Public Information Notice: IMF Concludes Article IV Consultation with Mongolia

February 17, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On January 24, 2000, the Executive Board concluded the Article IV consultation with Mongolia.1


Since the mid-1990s, Mongolia has been pursuing a wide-ranging economic reform program to complete the transition from a centrally-planned system to a private sector-oriented market economy which it launched at the beginning of the decade. Under this program, major actions were taken to tighten macroeconomic policies, restructure the banking system, reform the tax system, accelerate the pace of privatization, and harden enterprise budget constraints. This program received substantial support from international financial institutions and donors, including a three-year Poverty Reduction and Growth Facility (PRGF) arrangement that was approved in mid-1997.2 By 1998, these policies resulted in single digit inflation and a substantial increase in net international reserves. The economy also expanded at a healthy rate during this period with real GDP growth of 3-4 percent in both 1997 and 1998.

Mongolia's external and fiscal position began to deteriorate in mid-1998 due to a large decline in export prices and spillovers from the Asian and Russian financial crises. Initially, in response to the terms of trade shock, the export decline was accommodated through a reduction in international reserves in an effort to moderate exchange rate depreciation. As a result of these developments, Mongolia's trade balance shifted to a deficit of nearly 12 percent of GDP in 1998 (from a surplus of 3 percent in 1997) and international reserves fell from 13 to 11 weeks of import cover. The overall government deficit rose to 12 percent of GDP (from 9 percent in 1997) as export-based revenues decreased. In addition, the financial condition of the banking system deteriorated sharply.

In 1999, economic conditions began to stabilize. According to preliminary data, GDP is estimated to have grown by 3-4 percent, led by continued strength in the agricultural, service and construction sectors, and high real interest rates helped to keep inflation around 10 percent despite a large increase in the price of oil imports.

The external accounts improved in 1999, partly in response to a market-led depreciation of the exchange rate that facilitated further adjustment to the adverse terms of trade shock. According to preliminary data, the trade deficit declined to 9 percent of GDP, largely due to a decrease in imports, while international reserves increased to nearly 15 weeks of import cover. On the export side, a surge in China's demand for raw cashmere is expected to have helped to offset a decline in Mongolia's copper and gold exports.

The fiscal position of the government also improved in 1999 as measures were adopted under a supplementary budget to strengthen revenue through a uniform import duty of 5 percent and an excise tax on beer. Low-priority, domestically-financed capital expenditure and net lending were also reduced, while steps were taken to improve tax administration and budget management. According to preliminary data, the government deficit is estimated to have fallen to 8½ percent of GDP in 1999.

To strengthen the banking system, measures were taken in 1999 as part of the PRGF-supported program to resolve the financial situation of insolvent banks, increase loan recoveries, and reduce operating costs. The licenses of some deeply insolvent banks were revoked, initiating the process of liquidation. In the case of the Agriculture Bank, a plan has been developed to restore solvency and liquidity with a view to its eventual sale to private owners. Steps were also taken to improve the banking sector's legal framework and to strengthen bank supervision.

In other areas of structural reform, the government continued to pursue its privatization program, with technical work to prepare some of the large state-owned enterprises for privatization being completed.

Executive Board Assessment

Executive Directors welcomed the progress made in 1999 under Mongolia's PRGF-supported program to complete the adjustment to the external terms of trade shock suffered in 1998, redress macroeconomic imbalances, and reinvigorate structural reforms. They noted that tight macroeconomic policies had resulted in a reduction in the overall government deficit, a lowering of average inflation to within single digits and continued real GDP growth.

Directors observed that continued fiscal consolidation would remain essential to maintain inflation at low levels, to avoid the crowding out of private sector development, and to ensure that public debt remains at a sustainable level. For the 2000 budget, Directors emphasized that the large recent increase in civil service wage levels must be accompanied by vigorous implementation of the recently initiated public sector administrative reform. Many Directors also stressed the need to strengthen tax administration, as well as budget control and management, to ensure that the fiscal targets are achieved.

In the area of monetary policy, Directors recommended a continuation of the tight policy stance to ensure the achievement of program targets for inflation and the external sector. They stressed that a restrained credit policy would be especially critical in the coming months to counter a potential rise in inflationary pressures associated with recent increases in oil prices and reserve money. Directors considered that there may be scope for interest rate reduction later in the year if inflation remains low and fiscal consolidation proceeds successfully. To make monetary management more effective, they noted the importance of further steps to develop indirect instruments and improve the interbank money market. Directors also noted the benefits that will accrue from regularizing the financial relations between the Ministry of Finance and the Bank of Mongolia.

Directors observed that the market-led depreciation of the exchange rate had facilitated an appropriate adjustment to the large external terms of trade shock. They encouraged the authorities to maintain their flexible exchange rate policy, and supported their intention to limit intervention to smoothing excessive short-term fluctuations in the exchange rate and maintaining a sufficient level of foreign exchange reserves.

Directors commended the authorities for the bold steps taken under their comprehensive banking sector reform strategy. They noted that the closure of two insolvent banks would send an appropriate signal of the Bank of Mongolia's intention to promote sound banking institutions and the practices necessary for effective financial intermediation. Directors urged the authorities to remain vigilant over significant risks stemming from the current difficult state of the banking system. They also encouraged the authorities to persevere in their efforts to further strengthen the banking system through a timely restructuring of the Agriculture Bank, the privatization of the Trade and Development Bank, improvements in the climate for loan recovery, and enhanced bank supervision.

Directors stressed the important role of other structural reform measures in enhancing Mongolia's growth prospects. In this context, they welcomed the progress made toward the privatization of two large, state-owned enterprises and encouraged the authorities to pursue reforms that would improve the delivery of government services, rationalize the size of the public sector, and enhance the transparency of its operations.

In the light of little recent change in poverty indicators, Directors encouraged the authorities to refocus their efforts on poverty alleviation through the development of a Poverty Reduction Strategy Paper. In this connection, Directors stressed the need for creating strong work incentives, enhancing efficiency in utilization of education and health spending, reforming the pension system, and developing a well-targeted and adequate social safety net to help alleviate the hardships generated by the transition to a market-based economy.

Directors noted the extensive technical assistance received from the Fund by Mongolia to support its economic transition, and observed that the provision of that assistance had been broadly appropriate. They encouraged the authorities to continue their efforts to further improve the scope and quality of data dissemination, including through the implementation of Fund technical assistance, and welcomed Mongolia's interest in participating in the General Data Dissemination System.

Directors commended the authorities on maintaining a liberal trade system. They emphasized the benefits of such a system to the Mongolian development strategy.

Mongolia: Selected Economic Indicators

  1995 1996 1997 1998 1999 1/

(Percent change)
Real Economy          
Real GDP 6.3 2.4 4.0 3.5 3.2
Consumer prices (end period) 53.3 44.6 20.5 6.0 10.0
(In percent of GDP)
Public Sect          
General government revenue o 33.8 27.8 29.3 27.4 25.6
General government expenditure 40.4 36.0 37.9 39.1 34.0
Current balance 7.9 4.5 1.8 -0.6 0.5
Overall balance -6.7 -8.2 -8.6 -11.7 -8.4
Domestic bank financing -4.8 2.1 -3.3 3.8 0.0
(Percent change) 2/
Money and Credi          
Net domestic assets 12.4 -1.4 -6.3 56.4 -23.2
Credit to enterprises 18.0 23.2 13.2 18.5 -24.1
Broad money 3/ 32.9 25.8 19.8 8.8 31.6
Interest rate (in percent) 4/ 62.4 42.0 35.0 22.5 12.5
(In percent of GDP) 2/
External Sector          
Current account balance 5/ -5.5 -10.0 1.3 -12.6 -10.7
External debt 6/ 52.8 53.9 63.4 73.4 87.7
Debt service (in percent of exports of goods and services) 7/ 12.1 11.8 6.3 7.3 7.4
Gross official international reserves (in weeks of imports) 12.2 10.0 13.3 11.0 14.7
Terms of trade (percent change) 13.4 -23.6 12.2 -23.3 -6.8
Exchange rate (togrogs per US dollar, end period) 474 694 813 902 1,072

Sources: Mongolian authorities; and IMF staff estimates and projections.

1/ GDP and public sector data are preliminary; external sector data (excluding the exchange rate) are Fund staff estimates; credit growth to enterprises excludes balance sheet adjustments related to the Buligaar leather factory.
2/ Unless otherwise noted.
3/ The broad money growth rates for 1997 and 1998 have been adjusted to exclude the effects of a $20 million deposit at end-1997 that was reversed in early 1998.
4/ End period annualized interest rate on Bank of Mongolia 14-day bills.
5/ Excludes official transfers.
6/ Excludes disputed obligations in transferable rubles to Russia.
7/ Excludes servicing of disputed obligations in transferable rubles to Russia.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

2On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is 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 a policy framework paper (PFP), and preparations for a participatory process are underway. It is understood that all policy undertakings in the PFP during the current arrangement are subject to reexamination and modification in line with the strategy that is to be elaborated in an interim PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the interim PRSP will provide the policy framework for Mongolia's next PRGF arrangement.


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