Mongolia—Donors Meeting: Statement of the IMF Mission
March 14, 2009The IMF mission has reached a broad agreement, ad referendum, with the Mongolian authorities on an 18-month Stand-By Arrangement. This program will provide a framework for macroeconomic policies for this year and next, and merits support from the international community.
Mongolia has been hit by a combined shock of a sharp worsening in the terms of trade, a rapid domestic growth slowdown, and a difficult situation in the banking system. This has been compounded by overly loose and procyclical fiscal policy in recent years. The likelihood of a loss of macroeconomic stability is increasingly imminent and, if that were to occur, the social consequences would be grave.
The staff and Mongolian government had full agreement on the diagnosis of the difficult situation the country now faces and that the solution to the current confluence of shocks would need to encompass four broad principles:
• To restore health to the government’s finances;
• To allow the exchange rate to adjust flexibly towards its equilibrium level while calibrating monetary policy to safeguard international reserves;
• To bolster confidence in the banking system;
• To protect the poor, particularly during this coming period of economic adjustment.
It is clear that the Mongolian government is prepared to take significant steps to address the current imbalances that the country faces. In particular, the government has proposed a reduction in the nonmineral fiscal balance of more than 5 percent of GDP in 2009 (an overall deficit of 6 percent of GDP). This would amount to the bulk of the loss of mineral revenues that the budget is likely to suffer this year and will put Mongolia firmly on a path towards sustainable fiscal finances. The fiscal adjustment is centered primarily around expenditure restraint including a postponement of domestically financed capital expenditures, a wage and hiring freeze, and lower non-targeted transfers. The government has secured passage by the parliament of its fiscal plan which shows broad political ownership of the program. For 2010, the authorities intend to continue this trajectory of fiscal adjustment, bringing the deficit down further to 4 percent of GDP next year.
The central bank has also taken quick action to restore confidence in the banking system. It has taken Anod Bank into conservatorship and appointed an international auditor. The parliament has also recently passed a substantial improvement in the deposit guarantee system. These show the authorities’ commitment to stand behind the banking system. The central bank has also devised a comprehensive plan to strengthen banking supervision and address any potential weaknesses in banks.
The government plans, in collaboration with the Asian Development Bank and the World Bank, to design a comprehensive overhaul of the existing system of social transfer programs. The goal will be to target these programs toward the very poor and increase the support for the poorest households. It is expected those changes will be put in place in time for the 2010 budget.
There is still significant uncertainty about the level of domestic financing likely to be available in the coming year. However, even under a best case scenario, the government’s fiscal effort would still leave a financing need of around US$145 million for the year as a whole and an additional financing need of US$60 million in 2010. Given the global economic crisis, prospects for private sector financing of the budget deficit are slim and the authorities will have to rely on the donor community to fill this financing gap. The authorities program is ambitious and merits the broad support of the international community.