## 1mngea2021001 ## Source details **Canonical URL:** [1mngea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1mngea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1mngea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1mngea2021001.pdf.json) --- ### Outlook and growth projections - Real GDP growth: -4.6 percent in 2020; 4.5 percent in 2021; projected 7.0 in 2022. - Growth scenario for 2022–23: Mongolia poised for an export-led boom, with growth expected to accelerate to 6½–7 percent if export portals fully reopen and the Oyu Tolgoi copper mine is completed on schedule. - Medium-term growth: expected to moderate to 5 percent. - Output level: likely to remain below pre-pandemic trends due to permanent losses in activity (scarring). - Domestic activity: expected to gradually normalize as the pandemic is largely controlled. - Inflation: expected to return to the BOM’s targeted range; forecasted to remain within the BOM’s target given slack in the domestic economy. ### External sector, exports, and buffers - Export performance and external balances: - Export-led recovery began mid-2020; exports booming due to higher export prices. - Current account: -5.1 percent of GDP in 2020; projected -12.8 percent in 2021 and -12.8 percent in 2022. - Exports of goods (y/y percent change): -2.7 in 2020; 12.1 in 2021; 17.9 in 2022. - Imports of goods (y/y percent change): -13.1 in 2020; 31.5 in 2021; 13.6 in 2022. - Reserves and exchange rate: - Gross official reserves (USD millions): 4,534 in 2020; 4,243 in 2021; 4,508 in 2022. (Gross official reserves includes drawings from swap line.) - Reserves movements: declined by US$1 billion in H1 2020; rebuilt to US$4.4 billion by end-August 2021 after peaking at US$4.9 billion in April 2021. - Reserves net of BOM’s FX liabilities: US$0.76 billion by end-August 2021. - Exchange rate: Togrog per U.S. dollar (eop) 2,850 in 2020. - External vulnerabilities: - Thin net international reserves and high external public debt. - NIIP in 2020: -279 percent of GDP. - External liabilities composition (2020): FDI 182 percent of GDP; external debt 156 percent of GDP; government and BOM liabilities 79 percent of GDP. - OT mine liabilities: account for 70 percent of FDI liabilities; including a large external loan, OT liabilities estimated about 158 percent of GDP (47 percent of total liabilities). - External policy recommendations: - Allow greater exchange rate flexibility to act as a shock absorber. - Boost gross and net international reserves by opportunistic sterilized FX interventions. - Proactively reduce BOM foreign liabilities and reliance on off-balance sheet swaps. - Reduce external liabilities via fiscal consolidation, structural reforms, and development of the domestic debt market. ### Fiscal position and public debt dynamics - Primary balance (IMF definition): -6.7 percent of GDP in 2020; -3.1 percent in 2021; -1.1 percent in 2022. - General government debt: 77.4 percent of GDP in 2020; 81.5 percent in 2021; 76.8 percent in 2022. (General government debt data excludes SOEs debt and central bank’s liabilities from PBOC swap line.) - Public debt (GFS basis): 77½ percent of GDP in 2020; 81½ percent of GDP in 2021; about 68 percent of GDP by end-2026. - DSA and financing assumptions: - Real GDP growth expected to rebound to 4½ percent in 2021 and average 6 percent in 2022–26. - Inflation assumptions: 3.7 percent in 2020 rising to 7.2–7.5 percent in 2021–2022 and stabilizing at 6.4 percent by the medium term (2023 onward). - DSA assumes grant element of new external debt about 25 percent and average stock of domestic debt about 5 percent of GDP. - Illustrative consolidation scenario: - A 6½ percent of GDP consolidation over 2022−26—relative to the current baseline—could help bend public debt levels down to 56½ percent of GDP by 2026, closer to the IMF-recommended nominal anchor of 50 percent of GDP. This scenario includes an additional consolidation of ½ percent of GDP relative to the baseline in 2022. - Risks and shock scenarios (selected quantitative impacts): - Growth shock: one standard deviation decline in 2022–23 could raise debt-to-GDP to 105 percent in 2023 and gross financing needs to 22 percent of GDP in 2023. - Exchange rate shock: 33 percent nominal depreciation in 2021 would increase debt to almost 108 percent of GDP. - Financial sector contingent liability shock: one-off fiscal outlays of 15 percent of banking-sector assets (14½ percent of GDP) in 2022 plus growth shock could raise public debt to about 106 percent of GDP. - Combined macro-fiscal shock: public debt could peak about 139 percent of GDP by 2023 and gross financing needs peak at 28 percent of GDP in 2023. - Fiscal policy recommendations: - Pursue strong fiscal consolidation using high-quality reforms while protecting the poor and vulnerable. - Consolidation target: 6½ percent of GDP over 2022−26. - Preserve integrity of the Future Heritage Fund (FHF) and save windfalls in sovereign funds. ### Monetary policy and Bank of Mongolia (BOM) - Credit growth (percent change): -3.9 in 2020; 9.0 in 2021; 11.0 in 2022. - Monetary policy stance and guidance: - Monetary policy can stay on hold for now since the recent uptick in inflation is expected to subside. - BOM should remain vigilant and be ready to raise interest rates and reserve requirements if inflationary pressures become persistent. - Continue sterilizing FX interventions to contain excess liquidity. - BOM balance sheet and quasi-fiscal operations: - Quasi-fiscal operations totaled 5.2 percent of GDP by end-August 2021 and are expected to continue till end-2021. - BOM capital at end-August 2021: – 2.9 trillion MNT (7 percent of GDP) due to large losses in previous years. - Recommendations for BOM: - Enhance operational independence and governance. - Phase out quasi-fiscal operations and transfer them to the budget. - Resist parliamentary decisions on monetary and financial operations. - Allow greater exchange rate flexibility to serve as a shock absorber. - Continue building external buffers and proactively reduce foreign liabilities. - Reinstatement of macroprudential measures and mop up excess liquidity if needed. - Improve monetary transmission, including by increasing domestic debt issuance by the government within a comprehensive medium-term debt strategy. ### Financial sector and banking reforms - Banking sector conditions and concentration: - Banking system assets about 97 percent of GDP; banks comprise 93 percent of financial sector assets. - 80 percent of banking system assets concentrated in 5 SIFIs—Khan Bank, TDB, Golomt, Khas Bank, and State Bank. - Forbearance and transparency: - Pandemic-era forbearance measures masked asset quality; phase-out recommended by end-2021. - Sensitivity analysis: if 70 percent of forborne loans become NPLs, affected banks would need at least 1.29 percent of GDP in additional capital. - Two insolvent banks excluded from analysis. - Key recommended sequencing and actions: - Phase out regulatory forbearance by end-2021. - Conduct a fresh and independent Asset Quality Review (AQR) initially focused on potentially capital deficient banks, ideally by a reputable, independent international audit firm. - Ensure banks meet new minimum paid-in equity capital of MNT 100 billion by end-2021; require capital restoration plans for capital-deficient banks. - Delay bank IPO deadlines until necessary pre-conditions and contingency plans are in place; require IFRS-9 compliant audited financial statements prior to IPOs. - Strengthen supervisory capacity, contingency planning, resolution framework, and depositor protection arrangements (DICOM). - Public solvency support cannot be excluded and, if needed, should be coordinated between BOM and MOF with management change and shareholder bail-in conditions. ### Pandemic context and near-term support - Pandemic status (2021): - Lingering with high positivity rates and largely closed borders except cargo traffic. - 95 percent of the adult population fully vaccinated with Sinopharm and other vaccines; booster shots for adults and vaccination for ages 12−18 started. - Fatality rates and critical cases stabilized while daily cases and positivity rates remained high; healthcare system under pressure. - Near-term policy guidance: - Continued policy support may be needed until recovery is entrenched. - Any additional fiscal support should be targeted toward the vulnerable and used to bolster health systems. - Monetary policy may remain on hold unless inflation becomes persistent. ### Social safety nets, pensions, and structural fiscal reforms - Social safety nets findings: - Near-universal coverage and high levels of spending but inadequate support for the poor. - Mongolia spent 2½ percent of GDP on social assistance in 2019 (excluding pandemic relief). - Child Money Program (CMP) is universal and regressive; recommended re-targeting toward the poorest 40 percent of households. - Improving targeting could generate fiscal savings of about 3 percent of GDP. - Pension reforms (PIS) proposals and impacts: - Parametric reforms modeled include: automatic inflation indexation; gradual retirement age increase to 65; increase payroll contribution rate by 2 percent (combined to 19 percent); extension/valorization of wage base. - Fiscal impact examples: - Inflation-based indexation projected to stabilize state subsidy at about 4 percent of GDP by 2030. - Increasing eligibility age stabilizes state subsidy at about 5 percent of GDP by 2030. - Increasing contribution rate by 2 percent projected to realize about 1 percent of GDP fiscal savings per year on average. - Combined reforms projected to stabilize required state subsidy at about 1 to 2 percent of GDP per year till 2030. - Recommended transition: initiate reforms soon given time to build consensus and phase-in. - Social safety net recommendations: - Consolidate overlapping programs (e.g., merge CMP and Food Stamp Program). - Replace Minimum Pension with a Tested Social Pension (TSP). - Rationalize spending toward at least emerging market economy levels to save about 1 percent of GDP per year. ### Governance, SOE reforms, insolvency, AML/CFT - Governance priorities: - Decisively address corruption, governance, and AML/CFT weaknesses to strengthen the investment climate and promote diversification. - Publish full audit report on COVID-related expenditures and identify missing beneficial owners of awarded companies. - SOE and public sector management: - Consolidate SOEs into government financial statements and record fiscal support to SOEs on-budget. - Publish time-bound SOE reform strategy to address loss-making SOEs and improve transparency and dividend policies. - At end-2019, Mongolia’s 107 SOEs held 100 percent of GDP in debt while generating profits about 4 percent of GDP; all but two mining SOEs are loss-making. - Insolvency framework: - Existing 1997 law inadequate; revised corporate bankruptcy law to be submitted early 2022. - Recommended elements: expand scope to individual entrepreneurs, simplify insolvency tests (cash flow test primary), enhance creditor notification, strengthen rehabilitation provisions. - AML/CFT: - Continue implementing FATF recommendations and improve transparency of beneficial ownership. - Mongolia was put on FATF gray list in October 2019 and delisted in October 2020 due to decisive implementation. ### Staff appraisal, Board assessment, and policy recommendations - Staff and Board views: - Commendations for successful vaccination campaign and export-led recovery. - Concerns over significant downside risks from pandemic uncertainties, limited buffers, and high external public debt. - Key policy recommendations (near-term and medium-term): - Near term: continue supportive policies while ensuring fiscal support is targeted to vulnerable groups and health systems; monetary policy supportive unless inflation becomes persistent. - Medium term: implement strong fiscal consolidation and structural reforms—better targeted social assistance, ambitious pension reforms, improved public investment management, tax administration reforms, greater progressivity in PIT, and preserve FHF integrity. - Banking sector: phase out forbearance by end-2021; conduct independent AQRs; strengthen capital and supervisory oversight; delay IPOs until preconditions met. - Strengthen BOM operational independence, limit quasi-fiscal operations, allow exchange rate flexibility, and build external buffers. - Governance reforms: anticorruption, PIM, SOE reform, insolvency and judiciary reforms. ### External Sector Assessment and Annex highlights - External position assessment: "substantially weaker than implied by fundamentals and desirable policy settings." - NIIP and external debt: - NIIP in 2020: -279 percent of GDP. - External debt in Annex VI: 240 percent of GDP. - Composition example: FDI intercompany loans US$11.4 billion; public external debt US$10.7 billion; OT external liabilities US$11.5 billion (end-2020 estimate). - 95 percent of external debt long-term maturity; short-term debt 8.1 percent of GDP by end-2020. - Reserve adequacy: - Even if PBOC swap rolled over in 2023, reserve coverage projected to remain at bottom of recommended range; if repaid in 2023, coverage would fall below ARA metric. - Model estimates: - EBA-lite CA norm estimated at -6.8 percent of GDP. - Adjusted 2020 CA reported as -12.7 percent of GDP in model table. - CA gap estimated at -5.9 percent of GDP; translates to a 13.3 percent REER gap. - Annex II policy recommendations: - Boost reserves opportunistically; reduce foreign liabilities; develop domestic debt market; pursue banking reform to facilitate domestic financing. ### Key statistics and exact figures (selected, preserved) - Real GDP growth: -4.6 percent in 2020; 4.5 percent in 2021; projected 7.0 in 2022. - Current account: -5.1 percent of GDP in 2020; -12.8 percent in 2021 and 2022. - Exports of goods (y/y): -2.7 in 2020; 12.1 in 2021; 17.9 in 2022. - Imports of goods (y/y): -13.1 in 2020; 31.5 in 2021; 13.6 in 2022. - Gross official reserves (USD millions): 4,534 in 2020; 4,243 in 2021; 4,508 in 2022. - Primary balance (IMF): -6.7 percent of GDP in 2020; -3.1 percent in 2021; -1.1 percent in 2022. - General government debt: 77.4 percent of GDP in 2020; 81.5 percent in 2021; 76.8 percent in 2022. - Public debt (GFS basis): 77½ percent of GDP in 2020; 81½ percent of GDP in 2021; about 68 percent of GDP by end-2026. - Consolidation target: 6½ percent of GDP over 2022−26. - Pension reform fiscal impacts: combined reforms projected to stabilize required state subsidy at about 1 to 2 percent of GDP per year till 2030. - Banking sector sensitivity: extreme scenario provisioning need estimated at 1.29 percent of GDP. - FHF and FSF assets at end-2021 estimated to reach around 5.8 percent and 0 percent of GDP. - IMF debt service projections: baseline IMF debt service projected to be 0.7 percent of exports and 2 percent of gross reserves in 2024; adverse scenario: 0.8 percent of exports and 2.3 percent of gross reserves in 2024. - Selected DSA stress test peaks: - Combined shocks: public debt peak about 139 percent of GDP by 2023; gross financing needs peak at 28 percent of GDP in 2023. - Baseline gross financing requirements projected at 13.5 and 11.6 percent of GDP in 2023 and 2026 respectively. - Pension indicators: total pension expenditures projected to rise from about 6 percent of GDP to 14.4 percent of GDP by 2050; old age dependency ratio current 16 percent, 23 percent by 2030, 38 percent by 2050. *Source: IMF staff report for the 2021 Article IV Consultation (Mongolia), mission held September 13−October 5, 2021.* ### 4.5 percent in 2021, after contracting by 4.6 percent in 2020. In 2022-23, Mongolia remains ### 1mngea2021001 - 4.5 percent in 2021, after contracting by 4.6 percent in 2020. In 2022-23, Mongolia remains ### Outlook and growth projections - Real GDP growth: -4.6 percent in 2020; 4.5 percent in 2021; projected 7.0 in 2022. - Growth scenario for 2022–23: Mongolia poised for an export-led boom, with growth expected to accelerate to 6½–7 percent if export portals fully reopen and the Oyu Tolgoi copper mine is completed on schedule. - Medium-term growth: expected to moderate to 5 percent. - Output level: likely to remain below pre-pandemic trends due to permanent losses in activity (scarring). - Domestic activity: expected to gradually normalize as the pandemic is largely controlled. - Inflation: expected to return to the BOM’s targeted range; forecasted to remain within the BOM’s target given slack in the domestic economy. ### External sector, exports, and buffers - Export performance: an export-led recovery began in mid-2020 and is gathering steam due to booming prices for Mongolia’s exports. - Current account: -5.1 percent of GDP in 2020; projected -12.8 percent in 2021 and -12.8 percent in 2022. - Exports of goods (y/y percent change): -2.7 in 2020; 12.1 in 2021; 17.9 in 2022. - Imports of goods (y/y percent change): -13.1 in 2020; 31.5 in 2021; 13.6 in 2022. - Gross official reserves (in USD millions): 4,534 in 2020; 4,243 in 2021; 4,508 in 2022. (Gross official reserves includes drawings from swap line.) - Exchange rate: Togrog per U.S. dollar (eop) 2,850 in 2020. - Risks to external position: improvements in 2020 are likely temporary once recovery takes hold and imports pick up, reflecting lack of export diversification, heavy import dependence, and high external debt. - External vulnerabilities: thin net international reserves and high external public debt; rollover of large external liabilities has increased policy space. ### Fiscal and public debt dynamics - Primary balance (IMF definition): -6.7 percent of GDP in 2020; -3.1 percent in 2021; -1.1 percent in 2022. - General government debt: 77.4 percent of GDP in 2020; 81.5 percent in 2021; 76.8 percent in 2022. (General government debt data excludes SOEs debt and central bank’s liabilities from PBOC swap line.) - Policy recommendation: pursue strong fiscal consolidation using high-quality reforms to ensure external debt sustainability while protecting the poor and vulnerable. - Consolidation target: a 6½ percent of GDP consolidation over 2022−26—relative to the current baseline—would reduce public debt closer to the IMF-recommended nominal anchor (50 percent of GDP). - Fiscal risks: large, untargeted and continuing fiscal, quasi-fiscal and financial forbearance measures have heightened macrofinancial vulnerabilities; draft 2022 budget proposal to make high levels of untargeted social assistance permanent risks worsening debt dynamics and damaging the integrity of the Future Heritage Fund. - Recommended fiscal reforms: better targeted and more effective social assistance programs; ambitious pension reforms; improved public investment management; tax administration reforms; greater progressivity in personal income tax rates; preserve integrity of the Future Heritage Fund. ### Monetary policy and Bank of Mongolia (BOM) - Credit growth (percent change): -3.9 in 2020; 9.0 in 2021; 11.0 in 2022. - Monetary policy stance: monetary policy can stay on hold for now since the recent uptick in inflation is expected to subside; BOM should remain vigilant and be ready to raise interest rates and reserve requirements if inflationary pressures become persistent. - Recommendations for BOM: enhance operational independence and governance; phase out quasi-fiscal operations and transfer them to the budget; resist parliamentary decisions on monetary and financial operations; allow greater exchange rate flexibility to serve as a shock absorber; continue building external buffers and drawdown non concessional external liabilities; reinstate macroprudential measures and mop up excess liquidity if needed. - Suggested structural actions: improve monetary transmission, including by increasing domestic debt issuance by the government in the context of a comprehensive medium-term debt strategy. ### Financial sector and banking reforms - Banking sector concerns: financial sector weaknesses exacerbated by the pandemic increase exposure to external shocks by forcing public and private sectors to borrow externally; potential rise in non-performing loans (NPLs) could delay recovery. - Financial stability indicators and priorities: containment of market pressures noted, but persistent banking sector challenges remain. - Recommended sequencing and actions: - Phase out regulatory forbearance by end-2021. - Promptly undertake a fresh and independent asset quality review (AQR) for potentially capital deficient banks. - Ensure greater supervisory focus on strengthening banks and contingency planning. - Strengthen bank capital; address capital shortfalls in capital deficient banks. - Delay bank IPO deadlines until necessary pre-conditions for success and contingency plans are in place. - Ensure transparency and proper assessment of pandemic impact on bank balance sheets. - Quasi-fiscal programs: subsidized mortgage programs and similar operations should be transferred to the budget. ### Pandemic context and near-term support - Pandemic status: lingering in 2021 with high positivity rates and largely closed borders except cargo traffic; 95 percent of the adult population has been fully vaccinated with Sinopharm and other vaccines; booster shots for adults and vaccination for ages 12−18 have started; fatality rates and critical cases have stabilized while daily cases and positivity rates remain high; healthcare system under pressure. - Near-term policy guidance: - Continued policy support may be needed until recovery is entrenched. - Any additional fiscal support should be targeted toward the vulnerable and used to bolster health systems. - Monetary policy may remain on hold unless inflation becomes persistent. ### Risks and downside scenarios - Key downside risks: worsening of the pandemic, extended border closures, tighter global financing conditions, volatility in export prices, delays in completing the OT underground mines, and major deterioration in asset quality. - Specific vulnerabilities: lack of export diversification, heavy import dependence, high external public debt, thin net international reserves, compromised BOM operational independence, weakened bank balance sheets. - Policy-induced risks: procyclical policies could undermine macrofinancial stability and debt sustainability, reducing policy space to address other risks and undermining recovery. ### Structural and governance reforms - Long-term development strategy: authorities’ strategy focused on sustainable, inclusive, and green growth is welcomed. - Governance and structural priorities: - Decisively address long standing concerns about corruption, governance, and AML/CFT to strengthen the investment climate and promote diversification. - Implement e-governance and state enterprise reform plans. - Revamp insolvency framework and prioritize judiciary reforms to address impaired balance sheets. - Improve public investment management, fiscal rules, and complete long-overdue improvements now. - Publish the full audit report on COVID related expenditures, including missing information on beneficial owners. ### Executive Board Assessment and recommendations - Commendations: successful vaccination campaign and welcome of the export-led recovery. - Board concerns: significant downside risks due to pandemic uncertainties, limited buffers, and high external public debt. - Fiscal stance: call for ambitious fiscal consolidation strategy and bold structural fiscal reforms. - Monetary stance: stress enhancing BOM operational independence; maintain vigilance on inflation. - Banking sector: call for well-sequenced bank reforms, phasing out regulatory forbearance by end-2021, and conducting independent AQRs. - Governance: urge decisive action on corruption, governance, and AML/CFT; emphasize preserving integrity of Future Heritage Fund. - Additional Board suggestions: delay bank IPO deadlines until preconditions for successful IPOs and contingency plans are in place; publish full audit report on COVID expenditures. *Source: IMF staff report for the 2021 Article IV Consultation (Mongolia), mission held September 13−October 5, 2021.* ### 3. The reform agenda remains broad, with little progress on major IMF recommendations ### 3. The reform agenda remains broad, with little progress on major IMF recommendations ### Political and strategic context - The landslide 2021 Presidential victory consolidates power within the Mongolian People’s Party (MPP), with the party dominating all state leadership positions for the second time since 1990. - The 2020 Constitutional Amendment largely restricted the President’s power, but the victory ensures policy continuity given the MPP’s overwhelming Parliamentary majority. - Appetite for strong reforms may be weak ahead of the forthcoming 2024 Parliamentary elections. - The government adopted "Mongolia Vision 2050" prioritizing macroeconomic stability and green and sustainable development, aligned with Mongolia’s Sustainable Development Goals (SDG). - Immediate political-economy priorities: address the pandemic amidst populist spending pressures; make good on campaign promises about equitable distribution of mining wealth; renegotiate the investment agreement on the Oyu Tolgoi (OT) mining project. ### 2020–21 export-led recovery and domestic conditions - The economy rebounded after a deep recession in 2020; GDP growth surged in H1 2021, largely export-led due to a stronger global recovery, base effects, a resumption in mining FDI and private investment. - Recent border closures are hurting coal exports and production. - The domestic economy remains weak: private consumption and non-mining investment continue to contract despite policy support. - Labor market concerns: lower employment rates and incomes (especially in services due to intermittent lockdowns), sharp credit contraction in 2020, and declining labor force participation (LFP) rates—especially female LFP—indicating possible scarring. - Inflation picked up above the Bank of Mongolia’s (BOM) 6±2 percent target at end-September 2021, reflecting base effects and transitory supply-side factors affecting import prices. ### Policy response and quasi-fiscal measures - Fiscal and monetary policy have been highly supportive through end-2021: higher health-related spending, broad fiscal measures for households and SMEs, accommodative monetary policy with lower policy rates and reserve requirements. - The BOM and Financial Regulatory Commission (FRC) implemented temporary financial forbearance on prudential requirements, loan classifications, and restructuring standards. - The Anti-Pandemic Law (APL) of April 2020 temporarily suspended macroprudential limits on debt-income ratios and compelled BOM quasi-fiscal activities including: - purchasing a public enterprise bond to finance a debt relief scheme; - resuming a subsidized mortgage program; - extending concessional loans to gold miners. - The APL, supposed to expire end-2020, was extended till end-2021; some forbearance measures extended till end-March, 2022. ### Public debt and fiscal balances - Public debt rose sharply to 77½ percent of GDP by end-2020 due to the economic contraction and fiscal support measures; debt continued to rise in 2021 despite a one-off budget transfer from OT to settle tax disputes (2. 4 percent of GDP). - Part of higher-than-budgeted mineral revenue gains have been saved, increasing domestic buffers in the FHF. - The government successfully rolled over US$1 billion of Eurobonds coming due in 2022−23, increasing fiscal space. - Eurobond issuance in June 2021: two tranches with a face value of US$500 million each, 10-year and 5-year maturities, and interest rates of 4.45 and 3.5 percent. - On current trends and policies, fiscal balances are expected to deteriorate over the medium term despite planned consolidation in 2022. - Mongolia’s fiscal support through the pandemic included increased health spending (1½ percent of GDP during 2020–21) and untargeted economic support measures costing 13 percent of GDP. - Public debt is projected at 68 percent of GDP by 2026, above the IMF recommended 50 percent of GDP, and close to the authorities’ medium-term target of 60 percent of GDP in net present value (NPV) terms (equivalent to some 71 percent of GDP). - The fiscal multiplier is estimated to be low (0.3) given Mongolia’s high import propensity. ### External position, reserves, and vulnerabilities - The BOM intervened heavily to stabilize the exchange rate, causing a US$1 billion drop in gross international reserves (GIR) till mid-2020; GIR rebuilt to US$4.4 billion by end-August 2021 aided by improving exports, import compression, and US$1 billion in official and IMF financing. - Net international reserves (NIR) remain low due to significant BOM external liabilities, notably a US$1.8 billion PBOC swap rolled over in July 2020 and maturing in 2023. - The REER depreciated by 6½ percent in 2020, but recent inflation pickup led to REER appreciation in 2021. - Mongolia’s external liabilities were 338 percent of GDP in 2020 and are expected to remain large. - IMF SDR allocation in 2021: US$98.3 million. - Reserve coverage is expected to decline to a 4½-month import cover (111 percent of the ARA metric) over the medium term, even assuming a rollover of the PBOC swap in 2023. ### Financial stability and banking sector - Cancellation of 2019 BOM administrative measures and blanket pandemic-era forbearance—driven by Parliamentary intervention—may have increased capital shortfalls in some banks. - Reported non-performing loans (NPLs) have risen; two-tiered reporting (with/without forbearance) obscures the true size of bank capital needs. - Liquidity ratios remain adequate due to rising deposits and improving financial sector inclusion. - A 2017 regulation requiring banks to meet a new minimum paid-in equity capital level by end-2021 remains on track. - Amendments to the Banking Law and a 2020 Parliamentary banking sector reform strategy are steps to strengthen bank capital and reduce shareholder concentration. - Recommendation: phase out forbearance measures by end-2021 to improve transparency, strengthen bank capital, and prudently implement banking sector reforms to improve financial stability. ### Outlook and risks - Near-term growth outlook: GDP growth in 2021 likely to be 4½ percent; growth expected to accelerate in 2022−23 as coal exports recover, the second phase of OT comes onstream, and imports ease after OT completion. - Domestic demand should improve if the pandemic is largely controlled by end-2021; a modest upturn in credit growth is expected. - Medium term: growth expected to trend down to potential, but output levels likely to remain below pre-pandemic trends due to scarring in labor and product markets; inflation expected to return to the BOM’s target given economic slack. - External buffers expected to remain inadequate despite an export price boom; limited export diversification, heavy import dependence, high oil prices, and large mining investment needs will keep current account deficits high. - Risks predominantly on the downside, though rising commodity prices pose upside risks: - Global risks: more virulent pandemic outbreaks, prolonged border closures, tightening global financial conditions raising funding costs given large external liabilities. - Domestic risks: procyclical spending and reform delays ahead of 2024 elections undermining macro stability and debt sustainability; delays in OT renegotiation; financial sector weaknesses increasing exposure to external shocks; a potential rise in NPLs reducing bank lending; undercapitalized banks triggering instability; global shift away from coal worsening export outlook due to limited diversification. - Example: the 2-month closure of Mongolia’s border with China in 2020 led to a temporary 30 percent decline in exports. ### Authorities’ views and policy priorities - Authorities agreed with the assessment: near term, the economy will continue to be affected by export disruptions and high infection rates; the outlook is uncertain with significant downside risks from worsening outbreaks and extended border closures with China. - Policy priorities to achieve Vision 2050: - Secure the recovery until entrenched. - Manage the positive terms of trade shock prudently to avoid a future bust. - Use the windfall to achieve longer-term Vision 2050 goals. - Specific policy guidance: - Fiscal support should be targeted to the vulnerable and health systems (e.g., procuring vaccines, strengthening treatment, keeping export portals open). - Monetary policy could stay on hold given transitory inflation pressures but requires continued vigilance. - High-quality fiscal reforms to improve debt dynamics: sustainable pension and social assistance policies, improved public investment management, strengthened fiscal frameworks. - Terminate quasi-fiscal operations and enhance BOM’s operational independence; allow the exchange rate to serve as a shock absorber while building net external buffers. - Phase out forbearance measures by end-2021 to improve transparency; strengthen bank capital and prudently implement banking sector reforms. - Decisively address corruption and governance to strengthen the investment climate and maximize gains from the export windfall. ### Fiscal policy considerations and warnings - The 2022 budget should balance near-term support and debt reduction: any additional fiscal support should be targeted, temporary, and focused on health and keeping export portals open. - Permanent extension of pandemic-era increases in untargeted social transfers—financed by forgoing planned savings in the Future Heritage Fund (FHF)—is of particular concern and would be unaffordable when growth slows or commodity prices drop. - Untargeted permanent transfers: - Increase budget spending regardless of whether recipients save or spend the transfers. - Give rise to pressures for further increases over time, crowding out other priorities. - Risk raising reservation wages and reducing labor force participation, weakening domestic activity and productivity and undermining Vision 2050 goals. - If spent, may increase external vulnerabilities by boosting imports. - Longer-term fiscal risks: without pension reforms and credible measures to meet SDG and Vision 2050 commitments, public debt could rise rapidly; development spending for mining, renewable energy, and a knowledge-based economy would further aggravate debt pressures. - Mongolia’s reliance on external financing due to an underdeveloped domestic debt market increases susceptibility to external shocks; contingent liabilities from the financial sector and natural disasters add further fiscal risks. _Italic: IMF staff summary of chapter 3, "The reform agenda remains broad, with little progress on major IMF recommendations."_ ### 21. Stronger consolidation is needed to secure debt sustainability. Illustratively, a ### 1mngea2021001 - 21. Stronger consolidation is needed to secure debt sustainability. Illustratively, a ### Fiscal consolidation and debt sustainability - Illustrative consolidation: "6½ percent of GDP consolidation over 2022−26—relative to the current baseline—could help bend public debt levels down to 56½ percent of GDP by 2026, closer to the IMF-recommended nominal anchor of 50 percent of GDP." This scenario includes "an additional consolidation of ½ percent of GDP relative to the baseline in 2022." - Using fiscal buffers in lieu of reforms is not advisable: - Without addressing structural drivers, using buffers would "not fundamentally alter the debt path." - Using the FHF during an export price boom "would undermine the fiscal rules governing the FHF" and come "at a permanent cost to future Mongolian generations." - At end-2020, "56½ percent of outstanding public debt was owed to official creditors including MDBs, and 39 percent to private creditors (which have been, and are being, rolled over)." - Recommendation: "Debt reduction through fiscal reforms ... would create fiscal space for years to come, facilitate the achievement of the Vision 2050 goals, and help Mongolia withstand large external shocks." ### Priority fiscal and structural reforms (to implement in 2022−23 during the export boom) - General principle: "Implementing strong reforms during a recovery, while adequately protecting the poor and vulnerable, can be more socially and politically palatable than in a recession." - Focus areas: "improve cost effectiveness, the governance of state operations and public investment, and tax administration." Reforms require time to design and phased implementation, may entail near-term costs and capacity building, but yield long-lasting declines in the budget deficit and signal commitment to fiscal sustainability. - Better targeted social safety nets: - Current system: heavy reliance on unconditional cash transfers to the entire population through the Child Money Program (CMP); system is "regressive and provides inadequate support to the vulnerable." - Fiscal and social potential: "Amending the social safety net program to improve targeting and increase the coverage of, and the incidence and adequacy of benefits for the most vulnerable at the expense of the rich, can generate fiscal savings of about 3 percent of GDP and reduce poverty and income inequality." - Administrative note: "Various government databases and/or local government channels could be used to expand coverage of the vulnerable." In time, the unemployment benefit system "should be enhanced to make it a more effective automatic stabilizer in a downturn (IMF 2020b)." - Coverage detail: "Given a sizable informal sector, the unemployment benefit system covers about 23 percent of total unemployed in 2020." - Pension reforms: - Suggested parametric reform of the Pension Insurance Scheme (PIS): "gradual increases in the retirement age to 65 and penalties for early retirement, automatic inflation indexation of benefits, and an extension of the wage base for pensions." - Fiscal impact: "should produce fiscal savings of about 6½ percent of GDP by 2030 (Annex VII)." - Implementation note: "Pension reforms take time to achieve consensus and phase in, and should therefore be initiated soon." - Public investment management (PIM): - Improve PIM to address "value-for-money" concerns and ensure "sustainable levels of public investment are incorporated in the MTBF," which "can lower spending bills and reduce debt accumulation." - Tax policy and administration: - Revenue opportunities: "reinstating planned increases in social security contributions and through a combination of tax policy measures, such as broadening the tax base and allowing greater progressivity in the top personal income tax (PIT) rate (currently 10 percent versus 27 percent in EMD-Asia) would boost PIT revenue above that of peer countries." - Administration reforms: implement "annual compliance improvement plans, strengthen data and analytics, and introduce appropriate operational guidelines to improve the implementation of the 2019 tax policy legislation." - Customs: reduce revenue leakages by "modernizing legislation, streamlining processes, and upgrading skills, thereby replacing a control-centric approach with a risk-based and targeted one." - Debt management: - Continue improving "public sector asset and liability management and increase debt concessionality." - Favor "greater recourse to domestic financing, and a larger private sector role" to meet policy goals; achieving this requires "a fundamental course correction to address financial sector and governance weaknesses (Sections C and D)." ### Fiscal framework and anchors - Adopt and comply with a streamlined fiscal framework: "Mongolia should target a nominal debt anchor of 50 percent of GDP, as opposed to the current anchor of 60 percent in NPV terms, although it may not be able to achieve this target until after 2026." - Rationale for 50 percent anchor: Mongolia's "greater reliance on external debt compared to peer economies and its fiscal risks" justify a lower threshold to mitigate risk of debt exceeding safe levels under adverse shocks. - Operational recommendations: - "Such an anchor would reduce operational complexities and, being easier to communicate and monitor, be a better deterrent to political pressures, and should ideally cover budget liabilities incurred by the BOM." - "Preserving the integrity of the FHF will be crucial for investor confidence." Legislative changes to forgo future FHF savings to fund untargeted social assistance would "undermine the only pillar of the fiscal framework that has worked so far." - "A more independent Fiscal Council is needed—with adequate budget and staffing capacity—to help monitor the budget process, with a formal correction mechanism to address non-compliance (IMF 2019a and b)." ### Authorities’ views on fiscal measures (as presented) - Authorities consider draft 2022 budget policies "broadly appropriate" and consistent with the revised fiscal framework. - CMP: decision to "sustain the CMP at the 2020–21 levels and transform it from a welfare to a savings program over the medium-term" seen as appropriate to limit fiscal impact. - Legislative changes to the FHF: authorities view them as "consistent with the Vision 2050 development strategy" and "strongly disagreed" that using FHF accumulations to finance permanent untargeted social assistance would jeopardize the FHF. - Pension reforms: "to be discussed by Parliament in Fall 2021" and will "accommodate many of the recommended reforms," else state subsidies will continue to rise. - Tax policy: "There are no plans to raise taxes or make the PIT progressive." - Debt anchor: authorities recognize benefits of a nominal debt anchor but see the current NPV anchor as "consistent with past IMF debt sustainability assessments" and relevant since "most of Mongolia’s debt is concessional." Domestic issuance "would be considered as a last resort." ### Monetary and external sustainability - Monetary stance: - Recommendation: "Monetary policy should remain on hold." Rationale: "Inflation expectations and cost push pressures appear to be contained" and "the current accommodative stance remains appropriate since inflation is expected to be return to the BOM’s target, given the large output gap." - The BOM should "continue to sterilize interventions in the FX market to contain excess liquidity." - Vigilance on inflation: - Risks: "excess liquidity generated by strong exports inflows," "release of pent-up domestic demand," "shrinking labor force could put push up wages if LFP remains low," and policy support that is hard to reverse could overstimulate the economy. - Tools if inflation trends up: "raise interest rates and reserve requirements, reinstate the macroprudential measure on debt-income ratios, and mop up excess liquidity." - Quasi-fiscal operations: - Concern: "Quasi-fiscal operations should be discontinued as they are jeopardizing the operational independence and balance sheet of the BOM." - Data point: despite a 2 percent of GDP limit under the 2020 RFI arrangement, "quasi-fiscal operations totaled 5.2 percent of GDP by end-August 2021, and are expected to continue till end-2021." - Recommendation: discontinue quasi-fiscal operations when the APL expires at end-2021; "the subsidized mortgage lending program transferred to the government and phased out." - BOM capital at end-August 2021: "– 2.9 trillion MNT (7 percent of GDP) due to large losses in previous years." - Exchange rate and buffers: - Exchange rate: "The exchange rate should continue to act as a shock absorber and FX intervention should be limited to disorderly market conditions." Greater exchange rate flexibility would "lend credibility to the inflation anchor, help build buffers, and facilitate external adjustment." - External positions: "Stronger buffers are needed, given a large negative IIP and low NIR due to high external debt (Annex II)." - Options to bolster NIR and external sustainability: - Continue opportunistic FX interventions to build buffers without misaligning the exchange rate. - Consider divesting "the accumulated stock of non-gold precious metals (around US$450 million)." - Continue to boost the FHF and FSF and gradually invest these funds abroad to reduce currency risk and IIP over time. - Liability management: reduce foreign liabilities, reduce reliance on off-balance sheet swaps, and consider using "the IMF 2021 SDR allocation to repay non-concessional liabilities" as one option. - Improving monetary transmission requires financial sector and governance reforms to address structural excess liquidity and limited domestic securities. - Restarting domestic government bond issuance: - Merit in restarting issuance via a "conservative and staged process" with a comprehensive MTDS and Annual Borrowing Plan, adequate resourcing of debt management, investor relations, and coordination with the BOM. - Start with "small auctions at the short end of the curve, where the policy rate provides a natural anchor." ### Banking sector health and restructuring - Current state: - Banking system showing early recovery after pandemic shock; "banks remain highly liquid" and many maintain regulatory compliance, but profitability declined sharply in 2020 and only recently begun to recover. - NPLs rose during the pandemic and have recently moderated, but "NPLs are expected to expand further once forbearance measures are unwound." - System is "highly concentrated" with "important pockets of balance sheet weaknesses due to legacy issues, and governance and management challenges." - Stress and capital needs: - Sensitivity analysis: "many banks remain adequately capitalized and in full regulatory compliance even in a worst-case scenario requiring a 70 percent provisioning for loans currently under forbearance." - However, "capital needs are elevated for some banks. In the worst-case scenario ... these capital deficient banks would need at least an estimated 1.3 percent of GDP in additional capital." - Sequencing and policy actions for bank restructuring: - Transparency and assessment: - Ensure bank balance sheets "meet regulatory and accounting norms before the IPOs." - Phase out forbearance measures "by end-2021"; current timeframe seen as excessive. - Conduct a targeted asset quality review (AQR) "ideally starting in 2022" by an independent international audit firm for capital deficient banks; pursue an AQR of the entire system over the medium term. - Supervisory priorities: - Ensure banks meet new (higher) minimum paid-in equity capital by end-2021, "including through consolidation." - Conduct updated Business Plan and Solvency Assessments and stress tests; banks should "preemptively provision for forborne loans, and address identified weaknesses." - Address capital deficient banks: - Require capital restoration plans, monitored by the BOM; if restructuring fails within a reasonable timeframe, "the BOM should exercise its authority under the Banking Act and take appropriate measures until capital compliance is achieved." - Public solvency support "cannot be excluded" and should be operationalized without delay, with close BOM-MOF coordination to ensure effective use of public funds. - A crisis communications committee should maintain public and investor confidence. - The Deposit Insurance Corporation of Mongolia (DICOM) "must carry out its functions transparently" and provisions for government funding for DICOM in the event of insolvency of a SIFI "must be well-defined." - Address gaps in "collateral repossession, insolvency, and the inefficiencies of the court system." - Pre-conditions for bank IPOs: - Ensure balance sheet deterioration is addressed before IPOs; regulators should "delay the IPO target deadline" and avoid rushing to diversify shareholders. - FRC and BOM must effectively oversee IPOs and assess fitness and propriety of new large shareholders. - Given limitations of the Mongolian Stock Exchange, "a successful IPO is not guaranteed" and contingency plans are needed. *Source: IMF country report excerpt on Mongolia (sections 21–37).* ### 38. Over the medium term, further strengthening of supervision capacity will be ### 38. Over the medium term, further strengthening of supervision capacity will be ### Banking supervision and regulatory framework - The BOM has implemented the new supervisory framework designed to move the institution toward risk-based supervision, however implementation is not fully consistent with Basel. - Further training of supervisory staff could be helpful, particularly for reviewing and approving banks’ NPL resolution strategies and restructuring plans. - Regulatory reforms needed: - Insolvency and creditor rights need to be improved in the near term in line with the advice provided by the IMF and other institutions (Section D). - Further refinements may be needed in laws amended in late 2020 (such as the Banking Law). - Appropriate codes of corporate conduct should be legally mandated giving the BOM the appropriate legal authority to address non-compliance. - The Law on Deposit Insurance should be updated to improve creditor hierarchy of claims in line with international best practices. - Parliament should refrain from passing legislation that establishes policies and timetables that supersede the authorities of the regulatory bodies. ### Authorities’ views on banking reforms and implementation - The BOM was confident that, as the economy recovers, the performance of loans under forbearance will not contribute to an increase in NPLs. - The BOM’s sensitivity analyses, which stresses for increases in overall NPL levels—rather than loans under forbearance—suggest no capital shortfalls would arise in downside scenarios similar to historical downturns. - Banking sector reform strategy: - Aims to maintain the reform momentum within the current electoral cycle. - Unless Parliament amends the Banking Law, the authorities plan to adhere to the legislation’s deadlines; to date, all SIFIs have submitted IPO plans for approval and surveyed potential pools of investors. - Regulators are developing rules governing the IPO process: all banks are required to complete year-end IFRS-9 compliant audited financial statements for IPO disclosures. - BOM confident of ability to conduct fit and proper vetting of qualifying share purchasers but acknowledged vetting offshore investors would be more challenging. - Authorities acknowledged the need to formulate contingency plans in case of financial instability. ### Combatting corruption and governance weaknesses - Mongolia’s business climate ranks well below mineral resource-rich peer economies, with marginal improvements in recent years. - Notable problems include: electricity supply (infrastructure gaps); cross-border trading (widespread corruption); resolving insolvency (regulatory weaknesses and ineffective contract enforcement reflecting long and unpredictable judicial procedures and limited capacity for commercial dispute resolution); and initiating and operating businesses (weak governance and transparency). - Anti-corruption framework: - Legal framework has improved, but implementation is lagging, resulting in high corruption, particularly in several state functions. - Progress underway to strengthen revenue administration and modernize the customs regulatory framework with IMF assistance. - Remaining concerns: inadequate transparency requirements for politically exposed persons and a lack of protection of whistleblowers. - Strengthening fiscal transparency and public investment management (PIM) is a priority: - Strengthening fiscal transparency: need a strong institutional framework with clear roles and responsibilities among the National Audit Office (NAO), Fiscal Stability Council, MOF and Parliamentary offices to better control substantial off-budget spending. - Medium-term budgeting for multi-year public investment: all projects should be appraised prior to the budget process using an established project selection criteria, and incorporating appropriate levels of maintenance funding; sustainable levels of public investment spending should be incorporated in the MTBF. - Improved project appraisal, selection and management: enhance project selection/appraisal by using published criteria and methodology, beef up central oversight and support functions, link project selection with the budget process, prepare project implementation plans prior to approval, and strengthen payables reporting to better control project execution and arrears. - Adequate PPP management: planned PPP law to enact international best practices is commendable; selection of PPP projects should be based on appropriate guidelines and management frameworks which effectively control contingent liabilities and should be embedded within the budget process. ### State-owned enterprises (SOEs) and public sector management - Draft 2022 budget aims to increase SOE contributions by increasing profitability and strengthening transparency and accountability. - Immediate priorities: - Consolidate all SOEs into the government’s financial statements. - Record fiscal support to SOEs on-budget to improve transparency and provide impetus for financial self-sufficiency. - Publish a clear time-bound strategy for SOE reforms including proposals to address loss-making SOEs, increase productivity, and reduce vulnerability to corruption by strengthening SOE transparency, governance and oversight by the MOF and State Property Coordination Agency. - At end-2019, Mongolia’s 107 SOEs held 100 percent of GDP in debt while generating profits of about 4 percent of GDP. All but two mining SOEs are loss-making. ### Transparency of COVID-19 expenditures and audits - An independent third-party audit and transparency of COVID-19 expenditures is important to secure continued donor support. - Commitment to audit and publish results by end-June 2021 (IMF, 2020a) has been delayed due to the pandemic but a NAO audit report on Covid-19 expenditures was recently published. - Efforts to publish Covid-19 related contracts on the MOF website including information about awarded companies and beneficial owners are noteworthy; identification of missing beneficial owners should continue. ### Bank of Mongolia (BOM) governance - Weaknesses in governance continue to lead to high levels of quasi fiscal activities and supervisory challenges. - 2018 amendments to the Central Bank Law strengthened BOM governance, as did the 2021 amendments which reinstated legal immunity for supervisors to ensure appropriate appointment and dismissal procedures with limited scope for misuse. - Operational independence remains weak due to Parliamentary actions; a Parliamentary decision—not an MPC decision—kept extending the 2021 APL forcing the BOM to undertake large quasi-fiscal operations with significant monetary and financial implications. - Recommendations: - Enhance BOM’s institutional and financial autonomy. - Further clarify BOM’s mandate. - Ensure greater de facto protection of BOM management and staff from political pressure. ### Insolvency framework and corporate balance sheet resolution - The pandemic has increased insolvency risks, especially among SMEs, which are heavily represented in hard-hit sectors. - Policy balance: - Target assistance toward distressed but viable SMEs. - Facilitate orderly exit of non-viable SMEs. - Existing 1997 insolvency law shortcomings: - Does not adequately protect a creditor’s ability to collect collateral in the event of non-payment nor provide debtors an opportunity to rehabilitate their business. - A revised corporate bankruptcy law will be submitted to Parliament in early 2022. - Recommended elements for the revised insolvency framework: - Expanded scope to also cover individual entrepreneurs/merchants. - Simplified insolvency tests to expedite resolution (this could comprise a simple cash flow test as the basic standard (inability to pay debts as they fall due) and use a balance sheet test (liabilities exceeding assets) only as an alternative). - Enhanced creditor notification to facilitate the commencement of insolvency proceedings. - Strengthened legal provisions on rehabilitation plans to appropriately protect creditors’ rights. ### Anti–money laundering / Countering the financing of terrorism (AML/CFT) - Ongoing implementation of FATF recommendations should continue. - Recent plenary meeting of the Asia Pacific Group for Money Laundering (APG) reports substantial progress on technical compliance and improved effectiveness in several areas. - Remaining priorities: - Address implementation challenges. - Focus on preventive measures (i.e., customer due diligence, including politically exposed persons). - Improve transparency of beneficial ownership of legal persons, including those in dealings with, or dependent on, the public sector; this information should be accessible to reporting entities. - Context: Mongolia was put on FATF’s gray list in October 2019 but delisted in October 2020 due to decisive implementation of FATF recommendations, including (1) enforcement of a new supervisory framework covering all financial institutions and designated non-financial business and professions, (2) prosecutions of money laundering activity; (3) increased confiscation/seizure of non-declared currency; and (4) cooperation to prevent sanctions evasion of proliferation financing. ### Authorities’ views on governance, PIM, SOE reforms and AML/CFT - Authorities concurred that governance and transparency challenges remain. - Current actions: - Enhancing implementation capacity and effective enforcement to help combat corruption among high-level officials. - Strengthening public investment management to increase transparency and clarify responsibilities. - SOE reforms aim to increase enterprise value and budget contributions by aligning corporate governance with international standards, improving financial reporting and transparency, and enhancing expenditure discipline and dividend payout policies. - On AML/CFT, focus on undertaking a second national risk assessment, developing a national strategy, and effective implementation of the AML/CFT framework including by issuing relevant guidance to the private sector. - Authorities echoed importance of upgrading the insolvency framework and enhancing the BOM’s operational autonomy by continuing outreach to Parliamentarians. ### Post-Financing Assessment (PFA) — capacity to repay IMF and risks - Mongolia’s capacity to repay the IMF has slightly improved since 2020 due to a commodity price surge expected to boost exports significantly in 2021 and beyond as copper exports from the OT mines come onstream. - Recent strengthening in external balances has allowed the BOM opportunity to bolster its GIR. - External financing conditions remain favorable and successful Eurobond rollovers have reduced short-term refinancing risks. - However, external liabilities will remain large and the recent GIR accumulation is likely to be short-lived. - Baseline projection: IMF debt service projected to be 0.7 percent of exports and 2 percent of gross reserves in 2024. - Downside scenario (resurgence of an uncontrolled and super-contagious COVID-19 variant with border disruptions): - Mongolia’s capacity to repay the IMF would deteriorate somewhat but would still remain adequate: 0.8 percent of exports and 2.3 percent of gross reserves in 2024. - Policy responses if downside materializes: - Government: step up support for the health system and initiate containment measures while ensuring export portals can stay safely open. - BOM: allow the exchange rate to act as a shock absorber, continue to opportunistically intervene to buildup reserves, and rollover non-concessional external liabilities. - Policy support should be targeted and accompanied by structural fiscal reforms: pensions, social safety nets, tax policy and administration, public investment management, domestic debt issuance. - Discontinue quasi-fiscal activities; adopt and adhere to a simplified fiscal fiscal framework; and undertake financial, regulatory and governance reforms to create policy space. ### Staff appraisal, outlook and policy recommendations - Near-term and medium-term outlook: - An export-led recovery has begun; GDP growth in 2021 expected to be 4½ percent. - Growth expected to accelerate in 2022−23 to 6½–7 percent if export portals fully reopen and the OT copper mine is completed on schedule. - Medium-term growth expected to moderate to 5 percent, but output levels expected to remain below pre-pandemic trends due to permanent losses in activity. - Inflation is likely to return to the BOM’s 6±2 percent target given economic slack. - Downside risks include: resurgent pandemic, tighter global financial conditions, extended border closures, delays in completing the OT mine, and financial stability risks. Even in an adverse scenario, Mongolia’s capacity to repay the IMF remains adequate. - Policy recommendations: - Near term: continue supportive policies given lingering pandemic and weak domestic activity; ensure any fiscal support is better targeted toward those in need and to support health systems; monetary policy should remain supportive given transitory inflationary pressures. - Strong fiscal reforms are needed to address untenable debt dynamics: - The draft 2022 budget needs to better balance support and more ambitious fiscal consolidation to improve the medium-term debt trajectory. - Implement better targeted and more effective social assistance programs, ambitious pension reforms, improved public investment management and tax administration, and a more progressive PIT system in 2022–23. - A 6½ percent of GDP consolidation over 2022−26—relative to the current baseline—could help reduce public debt closer to the recommended nominal anchor (50 percent of GDP) over time. - Preserve the integrity of the FHF to maintain investor confidence and equitably share Mongolia’s mineral wealth with future generations. - Continue to improve asset-liability management and debt concessionality; gradually shift to domestic borrowing to reduce external liabilities. - Structural reform priorities: reform SOEs, the civil service, and introduce e-governance; flesh out and implement these plans. *International Monetary Fund — Mongolia: selected section on supervision capacity, governance, insolvency, AML/CFT, PFA, and staff appraisal.* ### 61. The BOM’s operational independence should be enhanced to ensure monetary and ### 1mngea2021001 - 61. The BOM’s operational independence should be enhanced to ensure monetary and ### Monetary and exchange-rate policy, and BOM operational independence - Findings: - Continued vigilance is needed to ensure that the inflationary pressures do not become persistent. - The exchange rate should continue to act as a shock absorber, limiting interventions to addressing disorderly market conditions. - Stronger buffers are needed given the substantially weaker external position than implied by fundamentals and desirable policies, requiring tighter fiscal policies and a strong financial sector. - The BOM should proactively reducing foreign liabilities. - Policy recommendations: - Enhance the BOM’s operational independence to ensure monetary and external stability. - Quasi-fiscal operations should be moved to the budget and phased out. - Parliament should resist making decisions on monetary operations. - Limit FX interventions to addressing disorderly market conditions while allowing the exchange rate to act as a shock absorber. - Build stronger buffers through tighter fiscal policies and a strong financial sector; proactively reduce BOM foreign liabilities. ### Banking sector reform and supervision - Findings: - The strategy to strengthen capital and reduce shareholder concentration through bank IPOs by end-2023 presents potential systemic stability implications. - Forbearance measures remain and transparency on the pandemic’s impact on banks is inadequate ahead of planned IPOs. - Policy recommendations and sequencing: - Phase out forbearance measures. - Conduct a new AQR (asset quality review), initially focused on potentially capital deficient banks and conducted by a reputable, independent international audit firm. - Near-term supervisory efforts should focus on strengthening banks and addressing capital deficient banks. - Put in place necessary pre-conditions for successful IPOs and contingency plans. - Delay the IPO deadline. ### Governance, anti-corruption, and structural reforms - Findings: - Strong governance and a reduction in corruption are critical to unlocking Mongolia’s growth potential. - Recent improvements in the AML/CFT framework and legislative initiatives are noteworthy but need effective implementation. - Effective enforcement remains weak; political interference hinders public service effectiveness; strengthened anti-corruption regulatory frameworks are not effectively enforced. - Policy recommendations: - Strengthen the rule of law and accelerate implementation of anti-corruption measures. - Revamp public investment management to improve project planning and reduce delays and cost overruns. - Revamp the insolvency framework and prioritize judiciary reforms to address impaired corporate and financial sector balance sheets. - Publish a summary audit report on Covid-19 expenditures, identify and publish missing beneficial owners of companies awarded Covid-19 related contracts, and publish the full audit report to promote transparency and accountability and to secure continued donor support. - Improve public and private sector balance sheets to facilitate post-pandemic recovery. ### Near-term monitoring and consultations - Finding: - The next Article IV consultation is expected to take place on a standard 12-month cycle. *International Monetary Fund — excerpt from content unit 1mngea2021001* ### Annex II. External Sector Assessment ### Annex II. External Sector Assessment ### External position overview - Mongolia’s external position in 2020 was assessed as "substantially weaker than implied by fundamentals and desirable policy settings." - Key vulnerabilities identified: excessively high external liabilities, net international reserves below desirable levels, and large negative NIIP. ### Current account and external financing - 2020 current account (CA) balance: -5.1 percent of GDP. - Drivers of 2020 CA improvement: strong import compression, improving terms of trade, and a boom in gold exports (including sales from gross international reserves). - Staff view: the 2020 improvement is temporary; CA deficits are projected to widen in 2021–22 as domestic demand and imports recover. - Medium-term outlook: higher copper exports and lower capital imports after completion of the OT project expected to contribute to a gradual improvement in the overall CA deficit, which will nevertheless remain large. - 2020 FDI inflows declined by 30 percent; donor financing rose to US$1 billion—including US$99 million from the IMF-supported RFI—compensating for the decline and leaving the financial account in surplus. - FDI inflows are projected to normalize starting in 2021, growing robustly in 2021–22 as the OT project is completed. ### Reserves and reserve adequacy - Reserves movements: - Declined by US$1 billion during the first half of 2020 due to large BOM intervention and sharp decline in exports. - Increased and reached US$4.4 billion by end-August 2021 after peaking at US$4.9 billion in April 2021. - Reserves net of BOM’s FX liabilities improved to US$0.76 billion by end-August 2021. - Projection considerations: - Even assuming the PBOC swap is fully rolled over in 2023, reserve coverage is projected to remain at the bottom of the recommended range. - If the PBOC swap is repaid in 2023, reserve coverage would fall below the levels recommended by the ARA metric. - Policy recommendation: boost gross and net reserves by opportunistic BOM interventions in the domestic FX market through sterilized interventions. ### International investment position (IIP) and external liabilities - NIIP in 2020: -279 percent of GDP, characterized as "much weaker than any other resource rich EMEs" and "one of the most negative in the world as a share of GDP." - Composition of IIP liabilities: - FDI: 182 percent of GDP. - External debt: 156 percent of GDP. - Government and BOM liabilities: 79 percent of GDP. - Role of Oyu Tolgoi (OT): - OT mine liabilities account for 70 percent of FDI liabilities. - Including a large external loan, OT liabilities are estimated to amount about 158 percent of GDP (47 percent of total liabilities). - Underground project expected to be completed by end-2022; completion is expected to mitigate risks as OT’s external liabilities are presumed to be financed by its earnings from copper exports and, in stress, presumed to be absorbed or financed by the parent company. - Projection: NIIP projected to improve from -279 percent of GDP in 2020 to -239 percent in 2026, driven by a decline in FDI inflows as OT is completed and projected fiscal consolidation over 2022–23, use of domestic FHF buffers for current spending, and some use of domestic borrowing for budget financing. - Note: If the PBOC swap is rolled over, it will remain an external liability for the BOM. ### Model estimates and assessment of REER and CA gap - EBA-lite current account (CA) approach: - CA norm estimated at -6.8 percent of GDP. - Adjusted 2020 CA (accounting for pandemic impacts and a Mongolia-specific gold exports adjustor) reported as -12.7 percent of GDP in model table (see source). - CA gap estimated at -5.9 percent of GDP. - REER results: - CA gap translates into a 13.3 percent REER gap. - EBA-lite REER model points to a REER undervaluation of 19.3 percent (noted as inconsistent with recent developments). - Actual REER movements: - REER depreciated by 6.5 percent in 2020. - REER appreciated by 9 percent (YTD, as of end-September 2021) due to recent pickup in inflation. - External Sustainability (ES) approach: does not point to REER misalignment since NIIP is projected to improve in the medium term without REER adjustment. - A coefficient of 0.58 percent is applied to the temporary increase in gold exports, equal to the correlation coefficient between gold exports and the cyclically adjusted CA balance over 2010–2020. ### Overall assessment and policy recommendations - Overall assessment: Mongolia’s external position is substantially weaker than implied by fundamentals and desirable policy settings, based on large negative IIP and EBA-Lite CA results. - Policy recommendations (selected): - The BOM should allow greater exchange rate flexibility to act as a shock absorber and improve incentives for private sector FX risk management. - Boost gross and net international reserves by opportunistically intervening in the domestic FX market through sterilized interventions. - Proactively reduce BOM foreign liabilities by reducing reliance on off-balance sheet swaps and other non-concessional liabilities. - Government should reduce external liabilities via fiscal consolidation, structural reforms to reduce long-term fiscal pressures, continued improvements in external debt management, and development of the domestic debt market. - Pursue banking sector reform to improve opportunities for domestic financing. - Over the medium-term, develop hedging instruments to manage existing FX exposures. ### Risk Assessment Matrix — selected global and domestic risks and policy responses - Global risks (source and likelihood / expected impact / policies): - Uncontrolled Covid-19 local outbreaks and global resurgence of the pandemic — High likelihood; High impact: growth deceleration, lower commodity prices, reduced export receipts and mining-related taxes, lower GDP growth, deteriorating fiscal balance, loss of foreign reserves, exchange rate pressure. - Policies: strengthen health systems, maintain exchange rate flexibility, opportunistically build reserves, prioritize fiscal consolidation, undertake fiscal/financial/regulatory reforms. - De-anchoring of U.S. inflation expectations leading to rising core yields and risk premia — Medium likelihood; Medium impact: higher funding costs and pressure on external buffers. - Policies: build external/domestic buffers, reduce financing needs via fiscal consolidation, use concessional financing, develop domestic debt market, restart government securities issuance. - Rising commodity prices amid volatility — Medium likelihood; Medium impact: improvement in external balances and buffers, faster growth, stronger fiscal balance. - Policies: fiscal consolidation and saving excess mining revenues/royalties in sovereign wealth funds, build GIR, lower non-concessional foreign liabilities, tighten monetary and macroprudential policies if inflation rises, strengthen governance and reforms to maximize benefits. - Domestic risks (source and likelihood / expected impact / policies): - Worsening domestic COVID-19 outbreak — High likelihood; High impact: slower recovery, sharp increase in public financing needs, severe impact if border with China is closed. - Policies: step up health system support, contain pandemic while limiting economic harm, target fiscal support, strengthen bank capital and monitor financial stress. - Intensification of financial sector vulnerabilities — Medium likelihood; High impact: bank undercapitalization, surge in NPLs, lower capital adequacy, financial instability. - Policies: ensure rapid bank recapitalization based on sound practices, conduct independent audits, prepare contingency plans, ensure NPL resolution strategies consider COVID-19, delay IPOs until vulnerabilities addressed. - Procyclical policies — Medium likelihood; Medium impact: undermine macro-financial stability and debt sustainability, jeopardize monetary operations. - Policies: follow Fiscal Stability Law, undertake pension, social assistance, PIM, insolvency, and SOE governance reforms, focus 2022 budget on larger fiscal consolidation, discontinue quasi-fiscal operations, enhance BOM independence and governance, resolve OT disputes expeditiously. - Extreme climate events — Medium likelihood; Medium impact: land degradation, hurt livestock sector, high socio-economic costs. - Policies: improve agricultural resilience, pasture management, facilitate adaptation to warmer temperatures. ### Fiscal framework performance (Annex IV highlights) - Fiscal Stability Law (FSL) history: - FSL passed in 2010; three fiscal rules became effective in 2013: (i) expenditure growth cap; (ii) structural fiscal balance target; (iii) NPV of public debt to GDP limit. - Implementation has been poor with frequent revisions and redefinitions of rules to accommodate slippages. - Examples: - 2015: debt rule definition narrowed from public to general government debt, excluding SOE debt and other items. - 2016: debt limit raised from 40 percent of GDP to 60 percent of GDP (in NPV terms). - Expenditure rule was not applied until 2017. - The initial structural fiscal balance target of 2 percent of GDP has been met only twice since 2013 and has been pushed forward to 2025. - Quasi-fiscal activity: - Use of Development Bank of Mongolia (DBM) promissory notes and concessions to finance capital spending, and BOM financing of quasi-fiscal activities, bypassed fiscal rules. - Quasi-fiscal activities brought onto budget in 2017 under EFF, but BOM resumed quasi-fiscal activities in 2020−21 under the Anti-Pandemic Law; these activities are likely to be extended till 2023 under the draft post-pandemic economic recovery law. - Sovereign wealth funds: - Fiscal Stabilization Fund (FSF) established in 2011 to insulate the budget from volatile commodity prices and provide buffers. - Future Heritage Fund (FHF) established in 2017 to distribute mineral wealth across generations and support macroeconomic management. - Recommendation: adopt and improve compliance with a streamlined fiscal framework, save additional windfall gains in sovereign wealth funds, preserve the integrity of the Future Heritage Fund, and pursue reforms to build credibility and buffers. *Source: Annex II. External Sector Assessment (Mongolia) — IMF staff assessment as provided in the source content.* ### 5. The government has been prioritizing the use of FSF over additional borrowing to ### 5. The government has been prioritizing the use of FSF over additional borrowing to finance its budget deficits until end-2023 ### Wealth funds: design, use, and recent developments - Purpose and deposits - The FSF is intended to create medium and long-term stability for the general budget. - Deposits to the FSF come from: additional budget revenue from higher-than-projected mineral prices; structural budget surpluses; unspent balances of the government reserve fund; net income from the financial activities of the Fund itself; and any other income as designated by the parliament. - The government can withdraw from the FSF to cover mineral revenue shortfalls. - Past and current use - In 2017, a provision to finance the budget deficit through 2023 was added to the law after the budget deficit rose from 5 percent of GDP in 2015 to 15.3 percent of GDP in 2016. - Continuous usage of FSF even at normal times undermines the credibility of the fund and defeats its purpose. - Future Heritage Fund (FHF) rules and practice - FHF rules dictate the government can only spend the balance on expenses related to Fund administration and independent audit until 2030. - A Transitional Provision approved in 2017 delayed actual savings until end-2018; FHF revenues collected in 2017−18 were fully used to pay down debt of its successor Human Development Fund (terminated in 2016). - FHF was used to temporarily fund transfers to the state budget totaling MNT310 billion for financing expenditures previously financed from the Human Development Fund. - Excluding these episodes, the government has continued to save in the FHF. - Recent practice during COVID-19 - Despite the need for additional borrowing to fund COVID related fiscal measures, the government has continued to follow governing rules of both funds. - Government utilized savings from the FSF to partly finance its budget deficit due to mineral revenue shortfalls while continuing to accumulate in the FHF. - Saving additional windfall from higher commodity prices in these funds would provide adequate buffers to respond to unexpected adverse shocks. - Proposed changes and risks - The draft 2022 budget proposes to fund a permanent expansion of untargeted social assistance instead of building savings in the FHF. - Ongoing discussions to establish a new development fund financed by dividends from SOEs (currently saved in the FHF) could undermine the FHF. - Maintaining the integrity of the FHF is presented as critical to ensure a fair distribution of mineral wealth across generations, strengthen macroeconomic policy management, boost public sector buffers, and increase investor confidence. - Fund asset levels (as stated) - At end-2021, total FHF and FSF assets are estimated to reach around 5.8 percent and 0 percent of GDP. ### Public debt overview and projections - Current and near-term public debt levels - Public debt (GFS basis) rose from 77½ percent of GDP in 2020 to 81½ percent of GDP in 2021. - Public debt is projected to decline over 2021–26 and is forecasted to remain about 68 percent of GDP by the end of 2026. - Gross financing requirements are expected to climb to 13.5 and 11.6 percent of GDP in 2023 and 2026 respectively due to maturing Eurobonds which were recently rolled over. - Composition and coverage - In 2020, external public debt (GFS basis) accounts for about 96 percent of total public debt. - The bulk of external debt is to the official sector and on concessional terms. - For the DSA, public debt coverage is expanded to include the Bank of Mongolia’s (BOM) external liabilities (PBOC swap) of about 14 percent of GDP in 2020 (US$1.8 billion), raising public debt to 91.3 percent of GDP at end-2020. - Public debt definition in the DSA specifically includes: consolidated public debt of the general government; government guarantees of external borrowing in foreign currency by SOEs; external borrowings by the Development Bank of Mongolia; IMF credit; and certain external liabilities of the BOM (the PBOC swap). - Drivers of longer-term debt pressures - Rising pension liabilities due to higher levels of untargeted social spending, generous parameters and unfavorable demographic trends. - Higher health and education expenditures to meet government policy goals. - Vulnerabilities to economic outlook, exchange rate, and realization of financial sector contingent liabilities. ### DSA baseline assumptions and dynamics - Macroeconomic and financing assumptions - Real GDP growth is expected to rebound to 4½ percent in 2021 and average 6 percent in the period 2022–26 due to booming of Mongolian mineral exports. - Inflation is expected to increase from its trough of 3.7 percent in 2020 to 7.2–7.5 percent in 2021–2022, and stabilize at 6.4 percent by the medium term (2023 onward). - External liabilities are expected to remain high; international reserves are assessed to be below desirable levels. - Financing mix assumes concessional budget support and project loans from multilateral development banks in line with current commitments, some domestic issuance of bonds at market rates, and relatively less concessional terms for new external budget support and project loans. - The DSA assumes Mongolia’s external debt will be contracted on relatively less concessional terms with grant elements of about 25 percent. - The average stock of domestic debt over the forecast horizon is assumed to be about 5 percent of GDP. - Fiscal assumptions - The primary balance is projected to improve to -3.1 percent of GDP in 2021 from -6.7 percent of GDP in 2020. - The primary balance is expected to improve further till 2023 to a deficit of 0.3 percent of GDP as COVID-19 stimulus measures expire. - Over the medium term, the primary balance is expected to deteriorate gradually due to accrued pension related expenditure. - Interest-growth dynamics - At end-2020, some 56½ percent of public debt was official and on relatively concessional terms. - The share of official sector debt is expected to increase to 77 percent by the end of 2026. - The average effective nominal interest rate of public debt is projected to decline from 3.2 percent in 2020 to 1.7 by 2026. ### Risks and shock scenarios - General assessment - Mongolia’s risks of debt distress remain high due to high debt, narrow economic base, pro-cyclical policy history, high foreign currency-denominated debt, and limited buffers. - Specific shock scenarios and quantitative impacts - Growth shock: - If growth declined by one standard deviation in 2022 and 2023, the debt-to-GDP ratio is forecast to reach 105 percent in 2023. - Gross financing needs would increase in 2023 to 22 percent of GDP compared to about 13.5 percent of GDP in the baseline. - Exchange rate shock: - A nominal exchange rate depreciation of 33 percent in 2021 would increase debt to almost 108 percent of GDP. - Gross financing needs would peak at 16 percent of GDP in 2023. - Financial sector contingent liability shock: - Assumes one-off fiscal outlays of 15 percent of banking-sector assets (14½ percent of GDP, excluding credit to the government) accrue in 2022, and real GDP growth declines by one standard deviation. - Under this shock, gross financing needs could reach 17 percent of GDP in the year of the shock, raising public debt to about 106 percent of GDP in the following year. - Primary balance shock: - Assumes fiscal balances deteriorate by another 1 percent of GDP next year before consolidation, combined with an increase in interest rates of 25 bps for every 1 percent of GDP worsening in the primary balance. - Cumulative shock equals 4 percent of GDP spread evenly over 2022–24 and an increase in interest rates by 60 bps in each year. - Under this scenario, public debt reaches 84 percent of GDP over the forecast horizon. - Combined macro-fiscal shock: - Under combined shocks to GDP growth and primary balance, public debt will peak at about 139 percent of GDP by 2023 compared to 83 percent of GDP in the baseline. - Gross financing needs will peak at 28 percent of GDP in 2023 compared to 13.5 percent in the baseline. - Fan-chart probabilities - If positive and negative shocks were equally likely, public debt would remain above 75 percent with a 25 percent probability. - If downside risks are judged more likely, public debt would stay above 75 percent with a probability of about 37 percent. ### Key statistics and figures (preserved exactly as reported) - Budget and fund statistics - Budget deficit rose from 5 percent of GDP in 2015 to 15.3 percent of GDP in 2016. - The FHF was used to temporarily fund transfers totaling MNT310 billion. - At end-2021, total FHF and FSF assets are estimated to reach around 5.8 percent and 0 percent of GDP. - Debt and fiscal ratios - Public debt (GFS basis): 77½ percent of GDP in 2020; 81½ percent of GDP in 2021; about 68 percent of GDP by end-2026. - Public debt fell to 66 percent of GDP at end-2019 from 87.6 at end-2016. - External public debt accounted for about 96 percent of total public debt in 2020. - Inclusion of BOM PBOC swap (US$1.8 billion, 14 percent of GDP) raises public debt to 91.3 percent of GDP at end-2020. - Some 56½ percent of public debt was official and on relatively concessional terms at end-2020; share of official sector debt expected to increase to 77 percent by end-2026. - Average effective nominal interest rate projected to decline from 3.2 percent in 2020 to 1.7 by 2026. - Banking system assets of some 97 percent of GDP as of 2020. - Contingent liability shock assumes one-off fiscal outlays of 15 percent of banking-sector assets (14½ percent of GDP). - Gross financing requirements projected at 13.5 and 11.6 percent of GDP in 2023 and 2026 respectively (baseline). - Growth and inflation assumptions: Real GDP growth 4½ percent in 2021 and average 6 percent in 2022–26; inflation 3.7 percent in 2020 rising to 7.2–7.5 percent in 2021–2022 and stabilizing at 6.4 percent by medium term. - Primary balance projections: -6.7 percent of GDP in 2020; -3.1 percent of GDP in 2021; 0.3 percent of GDP deficit in 2023. - DSA grant element assumption: about 25 percent. - Average stock of domestic debt assumption: about 5 percent of GDP. ### Policy recommendations and risk mitigation measures - Preserve integrity of the FHF to ensure fair intergenerational distribution of mineral wealth and to maintain the only fiscal framework pillar that has worked so far. - Implement fundamental reforms to ensure debt sustainability: - Parametric reforms of the pension insurance scheme. - More targeted and consolidated social safety nets. - Improvement in public investment management. - Allow greater tax progressivity and improve tax administration. - Increase domestic financing by restarting domestic government bond issuance; develop a comprehensive medium-term debt strategy and an Annual Borrowing Plan. - Address financial sector and governance weaknesses, improve compliance and streamline the fiscal framework. - Continue to improve asset-liability management and raise the concessionality of debt to improve fiscal space. - Adhere to a nominal medium-term debt anchor (as a percent of GDP); consider a lower anchor—50 percent of GDP—for Mongolia given greater reliance on external debt (most emerging market economies have adopted 60 percent of GDP). *Source: 1mngea2021001 - 5. The government has been prioritizing the use of FSF over additional borrowing to* ### 13. Given Mongolia’s history of boom-bust cycles, the authorities need to remain vigilant ### 13. Given Mongolia’s history of boom-bust cycles, the authorities need to remain vigilant ### Near-term policy priority: rebuild buffers and contingency planning - Resume progress in building fiscal and external buffers during the projected recovery this year. - Larger buffers are necessary because of inherent debt sustainability risks from resource-dependence, significant external imbalances, and contingent liabilities. - If downside risks materialize, contingency planning should proactively: - Explore reprioritizing expenditure plans. - Mobilize additional donor financing. ### Public sector debt dynamics and baseline projections (selected figures from DSA) - Nominal gross public debt: 61.4 (2019), 78.5 (2020), 91.3 (2021), 94.6 (2022), 88.5 (2023), 83.2 (2024), 79.6 (2025), 77.3 (2026), 77.0 (projection horizon displayed). - Public gross financing needs (in percent of GDP): 7.2 (2019), 0.8 (2020), 24.8 (2021), 9.2 (2022), 6.2 (2023), 13.4 (2024), 8.4 (2025), 5.6 (2026), 11.6 (later year displayed). - Real GDP growth (in percent): 8.0 (2019), 5.6 (2020), -4.6 (2021), 4.5 (2022), 7.0 (2023), 6.5 (2024), 6.0 (2025), 5.5 (2026), 5.0 (projection). - Inflation (GDP deflator, in percent): 11.2 (2019), 10.0 (2020), 3.7 (2021), 7.2 (2022), 7.5 (2023), 6.4 (2024), 6.0 (2025), 6.1 (2026), 6.0 (projection). - Nominal GDP growth (in percent): 20.2 (2019), 16.1 (2020), -1.0 (2021), 12.0 (2022), 15.0 (2023), 13.4 (2024), 12.4 (2025), 12.0 (2026), 11.3 (projection). - Effective interest rate (in percent): 4.0 (2019), 3.0 (2020), 3.2 (2021), 2.9 (2022), 2.3 (2023), 1.7 (2024), 1.6 (2025), 1.5 (2026), 1.6 (projection). - Change in gross public sector debt (cumulative): 4.4 (2019), -9.8 (2020), 12.9 (2021), 3.2 (2022), -6.1 (2023), -5.3 (2024), -3.6 (2025), -2.4 (2026), -0.3 (later), -14.4 (cumulative projection). - Identified debt-creating flows (cumulative): 0.1 (2019), -9.9 (2020), 14.2 (2021), -0.8 (2022), -6.1 (2023), -6.0 (2024), -4.3 (2025), -3.0 (2026), -1.5 (later), -21.7 (cumulative). - Primary deficit (in percent of GDP): 3.2 (2019), -3.2 (2020), 6.7 (2021), 3.1 (2022), 1.1 (2023), 0.3 (2024), 0.9 (2025), 1.8 (2026), 2.7 (later), 9.9 (cumulative). - Primary (noninterest) revenue and grants (in percent of GDP): 28.1 (2019), 31.7 (2020), 27.9 (2021), 32.1 (2022), 32.6 (2023), 32.9 (2024), 32.8 (2025), 32.4 (2026), 31.9 (later), 194.8 (cumulative). - Primary (noninterest) expenditure (in percent of GDP): 31.3 (2019), 28.5 (2020), 34.6 (2021), 35.2 (2022), 33.7 (2023), 33.2 (2024), 33.7 (2025), 34.2 (2026), 34.7 (later), 204.7 (cumulative). - Automatic debt dynamics (cumulative): -3.1 (2019), -6.7 (2020), 7.5 (2021), -3.9 (2022), -7.2 (2023), -6.2 (2024), -5.2 (2025), -4.8 (2026), -4.2 (later), -31.6 (cumulative). - Interest rate/growth differential (cumulative): -6.2 (2019), -9.3 (2020), 4.2 (2021), -7.4 (2022), -10.4 (2023), -9.1 (2024), -8.0 (2025), -7.4 (2026), -6.7 (later), -49.1 (cumulative). - Exchange rate depreciation contributions: 3.1 (2019), 2.5 (2020), 3.3 (2021) (other years not shown). ### DSA scenarios, stress tests, and risks (high-level) - Alternative scenarios modeled include Baseline, Historical, and Constant Primary Balance Scenario. - Stress tests include shocks to primary balance, real GDP growth, real interest rate, real exchange rate, combined shocks, and contingent liability shocks. - Under stress tests, indicators tracked include Gross Nominal Public Debt (percent of GDP), Public Gross Financing Needs (percent of GDP), and Gross Nominal Public Debt (percent of Revenue). - The heat-map risk assessment uses benchmarks such as debt burden benchmark of 70 percent, gross financing needs benchmark of 15 percent, EMBIG spreads (average over last 3 months, 27-Jul-21 through 25-Oct-21), and external financing requirement thresholds of 5 and 15 percent of GDP. ### External debt: scale, composition, and vulnerabilities (Annex VI key points and figures) - Mongolia’s external debt is very high: 240 percent of GDP. - Drivers: large capital needs of the mining sector; loose fiscal and monetary policy in the past; corporate borrowing. - Mitigating factors: large weight of FDI-related borrowing and large share of concessional external debt. - Major external borrowers and amounts: - FDI intercompany loans (almost entirely in the mining sector): US$11.4 billion (one-third of total external debt). - Public external debt: US$10.7 billion, comprising: - US$5.8 billion of external loans from the official sector (largely concessional). - US$2.9 billion of international bonds. - US$1.8 billion PBOC swap maturing in 2023. - Banks’ external leverage: US$1.6 billion at end-2020. - Remaining debt liabilities (excluding OT): US$4.0 billion, mainly corporate sector borrowing. - OT external debt liabilities (estimated end-2020): US$11.5 billion, two-thirds intercompany loans. - Maturity profile and other metrics: - 95 percent of external debt is of long-term maturity (more than one year). - Short-term debt: 8.1 percent of GDP by end-2020. - Stock of debt securities: stable at 34 percent of GDP. - Share of concessional public external debt: 48 percent. - Average interest rate on external debt liabilities: around 4½ percent. - Vulnerabilities and shock sensitivity: - External debt is particularly vulnerable to current account shocks, exchange rate depreciation, and rollover risk. - Non-FDI amortization is expected to rise in the medium term, increasing rollover risk and potential drains on international reserves. - A 30 percent depreciation could increase the external debt-to-GDP ratio by 130 percentage points. - The US$1.8 billion PBOC swap is assumed to be rolled over when maturing in 2023. - In June 2021, the government rolled over US$1 billion of Eurobonds coming due in 2022−23. ### External debt policy recommendations (Annex VI) - Tighten macroeconomic policies (fiscal and monetary) once the pandemic recedes to contain current account deficits and external indebtedness. - Improve MOF’s and BOM’s debt management capacity; adequately resource and staff MOF’s domestic debt management capacity. - Strengthen investor relations, market outreach, and coordination between MOF and BOM. - Increase public sector external assets, including gradually investing Future Heritage Fund (FHF) balances abroad from 2025 onwards. - Pursue banking reform to develop the domestic debt market and reduce reliance on external creditors. - Maintain strong policy management and governance, macro-financial stability, high buffers, and low political risk to help reduce rollover risks. ### Pension Insurance Scheme (PIS) reform proposals and fiscal implications (Annex VII key points and figures) - Rationale: Pension reform is critical to Mongolia’s fiscal sustainability given generous pension parameters and an ageing population; budget subsidies likely to rise significantly without reforms. - Key reform recommendations: - Gradual increase in the retirement age and penalties for early retirement. - Higher social insurance contributions. - Automatic price indexation of pensions. - Extension of the wage base for pensions. - PIS design and parameters: - Contributory, pay-as-you-go defined benefit scheme covering over 90 percent of the labor force. - Mandatory combined employer-employee contribution rate: 17 percent. - Voluntary participation (self-employed and informal sector) contribution rate: 13½ percent. - Benefits equal about 45 percent of pensionable wage base for workers contributing at least 20 years. - Accrual rate: 1.5 percent per year thereafter. - During the pandemic, exemptions from social insurance contributions were announced for qualifying workers in 2020–21; all exemptions expected to expire by end-2021. - Fiscal cost projections and demographic pressures: - World Bank estimates: state subsidy for the PIS projected to increase by about 8.4 percent of GDP between 2020 and 2050. - Total pension expenditures projected to rise from about 6 percent of GDP to 14.4 percent of GDP by 2050. - Old age dependency ratio: current level 16 percent; expected to increase to 23 percent by 2030 and 38 percent by 2050. - Comparators and generosity of parameters: - Retirement age for women: 55 (below all comparators). - Male retirement age: below advanced economies, on par with average emerging market and developing economy. - Early retirement provisions permit benefits as early as 10 years prior to legal retirement age for certain professions/conditions. - Coverage of pension beneficiaries to old age population: 290 percent (significantly higher than comparators). - Coverage of active contributors to working-age population: 29 percent (slightly higher than emerging market countries but very low). *Source: IMF staff.* ### 3. Proposed reforms. Any further delay in reforming the PIS will negatively affect Mongolia’s ### 3. Proposed reforms. Any further delay in reforming the PIS will negatively affect Mongolia’s ### Parametric pension reforms modeled - Four parametric reforms modeled: - (i) inflation indexation, with pensions adjusted by the CPI of the previous year; - (ii) increasing the retirement age at a rate of 3 months per year until it reaches age 65 for both men and women, with actuarially fair benefit reduction for early retirement; - (iii) an increase in the payroll contribution rate by 2 percent for both the mandatory and voluntary schemes and returning to a combined contribution rate of 19 percent; and - (iv) wage base extension and valorization: the wage base for calculating pensions should gradually be increased from the current 7 years to a worker’s lifetime wages and the wage base indexed or “valorized” according to the average growth in covered wages. ### Projected fiscal and distributional effects of the reforms - All three individually modeled reforms helped bring down state pension subsidy in 2030 by varying magnitudes relative to the baseline. - Inflation-based indexation is projected to stabilize state subsidy at about 4 percent of GDP by 2030. - Increasing the eligibility age stabilizes the state subsidy at about 5 percent of GDP by 2030. - Increasing the contribution rate by 2 percent is projected to realize on average about 1 percent of GDP fiscal cost savings per year. - The impact of wage base extension and valorization is projected to be immaterial for reducing fiscal costs (given difficulty in modelling behavioral response). - Combined scenario: - When all four reforms are combined, they are projected to stabilize the required state subsidy at about 1 to 2 percent of GDP per year, every year till 2030. - The combined reform scenario is designed to reflect all the three reforms enacted, according to the same parameters and transition period. ### Other pension reforms and considerations - Minimum Pension: - The Minimum Pension should be replaced with a Tested Social Pension (TSP), which would ensure that all Mongolian retirees have a minimum level of old age income protection. - The transition of the minimum pension to a TSP should be closely related to the indexation of benefits and is expected to have a negligible fiscal impact if the coverage of the elderly continues to make Pension Insurance largely universal. - Scheme evaluations: - A Notional Defined-Contribution (NDC) scheme was found to be ill-suited for Mongolia’s needs since the parametric reforms could achieve most of the results without abrupt reductions in replacement rates between cohorts. - A Funded Defined-Contribution scheme was considered neither advisable nor feasible for Mongolia since it would require a commitment to additional fiscal resources for three decades. - Combined effect: - A combined program of Parametric reforms and a TSP can substantially improve the sustainability, equity and predictability of Mongolia’s pension system. ### Key policy message - Pension reform is critical to Mongolia’s fiscal sustainability and to reduce the growth of pension expenditure. Any further delay in reforming the PIS will negatively affect Mongolia’s fiscal sustainability and its transition to an equitable pension system. --- ### Annex VIII. Evaluation of Mongolia’s Social Safety Nets — overview - Main findings: - Mongolia’s social safety net is characterized by near-universal coverage and high levels of spending, yet inadequate support for the poor. - The draft 2022 budget proposal to make universal untargeted social assistance permanent is unsustainable and does not address current challenges. - Spending and program composition: - Excluding the pandemic relief package, Mongolia had a higher level of spending on social assistance at (2½ percent of GDP in 2019) compared with other emerging market and advanced economies. - Share of total social assistance spending: unconditional cash transfer and social pension programs remain very large at 69 percent and 24 percent of total social assistance spending, respectively. ### Coverage, adequacy, and targeting metrics - Coverage: - Mongolia has substantially higher coverage for social assistance programs at 86 percent compared to EME (44 percent) and EMD-Europe (26 percent). - Coverage gap between poorest and richest: poorest 90 percent vs richest 73 percent => gap of 17 percent in Mongolia, compared to EMEs (46 percent) and EMD-Europe (37 percent). - Adequacy: - Mongolia’s poverty rate is 28 percent and mortality rate is 32 percent. - For the poorest quintile, the total transfers received as a share of the total spending of this group remains much lower in Mongolia (13 percent) than comparators in EMD-Europe (29 percent) and EMEs (19 percent). - For the richest quintiles, the adequacy of social assistance is 2 percent. - Incidence: - Benefits incidence for the 1st quintile (the poorest) is only 26 percent. - Beneficiary incidence at the 1st quintile for all social assistance is 21 percent, lower than country comparators, EME and EMD-Europe medians at 30 percent and 35 percent, respectively. ### Conclusions and policy recommendations - Main conclusion: - Mongolia spends much more on social assistance to achieve a lot less than other comparator countries due to lack of effective targeting toward the poor, raising fiscal sustainability issues in crises. - Recommended actions: - Improve and expand targeting: - Expand coverage but better target the Child Money Program toward the poorest 40 percent of households. - Expand coverage among the poor and target orphans, the urban unemployed, those exposed to serious livelihood risks and those that have limited social support. - Use existing social assistance programs as platforms to gradually improve the database to accurately capture vulnerable people while eliminating the rich who benefit from the programs. - Consolidate programs: - Consolidate overlapping programs (e.g., Child Money Program, Food Stamp Program, and social pension) to generate fiscal savings and avoid duplicating benefits; merge Child Money Program and Food Stamp Program as an example. - Rationalize spending: - Cutting spending to the level of at least emerging market economies will bring a fiscal savings of about 1 percent of GDP per year. - Broaden other existing social assistance programs: - Broaden social pension, social welfare allowance, community-based welfare services, allowance for the elderly and people with disabilities to accommodate poorer individuals and households. --- ### Annex IX. Banking Sector Stability — key points - Structure and concentration: - Banks comprise 93 percent of all financial sector assets. - 80 percent of banking system assets are concentrated in 5 SIFIs—Khan Bank, TDB, Golomt, Khas Bank, and State Bank. - Pre-pandemic capital issues: - The 2017 AQR found asset classification and provisioning deficiencies in select banks resulting in additional capital needs. - In 2019, a BOM forensic audit found most capital raised post-AQR was non-compliant, illicit, or fictional; BOM rejected almost all capital raises in October 2019 and instructed banks to raise compliant capital. - In December 2019, institution-specific administrative measures were placed on banks (restrictions on dividend payments and curtailment of certain business activities until capital was raised). - Forbearance and regulatory reversals: - In early 2020 BOM suspended administrative measures and accepted new capital raises without independent validation. - COVID-19 forbearance measures (some scheduled to remain in place until end-March 2022) have masked true asset quality and restricted BOM’s ability to understand pandemic impact; measures include: - Delaying loan classification windows (Performing extended up to 90 days past due from previous 15 days; Special Mention 91–120 days from previous 15–90; Non-Performing more than 121 days past due from previous 91). - Suspending classification requirement for restructured consumer and business loans. - Postponing repayment of subsidized mortgage loans and reducing rate from 8 percent to 6 percent. - Removing the negative credit history of eligible borrowers. - Allowing banks to breach capital safeguard buffers without regulatory penalty. - Permitting banks to pay zero interest on current and savings accounts. - Lowering bank liquidity ratio from 25 percent to 20 percent (this measure was canceled at end-July 2021). - Policy measures to improve stability: - 2017 regulation: all banks to meet new minimum paid-in equity capital level of MNT 100 billion by end-2021. - Banking Law amendments: require SIFIs to convert to Joint Stock Companies and limit single shareholder ownership to 20 percent. - 2020 Medium-Term Banking Sector Strategy: require all banks to meet the new 20 percent shareholder limit before end-2023 by tendering shares via public offer or private placement on a stock exchange approved by BOM; aims to improve access to capital and SIFIs intend to list on the Mongolian Stock Exchange. - Baselined balance-sheet assessment and sensitivities: - System-wide non-forborne NPLs expanded to a high of 9.3 percent in late 2020 before moderating by end-July 2021; one small bank had a sizable expansion of NPLs. - Profitability ratios fell into negative territory but recently rebounded; all but one SIFI generating positive levels in both ROA and ROE. - Banks remain highly liquid, with all except two insolvent banks remaining well above regulatory minimum 25 percent liquidity ratio. - Sensitivity analysis methodology: - Scenarios run from three baselines: (1) bank capital levels as accepted by BOM; (2) capital levels taking BOM’s number and subtracting shortfall amounts communicated to banks by BOM in October 2019; and (3) taking the latter number and further subtracting 2020 capital raises deemed too similar to suspect 2019 forensic audit raises. - Any forborne loans determined unlikely to be repaid will be adversely classified once forbearance measures are lifted, increasing NPLs. - The sensitivity analysis determines additional capital needs if 20–30–50–70 percent of these forborne loans became NPLs in the ‘Loss’ category, requiring 100 percent provisioning. *International Monetary Fund — Excerpts from the Mongolia report sections on Proposed Reforms, Annex VIII, and Annex IX.* ### 8. Sensitivity analysis results. Banks ### 8. Sensitivity analysis results. Banks ### Key findings from the sensitivity analysis - Banks continue to have high levels of liquidity and most maintain regulatory compliance with capital adequacy, tier 1, and leverage ratios, even under a severe 70 percent sensitivity scenario. - Many banks remain solvent and fully compliant with minimum capital requirements and thus require no additional capital raises; however, some banks would fall significantly below minimum capital requirements. - In the extreme downside, should 70 percent of forborne loans need to be provisioned, affected banks would need at a minimum 1.29 percent of GDP in additional capital. - Two insolvent banks were excluded from the analysis as they are beyond saving. - One bank falls below regulatory minima in the Baseline 1 scenario; the impact is broader under the other scenarios. ### Systemic and liquidity risks - Capital-deficient banks could present a systemic stability risk if public confidence erodes. - Potentially capital-deficient banks hold a significant share of system deposits with large concentrations of FX deposits; a run could rapidly drain liquidity and necessitate ELA from BOM including in FX. - Many banks rely heavily on wholesale FX funding with covenants that can make borrowings immediately callable if regulatory minima are breached, which could precipitate a liquidity crisis. - The GOM has exposure to the potentially capital-deficient banks totaling 3.6 percent of GDP through deposits and loans from government entities; many of these borrowings are unsecured and occupy a low ranking (ninth position) in the creditor hierarchy in liquidation. ### Action 1 — Increase transparency of bank balance sheets and identify full COVID-19 impact prior to bank IPOs - Transition forbearance measures from system-wide to increasingly targeted actions and move up full phase-out to end-2021; align phase-out with the end of the Anti-Pandemic Law and GOM emergency measures (end-2021). - Monitor NPLs, profitability indicators, and liquidity as forbearance is phased out. - Sensitivity analysis indicates removing forbearance will not adversely impact many banks; all but a few should be able to reclassify loans and provision without breaching regulatory compliance. - Require banks to fully disclose audited financial statements prior to launching IPOs on the Mongolian Stock Exchange; asset classification and provisioning consistent with IFRS-9 is critical. - BOM is requiring all banks to submit year-end 2021 audited financial statements under IFRS-9. ### Action 1 — Asset quality reviews (AQR) - Conduct a targeted AQR on problem banks once forbearance is lifted to assess asset quality, loan classification, provisioning needs, and capital adjustments. - BOM should independently validate any additional capital raises by banks rather than relying on bank-paid legal opinions. - Pursue a system-wide AQR in the medium term to update the 2017 exercise and integrate findings into BOM supervisory approach. ### Action 2 — Bank IPOs should be delayed - Banks should not proceed with IPOs until they provide accurate and transparent financial disclosures showing strong balance sheets; disclosures should be updated after forbearance ends and, for pre-pandemic capital-needy banks, based on updated AQR findings. - Banks that are not well capitalized and transparent should not be allowed to list; failed or masked IPOs could endanger IPOs by healthy banks and damage BOM and regulator reputations. - Reexamine BOM’s timeline to list banks and reduce single shareholder ownership below a 20 percent limit; achieving the 20 percent limit by end-2023 is not realistic given high shareholder concentration. - Avoid rushing shareholder diversification which could impede necessary capital raises given the Mongolian Stock Exchange’s low capitalization and absence of large IPO history. - Ensure legal basis for requirements is solid and be prepared for legal challenges; assess fitness and propriety of new large shareholders and guard against strawman transactions and ‘round tripping’. - BOM and FRC should manage and oversee the process. ### Action 2 — Safeguarding non-bank sector - Ensure investments in banks do not contribute to instability in the non-bank sector: FRC suggested insurance companies can invest up to MNT 180 billion from reserve funds, equal to 47 percent of their market cap. - Insurers should base investment decisions on strong risk management and liquidity access, not regulator direction; bank stock price declines could weaken insurance funds. ### Action 3 — Strengthen bank balance sheets (near term) - BOM should adhere to end-2021 deadline for banks to reach a new minimum paid-in equity capital level of MNT 100 billion (doubling the current level). - Many banks have begun plans, including consolidation, to reach the MNT 100 billion level; BOM should review plans to ensure they meet regulatory requirements and best practices. - BOM should urgently conduct updated Business Plan and Solvency Assessments and conduct stress tests using realistic criteria across a range of scenarios from moderately worsening to extreme downside. - Encourage banks to provision preemptively for forborne loans (in advance of winding down forbearance) and allow reduction of provisioning if borrower repayment capacity recovers. - Instruct capital-deficient banks to submit detailed, timebound restructuring plans focused on operational restructuring, capital restoration, and updated NPL strategies; BOM to review, require modifications, approve, monitor implementation, and place banks under enhanced supervision including on-site full-time examination teams until compliance and viability are restored. ### Action 4 — Timely regulatory and public support measures for capital shortfalls - BOM should take timely action against banks unable to raise sufficient capital, exercising authorities under the Banking Act, including replacement of bank management and suspension of shareholder voting rights until capital compliance is achieved. - Public solvency support cannot be excluded; public funds may be needed—estimated to be at least 1.29 percent of GDP—to avoid systemic challenges and enable capital-deficient banks to reach regulatory capital compliance if they cannot raise capital privately. - Any public recapitalization should be coordinated between BOM and MOF, predicated on management change and a bail-in of existing shareholders, and grounded in provisions of the Banking Law and the 2018 Law on Ensuring Banking Sector Stability with implementing regulations issued without delay. ### Action 4 — Improve resolution framework and insolvency foundations - Advance insolvency framework reforms and efforts to establish a specialized, independent unit to adjudicate financial claims; current claims resolution takes 4.2 years on average. - Improve functioning of the real estate market and utilize electronic trading platforms for bulk sales of distressed assets to increase real economic value (REV) of assets and allow banks to lessen upfront loss recognition. ### Action 4 — Communication and deposit insurance - Develop a clear communication strategy with a crisis communications committee including BOM and MOF to maintain public and investor confidence and coordinate messaging via press releases, press conferences, and outreach. - Deposit Insurance Corporation of Mongolia (DICOM) plays a key role in resolving smaller institutions, paying depositors, and contributing to Purchase and Assumption financing; reforms since 2019 include assumption of supervisory authority, additional staff, standardized insured deposit reporting, and an integrated database nearing completion. - Reduce political interference in DICOM, ensure transparent execution of its mandate, and define provisions for backup government funding in the event of a SIFI insolvency. ### Action 5 — Broader financial sector reforms and supervisory capacity building - Strengthen bank supervision capacity with IMF support; BOM has implemented a new supervisory framework toward risk-based supervision but implementation is not fully consistent with Basel and supervisory staff capacity development remains necessary. - IMF proposes reengagement of capacity development (CD) support to BOM, particularly in reviewing and approving banks’ NPL resolution strategies and restructuring plans that will be critical post-pandemic. *Source: 8. Sensitivity analysis results. Banks — IMF country report content.* ### 27. Regulatory reforms. A number of legislative and regulatory developments have been ### 1mngea2021001 - 27. Regulatory reforms. A number of legislative and regulatory developments have been ### Regulatory reforms - A Law on Deposits, Loans, and Banking Transactions was adopted. - Amendments to the Banking Law were drafted and adopted in late 2020 with IMF input. - The Central Bank Law, adopted in 1996, has been amended to: - include more appropriate legal protections for bank staff; - further establish the institutional integrity and independence of BOM. - The insolvency and creditor rights regime are being revised; it will be necessary to determine if the changes are in line with the advice provided by the IMF and other institutions. - Further refinements may be needed in these and other regulations which the IMF could support through HQ-based review. - Specific areas highlighted for attention: - Ensure appropriate codes of corporate conduct are included. - Ensure the BOM has appropriate legal authorities to address non-compliance. - Review and update the Banking Law and the Law on Deposit Insurance to improve creditor hierarchy of claims to bring it in line with international best practices. - Recommendation to Parliament: - The Parliament should refrain from passing legislation that establishes policies and timetables that supersede the authorities of the regulatory bodies. ### Annex X — An Illustrative Adverse Scenario (overview and assumptions) - Purpose: Present an illustrative adverse scenario built on a global resurgence of the pandemic and discuss Mongolia’s capacity to repay the IMF under such a shock. - Main assumption: A sharp global resurgence of the pandemic driven by a super-contagious virus variant in late 2021. - Basis: Scenarios in the IMF’s World Economic Outlook Update (July 2021) combining epidemiological models and the IMF’s G20 Model. - Global growth impact assumptions: - Growth in advanced economies in 2021 is projected to be weaker than the baseline by almost 0.8 percent. - Growth in advanced economies in 2022 is projected to be weaker than the baseline by 1.6 percent. - Oil prices are projected to decline by around 12 percent in 2022. - Metal prices are projected to decline by around 4 percent in 2022. - Domestic Mongolia assumptions: - Worsening of the domestic COVID-19 situation for about 6 months starting in late-2021/early-2022. - Temporary nationwide lockdown of 1 month. - Closure of the border with China for 4 months in late-2021/early-2022. - Fiscal and monetary policy responses assumed the same as in the baseline; no additional fiscal or quasi-fiscal support beyond the 2021 supplementary budget and the Anti-Pandemic Law. ### Impact of the adverse scenario (enumerated effects) - Growth: - Strong containment efforts, temporary domestic lockdown and lower mining exports to China would lower domestic growth by about 6 percent points in 2021−22 relative to the current baseline. - Given a wider and more persistent output gap, and global price declines under the adverse scenario, inflation would be lower compared to the baseline. - Assumption on inflation-GDP relationship: Inflation is assumed to decline by around 0.25 bps for every 1 pp decline in GDP growth, in-line with the IMF’s MAC DSA template. - External: - Decline in global commodity prices and extended closure of the China border, partly offset by compression of imports, would negatively impact the trade balance. - Current account deficit projected to widen to over 20 percent of GDP in 2022. - The increase in the current account deficit relative to the baseline is projected to be financed by the drawdown in the BOM’s gross reserves while maintaining a stable exchange rate. - Fiscal: - Decline in domestic activity and deterioration in trade would lead to lower revenues and widening overall fiscal deficit. - Sovereign yields would increase compared to the baseline, increasing debt service payments. - Refinancing of the $500 million Eurobond maturing in 2023 may need to be delayed due to tighter global financing conditions. - Assuming no additional fiscal support compared to the baseline, public debt (excluding BOM debt) would rise to around 90 percent of GDP by end-2022. - Public debt dynamics would worsen significantly and be particularly vulnerable to further declines in growth and large exchange rate depreciations. - Financial sector: - Lower economic activity, uncertainty, and tight FX liquidity would lead to a sharp deterioration in asset quality in the banking system, putting further pressure on bank capital. - Credit growth to the private sector could be expected to decline due to increased risk aversion by banks, further delaying the recovery. - Context on past measures: - Since start of the COVID-19 outbreak, there have been 4 temporary lockdowns with an average duration of 20 days and a maximum duration of 34 days whereas the border with China was closed for around 2 months in 2020. ### Mongolia’s capacity to repay the IMF (under the adverse scenario) - Mongolia’s capacity to repay the IMF would deteriorate somewhat but would still remain adequate. - Projected key indicators under the adverse scenario (relative to baseline): - IMF debt service as a percentage of exports projected to rise to 0.8 percent. - IMF debt service as a percentage of gross reserves projected to rise to 2.3 percent. - Despite the slight deterioration in these indicators, Mongolia’s capacity to repay the IMF is expected to remain adequate. ### Selected Fund relations data (as of September 30, 2021) - Quota: 72.30 (SDR Million) — 100.00 percent quota. - Fund Holdings of Currency: 296.41 (SDR Million) — 409.98 percent quota. - Reserve Position in Fund: 5.44 (SDR Million) — 7.52 percent quota. - Net cumulative SDR allocation: 118.05 (SDR Million) — 100.00 percent allocation. - SDR holdings: 98.22 (SDR Million) — 83.20 percent. - Outstanding Purchases and Loans (SDR Million; Percent Quota): - Emergency Assistance: 72.30 — 100.00. - Extended Arrangements: 157.25 — 217.49. - Latest Financial Arrangements: - EFF approved 05/24/2017, expired 05/23/2020, Amount Approved 314.51 (SDR Million), Amount Drawn 157.25 (SDR Million). - Stand-by approved 04/01/2009, expired 10/01/2010, Amount Approved 153.30 (SDR Million), Amount Drawn 122.64 (SDR Million). - ECF approved 09/28/2001, expired 07/31/2005, Amount Approved 28.49 (SDR Million), Amount Drawn 12.21 (SDR Million). - Latest Financial Outright Loan: - RFI committed 06/03/2020, drawn 06/05/2020, Amount Approved 72.30 (SDR Million), Amount Drawn 72.30 (SDR Million). - Overdue Obligations and Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - 2021 Principal 2.33; Charges/interest 1.08; Total 3.41. - 2022 Principal 17.91; Charges/interest 4.43; Total 22.34. - 2023 Principal 44.28; Charges/interest 4.04; Total 48.33. - 2024 Principal 62.36; Charges/interest 2.09; Total 64.45. - 2025 Principal 44.28; Charges/interest 0.95; Total 45.23. *Source: Staff Report for the 2021 Article IV Consultation (excerpt).* ### 2017. The 2017 assessment found limited progress in strengthening the safeguards and governance ### 1mngea2021001 - 2017. The 2017 assessment found limited progress in strengthening the safeguards and governance ### Safeguards and governance at the Bank of Mongolia (BOM) - 2017 assessment: found limited progress in strengthening safeguards and governance frameworks at the BOM. - Strengths identified in 2017: - Financial accountability and transparency practices were robust. - Areas needing strengthening (2017 assessment): - Operational and financial autonomy. - Collegial decision making. - Oversight of central bank operations and audit mechanisms. - Internal audit. - Steps taken by BOM in response to 2017 recommendations: - Amended the Central Bank Law to improve governance framework, autonomy of the BOM, and collegial decision-making. - Established an MoU with the Ministry of Finance (MOF) to limit BOM's involvement in the mortgage program. - Set up a working group to review the veracity of program monetary data. - Drafted a new charter for the Internal Audit Department and established quarterly reporting of the function to the Supervisory Board. - 2018 Central Bank Law amendments: - Allowed members of the Monetary Policy Committee to have a vote on policy decisions. - Ensured BOM decisions on bank supervisory issues are made through the Banking Supervision Committee. - 2021 Central Bank Law amendments: - Strengthened legal protections for supervisors. - Remaining important recommendations: - Agreement on timing and modalities for transfer of the mortgage program from the BOM to the MOF remains to be finalized. - BOM should recognize IMF holdings of Mongolia’s currency on its balance sheet. ### Exchange arrangement and multiple currency practices (MCPs) - Exchange regime history: - On March 24, 2009, BOM instituted a foreign exchange auction allowing determination of the exchange rate mainly by market forces. - De jure exchange rate arrangement: floating. - De facto exchange rate arrangement: stabilized. - De facto arrangement reclassifications: - Retroactively to crawl-like from floating, effective September 18, 2017. - To other managed from crawl-like, effective April 11, 2018. - Article VIII obligations: - Mongolia accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 1, 1996. - Two MCPs subject to Fund jurisdiction: 1. Multi-price auction system: - Gives rise to an MCP because no mechanism ensures accepted bids do not deviate by more than 2 percent. - Executive Board approved the multi-price auction MCP until June 22, 2010 (Decision No. 14365 of June 23, 2009), and its further extension until March 15, 2012 or the next Article IV consultation whichever is earlier (Decision No. 14669 of June 23, 2010 and Decision No. 14365 of March 16, 2011). - MCP could not be resolved by March 15, 2012 and will continue as long as the multi-price foreign exchange auction mechanism remains in place; remains to be approved and staff do not recommend Executive Board approval. 2. Official exchange (reference) rate for government transactions: - Official exchange rate is mandatorily used for government transactions, creating market segmentation. - Order #699 of the BOM (December 3, 2010) sets the reference rate as weighted average of market rates used from 4 PM of the previous day to 4 PM of the current day. - Staff view: Order #699 does not eliminate market segmentation and multiplicity of effective rates; absence of a mechanism to ensure commercial rates and reference rate do not deviate by more than 2 percent gives rise to an MCP subject to Fund approval; remains unapproved by the Executive Board. - Exchange restrictions: - Mongolia imposes exchange restrictions for security reasons in accordance with United Nations Security Council Resolution No. 92/757 concerning certain transactions with the Federal Republic of Yugoslavia (Serbia and Montenegro) that have been notified to the Fund under Decision 144 (11/4/94). - Measures since 2019: - BOM notes no measures since 2019 that could give rise to exchange rate restrictions or MCPs. - COVID-19 temporary macro-prudential measures against dollarization: - Required banks to notify BOM about any investments in FX denominated securities. - Restricted individuals and entities from transferring foreign currency between accounts in domestic banks. - BOM indicated these measures do not affect foreign settlements and transfers. ### Article IV consultation and cycle - 2019 Article IV consultation (IMF Country Report No. 19/297) concluded by the Executive Board on September 11, 2019. - Mongolia is on a 12–month cycle. ### ROSC assessments - Undertaken assessments and dates: - Data Dissemination (May 2001) - Fiscal Transparency Module (November 2001) - Fiscal Update (May 2005) - Data Dissemination (April 2008) - Monetary and Fiscal Policy Transparency (September 2008) - Banking Supervision (September 2008) ### Recent financial arrangements with the IMF - Rapid Financing Instrument: - Amount: equivalent to SDR 72.30 million (100 percent of quota). - Approved on June 3, 2020. - Extended Fund Facility: - 36-month Extended Fund Facility in an amount of equivalent to SDR 314.5054 million (435 percent of quota). - Approved on May 24, 2017. - Executive Board completed the fifth review on October 31, 2018. - Program expired on May 23, 2020. ### FSAP participation - Mongolia participates in the Financial Sector Assessment Program (FSAP). - FSAP missions: - First, second, and third missions: May 2007, September 2007, and November 2010 respectively. - Latest report (IMF Country Report No. 11/107) published in May 2011. ### Capacity development and IMF technical assistance (TA) - Mongolia is an intensive recipient of IMF TA. - Post-2019 Article IV TA focus areas: - Fiscal area: tax and customs administration via short-term expert visits and a resident advisor, supported by the Revenue Mobilization Thematic Fund. - Business continuity plan for Mongolian tax authorities (July 2020). - MCM support for external debt rollover (June 2020). - Assistance in developing framework for issuing local currency bonds and developing domestic capital market (January 2021). - Macroeconomic statistical indicators: high frequency indicators (September 2019 and March 2021) and residential property price index (April 2021). - Capacity building for debt sustainability analysis (June 2021). - Discussions with CCAMTAC since February 2021 for complementary TA. - IMF TA missions (September 2019–2021) — mission topics and timing: - Customs administration, (FAD) August–September 2019 - High frequency economic indicators, (STA) September 2019 - Banking regulation, (MCM) September 2019 - Revenue performance analysis, (FAD) October 2019 - AML/CFT, (LEG) November 2019 - Banking regulation, (MCM) November 2019 - Macro-Fiscal modeling, (FAD) January 2020 - Banking regulation, (MCM) January–February 2020 - Medium term debt strategy and liability management operations, (MCM) June 2020 (remote mission) - Business continuity plan for MTA, (FAD) June–September 2020 (remote mission) - Customs diagnostic mission, (FAD) July 2020 (remote mission) - Mongolia Customs General Authority (MCGA) strategic plan for 2021–2024, (FAD) September 2020 (remote mission) - Domestic government bond market development mission (MCM), January–February, 2021 - High Wealth Strategy (FAD), February–April 2021 (remote STX mission) - Tax Gap Analysis (FAD), February–April 2021 (remote STX mission) - High frequency economic indicators, (STA) March 2021 (remote mission) - Residential property price index, (STA) April 2021 (remote mission) - Issuing tax guidelines (FAD), April–June 2021 (remote STX mission) - Data and analytics (FAD), June 2021 (remote STX mission) - Debt Dynamics Training (ICD), June–July 2021 (remote mission) - Hidden economy strategy (FAD), August–September 2021 (remote STX mission) ### Resident representative - Since July 2019, Mr. SeokHyun Yoon has been the resident representative based in Ulaanbaatar. ### Relations with other international financial institutions - World Bank: link provided on original document. - Asian Development Bank: link provided on original document. ### Statistical issues (As of October 2021) - Overall assessment: - Data provision to the Fund is broadly adequate for surveillance, but shortcomings exist in GDP estimation and treatment of missing observations in price indices. - Priority areas for improvement: national accounts, price statistics, and migration of government finance statistics to a new methodology. - National accounts: - NSO publishes annual and quarterly GDP using production and expenditure approaches. - Annual supply-use tables compiled; implementation of 2008 SNA; 2015 rebasing implemented. - Ongoing work to chain-link annual GDP using annual Supply Use Tables (SUTs). - CCAMTAC cooperation and mission scheduled for March 2022 to improve quarterly GDP by expenditure. - 2018 mission recommendations: make further use of tax data to supplement/replace survey collections and improve volume estimates of taxes and subsidies on products. - Price statistics: - NSO produces monthly CPI with weights from the 2015 household survey; covers urban and rural households; disseminated within two weeks from the reference month. - NSO publishes monthly PPI for industrial activities and quarterly PPI for services. - Experimental quarterly residential property price index (RPPI) for Ulaanbaatar using mix-adjustment by stratification methodology. - TA ongoing to implement enhanced RPPI methodology; goal to disseminate improved RPPI in 2022. - Government finance statistics: - Current compilation generally follows GFSM 1986. - Authorities working to compile time series based on GFSM 2014. - STA provided TA (funded by Japan) to develop annual General Finance Statistics (GFS) for 2016 onward. - June 2019 GFS TA mission compiled a financial balance sheet and integrated stock-flow presentation for consolidated general government using accrual (IPSAS-based) accounts. - December 2018: authorities began reporting public sector debt statistics (PSDS) to the World Bank for dissemination. - Monetary and financial statistics: - BOM reports regular monetary data using IMF Standardized Report Forms (SRFs) covering central bank balance sheet and other depository corporations. - Mongolia’s MFS conform to concepts and definitions of the Monetary and Financial Statistics Manual and Compilation Guide. - BOM reports some basic data to the IMF’s Financial Access Survey and UN SDG indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults). - Mongolia does not currently report Financial Soundness Indicators (FSIs) to the Fund for dissemination; BOM needs to finalize action plan for submission. - External sector statistics: - BOM follows BPM6 for ESS compilation. - Priority for improvement: address persistent negative net errors and omissions. - Mongolia participates in the CDIS and CPIS. - Mongolia has compiled external debt statistics and the Reserves Data Template since subscribing to SDDS in 2019. - Data standards and quality: - Mongolia graduated to the Fund’s Special Data Dissemination Standard (SDDS) in April 2019. ### Selected data and timeliness indicators (as of October 2021) - Exchange rates: Date of latest observation 10/25/21; Date received 10/25/21; Frequency of data/ reporting/ publication: D D D. - International reserve assets and reserve liabilities of the Monetary Authorities: Date of latest observation 08/2021; Date received 09/2021; Frequency: M M M. - Reserve/base money: 08/2021; 09/2021; M M M. - Broad money: 08/2021; 09/2021; M M M. - Central bank balance sheet: 08/2021; 09/2021; M M M. - Consolidated balance sheet of the banking system: 08/2021; 09/2021; M M M. - Interest rates: Date of latest observation 10/20/2021; Date received 09/20/2021; Frequency: D D D. - Consumer price index: 09/2021; 10/2021; M M M. - Revenue, expenditure, balance and composition of financing – general government: 08/2021; 09/2021; M M M. - Stocks of general government and general government-guaranteed debt: 2021Q1; 06/14/21; Q Q Q. - External current account balance: 08/2021; 09/30/21; M M M. - Exports and imports of goods: 08/2021; 09/15/21; M M M. - GDP/GNI: 2021Q2; 08/24/21; Q Q Q. - Gross external debt: 2020Q4; 04/08/21; Q Q Q. - International investment position: 2021Q2; 09/21/21; Q Q Q. _Italicized source: IMF Country Report content (1mngea2021001) excerpt as provided in the supplied content._ --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1mngea2021001.pdf_