AKIPRESS.COM – The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mongolia.

Mongolian economy is recovering from its deepest recession in a decade, despite a persistent pandemic. The recovery is largely export-driven, supported by the global recovery and base effects. Despite continued economic support and a successful vaccination program, domestic activity remains low due to the pandemic. Many workers, especially women workers, are leaving the workforce, perhaps permanently. Inflation has increased recently, but mainly due to transient factors affecting import prices. Policies have been adequately supportive during the pandemic. However, the significant, untargeted and continuous fiscal, quasi-fiscal and financial abstention measures due to parliamentary actions have increased macro-financial vulnerabilities: public debt has risen sharply, bank balance sheets have weakened further and the operational independence of the government. the Bank of Mongolia (BOM) was compromised.

The government and BOM appropriately managed Mongolia’s external vulnerabilities. Taking advantage of favorable global financial conditions, Eurobonds maturing in 2022-23 have been successfully rolled over on better terms. The BOM opportunistically built up its gross international reserves, aided by the compression and disruption of imports, favorable terms of trade and the IMF’s SDR allocation in 2021 of $ 98.3 million ($ 95.8 million). % of quota). Despite this, international reserves are considered insufficient given the significant external commitments.

The economic outlook remains strong, although uncertain. Real GDP is expected to grow 4.5% in 2021, after contracting 4.6% in 2020. In 2022-2023, Mongolia remains on the verge of an export-led boom, with growth that is expected to accelerate to 6½ to 7% if export portals fully reopen. and the Oyu Tolgoi copper mine is completed on schedule. With the pandemic largely under control, domestic activity should gradually normalize. Medium-term growth is expected to moderate to 5%, but production levels are expected to remain below pre-pandemic trends due to permanent business losses. Inflation should return to the target range of the nomenclature. Despite a surge in export prices, current account improvements in 2020 are likely to be temporary once the recovery takes hold and imports pick up. This reflects Mongolia’s lack of export diversification, heavy dependence on imports, and high external debt.

The risks to the outlook lie in the downside risks. A worsening pandemic, prolonged border closures and tighter global financing conditions pose significant risks, given Mongolia’s meager net international reserves and high external debt. Weaknesses in the financial sector, exacerbated by the pandemic, increase Mongolia’s exposure to external shocks by forcing the public and private sectors to borrow externally. A significant deterioration in asset quality could impact bank capital and delay the recovery. Finally, pro-cyclical policies could undermine macro-financial stability and debt sustainability, reducing room for maneuver to deal with other major risks, jeopardizing Mongolia’s recovery.

Board assessment

The executive directors congratulated the authorities on a successful vaccination campaign and welcomed the ongoing export-led recovery. Despite the strong economic outlook, directors noted that significant downside risks remain given uncertainties related to the pandemic, Mongolia’s limited buffers and high external public debt. In this context, they stressed the importance of prudently managing the export boom to ensure recovery while achieving the country’s long-term development goals.

Directors agreed that in the short term, policies may need to remain supportive, given the persistent pandemic and weak domestic activity recovery. Calling for an ambitious fiscal consolidation strategy, Directors stressed the importance of bold structural fiscal reforms to tackle unsustainable debt dynamics. To this end, they underlined the importance of better targeted and more effective social assistance programs, ambitious pension reforms, better management of public investments and tax administration. Laudable plans for e-governance and reform of public enterprises should be fleshed out and implemented. Directors also stressed that the integrity of the Future Heritage Fund should be preserved to maintain investor confidence.

Directors stressed the need to strengthen the operational independence of the Bank of Mongolia (BOM) to ensure monetary and external stability. Continued vigilance is needed to ensure that inflation does not become persistent. Directors stressed that quasi-fiscal operations should be transferred to the budget and phased out, and that Parliament should refrain from making decisions on monetary and financial operations. Greater exchange rate flexibility could act as a shock absorber. The BOM should continue to build its external cushions and reduce its non-concessional external commitments.

Noting with concern the possibility of potential vulnerabilities in the banking sector, directors called for the surveillance to focus more on strengthening banks and contingency planning. In this context, they stressed the importance of a well-sequenced approach to banking reforms in order to minimize the risk of systemic instability. The phasing out of regulatory forbearance by the end of 2021 and the early completion of a new independent review of the asset quality of potentially capital-deficient banks would be imperative for transparency and proper assessment of bank balance sheets. Stressing the need to put in place the necessary preconditions for successful IPOs and contingency plans, they called for delaying the IPO deadline.

Directors commended the authorities’ long-term development strategy focused on sustainable, inclusive and green growth. In order to improve the business climate, they urged the authorities to decisively address long-standing concerns about corruption, governance and AML / CFT in order to strengthen the investment climate and promote diversification. Overhauling the insolvency framework and judicial reforms should be a priority to address the deteriorating balance sheets. Directors stressed the importance of publishing the full audit report on COVID-related spending, including missing information on beneficial owners.