IMF Executive Board Concludes 2009 Article IV Consultation with Mongolia

Public Information Notice (PIN) No. 10/31
February 24, 2010

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 2009 Article IV Consultation with Mongolia is also available.

On December 22, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mongolia.1


The global economic crisis and collapse in copper prices in 2008 hit the Mongolian economy hard. The loose macro-policies and tightly managed exchange rate pursued during the preceding boom years had made the economy particularly vulnerable and the situation deteriorated markedly earlier in 2009. The authorities then adopted an ambitious adjustment program supported by an IMF Stand-By Arrangement that, thanks to their strong policy implementation, has helped to quickly stabilize the economy.

After averaging 9 percent during 2004–08, real growth is expected to be slightly negative in 2009 as a result of the global crisis and the necessary tightening of policies. Nevertheless, the economy is now bottoming out and is projected to recover strongly in 2010 driven by investment in the Oyu Tolgoi mining project. Inflation, after peaking at over 30 percent in 2008, has declined sharply in recent months and is expected to settle at around 6 percent by end-2010. Medium-term prospects are favorable as Mongolia stands to benefit enormously from its vast mineral deposits and growth is expected to accelerate sharply around 2013 when production at the Oyu Tolgoi mine begins.

The authorities are making progress toward restoring health to public finances. An ambitious fiscal consolidation in 2009 is helping to unwind the considerable loosening of fiscal policy that took place during 2007–08. The budget deficit is projected to be 6½ percent of GDP for 2009 and 5 percent of GDP for 2010. Moreover, the authorities are committed to adjust spending, if needed, to offset any revenue shortfalls but to save any revenue over-performance. The government aims to adopt by early 2010 a Fiscal Responsibility Law to lock in fiscal discipline and a comprehensive social transfer reform to increase benefits to low-income households.

Exchange rate and monetary policies implemented earlier in 2009, especially the hike in interest rates, were instrumental in stabilizing market conditions. Since then, the authorities have appropriately lowered interest rates in line with the sharp decline in inflation and evolving market conditions. The authorities remain committed to a flexible exchange rate and a monetary policy geared toward low inflation and safeguarding international reserves.

The rapid expansion of credit during the boom years is now taking its toll on the banking system. The central bank is committed to strengthening the banking system and, as needed, acting promptly and decisively to bolster confidence. Two troubled banks were put into receivership in late November 2009 and the authorities are preparing a comprehensive bank restructuring plan with Fund staff assistance. The authorities already have in place an emergency facility for liquidity support and a blanket deposit guarantee which provide a strong basis for maintaining financial stability. Progress has also been made in strengthening supervision and a new Banking Law has been submitted to Parliament.

Executive Board Assessment

Executive Directors commended the Mongolian authorities’ continued strong performance under the Stand-By Arrangement. The economy has weathered the worst of the global crisis and is projected to rebound strongly in 2010, driven by investment in the Oyu Tolgoi mining project. The medium-term prospects are also favorable given Mongolia’s vast mineral wealth, although prudent macroeconomic management will be required to ensure that these resources translate into prosperity for all of its citizens.

Directors supported the authorities’ policy priorities to restore health to public finances, rebuild international reserves while maintaining a flexible exchange rate, bolster confidence in the banking system, and protect the poor. They cautioned that a return to the procyclical policy mix of 2007–08, even with relatively high copper prices, could lead to a repeat of the fiscal and balance of payments pressures experienced earlier in 2009.

Directors saw the ambitious fiscal consolidation already undertaken as a good down payment on unwinding past fiscal loosening. They stressed that continued fiscal adjustment, in particular expenditure rationalization, will be essential to fully restore health to government finances. In this regard, many Directors observed that the 2010 budget, as amended, implies only a modest adjustment. However, Directors were encouraged by the authorities’ commitment to limit the 2010 fiscal deficit to 5 percent of GDP by adjusting spending, as needed, and to save any revenue over-performance. They welcomed the authorities’ commitment to save the advance tax prepayment from Oyu Tolgoi mines to meet future financing needs. The authorities should be cautious in undertaking new nonconcessional external borrowing.

Directors underscored the importance of implementing structural fiscal reforms to strengthen the effectiveness of fiscal policy. They welcomed the authorities’ plan to adopt a Fiscal Responsibility Law and an integrated budget law, which together will help institutionalize fiscal discipline, strengthen fiscal management, and enhance fiscal transparency. Directors expressed concerns about the increase in untargeted, universal social transfers in the 2010 budget, and urged the authorities to promptly pass a law to increase transfers to low-income households and improve the targeting of benefits.

Directors commended the authorities’ success in managing the exchange rate and monetary policies. The authorities’ continued commitment to the flexible exchange rate regime will be crucial to maintain macroeconomic stability, insulate the economy from external shocks, and help facilitate an adjustment of the real exchange rate to structural changes related to the development of the mineral sector. Directors considered that any further monetary easing should be undertaken cautiously, especially as inflation is expected to rebound in 2010. While the current targeting of monetary aggregates remains appropriate in the near term, the authorities could consider moving toward an inflation targeting framework over the medium term.

Directors underscored that strengthening the banking system should be a top priority. They urged the authorities to continue to take prompt and strong actions to address problems in individual banks, and supported the central bank’s decision to put two problem banks into receivership. To bolster confidence, the authorities should develop comprehensive bank restructuring plans expeditiously, building on the results of the ongoing external audits, and continue to strengthen banking supervision. Directors also emphasized that any public financial support to banks should be tied to governance and structural reforms of the recipient banks, and that existing shareholders should be required to either inject new capital or be the first to bear losses.

Mongolia: Selected Economic and Financial Indicators, 200710

      Rev.   Proj.
  2007   2008   2009 2010
  (Percent change)

Real sector


Real GDP growth

10.2   8.9   -1.0 8.6


2.9   -2.9   0.3 6.0


12.2   11.9   -1.2 9.2

Consumer prices (end-period)

14.1   23.2   2.0 6.0

GDP deflator

12.3   20.2   7.5 6.0
  (In percent of GDP)

General government budget


Revenue and grants

40.9   36.1   30.7 33.0

Expenditure and net lending

38.0   41.0   37.2 38.0

Overall balance (including grants)

2.8   -4.9   -6.5 -5.0

Nonmineral overall balance

-10.6   -15.1   -12.7 -12.2
  (Percent change)

Money and credit 1/


Broad money

55.6   -5.1   20.0 25.4

Claims on nonbanks, adjusted for bank restructuring

67.7   28.7   2.9 7.5

Interest rate on central bank bills, end-period (percent) 2/

8.4   9.8  
  (In millions of US$)

Balance of payments


Current account balance (including official transfers)

265   -722   -167 -772

(In percent of GDP)

6.7   -14.0   -3.8 -16.1

Trade balance

-54   -613   -91 -841


1,949   2,534   1,833 1,995


-2,003   -3,147   -1,924 -2,836

Foreign direct investment

360   836   305 609

Gross official international reserves (end-period)

1,001   657   1,050 1,252

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

3.2   3.3   3.9 3.8

Terms of trade (percent change)

2.9   -11.7   4.3 -4.9
  (In percent of GDP)

Public and publicly guaranteed debt


Total public debt

39.4   33.9   51.6 70.8

Domestic debt 3/

0.5   0.0   6.3 26.6

External debt 4/

38.9   33.9   45.3 44.2

(In millions of US$)

1,529   1,610   1,937 2,082

Exchange rate


Togrogs per US$ (end-period)

1,170   1,268   ... ...

Togrogs per US$ (period average)

1,170   1,169   ... ...

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

-4.0   -2.5   ... ...

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

4.1   18.7   ... ...

Nominal GDP (In billions of togrogs)

4,600   6,020   6,407 7,373

Sources: Mongolian authorities; and IMF staff projections.
1/ For 2009-10, valued at the program exchange rate and gold price.
2/ Yield of 14-day bills until 2006 and of 7-day bills from 2007 onward.
3/ The projections for 2009 and 2010 include the estimated fiscalization cost of bank restructuring, the financing of the government's equity share in Oyu Tolgoi, and the Oyu Tolgoi tax-prepayment.
4/ Includes prospective Fund credit under the SBA.

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. An explanation of any qualifiers used in summings up can be found here:


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