IMF Executive Board Concludes 2008 Article IV Consultation with Mongolia

Public Information Notice (PIN) No. 08/77
July 1, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Mongolia is also available.

On June 4, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mongolia.1


Mongolia's economy has performed extremely well in recent years. Aided by a sharp run-up in the international prices of copper and gold, real GDP growth has averaged 9 percent since 2004, while per capita income has more than doubled. Although the upturn in performance was initially driven by developments in the mining sector, growth has spread to other sectors over time, including construction and financial services. High minerals prices and improvements in tax administration have generated rapid growth in government revenues, and the budget recorded significant surpluses over the past three years.

Growth picked up to 10 percent in 2007, while signs of overheating became increasingly apparent in the second half of the year. Inflation rose from 6 percent (year-on-year) in June 2007 to 21 percent in March 2008. The inflationary pressures reflected a relaxation of monetary and fiscal policies, large increases in prices for food and fuel, and transportation capacity constraints.

Monetary aggregates have been growing rapidly. Reserve money grew by 39½ percent in 2007, driven by a large increase in net foreign assets of the Bank of Mongolia (BOM), while broad money and credit to the private sector increased by 57 percent and 75 percent, respectively.

The overall fiscal surplus declined from 8 percent of GDP in 2006 to 2 percent in 2007. The decline in the surplus reflected an increase in spending amounting to 10 percentage points of GDP, including a proliferation of social welfare programs, a 49 percent increase in the civil service wage bill, and more than a doubling of capital spending. Budget revenues also increased, although less than expenditure, as high copper and gold prices, the mid-2006 introduction of a Windfall Profits Tax (WPT) on copper and gold, and improvements in tax administration and compliance, more than offset the revenue loss from cuts in the VAT, personal income tax, and corporate income tax rates.

With domestic demand accelerating, the external current account surplus narrowed from 7 percent of GDP in 2006 to 2½ percent in 2007. Imports increased very rapidly, reflecting the run-up in food and fuel import prices and large imports of capital equipment for the mining sector, while export growth slowed. However, the overall balance of payments position remained comfortable, as imports of capital goods were largely financed by foreign direct investment in the mining sector.

The strong economic performance of recent years has helped reduce Mongolia's vulnerability to severe shocks, such as large swings in the terms of trade and periodic episodes of drought and devastating cold. The net present value (NPV) of external public debt was cut from 51 percent of GDP at end-2004 to 24½ percent at end-2007, while international reserves of the BOM have increased almost fivefold since 2003 to US$1 billion (4½ months of nonmining imports). External debt is almost entirely concessional, and the debt service burden is low.

Mongolia's medium-term economic outlook is favorable. High minerals prices have spurred minerals exploration and re-energized plans to exploit very large untapped deposits of copper, gold, coal, uranium, and other minerals. With the expected opening of the new Oyu Tolgoi copper and gold mine in 2011, real GDP growth is projected to pick up from around 7−9 percent in 2008−10 to 12−14 percent in 2011−12. With strong policy implementation, it should be possible to bring inflation down to a single digit by end-2008 and to maintain a rate of 5−6 percent over the medium term. The external current account is expected to move into deficit during 2008−11, reflecting expected declines in copper prices and large FDI-financed imports of capital equipment for the mining sector, but it is projected to move back into surplus in 2012, after the Oyu Tolgoi mine comes on stream. The NPV of public debt, the debt service burden, and international reserves are expected to remain at comfortable levels.

Executive Board Assessment

Executive Directors commended the authorities for Mongolia's impressive economic performance in recent years, notably rapid GDP growth, budget and external current account surpluses, and record levels of international reserves. Directors considered that the medium-term outlook remains favorable, given Mongolia's vast mineral wealth. Nevertheless, they noted that near-term prospects are clouded by rising inflation, reflecting rapid growth in government spending and private sector credit, large increases in imported food and fuel prices, and the tightening of supply constraints. If allowed to persist, these inflationary pressures could threaten macroeconomic stability and impair growth.

Against this background, Directors underlined that the authorities' immediate priority is to address the risk of overheating by tightening both fiscal and monetary policies. On the structural front, steps should be taken to address transportation bottlenecks and other capacity constraints. Directors encouraged the authorities to establish a transparent, stable, and internationally competitive mining regime to reap the full benefits of the country's mineral resources.

Directors expressed concern about the inflationary consequences of a relaxation of fiscal policy over the past year. They welcomed the authorities' decision to cancel plans for additional spending in an amended budget. With revenues remaining much stronger than expected in the budget, Directors saw scope for maintaining a small surplus this year by curtailing low-priority capital spending and containing the wage bill. They welcomed the authorities' intention to consider future wage increases carefully in the context of a broader civil service reform aimed at enhancing efficiency. Directors encouraged the authorities to reduce the overlapping coverage and improve the targeting of social spending programs to help contain spending while assisting the most vulnerable groups.

Directors underscored the importance of establishing a clear medium-term fiscal framework to help anchor macroeconomic stability and avoid sharp swings in spending. In this context, they advised the authorities to consider, as part of the fiscal framework, the introduction of a separate limit on expenditure growth and the adoption of realistic nonmineral fiscal targets. The authorities should continue to rely on concessional sources of external finance whenever possible. Nonconcessional borrowing should be considered only for projects with clear economic viability that cannot be financed by concessional loans, and only when the risks of inflation have diminished. Directors also encouraged the authorities to consolidate any foreign financing with the general budget to ensure fiscal transparency.

Directors welcomed the recent tightening of monetary policy, and encouraged the authorities to stand ready to increase the policy interest rate further as needed. They observed that international reserves are now at a broadly comfortable level, and that a further large increase could complicate the efforts to reduce inflation. They also noted the staff's assessment that the real effective exchange rate is currently somewhat undervalued, although a few pointed out that the divergence was within the margin of error. Directors were of the view that, going forward, greater exchange rate flexibility would facilitate the conduct of monetary policy and adjustment to external shocks. Strengthening the interbank foreign exchange market to handle a larger share of foreign exchange transactions will be important, and in this regard, they welcomed the steps being taken by the authorities, including for the introduction of a screen-based trading system.

Directors commended the BOM for the progress made in strengthening its governance and risk management practices. They encouraged the BOM to expedite the preparation of a strategy to exit from its role as a major purchaser of domestically produced gold.

Directors considered that the overall condition of Mongolia's financial system is generally healthy and the framework for banking supervision is well-developed. Given the rapid credit growth, they encouraged the authorities to monitor large exposures closely and improve the supervision of liquidity and operational risks of banks. Directors welcomed the progress made by the Financial Regulatory Commission since its inception in 2006 to create a framework for the supervision of nonbank financial institutions. Further efforts are still needed to strengthen the statutory framework, especially for savings and credit cooperatives, and to develop the tools for consolidated supervision. Directors welcomed the authorities' intention to review plans for the establishment of a development bank, taking account of the experience elsewhere so as to avoid creating unfair competition and distortions in the financial sector.

Mongolia: Selected Economic and Financial Indicators, 2004-08

Nominal GDP (2007); $3,894 million 1/
Population, end year (2007); 2.64 million
Per capita GDP (2007); $1,489 1/
Poverty incidence (2006); 32.2 percent 2/
Quota: SDR 51.1 million



2004 2005 2006 2007 2008
        Est. Budget

Staff Recom. 3/

(Percent change)

Real sector

Real GDP growth

10.6 7.3 8.6 9.9 ... 8.6


34.3 10.9 6.3 1.7 ... 1.4


5.6 6.3 9.2 12.2 ... 10.3

Consumer Prices (end-period)

10.6 9.2 6.0 15.1 ... 8.8

GDP deflator

17.2 20.4 23.1 11.6 ... 10.3
(In Percent of GDP)

General government budget

Revenue and grants

33.1 30.1 36.6 40.6 44.4 42.6

Expenditure and net lending

35.0 27.5 28.5 38.4 46.9 41.1

Overall balance (including grants)

-1.8 2.6 8.1 2.2 -2.5 1.5

Nonmineral overall balance

-5.5 -1.4 -2.4 -12.5 -14.9 -12.0
(Percent change)

Money and credit

Domestic credit

23.0 22.3 -7.5 72.5 ... 25.2

Broad money

20.3 37.3 30.8 57.3 ... 22.9

Reserve money

16.8 19.7 37.7 39.6 ... 12.0

Interest rate on central bank bills, end-period (percent) 4/

15.8 3.7 5.1 8.4 ... ...

(In million of U.S. dollars; unless otherwise indicated)

Balance of payments

Current account balance (including official transfers)

27 29 222 101 ... -405

(In percent of GDP)

1.5 1.3 7.0 2.6 ... -8.5

Trade balance

-149 -155 30 -218 ... -839

(In percent of GDP)

-8.2 -6.7 0.9 -5.6 ... -17.6

Export, f.o.b.

872 1,069 1,545 1.952 ... 2,163

Import, c.i.f.

1,021 1,224 1,516 2,170 ... 3,002

Foreign direct investment

129 258 290 328 ... 688

Gross official international reserves (end-period)

208 333 718 1,001 ... 1,253

(In months of next year's imports of goods and services)

1.6 2.1 3.3 3.6 4.0

(In months of next year's nonmining imports) 5/

1.9 2.5 3.8 4.5 5.1

Trade prices

Export prices (U.S. dollar, percent change)

23.1 13.1 38.7 30.5 ... 4.0

Import prices (U.S. dollar, percent change)

15.3 9.2 12.2 9.5 ... 15.2

Terms of trade (percent change)

6.8 3.5 23.7 19.2 ... -9.7

(In million of U.S. dollars; unless otherwise indicated)

Public and publicly guaranteed debt

Total public debt (In percent of GDP)

81.4 60.3 46.7 40.0 35.7 34.1

Domestic debt (In percent of GDP)

6.8 3.7 1.7 0.6 0.3 0.3

External debt 6/

1,352 1,306 1,420 1,535 1,687 1,611

(In percent of GDP)

74.6 56.6 45.0 39.4 35.5 33.8

NPV of total public debt (In percent of GDP) 7/

57.9 44.5 29.87 25.1 22.6 21.6

NPV of external debt (In percent of GDP) 7/

51.1 40.8 28.1 24.5 ... 21.3

External debt service

91 43 57 52 ... 61

(In percent of exports of goods and services)

7.5 2.9 2.8 2.0 ... 2.1

Exchange rate

Togrogs per U.S. dollar (end-period)

1,209 1,221 1,165 1,170 ... ...

Togrogs per U.S. dollar (period average)

1,187 1,205 1,177 1,170 ... ...

Nominal effective exchange rate (end-period; percent change)

-6.1 1.5 1.9 -4.0 ... ...

Real effective exchange rate (end-period; percent change)

0.9 8.0 5.5 6.4 ... ...

Nominal GDP (billion togrogs)

2,152 2,780 3,715 4,558 ... 5,456

Sources: Data provided by the Mongolian authorities; and Fund staff estimates and projections.
1/ Based on period average exchange rate.
2/ Share of household below national poverty line, based on the Millenium Development Goals Implementation 2007.
3/ Fund staff projections based on policy recommendation.
4/ Yield of 14-day bills until 2006 and of 7-day bills for 2007.
5/ Nonmining imports of goods and services are approximated by total imports minus foreign direct investment.
6/ Includes IMF loans, guarantees, and arrears.
7/ Based on 5 percent discount rate from 2004 onwards.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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