A staff team of the International Monetary Fund (IMF) led by Koshy Mathai
visited Ulaanbaatar during February 1-19 to continue discussions with the
Mongolian authorities on a set of economic policies that could be supported
by IMF financial assistance. At the end of the visit, Mr. Mathai made the
following statement:
“The Mongolian government and the IMF team have 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. Other international partners also
plan to support the government’s program: the Asian Development Bank (ADB),
World Bank, and bilateral partners including Japan and Korea are together
expected to provide up to $3 billion in budget and project support; and the
People’s Bank of China is expected to extend its 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 and
will support the authorities’ “Economic Stabilization Program,” which
intends to restore economic stability and debt sustainability as well as to
create the conditions for strong, sustainable, and inclusive growth, while
protecting the most vulnerable citizens.
“This agreement is subject to the confirmation of financing assurances, the
completion of prior actions by the authorities, and the approval of the IMF
Executive Board. The Board is expected to consider Mongolia’s request in
March.
“Mongolia is well endowed with mineral resources, strong potential in
agriculture and tourism, and a young and dynamic population. Its long-run
future is promising, but in recent years it has been hit hard by the sharp
decline of commodity prices and a collapse in foreign direct investment
(FDI). Attempts to stem the decline through expansionary policies proved
ineffective after a few years, and the economy is now stagnating, weighed
down by high debt and low foreign-exchange reserves.
“Fiscal consolidation is a key priority, as loose fiscal policy in the past
was a major driver of Mongolia’s current economic difficulties and high
debt. Budget deficits will be reduced steadily, while priority social
spending will be maintained: for instance, the savings from better
targeting the Child Money Program will be used entirely to increase
spending on the food stamp program for the most vulnerable. Also, to boost
revenue, the personal income tax will be made more progressive, with rates
on only higher-income households increased.
“The Development Bank of Mongolia (DBM) will henceforth operate in an
independent, purely commercial manner, as laid out in the recently passed
DBM law, and the Bank of Mongolia (BOM) will not engage in additional
quasifiscal activity, with the mortgage program now operating essentially
as a revolving fund. In addition, the law on concession projects will be
reformed, and the public investment program (PIP) will be rationalized and
better aligned with national development priorities.
“The authorities will adopt a set of important fiscal reforms to ensure
that budget discipline is maintained, building on the existing framework
for fiscal responsibility. These include the creation of a Fiscal Council
to provide independent budget forecasts and costings of new policy
proposals, and provisions to give the government sole authority to
determine the total amount of spending in the budget, as well as to require
Ministry of Finance approval of any proposals to cabinet with a budgetary
cost.
“Monetary policy will remain appropriately tight, given the objective of
price stability. Over time, however, as the economy normalizes, it may be
appropriate to cut the policy rate if external and inflation indicators
permit. The exchange rate will continue to move flexibly, with intervention
limited to smoothing excessive volatility and preventing disorderly market
conditions. A major priority will be the adoption of a new BOM law to
clarify its mandate, strengthen governance, and improve independence.
“Strengthening the banking system is a crucial part of the program, to
ensure that the banks can support sustainable and inclusive economic
growth. The authorities’ first priority is to undertake a comprehensive
diagnosis of the banking system to assess institutions’ financial soundness
and resilience. With the results of this diagnostic in hand, the BOM will
engage banks to ensure appropriate restructuring and recapitalization, as
necessary. The BOM will complement these actions by strengthening the
regulatory and supervisory framework, and government is committed to
improving the deposit insurance system. The authorities are also committed
to strengthening the regime for Anti-Money Laundering and Combating the
Financing of Terrorism (AML/CFT).
“The authorities intend directly to boost economic activity and prospects
by attracting new investment to major mines, and by implementing an array
of structural reforms to promote economic diversification and improve
competitiveness, especially in agriculture and tourism. The broad range of
reforms envisaged under the program have been developed in close
collaboration with the World Bank and ADB.
“The authorities’ adjustment and structural reform program, supported by
the large package of external financing, is expected to stabilize the
economy and lay the basis for sustainable, inclusive, long-run growth. By
2019, growth is projected to pick up to around 8 percent, as economic and
financial conditions improve and key mining projects take off. 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, before
Mongolia was hit by external shocks. Fiscal consolidation will leave room
for the banking sector, over time, to extend more credit to the private
sector, consistent with projected growth. These policies would also put
public debt on a declining path over the course of the program.
“The government’s recently announced plan to engage with its private
external creditors to secure financing assurances for the program should
help restore debt sustainability. Specifically, the financing parameters of
the program assume that 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.
“On behalf of the staff team, I would like to thank the authorities for
their warm welcome, and the constructive discussions and excellent
collaboration we have had over recent months, bringing us to today’s
successful conclusion.”