## cr18303

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### EXECUTIVE SUMMARY — Context and Recent Developments
- A three-year arrangement under the Extended Fund Facility (EFF) approved on May 24, 2017, for SDR 314.5054 million (435 percent of quota, or about $425 million).
- Arrangement part of a $5.5 billion multi-donor financing package supporting the authorities’ Economic Recovery Plan.
- Arrangement subject to quarterly reviews.
- Growth and macro trends:
  - Economic growth just above 6 percent for the last three quarters.
  - Real GDP growth in Q2-2018 slightly above 6 percent (third quarter in a row).
  - Inflation hovered around the 8 percent informal target.
- Fiscal:
  - Primary balance through August reached a surplus of 5.3 percent of GDP, up from 3.1 percent in June.
  - Revenues increased by 31 percent year-to-date, driven by mineral exports and investment-related imports (VAT).
  - Primary balance projected to reach a surplus of 3.2 percent of GDP by end-year (compared with a 0.2 percent primary deficit target from the fourth review and -2.5 percent in the original program).
  - Authorities submitted a 2019 budget targeting a primary surplus of 1 percent of GDP and propose a 3 percent of GDP increase in expenditures for investment recovery.
  - Authorities committed to save 100 percent of any further revenue over-performance and to cut expenditures by mid-year if revenues disappoint.
- External sector and reserves:
  - Reserves increased in 2017 by $1.8 billion to reach $3 billion, or 74 percent of the ARA metric.
  - In 2018, reserves stalled and began to decline; exchange rate depreciated by 5.4 percent.
  - Bank of Mongolia sold $334 million of gross international reserves (10 percent of total) since end-May.
- Credit and financial sector:
  - Bank lending accelerated to 20 percent y/y in recent data (excluding principal in arrears and non-performing loans); corporate lending recovered to 15 percent in May (up from 2 percent in February).
  - Bank of Mongolia (BoM) policy responses included:
    - June announcement of a ceiling of 70 percent on debt service-to-income ratios for all new non-mortgage consumer loans (effective January 2019).
    - September increase in the risk weight on unhedged FX lending from 120 percent to 150 percent and introduction of a 30-month maturity limit on non-mortgage consumer loans (prior action for this review).
    - Adoption of a tightening bias in the September MPC (prior action for this review).
- Asset Quality Review (AQR) milestones:
  - January: third-party auditors completed assessment; system-wide shortfall of 1.9 percent of GDP based on Q3 2017 balance sheets.
  - May: updated projected capital need at end-2018 increased to 3.1 percent of GDP.
  - June: Parliament passed the Recapitalization Law enabling conditional public capital for systemic banks.
  - September: banks booked all additional provisions called for by the AQR (adjusted only by loans that were repaid) and required to submit updates on capital raised and plans to meet remaining shortfalls by end-December (both prior actions).
  - Remaining gap: banks have not re-classified non-performing loans in line with AQR findings (structural benchmark end-June).
- Structural reforms and governance:
  - Two tax administration bills submitted in May but failed to come to a vote; to be re-submitted in fall session.
  - Missed end-June indicative floor on social protection spending; authorities indicated full 2 percent of GDP social protection spending (new definition) would be allocated by end-year.
  - Child Money Program coverage increased from 60 to 80 percent at a cost of 0.1 percent of GDP, financed by cutting the “Poverty Benefit Program”.
  - Audit of concessions contracts completed after end-August due date.
  - Setbacks: reversing pension age increase, eliminating excise taxes on fuel, reversing increase in upper income personal tax rates, and establishing a Fiscal Council without sufficient independence.
  - Passage in 2017 of new laws for DBM and BoM to prevent further quasi-fiscal spending.
- AML-CFT:
  - Amendments to AML law and Law on Infringements passed but too late for July 2018 APG reassessment.
  - Low APG ratings attracted FATF scrutiny; risk of public listing by FATF in October 2019 if shortcomings persist.
  - Several foreign banks withdrew correspondent banking relationships; as of June 2018 there are no relationships with U.S. banks and all Mongolian banks access dollars via regional banks.

### PROGRAM PERFORMANCE, CONDITIONALITY, AND FINANCING
- All quantitative performance criteria (QPCs) for which data is available have been met.
- Data unavailable for the QPC on primary balance of the general government for end-September; expected to be met by a large margin.
- Of four structural benchmarks due, two expected to be met by the Board date and two expected to be completed in coming months.
- Staff supports a waiver of applicability for the end-September QPC target on the primary balance of the general government due to unavailable data.
- Prior actions: three of four prior actions for this review completed (two on credit growth, one on AQR provisioning); the fourth prior action pending requires submission of detailed updates regarding capital raised and how remaining shortfalls will be met by end-December.
- Program financing changes and reserve projections:
  - World Bank 2018 disbursement now expected in Q1 2019 instead of late 2018; linked Japan disbursement also delayed into 2019; World Bank total program commitment moderated from $600 million to $450 million.
  - Program remains fully financed for the next 12 months with good prospects thereafter.
  - Gross reserves expected to reach USD 3.9 billion in 2019 (5.5 months of imports and 99 percent of the ARA metric), above $3.5 billion projected at program approval.

### KEY POLICY STANCE AND COMMITMENTS
- Fiscal policy:
  - 2019 budget targets a primary surplus of 1 percent of GDP; proposes a 3 percent of GDP increase in expenditures focused on public investment and restoration of key expenditures.
  - Authorities committed to save 100 percent of any further revenue over-performance and to cut expenditures at mid-year if revenues disappoint.
- Monetary policy:
  - BoM halted easing in June after cutting rates by 400 basis points since May 2017 and adopted a tightening bias in September.
  - Authorities committed to further tightening if credit and import growth do not slow.
- Financial sector:
  - Banks to raise new capital as called for by the AQR with a deadline of end-December 2018; systemic, viable institutions unable to meet the deadline will be eligible for conditional public capital; others will be resolved per the Banking law.
  - From 1 January 2019, BoM will order banks not to pay dividends, coupon or principal of Tier 2 instruments, and bonuses to management until banks reach a Tier 1 capital ratio of 11%.
  - BoM to ensure newly issued Tier 2 instruments have early intervention triggers enabling write-down or conversion.
- Macroprudential measures and intervention:
  - Ceilings: 30 months on non-mortgage consumer loans effective January 1, 2019; 70 percent ceiling on DSTI for new non-mortgage consumer loans (effective January 2019).
  - Sales of foreign exchange to be limited to disorderly market conditions; authorities to consider regular and announced FX purchases to support reserve accumulation while preserving exchange rate flexibility.
- AML/CFT:
  - Priority to address APG deficiencies, introduce implementing regulations, and adopt a legal framework to address proliferation financing (structural benchmark end-April 2019).
  - 2019 budget increased AML/CFT funding for the Financial Regulatory Commission and law enforcement agencies.

### OUTLOOK, RISKS, AND SCENARIOS
- Growth and inflation projections:
  - Growth upgraded to 6.2 percent in 2018 (from 5 percent); smaller increase expected in 2019.
  - Inflation expected to remain around 8 percent.
- External balance and reserves:
  - Recovery in private demand, forthcoming fiscal loosening, and deteriorating terms of trade expected to widen the current account deficit in 2019.
  - With tighter credit policies, FX purchases by BoM and donor disbursements are expected to resume, allowing reserves to reach 3.9 billion at end-2019 (5.5 months of imports and 99 percent of ARA).
- Major downside risks:
  - Domestic political pressure for looser macro-policies could jeopardize reserves and program.
  - Disorderly modification of the OT investment agreement could stop OT investment with large macro implications.
  - External demand slowdown, particularly in China, could reduce mineral export prices and volumes; prices on gold and copper are already down 10-15 percent y.o.y.
  - Reversal of China’s increased coal import share would weigh significantly on the balance of payments.
  - Either external shock would require much tighter domestic policies or greater exchange rate depreciation to meet reserve targets.

### FISCAL STANCE, COMPOSITION OF 2019 SPENDING INCREASE, AND PUBLIC DEBT
- Fiscal stance and debt projections:
  - Draft 2019 budget proposes roughly 3 percent of GDP increase in expenditures.
  - Based on current forecasts, primary fiscal surplus of 1 percent of GDP in 2019, down from projected 3.2 percent surplus in 2018.
  - Fiscal stance remains stronger than:
    - target at program approval: -0.4 percent of GDP
    - debt stabilizing level: -5.5 percent of GDP
  - Public debt projections improved: debt now projected to be 5 percentage points lower by end-2018 and 6.5 percentage points lower by end-2019.
  - Authorities committed to save 100 percent of any revenue over-performance and cut expenditures at mid-year if revenues shortfall.
- Composition of 2019 spending increase (Change in Primary Expenditure in 2019, in percent of GDP):
  - Total 3.1
  - Wages and salaries 0.1
  - Other goods and services 0.2
  - Transfers and subsidies 0.3
  - Public Investment 2.7
    - Domestic sources 2.7
    - Central Government 1.2
    - Concession repayment 0.1
    - Local Gov. and Other 1.4
    - Foreign-financed 0.0
  - Net lending (excl. DBM) -0.3
- Specific components:
  - ~1 percent of GDP increase in Central Government spending (reduce air pollution, build schools/hospitals).
  - 1.4 percent of GDP increase in infrastructure spending by Local Governments.
  - 0.1 percentage point increase in clearing unpaid concessions.
  - Public wage bill increased by 16 percent to address reduced purchasing power of public employees.
- Public debt and DSA highlights:
  - Public debt projected to remain high at around 75 percent of GDP at end-2018 but expected to improve significantly under baseline.
  - Public debt-to-GDP ratio forecast to decline by about 32 percentage points between end-2017 and end-2023.
  - At present, 40 percent of public debt on concessional terms; expected to rise to about 60 percent by end of program.
  - Average effective interest rate currently 5.2 percent and projected to fall to about 4 percent by 2020.
- Key numerical projections (selected):
  - Nominal gross public debt: 2016 43.5; 2017 87.6; 2018 83.5; 2019 73.8; 2020 68.6; 2021 66.0; 2022 61.9; 2023 56.1; 50.3.
  - Real GDP growth (baseline): 2018 6.2; 2019 6.3; 2020 4.9; 2021 5.0; 2022 5.2; 2023 5.7.
  - Inflation (GDP deflator, baseline): 2018 8.1; 2019 6.5; 2020 6.5; 2021 6.4; 2022 6.7; 2023 6.3.
  - Primary balance (baseline): 2018 3.2; 2019 1.0; 2020 0.8; 2021 2.0; 2022 2.0; 2023 2.0.
  - Gross reserves: around USD 3 billion (gross official reserves stand at around USD 3 billion; reserves less than 5 months of imports and below 100 percent of ARA metric).
- Stress-test outcomes (high-level):
  - Growth shock: one standard deviation decline in growth in 2019–2020 pushes debt-to-GDP above 80 percent in 2020; gross financing needs in 2020 would rise to almost 15 percent of GDP (vs about 9 percent baseline).
  - Exchange rate shock: roughly 84 percent of the debt is foreign-currency denominated; a real exchange rate depreciation of 25 percent in 2019 would increase debt to above 80 percent of GDP (vs about 70 percent baseline).
  - Primary balance shock: a 15 percentage points of GDP worsening in the primary balance in 2021 would raise public debt to about 70 percent in 2021 and gross financing needs to almost 14 percent of GDP.

### FINANCIAL SECTOR REFORMS, AQR FOLLOW-UP, AND NPLs
- AQR process entering final critical phase; banks have until December to raise new private capital per BoM’s May communication.
  - Systemic, viable institutions unable to meet deadline eligible for conditional public capital; other banks unable to address shortfalls will be resolved.
- Contingency planning advancing to enable swift regulatory response after December deadline.
- NPL classification issue:
  - Banks have not yet classified NPLs in line with AQR findings.
  - Correct classification would significantly increase NPL ratios from current levels of 7-8 percent and necessitate reduction of incurred interest income and capital positions.
  - New capital called for in BoM’s May communication incorporates additional capital need from needed change in NPL classification.
  - Addressing classification will be a focus of the 6th review.
- NPL resolution and legal reforms:
  - Adopted and published NPL resolution strategy (May).
  - Timelines for legal measures: draft bankruptcy law amendments shared by end-September 2018; reformed law to be adopted by end-March 2019 (structural benchmark). Creditor rights amendments to be adopted by end-February 2019; real estate registry, private bailiffs, commercial courts to be implemented by end-April 2019 (structural benchmarks).
- Regulatory timetable:
  - By end-March 2019 amend BoM Regulation on asset classification and provisioning.
  - By end-June 2019 adopt new prudential regulations with select Basel II/III elements.
  - By end-June 2019 issue new regulation on credit origination and risk management.
- Asset Management Company (AMC) stance: decided not to proceed with a public AMC; any AMC pursued will not allow a Mongolian public stake greater than 5 percent nor public lending/guarantees.

### AML/CFT, CORRESPONDENT BANKING, AND SAFEGUARDS
- AML/CFT:
  - Improve AML/CFT framework to preserve correspondent banking relationships.
  - Priority actions: address APG deficiencies, introduce implementing regulations, adopt proliferation financing framework by end-April 2019.
  - 2019 budget increased AML/CFT funding for FRC and law enforcement by 941.6 million MNT.
  - Authorities need to demonstrate effectiveness in AML/CFT enforcement; poor APG rating risked FATF scrutiny.
- Correspondent banking:
  - Several foreign banks withdrew correspondent banking relationships; as of June 2018 no relationships with U.S. banks; Mongolian banks access dollars via regional banks.
- Safeguards and central bank governance:
  - Outstanding issues: timing/modalities for transfer of mortgage program from BoM to MoF not agreed; new internal audit charter drafted but not approved; no firm peer review for internal audit; independent oversight body provided for in revised BoM Law not yet established.
  - Staff engaged on monitoring safeguards developments at BoM.

### FISCAL STRUCTURAL REFORMS AND OTHER PRIORITIES
- Fuel pricing:
  - Concerns: retail prices set by commission that smooths prices via excise taxes; excise tax set at zero in 2017 (import duty 5 percent and VAT 10 percent remain).
  - Staff discussed three-phase plan: Phase I stop smoothing and set retail prices equal to suppliers’ cost recovery with monthly automatic adjustments; Phase II gradually raise excise tax from zero to target rate; Phase III allow full passthrough or resume smoothing with automatic mechanism (example: 3-percent price band).
  - Authorities to develop proposal by year’s end and change policy on fuel prices next year (structural benchmark end-June 2019 proposed).
- Mortgage program:
  - 80 percent of all mortgages subsidized; BOM only makes loans out of repayments while all net increase is on budget (0.4 percent of GDP).
  - Next step: reduce BOM exposure and ensure program fully on budget; focus of next review.
- Development Bank of Mongolia (DBM):
  - Revised DBM law strengthened management and reduced quasi-fiscal spending.
  - Board hired international auditing firm to review 2012-17 operations, expected by mid-December.
  - Explicit QPC on DBM net lending to monitor quasi-fiscal spending; proposal to exclude DBM net lending from primary balance QPC and introduce separate QPC on DBM net lending.
- Social spending:
  - Total social protection roughly 2 percent of GDP (indicative target).
  - Child Money Program > one-third of social spending and covers 80 percent of children.
  - Means-tested targeted programs remain small (0.2 percent of GDP in 2019 budget).
- Unpaid liabilities on concessions:
  - 2015-16 off-budget liabilities on build-transfer projects amounted to roughly 5 percent of GDP.
  - As of end-2018, authorities will have paid off 0.3 percent of GDP of these liabilities and plan to clear another 0.4 percent of GDP in 2019.
- Investment guidelines:
  - TA indicates domestically financed investment tends to be inefficient; authorities committed to issuing a regulation on appraisal and selection of investment projects (structural benchmark, end-December 2018).

### DATA, MONITORING, AND OPERATIONAL PARAMETERS
- Program exchange rate (togrog/U.S. dollar): 2,489.
- U.S. dollar per SDR: 1.35.
- Monetary gold price (U.S. dollar/ounce): 1,142.
- Bank of Mongolia Net International Reserves (NIR) — floor (change in eop stock, million US$ at program exchange rate): reported sequence includes 1,700 2,087 1,900 2,147 2,000 2,137 2,200 2,200 2,500 2,700 2,900.
- Net Domestic Assets (NDA) of BoM — ceiling (eop stock, billion togrog at program exchange rate): reported sequence includes 2,400 1,351 2,700 1,443 2,300 1,663 1,950 1,950 1,800 1,800 1,700.
- Reserve money (ceiling, billion togrog): reported sequence includes 4,000 2,941 4,400 3,420 4,600 3,706 4,750 4,750 4,900 4,900 5,000.
- Primary balance of the general government (floor, cumulative since beginning of fiscal year, in billion togrog): figures shown include -3776 37240948 -20.
- Social spending (floor, cumulative since beginning of fiscal year, in billion togrog): figures shown include 1,387 1,201 2,841 2,594 4,287 3,843.
- Stock of guarantees on external debt (ceiling, eop stock, million US$): 750 648 750 634 750 573 750 750 750 750 750.
- Memorandum items:
  - Budget support from bilateral and multilateral donors excluding Fund (eop stock, cumulative, million US$): 603 603 703 703 753 706 753 753 1,096 1,096 1,155.
  - Net nonconcessional borrowing received and repatriated by the general government under program baseline (eop stock, cumulative, million US$): 306 306 160 160 160 160 160 160 160 160.

### STAFF APPRAISAL, RECOMMENDATIONS, AND REQUEST
- Assessment:
  - Strategy broadly successful; authorities ahead of original program projections.
  - Pace of macro adjustment has slowed and there have been significant reversals on some structural reforms.
  - Main near-term challenge: implement sufficiently tight macro policy mix while completing AQR follow-up.
- Staff recommendations and requests supported:
  - Support waiver and modification of performance criteria (modify primary balance performance criterion, add DBM net lending performance criterion, modify social spending indicative target) and recommend completion of the fifth review.
  - Authorities requested completion of the fifth review and to draw one tranche amounting to SDR 26.2088 million.
- Key program actions recommended:
  - Be ready to raise policy rates and tighten credit conditions in the next MPC meeting if credit and import growth do not slow and reserve and exchange rate pressures continue.
  - Increase exchange rate flexibility to preserve competitiveness.
  - Continue expenditure restraint and strengthen tax administration while protecting social spending.
  - Ensure banks fully recapitalized by end-December; strengthen supervision, legislative/regulatory framework for NPLs, and AML framework.

*Source: cr18303 (IMF staff report and annexes as provided).*

### 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 about $425 million).
- The arrangement is part of a $5.5 billion multi-donor financing package that supports the authorities’ Economic Recovery Plan.
- The extended arrangement is subject to quarterly reviews.

### Recent developments
- Growth and macro trends:
  - Economic growth remains strong at just above 6 percent for the last three quarters.
  - Real GDP growth in Q2-2018 was slightly above 6 percent, the third quarter in a row.
  - Inflation has hovered around the 8 percent informal target.
- Fiscal:
  - Primary balance through August reached a surplus of 5.3 percent of GDP, up from 3.1 percent in June.
  - Revenues increased by 31 percent year-to-date, driven by mineral exports and investment-related imports (VAT).
  - Primary balance projected to reach a surplus of 3.2 percent of GDP by end-year (compared with a 0.2 percent primary deficit target from the fourth review and -2.5 percent in the original program).
  - Authorities submitted a budget for 2019 targeting a primary surplus of 1 percent of GDP and propose a 3 percent of GDP increase in expenditures for investment recovery.
  - Authorities committed to save 100 percent of any further revenue over-performance and to cut expenditures by mid-year if revenues disappoint.
- External sector and reserves:
  - Reserves increased in 2017 by $1.8 billion to reach $3 billion, or 74 percent of the ARA metric.
  - In 2018, reserves stalled and began to decline; the exchange rate depreciated by 5.4 percent.
  - Bank of Mongolia sold $334 million of gross international reserves (10 percent of total) since end-May.
- Credit and financial sector:
  - Bank lending accelerated to 20 percent y/y in recent data (excluding principal in arrears and non-performing loans); corporate lending recovered to 15 percent in May (up from 2 percent in February).
  - Bank of Mongolia policy responses included:
    - June announcement of a ceiling of 70 percent on debt service-to-income ratios for all new non-mortgage consumer loans (effective January 2019).
    - September increase in the risk weight on unhedged FX lending from 120 percent to 150 percent and introduction of a 30-month maturity limit on non-mortgage consumer loans (prior action for this review).
    - Adoption of a tightening bias in the September MPC (prior action for this review).
  - Asset Quality Review (AQR) milestones:
    - January: third-party auditors completed assessment; system-wide shortfall of 1.9 percent of GDP based on Q3 2017 balance sheets.
    - May: updated projected capital need at end-2018 increased to 3.1 percent of GDP.
    - June: Parliament passed the Recapitalization Law (Law on Ensuring Banking Sector Stability) enabling conditional public capital for systemic banks.
    - September: banks booked all additional provisions called for by the AQR (adjusted only by loans that were repaid) and required to submit updates on capital raised and plans to meet remaining shortfalls by end-December (both prior actions).
    - Remaining gap: banks have not re-classified non-performing loans in line with AQR findings (structural benchmark end-June).
- Structural reforms and governance:
  - Two tax administration bills were submitted in May (completing a structural benchmark originally due in October 2017) but failed to come to a vote and will be re-submitted in the fall session.
  - Missed end-June indicative floor on social protection spending; authorities indicated full 2 percent of GDP social protection spending (new definition) would be allocated by end-year.
  - Child Money Program coverage increased from 60 to 80 percent at a cost of 0.1 percent of GDP, to be financed by cutting the “Poverty Benefit Program”.
  - Audit of concessions contracts was completed after the end-August due date.
  - Setbacks included reversing the increase in the pension age, eliminating excise taxes on fuel, reversing the increase in upper income personal tax rates, and establishing a Fiscal Council without sufficient independence.
  - Passage in 2017 of new laws for the Development Bank of Mongolia and the Bank of Mongolia remains a major achievement to prevent further quasi-fiscal spending.
- AML-CFT:
  - Amendments to the AML law and the Law on Infringements were passed to address Asia Pacific Group on Money Laundering (APG) concerns, but not in time for reassessment at the July 2018 APG plenary.
  - Low APG ratings attracted FATF scrutiny; risk of public listing by FATF in October 2019 if shortcomings persist.
  - Several foreign banks have withdrawn correspondent banking relationships; as of June 2018 there are no relationships with U.S. banks and all Mongolian banks access dollars via regional banks.

### Program performance
- All quantitative performance criteria (QPCs) for which data is available have been met.
- Data unavailable for the QPC on primary balance of the general government for end-September; expected to be met by a large margin.
- Of four structural benchmarks due, two are expected to be met by the Board date and two are expected to be completed in coming months.
- Authorities request, and staff supports, a waiver of applicability for the end-September QPC target on the primary balance of the general government due to unavailable data.
- Prior actions: three of four prior actions for this review completed (two related to reining in strong credit growth and one to ensure banks book all additional provisions called for by the AQR); the fourth prior action is pending and requires submission of detailed updates regarding capital raised to date and how remaining shortfalls will be met by end December.

### Policies
- Fiscal policy:
  - 2019 budget submitted targeting a primary surplus of 1 percent of GDP.
  - Proposal includes a 3 percent of GDP increase in expenditures to recover investment.
  - Commitment to save 100 percent of any further revenue over-performance and to cut expenditures by mid-year if revenues disappoint.
- Monetary policy:
  - Authorities committed to further tightening the monetary stance in coming months if credit and import growth does not slow down.
  - BOM halted the easing cycle in June after cutting rates by 400 basis points since May 2017 and adopted a tightening bias in September.
- Financial sector:
  - Banks are in the process of raising new capital as called for by the AQR, with a deadline of end-December.

### Outlook and risks
- Growth forecasts:
  - Growth projections upgraded to 6.2 percent in 2018 (from 5 percent); smaller increase expected in 2019.
  - Inflation expected to remain around 8 percent.
- External balance and reserves:
  - Recovery in private demand, forthcoming fiscal loosening, and deteriorating terms of trade expected to widen the current account deficit in 2019.
  - With tighter credit policies, FX purchases by BOM and donor disbursements are expected to resume, allowing reserves to reach 3.9 billion (5.5 months of imports and 99 percent of ARA) at end 2019.
- Downside risks:
  - Domestic Political Consensus:
    - Political pressure for looser macro-policies (higher public spending, more exchange rate intervention, lower interest rates) could jeopardize reserves and the program.
    - Risk of disorderly modifications to the investment agreement underlying the OT mine could trigger a stop in OT investment with large macro implications.
  - External Demand:
    - A slowdown in global growth, particularly in China, could reduce prices and volumes of mineral exports.
    - Prices on gold and copper are already down 10-15 percent y.o.y.
    - A reversal of China’s increased coal import share would weigh significantly on Mongolia’s balance of payments.
    - Either development would require much tighter domestic policies or greater exchange rate depreciation to meet reserve targets.

### Program policies and strategy
- Program strategy objectives:
  - Secure macro stability using global tailwinds, concessional donor support, and fiscal adjustment to reduce public debt and build foreign exchange reserves while containing inflation.
  - Improve durability of adjustment with structural reforms to strengthen the banking system and reduce quasi-fiscal risks.
  - Protect spending on the most vulnerable and increase its efficiency.
- Assessment:
  - Strategy broadly successful with authorities ahead of original program projections.
  - Pace of macro adjustment has slowed and there have been significant reversals on some structural reforms.
  - Main near-term challenge: implementing a sufficiently tight macro policy mix while completing follow-up to the AQR.

*IMF staff visit and review context as of October 16, 2018.*

### 11.      The proposed 2019 fiscal stance represents a substantial loosening but still delivers a

### 11.      The proposed 2019 fiscal stance represents a substantial loosening but still delivers a 

### Fiscal stance and debt projections
- Draft 2019 budget proposes a roughly 3 percent of GDP increase in expenditures.
- Based on current forecasts, this will result in a primary fiscal surplus of 1 percent of GDP, down from a projected 3.2 percent surplus this year.
- Fiscal stance remains stronger than:
  - target at program approval: -0.4 percent of GDP
  - debt stabilizing level: -5.5 percent of GDP
- Public debt projections improved: debt is now projected to be 5 percentage points lower by end-2018 and 6.5 percentage points lower by end-2019 (See Annex II – Public DSA).
- Authorities committed to:
  - save 100 percent of any revenue over-performance
  - cut expenditures at mid-year if there is a revenue shortfall

### Composition of the 2019 spending increase
- Primary driver: public investment and restoration of key expenditures after two years of compression.
- Change in Primary Expenditure in 2019 (in percent of GDP):
  - Total 3.1
  - Wages and salaries 0.1
  - Other goods and services 0.2
  - Transfers and subsidies 0.3
  - Public Investment 2.7
    - Domestic sources 2.7
    - Central Government 1.2
    - Concession repayment 0.1
    - Local Gov. and Other 1.4
    - Foreign-financed 0.0
  - Net lending (excl. DBM) -0.3
- Specific components:
  - roughly 1 percent of GDP increase in Central Government spending (focused on reducing air pollution and building schools and hospitals)
  - 1.4 percent of GDP increase in infrastructure spending by Local Governments
  - 0.1 percentage point increase in the rate of clearing unpaid concessions
  - public wage bill increased by 16 percent to address reduced purchasing power of public employees over the last 5 years
- Authorities note proposed expenditure level remains substantially below pre-program years, particularly when previous quasi-fiscal spending is considered.

### Monetary, credit, and macroprudential policy
- Tighter monetary and credit policies will be needed to keep fiscal easing consistent with program goals.
- Authorities have begun tightening domestic financial conditions (announcements in June and September Monetary Policy Committee meetings).
- Higher policy rates will likely be necessary to prevent overheating and support the balance of payments.
- Macro-prudential tools:
  - Useful but two concerns remain:
    - 70 percent floor in the DSTI is still relatively accommodative and should be tightened further.
    - When facing balance of payments pressures, macro-prudential measures should complement, not substitute, an appropriately tight monetary policy stance.

### Exchange rate flexibility and external adjustment
- Greater exchange rate flexibility will be necessary to address a still large external imbalance.
- Recent FX interventions aimed to stem togrog weakness amid thin markets to avoid disorderly depreciation.
- Real effective exchange rate has appreciated by 7 percent in the year through July.
- Consequences of real appreciation:
  - losing competitiveness on the export side (particularly non-mining sectors such as agribusiness)
  - boosting demand for imports
- Authorities committed to consider regular and announced foreign exchange purchases to support reserve accumulation while preserving exchange rate flexibility.
- Agreed that sales of foreign exchange should be limited to disorderly market conditions.

### External position metrics and outlook
- Net international investment position (IIP): -270 percent of GDP.
- Weak IIP primarily reflects large external debt for the private sector and significant foreign liabilities of the Central Bank.
- Staff assessment: external position changed from broadly in line to weaker than fundamentals (See Annex 1—External Sector Assessment).
- While future mining output (OT and other mines) could solve external imbalance, tighter policies and greater exchange rate flexibility are important in the interim.

### Financial sector reforms and AQR follow-up
- AQR process entering final and most critical phase.
- Banks have until December to raise new private capital per BOM’s May communication.
  - Systemic, viable institutions unable to meet the deadline will be eligible for public capital, subject to strict conditions.
  - Other banks unable to address shortfalls will be resolved consistent with the Banking law.
- Contingency planning is advancing to enable swift regulatory response after the December deadline.
- Current NPL classification issue:
  - Banks have not yet classified non-performing loans in line with AQR findings.
  - Correct classification would significantly increase NPL ratios from current levels of 7-8 percent and necessitate reduction of incurred interest income and capital positions.
  - New capital called for in BOM’s May communication incorporates additional capital need from the needed change in NPL classification.
  - Addressing this classification will be a focus of the 6th review.
- Post-recapitalization focus: strengthen supervision and regulation and improve NPL resolution framework (several structural benchmarks throughout 2019).

### AML/CFT and correspondent banking
- Improving AML/CFT framework is a major priority to preserve correspondent banking relationships.
- Priority actions:
  - promptly address main deficiencies identified by the Asia Pacific group
  - introduce implementing regulations for recently passed AML laws
  - introduce a new legal framework to address proliferation financing (structural benchmark end-April 2019)
- 2019 budget increased AML/CFT funding for the Financial Regulatory Commission and other law enforcement agencies.
- Authorities need to demonstrate effectiveness in AML/CFT enforcement.

### Fiscal structural reforms agenda
- Fuel prices:
  - Concerns: prices do not adjust frequently to world oil prices; excise taxes on fuel are zero.
  - Staff discussed a three-phase plan; authorities to develop a proposal by year’s end and change policy on fuel prices next year (structural benchmark, end-June 2019).
- Mortgage program:
  - 80 percent of all mortgages are subsidized.
  - Under the program, BOM only makes loans out of repayments while all net increase is on budget (0.4 percent of GDP).
  - Next step: reduce BOM’s exposure and ensure program fully on budget; focus of next review.
- Development Bank of Mongolia (DBM):
  - Revised DBM law strengthened management and reduced quasi-fiscal spending.
  - Board hired an international auditing firm to review 2012-17 operations, expected by mid-December.
- Social spending:
  - Total social protection roughly 2 percent of GDP (indicative target).
  - Child Money Program accounts for more than one-third of social spending and covers 80 percent of children.
  - Means-tested targeted programs remain small (0.2 percent of GDP in 2019 budget).
- Unpaid liabilities on concessions:
  - 2015-16 off-budget liabilities on build-transfer projects amounted to roughly 5 percent of GDP.
  - As of end-2018, authorities will have paid off 0.3 percent of GDP of these liabilities and plan to clear another 0.4 percent of GDP in 2019.
- Investment guidelines:
  - TA indicates domestically financed investment tends to be inefficient; public investment guidelines inadequate.
  - Authorities committed to issuing a regulation on appraisal and selection of investment projects (structural benchmark, end-December 2018).

### Program modalities, conditionality, and financing
- Progress on conditionality:
  - All QPCs for which data is available have been met.
  - Mission supports a waiver of applicability for the end-September QPC on the primary balance of the general government due to data unavailability (expected to be met by a large margin).
  - Fiscal structural benchmarks expected: finalize audit of completed concession projects and meet operational guidance benchmark on tax compliance by board date.
  - Financial sector: part of a benchmark completed—booking necessary provisioning gaps from the AQR—but asset reclassification not yet done.
  - Structural benchmark on improving asset classification regulations (originally end-September) will be completed in early 2019.
  - June: authorities completed structural benchmark on finalization and publication of NPL resolution strategy.
- Proposed modifications:
  - QPCs: adjust primary balance target to reflect strong outturns and new TMU definitions; introduce new target for DBM net lending; set QPCs for March 2019.
  - Indicative target: adjust quarterly path of indicative spending floor on social spending starting end-December to capture seasonal patterns and TMU definition changes.
  - Structural benchmarks: authorities requested more time for fuel price reform, creditor rights amendments, and adoption of new prudential regulations incorporating select Basel II elements.
  - TMU: change primary balance QPC to exclude DBM net lending; introduce separate QPC explicitly on DBM net lending; revise social spending definition in the indicative target to include only social protection (excluding social insurance, education, and health).
- Program financing changes and reserve projections:
  - World Bank 2018 disbursement now expected in Q1 2019 instead of late 2018; linked Japan disbursement also delayed into 2019, with a similar delay for the 2019 disbursement into 2020.
  - World Bank total program commitment moderated from $600 million to $450 million.
  - Some Korea-related flows now expected after program end in 2020.
  - Program remains fully financed for the next 12 months with good prospects thereafter.
  - Gross reserves expected to reach USD 3.9 billion in 2019 (5.5 months of imports, 99 percent of the ARA metric), above $3.5 billion projected at program approval.

### Safeguards and central bank governance
- Implementation of outstanding 2017 safeguards assessment recommendations has slowed.
- Outstanding issues:
  - Timing and modalities for transfer of the mortgage program from BOM to MOF not yet agreed.
  - New internal audit charter drafted but not approved by management.
  - No firm agreements reached on a peer review of internal audit with another central bank.
  - Independent oversight body provided for in revised BOM Law not yet established.
- Staff remain engaged on monitoring safeguards developments at the BOM.

### Staff appraisal, risks, and recommendations
- Macroeconomic performance:
  - Economic recovery continues to be robust; macroeconomic outcomes have exceeded expectations due to strong external demand and expenditure restraint.
  - Fiscal and reserve targets under the program are expected to be met.
- Key risks to the program:
  - lower external demand for commodities
  - rising domestic pressures to loosen fiscal and monetary policies
  - adverse changes to the investment climate
  - resistance from vested interests
- Reserves and policy stance:
  - After strong reserve accumulation in 2017, progress stalled and reversed with BOM reserves declining for the first time since program start.
  - Gross reserves are at 76 percent of the ARA metric.
  - Authorities should be ready to raise policy rates and tighten credit conditions in the next MPC meeting if credit and import growth do not slow and reserve and exchange rate pressures continue.
  - Greater exchange rate flexibility is recommended to preserve competitiveness, especially with a strong US dollar.
- Fiscal policy:
  - Continued expenditure restraint and strengthening of tax administration, while protecting social spending, are key.
  - Improve public financial management, especially concerning concessions, public investment, and DBM operations.
- Banking sector:
  - Ensuring banks are fully capitalized by end-December is crucial to restore confidence.
  - Sustaining success requires stronger supervision, legislative and regulatory changes for NPLs, and strengthening AML framework.
- Staff recommendation:
  - Supports waiver and modification of performance criteria (modification of the primary balance performance criterion, addition of the DBM net lending performance criterion, and modification of the social spending indicative target) and recommends completion of the fifth review.

*Source: cr18303 - 11.      The proposed 2019 fiscal stance represents a substantial loosening but still delivers a*

### Box 1. Wage Bill

### Box 1. Wage Bill

### Recent Developments
- Real wages of the public and private sector grew sharply in the early part of the decade, rising by 48 percent in 2011–13.
- Since then, private sector wages have risen another 10 percent (cumulative 76 percent since 2010).
- The civil service has seen its real wages contract by 15 percent through August 2018.
- Public employment has grown by a cumulative 25 percent, mainly due to a sharp increase in 2014 and reflecting a significant expansion of lower-wage support positions.
- The real public-sector wage bill in 2018 is still 62 percent higher than it was in 2010.
- Almost all of the increase in the wage bill stems from the sharp rise in wages in the early part of the decade; since then, the impact of steadily rising employment has been mostly offset by falling real wages particularly in 2014 and again in 2017-18.

### Planned Wage Adjustments
- Labor unions have demanded a 50-percent wage increase for civil servants.
- The government announced two salary adjustments after consultation with Fund staff:
  - an average nominal raise of around 9 percent from September 1, 2018;
  - another nominal salary increase of roughly 8 percent in 2019.
- The adjustment will be larger for teachers, nurses, and other low-wage civil servants who have experienced the largest drop in purchasing power.
- Although much lower than the 50 percent demanded by the union, the current plan can reduce the salary gap between private and public sectors, and help relieve the shortage of civil servants, particularly to staff newly built hospitals and schools.

### Adjustment under the Program and Comparisons
- Adjustment under the program, together with the economic recovery and favorable external environment, brought down the wage bill from expensing more than 30 percent of revenues in 2016 to 22 percent in 2017.
- In light of the economic recovery, the proposed adjustments are not projected to raise the total wage bill as a percent of government revenues in 2018 and 2019.
- Mongolia’s wage bill is expected to remain lower than peers, whether measured as a percent of GDP, expenditure, or revenues.
- The current lower level is viewed as appropriate because revenues follow commodity cycles and are highly volatile.
- A lower average civil servant salary than peers may be appropriate if the Mongolian civil service requires a higher share of support service staff, such as teachers and medical workers, who typically receive lower wages than other civil servants.

### Future Challenges
- Recurrent changes in leadership have led to frequent reorganization of key ministries, compromising meritocratic principles in recruitment and promotion.
- A centralized personnel and payroll system is needed to improve monitoring, control and data collection by the Ministry of Finance.
- The complex pay structure with various supplementary payments should be reviewed and simplified to improve grading and efficiency.
- The government approved the Civil Service Law in December 2017; effective implementation of the new law is a key stepping stone for further reforms in civil service.

*Source: cr18303 - Box 1. Wage Bill.*

### Box 2. Fuel Pricing in Mongolia

### Box 2. Fuel Pricing in Mongolia

### Current Status
- Retail fuel prices in Mongolia are set by a commission consisting of the government, retailers, unions and civil society.
- The commission occasionally adjusts the retail price but not in the same frequency or magnitude as changes in supplier costs (e.g. import prices).
- The commission seeks to smooth retail prices by adjusting excise taxes.
- Consequence: during periods of particularly elevated import prices (e.g. 2014), the retail price can be too low for suppliers to cover costs.
- Increases in import prices in 2017 led the authorities to reduce taxes, setting the excise tax at zero (there is still an import duty of 5 percent and VAT of 10 percent).
- Supplier cost recovery is defined as import price plus fixed operational costs and profit margin.

### Policy Concerns
- Investment Climate/Growth
  - The lack of a transparent pricing system which preserves supplier margins can lead to fuel shortages, hurting economic growth.
- Tax Revenue
  - Given the low elasticity of fuel consumption, taxes on fuel are an important source of revenue, particularly for highly indebted governments.
- Administrative Burden
  - Given the frequency of changes in market conditions, an automatic pricing formula is preferred to price setting on an ad hoc basis by a committee.
- Environmental Costs
  - Below-cost recovery fuel prices, including low taxes, lead to over-consumption of fuel, which is particularly costly given the pollution and congestion in Ulan Bator.

### Potential Solutions (Three-Phase Approach)
- Phase I – Stop Smoothing
  - Retail prices should immediately be set equal to suppliers’ cost recovery (import price plus fixed operational costs and profit margin) at current tax rates, automatically adjusting each month.
  - Objective: avoid fuel shortages by preserving supplier margins.
- Phase II – Gradually Close Tax Gap
  - The automatic formula should be augmented to incorporate a gradual rise in excise tax rate, on a fixed schedule, from zero to a target rate that balances fiscal and environmental considerations.
- Phase III – Allow Full Passthrough or Resume Smoothing
  - Once the target tax rate has been reached, the authorities can either allow for a full pass through of costs without smoothing or resume smoothing but with an automatic mechanism to protect supplier margins and tax revenue.
  - Example mechanism: the 3-percent price band mechanism which sets retail price changes to a maximum of 3 percent.

*International Monetary Fund — Box 2. Fuel Pricing in Mongolia (from the source PDF).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### External position and NIIP
- Staff judge the external position to be weaker than fundamentals.
- Mongolia’s net international investment position is weak at -270 percent of GDP.
- Gross FX reserves are only 25 percent of GDP.
- External debt is very high at 240 percent of GDP.
- Assessment: Such large external leverage could still be consistent with external solvency and a broadly stable exchange rate over the long-term if Mongolia can maintain an adequate investment climate and sufficiently tight macro policies to turn its physical commodity wealth into foreign financial assets.
- Risk: Despite significant underground reserves, there is only one major mining project in the country (OT) and even that is increasingly at risk due to ongoing investment disputes.

### Gross official reserves, current account, and import dynamics
- Gross official reserves stand at around USD 3 billion.
- Reserves are less than 5 months of imports and below 100 percent of the Fund’s ARA metric.
- Reserve changes partly reflect large foreign liabilities including expensive swap agreements from China rolled over during the program.
- Reserve accumulation stalled and partially reversed in 2018 due to delays in donor disbursements stemming from weak program performance and weakness in the current account amid strong imports and declining terms of trade.
- Current account dynamics:
  - The current account deficit primarily reflects FDI-related imports, but is widening at the margin due to an acceleration in consumer imports.
  - Consumer imports are funded by 25 percent y.o.y. consumer credit growth.

### EBA-lite assessment and real exchange rate
- The macro balance approach of the External Balance Assessment Lite (EBA-lite) shows:
  - In 2017 the current account was a 10 percent of GDP deficit, weaker than the norm (CA Norm-5.6%...).
  - CA model: Actual CA-10.4%..., CA Norm-5.6%..., CA gap (model)-4.8%...
  - Policy gap component: o/w policy gap2.7%...
  - CA gap (staff-assessed) 1/-3.9%...
  - Elasticity-0.44...
  - REER gap8.9%-10.0%
- Interpretation: The current account in 2017 was weaker than fundamentals and hence the exchange rate was stronger than fundamentals would suggest, though part of the large current account deficit is overstated because it includes mining related imports that will improve the long-run trade balance.
- On the back of the nearly 25 percent depreciation of the togrog in 2016, direct estimates of the REER using EBA-lite find that the exchange rate is weaker than fundamentals.
- The large price adjustment did not reduce the current account deficit as expected because of the increase in FDI related imports and the large increase in household credit which helped maintain purchasing power.
- Adjustment note: 1/ Adjustment of -0.9% is included to account for higher imports due to the drought.

---

### Annex II. Public Debt Sustainability Analysis

### Baseline outlook and key assumptions
- Public debt projected to remain high at around 75 percent of GDP at end-2018 but expected to improve significantly under the baseline.
- Improvement driven by projections of high nominal growth, concessional financing, and strong fiscal performance under the program.
- Baseline assumptions:
  - Real GDP growth is expected to remain anchored around 5-6 percent.
  - Inflation is expected to remain at or below the target of 8 percent.
  - The exchange rate is assessed to be broadly in line with fundamentals and is expected to remain broadly stable over the forecast horizon.
  - Financing assumes concessional budget support and project loans in line with current commitments (see para ¶20 of staff report).
  - The primary balance is projected to remain in surplus between 2018 and 2023.

### Debt dynamics and interest-growth differential
- The public debt-to-GDP ratio is forecast to decline by about 32 percentage points between end-2017 and end-2023.
- Decline is almost entirely due to automatic debt dynamics given projected low interest rates and high economic growth.
- At present, 40 percent of public debt is on concessional terms and this is expected to rise to about 60 by the end of the program.
- The average effective interest rate of public debt is currently 5.2 percent and projected to fall to about 4 percent by 2020.
- Effective interest rate (table): 2016 2.7 2017 6.6 2018 5.2 2019 4.1 2020 4.6 2021 3.1 2022 3.6 2023 2.7 (as shown in the projections table and figures).

### Forecast track record and risks to primary balance
- Historically, Fund staff forecasts have been broadly reasonable on growth and inflation but too optimistic on the primary balance.
- Forecast error for primary balance has been significant—with actual primary deficits being much higher than projected.
- Risk mitigation: Continuation of the program can mitigate the risk of a sizable deviation of the primary balance from baseline projections in the near term, but this remains a material risk beyond the program horizon.
- The primary balance shock scenario envisions a significant increase in the primary deficit to reflect this risk.
- Boom-bust analysis suggests growth forecast is not optimistic.

### Sensitivity to shocks (scenarios and outcomes)
- Growth shock:
  - Assuming a decline in growth by one standard deviation in 2019 and 2020, the debt-to-GDP ratio is forecast to reach above 80 percent in 2020, reversing improvements.
  - Gross financing needs in 2020 would rise to almost 15 percent of GDP compared to about 9 percent of GDP in the baseline.
- Exchange rate shock:
  - Roughly 84 percent of the debt is foreign-currency denominated.
  - A real exchange rate depreciation of 25 percent in 2019 would increase debt to above 80 percent of GDP, compared to about 70 percent projected under the baseline.
- Primary balance shock:
  - A 15 percentage points of GDP worsening in the primary balance relative to the baseline in 2021 would raise public debt to about 70 percent in 2021, and gross financing needs to almost 14 percent of GDP.

### Uncertainty and fan charts
- Symmetric fan chart width is estimated at about 60 percent of GDP, illustrating significant uncertainty for equal-probability upside and downside risks.
- Asymmetric fan chart restricts upside shock to primary balance to zero, reflecting downside skew in risks (upside to primary balance restricted to zero).

### Debt profile and mitigating factors
- Weaknesses:
  - External financing needs are above the upper-risk assessment benchmark driven by Mongolia’s large current account deficit.
  - Public debt in foreign currency is also above the upper-risk assessment benchmark: 84 percent vs. 60 percent.
- Mitigating factors:
  - Macro performance under the program continues to be strong.
  - Authorities have rolled-over external bonds maturing in 2017 and 2018 at much lower interest rates than before.
  - Private and official inflows have boosted gross reserves significantly.
  - Authorities face no external maturities on international bonds until 2021.

### Key numerical projections and indicators (selected from tables/figures)
- Nominal gross public debt: 2016 43.5 2017 87.6 2018 83.5 2019 73.8 2020 68.6 2021 66.0 2022 61.9 2023 56.1 50.3 (table layout preserved).
- Public gross financing needs: 2016 4.8 2017 17.0 2018 5.4 2019 10.7 2020 8.4 2021 2.8 2022 3.7 2023 7.0 6.5.
- Real GDP growth projections (baseline): 2018 6.2 2019 6.3 2020 4.9 2021 5.0 2022 5.2 2023 5.7.
- Inflation (GDP deflator, baseline): 2018 8.1 2019 6.5 2020 6.5 2021 6.4 2022 6.7 2023 6.3.
- Primary balance (baseline): 2018 3.2 2019 1.0 2020 0.8 2021 2.0 2022 2.0 2023 2.0.
- Effective interest rate (table): 2018 4.1 2019 4.6 2020 3.1 2021 3.6 2022 2.7 2023 3.2.
- Debt change cumulative: Change in gross public sector debt cumulative -33.2; Identified debt-creating flows cumulative -44.4; Automatic debt dynamics cumulative -33.4.

---

### Stress Tests, Alternative Scenarios and Risk Assessment

### Alternative scenarios (selected underlying assumptions)
- Historical scenario: Real GDP growth 2018 6.2 2019 7.1 2020 7.1 2021 7.1 2022 7.1 2023 7.1; Inflation same as baseline; Primary Balance 2018 3.2 then -4.3 each year.
- Constant Primary Balance Scenario: Primary Balance 3.2 each year 2018-2023; other variables similar to baseline.
- Primary Balance Shock scenario: Primary balance turns to -13.0 in 2021 in the shock path shown; Real GDP growth path largely unchanged.
- Real GDP Growth Shock scenario: Real GDP growth path shows 2019 0.5 and 2020 -0.8 in the shock scenario.
- Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock: each shown with specific alternative effective interest rates, inflation, and primary balance paths in figures.

### Stress test outcomes (high-level)
- Gross nominal public debt and gross financing needs can rise sharply under shocks:
  - Under the Real GDP growth shock, debt rises above baseline and gross financing needs spike.
  - Under Primary Balance shock and Combined Macro-Fiscal shock, debt and financing needs increase strongly, with gross financing needs reaching double-digit percentages of GDP in some scenarios.
- Heat-map style risk assessment highlights:
  - Public debt in foreign currency at 84 percent (above 60 percent upper benchmark).
  - Gross financing needs, external financing requirement, bond spreads, and public debt held by non-residents are key vulnerabilities (values shown in figures and tables).

---

### Annex III. External Debt Sustainability Analysis

- Mongolia has extremely high external debt.
- Causes:
  - Significant capital needs of the mining sector.
  - Relatively loose fiscal and monetary policy over the last decade.
- While short-term external debt appears low, large foreign obligations in coming years will weigh on the external position.

*Source: IMF staff (Annex I–III, "Annex I. External Sector Assessment"; "Annex II. Public Debt Sustainability Analysis"; "Annex III. External Debt Sustainability Analysis").*

### 1.      In the last 10 years, Mongolia’s external debt has risen from 40 to over 240 percent of

### 1.      In the last 10 years, Mongolia’s external debt has risen from 40 to over 240 percent of

### External debt trends and drivers
- External debt rose from 40 to over 240 percent of GDP in the last 10 years.
- Primary drivers:
  - High investment rates (rather than low savings) producing large current account deficits (average of 14 percent of GDP).
  - Investment needs: large mining-related capital needs, public capital spending, and real estate building booms.
- 2016 specific drivers:
  - Dramatic widening in the fiscal stance due to large public investment outlays.
  - Togrog depreciated by 25 percent.
- 2017 specific drivers:
  - Investment resumed in the second phase of the Oyu Tolgoi mining project; a significant portion financed by inter-company loans.
  - Authorities borrowed about 10 percent of GDP from multilateral and bilateral official sectors to replace high cost domestic financing and improve debt sustainability.

### Main borrowers and composition (percent of GDP)
- Intercompany loans: 70 percent of GDP (almost entirely mining sector related; 80% of total intercompany lending is mining-related).
- Other corporate borrowing: roughly 70 percent of GDP (mix of mining and construction/real estate).
- Government: 63 percent of GDP (roughly evenly split between concessional loans from the official sector and international bonds).
- Central Bank and banks hold foreign liabilities to a significantly lesser degree (details below).

### Public and private financial sector foreign liabilities
- Central Bank:
  - Between 2013 and 2016, drew on swap line with the PBOC to support the exchange rate during weak terms of trade and loose macro policies.
- Private banks:
  - Borrowed abroad to support lending: 20 percent of GDP and 20 percent of bank liabilities.
  - One quarter of bank liabilities are to international organizations.

### Short-term external debt and amortization risk
- Short-term external debt (original maturity basis): 12 percent of GDP and only 40 percent of gross reserves.
- Spikes in short-term external debt by remaining maturity are mostly driven by amortization of medium- and long-term external debt.
- Such maturities are low in both 2018 and 2019, so external amortization is expected to remain manageable.
- No expected risks from short-term inter-company loans.

### Debt sustainability assessments and scenario projections
- Statement: External leverage is appropriate to some degree for Mongolia but the extent of foreign liabilities leaves Mongolia at risk going forward.
- Appropriateness:
  - Significant external borrowing to increase mining export potential is appropriate.
  - Use of inter-company loans for mining reduces risks around such borrowing.
  - Recent government borrowing on concessional terms to replace high-cost and short-maturity domestic borrowing lowers overall risks.
- Concerns:
  - At 240 percent of GDP, external borrowing has likely also been used to support excessive domestic demand and runs the risk of a correction in future years.
- Historical and projected totals (selected years, external debt in percent of GDP):
  - 2011: Total 105
  - 2012: Total 140
  - 2013: Total 158
  - 2014: Total 179
  - 2015: Total 193
  - 2016: Total 221
  - 2017: Total 247
- Baseline projection of external debt (in percent of GDP):
  - 2013: 157.6
  - 2014: 178.7
  - 2015: 193.3
  - 2016: 220.7
  - 2017: 246.9
  - 2018: 221.7
  - 2019: 209.4
  - 2020: 194.9
  - 2021: 180.3
  - 2022: 157.7
  - 2023: 137.8
- Change in external debt (in percent of GDP):
  - 2013: 17.4
  - 2014: 21.1
  - 2015: 14.6
  - 2016: 27.3
  - 2017: 26.2
  - 2018: -25.2
  - 2019: -12.4
  - 2020: -14.5
  - 2021: -14.7
  - 2022: -22.5
  - 2023: -19.9
- Identified external debt-creating flows and components (selected items, in percent of GDP):
  - Current account deficit, excluding interest payments (series shows large negative values in some years; specific table entries partially truncated in source).
  - Net non-debt creating capital inflows (negative): 2013: -16.7; 2014: -2.3; 2015: -0.9; 2016: 3.7; 2017: 4.8; 2018: -9.2; 2019: -10.2; 2020: -7.6; 2021: -9.5; 2022: -13.5; 2023: -13.9.
  - Automatic debt dynamics contributions (selected): 2013: 0.4; 2014: 10.9; 2015: 15.0; 2016: 19.5; 2017: 12.0; 2018: -5.9; 2019: -3.3; 2020: -0.9; 2021: -1.2; 2022: -1.4; 2023: -2.0.
  - Contribution from nominal interest rate (selected): 2013: 3.8; 2014: 6.3; 2015: 7.7; 2016: 9.3; 2017: 11.5; 2018: 7.5; 2019: 9.3; 2020: 8.5; 2021: 7.7; 2022: 7.1; 2023: 6.1.
  - Contribution from real GDP growth (selected): 2013: -15.9; 2014: -12.8; 2015: -4.4; 2016: -2.4; 2017: -11.2; 2018: -13.4; 2019: -12.6; 2020: -9.4; 2021: -9.0; 2022: -8.5; 2023: -8.1.
  - Contribution from price and exchange rate changes (selected): 2013: 12.5; 2014: 17.4; 2015: 11.7; 2016: 12.6; 2017: 11.7.
- External debt-to-exports ratio (in percent, selected years):
  - 2013: 398.3
  - 2014: 344.1
  - 2015: 428.1
  - 2016: 439.3
  - 2017: 404.3
  - 2018: 353.7
  - 2019: 366.8
  - 2020: 372.7
  - 2021: 354.0
  - 2022: 319.0
  - 2023: 275.4
- Gross external financing need (in billions of US dollars, selected years):
  - 2013: 4.7
  - 2014: 3.7
  - 2015: 3.3
  - 2016: 4.0
  - 2017: 5.0
  - 2018: 3.0
  - 2019: 3.9
  - 2020: 3.6
  - 2021: 3.4
  - 2022: 3.4
  - 2023: 2.6
- Gross external financing need (in percent of GDP, selected years):
  - 2013: 37.7
  - 2014: 30.4
  - 2015: 28.1
  - 2016: 36.0
  - 2017: 44.5
  - Later-year figures show declines to 23.3, 27.7, 23.6, 20.3, 18.2, 12.6 (table truncated for exact year labels).

### Scenario and shock tests (summary)
- DSA bound tests include scenarios for:
  - Interest rate shock (permanent one-half standard deviation shocks).
  - Growth shock.
  - Non-interest current account shock.
  - Combined shocks.
  - One-time real depreciation of 30 percent in 2017 (illustrated as raising debt path to 212 percent in a combined 30% depreciation scenario).
- Baseline average projections shown in figure boxes (baseline value shown as 138 in some figure contexts; historical values and scenario averages presented in figures).

### Program performance, fiscal and structural policy actions (LOI, selected commitments)
- Program performance (as of end-September 2018):
  - Met all end-September 2018 quantitative performance criteria (QPCs).
  - Primary surplus year-to-date: 5.3 percent of GDP, exceeding target.
  - Sold some reserves amid balance of payments pressure; still met NIR target due to previous over-performance.
  - Net domestic assets of BOM within the reserve money ceiling at end-Q2 2018.
  - Indicative target on social spending in Q3 missed due to spending concentration in final quarter; expected to meet full-year social spending target.
- Structural benchmarks and actions:
  - Fiscal sector:
    - Finalizing an audit of completed concessions contracts and developed a repayment plan; 2019 budget submission plans to allot roughly 0.4 percent of GDP for repayment of concessions.
    - Plan to design 2019 operational plan setting out tax compliance improvement strategies for SMEs by end-October.
  - Financial sector:
    - Banks booked provisioning gaps identified by the AQR.
    - Financial Stability Council approved and published an NPL resolution strategy.
    - Banks have not yet classified NPLs in line with AQR findings; asset classification regulation to be updated by March 2019.
  - Tax administration:
    - Joint MoF/GDT taskforce established to develop action plan and timetable for implementing new tax legislation expected to enter into effect on January 1, 2019.
    - GDT completed comprehensive review of first half-year implementation of 2018 compliance improvement strategies.
- Fiscal policy for 2018–2019:
  - 2018: Revenues exceeding forecasts due to strong mining sector exports and investment; cash expenditures broadly in line; under-execution of capital spending due to heavy rains.
  - Over-commitment on concessional donor-financed capital expenditures revised down to 1.3 percent of GDP (previously estimated 2.2 percent).
  - Civil servant average salary increased by about 9 percent starting September 1; fiscal cost of 56 billion togrog to be covered by a bonus in the budget.
  - 2019 budget submission aims for a primary surplus of 1 percent of GDP.
  - Planned measures:
    - Pass General tax law and Corporate income tax law in fall Parliament session; expected tax administration gains of 0.3 percent of GDP.
    - Increase social security contribution rates by 1 percentage point (split evenly employer/employee).
    - Increase annual wage bill (including bonuses) by 16 percent in 2019:
      - 14 percent increase in average wages (higher for education and health; lower for other sectors).
      - 2 percent increase in number of public sector workers.
      - Equivalent to an 8 percent increase in average wages over wage level at end-2018.
    - Capital expenditure budget kept at 9.1 percent of GDP for 2019; MoF to issue circular after Budget approval to inform donors and line ministries of allocations for capital spending.
- Proposed TMU adjustments:
  - Exclude DBM from the primary balance QPC; monitor DBM by setting a separate QPC on DBM net lending.
  - Revise definition of social spending to include only social protection spending.
- Further structural reforms and actions:
  - Three-stage approach to improving retail fuel pricing, with end-December draft strategy and enactment of legislation by end-June 2019 to enforce automatic monthly fuel price adjustment effective July 1, 2019 (end-June structural benchmark).
  - Ensure social protection assistance spending reaches indicative program target for 2018 (2.1 percent of GDP); increase coverage of targeted social protection programs by 0.2 percent of GDP for 2019 budget submission.
  - Prepare regulation on appraisal and selection of public investment projects; final draft by end-October 2018 and approval/publication by end-December 2018 (structural benchmark).
  - Development Bank of Mongolia to commission comprehensive review of 2012-2017 operations by an international auditing firm and publish by mid-December.
  - Explicit QPC on net lending by DBM to monitor quasi-fiscal spending.
  - GDT to complete design of 2019 Operational Plan by end-October (structural benchmark).
  - MOF and BOM to reduce quasi-fiscal risks and improve efficiency in subsidized mortgage program in consultation with Fund staff and World Bank.
  - Increased budget for FRC and law enforcement agencies to address APG AML/CFT concerns by 941.6 million MNT in the 2019 draft budget.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 8. While inflation is broadly in line with our current target, rapid credit growth poses risks to

### 8. While inflation is broadly in line with our current target, rapid credit growth poses risks to

### Overview and immediate risks
- Rapid credit growth poses risks to the balance of payments (which is still fragile) and financial stability (especially from rapidly escalating household debts).
- Authorities remain fully committed to meeting credit and NIR targets under the program and safeguarding financial stability.

### Prior actions (macro-prudential and monetary)
- Macro-prudential:
  - Impose a limit of 30 months on all non-mortgage consumer loans effective January 1, 2019.
  - Introduce sanctions for violations of the limits which at the very minimum requires banks to provision any loan that violates the DSTI limit.
- Monetary policy:
  - Adopt a tightening bias in official communication in the September monetary policy committee meeting given the risks from rapid credit growth, with a view to tightening monetary policy stance in the coming months if credit growth remains strong or if imports continue to rise.
- Intervention policy:
  - Ensure intervention policy is consistent with the need to significantly increase reserves while maintaining a flexible exchange rate.
  - Discuss with IMF technical experts a possible move toward a policy of regular and announced foreign exchange purchases without regard to the level of the exchange rate or domestic liquidity conditions.
  - Starting immediately, ensure that sales of foreign exchange are limited to disorderly market conditions.

### Financial sector policy — Follow-Up to the AQR
- Banks' AQR implementation and capital plans:
  - Banks have begun to incorporate the results of the AQR.
  - Prior actions taken: (i) banks booked all provisioning needs identified by the AQR, adjusted only by loans that have been repaid in line with the template agreed with BoM; (ii) BoM will require banks to submit, by end-September 2018, a detailed plan regarding how they will issue new capital in the amounts detailed in the May 8 letter from BoM. A "detailed" plan must include timeline, method of issuance, type and terms of capital instruments, targeted investors, information package to investors, and hired advisors.
  - BoM will check implementation of plans monthly in consultation with IMF staff.
  - BoM will ensure that NPLs are reported in accordance with AQR results and BoM regulation from end-September.
  - BoM will promptly take action with those banks that by end-December 2018 do not raise capital by the amounts stated in the early May communication to Banks (structural benchmark).
- Capital and Tier rules:
  - From 1 January 2019, BoM will order banks not to pay dividends, coupon or principal of Tier 2 instruments, and bonuses to management until banks have reached a Tier 1 capital ratio of 11%.
  - BoM will ensure that all newly issued Tier 2 instruments have early intervention triggers, so that they are loss-absorbing by full or partial write-down and/or conversion to equity upon request of the competent authority.
- Contingency planning and liquidity:
  - Financial Stability Council (BOM, MOF, FRC) to strengthen contingency planning, crisis preparedness, and readiness for bank resolutions.
  - BoM will continue to provide liquidity only to banks that are solvent and viable on a forward-looking basis.
- Prudential regulation timetable:
  - By end-June 2019, adopt new prudential regulations with select elements from Basel II/III (definition of capital, more sensitive credit risk weights, capital buffers, and the Pillar 2) (structural benchmark).
  - By end-March 2019, amend the BoM Regulation on asset classification and provisioning (structural benchmark originally due end-September 2018).
  - By end-June 2019, issue a new regulation on credit origination and risk management.

### Addressing Non-Performing Loans (NPLs)
- Implement the comprehensive NPL strategy adopted and published by the Financial Stability Council (FSC) in May.
- Legal and institutional actions and timelines:
  - By end-September 2018, MoJ, in cooperation with BoM, will share with IMF staff draft amendments to a reformed corporate bankruptcy law. The reformed law shall be adopted by end-March 2019 (structural benchmark).
  - By end-October 2018, MoJ, in cooperation with BoM and in consultation with IMF staff, will present draft amendments to legislations (including the civil code) to strengthen enforcement of creditor rights. These legislative amendments shall be adopted by end-February 2019 (structural benchmark).
  - By end-December 2018, in consultation with IMF staff, prepare draft amendments to laws related to the real estate registry to ensure full disclosure of ownership of real estates to the public; create a price and transaction registry for real estate; adopt a law on private bailiffs; and adopt a law to establish commercial courts. All four measures will be implemented by end-April (structural benchmark).
- Regulatory and institutional measures:
  - By end-December 2018, BoM will adopt a new regulation on collateral valuation and a new regulation on resolution of non-performing loans.
  - Explore setting up a registry for movable collateral.
  - Adopt a new law on appraisers by end-March 2019.
- Asset Management Company (AMC) stance:
  - Decided not to proceed with a public AMC. If an AMC structure is pursued, implementing legislation will not allow a Mongolian public stake greater than 5 percent nor will the government, BoM, or any other public-sector entity lend to or issue any guarantees to the AMC.

### AML/CFT Framework
- Continue to address concerns raised by the Asia Pacific Group (APG) on Money Laundering.
- Recent actions: passed amendments to the Anti-Money Laundering Law and the Law on infringements to address some concerns.
- Commitments and timeline:
  - By end-April 2019, issue and implement needed regulations related to recent amendments, adopt a new legal framework to address proliferation financing (structural benchmark), and deepen risk-based AML/CFT supervision.
  - In the 2019 draft budget, increase resources available to the Financial Regulatory Commission (FRC) and law enforcement agencies to improve enforcement of preventative measures.
  - Note: At the recent FATF meeting, given until June 2019 to make substantial progress in addressing the most significant concerns.

### Conclusions and request
- Authorities believe policies are adequate to achieve program objectives but stand ready to take additional measures as appropriate.
- Will continue to consult with Fund staff regarding any revisions and provide requested information for monitoring.
- Request completion of the fifth review of the arrangement under the Extended Fund Facility and modification of performance criteria, following which authorities intend to draw one tranche amounting to SDR 26.2088 million.

### Key quantitative performance figures and program parameters (selected)
- Requested tranche: SDR 26.2088 million.
- Program exchange rate (togrog/U.S. dollar): 2,489 (listed repeatedly as 2,489).
- U.S. dollar per SDR: 1.35.
- Monetary gold price (U.S. dollar/ounce): 1,142.
- Net international reserves (NIR) of the Bank of Mongolia (floor, cumulative, change in eop stock, in million US$ at program exchange rate): reported sequence includes 1,700 2,087 1,900 2,147 2,000 2,137 2,200 2,200 2,500 2,700 2,900 (as presented).
- Net domestic assets (NDA) of the BOM (ceiling, eop stock, in billion togrog at program exchange rate): reported sequence includes 2,400 1,351 2,700 1,443 2,300 1,663 1,950 1,950 1,800 1,800 1,700 (as presented).
- Reserve money (ceiling, in billion togrog): reported sequence includes 4,000 2,941 4,400 3,420 4,600 3,706 4,750 4,750 4,900 4,900 5,000 (as presented).
- Primary balance of the general government (floor, cumulative since the beginning of the fiscal year, in billion togrog): figures shown include -3776 37240948 -20 (as presented).
- Social spending (floor, cumulative since the beginning of the fiscal year, in billion togrog): figures shown include 1,387 1,201 2,841 2,594 4,287 3,843 (as presented).
- Stock of guarantees on external debt extended by the government or BOM (ceiling, eop stock, in million US$): reported sequence includes 750 648 750 634 750 573 750 750 750 750 750 (as presented).
- Memorandum items:
  - Budget support from bilateral and multilateral donors excluding Fund under the program baseline (eop stock, cumulative, in million US$): 603 603 703 703 753 706 753 753 1,096 1,096 1,155 (as presented).
  - Net nonconcessional borrowing received and repatriated by the general government (including the DBM) under the program baseline (eop stock, cumulative, in million US$): 306 306 160 160 160 160 160 160 160 160 (as presented).

### Structural conditionality and status (selected from Table 2)
- Prior Actions (Due before Board Meeting) — Status:
  - Impose a limit of 30 months on all non-mortgage consumer loans effective January 1, 2019; and introduce sanctions for violations of the limits which at the very minimum requires banks to provision any loan that violates the DSTI limit. — Met
  - Adopt a tightening bias in the official communication in the September monetary policy committee meeting given the risks from rapid credit growth, with a view to tightening monetary policy stance in the coming months if credit growth remains strong or if imports continue to rise. — Met
  - Banks book all provisioning needs identified by the AQR adjusted only by loans that have been repaid in line with the template agreed with BoM. — Met
  - BoM requires banks to submit, by end-September 2018, a detailed plan regarding how they will issue new capital in the amounts detailed in the May 8 letter from BoM. — Expected to be met
- Structural Benchmarks (selected):
  - Complete an audit of all existing concessions contracts, develop a repayment plan, and incorporate in the MTFF repayment plan — End-August 2018 — Expected to be Met
  - Implementation of 2019 Operational Plan that sets out tax compliance improvement strategies for SMEs — End-October 2018 — Expected to be Met
  - Enact legislation to reform structure of retail fuel prices and increased excise tax rates — End-December 2018 — Proposed to be reset to end-June 2019
  - Financial sector benchmarks with varied target dates include several items marked Not Met, Proposed to be reset, or scheduled through end-April 2019 (see structural conditionality listing for details).

*Source: IMF staff report and authorities' Letter of Intent and Technical Memorandum of Understanding (excerpts provided).*

### 2016. Amounts denominated Chinese Renminbi (RMB), SDR and gold will be converted for

### cr18303 - 2016. Amounts denominated Chinese Renminbi (RMB), SDR and gold will be converted for

### Exchange-rate and price conversions for program purposes
- 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 at 1142.54 U.S. dollars per troy ounce (as of December 31, 2016).

### Nonconcessional external borrowing — exclusions and definition
- 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.

### Concessional debt — grant element calculation
- A debt is concessional if it includes a grant element of at least 35 percent.
- Grant element definition: difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
- PV of debt at the time of contracting is calculated by discounting the future stream of payments of debt service due on this debt.
- For debts carrying a variable interest rate in the form of a benchmark rate plus a fixed spread, PV is calculated using a program reference rate plus the fixed spread (in basis points) specified in the debt contract.

### Discount and program reference rates
- The program reference rate for the six-month USD LIBOR is 3.18 percent and will remain fixed for the duration of the program.
- The spread of six-month Euro LIBOR over six-month USD LIBOR is -308 basis points.
- The spread of six-month JPY LIBOR over six-month USD LIBOR is -306 basis points.
- The 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.
- 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 for this purpose is the unified discount rate of 5 percent set forth in Executive Board Decision No. 15248-(13/97).

### Net International Reserves (NIR) of the BOM — floor and adjustments
- A floor applies to the change in level of NIR of the BOM.
- The floor on the change in NIR 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 Quantitative Performance Criteria table.
- The floor on the change in NIR 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 as shown in Quantitative Performance Criteria table.

### NIR measurement and components
- NIR is calculated as gross international reserves less international reserve liabilities.
- For program monitoring purposes, the stock of foreign assets and foreign liabilities of the BOM shall be valued at program exchange rates and gold price as described above.
- Gross international reserves of the BOM 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 such cash held in BOM’s vault) that are under the direct and effective control of the BOM and readily available for intervention in the foreign exchange market, or the direct financing of balance of payments imbalances.
- Excluded from gross reserves:
  - Any foreign currency claims on residents including MNT swaps with local banks;
  - Capital subscriptions in international institutions other than in the IMF;
  - Gross reserves that are in any way encumbered or pledged, including reserve assets used as collateral or guarantee for third-party external liabilities.

### International reserve liabilities — definition
- 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 of 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; and
  - 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 included under the first bullet above shall not be included again.
- Foreign currency owed to commercial banks with any maturity as part of the swap program will be treated as a reserve liability.

### Reserve money — indicative ceiling
- An indicative ceiling applies to the level of reserve money.
- Reserve money consists of currency issued by the BOM (excluding BOM holdings of currency) and commercial banks’ deposits held with the BOM (excluding foreign currency time deposits).

### Social protection spending — indicative floor and coverage
- An indicative floor applies to the level of social protection spending.
- This indicative target covers only current spending of both the central government and the local governments.
- General Government Social Protection Spending includes:
  - State budget: Expenses of core activities; Scientific and research work; Allowance to veterans, the elderly awarded with state medal; Council, commission members pay; Benefit to Honorary mothers (with more than 4 children); Pregnant and maternity benefit; Child money; Caregivers service; Other SW fund compensations; Allowance to the elderly; Other welfare services and allowance; Old-age benefit; Food stamp; Social welfare services to the disabled; To increase source of Pension; To increase source of Social benefit; Employers benefit, allowance; Incentives for discipline, responsibility and work results; Other unclassified activities.
  - Social Welfare Fund: Expenses of core activities; Support and compensations to citizens; Allowance to veterans, the elderly awarded with state medal; Benefit to Honorary mothers (with more than 4 children); Pregnant and maternity benefit; Child money; Welfare pension; Pregnant and mothers benefit; Conditional cash allowance; Community based welfare services; Livelihood support conditional cash allowance; Caregivers service; Other SW fund compensations; Social welfare services to the disabled; Allowance to the elderly.
  - Local governments: Support and compensations to citizens; Allowance to veterans, the elderly awarded with state medal; Benefit to Honorary mothers (with more than 4 children); Pregnant and maternity benefit; Child money; Welfare pension; Pregnant and mothers benefit; Conditional cash allowance; Community based welfare services; Livelihood support conditional cash allowance; Caregivers service; Other SW fund compensations; Social welfare services to the disabled; Allowance to the elderly.

### Net Domestic Assets (NDA) of the BOM — ceiling and adjustments
- 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 from bilateral and multilateral donors 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 calculating NDA, NIR will be adjusted for the swap program with commercial banks, foreign exchange demand deposits of commercial banks that are already part of the reserve money, and government foreign currency current accounts.
- ONFA is defined as other net foreign assets of the BOM, including the difference between accrued interest receivables on gross international reserves of the BOM and accrued interest payables on international reserve liabilities of the BOM and deposits of international financial institutions.

### Primary balance of the general government — floor
- A floor applies to the primary balance of the general government, excluding DBM’s net lending, measured on a cumulative basis over the course of the year.
- Definition components:
  - Overall balance of general government, excluding DBM’s net lending, defined below the line as:
    - net bank credit to the general government—including 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—including tax prepayments and holdings of government by pension and insurance funds, and any changes to the net assets (negative financing flows) of Fiscal Stability Fund, Social Security Funds, and Future Heritage Fund;
    - net external financing—including 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 measured above the line.

### DBM’s net lending — ceiling
- A ceiling applies to the net lending of DBM.
- DBM’s net lending is defined as loan disbursements in the calendar year less repayments in that year.

### Non-concessional medium- and long-term external debt — ceilings and netting
- Prior to the completion of the second review, there was a ceiling on the issuance of gross debt for 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.
- Starting from the completion of the second review, there will be a ceiling on net debt issuance rather than gross debt issuance.
- The ceiling applies end-June and end-December of every year, starting from end-December 2017.
- Netting rules:
  - No more than 6 months between contracting of new debt and retirement of existing debt to allow netting.
  - During the 6 month window, gross issuance will be adjusted by subtracting refinancing of existing debt of general government or the BOM or other agencies acting on behalf of the general government with nonresidents with original maturities of one year or more as well as any debt with original maturity of less than one year that is being refinanced by longer maturity debt.
  - If a new issuance falls before the date of ceiling application, but the repayment is scheduled after that date, netting still applies as long as the 6 months limit is adhered to.
- Specific exclusion:
  - 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 November 2017.
- Definition of debt for the program is set out in Executive Board Decision No. 15688, Point 8, adopted December 5, 2014.

### Guarantees on external debt — stock and definition
- For program purposes, a guarantee of a debt 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 by the recipient (involving payments in cash or in kind), or indirectly through any other obligation 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 and exclusions
- A ceiling applies to the 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. This is a continuous performance criterion.
- Excluded 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 (a financing arrangement for imports is considered to be “normal” when the credit is self-liquidating).

### Data provision — timing and reporting responsibilities
- 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)
  - The monetary survey, the balance sheet of the BOM, and the consolidated balance sheet of the commercial banks: monthly, except balance sheet of the BOM on a weekly basis within five working days of the end of the respective week.
  - Net international reserves and auctions of the BOM in the foreign exchange market on daily basis and full reporting of all interventions on a weekly basis.
  - Interest rates and volume on standing facilities and market operations on a weekly basis within five working days of the end of the respective week.
  - A detailed breakdown of net credit to government from the BOM (on a weekly basis) and the commercial banks; the latter reconciled with the MoF and sent monthly.
  - Stock of monetary gold in both thousands of troy ounces and U.S. dollars on a weekly basis.
  - Reporting if the BOM engages in monetary gold transactions or employs any other accounting rate for valuing gold assets; monthly reporting of increases in monetary gold through purchases from domestic sources and refining of nonmonetary gold (both prices and volumes).
  - Detailed breakdown of “other items net” for both the BOM and the commercial banks on a monthly basis, including valuation changes in NIR and ONFA arising from exchange rate changes and/or revaluation of gold.
  - A bank-by-bank list of required reserves and actual reserves on a biweekly basis.
  - Results of each central bank bills auction within five working days of each auction (amount offered, amount demanded, amount sold to each bank, announced rates, cut-off rates).
  - Data on the stock of BOM swaps with resident and non-resident commercial banks on a quarterly basis.
  - Data on the stock of BOM guarantees issued on behalf of the government or any other third party on a quarterly basis.
  - Data on BOM’s foreign convertible currency liabilities reflecting long- and short-term maturities of debt on a quarterly basis.
- B. Fiscal Data (Ministry of Finance (MOF))
  - Monthly consolidated accounts of the central, local, and general government, including detailed data on tax, nontax, and capital revenues, current and capital expenditures, net lending, and financing; financing components separated into foreign sources (cash, project, and program loans) and domestic sources (bank and nonbank).
  - Classified transactions of all social insurance funds.
  - Results of each treasury bills auction within five working days of each auction (amount of bills offered, amount demanded, amount sold to each bank and nonbanks, average yield in percent per month).
  - Monthly accounts of the DBM detailing new lending and repayment as well as the stock of outstanding loans on a cash basis.
  - Outstanding balances of all deposit accounts of the general government in commercial banks, including those of the extrabudgetary funds on a quarterly basis.
  - Outstanding balances of any new deposit accounts of the general government opened in addition to the existing ones for grants and loans received from multilateral or bilateral donors, including associated counterpart funds.
  - Monthly report on the 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 the execution of public investment projects signed or under negotiation, including details on amounts, terms, and conditions of current or future debt or nondebt obligations arising from these contracts on a quarterly basis by MoF.
  - Outstanding stock, disbursements, amortization, and interest payments of short-term external debt contracted and/or guaranteed by the government or the BOM by creditor in original currency and U.S. dollars on a quarterly basis by BOM.
  - Outstanding, disbursements, amortization, and interest payments of medium- and long-term external debt contracted and/or guaranteed by the government or the BOM by creditor in original currency and U.S. dollars on a quarterly basis by BOM.
  - Daily midpoint exchange rates of the togrog against the U.S. dollar, including the reference, interbank, and parallel market exchange rates (BOM).
  - Arrears on the external debt contracted and/or guaranteed by the government or the BOM by creditor in original currency and U.S. dollars on a quarterly basis by BOM.
- D. Other Data (National Statistical Office (NSO))
  - The monthly consumer price index and a detailed breakdown by major categories of goods and services included in the consumer basket.
  - The NSO’s monthly statistical bulletin, including monthly export and import data.

*International Monetary Fund — Program documentation excerpt (cr18303).*

### ANNEX 1. GUIDELINES ON PERFORMANCE CRITERIA

### ANNEX 1. GUIDELINES ON PERFORMANCE CRITERIA

### Definition of "debt" (guideline excerpt)
- Debt is a current (not contingent) liability created under a contractual arrangement through the 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 some future point(s) in time to discharge principal and/or interest.
- Primary forms of debt:
  - Loans: advances of money (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets equivalent to fully collateralized loans (such as repurchase agreements and official swap arrangements).
  - Suppliers’ credits: contracts permitting the obligor to defer payments until after goods are delivered or services provided.
  - Leases: debt is the present value (at lease inception) of all lease payments expected to be made during the agreement, excluding payments for operation, repair or maintenance of the property.
- Arrears, penalties, and judicially awarded damages arising from failure to pay 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.

### Recent fiscal and program performance (supplemental information)
- End-September primary balance target: target was -20 billion togrog (cumulative January–September); actual reported as 1,644 billion togrog.
- Revenues: rose 31 percent year-to-date (third quarter), driven by mineral exports and strong imports.
- Staff projection: primary surplus will reach 4.5 percent of GDP in 2018.
- Upside revenue policy: upside surprises in revenue will be saved and used for reducing debt.
- Public debt outlook: originally projected to peak close to 100 percent of GDP in 2018 but now expected to be down to 70 percent by the end of the year.

### External financing, reserves, and exchange rate developments
- Development Bank of Mongolia (DBM) bond issuance:
  - Amount: US$500 million.
  - Tenor: 5-year bond.
  - Coupon: 7.25 percent.
  - Subscription: 8 times over-subscribed.
  - Credit ratings: B- (Standard & Poor) and B (Fitch).
  - Purpose: proceeds expected to be solely for liability management (paying off short-term external debt with floating interest rates); should not affect the stock of external public debt.
- Net international reserves (NIR): declined by about $100 million since end-September amid balance of payments pressures.
- Gold monetization: authorities monetized $38 million in gold through October 18.
- Exchange rate movements: the togrog depreciated 5.4 percent year-to-date and 0.7 percent since end-September.
- Monetary policy stance: Bank of Mongolia (BOM) intervened in the foreign exchange market to address liquidity shortages and avoid excessive volatility; central bank committed to continuing reserve accumulation and maintaining a floating exchange rate.

### Banking sector, Asset Quality Review (AQR), and structural conditionality
- AQR follow-up and prior actions:
  - BOM requested banks provide updates on progress meeting the capital shortfall from the AQR.
  - BOM sent a formal communication to banks requiring incorporation of AQR and recent on-site inspection results into their October balance sheets; banks must raise the previously requested amount and type of capital by end-December 2018 or face BOM intervention.
  - On October 23, authorities sent this communication and have met the final prior action for the review.
- Bank recapitalization:
  - Seven banks with capital shortfalls submitted capital plans by end-September as requested.
  - Any Tier 1 shortfall must be met by issuing new common shares; failure to raise required capital by end-December 2018 could result in public injections of capital or resolution consistent with the Banking Law.
  - The last two months of the year were described as a critical period for recapitalization.
- AML/CFT: Mongolia scored poorly in last year’s APG mutual evaluation and was given until June 2019 to make substantial progress. Authorities committed to adopting required legal framework measures, strengthening supervision of financial entities, and increasing funding for relevant organizations.

### Key program figures and operational parameters (selected)
- Program exchange rate (togrog/U.S. dollar): 2,489
- U.S. dollar per SDR: 1.35
- Monetary gold price (U.S. dollar/ounce): 1,142
- Bank of Mongolia net international reserves (NIR) and related program reference: NIR developments and targets are tracked in million US$ at program exchange rate (table entries in the source show multiple target and actual values across review dates).
- Reserve money and other indicative targets: reserve money ceilings and social spending floors are specified as program indicators (table entries in the source show multiple target and actual values across review dates).

### Structural conditionality status (selected)
- Prior actions marked "Met":
  - Impose a limit of 30 months on all non-mortgage consumer loans effective January 1, 2019, and introduce sanctions including provisioning for loans violating DSTI limit.
  - Adopt a tightening bias in official communication in the September monetary policy committee meeting.
  - Banks book all provisioning needs identified by the AQR adjusted only by loans repaid in line with the agreed template with BoM.
  - BoM requires banks to submit detailed plans by end-September 2018 regarding issuance of new capital as detailed in the May 8 BoM letter.
  - BoM sends letters to banks with capital shortfalls requiring updated balance sheets and specifying Tier 1 shortfall to be met with common shares.
- Structural benchmarks with delayed or pending status (selected examples):
  - Complete an audit of all existing concessions contracts and develop a repayment plan: End-August 2018 — Not met, implemented with delay in October 2018.
  - Implementation of 2019 Operational Plan for tax compliance improvements for SMEs: End-October 2018 — Expected to be Met.
  - Adoption of legislative and regulatory reforms (retail fuel prices, excise taxes, creditor rights enforcement, Basel II/III elements, bankruptcy law, private bailiffs, real estate registry access, anti-proliferation financing framework): various target dates with several proposed resets and pending actions through 2019.

*Source: ANNEX 1. GUIDELINES ON PERFORMANCE CRITERIA (excerpt) and Supplementary Information and Supplementary Letter of Intent from the Mongolia Fifth Review under the Extended Fund Facility arrangement.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18303.pdf_