MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Special focus: Strengthening Disaster Risk Management for Future Challenges May 2025 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks May 2025 © 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy, completeness, or currency of the data included in this work and does not assume responsibility for any errors, omissions, or discrepancies in the information, or liability with respect to the use of or failure to use the information, methods, processes, or conclusions set forth. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to the World Bank Publications, the World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo and pictures: © Batbaatar Jambal / Baku’s Picture. Used with the permission of Batbaatar Jambal. Further permission required for reuse. Design: Baku’s Design Contents iii CONTENTS EXECUTIVE SUMMARY viii CHAPTER 1: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1 1. Recent economic developments 2 1.1. Mining and services supported growth and boosted domestic demand 2 1.2. Rising inflation alongside accelerating credit growth, prompted the central bank 6 to tighten policy 1.3. Strong revenues supported the buildup of some fiscal buffers, but large fiscal 11 procyclical expenditures pushed total spending beyond pandemic-era levels 1.4. The current account deficit expanded due to rising imports and falling mineral 15 prices 2. Outlook, risks, and policy recommendations 18 CHAPTER 2: STRENGTHENING DISASTER RISK MANAGEMENT FOR FUTURE CHALLENGES 23 1. Mongolia has strengthened its DRM framework, but key gaps remain 25 2. Policy recommendations 28 REFERENCES 32 iv MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks List of boxes, figures, and tables Boxes Box 1: Rapid growth in household debt warrants close attention 9 Box 2: Ulaanbaatar shifts to market-based infrastructure financing 14 Box 3: Strengthening fiscal preparedness through contingent financing instruments 30 Figures Figure ES.1. In 2023 and 2024 Mongolia benefited from a mining boom and its spillovers xiii to other sectors (including transportation) Figure ES.2. The loss in agriculture production was mainly offset by greater activities of xiii trade, services, and mining Figure ES.3. Increased domestic demand drove economic growth, though rising imports xiii offset part of this Figure ES.4. The central bank raised its monetary policy rate as the headline inflation xiii exceeded its target range Figure ES.5. The budget surplus narrowed xiv Figure ES.6. FDI inflows improved, offsetting the weaker current account balance xiv Figure 1. The loss in agricultural production was mainly offset by stronger mining and 2 services Figure 2. Production of coal and copper (particularly in Q4) dominated mining sector 2 growth Figure 3. Increased domestic demand drove economic growth, though rising imports 4 offset part of these gains Figure 4. Investments in equipment and construction surged while tempered by the 4 loss of livestock Figure 5. Expansion of private consumption aligns with higher household real income, 5 supported by rising wages and pensions alongside lower inflation Figure 6. Labor force participation improved beyond its pre-pandemic average, contrib- 5 uting to higher wage-related income through higher employment Figure 7. Both headline and core inflation picked up in the second half of 2024 7 Figure 8. Prices of domestically produced goods and services accelerated 7 Figure 9. Lending to businesses recovered, while personal consumption lending 8 persisted Figure 10. The BOM started to tighten its policy amid rising inflation and accelerating 8 credit growth Contents v Figure 11. Mining-related revenues, particularly from coal, remained significant in 2024 11 Figure 12. Income tax revenues primarily drove the growth in budget revenue 11 Figure 13. Total spending exceeded the elevated levels seen during the pandemic … 13 Figure 14. … with greater increases in wages, pensions, and capital expenditures 13 Figure 15. The budget surplus narrowed 13 Figure 16. The new bond issuance smoothened the government’s debt repayment profile 13 Figure 17. The current account deficit expanded due to rising imports and falling 15 mineral prices Figure 18. Strong domestic demand drove higher imports of capital and consumer goods 16 Figure 19. Falling coal prices weighed on export growth, while rising copper exports 16 provided a boost Figure 20. FDI inflows improved, offsetting the weaker current account balance 18 Figure 21. The sizable loss of livestock during dzuds has led to large contractions in 24 agricultural production Figure 22. Less than 10 percent of total livestock is insured 27 Figure 23. Various mechanisms are available to finance disaster risk 30 Figure B.1. Mongolian household debt surged in 2024 … 9 Figure B.2. … and stood at higher levels compared to peers 98 Figure B.3. Local government debt soared in 2024 14 Tables Table ES1. Selected macroeconomic indicators xiv Table 1. Selected macroeconomic indicators 22 vi MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks ABBREVIATIONS ASP Adaptive Social Protection BOM Bank of Mongolia Cat DDO Catastrophe Deferred Drawdown Option CCDR Country Climate and Development report CIT Corporate Income Tax CPI Consumer Price Index DBM Development Bank of Mongolia DRFI Disaster Risk Financing and Insurance DRM Disaster Risk Management DSTI Debt-Service-to-Income Ratio FDI Foreign Direct Investment FRC Financial Regulatory Commission FSC Fiscal Stability Council FSF Fiscal Stabilization Fund GDP Gross Domestic Product IBLI Index-Based Livestock Insurance IIF Institute of International Finance JSC Joint Stock Company LFPR Labor Force Participation Rate MEU Mongolia Economic Update MFLSP Ministry of Family, Labour and Social Protection MOF Ministry of Finance, Mongolia MUB Municipality of Ulaanbaatar NAP National Adaptation Plan NBFI Non-Bank Financial Institution NEER Nominal Effective Exchange Rate NPL Non-Performing Loan NSO National Statistics Office, Mongolia OT Oyu Tolgoi PPP Public-Private Partnership SOE State-Owned Enterprise SCC Savings and Credit Cooperative SWF Sovereign Wealth Funds VAT Value-Added Tax y-o-y Year-on-Year ACKNOWLEDGEMENTS vii ACKNOWLEDGEMENTS This edition of the Mongolia Economic Update (MEU) was prepared by Undral Batmunkh (Economist), Jose Luis Diaz Sanchez (Senior Economist), Erdenebulgan Ganbat (Consultant), and Khuderchuluun Batsukh (Consultant). Chapter 2 draws from the World Bank “Mongolia Country Climate and Development Report” and is prepared by Chyi-Yun Huang (Senior Urban Specialist, IEAU2), Xiao Wu (Urban Development Analyst, IEAU2), and Zoe Elena Trohanis (Lead Disaster Risk Management Specialist, IDUDR). The MEU was prepared under the guidance of Mara K. Warwick (Country Director), Sebastian Eckardt (Practice Manager), Tae Hyun Lee (Country Manager), and Elitza Mileva (Lead Economist and Program Lead). The team is grateful to Javkhlan Bold-Erdene (External Affairs Associate) for her support on communication affairs and Sukhchimeg Tumur for administrative support. The findings, interpretations, and conclusions expressed in this update are those of the World Bank staff and do not necessarily reflect the views of the Executive Board of the World Bank or the governments they represent. For information about the World Bank and its activities in Mongolia, please visit https://www.worldbank.org/en/country/mongolia. For questions and comments on the contents of this publication, please contact Undral Batmunkh (ubatmunkh@worldbank.org). The cutoff date for this edition of the MEU is March 31, 2025. viii MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks EXECUTIVE SUMMARY Recent Economic Developments and Outlook Economic growth remained robust at 5 percent in 2024, albeit moderating from 7.2 percent in 2023 (Figures ES1 and ES2). Despite some moderation from the previous year, growth in the mining sector remained strong as coal output reached a record high, while copper production at Oyu Tolgoi (OT), the country’s largest copper mine, surged on the back of higher copper concentration in the underground phase compared to the open pit mine. Trade and services also grew rapidly, driven by strong domestic demand fueled by rising household incomes, procyclical fiscal expansion, and rapid credit growth. However, the agriculture sector contracted sharply—more severely than last year—due to a second consecutive dzud (a harsh winter weather phenomenon), which was the most intense since 2010.1 On the demand side, robust growth in public consumption and investment, alongside private consumption fueled by rising incomes, drove economic growth in 2024, while net exports weighed on overall performance (Figure ES3). Procyclical fiscal expansion led to a record-high public spending on goods and services in 2024, along with a surge in public investment that bolstered gross capital formation. However, heavy livestock losses from the harsh winter reduced the stock of productive animals, limiting agricultural investment and partially offsetting gains in capital formation. Private consumption reached a record high as a share of GDP, supported by rising real incomes—driven by easing inflation, higher wages (particularly in the public sector), and improved labor market conditions—as well as stronger consumer confidence. Meanwhile, the contribution of net exports was negative in 2024, as the expansion of imports—driven by strong demand for consumption and investment goods—outpaced exports. Early 2025 high-frequency data indicate robust activity but with some shifts in underlying trends across sectors. While coal production recorded a 12.4 percent y-o-y decline during the first quarter of the year, this was more than offset by a 28.9 percent surge in copper output. Trade and services continue to support growth, underpinned by robust domestic demand, while the agriculture sector shows strong signs of recovery after two consecutive years with dzuds (see also this edition’s special focus chapter on disaster risk management, Chapter 2). 1 A dzud is a severe weather event marked by temperatures dropping below -30°C, strong winds, heavy snow, and ice. EXECUTIVE SUMMARY ix Strong demand, coupled with supply-side pressures, pushed up inflation in the second half of 2024. While the annual average inflation rate stood at 6.2 percent in 2024, inflationary pressures intensified in the second half of the year, reaching 9.1 percent by March 2025 and exceeding the central bank’s upper target of 8 percent (Figure ES4). Key cost-push drivers included a limited meat supply—due to increased exports and dzud-related livestock losses— as well as the direct and indirect effects of the electricity tariff adjustment introduced in November 2024. On the demand side, rising household incomes and increased personal borrowing boosted personal consumption, contributing to stronger inflationary pressures, as reflected in a notable rise in core inflation. Personal consumption loans were a major contributor to the surge in credit growth and played a significant role in the sharp rise in household indebtedness. In response to mounting inflation and credit-related risks, the central bank initiated a series of tightening measures. Since Q4 2024, the central bank increased banks’ reserve requirements three times, hiked the policy rate by 200 basis points in March 2025, and tightened the cap on debt-service-to-income ratio on personal consumption loans — a move also driven by growing concerns over rising household indebtedness. By February 2025, the ex-ante real interest rate, based on inflation expectations, had shown an uptick, suggesting that markets had begun to price in the policy tightening that would come in March. Despite strong revenues, the fiscal surplus narrowed in 2024 as government spending exceeded pandemic-era levels (Figure ES5). Fiscal revenues reached a record high as a share of GDP, supported by robust mining sector performance and broad-based growth in tax collections. However, the fiscal surplus narrowed as total expenditure rose sharply, with current spending reaching elevated levels and capital expenditures climbing to their highest since 2016. Nonetheless, increased mineral production and higher copper prices contributed to some accumulation in the Fiscal Stabilization Fund (FSF) and the Sovereign Wealth Funds (SWF). Combined with strong nominal GDP growth, the narrow surplus contributed to a decline in the public debt-to-GDP ratio, which fell to 43.3 percent by end- 2024—despite significant borrowing by the Municipality of Ulaanbaatar. More recently, in the first quarter of 2025, the budget balance deteriorated sharply—shifting from a surplus of 2.5 percent of GDP a year earlier to a deficit of 0.1 percent—driven mainly by steep declines in coal revenues, alongside an increase in spending on wages, pensions, and transfers. A surge in imports and falling mineral prices pushed Mongolia’s current account back into deficit in 2024. The current account recorded a 9.3 percent of GDP deficit, compared to a 0.6 percent surplus in 2023 (Figure ES6). Despite softer global prices, merchandise imports— led by machinery, equipment, and consumer durables—rose by 25.5 percent, reaching their highest share of GDP since 2012. While mining output remained strong, declining coal prices largely offset these gains, resulting in a moderate 3.9 percent growth in merchandise exports in 2024. Increased outbound tourism and a widening services deficit also contributed to the larger current account shortfall. Strong capital inflows helped cushion the external x MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks imbalance, reflecting higher foreign direct investment and increased international bond issuances, resulting in a modest increase in international reserves—from US$4.9 billion at end-2023 to US$5.5 billion by end-2024—equivalent to 3.8 months of imports. Reserves declined to US$5.0 billion by March 2025, reflecting continued weakness in coal export revenue and increased foreign exchange interventions by the central bank to ease the depreciation pressure on the nominal exchange rate. Despite the weaker global economic outlook, Mongolia’s economic growth is projected to remain robust in 2025, supported by a surge in copper production and a partial recovery in agriculture. Both global growth and commodity prices (excluding precious metals) are projected to decline this year, reflecting softer international trade and subdued investment amid rising uncertainty. Nevertheless, Mongolia’s real GDP growth is expected to reach 6.3 percent, reflecting robust domestic factors (Table ES1), including the increased copper output at Oyu Tolgoi, offsetting weaker performance in the coal industry. The agriculture sector is anticipated to recover moderately after two years of dzud-related losses and contribute positively to growth. On the demand side, growth in public and private consumption is projected to moderate, weighed down by weaker revenues, higher inflation and its impact on household purchasing power, and only a gradual recovery in rural livelihoods. Tighter credit conditions, higher production costs, and a decline in foreign direct investment— particularly related to Oyu Tolgoi—are expected to dampen private sector investment. Public investment under the government’s Four-Year Action Plan is expected to support growth to some extent, though its effect will be partly offset by higher imports of capital goods. Nevertheless, with mining exports (particularly gold and copper) expected to outpace imports, net exports are projected to contribute positively to GDP growth in 2025. While demand-side pressures are expected to moderate, headline inflation is projected to rise in 2025, driven largely by cost-push factors. Despite ongoing monetary tightening, inflation is forecast to accelerate and average around 10 percent in 2025. Recent tariff hikes are expected to raise prices—both directly and indirectly through their impact on supply chains—while continued exchange rate depreciation, reflecting widening external imbalances, will further increase the cost of imported goods. Both fiscal and external balances are projected to remain under pressure in 2025, amid softer commodity revenues and continued high spending. Combined effects of declining prices and lower coal volumes are expected to more than offset the effects of higher copper volumes and reduce mining-related fiscal revenues. While the 2025 budget reflects a shift toward a more neutral fiscal stance after several years of pro-cyclical policy, total expenditure is projected to remain above COVID-era levels, resulting in a moderate fiscal deficit. On the external side, weaker commodity prices are expected to weigh on the current account balance, despite higher anticipated copper export volumes from the expansion of Oyu Tolgoi’s underground operations. Meanwhile, increased profit repatriation and investment-related payments from Oyu Tolgoi are anticipated to add to the current account deficit. EXECUTIVE SUMMARY xi The medium-term growth outlook remains stable, but external and fiscal imbalances are expected to persist. Growth over 2026-27 is projected to average 5.2 percent, with a sustained agricultural recovery and a strong industrial expansion mostly in non-mining sectors such as construction. On the demand side, a rebound in private consumption— driven by easing inflation—and higher capital spending, supported by declines in interest rates, are projected to sustain growth, although rising imports are expected to offset some of these gains. External imbalances and fiscal vulnerabilities are anticipated to persist with continued softness in global commodity prices affecting fiscal and export revenues. Nonetheless, the public debt-to-GDP ratio is projected to decline gradually, supported by strong nominal GDP growth. Risks to the economic outlook arise from both external and domestic factors. Externally, persistent global trade policy uncertainty could weaken demand in major trading partners, lower prices for key commodities like coal and copper, and weigh on Mongolia’s exports, fiscal revenues, and investor sentiment. In contrast, stronger-than-expected stimulus in China or faster-than-expected turnaround in its property sector could lift external demand and commodity prices. Domestically, higher public and quasi-fiscal spending, including by the Ulaanbaatar municipality, may support short-term growth but could widen fiscal and external deficits and add to inflationary pressures. Rapid credit growth, especially through weakly regulated non-bank institutions, could also increase financial vulnerabilities. On the upside, faster progress on cross-border infrastructure projects could improve export capacity, particularly for minerals. Despite the recent shift to gradual fiscal and monetary tightening, further policy adjustments may be warranted to strengthen resilience and maintain macroeconomic stability. Unwinding the structural increase in social protection spending and reining in quasi-fiscal activity —such as the subsidized mortgage program— would not only reduce domestic demand pressures but also help rebuild fiscal buffers to protect against future shocks.2 In parallel, reinforcing fiscal rules and strengthening the independence of the Bank of Mongolia, including clarifying its inflation-focused mandate in the central bank law, would enhance policy credibility and effectiveness in anchoring inflation and safeguarding macroeconomic stability. Stability-oriented macroeconomic policies should be accompanied by structural reforms to enable a more diversified economy. Priorities include improving the business climate and economic governance to attract investment; better aligning education and training systems with labor market needs to fully leverage the country’s young and educated workforce; and mitigating climate-related risks to key sectors (e.g., encouraging sustainable herding practices).3 2 World Bank (2025a, forthcoming). 3 World Bank (2024a) xii MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Strengthening Disaster Risk Management for Future Challenges As part of broader efforts to strengthen resilience against future shocks, effective disaster risk management is also critical for Mongolia’s long-term growth and poverty reduction, particularly as natural hazards increasingly affect the country’s most vulnerable populations. Over the past 80 years, the frequency and severity of disasters have doubled. The 2024 dzud alone resulted in the loss of over 9.4 million livestock—more than 14.5 percent of the national herd—and caused a 28.7 percent drop in agricultural output, severely impacting rural livelihoods. In addition to dzuds, Mongolia faces recurring threats from droughts, floods, dust storms, earthquakes, and extreme heat. As highlighted in the Mongolia Country Climate and Development Report,4 climate related risks and natural disasters are expected to further increase in intensity and frequency, deepening risks for the poor. This special focus chapter (Chapter 2) identifies priority areas for strengthening disaster risk management and offers recommendations to enhance Mongolia’s resilience to natural hazards. In response to growing climate and disaster risks, the government has begun reinforcing its institutional and policy frameworks, with actions underway in disaster risk management, urban resilience, and climate adaptation. Building on this progress, the chapter calls for a more comprehensive and proactive disaster risk management approach that integrates prevention, preparedness, response, recovery, financing, and rehabilitation. Key priorities include strengthening the legal, policy, and institutional framework for disaster risk management; investing in resilient infrastructure and risk awareness; expanding emergency preparedness; strengthening disaster risk financing tools and the domestic insurance market; and institutionalizing adaptive social protection with robust delivery systems. 4 World Bank (2024b). EXECUTIVE SUMMARY xiii Figure ES.1. In 2023 and 2024 Mongolia benefited Figure ES.2. The loss in agriculture production was from a mining boom and its spillovers to other mainly offset by greater activities of trade, services, sectors (including transportation) and mining Percent deviation of real GDP and mining and Contributions to GDP y-o-y growth, transportation sector GDP compared to their levels in 2020 by production sectors GDP Mining and transportation sector GDP Agriculture Mining & transportation Others Real GDP Sources: National Statistics Office; World Bank staff Source: National statistics office. estimates. Note: Bars reflect percentage contributions to y-o-y GDP growth. Figure ES.3. Increased domestic demand drove Figure ES.4. The central bank raised its monetary economic growth, though rising imports offset policy rate as the headline inflation exceeded its part of this target range Contributions to GDP y-o-y growth, Monetary policy rate, inflation target, by demand components and headline inflation Net exports Gross capital formation Headline inflation Policy rate Government consumption Private consumption Real GDP Source: National Statistics Office. Sources: Bank of Mongolia; National Statistics Office. Note: Bars reflect percentage contributions to y-o-y GDP growth. xiv MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Figure ES.5. The budget surplus narrowed Figure ES.6. FDI inflows improved, offsetting the weaker current account balance Fiscal balances, percent Current account balance and its components, of GDP in percent of GDP Other financial account flows Net FDI inflow Current and capital account Official foreign reserves (RHS) Overall balance Structural balance Sources: Ministry of Finance; World Bank staff estimates. Source: Bank of Mongolia. Note: Structural balance is defined by the government as the overall fiscal balance net of fiscal saving funds. Table ES1. Selected macroeconomic indicators   2022 2023 2024e 2025f 2026f 2027f Real GDP Growth at constant market 5.0 7.2 5.0 6.3 5.2 5.2 prices Inflation (CPI, period average) 15.2 10.4 6.8 10.0 8.0 7.5 Current Account Balance (% of GDP) -13.2 0.6 -9.3 -12.1 -11.4 -11.5 Fiscal Balance (% of GDP) 0.7 2.6 1.3 -1.1 -1.5 -1.1 Debt (% of GDP) 62.1 44.4 43.3 39.3 36.5 33.9 Source: World Bank staff estimates. Note: Public debt does not include the Bank of Mongolia’s liability under the People’s Bank of China swap line (3.8 percent of GDP as of the end of 2024). Recent Economic Developments 1 and Outlook Chapter 1: Recent Economic Developments and Outlook 2 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Chapter 1: RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 1. Recent economic developments 1.1. Mining and services supported growth and boosted domestic demand Mongolia’s economy remained resilient in 2024, supported by continued strength in mining, transport, and services, despite a sharp contraction in agriculture due to severe weather conditions. GDP growth from the production side slowed to 4.9 percent from 7.4 percent in 2023 (Figure 1), but this decline was largely attributable to a 28.7 percent drop in agricultural output caused by the most severe dzud since 2010. The livestock sector lost 9.4 million livestock from the national herd (14.5 percent of the total) and produced 11.4 percent fewer offspring compared to 2023.5 Encouragingly, agriculture is showing signs of recovery, with high-frequency data pointing to a sharp increase in production during the first quarter of 2025. Figure 1. The loss in agricultural production was Figure 2. Production of coal and copper (particularly mainly offset by stronger mining and services in Q4) dominated mining sector growth Contributions to GDP y-o-y growth, by Contributions to mining GDP growth, production sectors by key minerals Coal Copper Others Gold Others Mining & Mining GDP growth transportation Agriculture Real GDP Source: National Statistics Office, Mongolia (NSO). Source: World Bank staff estimates based on the NSO Note: Bars reflect percentage contributions to y-o-y GDP database. growth. Note: Bars reflect percentage contributions to y-o-y growth in mining GDP. 5 During the 2023 and 2024 dzuds, Mongolia lost nearly 14 million livestock—about one-fifth of the 71 million livestock recorded at end-2022. In comparison, the 2010 dzud, the last major event of this scale, resulted in the loss of around 23.4 percent of the herd. Recent Economic Developments 3 and Outlook Although slower than in 2023, robust growth in mining and transportation services helped cushion the economy from the sharp contraction in agriculture. In 2024, mining and transportation expanded by 10.8 percent and 23.1 percent, respectively, together contributing 2.7 percentage points to overall GDP growth. Coal production reached a record 101.5 million tons—up 24.8 percent—adding 1.3 percentage points to growth, despite some slowdown in the final quarter due to stockpiling at a key border port (see Section 1.4, Figure 2). Higher coal output and exports also boosted road freight transport, which grew by 34.0 percent. In the final quarter, a 62.4 percent y-o-y surge in copper production helped offset the weaker coal output and maintained overall mining sector growth. This was supported by higher copper concentration in the underground phase at Oyu Tolgoi. Over the full year, copper production rose 26.1 percent, contributing 0.7 percentage points to growth. High frequency data in the first quarter of 2025 shows a continuation of this trend, with copper output up 28.9 percent y-o-y, while coal production declined by 12.4 percent, reflecting weaker demand. Trade and services grew rapidly in 2024, driven by strong domestic demand. Value-added growth in these sectors reached 8.4 percent, up from 6.3 percent in 2023. Wholesale and retail trade, along with other service sectors, accelerated on the back of rising household incomes, fiscal expansion, and rapid credit growth (see discussion below). In addition, improvements in asset quality and continued credit expansion supported growth in financial services, which contributed around 1.0 percentage point to overall GDP growth. On the demand side, public consumption and investment were key drivers of growth. Public consumption grew 18.3 percent in 2024, with spending on goods and services reaching record levels (see Section 1.3). Gross capital formation grew by 22.2 percent, contributing 9.3 percentage points to GDP growth (Figure 3), supported by a more than 50 percent surge in public investment, stronger foreign direct investment (FDI), and a rebound in bank lending to businesses.6 However, harsh winter conditions led to significant livestock losses and fewer maturing offspring, resulting in a notable depletion of livestock capital (Figure 4). 6 For details on bank lending, fiscal spending, and foreign investments, see Sections 1.2, 1.3, and 1.4. 4 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Figure 3. Increased domestic demand drove Figure 4. Investments in equipment and economic growth, though rising imports offset part construction surged while tempered by the loss of of these gains livestock Contributions to GDP y-o-y growth, by Contributions to nominal growth of gross demand components fixed capital formation Net exports Gross capital formation Building Machinery and equipment Government consumption Private consumption Cultivated biological assets Real GDP Other assets Gross fixed capital formation Source: NSO. Source: NSO. Note: Bars reflect percentage contributions to y-o-y GDP Note: Nominal decomposition of gross fixed capital forma- growth. tion is depicted due to data availability. Cultivated biologi- cal assets mostly refer to the herd of adult livestock. Private consumption was also a key growth engine in 2024, supported by rising real incomes and improved consumer sentiment. Private consumption growth accelerated to 12.9 percent in 2024, up from 9.7 percent in 2023, contributing 8.6 percentage points to overall economic growth (Figure 3). This strong performance was largely driven by a 13.5 percent increase in household real income and rising consumer confidence as the mining boom continued to fuel the broader economy.7 Lower inflation, coupled with several public sector wage hikes and rising private sector wages in a robust labor market, led to an 18.7 percent increase in households’ wage-related real income—more than offsetting the decline in agriculture-related income due to dzud-related losses (Figure 5).8 Two pension increases since mid-2023 and the distribution of dividends from the state-owned coal company Erdenes Tavan Tolgoi Joint Stock Company (JSC)—equivalent to roughly 40 percent of the average household’s monthly income—also supported household consumption. Toward the end of the year, however, rising inflation and the diminishing impact of earlier wage increases began to weigh on real income growth. Nevertheless, private consumption remained strong and outpaced income gains. 7 National Research and Consulting Center (2024) reports that the quarterly Consumer Confidence Index (CCI) for Mongolia has been improving steadily since the beginning of 2024, reaching its highest level in Q3 2024. 8 The national average wage grew by 17.2 percent in 2024 in real terms (or 24.3 percent in nominal terms). Public sector wages saw particularly sharp increases, rising between 23-39 percent in nominal terms, compared to approximately 16 to 25 percent in the private sector. In addition, the minimum wage was raised by 20 percent, effective January 1, 2024. Recent Economic Developments 5 and Outlook Figure 5. Expansion of private consumption aligns Figure 6. Labor force participation improved beyond with higher household real income, supported by its pre-pandemic average, contributing to higher rising wages and pensions alongside lower inflation wage-related income through higher employment Contributions to household real income Labor force participation rate (LFPR) y-o-y growth and unemployment rate Unemployment rate Labor force participation rate (RHS) Other income Agriculture income Pension & social welfare Wage income HH real income growth (y-o-y) HH real expenditure growth (y-o-y) Source: NSO. Source: NSO. Note: Bars reflect percentage contributions to y-o-y growth of household real income The labor market remained strong in 2024, supported by robust economic activity. The labor force participation rate exceeded its pre-pandemic average (2018–2019) for the first time since COVID-19, peaking in Q3 2024, as rising wages and improved job opportunities encouraged previously inactive individuals—including discouraged workers and women returning from maternity leave—to reenter the workforce (Figure 6).9 Employment increased by 2.3 percent in 2024, driven by strong hiring in the trade, services, accommodation, construction, and public sectors, which together contributed 4.4 percentage points to overall employment growth. In contrast, employment in the agriculture sector declined by 7.8 percent, subtracting about 2.0 percentage points from total employment growth amid a sharp drop in output due to the dzud-related livestock losses. Meanwhile, the unemployment rate remained low and stable (5.3 percent in Q4 2024), signaling a continued absorption of labor into the expanding economy. Net exports turned negative in their contribution to economic growth in 2024, as import growth outpaced exports. While coal exports reached a historic high and copper exports ramped up in the last quarter, real export growth of goods and services slowed sharply to 0.7 percent in 2024, reflecting a high base effect after the strong 33.2 percent expansion in 2023. Merchandise exports excluding coal and copper contracted by 12.2 percent, reflecting weaker performance in other sectors such as raw and uncombed 9 The female labor force participation rate improved to 54.3 percent in 2024 (up from 52.5 percent in 2023) but remains slightly below the pre-pandemic average of 54.9 percent (average of 2018-2019). 6 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks wool and cashmere. Meanwhile, real imports of goods and services remained strong, growing by 17.7 percent, only slightly down from 18.9 percent in 2023. This was driven by strong domestic demand, robust mining activity, and record-high public investment projects. As a result, net exports subtracted 16.4 percentage points from GDP growth in 2024—reversing their positive contribution of 1.8 percentage points in 2023 (Figure 3). 1.2 Rising inflation alongside accelerating credit growth, prompted the central bank to tighten policy Inflationary pressures strengthened in the second half of 2024, pushing headline inflation above the central bank’s target range. While the annual average inflation rate stood at 6.2 percent in 2024, monthly data reveal a marked acceleration toward year-end.10 Headline inflation rose from 4.6 percent in June to 8.4 percent in December 2024, and further to 9.1 percent by March 2025, exceeding the central bank’s upper target of 8 percent (Figure 7). Core inflation, which excludes food, fuel, and administered prices such as water, electricity, and heating, followed a similar upward trajectory. A 4.1 percentage point increase in core inflation over nine months since mid-2024 suggests the influence of domestic demand- side factors, particularly rising household income and borrowing (Section 1.1), which have supported consumption and contributed to second-round price effects. Domestic supply-side factors also played a key role in driving inflation over this period. The contribution of domestically produced goods and services to headline inflation rose from 3.0 percentage points in mid-2024 (65.1 percent of headline inflation) to 6.9 percentage points by March 2025 (76.0 percent of annual headline inflation), indicating significant cost- push pressures (Figure 8). Key contributors included higher food prices (including mutton) and the electricity tariff adjustment introduced in November 2024 to support the financial sustainability of the energy sector.11 The tariff increase not only had a direct impact on consumer prices but also indirectly raised production costs across a range of domestically produced goods and services.12 A near doubling of mutton exports in 2024, combined with dzud-related livestock losses, which rose by 132 percent, reduced the supply available for domestic consumption, contributing to higher prices. In contrast, price increases for imported goods and services remained moderate, supported by a slight decline in international food and fuel prices—down 2.0 and 2.4 percent in 2024, respectively—and an appreciating exchange rate, with the nominal effective exchange rate (NEER) strengthening by 5.4 percent over the year. 10 This is based on the NSO’s recent revision of the consumer basket to 2023. Based on the 2020 consumer basket headline inflation is estimated at 6.8 percent on average in 2024. 11 Mongolia introduced energy tariff reforms that are expected to enhance the sector’s financial sustainability and, if coupled with additional investments and service improvements, to reduce blackouts and inefficiency. Higher energy efficiency would boost productivity, investment, and growth over the medium term. 12 The index for domestically produced food rose by 10.3 percent, while the domestic services index increased by 13.0 percent y-o-y in March 2025. Recent Economic Developments 7 and Outlook Figure 7. Both headline and core inflation picked up Figure 8. Prices of domestically produced goods and in the second half of 2024 services accelerated Annual headline and core inflation Headline inflation and its contributors Headline inflation Core inflation Domestic goods and services Imported goods Headline inflation Source: NSO. Source: NSO. Note: The Bank of Mongolia (BOM) estimates core inflation by excluding 37 goods and services from the Ulaanbaatar consumer price index (CPI) basket. Robust economic growth and improved asset quality supported a strong rebound in business lending, while the expansion of personal consumption loans remained substantial. Total credit growth in the banking system reached 31.3 percent y-o-y in March 2025, up from 22.4 percent in December 2023. Business lending recovered steadily, accounting for roughly one-third of total credit growth, while personal consumption loans — particularly those backed by wages and pensions — and mortgage loans (including subsidized mortgages) contributed nearly half of the total credit expansion (Figure 9). Asset quality in the banking sector also improved, with the non-performing loan (NPL) ratio declining to 4.7 percent in March 2025 from 6.6 percent in December 2023 — its lowest level in a decade. However, trends diverged across lending segments. The NPL ratio for corporate loans declined due to both a reduction in the stock of NPLs and strong credit growth, supported by solid activity and profitability in the mining, professional services, and real estate sectors. In contrast, the NPL ratio for consumer loans fell primarily due to the denominator effect—i.e., rapid credit expansion—despite an increase in the absolute value of NPLs. In addition, government lending programs with subsidized interest rates — such as the housing mortgage program and agriculture-related initiatives like the New Cooperative Movement, Food Security Initiative, and White Gold program — collectively accounted for 19.9 percent of total credit outstanding, contributing 3.9 percentage points to overall credit growth. 8 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Figure 9. Lending to businesses recovered, while Figure 10. The BOM started to tighten its policy amid personal consumption lending persisted rising inflation and accelerating credit growth Y-o-y growth of total outstanding credit Credit growth and monetary policy indicators Business loans Consumption loans Policy rate RR on MNT deposits Mortgages RR on FX deposits Credit growth Other Total Source: BOM. Source: BOM. Note: Total outstanding loans include mortgage loans securitized by the Mongolian Mortgage Corporation, which are removed from the banks’ balance sheets. Bars reflect percentage contributions to total credit growth. Rapid credit growth, particularly in personal consumption, alongside rising inflationary pressures, prompted the central bank to tighten its policy stance. Since the last quarter of 2024, the central bank introduced a series of measures, including three increases in banks’ reserve requirements starting in October 2024, a 200-basis point hike in the policy rate in March 2025 (Figure 10), and a tightening of macroprudential rules. The latter included lowering the debt-service-to-income (DSTI) cap on personal consumption loans from 55 percent in July 2024 to 50 percent in March 2025 — a move also driven by growing concerns over rising household indebtedness (see Box 1).13 However, the impact of these measures is yet to fully materialize. The ex-post real interest rate declined in the second half of 2024, as inflation accelerated while nominal lending rates remained broadly stable—indicating that real borrowing costs fell despite the policy tightening, and thus monetary conditions effectively loosened. By February 2025, the ex-ante real interest rate, based on inflation expectations, had shown an uptick, suggesting that markets had begun to price in the tightening in policy that came in March. 13 In line with the BOM’s macroprudential tightening measures, the Financial Regulatory Commission (FRC) lowered the DSTI cap on consumer loans issued by non-bank financial institutions (NBFIs) from 70 percent to 60 percent and similarly reduced the loan-to-value ratio on car loans to 60 percent. Recent Economic Developments 9 and Outlook Box 1: Rapid growth in household debt warrants close attention Household indebtedness in Mongolia rose sharply in 2024, reaching historically high levels and exceeding those of many structural peers. Total household borrowing from domestic financial institutions—including banks, non-bank financial institutions (NBFIs), and savings and credit cooperatives (SCCs)—increased to 39.4 percent of GDP, up from 32.1 percent in 2023 (Figure B.1). This surpassed the previous peak in 2018, when personal consumption loans surged before the introduction of macroprudential measures by the BOM. Compared to peers, Mongolian households are more indebted than those in Kazakhstan and Russia, with debt levels approaching those seen in higher-income aspirational peers (e.g. Chile) with more mature financial systems (Figure B.2). Figure B.1. Mongolian household debt surged Figure B.2. … and stood at higher levels com- in 2024 … pared to peers Mongolia’s household debt issued by domestic Household indebtedness in selected countries, financial institutions, percent of GDP percent of GDP Loans issued by NBFIs and SCCs Mongolia Kazakhstan Ecuador Chile Business loans by households Peru Malaysia Russia Other consumer loans Salary and pension backed loans Mortgage Total Sources. NSO; BOM; FRC. Sources. IIF; BOM. Note: For consistency purposes, data reflecting only house- hold loans from the banking sector is shown. 10 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks The surge in household borrowing was driven by rising incomes, improved consumer confi- dence, and shifting borrowing patterns. Much of the increase in household debt was due to a 33.9 percent rise in bank lending, particularly in salary- and pension-backed loans. These loans expanded alongside strong income growth—particularly in wages and pensions—which boosted households’ borrowing capacity, supported by improved consumer confidence (see Section 1.2). While rising incomes can strengthen households’ ability to repay, credit growth outpaced income gains, contributing to the rapid accumulation of debt and raising financial stability concerns.14 Lending by NBFIs and SCCs rose even faster—by 58.3 percent in 2024— and accounted for 8.8 percentage points of total household credit growth in the fourth quarter. This pattern reflects both increased demand for credit and a shift toward less regulated non- bank lending channels. Regulatory gaps and weak institutional coordination may have contributed to financial stabil- ity risks. Despite measures introduced by the BOM and the Financial Regulatory Commission (FRC) to curb excessive credit growth, large parts of household lending remained outside the regulatory perimeter.15 Nearly 30 percent of bank consumer loans—primarily pension-backed— were not subject to debt-service-to-income (DSTI) regulations. In addition, loans issued by non-fintech NBFIs, which accounted for over 60 percent of NBFI household lending, were ex- empt from DSTI caps until November 2024, when the FRC extended coverage to all consumer loans.16 By March 2024, more than 350,000 individuals—14.8 percent of total borrowers—held loans from both banks and NBFIs, with an average DSTI ratio of 79.1 percent, well above reg- ulatory thresholds.17 These figures point to regulatory arbitrage enabled by inconsistent DSTI caps, inefficiency in the credit information system, and weak enforcement of DSTI limits, en- abling borrowers to bypass lending limits and accumulate high levels of debt across multiple institutions. Source: Authors’ analysis based on data from IIF, BOM, FRC, NSO, and findings of Bank of Mongolia and Bank of Korea (2024). 14 The NPL ratio on households’ consumption loans at banks reached 3.0 percent in March 2025, while past-due loans rose to 3.1 percent, up from 2.4 and 1.7 percent, respectively in March 2024. 15 The BOM introduced a cap on DSTI at 60 percent in 2019 and further reduced it to 55 percent in July 2024 and 50 percent in March 2025. Meanwhile, the FRC set this cap at 70 percent for NBFIs for the first time in 2023 and lowered it to 60 percent in March 2025. 16 The non-fintech NBFIs provide loan products through traditional channels, while fintech NBFIs provide loans through apps and other technical channels. 17 Bank of Mongolia and Bank of Korea (2024). Recent Economic Developments 11 and Outlook 1.3. Strong revenues supported the buildup of some fiscal buffers, but large fiscal procyclical expenditures pushed total spending beyond pandemic-era levels Fiscal revenue remained strong in 2024, supported in large part by the mining sector and robust domestic demand. Total budget revenue rose by 28.7 percent, reaching 39.2 percent of GDP—up from 34.3 percent in 2023. Robust coal export volumes more than offset declining prices, lifting coal-related revenues to 8.4 percent of GDP, while other mining revenues remained relatively stable (Figure 11). Despite a slowdown in mining sector growth, mining-related revenues—mainly from royalties and taxes, with corporate income tax (CIT) playing a leading role as mining accounts for roughly half of total CIT—contributed 11.1 percentage points to the overall revenue increase. At the same time, stronger domestic demand and import growth further boosted tax collections, including a 25.5 percent increase in VAT revenues (Figure 12). Buoyed by the surge in mining-related revenues and strong profitability of key state-owned mines, Mongolia transferred approximately MNT1.3 trillion (1.7 percent of GDP) in its SWFs—more than three times the previous year’s contribution.18 The FSF also accumulated 0.6 percent of GDP, bringing its total savings to about 2.3 percent of GDP, as copper prices remained above the 2024 budget’s stabilization threshold. However, overall fiscal revenue performance and transfers to the FSF and SWFs weakened in the first quarter of 2025, primarily due to lower receipts from the coal mining industry, driven by weaker coal prices and continued buildup of stockpiles near the border that delayed new shipments from Mongolia.19 Figure 11. Mining-related revenues, particularly from Figure 12. Income tax revenues primarily drove the coal, remained significant in 2024 growth in budget revenue Budget revenue, percent of GDP Contributions to y-o-y growth of budget revenue Non-mining revenue Other mining Non-tax revenue Copper Coal Total revenue (% of GDP) Other tax revenue VAT CIT PIT & SSC Royalties Total revenue (y-o-y) Sources: MOF; Ministry of Mining and Heavy Industries, Sources: MOF; World Bank staff estimates. World Bank staff estimates. 18 Of this, MNT500 billion (0.6 percent) was transferred to the newly established Provident Fund (PF), which supports the subsidized Housing Mortgage Program. 19 March 2025 statistics (the latest available), shows that budget revenue collected from the coal industry was down 73.7 percent (y-o-y) and revenue from copper down 25.4 percent (y-o-y). 12 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Fiscal spending surged in 2024, surpassing even the levels recorded during the COVID-19 pandemic. Total public expenditure grew by 34.9 percent, reaching 37.9 percent of GDP— exceeding the 2020 peak of 36.7 percent of GDP (Figure 13). Around two-thirds of this increase came from procyclical current spending, including large raises in pensions and public sector wages, that exceeded average inflation, along with a surge in purchases of goods and services mostly concentrated in the first half of the year ahead of the mid- 2024 Parliamentary elections (Figure 14).20 Meanwhile, capital expenditures also rose significantly, accelerating in the second half of 2024 and reaching 9.9 percent of GDP—the highest level since 2016. These investments supported the government’s Four-Year Action Plan and included major infrastructure projects aimed at promoting regional development, easing urban congestion in Ulaanbaatar, and improving connectivity. In the first quarter of 2025, however, capital expenditure was down 29.7 percent y-o-y, reflecting significant delays in project implementation and execution.21 Meanwhile, certain current expenditures remained procyclical, with further raises in public sector wages and pensions, and transfers to hospitals, together accounting for 13.3 percentage points of the 14.2 percent y-o-y increase in total expenditure in Q1 2025.22 With a weaker fiscal balance in 2024, the public debt-to-GDP ratio declined only slightly, driven entirely by robust nominal GDP growth rather than a reduction in debt levels (Figure 15). While the overall fiscal balance remained in surplus (1.3 percent of GDP), the structural balance—net of allocations to fiscal savings funds—turned negative (-1.0 percent of GDP). As a result, the debt ratio fell modestly to 43.3 percent by end-2024, down from 44.4 percent a year earlier. Still, the combination of a continued surplus and improved debt dynamics supported recent sovereign credit rating upgrades, helping to bolster market confidence and ease borrowing conditions.23 Leveraging this favorable environment, the Development Bank of Mongolia (DBM) and the Municipality of Ulaanbaatar (MUB) successfully tapped international markets in 2024 (see Box 2). Moreover, in February 2025, the government of Mongolia issued a USD 500 million ‘Century IV’ bond at a 6.625 percent rate with a five-year maturity, as part of its debt management strategy.24 The proceeds were used to refinance upcoming external obligations, helping to smooth the debt repayment profile (Figure 16). As a result of these actions, no large public external debt repayments are due until 2027— except for the US$800 million under the currency swap agreement with the People’s Bank of China, maturing in mid-2026. Despite the slower expansion in expenditures, the weaker revenue performance in Q1 2025 resulted in a small deficit (0.1 percent of GDP), compared to a surplus of 2.5 percent of GDP in Q1 2024. 20 Pension expenditures and public wage-related spending rose by 28.5 percent and 38.4 percent, respectively. Although the number of public sector employees remained unchanged, the large increase in wage expenditure reflects higher performance-based bonuses and location-based allowances introduced to support rural public sector employment under the government’s decentralization agenda. Spending on goods and services (also classified under current spending) was up 48.0 percent. 21 The 2025 approved budget envisions a 3.8-percent reduction in capital spending, following the already high level of 2024. 22 The government disbursed MNT 316 billion (approximately 0.3 percent of GDP) from the Health Insurance Fund to hospitals to compensate for financial losses accumulated over the past three years. 23 Credit rating agencies, Fitch, S&P and Moody’s upgraded Mongolia’s sovereign rating to B+, B+, and B2, respectively, in Q4 2024. 24 The spread on the new bond was significantly lower (2.3 percent) compared to the spread on refinanced bond (4.9 percent). Recent Economic Developments 13 and Outlook Figure 13. Total spending exceeded the elevated Figure 14. … with greater increases in wages, levels seen during the pandemic … pensions, and capital expenditures Budget expenditures in Contributions to y-o-y growth percent of GDP of budget expenditure Other current Capital spending spending, net lending Wages Social welfare Social welfare transfers transfers Pensions Pensions Wages Other current spending, net Capital spending lending Total spending Total expenditure (% of GDP) (y-o-y) Sources: Ministry of Finance (MOF); World Bank staff Sources: MOF; World Bank staff estimates. estimates. Figure 15. The budget surplus narrowed Figure 16. The new bond issuance smoothened the government’s debt repayment profile Fiscal balances, percent Sovereign Eurobonds, according to their of GDP due dates, million US$ Restructured Due Overall balance Structural balance Sources: MOF; World Bank staff estimates. Source: MOF. Note: Structural balance is defined by the government as the overall fiscal balance net of FSF and SWFs. 14 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Box 2: Ulaanbaatar shifts to market-based infrastructure financing In 2024, the Municipality of Ulaanbaatar initiated a shift toward market-based Figure B.3. Local government debt soared in 2024 financing to support its growing infrastructure needs. Enabled by legal Outstanding debt of the local government (mostly reforms introduced in 2021 and 2024, both the city of Ulaanbaatar) Ulaanbaatar city and Mongolia’s aimags Billion MNT (RHS) gained the authority to access domestic and Percent of GDP international securities markets.25 As a result, Percent of total government debt Ulaanbaatar successfully raised MNT500 billion through a domestic bond issuance in June 2024, structured in three tranches with maturities of 1 to 3 years and coupon rates ranging from 12.0 to 14.0 percent. This was followed by a US$500 million closed private placement in international markets in November 2024, issued with a 3-year maturity and a coupon rate of 7.75 percent -higher than the 6.625 percent on the sovereign Eurobond issued by the central government in February 2025). Sources: MOF; NSO. These issuances brought the local governments’ debt level to 3.2 percent of GDP by the end of 2024 (Figure B.3). The proceeds from the domestic bonds are being used to fund several critical infrastructure projects, including the construction of the Booroljuut Thermal Power Plant, which aims to boost electricity generation capacity by 150MW; the rehabilitation of road and transport networks; and the construction of the Tuul-1 wastewater collector and associated flood control infrastructure. Meanwhile, the international bond proceeds are earmarked for a 12,000-unit housing development in the Selbe sub-center, with expenditures to be evenly disbursed over the next four years. Looking ahead, the city plans to expand its infrastructure portfolio significantly, although financing strategies for many upcoming projects are yet to be fully defined. According to the 2025 Ulaanbaatar City Master Plan 2040, total infrastructure investment needs are projected to reach MNT236 trillion (approximately US$68 billion) over the 2023–2040 period—nearly three times Mongolia’s GDP in 2024. The plan envisions a more livable and efficient city through improved connectivity and decentralization, including the development of new urban centers and public transport. One of the early flagship initiatives is the metro project, with a projected cost of US$2.4 billion, of which 15 percent will be financed from the city’s budget and the remaining 85 percent from external borrowing. Source: Authors’ analysis based on data from MOF and NSO and reports of Ulaanbaatar City Municipality, Parliament of Mongolia and Mongolian National News Agency and other news agencies. 25 These include the 2021 amendment to the Law on the Legal Status of the Capital City and the 2024 amendment to the Law on Debt Man- agement. According to Article 28 of Debt Management Law, local governors, including the mayor of Ulaanbaatar, must first receive approval for issuing securities from the Citizens’ Representatives’ Meeting at the municipality and request the MOF’s approval at least four months before the start of the fiscal year. If the MOF determines that the proposed issuance complies with the budgetary limits, conditions, and criteria outlined in the Fiscal Stability Law, the proposal is submitted to the Government before the annual budget is finalized. Recent Economic Developments 15 and Outlook 1.4. The current account deficit expanded due to rising imports and falling mineral prices A surge in imports—driven primarily by strong domestic demand—pushed Mongolia’s current account back into deficit in 2024. The current account recorded a deficit of 9.3 percent of GDP, marking a sharp reversal from a 0.6 percent surplus in 2023. This shift was mainly due to a narrowing merchandise trade surplus (Figure 17), as merchandise imports jumped by 25.5 percent, reaching their highest share of GDP since 2012—a period of rapid double-digit growth fueled by robust domestic demand. The surge in imports was largely driven by increased demand for investment and consumer goods. Strong mining activity and expanded public infrastructure spending—particularly in coal production and logistics— boosted imports of capital goods such as machinery, equipment, and fuels, which together accounted for 15.4 percentage points of overall import growth. For example, machinery and equipment imports rose by 35.6 percent, while fuel imports increased by 15.7 percent.26 At the same time, rising household incomes and a sharp increase in consumer lending (Section 1.1 and 1.2) contributed to a surge in demand for imported consumer durables, which accounted for 9.2 percentage points of total import growth (Figure 18). This increase was driven primarily by higher volumes, as illustrated by the strong growth in passenger car imports.27 Similarly, despite a 7.6 percent decline in international food prices, Mongolia’s food imports rose by 19.6 percent in 2024, suggesting that the increase was volume-driven, reflecting greater household purchasing power amid solid economic growth (Section 1.1). In the first three months of 2025, Mongolia’s merchandise imports grew modestly by 1.2 percent y-o-y, reflecting sustained import values for fuel and capital equipment imports. Figure 17. The current account deficit expanded due to rising imports and falling mineral prices Current account balance and its components, in percent of GDP Exports of goods Imports of goods Services balance Income balance Current account balance Source: BOM. 26 While the international price of oil declined in 2024, a 21.9 percent increase in diesel fuel volumes, a crucial input for the mining sector, resulted in greater spending on fuel imports. 27 For instance, the number of imported passenger cars surged by 67.3 percent in 2024, resulting in a 58.4 percent increase in the total import bill for these vehicles. 16 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Merchandise export revenue growth remained subdued in 2024, as declining coal prices offset gains from copper exports. Total merchandise export revenues rose by just 3.9 percent, primarily driven by copper concentrate, which contributed 4.6 percentage points to overall export growth (Figure 19). Notably, OT’s copper concentrate export revenue increased by 21.3 percent, reflecting both improved ore quality—evidenced by increases of 12.9 percent in copper content and 5.4 percent in gold content—and a 10.4 percent rise in the average copper export price.28 However, these gains were partially offset by a 2.6 percent decline in coal export revenue, despite a 19.2 percent increase in export volume. The drop in coal earnings was largely due to an 18.3 percent fall in the average coal export price, driven by weaker global coal prices and a shift in Mongolia’s export composition toward lower-value thermal coal. According to Chinese Customs data, thermal coal’s share in Mongolia’s coal exports to China rose from 16.4 percent in 2023 to 24.0 percent in 2024.29 Over the same period, average export prices for coking and thermal coal declined by 10.2 percent and 22.5 percent, respectively. Total merchandise export revenue fell by 16.9 percent y-o-y in the first three months of 2025, largely driven by a sharp 42.2 percent drop in coal export earnings amid continued price declines and slightly weaker volumes as stocks at the key border port piled up reflecting weakening demand. Figure 18. Strong domestic demand drove higher Figure 19. Falling coal prices weighed on export imports of capital and consumer goods growth, while rising copper exports provided a boost Goods imports bill growth and percentage Goods exports growth and percentage contributions contributions Fuels Agricultural goods Capital goods Others Intermediate Iron ore goods and Coal industrial materials Copper Consumer Gold goods Total exports Total revenue (y/y, %) imports bill (y/y, %) Source: BOM. Source: BOM. Note: Stacked bars indicate the growth decomposition of Note: Stacked bars indicate the growth decomposition of the total imports bill in percentage points. total export earnings in percentage points. 28 OT’s copper concentrate contains copper, gold, and minimal silver and the Mongolian Customs records OT’s exports as “copper concentrate”. The Custom’s official export data for gold only records gold sold through the central bank. 29 Meanwhile, the share of coking coal within Mongolia’s coal exports declined from 79.5 percent in 2023 to 70.8 percent in 2024. Recent Economic Developments 17 and Outlook A small widening of the services deficit also contributed to the large current account shortfall in 2024. The services balance recorded a deficit of 13.0 percent of GDP, up slightly from 12.6 percent in 2023, primarily due to increased outbound tourism. The tourism balance posted a deficit of 1.1 percent of GDP, driven by a 27.0 percent rise in outbound tourism- related expenditures, as the number of outbound trips by Mongolian residents reached 2.7 million (a 34.7 percent increase). In contrast, inbound tourism also grew, with 727.4 thousand visitors recorded in 2024 (up 22.5 percent), contributing to a 12.6 percent increase in tourism-related service income. Other service components, including transportation, remained relatively stable over the year. In the first three months of 2025, the services deficit narrowed to 3.5 percent of GDP, down from 4.4 percent during the same period in 2024. Overall, during the first quarter of 2025, the current account deficit widened to 3.9 percent of GDP, up from 2.3 percent a year earlier, mainly due to a shrinking merchandise trade surplus — from 4.0 percent of GDP to 1.3 percent. Strong capital inflows more than offset the current account deficit and supported Mongolia’s foreign reserves. Net FDI reached 10.7 percent of GDP in 2024, with most inflows directed toward the mining sector, helping to finance the current account deficit and contributing to reserve accumulation (Figure 20). In addition, improved credit ratings (see Section 1.3) enabled financial intermediaries and the Ulaanbaatar City Municipality to raise US$950 million in external financing in 2024, further bolstering reserves. As a result, gross international reserves rose to US$5.5 billion by end-2024 (equivalent to 3.9 months of imports), up from US$4.9 billion at end-2023 (equivalent to 3.6 months of imports). In early 2025, Mongolia faced renewed exchange rate pressures, prompting large foreign exchange interventions and a decline in reserves. During this period, the Municipality of Ulaanbaatar and a private bank secured an additional US$900 million through external bond issuances. At the same time, rising exchange rate depreciation pressures —driven by market expectations about a further weakening of external balances—prompted the BOM to intervene in the foreign exchange market, supplying US$1.9 billion in the first three months—more than 1.6 times the US$1.2 billion provided during the same period in 2024. As a result of the intervention, the tugrug depreciation was limited to 2.0 percent against the U.S. dollar between January 1 and March 31, 2025. Combined with weaker export performance and stronger import demand, these developments contributed to a decline in gross international reserves to US$5.0 billion (3.4 months of imports) by March 2025. 18 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Figure 20. FDI inflows improved, offsetting the weaker current account balance Balance of payment indicators, percent of GDP Current and capital account Net FDI inflow Other financial account flows Official foreign reserves (RHS) Source: BOM. 2. Outlook, risks, and policy recommendations The global economic outlook is expected to weaken in 2025, weighed down by recent global trade policy shifts and heightened uncertainty. Both global growth and commodity prices (excluding precious metals) are projected to decline from 2024 levels, reflecting softer international trade and subdued investment amid rising uncertainty.30 In China— Mongolia’s largest trading partner—growth is forecast to moderate to 4.0 percent in 2025 from 5.0 percent in 2024, with a large fiscal stimulus partly mitigating the impact of external trade pressures.31 While the direct impact of recent global trade policy changes on Mongolia’s economy is expected to be limited, given its minimal trade exposure to the United States, indirect effects—particularly through weaker global growth and lower demand for key commodities—are expected to weigh on economic performance, fiscal revenues, and external balances. In the baseline scenario, Mongolia’s economic growth is projected to be robust in 2025, driven by a surge in copper production and a partial recovery of agriculture following a harsh winter. GDP growth is projected to reach 6.3 percent in 2025, up from 5.0 percent recorded in 2024. In particular, the mining sector is expected to expand by 14.2 percent and contribute about 1.9 percentage points to growth in 2025, largely driven by a projected 30 World Bank (2025b). 31 World Bank (2025c). Recent Economic Developments 19 and Outlook surge in copper production at OT as its underground mining operations expand and the copper content in its concentrate increases. The mining sector, excluding OT, is expected to contract by 7.7 percent due to weaker output in the first quarter, driven by significant stock building at the border. Following two years of dzud-related losses, the agriculture sector is expected to recover moderately and contribute 1.2 percentage points to GDP growth in 2025. Domestic demand growth is expected to moderate in 2025, following strong expansion in 2024. Gross domestic expenditure growth is projected to slow from 16.8 percent in 2024 to 2.3 percent in 2025, primarily due to a deceleration in government consumption, as current budget spending growth is expected to slow after reaching a record high. Private consumption growth is also anticipated to slow, reflecting rising inflation and its impact on household purchasing power, as well as only a gradual recovery in rural livelihoods. Private investment is expected to weaken, driven by a decline in foreign direct investment— particularly due to the tapering of OT’s underground expansion—and subdued domestic investor sentiment amid heightened global uncertainty. Elevated domestic lending rates, as the central bank maintains its tightening stance to curb inflation, along with higher production costs—especially energy, with electricity prices up 30 percent from November 2024—are likely to further weigh on private investment. Public investment under the government’s Four-Year Action Plan is expected to support growth to some extent, although its impact will be partially offset by a rise in imports of capital goods. Nevertheless, as real gold and copper exports are expected to outpace real imports, net exports are anticipated to support GDP growth in 2025. Headline inflation is projected to average 10 percent in 2025, driven primarily by cost- push pressures. The tariff hikes introduced in late 2024 are expected to keep consumer prices elevated in 2025, both through direct and second-round effects along supply chains. Continued expected exchange rate depreciation—reflecting widening external imbalances— will further elevate the cost of imported goods. On the demand side, although private consumption growth is expected to moderate from last year’s high, it remains elevated and continues to exert upward pressure on prices. As a result, headline inflation is expected to accelerate and remain above the central bank’s target range throughout 2025, despite ongoing monetary tightening. Mongolia’s fiscal balance is projected to shift to a moderate deficit of 1.1 percent of GDP in 2025, following a surplus in 2024, as mineral revenues decline, and spending remains elevated. Total budget revenues are forecast to fall to 35.8 percent of GDP, down from 39.2 percent in 2024, largely due to lower receipts from the mining sector. Royalties and CIT—of which roughly half are generated by mining—are expected to decline, reflecting a more than 20 percent expected drop in coal prices and an estimated 8 percent contraction in export volumes. On the expenditure side, based on the approved 2025 budget, total spending is projected to moderate slightly to 36.9 percent of GDP, down from 37.9 percent in 2024. This reflects a shift toward a more neutral fiscal stance after several years of pro- 20 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks cyclical policies, though spending remains slightly above COVID-era levels (36.7 percent in 2020). Despite the expected fiscal deficit, strong nominal GDP growth is projected to help reduce the public debt-to-GDP ratio to 39.3 percent in 2025, down from 43.3 percent in 2024. Mongolia’s external balances are expected to deteriorate in 2025, driven by falling commodity prices and rising investment income outflows. The current account deficit is projected to widen to 12.1 percent of GDP, up from 9.3 percent in 2024. Export revenues are expected to decline slightly, reflecting lower prices despite higher anticipated copper export volumes driven by the expansion of OT’s underground operations. While imports of goods and services are projected to moderate slightly as a share of GDP, the drop in exports will more than offset this, leading to a weaker trade balance. In addition, substantial investment income outflows from OT, reflecting profit repatriation by foreign shareholders, are expected to further widen the current account deficit. Although global oil prices are projected to ease, Mongolia’s fuel import costs are expected to only decline slightly due to a long-term price stabilization agreement with its primary Russian supplier. Foreign direct investment is also expected to soften, reflecting both the tapering of OT- related investments and heightened global uncertainty. Following the recent refinancing of maturing sovereign bonds, there are no large external debt maturities in 2025 for either the public or private sectors. Economic growth is projected to remain robust in the medium-term, averaging 5.2 percent in 2026–27. Growth is expected to be supported by a recovery in agricultural production to pre-dzud levels and steady expansion in non-mining sectors such as manufacturing and construction. While the mining sector is projected to continue contributing positively, its pace of growth is expected to moderate following the one-off boost from OT’s underground expansion in 2025. On the demand side, a rebound in private consumption—driven by easing inflation—and higher capital spending, supported by expected declines in interest rates, will help sustain growth. However, rising imports are expected to offset some of these gains. Inflation is projected to decline gradually over the medium-term and to fall within the central bank’s target range by 2027, reflecting the lagged effects of earlier monetary and macroprudential tightening. Despite the favorable growth outlook, external imbalances and fiscal vulnerabilities are expected to persist in the medium-term. Continued softness in global commodity prices, along with substantial investment income outflows from OT, are projected to keep the current account deficit wide. On the fiscal side, moderating mining revenues are expected to result in a small deficit over the medium-term. Nonetheless, the public debt-to-GDP ratio is projected to decline gradually, supported by strong nominal GDP growth. Public external debt service pressures are expected to remain limited, with no major repayments due until 2027, aside from the US$800 million maturing under the FX swap agreement with the People’s Bank of China in mid-2026. Recent Economic Developments 21 and Outlook Risks to the economic outlook stem from both external and domestic sources. On the external side, global trade policy uncertainty is a key downside risk, with the potential to dampen growth in major trading partners, reduce demand for Mongolia’s commodity exports (notably coal and copper), and exert downward pressure on global commodity prices. This would weigh on exports, fiscal revenues, and investor sentiment, potentially affecting capital flows and investment. Conversely, a stronger-than-expected fiscal stimulus in China or a faster resolution of its property sector challenges could support external demand and commodity prices. Domestically, higher-than-expected public spending—including by the Ulaanbaatar municipality (see Box 2)—and increased quasi-fiscal activity through SOEs could support near-term growth but at the cost of wider fiscal and current account deficits and stronger inflationary pressures. Unchecked credit expansion, particularly through weakly regulated non-bank financial institutions, could also heighten financial sector vulnerabilities and amplify risks in the event of an economic slowdown or tighter monetary conditions. On the upside, faster implementation of key cross-border infrastructure projects could ease logistical bottlenecks and enhance Mongolia’s export capacity, especially for minerals. While the 2025 budget’s focus on a structurally balanced stance marks a positive shift from recent highly procyclical policies, measures to enhance macro-fiscal resilience remain critical. Given heightened risks to the economic outlook and fiscal revenues, further rebuilding fiscal buffers is essential to enhance preparedness for potential downside shocks. Key reforms to augment the fiscal space include gradually returning social assistance spending to pre-pandemic levels while enhancing its effectiveness, implementing pension reforms to reduce reliance on state subsidies, equitably raising fiscal revenue, improving spending efficiency across social sectors, public investment, and the intergovernmental transfer system; and cautiously pacing large projects to avoid undermining fiscal sustainability or widening external imbalances.32 For example, while large-scale public investment projects—including Ulaanbaatar’s ambitious infrastructure plans—have the potential to enhance productivity and support long-term growth, they could pose significant fiscal and debt risks if expected returns are not carefully weighed against their costs. Strengthening the focus of monetary policy on anchoring inflation and safeguarding macroeconomic stability, alongside improved coordination between the central bank and other regulatory institutions, could help reduce risks to financial system stability. Strengthening both the legal and operational independence of the BOM, including clarifying its inflation-focused mandate in the central bank law, is essential to avoid quasi-fiscal interventions that weaken monetary policy transmission (World Bank, 2020 and 2024a). Phasing out such quasi-fiscal activities—such as the subsidized mortgage program—and explicitly prohibiting them under the BOM’s mandate would bolster the central bank’s credibility and effectiveness. At the same time, preserving financial stability amid rapid credit 32 World Bank (2025a, forthcoming). 22 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks growth and rising household indebtedness requires strengthened supervisory coordination. Elevated DSTI ratios raise concerns about household vulnerability—particularly if incomes decline or interest rates rise—posing risks to financial system stability. These risks highlight the urgent need for better data integration and coordinated regulation between the BOM and the FRC to eliminate regulatory arbitrage and preserve household financial resilience. Table 1. Selected macroeconomic indicators   2022 2023 2024e 2025f 2026f 2027f Real GDP Growth at constant market prices 5.0 7.2 5.0 6.3 5.2 5.2 Private Consumption 8.1 9.7 12.9 2.0 8.6 6.8 Government Consumption 6.9 3.2 18.4 1.7 5.3 2.4 Gross Fixed Capital Formation 13.2 5.3 19.7 2.0 2.0 4.3 Exports, Goods and Services 32.3 33.2 0.7 11.4 5.9 2.6 Imports, Goods and Services 29.1 18.9 17.7 4.1 6.8 3.8 Real GDP Growth, at constant factor prices 4.2 7.5 4.9 6.3 5.2 5.2 Agriculture 12.0 -8.9 -28.7 19.0 12.0 6.0 Industry (including mining) -4.5 12.9 6.5 9.9 5.9 5.3 Services 6.9 9.9 12.7 2.4 3.5 5.0 Inflation (CPI, period average) 15.2 10.4 6.8 10.0 8.0 7.5 Current Account Balance (% of GDP) -13.2 0.6 -9.3 -12.1 -11.4 -11.5 Net FDI, Inflow (% of GDP) 13.9 10.6 10.7 7.8 7.5 6.9 Fiscal Revenue (% of GDP) 33.8 34.3 39.2 35.8 35.4 35.0 Fiscal Expenditure (% of GDP) 33.1 31.6 37.9 36.9 36.9 36.1 Fiscal Balance (% of GDP) 0.7 2.6 1.3 -1.1 -1.5 -1.1 Primary Balance (% of GDP) 1.8 4.0 2.6 0.1 -0.5 0.0 Debt (% of GDP) 62.1 44.4 43.3 39.3 36.5 33.9 Source: World Bank staff estimates. Note: Public debt does not include the BOM’s liability under the People’s Bank of China swap line (3.8 percent of GDP as of the end of 2024). Inflation is based on the 2020 consumption basket. Recent Economic Developments 23 and Outlook Chapter 2: Strengthening Disaster Risk Management for Future Challenges 24 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Chapter 2: STRENGTHENING DISASTER RISK MANAGEMENT FOR FUTURE CHALLENGES Effective disaster risk management (DRM) is critical for Mongolia’s long-term growth and prosperity, particularly as the country faces mounting threats from natural hazards that disproportionately impact the poorest communities. Over the past 80 years, the frequency and severity of disasters have doubled, with dzuds occurring once every five years since 2000.33 Most recently, the 2024 dzud alone resulted in the loss of 14.5 percent of the national herd, a 28.7 percent contraction in agricultural production, and a 12.3 percent decline in agriculture-related household incomes, severely affecting rural livelihoods (Figure 21). Floods have also become more frequent over the past decade. Around 18 percent of the population in the three largest cities are now exposed to flood risk, while the urban residents in informal ger residents – dominated by urban poverty – are at disproportionately higher risk. According to the Mongolia Country Climate and Development Report, climate related risks and natural disasters are expected to increase both in frequency and intensity, with dzuds expected to occur roughly once every three years by mid-century.34 Given these increasing risks, and their impact on the most vulnerable populations and overall cost to the economy, reforms to strengthen Mongolia’s DRM system and enhance the country’s resilience to natural hazards remain critical. Figure 21. The sizable loss of livestock during dzuds has led to large contractions in agricultural production Livestock loss in percentage of total livestock and y-o-y percentage change in agricultural production Livestock loss (red = dzud year) Agriculture sector production (y-o-y, change) Source: NSO. Note: Livestock lost in a year is divided by the total number of livestock registered at the beginning of the same year and multiplied by (-1). 33 World Bank (2024b). 34 Under a plausible worst-case scenario that considers consecutive dzuds (as was last experienced in 2000–2002), extensive flooding (akin to the 1966 events in UB), and a loss of coal exports to China (due to unforeseen mitigation policies); all the major sectors in Mongolia’s economy would be affected, GDP losses could reach 20 percent over the three-year period, and 14 percent of people would be unemployed or unable to work. World Bank (2024b). Recent Economic Developments 25 and Outlook 1. Mongolia has strengthened its DRM framework, but key gaps remain Strategic and Legal Framework for DRM Mongolia has increasingly prioritized DRM in its national development strategies and legal frameworks. Key documents include the Law on Disaster Protection, which provides the primary legal basis for DRM preparedness and response, and the National Adaptation Plan (NAP).35 The Government of Mongolia Action Plan 2024–2028 emphasizes mainstreaming disaster risk reduction and strengthening emergency preparedness and response across all levels of government. Long-term policy documents such as Vision 2050 articulate goals including strengthening climate resilience and improving national and local disaster prevention capacities. A comprehensive Climate Change Framework Law is currently being developed to establish institutional arrangements for climate policy and incorporate financing provisions. Implementation Gaps and Institutional Challenges Despite these legal and strategic frameworks, the implementation of DRM measures remains limited. Current efforts largely focus on disaster preparedness and emergency response, with less emphasis on risk reduction and prevention. Where risk reduction measures exist, enforcement mechanisms are weak, and incentive structures are limited. For example, the Law on Disaster Protection mandates that government and corporate entities allocate 1.0 percent and 1.5 percent of their annual production and service costs to DRM activities. However, compliance is low due to the absence of monitoring and enforcement tools (see the following discussion on disaster risk financing framework). Integration of DRM into broader planning and budgeting processes remains partial, limiting the development of physical and financial resilience. Urban Risk and Infrastructure Vulnerabilities Mongolia’s infrastructure and spatial planning processes face growing challenges in managing exposure to natural hazards, particularly in urban areas. Vulnerability is exacerbated by rapid urbanization and unplanned expansion, especially in ger areas where 60 percent of Mongolia’s urban population resides. These informal settlements are often located on hillsides, near gullies, and in other high-risk zones prone to floods and 35 The Law of Disaster Protection requires all levels of government (including Sub-national governments) and disaster protection units to have disaster protection plans and mitigation measures. It regulates the coordination of the involvement of the Emergency Management Organiza- tion of Mongolia, the National Council on Disaster Risk Reduction, the State Emergency Commission, the State Services of Disaster Protection, State and Local Authorities, enterprises, private entities, and civil society in the framework of disaster prevention, preparedness, disaster risk reduction, search and rescue, response and recovery activities, as well as to implement state control on disaster protection. The NAP aims to support medium- to long-term climate change adaptation planning and budgeting for priority sectors such as agriculture, forestry, and water resource management. A Disaster Risk Management manual was prepared by the government in December 2023 which contains disaster risk reduction strategies and prevention activities to equip disaster risk reduction councils with essential skills for adapting to climate related risks and integrating disaster risk reduction strategies into their duties. 26 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks landslides. An estimated 18 percent of the population in the three largest cities live under flood exposure. 36,37,38 Climate related risks and continued migration to urban centers are likely to increase exposure to both disaster and climate risks in the coming years.39 Monitoring Systems and Data Gaps The effectiveness of Mongolia’s DRM efforts is constrained by outdated monitoring systems and data limitations. Most of the country’s weather, water, and climate monitoring systems remain manual, reducing the accuracy of forecasts and early warning capabilities.40 While progress has been made in deploying digital tools and real-time sensors, national coverage and integration with decision-making processes remain limited. In addition, hazard mapping and exposure data at the national and local levels are often outdated or incomplete, restricting the government’s ability to assess the vulnerability of critical infrastructure and plan accordingly. Disaster Risk Financing Framework Mongolia has developed a range of financing mechanisms to respond to disasters, but they are heavily weighted toward ex-post measures. The government primarily relies on treasury cash reserves, in-year budget reallocations, the Government Reserve Fund, and the FSF to finance emergency response and recovery. The Government Reserve Fund is capped at 1 percent of GDP and is used to cover relief expenditures related to crises caused by natural hazards or other events. However, it is earmarked for multiple uses41 and may be exhausted before a disaster occurs later in the fiscal year. The FSF can only be accessed if disaster- related expenditures exceed 5 percent of GDP, a threshold that would not be met even by a 1-in-250-year event projected to cause losses of 3.7 percent of GDP.42 Ex-ante financing remains limited. Although disaster risk reduction budgets have more than quadrupled between 2018 and 2021, funding is generally insufficient for large-scale risk reduction investments. A Contingency Fund managed by the Ministry of Finance, in addition to the Reserve Fund, is intended for sudden revenue shortfalls caused by unforeseeable events such as disruptions in domestic production and services, including agriculture.43 A National Disaster Risk Financing Strategy is currently under development to coordinate and rationalize the use of these instruments. The absence of standardized risk assessment, management, and transfer mechanisms further weakens the country’s financial preparedness for disasters. 36 World Bank (2024b). 37 World Bank (2022). 38 Central Asia Regional Economic Cooperation (2022). 39 Central Asia Regional Economic Cooperation (2022). 40 World Bank (2021). 41 E.g., settlement payments where the Government of Mongolia is found liable at International Court of Arbitration. 42 World Bank (2024b). 43 Food and Agriculture Organization of the United Nations (2024). Recent Economic Developments 27 and Outlook Disaster Risk Insurance Market Development The development of disaster risk insurance markets is constrained by regulatory gaps. The Disaster Protection Law requires all legal entities, including government agencies and private companies, to have insurance against natural hazard risks. However, enforcement is weak, and the supporting legal framework for private insurance market development is incomplete. The draft Disaster Risk Insurance Bill, which aims to address these gaps, has yet to be finalized and enacted.44 These regulatory shortcomings have also limited the scaling up of hybrid insurance initiatives such as the index-based livestock and wheat insurance programs. One such initiative is the Index-Based Livestock Insurance (IBLI) program, which illustrates both the potential and the limitations of Mongolia’s current disaster insurance landscape. Despite its relevance for rural livelihoods, the IBLI program faces significant design and coverage constraints that undermine its effectiveness as a risk transfer instrument. In Mongolia’s herder-based economy where livestock is a primary livelihood asset, IBLI is designed to compensate for losses during severe winters. However, as of 2023, only 14.4 percent of herder households and 9.9 percent of livestock were insured (Figure 22). Its design also reduces its effectiveness: payouts are triggered only when soum-level livestock mortality exceeds 6 percent, which means individual households suffering substantial losses may not qualify. These limitations restrict IBLI’s capacity to meaningfully reduce household vulnerability and scale as a disaster insurance mechanism. Figure 22. Less than 10 percent of total livestock is insured Insurance prevalence Share of herder households with insurance Share of insured livestock Source: NSO. Note: Share of insured livestock at the beginning of each year. The Index-Based Livestock Insurance is triggered only if losses exceed the predefined threshold set within a specific soum and the herders are reimbursed proportionally for their loss exceeding that threshold only. 44 World Bank (2024b). 28 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks Adaptive Social Protection and Livelihood Resilience Adaptive Social Protection (ASP) mechanisms remain underutilized in Mongolia’s DRM framework. ASP aims to help poor and vulnerable households prepare for, cope with, and adapt to shocks by linking social protection with risk management tools.45 Although Mongolia’s COVID-19 response demonstrated the potential of ASP tools to deliver timely support, several challenges persist.46 Social assistance remains weakly integrated into the national DRM strategy and subnational coordination structures, often resulting in ad hoc and delayed support during disasters. Data and delivery systems for ASP also face structural limitations. The Integrated Administrative Household Database, launched in 2023 as a unified social registry, is a promising step, but it still lacks full integration with health insurance, social,47 and public service databases. In addition, outdated information and limited real-time access to household- and asset-level data hinder the effective identification and targeting of beneficiaries, particularly herders. Financing for ASP remains predominantly ex-post, relying heavily on reallocation of existing budget revenues. 2. Policy recommendations To address the gaps identified in Mongolia’s current DRM system, the government can adopt a more comprehensive and proactive approach grounded in international best practices. These practices emphasize integrated disaster risk governance across prevention, preparedness, response, recovery, financing, and rehabilitation. Key priorities include institutional reforms, strengthened coordination, integration of DRM into development planning, and enhanced financial preparedness. Recommendations are structured to reflect the main areas of analysis covered in the report. Strengthening the legal, policy, and institutional framework for DRM is essential. Finalizing and operationalizing the Climate Change Framework Law and the National Disaster Risk Financing Strategy would provide a coordinated basis for implementation. Disaster risk reduction measures can be more systematically integrated into fiscal planning, public investment management, and macro-fiscal risk analysis.48 Strengthening these efforts requires reinforcing the policy, legal, and institutional framework for disaster risk reduction while developing and implementing priority disaster risk financing and insurance (DRFI) solutions following a risk-layering approach. 45 Specifically, ASP programs are designed to scale up in response to shocks, helping households meet immediate needs while strengthening long-term resilience by reducing negative coping strategies and protecting human capital and livelihoods. Negative coping strategies in re- sponse to economic shocks can include, for example, selling productive assets, reducing essential expenses such as food, healthcare, or educa- tion, and taking on high-interest loans. 46 World Bank (2025a, forthcoming); World Bank (2025d, forthcoming). 47 It currently incorporates administrative information from seven databases – civil registry (marriage, death, birth), property, motor vehicles, livestock census, tax, social insurance, and the NSO’s Population and Household Registration Database. 48 E.g., a special Dzud Resilience window within the Local Development Fund could be established, with appropriate science-based allocation mechanisms. Recent Economic Developments 29 and Outlook Building resilient infrastructure and enhancing risk awareness are vital for reducing vulnerability. This includes investing in flood protection measures and resilient infrastructure systems in hazard prone urban areas and updating and enforcing building codes and infrastructure design standards, particularly for critical infrastructure.49 Promoting sustainable land-use planning can also help reduce exposure to hazards such as urban flooding. At the same time, investments in early warning systems and emergency communication infrastructure are necessary, especially in rural areas. Public awareness and community-based preparedness can be improved through targeted education and training initiatives. Greater investment in emergency preparedness and targeted response can help reduce the risk and loss associated with disasters. Anticipatory actions—such as stockpiling emergency feed, improving logistics for distribution, and rehabilitating river basins—can be highly cost-effective, particularly in agriculture. For instance, research shows that every US$1 invested in Mongolia’s agrifood sector could yield over US$7. Moreover, early interventions to improve preparedness for a dzud event can reduce livestock mortality by an average of four cattle per household, underscoring the importance of timely preparedness measures.50 While recent initiatives—such as the “New Cooperative – Wealthy Herder” program launched alongside the 2024 Law on Mitigating the Negative Effects of Climate Change on Traditional Livestock Husbandry—seek to improve herders’ resilience, more targeted efforts are needed to address immediate preparedness gaps, including feed reserves and early response mechanisms. Flood protection infrastructure and risk-informed land use planning are also critical for mitigating the impact of high-intensity rainfall. Mongolia can enhance its disaster risk financing instruments and strengthen its financial preparedness to manage disasters more cost-effectively.51 DRFI includes creating risk financing solutions that mobilize and channel funds for response and reconstruction after disasters (Figure 23), supported by analytics and policies. For Mongolia, the government could reassess the 5 percent of GDP threshold required under the Law on Fiscal Stability to trigger FSF drawdowns and clarify access procedures. The existing DRM spending provisions under the Law on Disaster Protection—1.0 percent for government and 1.5 percent for the private sector—should be reviewed for enforcement and adequacy. The establishment of a contingent financing facility, supported by multilateral and/or bilateral partners, would ensure timely access to liquidity after disasters. For example, using innovative contingent financing instruments, such as the World Bank’s Catastrophe Deferred Drawdown Option 49 Public enforcement of building codes can be supplemented by educated banks and private insurers who are key in ensuring only compliant buildings that are eligible for financing and therefore provide a strong private-sector-led incentive to comply. 50 Food and Agriculture Organization of the United Nations (2024). 51 Note that before exploring legal reforms to adjust different budgetary instruments, there is a need to undertake an analysis to quantify the climate-related contingent liability of the government and the funding gap, as well as a value-for-money analysis to support risk-informed deci- sion-making on the most cost-effective combination of financial instruments for government to use (optimal risk layering strategy). Mongolia can enhance its disaster risk financing instruments and strengthen its financial preparedness to manage disasters more cost-effectively. 51 DRFI includes creating risk financing solutions that mobilize and channel funds for response and reconstruction after disasters (Figure 23), supported by analytics and policies. For Mongolia, the government could reassess the 5 percent of GDP threshold required under the Law on Fiscal Stability to trigger FSF drawdowns 30 MONGOLIA ECONOMIC and clarify access UPDATE procedures. The existing DRM spending provisions under the Law on Disaster Building Resilience Amid Risks Protection—1.0 percent for government and 1.5 percent for the private sector—should be reviewed for enforcement and adequacy. The establishment of a contingent financing facility, supported by multilateral and/or bilateral partners, would ensure timely access to liquidity after (Cat DDO), has shown to be effective in providing immediate liquidity in the aftermath disasters. For example, using innovative contingent financing instruments, such as the World of a disaster in several countries (see Box 3). Similar mechanisms could be tailored to Bank’s Catastrophe Deferred Drawdown Option (Cat DDO), has shown to be effective in providing Mongolia’s climate and hazard risks to improve the speed and effectiveness of disaster immediate liquidity in the aftermath of a disaster in several countries (see Box 3). Similar response. In addition, the design and implementation of sovereign risk transfer mechanisms mechanisms can strengthen could be tailored fiscal to Mongolia’s resilience climate by leveraging and hazard domestic risks to improve insurance markets,the speed and regional risk effectiveness pools, of disaster response. and international In addition, reinsurance the design and capital and markets.52 implementation of sovereign risk transfer mechanisms can strengthen fiscal resilience by leveraging domestic insurance markets, regional risk pools, and international reinsurance and capital markets. 52 Figure 23. Various mechanisms are available to finance disaster risk Figure 23. Various Mechanisms are Available to Finance Disaster Risk Source. World Bank Disaster Risk Finance and Insurance Program Source. World Bank Disaster Risk Finance and Insurance Program 50 Food and Agriculture Organization of the United Nations (2024). 51 Note that before exploring legal reforms to adjust different budgetary instruments, there is a need to undertake an analysis to quantify the climate-related contingent liability of the government and the funding gap, as well as a value-for-money analysis to support risk-informed decision-making on the most cost-effective combination of financial instruments for government to use 3: Strengthening Box risk (optimal layering strategy). fiscal preparedness through contingent financing instruments 52 World Bank (2024a). As climate-related shocks intensify, Mongolia faces growing fiscal risks from natural disasters. 37 While budget reallocations and emergency borrowing have traditionally been used to respond to disasters, these approaches can be costly, slow, and disruptive to planned spending. Contin- gent financing instruments—such as the World Bank’s Cat DDO—offer an alternative that can strengthen fiscal preparedness and reduce the economic cost of disaster response. The Cat DDO is a pre-arranged credit line that provides quick access to liquidity following a disaster, conditional on a sound policy framework for disaster risk management. Countries that have used this instrument—including the Philippines, Morocco, and Romania—have found it useful in avoiding delayed responses and reducing the need for emergency borrowing. 52 World Bank (2024b). Recent Economic Developments 31 and Outlook For Mongolia, a Cat DDO could complement other disaster risk financing tools by: • Enhancing liquidity at critical moments, helping protect priority spending during emergencies; • Improving predictability in fiscal planning, especially in years with high climate-re- lated risk; and • Encouraging continued progress on DRM policies, given its policy-linked structure. While not a substitute for broader risk financing or insurance, contingent credit can offer strong financial returns by reducing economic disruption, safeguarding public investment, and lowering the cost of disaster response over time. In a context where climate shocks like dzuds and floods are expected to become more frequent and severe, integrating contingent financing into Mongolia’s fiscal risk management strategy could offer a prudent, cost-effective comple- ment to existing buffers. Source: World Bank. Mongolia would benefit from a more developed domestic insurance market for disaster risk. The timely enactment of the Disaster Risk Insurance Bill can facilitate the creation of new products —such as livestock and crop insurance —improve the design of existing insurance programs, support insurer capacity-building, and clarify stakeholder responsibilities across the system. Incorporating solutions for last-mile delivery challenges can help extend insurance coverage for vulnerable populations. Public awareness and selective subsidies could further support uptake. Institutionalizing ASP as a core element of DRM and social protection systems can improve the timeliness and effectiveness of the response. This can be achieved by integrating ASP into national laws and strategies, as well as the draft Disaster Risk Financing Strategy. It is important to define the role of the Ministry of Family, Labor and Social Protection (MFLSP) within DRM coordination mechanisms at national and subnational levels.53 The systems that support ASP need to be strengthened. This includes expanding the Integrated Household Database to include missing administrative records and increasing the frequency and accuracy of household data updates. Improved access to real-time disaster impact data and enhanced household welfare assessment tools are also needed to better identify vulnerable populations. In parallel, frameworks should be established for the temporary scale-up of social assistance programs in response to shocks.54, 55 53 World Bank (2025d, forthcoming). 54 For example, when a dzud is predicted, herders in high-risk soums that are beneficiaries of the Child Money Program, Food Stamp Program and/or the Social Welfare Pension could be given the option to receive three-months’ worth of transfers in a lump-sum payment in October (i.e., payments for October, November, and December) and/or in January (i.e., payments for January, February, and March), instead of receiving the regular monthly benefices. 55 World Bank (2024b). 32 MONGOLIA ECONOMIC UPDATE Building Resilience Amid Risks REFERENCES Bank of Mongolia and Bank of Korea. (2024). 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