Statement by Grant Johnston, Alternate Executive Director for Mongolia and Gantsogt Khurelbaatar, Advisor to Executive Director October 31, 2018

Fifth Review Under the Extended Fund Facility Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Mongolia

Abstract

Fifth Review Under the Extended Fund Facility Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Mongolia

Our Mongolian authorities are very thankful for the support they are receiving from the Fund and from their development partners. Performance under the EFF has been good, helped by solid demand for exports and buoyant mineral prices. However, challenges lie ahead for Mongolia and there is no room for complacency.

Program performance

All quantitative targets for end-September 2018 have been met, despite an increase in imports that has put pressure on international reserves. Also, all prior actions for the fifth review—regarding monetary policy actions, macroprudential measures and the recapitalization of banks—have been completed. In particular, the submission of business plans by banks, regarding how they will raise new capital, was completed recently. While some structural benchmarks have taken a little more time than originally expected, the authorities remain committed to implementing all of these tasks, and are working hard to do so.

Fiscal policy

Revenue continues to overperform, based on the strong performance of the mining sector and increased imports. In fact, revenue at end-September was over 30 percent higher than a year earlier. This has allowed the Government to propose an increase in spending for 2019 and still deliver a primary surplus of 1 percent of GDP.

At the outset of the EFF program, Mongolia undertook a strong fiscal adjustment including freezing capital expenditure. Next year’s budget—which is currently being discussed in Parliament—includes an increase in expenditure, mostly on capital projects, with priority given to resolving issues in the health and education sectors. With little or no recent investment, existing health and education facilities have been unable to cope with demand from the public, or provide adequate services. Some secondary schools, for example, have had to operate two or three shifts each day to accommodate their pupils. There are hospital patients in corridors due to a shortage of proper rooms, and resources are stretched. With an increase in investment, the authorities are aiming to provide adequate social services to the population while continuing the successful implementation of the program.

Upside surprises in revenue will be saved and used for reducing debt. Public debt is on a more aggressively declining path than envisaged at the outset of the program, thanks to positive global mineral prices and prudent fiscal management. Originally, debt was projected to peak at close to 100 percent of GDP in 2018 but is now expected to be down to 70 percent by the end of the year.

Financial markets and monetary policy

Inflation at the end of September was 5.7 percent but in the medium term is expected to stabilize around the central bank’s target rate of 8 percent. The tugrik has been depreciating as a result of a weakening balance of payments. The Bank of Mongolia has intervened in the foreign exchange market a number of times to address liquidity shortages and avoid excessive volatility. The accumulation of international reserves has therefore slowed, but the central bank is committed to continuing its reserve accumulation and to maintaining a floating exchange rate.

A key part of the EFF program is creating a strong, resilient banking sector. An asset quality review was conducted earlier this year and as a consequence a number of banks are required to raise additional capital by the end of the year. Banks have incorporated the findings of the AQR in their balance sheets and set out how they will raise this capital. The last two months of this year are a critical period in the bank recapitalization process as the deadline for raising this required capital is approaching. The Bank of Mongolia is committed to undertaking all necessary measures in coordination with the mission team.

Mongolia scored poorly on most AML/CFT requirements in last year’s APG mutual evaluation and was given until June 2019 to make a substantial progress. The authorities are committed to undertake the required measures, including adopting the appropriate legal framework and strengthening supervision of financial entities. The authorities are also increasing funding for the organizations responsible for implementing the AML/CFT requirements.