Press Release: IMF Approves Three-Year ESAF Loan for Mongolia

July 31, 1997

The International Monetary Fund (IMF) approved a three-year loan for Mongolia under the Enhanced Structural Adjustment Facility (ESAF)1, in an amount equivalent to SDR 33.39 million (about US$45 million), to support the government’s economic program during 1997-2000. The first annual loan, in an amount equivalent to SDR 11.13 million (about US$15 million) is available in two equal semiannual installments, the first of which can be drawn on August 6, 1997.


In the early 1990s, Mongolia began a process of economic reform made possible by political liberalization and the demise of the trading system of the Council of Mutual Economic Assistance (CMEA). Initial steps, supported by the IMF through a stand-by credit in 1991-92 and ESAF loans between 1993 and 1996, included the liberalization of most wages and prices, a reduction in import restrictions, the privatization of some state enterprises, the establishment of a commercial banking system, easing of capital controls, and the introduction of a floating exchange rate system. Progress was also made on the stabilization front. In particular, inflation, which had reached over 300 percent earlier in the decade, was brought down to around 50 percent during 1995-96. Despite these important steps, serious structural problems remained, including a weak banking system, a large and inefficient public sector, a distortionary tax system, and a legal infrastructure that did not adequately support private sector development. With policy slippages and a large negative terms of trade shock, the budget deficit widened to 9.5 percent of GDP in 1996.

Medium-Term Strategy and the 1997-98 Program

The authorities’ medium-term strategy focusses on rapidly completing the transition to a full market economy and strengthening the foundation for strong and sustainable private sector-led growth by reducing the size of the public sector and fostering the development of private sector activity. The program’s medium-term objectives are to reduce inflation to single-digit rates; achieve an annual real growth rate of 6 percent; and increase official gross international reserves to the equivalent of over 15 weeks of import cover. To raise national savings over the medium-term, the budget deficit will be reduced to 6 percent of GDP in 2000 from 10.5 percent in 1997. The fiscal adjustment will be achieved by reducing the size of the public sector and reforms in public administration and taxation.

Consistent with the medium-term strategy and objectives, the key macroeconomic goals for 1997-98 are to achieve a real GDP growth rate of 3 percent in 1997 and 5 percent in 1998;reduce inflation from a monthly rate of 3½-4 percent during the first half of 1997 to 1½ percent by end-year; and an annual rate of 13 percent by end-1998; and increase official gross international reserves to the equivalent of over 13 weeks of import cover by the end of 1998. To achieve these objectives, monetary policy will be geared to maintaining positive real interest rates on central bank bills and limiting commercial bank access to central bank credit to the refinancing and rediscount facilities. The 1997 budget contains important steps to implement the medium-term fiscal strategy, including the elimination of most budget subsidies for enterprises and strict control over the wage bill. The elimination of import duties and the large up-front cost of bank restructuring--which are fundamental components of the reform strategy-- will cause the budget deficit to rise from 9.0 percent of GDP in 1996 to 10.5 percent in 1997. However, the deficit is expected to be significantly reduced in 1998 as the costs of bank restructuring decline and further tax reforms are phased in.

Structural Reforms

Under the program, the objectives of reducing the size of the public sector and fostering private sector development are being supported by wide-ranging structural reforms. The government has already eliminated virtually all import duties and begun implementation of a major tax reform. Public administration reforms are aimed at improving expenditure control and accountability to set the stage for decentralized decision-making. Under the new privatization strategy, the government has announced that it will divest itself of nearly all public enterprises and commercial assets by the end of the decade. Finally, the government has begun to restructure the banking system and is providing a transparent and neutral investment environment.

Addressing Social Needs

The government is committed to reforming education and health to improve the delivery of services; moving toward a self-financing pension system; and restructuring other aspects of the social welfare system to reduce budgetary costs and improve targeting.

The Challenge Ahead

The authorities are aware that perseverance will be needed to achieve macroeconomic stabilization while maintaining the momentum of reforms. Their bold strategy to unleash the private sector should enable Mongolia to achieve strong, sustainable growth, and lasting improvements in living standards.

Mongolia joined the IMF on February 14, 1991, and its quota 2 is SDR 37.10 million (about US$50 million). Its outstanding use of IMF financing currently totals SDR 29.7 million (about US$42 million).

Mongolia: Selected Economic Indicators







(Percent change)

Real GDP







Consumer prices
(end of period)







(Percent of GDP)

Overall fiscal balance
(deficit -)







External current account balance, excluding official transfers
(deficit -)







(Weeks of imports)

Gross official reserves







Sources: Mongolian authorities; and IMF staff estimates and projections.
* Program.
** Projections.

1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with 5½-year grace period.

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 share in the allocation of SDRs.


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