## _cr05396

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### Executive Summary — Background, recent context, and outlook
- Mongolia experienced two years of unusually rapid economic expansion, driven by good weather and high world mineral prices.
- Real GDP growth exceeded 10½ percent in 2004, and should continue to be robust, easing to 5 percent in 2005.
- Poverty incidence measured at 36 percent in 2002 (2002–03 household survey).
- Mongolia is landlocked with a territory of 1.6 million km², a harsh climate, underdeveloped infrastructure, and low population density.
- The PRGF arrangement approved in September 2001 lapsed in July 2005 without completion of the third and subsequent reviews.
- Most quantitative targets set at the combined First and Second Review (September 2003) were met; serious governance concerns emerged (notably central bank procedures and lack of information on the end-2003 settlement of the pre-1991 transferable ruble debt to Russia).

### Growth drivers and risks
- Drivers of the 2004–early 2005 expansion:
  - Rebound in the livestock sector following the 2000–01 “dzuds.”
  - Strong mining exploration and exports, boosted by unusually high copper and gold prices.
  - Strong foreign direct investment in mineral exploration.
  - Growth in services, particularly tourism and transit trade with Russia and China.
- Medium-term outlook: growth prospects expected to settle around at least 5 percent from 2005 onward.
- Key risk: vulnerability to large terms of trade shocks that could undermine fiscal and external positions.

### Inflation and monetary developments
- Inflation accelerated from mid-2004 due to supply-side shocks: higher world oil prices, sanitary regulation effects on meat prices, and utility price adjustments.
- Core inflation (BOM measure excluding meat, milk, and vegetables; the latter categories have a CPI basket weight close to 22½ percent) increased to 8–9 percent in late 2004.
- Monetary policy since late 2004 accommodated direct and second-round effects of supply shocks.
- Headline inflation reached 15¾ percent through July 2005, while core inflation increased only slightly.
- Staff recommendation: the Bank of Mongolia needs to address promptly high credit growth to avoid entrenching inflationary expectations and to tighten monetary stance.

### Fiscal performance and public finances
- Fiscal performance was good in 2004, with excellent prospects for 2005.
- Minerals-related revenues amounted to about 10 percent of the total in 2004; sharply higher than trend prices contributed about 2 percent of GDP to revenue in that year.
- The 2004 overall deficit was about 2 percent of GDP.
- The 2005 budget targeted an overall deficit of about 3½ percent of GDP, reflecting a new assistance program for poor families with children at a cost of about 1 percent of GDP (scaled back from original proposals).
- Revenue performance in 2005: receipts 22 percent above the first seven months of 2004.
- Policy priorities:
  - Focus future fiscal policy on tax reforms to make the system simpler and more efficient.
  - Further improve public expenditure allocation and financial management.

### Public and external debt — settlement of pre-1991 transferable ruble (TR) debt
- TR debt stock: TR 11.4 billion (TR1=$1), equivalent to about 10 times Mongolia’s GDP.
- Settlement terms at end-2003:
  - upfront cash payment by Mongolia of $250 million effected by end-2003 through a private intermediary;
  - cancellation of the entirety of the TR debt (principal and outstanding interest), yielding the equivalent of a 97.8 percent discount on the notional stock of debt.
- Financing of the $250 million settlement included:
  - US$50 million one-year T-bills to Ivanhoe Mines;
  - $25 million local currency short-term bills to a domestic private bank (6 to 10 month maturities);
  - $13 million advanced taxes from Erdenet;
  - $25 million draw-down from government deposits at the central bank;
  - use of official reserves financed by a loan from the central bank.
- The government contracted from the BOM a 10-year, interest-free, $100 million loan and a $37 million, interest-free, short-term loan; Parliament later approved payment of one percent annual interest on the 10-year loan.
- Nontransparent aspects and lack of full information on ultimate disposition of funds heightened governance concerns.

### Box 2 — The Impact of Copper on the Economy (findings and implications)
- Copper exports’ contribution to GDP in 2004: 21.5 percent
- Copper sector share of government total revenues in 2004: 8.9 percent
- Expected copper sector share of government total revenues in 2005: 10.5 percent
- Copper share of total exports: 54.1 percent (1994) → 36.2 percent (2004)
- Gold share of total exports: 3.1 percent (1994) → 27.9 percent (2004)
- Garments share of total exports: 10.9 percent (1994) → 20.2 percent (2004)
- Correlation copper price change — GDP (1994–2004): 0.59
- Copper exports in GDP fluctuation range (1994–2004): 12.5 and 21.5 percent
- Correlation copper price change — government total revenues (1994–2004): 0.46
- Correlation copper price change — total exports (1994–2004): 0.66
- Correlation copper price change — change of total exports (1994–2004): 0.79
- Low estimate of Oyu Tolgoï copper and gold reserves: US$6 billion
- Macroeconomic implications and risks:
  - Copper price fluctuations still account for most of the fluctuation of Mongolia’s total exports despite copper’s reduced export share.
  - Stress tests show Mongolia’s public external debt sustainability would be highly vulnerable to shocks from any significant fall in world prices.
- Policy implications and recommendations:
  - Copper price risk management should be considered to smooth revenues and reduce short-term vulnerabilities.
  - Adopt a cautious approach to contracting public borrowing; limit borrowing to concessional terms.

### Medium-Term Budget Framework (MTBF) for 2006–08 — fiscal stance and reforms
- MTBF envisages overall deficit increase to 4 percent of GDP in 2006, compared with the original 2005 budget target of 3½ percent.
- Staff view: an overall fiscal deficit of no more than 3-3¼ percent of GDP would be appropriate from 2006 onward.
- Spending reforms and public wage/pension measures recommended:
  - Civil service and pension reform combining employment and compensation reviews.
  - Enhance pension sustainability by raising the retirement age and phasing in a notional defined contribution system.
  - Eliminate overlapping family benefits; consolidate public tertiary education institutions; eliminate public health services of a purely private nature.
  - Wage bill containment: partial hiring freeze; limiting increases in real wages of support staff.
- Tax reform recommendations (broadly revenue neutral per FAD advice):
  - Removing exemptions.
  - Unifying the CIT at 25 percent, in two phases.
  - Removing restrictions on legitimate business expenses, and providing for loss carry forward.
  - Introducing cost-effective investment tax credits; reducing cascading under the VAT; increasing PIT threshold.
  - Offsetting measures: taxes on domestic beer and telecommunication services; increasing excises on cars.
- Caution: raising mining royalties well above industry standards would jeopardize investment.

### Public financial management (PFM) and Treasury Single Account (TSA)
- Government implemented a fully integrated Government Financial Management Information System with World Bank support.
- Concern: sharp increase in balances held outside the TSA in commercial banks since mid-2004 (when BOM ceased paying interest on these balances).
- Staff urged consolidation of all budget resources into the TSA and reversal of trends allowing entities to retain revenues in commercial banks.

### Monetary policy, exchange rate, and Bank of Mongolia (BOM) governance
- Monetary Policy Guidelines (MPG) main target for 2005: restrain growth of reserve money to 15 percent.
- Recommendation: BOM tighten monetary stance through indirect instruments; increase stock of Central Bank Bills (CBBs) from Tg. 69 billion at end-2004 to about Tg. 95 billion by end-2005.
- Yields on two-week CBBs declined to 3-4 percent at end-April from nearly 16 percent in December 2004.
- Commercial bank rates: lending rates about 23 percent; average deposit rates about 13 percent.
- Staff recommended transferring treasury funds in commercial banks back to government BOM account and considering reserve requirement increases only after CBB issuance is exhausted.
- BOM reported significant losses in 2005; staff recommended:
  - Assess full extent of losses.
  - Review legal framework on obligations if BOM net worth falls below norms.
  - Submit plan to Parliament to strengthen BOM finances and governance.
- Audit identified likely breaches of Central Bank Law in 2003 and 2004 accounts (government borrowing in excess of statutory limits; unauthorized lending to private sector; premature transfers of profits; poor reserve management).
- Mission stressed BOM should disengage from risky gold operations and derivatives and strengthen Supervisory Board oversight.

### Financial sector vulnerabilities and supervisory actions
- NPLs increased; ratio of NPLs to total loans rose to more than 11 percent.
- Indicators of bank profitability deteriorated; prospect of one or more banks in serious difficulty cannot be ruled out.
- Staff recommendations:
  - Strengthen supervision, avoid regulatory forbearance, enforce prudential norms.
  - Prepare detailed contingency plans for a systemic banking crisis; take targeted actions against problem banks; intensify on-site examinations.
  - Address weaknesses in CSCs and NBFIs: propose regulatory framework and supervisory agency for nonbank sector.
- Specific supervisory issues: breaches of banking laws in three banks related to large L/C issuances; BOM agreed to check for similar transactions system-wide.

### Debt sustainability analysis (DSA) — baseline and stress tests
- Classification: Mongolia at moderate/high vulnerability to debt distress; NPV of debt-to-GDP ratio was the single indicator above threshold under baseline.
- Baseline assumptions include average real GDP growth at 5 percent (6 percent in 2006), modest new borrowing (around US$115 million annually), and average concessionality of new borrowing about 47 percent.
- Baseline results:
  - NPV of debt-to-GDP ratio: 55 percent at end-2004; expected to decline in the long term.
  - Debt service ratio: around 4 percent of exports under baseline (against 20 percent threshold).
  - NPV of debt-to-revenue ratio: declines from around 150 percent in the medium term to 121 percent by 2015 and below 100 percent by 2025.
- Terms of trade stress (Case B.2) assumptions and results:
  - Copper and gold prices decline by 30 percent and 20 percent, respectively, in 2008; growth and volumes weakened thereafter.
  - Result: NPV of debt-to-GDP and debt-to-export ratios deteriorate well above thresholds and do not return to sustainable paths.
- Interest/concessionality stress (Case A.2):
  - Treating new debt as nonconcessional increases NPV of debt-to-GDP to about 60 percent after 2008, remaining high for several years.
- Fiscal bound tests (examples):
  - Reversion to historical averages (Case A1): public debt NPVs rise to nearly 100 percent of GDP (300 percent of revenue).
  - One-time 30 percent real depreciation in 2006 (Case B4): NPV ratio jumps to 76 percent of GDP (203 percent of revenue) in 2006 and remains around 70 percent of GDP through 2010.
- Policy implication: limit public sector borrowing to concessional terms and avoid guarantees or nontransparent negotiations.

### EGSPRS progress, governance, and structural reforms
- Progress report reaffirms earlier approach and focuses on broad-based growth and Millennium Development Goals; progress on MDGs limited.
- EPA (Ex Post Assessment) main findings:
  - Program design broadly appropriate; financing level adequate; arrangements frequently delayed and incomplete; structural agenda largely unfinished (financial sector weak; public enterprises need further restructuring/privatization; poverty goals unrealized).
  - EPA recommendation: continued close policy dialogue with a low access financial arrangement to support fragile macroeconomic stability and reforms.
- Governance priorities:
  - Improve BOM governance and ensure accountability related to Russian debt settlement.
  - Consider Extractive Industries Transparency Initiative, a new Anti-Corruption law with income disclosure, AML-CFT law, and legal/judicial reforms.
- Public enterprise reform:
  - Resume privatization program; improve governance for enterprises remaining public; prioritize energy sector revamping.

### Data, statistics, and technical assistance
- Statistical improvements made; Mongolia participates in GDDS; ROSC data module published May 2001.
- Outstanding data needs:
  - Improve GDP estimates (deflation methods, informal sector coverage, quarterly estimates).
  - Develop producer price index.
  - Improve fiscal data coverage and reconciliation; implement integrated chart of accounts.
  - Improve BOP coverage of remittances and FDI.
- Recent and planned TA missions listed across STA, FAD, MFD, MAE (source contains mission chronology and resident advisor assignments).

### Key policy recommendations (consolidated)
- Fiscal:
  - Keep overall deficit in 2005 well below original budget target; save windfall revenues; broadly neutral stance from 2006 with overall deficit no more than 3-3¼ percent of GDP.
  - Restrict public nonconcessional borrowing; adhere to regulations on guarantees.
  - Implement revenue-neutral tax reform to remove distortions, broaden base and improve VAT refunds.
  - Consolidate budget resources in TSA; improve PFM and procurement transparency.
- Monetary:
  - Tighten monetary stance; use CBBs to mop up liquidity; resume central bank bill issuance to meet reserve money growth targets.
  - Review BOM instruments and operational procedures; consider MFD assistance.
- Financial sector and governance:
  - Strengthen supervision, enforce prudential norms, take forceful corrective actions where needed.
  - Resolve BOM capital weakness; strengthen Supervisory Board and governance; disengage BOM from gold intermediation.
  - Complete AML-CFT legislation and implement anti-corruption measures.
- Structural and poverty policies:
  - Resume privatization and public enterprise reform; prioritize energy sector; focus on poverty monitoring and MDG-related indicators.
- Political economy:
  - Forge broad political consensus to sustain ownership and implementation of reforms.

### Selected key macroeconomic indicators and projections (preserved)
- Nominal GDP (2003): $1,274 million
- Population (2003): 2.47 million
- Per capita GDP (2003): $516
- Poverty incidence: 36 percent.
- Quota: SDR 51.1 million
- Real GDP: 4.0 (2002), 5.6 (2003), 10.6 (2004), 5.0 (2005 Proj.), 6.0 (2006 Proj.)
- Consumer prices (end period): 1.7 (2002), 4.7 (2003), 10.6 (2004), 10.0 (2005 Proj.), 5.5 (2006 Proj.)
- General government revenue (percent of GDP): 38.4 (2002), 37.9 (2003), 39.4 (2004), 39.1 (2005 Proj.), 37.4 (2006 Proj.)
- General government expenditure (percent of GDP): 44.4 (2002), 42.1 (2003), 41.7 (2004), 41.0 (2005 Proj.), 40.4 (2006 Proj.)
- Current balance (percent of GDP): 4.4 (2002), 7.6 (2003), 9.2 (2004), 9.3 (2005 Proj.), 7.4 (2006 Proj.)
- Primary balance (percent of GDP): -4.3 (2002), -3.0 (2003), -1.0 (2004), -0.7 (2005 Proj.), -2.0 (2006 Proj.)
- Overall balance (percent of GDP): -5.9 (2002), -4.2 (2003), -2.2 (2004), -1.8 (2005 Proj.), -3.0 (2006 Proj.)
- Broad money (percent change): 41.9 (2002), 49.7 (2003), 20.3 (2004), 19.3 (2005)
- Reserve money (levels and growth): Reserve money 21.7 (2002), 14.7 (2003), 16.8 (2004), 14.3 (2005)
- Net nonperforming loans/total loans (%): period series including 7.8, 7.0, 8.2, 8.3, 8.6, 12.4, 10.9, 11.2, 10.0 (Table 3)
- Gross official international reserves (end-period, millions): 271 (2002), 178 (2003), 205 (2004), 268 (2005), 269 (2006)
- Total public debt (incl. IMF) (millions of US dollars): 978 (2002), 1,237 (2003), 1,360 (2004), 1,417 (2005), 1,511 (2006)
- Total public debt (percent of GDP): 89.1 (2002), 91.7 (2003), 113.9 (2004), 99.0 (2005), 88.0 (2006)
- NPV of total public debt (millions): 658 (2002), 816 (2003), 822 (2004), 871 (2005), 930 (2006)
- Debt service (millions): 32.0 (2002), 284.0 (2003), 91.0 (2004), 147.6 (2005), 44.3 (2006)

*IMF Staff Executive Summary and staff report excerpts (source: _cr05396).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background, recent context, and outlook
- Mongolia experienced two years of unusually rapid economic expansion, driven by good weather and high world mineral prices.
- Real GDP growth exceeded 10½ percent in 2004, and should continue to be robust, easing to 5 percent in 2005.
- Poverty incidence measured at 36 percent in 2002 (2002–03 household survey). High growth likely contributed to some poverty reduction, but substantial challenges remain to achieve the Millennium Development Goals.
- Mongolia is a landlocked country with a territory of 1.6 million km², a harsh climate, underdeveloped infrastructure, and low population density, complicating prospects for broad-based, job-creating growth from mining.
- The current PRGF arrangement, originally approved in September 2001, lapsed in July 2005 without completion of the third and subsequent reviews. Most quantitative targets set at the combined First and Second Review (September 2003) were met, and progress was made on the structural agenda, but serious governance concerns emerged (notably central bank procedures and lack of information on the end-2003 settlement of the pre-1991 transferable ruble debt to Russia).

### Growth drivers and risks
- Drivers of the 2004–early 2005 expansion:
  - Rebound in the livestock sector following the 2000–01 “dzuds.”
  - Strong mining exploration and exports, boosted by unusually high copper and gold prices.
  - Strong foreign direct investment in mineral exploration.
  - Growth in services, particularly tourism and transit trade with Russia and China.
- Medium-term outlook: growth prospects expected to settle around at least 5 percent from 2005 onward.
- Key risk: vulnerability to large terms of trade shocks that could undermine fiscal and external positions.

### Inflation and monetary developments
- Inflation accelerated from mid-2004, triggered by supply-side shocks: higher world oil prices, changes in sanitary regulations increasing meat prices, and utility price adjustments.
- Core inflation (BOM measure excluding meat, milk, and vegetables; the latter categories have a CPI basket weight close to 22½ percent) increased to 8–9 percent in late 2004.
- Monetary policy since late 2004 accommodated direct and second-round effects of supply shocks.
- Headline inflation reached 15¾ percent through July 2005, while core inflation increased only slightly.
- Staff recommendation: the Bank of Mongolia needs to address promptly high credit growth to avoid entrenching inflationary expectations and to tighten monetary stance.

### Fiscal performance and public finances
- Fiscal performance was good in 2004, with excellent prospects for 2005.
- Strong revenue receipts reflected overall economic growth and higher-than-expected prices for copper and volume for gold.
- Minerals-related revenues amounted to about 10 percent of the total in 2004; sharply higher than trend prices contributed about 2 percent of GDP to revenue in that year.
- The 2004 overall deficit was about 2 percent of GDP—the lowest since the beginning of transition—allowing a notable decrease in indebtedness.
- The 2005 budget targeted a widening in the overall deficit to about 3½ percent of GDP, reflecting a new assistance program for poor families with children at a cost of about 1 percent of GDP (scaled back from original proposals).
- Revenue performance in 2005: receipts 22 percent above the first seven months of 2004, suggesting the deficit could remain at its 2004 level if spending discipline is maintained.
- Policy priorities:
  - Focus future fiscal policy on tax reforms to make the system simpler and more efficient.
  - Further improve public expenditure allocation and financial management.

### Public and external debt
- Mongolia’s public debt is large in nominal terms but considered highly concessional and sustainable with prudent macroeconomic policies; however, it remains vulnerable to large terms of trade shocks.
- Boxed analysis (Box 1) on the settlement of pre-1991 transferable ruble (TR) debt to Russia:
  - TR debt stock: TR 11.4 billion (TR1=$1), equivalent to about 10 times Mongolia’s GDP.
  - Settlement terms at end-2003: (i) upfront cash payment by Mongolia of $250 million effected by end-2003 through a private intermediary; and (ii) cancellation of the entirety of the TR debt (principal and outstanding interest), yielding the equivalent of a 97.8 percent discount on the notional stock of debt.
  - Financing of the $250 million settlement included: US$50 million one-year T-bills to Ivanhoe Mines; $25 million local currency short-term bills to a domestic private bank (6 to 10 month maturities); $13 million advanced taxes from Erdenet; $25 million draw-down from government deposits at the central bank; use of official reserves financed by a loan from the central bank.
  - Official reserves rose from $178 million at end-2003 to $205 million at end-2004, despite repayment of $50 million to Ivanhoe Mines.
  - The government contracted from the BOM a 10-year, interest-free, $100 million loan and a $37 million, interest-free, short-term loan, weakening the BOM’s income position and noted as violating the Central Bank Law in external audit reports; Parliament later approved payment of one percent annual interest on the 10-year loan.
  - Nontransparent aspects and lack of full information on ultimate disposition of funds heightened governance concerns; a parliamentary committee reported in early 2005 with conclusions that included confirmation that $250 million was paid as required through the Czech intermediary and that the debt was extinguished, with no evidence of malfeasance, but limited further information was available.

### Financial sector, central bank, and public enterprises
- Progress made in recent years on financial sector health and central bank strength, but further action is essential.
- Concerns:
  - High credit growth may mask fragility in some banks’ positions and regulatory forbearance.
  - The BOM’s capital weakness and decision-making structure need resolution and enhanced oversight.
- Public enterprise reform should remain a priority:
  - Improve governance of enterprises intended to remain in public ownership.
  - Resume privatization program.
  - Continue plans to revamp operations in the vital energy sector.

### Governance, donors, and external assistance
- World Bank, Asian Development Bank, and bilateral donors (particularly Japan) are active in Mongolia.
- Gross official aid flows (grants and concessional loans) were equivalent to about 14 percent of GDP in 2004 and should continue to grow.
- World Bank programs focus on civil service reform, public financial management and governance, legal framework for the mining sector, and the energy and financial sectors.
- AsDB is developing a new strategy to support economic growth, poor’s access to public services, and improved governance.
- Mongolia is eligible for assistance under the U.S. Millennium Challenge Account; authorities are identifying qualifying projects.
- Governance concerns need to be addressed to secure strong support from development partners for Mongolia’s growth and poverty reduction strategy.
- Mongolia’s commitment to an open trading system should be maintained to benefit from strong regional growth.

*IMF Staff Executive Summary (from the source document).*

### Box 2: The Impact of Copper on the Economy

### Box 2: The Impact of Copper on the Economy

### Copper’s contribution to the economy
- In 2004, copper exports contributed 21.5 percent to Mongolia’s GDP.
- In 2004, the copper sector accounted for 8.9 percent of government total revenues.
- The share of copper in government total revenues is expected to increase to 10.5 percent in 2005, due to significant dividends collected from Erdenet.

### Shifts in export composition (1994–2004)
- Share of copper in total exports decreased from 54.1 percent in 1994 to 36.2 percent in 2004.
- Gold’s share increased from 3.1 percent in 1994 to 27.9 percent in 2004.
- Garments’ share doubled from 10.9 percent in 1994 to 20.2 percent in 2004.
- Note: garments have a much lower value added because of high import content.

### Correlations and price-linked vulnerabilities
- Correlation between the change of the world copper price and Mongolia’s GDP was 0.59 between 1994 and 2004.
- Between 1994 and 2004, the share of copper exports in GDP fluctuated in the range of 12.5 and 21.5 percent.
- Correlation between the change of the copper price and government total revenues was 0.46 between 1994 and 2004.
- Correlation between the change of the copper price and the total exports was 0.66 (1994–2004).
- Correlation between the change of the copper price and the change of the total exports was 0.79 (1994–2004).

### Macroeconomic implications and risks
- Copper price fluctuations still account for most of the fluctuation of Mongolia’s total exports despite copper’s reduced export share.
- Current overall balance and current account were being lifted by rising world copper prices.
- Stress tests show Mongolia’s public external debt sustainability would be highly vulnerable to shocks from any significant fall in world prices in the coming months or years.
- The medium-term outlook notes a risk of an even-greater-than-assumed decline in copper and gold prices, which are the main recent export drivers.
- The DSA baseline does not reflect the possible coming on stream of the Oyu Tolgoï project; development by 2007 or 2008 would have a large, positive impact on activity, government revenues and exports (project low estimate: US$6 billion in reserves).

### Policy implications and recommendations
- Copper price risk management should be considered by the government as a way to smooth its revenues and reduce short-term vulnerabilities.
- A cautious approach to contracting public borrowing is required, given high vulnerability to terms-of-trade shocks tied to copper and gold exports.
- The report advises limiting borrowing to concessional terms to maintain sustainable debt dynamics over the medium and long-term.

### Key statistics and indicators (preserved exactly as in source)
- Copper exports’ contribution to GDP in 2004: 21.5 percent
- Copper sector share of government total revenues in 2004: 8.9 percent
- Expected copper sector share of government total revenues in 2005: 10.5 percent
- Copper share of total exports: 54.1 percent (1994) → 36.2 percent (2004)
- Gold share of total exports: 3.1 percent (1994) → 27.9 percent (2004)
- Garments share of total exports: 10.9 percent (1994) → 20.2 percent (2004)
- Correlation copper price change — GDP (1994–2004): 0.59
- Copper exports in GDP fluctuation range (1994–2004): 12.5 and 21.5 percent
- Correlation copper price change — government total revenues (1994–2004): 0.46
- Correlation copper price change — total exports (1994–2004): 0.66
- Correlation copper price change — change of total exports (1994–2004): 0.79
- Low estimate of Oyu Tolgoï copper and gold reserves: US$6 billion

*Source: _cr05396 - Box 2: The Impact of Copper on the Economy*

### 21.      The authorities’ Medium-Term Budget Framework (MTBF) for 2006–08 was

### _cr05396 - 21.      The authorities’ Medium-Term Budget Framework (MTBF) for 2006–08 was

### Medium-term fiscal framework and overall deficit
- MTBF submitted to Parliament in May 2005 envisages overall deficit increase to 4 percent of GDP in 2006, compared with the original 2005 budget target of 3½ percent.
- Developments (continued buoyancy of revenues and proposed tax reforms) suggest the MTBF will need revision to serve as a useful guide for policy.
- Team recommendation: ground the medium-term framework and tax reform proposals within overall fiscal allocation priorities.
- Staff view: taking into account projected deterioration in the terms of trade, an overall fiscal deficit of no more than 3-3¼ percent of GDP would be appropriate from 2006 onward.
- Rationale: this stance would be consistent with a steady decline in the stock of net credit to government and the ratio of public debt to GDP, while allowing room for concessionally financed capital spendings.

### Spending reforms and public wage/pension measures
- Staff encouraged implementing spending reforms in line with FAD technical assistance (Annex VII).
- Main reform areas for efficiency gains and savings:
  - Civil service and pension reform combining employment and compensation reviews.
  - Enhance pension sustainability by raising the retirement age and phasing in a notional defined contribution system.
  - Eliminate overlapping family benefits.
  - Consolidate public tertiary education institutions.
  - Eliminate public health services of a purely private nature.
- Wage bill containment measures recommended:
  - Partial hiring freeze to reduce excess support staff.
  - Limiting increases in real wages of support staff.
- Authorities’ position and actions:
  - Will focus on eliminating unnecessary positions; working group reviewing hiring and wage levels.
  - Considering proposals from Ministry of Social Assistance to restore pension viability and improve targeting of social benefits.
  - Considering targeting child money scheme payments by applying additional criteria.
  - Mission concern: proposals to build 40,000 housing units financed by very large nonconcessional foreign loans that would require public guarantees or servicing.

### Tax policy and medium-term reform proposals
- Government medium-term focus: ease tax burden on private sector and promote investment-led growth.
- Risk identified: combination of floated proposals could cause substantial revenue losses, reduce tax system efficiency, increase income inequality, and worsen business environment.
- Consideration had been given to flat rate proposals lowering top rates of CIT and PIT and gradually reducing VAT rate; pressures also exist to capture more mining boom benefits through taxes and charges.
- Mission recommendation: a comprehensive, broadly revenue neutral tax reform package along FAD recommendations, including:
  - Removing exemptions.
  - Unifying the CIT at 25 percent, in two phases.
  - Removing restrictions on legitimate business expenses, and providing for loss carry forward.
  - Introducing a cost effective system of tax incentives based on investment tax credits.
  - Reducing cascading under the VAT.
  - Increasing the threshold of PIT.
  - Introducing taxes on domestic beer and telecommunication services, and increasing excises on cars to offset revenue losses.
- Mining taxation caution: raising royalties well above industry standards would jeopardize investment; urged caution—World Bank team providing technical assistance.
- Government’s latest plans (after several revisions) sought to avoid earlier pitfalls; staff supported:
  - Increasing the PIT threshold.
  - Allowing legitimate expenses under CIT.
  - Replacing cost-ineffective tax holidays with tax credits.
- Further staff encouragements:
  - (i) unify the CIT rate nearer the top rate;
  - (ii) amend provisions for loss carry forward;
  - (iii) improve the VAT refund system;
  - (iv) eliminate remaining non-standard VAT exemptions.

### Public financial management (PFM) improvements
- Government implemented a fully integrated Government Financial Management Information System with World Bank support to allow improved fiscal reporting and control over funds.
- Staff welcomed progress and noted contribution to transparency per ROSC update on fiscal transparency.
- Concern: sharp increase in balances held outside the Treasury Single Account (TSA) in commercial banks since mid-2004 (when BOM ceased paying interest on these balances).
- Staff argument: budgetary discipline threatened by increased autonomy of entities collecting revenues to supplement appropriations; urged reversal of these trends.
- Authorities noted interest on such deposits must be resolved before agencies could be compelled to bring accounts under TSA.
- Plans being discussed with World Bank to improve procurement procedures.

### Monetary policy and exchange rate policy
- Team view: authorities’ medium-term inflation objectives at risk if ongoing monetary stimulus not withdrawn.
- Monetary Policy Guidelines (MPG) main monetary target for 2005: restrain growth of reserve money to 15 percent.
- Short-run outlook: given supply-side price shocks, unlikely inflation can be brought down below 10 percent, well above MPG target 5 percent.
- Recommendation: BOM tighten monetary stance through indirect instruments to meet MPG target.
- Operational instrument: Central Bank Bills (CBBs)
  - Need to increase stock of CBBs from Tg. 69 billion at end-2004 to about Tg. 95 billion by end-2005, which would also raise yields.
  - Yields on CBBs declined sharply in early 2005—the discount rate on two-week CBBs was 3-4 percent at end April, down from nearly 16 percent in December 2004.
  - Commercial bank interest rates likely to remain close to their current relatively high levels—23 percent for lending rates, and an average of 13 percent of deposit rates.
- Other measures:
  - Transfer treasury funds in commercial banks back to government BOM account to tighten liquidity.
  - Consider increases in reserve requirements only after BOM has exhausted CBB issuance via open tender.
  - BOM may re-examine effectiveness of instruments and operational procedures, possibly with Fund’s MFD assistance.
- BOM concerns and staff positions:
  - BOM recognized need to tighten via additional CBBs but concerned about losses; requested government offset cost of monetary operations by paying interest on remaining $90 million balance of loan that financed the Russian debt settlement.
  - Team supported BOM position and called on BOM to pay suitable interest on all government deposits held with them to reduce incentive for agencies to hold balances in commercial banks.
- Exchange rate policy:
  - Authorities committed to flexible exchange rate with interventions limited to smoothing and reserve acquisition.
  - International reserve levels broadly adequate (2½–3 months of imports).
  - If favorable shocks (new mining prospects) predominate, allowing togrog appreciation would help contain overheating; if negative shocks predominate, nominal depreciation would facilitate adjustment.
  - Medium-term amplitude of bilateral and effective exchange rate movements may be higher than observed over last two years.

### BOM governance and financial position
- BOM reported incurring significant losses in 2005; interest cost of CBBs made BOM hesitant to issue them adequately.
- Staff view: dealing with BOM financial problems may distract senior management from core focus (monetary policy and banking supervision); recommended comprehensive approach:
  - Assess full extent of losses.
  - Review legal framework to establish obligations of Ministry of Finance and BOM if net worth falls below best-practice norms.
  - Submit plan to Parliament to strengthen BOM finances and governance in medium term.
- Authorities and BOM agreed need to strengthen BOM financial position and governance.
- Audit-report identified likely breaches of Central Bank Law (CBL) in BOM accounts for 2003 and 2004, including:
  - Government borrowing in excess of statutory limits.
  - Unauthorized lending to private sector.
  - Premature transfers of profits to the Budget.
  - Poor international reserve management practices.
- Authorities agreed Supervisory Board’s role should be strengthened and reports more widely disseminated to Parliament.
- BOM’s gold operations:
  - BOM recognized its own-account trading and intermediary gold operations were unconventional but intended to continue until private sector took over.
  - Mission stressed such gold operations, including futures and derivatives, are highly risky for reserves and weaken governance.

### Financial sector vulnerabilities: banks, NBFIs, and CSCs
- Banking sector concerns:
  - NPLs (including overdue loans) increased during past 12 months, with ratio of NPLs to total loans rising to more than 11 percent.
  - Prospect of one or more banks getting into serious difficulty in the relatively near future cannot be ruled out.
  - Indicators of bank profitability have deteriorated.
  - Even limited bank default plus macro shocks could trigger a confidence crisis.
- BOM’s stance and supervisory actions:
  - BOM recognized some banks could get into serious difficulty but believed no systemic risk.
  - Improvements made: strengthened NPL identification and provisioning, and higher capital base requirements (when fully enforced).
  - Staff recommended continued strengthening of supervision, avoidance of regulatory forbearance, and improved corporate governance.
  - MFD recommendations: prepare detailed contingency plans for a systemic banking crisis; take targeted actions against problem banks; intensify on-site examinations; encourage or require problem banks to engage in management advisory contracts with experienced banks.
- Specific supervisory issues:
  - Breaches of banking laws occurred in case of three banks involved in issuance of large amount in L/Cs; validity of these L/Cs in question.
  - Potential for bank failure significant if legal judgments are held against any of these three banks given L/C amounts large relative to capital/assets.
  - BOM agreed to be ready to take strong action toward banks in event of default, non-committal on action against bank management.
  - BOM intends to carry out an in-depth check for similar transactions across the banking system and review procedures to prevent recurrence.
- Credit and savings cooperatives (CSCs) and NBFIs:
  - CSCs largely unregulated yet advertise deposits despite prohibitions, posing spillover risks to banking system though aggregate size remains small.
  - Proposals for a regulatory framework (including supervisory powers and prudential standards) to be submitted to Parliament in fall 2005.
  - Authorities acknowledged need to provide adequate resources to agency vested with supervisory powers over CSCs; consideration being given to a supervision agency covering whole non-bank financial sector.

### External policies: debt management and trade
- Debt sustainability analysis (DSA):
  - Authorities agreed with staff’s macroeconomic assumptions and main DSA findings.
  - DSA conclusion: strict continuation of government’s current external borrowing policy—relying only on concessional external borrowing or grants—was called for.
  - Authorities acknowledged need to resist pressures for agreements involving nontransparent negotiation and procurement procedures.
  - Team underscored critical need for improved debt management; Ministry of Finance tracking same debt indicators as used by DSA and plans to inform Parliament on debt management importance.
- Overdue bilateral debts:
  - Mission urged finalizing negotiations to clear existing overdue debts and avoid any new arrears.
  - Negotiations with Russia to resolve post-1991 Russian debt arrears (US$10 million as of end-2004) have taken place but no formal agreement reached.
  - Long-standing restructuring/rescheduling with Italy (US$13 million) yet to conclude.
  - A debt to Finland (US$9 million) remains unresolved; authorities do not regard this as in arrears due to readiness to provide meat as payment per earlier agreement.
- Trade policy:
  - WTO Trade Policy Review (TPR) confirmed Mongolia maintains generally open trade regime with a low uniform level of import tariff, limited non-tariff barriers, and only a few, small export taxes.
  - Political pressure for protectionism emerging, especially in food, drink and cashmere processing sectors; TPR cautioned against such pressures.
  - Proposals floated for selective duty increases and new export tariffs, especially on mineral products and raw cashmere; mission argued these should be resisted.
  - New minerals export taxes would hurt mining sector investment, FDI and growth; proposed tax on raw cashmere exports could lead to loss of income to herders or increased smuggling.
  - Recent lifting of quota under ATC hurt small garment sector; authorities engaging US and EU for favorable bilateral treatment and seeking greater access in markets such as meat where sanitary regulation has impeded trade.

*Source: IMF staff report text provided in content unit _cr05396*

### 44.      After some delay, the authorities have completed a progress report of the

### _cr05396 - 44.      After some delay, the authorities have completed a progress report of the

### Progress report on the Economic Growth Support Poverty Reduction Strategy (EGSPRS)
- The authorities completed a progress report of the EGSPRS formulated in 2003.
- The progress report:
  - reaffirms the approach of the earlier document published by the previous administration;
  - focuses on ways to enhance broad-based growth while embracing the pursuit of the Millennium Development Goals.
- Progress on achieving the Millennium Development Goals has been limited (Annex I).
- IMF staff, World Bank staff, and other donors discussed assisting to enhance priority setting and costing of initiatives in the EGSPRS within one broad framework to replace various action plans and guidelines, and to improve poverty monitoring.

### Ex Post Assessment (EPA) of Program Engagement, 1991–2005 — main findings
- Overall program design for macroeconomic policies for the SBA and three structural programs supported by the Fund had generally been appropriate.
- The level of intended financing provided by the Fund was adequate, given the large amounts of other donor support.
- Arrangements were frequently delayed and incomplete, yet official grants and lending from international development banks and bilateral donors was generally as projected and constant.
- Because of the steady flow of concessional financing, external debt had been allowed to rise to levels threatening sustainability.
- Programs differed in emphasis reflecting evolving transition stages and emerging challenges but were unable to be completed; a large part of the structural agenda remained unfinished:
  - the financial sector remained weak;
  - public enterprises required further restructuring or privatization;
  - poverty reduction goals were yet unrealized.
- Failures to complete arrangements were partly linked to country ownership not being fully sustained, undermined by frequent elections and government changes.
- EPA team recommendation: continued close policy dialogue between the Fund and the Mongolian authorities, ideally backed by a low access financial arrangement, because:
  - macroeconomic stability remained fragile;
  - tax and expenditure reforms needed further enhancement;
  - the financial sector required strengthening.
- Authorities’ perspective:
  - agreed with EPA broad conclusions and endorsed multiparty backing for any future Fund-supported program;
  - viewed two key factors undermining sustained ownership: a politicized society making policy continuity difficult, and poor government control over implementation;
  - favored focused programs concentrating on timely actions;
  - noted lack of linkage between foreign-financed projects and longer term fiscal implications; Deputy Prime Minister favored foreign direct investment where possible;
  - agreed poverty reduction and job creation were important, with strengthening of the financial sector and fiscal operations as key conditions—including a fully agreed and integrated medium term budget framework.

### Other issues (public enterprises, governance, statistics)
- Public enterprise reform and privatization:
  - appear to have stalled but the government sought to make progress;
  - next 3-year privatization program includes key enterprises in sectors designated as strategic, such as cashmere processing, banking, and energy;
  - energy sector: need to secure more energy supply with state and private sector involvement; guidelines for privatizing power plants, distribution and transmission networks submitted to Parliament;
  - public opposition existed to tariff adjustments needed to enhance financial viability of enterprises.
- Public sector governance and anti-corruption:
  - authorities agreed that a forceful move on as broad a front as possible to improve public sector governance would be beneficial;
  - priorities include improvement of BOM governance and ensuring accountability of government operations revealed by the settlement of the Russian debt;
  - measures that could contribute: Extractive Industries Transparency Initiative, envisaged new anti-corruption law instituting income disclosure requirements on senior officials, adoption and implementation of Anti-Money Laundering and Combating the Financing of Terrorism (AML-CFT) law, and legal and judicial reforms;
  - business community would welcome transparency of tax and customs administration operations.
- Statistics and data weaknesses:
  - while Mongolia produces a wide range of statistics, weaknesses remain in key economic data;
  - some progress in developing a national accounts framework; authorities welcomed assistance to improve quality of GDP estimates and to develop a producer price index;
  - fiscal data quality could be improved with introduction of the chart of accounts;
  - despite improvement in coverage of the BOP, further upgrading needed, particularly on remittances of migrant workers abroad and foreign direct investment; further technical assistance would be useful.

### Staff appraisal — medium-term prospects and risks
- Medium-term prospects are broadly favorable, provided authorities manage to slow inflation back to a single digit and sustain supportive fiscal policies.
- Growth projection: expected to settle around the 5 percent range, with a return to trend growth for the livestock sector.
- Mining: gradual coming on stream of a series of mid-size mining projects projected to sustain a stable pace of extraction.
- Inflation projection: with appropriate policy action (mainly monetary), inflation should slow to about 10 percent year-on-year at end 2005, returning to a 5 percent trend in 2006.
- Balance of risks to growth: broadly even.
  - Vulnerabilities: susceptible to a more pronounced decline in copper prices than currently anticipated; vulnerable to large weather shocks.
  - Policy risks: pressures for measures that could derail the fiscal stance remain intense.
  - Upside potential: very large increase in mineral extraction could transform the economy significantly.

### Fiscal policy advice and projections
- For 2005:
  - staff supports authorities’ aim to keep overall deficit to 2 percent of GDP, 1½ percentage points less than in the budget.
  - Rationale: at a time of high inflationary pressures, no need for additional stimulus, and weakening current account prospects, the stance contributes to macroeconomic stability.
  - Achieving the lower deficit target requires avoiding expenditure slippage from the approved budget, and saving additional revenues arising from temporarily favorable macroeconomic factors.
- For 2006 and beyond:
  - direction of fiscal stance should be broadly neutral, provided inflationary pressures have subsided.
  - Some small widening of the overall fiscal deficit to about 3–3¼ percent of GDP from 2006 would be appropriate as terms of trade gains unwind.
  - That deficit would be considerably lower than that envisaged at the time of the PRGF review.
  - Net domestic borrowing would continue to be significantly negative, and public debt would decline in GDP terms while financing infrastructure improvements critical for growth.
- Fiscal policy cautions:
  - authorities urged to resist tax giveaways and focus on eliminating distortions in current income taxes and VAT;
  - avoid inappropriate spending increases (e.g., large pay rises without staffing reforms, general increases in social transfer programs);
  - avoid engaging in large infrastructure projects with limited rates of return.
- Reform intent:
  - staff welcomes intention to reform the civil service and pension system but notes such changes will need perseverance.

### Debt sustainability and borrowing guidance
- Public debt seen as sustainable in the longer term but vulnerable to extreme terms of trade shocks.
- With aid from bilaterals, the AsDB and the World Bank at favorable terms, debt dynamics are consistent with sustainability.
- Although debt-to-GDP ratio is above the sustainability threshold for low-income countries in the same category of policy performance ratings and would remain above for some time, the strong export and revenue base is important.
- NPV of debt to exports and to revenues remain significantly below sustainability thresholds.
- Extreme permanent drop in mineral prices could undermine the position.
- Staff advises against loan agreements that entail nonconcessional terms and/or implicit or explicit government guarantees:
  - Nonconcessional external borrowing by the public sector on such a large scale as suggested would threaten external sustainability and raise governance concerns.
  - Any loans should adhere strictly to regulations relating to government borrowing and guarantees.

### Public financial management, monetary policy, and exchange rate guidance
- Public financial management:
  - implement plans for improvements vigorously to ensure tight control over public finance and improve transparency.
  - Government Financial Management Information System is an ambitious undertaking expected to allow improved fiscal reporting and control in time.
  - All budget resources should be consolidated in the treasury single account to improve transparency.
- Monetary policy:
  - a tighter monetary stance is essential to tame inflationary pressures.
  - staff looks forward to resumption of central bank bill issues in remaining months of 2005 to achieve target growth for reserve money and prevent supply-driven price increases becoming embedded in persistent double-digit inflation.
- Exchange rate:
  - for a commodity exporter like Mongolia, a flexible exchange rate regime remains appropriate.
  - government should resist trade-based measures to support sectors hit by shocks.
  - interventions should be limited to smoothing high-frequency fluctuations in the foreign exchange market.
  - with continued temporary high mineral prices, authorities urged to save some windfall gains through further reserve build up.
  - authorities commended for resisting undermining the open trading system.

### Financial sector and Bank of Mongolia (BOM) governance
- Financial sector health:
  - further progress needed to improve health of financial system and strength of central bank.
  - concern that high credit growth may mask fragility in some banks and regulatory forbearance.
  - indications some banks are weakening; BOM needs forceful corrective actions, tighter supervision, strict enforcement of prudential norms, including painful adjustments for individual institutions.
  - problems in the non-bank financial sector should be tackled vigorously; savings cooperatives may be running into difficulties.
  - consolidated non-bank financial watchdog agency proposed by authorities would be welcome.
  - staff encourages finalization of drafting laws for Anti-Money Laundering and Combating the Financing of Terrorism.
- BOM governance:
  - staff urges authorities to resolve BOM capital weakness and improve decision-making structure.
  - an enhanced supervisory board with direct access to parliament could assist oversight.
  - advisable that BOM move away from intermediation operations in gold, particularly derivative transactions; if such functions must remain public, they should be carved out into an agency legally and operationally separate from the central bank.

### Public enterprise restructuring and privatization
- Restructuring remains a priority via improved governance of enterprises to remain public and resuming the privatization program.
- Energy sector specifically would benefit from revamping operations and ensuring additional electricity supply in the longer term.

### Concluding recommendations
- Use the current strong external environment to:
  - provide fiscal space to consolidate debt sustainability;
  - resume a strong structural program to tackle outstanding poverty and growth issues.
- Early action to address governance weaknesses in the BOM and normalize links with government could provide basis for resumption of Fund program support.
- Apply the highest standard of transparency and accounting to any large-scale loan operation or settlement to build public confidence.
- Improve quality and coverage of fiscal statistics and address priority issues for national accounts and balance of payments:
  - implement government-wide chart of accounts to resolve technical issues for fiscal data;
  - focus on improved poverty indicators to assist work on the MDGs.

*Source: _cr05396 - IMF staff report excerpt.*

### 67.      It is recommended that Mongolia be on a 12-month consultation cycle. The

### _cr05396 - 67.      It is recommended that Mongolia be on a 12-month consultation cycle. The

### Recommendation and publication
- It is recommended that Mongolia be on a 12-month consultation cycle.
- The authorities have indicated that they, in principle, would consent to the publication of the staff report.

### Key macroeconomic indicators (selected, 2002–06; amounts in millions of US dollars unless otherwise indicated)
- Nominal GDP (2003): $1,274 million
- Population (2003): 2.47 million
- Per capita GDP (2003): $516
- Poverty incidence: 36 percent.
- Quota: SDR 51.1 million
- Real GDP: 4.0 (2002), 5.6 (2003), 10.6 (2004), 5.0 (2005 Proj.), 6.0 (2006 Proj.)
- Consumer prices (end period): 1.7 (2002), 4.7 (2003), 10.6 (2004), 10.0 (2005 Proj.), 5.5 (2006 Proj.)
- General government revenue (percent of GDP): 38.4 (2002), 37.9 (2003), 39.4 (2004), 39.1 (2005 Proj.), 37.4 (2006 Proj.)
- General government expenditure (percent of GDP): 44.4 (2002), 42.1 (2003), 41.7 (2004), 41.0 (2005 Proj.), 40.4 (2006 Proj.)
- Current balance (percent of GDP): 4.4 (2002), 7.6 (2003), 9.2 (2004), 9.3 (2005 Proj.), 7.4 (2006 Proj.)
- Primary balance (percent of GDP): -4.3 (2002), -3.0 (2003), -1.0 (2004), -0.7 (2005 Proj.), -2.0 (2006 Proj.)
- Overall balance (percent of GDP): -5.9 (2002), -4.2 (2003), -2.2 (2004), -1.8 (2005 Proj.), -3.0 (2006 Proj.)

### Monetary and banking aggregates (selected)
- Broad money (percent change): 41.9 (2002), 49.7 (2003), 20.3 (2004), 19.3 (2005)
- Reserve money (levels and growth): Reserve money 21.7 (2002), 14.7 (2003), 16.8 (2004), 14.3 (2005)
- Broad money velocity (GDP/BM, seasonally adjusted): 2.6 (2002), 2.1 (2003), 2.1 (2004), 2.0 (2005)
- Annual interest rate on central bank bills (percent, annualized yield on 14-day bills): 8.0 (2002), 15.0 (2003), 15.8 (2004)
- Net nonperforming loans/total loans (%): 7.8, 7.0, 8.2, 8.3, 8.6, 12.4, 10.9, 11.2, 10.0 (period series reported in Table 3)

### External sector and balance of payments (selected)
- Current account balance, including official transfers (millions of US dollars): -108 (2003), -99 (2004), 18 (2005), -37 (2006), -83 (2007)
  - In percent of GDP: -9.6 (2002), -7.7 (2003), 1.2 (2004), -2.2 (2005), -4.6 (2006)
- Trade balance (millions of US dollars): -229 (2002), -199 (2003), -149 (2004), -206 (2005), -267 (2006)
  - In percent of GDP: -20.5 (2002), -15.6 (2003), -9.8 (2004), -12.0 (2005), -14.9 (2006)
- Exports, f.o.b. (millions): 524 (2002), 627 (2003), 872 (2004), 914 (2005), 883 (2006)
  - Percent change: 3.2 (2002), 19.7 (2003), 39.0 (2004), 4.9 (2005), -3.5 (2006)
  - Of which gold (millions): 118 (2002), 157 (2003), 240 (2004), 272 (2005), 290 (2006)
  - Of which copper (millions): 140 (2002), 162 (2003), 284 (2004), 308 (2005), 268 (2006)
- Imports, c.i.f. (millions): 753 (2002), 827 (2003), 1,021 (2004), 1,120 (2005), 1,150 (2006)
  - Percent change: 8.6 (2002), 9.8 (2003), 23.5 (2004), 9.7 (2005), 2.7 (2006)
- Financial and capital account balance (millions): 174 (2002), 111 (2003), 101 (2004), 89 (2005)
- Gross official international reserves (end-period, millions): 271 (2002), 178 (2003), 205 (2004), 268 (2005), 269 (2006)
  - In months of next year/projected imports c.i.f.: 3.9 (2002), 2.1 (2003), 2.2 (2004), 2.8 (2005), 2.7 (2006)
- Net official reserves of the BOM (million U.S. dollar, selected): 160.0, 225.7, 129.0, 149.7, 156.1, 153.9, 163.5, 186.4, 211.4 (series in Table 3)

### Public and external debt (selected)
- Total public debt (incl. IMF) (millions of US dollars): 978 (2002), 1,237 (2003), 1,360 (2004), 1,417 (2005), 1,511 (2006)
  - In percent of GDP: 89.1 (2002), 91.7 (2003), 113.9 (2004), 99.0 (2005), 88.0 (2006)
- NPV of total public debt (millions of US dollars): 658 (2002), 816 (2003), 822 (2004), 871 (2005), 930 (2006)
  - As percent of GDP: 62.8 (2002), 62.7 (2003), 80.2 (2004), 60.2 (2005), 55.3 (2006)
- NPV of public and publicly guaranteed external debt (millions): 658, 816, 822, 871, 930 (same series)
  - In percent of exports of goods & services: 92.9, 97.7, 67.7, 68.9, 73.3 (2002–06)
- Public and publicly guaranteed external debt (millions): 978 (2002), 1,237 (2003), 1,360 (2004), 1,417 (2005), 1,511 (2006)
  - In percent of GDP: 88.7 (2002), 99.1 (2003), 90.9 (2004), 84.9 (2005), 86.0 (2006)
- Debt service (millions): 32.0 (2002), 284.0 (2003), 91.0 (2004), 147.6 (2005), 44.3 (2006)
  - In percent of exports of goods and services: 4.5 (2002), 34.0 (2003), 7.5 (2004), 3.7 (2005), 3.5 (2006)

### Fiscal operations (General Government, 2001–06; percent of GDP and levels)
- Total revenue and grants (selected years, millions of togrogs / percent of GDP): 429.5 (2001), 477.0 (2002), 553.9 (2003), 713.1 (2004), 738.9 (2005), 806.1 (2006), 839.9 (2006 proj in table header)
- Total expenditure and net lending (millions): 489.7 (2001), 550.5 (2002), 615.8 (2003), 753.7 (2004), 806.8 (2005), 843.7 (2006), 908.2 (proj)
- Overall balance (incl. grants, millions): -60.2 (2001), -73.4 (2002), -61.9 (2003), -40.6 (2004), -67.8 (2005), -37.6 (2006), -68.3 (proj)
- Financing (millions): 60.2 (2001), 73.4 (2002), 61.9 (2003), 40.6 (2004), 67.8 (2005), 37.6 (2006), 68.3 (proj)
- Domestic revenue (percent of GDP): 37.9 (2002), 37.3 (2003), 39.1 (2004), 38.9 (2005)
- Total expenditure and net lending (percent of GDP): 44.4 (2002), 44.4 (2003), 42.1 (2004), 41.7 (2005), 40.4 (2006)
- Current balance (excl. privatization receipts, percent of GDP): 4.8 (2001), 4.4 (2002), 7.6 (2003), 9.2 (2004), 7.1 (2005), 9.3 (2006), 7.4 (2006 proj)
- Primary Balance (percent of GDP): -3.9 (2001), -4.3 (2002), -3.0 (2003), -1.0 (2004), -1.9 (2005), -0.7 (2006), -2.0 (2006 proj)
- Domestic bank financing (net, percent of GDP): -1.7 (2001), -2.2 (2002), 9.5 (2003), -3.2 (2004), -3.9 (2005), -4.2 (2006), -2.6 (proj)

### Medium-term macroeconomic framework (2002–10, selected)
- Nominal GDP (in millions of U.S. dollars): 1,118 (2002), 1,274 (2003), 1,516 (2004), 1,717 (2005), 1,790 (2006), 1,898 (2007), 2,027 (2008), 2,170 (2009), 2,310 (2010)
- Real GDP (percent change): 4.0 (2002), 5.6 (2003), 10.6 (2004), 5.0 (2005–10 projected annually)
- Consumer prices (end-period, percent change): 1.7 (2002), 4.7 (2003), 10.6 (2004), 10.0 (2005), 5.5 (2006), 5.0 (2007–10)
- Current account balance (excluding official transfers, percent of GDP): -14.4 (2002), -11.6 (2003), -4.5 (2004), -7.1 (2005), -9.6 (2006), -9.1 (2007), -8.9 (2008), -8.5 (2009), -8.6 (2010)
- Gross official reserves (millions of US dollars): 271 (2002), 178 (2003), 205 (2004), 268 (2005), 269 (2006), 253 (2007), 245 (2008), 245 (2009), 263 (2010)
- Total public debt (percent of GDP): 91.7 (2002), 113.9 (2003), 99.0 (2004), 88.2 (2005), 86.7 (2006), 85.5 (2007), 84.0 (2008), 81.9 (2009), 80.2 (2010)
- NPV of total public debt (percent of GDP): 62.7 (2002), 62.7 (2003), 80.2 (2004), 60.2 (2005), 55.3 (2006), 52.7 (2007), 51.9 (2008), 50.7 (2009), 49.9 (2010)

### Structural benchmarks and performance criteria (September 2003–March 2004)
- Prior Actions (Observed): 
  - Secure Parliamentary approval of Medium-Term Budget Framework (August 31, 2003) — Observed.
  - Secure Parliamentary approval of amendment to the Central Bank Law and prepare TOR for Supervisory Board (August 31, 2003) — Observed.
- Structural Benchmarks (October 31, 2003 / March 31, 2004): 
  - Issue ministerial resolution on allocation of excess own-revenues and reporting — Observed (October 31, 2003).
  - Adopt ministerial regulation to obligate budget managers to make commitments strictly per monthly apportionments and develop Treasury cash plans — Observed (October 31, 2003).
  - Tighten enforcement of prudential controls requiring banks to submit internal audit reports to the BOM — Observed (October 31, 2003).
  - Fully adopt IAS, including IAS 39, in 2003 and future BOM statements — BOM applied IAS 39 since November 2003, but does not yet adopt IAS in full range (March 31, 2004).
- Performance Criteria (timing and status): 
  - Secure Parliamentary approval of TOR for BOM’s Supervisory Board (October 31, 2003) — Observed with delay; Parliament approved TOR in January 2004.
  - Establish Supervisory Board empowered for independent oversight and begin to enforce Central Bank Law amendments (November 30, 2003) — Observed with delay.
  - Complete special audits of BOM’s NIR as of end-June and end-September 2003 — Partially observed; audit on NIR as of end-June 2003 raised some questions.
  - Increase BOM provisioning requirements on commercial banks from 25 percent to 50 percent for substandard loans and from 50 percent to 75 percent for doubtful loans (March 31, 2004) — Observed.

*Sources: Mongolian authorities; and Fund staff estimates and projections.*

### 2.  Net domestic assets of the Bank of Mongolia (stock, ceiling)

### 2.  Net domestic assets of the Bank of Mongolia (stock, ceiling)

### Net domestic assets (BOM) — reported values
- -65.9
- -57.4
- -58.6
- -65.3
- -61.8
- -68.3
- -68.8
- -75.0
- -68.1
- -81.7
- -80.5
- 52.1
- -76.5
- -
- 76.5
- 59.1
- 81.9
- 40.8
- 38.7

### Domestic interest arrears (stock, ceiling)
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.2
- 0.0
- 0.0
- 0.0

### Net international reserves of the Bank of Mongolia (stock, floor)
- 222.0
- 214.5
- 212.7
- 233.0
- 215.7
- 233.9
- 245.0
- 227.7
- 256.9
- 250.0
- 249.1
- 131.6
- 250.0
- 250.0
- 149.5
- 121.1
- 129.5
- 165.0

### New nonconcessional external debt contracted or guaranteed by the government or the BOM (ceiling)
- Maturities of less than 1 year 4/
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
- Maturities of 1–12 years
  - 0.0
  - 0.0
  - 0.0
  - 26.5
  - 26.5
  - 26.5
  - 26.5
  - 26.5
  - 26.5
  - 26.5
  - 26.5
  - 26.5
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
- Maturities of 12 or more years
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0

### External payments arrears (stock, ceiling) 5/
- 4.1
- 4.1
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0

### Indicative target — Net domestic assets of the banking system (stock, ceiling) (In billions of togrogs)
- 189.7
- 198.2
- 199.2
- 235.1
- 254.6
- 239.4
- 240.0
- 259.5
- 236.7
- 252.0
- 253.2
- 468.2
- 269.5
- 269.5
- 497.9
- 636.4
- 626.5
- 561.0

### Memoranda items
- BOM's monetary gold pledged as collateral for external loans to domestic private companies
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
  - 0.0
- Balance of payments support (Excluding disbursements from the IMF)
  - 7.5
  - 7.5
  - 0.0
  - 17.3
  - 17.3
  - 0.0
  - 17.3
  - 17.3
  - 0.0
  - 20.0
  - 20.0
  - 19.1
  - 5.0
  - 5.0
  - 5.0
  - 20.0
  - 20.0
  - 28.4
- External budgetary assistance (program loans) (In billions of togrogs)
  - 8.5
  - 8.5
  - 0.0
  - 19.5
  - 19.5
  - 0.0
  - 19.5
  - 19.5
  - 0.0
  - 22.6
  - 22.6
  - 21.4
  - 5.7
  - 5.7
  - 5.6
  - 23.5
  - 0.0
  - 33.4
- Privatization receipts (In billions of togrogs)
  - 0.5
  - 0.5
  - 8.1
  - 8.2
  - 8.2
  - 8.6
  - 8.5
  - 8.5
  - 9.6
  - 11.1
  - 11.1
  - 20.7
  - 0.5
  - 0.5
  - 17.6
  - 19.1
  - 19.1
  - 14.6
- Transfer from the BOM to government (In billions of togrogs)
  - 0.0
  - 0.0
  - 0.0
  - 5.0
  - 5.0
  - 0.0
  - 5.0
  - 5.0
  - 0.0
  - 5.0
  - 5.0
  - 8.4
  - 0.0
  - 0.0
  - 5.0
  - 0.0
  - 0.0
  - 5.0
- Reserve money (In billions of togrogs)
  - 184.0
  - 184.0
  - 180.8
  - 197.0
  - 201.0
  - 195.1
  - 207.0
  - 213.5
  - 221.0
  - 199.7
  - 199.7
  - 200.3
  - 204.9
  - 204.9
  - 227.5
  - 232.0
  - 239.8
  - 233.
  - 9

### Notes and footnotes contained in the source
- 1/ The attached technical memorandum of understanding (TMU) sets out the definitions for the above targets under which Mongolia's performance under the program will be assessed.
- End-June
- End-Sept
- 5/ Excludes external debt in arrears that is in dispute.
- End-Dec.
- Table 8. Mongolia: Quantitative Performance Criteria and Indicative Targets Under the PRGF Arrangement, 2003–04 1/
- 2004
- 2003
- 2/ Figures after end-June 2003 reflect nonconcessional suppliers’ credits for Durgun hydropower station.
- End-March
- End-March
- 3/ The targets were not set formally, but agreed implicitly in reflection of the macroeconomic framework discussed during the Fund missions.
- 4/ Short-term loans include domestic private company borrowings from an international metals trading company under an administrative guarantee by the BOM which is backed.
- End-Dec.
- (In billions of togrogs)
- (In millions of dollars)

*Source: _cr05396 - 2.  Net domestic assets of the Bank of Mongolia (stock, ceiling)_ (PDF content provided).*

### conclusion of the December 2002 PRGF discussions, the BOM agreed to implement special

### _cr05396 - conclusion of the December 2002 PRGF discussions, the BOM agreed to implement special

### Exchange Arrangement
- Mongolia moved from a fixed exchange rate against the U.S. dollar to a floating exchange rate system on May 27, 1993.
- The Bank of Mongolia (BOM) has at times actively intervened to maintain a stable nominal exchange rate vis-à-vis the U.S. dollar over extended periods.
- The official exchange rate is set daily on the basis of transactions in the interbank market.
- At end-June 2005, the official midpoint rate was Tog 1,190 per U.S. dollar.
- The official exchange rate is applied to the public sector’s transactions in imports and services, including debt-service payments, and to trade and service transactions conducted under bilateral payments arrangements.
- Mongolia accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 1, 1996, and maintains an exchange system free from restrictions on payments and transfers for current international transactions.

### Article IV Consultation
- The 2002 Article IV consultation (Country Report No. 02/252) was concluded by the Executive Board on October 25, 2002.
- Mongolia will be on the 12–month cycle.

### ROSC Assessments
- ROSC, Data Module, May 4, 2001 (www.imf.org)
- ROSC, Fiscal Transparency Module, November 8, 2001 (Country Report No. 01/218)
- ROSC, Fiscal update, May, 2005

### Recent Financial Arrangements
- Three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) equivalent to SDR 40.81 million (80 percent of quota); first annual arrangement SDR 18.55 million (36.3 percent of quota) approved on June 25, 1993; second annual arrangement SDR 11.13 million (21.8 percent of quota) approved on November 23, 1994; ESAF arrangement lapsed on June 24, 1996.
- Three-year arrangement under the ESAF/PRGF equivalent to SDR 33.4 million (65.4 percent of quota); first annual arrangement SDR 11.13 million (21.8 percent of quota) approved on July 30, 1997; first year arrangement lapsed on July 30, 1998; second annual arrangement SDR 14.8 million (29 percent of quota) approved on June 16, 1999; first review completed January 2000; arrangement lapsed on June 15, 2000; ESAF/PRGF arrangement lapsed on July 29, 2000.
- Three-year arrangement under the PRGF equivalent to SDR 28.49 million (55.8 percent of quota); first year SDR 12.21 million (23.9 percent of quota) approved by the Executive Board on September 28, 2001; first and second reviews completed on September 12, 2003; Executive Board approved extension of the PRGF through July 31, 2005; arrangement expired on that date without completion of the third and subsequent reviews.

### Technical Assistance (Missions)
- Banking supervision and payment systems (MFD), June 2005.
- Options for Expenditure Savings and Efficiency Improvements (FAD), January 2005.
- Banking supervision and prudential framework (MFD), October 2004.
- Reforms of Tax Policies (FAD), October 2004.
- Government Finance Statistics (STA), August 2004.
- Balance of Payments Statistics (STA), July-August 2004.
- Banking supervision and prudential framework (MFD), May-June 2004.
- AML/CFT Action Plan and legislative awareness, May 2004.
- Banking supervision and accounting (MFD), October 2003.
- Government Finance Statistics (STA), August 2003.
- AML/CFT (MFD), June 2003.
- Banking supervision and accounting (MAE), November 2002.
- Revenue administration (FAD), September 2002.
- Banking supervision and accounting (MAE), May 2002.
- Review of treasury and intergovernmental fiscal reforms (FAD), August 2001.
- Banking supervision and accounting (MAE), May–June 2001.
- Money and banking statistics (STA), May 2001.
- Government finance statistics (STA), March 2001.
- Fiscal transparency and ROSC (FAD), March 2001.
- Intergovernmental fiscal relations and budget reform (FAD), January 2001.
- Visits by MAE peripatetic experts on banking supervision, payments system, monetary policy, and accounting and audit, November 2000 (ongoing).
- Consumer price statistics (STA), September–October 2000.
- ROSC: data module (STA), May 2000.
- Restructuring bonds and other securities (MAE), March 2000.
- National accounts statistics (STA), February 2000.

### Technical Assistance (Resident Advisors)
- National accounts statistics (STA), August 2001–September 2003.
- Treasury reform (FAD), June 1999–November 2003.
- Balance of payments (STA), March 1999–May 2001.
- Technical assistance for the period May 1995–October 1999 is reported in Annex II of the Staff Report for the 1999 Article IV Consultation.

### Resident Representative
- Ms. Rehm succeeded Mr. Martin as the Fund’s resident representative in Mongolia at end-December 2002.

### IMF-World Bank Relations — Partnership in Mongolia’s Development Strategy
- Mongolia became a member of the World Bank, IDA and IFC in February 1991.
- The Government’s Economic Growth Support and Poverty Reduction Strategy (EGSPRS) was discussed by the respective Boards of Executive Directors of the Bank and the Fund in September 2003; EGSPRS builds on the interim report (I-PRSP) presented in September 2001.
- EGSPRS five main pillars:
  - (i) ensuring macroeconomic stability and enhancing public sector effectiveness;
  - (ii) establishing a sound institutional and regulatory environment to complete Mongolia’s transition to a market economy and enabling the private sector to become an engine of growth;
  - (iii) enhancing balanced and environmentally sustainable development;
  - (iv) fostering sustainable human development and equitable distribution of the benefits from growth through improved service delivery in education, health, and social welfare;
  - (v) promoting good governance and gender equality.
- The Bank and the Fund jointly assisted the Government in formulation and preparation of the EGSPRS and continue to advise and monitor implementation through EGSPRS progress reports.
- The first Progress Report was discussed by Government Cabinet on May 4, 2005 and sent thereafter to Parliament for hearing.
- The World Bank and the IMF prepared a Joint Staff Advisory Note (JSAN) to advise the Government on improving EGSPRS implementation.
- The Bank is assisting the Government improve integration of planning, budgeting, and monitoring systems.

### World Bank Group Country Assistance Strategy and Lending
- Current Country Assistance Strategy (CAS) approved by World Bank Board on April 29, 2004; broadly aligned with EGSPRS.
- Bank funds account for 25 percent of Government investment.
- According to IDA-14 grant eligibility criterion calculations, Mongolia qualified to receive grant-only assistance in the Bank’s fiscal year 2006.
- Portfolio composition:
  - About 49 percent of the portfolio is in infrastructure projects (Energy, Transport, and Services Improvement).
  - 29 percent of the projects are in financial and private sector development.
  - 11 percent of the portfolio focuses on providing sustainable livelihoods to the poor.
  - 11 percent of the projects assist with public sector reform.
- CAS embodies a “results based approach” relating outcomes to EGSPRS goals, including the MDGs.

### Aid Coordination
- Bank lending represents about 11 percent of Mongolia’s overall Official Development Assistance (ODA) flows.
- Five major development partners (ADB, Germany, Japan, the United States, and the World Bank) accounted for approximately 87 percent of gross ODA in 2001-02.
- Government established four government-donor working groups to improve sectoral and cross-sectoral coordination.
- The new ADB country strategy paper (CSP) for 2005-2006 is aligned with EGSPRS priorities.
- USAID 2004-2008 Strategic Plan for Mongolia (approved in 2003) is broadly in line with EGSPRS objectives.
- The 2002-2006 UNDAF complements development activities by Government, civil society and other international donors.

### IMF-World Bank Collaboration in Specific Areas
- Close coordination of policy advice, common objectives, joint missions (including participation in IMF Article IV Consultations and Expenditure Policy Reform missions).
- Shared determination of structural reform measures to implement EGSPRS.

Public Sector and Fiscal Framework
- Bank supports public finance management and civil service administration through analytical advice, technical assistance, and investment projects.
- Proposed first Poverty Reduction Support Credit (PRSC) will focus on public expenditure management and civil service reforms.
- Fund provides advice on fiscal policy, monetary policy, and Central Bank governance.
- Treasury reform advice is a shared responsibility; Bank undertakes it via ECTAC, Fiscal TA, and trust fund-supported activities.

Public Expenditure Management
- Bank assists to improve budget planning, execution, reporting and accountability and public administration.
- Interventions include Fiscal TA and ECTAC, training, capacity building, and upgrading core information systems for public financial management.
- Interventions based on recommendations of the Bank’s Public Expenditure and Financial Management Review for Mongolia (2003).
- Bank implementing an Institutional Development Fund (IDF) Grant to Ulaan Baatar Municipality (UBM) for public expenditure policy formulation and execution.

Civil Service Reform
- Bank support via ECTAC and an IDF grant to:
  - (i) assist implementation of the Civil Service Reform Strategy (passed by Parliament in 2004);
  - (ii) strengthen medium term human resource policy and expenditure formulation in the context of the MTBF;
  - (iii) improve payroll management and control of personnel expenditures.

Financial Sector
- Bank increased involvement since late 1999 via financial sector review and Financial Sector Adjustment Credit (FSAC).
- FSAC objectives: strengthen prudential regulation and supervision, bank restructuring and privatization, resumption of Government payments services in rural areas, timely servicing of Government debt.
- FSAC closed in September 2004 with all tranches disbursed.
- Bank working with Government and selected commercial banks on credit risk management, automated payments system and Savings Bank resolution under the Financial Capacity Development Project (FCDP); mid-term review under way.
- Development of legal and regulatory framework for financial holding companies and NBFIs is an important policy requirement under the PRSCs.
- IFC became a minority owner of two Mongolian banks in 2004; provided funding support to a microfinance bank and technical assistance for leasing industry development; provided funding support to encourage micro-finance through the banking sector.

Private Sector Development
- Bank’s assistance evolved from SOE reforms and legal/regulatory changes in early/mid-1990s to alleviating access to finance through PSDC and PSDC II (PSDC II approved by the Board in June 2005).
- PSDC II will support SME growth through longer-term financing of eligible capital investment projects.
- Bank initiated an integrated study in mid-2004 combining an assessment of the investment climate, competitiveness studies of supply chains, and a diagnostic trade integration study; study to be completed in end-2005.
- Findings to inform development of a PSD strategy and the Bank’s assistance program.
- New lending operations encouraging private sector participation in infrastructure are being considered over the next three- to four-year period.

Social Sector and Poverty
- Bank assisted redesign and implementation of household income and expenditure surveys and subsequent poverty analysis (updated poverty profile as of 2002 due to data availability).
- Bank undertaking a Poverty Assessment; policy notes discussed in June 2005; full report under preparation.
- Bank working with Government to improve financial and budget management in social sectors.
- Bank engaged on hospital rationalization and broader health financing/system issues.
- Bank assisted in analyzing pension scheme sustainability; initiated a study to assess efficiency of targeted social assistance schemes using household survey data.
- Workshop on social transfer programs organized in October 2004.
- Bank helping create a database to track implementation progress of the Child Money program.
- Bank and Fund and ADB coordinate on budgetary impact of social policies and protection of social expenditures and pro-poor investments.
- Bank preparing a Rural School Support project and conducting a Public Expenditure Tracking Survey (PETS) for the education sector.

Rural and Urban Development
- Bank supports rural strategies, pastoral risk management, microfinance services, basic infrastructure via community-driven approaches, and piloting an index-based livestock insurance product (IBLIP approved by the World Bank Board in May 2005).
- Bank assisting Government formulate city development strategy, improve basic services delivery (water supply and Ger area upgrading), and assess urban poverty.
- Bank and Fund collaborate on municipal finance and intergovernmental fiscal relations.

Infrastructure
- Bank preparing an Infrastructure Strategy Report to examine Government prioritization of infrastructure investments and fiscal impact.
- Bank and Fund interested in monitoring inter-enterprise arrears, conducting social impact assessments of energy prices, enhancing transparency in investment decisions and financing arrangements, and efficient management of public funds.

Corruption, Justice and Legal Environment
- Corruption recognized as a significant problem requiring focused attention.
- Implementation of the Public Sector Management and Finance Law (PSMFL) and drafting of an Anti-Corruption Law are positive steps; much depends on quality of laws and implementing rules and regulations.
- Decision making perceived to be non-transparent; patronage and lack of accountability remain problems.
- Fund focuses on Central Bank and Anti-Money Laundering laws; Bank assists with judicial reforms to enhance public confidence in the legal system.
- Challenges remain in enhancing access to justice, disseminating new laws to the public, and enforcing existing laws.

MIGA and WBI
- MIGA: Mongolia signed the MIGA convention in 1991 and ratified it the following year; MIGA can assist in attracting foreign investment through marketing and guarantee activities.
- WBI: World Bank Institute organized seminars and courses in Mongolia, including economic management, business valuation, financial sector development, and social sector reform.

### Mongolia––Relations with the Asian Development Bank (AsDB)
- Mongolia became an AsDB member in February 1991.
- AsDB Country Operational Strategy (COS) for 1994–99 aimed to facilitate transition to a market economy by: (i) creating an environment for a competitive efficient market economy; (ii) developing human resources and skills; (iii) developing infrastructure.
- AsDB entered into a Poverty Partnership Agreement (PPA) with the Government in 2000; new COS for 2000–05 prioritized poverty reduction via pro-poor interventions in six core sectors: finance, public sector, social sector, agriculture, urban development and road.
- New Country Strategy and Program (CSP) for 2006-2008 expected to be completed in September 2005; CSP rests on two pillars:
  - (i) promoting broad-based economic growth—economically diverse, stable, and geographically distributed growth;
  - (ii) supporting inclusive social development—improving access of the poor to stable incomes and public services.
- CSP adopts a results-based program with clearly defined expected outcomes.
- AsDB Private Sector Operations Department (PSOD) explores feasibility of a shareholders loan fund in Mongolia.
- By December 2004, AsDB approved 34 ADF loans totaling $605.8 million and 118 TA grants amounting to $57.22 million.
- In 2005 two loans were expected to be approved: the Financial Sector Reform Program and the Education Sector Development Project; $2 million planned for TA in urban and housing, governance, transport, and capacity building for education and the financial sector.
- AsDB follows a performance-based allocation of ADF resources; Mongolia performed satisfactorily against benchmarks for sustainable economic growth, socially inclusive development, governance and public sector management, and portfolio performance.
- AsDB participates in Mongolia Consultative Group meetings and coordinates operations with IMF, World Bank and other donors; AsDB delivered the joint donors’ statement at the Tenth Assistance Group Meeting in Tokyo in November 2003.
- AsDB Resident Mission officially opened and fully operational in August 2001.
- Since March 2002, Mongolia participates as a full member of AsDB-supported sub-regional cooperation for the Central Asian Republics and People’s Republic of China (PRC).

### Statistical Issues
- (Annex VI titled "Mongolia: Statistical Issues" appears as a following section header in the source.)

*Source: _cr05396 - conclusion of the December 2002 PRGF discussions, the BOM agreed to implement special*

### 1.     Progress to Date

### 1.     Progress to Date

### Macroeconomic statistical framework and data dissemination
- The Mongolian authorities have established a framework for monitoring macroeconomic developments and have made substantial improvements in all statistical areas with extensive technical assistance, including from the Fund.
- Core data are provided on a timely basis.
- Mongolia is participating in the General Data Dissemination System (GDDS), and its metadata were posted on the Dissemination Standards Bulletin Board (DSBB) in August 2000.
- A ROSC mission visited Mongolia in May 2000 to assess data dissemination practices in relation to the IMF’s GDDS; the data module of the ROSC for Mongolia was published on the IMF website in May 2001.
- Note: As the ROSC was not prepared on the basis of the Data Quality Assessment Framework, no ratings were given; consequently, the TCIRS does not include memo items on data quality.

### National accounts and price statistics
- STA mission to assist national accounts improvements visited Mongolia in February 2000; authorities revised annual GDP estimates for 1995–99 and rebased accounts to 1995 prices in conjunction with that mission.
- An advisor assisted the NSO during August 2001- September 2003 to improve primary data collection and compilation systems for national accounts and price statistics.
- CPI methodology was substantially revised in January 2001 based on the 2000 STA mission recommendations. Main revisions:
  - (i) CPI basket updated based on the results of the 1999 Household Income and Expenditure Survey (HIES).
  - (ii) CPI weights updated using results of the 1999 HIES and the 2000 HIES, with the latter update done in March 2002.
  - (iii) CPI rebased from December 1995 to December 2000.
- Outstanding needs noted:
  - Quality of GDP estimates could be improved, particularly current deflation methods for constant price estimates.
  - Proper methodological treatment of animal losses due to harsh winters has been finalized.
  - Efforts needed to improve coverage of the informal sector and small-scale activity, especially in the services sector.
  - Raw data could be refined to produce reliable quarterly GDP estimates.
  - Construction of expenditure-based national accounts in constant price terms recommended as a check on production-side estimates.
- Producer Price Index: progress in implementing STA recommendations to develop a producer price index has been limited mainly due to resource and capacity constraints.

### Government finance statistics (GFS) and public sector reporting
- Authorities adopted systematic procedures for compiling annual fiscal reports for the general government and each subsector; GFS data compiled monthly for all subsectors except the extrabudgetary central government.
- Authorities completed an inventory of all government bank accounts and instituted stricter standards for registering bank accounts for government agencies to allow full reconciliation between government accounts data and banking data; however, adequate reconciliation of monetary and fiscal data and implementation of other TA recommendations are pending.
- In November 2004, STA assisted authorities in compiling the government accounts for 2003 according to the guidelines of the Government Finance Statistics Manual 2001 (GFSM 2001); mission provided extensive on-the-job training in GFSM 2001 methodology.
- Data were prepared and reported in the new format for publication in the 2004 GFS Yearbook.
- Chart of accounts generally follows GFSM 2001 but mission recommended further improvements to classification of assets and liabilities.
- Planned introduction of a computerized government financial management information system could improve data collection and processing, though severe staff constraints may limit MOF’s ability to implement all recommendations; further technical assistance may be required.
- Key shortcomings affecting annual and subannual fiscal data identified later:
  - Lack of coverage of government accounts.
  - Weaknesses in source accounting data.
  - Undocumented compilation and consolidation procedures.
  - Lack of reconciliation between government accounts data and banking data at an aggregate level.
- Recommended remedies: implementation of an integrated government-wide chart of accounts and ongoing treasury reforms to improve accounting and reporting practices.

### Monetary, balance of payments, and external statistics
- The 2001 monetary and financial statistics mission found the Bank of Mongolia (BOM) implemented most recommendations of the 1997 STA mission, including valuation of monetary gold and recording of Fund accounts in the BOM balance sheet.
- May 2001: a long-term resident advisor completed a 26-month assignment to help develop balance of payments (BOP) statistics compilation system, including implementation of an enterprise survey.
  - Survey results were reflected in the 1999 BOP data and used to generate partial international investment position estimates for the nonbank sector.
  - A new report form on international transactions that pass through domestic banks was developed.
  - BOM regulation requiring banks to report international transactions effective from January 1, 2002 was expected to substantially enhance accuracy and timeliness of BOP statistics.
- 2004 TA mission noted shortcomings in sustaining the long-term advisor’s work:
  - Very little use is made of data from the enterprise survey due to its low response rate.
  - Although partial information exists to compile an international investment position, such data are not compiled.
- May 2001 STA mission issues being followed up include:
  - Coverage of monetary statistics.
  - Classification of a number of foreign on-lent loans.
  - Recording of repurchase agreements on the treasury bills.
- A TA mission is scheduled for October 2005 to review progress and assist BOM in implementation of the MFSM methodology.
- Further improvement needed in BOP coverage, particularly data on remittances of migrant workers abroad and foreign direct investment.

### Publications and dissemination practices
- NSO publishes monthly and annual Statistical Bulletins in English and Mongolian covering population, employment, national accounts, prices, household income and expenditure, central and local government revenue and expenditure, and external trade.
- BOM publishes a monthly Statistical Bulletin (within 15 days of the end of the month, which includes summary statistics for the central bank, consolidated balance sheet of commercial banks, and interest and exchange rate data) and Annual Reports since 1993.

### Outstanding Issues (summarized from source text)
- GDP estimates: improve deflation methods, coverage of informal and small-scale activities, produce reliable quarterly estimates, construct expenditure-based constant price accounts.
- Producer price index: limited progress due to resource/capacity constraints.
- Labor statistics: deficiencies in wages and earnings data; establish quarterly sample surveys; use May 2002 civil service survey to build detailed civil service employment and wages database.
- Monetary statistics: follow up on May 2001 mission recommendations; scheduled TA in October 2005 for MFSM implementation.
- Fiscal data quality: improve coverage, source accounting, documentation of compilation/consolidation procedures, and reconciliation with banking data; implement integrated chart of accounts and treasury reforms.
- Balance of payments: need better data on remittances of migrant workers and foreign direct investment.

*Source: _cr05396 - 1.     Progress to Date*

### 4.      While there are important differences across the various debt and debt-service

### _cr05396 - 4.      While there are important differences across the various debt and debt-service

### Key findings on debt distress risk
- Overall assessment: Mongolia is at relatively high risk of debt distress.
- Main findings:
  - only one indicator—NPV of debt to GDP ratio—is above its threshold under the baseline scenario;
  - other indicators are well below their threshold over the entire projected period;
  - terms of trade shock would exacerbate these indicators above the thresholds.

### Baseline medium- and long-term scenario — basic assumptions and thresholds
- Macroeconomic and fiscal assumptions:
  - average real GDP growth rate at 5 percent (except for 6 percent in 2006);
  - increase in export growth in current dollar terms from about 3½ percent in the medium term to 6½ percent in the long term;
  - import growth in current dollar terms rises from about 4¾ percent in the medium term to 6 percent in the long term;
  - output growth around 5 percent based on continued development in mining sector with no large-scale discovery of new mining fields assumed;
  - main nonmining drivers: agriculture (livestock) and services (especially trade, transport and wholesale activities);
  - export projections reflect the WEO assumption of copper price adjustment to their long-term trend;
  - fiscal policy aimed at saving the current high-export price windfall, with all domestic public debt assumed fully repaid by 2008.
- External financing assumptions:
  - new borrowing projected at around US$115 million annually over the medium term, then increasing by about 2 ½ percent annually over the longer term;
  - average concessionality level of new external borrowing assumed at around 47 percent (equivalent to the current level);
  - grants assumed to increase by 2 percent annually over time with slightly higher rates in 2006 and 2007 to reflect IDA grant financing allocated during 2005-06.
- Policy and institutional classification:
  - Mongolia rated as a medium performer as of end-June 2005 under the joint IMF-WB DSA framework for LICs;
  - thresholds applied (medium performer):
    - NPV of debt-to-exports: 150 percent;
    - NPV of debt-to-GDP: 40 percent;
    - NPV of debt-to-fiscal revenue: 250 percent;
    - debt service thresholds: 20 percent of exports and 30 percent of revenues.

### External DSA (baseline results)
- NPV of debt-to-GDP ratio:
  - 55 percent at end-2004 (only indicator initially above its threshold);
  - expected to decline to below the threshold in the long term, but only during the later stage of the projected period.
- NPV of debt-to-export ratio:
  - begins well below the 150 percent threshold and remains there during the entire projection period, reflecting high export-to-GDP ratio from mineral resources.
- Debt service ratio:
  - expected to stay at around 4 percent of exports under the baseline scenario (against the 20 percent threshold), reflecting that most external debt is on concessional terms.

### Fiscal DSA (baseline results)
- NPV of debt-to-revenue ratio:
  - declines from around 150 percent in the medium term to 121 percent by 2015 and further to below 100 percent by 2025.
- Associated debt service ratio:
  - projected to increase to 7.3 percent in 2009, then decline gradually to 5 percent in 2025.
- Revenue assumptions:
  - slight decline of revenue-to-GDP ratio from 39 percent in 2005 to 34 percent by 2010, keeping the same level thereafter.

### Bound tests and alternative scenarios — vulnerabilities identified
- Terms of trade (Mongolia-specific) bound test (Case B.2):
  - assumptions:
    - copper and gold prices decline by 30 percent and 20 percent, respectively, in 2008, and each rises by 1 percent annually during 2009-25;
    - volume growth of gold export is half of the baseline scenario in and after 2008;
    - real GDP growth rate is less by 0.5 percent in 2008 and by 0.25 percent thereafter compared to baseline.
  - results:
    - both NPV of debt-to-GDP ratio and debt-to-export ratio deteriorate to well above corresponding thresholds and do not return to sustainable paths, indicating high vulnerability to international commodity prices.
- Interest rate/concessionality bound test (Case A.2):
  - assumptions:
    - average interest rate rises to 1.6 percent in 2008, gradually to 2.4 percent until 2012, and stays thereafter;
    - grace and maturity periods unchanged from baseline;
    - test equivalent to treating all new external debt as nonconcessional.
  - results:
    - debt burden becomes heavier in the medium term before returning to a sustainable path in the long term;
    - example: NPV of debt-to-GDP ratio would reach 60 percent after 2008 and remain high for several years.
- Risks from relaxation of prudent external borrowing:
  - large-scale external borrowing on non-concessional terms (notably negotiations underway) would worsen debt sustainability;
  - nontransparent negotiations and procurement procedures could increase total project costs even if contract terms appear concessional;
  - contingent liabilities (e.g., central bank guarantees on private sector borrowing) would also risk the baseline sustainable path.

### Fiscal bound-test scenarios — vulnerabilities to growth and exchange rate shocks
- Reversion to historical averages (Case A1):
  - outcome: public debt unsustainable, NPVs of public debt rising to nearly 100 percent of GDP (300 percent of revenue).
- 30 percent real exchange rate depreciation in 2006 (Case B4):
  - outcome: NPV ratio jumps to 76 percent of GDP (203 percent of revenue) in 2006 and remains around 70 percent of GDP (200 percent of revenue) through 2010.

### Debt distress classification and institutional context
- Classification:
  - Mongolia is at moderate risk of debt distress over the medium term, with long-term sustainability conditional on contracting external debt only on concessional terms and a nonadverse external environment.
  - Under the baseline scenario, public external debt ratio declines substantially in the long term.
  - Debt service indicators to export and revenue remain well below relevant thresholds due to high concessionality.
  - NPV of debt-to-export ratio and NPV of debt-to-revenue ratio stay well below their respective thresholds of 150 and 250 percent.
- Historical record:
  - authorities have a strong commitment to meeting external debt obligations;
  - large share of highly concessional multilateral borrowing has kept debt service manageable;
  - Mongolia has never availed itself of Paris Club debt relief;
  - authorities continue negotiations with some bilateral creditors over rescheduling and/or restructuring agreements originating during early economic transition.

### Summary and conclusions (policy implications)
- With prudent macroeconomic and external debt management, Mongolia’s debt indicators are projected to improve over the medium-to-long term.
- However, any slippage in these policies would have adverse consequences on public external debt sustainability.
- Stress tests indicate external debt indicators would become unsustainable under adverse external developments, especially:
  - sharp declines in copper and gold prices (terms of trade shocks);
  - substantial currency depreciation.
- While shocks to interest on new external borrowing are likely manageable over the longer term, the debt burden could initially worsen over the near-to-medium term.

*Source: _cr05396 - 4.      While there are important differences across the various debt and debt-service*

### 18.      Staying on a sustainable path would crucially require that Mongolia (i) continues

### 18.      Staying on a sustainable path would crucially require that Mongolia (i) continues

### Key findings and projections
- Continued access to concessional external loans and grants and resistance to politically driven large nontransparent borrowing and procurement commitments are crucial to remain on a sustainable path.
- Private sector development is needed to underpin investment-led solid growth and contribute to sustainable debt dynamics.
- Baseline public sector debt (in percent of GDP): 2002: 91.7; 2003: 113.9; 2004: 99.0; 2005: 88.2; 2006: 86.7; 2007: 85.5; 2008: 84.0; 2009: 81.9; 2010: 80.2; 2015: 66.2; 2025: 40.4.
- NPV of public sector debt (in percent of GDP): 2002: 62.7; 2003: 80.2; 2004: 63.0; 2005: 55.5; 2006: 53.6; 2007: 52.7; 2008: 51.9; 2009: 50.7; 2010: 49.9; 2015: 42.0; 2025: 26.0.
- Gross financing need (in percent of GDP): 2002: 7.1; 2003: 24.9; 2004: 6.7; 2005: 5.7; 2006: 4.2; 2007: 4.6; 2008: 4.7; 2009: 4.9; 2010: 4.8; 2015: 3.7; 2025: 1.6.

### Debt dynamics and fiscal balances
- Change in public sector debt (percent of GDP): 2002: 2.6; 2003: 22.2; 2004: -14.9; 2005: -10.8; 2006: -1.5; 2007: -1.2; 2008: -1.5; 2009: -2.1; 2010: -1.7; 2015: -2.7; 2025: -2.8.
- Identified debt-creating flows (percent of GDP): 2002: -2.8; 2003: 8.9; 2004: -23.9; 2005: -11.4; 2006: -2.4; 2007: -2.8; 2008: -3.2; 2009: -3.0; 2010: -2.4; 2015: -3.2; 2025: -2.9.
- Primary deficit (percent of GDP): 2002: 4.3; 2003: 3.0; 2004: 1.0; 2005: 4.6; 2006: 3.1; 2007: 0.7; 2008: 2.0; 2009: 2.2; 2010: 2.2; 2015: 2.4; 2025: 2.3.
- Revenue and grants (percent of GDP): 2002: 38.4; 2003: 37.9; 2004: 39.4; 2005: 39.1; 2006: 37.4; 2007: 36.6; 2008: 35.7; 2009: 35.1; 2010: 34.7; 2015: 34.6; 2025: 34.4.
  - Grants (percent of GDP): 2002: 0.6; 2003: 0.6; 2004: 0.3; 2005: 0.2; 2006–2025: 0.3 (each year listed as 0.3).
- Primary (noninterest) expenditure (percent of GDP): 2002: 42.8; 2003: 40.9; 2004: 40.4; 2005: 39.9; 2006: 39.4; 2007: 38.9; 2008: 37.9; 2009: 37.4; 2010: 37.0; 2015: 35.9; 2025: 34.3.

### Automatic debt dynamics and contributions
- Automatic debt dynamics (percent of GDP): 2002: -5.8; 2003: -9.6; 2004: -17.9; 2005: -9.4; 2006: -3.4; 2007: -4.2; 2008: -4.6; 2009: -4.6; 2010: -4.1; 2015: -4.4; 2025: -2.7.
- Contribution from interest rate/growth differential (percent of GDP): 2002: -3.5; 2003: -5.4; 2004: -12.9; 2005: -6.2; 2006: -5.6; 2007: -4.8; 2008: -4.8; 2009: -4.7; 2010: -4.6; 2015: -3.8; 2025: -2.4.
  - Contribution from average real interest rate (percent of GDP): 2002: 0.0; 2003: -0.5; 2004: -1.9; 2005: -1.5; 2006: -0.6; 2007: -0.7; 2008: -0.7; 2009: -0.7; 2010: -0.7; 2015: -0.6; 2025: -0.4.
  - Contribution from real GDP growth (percent of GDP): 2002: -3.5; 2003: -4.9; 2004: -11.0; 2005: -4.7; 2006: -5.0; 2007: -4.1; 2008: -4.1; 2009: -4.0; 2010: -3.9; 2015: -3.3; 2025: -2.1.
- Contribution from real exchange rate depreciation (percent of GDP): 2002: -2.4; 2003: -4.2; 2004: -5.0; 2005: -3.2; 2006: 2.2; 2007: 0.6; 2008: 0.2; 2009: 0.0; 2010: 0.4; 2015: ... (ellipsis in source).

### Other debt-creating flows and residuals
- Other identified debt-creating flows (percent of GDP): 2002: -1.4; 2003: 15.4; 2004: -7.0; 2005: -2.7; 2006: -1.0; 2007: -0.9; 2008: -0.8; 2009: -0.7; 2010: -0.7; 2015: -0.2; 2025: -0.1.
- Privatization receipts (negative, percent of GDP): 2002: -1.4; 2003: -1.5; 2004: -0.9; 2005: -0.1; 2006: -0.4; 2007: -0.4; 2008: -0.4; 2009: -0.3; 2010: -0.3; 2015: -0.2; 2025: -0.1.
- Residual, including asset changes (percent of GDP): 2002: 5.4; 2003: 13.3; 2004: 9.0; 2005: 0.5; 2006: 0.9; 2007: 1.6; 2008: 1.7; 2009: 0.9; 2010: 0.8; 2015: 0.5; 2025: 0.1.

### External debt and external-sector metrics
- Public and publicly guaranteed external debt (percent of GDP): 2002: 89.4; 2003: 99.1; 2004: 90.9; 2005: 84.8; 2006: 85.9; 2007: 85.4; 2008: 83.9; 2009: 81.7; 2010: 80.1; 2015: 66.2; 2025: 40.4.
- Change in external debt (percent of GDP): 2002: 0.2; 2003: 9.7; 2004: -8.1; 2005: -6.1; 2006: 1.1; 2007: -0.5; 2008: -1.5; 2009: -2.1; 2010: -1.7; 2015: -2.7; 2025: -2.8.
- NPV of external debt (percent of GDP): 2002: 59.7; 2003: 65.3; 2004: 54.9; 2005: 52.1; 2006: 52.9; 2007: 52.6; 2008: 51.8; 2009: 50.6; 2010: 49.8; 2015: 42.0; 2025: 26.0.
- NPV of external debt (in percent of exports): 2002: 92.9; 2003: 97.7; 2004: 67.9; 2005: 68.1; 2006: 73.3; 2007: 75.5; 2008: 76.5; 2009: 76.5; 2010: 76.7; 2015: 69.7; 2025: 49.6.
- Debt service-to-exports ratio (in percent): 2002: 4.5; 2003: 34.0; 2004: 7.5; 2005: 3.8; 2006: 3.6; 2007: 4.1; 2008: 4.3; 2009: 4.5; 2010: 4.3; 2015: 3.9; 2025: 3.3.
- Total gross financing need (billions of U.S. dollars): 2002: 0.1; 2003: 0.2; 2004: 0.0; 2005: 0.0; 2006: 0.0; 2007: 0.0; 2008: 0.0; 2009: 0.0; 2010: 0.0; 2015: 0.0; 2025: 0.0.
- Memorandum: Nominal GDP (billions of US dollars): 2002: 1.1; 2003: 1.2; 2004: 1.5; 2005: 1.7; 2006: 1.8; 2007: 1.9; 2008: 2.0; 2009: 2.1; 2010: 2.3; 2015: 3.3; 2025: 7.2.
- New external loan disbursement (billions of US dollars): 2002: 0.087; 2003: 0.116; 2004: 0.129; 2005: 0.124; 2006: 0.115; 2007: 0.115; 2008: 0.115; 2009: 0.115; 2010: 0.118; 2015: 0.134; 2025: 0.174.

### Sensitivity analysis and stress tests (selected outcomes)
- Table 1b baseline NPV of debt-to-GDP ratio (selected years): 2005: 56; 2010: 50; 2015: 42; 2025: 26.
- Alternative scenarios and bound tests show variations; examples:
  - A1. Real GDP growth and primary balance at historical averages: 2005: 56; 2015: 51; 2025: 102 (table shows series "56586164666979102" representing year-by-year values).
  - B4. One-time 30 percent real depreciation in 2006: values include 2005: 56; 2006: 67; 2015: 55; 2025: 35 (table shows series "65676737169675535").
- Table 2b (external debt stress tests) highlights scenarios such as:
  - B2. Terms of trade shocks on copper and gold exports in 2008 and lower growth thereafter can raise NPV of debt-to-GDP and debt service measures substantially (table entries include large increases, e.g., NPV of debt-to-GDP up to values like "92100106148245" in series context).
- Figure summaries indicate that the most extreme stress test is the test yielding the highest ratio in 2015; charts compare Baseline, No Reform, and Most extreme stress test for:
  - NPV of debt-to-GDP ratio, NPV of Debt-to-Revenue Ratio, and Debt Service-to-Revenue Ratio over 2005–2025.

### Policy recommendations and IMF Executive Board assessment
- Fiscal policy:
  - Keep overall deficit in 2005 well below the original budget target; avoid expenditure slippages and save additional revenues.
  - For 2006 and beyond maintain a broadly neutral fiscal stance provided inflation subsides, allowing further reduction in domestic banking borrowing and public debt (in GDP terms) while financing critical infrastructure.
  - Project borrowing should only be on concessional terms and without government or central bank guarantees.
  - Proceed with revenue-neutral tax reforms to improve efficiency, broaden base, eliminate distortions in income taxes and the VAT, and strengthen revenue administration.
  - Improve public financial management, including consolidating all budget resources into the treasury single account.
  - Avoid embarking on large infrastructure projects with low rates of return.
- Monetary policy:
  - Tighten monetary stance to prevent supply-driven price increases from becoming embedded in persistent double-digit inflation.
  - Use central bank bills to mop up liquidity; review BOM monetary policy instruments given high cost of operations.
- Financial sector and governance:
  - Strengthen banking supervision and enforcement of prudential rules; take forceful corrective actions to tighten supervision and enforce prudential norms.
  - Resolve capital weakness of the Bank of Mongolia (BOM), improve BOM independence and decision-making structure, and consider an enhanced supervisory board.
  - BOM should disengage from gold operations.
  - Complete drafting and implementation of laws on Anti-Money Laundering and Combating the Financing of Terrorism.
- Structural reforms:
  - Reinforce structural reform agenda to strengthen sustainable growth and resilience, improve private sector environment, and pursue public enterprise restructuring and privatization.
  - Improve governance of enterprises to remain in public sector; reinvigorate privatization program.
  - Prioritize reforms in the energy sector.
- Data and monitoring:
  - Improve quality and coverage of fiscal statistics; address priority issues for national accounts and balance of payments.
  - Improve poverty indicators to assist Millennium Development Goals work.
- Political economy:
  - Forge broad political consensus on the reform agenda to strengthen political ownership and improve implementation.
- IMF program engagement:
  - Continue close policy dialogue between the Fund and authorities, potentially backed by a strong Fund-supported program fully owned by Mongolia.

### Recent developments reported by IMF staff (September–October 2005)
- Fiscal and monetary developments in the two months prior to the staff statement remained broadly consistent with first-half trends.
  - Net domestic bank financing reduced by 3¼ percent of GDP in the first eight months of the year.
  - If spending discipline is maintained, the overall deficit could remain below 2 percent of GDP in 2005.
  - Broad money grew by 28 percent year-on-year at end-August; reserve money growth accelerated.
  - Bank of Mongolia issued extra central bank bills in July and took no further tightening steps thereafter.
- Inflation:
  - Annual headline inflation declined to 11½ percent at end-August from 17½ percent at end-June.
  - Core inflation slowed to 5 percent year-on-year at end-August from close to 9 percent at end-June.
  - Staff projected inflation for the year to be contained to 10 percent.
- External supply risk:
  - Mongolia’s main Russian supplier of refined products announced it would no longer sell to Mongolian importers after September, potentially causing temporary supply disruptions and higher domestic prices; other suppliers expected to fill the void.

### Selected economic indicators, 2001–05 (highlights)
- Real GDP growth (percent): 2001: 1.0; 2002: 4.0; 2003: 5.6; 2004: 10.6; 2005 (projection): 5.0.
- Consumer prices (end period): 2001: 7.9; 2002: 1.7; 2003: 4.7; 2004: 10.6; 2005 (projection): 10.0.
- General government revenue (percent of GDP): 2001: 38.5; 2002: 38.4; 2003: 37.9; 2004: 39.4; 2005 (projection): 39.1.
- General government expenditure (percent of GDP): 2001: 43.9; 2002: 44.4; 2003: 42.1; 2004: 41.7; 2005 (projection): 41.0.
- Overall balance (percent of GDP): 2001: -5.4; 2002: -5.9; 2003: -4.2; 2004: -2.2; 2005 (projection): -1.8.
- Total public debt (percent of GDP): 2001: 89.1; 2002: 91.7; 2003: 113.9; 2004: 99.0; 2005 (projection): 88.0.
- NPV of total public debt (percent of GDP): 2001: 62.8; 2002: 62.7; 2003: 80.2; 2004: 60.2; 2005 (projection): 55.3.
- Broad money growth (percent): 2001: 28.0; 2002: 41.9; 2003: 49.7; 2004: 20.3; 2005 (projection): 19.3.
- Domestic credit (percent change): 2001: 41.6; 2002: 43.2; 2003: 147.0; 2004: 23.0; 2005 (projection): 10.0.
- Non-interest current account balance (millions of US dollars): 2001: -77; 2002: -108; 2003: -99; 2004: 18; 2005 (projection): -37.
  - As percent of GDP: 2001: -7.6; 2002: -9.6; 2003: -7.7; 2004: 1.2; 2005 (projection): -2.2.
- Exports, f.o.b. (millions of US dollars): 2001: 523; 2002: 524; 2003: 627; 2004: 872; 2005 (projection): 914.
  - Of which Gold and Copper (millions of US dollars): 2001: 222; 2002: 258; 2003: 319; 2004: 524; 2005 (projection): 580.
- Imports, c.i.f. (millions of US dollars): 2001: 693; 2002: 753; 2003: 827; 2004: 1,021; 2005 (projection): 1,120.
- Gross official international reserves (end-period, millions of US dollars): 2001: 207; 2002: 271; 2003: 178; 2004: 205; 2005 (projection): 268.
  - In months of next year/projected imports c.i.f.: 2001: 3.3; 2002: 3.9; 2003: 2.1; 2004: 2.2; 2005 (projection): 2.8.
- Public and publicly guaranteed external debt (millions of US dollars): 2001: 854; 2002: 978; 2003: 1,237; 2004: 1,360; 2005 (projection): 1,417.
  - In percent of GDP: 2001: 84.3; 2002: 88.7; 2003: 99.1; 2004: 90.9; 2005 (projection): 84.8.
- Exchange rate, Togrogs per US dollar (end of period, selected): 2002: 1,102; 2003: 1,125; 2004: 1,170; 2005: 1,209 (ellipsis thereafter in source).

*Source: Country authorities; and Fund staff estimates and projections (IMF staff report and appendices, September–October 2005).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05396.pdf_