IMF Reaches Staff-Level Agreement with Mongolia on Three-Year Extended Fund Facility

IMF News, February 19, 2017

Source details

Canonical URL: IMF Reaches Staff-Level Agreement with Mongolia on Three-Year Extended Fund Facility

The Mongolian government and the IMF staff reached staff-level agreement on an economic and financial program to be supported by a three-year Extended Fund Facility (EFF) for SDR 314.505 million (435 percent of quota), or about $440 million.
Agreement is subject to: confirmation of financing assurances, completion of prior actions by the authorities, and approval of the IMF Executive Board. The Board is expected to consider Mongolia’s request in March.

IMF EFF: SDR 314.505 million (435 percent of quota), or about $440 million.
Other partners (ADB, World Bank, and bilateral partners including Japan and Korea): together expected to provide up to $3 billion in budget and project support.
People’s Bank of China: expected to extend RMB 15 billion swap line with the Bank of Mongolia for at least another three years.
The total external financing package will thus be around $5.5 billion.

Program intent: restore economic stability and debt sustainability; facilitate strong, sustainable, and inclusive growth; protect the most vulnerable citizens.
Structural potential: Mongolia is noted as well endowed with mineral resources, strong potential in agriculture and tourism, and a young and dynamic population.
Near-term outlook: growth is projected to pick up to around 8 percent by 2019 as economic and financial conditions improve and key mining projects take off.
Reserves target: foreign exchange reserves should rise to a healthy $3.8 billion (above 6 months of imports) by the end of the program, similar to levels seen in 2012.
Public debt: policies are expected to put public debt on a declining path over the course of the program.
Fiscal space: fiscal consolidation will leave room for the banking sector, over time, to extend more credit to the private sector, consistent with projected growth.

Fiscal consolidation is a key priority; budget deficits will be reduced steadily while maintaining priority social spending.
Social spending adjustments:
- Savings from better targeting the Child Money Program will be used entirely to increase spending on the food stamp program for the most vulnerable.
- Personal income tax will be made more progressive, with rates on only higher-income households increased.
Public investment and project management:
- The law on concession projects will be reformed.
- The public investment program (PIP) will be rationalized and better aligned with national development priorities.
Fiscal governance reforms:
- Creation of a Fiscal Council to provide independent budget forecasts and costings of new policy proposals.
- Provisions to give the government sole authority to determine the total amount of spending in the budget.
- Requirement for Ministry of Finance approval of any proposals to cabinet with a budgetary cost.

Monetary policy stance: will remain appropriately tight given the objective of price stability; over time, as the economy normalizes, it may be appropriate to cut the policy rate if external and inflation indicators permit.
Exchange rate: will continue to move flexibly, with intervention limited to smoothing excessive volatility and preventing disorderly market conditions.
Bank of Mongolia (BOM) governance: adoption of a new BOM law is a major priority to clarify its mandate, strengthen governance, and improve independence.
Quasi-fiscal activity: the BOM will not engage in additional quasifiscal activity; the mortgage program will operate essentially as a revolving fund.

Development Bank of Mongolia (DBM): will operate in an independent, purely commercial manner as laid out in the recently passed DBM law.
Banking system stabilization:
- Authorities’ first priority is a comprehensive diagnosis of the banking system to assess financial soundness and resilience.
- With the diagnostic results, the BOM will engage banks to ensure appropriate restructuring and recapitalization, as necessary.
- BOM will strengthen the regulatory and supervisory framework.
- Government committed to improving the deposit insurance system.
AML/CFT: authorities committed to strengthening the regime for Anti-Money Laundering and Combating the Financing of Terrorism.

Authorities intend to boost activity by attracting new investment to major mines and implementing structural reforms to promote economic diversification and competitiveness, especially in agriculture and tourism.
Reforms have been developed in close collaboration with the World Bank and ADB.

The government’s plan to engage with its private external creditors to secure financing assurances should help restore debt sustainability.
Program financing parameters assume external private creditor exposure will be maintained at its current level over the program period, on terms consistent with debt sustainability, and gross financing needs will remain at prudent levels during the post-program period.
Next procedural step: IMF Executive Board consideration in March (subject to the confirmations and prior actions noted above).

Press Release No. PR17/54 — IMF Communications Department, February 19, 2017.