Strengthening Debt and Financial Asset Management – Mongolia

I. INTRODUCTION


1. Significant increase in mineral production and exports offers the prospect of
strong growth in GDP in Mongolia over the coming decade.1 With a population of only
2.8 million people and some of the most extensive unexploited mineral resources in the
world, Mongolia is expected to move from a low-income country to a lower-middle-income
country in the near future. This will make possible a significant improvement in the quality
of life of Mongolian citizens and expand investment in infrastructure and human capital. This
robust economic growth represents new challenges, however, particularly in the area of fiscal
policy and operations. For example, eligibility for concessional loans from multilateral
creditor will be phased out. Therefore, the resources to finance necessary infrastructure will
need to come from other financing sources. To prepare for these challenges, it is necessary to
improve capacity, upgrade the legal and institutional frameworks, and identify and control
fiscal risks on a more permanent basis.

2. To address these challenges, the government is implementing many reforms in
its legal and institutional frameworks. In recent years the State Great Khural (parliament)
approved the FSL to work as a fiscal safety net and provide guidance for a stable and
sustainable fiscal policy and also implemented the Concession Law to regulate PPPs and
concessions. The government created a division within the SPC to manage PPPs and
concessions and supervise SOEs. The government also established the DBM to finance
development projects. Other legal reforms are currently being drafted such as the FAPDML
and Planning Law, an update of the Foreign Aid Law, and the IBL. There are also demands
for greater fiscal decentralization.

3. The relatively low level of public debt in the medium term and expectations for
strong GDP growth are creating opportunities to expand the size and number of
borrowing operations for financing new investments, however, implicit and explicit
fiscal risks should be carefully monitored. Debt is incurred across a range of institutional
segments, including the central government MOF, budget entities, projects, funds, and SOEs.
Fiscal risks arise from fluctuation in commodity prices that have an impact on budget
revenues, implicit or explicit guarantees provided to PPPs, quasi-fiscal operations and
structural losses of SOEs, borrowing of SOEs and local governments, and debt and active
financial asset management operations. The government has already implemented some of
the tools for managing the fiscal operations such as a TSA, an MTBF, and an MTDS. The
1 The March 2011 Article IV consultation prepared by the Asia and Pacific Department of the IMF
projects: a GDP growth of 10.3 percent, a total public debt of 38.6 percent of GDP, a primary deficit
of 3.1 percent of GDP, a non-mineral overall balance of -13.3 percent of GDP, and a structural
balance of -6.3 percent of GDP for 2011.

4. Many donors are currently providing advice on debt and asset management
issues, leading to the need for good coordination. The Monetary and Capital Market
Department of the IMF and the World Bank (WB) are providing advice and capacitybuilding
on MTDS. The Asian Development Bank (ADB) is in charge of developing the
domestic capital market. The United States Treasury Office of Technical Assistance has
posted a resident advisor who is working with the authorities on development of the domestic
bond market, external debt management, cash management, and sovereign wealth funds.
Likewise, the government of Korea is supporting the authorities with making the DBM
operational. Therefore, it is important to enhance coordination among the TA providers of
advice on financial asset and debt management issues by means of definition of a common
strategy and permanent exchange of information.

5. In 2010 the WB prepared an updated debt management performance
assessment, which identified improvements since 2008 as well as outstanding
weaknesses. Areas of strength include the governance framework, publication of the MTDS,
internal and external audits of public debt, and coordination with macroeconomic policies.
Among the areas that require strengthening are cash flow forecasting, cash balance
management, operational risk management, and debt reporting.

6. The FSL defines ceilings for total public debt and other fiscal indicators, which
should be monitored in a timely manner and on a continuous basis. The provisions
regarding the observance of the fiscal indicators become binding starting in 2013. Therefore,
the government has time for preparing regulations, reports, and supporting systems.
International experience shows that good communication and transparency are key factors
for the successful implementation of fiscal responsibility laws. FAD stands ready to provide
TA for setting up a projection and reporting framework.

7. The report discusses key issues relating to debt and financial asset management.
In Section II the report discusses the organization of debt management functions. Section III
deals with the identification, reporting and assessment of fiscal risks, including contingent
liabilities. Section IV considers reporting related to debt management. Section V provides
comments on the most recent draft of the FAPDML. Section VI analyses the state of cash
flow forecasting and cash balance management.

II. INSTITUTIONAL FRAMEWORK FOR DEBT MANAGEMENT OPERATIONS

A. Current Situation
8. The parliament provides a clear delegation of authority to the MOF to borrow
on behalf of the government. The General Budget Law of 1992 and the Public Sector
Management and Finance Law of 2002 establish the power of the government to borrow
within ceilings approved by the parliament. The IBL of 2011 defines the purposes a loan can
be issued from the state budget as well the ways the MOF shall implement the government
debt management. The legal framework also provides the authority to the government to
delegate borrowing activities to the MOF. Within the MOF, debt management functions are
spread across three separate departments.
9. The main back-office responsibilities and functions of debt recording, payment
of debt service, and preparation of statistical reports are performed by the DMD of the
Treasury Department. Domestic issuance is the responsibility of DMD, while external
bond issuance and external contractual borrowing are carried out by the FEPD and the
DFCD, respectively.
10. The Treasury’s DMD performs the main back-office responsibilities and
functions: debt recording, debt service payments, and statistics reports. The DMD
records all central government debt, including external and domestic debt and on-lending
loans, through the UNCTAD’s debt management financial accounting system (DMFAS). It
also prepares monthly, quarterly (to the budget), and annual (to the parliament) debt reports.
In 2011, for the first time, the DMD prepared the Debt Management Annual Report (2010),
including macroeconomic indicators and information on debt stock, composition, and
service. This report is available on the MOF’s webpage.

11. The main front-office responsibilities and functions of contracting loans and
issuing securities are dispersed among three distinct departments in the MOF. Recently
a state secretary order transferred the responsibilities on domestic bonds issuances, including
auctions decisions, from the FEPD to the Treasury Department. However, external bond
issuance continues to be the responsibility of the FEPD. Negotiation and contracting of
external aid and loans (concessional and non-concessional) are the responsibility of the
DFCD.
Box 1. Sound Practices in Public Debt Management
The guidelines for public debt management, published jointly by the IMF and the WB in 2001, state that
the organizational framework for debt management should be well specified, ensuring that mandates and
roles are well articulated guaranteeing coordination and sharing of information among the various units.
These guidelines were defined upon considering good international experiences and successful
implementation of debt offices. Despite the range of institutional alternatives for locating the sovereign
debt management functions across one or more agencies, the key requirement is to ensure that the
organizational framework surrounding debt management is clearly specified, that there is coordination
and sharing of information, and that the mandates of the respective units are clear.
A Debt Management Office (DMO) should be separated into front, middle and back offices with distinct
functions and accountabilities. The front office should be responsible for executing transactions,
including the management of auctions and other forms of borrowing. The guidelines reinforced that the
group executing a transaction and the one responsible for entering the transaction into the accounting
system should be from distinct units, respectively the front and back offices. The back office should then
be the unit that handles the settlement of transactions and the maintenance of the financial records and
the debt official statistics, being also responsible for debt revenues and expenditures projections for
budget purposes, monitoring it along the fiscal year. The middle office should undertake risk analysis,
monitoring and reporting portfolio-related risks, and should also assess the performance of debt
managers against the strategic benchmarks. The separation of front and middle functions into two
distinct units would promote the independence of those setting and monitoring the risk management
framework from those responsible for executing market transactions.
Another important issue pointed out by the guidelines refers to the release of an annual debt management
report, which reviews the previous year’s activities, and provides a broad overview of borrowing plans
for the current year based on the annual budget projections. Some countries separate the abovementioned
report in two. The Annual Borrowing Plan (ABP) would release the government objectives,
guidelines, and borrowing needs and strategies for the starting fiscal period, as well as targets for the
year-end. The Annual Debt Report (ADR) would publish the evolution of the main debt statistics and
evaluate whether or not they accomplished their goals using the targets defined by the ABP. These
reports are very important in increasing the transparency and the accountability of government debt
managers. They also assist financial markets by disclosing the criteria used to guide the debt strategy, the
assumptions and trade-offs underlying these criteria, and the managers’ performance in meeting them.
12. Some middle-office responsibilities and functions are been addressed by the
DMD. No other MOF department is in charge of middle-office functions. The first MTDS
was prepared in 2007 by the DMD for the period 2008/2010, the second was prepared in
2009 by a working group composed of the MOF departments involved in debt management
for the period 2010/2012, and the third one will be prepared by a working group that includes

the Treasury Department (head plus three members), Fiscal Policy Department [FPD] (one
member), Development Financing Department (one member), Financial and Economic
Department (one member), BOM (one member), and National Development and Innovation
Committee [NDIC] (one member). DMD expects that the 2012–14 MTDS will be finalized
by the end of 2011. After finalizing the draft report, the strategy is submitted to the Debt
Management and Risk and Expenditure Committee (DMREC) for validation and to the
minister of finance for approval. The MTDS is then sent to the cabinet of ministers and
parliament for information. The DMD also prepares a public debt risk report covering some
financial risks (exchange rate and floating rate) and refinancing risks (average time to
maturity and redemption profile).
13. In September 2011 the MOF state secretary issued an order creating the
DMREC. The DMREC is responsible for discussing the MTDS prepared by the working
group, monitoring the implementation of the strategy, and setting up ceilings for external and
domestic debt. The committee is chaired by the state secretary and composed of all heads of
MOF departments. The committee has met only once since its inauguration.
14. Decision-making regarding the characteristics of new government loans is not
centralized. The DMD, FEPD, and DFCD do not coordinate their securities issuance and
loan-contracting decisions in light of prevailing financial conditions, the current debt
structure, and the MTDS guidelines. Informally, the DMD is called by the DFCD to provide
comments on each new loan proposal before it is negotiated with the lender (maturity,
interest rate, conditionality and currency). Notably, the DMD also analyses Mongolia’s debt
in terms of sustainability. However, there is no discussion whether it would be better to pre
paid debt or use the available cash instead of borrowing as these are treated as independent
issues and cash plan does not provide sufficient medium-term information on the use of the
financial resources available to the treasury.
15. In 2010, the MOF and BOM signed a joint decree defining rules for coordination
and exchange of information. The objective is to enhance coordination between monetary
and fiscal policies and public debt management. However, no meetings have been conducted
to-date.
16. Preparation of the third MTDS, covering 2012–14, is underway and is facilitated
by arrangements set up under an order of the state secretary of the MOF in September
2011. The order created a working group to discuss and prepare the MTDS. The working
group consists of nine members: the Treasury Department Director, who presides over the
group, three members from the DMD, one from the BOM, one from the FPD, one from the
DFCD, one from the FEPD, and one from the NDIC.

Box 2. Public Debt Institutional Framework: the Brazilian Experience
In 1999, the Brazilian National Treasury implemented a new model for public debt management,
based on a DMO framework (back, middle and front offices), in line with the international best
practices. The front-office main functions are: (i) issuing bonds in the domestic and external markets;
(ii) defining the contractual debts financial characteristics; (iii) and evaluating structured operations
involving bonds or contractual debt. The middle office is responsible for: (i) monitoring risks; (ii)
developing medium- and long-term debt strategies, based on the optimum debt composition; (iii)
preparing and monitoring the ABP; (iv) releasing the ADR; and (v) dealing with domestic and external
investor relations. The middle office’s Institutional Relations Unit works as a direct channel with the
media, rating agencies, and market agents to provide regular and reliable information on public debt.
The back office is responsible for domestic and external debt register, control, and payment as well as
budget monitoring. It is also responsible for the official federal public debt statistics.
There is a Public Debt Committee composed of the DMO Director General and the three directors
from the front, middle, and back offices. The committee can also participate in the meetings of any
official dealing directly related to debt management. The committee conducts the following
conferences/meetings: (i) annual strategic meetings to discuss and approve the Long-Term Debt
Composition and, based on it, the MTDS; (ii) quarterly tactical meetings to approve and review the
ABP; and (iii) operational monthly meetings to decide on the bond issuance agenda for the following
month, according to the ABP.
Regarding governance, three events were fundamental in defining the centralization of the debt
management function in the treasury: (i) the approval in 2000 of the Fiscal Responsibility law that
stated that after 2002 the Central Bank would not be authorized to issue its own bonds to execute
monetary policy, but rather, would be required to use the treasury securities instead; (ii) in 2005 the
responsibilities for issuing bonds in the international market were transferred from central bank to the
treasury; and (iii) from 2010 on the DMO became responsible for defining the financial characteristics
of all federal government contractual debt (usually with multilaterals for investment purposes).
As a consequence, the DMO performance of debt operations improved substantially: The objectives
and guidelines are fully reflected in the day-to-day debt operations, Brazil is considered to have the
most efficient relationship with investors, road shows are organized regularly in the main international
financial centers to discuss the macroeconomic situation and public debt management strategy, and the
operation desk executes the external and domestic debt operations in an integrated way, assessing the
best funding alternatives.
In terms of transparency, three important documents are released regularly: (i) the ABP, published
since 2001, presents the debt objectives, guidelines, financing needs and strategies, as well the lower
and upper limits for debt indicators at the end of the year; (ii) the ADR, published since 2004, analyzes
the debt results in comparison with the ABP targets; and (iii) the Monthly Federal Public Debt Report,
published since 2007, presents information on the consolidated domestic and external debt statistics.
All reports are publicly available in Portuguese and English on the Brazilian National Treasury’s
website, at www.tesouro.fazenda.gov.br.
B. Staff Comments
17. The decentralization of front-office operations impedes the implementation of
the MDTS. The objectives and guidelines defined by the MTDS should be observed by all
areas responsible for debt management. There is a considerable risk of losing the main
targets and implementing a somewhat different strategy if the functions are dispersed in

distinct departments, lacking (both) efficient coordination and clear accountability regarding
the achievement of targets.
18. Responsibility for the decision-making regarding the financial characteristics of
new loans should be centralized in the DMD. The decision regarding the best moment to
access the domestic and external bonds markets to cover the budget needs, among other
purposes, is a financing decision, which should involve the constant comparison of the costs
and risks of raising resources through distinct financing sources. The separation of issuance
functions considerably increases the risk of larger borrowing costs due to incomplete
information, for example, by accessing the international market at an unfavorable moment
when cheaper domestic funding alternatives may be available.
19. Although the process of initiating contractual loans may be conducted by the
DFCD, decision-making regarding the financial characteristics of the loans should be
formally transferred to the DMD. Informally, the DMD is consulted by the DFCD to
comment on a new loan proposal, before being negotiated with the lender. However, because
this arrangement is informal, there is no guarantee that all new loans will be evaluated by the
Treasury Department and that its comments and recommendations will be observed.
20. In the same vein, centralization of the front-office activities would improve
operations and facilitate taking a whole-portfolio approach to ensure that decisions on
funding sources and debt composition are in line with the guidelines in the MTDS. This
is important considering that Mongolia is moving toward more sophisticated and nonconcessional
borrowing operations. For example, some structured operations, such as early
redemptions and swaps of currencies and other financial options, are permitted by bilateral
and multilateral lenders. An active front office could monitor the market conditions to better
access these opportunities, reducing costs and risks.
21. Some important middle-office functions need to be addressed by the MOF to
ensure an optimal debt composition over the medium term. Risk analysis at its initial
stage is the responsibility of the DMD, but is not prepared on a regular basis and does not
include all risks. A regular report on a semi-annual basis, for example, covering the main
debt indicators (stock, cost, composition) and risks would be very helpful to provide
guidance to the treasury, state secretary and the minister of finance. Also, the discussion
regarding the best debt composition in the long term (considering government investment
plans and its intention to create a sovereign wealth fund), the MTDS and the short-term debt
and asset management strategy would be better addressed if a separate middle-office were in
charge of such functions.
22. No unit is currently responsible for projecting the level of debt at the end of the
fiscal year monitoring the debt indicators defined by the FSL. A middle-office unit could
also be responsible for estimating all new loans for the year, based on updated information
received from other units, as well as for consolidating the information to efficiently anticipate

the risks related to the breaking of the limits. Also, a sensitivity analysis, mainly related to
the exchange rate (considering the significant amount of external borrowing), could capture
additional risks to the limit associated with sudden changes in the main macroeconomic and
financial indicators.
23. Improved communication is needed to ensure consistent messages to actual and
potential creditors and investors and to minimize misunderstanding regarding the
public debt management. The preparation of an ABP in line with the MTDS is fundamental
to guiding the government debt operations and increasing transparency. The ABP should
include objectives, guidelines, borrowing needs, and issuance strategy. The current ADR
should move towards an accountability report regarding the targets defined in the ABP. Also,
the ADR should evaluate the main public debt risks (financial, refinancing, and operational,
among others); and simulate distinct scenarios including stress tests, as well as a sensitivity
analysis of the debt in relation to marginal changes in the main financial and macroeconomic
indicators.
24. Depending on the number and size of each operation, good practice suggests the
establishment of an investor-relations unit to better understand the characteristics and
concerns of the holders of the debt. The creation of an investor relations unit would
facilitate permanent contact with investors and rating agencies to capture their expectations
and perceptions regarding the Mongolian macroeconomic and fiscal policies and public debt
management. Investor relations units have been seen as efficient instrument in broadening
the investor base and reducing misunderstandings regarding government strategies.
25. To ensure the achievement of debt objectives, best practice suggests that back-,
middle-, and front-office functions should be executed by specialized units within the
same organization. The DMD already executes all back-office functions, in addition to
some middle and front-office activities. In considering the above proposals to bring all frontoffice
functions to the Treasury Department, as well as to incorporate new middle-office
functions, it would be necessary to restructure the MOF and strengthen the Treasury
Department to continue performing cash and debt management functions under the
responsibility of the treasury. However, this needs to be done gradually because the Treasury
Department will need additional staff and capacity. The current structure of DMD with only
few staff needs to be reinforced and it seems that there is no resources available elsewhere in
the MOF what would imply that increase in the number of staff in the ministry is necessary
otherwise it will not be possible to implement all the reforms proposed in this report. As
observed in many debt management reforms elsewhere, these reforms can take many years to
complete.
C. Recommendations
 Define a plan to restructure the debt office functions to have a front-, middle-,
and back-office structure. Begin the restructuring by separating the middle- and

back-office functions. Then bring the issuance of external debt to the Treasury
Department and finally bring the external and loans operations to the Treasury
Department. Additional personnel may be needed, as will capacity building, in order
to perform these functions.
 Create a debt management committee to guide debt management activities and
improve coordination. This committee can be created even before the restructuring
of the debt office to further coordination among the different units, exchange of
information, and preparation of consolidate reports. The Committee should consist of
the units currently in charge of back-, middle-, and front-office functions and meet at
least monthly to discuss results achieved and actions for the next period.
 Prepare an annual borrowing plan to inform the government and the market of
the annual debt objectives, borrowing needs, and issuance strategy. This plan
should be in line with the MTDS and the MTBF and should be publicly available.
 Improve the current Debt Management Annual Report by analyzing the
implementation of the MTDS, justifying any deviations from the strategy, and
indicating measures that have been, or will be, implemented to achieve the goals
defined by the strategy. In some cases, a review and update of the strategy will be
necessary before the two-year cycle has ended. If needed the MTDS should be
revisited before the completion of the usual two-year cycle.
III. CONTINGENT LIABILITIES AND QUASI-FISCAL DEBT-RELATED ACTIVITIES
A. Current Situation
26. The government of Mongolia currently engages in multiple activities that may
create uncertain demands on future fiscal resources and, therefore, complicate fiscal
policy. These include loan guarantees, loans taken for the purpose of on-lending to stateowned
enterprises and local governments, PPPs, activities of SOEs, and the newly formed
DBM. These activities and related risk are growing in terms of type, complexity, and size.
Box 2 discusses the main types of fiscal risks.
Loan guarantees (excluding the DBM)
27. The MOF has the authority to issue loan guarantees after receiving approval
from the cabinet. This authority was established by the 1992 General Budget Law and has
been confirmed by subsequent budget system laws: the Public Sector Management and
Finance Law (and the IBL passed December 23, after the mission dates). While loan
guarantees have been issued under this authority, the MOF does not maintain a
comprehensive register of guarantees and is not able at this time to estimate the nominal
value of outstanding guarantees. Anecdotal evidence is that the number of outstanding

guarantees are few and, aside from guaranteeing deposits in the banking system, fairly small
in nominal value.
28. The parliament establishes, by resolution outside the medium-term fiscal
framework and the annual budget process, a maximum face value of outstanding
guarantees. The cabinet approves, on the basis of proposals from the MOF, specific
guarantees within this total. At this time there is no explicit process for saving, or
appropriating funds for, payments under loan guarantees in force. Any payment required
under a loan guarantee shall be made within the amount of the annual Budget Reserve Fund,
which cannot exceed one percent of the estimated GDP for the budget year; otherwise, it
shall require a budget amendment. The beneficiaries of a loan guarantee do not pay a fee for
receiving said guarantee.
Box 3. Fiscal Risks
The main issues when managing fiscal risk are:
1. Identification and disclosure of fiscal risks
2. Cost-effective mitigation of fiscal risks
3. Legal and administrative framework to manage fiscal risks
4. Integration of fiscal risks into fiscal analysis and budget process
Common fiscal risks are:
 Increases in debt-to-GDP ratio as a consequence of the business cycle, interest rate, commodity
prices, etc.
 Exchange rate depreciation, especially if debt is denominated in foreign currency.
 Changes in commodity prices, particularly if commodity prices decline for commodity-producing
countries
 Contingent liabilities stemming from banking crises, natural disasters, state-owned enterprises, subnational
government bailouts, legal claims guarantees and public-private partnerships
A Fiscal Risk Statement could cover the following topics:
 Macroeconomic Risks and Budget Sensitivity
 Public Debt
 Contingent Central Government Expenditure
o Contingent Liabilities
o Banking Sector
o Legal Action Against the Central Government
o Natural Disasters
 Public-Private Partnerships
 State-Owned Enterprises
 Subnational Governments
Note: Particularly important fiscal risks for Mongolia relate to commodity prices, SOEs, and PPPs.
Source: Fiscal Risks: Source, Disclosure and Management, 2009, IMF Fiscal Affairs Department, by
Aliona Cebotari, Jeffrey M. Davis, Lusine Lusinyan, Amine Mati, Paolo Mauro, Murray Petrie, and
Ricardo Velloso.

Guarantees over borrowing by the DBM
29. The DBM became operational in 2011 and is supervised by the MOF. However,
the role of the MOF is a matter of current policy and has not been established by law or
regulation. The Chairman of the Board of Directors is appointed by the prime minister and is
currently the FPD General Director. The law creating the DBM stipulates that the bank will
finance projects that are priorities of the government and parliament. A 2011 parliamentary
resolution directed that the DBM should focus on four types of projects: urban infrastructure
to support new housing, roads, railroads, and the industrial park in Sainshand, which is
intended to promote value-added processing associated with the mining industry. A
substantial number of these projects, while likely having a positive societal return, will not
produce revenue for the DBM or for the government, or will produce insufficient revenue to
pay debt service. In countries that have developed successful development banks, these are
generally not dependent on a continuous transfer of payments from government, which in
contrast may well be the case in Mongolia. The present arrangements of funding non-revenue
producing investments have basically set up a part of the capital budget outside the regular
budget process.
30. The DBM is preparing to launch a euro medium-term note program under
which it would issue up to USD 600 million (approximately MNT800 billion) in
securities in the international market. Parliament has authorized government to guarantee
the issuance. Procedures have not yet been established for policy-related and procedural
issues arising after the issuance has occurred, including currency hedging, where the funds
will be invested prior to need to expend in support of project execution, and so on. The
DBM, together with the MOF, is in discussions with the ADB about the possibility of
securing a Mongolian togrog (MNT)-denominated loan equivalent to approximately USD30-
50 million. The loan is contingent on the ADB’s ability to issue a MNT-denominated
security in the international market, which would provide back-to-back funding for the loan.
31. The DBM will become a major source of contingent liabilities and quasi-fiscal
debt. The initial government guarantee of USD600 million is equivalent to 4.5 percent of
forecasted 2012 GDP of MNT18 trillion. It is quite likely that the DBM will be used for
substantial additional project funding over the next few years, and that its financing will
require government guarantees to reduce financing costs. While the proportion of revenue
generating projects may change in the future, it appears today highly likely that a substantial
portion of the DBM projects will not generate sufficient revenue to cover financing costs,
and that the subsidy from the budget will be large and difficult to forecast reliably over the
long term.
32. While projects funded by the DBM must, by law, reflect the priorities of the
government and parliament, it is not clear at this time how the DBM’s operations will
be coordinated with, or shown in, the MTBF or the annual budget. These documents
should provide a comprehensive view of government sponsored activities, priorities,

financing and risks, and thus should include the DBM. Discussions have been held on
authorizing the NDIC to receive all applications for investment projects and determining
whether or not a project will be funded by the budget, as a PPP, or by the DBM. Any
decision in this regard should be reflected in the Development Planning and Policy Law
being drafted. More concretely, it is clear that budget funds will be required to pay debt
service for projects that do not generate sufficient revenue. Other issues, such as whether
DBM funding will appear as a financing source in the budget for project-related services
provided by line ministries, have not been clarified.
Government loans
33. Two types of loan programs in Mongolia create fiscal risks. First, the government
takes a loan for the purpose of on-lending to SOEs. Second, government loans funds from its
own resources to local governments. The nature of the fiscal risk is different in the two cases.
In the first case, the government must repay the loan used to finance the on-lending, and thus
represents a certain future cash outlay for debt service. However, there is an uncertain level
of debt service from SOEs on the on-lending. In the case of municipalities, the fiscal
uncertainty lies in the unpredictable need for making loans.
34. Mongolia has approximately USD 1.9 billion of outstanding loans to SOEs
financed from external loans denominated in foreign currency. Most of the loans to the
government for on-lending are on concessional terms. In most cases, government shifted
currency risks to SOEs by making the on-lending in the same currency as the original loan.
Only 3 percent of outstanding on-lending is in MNT. The repayment status of on-lending in
terms of funds lent is: 70 percent current, 11 percent delinquent, and 19 percent with no
contract. The last category of loans took place in the 1990s when on-lending occurred
without adequate controls or documentation. Attempts are now being made to recover those
funds, but it is probable that many of these loans made to SOEs will be written off.
35. At present, 91 SOEs are supervised and monitored by the SPC on behalf of the
government. The SPC is mandated by the government to privatize SOEs over the long term.
The committee develops a four-year plan following each national election for specific
privatizations. The current four-year plan calls for the privatization of 12 firms. The SPC’s
policy is to minimize additional long-term borrowing by SOEs before privatization occurs.
SPC is introducing modern corporate governance structures for SOEs, including an active
board of directors, at least one-third of which is comprised of independent members. Local
governments do own enterprises and monitor them, but these are uniformly small at this time.
36. In accordance with SPC policy, nearly all of the long-term borrowing by SOEs
has been financed by the government, which obtained most funds on concessional terms
from donors. Short-term borrowing, such as trade or inventory financing, can be financed by
commercial banks. All borrowing by SOEs must be approved by the SPC, which also collects
SOE debt information for decision-making and monitoring purposes.
22
37. The central budget provides loans to local government entities in the event of
short-term liquidity shortages or annual revenue shortfalls. The MOF administers this
program, which is intended to preserve local government operations and services. In 2011
five local government entities received loans totaling MNT6 billion. Loans may be made for
up to one year in duration and may cross fiscal years. The government has no problem
recovering these loans because the MOF has extensive powers in the local government
revenue equalization process, which may be used to recover loans. Thus, while there is a
fiscal risk to the central government, the amounts are relatively small and are short-term in
nature.
PPPs
38. Depending on how they are structured, PPPs can create significant contingent
liabilities and quasi-fiscal debt. These may be in direct financial terms, such as
guaranteeing loans, certain minimum levels of revenue, rates of return and equity
investments, or fixed prices of raw material or utility services such as electricity. Or they
may be indirect financial terms, such as the requirement that the public or the government
buy a certain quantity of goods and services. The SPC is responsible for developing,
negotiating, executing, and monitoring PPPs.
39. PPPs were first authorized in the Concessions Law passed by the parliament in
February 2010. A total of 125 PPPs have been proposed by line ministries (see Government
Resolution 198 of 2010). To date, two concession agreements have been approved by the
cabinet and signed and one is near the end of the final negotiation process (see Box 3). There
are other three in the bidding stage. At this time, while PPPs are viewed as potentially
important sources of funding for infrastructure development in Mongolia, the MOF has
imposed conservative criteria for evaluating PPPs, thereby limiting fiscal risk. These criteria
are policies, not laws or regulations, and thus are discretionary decisions and readily subject
to change.
40. The SPC does not currently have policies and procedures in place for assessing
and monitoring fiscal risks associated with PPPs. While the SPC is well aware of its
responsibilities for evaluating each PPP proposal, the methodology used by SPC for
assessing fiscal risks at the time of evaluating a PPP proposal is not well developed. Fiscal
risk assessments should be included in the project material sent to the MOF and cabinet prior
to approval of the PPP proposal. In addition, the SPC does not have policies, procedures or
methodologies in place for monitoring fiscal risks of PPPs after a PPP has been implemented.
The monitoring of PPPs and associated fiscal risks should occur quarterly, and should be
distributed to the MOF and cabinet. International evidence demonstrates that governments
are generally not experienced in contract oversight and enforcement particularly in relation to
complex contracts and this is where many governments have experienced problems with
PPPs. Assessment and monitoring should identify provisions in the PPP agreement that could
lead to payment by the government, events that will trigger such payments, probabilities of

such events occurring, estimates of payment amounts if a triggering event occurs, procedures
to reconcile payment estimates in the event of disagreement between the government and the
PPP partner, and an estimate of the time period between the moment the government
payment obligation becomes clear and the date the payment should be made. Monitoring
reports should also include historical information on payments actually made for each PPP.
As PPPs grow in number and total value, the assessment and monitoring of PPP-related fiscal
risks will become increasingly important.
Box 4. Public-Private Partnerships in Mongolia
Government policy today is that the state will provide no direct financial contributions to any PPP,
including tax exemptions. Fiscal risks, however, may arise from purchase agreements, political risk or
force majeure risk sharing. Additional government contributions to the PPPs include the gifting of free
land and supporting the PPPs in obtaining necessary licenses and permits.
To-date, three PPPs have been signed or are near final approval:
 A Build-Operate-Transfer Agreement for a 60 MW coal-fired power plant to be located in
Zavkhan aimag. The duration of the concession is 18 years: two to build and 16 to operate. The
government guarantees that the state-owned electricity distribution company will purchase all
power produced. The sale price for the power generated will be determined annually by the
Energy Regulatory Agency. There is a large unmet demand for electricity in northern and
western Mongolia hat will be served by the new generating plant.
 Two Build-Operate-Transfer toll roads (400 km and 50 km in length respectively) to link
southern Gobi mines with the Chinese road system. The duration of these two concessions is 15
years: three to build and 12 to operate. Tolls shall be MNT 1,500 per ton of cargo, which will
increase at a fixed rate of 2 percent per year. The firms created to enter into the PPPs are
majority owned by mines served by the roads, so revenue to the PPPs represents expense for the
mines, thereby reducing the potential for conflict between the toll roads and their customers.
B. Staff Comments
41. Although, the amount of contingent liabilities and quasi-fiscal debt incurred by
the government through the end of 2010 was fairly small, this is expected to increase
substantially in the near future, primarily through the activities of the DBM. The
government’s principal exposure to losses incurred up until 2011 came in the form of longterm
loans made by the government to the SOEs, much of which was financed by
concessional loans from donors. In this case, the amount that the government must repay for
this on-lending is clear; uncertainty lies only in whether loan repayments will provide funds
for the on-lending loans debt service or general budget revenue. From 2011 forward, the
clearest source of fiscal risks is the DBM. It is not unreasonable to expect that DBM
borrowing with government guarantees will reach the double digits in terms of share of GDP
in the relatively near future.

42. The MOF needs to establish procedures for how to pay under the terms of its
guarantee over borrowing by the DBM. There are three aspects to this problem. First,
because the DBM is being directed to finance projects that will not generate sufficient
revenue to finance debt service, it is predictable from the start that government must
contribute substantial sums to DBM for debt service. The MOF is aware of this and has
included funds to pay interest on DBM borrowing in the 2012 budget. However, the MOF
must develop policies as to when payment for debt service is to be made. Should it wait for
the DBM to fail paying the debt service, thus triggering the mechanisms of the guarantee so
that the government pays to the note trustee? Or, should the government anticipate the need
to provide funds to the DBM to help it cover debt service and provide funds prior to the
events formally triggering the guarantee? The latter approach is preferable so as to avoid
costs associated with formally defined financial distress by the DBM, which may result in
increased costs for future borrowing even with government guarantees.
43. Other issues relate to the accounting treatment of government’s financial
support for the DBM to meet its debt-service obligations prior to triggering a formal
call of the guarantee, and to the specific mechanisms in the budget for making
payments to the DBM. Funding provided by government to the DBM in support of its debt
service obligations might be treated in DBM’s financial statements as a loan or an equity
investment. Under cash accounting these transfers will be classified as expenditures in
government. This issue is separate from policies embedded in the legal documents describing
the terms of the guarantee. In addition, to the extent that government financial support for the
DBM can be predicted, a simple appropriation can be made in the annual budget. However, if
uncertainty exists for payment events or the size of payments, the MOF must develop budget
policies for obtaining authorization to spend.
44. Some projects currently planned for funding by the DBM appear to be the ones
that should be funded through the budget. The DBM has been directed by parliament and
cabinet to fund socially beneficial projects that do not generate sufficient funds to cover debt
service. The DBM is not better placed to fund or manage such projects than are line
ministries. Direct borrowing by the government for the funding of such projects is equivalent
to the government’s issuing a guarantee to the DBM for borrowing its own projects.
Government borrowing for what is in essence government expenditure is more transparent,
and is better aligned with institutional mechanisms in managing fiscal policy and prioritizing
spending across all possible projects (i.e., the MTBF and the budget process).
45. The DBM may increase the operational risk to project implementation. As a very
young organization, the DBM is still trying to define its role. In addition to the funding issues
described above, the bank is also considering its role in implementing projects. For example,
to what degree should the DBM build an internal capacity to design, procure, and supervise
the projects that it is financing? To what extent should it procure expertise in line ministries
and the private sector? The DBM should reduce operational risk when implementing projects

by employing expertise well developed in other public and private institutions, as opposed to
building its internal capacity beyond which is customary in any lending institution.
46. Contingent liabilities and quasi-fiscal debt contribute to public debt and the
related limits established by the FSL. Public debt in the FSL is defined as the “sum of
internal and external borrowings of the government, financial leasing, guarantees issued by
the government, bonds, all types of financial obligations repayable in the future by fully or
partially state-owned or locally-owned entities, and its interest and fines incurred in the event
of late payment of the government’s part of the financial obligations.” The FSL limited
public debt to 50 percent of GDP in 2011, and has a schedule for limits for each year until
2014 and beyond at which time the public debt limit is 40 percent of GDP. For 2012, the
MOF estimated the public debt using the net present value of guarantees but did not include
estimates of other contingent liabilities. The MOF is currently drafting regulations for
applying fiscal rules established in the FSL, including public debt limits.
47. Regarding contingent liabilities and quasi-fiscal debt, the main objectives of any
set of policies and procedures are that the government has a good idea of what demands
will be placed on the budget and that it is prepared to meet those demands. Prior to
2011, the Mongolian government met these objectives fairly well. However, the trend
developing with the DBM, and potentially with PPPs is troubling. Fiscal risks are growing
quickly, and use of the DBM to fund non-revenue generating projects that would customarily
fall within the budget, is not justifiable.
C. Recommendations
 Identify and report all fiscal risks of central government, including contingent
liabilities, in a fiscal risk statement. This should be part of the MTBF and budget
documents. The fiscal risks to be disclosed could mirror the guidance provided in
FAD’s 2009 publication entitled Fiscal Risks: Sources, Disclosure, and Management.
The MOF should prepare a regulation with detailed definitions, sources of data, longterm
policies, and the assignment of responsibilities to prepare the statement
annually.
 Establish a maximum limit on the face value of guarantees as part of the MTBF
and annual budget process. Currently, a maximum limit is established
independently of these institutional processes, and can be changed at any time. This
does not provide adequate coordination with other aspects of fiscal policy.
 Minimize or avoid using the DBM to finance projects that are unlikely to generate
sufficient revenues to cover the associated debt service. Socially-beneficial projects
should appear in the budget and any borrowing to finance such projects should be
made directly by the government. The DBM does not have a comparative advantage
to finance or execute such projects. The DBM financing for these projects reduces

budget transparency and unity and interrupts the institutional process in allocating
public resources efficiently.
 Develop procedures to ensure the budget financing of debt service associated with
projects financed by the DBM that do not independently generate sufficient resources
to cover financing costs, before guarantees are formally called. The MOF must develop
the policies and procedures of the mechanisms to make payments in a timely manner
that may become necessary under guarantees, or in response to other fiscal risks,
without violating the principle that all expenditures must be authorized by law. Use of
the Budget Reserve Fund for this purpose may not be sufficient.
 Ensure the integrity of the long-term public investment plan (PIP) process. In
particular, the PIP process should be used to screen projects proposed for funding or
sponsorship by the government, and to assign for each project an appropriate funding
mechanism, such as the budget, the DBM, or a PPP arrangement. This mechanism
will ensure consistent standards of project evaluation and consistent assignments to
different financing agencies. Additional work to evaluate such proposals should be
performed by the responsible agencies after a project is assigned to them.
 Include an analysis, prepared by the SPC, of the fiscal risks of each PPP project at the
time of proposal evaluation, and ensure quarterly monitoring of fiscal risks during the
life of the project. By design, PPP contracts involve the sharing of risks and resources
between the government and the private partner. The SPC must include an assessment of
fiscal risks, including estimated probabilities of events that will result in payments by
the government, in its evaluation of each PPP proposal. The committee should submit
this information as part of the package of material for review by the MOF and other
cabinet members prior to final approval of the PPP by the cabinet.
 Require audited annual financial statements to be prepared for each PPP
project and submitted to the SPC and the MOF. Include an analysis, prepared by
the SPC, of the fiscal risks of each PPP project at the time of proposal evaluation and
ensure the quarterly monitoring of fiscal risks during the life of the project.
IV. FINANCIAL REPORTING OF DEBT AND CONTINGENT LIABILITIES
A. Current Situation
48. The DMD is responsible for preparing the consolidated central government’s
gross debt statistics. The DMD prepares monthly, quarterly, and ADRs: the monthly report
provides information on the projected and actual amounts of external debt available to be
used during the year; the quarterly report provides information on the balance of outstanding
external debt by lender and contract; and the annual government debt management report
provides information on the main macroeconomic indicators, the amounts of total debt
(subdivided by domestic and external debt, and on-lending loans), and information on the

Mongolian sovereign credit rating according to the main international credit rating agencies.
The annual report also provides information on the debt sustainability analysis prepared by
the IMF and the WB.
49. Since 2007, on a biennial basis, the MOF has prepared a three-year MTDS. The
MTDS contains objectives and the scope of debt management operations, a description of the
debt composition and risks, a list of borrowing options, and some specific debt targets.
50. However, no report is prepared to analyze the implementation of the MTDS. It is
expected that the DMREC will prepare such a report in the coming years, but no resolution
was issued identifying content, periodicity, and distribution of such a report. The internal and
external auditors audit the debt information during the annual examination of the financial
statements of the Mongolian government. This is done for the compliance and accuracy of
the financial information. The report is publicly available on the MOF’s webpage.
51. The Accounting Policy Department (ACPD) of the MOF is responsible for the
preparation of the annual financial statements of the government. The financial
statements include the outstanding short-term and long-term assets and liabilities including
the budget entities, treasury operations, 100 percent owned SOEs, budget projects and funds,
and local governments. It does not include information on state-owned enterprises in which
government participation is between 50 and 99 percent. This report is audited annually by the
external audit office and is available on the MOF’s webpage.
52. The SPC is responsible for the monitoring and management of the participation
of the government in the SOEs. Currently, there are 91 SOEs operating in the mining,
energy, transportation, manufacturing, telecommunications, banking, and other economic
sectors. The government has a privatization program that annually privatizes a group of 10 to
12 companies. The SPC prepares a consolidated monthly report on the main financial
information of the SOEs such as total revenue, total spending, total debt, overall result
(profit/loss), and total receivables. It is expected that the overall result of the SOEs will be
slightly positive in 2011 but almost half of the SOEs operates in structural deficit. This report
is shared with the MOF but is not publicly available. The government has not provided
guarantees to these companies in recent years and has provided on-lending for cash flow
liquidity purposes but not for capital investment. For 2011, it is projected that all SOE will
have a total debt of MNT 1.9 trillion (18 percent of GDP) at the end of the year, of which
MNT 836 (8 percent of GDP) are related to joint ventures and companies not fully owned by
the government (mining, telecommunications, railways).

Note: The consolidated budget consists of the state budget, local budget, Human
Development Fund, and Social Insurance Funds. Government financial statements cover all
four budgets in the consolidated budget.
53. There is no formal report informing the government and analyzing the results of
the main fiscal indicators as defined by the FSL. The provisions of the FSL are precise in
terms of the indicators that should be followed to ensure a sound fiscal policy, and have
defined sanctions in case these are not observed.
54. There is no statement of fiscal risks and no information on contingent liabilities.
This issue was discussed in Section III.
B. Staff Comments
55. The MTDS must be the main tool guiding the management of debt. Currently
there is no report following up on the implementation of the debt strategy and analyzing the
eventual deviations and the reasons why they have occurred. The MOF should prepare an
annual report analyzing the implementation of the MTDS.

56. The MOF should prepare a quarterly report informing the government as to
whether or not the FSL indicators, including the debt indicators, were observed, as well
as there is a risk of non-compliance. It is vital that the MOF begin monitoring the
indicators as soon as possible. The report should also propose measures to return to
normality.
57. Thus far, the MOF has not issued a regulation to define how the provisions of
the FSL should be interpreted and observed. It is necessary to explain, for example, what
constitutes a guarantee, how the indicators should be interpreted in terms of coverage, which
entities should provide information to the MOF and in what periodicity, and which entity will
provide the GDP projection used for calculating the indicators. For example, the GDP figures
will be provisional when the indicator needs to be projected and it should be understood
whether or not the calculation will have to be revised when the definite figure be published,
or if the projected GDP will be used for reporting and compliance purposes.
58. There is no information on guarantees and contingent liabilities in the annual
financial statements. Section III discusses the international public sector accounting
standards (IPSAS) and how to disclose contingent liability information in financial
statements.
59. Financial information of the partially owned SOEs is not consolidated in the
annual financial statements. According to the IPSAS this information should be included
proportionally to the government’s participation in the company. Preferably, the reports
produced to comply with the FSL should be prepared by the ACPD because they are
responsible for preparing audited accounting reports and the FSL reports should be as
reliable and comprehensive as possible.
C. Recommendations
 Prepare monthly, quarterly, semi-annual, and annual fiscal reports informing
on the observance of the fiscal indicators as defined by the FSL. These reports
should be comprehensive, follow international accounting standards, and be
submitted as part of the annual financial statements of the government. The monthly
reports are for the MOF’s internal purposes and should be used to indentify whether
there is a risk that any of the indicators will not be achieved and what should be done
to bring the indicators to the target.
 Prepare an annual debt management report analyzing the implementation of the
MTDS, providing justification for departures from the strategy, and indicating
which measures have been, or will be, implemented to achieve the goals defined
by the strategy.
 Include financial information of the partially-owned SOEs in the consolidated
annual financial statements of Mongolia.

V. FINANCIAL ASSET AND PUBLIC DEBT MANAGEMENT LAW

A. Current Situation
60. The existing legal framework for debt and asset management is fragmented, but
has met the basic needs of the government’s financing operations. The General Budget
Law 1992 and Public Sector Management and Finance Law (PSMFL, 2002) provide the legal
bases for government borrowing. The IBL, in which these two laws and modern budget
institutions and practices are incorporated, is being reviewed by the parliament.2 The laws
authorize to the government to borrow with the approval of the parliament, and allow the
MOF to delegate borrowing rights. The FSL (2010) stipulates a ceiling for outstanding debt.
This law lays out the definition of debt includes external and domestic debts, as well as
government guarantees, and stipulates that the net present value of the outstanding debt
should not exceed 40 percent of GDP. External borrowing is governed by the Foreign Loans
and Grant Aid Law (FLGAL, 2003), while domestic borrowing is regulated by the Securities
law (2002). Provisions for reporting and auditing are defined in the Public Sector
Management and Finance Law. However, stated objectives of debt management or legal
requirements for a medium-term debt management strategy are not explicitly enshrined in the
current legislation.
61. The government is drafting a new comprehensive legal framework on public
debt management, financial assets management, and wealth fund investment. The draft
FAPDML or “draft law” defines the main roles of government entities. It also lays out
provisions on regulation, recording and reporting of public debt and contingent liabilities.
The main provisions relate to the following:
 Objectives—ensuring government financing needs at the lowest possible cost and
develop domestic debt market.
 Debt management strategy and borrowing limit—developing a debt management
strategy including a ceiling for outstanding public debt and guarantee, new
borrowing, and guarantees.
 Roles of entities—defining the rights and obligations of the parliament, government,
and MOF.
 Contingent liabilities and guarantees—define procedures and rules to provide
guarantees and assess and report on contingent liabilities.
 Recording and reporting—defining rules for registering and recording consolidated
public debt data and prepare regular reports.
 Financial assets management and wealth fund investment—defining sources of
financial assets, and governance rules for wealth fund investment and management
2 The IBL was passed by the parliament on December 23, 2011, after the mission completed the field visit.

 Establishing the investment council to manage the wealth fund.
 Cash management—preparing cash flow and stock forecasting and planning, and
identify financing cash needs
62. The new law will replace the FLGAL, be complementary to the FSL, and
provide detailed guidance of the IBL on matters related to public debt management.
The provisions for foreign financing in the FLGAL will be incorporated into the new draft
law. The debt ceilings of FSL would be ensured through the implementation of provisions for
debt and guarantee issuance in the draft law. They are also complementary to the general
provisions of government loans and debt management in the IBL, which was approved by the
parliament on December 23, 2011.
63. The new law is being developed by a working group and is expected to be
submitted for parliamentary approval in the 2012 spring session. The working group,
chaired by the MOF’s state secretary, was established in August 2010, and consists of ten
members, eight MOF department heads and two experts. Comments from the IMF (May
2011) and other international organizations have been provided. Other ministries have been
involved in the preparation of the draft law. The MOF plans to send a version by the end of
2011 for comments to the line ministries. After receiving comments, MOF will submit the
draft law to the cabinet for approval.
64. The new law establishes a Public Debt Management Council. The council is in
charge of defining borrowing ceilings, preparing the debt strategy, ensuring compliance with
debt targets, defining general terms for government securities, and preparing guidelines for
the council’s activities. The mission considers these objectives adequate.
B. Staff Comments
65. The drafting of the new legal framework for public debt and financial assets is a
welcome development. A sound and well-defined legal framework is essential for effective
debt and financial asset management. The provisions related to debt stipulated in existing
laws are not detailed enough to cover all aspects of modern debt issuance and management,
such as an explicit definition of objectives and debt management strategy. The new
framework will provide comfort and assurance to investors and other counterparts in relation
to the legal basis for engaging in lending operations and to the authorities on how to manage
debt and financial asset related transactions.
66. In comparing the current version of the May 2011 version, many issues have
been clarified and improved. They include:
 Clearer definition of roles and responsibilities of the parliament, government, minister
of finance, and MOF in dealing with debt issues.

 Expanded composition of MTDS to include medium-term objectives, debt
sustainability analyses, and macroeconomic indicators.
 Establishment of a public debt management council.
 Re-definition of limits on government borrowing and guarantees in line with
requirements of the FSL and the MTDS.
 Improvement in procedures of on-lending to include risk factors of repayment
 Broader provisions for issuance of government securities to include types, pricing,
and trading of government securities.
67. A key enhancement with the current draft law is the incorporation of provisions
on financial asset management and wealth fund investment, although there are some
unresolved issues. For example, the concepts and definitions of government financial assets
and the wealth fund are not clear enough, as they are used interchangeably in Articles 9 and
11. The funding and withdrawal rules of the wealth fund are not set out clearly. The
relationship between the wealth fund, the Human Development and the Fiscal Stability
Funds, need to be defined more clearly.3 Finally, the classification of financial assets in
Article 11 is too general, lacking sufficient meaningful information.
68. The governance structure and legal nature of the Investment Council need to be
defined more clearly to ensure accountability, expertise, and transparency in carrying
out investment activities. The council will have seven members (four staff members from
the MOF and one representative each from the BOM, FRD, and NDIC). A supporting unit
for management and coordination of financial investment will be established within the
MOF. However, it would be preferable to conduct further studies on the legal nature and
governance structure of the wealth fund: (i) determining whether the wealth fund is a
separate legal entity or not; (ii) deciding how to provide operational independence for the
fund while ensuring its accountability to the government and public; (iii) establishing rules
and procedures for appointing and firing the members of the governing body; and (iv)
defining the roles and responsibilities of the supporting unit. These are important issues that
should be addressed carefully when the decision to implement the fund is taken.
69. The establishment of Public Debt Management Council, chaired by the MOF, is
a step for providing advice on the implementation of the debt management strategy.
This council should act as an effective coordination mechanism within the MOF, as well as a
means of/ promoting coordination with other entities such as the BOM, DBM, SPC, and local
3 The Human Development and Fiscal Stability Funds are governed by the HDF law and FSL, respectively.
Article 9 of the draft law stipulates that the sources of the wealth fund shall come from these two funds without
mentioning clearly the funding and withdraw mechanism. The Government Special Funds law regulates the
types of the government special funds. These funds are for example, the government reserve, budget
stabilization, tourism, environment protection, immunization, small and medium enterprise development, and
public liability funds.

governments. The representative from the private sector should have proven competency on
financial market operations and macroeconomic policy.
70. The coverage of contingent liabilities should be expanded to include PPPs and
other types of concessions. Current provisions on contingent liabilities do not define the
PPP as a potential source of contingent liabilities.
71. The authorities should also identify the procedures and arrangements that could
be covered by secondary legislation or regulations. The draft law lays out several areas
that require guidelines or regulations for implementation. These include the guidelines or
regulations on trade of government securities, governance of the investment council,
operation of cash management, governance of the public debt management council, and rules
for preparing projects and programs funded by government external loans. Though the list of
secondary legislations varies depending on the country’s circumstances, the following list of
possible options for secondary regulations should be:
 Arrangement for the conducting of auctions
 Procedures for granting guarantees
 Procedures for granting and extending on-lending
 Procedures for debt servicing and redemptions
 Arrangements for managing contingent liability funds
 Roles, tasks, and organizational structure of the DMO and its coordination
mechanism
 Reporting and publication of information
72. It is important to reactivate the joint decree between the MOF and BOM that
called coordinating and exchanging information on debt and cash management. The
joint decree signed in March 2008 formalizes the exchange of information between the two
institutions, including cash flow forecasts, and establishes a joint working group to ensure
that monetary and fiscal policies are well coordinated. However, the working group has not
yet convened, though it is supposed to meet monthly. It does not seem that the coordination
mechanism is functioning well, though the decree mentions the need for coordinating the
issuance of BOM bills for monetary policy purposes and government securities for debt
management purposes.
C. Recommendations
Regarding the draft law we recommend:
 Further developing funding and withdrawal rules for the wealth fund, and
defining the relationship between the wealth fund and the Human Development and
Fiscal Stability Funds (Article 9, 10 of the draft law version of October 2011). Further

regulation should be also developed defining the specific procedures for managing
these funds.
 Defining the governance structure and legal nature of the Investment Council to
ensure expertise and accountability (Article 12).
Regarding the implementation of the law we recommend:
 Ensuring the active operation of the Public Debt Management Council to
promote coordination in debt management activities among all entities.
 Prepare secondary legislation (guidelines) detailing the operations, roles, systems
and procedures on contingent liabilities, as well as arranging for auctions, the
issuance of guarantees, and establishing a Contingent Liability Fund.
 Resuming the meetings as called for in the joint decree between the MOF and
BOM to ensure coordination of activities and exchange of information regarding debt
management, cash management, and financial assets management.

VI. CASH MANAGEMENT

A. Current Situation
73. There is a TSA in place, with extensive coverage. The TSA is domiciled at the
BOM. It encompasses the cash holdings of all entities that are captured under the government
financial management information system (GFMIS), including the budgetary central
government, aimags, Ulaanbaatar City, districts, and soums,4 with separate zero-balance
subaccounts for different entities. The Human Development Fund and the Social Insurance
Fund, which have their own governance structures and operate under special legislation, are
partially integrated into the TSA; they place cash in the TSA, but their holdings are not comingled
with other subaccounts. The balance of the TSA is currently approximately MNT
1.3 trillion (or 15 percent of GDP), of which MNT 500 billion represents cash attributable to
the central government’s budget. The TSA is not remunerated.
74. Some cash is held outside the TSA. Under current regulations, the placing of
deposits at local commercial banks is authorized up to a limit of MNT 70 billion from the
state budget; currently, MNT 40 billion is held in term deposits. The Social Insurance Fund,
which is not part of the state budget but is one of four components of the consolidated
4 Mongolia is divided in aimags (equivalent to provinces), and soums (equivalent to municipalities). The capital
city Ulaanbaatar has the same status as the aimags and the capital city is divided in districts.

budget, also has deposits in the banking system. The holdings of the Fiscal Stability Fund,
although placed at the central bank, are outside the TSA.
75. The DMD is responsible for cash management for the central government. The
DMD prepares forecasts of cash inflows and outflows associated with the central
government’s budget, as well as the Human Development Fund. The forecasts draw on
inputs from the Revenue Division, the Expenditure Division (for current expenditure), and
the Investment Division (for capital expenditure) of the FPD. Every Tuesday, the DMD
provides the BOM with a forecast of daily inflows, outflows, and the TSA balance over the
coming seven days. The DMD is also responsible for undertaking transactions to manage the
TSA balance on an active basis, although in practice such transactions are rare.
76. The proposed FAPDML includes provisions related to cash management. The
law assigns explicit responsibility for cash management to the MOF. There is a requirement
to maintain a cash buffer equivalent to 14 days of expenses at all times in the TSA. The
government may issue short-dated securities, go into overdraft at the BOM up to a certain
limit defined in the annual budget, and undertake other borrowing to cover cash shortfalls.
Excess cash may be deposited in the BOM or in commercial banks, invested in local and
foreign financial assets, or managed through repo transactions. The law also calls for the
preparation of a cash plan for the fiscal year.

Box 5. Cash Management: Policy Linkages and Relationship to
Budget Execution
Cash management has implications for a wide range of policy issues. The first policy consideration is
how budget execution interacts with cash inflows and outflows. Cash management should provide
flexibility to accommodate temporary fiscal shocks, thereby minimizing their impact on the orderly
execution of the budget. The second policy consideration is to what extent the level of cash balances is a
policy target. Minimizing idle cash balances reduces the economic cost of borrowing. Effective targeting
requires accurate cash flow forecasts, and efficient budget execution facilitates their preparation.
Depending on how closely the cash balance target is met, there are likely to be benefits to monetary
policy implementation, which is the third policy consideration. The fourth policy consideration is what
actions the government’s cash manager undertakes in the financial market to meet the target. Cash
management should contribute to sound financing of any deficit by enabling the costs and risks of
borrowing to be diversified throughout of the year. The fifth policy consideration is how those actions
support or impede domestic money market development.
While harmonized, cash management is distinct from budget execution. Budget execution is concerned
with ensuring that the budget is managed consistently within agreed financial limits. This covers aspects
including control over cash releases linked to resource availability, ensuring that releases are in line
with spending commitments, and delegation of budget management to line ministries. By contrast, cash
management is concerned with guaranteeing that the government has the liquidity available to fund its
expenditure in a timely manner and to meet its obligations as they fall due. This requires planning ahead
and making cost-effective use of the government’s available cash. Cutting planned expenditure because
of a lack of cash is cash rationing, not cash management. Effective cash management removes the need
for cash rationing.
For further information on sound practices in cash management, refer to: (i) I. Lienert (2009),
“Modernizing Cash Management,” IMF Technical Note and Manual 09/03; (ii) M. Williams (2010),
“Government Cash Management: Its Interaction with Other Financial Policies,” IMF Technical Note
and Manual 10/13; and (iii) S. Patanayak and I. Fainboim Yaker (2011), “Treasury Single Account: An
Essential Tool for Government Cash Management,” IMF Technical Note and Manual 11/04 (available
on the internet site of the IMF).
B. Staff Comments
77. Cash flow forecasting is largely ineffective. The horizon of the forecast prepared by
the DMD each week extends out only seven days, which is too short for making decisions
regarding the raising or investing of cash to accommodate timing mismatches between
revenue and expenditure. The forecast is also often unreliable and of limited usefulness for
assisting the BOM in planning its monetary policy operations. More generally, the exchange
of information between the DMD and the BOM about cash and debt management intentions
is erratic.
78. The causes of weak cash flow forecasting are systemic, starting with poor cash
planning in the MOF and line ministries. As part of the preparation of the budget, line
ministries (and other executing units) submit cash plans to the FPD that indicate when cash
will be required and those, in turn, form the basis for determining monthly expenditure

allotments, which are controlled through the GFMIS. Commitment controls for capital
expenditure are absent, however, and should be introduced. Line ministries are expected to
take account of known seasonality when preparing cash plans. At the top-down level, actual
allotments are determined with regard to the resources expected to be available each month.
Consequently, smaller allotments are approved for months when revenue is expected to be
low, although some issuance of security to raise cash is programmed. During the course of
the year, unused allotments may be carried over into subsequent months. In practice, the
preparation of allotments is poor, and line ministries request changes to the monthly
allotments throughout the year. The cash plans are reviewed on a quarterly basis to take
account of the differences between the start-of-year projection and outturns to-date.
79. These cash plans make for a useful starting point, but they are insufficient to
serve as forecasts of actual cash flows. Even if information on actual cash flows ex post is
adequate for budget execution and accounting purposes, there is little coordination within the
MOF between the FPD, FEPD, DFCD, and DMD on the flows expected on a weekly (and,
ideally, daily) basis. Forecasts of capital expenditure cash flows are particularly problematic
and often are not prepared at all. Technical capacity within line ministries to prepare highfrequency
cash flow forecasts is limited. The FPD, FEPD, DFCD, and DMD do not provide
feedback to line ministries on the quality of the cash plans that they prepare. It would be
helpful to concentrate initially on those ministries that account for the largest share of
expenditure, such as construction (infrastructure), health, education, and defense, and to
identify patterns on expenditures and revenues.
80. It is appropriate for the DMD to be responsible for cash balance management,
but the FPD is better positioned to take on the role of overall coordinator for cash flow
forecasting. Cash flow forecasting draws on information across multiple entities, and the
coordinator of the overall forecast should be the technical unit best placed to receive up-todate
data and evaluate various inputs. Often a distinction is made between compiling abovethe-
line forecasts of revenue and primary expenditure, and below-the-line forecasts of debt
and other financial transactions. Above-the-line forecasts are typically prepared by officials
responsible for monitoring budget execution. They draw on detailed bottom-up information
provided by revenue and spending entities. This information may be complemented by a topdown
analysis of how revenue and primary expenditure actually perform over time, which
becomes important if the bottom-up information lacks reliability. Debt management officials
typically prepare below-the-line forecasts. The FPD is the technical unit that has the most
direct and logical relationship with revenue and spending entities outside the MOF, as well as
centrally within the MOF. The ministry has received intermittent technical support from the
United States Treasury Office of Technical Assistance on cash flow forecasting, and it would
be desirable for that support to be continued and intensified.
81. The MOF currently lacks a mechanism to systematize decision-making
regarding the deviations between cash plans and outturns. Whenever forecasts are
updated, a key question is whether deviations between the cash plans and outturns represent

temporary differences that will be eliminated over the remainder of the year or permanent
departures that require an adjustment to the budget, whether through reductions in
expenditure, the introduction of new measures to raise revenue, a change in planned debt
issuance, or other actions. To that end, a useful innovation would be to establish a standing
Cash Forecast Committee involving technical-level staff from the FPD, FEPD, DFCD,
DMD, and key line ministries to facilitate the exchange of information and the preparation of
reliable cash flow forecasts on a high-frequency basis. It would be desirable if cash flow
forecasts were prepared on a rolling basis every week, with daily time steps out a minimum
of two weeks, weekly time steps out three months, and monthly time steps out one year.
82. Financial support from the central government for SOEs and local government
units is not accounted for in the cash plans. Most SOEs are non-profitable and require
periodic balance sheet support through the extension of loans or equity injections. Although
these operations are not frequent, they could entail large individual cash flows when they
occur. Advances, not to exceed a tenor of one year, from the MOF to aimags and local
entities (called “budget loans”) represent safety net financing for local government units but
can be an unexpected call on central government cash. In addition, no interest is charged on
these advances, whose economic substance is equivalent to an early transfer of revenues that
the central government is likely to anticipate to subnational units.
83. There are few cost-effective options for raising short-term funds in the event of a
temporary cash short-fall. Although the MOF faces no legal restriction against issuing
short-dated securities, this has not happened in recent years. By informal agreement, the
MOF issues securities only of over one year in maturity. This practice has the advantage of
avoiding conflict with the central bank bills issued by the BOM to absorb excess liquidity,
which have tenors of one, 12, and 28 weeks. However, issuing securities with maturities
greater than one year for cash management purposes is cumbersome and costly. In the
current environment, though, where a large balance is expected to remain in the TSA, this is
less problematic.
84. On the investing side, cash balance management is mostly passive. Almost all of
the government’s liquidity is held in the TSA, although the possibility of placing deposits in
commercial banks up to the full ceiling of MNT 70 billion would constitute a more active
management of approximately 15 percent of the MNT 500 billion of the TSA attributable to
the central government’s budget. Under current regulations, these deposits are undertaken
with the approval of the MOF’s state secretary, on the advice of the DMD. The deposits,
which are uncollateralized, may be of a tenor of up to three months, with the possibility of a
one-month extension. No institution-specific credit exposure limits are in place, however.
85. The lack of remuneration of the TSA balance is symptomatic of issues between
the MOF and the BOM that are important to resolve, even if it is difficult to do so. In
recent years, the BOM has been running losses owing to the cost of mopping up excess
liquidity and exchange-rate appreciation that has impacted the value of the foreign exchange

reserves portfolio negatively. The law governing the BOM obliges the government to
compensate the central bank for deficits, but that has not occurred systematically.
Furthermore, when the MOF has issued securities to the BOM for its portfolio, they have
been at sub-market rates. In retaliation, the BOM stopped remunerating the TSA balance.
While this supports the central bank’s profitability, it is non-transparent. It would be
desirable for the BOM to resume remunerating the TSA balance at a market-based rate, and
for the MOF to issue securities to the BOM at market-based rates. Moreover, the
arrangements for the transfer of central bank profits to the government and, conversely,
compensation by the government of central bank losses, should become more rule-based,
with discretion removed.
86. Under current circumstances, however, the passive approach to cash balance
management is broadly appropriate. Poor cash flow forecasts mean that it is difficult to
identify appropriate short-term investment and funding transactions. Investment options in
the local market for cash management purposes are limited. The DMD lacks the technical
skills to understand credit risk and evaluate investment options apart from straightforward
deposits. The DMD also lacks the systems infrastructure to obtain information on market
prices, as well as to execute, settle, and account for transactions, other than on an infrequent
basis.
87. The implications of the provisions in the proposed FAPDML relating to cash
management have not yet been adequately considered. Many of the provisions in the draft
law are sound. The law provides a clearer framework for cash management operations, the
types of transactions that are permitted, and recognition of the need to control credit risk.
These provisions will require further clarification in implementing guidelines to be useful
operationally.
88. Although a minimum balance for the TSA is mandated in the FAPDML, the
appropriate size of the cash buffer has yet to be analyzed. This analysis is inherently
tentative and must be re-examined over time as conditions change. In general terms, the more
volatile the daily cash flows are, the lower the ability to forecast them reliably, the weaker
the ability to undertake transactions within a sound risk and control framework, and the more
limited the availability of instruments to accommodate unanticipated fluctuations that give
rise to cash short-falls. This makes a larger cash buffer all the more appropriate. The current
environment in Mongolia argues in favor of a large precautionary balance.
C. Recommendations
 Establish a standing Cash Forecast Committee involving technical-level staff from
the FPD, FEPD, DFCD, DMD, and key line ministries to facilitate the exchange of
information and the preparation of initial rough tuning cash forecasts and gradually
moving towards a more reliable cash flow forecasts on a high-frequency basis.

 Prepare complete updated cash flow forecasts on a rolling basis every week, with
daily time steps out a minimum of two weeks, weekly time steps out three months,
and monthly time steps out one year.
 Regularly analyze the forecasts against actual cash flows to understand the reasons
for variation and improve forecasting performance, and submit the analysis to the
Cash Forecast Committee.
 Reach resolution with the BOM on issues of disagreement, notably the
reinstatement of remuneration of the TSA balance at a market-based rate, the issuance
of securities to the BOM at market-based rates, and predictable rules-based transfers
related to the profits and losses of the BOM.