## _cr08200

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### Executive Summary — recent performance and immediate concerns
- Real GDP growth averaged 9 percent over the past four years; per capita income more than doubled.
- Gross international reserves reached US$1 billion (4½ months of nonmining imports).
- NPV of external public debt declined to 24½ percent of GDP at end-2007.
- Inflation increased from 6 percent (y/y) in June 2007 to 21 percent in March 2008.
- Contributors to inflation: rapid growth in government spending (wages and transfer payments), credit to the private sector, import prices, transportation bottlenecks, and capacity constraints.
- Fiscal stance: overall surplus narrowed from 8 percent of GDP in 2006 to 2 percent in 2007; 2008 budget projects a deficit of 2½ percent.
- Monetary aggregates in 2007: reserve money grew by 39½ percent; broad money increased by 57 percent; domestic credit expanded by 67 percent; credit to the private sector increased by 75 percent.
- Current account surplus narrowed from 7 percent of GDP in 2006 to 2½ percent in 2007.
- NEER depreciated by 4 percent in 2007; togrog depreciated by 7 percent vis-à-vis the Chinese renminbi and 8 percent vis-à-vis the Russian ruble in 2007; REER appreciated by 6 percent in 2007.

### Inflation and macroeconomic stability — near-term policy recommendations
- Immediate priority: contain rapidly rising inflation to safeguard macroeconomic stability.
- Staff near-term recommendations:
  - Tighten both fiscal and monetary policies.
  - Aim to achieve a modest budget surplus in 2008 by avoiding further wage increases, consolidating welfare programs, and eliminating low priority capital projects.
  - Monetary policy objective: contain the growth of reserve money to 12 percent in 2008.
  - Increase exchange rate flexibility to help lower inflation and maintain external stability.
- External financing guidance:
  - Move cautiously in tapping nonconcessional external financing.
  - Nonconcessional borrowing should be considered only for projects with clear economic viability that cannot be financed from concessional sources, and only when inflation is under control.
- Mining sector policy:
  - Put in place transparent, stable, and internationally competitive fiscal and investment regimes to take full advantage of Mongolia’s mineral wealth.

### Fiscal policy — current stance, risks, and recommended adjustments
- 2008 budget specifics:
  - Overall balance swings from a surplus of 2 percent of GDP in 2007 to a deficit of 2½ percent of GDP in 2008.
  - Revenues budgeted at 44½ percent of GDP; spending expected to reach 47 percent of GDP.
  - Drivers of spending growth: large nominal increases in the wage bill, social welfare spending, and capital expenditure.
  - A tax amnesty program was put into effect in March 2008.
- Staff concerns and recommended adjustments:
  - Fiscal stimulus in the 2008 budget risks aggravating inflation and higher inflationary expectations.
  - Staff recommended maintaining a surplus of about 1½ percent of GDP in 2008, achievable by:
    - (i) strictly avoiding any further increases in civil service employment and wages during the remainder of the year;
    - (ii) reducing overlapping social spending and improving its targeting;
    - (iii) curtailing low priority capital spending.
  - Avoid recourse to fiscal measures that are inflationary (e.g., temporary tax exemptions/subsidies).
  - Prioritize investment spending in human capital and basic infrastructure to reduce the risk of “Dutch Disease.”
- Debt and borrowing:
  - Parliament authorized government to issue commercial foreign debt up to US$1.2 billion (25 percent of GDP).
  - Mission cautioned borrowing and spending on this scale could aggravate inflationary pressures and cause debt burden indicators to breach indicative thresholds.
  - Recommendation: rely primarily on concessional borrowing in the near term; strengthen capacity and risk management; fully consolidate any foreign financing with the general budget for transparency.
  - Continue negotiations of overdue obligations with bilateral creditors.
- Medium-term fiscal framework:
  - Mission suggested reducing the nonmineral deficit from 12½ percent of GDP in 2007 to 8 percent of GDP by 2010 and thereafter.
  - This target would smooth spending intertemporally and reduce the NPV of public debt to 18 percent of GDP over the medium term.
  - Consider setting a separate overall limit on the growth of spending or the expenditure-to-GDP ratio to reflect absorption capacity and avoid overheating.
- Tax amnesty: mission warned the tax amnesty could adversely affect future tax compliance; advised strengthening tax enforcement.

### Monetary and exchange rate policies — actions and guidance
- Monetary conditions contributed to inflationary pressures:
  - Reserve money growth: 39½ percent in 2007.
  - Broad money growth: 57 percent in 2007.
  - Domestic credit expansion: 67 percent; credit to the private sector: 75 percent.
- Recommended monetary actions:
  - Tighten monetary policy to contain reserve money growth to 12 percent in 2008.
  - Increase exchange rate flexibility; staff view real exchange rate as somewhat undervalued.
  - Given suggested fiscal target, an increase in the volume of central bank bills (CBBs) equal to about ½ percentage point of GDP during the year was required.
- Observed policy actions:
  - BOM raised the policy interest rate on seven-day bills to 9.75 percent in March 2008, cumulative increase since July 2007 of 335 basis points.
  - Reserve money growth slowed sharply in the first three months of the year.
  - Mission advised holding plans to transfer Social Security deposits from the BOM to commercial banks to help contain liquidity expansion.
- Exchange rate and reserve stance:
  - With international reserves "broadly comfortable," a further large increase in reserves was not needed and could complicate reducing inflation.
  - Flexible exchange rate policy recommended as an important component of monetary tightening.
  - Team recommended BOM widen its bid-offer spread, reduce scope of transactions at BOM’s reference rate, and require a share of mining taxes by the largest copper mine be paid in local currency.
  - A screen-based foreign exchange trading system is under development by the BOM and commercial banks.

### Financial sector soundness and supervision — progress and priorities
- Banking sector performance and supervision:
  - BOM’s framework for bank supervision generally well developed.
  - Banking system indicators in 2007: risk-weighted capital adequacy, return on assets, and return on equity "at comfortable levels".
  - Share of nonperforming loans in gross loans reduced from 5.6 percent at end-2005 to 3.2 percent at end-2007.
  - Some loan-quality measures may be distorted by rapid credit growth; authorities to remain vigilant.
  - A few small banks considered more vulnerable and remained under an enhanced supervisory regime; they did not pose a systemic risk.
  - FSAP team advised BOM to closely monitor suitability of bank shareholders and managements.
- Nonbank institutions, AML/CFT, and governance:
  - Supervision of nonbank financial institutions at an earlier stage; FRC established in 2006 to relicense SCCs, insurance companies, and other nonbanking financial institutions.
  - Mission advised no further bailouts to SCCs while relicensing proceeds.
  - Significant steps to strengthen AML/CFT, including establishment of a Financial Intelligence Unit in the BOM.
  - Remaining gaps: reporting of suspicious transactions by banks and law enforcement capacity constraints.
  - Caution advised on proposals to establish a development bank to avoid political interference.
  - Mongolian Mortgage Corporation operations should remain narrowly focused.
- BOM risk management improvements:
  - Creation of investment committee and a risk management unit; Value-at-Risk of reserves calculated daily since September 2007.
  - Foreign reserves divided into short-term and long-term portfolios; revised State Foreign Exchange Reserve Management Regulation requires counterparties rated “AA-” or higher.
  - By order of the Governor, BOM discontinued dealing in gold and currency options for commercial purposes; all outstanding positions closed upon expiration.
- Supervisory recommendations:
  - Continue to upgrade the supervisory framework: monitor large exposures; improve supervision of liquidity and operational risks; enact draft laws to support supervision of nonbank financial institutions; develop tools for consolidated supervision.
  - If a deposit insurance system is introduced, payments into the system should reflect condition of individual banks and should not be extended to nonbank financial institutions.

### Medium-term outlook, DSA findings, and scenarios
- Baseline growth projections:
  - With Oyu Tolgoi opening in 2011, staff scenario envisages real GDP growth picking up from around 7−9 percent in 2008−10 to 12−14 percent in 2011−12.
  - Other large projects not yet incorporated, implying upside potential.
- Inflation path under strong policy implementation:
  - Possible to bring inflation down to a single digit by end-2008 and to maintain a rate of 5−6 percent over the medium term.
- External current account:
  - Expected to move into deficit during 2008−11 (declining copper prices and large FDI-financed imports), and back into surplus in 2012 after Oyu Tolgoi comes on stream.
- Public debt and external debt assessment:
  - Mongolia assessed at low risk of debt distress under baseline, conditional on continued concessional borrowing and baseline external environment.
  - NPV of external public debt: 24½ percent of GDP at end-2007; projected decline to 17½ percent in 2012.
  - Public sector debt projected to fall from about 46½ percent of GDP at end-2006 to 26½ percent at end-2012; NPV of public debt declines to 18 percent by 2012 under mission scenario.
- Country-specific scenarios included in the DSA:
  - Scenario 1: Government issues US$1.2 billion in commercial borrowing in 2008−09 (half in each year); projects assumed high import content (90 percent).
  - Scenario 2: 3-year delay in OT mine and higher government equity participation (51 percent vs baseline 34 percent).
  - Scenario 3: Adverse terms-of-trade shock with copper and gold prices declining sharply in 2011 (by 35 percent and 25 percent, respectively).
- DSA stress-test findings:
  - Standard alternative scenarios show vulnerability if growth and primary balance revert to historical averages; staff cautions applicability due to structural changes.
  - Issuance of sovereign bonds worth US$1.2 billion would breach the 40 percent NPV debt-to-GDP threshold in 2009 in the illustrative scenario.
  - Stress tests show indicators remain generally below thresholds under most shocks, but large nonconcessional borrowing, delays in mining projects, or severe terms-of-trade shocks are main risks.

### Key implementation priorities and risks
- Implementation priorities:
  - Maintain concessional borrowing where possible.
  - Tight scrutiny of nonconcessional borrowing; restrict to economically viable, non-concessionally-financable projects.
  - Put in place a transparent, stable, and internationally competitive mining fiscal and regulatory framework.
  - Strengthen financial sector supervision and risk management; improve data dissemination and statistical coverage.
- Main risks:
  - Delay of major mining projects (e.g., Oyu Tolgoi) or higher-than-expected government participation in mining equity.
  - Less favorable financing terms (increased nonconcessional financing or sovereign bond issuance).
  - Terms-of-trade shocks to copper and gold prices and large real exchange rate depreciations.
  - Overheating driven by rapid fiscal expansion and private credit growth.

### Selected key statistics and projections (figures preserved exactly as in source)
- Nominal GDP (2007): $3,894 million 1/
- Population, end-year (2007): 2.64 million
- Per capita GDP (2007): $1,489 1/
- Poverty incidence (2006): 32.2 percent 2/
- Real GDP (percent change, selected series): 10.6; 7.3; 8.6; 9.9; 8.6; 8.0; 7.2; 12.2; 13.7; 5.3
- Consumer prices (period average; percent change, series): 7.9; 12.5; 5.1; 9.0; 12.0; 7.4; 5.8; 5.5; 5.5; 5.3
- Gross official reserves (millions of U.S. dollars, selected): 208; 333; 718; 1,001; 1,253; 1,382; 1,460; 1,530; 1,709; 1,786
- Broad money growth (percent change, series): 20.3; 37.3; 30.8; 57.3; 22.9; 23.3; 22.1; 21.4; 19.5; 17.0
- Copper prices (US$ per ton, series): 2,863; 3,676; 6,731; 7,132; 7,000; 6,000; 4,500; 3,500; 3,300; 3,300
- Gold prices (US$ per ounce, series): 409; 445; 604; 697; 960; 985; 1,015; 1,050; 1,080; 1,095
- Public sector debt (percent of GDP, selected): 81.4; 60.3; 46.7; 40.0; 34.1; 31.8; 29.1; 26.6; 26.1
- NPV of public sector debt (selected): 57.9; 44.5; 29.8; 25.1; 20.3; 15.8; 15.7
- NPV of external public debt-to-GDP (end-2007): 24½ percent
- Authorization by Parliament to issue commercial foreign debt up to US$1.2 billion (25 percent of GDP).

*Source: Executive Summary and selected chapters, IMF staff report (Staff Report for the 2008 Article IV Consultation—Informational Annexes and DSA excerpts as provided in the supplied PDF excerpt).*

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

### Executive Summary

### Background and Recent Economic Developments
- Mongolia’s economy has performed very well in recent years; real GDP growth has averaged 9 percent over the past four years, and per capita income has more than doubled.
- External position:
  - Gross international reserves reached a record level of US$1 billion (4½ months of nonmining imports).
  - Net present value (NPV) of external public debt declined to 24½ percent of GDP at end-2007.
- Inflation:
  - Increased from 6 percent (y/y) in June 2007 to 21 percent in March 2008.
  - Key contributors: rapid growth in government spending (wages and transfer payments), credit to the private sector, import prices, transportation bottlenecks, and capacity constraints.
- Fiscal developments:
  - Budget surpluses recorded over the past three years, but fiscal policy became increasingly expansionary.
  - Overall surplus narrowed from 8 percent of GDP in 2006 to 2 percent in 2007.
  - 2008 budget projects a deficit of 2½ percent.
- Monetary developments:
  - Reserve money grew by 39½ percent in 2007.
  - Broad money increased by 57 percent in 2007.
  - Domestic credit expanded by 67 percent (end-Executive Summary) and credit to the private sector increased by 75 percent (Box 1).
- External sector:
  - Current account surplus narrowed from 7 percent of GDP in 2006 to 2½ percent in 2007.
  - NEER depreciated by 4 percent in 2007; togrog depreciated by 7 percent vis-à-vis the Chinese renminbi and 8 percent vis-à-vis the Russian ruble in 2007.
  - REER appreciated by 6 percent in 2007.

### Key Issues and Policy Discussion — Inflation and Macroeconomic Stability
- Immediate priority: contain rapidly rising inflation to safeguard macroeconomic stability.
- Staff recommendations (near term):
  - Tighten both fiscal and monetary policies.
  - Aim at achieving a modest budget surplus in 2008 by avoiding further wage increases, consolidating welfare programs, and eliminating low priority capital projects.
  - Monetary policy objective: contain the growth of reserve money to 12 percent in 2008.
  - Increase exchange rate flexibility to help lower inflation and maintain external stability.
- External financing:
  - Move cautiously in tapping nonconcessional external financing.
  - Nonconcessional borrowing should be considered only for projects with clear economic viability that cannot be financed from concessional sources, and only when inflation is under control.
- Mining sector policy:
  - Put in place transparent, stable, and internationally competitive fiscal and investment regimes to take full advantage of Mongolia’s mineral wealth.

### Medium-Term Outlook and Main Policy Challenges
- Baseline growth projections:
  - With Oyu Tolgoi opening in 2011, staff scenario envisages real GDP growth picking up from around 7−9 percent in 2008−10 to 12−14 percent in 2011−12.
  - Other large projects (coal near China and others) not yet incorporated, implying significant upside potential.
- Inflation path:
  - With strong policy implementation, possible to bring inflation down to a single digit by end-2008 and to maintain a rate of 5−6 percent over the medium term.
- External current account:
  - Expected to move into deficit during 2008−11 (declining copper prices and large FDI-financed imports), and back into surplus in 2012 after Oyu Tolgoi comes on stream.
- Fiscal/financial stability:
  - NPV of public debt, debt service burden, and international reserves projected to remain at comfortable levels with prudent policies.
- Key policy challenges:
  - Containing inflation in the near term (elections in June 2008 complicate fiscal tightening).
  - Establishing a medium-term fiscal framework to avoid procyclical spending.
  - Strengthening financial sector soundness and governance to support sustained growth.

### Fiscal Policy — Current Stance and Recommendations
- 2008 budget:
  - Budget calls for overall balance to swing from a surplus of 2 percent of GDP in 2007 to a deficit of 2½ percent of GDP in 2008.
  - Revenues budgeted at 44½ percent of GDP; spending expected to reach a record 47 percent of GDP.
  - Drivers of spending growth: large nominal increases in the wage bill, social welfare spending, and capital expenditure.
  - A tax amnesty program was put into effect in March 2008.
- Staff concerns and recommended adjustments:
  - Fiscal stimulus in the 2008 budget risks aggravating inflation and higher inflationary expectations.
  - Staff recommended maintaining a surplus of about 1½ percent of GDP in 2008, achievable by:
    - (i) strictly avoiding any further increases in civil service employment and wages during the remainder of the year;
    - (ii) reducing overlapping social spending and improving its targeting;
    - (iii) curtailing low priority capital spending.
  - Advice to avoid recourse to fiscal measures to control inflation (e.g., temporary tax exemptions/subsidies).
  - Prioritize investment spending in human capital and basic infrastructure to reduce the risk of “Dutch Disease.”
- Debt and borrowing:
  - Parliament authorized government to issue commercial foreign debt up to US$1.2 billion (25 percent of GDP).
  - Mission cautioned that borrowing and spending on this scale could aggravate inflationary pressures and cause debt burden indicators to breach indicative thresholds in the medium term (Debt Sustainability Analysis).
  - Recommendation: rely primarily on concessional borrowing in the near term; strengthen capacity and risk management; fully consolidate any foreign financing with the general budget for transparency.
  - Continue negotiations of overdue obligations with bilateral creditors.
- Medium-term fiscal framework:
  - Current practice targets a constant overall budget balance in percent of GDP, which can be highly procyclical.
  - Mission suggested reducing the nonmineral deficit from 12½ percent of GDP in 2007 to 8 percent of GDP by 2010 and thereafter.
    - This target would smooth spending intertemporally and reduce the NPV of public debt to 18 percent of GDP over the medium term (see Supplement on DSA).
  - Consider setting a separate overall limit on the growth of spending or the expenditure-to-GDP ratio to reflect absorption capacity and avoid overheating.
- Tax amnesty:
  - Mission warned the tax amnesty could adversely affect future tax compliance; advised strengthening tax enforcement.

### Monetary and Exchange Rate Policies
- Monetary conditions added to inflationary pressures:
  - Reserve money growth: 39½ percent in 2007.
  - Broad money growth: 57 percent in 2007.
  - Domestic credit expansion: 67 percent; credit to the private sector: 75 percent.
- Policy recommendations:
  - Tighten monetary policy to contain reserve money growth to 12 percent in 2008.
  - Increase exchange rate flexibility; the real exchange rate is currently somewhat undervalued, and flexibility would help lower inflation and maintain external stability.

### Preserving Financial Sector Soundness and Other Issues
- Progress noted:
  - Authorities have advanced on recommendations from the 2006 Article IV consultation: sustainable debt position, strengthened central bank governance, improved financial sector soundness.
- Ongoing priorities:
  - Continued progress in strengthening the financial sector is critical for sustained growth.
  - Strengthen capacity for managing large infrastructure projects and associated financing risks.
  - Ensure transparency and consolidation of external financing into the budget.

*Source: Executive Summary, IMF staff report.*

### 17.      The authorities agreed that fiscal policy rules should be refined over time to

### _cr08200 - 17.      The authorities agreed that fiscal policy rules should be refined over time to

### Fiscal policy and mining sector regime
- Authorities agreed fiscal policy rules should be refined over time to ensure macroeconomic stability and fiscal sustainability, although formal adoption would be difficult in the near term.
- Need for transparent, stable, and internationally competitive fiscal and investment regimes for the mining sector was emphasized.
- On state equity participation in the mining sector:
  - Public opinion strongly in favor of greater state ownership.
  - Authorities believed increased state equity in large strategic deposits could be acquired gradually over time.

### Monetary and exchange rate policies
- Agreement that growth in monetary aggregates should be slowed to help bring inflation down.
- Mission recommendation:
  - Slow growth in reserve money to about 12 percent in 2008, consistent with bringing inflation down to about 9 percent by end-2008 and 5−6 percent thereafter.
  - Given the fiscal target suggested by the mission, increase in the volume of central bank bills (CBBs) equal to about ½ percentage point of GDP during the year was required.
- Policy actions and observations:
  - BOM raised the policy interest rate on seven-day bills to 9.75 percent in March 2008, bringing the cumulative increase since July 2007 to 335 basis points.
  - Reserve money growth slowed sharply in the first three months of the year.
  - If inflation does not decline, further increase in policy interest rate would be appropriate.
  - Mission advised holding plans to transfer Social Security deposits from the BOM to commercial banks to help contain liquidity expansion.
- International reserves and exchange rate stance:
  - With international reserves "broadly comfortable," a further large increase in reserves was not needed and could complicate reducing inflation.
  - Flexible exchange rate policy recommended as an important component of monetary tightening.
  - Team recommended BOM widen its bid-offer spread, reduce scope of transactions at BOM’s reference rate, and require that a share of mining taxes by the largest copper mine be paid in local currency.
- Authorities’ position and market development:
  - Authorities argued Mongolia already had a floating exchange rate regime; 2006–07 atypical due to some mining companies paying increased tax liabilities in foreign currency.
  - BOM had been a significant net seller of international reserves.
  - Need to strengthen interbank foreign exchange market acknowledged; consideration being given to limiting payment of taxes in dollars.
  - A screen-based foreign exchange trading system is under development by the BOM and commercial banks.
- Staff assessment:
  - Real effective exchange rate may be somewhat undervalued.
  - Mission reiterated importance of exchange rate flexibility to maintain external stability.

### Preserving financial sector soundness
- FSAP findings and banking system performance:
  - BOM’s framework for bank supervision generally well developed; BOM aware of risks in some individual banks.
  - Banking system indicators in 2007: risk-weighted capital adequacy, return on assets, and return on equity "at comfortable levels".
  - Share of nonperforming loans in gross loans reduced from 5.6 percent at end-2005 to 3.2 percent at end-2007.
  - Some measures of loan quality could be distorted by rapid credit growth; authorities to remain vigilant.
  - A few small banks considered more vulnerable and remained under an enhanced supervisory regime; they did not pose a systemic risk.
  - FSAP team advised BOM to closely monitor suitability of bank shareholders and managements given recent changes at some banks.
- Nonbank financial institutions and AML/CFT:
  - Supervision of nonbank financial institutions at an earlier stage; Financial Regulatory Commission (FRC) established in 2006 working to relicense savings and credit cooperatives (SCCs), insurance companies, and other nonbanking financial institutions.
  - Mission advised no further bailouts to SCCs while relicensing proceeds.
  - Significant steps to strengthen AML/CFT, including establishment of a Financial Intelligence Unit in the BOM.
  - Remaining gaps: reporting of suspicious transactions by banks and law enforcement capacity constraints.
  - Mission encouraged caution with proposals to establish a development bank to avoid political interference.
  - Mongolian Mortgage Corporation operations should remain narrowly focused to avoid impeding private sector housing finance.
- BOM risk management and governance improvements:
  - Creation of investment committee and a risk management unit to identify and manage financial and policy risks.
  - Since September 2007, risk management unit calculates Value-at-Risk of its portfolio daily to monitor market risks.
  - Foreign reserves divided into short-term and long-term portfolios to manage liquidity risk.
  - State Foreign Exchange Reserve Management Regulation, revised in January, requires counterparties rated “AA-” or higher.
  - By order of the Governor, BOM discontinued dealing in gold and currency options for commercial purposes; all outstanding positions closed upon expiration.
- Supervisory recommendations going forward:
  - Continue to upgrade supervisory framework: monitor large exposures, improve supervision of liquidity and operational risks, enact draft laws to support supervision of nonbank financial institutions, and develop tools for consolidated supervision.
  - If a deposit insurance system is introduced, payments into the system should reflect condition of individual banks and should not be extended to nonbank financial institutions.

### Other issues (statistics, transparency, extractive industries)
- Review of Standards and Codes (IMF Statistics Department) found Mongolia meets most recommendations of the General Data Dissemination Standards.
- Areas needing improvement:
  - Scope and coverage of national accounts and government statistics.
  - Broader dissemination of macroeconomic data to the public.
- Extractive Industry Transparency Initiative:
  - Staff welcomed Mongolia’s participation.
  - Encouraged progress in publishing government’s and companies’ reports and completing audit of government revenues from extractive industries.

### Staff appraisal — key findings and policy recommendations
- Recent performance and challenges:
  - GDP growth averaged more than 9 percent per annum since 2004; per capita income more than doubled.
  - Budget recorded three consecutive years of surplus; public debt burden cut sharply; external current account in surplus; international reserves at record levels.
  - Medium-term prospects favorable due to high minerals prices and plans to exploit copper, gold, and other minerals.
  - Major challenges: sharply rising inflation posing threat to macroeconomic stability; delays in finalizing some new mining investment agreements.
- Immediate policy priorities:
  - Focus on reducing inflation, keeping fiscal policy sustainable, establishing a transparent, stable, internationally competitive mining regime, and strengthening the financial sector.
- Fiscal policy recommendations:
  - Fiscal policy should be promptly tightened to contain inflationary pressures.
  - Staff welcomes authorities’ decision not to proceed with plans for substantial additional spending in an amended budget.
  - Given continued high copper and gold prices, authorities should aim at maintaining a modest fiscal surplus in 2008, instead of the 2½ percent of GDP deficit that is budgeted.
  - Suggested measures: contain the wage bill, curtail low priority capital spending, and take initial steps to reduce overlapping coverage and improve targeting of social welfare programs.
  - Consolidation and improved targeting of welfare programs could facilitate protection of vulnerable groups from food price hikes.
- Medium-term fiscal framework:
  - Reduce the nonmineral deficit from 12½ percent of GDP in 2007 to about 8 percent of GDP over the medium term.
  - Introduce a separate limit on growth in nominal expenditure or the expenditure-to-GDP ratio.
  - Be cautious about tapping nonconcessional external finance; limit such borrowing to projects with clear economic viability that cannot be financed from concessional sources and only when inflation is under control.
- Monetary policy and exchange rate recommendations:
  - Monetary policy should be directed at reducing inflation.
  - Staff welcomes BOM’s decision to raise the yield on CBBs and encourages consideration of a moderate further increase to avoid a more abrupt tightening later.
  - Real exchange rate currently somewhat undervalued; greater exchange rate flexibility would facilitate monetary tightening and enhance resilience to external shocks.
  - BOM should reduce use of the reference rate for transactions with market participants and foster development of an interbank foreign exchange market.
- Financial sector and data recommendations:
  - Continue strengthening management of international reserves, particularly gold reserves; reduce BOM’s role in domestic gold market; improve transparency of operations.
  - Continue upgrading supervisory framework for banks and nonbank institutions; monitor rapid credit growth and loan rollovers.
  - If deposit insurance is introduced, tailor payments to individual bank condition and exclude nonbank financial institutions.
  - Make further progress completing the GFSM 2001 pilot study and reconciling discrepancies between fiscal and monetary data on domestic financing.
  - Monitor size and nature of private capital flows while maintaining an open capital account regime.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### 34.      The staff recommends that the next Article IV consultation with Mongolia take

### _cr08200 - 34.      The staff recommends that the next Article IV consultation with Mongolia take

### Recommendation on Article IV timing
- The staff recommends that the next Article IV consultation with Mongolia take place on the standard 12-month cycle.

### Economic developments and drivers (2002–07)
- Real GDP growth remained strong; large mining sector expansion created spillover effects on other sectors.
- Mining versus nonmineral growth (selected indicators):
  - Mineral and nonmineral contributions shown in Figure 1 (Real GDP percent change).
- Fiscal position:
  - The budget recorded its third consecutive surplus in 2007.
- External sector:
  - Current account surplus declined in 2007, but the overall balance and FDI remained strong.
- Debt indicators:
  - External public debt ratios have declined sharply and are now below the debt-burden threshold.
- Inflation and exchange rate dynamics:
  - Rapid increase in inflation suggests that the economy is overheating.
  - Rising real exchange rate, while the nominal rate has been stable in terms of US$ since 2006.

### Fiscal indicators and public finances (2002–08)
- Mining sector fiscal contribution and expenditure dynamics:
  - Mining sector has been contributing to rapid growth of budget revenue.
  - Mining revenue financed large increases in wage bill, transfer payments, and capital expenditure.
- Selected fiscal aggregates (percent of GDP and levels as presented):
  - Total revenue and grants: 33.1; 30.1; 36.6; 40.6; 44.4; 42.6 (years 2004–2008 in Table 2).
  - Total expenditure and net lending: 35.0; 27.5; 28.5; 40.5; 38.4; 46.9; 41.1 (Table 2).
  - Nonmineral overall balance ranged (Table 2) from -5.5 to -12.0 (percent of GDP) across 2004–2008.
  - Mineral revenue/total revenue and grants (in percent): 11.2; 13.3; 28.6; 32.2; 36.3; 27.9; 31.8 (memorandum).
- Public debt:
  - Total public debt (incl. IMF)/GDP: 81.4; 60.3; 46.7; 40.0; 35.7; 34.1 (2004–2009 series in Table 2/memo).

### Monetary developments (2002–08)
- Broad money grew very rapidly, while reserve money remained volatile.
- Foreign currency deposits declined, reflecting stronger confidence in domestic currency.
- Interest rate spreads narrowed and credit to private sector accelerated.
- Monetary aggregates and indicators (selected exact figures):
  - Annual broad money growth: 20.3; 37.3; 30.8; 57.3; 22.9 (Table 3 memo).
  - Net foreign assets, net international reserves, and domestic credit increased as shown in monetary tables.

### External developments and balance of payments (2002–07, projections to 2013)
- Export, import, and FDI have grown rapidly.
- Gross official reserves rose to record levels:
  - Gross official reserves (end-period, in millions of U.S. dollars): 208; 333; 718; 1,001; 1,253 (selected historical levels).
  - Reserves in months of next year's imports: 1.6; 2.1; 3.3; 3.6; 4.0 (selected years).
- Commodity prices and debt service:
  - Copper and gold prices remained exceptionally high (copper and gold price series shown).
  - Since the settlement of Russian debt, debt service has remained low.
- Balance of payments (selected figures from Table 4 and projections):
  - Current account balance (including official transfers), in millions of US dollars: 27; 29; 22; 210; 1; -405 (selected entries).
  - Exports, f.o.b.: 872; 1,069; 1,545; 1,952; 2,163 (selected years).
  - Imports, c.i.f.: 1,021; 1,224; 1,516; 2,170; 3,002 (selected years).
  - Foreign direct investment (in millions of US dollars): 129; 258; 290; 328; 688 (selected years).

### Key macroeconomic and social statistics (selected)
- Nominal GDP (2007): $3,894 million 1/
- Population, end-year (2007): 2.64 million
- Per capita GDP (2007): $1,489 1/
- Poverty incidence (2006): 32.2 percent 2/
- Quota: SDR 51.1 million

### Medium-term outlook (2004–13 projections; selected lines)
- Real GDP (percent change): 10.6; 7.3; 8.6; 9.9; 8.6; 8.0; 7.2; 12.2; 13.7; 5.3 (selected years 2004–13 series in Table 6).
- Consumer prices (period average; percent change): 7.9; 12.5; 5.1; 9.0; 12.0; 7.4; 5.8; 5.5; 5.5; 5.3 (series).
- Gross official reserves (in millions of U.S. dollars, medium-term): 208; 333; 718; 1,001; 1,253; 1,382; 1,460; 1,530; 1,709; 1,786 (Table 4/6 series).
- Public debt indicators (percent of GDP, medium-term):
  - Total public debt: 81.4; 60.3; 46.7; 40.0; 34.1; 31.8; 29.1; 26.6; 26.1 (series).

### Debt sustainability assessment and risks (Joint IMF/World Bank DSA, May 6, 2008)
- Conclusion:
  - After four years of strong economic performance, Mongolia is now at a low risk of debt distress and, with its vast mineral wealth, the public debt burden is projected to continue to decline.
  - Debt burden indicators under the baseline and the standard stress tests are generally well below their indicative thresholds, even in the event of a decline in the terms of trade or further delays in developing a large new copper and gold mine.
- Key risks flagged:
  - A large issuance of nonconcessional external sovereign debt, which is being considered, could raise concerns over Mongolia’s debt sustainability.
  - The historical scenario leads to a prolonged and sustained breach of the threshold for the NPV of debt-to-GDP; the staff notes this result should be interpreted cautiously because extensive structural changes have taken place in the economy, making a historical-average scenario less appropriate.
- Staff and institutional approvals:
  - Joint IMF/World Bank Debt Sustainability Analysis prepared by IMF and IDA staffs; Approved by Steven Dunaway and Michael Hadjimichael (IMF) and Carlos Braga and Vikram Nehru (IDA); May 6, 2008.

### Policy implications and recommendations (implicit in staff analysis)
- Maintain standard 12-month Article IV consultation cycle.
- Exercise caution regarding large nonconcessional external sovereign borrowing, given potential to raise debt sustainability concerns.
- Monitor inflationary pressures and real exchange rate appreciation to address potential overheating.
- Continue to manage mining-related revenue windfalls to avoid deterioration in nonmineral balances and to sustain public debt reduction.

*Source: Mongolian authorities; IMF, International Financial Statistics, Commodity Price System, Information Notice System, and Fund staff estimates and projections.*

### 1.      This debt sustainability analysis (DSA) assesses Mongolia’s fiscal and external

### _cr08200 - 1.      This debt sustainability analysis (DSA) assesses Mongolia’s fiscal and external

### Framework and approach
- The DSA uses the joint IMF/World Bank forward-looking debt sustainability framework for low-income countries (LICs).
- Under this framework, Mongolia is rated as a medium performer with regard to its policies and institutions, and debt sustainability is analyzed in relation to the indicative threshold indicators for this category.
- The DSAs are based on the common standard LIC DSA framework and apply the standard alternative scenarios, bound tests, and additional country-specific scenarios and shocks.

### Baseline macroeconomic and DSA assumptions
- Baseline assumes development of Oyu Tolgoi (OT) mine goes forward, leading to substantial increases in GDP, exports, and government revenues starting from 2011.
- Real GDP growth assumptions:
  - 7−10 percent during 2007−10 (underpinned by OT development).
  - 12−14 percent during 2011−12 when OT production comes on stream.
  - Long-run real GDP growth expected at 5 percent.
- Inflation and price assumptions:
  - Inflation projected to slow to about 5−6 percent in the medium term.
  - GDP deflator expected to decline following projected declines in commodity prices.
- Fiscal and external balance path:
  - Overall budget assumed to fluctuate from a surplus in 2008 to deficits in the medium term and back to a surplus in 2014 when OT revenues accrue.
  - External current account expected to deteriorate in next few years due to mining-related investment imports, improving from 2011 when OT begins production; current account is expected to record surplus from 2012 (residual item in LIC DSA framework).
- Public external debt assumptions:
  - NPV of public external debt in terms of GDP assumed to be kept at comfortable levels in the long run.
  - As per capita income rises, share of concessional external financing expected to decline.
  - Baseline assumes Mongolia will no longer receive any grants in the long run.
  - External borrowing of the private sector (apart from FDI) assumed to increase in the medium and long term.

### Key macroeconomic projections (selected figures from the medium-term framework, 2004–13)
- Nominal GDP (in millions of U.S. dollars): 1,814; 2,307; 3,156; 3,894; 4,759; 5,344; 5,690; 6,405; 7,316; 7,787 (years shown in table sequence).
- Per capita GDP (in U.S. dollars): 720; 905; 1,224; 1,489; 1,793; 1,984; 2,081; 2,308; 2,597; 2,723.
- Real GDP (percent change): 10.6; 7.3; 8.6; 9.9; 8.6; 8.0; 7.2; 12.2; 13.7; 5.3.
- Consumer prices (period average; percent change): 7.9; 12.5; 5.1; 9.0; 12.0; 7.4; 5.8; 5.5; 5.5; 5.3.
- Total revenue and grants (percent of GDP): 33.1; 30.1; 36.6; 40.6; 42.6; 40.8; 39.0; 35.8; 36.5; 36.5.
- Total expenditure and net lending (percent of GDP): 35.0; 27.5; 28.5; 38.4; 41.1; 40.2; 40.1; 38.8; 38.8; 38.7.
- Overall balance (including grants; percent of GDP): -1.8; 2.6; 8.1; 2.2; 1.5; 0.6; -1.1; -3.0; -2.3; -2.2.
- Nonmineral overall balance (percent of GDP): -5.5; -1.4; -2.4; -12.5; -12.0; -9.9; -8.0; -8.0; -8.0; -8.0.
- Foreign financing (including gap financing; percent of GDP): 3.6; 3.2; 2.3; 1.8; 1.7; 1.5; 1.5; 1.3; 1.2; 1.1.
- Current account balance (including official transfers; percent of GDP): 1.5; 1.3; 7.0; 2.6; -8.5; -12.1; -12.8; -0.9; 5.5; 0.8.
- Gross official reserves (In millions of U.S. dollars): 208; 333; 718; 1,001; 1,125; 1,382; 1,460; 1,530; 1,709; 1,786.
- Copper prices (US$ per ton): 2,863; 3,676; 6,731; 7,132; 7,000; 6,000; 4,500; 3,500; 3,300; 3,300.
- Gold prices (US$ per ounce): 409; 445; 604; 697; 960; 985; 1,015; 1,050; 1,080; 1,095.
- Broad money growth (percent change): 20.3; 37.3; 30.8; 57.3; 22.9; 23.3; 22.1; 21.4; 19.5; 17.0.
- Sources: Data provided by the Mongolian authorities; and Fund staff estimates and projections. Fund staff projections based on policy recommendations. Based on period average exchange rate.

### Country-specific scenarios and shocks included
- Scenario 1: Government borrows a total of US$1.2 billion in 2008−09 (half in each year) on commercial terms. Projects financed assumed economically viable with high import content (90 percent). Note: US$1.2 billion is the maximum amount approved by the Parliament.
- Scenario 2: 3−year delay in timetable for bringing OT mine on stream and higher government equity participation (51 percent). Government equity participation in baseline is 34 percent. Government equity financed through nonrecourse borrowing; repayment made out of dividends with payments not exceeding project cash flow.
- Scenario 3: Adverse terms-of-trade shock in which copper and gold prices decline sharply in 2011 (by 35 percent and 25 percent, respectively, on top of the WEO projection) and catch up with baseline prices within 5 years.

### Public debt sustainability assessment
- Public debt situation:
  - Public debt at end-2007 estimated at 40 percent of GDP. Most public debt is external; about 60 percent of external debt contracted with multilateral creditors on concessional terms and the remaining amount with official bilateral creditors. At end-2007, Mongolia did not have outstanding public debt to external commercial creditors.
- Baseline scenario findings:
  - Public sector debt remains on a downward trend over the projection period.
  - Public debt falls from about 46½ percent of GDP at end-2006 to 26½ percent at end-2012 and continues to decline thereafter.
  - In NPV terms, public debt as a share of GDP declines to 18 percent by 2012, with further modest declines thereafter.
  - NPV of debt-to-revenue and debt service-to-revenue ratios are projected to follow a similar downward pattern.
- Alternative scenarios:
  - Standard DSA alternative scenarios suggest public debt sustainability would be put at risk if GDP growth and the primary budget balance reverted to historical averages; however, staff cautions this may not appropriately capture risks given extensive structural changes.
  - Country-specific scenarios indicate large sovereign borrowing would increase public debt burden in the medium term. Delays in OT development and greater government equity participation would also increase public debt burden slightly over the medium term; once mine is developed, debt burden would converge back to baseline by 2027.
- Bound tests:
  - Public debt sustainability most vulnerable to a sharp decline in economic activity.
  - Given the mining sector’s high importance, authorities should ensure tax and investment regimes for mining are transparent, stable, and internationally competitive.

### External debt sustainability assessment
- Baseline scenario findings:
  - Mongolia assessed at low risk of external debt distress.
  - NPV of external debt-to-GDP ratio was 24½ percent at end-2007 (below 40 percent threshold) and projected to decline to 17½ percent in 2012, dropping further in the long run.
  - NPV of debt-to-exports ratio stays well below 150 percent threshold during entire projection period.
  - Because most external debt is concessional, debt service ratio projected at 1−3 percent of exports (against 20 percent threshold).
  - NPVs of debt-to-revenue and debt service-to-revenue ratios projected to stay well below 250 percent and 30 percent thresholds, respectively.
- Alternative scenarios:
  - Debt burden increases under alternative scenarios but most indicators remain below indicative thresholds.
  - Standard alternative using historical averages indicates NPV of debt-to-GDP would breach threshold in medium and long terms, though staff questions applicability.
  - Issuance of sovereign bonds worth US$1.2 billion (about a quarter of projected nominal GDP in 2009) would make NPV of debt-to-GDP ratio breach 40 percent threshold in 2009, although other indicators remain below thresholds.
  - Delay of OT mine would raise debt burden modestly in medium term, especially relative to exports and revenue; external debt burden improves substantially in long run once mine production begins.
- Bound tests and stress tests:
  - Stress tests result in mild deterioration of debt burden indicators, but indicators remain well below thresholds.
  - Adverse terms-of-trade shock produces the most important deterioration among stress tests; even so, indicators are not expected to breach thresholds because additional production and exports from OT would offset price shocks.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08200.pdf*

### 14. Mongolia is now at a low risk of debt distress, assuming the authorities continue

### 14. Mongolia is now at a low risk of debt distress, assuming the authorities continue to borrow mainly on concessional terms and the external economic environment evolves broadly as envisaged in the baseline scenario.

### Summary assessment and policy message
- Mongolia is assessed to be at a low risk of debt distress conditional on:
  - continuing to borrow mainly on concessional terms, and
  - the external economic environment evolving broadly as envisaged in the baseline scenario.
- Policy recommendations:
  - Move gradually and cautiously in tapping nonconcessional sources of finance.
  - Use nonconcessional finance only for projects with clear economic viability that cannot be financed from concessional sources.
  - Establish a transparent, stable, and internationally competitive mining regime to sustain rapid growth and preserve debt sustainability.
- Rationale:
  - Strong economic performance in recent years has lowered the debt burden, reduced external vulnerability, and allowed space for high-priority public investment.

### Key debt and vulnerability indicators (selected)
- NPV of public sector debt (selected observations):
  - 2004: 57.9
  - 2005: 44.5
  - 2006: 29.8
  - 2007: 25.1
  - 2012: 20.3
  - 2017: 15.8
  - 2027 (projection): 15.7
- Public sector gross debt (percent of GDP; selected):
  - 2004: 81.4
  - 2005: 60.3
  - 2006: 46.7
  - 2007: 40.0
  - 2012: 31.8
  - 2017: 26.6
  - 2027 (projection): 19.0
- Share foreign-currency denominated of public sector debt (selected):
  - 2004: 74.9
  - 2007: 39.4
  - 2017: 21.4
  - 2027 (projection): 18.7
- NPV of public sector debt-to-revenue ratio (in percent; selected):
  - 2004: 174.8
  - 2007: 81.3
  - 2012: 49.8
  - 2017: 48.8
  - 2027 (projection): 32.3
- Debt service-to-revenue ratio (in percent; selected):
  - 2004: 14.6
  - 2007: 3.2
  - 2012: 3.1
  - 2017: 2.9
  - 2027 (projection): 2.0

### Macroeconomic and fiscal assumptions underpinning the baseline
- Real GDP growth (in percent; selected years and averages):
  - 2004: 10.6
  - 2005: 7.3
  - 2006: 8.6
  - 2007: 5.3
  - 2012: 9.9
  - 2017: 12.2
  - 2027 (projection): 13.7
  - 2018–23 average (projection): 9.9
- Inflation rate (GDP deflator, in percent; selected):
  - 2004: 17.2
  - 2005: 20.4
  - 2006: 23.1
  - 2007: 11.9
  - 2012: 3.9
  - 2017: 3.9
- Average nominal interest rate on forex debt (in percent; selected):
  - 2004–2006: 1.1 (each year)
  - 2012: 1.4
  - 2017: 1.5
  - 2018–23 average (projection): 1.3

### Alternative scenarios and stress tests (high-level)
- Scenarios analyzed include (high-level descriptions provided in the sensitivity tables):
  - A1. Key variables at historical averages.
  - A2. Primary balance unchanged from 2007.
  - A3. Permanently lower GDP growth.
  - A4. Sovereign bond issue for 2008–09 (assumes government issues sovereign bonds of $1.2 billion in 2008–09; $600 million each year).
  - A5. Delay of a big mining project and higher government equity participation (assumes Oyu Tolgoi delayed by 3 years and government equity participation of 51 percent).
- Bound tests include shocks such as:
  - Real GDP growth at historical average minus one standard deviation.
  - One-time 30 percent real depreciation in 2008.
  - 10 percent of GDP increase in other debt-creating flows in 2008.
  - Terms-of-trade shocks on copper and gold exports (assumes copper and gold prices decline by 35 percent and 25 percent respectively in 2011 on top of WEO assumptions, catching up with baseline in 5 years).
- Indicator behavior under stress:
  - Charts and tables present NPV of debt-to-GDP, NPV of debt-to-revenue, NPV of debt-to-exports, debt service-to-revenue, and debt service-to-exports under baseline, historical scenario, and most extreme stress tests for 2007–27.

### External debt and external solvency indicators (selected)
- External debt (nominal; percent of GDP; selected):
  - 2004: 76.9
  - 2007: 42.5
  - 2012: 41.0
  - 2017: 37.4
  - 2027 (projection): 30.5
- NPV of external debt (selected):
  - 2012: 28.8
  - 2017: 27.6
  - 2027 (projection): 28.4
- NPV of public and publicly guaranteed (PPG) external debt (selected):
  - 2012: 28.1
  - 2017: 24.5
  - 2027 (projection): 21.3
- PPG debt service-to-exports ratio (in percent; selected):
  - 2004: 7.5
  - 2007: 2.0
  - 2012: 2.1
  - 2017: 1.5
  - 2027 (projection): 1.3

### Financing composition and grant-equivalent financing
- Grant-equivalent financing (in percent of GDP; grant-equivalent financing and grant-equivalent share of external financing reported for selected years):
  - Grant-equivalent financing (in percent of GDP; selected): 2012: 4.6; 2013: 4.4; 2014: 4.1; 2015: 4.1; 2017: 2.3; 2027 projection: 0.6
  - Grant-equivalent financing (in percent of external financing; selected): 2012: 75.9; 2013: 74.7; 2014: 74.2; 2015: 73.7; 2017: 63.9; 2027 projection: 31.9
- Grant element of new external borrowing (note: many entries are not reported in the table excerpts).

### Financing needs and gross financing indicators
- Gross financing need (general government definition; selected):
  - 2004: 5.6
  - 2007: -1.3
  - 2012: 0.3
  - 2017: 3.0
  - 2027 (projection): 1.6
- Total gross financing need (billions of U.S. dollars; selected):
  - Series show small negative and small positive amounts in early projections; specific entries include -0.3, -0.5, -0.3, -0.2, -0.1, 0.0, etc., reflecting net changes and projected needs.

### Implementation priorities and risks
- Implementation priorities:
  - Maintain concessional borrowing where possible.
  - Tight scrutiny of nonconcessional borrowing; restrict to economically viable, non-concessionally-financable projects.
  - Put in place a transparent, stable, and internationally competitive mining fiscal and regulatory framework.
- Main risks:
  - Delay of major mining projects (e.g., Oyu Tolgoi) or higher-than-expected government participation in mining equity.
  - Less favorable financing terms (e.g., increased reliance on nonconcessional financing or sovereign bond issuance, with the sovereign bond illustrative assumed size of $1.2 billion in 2008–09).
  - Terms-of-trade shocks to copper and gold prices and large real exchange rate depreciations.

*Source: IMF staff projections and simulations; Staff Report for the 2008 Article IV Consultation—Informational Annexes (May 6, 2008).*

### introduction of a survey of enterprises. Work has commenced on revising the register of

### _cr08200 - introduction of a survey of enterprises. Work has commenced on revising the register of

### Statistical capacity, data collection, and quality
- Work has commenced on revising the register of businesses, last updated in 2002.
- A working group with key official and private data providers and users has been established.
- Commercial bank staff has been trained in data reporting.
- Further progress is needed in:
  - the estimation of the international investment position;
  - procedures to adjust for nonresponses in the enterprise survey.

### Dissemination practices
- The NSO publishes monthly and annual Statistical Bulletins in English and Mongolian, including data on:
  - population, employment, national accounts, prices, household income and expenditure, central and local government revenue and expenditure, and external trade.
- The BOM publishes an Annual Reports and a monthly Statistical Bulletin, which include:
  - summary statistics for the central bank, consolidated balance sheet for commercial banks, and interest and exchange rate data.

### Table of Common Indicators Required for Surveillance (as of April 1, 2008) — selected entries
- Exchange rates: Latest observation 3/31/08; Date received 4/1/08; Frequency of data D; Frequency of reporting M; Frequency of publication D.
- International reserve assets and reserve liabilities of the Monetary Authorities: Latest observation 2/2008; Date received 3/18/08; Frequency D; Frequency of reporting M; Frequency of publication M.
- Reserve/base money: Latest observation 2/2008; Date received 3/18/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Broad money: Latest observation 2/2008; Date received 3/18/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Central bank balance sheet: Latest observation 2/2008; Date received 3/18/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Consolidated balance sheet of the banking system: Latest observation 2/2008; Date received 3/18/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Interest rates: Latest observation 2/2008; Date received 3/18/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Consumer price index: Latest observation 2/2008; Date received 3/18/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Revenue, expenditure, balance and composition of financing – general government: Latest observation 2/2007; Date received 3/09/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Revenue, expenditure, balance and composition of financing – central government: Latest observation 2/2007; Date received 3/09/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- Stocks of central government and central government-guaranteed debt: Latest observation 2006; Date received 11/2007; Frequency A; Frequency of reporting A; Frequency of publication A.
- External current account balance: Latest observation Q4 2007; Date received 2/28/08; Frequency Q; Frequency of reporting Q; Frequency of publication Q.
- Exports and imports of goods: Latest observation 12/2007; Date received 1/29/08; Frequency M; Frequency of reporting M; Frequency of publication M.
- GDP/GNI: Latest observation 2007; Date received 1/2008; Frequency A; Frequency of reporting A; Frequency of publication A.
- Gross external debt: Latest observation 2007; Date received 3/26/08; Frequency A; Frequency of reporting A; Frequency of publication A.

### Millennium Development Goals — selected indicators for Mongolia (series of years listed as in source)
- Population below $1 a day (percent): ..14..........
- Prevalence of undernourishment (percent of population): ..45..2828 2827
- Poverty gap ratio at $1 a day: ..3..........
- Poverty headcount, national (in percent of population): ..36....36.. 36
- Prevalence of underweight in children (under five years of age): ....13...... 6
- Net primary enrollment ratio (in percent of relevant age group): 90..917980 8493
- Primary completion rate, total (in percent of relevant age group): ....8710898 9697
- Youth literacy rate (in percent ages 15-24): 999998.... 98
- Proportion of seats held by women in national parliament (in percent): 25..81111 117
- Ratio of girls to boys in primary and secondary education (in percent): 109..112110110 108116
- Ratio of young literate females to males (in percent ages 15-24): 100101101.... 102
- Share of women employed in the nonagricultural sector (in percent): 4948494749 4953
- Immunization, measles (in percent of children ages 12-23 months): 9285949895 9698
- Infant mortality rate (per 1,000 live births): 746750.... 4121
- Under 5 mortality rate (per 1,000): 1088965.... 5226
- Births attended by skilled health staff (in percent of total): ....97..97 99100
- Maternal mortality ratio (modeled estimate, per 100,000 live births): ....110...... 93
- Contraceptive prevalence rate (in percent of women ages 15-49): ....67..69 69
- Incidence of tuberculosis (per 100,000 people): 220209199196194 192177
- Prevalence of HIV, total (in percent of population aged 15-49): ........0 00
- Tuberculosis cases detected under DOTS (in percent): ..   7627468 8079
- Access to an improved water source (in percent of population): 62....6262.. 62
- Access to improved sanitation (in percent of population): ......5959.. 59
- CO2 emissions (metric tons per capita): 5 33.. 3 .. 6
- Forest area (in percent of total land area): 7..7.... 8
- Nationally protected areas (in percent of total land area): ........12 1214
- Aid per capita (current US$): 6 939185100 10483
- Debt service (in percent of exports): 0..6..34 3 3
- Fixed line and mobile phone subscribers (per 1,000 people): 3235114142184 18 4279
- Internet users (per 1,000 people): ..   0132158 80105
- Personal computers (per 1,000 people): ..   3132877 124133
- Total debt service (in percent of exports of goods, services and income): ..106729 33
- Unemployment, youth female (in percent of female labor force ages 15-24): ....23..21....
- Unemployment, youth male (in percent of male labor force ages 15-24): ....23..20....
- Unemployment, youth total (in percent of total labor force ages 15-24): ....23..20....
- Fertility rate, total (births per woman): 43322 22
- GNI per capita, Atlas method (current US$): ..260390450480 600690
- GNI, Atlas method (current US$, in billions): ..0.60.91,0971.2 1.52
- Gross capital formation (in percent of GDP): 3829363138 3736
- Life expectancy at birth, total (years): 63..636564 6567
- Literacy rate, adult total (percent of people ages 15 and above): 989898..98 98
- Population, total (in millions): 2.12.32.42.42.5 2.52.6
- Trade (in percent of GDP): 77112128148151 162160

### Public Information Notice (PIN) No. 08/77 — IMF Article IV Consultation with Mongolia (summary)
- Date: FOR IMMEDIATE RELEASE July 1, 2008.
- On June 4, 2008, the Executive Board concluded the 2008 Article IV consultation with Mongolia.
- Background and recent performance:
  - Real GDP growth averaged 9 percent since 2004.
  - Growth picked up to 10 percent in 2007.
  - Inflation rose from 6 percent (year-on-year) in June 2007 to 21 percent in March 2008.
  - Reserve money grew by 39½ percent in 2007.
  - Broad money increased by 57 percent and credit to the private sector increased by 75 percent in 2007.
  - Overall fiscal surplus declined from 8 percent of GDP in 2006 to 2 percent in 2007.
  - Net present value (NPV) of external public debt fell from 51 percent of GDP at end-2004 to 24½ percent at end-2007.
  - International reserves of the BOM increased almost fivefold since 2003 to US$1 billion (4½ months of nonmining imports).
- Medium-term outlook and projections:
  - With the expected opening of the new Oyu Tolgoi copper and gold mine in 2011, real GDP growth is projected to pick up from around 7−9 percent in 2008−10 to 12−14 percent in 2011−12.
  - With strong policy implementation, inflation could be brought down to a single digit by end-2008 and maintained at 5−6 percent over the medium term.
  - The external current account is expected to move into deficit during 2008−11, and move back into surplus in 2012 after Oyu Tolgoi comes on stream.
  - NPV of public debt, debt service burden, and international reserves are expected to remain at comfortable levels.

### Executive Board Assessment — key recommendations and concerns
- Main concerns:
  - Rising inflation reflecting rapid government spending growth and private sector credit expansion, large increases in imported food and fuel prices, and tightening supply constraints.
  - Risk of overheating that could threaten macroeconomic stability and impair growth.
- Immediate policy priorities:
  - Tighten both fiscal and monetary policies to address overheating.
  - Steps to address transportation bottlenecks and other capacity constraints.
  - Establish a transparent, stable, and internationally competitive mining regime.
- Fiscal policy guidance:
  - Curtail low-priority capital spending and contain the wage bill to maintain a small surplus given stronger-than-expected revenues.
  - Consider future wage increases carefully in the context of broader civil service reform.
  - Reduce overlapping coverage and improve targeting of social spending programs.
  - Establish a clear medium-term fiscal framework, potentially including:
    - a separate limit on expenditure growth;
    - adoption of realistic nonmineral fiscal targets.
  - Continue reliance on concessional external finance where possible; restrict nonconcessional borrowing to economically viable projects when inflation risks have diminished.
  - Consolidate foreign financing with the general budget for fiscal transparency.
- Monetary and exchange rate guidance:
  - Welcome recent tightening of monetary policy; be ready to increase the policy interest rate further as needed.
  - International reserves are broadly comfortable; a further large increase could complicate inflation reduction efforts.
  - Staff assessment: real effective exchange rate is currently somewhat undervalued (some Directors noted divergence within margin of error).
  - Greater exchange rate flexibility would facilitate policy and adjustment to external shocks.
  - Strengthen the interbank foreign exchange market; support for introduction of a screen-based trading system.
- Financial sector guidance:
  - Overall financial system condition generally healthy; banking supervision framework well-developed.
  - Given rapid credit growth, monitor large exposures and improve supervision of liquidity and operational risks.
  - Support progress of the Financial Regulatory Commission in supervising nonbank financial institutions.
  - Further strengthen statutory framework for savings and credit cooperatives and develop tools for consolidated supervision.
  - Review plans for establishment of a development bank to avoid unfair competition and distortions.

### Selected Economic and Financial Indicators, 2004–08 (highlights preserved exactly)
- Nominal GDP (2007): $3,894 million 1/
- Population, end year (2007): 2.64 million
- Per capita GDP (2007): $1,489 1/
- Poverty incidence (2006): 32.2 percent 2/
- Quota: SDR 51.1 million

Real sector (Percent change)
- Real GDP growth: 2004 10.6; 2005 7.3; 2006 8.6; 2007 9.9; 2008 Est. ...; Staff Recom. 8.6
- Mineral: 2004 34.3; 2005 10.9; 2006 6.3; 2007 1.7; 2008 Est. ...; Staff Recom. 1.4
- Nonmineral: 2004 5.6; 2005 6.3; 2006 9.2; 2007 12.2; 2008 Est. ...; Staff Recom. 10.3
- Consumer Prices (end-period): 2004 10.6; 2005 9.2; 2006 6.0; 2007 15.1; 2008 Est. ...; Staff Recom. 8.8
- GDP deflator: 2004 17.2; 2005 20.4; 2006 23.1; 2007 11.6; 2008 Est. ...; Staff Recom. 10.3

General government budget (In Percent of GDP)
- Revenue and grants: 2004 33.1; 2005 30.1; 2006 36.6; 2007 40.6; 2008 Est. 44.4; Staff Recom. 42.6
- Expenditure and net lending: 2004 35.0; 2005 27.5; 2006 28.5; 2007 38.4; 2008 Est. 46.9; Staff Recom. 41.1
- Overall balance (including grants): 2004 -1.8; 2005 2.6; 2006 8.1; 2007 2.2; 2008 Est. -2.5; Staff Recom. 1.5
- Nonmineral overall balance: 2004 -5.5; 2005 -1.4; 2006 -2.4; 2007 -12.5; 2008 Est. -14.9; Staff Recom. -12.0

Money and credit (Percent change)
- Domestic credit: 2004 23.0; 2005 22.3; 2006 -7.5; 2007 72.5; 2008 Est. ...; Staff Recom. 25.2
- Broad money: 2004 20.3; 2005 37.3; 2006 30.8; 2007 57.3; 2008 Est. ...; Staff Recom. 22.9
- Reserve money: 2004 16.8; 2005 19.7; 2006 37.7; 2007 39.6; 2008 Est. ...; Staff Recom. 12.0
- Interest rate on central bank bills, end-period (percent) 4/: 2004 15.8; 2005 3.7; 2006 5.1; 2007 8.4; 2008 Est. ...; Staff Recom. ...

Balance of payments (In million of U.S. dollars)
- Current account balance (including official transfers): 2004 27; 2005 29; 2006 222; 2007 101; 2008 Est. ...; Staff Recom. -405
  - (In percent of GDP): 2004 1.5; 2005 1.3; 2006 7.0; 2007 2.6; 2008 Est. ...; Staff Recom. -8.5
- Trade balance (in million of U.S. dollars): 2004 -149; 2005 -155; 2006 30; 2007 -218; 2008 Est. ...; Staff Recom. -839
  - (In percent of GDP): 2004 -8.2; 2005 -6.7; 2006 0.9; 2007 -5.6; 2008 Est. ...; Staff Recom. -17.6
- Export, f.o.b.: 2004 872; 2005 1,069; 2006 1,545; 2007 1.952; 2008 Est. ...; Staff Recom. 2,163
- Import, c.i.f.: 2004 1,021; 2005 1,224; 2006 1,516; 2007 2,170; 2008 Est. ...; Staff Recom. 3,002
- Foreign direct investment: 2004 129; 2005 258; 2006 290; 2007 328; 2008 Est. ...; Staff Recom. 688
- Gross official international reserves (end-period): 2004 208; 2005 333; 2006 718; 2007 1,001; 2008 Est. ...; Staff Recom. 1,253
  - (In months of next year’s imports of goods and services): 1.6; 2.1; 3.3; 3.6;  ; 4.0
  - (In months of next year’s nonmining imports) 5/: 1.9; 2.5; 3.8; 4.5;  5.1

Trade prices (percent change)
- Export prices (U.S. dollar): 2004 23.1; 2005 13.1; 2006 38.7; 2007 30.5; 2008 Est. ...; Staff Recom. 4.0
- Import prices (U.S. dollar): 2004 15.3; 2005 9.2; 2006 12.2; 2007 9.5; 2008 Est. ...; Staff Recom. 15.2
- Terms of trade (percent change): 2004 6.8; 2005 3.5; 2006 23.7; 2007 19.2; 2008 Est. ...; Staff Recom. -9.7

Public and publicly guaranteed debt
- Total public debt (In percent of GDP): 2004 81.4; 2005 60.3; 2006 46.7; 2007 40.0; 2008 Est. 35.7; Staff Recom. 34.1
- Domestic debt (In percent of GDP): 2004 6.8; 2005 3.7; 2006 1.7; 2007 0.6; 2008 Est. 0.3; Staff Recom. 0.3
- External debt (In million of U.S. dollars): 2004 1,352; 2005 1,306; 2006 1,420; 2007 1,535; 2008 Est. 1,687; Staff Recom. 1,611
  - (In percent of GDP): 2004 74.6; 2005 56.6; 2006 45.0; 2007 39.4; 2008 Est. 35.5; Staff Recom. 33.8
- NPV of total public debt (In percent of GDP) 7/: 2004 57.9; 2005 44.5; 2006 29.87; 2007 25.1; 2008 Est. 22.6; Staff Recom. 21.6
- NPV of external debt (In percent of GDP) 7/: 2004 51.1; 2005 40.8; 2006 28.1; 2007 24.5; 2008 Est. ...; Staff Recom. 21.3
- External debt service (In million of U.S. dollars): 2004 91; 2005 43; 2006 57; 2007 52; 2008 Est. ...; Staff Recom. 61
  - (In percent of exports of goods and services): 2004 7.5; 2005 2.9; 2006 2.8; 2007 2.0; 2008 Est. ...; Staff Recom. 2.1

Exchange rate
- Togrogs per U.S. dollar (end-period): 2004 1,209; 2005 1,221; 2006 1,165; 2007 1,170; 2008 Est. ...; Staff Recom. ...
- Togrogs per U.S. dollar (period average): 2004 1,187; 2005 1,205; 2006 1,177; 2007 1,170; 2008 Est. ...; Staff Recom. ...
- Nominal effective exchange rate (end-period; percent change): 2004 -6.1; 2005 1.5; 2006 1.9; 2007 -4.0; 2008 Est. ...; Staff Recom. ...
- Real effective exchange rate (end-period; percent change): 2004 0.9; 2005 8.0; 2006 5.5; 2007 6.4; 2008 Est. ...; Staff Recom. ...

Nominal GDP (billion togrogs)
- 2004 2,152; 2005 2,780; 2006 3,715; 2007 4,558; 2008 Est. ...; Staff Recom. 5,456

*International Monetary Fund — Public Information Notice and staff report material as presented in the provided content.*

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