## cr17140 ## Source details **Canonical URL:** [cr17140](https://www.imf.org/-/media/files/publications/cr/2017/cr17140.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17140.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17140.pdf.json) --- ### Mongolia’s mineral wealth and economic structure - Mineral endowment and potential: - Current proven reserves are estimated at around $1 trillion. - Oyu Tolgoi (OT): first phase already in production; second phase will begin production in 2018. Production indications suggest production can last for up to 100 years. - Tavan Tolgoi (TT): reportedly one of the largest single coal deposits in the world (estimated at around 7½ billion tons); redevelopment of TT is expected to begin in 2019. - Sizable uranium deposits and large potential in renewables (solar and wind); recent FDI example: $50 million from SoftBank. - Agriculture: around 60 million head of livestock; potential to expand meat, dairy, grain, and vegetable exports with modern techniques. - Much of the country has yet to be prospected; OT site may cover only a fraction of potential ore-bearing area. - Economic role and constraints: - Minerals account for up to 90 percent of total exports. - Mongolia will remain a mining economy for many decades despite diversification potential. - Key constraints: infrastructure gaps (railways, power), investment climate, regulatory and anti-money laundering weaknesses, and a mining tax regime under review for future projects. ### Recent macroeconomic developments (2014–2016) - Growth and activity: - Growth slowed from almost 8 percent in 2014 to 1 percent in 2016. - Mining weak through most of 2016; coal output and prices rose sharply in Q4 2016. - Nonmining growth supported by construction on OT-2 in H2 2016 and a sharp increase in fiscal spending; private consumption weakened. - Inflation and exchange rate: - Inflation fell sharply in 2015 and moved to a historical low in 2016 despite substantial depreciation of the togrog in H2 2016. - Togrog depreciated by more than 25 percent in the second half of 2016. - Reserves and external financing: - Gross international reserves broadly stable at $1.3 billion (3 months of imports) at end-2016. - External financing in 2016 included issuance of a $500 million sovereign bond, a $250 million international syndicated loan, and drawings under the PBOC swap line. - Mongolia’s credit rating was downgraded twice toward the end of 2016 (to Caa1 by Moody’s). ### Fiscal and debt developments - Fiscal outcomes: - Overall fiscal deficit reached a historical high of 17 percent of GDP in 2016 (Fund definition). - Drivers: sharp fall in revenues, higher interest payments, pre-election spending programs, clearance of some arrears on infrastructure spending, and a judicial settlement with a mining company. - Debt dynamics: - General government debt rose from 55 percent of GDP (Fund definition, present-value terms) at end-2015 to nearly 70 percent of GDP a year later (text notes other figures across tables). - Fiscal table excerpts (Percent of GDP): Revenue 29.6 25.1 23.7; Expenditure 37.9 33.6 40.7; Overall balance -8.4 -8.5 -17.0. - Memorandum one-off spending components (percent of GDP): pre-election programs 2.3, judicial settlement 0.6, arrears clearance 1.2. ### External sector and projections - Trade and current account: - Exports recovered late 2016; trade balance stayed in surplus but current account registered a deficit of around 4 percent of GDP in 2016. - Current account balance (percent of GDP) historical/projections: 2013 -25.4; 2014 -11.5; 2015 -4.0; 2016 -4.1; 2017 -4.4; 2018 -9.5; 2019 -13.6; 2020 -10.6; 2021 -8.4; 2022 -6.2. - Reserves and external debt: - Gross official reserves (end-period, in millions of US$): 2013 2,242; 2014 1,648; 2015 1,324; 2016 1,297; 2017 1,692; 2018 2,515; 2019 3,583; 2020 4,032; 2021 4,257; 2022 4,304. - External debt: end-2016 total external debt 220 percent of GDP, or 155 percent excluding the $7.1 billion of intercompany loans. Baseline external debt (percent of GDP): 2016: 220.0; 2017: 235.5; 2018: 232.7; 2019: 215.3; 2020: 198.4; 2021: 178.9; 2022: 159.1. - External debt-to-exports ratio (percent): 2016: 433.4; 2017: 424.5; 2018: 425.9. ### Monetary and banking sector conditions - Monetary policy and interest rates: - BOM hiked the policy rate by 450 bps in August 2016; policy rate was lowered by 100 bps in December 2016 to 14 percent in some parts of the document and to 15 percent in others (policy rate movements in 2016: hiked by 450 basis points (to 15 percent) in August; lowered by 100 bps in December). - Weighted average lending rate near 20 percent. - Banking sector metrics and vulnerabilities: - Total assets at 90 percent of GDP and loans at 50 percent of GDP. - Reported NPL ratio around 7 percent (excluding restructured loans and loans in early arrears); NPLs high for foreign-currency loans; some parts of the document cite NPL ratio at 8.2 percent. - Regulatory forbearance masking vulnerabilities; BOM moving slowly toward more risk-based supervision. - Banking system actions: - BOM stopped lending to government in H2 2016 and limited new mortgage financing to principal and interest received on existing mortgage assets. - Program commitments: independent Asset Quality Review (AQR) for every bank; AQR to be completed by end-October (year in source context: 2017); banks to present business and recapitalization plans "by end-December 2017"; shareholders to recapitalize banks "by June 2018" if shortfalls revealed. - Current estimates suggest bank capital needs could amount to 7 percent of GDP; contingency of "up to 3½ percent of GDP" included in the DSA for potential public support. ### Outlook and projections (policy-dependent) - Growth and inflation: - Growth expected to remain mildly negative in 2017, pick up in 2018, and reach 8 percent in 2019 when Tavan Tolgoi development/rehabilitation is expected to start. - Real GDP growth series (percent change): 2013 11.6; 2014 7.9; 2015 2.4; 2016 1.0; 2017 -0.2; 2018 1.8; 2019 8.1; 2020 5.3; 2021 6.1; 2022 8.5 (table elsewhere shows variant sequences). - Inflation projected to return to 6 percent by end-2017 and stabilize around 6½ percent as the economy normalizes (other sections noted inflation around 2½ percent or "less than 1 percent at end-2016" depending on passage). - Debt and reserves projections: - Debt: with envisaged fiscal consolidation and concessional external financing, debt sustainability should be restored with debt declining from 2019 onward; present-value debt should start declining by 2019 and fall to 74 percent of GDP (IMF definition) by 2022 in some projections. - Reserves: bring international reserves to $4 billion by 2020, or about 6½ months of imports. ### Risks and stress tests - Principal risks: - High exposure to global commodity markets and regional spillovers, especially China. - Domestic policy slippage could lead to stagnation, unsustainable debt buildup, balance of payments pressure, and growing bank vulnerabilities. - External shocks highlighted in Annex I: significant further strengthening of the US dollar and/or higher rates (Likelihood: H; Potential Impact: H), significant China slowdown (Likelihood: L-M; Potential Impact: H). - DSA stress-test findings: - Public debt rose sharply: nominal gross public debt 2015: 59.5 percent of GDP; end-2016: 87.6 percent of GDP; projected to 84.7 percent by 2022 and 59.7 percent by 2026 under program. - PV of public debt: 2016: 69.1 percent; 2017: 86.3 percent; 2018: 89.6 percent; declines from 2019 onward. - Public gross financing needs (percent of GDP): 2016: 18.5; 2017: 13.8; 2018: 13.9; 2026: 19.5. - External debt baseline trajectory and identified external debt-creating flows detailed across 2012–2022 with elevated external financing needs in several years. ### Policy implications and recommended priorities - Macro policy: - Maintain strict policy discipline to realize medium-term outlook tied to mining investments. - Restore robust fiscal framework to avoid procyclicality and rebuild buffers. - Tighten macro policies despite negative output gap; significant revenue and especially expenditure measures to reduce the deficit and put debt on a sustainable path. - Fiscal measures and fiscal structural reforms: - Reduce fiscal deficit from 17 percent of GDP in 2016 to 10.6 percent in 2017 and to below 2 percent of GDP by 2022; primary balance to turn to surplus in 2020. - Control spending by about 9 percent of GDP and boost revenue by about 2¼ percent of GDP during the program period. - Major spending-control measures: rationalize capital expenditure (capital spending averaged 12 percent of GDP over last three years); public-sector wage freeze through 2018; suspend civil servants’ grade advancement through 2019; restrict hiring through 2019 (with exceptions); roll back recent pension increases and raise retirement age by 6 months annually to 65. - Revenue measures include reversing cuts in petroleum excise, increasing excises on vehicles and on alcohol and tobacco, raising duties on tobacco, making PIT more progressive, eliminating threshold for withholding tax on interest, and increasing social security contributions by 5 percentage points over 3 years (2 percent in 2018, 1 percent in 2019, and 2 percent in 2020). - Strengthen DBM governance and consolidate DBM commercial spending into the annual budget over time; Future Heritage Fund law entered into force January 1, 2017 with transitional provisions. - Financial sector and banking reforms: - Comprehensive AQR for every bank; business and recapitalization plans to be assessed; shareholders to recapitalize by June 2018; public funds possible subject to strict criteria. - Amend Banking Law and DICOM law, strengthen fit-and-proper rules, related-party exposure rules, provisioning, asset classification, liquidity requirements, early-intervention framework, and bank resolution tools. - Establish specialized managing entity by end-December 2017 to manage government participation in restructured banks. - Introduce legislation and procedures for use of public funds, and an exit strategy for public participation in banks by end-September 2018. - Exchange rate, reserves, and external policy: - Allow exchange rate to move flexibly; intervention limited to disorderly market conditions and opportunistic reserve purchases. - Reserve targets: reach 6½ months of imports by program end; excluding PBOC swap line, reserve coverage would be 4¼ months of imports. - Structural reforms and diversification: - Sequence and prioritize reforms to support diversification (agribusiness, tourism, renewables); improve animal health framework for meat exports; work on WTO Trade Facilitation Agreement; revise law on permits to improve business climate. - Strengthen investment climate: resume exploration licensing, enhance AML/CFT and anti-corruption frameworks, consider appropriate mining tax regime for future projects while respecting existing agreements. - Social protection: - Target Child Money Program to poorest 40 percent of households; savings redirected to increase food stamps for poorest; consolidate more than 70 social transfer programs without cuts in benefits to generate administrative savings. - Program monitoring and conditionality: - IMF access: "435 percent of quota (SDR 314.5054 million, or about $425 million)." - Total financing package: "$5½ billion." - Principal donor commitments: ADB $900 million (including $600 million budget support, $300 million project financing); World Bank committed $400 million in budget support with prospects for additional $200 million; Japan $850 million budget support; Korea $700 million project financing; PBOC swap line RMB 15 billion ($2.2 billion) extended until 2020. - Quarterly program reviews with specified test dates; quantitative performance criteria and structural benchmarks laid out (see program tables for exact targets and dates). ### Box 2 — Response to Past Fund Policy Advice (summary) - Authorities generally agreed on need for policy adjustment and acted on some recommendations, but implementation was weak and deteriorated ahead of parliamentary elections in mid-2016. - Fiscal policy recommendations: tightening recommended; implementation poor—revenues undershot and spending control loosened; sovereign wealth fund law passed but not yet operationalized. - Monetary policy recommendations: tighten monetary policy; implementation uneven with large expansion and quasi-fiscal activity; later policy tightening with 450 bps hike. - Financial policy recommendations: strengthen bank supervision and end forbearance; limited progress with new provisioning regulations but continued forbearance. - IMF staff reiterated priorities include tightening macro policies, prudent monetary stance, building reserves, ending forbearance, structural reforms to boost growth, and enhancing social safety nets. *Source: cr17140 - IMF staff report excerpts from the provided content.* ### 1. Mongolia’s Mineral Wealth ______________________________________________________________________8 ### 1. Mongolia’s Mineral Wealth ### Mineral endowment and potential - Mongolia has large deposits of copper, gold, coal, uranium, and other minerals; current proven reserves are estimated at around $1 trillion. - Oyu Tolgoi (OT): first phase already in production; second phase will begin production in 2018. OT is described as one of the top copper and gold mines in the world and production indications suggest production can last for up to 100 years. - Tavan Tolgoi (TT): reportedly one of the largest single coal deposits in the world (estimated at around 7½ billion tons); redevelopment of TT is expected to begin in 2019. - Mongolia also has sizable uranium deposits and large potential in renewables (solar and wind), with recent FDI examples including $50 million from SoftBank. - Agriculture: around 60 million head of livestock; potential to expand meat, dairy, grain, and vegetable exports with modern techniques. - Much of the country has yet to be prospected; some observers suggest the current OT site covers only a fraction of potential ore-bearing area. ### Economic role of minerals and diversification constraints - Minerals account for up to 90 percent of total exports. - Despite diversification potential (agribusiness, tourism, renewables), Mongolia will remain a mining economy for many decades. - Key constraints to monetizing deposits: infrastructure gaps (railways, power), investment climate, regulatory and anti-money laundering weaknesses, and a mining tax regime under review for future projects. - With improved infrastructure and a more market-friendly investment environment, exports are expected to more than double and GDP growth to be boosted by mega-projects. ### Recent macroeconomic developments (2014–2016) - Growth slowed from almost 8 percent in 2014 to 1 percent in 2016. - Mining weak through most of 2016; coal output and prices rose sharply in Q4 2016 due to Chinese supply disruptions and China’s policy shift away from coal production. - Nonmining growth supported by construction on OT-2 in H2 2016 and a sharp increase in fiscal spending, but private consumption weakened. - Inflation fell sharply in 2015 and moved to a historical low in 2016 despite substantial depreciation of the togrog in H2 2016. ### Fiscal and debt developments - Overall fiscal deficit reached a historical high of 17 percent of GDP in 2016 (Fund definition), more than double the level in 2015. - Drivers of the 2016 fiscal deterioration: sharp fall in revenues, higher interest payments, pre-election spending programs, clearance of some arrears on infrastructure spending, and a judicial settlement with a mining company. - General government debt rose from 55 percent of GDP (Fund definition, present-value terms) at end-2015 to nearly 70 percent of GDP a year later. - Fiscal table excerpts (Percent of GDP): Revenue 29.6 25.1 23.7; Expenditure 37.9 33.6 40.7; Overall balance -8.4 -8.5 -17.0. (These figures appear in the Fiscal Accounts, 2015-26 table presented in the source.) - Memorandum items noted one-off spending components: pre-election programs 2.3, judicial settlement 0.6, arrears clearance 1.2 (percent of GDP). ### External sector and reserves - Exports recovered late 2016 due to commodity price improvements and coal export pickup; trade balance stayed in surplus but current account registered a deficit of around 4 percent of GDP in 2016. - Exchange rate pressure: togrog depreciated by more than 25 percent in the second half of 2016. - Gross international reserves broadly stable at $1.3 billion (3 months of imports) at end-2016. - External financing in 2016 included issuance of a $500 million sovereign bond (at a high yield), contracting of a $250 million international syndicated loan, and drawings under the PBOC swap line. - Mongolia’s credit rating was downgraded twice toward the end of 2016 (to Caa1 by Moody’s). ### Monetary and banking sector conditions - Monetary stance: BOM hiked the policy rate by 450 bps in August 2016 to defend the exchange rate; in December 2016 the policy rate was lowered by 100 bps to 14 percent in light of weak activity and low inflation. - Weighted average lending rate near 20 percent. - Loan growth weak and driven mainly by subsidized credit schemes; BOM stopped lending to government in H2 2016 and limited new mortgage financing to principal and interest received on existing mortgage assets. - Banking sector: total assets at 90 percent of GDP and loans at 50 percent of GDP. Reported NPL ratio around 7 percent (excluding restructured loans and loans in early arrears); NPLs high for foreign-currency loans. Regulatory forbearance masking vulnerabilities; BOM moving slowly toward more risk-based supervision. ### Outlook and projections (policy-dependent) - Growth: expected to remain mildly negative in 2017 (reflecting fiscal consolidation), pick up in 2018, and reach 8 percent in 2019 when Tavan Tolgoi development/rehabilitation is expected to start. - FDI: second-phase OT development expected to generate around $1 billion in FDI annually for the next few years. - Inflation: projected to return to 6 percent by end-2017 and stabilize around 6½ percent as the economy normalizes. - Debt and reserves: envisaged fiscal consolidation and substantial concessional external financing should restore debt sustainability, with debt declining from 2019 onward, and bring international reserves to $4 billion by 2020, or about 6½ months of imports. - Risks: high exposure to global commodity markets and regional spillovers, especially China; policy slippage could lead to continued stagnation, unsustainable debt buildup, balance of payments pressure, and growing bank vulnerabilities. ### Policy implications and recommended priorities - Maintain strict policy discipline to realize the favorable medium-term outlook tied to mining investments. - Sequence and prioritize reforms to support diversification (agribusiness, tourism, renewables) while harnessing mining revenues productively. - Restore a robust fiscal framework to avoid procyclicality and rebuild buffers. - Improve infrastructure (railways, power generation) to enable large-scale coal and mineral exports. - Strengthen investment climate: resume exploration licensing, enhance AML and anti-corruption frameworks, and consider an appropriate mining tax regime for future projects while respecting existing agreements. - Accelerate capacity-building in banking supervision and move to risk-based oversight to reveal and address hidden bank vulnerabilities. *Source: IMF staff report chapter “1. Mongolia’s Mineral Wealth” from the IMF country report content provided.* ### Box 2. Response to Past Fund Policy Advice ### Box 2. Response to Past Fund Policy Advice ### Summary assessment - The authorities generally agreed on the need for policy adjustment and responded to some recommendations made in past Article IV consultations. - Implementation was weak and deteriorated further ahead of parliamentary elections in mid-2016. ### Fiscal Policy: key recommendations and implementation - Recommendation: Tighten fiscal policy to bring deficits and debt gradually down to FSL/debt law limits. - Implementation: Poor. The budget set out appropriate targets, but implementation was weak and deteriorated further before the parliamentary elections. Revenues undershot and spending control was substantially loosened. Debt has also risen sharply. - A sovereign wealth fund law was passed to promote savings in the medium term but has yet to be operationalized. - Recommendation: Consolidate spending by various public sector bodies such as the DBM and BoM into the annual budget. - Implementation: Partially done. BOM retains the mortgage subsidy program for now, though spending is restricted to the amount of principal and interest inflows from existing mortgage assets. DBM’s commercial spending remains unconsolidated but will be included in the program’s fiscal targets. ### Monetary Policy: key recommendations and implementation - Recommendation: Tighten monetary policy. - Implementation: Uneven policies. Large expansion (including quasifiscal activity), against Fund advice. BOM cut the policy rate twice citing very low inflationary pressures. However, bank rates did not follow and excess liquidity and weak confidence subsequently undermined the exchange rate. Policy has tightened recently with 450 bps hike in the policy rate and the introduction of improved liquidity management tools. This has stabilized the market for now. - Recommendation: Maintain exchange rate flexibility. - Implementation: Some progress. The BOM’s intervention has, however, at times been larger than would be justified solely by the need to address disorderly market conditions. ### Financial Policy: key recommendations and implementation - Recommendation: Strengthen bank supervision, improve the crisis management framework including legal and operational changes, and end forbearance. - Implementation: Limited progress. Fund TA on bank supervision provided specific recommendations on bank supervision, which the BOM welcomed. New regulations on provisioning were introduced but need improvement. Limited progress has been made on improving the crisis management framework. Regulatory forbearance continues. ### IMF staff policy advice reiterated (excerpt of priorities) - Tighten macro policies despite negative output gap, including significant revenue and especially expenditure measures to reduce the deficit and put debt on a sustainable path. - Monetary policy should remain prudent—i.e., the stance should remain appropriately tight for the time being, with policy rate cuts considered only carefully—and the central bank should avoid quasifiscal activity. - External policies should focus on building up reserves—the exchange rate should be allowed to move flexibly, with intervention limited to addressing disorderly market conditions. - Financial-sector policies should focus on safeguarding stability and improving bank soundness—the BOM should end forbearance, adopt a well-defined early-intervention framework in the form of a progressive ladder of intervention, and deal proactively with banks that do not meet prudential norms. - Move ahead on a structural agenda to boost longer-term growth prospects: governance and institutional reforms, improve the business environment, encourage foreign investment (especially in mining, agribusiness, and the financial sector), and pursue diversification into agriculture and tourism. - Enhance social safety nets and promote inclusive growth by increasing efficiency and better targeting to the most vulnerable and addressing substantial income inequality. ### Authorities’ views (summary) - The authorities largely agreed with staff recommendations and stated these were incorporated in their “Economic Recovery Program.” - They highlighted actions taken immediately upon taking office: tightening monetary policy and stopping quasifiscal activities of BOM and DBM. - They recognized the need for banking sector reforms and committed to reforming the social safety net while protecting the most vulnerable. *Italic line: Source: cr17140 - Box 2. Response to Past Fund Policy Advice* ### 26. The BOM is committed to keeping monetary policy appropriately tight (MEFP ¶21). ### The BOM is committed to keeping monetary policy appropriately tight (MEFP ¶21) ### Monetary stance and inflation outlook - Inflation was "less than 1 percent at end-2016" and "is expected to reach 6 percent this year". - Policy rate: 14 percent. - Real rates are "substantially positive and higher than in the past", implying potential room to ease in the future "as the economy stabilizes, and assuming BOP and inflation indicators permit". - The BOM and MOF will coordinate closely to manage liquidity conditions under the program, "particularly given the substantial (and likely lumpy) external financing that should flow into the country under the program." ### Exchange rate and reserves - Exchange rate policy: "allowed to move flexibly under the program (MEFP ¶24)"; intervention limited to addressing disorderly market conditions and opportunistic market purchases to build reserves. - Reserve targets under the program: build reserves to a healthy "6½ months of imports" by end of the program (reserve adequacy metric); "excluding drawings from the PBOC swap line, reserve coverage would be a still-adequate 4¼ months of imports." ### Central bank governance and administration - Adoption of a new central bank law in line with international best practice (MEFP ¶¶22-23) to: - Clarify BOM’s mandate and strengthen governance and autonomy. - Give Monetary Policy Committee members a vote on policy decisions. - Decide bank supervisory issues collectively. - Modernize BOM structure, with focus on human resources and IT. - Continue annual external audit. - Develop a strategy to address BOM’s negative capital position, including "an end to lossmaking quasi-fiscal activities and a plan for recapitalization that also takes into consideration the fiscal/debt implications." ### Financial sector diagnosis, recapitalization, and supervision - Comprehensive diagnosis and AQR: - "Every bank will be subject to an independent Asset Quality Review (AQR) (MEFP ¶27)." - BOM published a Request for Proposals (prior action); firms to be chosen shortly and "will be expected to complete the AQR by end-October." - Following AQR, banks must present business and recapitalization plans covering shortfalls and expected capitalization and profit and loss "until 2019." - BOM to approve or reject banks' business and capital plans "by end-December 2017." - Recapitalization timeline and scale: - Banks must complete recapitalization "by June 2018" if shortfalls are revealed. - "Current estimates suggest that bank capital needs could amount to 7 percent of GDP." - Authorities will first seek full recapitalization by shareholders; public funds could be used if financial stability is at risk, subject to strict criteria. - A contingency of "up to 3½ percent of GDP" has been included in the DSA for potential public support. - Banks using public funds will undergo restructuring and governance changes; non-systemic banks unable to raise private capital should be subject to resolution. - Regulatory and supervisory upgrades (MEFP ¶33) to: - Improve asset classification, provisioning, and collateral valuation. - Strengthen fit and proper requirements and related-party exposure rules. - Improve early-intervention framework and bank resolution. - Upgrade liquidity requirements and enhance BOM powers to request additional capital and provisioning and to apply levies on banks. - Bring DICOM law in line with international best practice. - Ensure DBM is supervised by BOM under a new DBM law. ### Nonbank sector and AML/CFT - Nonbank financial sector: "share of less than 5 percent of Mongolia’s total financial assets"—small but supervision capacity needs improvement at the Financial Regulatory Commission. - AML/CFT commitments (MEFP ¶¶36–37): - Adopt amendments to the AML/CFT law, the anti-corruption law, and the criminal code "by end-March 2018." - Strengthen resources and expertise of AML/CFT and anti-corruption authorities. - Receive technical assistance from the Fund, ADB, Asia Pacific Group, and World Bank. ### Social protection and diversification measures - Social safety nets (MEFP ¶20): - Target the Child Money Program to the poorest "40 percent of households"; all savings from targeting to be directed to increasing food stamps for the poorest. - Consolidate more than "70 social transfer programs" (without cuts in benefits) to generate administrative savings. - World Bank and ADB supporting additional initiatives to improve social safety nets. - Competitiveness/diversification (MEFP ¶38): - Continue mining as key sector; promote agribusiness and tourism. - Improve animal health framework to facilitate meat exports to Russia and China (with "more than 60 million head of livestock"). - Work on WTO Trade Facilitation Agreement and revise the law on permits to improve business climate. - Promote Mongolia as a tourism destination. ### Program financing, access, and donor support - IMF access: "435 percent of quota (SDR 314.5054 million, or about $425 million)." (maximum under normal access limits) - Total financing package: "$5½ billion." - Principal donor commitments: - Asian Development Bank: "$900 million" over the program period, including "$600 million in budget support and $300 million in project financing." - World Bank: committed "$400 million in budget support" with "good prospects" for an additional "$200 million" mostly as project aid. - Japan: "$850 million" entirely as budget support. - Korea: "$700 million of project financing over the period 2017–22 (including $200 million previously committed)." - PBOC swap line: "RMB 15 billion ($2.2 billion)" extended until 2020; potential further extension in 2020 if policies remain on track. - Program financing table highlights: - "Total Financing 2017-2022 Financing5,650" - "IMF425" - "Other IFIs1,500" - "World Bank 1/600" - "o/w project financing175" - "ADB900" - "o/w project financing300" - "Bilateral donors1,550" - "Japan850" - "Korea700" - "o/w project financing700" - "PBOC swap line2,175" - Program fully financed: "firm commitments from donors to fill the entire financing gap for the first 12 months"; project financing matched to existing budget spending items for year one, transforming assistance into quasi-budget support. - Private-sector engagement: program expected to catalyze private-sector portfolio and FDI inflows, validated by the recent successful bond exchange. ### Program risks, monitoring, and safeguards - Key risks: - Domestic policy slippages, sensitive commitments, and electoral cycle (Presidential elections in "June 2017" and parliamentary elections in "2020"). - External shocks: lower commodity prices, weaker FDI, delays in major mining projects, and less favorable borrowing conditions—risks to growth and debt sustainability. - Monitoring and conditionality: - Quarterly program reviews. - Test dates: "end-April and end-June 2017" for first and second sets of performance criteria. - Quarterly quantitative performance criteria on: primary balance of general government; net official international reserves and net domestic assets of BOM; nonconcessional medium- and long-term external debt; stock of guarantees on external debt by the government or BOM (ceiling). - Continuous performance criterion (zero ceiling) on nonconcessional short-term external debt and accumulation of external payment arrears. - Indicative target on reserve money and structural benchmarks to gauge reform progress. - Prior actions completed ahead of the Executive Board meeting: - Passage of a 2017 supplementary budget and medium-term budget framework (2018-2020) consistent with program targets; completed "on April 13." - Launch of procurement procedure for AQR; completed "on March 31." - Discontinuation of net BOM financing of the mortgage program and other quasi-fiscal BOM lending; BOM verified this "in a letter on April 13." - Safeguards and audits: - "An updated safeguards assessment of the BOM is in progress and is expected to be completed by the first review." A safeguards mission was completed "in early April." - BOM continues to be audited by leading external accounting firms and publishes financial statements. - Capacity to repay and exposures: - Mongolia currently has zero Fund credit outstanding and an unblemished repayment history with the Fund. - "Total Fund exposure would be limited to at most 3½ percent of GDP, or about 10 percent of gross reserves." - Mongolia has arrears to China of "CHF 5.6 million" dating back to 1986–91; discussions are under way and China has consented for the Board to consider Mongolia’s request for an extended arrangement. ### Staff appraisal summary - Policy discipline is essential given Mongolia’s vulnerability to external shocks and dependence on mining. - Macro policies need urgent tightening to stabilize the economy; fiscal deficit must be brought down sharply to restore debt sustainability. - Monetary policy should be kept tight, with possible easing later as stabilization occurs; exchange rate should remain flexible as a buffer. - Structural reforms are critical for durable adjustment: remove DBM and BOM from fiscal activity, improve central bank independence and governance, strengthen the banking sector, diversify the economy, and better target social safety nets. *Source: IMF country report text as provided in the content unit.* ### 49. The authorities have strong program ownership, but this is nonetheless a high-risk ### 49–50. The authorities have strong program ownership, but this is nonetheless a high-risk program ### Program design and political economy - Program policies are drawn almost entirely from the “Economic Recovery Program” that the government drew up soon after taking office last summer. - The government has a large majority in parliament. - Commitments are frontloaded to the extent possible, and reviews will be conducted on a quarterly basis. - The program includes a number of prior actions for approval. ### Principal risks and vulnerabilities - Many measures may be difficult and politically controversial. - There could be risks of policy slippage in many areas, particularly over time, as reform fatigue could set in. - The economy remains subject to external shocks, including: - weakening of commodity prices; - an economic slowdown in key trading partners; - delays in major mining projects; - adverse changes in global market conditions. - These shocks could have serious implications for Mongolia’s projected economic recovery and for debt sustainability. ### Staff assessment and financing request - Staff support the authorities’ request for an extended arrangement. - Rationale cited: Mongolia’s balance of payments need, the policy actions already taken, and the authorities’ commitment to implement far-reaching reforms over the program period. - Financing requested: an extended arrangement in the equivalent of SDR 314.5054 million. *IMF country report excerpt.* ### 51. Following approval of the proposed arrangement, Mongolia will be placed on a 24- ### cr17140 - 51. Following approval of the proposed arrangement, Mongolia will be placed on a 24- ### Article IV Consultation cycle decision - Following approval of the proposed arrangement, Mongolia will be placed on a 24-month Article IV Consultation cycle, in line with Decision No. 14747-(10/96), adopted on September 28, 2010, as amended. ### Real sector developments - Growth picked up in 2016Q4 on the back of a large increase in coal output. - Inflation remained subdued in 2016 reflecting weak economic activity. - Poverty has been going down steadily, in both urban and rural areas. - Employment generation decelerated as the economy slowed down. - While Mongolia looks relatively good on the Human Development Index, progress in reducing income inequality has been limited. - Real GDP growth (percent change): 2013 11.6; 2014 7.9; 2015 2.4; 2016 1.0; 2017 -0.2; 2018 1.8; 2019 8.1; 2020 5.3; 2021 6.1; 2022 8.5 ### Fiscal and monetary sector developments - The fiscal deficit ballooned as revenues stagnated and one-off spending spiked in the run-up to the 2016 election. - As a result, general government debt rose markedly. - Monetary policy was accommodative early in 2016, but the authorities raised the policy rate sharply in August to stem pressures on the exchange rate. - Loan growth was driven by subsidized lending under the mortgage program. - NPLs continued to rise, given the weak economy. - General government debt (percent of GDP): 2013 46.0; 2014 57.1; 2015 59.5; 2016 87.6; 2017 94.9; 2018 101.3; 2019 100.0; 2020 97.5; 2021 92.3; 2022 84.7 - Overall balance (IMF definition, percent of GDP): 2013 -8.9; 2014 -11.3; 2015 -8.5; 2016 -17.0; 2017 -10.6; 2018 -8.5; 2019 -5.9; 2020 -4.0; 2021 -2.0; 2022 -1.5 - Primary balance (IMF definition, percent of GDP): 2013 -7.5; 2014 -8.8; 2015 -5.6; 2016 -13.1; 2017 -5.5; 2018 -3.1; 2019 -1.0; 2020 0.3; 2021 1.5; 2022 1.6 ### External sector developments - The trade balance has stayed in surplus given the weak economy, but the current account remains in deficit. - Exports fell with commodity prices but imports have fallen even faster given the economic slowdown. - FDI remains weak (with the recent large drop reflecting an accounting change related to OT-2). - Gross international reserves have remained stable, supported by international borrowing. - The currency depreciated markedly in the second half of last year before stabilizing in the first quarter of 2017. - Spreads have been volatile but tightened in February after staff-level agreement on a program was reached. - Current account balance (percent of GDP): 2013 -25.4; 2014 -11.5; 2015 -4.0; 2016 -4.1; 2017 -4.4; 2018 -9.5; 2019 -13.6; 2020 -10.6; 2021 -8.4; 2022 -6.2 - Gross official reserves (end-period, in millions of US$): 2013 2,242; 2014 1,648; 2015 1,324; 2016 1,297; 2017 1,692; 2018 2,515; 2019 3,583; 2020 4,032; 2021 4,257; 2022 4,304 ### Selected monetary and banking indicators - Credit growth (percent change): 2013 57.9; 2014 23.5; 2015 0.5; 2016 8.5; 2017 9.0; 2018 10.3; 2019 10.6; 2020 11.1; 2021 11.9; 2022 15.6 - Reserve money growth (percent change): 2013 54.0; 2014 2.7; 2015 -28.2; 2016 24.6; 2017 21.8; 2018 19.3; 2019 16.0; 2020 15.3; 2021 15.1; 2022 16.1 - Key banking indicators (selected): NPL to gross loans (percent): 2013 6.7; 2014 6.0; 2015 5.8; 2016 2.5; 2017 3.1; 2018 7.3; 2019 7.2; 2020 6.9 ### Balance of payments and financing - Exports (in millions of US$): 2013 4,269; 2014 5,776; 2015 4,616; 2016 4,803; 2017 4,898; 2018 4,943; 2019 5,440; 2020 5,827; 2021 6,348; 2022 6,777 - Imports (in millions of US$): 2013 -5,590; 2014 -4,783; 2015 -3,438; 2016 -3,473; 2017 -3,632; 2018 -3,975; 2019 -4,731; 2020 -4,825; 2021 -5,081; 2022 -5,151 - Trade balance (in millions of US$): 2013 -1,321; 2014 994; 2015 1,178; 2016 1,330; 2017 1,266; 2018 968; 2019 709; 2020 1,002; 2021 1,267; 2022 1,626 *Sources: Mongolian authorities; and Fund staff projections.* ### Annex I. Global Risk Assessment Matrix ### Annex I. Global Risk Assessment Matrix ### External Risks — Findings and Recommendations - Significant further strengthening of the US dollar and/or higher rates - Likelihood: H - Potential Impact: H: "Filling the large external financing gap could be more challenging and expensive if markets reassess Mongolia’s sovereign risk." - Recommendation: "Maintain exchange rate flexibility and tighten macro policies; improve investment climate to attract FDI." - Significant China slowdown and its spillovers - Likelihood: L-M - Potential Impact: H: "Exports could decline further, intensifying BOP pressures and fiscal revenue shortfalls. More currency depreciation could be likely, adversely affecting the banks." - Recommendation (medium term): "maintain exchange rate flexibility to preserve FX reserves; tighten macro policies." - Recommendation (long term): "build resilience against external shocks; realize inclusive growth via diversification of the economy." ### Domestic Risks — Findings and Recommendations - Expansionary fiscal policy - Likelihood: M - Potential Impact: H: "Inability to tighten fiscal policy could further intensify BOP pressures and add to debt burdens." - Recommendation: "Undertake fiscal consolidation in line with requirements of the FSL." - Loose monetary policy - Likelihood: M - Potential Impact: H: "Loose monetary policy could worsen BOP pressure and raise banking-sector risks." - Recommendation: "Monetary policy should remain tight and the unconventional policies followed in recent past remain discontinued." - Elevated banking fragilities - Likelihood: H - Potential Impact: H: "Bank and/or currency run could emerge should confidence weaken. Given the high degree of dollarization in the economy, this could put further pressure on reserves." - Recommendation: "Strengthen supervisory framework; phase out forbearance; enhance provisions and capital ratios." - Uncertain business climate - Likelihood: M-H - Potential Impact: H: "Uncertain environment could impede FDI inflows and further weigh on investors’ confidence." - Recommendation: "Improve business climate, clarify tax issues, and enhance transparency." - Political constraints ahead of presidential election in mid 2017 - Likelihood: M - Potential Impact: H: "Political factors could constrain decisive action on appropriately tight policies and cleaning up the banking system." - Recommendation: "Better public awareness of the seriousness of the current economic difficulties and developing consensus on the need for adjustment." *Source: Annex I. Global Risk Assessment Matrix (IMF staff summary in the provided content)* --- ### Annex II. Debt Sustainability Analysis — Public Sector DSA ### Overview and Key Conclusions - "Mongolia’s public debt has risen very sharply in recent years and, absent the fiscal adjustment, concessional financing, and private-sector creditor engagement strategy under the program, debt would be on an unsustainable trajectory." - With program implementation, "these elements... help to restore debt sustainability (contingent on successful implementation of the program)." - The DSA covers: (i) general government debt (including that of the DBM); (ii) government guaranteed debt; and (iii) liabilities to the Fund. The PBOC swap line and SOE debt are excluded. - Projection horizon: "10-year period" with focus on the first five years. ### Historical and Projected Public Debt Levels (selected exact values) - Nominal gross public debt: - 2015: 59.5 percent of GDP - end-2016: 87.6 percent of GDP - Projected to increase through 2018 then decline: 84.7 percent of GDP by 2022 and 59.7 percent by 2026 - PV of public debt: - 2016: 69.1 percent - 2017: 86.3 percent - 2018 (projected increase): 89.6 percent - Declines from 2019 onward - Public gross financing needs (selected years, percent of GDP): - 2016: 18.5 - 2017: 13.8 - 2018: 13.9 - 2026: 19.5 - Effective interest rate (percent): 2016: 6.9; 2017: 5.2; 2018: 6.1; later projection values shown in the DSA tables. - Real GDP growth (percent): historical and projections include: 2016: 1.0; 2017: -0.2; 2018: 1.8; 2019: 8.1; average near "nearly 7 percent from 2020 to 2026" (text). - Nominal GDP growth (percent): 2016: 3.3; 2017: 9.0; 2018: 6.3; 2019: 13.4 (table shows series). - Inflation (GDP deflator, percent): 2017: 9.3; 2018: 4.4; 2019: 4.9; then range around 5.9–5.7 in subsequent years as presented. ### Drivers of Debt Dynamics - Recent rise in nominal debt (59.5 percent in 2015 to 87.6 percent by end-2016) driven by: - Low commodity prices → revenue shortfalls - Loose fiscal policy and one-off pre-2016 election spending - Increase in interest payments - Currency depreciation - Projected decline in debt from 2019 onward driven by: - Rapid and sustained growth expected as OT-2 comes onstream (major mining projects) - Fiscal consolidation under the program ### Fiscal Adjustment and Assessment - Fiscal path under program: - Deficit declines from 17 percent of GDP in 2016 to 10.6 percent in 2017, and to around 1.5 percent of GDP by 2022. - Primary balance moves from a deficit of 13.1 percent of GDP in 2016 to a surplus of 1.6 percent of GDP in 2022. - Staff view: "The programmed deficit reduction [is] realistic given the authorities’ strong commitment and the program’s substantial structural conditionality to strengthen fiscal discipline." - Fiscal multiplier: DSA assumes "a short-term fiscal multiplier (from deficit reduction) of over 1.0." ### Financing Package and Market Engagement - Financing package: "The total package of $5½ billion—largely concessional—helps reduce more expensive domestic public borrowing and lower PV debt." - Concessional financing terms: interest rates typically below 2 percent and maturities up to over 20 years (text). - Market engagement: "The $580 million DBM bond was successfully exchanged in early 2017," expectations to refinance the $500 million Chinggis bond and $161 million Dim Sum bond maturing in 2018. Government will engage domestic creditors to secure financing on sustainable terms. ### Banking Sector and Recapitalization - "Bank recapitalization needs could amount to 7 percent of GDP." - Contingency: "a contingency of up to 3½ percent of GDP has been included in the DSA, in case such funding should be needed." - Public funds could be used subject to strict criteria and consultation with Fund staff. ### Vulnerabilities and Stress Tests — Key Results - Heat map, fan charts, and stress tests indicate "significant vulnerabilities." - Fan charts and stress tests show public debt could increase substantially under a real GDP growth shock and, to a lesser extent, other shocks. - Gross financing needs (GFN) "remains high in some years, particularly among those toward the end of the projection period when debt has dropped to much lower levels (less than 70 percent)." - The high share of concessional financing reduces PV debt relative to nominal levels, making PV debt a major indicator for sustainability. ### External DSA — Notes and Key Figures - Coverage: public and publicly guaranteed external debt (including swap lines and concessional bilateral/multilateral loans) and external liabilities of the banking sector and private corporations. Mining-related intercompany loans form the bulk of private external debt. - Intercompany loans: "As of end-2016, intercompany lending comprised around 30 percent of total external debt." - External debt levels: - End-2016: 220 percent of GDP total external debt, or 155 percent excluding the $7.1 billion of intercompany loans. - Drivers of 2016 increase: new external borrowing and currency depreciation; external debt rose by over 30 percent of GDP from end-2015 to end-2016. External public debt increased by close to 7 percent of GDP in 2016 due to a new $250 million government loan from Credit Suisse in March and a $500 million bond issuance in April. The remainder largely reflects nearly 25 percent nominal depreciation of the togrog relative to the US dollar. *Source: Annex II. Debt Sustainability Analysis (IMF staff text and tables from the provided content)* ### 2018. While the large concessional donor support as part of the program is expected to increase ### cr17140 - 2018. While the large concessional donor support as part of the program is expected to increase ### External debt sustainability and shocks - Large concessional donor support as part of the program is expected to increase external debt in the short run, but over time this inexpensive financing coupled with Mongolia’s underlying medium-term fundamentals are favorable to external debt sustainability. - Ongoing mining developments are expected to deliver significant FDI inflows (starting 2017) as well as favorable export and growth dynamics, especially toward the end of the forecast horizon. - Debt dynamics are subject to external shocks, particularly a steep depreciation (though the impact of this is overstated on account of intercompany lending since dollar-based revenues shield mining companies’ debt repayment capacity). - Scenario outcomes from the External Debt Sustainability analysis (Figure 1 and Table 1 excerpts): - Baseline external debt (in percent of GDP): 2012: 125.2; 2013: 151.2; 2014: 171.7; 2015: 186.3; 2016: 220.0; 2017: 235.5; 2018: 232.7; 2019: 215.3; 2020: 198.4; 2021: 178.9; 2022: 159.1. - Change in external debt (levels): 32.7; 26.0; 20.5; 14.6; 33.7; 15.5; -2.8; -17.4; -16.9; -19.5; -19.9 (corresponding to 2012–2022 rows). - Identified external debt-creating flows (sum of components): -22.7; 5.8; 14.0; 10.1; 52.7; -4.7; -9.3; -24.3; -16.7; -18.6; -17.6. - Current account deficit, excluding interest payments: 25.5; 21.6; 5.2; -3.7; -5.1; -6.9; -1.2; 3.9; 1.8; 0.6; 0.4. - Net non-debt creating capital inflows (negative): -35.9; -16.7; -2.3; -0.9; 37.0; -9.7; -14.7; -20.8; -16.6; -15.8; -10.0. - Automatic debt dynamics: -12.3; 0.9; 11.1; 14.7; 20.8; 11.9; 6.6; -7.5; -2.0; -3.5; -8.0. - Contribution from nominal interest rate: 1.9; 3.8; 6.3; 7.7; 9.2; 11.3; 10.8; 9.8; 8.8; 7.8; 5.9. - Contribution from real GDP growth: -9.6; -14.2; -12.3; -4.2; -1.9; 0.5; -4.2; -17.2; -10.8; -11.3; -13.9. - External debt-to-exports ratio (in percent): 287.8; 382.0; 329.8; 411.3; 433.4; 424.5; 425.9; 392.8; 362.6; 324.4; 297.7. - Gross external financing need (in billions of US dollars): 4.1; 4.0; 2.4; 1.3; 2.1; 2.8; 3.5; 4.2; 3.4; 3.2; 3.2. - Gross external financing need (in percent of GDP): 33.2; 32.0; 19.3; 11.5; 19.0; 10-Year; 10-Year; 27.0; 32.8; 37.0; 27.4; 23.9; 21.9. (table shows header labeling; key point: elevated financing needs in earlier years and volatility over projection horizon) - Stress-test scenarios illustrated include: interest rate shock, real depreciation shock (one-time real depreciation of 30 percent occurs in 2017), non-interest current account shock, growth shock, combined shock; individual shocks are permanent one-half standard deviation shocks and combined scenarios include permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. ### Macroeconomic outlook and key projections (baseline assumptions) - Growth and inflation: - Real GDP growth (historical/projections and key averages): 2012: 12.3; 2013: 11.6; 2014: 7.9; 2015: 2.4; 2016: 1.0; 2017: 7.4; 2018: 5.8; 2019: -0.2; 2020: 1.8; 2021: 8.1; 2022: 5.3; 10-Year Average: 6.1; Standard Deviation: 8.5. - GDP deflator in US dollars (change in percent): 5.1; -8.3; -10.2; -6.1; -6.8; 4.4; 16.0; -6.7; 0.7; 0.9; 1.5; 1.3; 1.4. - Interest rates, trade, and capital flows: - Nominal external interest rate (in percent): 2.4; 3.1; 4.1; 4.3; 4.6; 2.7; 1.4; 4.8; 4.7; 4.6; 4.4; 4.2; 3.6. - Growth of exports (US dollar terms, in percent): -1.7; -6.9; 27.5; -16.4; 5.5; 13.6; 27.4; 1.8; 1.0; 9.4; 6.7; 8.3; 6.7. - Growth of imports (US dollar terms, in percent): 5.4; -4.8; -9.3; -27.8; 8.5; 16.9; 39.6; 0.7; 9.4; 16.0; 1.9; 5.2; 1.9. - Current account balance, excluding interest payments: -25.5; -21.6; -5.2; 3.7; 5.1; -9.3; 12.0; 6.9; 1.2; -3.9; -1.8; -0.6; -0.4. - Net non-debt creating capital inflows: 35.9; 16.7; 2.3; 0.9; -37.0; 11.5; 22.1; 9.7; 14.7; 20.8; 16.6; 15.8; 10.0. ### Recent economic developments (context and 2016–17 dynamics) - Growth and sectoral developments: - Growth decelerated from 17 percent in 2011 to 1 percent in 2016. - Temporary geological factors depressed OT-1 output in 2016; a pickup in coal production in Q4 2016 helped overall mining growth. - Nonmining growth was sluggish; agriculture and transportation showed relative strength. - External position: - Current account remained in deficit at about 4 percent of GDP in 2016. - Gross reserves were broadly stable at about $1.3 billion (3 months of imports) in 2016; reserves helped by utilization of the swap line. - Currency depreciated by about 25 percent in the second half of 2016. - Fiscal position: - Fiscal deficit (IMF definition) increased to 17 percent of GDP in 2016, up from around 10 percent of GDP in prior years due to quasifiscal spending and pre-election spending. - General government debt rose above 85 percent of GDP. - Domestic treasury bill yields rose up to 17 percent in 2016. - Monetary and financial sector: - Bank of Mongolia (BOM) hiked policy rate by 450 basis points in August (to 15 percent) and later lowered by 100 bps in December. - BOM introduced longer-term central bank bills and stopped lending to government in the second half of 2016; limited new mortgage financing to amount of principal and interest received on existing mortgage assets. - Loan growth remained very weak; subsidized credit schemes supported lending but these schemes are winding down. - Banking sector vulnerabilities: deteriorating asset quality from 2013–14 credit boom, many unhedged dollar loans, weak supervision and forbearance. ### Program support, policy objectives, and reform measures - Program financing and objectives: - Multilateral and bilateral partners committed concessional financing to support policy adjustment and structural reforms; this financing is critical to establish financing assurances, reduce reliance on more expensive short-term debt, and restore debt sustainability and gross financing needs. - Authorities requested a three-year extended arrangement under the IMF’s Extended Fund Facility (EFF), with access equivalent to SDR 314.5054 million (435 percent of quota). - Key policy actions and reform agenda (from MEFP and Letter of Intent): - Fiscal: aim to cut the fiscal deficit (IMF definition) from 17 percent of GDP in 2016 to 10.6 percent in 2017 through budget measures and consolidation. - Monetary/Exchange rate: BOM policy tightening (450 basis points hike) to support stabilization; introduction of longer-term central bank bills to absorb liquidity. - Financial sector reforms: (i) launch a comprehensive diagnosis of the banking system followed by recapitalization and restructuring as needed; (ii) enhance regulation and supervision; (iii) improve governance; (iv) support resolution of poor-quality assets. - Structural reforms: planning improvements to fiscal framework, a revamped BOM law, measures to diversify the economy and improve competitiveness, and actions to advance mining projects such as Tavan Tolgoi and OT-2. - Program documentation and transparency: - Authorities submitted a Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU) with quantitative targets and proposed prior actions and structural benchmarks for 2017−2020. - Authorities intend to make public the IMF staff report, the MEFP, the TMU, and the informational annex once the Executive Board approves the EFF. ### Key numeric highlights (selected) - FDI fell from $4½ billion in 2011 to nearly zero in 2015. - External debt (percent of GDP): peak in baseline 2017: 235.5; projected 2022: 159.1. - External debt-to-exports ratio (in percent): 2016: 433.4; 2017: 424.5; 2018: 425.9. - Gross external financing need (US$ billions): 2017: 2.8; 2018: 3.5; 2019: 4.2. - Fiscal deficit (IMF definition): 2016: 17 percent of GDP; target 2017: 10.6 percent of GDP. - Policy rate movements in 2016: hiked by 450 basis points (to 15 percent) in August; lowered by 100 bps in December. - Currency depreciation: about 25 percent in second half of 2016. - Reserves: about $1.3 billion in 2016 (3 months of imports). - Requested EFF access: SDR 314.5054 million (435 percent of quota). *International Monetary Fund staff report material (excerpted).* ### 10. The banking sector is under pressure. Asset quality has declined on account of the weak ### 10. The banking sector is under pressure. Asset quality has declined on account of the weak ### Banking sector condition and vulnerabilities - Reported NPL ratio risen to around 7 percent (excluding restructured loans and loans in early arrears). - NPLs are highest for foreign-currency loans; many such loans have been extended to unhedged borrowers. - Provisioning for high NPLs is likely inadequate in certain cases, placing pressure on capital adequacy ratios. - Some restructured loans are reportedly of uncertain quality. - Program commitment: comprehensive effort to analyze banks’ resilience and, depending on results, to recapitalize and restructure banks; strengthen banks’ governance; improve regulation, supervision, and resolution by amending the Banking Law. ### Macroeconomic outlook and program objectives (2017–20) - Growth projection: will soon pick up to as much as 8 percent as the economy stabilizes and mining projects take off. - Gross reserves target: rise to a healthy $4 billion (6½ months of imports) by the end of the program. - Government debt: present-value debt should start declining by 2019 and fall to 74 percent of GDP (IMF definition) by 2022. - Fiscal anchor: primary balance should turn to surplus in 2020. - Fiscal consolidation expected to leave room over time for the banking sector to extend more credit to the private sector, consistent with projected growth. ### Fiscal policy stance and targets - Historical deficit: reached 17 percent of GDP on the IMF’s definition (including DBM’s commercial spending) last year. - 2017 target: reduce deficit to 10.6 percent of GDP (supplementary budget and passage of corresponding fiscal measures will be a prior action). - Medium-term target: reduce deficit steadily to below 2 percent of GDP by 2022. - By 2022, intention eventually to move the fiscal balance into surplus. - Fiscal consolidation magnitude: control spending by about 9 percent of GDP during the program period and boost revenue by about 2¼ percent of GDP during the program period. - Concessional financing expected: $3 billion of concessional support from bilateral and multilateral donors to help contain debt and gross financing needs. ### Major spending-control measures (examples) - Capital expenditure: rationalize capital spending (capital spending averaged 12 percent of GDP over the last three years). - Wage bill: institute public-sector wage freeze through 2018; suspend civil servants’ grade advancement through 2019; restrict hiring through 2019 (freeze in all sectors except health, education, emergency services, and police—where one new employee will be hired for every two who leave). - Pensions: roll back recent pension generosity increases; raise retirement age for both men and women by 6 months annually, to 65. - Social spending: protect priority social spending; target Child Money Program to the poorest 40 percent of Mongolian households (plan to offset targeting retroactively by offering backpayments to the upper 40 percent in 2019 will be dropped); savings used entirely to increase spending on the better-targeted food stamp program. - Other expenditure savings: central procurement system for drugs and medical equipment; roll back some bills approved since the passage of the 2017 budget that have negative fiscal consequences. ### Revenue measures (examples) - Excises and duties: reverse the last two cuts in the petroleum excise (from July 1, 2017 and October 1, 2017) while rationalizing rates across petroleum products; increase excises on vehicles and on alcohol and tobacco (from May 1, 2017 and January 1, 2018, respectively); raise duties on tobacco (from May 1, 2017). - Personal income tax: make PIT more progressive by increasing rates on upper brackets (from January 1, 2018). - Withholding tax: eliminate threshold above which interest is subject to withholding tax. - Social security contributions: increase by 5 percentage points over 3 years (2 percent in 2018, 1 percent in 2019, and 2 percent in 2020), with employer and employee contributions each increased by 2.5 percentage points. - Automatic revaluation: ensure fines, fees, stamp duties, and other revenues fixed in togrog terms will automatically be revalued according to inflation each year, starting from 2019. ### Debt management and creditor engagement - Market-friendly exchange executed for the $580 million DBM bond maturing in March; issue oversubscribed and maturities extended by seven years. - Expectation to return to the market to finance other obligations. - Domestic creditor engagement to ensure continued financing on terms consistent with debt sustainability; yields expected to decrease as macro outlook and fiscal situation improve. ### Fiscal structural reforms and institutions - DBM law: passed new law to strengthen DBM independence and restrict it to commercial activities; safeguards include limits on government/parliament project selection authority, profitability-based project selection, independent board members, international competitive selection of senior management, and BOM supervision. Monitoring of fiscal deficit will include DBM spending; potential future exclusion of DBM from fiscal monitoring subject to conditions (one year commercial track record; third-party audit; reduced reliance on government funding/guarantees), with separate DBM balance target if excluded. - Mortgage program: limited net BOM financing of the program and other quasifiscal programs to zero (prior action); new mortgage funding only from principal and interest inflows from existing mortgage assets; interest-financed expansion of mortgages now reflected as government net lending starting with the 2017 supplementary budget; government and BOM to sign Memorandum of Understanding stating BOM acts solely as agent of government; plan to transfer program to government next year and eventually convert to a purely private-sector undertaking with any guarantee/subsidy transparently reflected in the budget. - PAYGO / Parliamentary restrictions: amend Integrated Budget Law and other laws by end-November 2017 to remove, effective 2018 onward, Parliament’s ability to increase the overall spending envelope unless matched by offsetting, realistically costed measures (structural benchmark). - Supplementary budgets: obey Integrated Budget Law requirement that a supplementary budget be passed before spending on any new program is committed. - Ministry of Finance powers: new Cabinet resolution requiring MOF prior approval before proposals with substantial fiscal implications can be tabled at Cabinet. - Accountability framework: adhere strictly to provisions establishing personal responsibility and liability of ministers and senior officials for budget law violations. - Fiscal council: establish independent fiscal council under its own law by end-December 2017 (structural benchmark); council to prepare independent budget forecasts and costings of MPs’ policy proposals, verify off-budget vehicles are not used to circumvent budget limits, and monitor compliance with the FSL. - PPPs / concessions: assign MOF a gatekeeper role over all PPPs; restrict local governments’ ability to initiate projects; conduct audit of all existing concession contracts before further payments; work with ADB to revise legal framework; contract no new concessions until legislation amended (except possibly some new BOT projects) and attempt to cancel contracted projects not yet launched. - Public Investment Program (PIP): rationalize PIP, cull low-value-added projects, and improve processes with World Bank assistance to align PIP with national development priorities. - Future Heritage Fund (FHF): law entered into force on January 1, 2017; transitional provisions delay actual savings by a couple of years; until 2022, FHF revenues to be fully used to retire government debt and transfer Human Development Fund expenditures to the state budget smoothly. - Payment arrears: commit to strengthening control and monitoring systems to prevent buildup of arrears. ### Tax system reform agenda and benchmarks - Independent working group to review tax structure (including VAT and business/mining taxation) with IMF TA: set up by end-August 2017 (structural benchmark); submit report by end-December 2017 (structural benchmark). - Tax expenditures: review and report on existing tax expenditures and reduce allocations in the next budget with World Bank TA. - Revenue administration: finalize and begin implementing compliance strategies for different-sized businesses by end-April 2017 (structural benchmark); submit revised general taxation law to Parliament by end-October 2017 (structural benchmark); submit legislation to create simplified tax regime for micro businesses by end-October 2017 (structural benchmark). - Targeting and social program benchmarks: Child Money Program targeting tightened to poorest 40 percent (structural benchmark); savings used to increase food stamp program spending (structural benchmark). ### Social protection measures - Child Money Program targeting to poorest 40 percent; plan to drop retroactive backpayments to upper 40 percent in 2019. - Savings reallocated to expand better-targeted food stamp program to shield Mongolia’s poorest citizens. - Consolidation of overlapping transfer programs to achieve small net administrative savings while maintaining total average benefits. - Parametric pension reform and other social initiatives to be implemented; detailed descriptions referenced for World Bank and ADB operations. ### Monetary and exchange rate policy - Monetary policy stance: will remain appropriately tight in 2017 given objective of price stability; BOM to keep policy tight in 2017 as warranted by fundamentals. - Policy rate: currently at 14 percent. - Inflation: now around 2½ percent. - Conditional policy rate path: over time, as the economy normalizes, BOM may consider cutting the policy rate if BOP and inflation indicators permit. - Exchange rate: keep flexible to act as a shock-absorber for a commodity-dependent economy. - Reserve money: keeping reserve money on the program path requires careful liquidity management and close BOM-Treasury coordination given still-large fiscal deficit and substantial, likely lumpy, external financing. ### Bank of Mongolia (BOM) governance, law, and balance-sheet matters - New BOM law: submission by end-November 2017 and adoption by end-March 2018 (structural benchmarks). Law to clarify BOM mandate, strengthen governance, improve independence, and enhance powers of the Monetary Policy Committee (including giving its members a vote on policy decisions). - Supervisory decisionmaking: supervisory decisions to be made collectively; decisionmaking body to meet regularly to review individual banks and the banking system and make supervisory decisions as necessary. - BOM modernization: reorganize with focus on human resources, IT, and strengthened governance; commit to annual external audit. - BOM negative capital position: work on a gradual strategy to address BOM’s negative capital position; progress to be gradual given already high public debt levels. *IMF country report excerpt.* ### 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to ### 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to ### Exchange rate policy and reserves - The exchange rate will be allowed to move flexibly; FX sales will be limited to smoothing excessive volatility and preventing disorderly market conditions. - Given projected BOP surpluses under the program and the corresponding NIR targets, the BOM will build reserves. - Gross reserves are expected to reach a healthy 6½ months of imports by the end of the program—similar to levels seen in 2012, before external shocks hit Mongolia. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Other external payments commitments - During the program the authorities will not: - impose or intensify restrictions on the making of payments and transfers for legitimate current international transactions; - introduce or modify multiple currency practices; - conclude bilateral payments agreements that are inconsistent with Article VIII of the IMF’s Articles of Agreement; - or impose or intensify import quota restrictions for balance of payments reasons. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Financial sector policies — overall commitment - Commitment to a sound and stable financial system that contributes to economic growth. - First priority: comprehensive diagnosis of the banking system to assess financial soundness and resilience. - Follow-up: bank restructuring and recapitalization, and—if needed—the safe and timely resolution of nonviable institutions. - Complementary actions: bring bank regulations to international best practice, strengthen bank supervision, improve monitoring and support of bank liquidity, and improve framework for restructuring and resolution of problem loans. - Commitment to strengthen the regime for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). - Multilateral partners providing assistance include the ADB, APG, IMF, and World Bank. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Assessing financial resilience (AQR and business plans) - All 14 banks required to: - (i) undergo independent studies of current asset valuations (Asset Quality Review, AQR); - (ii) submit business plans demonstrating financial strength, including effects of any necessary recapitalization and restructuring, through 2019. - Overall AQR and business plan review to be completed by end-December 2017. - Process details: - BOM to appoint a Steering Committee to oversee diagnostics; IMF staff as observers. - On March 31, 2017, BOM launched procurement to hire independent internationally reputable expert company(ies) to carry out the AQR (prior action). Terms of reference require no conflict of interest or contractual agreement with the banks in the last two years. The AQR will be completed by end-October 2017. - Banks to submit business plans by end-November 2017, prepared per requirements developed with IMF staff, providing detailed financial forecasts and estimate of capital needs through end-2019; assessed and validated using BOM stress test model in consultation with IMF staff. - AQR and business plans will allow assessment of whether banks’ capital adequacy meets minimum Tier 1 and overall capital targets defined in consultation with IMF staff, both at end-2016 and until end-2019. - BOM will decide on banks’ business plans and communicate within one month of receipt, i.e., by end-December 2017. Where adequate capitalization and viable business are shown, no further steps required. Where deficiencies or nonviable models are found, banks must submit recapitalization and restructuring plans addressing diagnostic findings and committing to fill capital shortfalls and restructure operations to achieve long-run profitability. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Bank recapitalization and restructuring process - Shareholders responsible for ensuring banks are fully capitalized, profitable, well managed, and contribute to growth. - If shortfall exists (including prospective, per business plans), institution must submit time-bound, monitorable action plan for meeting capital adequacy and other financial milestones; milestones reviewed by BOM and modified quarterly as needed. - Shareholders required to fully capitalize institutions by June 2018, either themselves or by bringing in new fit-and-proper shareholders, including possibly foreign investors as minority or majority shareholders. - Authorities will ensure adequate backup funds and maintain financial stability through recapitalization and restructuring. - If shareholders cannot fully recapitalize, authorities may facilitate orderly restructuring using public funds subject to strict criteria: - Existing shareholders must absorb any losses identified in the AQR before public funds used. - Bank must be restructured to ensure long-term viability; management replaced as appropriate. - Public funds only used in the public interest of maintaining financial stability. - Understandings with IMF staff on criteria by end-October 2017 and necessary legislative changes by end-December 2017 (structural benchmark). - Government will seek budgetary authorization to provide financial support subject to strict procedures developed with IMF staff; in most cases support anticipated to be shown below the line in the budget as an exchange of financial assets (to be determined at time). - By end-September 2018 authorities will prepare an exit strategy for divesting existing and potential public participation in banks. - Financial Stability Council (FSC) actions: - FSC will ensure proper governance regarding use of public funds for recapitalization and restructuring. - FSC will be enlarged to include Deposit Insurance Corporation of Mongolia (DICOM) and will immediately appoint a spokesperson for the communication strategy of the recapitalization process, developed in consultation with IMF staff. - Specialized managing entity: - To be set up by end-December 2017 to manage government participation in restructured banks, in consultation with IMF staff. - Mandate: maximize value of State holdings and interact with banks on a commercial and arm’s-length basis. - Ensure members of the specialized entity, bank board members representing the state, and bank managers are fit and proper, independent, and professionally suitable. - Relationship framework agreement between managing entity and each bank with state shareholding to prevent political interference. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Resolution framework and deposit insurance - Nonviable institutions to exit in manner preserving depositor confidence, financial stability, and minimizing economic costs. - Legislation and cooperation framework for bank resolution to be brought up to best international standards, in consultation with IMF staff, by end-November 2017 (structural benchmark). - Legislative changes will ensure BOM has full suite of resolution tools; steps to ensure adequate staffing of supervision department. - DICOM law to be amended by end-November 2017 to align with IADI Core Principles for Effective Deposit Insurance Systems (structural benchmark). - By end-April 2017, a backup financing facility will be put in place to ensure DICOM can meet obligations to protect insured depositors. - DICOM operations to be improved by end-November 2017, inter alia by facilitating data sharing with the BOM to ensure faster payout of deposits where appropriate. - BOM will ensure banks can be resolved efficiently and timely, minimizing economic costs. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Upgrading regulatory and supervisory framework - Commitments: - Ensure conservative implementation of IFRS accounting and best international standards on asset classification, loan provisioning, and collateral valuation. - BOM to adopt an amendment to its regulation on asset classification and provisioning by end-June 2017, in consultation with IMF staff (structural benchmark). - Introduce individual assessment of banks’ risks and advance liquidity requirements. - By end-December 2018 initiate Pillar II process based on banks’ ICAAP and ILAAP and SREP. - Amend BOM regulation on liquidity requirements and bring in line with Basel framework (Liquidity Capital Ratio, Principles for Sound Liquidity Risk Management and Supervision) no later than end-January 2019. - Improve governance of banks. - By end-November 2017: (i) strengthen fit and proper requirements of all board members, senior management, and shareholders of banks in line with international best practice and in consultation with IMF staff; (ii) update legislation and introduce regulation on related-party loans; (iii) strengthen ultimate beneficial owner requirements (structural benchmark). - Based on updated regulations, by end-September 2018 carry out review of related-party exposures to ensure transactions with related parties are not undertaken, restructured, or resolved on more favorable terms than corresponding transactions with non-related counterparties. - Improve supervisory powers for early intervention and requesting additional capital. - By end-November 2017 amend the Banking Law, in consultation with IMF staff, to: - (i) improve BOM’s early intervention framework, including by introducing a capital buffer above the minimum and linking supervisory actions to its depletion; - (ii) align rules on large exposures with international best practice; - (iii) ensure BOM has adequate powers to request additional capital and provisioning to enhance financial strength or absorb existing and estimate future credit losses, including based on diagnostic studies and business plan analysis; - (iv) introduce power for BOM to apply levies on banks to cover costs of supervision, including AQRs (structural benchmark). *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Monitoring and supporting bank liquidity - Authorities will monitor and, if needed, provide adequate liquidity to the banking system in a transparent and expeditious manner. - Introduce full daily monitoring of liquid assets and liquidity flows by improving reporting and expanding forecasting tools. - Update credit-granting rules to banks in line with international best practice as needed. - BOM stands ready to take appropriate measures to maintain sufficient liquidity in banks consistent with its rules. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Facilitating resolution of nonperforming loans (NPLs) - Two-front approach: - Improving banks’ policies and procedures for loan workouts: - Issue a regulation by end-December 2017 requiring banks to have strategies, policies, and internal capacity to resolve NPLs. - Require banks to report on NPLs in more detail from end-June 2018. - Identifying impediments to effective NPL resolution: - In consultation with relevant ministries, review banks’ operating environment to identify impediments related to insolvency and enforcement laws, taxation issues, and legal/regulatory obstacles to NPL sales and outsourcing. - Develop an NPL resolution strategy including milestones and timetable to remove identified impediments. - Financial Stability Board to approve this strategy by end-January 2018 (structural benchmark). - Authorities intend to request technical assistance for this work. - Asset Management Company (AMC): - Considerable work toward setting up an AMC has been undertaken. - Questions remain, including AMC’s fit with the AQR process. - Authorities will evaluate whether to move forward with legislative initiative after further study, in consultation with the ADB and IMF staff. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) and anti-corruption - Commitment to enhance AML/CFT and anti-corruption frameworks to bring them into compliance with international standards to improve business climate, facilitate capital inflows, and increase transparency and soundness of key sectors. - By end-March 2018 adopt amendments to legal framework to support anti-corruption efforts: - Amend AML/CFT law, anti-corruption law, and criminal code to ensure: - (i) corruption offenses are criminalized in line with the UN convention against corruption, including with regard to illicit enrichment; - (ii) domestic politically exposed persons are subject to due diligence requirements in line with the FATF standard; - (iii) senior officials are subject to comprehensive asset disclosure requirement covering assets beneficially owned, reporting to a single agency for timely publication, and subject to dissuasive sanctions for absence or false declaration. - Authorities will further strengthen resources and expertise of competent AML/CFT and anti-corruption authorities. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Competitiveness and diversification - Acknowledge mining will likely remain central for many decades; aim to diversify and improve competitiveness. - Planned actions: - Develop and implement an animal health law; higher phytosanitary standards to help unlock meat exports given over 60 million head of livestock. - Work on the WTO Trade Facilitation Agreement. - Revise the law on permits to improve business climate. - These issues are discussed in detail in World Bank budget support loan documentation. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Program risks, contingencies, and monitoring - Main risks identified: - (i) weakening of commodity prices; - (ii) economic slowdown in key trading partners; - (iii) weaker than projected revenues; - (iv) lower than expected growth; - (v) lower than planned capital inflows; - (v) realization of other contingent liabilities. - These risks could destabilize the macroeconomic environment and further challenge public debt sustainability. - Authorities stand ready to adjust policies promptly in close consultation with IMF staff; contingent fiscal measures will be developed during the first review. - Reviews: - Program subject to quarterly reviews assessing macroeconomic performance and progress on structural benchmarks. - First two reviews will take place before June 30, 2017, and September 30, 2017, respectively. - A safeguards assessment of the BOM will be conducted by the 1st review. *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### Quantitative performance criteria and indicative targets (selected figures reproduced exactly as in source) - Indicative targets / Performance Criteria (change in end-of-period stocks evaluated at program exchange rates): - Change in net international reserves (NIR) of the Bank of Mongolia (BOM) (floor, cumulative, change in eop stock, in million US$ at program exchange rate): -2500 100 250 550 - Net domestic assets (NDA) of the BOM (ceiling, eop stock, in billion togrog at program exchange rate): 5,4005,1004,9004,6004,000 - Primary balance of the general government (floor, cumulative since the beginning of the fiscal year, in billion togrog): -650-850-1,050-1,500-350 - New nonconcessional external debt maturing in one year or more, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$): 6001,8001,8001,8001,800 - Stock of guarantees on external debt extended by the government or BOM (ceiling, eop stock, in million US$): 850850850750750 - Indicative Targets (IT): - Reserve money (ceiling, in billion togrog): 3,4003,5003,9004,0004,200 - Continuous Performance Criteria: - New nonconcessional external debt maturing in less than one year, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$): 00000 - Accumulation of new external payment arrears (ceiling, eop, in million US$): 00000 - Memorandum items: - Budget support from bilateral and multilateral donors excluding Fund under the program baseline (eop stock, cumulative, in million US$): 0257427597783 - Net nonconcessional borrowing received and repatriated by the general government (including the DBM) under the program baseline (eop stock, cumulative, in million US$): 2020202020 - Program exchange rate (togrog/U.S. dollar): 2489.42489.42489.42489.42489.4 - U.S. dollar per SDR: 1.31.31.31.31.3 - Monetary gold price (U.S. dollar/ounce): 1,1421,1421,1421,1421,142 *Source: cr17140 - 24. We will continue to allow the exchange rate to move flexibly, with FX sales limited to* ### 1. improve the early intervention framework ### 1. improve the early intervention framework ### Policy actions and implementation deadlines - Amend DICOM law to bring it in line with IADI Core Principles for Effective Deposit Insurance Systems — end-November 2017 - Financial Stability Board (FSB) approval of an NPL resolution strategy: - FSB to establish a working group to (i) identify and analyze impediments to debt resolution (insolvency and enforcement laws, taxation issues, legal and regulatory obstacles to NPL sales and outsourcing) and (ii) develop an NPL resolution strategy including milestones and a timetable for removal of identified impediments — end-January 2018 - BOM to carry out a review of related party exposures based on improved legislation — end-September 2018 - BOM to adopt an amendment to its regulation on asset classification and provisioning in consultation with IMF staff — end-June 2017 - Enact a law on the use of public funds — end-December 2017 ### Strengthening regulatory and supervisory powers - Ensure that BOM has adequate powers to request from banks additional capital and provisioning to: - enhance financial strength; or - absorb existing and estimated future credit losses, including actions based on diagnostic studies and analysis of business plans - Introduce power for BOM to apply levies on banks to cover the cost of supervision including AQRs - Strengthen shareholders’, board members’, and senior management’s fit and proper requirements - Upgrade rules on banks’ related party exposure and final beneficial owners ### NPL resolution and institutional cooperation - Bring the bank resolution legislation, funding and cooperation framework up to best international standards in cooperation with MoF, DICOM - NPL strategy development by FSB working group to identify impediments and set milestones and timetable for removal ### Key statistics and program-relevant figures (from TMU) - Reference exchange rate of the Mongolian togrog to the U.S. dollar for program valuation: 2489.4 (as of December 31, 2016) - Cross-rates (as of December 31, 2016): - Chinese Renminbi (RMB) = 0.14389 U.S. dollars - Special Drawing Right (SDR) = 1.344330 U.S. dollars - Official gold holdings = 1142.54 U.S. dollars per troy ounce - Program reference rate for six-month USD LIBOR = 3.18 percent (fixed for program duration) - Spreads over six-month USD LIBOR: - six-month Euro LIBOR = -308 basis points - six-month JPY LIBOR = -306 basis points - six-month GBP LIBOR = -231 basis points - for currencies other than Euro, JPY, and GDP, spread = 0 basis points - Stock of guarantees on external debt at end-2016 = $1,385 million ### Quantitative performance criteria and macro-financial targets (high level) - Test dates with performance criteria: end-April 2017, end-June 2017, end-September 2017, end-December 2017 - Performance criteria include: - Floors on the change in level of net international reserves (NIR) of the BOM - Ceilings on the level of net domestic assets (NDA) of the BOM - Floors on the level of primary balance of the general government - Ceilings on contracting and/or guaranteeing by the general government or the BOM of new nonconcessional external debt maturing in one year or more - Ceilings on stock of guarantees on external debt by the general government or the BOM - Continuous performance criteria include: - Ceilings on contracting and/or guaranteeing new nonconcessional external debt maturing in less than one year - Ceilings on accumulation of new external payment arrears - Indicative targets (same test dates) include ceilings on the level of reserve money ### Definitions relevant for program monitoring - General government (GG) includes: units of budgetary central government, social security funds, extra-budgetary funds (including but not limited to the Stabilization Fund and the Future Development Heritage Fund), local governments, and the Development Bank of Mongolia (DBM) - Debts of other legally autonomous SOEs and BOM liabilities including the swap line with the People’s Bank of China (PBOC) are excluded from the GG debt definition - Primary balance of the GG = consolidated fiscal balance of the GG plus total interest payments of the GG - Domestic banking system = BOM and licensed commercial banks incorporated in Mongolia - Fiscal year = calendar year (January 1 to December 31) - For program purposes, nonconcessional external borrowing excludes (i) use of IMF resources; (ii) lending from ADB, EBRD, AIIB, and World Bank Group; (iii) lending from governments and government agencies such as JICA, Export-Import Banks of India, Korea, and Turkey, and the Development Bank of Germany; (iv) concessional debts; (v) any togrog-denominated treasury bill and government bond holdings by nonresidents - Concessional debt = debt with grant element of at least 35 percent (grant element calculated as difference between PV and nominal value expressed as percentage of nominal value, PV discounted using specified rules) ### Net international reserves (NIR), reserve money, and NDA measurement rules (high level) - NIR = gross international reserves less international reserve liabilities - Gross international reserves include monetary gold holdings, SDR holdings, Mongolia’s reserve position in the IMF, and foreign currency assets held abroad (plus cash in BOM’s vault) under direct and effective BOM control and readily available for intervention - Excluded from gross reserves: foreign currency claims on residents, capital subscriptions in international institutions, and encumbered/pledged reserves - International reserve liabilities include all outstanding liabilities of Mongolia to the IMF; foreign currency liabilities of BOM to nonresidents with original maturity up to and including one year (including gold deposits by foreign banks); liabilities to the People’s Bank of China under the swap line; any foreign currency liabilities of any maturity of BOM to residents including deposits and current accounts of commercial banks - Reserve money (indicative ceiling) = currency issued by BOM (excluding BOM holdings of currency) plus commercial banks’ deposits held with BOM - NDA calculation: NDA = reserve money − (NIR + other net foreign assets (ONFA)) - ONFA includes accrued interest receivables on gross international reserves minus accrued interest payables on international reserve liabilities and deposits of international financial institutions - Adjustments to NDA ceiling: - Downward by amount of external borrowing (budget support and net nonconcessional borrowing excluding project financing) received by GG in excess of programmed level - Upward by 50 percent of the amount of external borrowing received by GG that is short of the programmed level ### Data provision and reporting requirements - Data to be provided to IMF’s Resident Representative by the 20th day of each month, unless otherwise indicated - Monetary data (BOM): - Monthly: monetary survey, consolidated balance sheet of commercial banks; weekly: BOM balance sheet (within five working days of week end) - Daily: NIR and BOM foreign exchange market auctions; weekly: full reporting of all interventions - Weekly (within five working days): interest rates and volumes on standing facilities and market operations - Weekly: detailed breakdown of net credit to government from BOM; commercial banks’ reconciliation with MOF sent monthly - Weekly: stock of monetary gold (both thousands of troy ounces and U.S. dollars); monthly reporting of gold transactions if applicable (prices and volumes) - Weekly: assets and liabilities held in Renminbi and in SDR - Monthly: detailed breakdown of “other items net” for BOM and banks, including valuation changes from exchange rate/gold revaluation - Biweekly: bank-by-bank list of required reserves and actual reserves - Results of each central bank bills auction within five working days - Quarterly: stock of BOM swaps with resident and non-resident commercial banks; stock of BOM guarantees issued; BOM foreign currency liabilities reflecting long- and short-term maturities - Fiscal data (MOF): - Monthly consolidated accounts of central, local, and general government including detailed tax, nontax, and capital revenues, current and capital expenditures, net lending, and financing (financing separated into foreign and domestic sources) - Classified transactions of all social insurance funds - Results of each treasury bills auction within five working days - Monthly DBM accounts detailing new lending, repayment, and outstanding loans (cash basis) - Quarterly: outstanding balances of all deposit accounts of the general government in commercial banks, including extrabudgetary funds - Outstanding balances of any new deposit accounts opened for grants and loans received from donors (including counterpart funds) - Monthly report on stock of outstanding debt of the general government including DBM (domestic and external debt, promissory notes, tax pre-payments, guaranteed debt netting out cross holdings) - External sector data (BOM and MOF): - Quarterly (MOF): complete list of new contracts above $10 million for public investment projects (signed or under negotiation), including amounts, terms, and conditions of current or future debt or nondebt obligations - Quarterly (BOM): outstanding stock, disbursements, amortization, and interest payments of short-term external debt contracted and/or guaranteed by government or BOM by creditor in original currency and U.S. dollars - Quarterly (BOM): outstanding, disbursements, amortization, and interest payments of medium- and long-term external debt contracted and/or guaranteed by government or BOM by creditor in original currency and U.S. dollars - Daily (BOM): midpoint exchange rates of the togrog against the U.S. dollar, including reference, interbank, and parallel market exchange rates - Quarterly (BOM): arrears on external debt contracted and/or guaranteed by government or BOM by creditor in original currency and U.S. dollars - Other data (NSO): - Monthly consumer price index and detailed breakdown by major categories - NSO monthly statistical bulletin including monthly export and import data *Source: cr17140 - 1. improve the early intervention framework (IMF).* ### Annex I. Guidelines on Performance Criteria ### Annex I. Guidelines on Performance Criteria ### Excerpt identification - Excerpt from Executive Board Decision No. 15688, adopted December 5, 2014 - Paragraph reference: 8. ### Scope and definition of "debt" - For the purpose of these guidelines, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. - The performance criterion or indicative target will include all forms of debt. ### Primary forms of debt (enumerated) - i. loans - Definition: advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits). - Also includes temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements). - ii. suppliers’ credits - Definition: contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided. - iii. leases - Definition: arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. ### Valuation rule for leases - For the purpose of these guidelines, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. ### Awarded damages and non-debt obligations - Awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. *Source: Annex I. Guidelines on Performance Criteria (Excerpt from Executive Board Decision No. 15688, adopted December 5, 2014).* ### 4. The teams agreed to continue the close cooperation going forward. Table 1 details ### 1. Activity has begun picking up, suggesting possible upside risks to this year’s ### 1. Activity has begun picking up, suggesting possible upside risks to this year’s ### Activity and outlook - GDP growth registered 4.2 percent y/y in the first quarter. - Strong private investment more than offset a contraction in government consumption. - Staff appraisal: FDI is of critical importance to Mongolia, and continuing efforts to strengthen the investment climate will be a key priority. ### Inflation, reserves, and external sector - Inflation rebounded to 3½ percent y/y in April, reflecting higher food prices. - Gross international reserves, though still weak, have risen somewhat with better commodity prices and stronger-than-expected exports. ### Fiscal performance - Fiscal performance is on track: the deficit through March amounted to around 1 percent of GDP, as against an annual target of 10½ percent. ### Measure affecting FDI foreign-exchange transactions and program timing - A Parliamentary resolution ratified on April 20 included a clause requiring foreign-exchange sales of major FDI projects to be channeled through the domestic banking system, raising serious concern that it could affect the investment climate and undermine macroeconomic projections for FDI, growth, and the balance of payments. - Executive Board consideration of the Article IV Consultation and EFF request was postponed from the original date of April 28, pending resolution of this issue. - Parliament passed a new version of the resolution that excluded the clause on May 4, paving the way to Board consideration on May 24. - As a result of the postponement, the first test date for the program’s quantitative performance criteria was moved to end-June instead of end-April, and the phasing of quarterly reviews and disbursements was modified accordingly. - The authorities’ supplementary Letter of Intent (LOI) requesting these changes was submitted (Supplementary LOI dated May 17, 2017). ### Program monitoring, reviews, and financing phasing - Rephasing: the first two reviews of the program will take place before September 30, 2017, and December 31, 2017, respectively. - Table summary (phasing of program financing, in millions of U.S. dollars): - Financing by quarter (2017Q2, 2017Q3, 2017Q4, 2018Q1): 295, 208, 258, 278. - IMF financing by quarter: 38, 38, 38, 28. - Other IFIs and bilateral donors by quarter: 257, 170, 220, 249. - Proposed access and phasing under the extended arrangement (selected dates and aggregate): - Board approval of extended arrangement: May 24, 2017. - Observance of end-June 2017 performance criteria, completion of first review: September 15, 2017. - Observance of end-September 2017 performance criteria, completion of second review: December 15, 2017. - Subsequent reviews listed through March 15, 2020, with repeated Purchase Million SDR / Million USD / Percent of Availability rows summing across reviews to 314.5054425.44435.00 (Table 2 totals preserved as presented). ### Quantitative performance criteria (Revised Table A1 / Table 1 — targets at specified dates) - Change in net international reserves (NIR) of the Bank of Mongolia (BOM) (floor, cumulative, change in eop stock, in million US$ at program exchange rate): 0, 100, 250, 550 (for 6/30/2017, 9/30/2017, 12/31/2017, 3/30/2018). - Net domestic assets (NDA) of the BOM (ceiling, eop stock, in billion togrog at program exchange rate): 5,100; 4,900; 4,600; 4,000. - Primary balance of the general government (floor, cumulative since the beginning of the fiscal year, in billion togrog): -850; -1,050; -1,500; -350. - New nonconcessional external debt maturing in one year or more, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$): 1,800; 1,800; 1,800; 1,800. - Stock of guarantees on external debt extended by the government or BOM (ceiling, eop stock, in million US$): 850; 850; 750; 750. - Indicative Targets — Reserve money (ceiling, in billion togrog): 3,500; 3,900; 4,000; 4,200. - Continuous Performance Criteria (ceiling, eop stock, in million US$): - New nonconcessional external debt maturing in less than one year: 0; 0; 0; 0. - Accumulation of new external payment arrears: 0; 0; 0; 0. - Memorandum items: - Budget support from bilateral and multilateral donors excluding Fund under the program baseline (eop stock, cumulative, in million US$): 257, 427, 597, 783. - Net nonconcessional borrowing received and repatriated by the general government (including the DBM) under the program baseline (eop stock, cumulative, in million US$): 20, 20, 20, 20. - Program exchange rate (togrog/U.S. dollar): 2489.4, 2489.4, 2489.4, 2489.4. - U.S. dollar per SDR: 1.3, 1.3, 1.3, 1.3. - Monetary gold price (U.S. dollar/ounce): 1,1421,1421,1421,142 (entries preserved exactly as presented). ### Indicators of Fund credit and capacity to repay (select projections, Table 4 & Table 5) - Existing and prospective Fund arrangements — Disbursements (SDR, selected years): 83.87 (2017); 99.59 (2018); 104.84 (2019); 26.21 (2020). - Stock of existing and prospective Fund credit (end of period, SDR): 83.87 (2017); 183.45 (2018); 288.29 (2019); 314.51 (2020); 312.18 (2021); 294.27 (2022). - GRA credit to Mongolia (SDR, selected years): 83.87 (2017); 183.45 (2018); 288.29 (2019); 314.51 (2020); 312.18 (2021); 294.27 (2022). - In percent of quota (GRA credit to Mongolia): 116.00; 253.74; 398.75; 435.00; 431.78; 407.01 (2017–2022). - In percent of GDP (GRA credit to Mongolia): 1.10; 2.34; 3.37; 3.44; 3.17; 2.72 (2017–2022). - Public and publicly-guaranteed debt (percent of GDP): 94.86; 101.34; 100.00; 97.46; 92.31; 84.70 (2017–2022). - Public and publicly-guaranteed debt (percent of exports of goods and services): 171.01; 185.46; 182.44; 178.13; 167.39; 158.51 (2017–2022). - Debt service on GRA credit (SDR): 0.68; 2.21; 5.25; 8.07; 8.39; 8.18 (2017–2022). ### Structural benchmarks and prior actions (Revised Table A2 — selected items and completion dates) - Prior actions (to be completed before Board approval): - Passage of a 2017 supplementary budget and a medium-term budget framework (2018–2020) consistent with program targets, and passage of all fiscal measures needed to support 2017 targets. - BOM to launch the procurement procedure for AQRs by internationally reputable firms on banks based on terms of reference developed in consultation with IMF staff. - Authorities to communicate discontinuation of any net BOM financing of the mortgage program as well as any quasi-fiscal lending to companies. - Structural benchmarks (selected, with completion dates): - Establishment of a working group to review the tax structure: end-August 2017. - Submission to Parliament of a revised general taxation law: end-October 2017. - Submission to Parliament of legislation to create a simplified tax regime for micro and small businesses: end-October 2017. - Passage of a 2018 budget in line with the program’s fiscal path: end-November 2017. - Revision of budget laws and introduction of a new law to establish a fiscal council: end-December 2017. - Submission of the tax working group’s report to the Ministry of Finance: end-December 2017. - Targeting of the Child Money Program to the poorest 40 percent of Mongolian households and redirecting savings to the Food Stamps program: end-December 2017. - Submission to Parliament of a new Bank of Mongolia Law: end-November 2017; Adoption of the new Bank of Mongolia Law: end-March 2018. - BOM to adopt an amendment to its regulation on asset classification and provisioning in consultation with IMF staff: end-June 2017. - Financial Stability Board (FSB) approval of an NPL resolution strategy (working group to identify impediments and develop strategy): end-January 2018. - BOM to carry out a review of related party exposures based on improved legislation: end-September 2018. - Enact a law on the use of public funds: end-December 2017. - Banking and deposit insurance legislative amendments with multiple objectives (improve early intervention, bring bank resolution framework to international standards, ensure BOM powers for capital/provisioning, introduce levies on banks, strengthen fit-and-proper requirements, upgrade related party exposure rules): end-November 2017. ### Governance and statements - Supplementary Letter of Intent dated May 17, 2017 signed by B. Choijilsuren (Minister of Finance) and N. Bayartsaikhan (Governor, Bank of Mongolia). - Statement by Christine Barron et al., May 24, 2017, noting Mongolia’s significant potential, the macroeconomic deterioration following the fall in commodity prices and slower growth in China, and the economic conditions faced by the Government when it took office in July. *IMF staff report and Supplementary Letter of Intent (May 17–24, 2017) — Mongolia (revised tables and program documentation as presented in the source).* ### 2016. They have since embarked on an ambitious and challenging economic recovery ### cr17140 - 2016. They have since embarked on an ambitious and challenging economic recovery ### Recent Economic Developments and Outlook - The economy will start to regain growth momentum after 2017. - Mongolia’s economic growth is expected to fall slightly in 2017, before modest growth of 1.8 percent in 2018 and stronger growth of 8.1 percent in 2019, driven by further mining investment. - Growth in the first quarter of 2017 was 1.3 percent. - The authorities think there is some larger upside risk to economic growth from the mining sector. - Mongolia’s economy will remain heavily dependent on the mining sector with large potential reserves yet to be exploited. - Mongolia is rich in mineral resources including copper, coking coal, gold and other minerals. - Oyu Tolgoi will have a second phase development of $US 6 billion investment. - Tavan Tolgoi’s expanded production from 2018 will contribute significantly to economic growth. - The long-term global copper and gold price outlook is stable. - Coking coal market prices have tripled compared to last year, which gives a more positive outlook to near-term economic growth. - Higher mineral prices will support a recovery in the trade balance and contribute to a tighter fiscal stance but inflation is expected to remain well within the program target. - A significant contribution to the better near-term and medium-term outlook for Mongolia is that it avoided default on foreign debt. - Low level of foreign reserves and short-term bond payments due in 2017, 2018 and 2019 totaling around $US1.2 billion posed a risk of default. - With the announcement on February 16, 2017 that the authorities and Fund staff had reached an agreement on an Extended Fund Facility program, the Government successfully refinanced $US 580 million of Mongolian Government issued euro bonds maturing on 21st March, 2017. - Mongolia exchanged 79 percent of the debt with existing bondholders to new 7 year bonds and raised the remaining amount from new private sector investors. - Upcoming bond payments scheduled for January 2018 and 2019 will be refinanced from the market. ### Fiscal Policy - The Medium Term Fiscal Framework’s primary goals is to stabilize public debt. - The Mongolian fiscal deficit was financed primarily by local and foreign borrowings which accumulated in high public debt. - Over the last four years the Government borrowed heavily through issuance of domestic bonds. - Current debt financing costs equal one fifth of the budget and average coupon rates on treasury notes are around 15 percent annually. - Budget support lending from donors will be used towards reducing the public debt and debt financing costs. - Frontloading of available liquid funds in the first year of the program could significantly reduce the pressure on the Government to issue treasury notes, reduce financing cost of debt from the budget and may effectively signal to the domestic debt market a lower interest rate period. - Authorities are strongly committed to reduce public debt by lowering the fiscal deficit and efficient management of public debt. - The fiscal deficit reached 17 percent of GDP in 2016, including quasi-fiscal activities by the Development Bank of Mongolia (DBM) and the Bank of Mongolia (BOM). - The Government has already significantly cut fiscal expenditures resulting in a decrease of the fiscal deficit by 7 percent of GDP to 10.4 percent of GDP in 2017. - The program target is to reduce the fiscal deficit below 2 percent of GDP by 2021. - On the expenditure side, the authorities have adopted a policy to move away from universal social spending to a policy more targeted to the most socially vulnerable sectors; this is expected to reduce expenditures by 1.5 percent of GDP over the next three years. - Significant cuts are also being made to capital expenditures and in the coming years if budget revenue allows it will be spent on much needed infrastructure. - On 14 April, the Parliament approved a number of politically challenging tax increases despite strong opposition from the public. - Tax policy measures include increasing taxes and excise on petroleum, vehicles, alcohol and tobacco, customs duty on tobacco, introducing a progressive personal income tax, raising social security contributions and eliminating the threshold for withholding tax on interest earned. - These measures will bring a stable income stream to the budget. - The Government’s implementation of politically difficult and unpopular tax increases demonstrates strong commitment to economic reform and the Fund program. ### Monetary and Exchange Rate Policy - Monetary policy will remain appropriately tight to achieve the objective of price stability. - The BOM will continue to allow the exchange rate to move flexibly consistent with macro fundamentals and will exploit any opportunities to enhance the level of foreign exchange reserves. - As indicated in the staff report for the 2017 Article IV consultation, BOP projection for 2017 and 2018 are under pressure, due to high level of current account deficit. - Recent trend shows that current account balance is recovering quicker than expected, due to a sharp pickup in coal exports, and it is expected to continue through the year. - The Government of Mongolia is eager to start big projects such as Tavantolgoi (coking coal mine) and Gatsuurt (gold mine) in the near future; thus, the BOP outlook could be better than the projection shown in the staff report for the 2017 Article IV consultation. - Due to previous expansionary monetary policy and quasi-fiscal activities by the BOM, foreign reserves decreased from $US 4.5 billion in 2012 to $US 1.3 billion at end of 2016. - Adoption of a new Central Bank law to clarify central bank’s mandate, improve independence and introduce collective decision making on policy issues will be vital. - The proposed new Central Bank law will be submitted to Parliament by November this year and enacted by March next year. ### Financial Sector Policies - Financial sector stability is a cornerstone of future solid economic growth. - Bank balance sheets deteriorated rapidly over the last few years due to negative impact of exchange rate devaluations on mostly US dollar denominated loans and the overall slowdown in the economy following the commodity price slump. - Current NPL ratio stands at 8.2 percent. - Further detailed analysis and a complete review need to be done on banks’ health. - As one of the prior actions identified in the MEFP, the BOM has launched the procurement procedure to hire an independent, internationally reputable expert company to carry out the AQR in consultation with the IMF staff. - The BOM announced the invitation for potential consultant companies to express their interest to carry out the AQR which was opened until April 21, 2017. - The selection process of candidates may be completed by late June 2017. - Depending on the AQR findings, banks will be required to fix their shortcomings and, most importantly, to recapitalize their capital deficiencies if they are found. - Authorities will not intervene unless there is a clear systemic risk to the financial sector. - The Fund and the BOM staff have agreed to adopt an amendment to asset classification and provisioning regulation by end-June, 2017. - This regulation was already revised based on the recommendations of a prior IMF Technical assistance mission team and has been implemented since December 2017. - The BOM remains committed to implementing the amendments but will delay it until other amendments arising from the AQR are implemented because the BOM is concerned that amending the regulation that was introduced only a few months ago could be disruptive for the banks and affect BOM’s credibility with the banks. ### Conclusion - Mongolia has strong long-term economic potential due to its abundant natural resources. - The Government of Mongolia has met all the prior actions set out in the program, namely discontinuation of quasi-fiscal activities, passage of the supplementary budget consistent with program targets and starting the procurement procedures for the banking sector AQR. - The Government of Mongolia strongly believes that the improving economic outlook and sound macroeconomic policies under the Extended Fund Facility program will deliver positive outcomes and the country’s economy will recover soon. - Main challenges are to put in place policy measures to build a diversified and resilient economy to avoid negative effects of future commodity cycles. - The Government is committed to strict fiscal discipline and stringent monetary policy as key conditions for successful program implementation. - The authorities reaffirm their strong commitment to the policies and objectives under the IMF program. *IMF staff and Mongolian authorities summary as presented in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17140.pdf_