## _cr1052

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---

### Executive Summary
- Stand-By Arrangement: an 18-month Stand-By Arrangement in the amount of SDR 153.3 million (300 percent of quota) approved April 1, 2009.
- Program performance:
  - Second review approved September 21, 2009.
  - All end-September performance criteria for the third review were met.
  - Indicative limit on the budget deficit breached by a small margin due to higher-than-expected capital spending; annual deficit target expected to be met as mineral revenues pick up in Q4 2009.
  - Structural benchmark to place Anod Bank into receivership was met with some delay.
- Shock and stabilization:
  - Global economic crisis and collapse in copper prices in 2008–09 hit Mongolia hard.
  - By early 2009 international reserves were being depleted; insufficient funds to finance the 2009 budget; the fourth largest bank was intervened.
  - Strong policy implementation under the Fund-supported program helped quickly stabilize the economy.
- Outlook:
  - Growth likely slightly negative in 2009; staff expects growth around -1 percent in 2009 and recovery to around 8 percent in 2010 (staff projection 2010: 8.6).
  - Inflation peaked at over 30 percent in 2008; expected to settle around 6 percent by end-2010; staff and authorities expected inflation to rebound to around 6–8 percent in 2010.
- Long-term message: maximize mineral wealth benefits through continued fiscal discipline, a flexible exchange rate, and a sound banking system.

### Recent Developments and Outlook
- Growth and inflation:
  - Real growth averaged 9 percent during 2004–08.
  - Real growth expected to be slightly negative in 2009; staff projects 2009: -1.0; 2010: 8.6.
  - Inflation peaked at over 30 percent in 2008; inflation expected around 6 percent by end-2010.
  - Monthly detail: inflation was -1.1 percent in October and projected to reach 2 percent by December and below 8 percent at end-2010.
- Politics:
  - Presidential election summer 2009: Mr. Tsakhia Elbegdorj defeated the incumbent.
  - Prime Minister Bayar resigned in late October 2009; Mr. S. Batbold elected Prime Minister.
  - Parliamentary elections scheduled for 2012.
- External sector:
  - Trade balance volatile; current account improved significantly in 2009 through import slowdown.
  - Current account set to worsen in 2010 due to import surge associated with Oyu Tolgoi development; later large surpluses expected after Oyu Tolgoi production starts in 2013.
  - In coming years current account deficits expected to be largely financed by FDI inflows and private loans.

### Monetary and Exchange Rate Policy
- Exchange rate framework:
  - Authorities committed to a flexible exchange rate; central bank intervened to smooth volatility and opportunistically build international reserves.
  - Real effective exchange rate has depreciated by some 20 percent from the peak in October 2008.
  - Staff estimates current level of the real exchange rate is broadly in line with fundamentals (Equilibrium Exchange Rate approach favored for a mineral dependent economy).
  - Policy recommendation: flexible exchange rate indispensable to facilitate adjustment through nominal exchange rate rather than prices.
- Monetary stance:
  - Policy rate hikes earlier in 2009 instrumental in stabilizing markets; subsequent gradual lowering as conditions eased.
  - Going forward monetary policy geared to achieving low inflation and safeguarding international reserves; authorities cautious on further easing given inflation expected to rebound around 6–8 percent.

### Fiscal Policy: Stance, Risks, and Structural Reform
- Past and near-term stance:
  - 2007–08 rapid spending expansion increased structural deficits; 2009 required fiscal contraction to align deficits with financing.
  - For 2010, overall balance should be limited to 5 percent of GDP, in line with the budget passed by Parliament.
  - Any revenue over-performance should be saved; any revenue shortfall fully offset by spending cuts.
  - Advance payments associated with Oyu Tolgoi should be saved to meet financing needs in 2011 and beyond.
- Fiscal risks and recommendations:
  - Mineral revenues expected to pick up in Q4 2009 and subsequently with Oyu Tolgoi development.
  - Prompt adoption of a Fiscal Responsibility Law recommended to institutionalize fiscal discipline; law should be comprehensive with explicit costing and numerical targets.
  - Social transfer reform: move away from universal transfers toward targeted benefits; authorities committed to passing social transfer reform law by February 1, 2010.
  - Consolidation options: reductions in subsidies, universal transfers, and investment spending.
  - Decline in the deficit must continue until Oyu Tolgoi revenue starts to enter the budget (in around 2015).

### Banking System: Conditions and Policy Actions
- System condition:
  - Rapid credit growth during 2006–08 worsened credit quality; banking system undercapitalized with weak balance sheets.
  - Fourth largest bank intervened in early 2009; Anod Bank placed into receivership (Anod bank put into receivership on November 30, 2009); Zoos Bank receiver appointed and external audit initiated.
  - System-wide balance sheet worsening and rising nonperforming loans noted.
- Policy actions and recommendations:
  - Central bank responded proactively to individual bank problems; further public funds may be needed to restructure banks.
  - Any public injections should be tied to governance and structural reforms at recipient banks, including changes in management, dilution of shareholders’ ownership, transparent fit and proper ownership/management, improved risk management, and strengthened lending practices.
  - Strengthen supervision, improve loan classification and provisioning rules, require monthly reporting, and enforce regulatory requirements.

### Mining Scale-Up and Long-Run Effects (Oyu Tolgoi)
- Oyu Tolgoi Investment Agreement signed in October 2009; Oyu Tolgoi production expected to start in 2013.
- CGE model results (qualitative):
  - Scaling up mining increases mineral GDP, reallocates resources, and exerts real exchange rate appreciation pressures, reducing competitiveness of nonmineral tradables.
  - Government revenue increase creates space for higher spending, but higher wages and nontradable prices limit real purchasing power gains.
  - Labor competition from mining raises wages; increased reliance on mining raises vulnerability to commodity price shocks.
  - Policy recommendations: maintain flexible exchange rate and adopt Fiscal Responsibility Law to smooth adjustment and support nonmineral economy development.

### Program Performance, Fund Support, and Operational Details
- Stand-By Arrangement disbursements and reviews:
  - Approved April 1, 2009 — 153,300,000 SDRs (300 percent of quota).
  - June 23, 2009 — 25,550,000 SDRs (50 percent of quota) — completion of first review.
  - September 21, 2009 — 15,330,000 SDRs (30 percent of quota) — completion of second review.
  - December 22, 2009 — 15,330,000 SDRs (30 percent of quota) — completion of third review.
  - March 15, 2010; June 15, 2010; September 15, 2010 — scheduled subsequent reviews and disbursements of 15,330,000 SDRs each.
  - Total amount of purchase under the 18-month SBA: 153,300,000 SDRs.
- Technical Memorandum highlights:
  - Quantitative performance criteria for NIR floors, NDA ceilings, net credit to government ceilings, ceilings on external borrowing, and indicative targets for fiscal deficits with detailed adjustors.
  - Program exchange rate: Tog 1,560 per U.S. dollar.
  - SDR program exchange rate: SDR 1 = US$1.509.
  - Monetary gold valued at US$880 per ounce.
- Data and audits:
  - Data provision adequate for surveillance; external auditors need access to central bank vaults by end-2009 to resolve qualified audit opinion from 2008.

### Debt Sustainability, Risks, and Scenarios
- Overall assessment: Mongolia remains at low risk of external debt distress; one-off borrowing in 2009–10 temporarily increases public debt but falls rapidly in 2012–14.
- Stress tests:
  - One-time 30 percent exchange rate depreciation relative to baseline in 2010 would breach threshold over 2010-12; adverse effects gradually unwound once Oyu Tolgoi starts in 2013.
  - Country-specific alternative scenario: assumes fiscal looseness and full spending of mining revenues — leads to significant real exchange rate appreciation and deterioration in the current account but does not produce indicators that significantly breach thresholds in staff analysis.
- Key DSA projections (selected series, preserved as in source):
  - External debt (nominal) selected years: 2009: 48.0; 2010: 59.8; 2011: 68.4; 2012: 86.9; 2013: 68.0; 2019: 17.1; 2029: 14.1.
  - PV of PPG external debt as percent of exports selected: 2011: 45.1; 2012: 75.9; 2013: 75.3; 2014: 70.0; 2019: 25.5; 2029: 31.8.
  - Public sector debt (percent of GDP) selected: 2009: 51.6; 2010: 70.8; 2013: 54.7; 2019: 18.6; 2029: 14.7.
  - Debt service-to-exports ratio (percent) selected: 2013: 15.7; 2014: 19.0; 2019: 4.1; 2029: 2.8.
- Policy priority: pursue fiscal adjustment before mining revenues materialize; be cautious with new nonconcessional external borrowing.

### Data, Technical Assistance, and Statistical Issues
- Data provision:
  - Authorities committed to timely monthly reporting of monetary, fiscal, and external data; specific reporting responsibilities assigned to BOM, MOF, and NSO with deadlines (e.g., monetary survey monthly; net international reserves daily; fiscal data monthly by the 20th day).
- Statistical gaps and actions needed:
  - Improve annual and quarterly production accounts, capital formation estimation, and coverage of informal sector.
  - CPI rebased January 2008; housing price index published since October 2008.
  - Monetary statistics to extend coverage to savings and credit unions; reconcile BOM and MOF financing data.
  - Balance of payments dissemination improved with standard presentation since Q3 2009.
- Technical assistance missions listed across 2008–2009 in areas including Banking Restructuring, Monetary and Financial Statistics, Fiscal Expenditure Review, and Foreign Exchange Market.

### Key Policy Recommendations (aggregated)
- Maintain fiscal discipline: limit 2010 overall deficit to 5 percent of GDP; save any revenue over-performance; continue consolidation through 2011 until mineral revenues are realized.
- Adopt a comprehensive Fiscal Responsibility Law and complementary organic budget law by February 1, 2010.
- Maintain a flexible exchange rate to absorb terms-of-trade shocks and facilitate nominal adjustment.
- Strengthen the banking system: proceed with resolute bank restructuring, tie public support to governance reforms, and strengthen supervision and provisioning rules.
- Save Oyu Tolgoi advance payments to meet future financing needs and avoid procyclical spending.
- Consider moving toward an inflation targeting framework over the medium term, after preparatory steps (inflation forecasting, financial market deepening, transmission improvements).

### Selected Key Statistics and Dates (preserved)
- Stand-By Arrangement: SDR 153.3 million (300 percent of quota); approved April 1, 2009.
- Second review approved: September 21, 2009.
- Staff visit to Ulaanbaatar: October 28–November 10, 2009.
- Report approved by Nigel Chalk and Dhaneshwar Ghura: December 7, 2009.
- Structural benchmark: social transfer reform law to be passed by February 1, 2010.
- Oyu Tolgoi production expected to start: 2013.
- Real growth averaged 9 percent during 2004–08.
- Inflation peaked at over 30 percent in 2008.
- Nominal GDP (2008): US$5,243 million.
- Population, end-year (2008): 2.68 million.
- Per capita GDP (2008): US$1,972.
- Poverty incidence (2007/08): 35.2 percent.
- Quota: SDR 51.1 million.
- Selected projections (as in source tables): Real GDP growth: 2007: 10.2; 2008: 8.9; 2009: -1.0; 2010: 8.6. Consumer prices (period average): 2007: 8.2; 2008: 26.8; 2009: 6.3; 2010: 4.9.
- Gross official international reserves (end-period, US$ millions) selected: 2007: 1,001; 2008: 657; 2009: 1,050; 2010: 1,252.
- Copper price (US$ per ton) selected: 2007: 7,132; 2008: 6,963; 2009: 5,000; 2010: 5,800 (tables also show other used assumptions and projections).

*International Monetary Fund. Staff Report for the 2009 Article IV Consultation, Third Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria. December 7, 2009.*

### 2009. The views expressed in the staff report are those of the staff team and do not

### Staff Report for the 2009 Article IV Consultation, Third Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria

### Executive Summary
- Stand-By Arrangement: an 18-month Stand-By Arrangement in the amount of SDR 153.3 million (300 percent of quota) was approved by the Board on April 1, 2009.
- Program performance: The second review was approved by the Board on September 21, 2009. All end-September performance criteria for the third review were met.
- Economic shock and stabilization:
  - The global economic crisis and collapse in copper prices in 2008–09 hit Mongolia hard.
  - Loose macro-policies during the preceding boom years increased vulnerability.
  - By early 2009 international reserves were being depleted; insufficient funds to finance the 2009 budget; the fourth largest bank was intervened.
  - Strong policy implementation under the Fund-supported program helped quickly stabilize the economy.
- Outlook:
  - Growth is likely to be slightly negative in 2009.
  - The outlook for 2010 is favorable with a projected sharp rebound driven by development of the mineral sector, notably the Oyu Tolgoi mining project.
  - Inflation peaked at over 30 percent in 2008 but is expected to settle at around 6 percent by end-2010.
- Long-term policy message: Maximizing mineral wealth benefits requires continued fiscal discipline, a flexible exchange rate, and a sound banking system to transform mineral wealth into lower poverty and rising household income.

### Recent Developments
- Growth and inflation:
  - Real growth averaged 9 percent during 2004–08.
  - Real growth is expected to be slightly negative in 2009.
  - Inflation peaked at over 30 percent in 2008; projected to be around 6 percent by end-2010.
- Politics:
  - Presidential election in summer 2009: Mr. Tsakhia Elbegdorj of the Democratic Party defeated the incumbent.
  - In late October 2009 Prime Minister Bayar submitted his resignation; Mr. S. Batbold was elected Prime Minister.
  - Parliamentary elections scheduled for 2012.
- Macro-policy legacy:
  - Prior to 2009: pro-cyclical fiscal policy, tightly managed exchange rate, passive monetary policy → overheating, inflation, credit boom, balance of payments pressures.
  - Fiscal measures that permanently increased the deficit included: cut in the VAT rate, lowering of social security contributions, introduction of untargeted universal transfers, civil service wage increases.
  - Rapid credit growth during 2006–08 worsened credit quality; banking system undercapitalized with weak balance sheets.
- External sector:
  - Trade balance volatile reflecting terms of trade shocks.
  - Current account improved significantly in 2009 through a slowdown in imports.
  - Current account set to worsen in 2010 due to import surge associated with Oyu Tolgoi development.
  - In coming years current account deficits expected to be largely financed by FDI inflows and private loans.
  - Large current account surpluses expected after Oyu Tolgoi production starts in 2013.
- Program performance details:
  - All performance criteria for the third review were met.
  - The indicative limit on the budget deficit was breached by a small margin due to higher-than-expected capital spending; annual deficit target expected to be met as mineral revenues pick up in Q4 2009.
  - Structural benchmark to place Anod Bank into receivership was met with some delay.
  - Authorities committed to passing a social transfer reform law by February 1, 2010.

### Policy Discussions — Outlook and Risks
- Growth and inflation outlook:
  - Staff and authorities broadly agreed on outlook; authorities expected growth in 2009 could be slightly higher than staff forecast.
  - Uncertainty from potential H1N1 flu-related closures could dampen Q4 2009 growth.
  - Growth expected to recover strongly in 2010 due to Oyu Tolgoi investment.
  - Inflation deflation in recent months judged temporary; inflation likely to rebound to around 6–8 percent in 2010.

### Monetary and Exchange Rate Policy
- Exchange rate framework:
  - Authorities committed to a flexible exchange rate.
  - Central bank intervened on both sides of the market to smooth volatility and opportunistically build international reserves.
  - As interbank market deepens, central bank anticipates moving away from twice-weekly foreign currency auctions toward interbank interventions.
  - Agreement that exchange rate flexibility is indispensable to prevent expected real appreciation pressures from manifesting as higher inflation.
  - Staff estimates suggest the current level of the real exchange rate is broadly in line with fundamentals (see Box 4).
- Monetary policy stance:
  - Policy rate hikes earlier in 2009 were instrumental in stabilizing market conditions.
  - Central bank has lowered interest rates in line with evolving market conditions since the hike.
  - Going forward monetary policy to be geared to achieving low inflation and safeguarding international reserves.
  - Authorities cautious on further easing given inflation expected to rebound to around 6–8 percent next year.

### Fiscal Policy (summary of issues and measures)
- Past fiscal policy:
  - 2007–08 rapid expansion of spending created a legacy of higher structural deficits.
  - Recent fiscal contraction in 2009 was necessary to align deficits with available financing.
- Fiscal risks and revenue outlook:
  - Mineral revenues expected to pick up in Q4 2009 and subsequently with Oyu Tolgoi development.
  - Adoption of a Fiscal Responsibility Law is planned and discussed as important to insulate fiscal policy from price shocks (Box 5 reference).
- Structural reforms:
  - Authorities committed to social transfer reform law by February 1, 2010.

### Banking System
- Banking sector condition:
  - Fourth largest bank was intervened in early 2009.
  - Rapid credit growth during 2006–08 led to deterioration in credit quality.
  - Banking system described as undercapitalized with weak balance sheets.
- Policy actions:
  - Structural benchmark to place Anod Bank into receivership was met (with some delay).
  - Strengthening the banking system is a priority to support macroeconomic stability and to manage scaling up of mining-related investment.

### Other Policy Issues and Long-Run Mining Impact
- Long-run effects of scaling up mining (Oyu Tolgoi):
  - Oyu Tolgoi Investment Agreement signed in October 2009 is expected to drive long-term growth.
  - Multisectoral computable general equilibrium (CGE) model analysis indicates:
    - Scaling up mining will increase mineral GDP and affect other sectors through resource reallocation and relative price changes.
    - Real exchange rate pressure to appreciate, making nonmineral exports less competitive and reducing the relative role of the nonmineral tradable sector.
    - Government revenue increase creates space for higher spending, but higher wages and nontradable prices limit real increases.
    - Government will compete for labor with nontradable sectors, resulting in upward wage pressure.
    - Increased reliance on mining could raise vulnerability to commodity price shocks.
    - Benefits of maintaining a flexible exchange rate and adopting a Fiscal Responsibility Law to smooth adjustment and support nonmineral economy development.
- Modeling results (qualitative summary from CGE simulations):
  - Value-added by sector and wage rate impacts shown across 2005–2025 horizons indicate large relative increases in mining sector activity and upward pressures on wages and nontradable prices.

### Boxes — Key Analytical Findings
- Box 1: Comparison with selected copper producers (Chile, Zambia, Papua New Guinea, Peru)
  - Mongolia experienced large real currency appreciation realized entirely through higher inflation, unlike some peers that absorbed appreciation via nominal exchange rate changes.
  - After copper prices fell, Mongolia’s contraction was larger than many peers; only Peru had a similar decline.
  - Pro-cyclical government spending amplified Mongolia’s volatility: other copper producers ramped up real government spending following price declines (counter-cyclical), but Mongolia contracted spending sharply to reduce the fiscal deficit.
- Box 2: Spend-and-absorb framework for boom-bust cycle (2006–08)
  - Analysis using a dynamic stochastic general equilibrium model with nominal rigidities shows:
    - In 2006 initial mineral revenue inflows were largely saved; fiscal and current account balances improved relative to 2005.
    - In 2007 fiscal policy fully spent additional resources; monetary easing in latter 2007 led to fast money and credit growth, higher inflation, real exchange rate appreciation, and import surge.
    - The late-2008 collapse in copper prices reduced exports and foreign exchange inflows; persistent high spending drew down government deposits, leading to import-driven current account deterioration, reserve drain, sharp depreciation in late 2008, and fiscal unsustainability.
    - The Fund-supported adjustment program and authorities’ policy implementation restored macro stability by mid-2009.
- Box 3: Long-run CGE analysis of scaling up mining production
  - Scaling up mining increases mineral output and causes reallocation effects, real appreciation pressures, wage increases, and potential contraction of nonmineral tradable sectors.
  - Flexible exchange rate and Fiscal Responsibility Law recommended to mitigate macroeconomic distortions and smooth adjustment.

### Key Statistics and Dates (preserved as in source)
- Stand-By Arrangement: SDR 153.3 million (300 percent of quota); approved April 1, 2009.
- Second review approved: September 21, 2009.
- Staff visit to Ulaanbaatar: October 28–November 10, 2009.
- Report approved by Nigel Chalk and Dhaneshwar Ghura: December 7, 2009.
- Structural benchmark: social transfer reform law to be passed by February 1, 2010.
- Oyu Tolgoi production expected to start: 2013.
- Real growth averaged 9 percent during 2004–08.
- Inflation peaked at over 30 percent in 2008.
- Inflation expected around 6 percent by end-2010; staff and authorities expected inflation to rebound to around 6–8 percent in 2010.

*International Monetary Fund. Staff Report for the 2009 Article IV Consultation, Third Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria. December 7, 2009.*

### Box 4. Exchange Rate Assessment

### Box 4. Exchange Rate Assessment

### Overview
- A large mining project (Oyu Tolgoi) drives the economic outlook over the medium-term and complicates assessment of the equilibrium real exchange rate.
- Available information does not indicate the current level of the real exchange rate is out of line with medium-term fundamentals.

### Traditional indicators
- The current account balance is expected to be quite volatile over the next several years.
- Imports related to the development of the Oyu Tolgoi mine are sizeable and will result in significant current account deficits in the next few years, followed by a rapid swing to surplus once production from the mine starts.
- The current account outlook is highly sensitive to expected commodity prices.
- These structural changes imply large swings in the equilibrium exchange rate over the next decade.

### Quantitative assessments
- The real effective exchange rate has depreciated by some 20 percent from the peak in October 2008.
- The current level appears broadly in line with medium-term fundamentals as indicated by the Equilibrium Exchange Rate approach, which is described as "a more reliable indicator for a mineral dependent economy."
- The Macrobalance and External Sustainability approaches produce volatile estimates that follow the large swing in the current account driven by Oyu Tolgoi related flows and, therefore, are less reliable.
- Note: "The assessment is based on standard CGER Methodology using the Exchange Rate Assessment Toolkit."

### Implications and policy recommendations
- Structural changes expected in coming years are likely to lead to substantial shifts in the real exchange rate.
- A flexible exchange rate will be indispensable in helping to facilitate adjustment through the nominal exchange rate rather than prices.
- A flexible exchange rate would help the economy absorb large terms-of-trade shocks associated with increased reliance on commodity exports.

*Source: Box 4, Exchange Rate Assessment (excerpt).*

### 21.      Program issues. The authorities continue to work to reach agreement on their

### _cr1052 - 21.      Program issues. The authorities continue to work to reach agreement on their

### Program status and arrears
- The authorities continue to work to reach agreement on their remaining arrears to bilateral creditors.
- Options for a successor concessional arrangement were discussed, but the authorities have chosen to reserve judgment until a later date.

### Data and audits
- Data provision to the Fund is adequate for surveillance.
- External auditors need to be given access to central bank’s vaults by end-2009 to provide assurances on the reliability of monetary data aggregates and to resolve the qualified audit opinion that arose in 2008.

### Extractive Industry Transparency Initiative (EITI)
- Mongolia has made progress toward becoming EITI compliant by next year.
- The EITI audit report covering company payments and government receipts for the fiscal year 2006 has been published.
- The 2007 report is being verified by the EITI National Council.
- EITI validation is expected to be completed by March 2010.

### Trade and investment policy stance
- Authorities remain committed to maintaining free trade and investment regimes to strengthen competitiveness and facilitate structural changes associated with the development of the Oyu Tolgoi project.

### Staff appraisal — Macro-outlook
- Growth this year is likely to be around -1 percent, reflecting the impact of the global crisis and policy tightening.
- Real GDP growth is projected to pick up substantially next year to around 8 percent, boosted by capital expenditure related to the ongoing construction of the Oyu Tolgoi mine.
- Inflation has fallen sharply this year; over the medium term, real growth is expected to be high, driven first by investment in the mining sector and subsequently by rapid expansion in mineral output.
- Prudent macroeconomic management is required to ensure mineral wealth translates into broad-based prosperity.

### Fiscal stance and recommendations
- Fiscal policy was loosened substantially in 2007–08 and the nonmineral fiscal deficit increased by 13 percent of GDP.
- The loosening will need to be unwound to return the budget deficit to a level that can be comfortably financed without generating inflation or crowding out private lending.
- For 2010, the overall balance should be limited to 5 percent of GDP, in line with the budget passed by Parliament.
- The 2010 target implies only a modest consolidation in the nonmineral balance to support the recovery; any revenue over-performance should be saved.
- Continued adjustment will be needed in 2011, in part to offset revenue loss from the planned elimination of the windfall profits tax.
- Consolidation options include expenditure rationalization: reductions in subsidies, universal transfers, and investment spending.
- Decline in the deficit must continue until Oyu Tolgoi revenue starts to enter the budget (in around 2015).
- Advance payments associated with Oyu Tolgoi should be saved to meet financing needs in 2011 and beyond, given declining donor budgetary support after 2010.

### Structural fiscal reforms
- Prompt adoption of a Fiscal Responsibility Law is recommended to institutionalize fiscal discipline.
- The law should be comprehensive, covering all aspects of government revenue and spending, with explicit costing of spending initiatives consistent with numerical targets.
- Reform of the social transfer regime is a priority: move away from universal transfers toward more targeted benefits to better protect the poor and vulnerable.
- Recent increases in universal transfers are identified as a step in the wrong direction that reduces fiscal flexibility and increases fiscal risks.

### Exchange rate policy
- Reforms to exchange rate management are working well, allowing the Bank of Mongolia to rebuild international reserves.
- A flexible exchange rate is considered crucial for macroeconomic stability: it insulates against external shocks, facilitates reserve rebuilding, and reduces inflation.
- As Oyu Tolgoi production expands, the real exchange rate will appreciate; a flexible nominal exchange rate allows appreciation without higher inflation.
- Greater flexibility would give the central bank autonomy to pursue monetary policy targeted at low inflation and robust growth.
- Returning to a tightly managed exchange rate risks higher inflation, which would adversely affect the poorest and increase income inequality.

### Monetary policy framework
- The Bank of Mongolia should consider moving, over time, to an inflation targeting framework consistent with a flexible exchange rate.
- Preparatory steps include enhancing inflation forecasting, improving monetary policy transmission through financial market deepening, and strengthening the banking system.
- In the interim, monetary policy should aim for stable and low inflation, safeguard international reserves, and contain exchange rate volatility by targeting monetary aggregates.

### Near-term monetary policy
- Earlier policy rate increases helped stabilize markets; subsequent calm and decelerating inflation justified gradual lowering of the policy interest rate.
- Going forward, interest rates should be adjusted prudently in line with market conditions and the inflation outlook.
- Inflation is expected to rise from current very low levels and stabilize at around 6 percent.
- A cautious approach will enhance central bank credibility while safeguarding reserves.
- Further loosening is unlikely to jumpstart credit growth because banks hold excess liquidity and are constrained by weak balance sheets.

### Banking system
- Rapid credit expansion during the boom years has led to sharply increased nonperforming loans and falling capital adequacy ratios.
- The central bank has responded proactively to problems in individual banks and should continue this approach.
- Further public funds may be needed to restructure banks; any injection should be tied to governance and structural reforms at recipient banks, including:
  - changes in management;
  - dilution of shareholders’ ownership;
  - ensuring transparent, fit, and proper bank ownership and management;
  - improving risk management systems; and
  - strengthening lending practices.
- Continued strengthening of supervision is needed to prevent recurrence of instability and secure a sound banking system.

### Risks and scenario of policy reversal
- Weaknesses in the banking system are the primary risk; difficult decisions may be needed to restructure some banks, potentially writing down equity of some existing owners.
- Deposit outflows similar to those at Zoos Bank could recur and spread, causing capital outflows and currency pressure requiring decisive response.
- Fiscal policy is a risk due to political pressures to spend large Oyu Tolgoi advance payments and any mineral revenue over-performance.
- If Oyu Tolgoi advance payments were spent today, fiscal adjustment halted, and the exchange rate tightly managed, government could run out of financing in the next one–two years, potentially repeating the near-crisis experienced earlier.
- Consequences of such a reversal would include high and rising inflation, large current account deficits, and depletion of international reserves.

### Program performance and implementation
- All principal performance criteria—for this and all previous reviews—have been met.
- The indicative limit on the fiscal deficit was slightly missed for end-September, but the end-December fiscal target should be comfortably met as revenues are expected to pick up in the fourth quarter.
- Some structural benchmarks will be completed with a modest delay; authorities remain committed and have made demonstrable progress.

### Summary and policy priorities
- The economy has weathered the worst of the crisis and is set to rebound strongly starting in 2010.
- Mongolia stands to benefit enormously from vast mineral deposits.
- Maximizing benefits requires continued commitment to:
  - fiscal discipline;
  - a flexible exchange rate; and
  - a sound banking system.
- Staying the course with these policies will help ensure mineral wealth is transformed into falling poverty, rising household income, and improving standards of living for all Mongolians.

*IMF staff appraisal as presented in the source content.*

### 36.      Staff recommends completion of the third review and that the next Article IV

### _cr1052 - 36.      Staff recommends completion of the third review and that the next Article IV

### Staff recommendation
- Staff recommends completion of the third review.
- Staff recommends that the next Article IV consultation takes place on the 24-month cycle since Mongolia is currently under a Fund arrangement.

### Macroeconomic developments — main messages and outlook
- Main Message: The economy was hit hard by the global economic crisis but has now stabilized and is expected to rebound strongly next year.
- Real GDP growth is bottoming out and is expected to recover strongly next year, spurred by Oyu Tolgoi related investment.
- A recovery in copper prices is also helping the economy, including by boosting export earnings and fiscal revenue.
- Real GDP (year-on-year percent change) plotted for 2005Q4–2010Q4(f) with quarterly and annual series (figures shown in the source).
- Terms of trade (y/y percent change) and Copper price (US$ per metric tonnes) series shown for 2005–2009 (f).
- The current account, which worsened considerably in 2008, is now broadly in balance (excluding Oyu Tolgoi flows).
- The authorities’ fiscal adjustment effort is reducing the nonmineral fiscal deficit, which had grown rapidly in 2007-08.
- Inflation has fallen rapidly and is expected to remain low.
- Real exchange rate appreciation has been largely unwound by togroq depreciation and low inflation.
- Exchange rate indices: NEER and REER (January 2005=100, increase denotes appreciation).

### Policy developments — main messages and actions
- Main Message: The economy stabilized quickly this year thanks to the authorities’ strong policy implementation.
- Mineral revenue fell sharply in 2008-09, necessitating a considerable adjustment in real government spending to bring the deficit to a level that could be financed.
- Mineral revenue components tracked: Royalty, Corporate income tax, Windfall profit tax, Dividends, Total mineral revenue (in percent of GDP and in billions of togrogs) for 2005–2009 (f).
- Real expenditure and net lending (constant prices, Dec. 2005) with capital and current expenditure series and total rolling annual growth for Sep-06–Sep-09.
- As market conditions stabilized, the central bank began to unwind the earlier hike in interest rates.
- CBBs outstanding (Togrog bn) and 7-day and 84-day CBBs rates shown for Jan-09–Oct-09.
- Daily Gross and Net International Reserves (GIR, NIR) series shown for Dec-08–Oct-09 (In millions of U.S. dollars).
- Reserve money has been kept in line with program targets; this has promoted stability and lowered inflation and helped stabilize the exchange rate.
- Reserve money and bank/auction rates (Tog/US$) series shown for Sep-07–Nov-09.

### Banking developments — main messages and risks
- Main Message: The economic downturn has taken its toll on banks, and though there are some signs that confidence is returning, there are still risks to the banking sector as highlighted by the worsening of the system-wide balance sheet.
- Broad money growth is recovering as the economy remonetizes and confidence returns.
- Commercial banks’ deposits series (foreign currency and domestic currency) shown for Sep-07–Sep-09 (In billions of togrog).
- Dollarization increase has moderated: foreign currency loans (% of total loans) and foreign currency deposits (% of total deposits) series for Sep-07–Sep-09.
- Claims on non-banks (year-on-year percent change) show decline in credit growth rates bottoming out but remaining sluggish.
- Banks have directed deposits towards building excess reserves rather than lending; excess reserves series shown (total percent of reserve money; domestic and foreign currency in billions of togrog).
- Bank soundness indicators: Capital adequacy ratio, Nonperforming loans, and Return on assets (In percent) for Sep-08–Sep-09; rising NPLs noted as a consequence of imprudent lending during boom years.

### Key statistics and projections (selected figures from Tables)
- Nominal GDP (2008): US$5,243 million.
- Population, end-year (2008): 2.68 million.
- Per capita GDP (2008): US$1,972.
- Poverty incidence (2007/08): 35.2 percent.
- Quota: SDR 51.1 million.
- Real GDP growth: 2007: 10.2; 2008: 8.9; 2009: -1.0; 2010: 8.6; 2009 (f): 0.5; 2010 (f): 3.0.
- Consumer prices (period average): 2007: 8.2; 2008: 26.8; 2009: 6.3; 2010: 4.9; 2009 (f): 8.5; 2010 (f): 7.9.
- Overall balance (including grants) as percent of GDP: 2007: 2.8; 2008: -4.9; 2009: -6.5; 2010: -5.0; 2009 (f): -6.5; 2010 (f): -5.0.
- Nonmineral overall balance: 2007: -10.6; 2008: -15.1; 2009: -12.7; 2010: -12.2; 2009 (f): -12.1; 2010 (f): -9.0.
- Broad money annual growth: 2007: 55.6; 2008: -5.1; 2009: 20.0; 2010: 25.4; 2009 (f): 15.0; 2010 (f): 23.0.
- Current account balance (including official transfers) in US$: 2007: 265; 2008: -722; 2009: -167; 2010: -772; 2009 (f): -291; 2010 (f): -449.
- Gross official international reserves (end-period): 2007: 1,001; 2008: 657; 2009: 1,050; 2010: 1,252; 2009 (f): 919; 2010 (f): 1,068.
- Copper price (US$ per ton): 2007: 7,132; 2008: 6,963; 2009: 5,000; 2010: 5,800; 2009 (f): 4,000; 2010 (f): 4,100.
- Nominal GDP (in billions of togrogs): 2007: 4,600; 2008: 6,020; 2009: 6,407; 2010: 7,373; 2009 (f): 6,209; 2010 (f): 6,931.

(Note: Tables in the source provide extensive additional series: fiscal accounts, monetary aggregates, balance of payments, and medium-term projections through 2016.)

### Fiscal operations and public finances — summary items
- Total revenue and grants (in US$ millions): 2007: 1,880; 2008: 2,170; 2009: 1,967; 2010: 2,432; 2009 (f): 1,910; 2010 (f): 2,083.
- Total expenditure and net lending (in US$ millions): 2007: 1,750; 2008: 2,467; 2009: 2,383; 2010: 2,802; 2009 (f): 2,315; 2010 (f): 2,428.
- Overall balance (incl. grants) (in US$ millions): 2007: 131; 2008: -296; 2009: -416; 2010: -370; 2009 (f): -405; 2010 (f): -345.
- Nonmineral overall balance (in US$ millions): 2007: -486; 2008: -911; 2009: -815; 2010: -898; 2009 (f): -753; 2010 (f): -622.
- Capital expenditure (percent of GDP): 2007: 10.0; 2008: 10.4; 2009: 7.1; 2010: 6.7; 2009 (f): 6.9; 2010 (f): 6.5.
- Copper price used in fiscal memorandum (US$ per ton): 2007: 7,132; 2008: 6,963; 2009: 5,000; 2009 (f): 5,500; 2010 (f): 4,000; 2010 (projection): 4,100.

### Balance of payments — selected items
- Exports (US$ millions): 2007: 1,949; 2008: 2,534; 2009: 1,833; 2010: 1,995; 2009 (f): 1,830; 2010 (f): 2,117.
- Imports (US$ millions): 2007: -2,003; 2008: -3,147; 2009: -1,924; 2010: -2,836; 2009 (f): -2,013; 2010 (f): -2,528.
- Direct investment (US$ millions): 2007: 360; 2008: 836; 2009: 305; 2010: 609; 2009 (f): 517; 2010 (f): 930.
- Current account balance (in percent of GDP) including official grants: 2007: 6.7; 2008: -14.0; 2009: -3.8; 2010: -16.1; 2009 (f): -6.9; 2010 (f): -10.3.
- Current account excluding Oyu Tolgoi (in percent of GDP): 2007: 10.1; 2008: -10.3; 2009: -0.5; 2010: 0.4; 2009 (f): -1.2; 2010 (f): 3.5.
- Memorandum: Copper price (US$ per ton) in Table 4: 2007: 7,132; 2008: 6,963; 2009: 5,000; 2010: 5,500; 2009 (f): 4,000; 2010 (f): 4,100.

### Program reviews, disbursements, and Fund support
- Stand-By Arrangement: Approved April 1, 2009 — 100 percent of quota — 51,100,000 SDRs.
- Completion of reviews and observance of performance criteria:
  - June 23, 2009 — 50 percent of quota — 25,550,000 SDRs — Completion of the first review and observance of end-April 2009 performance criteria.
  - September 21, 2009 — 30 percent of quota — 15,330,000 SDRs — Completion of the second review and observance of end-June 2009 performance criteria.
  - December 22, 2009 — 30 percent of quota — 15,330,000 SDRs — Completion of the third review and observance of end-September 2009 performance criteria.
  - March 15, 2010 — 30 percent of quota — 15,330,000 SDRs — Completion of the fourth review and observance of end-December 2009 performance criteria.
  - June 15, 2010 — 30 percent of quota — 15,330,000 SDRs — Completion of the fifth review and observance of end-March 2010 performance criteria.
  - September 15, 2010 — 30 percent of quota — 15,330,000 SDRs — Completion of the sixth review and observance of end-June 2010 performance criteria.
- Total amount of purchase under the 18-month Stand-By Arrangement: 300 percent of quota — 153,300,000 SDRs.

### Government letter and policy intentions (Attachment I, December 3, 2009)
- The government states that macroeconomic policies supported by the Stand-By Arrangement have stabilized market conditions, boosted international reserves, and lowered inflation.
- The government notes signing a major international agreement to develop the Oyu Tolgoi mine.
- Policy objectives: achieve strong, sustainable, and equitable growth with low inflation and healthy public finances.
- Planned reform priorities: strengthening the banking system, restoring health to the budget, maintaining a flexible exchange rate, and shielding low income groups from the effects of the crisis.
- The government requests completion of the third review given program success and observance of end-September performance criteria.
- The fourth review is scheduled on or after March 15, 2010; the fifth review on or after June 15, 2010.
- The government will maintain close policy dialogue with the Fund and consult with the IMF before modifying measures or adopting new measures.

*Sources: Mongolian authorities; and IMF staff estimates and projections as contained in the provided document.*

### 1.      Growth and inflation We expect the economy to rebound from around zero growth

### _cr1052 - 1.      Growth and inflation We expect the economy to rebound from around zero growth

### Growth and inflation
- We expect the economy to rebound from around zero growth this year to roughly 8 percent next year, spurred by investments that will accompany the development of the Oyu Tolgoi mine.
- The prospects for the medium term are favorable owing to the significant upswing in mineral exports once the Oyu Tolgoi project comes on stream in 2013.
- Inflation was -1.1 percent in October and is projected to reach 2 percent by December and below 8 percent at end-2010.

### Fiscal policy: objectives and commitments
- Restoring health to public finance is the top priority.
- 2009 fiscal outcome
  - With the recovery in copper prices, the 2009 deficit is expected to be lower than the government’s target of 6½ percent of GDP.
  - Banks will be required to repay the budget for the net lending to the gold mining sector undertaken earlier in the year.
- 2010 budget and medium-term stance
  - Committed to limiting the 2010 budget deficit to 5 percent of GDP as in the budget passed by Parliament.
  - If revenue comes in lower than projected, any shortfall will be fully offset by a reduction in spending to ensure program deficit targets are achieved.
  - If revenues exceed budget forecasts, additional revenues will be saved to help meet future financing needs and limit pro-cyclicality of spending.
  - Continue fiscal adjustment after 2010 in anticipation of scaled down donor budgetary support.
  - Any advance payments received for the Oyu Tolgoi mining project will be fully incorporated in the budget as a financing item.
- Institutional/fiscal frameworks
  - A Fiscal Responsibility Law will be submitted by end-December to promote fiscal discipline by enhancing transparency, strengthening accountability, and establishing numerical rules to limit the fiscal balance, government debt, and spending growth.
  - A complementary organic budget law is under preparation.
  - Plan to pass both laws by February 1, 2010.
- Social protection
  - A social transfer reform law will be submitted to Parliament to better assist Mongolia’s most vulnerable by increasing benefits to low income households while generating modest fiscal savings through improved targeting.
  - Implementation will be phased over the coming year as means-testing capacity is built.
  - Donor support acknowledged; World Bank and Asian Development Bank to be engaged in implementation.
  - Target to pass the social transfer reform law by February 1, 2010.

### Monetary and exchange rate policies
- Exchange rate policy
  - Fully committed to a flexible exchange rate to provide a shock absorber against terms of trade volatility and to safeguard international reserves.
  - Intervention strategy guided by rebuilding international reserves and allowing the exchange rate to move in line with market conditions while smoothing excess volatility due to temporary imbalances.
  - Will consult with Fund staff if, during any 30 day period, net sales in foreign exchange auctions exceed US$30 million.
- Monetary policy
  - Primary objective remains achieving and maintaining low inflation and macroeconomic stability.
  - Inflation has decelerated sharply and is expected to stay below 8 percent through 2010.
  - This has created some scope for the central bank to lower policy interest rates in October; the central bank will continue to adjust interest rates prudently in line with evolving market conditions and the inflation outlook.

### Banking system reforms and supervision
- Banks and resolution actions
  - A receiver was appointed to begin liquidating Anod Bank.
  - The government will fully reimburse the central bank for any resolution costs it has incurred by the end of the year.
  - A receiver was also appointed to Zoos Bank and an external audit has been initiated.
  - External audits at other banks will start soon, with ten to be completed by end-January 2010.
  - Public funds may be needed to restructure the banking system; any injection of public funds will be tied to governance and structural reforms at recipient banks (changes in management; ensuring transparent, fit, and proper owner/managers; improving risk management systems; strengthening lending practices).
  - Commitment to proactive, vigorous handling of individual bank problems and to enforce all existing regulatory requirements for all banks.
- Supervision enhancements
  - Improve the loan classification system for restructured loans by clarifying the definition, tightening rules for upgrading, and requiring monthly reporting.
  - Banking Law submitted to Parliament in October to reinforce prudential requirements, strengthen legal protection of bank supervisors, and more clearly define connected parties.

### Other policies
- External financing
  - Committed to prudently managing any further nonconcessional borrowing within program ceilings.
  - Maintain current prohibition on government guarantees.
  - Remain committed to resolving the remaining bilateral official arrears.

### Quantitative performance criteria and indicative targets (selected figures as presented)
- Net international reserves (NIR) of the Bank of Mongolia (BOM) (floor, eop stock, in million US$) — reported table values:
  - Actual 12/31/2008: 495
  - Prog. 9/30/2009: 537
  - Adjusted Prog. 12/31/2009: 614
  - Outcome 3/31/2010: 763
  - Prog. Rev. 12/31/2009: 595
  - Prog. Rev. 3/31/2010: 798
  - Prog. 6/30/2010: 600
  - Prog. Rev. 6/30/2010: 853
  - Prog. (another row) 6/30/2010: 535
  - Rev. 6/30/2010: 788
- Net domestic asset (NDA) of the BOM (ceiling, eop stock, in billion togrog) — reported table values:
  - Actual 12/31/2008: -171
  - Prog. 9/30/2009: -302
  - Adjusted Prog. 12/31/2009: -304
  - Outcome 3/31/2010: -618
  - Prog. Rev. 12/31/2009: -343
  - Prog. Rev. 3/31/2010: -542
  - Prog. 6/30/2010: -331
  - Prog. Rev. 6/30/2010: -618
  - Prog. (another row) 6/30/2010: -224
  - Rev. 6/30/2010: -491
- Net credit to government (NCG) (ceiling, cumulative from the beginning of the fiscal year, in billion togrog) — reported table values:
  - Actual 12/31/2008: 130
  - Prog. 9/30/2009: -69
  - Adjusted Prog. 12/31/2009: -70
  - Outcome 3/31/2010: -150
  - Prog. Rev. 12/31/2009: 64
  - Prog. Rev. 3/31/2010: 58
  - Prog. 6/30/2010: 87
  - Prog. Rev. 6/30/2010: 100
  - Prog. (another row) 6/30/2010: 227
  - Rev. 6/30/2010: 242
- New nonconcessional external debt maturing in one year or more, contracted or guaranteed by the government or the BOM (ceiling, eop stock since April 2009, in million US$):
  - Several program rows show values: 0; 200; ...; 100; 200; 200; 200; 200; 200; 200; 200
- Indicative target — General government fiscal deficit (ceiling, cumulative since the beginning of fiscal year, in billion togrog) — reported table values:
  - 296; 315; ...; 333; 405; 416; 125; 136; 200; 216
- Memorandum items — Support from bilateral and multilateral donors excluding IMF (cumulative since the beginning of the year, in million US$), program level:
  - 0; 112; ...; 113; 147; 174; 20; 20; 40; 40
- Disbursed new nonconcessional external debt (eop stock, in million US$), program level:
  - ...; 75; ...; 75; 75; 75; 75; 75; 0; 0
- Disbursed Oyu Tolgoi tax prepayment loans (eop stock, in million US$), program level:
  - ...; ...; ...; 0; ...; 100; ...; 150; ...; 150

### Structural benchmarks and actions (selected items and statuses)
- Revising relevant laws to require Erdenet to pay taxes in togrog. Target date 6/30/2009 — Completed on July 9.
- Announcement of a resolution plan for Anod bank based on the diagnostic assessment of the external auditor. Target date 6/30/2009 — Completed. Anod bank was put into receivership on November 30, 2009.
- Comprehensive review of transfer programs resulting in revision of relevant laws to streamline transfer programs and safeguard the social safety net. Target date 6/30/2009 — Completed late June, reform plan approved by Cabinet-level Working Group.
- Submission to the parliament of a revised banking law and other pertinent laws (strengthened prompt corrective action clauses, requiring consolidated supervision, improved bank resolution framework, legal protection for supervisors, clearer definition of "group of connected parties," reinforced prudential requirements). Target date 6/30/2009 — Completed on July 24.
- Pass a comprehensive social transfer reform that saves money and protects the poor through better targeting. Target date 12/1/2009 — Delayed, passage expected by February 1, 2010.
- Pass a 2010 budget consistent with the IMF supported Stand-By Arrangement. Target date 12/1/2009 — Completed November 27.
- Submission to parliament of Fiscal Responsibility Law consistent with recommendations of Fund technical assistance. Target date 12/31/2009 — In progress, FAD provided TA in July.

### Technical Memorandum of Understanding — highlights
- Quantitative performance criteria established for end-December 2009, end-March 2010, and end-June 2010 for:
  - Floors on NIR of the BOM; ceilings on NDA of the BOM; ceilings on net bank credit to general government; ceilings on contracting/guaranteeing new medium- and long-term external debt; ceilings on new short-term external debt; ceiling on accumulation of domestic payment arrears.
- Continuous performance criteria on ceilings for accumulation of new external payment arrears of the central government and the BOM.
- Indicative targets for ceilings on the general government fiscal deficit for end-December 2009, end-March 2010, and end-June 2010.
- Institutional definitions
  - General government includes all units of budgetary central government, social security funds, extrabudgetary funds, and local governments.
  - Domestic banking system defined as BOM, existing and newly licensed commercial banks incorporated in Mongolia and their branches.
- Valuation and program exchange rates and prices:
  - Program exchange rate: Tog 1,560 per U.S. dollar.
  - SDR program exchange rate: SDR 1 = US$1.509.
  - Monetary gold valued at US$880 per ounce.
- NIR adjustments and definitions
  - NIR floor adjusted upward (downward) by support from bilateral and multilateral donors (excluding IMF) in excess (short) of the programmed level cumulative since April 2009.
  - NIR adjusted upward by nonconcessional borrowing disbursed in excess of program level, except amounts drawn under a swap arrangement with China.
  - NIR adjusted for Oyu Tolgoi tax prepayment loans disbursed in excess (short) of programmed level.
  - NIR calculated as gross international reserves less international reserve liabilities; valuation at program exchange rates and gold price.
  - Gross international reserves components and exclusions specified.
- NDA adjustments and definitions
  - Ceiling on NDA adjusted downward (upward) by donor support in excess (short) of program level cumulative since April 2009; adjusted downward by nonconcessional debt disbursed during program period, except amounts drawn under swap with China; adjusted for Oyu Tolgoi tax prepayment loans disbursed in excess (short).
  - NDA calculated as reserve money minus the sum of NIR and other net foreign assets (ONFA).
- Net domestic credit to general government (NCG)
  - Ceiling applies to cumulative net bank credit flows to general government from beginning of year, with adjustors for donor support and disbursed nonconcessional debt.
  - NCG definition includes net borrowing from BOM, net borrowing from commercial banks, and net change in domestic government debt held by parties other than BOM and commercial banks; excludes government deposits lost or government debt issued to pay for resolution of Anod Bank.
- Fiscal deficit definition and treatment
  - Indicative ceiling target applies to general government fiscal deficit measured cumulatively from beginning of year.
  - Fiscal deficit defined as total general government revenue and grants minus total general government expenditure and net lending.
  - Principal costs of resolving Anod Bank excluded from expenditure and net lending, but corresponding interest payments included.
  - If gold mining loans on-lent to commercial banks are not fully repaid by end-2009, end-2009 fiscal deficit indicative targets will be adjusted upward by unpaid loans; end-June 2010 target will be adjusted downward by the amount of unpaid loans as of end-2009.
- Domestic payment arrears
  - Measured as government payables and liabilities overdue by more than 60 days.
  - If stock ≤ Tog 3.5 billion, program considers domestic arrear accumulation to be zero; excess considered domestic arrear accumulation.
  - Program aims for zero domestic arrear accumulation under this definition.
- External debt
  - Ceiling on contracting and guaranteeing of new nonconcessional external borrowing with original maturities one year or more by central government, BOM, or other agencies on behalf of central government.
  - Ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received.
  - For swap arrangements with People’s Bank of China, only amounts actually drawn count toward the ceiling and are considered to have original maturity of more than one year.
  - Secondary market transactions of Oyu Tolgoi tax-prepayment loans with nonresidents are not considered external financing for program purposes.

*Source: _cr1052 - 1.      Growth and inflation We expect the economy to rebound from around zero growth*

### 21.      The definition of debt, for the purposes of the program, is set out in Executive Board

### 21.      The definition of debt, for the purposes of the program, is set out in Executive Board Decision No. 12274, Point 9, as revised on August 24, 2000 (see Annex I).

### Definition of debt (program purposes)
- Debt is defined by Executive Board Decision No. 12274, Point 9, as revised on August 24, 2000 (see Annex I).
- Excerpt (Annex 1) interpretation:
  - Debt = a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time.
  - Primary forms of debt:
    - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits), and temporary exchanges of assets equivalent to fully collateralized loans (such as repurchase agreements and official swap arrangements);
    - (ii) suppliers’ credits (deferred payment contracts for goods or services);
    - (iii) leases — debt equals the present value (at the inception of the lease) of all lease payments expected during the agreement, excluding payments that cover operation, repair or maintenance.
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Exclusions from debt ceilings
- Excluded from the ceiling are:
  - (i) the use of Fund resources;
  - (ii) lending from the World Bank, the Asian Development Bank, and the International Fund for Agricultural Development;
  - (iii) debts incurred to restructure, refinance, or prepay existing debts, to the extent that such debt is incurred on more favorable terms than the existing debt;
  - (iv) concessional debts;
  - (vi) any togrog-denominated treasury bill and government bond holdings by nonresidents.

- For short-term external debt ceilings (contracting and guaranteeing of new nonconcessional borrowing with nonresidents with original maturities of less than one year), excluded from the ceiling are:
  - (i) debts classified as international reserve liabilities of the BOM;
  - (ii) debts to restructure, refinance, or prepay existing debts;
  - (iii) togrog-denominated treasury bills, government bonds, and BOM bills held by nonresidents;
  - (iv) normal import financing (a financing arrangement for imports is “normal” when the credit is self-liquidating);
  - (v) amounts drawn under any swap arrangements with People’s Bank of China.

### Guarantees (program purposes)
- A guarantee of a debt arises from any explicit legal obligation of the central government, the BOM, or other agencies on behalf of the central government to service a loan in the event of nonpayment by the recipient (involving payments in cash or in kind), or indirectly through any other obligation of the central government, the BOM, or other agencies on behalf of the central government to finance a shortfall incurred by the loan recipient.

### Concessional debt—grant element calculation and criteria
- For program purposes, a debt is concessional if it includes a grant element of at least 35 percent.
- Grant element definition and calculation:
  - The grant element of a debt = the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt.
  - The NPV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt.
  - Discount rates used are the currency specific commercial interest reference rates (CIRRs), published by the Organization for Economic Cooperation Development (OECD).
  - For debt with a maturity of at least 15 years, the ten-year-average CIRR will be used to calculate the NPV of debt and, hence, its grant element.
  - For debt with a maturity of less than 15 years, the six-month average CIRR will be used.
  - Margins for differing repayment periods (added to both the ten-year and six-month averages) are:
    - 0.75 percent for repayment periods of less than 15 years,
    - 1 percent for 15 to 19 years,
    - 1.15 percent for 20 to 29 years,
    - 1.25 percent for 30 years or more.
- Loans provided by a private entity will not be considered concessional unless accompanied by a grant or grant element provided by a foreign official entity, such that both components constitute an integrated financing package with a combined grant element equal to at least 35 percent.

### Short-term external debt (program ceiling and scope)
- A ceiling applies to the contracting and guaranteeing by the central government, the BOM, or other agencies on behalf of the central government of new nonconcessional borrowing with nonresidents with original maturities of less than one year.
- The ceiling applies to debt and commitments contracted or guaranteed for which value has not yet been received.
- The definition of debt for program purposes referenced again Executive Board Decision No. 12274, Point 9, as revised on August 24, 2000.

### External payment arrears (performance criterion)
- A continuous performance criterion applies to the nonaccumulation of external payments arrears on external debt contracted or guaranteed by the general government or the BOM.
- External payments arrears consist of external debt-service obligations (principal and interest) that have not been paid at the time they are due, as specified in the contractual agreements.
- Overdue debt and debt service obligations that are in dispute will not be considered as external payments arrears for the purposes of program monitoring.

### Data provision—reporting commitments and frequency
- Authorities committed to using the best available data so that subsequent data revisions will not lead to a breach of a performance criterion; all revisions will be promptly reported to the Fund’s Resident Representative. The likelihood of significant data changes, including definitional changes, will be communicated as soon as the risk becomes apparent.
- Data required to monitor performance under the program, including those related to performance criteria and indicative targets, will be provided electronically or in hard copy to the Fund’s Resident Representative by the 20th day of each month, unless otherwise indicated.

- Reporting responsibilities and data items (specified reporting agency in parentheses):
  - A. Monetary Data (BOM)
    - The monetary survey, the balance sheet of the BOM, and the consolidated balance sheet of the commercial banks; monthly, except BOM balance sheet weekly within five working days of the end of the respective week.
    - Net international reserves and interventions of the BOM in the foreign exchange market on daily basis.
    - Interest rates and volume on standing facilities and market operations on a weekly basis within five working days of the end of the respective week.
    - A detailed breakdown of net credit to government from the BOM and the commercial banks.
    - Stock of monetary gold in both thousands of fine troy ounces and U.S. dollars; report any monetary gold transactions, accounting rates, purchases from domestic sources, refining of nonmonetary gold, prices and volumes, and liabilities guaranteed or backed by gold.
    - A detailed breakdown of “other items net” for both the BOM and the commercial banks, including valuation changes in net international reserves and net other foreign assets arising from exchange rate changes and/or revaluation of gold.
    - Outstanding balances of all deposit accounts of the general government in commercial banks, including those of the extrabudgetary funds.
    - Outstanding balances of any new deposit accounts of the general government opened in addition to the existing ones for grants and loans received from multilateral or bilateral donors, including associated counterpart funds.
    - A bank-by-bank list of required reserves and actual reserves.
    - Results of each central bank bills auction within five working days of each auction, including amount of bills offered, amount demanded, amount sold to each bank, announced rates, and cut-off rates.
  - B. Fiscal Data (Ministry of Finance (MOF))
    - Consolidated accounts of the central, local, and general government, including detailed data on tax, nontax, and capital revenues, current and capital expenditures, net lending, and financing; financing components should be separated into foreign sources (cash, project, and program loans) and domestic sources (bank and nonbank).
    - Classified transactions of all social insurance funds.
    - Domestic payment arrears of the general government.
    - Noninterest outstanding payables by each subsector of the general government, including the social security funds, with a detailed breakdown by major categories and remaining maturity.
    - Results of each treasury bills auction within five working days of each auction, including amount of bills offered, amount demanded, amount sold to each bank and nonbanks, and the average yield in percent per month.
  - C. External Sector Data (BOM and MOF)
    - Complete list of new contracts for the execution of public investment projects, signed or under negotiation with foreign or domestic entities, including details on amounts, terms, and conditions of current or future debt or nondebt obligations arising from these contracts.
    - Outstanding stock, disbursements, amortization, and interest payments of short-term external debt contracted or guaranteed by the government or the BOM by creditor in original currency and U.S. dollars.
    - Outstanding, disbursements, amortization, and interest payments of medium- and long-term external debt contracted or guaranteed by the government or the BOM by creditor in original currency and U.S. dollars.
    - Daily midpoint exchange rates of the togrog against the U.S. dollar, including the official, interbank, and parallel market exchange rates (BOM).
    - Arrears on the external debt contracted or guaranteed by the government or the BOM by creditor in original currency and U.S. dollars.
  - D. Other Data (National Statistical Office (NSO))
    - The monthly consumer price index and a detailed breakdown by major categories of goods and services included in the consumer basket.
    - The NSO’s monthly statistical bulletin, including monthly export and import data.

*International Monetary Fund — Staff Report for the 2009 Article IV Consultation, Third Review Under the Stand-By Arrangement, and Request for Modification of Performance Criteria––Informational Annex (Prepared by the Asia and Pacific Department, December 7, 2009).*

### ANNEX I. MONGOLIA––FUND RELATIONS

### ANNEX I. MONGOLIA––FUND RELATIONS (As of October 31, 2009)

### Membership and Quotas
- Status: Joined: 02/14/1991; Article VIII.
- Quota: 51.10 SDR Million (100.0 percent).
- Fund Holdings of Currency: 142.95 SDR Million (279.74 percent of quota).
- Reserve Position in Fund: 0.14 SDR Million (0.27 percent of quota).
- SDR Department:
  - Net cumulative allocation: 48.76 SDR Million (100.00 percent).
  - Holdings: 49.09 SDR Million (100.67 percent).

### Outstanding Purchases, Loans, and Recent Financial Arrangements
- Outstanding:
  - Stand-by Arrangements: 91.98 SDR Million (180.00 percent of quota).
  - ESAF/PRGF Arrangements: 8.73 SDR Million (17.09 percent of quota).
- Latest arrangements (amounts in SDR Million):
  - Stand-by: Approval Date 04/01/2009; Expiration Date 10/01/2010; Amount Approved 153.30; Amount Drawn 91.98.
  - PRGF: Approval Date 09/28/2001; Expiration Date 07/31/2005; Amount Approved 28.49; Amount Drawn 12.21.
  - ESAF/PRGF: Approval Date 07/30/1997; Expiration Date 07/29/2000; Amount Approved 33.39; Amount Drawn 17.44.
  - ESAF: Approval Date 06/25/1993; Expiration Date 06/24/1996; Amount Approved 40.81; Amount Drawn 29.68.
- Recent Stand-by: An 18-month Stand-by Arrangement equivalent to SDR 153.3 million (300 percent of quota) approved on April 1, 2009. First review completed on June 23, 2009; second review completed on September 21, 2009.

### Projected Obligations to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming obligations by year:
  - 2009: Charges/interest 0.29; Total 0.29.
  - 2010: Principal 3.04; Charges/interest 1.22; Total 4.25.
  - 2011: Principal 2.44; Charges/interest 1.20; Total 3.65.
  - 2012: Principal 22.71; Charges/interest 1.16; Total 23.86.
  - 2013: Principal 47.62; Charges/interest 0.71; Total 48.32.

### Safeguards Assessments
- Update safeguards assessment of the Bank of Mongolia (BOM) related to the April 2009 Stand-by Arrangement finalized on June 17, 2009.
- Previous assessments: March 2002 and November 2003.
- 2009 assessment findings:
  - BOM has continued to improve its safeguards framework since the 2003 assessment.
  - Financial reporting and audit practices generally comply with international standards.
  - Some aspects of the oversight mechanism should be strengthened and certain external audit scope limitations should be removed.

### Exchange Arrangement and Multiple Currency Practices (MCPs)
- De jure arrangement: floating (Mongolia moved to a floating exchange rate system on May 27, 1993).
- BOM’s official exchange rate: midpoint of the previous days’ average buying and selling rates of transactions in the interbank market and transactions between banks and their clients; announced each weekday except national public holidays; BOM reserves the right to intervene.
- Classification changes (methodology and events):
  - Effective February 2, 2009, de facto classification changed from a conventional pegged arrangement to a stabilized arrangement, retroactively to April 30, 2008 (methodological revision).
  - Due to rapid currency depreciation between October 2008 and February 2009, reclassified to “other managed arrangement” as of November 1, 2008.
  - On March 24, 2009, BOM instituted a foreign exchange auction allowing market determination of the exchange rate; effective March 24, 2009, de facto arrangement reclassified to floating.
- Article VIII: Mongolia accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 1, 1996.
- MCPs subject to Fund jurisdiction:
  - Multi-price auction system: modalities give rise to an MCP because there is no mechanism ensuring accepted bid exchange rates do not deviate by more than 2 percent.
  - Official exchange (reference) rate: determination method and requirement for government international transactions give rise to an MCP because of absence of mechanism/infrastructure ensuring the official rate does not deviate by more than 2 percent from the commercial rate (Country Report 09/254 08/14/2009).
- Reforms and authorizations:
  - Further progress needed to develop a screen-based system enabling the Bank of Mongolia to trade at spot exchange rates; BOM intends to institute and introduce the screen-based system in the inter-bank market by March 31, 2010.
  - Executive Board approved the multi-price auction MCP until June 22, 2010 (Decision No. 14365 of June 23, 2009).
- Exceptions: Mongolia imposes exchange restrictions for security reasons in accordance with United Nations Security Council Resolution No. 92/757 concerning certain transactions with the Federal Republic of Yugoslavia (Serbia and Montenegro) that have been notified to the Fund under Decision 144 (11/4/94).

### Article IV Consultation and ROSC Assessments
- Article IV: The 2008 Article IV consultation (IMF Country Report No. 08/200) concluded by the Executive Board on June 4, 2008. Mongolia is on the 12–month cycle.
- ROSC and related assessments (titles and dates as listed):
  - Data Dissemination, May 2001.
  - Fiscal Transparency Module, November 2001 (Country Report No. 01/218).
  - Fiscal update, May 2005.
  - Data Dissemination, April 2008.
  - Monetary and Fiscal Policy Transparency, September 2008.
  - Banking Supervision, September 2008.

### FSAP Participation
- Mongolia participates in the Financial Sector Assessment Program (FSAP).
- FSAP missions: May 2007 and September 2007.
- Latest FSAP report published: IMF Country Report No. 08/300, September 2008.

### Technical Assistance (Missions and Resident Advisors)
- Selected missions (most recent entries listed with department and dates as provided):
  - External Sector Statistics (STA), November 2009.
  - Banking Restructuring (MCM), October–November 2009.
  - Monetary and Financial Statistics (STA), September 2009.
  - Supervisory and Regulatory Capacity Building of the FRC (MCM), February, April, and September 2009.
  - Bank Restructuring (MCM), August 2009.
  - Budget Preparation and Budget Legal Reforms (FAD), January, June, and July 2009.
  - Foreign Exchange Market and Monetary Policy (MCM), May 2009.
  - Foreign Exchange Market (MCM), March 2009.
  - Fiscal Expenditure Review (FAD), January 2009.
  - Operational Framework of Monetary Policy (MCM), December 2008.
  - (Further mission listings continue through February 2000 as provided.)
- Resident Advisors:
  - Budget Planning (FAD), June 2009–June 2010.
  - National Accounts Statistics (STA), August 2001–September 2003.
  - Treasury Reform (FAD), June 1999–November 2003.
  - Balance of Payments (STA), March 1999–May 2001.
- Note: 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
- Mr. Parmeshwar Ramlogan has been the Fund’s resident representative in Mongolia since August 2009.

*Source: ANNEX I. MONGOLIA––FUND RELATIONS (As of October 31, 2009).*

### ANNEX IV. MONGOLIA—STATISTICAL ISSUES

### ANNEX IV. MONGOLIA—STATISTICAL ISSUES

### Overview
- Data provision to the Fund is adequate for surveillance, but further improvements are needed, especially on national accounts and government finance statistics.
- Mongolia participates in the General Data Dissemination System (GDDS).
- A data ROSC mission visited Mongolia in September 2007 to update the May 2000 assessment of macroeconomic statistics against the GDDS, complemented by an assessment of data quality based on the IMF’s Data Quality Assessment Framework.
- The IMF Statistics Department has provided support to the National Statistics Office (NSO) in implementing its Program of Statistics Development for 2006–10 to strengthen statistical capacity and place Mongolia in a position to subscribe to the Special Data Dissemination Standard.

### National accounts and price statistics — findings and actions needed
- Deficiencies persist in the annual and quarterly production accounts that detract from accuracy, including estimation of capital formation and deflators to derive constant price estimates of GDP.
- A proper methodological treatment of animal losses due to harsh winters has been finalized.
- Efforts are needed to improve coverage of the informal sector and small-scale activity, especially in the services sector.
- Construction of expenditure-based national accounts in constant price terms is recommended as a useful check on production-side estimates; experimental estimates were produced in August 2008 and require further refinements.
- Real sector technical assistance: first mission after September 2007 ROSC in November 2007; final mission in August 2008.
- CPI developments:
  - CPI was rebased in January 2008 with expenditure-derived weights from the 2005 Household Income and Expenditure Survey.
  - NSO has published a national CPI for Ulaanbaatar and 21 aimags since January 2008.
  - A housing price index has been published since October 2008.
  - Progress still needed on wages and earnings data.
  - August 2008 mission reviewed the CPI and provided worksheets to address issues.
- Producer price index development:
  - Development complete for mining, manufacturing, and electricity.
  - A retail price index and a construction index were under development in 2008.

### Fiscal statistics — methodology and classification
- Concepts and definitions for fiscal statistics generally follow GFSM 1986 guidelines.
- No formal decision yet on adopting a migration path to GFSM 2001 methodology, although the new framework is planned for compiling fiscal statistics.
- Classifications for sub-annual and annual fiscal statistics broadly follow GFSM 1986, with some differences for financing.

### Monetary and financial statistics — coverage and recommendations
- Monetary and financial statistics broadly conform to MFSM methodology.
- Bank of Mongolia’s (BOM’s) monetary survey covers the central bank and 16 operating commercial banks, but excludes savings and credit unions.
- September 2006 STA mission recommended correcting misreporting of government deposit data by commercial banks.
- June 2008 mission recommendations include:
  - Extending coverage of monetary statistics to include savings and credit unions as depository corporations.
  - Collecting supplementary data such as repurchase agreements, accrued interest, and financial derivatives from commercial banks.
- September 2009 mission recommendations:
  - Reconcile BOM and Ministry of Finance data on government financing.
  - Finalized standardized report forms for the BOM and other depository corporations for the International Financial Statistics publication.
  - Include data on nonbank financial institutions (microfinance companies) in the financial corporations survey.

### Balance of payments statistics — coverage and improvements
- BOM follows concepts and methods in the Balance of Payment Manual fifth edition.
- BOM started disseminating the balance of payments according to the IMF standard presentation table and the international investment position from the third quarter of 2009.
- Coverage widened by extending the International Transaction Reporting System (ITRS) to nonbank financial institutions and by increasing the number of direct reporting private enterprises via a semi-annual external sector statistics seminar.
- Further improvements needed in the analysis of balance of payments and the quarterly survey on direct investment of foreign investment enterprises.

### Data dissemination and publications
- NSC 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 an Annual Report and a monthly Statistical Bulletin including summary statistics for the central bank, consolidated balance sheet for commercial banks, and interest and exchange rate data.

### Mongolia—Table of Common Indicators Required for Surveillance (selected items, as of October 31, 2009)
- Exchange rates 10/31/09 10/31/09 D M D
- International reserve assets and reserve liabilities of the Monetary Authorities1 10/31/09 10/31//09 D M M
- Reserve/base money 9/2009 10/20/09 M M M
- Broad money 9/2009 10/20/09 M M M
- Central bank balance sheet 9/2009 10/20/09 M M M
- Consolidated balance sheet of the banking system 9/2009 10/20/09 M M M
- Interest rates2 9/2009 10/20/09 M M M
- Consumer price index 9/2009 10/20/09 M M M
- Revenue, expenditure, balance and composition of financing3 – general government4 9/2009 10/20/09 M M M
- Revenue, expenditure, balance and composition of financing3 – central government 9/2009 10/20/09 M M M
- Stocks of central government and central government-guaranteed debt5 2008 2/2009 A A A
- External current account balance Q2 2009 8/2009 Q Q Q
- Exports and imports of goods 9/2009 10/20/09 M M M
- GDP/GNI 2008 1/2009 A A A
- Gross external debt 2008 2/2009 A A A

Notes associated in source:
- 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 2 Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
- 3 Foreign, domestic bank, and domestic nonbank financing.
- 4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5 Including currency and maturity composition.
- 6 Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I), Not Available (NA).

### Selected social and development indicators (as presented)
- Employment to population ratio, 15+, total (percent)53515252
- Employment to population ratio, ages 15-24, total (percent)42393635
- GDP per person employed (annual percent growth)2-178
- Income share held by lowest 20 percent7.47.57.2..
- Malnutrition prevalence, weight for age (percent of children under 5)...11.65.3...
- Poverty gap at $1.25 a day (PPP) (percent)546...
- Poverty headcount ratio at $1.25 a day (PPP) (percent of population)191522...
- Prevalence of undernourishment (percent of population)40..29...
- Vulnerable employment, total (percent of total employment)...5760...
- Literacy rate, youth female (percent of females ages 15-24)...989797
- Literacy rate, youth male (percent of males ages 15-24)...979494
- Persistence to last grade of primary, total (percent of cohort)...898484
- Primary completion rate, total (percent of relevant age group)718793110
- Total enrollment, primary (percent net)...939198
- Proportion of seats held by women in national parliaments (percent)8874
- Ratio of female to male enrollments in tertiary education...179162156
- Ratio of female to male primary enrollment104104102102
- Ratio of female to male secondary enrollment...123113111
- Share of women employed in the nonagricultural sector (percent of total nonagricultural employment)47.950.453.1...
- Immunization, measles (percent of children ages 12-23 months)85929798
- Mortality rate, infant (per 1,000 live births)61493935
- Mortality rate, under-5 (per 1,000)82634843
- Adolescent fertility rate (births per 1,000 women ages 15-19)11101417
- Births attended by skilled health staff (percent of total)..979999
- Contraceptive prevalence (percent of women ages 15-49)65676666
- Maternal mortality ratio (modeled estimate, per 100,000 live births).....46...
- Pregnant women receiving prenatal care (percent)...979999
- Unmet need for contraception (percent of married women ages 15-49)......14...
- Incidence of tuberculosis (per 100,000 people)205205205205
- Prevalence of HIV, total (percent of population ages 15-49)......0.10.1
- Tuberculosis cases detected under DOTS (percent)8617876
- CO2 emissions (kg per PPP $ of GDP)2.31.71.3...
- CO2 emissions (metric tons per capita)3.53.13.4...
- Forest area (percent of land area)777...
- Improved sanitation facilities (percent of population with access)47485050
- Improved water source (percent of population with access)65687272
- Nationally protected areas (percent of total land area)......13.913.9
- Aid per capita (current US$)92918687
- Debt service (PPG, percent of exports, excluding workers' remittances)10632
- Internet users (per 100 people)011112
- Mobile cellular subscriptions (per 100 people)062235
- Telephone lines (per 100 people)3566

*ANNEX IV. MONGOLIA—STATISTICAL ISSUES*

### 9.      Mongolia’s external risk of debt distress remains low (Figure. 1). External debt

### 9. Mongolia’s external risk of debt distress remains low

### External debt outlook and medium-term trajectory
- External debt ratios will remain broadly in line with the previous DSA over the medium term.
- Comparing the previous baseline debt ratios using the same respective PV of debt does not show a substantial difference.
- One-off borrowing in 2009–10 will lead to a temporary but significant increase in the level of public debt but will fall rapidly in 2012–14.
- Debt service-to-exports and debt service-to-revenues ratios will peak in 2011–12 but will stay below the threshold.
- Pursuing fiscal adjustment in the period before the mining project comes into stream will be key.

### Stress testing and exchange rate shock
- A one-time 30 percent exchange rate depreciation relative to the baseline in 2010 would breach the threshold over the 2010-12 period.
- With the Oyu Tolgoi mine starting production in 2013, the adverse effects of the depreciation would be gradually unwound.
- The exceptional access under the SBA and the broad program framework have bolstered international reserves and restored confidence in the currency, making the probability of a depreciation of this magnitude relatively low.

### Fiscal sustainability and medium-term risks
- Risks for fiscal sustainability have increased over the medium term but remain low.
- The baseline includes:
  - fiscalization of the banking sector losses through domestic bond issuances, and
  - loans to the government from the local mining company for acquiring the government’s equity share and a pre-payment on future revenues.
- The government will receive dividends from its 34 percent equity share.
- Government deposits are expected to increase, providing a comfortable fiscal reserve cushion.

### Country-specific alternative scenario
- The scenario assumes a more sizable real appreciation than the baseline.
- When mineral revenues start materializing they will create macroeconomic challenges.
- This scenario assumes that fiscal policy is loose and mining revenues are fully spent over the medium to long term.
- Monetary policy can only counteract inflationary pressures resulting from the fiscal expansion by allowing the nominal exchange rate to adjust.
- Hence, the scenario assumes a significant real exchange rate appreciation and a deterioration in the current account balance over the long term.
- This country-specific alternative scenario does not result in indicators significantly breaching thresholds.

*Source: IMF Country Report content (excerpt provided).*

### 13.      The overall assessment has not changed with the last DSA and the external DSA

### 13.      The overall assessment has not changed with the last DSA and the external DSA

### Overall assessment
- Mongolia remains at low risk of external debt distress.
- The overall assessment has not changed with the last DSA and the external DSA.
- The short-term macroeconomic outlook has improved due to strong performance under the SBA and a more favorable global outlook than envisaged at the outset of the program.
- The increase in domestic debt, albeit from a low level, does not lead to a different sustainability assessment than under the external DSA.

### External debt sensitivity and scenarios
- In the last joint Bank-Fund DSA (Country Report No. 09/130), a 20 percent lower copper price than in the baseline scenario (US$4,500/ton vs. US$5,100/ton in the current baseline) during 2010–15 showed the economy remained vulnerable to commodity price changes despite expected export volume increases from the Oyu Tolgoi mining project.
- Stress-test note: "The most extreme stress test is the test that yields the highest ratio in 2019." Specific tests identified:
  - Figure b: one-time depreciation shock yields most extreme.
  - Figure c: exports shock yields most extreme.
  - Figure d: one-time depreciation shock yields most extreme.
  - Figure e: exports shock yields most extreme.
  - Figure f: exports shock yields most extreme.
- IMF staff projections and simulations used third review debt assumptions with SBA request macro assumptions for comparative baselines.

### Key indicators of public and publicly guaranteed external debt (selected projections 2009–2029)
- Debt accumulation and financing:
  - Rate of Debt Accumulation, Grant element of new borrowing (right scale), Grant-equivalent financing (% of GDP) are presented in staff projections (figures).
- PV of debt and ratios (figures and tables show baseline, most extreme shock, threshold, old baseline, SBA scenarios).
- Debt service ratios (figures show debt service-to-revenue and debt service-to-exports under alternatives).

### External Debt Sustainability Framework — Baseline Scenario (selected table entries, 2006–2029)
- External debt (nominal) series (selected years shown in table):
  - 2006: 45.1
  - 2007: 40.1
  - 2008: 34.7
  - 2009: 48.0
  - 2010: 59.8
  - 2011: 68.4
  - 2012: 86.9
  - 2013: 68.0
  - 2014: 52.4
  - 2019: 17.1
  - 2029: 14.1
- Of which: public and publicly guaranteed (PPG):
  - 2006: 44.3
  - 2007: 38.9
  - 2008: 33.9
  - 2009: 45.3
  - 2010: 44.2
  - 2011: 36.3
  - 2012: 34.3
  - 2013: 27.6
  - 2014: 23.5
  - 2019: 14.0
  - 2029: 13.8
- Change in external debt (selected):
  - 2006: -16.2
  - 2007: -5.0
  - 2008: -5.3
  - 2009: 13.3
  - 2010: 11.8
  - 2011: 8.6
  - 2012: 18.5
  - 2013: -18.9
  - 2014: -15.6
  - 2019: -1.1
  - 2029: -0.3
- Identified net debt-creating flows (selected):
  - 2006: -32.7
  - 2007: -24.8
  - 2008: -11.7
  - 2009: -2.7
  - 2010: -0.4
  - 2011: 4.0
  - 2012: 13.0
  - 2013: -24.0
  - 2014: -15.8
  - 2019: -7.7
  - 2029: 0.9
- Non-interest current account deficit (selected series and stabilizing value):
  - 2006: -7.5
  - 2007: -7.1
  - 2008: 13.7
  - 2009: 2.3
  - 2010: 7.5
  - 2011: 3.2
  - 2012: 15.6
  - 2013: 20.7
  - 2014: 17.0
  - Non-interest current account deficit that stabilizes debt ratio: 8.6 (table entry)

- PV of external debt (selected years):
  - 2011: 27.1
  - 2012: 39.2
  - 2013: 51.9
  - 2014: 64.2
  - 2015: 81.1
  - 2016: 63.2
  - 2017: 48.2
  - 2019: 14.8
  - 2029: 12.1
- PV of PPG external debt (selected years):
  - 2011: 26.3
  - 2012: 36.5
  - 2013: 36.3
  - 2014: 32.2
  - 2015: 28.4
  - 2016: 22.8
  - 2017: 19.3
  - 2019: 11.7
  - 2029: 11.8
- PV of PPG external debt in percent of exports (selected):
  - 2011: 45.1
  - 2012: 75.9
  - 2013: 75.3
  - 2014: 70.0
  - 2015: 67.5
  - 2016: 43.5
  - 2017: 35.0
  - 2019: 25.5
  - 2029: 31.8
- PV of PPG external debt in percent of government revenues (selected):
  - 2011: 73.4
  - 2012: 122.1
  - 2013: 111.1
  - 2014: 110.3
  - 2015: 97.1
  - 2016: 93.2
  - 2017: 81.9
  - 2019: 43.6
  - 2029: 44.9
- Debt service-to-exports ratio (in percent) (selected):
  - 2006: 5.9
  - 2007: 6.5
  - 2008: 4.4
  - 2009: 4.5
  - 2010: 3.4
  - 2011: 3.5
  - 2012: 5.8
  - 2013: 15.7
  - 2014: 19.0
  - 2019: 4.1
  - 2029: 2.8
- PPG debt service-to-exports ratio (in percent) (selected):
  - 2006: 5.4
  - 2007: 4.3
  - 2008: 3.6
  - 2009: 4.5
  - 2010: 3.4
  - 2011: 3.5
  - 2012: 5.8
  - 2013: 4.5
  - 2014: 3.7
  - 2019: 1.5
  - 2029: 2.8
- Total gross financing need (billions of U.S. dollars) (selected):
  - 2006: -0.4
  - 2007: -0.5
  - 2008: 0.0
  - 2009: 0.0
  - 2010: 0.2
  - 2011: 0.5
  - 2012: 1.2
  - 2013: 0.0
  - 2014: 0.2
  - 2019: -1.1
  - 2029: 0.8

### Key macroeconomic assumptions (selected series and values)
- Real GDP growth (in percent) (selected across table):
  - 2006: 8.6
  - 2007: 10.2
  - 2008: 8.9
  - 2009: 6.5
  - 2010: 3.3
  - 2011: -1.0
  - 2012: 8.6
  - 2013: 6.5
  - 2014: 5.8
  - 2019: 26.3
  - 2029: 18.8
  - 2015-29 Average entries included: 10.8, 2.3, 3.1, 5.7 (table contains multiple entries across rows)
- GDP deflator in U.S. dollar terms (change in percent) (selected):
  - 2006: 26.0
  - 2007: 13.0
  - 2008: 20.3
  - 2009: 10.0
  - 2010: 10.4
  - 2011: -13.2
  - 2012: -0.1
  - 2013: 8.6
  - 2014: 6.2
  - 2019: -2.0
  - 2029: -0.3
- Effective interest rate (percent) (selected entries across projections):
  - 2006: 1.2
  - 2007: 1.1
  - 2008: 0.9
  - 2009: 1.8
  - 2010: 0.7
  - 2011: 1.5
  - 2012: 1.2
  - 2013: 1.0
  - 2014: 0.8
  - 2019: 5.6
  - 2029: 6.2
- Growth of exports of G&S (U.S. dollar terms, in percent) (selected):
  - 2006: 36.9
  - 2007: 24.2
  - 2008: 18.9
  - 2009: 19.7
  - 2010: 16.0
  - 2011: -29.0
  - 2012: 8.8
  - 2013: 10.3
  - 2014: 3.0
  - 2019: 54.1
  - 2029: 24.5
- Growth of imports of G&S (U.S. dollar terms, in percent) (selected):
  - 2006: 19.5
  - 2007: 28.5
  - 2008: 57.4
  - 2009: 19.8
  - 2010: 16.1
  - 2011: -36.4
  - 2012: 34.8
  - 2013: 21.0
  - 2014: -0.4
  - 2019: -13.8
  - 2029: 9.8
- Grant element of new public sector borrowing (in percent) (selected projections):
  - 2013: 24.2
  - 2014: 27.3
  - 2015: 35.1
  - 2016: 34.0
  - 2017: 28.9
  - 2018: 28.5
  - 2019: 29.7
  - 2020: 25.8
  - 2021: 24.9
  - 2022: 25.3
- Government revenues (excluding grants, in percent of GDP) (selected):
  - 2006: 36.5
  - 2007: 40.4
  - 2008: 35.8
  - 2009: 29.9
  - 2010: 32.7
  - 2011: 29.2
  - 2012: 29.3
  - 2013: 24.5
  - 2014: 23.6
  - 2019: 26.9
  - 2029: 26.2
- Grant-equivalent financing (in percent of GDP) (selected):
  - 2013: 3.0
  - 2014: 1.4
  - 2015: 0.9
  - 2016: 0.9
  - 2017: 0.8
  - 2018: 0.7
  - 2019: 0.6
  - 2020: 0.6
  - 2021: 0.6

### Public sector debt sustainability (Table 2, selected entries, 2005–2029)
- Public sector debt (percent of GDP, selected):
  - 2006: 44.3
  - 2007: 38.9
  - 2008: 33.9
  - 2009: 51.6
  - 2010: 70.8
  - 2011: 69.5
  - 2012: 68.0
  - 2013: 54.7
  - 2014: 46.2
  - 2019: 18.6
  - 2029: 14.7
- Of which: foreign-currency denominated (selected years mirror PPG external exposure entries).
- Identified debt-creating flows (selected):
  - 2006: -25.7
  - 2007: -11.6
  - 2008: -2.0
  - 2009: 12.6
  - 2010: 3.2
  - 2011: -1.0
  - 2012: 0.1
  - 2013: -4.0
  - 2014: -16.7
  - 2019: -15.0
  - 2029: -3.1
- Primary deficit (selected):
  - 2006: -8.7
  - 2007: -3.2
  - 2008: 4.6
  - 2009: 1.3
  - 2010: 5.0
  - 2011: 6.0
  - 2012: 3.6
  - 2013: 1.2
  - 2014: 0.4
  - 2019: -2.9
  - 2029: -5.9
- Automatic debt dynamics (selected):
  - 2006: -16.6
  - 2007: -8.0
  - 2008: -6.4
  - 2009: 4.4
  - 2010: -4.6
  - 2011: -10.9
  - 2012: -4.0
  - 2013: -13.6
  - 2014: -8.9
  - 2019: -0.9
  - 2029: -0.6
- Residual, including asset changes (selected):
  - 2006: 10.3
  - 2007: 6.2
  - 2008: -3.0
  - 2009: 5.1
  - 2010: 15.9
  - 2011: 8.9
  - 2012: 2.5
  - 2013: 3.4
  - 2014: 6.4
  - 2019: 2.8
  - 2029: 0.8
- PV of public sector debt (selected):
  - 2011: 28.5
  - 2012: 44.1
  - 2013: 63.6
  - 2014: 63.8
  - 2015: 62.6
  - 2016: 50.3
  - 2017: 42.3
  - 2019: 16.3
  - 2029: 12.8
- PV of public sector debt-to-revenue and grants ratio (in percent) (selected):
  - 2011: 79.0
  - 2012: 143.5
  - 2013: 192.8
  - 2014: 216.5
  - 2015: 211.5
  - 2016: 203.2
  - 2017: 177.5
  - 2019: 60.0
  - 2029: 48.5
- Debt service-to-revenue and grants ratio (in percent) (selected):
  - 2011: 9.3
  - 2012: 6.8
  - 2013: 6.0
  - 2014: 6.8
  - 2015: 7.6
  - 2016: 8.9
  - 2017: 11.3
  - 2019: 19.1
  - 2029: 4.0

### Sensitivity analyses (Tables 3, 4a, 4b — selected points)
- Table 3 and Tables 4a/4b present multiple alternative scenarios and bound tests (A1–A4 and B1–B6), including:
  - A1: Real GDP growth and primary balance at historical averages.
  - A2: Primary balance unchanged from 2009.
  - A3: Permanently lower GDP growth (assumption footnote applies).
  - B1–B3: Growth and primary balance shocks at historical average minus one standard deviation and combinations.
  - B4: One-time 30 percent real depreciation in 2010.
  - B5: 10 percent of GDP increase in other debt-creating flows in 2010.
  - B6 (in some tables): One-time 30 percent nominal depreciation relative to the baseline in 2010.
- Footnotes governing scenario mechanics:
  - 1/ Real GDP growth at baseline minus one standard deviation divided by the length of the projection period.
  - 2/ Revenues inclusive of grants.
  - 3/ For export shocks, export values remain permanently lower while current account share assumed to return to baseline (offsetting import adjustment).
  - 4/ Net nondebt creating flows include official and private transfers and FDI.
  - 5/ Depreciation defined as percentage decline in dollar/local currency rate, not exceeding 100 percent.
  - 6/ For less favorable financing, interest rate on new borrowing assumed 2 percentage points higher than baseline.

### Executive Board assessment and policy recommendations (PIN and Executive Board summary)
- Executive Directors commended strong performance under the Stand-By Arrangement and noted the economy weathered the worst of the global crisis; rebound in 2010 expected driven by Oyu Tolgoi investment.
- Directors supported policy priorities:
  - Restore health to public finances.
  - Rebuild international reserves while maintaining a flexible exchange rate.
  - Bolster confidence in the banking system.
  - Protect the poor.
- Cautions and recommendations:
  - Avoid returning to the procyclical policy mix of 2007–08.
  - Continue fiscal adjustment, especially expenditure rationalization.
  - Limit the 2010 fiscal deficit to 5 percent of GDP by adjusting spending as needed and save any revenue over-performance.
  - Save the advance tax prepayment from Oyu Tolgoi mines to meet future financing needs.
  - Be cautious undertaking new nonconcessional external borrowing.
  - Implement structural fiscal reforms: adopt a Fiscal Responsibility Law and an integrated budget law to institutionalize fiscal discipline, strengthen fiscal management, and enhance fiscal transparency.
  - Improve targeting of social transfers; pass law to increase transfers to low-income households.
  - Monetary policy: remain committed to flexible exchange rate and low inflation; undertake further monetary easing cautiously as inflation may rebound in 2010; consider moving toward an inflation targeting framework over the medium term.
  - Banking system: make bank-strengthening a top priority; take prompt actions to address problem banks; develop comprehensive bank restructuring plans expeditiously; tie public financial support to governance and structural reforms; require existing shareholders to inject capital or bear losses first.

### Selected economic and financial indicators, 2007–10 (summary table entries)
- Real GDP growth (percent change):
  - 2007: 10.2
  - 2008: 8.9
  - 2009: -1.0
  - 2010: 8.6
- Consumer prices (end-period):
  - 2007: 14.1
  - 2008: 23.2
  - 2009: 2.0
  - 2010: 6.0
- General government budget (percent of GDP):
  - Revenue and grants: 2007: 40.9; 2008: 36.1; 2009: 30.7; 2010: 33.0
  - Expenditure and net lending: 2007: 38.0; 2008: 41.0; 2009: 37.2; 2010: 38.0
  - Overall balance (including grants): 2007: 2.8; 2008: -4.9; 2009: -6.5; 2010: -5.0
  - Nonmineral overall balance: 2007: -10.6; 2008: -15.1; 2009: -12.7; 2010: -12.2
- Balance of payments (millions of US$ and percent of GDP):
  - Current account balance (including official transfers): 2007: 265; 2008: -722; 2009: -167; 2010: -772
  - Current account (percent of GDP): 2007: 6.7; 2008: -14.0; 2009: -3.8; 2010: -16.1
  - Exports (US$ millions): 2007: 1,949; 2008: 2,534; 2009: 1,833; 2010: 1,995
  - Imports (US$ millions): 2007: -2,003; 2008: -3,147; 2009: -1,924; 2010: -2,836
  - Foreign direct investment (US$ millions): 2007: 360; 2008: 836; 2009: 305; 2010: 609
  - Gross official international reserves (end-period, US$ millions): 2007: 1,001; 2008: 657; 2009: 1,050; 2010: 1,252
  - Reserves in months of next year's imports: 2007: 3.2; 2008: 3.3; 2009: 3.9; 2010: 3.8
- Public and publicly guaranteed debt (percent of GDP and amounts):
  - Total public debt (percent of GDP): 2007: 39.4; 2008: 33.9; 2009: 51.6; 2010: 70.8
  - Domestic debt (percent of GDP): 2007: 0.5; 2008: 0.0; 2009: 6.3; 2010: 26.6
  - External debt (percent of GDP): 2007: 38.9; 2008: 33.9; 2009: 45.3; 2010: 44.2
  - Public and publicly guaranteed debt (US$ millions): 2007: 1,529; 2008: 1,610; 2009: 1,937; 2010: 2,082
- Nominal GDP (In billions of togrogs):
  - 2007: 4,600
  - 2008: 6,020
  - 2009: 6,407
  - 2010: 7,373

*Source: IMF staff projections and simulations; Mongolian authorities; Public Information Notice material in the source PDF.*

### 2. Compared to the average 9 percent real growth during 2004-08, this year’s growth has shrunk

### _cr1052 - 2. Compared to the average 9 percent real growth during 2004-08, this year’s growth has shrunk

### Growth outlook and structural drivers
- Compared to the average 9 percent real growth during 2004-08, this year’s growth has shrunk due to the globally-evolving crisis and the sharp decline in the price of copper.
- Authorities and staff agree the Mongolian economy is bottoming out and stands ready to recover at a strong pace to above 8 percent next year.
- A major international agreement for the development of the Oyu Tolgoi (OT) mine in October 2009 has provided meaningful momentum for recovery and is concurrently stimulating significant structural changes in the economy.
- OT mining production starting in 2013 will likely increase the role of the mining sector and render the medium-term macroeconomic outlook favorable.
- Authorities aim to adopt prudent and premeditated macroeconomic management to maximize the contribution of mineral wealth to economic success.

### Inflation, current account, and near-term balances
- Double-digit high inflation in the recent boom-bust period has dropped sharply.
- Inflation projections and targets:
  - Stabilized at a stable low level of 2 percent at end-December.
  - Below 8 percent at end-2010, compared to staff’s projection of 6 percent at end-2010.
- Current account developments:
  - Improved from -14 percent of GDP last year to around -4 percent this year, owing to the big drop in imports and increasing copper price.
  - Some near-term deterioration expected related to OT-related investments and imports.
  - Medium-term expectation: large surpluses as OT mining starts production.
  - Interim expected short-term deficit could be financed by FDI inflows and private loans.

### Program performance and objectives
- All performance criteria for the third review were successfully met.
- The breach in the indicative target of the government deficit for end-September is minimal and addressable.
- Authorities are confident the end-December fiscal target will be comfortably observed, given expected pick-up in mineral revenue in the fourth quarter.
- Some structural benchmarks have modest delays; these are mostly technical and authorities show meaningful progress and commitment to complete them.
- Authorities reaffirm commitment to policy objectives in their Letter of Intent: strong, sustainable and equitable growth, low inflation, and prudent public finances.
- Emphasis on reforms to:
  - Strengthen the banking system.
  - Restore health to the budget.
  - Maintain a flexible exchange rate.
- Authorities will take prompt and decisive actions to cope with imminent problems and adopt forward-looking productivity-enhancing measures.

### Fiscal policy stance and institutions
- Fiscal consolidation pursued in the year; first priority remains healthier and sustainable public finances.
- Authorities agree fiscal restraint warranted for several years to place government finance on a sustainable path.
- Budget deficit commitments:
  - 6½ percent of GDP for 2009.
  - 5 percent in 2010.
- Authorities will encourage banks to repay their budget for the net lending to the gold mining sector related to an earlier gold mining-related loan.
- Debt outlook:
  - Debt distress level remains low.
  - Debt outlook expected to recover and improve over the medium term owing to foreseen mineral revenues starting in 2013, despite some increase in debt ratio over the next two years.
- Near-term fiscal deterioration risks:
  - Elimination of the windfall profit tax in 2011.
  - Decrease in donor budgetary support.
- Fiscal policy rule on revenue shortfalls/surpluses:
  - Any possible revenue shortfall lower than that projected in the budget will be fully compensated by a reduction in spending.
  - More revenue surplus than the budget forecast will be saved for future needs and for counter-cyclicality purposes.
- Institutional reforms:
  - Submission to Parliament by end-December of a Fiscal Responsibility Law and a complementary organic budget law, aiming for approval by February 1, 2010.
  - These laws aim to promote fiscal discipline by establishing numerical rules controlling fiscal balance, government debt, and spending growth.
- Social transfer reform:
  - New social transfer reform law to be submitted to Parliament aiming at passing by February 1, 2010.
  - Reform goals: better assist the poor and needy and create fiscal saving by better targeting, improving capacity for effective means-testing.
  - Authorities appreciate donor support and will stand receptive to advice from the World Bank and the Asian Development Bank.

### Monetary policy and exchange rate framework
- Monetary policy actions during crisis: hike in policy rate earlier in the year and timely reduction consistent with market situations, following the Fund’s advice.
- Key monetary policy objective: maintain low inflation and contribute to macroeconomic stability.
- Bank of Mongolia (BOM) will:
  - Monitor inflation development closely.
  - Preserve international reserves.
  - Adjust interest rates prudently in line with evolving market conditions.
- Medium-term objective: introduce an inflation targeting framework.
  - Will invest efforts to lay technical foundations step by step, including improving inflation forecasting and advancing the monetary transmission channel.
- Exchange rate policy:
  - Authorities agree a flexible exchange rate will relieve terms of trade volatility and prevent higher inflation associated with OT mining operations in 2013.
  - Intervention will focus on smoothing excess volatility caused by temporary imbalances and allow exchange rate determination in line with market conditions.
  - Authorities welcome staff’s estimation that the current level of the real exchange rate is broadly in line with fundamentals.

### Banking system stability and reforms
- Banking sector fragilities remain a key vulnerability despite crisis-management successes.
- Authorities prioritize bolstering integrity of and confidence in the banking system and commit to proactive responses to problems in individual banks.
- Specific bank actions:
  - Anod and Zoos banks addressed by measures such as appointing a receiver and accelerating liquidation.
  - Proactive measures being considered for Zoos Bank, coupled with an external audit underway.
  - Authorities working to prevent deposit outflows at other banks.
  - Injection of public money to restructure banks will be implemented to improve governance and facilitate structural reforms at recipient banks.
- Banking system challenges identified:
  - Increasing non-performing assets.
  - Deteriorating capital adequacy ratios.
  - Concerns about the integrity of the loan provisioning system.
- Planned measures:
  - Clarify definition and tighten rules for loan provisioning.
  - Obligate regular reporting.
  - Continue strengthening supervision and fully enforce regulatory requirements.
  - Redouble efforts to pass the pending revised Banking Law and seek options for a robust legal and regulatory system.
- Authorities welcome staff discussions on contingency plans for additional bank distress.

### Other policy issues and governance
- Cabinet reshuffling in late-October after May 2009 presidential election; newly-elected Prime Minister expressed firm political ownership of the Fund’s program.
- Authorities committed to:
  - Keeping non-concessional debt within the program ceiling by prudent management.
  - Maintaining prohibition on government guarantees as a disciplinary measure.
  - Resolving remaining bilateral official arrears within the foreseeable future.
- Progress on transparency:
  - Authorities have made progress in becoming a member of the Extractive Industry Transparency Initiative (EITI).
  - Increased transparency in the mining sector, combined with fiscal consolidation, expected to help prevent recurrence of past boom-bust cycles.
- Government’s free trade and investment policies should be pursued more rigorously in preparation for the after-crisis period.

### Conclusion and commitments
- Authorities remain cautious and proactive in managing economic policies and will focus on potential threats during the recovery while considering optimal policy options.
- Frequent and close consultations with the Fund are regarded as essential for swift stabilization.
- Authorities stand ready to take additional measures, if necessary, to accomplish social and economic objectives under the SBA.
- Expressions of appreciation:
  - Mongolian authorities express exceptional appreciation to the Fund and its staff for sustained and appropriate policy advice.
  - Authorities extend deepest gratitude to the Fund’s mission chief, Mr. Steven Barnett, and his team for their hard work and advice in setting up Mongolia’s economic reform program.

*Source: _cr1052 - 2. Compared to the average 9 percent real growth during 2004-08, this year’s growth has shrunk*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1052.pdf_