Mongolia’s economy grew faster than expected last year, lifted by record coal sales to China and steady copper exports that boosted growth to a five-year high.

The economy expanded by 7% in 2023, Mongolia’s National Statistical Office reported on February 19, eclipsing the 5% growth rate seen in the previous year. Growth also exceeded the International Monetary Fund’s (IMF’s) October forecast of 5.5%. 

“The better performance was mainly because of stronger coal output and exports, and transportation services related to mining production and exports,” said Angana Banerji, IMF mission chief to Mongolia.

Strong coal sales fuelled economic growth as annual coal exports rose to a record-high 66.7mn tonnes in 2023 from 31.7mn tonnes a year earlier, according to the statistical office. Prior to last year, Mongolia’s previous coal export record was 2019’s 36.5mn tonnes.

The value of last year’s coal exports was $8.8bn, accounting for more than half of the country’s $15.2 billion in total export revenue. 

The surge in exports gave Mongolia a $5.9bn trade surplus. They also helped lift the central bank’s foreign cash reserves to $4.8bn, marking a 36% y/y increase.

China bought nearly all of Mongolia’s mineral exports as Beijing sought alternative markets and prices that can undercut those offered by Australia and Russia. Mongolia shares a 2,880-mile-long (4,635-kilometre-long) border with China. Infrastructure upgrades at frontier ports straddling the two countries have helped facilitate trade.

Mongolia last year also exported $2.6bn in copper, mainly from Oyu Tolgoi, the Rio Tinto-operated mine located 80 km north of the China-Mongolia frontier. Gold ($738mn) and iron ore ($444mn) were other solid export earners.

Crude oil production also showed some promise last year with 4.7mn barrels exported, up from just 237,000 barrels exported in 2021. For now, Mongolian crude is exported to China but in the future Ulaanbaatar hopes it can use domestic oil to refine its own petroleum products, reducing reliance on Russian imports.

Coal exports and revenue have improved partially through a restructuring of Erdenes Tavan Tolgoi, Mongolia’s largest state-owned coal producer. The company was in utter turmoil in late 2022 after authorities arrested several of its leaders on “coal theft” corruption charges.

The ensuing crackdown mainly targeted coal transporters and officials at border crossings. The government then ordered sales of state-owned coal to be sold through the Mongolian Stock Exchange, which helped improve accounting and transparency in the coal industry.

“The reduction in corruption-related costs and improved transparency not only benefits Mongolia's economy but also enhances its competitiveness in the global coal market,” said Amar Adiya, publisher of online newsletter Mongolia Weekly.

The government has also helped itself by improving coal transportation links to China. Over the past two years, Mongolia has completed key rail links from its mines in the Gobi Desert running to border crossings with China in a bid to boost mineral exports. 

Mongolia’s middle class saw benefits of the export-fuelled growth. Public sector wages grew 30-40% last year and public sector employees are set to receive another 10% raise in April, the IMF said. 

Reforms at major state mines and infrastructure upgrades have paid dividends for Mongolia's economy, Amar said. He also credits the government of Prime Minister Oyun-Erdene Luvsannamsrai for paying off bonds in a timely fashion and running a budget surplus.

The Oyun-Erdene government has dug itself out of a hole created by covid pandemic lockdowns. In 2020, the economy shrank 4.6% and in 2021 growth was just 1.6%. The 2023 GDP numbers are the highest recorded since Mongolia registered 7.7% growth in 2018.

But Amar observed that the government needs to do a better job in distributing wealth. 

“Leaders will need to translate macro gains into improved livelihoods and welfare if they want to convince the public that Mongolia’s economy truly offers a brighter horizon,” said Amar.

But the IMF worries that increased spending power for average Mongolians will create inflationary pressure in the coming months. Inflation is relatively high at 7.6% and the concern is that it could head toward double digits if spending surges with mining revenue and cash handouts ahead of elections due in June.

External pressures are another concern. An economy that leans so heavily on its mining exports could quickly sour if China’s economy cools.

“Ordinary Mongolians continue to face high costs of living, especially food, fuel and utilities,” said Amar. “While the economy may be turning around on paper, inequality appears entrenched.”

Recognising that leaning too heavily on mining carries risk, the government has tried diversifying the economy by promoting international tourism and agriculture. 

It rolled out a media campaign, eased visa restrictions and declared 2023 the “Year to Visit Mongolia.” By summer’s end, tourists had spent around $650mn in the country, according to Montsame, the state-run news agency.

In terms of agriculture, Mongolia rarely exports meat beyond China, but last year delivered 2.6mn tonnes of sheep and goat meat to Iran, raising around $9mn.

While diversification of the economy is a worthwhile endeavour for the current government – and whoever leads the country after the June elections – no one doubts that mining will be the mainstay of Mongolia’s economy for possibly decades to come. 

More investment in rail links to China are coming. They will boost coal exports even higher and make Mongolia that much more competitive in the eyes of Chinese buyers. A lot can change over a year, but Mongolia got off to a good start in January, exporting 6.6mn tonnes of coal, putting it on pace to export around 80mn tonnes in all this year.

Michael Kohn has covered Mongolia since 1998, reporting on social, political and economic changes in the country during its transition and growth. He has written travel guidebooks on Mongolia and two books: Dateline Mongolia and Lama of the Gobi.