The Mongolia-IMF Stand-By
Arrangement: Achievements,
Lessons Learnt, Challenges Ahead
Parmeshwar Ramlogan
IMF Resident Representative
October 29, 2010
1
Background
Context of the SBA
• Sharp deterioration in macroeconomic conditions in 2008 due to:
– Collapse of export prices of copper and gold
– Inappropriate economic policies
Two Components of the SBA
• Financing Component: Commitment by the IMF to provide financial
resources to the Government
– Amount: SDR 153.3 million (About US$ 242 million at today’s exchange rate)
– Complementary financing by the donor community (World Bank, ADB, Japan,
Australia)
• Adjustment Component: Commitment by the Government to implement
a program of economic policies and reforms agreed with the IMF
2
Objectives of the Economic Program
Short-Run Objective (Stabilization Component)
• Stabilize the economy
–
–
–
–
–
Reduce inflation
Stop the currency depreciation
Rebuild net international reserves
Avoid a banking crisis
Restore economic growth
Medium-Term Objective (Reform Component)
• Strengthen the policy framework to improve the economy’s
resilience to future economic shocks
– Fiscal reforms to avoid boom-bust fiscal policies
– Banking reforms to strengthen the financial sector
– Social welfare reforms to improve the social safety net
3
The Stabilization Program
• Fiscal Policy
– Reduce the budget deficit to a level consistent with available noninflationary financing
– Limit new non-concessional borrowing to maintain a sustainable
public debt
• Monetary Policy
– Raise the Bank of Mongolia’s policy rate
– Reduce excess liquidity in the banking system
• Exchange Rate Policy
– Let the exchange rate be market determined
– Intervene in the foreign exchange market only to achieve the net
international reserve targets and to avoid excessive volatility of the
exchange rate
4
Fiscal policy has been tightened
Fiscal Balance
50,0
40,0
Total revenues and grants
Total expenditure and net lending
Overall balance
30,0
20,0
10,0
0,0
2005
2006
2007
2008
2009
2010
-10,0
Source: Ministry of Finance
5
Monetary policy has been tightened
6
The Bank of Mongolia is committed to
a market-determined exchange rate
7
The Structural Reform Program
• Fiscal Reforms
– Fiscal Stability Law
– Integrated Budget Law
– Tax Administration
• Banking Reforms
–
–
–
–
Central Bank Law
General Banking Law
Financial supervision and regulation
Bank restructuring plan
• Social Welfare Reforms
– Social Welfare Reform Law
8
Achievements
• The economy stabilized very quickly
– Economic growth has rebounded
– Inflation declined sharply in 2009
– International reserves are at record levels
– Confidence in the tugrik has been restored
– Indicators of banking health are improving
– Bilateral debt relations were normalized
9
Economic growth has rebounded
25
25
Real GDP
20
(Year-on-year percent change)
Proj.
20
15
15
10
10
5
5
0
0
-5
2005Q4
2006Q4
2007Q4
2008Q4
2009Q4
-5
2010Q4
10
Inflation has come down sharply
60
50
60
CPI Inflation
Proj.
50
40
40
30
30
20
20
10
10
0
0
-10
-20
Jan-05
Overall
-10
Food and nonalcoholic beverages
-20
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
11
Official reserves are at record levels
12
The currency is now appreciating
1600
1550
Bank and Auction Rates (Tog/US$)
1600
Sell average
Buy average
1550
1500
1500
1450
1450
1400
1400
1350
1,298.5 1350
1300
1300
1250
1,289.8
1250
Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10
13
Bank balance sheets have
strengthened
22
20
22
Banking System Excl. Anod and Zoos
20
18
18
16
16
14
14
12
12
Capital adequacy ratio
Nonperforming loans
10
10
8
8
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
14
Achievements
• More importantly, the policy framework has
been strengthened
– Fiscal Stability Law has been approved in Parliament
– Banking laws and regulations have been revised
– Banking supervision and regulation is being
strengthened
– Integrated budget law, social welfare reform law, and
bank restructuring plan have been submitted to
Parliament
– Tax administration is being strengthened
– The exchange rate is now market-determined
15
Lessons Learnt
Lesson No. 1: Government Ownership of Policies is
Critical
• The SBA was the first IMF-supported program to be
completed successfully. Why?
– Government commitment was the key.
• This brings up the broader question of government
ownership of economic policies and reforms
– Ownership means government acting out of conviction
that it is doing what is best for Mongolia, and is prepared
to stand up and defend its policies.
– Such a conviction requires that policies be based on sound
economic principles, not on political expediency.
16
Lessons Learnt
Lesson No. 2: Need to Build Public Support for
Policies and Reforms
• Once the government is convinced about its
course of action, it has to go about convincing
the broader public, particularly members of
Parliament.
– The government must communicate its policies
clearly to the public
– A public communications strategy is important
17
Lessons Learnt
Lesson No. 3: The Ministry of Finance and Bank
of Mongolia Must Be Operationally
Independent
• Operational independence means freedom to
design and implement economic policies
without parliamentary interference.
– In Mongolia, the distinction between the
executive and legislative branches of government
is somewhat blurred.
18
Challenges Ahead
• Avoid the natural resource curse
–
–
–
–
–
Keep inflation under control
Maintain a sustainable public debt
Reduce the economy’s vulnerability to export price shocks
Manage resources wisely and efficiently
Develop the non-mineral sectors of the economy
• Critical actions needed
–
–
–
–
–
–
–
Maintain prudent macroeconomic policies
Rigorously implement the Fiscal Stability Law
Complete the structural reform agenda
Strengthen public expenditure management
Give priority to economic and social infrastructure
Strengthen tax administration
Improve governance and reduce corruption
19