## A. Introduction

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_cr05170

### A. Introduction
- The first Report on the Observance of Standards and Codes (ROSC) on fiscal transparency for Mongolia was issued in November 2001.
- This Update was prepared by an IMF staff team as background documentation for the periodic consultation with the member country and is based on information available at the time it was completed in May, 2005.
- Unless indicated differently below, the recommendations made in the 2001 ROSC remain relevant.

### B. Description of Progress

#### Clarity of roles and responsibilities
- Adoption of legal frameworks:
  - Public Sector Management and Finance Law (PSMFL) adopted in June 2002 to set the legal basis for public administration reforms, output budgeting, and accrual accounting.
  - General Budget Law adopted in November 2002 to provide for an orderly transition from the previous budget management arrangements to the PSMFL.
- PSMFL effects:
  - Redefined intergovernmental financial relations, centralizing allocations to national programs—particularly health and education—and defining local authorities’ roles in terms of output contracts with central ministries.
  - Further work required to ensure the PSMFL’s provisions are effectively enforced and to delineate roles of the executive branch, the Parliament and the Bank of Mongolia (BOM) in debt management operations.
- December 2003 debt settlement with Russia:
  - The government secured the writing off of 98 percent of its long-standing pre-1991 debt to Russia.
  - The government repaid the balance of US$250 million (20 percent of GDP) in cash through a foreign intermediary, while providing limited information about the precise terms to Parliament and the public.
  - The government borrowed the equivalent of US$137 million from the BOM to finance the debt settlement.
- Central Bank Law (CBL) amendments and issues:
  - CBL amendments in June 2003 tightened safeguards for the BOM to limit quasi-fiscal activities (QFAs), but BOM’s role in financing the debt settlement raised questions about adequacy of checks and balances.
  - The BOM’s 2003 audit report confirmed the government borrowing breached statutory limits on BOM credit to government.
  - The audit identified at least two other breaches of the CBL: higher-than-mandated transfers of profits to the budget, and extension of Tog 18 billion (1¼ percent of GDP) of loans to private mining companies (a prohibited activity).
- Reduction in QFAs scope through privatizations/restructuring:
  - Trade and Development Bank privatized in 2002.
  - Agricultural Bank restructured and privatized in 2003.
  - Energy Authority decentralized into joint-stock companies with private participation.
- Integration of extra-budgetary funds:
  - Most former extra-budgetary funds are integrated; all bank accounts of special funds incorporated in a Treasury Single Account (TSA) at the BOM.
  - Further work needed to extend TSA coverage to all foreign donor grant-funded activities.
- Tax administration improvements:
  - Improved collection and tax-sharing arrangements reduced local authority interference.
  - Information on tax rules and regulations to taxpayers substantially improved.
  - Occasional calls by revenue authorities for payments based on “revenue plans” rather than tax returns and assessments remain.

#### Public availability of information
- ROSC recommendations reiterated:
  - Improve public debt registry and publication of public debt information; include contingent liabilities, tax expenditures and QFAs in the budget.
- Transparency concerns from December 2003 Russia debt settlement:
  - Secrecy of the settlement raised transparency and accountability concerns.
  - A detailed report on the settlement’s components and implications for budget and public debt has yet to be provided to Parliament and the public.
- Budget documents and framework:
  - Beginning in 2003, a rolling three-year Budget Framework statement has been produced and submitted to Parliament each year; budget documents submitted to Parliament have improved in quality.
  - Information about the late-2003 debt settlement was absent from the 2004 Budget and the draft Budget Framework Statement for 2005; the first official acknowledgement of the settlement’s impact on public finances was presented with the 2004 Amended Budget in September 2004.
  - Budget documents still do not include updated projections on current-year estimated outturns for meaningful comparisons with original budget targets.
- Publication practices:
  - Treasury monthly reports and selected pages of the Fiscal Financial Report are sent to the National Statistics Office (NSO) for publication in its Monthly Bulletin of Statistics, but tables exclude data on the government’s overall balance and its financing.
  - A concise introductory brochure for the 2004 Budget was published and disseminated with UNDP assistance.
- Debt reporting:
  - A new debt management information system (DMFAS) was introduced with UNCTAD assistance, improving debt data reporting and debt sustainability assessment.
  - Authorities can produce timely and reliable debt data, but data on the size and composition of public debt and other financial assets and liabilities of the general government have not been published yet.
- Tax expenditures and contingent liabilities:
  - Tax authorities compile data on tax expenditures on VAT and CIT and provide these to MOFE, the Cabinet, and Parliament.
  - Information on contingent liabilities and risks, required by the PSMFL, has not yet been produced and provided to Parliament.

#### Open budget preparation, execution, and reporting
- Accounting and financial information:
  - Cash statements based on GFSM1986 were prepared for general government for FY2001 and FY2002.
  - Accounts for general government based on GFSM2001 methodology were produced for FY2002, and FY2003 accounts were finalized with STA mission assistance in August 2004.
  - MOFE still needs to build capacity to sustain GFSM2001-based fiscal accounts production.
- TSA implementation:
  - A TSA has been established and coverage progressively extended; as of end-2003, most government bank balances consolidated in a treasury-controlled account at the BOM.
  - Some foreign donor-sponsored extra-budgetary funds and project management units maintain accounts outside the TSA due primarily to donor unwillingness to allow transfer.
- Treasury capacity:
  - Local treasury offices set up to cover state and local budgets have improved cash management, expenditure controls, and reconciliation procedures.
- GFMIS and commitment controls:
  - Implementation of a Government Financial Management Information System (GFMIS) under a World Bank-financed project is planned to further improve accounting and reporting.
  - The Treasury is implementing a system of commitment controls, initially focusing on large commitments, to be extended to comprehensive registration of purchase orders and supply contracts when GFMIS is in place.

#### Assurances of integrity
- Budget realism and arrears:
  - Realism of budget estimates has improved, but further improvements in quality and coverage of revenue and expenditure projections and enforcement mechanisms are required.
  - Own revenues of budget entities are systematically underestimated; budget entities have been allowed to use excess revenues for unbudgeted expenditures at their discretion.
  - Government initiated new investment projects outside the budget process financed by unbudgeted privatization receipts and other excess revenues.
- Regulations adopted in October 2003:
  - New regulation enables budget entities to spend excess revenue only after authorization from the related line ministry and the MOFE.
  - Another regulation introduced a requirement of treasury authorization for commitments requiring competitive tenders and for purchases by budget entities that accumulate arrears.
  - Effectiveness of enforcement of these regulations remains to be seen.
- Data reconciliation and arrears monitoring:
  - Reconciliation and compilation of fiscal reports improved partly due to TSA implementation.
  - Authorities produce monthly fiscal data; quality of data on corporate income tax receipts, budget entities’ own revenues, and privatization receipts improved significantly.
  - Year-end budget estimates remain subject to substantial revision: in FY2003 capital expenditures and expenditures on goods and services were revised up overall by 1.1 percent of GDP.
  - Government arrears have been substantially reduced since 2001; monthly reports now consolidate payables and receivables of budget entities for close monitoring.

### C. IMF Staff Commentary — Priorities and Recommendations
- Summary assessment:
  - Good progress made since the 2001 ROSC in integrating extra-budgetary funds with the budget, improving public debt information, and improving realism of budget estimates; further work required to address transparency concerns from the Russia debt settlement and other weaknesses.
- Suggested short- to medium-term priorities:
  - Adopt amendments to the PSMFL to:
    - (i) establish effective arrangements to ensure adequate budget discipline and accountability of budget managers, including penalties for violating budget authority;
    - (ii) prohibit capital spending on new investments outside the budgetary process;
    - (iii) establish regular publication of comprehensive government fiscal and financial information according to forward release calendars;
    - (iv) introduce a regular budget review process in the MOFE and the Cabinet, and a mid-year review process in the Parliament.
  - Carry out a diagnostic study of the sources and uses of own revenues of budget entities, including full examination and audit of expenditures financed from own revenues—particularly capital expenditures of the customs administration.
  - Conduct an assessment of reasons for remaining differences between preliminary and final fiscal data, and use the results to improve reliability of monthly reports; make corresponding monthly data changes using semi-annual and annual reports.
  - Prepare a comprehensive report on all legal, procedural, economic and financial elements of the recent debt settlement operation with Russia for presentation to Parliament, with references to relevant sections of the PSMFL, Central Bank Law and other applicable laws, and disseminate the report to the public as soon as possible.
  - Take steps to further separate roles of the government and other public entities to avoid new QFAs and prevent misappropriation of public funds, including amending relevant laws and/or ensuring proper enforcement.
    - Effective implementation of the oversight role of the Supervisory Board of the BOM is especially important; the Board should review all elements of BOM’s involvement in the late-2003 debt settlement and prepare a written assessment of legality and propriety of related transactions for submission to Parliament.
  - Remove inconsistencies between the State Property Law and the PSMFL to allow use of privatization proceeds for debt reduction.
  - Improve publication and public dissemination of budget documents:
    - Documents submitted to Parliament should provide detail on basis of macroeconomic forecasts, and fiscal and government finance data.
    - Include comprehensive data on actual financial performance, including size and composition of public debt and other financial assets and liabilities of the general government.
    - Annexes should provide detailed data on financial performance of public enterprises, statements on tax expenditures, and quasi-fiscal operations.
    - Full budget documents should be made freely available to the public and user-friendly summaries regularly published.
  - Include foreign grants given to government entities (in cash or kind) in budget estimates and budget reports in full amount; pay particular attention to transparency of commodity grants provided through agriculture funds.
  - Determine legal status of remaining self-financed government agencies under the PSMFL and incorporate their accounts into the budget or treat them as public enterprises as appropriate.
  - Complete transfer of all government bank accounts to the TSA at the BOM, including identifying and seeking to remove donor-imposed constraints on transferring project accounts to the TSA.
  - Design and approve a single chart of accounts consistent with GFSM2001 classifications to support transaction registration in GFMIS.

### Medium- to longer-term measures for public investment, social insurance, and public sector management (Section 2)
- Public investment:
  - Develop a comprehensive and clearly prioritized public investment program to establish clear directions for capital investment and take account of the current cost of completed projects and their overall macroeconomic impact in the context of the medium-term budget framework.
- Social insurance:
  - Ensure that the social insurance authorities disclose future social security obligations and that these obligations are assessed in line with international standards and fully considered in medium- and long-term fiscal planning.
- Public sector accounting and reporting:
  - Fully enforce the Public Sector Management and Finance Law to:
    - (i) require budget entities to report all their assets and liabilities, revenues and expenses, and cash flows in their financial statements;
    - (ii) require that all public sector entities and the MOFE attach notes to the consolidated government fiscal statements describing the methods of producing the reports and all departures from the International Public Sector Accounting Standards.
- Asset management:
  - Conduct an inventory of all government assets and ensure that the assets are properly placed under the custody of responsible government entities, recorded, and reported in periodic financial statements.

*International Monetary Fund — Mongolia: Report on the Observance of Standards and Codes, Fiscal Transparency Update, May 2005 (IMF Country Report No. 05/170).*

## Section 1

## Mongolia: Report on the Observance of Standards and Codes — Fiscal Transparency Update (Section 1)

### A. Introduction
- The first Report on the Observance of Standards and Codes (ROSC) on fiscal transparency for Mongolia was issued in November 2001.
- This Update was prepared by an IMF staff team as background documentation for the periodic consultation with the member country and is based on information available at the time it was completed in May, 2005.
- Unless indicated differently below, the recommendations made in the 2001 ROSC remain relevant.

### B. Description of Progress

#### Clarity of roles and responsibilities
- A new Public Sector Management and Finance Law (PSMFL) was adopted in June 2002 to set the legal basis for public administration reforms, output budgeting, and accrual accounting; a separate General Budget Law was adopted in November 2002 to provide for an orderly transition from the previous budget management arrangements to the PSMFL.
- The PSMFL has redefined intergovernmental financial relations, centralizing allocations to national programs—particularly health and education—and defining local authorities’ roles in terms of output contracts with central ministries.
- Further work is required to ensure the PSMFL’s provisions are effectively enforced and to delineate roles of the executive branch, the Parliament and the Bank of Mongolia (BOM) in debt management operations.
- December 2003 debt settlement with Russia:
  - The government secured the writing off of 98 percent of its long-standing pre-1991 debt to Russia.
  - The government repaid the balance of US$250 million (20 percent of GDP) in cash through a foreign intermediary, while providing limited information about the precise terms to Parliament and the public.
  - The government borrowed the equivalent of US$137 million from the BOM to finance the debt settlement.
- Central Bank Law (CBL) amendments in June 2003 tightened safeguards for the BOM to limit quasi-fiscal activities (QFAs), but BOM’s role in financing the debt settlement raised questions about adequacy of checks and balances.
  - The BOM’s 2003 audit report confirmed the government borrowing breached statutory limits on BOM credit to government.
  - The audit identified at least two other breaches of the CBL: higher-than-mandated transfers of profits to the budget, and extension of Tog 18 billion (1¼ percent of GDP) of loans to private mining companies (a prohibited activity).
- Reduction in scope for QFAs:
  - Trade and Development Bank privatized in 2002.
  - Agricultural Bank restructured and privatized in 2003.
  - Energy Authority decentralized into joint-stock companies with private participation.
- Integration of extra-budgetary funds into budget process:
  - Most former extra-budgetary funds are integrated; all bank accounts of special funds incorporated in a Treasury Single Account (TSA) at the BOM.
  - Further work needed to extend TSA coverage to all foreign donor grant-funded activities.
- Tax administration:
  - Improved collection and tax-sharing arrangements reduced local authority interference.
  - Information on tax rules and regulations to taxpayers substantially improved.
  - Occasional calls by revenue authorities for payments based on “revenue plans” rather than tax returns and assessments remain.

#### Public availability of information
- The ROSC recommended improvements to the public debt registry and publication of public debt information, plus inclusion of contingent liabilities, tax expenditures and QFAs in the budget.
- Secrecy of the December 2003 Russia debt settlement raised transparency and accountability concerns:
  - A detailed report on the settlement’s components and implications for budget and public debt has yet to be provided to Parliament and the public.
- Budget documents and budget framework:
  - Beginning in 2003, a rolling three-year Budget Framework statement has been produced and submitted to Parliament each year, and budget documents submitted to Parliament have improved in quality.
  - Information about the late-2003 debt settlement was absent from the 2004 Budget and the draft Budget Framework Statement for 2005; the first official acknowledgement of the settlement’s impact on public finances was presented with the 2004 Amended Budget in September 2004.
  - Budget documents still do not include updated projections on current-year estimated outturns for meaningful comparisons with original budget targets.
- Publication practices:
  - Treasury monthly reports and selected pages of the Fiscal Financial Report are sent to the National Statistics Office (NSO) for publication in its Monthly Bulletin of Statistics, but tables exclude data on the government’s overall balance and its financing.
  - A concise introductory brochure for the 2004 Budget was published and disseminated with UNDP assistance.
- Debt reporting:
  - A new debt management information system (DMFAS) was introduced with UNCTAD assistance, improving debt data reporting and debt sustainability assessment.
  - Authorities can produce timely and reliable debt data, but data on the size and composition of public debt and other financial assets and liabilities of the general government have not been published yet.
- Tax expenditures and contingent liabilities:
  - Tax authorities compile data on tax expenditures on VAT and CIT and provide these to MOFE, the Cabinet, and Parliament.
  - Information on contingent liabilities and risks, required by the PSMFL, has not yet been produced and provided to Parliament.

#### Open budget preparation, execution, and reporting
- Accounting and financial information:
  - Cash statements based on GFSM1986 were prepared for general government for FY2001 and FY2002.
  - Accounts for general government based on GFSM2001 methodology were produced for FY2002, and FY2003 accounts were finalized with STA mission assistance in August 2004.
  - MOFE still needs to build capacity to sustain GFSM2001-based fiscal accounts production.
- TSA implementation:
  - A TSA has been established and coverage progressively extended; as of end-2003, most government bank balances consolidated in a treasury-controlled account at the BOM.
  - Some foreign donor-sponsored extra-budgetary funds and project management units maintain accounts outside the TSA due primarily to donor unwillingness to allow transfer.
- Treasury capacity:
  - Local treasury offices set up to cover state and local budgets have improved cash management, expenditure controls, and reconciliation procedures.
- GFMIS and commitment controls:
  - Implementation of a Government Financial Management Information System (GFMIS) under a World Bank-financed project is planned to further improve accounting and reporting.
  - The Treasury is implementing a system of commitment controls, initially focusing on large commitments, to be extended to comprehensive registration of purchase orders and supply contracts when GFMIS is in place.

#### Assurances of integrity
- Budget realism and arrears:
  - Realism of budget estimates has improved, but further improvements in quality and coverage of revenue and expenditure projections and enforcement mechanisms are required.
  - Own revenues of budget entities are systematically underestimated; budget entities have been allowed to use excess revenues for unbudgeted expenditures at their discretion.
  - Government initiated new investment projects outside the budget process financed by unbudgeted privatization receipts and other excess revenues.
- Regulations adopted in October 2003:
  - New regulation enables budget entities to spend excess revenue only after authorization from the related line ministry and the MOFE.
  - Another regulation introduced a requirement of treasury authorization for commitments requiring competitive tenders and for purchases by budget entities that accumulate arrears.
  - Effectiveness of enforcement of these regulations remains to be seen.
- Data reconciliation and arrears monitoring:
  - Reconciliation and compilation of fiscal reports improved partly due to TSA implementation.
  - Authorities produce monthly fiscal data; quality of data on corporate income tax receipts, budget entities’ own revenues, and privatization receipts improved significantly.
  - Year-end budget estimates remain subject to substantial revision: in FY2003 capital expenditures and expenditures on goods and services were revised up overall by 1.1 percent of GDP.
  - Government arrears have been substantially reduced since 2001; monthly reports now consolidate payables and receivables of budget entities for close monitoring.

### C. IMF Staff Commentary — Priorities and Recommendations
- Good progress made since the 2001 ROSC in integrating extra-budgetary funds with the budget, improving public debt information, and improving realism of budget estimates; further work required to address transparency concerns from the Russia debt settlement and other weaknesses.

- Suggested short- to medium-term priorities:
  - Adopt amendments to the PSMFL to:
    - (i) establish effective arrangements to ensure adequate budget discipline and accountability of budget managers, including penalties for violating budget authority;
    - (ii) prohibit capital spending on new investments outside the budgetary process;
    - (iii) establish regular publication of comprehensive government fiscal and financial information according to forward release calendars;
    - (iv) introduce a regular budget review process in the MOFE and the Cabinet, and a mid-year review process in the Parliament.
  - Carry out a diagnostic study of the sources and uses of own revenues of budget entities, including full examination and audit of expenditures financed from own revenues—particularly capital expenditures of the customs administration.
  - Conduct an assessment of reasons for remaining differences between preliminary and final fiscal data, and use the results to improve reliability of monthly reports; make corresponding monthly data changes using semi-annual and annual reports.
  - Prepare a comprehensive report on all legal, procedural, economic and financial elements of the recent debt settlement operation with Russia for presentation to Parliament, with references to relevant sections of the PSMFL, Central Bank Law and other applicable laws, and disseminate the report to the public as soon as possible.
  - Take steps to further separate roles of the government and other public entities to avoid new QFAs and prevent misappropriation of public funds, including amending relevant laws and/or ensuring proper enforcement.
    - Effective implementation of the oversight role of the Supervisory Board of the BOM is especially important; the Board should review all elements of BOM’s involvement in the late-2003 debt settlement and prepare a written assessment of legality and propriety of related transactions for submission to Parliament.
  - Remove inconsistencies between the State Property Law and the PSMFL to allow use of privatization proceeds for debt reduction.
  - Improve publication and public dissemination of budget documents:
    - Documents submitted to Parliament should provide detail on basis of macroeconomic forecasts, and fiscal and government finance data.
    - Include comprehensive data on actual financial performance, including size and composition of public debt and other financial assets and liabilities of the general government.
    - Annexes should provide detailed data on financial performance of public enterprises, statements on tax expenditures, and quasi-fiscal operations.
    - Full budget documents should be made freely available to the public and user-friendly summaries regularly published.
  - Include foreign grants given to government entities (in cash or kind) in budget estimates and budget reports in full amount; pay particular attention to transparency of commodity grants provided through agriculture funds.
  - Determine legal status of remaining self-financed government agencies under the PSMFL and incorporate their accounts into the budget or treat them as public enterprises as appropriate.
  - Complete transfer of all government bank accounts to the TSA at the BOM, including identifying and seeking to remove donor-imposed constraints on transferring project accounts to the TSA.
  - Design and approve a single chart of accounts consistent with GFSM2001 classifications to support transaction registration in GFMIS.

*International Monetary Fund — Mongolia: Report on the Observance of Standards and Codes, Fiscal Transparency Update, May 2005 (IMF Country Report No. 05/170).*

## Section 2

## _cr05170 - Section 2

### Medium- to longer-term measures for public investment, social insurance, and public sector management

- Develop a comprehensive and clearly prioritized public investment program to establish clear directions for capital investment and take account of the current cost of completed projects and their overall macroeconomic impact in the context of the medium-term budget framework.  
- Ensure that the social insurance authorities disclose future social security obligations and that these obligations are assessed in line with international standards and fully considered in medium- and long-term fiscal planning.  
- Fully enforce the Public Sector Management and Finance Law to: (i) require budget entities to report all their assets and liabilities, revenues and expenses, and cash flows in their financial statements; (ii) require that all public sector entities and the MOFE attach notes to the consolidated government fiscal statements describing the methods of producing the reports and all departures from the International Public Sector Accounting Standards.  
- Conduct an inventory of all government assets and ensure that the assets are properly placed under the custody of responsible government entities, recorded, and reported in periodic financial statements.

*Source: _cr05170 - Section 2*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05170.pdf_