Press Release: IMF Approves US$37 Million PRGF Arrangement for Mongolia
October 1, 2001
The Executive Board of the International Monetary Fund (IMF) on Friday approved a three-year arrangement for Mongolia under the Poverty Reduction and Growth Facility (PRGF)1 for SDR 28.49 million (about US$37 million). As a result of Friday's decision, Mongolia will be able to draw SDR 4.07 million (about US$5 million) from the arrangement.
Following the Board discussion on Mongolia, Anne Krueger, First Deputy Managing Director, and Acting Chair said:
"Mongolia has made great strides during the last decade in fostering a market economy and promoting macroeconomic stability. However, it continues to face important challenges. Weak economic governance in the past has contributed to an increase in the quasi-fiscal losses by state-owned banks and nonfinancial enterprises, a buildup of fiscal arrears, and an unsustainable increase in the public debt ratio. As the pace of privatization and other market-oriented reforms slowed in the late 1990s, the prospects for private investment and sustained economic growth weakened. Also, with domestic incomes depressed by adverse terms of trade and severe weather conditions, progress toward poverty alleviation has been slow in recent years.
"Consistent with the government's interim Poverty Reduction Strategy Paper (I-PRSP), policies under the PRGF-supported program will seek to protect macroeconomic stability and strengthen the momentum of structural reform, with a view to promoting faster, private sector-led growth and poverty reduction. The government's strategy will need to be centered on an ambitious, but realistic effort to gradually reduce the public debt burden, while also providing for the country's social needs. With the help of a substantial package of revenue measures, which has largely already been implemented, the fiscal deficit is to be contained at a level that can be comfortably financed by concessional external loans. There are ongoing efforts to strengthen fiscal transparency and accountability through improved fiscal data quality and reporting, more realistic budgeting, better treasury management, and the elimination of quasi-fiscal activities and arrears, but further progress is necessary. From 2002 onwards, fiscal consolidation will focus primarily on expenditure-saving reforms that will not jeopardize the government's poverty reduction objectives.
"Monetary policy will be directed towards reducing inflation to the low single digit range, while continuing to bolster external reserves. To keep the growth of monetary and credit aggregates within prudent limits, the Bank of Mongolia (BOM) has recently stepped up its sales of BOM bills, while ensuring that BOM bill rates remain positive in real terms. The government will take steps to enhance the BOM's independence and discourage its involvement in quasi-fiscal operations. The government and the BOM are committed to a market-based system of credit allocation and will not exercise moral suasion over the management of state-owned banks to extend loans on non-commercial terms.
"Steadfast program implementation will be required to protect Mongolia's external viability over the medium term. Given the country's high external debt burden and its vulnerability to terms of trade and climatic shocks, nonconcessional external public borrowing should continue to be avoided and the concessionality of aid inflows maintained. Reforms will need to be pursued with determination to strengthen competition and efficiency, maintain an open trade and investment regime, and reduce reliance on debt-creating capital inflows. The accelerated progress towards privatization and energy sector reform is particularly welcome in this context.
"The government has prepared an I-PRSP through a broad consultative process which provides a sound basis for preparing a full-fledged PRSP and for concessional assistance from the Fund and the World Bank. The full PRSP will need to reflect careful consideration of the tradeoffs between the government's poverty reduction agenda and the overall budget constraint, including through the costing, prioritization, and sequencing of programs likely to entail increased public spending. It will also need to be based on a realistic assessment of the economy's growth prospects. Solid domestic political support and continued donor assistance will be essential in implementing the authorities' program. Accurate and timely data reporting will also be necessary to facilitate program monitoring," Ms. Krueger said.
Recent Economic Developments
The losses of the animal husbandry sector, resulting from two consecutive harsh winters (Zud) and from a recent outbreak of foot-and-mouth disease, have taken a heavy toll on Mongolia's output in 2000 and early 2001. Real GDP growth is estimated to have declined from 3¼ percent in 1999 to about 1 percent in 2000 and is projected to recover moderately in 2001. The year-on-year inflation rate fell to 8 percent by end-2000, but accelerated again in the first half of 2001 partly due to higher electricity tariffs and the Zud-related decline in domestic meat supplies. The seasonal increase in meat supplies has since, however, helped to reverse some of the earlier rise in food prices, easing inflationary pressures from mid-2001.
The overall balance of payments recorded a large surplus during 2000. Export receipts rose by 18 percent in 2000 as international copper prices rebounded and cashmere prices picked up, while imports surged by 21 percent reflecting the strength of demand in the nonagricultural sector and the need for Zud-relief. Although the current account deficit widened, it was more than covered by increased official grants and private inflows. Gross official reserves reached a level of $191 million or 14 weeks of imports of goods and services by end-2000.
Fiscal discipline was eroded in the run-up to the parliamentary elections in mid-2000. Unrealistic budgeting, together with weak accounting, internal control, and auditing procedures, especially at the local government level, led to substantial expenditure overruns. The accumulation of arrears, including by the major public enterprises that are excluded from the fiscal accounts, tended to undermine the reliability and analytical content of official general government statistics. An unanticipated surge in revenues towards the end of 2000 (coming mainly from the revenue increase at a mining sector company partly owned by the government), together with delays in the implementation of foreign-financed projects, led to a narrowing of the overall general government deficit from 12 percent of GDP in 1999 to less than 7 percent of GDP in 2000. Reflecting also favorable movements in exchange rates, the public debt ratio declined from 102½ percent of GDP (72 percent in NPV terms) in 1999 to 96½ percent of GDP (66 percent in NPV terms) in 2000.
The growth of bank credit to the private sector was restrained in early 2000, but credit growth picked up sharply beginning in late 2000. While BOM bill rates rose broadly in line with the rate of inflation during the first nine months of 2000, they fell sharply beginning in late 2000. This development, together with an apparent trend towards reintermediation as confidence in the banking system improved in response to continuing bank reforms, led to rapid credit growth through the first half of 2001. Since then, however, the BOM has taken important steps to increase BOM bill rates and open market sales, with a view to slowing the growth of monetary and credit aggregates.
In the medium-term, the government's poverty reduction strategy under the PRGF rests on three pillars: (i) macroeconomic stability; (ii) private-sector led and outward-oriented growth; and (iii) broad-based and more equitable distribution of benefits from growth. To lead to a meaningful reduction in poverty, the government seeks to raise real GDP growth to 6 percent by 2004 while reducing inflation to 5 percent, containing the external current account deficit in the range of 6-7 percent of GDP, and raising gross official reserves to about four months of import cover.
To reverse the buildup of the debt-to-GDP ratio, the government aims to contain the budget deficit to 7¼ percent of GDP in 2001 and reduce it to around 6 percent of GDP by 2004. This should lead to a reduction of the public debt ratio to 94 percent of GDP (58 percent of NPV terms) by 2004. The pace of fiscal adjustment under the program is circumscribed by the need to promote fiscal sustainability while also taking decisive measures to institute more realistic and transparent budgeting and meet the government's growth and poverty reduction objectives. During 2001, fiscal adjustment will be centered on revenue mobilization, but during 2002-2004 policies will be reoriented so as to contain unproductive expenditures and make room for more adequate provisions for poverty reducing programs.
Monetary policy will be geared to reducing inflation to about 8 percent by end-2001, and to the low single-digit range over the medium term while continuing to bolster the stock of official reserves. The authorities will refrain from measures to subsidize and/or direct domestic or foreign lending to favored industrial activities during the program period. The authorities will also pursue a flexible exchange rate policy and maintain a market-based exchange rate system.
The government projects Mongolia's external position to improve gradually over the medium term, with policy measures under the program and continued donor support. The current account deficit is projected to narrow from about 7¼ percent of GDP in 2001 to 6 percent in 2004, assuming that import growth reverts to a level that is more in line with GDP growth from 2001 onwards and that the terms of trade recover in 2002-2003 before leveling off thereafter. A major risk stems from Mongolia's continued vulnerability to terms of trade and climatic shocks. An unanticipated weakening of copper prices, in particular, would put the fiscal accounts under serious strain. Another risk relates to the size and composition of capital inflows. A shift in the composition of aid inflows in favor of loans could threaten the sustainability of Mongolia's external position.
On the structural agenda, aside from a far-reaching reform program to enhance fiscal transparency and accountability and to strengthen tax administration, the government seeks to implement public enterprise reform and privatization. The program for 2001 envisages the sale through competitive tender of several companies, including the Trade and Development Bank, and Gobi Cashmere Company. The government has also embarked on a reform program for the energy sector. At the same time, the government aims to institute adequate social safety nets to protect vulnerable groups from the potential adverse side effects of reforms. It will also continue to implement measures to strengthen bank regulation and supervision and banking-sector reforms.
Mongolia joined the IMF on February 14, 1991. Its quota2 is SDR 51.10 million (about US$66 million). Its outstanding use of IMF credits totals SDR 35.62 million (about US$46 million) as of end-August.
1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Mongolia, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½ year grace period on principal payments.
2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.