Press Release No. 13/394

Press Release: IMF Completes 2013 Article IV Mission to Mongolia

October 7, 2013

An International Monetary Fund (IMF) mission, led by Mr. Geert Almekinders, visited Mongolia during September 10-24, 2013, to hold discussions for the 2013 Article IV consultation. The mission met Prime Minister Altankhuyag, Minister of Finance Ulaan, Minister of Economic Development Batbayar, the Bank of Mongolia Governor Zoljargal, and other high-level government officials. In addition, the mission met with members of the legislature, the private sector, and the donor community.

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

“Mongolia continues to be one of the fastest growing economies in the world. The economy expanded by 12½ percent in 2012 and by 11½ percent in the first half of 2013. Growth has been buoyed by a relatively mild winter boosting agriculture and expansionary fiscal and monetary policies. The latter have been deployed to compensate for the marked slowdown in coal exports and foreign direct investment (FDI)-financed mining development—key drivers of growth in recent years. The strong growth of the economy has helped reduce poverty by more than 11 percentage points over the past two years.

“Adverse shocks to FDI inflows and exports, together with expansionary macroeconomic policies, have put pressure on the balance of payments. As a result, central bank reserves have come down considerably from record levels reached in late-2012 following Mongolia’s successful first sovereign bond issuance. In recent months, to help relieve the balance of payment pressures, the Bank of Mongolia has allowed more exchange rate flexibility. Looking ahead, real GDP growth for Mongolia is currently projected by the IMF at close to 12 percent in 2013, buoyed also by the start of commercial operations at the Oyu Tolgoi copper and gold mine.

“Mongolia’s medium-term prospects remain promising given its large natural resource endowment. However, expansionary macro policies are likely to put pressure on inflation and the balance of payments in the period ahead. Also, Mongolia is facing an uncertain external environment. Advanced economies are getting ready to exit from the very supportive monetary policies implemented in recent years. China’s economy is expected to rebalance away from a mostly investment-based growth model toward a more consumption-based growth model. Both these factors are bound to have major spillovers globally and especially in the region. Spillover risks will particularly affect the more vulnerable emerging market economies. In light of this, Mongolia needs to change course to avoid becoming highly exposed to these external shocks and risks of crisis.

“The authorities are fully aware that mitigating risks to macro-economic and financial stability is necessary for investor confidence and sustained high growth. To address those risks, which are elevated by the highly uncertain external environment, our discussions focused on the need to adjust policies with a view to containing balance of payments pressures and inflation. In particular, the mission recommended a package of fiscal adjustment, reducing monetary stimulus, continued exchange rate flexibility, and steps to further strengthen the banking sector and the foreign investment regime.

“We welcomed the government’s recent announcement to cut spending from the 2013 budget by about MNT 1 trillion. The commitment to contain the structural fiscal deficit within the Fiscal Stability Law’s (FSL) 2 percent of GDP ceiling is particularly noteworthy. At the same time, the mission noted that an increasing amount of government spending is taking place outside the budget. This is not consistent with the Fiscal Stability Law’s main objective of “ensuring fiscal stability.” The off-budget spending is implemented by the Development Bank of Mongolia (DBM), and is financed from the sovereign bond proceeds. It is essential to establish a legal framework for the inclusion of DBM spending in the budget. It is recommended that the authorities draw up an ambitious and credible fiscal consolidation plan aimed at meeting the 2-percent of GDP ceiling for the structural deficit (including DBM operations) over the medium term. In this regard, it is encouraging that the government is planning to slow the pace of DBM spending during the remainder of this year and is reviewing relevant plans going forward.

“While the various Bank of Mongolia programs introduced this year were designed to mitigate the impact on the domestic economy of declining FDI and export earnings, we welcome the Bank of Mongolia’s intention to phase out these programs over time. The rapid credit growth observed in recent months is not sustainable and, unless reined in, risks leading to sustained pressures on macro stability as well as heightened banking sector vulnerabilities.

“We welcome the increased exchange rate flexibility observed in the past three months. The floating exchange rate regime and auction system should be maintained. Intervention should be limited to smoothing excessive exchange rate volatility.

“The increased capitalization of the banking system and the recent establishment of the Deposit Insurance Corporation are other welcome developments. The recent failure of Savings Bank was handled well and did not lead to contagion effects. Building on these positive developments, and in view of the risks related to the rapid growth of bank credit, it would be important to strengthen banking supervision and the provisioning regime. Only hedged borrowers should have access to foreign currency loans.

“We welcome the adoption of the new Investment Law. This, along with other legislative changes the government is making, can be expected to render the business environment for domestic and foreign investors more predictable and transparent.

We would like to express our sincere appreciation to the Mongolian authorities and our other counterparts for their hospitality and the productive and candid nature of our discussions.”

The final staff report on the Article IV consultations will be submitted to the Executive Board in coming weeks and will be considered by the Board in November.