Mongolia Turns the Corner with $5.5 Billion IMF-Led Financing Package
IMF News, May 31, 2017
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- Authors: Neil Saker
- Published: May 31, 2017
Financing package and context
- The IMF approved a three-year, $434 million loan for Mongolia as part of a broader $5.5 billion financing package supported also by Japan, Korea, China, the World Bank, and the Asian Development Bank.
- In terms of GDP, this is the fourth-largest package in IMF history.
- Context: Mongolia has been hit by the commodity price slump, slowing demand in key export markets, and past policy mistakes; the government is pursuing an Economic Recovery Plan with IMF support.
- Publication date: May 31, 2017.
Program objectives
- Support the Economic Recovery Plan to:
- build foreign exchange reserves;
- put debt on a sustainable path;
- strengthen the banking sector;
- secure stable, inclusive growth over the long run.
Strengthening policies
- Fiscal consolidation is central to stabilization and, together with donor concessional financing and continued engagement of Mongolia’s private creditors, can help restore debt sustainability.
- Projected fiscal path:
- The fiscal balance will improve steadily, turning from a large deficit to a modest primary surplus by the early 2020s.
- Fiscal measures will be balanced between:
- reducing excessive expenditures; and
- increasing revenues by moving to a progressive tax system and improving tax administration.
- Monetary and exchange rate policy:
- Monetary policy will be kept appropriately tight, with scope for interest rate cuts as the economy stabilizes.
- The exchange rate will be allowed to move flexibly.
- Banking sector reforms:
- The fragile banking system will be strengthened through a special audit and recapitalization process.
- The role of the Bank of Mongolia will be enhanced through upgrades to its governance, independence, and regulatory and supervisory framework.
- Quote from IMF mission chief for Mongolia Koshy Mathai:
- “The authorities have an ambitious program in front of them, but with their strong political backing and steadfast implementation, they can strengthen policies and implement critical structural reforms to stabilize the economy and make it more resilient to future shocks.”
Breaking the cycle (structural fiscal reforms)
- Measures to break the boom-bust cycle and bolster fiscal discipline include:
- a new law to strengthen the independence and commercial orientation of the Development Bank of Mongolia;
- limits on the powers of the cabinet and of parliament to increase spending;
- improvements to the public investment program;
- a stronger framework for public-private partnerships;
- a new fiscal council to provide independent views on the budget.
Protecting the poor and social safeguards
- Poverty and social protection:
- The poverty rate has fallen in recent years but remains high at over 21 percent of the population and will likely increase with the recent economic downturn.
- The program emphasizes strengthening the social safety net, with benefits better targeted to the neediest.
- The IMF has worked closely with the Asian Development Bank and the World Bank on social protection measures.
- The underfunded pension system is being strengthened.
Staying competitive and diversification
- Long-term growth and diversification priorities:
- Sustainable mining will remain the bedrock of the economy.
- Mongolia’s 60 million livestock position the country to develop meat and dairy exports and expand the cashmere sector.
- Tourism is identified as another substantial opportunity.
- Encouraging regional integration through better infrastructure will stimulate new growth sources and deepen links with neighboring economies.
- Outlook:
- Over the next few years, as major mines come into production, Mongolia could see a fundamental economic transformation.
- The IMF looks forward to being Mongolia’s partner along this journey.
International Monetary Fund