IMF's Mongolia Deal Comes With Plan to Avoid Boom-Bust-Bailout

  • IMF $434 million bailout is part of a $5.5 billion package
  • Sixth bailout since 1990 followed drop in commodity prices

The International Monetary Fund approved a loan package of $434 million to Mongolia on Thursday to support an economy recovering from weak commodity prices and low foreign investment.

The IMF contributions are part of a $5.5 billion deal that includes money from the Asian Development Bank and the World Bank, with Japan and South Korea as bilateral lenders. Also included is a three-year extension of a currency swap with China worth 15 billion yuan ($2.2 billion).

Mongolia’s sixth IMF bailout since 1990 follows a downturn in prices for copper and coal, the landlocked Asian nation’s two main export commodities. The budget deficit soared and disputes with investors including Rio Tinto Plc led to a collapse in foreign investment and depleted foreign exchange reserves.

Read more about Mongolia’s epic economic meltdown

The IMF program is one of the largest of its kind when taken as a percentage of a nation’s gross domestic product, IMF representative Neil Saker said at a press conference in Ulaanbaatar on Thursday. The loan is “to stabilize the economy in the short term and lay the foundations for inclusive, sustainable development and job-creating growth,’’ said Saker.

The funds will be used to boost foreign reserves at the central bank, which currently hover around $1 billion. The first tranche of $38.6 million is expected this month. Boosting reserves will increase confidence in the economy, Saker said, with the potential for ratings upgrades and a greater influx of cash.

“Mongolia has a good history of complying with IMF bailout terms, but it also has an extremely bad history of failing to continue the fiscal discipline once the program ends. I’m more worried about what happens after than during,” Munkhdul Badral, head of market intelligence firm Cover Mongolia, said in an email.

Tax Hikes

Mongolia passed controversial tax hikes ahead of the IMF deal, including a progressive income tax that has the highest earners paying 25 percent and a new tax on the interest accumulated in savings accounts. Parliament also passed increased taxes on tobacco products, passenger vehicles and alcohol. Social insurance by both taxpayers and companies are also set to increase.

“IMF austerity will be painful, especially where social spending is concerned,’’ said Nick Cousyn, COO of BDSec, Mongolia’s largest brokerage. “The government’s only option to offset that pain is to move forward with megaprojects, most notably the development of the Erdenes Tavan Tolgoi mine, the largest undeveloped coking coal deposit in the world.”

Completion of the deal was held up last month after lawmakers approved a banking measure that required large FDI projects to funnel revenues through local banks. The measure was canceled earlier this month after investors and the IMF raised concerns.

“Key to Mongolia’s recovery will be progressive legislation geared to attract much needed FDI,’’ said Cousyn. “Once presidential elections conclude in late June, populism will recede and the country can focus on rebuilding investor confidence and the economy.”

Boom & Bust

Mongolia must break the boom-bust-bailout cycle it has been riding over the past 15 years said Saker. The economy grew rapidly last decade as commodity prices soared along with demand from China, only to crumble when prices fell. The economy has potential to grow at around 8 percent per year, he added.

Mongolia’s economy grew just 1 percent last year -- compared with 17 percent in 2011. Output rose 4.2 percent year-on-year in the first quarter on the back of strong coal exports.

Diversification away from mining and into agriculture and tourism will help to steady the economy, said Saker. Currently 93 percent of Mongolia’s exports go to China, mainly in coal and copper.

Fiscal consolidation and control on spending are priorities for Mongolia’s economic recovery, said Saker. In net-present-value terms, general government debt will fall from the current level of 86 percent to below 80 percent by 2021 and more sharply thereafter if revenues from Oyu Tolgoi copper mine are saved.

Populist Programs

Earlier this decade, Mongolia raised significant debt on international markets to pay for roads, cash handouts, low interest mortgages and other populist programs.

“It’s important to put in place controls on expenditures so during the next boom expenditures don’t rise excessively and lead to more deficits,” said Saker.

The IMF is also encouraging regulatory and supervisory reforms at the central bank.“The aim is to have a well-supervised and well-capitalized banking system that can support inclusive and job-creating growth with low interest rates in the future,” said Saker.

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