## 1mngea2023002 ## Source details **Canonical URL:** [1mngea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1mngea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mngea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mngea2023002.pdf.json) --- ### Context: Stepping Back from the Brink - Mongolia faced multiple shocks in 2022: closed China borders, the Ukraine war and sanctions on Russia, rising global prices, and sharply tighter global financing conditions. - Policy responses to the pandemic (sizeable untargeted policy support and interventions to stabilize the exchange rate) contributed to large and rising external and internal imbalances and sovereign spreads spiking in 2022Q3 ahead of large external debt repayments due in 2023‒24. - Stabilizing developments: - China’s reopening aided recovery. - New leadership at Erdenes Tavan Tolgoi (ETT) and government export facilitation measures. - Greater ER flexibility and tighter domestic financial conditions after monetary policy rate hikes to 13 percent and banks’ risk aversion helped contain imports. - Stronger export volumes and prices and a large influx of private sector financing at end-2022 shored up gross international reserves (GIR). - Moody’s and S&P Global reaffirmed Mongolia’s sovereign ratings at B3 stable and B (outlook stable). - US$1.8 billion PBOC swap rolled over till 2026 in August 2023. - On January 10th, 2023 Mongolia issued a US$650 million Eurobond with a 5-year tenor and coupon rate of 8.65 percent; the bond was oversubscribed up to about $4 billion. ### Growth, Activity, and Inflation - Recent performance: - GDP growth: 5 percent (2022); 7.9 y/y (2023Q1). - Mining sector activity stagnant in 2022 despite export-led recovery. - Inflation and monetary policy: - Headline inflation: 9.2 percent (July 2023); BOM target band 6±2 percent. - IMF staff forecast: 11.7 percent (end-2023); 12.8 percent (2024); decline to BOM target over medium term. - Monetary policy rate: 13 percent; BOM raised policy rate to 13 percent and tightened reserve requirements (700 bps increase over 2022). ### External Imbalances, Reserves, and NIIP - External vulnerabilities: - Large negative NIIP and among the world’s largest external debt positions. - Current account (CA) deficit: 13.4 percent of GDP (2022). - CA norm (EBA-lite): -9.1 percent of GDP; CA gap: -3.3 percent of GDP; REER gap: 7.6 percent. - Reserves and buffers: - GIR: US$3.4 billion (end-2022); US$3.8 billion (end-July 2023); 3.4 months of imports; 87 percent of the ARA metric. - GIR net of commercial banks’ FX deposits at BOM: US$1.9 billion (end-2022); reached US$2.8 billion (end-July 2023). - Recommended GIR: around 130-150 percent of the ARA metric given large negative NIIP. - External financing and refinancing risks: - Large scheduled external repayments and private external liabilities exceed US$3 billion in H2 2023 and throughout 2024. - IIP liabilities: -288 percent of GDP (2022); NIIP projected to improve from -248 percent of GDP (2022) to -226 percent of GDP (2027). - Composition of liabilities: FDI 166 percent of GDP (OT 126 percent of GDP), external loans 78 percent of GDP, debt securities 19.5 percent of GDP. - ETT off-take agreements: - Total value: US$3.4 billion; repayment terms: US$1.1 billion in cash and US$2.3 billion in coal over 2019‒26. - Projected drains on GIR: US$179 million (end-2023); US$233 million (2024); US$295 million (2025). - Excluding Bogdkhan project, US$1.1 billion remains to be executed over 2023‒25, earmarking 10 percent of ETT’s projected coal exports on average (6.1 percent of Mongolia’s total coal exports, 1.8 percent of GDP). ### Fiscal Policy, Public Finances, and Outlook - Fiscal stance and recent measures: - Fiscal policy set to become expansionary ahead of June 2024 Parliamentary elections. - Parliament let the Anti-Pandemic Law expire end-2022; outstanding quasi-fiscal operation balances 7 percent of GDP to be moved off BOM balance sheet by end-June 2023. - Supplementary budget in mid-2023 introduces large and permanent spending increases amounting to 3 percent of GDP (2023) and 6 percent of GDP (2024). - Public sector wage increases: 30-40 percent on average (starting 2023H2). - Fiscal outlook: - Without corrective measures, fiscal balances expected to remain in deficit during 2023‒27. - Public debt projected to rise to 67.5 percent of GDP by 2027 under unchanged policies (noting DSA projects different paths—see Annex V). - NMPB expected to record large deficits due to softer commodity prices and lasting spending increases. - Authorities’ supplementary budget assumptions: GDP growth of 6 and 6.5 percent in 2023 and 2024 respectively, coal exports of 50 million tons, and inflation declining to 10 by end-2023. - Fiscal consolidation recommendations: - Illustrative fiscal adjustment of around 4 percent of GDP in 2023‒24 could set public debt on a downward path toward 50 percent of GDP by 2027 and raise GIR. - Immediate savings: roll back automatic increases in pay supplements, freeze public sector wage rates at end-2023 nominal levels in 2024, rationalize civil service size to pre-COVID levels, strengthen performance-based budgeting, and contain non-wage current spending. - Do not use FHF transfers for budget spending; refrain from fiscal transfers to the FHF. ### Banking Sector, NBFIs, SOEs, and Governance - Banking sector health: - Banks profitable; system-wide provisioning: "95 percent at end-May 2023". - System-wide capitalization above minimum requirements though edged down; credit growth declined and projected subdued in real terms. - BOM conducted an AQR of five D-SIBs in 2022; all five launched IPOs. - BOM policy rate hikes and tightened requirements have contained credit growth; survey-based 12-month ahead inflation expectations fell to 9 percent (2023Q2), forward-looking real policy rates ~4 percent. - Nonbank financial institutions (NBFIs): - NBFI sector small but emerging; Fintech companies constitute "90 percent of the NBFI sector". - FRC introduced a "70 percent" DSTI for Fintech in January 2023. - DBM and SOEs: - DBM NPLs: MNT1.7 trillion (3½ percent of GDP or 55 percent of DBM’s total assets); 35 percent of NPLs recouped in 2022, reducing DBM’s NPLs to 1.2 percent of GDP at end-2022. - DBM bought back US$83 million Eurobond and secured funds to repay Samurai bond due December 2023; DBM’s cash position remains inadequate for external liabilities due in 2023. - SOE governance: ETT contract declassification, IAAC investigation, suspension of a large off-take contract, pilot online coal auctions; online auctions to extend to all SOE commodity exports starting January 1, 2024. - Governance recommendations: strengthen disclosure of commercial contracts, ban new off-take contracts, open board selection, and consider DBM diagnostic balance sheet review or winding down if viability cannot be credibly demonstrated. - Financial stability and supervision recommendations: - Intensify supervision for D-SIBs, avoid regulatory forbearance, implement forward-looking stress testing, finalize bank corporate governance regulations, and strengthen AML/CFT implementation and beneficial ownership transparency. - Develop NPL resolution strategy, broaden credit reporting, enhance BOM operational autonomy, cease quasi-fiscal operations, and transfer outstanding quasi-fiscal balances to the government. ### Sovereign Risk and Debt Sustainability (Annex V) - Executive summary: - High risk of sovereign stress. - Public debt: 77.8 percent of GDP (2022); projected to decline in 2023 then increase to over 86.3 percent of GDP by year 10. - External share of public debt: 94% (including PBOC swap). - PBOC–BOM swap line: US$1.8 billion (12 percent of GDP). - Probability public debt >100 percent of GDP by 2028: 25 percent. - Customized shock parameterization (exact figures): - Contingent liability: 5.9 percent of GDP (2023, one-period). - Growth shock: 4.5 percentage points to real GDP growth per period (2023–24, two periods). - Exchange rate shock: 33 percent nominal depreciation per period (2023–24, two periods); pass-through 0.25 implies 25 percent real depreciation. - Interest rate shock: 700 bps per period (2023–27, five periods) calibrated to reach 1,200 bps peak spreads. - Policy implications: - More ambitious structural fiscal adjustment required, reorientation toward domestic debt financing and development of domestic capital markets, proactive Eurobond maturity management, pension reform, and economic diversification away from coal. ### Outlook, Risks, and Illustrative Adverse Scenario - Growth outlook: - 2023 growth upgraded to 5½ percent. - After an initial uptick, growth expected to slow in 2024‒27 despite mining sector resurgence (OT underground production from 2023Q1). - Inflation outlook: - Inflation expected at 11.7 percent (end-2023) and 12.8 percent (2024) before declining to the BOM’s 6±2 percent target over the medium term. - External outlook: - Coal export assumptions: 47 million tons (2023); 50 million tons (2024‒27); historical record 36.5 million tons (2019). - GIR expected to decline in 2023 and remain low in 2024‒25. - New net external financing inflows likely to decline if global interest rates remain high. - Downside risks: - External: sharper-than-expected slowdown in China, commodity price volatility, tighter global financial conditions, disruptions to oil import payments due to Russian sanctions. - Domestic: fiscal slippage ahead of 2024 elections, contingent liabilities from SOEs, governance failures. - Illustrative adverse scenario assumptions and impacts: - Coal export volumes to China 10 percent lower relative to baseline; higher budget spending (2 percent of GDP in 2024); private sector external debt partly repaid (not rolled over) in 2023‒24. - Under the downside scenario: export receipts and fiscal balances deteriorate, inflationary and external pressures rise, external buffers decline in 2024‒25, widening fiscal deficits increase gross financing needs and public debt sharply; absent new external financing or policy adjustment, budget financing constraints and FX liquidity pressures could materialize. ### Policy Package to Preserve Macroeconomic and External Stability - Overarching strategy: - Fiscal consolidation and strict adherence to fiscal rules. - Greater ER flexibility to act as a shock absorber. - Permanent cessation of quasi-fiscal activities and stronger macroprudential enforcement. - Faster GIR accumulation opportunistically (e.g., if mineral export upside materializes). - Government refinancing of DBM’s external debt and attraction of new FDI and private external financing. - Strengthen SOE and fiscal governance, intensify banking supervision, and improve BOM operational autonomy and safeguards. - Fiscal consolidation specifics and sequencing: - Achieve illustrative fiscal adjustment ~4 percent of GDP in 2023‒24 through revenue and expenditure reforms. - Immediate savings: roll back pay supplement increases, freeze wage growth in nominal terms in 2024, contain non-wage current spending, rationalize subsidies, strengthen capex portfolio management and PIM. - Revenue-side measures (Annex VI and Tables): - Reduction in tax arrears: "1.0" percent of GDP (2024‒25). - Rationalization of tax expenditures: "0.9" percent of GDP (2024‒26). - Tax administration measures: "0.6" percent of GDP (2024). - Additional measures (cigarette/multiple cars): "0.1" percent of GDP (2024). - Expenditure-side measures (Annex VI and Tables): - Wage bill adjustment: "1.4" percent of GDP (2024‒27). - Reduction in energy and food subsidy: "0.15" percent of GDP (2025‒26). - Project reprioritization (PIMA): "0.5" percent of GDP (2023‒24). - Reduction in public investment: "1.2" percent of GDP (2023‒24). - Price indexation of pension benefits: "0.8" percent of GDP (2024‒27). - CMP targeting: "0.8" percent of GDP (2025). - Tax policy recommendations: - Introduce two- or three-tier PIT with top PIT rate of 20 percent above a high-income threshold (e.g., "10 times the MW") to improve progressivity and revenues. - Improve tax arrears collection: collectible arrears estimated at MNT1,244 billion (2.4 percent of GDP) as of December 2022; assume only 60 percent collectible with three-year average annual arrears collection rate of 39.1 percent. - Rationalize tax expenditures: TE cost estimated at 2.2 percent of GDP in 2022; cut direct and indirect TEs. - Pension and social policy: - Automatic inflation indexation of pensions effective January 2024 (following revised Pension Law July 2023); automatic indexation could save "0.8 percent of GDP by 2027". - CMP targeting reform: move to means-tested CMP from 2025, rationalize benefit levels by quintile (examples: MNT90,000; MNT60,000; MNT40,000; MNT20,000 for quintiles 2–5), index benefits only for bottom 40th percentile, expected fiscal savings about "0.8 percent of GDP". - Domestic debt market and monetary operations: - Mop up excess liquidity via continued issuance of Central Bank Bills at policy rate and market-based auctions of domestic securities by the government. - Planned domestic bond issuance in 2023: planned MNT1.6 trillion (2.6 percent of GDP). - Replace private placements with regular market-based auctions; broaden primary market participants to include NBFIs. - Harmonize DSTI limits for NBFIs with banking sector; DSTI may need lowering if inflation and consumer credit growth persist. - Financial sector and supervisory reforms: - Intensify supervision, especially D-SIBs; conduct frequent on-site inspections; improve NPL resolution and credit reporting; strengthen AML/CFT and beneficial ownership transparency. - Revise bank corporate governance, implement Pillar 2, and strengthen resolution frameworks and inter-agency crisis coordination. - SOE, PIM, PPP, and governance: - Integrate mineral wealth management into fiscal framework. - Integrate PPPs into PIM, consolidate PPP funding into state budget, strengthen MOF gatekeeping, and rigorously appraise PPPs. - Strengthen SOE oversight: MED and MoF review investment plans at arm’s-length; do not implement projects without rigorous appraisal. - Safeguard GIR via sound debt management, enforce currency settlement law, and ensure SOE repatriation requirements. - Contingency operational measures: - Prepare contingency plans to ensure Russian fuel import payments continue given restricted CBR access; coordinate BOM and government contingency planning. ### Key Exact Figures and Statistics (selected) - GDP growth: 5 percent (2022); 7.9 y/y (2023Q1); 5½ percent (2023 forecast upgrade). - Inflation: 9.2 percent (July 2023); 11.7 percent (end-2023 forecast); 12.8 percent (2024 forecast). - Monetary policy rate: 13 percent. - GIR: US$3.4 billion (end-2022); US$3.8 billion (end-July 2023); 3.4 months of imports; 87 percent of the ARA metric. - PBOC swap: US$1.8 billion (rolled over till 2026 in August 2023). - Eurobond issued: US$650 million (January 10th, 2023); 5-year tenor; coupon rate of 8.65 percent; oversubscribed up to about $4 billion. - ETT off-take agreements: US$3.4 billion total; US$1.1 billion remains to be executed over 2023‒25 (excluding Bogdkhan). - Quasi-fiscal balances to be moved off BOM: 7 percent of GDP. - Supplementary budget permanent spending increases: 3 percent of GDP (2023); 6 percent of GDP (2024). - Public sector wage increases: 30-40 percent on average (starting 2023H2). - DBM NPLs: MNT1.7 trillion (3½ percent of GDP or 55 percent of DBM’s total assets); reduced to 1.2 percent of GDP at end-2022 after recouping 35 percent in 2022. - Public sector employees: 25 percent of total employment in Mongolia. - Coal export assumptions: 47 million tons (2023); 50 million tons (2024‒27); 36.5 million tons (record in 2019). - Public debt: 77.8 percent of GDP (2022); projected over 86.3 percent of GDP by year 10 in SRDSF; probability public debt >100 percent of GDP by 2028: 25 percent. - Planned domestic bond issuance in 2023: MNT1.6 trillion (2.6 percent of GDP). - Fiscal reform package potential fiscal gains: about "4 percent of GDP in fiscal gains in 2023‒24". - Revenue/expenditure reform itemized savings (Annex VI): - Tax arrears collection: "1.0" percent of GDP (2024‒25). - Rationalize tax expenditures: "0.9" percent of GDP (2024‒26). - Tax administration measures: "0.6" percent of GDP (2024). - Wage bill adjustment: "1.4" percent of GDP (2024‒27). - Project reprioritization (PIMA): "0.5" percent of GDP (2023‒24). - Reduction in public investment: "1.2" percent of GDP (2023‒24). - Price indexation of pension benefits: "0.8" percent of GDP (2024‒27). - CMP targeting: "0.8" percent of GDP (2025). *Source: IMF staff report content (1mngea2023002).* ### References _______________________________________________________________________________________ 54 ### 1mngea2023002 - References ### Context: Stepping Back from the Brink - Mongolia faced multiple economic challenges in 2022 including closed borders of China, the Ukraine war and sanctions on Russia, rising global prices, and sharply tighter global financing conditions. - Policy responses to the pandemic (sizeable untargeted policy support and interventions to stabilize the exchange rate) contributed to large and rising external and internal imbalances and sovereign spreads spiking in 2022Q3 ahead of large external debt repayments due in 2023‒24. - Stabilizing developments: - China’s reopening aided recovery. - New leadership at Erdenes Tavan Tolgoi (ETT) and government export facilitation measures. - Greater ER flexibility and tighter domestic financial conditions after hikes in the monetary policy rate to 13 percent and banks’ risk aversion helped contain imports. - Stronger export volumes and prices and a large influx of private sector financing at end-2022 shored up gross international reserves (GIR). - Moody’s and S&P Global reaffirmed Mongolia’s sovereign ratings at B3 stable and B (outlook stable), respectively. - The US$1.8 billion PBOC swap was rolled over till 2026 in August 2023. - On January 10th, 2023, Mongolia issued a US$650 million Eurobond with a 5-year tenor and coupon rate of 8.65 percent to help refinance Eurobonds maturing in May 2023 and part of the US$600 million Eurobonds maturing in 2024; the bond was oversubscribed up to about $4 billion. ### Growth, Activity, and Inflation - Recent performance: - GDP growth surged to 5 percent in 2022 and 7.9 y/y in 2023Q1. - Mining sector activity remained stagnant in 2022 despite export-led recovery driven by drawdown of inventories in coal and disruptions to other mineral production. - Inflation dynamics: - Headline inflation at 9.2 percent in July 2023, above the BOM’s 6±2 band but on a declining trend after peaking in mid-2022. - Core inflation recently started moderating after a sustained year-long rise. - The BOM raised the monetary policy rate to 13 percent. ### External Imbalances and Reserves - Key vulnerabilities: - Large net international investor position (NIIP) and external debt, among the world’s largest. - The 2022 current account (CA) deficit remained wide due to weaker export prices and large imports related to public sector infrastructure, FDI, consumer goods and transportation services. - ETT’s multi-year off-take agreements worth US$3.4 billion lock in coal export price discounts (Annex I). - Reserve and buffer indicators: - GIR was US$3.4 billion at end-2022 and US$3.8 billion at end-July 2023, 3.4 months of imports and 87 percent of the ARA metric. - GIR (excluding commercial banks’ FX deposits at BOM) and net international reserves (NIR), excluding all BOM’s FX liabilities, are lower still. - Financing and rollover risks: - Sound sovereign debt management has mitigated sovereign rollover risks, but rollover risks for other entities (e.g., the private sector) remain high. - Balance of payments data for January-April 2023 indicates net financial outflows of US$222 million, in contrast to net inflows of US$294 million during the same period in 2022. ### Fiscal Policy and Public Finances - Fiscal stance: - Fiscal policy is set to become expansionary in the run-up to the June 2024 Parliamentary elections. - Parliament let the Anti-Pandemic Law expire at end-2022, mandating that outstanding quasi-fiscal operation balances (7 percent of GDP) be moved off the BOM’s balance sheet by end-June 2023. - The BOM’s advance payments to banks for the subsidized mortgage program in December 2022 de facto allow these operations to continue through 2023H1. - Recent and planned spending increases: - Public expenditures have been expansionary relative to pre-COVID levels due to persistently higher untargeted social transfers through the Child Money Program (CMP) and the large pipeline of public investment projects. - The supplementary budget approved in mid-2023 introduces large and permanent spending increases in the wage bill and pension benefits—amounting to 3 and 6 percent of GDP in 2023 and 2024 respectively. - Public sector wage increases of 30-40 percent on average starting 2023H2 are expected to boost demand and have spillovers to other sectors. - Fiscal outlook: - The fiscal position is expected to deteriorate by end-2023 despite commodity revenue overperformance through 2023H1. - IMF staff forecasts assume the large spending increase will be funded by stronger export-related revenues and a mix of domestic and foreign financing. - Domestic bonds issuance restarted in 2022 via private placements, with market issuance planned in 2023. - Fiscal forecasts for 2024‒27 assume unchanged policies given the lack of clarity about fiscal policy commitments for 2024. ### Banking Sector, SOEs, and Governance - Banking sector: - Broadly stable banking sector; BOM conducted an Asset Quality Review (AQR) of five D-SIBs in 2022 and all five have since launched initial public offerings (IPO). - IMF assistance continues on macroprudential framework, bank corporate governance regulatory framework, and improving risk-based supervision. - DBM and SOE governance: - DBM’s NPLs amounted to MNT1.7 trillion (3½ percent of GDP or 55 percent of DBM’s total assets); 35 percent of NPLs were recouped in 2022, reducing DBM’s NPLs to 1.2 percent of GDP at end-2022. NPL recovery continues in 2023. - Public outcry in late-2022 over alleged coal theft from ETT prompted emergency measures: declassification of ETT’s off-take contracts with a domestic company, hiring an international audit firm, IAAC investigation of ETT, suspension of a large off-take contract, and pilot online auctions for coal exports to introduce transparent pricing. Online auctions are expected to extend to all SOE commodity exports starting January 1, 2024. - SOE reforms: strengthened disclosure of commercial contracts and transactions, ban on new off-take contracts, and open selection of board members. - Legal proceedings related to DBM are ongoing and modalities for DBM’s external debt repayment are being decided. ### Reforms and Technical Assistance - Legislative and institutional reforms advancing: - Parliament approved the PPP law, the Investment Banking law, medium-term budget framework (MTBF), fiscal oversight and accountability reforms, and a package of Social Insurance laws including the Pension law. - Parliament is slated to discuss private pension system and insolvency framework reforms in 2023H2. - An updated Public Investment Management Assessment (PIMA) was recently completed. - IMF and World Bank assistance are supporting pension and social insurance reforms, PPP operationalization, fiscal and SOE risk assessment, and strengthening fiscal frameworks. ### Outlook: A Return to Imbalances - Growth outlook: - After an initial uptick, growth is expected to slow in 2024‒27. - Mining sector activity is likely to resurge following China’s reopening, ETT’s improved performance, operationalization of OT’s underground copper mine starting 2023Q1, and reorientation of coal export transportation toward domestic companies. - 2023 growth has been upgraded to 5½ percent, but medium-term forecasts envisage below-potential GDP growth despite stronger mining sector performance after OT project completion and record coal exports to China. - Inflation outlook: - Inflation is expected to remain at 11.7 percent by end-2023 and rise further to 12.8 percent in 2024 before declining to the BOM’s 6±2 percent target range over the medium term. - Drivers of the near-term rise: procyclical fiscal stimulus, public sector wage growth, consumer credit expansion through salary-backed loans, broader wage and cost-push pressures, declining labor force participation, untargeted social transfers, and large minimum pension hikes in 2022. - Some moderating forces include declining global food, energy and other imported commodity prices, an agreement to purchase Russian gasoline at a discount till 2027, and tighter domestic financial conditions. - External and reserve outlook: - CA deficits are expected to remain large despite high coal and copper export volumes, stronger copper prices, fuel import price discounts, and reorientation of coal export transportation toward domestic companies. - Coal exports are assumed to increase to 47 million tons in 2023 (higher than the record achieved in 2019 of 36.5 million tons) and rise further to 50 million tons during 2024‒27 as forecasted by the government. - GIR is expected to decline in 2023 and remain low in 2024‒25. - New net external financing inflows from international markets are likely to decline if global interest rates remain high. ### Key Statistics and Exact Figures from the Content - GDP growth: 5 percent (2022); 7.9 y/y (2023Q1); 5½ percent (2023 forecast upgrade). - Monetary policy rate: 13 percent. - Headline inflation: 9.2 percent (July 2023); 11.7 percent (end-2023 forecast); 12.8 percent (2024 forecast); BOM target band 6±2 percent. - GIR: US$3.4 billion (end-2022); US$3.8 billion (end-July 2023); 3.4 months of imports; 87 percent of the ARA metric. - PBOC swap: US$1.8 billion (rolled over till 2026 in August 2023). - Eurobond: US$650 million issued on January 10th, 2023; 5-year tenor; coupon rate of 8.65 percent; oversubscribed up to about $4 billion. - ETT off-take agreements: US$3.4 billion. - Quasi-fiscal operation balances to be moved off BOM balance sheet: 7 percent of GDP. - Supplementary budget permanent spending increases: 3 percent of GDP (2023); 6 percent of GDP (2024). - Public sector wage increases: 30-40 percent on average (starting 2023H2). - DBM NPLs: MNT1.7 trillion (3½ percent of GDP or 55 percent of DBM’s total assets); reduced to 1.2 percent of GDP at end-2022 after recouping 35 percent in 2022. - Public sector employees: 25 percent of total employment in Mongolia. - Coal export assumptions: 47 million tons (2023); 50 million tons (2024‒27); 36.5 million tons (record in 2019). *Source: 1mngea2023002 - References* ### 2025. However, in recent years, approved budgets ### 1mngea2023002 - 2025. However, in recent years, approved budgets ### Fiscal outlook and projections - Without corrective measures, fiscal balances are expected to remain in deficit during 2023‒27, raising public debt ratios (Tables 5a-5b). - Mongolia’s public debt is projected to rise to 67.5 percent of GDP by 2027, well above the appropriate debt anchor (50 percent of GDP), assuming that the Future Heritage Fund (FHF) and Fiscal Stability Fund (FSF) accumulations take place largely in line with legislative mandates. - The NMPB is expected to record large deficits due to: - a softer outlook for commodity prices; - the full-year impact of the large and permanent increases in pension and public sector wages and benefits in 2024; - elevated capex through 2027 in line with the government’s Annual Development Plan. - Authorities’ supplementary budget assumptions: - GDP growth of 6 and 6.5 percent in 2023 and 2024 respectively driven by stronger coal export volumes (50 million tons). - Inflation declining to 10 by end-2023 and reaching the BOM’s target range by end-2024. - BOM expects the supplementary budget to have 2 percentage point impact on inflation. ### Authorities’ views and differences with staff - Authorities are more optimistic on the overall economic outlook and believe: - the supplementary budget will be deficit neutral due to a windfall from coal exports; - adherence to the deficit, debt, and expenditure targets in the Fiscal Stability Law (FSL) in the 2024 budget would lead to stronger outcomes than staff projections. - Staff note risks from Mongolia’s track record in adhering to the FSL and that recent amendments “may improve adherence to the fiscal framework but in future, once the amendments become effective at a date that remains to be agreed with the Ministry of Finance.” - BOM’s external sector projections were largely in line with staff’s though slightly more optimistic on external financing prospects and GIR; BOM confirmed the PBOC swap had been rolled over. ### Downside risks and illustrative adverse scenario - Key external vulnerabilities: - Mongolia’s negative NIIP position, high external debt, weak external buffers, and dependency on imports and commodity exports. - Vulnerability to tighter global financial conditions, commodity price volatility, intensifying geo-economic fragmentation, and China’s recovery. - Specific downside risk channels: - A sharper-than-expected slowdown in China could reduce demand for commodity exports; baseline forecasts assume significantly stronger coal export volumes to China—double the long-term historical average—based on government plans and export facilitation successes. - Commodity price volatility could materialize if global risks related to growth slowdown in AEs and China were to materialize. - Domino effects from higher global interest rates and/or disorderly debt events in some EMDEs could cause capital outflows and increase risk premia. - Disruptions in oil import payments due to escalating Russian sanctions could significantly hurt Mongolia’s mining and energy sectors. - Domestic downside risks: - The government’s ability to maintain policy discipline ahead of the 2024 elections may present a challenge; further fiscal support could aggravate external and inflationary pressures. - Contingent liabilities of the SOE sector and governance challenges could adversely affect public finances, external imbalances, and/or financial stability. - Illustrative adverse scenario assumptions and impacts: - Scenario based on WEO Update (April 2023) global adverse scenarios plus: - coal export volumes to China 10 percent lower relative to the baseline; - higher budget spending (2 percent of GDP in 2024); - private sector external debt is assumed to be partly repaid (not fully rolled over) in 2023‒24 (paragraph 18). - Note in the Illustrative Adverse Scenario box: “Given tighter global financial conditions, private debt is assumed to be fully repaid (not rolled over) in 2023-24 in contrast with the baseline assumptions of full rollover.” - Under such a downside scenario, exports receipts and fiscal balances would deteriorate, raising persistent inflationary and external pressures; external buffers are likely to decline and remain precariously low in 2024‒25; widening fiscal deficits would increase gross financing needs and public debt sharply; absent new external financing and/or policy adjustment, shocks could result in budget financing constraints and FX liquidity pressures in the banking system. ### Policies to preserve macroeconomic and external stability - Overarching strategy: - Fiscal consolidation and adherence to fiscal rules are vital. - Fiscal spending should be reined in starting in 2023; the 2024 budget should be based on high-quality revenue and spending measures to boost efficiency and equity. - Greater ER flexibility is needed to boost external buffers, supported by a government refinancing of DBM’s external debt and efforts to attract new FDI and private external financing. - Stronger enforcement of macroprudential policies and permanent cessation of quasi-fiscal activities to help contain inflation. - Support measures: effectively implement SOE and fiscal governance reforms, and intensify banking supervision. - Fiscal consolidation specifics: - Illustrative fiscal adjustment of around 4 percent of GDP in 2023‒24 underpinned by fiscal reforms could help achieve an orderly resolution of macroeconomic and external pressures while setting public debt on a downward path toward the recommended debt anchor of 50 percent of GDP by 2027 and raising GIR to adequate levels. - Government should refrain from using fiscal transfers to the FHF for budget spending to contain debt and adhere to the fiscal framework. - Areas for immediate savings and reforms: - Roll back the automatic increase in civil service pay supplements (such as overtime) resulting from the 2023 supplementary budget given the large real increase in base pay and the six-fold increase in pay supplements over 2017‒23; pay supplements now account for 40 percent of the civil service wage bill. - Gradually rationalize the size of the civil service to pre-COVID levels; freeze public sector wage rates at end-2023 levels in 2024 in nominal terms and subsequently maintain in real terms for a few years. - Contain non-wage current spending by strengthening performance-based budgeting in education, health, and culture/art sectors, increasing transparency, and controlling the recurrent budget; as food and energy prices stabilize, rationalize food and energy subsidies. - Strengthen capex portfolio management and new project selection using performance indicators and scoring in the digitalized Public Investment Management Information Systems (PIMIS); align sectoral budget allotment for capex with capex execution performance. - Strengthen SOE oversight by mandating MED and MoF review (at arms-length) investment plans and budgets of major SOEs; do not implement investment projects unless they have rigorous project appraisal and selection. - Social and tax policy adjustments: - Phase in greater targeting of social assistance after the elections using the new household income database; re-align the Child Money Program benefit levels to the pre COVID levels for high-income groups. - Reform PIT: IMF technical assistance suggests a two or three-tier PIT system with a top PIT rate of 20 percent above a high-income threshold to equalize the effective tax burden and potentially generate additional revenues. - Step up other revenue-enhancing measures: - Improve collection of tax arrears by refining classification of uncollectable debt, introducing clear write-off provisions, and monitoring aged schedules of debtors. - Strengthen filing and payment and voluntary compliance, online taxpayer registration, dispute resolution, and operational risk management. - Reduce tax expenditures to pre-pandemic levels by removing tax exemptions and credits. - Pension reforms: automatic indexation of pension benefits and other parametric reforms on retirement age and vesting rules—beyond the inflation indexation introduced in the revised Pension Law of July 2023—and rationalize social welfare pension beneficiaries to create fiscal savings. *Source: IMF staff report content (1mngea2023002).* ### 24. Strong structural measures to enhance fiscal discipline could boost investor ### 24. Strong structural measures to enhance fiscal discipline could boost investor ### Fiscal discipline and public investment management (PIM) - Strengthen tax administration and the customs regulatory framework to broaden the revenue base in an equitable manner. - Strengthen PIM to improve efficiency and reduce corruption, and ensure greater budget transparency, oversight, and accountability. - IMF technical assistance (IMF, 2023d) noted major progress on several fronts, but highlighted the need to strengthen: - effective implementation of fiscal rules, MTBF, investment budgeting, budgeting comprehensiveness and unity, and maintenance funding. - Adopt a simplified fiscal framework based on a nominal debt anchor of 50 percent of GDP and a simple operational rule to improve fiscal discipline by boosting transparency. - Integrate mineral wealth management into the fiscal framework with clear accountability. - In line with international best practices, further actions needed: - (i) integrate PPPs in the PIM process; - (ii) consolidate PPP funding into the state budget; - (iii) further strengthen the MOF’s role as a gatekeeper to manage PPP-related fiscal risk; - (iv) rigorously appraise all PPPs according to the new PPP law; and - (v) introduce mechanisms to limit unsolicited PPP proposals. - The planned sovereign wealth fund and Development Fund for strategic investment should be integrated into the state budget for proper oversight and be guided by the PIM and PFM framework; a strong firewall and appropriate safeguards for the SWF Board are required. ### Contingent fiscal liabilities, SOEs, and DBM - Reduce contingent fiscal liabilities associated with state-owned DBM and other SOEs. - The current strategy to minimize new fiscal contingent liabilities of state-owned DBM by appointing an internationally reputable manager may be difficult without addressing DBM’s balance sheet and governance challenges. - Recommend appointing an independent external advisor to conduct a diagnostic balance sheet review to develop a proper course of action. - If DBM’s governance cannot be credibly strengthened and business model viability clarified, consider winding DBM down to reduce fiscal risks. - SOE privatization agenda should be carefully designed and preceded by adequate risk assessment, strengthened governance and oversight, a sound regulatory framework, and transparent reporting to control contingent liabilities. ### Authorities’ views on fiscal measures and 2023 supplementary budget - The 2023 supplementary budget was viewed by authorities as well justified: - Strong coal exports and GDP growth in 2023H1 boosted government revenues, providing room for extra spending. - Public sector wages, benefits, and pensions were raised to compensate for inflation and address post-pandemic austerity. - CMP was expanded to universal coverage to support Mongolia’s birth rate; CMP should not be viewed as social assistance. - Draft revisions to the Social Welfare Law envisage means-testing social assistance going forward based on a refined household database. - The government disagreed with staff fiscal forecasts and the assessment of a high risk of sovereign stress, asserting intent to abide by the FSL Article 6 by containing recurrent expenditure (keeping wage bills and goods and service expenditure at end-2023 nominal levels) in the 2024 budget. - Authorities intend to advance fiscal reforms and governance: - approve a new SOE law; - prepare necessary PPP regulations; - strengthen budget transparency and oversight; - with IMF TA, strengthen public investment management, tax compliance and arrears collection, and explore new tax policy measures. - Noted improvements: ETT’s governance improvements resulting in higher coal mining revenues; DBM requested ADB TA on governance issues. ### Greater exchange rate flexibility and external buffers - The BOM should continue to allow greater ER flexibility; greater flexibility since 2022Q1 helped contain imports and limit GIR erosion. - BOM shifted FX sales from auctions to inter-bank transactions under periods of high FX pressures to allow more discretion in supplying FX to more banks. - Given an assessment of an overvalued REER (Annex II, Figure), persistent external imbalances, and significant downside external risks, the BOM should continue to use the ER as a shock absorber to contain consumer imports and preserve GIR. - BOM’s resumption of FX sales through auctions is welcome to support efficient FX allocation. - An effective BOM communication strategy is critical and would be more effective if accompanied by a credible commitment to fiscal prudence (for example, strict adherence to the FSL). - The impact of a weaker ER on inflation should be offset through fiscal consolidation and stronger macroprudential policy enforcement, and monetary policy credibility. - External buffers recommendation: - Given Mongolia’s large negative NIIP and negative CA norm (Annex II), GIR should ideally be around 130-150 percent of the ARA metric (Annex II, Figure). - BOM should accumulate reserves through opportunistic interventions and accelerate accumulation pace (e.g., if mineral exports reach or exceed the government’s target or in case of strong net foreign financing inflows). ### Government role to safeguard and boost GIR - Safeguard against FX drains through sound debt management: - Given moderation in Mongolia’s sovereign spreads, government should directly refinance DBM’s external liabilities through new external financing and address moral hazard concerns and public sentiments by resolving DBM’s governance problems decisively. - Closely monitor external liability management plans of domestic entities and their ability to raise adequate external financing (e.g., ETT’s off-take contracts). - Ensure fiscal and SOE spending plans consider external sector implications and enforce SOE governance reforms. - Adequately enforce Mongolia’s currency settlement law and SOE repatriation requirements and coordinate with BOM on external payments and handling disruptive FX outflows. - Improve FX inflows: - Enable new FDI and portfolio inflows urgently by strengthening governance and the investment environment. - IPOs of banks and SOEs provide opportunity to attract foreign financing but require amendments to capital gains and withholding taxes to align with international practices. ### BOM operational and contingency issues - BOM and government should work with stakeholders to prepare contingency plans to ensure Russian fuel import payments continue smoothly, given loss of access to all CBRs for US$ gasoline import payments and current reliance on yuan transactions through Chinese banks. ### Monetary policy, liquidity, and domestic debt market - Mop up excess liquidity via: - Continued issuance of Central Bank Bills (CBBs) at the policy rate; and - Market-based auctions of domestic securities by the government. - Planned domestic bond issuance in 2023: - Planned MNT1.6 trillion 2.6 percent of GDP domestic bonds issuance in 2023 to be used for deficit financing, developing the domestic securities market, and for refinancing domestic bonds. - Market development and issuance recommendations: - Replace private placements with a regular schedule of issuances through market-based auctions. - Broaden primary market participants to include NBFIs. - Encourage secondary market trading in the Mongolian Stock Exchange (MSE) and over-the-counter markets. - Government may need to offer higher yields to encourage investor participation given lack of price discovery. - Strengthen macroprudential policies: - Harmonize the debt service to income limit (DSTI) for NBFIs with that of the banking sector and better enforce DSTI limits across the financial sector. - DSTI limit may need to be lowered if inflation and consumer credit growth remain persistently elevated. - Monetary policy stance: - BOM raised its policy rate by 700 bps (from 6 percent to 13 percent) over 2022, and tightened reserve requirements. - BOM’s survey-based 12-month ahead inflation expectations fell to 9 percent in 2023Q2, resulting in forward-looking real policy rates reaching 4 percent (Figure). - At current inflation rates (9.2 percent in July 2023), the real policy rate is around 4 percent. - Higher policy rates are gradually raising average lending and deposit rates; credit growth declined significantly and is projected to remain subdued in real terms. - Further policy rate hikes may be warranted if ER pressures, stronger imported inflation, or dollarization risks materialize. - Improve BOM monetary policy communications by making communications consistent, the Inflation Report more forward-looking, and streamlining its MPG (IMF 2023a). ### BOM operational autonomy, quasi-fiscal operations, and safeguards - Strengthen BOM operational autonomy legally and institutionally: - 2023 safeguards assessment highlighted elevated risks due to weak legal provisions on autonomy and governance in the Central Bank Law (CBL) and the expansion of quasi-fiscal activities. - BOM quasi-fiscal operations undermined monetary policy effectiveness and contributed to a large negative equity position. - At end-May 2023, BOM capital was -4.7 trillion MNT (7.6 percent of GDP). - Cease quasi-fiscal operations permanently and transfer outstanding quasi-fiscal balances directly to the government to ensure transparency. - The subsidized mortgage lending program should be wound down by allowing the outstanding stock to be gradually run down on the government’s balance sheet in line with repayment terms, managing resulting budget liabilities via fiscal consolidation and an improved fiscal framework. - Legislative changes are needed to clarify BOM’s mandate and boost ex ante operational autonomy from Parliament; Constitutional amendments proposed by BOM are welcome and the CBL and Banking Law should be strengthened further, including protections for BOM management and staff from political pressures. - Strengthen independent oversight and internal controls: - Establish an independent oversight body with a fiduciary duty to the BOM and stronger internal operational controls. - Counterbalance high concentration of power in the Governor’s position with independent oversight and operational controls in key areas (e.g., ER, reserves management). ### Authorities’ views on monetary and financial measures - The BOM agreed with the need to maintain a tight monetary policy stance and be vigilant against rising inflationary pressures. - Main BOM concern: rise in inflation pressures via credit channel from potential growth in salary-backed loans from NBFIs where DSTI limits are higher than banks. - BOM acknowledged scope to implement and harmonize DSTI in NBFIs and welcomed IMF TA on macroprudential framework. - Further monetary tightening may be premature given weak banking sector credit growth and uncertain impact of supplementary budget, but BOM acknowledged keeping tighter stance may be required. - A restart of government domestic debt issuance through market auctions would help deepen domestic financial markets and absorb excess liquidity. - While working with MOF to transfer quasi-fiscal operations to government, BOM considers permanent cessation unlikely given socio-economic importance; BOM has established a working group to implement the 2022 safeguards assessment and is implementing IMF recommendations on communications, including streamlining the MPG to be presented to Parliament in September 2023. *Source: IMF Staff report excerpt (content unit 1mngea2023002).* ### 38. The financial sector remains broadly stable but could be susceptible to broader ### The financial sector remains broadly stable but could be susceptible to broader macroeconomic pressures. ### Financial-sector snapshot and key indicators - Banks are profitable and bank liquidity has been holding up well, with no major changes in buffers and an improvement across the most liquid banks. - System-wide provisioning indicates that NPLs are well covered: "95 percent at end-May 2023". - NPLs remain elevated (system-wide and concentrated in certain sectors). - System-wide capitalization edged down but remains above minimum requirements; the BOM provided assurances that bank capital quality met the requisite standards. - Full-scale onsite inspections of D-SIBs have resumed since August 2020, supported by targeted onsite inspections. ### FX liquidity and external vulnerabilities - FX liquidity risk has risen for some D-SIBs due to deteriorating net FX positions amid high FX deposits to hedge ER volatility. - Banks have large FX borrowings abroad, partly hedged by swaps with BOM. - FX liquidity pressures (including from a potential non-renewal of overseas credit lines) would require BOM intervention, but such intervention may be difficult given implications for GIR and ER stability. ### Credit risk, NPLs, and sectoral concentrations - Declining private sector credit growth may weigh on future bank profitability and capital. - Credit risk may rise as non-mining GDP growth begins to slow, real incomes decline due to persistently high inflation, and mortgage payments resume after moratoria end. - Continued weakness in debt repayment capacity is visible across sectors, especially mining and construction where "23-31 percent of loans are non-performing". - Risks are high for banks with concentrated corporate lending. ### Nonbank financial institutions (NBFIs) - The NBFI sector—though still small—is emerging as an alternative source of private sector credit. - Leverage is rising amid a weaker regulatory framework and limited supervisory capacity. - The FRC introduced a "70 percent" debt service to income limit (DSTI) for Fintech companies (which comprise "90 percent of the NBFI sector") in January, 2023. ### Sensitivity analyses and capital adequacy - Sensitivity analyses indicate continued financial stability concerns. - Banks' potential recapitalization needs could rise if downside risks materialize. - Losses are distributed across D-SIBs under scenarios consistent with the global financial crisis shock. - Capital shortfalls could be larger if bank capital quality is weak—for example, if capital gaps identified by the 2019 forensic audit have not been fully addressed, or reversed, or aggravated. ### Priority supervisory and regulatory recommendations - Intensify banking supervision, particularly for D-SIBs: - Prioritize high-risk banks and high-risk operations with a forward-looking, holistic risk assessment (IMF2023c). - Implement off-site supervision and DTSI ratios for banks more effectively. - Carry out full-scale on-site inspections for D-SIBs more frequently within supervisory plans for each D-SIB. - Avoid regulatory forbearance and ensure supervisory actions are consistent with BOM communications. - Ensure bank financial statements are accurate and in line with prudential norms to protect confidence in IPO processes; recognize distressed assets and properly record associated losses. - Continue and strengthen stress tests and finalize revisions to bank corporate governance regulations. - BOM’s intention to introduce Pillar 2 of the Basel Framework and enhance RBS processes is welcome, but effective implementation of current regulatory provisions is a necessary precondition. ### Structural, market, and governance reforms to support financial stability - Recalibrate the end-2023 deadline for D-SIB shareholder diversification; achieving the "20-percent single shareholder limit by end-2023" is likely to be difficult in a sound manner. - Encourage banks to develop time-bound plans for diversification and clarify implications, penalties, and contingency plans if diversification cannot be achieved within the currently legislated timeframe. - Consider raising shareholder limits for D-SIBs and smaller banks and allowing selected IFIs to invest in multiple banks to attract investors that improve management and operations. - Align withholding and capital gains tax with international norms to help attract foreign financing and address external pressures. - Ensure new equity is sourced from bona fide new investors; investors and their beneficial owners (BOs) should meet fit and proper requirements in line with international standards (FATF and BIS/BCBS). ### Strengthening supervisory and implementation capacity (BOM, FRC, GASR) - Improve NPL resolution: - Develop a strategy for NPL resolution; insolvency and creditor rights need improvement as part of ongoing insolvency reform. - Work with government, banks, and investors to improve the market for NPLs and collateral valuation and enforcement. - Broaden creditor information: - The credit reporting system should be broadened so comprehensive creditor information is collected by BOM, FRC, and newly established private credit information bureaus (CIBs). - Replacing the current BOM credit registry without fully operationalizing CIBs is risky. - Improve BOM financial policy analysis and communication: - Sharpen the Financial Stability Report (FSR) and enhance internal and external communication; FSR should include in-depth assessments of macro-financial linkages (IMF 2023). - Enhance regulatory framework: - Continue enhancements of an RBS framework, bank licensing, and corporate governance regulations. - Develop an assessment process for corporate governance integrated into the risk assessment cycle and effectively implement updated bank corporate governance regulations aligned with Basel guidance and the FRC. - Strengthen AML/CFT implementation: - GASR should align the definition of BO with FATF standards, enhance BO registration and verification (especially for legal entities dealing with, or dependent on, the public sector), and improve access to BO information. - Align AML/CFT supervision by BOM and FRC with risks and developments, including in the NBFI sector; include thematic inspections for PEPs and BO of credit-seeking companies. - Implement fit and proper measures effectively to safeguard financial system integrity. - Improve nonbank supervision: - FRC should tighten NBFI lending standards and harmonize the macroprudential framework with that of the banking system to address regulatory arbitrage. ### Bank resolution and crisis-management enhancements - Financial Stability Committee (FSC) should develop bank resolution strategies and procedures: - Revamp the regulatory framework to enhance inter-agency information exchange and coordination, especially between DICOM and BOM and especially in a crisis. - Expand BOM’s resolution powers and develop a comprehensive plan and capacity to execute it. - BOM should develop a manual on resolution policies and procedures. - DICOM should conduct independent on- and off-site inspections, have full access to information, and take corrective actions as needed. - Given limited fiscal space, establish preconditions for the use of government funding, guarantees, or indemnities in resolution with appropriate safeguards to preserve fiscal integrity. - BOM should operationalize a line of credit from the MOF to ensure funding for bank resolutions. - MOF’s powers to provide funding in crises should be expanded and emergency funding arrangements in case of bank insolvency should be well defined. ### Authorities’ views (summary) - BOM agreed with the banking sector assessment; banking sector vulnerabilities increased slightly from end-2022 but overall risk is below the historical average. - BOM’s stress tests indicate resilience to adverse stresses; requested IMF TA on stress testing and crisis resolution framework implementation. - All D-SIBs met AQR-adjusted capital requirements and initiated IPOs, which were oversubscribed, boosting bank capitalization with new, high-quality capital. - BOM and D-SIBs expressed concerns about feasibility of meeting the "20 percent" single shareholder limit by year-end. - FRC is drafting an NBFI law introducing substantial regulations to safeguard consumers; DICOM highlights need to amend the Banking Law to allow better information sharing with BOM and FRC. - Progress on FATF recommendations: new AML/CFT National Strategy for 2022‒2030 includes plans to improve legal and implementation frameworks, including beneficial ownership; authorities are receiving technical assistance to expand access to CBRs with US banks. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mngea2023002.pdf* ### 55. Policies to improve the business climate, address corruption and strengthen ### Policies to improve the business climate, address corruption and strengthen ### Governance, business climate, and policy recommendations - Immediate policy actions recommended: - The strengthened Investment Law should be urgently enacted and implemented effectively to cut red tape. - The Minerals Law overhaul should be accelerated. - The insolvency framework should be modernized. - Effective enforcement of SOE governance reforms is required. - A decisive resolution of DBM's governance challenges is important. - A strong judiciary would be important to underpin reforms. - The draft Whistleblower Law should be approved by Parliament without further delay. - Institutional timing: - The next Article IV consultation is expected to take place on a standard 12-month cycle. ### Erdenes Tavan Tolgoi (ETT) off-take agreements — contract summary and implementation - Overall profile: - Four off-take agreements signed during 2019‒22 amount to US$3.4 billion. - Contract repayment terms: US$1.1 billion in cash and US$2.3 billion in coal over 2019‒26. - The total agreements represent 22 percent of 2022 GDP. - Contract features and effects: - Contracts determine coal price quarterly via an indexation mechanism; practice sets a low base price, producing an average coal price discount of around 10 percent compared to market prices across all projects. - Lower contract prices imply higher coal quantities earmarked for repayment, reducing coal available for market sales. - One project (Bogdkhan railway) has been effectively permanently suspended by authorities. - Excluding Bogdkhan, an estimated US$1.1 billion remains to be executed over 2023‒25, mostly to be repaid in coal, earmarking 10 percent of ETT’s projected coal exports on average over the period (6.1 percent of Mongolia’s total coal exports, 1.8 percent of GDP). - Construction activity is expected to peak in 2023‒24; bulk of projects scheduled for completion in 2023 and 2024 (assuming Bogdkhan remains suspended). - Transparency and governance: - Contracts were originally protected by secrecy clauses, not submitted to Parliament, nor disclosed publicly; partial declassification followed public unrest in December 2022. - Chinese counterpart NORINCO denied disclosure for two projects citing confidentiality; authorities released some basic information on those projects. ### Macroeconomic and external impacts of the off-take agreements - Balance of payments and reserves: - Capital imports related to these agreements averaged 1.6 percent of GDP between 2019 and 2022. - The agreements contributed to a US$800 million drain on gross international reserves (GIR) as of end-2022. - Projected imports related to these contracts: increase to 2.1 percent of GDP (5.2 percent of total imports) over 2023‒24 when construction costs peak. - Estimated drains on GIR from these projects: US$179 million by end-2023, US$233 million in 2024, and US$295 million in 2025. - In the absence of these projects, all ETT coal export proceeds would have generated FX inflows—leading to a US$750 million GIR increase by end-2026 compared to the baseline forecasts. - External liabilities and fiscal/contingent risks: - Agreements are akin to collateralized debt instruments secured by future coal export receipts and allow repayment in cash or coal. - ETT’s external liabilities from the agreements were estimated at US$62 million at end-2022 and are expected to rise to around US$200 million in 2024 (1.2 percent of Mongolia’s non-FDI external debt). - While ETT is currently profitable with no explicit government guarantees and the contracts are not included in public debt aggregates, coal price discounts and cash payments have likely reduced ETT profitability and fiscal dividend transfers. - If ETT becomes unprofitable, its liabilities could become government debt; limited transparency increases uncertainty. ### External sector assessment and medium-term outlook - Overall assessment: - Mongolia’s external position in 2022 was weaker than the level implied by medium-term fundamentals and desirable policies; GIR remained well below the ARA metric. - Current account and drivers: - Mongolia's current account (CA) deficit was 13.4 percent of GDP in 2022. - Contributors: increased imports for infrastructure projects, release of pent-up demand financed by pandemic-era savings, and large deficits in services and income balances. - China’s zero-COVID border disruptions reduced exports until 2022H2; China’s reopening boosted coal exports thereafter. - Medium-term projections and vulnerabilities: - Mongolia is expected to face persistent CA pressures during 2023‒2027 despite benefits from China’s reopening. - Annual coal export volumes projected in the baseline: 47 thousand tons in 2023 and 50 thousand tons over the medium term, above the historical high of 36.5 thousand tons in 2019. - Coal export prices expected to remain broadly stable with respect to 2022 and decline gradually over the forecast horizon. - Copper production at the underground mine of Oyu Tolgoi (OT) commenced in March 2023, with peak production expected by 2028. - CA deficits are projected to remain sizable due to import pressures associated with infrastructure projects and FDI (including OT), higher wages and transfers in the 2023 supplementary budget, off-take agreements earmarking coal proceeds, high import dependence for services, and a large negative IIP. - The CA dynamics are particularly vulnerable to global shocks (especially developments in China), domestic policy slippages, and the global shift towards a zero-carbon economy given Mongolia’s heavy reliance on coal exports. - Policy responses recommended to strengthen external resilience: - Strong fiscal consolidation to build buffers, requiring a reduction of public and SOE investments, greater progressivity in taxes, and better targeted social spending. - Progress on a broader development agenda to harness more FDI and private capital flows, develop domestic capital markets, boost export performance, and pursue economic diversification. *Source: IMF staff report excerpts (MONGOLIA).* ### 3. Mongolia’s external position is ### 3. Mongolia’s external position is weak. ### External balance: Current account, CA norm, and REER - The EBA-lite current account approach estimates the CA norm at -9.1 percent of GDP. - The large negative IIP position explains a significant part of the negative CA norm (-6.9 percent of GDP). - The CA gap is estimated at -3.3 percent of GDP, which translates into a 7.6 percent REER gap. - Estimation adjustments: - Price and volume adjustors for coal were incorporated; these reduce the estimated REER gap but do not alter the bottom-line external assessment. - Coal price adjustor: international coal prices rose strongly in 2022, but Mongolia’s coal export price "has remained broadly flat" during 2022 due to non-transparency in ETT’s coal export pricing; the coal price used for the terms of trade gap calculation entering the cyclical component of the CA-model was recalculated to reflect non-increasing coal export prices during 2022 for Mongolia. - Coal volume adjustor: introduced to account for China’s border closure in 2022H1 which significantly reduced coal export volumes; the magnitude of the adjustor (-1.2 percent of GDP) was derived by comparing historical ratios of coal volume exports in the first and second half of every year over the past decade. - The effects of the war in Ukraine have weighed on the CA, but this impact is hard to quantify and is therefore not incorporated quantitatively into the assessment. - The EBA-lite REER model points to a smaller REER overvaluation of 1 percent. - The REER started to appreciate again in 2023Q2 after partly unwinding a strong overvaluation during 2022 and early 2023. - The EBA-Lite External Sustainability (ES) approach, which calculates the external adjustment needed to stabilize the NIIP, does not point to REER misalignment since the NIIP is projected to improve in the medium term without REER adjustment. ### Capital and financial accounts - Strong FDI inflows continued to keep the financial account (FA) in surplus in 2022 though the global financial environment is posing challenges. - FDI is projected to remain buoyant in the medium term as the OT project is executed. - Mongolia tapped international capital markets in January 2023 to mitigate rollover risks. - The Government of Mongolia issued a US$645 million Eurobond at 8.95 percent in January 2023. - Sovereign spreads declined from above 1,000 bps in October 2022 to less than 350 bps in February 2023. - Global financial market turbulence and increased uncertainty after shocks to advanced-economy banking systems in March 2023 have weakened the outlook for financial flows and pose risks given Mongolia’s external refinancing needs. ### Reserves levels and adequacy - GIR declined to US$3.4 billion in 2022 from US$4.3 billion in 2021. - Reserve coverage fell to 73 percent of the ARA metric in 2022, corresponding to 3 months of imports. - GIR net of commercial bank’s FX deposits at the BOM: - US$1.9 billion as of the end of 2022 (deterioration from US$3.6 billion at end-2021). - Reached US$1.5 billion in October 2022, improving to US$2.8 billion at end of July 2023. - A sizeable disbursed PBOC swap line (US$1.8 billion) has been rolled over in 2023 for another 3 years. - Reserves are projected to remain below the recommended range over the forecast horizon. - Major downside risks underline inadequacy of current reserve levels: - Mongolia faces large public and private external repayment obligations totaling more than US$3 billion in the second half of 2023 and throughout 2024. - Public sector scheduled repayments include DBM external bonds totaling more than US$700 million (due in second half of 2023) and Eurobonds totaling US$391 million (due in early 2024). - Scheduled repayments of non-OT private external loans and bonds in 2023 and 2024 totals nearly US$2 billion. - If refinancing becomes more challenging, scheduled external repayments would have to be met through local financing and/or domestic currency cash reserves, causing a significant decrease in GIR and disruptive pressures on the ER. - Spillovers from developments in China and Russia (including secondary impacts of sanctions related to the war in Ukraine) could adversely affect Mongolia. ### Foreign assets and liabilities: IIP position and trajectory - Mongolia’s international investment position (IIP) liabilities remain exceptionally large. - IIP liabilities: - Improved to -288 percent of GDP in 2022 from -313 percent of GDP in 2021, but remain much larger than any other resource rich EMEs and one of the most negative in the world as a share of GDP. - Composition: FDI (166 percent of GDP, of which 126 percent of GDP is attributed to OT), external loans (78 percent of GDP), and debt securities (19.5 percent of GDP). - Includes the disbursed portion of the PBOC swap line (10 percent of GDP). - FDI weight is a mitigating factor: - FDI accounts for 56 percent of total liabilities, evenly split between debt and equity. - OT liabilities alone account for 78 percent of FDI liabilities and, including a large external loan, are estimated to amount about 138 percent of GDP (48 percent of total liabilities). - OT’s underground project production beginning helps mitigate risks as OT’s external liabilities are presumed to be financed by earnings from copper exports; in stress, there is a presumption these liabilities will be absorbed or financed by the parent company. - IIP trajectory: - Mongolia’s NIIP is projected to improve from -248 percent of GDP in 2022 to -226 percent in 2027. - The NIIP is projected to decline to -US$47.6 billion in 2027 from -US$42.5 billion in 2022. - Drivers of improvement: external debt repayment cushioned by modest fiscal consolidation, reduced reliance on off-balance sheet swaps by the BOM and greater domestic borrowing for budget financing. - Strong FDI inflows led by OT investment should continue to pressure liabilities in the medium term. ### External position assessment and policy recommendations - Overall assessment: Mongolia’s external position is weaker than implied by fundamentals and desirable policy settings, based on the large negative IIP position and the results from the EBA-Lite CA assessment. - Policy guidance and recommendations: - Exchange rate policy: - The exchange rate should continue to be allowed to act as a shock absorber and reflect market forces to a greater extent. - Reserves management: - The BOM should opportunistically accumulate reserves, particularly if FX inflows surprise positively due to materialization of coal export upside risks. - Near-term financing strategy: - Given low GIR levels, the government should repay DBM’s external liabilities through new borrowing abroad. - Fiscal and investment priorities: - The government should reduce external pressures via fiscal consolidation and better prioritization of public and SOE investments along with structural reforms to reduce longer-term pressures. - Medium- and long-term strategy: - Sustainably addressing external imbalances hinges on policies that harness FDI and private capital inflows while gradually developing domestic capital markets and pursuing policies to promote export performance as well as economic diversification. *Source: IMF staff chapter on Mongolia’s external position.* ### Annex III. Progress on Recommendations of the ### Annex III. Progress on Recommendations of the 2022 Article IV Consultation ### Fiscal Policy - Overall fiscal balance recorded a surplus 0.7 percent of GDP in 2022, while the NMPB recorded a deficit -7.4 percent of GDP in 2022. - The 2023 budget targeted a small consolidation which was reversed by a supplementary budget approved in June 2023. - The MTBF for 2024-26 envisages that the overall balance will improve supported by some consolidation after 2024. - Introduction of revenue-enhancing progressivity in PIT: - A three-tier PIT with rates of 10, 15 and 20 percent at income thresholds of MNT120 million, MNT180 million was introduced in the 2023 budget; it affects only 0.1 percent of individuals. - Targeting of CMP toward the vulnerable: - Partial targeting CMP was introduced in 2023 with the coverage of 91 percent of children on a voluntary basis. - The 2023 supplementary budget reversed the partial targeting to universal support. - A new household database is being developed which could help rationalize social spending. - Debt management and domestic bond issuance: - The Medium-term Debt Management Strategy for 2023-25, approved in May 2022, left the NPV-term debt anchor unchanged. - Discussions regarding the adoption of a new nominal debt anchor have not started. - In 2022, the government issued MNT684 billion domestic bonds (private placement). - The 2023 supplementary budget plans MNT2.3 trillion domestic debt issuance. - The government plans to submit amendments to the Law on Securities Market in 2023H2 to increase secondary marking trading in the Mongolia Stock Exchange, to attract long-term investors, and to enhance transparency and corporate governance of listed companies. - FHF revenue inflows and budget financing: - Parliament amended the FHF law in November 2022 to continue financing budget expenditures by the FHF in 2023 by suspending the transfer of mining royalty revenues to the FHF. - Parliament will revisit the FHF Law in 2023H2 to decide whether to continue FHF financing of budget expenditures in the context of the 2024 budget. - Public capex: - The planned capex spending in the 2023 supplementary budget remains high (9.3 percent of GDP) to complete ongoing projects. ### Monetary and Exchange Rate Policies - Monetary policy stance: - BOM raised the policy rate to 13 percent by 1 ppt in December 2023 and has kept the policy rate unchanged since. - BOM reduced the policy corridor to ±1 percent (from ±2 percent) in March 2023 to ease tight MNT liquidity conditions. - BOM removed FX reserve requirements for foreign borrowings to address FX scarcity and mitigate exchange rate pressures. - Given expansionary fiscal policy under the 2023 supplementary budget, the June 2023 Monetary Policy Committee decided to stay on hold. - BOM is strengthening its analytical and forecasting capabilities with IMF assistance. - Exchange rate flexibility and FX operations: - Following a 22 percent depreciation in 2022, the pace of MNT/USD exchange rate depreciation moderated through end-March 2023; the exchange rate appreciated in 2023Q2. - BOM relied on FX sales in the interbank market during 2022‒2023Q2 relative to auction sales, largely due to FX scarcity, but has recently shifted to FX sales through auctions. - Quasi-fiscal operations and operational independence: - BOM stopped new quasi-fiscal operations from January 2023 given the APL expiration at end-2022, but pre-financed subsidized mortgage financing in December 2022 to enable the program to continue till 2023H1. - BOM recently instructed banks to use mortgage repayments to provide new mortgages instead of repaying the BOM. - The 2023 MPG, approved by Parliament, requires the subsidized mortgage program to be transferred to the government by end-June 2023. - A working group (BOM, MoF, Ministry of Construction) was set up; no decision had been made as of end-July 2023. - BOM intends to address the dual mandate of exchange rate stability and price stability, but this is not likely to happen soon given the need for a Constitutional amendment. - Foreign exchange reserves: - GIR increased to US$3.8 billion at end-July, 2023 helping to improve investor confidence. ### Financial Sector Policy - Post-AQR banking reform execution: - All five D-SIBs initiated IPOs by June 2023. - Share prices of all banks have fallen below their IPO price due to thin trading volumes in the stock exchange. - The 3 D-SIBs required to diversify their shareholdings face challenges in meeting the end-2023 deadline for diversifying single shareholder concentration. - NBFI supervision: - FRC has gradually resumed on-site nonbank supervision since January 2022; limited capacity has constrained effective supervision. - In January 2023, FRC introduced a 70 percent DTI for Fintech companies (which account for 90 percent of NBFIs). - Crisis preparedness and management: - BOM is preparing a crisis preparedness and management manual and has requested IMF assistance, with intention to complete the manual by end-2023. - Banking supervision and regulation: - BOM is upgrading its corporate governance regulations since 2022H1, with limited progress so far. - BOM is enhancing its risk-based supervision framework with multi-year IMF and WB assistance. - Credit reporting reform: - No progress has been made in addressing the weak credit reporting system. ### Structural Policy - Pension reforms: - Parliament approved in July 2023 a package of revised Social Insurance Laws which contained parametric reforms of pension insurance scheme. - MTBF framework and fiscal transparency: - Parliament adopted in July 2023 a fiscal reform plan to strengthen the MTBF and to improve transparency and oversight, as proposed by the Parliamentary Budget Standing Committee. - MoF is strengthening its medium-term macroeconomic framework with IMF assistance. - Public investment management (PIM): - An IMF PIMA technical assistance mission assessed the PIM framework in July 2023. - Some progress was made in PIM information systems and regulations; limited progress in fiscal framework, multi-year budgeting, and roles/responsibilities within government. - Following PPP law approval in December 2022, authorities are preparing regulations to implement the PPP law effective January 2024, with IMF and WB assistance. - DBM balance sheet and liabilities: - DBM’s NPLs were lowered to 1.2 percent of GDP at end-2022. - DBM bought back US$83 million Eurobond and secured funds to repay the Samurai bond due December 2023. - DBM’s cash position remains inadequate to deal with external liabilities due in 2023. - SOE privatization: - In 2023, 26 SOEs are expected to offer up to 34 percent of shares to the public. - Government intends to expand the list of SOEs going public in 2023 with large mining SOEs by amending the 2022 Parliamentary Resolution on SOE Privatization Guidelines for 2022-23. - The July 2023 IMF PIMA mission concluded that SOE governance and oversight framework remains insufficient. - Insolvency framework modernization: - A draft amendment to the Insolvency Law reflecting IMF assistance was submitted to Parliament in April 2022 and is expected to be discussed in 2023H2. - Parliament formed a working group to incorporate stakeholder comments, including IMF inputs, in 2023H2. - Authorities are considering a separate law to broaden insolvency law scope to individual entrepreneurs (benefitted from IMF assistance in 2022H2). - Fuel import payments: - Fuel import payments are currently settled in CNY through one local bank with Chinese banks’ assistance. - In October 2022, Mongolia made a long-term contract with Russia for purchasing petroleum products through 2027 at a stable price and requested Russia to provide trade financing to secure gasoline import payments. - Female labor force participation: - Authorities implemented a women’s employment promotion program in 2022, including: (1) extending up to MNT10 million financing to women operating childcare centers; and (2) conducting skill and remote work trainings for women. - In 2023, authorities plan to launch an employment promotion program for victims of family abuse (whose 90 percent is women). - Climate resilience and diversification: - To reduce livestock headcount to sustainable levels, export quota for most meat were temporarily lifted until October 2023. - Electricity tariffs for legal entities were increased by 14-38 percent in November 2022. - The National Committee on Climate Change approved the 2023 “one-billion-tree” strategy and action plan in March 2023 to help facilitate reduction of greenhouse gas emission. ### Governance and Anti-Corruption - SOE governance and contract transparency: - SOE off-take contracts have been partially disclosed to the public since October 2022. - A government special representative was appointed to improve the financial performance of SOEs. - Two draft laws aimed at improving SOE governance, management of public assets, and contract transparency were submitted to Parliament; Parliamentary discussions expected in 2023H2. - A Parliamentary working group issued recommendations to strengthen DBM’s corporate governance; recommendations lack details. - Anti-corruption implementation: - Effective implementation of the anti-corruption legal framework remains limited, including due to limited judicial integrity. - Prominent cases are ongoing (ETT’s coal theft scandal under investigation; DBM is undergoing a court hearing in the context of anti-corruption efforts). - Government identified 5 priority areas for reform: (i) protection of whistleblowers; (ii) prosecution of public officials involved in corruption; (iii) repatriation of individuals that escaped investigation and court proceedings; (iv) identification and repatriation of illegal assets; and (v) strengthened transparency of SOE governance. - The Independent Authority Against Corruption submitted to Parliament a draft comprehensive national strategy in April 2023, containing 10 goals, 45 objectives, and 224 targeted activities. The strategy is scheduled for Parliament discussion in 2023H2. - Whistleblower protection: - A draft Law on Whistleblower Protection is scheduled for Parliament discussion in 2023H2. - AML/CFT framework: - Authorities are beginning to implement the AML/CFT framework: undertaking off-site and on-site supervision of certain entities; issuing guidelines on politically exposed persons for reporting entities; deploying the GoAML software for STR reporting; and increasing number of companies registering their beneficial ownership information. ### Risk Assessment Matrix — Global and Regional Risks - Escalation of Russia’s war in Ukraine leads to escalation of sanctions and other disruptions: - Likelihood: High - Expected impact on Mongolia: High - Impact description: New CBR disruptions could significantly impact Mongolia’s mining and energy sectors, which rely heavily on imports of Russian petroleum products; the economy could come to a near standstill given limited scope for geographical diversification. - Policies to minimize impact: - Continue to work with EU, UK, and US to ensure payments for Russian imports can continue to be made. - Prepare contingency plans to respond to disruptions in the only remaining CBR, including exploring alternative means for payments for imports from Russia. - Continue efforts to address gaps in and improve the implementation of the AML/CFT framework. - Commodity price volatility: - Likelihood: High - Expected impact on Mongolia: High - Impact description: Volatility in international copper and coal prices and/or growth deceleration in China could lead to significant uncertainty in the external and fiscal outlook; lower prices and/or volumes would reduce export receipts, weaken external imbalances, erode foreign reserves, raise exchange rate pressures, inflation, and rollover risks; fiscal balances would deteriorate significantly raising rollover and debt sustainability risks. Higher commodity prices could improve trade balances but high food prices would directly impact inflation with second-round effects. - Policies to minimize impact: - Build external buffers by allowing greater ER flexibility to act as a shock absorber. - Prioritize strong and front-loaded fiscal consolidation to reduce public external debt, targeting support only to those facing economic hardship, reducing the wage bill, increasing progressivity in PIT, reducing tax expenditures and arrears and reprioritizing public and SOE investments (Annex VI). - Further tighten the monetary policy stance if upside risks to inflation or broader dollarization materialize and strengthen the BOM’s communication on inflation and ER developments. - Issue domestic debt through market-based auctions to improve monetary policy transmission. - Undertake fiscal, financial, and regulatory reforms and credibly adhere to fiscal rules to preserve investor confidence and improve macroeconomic stability. - If commodity prices are higher, BOM should undertake a faster pace of GIR accumulation to reach adequate level of reserves. - Abrupt growth slowdown in China: - Likelihood: Medium - Sovereign debt distress due to higher global interest rates and/or disorderly debt events in some EMDEs: - Likelihood: Medium - Expected impact description: Tighter global financial conditions could increase external imbalances; external funding costs for the government and private companies could rise hampering refinancing and new external borrowing; loss in international reserves; ER pressure with significant pass-through to inflation, contraction in growth, and worsening fiscal balances. - Policies to minimize impact: - In addition to fiscal consolidation, reduce external financing needs through appropriate debt management, the use of domestic financing by resuming domestic bond issuance, and a credible commitment to fiscal prudence by adhering to the fiscal framework. - BOM should closely monitor external liability management plans of domestic entities and their ability to raise adequate external financing abroad and maintain credit lines with foreign banks. - Authorities should adequately enforce the currency settlement law and repatriation requirements of state-owned enterprises and strengthen the investment environment to attract new FDI and portfolio inflows. - Systemic financial instability: - Likelihood: Medium ### Risk Assessment Matrix — Domestic Risks - Intensification of financial sector vulnerabilities: - Likelihood: Medium - Expected impact on Mongolia: High - Impact description: A sharp rise in non-performing loans due to higher inflation and a weaker economy could impair banks’ capital adequacy and broader financial stability; failure of D-SIBs to meet shareholder diversification targets by required deadlines could destabilize the financial sector with spillovers to the real economy. - Policies to minimize impact: - Ensure D-SIBs are well capitalized. - Intensify bank oversight through effective offsite and more frequent onsite supervision. - Recalibrate the end-2023 deadline for diversification of shareholders in 3 D-SIBs and develop contingency plans for banks failing to meet the new shareholder concentration limits. - Ensure bank capital quality is good and meets sound supervisory/regulatory requirements at all times. - Procyclical and inflationary policies: - Likelihood: Medium - Expected impact on Mongolia: High - Impact description: Political pressure to undertake additional populist policies ahead of the June 2024 elections could further undermine macro-financial and external stability, debt sustainability, and institutional integrity, while delaying reforms. - Policies to minimize impact: - Undertake critical reforms such as wage bill rationalization, social assistance targeting, improved public investment management, progressive PIT, pension reforms, and strengthened SOE governance to improve public finances. - 2024 budget should adhere to the fiscal stability law and aim for strong fiscal consolidation based on high-quality measures that boost efficiency and equity. - Adopting a simplified fiscal framework with a nominal debt anchor can help boost investor confidence. - Intensification of governance challenges: - Likelihood: Medium - Expected impact on Mongolia: High - Impact description: Weaker governance can reduce growth and productivity through inefficiency and corruption, worsen public debt dynamics and external imbalances, and weaken financial stability; it can adversely affect public and investor sentiments and the investment climate. - Policies to minimize impact: - Strengthen public sector, SOE and BOM transparency, accountability and oversight including through greater contract transparency, checks and balances, effective enforcement of strengthened regulations, greater protection against political influence, and a strengthened rule of law and judiciary. - Publication of asset declarations and strengthening BO transparency would enhance monitoring of PEPs. - The draft Whistleblower Protection law should be passed without further delay. - Climate change: - Likelihood: High - Expected impact on Mongolia: Medium - Impact description: Frequent and intense weather shocks impact the agricultural sector, affecting rural income and increasing inequality. In the medium-term, a shift to a low-carbon global economy could reduce coal demand and price, with severe impacts on Mongolia’s external position and public finances. - Policies to minimize impact: - Accelerate implementation of the national adaptation plan to improve resilience of the agricultural sector and raise productivity. - Reduce livestock headcount to sustainable levels. - Implement actions to advance the green transformation, including by reducing GHG emissions and air pollution and diversifying away from coal. *Source: Annex III. Progress on Recommendations of the 2022 Article IV Consultation (IMF).* ### Annex V. Sovereign Risk and Debt Sustainability Assessment ### Annex V. Sovereign Risk and Debt Sustainability Assessment ### Executive summary - Mongolia faces a high risk of sovereign stress. - Public debt-to-GDP ratio reached 77.8 percent of GDP in 2022 and is projected to decline in 2023 but to increase thereafter, reaching over 86.3 percent of GDP by year 10 of the projections. - Public debt is primarily external: 94% of total public debt (including the PBOC swap). - A US$1.8 billion (12 percent of GDP) swap line between the People's Bank of China (PBOC) and the Bank of Mongolia (BOM) has been rolled over in 2023 for another 3 years and is included in the public debt coverage. - Current policies do not adequately address debt dynamics; the 2023 supplementary budget increased pension spending and reinforced risks of persistent public spending increases. ### Public debt: coverage, level, and profile - Debt coverage comprises: - general government, - a state-owned bank (Development Bank of Mongolia), - public-private partnerships, - and the US$1.8 billion (12 percent of GDP) PBOC–BOM swap line rolled over in 2023. - Key levels and projections: - Actual public debt: 77.8 percent of GDP in 2022. - Projected path: decline in 2023, then increase to over 86.3 percent of GDP by year 10. - Creditor and currency profile: - 94% of total public debt is external (including the PBOC swap) and owed to official creditors on largely concessional terms. - Debt predominantly consists of medium and long-term obligations; Eurobond maturities are concentrated in the next five years. - Local currency debt is expected to grow incrementally over time, in line with growing financing needs and development of domestic capital markets. - Notable issuance and maturities: - In January 2023 the government issued a US$645 million Eurobond used toward refinancing requirements associated with the Gerege (2023) and Khuraldai bond (2024). - Public sector maturities over the next 5 years are as follows: - 2023: US$517 million Gerege bond (refinanced), US$500 million DBM Eurobond, and US$223 DBM Samurai bond; - 2024: US$600 million Khuraldai bond; - 2026: US$600 Nomad bond; - 2027: US$500 million Century bond; - 2028: US$650 million Century 2 bond. ### Sovereign stress drivers and risk assessment - Overall assessment: - The Sovereign Risk and Debt Sustainability Framework (SRDSF) assigns a final assessment of High risk of sovereign stress across horizons. - The analysis focuses on risk of sovereign stress (debt sustainability assessment optional and not carried out here). - Medium-term drivers: - History of economic volatility and vulnerability to external and natural disaster shocks generate significant downside risks. - The financeability module flags limited capacity of the domestic banking sector to finance government shocks under a generalized stress scenario. - There is a 25 percent probability that public debt could exceed 100 percent of GDP by 2028 (debt fan chart). - GFNs exhibit spikes driven by PBOC swap rollover requirements and growing amortization needs. - Long-term drivers: - Rising pension liabilities, development spending needs, and the global transition toward lower emissions increase long-term risk. - Pension pressures are expected to exert significant strains on public debt dynamics over the long term due to growing Retirement Pension Insurance Fund deficits (aging population and high average benefits per beneficiary). - Natural disaster and climate adaptation financing needs can heighten long-term sovereign stress risk. - Resource dependence: coal-dominated exports face decline under global energy transition scenarios, while copper prospects may improve; IMF analysis indicates the global energy transition could raise public debt by 3.5-5 percentage points of GDP by 2030 under a transition scenario. ### Customized stress tests and scenario parameterization - Customized shocks complement SRDSF automatic shocks and highlight vulnerabilities to exchange rate depreciation, persistent increases in borrowing costs, and contingent liabilities. - Parameterization of customized shocks: - Contingent liability: one-period shock in 2023 amounting to 5.9 percent of GDP (financial sector 2.8 percent of GDP; SOEs 3.1 percent of GDP). - Growth: two-period shock in 2023–24 amounting to 4.5 percentage points to real GDP growth per period (one standard deviation). - Exchange rate: two-period shock in 2023–24 amounting to 33 percent nominal exchange rate depreciation per period (equivalent to a 25 percent real depreciation based on a pass through of 0.25). - Interest rate/market access: five-period shock in 2023–27 of 700 bps per period (calibrated to reach the 1,200 bps peak sovereign spreads observed in late 2022). - Stress-test outcomes: - Sharp exchange rate depreciations and persistent increases in borrowing costs could lead to sustained loss of market access and substantial increases in debt ratios and GFNs. - Banking crisis stress tests imply significant increases in debt and GFNs; the domestic banking sector has limited capacity to absorb government financing shocks in generalized stress scenarios. - GFNs present a distinct volatility pattern influenced by the PBOC swap line renewals and increasing amortization needs. ### Policy implications and recommended reforms - Fiscal policy: - A more ambitious structural fiscal adjustment is required to stabilize debt and lower the probability of sovereign stress. - Current policies do not adequately rebuild buffers despite projected accumulation of government deposits (treasury account, Future Heritage Fund, Fiscal Stability Fund). - Debt management: - Reorientation toward domestic debt financing and development of domestic capital markets are important given rising local currency debt needs. - Manage concentrated Eurobond maturities and large amortization profiles proactively to contain rollover risk. - Structural reforms: - Comprehensive structural reforms to boost growth potential, diversify exports, develop the private sector’s role, and attract private financing are essential to sustainably reduce debt vulnerabilities. - Pension reform is essential; automatic inflation indexation of pension benefits could stabilize required state subsidy. - Effective natural resource management and economic diversification (reducing coal dependency and leveraging copper opportunities) are critical to mitigate long-term risks. - Climate and disaster resilience: - Engage the private sector to address climate adaptation financing needs; adaptation challenges could generate important financing requirements and heighten long-term sovereign stress risk. ### Key statistics and probabilities (exact figures from the analysis) - Public debt: 77.8 percent of GDP in 2022. - PBOC–BOM swap line: US$1.8 billion (12 percent of GDP). - Projected public debt by year 10: over 86.3 percent of GDP. - External share of public debt: 94% (including PBOC swap). - Probability public debt >100 percent of GDP by 2028: 25 percent. - Customized shock magnitudes: - Contingent liability: 5.9 percent of GDP (2023, one-period). - Growth shock: 4.5 percentage points to real GDP growth per period (2023–24, two periods). - Exchange rate shock: 33 percent nominal depreciation per period (2023–24, two periods); pass-through 0.25 implies 25 percent real depreciation. - Interest rate shock: 700 bps per period (2023–27, five periods) calibrated to reach 1,200 bps peak spreads. - IMF estimate on energy transition impact: public debt could rise by 3.5-5 percentage points of GDP by 2030 under a global energy transition scenario. *Source: Fund staff.* ### Annex VI. Fiscal Reform Options for Mongolia ### Annex VI. Fiscal Reform Options for Mongolia ### Context and overall estimate of fiscal gains - Underlying fiscal stance expected to remain lax in 2023‒24, with the 2023 supplementary budget introducing a procyclical expansion in budget spending of "3 percent of GDP compared with the 2023 original budget, a full-year impact of 6 percent of GDP in 2024" through permanent increases in current spending (wages, pensions, and social benefits). - On-going public investments in the 2023 budget are about "9 percent of GDP". - The Annual Development Plan for 2024 includes Public Investment Plans amounting to "MNT13.6 trillion". - Parliamentary amendment to the Fiscal Stability Law (FSL) adopted to improve MTBF credibility; effective date to be decided with MOF. - The reform package summarized could generate about "4 percent of GDP in fiscal gains in 2023‒24" in terms of the primary balance. - Measures to rein in fiscal spending should start in 2023; deeper reforms phased in post-election. ### Summary of reform options and estimated fiscal savings (from Table 1) - Revenue measures - Reduction in tax arrears: "1.0" percent of GDP; Timeline: "2024‒25" - Rationalization of tax expenditure: "0.9" percent of GDP; Timeline: "2024‒26" - Tax administration measures: "0.6" percent of GDP; Timeline: "2024" - Additional measures (new taxes on cigarette/multiple cars): "0.1" percent of GDP; Timeline: "2024" - Expenditure measures - Consolidation of current expenditure - Wage bill adjustment: "1.4" percent of GDP; Timeline: "2024‒27" - Reduction in energy and food subsidy: "0.15" percent of GDP; Timeline: "2025‒26" - Consolidation of capex - Project reprioritization (PIMA): "0.5" percent of GDP; Timeline: "2023‒24" - Reduction in public investment: "1.2" percent of GDP; Timeline: "2023‒24" - Price indexation of pension benefits: "0.8" percent of GDP; Timeline: "2024‒27" - CMP targeting: "0.8" percent of GDP; Timeline: "2025" *Source: IMF staff calculations; Mongolian authorities.* ### A. Revenue measures — findings and policy recommendations - Collection of tax arrears - Collectible tax arrears estimated at "MNT1,244 billion (2.4 percent of GDP)" as of December 2022, comprising overdue payments of CIT ("20 percent"), VAT ("59 percent"), and royalty ("20 percent"). - Large part of arrears owed by SOEs; some are disputed debt leading to lower recovery rates. - Recommended actions: - Refine classification of “uncollectible” debt based on taxpayer risk category (death, bankruptcy, liquidation). - Introduce a clear write-off provision for existing debt. - Monitor aged schedule of debtors and classify current and non-current debt (shorter than or over 12 months) in line with the TADAT metric. - Improve dispute resolution processes. - Assumption in reform scenario: "only 60 percent of outstanding arrears are collectible" with a three-year average annual arrears collection rate of "39.1 percent" (IMF, 2022a). - Rationalization of tax expenditures (TE) - TE cost estimated at "2.2 percent of GDP in 2022". - Direct TEs rose from "0.5 percent in 2019 of GDP" to "1.2 percent of GDP in 2022". - Indirect TEs under VAT, excise tax, and custom duties increased by up to "1.1 percent of GDP in 2022". - Policy options: - Review discounted PIT and CIT rates applied to sales of immovable property; self-employed individuals (taxable income less than "MNT50 million"); income from social activities; and capital income. - Eliminate CIT exemptions for non-profit entities and education and health institutions. - Streamline tax credits for first purchase of homes and educational expenses (e.g., introduce cap per child). - Address VAT policy gaps (exemptions for food, educational and medical services, gasoline and fuel). - Increased progressivity of PIT - Prior to 2023, flat PIT rate of "10 percent" for residents; SSCs capped at "10 times the minimum wage (MW)", reducing effective PIT at the top 1 percent with annual incomes above "MNT47.5 million". - Top 1 percent holds about "one-third of total taxable income". - Recommendation: introduce a two- or three-tier PIT with the top PIT rate of "20 percent" applied to taxpayers with taxable income above "10 times the MW". - Expected benefits: enhance equity, harmonize CIT and PIT top rates, reduce tax avoidance. Estimates of additional revenue yields are not yet available. - Continued progress on tax administration and customs - TADAT assessment notes improvements (quality of registered taxpayers, internal procedures, digitalization, risk management), but gaps remain in operational risk management, enforcement for filing/payment compliance, dispute resolution, voluntary compliance, and refund processing. - Customs priorities: enhance compliance risk management, improve export/import procedures, fully utilize E-Barimt, upgrade Customs-Tax interface, and progress in automatic exchange of financial information. - Estimated revenue gains: "0.6 percent of GDP in 2024" from tax administration reform. - Additional revenue measures - Reintroduce revenue-boosting measures proposed in 2023 budget discussions: estimated about "0.1 percent of GDP" from excise taxes on e-cigarettes, luxury consumption taxes, and higher tax rates on multiple car owners. - Authorities plan to raise tariffs on agricultural goods over the next three years. - Apply capital gains tax on financial assets equally to residents and non-residents (expected small revenue impact). - VAT reform recommendation: move to standard VAT base before considering VAT rate increase; zero-rate mineral exports and provide input tax credits against capital expenditure to narrow tax base, with net effect likely revenue neutral. ### B. Expenditure measures — findings and policy recommendations - Wage bill adjustments - Civil servant share grew from "14 percent of the working population in 2018" to "17.8 percent in 2022". - Pay supplements expanded six-fold since 2017 and reached almost "40 percent of total wage bill in 2023". - The 2023 supplementary budget introduced pay supplement increase of "MNT238 billion". - Policy recommendations: - Roll back the increase in pay supplements introduced in the 2023 supplementary budget in the 2024 budget. - Freeze public sector real wages at end-2023 levels for a few years. - Consolidate share of civil servants in working-age population below "15 percent". - Strengthen performance-based budgeting effectiveness in education, health and culture/art sectors. - FAD Expenditure Assessment Tool indicates government employment larger than average of Emerging Market Economies (EMEs). - Consolidation in non-wage current expenditure - 2024 MTBF envisages consolidation through performance/results-based budgeting, enhanced transparency, and tighter control and accountability. - Rationalize food and energy subsidies (about "0.15 percent of GDP") as food and energy price inflation stabilizes. - MTBF assumes current expenditure-to-GDP ratio follows gradual declining trend with annual impact of about "0.1 percent of GDP". - Prioritization of capex and public investment management (PIM) - Delaying or canceling low-priority public investment projects can yield large short-term fiscal savings and lessen external pressures. - Strengthen PIM to enhance transparency, efficiency, and reduce corruption; raise maintenance spending where cost-saving. - Priority measures: - Build staff capacity at the Ministry of Economy and Development (MOED), established January 2022. - Improve project selection, appraisal, prioritization, and management; include SOE infrastructure projects. - Fully utilize Public Investment Management Information System (PIMIS) with performance indicators/scoring and multi-year project cost data. - Simplify capex budgeting to a single-entry point with stronger link to national and sectoral development plans. - Align sectoral budget appropriation for capex with performance on capex execution. - Mandate MED and MOF review (at arm's-length) of investment plans and budgets of major SOEs. - PIMA findings: Mongolia lags peers in multi-year budgeting, portfolio management and oversight; should strengthen fiscal targets and rules, multi-year budgeting, budget comprehensiveness and unity, budgeting for investment, and maintenance funding. - PPP institutional upgrades: - PPP law approved December 2022; implementation postponed to January 2024 pending subordinate regulations. - Recommendations: integrate PPPs in PIM, consolidate PPP funding into state budget, strengthen MOF gatekeeper role on PPP fiscal risk, rigorously appraise PPPs, limit unsolicited PPP proposals. - Pension reform - Demographics: declining fertility and increasing lifespans; elderly population growing faster than working-age population, raising old-age dependency ratio. - World Bank PROST (2019 and update) recommended parametric reforms: (a) automatic indexation for pension benefits, (b) increase in payroll contribution rates, (c) increase in retirement age, (d) establishment of a linear accrual rate of "2 percent per year". - Latest PROST projection indicates growing deficits in the Retirement Pension Insurance Fund and significant growth in required state subsidy. - World Bank recommends automatic indexation (mix of wage and price-based) as the most amenable reform. - Projection: introduction of automatic indexation of pension benefits to CPI inflation could create fiscal savings of "0.8 percent of GDP by 2027". - Following Parliament's approval of revised Pension Law (July 2023), inflation indexation of pension benefits would be effective from "January 2024". - Other parametric reforms (retirement age, vesting rules) could be explored for further savings. - MLSP reported double counting of beneficiaries for social welfare pension and benefits in the 2023 supplementary budget; recommendation to eliminate duplication to rationalize social transfer programs. ### Implementation sequencing and timing - Start measures in 2023 where feasible (project reprioritization, reduction in public investment). - Implement revenue collection and tax administration reforms concentrated in "2024" and "2024‒25" (tax arrears, tax administration, rationalization of tax expenditures). - Phase in wage bill adjustments and pension indexation over "2024‒27". - Target CMP targeting reforms for "2025". - Prioritize actions that are administratively achievable before the 2024 Parliamentary elections and deepen reforms post-election according to a feasible fiscal reform strategy. *Source: IMF staff calculations; Mongolian authorities.* ### 12. Increasing CMP targeting and progressivity: Mongolia has many social transfer programs ### 12. Increasing CMP targeting and progressivity: Mongolia has many social transfer programs ### Current spending and coverage - Mongolia spends about 6 percent of GDP annually on social transfers (excluding social pension). - Main programs are mainly unconditional cash transfers through the CMP and Food Stamp Program. - Poverty remains relatively high, reflecting low adequacy and benefit incidence of Mongolia’s social assistance program at the lowest quintile of the population. - The MLSP has made significant progress in improving coverage in a new household income database with the support of an external expert. ### Reform proposal and timing - Using the new database, a means-tested CMP could be gradually introduced after the elections from 2025 onwards with a clear eligibility criterion to better target the CMP to the poor. - A holistic review of the benefit level by each income bracket—which realigns monthly benefit payments closer to the pre-COVID level for the upper quintiles of income distribution while maintaining the benefit levels for the poor in real terms—could contribute to fiscal savings of about 0.8 percent of GDP while improving the benefit incidence for the most vulnerable in the long-term. - As indicated in the text, monthly benefit level is assumed to be rationalized to MNT90,000, MNT60,000, MNT40,000, and MNT20,000 for the 2nd, 3rd, 4th, and 5th income quintile groups in 2025 under the reform scenario. - Moreover, the benefit amount will be indexed to CPI inflation only for the bottom 40th income percentile, reducing benefits payments to the rich over time. ### Recent adjustments to related social spending - The 2023 supplementary budget increased pension spending by MNT394.6 billion to address gaps in pension benefits across pensioners and to adjust benefits by inflation. - MNT89.8 billion was allocated to raise social welfare pension and benefits to disabled children and their care allowance. - The actuarial projections will be updated in future to take these changes into account. ### CMP Benefit Structure: Current vs. Reform (Table 2 data) - Total number of eligible children (Current): 1,193,000 - Quintile 1 (poorest) - Number of eligible children: 200,600 - Monthly benefit amount (Current, in MNT): 100,000 - Monthly benefit amount (Reform, in MNT): 100,000 - Indexation of benefit to inflation: Yes - Quintile 2 - Number of eligible children: 289,600 - Monthly benefit amount (Current, in MNT): 100,000 - Monthly benefit amount (Reform, in MNT): 90,000 - Indexation of benefit to inflation: Yes - Quintile 3 - Number of eligible children: 473,900 - Monthly benefit amount (Current, in MNT): 100,000 - Monthly benefit amount (Reform, in MNT): 60,000 - Indexation of benefit to inflation: No - Quintile 4 - Number of eligible children: 176,700 - Monthly benefit amount (Current, in MNT): 100,000 - Monthly benefit amount (Reform, in MNT): 40,000 - Indexation of benefit to inflation: No - Quintile 5 (richest) - Number of eligible children: 52,200 - Monthly benefit amount (Current, in MNT): 100,000 - Monthly benefit amount (Reform, in MNT): 20,000 - Indexation of benefit to inflation: No - Source of table data: Ministry of Finance (2023 budget document) ### Expected outcomes and fiscal implications - If spent efficiently, current social transfer spending could have a large impact on reducing poverty and inequality. - The proposed targeting and progressivity changes aim to improve benefit incidence for the most vulnerable while delivering fiscal savings of about 0.8 percent of GDP over the medium term. - Indexing benefits only for the bottom 40th income percentile implies a downward shift of benefit incidence for upper income quintiles over time (as illustrated by the downward shift of benefit incidence curve for upper income quintiles in 2033 in the source). *Source: IMF staff report chapter "12. Increasing CMP targeting and progressivity: Mongolia has many social transfer programs" (Departmental informational annex).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mngea2023002.pdf_