IMF Executive Board Approves Financial Arrangement for Mongolia

IMF News, May 24, 2017

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Executive Board 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).
Immediate disbursement enabled: SDR 27.9560 million (about $38.6 million).
Total financing package, including other partners, amounts to about $5.5 billion.
Other partners: Asian Development Bank, World Bank, Japan, Korea (expected up to $3 billion in budget and project support), and the People’s Bank of China (expected to extend its RMB 15 billion swap line with the Bank of Mongolia for at least another three years).

Primary aims:
- Stabilize the economy.
- Restore confidence.
- Pave the way to economic recovery.
Critical pillars:
- Fiscal consolidation to reduce pressure on domestic financial markets, stabilize the external position, and restore debt sustainability.
- Comprehensive rehabilitation of the banking system and strengthening of the Bank of Mongolia.
- Broad structural reforms to support private-sector led growth.
- Safeguards to protect the most vulnerable during adjustment and institutional reforms to ensure durable fiscal adjustment.

Fiscal consolidation measures include 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.
Structural fiscal reforms will include creation of an independent fiscal council to bolster budget discipline.
Social protection measures:
- Important safeguards to protect vulnerable groups; priority to health and education.
- Savings from better targeting the Child Money Program will be used entirely to increase spending on the food stamp program for the most vulnerable.

Commitment to a market-determined exchange rate to strengthen resilience to external shocks.
Monetary stance: will need to remain tight for the time being.
A new Bank of Mongolia (BOM) law will be adopted to clarify the BOM’s mandate and strengthen its governance and autonomy.
The program envisages strengthening the Bank of Mongolia and improving governance and independence through legislation.

Initial step: comprehensive diagnosis of the banking system to assess financial soundness and resilience of institutions.
Follow-up measures: recapitalization and restructuring of banks as needed.
Strengthening of the regulatory and supervisory framework.
Reinforcement of the AML/CFT regime.

Program seeks to end boom-bust cycles and lay foundation for sustainable, inclusive growth by:
- (i) disciplining fiscal policy;
- (ii) improving the central bank’s independence, governance, and focus on core responsibilities;
- (iii) strengthening the financial sector;
- (iv) fostering economic diversification and inclusive growth;
- (v) protecting the most vulnerable in society.
Sectoral focus:
- Mining remains a key sector given large mineral resources.
- Agribusiness and tourism identified as sectors with strong potential.
- Structural reforms to promote diversification, improve competitiveness, and encourage foreign direct investment.

Minerals accounted for up to 90 percent of total exports; sharp drop in commodity prices from 2011 onward severely affected the balance of payments and fiscal position.
Macroeconomic policy easing previously supported growth but increased public debt, weakened the balance of payments, and reduced banks’ asset quality.
By end-2016, the large fiscal deficit and currency depreciation pushed general government debt up to nearly 90 percent of GDP.

Sizable fiscal adjustment, coordinated concessional external financing from development partners, and continued engagement with private creditors are expected to restore debt sustainability and rebuild international reserves.
Other international partners are expected to provide support: 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 its RMB 15 billion swap line with the Bank of Mongolia for at least another three years.

Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, emphasized:
- Mongolia was hit hard by commodity price declines and slowdown in key export markets; prior expansionary policies resulted in unsustainable public debt and falling international reserves.
- Determined implementation will be critical to the success of the program.
- The IMF, together with Mongolia’s development partners, will assist the authorities with the arrangement under the Extended Fund Facility.

IMF Press Release No. 17/193 (May 24, 2017).