Press Release No. 18/37

IMF Reaches Staff-Level Agreement on the Third Review of Mongolia’s Extended Fund Facility

February 6, 2018

• Mongolia’s economy is recovering, reflecting strong international demand for commodities and improving confidence; key macro-economic quantitative targets, including the fiscal deficit and international reserves, have been achieved by large margins.
• Risks include a correction in external demand for commodity exports and rising fuel prices. It is, thus, essential that the authorities continue to build buffers and implement the structural reforms necessary for high and sustainable growth.
• The near-term focus should remain strengthening the banking system, putting in place a better tax framework, and improving budgetary controls.

An International Monetary Fund (IMF) staff team led by Mr. Geoff Gottlieb visited Ulaanbaatar from January 24 to February 6, 2018 to conduct discussions on the third review of the three-year Extended Fund Facility (EFF) arrangement approved on May 24, 2017, in an amount equivalent to SDR314.5054 million, or about US$434.3 million [1] (see Press Release No. 17/193 ).

At the conclusion of the visit, Mr. Gottlieb made the following statement:

“The economy is doing better than expected led by commodity exports and a pick-up in domestic demand. Growth is now projected at 5.0 percent in 2018 and 6.3 percent in 2019. The government’s adjustment program, supported by a $5.5 billion IMF-supported package, is showing positive results with the successful roll over of external bonds maturing in 2017 and 2018, a $1.8 billion increase in reserves, and a sharp reduction in government debt. These developments have resulted in a largely stable exchange rate, a fall in interest rates, and have greatly improved the government’s debt service schedule. Nevertheless, the growth outlook is subject to risks including a fall in external demand for commodities and higher fuel prices. In light of these risks and still limited buffers, fiscal and monetary policies should remain prudent.

“Macro-economic performance under the program has been positive, with all quantitative targets met by large margins. Fiscal results have been much better than expected, supported by stronger revenues and tight expenditure control. The overall fiscal deficit in 2017 was 1.9 percent of GDP compared to the target of 10.6 percent and 17 percent in 2016. The authorities’ program for 2018 envisages continued prudence in the deficit, while strengthening tax administration through new tax laws and improving budgetary controls on concessions, public investment projects and the operations of the Development Bank of Mongolia. The fiscal over-performance has provided some room for adapting program policies including a rise in civil service salaries in 2019 after several years of restraint.

“The authorities are moving ahead with the strengthening of the banking system and it is crucial that the key steps are implemented as planned. Important legal reforms including the Banking law and Bank of Mongolia law have been passed, a new deposit insurance law is expected shortly, and improvements to the regulatory and supervisory framework are under way. The results of the comprehensive Asset Quality Review have been communicated to banks individually and they are now in the process of preparing plans to reinforce, where needed, their capital adequacy. A law on bank recapitalization that delineates, in line with international best practice, when public funds can and should be used will be introduced in coming months. The authorities will also move ahead with putting in place an NPL resolution framework that will allow for more rapid improvement in banks’ balance sheets.

“The authorities and the team have reached staff-level agreement on the completion of the third review under the EFF arrangement, which is subject to the approval of the IMF Executive Board.

“The team thanks the authorities for their cooperation, constructive dialogue, and hospitality during its stay in Mongolia.”

[1] The dollar amount is calculated based on the SDR-dollar rate of May 24, 2017, equivalent to $425mn at SDR-dollar rate of 1.35274 as of February 27, 2017.