Statement by Grant Johnston, Alternate Executive Director for Mongolia and Gantsogt Khurelbaatar, Advisor to Executive Director June 27, 2018

A three-year arrangement for Mongolia under the Extended Fund Facility (EFF) was approved on May 24, 2017, in an amount equivalent to SDR 314.5054 million.


A three-year arrangement for Mongolia under the Extended Fund Facility (EFF) was approved on May 24, 2017, in an amount equivalent to SDR 314.5054 million.

Our Mongolian authorities appreciate the continuing engagement they have with the Fund and the candid and constructive discussions they had with staff during the fourth review of the Extended Fund Facility arrangement. This arrangement has enabled Mongolia to refinance its public debt, supported its economic revival, and provided a strong basis for ongoing macroeconomic reforms. However, the country remains vulnerable to external and domestic shocks and further building of economic buffers is required. The authorities are fully committed to the program and agree with staff’s assessment and conclusions. The authorities also thank their development partners, the Asian Development Bank, China, Japan, Korea and the World Bank, for supporting Mongolia’s program of macroeconomic adjustment.

Program performance

The EFF program remains firmly on track. All quantitative performance criteria for end-March 2018 were met, with some by big margins. Structural benchmarks have been achieved, albeit with some short delays, including the enactment of the Bank of Mongolia law and the submission of a general taxation bill to Parliament. Recently, the law governing the recapitalization of systemic and viable banks—a prior action for the fourth review—was passed, and an NPL resolution strategy was published by the Financial Stability Council.

Fiscal policy

Strong demand for coal and copper, and good prices for these commodities, has boosted growth and brought in significantly more revenue than previously expected. FDI in the mining sector has also increased and tax administration has been strengthened. Yet it is notable that, while revenue gains have been sizable, two-thirds of the improvement in the fiscal balance last year came from expenditure contraction.

The positive progress in 2017 has continued into 2018. The primary surplus for the first quarter of this year was 2.1 percent of GDP and annual growth (year-on-year) was 6.1 percent. Foreign debt obligations have been successfully rolled over until 2021 and the authorities are focused on reducing domestic debt, which has nearly halved since the end of 2016. The only risk to the fiscal balance target this year—which is being tightened—comes from higher-than-planned spending on capital projects funded by concessional debt from donors. Projections are that revenue may overperform by to 2 to 3 percent of GDP this year which will help offset these over-commitments. The authorities are committed to keeping the fiscal deficit in line with program goals and, if additional measures are needed, will take steps to meet the program target, for example by tighter control over domestically-financed projects and rationalizing non-essential current spending.

One emerging issue that concerns the authorities is a rising level of discontent around public servants’ wages. Recently there have been street protests, and the lack of any salary increase over the past few years is becoming a major challenge to the public’s ongoing acceptance of the program, especially when they see continued revenue overperformance and strong fiscal balances. This issue is being discussed with staff. A successful resolution—within the program parameters—would help maintain public support and allow the authorities to continue with necessary economic reforms.

Monetary and financial sector policies

Inflation is well-contained. The annual inflation rate at the end of May was 6.6 percent, which is below the target of 8 percent. Net international reserves continue to be accumulated, although the pace has slowed in recent months. With strengthening domestic demand, there is increased pressure on the balance of payments and on reserves. The exchange rate is currently stable and the Bank of Mongolia will not intervene in the market unless there is excessive volatility.

An asset quality review was concluded earlier this year. In May, the Bank of Mongolia notified commercial banks about the capital they are required to raise by the end of this year. Under-capitalized banks also need to book capital shortfalls on their balance sheets by the end of June. This exercise will promote more confidence in Mongolia’s banking sector.The authorities are working to address AML/CFT deficiencies identified by the Asia Pacific Group. Earlier this year, both the Law on Combating Money Laundering and Terrorism and the Law on Infringements were strengthened in response to the mutual evaluation. Further work remains to be done, including increasing the supervision of non-bank financial institutions and high risk-entities.