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. 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.”
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.
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.