Press Release No. 99/23

Press Release: IMF Approves Second Annual ESAF Arrangement for Mongolia

June 16, 1999

The International Monetary Fund (IMF) today approved the second annual arrangement under the Enhanced Structural Adjustment Facility (ESAF),¹ to support Mongolia's economic and financial program. The three-year ESAF arrangement was approved on July 30, 1997 in an amount of SDR 33.39 million (about US$45 million). (See Press Release No.97/36.) Today's decision provides Mongolia with SDR 14.84 million (about US$20 million) in support of the authorities' adjustment program, with a disbursement of SDR 5.936 million (about US$8 million) available immediately.

Background
Under the first annual ESAF arrangement, the economic program got off to an impressive start in 1997, but progress stalled in 1998 as a result of large declines in export prices and spillovers from regional crises, and political problems. Although some corrective actions were taken-including the introduction and later increase of the value added tax—the shock was such that the fiscal program nevertheless went off track, and the first annual arrangement lapsed in mid-1998. However, the formation of a new government in late 1998 enabled the authorities to reinvigorate the reform process.

Overall economic performance under the first annual arrangement was mixed. The adverse external developments led to a sharp drop in budgetary revenues, a loss in international reserves, and a renewed deterioration in bank portfolios. The overall fiscal deficit widened to 11¼ % of GDP, net domestic credit to the government increased, and domestic and external payments arrears were accumulated in 1998. Despite adverse circumstances, however, monetary policy remained tight, and inflation declined sharply to 6½ % by end-1998. Private sector activity also remained surprisingly resilient, with real GDP growth slowing only modestly to 3½ % in 1998.

Medium-Term Strategy and the 1999/2000 Program
The authorities' strategy is to create a stable macroeconomic environment and implement market reforms conducive to private sector-led growth. The 1999-2000 program aims at achieving real GDP growth of 3-4% a year, a further reduction in inflation to low single digits, and a rebuilding of gross official reserves to the equivalent of 14 weeks of imports in 2000. To meet these objectives, the government intends to implement a restrained fiscal policy to reduce the overall deficit significantly over the medium term. To this end, Parliament has already approved a supplementary budget for 1999 which incorporates major revenue measures and expenditure cuts. Monetary policy will remain tight to lock in the recent strong gains in inflation performance and to strengthen the external payment position.

Structural Reforms
Structural reforms will focus on restoring a sound banking system, accelerating the already successful privatization program, and enhancing the transparency and efficiency of government operations. The authorities have drawn up a comprehensive plan for banking sector reform, which aims to deal with three insolvent commercial banks, to improve the Bank of Mongolia's supervisory capacity to monitor and enforce compliance with prudential regulations, and to strengthen commercial banks' skills for portfolio management and the institutional and legal framework for loan recovery. On the privatization front, efforts will focus on the sale of large and strategically important enterprises, including those in the agroprocessing, banking, transportation, telecommunications, mining, and energy sectors. To improve government operations, the authorities plan treasury reforms to strengthen overall expenditure control and cash management, and public administration reforms to identify core functions of budgetary units and eliminate non-core functions.

Addressing Social Needs
The government has a firm commitment to strengthen the social safety net and improve the provision of social services to alleviate the costs of transition to a market economy. Emphasis is being placed on market-oriented measures, including expanded training programs and small business creation. Comprehensive, donor-supported restructuring programs are already under way in the health and education sectors. These programs are being supplemented by targeted programs of direct assistance to the most vulnerable groups under the National Poverty Alleviation Program.

The Challenge Ahead
Continued domestic political consensus in support of the reform program and strong donor support will be crucial for meeting the challenges ahead, including the need for further fiscal consolidation, forceful and thorough implementation of banking sector reform, and maintenance of the liberal trade regime and the prudent external debt policies that have served Mongolia so well.

Mongolia joined the IMF on February 14, 1991, and its current quota² is SDR 51.1 million (about US$69 million). Its outstanding use of IMF financing currently totals SDR 34.32 million (about US$46 million).