The last months of 2016, were characterized by concern, both at home and abroad, as to whether Mongolia could convince the International Monetary Fund (IMF) and other stakeholders, to offer financial assistance. The country let off a collective sigh of relief in February 2017, when a staff-level agreement was reached. Hard work and flexibility on both sides, had enabled a successful conclusion to a complex, multifaceted negotiation.
Central Square in Mongolia
In early February, a delegation of IMF officials closely engaged with Mongolian authorities, in trying to marry potential financial assistance to a menu of economic policies designed to revive a flagging economy and repair a large hole in public finances. Led by Koshy Mathai, it eventually announced a deal which would involve an Extended Fund Facility (EFF) of around US$440m alongside assistance from key strategic partners.
Both the IMF and the government of Mongolia have been keen to emphasize this is the country’s plan for recovery, not an internationally imposed set of policies. The Mongolian government has an ‘Economic Stabilization Program’, which is aimed at increasing the sustainability of debt and restoring economic credibility. The IMF package is designed to support this process, alongside further assistance from the Asian Development Bank (ABD), World Bank, Japan and South Korea. It also involves the extension of a 15-billion-yuan currency swap with China by three years.
Banking Sector Outstanding Loans as of October 2016 by sector
In Mathai’s statement, there were takeaways familiar to Mongolia-observers. He stressed its promising future, on the basis, not only of mineral wealth, but potential to diversify into agriculture and tourism. Noting Mongolia’s young and dynamic population, Mathai highlighted the need for fiscal consolidation, and a departure from the previously expansionary economic policy which had been a major contributory factor to Mongolia’s malaise.
One characteristic of the reforms is the attempt to galvanize public support by avoiding blanket austerity. Targeted social spending, for instance, is to be maintained, with funds from the Child Money Program used to pay for food stamps for society’s most vulnerable. In an attempt to ensure those with the broadest shoulders contribute most to the country’s recovery, a progressive rate of taxation is due to be introduced.
Reforms to the banking system are also integral to hopes of a more sustainable economic future. The Bank of Mongolia (BOM) is to refrain from quasi-fiscal activities, and the mortgage fund, is to only operate a revolving facility. The Development Bank of Mongolia (DBM), meanwhile, is due to act in an independent, commercial manner- a role enshrined in recent statute. In particular, effective stress-testing of the loan books of Mongolia’s banks, will enable restructuring to ensure resilience in coming years.
In order to ensure there is a continuation of fiscal discipline, an independent Fiscal Council is to be established, to provide forecasts and advice on new policy proposals. Meanwhile, monetary policy is expected to remain relatively tight, but this does not preclude the possibility of allowing a cut to the policy rate if economic conditions improve. Importantly, there is to be a flexible movement of the currency, free from interference by government.
Source: National Statistical Office
The best intentions of politicians, and the most finely tuned structure, however, will only be maintained, if there is a return to growth. To this end, the IMF seems positively predisposed to statements and actions taken by the Mongolian government. Inter alia, these include directly attempting to attract new investment to major mining projects, investing in infrastructure and taking the first tentative steps toward diversification It will be of some comfort to international investors that the plans to achieve these objective were developed in conjunction with the ADB.
The consequence of the package of support- and the plans of the Mongolian government-is strong growth of eight percent is expected by 2019. IMF projections suggest by that time foreign exchange reserves will be back at 2012 levels, providing insulation in the event of exogenous economic shocks. It would also place Mongolia in a better position in terms of reducing the level of the public debt.
Mongolia GDP Growth Rate
Source: Trading Economics
By April 2017, the IMF’s representative, Neil Saker, confirmed Mongolia had met all necessary pre-conditions. The government had passed a supplementary 2017 budget, undertaken a review of the quality of assets held by its banks, and confirmed the BOM’s departure from quasi-fiscal activities. Swift satisfaction of these requirements bodes well for the success of the overall program in months and years ahead.
