The exchange rate is one of the most important determinants of a country's relative level of economic health. It fluctuates the most during economic and political crises. The reason behind the fluctuation in the exchange rate can be explained by the balance of foreign trade, the balance of payment, and other economic indicators.

According to the Bank of Mongolia, our country’s foreign exchange (forex) reserves have reached USD 3.4 billion, enough to cover the imports of goods for 6 months. For the last 10 days, Mongolian tugrug (MNT) has strengthened against USD by about 7 MNT and showed signs of stabilization.

At the end of the last year, foreign currency demands of the commercial banks were high during the forex auction of the BoM. Although, their demands decreased in March 2023. In particular, the BoM supplied the commercial banks with USD amounting to 68.3 million, while for the forex auction on March 30, no buy bids of USD were submitted from any commercial banks. On the contrary, the commercial banks submitted their USD sell bids amounting to USD 36 million to the BoM. This is the second time in recent years that the BoM has bought USD from commercial banks, the first one was in 2021.

Experts are explaining the reasons behind the MNT strengthening against USD concerning the following three factors. Firstly, the Government of Mongolia has made successful deals on re-financing the debts due in upcoming years and attracted the required financing. It could be one of the factors that impacted the exchange rate stabilization. Secondly, Mongolia commenced the fourth-largest high-technology underground mine in the world last month, which was a significant event that restored investors’ trust. Thirdly, border reopening and easing travel restrictions in China brought a real sense of optimism to the Mongolian economy. The reopening of ports linking China and Mongolia boosted the exchanges of major commodities including coal, iron ore, and machinery. As of the end of March, total coal export reached 8.7 million tons, an increase of 3.6 times compared to the same period in 2022. Moreover, Mongolia has exported 0.9 million tons of iron ore, jumping 50% from a year ago.

Meanwhile, the exchange rate of Chinese Yuan (RNB) reached a record high of MNT 519.75 in February 2023. It was mainly due to China’s post-Covid reopening and increased capital inflow. But since then, the RNB has slightly fallen to MNT, averaging around 512.19 MNT.

In any case, the MNT rate has stabilized for the last 10 days. But what will happen next?

Economists, university professors, and 27 researchers and analysts conducted USD/MNT exchange rate forecasting at the beginning of this year. According to their projections, the pair is forecasted to average at 3537.3 MNT and peak at 3618.1 MNT in the first quarter of this year. In general, a long-term weakening is expected for MNT against USD.