The Monetary Policy of Mongolia for 2017

The Monetary Policy of Mongolia to be implemented by the State in 2017 was approved by Parliament Resolution No. 68 dated 17th of November 2016 and the draft of this Resolution was initially submitted to Parliament on the 29th of September 2016. As a general background to the Policy, it was stated in the introductory document of the draft Resolution that changes in the economy of Mongolia’s main export market, China has had a negative effect on external economic conditions and exports. It was further stated that the debt repayments of the Government, Development Bank of Mongolia and the Central Bank of Mongolia that are due soon may pose a strain on the balance of payments, and that the slowdown of the growth of the economy and the sudden increase of the budget deficit has played a substantial role in the deterioration of the credit rating of Mongolia. The budget deficit for 2016 is currently 18% of the GDP (4.3 trillion) and the foreign debts of the Government is at 88% of the GDP and in these circumstances, it has become increasingly difficult to finance the budget deficit with loans as it could increase the present difficulties and threaten debt stability. The economic growth for the first half of 2016 was 1.4% and unemployment was at 10.4%. The economic growth for 2016 and 2017 is projected at 0-1% and 2-3% respectively and the World Bank and IMF projects economic growth for 2017 at 2.7% and 2.5% respectively.

In addition, it was also stated that increasing the money supply without decreasing the budget deficit, debt pressures and the risks of the financial system to withstand cycles has the potential to result in a loss of the stability of the external balance of the economy, the increase of the pressure of the depreciation of the Mongolian togrog and may affect the stability of the financial sector adversely. Therefore, the monetary policies implemented in the previous year should be put aside and measures in accordance with market principles need to be put in place. The Monetary Policy for 2017 is to be utilized to overcome the current economic difficulties with minimal damage and to stabilize the macro-economy in the short term with the aim of securing economic growth in the medium and long term.

1. The specific objectives the Monetary Policy is to achieve are:

1.1 The inflation rate as measured by Consumer Price Index is not to exceed 8% for 2017-2019.

The stabilization of the inflation rate is vital for the protection of the actual income of the citizens and decrease of business uncertainty for the efficient allocation of economic resources. As such, the stable inflation rates are an important aspect for the support of medium and long term growth of the economy and the development of the financial market.

1.2 The exchange rate of MNT against foreign currencies is to become flexible and compatible with the base conditions of the macro-economy.

Although the deficit of the balance of payments fell in the first half of 2016, the level of foreign currency reserves available are not enough for the large scale repayments due in 2017 by the Government and the private sector. This issue cannot be resolved through policy alterations alone. Therefore, the flexibility of the exchange rate must be maintained to strengthen the medium and long term foreign payment and settlement capabilities which will in turn protect domestic production, exports and economic competitiveness.

1.3 Flexible policies of the exchange rate and monetary policies are to be utilized in order to regulate the exchange rate of MNT in relation to possible sudden changes of the external economy and foreign currency reserves are to be increased to an appropriate level.

International financial institutions, credit rating agencies and investors view the foreign currency reserves and external sector indicators as vulnerabilities of the external sector of the economy. A higher level of foreign currency reserves will serve as an indication of lower financial risk in order to receive positive ratings from credit rating agencies and reduce the costs of borrowing.

2. Objectives in relation to the stability of the financial sector are:

2.1 In order to decrease the risks of the finance sector and achieve financial stability, an evaluation is to be conducted in partnership with international financial institutions and macro prudential policies are to be implemented.

2.2 In order to maintain the ability of the banking sector to complete payments promptly and its risk tolerance capacity, action must be taken to prevent possible risks.

A bank stress test will be carried out in the financial sector to determine possible risks and policy measures will be taken based on the results. Furthermore, in order to formulate a development plan for the activities of the Credit Information Bureau, the Central Bank will cooperate with international financial institutions. The execution of certain functions of the Credit Information Bureau such as the determination of the credit rating of the creditors by businesses of the private sector will be supported.

3. Objectives in relation to the infrastructure of the financial markets and its institutions are:

3.1 The operations of the Financial Stability Council will be intensified in order to overcome economic difficulties in the short term and the cooperation between members of the Council will be extended.

The operations of the Financial Stability Council will be improved to meet international standards and cooperation with international financial institutions is under discussion to develop a detailed procedure and recommendation outlining the duties of the members of the Council to take measures in response to possible difficulties that could arise in the financial sector.

3.2 The independence and impartiality of the Central Bank of Mongolia as well as the regulation of the foreign and national currency payments system will be improved.

A draft “Law on the National Payments System” will be developed in order to support the reliable and efficient operation of the Payments System of Mongolia, to improve the legal environment and to strengthen the control capacity of the payments system. The draft Law will also serve as the basis for the increase of non-physical means of payment and support the introduction of an electronic payments system for Governmental transactions as well as to improve the clearing and settlement process of the Government and the Central Bank of Mongolia.

BATTUSHIG.B, Partner (battushig@gtsadvocates.mn, tel+976 331020)

KHULAN.B, Paralegal (khulan@gtsadvocates.mn, tel+976 331020)


gtsadvocates: 06 12 2016