Mongolia reached an initial agreement with the International Monetary Fund for a three-year program that includes a $440 million loan package as part of a $5.5 billion bailout to help the north Asian country with looming debt repayments.

“The Asian Development Bank, the World Bank and bilateral partners including Japan and Korea are expected to provide up to another $3 billion in budget and project support, while the People’s Bank of China is expected to extend its 15 yuan billion ($2.2 billion) swap line with the Bank of Mongolia for at least another three years,” the IMF said in a statement released on Sunday. “The total external financing package will thus be around $5.5 billion.”

Economic growth in Mongolia slowed to 1 percent last year as commodity prices fell and growth slowed in China, the main buyer of the nation’s copper and coal exports. The country also saw foreign investment collapse after a dispute with Rio Tinto Plc over the Oyu Tolgoi copper mine.

The Extended Fund Facility (EFF) will support the government’s plan to address balance-of-payment pressures and also help the government repay looming debts, including the Development Bank of Mongolia’s $580 million bond repayment due in March.

Restore Stability

The financing will support Mongolia’s 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,” according to the IMF statement.

The 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, according to the statement. The board is expected to consider Mongolia’s request in March.

Ahead of the agreement, parliament amended the development bank law, making changes recommended by the IMF. The amendments were designed to depoliticize the bank and include a rule that board members can’t have held political office in the past five years.

Mongolia’s central bank had $1.3 billion in foreign reserves at the end of December, well below the $4.1 billion it held at the same time in 2012, when money was pouring into Mongolia’s mining sector amid the commodities boom. The tugrik fell 20 percent last year, fifth-worst among exotic currencies tracked by Bloomberg.

Currency Reserves

Foreign exchange reserves should rise to $3.8 billion by the end of the program, according to the IMF statement. By 2019, growth is projected to pick up to around 8 percent.

“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 IMF said.

The country’s budget deficit at the end of 2016 tripled to 3.67 trillion tugrik ($1.5 billion), compared to a year earlier, while total external trade dropped 2.3 percent and non-performing loans in the banking system rose 25 percent.

“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,” according to the IMF.

Source:
courtesy of BLOOMBERG

by Michael Kohn

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