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Mongolia: Staff Report for the 2017 Article IV Consultation and Request for an Extended Arrangement Under the Extended Fund Facility—Supplementary Information and Supplementary Letter of Intent

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
May 2017
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This supplement provides information on developments since the issuance of the staff report for the 2017 Article IV Consultation and Request for an Extended Arrangement under the Extended Fund Facility (EBS/17/30) on April 14, 2017. The supplement does not change the thrust of the staff appraisal.

Recent economic developments

1. Activity has begun picking up, suggesting possible upside risks to this year’s economic outlook. GDP growth registered 4.2 percent y/y in the first quarter, with strong private investment more than offsetting a contraction in government consumption. Inflation, which had fallen to nearly zero at end-2016 on account of soft activity (and despite the depreciation of the currency), rebounded to 3½ percent y/y in April reflecting higher food prices. Gross international reserves, though still weak, have risen somewhat with better commodity prices and stronger-than-expected exports. Finally, fiscal performance is on track, with the deficit through March amounting to around 1 percent of GDP, as against an annual target of 10½ percent.

Measure affecting FDI foreign-exchange transactions

2. A measure on the foreign-exchange banking arrangements of foreign direct investment (FDI) projects risked undermining the macro framework of the program. A Parliamentary resolution ratified on April 20 implementing key parts of the authorities’ program included a clause requiring the foreign-exchange sales of major FDI projects to be channeled through the domestic banking system. There was a serious concern that the clause could affect the investment climate and undermine the macroeconomic projections underpinning the program, in particular, the outlook for FDI, growth, and the balance of payments. Executive Board consideration of the Article IV Consultation and EFF request was thus postponed from the original date of April 28, pending resolution of this issue. Parliament passed a new version of the resolution that excluded the clause on May 4, paving the way to Board consideration on May 24.

3. The postponement of Board consideration has required some modifications to program monitoring arrangements. The first test date for the program’s quantitative performance criteria will now be end-June instead of end-April., and the phasing of quarterly reviews and disbursements is modified accordingly. (See Tables 13.) The authorities’ supplementary Letter of Intent (LOI) requesting these changes is attached, along with revised relevant staff report tables. An end-April structural benchmark on tax compliance improvement strategies was met on time and thus no longer remains in the program’s structural agenda.

Table 1.Mongolia: Quantitative Performance Criteria (Revised Staff Report Table 10)
6/30/20179/30/201712/31/20173/30/2018

Indicative targets
Performance Criteria 1/2/
Change in net international reserves (NIR) of the Bank of Mongolia (BOM) (floor, cumulative, change in eop stock, in million US$ at program exchange rate)0100250550
Net domestic assets (NDA) of the BOM (ceiling, eop stock, in billion togrog at program exchange rate)5,1004,9004,6004,000
Primary balance of the general government (floor, cumulative since the beginning of the fiscal year, in billion togrog)−850−1,050−1,500−350
New nonconcessional external debt maturing in one year or more, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$).1,8001,8001,8001,800
Stock of guarantees on external debt extended by the government or BOM (ceiling, eop stock, in million US$)850850750750
Indicative Targets (IT)
Reserve money (ceiling, in billion togrog)3,5003,9004,0004,200
Continuous Performance Criteria
New nonconcessional external debt maturing in less than one year, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$).0000
Accumulation of new external payment arrears (ceiling, eop, in million US$).0000
Memorandum items
Budget support from bilateral and multilateral donors excluding Fund under the program baseline (eop stock, cumulative, in million US$)257427597783
Net nonconcessional borrowing received and repatriated by the general government (including the DBM) under the program baseline (eop stock, cumulative, in million US$)20202020
Program exchange rate (togrog/U.S. dollar)2489.42489.42489.42489.4
U.S. dollar per SDR1.31.31.31.3
Monetary gold price (U.S. dollar/ounce)1,1421,1421,1421,142

Evaluated at program exchange rates.

Cumulative targets are all defined relative to 12/31/2016 except for the primary balance in Q1 2018.

Evaluated at program exchange rates.

Cumulative targets are all defined relative to 12/31/2016 except for the primary balance in Q1 2018.

Table 2.Mongolia: Proposed Access and Phasing Under the Extended Arrangement (Revised Staff Report Table 9)
Purchase
Availability DateMillion SDRMillion USDPercent of Quota
May 24, 2017Board approval of extended arrangement27.956037.8238.67
September 15, 2017Observance of end-June 2017 performance criteria, completion of first review27.956037.8238.67
December 15, 2017Observance of end-September 2017 performance criteria, completion of second review27.956037.8238.67
March 15, 2018Observance of end-December 2017 performance criteria, completion of third review20.959828.3528.99
June 15, 2018Observance of end-March 2018 performance criteria, completion of fourth review26.208835.4536.25
September 15, 2018Observance of end-June 2018 performance criteria, completion of fifth review26.208835.4536.25
December 15, 2018Observance of end-September 2018 performance criteria, completion of sixth review26.208835.4536.25
March 15, 2019Observance of end-December 2018 performance criteria, completion of seventh review26.208835.4536.25
June 15, 2019Observance of end-March 2019 performance criteria, completion of eighth review26.210635.4636.25
September 15, 2019Observance of end-June 2019 performance criteria, completion of ninth review26.210635.4636.25
December 15, 2019Observance of end-September 2019 performance criteria, completion of tenth review26.210635.4636.25
March 15, 2020Observance of end-December 2019 performance criteria, completion of eleventh review26.210635.4636.25
314.5054425.44435.00
Table 3.Mongolia: Phasing of Program Financing (Revised Staff Report Text Table)(In millions of U.S. dollars)
2017Q22017Q32017Q42018Q1
Financing295208258278
IMF38383828
Other IFIs and bilateral donors257170220249
Sources: Fund staff projections.
Sources: Fund staff projections.

Staff Appraisal

4. The thrust of the staff appraisal remains unchanged. FDI is of critical importance to Mongolia, and continuing efforts to strengthen the investment climate will be a key priority.

Table 4.Mongolia: Indicators of Fund Credit, 2017–22 (Revised Staff Report Table 8)(In millions of SDR, unless otherwise indicated)
Projections
201720182019202020212022
Existing and prospective Fund arrangements
Disbursements83.8799.59104.8426.21
Stock 1/83.87183.45288.29314.51312.18294.27
Obligations 2/10.7226.09
Principal (repayments/repurchases)2.3317.91
Charges and interest0.682.215.258.078.398.18
Stock of existing and prospective Fund credit 1/83.87183.45288.29314.51312.18294.27
In percent of quota116.00253.74398.75435.00431.78407.01
In percent of GDP1.102.343.373.443.172.72
In percent of exports of goods and services1.984.286.146.285.765.09
In percent of gross usable reserves4.967.298.057.807.336.84
Obligations to the Fund from existing and prospective Fund arrangements0.682.215.258.0710.7226.09
In percent of quota0.943.067.2611.1614.8336.09
In percent of GDP0.010.030.060.090.110.24
In percent of exports of goods and services0.020.050.110.160.200.45
In percent of gross usable reserves0.040.090.150.200.250.61
Sources: IM F Finance Department; and Fund staff estimates and projections.

End of period.

Repayment schedule based on scheduled debt service obligations.

Sources: IM F Finance Department; and Fund staff estimates and projections.

End of period.

Repayment schedule based on scheduled debt service obligations.

Table 5.Mongolia: Capacity to Repay Indicators, 2017–22 (Revised Staff Report Table 7)(In millions of SDR, unless otherwise indicated)
Projections
201720182019202020212022
Exposure and Repayments from Existing and Prospective Fund Arrangements
GRA credit to Mongolia83.87183.45288.29314.51312.18294.27
In percent of quota116.00253.74398.75435.00431.78407.01
Debt service on GRA credit0.682.215.258.0710.7226.09
Principal (repayments/repurchases)2.3317.91
Charges and interest0.682.215.258.078.398.18
Debt and debt service ratios (In percent of GDP)
Public and publicly-guaranteed debt94.86101.34100.0097.4692.3184.70
Excluding proposed IMF93.7799.0096.6394.0289.1481.98
GRA credit to Mongolia1.102.343.373.443.172.72
Public and publicly-guaranteed debt service17.6919.2018.1714.6715.8919.08
Excluding proposed IMF17.6819.1718.1114.5815.7818.84
GRA debt service0.010.030.060.090.110.24
Debt and debt service ratios (In percent of exports of goods and services)
Public and publicly-guaranteed debt171.01185.46182.44178.13167.39158.51
Excluding proposed IMF169.03181.18176.30171.84161.64153.43
GRA credit to Mongolia1.984.286.146.285.765.09
Public and publicly-guaranteed debt service31.8935.1333.1426.8128.8135.70
Excluding proposed IMF31.8735.0833.0326.6528.6135.25
GRA debt service0.020.050.110.160.200.45
Sources: IMF Finance Department; and Fund staff estimates and projections.
Sources: IMF Finance Department; and Fund staff estimates and projections.
Supplementary Letter of Intent

May 17, 2017

Ulaanbaatar

Ms. Christine Lagarde

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Lagarde:

We understand that Board consideration of Mongolia’s request for an extended arrangement under the Extended Fund Facility was postponed pending clarification of a recent measure related to foreign-exchange banking arrangements of foreign direct investment projects. After careful consideration, Parliament decided to rescind this measure on May 4, and we look forward to Board consideration of our EFF request as rescheduled on May 24.

The postponement, however, necessitates some modifications to program monitoring arrangements. Specifically, we propose a rephasing of test dates, program reviews, and disbursements, as set out in attached Tables A1 and A2. The first two reviews of the program will take place before September 30, 2017, and December 31, 2017, respectively. We are happy to report that finalization of tax compliance improvement strategies, which was earlier intended as a structural benchmark for end-April, was completed on time.

Aside from these changes, our Letter of Intent (LOI), Memorandum of Economic and Financial Policies (MEFP), and Technical Memorandum of Understanding (TMU) of April 13, 2017 remain valid. We believe that the policies set forth therein are adequate to achieve the objectives of the program but we stand ready to take additional measures as needed. As is standard under all IMF arrangements, we will consult with the IMF before modifying measures contained in our MEFP or adopting new measures that would deviate from the goals of the program.

Sincerely yours,

/s//s/
B. ChoijilsurenN. Bayartsaikhan
Minister of FinanceGovernor, Bank of Mongolia

Attachments

Revised – Table A1.Mongolia. Quantitative Performance Criteria
6/30/20179/30/201712/31/20173/30/2018

Indicative targets
Performance Criteria 1/2/
Change in net international reserves (NIR) of the Bank of Mongolia (BOM) (floor, cumulative, change in eop stock, in million US$ at program exchange rate)0100250550
Net domestic assets (NDA) of the BOM (ceiling, eop stock, in billion togrog at program exchange rate)5,1004,9004,6004,000
Primary balance of the general government (floor, cumulative since the beginning of the fiscal year, in billion togrog)−850−1,050−1,500−350
New nonconcessional external debt maturing in one year or more, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$).1,8001,8001,8001,800
Stock of guarantees on external debt extended by the government or BOM (ceiling, eop stock, in million US$)850850750750
Indicative Targets (IT)
Reserve money (ceiling, in billion togrog)3,5003,9004,0004,200
Continuous Performance Criteria
New nonconcessional external debt maturing in less than one year, contracted and/or guaranteed by the government or the BOM (ceiling, eop stock, in million US$).0000
Accumulation of new external payment arrears (ceiling, eop, in million US$).0000
Memorandum items
Budget support from bilateral and multilateral donors excluding Fund under the program baseline (eop stock, cumulative, in million US$)257427597783
Net nonconcessional borrowing received and repatriated by the general government (including the DBM) under the program baseline (eop stock, cumulative, in million US$)20202020
Program exchange rate (togrog/U.S. dollar)2489.42489.42489.42489.4
U.S. dollar per SDR1.31.31.31.3
Monetary gold price (U.S. dollar/ounce)1,1421,1421,1421,142

Evaluated at program exchange rates.

Cumulative targets are all defined relative to 12/31/2016 except for the primary balance in Q1 2018.

Evaluated at program exchange rates.

Cumulative targets are all defined relative to 12/31/2016 except for the primary balance in Q1 2018.

Revised – Table A2.Mongolia: Proposed Prior Actions and Structural Benchmarks
Completion Date
Prior actions (to be completed before Board approval of the new arrangement)
Fiscal
Passage of a 2017 supplementary budget and a medium-term budget framework (2018-2020) consistent with program targets, and passage of all fiscal measures needed to support 2017 targets
Banking
BOM to launch the procurement procedure for AQRs by internationally reputable firms on banks based on terms of reference developed in consultation with IMF staff.
Monetary
Authorities to communicate to staff the discontinuation of any net BOM financing of the mortgage program as well as any quasi- fiscal lending e.g. to companies
Structural benchmarks
Fiscal
Establishment of a working group to review the tax structure and make recommendations to improve efficiency and equity including review of the investment, VAT, personal income tax, and economic entity tax laws with a view to enhance revenue, reduce complexity, and introduce progressivity in personal income tax, in consultation with IMF staff.end-August 2017
Submission to Parliament of a revised general taxation law that consolidates the common administrative provisions that apply to all tax types, promotes consistent administration of the tax system, and achieves an appropriate balance between taxpayers’ interest and the powers of the tax authoritiesend-October 2017
Submission to Parliament of legislation to create a simplified tax regime for micro and small businesses within the scope of IMF technical assistance recommendations.end-October 2017
Passage of a 2018 budget in line with the program’s fiscal path.end-November 2017
Revision of the relevant budget laws and introduction of a new law to establish a fiscal council, in line with international best practice and IMF advice.end-December 2017
Revision of the Integrated Budget Law and other relevant laws to restrict, effective 2018 onward, Parliament from increasing the aggregate expenditure envelope reflected in the budget presented by the Minister of Finance (including through a PAYGO provision).end-November 2017
Submission of the tax working group’s report to the Ministry of Finance.end-December 2017
Social protection
The Child Money Program will be targeted to the poorest 40 percent of Mongolian households and the savings redirected toward the better-targeted Food Stamps program.end-December 2017
Monetary
Submission to Parliament of a new Bank of Mongolia Law, to clarify the BOM’s mandate, strengthen autonomy and governance, and improve operations, in consultation with IMF staff.end-November 2017
Adoption of the new Bank of Mongolia Law.end-March 2018
Banking
Amendment of the Banking Law and Bank of Mongolia Law and related secondary legislation, guided by IMF staff, toend-November 2017
  • 1. improve the early intervention framework
  • 2. bring the bank resolution legislation, funding and cooperation framework up to best international standards in cooperation with MoF, DICOM
  • 3. ensure that BOM has adequate powers to request from banks additional capital and provisioning to enhance financial strength or to absorb existing and estimated future credit losses, including based on the diagnostic studies and the analysis of the business plans
  • 4. introduce power for BOM to apply levies on banks to cover the cost of supervision incl. AQRs
  • 5. strengthen shareholders’, board members’, and senior management’s fit and proper requirements
  • 6. upgrade rules on banks’ related party exposure and final beneficial owners
Amendment of DICOM law to bring it in line with IADI Core Principles for Effective Deposit Insurance Systems.end-November 2017
Financial Stability Board (FSB) approval of an NPL resolution strategy. In consultation with other relevant ministries, the FSB will first establish a working group, and that group will: (i) identify and analyze impediments to debt resolution, in particular related to insolvency and enforcement laws, taxation issues, and legal and regulatory obstacles to NPL sales and outsourcing; and (ii) develop an NPL resolution strategy including milestones and a timetable for removal of identified impediments.end-January 2018
BOM to carry out a review of related party exposures based on improved legislationend-September 2018
BOM to adopt an amendment to its regulation on asset classification and provisioning in consultation with IMF staffend-June 2017
Enact a law on the use of public fundsend-December 2017

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