Mongolia: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Mongolia

International Monetary Fund. Asia and Pacific Dept

doi:10.5089/9781513514161.002.A001

Author: International Monetary Fund. Asia and Pacific Dept

Publication Date:: 17 Sep 2019

eISBN:: 9781513514161

Language:: English

Keywords:: ISCR; CR; growth; consumer price index inflation; EFF program; exchange rate; foreign exchange; debt service; central bank; monetary policy

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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Mongolia

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Mongolia

Context

1. Mongolia’s economy has recovered quickly from the most recent downturn. In 2016, the economy was nearly in a recession, the real exchange rate had depreciated 25 percent, the fiscal deficit had ballooned to 15 percent of GDP and sovereign spreads had spiked to double digits. In response, the authorities adopted a new package of policies (the “Economic Recovery Program”) supported by $5.5 billion in official sector assistance including a three-year $425 million Extended Fund Facility from the IMF. At the same time, a sharp improvement in external conditions generated a swift recovery in mining investment and exports. By early 2019, the stronger policy framework, significant official financing, and rebound in economic activity had contributed to a 17 percent of GDP improvement in the fiscal balance, a 14 percentage points of GDP decline in public debt, and a $2½ billion increase in gross international reserves ($3.8 billion at end-March).

2. Nonetheless, buffers are still insufficient, and the economy remains vulnerable to external shocks. In the decade prior to the current IMF-supported program, Mongolia experienced a series of external shocks (the Global Financial Crisis in 2008–9, commodity price shock in 2012–15) and sharp falls in FDI (suspension of the second phase of the Oyu Tolgoi (OT) mine over a shareholder dispute). To support growth, the authorities pursued highly expansionary policies leading to double digit credit growth and fiscal deficits and large-scale money creation, and used borrowed funds, including a PBOC swap and sovereign bonds, to prevent exchange rate depreciation. The legacy of these shocks and policies is that buffers remain insufficient even after two years of progress. The level of international reserves, once short-term on- and off-balance sheet liabilities are netted out, is just above zero. Public and external debt are still high at 73 and 220 percent of GDP, respectively. And capital ratios in the banking sector remain below adequate levels. Building buffers is particularly important because Mongolia has a narrow economic base (80 percent of exports on average are minerals) and is facing a rising frequency and severity of climate disasters.

3. Looking ahead, there are four policy priorities that can help Mongolia achieve high, inclusive and green growth.

Tight macro policies and a more flexible exchange rate to reduce current account deficits and increase foreign exchange reserves.
Increase bank capital, enhance risk-based supervision, and eliminate regulatory forbearance to ensure the banking sector can support sustainable growth.
Strengthen the investment climate for the tradable sector with upgrades to infrastructure and governance, including by reducing vulnerabilities to corruption, to help address large external imbalances.
Improve the tax/regulatory framework to address overgrazing and desertification to make the agriculture sector more resilient to climate change.

The Economic Backdrop

4. Since 2016, Mongolia has experienced a sharp recovery in real GDP growth, driven primarily by the mining sector. Rising from about 1 percent (y/y) in 2016, growth reached 6.9 percent in 2018 and 8.6 percent in 2019Q1. Three key factors explain the turnaround. First, annual mineral exports, especially coal, have increased by about 50 percent over two years to reach $6 billion, due to a combination of stronger volumes, reflecting China’s rising preference for imported coking coal even as steel production flatlined in recent years, and a significant rise in commodity prices, around 15–20 percent above long-term trends. Second, during the same period, annual foreign direct investment increased from about $300 million to $2.1 billion, due in large part to the resumption of the second investment phase of the OT copper mine. And third, a recovery in domestic confidence and loosening in financial conditions have supported a sharp recovery in bank lending and domestic demand more broadly. Because of the recovery in economic activity and supply side pressures, inflation rose sharply in 2017 and has hovered around the BOM’s target of 8 percent since. In recent months, inflation has remained broadly around the 8 percent target, but ticked up slightly in June, reflecting higher food and utilities prices.

5. The fiscal stance tightened substantially in 2017 and 2018, helping reduce public debt. The primary balance improved from a deficit of 11.2 percent of GDP in 2016 to a surplus of 5.9 percent of GDP in 2018. This significant fiscal consolidation reflected equally strong mining and non-mining revenue mobilization and expenditure restraint. Meanwhile, significant concessional financing contributed to a reduction in the interest bill by 1 percentage point of GDP in 2018. Given the combination of fiscal consolidation, concessional financing, and strong economic activity, public debt fell by 14 ppts over 2 years to reach 73 percent of GDP at end-2018.

6. The widening of the current account deficit in recent years mainly reflects the surge in FDI but also some over-heating. Despite consistent goods surpluses, Mongolia has a structurally large current account deficit due to interest income and dividend payments and services (freight purchases) balances which average a combined 15 percent of GDP. The rise in the current account deficit in recent years to double digit levels largely reflected an increase in FDI-financed imports, which limited the pressure on the overall balance of payments. In this environment, gross international reserves (GIR) rose rapidly—from 37 to 74 percent of the IMF’s ARA metric, in 2017— with large scale donor flows and gold purchases from local miners (see Annex VI). However, reserve accumulation over the past 18 months has slowed, due to delays in donor financing, rapid growth in goods imports which peaked at 50 percent in mid-2018, and rising sales by BOM of foreign exchange to limit pressure on the exchange rate.

7. The Bank of Mongolia has started to address overly rapid credit growth. As risk perceptions improved in 2017 and 2018, the central bank lowered policy rates by 500 bps (1300bps in real terms given rising inflation) to 10 percent. Easier financial conditions along with a preannouncement of the planned debt-service-to-income (DSTI) prudential limit to be introduced on January 1, 2019, helped credit growth surge to 24 percent y.o.y. as of 2018Q4. The credit growth was driven by sharply rising household leverage with the average debt-service-to-income ratio now over 50 percent for half of households. Recognizing these concerns, BOM (i) raised policy rates by 100 bps in December 2018 with a tightening bias, (ii) introduced a 30-month loan maturity limit and a ceiling of 60 percent on debt-service-to-income ratios for all new non-mortgage consumer loans effective April 2019, and (iii) increased the risk weight on unhedged FX lending from 120 percent to 150 percent. The macro-prudential limit has been particularly effective and credit growth has started to correct. These actions resulted in a significantly lower level of credit expansion in Q1 2019 but the flow of new credit increased again in Q2 and should continue to be monitored.

8. Efforts to ensure a sufficiently capitalized and well-regulated banking sector remain incomplete. Out of the seven banks which the Asset Quality Review (AQR) identified as having shortfalls, one has been closed (Capital Bank) with an estimated fiscal cost of 1 percent of GDP, due to public sector deposits in the bank. The other six banks are reported to have raised most of the capital required by the AQR (about 2 percent of GDP) but there are significant concerns as to whether the transactions comply with local regulations and international best practice. As a result, the authorities agreed under the IMF-supported program to a ‘forensic audit’ of these transactions as a prior action under the EFF. To date, the BOM has made limited progress on strengthening its regulatory and supervisory framework and the official capital numbers still reflect significant forbearance.

Box 1.

Status of Extended Fund Facility (EFF) Program

The Executive Board of the IMF has completed 5 out of 11 scheduled reviews under the 3-year Fund-supported program originally approved in May 2017. In November 2018, the IMF reached “staff-level agreement” with the authorities on the 6th review. Performance on key quantitative performance criterion had been strong with all end-September targets met. However, implementation of structural benchmarks was mixed with several financial sector reforms delayed, including those related to the follow-up to the AQR.

To address this concern, the authorities committed, as a prior action for the completion of the 6^th review, to take supervisory action against any bank which did not raise the capital requested by the BOM by the end 2018 deadline. This prior action has not yet been completed leading to a delay in completing the review.

In addition, information shared by the BOM in early 2019 about the capital that banks had raised triggered several concerns about its consistency with Mongolian regulations and international best practice. As a result, IMF staff also requested that the BOM hire a third party to conduct a forensic audit of the capital raising transactions thus far. If the audit, which was initiated in June 2019, finds information to suggest the source or nature of equity injections thus far is insufficient, banks’ capital will be deducted accordingly, and banks will be asked to find new capital in its place.

Outlook, Near-Term Risks, and Longer-Term Macro Challenges

A. Outlook

9. Growth is expected to remain robust but decelerate to around 5½ percent by end-2020. The primary headwinds in projections are slower export growth (real coal volumes, coal and copper prices) and slower credit growth (due to recent macro-prudential measures). Partially offsetting these headwinds, fiscal policy will provide material stimulus in 2019, driven by a normalization in infrastructure spending. Staff projects the primary surplus to fall to about 3 percent of GDP in 2019, still higher than the budget target of 1 percent of GDP due to revenue overperformance and spending under-execution, and to around 1 percent in 2020 assuming the expenditure levels in the authorities recently approved Medium Term Budget Framework. The slower growth will contribute to a reduction in the current account deficit and allow consumer price inflation to converge toward the BOM’s target of 8 percent.

Key Macro Assumptions

10. Looking further ahead, the outlook for the Mongolian economy remains relatively strong but with declining foreign reserves. IMF staff assume that the projected near-term fall in prices for key commodities does not continue over the medium term, the OT underground mine comes on line in the 2022–23 timeframe and developments in China do not excessively limit coal exports. In addition, some loosening in fiscal and monetary policies in the period after the IMF-supported program expires is assumed. Under these parameters, growth is projected to remain strong over the medium term (around 5–6 percent) with continued declines in public and external debt (See Annex IV and V for Public and External Debt Sustainability Assessments). However, we also assume that a combination of looser domestic policies, the end of large-scale concessional financing from donors, and continued reluctance to allow the exchange rate to adjust will weigh on foreign exchange reserves, which are projected to fall to 83–84 percent of ARA metric by 2023, reversing projected near-term gains (see Annex VI).

B. Near-term Risks

11. Downside risks in the near-term continue to loom large. Mongolia’s narrow economic base – 80 percent of exports are minerals, 90 percent of exports go to China; and half of FDI is in one project – leave it highly exposed to changes in external conditions (See Annex I for Risk Assessment Matrix). In addition, there is significant uncertainty about the economic priorities of future administrations. There are four key risks:

Shocks to mineral demand. Mongolia could be affected by a fall in commodity revenues due to a slowdown in global demand, renewed bottlenecks at the Chinese border, or a reversal of China’s growing reliance on imported coking coal to supply its steel sector.
External financing risk. Mongolia faces large external financing requirements in the near-term that could put pressure on the balance of payments, especially in the event the IMF-supported program remains delayed. A $500 million BOM FX swap with a large domestic commercial bank matures in 1H-2020 and the PBoC swap with the BOM ($1.8 billion drawn) expires in August 2020. Starting in 2021, the government faces a series of large bullet amortizations on eurobonds. In the event that the IMF-supported program remains delayed, Mongolia may also lose some access to roughly $500 million in scheduled concessional multilateral and bilateral financing currently assumed in the baseline, which would lead to an increase in the funding costs and could hurt confidence.
Financial stability risks. With bank recapitalization under the AQR exercise incomplete, several banks remain under-capitalized, including two systemic institutions, and could be a source of financial distress or an amplifier of a shock from elsewhere. Meanwhile, risks also stem from household loans, which make up 50 percent of total credit outstanding and are concentrated in over-leveraged borrowers. Credit losses from these loans could hurt bank profitability and combined with the high household leverage, could exacerbate a recession. Household loans now account for 16 percent of total NPLs, up from 12.5 percent in November 2018. Given the lag in which NPLs materialize and the surge in lending at end-2018, it will be important to monitor this indicator closely going forward.
Political Uncertainties and Broader Governance Concerns. Political pressures during the parliamentary election cycle in 2020 could lead to procyclical policies. The main concerns are a destabilizing easing in monetary and fiscal policies, a return to quasi-fiscal activities, and a disorderly rupture in discussions with OT, leading to a suspension of investment and construction on the underground mine.

12. If shocks do materialize, current buffers are insufficient. Over the last decade, Mongolia has been hit by three large shocks: (i) the global financial crisis (2008–09), (ii) the global commodity price shock (2013–14), and (iii) the domestic crisis of 2016. In these episodes, public debt as a share of GDP increased by 14–26 percentage points, while the GIR fell by 49–67 percent (see chart). To assess Mongolia’s buffers under the current baseline, staff calibrated an adverse scenario informed by these past shocks. In the hypothetical adverse scenario, commodity prices in 2020–21 fall by a similar magnitude as in the past shock, affecting growth and balance of payments and triggering a policy response akin to that used in past episodes. In such an adverse scenario, the buffers are assessed to be insufficient—as public debt reaches 95 percent of GDP and reserves decline below $1 billion (or just above 0.5 month of imports).

Authorities’ Views

13. The authorities were more optimistic than staff about headline growth in the near term. They see moderate acceleration in the economy this year, citing strong mineral exports in the first five months of the year and the moderate loosening in the budgeted fiscal stance. Looking beyond this year, the authorities shared staff’s view that growth will likely moderate in line with a projected deterioration in terms of trade and falling FDI. The authorities also recognized the downside risks cited by staff. They underscored the need for diversification, continued public debt reduction and additional foreign exchange reserves. Nonetheless, the authorities argued that progress under the program had enhanced buffers against external shocks. Moreover, they saw significant upside in the event they can increase the productivity of strategic mining assets via their public investment plans.

C. Longer-term Macro Challenges

14. Over the last ten years, external and environmental vulnerabilities have risen in Mongolia. As a result, Mongolia is less prepared to deal with shocks going forward, whether it is a sharp fall in global growth or a repeat of the extreme climate events that are occurring with increasing frequency. Addressing these concerns will take time and sustained policy effort. Nonetheless, identifying and understanding these challenges is central to securing sustainable growth and macroeconomic stability going forward.

External Sustainability

15. While partly necessary to build mining capacity, investment in Mongolia has vastly outpaced national savings, resulting in very high levels of external liabilities. For the last decade, Mongolia has averaged current account deficits of 20 percent of GDP, leading to a rapid buildup of external liabilities (309 percent of GDP, of which 70 percent is debt)—and deterioration in the Net International Investment Position (NIIP) (-260 percent of GDP). The primary driver is investment to GDP ratios of 40 percent or more. This raises two concerns: (i) while slightly more than half of the liabilities has financed tradable sectors like mining, significant financing has also been absorbed by ‘other’ private companies for which large data gaps exist about the ability to service the debt, and (ii) some large mining projects have not been completed and still face implementation risk, raising questions about their ability to generate foreign exchange over the medium-term.

16. Considering Mongolia’s sizable external imbalances, staff assesses the external position as substantially weaker than implied by fundamentals and desirable policy settings. Due to Mongolia’s large external stock imbalances, the assessment draws on the EBA-Lite External Sustainability (ES) approach which calculates the external adjustment needed to stabilize the NIIP. The model implies a current account gap of -4 percent of GDP and a real effective exchange rate (REER) overvaluation of 9 percent. However, given how negative this NIIP position is, the goal should be improving, not stabilizing the NIIP at current levels—suggesting a larger adjustment would be necessary. A more flexible exchange rate—via less sales of foreign exchange – should play a role in making this adjustment. This is particularly important given Mongolia’s high inflation relative to trading partners which will erode competitiveness absent nominal depreciation. But given the high proportion of foreign currency denominated public debt, the adjustment should not rely entirely on a weaker currency but rather also tighter macro policies and a more competitive tradable sector (See Annex VI for External Sector Assessment).

Authorities’ Views

17. The authorities shared the view that net external liabilities were too large and that building further foreign exchange reserves was a priority. They disagreed that the exchange rate was excessively overvalued and did not feel that depreciation would help address external imbalances as it could quickly become disorderly and would not demonstrably improve the trade balance given that exports are dominated by commodities and imports are dominated by mining related capital goods, industrial materials and fuel. The BOM emphasized the need for prudent fiscal policy and structural reforms (e.g. better infrastructure, stable investment climate) to improve competitiveness of the export sector.

Environmental Sustainability

18. Massive land degradation is hurting the livestock industry and undermining a key opportunity for diversification. Mongolia has a comparative advantage in livestock production for either cashmere or meat due to vast grasslands—spanning 80 percent of the country—and proximity to large Asian markets. The sector also employs one in four Mongolians. However, 65 percent of all grasslands are now considered “degraded” (i.e. reduction in land’s productive capacity) and over 90 percent of them have experienced some desertification (see SIP). This stems from two worrisome trends:

Overgrazing - With virtually no land use regulations since the socialist period, herders responded to rising global demand for cashmere by vastly expanding their goatherds. At the same time, without a developed meat industry and strategic animal breeding there have been no serious limits on livestock growth. Thus, the livestock population almost tripled since 1990 to about 70 million animals now—leading to serious overgrazing pressures.
Climate Change - Due to its unique geography, Mongolia has warmed three times faster than the rest of the world and 80 percent of the country is defined as highly vulnerable to climate change. Both the higher average temperatures and the increase in weather extremes have accelerated land degradation.

19. There are several important macro-critical implications of the land degradation. First, there is an increase in the severity of livestock loss: during harsh winters (’dzuds’), which have increased in frequency, there can be extreme losses of wealth of up to 15 percent of GDP. Second, there is a decline in the value-added of the sector as the older average age of livestock combined with absence of strategic breeding has led to a decline in cashmere and meat quality. Third, more difficult conditions for herders have resulted in massive emigration to the capital, outpacing the government’s ability to provide basic services. This rapid urbanization has contributed to an expansion of the ger district (shantytown) which in turn drives up pollution due to the reliance on coal burning for heat. Finally, the size and goat-heavy composition of the Mongolia’s livestock accelerates desertification as they destroy the protective crust of the soil that naturally checks wind erosion. Desertification in Mongolia is linked to the intense dust storms (’Yellow Dust’) across East Asia leading to rising health and economic costs across the region (See SIP).

Authorities’ Views

20. The authorities acknowledged the importance of securing environmental sustainability. With respect to the livestock sector, they shared staff’s assessment regarding the drivers of land degradation and overgrazing. The authorities also recognized that the consequences were macro-critical in nature and required a policy response.

Policies for Stable, Inclusive, and Green Growth

To firmly place Mongolia on a stable, inclusive, and green growth path, policy priorities should focus on five broad areas: (A) making fiscal policy sustainable and more equitable, (B) building buffers against external shocks, (C) restoring health to the banking system, (D) making the agriculture sector more productive and resilient to climate shocks, and (E) combatting corruption.

A. Macro-Policy Settings

Fiscal Policy

21. Fiscal policy should prioritize further debt reduction and proactively address large rollover needs on external debt. For 2019, the main priority is to refrain from a supplementary budget and save any revenue over-performance to pay down debt faster. Given the large increase in budgeted investment spending this year and constraints on absorptive capacity, some under-execution is expected, which would be appropriate. For 2020–24, the authorities should target a primary surplus of at least 1 percent of GDP, the level necessary to bring the public debt-GDP ratio down to a safe level in the medium term, based on current assumptions (see discussion below). Staff advised that any overperformance should be saved to help further rebuild buffers and guard against downside risks to the debt profile. Staff considers the 2020 expenditure ceilings outlined in the recently approved Medium Term Budget Framework to be broadly consistent with above target: given staff’s current macroeconomic projections, the 2020 expenditure ceilings would result in a primary surplus of 1.1 percent of GDP. To further reduce risks around public debt, the authorities should also promptly seek opportunities to refinance the substantial Eurobond amortizations in the 2021–24 period.

Monetary Policy

22. To help correct imbalances, BOM should stand ready to tighten monetary policy further. The goal of monetary policy in Mongolia should be to anchor inflation below the current target of 8 percent at around 5–6 percent (the current 8 percent target is among the highest in the world and was increased recently from 6 percent to 8 percent in 2014) and help address Mongolia’s large external stock imbalances (high external debt, low international reserves). At present, the estimated output gap remains positive, inflation is high at around 8 percent, and the balance of payments are not sufficiently strong to allow fast enough reserve accumulation. However, on a forward-looking basis, there is evidence that the current policy stance has initiated some of the needed correction. The December hike in the policy rate and January tightening in macro-prudential ratios are reducing credit growth sharply, albeit from high levels. Import growth is also decelerating sharply, from 30 percent (y/y) in 2018 to about zero at end-June. These developments, combined with broader headwinds to growth in staff’s baseline projections, should help inflation moderate going forward. Nonetheless, the BOM should remain vigilant with further tightening as necessary, particularly if credit growth does not continue to decelerate below nominal GDP. In addition, tighter debt-service to income ratios (see ¶30), clear communication to better anchor expectations, and significantly stronger supervision of non-bank institutions would all help achieve key goals of the central bank.

FX Intervention and Exchange Rate Policy

23. The BOM should continue to bolster foreign exchange reserves and do so through direct purchases instead of borrowing. The BOM has made progress in increasing GIR which reached $3.7 billion at end-May 2019, up from $1.3 billion at end-2016. This is however a materially lower pace of accumulation than what would have been possible with less foreign exchange sales by BOM. Moreover, Mongolia has short-term, on and off-balance sheet liabilities of $3.1 billion. If one nets these out, gross reserves would fall to $600 million. In addition, the BOM has $1.2 billion in non-deliverable off-balance sheet swaps which are denominated in FX but settled in local currency and can create indirect pressure on the exchange rate at settlement. The goal over time should be to move away from reliance on such borrowed funds. Specifically, the BOM should undertake direct FX purchases to increase gross reserves, net of any short-term foreign exchange liabilities, to at least 100 percent of the IMF’s ARA Metric (a composite of current and capital account obligations) which would imply a $3–4 billion increase from current levels. Such an increase will take time. It will require tight fiscal and monetary policy; limiting sales of foreign exchange to disorderly market conditions, which requires greater acceptance of depreciation, and a stronger investment climate to attract the needed long-term capital flows—see Annex VI: External Sector Assessment.

Data Template on International Reserves and Foreign Currency Liquidity

(USD Billions, End-May 2019)

Source: Bank of Mongolia

Authorities’ Views

24. The authorities felt that current policies were broadly appropriate to tackle outstanding macro-risks. On fiscal policy, the authorities agreed with staff on the need to save any revenue over-performance in 2019 given the importance of debt reduction. For next year, the authorities felt their Medium-Term Budget Framework (MTBF) approved in June appropriately balanced spending needs with debt reduction objectives. For monetary policy, the authorities felt that the current stance was appropriate for now. They pointed to national inflation which remains in line with the 8 percent target and felt inflation pressures are contained given the anticipated slowdown of growth. In fact, they foresaw a potential need to loosen given the pace at which credit growth was currently decelerating. The authorities agreed that further accumulation in foreign exchange reserves was necessary but emphasized that the shallow foreign exchange market made it difficult to build reserves and increased the risk of disorderly moves. The BOM felt that material increases in international reserves required a much stronger investment climate and more diversified sources of foreign exchange.

B. Structural Reforms

Fiscal Structural

25. While fiscal performance has been strong under the IMF-supported program, some adjustments to the fiscal framework could help medium term fiscal sustainability. For most of the years since the Fiscal Stability Law (FSL) took effect in 2013, governments have not fully complied with the original targets in the law (especially if one includes off-budget quasi-fiscal spending) . Going forward, a more independent Fiscal Council could help monitor the budget process and a formal procedure by which the authorities adjust fiscal targets if outturns deviate from expectation would help manage cases of non-compliance. Moreover, to sustain the fiscal discipline demonstrated during the program period, the authorities could consider strengthening the framework (See SIP):

The structural balance rule could be reconsidered. It is difficult to communicate to the public and challenging to monitor. Moreover, during downturns, it calls for accommodating the cyclical decline in revenue, which could complicate the objective of bringing debt down to prudent levels.
The debt anchor, currently set at 60 percent of GDP in present valued terms could be tightened and communicated in nominal terms to make it more robust and transparent. Based on an FAD template which calibrates fiscal space based on past shocks, a debt anchor of 50 percent of GDP in nominal terms in the medium term would mitigate the risk of debt exceeding safe levels in the face of adverse shocks.
Expenditure growth should be constrained sufficiently below the long run historical average growth rate of non-mining nominal GDP to ensure public debt reaches the debt anchor by 2024. Afterwards, public expenditures should grow in line with the long-run average of historical (not projected) non-mining nominal GDP.

26. The composition of government spending could be adjusted to better address core social problems. Mongolia suffers from a high poverty rate (28 percent in 2018) and the second highest mortality rate from non-communicable diseases in Asia. The main social program is an unconditional cash transfer program (Child Money Program) which is effective at reaching a broad segment of the population but has been insufficient to improve living standards of the most vulnerable. The core priorities should be bringing public health expenditures in line with peers, complementing the Child Money program with social programs that better target the poor (e.g. food stamps), and expanding social insurance to protect vulnerable groups from shocks. Such programs could be done in a budget-neutral way by streamlining inefficient public expenditure, gradually re-introducing fuel excise taxes or introducing taxes on luxury cars and moving towards a more progressive personal income tax.

27. Strengthening fiscal governance around public investment spending is critical, particularly given the ambition of the authorities’ spending plans in the coming years. Historically, public investment spending in Mongolia has raised several concerns: pro-cyclical, uneven quality, and often off-budget (e.g. by the Development Bank of Mongolia) and thus not transparent. In addition, the BoM has in some cases financed this spending, putting severe strains on macroeconomic stability. Encouragingly, the authorities have made progress under the Fund-supported program, both in containing the level of public investment and moving such spending on budget. However, further progress is necessary, particularly given that the authorities have announced intentions to embark on a series of mega projects that aim to overhaul Mongolia’s infrastructure (e.g. roads, railroads, power plants and coal-washing plants). Priorities for improving governance around investment spending include: (i) applying the recently adopted investment guidelines to all new capital projects, including PPPs and investments by state-owned enterprises, leading to a unified framework for assessing, selecting and implementing infrastructure projects; (ii) enhancing fiscal risks assessments by including in the yearly budget a discussion of fiscal risks stemming from large infrastructure projects, especially large mega projects; (iii) ensuring that all non-commercial programs with a social objective (e.g. the subsidized mortgage program) are on the general government’s budget rather than pushed to SOEs; and (iv) refraining from using BoM’s balance sheet for the financing of any quasi-fiscal activity (which is consistent with the new central bank law).

Authorities’ Views

28. With respect to fiscal structural policies, the authorities felt strongly that this was not the time to revise the fiscal rules framework. They stressed that political support for the rules had been rising and any attempt to change the framework now would risk weakening key parameters. In addition, the authorities argued that the structural balance rule provided a vehicle to accumulate assets in the two special fiscal funds (Fiscal Stabilization Fund (FSF) and Future Heritage Fund (FHF)). They thought that this is useful even though debt remains high as it promotes discipline and reduces the economy’s dependency on the mining sector. On social policy, the authorities preferred to assess the impact of recent increases before committing to increasing social spending. They also saw scope for improving the efficiency of existing programs, particularly in the health sector to enhance service delivery. The authorities fully acknowledged the ambition of planned mega-projects as well as the contingent fiscal risks from taking on such large exposures. They emphasized their commitment to transparency in financing and execution.

Financial Sector

29. Commercial bank business practices and Central Bank supervision remain inadequate for ensuring macroeconomic stability. There are several concerns. First, loan origination lacks adequate due diligence as demonstrated by the recent surge in household lending, often to borrowers with debt service to income above 90 percent. Second, banks’ asset classification standards are short of best practice, leading the AQR in 2018 to require significant changes to NPLs and provisions. Third, the supervisor allows forbearance to flatter banks’ end-year accounts which delays the need to strengthen balance sheets. And when banks do raise capital, there are serious concerns about the sources of the equity injection. Fourth, there has been limited progress on initiatives to reform the insolvency law, improve debt enforcement, and incorporate debt restructuring mechanisms. In the near-term, there are four priorities to address these issues and help resume the IMF-supported program:

The BOM must ensure the completion of an independent forensic audit which provides sufficient information to verify the appropriateness of recent capital injections.
If the forensic audit finds that any capital raised is not consistent with local regulations and best practice, supervisors should deduct capital accordingly
The BOM should intervene any bank which does not raise the capital requested in May 2018.
It is critical to proceed with planned regulations to strengthen standards on loan origination, collateral valuation and asset classification.

30. Further tightening in macroprudential ratios and a broadening of their coverage is necessary for financial stability and consumer protection. The recent move by the BOM to introduce a debt service to income limit of 60 percent was welcome and will help to protect households from unsustainable burdens. However, households are responding to the recent regulations by increasingly relying on non-bank financial institutions which charge considerably higher interest rates (average interest rates of 41 percent vs 17 percent at banks). The immediate imperative is ensuring that the debt-service to income limit has no gaps in coverage by extending to all household loans, regardless of the source (bank or non-bank), use (mortgage or consumer), or collateral (salary or pension). Going forward, the debt service limit should be lowered further as 60 percent remains high by international comparison. In addition, consumer protection needs to be a greater focus of financial sector reforms, including better information provisions (e.g. annual percentage rate (APR) and the impact of depreciation of foreign exchange denominated loans), prohibition of usury practices and designating an adequate institution responsible for the resolution of consumer complaints.

31. Implementation of recommendations from the 2017 safeguards assessment is ongoing. Recommendations on the external audit policy and internal audit charter have been completed following review by the Supervisory Board and approval by management. Remaining outstanding recommendations include, transfer of the mortgage program from the BOM to the MOF and peer reviews of internal audit and currency operations. While discussions between the BOM and the MOF are ongoing, agreement on the modalities and the date of transfer of the mortgage program have not yet been reached. To strengthen internal audit, the BOM is in the process of formalizing a technical assistance agreement with a consultant under a World Bank project and work is expected to commence in September 2019. The peer review of currency operations by another central bank is expected to be completed by end-2019.

Authorities Views

32. The authorities believe that banks’ capital ratios are now in compliance with prudential requirements. However, they also underscored their commitment to ensuring that banks raise the capital requested by BOM in May 2018 and recognized that the forensic audit will be useful in verifying the integrity of recent capital injections. The Bank of Mongolia shared staff concerns about household debt and saw scope for further tightening in macro-prudential ratios going forward. However, officials were somewhat concerned at the pace of the slowdown in household lending resulting from previous tightening and felt more time was necessary before further changes. The Financial Regulatory Commission did not see financial stability concerns from the recent rise in non-bank lending and thus saw no need at this time to extend debt service to income limits to these institutions.

Environmental Sustainability and Upgrading the Agriculture Sector

33. Mongolia cannot do much to slow climate change, but policies can help mitigate its impact while promoting stable and inclusive growth. Balancing the livestock population with nature’s capacity to regrow is crucial to secure the sector’s sustainability. While better pasture management and programs to improve livestock productivity are much needed, from a macro perspective two key policies can help (i) using a pasture tax to feasibly cut livestock population in half in line with national targets (as also recommended by other IFIs), and (ii) boost value-added of the entire sector by upgrading the meat and cashmere industry:

A progressive pasture tax. Ahead of the 2009 presidential election, Parliament repealed all taxes on herders, allowing huge inequality in livestock holdings to persist. Re-introducing a pasture tax with an exception for small/medium herders can reduce herd size and in turn help reduce land degradation and wealth inequality.
Upgrading the meat and cashmere industry. Stronger meat exports would provide a natural limitation on herd size. The three key priorities for upgrading the meat industry are (1) reduced trade barriers, (2) joint investment in logistics, and (3) cooperation and assistance in addressing food safety concerns (e.g. achieving ‘Foot and Mouth Disease Free’ status). In addition, improving cashmere quality will enable a larger share of Mongolian cashmere to be used by the luxury garment industry—boosting incomes of herders. This will require better animal management practices, improving grading and standardization, and expanding market access to Mongolian traders. For all of these, Mongolia would benefit from technical assistance, foreign investment, and trade agreements. Securing trade deals that include Mongolia’s commitments to curb desertification offers a unique opportunity for a win-win for the region.

Authorities’ Views

34. The authorities broadly shared staff’s assessment and policy recommendations regarding land degradation and overgrazing in Mongolia. With respect to a pasture tax, the authorities suggested that enabling local governments to retain and spend the tax revenues to improve pasture quality and address water shortages will increase its political acceptability. The authorities also recognized the imperative of developing the meat sector and emphasized that their current focus is improving phytosanitary standards and further developing logistics.

Governance

35. Improving governance is a crucial step for Mongolia to achieve sustainable and inclusive growth. As a relatively young democracy and a natural resource-based economy, Mongolia has many features that weigh on governance including relatively weak institutions, large lumpy capital projects, and windfall revenues from mining booms. Encouragingly, there are important signs of progress in strengthening governance. The authorities have upgraded the anti-corruption framework and civil society is active in advocating for the required reforms. Nonetheless, more work remains. The authorities should follow through on recommendations identified in the 2019 OECD-Anti-Corruption Network Monitoring Report, including steps to improve the legal framework, strengthen the integrity and independence of judicial and anti-corruption institutions, as well as strengthen the capabilities of the judiciary, especially relating to commercial issues and debt resolution. Given the opportunities for rent seeking, special attention should be focused on politically exposed persons including through enhancing the income and asset declaration framework which will also improve AML/CFT compliance. Other important areas for reform include i) more disclosure/transparency around PPP/concession obligations and the allocation of mining licenses and ii) a more diversified and open shareholding structure of the banks, including through IPOs and foreign bank entry, and iii) strengthening implementation of procurement controls, including at SOEs (See Annex III and SIP).

Authorities’ Views

36. The authorities agreed with staff that improvements in governance were necessary for sustainable growth. They highlighted concrete actions in recent years including improvements in the management of Special Funds in the budget, constraints on the DBM and BOM to limit quasi-fiscal spending, better controls over public-private partnerships and a stronger AML/CFT framework. They also highlighted enactment of recent powers to replace prosecutors and judges would strengthen the state’s enforcement powers against corruption.

Staff Appraisal

37. Mongolia has made major progress since 2017 in boosting growth and increasing resilience, yet vulnerability to external shocks remains. Growth accelerated to 6.9 percent in 2018 and 8.6 percent in Q1 2019. The fiscal balance has improved by 18 percentage points, enabling public debt to fall by 14 percentage points. Net foreign exchange reserves have increased by about $3 billion since 2016. Structural reforms progressed in several key areas: the budget process is more resilient to political pressure and quasi-fiscal activities were curtailed. Notwithstanding the progress, Mongolia’s current buffers are inadequate in the event downside risks materialize. A sharp fall in external demand could halt the growth momentum, reverse public debt dynamics and trigger financial instability.

38. Tight macro policies are needed for further debt reduction and reserve accumulation. Public and external debt are still elevated at about 73 and 220 percent of GDP, respectively, at end-2018. The authorities should target a primary surplus of at least 1 percent of GDP beyond 2019 to bring public debt to around 50 percent of GDP in the medium term, and use any revenue overperformance to further rebuild buffers and guard against downside risks to the debt profile. With inflation high and international reserves still too low, further tightening in policy rates may be necessary to ensure price stability and rein in credit growth. The BOM should continue to build FX reserves through spot purchases. Since the external position is assessed to be substantially weaker than implied by fundamentals and desirable policy settings, the BOM should allow a more flexible exchange rate and refrain from FX sales other than preventing disorderly market conditions.

39. Fiscal governance and the composition of fiscal policy can be improved further to prevent boom-bust cycles. Current fiscal rules have not been consistently effective in preventing excess fiscal deficits. A streamlining of the framework with a more independent Fiscal Council and a formal correction mechanism would be useful. Regarding the execution of the planned mega projects, it is important to ensure good governance and refrain from quasi-fiscal spending. There is also scope to strengthen social spending, especially in the public health sector.

40. The financial sector would benefit from building capital buffers and targeted regulatory tightening. The BOM needs to ensure banks have raised sufficient capital in a manner consistent with Mongolian law and international best practice. For banks that fail to do so, the BOM should be prepared to take necessary regulatory actions. Going forward, proceeding with tighter regulations on loan origination, collateral valuation, and asset classification will help. In addition, debt service to income limits should be tighter and have broader coverage to address the rapid rise in household debt.

41. To achieve lasting growth that benefits all Mongolians, the authorities should strengthen governance and diversify the economy in a sustainable manner. Weak governance and rule of law and the resulting vulnerabilities to corruption remain limiting factors for development. The authorities should improve the legal framework and strengthen the capabilities of the judiciary in line with OECD-ACN recommendations. For economic diversification, upgrading the livestock industries and developing tourism offer vital opportunities to leverage Mongolia’s vast grasslands. Policies, such as a progressive pasture tax and better quality control on meat product, can help provide a natural limit on livestock quantity and address the pressing issue of overgrazing.

It is expected that the next Article IV consultation with Mongolia will be held in accordance with the Executive Board decision on the consultation cycle for members with Fund arrangements.

Table 1.

Mongolia: Selected Economic and Financial Indicators, 2016–24

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}DBM spending is excluded from fiscal balance and monitored separately.

^{^2/}Excludes privatization receipts; includes interest financed mortgage spending from 2017 onwards.

^{^3/}General government debt data excludes SOEs debt and central bank’s liabilities from PBOC swap line.

^{^4/}Gross official reserves includes drawings from swap line.

Table 1.

Mongolia: Selected Economic and Financial Indicators, 2016–24

							2016	2017	2018	2019	2020	2021	2022	2023	2024
							Act.	Act.	Act.	<-----------------------------Proj.-------------------------------->
							(In percent of GDP, unless otherwise indicated)
*National Accounts*
	Nominal GDP (in billions of togrogs)						23943	27876	32094	37129	42092	47531	53652	60002	66798
	Real GDP growth (percent change)						1.2	5.3	6.9	6.5	5.4	5.1	5.6	6.0	5.0
		Domestic Demand					0.2	12.1	12.8	9.7	3.9	5.9	1.6	5.1	4.3
					Consumption		-0.2	3.9	-1.2	1.0	-1.3	6.3	8.7	5.5	9.5
						Private	-2.6	5.4	-1.7	0.1	-3.1	6.6	9.6	5.4	10.7
						Public	10.6	-1.8	0.5	5.0	5.4	5.1	5.6	6.0	5.0
					Investment		1.3	35.2	43.5	22.6	10.3	5.5	-6.3	4.5	-2.5
						o/w GFCF	0.5	35.6	22.6	26.8	15.1	5.3	-4.3	6.3	-2.7
					Exports of G&S		13.8	14.8	14.1	13.6	8.5	13.7	12.6	14.9	12.1
					Imports of G&S		12.7	24.8	21.4	16.7	6.4	13.7	7.9	13.4	11.2
	Contributions to Real GDP (ppts)
				Domestic Demand			0.2	11.7	13.2	10.5	4.3	6.5	1.8	5.4	4.6
				Net Exports of G&S			1.0	-6.3	-6.3	-4.0	1.1	-1.4	3.8	0.6	0.4
	Gross national saving						26.0	21.3	25.4	28.8	33.3	33.8	31.4	31.6	28.5
				Public			-3.6	3.1	8.3	8.4	8.2	8.7	8.8	9.0	9.0
				Pr ivate			29.6	18.2	17.0	20.4	25.1	25.1	22.6	22.6	19.5
	Gross capital formation						25.7	31.4	42.3	43.2	45.7	45.1	40.8	40.4	37.3
				Public			9.9	5.9	5.0	7.8	8.3	10.3	10.2	10.6	10.7
				Private			15.9	25.4	37.3	35.4	37.4	34.8	30.7	29.8	26.6
*Prices*
	Consumer Prices (EoP; percent change)						0.8	7.2	9.7	8.4	8.1	7.0	6.9	7.1	7.2
	Copper prices (US$ per ton)						4868	6170	6530	6058	5991	6045	6090	6123	6123
	Gold prices (US$ per ounce)						1248	1257	1269	1288	1309	1336	1367	1393	1393
	Oil price (in U.S. dollars per barrel)						42.8	52.8	68.3	65.5	63.9	60.7	58.5	57.6	57.6
	GDP deflator (percent change)						2.2	10.5	7.7	8.6	7.6	7.4	6.9	5.5	6.0
*General government accounts*
	Primary balance (IMF definition) ^1/						-11.2	0.4	5.9	3.0	1.1	-0.5	-0.5	-0.5	-0.5
		Total revenue and grants					24.4	28.5	31.4	30.9	30.2	30.2	29.9	30.3	30.4
		Primary expenditure and net lending					35.5	28.2	25.5	28.0	29.1	30.7	30.4	30.8	30.9
	Interest						4.1	4.1	3.3	2.4	2.0	1.7	1.4	1.6	1.6
	Overall balance (IMF definition) ^2/						-15.3	-3.8	2.6	0.6	-0.9	-2.2	-1.9	-2.1	-2.1
	Gross Financing Needs						18.0	3.6	5.3	2.4	2.6	7.0	9.5	8.2	6.6
	General government debt ^3/						87.6	84.6	73.3	73.0	71.0	66.2	61.7	58.9	57.2
				Domestic			20.2	13.6	5.3	4.2	3.0	2.2	1.5	2.8	4.9
				External			67.5	71.0	68.0	68.9	68.0	64.0	60.1	56.1	52.3
*Monetary sector*
	Broad money growth (percent change)						21.0	30.4	22.8	25.4	13.4	12.9	12.9	11.8	11.3
	Reserve money growth (percent change)						24.6	30.5	19.1	17.1	13.8	17.6	12.3	17.5	17.7
	Credit growth (percent change)						6.7	11.1	23.4	18.0	17.0	15.0	15.0	16.0	17.0
*Balance of payments*
	Current account balance						-6.3	-10.1	-17.0	-14.4	-12.4	-11.3	-9.5	-8.8	-8.8
			Exports of goods (y/y percent change)				4.1	21.4	12.4	10.1	2.6	8.9	7.5	9.9	7.0
			Imports of goods (y/y percent change)				0.8	25.3	35.4	1.4	0.3	9.4	2.8	8.7	6.0
	Gross official reserves (in USD millions) ^4/						1297	3012	3461	3655	4033	4018	3638	3325	2802
				(In months of imports)			2.4	4.0	4.7	5.0	5.0	4.9	4.1	3.5	2.9
*Exchange rate*
	Togrog per U.S. dollar (eop)						2490	2427	2644	…	…	…	…	…	…
*Memorandum item*
	Population in million (eop)						3.1	3.2	3.2	…	…	…	…	…	…

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}DBM spending is excluded from fiscal balance and monitored separately.

^{^2/}Excludes privatization receipts; includes interest financed mortgage spending from 2017 onwards.

^{^3/}General government debt data excludes SOEs debt and central bank’s liabilities from PBOC swap line.

^{^4/}Gross official reserves includes drawings from swap line.

Table 1.

Mongolia: Selected Economic and Financial Indicators, 2016–24

							2016	2017	2018	2019	2020	2021	2022	2023	2024
							Act.	Act.	Act.	<-----------------------------Proj.-------------------------------->
							(In percent of GDP, unless otherwise indicated)
*National Accounts*
	Nominal GDP (in billions of togrogs)						23943	27876	32094	37129	42092	47531	53652	60002	66798
	Real GDP growth (percent change)						1.2	5.3	6.9	6.5	5.4	5.1	5.6	6.0	5.0
		Domestic Demand					0.2	12.1	12.8	9.7	3.9	5.9	1.6	5.1	4.3
					Consumption		-0.2	3.9	-1.2	1.0	-1.3	6.3	8.7	5.5	9.5
						Private	-2.6	5.4	-1.7	0.1	-3.1	6.6	9.6	5.4	10.7
						Public	10.6	-1.8	0.5	5.0	5.4	5.1	5.6	6.0	5.0
					Investment		1.3	35.2	43.5	22.6	10.3	5.5	-6.3	4.5	-2.5
						o/w GFCF	0.5	35.6	22.6	26.8	15.1	5.3	-4.3	6.3	-2.7
					Exports of G&S		13.8	14.8	14.1	13.6	8.5	13.7	12.6	14.9	12.1
					Imports of G&S		12.7	24.8	21.4	16.7	6.4	13.7	7.9	13.4	11.2
	Contributions to Real GDP (ppts)
				Domestic Demand			0.2	11.7	13.2	10.5	4.3	6.5	1.8	5.4	4.6
				Net Exports of G&S			1.0	-6.3	-6.3	-4.0	1.1	-1.4	3.8	0.6	0.4
	Gross national saving						26.0	21.3	25.4	28.8	33.3	33.8	31.4	31.6	28.5
				Public			-3.6	3.1	8.3	8.4	8.2	8.7	8.8	9.0	9.0
				Pr ivate			29.6	18.2	17.0	20.4	25.1	25.1	22.6	22.6	19.5
	Gross capital formation						25.7	31.4	42.3	43.2	45.7	45.1	40.8	40.4	37.3
				Public			9.9	5.9	5.0	7.8	8.3	10.3	10.2	10.6	10.7
				Private			15.9	25.4	37.3	35.4	37.4	34.8	30.7	29.8	26.6
*Prices*
	Consumer Prices (EoP; percent change)						0.8	7.2	9.7	8.4	8.1	7.0	6.9	7.1	7.2
	Copper prices (US$ per ton)						4868	6170	6530	6058	5991	6045	6090	6123	6123
	Gold prices (US$ per ounce)						1248	1257	1269	1288	1309	1336	1367	1393	1393
	Oil price (in U.S. dollars per barrel)						42.8	52.8	68.3	65.5	63.9	60.7	58.5	57.6	57.6
	GDP deflator (percent change)						2.2	10.5	7.7	8.6	7.6	7.4	6.9	5.5	6.0
*General government accounts*
	Primary balance (IMF definition) ^1/						-11.2	0.4	5.9	3.0	1.1	-0.5	-0.5	-0.5	-0.5
		Total revenue and grants					24.4	28.5	31.4	30.9	30.2	30.2	29.9	30.3	30.4
		Primary expenditure and net lending					35.5	28.2	25.5	28.0	29.1	30.7	30.4	30.8	30.9
	Interest						4.1	4.1	3.3	2.4	2.0	1.7	1.4	1.6	1.6
	Overall balance (IMF definition) ^2/						-15.3	-3.8	2.6	0.6	-0.9	-2.2	-1.9	-2.1	-2.1
	Gross Financing Needs						18.0	3.6	5.3	2.4	2.6	7.0	9.5	8.2	6.6
	General government debt ^3/						87.6	84.6	73.3	73.0	71.0	66.2	61.7	58.9	57.2
				Domestic			20.2	13.6	5.3	4.2	3.0	2.2	1.5	2.8	4.9
				External			67.5	71.0	68.0	68.9	68.0	64.0	60.1	56.1	52.3
*Monetary sector*
	Broad money growth (percent change)						21.0	30.4	22.8	25.4	13.4	12.9	12.9	11.8	11.3
	Reserve money growth (percent change)						24.6	30.5	19.1	17.1	13.8	17.6	12.3	17.5	17.7
	Credit growth (percent change)						6.7	11.1	23.4	18.0	17.0	15.0	15.0	16.0	17.0
*Balance of payments*
	Current account balance						-6.3	-10.1	-17.0	-14.4	-12.4	-11.3	-9.5	-8.8	-8.8
			Exports of goods (y/y percent change)				4.1	21.4	12.4	10.1	2.6	8.9	7.5	9.9	7.0
			Imports of goods (y/y percent change)				0.8	25.3	35.4	1.4	0.3	9.4	2.8	8.7	6.0
	Gross official reserves (in USD millions) ^4/						1297	3012	3461	3655	4033	4018	3638	3325	2802
				(In months of imports)			2.4	4.0	4.7	5.0	5.0	4.9	4.1	3.5	2.9
*Exchange rate*
	Togrog per U.S. dollar (eop)						2490	2427	2644	…	…	…	…	…	…
*Memorandum item*
	Population in million (eop)						3.1	3.2	3.2	…	…	…	…	…	…

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}DBM spending is excluded from fiscal balance and monitored separately.

^{^2/}Excludes privatization receipts; includes interest financed mortgage spending from 2017 onwards.

^{^3/}General government debt data excludes SOEs debt and central bank’s liabilities from PBOC swap line.

^{^4/}Gross official reserves includes drawings from swap line.

Table 2a.

Mongolia: Summary Operations of the General Government, 2016–24

(In billions of togrogs)

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}Includes deposit buildup in government accounts

^{^2/}DBM spending is excluded from fiscal balance and monitored separately.

Table 2a.

Mongolia: Summary Operations of the General Government, 2016–24

(In billions of togrogs)

									2016	2017	2018	2019	2020	2021	2022	2023	2024
									Act.	Act.	Act.	<-----------------------------Proj.-------------------------------->
Total revenue and grants									5835	7958	10063	11478	12702	14364	16055	18159	20280
	Current revenue								5756	7896	10024	11353	12639	14343	16031	18133	20251
				Tax revenue and social security contributions					4951	7013	9035	10281	11424	12972	14483	16401	18323
						Income taxes			1043	1610	2086	2406	2650	3020	3415	3904	4379
								CIT	520	962	1277	1487	1611	1848	2092	2424	2732
								PIT	523	648	809	919	1039	1173	1323	1479	1647
						Social security contributions			1110	1321	1621	1881	2226	2497	2801	3132	3487
						VAT			1141	1619	2196	2438	2646	3015	3308	3746	4170
						Excise taxes			630	520	754	854	966	1087	1216	1360	1515
						Customs duties and export taxes			328	512	682	750	791	905	973	1083	1206
						Other taxes			698	1431	1694	1953	2144	2448	2769	3176	3567
				Non-tax revenue					805	882	989	1072	1215	1372	1549	1732	1928
Total expenditure and net lending									9495	9013	9223	11272	13061	15409	17065	19395	21700
		Current expenditure							6614	7039	7348	8245	9179	10220	11312	12735	14208
					Wages and salaries				1747	1800	1879	2215	2511	2836	3201	3580	3985
					Purchase of goods and services				1386	1337	1438	1732	1964	2218	2503	2799	3117
					Subsidies				229	261	228	252	256	321	363	406	452
					Transfers				2265	2484	2757	3152	3624	4038	4502	5014	5569
					Interest payments				986	1156	1047	893	823	807	743	936	1086
		Capital expenditure and net lending							2882	1974	1875	3027	3883	5189	5754	6660	7492
				Capital expenditure					2360	1658	1608	2899	3491	4920	5450	6346	7148
						Domestically-financed			1664	1105	1108	1955	2333	3575	4498	5549	6415
							o/w DBM noncommercial spending		240	0	0	0	0	0	0	0	0
						Foreign-financed			696	553	500	944	1159	1345	952	798	733
					Net lending				521	316	267	128	391	269	304	314	344
							o/w Mortgage program net lending		0	0	120	115	124	134	151	164	177
Overall balance (IMF definition)									-3660	-1055	840	206	-360	-1045	-1011	-1236	-1420
Primary balance (IMF definition)									-2674	102	1886	1099	464	-238	-268	-300	-334
Financing									3660	1055	-2719	-206	360	1045	1011	1236	1420
		External							1214	1716	-916	850	1778	408	348	-216	-418
			Disbursement						1350	1881	0	1765	2249	2491	4152	3192	2510
			Amortization						-136	-165	-916	-915	-471	-2083	-3803	-3408	-2928
		Domestic (net)							2446	-661	-1804	-1056	-1418	637	662	1452	1838
			Government bonds (net issuance)						2049	-419	-1804	94	-318	-63	-138	952	1638
			Privatization						1	0	0	0	0	0	0	0	0
			Other ^1/						396	-242	0	-1150	-1100	700	800	500	200
*Memorandum items:*
		DBM commercial spending ^2/							247	-475	44	177	201	227	256	286	318
		Mineral revenue (in percent of GDP)							2.3	4.8	5.4	5.3	5.5	5.6	5.6	5.8	5.9
		Non-mineral revenue (in percent of GDP)							22.1	23.7	25.9	25.6	24.7	24.7	24.3	24.5	24.5
		Total expenditure (in percent of non-mineral GDP)							49.6	42.2	37.6	37.0	37.8	39.5	38.8	39.4	39.6
		Non-mineral overall balance (in percent of non-mineral GD							-16.9	-5.8	0.6	-5.8	-7.7	-9.5	-9.1	-9.6	-9.7
		Primary spending (change in percent)							32.8	-7.7	4.1	26.9	17.9	19.3	11.8	13.1	11.7

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}Includes deposit buildup in government accounts

^{^2/}DBM spending is excluded from fiscal balance and monitored separately.

Table 2a.

Mongolia: Summary Operations of the General Government, 2016–24

(In billions of togrogs)

									2016	2017	2018	2019	2020	2021	2022	2023	2024
									Act.	Act.	Act.	<-----------------------------Proj.-------------------------------->
Total revenue and grants									5835	7958	10063	11478	12702	14364	16055	18159	20280
	Current revenue								5756	7896	10024	11353	12639	14343	16031	18133	20251
				Tax revenue and social security contributions					4951	7013	9035	10281	11424	12972	14483	16401	18323
						Income taxes			1043	1610	2086	2406	2650	3020	3415	3904	4379
								CIT	520	962	1277	1487	1611	1848	2092	2424	2732
								PIT	523	648	809	919	1039	1173	1323	1479	1647
						Social security contributions			1110	1321	1621	1881	2226	2497	2801	3132	3487
						VAT			1141	1619	2196	2438	2646	3015	3308	3746	4170
						Excise taxes			630	520	754	854	966	1087	1216	1360	1515
						Customs duties and export taxes			328	512	682	750	791	905	973	1083	1206
						Other taxes			698	1431	1694	1953	2144	2448	2769	3176	3567
				Non-tax revenue					805	882	989	1072	1215	1372	1549	1732	1928
Total expenditure and net lending									9495	9013	9223	11272	13061	15409	17065	19395	21700
		Current expenditure							6614	7039	7348	8245	9179	10220	11312	12735	14208
					Wages and salaries				1747	1800	1879	2215	2511	2836	3201	3580	3985
					Purchase of goods and services				1386	1337	1438	1732	1964	2218	2503	2799	3117
					Subsidies				229	261	228	252	256	321	363	406	452
					Transfers				2265	2484	2757	3152	3624	4038	4502	5014	5569
					Interest payments				986	1156	1047	893	823	807	743	936	1086
		Capital expenditure and net lending							2882	1974	1875	3027	3883	5189	5754	6660	7492
				Capital expenditure					2360	1658	1608	2899	3491	4920	5450	6346	7148
						Domestically-financed			1664	1105	1108	1955	2333	3575	4498	5549	6415
							o/w DBM noncommercial spending		240	0	0	0	0	0	0	0	0
						Foreign-financed			696	553	500	944	1159	1345	952	798	733
					Net lending				521	316	267	128	391	269	304	314	344
							o/w Mortgage program net lending		0	0	120	115	124	134	151	164	177
Overall balance (IMF definition)									-3660	-1055	840	206	-360	-1045	-1011	-1236	-1420
Primary balance (IMF definition)									-2674	102	1886	1099	464	-238	-268	-300	-334
Financing									3660	1055	-2719	-206	360	1045	1011	1236	1420
		External							1214	1716	-916	850	1778	408	348	-216	-418
			Disbursement						1350	1881	0	1765	2249	2491	4152	3192	2510
			Amortization						-136	-165	-916	-915	-471	-2083	-3803	-3408	-2928
		Domestic (net)							2446	-661	-1804	-1056	-1418	637	662	1452	1838
			Government bonds (net issuance)						2049	-419	-1804	94	-318	-63	-138	952	1638
			Privatization						1	0	0	0	0	0	0	0	0
			Other ^1/						396	-242	0	-1150	-1100	700	800	500	200
*Memorandum items:*
		DBM commercial spending ^2/							247	-475	44	177	201	227	256	286	318
		Mineral revenue (in percent of GDP)							2.3	4.8	5.4	5.3	5.5	5.6	5.6	5.8	5.9
		Non-mineral revenue (in percent of GDP)							22.1	23.7	25.9	25.6	24.7	24.7	24.3	24.5	24.5
		Total expenditure (in percent of non-mineral GDP)							49.6	42.2	37.6	37.0	37.8	39.5	38.8	39.4	39.6
		Non-mineral overall balance (in percent of non-mineral GD							-16.9	-5.8	0.6	-5.8	-7.7	-9.5	-9.1	-9.6	-9.7
		Primary spending (change in percent)							32.8	-7.7	4.1	26.9	17.9	19.3	11.8	13.1	11.7

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}Includes deposit buildup in government accounts

^{^2/}DBM spending is excluded from fiscal balance and monitored separately.

Table 2b.

Mongolia: Summary Operations of the General Government, 2016–24

(In percent of GDP)

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}Includes deposit buildup in government accounts

^{^2/}DBM spending is excluded from fiscal balance and monitored separately.

Table 2b.

Mongolia: Summary Operations of the General Government, 2016–24

(In percent of GDP)

									2016	2017	2018	2019	2020	2021	2022	2023	2024
									Act.	Act.	Act.	<-----------------------------Proj.-------------------------------->
Total revenue and grants									24.4	28.5	31.4	30.9	30.2	30.2	29.9	30.3	30.4
Current revenue									24.0	28.3	31.2	30.6	30.0	30.2	29.9	30.2	30.3
				Tax revenue and social security contributions					20.7	25.2	28.2	27.7	27.1	27.3	27.0	27.3	27.4
						Income taxes			4.4	5.8	6.5	6.5	6.3	6.4	6.4	6.5	6.6
								CIT	2.2	3.5	4.0	4.0	3.8	3.9	3.9	4.0	4.1
								PIT	2.2	2.3	2.5	2.5	2.5	2.5	2.5	2.5	2.5
						Social security contributions			4.6	4.7	5.1	5.1	5.3	5.3	5.2	5.2	5.2
						VAT			4.8	5.8	6.8	6.6	6.3	6.3	6.2	6.2	6.2
						Other taxes			2.9	5.1	5.3	5.3	5.1	5.2	5.2	5.3	5.3
			Non-tax revenue						3.4	3.2	3.1	2.9	2.9	2.9	2.9	2.9	2.9
Capital revenue and grants									0.3	0.2	0.1	0.3	0.1	0.0	0.0	0.0	0.0
Total expenditure and net lending									39.7	32.3	28.7	30.4	31.0	32.4	31.8	32.3	32.5
		Current expenditure							27.6	25.3	22.9	22.2	21.8	21.5	21.1	21.2	21.3
					Wages and salaries				7.3	6.5	5.9	6.0	6.0	6.0	6.0	6.0	6.0
					Purchase of goods and services				5.8	4.8	4.5	4.7	4.7	4.7	4.7	4.7	4.7
					Subsidies				1.0	0.9	0.7	0.7	0.6	0.7	0.7	0.7	0.7
					Transfers				9.5	8.9	8.6	8.5	8.6	8.5	8.4	8.4	8.3
					Interest payments ^1/				4.1	4.1	3.3	2.4	2.0	1.7	1.4	1.6	1.6
		Capital expenditure and net lending							12.0	7.1	5.8	8.2	9.2	10.9	10.7	11.1	11.2
				Capital expenditure					9.9	5.9	5.0	7.8	8.3	10.4	10.2	10.6	10.7
						Domestically-financed			7.0	4.0	3.5	5.3	5.5	7.5	8.4	9.2	9.6
							o/w DBM noncommercial spending		1.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
						Foreign-financed			2.9	2.0	1.6	2.5	2.8	2.8	1.8	1.3	1.1
					Net lending				2.2	1.1	0.8	0.3	0.9	0.6	0.6	0.5	0.5
							o/w Mortgage program net lending		0.0	0.0	0.4	0.3	0.3	0.3	0.3	0.3	0.3
Overall balance (IMF definition)									-15.3	-3.8	2.6	0.6	-0.9	-2.2	-1.9	-2.1	-2.1
Primary balance (IMF definition)									-11.2	0.4	5.9	3.0	1.1	-0.5	-0.5	-0.5	-0.5
Financing									15.3	3.8	-8.5	-0.6	0.9	2.2	1.9	2.1	2.1
	External								5.1	6.2	-2.9	2.3	4.2	0.9	0.6	-0.4	-0.6
			Disbursement						5.6	6.7	0.0	4.8	5.3	5.2	7.7	5.3	3.8
			Amortization						-0.6	-0.6	-2.9	-2.5	-1.1	-4.4	-7.1	-5.7	-4.4
	Domestic (net)								10.2	-2.4	-5.6	-2.8	-3.4	1.3	1.2	2.4	2.8
			Government bonds (net issuance)						8.6	-1.5	-5.6	0.3	-0.8	-0.1	-0.3	1.6	2.5
			Privatization						0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
			Other ^1/						1.7	-0.9	0.0	-3.1	-2.6	1.5	1.5	0.8	0.3
*Memorandum items:*
	DBM commercial spending ^2/								1.0	-1.7	0.1	0.5	0.5	0.5	0.5	0.5	0.5
		Mineral revenue (in percent of GDP)							2.3	4.8	5.4	5.3	5.5	5.6	5.6	5.8	5.9
		Non-mineral revenue (in percent of GDP)							22.1	23.7	25.9	25.6	24.7	24.7	24.3	24.5	24.5
		Total expenditure (in percent of non-mineral GDP)							49.6	42.2	37.6	37.0	37.8	39.5	38.8	39.4	39.6
		Non-mineral overall balance (in percent of non-mineral GDP)							-16.9	-5.8	0.6	-5.8	-7.7	-9.5	-9.1	-9.6	-9.7
		Primary spending (change in percent)							32.8	-7.7	4.1	26.9	17.9	19.3	11.8	13.1	11.7

Sources: Mongolian authorities; and Fund staff projections.

^{^1/}Includes deposit buildup in government accounts

^{^2/}DBM spending is excluded from fiscal balance and monitored separately.

Table 2b.

Mongolia: Summary Operations of the General Government, 2016–24

(In percent of GDP)

					2016	2017	2018	2019	2020	2021	2022	2023	2024
					Act.	Act.	Act.	<-----------------------------Proj.-------------------------------->
Total revenue and grants					24.4	28.5	31.4	30.9	30.2	30.2	29.9	30.3	30.4
Current revenue					24.0	28.3	31.2	30.6	30.0	30.2	29.9	30.2	30.3
		Tax revenue and social security contributions			20.7	25.2	28.2	27.7	27.1	27.3	27.0	27.3	27.4
			Income taxes		4.4	5.8	6.5	6.5	6.3	6.4	6.4	6.5	6.6
				CIT	2.2	3.5	4.0	4.0	3.8	3.9	3.9	4.0	4.1
				PIT	2.2	2.3	2.5	2.5	2.5	2.5	2.5	2.5	2.5
			Social security contributions		4.6	4.7	5.1	5.1	5.3	5.3	5.2	5.2	5.2
			VAT		4.8	5.8	6.8	6.6	6.3	6.3	6.2	6.2	6.2
			Other taxes		2.9	5.1	5.3	5.3	5.1	5.2	5.2	5.3	5.3
	Non-tax revenue				3.4	3.2	3.1	2.9	2.9	2.9	2.9	2.9	2.9
Capital revenue and grants					0.3	0.2	0.1	0.3	0.1	0.0	0.0	0.0	0.0
Total expenditure and net lending					39.7

Gross Foreign Assets			3706
Pre-Determined Short-Term Drains on Foreign Currency			-3076
	of which
		Loans, Securities and Deposits	-2441
		Forwards and Futures	-635
*Memo*
	Financial Instruments Denominated in
	FX but Settled i n Local Currency
	Long Term FX Liabilities		-163

Gross Foreign Assets			3706
Pre-Determined Short-Term Drains on Foreign Currency			-3076
	of which
		Loans, Securities and Deposits	-2441
		Forwards and Futures	-635
*Memo*
	Financial Instruments Denominated in
	FX but Settled i n Local Currency
	Long Term FX Liabilities		-163

Topics

Countries

Series

About

Resources

Abstract

Context

The Economic Backdrop

Outlook, Near-Term Risks, and Longer-Term Macro Challenges

A. Outlook

B. Near-term Risks

Authorities’ Views

C. Longer-term Macro Challenges

External Sustainability

Authorities’ Views

Environmental Sustainability

Authorities’ Views

Policies for Stable, Inclusive, and Green Growth

A. Macro-Policy Settings

Fiscal Policy

Monetary Policy

FX Intervention and Exchange Rate Policy

Authorities’ Views

B. Structural Reforms

Fiscal Structural

Authorities’ Views

Financial Sector

Authorities Views

Environmental Sustainability and Upgrading the Agriculture Sector

Authorities’ Views

Governance

Authorities’ Views

Staff Appraisal