IMF Executive Board Concludes 2021 Article IV Consultation with Mongolia

IMF News, November 29, 2021

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The Mongolian economy is rebounding from its deepest recession in a decade despite a lingering pandemic.
Recovery is largely export-led, supported by the global recovery and base effects.
Domestic activity remains weak due to the pandemic; many workers, especially female workers, are leaving the workforce, perhaps permanently.
Inflation has risen recently but mainly due to transitory factors affecting import prices.
Real GDP projections:
- 2020: -4.6 (percent change)
- 2021: 4.5 (percent change)
- 2022: 7.0 (percent change)
Medium-term trajectory:
- 2022−23: Growth expected to accelerate to 6½–7 percent if export portals fully reopen and the Oyu Tolgoi copper mine is completed on schedule.
- Medium term growth expected to moderate to 5 percent, with output levels likely to remain below pre-pandemic trends due to permanent losses in activity.
Inflation is expected to return to the BOM’s targeted range as domestic activity normalizes.

Government and Bank of Mongolia (BOM) appropriately managed external vulnerabilities by rolling over Eurobonds coming due in 2022−23 on better terms.
BOM opportunistically built gross international reserves aided by import compression and disruptions, a favorable terms of trade, and the 2021 IMF SDR allocation of US$98.3 million (95.8 percent of quota).
Despite reserve accumulation, international reserves are assessed to be inadequate given large external liabilities.
Current account:
- 2020: -5.1 (percent of GDP)
- 2021: -12.8 (percent of GDP)
- Despite an export price boom, 2020 current account improvements are likely temporary once recovery takes hold and imports pick up, reflecting lack of export diversification, heavy import dependence, and high external debt.

Policies during the pandemic were appropriately supportive.
Concerns noted:
- Large, untargeted and continuing fiscal, quasi-fiscal and financial forbearance measures due to Parliamentary measures have heightened macrofinancial vulnerabilities.
- Public debt has sharply increased, bank balance sheets have further weakened, and BOM’s operational independence has been compromised.
Directors’ policy guidance:
- Near-term policies may need to remain supportive given the lingering pandemic and weak domestic recovery.
- Call for an ambitious fiscal consolidation strategy and bold structural fiscal reforms to address untenable debt dynamics.
- Emphasized importance of better targeted and more effective social assistance programs, ambitious pension reforms, improved public investment management, and tax administration.
- Preserve the integrity of the Future Heritage Fund to maintain investor confidence.
- Enhance BOM operational independence to ensure monetary and external stability.
- Move quasi-fiscal operations to the budget and phase them out; Parliament should resist making decisions on monetary and financial operations.
- Greater exchange rate flexibility could serve as a shock absorber.
- BOM should continue building external buffers and draw down non concessional external liabilities.
- Continued vigilance to ensure inflation does not become persistent.

Financial sector weaknesses have been exacerbated by the pandemic, increasing exposure to external shocks by forcing public and private sectors to borrow externally.
Risks of a major deterioration in asset quality could impact bank capital and delay recovery.
Directors’ recommendations for the banking sector:
- Greater supervisory focus on strengthening banks and contingency planning.
- Well-sequenced approach to bank reforms to minimize systemic instability risk.
- Phase out regulatory forbearance by end-2021.
- Promptly undertake a fresh and independent asset quality review for potentially capital deficient banks for transparency and proper assessment of bank balance sheets.
- Put in place necessary preconditions for successful IPOs and contingency plans; call for delaying the deadline for the IPOs.

Directors welcomed the authorities’ long-term development strategy focused on sustainable, inclusive, and green growth.
To improve the business climate, Directors urged decisive action to address long standing concerns about corruption, governance, and AML/CFT to strengthen the investment climate and promote diversification.
Priorities highlighted:
- Revamp the insolvency framework and prioritize judiciary reforms to address impaired balance sheets.
- Flesh out and implement plans for e-governance and state enterprise reform.
- Publication of the full audit report on COVID related expenditures, including the missing information on beneficial owners.

Population (2019): 3.4 million
GDP per capita: 3,965
Quota: SDR 72.3 million
Main products and exports: Copper, coal, gold and cashmere.
Poverty headcount ratio: 28.4 (% of population, 2018)
Key export markets: China, Russia.
Selected macro indicators (2020 act., 2021 proj., 2022 proj.; in percent of GDP unless otherwise indicated):
- Real GDP growth (percent change): -4.6; 4.5; 7.0
- Consumer Prices (EoP; percent change): 2.3; 7.5; …
- Primary balance (IMF definition): -6.7; -3.1; -1.1
- General government debt 1/: 77.4; 81.5; 76.8
- Credit growth (percent change): -3.9; 9.0; 11.0
- Current account balance: -5.1; -12.8; …
- Exports of goods (y/y percent change): -2.7; 12.1; 17.9
- Imports of goods (y/y percent change): -13.1; 31.5; 13.6
- Gross official reserves (in USD millions) 2/: 4534; 4243; 4508
- Exchange rate Togrog per U.S. dollar (eop): 2850; …
Footnotes:
- 1/ General government debt data excludes SOEs debt and central bank’s liabilities from PBOC swap line.
- 2/ Gross official reserves includes drawings from swap line.

IMF Communications Department; Press Release No. 21/350; November 29, 2021.