This statement summarizes additional information on economic developments and policies that have become available since the staff report was issued. This information does not alter the thrust of the staff appraisal.

1. The most recent economic data have been broadly as envisaged. Inflation has continued to moderate, dropping to 9¼ percent in February. The economy registered a trade surplus in the first two months of the year, with exports up 27 percent over 2014, and imports down 25 percent, but the overall balance of payments remains in deficit. Fiscal revenue has stayed weak, with collections in the first two months of the year accounting for 11 percent of the annual budget.

2. The authorities have confirmed their agreement with many of the key Article IV recommendations and are in the process of implementing policy changes. In a letter shared with staff on March 26, 2015, they outlined their policy intentions, including their commitment to a medium-term fiscal consolidation path, and detailed their recent policy efforts. In particular:

• The authorities are targeting a fiscal deficit of 5 percent of GDP in 2015, including the “non-commercial” spending of the Development Bank of Mongolia (DBM), and intend to reduce this gradually to 2 percent of GDP by 2018.

• The authorities have linked the payment of civil-service wage increases—about ½ percent of GDP, and restricted to lower-income workers—to budget revenue performance and scheduled such payments for the end of the year. They are also considering the possibility of freezing DBM spending.

• Remaining loans under the Price Stabilization Program (PSP) will be transferred to the government balance sheet by end-June. Working groups have been set up to analyze the appropriate future for PSP and mortgage lending.

• A comprehensive set of measures is envisaged to strengthen DBM governance. In particular, an independent assessment—possibly with assistance from the World Bank—will be conducted to determine the bankability of the DBM’s “commercial projects,” and the DBM will be brought under supervision of the Bank of Mongolia (BOM).

• The authorities consider measures to protect the most vulnerable as a high priority and are considering options to strengthen the effectiveness of existing social programs with high impact on the poor (such as child allowances and food stamps).

• The authorities are committed to exchange-rate flexibility.

• In order to strengthen the banking system, the BOM intends, over 2015–17, to: increase loan loss provisions; tighten requirements for recognition of nonperforming loans; increase the minimum paid-in capital of banks; raise the Tier-1 capital adequacy ratio (CAR) to 10½ percent for systemically important banks; incorporate PSP loans into banks’ CAR calculations; increase sectoral risk weights; and impose additional capital requirements on banks with higher risk profiles.

• The authorities are working on a range of steps, including tax measures, to improve the investment climate.

3. The authorities’ efforts to strengthen policies are welcome, although additional steps will be needed, and full and early implementation will be critical.