## 1mngea2025001-source-pdf

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### Context and recent developments
- A booming mining sector in 2023-24 significantly bolstered exports and economic growth, enabling a substantial increase in fiscal spending.
- Government mining revenue more than doubled from 2022 to 2024, enabling a procyclical 67 percent increase in spending over the same period and fiscal surpluses in 2023‒24.
- Public debt declined from 64.5 percent of GDP in 2022 to 44.5 percent in 2024.
- Gross official reserves (GIR) increased to 5,510 (in USD million) in 2024; GIR as of mid-June 2025 were equivalent to 88 percent of the IMF’s ARA metric under the floating exchange rate classification and 61 percent under the fixed exchange rate classification.
- Key macro data (selected):
  - Real GDP growth (percent change): 2022: 5.0; 2023: 7.4; 2024: 4.9
  - Government revenue and grants (percent of GDP): 2022: 34.4; 2023: 34.6; 2024: 39.2
  - Government expenditure (percent of GDP): 2022: 33.7; 2023: 32.0; 2024: 38.0
  - Overall balance (percent of GDP): 2022: 0.7; 2023: 2.7; 2024: 1.3
  - Public debt (percent of GDP): 2022: 64.5; 2023: 45.9; 2024: 44.5
  - Current account balance (percent of GDP): 2022: -13.4; 2023: 0.6; 2024: -10.5
  - Gross official reserves (in USD million): 2022: 3,400; 2023: 4,922; 2024: 5,510
- 2024 features:
  - Mining-supported growth despite a severe winter (dzud) that led to the loss of 9.4 million adult livestock in 2024.
  - Large wage and pension increases, and dividend payouts by Erdenes Tavan Tolgoi (ETT) boosted household incomes and salary-backed consumer credit.
- 2025H1 developments:
  - Economic activity weakened: coal exports declined markedly, worsening the current account, reducing budget revenues, and creating depreciation pressures.
  - Inflation declined to 8.2 percent in June 2025 while the BOM’s target band is 6±2.
  - Bank credit: 37.8 percent y/y in February 2025, moderating to 29.5 percent in May 2025.
  - NBFI credit: 54.7 percent y/y in Q1 2025, largely driven by loans to individuals.
  - Household debt rose to 42.3 percent of GDP in 2025Q1.
  - BOM faces exchange rate risk from non-deliverable FX swaps with banks amounting to $3.0 billion as of mid-June 2025.

### Outlook and risks (baseline and scenarios)
- Baseline projections:
  - Growth projected to rise to 5.5 percent in 2025, supported by an agricultural recovery.
  - Over the medium term growth projected to converge to potential of about 5 percent.
  - Inflation anticipated to remain above the BOM target band until 2026.
  - Elevated current account deficits forecast to persist, reducing GIR buffers to only 3 months of imports despite FDI inflows and additional external borrowing.
  - Public debt projected to increase to 55.2 percent of GDP over the medium term.
- Mega projects and financing risks:
  - Authorities announced mega projects exceeding 100 percent of 2024 GDP; projects indicated to be primarily financed externally.
  - Securing external financing more than 100 percent of the 2024 GDP will be challenging; greater reliance on domestic financing would increase pressure on GIR, the exchange rate, and inflation.
- Illustrative adverse scenario:
  - Assumes coal export volumes and prices both fall by 10 percent compared to baseline.
  - Under this shock:
    - Sharp decline in exports and fiscal balances, higher inflationary and external pressures.
    - GIR could fall below two months of import coverage.
    - Fiscal deficits would widen and public debt could rise to 63 percent by 2030 under the adverse scenario.
- Risk assessment (balance tilted to the downside):
  - Near-term downsides include uncertainties in Chinese coal demand, larger-than-expected coal price declines, escalation of global trade tensions, policy slippages, depreciation pressures, and elevated credit growth in banks and NBFIs.
  - Long-term risks include China’s energy transition reducing coal demand and the need for investments to shift mining activity toward other minerals.
  - Upside: faster-than-expected implementation of mega projects and new mining production could boost growth.

### Fiscal policy — findings, risks, and recommendations
- Deterioration in 2025H1: sharp decline in coal exports and fiscal revenues, widening current account deficit, exchange rate pressures, and a decline in GIR.
- Fiscal rule changes (2023–mid‑2024) include:
  - Enhanced role of the Fiscal Stability Council.
  - A nominal debt ceiling of 60 percent of GDP.
  - A 30 percent of GDP rule for current expenditure.
  - Retained 2 percent of GDP structural deficit ceiling.
- Staff concerns:
  - Procyclicality risk from the new expenditure rule; a rule constraining total spending growth would have been preferable.
- Government response to 2025 revenue shortfalls:
  - Supplementary 2025 budget includes spending cuts amounting to 2.0 percent of GDP relative to the approved budget.
  - Measures include a 9 percent reduction in the number of civil servants over 2025−26 (excluding health and education), under-execution of capital projects, and a sizeable freeze in operational spending.
  - Critical to safeguard social spending to protect the most vulnerable.
- Tax package risks (set to be implemented over 2026-27):
  - Includes large VAT rebates, a higher VAT threshold, reductions in PIT and CIT rates and bases, and progressive VAT elements.
  - Could significantly reduce tax collections, increase the deficit, reduce fiscal space, and hinder compliance with fiscal rules.
  - Mongolia’s tax administration is not yet adequately prepared for measures such as progressive VAT.
- Fiscal consolidation options:
  - Contain the wage bill, better target social assistance, broaden and diversify non-mineral taxes.
  - Streamline tax incentives, address tax arrears, and enhance tax and customs administrations.
  - Implement large capital projects only within the fiscal rule framework and if external financing has been secured; prioritize projects based on feasibility studies and sound public investment and PPP frameworks.
  - Maintain and use the MTFF to support multi-year projects and mitigate fiscal and external risks.
- Fiscal vulnerability highlights:
  - BOM’s large negative equity position of about 8.5 percent of GDP in 2024.
  - Contingent liabilities from SOEs and PPPs, and predominance of foreign currency-denominated public debt.

### Monetary policy — stance and recommendations
- Monetary stance should remain tight to contain inflation and avoid de-anchoring of inflation expectations.
  - Real policy rate remains below pre-pandemic levels.
  - Impact of policy rate increases operates primarily through the exchange rate rather than demand contraction.
- Policy recommendations:
  - BOM should raise the policy rate further to curb inflation if the recent decline in inflation is reversed.
  - Use reserve requirements to manage liquidity and slow credit growth.
  - Expand domestic debt issuance to develop domestic bond markets and strengthen monetary policy effectiveness; government restarted market-based auctions in April 2025.
  - BOM should be fully relieved from quasi-fiscal obligations and focus on price and financial stability; government should take over the subsidized mortgage program.
  - Amend the Central Bank Law to enhance mandate, autonomy, governance, and prohibit quasi-fiscal operations.
  - MOF and BOM should agree on a memorandum of understanding for gradual recapitalization compatible with fiscal sustainability.
- Empirical transmission findings (LBVAR):
  - A 100-basis point monetary policy shock leads to a maximum reduction of 0.5 percentage points in inflation seven quarters after the shock; inflation response significant for about three years.
  - Policy rate pass-through: interbank and new mortgage rates increase by 0.8 and 0.7 percentage points respectively; lending-rate pass-through about 0.2 percentage points.

### Exchange rate policy and external sector recommendations
- External buffers need to be increased; GIR inadequate by ARA metrics under some classifications.
- Policy guidance:
  - Prioritize reserve accumulation and allow for greater exchange rate flexibility to act as a shock absorber.
  - Gradually reduce BOM’s role as intermediary and structural provider of FX to support price discovery and develop domestic FX derivatives.
  - Reduce contingent liability from FX swaps with banks ($3.0 billion mid-June 2025).
  - Government should pursue reforms to attract external private financing, particularly FDI.
- External sector outlook and metrics:
  - Current account: small surplus in 2023 to a deficit of 10.5 percent of GDP in 2024; widened further in 2025H1.
  - Exports by destination (2024): China 91%; Switzerland 5%; Russia 1%; Others 3%.
  - Exports by commodity (2024): Coal 55%; Copper 21%; Gold 6%; Iron 4%; Other minerals 2%; Animal & animal products 1%; Others 11%.
  - EBA-lite results: CA Norm at -7.1 percent of GDP; Adjusted CA at -11.2 percent of GDP; CA Actual at -10.5 percent of GDP; CA Gap 4.0 percent of GDP; REER gap implied 9.2 percent; REER overvaluation 4.7 percent.

### Macroprudential and financial sector recommendations
- Financial stability concerns:
  - Banking sector remains well-capitalized and profitable, but high credit growth poses risks; sharp rise in NPLs possible if conditions deteriorate.
  - Rapid NBFI lending: as of 2025Q1, consumer lending by NBFIs accounts for 72 percent of new loans issued by NBFIs; outstanding consumer loans by NBFIs amount to 37 percent of consumer loans in the banking sector.
  - Banks’ FX borrowing abroad rose significantly in 2024, increasing BOM swap usage.
- Policy measures recommended:
  - Strengthen and harmonize DSTI limits across banks and NBFIs; include pension-backed loans in DSTI limits.
  - Align DSTI limits for NBFIs with those for banks and ensure effective enforcement to prevent regulatory arbitrage.
  - Broaden macroprudential toolkit (capital and liquidity tools) and separate macroprudential decision-making from monetary policy.
  - Monitor and limit interconnections between banks and NBFIs; recent provision prohibiting NBFIs from obtaining funding from banks is welcome.
  - Improve credit information sharing, collateral valuation, contract enforcement, and foreclosure processes.
  - Strengthen bank resolution frameworks: develop crisis management arrangements, BOM resolution manual, resolution plans for individual banks, and establish a line of credit between Deposit Insurance Corporation and MOF.

### Structural reforms, governance, and climate considerations
- Structural barriers and governance priorities:
  - Reduce red tape, expedite insolvency resolution, clarify land use, increase judicial efficiency, and ensure consistent regulatory enforcement.
  - Adopt revised Foreign Investment Law to enhance investor protection and include robust dispute resolution mechanisms.
  - Amend PPP Law (approved January 2025) to address gaps.
  - Address corruption vulnerabilities in revenue institutions, strengthen transparency of public procurement and SOEs, and adopt the draft Whistleblower Law.
  - Strengthen transparency of beneficial ownership information.
- SOE and SWF governance:
  - New Sovereign Wealth Fund and sub-funds require strong governance frameworks; FHF lacked a Governing Board, Investment Policy, and full transparency mechanisms as of end-2024.
  - Development Bank of Mongolia (DBM) has balance sheet and governance issues that need resolving before resuming lending.
- Climate and long-term fiscal implications:
  - Climate-related investment needs could amount to 43 percent of 2024 GDP over the next 25 years (World Bank estimate).
  - Mongolia’s National Adaptation Plan 2024–30 aims to increase renewables to 30 percent of electricity and reduce greenhouse gas emissions by 22.7 percent by 2030.
  - Under a China decarbonization scenario, Mongolia’s GDP could be 1.9 percent lower by 2040; commodity price shocks and adaptation costs increase public debt materially.

### Debt sustainability and DSA key findings
- Public debt dynamics:
  - Public debt reduced from 75.5 percent of GDP in 2022 to 48 percent of GDP in 2024.
  - Baseline public debt projections (percent of GDP): 2023: 53.0; 2024: 48.0; 2025: 49.4; 2026: 51.6; 2027: 54.3; 2028: 55.9; 2029: 57.2; 2030: 57.9; 2031: 60.1; 2032: 63.0; 2033: 64.7.
  - Gross financing needs (GFN) projection highlights: 2025: 3.9; 2027: 7.6; 2030: 9.6; 2031: 11.6.
- Risk assessment:
  - Sovereign Risk and Debt Sustainability Framework indicates a move from high to moderate near-term risk but vulnerabilities remain significant; final medium-term DSA risk assessment downgraded to high.
  - The estimated Logit Stress Probability (LSP) rose from 3 percent in 2023 to 9 percent in 2024.
  - Commodity price shocks could elevate terminal debt to 84 percent of GDP in stress scenarios.
  - Stress tests: about 16.9 percent probability of public debt reaching a non-stabilization level over the medium-term under the DSA assumptions.
- Debt composition and vulnerabilities:
  - Foreign-currency denominated debt accounts for 94 percent of total public debt, including the PBOC swap.
  - Eurobonds account for 30 percent of total debt, average maturity 5 years.
  - Ulaanbaatar city issued a 3-year international bond worth US$500 million, backed by a state guarantee.
  - DSA coverage includes general government, DBM, and a US$2.1 billion PBOC swap line (10 percent of GDP).

### Coal sector and transition implications
- Coal in 2024:
  - Coal comprised 55 percent of exports in 2024 and generated about 20 percent of total fiscal revenue in 2024.
  - Mongolia exported 83.8 million tons of coal in 2024; metallurgical coal makes up approximately 70 percent of output.
  - Exports to China accounted for 91 percent of exports in 2024.
- IMF-ENV model simulations and findings:
  - Under a decarbonization scenario calibrated using World Bank (2024) results, a 13 percent decline in Mongolia's coal exports to China by 2040 would reduce Mongolia's GDP by 1.9 percent by 2040.
  - Employment impacts by 2040: coal mining jobs down by 9.8 percent; overall employment falls by 1 percent.
  - Capital investment needs in coal mining decline by about 11 percent by 2040 under the simulated 13 percent export decline.
  - Offsetting factors include low extraction costs for Mongolian metallurgical coal and proximity to China, and potential rises in copper demand; copper accounted for 21 percent of exports in 2024 and is expected to rise above 30 percent of exports with 2025 production increases.
- Policy implication:
  - Need to diversify exports, attract FDI in non-coal sectors (including renewables and copper), and prepare fiscal buffers and social support for transition scenarios.

### Risk Assessment Matrix — salient risks and recommended policies
- Global and regional risks:
  - Commodity price volatility (Likelihood: Medium) with high impact; policies: build external buffers, front-loaded fiscal consolidation, issue domestic debt, and opportunistic GIR accumulation if exports inflows are higher.
  - Trade policy and investment shocks (Likelihood: High) with medium impact; policies: build fiscal and external buffers.
  - Sovereign debt distress (Likelihood: High) with medium impact; policies: fiscal consolidation, expand domestic bond issuance, enforce currency settlement and repatriation rules.
- Domestic risks:
  - Rising credit risks in financial sector (Likelihood: Medium) with high impact; policies: vigilant supervision, harmonized DSTI limits, improved credit information.
  - Procyclical and inflationary policies (Likelihood: High) with high impact; policies: maintain fiscal prudence, wage bill rationalization, social assistance targeting, and strengthened public investment management.
  - Climate change (Likelihood: High) with medium impact; policies: accelerate National Adaptation Plan implementation, reduce livestock headcount to sustainable levels, and advance green transformation.

*Source: 1mngea2025001-source-pdf - IMF staff report (selected extracts).*

### 2025. The team included Tahsin Saadi Sedik (Head), Tigran

### 1mngea2025001-source-pdf - 2025

### CONTEXT
- A booming mining sector in 2023-24 significantly bolstered exports and economic growth, enabling a substantial increase in fiscal spending.
- Government mining revenue more than doubled from 2022 to 2024, enabling a procyclical 67 percent increase in spending over the same period and fiscal surpluses in 2023‒24.
- Public debt declined from 64.5 percent of GDP in 2022 to 44.5 percent in 2024.
- Gross international reserves (GIR) increased markedly in 2024.
- The highly expansionary fiscal policy contributed to rising imports and inflation.
- In 2025H1, lower coal exports and heightened global uncertainty clouded the outlook.
- Political developments: a three-party coalition government dissolved unexpectedly in early June 2025 after a no-confidence vote; a new government was formed with G. Zandanshatar elected Prime Minister in June 2025.
- Authorities announced mega projects amounting to more than 100 percent of 2024 GDP (by both the central government and Ulaanbaatar city).
- A tax package is under consideration to respond to demands for a more equitable distribution of mining wealth.

### RECENT DEVELOPMENTS
- 2024 growth was supported by a booming mining sector despite a severe winter (dzud) that led to the loss of 9.4 million adult livestock in 2024.
- Large wage and pension increases, and dividend payouts by coal producer Erdenes Tavan Tolgoi (ETT) boosted household incomes and salary-backed consumer credit.
- Economic activity weakened in 2025H1: coal exports declined markedly, worsening the current account, reducing budget revenues, and creating depreciation pressures.
- Following a strong revenue outturn in 2024, falling coal prices produced a sizeable budget revenue shortfall in 2025H1.
- In 2024 the government accumulated savings in the Sovereign Wealth Fund and the Fiscal Stability Fund; rating agencies upgraded Mongolia’s sovereign credit rating and the sovereign spread fell to historically low levels in early 2025.
- The authorities prefunded part of the Eurobond due in 2026 and 2028, reducing rollover risks.
- Inflation: began to moderate in March 2025 but remained above the Bank of Mongolia’s (BOM) target band. Inflation declined to 8.2 percent in June 2025 while the BOM’s target band is 6±2.
- Monetary responses: BOM cut the policy rate in early 2024, then raised the policy rate in March 2025; increased reserve requirement; tightened the DSTI limit for consumer loans. The Financial Regulatory Commission (FRC) tightened the DSTI ratio for NBFIs.
- Credit growth: bank credit reached 37.8 percent y/y in February 2025, moderating to 29.5 percent in May 2025. NBFI credit reached 54.7 percent y/y in Q1 2025, largely driven by loans to individuals.
- Household debt rose to 42.3 percent of GDP in 2025Q1.
- External positions: external debt and negative IIP as percent of GDP decreased since 2022 but remain high. The current account moved from a small surplus in 2023 to a deficit of 10.5 percent of GDP in 2024 and widened further in 2025H1.
- GIR as of mid-June 2025 were equivalent to 88 percent of the IMF’s Assessing Reserve Adequacy (ARA) metric under the floating exchange rate classification; under the fixed exchange rate classification ARA coverage drops to 61 percent.
- BOM faces exchange rate risk from non-deliverable FX swaps with banks amounting to $3.0 billion as of mid-June 2025.

- Key tabulated indicators (Text Table 1, Selected Economic and Financial Indicators, 2022-24):
  - Real GDP growth (percent change): 2022: 5.0; 2023: 7.4; 2024: 4.9
  - Real domestic demand growth (percent change): 2022: 9.0; 2023: 4.1; 2024: 16.8
  - Government revenue and grants (percent of GDP): 2022: 34.4; 2023: 34.6; 2024: 39.2
  - Government expenditure (percent of GDP): 2022: 33.7; 2023: 32.0; 2024: 38.0
  - Overall balance (percent of GDP): 2022: 0.7; 2023: 2.7; 2024: 1.3
  - Public debt (percent of GDP): 2022: 64.5; 2023: 45.9; 2024: 44.5
  - Exports (goods, percent of GDP): 2022: 57.5; 2023: 68.5; 2024: 62.5
  - Imports (goods, percent of GDP): 2022: 50.3; 2023: 46.1; 2024: 49.5
  - Current account balance (percent of GDP): 2022: -13.4; 2023: 0.6; 2024: -10.5
  - Gross official reserves (in USD million): 2022: 3,400; 2023: 4,922; 2024: 5,510

### OUTLOOK AND RISKS
- Baseline projections and medium-term outlook:
  - Growth projected to rise to 5.5 percent in 2025, supported by an agricultural recovery.
  - Mining output expected to remain robust, supported by increased production of higher-grade copper concentrate at Oyu Tolgoi (OT).
  - Coal export values projected to decline significantly in 2025, reducing exports and fiscal revenues and exerting depreciation pressures.
  - Over the medium term growth projected to converge to potential of about 5 percent.
  - Inflation anticipated to remain above the BOM target band until 2026.
  - Elevated current account deficits forecast to persist, reducing GIR buffers to only 3 months of imports despite FDI inflows and additional external borrowing.
  - Fiscal position expected to deteriorate after 2026 once the revenue impact of the tax package takes effect.
  - Public debt projected to increase to 55.2 percent of GDP over the medium term.

- Mega projects and financing risks:
  - Authorities announced mega projects exceeding 100 percent of 2024 GDP; authorities indicate projects will primarily be financed externally.
  - Securing external financing more than 100 percent of the 2024 GDP will be challenging; realistic implementation likely to proceed gradually.
  - Greater reliance on domestic financing would increase pressure on GIR, the exchange rate, and inflation given high import intensity of capital expenditure.

- Risk assessment (balance tilted to the downside):
  - Near-term downside risks: uncertainties in Chinese coal demand, larger-than-expected coal price declines, escalation of global trade tensions, policy slippages (reducing non-mineral tax collections, removing large capex from fiscal rules), depreciation pressures raising inflation, and elevated credit growth in banks and NBFIs posing financial stability risks.
  - Long-term risks: global and China’s energy transition could reduce demand for coal and require large investments to shift mining activity toward other minerals.
  - Upside: faster-than-expected implementation of mega projects and new mining production could boost growth.

- Illustrative adverse scenario:
  - Assumes coal export volumes and prices both fall by 10 percent compared to baseline.
  - Under this shock: sharp decline in exports and fiscal balances, higher inflationary and external pressures.
  - GIR could fall below two months of import coverage.
  - Fiscal deficits would widen and public debt could rise to 63 percent by 2030 under the adverse scenario.
  - Figures show headline inflation and current account balance diverging substantially between baseline and adverse scenario through 2030.

- Export composition and dependencies (2024):
  - Exports by country in 2024: China 91%; Switzerland 5%; Russia 1%; Others 3%.
  - Exports by commodity in 2024: Coal 55%; Copper 21%; Gold 6%; Iron 4%; Other minerals 2%; Animal & animal products 1%; Others 11%.

### AUTHORITIES’ VIEWS
- Authorities are more optimistic than staff:
  - The revised medium-term fiscal framework (MTFF) projects higher real GDP growth for 2026−28, supporting stronger fiscal revenue forecasts.
  - Revenues are still expected to remain below 2025 budgeted levels.
  - Authorities have taken measures and adjusted the outlook to be more realistic in the supplementary budget.
  - The Bank of Mongolia projects inflation to return to the target range by 2026.

*Source: 1mngea2025001-source-pdf - 2025 (IMF mission report content provided).*

### 15.      The weakening economic outlook calls for greater policy prudence. The macroeconomic

### 15.      The weakening economic outlook calls for greater policy prudence. The macroeconomic

### A. Fiscal Policy — findings and risks
- Macroeconomic conditions deteriorated markedly in 2025H1: sharp decline in coal exports and fiscal revenues, widening current account deficit, exchange rate pressures, and a decline in GIR.
- Fiscal rules amended in 2023 and 2024:
  - Enhance role of the Fiscal Stability Council.
  - Restrict Parliament’s ability to modify fiscal rules.
  - Introduce a nominal debt ceiling of 60 percent of GDP and a 30 percent of nominal GDP rule for current expenditure.
  - Retain the 2 percent of GDP structural deficit ceiling.
  - Concern: procyclicality of the new expenditure rule could aggravate economic cycles and incentivize spending misclassifications; a rule constraining total spending would have been preferable.
- Government response to revenue shortfalls:
  - Supplementary 2025 budget includes spending cuts amounting to 2.0 percent of GDP relative to the approved budget (in line with staff’s fiscal projections).
  - Measures include a 9 percent reduction in the number of civil servants over 2025−26, under-execution of capital projects, and a sizeable freeze in operational spending.
  - Critical to safeguard social spending to protect the most vulnerable.
- Tax package under discussion (set to be implemented over 2026-27) risks:
  - Includes large VAT rebates, a higher VAT threshold, reductions in PIT and CIT rates and bases, and progressive VAT elements.
  - If implemented, would significantly reduce tax collections, increase the deficit, reduce fiscal space for development projects, and hinder compliance with fiscal rules while increasing budget vulnerability to volatile mining revenues.
  - Mongolia’s tax administration is not yet adequately prepared for measures such as progressive VAT.
- Fiscal consolidation needs and options:
  - Create fiscal space by containing the wage bill, better targeting social assistance, and broadening and diversifying non-mineral taxes.
  - Streamline tax incentives, address tax arrears, and enhance tax and customs administrations.
  - Large capital projects should be implemented only within the fiscal rule framework and if external financing has been secured; prioritize projects based on feasibility studies and sound public investment and PPP frameworks.
  - MTFF (Medium-Term Fiscal Framework) is essential to support multi-year projects and mitigate fiscal and external risks.
- Fiscal risk assessment:
  - Sovereign Risk and Debt Sustainability Framework (SRDSF) indicates a lower risk rating compared to 2023, moving from high to moderate risk.
  - Vulnerabilities remain significant due to high dependence on volatile mineral revenues, predominance of foreign currency-denominated public debt, large contingent liabilities from SOEs and PPPs, and the BOM’s large negative equity position—about 8.5 percent of GDP in 2024.
  - Priority: reduce unfunded quasi-fiscal operations by SOEs; strengthen legal frameworks for SOEs and PPPs; enhance MOF capacity to monitor fiscal risks.
  - Potential recapitalization of the BOM should be implemented gradually.
- Quantified elements in assessment:
  - Text Table 2. Mongolia: Estimated Impact Tax Package (2026−2027)
    - Total Impact (in MNT billion): 1,242 and 1,850
    - In percent of GDP: 1.2 and 1.6
    - Components (selected as presented): Progressive VAT 1,200...; Delayed payments 442...; PIT Credits ...1,500; PIT Increased Threshold + Progressive Rates ...500; Advisory and Assistance Services ...-150; Reduction in Hidden Economy -180...
  - Staff analysis note: tax multipliers are small and short-lived.

### Authorities’ views on fiscal policy (as provided)
- Authorities committed to fiscal prudence via supplementary 2025 budget to address projected revenue shortfall; envisage significant expenditure cuts to ensure compliance with the 2 percent of GDP structural deficit ceiling.
- Most cuts from cancelling domestically financed capital projects not appraised and procured by end-May; externally financed capital projects continue as planned, with potential fast-tracking of three major infrastructure projects: an oil refinery, a hydropower plant, and a housing complex in Ulaanbaatar’s ger area.
- Planned 9 percent reduction in civil servants would exclude health and education sectors.
- Authorities acknowledged implementation challenges for the tax package and developed a medium-term strategy involving organizational restructuring to support rollout.
- Authorities view Mongolia’s sovereign debt risk as moderate and intend gradual spending cuts through better targeting and efficiency; approved 2026-28 MTFF supports this strategy alongside renewed domestic debt issuance.

### B. Monetary Policy — stance and recommendations
- Monetary stance should remain tight to contain inflation and avoid de-anchoring of inflation expectations.
  - Inflation expected to rise in 2025 and stay above the target band through 2026.
  - Impact of policy rate increase on inflation is primarily through the exchange rate rather than demand contraction.
  - Real policy rate remains below pre-pandemic levels.
- Policy recommendations:
  - BOM should raise the policy rate further to curb inflation if the recent decline in inflation is reversed.
  - Use reserve requirements to manage liquidity and slow credit growth.
  - Current high reserve requirements incentivize banks to borrow externally with BOM bearing FX risks through FX swaps.
- Domestic debt issuance:
  - Increased domestic debt issuance will help develop domestic bond markets and strengthen monetary policy effectiveness.
  - Government restarted domestic debt program with market-based auctions in April 2025.
  - Expanded issuance could reduce the need for BOM to mop up liquidity by issuing costly central bank bills, a contributor to BOM persistent losses; help establish a benchmark yield curve, mitigate FX-related fiscal risks, and improve monetary policy transmission.
- BOM governance and quasi-fiscal activities:
  - Key reforms from the 2023 safeguards assessment not fully implemented: insufficient legal protections for BOM autonomy and governance; BOM’s ongoing involvement in quasi-fiscal activities; internal controls and oversight require strengthening; Supervisory Board appointed by Parliament lacks degree of independent oversight seen at other central banks.
  - BOM should be fully relieved from quasi-fiscal obligations and focus on price and financial stability.
  - Although BOM abstained from quasi-fiscal lending since 2023, it continues to recycle repayments to fund new subsidized mortgage loans; these are also funded by the newly established Savings Fund.
  - Government should move forward with takeover of the BOM's subsidized mortgage program.
- Legal and fiscal coordination:
  - Amendments to the Central Bank Law should be finalized and submitted to Parliament to enhance mandate, autonomy, governance; exclude Parliament from BOM monetary policy operations; further prohibit quasi-fiscal operations; enhance checks-and-balances.
  - MOF and BOM need a memorandum of understanding for a gradual recapitalization strategy compatible with fiscal sustainability.

### Authorities’ views on monetary policy (as provided)
- Authorities agreed on need to maintain tight monetary policy until inflation returns to target and will use complementary tools to curb credit growth.
- Reserve requirement ratio will be adjusted to absorb excess liquidity and reduce losses from central bank bill issuance.
- Renewed, though limited, issuance of domestic government securities will aid liquidity absorption.
- Gradual shift of subsidized mortgage program from BOM to government seen as positive.
- Authorities working to reach consensus on amendments to Central Bank Law before submitting the draft to Parliament.

### C. Exchange Rate Policy — findings and recommendations
- External buffers need to be increased to strengthen resilience against shocks; GIR are inadequate according to ARA metrics.
- Commodity exporters generally need larger buffers than ARA indicates, given significant shocks they face.
- Given Mongolia’s high vulnerability to external shocks (as illustrated by the adverse scenario), BOM should:
  - Prioritize reserve accumulation.
  - Allow for greater exchange rate flexibility.
  - Gradually reduce its role as intermediary and structural provider of FX to the market to support price discovery and development of domestic FX derivatives market.
  - Reduce substantial contingent liability from FX swaps with banks; a large FX swap position could make BOM hesitant to permit greater exchange rate flexibility if it increases losses from FX swaps.
- Government should pursue reforms to attract external private financing, particularly FDI.

### Authorities’ views on exchange rate policy (as provided)
- Authorities reaffirmed commitment to maintaining adequate level of GIR and a flexible exchange rate.
- A BOM–Finance Ministry working group developed a strategy to strengthen reserves by boosting exports, curbing imports, and increasing FX inflows.
- BOM’s FX swap terms adjusted to align with market conditions and reduce BOM losses.
- Partial repayment of the PBOC swap line during 2023−24 created space to further boost reserves if needed.

### D. Macroprudential and Financial Sector Policies — findings and recommendations
- Banking sector remains well-capitalized and profitable, but high credit growth poses risks to financial stability; risk of sharp rise in NPLs if macroeconomic conditions deteriorate.
- Banks’ FX borrowing from abroad rose significantly in 2024, increasing use of swaps with BOM to cover FX mismatch and meet net FX position requirements.
- Macroprudential framework needs strengthening:
  - Recent tightening of DSTI limits for banks and NBFIs and loan-to-value ratio for car leases by NBFIs is welcome.
  - Pension-backed loans should be included in DSTI limit.
  - Align DSTI limits for NBFIs with those for banks and ensure effective enforcement to prevent regulatory arbitrage.
  - BOM should consider a broader set of capital and liquidity macroprudential tools to address specific risks and transmission channels.
  - Separate macroprudential policy decision-making from monetary policy in formulation and implementation.
- Rapid expansion of NBFI lending:
  - As of 2025Q1, consumer lending by NBFIs accounts for 72 percent of new loans issued by NBFIs.
  - Outstanding consumer loans by NBFIs amount to 37 percent of consumer loans in the banking sector.
  - NBFIs have tapped a wide range of funding sources (domestic and foreign banks, trust loans, debt securities); leverage remains low but has risen significantly.
  - Supervision should closely monitor interconnections between banks and NBFIs.
  - New provision prohibiting NBFIs from obtaining funding from banks is welcome.

*Source: IMF staff analysis as presented in the provided chapter extract.*

### 36.      Broad reforms are needed to bolster the financial sector’s ability to lend to

### 36.      Broad reforms are needed to bolster the financial sector’s ability to lend to creditworthy entities.

### Financial sector weaknesses and reform priorities
- Key weaknesses: credit information sharing, collateral valuation, contract enforcement, foreclosure processes, and regulatory oversight of loan rescheduling and restructuring.
- Consequences: elevated credit losses, high lending rates, overreliance on immovable collaterals, and hindered access to finance for small and medium-sized enterprises.
- Priority legal reforms: Amendments to the Insolvency and Credit Information Laws to improve the credit information system and allow financial institutions to handle poor asset quality more effectively.
- Recommendation: Strengthen bank resolution frameworks by:
  - Financial Stability Council developing crisis management arrangements, including inter-agency information-sharing and coordination.
  - BOM creating a manual outlining resolution policy and procedures and developing resolution plans for individual banks.
  - Establishing a line of credit between the Deposit Insurance Corporation and the MOF to ensure funding for bank resolutions.

### Bank ownership, supervision, and macroprudential policy
- Shareholder diversification: Full implementation of bank shareholder diversification—raising shareholder limits and allowing investment in multiple banks—would foster financial development and attract investors that can enhance bank management and operations.
- Additional measures: Adopt principles for vetting controlling interests in banks and implement effective supervision of complex shareholding structures to mitigate connected and related-party lending risks.
- Macroprudential developments and authorities’ actions:
  - Authorities tightened DSTI ratios for banks and NBFIs and are expanding the macroprudential toolkit and separating it from monetary policy.
  - Progress on adoption of risk-based supervision and Basel III standards is ongoing with support from the IMF and other IFIs.
  - Measures introduced to limit NBFI financing from domestic banks to address rapid NBFI lending growth.
- Further recommendations from staff:
  - Include pension-backed loans in DSTI limits.
  - Align the DSTI limit for NBFIs with that of banks.
  - Expand the BOM’s macroprudential toolkit.
  - Separate macroprudential and monetary policy formulation and implementation.

### Structural policies, governance, and anti-corruption
- Business climate issues: The State’s large footprint, changing rules, legal and regulatory barriers, red tape, licensing and taxation complexities, slow insolvency resolution, and unclear land use hinder private sector initiative and deter FDI.
- Recommended legal and institutional reforms:
  - Reduce red tape, expedite insolvency resolution, clarify use of land, increase judicial efficiency and transparency, and ensure consistent regulatory enforcement including tax administration.
  - Adopt the revised Foreign Investment Law promptly to enhance investor protection and include robust dispute resolution mechanisms.
  - Amend the PPP Law (approved January 2025) to address current gaps.
- Anti-corruption priorities:
  - Address corruption vulnerabilities in revenue institutions.
  - Strengthen transparency and accountability of public procurement and SOEs.
  - Adopt legislative reforms, including prompt adoption of the draft Whistleblower Law.
  - Enhance transparency of beneficial ownership information to help prevent illicit financial flows.
- Specific SOE and public entity governance:
  - The new Sovereign Wealth Fund requires a strong governance framework for its sub-funds to be put in place swiftly.
  - The Development Bank of Mongolia (DBM) has long-standing balance sheet and governance issues that need to be addressed before it resumes lending operations.

### AML/CFT and implementation status
- Legal progress: As of July 2023, Mongolia has been assessed to be "compliant" and "largely compliant" with all 40 FATF technical recommendations.
- Next step: Effective implementation of the AML/CFT framework is required to strengthen other government priorities and support tax collection.

### Climate adaptation, mitigation, and fiscal implications
- Natural hazards: Climate change is expected to increase the frequency and intensity of natural hazards such as harsh winters (dzuds) and floods; dzuds have occurred in one out of five years since 2000.
- Carbon intensity and transition risks:
  - Mongolia relies on coal for energy and the large livestock sector, making energy transition macro-critical.
  - Coal accounted for over half of total exports and 20 percent of fiscal revenues in 2024.
  - Mongolia’s National Adaptation Plan to Climate Change 2024–30 aims to increase the share of renewables electricity to 30 percent and reduce greenhouse gas emissions by 22.7 percent by 2030.
  - China’s decarbonization could result in a 1.9 percent reduction in Mongolia’s GDP by 2040; increased demand for copper could partially offset this.
- Investment needs and financing:
  - World Bank (2024 Mongolia Country Climate and Development Report) estimates climate-related investment needs could amount to 43 percent of 2024 GDP over the next 25 years.
  - Mitigation measures would account for approximately 70 percent of these needs, with about half of the investment needs coming from the energy sector.
  - Financing will require public and private sector contributions and creation of fiscal space.

### Staff appraisal: macroeconomic outlook and policy guidance
- 2023–24 dynamics: Record-high coal exports and robust household and government spending led to buoyant activity, fiscal surpluses despite large spending increases, successful external debt rollovers, and reduced vulnerabilities. However, procyclical fiscal policy and 2024 policy rate cuts fueled rapid credit growth, a surge in imports, widening current account deficit, and inflation above the BOM’s target band.
- 2025H1 developments: Resource-driven boom weakened in 2025H1 due to a sharp decline in coal export receipts, causing a sizeable budget revenue shortfall, a further widening of the current account deficit, a reduction in GIR, and increased exchange rate pressures.
- Fiscal recommendations:
  - Implement prudent fiscal policy to restore internal and external balances and preserve fiscal buffers.
  - Reconsider the design and timing of the proposed tax package that would significantly reduce non-mining tax revenues.
  - Broaden the non-mining tax base and contain current expenditures to create fiscal space for priority investments.
  - Prioritize mega projects according to external financing availability and the economy’s absorptive capacity and implement them within fiscal rules.
  - Avoid frequent changes to fiscal rules to preserve credibility.
  - Expand domestic debt issuance to establish a benchmark yield curve, develop domestic markets, and reduce reliance on external borrowing.
  - Prepare an ambitious and rapid consolidation strategy should downside risks materialize.
- Monetary and exchange rate policy recommendations:
  - BOM should maintain tight domestic financial conditions to control inflation; a further rate increase may be warranted if the recent decline in inflation reverses.
  - Strengthen BOM’s legal mandate, operational autonomy, and governance through amendments to the central bank law.
  - BOM should fully withdraw from quasi-fiscal operations by transferring its subsidized mortgage portfolio to a designated public entity.
  - MOF and BOM should agree on a gradual recapitalization strategy for the BOM.
  - Increase exchange rate flexibility to strengthen resilience to external shocks.
  - BOM should pursue opportunistic accumulation of reserves when market conditions allow and reduce its role as a structural provider of FX to support better price discovery.
  - Support development of domestic FX derivatives markets and phase out BOM’s dominant provision of FX hedging instruments to banks.
- Financial stability recommendations (condensed):
  - Strengthen macroprudential frameworks and financial oversight to mitigate risks from rapid credit growth.
  - Facilitate bank shareholder diversification by raising ownership limits and allowing investment in multiple banks.
  - Strengthen insolvency frameworks and creditor rights to enable more effective NPL resolution.

*MONGOLIA — INTERNATIONAL MONETARY FUND*

### 52.      It is recommended that the next Article IV consultation take place on the standard 12-

### 1mngea2025001-source-pdf - 52.      It is recommended that the next Article IV consultation take place on the standard 12-

### Growth, exports, and domestic demand
- Growth remained robust in 2024 supported by record-high mining exports and strong public and household spending.
- Figure indicators (textual highlights):
  - Mining and Agricultural Sectors Contribution to GDP: Real GDP (y/y) and sectoral contributions shown; charted values not tabulated in source text.
  - Mongolia's Exports (In million US dollar): time series from 2017–2024 showing coal, copper, and other exports with rising levels through 2024.
- Table 1: National Accounts (selected rows as presented)
  - Real GDP growth (percent change)5.07.44.95.55.55.55.35.05.0
  - Nominal GDP (in USD million)17,14620,31523,586..................
  - Contributions to Real GDP (ppts)
    - Domestic Demand11.45.621.26.64.47.07.05.96.2
    - Exports of G&S13.917.90.53.05.02.62.11.71.7
    - Imports of G&S-20.3-16.2-16.8-4.1-3.9-4.1-3.8-2.6-2.9
  - Consumption65.857.566.171.270.670.971.071.270.9
    - Private51.944.549.854.954.755.255.355.555.2
    - Public13.913.016.316.316.015.815.715.715.7
  - Gross Capital Formation42.333.934.632.230.730.831.131.231.5
  - Gross Fixed Capital Formation29.825.326.824.223.723.824.124.224.5
  - FDI14.210.711.69.59.18.98.88.07.9
  - Gross national saving28.934.524.118.418.718.618.818.819.2

### External imbalances, reserves, and external financing
- Current account and financial flows (Figure and Tables):
  - Current account returned to deficit in 2024 as imports surged; charted Current Account (In USD million), and Financial Account components show robust inflows sustaining Gross International Reserves (GIR).
- Table 2a: Balance of Payments (In Millions of U.S. Dollars) — selected lines:
  - Current account balance (including official grants)-2,303121-2,485-3,498-3,180-3,420-3,632-3,811-3,987
  - Trade balance1,2334,5493,0812,0472,6172,5162,3522,1572,133
  - Exports9,85413,91414,75013,64714,74315,28515,90216,32316,823
    - Mineral exports8,96412,71013,69412,41913,37013,80014,31014,61014,979
    - Non-mineral exports8901,2041,0561,2281,3731,4851,5921,7131,844
  - Imports-8,622-9,366-11,668-11,600-12,126-12,770-13,550-14,166-14,690
  - Financial account1,2769562,6592,3601,8571,8891,8552,5692,975
    - Direct investment2,4282,1722,7272,3972,4122,4992,5902,4762,572
  - Gross official reserves (end-period)3,4004,9225,5104,9465,1285,2805,1205,1265,269
  - Net international reserves (NIR)1/-7881,1521,768..................
- Table 2b: Balance of Payments (In Percent of GDP) — selected lines:
  - Current account balance (including official grants)-13.40.6-10.5-13.9-12.0-12.2-12.3-12.3-12.3
  - Exports57.568.562.554.055.454.553.952.951.9
  - Imports-50.3-46.1-49.5-45.9-45.6-45.6-46.0-45.9-45.3
  - Direct investment14.210.711.69.59.18.98.88.07.9
  - Gross official reserves (end-period)3.03.64.13.53.53.43.23.13.1 (In months of next year's imports of G&S)

### Inflation dynamics and monetary conditions
- Inflation increased since mid-2024, largely reflecting domestic factors including a rise in electricity tariffs in late 2024.
- Causal factors highlighted:
  - Strong fiscal impulse in 2024 (Fiscal Impulse chart: Non-mineral primary balance in percent non-mineral GDP shows negative impulse).
  - Cuts in the monetary policy rate in 2024 accelerated credit to the private sector.
  - Exchange rate depreciation was not the major source of observed inflation pressures.
- Figure indicators:
  - National Consumer Price Index (Headline, Food, Transportation) charts show rising headline inflation through 2025.
  - Interest rates series include Policy Rate, Lending Rate (DC), Lending Rate (FX), Deposit Rate (DC) with levels charted (exact numerical time series in figures).
  - Credit Growth, Exchange rate (MNT/USD), and Inflation relation charted.
- Table 1: Prices (selected):
  - Consumer Prices (Avg; percent change)15.110.46.28.78.67.97.26.76.4
  - Consumer Prices (EoP; percent change)13.37.78.39.08.27.56.86.56.2
  - Policy and banking credit growth (Table 3 and Table 1):
    - Credit growth (percent change)8.622.030.925.021.219.517.515.515.5
    - Broad money growth (percent change)6.526.815.014.613.111.811.613.911.7

### Fiscal performance, savings, and public debt
- Strong mining revenue led to primary and overall fiscal surpluses in 2023 and 2024 despite substantial increases in primary expenditure.
- Surpluses were used to replenish savings funds and reduce public debt to historically low levels; sovereign spreads fell materially (Figure charts).
- Table 4a/4b: Summary Operations of the General Government (selected rows)
  - Total revenue and grants (in Billions of Togrogs)18,52224,38731,37531,71935,02737,68242,55547,68153,508
  - Total expenditure and net lending18,16022,50930,36532,02535,70840,11144,98850,27956,406
  - Overall balance (IMF definition)3621,8781,009-306-681-2,429-2,433-2,599-2,897
  - Primary balance (IMF definition)1,1603,0282,2041,2071,244585699531,282
  - Mineral revenue (in percent of GDP)8.410.011.88.59.08.88.78.58.3
  - Non-mineral primary balance (in percent of GDP)-6.3-5.7-8.9-7.2-7.8-8.8-8.3-7.9-7.6
  - Sovereign Wealth Fund (in percent of GDP)5.04.65.76.27.58.18.58.89.1
  - Public debt (in percent of GDP)64.545.944.546.048.451.353.054.555.2
  - Interest payments (billions of togrogs)797.81,1501,1951,5121,9242,4873,0033,5524,180

### Banking sector and NBFIs: credit expansion and risks
- Bank lending surged post-COVID, driven particularly by loans to individuals; loans to individuals doubled since 2023Q1 and currently account for more than half of total bank credit (Figure charts).
- Credit composition and indicators (Figure and Table 3):
  - Bank credit growth concentrated in mortgage and wage-backed loans.
  - NPL ratio has been decreasing, primarily due to rapid growth in loan amounts.
  - FX deposit share declined in 2024 for D-SIBs.
  - Banks’ capital remains above the minimum required (CAR dashed line at 12% in figure).
- NBFI sector:
  - NBFI lending grows faster than banking sector but banking sector still dominates.
  - NBFI loans concentrate on consumer loans.
  - NBFI NPL ratio trending downward; leverage has increased though remains relatively low.
  - NBFI profitability and capital efficiency improving.
- Table 3: Monetary Aggregates (selected)
  - Reserve Money6,7277,22710,98011,16612,63414,13015,77117,96920,222 (end periods 2022–2030)
  - Broad money29,66537,62443,27649,59356,11362,76070,04679,81089,180
  - Net foreign assets1,8648,4528,3274,645425-5,024-10,470-14,265-20,556
  - Net domestic assets27,80129,17234,94944,94855,68867,78580,51694,075109,735
  - Credit outstanding (In MNT bn)1/26,24532,01441,91752,39663,50475,88889,168102,989118,952

### Fiscal and external projections (selected projections and memoranda)
- Table 1: Selected projections (2025–2030, as presented)
  - Real GDP growth (percent change) ... 5.5 5.5 5.5 5.3 5.0 5.0 (full sequence shown in table)
  - Current account balance (percent of GDP) ... -13.9 -12.0 -12.2 -12.3 -12.3 -12.3
  - Gross official reserves (in USD million) ... 4,9465,1285,2805,1205,1265,269
  - External debt (in percent of GDP) ... 159161165168170171
  - Net IIP (in percent of GDP) ... -188-191-194-196-198-199
- Table 2a: Key projected flows (In Millions of U.S. Dollars)
  - Exports13,64714,74315,28515,90216,32316,823 (2025–2030 sequence in table)
  - Imports-11,600-12,126-12,770-13,550-14,166-14,690
  - Financial account2,3601,8571,8891,8552,5692,975
  - Donor support and change in reserves sequences shown in table.

### Indicators of Fund credit and obligations
- Table 5: Indicators of Fund Credit Outstanding, 2025‒30 (In Millions of SDR)
  - Stock 1/58.3832.188.300.000.000.00
  - Obligations 2/31.0529.6126.3510.031.511.51
  - Principal (repayments/repurchases)26.2126.2123.888.300.000.00
  - Charges and interest4.843.402.481.731.511.51
  - Stock of existing and prospective Fund credit 1/58.3832.188.300.000.000.00
  - In percent of quota80.7544.5011.480.000.000.00
  - In percent of GDP0.310.170.040.000.000.00

*Source: Mongolia—IMF staff report (selected figures, tables, and text extracted from the supplied PDF content).*

### Annex I. Progress on Recommendations of the

### Annex I. Progress on Recommendations of the 2023 Article IV Consultations

### Fiscal Policy — Progress and Key Findings
- The overall fiscal balance recorded large surpluses in 2023 and 2024, reducing the debt-to-GDP ratio and replenishing buffers (e.g., mining funds).
- Expenditure in real terms grew by 26.3 percent in 2024.
- Specific recommendation progress:
  - Contain growth of current expenditure: November 2024 overdue electricity tariff increase implemented, reducing SOE electricity sector losses; automatic increase in civil service pay supplements has not been rolled back.
  - Strengthen public investment management and SOE oversight: Draft amendments for the Public Investment Law, the Law on State and Local Property Law, and a new draft SOE Law to be submitted to Parliament.
  - Strengthen collections of non-mining revenues: Recommendations not implemented; government plans to adopt a tax package aimed at significant reductions in the rates.
  - Improve targeting of social assistance: Draft revision to the Law on Social Welfare under discussion; no progress on Child Money Program targeting; work underway to strengthen NSO’s household database.
  - Adopt simplified fiscal framework and operational rules: 2024 amendments of FSL add limits on public debt-to-GDP and current expenditure, but fiscal rules remain procyclical.
  - Reduce contingent fiscal liabilities: DBM headline figures improved and a draft DBM Law under discussion, yet DBM still has important losses and a high level of NPL.
  - Reform pension system: Pension reform approved in July 2023 is being implemented, but new measures have been introduced in the opposite direction (e.g., reduction from 7 to 5 years in the wage period used to calculate pensions).

### Monetary and Exchange Rate Policies — Progress and Key Findings
- The BOM has tightened monetary and macroprudential regulations since late 2024 by increasing the policy rate, increasing banks’ reserve requirements, and strengthening DSTI requirements. Despite these measures, inflation and credit remain high.
- Quasi-fiscal operations: Outstanding balance of the Housing Mortgage Program and the stock of residential mortgage-backed securities held by BOM have not been transferred to the government.
- BOM Law amendments: BOM prepared draft amendments with LEG TA to clarify mandate and strengthen autonomy, transparency, and accountability; authorities have not submitted the draft law to Parliament.
- Exchange rate flexibility and buffers:
  - The exchange rate remained almost constant in nominal terms during 2024; in 2025 Q1, BOM allowed greater exchange rate flexibility.
  - GIR reached US$5.5 billion in 2024, up from US$4.9 billion in 2023, covering 4.1 months of imports of goods and services.
  - GIR represents 112 percent of the ARA metric under a floating exchange rate classification and 76.3 percent under a fixed exchange rate classification.
  - NIR stands at US$1.8 billion at end-2024.
  - BOM’s FX swaps with banks increased significantly in 2024, reaching $3.0 bn by mid-June 2025.
  - GIR is expected to remain below the recommended range over the forecast period.

### Financial Sector Policy — Progress and Key Findings
- Banking supervision: BOM started adopting a ‘risk-based’ approach focused on contingent liabilities and strategic risk.
- Post-AQR banking reform: Deadline for shareholder diversification rescheduled from end-2023 to end-2026.
- Regulatory gaps: Gaps between banks and NBFI reduced but persist.
- Crisis preparedness: BOM is working on a crisis preparedness and management manual based on IMF TA provided in 2023.
- Insolvency framework: Draft law on insolvency proceedings and resolution prepared with IMF assistance; enactment pending.
- Credit reporting: Draft amendments to the Credit Information Law under discussion.

### Structural Policy and Governance — Progress and Key Findings
- Business climate: Recommendations not implemented; a draft Commerce Law has been presented to Parliament for discussion.
- FDI attraction and regulation:
  - Incentives and tax stability agreements not yet implemented.
  - 2024 Investment Law reform constrains options for foreign and domestic investors to obtain rights to use and possess land.
  - Mineral Law changes revisiting State participation in strategic mineral deposits have not been well received by investors.
- BOM financial policy analysis and communication: Financial Stability Report remains backward looking and lacks in-depth macro-financial linkage assessment.
- Governance and anti-corruption:
  - New National Anti-Corruption Strategy introduced.
  - Law on Political Parties improved transparency and disclosure requirements.
  - Revised Law on Procurement introduced an e-procurement system for all public procurement online.
  - Whistleblower Protection Law pending in Parliament.
  - SOEs: Technically required to follow international best practices on disclosure, accounting, and reporting, but implementation lags; progress on asset declaration and beneficial ownership publication is lacking.
  - AML/CFT: Mongolia implemented the forty technical recommendations made by FATF under the Mutual Evaluation of 2017; Mongolia remains in enhanced follow-up by Asia/Pacific Group.

*Source: Annex I. Progress on Recommendations of the 2023 Article IV Consultations (from the provided IMF content).*

### Annex II. External Sector Assessment

### Overall Assessment and Policy Responses
- Overall assessment: Mongolia’s external position in 2024 was weaker than the level implied by medium-term fundamentals and desirable policies, with GIR remaining below the ARA metric.
- Potential policy responses:
  - Fiscal consolidation to build buffers.
  - Moderate spending growth by containing current spending through better targeting of social spending and prioritizing investment projects.
  - Strengthen collection of non-mining tax revenue.
  - Boost export capacity, advance economic diversification, improve business environment to attract more FDI, and develop domestic money and capital markets.
  - BOM should allow more exchange rate flexibility to better reflect economic fundamentals.

### Current Account — Findings and Projections
- 2024 outcome:
  - Current account (CA) turned into a deficit in 2024.
  - Significant growth in imports of consumer and capital goods pushed the CA into a deficit of 10.5 percent of GDP in 2024, down from a surplus in 2023.
  - Mineral exports reached record highs driven by strong coal export volumes and a marked increase in copper exports following commencement of OT’s underground mine operations in March 2023.
  - Auction-based coal sale mechanism accounted for 27 percent of coal exports in 2024.
  - Deficits in services and income accounts continued to weigh heavily on the CA.
- 2025H1: Coal exports continued to decline, primarily due to lower prices, resulting in a worsened current account and some pressure on the exchange rate.
- Medium-term projection (2025–2030):
  - CA deficit expected to remain elevated despite robust exports.
  - Coal exports projected to gradually recover starting 2026, with annual coal export volume having reached a record high of 83.8 million tons in 2024 and projected to increase gradually from 2026 under the baseline scenario.
  - OT output expected to rise strongly in 2025 and remain high over the medium term.
  - Persistent large CA deficits expected due to strong import demand from infrastructure projects, FDI, elevated consumer spending, high overseas travel spending, and reliance on imported transportation services.
  - Large negative IIP will imply continued sizable income account deficits.
  - External vulnerability to global shocks, especially developments in China, and domestic policy shifts noted; global low-carbon transition poses a significant external risk due to reliance on coal exports, though rising copper demand could partially offset.

### EBA-lite Results and CA Metrics
- EBA-lite current account approach estimates:
  - CA Norm at -7.1 percent of GDP.
  - Adjusted CA at -11.2 percent of GDP.
  - CA Actual at -10.5 percent of GDP.
  - CA Gap estimated at 4.0 percent of GDP.
  - REER gap implied by CA gap: 9.2 percent.
  - EBA-lite REER model indicates a REER overvaluation of 4.7 percent.
  - Elasticity listed as -0.4 in model outputs shown.

### Real Exchange Rate
- 2024 assessment: REER assessed to be overvalued.
  - Trade-weighted REER appreciated by 9.6 percent in 2024, driven primarily by higher domestic inflation compared to trading partners.
  - NEER appreciated by 3.3 percent in 2024.
- 2025 to May: Despite elevated inflation, REER depreciated by 1.8 percent in 2025 up to May as NEER depreciated amid weakening coal exports.

### Capital and Financial Accounts
- 2024 developments:
  - Higher portfolio inflows supported an increase in net capital inflows.
  - FDI projected to remain robust over the medium term, supported by the signing of the Zuuvch-Ovoo uranium project with France’s Orano Mining.
  - Well-executed external debt refinancing and BOM’s repayment of half of the outstanding swap line with the People’s Bank of China reduced external debt risks.
  - Sovereign credit ratings upgrade and decline in sovereign spreads occurred before their surge following a U.S. tariff hike.

### Reserves Levels
- GIR and coverage:
  - GIR reached US$5.5 billion in 2024, up from US$4.9 billion in 2023.
  - GIR covered 4.1 months of imports of goods and services in 2024.
  - GIR equals 112 percent of the ARA metric under a floating exchange rate classification.
  - Under a fixed exchange rate classification (as in AREAER), GIR coverage falls to 76.3 percent of the ARA metric.
  - NIR stands at US$1.8 billion at end-2024.
  - BOM’s FX swaps with banks increased to $3.0 bn by mid-June 2025.
  - GIR expected to remain below recommended range over the forecast period.

### Foreign Assets and Liabilities: Position and Trajectory
- IIP liabilities:
  - Peaked at 340 percent of GDP in 2020; fell to 228 percent of GDP by 2024.
  - Liabilities predominantly in U.S. dollars, consisting mainly of:
    - FDI: 142 percent of GDP (with 106 percent attributed to OT).
    - External loans: 59 percent of GDP.
    - Debt securities: 15.5 percent of GDP.
  - BOM repaid half of the outstanding PBOC swap line, reducing current balance to 3.5 percent of GDP.
  - Net IIP remained deeply negative at -186 percent of GDP as of 2024.
- 2025Q1 and mitigation:
  - As of 2025Q1, FDI represents 62 percent of total liabilities, roughly split between debt and equity.
  - Liabilities related to OT alone account for 75 percent of FDI liabilities and, including a major external loan, amount to 122 percent of GDP—or 54 percent of total liabilities.
  - Start of underground production at OT in March 2023 boosted exports and helped reduce risks associated with large international liabilities, as OT’s external obligations expected to be serviced through export revenues.
- Projections:
  - IIP liabilities projected to edge up from 228 percent of GDP in 2024 to 235 percent of GDP by 2030.
  - Net IIP projected to deteriorate from -186 percent to -199 percent of GDP over the same period.
  - Continued robust FDI inflows (Zuuvch-Ovoo and ongoing OT investments) would keep external liabilities high in the medium term.
  - Staff anticipates increased reliance on domestic borrowing to finance the budget.

### External Position Assessment — Conclusion and Policy Implications
- Overall assessment: Mongolia’s external position is weaker than implied by fundamentals and desirable policy settings, based on EBA-Lite CA analysis and significant negative IIP position.
- Policy implications and recommendations:
  - Allow the exchange rate to function as a shock absorber under intensified external pressures.
  - Build reserves opportunistically; aim to increase buffers given volatility of commodity exporters.
  - Government action to ease external pressures: fiscal consolidation and better prioritization of public investments.
  - Medium- to long-term needs: support FDI, develop domestic capital markets, and promote economic diversification and export growth to address external imbalances sustainably.

*Source: Annex II. External Sector Assessment (from the provided IMF content).*

### Annex III. Risk Assessment Matrix

### Annex III. Risk Assessment Matrix

### Global and Regional Risks
- Commodity price volatility (Likelihood: Medium)
  - Expected impact:
    - High: "Volatility in copper and coal prices could lead to significant uncertainty in external and fiscal outlook. Lower prices would weaken external imbalances, further eroding foreign reserves, raising exchange rate pressures, and inflation. Fiscal balances would deteriorate, raising rollover and debt sustainability risks. On the flip side, higher copper and coal prices can improve the external and fiscal outlook."
  - 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, containing the wage bill, strengthening collection of non-mining revenue (by reducing tax expenditures and arrears) and reprioritizing public and SOE investments."
    - "Further tighten the monetary policy stance if upside risks to inflation materialize."
    - "Issue domestic debt through market-based auctions to reduce exposure to external borrowing and 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 exports inflows are higher, the BOM should accelerate the GIR accumulation to reach adequate level of reserves."

- Trade policy and investment shocks (Likelihood: High)
  - Expected impact:
    - Medium: "Higher trade barriers owing to escalating protectionism would reduce global trade and cause supply disruptions. There will be spillover impact on Mongolia especially through China."
  - Policies to minimize impact:
    - "Build fiscal and external buffers to mitigate risks."

- Sovereign debt distress (Likelihood: High)
  - Expected impact:
    - Medium: "Stronger U.S. dollar and shrinking development aid would affect Mongolia’s balance of payments negatively. Higher interest rates could increase external funding costs for the government and private companies."
  - Policies to minimize impact:
    - "In addition to fiscal consolidation, reduce external financing needs through appropriate debt management, the use of domestic financing by expanding domestic bond issuance, and a credible commitment to fiscal prudence by adhering to the fiscal framework."
    - "The authorities should adequately enforce the currency settlement law and repatriation requirements of SOE and strengthen the investment environment to attract new FDI and portfolio inflows."

- Tighter financial conditions and systemic instability (Likelihood: Medium)
  - Expected impact:
    - Medium: "Higher-for-longer interest rates could increase external funding costs for the government and private companies, and hamper their ability to refinance their external debt and/or undertake new external borrowing. This could lead to a loss in international reserves. Stronger U.S. dollar would also affect Mongolia’s balance of payments negatively. The ER could come under severe pressure with significant ER pass-through to inflation."
  - Policies to minimize impact:
    - "In addition to fiscal consolidation, reduce external financing needs through appropriate debt management, the use of domestic financing by expanding domestic bond issuance, and a credible commitment to fiscal prudence by adhering to the fiscal framework."

- Regional conflicts (Likelihood: Medium)
  - Expected impact:
    - "Intensification of Russia’s war in Ukraine could lead to new disruptions to correspondent banking relationship (CBR) and negatively affect Mongolia’s imports of Russian petroleum products."
  - Policies to minimize impact:
    - "If there are CBR disruptions relating to Russian fuel imports, work with US and EU to ensure that payments can continue to be made and explore alternative means for payments."

- Legend/Notes on RAM:
  - "“L” =Low; “M” =Medium; “H” =High. The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly."

### Domestic Risks
- Rising credit risks in the financial sector (Likelihood: Medium)
  - Expected impact:
    - High: "A potential sharp rise in non-performing loans in banks and NBFIs due to a deterioration in economic conditions could impair their capital adequacy and broader financial stability. Financial difficulties in the NBFIs can spillover to the banking sector via lending and ownership."
  - Policies to minimize impact:
    - "Financial sector supervision should continue to be vigilant on emerging risks, notably credit risk, given strong credit growth in the banking and non-banking financial sectors."
    - "Effective enforcement and harmonization of debt service-to-income limits across banks and NBFIs and comprehensive creditor information are needed to contain excessive consumer credit."

- Procyclical and inflationary policies (Likelihood: High)
  - Expected impact:
    - High: "Political pressure to undertake additional populist policies, such as the proposed tax and social security cuts, could further undermine macro-financial and external stability, debt sustainability and the integrity of Mongolia’s institutions, while delaying reforms."
  - Policies to minimize impact:
    - "Maintain fiscal prudence. 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."

- Intensification of governance challenges (Likelihood: Medium)
  - Expected impact:
    - High: "Weaker governance can result in lower growth and productivity outcomes 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:
    - "Stronger 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, are vital for good governance."
    - "Publication of asset declarations and strengthening beneficial ownership transparency would enhance monitoring of politically exposed persons. The draft Whistleblower Protection law should be passed without further delay."

- Climate change (Likelihood: High)
  - Expected impact:
    - Medium: "Frequent and intense weather shocks impact the agricultural sector, affecting rural income and increasing inequality. In the long-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 the implementation of the national adaptation plan to improve the resilience of the agricultural sector to climate change and raise its 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."

### Annex IV. Sovereign Risk and Debt Sustainability Assessment — Key Findings
- Overall assessment:
  - "Following significant reductions in recent years, Mongolia’s public debt is assessed as displaying a moderate risk of sovereign stress in the near term, but a high risk in the medium to long term."
  - "Mongolia’s substantial reliance on foreign-currency denominated debt heightens its vulnerability to fluctuations in commodity prices and exchange rate. However, the accumulation of savings in the government’s mining funds, amounting to 7.9 percent of GDP by end-2024, serves as a mitigating factor."
  - Policy needs: "Reforms are needed to reduce Mongolia’s debt-related vulnerabilities, including measures to moderate spending growth, enhance non-mineral revenue mobilization, develop domestic debt markets, and promote greater economic diversification."

- Near-term and medium-term risk evolution:
  - "The estimated Logit Stress Probability (LSP) tripled from 3 percent in 2023 (to predict stress in 2024-25) to 9 percent in 2024 (to predict stress in 2025-26)."
  - Drivers of deterioration in 2024: "(i) debt burden/buffer (+4 percentage points); (ii) cyclical position (+2 percentage points); and (iii) global conditions (+1 percentage point)."
  - "In the medium term, Mongolia’s debt ratio is projected to increase, reflecting a deteriorating fiscal situation, mostly driven by reduced mining revenue, strong political pressure to reduce the tax and social security burden on individuals, increase capital spending on mega projects, and maintain the current high level of social spending and public wage bill."

- Coverage and composition of public debt:
  - "The coverage of public debt used in the analysis is broader than that used by the authorities."
  - Items included additionally: "debt of the Development Bank of Mongolia (a state-owned bank), explicit guarantees to SOEs' debt, and legacy MOF debt against BOM."
  - "It includes a US$2.1 billion swap line (representing 10 percent of GDP) established between the People's Bank of China (PBOC) and the Bank of Mongolia (BOM), which has been extended for another 3 years in 2023."

- Currency and maturity structure:
  - "Foreign-currency denominated debt accounts for 94 percent of total public debt, including the PBOC swap."
  - "Official multilateral and bilateral creditors make up 56 percent of total debt."
  - "The current total stock of Eurobonds accounts for 30 percent of total debt, with an average maturity of 5 years."
  - "Ulaanbaatar city has recently issued a 3-year international bond worth US$500 million, backed by a state guarantee."
  - "Domestic government securities, which are denominated in local currency, account for a small portion of total sovereign debt."

- Recent trajectory and projections:
  - "From the peak of 75.5 percent of GDP in 2022, Mongolia's public debt declined markedly to 48 percent of GDP in 2024. This 27.5 percentage point reduction over the two-year period primarily reflects robust nominal GDP growth fueled by a surge in mineral exports that strengthened the fiscal position, and improved debt management of the DBM."
  - "In February 2025, a strategic pre-financing operation of portions of the 2026 and 2028 Eurobonds helped smooth amortizations profile over the next five years (Figure 3), thereby reducing rollover risks."
  - Medium-term projection: "A slight increase in debt levels in 2025, followed by a steady increase, ultimately reaching 64.7 percent of GDP by the tenth year of the projections' horizon."
  - "Gross Financing Needs (GFN) are projected to increase significantly, reaching almost 9.5 percent of GDP by 2030 and 11.6 percent by 2034."

- Realism analysis highlights:
  - "The forecast track record shows a strong overly pessimistic bias across all the key debt drivers over the five-year horizon when compared to peers, indicating a low risk of optimism to the projections."
  - "Reflecting the weakening prospects for mining exports, unstable commitment to fiscal rules, and slow accumulation in the mining funds, the debt ratio is projected to steadily increase over the next five years."
  - "The bond issuances tool does not flag realism issues, although it does show a gradual increase in Mongolia's spread over 10-year U.S. Treasuries."

- Stress test results and probabilities:
  - "The resulting fan chart is relatively wide, with about 50 percent of terminal debt level falling within the 75-95 percentile range, and 16.9 percent probability of public debt reaching a non-stabilization level over the medium-term."
  - "Commodity price shocks could elevate the terminal debt ratio to 84 percent of GDP and the GFN to 15.9 percent of GDP in the medium term."
  - "Exchange rate and natural disaster shocks could increase the terminal debt ratio to 60 percent and 65 percent, respectively."

*International Monetary Fund — Annex III. Risk Assessment Matrix (with Annex IV summary) contained in the provided source content.*

### 8.      Long-term risks are assessed as high due to significant contingent fiscal risks (Figures 8,

### Long-term risks are assessed as high due to significant contingent fiscal risks

### Long-term Module — Large Amortization
- High risk signals from the Long-term Module for Large Amortization, primarily driven by a substantial increase in GFN under standard refinancing assumptions.
- Annex IV. Figure 7 summary: overall risk indication is high. Enhanced debt management that improves debt profiling yields lower debt projections compared with historical 10-year average assumptions.

### Long-term Module — Demographics and Pensions
- Long-term Demographic-Pension module shows long-term challenges and risks.
- World Bank-based projections: pensions are projected to rise, potentially accounting for 8.8 percent of GDP by 2050.
- Social security contributions are expected to dwindle over time; in the absence of reforms, government contributions would need to increase to fill the gap, further elevating the debt ratio.
- Annex IV. Figure 8 highlights:
  - Pension financing needs estimated to increase from 5.9 percent of GDP in 2025 to approximately 9 percent of GDP by 2050.
  - Permanent adjustment needed in the pension system to keep pension assets positive for: 30 years / 50 years / Until 2100 (presented as scenario horizons in the figure).

### Long-term Module — Climate Change: Adaptation
- The Climate Change: Adaptation module is calibrated to World Bank estimates of adaptation investment needs in Mongolia: US$3.5 billion, or 0.4 percent of GDP per year.
- Both standardized and customized climate-adaptation scenarios indicate a significantly larger effect on public debt relative to the baseline, which is already under significant strain (Annex IV. Figure 9).

### Long-term Module — Natural Resources
- Natural Resource module follows standard natural resource scenario settings.
- While depletion is not an immediate concern, lower extraction rates—reflecting China's lower demand for Mongolian minerals (particularly coal) as China decarbonizes by 2040—pose a substantial risk to Mongolia's public debt levels.

### Debt Dynamics, Baseline Projections, and Risk Metrics
- Public debt reduction and recent levels:
  - Public debt reduced from 75.5 percent of GDP in 2022 to 48 percent of GDP in 2024.
- Baseline projection (Annex IV. Figure 4, percent of GDP unless indicated otherwise):
  - Public debt: 2023: 53.0; 2024: 48.0; 2025: 49.4; 2026: 51.6; 2027: 54.3; 2028: 55.9; 2029: 57.2; 2030: 57.9; 2031: 60.1; 2032: 63.0; 2033: 64.7.
  - Change in public debt: 2023: -22.5; 2024: -5.0; 2025: 1.4; 2026: 2.1; 2027: 2.7; 2028: 1.7; 2029: 1.3; 2030: 0.7; 2031: 2.2; 2032: 1.1; 2033: 1.8; 2034: 1.7.
  - Gross financing needs (GFN): 2023: 6.1; 2024: 4.6; 2025: 3.9; 2026: 4.1; 2027: 7.6; 2028: 8.0; 2029: 8.0; 2030: 9.6; 2031: 11.6; 2032: 9.6; 2033: 10.6; 2034: 11.6.
  - Of which: debt service: 2023: 10.4; 2024: 7.4; 2025: 5.3; 2026: 5.3; 2027: 7.7; 2028: 8.4; 2029: 8.6; 2030: 10.4; 2031: 12.7; 2032: 10.6; 2033: 11.9; 2034: 13.1.
  - Memo: Real GDP growth (percent): 2023: 7.4; 2024: 4.9; 2025: 5.5; 2026: 5.5; 2027: 5.5; 2028: 5.3; 2029: 5.0; 2030: 5.0; 2031: 4.9; 2032: 4.8; 2033: 4.7; 2034: 4.6.
  - Memo: Inflation (GDP deflator; percent): 2023: 21.8; 2024: 8.2; 2025: 7.0; 2026: 8.4; 2027: 7.7; 2028: 7.1; 2029: 6.4; 2030: 6.4; 2031: 6.2; 2032: 6.0; 2033: 5.9; 2034: 5.9.
- Medium-term risk analysis:
  - Fanchart width: 91.8 percent of GDP.
  - Final medium-term assessment downgraded to high risk due to low external buffers, SOE contingent liabilities, and BOM large negative equity.
  - Prob. of missed crisis, 2025-2030, if stress not predicted: 18.2 pct.
  - Prob. of false alarms, 2025-2030, if stress predicted: 21.6 pct.
- Debt coverage in the DSA includes the general government (including Ulaanbaatar Capital City), a state-owned bank (Development Bank of Mongolia), and a 3-year US$2.1 billion (10 percent of GDP) swap line between the People's Bank of China (PBOC) and the Bank of Mongolia (BOM) rolled over in 2023.

### Key Stress-Testing and Scenario Findings
- Pension scenario: pension-related fiscal pressures materially increase pension financing needs and add to GFN and public debt trajectories (Annex IV. Figure 8).
- Climate adaptation scenario: calibrated to US$3.5 billion (0.4 percent of GDP per year) raises public debt significantly relative to the baseline (Annex IV. Figure 9).
- Commodity price and extraction shocks (notably lower coal demand from China decarbonizing by 2040) could substantially raise public debt; commodity price shocks could raise public debt to 84 percent of GDP in stress scenarios described in the medium-term analysis.

### Policy Implications and Recommendations (from DSA summary)
- Strengthen efforts to:
  - Improve spending composition.
  - Diversify the economy.
  - Maintain fiscal discipline.
  - Enhance the role of the private sector.
  - Boost FDI inflows.
- Implement pension reforms and plan for sizable adaptation investments to mitigate long-term fiscal pressures and reduce contingent liability risks.
- Enhance debt management practices to improve debt profiling and reduce rollover and refinancing risks.

*Source: IMF staff estimates and projections (Annex IV of the DSA).*

### Annex IV. Figure 10. Mongolia: Natural Resources

### Annex IV. Figure 10. Mongolia: Natural Resources

### Scenario description and assumptions
- This exercise adheres to the standard parameters of a natural resource scenario.
- Although the depletion of natural resources is not an immediate concern, the anticipated decrease in coal extraction rates beginning in 2040—consistent with the World Bank's development report for Mongolia—suggests a decline in demand for Mongolia's resources, primarily from China.
- This shift is expected to significantly affect public debt levels.
- Baseline reference used: "Baseline: 10-year historical average."

### Timeline and chart markers (as presented)
- X-axis years explicitly shown: 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053
- Secondary listing of years also shown: 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053
- Y-axis tick labels (two panels in the figure): 0.0, 50.0, 100.0, 150.0, 200.0, 250.0 (upper panel); -50.0, 0.0, 50.0, 100.0, 150.0, 200.0, 250.0 (lower panel)

### Key messages and implications
- Projected decline in coal extraction beginning in 2040 is driven by anticipated lower demand (primarily from China) and aligns with the World Bank development report for Mongolia.
- The natural resource scenario indicates material implications for public sector indebtedness: the decline in resource extraction and revenue is expected to significantly affect total public debt-to-GDP ratios.
- The exercise uses a historical baseline comparator: the 10-year historical average.

### Visible figure components referenced
- Figure title: "Natural Resources"
- Two plotted series/headings referenced: "GFN-to-GDP Ratio" and "Total Public Debt-to-GDP Ratio"
- Label on figure page: "Baseline: 10-year historical average"

*Source: Annex IV. Figure 10. Mongolia: Natural Resources (IMF).*

### Annex VIII. Recent Changes in Fiscal Framework

### Annex VIII. Recent Changes in Fiscal Framework

### Historical record of fiscal rules and mining funds
- Mongolia has a long track record with the use of fiscal rules and the establishment of mining funds.  
- In practice Mongolia’s fiscal policy has been characterized by a high level of procyclicality, volatility, and limited buffers. The reasons for this outcome have been weak adherence to the rules and frequent changes to them.  
- The Fiscal Stability Law (FSL) has been modified numerous times since its inception in 2010. Some changes were introduced in response to shocks, to enhance the role of the Fiscal Stability Council (FSC), or to restrict parliament’s ability to modify the rules.  
- More often, the FSL has been modified to accommodate budget overruns or facilitate the spending of unexpected revenue windfalls; the last such modification occurred mid-2024.  
- The rules governing mining funds have also been changed frequently. The government changed the Law on Government Special Funds (LGSF), with the intention of circumventing provisions regarding accumulation at and withdrawals from the Fiscal Stability Fund (FSF), created in 2013 to smooth budget revenues. The rules of the Future Heritage Fund (FHF) were changed in 2018 to allow use of FHF funds until 2022 and to repay debt incurred by the 2009 Human Development Fund (HDF).

### New amendments introduced by mid-2024
- Fiscal rules (new FSL features):
  - Preserves the 2 percent of GDP ceiling on the “structural” deficit, defined as “structural” revenues minus total expenditures.
  - “Structural” revenues are defined as the portion of mining revenues above the “structural mining revenues” computed at a “reference” price, defined as a 24-year moving average of mining prices.
  - Introduces a new 30 percent of GDP ceiling on current expenditure, replacing the old cap on total nominal spending growth.
  - Introduces a new 60 percent of GDP ceiling on government debt in nominal terms, replacing the old ceiling that was defined as net present value.
  - Introduces a new 2 percent of GDP floor on the “basic” surplus, defined as the difference between the “structural” revenues and “basic” expenditures (basic expenditures = total expenditures minus debt-financed expenditure, e.g., gross borrowing incurred in that fiscal year). The new “basic” surpluses should be used to amortize or buyback government debt.
  - The revised MTFF does not provide a breakdown of capital spending plans as it used to do.
- Funds (SWF Law enacted April 2024):
  - Preserves the Fiscal Stability Fund (FSF), which accumulates 50 percent of mining revenues above the “reference” price (if the structural balance is in surplus).
  - Preserves the Future Heritage Fund (FHF), into which 65 percent of mining royalties will be deposited.
  - Creates two new funds:
    - Saving Fund (SF): comprises all dividends from state-owned enterprises (SOEs) in the mining sector; intended to finance healthcare, education, and housing programs of the current generation.
    - Development Fund (DF): comprises 50 percent of the mining revenues above the “reference” price; intended to fund high-priority development projects.

### Assessment: desirable elements and limitations of the new framework
- Desirable element:
  - The intention to use the 2 percent of GDP “basic” structural surplus for debt repayment is welcome.
- Related constraint and risk:
  - Using fiscal surpluses to repay external debt would require purchases of foreign exchange from the BOM, which could weigh on the level of international reserves and the exchange rate.
  - Repayments and buybacks of existing debt, which might need to be replaced with new and more expensive debt later on, may increase debt-related vulnerabilities.
- Expenditure rule critique:
  - The new expenditure rule (cap on the level of spending as share of nominal GDP) conflicts with basic guidelines on fiscal rules selection.
  - An alternative suggested: a cap on growth of public spending as a share of GDP instead of a cap on the level of spending as share of nominal GDP would accommodate economic fluctuations better, allow automatic stabilizers to function, and reduce procyclicality.
- MTFF limitation:
  - The exclusion of capex from MTFF significantly weakens the fiscal framework. Prior to the latest revisions, the MTFF included projections for aggregate capital expenditures; the omission of capital spending projections weakens the MTFF’s influence on the budget process.
- Fund governance, transparency, and accountability:
  - Management, transparency, and accountability guidelines for the new funds have not yet been fully defined.
  - All funds will be part of the general budget process and their budgets are to be approved by parliament; at present they function as Treasury accounts at BOM.
  - The SWF Law assigns responsibilities to:
    - Ministry of Finance (FHF),
    - Ministry of Family, Labor and Social Protection (SF),
    - Ministry of Economy and Development (DF) regarding administration and reporting of the funds’ operations.
  - The SWF law specifies SF resources to be recorded in individual savings account of each citizen of Mongolia (regulations are currently under preparation).
  - The FHF still does not have a Governing Board, nor an Investment Policy, nor transparency and oversight mechanisms in place, despite the FHF Law mandating the production of annual quarterly and monthly statements, and oversight arrangements by Auditor General and State Great Hural.

### Annex VIII. Box 1 — Description of Funds as Per SWF Law
- Future Heritage Fund (FHF)
  - Objectives: Intergenerational equity
  - Main inflows: 65 percent of the mining royalties (after distribution to other funds such as the FSF and DF)
  - Outflows: No withdrawals before 2030, after which 10 percent of net investment income will be transferred to the budget.
  - Management: Until 2030 Ministry of Finance and Bank of Mongolia; after 2030 a separated corporation (yet to be established).
  - Net assets end 2024: MNT 3.9 trillion (4.9 percent of GDP)
- Savings Fund (SF)
  - Objectives: Healthcare, education, and housing for current generation
  - Main inflows: Dividends from State’s shareholdings in mining companies.
  - Outflows: Still to be defined
  - Management: Ministry of Family, Labor and Social Protection, recorded as individual savings account of each citizen of Mongolia, remunerated at policy rate
  - Net assets end 2024: MNT 500 billion (0.6 percent of GDP)
- Development Fund (DF)
  - Objectives: High-priority development projects.
  - Main inflows: Special fee for the use of mining resources from strategic mineral deposits /including radioactive/. Non-tax revenue from State ownership changes in radioactive mineral deposits
  - Outflows: Still to be defined
  - Management: Ministry of Economy and Development
  - Net assets end 2024: No deposits made yet
- Fiscal Stabilization Fund (FSF)
  - Objectives: Fiscal buffer (e.g., revenue shortfalls)
  - Main inflows: 50 percent of mining revenues above structural price, if the structural balance in surplus. Mineral revenues above structural price, 50 percent if the structural balance surplus; 100 percent if the structural balance in deficit.
  - Outflows: If (i) fiscal balance worsens by 4 or more percent of GDP due to force majeure, (ii) if mining output drops by 20 percent, (iii) one percent of GDP spending because of disaster or national emergency.
  - Management: Ministry of Finance
  - Net assets end 2024: MNT 1.7 trillion (2.2 percent of GDP)

*Source: Mongolian authorities; Annex VIII. Recent Changes in Fiscal Framework*

### 2.      The effectiveness of monetary policy transmission in Mongolia has become

### 2.      The effectiveness of monetary policy transmission in Mongolia has become increasingly pertinent in light of recent monetary policy cycles

### Overview and recent policy actions
- In 2022, following the escalation of inflation—partly driven by exchange rate pressures—the BOM tightened its monetary policy from December 2021 to December 2022.
- The policy rate was increased by 700 basis points, reaching 13 percent, and the policy rate corridor was widened to ±2 percent.
- Reserve requirements were tightened by 200 basis points.
- Despite these measures, impacts on lending and deposit rates were minimal, largely due to substantial liquidity injections from the BOM’s quasi-fiscal operations and excess liquidity.
- Inflation subsequently declined, driven primarily by lagged monetary policy tightening, reduced import prices, and a slight appreciation of the exchange rate, enabling subsequent cuts in the policy rate.
- Credit to the private sector and the real economy exhibited a muted response, attributed to heightened risk aversion, prevailing economic uncertainty, quasi-fiscal operations, and excess liquidity.

*Empirical approach*
- The study uses a Large Bayesian Vector Autoregressive (LBVAR) model with 24 quarterly variables observed over 2005Q1 to 2023Q4, with four lags.
- The Bayesian approach implements Minnesota priors to account for persistence and mean-reversion; the large model is structured consistent with a three-variable VAR and achieves an R-squared of 75 percent.
- Monetary policy shocks are identified using a Cholesky-like identification scheme dividing variables into four ordered blocks: slow-moving variables, the policy rate, fast-moving variables, and exogenous global variables.
- The policy rate is the monetary policy instrument and is set to a 100-basis point change upon impact.
- Fast-moving variables primarily include financial indicators such as interest rates, stock prices, volatility, and the exchange rate.

### Inflation and exchange rate channel
- The identified shock resembles a monetary policy shock: the policy rate increases on impact while real variables and inflation decline thereafter.
- Inflation declines and its impact lasts longer than that on GDP, extending nearly three years.
- Inflation gradually decreases, reaching a maximum reduction of 0.5 percentage points seven quarters after the shock before reverting to the steady state.
- The inflation response remains statistically significant for about three years and is influenced more by movements in the exchange rate than by the short-lived decline in output.
- The exchange rate channel plays a crucial role, consistent with documented significant exchange rate pass-through in Mongolia.
- Following contractionary policy, the domestic currency appreciates; the exchange rate does not react forcefully upon impact, potentially due to central bank intervention consistent with a crawling peg classification.
- No exchange puzzle or price puzzle is observed, attributed to the rich data environment of the LBVAR.

### Transmission to the real sector
- Contraction in consumption negatively impacts the economy; GDP falls, with the decline peaking five quarters after the shock.
- The impact on the real economy is short-lived and not statistically significant, lasting just over a year.
- Investment response is not statistically significant, potentially because a significant portion of investment is concentrated in the mining sector (mining infrastructure and related projects) and ongoing government infrastructure initiatives (transportation and energy).

### Interest rate channel and financial market pass-through
- All interest rates—interbank, lending, and new mortgage rates—rise with the policy rate, but to varying degrees.
- The shock is transmitted more forcefully to the interbank and new mortgage rates (increases of 0.8 and 0.7 percentage points, respectively) than to the lending rate (pass-through of 0.2 percentage points).
- The modest lending-rate response may reflect weak transmission due to a lack of an effective domestic debt market and substantial liquidity injections via the BOM’s quasi-fiscal operations since the pandemic.

### Bank balance sheets and financial stability effects
- Individual and private bank loans decline, reducing bank assets; effects are short-lived.
- Impacts last just over a year for loans to individuals and closer to two years for loans to the private sector.
- Loans to the private sector contract significantly, peaking at a reduction of 1.8 percentage points after one year; loans to individuals decrease by 1.2 percentage points.
- Non-performing loans (NPLs) initially rise (likely due to higher default probability) but subsequently fall as loan volumes decrease.
- Declining lending activity reduces bank profitability, negatively affecting bank capital; the effect on bank capital peaks after about a year before recovery.
- The leverage ratio experiences a sharp decline followed by a gradual recovery as banks clean up balance sheets.

### Policy implications and recommendations
- Direct monetary policy transmission may be compromised by other policies (e.g., fiscal policy) that operate in the opposite direction, illustrating the need for coordination between monetary and fiscal policies.
- Monetary authorities should avoid quasi-fiscal policies that undermine transmission and jeopardize central bank independence.
- Adopting a more flexible exchange rate regime would enhance monetary policy transmission and could have a stronger impact on inflation.
- Developing financial markets would improve transmission efficiency, facilitating smoother interactions between monetary actions and real-economy effects.
- These measures, together, support an IT framework for effective monetary policy implementation.

### Annex XI — Distributional impact of inflation: evidence from household survey
- Context and key magnitudes:
  - Highly expansionary fiscal policy and strong consumer spending have driven inflation higher since 2024H2; a November 2024 electricity tariff hike intensified the rise.
  - Headline inflation moderated to 8.2 percent y/y in June 2025; still above the BOM’s 6±2 target range.
  - Inflation varies by category: housing and utilities inflation reached 20.9 percent y/y; transportation inflation was 4.3 percent y/y.
  - Inflation peaked in 2022 at 15.2 percent y/y—the highest since 2009.
- Data and methodology:
  - Analysis uses household consumption data from the 2021 and 2022 annual Household Social Economic Survey (HSES).
  - 2022 survey: around 1,800 households each month, totaling approximately 22,000 households for the year.
  - 2021 survey: covered about 11,000 households.
  - The compensating variation is used to compute the effective inflation facing each household, controlling for expenditure shares and category-specific price changes.
- Distributional findings:
  - The most common inflation rate experienced by households (distribution peak) is 15.4 percent, similar to 2022 headline inflation of 15.2 percent.
  - Rural households and low-income households generally face higher effective inflation, though differences across groups are moderate.
  - Better-educated households and larger households faced lower effective inflation.
  - Consumption patterns differ by income quintile: bottom quintile spends nearly half of total expenditure on basic goods and services (food, housing and utilities, health), over 50 percent more than the top quintile’s share.
  - In 2022, shares of spending on food and beverages, communications, and education declined; expenditures on transport and housing and utilities increased.
- Regression statistics (selected):
  - Rural dummy: 0.242*** and 0.189*** (standard errors: (0.030), (0.039)).
  - Ln(household income): -0.136***, -0.097***, -0.087*** (standard errors: (0.020), (0.028), (0.027)).
  - Household size: -0.089***, -0.073*** (standard errors: (0.017), (0.017)).
  - Years of education (oldest household member): -0.030***, -0.028*** (standard errors: (0.007), (0.007)).
  - Education dummy (1 for more than high school, oldest household member): -0.165**, -0.142** (standard errors: (0.068), (0.067)).
  - R-squared reported values: 0.01, 0.02, 0.04 across specifications.
  - No. of observations: 11,178 and 7,521 (depending on specification).
- Policy implication:
  - Need for means-tested and well-targeted assistance because inflation’s burden is more pronounced for lower-income and rural households; targeted support is a more efficient use of government resources and ensures assistance reaches those most affected.

### Annex XII — Impact of coal transition on Mongolia
- Global context and uncertainty:
  - Global shift away from fossil fuels implies declining coal demand; pace is uncertain.
  - Using IPCC AR6 scenarios, IMF staff calculations show median global coal production will decline by 21 percent between 2022 and 2050 under the baseline scenario of 2.7°C average warming by the end of the century.
  - Under the optimistic scenario (1.8°C warming), median demand for coal will decline by around 81 percent with the possibility of a full phase-out by 2050.
  - Under the pessimistic scenario (3.6°C warming), rising and unabated coal use could materialize.
- Implications for Mongolia:
  - Under a decarbonization scenario for China, with a 13 percent decline in Mongolia's coal exports by 2040 in line with findings by the World Bank (2024), Mongolia’s GDP would be 1.9 percentage points lower than the baseline.

*Source: IMF staff analysis in the provided chapter/annexes.*

### 2.      Coal is a key driver of Mongolia’s exports and fiscal revenue.

### 2.      Coal is a key driver of Mongolia’s exports and fiscal revenue.

### Coal production, composition, and trade
- In 2023, Mongolia’s coal production and export volume more than doubled, fueled by strong demand from China, its main market.
- Metallurgical coal makes up approximately 70 percent of output, followed by 15 percent lignite, with the rest being bituminous and sub-bituminous coal (U.S. Energy Information Administration (EIA)).
- Mongolia's share of global metallurgical coal production rose to 4 percent in 2023.
- About 85 percent of coal production is exported.
- Coal comprised just over half of total exports in 2024.
- Imports from Mongolia accounted for 15 percent of China’s total coal imports in 2024.
- Coal generated about 20 percent of Mongolia’s total fiscal revenue in 2024.
- ETT’ coal reserves are estimated at 6.3 billion tons, including 3.3 billion tons of metallurgical coal and 3 billion tons of thermal coal.
- In 2024, Mongolia exported 83.8 million tons of coal.

### Modeling approach and scenarios
- The IMF-ENV model is used to simulate two scenarios for Chinese coal demand for iron and steel production and assess the impacts on Mongolia.
- IMF-ENV model characteristics:
  - A global dynamic computable general equilibrium model based on input-output tables from 160 countries and 76 commodities.
  - Models trade flows with the Armington specification.
  - Offers high sectoral and country granularity and captures general equilibrium effects alongside input-output effects.
- Notes on model treatment:
  - The IMF-ENV model does not differentiate between types of coal. Coal used for iron and steel production is treated as metallurgical coal.
  - Using data from the World Bank (2024), two scenarios were developed to illustrate possible trajectories for metallurgical coal demand in China's iron and steel sector.
- Drivers of changes in coal demand include enhanced decarbonization efforts in Chinese steel manufacturing, declining demand for construction, and advances in alternative steel production technologies.
- Under the decarbonization scenario, Mongolia’s coal exports to China decline in proportion to the fall in Chinese coal demand for iron and steel production.

### Simulation results: macroeconomic and labor impacts
- Under the decarbonization scenario, a decline in China’s coal demand could reduce Mongolia's GDP by 1.9 percent by 2040.
- Employment impacts by 2040 relative to the baseline:
  - Jobs in the coal mining sector decrease by 9.8 percent.
  - Overall employment falls by 1 percent.
- Reduced employment leads to lower wages, which reduce household income and private consumption.

### Investment impacts
- The simulated 13 percent decline in coal exports to China would reduce the need for capital investment in Mongolia’s coal mining sector by about 11 percent by 2040.
- If China’s demand for Mongolian coal falls more—due to reorienting toward domestic coal or other political and economic factors—the investment decline would be even larger.
- Given the uncertain outlook, investors would carefully assess both short- and long-term investment strategies for capital-intensive sectors like mining.

### Offsetting factors and structural considerations
- Factors that may mitigate impacts of a global coal transition on Mongolia:
  - Very low extraction costs for metallurgical coal and proximity to China, potentially allowing Mongolia to export coal to China longer than some trading partners. (This factor is accounted for in the IMF-ENV model.)
  - Most studies anticipate a significant reduction in thermal coal used for power generation due to cheaper alternatives such as solar and wind power. (Not explicitly modelled in IMF-ENV.)
  - Green hydrogen as an alternative in iron and steel production is not yet widely deployed with current technology. (Not explicitly modelled in IMF-ENV.)
  - Large-scale implementation of carbon capture and storage plants could extend coal use, although this technology has not yet been adopted on a large scale. (Not explicitly modelled in IMF-ENV.)
- Diversification offsets:
  - Copper is Mongolia’s second most important mining product, accounting for around 20 percent of Mongolia’s exports in 2024.
  - A substantial boost in copper production in 2025 is expected to increase copper’s share in total exports to more than 30 percent.
  - Authorities are trying to attract significant FDI in the renewable sector with the goal of exporting electricity to China.

*Source: 2.      Coal is a key driver of Mongolia’s exports and fiscal revenue.*

### 11.      Since July  2023, Mr. Tigran Poghosyan has been the resident representative based in

### Statement by Mark Blackmore, Alternate Executive Director for Mongolia and Sukh-Ochir Batsukh, Advisor to Executive Director September 5, 2025

### Recent Developments and Outlook
- In recent years, the rapid expansion of the mining sector has elevated Mongolia to the upper middle-income country classification.
- The revised Medium-Term Fiscal Framework (MTFF) projects higher real GDP growth for 2026–28, supporting stronger fiscal revenues, though still below 2025 budgeted levels.
- A booming mining sector, combined with strong government and household spending, underpinned robust growth in 2024 despite severe weather shocks in agriculture, including the loss of 9.4 million livestock from a harsh dzud.
- Higher wages, pensions, and dividend payouts by Erdenes Tavan Tolgoi (ETT) boosted household incomes and credit-driven consumption.
- In 2025H1, economic activity weakened as coal exports receipts fell sharply, weighing on the current account, fiscal revenues, and the exchange rate.
- Agriculture showed a strong recovery in 2025H1, but the decline in coal prices led to a sizeable shortfall in mining revenues.
- Fiscal buffers were supported by earlier savings in the Sovereign Wealth Fund and Fiscal Stability Fund, sovereign rating upgrades, and proactive refinancing of Eurobonds maturing in 2026 and 2028.
- Inflation moderated in early 2025 but remained above the Bank of Mongolia’s (BOM) 6±2 percent target band.
- The BoM raised the policy rate, increased reserve requirements, and tightened consumer loan regulations for both banks and NBFIs.
- Credit growth remains high, with household debt rising to 42.3 percent of GDP by early 2025.
- External vulnerabilities: the current account deficit widened to over 10 percent of GDP in 2024 and further in 2025H1; reserves declined to 88 percent of the IMF’s adequacy metric under a floating exchange rate classification.
- Growth projections: 5.5 percent in 2025, supported by agriculture; medium-term growth expected to converge to about 5 percent.
- Inflation is forecast to return to the target range by 2026.
- Risks tilted to the downside: weaker coal demand, larger-than-expected price declines, global trade tensions, and elevated credit growth.
- Longer-term exposure: Mongolia remains exposed to China’s energy transition and falling global coal demand; faster implementation of mega projects and new mining production could provide upside.

### Fiscal policy
- Government focus: safeguarding fiscal discipline and ensuring compliance with the fiscal rules.
- Recent amendments to the fiscal framework:
  - Enhanced role of the Fiscal Stability Council.
  - Restricted Parliament’s ability to modify fiscal rules.
  - Introduced a nominal debt ceiling of 60 percent of GDP.
  - Introduced a 30 percent of GDP ceiling for current expenditures.
  - Introduced a structural deficit ceiling of 2 percent of GDP.
- Authorities acknowledge the expenditure rule could introduce procyclicality but aim to keep fiscal rules a credible policy anchor.
- The supplementary 2025 budget was formulated to address revenue shortfalls and maintain compliance with the deficit ceiling.
- Supplementary budget measures:
  - Envisages expenditure cuts amounting to about 2 percent of GDP relative to the approved 2025 budget.
  - Cuts largely from cancelling domestically financed capital projects not appraised or procured by end-May, and freezing operational spending.
  - Externally financed capital projects will continue as planned.
  - Potential fast-tracking of three major infrastructure projects: an oil refinery, a hydropower plant, and a housing complex in Ulaanbaatar’s ger area.
  - Planned 9 percent reduction in civil servants over 2025–26 will exclude the health and education sectors.
- Taxation: proposed tax package under review; designed to reduce the tax burden on low- and middle-income households and eligible businesses, and modernize tax administration; implementation challenges acknowledged given planned civil service cuts and limited administrative capacity.
- Authorities agree with staff that Mongolia’s sovereign risk is best assessed as moderate, reflecting the recent decline in public debt and improvements in debt management.
- Debt management: strengthened significantly with disciplined adherence and successful external liability management and refinancing on an annual basis.
- Authorities will continue gradual expenditure rationalization, better targeting, and efficiency measures to address expected revenue shortfalls while maintaining fiscal space for priority projects.
- The approved 2026–28 MTFF provides a clear framework to support this approach.
- Importance of prioritizing large capital projects, securing external financing, and implementing projects within sound public investment and PPP frameworks to contain fiscal and external risks.

### Monetary policy
- Authorities agree on the need to maintain a tight monetary policy stance until inflation returns to target.
- Inflation expected to remain above the mid-point of the target 6 percent through 2026; price stability is a key priority due to disproportionate effects on poorer and rural households.
- Complementary tools to curb credit growth will be used, including adjusting the reserve requirement ratio to absorb excess liquidity and moderating credit expansion.
- Resumption of market-based domestic government securities issuance is viewed as positive to aid liquidity absorption, reduce reliance on costly central bank bills, and help establish a benchmark yield curve to strengthen monetary policy transmission.
- Commitment to gradually reducing the BOM’s quasi-fiscal activities to allow focus on price and financial stability.
- Gradual transfer of the subsidized mortgage program from the BOM to the government seen as important.
- Efforts underway to amend the Central Bank Law to strengthen the BOM’s mandate, independence, and governance; amendments will clarify hierarchy of objectives, prohibit quasi-fiscal operations, and strengthen internal oversight and accountability.
- Authorities emphasize maintaining an adequate level of gross international reserves (GIR) and preserving exchange rate flexibility.
- A joint BOM–Ministry of Finance strategy developed to strengthen reserves by supporting exports, containing imports, and attracting greater FX inflows, including FDI.
- Partial repayment of the PBOC swap line in 2023–24 created space to rebuild reserves.
- Adjustment of BOM’s FX swap terms to align with market conditions has reduced central bank losses.
- Over time, BOM should reduce its role as an intermediary in the FX market and allow more effective price discovery, while developing the domestic FX derivatives market to reduce contingent liabilities.
- Authorities reaffirm commitment to monetary and external stability and readiness to recalibrate policies if inflationary pressures intensify, including further policy rate increases, tighter reserve requirements, or enhanced liquidity management, while ensuring consistency with fiscal sustainability.

### Macroprudential and financial sector policies
- Banking sector remains well capitalized and profitable, but rapid credit growth poses risks to financial stability.
- Banks’ foreign currency borrowing from abroad increased substantially in 2024, heightening reliance on swaps with the BOM to manage FX mismatches.
- Authorities tightened debt-service-to-income (DSTI) ratios for both banks and NBFIs and introduced limits on certain products, such as car leases, to mitigate household indebtedness risks.
- Importance of aligning DSTI ratios across banks and NBFIs, broadening the macroprudential toolkit, and ensuring its independence from monetary policy.
- Ongoing efforts to strengthen financial supervision, including adoption of risk-based supervision and Basel III standards with support from the IMF and other IFIs.
- Rapid expansion of NBFI lending, increasingly concentrated in consumer loans and financed through domestic and foreign banks, trust loans, and securities issuance.
- Measures introduced prohibiting NBFIs from obtaining financing from domestic banks to curb risks and limit excessive interconnections between banks and NBFIs.
- Need to further enhance oversight to address leverage build-up and vulnerabilities.
- Structural priorities: improvements in credit information sharing, collateral valuation, contract enforcement and foreclosure procedures, and amendments to insolvency and credit information laws to better address asset quality issues.
- Benefits of fully implementing bank shareholder diversification and enhancing supervision of complex ownership structures to reduce related-party lending risks.
- Strengthening bank resolution frameworks remains essential; ongoing work within the Financial Stability Council on crisis management arrangements, inter-agency coordination, and developing resolution manuals and bank-specific plans.

### Structural policy
- Authorities committed to improving Mongolia’s business environment via legal and regulatory reforms to reduce red tape, facilitate licensing and taxation, and expedite insolvency resolution.
- Forthcoming FDI Law expected to enhance investor protection and introduce a robust dispute resolution mechanism; amendments to the PPP Law will address existing gaps.
- Efforts to increase judicial efficiency, strengthen transparency, and ensure consistent regulatory enforcement, including in tax administration.
- Authorities acknowledge that the State’s large footprint can deter private investment and FDI and aim to create a more predictable and competitive business climate.
- Policies to address corruption and improve governance remain a priority:
  - Build on recent anti-corruption legal reforms by strengthening enforcement, including through digital oversight, greater transparency in SOE operations, and capacity building for prosecutors and judges.
  - Address corruption vulnerabilities in revenue institutions and public procurement.
  - Put in place a strong governance framework for the new Sovereign Wealth Fund and its sub-funds.
  - Tackle long-standing balance sheet and governance issues at the Development Bank of Mongolia before it resumes lending operations.
- Focus on climate transition and financial integrity:
  - Commitments under the National Determined Contribution: raise the share of renewable electricity to 30 percent and achieve a 22.7 percent reduction in total national greenhouse gas emissions by 2030 compared to the emissions under the business-as-usual scenario for 2010.
  - Aware of macro-critical nature of the energy transition given dependence on coal revenues; aim to promote economic diversification and investment in minerals and renewables.
  - Enhance AML/CFT implementation following recent legal reforms, building on Mongolia’s progress in being assessed “compliant” or “largely compliant” with FATF standards.
  - Reforms will support tax collection and transparency of beneficial ownership information.
  - Mobilizing large-scale climate-related investments—estimated at 43 percent of GDP over the next 25 years—needed to advance the green transition.

*Statement by Mark Blackmore, Alternate Executive Director for Mongolia and Sukh-Ochir Batsukh, Advisor to Executive Director September 5, 2025*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1mngea2025001-source-pdf.pdf_