On May 24, the International Monetary Fund (IMF) approved a funding packet totalling $434.3m for Mongolia, which will act to unlock further funding for the debt-ridden country from international donors. The IMF’s provision is tied to a total financing package amounting to about $5.5 billion, including support from the Asian Development Bank, the World Bank, Japan and South Korea.
Over recent years, dwindling mineral revenues have severely damaged Mongolia’s balance of payments and fiscal position. While a mining boom acted to fuel rapid growth for the economy when prices were high, a heavy dependence on commodity revenues rendered the economy acutely vulnerable to price shocks. A dip in export demand from China – Mongolia’s primary importer – further exacerbated the impact of the 2011 commodity price shock. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair of the IMF, explained: “Efforts to mitigate these shocks through expansionary policies were unsuccessful and resulted in unsustainable public debt, falling international reserves, and lower growth.”
Mongolia has become lumbered with increasingly unsustainable debt, reaching 90 percent of GDP at the end of 2016
Compounding matters, a dramatic drop in the value of the tugrik – Mongolia’s currency – has increased the size of public debt in domestic terms. As a result, the country has become lumbered with increasingly unsustainable debt, reaching 90 percent of GDP at the end of 2016.
According to Furusawa, “against this background, the Mongolian authorities are implementing a programme to maintain macroeconomic stability, pave the way to economic recovery, and protect the most vulnerable during the adjustment process”.
A key pillar of the plan will be a push to tighten fiscal budgets through the implementation of cuts to non-essential expenditures, a move to progressive taxation, pension and public financial management reforms. While driving forward with deep cuts, the programme aims to provide safeguards to protect the vulnerable groups and take steps to better target the social safety net.
In addition, the fund has pushed for a greater commitment to a market-determined exchange in an effort to bolster the economy’s resilience to external shocks.
The programme will also introduce new central bank legislation in order to improve central bank independence and governance system. Further to this, a move towards recapitalisation and restructuring of the financial sector is planned following a comprehensive assessment of the soundness of the sector.