## Mongolia—Assessment Letter for the Asian Development Bank

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### Recent developments
- Real GDP grew by 7.0 percent in 2023, driven by record-high coal production and exports and increasing consumption in 2023H2. Coal export volumes more than doubled year-on-year.
- Coal export surge exceeded projections embedded in the 2023 supplementary budget and IMF staff forecasts; driven by strong demand from China after a sharp decline in its coking coal imports in 2021−22.
- Despite large and permanent wage and pension increases in the 2023 supplementary budget and a large non-mineral primary deficit (NMPD), the budget recorded an overall surplus due to higher mineral revenues.
- Public debt to GDP ratio declined significantly due to a surge in nominal GDP and debt repayments.
- Inflation continued to decline; headline inflation was 7.6 percent in January 2024, within the Bank of Mongolia's (BOM) target band (6±2 percent).
- External balances improved and external debt as a percent of GDP declined:
  - Gross international reserves (GIR) rose to US$4.9 billion at end-February 2024 (3.6 months of imports or 110 percent of the IMF Assessing Reserve Adequacy Metric (ARA)).
  - Improved external position and global financial conditions enabled management of external debt rollover risks in 2023 despite large external financing needs.
  - In late 2023, the government refinanced part of its 2024 Eurobond repayments; the Development Bank of Mongolia (DBM) repaid its Eurobond and used domestic bridge financing to refinance its Samurai bond.
  - The BOM repaid a portion of the outstanding balance of its swap line with the People's Bank of China.
  - Major private external debt maturing in early 2024 were successfully refinanced; remaining external financing needs for 2024 are moderate.

### Outlook and risks
- Growth outlook:
  - GDP growth is forecast to be 6½ percent in 2024 and moderate toward potential growth over the medium term.
  - Near-term stimulus: full-year impact of the 2023 supplementary budget, additional wage and pension increases in 2024, and distribution of dividends to households by Erdenes Tavan Tolgoi are expected to stimulate growth.
  - Mining sector: expected to remain robust—higher-grade copper exports from Oyu Tolgoi’s (OT) underground mine became fully operational in 2023Q1; coal exports to China are assumed to remain in line with the record highs of 2023.
  - Drag factors: heavy losses in the livestock sector due to severe winter conditions.
- External outlook:
  - Current account balance is expected to revert to a sizable deficit due to high import volumes and declining coal prices, keeping GIR largely unchanged at the end-2023 level (US$4.8 billion, 3.6 months of imports, 108 percent of ARA).
- Key risks and uncertainties:
  - High reliance on mineral exports and dependence on China as the primary market.
  - A sharper slowdown in demand for commodity exports (in particular, coal demand from China) or a negative commodity price shock could adversely affect the economy and external balances.
  - Additional pre-election fiscal support could boost growth but increase external and inflationary risks.
  - Natural disasters and geopolitical developments add uncertainty.
  - Upside: further acceleration of coal exports to China or stronger-than-expected commodity prices could provide an economic windfall.
  - Other factors: large infrastructure projects under discussion (not yet formalized) and potential for production/export of higher quality copper and coal selling at a premium.

### Policies to preserve macroeconomic and external stability

Fiscal policy
- Public debt dynamics:
  - With unchanged fiscal policies, public debt is projected to rise above 50 percent of GDP in the medium-term.
  - Public debt remains vulnerable to macroeconomic shocks and exchange rate dynamics and could rise if downside risks, fiscal risks, contingent liabilities, and natural disaster shocks materialize.
  - Based on the assessment of the 2023 Article IV consultation, Mongolia faces a high risk of sovereign stress.
- Need for consolidation:
  - Fiscal consolidation continues to be necessary to ensure macroeconomic stability and debt sustainability.
  - The NMPD is expected to widen significantly due to the sizable fiscal expansion in 2024 and could worsen if fiscal risks materialize.
  - A draft Law on Sovereign Wealth Funds proposes to expand extrabudgetary funds to finance existing government spending, potentially generating new fiscal risks if not well governed.
  - Potential amendment to the DBM law (if approved in March 2024 before DBM governance is strengthened) could give rise to additional contingent fiscal liabilities via EXIM banking operations.
  - Recommended composition of consolidation: broad-based measures encompassing the wage bill, public investment management, progressivity in personal income taxes, and means-tested social assistance targeting.
  - Recommendation: the government should refrain from further fiscal loosening.
- Fiscal governance reforms:
  - Introduce a well-defined escape clause and corrective mechanisms in the fiscal framework.
  - Realign ministerial/agency responsibilities and ensure the independence of the Fiscal Stability Council.
  - Bolster efficiency, oversight, and accountability of public investment management, including an arms-length review of investment plans of major state-owned enterprises.
  - Integrate extrabudgetary funds into the budget with strong governance.
  - Strengthen DBM governance by appointing an independent external advisor to conduct a diagnostic balance sheet review.

Monetary and exchange rate policy
- Given the substantial fiscal stimulus in 2024 and expected rise in inflation, maintain tight domestic financial conditions via monetary and macroprudential policies.
- In absence of a well-functioning domestic securities market, the BOM should continue mopping up excess liquidity from FX inflows through issuance of central bank bills and maintain a tighter monetary policy stance.
- To contain excessive salary-backed consumer credit growth:
  - Effectively enforce debt service to income (DSTI) limits in banks.
  - Harmonize the DSTI of the non-bank financial sector with those of the banking sector.
- Maintain a flexible exchange rate and further increase external buffers to build resilience against external shocks.
- Resume domestic debt issuance to support the BOM’s ability to mop up excess liquidity.

Other policies
- Financial sector supervision:
  - Continue strengthening supervision; the financial sector remains broadly stable with some recovery in bank profitability in 2023H2 supported by increasing credit growth.
  - Implement onsite and off-site supervision prioritizing high-risk banks and operations.
  - Ensure bank capital is high quality and held by fit and proper investors.
  - Parliament should extend the deadline for shareholder diversification of domestic systemically important banks once the Banking Law amendments are resubmitted to Parliament.
- Governance and anti-corruption:
  - Address corruption and strengthen governance and institutions.
  - Upgrade and effectively enforce the anti-corruption and regulatory framework.
  - Pass the draft Whistleblower Protection law without further delay.
  - Implement measures to attract FDI, enhance public sector efficiency, and diversify the economy, including accelerating the overhaul of the Minerals Law.

### IMF relations
- Mongolia is on a standard 12-month Article IV consultation cycle.
- Mongolia received an SDR allocation of US$98.3 million in 2021.
- Mongolia received emergency assistance from the IMF through the Rapid Financing Instrument in 2020.
- Mongolia is a major recipient of IMF technical assistance.

*Source: Mongolia—Assessment Letter for the Asian Development Bank (ppea2024010)*

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_Source: https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024010.pdf_