Mongolia: Concluding Statement of the 2024 IMF Staff Visit
IMF News, October 14, 2024
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- Published: October 14, 2024
Mission summary and priorities
- A critical priority for the new coalition government is to manage the current commodity boom prudently to effectively implement its ambitious reform and investment agenda.
- Building external and fiscal buffers will help create the necessary policy space to implement the ambitious investment program and other reforms in line with the economy’s absorptive capacity while maintaining external and internal balance.
- Achieving these goals requires:
- Fiscal policy tightening and adherence to fiscal rules.
- Tight monetary and macroprudential policies.
- Enhanced financial supervision.
- Progress on soft infrastructure (legislative, regulatory, institutional frameworks) alongside hard infrastructure.
- Major institutional steps noted:
- Introduction of a nominal debt ceiling with strong deterrence.
- Planned energy tariff reforms.
- Need to prioritize infrastructure projects with proper feasibility studies, strengthened medium-term fiscal planning, and sound public investment management.
The economy: a commodity boom
- Drivers of buoyant activity:
- A booming mining sector and record high coal exports.
- Strong household and government spending.
- Large and permanent wage and pension increases in the 2023−2024 budgets.
- Large dividend payouts by Erdenes Tavan Tolgoi and government support programs.
- A minimum wage hike that boosted household incomes and salary‑backed consumer credit.
- Fiscal and debt developments:
- Strong revenue collection and backloaded capex registration contributed to a budget surplus despite significant public spending increases.
- Public debt declined to 47 percent of GDP at end-2023.
- Inflation and credit:
- Headline inflation has eased and lies within the BOM’s 6±2 target band.
- Core inflation remains sticky and ticked up to the upper limit of the target band in August.
- Rapid credit growth in bank and non-bank financial (NBFI) sectors, especially consumer loans, exceeding long-term trends.
- BOM tightened reserve requirements and debt service to income (DSTI) limits for consumer loans; household debt is rising rapidly for some borrower segments.
- External position:
- External vulnerabilities declined despite a marked deterioration in the current account deficit due to strong imports and softer coal export prices.
- Gross international reserves (GIR) at end-August: US$4.7 billion, 3.3 months of imports or 96 percent of the ARA metric.
- Well-executed external debt refinancing and BOM’s repayment of half of the outstanding PBOC swap line reduced external debt risks and contributed to a sovereign credit ratings upgrade.
Outlook: continuing commodity boom, robust growth, but rising imbalances
- Growth expectations:
- Growth is expected to remain robust in 2024−25 reflecting strong mining sector growth, increased production of higher‑grade copper, stronger coal exports to China, and expansionary 2024 supplementary and draft 2025 budgets.
- The output gap is estimated to remain positive through 2028.
- Fiscal and external implications:
- Assuming the government’s spending plans on mega projects are gradually phased in in line with external financing, fiscal deficits are expected to rise through 2029, raising gross financing needs, public debt, and fiscal risks.
- Expansionary fiscal policies are likely to widen external and internal imbalances.
- Inflation is expected to continue to rise in 2024H2 and remain above target till 2026 due to:
- Lagged effects of substantial fiscal stimulus in the pipeline.
- Additional stimulus from the 2024 supplementary and 2025 budgets.
- Energy tariff increases.
- Strong credit growth.
- Current account deficits are expected to persist due to high import intensity of investment projects, reducing GIR buffers despite FDI and new external borrowing.
- Forecast uncertainty and risks:
- Uncertainty around implementation pace, financing, and private sector participation in mega projects.
- Procuring external financing equal to 67 percent of 2024 GDP within 4−5 years is judged difficult.
- Downside risks: commodity price volatility, Chinese demand uncertainty for coal, disruptions in fuel imports from Russia, delays at China’s Tianjin port, regulatory/procedural barriers to copper production/export, natural disasters, geopolitical developments.
- Upside: stronger-than-expected commodity prices or exports to China and new medium-term mining production.
Policies: prudent commodity boom management to sustain growth momentum
A. Fiscal tightening and adherence to fiscal rules: the top policy priority
- Fiscal tightening needed to ensure external and internal balance, build buffers during the boom, and reduce the burden on monetary policy.
- Measures recommended to achieve consolidation and boost non-mining revenues:
- Containing the wage bill.
- Targeting social assistance.
- Increasing progressivity in personal income taxes.
- Reducing tax exemptions.
- Tax and customs administration reforms.
- Reorient spending toward well-managed infrastructure investment aligned with absorptive capacity.
- Need for a more effective Medium-Term Fiscal Framework (MTFF) including capital expenditures.
- Investments should be prioritized based on proper feasibility studies, with sound public investment management (PIM) and PPP legislative frameworks.
- The adoption of a nominal debt ceiling of 60 percent of GDP is a major step forward.
- Retaining the structural deficit ceiling helps contain excessive fiscal deterioration.
- Warnings:
- The debt limit is not binding at present; procyclicality of the new expenditure rules may aggravate cycles.
- Rules will need to place constraints on total spending to preempt misclassifications.
- Frequent changes in fiscal rules should be avoided.
- IMF staff stand ready to assist the government in developing appropriate total spending constraints.
B. Ensuring tighter domestic financial conditions
- Monetary and macroprudential policies should keep domestic financial conditions tight.
- Given expected inflation pressures absent fiscal consolidation, BOM should ensure real policy rates remain high until inflation stabilizes within the target band.
- Maintaining an unchanged monetary policy stance in September 2024 would have been better aligned with the BOM’s assessment of inflationary outlook.
- Tightening of DSTI limits and reserve requirements to slow excessive credit growth was timely and appropriate; additional measures may be needed.
- Government plans to resume domestic debt issuances to establish a yield curve should improve monetary policy transmission.
C. Building external buffers to strengthen resilience and increase policy space
- Increase external buffers to strengthen resilience to shocks and create room for reforms.
- BOM should allow greater exchange rate (ER) flexibility to absorb external shocks.
- Government should enforce SOE repatriation and the currency settlement law, and undertake reforms to attract new FDI and external private financing.
- The BOM-MOF-MOED working group to align investment pace with external stability considerations is an excellent initiative.
D. Ensuring a sound financial sector
- Financial sector supervision should remain vigilant, notably on credit risk given exceptionally strong credit growth.
- Policy recommendations:
- Align planned reduction in DSTI limits for NBFIs with lower bank DSTI limits quickly to prevent regulatory arbitrage.
- Ensure DSTI limits are effectively enforced.
- Accelerate use of FICO credit scoring.
- Improve financial literacy to discourage over‑leveraged consumers.
- Adhere to NBFI regulations and rapidly approve upgraded NBFI regulatory framework.
- BOM and FRC supervisors should identify and reduce interlinkages between banks and NBFIs, including targeted onsite supervisions and special provisioning requirements if necessary.
- Allow the BOM Governor to exercise powers granted by the Central Bank Law to nominate key personnel for supervisory oversight immediately.
- Broader reforms:
- Improve insolvency and creditor rights.
- Continue banking sector reforms to meet the new end-2026 deadline, with BOM monitoring of time-bound plans for shareholder diversification.
- Increase shareholder limits to allow selected IFIs to invest in multiple banks.
E. Strengthening soft infrastructure for sustainable growth
- Key soft infrastructure priorities:
- Strengthened Investment Law to cut red tape.
- Accelerated overhaul of the Minerals Law.
- Approval of amendments to the SOE, Insolvency and draft Whistleblower Laws.
- Additional recommendations:
- Effective enforcement of SOE governance reforms and a strong judiciary.
- Ensure operational independence of BOM.
- Implement planned energy tariff reform with well-communicated, appropriately paced increases and targeted temporary assistance to poor households.
- Ensure regulatory coherence with tax laws and effective tax dispute resolution processes to facilitate existing FDI and attract new FDI.
- Establish a strong governance framework for the new Sovereign Wealth Fund’s sub-funds quickly.
Key statistics and projections (selected items from Table 1)
- Nominal GDP (in USD million):
- 2021: 15,286
- 2022: 17,146
- 2023: 20,315
- 2024: 23,669
- 2025: 27,242
- 2026: 29,120
- 2027: 31,569
- 2028: 34,024
- 2029: 36,400
- Real GDP growth (percent change):
- 2021: 1.6
- 2022: 5.0
- 2023: 7.4
- 2024: 5.5
- 2025: 7.0
- 2026: 6.0
- Contributions to Real GDP (ppts) — Domestic Demand:
- 2021: 17.6
- 2022: 11.4
- 2023: 5.6
- 2024: 20.2
- 2025: 8.3
- 2026: 7.6
- 2027: 10.0
- 2028: 8.8
- 2029: 7.2
- Consumption (percent of GDP):
- 2021: 67.9
- 2022: 65.8
- 2023: 57.5
- 2024: 61.5
- 2025: 60.4
- 2026: 63.0
- 2027: 63.6
- 2028: 63.2
- 2029: 62.7
- Gross national saving (percent of GDP):
- 2021: 22.9
- 2022: 28.9
- 2023: 34.5
- 2024: 29.0
- 2025: 27.7
- 2026: 27.0
- 2027: 26.3
- 2028: 26.2
- 2029: 26.7
- Copper prices (US$ per ton):
- 2021: 9317
- 2022: 8829
- 2023: 8491
- 2024: 9298
- 2025: 9450
- 2026: 9550
- 2027: 9584
- Coal prices (US$ per ton):
- 2021: 150
- 2022: 123
- 2023: 131
- 2024: 115
- 2025: 105
- General government accounts (selected):
- Primary balance (IMF definition):
- 2021: 9.7
- 2022: 2.2
- 2023: 4.3
- 2024: 1.8
- 2025: 0.3
- 2026: -0.3
- 2027: -0.4
- 2028: -0.1
- Total revenue and grants:
- 2021: 32.8
- 2022: 34.4
- 2023: 34.6
- 2024: 37.6
- 2025: 36.5
- 2026: 35.6
- 2027: 34.7
- 2028: 34.8
- Overall balance (IMF definition):
- 2021: 7.8
- 2022: 0.7
- 2023: 2.7
- 2024: 0.4
- 2025: -1.0
- 2026: -1.1
- 2027: -1.8
- 2028: -2.0
- 2029: -1.7
- Non-mineral primary balance (percent of GDP):
- 2021: 2.0
- 2022: -6.3
- 2023: -5.7
- 2024: -10.3
- 2025: -11.1
- 2026: -10.6
- 2027: -10.4
- 2028: -10.2
- 2029: -9.9
- General government debt:
- 2021: 67.7
- 2022: 64.5
- 2023: 46.8
- 2024: 42.4
- 2025: 40.0
- 2026: 40.7
- 2027: 44.8
- 2028: 47.3
- Monetary and financial indicators:
- Broad money growth (percent change) — 2021: 13.8; 2022: 20.0; 2023: 15.9; 2024: 11.9; 2025: 12.3; 2026: 11.8.
- Reserve money growth (percent change) — 2021: 39.9; 2022: 20.1; 2023: 13.7; 2024: 12.1.
- Credit growth (percent change) — 2021: 18.1; 2022: 22.0; 2023: 24.0; 2024: 16.0.
- Balance of payments:
- Current account balance (percent of GDP):
- 2021: -13.8
- 2022: -13.4
- 2023: 0.6
- 2024: -6.9
- 2025: -7.7
- 2026: -8.3
- 2027: -9.2
- 2028: -9.5
- 2029: -9.3
- Exports of goods (percent of GDP) — 2021: 53.2; 2022: 68.5; 2023: 62.7; 2024: 60.0; 2025: 58.9; 2026: 55.1; 2027: 53.1; 2028: 53.3.
- Gross official reserves (in USD million):
- 2021: 4366
- 2022: 3400
- 2023: 4921
- 2024: 5027
- 2025: 5140
- 2026: 5828
- 2027: 6736
- 2028: 7159
- 2029: 7580
- Gross official reserves (in months of imports): 3.7 (2021); GIR reported at end-August: US$4.7 billion, 3.3 months of imports or 96 percent of the ARA metric.
- Exchange rate:
- Togrog per U.S. dollar (eop):
- 2021: 2849
- 2022: 3445
- 2023: 3411
Mission visit
- An IMF team visited Ulaanbaatar to conduct the discussions during September 25–October 1, 2024.
Concluding statement prepared by IMF staff following the September 25–October 1, 2024 mission.
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- Press Release-English