THE BANK OF MONGOLIA ANNUAL REPORT 2018 FOREWORD BY THE GOVERNOR On behalf of the Bank of Mongolia, I extend my sincere greetings to you and am pleased to present the Bank of Mongolia’s annual report. To demonstrate the central bank’s transparency, accountability and responsibility, the report covers its actions and monetary policy operations in 2018, as well as marginal developments in the Mongolian economy. In addition to overcoming the economic challenges successfully, 2018 marks a year of economic recovery and reforms in the banking and financial sector. The Bank of Mongolia successfully implemented monetary policy actions to fulfill its main objectives of stabilizing inflation around its target rate and stimulating economic recovery. As a result of policy actions to manage growth of money supply and credit, inflation measured by the Consumer Price Index (CPI) stood close to the target level and the preliminary estimates on economic growth reached 6.9 percent, which indicates continued acceleration and recovery in the last three years. Considering the favorable promote in overall economy, the Bank of Mongolia implemented measures to reduce bank lending rates and financial inclusion. As a result, weighted average lending rate of banks declined by 2.5 percentage points from previous year, reaching 16.9 percent at the end of 2018. Lower lending rates have supported issuance of business loans in domestic currency. Thus, growth of business loans picked up significantly from previous years and boosted domestic investment, employment and production. In the past three years, the Bank of Mongolia undertook a wide range of reforms and has successfully fulfilled its mandate to ensure macroeconomic and financial stability. Particularly, banking and financial sector legislations were successfully reformed to validate and ensure the central bank independence. By amending the banking sector fundamental laws such as Law on Central Bank, banking law, and Banking sector stability law etc., the Bank of Mongolia was able to introduce best international practices regarding central bank governance and collective decision-making framework, and adopted a new function of macro prudential policy, which had significant implications for the financial sector. Overall, such legal reform in the banking sector would support the Bank of Mongolia’s capacity to improve monetary policy effectiveness, to strengthen the banking sector, to support smooth operation of financial intermediation, to stabilize the economy and to prevent risk accumulation in the financial sector. Starting 2018, the Bank of Mongolia is issuing its financial report in accordance with the International Financial Reporting Standard 9 and thus assured its credibility and accountability to the public. In addition, items in the Mongolian Treasury Fund were revalued in accordance with international standards for the first time and the fund was enriched with precious historical artifacts. In the reporting year, cumulative loss of the Bank of Mongolia declined by 1.2 trillion MNT. Moreover, the Bank of Mongolia established a legal framework for the national payment system, raised the maximum limit on the interbank transaction of small value to 3 million MNT, accelerated the speed of transaction by three times, and supported the system’s continuity and reliability. In addition, first special license on transactions of non-cash payment was granted, marking the initial step in supporting development of Fintech industry in Mongolia. THE BANK OF MONGOLIA ANNUAL REPORT 2018 3 The Bank of Mongolia increased its foreign reserves by 3.5 times over the last two years to 3.6 billion USD (to cover 8 months of import), by implementing effective monetary and exchange rate policies for macroeconomic stability and increasing its purchase of precious metals, which is the main domestic source of foreign exchange reserves. The Bank of Mongolia has purchased 22 tons of precious metal in 2018, which increased foreign reserves by 740 million USD. Such development in foreign reserves was one of the main factors that boosted confidence in the national currency – togrog, reduced sovereign risk and thus supported improvements in the country's credit rating. Consequently, as the macroeconomic condition stabilized, recovery in economic conditions and upgrade in the long-term issuer ratings made positive impact on the Government, Development Bank, Mongolian Mortgage Corporation and private sector’s ability to attract funds from the international market. The Bank of Mongolia’s policy decisions and measures are aimed at building external buffers and reducing economic vulnerability, while limiting excessive fluctuations in the exchange rate. The 2018 reforms in the banking sector were aimed at maintaining financial stability, strengthening the financial system resilience, and improving banks’ risk tolerance. In particular, the actions were focused on banks, reflecting the on Asset Quality Review results in banks’ balance sheets, improving the legal and administrative framework for settling non-performing assets, and introducing a system for bank re-capitalization to support banking sector stability. Since strong banking sector is the basis for strong financial sector and is crucial for building strong economic fundamentals, the Bank of Mongolia shall proceed implementing the “Banking sector legal reform agenda” aimed at improving the banking sector's risk management, resilience and legal environment in accordance to the best international practice, in 2019. The Bank of Mongolia is fully committed to the "Extended Fund Facility" program, a three-year extended arrangement jointly implemented by the Government of Mongolia and the International Monetary Fund. Under the extended arrangement, quantitative targets, such as ceiling on net domestic assets, floor on net foreign assets of the Central Bank etc., and previously agreed actions were reviewed. Successful completion of the program has strategic importance on our economic prospects. Particularly, the IMF and other donors' financial assistance would have significant implications on the medium-term external debt sustainability. Hence, the Bank of Mongolia shall remain committed to the successful completion of the program. The Bank of Mongolia pays particular attention to disclose information on economic developments, policies and decisions, and its grounds to public for transparency purposes. In 2018, the Bank organized several forums and research sessions, including, "Economic Policy Forum", "Ulaanbaatar Consensus", "Strategy to Reduce Lending Rate ", "Issues to Consider in Mongolia's Foreign Trade Policy", and "Global Environment: Considerations in Formulation and Implementation of Economic Policies" etc. Under the scope of its social responsibility and National Program on Financial Literacy, the Bank organized several regional meetings, campaigns and lectures in the capital city as well as in local regions. Furthermore, in line with best international practices, the Bank of Mongolia established the Economic Research and Training Institute in 2018. The Bank of Mongolia commits to implementing reforms and improvements that are deemed necessary to lay the basis for medium term economic and financial stability. BAYARTSAIKHAN N. GOVERNOR OF THE BANK OF MONGOLIA 4 THE BANK OF MONGOLIA ANNUAL REPORT 2018 ORGANIZATIONAL CHART OF THE BANK OF MONGOLIA (2018) SECRETARIAT OF THE GOVERNOR SUPERVISORY FINANCIAL STABILITY BOARD COUNCIL OF MONGOLIA GOVERNOR’S OFFICE BANKING SUPERVISION BOARD OF MONETARY POLICY COUNCIL DIRECTORS COMMITTEE FIRST DEPUTY DEPUTY GOVERNOR GOVERNOR Policy and operation division Administration and PaYMENT Human Resources SYSTEMS Oversight Division DEPARTMENT division FINANCIAL Security Unit National electronic GENERAL INFORMATION transaction center MANAGEMENT UNIT DEPARTMENT Foreign Relations Banking Policy Unit FINANCIAL and Restructuring REPORTING AND Division Maintenance ACCOUNTING Division DEPARTMENT Supervision SUPERVISION Division Legal Policy DEPARTMENT Monitoring and Division LEGAL Software Financial Services DEPARTMENT Division Development Unit Compliance INFORMATION Division TECHNOLOGY AML-CFT DEPARTMENT System Supervision Unit Maintenance Unit Monetary Policy and RISK MONETARY Forecasting Division MANAGEMENT POLICY UNIT DEPARTMENT Economic Analysis and Policy Division REGIONAL DIVISIONS (5), BRANCHES (12) мөнгөн тэмдэгтийн Reserve RESERVE бодлого, Management MANAGEMENT төлөвлөлтийн хэлтэс Division BANKNOTE AND FINANCIAL DEPARTMENT MARKETS Financial Markets ECONOMIC үйл ажиллагааны DEPARTMENT Division RESEARCH хэлтэс AND TRAINING INSTITUTE Treasury Fund Research Division RESEARCH AND RESIDENT STATISTICS REPRESENTATIVE DEPARTMENT IN EUROPE Statistics Division INTERNAL AUDIT DEPARTMENT Press Unit PUBLIC EDUCATION AND INFORMATION Information and CENTER Inquiry Unit THE BANK OF MONGOLIA ANNUAL REPORT 2018 5 CONTENT 1. MACROECONOMIC OVERVIEW OF MONGOLIA 9 1.1 Inflation ................................................................................................................................................9 1.2 Real sector ..........................................................................................................................................10 1.3 External balances ..............................................................................................................................13 1.4 Мonetary and financial sector ............................................................................................................18