Monetary Policy Guideline for 2021: The path to economic recovery

by Gan-Ochir Doojav | Chief Economist, Bank of Mongolia


Due to the Covid-19 epidemic, our economy is in recession. In the first half of this year, the economy contracted by 9.7 percent.


This is causing further issues. Declining export earnings and widening balance of payments deficits put pressure on our foreign exchange reserves. There’s also a high risk of loan defaults and deteriorating loan quality, which tightens lending terms.


In response, the Bank of Mongolia is taking three main measures to maintain financial stability and alleviate the financial difficulties of borrowers.


First, measures have been taken to gradually reduce the policy rate (to 8 percent) and the required reserve ratio of the togrog, ease the terms of the central bank's financing instruments, increase the list of collateral, and extend the maturity term. These measures are aimed at maintaining the liquidity of the banking system and increasing the resources available to banks for lending.


Second, to maintain the stability of the banking system, banking supervision procedures and prudential ratios have been temporarily changed, and loan restructuring and asset classification procedures have been adjusted. Under this arrangement, MNT 3.8 trillion in business loans were restructured without reclassification.


Third, we’ve taken measures to delay the repayment of consumer and mortgage loans. This should increase household income, support consumption, alleviate financial difficulties, and ease transaction fees. To date, the consumer loans of 82,868 borrowers (worth MNT 728 billion) and the mortgage loans of 38,270 borrowers (worth MNT 2.0 trillion) have been restructured without any loan classification.

These measures are aimed at protecting individuals, businesses and the banking system from the economic downturn caused by the pandemic. This will ensure the stability of the financial system and promote economic recovery.


On the international front, the Covid-19 pandemic caused a sharp recession in the global economy and weakened the currencies of some commodity-exporting countries by 10-30 percent. The togrog has depreciatd by about 4 percent against the US dollar since the beginning of the year, which was a necessary policy adjustment during a difficult period when export revenues fell by 40-50 percent.


The good news is that Mongolia's partial refinancing of the $500 million Mazaalai bond, to be repaid in 2021, and the $1 billion Chinggis bond, to be repaid in 2022, has eased short-term external debt repayment pressures.


So what does the future look like?


In formulating the monetary policy guideline for 2021, the Bank of Mongolia has followed the principle of rescuing the economy from a crisis and ensuring medium-term stability.


A main feature of next year's monetary policy is the goal of stabilizing inflation at around 6 percent with an interval of plus or minus 2 percentage points. The basis for ensuring economic and financial stability is to reduce inflation volatility and maintain it at a low-level, in line with economic and financial market conditions.


In the medium term, the policy will cause fluctuations in the exchange rate of the togrog against foreign currencies and lower interest rates in financial markets.


To develop the financial sector, the Bank of Mongolia is implementing the “Medium Term Banking Sector Reform Program”. The program aims to build a banking sector with a high risk bearing capacity that can continue to provide financial intermediation at a low cost.


In terms of banking supervision, measures will be taken to overcome the current difficulties with minimal damage to ensure the stability of financial intermediation and to gradually return the counter-cyclical policy measures to normal.


The reform will continue to make the financial market more efficient, protect the interests of financial institutions, investors and consumers, create an environment for advanced new products and services, and expand financial intermediation. In addition, the regulation of the national payment system will be improved to enhance infrastructure and support financial services based on new technologies. The measure will increase financial deepening and inclusion, and improve the efficiency of the whole financial system.


Coordination between public-private partnerships and organizations is essential to ensure the successful implementation of our action plan for the “Strategy for Reducing the Lending Rate”, which was approved by the State Great Hural (Parliament) in August 2020.


There is a need to intensify, with government support, the improvement of relevant legislation to resolve loan agreement disputes quickly and efficiently, which will help reduce lending rates and support financial intermediation. Moreover, the coordination of fiscal and monetary policies is crucial for the successful implementation of the multilateral measures outlined in Parliament’s strategy.


Finally, Mongolia has fulfilled the instructions of the Financial Sanctions Authority (FATF) to get off the international financial ‘grey list’. The next assessment of Mongolia's anti-money laundering and anti-terrorist protections will take place in 2023. Preparations for that assessment need to begin now, with the approval and implementation of a national program and action plan.


Although the global and domestic economies are expected to recover gradually in 2021, uncertainty remains high. Fundamental economic risks will remain until there are effective treatments and vaccines against the Covid-19 pandemic.


Dr. Gan-Ochir Doojav is the Chief Economist of the Bank of Mongolia. He is a frequent public speaker on Mongolian economy and monetary policy. He recently wrote a book titled “Mongolian Development Path: Lessons, Challenges and Opportunities” and proposed the“Ulaanbaatar Consensus” for policymakers.

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