The government has reached an agreement with the International Monetary Fund (IMF) team on the financing of a three-year extended fund facility (EFF) program for 440 million USD. Asian Development Bank (ADB), World Bank, and the governments of Japan and South Korea are expected to provide a combined three billion USD in budget and project support, making the government’s total external financing package 5.5 billion USD.
A press conference was organized at the State Palace on February 19, with Finance Minister B.Choijilsuren, Mongol Bank President N.Bayartsaikhan, and Head of the IMF team Koshy Mathai in attendance to report on the agreement, which concludes negotiations that began in August 2016.
The People’s Bank of China is also expected to extend a 15 billion RMB swap line with Mongol Bank, contributing to the 5.5 billion USD total. The 5.5 billion USD package is the largest the IMF has arranged with Mongolia, with the last program providing around 300 million USD. The program is designed to support the Mongolian government’s Economic Stabilization Program.
“To put this agreement into context, the last program Mongolia had with the IMF, at around 300 million USD, was one-20th of the current arrangement,” noted Koshy Mathai.
EFF AGREEMENT NOT YET FINALIZED
Mathai emphasized that the current agreement is a staff-level agreement, meaning the agreement has to be finalized by the IMF Executive Board. The agreement is subject to the confirmation of financing assurances, the completion of prior actions by the Mongolian government, and the final approval of the IMF Executive Board.
Confirming financing assurances means that the IMF must firmly establish that the partners will meet their obligations. The prior actions that need to be taken by the government include halting all quasi-fiscal (financial transactions that are not included in the government’s budget) activities of Mongol Bank and conducting a full diagnosis of the banking system. The IMF Executive Board is expected to review Mongolia’s request in March 2017.
When asked if the Executive Board could reject Mongolia’s request, Mathai said that the board has the full discretion and power to either approve or reject the decision. But he noted, “once a staff-level agreement is established, the board typically approves the agreement.”
FISCAL CONSOLIDATION A TOP PRIORITY
According to the IMF team, loose fiscal policy in the past was a major driver of the nation’s current economic difficulties and high debt. The IMF requires that budget expenditure be cut while budget deficit is steadily reduced. However, the Ministry of Finance and the IMF agreed to maintain priority social spending, asprotecting the nation’s most vulnerable citizens is atop priority for the IMF and the government. The savings from better targeting of spending for the Children’s Money Program will be used entirely to increase funding for a food stamp program.
In order to maintain budgetary discipline, the government will implement several key fiscal reforms. A Fiscal Council will be created to provide independent budget forecasts and to review the expenditures of new policy and project proposals. Provisions will also be added to give the government the sole authority on budgetary spending, and the Ministry of Finance will have to approve the budgets of any proposals submitted to Cabinet.
DEVELOPMENT BANK OF MONGOLIA AND MONGOL BANK REFORMS
The authority, capability, and operations of the Development Bank of Mongolia (DBM) and Mongol Bank are set to change under the EFF agreement. The DBM will operate in an independent and purely commercial manner, as detailed in the recently ratified DBM law. In essence, the DBM will not be connected to the state budget and will receive financing from other sources, such as international financial organizations.
The adoption of amendments to the Law on Mongol Bank has been stated as a top priority, with changes designed to strengthen governance and increase the central bank’s independence. Mongol Bank will not be involved in any additional quasi-fiscal activity in the future and will mainly focus on monetary policy instead of fiscal policy. This means that Mongol Bank will transfer its management of the eight percent mortgage program to Cabinet in 2018, as the IMF sees the plan as a fiscal operation. In 2017, Mongol Bank will continue to have authority over the mortgage program, but the mortgage program will be operating as a revolving fund from now on.
Another reform that will be implemented is amendments to the Law on Concessions, changing the way concession projects are approved and implemented, and the state’s public investment program will be rationalized and better aligned with national development priorities.
Monetary policy will be set as “appropriately tight”, with the main goal being price stability with minimal government intervention. The policy rate could be reduced if market conditions shift. Intervention in the exchange rate will be limited, as it will continue to move flexibly.
SOME TAXES TO INCREASE
In order to boost state revenue, six to seven taxes will be raised. Social insurance and personal income tax will increase by one percent in 2018. Personal income tax policy will also be made more progressive, with rates increasing for higher-income households.
The fuel import tax that was decreased in January will return to its normal rate and taxes on alcohol and cigarettes will rise. Depending on a vehicle’s manufacture date, vehicle taxes will increase by three to 15 percent. Taxes will begin being collected on savings account interest starting on April 1, 2017.
STRENGTHENING THE BANKING SYSTEM
Reforming the banking system is a crucial part of the EFF, IMF representatives stated. In order to ensure the stability of banks and their ability to support sustainable and inclusive economic growth, a comprehensive diagnosis of the banking system will be conducted to assess the financial resilience and soundness of Mongolia’s banks. Once the diagnosis is complete, Mongol Bank will use the results to cooperate with banks to restructure and recapitalize as necessary. The regulation and supervision mechanisms of the banking system by Mongol Bank will also be undergoing changes.
The agreements made between the IMF and the government are expected to stabilize the economy and lay a foundation for sustainable growth. There will be short-term challenges resulting from the changes outlined in the agreement. Finance Minister B.Choijilsuren compared the program to taking medicine, “it tastes bitter at first but it helps us heal.” The IMF predicts that the reforms that will be undertaken by the government, coupled with the financing package of 5.5 billion USD, will help GDP growth reach eight percent by 2019. The IMF forecasts that foreign exchange reserves will reach a healthy figure of 3.8 billion USD by the end of the EFF program’s three-year duration.