Mongolia: Staff Concluding Statement of the 2022 Article IV Mission

IMF News, October 25, 2022

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Mongolia: Staff Concluding Statement of the 2022 Article IV Mission

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• Published: October 25, 2022

Executive summary

• Stronger policy adjustment is urgently needed to address Mongolia’s rising internal and external imbalances, including:
  • much greater exchange rate flexibility;
  • strengthening international reserves to facilitate large external debt rollovers in 2023;
  • further tightening monetary policy by promptly phasing out the Bank of Mongolia’s quasi fiscal operations by allowing the Anti‑Pandemic Law to expire by end-2022.
• Strong fiscal consolidation is urgently needed in 2023, including:
  • substantial targeting of social assistance toward the vulnerable;
  • introducing progressivity in personal income taxation;
  • substantial cuts in public investment and stronger oversight and reprioritization of SOE investment projects.
• Strong banking supervision is necessary to support banking reforms amid economic uncertainty.
• Mongolia’s economic resilience depends critically on Parliamentary actions in the coming months, notably on the 2023 budget.

Rising external and internal imbalances — recent developments

• Economic activity:
  • After 4 successive quarters of contraction, a sharp uptick in 2022Q2 GDP largely reflects recovery in the non-mining sector, especially agriculture.
  • Mining GDP contraction eased as cross‑border trade restrictions relaxed.
• External pressures and FX:
  • External imbalances widened due to higher global prices for imported food and fuel, export contraction from China’s zero-COVID measures, rising imports for infrastructure and construction, and release of pent-up consumer demand.
  • Off-take barter agreements: a large share of Erdenes Tavan Tolgoi (ETT) export revenues are used to finance Chinese construction projects in Mongolia, restricting FX inflows and boosting imports.
  • Exchange rate depreciated by 17½ percent year-to-date by end-September.
  • Gross international reserves stood at US$2.8billion at end-September.
• Inflation and domestic demand:
  • Inflation surged past the Bank of Mongolia’s target band, driven by supply-side and global factors (high international prices, decline in domestic meat production, China-related supply disruptions), ER passthrough, and large second-round effects despite weak labor markets.
  • Domestic real incomes rose due to large untargeted government support since 2020, a large hike in minimum pensions in early 2022, and recent wage recovery.
• Fiscal and quasi-fiscal stance:
  • Repeated extension of the Anti‑Pandemic Law (APL) to end‑2022 compelled the BOM to inject significant liquidity via quasi-fiscal operations, undermining monetary tightening and the interest rate channel.
  • Full cash payment of expanded child money support in the 2022 supplementary budget added to inflationary and ER pressures.
  • Non-mineral primary balance continues to record a significant deficit.
  • Acceleration of delayed capex execution by end-year expected to boost imports, ER and inflationary pressures.

Outlook: fragile recovery and major risks

• Growth projections:
  • Real GDP growth forecast: 2.5 percent in 2022 and 4 percent in 2023, mainly from mining contributions; medium-term forecasts envisage above-potential growth as copper and coal exports normalize.
• Inflation and buffers:
  • Inflation expected to remain well above the BOM’s target band till end-2023.
  • International reserves: GIR expected to hover around US$2½ billion by end-2022 and fall to precarious levels in 2023–24.
  • Current account deficit likely to remain wide in 2022–23.
• Downside risks:
  • Tightening global financial conditions, extended Chinese border closures, faster slowdown in China, commodity price volatility.
  • Possible disruption of correspondent banking relationships due to de-risking related to sanctions against Russia.
  • Suboptimal domestic policies (expansionary policies ahead of 2024 elections, sizable contingent liabilities from the financial and SOE sectors).

Policy priorities: resolving external and internal imbalances

• General:
  • Window for strong reforms is narrow; policy choices are limited and not first-best. Mongolia’s economic strength depends critically on Parliamentary decisions, especially the 2023 budget.

A. Preserving External Stability

• Exchange rate:
  • Much greater ER flexibility is warranted; BOM should limit FX interventions to disorderly market conditions and design an effective communication strategy.
  • ER depreciation will pass through to inflation and worsen debt dynamics but can improve private sector incentives and reduce imports/speculation.
• Reserves and external financing:
  • International reserves should be bolstered through opportunistic interventions, coordinated with external liability management plans.
  • Government actions to support reserves: sharply cut and prioritize public investment (including SOE-financed), ensure repatriation requirements are respected, improve coordination with BOM on external payments, roll back tax exemptions on imports that foster imports.
  • Continue facilitating automated zero‑contact exports, open new trade portals, facilitate new FDI inflows, and work to ensure Russian oil import payments proceed smoothly.
• Rollover management:
  • Eurobond rollover should be executed at the earliest opportunity; the large PBOC swap line should ideally be renewed on concessional terms.
  • Current plans to recoup a large share of DBM’s NPLs via SOE repayments are taking time; (p)repayment of DBM’s Samurai bonds using NPL recoveries would reduce already-low GIR.
  • If DBM cannot strengthen its balance sheet in time to rollover its Eurobond by 2023Q3, the least bad option may be government repayment of DBM’s external liabilities through new external borrowing.

B. Addressing Persistent Inflation

• Quasi-fiscal operations and APL:
  • Phase out quasi-fiscal operations quickly: APL should expire at end-2022 (or earlier if feasible) and not be resuscitated; all outstanding balances should be transferred to the government at end‑2022.
  • Allow operations to wind down in line with repayment terms starting in 2023 while managing investor expectations for the resulting rise in budget liabilities and improving the fiscal framework.
• Monetary policy:
  • High policy rates warranted to ensure forward-looking real rates are positive and to signal commitment to fight inflation; pace of tightening should be calibrated to incoming data and avoid destabilizing the banking sector.
  • BOM should explain inflation drivers and rationale for policy stance.
• Support from government:
  • Government should ease supply bottlenecks, reduce domestic demand through strong fiscal consolidation, better target policy support (including utility subsidies) toward the most vulnerable, improve monetary policy transmission via domestic debt issuance, and delay a smaller minimum wage increase.
  • Energy prices should reflect market forces despite inflationary impacts to preserve fiscal resources and conserve energy use.

C. Strengthening Public Sector Balance Sheets

• Urgent high-quality consolidation:
  • The proposed ½ percent of GDP consolidation in the 2023 budget is inadequate.
  • 2023 budget should target CMP to vulnerable households and introduce substantial PIT progressivity.
  • Consider eliminating customs duty exemptions for non-food imports and applying non-resident capital gains tax to net gains instead of gross sales value.
  • Further progress on tax and customs administration reforms is needed.
• Public investment:
  • Substantial cuts in public investment by the budget and SOEs are needed to boost GIR by end‑2023 and reduce debt rollover risks; delay ongoing budget-financed capex, tighten allotments to highest-priority projects, and secure concessional foreign financing.
  • SOEs’ off-take contracts should be transparently disclosed and incorporated into an updated Development Plan for Parliamentary prioritization and ratification.
  • Strengthen public investment management via Parliamentary approval of draft PPP law, enhanced transparency, better project selection and management, and boosting the Ministry of Economic Development’s capacity.
• Mineral wealth and fiscal framework:
  • Integrate Sovereign Wealth Fund and Development Fund framework into the fiscal framework with clear accountability.
  • Reverse 2021 legislative changes that forgo future savings in the Future Heritage Fund to fund CMP expansion, so reductions in CMP increase fiscal policy space.
  • Transition to a simplified fiscal framework based on a nominal debt anchor of 50 percent of GDP and a simple operational rule; enhance fiscal transparency and reporting.
• SOE governance and DBM:
  • For DBM, appoint an independent external advisor to conduct a diagnostic review and draft a reform plan; determine long-term viability in context of strengthened public investment management.
  • Privatization of non-financial SOEs should be preceded by robust risk assessment, strengthened oversight of SOE debt and investments, transparent reporting, regulatory framework, and legislation (e.g., non-bailout clause); place budgetary ceilings on lending or guarantees subject to annual Parliamentary approval.

D. Strengthening Financial Stability

• Banking sector vulnerabilities and supervision:
  • System-wide bank capital, asset quality, and profitability improved, but higher risk aversion, lending slowdown, deteriorating mining sector exposures, growing household debt, and brisk NBFI lending pose vulnerabilities.
  • Greater supervisory vigilance warranted; continue AQR monitoring and additional supervisory actions if necessary.
  • IPOs of D-SIBs delayed to June 2023 provide time for AQR; support upcoming IPOs with fit and proper assessments, ensure high-quality capital, and communicate AQR results to bolster confidence.
  • Intensify NBFI supervision and tighten lending standards.
• Contingency planning and legal framework:
  • Reconsider legal implications of not adhering to IPO timelines to avoid triggering banking sector instability; BOM should develop contingency plans.
  • Key structural reforms: expedite insolvency reform approval; FRC, MOF, BOM, and DICOM should develop an effective crisis management framework with information exchange arrangements and design a bank resolution framework.

Key statistics and projections (selected)

• Nominal GDP (in USD million): 14,206 (2019); 13,313 (2020); 15,286 (2021); 15,530 (2022); 15,976 (2023); 16,688 (2024); 17,784 (2025).
• Real GDP growth (percent change): 5.6 (2019); -4.6 (2020); 1.6 (2021); 2.5 (2022); 4.0 (2023); 5.5 (2024); 6.0 (2025).
• Consumer Prices (Avg; percent change): 7.3 (2019); 3.7 (2020); 7.1 (2021); 14.7 (2022); 12.3 (2023); 9.0 (2024); 8.3 (2025).
• Consumer Prices (EoP; percent change): 2.3 (2019); 13.5 (2020); 13.9 (2021); 10.1 (2022); 8.6 (2023); 8.0 (2024).
• Copper prices (US$ per ton): 6010 (2019); 6175 (2020); 9317 (2021); 8815 (2022); 7914 (2023); 7897 (2024); 7881 (2025).
• Coal prices (US$ per ton): 84 (2019); 74 (2020); 129 (2021); 160 (2022); 163 (2023); 165 (2024); 167 (2025).
• Oil price (U.S. dollars per barrel): 61.2 (2019); 41.8 (2020); 69.4 (2021); 98.2 (2022); 85.5 (2023); 80.2 (2024); 76.2 (2025).
• Primary balance (IMF definition, percent of GDP): 3.3 (2019); -6.7 (2020); -1.1 (2021); 0.9 (2022); 2.0 (2023); 2.4 (2024); 1.7 (2025).
• Total revenue and grants (percent of GDP): 31.8 (2019); 27.9 (2020); 32.8 (2021); 33.9 (2022); 35.5 (2023); 35.0 (2024); 34.7 (2025).
• Primary expenditure and net lending (percent of GDP): 28.5 (2019); 34.6 (2020); 34.0 (2021); 33.0 (2022); 33.5 (2023); 32.6 (2024).
• Overall balance (IMF definition, percent of GDP): 1.0 (2019); -9.2 (2020); -3.0 (2021); -0.9 (2022); -0.3 (2023); 0.2 (2024); -0.1 (2025).
• General government debt (percent of GDP): 66.8 (2019); 83.4 (2020); 67.7 (2021); 72.2 (2022); 72.7 (2023); 69.6 (2024); 66.0 (2025).
  • Domestic: 6.7 (2019); 3.2 (2020); 2.9 (2021); 3.1 (2022).
  • External: 60.2 (2019); 77.8 (2020); 64.6 (2021); 69.3 (2022); 66.5 (2023); 62.7 (2024).
• Broad money growth (percent change): 8.2 (2019); 16.2 (2020); 13.8 (2021); 0.1 (2022); 11.6 (2023); 12.4 (2024).
• Reserve money growth (percent change): 5.4 (2019); -12.7 (2020); 6.5 (2021); -1.6 (2022); 9.7 (2023); 10.5 (2024); 11.5 (2025).
• Credit growth (percent change): -3.8 (2019); 18.5 (2020); 7.8 (2021).
• Current account balance (percent of GDP): -15.2 (2019); -5.1 (2020); -20.5 (2021); -14.9 (2022); -12.5 (2023); -8.6 (2024).
• Exports of goods (percent of GDP): 50.6 (2019); 52.5 (2020); 54.0 (2021); 59.8 (2022); 67.8 (2023); 71.4 (2024); 73.3 (2025).
• Imports of goods (percent of GDP): 42.4 (2019); 39.3 (2020); 45.4 (2021); 56.3 (2022); 56.0 (2023); 55.3 (2024); 54.1 (2025).
• Togrog per U.S. dollar (eop): 2734 (2019); 2850 (2020); 2849 (2021).
• Gross international reserves: US$2.8billion at end-September (2022); GIR expected around US$2½ billion by end-2022.
• Exchange rate depreciation: 17½ percent year-to-date by end-September (2022).
• Population in million (eop): 3.4 (mem. item).

IMF staff concluding statement of the 2022 Article IV mission to Mongolia (September 15–28, 2022).

Content in this bundle

• Press Release-English
  • Press Release-English (Markdown version)
  • Press Release-English (PDF)

References

• Mongolia and the IMF
• Russian Federation and the IMF
• IMF Policy Advice -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• https://www.imf.org/en/home