Foreign exchange reserves and a flexible exchange rate

Mongolia’s economy is highly dependent on mining export revenues and remains vulnerable to global commodity price fluctuations and changes in the external environment. Under these circumstances, a flexible, market-driven exchange rate and adequate international reserves are core conditions for maintaining macroeconomic stability.

Since 2019, the arrangement under which the Bank of Mongolia purchases export proceeds from state-owned and state-dominated entities have reduced short-term exchange rate volatility. However, it has also increased the central bank’s involvement in the foreign exchange market, constraining market-based price discovery to some extent. There is therefore a need to gradually reduce central bank intervention to support foreign exchange market development and strengthen market competition.

Adequate international reserves serve as an essential buffer against external shocks, help mitigate risks associated with sharp exchange rate volatility, and thereby support macroeconomic and financial stability. As of August 2026, international reserves stood at a record high of USD 8.4 billion. However, this increase was largely driven by long-term funding raised by banks and financial institutions in international markets, together with the Bank of Mongolia’s purchases of precious metals from the domestic market. Although reserves covered 7.5 months of imports, it remained below the target established under Mongolia’s national security concept. It is therefore necessary to regularly assess reserve adequacy in light of the balance of payments projections, import needs, external debt service, and other external payment obligations, and to consistently pursue policies to gradually build reserves and maintain them at an adequate level.

The Bank of Mongolia’s Medium-Term Strategy (2026–2030) envisages gradually reducing the central bank’s participation in foreign exchange auctions and transitioning toward a market-based exchange rate regime. In the medium term, the Bank of Mongolia will shift from being an active market participant to a policy regulator. In addition, in line with international best practices, it will pursue policies to improve, optimize, and strengthen foreign reserve management.

• Set the exchange rate flexibly in line with macroeconomic fundamentals: Consistent with the principle that the exchange rate should flexibly reflect foreign exchange market supply and demand as well as macroeconomic fundamentals, the Bank of Mongolia will gradually reduce its intervention in the domestic foreign exchange market. In this context, the current arrangement under which the Bank of Mongolia directly purchases foreign exchange export earnings from state-owned and state-dominated entities will gradually transition to a market-based system, creating the conditions for foreign exchange transactions to be conducted through the interbank foreign exchange market. In addition, to improve exchange rate risk management, the legal, institutional, and market infrastructure needed to support the development of foreign exchange forwards, swaps, and other derivative instruments will be strengthened. While implementing these measures, the Bank of Mongolia will, in the event of sudden fluctuations that cannot be explained by macroeconomic fundamentals, respond appropriately within its legal mandate to preserve financial stability and avoid disruptions to market functioning.
• Reduce the Bank of Mongolia’s participation in the foreign exchange market by increasing information transparency and developing foreign exchange trading infrastructure: Trading in the domestic foreign exchange market and the consolidation and processing of exchange rate information have not yet been fully developed into a unified system, creating information asymmetries and adversely affecting market efficiency. The information and trading infrastructure of the foreign exchange market will therefore be developed, transparency and access to market information will be enhanced, and market participants’ analytical and risk management capabilities will be strengthened. This will improve the efficiency of exchange rate price discovery, enhance liquidity and competition in the foreign exchange market, and create conditions for a gradual reduction in the need for direct intervention by the Bank of Mongolia.
• Implement measures to maintain the adequacy of international reserves at international benchmark levels and increase the overall level of reserves: Policies will be implemented to continuously assess and gradually increase the optimal level of reserves by linking reserve adequacy to balance of payments projections, external debt service, import needs, and other risk factors relevant to economic and financial stability and the mitigation of external shocks. In addition, reserve management will seek an appropriate balance between liquidity, safety, and return by improving the investment policy and structure of international reserves and increasing the diversification of investment instruments in response to geopolitical conditions and changes in international financial markets.

Developing foreign exchange market infrastructure and increasing information transparency will improve market efficiency, enhance trading activity and liquidity, and strengthen the conditions for exchange rates to adjust in accordance with market principles. Improving foreign reserve management and increasing the diversification of investment instruments to maintain reserve adequacy, safety, and liquidity at international benchmark levels will support economic and financial stability and strengthen market participants’ confidence. Implementing a policy of maintaining a flexible exchange rate in line with macroeconomic fundamentals and strengthening reserve adequacy will enhance Mongolia’s capacity to withstand external economic shocks, support macroeconomic stability, improve the country’s credit rating, and create conditions for reducing the cost of raising funds in international financial markets. In addition, gradually transitioning the trading of foreign exchange export earnings of state-owned and state-dominated entities to market-based principles will help reduce fluctuations in the money supply and alleviate inflationary pressures.