IMF EXECUTIVE BOARD OFFICIALLY GREENLIGHTS MONGOLIA’S EFF ENROLLMENT
After multiple delays, the International Monetary Fund (IMF) announced on May 24 that its Executive Board officially approved a three-year extended arrangement for Mongolia under its extended fund facility (EFF) program in the amount of 314.5 million SDR (about 434.3 million USD) to support the country’s economic reform program.
With approval for enrollment, the financial commitments of other financing partners, such as Asian Development Bank, World Bank, and the governments of Japan, South Korea, and China, also become official. In total, the financial package will be 5.5 billion USD. Mongolia will receive immediate disbursement of 38.6 million USD with the approval of the IMF board.
“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 IMF stated in a press release.
“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 IMF added.
Following the Executive Board’s discussion, Mitsuhiro Furusawa, the board's Deputy Manag- ing 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 ex- pansionary 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 nonessential 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.”
The IMF detailed the ways that the program will lay the foundation for sustainable, inclusive growth in the future, noting, “To end the boom-bust cycles of the past, the reform program will help establish a disciplined fiscal policy; improve the central bank’s independence, governance, and focus on core responsibilities, strengthen the financial sector, foster economic diversification and inclusive growth, and protect the most vulnerable in society.”
FISCAL POLICY
Fiscal adjustment, combined with 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 Law on the Central Bank will be adopted to clarify the Bank of Mongolia’s mandate and strengthen its governance and autonomy. The bank’s monetary policy 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 the financial soundness and resilience of institutions. This will be followed by recapitalization and restructuring as needed. The regulatory and supervisory framework of the banking system 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 vulnerable groups, and gives priority to health and education. Savings from better targeting of the Children’s 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. Asian Development Bank, World Bank, and bilateral partners, including Japan and South Korea, are expected to provide up to three billion USD in budget and project support. The People’s Bank of China is expected to extend its 15 billion RMB swap line with the Bank of Mongolia for at least another three years.
In response to the approval of EFF enrollment, Finance Minister B.Choijilsuren, a key figure in negotiations with the IMF, said that a green light has been turned on for the Mongolian economy. He expressed his gratitude to the partnering international organizations and countries, and also thanked the Mongolian people for their understanding throughout the process.