ULAANBAATAR (Reuters) - Mongolia has agreed with the International Monetary Fund and other partners for a $5.5 billion economic stabilization package, according to a statement from the IMF on Sunday.

The landlocked nation saw its economy grow at a double-digit annual rate over 2011-2013 as foreign investors rushed in to take advantage of its vast untapped mineral deposits, but it has been hit hard by an economic crisis since 2016 due to government overspending and declining revenues from commodity exports.

To bailout the country - which is now scrambling to avoid missing a $580 million sovereign-guaranteed debt repayment due in March - the Asian Development Bank, World Bank and bilateral partners, including Japan and South Korea, will provide up to $3 billion in aid, the IMF said in its statement.

People’s Bank of China will expand a swap line worth 15 billion yuan ($2.19 billion), while the IMF will offer three-year loans worth about $440 million, the latter added.

The bailout plan is pending formal approvals from the IMF board in March, according to the statement.

“Fiscal consolidation is a key priority, as loose fiscal policy in the past was a major driver for Mongolia’s current economic difficulties and high debt,” said Koshy Mathai, IMF’s team leader for the package.

Paving the way for the bailout was a move by the country’s lawmakers earlier this month to allow the Development Bank of Mongolia, which issued the $580 million debt that is up for repayment, to act independently of the government.

Under the bailout plan, Mongolia has pledged to implement fiscal reforms for greater budget discipline, maintain a flexible exchange rate and build a stronger regulatory environment for banking and finance.

The president of the Bank of Mongolia, Nadmid Bayartsaikhan, said the central bank would no longer bankroll fiscal policy programs, including a mortgage subsidy one that will now be self-sustaining rather than dependent on additional financing from the central bank.

Bayartsaikhan added that an independent study of the banking sector would be launched to identify weaknesses at institutions and the need for new regulations.

The Mongolian economy grew at 1 percent last year, its slowest pace in seven years, and may slip into recession when austerity measures imposed on the country for a debt bailout are rolled out.

However, the bailout terms will not affect Mongolia’s social spending. It plans to subsidize some drug costs and a universal allowance for children will be given to those in need, Finance Minister Battogtokh Choijilsuren told reporters on Sunday.

With these structural changes in place, Mathai of the IMF said Mongolia could look forward to sustainable growth built upon its lucrative mining sector, as well as its growing industries in agriculture and tourism.

“I think we’re looking at a pretty good outlook for Mongolia,” said Mathai.</s>IMF Reaches Staff-Level Agreement with Mongolia on Three-Year Extended Fund Facility

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

The Mongolian government and the IMF team reached staff-level agreement on an economic and financial program to be supported by a three-year EFF for about $440 million.

The IMF financial assistance will help catalize up to $3 billion in budget and project support, and China is expected to extend RMB 15 billion swap line.

The government’s economic program intends to restore economic stability and debt sustainability, and will facilitate strong, sustainable and inclusive growth, while protecting the most vulnerable.

A staff team of the International Monetary Fund (IMF) led by Koshy Mathai visited Ulaanbaatar during February 1-19 to continue discussions with the Mongolian authorities on a set of economic policies that could be supported by IMF financial assistance. At the end of the visit, Mr. Mathai made the following statement:

“The Mongolian government and the IMF team have reached staff-level agreement on an economic and financial program to be supported by a three-year Extended Fund Facility (EFF) for SDR 314.505 million (435 percent of quota), or about $440 million. Other international partners also plan to support the government’s program: the Asian Development Bank (ADB), World Bank, and bilateral partners including Japan and Korea are together expected to provide up to $3 billion in budget and project support; and the People’s Bank of China is expected to extend its RMB 15 billion swap line with the Bank of Mongolia for at least another three years.

“The total external financing package will thus be around $5.5 billion and will support the authorities’ “Economic Stabilization Program,” which intends to restore economic stability and debt sustainability as well as to create the conditions for strong, sustainable, and inclusive growth, while protecting the most vulnerable citizens.

“This agreement is subject to the confirmation of financing assurances, the completion of prior actions by the authorities, and the approval of the IMF Executive Board. The Board is expected to consider Mongolia’s request in March.

“Mongolia is well endowed with mineral resources, strong potential in agriculture and tourism, and a young and dynamic population. Its long-run future is promising, but in recent years it has been hit hard by the sharp decline of commodity prices and a collapse in foreign direct investment (FDI). Attempts to stem the decline through expansionary policies proved ineffective after a few years, and the economy is now stagnating, weighed down by high debt and low foreign-exchange reserves.

“Fiscal consolidation is a key priority, as loose fiscal policy in the past was a major driver of Mongolia’s current economic difficulties and high debt. Budget deficits will be reduced steadily, while priority social spending will be maintained: for instance, the savings from better targeting the Child Money Program will be used entirely to increase spending on the food stamp program for the most vulnerable. Also, to boost revenue, the personal income tax will be made more progressive, with rates on only higher-income households increased.

“The Development Bank of Mongolia (DBM) will henceforth operate in an independent, purely commercial manner, as laid out in the recently passed DBM law, and the Bank of Mongolia (BOM) will not engage in additional quasifiscal activity, with the mortgage program now operating essentially as a revolving fund. In addition, the law on concession projects will be reformed, and the public investment program (PIP) will be rationalized and better aligned with national development priorities.

“The authorities will adopt a set of important fiscal reforms to ensure that budget discipline is maintained, building on the existing framework for fiscal responsibility. These include the creation of a Fiscal Council to provide independent budget forecasts and costings of new policy proposals, and provisions to give the government sole authority to determine the total amount of spending in the budget, as well as to require Ministry of Finance approval of any proposals to cabinet with a budgetary cost.

“Monetary policy will remain appropriately tight, given the objective of price stability. Over time, however, as the economy normalizes, it may be appropriate to cut the policy rate if external and inflation indicators permit. The exchange rate will continue to move flexibly, with intervention limited to smoothing excessive volatility and preventing disorderly market conditions. A major priority will be the adoption of a new BOM law to clarify its mandate, strengthen governance, and improve independence.

“Strengthening the banking system is a crucial part of the program, to ensure that the banks can support sustainable and inclusive economic growth. The authorities’ first priority is to undertake a comprehensive diagnosis of the banking system to assess institutions’ financial soundness and resilience. With the results of this diagnostic in hand, the BOM will engage banks to ensure appropriate restructuring and recapitalization, as necessary. The BOM will complement these actions by strengthening the regulatory and supervisory framework, and government is committed to improving the deposit insurance system. The authorities are also committed to strengthening the regime for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT).

“The authorities intend directly to boost economic activity and prospects by attracting new investment to major mines, and by implementing an array of structural reforms to promote economic diversification and improve competitiveness, especially in agriculture and tourism. The broad range of reforms envisaged under the program have been developed in close collaboration with the World Bank and ADB.

“The authorities’ adjustment and structural reform program, supported by the large package of external financing, is expected to stabilize the economy and lay the basis for sustainable, inclusive, long-run growth. By 2019, growth is projected to pick up to around 8 percent, as economic and financial conditions improve and key mining projects take off. Foreign exchange reserves should rise to a healthy $3.8 billion (above 6 months of imports) by the end of the program, similar to levels seen in 2012, before Mongolia was hit by external shocks. Fiscal consolidation will leave room for the banking sector, over time, to extend more credit to the private sector, consistent with projected growth. These policies would also put public debt on a declining path over the course of the program.

“The government’s recently announced plan to engage with its private external creditors to secure financing assurances for the program should help restore debt sustainability. Specifically, the financing parameters of the program assume that external private creditor exposure will be maintained at its current level over the program period, on terms consistent with debt sustainability, and gross financing needs will remain at prudent levels during the post-program period.

“On behalf of the staff team, I would like to thank the authorities for their warm welcome, and the constructive discussions and excellent collaboration we have had over recent months, bringing us to today’s successful conclusion.”</s>Feb 19 Mongolia has agreed with the International Monetary Fund and other partners for a $5.5 billion economic stabilization package, according to a statement from the IMF on Sunday.

Asia Development Bank, World Bank and bilateral partners, including Japan and South Korea, will provide up to $3 billion, while People's Bank of China will expand a swap line worth 15 billion yuan ($2.19 billion), the IMF said.

IMF will offer three-year loans worth about $440 million. ($1 = 6.8640 Chinese yuan renminbi) (Reporting by Terrence Edwards; Editing by Himani Sarkar)</s>iStock/Thinkstock(NEW YORK) — In an attempt to climb out of intense debt, Mongolia has reached an agreement with the International Monetary Fund (IMF) on a $5.5 billion dollar bailout package.

Yahoo! News reports its main export, copper, has dropped in price by more than 50 percent over the past five years, and the development of mining the sovereign state’s wealth of natural resources has been delayed. Slowing growth in China, the country’s primary customer, has also contributed to the debt according to Yahoo! News.

Mongolia’s national statistics office lists the economy growing at 1.0 percent in 2016 while the debt skyrocket 3.7 trillion tugrik ($1.5 billion).

Yahoo! News additionally reports Koshy Mathai, the IMF’s Asia-Pacific deputy division chief, says the bailout will “restore economic stability and debt sustainability as well as to create the conditions for strong, sustainable, and inclusive growth, while protecting the most vulnerable citizens.”

Mongolia has a $580 million bond payment due in March and will receive a $440 million loan over the next three years.</s>The International Monetary Fund has agreed to $440 million loan to the government of Mongolia, part of a package totalling $5 billion which will aim to bail the country out of the mess caused by reliance upon commodity prices. The essential problem here is that Mongolia is very rich in mineral deposits but the prices of such minerals are highly variable. It's thus all too easy to get locked into a budgetary set up where spending commitments hit just as the revenues slip away. Sadly, it's not unusual for commodity dependent governments to do this:

The International Monetary Fund said Sunday that it and other partners have agreed on terms for a more than $5 billion loan package to the Mongolian government to help get the north Asian country's economy back on track. The deal is subject to approval by the IMF's executive board, which is expected to consider Mongolia's request in March. According to the terms agreed by the Mongolian government and IMF envoys, the IMF would provide $440 million over three years. The Asian Development Bank, World Bank, Japan and South Korea are together expected to provide up to $3 billion, and the People's Bank of China is expected to extend its 15 billion RMB ($2 billion) swap line with the Bank of Mongolia for at least another three years, the IMF statement said.

That's the outline of the deal and it's one of these entirely standard sort of things. The government has simply been spending too much, it must spend less, and the IMF is there almost as the financial system's guarantor that this is all going to be done in the right manner. For what really happens here is that, as above, it's not the IMF that provides the bulk of the cash needed to bail someone out. That almost always comes from other people with an interest--and the private sector generally follows after those various official lenders. The IMF does provide some money, yes, but as here it's less than 10% of the total. What the IMF is really providing is the imprimatur of the organisation. Yes, we've checked these plans and they look reasonable enough to us.

As to why the bailout is necessary, it's the old story of commodity dependent economies:

Here's the essential story about Mongolia's economy. Vast, truly humongous, areas of the steppes, the rolling grasslands that reach from Hungary to China, with the associated horses, sheep and goats. From which comes the county's major manufactured export, cashmere. Not very many people though--and underneath eyewatering amounts of possibly valuable minerals like copper, tungsten, coal and so on. Which in the 00s really were valuable, they're right next door to China, China's going through the largest economic boom ever known to mankind, things look just lovely. Foreign investment pours in, GDP growth is amazing and what could go wrong?

What goes wrong is what tends to happen in commodity booms, they end. But the government is set up to be distributing this mineral wealth and they don't stop when China's appetite for raw materials tempers a bit. They didn't, really, do anything wrong. They were just a bit over enthusiastic about how high mineral prices would stay for too long. And when they didn't they tried borrowing to fill the gap but that sort of Keynesianism doesn't work in a commodity based economy. And that's it really.

They're also doing the bailout the right way:

The government was, quite rightly, taxing those resource rents from the minerals. And using the money to make life better for poor people. Just absolutely correct to be doing that. But when the taxes from the resource rents fall then it's necessary to be a little less generous to said poor. And this is the right way to do it too, not to abandon the poor, but to make sure that only the poor, those who really need it, are getting the aid.</s>The International Monetary Fund said Sunday that it and other partners have agreed on terms for a more than $5 billion loan package to the Mongolian government to help get the north Asian country’s economy back on track. 

 

 The deal is subject to approval by the IMF’s executive board, which is expected to consider Mongolia’s request in March.

 

 According to the terms agreed by the Mongolian government and IMF envoys, the IMF would provide $440 million over three years. The Asian Development Bank, World Bank, Japan and South Korea are together expected to provide up to $3 billion, and the People’s Bank of China is expected to extend its 15 billion RMB ($2 billion) swap line with the Bank of Mongolia for at least another three years, the IMF statement said. 

 

 The economy of mineral-rich Mongolia has been hit hard in recent years by a sharp decline in commodity prices and a collapse in foreign direct investment.

Adding to Mongolia’s woes is an exceptionally cold winter for the second successive year, which the Red Cross warned last week was putting the livelihoods of more than 150,000 nomadic herders and family members at risk.

Mongolia’s national debt now stands around $23 billion, or twice the annual economic output, and a $580 million payment to foreign bondholders is due March 21.

 

 The IMF statement said the loan agreement would mean Mongolia has to strengthen its banking system and adopt fiscal reforms to ensure that budget discipline is maintained. 

 

 Generally, terms required by the IMF as a condition for such lending often prompt complaints in borrower countries that the conditions hurt the poor or undercut economic growth by reducing social spending or investment in public facilities.
An agreement is reached between Mongolian government representatives and the International Monetary Fund and other international partners on a three-year, $5.5 billion economic stabilization package.