## EXECUTIVE SUMMARY

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---

### Recent developments
- During the three-year EFF which expired at end-May, Mongolia:
  - Averaged growth of 5.2 percent since 2017.
  - Recorded a primary balance averaging a surplus of 3 percent of GDP (8 ppts stronger than the debt-stabilizing level).
  - Saw public debt fall by almost 20 percentage points.
  - Increased net international reserves by $2.5 billion prior to the pandemic.
- At end-2019:
  - Public debt was almost 70 percent of GDP.
  - Reserves net of short-term drains were roughly $400 million.
- The EFF expired on May 23.
- Mongolia imposed containment measures at the outbreak of the virus in China in early 2020, limiting confirmed COVID-19 cases to about 140 as of mid-May, all reported as imported cases.

### Impact of COVID-19 — macroeconomic effects and projections
- Early 2020 macro developments:
  - Exports contracted by 40 percent y/y in Q1 2020.
  - Fiscal revenues declined by 8½ percent.
  - Private sector credit growth fell to -3.4 percent at end-April 2020.
  - EMBI spreads spiked from just over 200 to 1200 in March, moderating to around 900 basis points.
  - Gross reserves fell more than $1 billion in the first 5 months of 2020 (out of $4.3 billion at end-2019).
  - BOM reduced the policy rate by 100 bps in both March and April to 9 percent and lowered the MNT reserve requirement by 200 bps.
- Staff projection:
  - Real GDP to contract by 1 percent in 2020 (6 percentage points lower than the pre-COVID-19 projection).
  - Economic activity to begin recovering in 2020H2 driven by policy loosening, resumption of mining exports to China, pickup in credit growth, and lifting of containment measures.
  - Agricultural sector accounts for 20 percent of GDP and has been somewhat insulated.
  - Inflation expected to remain low due to low international oil prices and weak domestic demand.

### Fiscal and quasi-fiscal measures (announced by authorities)
- General government discretionary package for 2020 described as largely budget neutral; composition:
  - Tax cuts: 2.8 percent of GDP.
  - Increased social transfers and higher health spending: 2.6 percent of GDP.
  - Offsets: 2 percent of GDP in lower current spending and 2.5 percent of GDP in capital expenditure cuts.
- Detailed measures (in billions of MNT / in percent of GDP):
  - Tax Measures (effective April 1 - September 30): 1,120 / 2.8
    - Exemption of some employment income from SSC: 771 / 2.0
    - Exemption of private-sector employment income from PIT: 260 / 0.7
    - Exemption of profits from CIT if turnover < MNT1.5 billion: 300 / 0.1
    - Exemption of rental income from PIT/CIT if rent has been lowered: 200 / 0.1
    - Waiving late payment penalties for PIT/SSC: 270 / 0.1
    - Exemption of certain medical goods and food stuffs from VAT and customs duty: 120 / 0.0
  - Expenditure Measures: 1,045 / 2.7
    - Increase in health spending (financed by donors and Government Reserve Fund): 171 / 0.4
    - Temporary increase in Child Money Program (April 1 to October 1): 550 / 1.4
    - Double Food Stamps Allowance (May 1 to October 1): 100 / 0.0
    - Increase in Social Welfare Pension (May 1 to October 1): 350 / 0.1
    - Wage subsidies for employers (April 1 to July 1): 520 / 0.1
    - Cash transfers to herders: 200 / 0.5
    - Interest subsidies for cashmere producers: 270 / 0.1
  - Possible Quasi-Fiscal Activities:
    - BoM to re-start subsidized mortgage program: 120 / 0.3
    - BoM to buy bonds issued by mining SOE that financed pension loan cancellation: 700 / 1.8
    - BoM to subsidize short-term loans of banks to gold miners: 500 / 1.3
- Parliament proposed temporary resumption (until end-year) of BOM’s subsidized mortgage loan program for an estimated MNT150 billion.

### Fiscal outlook and financing needs
- COVID-19 impact on the budget:
  - Despite the fiscal response being almost neutral, the primary balance is projected to deteriorate by 6½ percentage points in 2020 to a deficit of about 3 percent of GDP.
  - Gross financing needs of roughly 8 percent of GDP can be met primarily via official-sector support.
- Balance of payments impact (2020, in millions of USD):
  - Exports revised down by $2,081 (from 7,434 to 5,353).
  - FDI revised down by $304 (from 1,756 to 1,452).
  - Overall balance change: pre-COVID -3,504 to post-COVID -3,609 (difference -106).
  - Gross official reserves: 4,502 pre-COVID to 3,256 post-COVID (difference -1,246).
  - Trade balance change: 1,205 pre-COVID to 363 post-COVID (difference -842).
  - Financial account balance: 184 pre-COVID to -1,387 post-COVID (difference -1,571).
- Ex ante BOP gap on the order of $4 billion driven by lower exports and FDI, maturing external amortizations, and limited market access; mitigants include automatic import reductions and weakening domestic demand, with a planned drawdown of about $1 billion in gross reserves and reliance on new official sector support and exchange rate adjustment.

### Request for IMF financing and staff assessment
- Authorities requested financing under the Rapid Financing Instrument (RFI) equivalent to 100 percent of quota:
  - SDR 72.3 million equivalent to $99 million.
- Staff assessment:
  - Public debt is sustainable, though risks of distress remain elevated.
  - Capacity to repay the Fund is adequate.
  - Staff assesses Mongolia meets the qualification criteria for an RFI.
- Intended use of resources:
  - To help finance the budget deficit widened by weak economic activity, emergency virus-related spending, and broader stimulus measures.
- Date: May 27, 2020.

### Risks
- Downside risks dominate:
  - Vulnerability to a sustained deterioration in the external environment given a narrow economic base and insufficient foreign exchange reserves.
  - Significant external repayments in 2020–24 subject to refinancing risks as access to international debt markets deteriorates.
  - Possible more significant domestic outbreak as mobility resumes.
  - Risk of sharp rise in stimulus, including quasi-fiscal spending around parliamentary elections in June, adding pressure on the balance of payments.
  - Weak capital buffers in the banking system; temporary regulatory loosening risks should be carefully managed.

### Policy recommendations and staff views
- Overarching objective: prevent an outbreak, soften output contraction, avoid excessive balance of payments deterioration, and preserve debt sustainability.
- Fiscal policy:
  - Staff agree with the broadly budget-neutral fiscal stance for 2020 and with compositional shifts toward tax relief and crisis-related emergency spending.
  - Expansion of the Child Money program seen as appropriate for rapid broad coverage.
  - Concern about adequacy of virus-related health spending; authorities committed to contingency plans for further health spending and disaster relief if needed.
- Quasi-fiscal activities:
  - Concerns about Parliament expanding BOM’s quasi-fiscal role: reduces transparency, damages BOM balance sheet, poses risks to monetary policy effectiveness, and shifts fiscal costs/credit risk to the central bank.
  - Agreed measures with BOM and staff:
    - Limit all quasi-fiscal activities by the BOM including those called for in the Anti-Pandemic Law to MNT800 billion (2 percent of GDP).
    - Stop all quasi-fiscal spending by the BOM starting in January 2021.
    - Fully disclose this spending in BOM’s financial statements.
- Monetary and exchange rate policy:
  - Further loosening in the policy rate should be avoided.
  - Greater exchange rate flexibility is critical to build buffers and facilitate external adjustment; combine flexibility with tight policy stance and structural reforms as pandemic subsides.
  - Recommend greater local currency debt issuance, including participation from non-residents, to improve currency composition of public and private debt.
- Financial sector:
  - Financial relief measures should be targeted, timebound, and recognized.
  - BOM should adhere to internationally accepted practices for loan classification and provisioning; supervisors should provide clear guidance to banks.
  - Loan restructurings should be afforded only to borrowers with proven negative impact from the pandemic.
  - Ensure BOM has accurate understanding of medium- to long-term impacts through appropriate classification, provisioning, and capital adjustments.

### Reform commitment, governance, and FATF
- Authorities reiterated commitment to reforms recommended in the 2019 Article IV Consultation aimed at diversifying the economy.
- Staff will urge authorities to:
  - enhance financial supervision,
  - pursue banking reforms,
  - improve the business environment,
  - combat corruption, and
  - strengthen AML/CFT.
- FATF status: Mongolia was placed on the FATF’s grey list in October 2019 and was requested to implement 6 immediate actions. The FATF plenary meeting in February 2020 noted the authorities’ good progress and considered 3 out of the 6 action items as having been met.

### Debt sustainability — assessment and key projections (Annex I highlights)
- Overall assessment: public debt sustainable under the baseline, but risks of debt distress remain elevated.
- Key numbers and projections:
  - Public debt set to increase to 77 percent of GDP in 2020, then resume downward to reach 64 percent of GDP by end-2025.
  - Primary surpluses averaged 3 percent of GDP over the past three years.
  - Gross financing requirements projected to climb from about 8 percent of GDP in 2020 to 16 percent of GDP in 2023 before descending to single digits in the medium term.
  - External debt: $30.7 billion at end-2019, or 221 percent of GDP.
  - At end-2019, 50 percent of public debt was on concessional terms; share expected to decline towards 40 percent by end-2025.
  - Average effective nominal interest rate projected to remain broadly stable at 3.7 percent.
- Stress-test scenarios and results:
  - Growth shock: one standard deviation decline in 2021–22 could raise debt-to-GDP to just below 85 percent in 2022; gross financing needs about 20 percent of GDP in 2022.
  - Exchange rate shock: 33 percent nominal depreciation in 2021 would increase debt to almost 90 percent of GDP; gross financing needs peak at 20 percent of GDP in 2023.
  - Financial sector contingent liability shock: one-off outlays equal to 15 percent of banking-sector assets in 2021 plus a growth decline could push public debt toward 90 percent of GDP and gross financing needs to 20 percent of GDP.
  - Primary balance shock: a cumulative 4 percent of GDP deterioration over 2021–23 plus interest rate increases would worsen debt trajectory but not breach 76 percent of GDP over the forecast horizon.
- Fan-chart probabilities:
  - If shocks symmetric, public debt would remain above 75 percent with 25 percent probability by end-forecast.
  - Under downside-dominated risks, probability rises to about 37 percent.

### Modalities of IMF support and external financing
- IMF RFI:
  - Staff supports RFI purchase of 100 percent of quota (SDR 72.3 million equivalent to $99 million).
  - RFI equals 0.7 percent of 2020 GDP and 2.7 percent of projected gross international reserves.
  - Projected repurchases and charges (composed of EFF and emergency assistance repayments) would peak in 2024 at 1.8 percent of international reserves and 0.9 percent of exports of goods and services.
  - IMF resources to be transferred to the budget to help cover gross financing needs largely from the crisis-related fall in revenues (9 percent of GDP).
- Additional official support and commitments:
  - ADB committed an additional $200 million in budget support and $60 million in project lending to be disbursed in 2020.
  - PBOC committed to rollover the $1.7 billion swap which matures in July.
  - MOF is seeking additional support from the Government of Japan.
- Safeguards and governance commitments:
  - BOM will undergo an update of the 2017 safeguards assessment.
  - MOF–BOM memorandum of understanding on servicing IMF-related obligations to be prepared.
  - MOF committed to publish quarterly reports on emergency fund spending, conduct an independent third-party audit, publish full procurement contracts with awarded companies and beneficial owners, and do ex-post validation of delivery.

### Staff appraisal and policy priorities
- Urgent financing need estimated at $4 billion in 2020 to avoid severe economic disruptions from sharp declines in mineral exports and FDI.
- Real GDP expected to contract by 1 percent in 2020, with significant downside risk.
- Near-term policy priorities:
  - Limit macro-financial impact and social fallout.
  - Maintain sound policy and governance to ensure debt sustainability and support a broad-based recovery.
- Post-crisis priorities include rebuilding fiscal, external and financial buffers and pursuing banking reforms.
- Donor support catalyzed by a Fund program would help avoid disorderly adjustment, limit reserves drawdown, and minimize hardship on households and firms.

### Appendix 1 — Letter of Intent (key commitments and figures)
- COVID-19 status and containment:
  - First reported case March 9; letter: 148 confirmed cases; subsequent statement as of June 1, 2020: 185 confirmed cases.
- Economic impact and outlook:
  - Mining exports down 40 percent in Q1 2020.
  - Domestic fiscal revenues down 9 percent year in Q1 2020.
  - Estimated BOP financing gap before new official financing or adjustment: on the order of $4 billion.
  - Real GDP expected to contract by 1 percent in 2020; modest rebound in 2021.
  - BOM sold $605 million by end-April to prevent a disorderly exchange rate adjustment; about thirty percent of reserves could be lost this year (statement).
- Fiscal response:
  - Emergency fiscal package: tax relief and cuts in social security contributions 2.8 percent of GDP; increase in social transfers and health spending 2.6 percent of GDP; offsets via cuts to current expenditures 2 percent of GDP and capital expenditures 2.5 percent of GDP.
  - Limits on BOM quasi-fiscal activities: MNT800 billion (2 percent of GDP); stop starting January 2021; fully disclose in audited financial statements.
  - RFI request: SDR72.3 million (equivalent to $99 million), purchase of 100 percent of quota.
- Monetary and liquidity measures:
  - Cumulative cut in policy rate of 200 basis points; policy rate cuts of 100 basis points in both March and April (statement).
  - Reserve requirement reduction: 200 basis points.
  - Policy rate corridor reduced to ±1 percent.
  - Banks’ liquidity ratios lowered by 5 percentage points.
  - BOM FX sales by end-April: $605 million.
- Financial sector commitments:
  - Timebound financial forbearance; ensure appropriate classification, provisioning, and capital adjustments; restrict restructurings to borrowers with proven pandemic impact.
  - BOM to undergo updated safeguards assessment and provide audit access to IMF staff.
- Transparency on COVID-19 spending:
  - Publish regular revenue and expenditure information; publish quarterly reports on MOF website; independent third-party audit within six months; publish procurement contracts with awarded companies and beneficial owners and ex-post validation of delivery.
- Additional financing:
  - Secured additional $100 million of budget support from the Asian Development Bank.
  - Thanks to World Bank, ADB, European Union and others; PBOC extended swap arrangement.

*Source: 1mngea2020001 - EXECUTIVE SUMMARY.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments
- During the three-year EFF which expired at end-May, Mongolia:
  - Averaged growth of 5.2 percent since 2017.
  - Recorded a primary balance averaging a surplus of 3 percent of GDP (8 ppts stronger than the debt-stabilizing level).
  - Saw public debt fall by almost 20 percentage points.
  - Increased net international reserves by $2.5 billion prior to the pandemic.
- At end-2019:
  - Public debt was almost 70 percent of GDP.
  - Reserves net of short-term drains were roughly $400 million.
- The EFF expired on May 23.
- Upon the outbreak of the virus in China in early 2020, Mongolia imposed containment measures that helped limit confirmed COVID-19 cases to about 140 as of mid-May, all reported as imported cases.

### Impact of COVID-19 — macroeconomic effects and projections
- Macroeconomic impacts in early 2020:
  - Exports contracted by 40 percent y/y in Q1 2020.
  - Fiscal revenues declined by 8½ percent.
  - Private sector credit growth fell to -3.4 percent at end-April 2020.
  - EMBI spreads spiked from just over 200 to 1200 in March, moderating to around 900 basis points.
  - Gross reserves fell more than $1 billion in the first 5 months of 2020 (out of $4.3 billion at end-2019).
  - BOM reduced the policy rate by 100 bps in both March and April to 9 percent and lowered the MNT reserve requirement by 200 bps.
- Staff projection:
  - Real GDP to contract by 1 percent in 2020 (6 percentage points lower than the pre-COVID-19 projection).
  - Economic activity to begin recovering in 2020H2 driven by policy loosening, resumption of mining exports to China, pickup in credit growth, and lifting of containment measures.
  - Agricultural sector accounts for 20 percent of GDP and has been somewhat insulated.
  - Inflation expected to remain low due to low international oil prices and weak domestic demand.

### Fiscal and quasi-fiscal measures (announced by authorities)
- General government discretionary package for 2020 described as largely budget neutral; composition:
  - Tax cuts: 2.8 percent of GDP.
  - Increased social transfers and higher health spending: 2.6 percent of GDP.
  - Offsets: 2 percent of GDP in lower current spending and 2.5 percent of GDP in capital expenditure cuts.
- Detailed measures (in billions of MNT / in percent of GDP):
  - Tax Measures (effective April 1 - September 30): 1,120 / 2.8
    - Exemption of some employment income from SSC: 771 / 2.0
    - Exemption of private-sector employment income from PIT: 260 / 0.7
    - Exemption of profits from CIT if turnover < MNT1.5 billion: 300 / 0.1
    - Exemption of rental income from PIT/CIT if rent has been lowered: 200 / 0.1
    - Waiving late payment penalties for PIT/SSC: 270 / 0.1
    - Exemption of certain medical goods and food stuffs from VAT and customs duty: 120 / 0.0
  - Expenditure Measures: 1,045 / 2.7
    - Increase in health spending (financed by donors and Government Reserve Fund): 171 / 0.4
    - Temporary increase in Child Money Program (April 1 to October 1): 550 / 1.4
    - Double Food Stamps Allowance (May 1 to October 1): 100 / 0.0
    - Increase in Social Welfare Pension (May 1 to October 1): 350 / 0.1
    - Wage subsidies for employers (April 1 to July 1): 520 / 0.1
    - Cash transfers to herders: 200 / 0.5
    - Interest subsidies for cashmere producers: 270 / 0.1
  - Possible Quasi-Fiscal Activities:
    - BoM to re-start subsidized mortgage program: 120 / 0.3
    - BoM to buy bonds issued by mining SOE that financed pension loan cancellation: 700 / 1.8
    - BoM to subsidize short-term loans of banks to gold miners: 500 / 1.3
- Parliament proposed temporary resumption (until end-year) of BOM’s subsidized mortgage loan program for an estimated MNT150 billion.

### Fiscal outlook and financing needs
- COVID-19 impact on the budget:
  - Despite the fiscal response being almost neutral, the primary balance is projected to deteriorate by 6½ percentage points in 2020 to a deficit of about 3 percent of GDP.
  - Gross financing needs of roughly 8 percent of GDP can be met primarily via official-sector support.
- Balance of payments impact (2020, in millions of USD):
  - Exports revised down by $2,081 (from 7,434 to 5,353).
  - FDI revised down by $304 (from 1,756 to 1,452).
  - Overall balance change: pre-COVID -3,504 to post-COVID -3,609 (difference -106).
  - Gross official reserves: 4,502 pre-COVID to 3,256 post-COVID (difference -1,246).
  - Trade balance change: 1,205 pre-COVID to 363 post-COVID (difference -842).
  - Financial account balance: 184 pre-COVID to -1,387 post-COVID (difference -1,571).
- Ex ante BOP gap on the order of $4 billion driven by lower exports and FDI, maturing external amortizations, and limited market access; mitigants include automatic import reductions and weakening domestic demand, with a planned drawdown of about $1 billion in gross reserves and reliance on new official sector support and exchange rate adjustment.

### Request for IMF financing
- Authorities requested financing under the Rapid Financing Instrument (RFI) equivalent to 100 percent of quota:
  - SDR 72.3 million equivalent to $99 million.
- Staff assessment:
  - Public debt is sustainable, though risks of distress remain elevated.
  - Capacity to repay the Fund is adequate.
  - Staff assesses Mongolia meets the qualification criteria for an RFI.
- Intended use of resources:
  - To help finance the budget deficit widened by weak economic activity, emergency virus-related spending, and broader stimulus measures.
- Date: May 27, 2020.

### Risks
- Downside risks dominate:
  - Vulnerability to a sustained deterioration in the external environment given a narrow economic base and insufficient foreign exchange reserves.
  - Significant external repayments in 2020–24 subject to refinancing risks as access to international debt markets deteriorates.
  - Possible more significant domestic outbreak as mobility resumes.
  - Risk of sharp rise in stimulus, including quasi-fiscal spending around parliamentary elections in June, adding pressure on the balance of payments.
  - Weak capital buffers in the banking system; temporary regulatory loosening risks should be carefully managed.

### Policy recommendations and staff views
- Overarching objective: prevent an outbreak, soften output contraction, avoid excessive balance of payments deterioration, and preserve debt sustainability.
- Fiscal policy:
  - Staff agree with the broadly budget-neutral fiscal stance for 2020 and with compositional shifts toward tax relief and crisis-related emergency spending.
  - Expansion of the Child Money program seen as appropriate for rapid broad coverage.
  - Concern about adequacy of virus-related health spending; authorities committed to contingency plans for further health spending and disaster relief if needed.
- Quasi-fiscal activities:
  - Concerns about Parliament expanding BOM’s quasi-fiscal role: reduces transparency, damages BOM balance sheet, poses risks to monetary policy effectiveness, and shifts fiscal costs/credit risk to the central bank.
  - Agreed measures with BOM and staff:
    - Limit all quasi-fiscal activities by the BOM including those called for in the Anti-Pandemic Law to MNT800 billion (2 percent of GDP).
    - Stop all quasi-fiscal spending by the BOM starting in January 2021.
    - Fully disclose this spending in BOM’s financial statements.
- Monetary and exchange rate policy:
  - Further loosening in the policy rate should be avoided.
  - Greater exchange rate flexibility is critical to build buffers and facilitate external adjustment; combine flexibility with tight policy stance and structural reforms as pandemic subsides.
  - Recommend greater local currency debt issuance, including participation from non-residents, to improve currency composition of public and private debt.
- Financial sector:
  - Financial relief measures should be targeted, timebound, and recognized.
  - BOM should adhere to internationally accepted practices for loan classification and provisioning; supervisors should provide clear guidance to banks.
  - Loan restructurings should be afforded only to borrowers with proven negative impact from the pandemic.
  - Ensure BOM has accurate understanding of medium- to long-term impacts through appropriate classification, provisioning, and capital adjustments.

*Source: 1mngea2020001 - EXECUTIVE SUMMARY.*

### 12.      The authorities reiterated their commitment to reforms as recommended in the

### 12.      The authorities reiterated their commitment to reforms as recommended in the

### Reform commitment and governance priorities
- The authorities reiterated commitment to reforms recommended in the 2019 Article IV Consultation aimed at boosting Mongolia’s growth potential by diversifying the economy.
- Staff will urge the authorities to pursue sound governance practices by:
  - enhancing financial supervision,
  - pursuing banking reforms,
  - improving the business environment,
  - combatting corruptions, and
  - strengthening AML/CFT.
- FATF status: Mongolia was placed on the FATF’s grey list in October 2019 and was requested to implement 6 immediate actions. The FATF plenary meeting in February 2020 noted the authorities’ good progress and considered 3 out of the 6 action items as having been met.

### Debt sustainability — assessment and risks
- Overall assessment: Mongolia’s public debt is sustainable under the baseline, but risks of debt distress remain elevated.
- Fiscal track record and effects:
  - Primary surpluses averaged 3 percent of GDP over the past three years (compared to the debt-stabilizing level of about -5 percent of GDP).
  - Public debt fell by almost 20 percentage point to 69 percent of GDP at end-2019.
- Covid-19 impact and projections:
  - Under the baseline scenario, public debt is projected to rise 8 percentage points to 77 percent of GDP in 2020 before resuming its decline.
  - Projected improvement over the medium-term reflects favorable debt dynamics predicated on a swift rebound in economic activity from next year, the significant share of existing debt on concessional terms, and some fiscal consolidation.
- Gross financing requirements:
  - Projected to climb from about 8 percent of GDP in 2020 to 16 percent of GDP in 2023 on the back of maturing external bonds, before descending to single digits in percent of GDP in the medium term.
- Risk factors:
  - Mongolia’s narrow economic base,
  - history of pro-cyclical policies,
  - high levels of foreign exchange-denominated debt,
  - contingent liabilities from quasi-fiscal operations and potential bank bailouts.
- Measures to preserve debt sustainability:
  - Authorities stand ready to take additional measures in 2020 to contain the primary balance to less than 3 percent of GDP, including the possibility of further re-prioritizing capital expenditures.
  - Commitment to strict selection and appraisal criteria and respect for absorptive capacity constraints in capital expenditure plans.
  - BOM’s commitment to limit quasi-fiscal spending within 1 percent of GDP to reduce contingent liability risks.

### External debt profile
- Total external debt: $30.7 billion at end-2019, or 221 percent of GDP.
- Contributing factors:
  - large capital needs by the mining sector often financed by debt rather than equity,
  - loose fiscal and monetary policy over much of the past decade,
  - reliance on external wholesale funding by some banks.
- Composition and mitigating factors:
  - Nearly half of total external debt is FDI-related.
  - About one quarter reflects long-term liabilities of the general government.
- Monitoring needs: Contingent liabilities related to quasi-fiscal operations and potential bank bailouts linked to the banking sector reform agenda warrant close monitoring.

### Modalities of IMF support and external financing
- IMF request and assessment:
  - Staff support authorities’ request for a purchase under the RFI equivalent to 100 percent of quota (SDR 72.3 million equivalent to $99 million).
  - Staff assesses Mongolia meets the qualification criteria for an RFI due to an urgent BoP need that would otherwise cause immediate and severe economic disruption.
- Capacity to repay:
  - Proposed RFI represents 0.7 percent of 2020 GDP and 2.7 percent of projected gross international reserves.
  - Projected repurchases and charges to the Fund (composed of EFF and emergency assistance repayments) would peak in 2024 at 1.8 percent of international reserves and 0.9 percent of exports of goods and services.
- Use of RFI resources and financing gap:
  - Authorities requested RFI resources be transferred to the budget.
  - Identified increase in higher health spending of 0.4 percent of GDP will be fully funded by already secured loans from the ADB and World Bank.
  - IMF resources will be used to help cover the 9 percent of GDP in gross financing needs stemming largely from the crisis-related fall in revenues.
  - Authorities have a contingency plan to scale-up health and social spending as necessary to increase support for the vulnerable.
- Additional official sector support:
  - ADB committed an additional $200 million in budget support and $60 million in project lending to be disbursed in 2020.
  - PBOC committed to rollover the $1.7 billion swap which matures in July.
  - MOF is seeking additional support from the Government of Japan.
- Safeguards and governance commitments:
  - Bank of Mongolia will undergo an update of the 2017 safeguards assessment.
  - A memorandum of understanding between the Ministry of Finance and the Bank of Mongolia on responsibilities for servicing related financial obligations to the IMF will be prepared.
  - Ministry of Finance committed to safeguards of COVID-19 related spending, including:
    - publishing quarterly reports on emergency fund spending on the MOF website,
    - conducting an independent third-party audit,
    - publishing the full text of all procurement contracts on COVID-19 related spending with names of awarded companies and their beneficial owners,
    - an ex-post validation of delivery.

### Staff appraisal and macroeconomic outlook
- Urgent financing need:
  - Sharp decline of mineral exports and FDI inflows opened an urgent financing need estimated at $4 billion in 2020 that, if not addressed, could give rise to severe economic disruptions.
- Economic impact of the pandemic:
  - Containment measures limited spread but caused large disruptions in economic activity, affecting employment and household income.
  - Real GDP is expected to contract by 1 percent in 2020, subject to significant downside risk depending on the pandemic’s evolution.
- Policy stance:
  - Authorities committed to safeguarding macroeconomic, financial and external stability through timely policies addressing health needs, safeguarding employment, and protecting the vulnerable.
  - Near-term policy priorities agreed with staff focus on limiting macro-financial impact and social fallouts while maintaining sound policy and governance to ensure debt sustainability and support a broad-based recovery.
  - Post-crisis commitments include rebuilding fiscal, external and financial buffers and pursuing banking reforms.
- IMF support rationale:
  - Staff supports the RFI purchase: Mongolia meets qualification criteria, debt is sustainable, and capacity to repay remains adequate.
  - Financial support under the RFI (SDR 72.3 million / $99 million) will close part of Mongolia’s external financing gap; remaining needs to be filled by other partners and policy adjustments.
  - Donor support catalyzed by a Fund program would help avoid disorderly adjustment, limit reserves drawdown, and minimize hardship on households and firms.

### Key numeric highlights from the text and tables
- Primary surpluses averaged 3 percent of GDP over the past three years.
- Public debt reduced to 69 percent of GDP at end-2019.
- Public debt projected to rise 8 percentage points to 77 percent of GDP in 2020.
- Gross financing requirements: about 8 percent of GDP in 2020; 16 percent of GDP in 2023.
- External debt: $30.7 billion at end-2019, or 221 percent of GDP.
- RFI request: 100 percent of quota (SDR 72.3 million equivalent to $99 million).
- RFI as share of GDP: 0.7 percent of 2020 GDP.
- RFI as share of projected gross international reserves: 2.7 percent.
- Projected peak of Fund-related repurchases and charges in 2024: 1.8 percent of international reserves and 0.9 percent of exports of goods and services.
- Urgent financing need estimated at $4 billion in 2020.
- ADB additional support: $200 million budget support and $60 million project lending in 2020.
- PBOC rollover: $1.7 billion swap maturing in July.
- Higher health spending identified: 0.4 percent of GDP to be funded by ADB and World Bank loans.
- BOM commitment to limit quasi-fiscal spending within 1 percent of GDP.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mngea2020001.pdf*

### Annex I. Public Debt Sustainability Analysis

### Annex I. Public Debt Sustainability Analysis

### Overview and Overall Assessment
- Public debt is set to increase to 77 percent of GDP in 2020 amid the sharp deterioration in fiscal balances due to the Covid-19 crisis, then resume a downward trajectory to reach 64 percent of GDP by end-2025.
- Mongolia’s debt is assessed as sustainable under the baseline but with elevated risk of debt distress.
- Past fiscal performance under the EFF-supported program:
  - Primary surpluses averaged 3 percent of GDP over the past three years (versus a debt-stabilizing level of about -5 percent of GDP).
  - Public debt fell by almost 20 percentage points to 70 percent of GDP at end-2019.
- Under the baseline:
  - Public debt projected to rise 7 percentage points to 77 percent of GDP in 2020, then decline about 12 percentage points between end-2020 and end-2025.
  - Gross financing requirements would climb to 15.9 percent of GDP in 2023 before descending to single digits in percent of GDP in the medium term.
- Key structural vulnerabilities explaining high risk assessment: narrow economic base, history of pro-cyclical policies, and high levels of foreign exchange-denominated debt.

### Coverage and Definitions
- Public debt coverage for the DSA includes:
  - (i) consolidated public debt by the general government (local and foreign currency);
  - (ii) public guarantees of external borrowing in foreign currency by state-owned enterprises;
  - (iii) external borrowings in foreign currency by the Development Bank of Mongolia;
  - (iv) IMF credit.
- Exclusions: certain external liabilities of the BoM (bilateral SWAP lines) and fully collateralized public guarantees of private-sector external debt.

### Baseline Assumptions
- Growth and inflation:
  - Real GDP growth: rebound to 8 percent in 2021 and average 5.5 percent in 2022-25.
  - Inflation: increase from trough of 5.3 percent last year, stabilizing just below the target of 8 percent.
- External and exchange rate:
  - External position weaker than fundamentals; nominal exchange rate expected to depreciate over horizon.
- Financing:
  - Assumes concessional budget support and project loans in line with current commitments, mainly over 2020 and 2021.
  - Assumes Mongolia maintains access to international bond markets.
- Primary balance path:
  - Projected to deteriorate to -2.9 percent of GDP in 2020, improve over two years to -0.5 percent, and remain at -0.5 percent in 2023–25.
- Debt structure and effective interest rate:
  - At end-2019, 50 percent of public debt was on concessional terms; share expected to decline gradually towards 40 percent by end-2025.
  - Average effective nominal interest rate projected to remain broadly stable at 3.7 percent.

### Debt Dynamics and Projections
- Principal drivers of projected debt decline from 2023: automatic debt dynamics, low effective interest rates (concessional debt), and high economic growth.
- Composition and timing risks:
  - Public external debt will lead to large external amortizations in 2022–23, which may create financing pressures.
  - Public debt held by non-residents and public debt denominated in foreign currency are both at 94 percent (all public debt owed to non-residents is foreign exchange denominated).

### Risks and Stress Tests
- Forecast track record (2010–18):
  - Fund staff systematically underestimated economic growth and overestimated inflation.
  - Primary balance forecasts were too optimistic (actual primary deficits larger than projected), except in the two most recent years of the analysis.
- Main sensitivity shocks and results:
  - Growth shock:
    - If growth declined by one standard deviation in 2021 and 2022, debt-to-GDP forecast to reach just below 85 percent in 2022.
    - Gross financing needs would increase to about 20 percent of GDP in 2022 (versus about 13 percent in baseline).
  - Exchange rate shock:
    - A nominal exchange rate depreciation of 33 percent in 2021 would increase debt to almost 90 percent of GDP.
    - Gross financing needs would peak at 20 percent of GDP in 2023.
  - Financial sector contingent liability shock:
    - Assumptions: (i) one-off fiscal outlays equal to 15 percent of banking-sector assets (excluding credit to the government) in 2021; (ii) concomitant real GDP growth decline by one standard deviation.
    - Under this shock, gross financing needs could reach 20 percent of GDP in the year of the shock, sending public debt toward 90 percent of GDP in the following year.
  - Primary balance shock:
    - Assumes consolidation in 2021-22 is not implemented: fiscal balances deteriorate by another 0.7 percent of GDP next year before consolidation, combined with an increase in interest rates of 25bps for every 1 percent of GDP worsening in the primary balance.
    - Cumulative shock equals 4 percent of GDP spread evenly over 2021-23 and an increase in interest rates by 60bps in each year.
    - Under this scenario, public debt trajectory worsens but does not breach 76 percent of GDP over the forecast horizon.
- Fan-chart probabilities:
  - If positive and negative shocks equally likely, public debt would remain above 75 percent with a 25 percent probability by end-forecast.
  - Under asymmetric downside-dominated risks (restricted positive realizations of exchange rate and primary balance), public debt would stay above 75 percent with a probability of about 37 percent.
- Additional risk indicators:
  - External financing needs (driven by current account deficit) are above the upper-risk-assessment benchmark.
  - Large current account deficits in recent years reflect one large FDI mining project; current account expected to improve as project completes and production/exports pick up.
  - Most external debt provided by bi- and multilateral lenders on below-market terms, which mitigates some external financing risk.

### Risk Mitigation and Policy Recommendations
- Levers to underpin debt sustainability:
  - Achieve a vigorous recovery in economic activity and unwind fiscal loosening over the medium term.
  - Keep expenditure growth anchored to nominal GDP to allow fiscal balances to improve as revenues recover.
  - Secure access to concessional financing beyond 2021 to mitigate risks associated with the projected hump in gross financing requirements in 2023.
- Precautionary measures given boom-bust history:
  - Use projected recovery to resume building fiscal and external buffers.
  - Build larger buffers to protect against resource-dependence, external imbalances, and contingent liabilities.
  - Prepare contingency plans to reprioritize expenditure and mobilize additional donor financing if downside risks materialize.
  - Progress in integrating external debts by public sector entities outside the general government into the DSA is necessary for a comprehensive assessment of debt vulnerabilities.

*Source: Annex I. Public Debt Sustainability Analysis.*

### Appendix 1. Letter of Intent

### Appendix 1. Letter of Intent

### Covid-19 status and containment measures
- Early containment measures in January and February: cancelling new-year celebrations, closing schools, restaurants and bars, limiting passenger transportation within Mongolia, and closing the border with China to passengers and freight.
- First reported case of Covid-19: March 9; total number of confirmed cases to date (letter): 148.
- Subsequent statement: as of June 1, 2020, Mongolia had 185 confirmed cases of COVID-19, with the majority imported and detected during compulsory quarantine.
- Testing and quarantine: “We will continue to test as appropriate and quarantine all affected cases.”

### Economic impact and outlook
- Mining exports: down 40 percent in the first quarter of 2020.
- Domestic fiscal revenues: down 9 percent year in the first quarter of the year.
- Projected sharp fall in output in 1H-20; gradual recovery beginning in second half of 2020 in line with a measured global recovery.
- Estimated balance of payments (BOP) financing gap before new official financing or adjustment: on the order of $4 billion.
- Medium-term outlook: economy expected to contract by 1 percent in 2020 (statement), 6 percentage points lower than the pre-COVID projection; modest rebound expected in 2021.
- Reserves: Bank of Mongolia sold $605 million by end-April to prevent a disorderly adjustment in the exchange rate; about thirty percent of reserves could be lost this year (statement).
- Debt and fiscal effects (statement): fiscal revenues projected to decline by 5.2 percent of GDP in 2020; overall fiscal deficit projected to reach -2.9 percent of GDP in 2020; public debt projected to increase by nine percentage points of GDP in 2020.

### Fiscal response and commitments
- Emergency fiscal package composition:
  - Tax relief and cuts in social security contributions: 2.8 percent of GDP.
  - Increase in social transfers and health spending: 2.6 percent of GDP.
  - Offset: cut current expenditures by 2 percent of GDP and capital expenditures by 2.5 percent of GDP to ensure a neutral budgetary impact.
- Near-term fiscal stance:
  - Allow automatic stabilizers to operate.
  - Projected primary balance: from a surplus of 4 percent of GDP in 2019 to a deficit of about 2½ percent of GDP in 2020.
  - Contingency plan to scale-up health and social spending if needed; mitigate budgetary impact through reprioritizing expenditures.
  - Intention to unwind fiscal loosening in 2021 and resume reduction in public debt.
  - Stand ready to take additional measures to lower the primary deficit, including re-prioritizing capital expenditures, if debt diverges from the envisaged path.
- Limits on quasi-fiscal spending by the Bank of Mongolia (BOM):
  - (1) limit all quasi-fiscal activities by the BOM—including those initiatives tasked in the Anti-Pandemic Law— to MNT800 billion (2 percent of GDP);
  - (2) stop quasi-fiscal spending starting in January 2021;
  - (3) fully disclose them in BOM’s audited financial statements which will be published on the BOM website.
- Emergency financing request:
  - Request for assistance under the Rapid Financing Instrument (RFI) in the equivalent of SDR72.3 million (equivalent to $99 million), corresponding to a purchase of 100 percent of quota.
  - Use of RFI resources: to help cover fiscal needs associated with the virus outbreak including those of low-income households and firms under stress.
  - Authorities will consider seeking a successor IMF arrangement if financing needs continue.

### Monetary, exchange rate, and liquidity measures
- Bank of Mongolia (BOM) measures to support liquidity and credit conditions:
  - cumulative cut in the policy rate of 200 basis points;
  - lower MNT reserve requirements by 200 basis points;
  - reduction in the policy rate corridor to ±1 percent;
  - lower banks’ liquidity ratios by 5 percentage points.
- BOM foreign exchange intervention: sold $605 million by end-April.
- Policy direction:
  - Allow greater exchange rate flexibility going forward.
  - Once pandemic crisis abates, BOM will step up efforts to build international reserves.
  - Over the medium term, develop local currency debt markets to attract non-resident participation and reduce exchange rate vulnerability.
- From the statement: policy rate cuts of 100 basis points in both March and April; reserve requirements reduced by 200 basis points; temporary postponement of mortgage and other loan payments for households.

### Financial sector policy and safeguards
- Temporary financial forbearance measures announced by BOM:
  - temporary easing on prudential requirements, loan classifications, restructuring standards;
  - deferred payment of consumption loan principals and interests by up to 12 months;
  - suspension of corrective actions against breaches of capital conservation buffer;
  - temporary resumption of BOM’s mortgage program.
- Commitments on financial measures:
  - Ensure pandemic-related financial easing measures are timebound.
  - Ensure temporary measures do not prevent appropriate classification, provisioning, and capital adjustments to accurately assess medium- to long-term impacts.
  - Restrict loan restructurings to borrowers with proven negative impact from the pandemic.
  - Return to ensuring a fully capitalized banking system as soon as immediate pressures pass, including addressing outstanding commitments under the 2017 EFF.
- BOM safeguards and audit commitments:
  - BOM commits to undergo an updated safeguards assessment.
  - Continue to provide IMF staff with access to most recently completed audit reports and authorize BOM’s external auditors to hold discussions with IMF staff.
  - Prepare a memorandum of understanding between the MOF and the BOM on responsibilities for servicing the related financial obligations to the IMF, since RFI funds will be used for budget financing.

### Structural policies and governance
- Continued commitment to:
  - improve the business environment;
  - combat corruption;
  - enhance financial supervision;
  - strengthen governance, notably AML/CFT.
- AML/CFT progress: Mongolia was grey listed by FATF in October 2019; authorities have undertaken measures to address deficiencies; progress reports discussed at FATF working groups in January and May 2020.
- Transparency and accountability on Covid-19 spending:
  - Government to publish regular information on revenue and expenditure performance.
  - Provide separate reporting mechanism for Covid-19 expenditures and publish quarterly reports on MOF website.
  - Commission independent third-party audit of Covid-19 spending within six months of disbursement and publish results on MOF website.
  - Published audit results to include full text of all related procurement contracts, names of awarded companies and their beneficial owners, and an ex-post validation of delivery.

### Additional financing and creditor engagement
- Intensified efforts to mobilize additional financing from bilateral and multilateral creditors.
- Secured additional $100 million of budget support from the Asian Development Bank.
- Authorities thankful to World Bank, Asian Development Bank, European Union and other donors for loans and grants; thankful to the People’s Bank of China for extending the swap arrangement with the Bank of Mongolia.

### Key numerical figures and program items
- Mining exports: down 40 percent (Q1 2020).
- Fiscal revenues: down 9 percent year in the first quarter of the year.
- BOP financing gap (before new official financing or adjustment): on the order of $4 billion.
- RFI request: SDR72.3 million (equivalent to $99 million), purchase of 100 percent of quota.
- BOM FX sales by end-April: $605 million.
- Policy rate cumulative cut: 200 basis points (letter); statement notes cuts of 100 basis points in both March and April.
- Reserve requirement reduction: 200 basis points.
- Policy rate corridor reduction: to ±1 percent.
- Banks’ liquidity ratios lowered by: 5 percentage points.
- Limits on quasi-fiscal activities by BOM: MNT800 billion (2 percent of GDP); stop starting January 2021.
- Primary balance projection: from surplus of 4 percent of GDP in 2019 to deficit of about 2½ percent of GDP in 2020.
- Fiscal revenue projection (statement): decline by 5.2 percent of GDP in 2020.
- Overall fiscal deficit projection (statement): -2.9 percent of GDP in 2020.
- Public debt projected change (statement): increase by nine percentage points of GDP in 2020.
- Expected change in reserves (statement): around thirty percent of reserves could be lost this year.
- Output projection (statement): economy expected to contract by 1 percent in 2020; rebound modestly in 2021.

### General Government — Covid-19 Expenditures (as reported)
- Expenditure Measures: 1,045 (in billions of MNT) — 2.6 (in percent of GDP)
- Increase in health spending (financed by donors and Government Reserve Fund): 171 — 0.4
- Temporary increase in Child Money Program (April 1 to October 1): 550 — 1.4
- Double Food Stamps Allowance (May 1 to October 1): 100 — 0.0
- Increase in Social Welfare Pension (May 1 to October 1): 350 — 0.1
- Wage subsidies for employers (April 1 to July 1): 520 — 0.1
- Cash transfers to herders: 200 — 0.5
- Interest subsidies for cashmere producers: 270 — 0.1
- Source: Ministry of Finance and Fund staff estimates (values shown are in billions of MNT and in percent of GDP).

*Letter of Intent and accompanying Statement by Executive Director (Mongolia), dated May 27, 2020 / June 3, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mngea2020001.pdf_