IMF Executive Board Completes Third Review Under Stand-By Arrangement with Mongolia and Approves US$24.1 Million DisbursementPress Release No. 09/475
December 22, 2009
The Executive Board of the International Monetary Fund (IMF) today completed the third review of Mongolia's economic performance under a program supported by an 18-month Stand-By Arrangement (SBA). The completion of the review enables the immediate disbursement of an amount equivalent to SDR 15.33 million (about US$24.1 million), bringing total disbursements under the arrangement to an amount equivalent to SDR 107.31 million (about US$168.6 million). The Board also approved the request for modification of performance criteria to reflect the revised macroeconomic data and framework.
The SBA was approved on April 1, 2009 (see Press Release No. 09/110) for an amount equivalent to SDR 153.3 million (about US$ 240.9 million) or 300 percent of Mongolia's quota. The Mongolian economy was hit hard by the global economic crisis earlier the year, and the Fund’s financial assistance via the SBA aims to support the country's economic stabilization efforts.
Following the Executive Board's discussion on Mongolia, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:
“The global economic crisis and collapse in copper prices last year hit the Mongolian economy hard. Since then, the authorities’ strong policy implementation has helped to quickly stabilize market conditions. Growth is beginning to turn around and the outlook for next year and beyond is quite favorable, driven by development of the mineral sector.
“The authorities have made good progress in restoring health to public finances. Their commitment to strictly control the 2010 budget deficit is reassuring, especially their commitment to adjust spending to offset any revenue shortfalls while saving any revenue over-performance to help meet future financing needs and limit the pro-cyclicality of spending. Additional fiscal adjustment and expenditure rationalization will be needed in 2011 and beyond to ensure that the budget deficit can be comfortably financed. Adoption of a Fiscal Responsibility Law will help institutionalize fiscal discipline and prevent a repeat of the boom-bust fiscal policies of the past. Prompt passage of a comprehensive social transfer reform will be critical for fighting poverty by increasing support to low-income households and improving targeting.
“The combination of a flexible exchange rate and a monetary policy geared toward achieving low inflation and safeguarding international reserves is working well. In line with evolving market conditions, the central bank has appropriately lowered interest rates. Further monetary easing should be approached with caution as inflation is projected to rebound next year. In the years ahead, maintaining a flexible exchange rate will be critical for promoting macroeconomic stability, insulating the economy from external shocks, and facilitating the economy’s adjustment to the substantial expansion of the mineral sector. Over the medium term, the adoption of formal inflation targeting would complement the flexible exchange rate regime and help secure low inflation by allowing pressures for a real appreciation of the currency to feed through the nominal exchange rate instead of inflation.
“Strengthening the banking system remains a top priority. The authorities will need to respond proactively and vigorously to problems in individual banks as they arise, and to bolster confidence in the banking system. A comprehensive bank restructuring plan should be developed that builds on the findings of the ongoing external audits. Public financial support should be tied to governance and structural reforms at the recipient banks, and existing owners should be required to either inject new capital or be the first to absorb losses.
“The authorities’ success in implementing their economic program is commendable. The Mongolian economy stands to benefit considerably from the country’s significant mineral deposits, and maximizing these benefits will require a continued commitment to fiscal discipline, a flexible exchange rate, and a sound banking system. Staying the course with such policies will help ensure that Mongolia’s considerable mineral wealth translates into lower poverty, rising household income, and a steadily improving standard of living for all of Mongolia’s citizens,” Mr. Kato stated.