Can monetary policy guarantee 4-5% economic growth in 2023?

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Since the macroeconomic policy is aimed at improving the quality of citizens’ life by ensuring economic growth, keeping inflation and unemployment at a stable low level and reducing fiscal and trade deficits, the draft basic guidelines for 2023 state monetary policy, which is expected to be passed by Parliament this week, is drawing people’s attention.

Mongol Bank developed the draft guideline to support the economic and financial stability of Mongolia and overcome the pandemic and international conflict situation, the rise in foreign and domestic prices and other spillovers through the coordinated implementation of budget, monetary and financial policies.

The pandemic effects and the external geopolitical tensions have directly and indirectly affected the country’s economy for the past two years.

Mongol Bank explains that progressive measures taken in terms of budget, monetary and financial policies have yielded results, expanding the economy by 1.9 percent in the first half of 2022 compared to the same period of last year. The bank views that the economy of all sectors, except transportation, mining and construction, has grown.

If exports hike, the economy will grow by 3 percent this year and 4 to 5 percent in 2023, according to the draft monetary policy.

Governor of Mongol Bank B.Lkhagvasuren informed that effective implementation of programs to combat money laundering and financing of terrorism at the national level, raise public awareness and protect the interests of financial consumers are included in the draft guideline. Policy activities targeted at maintaining financial stability are also reflected.

According to the bank, the following five measures will be implemented within the scope of measures to solve the problems arising in foreign trade, transportation and logistics spheres, and increase the export of raw materials, goods and products:

• To improve the capacity and infrastructure of ports to meet international standards

• To increase the flow of exports and imports and make effective arrangements to avoid amassing containers on one side

• To study possible channels to increase transport routes and use them when necessary

• To investigate the risks of supply delays and plan countermeasures

• To develop a transport and logistics policy and create a legal environment that is consistent with Mongolia’s foreign trade policy


Economists and politicians are saying that as people’s lives are deteriorating and inflation is increasing, the monetary policy for next year should target at reducing inflation.

Until recently, inflation was driven by supply-side and global factors, such as high international prices, the decline in domestic meat production and supply disruptions related to China’s border restrictions and sanctions against Russia. High food and energy inflation is leading to large second-round effects on inflation despite “still-weak” labor market conditions in the country, international experts concluded.

Therefore, Mongol Bank has planned to implement a monetary policy aimed at stabilizing inflation at a single-digit number in 2023 as curbing inflation to a low level in the future is a prerequisite for ensuring stable economic growth.

According to the International Monetary Fund (IMF), inflation is expected to remain well above the bank’s target band untill end-2023.

Rising meat production, falling international food and energy prices and the agreement to purchase Russian oil at a discount can ease inflationary and external pressures. However, the impact of fiscal and quasi-fiscal support and the approved large minimum wage increase will continue to push up inflation, the fund says. In order to reduce inflation, IMF recommended phasing out quasi-fiscal operations and ensuring high policy rates since forward-looking real rates are positive. Meanwhile, the central bank emphasizes the need to pay special attention to increasing export income for better economic growth.

This year, Mongol Bank has increased the policy interest rate by a total of six percentage points through four revisions in addition to making policy adjustments. However, it has become clear that trying to solve the current problems and difficulties by tightening the monetary policy in the future carries the risk of dragging down the private sector. This prompts the central bank to develop other policies and activities without delay.


Economists and experts are pressing the government to urgently make stronger policy adjustments to address Mongolia’s rising internal and external imbalances. This entails ensuring much greater exchange rate flexibility, strengthening international reserves to facilitate large external debt rollovers in 2023 and further tightening monetary policy.

External balances have continued to worsen because of rising imports related to infrastructure and construction projects and the release of pent-up demand for consumer durables and services financed by savings accumulated during the pandemic.

The draft document provides for improving external solvency, preventing potential risks and directing macroeconomic policies to ensure the internal and external balance of the economy in 2023. In this context, by solving the problems of transportation and logistics and eliminating border bottlenecks, Mongol Bank views it is possible to heighten export income, improve trade turnover, reduce transportation costs and solve pressure on prices and exchange rates.

On top of that, the deterioration of our country’s trade balance affects the decrease in the net inflow of foreign currency. As a result, there is a shortage of foreign currency and prices rise, which affects all sectors.

Mongol Bank believes that the following factors have contributed to the widening of the trade deficit:

• In recent quarters, commodity prices have been high on the global market but our country’s export prices have remained low.

• Financing of large project constructions from internal sources and export earnings has reduced foreign exchange inflows and expanded imports.

• Increases in import prices of products such as fuel and food have escalated import bills.

• High budget costs

In order to implement a strict budget and monetary policy in accordance with the internal financial capacity, Mongol Bank has included a number of issues, such as policy goals to be implemented in cooperation with other state-owned organizations, in the draft basic guidelines for 2023 state monetary policy.

To ensure economic stability in the medium and long terms, experts say that it is necessary to implement policies and regulations aimed at deepening the development of the industrial sector, protecting import-substituting industries and deepening economic diversification by supporting exports within the framework of the state budget, monetary policy and financial regulation.

Also, they highlight the need to take necessary measures to mitigate the negative effects of external factors and support the economy to improve external solvency and broaden external financing sources.

In the medium term, the central bank has proposed to continue to support the development of foreign trade financial products and services in support of non-mining exports, which have become an essential factor for sustainable development, and create a sustainable green financing system. It views it as appropriate to direct macroeconomic policies to prevent future risks and ensure an internal and external balance of the economy.

Within the framework of the above policy, urgent measures are needed to raise foreign exchange reserves and decelerate the weakening of the tugrug against the US dollar. Director of Reserve Management Financial Markets of Mongol Bank A.Enkhjin emphasized that the flexibility of the tugrug exchange rate will be maintained in the future. In other words, the central bank will support the policy of setting the exchange rate of tugrug against the US dollar based on market principles.

She elaborated at the recent parliamentary session, “In the medium and long terms, we need to preserve foreign exchange reserves necessary for stable national development. We have no choice but to keep the tugrug exchange rate flexible. The US dollar has strengthened by 16 percent against major currencies but weakened against the US dollar by 18 percent compared to the same period of last year. Since Mongolia is a country with limited resources, we need to prioritize our policies. If we do not prioritize our policies to be implemented in accordance with our foreign exchange reserves, our development plans will not be aligned with our foreign exchange reserves.”

Mentioning that 75 percent of the total population receives some type of welfare, A.Enkhjin said that without cutting down welfare and public spending, it will be very difficult to meet the targets for foreign exchange reserve, exchange rate and inflation.

International organizations say that introducing substantial targeting of social assistance toward the vulnerable and progressivity in personal income taxation would signal a welcome and durable shift in the direction of fiscal policy toward prudence. The central bank should limit foreign exchange market interventions to disorderly market conditions and design an effective communication strategy, they recommend. 

In particular, IMF has proposed Mongol Bank to accumulate reserves through opportunistic interventions and be fully cognizant of external liability management plans of all entities. In addition to consolidation, the government is advised to sharply cut back and prioritize public investment, ensure that Mongolia’s repatriation requirements are respected, improve coordination with the central bank on external payments and roll back tax exemptions on imports. The government should also continue to facilitate automated zero-contact exports at the border, open new trade portals and facilitate new foreign direct investment inflows. It should continue work with key stakeholders to ensure Russian oil import payments can proceed smoothly, the fund highlighted.

During the parliamentary plenary session, Governor of Mongol Bank B.Lkhagvasuren emphasized the need to grow foreign currency reserves as Mongolia will settle several foreign bond payments in the next two years.

In 2023, in particular, a total of 1.3 billion USD will be spent on bond repayments, so there is a need to build foreign exchange reserves quickly. In connection with the international economic situation and the situation of our country, international experts flagged it “impossible” for Mongolia to raise bonds with an interest rate of less than 10 percent on the international market.

The governor informed, “If the export of coal continues normally, it will be possible to  pay off foreign debts with less pressure. Mongolia needs to support foreign direct investment. Currently, there is no direct foreign investment coming to our country, except for the Oyu Tolgoi Project. 2023 will be the most ‘stressful’ year for Development Bank bonds and private sector liabilities. In order to prepare for this, Mongol Bank will maintain an adequate level of foreign exchange reserves.”

In any case, Mongolia’s economic strength will depend critically on the policies approved by Parliament in the coming months, especially the monetary policy and state budget. All we can do is nudge them in the right direction and hope that they make the most feasible and effective decisions.

Misheel Lkhasuren