{
  "title": "Mongolia -- Preliminary Conclusions of the 2011 Article IV Mission",
  "publication": "IMF News, February 16, 2011",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs021711",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2011-02-16",
  "sections": [
    {
      "heading": "Recent developments",
      "content": "- Growth rebounded strongly last year to 6.1 percent.\n- Severe winter led to a sharp contraction in agriculture, especially animal husbandry.\n- Shock to food supply helped drive inflation into the double digits for much of the year, led by rising meat prices.\n- Higher copper prices and a rapid increase in coal production are fueling strong export growth and have helped boost international reserves to an all-time high."
    },
    {
      "heading": "Outlook",
      "content": "- Growth this year is projected to remain strong and is set to accelerate to around 10 percent.\n- The large increase in fiscal spending underway is creating excess demand that will result in higher inflation and surging imports.\n- Inflation could reach some 20 percent by year-end.\n- Over the medium-term growth will be driven by an increase in mining output, with an especially large boost around 2013 when production from Oyu Tolgoi starts."
    },
    {
      "heading": "2011 Budget — assessment and risks",
      "content": "- Around one-third of Mongolians living below the poverty line motivates government desire to provide immediate support.\n- The large increase in spending this year will:\n  - increase inflation, dissipating any immediate benefits;\n  - crowd out private sector activity;\n  - cause faster real exchange rate appreciation;\n  - potentially reduce real household purchasing power;\n  - surge imports as imports become cheaper relative to domestically produced goods;\n  - reduce local competitiveness with knock-on effects for investment and employment.\n- High inflation concentrated in staple food items will have an especially hard impact on the poor.\n- Recommendation: the 2011 budget should be amended to reduce spending substantially."
    },
    {
      "heading": "Medium-term fiscal framework",
      "content": "- A sound fiscal policy is necessary to ensure mineral wealth leads to lasting prosperity.\n- Fiscal management objectives include:\n  - (i) smoothing economic growth through counter-cyclical fiscal policy;\n  - (ii) leaving room for the private sector to thrive;\n  - (iii) providing buffers against a downturn in global commodity prices.\n- The adoption of the fiscal stability law last year was a landmark achievement.\n- The 2011 budget is a big step backwards; the fiscal stability law will succeed only if strictly adhered to in letter and spirit.\n- Practical implications:\n  - Expenditure restraint is required, for example by keeping spending frozen in real terms, to bring the fiscal position in compliance with the numerical rules that start in 2013.\n  - Avoid circumventing the law via off-budget vehicles or government guarantees.\n  - Quasi-fiscal risks include the Development Bank, public-private partnerships, and public guarantees; such operations need to be managed prudently and in line with international good practices."
    },
    {
      "heading": "Structural fiscal reforms",
      "content": "- Ongoing efforts to advance structural fiscal reforms are welcome and should proceed.\n- Top priorities:\n  - introduction of a targeted poverty benefit as part of social transfer reform to help the most vulnerable and increase fiscal flexibility;\n  - adoption of an integrated budget law to modernize intergovernmental fiscal relations, strengthen budget execution, and improve public investment and medium-term fiscal planning;\n  - continued strengthening of the large taxpayer office to provide better taxpayer services and more efficient revenue collection.\n- Warning: increasing exemptions or using the VAT to target preferred sectors would be highly inefficient and ineffective, complicate tax administration, and risk revenue leakage."
    },
    {
      "heading": "Monetary policy",
      "content": "- Inflation is already too high; the substantial increase in fiscal spending underway will push it up further.\n- There are limits to what monetary policy can achieve if budget spending is not scaled back.\n- Recommendation: the central bank should be more proactive in fighting inflation and promptly initiate a tightening cycle, starting with an up-front hike in interest rates.\n- Rationale:\n  - The central bank policy rate is already very negative in real terms and will become even more so as inflation rises.\n  - Higher interest rates are essential in tempering the rise in inflation.\n- Trade-offs:\n  - Tighter monetary policy will lessen credit availability and slow private activity (crowding out), but this is preferred to allowing inflation pressures to build.\n  - Responsibility for crowding out lies with the decision to implement a very loose fiscal policy that monetary authorities now need to offset.\n- Additional recommendation: give the central bank a more explicit mandate to make inflation the primary objective of monetary policy."
    },
    {
      "heading": "Macroeconomic policy mix",
      "content": "- The combination of expansionary fiscal policy and the need for tighter monetary policy is inefficient, resulting in macroeconomic volatility and higher inflation.\n- Higher inflation carries large social costs, disproportionately hurting the poor and those on fixed incomes.\n- Preferred mix:\n  - Significantly scale back the increase in government spending this year;\n  - Reduce the amount of monetary tightening needed;\n  - Achieve lower inflation this year and next, a smoother growth path, lower interest rates, and less real exchange rate appreciation;\n  - Improve competitiveness of the local economy and create a better environment for the private sector."
    },
    {
      "heading": "Exchange rate policy",
      "content": "- The flexible exchange rate regime has been working well over the past 1½ years.\n- International reserves are at an all-time high, and the nominal exchange rate has evolved in line with market conditions.\n- The central bank has succeeded in dampening excess volatility from large and lumpy foreign exchange flows; this intervention strategy remains appropriate.\n- Nominal appreciation last year helped tighten monetary conditions and reduced the increase in inflation.\n- Looking forward, the flexible exchange rate regime will:\n  - help control inflation;\n  - provide a shock absorber against external shocks;\n  - facilitate the real exchange rate adjustment likely over the medium-term with rapid growth in the mineral sector."
    },
    {
      "heading": "Banking system",
      "content": "- A healthy banking system is important for private sector development, access to credit, and safeguarding depositors via supervision and regulation.\n- Recent progress in strengthening banking supervision is welcome.\n- Priorities:\n  - strictly enforce existing regulations and replace supervisory forbearance with resolute action against noncompliant banks;\n  - implement the Empowering the Banking Sector and Capital Support Program to provide transparent and fair temporary support to banks needing time to comply;\n  - prompt passage of this legislation should be a top priority.\n- All existing and future costs of bank restructuring should be promptly covered by the budget and not borne by the central bank."
    },
    {
      "heading": "Medium-term outlook and policy imperatives",
      "content": "- The Mongolian economy has a bright future with mineral sector development offering substantial growth and an opportunity to spread prosperity.\n- Success is not guaranteed; the “resource curse” risk is real and Mongolia’s recent crisis illustrates high costs of failure.\n- Required disciplined macroeconomic policies:\n  - (i) contain fiscal spending pressures and strictly adhere to the fiscal stability law;\n  - (ii) gear monetary policy toward containing inflation, including timely adjustment of interest rates in line with evolving price pressures;\n  - (iii) maintain a flexible exchange rate regime;\n  - (iv) safeguard the banking system through prudential regulation and supervision.\n- Pursuing this policy combination would help ensure mineral wealth translates into strong, sustained, and equitable growth.\n\nMongolia -- Preliminary Conclusions of the 2011 Article IV Mission, February 16, 2011.\n\n---\n\n\n References\n\n- Mongolia and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs021711"
    }
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    "Published: February 16, 2011",
    "Growth rebounded strongly last year to 6.1 percent.",
    "Severe winter led to a sharp contraction in agriculture, especially animal husbandry.",
    "Shock to food supply helped drive inflation into the double digits for much of the year, led by rising meat prices.",
    "Higher copper prices and a rapid increase in coal production are fueling strong export growth and have helped boost international reserves to an all-time high.",
    "Growth this year is projected to remain strong and is set to accelerate to around 10 percent.",
    "The large increase in fiscal spending underway is creating excess demand that will result in higher inflation and surging imports.",
    "Inflation could reach some 20 percent by year-end.",
    "Over the medium-term growth will be driven by an increase in mining output, with an especially large boost around 2013 when production from Oyu Tolgoi starts.",
    "Around one-third of Mongolians living below the poverty line motivates government desire to provide immediate support.",
    "The large increase in spending this year will:",
    "High inflation concentrated in staple food items will have an especially hard impact on the poor.",
    "Recommendation: the 2011 budget should be amended to reduce spending substantially.",
    "A sound fiscal policy is necessary to ensure mineral wealth leads to lasting prosperity.",
    "Fiscal management objectives include:",
    "The adoption of the fiscal stability law last year was a landmark achievement.",
    "The 2011 budget is a big step backwards; the fiscal stability law will succeed only if strictly adhered to in letter and spirit.",
    "Practical implications:",
    "Ongoing efforts to advance structural fiscal reforms are welcome and should proceed.",
    "Top priorities:",
    "Warning: increasing exemptions or using the VAT to target preferred sectors would be highly inefficient and ineffective, complicate tax administration, and risk revenue leakage.",
    "Inflation is already too high; the substantial increase in fiscal spending underway will push it up further.",
    "There are limits to what monetary policy can achieve if budget spending is not scaled back.",
    "Recommendation: the central bank should be more proactive in fighting inflation and promptly initiate a tightening cycle, starting with an up-front hike in interest rates.",
    "Rationale:",
    "Trade-offs:",
    "Additional recommendation: give the central bank a more explicit mandate to make inflation the primary objective of monetary policy.",
    "The combination of expansionary fiscal policy and the need for tighter monetary policy is inefficient, resulting in macroeconomic volatility and higher inflation.",
    "Higher inflation carries large social costs, disproportionately hurting the poor and those on fixed incomes.",
    "Preferred mix:",
    "The flexible exchange rate regime has been working well over the past 1½ years.",
    "International reserves are at an all-time high, and the nominal exchange rate has evolved in line with market conditions.",
    "The central bank has succeeded in dampening excess volatility from large and lumpy foreign exchange flows; this intervention strategy remains appropriate.",
    "Nominal appreciation last year helped tighten monetary conditions and reduced the increase in inflation.",
    "Looking forward, the flexible exchange rate regime will:",
    "A healthy banking system is important for private sector development, access to credit, and safeguarding depositors via supervision and regulation.",
    "Recent progress in strengthening banking supervision is welcome.",
    "Priorities:",
    "All existing and future costs of bank restructuring should be promptly covered by the budget and not borne by the central bank.",
    "The Mongolian economy has a bright future with mineral sector development offering substantial growth and an opportunity to spread prosperity.",
    "Success is not guaranteed; the “resource curse” risk is real and Mongolia’s recent crisis illustrates high costs of failure.",
    "Required disciplined macroeconomic policies:",
    "Pursuing this policy combination would help ensure mineral wealth translates into strong, sustained, and equitable growth.",
    "[Mongolia and the IMF](http://www.imf.org/external/country/MNG/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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