Mongolia: 2015 Article IV Consultation-Staff Report; Press Release; and Statement by the Executive Director for Mongolia

KEY ISSUES Context. Medium- to long-term prospects are promising given Mongolia's large natural resources. Nonetheless, the country currently faces serious balance-of-payments (BOP) pressures on account of low FDI and weak commodity prices, as well as overly loose macro policies. Current Outlook. Imports have started to taper off, and, with the first phase of the Oyu Tolgoi copper and gold mine now in operation, exports have picked up. The trade balance has thus improved, but with FDI and other financial-account flows still depressed, the overall BOP remains in substantial deficit. In addition, public debt has risen sharply, and bank vulnerabilities are growing. Barring a change in policies and/or major new developments in the real economy, these trends are likely to continue. Policies. Recognizing these challenges, the new government has already taken some action, but further policy adjustment is required to stabilize the economy, and structural measures are needed to promote investment and ensure sustained growth. In particular: • Credible fiscal consolidation, covering both the traditional budget and the Development Bank of Mongolia (DBM), is needed to reduce projected deficits, bring public debt under control, and moderate BOP pressure; • All fiscal or quasifiscal activity currently undertaken by the DBM, the Bank of Mongolia (BOM), or other agencies should be conducted on-budget by the government; • Some monetary tightening would be desirable, to moderate credit growth further and strengthen the BOP, while ensuring that banks remain adequately liquid; • Exchange rate flexibility should be preserved, as a shock absorber for the economy; • Banks' provisions and capital buffers should be bolstered, and supervisory and crisis preparedness frameworks strengthened; • Governance reforms at the DBM and BOM would help strengthen these institutions; • Steps should be taken to move ahead with major mining projects, improve the investment climate, boost FDI, and support growth; and • Social safety nets should be strengthened and better targeted to the poor.