A recent IMF study, examining over 2 decades of wage trends from Q4 2000 to Q4 2023, reveals a key driver of inflation. Does rising pay in the public or private sector fuel price surges more? The findings may challenge common assumptions.

• Wage Growth vs. Inflation: Between 2001 and 2022, real wage growth in both sectors exceeds inflation. Public sector wages grow by an average of 15%, private sector wages by 16%, while inflation averages 8%. This wage growth, outpacing inflation, adds to inflationary pressures.

🙄 Private Sector Wage Growth and Immediate Inflation Impact

The IMF study finds that private-sector wage increases have a stronger and more immediate impact on inflation than public-sector wage hikes. Both sectors have an elasticity of 0.6, meaning a 10% wage increase leads to a 6% rise in inflation. However, public-sector wage hikes take longer to affect inflation, with the impact peaking in 2025.

• 🔙 From 2000 to 2010, public and private sector wages in Mongolia generally move together. However, from 2011 onwards, private-sector wages start to outpace public-sector wages, partly due to increased foreign direct investment (FDI), particularly in the Oyu Tolgoi mine.

In 2023, public wages rise by an average of 35%—20 percentage points higher than the historical 15% annual growth. This sharp increase adds 13 percentage points to inflation by mid-2025, though pressures gradually ease after 2026.

🤔 Why the Private Sector Leads Wage Growth

Private sector wages, especially in high-paying industries like mining, set wage trends. Despite employing just 5% of the workforce, the mining sector offers the highest wages, driven by FDI and economic demand. From 2011 to 2023, private-sector wages consistently outpace public-sector wages, maintaining a 30% wage premium by 2023. However, the 2023 public sector wage hike eliminates this premium within two quarters.

• 🙇🏻 As private sector wages rise, the public sector often follows suit to remain competitive, making public-sector wage growth largely reactive.

Finally… The IMF recommends aligning public wage growth with productivity. However, low wages and low productivity reinforce each other, creating a cycle that calls for structural reform.

  🪟 Mongolia's Economic Outlook: 2027-2028

The Ministry of Economy and Development drafts the medium-term fiscal framework based on macroeconomic projections from the Fiscal Stability Council (FSC). Let’s explore the key points from the FSC’s forecast:

🔻 To Grow Anyway: But Deficit Expected

According to the FSC, real GDP growth ranges from 5.4% to 5.7% in 2026-2028. However, the share of budget revenues in GDP stays steady at 35.7%, while expenditures range between 36.7% and 37.7%. In other words, the government approves a balanced budget in 2026, but it expects a budget deficit afterward.

⚠️ Interesting Prediction

Mining revenues, which are a major source of Mongolia's GDP and budget, contribute 16.7% of GDP in 2025. However, this share decreases by 2.2 percentage points by 2028. The FSC’s commodity price forecast suggests a 5.4% average annual drop in gold prices from 2025 to 2028, while coal prices rise by 4.1%. However, current trends contradict these forecasts, meaning the budget is based on somewhat optimistic assumptions regarding commodity prices.

⁉️ Inflation: Just a Trailer

On inflation, the Bank of Mongolia forecasts that electricity price hikes contribute an additional 1.2 percentage points to inflation. As a result, inflation in Ulaanbaatar rises steadily since June 2024, exceeding 10%. Unfortunately, the Bank notes, "Inflation does not reach its peak yet. It continues to rise over the next two quarters and enters double digits," with a projected drop to 8% by 2026.

🧐 Meanwhile: Boost the Foreign Exchange Reserves!

According to the FSC, the balance of payments remains in deficit in 2027-2028. Consequently, foreign exchange reserves stay unchanged. However, if imports rise, reserves cover only 2.8 months of import consumption by 2028. In response, Finance Minister instructs the Erdenes Mongol Union to build up $1 billion in foreign exchange reserves, potentially by increasing coal sales.

In summary, Mongolia’s 2027-2028 budget projections are set. What are your predictions? Share your thoughts HERE.