WHERE LIES THE BLAME FOR AN ECONOMY OVER-DEPENDENT ON COAL?

By Ts. Elbegsaikhan

Last February, the Mongolian government successfully raised $500 million by issuing the "Century IV" bond in the international market. It was recognized both at home and abroad that Mongolia is managing its debt quite effectively.

Due to exceptionally high investor demand, the initial order for the bond exceeded trading volume by 8.2 times, reaching a total of $4.1 billion. As a result, the bond's interest rate was set at 6.625%, lower than the initial expectation of 7.125%. In short, this reduction means that the future burden of foreign debt on the budget has been eased accordingly.

But what was the real reason behind issuing this bond?

The primary goal was to repay the Mongolian government's existing debt, a process known as refinancing. The government plans to buy back the $566 million "Nomad" bonds maturing in 2026, the $650 million "Khunnu" bonds maturing in 2028, and to refinance the "Century II" bonds. Without this move, the government would have faced payments of approximately $1.7 billion within 1-2 years. In essence, this step postponed debt due "today" to "tomorrow."

The early redemption of the "Khunnu" and "Nomad" bonds was welcomed positively by the international community. Additionally, the interest rate on the "Century IV" bond is 0.1 to 0.4 percentage points lower than that of countries with comparable credit ratings, such as Uzbekistan, Brazil, and the Dominican Republic. This difference reflects growing investor confidence in Mongolia's economic prospects. However, it is likely that the financial burden associated with these bonds will predominantly impact the coal sector.

Given the government's existing debt, there is a pressing need to improve fiscal discipline, strengthen planning, and focus on more efficient spending. Since the first issuance of the Chinggis bond in 2012-when the budget deficit was at its peak-the government has increasingly relied on issuing bonds to manage its finances.

Immediately after securing bond financing, the government starts sending out messages to both domestic and international audiences, emphasizing its "high international reputation" and "successful debt management." Then, forgetting the matter for some time, the government suddenly realizes that the budget deficit has reached its highest level as repayment time approaches. To justify these recurring deficits, authorities often point to unexpected declines in mineral resource prices- which generate the bulk of Mongolia's foreign currency earnings-and disruptions in budget revenues - in an effort to maintain the image of sound fiscal management.

It is certainly positive that Mongolia has earned enough trust to refinance or defer its loans. However, it is regrettable that missed opportunities are rarely acknowledged or addressed. The budget is not always in deficit-2023, for example, saw a surplus. While much of the credit for this was publicly attributed to the Minister of Finance, the reality is that it was largely the coal sector that generated the revenues to make this possible. Despite already shouldering the bulk of the financial burden, coal was expected to carry an even greater share the following year.

As a result of declining coal demand, last year's budget ended with a deficit of 776.2 billion MNT. The authorities, seemingly forgetting that an additional 6 trillion MNT in debt was becoming due soon, submitted a wave of ambitious dream projects to Parliament-plans that significantly expanded the budget deficit and were intended to be implemented all at once. Remarkably, these proposals were not only submitted but also approved.

Today, as budget revisions and state austerity dominate discussions, this issue demands far more serious attention. Moving forward, strict budget discipline is essential. Bonds issued in 2030-2031 should be reserved exclusively for financing major projects, upgrading outdated energy infrastructure, and building new facilities.

Until then, we must avoid "slipping" into repeated budget revisions while blaming coal for shortfalls. Instead, we need to take concrete steps to steadily improve our credit rating toward an "A" level.

If bonds were issued solely to address development needs and urgent issues, there would be no need to debate government debt ceilings and limits. But at a time when debt itself has become a problem, and it is unclear who will repay it and how, isn't it regrettable to spend money even on small expenses, such as replacing a kerb with a piece of marble, let alone on major projects?

In the future, it is essential to reduce our heavy reliance on coal, establish a stable and efficient public procurement system independent of mineral revenues, and take account of its fluctuations. The urgency of this is clear with the budget deficit reaching 3 trillion MNT before the end of the first half of the year.

If the government truly cares about the well-being of its citizens, it must urgently overhaul the current procurement system, which heavily favors imports, undermines the competitiveness of domestic producers, and weakens the national currency. The sharp drop in coal prices will not only strain the budget but also reduce foreign currency inflows, leading to a shortage of US dollars and risking inflation once again eroding people's purchasing power. Now is the time to make the necessary budget adjustments to safeguard both our present and our future.