Central bank independence and governance reform

A central bank needs sufficient autonomy and independence to meet its policy objectives, above all to keep inflation low and stable. The International Monetary Fund rated the Bank of Mongolia’s autonomy and independence at 69 percent, indicating substantial room for improvement. The IMF identified four weaknesses: incomplete governance arrangements for decision-making, implementation and oversight; an unclear primary objective open to multiple interpretations; limited legal leverage over fiscal policy; and the absence of a comprehensive prohibition on quasi-fiscal activity. The Bank of Mongolia’s growing capital deficit compounds these institutional weaknesses by constraining policy space and weakening public confidence. The accumulated losses reflect the cost of financing quasi-fiscal programs and the reliance on CBBs to absorb excess liquidity. Until these losses are addressed, the Bank of Mongolia will have less room to pursue its core price-stability mandate and public trust will remain at risk.

Strengthening central bank independence and governance is the first of the five strategic directions in Bank of Mongolia’s Medium-Term Strategy for 2026–2030. Under this direction, the Bank has set three priority objectives to be fully delivered over the medium term: improving its autonomy, independence and governance; ending all financing of quasi-fiscal measures and programs; and resolving its capital deficit.

The reform has three interrelated components: revising the Law on the Central Bank (Bank of Mongolia), recapitalizing the Bank of Mongolia through the issuance of government securities, and establishing an annual fiscal–monetary coordination process. The measures below explain the legal changes first, followed by the recapitalization mechanism and implementation schedule.

A revised draft of the Law on the Central Bank (Bank of Mongolia) will be prepared and submitted to the State Great Khural. Its purpose is to strengthen the governance, independence, autonomy, transparency and accountability. The draft will draw on experience in applying the current law, including identified overlaps, gaps and inconsistencies; the law’s impact assessment; international best practice and lessons from past experience; and proposals from government agencies, financial-sector participants, citizens and the wider public. It will provide for:

• defining the objective as “ensuring price stability,” with low and stable inflation as its primary goal;
• prohibiting from financing any quasi-fiscal project, program or activity;
• safeguarding the independence of the governance in political, economic and legal terms;
• improving the supervisory and decision-making framework for macroprudential policy, that is, for financial stability;
• issuing special-purpose, long-term government securities to cover its capital deficit;
• setting rules for open and transparent disclosure and reporting on the activities;
• defining the legal status of central bank staff and improving human resources policy;
• establishing unified data governance, building data-exchange infrastructure (APIs), and tightening data integrity, control and accountability over data and information flows;
• advancing digital governance and reforming the credit information system’s legal framework to support financial stability.

A clearly defined primary objective, institutional coordination between fiscal and monetary policy, and a reformed legal framework for governance will secure the Bank of Mongolia’s independence in political, economic and legal terms.

Monetary and macroprudential policy decisions will be taken through separate frameworks, with a stronger institutional setup for macroprudential policy and a clear line between the two. This will give macroprudential tools a sound legal basis and make them more effective.

With the Bank of Mongolia focused firmly on price stability and prohibited from financing quasi-fiscal activity, further losses from such financing will be prevented. The proposed recapitalization measures will address the accumulated losses and capital deficit, strengthen financial stability and support greater public confidence in the central bank.

The Bank of Mongolia will phase in a comprehensive, technology-based management system across its policies and operations and speed up its digital transformation, which will strengthen its governance.