Source: The International Monetary Fund                         Date: 31 March, 2011

In a statement issued last month at the conclusion of its Article IV Consultation, Post Program Monitoring, and Ex Post Evaluation (EPE) with Mongolia, the Executive Board of the International Monetary Fund (IMF) has noted how “the authorities’ steadfast policy implementation, financial support from the donor community, and a rebound in global copper prices” helped  quickly stabilize the country’s economy, after it had been hit hard by the global economic crisis, and “was on the verge of collapse” by early 2009.  The recovery is “all the more impressive in light of the severe winter that led to a sharp contraction in agriculture, especially animal husbandry”. Growth this year is projected to remain strong and accelerate to around 10 percent, but the IMF fears “the large increase in fiscal spending under way is creating excess demand that will result in higher inflation and surging imports”.

The Executive Board also reviewed an EPE of Mongolia’s experience with the exceptional access SBA approved in April 2009, the first Fund SBA in Asia since the Asian financial crisis. The EPE focused on program design and implementation, as well as key lessons from the experience. The report found that the SBA contributed to stabilizing a rapidly deteriorating macroeconomic situation during the global crisis, as well as facilitating structural reforms to strengthen the policy framework. “Lessons learned include that large financing packages, combined with appropriately streamlined conditionality, can effectively stabilize crises; that timely technical assistance can greatly facilitate program implementation; and that securing a durable commitment to post-program reforms remains a future challenge,” the statement said.

The Directors observed that pro-cyclical policies are undermining hard-won macroeconomic stability, and overheating has become a key policy concern. “This calls for fiscal restraint and tightened monetary conditions,” they said, adding that medium-term prospects are favorable but “a prudent management of Mongolia’s vast mineral resources is necessary for sustainable growth and lasting prosperity”. They expressed “concern” that the large increase in fiscal spending envisaged for this year will further drive up inflation, with an adverse impact on the poor, and called on the authorities “to amend the 2011 budget and cut public spending to bring the fiscal stance back in line with the cyclical requirements and the medium-term objectives of the Fiscal Responsibility Law”. They also considered the adoption of a better targeted social transfer system to be a priority for the period ahead. Noting the potential for large quasi-fiscal liabilities, they urged “caution with the planned establishment of a development bank, the provision of government guarantees, and the implementation of public-private partnerships”.

The Directors agreed that “the flexible exchange rate regime has worked well” and encouraged the authorities “to remove the remaining multiple currency practices as soon as conditions permit”. Welcoming “the progress in strengthening financial oversight” and implementing the recommendations of the Financial Sector Assessment Program, they highlighted the importance of strict enforcement of existing regulations, and looked forward to the enactment of a law governing the provision of public support for bank restructuring and recapitalization. They also encouraged an early establishment of a deposit insurance system to replace the blanket deposit guarantee.