IMF Survey: Mongolia Stages Dramatic Turnaround
IMF News, September 13, 2010
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- Authors: Steven Barnett, Julia Bersch IMF Asia, Pacific Department September
- Published: September 13, 2010
Economic health check and macro outcomes
- Mongolia was "on the verge of collapse" by early 2009: growth stalling, international reserves rapidly depleted, insufficient financing for government spending, and banking system under pressure.
- 18 months later:
- Growth is expected to hit 8 percent this year.
- International reserves have reached an all time high of $1.6 billion.
- Public finances are on a sound footing.
- The banking system has been strengthened.
IMF-supported program: scope and objectives
- Program put in place in early 2009; included a stand-by loan of around $232 million.
- Main goal: ensure Mongolia quickly returned to a path of strong, sustained, and equitable growth with low inflation.
- The program provided confidence, financing, and breathing space for the authorities to more gradually adjust policies and catalyzed contributions from the World Bank, Asian Development Bank, Japan International Cooperation Agency, and many other bilateral donors.
- Authorities met every single performance criterion of the 18-month arrangement and passed every program review.
Four pillars of the strategy
- Flexible exchange rate to rebuild international reserves:
- Early 2009: implemented a flexible exchange rate regime limiting intervention to smoothing excess volatility and opportunistically building reserves.
- Intervention carried out through twice-weekly auctions.
- Supported by an up-front 400-basis-point hike in the policy interest rate.
- Result: foreign exchange market stabilized rapidly; international reserves now at $1.6 billion.
- Restore health to public finances:
- Large fiscal adjustment in 2009, achieved mainly through reprioritization of spending.
- Fiscal adjustment continued in the following year and, aided by the rebound in copper prices and the economic recovery, the fiscal deficit is expected to fall to 2 percent of GDP—well below the government’s original target.
- Parliament passed a comprehensive fiscal responsibility law.
- Protect the poor from the burden of adjustment:
- Social transfers were increased during the program period to shield the most vulnerable.
- A new social transfer reform law has been submitted to parliament and is expected to be passed in November; it would introduce a well targeted poverty benefit to strengthen the social safety net and improve fiscal flexibility.
- Bolster the banking system:
- Two important banks were put into receivership, but confidence and risk containment have improved.
- Parliament approved a revised banking law to strengthen the regulatory framework.
- A second piece of legislation to recapitalize the banks has been submitted to parliament.
- Tougher supervision regulations have been issued and are now being enforced.
Program design, flexibility, and implementation
- Conditions were restricted to areas necessary to return the economy to strong growth.
- Program adjusted flexibly as circumstances evolved:
- When 2009 growth was weaker than expected, fiscal deficit targets were loosened to support recovery.
- Program adapted to provide scope for a modest increase in spending to raise pensions and civil servant salaries.
- Resources reflected 2009 reforms in IMF lending instruments, with a substantially increased level of financial support.
- Strong ownership by Mongolian authorities contributed to the program’s success.
Outlook and mineral sector prospects
- Bright outlook driven by pending boom in the mineral sector.
- Landmark investment agreement signed in late 2009 to develop the Oyu Tolgoi mine in the South Gobi Desert—referred to by some as the biggest undeveloped copper-gold project in the world—stands as a cornerstone for development of Mongolia’s mineral resources.
- Development of other major projects, like the massive Tavan Tolgoi coal deposits in southern Mongolia, is under way.
- Authorities’ policy reforms have laid a solid foundation for managing the pending mineral boom and ensuring that mineral wealth leads to sustained growth that spreads prosperity.
IMF Survey: Mongolia Stages Dramatic Turnaround — By Steven Barnett and Julia Bersch, IMF Asia and Pacific Department, September 13, 2010