ULAANBAATAR -- The International Monetary Fund and the Mongolian government announced Saturday an agreement on a three-year bailout program that averts a default on a semi-sovereign bond maturing March 21.
The government has agreed to fiscal and structural reforms in exchange for the new IMF-brokered funding. Under its Extended Fund Facility programs, which usually last three years, the IMF monitors progress on a quarterly basis before the next loan tranche is given.
The foundering $580 million bond with a 5.75% coupon was issued in 2012 by Development Bank of Mongolia, a state-run project-finance bank. The country's worsening balance of payments and depleted foreign exchange reserves meant the government could not repay or roll over the bond without fresh foreign credit.
As soon as the IMF agreement was announced on Saturday, the government said the old bond could be exchanged for a new government bond, but it did not go into details.
In addition to the $440 million from the IMF itself, the program will see some $3 billion in loans to the government or public projects from the Asian Development Bank and the World Bank as well as from Japan, South Korea and other countries.
China will contribute to the program by extending the duration of a 15 billion-yuan ($2.2 billion) currency swap with the Bank of Mongolia, the central bank. This brings the likely total value of the bailout package to over $5 billion.
The agreement requires the government to cut its budget deficit and implement various reforms. Welfare spending will become more "targeted," the IMF said.
Finance Minister Choijilsuren Battogtokh said cash allowances for children will be limited to low-income households, and the pensionable retirement age raised. Progressive personal income tax will be introduced, and interest earned on savings taxed. Taxes on fuel, imported cars, alcohol and tobacco will all be increased.
The government has promised legislation to reform the roles of the central bank and the development bank. Kashi Mathai, who heads the IMF's Mongolia program, said in the future "the central bank will solely focus on monetary policy and price stability, and will stop functioning as a fiscal branch."
The previous administration used the central bank as an extra-budgetary channel to subsidize mortgage loans extended by commercial banks, worsening the budget deficit. Politicians used the development bank to fund their own businesses. Parliament is already drafting legislation to shield both banks from direct political interference.
Mongolia achieved 17% economic growth in 2011 on the back of rising commodity prices, but fell into crisis when those prices went down. Public external debt mushroomed from about $2.5 billion, or 31% of gross domestic product, at the end of 2010 to $8.5 billion in 2016 -- about 85% of estimated GDP. The fiscal deficit is expected to have ballooned to 15% of GDP last year, and foreign exchange reserves are barely sufficient to cover minimum commitments.
Batsuuri Haltar, an economist at Shinjeech (Analyst) magazine, told the Nikkei Asian Review that the bailout will help if it leads to fairer taxation of the rich and moderated public spending. "However, Mongolians need to check whether there are any requirements hidden from the public," he said.
Haltar noted the IMF has consistently recommended privatization of state enterprises such as power plants. This has attracted foreign investment interest but without the wider national benefit being entirely clear.