Mongolia: Staff Report for the 2008 Article IV Consultation—Informational Annexes

The staff report for the 2010 Article IV Consultation underlies that in recent years, Mongolia’s economy has performed quite well. The inflation pressures reflected a relaxation of monetary and fiscal policies and large increases in prices for food and fuel. The debt service burden and international reserves are expected to remain at comfortable levels. Executive Directors welcomed the authorities’ purpose to review plans for the establishment of a development bank, taking account of the know-how elsewhere so as to avoid creating unfair competition in the financial sector.

Abstract

The staff report for the 2010 Article IV Consultation underlies that in recent years, Mongolia’s economy has performed quite well. The inflation pressures reflected a relaxation of monetary and fiscal policies and large increases in prices for food and fuel. The debt service burden and international reserves are expected to remain at comfortable levels. Executive Directors welcomed the authorities’ purpose to review plans for the establishment of a development bank, taking account of the know-how elsewhere so as to avoid creating unfair competition in the financial sector.

Annex I: Mongolia—Fund Relations

(As of April 30, 2008)

I. Membership Status: Joined: 02/14/1991; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to Fund: (SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Safeguards Assessments:

Under the Fund’s safeguards assessment policy, the Bank of Mongolia (BOM) was subject to a full safeguards assessment with respect to the PRGF arrangement that was approved by the Executive Board on September 28, 2001. An on–site safeguards assessment of the BOM was completed on September 10, 2003. Staff recommended that the BOM implement measures to strengthen its external audit mechanism and financial reporting framework. The BOM has so far implemented several of the recommendations. Staff continues to monitor the BOM’s efforts to: (i) commit to the full adoption of International Accounting Standards (IAS) and to disclose its guarantees and pledges in its financial statements; and (ii) disclose the fair value of derivatives in its net international reserve position and financial statements. At the conclusion of the December 2002 PRGF discussions, the BOM agreed to implement special semi–annual audits of NIR to provide further assurance on the NIR position and to identify any related pledges or guarantees.

VIII. Exchange Arrangement:

On May 27, 1993, Mongolia moved from a fixed exchange rate against the U.S. dollar to a floating exchange rate system. The official exchange rate is set daily on the basis of transactions in the foreign exchange market. The de facto exchange rate arrangement was reclassified to a conventional peg effective from June 2006. The official exchange rate is applied to State budget and customs transactions, including debt–service payments, and to trade and service transactions conducted under bilateral payments arrangements. Mongolia accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 1, 1996, and maintains an exchange system that is free from restrictions on payments and transfers for current international transactions. Mongolia imposes exchange restrictions for security reasons in accordance with United Nations Security Council Resolution No. 92/757 concerning certain transactions with the Federal Republic of Yugoslavia (Serbia and Montenegro) that have been notified to the Fund under Decision 144–(52/51).

IX. Article IV Consultation:

The 2006 Article IV consultation (IMF Country Report No. 07/30) was concluded by the Executive Board on January 10, 2007. Mongolia is on the 12–month cycle.

X. ROSC Assessments:

  • ROSC, Data Module, May 4, 2001 (www.imf.org)

  • ROSC, Fiscal Transparency Module, November 8, 2001 (Country Report No. 01/218)

  • ROSC, Fiscal update, May, 2005

  • ROSC, Data Module, October 2007 (www.imf.org)

XI. Recent Financial Arrangements:

A three–year arrangement under the Enhanced Structural Adjustment Facility in an amount equivalent to SDR 40.81 million (80 percent of quota) with a first annual arrangement in an amount of SDR 18.55 million (36.3 percent of quota), was approved on June 25, 1993. The second annual arrangement in an amount of SDR 11.13 million (21.8 percent of quota) was approved on November 23, 1994. The ESAF arrangement lapsed on June 24, 1996.

A three–year arrangement under the ESAF/PRGF in an amount equivalent to SDR 33.4 million (65.4 percent of quota), with a first annual arrangement in an amount of SDR 11.13 million (21.8 percent of quota), was approved by the Executive Board on July 30, 1997. The first year arrangement lapsed on July 30, 1998. The second annual arrangement of SDR 14.8 million (29 percent of quota) was approved on June 16, 1999. The first review under that arrangement was completed in January 2000 and the arrangement lapsed on June 15, 2000. The ESAF/PRGF arrangement lapsed on July 29, 2000.

A three–year arrangement under the PRGF in an amount equivalent to SDR 28.49 million (55.8 percent of quota), with the first year of the arrangement in an amount of SDR 12.21 million (23.9 percent of quota), was approved by the Executive Board on September 28, 2001. The first and second review under the PRGF was completed on September 12, 2003, and the Executive Board approved the extension of the PRGF through July 31, 2005. The arrangement expired on that date without the completion of the third and subsequent reviews.

XII. FSAP Participation:

Mongolia participates in the Financial Sector Assessment Program (FSAP). The first and second FSAP missions took place in May 2007 and September 2007 respectively.

XIII. Technical Assistance:

Missions:

  • Budget Preparation (FAD), February 2008

  • Bank Supervision (MCM), February 2008

  • Enhancing Foreign Exchange Market (MCM), February 2008

  • Monetary Operations (MCM), January 2008

  • Real Sector Statistics (STA), November–December 2007

  • Poverty and Social Impact Analysis (FAD), December 2007

  • Measures to Combat Money Laundering and the Financing of Terrorism (LEG), December 2007

  • ROSC Data Module (STA), October 2007

  • Fiscal Affairs Department Scoping Mission (FAD), September 2007

  • Real Sector Statistics (STA), June–July, 2007

  • International Market Access (MCM), May 2007

  • Bank Supervision and Reserves Management (MCM), April 2007

  • Real Sector Statistics (STA), March–April 2007

  • Government Finance Statistics (STA), March–April 2007

  • Fiscal Regime for the Mining Sector and the Development Fund (FAD), January 2007

  • Government Finance and Monetary and Financial Statistics (STA), September 2006

  • Improving Banking Supervision and Reserve Management (MCM), September 2006

  • Value Added Tax, Income Tax and Excise Tax Legislation (LEG), August 2006

  • Cooperation between Mongolia’s NSO and STA, May 2006

  • Management Structure of the Bank of Mongolia (MFD), April 2006

  • Monetary and Financial Statistics (STA), October 2005.

  • Banking supervision and payment systems (MFD), June 2005.

  • Options for Expenditure Savings and Efficiency Improvements (FAD), January 2005.

  • Banking supervision and prudential framework (MFD), October 2004.

  • Reforms of Tax Policies (FAD), October 2004.

  • Government Finance Statistics (STA), August 2004.

  • Balance of Payments Statistics (STA), July–August 2004.

  • Banking supervision and prudential framework, (MFD), May–June 2004.

  • AML/CFT Action Plan and legislative awareness, May 2004.

  • Banking supervision and accounting (MFD), October 2003.

  • Government Finance Statistics (STA), August 2003.

  • AML/CFT (MFD), June 2003.

  • Banking supervision and accounting (MAE), November 2002.

  • Revenue administration (FAD), September 2002.

  • Banking supervision and accounting (MAE), May 2002.

  • Review of treasury and intergovernmental fiscal reforms (FAD), August 2001.

  • Banking supervision and accounting (MAE), May–June 2001.

  • Money and banking statistics (STA), May 2001.

  • Government finance statistics (STA), March 2001.

  • Fiscal transparency and ROSC (FAD), March 2001.

  • Intergovernmental fiscal relations and budget reform (FAD), January 2001.

  • Visits by MAE peripatetic experts on banking supervision, payments system, monetary policy, and accounting and audit, November 2000.

  • Consumer price statistics (STA), September–October 2000.

  • ROSC Data Module (STA), May 2000.

  • Restructuring bonds and other securities (MAE), March 2000.

  • National accounts statistics (STA), February 2000.

Resident Advisors:

  • National accounts statistics (STA), August 2001–September 2003

  • Treasury reform (FAD), June 1999–November 2003

  • Balance of payments (STA), March 1999–May 2001

Technical assistance for the period May 1995–October 1999 is reported in Annex II of the staff report for the 1999 Article IV consultation.

XIV. Resident Representative:

Mr. Jang has been the Fund’s resident representative in Mongolia since April 1, 2006.

Annex II. Mongolia—Relations with the World Bank Group1

Mongolia became a member of the World Bank Group in February 1991. Bank lending to Mongolia, currently on IDA–only terms, represents about 11 percent of the country’s overall official development assistance flows. A new World Bank Group Country Partnership Strategy (CPS) is under preparation, which will be broadly aligned with the Mongolian Government’s National Development Strategy (NDS).

The Bank’s main sectoral activities also include:

Public Sector Governance. The Bank is working with the Government to strengthen its public finance management framework, improve civil service administration through the combination of analytical advice, and technical assistance projects under the ongoing Economic Capacity building Technical Assistance project. In addition, a Governance Assistance Project was approved in May 2006. This project helps improve transparency, accountability and governance in the areas of public financial management (budget execution, debt management, civil service), supports the government in its ongoing anti–corruption efforts, poverty monitoring, and improving the investment climate (especially, tax administration and public procurement). A Public Expenditure and Financial Management Review is being prepared for completion in the first half of 2008. As part of the Bank’s Country Governance Assessment Program (C–GAP), Governance Assessment is underway in Mongolia which aims at informing the next CPS implementation process in order to enhance prospects of achieving the desired development results.

Financial sector. The World Bank Group has actively supported capacity building and reforms in the financial sector with an emphasis on strengthening banking supervision and credit risk management capacity of commercial banks. The Bank is jointly conducting a Financial Sector Assessment Program (FSAP) with the IMF, and will continue to provide technical assistance (TA) support under ongoing operations such as the second Private Sector Development Credit (PSDC II) (which provides technical assistance in developing risk management and term–lending capacity in selected Mongolian banks, and enhancing central bank supervision capacity, in addition to improving access to financing for long–term private sector capital investments.) The IFC is also playing a significant role in the World Bank Group’s investments and transactions in the Mongolian financial sector (see below).

Private Sector Development (PSD). The findings from an Investment Climate study completed in 2006 and a study on Mongolia’s Sources of Growth (the 2007 Country Economic Memorandum) identified key constraints to sustained broad–based economic growth in Mongolia over the medium term. The Governance Assistance project is addressing some of these identified issues related to investment climate issues in the areas of tax administration or public procurement, as well as in reducing corruption and improving transparency. New lending operations to encourage private sector participation in infrastructure sector are also being considered for the next three to four years, as well as in the mining sector Technical assistance is also being provided at the request of the Government in the mining sector in cooperation with the ABD, IMF and EBRD.

Social sectors. A Poverty Assessment was completed by the World Bank in 2006 which reports on the findings of the 2003–2004 HIES–LSMS household survey. The Bank is working with the Mongolian authorities to help them conduct another HIES–LSMS study in 2007–2008 to track progress in poverty alleviation in the country over the past few years. In education, the Bank launched a Rural Education project that will build classroom libraries in all rural elementary schools in Mongolia. The World Bank is playing a catalytic role in enabling Mongolia to access $29 million in grant funds under the “Education for All–Fast Track Initiative (FTI)”. This program will help smooth the ongoing transition in the educational curriculum from a 10–year to a 12–year education system. The Bank has also completed analytical studies on the quality of the educational system in Mongolia and its implications for the eventual transition to a 12–grade system. A labor market study by the Bank was also undertaken recently, which identifies three major interrelated challenges facing Mongolia’s labor market—joblessness, informality and skills mismatch. In social protection, studies were carried out on the pension system and the social welfare/transfer schemes in the context of the ongoing Public Expenditure and Financial Management Review (PEFMR).

Rural and Urban sustainable development. The Bank is also assisting the government in the development of its rural development strategy. Projects are financing efforts to promote secure and sustainable livelihoods through activities in pastoral risk management, microfinance services, basic infrastructure investment (through community–driven approaches), and the piloting of a new index–based livestock insurance product. In this regard, the second Sustainable Livelihood Project was approved in 2007. A Forest Landscapes Development and Conservation project is under preparation. In the area of urban development, the focus of the Bank Group activities is primarily on city development strategies in Mongolia. The Bank is also supporting the improvement of basic service delivery, particularly on improvement of water supply and ger area upgrading.2 In the context of the new CPS, efforts at reducing air pollution and strengthening urban governance also being discussed with the authorities. The World Bank has been engaged in partnership with the Dutch government to support analytical work and technical assistance in the environment and natural resources management areas. In addition, work is underway to analyze and advise the authorities towards determining its medium–term infrastructure needs and environmental issues that need to be addressed in the South Gobi.

Infrastructure. An Information and Communication Infrastructure Development Project was approved on June 8, 2006. The Bank is working with the government to improve the technical and financial operations of Mongolian electricity and water utilities through two projects: namely, the Energy Project and UB2 project respectively. An Infrastructure Strategy report—including sectoral background notes was completed in early 2007. Ongoing policy discussions include a range of issues, including: tariffs adjustment in the energy sector; increased reliance on renewable energy technologies in rural energy supply; strengthening and diversifying off–grid energy supply chains; and increasing rural access to modern energy facilities. In this regard, a Renewable Energy and Access Project was approved in November, 2006. The World Bank is also providing policy advice and assistance to improve energy efficiency and enhancing the financial sustainability of Mongolia’s district heating sector.

Judicial and Legal reforms, Supreme Audit Institutions. The Bank is supporting efforts to enhance public confidence in the legal system, with a focus on the judiciary system through the creation of an administrative court system, the establishment of the National Legal Center and through pilots designed to improve legal education and information. Challenges remain in improving legal education, enforcing court decisions, enhancing access to justice, especially for the poor; disseminating new laws to the public; and enforcing existing laws. The Bank continues to work with the Mongolia National Audit Office to strengthen its technical audit capacity.

IFC became a minority owner of two Mongolian banks in 2004 as well as providing debt capital to a third bank. In 2007 IFC became a shareholder in the third bank and will continue in the near term to support access to finance through the banking sector. The IFC is also providing technical assistance for developing a leasing industry and the creation of a mortgage corporation. IFC plans to scale up its activities in Mongolia under the next CPS. It will continue to support the development of the leasing industry in Mongolia, and could also assist in building an SME linkages program with an effort towards strengthening local suppliers and supporting community development. IFC may consider, if appropriate, assistance in developing mining in an environmentally and socially responsible manner through transaction support, joint financing of public–private partnerships, and technical assistance. Finally, IFC is currently exploring opportunities to support manufacturing and agri–business (cashmere industry), renewable energy and water treatment projects in the Mongolia.

MIGA: Mongolia signed the MIGA convention in 1991 and ratified it the following year. MIGA is able to assist the country in attracting foreign investment through its guarantee program.

Annex III. Mongolia—Relations with the Asian Development Bank3

Mongolia became a member of the Asian Development Bank (ADB) in February 1991. In line with ADB’s poverty reduction strategy, ADB entered into a Poverty Partnership Agreement (PPA) with the Government of Mongolia in 2000. Within the framework of the PPA, in October 2005, ADB formulated its Country Strategy and Program (CSP) for 2006–08. The new CSP concentrates on achieving poverty reduction by supporting (i) stable, broad based growth and (ii) socially inclusive development. An indicative lending level of $85 million from ADB’s concessional Asian Development Fund resources is programmed for 2006–2008, supplemented by an additional $40 million from ADB’s regional fund. The CSP formulates a program that includes assistance in agriculture, transport, education, health, and urban development and support for administrative consolidation in support of interventions in these sectors. A CSP Update for 2007–2009 maintains the overall directions of the CSP while increasing the focus of projects on the Government’s own strategic objectives, accounting for the need for better governance, the potential for increased levels of grant funding from other agencies, and ADB’s own Medium Term Strategy II and its Managing for Development Results Agenda. Since March 2002, Mongolia has been a full member of the ADB–supported Central Asia Regional Economic Cooperation program for the Central Asian Republics and People’s Republic of China (PRC).

ADB has provided loans for 40 projects totaling $675.1 million in the agriculture, education, energy, financial, health, industry, telecommunications, transport, and urban development sectors. Fourteen loans were active at the end of 2007. ADB has also provided one private sector equity investment in the amount of $6.1 million and one private sector credit line of $10 million. Technical assistance grants have totaled close to $63.0 million, and grants funded by the Japan Fund for Poverty Reduction and Japan Fund for Information and Communication Technology total $10.7 million. Most early ADB support was in the form of quick–disbursing loans and investments in ailing infrastructure sectors. Governance and poverty were identified as the major development objectives in later years.

ADB allocates its concessional ADF resources to eligible member countries, including Mongolia, based on an annual country performance assessment. The assessment focuses on indicators of sustainable economic growth, socially inclusive development, governance and public sector management, and portfolio performance. Based upon its debt–sustainability, Mongolia is eligible for grant funding of 100 percent of its ADF allocation of $46.83 million over 2007–08.

Annex IV. Mongolia—Statistical Issues

Data provision to the Fund is adequate for surveillance, but further improvements are needed, especially on national accounts and government finance statistics. There is also a need for broadening the dissemination of macroeconomic data to the public. Mongolia participates in the General Data Dissemination System (GDDS). A data ROSC mission visited Mongolia in October 2007 to update the May 2000 assessment of the macroeconomic statistics against the GDDS, complemented by an assessment of data quality based on the IMF’s Data Quality Assessment Framework.

The IMF Statistics Department is providing support to the National Statistical Office (NSO) in implementing its Program of Statistics Development for 2006–2010. It aims to strengthen the statistical capacity in conformity with the GDDS plans for improvement and to place Mongolia in a position to subscribe the Special Data Dissemination Standard.

On national accounts and price statistics deficiencies persist in the annual and quarterly production accounts that detract from the accuracy of the data, including the use of inappropriate techniques to estimate capital formation and inconsistent deflators to derive constant price estimates of GDP. While a proper methodological treatment of animal losses due to harsh winters has been finalized, efforts are needed to improve coverage of the informal sector and small–scale activity, especially in the services sector. Furthermore, the construction of expenditure–based national accounts in constant price terms would serve as a useful check for the production side estimates. The supply and use table for 2005 is being finalized and should provide a new benchmark for GDP. The first real sector technical assistance mission following the October 2007 ROSC took place in November 2007, and the final mission is expected to take place in late–2008.

The consumer price index (CPI) was rebased in January 2008 with expenditure derived weights from the 2005 Household Income and Expenditure Survey (HIES). The NSO has published a national CPI for Ulaanbaatar and 21 aimags (provinces) since January 2008, and is now developing a house price index. Progress is still needed on wages and earnings data.

The concepts and definitions used to compile fiscal statistics generally follow the guidelines of the GFSM 1986. No formal decision has yet been taken on adopting a migration path to the GFSM 2001 methodology, although the new framework is planned to be used for compiling fiscal statistics. The classifications used for sub–annual and annual fiscal statistics follow broadly the classifications of the GFSM 1986, but with some differences for financing. A major classification issue concerns financing. The item banking system net credit is calculated as a residual and the change in cash balances for the period is not identified separately.

Monetary and financial statistics broadly conform to the concepts and definitions of the MFSM methodology. The Bank of Mongolia’s (BOM’s) monetary survey covers the central bank and 16 operating commercial banks, but excludes savings and credit unions, which increasingly compete with commercial banks and whose deposit share is growing rapidly. The September 2006 STA mission recommended actions aimed at correcting misreporting of government deposit data by commercial banks. The BOM has begun compilation of monetary data based on the Standardized Report Forms (SRFs), but further technical assistance may be needed to complete the project.

Regarding balance of payments statistics, the BOM strictly follows the concepts and methods in the Balance of Payment Manual fifth edition. Coverage has been expanded through the introduction of a survey of enterprises. Work has commenced on revising the register of businesses, last updated in 2002. In addition, a working group with key official and private data providers and users has been established and commercial bank staff has been trained in data reporting. Further progress is needed in the estimation of the international investment position and in procedures to adjust for nonresponses in the enterprise survey.

As regards dissemination, the NSO publishes monthly and annual Statistical Bulletins in English and Mongolian. These bulletins include data on population, employment, national accounts, prices, household income and expenditure, central and local government revenue and expenditure, and external trade. The BOM publishes an Annual Reports and a monthly Statistical Bulletin, which includes summary statistics for the central bank, consolidated balance sheet for commercial banks, and interest and exchange rate data.

Annex IV. Mongolia—Table of Common Indicators Required for Surveillance

As of April 1, 2008

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market–based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA).

Annex V. Mongolia—Millennium Development Goals

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Sources: World Bank, World Development Indicators Database; UNDP; NSO, Living Standard Measurement Survey 2002/2003; and MOF: Millennium Development Goals Implementation in Mongolia 2007.

Halve, between 1990 and 2015, the proportion of people whose income is less than one dollar a day, and the proportion of people who suffer from hunger.

Ensure that, by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling.

Eliminate gender disparity in primary and secondary education preferably by 2005 and to all levels of education no later than 2015.

Reduce by two–thirds, between 1990 and 2015, the under–five mortality rate.

Reduce by three–quarters, between 1990 and 2015, the maternal mortality ratio.

Have halted by 2015, and begun to reverse, the spread of HIV/AIDS and the incidence of malaria and other major diseases

Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources. Halve, by 2015, the proportion of people without sustainable access to safe drinking water

Develop further an open, rule–based, predictable, non–discriminatory trading and financial system. Address the special needs of the least developed countries. Address the special needs of landlocked countries and small island developing states.

1

Questions may be addressed to Ms. Boyreau, 473–8541.

2

A Ger is the traditional dwelling tent of Mongolian people.

3

Prepared by Asian Development Bank staff.