## IMF Staff Report: Mongolia — Extended Fund Facility (cr17396) ## Source details **Canonical URL:** [IMF Staff Report: Mongolia — Extended Fund Facility (cr17396)](https://www.imf.org/-/media/files/publications/cr/2017/cr17396.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17396.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17396.pdf.json) --- ### Context - A three-year arrangement under the Extended Fund Facility (EFF) approved on May 24, 2017 in an amount equivalent to SDR 314.5054 million (435 percent of quota, or approximately $425 million). - Arrangement part of a $5.5 billion multi-donor financing package supporting policy adjustment and structural reforms. - Document covers the first and second review due to delays; extended arrangement subject to quarterly reviews. ### Recent developments and outlook — growth and sectoral drivers - Growth: - Growth was 5.3 percent in 1H2017, up from 1.2 percent in 2016. - Growth projected 3.3 percent in 2017 and 4.2 percent in 2018. - Real GDP growth Q3: 6.7 percent year-on-year, up from 6 percent in Q2. - Sectoral dynamics: - Primary driver: coal sector — coal prices doubled and export volumes rose by 90 percent in the Jan–July period year-over-year. - Mining as a whole contracted in 1H2017; construction remained negative with a large inventory overhang in real estate. - Coal exports in October were 16 percent below the average level for Q4 2016; coal truck crossings to China averaged 650 per day in October and November. ### Fiscal outturn, budget, and public debt - Fiscal outturn: - General government recorded a primary budget surplus of about 1 percent of GDP in cash terms in the year through September 2017. - Supplementary budget allocates half of projected MNT 700 million (about 2.5 percent of GDP) over-performance to additional one-off spending: capital investment projects (0.8 percent of GDP), Child Money Program (0.4 percent of GDP), wage bonus to civil servants (0.2 percent of GDP) and assorted expenditure cuts (-0.3 percent of GDP). - Supplementary budget implies a primary deficit of 3.4% of GDP for the year, compared with 13 percent of GDP recorded in 2016. - Fiscal strategy: - Plan: reach a primary deficit of 1 percent of GDP in 2019 and a surplus of 1.5 percent of GDP in the medium term (in line with the Fiscal Stability Law). - Authorities committed to save at least half of any revenue overperformance. - 2018 budget submitted consistent with a primary deficit of slightly more than 2½ percent of GDP; 2018 budget aims for a primary deficit of 2.6 percent of GDP vs 3.1 percent at approval time. - Public debt: - Public debt projected to fall from 87 percent of GDP in 2016 to 73 percent of GDP in 2022 (compared with 84 percent of GDP at program approval). - Baseline nominal gross public debt series includes: 63.3 (2016), 58.0 (2017), 52.7 (2018) (percent of GDP) and projections through 2026 in source tables. ### External sector, reserves, and financing - Current account and reserves: - Current account deficit narrowed to roughly 4 percent of GDP in 3Q-17 (rolling four quarters) from more than 8 percent a year earlier. - Gross reserves reached $1.6 billion in 2017Q3, above the $1.5 billion originally projected. - Net international reserves increased from 2.4 months of import coverage in 2016 to 4.4 months in November. - Market financing and donor support: - Authorities issued a 5-year $800 million bond at 5.625 percent in October, fully covering the government’s $660 million in external bond maturities for the next year; issuance covers all external financial needs through end-2020. - External donor funding was $500 million behind schedule due to program interruption after the fall of government in September; donor disbursements resumed in November (ADB $100 million, World Bank $120 million, JICA $280 million loan agreement). - Program remains fully financed with firm financing assurances from World Bank, ADB and key bilateral donors for next 12 months. ### Monetary policy, inflation, and exchange rate - Policy actions: - Bank of Mongolia cut interest rates by 200 basis points to 12 percent in June 2017 (partly unwinding a 450-basis point hike in 2016); policy rates held to await inflation developments. - Inflation: - Inflation rose from near zero in 2016 to over 8 percent as of October 2017; staff noted recent data showing 7 percent and country-wide November inflation at 6.5 percent and 7.6 percent in Ulaanbaatar. - Monetary policy guideline: 8 percent for 2017 and 2018. - Exchange rate guidance: - If appreciation pressure materializes, accumulate additional foreign exchange reserves and sterilize purchases to avoid reserve money growth. - If depreciation pressure emerges, generally refrain from intervening; sales of reserves limited to disorderly market conditions. ### Financial sector health, AQR, and recapitalization framework - Banking sector indicators: - Credit growth recovered strongly; nearly 20 percent credit growth to households. - ROE of 10 percent; liquid assets one quarter of total assets; public sector securities account for one quarter of bank assets and currently pay double-digit interest rates. - FX deposits 31 percent of total and 17 percent of GDP; FX loans 21 percent of total and 10 percent of GDP. - Reported capital adequacy: total capital adequacy 17.5 percent; Tier 1 13.4 percent. - NPLs broadly stable at 7.7 percent; provision coverage of NPLs 73 percent. - Concerns that asset quality ratios may be overstated due to regulatory forbearance and disparities across banks. - Asset Quality Review (AQR) and stress testing: - AQR conducted by Price Waterhouse Coopers on all Mongolian banks; results expected by mid-December (structural benchmark end-December 2017). - Post-AQR: BOM to inform banks of capital shortfalls; banks have until November 2018 to restore capital adequacy. - If systemically important and viable banks cannot raise capital privately, some public funds may be needed. - Recapitalization and legal framework: - Recapitalization Law being finalized (structural benchmark end-January 2018). - Deposit insurance law to align DICOM with international best practice (structural benchmark end-February 2018). - Public recapitalization framework principles include financial stability considerations, governance, burden sharing, restructuring, strict oversight, and exit scenarios; shareholders required to recapitalize banks by end-November 2018 if shortfalls identified. ### Key program performance, benchmarks, and reforms - Quantitative performance criteria: - All end-September performance criteria were met; primary balance and NIR targets met by sizeable margins. - Structural benchmarks: - All structural benchmarks due by end-June were implemented; several due in September–November are in progress or re-phased due to government change. - Selected new/re-phased structural benchmarks and timing include: Asset Quality Review completion by end-December 2017; draft recapitalization law end-January 2018; DICOM amendments end-February 2018; NPL resolution strategy finalized end-March 2018; audit of concession contracts end-June 2018; guideline on public investment appraisal end-September 2018. - Program modifications proposed: - Modify end-December QPCs and ITs, set new QPCs and ITs for end-March and end-June 2018, propose new end-September ITs; revised NIR QPC locks in most overperformance to-date; revised fiscal deficit QPC tightened by half of the increase in projected revenues; new ceiling on net debt issuance to replace ceiling on gross issuance. ### Public and external debt analyses, baseline assumptions, and stress tests - Public DSA highlights: - Nominal gross public debt series includes 63.3 (2016), 58.0 (2017), 52.7 (2018) (percent of GDP) with projections through 2026 in source tables. - PV of public debt (percent of GDP) series includes 53.8 (2016), 49.3 (2017). - Public gross financing needs: 17.6 (2016), 14.6 (2017), 13.7 (2018) (percent of GDP). - Baseline assumptions: Real GDP growth 3.3 (2017), 4.2 (2018), 6.7 (2019), 5.0 (2020), 5.8 (2021), 8.2 (2022); Inflation (GDP deflator) 11.0 (2017), 6.2 (2018), 6.2 (2019). - External debt and vulnerability: - External debt noted as now high at 220 percent of GDP; it rose by over 30 percentage points of GDP from end-2015 to end-2016. - Composition: intercompany loans largest category — account for 30 percent of total or 65 percent of GDP. - Baseline external debt path (percent of GDP) includes 222.8 (2016), 224.9 (2017), 209.3 (2018), 197.9 (2019), 185.8 (2020), 169.8 (2021), 148.8 (2022). - Stress tests and scenarios: - Scenarios include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock and Contingent Liability Shock with corresponding variable paths provided in source. - Benchmarks used: Debt burden benchmark 70 percent; Gross financing needs benchmark 15 percent of GDP; bond spreads 200 and 600 basis points; external financing requirement benchmarks 5 and 15 percent of GDP; public debt held by non-residents benchmarks 15 and 45 percent. ### Risks and priorities - Key domestic risks: - Banking sector: potential capital shortfalls identified by AQR; need for swift corrective action. - Political fragility that could compromise structural reforms and fiscal discipline. - Uncertainty around completion of mega-construction projects (OT underground pit and TT project). - Climate risks affecting agriculture and disinflation efforts. - Key external risks: - Changes in global demand impacting commodity prices. - Border frictions with China affecting coal exports. - Priorities: - Build fiscal and external buffers; complete financial sector diagnosis and address weaknesses; maintain cautious monetary policy and continue reserve accumulation; safeguard fiscal consolidation and save half of any revenue overperformance. ### Gender, social, and program inclusiveness (Box 2 highlights) - Program measures: - Strengthening banking system and lowering interest rates to enable credit to SMEs, many led by female entrepreneurs. - Economic diversification to create opportunities for female participation. - Development partner actions: - ADB $150 million policy-based loan in 2017 with women as largest beneficiaries. - World Bank Export Development project includes outreach to women entrepreneurs. - Selected gender and socio-economic indicators (selected exact figures preserved): - Share of females in total population...50.8 - Share of single mothers in total households10.69.1 - Share of female graduates at all levels of education54.052.8 - Total unemployment rate8.27.5 - Female unemployment rate8.16.7 - Female MPs (in persons, out of a total of 76)1113 (in 2016) - Females in public sector — Political appointees...23.6; Public administration positions...58.0; Special services...25.9; Support services...69.8 - Life expectancy — Total68.3269.89; Female71.7975.84; Male64.6866.02 ### Meetings, mission, and staff appraisal - Mission conducted in Ulaanbaatar during October 18–30, 2017; mission head Geoff Gottlieb and team members listed in source. - Meetings included Prime Minister U. Khurelsukh, Finance Minister Ch. Khurelbaatar, Bank of Mongolia Governor N. Bayartsaikhan and other officials. - Staff appraisal: - Positive: economy recovering, authorities credited for program progress, external environment supportive, fiscal over-performance and reserve accumulation. - Remaining challenges: growth not broad-based, public debt remains high, reserves still low; priority to address banking weaknesses swiftly, maintain fiscal discipline and cautious monetary policy. - Recommendation: support completion of first and second reviews, modify performance criteria as proposed, set new QPCs/ITs for end-March and end-June 2018, new ITs for end-September 2018, and make two purchases following review completion. *IMF staff report: EXECUTIVE SUMMARY and selected annexes and appendices (cr17396).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - A three-year arrangement for Mongolia under the Extended Fund Facility (EFF) was approved on May 24, 2017, in an amount equivalent to SDR 314.5054 million (435 percent of quota, or approximately $425 million). - The arrangement is part of a $5.5 billion multi-donor financing package supporting policy adjustment and structural reforms to stabilize the economy and lay the basis for sustainable, inclusive growth. - The extended arrangement is subject to quarterly reviews; because of delays, this combined document covers the first and second review. ### Recent developments and outlook - Growth and sectoral drivers - Growth was 5.3 percent in 1H2017, up from 1.2 percent in 2016. - Growth is expected to reach slightly over 3 percent in 2017 (projected 3.3 percent) and over 4 percent in 2018 (projected 4.2 percent). - Primary driver: coal sector — coal prices doubled and export volumes rose by 90 percent in the Jan–July period year-over-year. - Mining as a whole contracted in 1H2017; construction remained negative with a large inventory overhang in real estate. - Fiscal outturn and public debt - In cash terms, the general government recorded a primary budget surplus of about 1 percent of GDP in the year through September 2017. - A recent supplementary budget allocates half of the projected MNT 700 million (about 2.5 percent of GDP) in over-performance to additional one-off spending: capital investment projects (0.8 percent of GDP), the Child Money Program (0.4 percent of GDP), a wage bonus to civil servants (0.2 percent of GDP) and assorted expenditure cuts (-0.3 percent of GDP). - The supplementary budget implies a primary deficit of 3.4% of GDP for the year, compared with 13 percent of GDP recorded in 2016. - Public debt is now projected to reach 73 percent of GDP in the medium-term versus 84 percent of GDP at the time of the program request. - External sector, reserves, and financing - Current account deficit narrowed to roughly 4 percent of GDP in 3Q-17 (rolling four quarters) from more than 8 percent a year earlier. - Gross reserves reached $1.6 billion in 2017Q3, above the $1.5 billion originally projected. - The authorities issued a 5-year $800 million bond at 5.625 percent in October, fully covering the government’s $660 million in external bond maturities for the next year; issuance covers all external financial needs through end-2020. - External donor funding was $500 million behind schedule due to program interruption after the fall of government in September. - Monetary and inflation - In June 2017, the Bank of Mongolia cut interest rates by 200 basis points to 12 percent (unwinding part of a 450-basis point hike in 2016). - Inflation rose from near zero in 2016 to over 8 percent as of October 2017, reflecting stronger demand, delayed FX pass-through, one-off factors (e.g., change in CPI basket, fiscal measures), and supply shocks. - Authorities have kept policy rates on hold to await more evidence regarding inflation developments and monitor the lagged impact of the previous cut. - Financial sector health and vulnerabilities - Credit growth recovered strongly, largely due to nearly 20 percent credit growth to households. - Banking sector indicators: ROE of 10 percent; liquid assets one quarter of total assets; public sector securities account for one quarter of bank assets and currently pay double-digit interest rates. - FX deposits are 31 percent of total and 17 percent of GDP; FX loans are 21 percent of total and 10 percent of GDP. - Reported capital adequacy ratios: total capital adequacy 17.5 percent; Tier 1 13.4 percent. - NPLs broadly stable at 7.7 percent; provision coverage of NPLs 73 percent. - Concerns that asset quality ratios may be overstated due to regulatory forbearance and disparities across banks; ongoing Asset Quality Review (results expected in mid-December) and forthcoming stress test are important. ### Program performance - All end-September performance criteria were met. - Structural benchmarks: mixed performance — some reforms met on time; others expected to be delayed, largely because the fall of the government in September interrupted implementation. - The authorities committed to tighten 2018 fiscal targets relative to the path set at program approval and to save at least half of any revenue overperformance. ### Outlook, risks, and scenarios - Near-term projection and drivers - Growth in 2017 projected to reach 3.3 percent, below the 5.3 percent recorded in 1H-17 due to base effects and border bottlenecks for coal exports. - Growth projected to accelerate to 4.2 percent in 2018, driven by construction (first positive outturn since 2013) and improved phases for key mines. - Baseline assumptions for medium-term - Continued strong policy implementation and supportive global conditions. - Completion during the projection period of two major construction projects: the OT underground pit (copper) and the TT project (coal and related railway and power plant), implying increased near-term FDI and imports and much higher growth starting in 2022 when projects are completed. - Key risks - Domestic risks: - Banking sector: if the AQR finds a capital shortfall at any bank, swift action will be critical. - Political fragility could compromise structural reform implementation and fiscal discipline. - Uncertainty about the completion of the mega-construction projects, particularly the TT project. - Climate risks that can undermine agricultural output and disinflation efforts. - External risks: - Changes in global demand affecting commodity prices. - Further difficulties at the border with China affecting coal exports. - Positive external note: authorities have covered all 2018–21 refinancing needs, reducing vulnerability to global liquidity shocks. ### Policy discussions and recommended strategy - Three-pillar medium-term strategy - Build buffers (fiscal and external) by taking advantage of better growth and investor confidence to move away from boom-bust cycles. - Complete a thorough diagnosis of the financial sector and address key weaknesses to enable stronger and safer private sector credit flows. - Maintain cautious monetary policy and continue reserve accumulation to preserve competitiveness gains from the 2016 real exchange rate correction and promote diversification toward tourism and agriculture. - Fiscal policy specifics for 2018 - Government submitted a budget consistent with a primary deficit of slightly more than 2½ percent of GDP, below the 3.1 percent of GDP targeted at approval time. - Key budget measures: introduction of a progressive income tax; raising the social contribution rate; increasing excise on alcohol and tobacco; increase in the retirement age; an additional year of the wage and hiring freeze. - Authorities committed to save at least half of any revenue overperformance (as in 2017). - Targeting Child Money program to the poorest 60 percent of children (structural benchmark end-December 2017); expected savings on the order of MNT100 billion (0.4 percent of GDP) to be reallocated to other pro-poor initiatives including a targeted cash benefit program and hot meals program for the homeless. - Program seeks to further promote gender equality (see Box 2 referenced in source). ### Meetings and mission - Discussions were held in Ulaanbaatar during October 18–30, 2017. - The mission included Geoff Gottlieb (head), Neil Saker (resident representative), Manuk Ghazanchyan (all APD), Wendell Daal (FAD), Pierpaolo Grippa, Laszlo Butt (both MCM), and Pragyan Deb (SPR), supported by Mmes. Selenge Sandagsuren, Ardak Bazarbai and Khulan Buyankhishig (economists in the resident representative office), Mr. Paroutzoglou and Ms. Tolentino (both APD). Mr. Choi and Mr. Kh. Gantsogt (OED) participated in some discussions. - The mission met Prime Minister U. Khurelsukh, Finance Minister Ch. Khurelbaatar, Bank of Mongolia Governor N. Bayartsaikhan, and other senior officials as well as private sector representatives. *IMF staff report: EXECUTIVE SUMMARY (cr17396).* ### 15. At present, the authorities are on ### 15. At present, the authorities are on track to outperform the debt projections at the time of the program approval ### Fiscal outlook and debt dynamics - Plan: reach a primary deficit of 1 percent of GDP in 2019 and a surplus of 1.5 percent of GDP in the medium term (in line with the Fiscal Stability Law). - Consolidation approach: mixture of expenditure restraint and revenue mobilization while protecting pro-poor spending. - Interest bill trajectory: fall from about 4 percent of GDP to 2½ percent of GDP in the medium term, assuming policy mix in line with program commitments and ongoing donor support. - Public debt projections: fall from 87 percent of GDP in 2016 to 73 percent of GDP in 2022 (compared with 84 percent of GDP at program approval). - Present-value debt: marginally lower than headline in 2017 and falls more rapidly through the end of the program as the share of debt that is concessional rises. ### Wage bill and public employment - Recent policy: authorities froze the pay of civil servants in nominal terms to help reduce the deficit. - Context: public sector wages are relatively low but the wage bill as a whole is in line with peers due to a very large civil service. - Risk: any wage increase that has a material impact on individual civil servants would risk jeopardizing recent gains in fiscal sustainability unless accompanied by civil service reform. - Priority: address wage concerns while recognizing required tradeoffs. ### Strengthening fiscal institutions and benchmarks - PAYGO provision: Parliament passed a PAYGO provision restricting Parliament from increasing the aggregate expenditure envelope relative to the Finance Ministry’s budget. - Tax policy working group: established to provide advice on tax policies to stimulate sustainable growth; interim report due to the Ministry of Finance (structural benchmark end-December 2017). - Fiscal Council: work underway to establish a Fiscal Council to provide a second opinion on budget proposals (structural benchmark end-December 2017). - Additional structural benchmarks: - Improve revenue administration (end-January 2018). - Complete an audit of concession contracts and develop a corresponding payment plan (end-June 2018). - Approve a guideline on the appraisal and selection of public investment projects (end-September 2018). ### Monetary policy, exchange rate, and reserves - Inflation guideline: 8 percent for 2017 and 2018. - Recent inflation: sharp rise from near zero percent in 2016 to 7 percent in recent data; staff does not expect significant further increases as one-off factors fall out of the index. - Exchange rate history and risks: - 20-percent depreciation in the exchange rate in 2016 did not lead to consumer price inflation at that time. - With a stronger economy in 2018, firms may seek to recover lost margins, arguing for caution. - Policy stance: no scope for a sustained easing cycle given inflation pressures; future interest rate moves will be data-dependent. - Exchange rate management guidance: - If appreciation pressure materializes, use the tailwind to accumulate additional foreign exchange reserves to ensure an adequate external buffer, prevent excessive imports, and preserve competitiveness gains. - Purchases should be sterilized to avoid excessive reserve money growth, credit growth and inflation pressures—active use of Central Bank bills is underscored. - If depreciation pressure emerges, generally refrain from intervening given still limited buffers; sales of reserves should be limited to disorderly market conditions and should not prevent needed correction. ### Legal and institutional monetary reforms - New Central Bank law: expected to pass shortly; will clarify the mandate of the BOM, improve governance arrangements, and enhance independence. - Mortgage program: ongoing efforts to clarify legal and financial issues; BOM and Ministry of Finance signed a Memorandum of Understanding on the mortgage program per safeguards assessment recommendations and are following up on other safeguards recommendations. ### Financial sector assessment and reform priorities - Asset Quality Review (AQR): conducted by Price Waterhouse Coopers on all Mongolian banks; results expected by mid-December (structural benchmark end-December 2017). - Post-AQR process: - BOM will inform banks of capital shortfalls based on AQR, business plans, and stress tests. - Banks will have until November 2018 to restore capital adequacy. - If systemically important and viable banks cannot raise necessary capital privately, some public funds may be needed. - Recapitalization Law: being finalized (structural benchmark end-January 2018) to set conditions for use of public funds. - Deposit insurance: law to align the deposit insurance agency with international best practice and ensure sufficient funding (structural benchmark end-February 2018). ### Broader regulatory and supervisory strengthening - Updated banking law: expected to be approved shortly to modernize the financial safety net (early intervention and bank resolution framework) and strengthen governance requirements (suitability for bank board members, related-party exposure rules). - NPL strategy: interagency working group to develop strategy for resolving existing NPLs and preventing excessive problem loans; strategy to be finalized shortly (structural benchmark end-March 2018) with reforms implemented by end-2019. - Asset classification and provisioning: regulation upgraded in June 2017 and to be further improved (structural benchmark end-September 2018) based on AQR findings and external advice. - Related-party exposures review by BOM: scheduled (structural benchmark end-December 2018). - Collaboration: policies and frameworks designed in close collaboration with the ADB and the IMF. ### AML/CFT framework - Asia Pacific Group (APG) outcome: Mongolia given until October 2018 to strengthen its AML/CFT framework, including targeted financial sanctions, scope of coverage, and effective risk-based supervision. - Risk: weak implementation could adversely affect correspondent banking relationships and cross-border flows. - Commitment: authorities to amend AML/CFT and anti-corruption frameworks to bring them into compliance with international standards by end-April 2018. ### Program modalities, performance criteria, and financing - Quantitative performance: all QPCs were met; primary balance and NIR targets met by sizeable margins. - Structural benchmark implementation: all structural benchmarks due by end-June were implemented; several due in September–November are in progress but incomplete partly due to dismissal of the government in September. - Fiscal specifics: - 2018 budget passed in line with program targets. - Revised integrated budget law restricts Parliament’s ability to expand the budget envelope. - Authorities deferred piecemeal submission of a revised general taxation law and simplified SME regime to group them with comprehensive tax reform in February 2018 (new structural benchmark). - Monetary/financial legislative timing: revised Bank of Mongolia law submitted; passage of new deposit insurance (DICOM) law and new Banking law likely to be missed and will be re-phased. - Program adjustments proposed in the Letter of Intent: - Modify end-December QPCs and ITs and set new QPCs and ITs for end-March and end-June; new end-September ITs proposed. - Revised NIR QPC locks in most overperformance to-date while maintaining future incremental improvement. - Revised fiscal deficit QPC tightened by half of the increase in projected revenues. - New ceiling on net debt issuance proposed to replace ceiling on gross issuance. - Completion dates for some structural benchmarks adjusted and the list expanded for 2018 priorities. - Financing: program remains fully financed with firm financing assurances from the World Bank, Asian Development Bank and key bilateral donors for the next 12 months and reasonable prospects for outer years. - Capacity to repay Fund: adequate under the baseline scenario (Table 7) with higher reserves and lower public debt compared to the original program scenario. - Key risks: domestic political risks and exposure to volatile commodity markets. ### Safeguards assessment update - 2009 BOM safeguards assessment updated: limited progress in strengthening safeguards and governance frameworks. - Strengths and weaknesses: - Financial accountability and transparency practices robust. - Weaknesses in operational and financial autonomy, collegial decision making, oversight of central bank operations and audit mechanisms, and internal audit. - Mitigation: forthcoming BOM law expected to reduce many weaknesses (structural benchmark under the program). ### Staff appraisal: achievements and priorities - Positive assessment: - Economy recovering; authorities credited for program progress. - External environment more supportive than envisioned, especially strong commodity demand from China. - Authorities used positive backdrop to over-perform on fiscal policy and accumulate more reserves. - Public debt now projected to peak at —and fall to— considerably lower levels than envisioned at program approval. - Remaining challenges and priorities: - Growth is not broad-based; public debt remains high; reserve buffers still low—vulnerable to external shocks or policy slippages. - Maintain course on reforms; avoid complacency. - Macro policy mix critical: strong 2018 budget, commitment to save half of any revenue overperformance, cautious monetary policy given sharply rising inflation, and translating balance of payments improvements into reserve accumulation. - Immediate priority: address any banking sector weaknesses swiftly and firmly; ensure capital shortfalls are addressed without unduly favoring shareholders or over-exposing the public-sector balance sheet. - Continue improvements to fiscal policymaking frameworks, including progress on the Fiscal Council to reduce risk of pro-cyclical spending. - Staff recommendation: - Support completion of the first and second reviews of the extended arrangement. - Support modification of existing performance criteria, setting new performance criteria for end-March 2018 and end-June 2018, new ITs for end-September 2018, and making two purchases following review completion. *Source: IMF staff report (content unit: cr17396).* ### Box 2. How Does the Program Support Women? (Concluded) ### Box 2. How Does the Program Support Women? (Concluded) ### Program measures to create inclusive, job‑creating growth - Strengthening the banking system and reducing the interest rate structure will allow banks to lend to new sectors including SMEs that have a large proportion of female entrepreneurs. - Economic diversification will create more opportunities for female participation. ### Unlocking the contribution of development partners - The EFF will allow other IFIs, including the Asian Development Bank (ADB) and World Bank, to lend more to Mongolia. - The ADB has processed a $150 million policy-based loan in 2017 to support welfare programs in Mongolia—with women the largest beneficiaries. - The Fund is working closely with the United Nations Development Program in Mongolia in its work to pursue the Sustainable Development Goals, which include gender equality issues. - The program has helped facilitate the World Bank’s Export Development project, which focuses on diversification toward non-mineral exports and which includes special efforts to reach out to women entrepreneurs. ### Key gender and socio‑economic indicators (selected) - Share of females in total population...50.8 - Share of single mothers in total households10.69.1 - Share of female graduates at all levels of education54.052.8 - Total unemployment rate8.27.5 - Female unemployment rate8.16.7 - Female MPs (in persons, out of a total of 76)1113 (in 2016) - Females in public sector - Political appointees...23.6 - Public administration positions...58.0 - Special services...25.9 - Support services...69.8 - Life expectancy - Total68.3269.89 - Female71.7975.84 - Male64.6866.02 *Sources: World Development Indicators, World Bank; Mongolian authorities; and IMF.* ### Annex I. Public Debt Sustainability Analysis ### Annex I. Public Debt Sustainability Analysis ### Baseline public debt dynamics (Mongolia) - Nominal gross public debt (percent of GDP): 37.3 (2006), 62.1 (2007), 87.6 (2008), 85.3 (2009), 89.0 (2010), 88.3 (2011), 86.2 (2012), 80.8 (2013), 73.4 (2014), 68.4 (2015), 63.3 (2016), 58.0 (2017), 52.7 (2018), ... (projections through 2026 shown in source). - PV of public debt (percent of GDP): 55.0 (2006), 69.6 (2007), 82.9 (2008), 81.8 (2009), 80.0 (2010), 77.1 (2011), 72.7 (2012), 66.6 (2013), 62.1 (2014), 58.1 (2015), 53.8 (2016), 49.3 (2017). - Public gross financing needs (percent of GDP): 3.8 (2006), 10.7 (2007), 18.0 (2008), 19.4 (2009), 14.2 (2010), 14.0 (2011), 11.2 (2012), 11.8 (2013), 15.7 (2014), 11.1 (2015), 17.6 (2016), 14.6 (2017), 13.7 (2018). - Real GDP growth (percent): 8.8 (2006), 2.4 (2007), 1.2 (2008), 3.3 (2009), 4.2 (2010), 6.7 (2011), 5.0 (2012), 5.8 (2013), 8.2 (2014), 7.0 (2015), 7.0 (2016), 6.9 (2017), 6.8 (2018). - Inflation (GDP deflator, percent): 13.1 (2006), 1.7 (2007), 2.1 (2008), 11.0 (2009), 6.2 (2010), 6.2 (2011), 5.8 (2012), 5.6 (2013), 5.7 (2014), 5.6 (2015), 5.4 (2016), 5.4 (2017), 5.4 (2018). - Nominal GDP growth (percent): 23.8 (2006), 4.2 (2007), 3.4 (2008), 14.6 (2009), 10.7 (2010), 13.3 (2011), 11.1 (2012), 11.7 (2013), 14.4 (2014), 13.0 (2015), 12.8 (2016), 12.6 (2017), 12.6 (2018). - Effective interest rate (percent): 2.3 (2006), 5.3 (2007), 6.6 (2008), 5.1 (2009), 6.0 (2010), 6.0 (2011), 5.5 (2012), 4.7 (2013), 4.2 (2014), 4.4 (2015), 4.7 (2016), 4.7 (2017), 4.8 (2018). - Ratings (Moody's / S&P / Fitch): Caa1 / B- / B- (as reported). ### Contribution to changes in public debt and identified debt-creating flows - Cumulative change in gross public sector debt (percent of GDP): 2.7 (2006–2014), 5.0 (2015), 25.5 (2016), -2.3 (2017), 3.7 (2018), -0.7 (2019), -2.1 (2020), -5.4 (2021), -7.4 (2022), -5.0 (2023), -5.1 (2024), -5.3 (2025), -5.3 (2026); cumulative: -34.9 (through projection horizon), -4.0 (2016? as listed). - Identified debt-creating flows (percent of GDP): -1.6 (2006–2014), 8.4 (2015), 26.7 (2016), -4.2 (2017), -1.4 (2018), -4.8 (2019), -5.2 (2020), -7.0 (2021), -8.7 (2022), -7.2 (2023), -6.6 (2024), -6.1 (2025), -5.7 (2026); cumulative: -56.9. - Primary deficit (percent of GDP): 2.8 (2006–2014), 5.6 (2015), 13.0 (2016), 3.4 (2017), 2.6 (2018), 1.0 (2019), -0.8 (2020), -1.5 (2021), -1.5 (2022), -1.7 (2023), -1.7 (2024), -1.7 (2025), -1.7 (2026); cumulative: -3.5. - Primary (noninterest) revenue and grants (percent of GDP): 28.8 (2006–2014), 25.1 (2015), 23.5 (2016), 25.9 (2017), 25.9 (2018), 26.6 (2019), 26.6 (2020), 26.6 (2021), 26.6 (2022), 26.5 (2023), 26.5 (2024), 26.5 (2025), 26.6 (2026); cumulative: 64.4. - Primary (noninterest) expenditure (percent of GDP): 31.6 (2006–2014), 30.7 (2015), 36.6 (2016), 29.4 (2017), 28.5 (2018), 27.6 (2019), 25.9 (2020), 25.1 (2021), 25.1 (2022), 24.8 (2023), 24.8 (2024), 24.9 (2025), 24.9 (2026); cumulative: 61.0. - Automatic debt dynamics (percent of GDP): -4.2 (2006–2014), 3.0 (2015), 13.6 (2016), -7.3 (2017), -3.7 (2018), -5.8 (2019), -4.5 (2020), -5.4 (2021), -7.2 (2022), -5.5 (2023), -4.9 (2024), -4.5 (2025), -4.0 (2026); cumulative: -52.7. - Interest rate/growth differential contribution: -5.6 (2006–2014), 0.6 (2015), 1.9 (2016), -7.3 (2017), -3.7 (2018), -5.8 (2019), -4.5 (2020), -5.4 (2021), -7.2 (2022), -5.5 (2023), -4.9 (2024), -4.5 (2025), -4.0 (2026); cumulative: -52.7. - Of which: real interest rate contribution: -3.1 (2006–2014), 1.9 (2015), 2.7 (2016), -4.8 (2017), -0.4 (2018), -0.5 (2019), -0.5 (2020), -1.0 (2021), -1.3 (2022), -1.0 (2023), -0.7 (2024), -0.6 (2025), -0.5 (2026); cumulative: -11.3. - Of which: real GDP growth contribution: -2.5 (2006–2014), -1.3 (2015), -0.7 (2016), -2.5 (2017), -3.3 (2018), -5.3 (2019), -4.0 (2020), -4.4 (2021), -5.8 (2022), -4.6 (2023), -4.2 (2024), -3.9 (2025), -3.5 (2026); cumulative: -41.4. - Exchange rate depreciation contribution (percent of GDP): 1.4 (2006–2014), 2.3 (2015), 11.7 (2016), ... (projections noted). - Other identified debt-creating flows (percent of GDP): -0.1 (2006–2014), -0.2 (2015), 0.0 (2016), -0.4 (2017), -0.3 (2018), 0.0 (2019–2026); cumulative: -0.7. - Net privatization proceeds: -0.1 (2006–2014), -0.2 (2015), 0.0 (2016), -0.4 (2017), -0.3 (2018), 0.0 (2019–2026); cumulative: -0.7. - Contingent liabilities and other liabilities (bank recap. and PSI sweetner): 0.00 for all years reported. - Residual (including asset changes) (percent of GDP): 4.3 (2006–2014), -3.3 (2015), -1.2 (2016), 1.9 (2017), 5.1 (2018), 4.1 (2019), 3.1 (2020), 1.6 (2021), 1.3 (2022), 2.2 (2023), 1.5 (2024), 0.8 (2025), 0.4 (2026); cumulative: 21.9. ### Baseline assumptions and alternative scenarios - Baseline scenario key assumptions: - Real GDP growth (percent): 3.3 (2017), 4.2 (2018), 6.7 (2019), 5.0 (2020), 5.8 (2021), 8.2 (2022), 7.0 (2023), 7.0 (2024), 6.9 (2025), 6.8 (2026). - Inflation (percent): 11.0 (2017), 6.2 (2018), 6.2 (2019), 5.8 (2020), 5.6 (2021), 5.7 (2022), 5.6 (2023), 5.4 (2024), 5.4 (2025), 5.5 (2026). - Primary balance (percent of GDP): -3.4 (2017), -2.6 (2018), -1.0 (2019), 0.8 (2020), 1.5 (2021), 1.5 (2022), 1.7 (2023), 1.7 (2024), 1.7 (2025), 1.7 (2026). - Effective interest rate (percent): 5.1 (2017), 6.0 (2018), 6.0 (2019), 5.5 (2020), 4.7 (2021), 4.2 (2022), 4.4 (2023), 4.7 (2024), 4.7 (2025), 4.8 (2026). - Constant primary balance scenario: - Primary balance held at -3.4 (percent of GDP) throughout projection years listed. - Effective interest rate path shown: 5.1, 6.0, 5.0, 3.9, 2.8, 2.0, 1.6, 1.2, 1.2, 1.1 (years corresponding to projections). - Debt-stabilizing primary balance (percent of GDP) is presented in the source tables and charts (values shown graphically in source). ### Composition of public debt and financing needs - Charts in source show: - By maturity: share of short-term and medium-and long-term debt (percent of GDP) across 2008–2026. - By currency: local currency-denominated versus foreign currency-denominated shares (percent of GDP) across 2008–2026. - Public gross financing needs (percent of GDP) across 2016–2026 (detailed numeric series provided in tables/charts in source). ### Realism of baseline assumptions and predictive track record - Forecast track record (2006–2014) percentile ranks for Mongolia median forecast error: - Real GDP growth median forecast error: -0.70; percentile rank: 29%. - Primary balance median forecast error: -0.69; percentile rank: 29%. - Inflation (deflator) median forecast error: -0.41; percentile rank: 20%. - Distribution of forecast errors and interquartile ranges are illustrated in source figures. - Boom-bust analysis and cyclically-adjusted primary balance (CAPB): - Mongolia 3-Year Adjustment in CAPB and 3-Year Average Level of CAPB are shown relative to cross-country distributions (charts in source). ### Stress tests and shock scenarios (public DSA) - Scenarios analyzed with underlying assumptions listed (selected values preserved as reported): - Primary Balance Shock scenario: Primary balance path includes deeper deficits (example: -5.5, -4.6, -3.1 for early projection years under shock). - Real GDP Growth Shock scenario: Real GDP growth path altered (example: 3.3, -1.5, 1.0, 5.0, 5.8, 8.2...). - Real Interest Rate Shock scenario: Effective interest rate path adjusted (example: 5.1, 6.0, 6.2, 5.9, 5.3, 5.0...). - Real Exchange Rate Shock scenario: Inflation and other variables adjusted (example inflation 11.0, 7.9, 6.2...). - Combined Shock and Contingent Liability Shock scenarios also provided with corresponding variable paths. - Stress test outputs displayed in source charts: - Gross Nominal Public Debt (percent of GDP) under baseline and shocks for 2017–2026. - Gross Nominal Public Debt (percent of revenue) and Public Gross Financing Needs (percent of GDP) under various shocks. - Benchmarks and risk-assessment thresholds used in heat map and cell highlighting: - Debt burden benchmark: 70 percent (cells colored based on exceeding benchmark). - Gross financing needs benchmark: 15 percent of GDP. - Market perception benchmarks: bond spreads of 200 and 600 basis points; external financing requirement benchmarks of 5 and 15 percent of GDP; change in share of short-term debt of 0.5 and 1 percent; public debt held by non-residents benchmarks of 15 and 45 percent; share of foreign-currency denominated debt benchmarks of 20 and 60 percent. ### Risk assessment summary (public DSA) - Key indicators and country values shown in source heat map (numeric highlights preserved as presented): - Bond Spread over U.S. Bonds: 547 bp (as of 05-Jan-17 through 05-Apr-17 average). - External Financing Requirement (percent of GDP) and Annual Change in Short-Term Public Debt (percent of total) shown in tables/figures. - Public Debt Held by Non-Residents: 77% (percent of total) noted in chart legend. - Public Debt in Foreign Currency: 12% (percent of total) shown in legend. ### External debt: Annex II (summary of findings) - External debt level and recent change: - External debt at 220 percent of GDP (noted as "now high at 220 percent of GDP"). - It rose by over 30 percentage points of GDP from end-2015 to end-2016. - About two-thirds of this increase is attributed to the nearly 25 percent depreciation in the exchange rate. - Remainder of 2016 increase largely from a government loan of $240mn from Credit Suisse (March) and a $500mn bond issuance (April). - Composition and key features: - Intercompany loans are the largest single category: account for 30 percent of the total stock or 65 percent of GDP; largely relate to the mining sector. - Oyu Tolgoi converted a $4.1bn intercompany loan into a long-term external loan (no longer classified as intra-company lending); this change reduced intra-company share from close to 50 percent at end-2015 to current share levels reported. - Risks associated with intercompany obligations are generally less than other types of external debt because repayment capacity is less directly tied to domestic economic conditions and rollover risk is lower. - Outlook and vulnerabilities: - External debt projected to start declining rapidly but remains highly sensitive to shocks, particularly steep depreciation. - Public sector debt composition will increasingly favor external borrowing due to large committed donor funding in the program; low interest cost expected to support fiscal sustainability in the medium term. - Private sector mining developments expected to deliver significant FDI inflows (non-debt financing), and favorable export and growth dynamics toward end of forecast horizon. - Debt dynamics sensitive to external shocks; however, because the tradable sector is largely the borrower from abroad, exchange rate changes should not necessarily undermine repayment capacity. - External Debt Sustainability Framework (Table 1 highlights, selected items): - Baseline external debt (percent of GDP) path: 125.2 (2012), 151.2 (2013), 171.7 (2014), 186.2 (2015), 222.8 (2016), 224.9 (2017), 209.3 (2018), 197.9 (2019), 185.8 (2020), 169.8 (2021), 148.8 (2022); change in external debt series and identified external debt-creating flows detailed in table. - Change in external debt (percent of GDP): 32.7 (2012), 26.0 (2013), 20.5 (2014), 14.4 (2015), 36.6 (2016), 2.1 (2017), -15.6 (2018), -11.4 (2019), -12.1 (2020), -16.1 (2021), -20.9 (2022). - Identified external debt-creating flows (percent of GDP): -22.7 (2012), 5.8 (2013), 14.0 (2014), 9.9 (2015), 55.4 (2016), -9.9 (2017), -12.0 (2018), -18.0 (2019), -13.7 (2020), -15.6 (2021), -17.8 (2022). - Current account deficit, excluding interest payments (percent of GDP): 25.5 (2012), 21.6 (2013), 5.2 (2014), -3.7 (2015), -3.0 (2016), -3.2 (2017), -3.6 (2018), 1.6 (2019), -0.1 (2020), -1.6 (2021), -2.6 (2022). - Net non-debt creating capital inflows (negative = outflows) (percent of GDP): -35.9 (2012), -16.7 (2013), -2.3 (2014), -0.9 (2015), 37.7 (2016), -9.5 (2017), -11.8 (2018), -17.5 (2019), -14.2 (2020), -13.0 (2021), -9.2 (2022). - Automatic debt dynamics (percent of GDP): -12.3 (2012), 0.9 (2013), 11.1 (2014), 14.6 (2015), 20.7 (2016), 2.8 (2017), 3.4 (2018), -2.0 (2019), 0.7 (2020), -1.0 (2021), -5.9 (2022). - Contribution from nominal interest rate (percent of GDP): 1.9 (2012), 3.8 (2013), 6.3 (2014), 7.7 (2015), 9.3 (2016), 10.1 (2017), 12.1 (2018), 1.1 (2019), 0.9 (2020), 8.8 (2021), 6.6 (2022). - Contribution from real GDP growth (percent of GDP): -9.6 (2012), -14.2 (2013), -12.3 (2014), -4.3 (2015), -2.5 (2016), -7.3 (2017), -8.8 (2018), -13.0 (2019), -9.2 (2020), -9.9 (2021), -12.5 (2022). - Contribution from price and exchange rate changes: -4.5 (2012), 11.4 (2013), 17.1 (2014), 11.1 (2015), 13.8 (2016), ... (projections noted). - Residual, including change in gross foreign assets (percent of GDP): 55.3 (2012), 20.2 (2013), 6.5 (2014), 4.5 (2015), -18.8 (2016), 12.0 (2017), -3.6 (2018), 6.6 (2019), 1.6 (2020), -0.5 (2021), -3.2 (2022). - External debt-to-exports ratio (percent): 287.8 (2012), 382.0 (2013), 329.8 (2014), 411.3 (2015), 439.3 (2016), 370.8 (2017), 396.1 (2018), 381.3 (2019), 369.0 (2020), 339.4 (2021), 313.4 (2022). - Gross external financing need (in billions of US dollars): 4.1 (2012), 4.0 (2013), 2.4 (2014), 1.3 (2015), 2.5 (2016), 3.0 (2017), 3.3 (2018), 4.2 (2019), 3.6 (2020), 3.2 (2021), 3.6 (2022). - Gross external financing need (percent of GDP): 33.2 (2012), 32.0 (2013), 19.3 (2014), 11.5 (2015), 22.5 (2016), ... (10-Year averages and projections shown in source). - Scenario with key variables at their historical averages projects external debt: 224.9, 208.8, 197.7, 183.2, 169.0, 154.8, ... with overall change -24.5 over horizon. - Key macroeconomic assumptions underlying the baseline (selected historical and projection values): - Real GDP growth (percent): 12.3, 11.6, 7.9, 2.4, 1.2, 7.5, 5.7, 3.3, 4.2, 6.7, 5.0, 5.8, 8.2 (series across 2012–2022 as listed). - GDP deflator in US dollars (change in percent): 5.1, -8.3, -10.2, -6.1, -6.9, 4.4, 16.0, -2.8, 4.0, 1.2, 1.6, 2.4, 3.4. - Nominal external interest rate (percent): 2.4, 3.1, 4.1, 4.3, 4.7, 2.7, 1.4, 4.6, 5.9, 5.7, 5.3, 5.2, 4.3. - Growth of exports (US dollar terms, percent): -1.7, -6.9, 27.5, -16.4, 5.6, 13.6, 27.4, 20.1, -5.5, 6.2, 3.5, 7.6, 6.3. - Growth of imports (US dollar terms, percent): 5.4, -4.8, -9.3, -27.8, 12.4, 17.3, 39.6, 14.0, 1.6, 14.0, -0.3, 4.6, 1.6. - Current account balance, excluding interest payments (percent of GDP): -25.5, -21.6, -5.2, 3.7, 3.0, -9.4, 11.7, 3.2, 3.6, -1.6, 0.1, 1.6, 2.6. - Net non-debt creating capital inflows (percent of GDP): 35.9, 16.7, 2.3, 0.9, -37.7, 11.4, 22.2, 9.5, 11.8, 17.5, 14.2, 13.0, 9.2. *Source: IMF staff (Annex I. Public Debt Sustainability Analysis; Annex II. External Debt Sustainability Analysis) — As of April 05, 2017.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Context - Economic Recovery Plan, supported by the IMF-led package, is "now showing positive results" and the Mongolian economy is "rebounding." - Growth expected to reach 3.3 percent "this year" and increase further thereafter. - Foreign-exchange reserves "have grown." - Improved coal export market conditions in China and investment inflows have boosted growth; "strong performance in the coal sector has spilled over into other areas." - Fiscal revenues are "substantially above the projected level." - Market interest rates "have fallen sharply" and confidence is returning. - Financing secured from donors: - RMB15 billion Swap Line with the People’s Bank of China renewed for another three years in July 2017. - Agreed terms with the Japanese government on $850 million in budget support to be disbursed in three annual tranches. - ADB disbursed $200 million in loans as part of a multi-year $900 million commitment. - World Bank expected to approve first phase of funding "in the coming months." - Korean government working with Government of Mongolia to identify projects for Korean concessional financing. - Private-sector creditor involvement: tapped international capital markets a second time this year to roll over sovereign bonds due in 2018; coupon rates tightening at each issuance. - No use of foreign-exchange reserves to settle foreign private-sector debts; engagement maintained with foreign private creditors. - Domestic borrowing: banks committed to maintain holdings of treasury bills; yields "have dropped sharply" influenced by fiscal consolidation, foreign inflows, and the June 2017 Bank of Mongolia policy rate cut. ### Program Performance - All end-September 2017 quantitative performance criteria "were met—by large margins in some cases." - Structural benchmarks due by end-June met: - General Department of Taxation finalized compliance improvement strategies for different taxpayer categories by end-April. - Bank of Mongolia amended its regulation on asset classification and provisioning in June. - Working group constituted in August to undertake a comprehensive study of the overall tax structure. - Structural benchmarks due end-October and end-November: most reforms implemented, with a few delays due to government change. - Specific actions taken: - Fiscal benchmarks: 2018 budget passed in line with program’s fiscal path; revised integrated budget law and other laws changed to restrict Parliament’s ability to increase expenditure envelope. - Delays: revised general taxation law and simplified tax regime for micro and small businesses not submitted; re-committed to submit legislation in February. - Monetary: submitted new Bank of Mongolia law to Parliament to clarify mandate, strengthen autonomy and governance, and improve operations. - Financial sector: amendments to the banking law submitted; DICOM law to be submitted shortly; passage delayed by political developments but expected in coming months. - Deviation: Cabinet decision on July 4 to universalize Child Money Program benefits (suspension of targeting) used substantial revenue over-performance to provide benefits to all children; 2018 budget targets poorest 60 percent of children through Child Money Program starting January 2018 (structural benchmark end-December 2017). - Reallocated savings to higher spending on food stamps and other programs for the most vulnerable. - Poverty increased from 21 percent to close to 30 percent between 2014 and 2016. - Government sought to increase Child Money Program coverage to 80 percent; will continue reviewing social assistance with ADB and JICA. ### Fiscal Policy - Fiscal consolidation remains central to recovery program; tight expenditure control and implementation of all program tax increases despite a recovering environment and political constraints. - 2017 revenue target "is likely to be exceeded by more than 2 percent of GDP." - Supplementary budget (October) used less than half of revenue over-performance for priority items: repairs to schools, hospitals, local administrative offices, purchases of medical equipment, and settling outstanding contingent liabilities. - One-off wage bonus to civil servants amounts to 0.2 percent of GDP in aggregate. - Remaining half of revenue over-performance saved to lower deficit and limit costly short-term borrowing. - IMF-basis deficit projections for the year: - Primary deficit expected to fall to 3.4 percent of GDP. - Overall deficit expected to fall to 7.6 percent of GDP. - 2018 budget aims for a primary deficit of 2.6 percent of GDP vs 3.1 percent of GDP at program approval. - Commitment: if revenues exceed projections, at least half of over-performance (in percent of GDP) will be saved to reduce fiscal deficit, new borrowing, and interest bill. - Medium-term objective: reach a primary surplus of roughly 1½ percent of GDP by 2022 (in line with the Fiscal Stability Law) to secure long-term debt sustainability. - Projection: public debt to reach about 73 percent of GDP in the medium term under the consolidation path. - Ongoing fiscal structural reforms: - Tax working group established; interim report to Ministry of Finance shortly (structural benchmark end-December 2017). - Working towards establishing a Fiscal Council to oversee the budget (structural benchmark end-December 2017). - Improving GDT operations with IMF assistance. - New and re-phased structural benchmarks: - Start implementation of 2018 compliance improvement strategies for large, medium, small, and micro businesses (structural benchmark end-January 2018). - Submit to parliament i) a revised general taxation law and ii) legislation creating a simplified tax regime for micro and small businesses (structural benchmark end-February 2018). - Complete an audit of all existing concessions contracts, develop a repayment plan and incorporate it into the medium-term fiscal framework (MTFF) (structural benchmark end-June 2018). - Cabinet to approve a Guideline on appraisal and selection of public investment projects with methodology and evaluation criteria (structural benchmark end-September 2018). ### Monetary and Exchange Rate Policies - Policy rate was raised by 450 basis points in 2016; partial unwind allowed by improved balance of payments, including a 200-basis point cut in June. - Inflation developments: - Rose from less than 1 percent at end-2016 to over 6 percent in September 2017. - Factors: CPI basket revisions, one-off fiscal measures, lagged impact of 2016 depreciation, supply shocks, and economic recovery. - Expected to be around 8 percent at end-2017 and remain broadly unchanged in 2018, consistent with the BoM monetary policy guideline. - Monetary stance: held in September to monitor impact of the June cut; further easing conditional on data developments and confirmation that inflation and exchange rate pressures remain contained. - Liquidity management priorities given large donor inflows; increased issuance of central bank bills and readiness to take steps to minimize excess liquidity; consideration of macroprudential tools and measures to contain foreign currency balance sheet risks. - Exchange rate policy: - Togrog may face appreciation pressure; authorities ready to intervene to build reserves and avoid undue real exchange rate appreciation. - Committed to building reserves "at a faster pace than envisaged under the program targets" if appreciation pressure and market conditions are favorable. - Will allow exchange rate flexibility; FX sales limited to smoothing excessive volatility and preventing disorderly market conditions. - Mortgage program: - Now operated by BoM solely as an agent of government. - Financing of new mortgages from interest on existing assets reflected transparently in the budget. - World-Bank-funded expert advising on a time-bound plan for BoM to fully exit the program. - Plan to agree with the Fund no later than end-September 2018 on a plan to make this transfer. - Revised Memorandum of Understanding between BoM and Ministry of Finance signed per 2017 Safeguards Assessment recommendations; following up on other safeguards recommendations. ### Financial Sector Policy - Progress on rehabilitating and strengthening the financial system with donor support. - Asset Quality Review (AQR) of all Mongolian banks: - International firm selected after competitive tender. - Methodology based on ECB’s AQR manual with adjustments for Mongolian conditions. - Results to be delivered by mid-December 2017 (structural benchmark end-December 2017); timing later than originally planned to allow banks time to revalue collaterals. - Related AQR benchmarks re-phased accordingly. - Capital and stress testing: - Authorities will independently determine any capital buffer needed to ensure compliance with prudential requirements through 2019, using stress tests with baseline and adverse scenarios. - Banks to prepare and submit plans by mid-March 2018 demonstrating financial strength and continuous compliance with prudential requirements through end-2019. - By end-May 2018, authorities to review banks’ plans, reconcile with results, and communicate assessments of regulatory capital positions. - BOM will coordinate a communication strategy for post-AQR phase with Financial Stability Council members. - Bank shareholder responsibilities: - Shareholders must ensure banks are fully recapitalized, profitable, and well managed. - If capital shortfall exists, shareholders required to fully capitalize institutions by end-November 2018, either themselves or by bringing in new fit-and-proper shareholders, possibly foreign investors (structural benchmark end-November 2018). - Authorities will ensure adequate backup funds and maintain financial stability during recapitalization and restructuring. - Recapitalization framework: - Common principles agreed with IMF staff for systemically important and viable banks that cannot raise capital privately (scope, governance, burden sharing, restructuring, increased supervision, need for privatization). - Draft recapitalization law prepared with Fund technical assistance; describes process and conditions for using public funds, management of public equity holdings to be temporary, at arm’s length, and without political interference. - Draft law to be submitted by Ministry of Finance to Parliament and enacted no later than end-January 2018 (structural benchmark end-January 2018). - BoM and Financial Stability Council members to prepare an action plan for non-viable and non-systemic banks to be completed no later than January 2018. - Specialized entity and exit strategy: - Operational plan to set up a specialized entity to manage potential government participation in banks to be prepared by March 2018. - Entity to start operating by end-November 2018 if public participation proves to be substantial (defined in consultation with IMF staff). - Exit strategy for divesting existing and potential public participation in banks to be prepared by end-February 2019. - Financial safety net and regulation: - Draft amendments to the Central Bank and Banking Laws finalized and submitted to Parliament; expected to be approved shortly and enter into force immediately thereafter. - Once banking law approved, BoM will elaborate regulations per the law. - BoM to carry out review of related party exposures based on new banking law and regulations by end-December 2018 (structural benchmark end December 2018). - Regulation on asset classification and provisioning upgraded in June 2017; further improvements by end-September 2018 based on AQR findings and external expert advice (structural benchmark end September 2018). - With IMF assistance, MOF to finalize draft amendments to the Law related to the Licensing of Appraisers by end of March 2018, to be adopted by no later than end-September 2018. *Appendix I. Letter of Intent, November 30, 2017, Ulaanbaatar.* ### 2018. The Bank of Mongolia will develop a new regulation for banks on Appraisal and Valuation, ### 2018. The Bank of Mongolia will develop a new regulation for banks on Appraisal and Valuation ### Financial-sector regulatory actions and deadlines - The Bank of Mongolia (BOM) will develop a new regulation for banks on Appraisal and Valuation, to be completed no later than March 2018 and adopted by the following September. - The BOM will issue a regulation by end-February 2018 to require banks to: - develop their own NPL strategies and operational policies; - report NPLs in more detail; and - set targets on NPL resolution. - Draft amendments to the law on deposit insurance (to bring it into compliance with international principles and ensure that DICOM can flexibly contribute to funding of potential bank resolutions) were finalized following World Bank and Fund assistance; the draft law’s approval was re-phased with a structural benchmark end-February 2018. - A solution will be found to ensure adequate back-up funding for DICOM that does not incur excessive fiscal costs (structural benchmark end-February 2018). - The authorities will coordinate substantial technical assistance from the IMF and other donors and have appointed a coordinator to manage these efforts. ### Nonperforming loan (NPL) resolution strategy and potential AMC - A multi-agency working group (WG) including BOM, Ministry of Finance, Ministry of Justice, and the FSC secretariat was set up to develop an NPL resolution strategy to improve banks’ operating environment and practices. - With IMF and other IFI technical assistance, the WG has been: - analyzing impediments to NPL resolution; - examining credit underwriting and NPL management practices of banks; and - drawing on Asset Quality Review (AQR) findings. - Timeline commitments: - Draft NPL resolution strategy to be discussed with IMF staff by end-December (2017) and finalized and published by the FSC by end-March 2018 (structural benchmark end March 2018). - Commit to implement agreed reforms contained in the NPL strategy by the end of 2019 using a timeline developed with the Fund. - On an Asset Management Company (AMC): - The authorities see an AMC as one possible mechanism to assist in NPL resolution if designed in line with best international practices regarding governance and valuation. - They will wait for AQR and WG results and prepare a thorough feasibility and cost–benefit assessment before deciding whether to establish an AMC. - They will coordinate closely with IMF and other partners and consult all stakeholders before any legislative action related to NPL resolution (including establishment of an AMC). ### Public recapitalization framework (principles) - Introduce a legal framework with strict principles guiding possible use of public funds to recapitalize banks, reflecting international best practices: - Financial stability considerations: systemic and viable banks eligible for public capital if private capital insufficient; nonviable banks to be resolved or liquidated. - Governance: Financial Stability Council coordinates recapitalization and restructuring with clarified roles; possible dedicated entity to manage state’s interest; government to remain at arm’s length from day-to-day bank conduct. - Burden sharing: Losses identified in independent AQR; equity reduced accordingly prior to public funds injection; losses allocated up the creditor hierarchy with due consideration for financial stability. - Restructuring: Public solvency support paired with comprehensive restructuring plan with KPIs; suspension of dividends and interest on subordinated debt that qualifies as capital until support repaid and financial solidity restored; appropriate actions against managers and board members as needed. - Strict oversight: Recipients of public support subject to enhanced supervision and reporting; authorities to have powers to monitor/approve or veto large transactions and related-party transactions. - Exit scenarios: Develop privatization strategy to recover capital injection and other financial support within a reasonable period. ### AML/CFT and other legislative commitments - Mongolia was given until October 2018 by the Asia Pacific Group (APG) to strengthen its AML/CFT framework; authorities will amend the AML/CFT framework by end-June 2018. - Submission and legislative benchmarks (selected): - Submission to Parliament of a new Bank of Mongolia Law (to clarify mandate, strengthen autonomy and governance) — end-November 2017: Met. Adoption of the new Bank of Mongolia Law — end-March 2018. - Amendment of DICOM law to align with IADI Core Principles — end-November 2017: Not Met; revised to end-February 2018. - Approval of amendment of the Banking Law covering early intervention, bank resolution legislation, funding and cooperation framework, BOM powers, levies on banks, fit and proper requirements, related party exposure rules — end-November 2017: Not Met – Expected by end-December (2017). - Financial Stability Council (FSC) finalization and publication of an NPL resolution strategy — end-January 2018: revised to end-March 2018. - Enact a law or amendment of existing laws on the use of public funds — end-December 2017: revised to End-January 2018. - BOM to carry out a review of related party exposures based on improved legislation — end-September 2018: revised to end-December 2018. - The Child Money Program targeting and Food Stamps reallocation: In the 2018 budget, the Child Money Program will be targeted to the poorest 60 percent of children and the savings redirected gradually toward the better-targeted Food Stamps program — end-December 2017. ### Program financing request and general commitments - Request completion of the first and second reviews of the extended arrangement under the Extended Fund Facility, after which the authorities intend to draw two tranches amounting to SDR 27.9560 million each (SDR 55.912 million total). - The government authorized publication of the letter, attachments, and associated staff report. ### Quantitative program highlights (selected exact figures from Table 1 and memoranda) - Change in net international reserves (NIR) of the BOM (floor, cumulative, change in eop stock, in million US$ at program exchange rate): 636 1008 0925 0950 550 1,200 1,100 1,300 - Net domestic assets (NDA) of the BOM (ceiling, eop stock, in billion togrog at program exchange rate): 4,774 4,540 4,900 4,146 4,600 4,400 4,000 3,850 3,900 3,700 - Primary balance of the general government (floor, cumulative since the beginning of the fiscal year, in billion togrog): -3,127 314 -1,050 585 -1,500 -950 -350 -425 -650 -850 - 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$): 600 1,800 600 1,800 NA 1,800 NA NA NA NA - Stock of guarantees on external debt extended by the government or BOM (ceiling, eop stock, in million US$): 1,385 757 850 688 750 750 750 750 750 750 - Reserve money (indicative target, ceiling, in billion togrog): 3,067 3,234 3,900 3,280 4,000 3,650 4,200 3,600 3,800 4,000 - Program exchange rate (togrog/U.S. dollar): 2489.4 2489.4 2489.4 2489.4 2489.4 2489.4 2489.4 2489.4 2489.4 2489.4 - U.S. dollar per SDR: 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 1.3 - Monetary gold price (U.S. dollar/ounce): 1,142 1142.0 1,142 1,142 1142.0 1,142 1142.0 1,142 1,142 1142.0 ### Structural benchmarks (selected timing and status) - Finalization and commencement of implementation by GDT of compliance improvement strategies — end-April 2017: Met. - Establishment of a working group to review the tax structure — end-August 2017: Met. - Submission to Parliament of a revised general taxation law — end-October 2017: Not Met; revised end-February 2018. - Passage of a 2018 budget in line with the program’s fiscal path — end-November 2017: Met. - Start implementation of 2018 compliance improvement strategies — New structural benchmark end-January 2018. - Complete an audit of all existing concessions contracts and develop repayment plan — New structural benchmark end-June 2018. - Cabinet to approve a Guideline on appraisal and selection of public investment projects — New structural benchmark end-September 2018. - Completion of the Asset Quality Review of all Mongolian banks — New structural benchmark end-December 2017. - Completion of the recapitalization process for viable banks and of resolution for nonviable ones — New structural benchmark end-November 2018. *Source: IMF country documentation for Mongolia contained in the provided PDF chapter.* ### 4. For the purposes of the program the following definitions will be used: ### 4. For the purposes of the program the following definitions will be used: ### Definitions of institutional coverage and fiscal terms - The general government (GG) includes: - all 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), and local governments, and the Development Bank of Mongolia (DBM). - Debts of other legally autonomous state-owned enterprises (SOEs) and BOM liabilities including the swap line with the People’s Bank of China (PBOC) are excluded. - The domestic banking system is defined as the BOM and licensed commercial banks incorporated in Mongolia. - The fiscal year is the calendar year, starting on January 1 and ending on December 31. ### Program accounting exchange rates and valuation rules - For program purposes: - all foreign currency-related assets, liabilities, and flows will be evaluated at “program accounting exchange rates” except items affecting government fiscal balances, which will be measured at current exchange rates. - U.S. dollar denominated components of the BOM balance sheet will be valued at the reference exchange rate of the Mongolian togrog to the U.S. dollar of 2489.4 announced by the BOM as of December 31, 2016. - Chinese Renminbi (RMB) valued at 0.14389 U.S. dollars (as of December 31, 2016). - Special Drawing Right (SDR) valued at 1.344330 U.S. dollars (as of December 31, 2016). - Official gold holdings valued at 1142.54 U.S. dollars per troy ounce (as of December 31, 2016). ### Nonconcessional external borrowing exclusions and concessionality rule - For program purposes nonconcessional external borrowing excludes: - (i) the use of IMF resources; - (ii) lending from the Asian Development Bank, European Bank for Reconstruction and Development, Asian Infrastructure Investment Bank, and the World Bank Group; - (iii) lending from governments and government agencies such as the Japan International Cooperation Agency, the 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. - A debt is concessional if it includes a grant element of at least 35 percent, calculated as: - grant element = (PV of debt difference from nominal) expressed as a percentage of nominal value. - PV of debt at contracting is calculated by discounting the future stream of payments of debt service due on this debt. - Note: For debts with a grant element equal or below zero, the PV will be set equal to the nominal value of the debt. The discount rate used is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97). ### Present value calculation for variable rate debts and program reference rates - For debts carrying a variable interest rate (benchmark interest rate plus fixed spread), PV is calculated using: - a program reference rate plus the fixed spread (in basis points) specified in the debt contract. - Program reference and spreads: - Program reference rate for the six-month USD LIBOR is 3.18 percent and will remain fixed for the duration of the program. - Spread of six-month Euro LIBOR over six-month USD LIBOR is -308 basis points. - Spread of six-month JPY LIBOR over six-month USD LIBOR is -306 basis points. - Spread of six-month GBP LIBOR over six-month USD LIBOR is -231 basis points. - For interest rates on currencies other than Euro, JPY, and GDP, the spread over six-month USD LIBOR is 0 basis points. - Where the variable rate is linked to a benchmark other than six-month USD LIBOR, a spread reflecting the difference between the benchmark and six-month USD LIBOR (rounded to the nearest 50 bps) will be added. ### Net International Reserves (NIR) of the BOM — floor and measurement - A floor applies to the change in level of NIR of the BOM. - The floor will be adjusted upward (downward) by the amount of budget support from bilateral and multilateral donors (excluding the IMF) in excess (short) of the programmed level as shown in the Quantitative Performance Criteria table. - The floor will also be adjusted upward (downward) by the amount of net nonconcessional borrowing (excluding project financing) received and repatriated by the general government in excess (short) of the programmed level during the program period. - NIR calculation: - NIR = gross international reserves less international reserve liabilities. - For program monitoring, the BOM foreign assets and liabilities shall be valued at program exchange rates and gold price as described above. - Gross international reserves are defined as the sum of: - Monetary gold holdings of the BOM; - Holdings of SDRs; - Mongolia’s reserve position in the IMF; and - Foreign currency assets held abroad (plus cash held in BOM’s vault) under the direct and effective control of the BOM and readily available for intervention or direct financing of balance of payments imbalances. - Exclusions from gross reserves: - any foreign currency claims on residents including MNT swaps with local banks; - capital subscriptions in international institutions other than the IMF; - gross reserves encumbered or pledged (including reserve assets used as collateral or guarantee). - International reserve liabilities of the BOM are defined as the sum of: - All outstanding liabilities of Mongolia to the IMF; - Any foreign currency liabilities of the BOM to nonresidents with an original maturity up to and including one year (including any gold deposits by foreign banks); - The liabilities to the People’s Bank of China under the swap line; - Any foreign currency liabilities of any maturity of the BOM to residents including current accounts and deposits of the commercial banks. - Government foreign currency deposits at the BOM will be treated as an international reserve liability (IMF liabilities already counted under first bullet are not double-counted). - Foreign currency owed to commercial banks as part of the swap program will be treated as a reserve liability. ### Reserve Money and Net Domestic Assets (NDA) - Reserve Money: - An indicative ceiling applies to the level of reserve money: currency issued by the BOM (excluding BOM holdings of currency) and commercial banks’ deposits held with the BOM (excluding foreign currency time deposits). - Net Domestic Assets (NDA): - A ceiling applies to the level of NDA of the BOM. - The ceiling on NDA will be adjusted downward by the amount of external borrowing (both budget support from bilateral and multilateral donors and net nonconcessional borrowing excluding project financing except for debt management purposes) received by the general government in excess of the programmed level. - The ceiling on NDA will be adjusted upward by 50 percent of the amount of external borrowing (both budget support and net nonconcessional borrowing excluding project financing except for debt management purposes) received by the general government in short of the programmed level. - NDA calculation: NDA = reserve money − (NIR + other net foreign assets (ONFA) of the BOM). - For NDA calculation, NIR will be adjusted for the swap program with commercial banks, foreign exchange demand deposits of commercial banks that are part of reserve money, and government foreign currency current accounts. - ONFA defined as other net foreign assets of the BOM, including difference between accrued interest receivables on gross international reserves and accrued interest payables on international reserve liabilities and deposits of international financial institutions. ### Primary balance of the general government (excluding DBM) — floor - A floor applies to the primary balance of the general government excluding DBM plus net lending and net interest payments of DBM, measured cumulatively over the year. - Components: - Overall balance of general government excluding DBM (defined below the line) comprising: - net bank credit to the general government — includes net borrowing from BOM (ways and means advances, loans, holdings of treasury bills and government bonds, minus deposits) and commercial banks (loans, advances, and holdings of treasury bills and government bonds, minus deposits). - net nonbank financing — includes tax prepayments and holdings of government by pension and insurance funds, and any changes to net assets (negative financing flows) of Fiscal Stability Fund, Social Security Funds, and Future Heritage Fund. - net external financing — includes program loans, project loans, nonconcessional borrowing or long term external debts such as sovereign bonds or commercial loans. - Privatization receipts. - Gross interest payments of the general government on domestic and external debt excluding DBM measured above the line. - DBM’s net lending (loan disbursements less repayments) and net interest payments (DBM’s interest payments less interest receipts excluding interest payments and receipts to other general government) measured above the line. ### Nonconcessional medium- and long-term external debt ceilings and guarantees - Prior to the completion of the second review: - Ceiling on issuance of gross debt contracting and/or guaranteeing by the general government or the BOM or other agencies on behalf of the general government of new debt with nonresidents with original maturities one year or more. - Ceiling applied to debt and commitments contracted or guaranteed for which value has not yet been received. - From completion of the second review: - Ceiling on net debt issuance rather than gross debt issuance (permits debt liability management). - Netting constraint: no more than 6 months between contracting of new debt and retirement of existing debt for netting. - Ceiling applies to contracting and/or guaranteeing by the general government or the BOM or other agencies on behalf of the general government of debt with nonresidents with original maturities one year or more. - Ceiling will apply end-June and end-December of every year, starting from end-December 2017. - The two GOM bonds maturing in January 2018 and June 2018 will be excluded from the netting since they are already in the process of being refinanced through the issuance of the US$800 million Eurobond in October 2017. - Definition of debt for program purposes is set out in Executive Board Decision No. 15688, Point 8, adopted December 5, 2014 (see Annex 1). - Stock of guarantees on external debt: - For program purposes, a guarantee arises from any explicit legal obligation of the general government, the BOM, or other agencies on behalf of the general government to service a loan in the event of nonpayment (payments in cash or in kind) or to finance a shortfall incurred by the loan recipient. - The stock of guarantees on external debt stood at $1,385 million at the end of 2016. ### Short-term external debt ceiling - A ceiling applies to contracting and guaranteeing by the general government, the BOM, or other agencies on behalf of the general government of new debt with nonresidents with original maturities of less than one year. - Ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received. - This is a continuous performance criterion. - Definition of debt per Executive Board Decision No. 15688, Point 8, adopted December 5, 2014 (see Annex I). - Exclusions from the ceiling: - (i) debts classified as international reserve liabilities of the BOM; - (ii) debts to restructure, refinance, or prepay existing debts; - (iii) togrog-denominated treasury bills, government bonds, and BOM bills held by nonresidents; - (iv) normal import financing (self-liquidating credit for imports). ### Data provision requirements and reporting schedules - General timing: Data required to monitor performance under the program will be provided electronically or in hard copy to the Fund’s Resident Representative by the 20th day of each month, unless otherwise indicated. - A. Monetary Data (BOM) — reporting responsibilities in parentheses: - Monetary survey, BOM balance sheet, consolidated balance sheet of commercial banks: monthly, except BOM balance sheet weekly within five working days of week end. - Net international reserves and auctions of the BOM in the FX market: daily; full reporting of all interventions weekly. - Interest rates and volume on standing facilities and market operations: weekly within five working days of week end. - Detailed breakdown of net credit to government from BOM (weekly) and commercial banks (reconciled with MOF and sent monthly). - Stock of monetary gold in both thousands of troy ounces and U.S. dollars: weekly. - If BOM engages in monetary gold transactions or uses any accounting rate for valuing gold assets, report both prices and volumes monthly. - Any liabilities guaranteed or backed by gold to be reported. - Detailed breakdown of “other items net” for both BOM and commercial banks including valuation changes from exchange rate changes and/or revaluation of gold: monthly. - Bank-by-bank list of required reserves and actual reserves: biweekly. - Results of each central bank bills auction within five working days of each auction (amounts offered, demanded, sold to each bank, announced rates, cut-off rates). - Data on stock of BOM swaps with resident and non-resident commercial banks: quarterly. - Data on stock of BOM guarantees issued on behalf of the government or any other third party: quarterly. - Data on BOM’s foreign convertible currency liabilities reflecting long- and short-term maturities: quarterly. - B. Fiscal Data (Ministry of Finance (MOF)): - Monthly consolidated accounts of central, local, and general government including detailed tax, nontax, capital revenues, current and capital expenditures, net lending, and financing; financing separated into foreign (cash, project, program loans) and domestic (bank and nonbank). - Classified transactions of all social insurance funds. - Results of each treasury bills auction within five working days of each auction (amount offered, demanded, amount sold to each bank and nonbanks, average yield in percent per month). - Monthly accounts of DBM detailing new lending and repayment and stock of outstanding loans on a cash basis. - Outstanding balances of all deposit accounts of the general government in commercial banks including extrabudgetary funds: quarterly. - Outstanding balances of any new deposit accounts of the general government opened for grants and loans received from donors, including associated counterpart funds. - Monthly report on stock of outstanding debt of the general government including DBM, including domestic and external debt, promissory notes, tax pre-payments and guaranteed debt netting out any cross holdings between DBM and the GoM. - C. External Sector Data (BOM and MOF): - Complete list of new contracts above $10 million for public investment projects signed or under negotiation, including details on amounts, terms, and conditions of current or future debt or nondebt obligations: quarterly by MOF. - Outstanding stock, disbursements, amortization, and interest payments of short-term external debt contracted and/or guaranteed by the government or BOM by creditor in original currency and U.S. dollars: quarterly by BOM. - Outstanding, disbursements, amortization, and interest payments of medium- and long-term external debt contracted and/or guaranteed by the government or BOM by creditor in original currency and U.S. dollars: quarterly by BOM. - Daily midpoint exchange rates of the togrog against the U.S. dollar, including reference, interbank, and parallel market exchange rates: BOM. - Arrears on external debt contracted and/or guaranteed by the government or BOM by creditor in original currency and U.S. dollars: quarterly by BOM. - D. Other Data (National Statistical Office (NSO)): - Monthly consumer price index and detailed breakdown by major categories of goods and services in the consumer basket. - NSO’s monthly statistical bulletin, including monthly export and import data. ### Annex 1 — Executive Board definition of “debt” (excerpt) - Executive Board Decision No. 15688-(14/107), adopted December 5, 2014, point 8: - Debt definition: a current, i.e., not contingent, liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring the obligor to make one or more payments in the form of assets (including currency) or services at future times to discharge principal and/or interest. - Primary forms: - (i) loans — advances of money made on basis of undertaking to repay (including deposits, bonds, debentures, commercial loans, buyers’ credits) and temporary exchanges equivalent to fully collateralized loans (repurchase agreements, official swap arrangements); - (ii) suppliers’ credits — supplier permits deferral of payments after delivery of goods or services; - (iii) leases — present value at inception of all lease payments expected during agreement period excluding payments covering operation, repair or maintenance. - Under this definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. *Source: IMF staff report section titled “For the purposes of the program the following definitions will be used:”* ### 1. Third quarter real GDP growth was 6.7 percent year-on-year, up from 6 percent in Q2 ### 1. Third quarter real GDP growth was 6.7 percent year-on-year, up from 6 percent in Q2 ### Economic growth and production - Real GDP growth in Q3 was 6.7 percent year-on-year, up from 6 percent in Q2 and slightly higher than estimated at the time of the mission. - Growth drivers: - Turn-around in net exports on the expenditure side. - Recovery in mining on the production side. - Outlook and risks: - Real GDP growth for the entire year 2017 may be slightly higher than projected in the staff report. - A significant slowdown is still projected in the fourth quarter, mainly due to developments in the coal sector. - Coal exports in October were 16 percent below the average level for the fourth quarter of 2016. - Per the Ministry of Road and Transportation Development, coal truck crossings to China averaged 650 per day in October and November, about half the number recorded earlier in the year. ### Fiscal developments and budget process - 2018 budget: - In November, authorities submitted and parliament passed a 2018 budget in line with program targets. - On December 5, the President vetoed the expenditure part of the budget, arguing it was too loose and crowded out private sector borrowing. - Parliament overturned the President’s veto on December 7, allowing the original version to proceed. - Fiscal outcomes and targets: - Greater-than-expected revenue and strong fiscal discipline led to a significant reduction in the fiscal deficit. - Half of the recent fiscal overperformance was used to reduce debt and this policy will be continued. - Authorities aim to halve the overall budget deficit from 17 percent of GDP in 2016 to 6.4 percent by 2018. - Interest payments account for 5.5 percent of GDP; the Government is potentially crowding out private sector borrowing. - Public sector wage pressure and social support: - From August to November, school teachers and doctors held nationwide strikes and street demonstrations over salaries that have not increased since 2014 and that remain part of the public sector wage freeze until 2019. - Recent studies show poverty increasing and many people struggling to maintain a minimum standard of living. - Authorities provided a compensation payment to civil servants equal to half of one month’s salary in 2017 and 2018. - Authorities seek continued dialogue on long-term civil service reform and wage issues. - Child Money program: being reduced in coverage to target 60 percent of children. Increasing poverty and a 15 percent reduction in the average household income over two years have increased pressure on families; Child Money could provide a reliable source of income for families. ### External financing and donor support - Donor disbursements resumed in November after delays: - Asian Development Bank disbursed a $100 million loan after completion of the final condition related to targeting of the Child Money Program. - World Bank proceeded with its $120 million Development Policy Credit. - In early December, Japan International Cooperation Agency (JICA) signed a $280 million loan agreement expected to be disbursed toward year’s end. - Market confidence: - Strong program performance helped boost investor confidence, evidenced by the successful issuance of a US$800 million Eurobond in October. - All external financing needs to cover external bond maturities have been met for the remainder of the program period. ### Program performance and authorities’ statement - Authorities requested completion of the first and second reviews under the Extended Fund Facility (EFF) arrangement. - The EFF arrangement, favorable external conditions and the launching of an economic recovery plan have resulted in better-than-anticipated outcomes. - Achievements: - Fiscal discipline and effective monetary policy have contributed to stabilization, a reduced deficit, lower public debt and greater international reserves. - All performance criteria and most structural benchmarks have been achieved. - Challenges and priorities: - Maintain fiscal discipline and policy stability. - Strengthen economic activity and continue to increase reserves. - Improve resilience of the banking and financial sectors and develop financial sector infrastructure. - Continue structural reforms, build buffers and reduce economic vulnerabilities under the program. ### Monetary policy and financial sector - Inflation: - Bank of Mongolia aims to maintain CPI inflation at a long-term equilibrium of 8 percent (embedded in the Monetary Policy Guidelines). - Inflation is picking up: in November it reached 6.5 percent in the country as a whole and 7.6 percent in Ulaanbaatar. - Inflation is expected to rise slightly in the coming months with the economic recovery; authorities are committed to keeping inflation pressures contained. - International reserves: - Net international reserves increased from 2.4 months of import coverage in 2016 to 4.4 months in November. - Authorities will continue to take opportunities to increase reserves when conditions permit. - Banking sector: - Banking sector asset quality review was delayed due to a limited number of qualified reviewers but is set to finish in December 2017. - Authorities will use the asset quality review and staff advice to prepare and implement a banking sector strategy. - Mortgage program: - The mortgage program has been fully transferred from the Bank of Mongolia to the government; BOM now acts only as an agent of the government. - Authorities continue to stress the importance of the mortgage program. - Social infrastructure and pollution: - Lack of quality housing and infrastructure, together with poverty, are key drivers of the extreme pollution found in Ulaanbaatar, which is one of the most polluted cities in the world. *Statement by Heenam Choi, Executive Director for Mongolia and Gantsogt Khurelbaatar, Senior Advisor to Executive Director; December 15, 2017.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17396.pdf_