An In­ter­na­tional Mon­e­tary Fund staff team led by Ge­off Got­tlieb vis­ited Ulaan­baatar from Oc­to­ber 18-30, 2017 to con­duct dis­cus­sions on the first and sec­ond re­views of the three­year ex­tended fund fa­cil­ity pro­gram. Shorty af­ter, the IMF Ex­ec­u­tive Board com­pleted the first and sec­ond re­views of Mon­go­lia’s per­for­mance un­der the pro­gram and ap­proved the 79.1 mil­lion USD dis­burse­ment. Ge­off Got­tlieb, IMF’s mis­sion chief for Mon­go­lia, gave an ex­clu­sive in­ter­view to Unu­udur and The UB Post.

The IMF’s res­i­dent rep­re­sen­ta­tive, Neil Saker, made a state­ment last De­cem­ber. He noted, “There have been sev­eral pos­i­tive changes as part of the IMF ex­tended fund fa­cil­ity.” He said that for­eign cap­i­tal and in­vest­ment has in­creased, econ­omy and tu­grug ex­change rate have sta­bi­lized, also the in­ter­est rate of bonds in the in­ter­na­tional mar­ket has de­creased. In your opin­ion, what are the most im­por­tant im­prove­ments of the past?

The first key im­prove­ment came in early 2017 when the au­thor­i­ties agreed to a com­pre­hen­sive mix of sound poli­cies to sta­bi­lize the econ­omy. This strong com­mit­ment al­lowed the au­thor­i­ties to se­cure sub­stan­tial fi­nan­cial as­sis­tance from the in­ter­na­tional fi­nan­cial com­mu­nity and thus avert a po­ten­tial fi­nan­cial cri­sis which was a real risk ear­lier last year. The sec­ond key im­prove­ment is that au­thor­i­ties have fol­lowed through on these com­mit­ments and used the bet­ter than ex­pected ex­ter­nal en­vi­ron­ment to over-per­form on their key macroe­co­nomic tar­gets, par­tic­u­larly with re­spect to the fis­cal bal­ance and for­eign ex­change re­serves. This per­for­mance has helped sta­bi­lize the ex­change rate and re­duce bor­row­ing costs. The fi­nal crit­i­cal im­prove­ment is with re­spect to the growth out­look. While much of the re­cent mo­men­tum is a func­tion of ex­ter­nal events, there has been re­newed mo­men­tum in other sec­tors in­clud­ing man­u­fac­tur­ing.

Com­ing into ef­fect on Jan­uary 1, 2018, some taxes will be in­creased as agreed upon with the In­ter­na­tional Mon­e­tary Fund. The de­ci­sion to in­crease the per­sonal in­come tax for high-in­come in­di­vid­u­als was made last year. Many peo­ple are op­posed to this de­ci­sion. What do you think of this?

A flat in­come rate at 10 per­cent is not ap­pro­pri­ate for a coun­try like Mon­go­lia es­pe­cially given ris­ing in­come in­equal­ity. A pro­gres­sive tax sys­tem where richer peo­ple pay pro­por­tion­ally more is typ­i­cal glob­ally and is more equitable. The changes are struc­tured to be propoor as the thresh­old be­fore which the tax rates kick in has been raised from 84,000 MNT to 120,000 MNT and will grad­u­ally rise to 240,000 MNT by 2021. 85 per­cent of cit­i­zens will pay less tax than be­fore. The high­est rate of 25 per­cent is still low by in­ter­na­tional stan­dards and will only ap­ply to those who earn 3.5 MNT per month (three and a half times the av­er­age wage). There is scope for fur­ther re­forms to im­prove the ef­fi­ciency and fair­ness of the tax sys­tem and they will be a fo­cus of the pro­gram go­ing for­ward.

I heard that IMF told the Fi­nance Min­istry that there was an op­por­tu­nity to erase debt. Is it pos­si­ble? As you know Mon­go­lian debt is still high. Bonds will be ma­tur­ing in the 2020s.

We are not fa­mil­iar with this com­ment. In most cases, debt is not “erased”. Rather the gov­ern­ment can en­sure that it be­comes less of a bur­den to the econ­omy by re­duc­ing the ra­tio of debt to GDP. This pri­mar­ily oc­curs by gen­er­at­ing strong GDP growth while lim­it­ing the ex­tent of new bor­row­ing with strong fis­cal per­for­mance. The gov­ern­ment can also im­prove the debt-GDP ra­tio by low­er­ing their in­ter­est bill which can be achieved by ex­chang­ing ex­pen­sive debt with cheaper obli­ga­tions as con­fi­dence re­turns and Mon­go­lian debt be­comes more at­trac­tive to in­vestors.

Step­ping back, from the out­set of this pro­gram, we have be­lieved that Mon­go­lia’s debt will be­come safe and sus­tain­able over the medium term pro­vided the au­thor­i­ties pur­sued the ap­pro­pri­ate poli­cies, mainly with re­spect to a pru­dent fis­cal pol­icy, stronger fi­nan­cial su­per­vi­sion, and steady com­ple­tion of mega­con­struc­tion projects re­lated to the min­ing sec­tor. Debt is still high but the au­thor­i­ties have made con­sid­er­able progress since pro­gram ap­proval and the cur­rent tra­jec­tory for pub­lic debt is now con­sid­er­ably bet­ter than it was be­fore. Pub­lic debt is cur­rently ap­prox­i­mately 85 per­cent of GDP and is now pro­jected to fall to 73 per­cent of GDP by 2022. As a gen­eral mat­ter, the fund does sup­port ef­forts by au­thor­i­ties to take ad­van­tage of good mar­ket con­di­tions to en­sure a smooth re­pay­ment pro­file and low av­er­age in­ter­est cost.

The eco­nomic sit­u­a­tion is be­com­ing bet­ter be­cause of in­creased coal ex­port rev­enue. But I think there are risks. For ex­am­ple, maybe there are down­side risks to the coal sec­tor. What risks are there for the fu­ture of the Mon­go­lian econ­omy?

All economies that have sig­nif­i­cant de­pen­dence on com­modi­ties are vul­ner­a­ble to changes in global de­mand. Mon­go­lia is not alone in this re­gard. The key is that the au­thor­i­ties use the pol­icy tools at their dis­posal to limit the scope for these changes to desta­bi­lize the Mon­go­lian econ­omy. In par­tic­u­lar, dur­ing periods of strong com­mod­ity rev­enues, the au­thor­i­ties need to re­duce debt and build for­eign ex­change re­serves. Such poli­cies are the fo­cus of the IMF pro­gram.

Le­gal re­forms will be made in the bank­ing sec­tor. What is the main im­pact of le­gal re­forms?

The ob­jec­tives are to up­date the le­gal en­vi­ron­ment both to reflect the sig­nif­i­cant changes in the bank­ing sys­tem in re­cent years and to be in line with global re­forms passed as a re­sponse to the global fi­nan­cial cri­sis. The re­forms will also im­prove the gov­er­nance of the Bank of Mon­go­lia (BOM) and its oper­a­tions, im­prove the reg­u­la­tory and su­per­vi­sory frame­work, and strengthen the fi­nan­cial sec­tor safety net.

Mon­go­lian com­mer­cial banks were go­ing through an AQR. Can you tell us about the re­sults?

The BOM hired out­side ad­vi­sors to con­duct the AQR and those ad­vi­sors are still fi­nal­iz­ing the re­port. We un­der­stand that the BOM wishes to make a pub­lic state­ment about the re­port once it is com­plete.

A fis­cal coun­cil will be estab­lished. How will the coun­cil work?

The Fis­cal Coun­cil is in­tended to be a high level body with the aim of en­sur­ing that the fis­cal stance and the an­nual bud­get are con­sis­tent with the fis­cal rules that Mon­go­lia adopted in 2012, in­clud­ing the Fis­cal Sta­bil­ity Law. Ad­her­ence to this frame­work would avoid the debt prob­lems of re­cent years and would strengthen macroe­co­nomic sta­bil­ity. Fis­cal coun­cils have been adopted in sev­eral coun­tries in re­cent years and have gen­er­ally helped in en­sur­ing pru­dent fis­cal poli­cies.

When will an IMF staff team visit to Mon­go­lia?

The cur­rent plan is to visit Mon­go­lia in the sec­ond half of Jan­uary as part of the Third Re­view Mis­sion.

Do you think the Mon­go­lian econ­omy will have a full re­cov­ery when the IMF pro­gram ends?

The main goal for the pro­gram is to en­sure that key macro-poli­cies (e.g. fis­cal bal­ance and ex­change rate pol­icy) and struc­tural re­forms (to­ward a more sta­ble bank­ing sys­tem, a stronger tax code) are ad­e­quate to lay the ground­work for high and sus­tain­able growth. If this is achieved, vul­ner­a­bil­i­ties will have been sub­stan­tially re­duced. None­the­less, given the size of chal­lenges that Mon­go­lia faced at the time of pro­gram ap­proval, more time may be needed for a full re­cov­ery.

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