On May 24, 2017 the IMF Board approved a three-year Extended Fund Facility (EFF) for SDR 314.505 million (435 percent of quota) or about US$434 million for Mongolia. The financial assistance will support the country’s economic reform program to restore economic stability and create conditions for strong, sustainable and inclusive growth. It aims to encourage fiscal discipline and savings, rehabilitate the financial sector, promote investment and employment, and strengthen the social safety net to protect the most vulnerable citizens.

Mongolia and the IMF

questions and answers

Q1: How will the IMF loan help Mongolia?

The IMF loan will support the country’s finances while the authorities advance reforms needed to create conditions for strong and sustainable economic growth that benefits all. The loan will also help catalyze about $5.5 billion in financial support from the Asian Development Bank (ADB) and the World Bank, as well as bilateral partners such as Japan, Korea and the People’s Bank of China. This joint package will help Mongolia save on debt payments and make its debt sustainable over time.

 Q2: What are the key reforms in Mongolia’s program? Is increasing austerity the focus?

The priorities in the Mongolian government’s economic program are to reduce the fiscal deficit and maintain spending discipline, as loose fiscal policy in the past was a major driver of Mongolia’s current economic difficulties. Also, the authorities plan to reform financial sector and to increase future economic growth by promoting economic diversification, especially in the agriculture and tourism sectors. Importantly, their program will make sure that the most vulnerable are protected by making sure social safety nets are in place.

Q3:  Will the reforms disproportionately impact the poor?

The Mongolian authorities are determined to protect the most vulnerable groups of the population. In this regard, they plan to better target social programs. For example, the Child Money Program will be extended and narrowed to the poorest 40 percent of households, while the savings will be used entirely to increase spending on the better-targeted food stamp program. Also, to boost revenue, personal income tax will be made more progressive, so only rates on higher income households will be increased.

Q4:  Why does the IMF recommend increasing taxes?

More than three-quarters of the fiscal reforms in the authorities’ program comes from reducing spending, since Mongolia’s fiscal accounts stand out in international comparison more for their high expenditure than for low revenue. That said, there needs to be a balance between spending and revenue for Mongolia to strengthen its finances. Revenues are below international averages, and thus the program includes limited tax increases as well. These increases, however, are designed in a way to improve the efficiency and equity of the tax system, and the burden will mostly be borne by richer segments of the population—some excises are being increased and the income tax is being made more progressive.

Q5:  Won’t this loan just add to Mongolia’s debt and make the problem worse?

The loans in this package replace much more expensive and shorter-term borrowings that the government would otherwise have to do. In addition, under the program, the authorities are reducing the deficit substantially, and thus Mongolia’s debt is expected to fall quite substantially.

Q6:  Why is a flexible exchange rate better for Mongolia’s economy?

A flexible exchange rate helps mitigate external shocks, strengthen reserves, and preserve competitiveness. It makes the economy stronger and more resilient.

Q7:  How can Mongolia reduce its dependence on commodity prices and achieve a more stable economic performance?

The authorities’ program focuses on policies to reduce this dependency over time. On the one hand, it includes measures to bolster discipline at every stage of the budget process and fix the problems that have derailed fiscal policy in the past. These include a new law to strengthen the independence and commercial orientation of the Development Bank of Mongolia, limits on the powers of the cabinet and of parliament to increase spending without providing for necessary resources, improvements to the public investment program, a stronger framework for public-private partnerships, and a new fiscal council to provide independent views on the budget.

On the other hand, the program also focuses on fostering diversification to create jobs and achieve more inclusive growth. Sustainable mining will remain the bedrock of the economy, but with its 60 million livestock, Mongolia is also well positioned to develop its meat and dairy exports, as well as its already well-known cashmere sector. Tourism is another area of substantial opportunity. Encouraging regional integration through better infrastructure will also stimulate new growth sources and deepen links with Mongolia’s dynamic neighbors.