The Executive Board of the International Monetary Fund (IMF) today approved
a three-year extended arrangement under Extended Fund Facility (EFF) for
Mongolia in a total amount of SDR 314.5054 million (about US$434.3 million,
or 435 percent of quota) to support the country’s economic reform program.
[1]
Other financing partners, including the Asian Development Bank, the World
Bank, Japan, and Korea, have also committed to provide budgetary and
project support, and the People’s Bank of China has agreed to extend its
swap line with the Bank of Mongolia. In sum, the total financing package
amounts to about $5.5 billion. The Board’s approval of the arrangement
enables the immediate disbursement of an amount equivalent to SDR 27.9560
million (about $38.6 million).
The authorities’ program aims to stabilize the economy, restore confidence,
and pave the way to economic recovery. A critical pillar of the program is
fiscal consolidation, to reduce the pressure on domestic financial markets,
stabilize the external position, and restore debt sustainability. The
program includes important safeguards to protect the most vulnerable during
this period of adjustment as well as institutional reforms to make sure the
fiscal adjustment is durable. Another pillar of the program is a
comprehensive effort to rehabilitate the banking system and strengthen the
Bank of Mongolia. A broad set of structural reforms is designed to support
private-sector led growth.
The Executive Board also concluded the 2017 Article IV consultation with
Mongolia today. A separate press release will be issued shortly.
Following the Executive Board’s discussion, Mr. Mitsuhiro Furusawa, Deputy
Managing Director and Acting Chair, issued the following statement:
“Mongolia was hit hard by the sharp decline of commodity prices and the
slowdown in key export markets. Efforts to mitigate these shocks through
expansionary policies were unsuccessful and resulted in unsustainable
public debt, falling international reserves, and lower growth.
“Against this background, the Mongolian authorities are implementing a
program to maintain macroeconomic stability, pave the way to economic
recovery, and protect the most vulnerable during the adjustment process.
Fiscal consolidation is a critical element of this program, including cuts
of non-essential expenditures, a move to progressive taxation, pension and
public financial management reforms, and steps to strengthen and better
target the social safety net. A number of structural fiscal reforms,
including an independent fiscal council, will help to bolster budget
discipline. Sizable fiscal adjustment, coordinated concessional external
financing from development partners, and continued engagement with private
creditors will help restore debt sustainability and rebuild international
reserves. The commitment to a market-determined exchange rate will
strengthen the economy’s resilience to external shocks, supported by
prudent monetary policy and the program’s favorable impact on confidence
and private sector capital flows. A new central bank law is envisaged to
strengthen the governance and independence of the Bank of Mongolia. In
addition, implementation of a comprehensive strategy would rehabilitate the
banking sector, improve the supervisory and regulatory framework, and
strengthen the AML/CFT regime. The program also includes structural reforms
to achieve sustainable and inclusive growth. These reforms aim to improve
the business environment, promote economic diversification, and encourage
foreign direct investment.
“Determined implementation will be critical to the success of the program.
Together with Mongolia’s development partners, the IMF will assist the
authorities in their effort with an arrangement under the Extended Fund
Facility.”
ANNEX
Recent Economic Developments
With minerals accounting for up to 90 percent of total exports, the sharp
drop in commodity prices from 2011 onward severely affected the balance of
payments and fiscal position. Macroeconomic policy easing to buffer the
economy from external shocks supported growth for a while, but at the cost
of increasing public debt, weakening the balance of payments, and reducing
banks’ asset quality. By end-2016, the large fiscal deficit and the
depreciation of the currency together pushed general government debt up to
nearly 90 percent of GDP.
The authorities recognized these economic difficulties and prepared an
“Economic Recovery Program” that would largely reverse past policies. They
also approached the Fund for assistance.
Program Summary
The authorities’ program supported by the extended arrangement aims to
stabilize the economy, restore confidence, and pave the way to economic
recovery. A critical pillar of the program is fiscal consolidation to
reduce the pressure on domestic financial markets, stabilize the external
position, and restore debt sustainability.
The program also lays the foundation for sustainable, inclusive growth in
the future. To end the boom-bust cycles of the past, the reform program
will: (i) discipline fiscal policy; (ii) improve the central bank’s
independence, governance, and focus on core responsibilities; (iii)
strengthen the financial sector; (iv) foster economic diversification and
inclusive growth; and (v) protect the most vulnerable in society.
Fiscal Policy.
The fiscal adjustment, combined with the projected growth recovery, a
gradual normalization of domestic yields, and the authorities’ access to
concessional financing under the program, is expected to restore debt
sustainability.
Monetary and Exchange Rate Policies.
A new Bank of Mongolia (BOM) law will be adopted to clarify the BoM’s
mandate and strengthen its governance and autonomy. The monetary stance
will need to remain tight for the time being, and the exchange rate
flexible.
Financial Sector reforms.
As a first step, the authorities will undertake a comprehensive diagnosis
of the banking system to assess institutions’ financial soundness and
resilience. This will be followed by recapitalization and restructuring as
needed. The regulatory and supervisory framework will be strengthened.
Growth-enhancing structural reforms.
Given the country’s large mineral resources, mining will always be a key
sector for the economy, but agribusiness and tourism have strong potential
as well. The program includes structural reforms to promote economic
diversification and improve competitiveness.
Social protection.
The program includes important safeguards to protect the vulnerable groups,
and gives priority to health and education. 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.
Program financing.
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.
[1]
The dollar amount is calculated based on the SDR-dollar rate of May
24, 2017
