   sector   sector   also   also     contracted contracted   by   by 6.3    percent 6.3   percent   (y/y) have also contributed to low inflation as Mongolia is   (y/y)   in   the   in   the   same   same   period   period   from   from    expansion expansion (8  percent)   (8  percent) in  2019,   in   2019,   with   a  fall   with   a  fall in    in  both both   residential   residential   and   industrial   and   industrial   building   building   activity   activity   (the   latter   (the   latter    January–September 2020, up from 8.4 percent in 2019, a net oil importer. Moreover, the government decision mainlymainly   due   to   the   due to   the slowdown   slowdown   in  the in    the   development development   of  the of   the Oyu   Oyu   Tolgoi   Tolgoi   mine’s   mine’s   underground   underground   project).   project).   In   In  reflecting relatively favorable weather conditions and to reduce the price of coal briquettes also significantly contrast, contrast,  expansion expansion  in the  in   agriculture the  agriculture  sector  sector  accelerated  accelerated  to 11.3  to 11.3  percent  percent  during  during  January–September  January–September  2020,  2020,     higher survival rates of livestock. Finally, net taxes contributed to moderate inflation through end-2020. up  from up  from   8.4  8.4 percent  percent   in  2019,   in  2019,   reflecting   reflecting   relatively   relatively   favorable   favorable   weather  weather   conditions   conditions   and   higher   and   higher   survival  survival   rates       rates contracted of  livestock. of livestock. by 8.4  Finally, percent  Finally, net   net (y/y) taxes  taxes amid  contracted  contracted subdued  by domestic  by 8.4 8.4 percent percent However,  (y/y)  (y/y) amid  amid food  subdued price  subdued inflation  domestic domestic remained  demand  demand  and high  and  import at 8.5  import     demand compression compression and import  (mainly  (mainly compression  a sharp  a sharp  fall fall (mainly in imports  in imports a sharp  of passenger fall  of passenger percent  cars  cars  and at  and end-2020  mining  mining ‐sector (8.3 ‐sector percent ‐related ‐related at  capital end-2019)  capital  goods).  goods). amid     in imports of passenger cars and mining-sector-related the lockdowns and panic buying. capital A2.A2. goods).  Inflation  Inflation  moderated  moderated  notably, notably,  reflecting  reflecting  subdued  subdued  domestic  domestic  demand  demand  and  and  lower  lower  oil oil prices  prices   was   With subdued inflation, the monetary policy rate Weakening Weakening  domestic domestic  demand  demand  largely  largely  contributed  contributed  to  to moderate  moderate reduced to  a  inflation inflation historic in 2020. in  2020. low  Inflation to  mitigate Inflation  moderated moderated  the economic  to   to  A2. 2.3 2.3 Inflation percent   percent moderated  in  November  in  November   2020, notably,   2020,   down   down   fromreflecting   from  5.2  5.2 percent   percent  impact in  2019  in  2019 on the  of on   the the back   of  muted   back COVID-19   muted   ofshock.   domestic domestic  Reflecting   demand   demand weaker     subdued pressures pressures domestic  following following  plummeting  plummeting demand  private  privateand  investment lower and  investment  and  domestic decelerating  decelerating demand,  private  private  consumption  consumption core inflation moderated  growth  growth  (figure (figure  to     0.2  prices oilI.7). I.7). Supply Supply  side  side  factors,  factors,  such  as lower  such  as lower  global  global  oil   oil prices, prices,  have   have  also   also    contributed contributed percent at end-2020 from 4.2 percent (y/y) at end-  to     to low     low   inflationinflation  as     as Mongolia  Mongolia       net is  ais   a   net oil  importer. oil  importer.   Moreover,   Moreover,   the government    the   government   decision   decision   to    2019 (figure I.8). Moreover, domestic credit contracted   reduce to   reduce   the   the   price   price  of    coal of     coal   briquettesbriquettes   also     also Weakening domestic demand largely contributed to significantly significantly  contributed  contributed  to moderate  to moderate  inflation  inflation  through through  endin  end ‐ 2020. March ‐2020. as  banks’  However, However,  food risk  food price aversion  price  inflation inflation  toward  remained  remained new loans     moderate inflation in 2020. Inflation moderated to high  at 8.5 high  at  8.5 percent  percent  at end  at end ‐2020 ‐2020  (8.3  (8.3  percent  percent  at end  at end ‐2019) ‐2019)   amid   amid  the  the     lockdowns lockdowns increased amid heightened market uncertainty   and   and   panic   panic  buying.   buying.     2.3 percent in December 2020, down from 5.2 percent With in With  subdued 2019  subdued on the inflation,  back  inflation,  the of  the  monetary muted  monetarydomestic  policy  policy  rate demand  was  rate  was triggered  reduced  reduced  toby  a  historic  to the COVID-19  a historic  low  toshock.  low  to mitigate  mitigate This  thealso  the contributed  economic  economic     impactimpact pressures of  the the   of  following   COVID   COVID ‐19 ‐shock. plummeting 19  shock.   Reflecting   Reflecting private   weaker investment   weaker   domestic to   domestic the falling   demand,   demand, core   core inflation   core  inflation   inflation trend.   moderated   moderated The authorities   to  0.2 to  0.2  percent and percent  at end decelerating  at end ‐2020  from ‐2020 private  from 4.2 4.2 consumption percent  percent  (y/y) growth  (y/y)  at end  at end (figure ‐2019 ‐2019 (figure  (figure consequently  I.8).  Moreover,  I.8).  Moreover, cut the policy  domestic  domestic rate by a  total  credit credit  contracted of  contracted 500 basis     in   in March  March   as   as banks’  banks’   risk   I.7). Supply side factors, such as lower global oil prices,  aversion risk   aversion   toward   toward   new     new loans     loans increased   points increasedin   2020 amid   amid to   heightened 6   heightened percent, a   market historic   market   low.   uncertainty uncertainty     triggered triggered  by  the by   COVID the  COVID ‐19 ‐shock. 19 shock.  This  This also  contributed  also  contributed  to the  to   falling the  falling  core  core  inflation  inflation  trend.  trend.  The  authorities  The  authorities     consequently consequently  cut  cut the the   policy  policy rate  by  a  rate  total by  a total  of 500  of 500  basis  points  basis  points  in 2020  in 2020  to 6  to  6 percent,  percent,  a historic  a historic  low.        low. Figure I.7. Inflation moderated amid lower oil Figure I.8. …and compounded by the contraction Figure pricesFigure I.7. and  I.7.  Inflation Inflation subdued  moderated  moderated domestic  demand… amid  amid lower  lower  oil prices  oil prices   Figure   Figure of I.8.  I.8. …and domestic  …and  compounded  compounded credit  by the  by the contraction  contraction  of   of   subdued andand  domestic  subdued  domestic  demand…  demand…     domestic domestic  credit  credit     y/y change y/y change y/y change y/y change     y/y change y/y change     Core inflation Core inflation (y/y): RHS (y/y): RHS 30% 30% 12% 12% growth CreditCredit (y/y): LHS growth (y/y): LHS rate: RHS PolicyPolicy rate: RHS 12% 12% 20% 20% 10% 10% 22% 22% 10% 10% 10% 10% 8% 8% 8% 8% 0% 0% 6% 6% 12% 12% 6% 6% Fuel price: Fuel price: LHS LHS -10% -10% 4% 4% 4% 4% Domestic Domestic demand: demand: LHS LHS 2% 2% -20% -20% 2% 2% 2% 2% Headline Headline inflation inflation (UB): RHS (UB): RHS -30% -30% 0% 0% -8% -8% 0% 0% Q1-18 Q1-18 Q2-18 Q3-18 Q2-18 Q3-18 Q4-18 Q1-19 Q4-18 Q2-19 Q1-19 Q2-19 Q3-19 Q4-19 Q3-19 Q4-19 Q1-20 Q2-20 Q1-20 Q2-20 Q3-20 Q3-20 Dec-18 Dec-18 Dec-19 Dec-19 Dec-20 Dec-20 Aug-18 Aug-18 Feb-19 Apr-19 Feb-19 Jun-19 Apr-19 Aug-19 Jun-19 Aug-19 Feb-20 Apr-20 Feb-20 Jun-20 Apr-20 Aug-20 Jun-20 Aug-20 Oct-18 Oct-18 Oct-19 Oct-19 Oct-20 Oct-20         Sources: Sources:  NSO  Bulletin;  NSO  Bulletin;  World  World  Bank  staff  Bank  estimates.  staff  estimates.     Sources: Sources:  BoM;  BoM;  World World  Bank  staff  Bank  estimates.  staff      estimates. Sources: NSO Bulletin; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Note:  Domestic Note:  demand  Domestic  is defined  demand  is defined as the  as  sum  of final the sum      of final Note: Note: RHS  RHS Note: =  = right RHS  = right‐hand ‐hand  side; right-hand  LHS  side; side; LHS = = left  LHS  hand  =‐ left‐hand left-hand  side.  side. side.     Note: Domestic demand is defined as the sum of final consumption consumption consumption investment  and and  from  investment  from  national  national  accounts  accounts  data.  data.     and investment from national accounts data. RHS = right-hand side; LHS   RHS RHS ==left-hand  = right  right ‐hand ‐hand  side; side. = left  side;  LHS LHS  hand  =‐  side. left‐hand      side.                                                                                                                                 8 The 8 The  contraction contraction  in  textile  in the the textile  industry,  industry,  which  which  represents  represents  nearly  nearly  14 percent  of manufacturing  14 percent  production,  of manufacturing  production,  is mainly  is mainly  attributed  attributed  to   to  weakened weakened  business  business  activity,  activity,  especially  especially  in the the cashmere  in cashmere  industry.  industry.       19 19      7 MONGOLIA ECONOMIC UPDATE From Relief to Recovery   A3. The COVID-19 shock affected the require relatively lower skilled labor compared to  structure and conditions of the labor sectors such as information technology (IT), finance, education, and health, and therefore workers in these A3. The COVID‐19 shock affected the structure and conditions of the labor market     market fields had lower job security and limited opportunity A3. The  COVID The  The COVID-19  COVID ‐19 pandemic ‐19 shock pandemic  has has  affected  led led to to  job the  job  losses structure  losses  in in  and  several to work  conditions sectors from and home. of  the  labor  labor In contrast, market force participation during the      pandemic,  rate (LFPR)  marked several The    COVIDthe   sectors lowest ‐19 pandemic   level and labor    hasin   forcea   decade.  led participation   According to job losses rate   tothe  official health   NSO sector   in several sectors and labor force participation ratedata, saw a   at   substantial end ‐ September rise in   employment. 2020,  (LFPR)   total     employment (LFPR) marked marked   the  increased the lowest   lowest  by   level  20,400 level   in in a  a (1.7 percent,  decade. decade.   According According  y/y) relative    to Furthermore,   official  to  a year   NSO employment   data, ago.   at  Whilein the   end  sizable trade  and ‐September COVID ‐19 IT sectors   2020,     ‐related   total employment increased by 20,400 (1.7 percent, y/y) relative to a year ago. While sizable COVID‐19‐related    relief to   measures official NSO   to   data, firmsat   overall end-September   might   have 2020,   contributed total increased  to   this   duringoutcome,this   period,the   difference partly explained  in   level by   theof   skills required employment relief  for different   measures increased  sectors   to  firms by   overall may 20,400  explain (1.7   might percent,   have  the  ups and y/y)   contributed  downs digital in      to  transformation this  employment outcome, of   the economic across   difference  sectors. activities,   in  level 9 of  fact,   In including skills  the  required for different sectors may explain the ups and downs in employment across sectors.  In fact,on mining, relative   construction, to a year   manufacturing, ago. While sizable   agriculture, COVID-19-   and trade.   entertainment 11 In the meantime,   sectors the labor   all   force posted (employment   a 9   year ‐  the‐year     decline mining, related   in   their  relief   employment construction, measures   manufacturing, to firms   of  September   asoverall   agriculture, might have   2020  and + unemployment)   (figure   entertainment   I.9)  amid decreased   the  lockdowns   sectors by 1   all  posted percent   and in   a  year the same   precautionary ‐on‐year    measures decline contributed  by   in  to the   their  authorities. this employment outcome, the  Moreover,   as  in   of  September difference this  could level of  also   2020 period,  and  be explained   (figure I.9) theamid number by    the  the of those  fact   lockdowns out  that of the the   and labor force  industrial precautionary      sectors measures skills required  by  the for  authorities. different  Moreover, sectors may  this explain  could the   also increased  be require  relatively  lower  skilled  labor  compared  to  sectors  such  as  information  technology  (IT),  finance,  explained by 4  percent. by  the  factThis  thatindicates  the   that industrial finding sectors a     ups and  downs require education, relatively   andin   lower employment   health,    and skilled   labor across   therefore   compared sectors.   workers 10 In fact,   to    in job sectors   these has   suchbecome   fields more   as  information had  lower difficult and   technology that job  security some   (IT),  and of the   finance,   limited    education, the mining,   and   health, construction,   and   therefore manufacturing,   workers agriculture,   in opportunity to work from home. In contrast, during the pandemic, the health sector saw a substantial rise    unemployed these   fields moved   had   out lower of the   job labor   force. security   and   limited   in opportunity and entertainment employment.  to   work  from all sectors Furthermore, home.  In contrast, posted  during a year-on-year  employment  in  the pandemic,  the trade  and IT sectors Unemployment  the health rates  increased  sector moderately  saw a  substantial  during increased thisin period,  rise Q3 2020.      partly in  employment. decline explained in   by   the  their  Furthermore, employment as employment digital  transformation of September  of  in  the trade 2020 economic    and IT sectors activities,  increased   including  during   trade. 10  this period, partly    In  the   meantime,  the  Despite the sharp output contraction, unemployment explained (figure I.9)   byamid  the   digital the   transformation lockdowns labor force (employment + unemployment) decreased and   of   economic precautionary   activities,   by   1     including percent   in     thetrade.   same 10   In   the  meantime, period,   and  the   the     number rates were relatively stable in H1 2020, partly labor   force   (employment   +   unemployment)   decreased   by   1   percent   in   the   same   period,   and   the   number   of measures those out by  of the  theauthorities.  labor force Moreover, this could  increased  by 4  also percent.  This indicates supported  that finding by the sizable income  asupport  job has  become measures. 12 more   be those of  out of explained by  the the fact  that  labor force  increased the  bysectors industrial  4 percent. This indicates that finding a job has become more  difficult  and that  some  of the unemployed  moved out of the labor force.   difficult and that some of the unemployed moved out of the labor force.   Figure Figure  I.9.I.9. The  The COVID-19  COVID pandemic  has ‐19 pandemic putsome has put  some  Figure Figure I.10.  I.10. …thereby  reversing  …thereby reversing declining trends  declining of of   trends Figure I.9. The COVID‐19 pandemic has put some  Figure I.10. …thereby reversing declining trends of  jobsjobs   at at risk... risk...   the the   unemployment  rate unemployment rate    jobs at risk...  the unemployment rate   Change Change  in  employment in  employment Change  (Q3  2020–Q3  (Q3 in employment 2020–Q3   2019, 2019, (Q3 2020–Q3   y/y  percent  y/y 2019, percent   Unemployment Unemployment  rate  rate  by  by  gender  gender Unemployment   by gender  rate change) change)   y/y percent change) 15% 15% Unemployment rate Unemployment rate Total 1.7% Total 1.7% Health Health 45% 45% MaleMale Finance Finance 38% 38% & communication InfoInfo & communication 17% 17% 12% 12% Female Female Education Education 11% 11% Trade Trade 10% 10% Transportation Transportation 6% 6% Manufacturing Manufacturing -1% -1% Construction Construction -2% -2% 9% 9% Agriculture Agriculture -2% -2% Public Public admin/defense admin/defense -5% -5% Mining Mining -5% -5% Water Water & utilities & utilities -6% -6% Administrative -14% 6% 6% Administrative -14% Household activities -18% Household activities -18% Hospitality -25% Hospitality -25% Science -34% Science -34% Electricity -35% Electricity -35% 3% Entertainment -42% 3% Entertainment -42% Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20    Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20   Sources: NSO Bulletin; World Bank staff estimates.  Sources: NSO Bulletin; World Bank staff estimates.      Sources: NSO Sources: NSOBulletin;  Bulletin;  World World Bank Bank  staff estimates.  staff estimates. Sources:  NSO Sources: NSO  Bulletin; Bulletin;  World World  Bank Bank staff  staff estimates.  estimates.   Unemployment  rates  moderately  increased  in  Q3  2020.  Despite  the  sharp  output  contraction,  Unemployment  rates  moderately  increased  in  Q3  2020.  Despite  the  sharp  output  contraction,  unemployment  rates  were  relatively  stable  in  H1  2020,  partly  supported  by  the  sizable  income  support  unemployment 11   rates  were  relatively  stable  in  H1  2020,  partly  supported  by  the  sizable  income  support  measures.  However, unemployment moderately increased to 7.3 percent in Q3, up from 6.6 in H1 (figure  measures. I.10). 12   11 The However,   rise  unemployment   in  unemployment  moderately   was  increased   faster  for  men  to   than  for  7.3 percent   women,  in Q3,   as  more  up from   women  6.6 in  H1   dropped out (figure   of    I.10). 12   The  force, the labor rise  in   unemployment  thus was  faster  reducing the  number   for  men  of women   than  for  actively   women, seeking  jobs.  as     more  women  dropped  out  of  the labor force, thus reducing the number of women actively seeking jobs.      Measures include exemptions on tax, social security contributions, and use of the unemployment insurance fund to support firms that did not lay off 10 workers.                                                              However, according to the latest Household Response Phone Survey by NSO and World Bank, the strict lockdown since mid-November 2020 may have 11 caused significant disruptions of employment in the private sectors (see Part II for details).                                                              9 12  Measures   include Measures include   exemptions exemptions on tax,   on   tax, social security   security  contributions,   socialcontributions, and use of the  and   use  of  the unemployment   unemployment insurance   insurance fund to support   fund firms that did  not lay off   to  support   Measures 9 firms  that  include workers. did not   lay  off workers. exemptions   on  tax,  social  security  contributions,  and  use  of  the  unemployment  insurance  fund  to  support  firms10   However,  according  to  the  latest  Household  Response  Phone  Survey  by  NSO  and  World  Bank,  the  strict  lockdown  since  mid‐ 8  that did not lay off workers. 10 November 2020 may have caused significant disruptions of employment in the private sectors (see Part II for details).   However,  according  to  the  latest  Household  Response  Phone  Survey  by  NSO  and  World  Bank,  the  strict  lockdown  since  mid‐ 11  Measures  include  exemptions  on  tax,  social  security  contributions,  and  use  of  the  unemployment  insurance  fund  to  support  November  2020 may have caused significant disruptions of employment in the private sectors (see Part II for details). 11 firms that did not lay off workers.     Measures   include  exemptions  on  tax,  social  security  contributions,  and  use  of  the  unemployment  insurance  fund  to  support  12 There were 92,600 unemployed people in September, up from 83,700 people in H1 2020.  firms  that did not lay off workers.   12  There were 92,600 unemployed people in September, up from 83,700 people in H1 2020.  ECONOMIC PERFORMANCE AND PROSPECTS However, unemployment moderately increased to 7.3 childcare responsibilities. This is more relevant to percent in Q3, up from 6.6 in H1 (figure I.10).13 The rise women, who traditionally bear the responsibility of in unemployment was faster for men than for women, caregiver. Also, the generous increase of social welfare   more women dropped out of the labor force, thus  as benefits coupled with other relief measures increased reducing the number of women actively seeking jobs. the financial means of eligible households and hence Generous  income  support  is  likely to  have  have  contributed may  to  thehave  moderatereduced impact the need  of to look  the  pandemic for employment  on  labor Generous Generous  income income  support support is is  likely likely to  to  have  contributed contributed  to  the  moderate  impact of  the  pandemic  on  labor    market market   conditions   (see   Part   II   for   details).   A   moderate (figure   rise  in  unemployment  and  shrinking  labor  force      rise   inI.11).   Still, unemployment family   support and   shrinkingremains   labor the   main force conditions to the  moderate   (see  Part impact of the   II  for   details). on pandemic A  moderate labor source of  theincome participation participation market conditions  during  during (see  times  times Part of  of II  for  severe severe details).  economic  economic A moderate  crisis  crisis  often  often  reflect  reflect  the  fact  fact  assistance  that that  people  people for  people believe  believe  it currently   it  would  would  be out    be harder harder  to  to  find  find  employment  employment  and and  they  they  stop  stop  looking  looking  for for jobs. of  jobs. work.  With  With In  COVID  COVID 2019, ‐19 about ‐19  spreading  spreading 85 percent  so so of  easily,  easily, the unemployed  people  people  may may    rise in unemployment and shrinking labor force indicated that financial support from family members have have   stopped   stopped   looking   looking   for   for  a    ajob   job   to  to   reduce   reduce   the   the   risk   risk   of  of   contracting   contracting   the   the   virus.   virus.   Closing   Closing   kindergartens   kindergartens   and   and    participation during times of severe economic crisis schools  may   schools may have also discouraged unemployed parents from looking for a job due to increased household    have  also  discouraged  unemployed  parents was  from their   looking main  for source a  job of  due  to income.  increased This share  householddeclined often reflect the fact that people believe it would be and and  childcare  childcare  responsibilities.  responsibilities.  This  This  is  is  more more  relevant  relevant  to to  women, in Q2 2020  women,  who  who to  traditionally 80 percent,  traditionally  bear while  bear  the theabout responsibility 14 percent  responsibility  of of of     harder caregiver.to find   Also, employment   the   generous and they   increase stop looking   of   social for   welfare   benefits   coupled   with   other   relief   measures caregiver.   Also,   the   generous   increase   of   social   welfare the   benefits unemployed   coupled reported   with   other that they  mainlyrelief   measures rely on cash    jobs. With  the increased increased COVID-19   the   financial   financial spreading   means   means   so of  of easily,   eligible   eligible people   households   households may   and   and   hence transfers  hence   may and   may social   have   have   reduced   reduced welfare benefits  the   the   need   need (figure   to  to   look  I.12). look   for   for    have stopped  (figure employment employment looking   (figure  for I.11).   I.11). a  job Still,   Still,   to   family family reduce the risk   support   support   remains of   the   remains   the   main   main   source   source   of   of   income   income   assistance   assistance   for  for   people   people    contracting currently   currently out of work. In 2019, about 85 percent of the unemployed indicated that financial support from    the out  virus. of   work. Closing In   kindergartens 2019,   about  85 and  percent schools  of  the  unemployed  indicated  that   financial  support  from may family family have   members   members also discouraged   was   was   their   their  unemployed   main main   source   source parents   of   of from  This   income.   income.   This   share   share   declined   declined   in   in   Q2  Q2   2020   2020   to  to   80   80   percent,   percent,   while   while    looking about about  14 14for  percent  percent a job  of due  of  the  the to increased  unemployed  unemployed household  reported  reported and  that  that  they  they  mainly  mainly  rely rely  on  on  cash  cash  transfers  transfers  and  and  social  social  welfare  welfare    benefits benefits  (figure  (figure  I.12).  I.12).    Figure I.11. Relevance of cash transfers for people Figure I.12. For unemployed, main source of Figure Figure  I.11.  I.11.  Relevance  Relevance  of of  cash  cash  transfers  transfers  for for  people  people     Figure Figure  I.12.  I.12.  For For  unemployed,  unemployed,  main  main  source  source  of of  income  income    currently out of work increased in H1 2020 income support shifted in Q2 2020 currently currently  out out  of  of  work  work  increased  increased  in  in H1 H1  2020  2020    support support  shifted  shifted  in  in Q2 Q2  2020  2020    Share Share Share  of  of  people  people people    reporting reporting reporting  cash  cash cash  benefits/social  benefits/social benefits/social  welfare  welfare welfare  as as as main    Y/y Y/y  change  change  in  in Y/y change  main  main in    source source main  of  of source  of income  income income support  support  for support for     unemployed for main main  source  source  of  of  income  incomesource  support of income  support     support unemployed unemployed  people  people     people 15% 15% Unemployed Unemployed Out Out of of labor labor force force 6 6 Family Family support support 13% 13% 4 4 Cash Cash benefits/social benefits/social welfare welfare 11% 11% Percentage points 2 2 Percentage points 9%9% 0 0 7%7% -2 -2 5%5% -4 -4 3%3% -6 -6 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q1 Q1 Q2 Q2 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20    Sources: Sources:  NSO  NSO  (LFS  (LFS  2019,  2019,  2020);  2020);  World  World  Bank  Bank  staff  staff  estimates.  estimates.    Sources: Sources:  NSO  NSO  (LFS  (LFS  2019,  2019,  2020);  2020);  World  World  Bank  Bank  staff  staff  estimates.      estimates. Sources: NSO (LFS 2019, 2020); World Bank staff estimates. Sources: NSO (LFS 2019, 2020); World Bank staff estimates. A4. A4.  The  The  budget  budget  deficit  deficit  widened  widened  sharply  sharply  in  in  2020  2020  but  but  is  is  expected  expected  to  to  narrow  narrow  in  in  2021  2021    The The   decline   decline  in in   economic   economic  activity  activity   and   and   forgone   forgone  revenue  revenue  linked  linked   to  to  selected  selected  COVID  COVID ‐19‐19   relief   relief  measures  measures  led  led    toto a  a  large large  overall  overall  revenue  revenue  shortfall  shortfall  in in  2020.  2020.  Total  Total  revenue  revenue  declined  declined  by by 13  13  percent  percent  (y/y)  (y/y)  in in  2020,  2020,  reflecting  reflecting    weaker weaker   mineral   mineral   revenue,   revenue,   subdued   subdued   consumption,   consumption,   income   income   losses,   losses,   and   and   tax   tax   relief   relief   measures   measures   (figure   (figure   I.13).   I.13). 1313      Tax Tax   revenue   revenue   fell   fell   by   by   12.8   12.8   percent   percent   (y/y),   (y/y),   while   while   non   non ‐tax ‐tax   revenue   revenue   contracted   contracted   by  by   12.6   12.6   percent   percent   (y/y).   (y/y).   Notably,   Notably,    the   corporate   income   the  corporate  income  tax,  social  security  contributions,  and  the  value‐added  tax,  which  together    tax,   social   security   contributions,   and   the   value ‐ added   tax,   which   together accounted accounted  for  for  61  61  percent  percent  of of  overall  overall  tax  tax  revenue,  revenue,  contracted  contracted  by  by  15.8  15.8  percent  percent  (y/y),  (y/y),  19.6  19.6  percent,  percent,  and and  11.2  11.2    percent, percent,  respectively,  respectively,  amid  amid  the  the  COVID  COVID ‐19 ‐19 ‐related ‐related  relief  relief  measures  measures   and   and  the the  fall  fall  in in  mineral  mineral  sector  sector  revenue.  revenue.    The The  personal  personal  income  income  tax  tax  fell  fell  by by  7.2  7.2  percent  percent  (y/y),  (y/y),  reflecting  reflecting  tax  tax  relief  relief  and  and  income  income  losses  losses  amid  amid  the  the  COVID  COVID ‐‐ 1919 ‐related ‐related  precautionary  precautionary  measures  measures  and  and  moderate  moderate  labor  labor  market  market  pressures.  pressures.  Excise  Excise  and  and  customs  customs  duties  duties  also  also    declined.   In declined. In fact, as the revenue shortfall had already reached 3.9 percent of projected 2020 GDP by July      fact,   as   the   revenue   shortfall   had   already   reached   3.9   percent   of   projected   2020   GDP   by   July 2020, 2020,  a  a  series series  of  of  revenue  revenue ‐enhancing ‐enhancing  measures  measures  (for  (for  example,  example,  collection  collection  of  of  tax tax  arrears,  arrears,  and and  tax tax  prepayment  prepayment    13 There were 92,600 unemployed people in September, up from 83,700 people in H1 2020. from from  major  major  state  state ‐owned ‐owned  enterprises)  enterprises)  were  were  sanctioned  sanctioned  under  under  the  the  2020  2020  supplementary  supplementary  budget.  budget.       9                                                                                                                             In  In 13 13   fact,   fact,   the   the   revenue   revenue  shortfall  shortfall   had   had   already   already   reached   reached   3.9   3.9   percent   percent   of   of  projected  projected   2020   2020  GDP  GDP   by   by   July   July   2020   2020   when   when   the   the   authorities   authorities   were   were     considering considering  the  the  2020  2020  supplementary  supplementary  budget.  budget.    21  MONGOLIA ECONOMIC UPDATE From Relief to Recovery A4. The budget deficit widened sharply in duties also declined. In fact, as the revenue shortfall had already reached 3.9 percent of projected 2020 GDP by 2020 but is expected to narrow in 2021 July 2020, a series of revenue-enhancing measures (for The decline in economic activity and forgone revenue example, collection of tax arrears, and tax prepayment linked to selected COVID-19 relief measures led to a from major state-owned enterprises) were sanctioned large overall revenue shortfall in 2020. Total revenue under the 2020 supplementary budget. declined by 13 percent (y/y) in 2020, reflecting weaker mineral revenue, subdued consumption, income losses, Meanwhile, measures to minimize the economic and and tax relief measures (figure I.13).14 Tax revenue fell social impact of the COVID-19 crisis drove a surge in by 12.8 percent (y/y), while non-tax revenue contracted spending. Total budget spending rose by 22.1 percent by 12.6 percent (y/y). Notably, the corporate income tax, (y/y) in 2020 following 24 percent growth in 2019 social security contributions, and the value-added tax, (figure I.14). Social protection and welfare spending which together accounted for 61 percent of overall tax increased by 128.7 percent (y/y) in 2020 due to crisis revenue, contracted by 15.8 percent (y/y), 19.6 percent, response measures (mainly the sharp increase in and 11.2 percent, respectively, amid the COVID-19- benefits of the Child Money Program) (see box I.2). related relief measures and the fall in mineral sector Health spending increased by 27 percent (y/y) in the revenue. The personal income tax fell by 7.2 percent same period. Meantime, capital spending execution (y/y), reflecting tax relief and income losses amid was stronger than in the previous years (8.3 percent), the COVID-19-related precautionary measures and reflecting the government’s efforts to support the     economy by boosting domestic demand.15 moderate labor market pressures. Excise and customs Figure FigureFigure  I.13. Government   I.13. I.13.  Government Government  revenue  has  revenue revenue  declined  declined  has has  across  across declined   Figure  I.14.  I.14.   Figure Figure …while  …while I.14.  government  government …while  spending government  soared  soared  spending   soared  driven all  all  categories… categories…   across all categories…   driven driven   by    social by     welfare social   welfare     spending spending   and  public   and by social welfare spending and public investment     public   investment investment     Budget Budget  revenue,  revenue, Budget  y/y  y/y  change    revenue,  change   change  y/y Budget Budget  spending,  spending, y/y change  Budget   spending, y/y change    y/y change Goods Goods & & Services Services InterestInterest payment payment Sub & Transfers Sub & Transfers Direct mineral Direct mineral revenuerevenue CIT CIT PIT PIT VAT VAT Capex Capex Net Lending Net Lending Wages Wages Excise Excise & & Custom Custom Other taxes Other taxes Total spending Total spending Non-Tax Non-Tax revenue revenue Total revenue Total revenue 43.3% 43.3% 40% 40% 34.2% 34.2% 27.1% 27.1% 40% 40% 19.5% 19.5% 23.9% 23.9%22.1% 22.1% 20% 20% 20% 20% 2.7% 2.7% 0% 0% 0% 0% -2.9% -2.9% -5.3% -5.3% -2.1% -2.1% -13.0% -13.0% -5.9% -5.9% -20% -20% -20% -20% 2015 2015 2016 2016 2017 2017 2018 2018 2019 20192020e 2020e 2015 2015 2016 2016 2017 2017 2018 2018 2019 20192020e 2020e         Sources: Sources: Sources:  MoF; MoF;   MoF; World World  Bank  World Bank staff  Bank staff   estimates.   staff estimates. estimates.   Sources: Sources:  MoF; MoF; Sources:  MoF; World  World  Bank World  Bank staff Bank  estimates.   estimates. staffstaff estimates.    Note: Note: Note:  CIT= CIT  = corporate   CIT  income  = corporate corporate income PIT  =  tax;  income tax;  tax; PIT  =  PIT personal  =  personal personal income  income tax;  income  tax; VAT =     tax;  VAT  =  value VAT value-added ‐  = value added tax.  tax.   tax.  ‐added     Meanwhile, Meanwhile,  measures  measures  to minimize  to minimize  the  economic the economic  and and  social social  impact  impact  of the the COVID  of  COVID ‐19 crisis ‐19 crisis  drove  drove  a surge    a surge   in spending. in spending.  Total Total  budget  budget spending  spending  by 22.1  rose rose  percent  by 22.1  percent  (y/y)  in 2020  (y/y)  following  in 2020  following  24 percent  24 percent  growth growth  in 2019  in 2019     (figure  I.14). (figure  Social  I.14).  Social  protection  protection and welfare  and welfare  spending  spending  increased  increased  by 128.7  by 128.7  percent  percent  (y/y)  (y/y)  in 2020  in 2020  due due  to crisis to crisis     response response   measures   measures   (mainly  (mainly   the  sharp   increase the  sharp   increase  in  benefits   in  benefits   of  the the  Child   of  Child   Money   Money   Program)   Program)   (see box  box    (see I.2).  I.2).  Health  spending Health  increased  spending  increased  by 27  by  27 percent  percent  (y/y)  in the  (y/y)  in  same the same  period.  Meantime,  period.  Meantime,  capital  capital  spending  spending  execution  execution     was was  stronger stronger  than  than  in the the previous  in  previous  years years  (8.3 (8.3 percent),  percent),  reflecting  reflecting the government’s  the  government’s  efforts  efforts  to support  to support  the  the  economy 14 economy In fact,  by the boosting  boosting  by shortfall revenue  domestic had  domestic already  demand.  demand. reached 3.9 14    14   of projected 2020 GDP by July 2020 when the authorities were considering the 2020 percent supplementary budget. 15 In fact, the increased social transfers and higher health spending were partly compensated by government capital expenditure cuts worth 0.6 The fiscal  The percentage fiscal   deficit   points   deficit of   increased   increased GDP in the   significantly   significantly 2020 supplementary   owing budget.   owing   to  revenue   to  revenue   losses   and   losses spending   and   needs   spending   needs   to  fight   the  the    to  fight pandemic. pandemic.  The budget The budget  deficit  deficit  reached reached  9.5 percent  9.5 percent  of GDP  of GDP  in 2020,  in 2020,  its highest  its highest  level  since  level  since  2016  (figures  2016  I.15 I.15   (figures 10  and and I.16).  I.16). 15  The 15  three The three  years  of fiscal  years  consolidation  of fiscal  consolidation that  that helped   to rebuild  helped   to rebuild  sizable  sizable   buffers   buffers contributed  also  also  contributed     to   to the the government’s government’s  efforts  efforts  to cope  to cope with  the    with the COVID COVID ‐19 shock ‐19 shock  in the in   the early early  months months  of 2020.  of 2020. 16  In 16  In contrast contrast  to   to  what   was  was what observed  observed   during   the  2015–16   during the  2015–16   economic   economic   slowdown,   slowdown, the  government   the  government   had  hadno  pressing   no  pressing  need   to    to    need borrow borrow   from   either   from   either   domestic   domestic   or  international   or  international   markets   markets   in  the   in  first the  first months five  five   of  2020.   months   of  2020.   However,   However,  since     since    2020, JuneJune  government  2020,  government  requests  requests  for donor  financing  for donor  have  financing  have  intensified,  intensified,  including  including  additional  additional  budget  support  budget  support    ECONOMIC PERFORMANCE AND PROSPECTS The fiscal deficit increased significantly owing to plans to bring back the fiscal deficit within 2 percent of revenue losses and spending needs to fight the GDP (figure I.20). A projected rebound in revenues (3.4 pandemic. The budget deficit reached 9.5 percent of percentage points of GDP) and substantial spending GDP in 2020, its highest level since 2016 (figures I.15 cuts (4.6 percentage points of GDP) are estimated to and I.16).16 The three years of fiscal consolidation that support the sharp improvement in the fiscal stance in helped to rebuild sizable buffers also contributed to the 2021. The underlying assumptions of the 2021 budget government’s efforts to cope with the COVID-19 shock include, among others, strong economic recovery (7.2 in the early months of 2020.17 In contrast to what was percent in 2021), modernization/renovation of customs observed during the 2015 - 16 economic slowdown, and border points, digitalization of tax administration, the government had no pressing need to borrow from improved governance of state-owned enterprises, and either domestic or international markets in the first five introduction of a new tax on livestock headcount (see months of 2020. However, since June 2020, government box I.3). It also considers a reduction of total spending requests for donor financing have intensified, including mainly reflecting the expiry of major COVID-19-related additional budget support totaling US$550 million relief/stimulus measures (except the Child Money from the International Monetary Fund (IMF), Asian Program) and a moderate reduction of the capital Development Bank (ADB), Asian Infrastructure budget relative to the 2020 supplementary budget. Investment Bank, and Japan, disbursed in H2 2020. In addition, a substantial increase of accumulation in the fiscal stabilization and future heritage funds, After a surging deficit in 2020, the 2021 budget similar to their levels in 2019, is also estimated under plans to return to fiscal consolidation. The 2020 the 2021 budget. Finally, after an increase in 2020, the supplementary budget exhibited a widening of the government expects that the debt-to-GDP ratio will overall fiscal deficit from an initial target of 2.4 percent resume its downward trajectory in 2021- 22 based on of GDP to 9.9 percent of GDP. However, the 2021 budget these fiscal policy assumptions.     Figure I.15. The revenue shortfall was exacerbated Figure I.16. …reversing the fiscal surplus trajectory Figure I.15. The revenue shortfall was exacerbated by  Figure I.16. …reversing the fiscal surplus trajectory  Figure Figure  I.15. I.15.  The  The   revenue revenue    shortfall shortfall  was  was   exacerbated exacerbated  by   by  Figure Figure  I.16.  …reversing the fiscal  surplus  trajectory     by huge huge spending  spending  … …   the I.16. ofof the  …reversing past  past three  three  years the  fiscal  years  surplus trajectory hugehuge  spending  spending  …   …  of past of the the past  three  three  years      years Budget revenue  and Budget  expenditures revenue   and expenditures Overall and primary Overall  budget  balances and primary   balances Budget Budget  revenue  revenue  and and  expenditures   expenditures Revenue (% of GDP)     Expenditures (% of GDP) Overall Overall and and primary   primary  budget  budget  budget  balances  balances Overall budget balance (% of GDP)   Primary budget balance (% of GDP) Revenue Revenue (% of GDP) (% of GDP) Expenditures Expenditures (% of GDP) (% of GDP) Overall Overall budgetbudget balancebalance (% of GDP)Primary (% of GDP) Primary budget budget balance balance (% of GDP) (% of GDP) 5.8 40 5.8 5.8 3.7 40 2.6 40 3.7 1.4 3.7 37 0.2 0.3 2.6 2.6 1.4 37 0.3 1.4 37 0.2 0.2 0.3 32 31 32 31 32 32 32 31 31 32 31 31 -1.7 31 -1.7 -1.7 -3.0 28 -4.0 -3.8 28 31 -3.0 -3.0 28 31 28 -4.0 -4.0 -3.8 -3.8 28 28 28 -6.9 28 28 26 -6.9 -6.9 26 24 -9.5 26 24 24 -11.2 -9.5 -9.5 -11.2 -11.2 -15.3 -15.3 -15.3 2015 2016 2017 2018 2019 2020e 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e 2014 2015 2016 2017 2018 2019 2020e 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 20192020e 2020e     Sources: MoF; World Bank staff estimates.     Sources: MoF; World Bank staff estimates.     Sources: MoF; World Bank staff estimates.  Sources: MoF; World Bank staff estimates.  Sources: Sources:  MoF;  MoF;  World  World  Bank  Bank staff  staff  estimates. estimates.     Sources: Sources:  MoF;  MoF;  World  World  Bank  Bank staff  staff  estimates. estimates.     Box I.2. Government fiscal relief measures to alleviate the economic impact of the COVID‐19 pandemic   I.2.  Government Box Box I.2. Government  fiscal  fiscal  relief  relief  measures  measures  to alleviate  to alleviate the economic  the economic  impact  impact  of COVID  of the the COVID ‐19 pandemic ‐19 pandemic       The government’s COVID‐19 relief package, totaling about MNT 3.6 trillion (over 9 percent of GDP), was rolled  The The  government’s   in  three   phases. government’s out COVID  COVID ‐  19 The ‐19 relief  relief  package,  package,   government  totaling   totaling response  about  about  MNT   is  primarily  MNT  3.6 3.6 trillion  trillion    focused  (over  (over  9 percent  9 percent   on  supporting   of  of GDP),  GDP), households  was  was rolled   rolled and  firms      out  outin    three in  three particularly   phases.     phases. affected   The      The by     government government the   economic       response response downturn,   is     is  primarily primarily and   on     small   focused focused   and     on medium    supporting on  supporting ‐sized       households households enterprises     (SMEs) and    and   to   firms firms       cushion   In particularly particularly fact, the   affected  budget affected   by the (August   by  economic economic   downturn,   and of     on small   and   medium ‐sized enterprises an  initial of  (SMEs)   toof  cushion      the downturn,  2020) 16 2020 amendment exhibits  and on a widening   smallthe  and medium overall fiscal ‐sized deficit   enterprises from   (SMEs) target 2.4   to  cushion percent GDP   to 9.9 loss percent of of  income GDP.  and avoid  mass unemployment  and  bankruptcies.  This includes over 3 percent  of GDP  in tax relief   loss  loss of     of income   income  and  and avoid   avoid   mass   mass     unemployment unemployment   and   and   bankruptcies. bankruptcies.   This   This     includesincludes   over   over  3    3   percent percent   of     GDPof   GDP   in     taxin    tax   relief relief     17 Themeasures prudent fiscal  and  6 percent policy followed  ofby  GDP  in increased the authorities during  social 2017–19  transfers created some andfiscal  higher space  health and led  spending  (figure I.17). to the accumulation of sizable   cash reserves measures measures of about MNT and 2.7 and 6  6 (over  percent trillion percent  of  GDP of GDP 7 percent  in  in increased of increased GDP)  social at end-2019.  social  transfers  transfers  and andhigher higher health  health  spending  spending  (figure  (figure  I.17).  I.17).             Figure I.17. COVID‐19 fiscal relief measures  11  I.17.  I.17. Figure Figure COVID COVID ‐19 fiscal ‐19 fiscal  relief  relief  measures  measures     Tax relief measures (over 3% of GDP) Spending measures (over 6% of GDP) Tax relief Tax relief measures measures 3% of3% (over (over of GDP) GDP) Spending Spending measures measures (over (over 6% of6% of GDP) GDP) SSC exemptions 2 Increase in CMP 4.4 SSC exemptions 2 Increase Increase in CMP in CMP 4.4 4.4 SSC exemptions 2 Increase in health spending 0.7 PIT exemptions 0.5 Increase Increase in health in health spending 0.7 spending 0.7 PIT exemptions PIT exemptions 0.5 Cash transfer to herders 0.5 0.5 Cash transfer to herders 0.5 Cash transfer to herders 0.5 -1.7 -1.7 31 -3.0 -3.0 31 28 -4.0 -4.0 -3.8 -3.8 28 28 28 28 28 -6.9 -6.9 26 26 24 -9.5 -9.5 24 -11.2 -11.2 -15.3 -15.3 MONGOLIA ECONOMIC UPDATE From Relief to Recovery 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020e 2020e 2020e 2020e 2014 20142015 20152016 20162017 20172018 20182019 2019         Sources:  MoF; Sources:  World  MoF;  Bank  World  staff  staff  Bank estimates.    estimates.  Sources:  MoF; Sources:  World  MoF;  Bank  World  staff  staff  Bank estimates.    estimates.  Box I.2. Government fiscal relief measures to alleviate the economic impact of the COVID-19 pandemic Box I.2. Box  Government  fiscal  I.2. Government  relief  fiscal  measures  relief  to alleviate  measures  the  economic  to alleviate  impact the economic  of the  impact  of  COVID ‐19 pandemic the COVID       ‐19 pandemic government’s TheThe  government’s COVID-19  COVID relief package, ‐19 relief totaling  package, about  totaling MNT MNT  about 3.6 trillion (over  3.6 trillion 9 percent  (over  9 percentof GDP), was rolled  of GDP),  was  was out in rolled   The government’s  COVID ‐19 relief  package,  totaling  about MNT  3.6 trillion  (over  9 percent  of GDP),  rolled  three phases. out   out 18 in  three The  government phases.   The   response government is primarily   response focused   is  on supporting primarily   focused households   on   supportingand firms   particularly households   and affected   firms     in  three  phases.  The  government  response  is  primarily  focused  on  supporting  households  and  firms   by the economic particularly downturn,   affected on small  and and  economic   by  the medium-sized downturn,   and  on  enterprises small   and  (SMEs) ‐to medium   and sizedcushion loss of   enterprises income   (SMEs)   toand avoid   cushion   particularly   affected   by  the  economic   downturn,   and   on  small   medium ‐sized   enterprises   (SMEs)   to  cushion   mass unemployment loss  of  income  and and bankruptcies.   avoid  mass This includes  unemployment over  and 3 percent of   bankruptcies. GDP  This in tax relief measures and 6 percent of GDP loss  of income and avoid  mass  unemployment and bankruptcies.   This includes  over  includes  3 percent  over  of GDP  3 percent in tax  of  GDP  in  relief    tax relief   in increased measures social  and  6 transfers  percent  and of GDP higher health spending (figure I.17). measures and  6 percent in increased  of  GDP  social  in increased  transfers  social  and  higher  transfers and higher health  spending  health  (figure  spending  I.17).  (figure        I.17).     I.17. COVID-19 fiscal relief measures Figure Figure COVID  I.17.  I.17. Figure ‐19 fiscal  COVID  relief ‐19 fiscal  measures  relief    measures  Tax relief Tax relief measures measures Tax (over (over 3% 3% of relief measures of3% GDP) (over GDP) of GDP) Spending Spending measures measures Spending (over 6% (over measures 6% of GDP) of6% (over GDP) of GDP) SSC exemptions Increase in CMPin CMP Increase 4.4 4.4 SSC exemptions 2 2 Increase in health Increase spending in health spending 0.7 0.7 PIT exemptions PIT exemptions 0.5 0.5 Cash transfer to herders Cash transfer to herders 0.5 0.5 CIT exemptions (turnover CIT exemptions < MNT1.5 (turnover < MNT1.5 0.16 Increase in social 0.16 Increase inwelfare pension social welfare 0.15 pension 0.15 bn) bn) Wage subsidies for employers Wage subsidies 0.13 for employers 0.13 exemption PIT/CITPIT/CIT if rent has exemption been if rent has been 0.07 0.07 lowered Increase in govt's lowered Increase in emergency fund fund govt's emergency 0.1 0.1 Waiving late payment Waiving penalties late payment for penalties for 0.03 Interest subsidies Interest for cashmere subsidies producers for cashmere 0.07 producers 0.07 PIT/SSC 0.03 PIT/SSC Doubling food stamp Doubling allowance food stamp 0.04 allowance 0.04 VAT exemption (Medical VAT exemption & Food) (Medical 0.02 & Food) 0.02 Sources:  MoF; Sources:  World  MoF;  Bank  World  staff  staff  Bank estimates.    estimates.   Note: Sources:  In percent MoF; Note: World  of GDP. Bank  In percentstaff CIT =  estimates.  of GDP.   corporate CIT  income  = corporate  tax; CMP  income = Child  tax;  CMP  Money  = Child  Program;  Money  PIT =  PIT personal  Program;  income  = personal  tax; SSC  income  =  tax;  social  SSC    = social  security Note:  contribution; security In percent GDP. CIT VAT of contribution;   =  value VAT = corporate ‐added value  = income  tax. ‐added tax;    tax. CMP =  Child Money Program; PIT = personal income tax; SSC = social security   contribution; VAT = value-added tax.   Mongolia’s Mongolia’s   fiscal   relief   fiscal   measures   relief   measures   are  amongare  among  the  largest the  largest  in  the  in  region.   The  optimal the  region. The  optimal  size  of size any  of  support any  support   package     package   Mongolia’s fiscal   relief is  contingent is  contingent on  the  onmeasures   severity the  severity are   of   the among   of   outbreak the  largest the  outbreak and   and a  country’s in   a the region. country’s   initial The   conditions   initial  optimal conditions size   (such   of as  the   (such any support   as  state package   of  the   of  health the  state is the  health    contingent sector, on the  commodity sector, severity  commodity of the outbreak  dependence,  dependence,  fiscal  and  fiscaland a  country’s   monetary and monetary  space initial  and   space conditions  degree and degree (such  of informality,as the  of informality, to state  name of  to name  a the  ahealth few).  With  few).  sector, these  With    these   commodity caveats, dependence,   Mongolia’s   fiscal support and   monetary package   in   space response and   to   degree the   crisis of   is informality,   relatively caveats,  Mongolia’s  support  package  in  response  to  the  crisis  is  relatively  higher  than  the  average  size   to name higher   than a  few). the   With average these   size   caveats, of   fiscal     of  fiscal  Mongolia’s measures support measures announced package  announced  toresponse in  to date  in developing  date to the  in developing crisis  EAP, is estimated  estimated  EAP, relatively at around higher  at  5 than  around percent the of  5 percent average  GDP (figure  of  GDP size  of fiscal I.18).  (figure  I.18). measures  Nearly  two   Nearly ‐two‐ announced thirds to date  of these thirds  relief  of these in developing  measures  relief  measures EAP,  were estimated  directed  were at  at individuals  directed around 5  at individuals percent  to mitigate of GDP  to mitigate (figure  the  impact I.18). the impact Nearly  of income  of income two-thirds  loss   for loss  for of  households these households     relief measures (figure  I.19). (figure  were Such  I.19). directed  measures  Such at  measures wereindividuals  broad  were ‐based,  broad to mitigate  using ‐based,  the social  using impact  insurance  social of income  insurance to protect  to loss  for households formal  protect  sector  formal  sector (figure  workers workers I.19).  and Such   social and    social   measures were assistance  to assistance broad-based,  support  to support  the using poor   the poor social  and insurance   vulnerable. and  vulnerable.    to protect    formal sector workers and social assistance to support     the  poor and vulnerable.   Figure I.18. Mongolia’s fiscal relief package is one of Figure I.19. Income support and tax exemptions  I.18. Mongolia’s FigureFigure  fiscal relief  I.18. Mongolia’s fiscal relief package  is one  package    one  is Figure   Figure  I.19. Income  support  I.19. Income  and tax  support  and  exemptions    tax exemptions   the highest among EAP countries dominated fiscal relief measures of theof  highest  among  the highest  among  EAP countries  EAP countries     23  dominated dominated 23    fiscal   fiscal relief  relief   measures   measures   12% 12% 10% 10% Firms - Revenue Firms - Revenue measuresmeasures Additional Additional health-related health-related spendingspending 9% 9% 10% 10% Quasi-fiscal operations Quasi-fiscal operations 8% 8% Firms - Additional Firms - Additional spendingspending on support on revenue revenue support     Additional spendingspending Additional and measures and revenue revenue measures Individuals - Revenue Individuals measures - Revenue measures 7% 7% 8% 8% Percent of GDP Percent of GDP Percent of GDP Percent of GDP 6% 6% Individuals - Additional Individuals spendingspending - Additional on income onsupport income support 6% 6% 5% 5% 4% 4% 4% 4% 3% 3% 2% 2% 2% 2% 1% 1% 0% 0% 0% 0% MNG THA CHN MNG CHNPHL THAIDN IDNMYS PHLKHM VNM MYS MMR KHM VNMLAO MMR LAO MNG MNG CHN THA THA IDN CHN PHL IDN MYS PHL KHM KHM MMR MYS VNM VNM MMR         Sources: Sources: Sources:  MoF; MoF;  World World MoF;  World Bank Bank  Bank  2020b; 2020b; World  World  2020b; Bank Bank  World  Bank staff staff  staff estimates.  estimates. estimates.     Note: Note:  Data   Data   are   as  are of   September as  of  September   12,  Data   12,  2020. 2020.   Data   refer    to   general refer   government,   to  general   except   government,   except   for  Indonesia,   for  Indonesia,   Malaysia,   Malaysia,   and   and  the     the  Note: Data are as of September 12, 2020. Data refer to general government, except for Indonesia, Malaysia, and the Philippines, which Philippines, Philippines,   which  whichrefer  torefer   central   to  central   government   government only.  Income   only.  Income   and  revenue   and  revenue   support   measures   support refer to central government only. Income and revenue support measures include direct transfer payments; reduction or deferral of   measures   include   direct   direct   include   transfer transfer     payments; payments; payment  reduction commitments;  or  reduction deferral foregone  of payment  or deferral revenue of payment  from  commitments;  commitments; tax cuts, credits, foregone  revenue  foregone and exemptions;  revenue  from and  tax  from other  tax  cuts, financial credits,  cuts,  credits,  and exemptions; assistance to and  and  exemptions; individuals and  and    firms. other financial other financial  assistance  to individuals  assistance  and firms.  to individuals  and  firms.      Mongolia Mongolia   has  limited   has  limited   headroom   headroom   to  provide   further   to  provide   fiscal  fiscal   further relief  relief (and  to   boost (and boost   to   economic  economic   recovery).  recovery).   In  terms terms   In    of    of  18 government government It includes the extension debtof  debt  sustainability,  sustainability, some measures  Mongolia which  Mongolia are  expected compares to  be  compares  unfavorably unfavorably implemented  tountil  other to  other July  countries. countries. 2021. But  Government it does  Government not include  debt  as  debt the  as a share  a share government’s   recent decisionof   GDP on of   GDP utilities   accounts exempting accounts   about   forfees 70  percent  households for  about   for   70  percent   atenterprises. and   end ‐2019,   at   end‐ 2019,compared  compared   to  the   to   40   percent   the   average   40  percent   average   for  emerging   for  emerging  markets   markets     and  developing and  developing   economies   economies   (EMDEs).   Moreover,   (EMDEs).   Moreover,   banks’   banks’   excess   liquidity   excess   liquidity   was   estimated was  estimated   MNT  MNT   7.7  trillion 7.7  trillion   in    in  12 November November  2020, 2020,of which  central  of which  central  bank   bank bill  bill holdings  holdings  by banks  by   was around banks  was around  MNT   MNT 5.4  trillion,  5.4 trillion,  indicating  sizable  indicating  room room   sizable for domestic for domestic  debt issuance.  debt issuance.  Given  Given large  external large external  debt (over debt 60  percent (over  of GDP  60 percent  of  compared  GDP compared  to the  40  to  the  percent  40 percent EMDE    EMDE   average), average),  borrowing  in foreign  borrowing  in foreign  currency  is still is  currency not  a  favorable  still not a favorable  option.  Finally,  option.  tapping  Finally,  into the  tapping  into  the Fiscal  Fiscal Stability  Fund  Fund   Stability could could not provide not provide  enough  fiscal space  enough fiscal  space  to mitigate to mitigate  the impact  of the  the impact  pandemic,  of  the pandemic,  considering  declining  considering  coal prices.  declining  coal prices.     In In  fact, fact,   the   Fiscal   the  Fiscal Stability   Fund’s   Stability   liquid   Fund’s part  is   liquid   part   estimated   is  estimated   at  MNT MNT   at  150   150  billion   billion   (0.4  percent   (0.4  percent   of  GDP) as  of  as   of  GDP) end ‐   end‐   of ECONOMIC PERFORMANCE AND PROSPECTS Mongolia has limited headroom to provide further fiscal relief (and to boost economic recovery). In terms of government debt sustainability, Mongolia compares unfavorably to other countries. Government debt as a share of GDP accounts for about 70 percent at end-2019, compared to the 40 percent average for emerging markets and developing economies (EMDEs). Moreover, banks’ excess liquidity was estimated MNT 7.7 trillion in November 2020, of which central bank bill holdings by banks was around MNT 5.4 trillion, indicating sizable room for domestic debt issuance. Given large external debt (over 60 percent of GDP compared to the 40 percent EMDE average), borrowing in foreign currency is still not a favorable option. Finally, tapping into the Fiscal Stability Fund could not provide enough fiscal space to mitigate the impact of the pandemic, considering declining coal prices. In fact, the Fiscal Stability Fund’s liquid part is estimated at MNT 150 billion (0.4 percent of GDP) as of end-November. Sources: MoF; World Bank 2020b; World Bank staff estimates. The revenue projections in the 2021 budget are the government plans to improve the capacity at the moderately optimistic. At 7 percent, the growth border posts and accelerate digitalization to reduce red assumption in the 2021 budget appears ambitious tape. However, this is likely to be optimistic amid the given the ongoing strict lockdown at the start of 2021. preventive public health measures still in place and It is, however, achievable, assuming a strong recovery of continued worries about the rise in infection rates in mining exports and successful domestic containment major markets. Moreover, the budget assumes that tax of COVID-19. While commodity price assumptions are administration reforms (simplification, digitalization, broadly in line with the projections of international international taxation issues) will bring an additional institutions, export projections may be optimistic. In MNT 1.1 trillion in revenue (1.5 percentage points of particular, the 2021 budget assumes that coal export GDP), contributing to 44 percent of the total expected volumes will increase to 42 million tons next year, a revenue increase (figure I.21). However, the successful 15 percent rise from the historically high level (36.6 and timely implementation of these measures may be million  tons) achieved in 2019. To achieve this target, challenging in a context dominated by the pandemic.   Figure I.20. Figure deficit The The  I.20. widened  deficit sharply  widened in 2020  sharply  in 2020 but is  Figure Figure I.21. I.21. The revenue projections The revenue projections in the 2021 in the 2021  Figure  I.20. but is  The deficit expected expected  toto  widened narrow  narrow  sharply  notably  in in notably  2021 in 2020 2021    but is  Figure I.21. budget budget The  revenue  are are  projections  moderately  in the  2021   optimistic… expected  to narrow In percent  notably  of GDP    in 2021   are moderately budgetRevenue  optimistic…  to increase    by 3.4 percentage  points of GDP in  In percent of GDP  In percent of GDP RevenueRevenue to increase  to increase  by 3.4by 3.4 percentage  percentage points  points of GDP  of GDP  in  in 2021. Overall balance Primary balance 2021.   Overall balance Primary balance 2021.  6% 6% 3% 3% 3% 0% 3% 1% 1% 0% 1% 1% -2% -4% -2% -4% -7% -7% -10% -11% -10% -11% -15% -15% 2016 2017 2018 2019 2020 Suppl 2021 Plan 2016 2017 2018 2019 2020 Suppl 2021 Plan Sources: MoF; World Bank staff estimates.  Sources: MoF; World Bank staff estimates.  Sources: MoF; World Sources: MoF;  WorldBank staff  Bank estimates.  staff  estimates.   MoF;MoF; Sources: Sources: World  World Bank  Bank staff  staff estimates.   estimates. The  revenue  projections  in  the  2021  budget  are  moderately  optimistic.  At  7  percent,  the  growth  The  revenue assumption   projections  in the 2021   in   the budget  2021   budget  appears   are  moderately  ambitious  given the   optimistic.  ongoing strict   At  lockdown 7  percent,  at  the  the   growth start of  2021.  assumption  in  the  2021  budget   appears   ambitious  given It  is,  however,  achievable,  assuming  a  strong  recovery  of  mining  exports  and  successful  the  ongoing  strict   lockdown  at  the   start   of  2021.     domestic   It  is,  however,   achievable,   assuming   a   strong   recovery containment of COVID‐19. While commodity price assumptions are broadly in line with the projections of    of   mining   exports   and   successful   domestic   containment  of COVID international ‐19. While   institutions,  commodity   export  price assumptions   projections   may  be  optimistic.  are broadly  in line with   In  particular,   the the  projections   2021   budget  assumes of    international   institutions,   export   projections   may   be   optimistic. that coal export volumes will increase to 42 million tons next year, a 15 percent rise from the historically    In   particular,   the   2021   budget   assumes   that coalhigh export   level   volumes (36.6  million  will  increase tons)  achieved  to 42 million  in  2019.  tons  To  next achieve year,  a 15   this  percent   target,   the  rise  from the    government  historically   plans  to  improve   high  level   (36.6   million   tons)   achieved   in   2019.   To   achieve   the capacity at the border posts and accelerate digitalization to reduce red tape. However, this is likely this   target,   the   government   plans   to   improve    to  the capacity  at the border be  optimistic   amid  the  posts  and accelerate   preventive   public  digitalization health  measures  to reduce   still  in  red  tape.   place   and  However,   continued  this  is likely   worries  to  13   about   the  be  optimistic   amid   the   preventive   public   health   measures   still   in rise  in  infection  rates  in  major  markets.  Moreover,  the  budget  assumes  that  tax  administration  reforms   place   and   continued   worries   about   the     infection  rates  digitalization, rise  in (simplification, in  major  markets.   Moreover,   international   the  budget   taxation   issues)   assumes   will  bring   that  an tax administration    additional   MNT   reforms     in  1.1  trillion revenue  (1.5 (simplification, digitalization,  percentage   international  points of GDP),   taxation  contributing  issues)   will  to  44  bring  an  percent   additional  of  the total expected   MNT  1.1   trillion  increase in   revenue   revenue  (1.5  percentage  points  of  GDP),  contributing  to  44  percent (figure  I.21).  However,  the  successful  and  timely  implementation  of  these  measures  may  be  challenging   of   the  total  expected  revenue   increase   MONGOLIA ECONOMIC UPDATE From Relief to Recovery Box I.3. Summary of the 2021 budget The 2021 budget is based on optimistic macroeconomic assumptions. It assumes (i) real economic growth of -1 percent in 2020 and 7.2 percent in 2021; (ii) strong demand for coal and relatively higher production of copper concentrate; (iii) continuation of tax reforms in 2021; and (iv) inflation of 7 percent in 2021, in line with the monetary policy guidelines. The revenue projections and corresponding expenditure plans are shown in table I.1. Table I.1. Mongolia: Improvements in the overall fiscal balance in 2021 (% of GDP) 2020 Supplementary 2021 Plan Diff Revenues 27.7 31.1 3.4 Stabilization & Heritage Funds 2.6 3.2 0.6 Tax Revenues 22.9 25.5 2.6 Non-Tax Revenues 2.3 2.5 0.2 Expenditures 37.7 33.0 -4.6 Recurrent spending 26.3 23.3 -3.0 o.w. Wages and Salaries 6.9 5.7 -1.1 Goods & Services 5.9 4.8 -1.2 Others (incl. Social Spending) 13.5 12.8 -0.7 Capital spending 8.8 8.4 -0.4 Interest Payments 2.5 2.7 0.2 Overall balance -9.9 -1.9 8.0 Primary balance -7.4 0.8 8.2 Source: MoF. Key highlights of the 2021 budget: • Return to a fiscal sustainability path after a substantial hike in the fiscal deficit in 2020 driven by a sharp revenue shortfall and a rise in public spending to mitigate the impact of COVID-19 crisis. • Fiscal improvements mainly supported by: o Higher mineral revenue, reflecting the positive prospect in commodity prices and ambitious export targets. o Stronger economic recovery leading to higher tax revenue under existing and new policies. o Rolling back (expiry) of COVID-19-related spending measures and other recurrent spending, and rationalization of capital expenditures to compensate for the substantial increase in social spending (mainly the Child Money Program) planned in H1 2021. o Improvement in the overall balance of over US$1 billion (8 percentage points of GDP) and a primary deficit of over US$1.1 billion (8.2 percentage points) compared with the 2020 supplementary budget. • Ambitious but achievable growth assumptions depending on recovery in mining exports. • Revenue projections are predicated on successive implementation of tax administration reforms (simplification, digitalization, international taxation issues including introduction of transfer pricing and renovation of customs capacity). • Assuming successful containment of the pandemic, recurrent spending related to COVID-19 measures are planned to be scaled down. • No growth assumed in the size of the civil service, the wage bill, or pensions. • Partial extension of top-up on benefits of the Child Money Program entails sizable fiscal burden (about 2.2 percent of GDP). 14 ECONOMIC PERFORMANCE AND PROSPECTS • Capital expenditure allocation (8.4 percent of GDP) slightly declined from 2020 supplementary budget - largely to complete ongoing projects. It remains higher than in the pre-COVID years (which were significantly expansionary). • Interestingly, many projects that were included in the 2020 budget for reconstruction have been scaled down for renovation, with substantial cost savings (these include the state drama theater, state opera house, and national library). However, there is room for further rationalization and reprioritization of the current public investment program. The capital expenditure execution rate has generally averaged about 80 percent over the past three years. • Commitment to budget credibility as overall budget envelope is consistent with the 2020 Medium-Term Fiscal Framework. Sources: MoF; 2020 budget document; World Bank staff illustrations. A5. External pressures considerably pressures were reduced thanks to a remarkable current account adjustment. Lower FDI (which contracted by eased following notable current account about 30 percent [y/y] in 2020) and the private sector adjustment external debt payment (US$500 million in May 2020) Despite lower capital inflows and large private sector accounted for the narrower financial account surplus despite official sector support from development  debt repayments, external pressures eased considerably amid exports   recovery and imports compression. partners including ADB, IMF, AIIB, the World Bank and In 2020, Mongolia’s balance of payments recorded Japan.19 In contrast, weak domestic demand and the from   development a surplus of US$787   partners million including   (figure   ADB, I.22).   IMF, aAIIB,quick Despite   the  World recovery   Bank   and  Japan. of exports 17 have resulted  In  contrast,   weak  in a remarkable from   development   partners   including   ADB,  IMF,  AIIB,  the  World  Bank  and  Japan.17  In  contrast,  weak  domestic   demand surplus  of narrower domestic   and   the   the financialquick   recovery   of   exports   have   resulted current account adjustment.  in   a   remarkable   current   account   demand   and  the account, external quick  recovery   of  exports  have  resulted  in  a  remarkable  current  account  adjustment.   adjustment.   Figure I.22. Figure I.22. Current account  Current account adjustment adjustment was was   Figure I.23. Current account surplus in recent months Figure  I.22. Current   account adjustment  was  Figure I.23.  Current Figure I.23. Current account  surplus  account  in  recent  surplus in recent months  months  is   is  enough enough to to  ease ease   external external   pressures pressures   is unprecedentedunprecedented   in   in Mongolia’s Mongolia’s   recent  recent history history   enough to ease external pressures  unprecedented in Mongolia’s recent history  External accounts External   (million accounts External  US$)  (million    US$)    (million accounts US$) Monthly  current Monthly  current Monthly  account current  balance  account account  (million  balance US$,  (million  (million balance  3 mma)  US$,US$, 3  mma)  3 mma)   FA & KA (mn CA (mn US$) CA (mn US$) FAUS$) & KA (mn US$)BoP (mn US$) BoP (mn US$) Trade Balance Trade Balance Current Transfers Current Transfers Income Balance Income Balance ServicesServices Current Account Current Account 3,000 3,000 2,615 2,615 2,615 2,615 2,065 400 400 2,065 2,000 2,000 1,460 300 1,460 300 1,220 1,220 200 200 1,000 681 1,000 681 453 453 100 100 786.9 (18) 786.9 (18) 0 0 0 0 (142) -100 -1,000 (142) (433) -100 (700) (433) -200 -1,000 (700) (1,155) -200 -2,000 (1,155) -300 -2,000 -300 (2,207) (2,162) -400 -3,000 (2,162) -400 Feb-18 Apr-18 Jun-18 Aug-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-18 Oct-19 Oct-20 (2,207) -3,000 2016 2017 2018 2019 2020 Feb-18 Apr-18 Jun-18 Aug-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-18 Oct-19 Oct-20 2016 2017 2018     Sources: BoM;  World  Bank staff2019  estimates. 2020     Source: BoM.    Sources: BoM; World Bank staff estimates.  Note :  CA   =   current  account; Sources: BoM; World Bank staff estimates.   KA   =   capital  account; Source:  FA =    BoM. Note: 3 BoM. Source:  mma = three‐month moving average.  Note: CA =  current account; financial account;  KA BOP  and  = Balance = capital  of payments.  FA =    Note: 3 mma = three‐month moving average.   account; Note: CA = current account; KA = capital account; FA = financial Note: 3 mma = three-month moving average. financial account;  account; and  and BOP BOP = Balance  = Balance of payments.  of payments. Improvement  in  the  trade  balance  drove  the  current  account  adjustment.  The  current  account  deficit  Improvement narrowed   to  US$433   in  the   million  in trade  balance   2020 drove   from   the   US$2.1   current   billion  in   account   2019.  In  fact,   adjustment.   the   The   current current  account account   posted deficit   a  narrowed surplus   to  US$433 of US$530   million million  during   in  2020  May–December,   from   US$2.1  billion  which is unprecedented   in  2019.   In  fact,  the  in  the past   current decade (figure    account   posted  I.23).   a    surplus of Import  US$530   compression  million during   supported   by  weaker   May–December,  which domestic   demand  and  lower  is unprecedented  in the   oil   prices  past   contributed  decade to  the  (figure  I.23).    current Import  compression   account   adjustment,   coupled   supported  by  weaker  domestic  demand  and  lower  oil  prices  contributed  to  the      with   the   relatively   quick   recovery   of   exports   (figures   I.24   and I.25). 18,19,20   Moreover,   lower   profits   repatriation   and   declining   service   payments   (for   example,   travel  current   account The recent   adjustment, sovereign bond   coupled issuance (US$600 million   with in late   the   relatively September) by   quick the government   recovery did   of not have   exports   (figures a sizable direct impact   I.24  and  on the country’s 19 restrictions external position   and  were as the proceeds limited used mainly  activities)   truck to pay off existing  also  played public   anIn debts.   important contrast, it had   role   in  the significant   improved implications on  current   account  market expectations I.25). 18,19,20   Moreover, regarding immediate pressure of   lower profits external  liquidity   repatriation and   and  declining  service  payments  (for  example,  travel  exchange rate depreciation. balance.  Furthermore,  the  BoM’s  gold  purchase,  which  reached  a  historically  high  level  of  23  metric  ton  restrictions   and  limited   truck   activities)   also   played   an  important 21   in  the  improved  current  account    role in 2020, significantly  supported  the  export  recovery  (figure I.24).   15 balance.  Furthermore,  the  BoM’s  gold  purchase,  which  reached  a  historically  high  level  of  23  metric  ton  in 2020, significantly supported the export recovery (figure I.24).21                                                               MONGOLIA ECONOMIC UPDATE From Relief to Recovery Improvement in the trade balance drove the current Current account adjustment, specifically a surge in account adjustment. The current account deficit gold purchases by the BoM, led to a strong recovery narrowed to US$433 million in 2020 from US$2.1 billion in reserves after a significant drop during January– in 2019. In fact, the current account posted a surplus May. Due to the sharp drop in exports, the current of US$530 million during May–December, which is account deficit widened in H1 2020 compounded by unprecedented in the past decade (figure I.23). Import declining capital inflows (mainly FDI) and large private compression supported by weaker domestic demand sector external debt repayments, resulting in a drain and lower oil prices contributed to the current account on foreign exchange reserves (figure I.26). However, adjustment, coupled with the relatively quick recovery reserves recovered significantly in H2 2020 amid the of exports (figures I.24 and I.25).20, 21, 22 Moreover, lower current account adjustment, disbursement from some profits repatriation and declining service payments (for donors, and extensive gold purchases by the BoM. In example, travel restrictions and limited truck activities) fact, gross international reserves reached a historically also played an important role in the improved current high level of US$4.5 billion (equivalent to over eight account balance. Furthermore, the BoM’s gold purchase, months of imports) at end-2020, up from US$4.3 which reached a historically high level of 23 metric ton billion in 2019. in 2020, significantly supported the export recovery  (figure I.24).23   Figure I.24. Exports were hit hard in H1, but have Figure I.25. Import compression has largely been Figure  I.24. recovered  Exports Figurequickly  were hit  I.24. Exports  hard  were  in  hit  H1,  in  hard but  have  H1,  but  have  Figure  I.25.   driven Figure Import  compression by  lower I.25. Import fuel  has and capital  compression  largely  has goods  been  largely     imports  been recovered   quickly   recovered quickly  driven   by lower   fuel  and   capital  goods driven by lower fuel and capital goods imports     imports    Contribution Contribution  to growth Contribution to (y/y,  to growth  growth (y/y, percentage  percentage  points)  (y/y, percentage   points)  points)  Contribution Contribution  to Contribution  growth  to growth to growth  (y/y,  percentage  (y/y, (y/y, percentage  points)  percentage   points)  points)  Consumption Consumption Industrial & Intermediate Industrial & Intermediate 20% 20% goodsgoods CapitalCapital Fuels Fuels Others Others Total imports growth Total imports growth 10% 10% 10% 10% 0% 0% 5% 5% -10% -10%Gold Gold 0% 0% Copper Copper -20% -20% -5% -5% Coal Coal -30% -30% Crude oil -10% Crude oil -10% -40% Others -40% Others -15% Total exports growth -15% -50%Total exports growth -50% -20% -20% Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Oct-19 Oct-20 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Oct-19 Oct-20 Dec-19 Dec-20 Jun-19 Jul-19 Aug-19 Sep-19 Nov-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Nov-20 Oct-19 Oct-20 Dec-19 Dec-20 Jun-19 Jul-19 Aug-19 Sep-19 Nov-19 Jan-20 Feb-20 Mar-20 Apr-20 Jul-20 Aug-20 May-20 Jun-20 Sep-20 Nov-20 Oct-19 Oct-20     Sources: NSO; BoM; World Bank staff estimates.  Sources: BoM; World Bank staff estimates.      NSO; BoM; Sources: NSO; Sources: World Bank staff estimates. Sources: BoM; World Bank staff estimates.  BoM;  World  Bank  staff  estimates.  Note: Coal, copper and gold accounted for 75 percent of Sources: BoM; World Bank staff estimates.  Coal, Note: Coal, copper  copper and gold  and accounted for  gold accounted 75 percent of total  in 2020.   for 75 percent of  Note: total  export  proceeds export total proceeds  export in 2020.  proceeds  in 2020.  Current account adjustment, specifically a surge in gold purchases by the BoM, led to a strong recovery  Currentin  account   reserves  adjustment,   after  a  significant specifically  drop   a  surge during  in gold purchases   January–May.   Due    by to  the   the  BoM,   sharp  led  to   drop in  a  strong exports,   recovery the   current    in  reservesaccount   after   a  significant  deficit  widened   in drop   during  H1 2020   January–May.  compounded   Due  to  by declining   the  sharp  capital  inflows   drop   in  exports,  (mainly  FDI) and   the  large  current  private    accountsector deficit  widened  external  in H1  debt  2020 compounded  repayments,  resulting in  by a declining drain on foreign  capital  inflows (mainly  exchange  reserves  FDI)  (figure and  large  I.26).  private     However, sector external reserves  debt   recovered repayments,  resulting   significantly   in  H2  in  a drain   2020   amid foreign  on  the   current  exchange   account  reserves   adjustment,  (figure  I.26). However,   disbursement   from    reserves   recovered some   donors,   significantly   and  extensive   in H2  2020   gold purchases  amid   the   by   current   the   BoM.  In   account   fact,  gross   adjustment,   international   disbursement   reserves  reached   from  a  some   historically donors,   and high     level of extensive    US$4.5 gold    billion (equivalent purchases   by   the   BoM. to over   In    eight fact,    months gross    of imports) international     at end‐2020, reserves   reached up from   a    20 Imports were also severely affected by friction at main border ports with Russia and China. Since the first domestic contagion of the virus, all historicallyUS$4.3 transportation  high through  billion  level the main  in of  2019.  US$4.5 borders  were ceased, (equivalent  billion and there has been  to an over  eight increasing  months congestion  of of  imports) merchandise and  at  end traffic on‐2020, the other  up side from of the  border. Without customs clearance, these items are not recorded as imports, despite having already been paid for. Since the friction is not expected to be US$4.3   billion resolved soon, Figure   in the imports  2019.  I.26.are    FXlikely to be    reserves recovered recorded January  or  strongly in late after  a  2021. February Figure I.27. …and the exchange rate stabilized in H2  21 The government’s efforts to boost exports by accelerating coal transportation at the key border posts with China have also supported the recovery of sharp fall in H1, supported by eased current  after a moderate depreciation in the first half  Figure I.26. FX reserves recovered strongly after a  Figure I.27. …and the exchange rate stabilized in H2  exports. 22 account   adjustment   and  gold   purchases…   Exports declined by 45.3 percent (y/y) in the first four months of 2020, but contraction eased significantly to 0.6 percent by December 2020 amid sharp fall  in H1, easing/expiryGross  supported  by eased  current   after commodity a moderate  depreciation  prices), in theand first   gold exports.  halfin  international of some  reserves precautionary  (GIR) measures, in  Chinese  (billion recovery US$)  demand andExchange  rate: Tugrug prices  (Spot (mainly  rate, copper  Index, Dec  31, 2015=100) a surge   23 account adjustment and gold purchases…  5.0 mining, the BoM provided soft loans of MNT 110 billion (US$42 million) to gold miners under the “Gold-2” program. To support gold 145 MNT/US$ Gross international 4.5  reserves (GIR) (billion US$)  Exchange  rate: Tugrug  (Spot rate, Index, Dec 31, 2015=100)  140 16 5.0 4.0 145 135 MNT/US$ MNT/CNY 4.5 3.5 Depreciation 140 130 MNT/CNY 4.0 3.0 125 135 3.5 2.5 120 Depreciation 130 3.0 2.0 115 125 2.5 1.5 110 120 Coal Coal -30% -30% Crude oilCrude oil -10% -10% -40% -40% Others Others -15% -15% Totalgrowth Total exports exports growth -50% -50% -20% -20% ECONOMIC PERFORMANCE AND PROSPECTS Jun-19 Aug-19 Jun-19 Aug-19 Dec-19 Feb-20 Dec-19 Apr-20 Feb-20 Jun-20 Apr-20 Aug-20 Jun-20 Aug-20 Dec-20 Dec-20 Jul-19 Sep-19 Jul-19 Nov-19 Sep-19 Jan-20 Nov-19 Mar-20 Jan-20 May-20 Mar-20 Jul-20 May-20 Sep-20 Jul-20 Nov-20 Sep-20 Nov-20 Oct-19 Oct-19 Oct-20 Oct-20 Dec-19 Dec-19 Dec-20 Dec-20 Jun-19 Jul-19 Aug-19 Jun-19 Sep-19 Jul-19 Aug-19 Nov-19 Sep-19 Nov-19 Jan-20 Feb-20 Mar-20 Jan-20 Feb-20 Apr-20 Mar-20 May-20 Apr-20 Jun-20 Jul-20 Aug-20 Aug-20 May-20 Jun-20 Sep-20 Jul-20 Nov-20 Sep-20 Nov-20 Oct-19 Oct-19 Oct-20 Oct-20         Sources: Sources:  NSO;  World  NSO; BoM; BoM;  World Bank staff  Bank  staff estimates.  estimates.     Sources: Sources: BoM;  World  BoM;  World Bank staff  Bank  staff estimates.  estimates.     Note: Note: Coal,  Coal, copper  copper  and gold  and  accounted  gold accounted percent  for 75 for  of   of   75 percent The tugrug total export  depreciated proceeds total export  proceeds moderately  in 2020.  in  2020.  against the US the intervention of the BoM, which continued to sell dollar in 2020 supported by foreign exchange (FX) foreign exchange on the domestic market. In fact, BoM’s Current Current interventions.  account  account In  adjustment, nominal  adjustment, terms, the  specifically  specifically tugrug  a surge depreciated  in gold  a surge  in  purchases grossgold  purchases foreign  by  the exchange  by BoM,  the  BoM,  led to interventions  a strong  led  a strong  to(excluding  recovery  recovery direct    byin 4.2   reserves in  reserves percent   after against   after a the  a significant  significant U.S. dollar   drop and   drop during by 11.2   during   January–May. percent   January–May. FX  purchases Due  to   the Due   to  sharp from  thelarge   sharp   drop   drop mining in  exports,   in   exports, companies)   the   the  current   current reached     account against account the deficit  deficit Chinese  widened  widened RMB  in in H1   in 2020   2020 compounded  H1(figure 2020  compounded I.27). The  by declining  by  declining US$2.63  capital billion  capital  inflows  (mainly in inflows 2020,  (mainly close  FDI)  the to andFDI)  and large  large US$2.87 private  private billion    sector  external sector   external  debt  debt repayments, depreciation of the tugrug was smaller in 2020 relative  repayments,  resulting    in resulting  a  drain   in   a    drain on     on foreign in 2019 (figure I.29). Nonetheless, with moderate      exchange foreign  exchange  reserves  reserves  (figure    I.26). (figure  I.26).  However,  However,   toreservesreserves the exchange   recovered rates  of   recovered significantly Russia  significantly and   in   H2 Kazakhstan   in   H2   2020   2020 amid (figure the  inflation,    amid current   the  current the  real   account account   adjustment,   adjustment, effective   disbursement exchange   disbursement rate depreciated  from   from  some   donors, some   donors,   and   extensive   and I.28). Such moderate depreciation was supported by   extensive  gold   purchases gold   purchases  by   the  by    the BoM.     In BoM.     fact,In   fact, gross     international gross by over 3 percent (y/y) by November 2020.   international   reserves     reserves reached     reached a     a  historically historically  high  level high level of US$4.5  of US$4.5 billion  (equivalent  billion  (equivalent  to over  to seven over seven  months  months  of imports)  of imports)  at end  at  end‐2020, ‐2020,  up from  up from  US$4.3  billion US$4.3  in 2019.  billion    in 2019.   Figure I.26. FX reserves recovered strongly after Figure I.27. …and the exchange rate stabilized sharp aFigure fall in  I.26. Figure  FX H1,  I.26.  FXsupported  reserves  reserves  recovered  by eased recovered strongly current after a  strongly   Figure after  a  Figure  in H2 I.27. after  …and  I.27. …and    a moderate the  the exchange  exchange depreciation  rate stabilized  rate stabilizedin  inthe  H2 in H2  account adjustment  fall sharpsharp  in fall    H1,  supported  in  H1, and gold  supported  by purchases…  by eased eased  current  current     after a  first after half  a moderate moderate  depreciation depreciation  in the  first  in  the  first  half    half  account account  adjustment  adjustment  and gold  and  purchases…    gold purchases…  Gross international reserves (GIR) (billion US$) Exchange rate: Tugrug (Spot rate, Index, Dec 31, 2015=100) Gross international Gross international  reserves  reserves  (GIR) (billion  (GIR) (billion  US$)   US$)  Exchange Exchange rate: Tugrug  rate: Tugrug  (Spot  rate, Index, (Spot  rate,  Index, Dec 31,  Dec  2015=100)    31, 2015=100)  5.0 5.0 145 145 MNT/US$ MNT/US$ 4.5 4.5 140 140 MNT/CNY MNT/CNY 4.0 4.0 135 135 3.5 3.5 Depreciation Depreciation 130 130 3.0 3.0 125 125 2.5 2.5 120 120 2.0 2.0 115 115   1.5 1.5 110 110 1.0 1.0 105 105  0.5 0.5 100 100 0.0 0.0 95 95 supported  by  the  intervention  of  the  BoM,  which  continued  to  sell  foreign  exchange  on  the  domestic  Dec-15 Jun-16 Dec-15 Sep-16 Dec-16 Jun-16 Sep-16 Jun-17 Dec-16 Sep-17 Dec-17 Jun-17 Sep-17 Jun-18 Dec-17 Sep-18 Dec-18 Jun-18 Sep-18 Jun-19 Dec-18 Sep-19 Dec-19 Jun-19 Sep-19 Jun-20 Dec-19 Sep-20 Dec-20 Jun-20 Sep-20 Dec-20 Mar-16 Mar-16 Mar-17 Mar-17 Mar-18 Mar-18 Mar-19 Mar-19 Mar-20 Mar-20 Dec-16 Dec-16 Jun-17 Dec-17 Jun-17 Dec-17 Jun-18 Dec-18 Jun-18 Dec-18 Jun-19 Dec-19 Jun-19 Dec-19 Jun-20 Dec-20 Jun-20 Dec-20 Mar-17 Mar-17 Sep-17 Mar-18 Sep-17 Mar-18 Sep-18 Mar-19 Sep-18 Mar-19 Sep-19 Mar-20 Sep-19 Mar-20 Sep-20 Sep-20 market.   In  fact, supported   BoM’s   by   gross  foreign   the  intervention   exchange   of  the   continued  (excluding    interventions   BoM,  which   direct to  sell  foreign   FX  purchases   exchange   from   on  the  domestic     large      Source: mining     BoM. Source: companies) market.    BoM.     reached   US$2.63   billion     In  fact, BoM’s  gross  foreign  exchange  interventions in   Source: 2020,   Source:   BoM. close      BoM. to     the     (excluding US$2.87   direct  FX  purchases  from  large      billion   in   2019   (figure   I.29). Source: Note: BoM. Note:  = foreign  FX  FX = foreign  exchange.    exchange.   Source: BoM . Nonetheless, mining Note:    companies) FX = foreign   with  moderate exchange.  inflation,   reached   US$2.63  the  real effective in  2020,      billion exchange close   to  the  rate  depreciated   US$2.87   billion   by in  over   2019 3 percent    (figure  (y/y)   I.29).     Nonetheless, by November  2020.  with     moderate inflation, the real effective exchange rate depreciated by over 3 percent (y/y)  Theby The   tugrug   tugrug  November   depreciated2020.    moderately   depreciated   moderately   against   the  US   against   the   US  dollar   dollar   in  2020 supported   in  2020   supported   by  foreign   by  foreign   exchange   exchange   (FX)   (FX)  interventions. interventions.  In nominal  In nominal  terms,  terms,  the tugrug the tugrug  depreciated  depreciated  by 4.2  by percent  4.2 percent  against  the U.S.  against  the  dollar  U.S. dollar  and by  and  by  11.2   11.2 Figure Figure I.28.  I.28. The  The tugrug   tugrug depreciation was  depreciation was moderate moderate   Figure Figure  I.29. I.29. …supported  …supported   by by FX FX interventions   interventions  by by   thethe   percent   percent Figure against     I.28. against   the The     the Chinese tugrug  Chinese    RMB depreciation RMB in  2020   in was  2020  (figure     moderate(figure  I.27).    I.27).  The   Figure The    depreciation depreciation I.29.    of …supported  the  of    the tugrug by  FX  tugrug   was     interventions smaller was    in smaller   by    2020 the in  2020     compared to Mongolia’s compared to Mongolia’s structural peers...  structural peers... BoM, particularly in the BoM, particularly in the first half of 2020  first half of 2020 relative   to relative   the  to     the exchange     exchangerates compared to Mongolia’s structural peers...    rates   of     of Russia     Russia and   Kazakhstan   and   Kazakhstan   (figure     I.28). (figure   I.28). Such      moderate Such BoM, particularly in the first half of 2020    moderate   depreciation   depreciation   was    was   Nominal exchange Nominal  rate exchange  per rate  US$ per  (y/y US$ (y/y change,  end‐2020)  change, end-2020) The BoM’s netThe BoM’s and  FX sales  MNT/US$ net FX   MNT/US$ sales and Nominal exchange rate per US$ (y/y change, end‐2020)  The BoM’s net FX sales and MNT/US$  3.5 3100 Russia 19.2% 3.5   28  28 TheBoM's The BoM's net net sales MNT/USD (eop): RHS offoreign sales of foreignexchange exchange(bn US$): (bn LHS US$): LHS 3100 2850 Russia 19.2% 2850 2900 MNT/USD (eop): RHS 2734 Kazakhstan 10.3% 3 2734 2643 2900 Kazakhstan 10.3% 3 2643 South Africa 2700 4.8% 2490 2700 South Africa 4.8% 2.5 2.5 2490 2427 2427 2.872.87     Mongolia Mongolia 4.2%4.2% 2500 2500 2.63 2.63 1.9 1.9 Botswana 22 1.8 1.8 Botswana 1.2%1.2% 1.6 2300 2300 1.6 1996 1996 1.5 1.5 Indonesia Indonesia 0.9%0.9% 2100 2100 1.5 1.5 1888 1888 1.2 Malaysia Malaysia -1.7% -1.7% 1 1 1900 1900 11 1659 1659 Chile Chile -3.9% -3.9% 1.2 1700 1700 Japan Japan-5.0% -5.0% 0.5 0.5 1392 1392 0.1 1500 1500 China -6.2% 0.1 China -6.2% 0 1300 Euro -8.2% 0 1300 Euro -8.2% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2012   2013 2014 2015 2016 2017 2018 2019 2020       Sources: https://www.x‐rates.com/; BoM; World Bank staff  Sources: BoM; World Bank staff estimates.  Sources:   https://www.x ‐ rates.com/; Sources: https://www.x-rates.com/; estimates.    BoM; BoM; World   BankWorld staff   Bank  staff estimates.   Sources: Sources:   BoM; World BoM;  World   Bank Bank   staffstaff   estimates. estimates. Note: The BoM’s gross FX sales exclude its direct FX purchases    estimates.  Note: The   large Note: from The  BoM’s  BoM’s mining  gross gross FX  FX  companies,  sales sales exclude    exclude which  started its its direct  direct  in  June   FX FX purchases  purchases 2018. eop    from   large from  largemining companies,  mining which started  companies,  which in started June 2018.  ineop = end-of- June  hand 2018.  side. = end ‐ of ‐period;  RHS   =   right ‐ hand   period; RHS = right-hand side; LHS = left-hand side. side;   LHS   =   left ‐      eop    = end‐of‐period; RHS = right‐hand side; LHS = left‐hand side.    A6.  Monetary  conditions  have  eased,  but  risks  in  the  banking  sector  are  building  as  asset  A6.  Monetary   conditions quality deteriorates     have  eased,  but  risks  in  the  banking  sector  are  building  as  asset  quality  deteriorates  17   Prior  to  the  onset  of  the  COVID‐19  pandemic,  monetary  policy  focused  on  addressing  unsustainable Priorcredit   growth   to  the   onset   through macroprudential   of  the  COVID ‐19  pandemic,   measures.   As  inflation   monetary   policy   was   well  within   focused   the  BoM’s   on  addressing   target  of  8      unsustainable percent credit   growth  in  through  the  2018–19,  BoM focused on macroprudential  addressing   measures.    As unsustainable   inflation  was  credit growth   well   within (particularly   the  BoM’s  household   target  of    8  loans)   and percent in 2018–19,   external   imbalances   with   a   mix   of   contractionary   monetary   and  the BoM focused on addressing unsustainable credit growth (particularly household    macroprudential   policy   24 measures.   In  fact,  the  rapid  credit  expansion  in  2017–18  was  channeled  mainly  to  households,  and  MONGOLIA ECONOMIC UPDATE From Relief to Recovery A6. Monetary conditions have eased, but medium term. The BoM has also been trying to nudge banks to use their excess liquidity to support economic risks in the banking sector are building as activities by making it relatively unattractive for banks asset quality deteriorates in the short run to passively deposit funds with the Prior to the onset of the COVID-19 pandemic, central bank in the form of central bank bills. Moreover, monetary policy focused on addressing unsustainable the central bank reduced the reserve requirement ratio, credit growth through macroprudential measures. and introduced a longer-term liquidity instrument to As inflation was well within the BoM’s target of 8 further encourage banks to lend their excess liquidity. percent in 2018–19, the BoM focused on addressing In addition, the BoM reengaged with the government’s unsustainable credit growth (particularly household subsidized mortgage program, introduced a freeze loans) and external imbalances with a mix of on mortgage loan repayments, engaged in several contractionary monetary and macroprudential policy asset purchasing programs, and provided soft loans to measures.24 In fact, the rapid credit expansion in banks to support non-mineral export industries and 2017–18 was channeled mainly to households, and SMEs. In total, these measures are estimated to cost consequently, the household debt-to-income ratio was around 3 percent of GDP, while the effective cost of estimated to have reached as high as about 70 percent other regulatory measures could not be estimated at end-2018, up from an average of 39 percent in 2012. (see box I.4). As a result of macroprudential measures, broad money The impact of the monetary policy easing was growth and domestic credit growth fell from 23 percent mitigated by a credit contraction amid the pandemic. and 26.5 percent, respectively, in December 2018, to 7 Broad money growth accelerated to 16 percent (y/y) in percent and 5.1 percent in December 2019 (figure I.30). December, from its recent low of 1.6 percent in April  In 2020, the monetary policy stance shifted toward 2020. However, domestic credit growth remained in mitigating the economic impact of the pandemic. negative territory while banking sector excess reserves Since March 2020, the BoM lowered its   policy rate four continued to increase gradually (figure I.31). The banks   to  lend   their   excess   liquidity. In  addition,   the  BoM  reengaged  with  the  government’s  subsidized  times by a  cumulative 500 basis points to 6  percent, overall economic contraction, rising nonperforming mortgage program,  introduced   a  freeze on  mortgage   loan  repayments,  engaged  in  several  asset  a historical  low (figure  I.30). The goal  was loans, and risk aversion due to heightened uncertainty purchasing programs, and  provided softto reduce   loans   to  banks   to  support  non‐mineral  export  industries  and  market SMEs. interest  total,rates  In  these and boost domestic  measures demand in  are estimated  tothe made banks  cost around reluctant  3 percent to lend  of GDP, companies and the  while reluctant  effective  cost of  other regulatory measures could not be estimated (see box I.4).  Figure I.30. The monetary policy rate was lowered Figure I.31. However, banks have been reluctant to Figure  I.30. The low to a historical monetary  policy to revive  rate credit  was lowered  growth Figure  I.31. lend  However, despite  banks having  have sizable  been reserves reluctant to  excess to a historical low to revive credit growth  lend despite having sizable excess reserves   supply, domestic Money domestic Money supply,  credit,credit, and policy  and policy  rate rate Domestic Domestic credit credit  and banks and banks  excess excess   reserves  reserves Excess reserves to deposit ratio (%): RHS M2 growth (y/y): LHS 30% 40% Domestic credit growth (y/y): LHS 30% Bank loan growth (y/y): LHS 15% 25% 35% Policy rate: RHS 20% 30% 20% 10% 15% 25% 10% 20% 10% 5% 15% 5% 0% 0% 10% ‐5% 5% -10% 0% ‐10% 0% Sep-18 Dec-18 Jun-19 Sep-19 Dec-19 Jun-20 Sep-20 Dec-20 Mar-19 Mar-20 Mar‐17 Mar‐18 Mar‐19 Mar‐20 Jun‐17 Sep‐17 Dec‐17 Jun‐18 Sep‐18 Dec‐18 Jun‐19 Sep‐19 Dec‐19 Jun‐20 Sep‐20 Dec‐20     Sources:  BoM; Sources: BoM;  World World  Bank Bank  staff staff  estimates.  estimates. Sources:  BoM; Sources:  World BoM; World Bank Bank   staff staff  estimates.  estimates. Note: RHS Note: RHS  =  right‐hand =right-hand  side; side; LHS  LHS side.  side.   = left‐hand = left-hand Note: RHS Note:  = right RHS = right-hand LHS  ‐hand side; side;  LHS =  left‐hand =left-hand  side.  side.   The  impact  of  the  monetary  policy  easing  was  curtailed  by  a  credit  contraction  amid  the  pandemic.  Broad  money  growth  accelerated  to  16  percent  (y/y)  in  December,  from  its  recent  low  of  1.6  percent  in  April These 24 However, domestic  2020. include macroprudential   credit measures aimed  growth at limiting  remainedratio the debt-to-income  in a  negative of  trajectory individual borrowers  while from as high as 100 the   banking percent to 60  percent, sector  reducing the maturity on non-mortgage household loans, and raising the risk weight on unhedged foreign currency borrowing. excess  reserves  continued  to  increase  gradually  (figure  I.31).  Interestingly,  the  overall  economic  contraction, 18  rising nonperforming loans, and risk aversion due to heightened uncertainty largely explained  the  persistence  of  credit  contraction,  despite  some  support  from  monetary  policy  easing.  This  provides  the BoM the justification to pursue banking sector clean up to prevent a long balance sheet stagnation.  Box I.4. The Bank of Mongolia’s measures to mitigate the impact of COVID‐19  ECONOMIC PERFORMANCE AND PROSPECTS Box I.4. The Bank of Mongolia’s measures to mitigate the impact of COVID-19 The Monetary Policy Committee (MPC) of the Bank of Mongolia (BoM) met six times since the start of the COVID-19 pandemic in February 2020. Several decisions were taken by the MPC aimed at boosting credit growth, relieving the debt burden, and supporting liquidity of the banking system. These include: • Reducing the policy rate sequentially from 11 percent to 6 percent, over meetings held in March, April, September, and November 2020. As the inflation outlook remained within the central bank’s target, reduction of the policy rate was intended to relieve the financing costs of banks, support financial intermediation, and stimulate domestic demand. • Relaxing the condition of repo financing instruments to support liquidity of the banks. The MPC narrowed the interest rate corridor by 200 basis points, which effectively reduced the interest rate on the short-term repo instrument. In September, the maturity of the longer-term repo instrument was temporarily extended from 90 days to 180 days and its interest rate reduced from 16 percent to 11 percent. Consequently, banks could borrow from the BoM at a lower rate and for a longer term. • Releasing more liquidity to the banking system by reducing the required reserve ratio on domestic currency liabilities by 4.5 percentage points to 6 percent in March. As a result, an estimated MNT 730 billion was released to the market. • Promoting incentives to reduce interest rates on FX deposits and discourage deposit dollarization by reducing remunerationa provided to banks by the amount equivalent to their FX deposits and interest-bearing FX current accounts. In addition to applying higher reserve requirements on FX liabilities, this measure was intended to support the stability of the financial system by addressing the growing currency mismatch. • Allowing the restructuring and extension of the maturity of consumer loans of troubled borrowers for up to 12 months and later extending the deadline to the end of the year. These measures are intended to reduce monthly payments of troubled borrowers and support private consumption.b • Purchasing assets and providing concessional loans. The BoM purchased municipal bonds to support its mortgage program (MNT 100 billion) targeting civil servants at the COVID-19 frontline; provided repo loans to banks to indirectly support loans for non-mineral exports and SMEs (MNT 230 billion), and directly provided concessional funding for gold companies under the “Gold-2” program (MNT 110 billion). Under its supervisory function, the BoM made temporary changes to its regulations, effective until the end of 2020. These include: • Loosening the asset classification regulation starting in March so that borrowers’ credit history is not affected. Consumer and mortgage loans that are in arrears for less than 90 days will be considered normal (the regular cutoff is 15 days), those in arrears for 91 to 120 days will be considered past due (the regular cutoff is 90 days), and those that missed payments for over 121 days would be considered nonperforming. • Reducing the liquidity ratio for banks from 25 percent to 20 percent, so that banks could reduce their liquid assets and create room for issuing loans. • Encouraging banks to reduce their transaction fees and removing FX deposits from the insurance coverage to discourage deposit dollarization. 19 MONGOLIA ECONOMIC UPDATE From Relief to Recovery Under the framework of a Parliamentary resolution to support the economy amid COVID-19, passed on April 29, the BoM took the following measures: • Allowing the freezing of payments of the subsidized mortgage program and extending its maturity for up to six months (later extended by eight more months). The subsidized mortgage borrowers were given a one-time option to restructure their loans without any interest accrual on their balance starting May 1. As of June 19, 38,270 borrowers had restructured their loans and delayed payments of MNT 121 billion MNT. In November, the freeze period was extended by eight more months and is expected to delay payments of MNT 310 billion. • Continuing to finance the subsidized mortgage program. As agreed under the IMF Extended Fund Facility program and the World Bank’s Economic Management Support Operation series, BoM financing of the subsidized mortgage program ended on January 1, 2020. However, the Law on Pandemic Preparedness and Response of April 2020 reauthorized BoM’s financing of the program, which currently amounts to about MNT 245 billion. Source: BoM. Note: a. The BoM provides some remuneration to banks for their assets held at the central bank in accordance with the reserve requirement. b. The option to restructure is usually not restricted by the BoM. However, loans issued before January 1, 2019, were not capped by the ceiling of 60 percent set on the debt-service-to-income ratio and a 30-month term limit. Restructuring these loans would have violated either one of these restrictions. The BoM therefore provided a one-time pardon on the term limit of 30 months to reduce the debt burden of households. to invest – explaining the limited impact of monetary rapidly, weakening income of households and lower policy easing on credit growth. A thorough clean-up profitability of the corporates have curtailed their of bank balance sheets post crisis may be needed to potential to borrow, as well. According to the NSO’s encourage fresh lending activity and thus support the survey, 64.2 percent of firms reported an income loss recovery. over 50 percent due to the COVID-19 shock. Corporate loan issuance has been declining in all sectors and The credit contraction was prolonged as consumers     small businesses were severely hit by the COVID-19 seems most severe in key sectors such as construction, and trade, transportation, manufacturing, and mining (figure shock. Domestic credit contracted by about 5 percent in I.32). In addition to tighter conditions and weakening 2020, marking declining   in   a  contraction all sectors   andof   10 consecutive seems   most   months. severe   in   key   sectors   such  as  construction, of  households  trade, transportation, for     declining in all sectors and seems most severe in key  sectors income, the such  as  construction, decelerating preference  trade,  transportation, While banks manufacturing, have tightened   and   mining their   (figureloan issuance   I.32).   In to   addition   to   tighter   conditions   and   weakening   income, the  to    manufacturing,   and   mining   (figure   I.32).   In   addition   to durable   tighter goods   conditions such as cars   and   weakening may   income, have contributed   the corporates deceleratingand households  as  preference of  loan quality deteriorated households  for  durable  goods  such  as  cars  may  (figure have  contributed  to  declining    decelerating  preference  of  households  for  durable  goods declining  such  as loan cars  issuance  may  have contributed  I.33).  to  declining loan  issuance loan  (figure  issuance  I.33).  (figure     I.33). Figure I.32. Corporate loans issuance has been Figure I.33. Banks have also tightened new loan Figure Figure I.32. declining  Corporate  I.32.  Corporate across  loans sectors  issuance  loans  has  issuance  been  has     been Figure Figure I.33.  I.33. issuance  Banks  to Banks have  also  have individuals,  tightened  also  new  tightened entrepreneurs, new loan and     loan SMEs declining declining  across  sectors  across  sectors   issuance issuance  to  individuals,  to  entrepreneurs,  individuals,  entrepreneurs,  and  and SMEs     SMEs Corporate Corporate Corporate loans  loans  issuance  loans issuance  issuance (a(a  12-month  12  (a ‐month 12‐month rolling  rolling  sum,  rollingsum, y/y)  y/y)  sum,      y/y) Individual Individual  loans Individual  loans loans issuance  issuance  issuance (a  12  (a ‐(a  12 12-month month rolling  rolling ‐month  sum,  rolling sum, y/y)  y/y)  sum,        y/y) 70% Agriculture Agriculture Salary and Salary pension and backed pension backed 70% Mining Mining 50% 50% Deposit Depositbacked backedloans loans 60% 60% Manufacturing Manufacturing Credit card Credit card 50% 50% Construction Construction Others Others Trade Trade 30% Entrepreneurs Entrepreneursand SMEs and SMEs 40% 40% 30% Transportation Transportation Household Household loan loan 30% 30% Other Other 20% 20% Corporate Corporateloans loans 10% 10% 10% 10% 0%0% -10% -10% -10% -10% -20% -20% -30% -30% -30% -30% Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-19 Oct-20 Dec-18 Feb-19 Jun-19 Dec-19 Feb-20 Jun-20 Dec-20 Apr-19 Aug-19 Apr-20 Aug-20 Oct-19 Oct-20 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-19 Oct-20 Dec-18 Feb-19 Jun-19 Dec-19 Feb-20 Jun-20 Dec-20 Apr-19 Aug-19 Apr-20 Aug-20 Oct-19 Oct-20       Sources: BoM; World Bank staff estimates. Sources: BoM; World Bank staff estimates. Sources: Sources: BoM;  World  BoM;  Bank  World  staff  Bank  estimates.  staff      estimates. Sources: Sources: BoM;  World  BoM;  Bank  World  staff  Bank  estimates  staff      estimates Asset Asset  quality   of   quality   the   of   banking   the   system   banking   has   system   deteriorated   has   notably,   deteriorated   reflecting   notably,   the   reflecting   impact   the   of   impact   the   of   pandemic.   the      pandemic. 20 The The nonperforming  loans  nonperforming  (NPLs)  loans  of  (NPLs)  commercial  of  banks  commercial  reached  banks  MNT  reached  2  MNT    2 trillion  by  trillion  December,  by  a  a  December, 10  percent  10     percent increase increase   relative   relative  to   to  end   end‐2019. ‐2019.   The   The  NPL   NPL   ratio   (nonperforming   ratio   (nonperforming   loans   loans   to   total   to   total  outstanding   outstanding   loans)   loans)   increased   increased    to  11.7 to  11.7 percent  percent  in  December  in  December  from  from  10.1  10.1  percent  percent  in  in December  December  2019  2019  (figure  (figure  I.34).  I.34).  Past  Past ‐due ‐due loans  loans  have  have  been  been   increasing increasing   more   more  rapidly.   rapidly.   The   The   amount   amount   of   of  past   past‐due ‐due   loans   loans   reached   reached   about   about   MNT   MNT   1.3   1.3   trillion   trillion   from   from   MNT   MNT   816      816 billion   in billion   December   in   December   2019.   2019.  The   The   ratio   ratio   of   past   of   past ‐due ‐due   loans   loans   to   to  total   total   loans   loans   jumped   jumped   to   to  7.4   7.4  percent   percent   in   December   in   December    ECONOMIC PERFORMANCE AND PROSPECTS Asset quality of the banking system has deteriorated The adequacy of loan loss provisions (LLP) for both notably, reflecting the impact of the pandemic. corporate and individual loans is uncertain.25 As of The nonperforming loans (NPLs) of commercial December 2020, LLP for corporate loans stood at MNT banks reached MNT 2 trillion by December, a 10 1.2 billion. This covers over 80 percent of NPLs and percent increase relative to end-2019. The NPL ratio around half of the value of problematic loans (NPLs (nonperforming loans to total outstanding loans) + past due loans), (figure I.36). The LLP coverage increased to 11.7 percent in December from 10.1 of problematic loans for the mining, construction, percent in December 2019 (figure I.34). Past-due loans manufacturing, and trade sectors ranged between 33 have been increasing more rapidly. The amount of past- and 77 percent, while these sectors combined account due loans reached about MNT 1.3 trillion from MNT for about 70 percent of total problematic loans. 816 billion in December 2019. The ratio of past-due Meanwhile, 51 percent of the value of problematic loans to total loans jumped to 7.4 percent in December loans issued to individuals is currently covered by from 4.5 percent at end-2019. Problematic loans (NPLs provisions (figure I.37). The weakest provisioned loans and past-due loans) are likely to rise further once are car loans. forbearance on identification of these loans expires as planned by July 2021. According to the BoM, as of The banking system remains liquid. The liquidity ratio September 2020, over 20 percent of total loans in (liquid assets to total assets) has been trending up the banking sector were affected by the pandemic, since June 2020 and reached 40.6 percent in December and additional loans may become problematic once 2020, its highest in the past two years (figure I.38). regulatory forbearance is scaled back. Across sectors, Bank reserves stood at 15.9 percent of total deposits the mining sector claimed the highest proportion of in December 2020, above the reserve requirement loans affected by the COVID-19 shock (46 percent), ratios (15 percent for FX deposits and 6.5 percent for   followed by construction (38 percent), trade (35 MNT deposits). However, this is a reduction from 25.6 percent), and real estate (26 percent) (figure I.35). percent in April 2020 mainly due to a steady increase   in FX deposits (denominator) until September 2020.26 Figure I.34. Loan quality has deteriorated  Figure I.35. …mainly in the mining, construction, and  notably…   Loan quality has deteriorated notably… Figure I.34. trade I.35. …mainly in the mining, construction,  sectors Figure Figure I.34. Loan quality has deteriorated  Figure I.35. …mainly in the mining, construction, and  NPLs and past‐due loans in percent to outstanding loans   Increase sectors  loans by sector (in billions of MNT)   of problematic and trade NPLsnotably…   loans in percent to outstanding loans and past-due trade sectors  12% NPLs and past‐due loans in percent to outstanding loans   700 Increase Increase  of problematic loans  by  sector of problematic loans New by NPLs and   sector (in  billions (in past-duebillions of loans  MNT) of MNT) since   2019 Dec 12% 700 600 Outstanding New NPLs and NPLs and past-due past-due loans loans since Dec 2019 in Dec 2019 10% 600 Outstanding NPLs and past-due loans in Dec 2019 Past-due loans 500 10% Past-due loans 500 8% 400 NPLs 8% 400 NPLs 300 300 6% 6% 200 200 4% 100 100 4% Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 00 Mining Mining Construction Construction Trade Trade Real estate Real estate Agriculture Agriculture         Sources: BoM; World Sources: Bank World  BoM; staff estimates.  Bank staff estimates.  Sources:  BoM; Sources: BoM; World Bank   World staff  Bank estimates.  staff  estimates.    Sources: BoM; World Bank staff estimates.  Sources:  BoM; World  Bank  staff  estimates. There are limited provisions for pandemic‐related loan losses, as loan loss provisions (LLP) remain low  There are  limited provisions for pandemic‐related for  both  corporate  and  individual  loans. 23  loan losses, as loan loss provisions (LLP) remain low    As  of  December  2020,  LLP  for  corporate  loans  stood  at  MNT  23 for  both   corporate 1.2   and  individual   billion.  Although   this  covers   loans.   over  80  As   of  December percent   of  NPLs,  it  2020,   LLP  for is  equivalent   to   corporate only  half  of    loans   stood  at  MNT  the  problematic 1.2  billion.   Although   this   covers   over   80   percent   of   NPLs,   it  loans (NPLs + past‐due loans) (figure I.36). The LLP share of problematic loans for the mining, construction, is   equivalent   to   only   half   of   the   problematic     loans (NPLs  + past‐due manufacturing,  loans)   and   trade (figure   sectors  I.36).  The   ranged    between LLP share  of   33  problematic   and   77  percent,  loans   while  for  the  mining,   these sectors  combined construction,     25 account manufacturing, The provision for    coverage  about and    70  trade ratio is used  percent sectors to determine  of    total ranged how  problematic banks   between are protected from  loans. 33    Meanwhile, and possible   77    only  51 percent, losses on nonperforming while  percent credits.  of the  problematic    these   sectors   combined   The consistent increase in the FX deposits since March 2020 was reversed in October 2020. From a peak of 31 percent in September 2020, the FX 26 account loans deposit -   for  total   issued about deposit    70 ratio to   individuals  percent reached   25.7 percentis    of totalcurrently   covered  problematic in December   2020, its levelby   provisions  loans. in March–April    Meanwhile,(figure 2020.   I.37).   The   weakest   provisioned  only 51 percent of the problematic    loans   are car loans.  loans issued  to individuals is currently covered by provisions (figure I.37). The weakest provisioned loans  21 are car loans. Figure    I.36. Provisions to loans of risky sectors seem  Figure I.37. Banks should also take hefty charges as   low  the COVID‐19 impact intensifies  Figure I.36.  Provisions Sectoral  to  assessment  loans  of  of risky  corporate  loans,   sectors December  seem  2020   Figure  I.37. Household  Banks  loans should  and  SME  also  loans,  take  hefty  December 2020   charges as   low  Problematic loans (% of total loans in each sector) the  COVID‐19 impact intensifies  80% 69% 1.2 1.2   billion.   billion.   Although   Although   this   this   covers   covers   over   over   80   80   percent   percent   of   of   NPLs,   NPLs,   it   it   is   is   equivalent   equivalent   to   to   only   only   half   half   of   of   the   the   problematic   problematic    loans loans  (NPLs  (NPLs  +  past  +  past ‐due ‐due  loans)  loans)  (figure  (figure  I.36).  I.36).  The  The  LLP  LLP  share  share  of  of  problematic  problematic  loans  loans  for  for  the  the  mining,  mining,  construction,  construction,    manufacturing, manufacturing, and    and trade    trade    sectors sectors ranged    ranged between    between 33    33    and and 77    77 percent,    percent, while    while    these these sectors    sectors combined    combined    account account MONGOLIA  for  for  about  about  70  70 ECONOMIC  percent  percent UPDATE  of  of  total  total From  problematic  problematic Relief to Recovery loans.  loans.  Meanwhile,  Meanwhile,  only  only  51  51  percent  percent  of  of  the  the  problematic  problematic    loans loans  issued  issued  to  to  individuals  individuals  is  is  currently  currently  covered  covered  by  by  provisions  provisions  (figure  (figure  I.37).  I.37).  The  The  weakest  weakest  provisioned  provisioned  loans  loans    are are  car  car  loans.  loans.    Figure Figure Figure I.36.  I.36.  I.36. Provisions  Provisions  Provisions to  to  to loans  loans  of  loans  of of  risky risky  risky  sectors  sectors sectors  seem  seem Figure     Figure Figure I.37.I.37.  I.37. Banks  Banks  Banks should  should  should also  also  also take  take  take hefty  hefty  hefty charges  charges  charges  as  as     lowseem low   low the theas the  COVID  COVID COVID-19 ‐19 ‐19 impact impact  impact intensifies  intensifies  intensifies    Sectoral Sectoral  assessment  assessment Sectoral  of  of assessment  corporate  corporate of  loans, corporate  loans, loans, December  December December  2020    2020 2020 Household Household  loans  loans Household and  and SME  SME loans and SME  loans,  loans,December  December  loans,  2020  2020 December    2020 Problematic Problematic loans (% loans (%of oftotal total loans loans inin each sector) sector) each 80% 80% 69% 69% LLP LLP(% (%of ofproblematic problematicloans loans each inin each sector) sector) 70% 70% 62% 62% 100% 100% 87% 87% 56% 56% 60% 60% 51% 51% 77% 77% 80% 80% 44% 44% 68% 68% 50% 50% 52% 52% 50% 50% 48% 48% 60% 60% 40% 40% 40% 40% Problematic Problematic loans loans (%(% of of total total loans loans each inin category) each category) 33% 33% 40% 40% 54% 54% 30% 30% 49% 49% LLP LLP (% (% of of problematic problematic loans loans each inin category) each category) 20% 20% 14% 14% 15% 15% 20% 20% 31% 31% 33% 33% 33% 33% 32% 32% 9% 9% 9% 9% 7% 7% 19% 19% 13% 13% 10% 10% 0% 0% 0% 0% Total Total Others Others Credit Credit card card Salary Salary && Car Car loans loans pension pension backed backed loans loans       Sources: Sources:  BoM;  BoM;  World  World  Bank  Bank  staff  staff  estimates.  estimates.    Sources: BoM; World Bank staff estimates. Note: Note: Problematic  Problematic  loans  loans =  =  NPLs  NPLs  + + past  past ‐due ‐due Note: Problematic loans = NPLs + past-due loans.  loans.  loans.    The The   banking   banking   system   system   seems   seems   to   to   remain   remain   liquid.   liquid.   The   The   liquidity   liquidity   ratio   ratio   (liquid   (liquid   assets   assets   to   to   total   total   assets)   assets)   has   has   been   been    However, the risk of currency mismatch remains high in mounting external pressures, particularly in the first half trending trending  up  up  since  since  June  June  2020  2020  and  and  reached  reached  40.6  40.6  percent  percent  in  in  December  December  2020,  2020,  its  its  highest  highest  in  in  the  the  past  past  two  two  years  years    the banking system. The share of foreign liabilities in of the year. Deposit dollarization has declined somewhat (figure (figure  I.38).  I.38).   Bank   Bank  reserves  reserves  stood  stood  at  at  15.9  15.9  percent  percent  of  of   total   total  deposits  deposits  in  in  December  December  2020,  2020,  above  above   the   the  reserve  reserve    the banking system is almost triple the size of foreign in recent months amid an improving current account requirement requirement    ratios ratios    (15 (15 percent    percent   for for FX       FX deposits deposits and    and   6.5 6.5    percent percent    for for    MNT MNT deposits).    deposits).    However, However, this    this    is is aa       assets, which exposes banks to high risks of currency balance and sequential policy measures by the BoM, mismatch. In fact, FX deposits reached 31 percent of including setting higher reserve requirements on FX                                                                                                                         total deposits in September 2020,    the highest rate in deposits and removing its insurance coverage in case gap    23 23  The  The  provision  provision  coverage  coverage  ratio  ratio  is  is  used  used two years, while FX loans were  to to 9  percent  determine  determine  how  how of total  banks  banks loans  are  are protected of  protected  from bank failures from  possible  possible (see box losses  losses I.4).  on  on nonperforming  nonperforming Nevertheless,  credits.  credits. the large (figure I.39). Credit risk associated with exchange rate 33 33  between   deposit dollarization and credit dollarization fluctuation is now relatively moderate as banks have in times of an uncertain external environment exposes     tightened their condition for FX loans significantly banking system balance sheets to significant fluctuations   over the past few years. In contrast, households and in the exchange rate. corporates  from reduction have   25.6  percent ramped up their   in FX  April   2020 deposits   mainly  due  to  a  steady  increase  in  FX  deposits  (denominator)  following reduction  from 24 25.6  percent  in  April  2020  mainly  due  to  a  steady  increase  in  FX  deposits  (denominator)  until September reduction until  2020.   from  25.6  September     percent  2020. 24     in  April  2020  mainly  due  to  a  steady  increase  in  FX  deposits  (denominator)  24 until  September  2020. Figure I.38. The liquidity of the banking system   Figure I.39. …however, the banking system remains Figure I.38.  The Figure  liquidity  I.38.  of the   The liquidity banking  of  system  the banking    system   Figure  I.39. Figure  …however,  I.39.  …however,  the banking  system  remains  system remains   has remained steady... vulnerable to risk of the  banking currency mismatch has remained Figure  I.38. The  steady... has remained  liquidity  steady...    of the banking system  vulnerable Figure  I.39. vulnerable …however,  to  to  risk  of  of currency  risk  the banking  currency  mismatch  system  mismatch      remains  has remained  steady... Liquid assets/total   (%) asset (%) asset Liquid assets/total 33% vulnerable 33% to  risk FX deposit/total FX  of deposits: currency deposit/total LHS deposits:  mismatch  LHS 39% 39% Bank reserves/deposits Liquid (%) asset(%) assets/total Bank reserves/deposits (%) 33% FX loans/total loans: deposit/total FX loans/total LHS deposits: loans: LHS LHS 2,830 2,830 39% Bank reserves/deposits (%) FX loans/total MNT/USD: RHS MNT/USD: RHS loans: LHS 2,830 28% 28% 2,780 2,780 34% 34% 28% MNT/USD: RHS 2,780 2,730 2,730 34% 2,730 29% 23% 23% 2,680 2,680 29% 23% 2,680 29% 2,630 18% 2,630 24% 18% 2,630 2,580 24% 18% 2,580 24% 2,580 2,530 19% 13% 2,530 2,530 19% 13% 13% 2,480 19% 2,480 2,480 14% 8% 2,430 14% 14% 8% 8% 2,430 2,430 Jun-18 Aug-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-18 Oct-19 Oct-20 Dec-19 Dec-20 Feb-19 Apr-19 Jun-19 Aug-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-19 Oct-20 Jun-18 Aug-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-18 Oct-19 Oct-20 Jun-18 Aug-18 Dec-18 Feb-19 Apr-19 Jun-19 Aug-19 Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Dec-20 Oct-18 Oct-19 Oct-20 Dec-19 Dec-20 Feb-19 Apr-19 Jun-19 Aug-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-19 Oct-20 Dec-19 Dec-20 Feb-19 Apr-19 Jun-19 Aug-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-19 Oct-20     Sources: BoM; World Bank staff estimates.      Sources: BoM; World Bank staff estimates.     Sources: Sources: BoM;  BoM;  World  World  Bank  Bank  staff  staff estimates.  estimates.     Sources: Sources: Note: BoM;   FX BoM;  World  World   deposits  Bank   of Bank  staff   firms  staff  estimates.    and estimates.   households      are  considered  Sources: BoM; World Bank staff estimates. Sources: Note: BoM; World  Bank staff  estimates. Note:   FX   deposits liabilitiesFX   for deposits  banks, of   of while   firms firms  FX  loans   and and   are households  assets of   households     are are   considered banks.considered       Note: FX  deposits liabilities for banks, of  firms while and  FX households are considered liabilities RHS = liabilities    right for   ‐hand banks,    side; while    LHS FX   loans =  left  loans ‐   are  hand are    side. assets assets  of banks.    of   banks.       for banks, RHS  = right while ‐handFX loans  side;  LHS are =assets  left‐hand of banks.  side.  RHS =  right RHS ‐hand side; = right-hand  LHS side; LHS  = = left ‐hand side. left-hand side.  However, risk of currency mismatch remains high in the banking system. The share of foreign liabilities  22 However, in   risk the  banking  risk of  currency   system  mismatch   is  almost  remains   triple   the  high   size   of   in  the banking foreign   assets,  system.  The share which  The exposes  of foreign   banks  liabilities   to  high   risks  of     However,   of currency  mismatch  remains  high  in  the  banking  system.  share  of foreign  liabilities in  the  banking  system  is  almost  triple  the  size  of  foreign  assets,  which  exposes  banks  to  high  risks  of  currency  mismatch.  In  fact,  FX  deposits  reached  31  percent  of  total  deposits  in  September  2020,  the  in  the  banking currency   system   mismatch.   is  almost   In  fact,   triple   FX  FX   the  size deposits   of  foreign   assets,   which exposes  deposits   banks   to  high   risks   of   highest rate  in two years,  while reached  loans  were   31  percent  9 percent  of total  of total  (figure   loans   in  I.39).    September Credit risk  associated 2020,   the     currency   mismatch. highest  rate in   In   fact,   two   FX  while  years, deposits  FX   reached   31   percent  of  total of  total   deposits   in  September  risk  associated 2020,  the   with   exchange rate   fluctuation is  now loans  were   relatively9 percent   moderate loans   as   banks    (figure  I.39). have  significantly Credit   tightened   their    condition  for  FX  loans  over  the  past  few  years.  In  contrast,  households  and  corporates  have  ramped  up    highest rate with     in   two exchange   years,   rate   while     FX fluctuation   loans   is     were now     9   percent relatively     of   moderate total     asloans   banks  (figure   have  I.39).   Credit significantly    risk   associated tightened   their   ECONOMIC PERFORMANCE AND PROSPECTS B. Outlook and Risks The Mongolian economy is expected to recover moderately from the OUTLOOK AND pandemic, as the latest outbreak has added considerable uncertainty. RISKS Mongolia is expected to have experienced its first recession in a decade in 2020 as real GDP is estimated to contract by 5.2 percent (table I.2).27 Mongolia trails the Philippines, Thailand, and Malaysia, which are the other economies projected to be most impacted in the EAP region (box I.6). The mining and services sectors, particularly, are expected to be severely hit by weak external demand and COVID-19 containment measures. However, real GDP growth is projected to accelerate to about 5 percent in 2021-22, supported by a renewed drive of investment in the mining sector (compounded by higher-grade ore and increased production of gold) despite delay in the production schedule of Oyu Tolgoi’s underground development.28 Private investment backed by FDI and domestic credit (mainly corporate loans) will remain a key contributor to growth in 2021-22, especially in mining, manufacturing, and transport services. Private consumption will also support growth in the medium term. Monetary policy is expected to be tightened in the medium term as inflation and external sector pressures re-emerge. Inflation moderated in 2020 driven by weak domestic demand, lower imports, and negative credit growth. However, it will pick up gradually in 2021–22, while exceeding the BoM’s medium-term target as economic activity recovers.29 Moreover, relatively higher fiscal spending in 2020 compared to the previous two years and the expected recovery of domestic credit could generate inflationary pressures in 2021.30 Our base case is built on the continued commitment of the monetary authorities to price stability keeping inflation within the central bank’s target, which would eventually help lower inflation expectations. Interventions in the foreign exchange market are expected to be limited to smoothing excessive volatility, allowing more flexibility in exchange rate movements, and rebuilding international reserves. Further policy rate cuts are unlikely as the external environment remains uncertain and the central bank’s policy rate is already at a historical low (6 percent). In addition, the reserve requirement ratio stands at 6.5 percent, its lowest level since the 2008–09 global financial crisis, leaving little room for decreasing it further to induce liquidity into the financial system. Recently introduced monetary policy tools such as long-term repo transactions (which has availed MNT 230 billion to banks in Q4 2020 and up to MNT 250 billion 27 Our estimate of real GDP growth for 2020 contrasts squarely with overoptimistic growth assumptions of the 2021 budget, which considered a 1 percent contraction in 2020 and 7.2 percent growth in 2021 (see box I.3). 28 This increase in the gold production outlook is the result of initiatives implemented by Oyu Tolgoi that have brought the higher-grade gold-bearing ore from the South West pit forward into 2020 and 2021. The plan also allows for copper production growth of 315 percent from 2022 to 2028 as well as gold production growth of 140 percent in the same time frame. 29 Through the approval of 2021 monetary policy guidelines, the BoM reduced its inflation target rate for 2021–23 to 6 percent, with a +/-2-percentage- point band. 30 IMF 2012. 23 MONGOLIA ECONOMIC UPDATE From Relief to Recovery is expected in Q1 2021) could put further pressure on amount to approximately over 9 percent of GDP, which the domestic FX market amid weak FX inflows.31, 32 was financed mainly by external concessional lending and a drawdown of the government’s deposits in the Further loan forbearance by the BoM could lead to sovereign wealth fund. With a sizable revenue shortfall unintended effects including on economic growth in the   and fiscal relief measures, government debt is estimated medium term. As indicated earlier, the asset quality of to have risen in 2020 before declining gradually starting several banks has been threatened amid diminishing from 2021. However, Mongolia’s debt ratio remains high corporate earnings are  projected   to over decline the   to  past 2  percentfew  months. of  GDP  during In   2021–23  from  2.6  percent  of  GDP  in  2020  and  2.3  among comparators (figure I.40). addition, percentthe  in  2019.31  measures could be masking forbearance a significant amount of problematic loans as discussed After above. By  a   rise  in  2020, September 2020,   the   government over 20 percent   debt to‐GDP  Figure I.40. The government debt-to-GDP ratio of ‐the Figure I.40. The government debt‐to‐GDP ratio is  ratio banking   is  expected sector loan book   to had decline been   again   in  the reportedly   outer  years  is estimated to have risen in 2020 in many impacted estimated to have risen in 2020 in many selected  with  favorable by COVID-19. Therefore,   debt   dynamics advancing bank  in reforms part  driven would   by  a  selected peers  peers cyclical   recovery.   Before be critical to support growth in the medium term as   the   COVID ‐ 19   outbreak,   Government  debt (in percent Government debt (in  of  GDP)   of GDP) percent broadly prudent fiscal management in 2017–19 led to  100 several banks, especially those exposed to sector- Chile a  sharp  reduction  in  government  debt,  giving  the  distressed loans, lower earnings, and insufficient capital, 80 China government some room to craft a fiscal response. The  may be vulnerable. combination  of  increased  spending  and  an  expected  60 Kazakhstan 2021  inbudget The decline  revenueand  collection the  is  estimated to widen medium-term fiscal  the  Malaysia fiscal  deficit framework for 2021 - 23 are  broadly   considerably and  lead   to  an  increase consistent with   in  40 Mongolia government   debt.   The   fiscal consolidation and the debt reduction objective. three   phases   of   stimulus   20 Peru The packages government’s   combined   amount  to   Medium-Term approximately Fiscal Framework   over  9  percent projects   of  GDP, an overall budget  which deficit  was   financed of 1.5 percent  of mainly GDP,   by  0 Philippines 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020f 2021f 2022f externalin on average,   concessional 2021-23. However,   lending   and  a under   drawdown less optimistic   of  the  Russia government’s  deposits  in  the  sovereign  wealth  fund.  Sources: Sources:   IMF   2020;   World   Bank   staff   estimates.   revenue projections, we project that the overall IMF 2020; World Bank staff estimates. With  a  sizable  revenue  shortfall  and  fiscal  relief  fiscal deficit would average about 1.9 percent of GDP measures,  government  debt  is  estimated  to  have  risen  in  2020  before  declining  gradually  starting  from  during 2021-23. 2021.  However, Financial  Mongolia’s support  debtfrom  ratio multilateral remains high among  comparators (figure I.40).  and bilateral donors would be necessary to ensure Risks sustainable financing of the deficit. Interest payments,   Table I.2.  Key macroeconomic There is a  indicators large band   of uncertainty around the baseline reflecting projected concessional    financing, are projected 2016   2017   2018   forecast, with both upside 2019  2020e   2021f  risks. and downside 2022fIn   the to decline to 2 percent of GDP during 2021–23 from 2.6      Annual   percent  change   unless   indicated near term, the biggest risk is the inability to contain   otherwise   Real   GDP   growth,   at   percent of GDP in 2020 and 2.3 percent in 2019.constant   market   prices   33 1.4   5.4   7.0   5.0   ‐ 5.2   4.3   5.4   the latest outbreak, resulting in a prolonged lockdown.     Private Consumption  ‐2.2  5.4  12.4  9.9  2.0  3.6  4.5  After a rise in 2020, the government debt-to-GDP ratio This would take a significant toll on public health and     Government Consumption  10.6  ‐1.8  ‐0.8  11.5  17.5  ‐5.1  1.6  is expected to decline again in the outer years with the economy in the coming months. Other risks to the     Gross Fixed Capital Formation  0.5  35.6  21.3  23.5  ‐16.3  9.0  10.0  favorable debt dynamics in part driven by a cyclical growth outlook include the impact of further waves     Exports, Goods and Services  13.8  14.8  24.0  9.1  ‐5.0  13.4  7.4  recovery.    Imports, Before  Goods the  and COVID-19 outbreak, broadly of the COVID-19 global pandemic on commodity  Services  12.7  24.8  30.9  22.3  ‐9.0  14.1  8.4  prudent Real fiscal management in 2017–19 led to a sharp prices (especially coal and copper), a relaxation of  GDP growth, at constant factor prices  1.2  5.3  7.2  5.2  ‐5.2  4.3  5.4  reduction in government debt, giving the government the government’s commitment to reforms after the    Agriculture  6.2  1.8  4.5  8.4  10.8  5.0  6.0  some room to craft a fiscal response. The combination of COVID-19 pandemic, weather-related shocks (drought/    Industry (incl mining)  ‐0.4  0.7  7.9  3.1  ‐11.0  6.3  5.4  increased spending and an expected decline in revenue floods, a harsh winter), and limited progress on banking    Services  1.1  7.7  4.7  5.8  ‐5.7  2.5  5.2  collection is estimated to widen the fiscal deficit sector reforms (box I.5). A downside scenario of the Inflation (CPI, end‐period)  0.9  6.4  8.1  5.2  2.3  5.0  7.0  considerably and lead to an increase in government outlook could materialize if the impact of COVID-19 Current account balance (% of GDP)  ‐6.3  ‐10.2  ‐16.8  ‐15.4  ‐3.3  ‐7.7  ‐8.3  debt. The three phases of stimulus packages combined persists in advanced economies exacerbated by trade Financial and Capital account (% of GDP)  7.6  24.5  17.4  21.1  9.2  11.8  13.2     Net Foreign Direct Investment (% of GDP)*  1.1  12.7  16.3  16.5  12.5  14.0  15.0  31 The recent renewal of the border bottleneck with China following the domestic contagion of the COVID-19 in Mongolia is an additional external Fiscal sector pressure. In Balance of GDP)**  (% coal fact, coking   China recently soared to a four-year prices in ‐15.3  high‐3.8   Mongolia’s after 2.6  first local ‐9.5  of‐2.7 1.4  transmission the  COVID-19 ‐1.9 by mid- November 2020 resulted in emergency measures. These measures have slowed operations at the border crossings. Some traders have recently continued Primary Balance (% of GDP)  ‐10.1  to lift Mongolian coal prices after noting firm coking coal demand from Chinese end-users. 0.4  5.8  3.7  ‐6.9  ‐0.3  0.1  32 Public The Monetary  Debt Policy  (% of GDP)*** Committee   on December 18th that up to MNT decided 84.7  in funding 87.6 250 billion 72.6  would 69.0be  provided 73.0  and 77.7  exporters 79.4 to non-mining SMEs in Q1 2021. 33 *In 2016, the net FDI number excluded the transactions of Oyu Tolgoi‐2 project financing in May–June 2016.  One key feature of the government’s debt management strategy is to substitute expensive domestic debt with concessional borrowing and foreign debt ** Development obtained through refinancing Bank of Mongolia on preferential  (DBM) terms,  spending resulting  isa in  excluded  fromdecline considerable  fiscal balance  and payments in interest monitored  separately. in 2017-18.    24                                                              31  One  key  feature  of  the  government’s  debt  management  strategy  is  to  substitute  expensive  domestic  debt  with  concessional  borrowing  and  foreign  debt  obtained  through  refinancing  on  preferential  terms,  resulting  in  a  considerable  decline  in  interest  payments in 2017–18. 36  ECONOMIC PERFORMANCE AND PROSPECTS Table I.2. Key macroeconomic indicators 2016 2017 2018 2019 2020e 2021f 2022f Annual percent change unless indicated otherwise Real GDP growth, at constant market prices 1.4 5.4 7.0 5.0 -5.2 4.3 5.4 Private Consumption -2.2 5.4 12.4 9.9 2.0 3.6 4.5 Government Consumption 10.6 -1.8 -0.8 11.5 17.5 -5.1 1.6 Gross Fixed Capital Formation 0.5 35.6 21.3 23.5 -16.3 9.0 10.0 Exports, Goods and Services 13.8 14.8 24.0 9.1 -5.0 13.4 7.4 Imports, Goods and Services 12.7 24.8 30.9 22.3 -9.0 14.1 8.4 Real GDP growth, at constant factor prices 1.2 5.3 7.2 5.2 -5.2 4.3 5.4 Agriculture 6.2 1.8 4.5 8.4 10.8 5.0 6.0 Industry (incl mining) -0.4 0.7 7.9 3.1 -11.0 6.3 5.4 Services 1.1 7.7 4.7 5.8 -5.7 2.5 5.2 Inflation (CPI, end-period) 0.9 6.4 8.1 5.2 2.3 5.0 7.0 Current account balance (% of GDP) -6.3 -10.2 -16.8 -15.4 -3.3 -7.7 -8.3 Financial and Capital account (% of GDP) 7.6 24.5 17.4 21.1 9.2 11.8 13.2 Net Foreign Direct Investment (% of GDP)* 1.1 12.7 16.3 16.5 12.5 14.0 15.0 Fiscal Balance (% of GDP)** -15.3 -3.8 2.6 1.4 -9.5 -2.7 -1.9 Primary Balance (% of GDP) -10.1 0.4 5.8 3.7 -6.9 -0.3 0.1 Public Debt (% of GDP)*** 87.6 84.7 72.6 69.0 79.4 77.7 73.0 *In 2016, the net FDI number excluded the transactions of Oyu Tolgoi-2 project financing in May–June 2016. ** Development Bank of Mongolia (DBM) spending is excluded from fiscal balance and monitored separately. ***General government debt data exclude SOE debt and the central bank liability from the People’s Bank of China swap line. uncertainty between the United States and China. These used its available monetary and fiscal space to offset the events could severely cripple global demand, the price negative economic impacts of the COVID-19 pandemic. of key export commodities (particularly copper), and However, with the Bank of Mongolia’s policy rate now financial markets. Additionally, weather-related shocks at a historically low level, monetary policy space is (including potential risk of the dzud34) could affect limited to stimulate the economy if the pandemic non-mining exports (for example, meat and cashmere) persists. In addition, other monetary policy tools such and thus adversely impact the income of poor and as quantitative easing measures (including the recent vulnerable herders. Finally, the failure to gradually introduction of a long-term repo instrument) could return to fiscal discipline, as foreseen in the 2021 decrease the BoM’s space for further liquidity support. budget, could precipitate a deterioration in investor and After a sharp rise in 2020 largely driven by the COVID-19 consumer confidence and derail the incipient recovery. response package, government debt is expected to Inadequate recapitalization of the banking sector could remain elevated and thus erode the existing fiscal space. exacerbate these risks and furthermore affect planned Therefore, rebuilding fiscal buffers is a key priority in the official sector support. On a positive note, the Financial medium term. Action Task Force removed Mongolia from the list of External financing pressures could reemerge in the countries with inadequate protection against money medium term. Although exports are expected to laundering and terrorist financing, commonly referred to recover notably in 2021–22, an expected renewed as the “grey list.” This would positively affect FDI inflows drive in imports of investment-related merchandise and and boost the credibility of the financial sector. services will likely keep the current account in the red A shrinking fiscal and monetary space could pose in the coming years. Unless further external financing challenges to the Mongolian economy if the COVID-19 is timely and successfully mobilized, a higher current pandemic continues throughout 2021. Mongolia has account deficit could easily translate into a deficit in 34 Dzud “is a Mongolian term for a severe winter in which large number of livestock die, primarily due to starvation due to being unable to graze, in other cases directly from the cold” (https://en.wikipedia.org/wiki/Zud_(Mongolia). 25 MONGOLIA ECONOMIC UPDATE From Relief to Recovery Box I.5. Medium-term Banking Sector Strengthening Program for 2020–2023 On January 29, 2020, the Economic Standing Committee of the Parliament passed a resolution that authorized the Bank of Mongolia to implement the Medium-Term Banking Sector Strengthening Program for 2020–23. The program has five main objectives with detailed actions and expected outcomes: 1. To reduce ownership concentration of the banking sector and improve its governance, the BoM shall, among others, require banks to change their form from limited liability companies (LLCs) to joint stock companies (JSCs), limit the sum of shares with voting rights and offer some shares to the public, and make necessary changes in the legal framework to ensure the rights of the minority stakeholders. As a result, banks’ shareholding structure would be more diversified, and bank funding sources could be improved with public participation and oversight. 2. To continue enhancing the banking supervision and regulatory instruments to international standards, the BoM   introduce prudential ratios conforming with the Basel standards, establish a legal framework for risk-based shall   supervision, and collaborate with relevant authorities for effective enforcement. An expected outcome is a flexible risk-based banking supervision regulatory environment. 5. To  provide  specialized  banking  licenses  with  requirements  tailored  to  their  operations  and  business  3. To successfully complete the   International  anMonetary Fund (IMF) Extended Fund Facility Program , the BoM shall 5. models, To  provide  the  BoM   specialized shall  build banking   effective licenses  with legal  requirements framework  to  issue tailored  specialized   to  their  banking operations  licenses,  support    and  business   banks raise   ensure that introduction their of   additional FinTech   to   the capital   banking in  full sector,from   andlegitimate   modify   sources, the   take necessary supervisory   methodologyactions   on banks    accordingly. models, the BoM shall build an effective legal framework to issue specialized banking licenses, support   that failed to meet the capital introduction  of FinTech requirement,  to the banking and make  sector,an effort to reach  and modify  thean agreement  with  supervisory the IMF to methodology complete     accordingly. theSources:    BoM; minutes sixth review. As a result,  of the  Economic the resilience  Standing  Committee and soundness  meeting of  on January the banking system  29, will 2020. be   improved, and long-term Sources:growth economic  BoM; minutes will be  ofsustained.  the Economic Standing Committee meeting on January 29, 2020.  A  shrinking  fiscal  and  monetary  space  could  pose  challenges  to  the  Mongolian  economy  if  the  COVID‐   4. To enhance the effectiveness of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), the BoM 19 A   pandemic   shrinking   continues   fiscal   and  monetary   throughout   space   2021.   could   Mongolia   has  used  to   pose  challenges its  the available   Mongolian   monetary  economy  and  fiscal   if  the   space   COVID   to ‐  shall enhance the AML/CFT regulatory framework for banks and the effectiveness of its supervision with relevant 19  pandemic  continues  throughout  2021.  Mongolia  has  used  its  available  monetary  and  fiscal  space  to  offset   the   negative   economic   impacts   of   the   COVID ‐ 19   pandemic.   However,   with   the   Bank   of   Mongolia’s   authorities, support correspondent banking relationships of banks, and improve requirements and supervision of policy offset   rate the    now at a negative   economic historically    low level, impacts   of   monetary  the   COVID policy  ‐ 19    space is  limited pandemic. However,  to  stimulate with   the    the economy Bank   of    if the  Mongolia’s   bank shareholders and their paid-in capital. pandemic policy  rate persists.   now In  addition,  at a  historically  low   other  level,   monetary  monetary   policy tools  is policy  space such  limited  as  to quantitative  stimulate the   easing  economy   measures  if the    5. To provide specialized (including banking licenses  with of  a requirements tailored to their operations and business models, the   for  pandemic    the   recent persists.   In   introduction   addition,  other  long ‐term  repo monetary   policy   instrument)   tools  such   as   quantitative   could decrease   the   BoM’s   easing    measures space   BoM shall further build an effective   liquidity   support. legal framework   After   a  sharp torise issue specialized banking licenses, support introduction of FinTech (including   the  recent   introduction   of  a   long   term ‐ in   2020   repo  largely   driven   instrument)   by   the could   COVID   decrease ‐19   response   the   BoM’s  space package,  for    to the banking sector, and modify the supervisory methodology accordingly. government further  liquidity   debt   is  expected   support.   After   to   a    sharp remain   elevated   rise   in  2020   and   thus   largely   driven erode  by the   existing   the   COVID   fiscal   space.  Therefore, ‐19  response   package,    rebuilding government   fiscal   debt  buffers   is   expected is   a  key Sources: BoM; minutes of the Economic Standing Committee meeting on January 29, 2020.     to priority   remain   in    the elevated   medium   and  term.   thus     erode   the   existing   fiscal   space.   Therefore,   rebuilding External financing  fiscal buffers  pressures  is a key  could  priority reemerge  in the  medium term.  the balance in ofthe External payments.   medium  financing Despite,   term.  pressures the extension   Although  could   exports of swap  reemerge   are    Figure  I.41. The size of external bonds maturing during  Figure I.41. The size of external bonds maturing lines with expected the People’s   to   recover Bank   of notablyChina   in and   2021–22, successful   an   2022–24 Figure  I.41. is  significant The size of    external bonds maturing during  in  the  medium  term.  Although  exports  are  during 2022–24 is significant refinancing expected of immediate expected     to renewed payments   recover    notably drive of  in   US$570 in imports    2021–22, million,     anof  Payment   schedule   of   2022–24 is significant  sovereign bonds (million US$)     key a total ofinvestment expected US$2.1 billion ‐related   renewed     drive in sovereign merchandise in  imports   external   debt  and of  is   Payment  schedule Payment O/W  of key of schedule refinanced sovereign  bondsbonds key sovereign through the "Nomad"  bond (million (million (US$600  US$) mn)   US$) services still due investment during 2021–24   will  likely ‐related   keep   (figure  the  current merchandise I.41). In addition, 35  account   and  in   Government international bonds O/W refinanced through the "Nomad" bond (US$600 mn) the   servicesred    in will   the     likelycoming delayed implementation of ongoing reforms (including   keep     years. the  current   Unless  account  further  in     Government international bonds external the   red    infinancing   the   coming   is  timely   years.   and    successfully Unless   further     fiscal consolidation and the banking sector) and a mobilized, external   a  higher   financing   is  current timely   andaccount successfully  could   deficit    200 less effective response to the pandemic affect could  easily mobilized,   a    translate higher     into   aaccount current   deficit   in   the  deficit   200 Mongolia’s sovereign ratings and reduce the odds of balance could   of  payments.   easily   translate   into  a  deficit   Despite, the  extension   in  the    refinancing of under swap  favorable  lines  with the conditions. Although  of gross 800 balance of  payments. Despite,  the   People’s Bank   extension China    370 600 600 reserves reached and   successfula historically   refinancing high level   of of   immediate US$4.5 of  swap  lines with  the People’s  Bank  of China    370 800 billion (over eight payments and months   successful  of US$570   of  million,at imports) refinancing end-2020,   a total of  immediate of US$2.1 and     600 600 130 it is expectedbillion payments to   in remain   sovereign  of US$570 at that   external  million, level   a in debt  total the   is  of medium still  US$2.1   due    33 during still below term, it is billion   2021–24 100   percent(figure of   in  sovereign  external  debt  is  still  due    I.41). the IMF’s   In   addition, Assessing   130 2021 2022 2023 2024 delayed Reserve Adequacy during  2021–24   metric implementation (a ratio between   (figure    I.41). of  ongoing 33 100 and   reforms   In  addition, 150     Sources: MoF; Sources: MoF; BoM; 2021  BoM; World World 2022 Bank staff estimates.  Bank staff estimates.2023   2024 (including considered percent isdelayed   fiscal   consolidation adequate).   of  ongoing  reforms  Sources: MoF; BoM; World Bank staff estimates.    implementation 36   and   the   banking  sector) (including   fiscal   and   a  less  effective   consolidation     response and   the   to  the  pandemic  could  affect  Mongolia’s  sovereign  ratings  35 and banking The People’s   reduce Bank of China  sector)   the   swap  and odds line with     a  less of the BoM  refinancing   effective was renewed   under   response for another    favorable   theyears. tothree   conditions.   pandemic Also, no   could large   Although   affect of repayments   gross Mongolia’s the public   reserves debt  sovereign are due   reached until 2022,   a    ratings   to a successful   partly thanks historically high issuance   level   of a US$600of   US$4.5million billion international   (over bond   seven   months in September 2020   of   (with imports) a maturity at   end of 5.5 ‐ years 2020, with a and   it 5.1 percent   is   expected coupon). This to  and   reduce   the   odds   of   refinancing   under   favorable   conditions. issuance (i) helped reaffirm market sentiment toward Mongolia; (ii) helped repurchase three-fourths of a US$500 million bond due in 2021, and one-fifth of a   Although   gross   reserves   reached   a   US$1.0 billionremain historically bond due   at   that  high in 2022;    andlevel level   inof  the (iii) contributed US$4.5   medium  billion to interest   term,  (over savings of  approximately it   is  still  seven US$27  of   below  months 100   percent  imports) million per year,  at of    end  the according   IMF’s ‐2020, to  and  Assessing the government.  it is expected   Reserve to    36 Adequacy The assessing reserve adequacy   metric   (a metric   ratio reflects  betweenpotential 100   and balance-of-payments  150 remain  at  that  level  in  the  medium  term,  it  is  still  below  100  percent  of  the  IMF’s  Assessing  Reserve    percent   FX liquidityis   considered needs in adverse  adequate). circumstances   34 and is used to assess the adequacy of FX reserves against potential FX liquidity drains (see IMF 2016). Adequacy metric (a ratio between Box  100 I.6.   and 150 Global  and  percent  regional  is  considered  outlook  and risks adequate). a   34   26   Box I.6. Global and regional outlook and risksa                                                                 33   The  People’s  Bank  of  China  swap  line                                                                with  the  BoM  was  renewed  for  another  three  years.  Also,  no  large  repayments  of  the  ECONOMIC PERFORMANCE AND PROSPECTS Box I.6. Global and regional outlook and risksa The massive shock triggered by the COVID-19 pandemic and shutdown measures to contain it have plunged the global economy into a severe contractionb (figure I.42). In advanced economies, precautionary social distancing and stringent lockdowns in response to surging COVID-19 cases triggered an unprecedented collapse in the demand and supply of services in mid-2020, and the ensuing recovery has been dampened by a substantial resurgence of COVID-19 cases. The health and economic crisis triggered by COVID-19 caused emerging markets and developing economies (EMDE) output to shrink by an estimated 2.6 percent in 2020 - the worst rate since at least 1960. Excluding the recovery in China, the contraction in EMDE output in 2020 is estimated to have been 5 percent, reflecting recessions in over 80 percent of EMDEs-a higher share than during the global financial crisis, when activity shrank in about a third of EMDEs. The severity of the shock to EMDEs was uneven, depending on the intensity of pandemic-related domestic disruptions and the spillovers from the global recession. The worst-hit economies were those with extended periods of lockdowns combined with large domestic outbreaks or domestic policy uncertainty, and those that rely heavily on tourism and travel. Global economic output is expected to expand by 4 percent in 2021 but remain below pre-pandemic projections by more than 5 percent. This outlook is predicated on proper pandemic management and effective vaccination limiting the community spread of COVID-19 in many countries, and on continued monetary policy accommodation accompanied by diminishing fiscal support. Global growth is projected to moderate to 3.8 percent in 2022, weighed down by the pandemic’s lasting damage to potential growth. Although aggregate EMDE growth is envisioned to firm to 5 percent in 2021 and to moderate to 4.2 percent in 2022, the improvement largely reflects China’s expected rebound. Absent China, the recovery across EMDEs is anticipated to be far more muted, averaging 3.5 percent in 2021–22, as the pandemic’s lingering effects continue to weigh on consumption and investment. Despite the recovery, aggregate EMDE output in 2022 is expected to remain 6 percent below its pre-pandemic projection. The pandemic is expected to leave lasting scars on productivity, including through its effect on the accumulation of physical and human capital, which will exacerbate the downward trend in potential growth. Figure I.42. Real GDP growth (percent) Figure I.43. World commodity price forecast (Index=nominal U.S. dollars, 2016=100) Crude Oil Coking Coal Copper Gold World Advanced economies Emerging market and developing countries Sources: World Bank 2021; Consensus forecast. Sources: World Bank 2021; Consensus forecast. Investment in EMDEs collapsed in 2020, following a decade of persistent weakness. Some recovery of investment growth is expected to expand in 2021 but will not be sufficient to offset the 2020 loss. Based on the experience of past epidemics, investment is likely to remain weak for several years following the COVID-19 pandemic. A supportive policy environment will be key to laying the groundwork for an investment rebound in EMDEs. The COVID-19 shock has triggered a surge in debt levels and has exacerbated debt-related risks in EMDEs, where even before the pandemic, a rapid debt buildup had raised concerns about debt sustainability and the possibility of financial crisis. 27 MONGOLIA ECONOMIC UPDATE From Relief to Recovery Most commodity prices rebounded in the second half of 2020; however, the pickup in oil prices lagged the broader recovery in commodity prices due to the prolonged impact of the pandemic on global oil demand. Oil prices are forecast to remain close to current levels and average US$44 per barrel in 2021 before rising to US$50 per barrel in 2022. The main risk to this forecast relates to the evolution of the pandemic, with oil demand particularly susceptible to lockdown measures and reduced mobility; however, positive vaccine news has reduced this risk somewhat. Base metal prices were, on net, broadly flat in 2020, as sharp falls in the first half of the year were followed by a strong recovery in the second half due to rising demand from China. Prices are expected to increase 5 percent in 2021 alongside the expected rebound in global demand (figure I.43). Agricultural prices rose 4 percent in 2020, largely driven by supply shortfalls and stronger-than-expected demand in edible oils and meals. Some regions experienced localized food price spikes, and a decline in household incomes, particularly among the poorest populations, has increased the risk of food insecurity. Agricultural prices are forecast to see a further modest increase in 2021. After a sharp slowdown to 0.9 percent in 2020, output in East Asia and Pacific (EAP) is projected to Figure I.44. East Asia and Pacific country forecasts expand 7.4 percent in 2021, to a level still around Real GDP growth (at market prices, y/y) 3 percent below pre-pandemic projections (figure I.44). Growth in China is projected to accelerate to 7.9 percent this year, reflecting the release of pent-up demand and a quicker-than-expected resumption of production and exports. Growth is expected to slow to 5.2 percent in 2022, well below its pre-pandemic potential rate, leaving output about 2 percent below pre-pandemic projections. In the rest of the region, the recovery is expected to be more protracted. Following last year’s contraction, output in the region excluding China is expected to expand by 4.9 percent in 2021 and 5.2 percent in 2022, to a level around 7.5 percent below pre-pandemic projections, with Source: World Bank 2021. significant cross-country variations. While global growth is projected to recover in 2021, it will be weaker if a protracted pandemic requires an extension of control measures, the COVID-19 vaccine procurement and distribution are delayed, and a prolonged disruption to economic activity exacerbates financial stress resulting in a widespread financial and debt crises. For instance, fiscal measures have replaced a proportion of lost incomes and mitigated default risk, loan guarantees have helped keep businesses afloat, and liquidity provision by central banks has kept the financial system functional. However, if the impact of the pandemic continues to grow, financial crises may follow, resulting in a collapse in lending, a longer global recession, and a slower recovery. Even if the global financial system avoids a crisis, the debt accumulated in response to the pandemic may weigh on growth in the longer run. Sources: World Bank 2020b; 2021. Note: a. This box draws heavily on World Bank (2021). b. World Bank 2021. 28 PERFORMANCE AND PROSPECTS II. COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA A. Channels of COVID-19 Shocks to Households 32 B. Impacts on Employment and Labor Income 34 C. Impacts on Non-labor Income 40 D. Potential Impacts on Poverty 41 E. Potential Mitigation Impacts of Policy Responses 45 29 MONGOLIA ECONOMIC UPDATE From Relief to Recovery II. COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA 37 A. Channels of COVID-19 Shocks to some businesses remain closed and other containment Households measures continue as of end-January 2021.38 Mongolia went into nationwide lockdown for the Despite fewer confirmed cases in Mongolia than in second time on November 12, 2020. At the beginning neighboring countries, the household-level shocks of the COVID-19 outbreak, the Government of Mongolia caused by COVID-19 may be long-lasting and took early and decisive measures to prevent the disproportionally affect the poor and vulnerable. The inflow of COVID-19, including closures of its borders poor and vulnerable generally have limited resources and all schools (figure II.1). As confirmed cases grew to protect themselves and are therefore likely to be globally, greater travel restriction measures have been most exposed to the negative impacts of many shocks. imposed: the Trans-Siberian Railway and all inbound COVID-19-related shocks are no exception, and given international flights were suspended and the border their breadth and persistence, they have the potential with Russia was closed. The government also canceled to threaten the sustainability of poverty reduction Mongolia’s national Lunar New Year celebrations efforts. While the poverty rate in Mongolia declined and restricted travels in Ulaanbaatar and all 21 during 2016–18, the speed of poverty reduction has aimags (provinces). As these prompt containment and slowed, and much of the population is still clustered mobility restriction measures appeared to have been just above the national poverty line. When a shock hits, effective in preventing the local spread of COVID-19 these vulnerable households can easily fall back into in Mongolia, the government gradually lifted strict poverty while the poor can sink into deeper poverty. measures from May 31 and schools reopened on COVID-19-related shocks may lead to adverse effects September 1, 2020. However, in mid-November, after on various dimensions of household well-being the first locally transmitted cases were verified, the through various transmission channels. Figure II.2 government imposed a strict nationwide lockdown, illustrates how the effects of COVID-19 are transmitted and while strict containment measures were lifted, at the household and individual level. The impact of 37 This chapter was prepared by Ikuko Uochi (Economist) and Lydia Kim (Consultant) of the Poverty and Equity Global Practice at the World Bank. 38 As of January 31, 2021, 1,779 cases were confirmed (https://coronavirus.jhu.edu/region/mongolia). 30 also canceled Mongolia’s national Lunar New Year celebrations and restricted travels in Ulaanbaatar and  all  21  aimags  (provinces).  As  these  prompt  containment  and  mobility  restriction  measures  appeared  to  have  been  effective  in  preventing  the  local  spread  of  COVID‐19  in  Mongolia,  the  government  gradually  lifted  strict  measures  from  May  31  and  schools  reopened  on  September  1,  2020.  However,  in  mid‐ COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA November,  after  the  first  locally  transmitted  cases  were  verified,  the  government  imposed  a  strict  nationwide lockdown, and while strict containment measures were lifted, some businesses remain closed  and other containment measures continue as of end‐January 2021.36  Figure II.1. Authorities tightened containment measures as the number of COVID-19 cases increased Figure II.1. Authorities tightened containment measures as the number of COVID‐19 cases increased  Stringency Stringency of government  of government measures  measures  toto contain  contain ‐19 and COVID-19  COVID andconfirmed COVID-19  confirmed  COVID‐ 19 cases  cases 60 100 New COVID-19 cases Stringency index 90 50 New COVID-19 cases 80 Stringency index 70 40 60 30 50 40 20 30   20 10 10 their breadth 0  and persistence, they have the potential to threaten the sustainability of poverty 0  reduction  efforts. While the poverty rate in Mongolia declined during 2016–18, the speed of poverty reduction has  slowed,  and  much  of  the  population  is  still  clustered  just  above  the  national  poverty  line.  When  a     shock  Source: hits,    Oxford these    University  vulnerable  (OxCGRT).   households   can   easily   fall   back  into   poverty   while   the   poor   can  sink   into   deeper  Source:  TheUniversity Oxford Note:  stringency(OxCGRT).  index measures the stringency of government containment measures, including school and workplace  poverty.    Note: The stringency index measures the stringency of government containment measures, including school and workplace closings and closings and restrictions on gatherings in response to COVID‐19. Higher values indicate more stringent measures.  restrictions on gatherings in response to COVID-19. Higher values indicate more stringent measures. COVID‐19‐related  shocks  may  lead  to  adverse  effects  on  various  dimensions  of  household  well‐being  Despite various through fewer  confirmed  transmission   cases   in  Mongolia  channels.  Figure   than   in  II.2   neighboring  illustrates  how   countries,  the effects   the  of  household  COVID‐19  ‐are level   shocks     transmitted COVID-19 caused at can  by COVID   the  household be divided  ‐and 19 may into be economic   individual long  ‐ lasting level.  and and The   social   ofto  disproportionally impact service   COVID  delivery can the  affect ‐19 disruptions be   divided poor  and   into in health,  vulnerable.   economic  The education,   and poor       social impacts. The and vulnerable impacts. economic impact  generally   The  economic  have limited   impact is further   is  furtherdivided  resources   divided into  to  protect and into  labor social  themselves protection.   income,  and non are This ‐labor section  therefore   income, of  likely   andthe  to  be most   pricereport will       shocks laborexposed on income,   to  consumption.   the  negative non-labor  Given income,  impacts  the and  of  relatively   many price shocks  limited   shocks. on   COVID  number of ‐ 19‐related  primarily COVID focus   shocks on the ‐19 infections   are   no economic  in   exception,  Mongolia, aspects of     and  households given  are  COVID-19 consumption. more  likely Given   to  bethe relatively   impacted indirectnumber   by limited   economic of   shocks.shocks   Theat the household   social   impacts  of level and explore   the  pandemic   are how   mainlythe                                                              COVID-19 infections in Mongolia,   households are more impacts of COVID-19 are translated from aggregate related  to service delivery disruptions in health, education, and social protection. This section of the report  35  This chapter was prepared by Ikuko Uochi (Economist) and Lydia Kim (Consultant) of the Poverty and Equity Global Practice at  will likely the to primarily   World be impacted  Bank.  focus   by  on  the economic indirect economic  aspects shocks. of The COVID ‐19 shocks shocks  at the household to households and individuals  level and and  explore estimate the   how the social 36  impacts  As impacts  of January  of  COVID  31,the  2021,  ‐ 19 are pandemic 1,779  translated  cases are  weremainly  from  confirmed  aggregate related  shocks to potential  households effects  (https://coronavirus.jhu.edu/region/mongolia).  and individuals of COVID-19 on the poverty  and estimate rate.   the potential effects of COVID‐19 on the poverty rate.  41  Figure II.2. Transmission Figure channels of COVID-19  II.2. Transmission impacts  channels  ofto households  COVID ‐19 impacts to households  Direct:   lost earnings to illness Labor income Indirect: earnings/employ- ment shocks Household Coping Strategies: Economic • Reduced total impact food/education/health Remittance consumption COVID-19 Shocks on • Household labor/entering Non-labor income households work force Public transfers • Use saving, borrowing • Selling assets • Risk pooling Price changes and • Government assistance and goods’ shortage other aids, etc. Consumption Out of pocket cost of health care Social impact Service disruption   Sources: Modified based on World Bank (2020a).  Sources: Modified based on World Bank (2020a). B. Impacts on Employment and Labor Income   The  COVID‐19  Household  Phone  Response  Survey  (HRPS)  shows  that  the  pandemic  caused  significant31  disruptions in employment (box II.1).  Almost 19 percent of workers who had been working pre‐crisis38  37 had stopped working by the end of May 2020, with two‐thirds out of work due to COVID‐19‐related issues  such  as  mandated  business  closures,  quarantine,  or  other  reasons  caused  by  mobility  restrictions.  Between June and September, some recovery in employment was visible, as nearly half of those who had  MONGOLIA ECONOMIC UPDATE From Relief to Recovery B. Impacts on Employment and Labor other reasons caused by mobility restrictions. Between Income June and September, some recovery in employment was visible, as nearly half of those who had been out The COVID-19 Household Phone Response Survey of work by late May had returned to work by early (HRPS) shows that the pandemic caused significant September. However, with the rise in COVID-19 cases disruptions in employment (box II.1).39 Almost 19 in early November and stricter containment measures, percent of workers who had been working pre-crisis40 the share of individuals working pre-crisis who were no had stopped working by the end of May 2020, with longer working rose to 51 percent by early December two-thirds out of work due to COVID-19-related issues 2020 (figure II.3). such as mandated business closures, quarantine, or Box II.1. Mongolia COVID-19 Household Response Phone Survey To explore transmission channels of COVID-19 shocks to households, the analysis in this report uses data from three rounds of the Mongolia COVID-19 Household Response Phone Survey (HRPS). The HRPS was jointly implemented by the National Statistics Office of Mongolia (NSO) and the World Bank with the aim of monitoring the economic and social impacts of the pandemic at the household level. The HRPS drew a subsample of 2,000 households from the nationally representative 2018 Household Socio-Economic Survey (HSES) and aimed to monitor and collect information from the same households across multiple rounds. The first round took place from May 22 to 29, 2020; the second from August 31 to September 7, 2020; and the third from December 3 to 15, 2020. The second lockdown occurred in mid-November to December 2020, which overlaps with the reference period for the third round of the HRPS. Comparison of the third-round results to other rounds in the HRPS or to any other surveys would be sensitive considering the timing and intensity of the containment measures. As the HRPS was phone-based, the sample is representative of households that have access to a telephone. Out of 16,454 households sampled in the 2018 HSES, 95.1 percent had a valid working phone number. Sampling weights were constructed to ensure unbiased estimates from the sample,a and the sample distribution of the HRPS is similar to that of the 2018 HSES on key household characteristics such as location, education level of household head, and poverty status. The HRPS questionnaire covers a range of topics, including knowledge and behavior associated with COVID-19, employment, family business, herders’ livelihood, income, access to food and basic services, methods of coping with the crisis, and safety nets. Table II.1. Overview of HRPS Rounds 1–3 Round 1 Round 2 Round 3 Data collection period May 22 to 29, 2020 August 31 to September 7, December 3 to 15, 2020 2020 Implementation method Computer-assisted telephone interviewing (CATI) Number of respondents 1,333 households 1,212 households 1,147 households Response rate 66.7 percent (out of 90.9 percent (out of 1,333 94.6 percent (out of 1,212 2,000 households households interviewed in households interviewed in sub-sampled from Round 1) Round 2) 2018 HSES) Sources: HPRS Rounds 1, 2, and 3; https://www.worldbank.org/en/country/mongolia/brief/monitoring-covid-19-impacts-on-households-in-mongolia. Note: a. Himelein 2014. 39 Respondents who “stopped working” in the HRPS refers to those who did not work for permanent or temporary reasons during the week preceding the survey, while they had worked in previous rounds or pre-pandemic. Please note that the definition of “stopped working” in the HRPS is different from the definition of unemployment in the Labor Force Survey, which refers to a person who is actively looking for a job during the last 30 days preceding the survey and is ready to start to work but is unable to find work. 40 In the HRPS, pre-crisis and pre-pandemic are defined as before January 27, 2020. 32 COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA While the majority of these shocks to employment been particularly affected.41 Shares of those who appear to have been temporary, poorer workers were stopped working by December 2020 among the more likely to face long-term job losses. About 6 out industry sectors - namely, manufacturing, utilities, of 10 respondents to the HRPS who stopped working construction, and mining - reached 70 percent (figure between June and December 2020 indicated that they II.4). In particular, the construction and manufacturing had a job to return to once stringent containment sectors were heavily affected by the lockdown that measures have been lifted. Although this likelihood is occurred in mid-November to December 2020, which similar across the welfare distribution, poorer workers overlaps with the reference frame for the third round have been significantly more likely to face long-term of the HRPS. As many construction sites and factories unemployment: Among those who were working pre- reopened once mobility restrictions eased, disruptions pandemic, 21 percent of workers in the bottom 40 of in employment in the industry sector are likely to the welfare distribution had stopped working by June be temporary: nearly two out of three of those who and continued to be unemployed by December, while stopped working in the industry sector reported they just 11 percent of those in the top 60 had. have a job to return to. Private service sectors such as accommodation, restaurants, and transportation, as Although the employment impacts of the crisis have well as retail trade and other services (for example, extended across most economic sectors, industry, personal services and recreation/entertainment),   tourism, hospitality, transportation, and trade have have also faced sizable employment shocks. While a   Figure Figure  II.3.II.3.  MoreMore than  than half  half of workers  of workers  whowho worked  worked  pre‐ Figure   Figure II.4.  II.4. Large  Large shares  shares of  of workers  workers in  in the  the   industry pre-pandemic pandemic  stopped Figure II.3. stopped working  More than  half by working by of  workers the the second  whosecond  lockdown   ‐  worked pre and   Figure private industry  and  II.4. services  private  Large  shares sectors  services faced  sectors  of workers employment  in the  faced     lockdown pandemic stopped working by the second lockdown  disruptions employment industry  disruptions  and private    sectors faced   services Employment status change for those working pre‐pandemic    employment  who  stopped working between    disruptions Share of workers Employmentstatus Employment change for those working pre-pandemic ShareShare of workers who stopped working between  status  change  for those  working  pre‐pandemic     of workers Jan  who  and  2020,  by  stopped  Dec working  between  subsector Jan and Dec 2020, by subsector      Jan and Dec 2020, by subsector  Private sector services 40 32 72 Private sector services 40 32 72 Industry 43 27 70 Industry 43 27 70 Other services 36 30 66 Other services 36 30 66 Retail Retail trade trade 34 34 26 26 60 60 Public admin, Public education, admin, education, 35 20 20 15 15 35 health health Agriculture 11 22 32 Agriculture 11 22 32 0 50 100 0 50 100 percent of respondents working pre-crisis percent of respondents working pre-crisis not working but have a job to return to not working but have a job to return to not working and don't have a job to return to not working and don't have a job to return to       Sources: Sources:  HRPS HRPS  Rounds Rounds  1 and 1 and  3; World 3; World Bank Bank staff  estimates. staff estimates.   Note:  Industry  includes  mining,  manufacturing,  utilities,  and  Sources:  HRPS includes Note: Industry Rounds mining, 1 and 3;  staff estimates.  World Bankutilities, manufacturing,   and construction; Note:   Industry construction; private sector   includes  private services sector   mining, include services   manufacturing,  include accommodation accommodation and food   utilities,    and  services, construction; and communication, finance, real estate and transportation. Other services include   food other  private   services, service  sector communication,  activities;  services arts,  include   finance, entertainment,   real  accommodation and   estate   and  recreation;   transportation. and  food  services, activities of households as employers; and activities of extraterritorial organizations.  Other   communication, services include other  service   finance,  activities;   real   estate   and  arts,   entertainment, transportation.   and  Other   recreation;  services   activities  include  other   of   households  service    activities;   as  employers; arts,  and activities   entertainment,   and  of  extraterritorial recreation;  organizations.   activities     of  households   as employers; and activities of extraterritorial organizations.  These sectors are referred to as “affected sectors,” and workers engaged in these sectors are referred to as “affected workers” in this report. 41   Although the employment impacts of the crisis have extended across most economic sectors, industry,    who  33   39 tourism, Although   hospitality,  the  employment   transportation,  impacts of    and crisis  have the  trade have  been   particularly extended  across   affected. most economic   Shares   of  those  sectors,  industry,   stopped tourism,   working  by   hospitality,   December  2020   transportation,   and  among   trade  the   industry   have   been   particularly sectors―namely,   manufacturing,   affected. 39   Shares  of   utilities,     those  who   construction, stopped   working   and     mining   by December―reached   2020     70   percent among   the   (figure   II.4). industry   In  particular,   sectors ―namely,    the   construction   utilities, manufacturing, and    manufacturing  sectors  were  heavily  affected  by  the  lockdown  that  occurred  in  mid‐November  to  construction,  and  mining―reached  70  percent  (figure  II.4).  In  particular,  the  construction  and  December  2020,  which  overlaps  with  the  reference  frame  for  the  third  round  of  the  HRPS.  As  many  MONGOLIA ECONOMIC UPDATE From Relief to Recovery large share of those working in these service sectors decline of carried passengers, and another nationwide had stopped working between January and December lockdown from November 2020 halted the steady 2020, these employment disruptions likely happened recovery of passenger railway use that began over during the strict second lockdown, and more than the summer. Travel restrictions critically impacted half of those out of work have a job to return to.42 In tourism-related sectors (such as accommodations contrast, workers employed in the agriculture, public and restaurants), retail businesses, transportation, administration, health, and education sectors are by far and other services (such as personal services and less affected. Even under the second lockdown, only recreation). The number of tourists entering Mongolia about one-third of those were out of work. However, more than halved in the first quarter of 2020 compared once farmers and herders lose a job, they are less likely to the same period of 2019. It further declined to less to be able to return to the same job even after the than 10,000 people during the peak tourist season lockdown is lifted. in the second and third quarters (figure II.7). As 70 percent of tourists came to the country during the Two out of three workers who stopped working bet- second and third quarters in recent years, a prolonged ween January and December 2020 were employed in decline in tourism flows worsened the impact on the the aforementioned affected sectors. In 2019, about tourism sector. half of workers in Mongolia (48 percent of the employed   population or 557,000 people) were engaged in the COVID-19-related mobility restrictions and disruptions affected sectors (figure II.5). However, among workers also decreased domestic private consumption in who experienced job losses between the 40 onset of transportation, retail, hospitality, and other services, of  crisis out  the workand   have   a   job   to   return December 2020, almost 1.4 times this   to.   In  contrast,   workers  employed  in  the  agriculture,  public  including personal services and recreation. Figure II.8 administration, share was from   health,   and  education the affected sectors. Overall,   sectors   are nearly 3  by exhibits affected. far  less Google   Even data, mobility under indicate  lockdown,   the  second which how   onlyin about   one ‐ third   of   those   were 10 workers who faced disruptions were employed in   out   of   work.   However,   once   farmers   and   herders   busy certain types of locations are compared to alose   a   job,   they   are   likely to be less industries,  able  to  return and 6 in 10 in services.   to  the  same   job   even   after  the lockdown five-week period from  isearly  lifted.   January to February 2020.  out of three workers TwoTourism-related  whowere stopped  working The data show a significant  between January and December 2020 decline in the number  were of  employed   service sectors severely hit due trips to retail and recreation places, grocery stores, to  early in  the aforementioned and prolonged   affected   sectors. As travel restrictions. In shown 2019,  about  half  of  workers  in  Mongolia  (48  percent  of  the  and transportation stations during February to April employed   population   or   557,000   in figure II.6, the first lockdown, during which the people)   were   engaged  in  the  affected  sectors  (figure  II.5).  However,  and again during November to December 2020. In among  workers Government  who of  experienced Mongolia suspended  job  losses all  between the onset of the  crisis and December 2020, almost  international particular, a sharp drop in visits to these places is visible 1.4 times flights, this road  share  was and rail  from travel,  the and  affected closed  sectors. Overall, nonessential  nearly 3 in 10 workers who faced disruptions  in the last week of February and in mid-November, were  employed businesses  in industries, last February resulted  and 6 in in 10 a  significant in services.  when the government restricted nonessential travel in  affected Figure Figure II.5. Share of workers II.5. Share in 2019 in affected sectors in 2019   of workers sectors Manufacturing Construction Mining Utilities Retail trade Transportation Other services Accommodations, restaurants Not affected 8 6 5 3 14 5 4 3 52 0 10 20 30 40 50 60 70 80 90 100 Percent of employed workers     Sources:  NSO; LFS 2019; World Bank staff estimates.  Sources: NSO; LFS 2019; World Bank staff estimates. Tourism‐related  service  sectors  were  severely  hit  due  to  early  and  prolonged  travel  restrictions.  As  While more than 60 percent of those working in services sectors including accommodation and restaurants, retail trade, transportation, professional or 42 shown   in activities, technical figurereal  II.6,   the estate,   first finance,   lockdown, insurance,   and information, during   which communication   the had   Government stopped   of working by December   Mongolia 2020,   suspended previous rounds of the HRPS   all  show that job losses were relatively small in these sectors until September 2020, before lockdown measures were put in place. international  flights,  road  and  rail  travel,  and  closed  nonessential  businesses  last  February  resulted  in  a  34 significant  decline of carried passengers, and another nationwide lockdown from November 2020 halted  the  steady  recovery  of  passenger  railway  use  that  began  over  the  summer.  Travel  restrictions  critically  impacted  tourism‐related  sectors  (such  as  accommodations  and  restaurants),  retail  businesses,  transportation,  and  other  services  (such  as  personal  services  and  recreation).  The  number  of  tourists  COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA     Figure II.6. The number of carried passengers in Figure II.7. The number of tourists in 2020 was Figure II.6.  The number Figure  of  II.6. The  carried  of  number passengers  in 2020   in 2020  carried passengers   Figure    II.7.  The number   Figure  of  II.7. The  tourists  number  in 2020 was 2020 declined during the first and second declined during the first and second lockdowns   lockdowns considerably lower than ofin tourists considerably lower than in previous years   in 2020 was  previous years declined during the first and second lockdowns   considerably lower than in previous years  600 600   300   300 Number of carried passengers (thousands) Flight Railway Mar-19 Number of carried passengers (thousands) Flight Railway 261 261 500 500 229 250 229 Number of tourists (thousands) 250 Number of tourists (thousands)   400 400 200 200 142 142 300 300 150 132150 132 98 98 99 99 200  II.6. The Figure 200 number of carried passengers in 2020  70 II.7.   Figure 100  The 100  number of 75 70 75 tourists in 2020 was  declined 100   during  the first and second lockdowns   considerably 50   lower   than  in previous 36  years 36   100 50 600   300 7 10 7 10 Number of carried passengers (thousands) 0 0 Flight Railway 0 0 261 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 500 Jan-19 May-19 Sep-19 Nov-19 Jan-20 May-20 Sep-20 Nov-20 Jul-19 Mar-20 Jul-20 Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 Jan-19 May-19 Sep-19 Nov-19 Jan-20 May-20 Sep-20 Nov-20 Mar-19 Jul-19 Mar-20 Jul-20 250 229 Number of tourists (thousands)       400 200   Sources: Sources:  NSO; NSO;  World Sources: World  Bank  NSO; Bank  staff  World staff estimates.    Bank staff  estimates.  estimates. Note: Note:  Number Number Note: of passengers  of  Number passengers  includes  of passengers includes  both both  domestic  includes domestic  and and both  international  domestic  and international  travel.    travel.    international travel. 142 300 150 132 98 99 and COVID 200 ‐19 ordered ‐related COVIDbusiness ‐19  mobility ‐related and  restrictions mobility closures. school  and disruptions restrictions  and disruptions Despite  also(figure  decreased  also100    domestic decreased II.9, panel 70  private  domestic  consumption b). Without 75  private consumption  in  appropriate  in   policy transportation, transportation,  retail, hospitality,  retail,    and other hospitality,    services, and  other   including services,    personal  personal including services  and  recreation. services  and    Figure recreation.    Figure  an increase100 in mobility between April and November, responses 50 and aid, these small firms are likely to face 36 II.8  exhibits II.8 Google    exhibits   Google  data,   mobility mobility   which   data,   indicate   which  how indicate  busy   certain   how   busy   types   certain types  of     of  locations are  compared locations   are  compared   to  a 7 10   to  a  COVID-19-related five‐0week  period five ‐week disruptions  from period  early  January  fromhave  early continued  to  February  January having  to  February 2020. The a  2020.significant  data  The show  a  data operating 0  significant  show a significant constraints  decline  in  the number  decline as  in thetheir   numberaccess   to detrimental of trips to effect  retail  on  and livelihoods  recreation - particularly  places,  grocery during  stores,  and finance  transportation is relatively  stations during limited, and their  February   February to April employers    to April might Q1-18 Q2-18 Q3-18 Q4-18 Q1-19 Q2-19 Q3-19 Q4-19 Q1-20 Q2-20 Q3-20 of  trips to retail  and recreation  places,  grocery  stores,  and transportation  stations  during   Jan-19 May-19 Sep-19 Nov-19 Jan-20 May-20 Sep-20 Nov-20 Mar-19 Jul-19 Mar-20 Jul-20 and again the second  during and lockdown  again  November  during in November  to December  November 2020 - 2020.  to December in the  Inretail,  particular,  2020. In particular,  a sharp have to  drop  a  in  sharp lay off visits  drop  to  in employees  these  visits  places  toor these  is  visible reduce places   is visible working hours.     in  the  last Sources: hospitality, in  NSO;   week   the personal   last  World February   of  Bankweek  services,   of     staff and February estimates. and   inrecreation   mid  and ‐November,   in  mid ‐November, sectors,  when  the   government   when Wage the  government  workers   restricted in the   nonessential   restricted trade and travel    travel  hospitality   nonessential   sectors and ordered Note:  Number and   business ordered of  passengers and  includes  business school  and   closures.  school both  domestic Despite   closures.  and  an  increase  Despite international  an  in  mobility increase travel. mobility  between     in  between April and  November,  April  and November,    which COVID are ‐concentrated 19 ‐related in urban   disruptions areas.   have   continued   having  a are also  effect less  likely to be ― given employee benefits COVID ‐19 ‐related  disruptions   have  continued   having detrimental   a  detrimental on   livelihoods   effect particularly   on  livelihoods   ―particularly   during COVID ‐   the 19   second during ‐ related   the      lockdown mobility second  restrictions lockdown   in  November   in  and    2020   November ―in disruptions   the   2020  such  ― also retail, as in  decreased the social   hospitality, insurance   retail,  domestic   personal hospitality,   and    personal services, private paid     services, consumptionleave and    and (figure in   II.9, affected sectors, The recreation service  which sectors  are are characterized  concentrated  in urban by    panel c). Moreover, workers in the affected sectors  areas. recreation  sectors,  which  are  concentrated in urban  areas.    personal services and recreation. Figure  transportation,  retail, relatively high informality and low skill levels,  including  hospitality,  and  other  services, generally have lower levels II.8Figure   exhibits   Google   mobility   data,   which   indicate   how   busy   certain   types   of   locations areeducation    of   compared compared   to  a  rendering  workers II.8.  The mobility Figure  II.8. in  these The  of  people  of  mobilitysectors to  people get certain more  to  services  get  certain vulnerable  was  significantly  services to  was others  affected  significantly working  by  government  affected in  by government sectors characterized   by greater five ‐ week restrictions   period    restrictions   from      early   January   to   February   2020.   The   data   show   a   significant   decline   in   the   number   negative to of  trips 3 to employment  retail  3and shocks.  recreation Over  places, half grocery of workers  stores,  and transportation   locations as stations  during  February  to ‐day  moving ‐day  average  moving  of  Mongolia’s  average  mobility  of Mongolia’s  data  at specific  mobility  data formality,  at  specific  (% such change locations  public  from (%  change administration,  the  baseline)  from the   baseline)    April  real education, retail in and  againtrade 100 during and November transportation Retail  to & are self-employed  December recreation Retail & recreation  2020. In particular, estate,  a sharp  drop in visits and finance. Workplace  to these  places is closures and visible   business 100 in  theII.9, (figure   last panel of 80   week 80 a). In Grocery   February the & trade and   in  mid pharmacy Grocery sector ‐November, & pharmacy and in   when   the  government disruptions endanger   restricted their   nonessential business   travel   continuity, Transit stations Transit stations theand accommodation  ordered  business and  and restaurant  school closures. sector, where,  Despite  an increase   in   mobility   between   April   and   November,   Percentage change from baseline Percentage change from baseline 60 60 and without job security, low-skilled and informal COVID‐19 respectively, 40 ‐related 44 percent 40  disruptions and 70   havepercent   continued of workers   having  a  detrimental  effect  on  livelihoods―particularly  workers face a higher risk of losing their job and labor are paid   the during 20   second employees, 20   more lockdown than   in   November  2020 three-quarters are ―inincome   the  retail,  hospitality,  personal  services,  and  recreation sources. 0  sectors,   which   are   concentrated  in   urban  areas.    working for small firms with fewer than 50 employees 0 -20 -20 Figure II.8. The mobility of people to get certain services was significantly affected by government  Figure II.8. -40 The mobility -40 of people to get certain services was significantly affected by government restrictions restrictions -60    -60 day moving 3‐-80 3-day average -80  of Mongolia’s moving average  mobility of Mongolia’s  data mobility  at specific data  locations locations (% at specific (% change  from change from  the the  baseline)  baseline) Feb-20 Mar-20 Feb-20 Apr-20 Mar-20 May-20 Apr-20 Jun-20 May-20 Jul-20 Jun-20 Aug-20 Jul-20 Sep-20 Aug-20 Oct-20 Sep-20 Nov-20 Oct-20 Dec-20 Nov-20 Dec-20 100 Retail & recreation     Sources: Google  Community Sources:  Mobility Grocery &    Google Community  Report  (as of Mobility pharmacy  December Report  (as of 30, 2020).  30, 2020).  December 80  baseline is the median value for the corresponding day of the week during the five‐week period Jan 3–Feb 6, 2020.   Note: The Note: The baseline is stations  value for the corresponding day of the week during the five‐week period Jan 3–Feb 6, 2020.    the median Transit Percentage change from baseline 60 40 The   affected The  affected service   sectors service   are   characterized sectors   by  relatively   are  characterized   high  informality   by  relatively   and  low   high  informality    and    low skill levels,     levels,    skill rendering 20   workers rendering   in  these workers    sectors in   these  more     sectorsvulnerable   more     to   negative vulnerable   to     employment negative     shocks. employment    Over   shocks. half     of Over     half  of  0 -20 46  46  -40 -60     -80 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20   Sources: Google Community Mobility Report (as of December 30, 2020).  Sources: Google Community Mobility Report (as of December 30, 2020). Note: The baseline is the median value for the corresponding day of the week during the five‐week period Jan 3–Feb 6, 2020.   Note: The baseline is the median value for the corresponding day of the week during the five-week period Jan 3–Feb 6, 2020. The  affected  service  sectors  are  characterized  by  relatively  high  informality  and  low  skill  levels,  35 rendering  workers  in  these  sectors  more  vulnerable  to  negative  employment  shocks.  Over  half  of  46  (figure  II.9,  panel  b).  Without  appropriate  policy  responses  and  aid,  these  small  firms  are  likely  to  face  significant operating constraints as their access to finance is relatively limited, and their employers might  have to lay off employees or reduce working hours. Wage workers in the trade and hospitality sectors are  also less likely to be given employee benefits such as social insurance and paid leave (figure II.9, panel c).  Moreover, MONGOLIA   workers   in  the ECONOMIC   affected UPDATE   sectors From   generally Relief   have  lower  levels  of  education  compared  to  others  to Recovery working  in  sectors  characterized  by  greater  formality,  such  as  public  administration,  education,  real  estate, and finance. Workplace closures and business disruptions endanger their business continuity, and  without  job  security,  low‐skilled  and  informal  workers  face  a  higher  risk  of  losing  their  job  and  labor  II.9. Lower-skilled Figure sources. income   individuals working in the informal sectors are most vulnerable Panel A. Figure II.9. Lower ‐skilled individuals working in the  informal Panel B.  sectors are most vulnerable  Panel C. Type of employment Enterprise size of  wage workers Wage workers with social insurance Panel A. Type of employment  Panel  B. Enterprise size of wage workers  Panel  C. Wage workers with social  insurance  Trade 44 55 Trade 43 33 24 Trade 71 Hotels, 70 30 Hotels, restaurants 38 53 8 Hotels, restaurants 63 restaurants Transportation 21 19 58 Transportation 9 31 61 Transportation 88 All non-farm 29 41 28 All non-farm All non-farm sectors 16 40 44 86 sectors sectors de and transportation are self‐employed (figure 0 20 40 panel  II.9, 60 80  a).  In the trade sector and  100 0 20 40 60 80 100 0 20 40 60 80 100 wage(public)  44 percent on and restaurant sector, where, respectively,  and 70 percent of workers  wage(private) less than 10 10-50 50 and more , more than three‐quarters are working   for self-employed  small  firms Others with   fewer  than  50   employees     ).  Without  appropriate  policy  responses  and  aid,  these  small  firms  are  likely  to  face    g constraints as their access  Sources: to finance Sources:    NSO; NSO; isHSES HSES 2018;  relatively 2018; limited,  LFS 2018; LFS 2018;  and World   their World Bank  Bank staff  employers staff estimates.  estimates.  might     oyees or reduce working hours. Wage workers in the trade and hospitality sectors are     given employee benefits such as social insurance and paid leave (figure II.9, panel c).  Despite Despite in  the  affected  sectors  generally considerable   considerable   have   lower  levels negative   of negative    educationimpacts on employment   impacts   compared    on   to     others 2020. Among businesses that were still operating over in particular sectors, the pandemic has led to Figure  II.10.  Non‐farm  business  owners were  significant, were hit severely   characterized  by  greater  employment formality,   such   asin     particular   public   sectors,   administration,   education,  the  even   real   this period, income losses particularly Reduction in household income between December 2019 and   Workplace closures and businesspandemic more  disruptions widespread  has  led   to  even  endanger reductions   in  their more  business labor   widespread  continuity, income. Nearly    December  and  2020the during   second lockdown, in which more than half y,  low‐skilled  and  informal   workers  face reductions  in a   higher  labor   risk  of  losing  income.  Nearly   their 6   out job  andof 10  labor     6 out of 10 households in Mongolia engaged in labor 100of non-farm businesses experienced a 60 percent loss households a in   Mongolia engaged in  income   in  this labor   Percent of households with specified source of experienced decrease from source or more in income compared 87 to the same time in the illed individuals working in the  informal sectors experienced   a   are  most vulnerable decrease   in     income   from   this   mployment  compared to Panel B. Enterprise size of wage workers  the same period of previous Panel C. Wage workers with social insurance  year (figure previous 80 year. source II.10).   comparedwith Households   to  the   same businesses non-farm period  of were 68 previous  33year   (figure  II.10). Trade Households   with  55 Trade most likely 43 to24be affected, with almost 71 9 out of 10 60Although 57 nonagricultural sectors have been more income non‐farm  businesses  were  most  likely  to  be  likely to experience employment shocks, disruptions 70 30 participating 53 households restaurantsreductions suffering in income Hotels, restaurants 38 affected,  with  almostHotels, 8  9 out  of 10 participating63   in supply chains 36 contractions in external demand and from this source. According to the Household Response 40 9 58 Transportationhouseholds 9 31 61  suffering  Transportation reductions  in 88income  for livestock products have led to significant earnings Phone from  this Survey   source. (HRPS),  Accordingby June   to2020, more than   the  Household   40 41 28 All non-farm percent16 40 of households44 All operating non-farm losses among rural herders. Most herders and farmers sectors non-farm 86 businesses 20 sectors Response  Phone Survey  (HRPS),  by June  2020,  40 60 80 100 pre-pandemic 80had temporarily or permanently closed continued to work in the initial months of the pandemic, wage(private) more0 20  than 40 60 40 percent  100  of households 0 20 operating 40 60 80 100   less than 10 their 10-50 business, 50 and more and closures continued into with very few reporting that they stopped working from Others non‐ farm  businesses   pre ‐pandemic   December had    0   January However, employment to June. Wages Total labor Non-farm disruptions in Agriculture temporarily 18; LFS 2018; World Bank staff estimates.     or  permanently  closed  their  income business Figure II.10. business,   and Non-farm   closures business   continued owners  were intohit   Sources: agriculture have increased since then: By December    NSO, HRPS Round 3; World Bank staff estimates.  severely 2020, a third of individuals who had been working ble  negative  impacts  onDecember    2020. Among businesses that were  Note:  The  sample  is  restricted  to  households  with  the  specified  particular  sectors,  thestill   Figure  II.10. Non   operating ‐farm   over  business   this  owners   period,  were hit   income severely    losses     source in agriculture of income before  for each the  category pandemic  for the were   no longer  last 12 months. ReductionReduction  in household in household  income  between income between  December  2019 and  o  even  more  widespreadwere   December   significant, December  2020     2019 particularly and December 2020   the    during working. In addition, two out of three households income. Nearly 6 out of 10  100 engaged in agricultural activities experienced a ngolia  engaged  in  labor  Percent of households with specified source of 87 ease  in  income  from  this  significant decline in agricultural income in 2020 80 47  to  the  same  period  of  68 (figure II.10). Many herders depend on the harvest re  II.10).  Households  with  60 57 of cashmere, which is the most lucrative livestock income es  were  most  likely  to  be  product. However, contractions in the global demand   st 9 out of 10 participating  36 ng  reductions  in  income  40 for cashmere that have coincided with the peak season ccording  to  the  Household  for harvesting cashmere has resulted in significant 20 rvey (HRPS), by June 2020,  negative impacts on herders’ cash income. Negative nt of households operating  ses  pre‐pandemic  had  0 income shocks to rural herders are particularly Total labor Wages Non-farm Agriculture ermanently  closed  their  income business detrimental because income growth among this group osures  continued  into  Sources:   Sources: NSO, NSO, HRPS HRPS Round  Round 3; World  3; WorldBank  Bank staff staff estimates. estimates.  was the biggest driver of the recent poverty reduction mong businesses that were  Note: Note: The   The   sample sample is  restricted is  restricted to  households to  households   with with   the the   specified  specified this  period,  income  losses  source of income for each category for the last 12 months.  (between 2016 and 2018). source of income for each category for the last 12 months. particularly  during  the  36 47    COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA While poor workers were more likely to experience distribution between June and December 2020, employment losses43 during the first half of 2020, both particularly during the second lockdown, when most employment and income losses were felt similarly businesses were ordered to close. across the welfare distribution during the second lockdown. Although poor households are more likely Given high participation among the wealthy in retail to work in agriculture - which was less affected by the trade and non-farm businesses, mandated closures had pandemic in terms of employment losses compared a significant impact on employment among the top to other sectors - engagement in low-skilled jobs in quintiles in the latter half of 2020. While the wealthy the above-mentioned affected sectors, particularly may have been less vulnerable to job losses during manufacturing, utilities, mining, and personal services, the first half of 2020, income losses were generally is also high among poorer workers. Generally, about felt across the welfare distribution throughout the two in three workers in the bottom 20 percent of the year, and more than half of households in all welfare welfare distribution are employed in low-skilled jobs.44 quintiles faced income losses in 2020 (figure II.11, Workers at the top of the welfare distribution are more panel B). Lower external and internal demand, business likely to have formal job protection or skilled jobs in closures, and reduced work hours have resulted in services that may be more amenable to working from lower wages and/or business profits throughout the home such as professions in public administration, distribution. The HRPS data indicate that, generally, finance, and other professional jobs. Indeed, workers the wealthy suffered greater percentage and absolute at the bottom of the welfare distribution, namely the losses than poorer households, although the marginal bottom 20 percent, were significantly more likely effect per tugrug on well-being is likely to be higher to face job losses between January and June 2020, for poorer households. This implies that the economic when mobility restrictions were still low and business contraction in 2020 has so far had a widespread impact closures were not mandated by the government across the welfare distribution. (figure II.11, panel A). However, disruptions in     employment were more widespread across the Figure II.11. Employment and income losses across welfare distribution Figure  II.11. Figure  Employment  II.11.  and  income  Employment  losses and income  across  losses  welfare  across  distribution  welfare    distribution  Panel A. Panel Panel A. Stopped Stopped  working  A. Stopped working due to  due to  working    dueCOVID  to COVID COVID-19‐19  ‐19  Panel B. Income Panel Panel  B. B.  loss  Income Income  between  loss loss between Dec  between 2019 Dec Dec and  2019 2019  Dec and  2020  and Dec  Dec 2020  2020 80 80 80 80 Jan - Jun 2020 Jan Jun - Dec - Jun 2020 Jun2020 - Dec 2020 69 69 Percent of households with labor income Percent of households with labor income 70 70 60 60 58 58 60 60 54 54 54 54 53 53 Percent of workers Percent of workers 50 50 40 40 36 36 40 40 31 31 29 29 27 27 25 25 30 30 19 19 20 20 15 15 13 13 20 20 12 12 9 9 10 10 0 0 0 0 Q1 (poorest) Q2 Q1 (poorest) Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 (wealthiest) (wealthiest) (poorest) (poorest) (wealthiest) (wealthiest)               Sources: Sources: Sources:  NSO; NSO; HRPS  NSO; HRPS 2020   HRPS 2020 Rounds 1 Rounds  2020 Rounds  1  and and 3;  3;  1  World  and World Bank  Bank  3; World staff staff  estimates.  Bank estimates.   staff estimates.  Note: Note:  The Note: The  samplesample  The in sample   in panel panel in  A is  restricted A is restricted  panel  A isto  to respondents  restricted  to who respondents  who respondents were the  same  were the same   were whoacross the    rounds across same  across 1 and  rounds  1 A and  rounds 3. Panel uses 3.  1  Panel  and those  3. who  Astopped  uses  Panel  A  those uses  who  those working   who  due stopped to   working stopped   due   working COVID-19-related   to reasons   such due COVID   toas ‐ 19‐related   COVID workplace   reasons ‐19‐related and   such  such   reasons school asquarantine, closures,   workplace   and   as  workplace and    school and  school stay-at-home  closures,   closures, orders   quarantine, under the   and   stay   quarantine, government’s and ‐ at‐home stay ‐at‐home containment     orders  under orders measures.  the government’s  under  the government’s  containment  measures.  containment    measures.       Geographically, Geographically,   urban   urban  households   households   have   been   have     been   Figure  II.12. Figure  Urban  II.12.  workers  Urban  were  workers  more  were  likely  more  to stop  likely  to stop  more  likely more  to face  likely  to  face the   economic the economic  repercussions  repercussions  of   of   working working  in 2020    in 2020   COVID ‐19. ‐19. COVID Employment   Employment   in   the in   thehighly   affected   highly   affected    50 50 sectors  is concentrated sectors  is concentrated  in urban  in urban  areas:  82 percent  areas:  82 percent     43 Employment losses include temporary work disruptions under nationwide lockdowns due to COVID-19. of respondents working pre-crisis of   those   working in  these Bank  2020;  Bank sectors in  urban   live  live   of respondents working pre-crisis 44 NSO of  the and those World   working in  these   World   sectors 2018.   in  urban   40 40 40 40 36 36 areas,   mainly areas,   Ulaanbaatar,   mainly   Ulaanbaatar,   which   is  significantly   which   is  significantly     higher   than   the  overall   share   (62  percent)   among   37 higher   than the  overall   share (62  percent)   among   30 30 all  workers. all  workers.   Those   living   Those   in  Ulaanbaatar   living   in  Ulaanbaatar   or  Aimag     or  Aimag   centers  were centers  at least  were  1.9 and  at least  1.9 3.9 and  times  3.9 times more  likely  more    likely   20 20 18 18 to  stop   working to  stop   between   working   between   January   January  and  and December   December     MONGOLIA ECONOMIC UPDATE From Relief to Recovery Geographically, urban households have been Also, under the COVID-19 pandemic, unemployed more likely to face the economic repercussions of and inactive individuals face further difficulties in COVID-19. Employment in the highly affected sectors searching for a job, leading to a greater likelihood is concentrated in urban areas: 82 percent of those of sinking into deeper poverty. Even without the Figure II.11. Employment and working  income lossesin these sectors  across welfare live in   urban areas, mainly  distribution COVID-19 pandemic, poverty headcount rates for ed working due to COVID‐19  Panel B. Income loss between Dec 2019 and Dec 2020  Ulaanbaatar, which is significantly higher than the unemployed and economically inactive individuals 80 un 2020 Jun - Dec 2020 overall share (62 percent) among 69 all workers. Those were significantly higher compared to the employed or Percent of households with labor income living in Ulaanbaatar 60 58 54 or Aimag 54 centers 53 were at least retiree population. The poor and near-poor, who have 36 1.9 and 3.9 times more likely to stop working between low levels of human capital, are less likely to be able 40 25 31 January and December 2020 than those living in Soum 29 to meet labor market needs and often face difficulties 12 13 centers and 20 the countryside, respectively (figure II.12). in finding a job. Being unemployed or economically 9 In particular, poor workers residing in urban areas inactive means no labor income, translating into lower 0 Q2 Q3 Q4 Q5 are more likely Q1 to be Q2 engagedQ3 inQ4 informal, Q5 part-time, consumption and a higher chance of staying in poverty. (wealthiest) (poorest) (wealthiest) and  small   businesses in the affected sectors    and are The COVID-19 pandemic can exacerbate the already 20 Rounds 1 and 3; World Bank staff estimates.  anel A is restricted to respondents thus whoexposed  were the same a higher to across 1 and of  rounds risk job Alosses 3. Panel  uses those  who  their than devastating situation and high poverty rates for this to  COVID‐19‐related  reasons  such wealthier counterparts.   as  workplace   and  school  closures,  quarantine,  and  stay‐at‐home  segment of the population. nment’s containment measures.  ban  households  have  been Figure   II.12. Urban workers were more likely to Figure II.12. Urban workers were more likely to stop  C. Impacts on Non-labor Income he economic repercussions of   working stop working in 2020  in 2020   ment  in  the  highly  affected  Remittances are a critical income source for recipient 50 ted in urban areas: 82 percent  households, but their inflows are expected to fall Percent of respondents working Percent of respondents working pre-crisis n  these  sectors  live  in  urban  40 nbaatar,  which  is  significantly  40 36 during the COVID-19 pandemic. According to the 2018 rall  share  (62  percent)  among  HSES, 18 percent of households received some sort of 30 iving  in  Ulaanbaatar  or  Aimag  pre-crisis private remittance in the last 12 months prior to the t 1.9 and 3.9 times more likely  20 18 tween  January  and  December  survey. In Mongolia, most remittances are domestic ving  in  Soum  centers  and  the  10 9 transfers: only 2 percent of households received private ectively  (figure  II.12).  In  transfers from abroad. By consumption levels, wealthier rkers  residing  in  urban  areas  0 be  engaged  in  informal,  part‐ Ulaanbaatar Aimag center Soum center Countryside households are more likely to receive remittances, with   inesses  in  the  affected  sectors   Sources:   NSO;   HRPS   2020   Round Sources: NSO; HRPS 2020 Round 3; World Bank staff   3;  World   Bank   staff  estimates. 24 percent of households in the wealthiest quintile ed to a higher risk of job losses  estimates.   Note: Ulaanbaatar Note: Ulaanbaatar and aimag centers  and aimag are are  centers considered  consideredurban.  urban.  receiving remittances, while only about 14 percent  counterparts.  of the bottom 40 percent of households receiving g  impacts  across  various  sectors,  the  pandemic  has  affected  similarly  women  and  e likelihood of being out of  work. them (figure II.13). However, as shown in figure II.14, Due to Compared  to men, far-reaching  women impacts  are more across  likely sectors, various to work  the ch as education, health, personal services, and hospitality, while men are more likely  regardless of household welfare level, remittances are pandemic has affected similarly women and men in sectors such as construction and mining. As the economic  impacts of COVID‐19 have  a critical income source for all remittance-receiving terms ss multiple industry and service likelihood of the both  sectors,  womenof being  and  men haveout  of work. faced Compared  job losses.   ests  that  female‐headed  households households, accounting for one-quarter to one-third of have  been to men,  women   similarly are more   likely   to  experience likely to work income   in service ed households.   their total household income. The COVID-19 disruptions sectors such as education, health, personal services, VID‐19  pandemic,  unemployed  and  inactive  individuals  face  further  difficulties  in  can significantly affect the employment status of and hospitality, while men are more likely to work ,  leading  to  a  greater  likelihood  of  sinking  into  deeper  poverty.  Even  without  the  migrant workers, and, thus, inflow of remittances. The , poverty headcount ratesin  for industry unemployed sectors such as  construction  and economically inactive individuals and mining.  were   impact might be long-lasting if businesses where compared to the employed As the economic impacts of COVID-19 have been   or   retiree  population.   The   poor  and   near ‐ poor,   who   have    capital, are less likely to be able to meet labor market needs and often face difficulties  migrant workers are engaged do not improve quickly. extensive across multiple industry and service sectors, g unemployed or economically inactive means no labor income, translating into lower  For the poor and vulnerable recipient households that both women and men have faced job losses. The HRPS heavily rely on remittances and have little savings or also 49   suggests that female-headed households have assets to buffer themselves, the remittance impacts been similarly likely to experience income losses as   compound their existing vulnerabilities. will male-headed households. 38 Other  non Other non ‐‐ labor labor income,   income, notably   notably   public public  transfers, transfers,  represents represents an  important   an important  shareshare  of of  household household income   income    for the for  poor. Although  the poor.  Although labor  labor income  income accounts  accounts for  more  for more  than  than 60  percent of  60 percent  household income  of household  for the  income for  poor,    the poor, one one ‐‐ third third  of of  their income  comes their  income comes  from from  social social  transfers transfers such  as   such child  money, as  child other  social money,  other protection   social  protection COVID  -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA programs, programs,   and and   pensions.43 pensions. 43    According According to    the to   HRPS the  HRPS    (Round (Round 3),  3),   only only   33  percent percent    of of  social social  assistance   assistance recipients recipients    have have faced   faced   disruptions disruptions   in   in receiving receiving    government government assistance   assistance  under under   the   the pandemic.   pandemic. Figure Figure    II.13. II.13.    Percent Percent    of of households   households   receiving receiving a    a   Figure Figure II.14.   II.14.    Share Share of       of remittance remittance    to to    total total   household household   Figure II.13. remittance, remittance, 2018    Percent 2018   of households receiving a Figure income income    II.14. Share (among (among households    of remittance households    thatto that  total receivedhousehold received a    a   remittance, 2018 income (among remittance) remittance)    households that received a remittance) 30 30 40% 40% receiving households receiving total to total 35% 35% 25 25 30% 30% remittance to 20 20 of remittance 25% 25% income household income of households remittance remittance 15 15 20% 20% 24.0 24.0 15% 15% 33% 33% household 10 10 30% 30% 18.3 18.3 26% 26% 27% 27% 27% 27% shares of 14.3 14.3 14.2 14.2 15.5 15.5 10% 10% Percent of Average shares 55 Percent 5% 5% 00 Average 0% 0% Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Q1 Q1 Q2 Q2 Q3 Q3 Q4 Q4 Q5 Q5 Incomedistribution Income fromlowest distributionfrom tohighest lowestto highest Income Incomedistribution fromlowest distributionfrom tohighest lowestto highest Sources: NSO, HSES 2018; World Bank staff estimates.       Sources: Note:   Sources:  NSO, NSO, Error  HSES  HSES bars  2018;  2018; in figures  World  World show  Bank  Bank 95 percent  confidence staff  staff  estimates.  estimates.    intervals. Note: Note: Error  Error  bars  bars  in  in  figures  figures  show  show 95  95 percent  percent  confidence  confidence  intervals.    intervals. Other non-labor income, notably public transfers, in 2020 for the baseline scenario and a 50 percent represents an important share of household income decline for all quarters in 2020 for the lower-case D. D. Potential  Impacts Potential Impacts  on Poverty   on  Poverty    for the poor. Although labor income accounts for more scenario. The employment-output elasticities used as This This section    thansection assesses    60 percent assesses the  the of  household   potential potential income   impacts impacts for the  of   of the   the poor, COVID COVID ‐‐ inputs 19   19 pandemic pandemic on   on into the simulation   the   the national national    poverty poverty are calculated headcount   headcount based on    rate rate    by one-third of their  income by   adapting adapting aa   macro macro ‐‐ comes micro micro from simulation    simulation social transfers model.44    model. 44    The The information ADePT    ADePT macro    macro of sectoral micro ‐‐ GDPmicro simulation    simulation growth    combines combines   and employment 45 45 macroeconomic macroeconomic such as child money,   projections projections other social and   and household   household protection   welfare welfare programs, and   and profile   profile changes from   from between  2010  the the latest   latest   household household and 2018, and the  survey survey population and   and   and pensions. According to the HRPS (Round 3), only 45 growth forecasts are based on the latest UN World                                                                                                                            43 3 percent of social assistance recipients have faced 43 Population Prospects (2019). NSO NSO  and  and  World  World  Bank  Bank  2020.  2020.    44 disruptions in receiving government assistance under 44  The  The  microsimulation  microsimulation  model  model  used  used  in  in  this  this  report  report  is  is  outlined  outlined  in  in  Olivieri  Olivieri  et  et al.  al.  (2014).  (2014).    45 HSES 45 HSES the  2018  2018 .. pandemic. The simulation results suggest that without mitigation measures there would be an increase of 5.9 to 7.9 D. Potential Impacts on Poverty 50 50    percentage points in the national poverty rate in 2020, compared to the pre-COVID forecast. This is equivalent This section assesses the potential impacts of to adding approximately 195,000 to 260,000 people    the COVID-19 pandemic on the national poverty into poverty (figures II.15 and II.16). Even without the headcount rate by adapting a macro-micro simulation COVID-19 pandemic, the recent increasing food prices model. The ADePT macro-micro simulation combines 46 placed great stress on poorer households, slowing macroeconomic projections and household welfare the speed of poverty reduction between 2019 and and profile from the latest household survey47 and then 2020 under the pre-COVID case.48 With deteriorating incorporates microsimulation assumptions related to economic forecasts under the COVID-19 pandemic, the labor market, non-labor income, and price changes the poverty rate would go up to 31.7 and 33.6 percent to project distributional and poverty effects of these in the baseline and lower case, respectively, meaning assumptions. Table II.2. summarizes GDP and price that over 1 million people in Mongolia would be under projections for three scenarios: (i) pre-COVID case the poverty line. The impacts of COVID-19 would last (business as usual), (ii) baseline case, and (iii) lower beyond the current pandemic and will not be easily case. The baseline and lower-case scenarios also recovered. With the projected slower-paced recovery, incorporate adverse remittance flow in the simulation, the baseline case simulation results suggest that with assuming a 50 percent decline for two quarters poverty rate of 2022 would not go back to the level 45 NSO and World Bank 2020. 46 The microsimulation model used in this report is outlined in Olivieri et al. (2014). 47 HSES 2018. 48 The poverty line in the simulation was adjusted by the difference in food and non-food inflation rates. Since the ratio of food consumption to total consumption in the poverty line is 51 percent, which is significantly higher than the ratio of food items in the CPI basket (26 percent), higher food price inflation relative to non-food inflation would shift the poverty line upward, pushing more people under the poverty line. 39 MONGOLIA ECONOMIC UPDATE From Relief to Recovery Table II.2. GDP growth and inflation assumptionsа (1) Pre-COVID Case (business as usual) 2018 2019 F 2020 E 2021 E 2022 E Agriculture 4.5% 4.5% 4.4% 4.4% 5.0% Industry including mining 7.9% 3.4% 3.1% 5.6% 5.7% Services 4.7% 6.8% 6.2% 6.2% 6.7% Total 7.2% 5.8% 5.3% 5.6% 5.8% (2) Baseline Case 2018 2019 2020 E 2021 E 2022 E Agriculture 4.5% 8.4% 10.8% 5.0% 6.0% Industry including mining 7.9% 3.1% -11.0% 6.3% 5.4% Services 4.7% 5.8% -5.1% 2.9% 5.2% Total 7.2% 5.2% -5.2% 4.3% 5.4% (3) Lower Case 2018 2019 2020 E 2021 E 2022 E Agriculture 4.5% 8.4% 9.4% 4.0% 5.0% Industry including mining 7.9% 3.1% -12.2% 2.9% 3.9% Services 4.7% 5.8% -7.9% 1.6% 3.0% Total 7.2% 5.2% -7.1% 2.4% 3.5% Inflation (YoY) for pre-COVID case 2018 2019 2020 E 2021 E 2022 E Total CPI 8.1% 5.2% 7.0% 8.0% 8.5% Food CPI 9.1% 8.3% 11.0% 9.0% 8.6% Non-Food CPI 7.8% 4.2% 5.6% 7.6% 8.5% Inflation (YoY) for Baseline and lower cases 2018 2019 2020 E 2021 E 2022 E Total CPI 8.1% 5.2% 2.3% 5.0% 7.0% Food CPI 9.1% 8.3% 8.5% 8.0% 8.2% Non-Food CPI 7.8% 4.2% 0.1% 4.0% 6.6% Note: a. The pre-COVID case was based on forecasts from the Mongolia Economic Update (as of January 2020), whose 2019 GDP was a forecast since the final 2019 GDP figure was not published at that time. Baseline and lower cases are the latest World Bank forecasts provided as of January 18, 2021. 40 pandemic pandemic  and  and  will  will  not  not  be  easily  be  easily  recovered.  recovered.  With  With  the  the  projected  projected  slower  slower ‐paced ‐paced  recovery,  recovery,  the  the  baseline  baseline  case  case     simulation simulation  results  results  suggest  suggest  that  that  poverty  poverty  rate  rate  of  2022  of  2022  would  would  not  not  go  back  go  back to to  the  the  level  level  of  2018,  of  2018,  and  and  nearly  nearly   1  1  million million  people  people  would  would  remain  remain  in in     poverty. poverty.  Given  Given  the  the  limited  limited  share  share  of  remittance  of  remittance ‐receiving ‐receiving  households,  households,  the  the     overall overall  impacts  impacts  of  of  remittances  remittances  are are relatively  relatively  limited.  limited.   Without   Without  COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA     adverse  adverse     impacts impacts  in    in remittances,  remittances,  the    the  poverty poverty rates rates  are  are  projected  projected  to to  increase  increase  by  by  5.5  5.5  to  6.4  to  6.4  percentage  percentage  points  points  in   in  the the  baseline  baseline  and and  lower  lower ‐case ‐case  scenarios,  scenarios,     respectively. respectively.         Figure  Figure  Figure II.15.  II.15.  II.15.  Projected Projected  Projected poverty  poverty rates  povertyrates  rates     Figure Figure Figure  II.16. II.16. Projected Projected  Projected  II.16.  number  number  of number of  of poor  poor  poor people  people  people      36 36 1,200 1,200 33.6 33.6 1,098 1,098 1,084 1,084 National Poverty headcount rate (%) National Poverty headcount rate (%) 32.8 32.8 34 34 1,046 1,046 Number of poor (thousands) Number of poor (thousands) 31.3 31.3 1,100 1,100 32 32 1,000 1,000 30 30 31.7 31.7 1,035 1,035 30.5 30.5 1,007 1,007 28 28 900900 959959 28.4 28.4 28.7 28.7 26 26 905905 26.9 26.9 800800 871871 841841 24 24 25.8 25.8 796796 700700 22 22 24.1 24.1 746746 20 20 22.3 22.3 600600 20182018 2019E 2019E 2020F 2020F 2021F 2021F 2022F 2022F 20182018 2019E 2019E 2020F 2020F 2021F 2021F 2022F 2022F (actual) (actual) (actual) (actual) Pre-covid Pre-covid Baseline Baseline Lower Lower case case Pre-covid Pre-covid Baseline Baseline Lower Lower case case                     Source: Source: Source:  World  World World  Bank  Bank Bank  staff staff  estimates  staff  estimates estimates  (ADePT (ADePT  (ADePT  simulation).  simulation). simulation).     Source: Source: Source:  World  Bank  World World Bank  Bank staff staff staff  estimates  estimates  estimates (ADePT (ADePT  simulation).  (ADePT  simulation).  simulation).     Note: Note:  Impacts  Impacts Note: Impacts of   of COVID of  COVID ‐19 ‐related ‐19 COVID-19-related ‐related  mitigation  mitigation mitigation by the  by  responses  responses responses  by  the  the     Note:   Impacts Note: Note:   Impacts Impacts   of of COVID   of   COVID ‐19 COVID-19-related ‐related ‐19 ‐related  mitigation   mitigation mitigation by the   by   responses   responses responses   by     government government government  were were not  were  included  not  included not in the  included  in poverty the in  the projection.  poverty  poverty  projection.  projection.     government the the   government were not   government  included   were were the   innot   not   poverty   included includedprojection.    inthe   in   the   poverty   poverty     projection. projection.        2018, and nearly 1 million people would remain in of among     the poorest population group that would poverty. Given the limited share of remittance-receiving expect a consumption decline by 18 percent between The The  welfare households, welfare  impact  impact the  on overall  the  on  the    poor, poor, impacts  particularly  particularly of remittances  among  among  the  the 2018  “new and poor,”  “new  poor,” 2020  would  would under the be  lower-case be significantly  significantly scenario  higher  higher  than (figure than    thatthat     observed observed   in    in   the the  are relatively limited. Without adverse impacts in   restrest  of     ofthe  the     population. population.   The  The     COVID COVID II.17).‐ 19‐ 19   Aseconomic   economic a result,     impacts the impacts depth     would would and   affect   severityaffect     households of households poverty     across across   all    allincome   income     classes, classes, remittances, the poverty rates are projected to increase  but  but  the the  relative  relative    welfare welfare     impact, impact,     withwith   the   the    absence absence   would worsen, with an increase of 3.4 percentageof  of     effective effective  mitigation  mitigation    policies, policies,       is by is highest  5.5 highest to  among 6.4  among   the percentage   the   poorest   poorestpoints  in population   populationthe baseline   group   group   that and   that   would   would points   expect   expect in the poverty a  consumption   a  consumption gap, and 1.9   decline   decline percentage   by  by  18 18   percent   percent  points in     between between     2018 2018   lower-case scenarios, respectively.   and and   2020   2020   under   under     the the    lower lower ‐ ‐ casecase   scenario   scenario the poverty severity index. Among the poor population,       (figure   (figure     II.17). II.17).   As     Asa   a   result, result,   the   the    depthdepth   and  and     severity severity ofof  poverty  poverty  would would  worsen,  worsen,  with with  an  an  increase  increase  of  3.4  of  3.4  percentage  percentage notably  points  points the “new in   the in  the poverty poor,”  poverty who became  gap, gap,  and  and poor  1.9 1.9  percentage in  percentage 2020 due     The points points welfare   in   inthe   the impact   poverty   poverty on the   severity   severity poor,  index.particularly   index.   Among   Among among   the  the   poor   poor population,  to   population, the COVID-19   notably   notably economic   the   the  “new   “new shocks,   poor,”   poor,” would   who  who be   became   became severely     the poorpoor “new   in  in  poor,” 2020 2020 would   due  due   to  be   tothe   the significantly   COVID   COVID ‐19 ‐19higher   economic than  that   economic   shocks, shocks, affected. Their welfare would decline significantly     would   would   be  be  severely   severely   affected.   affected.     TheirTheir   welfare   welfare     would would   observed decline decline in the rest  of  significantly  significantly the population.  because because  they they  would  would The be COVID-19  forced  be  forced  to  to  decrease  decrease because  their  their they  per would  per  capita  capita be  consumption forced  consumption to decrease  by by  their  27  27 to to  31 per  31     economic percent percent  from impacts  from  2018 2018 would  to  2020  to  2020 affect in   real in households  real  terms  terms across  (figure  (figure all II.18).  II.18).    capita consumption by 27 to 31 percent from 2018 to    income classes, but the relative welfare impact, with 2020 in real terms (figure II.18). the absence of effective mitigation policies, is highest Figure Figure   II.17. Figure II.17.   Consumption II.17.  growth growth Consumption Consumption  growth   incidence incidence incidence (% (%   (%    change Figure Figure II.18.   II.18. Figure   Average Average II.18.   welfare Averagewelfare welfare  loss loss  from lossfrom from 2018   2018 2018 to   to to 2020  by   2020 by   change change of per of   of  per capita per  capita capita consumption   consumption consumption from 2018 from   from   2018 2018  to to 2020) to   poverty poverty 2020   status status    by poverty status 2020)   2020) 5 5 baseline baseline lower lower 0% 0% 2018 from 2018 0 0 to 2018 to -5% -5% from 2018 -4% -4% change from -10% -10% -6% -6% -7% -7% -5 -5 -7% -7% loss from Percent change -15% -15% -10 -10 welfare loss 2020 2020 -20% -20% Percent Average welfare -15 -15 -25% -25% -30% -30% -27% -27% Average -20 -20 52 52     -35% -35% -31% -31% richest richest poorest poorest 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 newpoor new poor already alreadypoor poor restof rest popoulation ofpopoulation pre-covid pre-covid baseline baseline lower lower           Source: Source: Source: World     World World Bank  Bank Bank   staff staff staff estimates   estimates estimates (ADePT  (ADePT (ADePT   simulation). simulation).   simulation). Note: Note: Impacts  of   Impacts of  COVID COVID‐‐19 related  mitigation 19‐‐related responses  by mitigation  responses by  the the  government were  not government  were included  in not  included Note: Impacts of COVID-19-related mitigation responses by the government were not included in the poverty projection. Consumption in 2018 in  the poverty  projection. the  poverty projection.   Consumption Consumption    in in  2018  2018  was  was    adjusted adjusted    to to  2020  2020  price   price    levels. levels. New  New  poor  poor    are are   those those who  who were  were   not not   poor poor  before  before was adjusted to 2020 price levels. New poor are those who were not poor before the COVID-19 pandemic but became poor during the pandemic.  the  the  COVID COVID ‐‐ 19 19 pandemic   pandemic   but but   became became Already   poor poor poor during   during are those who the   the were pandemic.   pandemic. already poor Already   Already   poor pre-COVID. poor  are are  those those  who were  already who  were poor  pre already  poor pre‐‐COVID. COVID.   41 Urban  households Urban households  are more  likely are  more to  be likely  to be  adversely adversely  affected affected  than than  those those  in rural  areas. in  rural areas.  While While  the simulated   the  simulated poverty  rate poverty rate  forfor  2020 2020  in in  the countryside  remains the  countryside remains  at at  the the  same same  level from  the level  from the  pre pre‐‐COVID COVID  to the  lower to  the case   lower‐‐case scenario,  it scenario, would  significantly it  would increase  in significantly  increase in  other other  locations locations  of the  nation of  the (figure  II.19). nation  (figure In  particular, II.19).  In poverty   particular,  poverty incidence  in incidence the  Aimag in  the centers  would Aimag  centers reach  the would  reach the  highest highest  levels, levels,  rising from  28 rising  from percent  in 28  percent the  pre in  the COVID   pre‐‐COVID 5 baseline lower 0% Percent change from 2018 0 Average welfare loss from 2018 to -5% -4% -10% -6% -7% -5 -7% MONGOLIA ECONOMIC UPDATE From Relief to Recovery -15% -10 2020 -20% -15 -25% Urban -20 households are more likely to be adversely -30% Nearly two-thirds of “new poor” attributable to the -27% -35% -31% affected than those in rural areas. While the simulated COVID-19 shocks are from the services sectors. While richest poorest 2 3 4 5 6 7 8 9 poverty rate for 2020 in the countryside remains the COVID-19 shocks new poor have affected already poor a wide range of rest of popoulation pre-covid baseline lower   at the same level from the pre-COVID to the lower- economic activities, the intensity of the impacts was   Source:   World   Bank   staff   estimates   (ADePT case scenario, it would significantly increase in other  simulation).   not the same across the sectors. Figure II.21 shows the Note:  Impacts  of  COVID‐19‐related  mitigation  responses  by  the  government  were  not  included  in  the  poverty  projection.  locations of the nation (figure II.19). In particular, distribution of the “new poor” and “already poor” who Consumption in 2018 was adjusted to 2020 price levels. New poor are those who were not poor before the COVID‐19 pandemic  poverty but becameincidence in the  poor during  the Aimag centers  pandemic. would  Already  poorreach already  are those live  who were under poor  already the  poverty pre‐COVID. line   in the pre-COVID the highest levels, rising from 28 percent in the pre- scenario by employment sectors. Before the COVID-19 case to 38 percent COVID households Urban  are more in the lower-case  likely scenario.  affected  to be adversely outbreak, the share  than  those of the  in poor  rural was relatively  areas.  While the uniform  simulated  Indeed, nearly three-quarters of the “new poor,” who across all sectors, poverty rate for 2020 in the countryside remains at the same level from the pre‐COVID to the lower‐case  but the projected economic the fell under it scenario, poverty  would line due to the  significantly COVID-19  increase  in shocks, contraction other locations  of the clearly  nation pushes  (figure more service  II.19). workers into  In particular,  poverty  are from either the capital city or Aimag centers (figure poverty. In turn, as the limited incidence  in  the  Aimag  centers  would  reach  the  highest  levels,  rising  from  28  percent  in  the  pre‐COVID  aggregate impacts II.20) As a result, under the lower-case scenario, more are projected in the agriculture sector under the case  to 38 percent in the lower‐case scenario. Indeed,  nearly three‐quarters of the “new poor,” who fell  than 200,000 people in urban areas would be newly COVID-19 scenarios, only 6 percent of the new poor under the poverty line due to the COVID‐19 shocks, are from either the capital city or Aimag centers (figure  added to the existing poor, while 74,000 people fell in the baseline and lower-case scenario are linked to II.20) As a result, under the lower‐case scenario, more than 200,000 people in urban areas would be newly  into poverty in rural areas. agriculture. added to the existing poor, while 74,000 people fell into poverty in rural areas.  Figure II.19. Poverty headcount by location Figure  II.19. Poverty headcount by location  40 38 36 Poverty headcount rate (%) 35 35 33 33 32 30 30 30 30 29 29 30 28 34 26 26 32 25 28 23 26 20 2018 2020 pre covid 2020 base 2020 lower Ulaanbaatar Aimag center Soum center Countryside National   Source:   Source: World  Bank World Bank  staff staff  estimates estimates (ADePT (ADePT  simulation).  simulation). Note:  Impacts Note:  of Impacts of  COVID‐19‐related COVID-19-related  mitigation mitigation responses  responses  by the by the government  government were  were not included in the not  included poverty  in the poverty projections.  projections.   Nearly   two Figure ‐thirds  II.20.   of  “new  Distribution  of the  poor”  poor by   attributable  location    to  the Figure   COVID  II.21. ‐19  shocks  Distribution  of the  poor are  by from   the  services  sector     sectors.   economic Figure II.20. Distribution of the poor location by poor Figure II.21. Distribution the poor of poor by economic While      the COVID Figure‐19  shocks  II.20.  have  Distribution  affected  of  the a wide   by  location range  of economic      Figure  II.21.  activities,  Distribution  of the  the   intensity by economic  of  the    impacts   sector     sector    was  not  the  same  across  the 60   sectors. Already poor (2020 pre-covid)   II.21  shows  the    Figure 70 distribution  of  the  “new  poor” Already poor (2020 pre-covid) 64 66  and  “already  Distribution of the poor (% of total poor) 60 70 poor” who already 49 49   live  under poor    the baseline)   line  in  the  pre‐COVID poverty Already poor (2020 pre-covid)   scenario   by Already poor (2020   employment pre-covid)   sectors. 64 66  Before  Distribution of the poor (% of total poor) New (2020 New poor (2020 baseline) 60 Distribution of the poor (% of total poor) 50 49 49 the COVID‐19  outbreak,  the  share the poor was relatively uniform across all sectors, but the projected   of lower) New poor (2020 baseline) 60 New poor New (2020 poor (2020 lower) baseline) Distribution of the poor (% of total poor) 50 New poor (2020 41 New poor (2020 lower) New poor (2020 lower) 50 economic 40  contraction clearly pushes more service workers 41 50 into poverty. In turn, as the limited aggregate  40 impacts are projected in the agriculture sector under 40   the  COVID‐19  scenarios,  only  6  percent 34 40 38 38  of the new  30 34 poor in the baseline 30  and 24 22 25 lower ‐ 25case 24  scenario   are  linked 30   to  agriculture.   28 30 28 28 30 28 22 30 19 19 19 18 19 19 20 19 18 20 20 20 10 10 7 7 7 7 53 10   10 6 6 6 6 0 0 0 0 Ulaanbaatar Ulaanbaatar Aimag center Soum center Soum Aimag center center Countryside Countryside Agriculture Agriculture Industry Industry Services Services         Source: Source:  World World Source:  Bank Bank  World  staff staff  Bank  staff  estimates estimates  estimates  (ADePT (ADePT  (ADePT simulation).  simulation). simulation).     Source: Source:  World  World  Bank  Bank  staff  staff estimates  estimates  (ADePT  (ADePT  simulation).  simulation).     Note:  Impacts Note:  Impacts  ‐ of  COVID ‐ 19‐related  mitigation  responses Note: Impacts  by   Impacts  of COVID ‐19‐related  mitigation  by   by   responses Note: Impacts of of COVID ‐19 COVID-19-related related mitigation mitigation responses responses  by  Note: by the government  of COVID were not included 19‐related in the‐poverty  mitigation projections.  responses the government were not included in the poverty  the government were not included in the poverty  the government were not included in the poverty  the government were not included in the poverty  projections  projections.  projections  projections.  42 E. Potential Mitigation Impacts of Policy Responses  E. Potential Mitigation Impacts of Policy Responses  There is an immediate need to increase the resilience of the poor (including “new poor”) and vulnerable  immediate There is an households need    that  to   are   severely increase  the resilience   affected   under  of the the  poor    ongoing  (including  “new and  prolonged  poor”)   shocks.  and   The  vulnerable   of    Government   that  are householdsMongolia   severely   affected   under   the   ongoing   and   prolonged   shocks.   The  responded quickly and implemented a series of measures to mitigate negative welfare impacts   Government   of      COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA (4) Orphan children,  188,000  288,000  May 1–Dec  14,219    under age 18  31, 2020    E. Potential Mitigation Impacts of Policy The Child Money Program (CMP) is the largest social (5) Single  parent w/4+  188,000  288,000  May 1–Dec  12  Responses (4) children  Orphan  under  age  18  protection  children,  program 188,000   and  covers 288,000 May more   31, 1–Dec  than  2020   90 percent 14,219   (4) Orphan children,  188,000  288,000  May 1–Dec  14,219  under age 18  31, 2020  provides 20,000 under age 18  31, 2020  of the poor in Mongolia.51 The CMP 3 is an under   Children  age 16 to  increase  in need Children  under  age 16    188,000 There immediate need the (5)resilience  Single parent w/4+ per   tugrug188,000 child   288,000 (under   288,000age   May May per 18)  1–Dec 1–Decmonth     10,243  and 12  covers for permanent care   in need   of (5)    permanent Single   parent  w/4+   188,000   288,000   31, May    2020 1–Dec     12  of the poor (including “new poor”) and children vulnerable under age 18  31, 2020  care   children under age 80 18  percent of all children. As of  2020 about 92 percent 2018, 31, households 4 3  that   Food Stamp are Children  Program   severely  under affected  age 16 in need (1)   Poorunder Children the  age  under  HHs: Adults    16of  the poor 16,000   population 188,000   288,000 32,000  lives   in   households May May 1–Dec with     10,243 1, 2020–   CMP 118,748   3  for Children  under  age    16 in need  Children  under ongoing and  permanent prolonged care  shocks. The Government (2) Poor in  need of  HHs: of  age  permanent  16      benefits 188,000  (figure 288,000  II.22). As less May  1–Dec 31, 2020 wealthy     10,243  households for permanent care   in care     Children  need  of permanent   8,000   16,000   May 31,   1–Nov 2020     123,189  Mongolia responded 4  Food Stamp quickly Program and   implemented care (1)  Poora    series  HHs: Adultstend   have  more32,000 to16,000 children,   May the 1,  1, poor    are 118,748   2020 2020– more likely   of measures Sources: 4  to Food mitigate  Stamp  Program  welfare impacts negative  https://www.legalinfo.mn/law/details/15358?lawid=15358, (1) Poor (2) Poor  HHs: Adults  under  HHs: Children to  receive 16,000   http://hudulmur 8,000 higher   32,000  levels 16,000   of CMP ‐halamj.gov.mn/. May 1, 2020–  May 1–Nov     compared benefits 118,748  123,189  to the COVID-19 pandemic, which include (2)  Poor HHs: Children  allowance 8,000  better-off households. The CMP 16,000   May  1–Nov  2020 1,accounts      for 123,18910 percent   Sources: https://www.legalinfo.mn/law/details/15358?lawid=15358, http://hudulmur‐halamj.gov.mn/. 1, 2020     increases The in   Child  Money the Child Sources:    Program Money Program,   (CMP)   is  thefood https://www.legalinfo.mn/law/details/15358?lawid=15358, stamps,   largest   social household of  protection  http://hudulmur income   program for  and the  bottom ‐halamj.gov.mn/. covers   20 more percent   thanof   90  and other percent of  theemployment  poor and  in Mongolia. social 49 welfare benefits  The CMP  provides households  20,000 (figure  tugrug  per II.23).  child  (under  age per  month  18)  than   The   Child   Money   Program  (CMP)   is  the   largest  social   protection program   and   covers   more 90  (table and II.3).   covers 49 The   80In   this Child   percent  section, Money   of    using Program all   the   children. microsimulation (CMP)   49   As is   the of     largest 2018,     social about   protection 92   percent   program   of   the   and     poor covers     populationmore   than    lives 90    in   percent of the poor in Mongolia. 49  The CMP provides 20,000 tugrug per child (under age 18) per month  results, the households percent and potential with   covers  of   CMP the  mitigation 80   percent poor inimpacts  benefits    Mongolia. (figure of of  all  children. these  II.22). The  policy  As CMP As of  provides  less  wealthy 2018,  20,000   about  households   92   tugrug percent  per tend of  child   the  to  (under  have poor  age  more   population per  month  18)  children,   lives   in the    responses and on   covers household households   80 with   percent welfare  CMP benefits   of will   all be   children. examined.   As   50 of   2018,   about   92   percent   of   the   poor   population   lives   in   poor are more  likely to  receive  higher   (figure levels  II.22). of CMP  As benefits less wealthy  households  compared  to bettertend to‐ have  off  more children,  households.  The  the    CMP   households poor  are  more  with likely  CMP  to   receive benefits  (figure  higher  II.22).  levels  of As  CMP  less  wealthy  benefits  households  compared  to   better tend to  have ‐off  more children,  households.  The  CMP the    accounts for   10   poor are  forpercentmore   of   household  income   for   the   bottom  20  percent  of  households   (figure   II.23).    Figure accounts II.22. Share likely 10 population  of  percent  to receive  of household living  higher  income in  income levels of  CMP  for  the  benefits  bottom Figure  compared 20 percent  II.23. Shares  to  of  better  households of ‐off households. CMP and other  (figure  The   II.23). household CMP     Figure accounts  II.22. Share   for   10  of population  percent  of   household  living in    for   the Figureincome   bottom   20  II.23. Shares of2018  percent  of   households  CMP and other household income   (figure  II.23).      householdsFigure receiving  II.22. Share CMP, 2018  of population  living in  Figure II.23.sources,  Shares of CMP and other household income  households   receiving Figure II.22. households   CMP,  Share of  CMP,  receiving  2018   population 2018  living in  sources,  2018 Figure II.23. sources,  2018    Shares    of CMP and other household income  100 households 96 96  receiving CMP, 2018  sources, 2018  100 100 92 100 92 5 5 33 33 3 3 7 7 8696 10 88 5 5 % of population in households receiving CMP 92 86 10 % of population in households receiving CMP 90 100 83 100 3 3 3 37 3 90 83 15 15 5 86 77 10 11 11 8 5 16 % of population in households receiving CMP 90 83 77 80 80 15 11 11 16 143 14 80 80 73 73 8 8 33 71 71 55 11 1 8 1 77 80 11 88 16 114 1 70 80 70 73 65 71 65 10 108 665 3 1 8 9 1 9 60 5 15 8 8 58 60 10 6 13 9 70 60 58 65 60 5 15 15 15 13 14 14 60 58 13 5 15 15 13 60 13 14 50 42 40 13 50 50 42 40 40 42 40 50 52 52 49 40 40 20 44 30 5050 52 52 5252 49 49 20 20 44 44 30 30 20 0 20 20 10 0 Q1 Q2 Q3 Q4 Q5 10 0 10 0 wage Q1 Q2 farm Q3 Q4 business Q5 Q1 Q2 Q3 Q4 Q5 0 richest poorest 4 2 2 5 3 3 4 5 6 7 8 9 child wage money pension farm other public transfers business 0 wage farm business richest poorest 6 4 5 6 7 8 9 capital child money remittances pension other public transfers richest poorest 2 3 7 8 9 child money capital pension remittances other public transfers Sources: NSO; 2018 HSES; World Bank staff estimates.  Sources: capital  NSO; 2018 HSES; World  Bank staff estimates.  remittances Sources: NSO; 2018 HSES; World Bank staff estimates.  Sources: NSO; 2018 HSES; World Bank staff estimates.      Sources: Sources:   NSO; NSO;  2018 2018  HSES; HSES; World    World Bank Bank staff  staff estimates. estimates.   Sources:  NSO; Sources:   2018 NSO;  HSES; 2018  World HSES; Bank World  Bank  staff staff  estimates. estimates.    the    Additional  CMP benefits  provided  by the government  would mitigate  the  COVID ‐19  welfare  loss for   Additional  CMP benefits  provided  by  the government  would  mitigate  the COVID ‐19  welfare  loss to     for  the     poor.   In  response  to  COVID ‐19,  the   government   expanded   CMP’s   monthly   benefit   level   from   20,000 Additional poor.  CMP 100,000    In   response benefits  tugrug  per   to  provided   COVID child  for  15 ‐ by19,   the  government  the  months government  from April  expanded 1, would  2020 to July 1,  2021,   CMP’s  mitigate monthly  the   benefit  COVID  which  is ‐   level 19  welfare equivalent   from  to     20,000 loss a cost   of  for to       the 100,000 poor.  In  response 3.0 percent  tugrug   to  of  COVID  per  GDP. 50   50child The  the ‐ 19,  for  15 additional  months   government  from  CMP benefits  April   expanded   1,  2020  would increase  to   July CMP’s   monthly   1,   2021, per capita  which   benefit    consumptionis  equivalent   level   from  of   to  a  the poorest  cost   20,000   of      to  3.0 population percent   of  GDP.  The  additional   CMP   benefits   would  increase   per   capita   consumption  of   the  poorest     of  100,000 tugrug  per  child group by 30,000   for  15 months  tugrug  on average,  from  April 1,  2020 to  for  accounting July  36  1, to  38 percent  2021,  which  of  istheir  average per  equivalent  to   capita a cost population consumption  group  by  30,000  tugrug   on  average,  accounting   for  36  to  38   percent  of  their  average   per    due      capita 3.0 percent  of GDP.   The consumption 50 (figure   (figure  II.24). The  additional   II.24).  The  CMP  compensation  CMP  CMP benefits  compensation  would  amount    increase amount  would  would  per completely    capita consumption completely  mitigate welfare  mitigate  welfare  of  losses   losses the poorest  due to the COVID‐19 shocks for the bottom 40 (figure II.25). In the lower‐case scenario, for example, without    population  group  by 30,000  tugrug  the on  bottom average,  accounting  for  the 36  to  38  percent  of their average  without  example, per capita   to   the   COVID ‐ effective mitigation measures, the poorest group’s consumption would decline by nearly 20 percent from    19   shocks   for     40   (figure   II.25).   In   lower ‐ case   scenario,   for   consumption effective the   (figure   pre‐COVID   II.24).  mitigation  The   consumption    measures,CMP  compensation  the  poorest   level, but  with  group’s  amount   additional  consumption  would   CMP  benefits,  completely  would  decline   their  mitigate  by nearly  20   consumption   welfare is  projected   percent from losses   to        due to the COVID the expand ‐19    pre shocks ‐  by COVID  11 percent.  for the   consumption  By  bottom  contrast,  level,  40    (figure CMP but  additional   with    II.25). additional  In the  benefits   CMP  are lower   benefits, ‐case scenario,  not sufficient   their   consumption  to recover  for  example,  COVID  is   projected ‐19 welfare  without   to      expand effective mitigation losses for the  by  11   percent.  measures,  By  contrast,  additional   CMP  top 50.    the poorest group’s consumption would decline by nearly 20 percent from  benefits  are  not  sufficient  to   recover  COVID ‐ 19  welfare     losses  for   the  top   50.    the  pre‐COVID  consumption  level,  but  with  additional  CMP  benefits,  their  consumption  is  projected  to  expand by                                                                                                                         11 percent. By contrast, additional 49      weighted)  CMP benefits are not sufficient to recover COVID‐19 welfare   Based on household‐level data (population  from HSES 2018.  the losses for 5049  top 50.   GDP is based on nominal 2019 figure (Source: NSO).  from HSES 2018.    Based   on   household ‐ level   data   (population   weighted) As of November 49  is2020. 23, 50 GDP  based  on monthly The nominalincreased benefit  2019 figure amount  (Source: NSO).for children in the Food Stamp Program decreased from MNT 16,000 to the original benefit amount of MNT 8,000 from November 1, 2020. While the extension of additional benefits for the adult Food Stamp Program was not announced,                                                             55  the program continued at least until the end of 2020. In addition to these social protection measures, the Government of Mongolia has implemented other 55  49 COVID-19-related responses, including exemptions of social security contributions, utility payment, and personal income tax. Based  50   on   household ‐ level   data   (population   weighted)   from   HSES   2018.   Due to the difficulties identifying “children (under age 16) in need for permanent care” in HSES, the response impact of “children for permanent care” 50 not  examined GDP is is based in on nominal this  2019 figure (Source: NSO). analysis.   51 Based on household-level data (population weighted) from HSES 2018.   55  43   MONGOLIA ECONOMIC UPDATE From Relief to Recovery Table II.3. Government responses to COVID-19 (Social protection-related measures) Original benefit Increased Time frame to Number of Program Eligibility criteria size (monthly, amount apply beneficiaries MNT) (MNT) 1 Child Money Program Children age 0–18 20,000 100,000 Apr 1, 2020– 1,144,630 (CMP) July 1, 2021 2 Social Welfare Pension (1) Seniors (not eligible 188,000 288,000 May 1–Dec 3,140 (goes for the following for SI pension), F55+/ 31, 2020 groups): M60+ (2) Dwarf individual age 188,000 288,000 May 1–Dec 106 16+ 31, 2020 (3) Disabled persons age 188,000 288,000 May 1–Dec 36,486 16+ 31, 2020 (4) Orphan children, 188,000 288,000 May 1–Dec 14,219 under age 18 31, 2020 (5) Single parent w/4+ 188,000 288,000 May 1–Dec 12 children under age 18 31, 2020 3 Children under age 16 in Children under age 16 in 188,000 288,000 May 1–Dec 10,243 need for permanent care need of permanent care 31, 2020 4 Food Stamp Program (1) Poor HHs: Adults 16,000 32,000 May 1, 2020– 118,748 (2) Poor HHs: Children 8,000 16,000 May 1–Nov 1, 123,189 2020 Sources: https://www.legalinfo.mn/law/details/15358?lawid=15358, http://hudulmur-halamj.gov.mn/. Additional CMP benefits provided by the government As a result, with the government’s mitigation measures, would mitigate the COVID-19 welfare loss for the poor. poverty is expected to fall below the pre-COVID level in In response to COVID-19, the government expanded both the baseline and lower-case scenarios. As shown CMP’s monthly benefit level from 20,000 to 100,000 in figure II.26, taking into account the additional tugrug per child for 15 months from April 1, 2020 to CMP benefits, the 2020 simulated poverty rate for July 1, 2021, which is equivalent to a cost of 3.0 percent the baseline and lower-case scenarios would drop to of GDP.52 The additional CMP benefits would increase 22.3 and 23.9 percent, respectively. While additional per capita consumption of the poorest population allowances on the social welfare pension and Food group by 30,000 tugrug on average, accounting for 36 Stamp Program would have little effect on overall to 38 percent of their average per capita consumption poverty given their limited coverage of the poor, those (figure II.24). The CMP compensation amount would interventions to reach different vulnerable groups completely mitigate welfare losses due to the are critical. By combining these policy responses, the COVID-19 shocks for the bottom 40 (figure II.25). In simulation results suggest that potential welfare loss the lower-case scenario, for example, without effective among poor households would be eliminated and mitigation measures, the poorest group’s consumption poverty rates return to below the pre-COVID level. would decline by nearly 20 percent from the pre-COVID consumption level, but with additional CMP benefits, their consumption is projected to expand by 11 percent. By contrast, additional CMP benefits are not sufficient to recover COVID-19 welfare losses for the top 50. 52 GDP is based on nominal 2019 figure (Source: NSO). 44 40    Baseline Lower 20 Baseline + CMP Lower + CMP 35 % change from the uncompensated case % change from the 2020 pre-COVID case % change from the 2020 pre-COVID case 15 30 COVID -19 IMPACTS ON HOUSEHOLDS IN MONGOLIA    25 10 5 20 15  CMP additional benefits as share of per  0 Figure Figure II.24. Figure  II.24.II.24.  CMPCMP additional  additional benefits  benefits as as share share  ofof  per  Figure  II.25. Figure Figure II.25.  II.25. Welfare Welfare  Welfare  changes  changes changes  with with  with  CMP CMP  CMP additional  additional     additional capita  consumption, per capita capita consumption, 10  2020 a  a  consumption,  2020 2020 a benefits -5 compared benefits compared   to to pre ‐ COVID pre-COVID benefits compared to pre‐COVID case, 2020   case, case,  2020 2020   40 5       -10 40 Baseline Lower 20 -15 Baseline + CMP Lower + CMP 35 0 20 % change from the uncompensated case 35 Baseline Lower Baseline + CMP Lower + CMP % change from the uncompensated case % change from the 2020 pre-COVID case richest poorest 2 3 4 5 6 7 8 9 richest poorest 2 3 4 5 6 7 8 9 15 30 15 30      10 10   25 25  World Bank staff estimates (AdePT simulation).  Source: Source: World Bank staff estimates (AdePT simulation).  5 20  a. CMP recipients are based on information from the HSES    Note: 5 20 2018.  0 15 0 15     As a result, 10 10  with the government’s mitigation measures, poverty -5 -5  is expected to fall below the pre‐COVID  level  in5   both  the  baseline  and  lower‐case  scenarios.  As  -10 shown -10   in  figure  II.26,  taking  into  account  the  5 additional CMP benefits, the 2020 simulated poverty rate for -15  the  baseline  and lower‐case scenarios would  0 -15 drop  to  22.3  and  23.9  percent,  respectively.  While  additional  allowances  on  the  social  welfare  pension  0 richest poorest 2 3 4 5 6 7 8 9 richest poorest 2 3 4 5 6 7 8 9 richest poorest 2 3 4 5 6 7 8 9 richest poorest 2 3 4 5 6 7 8 9 and  Food  Stamp  Program  would  have  little  effect  on  overall  poverty  given  their  limited  coverage  of  the              poor, Source:    those World   interventions  Bank   staff   estimates reach  simulation). different  vulnerable   to  (AdePT   groups Source:     are World     critical. Bank   staff   By  combining  estimates   (AdePT these  policy  simulation).       Source:  World  Bank  staff  estimates  (AdePT  simulation).  Source:  World   Bank  staff estimates  (AdePT simulation).  responses, Note: Source:  a.  CMP   the World   Banksimulation  recipients staff estimates  are    based results (AdePT  on   suggest simulation).  information   that  from    thepotential  HSES       welfare Source: World   loss Bank   among staff estimates  poor   (AdePThouseholds simulation).   would   be   Note:  a. eliminated  CMP  and  recipients  poverty  are  based  rates  on  information  returnfrom below  to the  from  the  HSES  the pre‐COVID    level.    2018.     a. CMP Note: 2018. recipients are based on information HSES 2018.       As  a  result,  with Figure  the  II.26. Poverty  government’s  headcount  mitigation  rates with and  measures,  poverty without  is  policy responses,  expected  2020  the pre‐COVID  a  As  a  result, Figure  with II.26.  the  government’s Poverty headcount rates  mitigation with and  measures, without policy  poverty responses,  is 2020a  to  expected  to  fall  fall  below  below the pre‐COVID  level level   in   both   in   both   the   the   baseline   baseline   and   and   lower   lower ‐case ‐case   scenarios.   scenarios.       As   As   shown   shown   in   in  figure   figure   II.26,   II.26,   taking   taking   into   into  account   account   the   the   additional additional CMP benefits, the 2020 simulated poverty rate for the baseline 40  CMP   benefits,  the  2020  simulated  poverty  rate  for  the  baseline  and  lower  and lower ‐ case  scenarios ‐case33.4 scenarios would  would    33.6 33.4 drop drop   to   to  22.3   22.3   and   and   23.9   23.9   percent, 31.7   percent,   respectively.   respectively. 31.5   While 31.5   While   additional   additional   allowances   allowances   on   on   the   the   social   social   welfare   welfare   pension   pension    2020 poverty rates (%) 30 25.8 and   Food   Stamp   Program and  Food  Stamp  Program  would 22.3   would   have   little   effect have  little  effect  on  21.7   on   overall   poverty   given   their 23.9   limited overall  poverty  given  their  limited  coverage  of  the    coverage 23.4  of   the   poor, poor,   those20   interventions   those   interventions   to   to   reach   reach   different   different   vulnerable   vulnerable   groups   groups   are   are   critical.   critical.   By   By   combining   combining   these   these   policy   policy    responses, responses,   the   the   simulation   simulation   results   results   suggest   suggest   that   that   potential   potential   welfare   welfare   loss   loss   among   among   poor   poor   households   households   would   would   be      be 10 eliminated  and  poverty  rates  return eliminated and poverty rates return to below the pre‐COVID level.   to   below   the  pre ‐ COVID   level.   0 Figure Figure II.26.  Poverty  II.26.  headcount  Poverty  rates  headcount  with  rates  and  with  without  and  policy  without  responses,  policy  2020  responses, a   2020a  Lower + CMP Base Lower + SWP Lower + FSP Lower + All SP pre-COVID Base + CMP Lower Base + SWP Base + FSP Base + All SP responses responses         40 40 33.6 33.4 33.4 31.7 31.7 31.5 31.5 31.5 31.5 33.6 33.4 33.4   30   World Source: 25.8  Bank staff estimates (ADePT simulation);  2020 poverty rates (%) Source: World Bank staff estimates (ADePT simulation); 2020 poverty rates (%) 30 25.8 23.9 23.4 Note: All  a. a. Note:  beneficiary All  and beneficiary and  pre‐COVID pre-COVID  allowance 22.3 allowance 22.3  level information level information of each 21.7program 21.7  of each  program is based on the is  based HSES 23.9 2018. on the HSES 2018.  23.4 CMP  20 CMP 20= Child = Child Money    Money Program; Program;  FSP FSP  = Food = Food Stamp Stamp  Program; Program;  SWP SWP = Social  = Social Welfare  Welfare Pension.  Pension.     10 10 The  HRPS  results  also  suggested  that  COVID‐19‐related  government  assistance  has  generally  been  0 helpful 0   in  mitigating  negative  economic  impacts  of  the  pandemic  for  beneficiary  households,  Lower + CMP Base Lower + SWP Lower + FSP Lower + All SP pre-COVID Base + CMP Lower Base + SWP Base + FSP Base + All SP Lower + CMP Base Lower + SWP Lower + FSP + All SP pre-COVID Base + CMP Lower Base + SWP Base + FSP + All SP particularly  the  poor.  Among  households  receiving  any  type  of  government  assistance,  35  percent  responses responses responses responses expressed that the aid completely made up for the negative repercussions of the crisis, while another 57  Base Lower        percent said that it partially offset impacts (figure II.27). These numbers are largely driven by the ability Source:  World Bank staff estimates (ADePT simulation);  Source:  World Bank staff estimates (ADePT simulation);  Note: a. Note:  All  a.  beneficiary  All  and  beneficiary  pre  and ‐COVID  pre ‐COVID  allowance  allowance level  level 56  of  information  information  each  of  program  each  program  is  based  is  on  based  the  on  HSES  the  2018.  HSES     2018. CMP CMP Child  =  =  Money  Child  Money Program;  Program;  FSP  =  =  FSP Food  Food  Stamp  Program;  Stamp  Program;  SWP  =  =  SWP Social  Social Welfare  Welfare Pension.  Pension.              The  HRPS The   HRPS   results   results   also   also   suggested   suggested   that   COVID   that   COVID ‐19 ‐19‐related ‐related   government   government   assistance   assistance   has   generally   has   generally   been   been    helpful helpful   in in   mitigating mitigating    negative negative    economic economic    impacts impacts    ofof   the the    pandemic pandemic    for    beneficiary for beneficiary    households, households,    particularly   the   poor.   Among   households   receiving   any   type   of   particularly  the  poor.  Among  households  receiving  any  type  of  government  assistance,  35  percentgovernment   assistance,   35   percent    expressed expressed  that  that  the  the  aid  completely  aid  completely  made  made  up  up  for  the  for  the negative  negative  repercussions  repercussions  of  of the  the crisis,  crisis, while  while  another  another  57  45 57  percent  said  that  it  partially  offset   impacts   (figure  II.27).   These   numbers percent said that it partially offset impacts (figure II.27). These numbers are largely driven by the ability  are  largely   driven  by  the  ability      56 56   MONGOLIA ECONOMIC UPDATE From Relief to Recovery The HRPS results also suggested that COVID-19- COVID-19-related disruptions have been ongoing and related government assistance has generally been might have escalated since the government imposed helpful in mitigating negative economic impacts of the second lockdown measures in mid-November, and the pandemic for beneficiary households, particularly the actual impacts on household welfare need to be the poor. Among households receiving any type of closely monitored. The estimated potential impacts government assistance, 35 percent expressed that the on poverty in this report are based on the latest aid completely made up for the negative repercussions available macroeconomic forecasts, distributional of the crisis, while another 57 percent said that it and price assumptions. Once the macroeconomic partially offset impacts (figure II.27). These numbers are forecasts and other model assumptions are revised, largely driven by the ability of the CMP to partially or the microsimulation results need to be updated fully offset the negative income shocks that households accordingly. have experienced since the crisis began. While most of both poor and non-poor CMP recipients expressed that the transfers were beneficial, poor recipients were 6 percent more likely to indicate that the aid completely or partially mitigated the effects of the crisis. Figure II.27. Perception of usefulness of government assistance Percent of beneficiary households Any government assistance 35 57 6 Child Money Completely mitigated Program 37 56 3 4 Partially mitigated Other Direct Has not mitigated Cash Transfers 18 60 8 14 Not affected by COVID-19 Source: World Bank staff estimates (HRPS Round 2). 46 REFERENCES References Himelein, K. 2014. “Weight Calculations for Panel Surveys with Subsampling and Split-off Tracking.” Statistics and Public Policy 1 (1). Taylor & Francis Online, December 23. https://www.tandfonline. com/doi/full/10.1080/2330443X.2013.856170. IMF (International Monetary Fund). 2012. “Inflation Dynamics in Mongolia: Understanding the Roller Coaster.” International Monetary Fund, Washington, DC. _____. “2016. Guidance note on the assessment of reserve Adequacy and related considerations” https://www.imf.org/external/np/pp/eng/2016/060316.pdf _____.. 2020. World Economic Outlook, October 2020: A Long and Difficult Ascent. Washington DC: International Monetary Fund. National Statistics Office of Mongolia and World Bank. 2020. Mongolia Poverty Update 2018 (English).  Washington, DC: World Bank Group. http://documents.worldbank.org/curated/ en/532121589213323583/Mongolia-Poverty-Update-2018. _____. 2020. “Results of Mongolia COVID-19 household Response phone survey (Round 1).” Ulaanbaatar. _____. 2020. “Results of Mongolia COVID-19 household Response phone survey (Round 2).” Ulaanbaatar. _____. 2021. “Results of Mongolia COVID-19 household Response phone survey (Round 3).” Ulaanbaatar. Olivieri S., S. Radyakin, S. Kolenikov, M. Lokshin, A. Narayan, and C. Sánchez-Páramo. 2014. “Simulating Distributional Impacts of Macro-dynamics: Theory and Practical Applications.” World Bank Publications, number 20391, World Bank, Washington, DC, June. World Bank. 2020a. World Bank East Asia and Pacific Economic Update, April 2020: East Asia and Pacific in the Time of COVID-19. Washington, DC: World Bank. https://openknowledge.worldbank.org/ handle/10986/33477. _____. 2020b. World Bank East Asia and Pacific Economic Update, October 2020: From Containment to Recovery. Washington, DC: World Bank. https://openknowledge.worldbank.org/handle/10986/34497. _____. 2021. Global Economic Prospects, January 2021. Washington, DC: World Bank. https://openknowledge. worldbank.org/handle/10986/34710. 47 MONGOLIA ECONOMIC UPDATE From Relief to Recovery MONGOLIA ECONOMIC UPDATE From Relief to Recovery Address: Floor 5, MCS Plaza, 4 Seoul Street, 14250 Ulaanbaatar, Mongolia Tel: +(976)7007 8200 • Web: www.worldbank.org/mongolia Facebook: World Bank Mongolia 50