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IMF Country Report No. 15/109
April 2015
MONGOLIA
2015 ARTICLE IV CONSULTATION STAFF REPORT; PRESS RELEASE; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR MONGOLIA
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2015 Article IV consultation with Mongolia, the following documents have been released and are included in this package:
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on April 3, 2015, following discussions that ended on February 18, 2015, with the officials of Mongolia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 19, 2015.
An Informational Annex prepared by the IMF.
A Debt Sustainability Analysis prepared by the IMF and the World Bank.
A Staff Statement of April 3, 2015, updating information on recent developments.
A Press Release summarizing the views of the Executive Board as expressed during its April 3, 2015 consideration of the staff report that concluded the Article IV consultation with Mongolia.
A Statement by the Executive Director for Mongolia.
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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© 2015 International Monetary Fund
INTERNATIONAL MONETARY FUND
March 19, 2015
MONGOLIA
STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION
Key Issues
Context. Medium- to long-term prospects are promising given Mongolia’s large natural resources. Nonetheless, the country currently faces serious balance-of-payments (BOP) pressures on account of low FDI and weak commodity prices, as well as overly loose macro policies.
Current Outlook. Imports have started to taper off, and, with the first phase of the Oyu Tolgoi copper and gold mine now in operation, exports have picked up. The trade balance has thus improved, but with FDI and other financial-account flows still depressed, the overall BOP remains in substantial deficit. In addition, public debt has risen sharply, and bank vulnerabilities are growing. Barring a change in policies and/or major new developments in the real economy, these trends are likely to continue.
Policies. Recognizing these challenges, the new government has already taken some action, but further policy adjustment is required to stabilize the economy, and structural measures are needed to promote investment and ensure sustained growth. In particular:
• Credible fiscal consolidation, covering both the traditional budget and the Development Bank of Mongolia (DBM), is needed to reduce projected deficits, bring public debt under control, and moderate BOP pressure;
• All fiscal or quasifiscal activity currently undertaken by the DBM, the Bank of Mongolia (BOM), or other agencies should be conducted on-budget by the government;
• Some monetary tightening would be desirable, to moderate credit growth further and strengthen the BOP, while ensuring that banks remain adequately liquid;
• Exchange rate flexibility should be preserved, as a shock absorber for the economy;
• Banks’ provisions and capital buffers should be bolstered, and supervisory and crisis preparedness frameworks strengthened;
• Governance reforms at the DBM and BOM would help strengthen these institutions;
• Steps should be taken to move ahead with major mining projects, improve the investment climate, boost FDI, and support growth; and
• Social safety nets should be strengthened and better targeted to the poor.
Approved By
Markus Rodlauer and Masato Miyazaki
Discussions were held in Ulaanbaatar during September 4–17, 2014, December 11–18, 2014, and February 9–18, 2015. The staff team included K. Mathai (head), F. Mochtar, N. Saker (incoming resident representative), and J. Yu (all APD), Y. Kinoshita (non-resident representative, OAP), B. Shang (FAD), O. Croitoru Nedelescu (MCM), P. Gupta (RES), and K. Svirydzenka (SPR). Mr. Rodlauer (APD) attended some of the meetings, as did Messrs. Togmid and Yoon (OED). The team was assisted by Mmes. Ardak, Khulan, and Selenge in the local IMF office. Mmes. Choi, Meng, and Tolentino (all APD) assisted in the preparation of this report.
Contents
CONTEXT
RECENT DEVELOPMENTS AND OUTLOOK
POLICY DISCUSSIONS
A. Macroeconomic Policies
B. Structural Reforms and Social Policies
C. Financial Sector
D. Other Issues
STAFF APPRAISAL
FIGURES
1. Real Sector Developments
2. Fiscal and Monetary Sector Developments
3. External Sector Developments
4. Inclusive Growth Indicators
5. Key Indicators in Baseline and Policy Adjustment Scenarios
TABLES
1. Selected Economic and Financial Indicators, 2011–20 (Baseline)
2. Summary Operations of the General Government, 2011–16 (Baseline)
3. Monetary Aggregates, 2011–17 (Baseline)
4. Balance of Payments, 2011–20 (Baseline)
5. Selected Economic and Financial Indicators, 2011–20 (Adjustment Scenario)
6. Summary Operations of the General Government, 2011–16 (Adjustment Scenario)
7. Monetary Aggregates, 2011–17 (Adjustment Scenario)
8. Balance of Payments, 2011–20 (Adjustment Scenario)
9. Baseline and Policy Adjustment Scenarios, 2013–20
ANNEXES
I. Economic Impact of Mongolia’s Natural Resource Endowments
II. External Sector and Exchange Rate Assessment
III. Development Bank of Mongolia
IV. Risk Assessment Matrix
V. Implementation of Past IMF Recommendations
VI. Summaries of Background Analytical Work
VII. Policy Agenda for Strengthening the Banking Sector
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MONGOLIA
STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX
March 19, 2015
Prepared By
Asia and Pacific Department (in collaboration with other Departments)
Contents
FUND RELATIONS
WORLD BANK-IMF COLLABORATION
RELATIONS WITH THE ASIAN DEVELOPMENT BANK
STATISTICAL ISSUES
MILLENNIUM DEVELOPMENT GOALS
MAIN DATA WEBSITES
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MONGOLIA
STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—DEBT SUSTAINABILITY ANALYSIS
March 19, 2015
Approved By
Markus Rodlauer and Masato Miyazaki (IMF) and Satu Kähkönen and Mathew Verghis (IDA)
The Debt Sustainability Analysis (DSA) has been prepared jointly by IMF and World Bank staff, in consultation with the authorities, using the debt sustainability framework for low-income countries approved by the Boards of both institutions.
Based on the LIC-DSA analytical framework and a broader coverage of public debt than previously used, this debt sustainability analysis (DSA) concludes that Mongolia is at high risk of public debt distress under the baseline scenario.1 This is not because debt is on an ever-increasing path over the medium-term, but rather because key debt indicators are currently elevated and, while expected to decline over time, would still remain above the relevant thresholds for a number of years. This assessment shows a significant deterioration of debt dynamics since the 2013 Article IV, which suggested a moderate risk under a “strong policy scenario.” In 2014, the fiscal deficit ceiling set forth under the Fiscal Stability Law (FSL) was breached, DBM borrowed large amounts at commercial terms, and the BOM continued to draw down its swap line established with the People’s Bank of China (PBC). Public debt could rise further in the near term as the newly passed Debt Management Law allows more room for the government to contract debt and guarantees.2
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Press Release No. 15/169
FOR IMMEDIATE RELEASE
International Monetary Fund
Washington, D.C. 20431 USA
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