Could you provide an overview of Mongolia’s monetary policy strategy and objectives?

As outlined in the Central Bank Law, our primary objective is to ensure the stability of the national currency, the tögrög. However, this statement is subject to two interpretations: either focusing on inflation or the exchange rate. The Bank of Mongolia explicitly states its objective as safeguarding the purchasing power of the tögrög, demonstrating a commitment to price stability measured by the Consumer Price Index. On the other hand, some stakeholders tend to lean towards emphasizing exchange rate stability. In our country, characterized by a small, open economy heavily dependent on commodity exports, maintaining a flexible exchange rate is crucial. It serves as a vital shock absorber in the economy. Consequently, the Bank of Mongolia’s mandate is to stabilize inflation at 6% with a band of +/-2 percent over the medium term, as outlined in the Monetary Policy Guidelines for 2024, approved by the Parliament. Could you comment on the efforts to tame inflation and the outlook on inflation/interest rates for 2024?

The year 2022 presented substantial challenges for numerous central banks, with a notable surge in inflation attributed to rising oil and food prices and supply chain disruptions stemming from geopolitical tensions in the aftermath of the pandemic. In response to these circumstances, the Bank of Mongolia implemented a series of five policy rate hikes throughout 2022. This resulted in a cumulative increase of 7 percentage points, elevating the rate from 6% to its current level of 13%.

Over the past few quarters, inflation has exhibited a moderate decline, reaching 7.9% in December 2023 a substantial reduction from the 16.% recorded in June 2022. This decline can be attributed primarily to the decrease in import prices, facilitated by the easing of supply chain disruptions and the stabilization of the exchange rate, supported by an upswing in coal exports. Furthermore, the impact of a tighter monetary policy stance has become evident in the sluggish growth of imports and business loans throughout 2023. How can Mongolia reduce/face macro risks as a commodity-driven economy?

Mongolia, being a resource-rich and landlocked country, faces potential spillovers from developments in its two neighboring nations, China and Russia. Furthermore, with the mining sector serving as the primary driver of our economy, coupled with limited buffers, our economic landscape becomes susceptible to external shocks. In light of these economic characteristics, it becomes imperative to manage our economy countercyclically. The establishment of buffers within economic sectors and among various agents plays a pivotal role in fortifying economic resilience against adverse conditions. Additionally, fostering economic diversification emerges as a crucial strategy to further enhance our economic resilience.

In this context, the Bank of Mongolia has successfully collaborated with commercial banks to strengthen priority sectors by increasing loan supplies. Notably, commercial banks, in collaboration with international financial organizations, are actively supporting the non-mining export sectors, particularly the wool and cashmere sectors. Additionally, the banking sector, spearheaded by the central bank, has played an active role in supporting the “Food Supply and Safety” national campaign, an initiative led by the President of Mongolia. Our engagement in green financing exemplifies a proactive approach toward addressing the challenges of climate change, showcasing our commitment to building a more resilient and sustainable future. What is the expected outcome of recent reforms in the banking sector, including the compulsory public listing of the country’s top five commercial banks?

The Mongolian banking system is at a crucial crossroads. Policy reforms have been crafted to tackle the barriers obstructing the effective advancement of the banking sector. The “Banking Sector Reform Program 2020-2023” covered the entire Mongolian banking sector, with the goal of fortifying banking institutions in the short to medium term.

As part of this ambitious reform program, the Bank of Mongolia has focused its efforts on reducing ownership concentration and improving the corporate governance of banks. This aims to foster a transparent and socially responsible banking system.

The transition of banks into joint-stock companies and the IPOs of systemically important banks (SIBs) have led to a rise in investment opportunities, expanded market participation, and the availability of highly liquid financial products. The Bank of Mongolia expects that these recent banking sector reforms will bolster banks’ capital, improve governance, and enhance the performance of the domestic stock market.

The current two-tiered system, comprising the central bank and commercial banks, has navigated challenges and propelled the banking and financial markets forward.