According to a report released by the International Monetary Fund (IMF) on May 5th, Mongolia's economic growth forecast has been revised downward to 1%. The report states that under the ongoing Russia-Ukraine conflict and the impact of supply chains, potential risks to Mongolia's economy have begun to emerge. Due to the global rise in prices, the country's inflation rate is expected to remain high.
A report released by Mongolia's National Statistical Office at the end of April shows that the country's inflation rate in March was 14.4%. The Central Bank of Mongolia stated that, considering the current domestic and international economic situation, there is still a risk of further increases in the inflation rate. Data indicates that Mongolia's inflation level has been intensifying since April 2021 and has continued to rise since then. For example, the highest price increases have been in logistics and food prices, which have risen by nearly 24% and 18%, respectively. This inflation rate is not only high in the region but also globally.
The IMF stated that if these issues are resolved, Mongolia's economic situation will improve in 2020. In the face of inflationary pressures, the IMF has advised Mongolian authorities to provide further economic support only to those in need, rather than to all Mongolians. For instance, the country's oil and most consumer goods need to be imported, but there is currently a shortage of imported goods, which further exacerbates inflationary pressures.
According to the latest "Asian Development Outlook 2022" report released by the Asian Development Bank a week ago, Mongolia has fallen into an economic predicament due to negative economic growth for three consecutive quarters. At the same time, trade in mineral product exports has been hindered by the pandemic and the Russia-Ukraine conflict, and the slowdown in international commodity market demand has not only expanded the country's budget deficit but also had an adverse impact on the stability of fiscal conditions, increasing the vulnerability of Mongolia's economy.
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The latest data from Mongolia's General Administration of Customs shows that in the first quarter of 2022, the country's coal exports decreased by 62.2%, and other mineral exports, which account for most of the export revenue, were also very low. For example, in January alone, the total foreign trade turnover decreased by $2.6 million compared to the same period in 2021 (only $1.096 billion), with the total export of goods and raw materials dropping by 16%.
As a result, Mongolia's ability to obtain foreign exchange reserves through mineral product exports has begun to decline, putting pressure on currency stability and the safety of foreign reserves. This also indicates that the current situation of a significant contraction in foreign exchange income, continuous devaluation of the local currency, and a sharp rise in inflation in Mongolia is likely to continue.
It is against these backgrounds that, as a response, Mongolian authorities have announced on April 10th that the country will fully enter a state of conservation, intensifying the formulation or implementation of countermeasures. For example, as we reported last month, these measures include not purchasing new cars and office furniture and other facilities for the current and next year, re-examining the budget expenditures of state-owned and local companies and putting them into a state of conservation, and so on.
Although Mongolia has vast grasslands and rich mineral resources, with more than 80 types of minerals such as iron ore, copper, coal, gold, and rare earths that have been identified, making it one of the 12 countries with the richest natural wealth in the world, the变现 ability of mineral products, which account for the pillar industry of the country, is declining. Along with the decline in foreign reserve reserves, foreign debt is also growing rapidly.
According to the latest data from Mongolia's National Statistical Office, as of April, the country's total foreign debt has reached $34 billion, an increase of $1.2 billion from 2020. Based on Mongolia's total population of 3.3 million, the per capita debt is as high as $10,000. However, it is worth noting that currently, Mongolia only has about $4.9 billion in foreign reserves.
This naturally reminds the outside world of the 2014 scenario when the sharp drop in commodity prices plunged Mongolia's economy into heavy debt, with many Mongolian citizens donating their horses, gold, and jewelry to help the government repay its debts. It is against these backgrounds that analysts believe that increasing proximity to the Chinese market is becoming a new driving force for Mongolia to emerge from its economic predicament and the global economic growth recovery environment triggered by the Russia-Ukraine conflict, the tightening of monetary policy by the Federal Reserve, and public health crises. Especially under the pressure of high inflation and external debt, a shortage of foreign reserves, and the downward adjustment of economic growth expectations by the IMF.Meanwhile, an increasing number of countries, including Iran, Hungary, and Turkey, are also reducing their US dollar reserves and approaching the Chinese market, choosing the Chinese yuan to hedge against the risk of dollar spillover. The yuan is continuously being purchased by global investors, and data shows that China has become Mongolia's largest trading partner and the second-largest source of investment.
In this regard, according to media reports, Chinese buyers have expressed interest in increasing the import of coal from Mongolia. We have noticed that, according to the Mongolian Border Port Commission, Mongolia has already started exporting coal to the Chinese market through the Gashuun Sukhait-Ganqimaodu port with more than 300 trucks, and the number of coal transport vehicles will increase in the coming months. At the same time, China has also asked Mongolia to improve its coal dust pollution control capabilities. Data shows that as of April 21, 2022, Mongolia exported a total of 3.3 million tons of coal in 2022.
At the same time, in order to save the economy and improve the singularity of the economic structure, Mongolia is also learning from China's economic development model and has established a free trade and economic zone in Zamyn-Uud City, the largest land port on the China-Mongolia border. We have noticed that the yuan can be used for consumption here and has become one of the driving forces for Mongolia's economic growth. These are even more precious for Mongolia's economy, which is caught in high prices and heavily in debt after a shortage of foreign reserves.
Data obtained by our team at the Mongolian Economic Forum held on April 7, 2022, shows that there are currently 88 enterprises in the Zamyn-Uud Free Zone with 113 hectares of land, with a total investment of about 1.481 billion yuan. These projects mainly include manufacturing, transportation and logistics, and tourism industries.
The latest development is that the State Great Khural of Mongolia has reviewed and passed the draft resolution on April 7 to establish a free economic zone in the Khushig Valley, making it a financial center for Mongolia. Against the backdrop of Mongolia's accession to the Asia-Pacific Trade Agreement, Chinese enterprises will become more convenient in driving Mongolia's economic and trade, and Mongolia is also building a new railway to connect with the Mandula port on the China-Mongolia border, which can reduce the transportation cost of iron ore by 4-8 US dollars.
New data shows that the China-Mongolia trade volume now accounts for 68% of Mongolia's total trade volume. For example, Mongolian people often drive trucks to queue up at Erlian Hot to shop and buy Chinese-made high-quality and low-priced products. After returning loaded, they transport them to other cities to make a profit and inject vitality into local economic development. This is because Mongolian nationals enjoy visa-free treatment here and it is a major consumption place for them in China.
Not only that, Mongolia is also vigorously promoting the construction of the Chagaan De乌拉 border Ulan Bator port, aiming to further increase the export of coking coal to China, hoping to obtain higher benefits from mineral resource income. In addition, Mongolia has formulated a series of preferential policies to develop digital assets, hoping to seize the great opportunity of China's digital economic development. All of the above are particularly precious for Mongolia's economy, which is caught in a shortage of foreign reserves, heavily in debt, and high prices. Obviously, this has brought convenience to Mongolia's economy and businesses in terms of currency, transportation, and infrastructure.