represented less than 1 percent (0.9 %) of GDP and a little more than 2 percent (2.1%) of the annual expenditures in 2016.<sup>9</sup> The subsidy to interest rates associated to housing mortgages started in 2013. It was introduced to increase the affordability and accessibility of apartments for urban residents, particularly young families and those living in the ger districts. It originally established a top 8 percent interest rate for mortgage loans and in January 2016 it lowered the interest rate to 5 %. Given that in year 2016 the average market interest rate in Mongolia was 19.7 percent, this implies a subsidy of at least 11.7 percent over the outstanding loan for each beneficiary household, making the subsidy bigger the bigger the loan is.

Both electricity and central heating have tariffs regulated by volume of consumption. There are three electricity tariffs in Mongolia. The lowest tariff, for “vulnerable consumers”, is 48.2 MNT/kWh (2.3 cents of US$/kWh) below a minimum consumption threshold and 69.30 MNT/kWh (3.2 cents of US$/kWh) for consumption above that threshold. The minimum threshold is 100 kWh per month in Ulaanbaatar city, 75 kWh per month in Darkhan and Erdenet cities, and 50 kWh in all other cities or soums. The second tariff is for residential areas using a single meter. In this case the tariff is of 98.40 MNT/kWH (4.6 cents of US$/kWh) for monthly consumption below 150 kWh and 118.20 MNT/kWh (5.5 cents of US$/kWh) for consumption above that threshold. The third tariff is for residential areas using a time use meter (TUM). In this case, daytime consumption (from 6:00 to 21:00 hours) is charged 104.3 MNT/kWh (4.9 cents of US$/kWh) and nighttime (21:00 to 6:00 hours) is charged 77.10 MNT/kWh (3.6 cents of US$/kWh). Finally, for residential use, central heating tariffs are 3,000 MNT/month for areas up to 40 square meters (m<sup>2</sup> ), 5,000 MNT/month for areas between 41 and 80 m<sup>2</sup> and 10,000 MNT for areas above 81 m<sup>2</sup> .

The subsidy to electricity and heating is computed using the price-gap approach, which compares actual consumer tariffs with production costs and then multiplies that differential by the volume of electricity consumed to obtain the level of subsidies. This method ignores implicit subsides that may be due to other tax exemptions or preferential pricing for inputs to public utility companies, or to consumers, and makes use of data approximations about the actual cost of production of the service. The latter may be difficult to collect due to the dearth of accurate data in the companies and difficulties in gauging opportunity cost of these utilities which are seldom traded in international markets.<sup>10</sup> Estimates of average production costs of electricity range from 147 MNT/kWh to 213 MNT/kWh, while for central heating the production costs range 460 to 693 MNT/m<sup>2</sup> . These come from data of reported costs of production, generation and distribution of electricity and central heating companies from the Central System (representing 95% of the total sector costs). Expert estimates indicate that these reported costs of production fail to include three important components: first, the implicit subsidy that companies receive from coal at a price estimated to be at least 50% lower market interest rate in 2016, and an 8 percent for the program) leads to an annual subsidy of MNT 351 billion which represents 1.5 percent of GDP in 2016.

> 9  Preliminary data from 2016 Mongolian Statistical Yearbook indicate subsidies to government organizations and private companies for 224.4 billion MNT.

10 For a recent use of this method in Central American countries see (Hernández Oré, Sánchez, Sousa, & Tornarolli, <u>2018) and for a more technical discussion see (Koplow, 2009).</u> 5 MONGOLIA Distributional impact of taxes and transfers / May 2018