The IMF Stand-By Arrangement provides Mongolia with an 18-month loan of SDR 153.3 million (US$243 million) to help address its economic crisis caused by falling copper prices and the global recession. In exchange for IMF financing, Mongolia agreed to an economic program involving fiscal austerity, exchange rate flexibility, monetary tightening, and banking reforms. Initial results are positive, with reserves and inflation improving while policies are implemented, but growth is slower than expected. Continued commitment to reforms and a recovery in copper prices could help Mongolia restore confidence and stability.

1. The IMF Stand-By Arrangement
With Mongolia
How It Is Helping To Safeguard Macroeconomic
Stability
Parmeshwar Ramlogan
IMF Resident Representative in Mongolia
28 September 2009
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2. Main Features of the SBA
• Two Components:
– Financing Component: Commitment by the IMF
to provide financial resources to the Government
to help resolve the country’s economic difficulties.
– Adjustment Component: In return for IMF
resources, the Government has committed to
implementing a program of economic policy
adjustments and reforms agreed with the IMF.
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3. Main Features of the SBA
• 18-month loan agreement with the
Government.
• Approved April 1, 2009.
• Expires October 1, 2010.
• Amount: SDR 153.3 million (About US$243
million at today’s SDR exchange rate).
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4. Main Features of the SBA
• To be disbursed quarterly in seven tranches.
• Disbursements are frontloaded. Three
tranches, totalling about US$146 million,
already disbursed.
• Four more tranches remaining, in equal
amounts of about US$24 million each.
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5. Main Features of the SBA
• Disbursements conditional upon compliance
with policy commitments.
• Quarterly reviews of program implementation
to assess compliance.
• Two reviews completed so far. Third review
due by the end of the year.
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6. Complementary Donor Financing
• IMF financing is part of a package of financing
by the donor community.
• Complementary financing of about $180
million is being provided by other donors,
including the World Bank, Asian Development
Bank, and Japan.
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7. Origins of the Economic Crisis
• Exogenous Shocks
– Copper price drop (70%) in second half of 2008.
– Global economic and financial crisis.
• Expansionary Fiscal Policies in 2007-08
– Budget balance shifted from surplus of 8.2% of GDP in
2006 to deficit of 4.8% of GDP in 2008.
• Pegged Exchange Rate
– Exacerbated inflationary pressures and loss of
international reserves.
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8. Manifestation of the Crisis
• Slowdown of economic growth
– Average 9.2 percent 2006-2008.
– Projected nearly flat in 2009.
• Loss of international reserves
– Net reserves fell from $938 million end-2007.
– To $518 million end-2008.
– To $385 million mid-March 2009.
– Rose to $785 million September 23, 2009.
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9. Manifestation of the Crisis
• Inflationary pressures
– 34 percent end-August 2008.
– 16 percent end-March 2009.
– 0.6 percent end-August 2009.
• Exchange rate pressures
– 25 percent nominal depreciation in Q1 2009.
• Banking sector difficulties
– Isolated run on Anod Bank in December 2008.
– Declining credit to the private sector since last quarter
of 2008, after rapid growth earlier.
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10. Objectives of the Economic Program
• Restore confidence and stabilize markets.
• Bring inflation down.
• Build up net international reserves.
• Create the conditions for a resumption of
sustained economic growth.
• Strengthen the banking system.
• Protect the poor.
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11. Core Elements of the Program
• Restoring Fiscal Sustainability
– Limits on budget deficit to levels consistent with
available non-inflationary financing.
• Mostly through expenditure restraint.
– Limits on new non-concessional borrowing.
– Fiscal reforms to contain expenditure growth and
restrain the accumulation of public debt.
• Fiscal responsibility law.
• Integrated budget law.
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12. Core Elements of the Program
• Flexible Exchange Rate Policy
– Intervene in the foreign exchange market only to:
• Achieve the net international reserve targets.
• Smooth excessive exchange rate volatility.
– Develop the inter-bank foreign exchange market
to reduce the role of the Bank of Mongolia and
advance the role of the market in determining the
exchange rate.
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13. Core Elements of the Program
• Supportive Monetary Policy
– Maintain a tight monetary policy until inflation is
on a clear downward path and international
reserves have strengthened sufficiently.
• Policy rate raised in mid-March, lowered in mid-May
and mid-June.
• Reserve requirements raised in mid-March.
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14. Core Elements of the Program
• Banking Sector Reforms
– Strengthening of bank supervision and regulation.
– Extension and improvement of the Government’s
blanket deposit guarantee scheme.
– Capital adequacy ratio of at least 12 percent now
required of banks.
– Action on Anod Bank.
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15. Core Elements of the Program
• Protection of the Poor from Fiscal Adjustment
– Maintain or increase poverty-related spending.
– Reform the social welfare system to consolidate
benefits and improve targeting to the poor.
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16. Implementation Results To Date
• The Government has demonstrated
commitment to the economic program.
Policies are being implemented as agreed.
• All performance criteria through the end of
June have been observed to date.
• Nearly all structural benchmarks through the
end of June have been observed.
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17. Implementation Results To Date
• Net international reserves have risen to $785
million, from $421 million at end-March.
• Inflation has come down to almost zero in the
year ending August 2009.
• The foreign exchange market is stable, spreads
narrowed, auction mechanism is working well.
• But economic growth has been slower than
expected. Fiscal targets slightly relaxed to
provide greater support to economic activity.
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18. Looking Forward
• Cause for optimism about the future:
– Copper price has been rising.
– Signs of global economic recovery.
– Oyu Tolgoi mining project.
– Investor interest in other mineral resources.
• Critical factors:
– Confidence.
– How well the Government manages the economy,
especially the impact of OT.
– The external environment.
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