A staff team of the International Monetary Fund /IMF/ led by Koshy Mathai visited Ulaanbaatar during February 1-19 to continue discussions with the Mongolian authorities on a set of economic policies that could be supported by IMF financial assistance. At the end of the visit, Mr. Mathai made the following statement:
"The Mongolian government and the IMF team have reached staff-level agreement on an economic and financial program to be supported by a three-year Extended Fund Facility for $440 million.
Other International partners also plan to support the government's program: the Asian Development Bank, 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.
The total external financing package will thus be around $5.5 billion and will support the authorities 'Economic Stabilization Program', which intends to restore economic stability and debt sustainability as well as to create the conditions for strong, sustainable, and inclusive growth, while protecting the most vulnerable citizens.
This agreement is subject to the confirmation of financing assurances, the completion of prior actions by the authorities, and the approval of the IMF Executive Board. The Board is expected to consider Mongolia's request in March.
Mongolia is well endowed with mineral resources, strong potential in agriculture and tourism, and a young and dynamic population. Its long-run future is promising, but in recent years it has been hit hard by the sharp decline of commodity prices and a collapse in foreign direct investment/FDI/. Attempts to stem the decline through expansionary policies proved ineffective after a few years, and the economy is now stagnating, weighed down by high debt and low foreign-exchange reserves.
Fiscal consolidation is a key priority, as loose fiscal policy in the past was a major driver of Mongolia’s current economic difficulties and high debt. Budget deficits will be reduced steadily, while priority social spending will be maintained: 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. Also, to boost revenue, the personal income tax will be made more progressive, with rates on only higher-income households increased.
The personal income tax will be made more progressive, with rates on only higher-income households increased.
The Development Bank of Mongolia (DBM) will henceforth operate in an independent, purely commercial manner, as laid out in the recently passed DBM law, and the Bank of Mongolia (BOM) will not engage in additional quasifiscal activity, with the mortgage program now operating essentially as a revolving fund. In addition, the law on concession projects will be reformed, and the public investment program (PIP) will be rationalized and better aligned with national development priorities.
The authorities will adopt a set of important fiscal reforms to ensure that budget discipline is maintained, building on the existing framework for fiscal responsibility. These include the creation of a Fiscal Council to provide independent budget forecasts and costings of new policy proposals, and provisions to give the government sole authority to determine the total amount of spending in the budget, as well as to require Ministry of Finance approval of any proposals to cabinet with a budgetary cost.
Monetary policy will remain appropriately tight, given the objective of price stability. Over time, however, as the economy normalizes, it may be appropriate to cut the policy rate if external and inflation indicators permit. The exchange rate will continue to move flexibly, with intervention limited to smoothing excessive volatility and preventing disorderly market conditions. A major priority will be the adoption of a new BOM law to clarify its mandate, strengthen governance, and improve independence.
Strengthening the banking system is a crucial part of the program, to ensure that the banks can support sustainable and inclusive economic growth. The authorities’ first priority is to undertake a comprehensive diagnosis of the banking system to assess institutions’ financial soundness and resilience. With the results of this diagnostic in hand, the BOM will engage banks to ensure appropriate restructuring and recapitalization, as necessary. The BOM will complement these actions by strengthening the regulatory and supervisory framework, and government is committed to improving the deposit insurance system. The authorities are also committed to strengthening the regime for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).
The authorities intend directly to boost economic activity and prospects by attracting new investment to major mines, and by implementing an array of structural reforms to promote economic diversification and improve competitiveness, especially in agriculture and tourism. The broad range of reforms envisaged under the program have been developed in close collaboration with the World Bank and ADB.
By 2019, growth is projected to pick up to around 8 percent, as economic and financial conditions improve and key mining projects take off.
The authorities’ adjustment and structural reform program, supported by the large package of external financing, is expected to stabilize the economy and lay the basis for sustainable, inclusive, long-run growth. By 2019, growth is projected to pick up to around 8 percent, as economic and financial conditions improve and key mining projects take off. Foreign exchange reserves should rise to a healthy $3.8 billion (above 6 months of imports) by the end of the program, similar to levels seen in 2012, before Mongolia was hit by external shocks. Fiscal consolidation will leave room for the banking sector, over time, to extend more credit to the private sector, consistent with projected growth. These policies would also put public debt on a declining path over the course of the program.
The government’s recently announced plan to engage with its private external creditors to secure financing assurances for the program should help restore debt sustainability. Specifically, the financing parameters of the program assume that external private creditor exposure will be maintained at its current level over the program period, on terms consistent with debt sustainability, and gross financing needs will remain at prudent levels during the post-program period.
On behalf of the staff team, I would like to thank the authorities for their warm welcome, and the constructive discussions and excellent collaboration we have had over recent months, bringing us to today’s successful conclusion.”
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