Mongolia: Concluding Statement of 2022 IMF Staff Visit
IMF News, May 12, 2022
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- Published: May 12, 2022
Overview
- Mission dates: IMF team visited Ulaanbaatar during April 28–May 4, 2022.
- Main assessment: Mongolia is facing stagflation driven by global shocks and border disruptions, with significant downside risks despite an export price boom.
- Immediate policy stance: Monetary policy should stay on hold for now; tight fiscal and quasi‑fiscal policies and greater exchange rate flexibility are also necessary.
Stagflationary outlook and risks
- Growth projection: economy expected to expand at 1 percent in 2022, instead of the 7 percent forecasted in November 2021.
- Inflation projection: average rate of 14½ percent in 2022.
- Key downside risks listed:
- commodity price volatility;
- extended Chinese border closures;
- an escalation of sanctions on Russia;
- tighter global financing conditions;
- risk of a pandemic resurgence;
- disruption in correspondent banking relations due to sanctions on Russia could lead to a near-standstill in the worst-case scenario.
- Medium-term upside scenario: if border disruptions and geopolitical shocks resolve by end-year, growth could accelerate to above 6 percent in 2023-25 with strong commodity prices and Oyu Tolgoi underground mine production starting in 2023.
Monetary policy and exchange rate
- Monetary stance recommendation:
- Keep monetary policy on hold and be data dependent, given inflation largely driven by global supply shocks and measures already taken.
- Be prepared to tighten if a wage-price spiral emerges.
- Monitor inflationary impact of government support measures, the large real minimum pension increase, and forthcoming minimum wage hikes.
- Quasi-fiscal operations:
- Phase out quasi‑fiscal operations immediately (currently being continued till end-2022) because untargeted support adds to inflation and FX pressures and undermines monetary policy.
- Phasing out would support BOM operational independence and help meet Mongolia’s commitments under the 2020 emergency financing assistance.
- Exchange rate policy:
- Allow greater exchange rate flexibility so the exchange rate can act as a shock absorber.
- Limit BOM FX interventions to disorderly market conditions; use opportunistic interventions to bolster international reserves.
- Implement an effective communication strategy to stem speculative pressures.
Fiscal policy and social support
- Fiscal consolidation priority: strong fiscal consolidation essential to support monetary policy, contain inflation, manage external pressures, and address debt maturing in 2023.
- 2022 supplementary budget: appropriately targets new policy support toward the vulnerable, tightens current spending, and prioritizes investments.
- Social assistance guidance:
- Any additional support should be temporary and targeted to vulnerable households.
- Avoid permanent fiscal expansions that undermine consolidation.
- Concern: allowing full use of expanded child money support could increase demand and inflation unless saved by recipients.
- Large hikes in minimum pensions and minimum wages in real terms are likely inflationary and counterproductive given supply bottlenecks.
- Recommend better targeting of social assistance to reduce poverty without raising inflation; improve equity and spending efficiency.
- Revenue and savings:
- 2023 budget should be conservative and balance consolidation with necessary support.
- Raising revenues through progressive personal income taxation recommended to fund investments in education, health, and infrastructure.
- Any revenue windfalls should be saved after protecting priority spending (e.g., on healthcare) in real terms.
- Reverse the 2021 legislative changes that forgo future savings in the Future Heritage Fund to fund permanent expansion of untargeted social assistance.
- Public investment and supply side:
- Accelerate public investment and improve processes to facilitate automated zero-contact exports at the Chinese border.
- Continue policy allowing energy prices to reflect market values to preserve fiscal resources and conserve energy.
Financial sector, IPOs, and Bank of Mongolia (BOM) actions
- Asset quality reviews and IPOs:
- BOM should conduct an asset quality review (AQR) of banks and exercise its powers to ensure a sound IPO process.
- Concerns raised by BOM’s decision to suspend the initiated AQR; Parliament ideally should delay the June 2022 IPO deadline until AQRs can be completed.
- If Parliament does not delay, BOM should complete AQRs before larger amounts of shares are issued by the 2023 deadline to reduce shareholder concentration.
- BOM should conduct forward-looking stress tests to assess mining sector developments’ impact on bank balance sheets and engage in contingency planning.
- If IPOs fail, BOM should take corrective measures outlined in the Banking Law to stabilize banks.
- Development Bank of Mongolia (DBM):
- DBM’s balance sheet problems should be promptly and judiciously addressed to avoid fiscal and external stability implications in 2023.
- Use of public funds for DBM without fixing long-standing governance concerns is inadvisable and poses future fiscal risks.
- Recommend appointing an independent external advisor to conduct a diagnostic review of DBM’s balance sheet and develop a credible plan.
- Strengthen DBM governance and determine long-term viability in the context of public investment management reforms.
Structural reforms and debt management
- Continue and implement strong structural reform plans to reduce reliance on external borrowing.
- Implement a new medium-term debt strategy with a nominal debt anchor and domestic debt issuance to support fiscal prudence and debt sustainability.
- Reforms needed:
- pension parameters;
- state-owned enterprises;
- sound public investment and fiscal risk management.
- Integrate planned sovereign wealth and development funds into the state budget for proper oversight.
- Modernize and expand the insolvency framework to help individuals, companies, and banks address impaired balance sheets.
Selected economic and financial indicators (highlights from Table 1)
- Nominal GDP (in USD million):
- 2019: 14,206
- 2020: 13,313
- 2021: 15,098
- 2022: 15,790
- 2023: 16,629
- 2024: 18,366
- 2025: 20,134
- 2026: 21,833
- 2027: 23,494
- Real GDP growth (percent change):
- 2019: 5.6
- 2020: -4.6
- 2021: 1.4
- 2022: 1.0
- 2023: 6.0
- 2024: 7.0
- 2025: 5.5
- 2026: 5.0
- Consumer Prices (Avg; percent change):
- 2019: 7.3
- 2020: 3.7
- 2021: 7.1
- 2022: 14.4
- 2023: 11.9
- 2024: 9.6
- 2025: 8.2
- 2026: 6.5
- Consumer Prices (EoP; percent change):
- 2019: 5.2
- 2020: 2.3
- 2021: 13.5
- 2022: 14.2
- 2023: 10.5
- 2024: 8.7
- 2025: 7.7
- Commodity price projections (selected):
- Copper prices (US$ per ton): 2019: 6010; 2020: 6175; 2021: 9317; 2022: 10105; 2023: 10048; 2024: 9908; 2025: 9751; 2026: 9629; 2027: 9584
- Coal prices (US$ per ton): 2019: 84; 2020: 74; 2021: 129; 2022: 181; 2023: 137; 2024: 107; 2025: 108
- Gold prices (US$ per ounce): 2019: 1392; 2020: 1770; 2021: 1800; 2022: 1914; 2023: 1953; 2024: 1994; 2025: 2035; 2026: 2061; 2027: 2081
- Oil price (U.S. dollars per barrel): 2019: 61.4; 2020: 41.3; 2021: 69.1; 2022: 106.8; 2023: 92.6; 2024: 84.2; 2025: 78.5; 2026: 74.7; 2027: 72.5
- General government accounts (selected, percent of GDP):
- Primary balance (IMF definition): 2019: 3.2; 2020: -7.5; 2021: -1.2; 2022: 0.6; 2023: 2.0; 2024: 1.1; 2025: 0.0; 2026: -0.5
- Total revenue and grants: 2019: 31.7; 2020: 27.1; 2021: 33.1; 2022: 35.8; 2023: 35.7; 2024: 34.7; 2025: 34.3; 2026: 33.8; 2027: 33.6
- Primary expenditure and net lending: 2019: 28.5; 2020: 34.6; 2021: 35.2; 2022: 33.5; 2023: 33.3; 2024: 34.2
- Interest: 2019: 2.5; 2020: 1.9; 2021: 1.7; 2022: 1.5; 2023: 1.6; 2024: 1.2
- Overall balance (IMF definition) 2/3/: 2019: 0.9; 2020: -10.0; 2021: -3.1; 2022: 0.1; 2023: -0.6; 2024: -1.6; 2025: -1.8
- Monetary sector (percent change):
- Broad money growth: 2019: 16.3; 2020: 15.0; 2021: 8.5; 2022: 15.7; 2023: 15.5; 2024: 13.8; 2025: 12.6; 2026: 11.8
- Reserve money growth: 2019: 5.4; 2020: -12.7; 2021: 6.6; 2022: 14.9; 2023: 14.6
- Credit growth: 2019: 4.4; 2020: -3.8; 2021: 18.5; 2022: 8.4; 2023: 10.7; 2024: 11.5; 2025: 12.8
- Balance of payments:
- Current account balance (percent of GDP): 2019: -15.2; 2020: -5.1; 2021: -13.0; 2022: -18.8; 2023: -16.7; 2024: -13.6; 2025: -8.1; 2026: -8.0; 2027: -7.6
- Exports of goods (y/y percent change): 2019: 18.0; 2020: 14.1; 2021: 9.9; 2022: 11.2; 2023: 4.9
- Imports of goods (y/y percent change): 2019: 2.4; 2020: -13.1; 2021: 32.7; 2022: 24.9; 2023: 2.8; 2024: 4.1
- Exchange rate:
- Togrog per U.S. dollar (eop): 2019: 2734; 2020: 2850; 2021: 2849; 2022: …
- Memorandum:
- Population in million (eop): 2019: 3.3; 2020: 3.4
Source: Mongolia: Concluding Statement of 2022 IMF Staff Visit (May 12, 2022).
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