Statement by Heenam Choi, Executive Director for Mongolia and Gantsogt Khurelbaatar, Senior Advisor to Executive Director March 28, 2018

Staff Report for the First and Second Reviews Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for Mongolia


Staff Report for the First and Second Reviews Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for Mongolia

Our Mongolian authorities would like to thank the staff for their candid assessment and constructive engagement.

The EFF program, official sector support and a favorable external environment have supported a strong economic recovery in Mongolia. The authorities undertook extensive economic reforms that have strengthened macroeconomic fundamentals. As a result, the fiscal deficit and public debt are decreasing at a much faster pace than projected at the time the EFF was approved. Inflation is within the target range; the exchange rate has stabilized and foreign reserves have continued to rise. The authorities’ commitment to the program objectives, fiscal discipline and prudent monetary policy have played a key role in the economic revival of the country.

Recent economic development

The economy has performed better than expected, fueled by an increase in demand for commodities and growth in FDI. Economic growth reached 5.1 percent in 2017 compared to initial projections of −0.2 percent of GDP. The non-mining sector is showing solid growth and contributing to the overall growth of the economy.

Near term growth prospects are positive, as global commodity prices are projected to remain high, alongside improved market sentiment and increased domestic demand.

Public debt is decreasing at a much faster pace than expected. With refinancing of sovereign bonds at much lower market rates, short term debt pressures have fallen and there are no outstanding major payments due until the end of the program. Based on stronger growth and improved macroeconomic management, public debt is projected to decrease to 55.2 percent of GDP by 2023 from 84.6 percent of GDP in 2017.

Program performance

Quantitative targets for the end of 2017 were exceeded by considerable margins. Most structural benchmarks were either met or, in the case of the revised taxation laws and bank recapitalization law, will be implemented with a short delay. Some policy measures were revised after widespread public objection.

The structural benchmark related to the submission of revisions to the taxation laws, originally due in February, is delayed by one month. Revision of the main tax law happens only infrequently and, considering its importance to the economy, the authorities have initiated country wide consultations with the public, tax payers, scholars and professional organizations in February. These consultations will end in March and the revised general taxation, corporate income tax, personal income tax laws will be submitted to the Parliament for approval.

Submission of the recapitalization law, originally planned for January, has been delayed as it could have negatively affected the stability of the financial sector. As market sensitivity lowers, following the Asset Quality Review (AQR), the authorities are planning to pass the recapitalization law in May.

Some policy measures under the EFF program were not enacted. There was a growing discontent from the population about the introduction of the progressive personal income tax and the increase in pension age, given a still-modest recovery in household incomes. To maintain social cohesion and maintain momentum for reforms, the authorities felt they had to unwind these measures.

Mongolia is fully dependent on imported fuel. The excise tax on fuel is used to smooth global oil price movements. However, the recent increase in global oil prices made it difficult to keep the current arrangement, and the excise tax on certain types of gasoline has been temporarily removed. However, the authorities, with assistance from the Fund, will introduce fuel price formulas to reflect the global oil price movements and reintroduce excise tax on fuel in 6 months.

The fiscal costs of these policy changes will have a 0.5 percent of GDP impact on the fiscal balance and, to offset this, the authorities are committed to maintaining a tight expenditure policy.

Fiscal Policy

Driven by a strong economic performance, fiscal revenues outperformed projections by nearly 24 percent in 2017. Tight fiscal expenditure control and revenue overperformance resulted in an improvement in the fiscal balance of 8.7 percent of GDP, with an overall deficit of 1.9 percent of GDP in 2017.

Revenue projections for this year are positive and the authorities expect further reductions in the fiscal deficit. In the first two months of this year, fiscal revenues increased 23.5 percent. Despite this increase in fiscal revenues, the authorities do not intend to submit a supplementary budget to increase expenditure.

Thanks to revenue outperformance and official sector budget support, the authorities are reducing domestic borrowing. Over the four years to 2017, the stock of domestic government bonds reached 22.9 percent of GDP with the coupon rate peaking at 18 percent. This year, the authorities are planning to limit issuance of domestic bonds and reduce total interest payments to 3.7 percent of GDP, with a further reduction to 2.2 percent of GDP by 2023.

Monetary and financial sector policies

The exchange rate has remained stable and gross national reserves have more than doubled, reaching the equivalent of 5.2 months of imports. The policy of the Bank of Mongolia is to use every opportunity to continue building reserves.

Inflation is currently at 6.9 percent, below the Bank of Mongolia’s target rate of 8 percent. In the medium term, the authorities expect that inflationary pressures will decline and inflation will be contained within the target range.

The banking sector AQR provided a good analysis of the health of the banking sector. AQR results showed that the required capital of the banking system needs to be increased by at least an amount equivalent to 1.9 percent of the 2017 GDP, to meet the capital adequacy ratio requirement. This is consistent with the estimates of the Bank of Mongolia and the recapitalization process will not undermine the banking sector stability.

Major legislation changes to strengthen financial sector stability have been approved this year. Amendments to the central bank law, banking law, and deposit insurance law were passed by the Parliament.


The authorities are aware that there is no room for complacency. They are committed to pursuing a tight fiscal policy and prudent monetary policy, together with implementation of reforms under the program to strengthen macroeconomic stability, build buffers and promote inclusive growth.

The Fund’s continued engagement through the EFF program and support from development partners are vital in achieving macroeconomic stability. In this regard, the Mongolian authorities would like to thank the Fund, the Asian Development Bank, the World Bank, Korea, Japan and China for their continued support of the program.

Mongolia: Staff Report for the Third Review Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for Mongolia
Author: International Monetary Fund. Asia and Pacific Dept