May 26, 2017 12:40 am JST

IMF aid raises questions about Mongolia's ability to reform

Critics worry that money would be misspent

KHALIUN BAYARTSOGT, Contributing writer, and TAY HAN NEE, Nikkei Asian Review associate editor

Mongolian Minister of Finance Choijilsuren Battogtokh, left, and Neil Saker, IMF country representative, greet each other at a news conference on May 25 in Ulaanbaatar. (Photo by Odbayar Urkhensuren)

ULAANBAATAR/LONDON -- The International Monetary Fund has finally approved a much-needed $5.5 billion aid package for Mongolia, but experts question if the government is able to implement painful structural reforms to put the economy back on track.

The IMF board on Wednesday approved a three-year loan of $434.3 million to Mongolia. The Asian Development Bank, World Bank, Japan and South Korea also committed support while the People's Bank of China agreed to extend a swap line with the Bank of Mongolia. About $38.6 million will be immediately disbursed.

The IMF decision was made after it deemed that Mongolia had met some of its criteria including raising taxes and cutting spending. The confirmation of the package was delayed by a month on concerns about a requirement by Mongolia that strategically important companies, such as miner Rio Tinto, conduct their businesses through local banks. The government subsequently backed down from that rule so that it could push through the IMF deal.

Minister of Finance Choijilsuren Battogtokh said parliament would not increase headcount and would seek to raise more taxes, in a bid to rein in spending and increase state coffers, in a press conference held jointly with the IMF. Choijilsuren said the IMF loan would go toward foreign debt repayment and open the door to economic growth.

"The authorities' program aims to stabilize the economy, restore confidence, and pave the way to economic recovery," the IMF said in a statement. "A critical pillar of the program is fiscal consolidation, to reduce the pressure on domestic financial markets, stabilize the external position, and restore debt sustainability."

Mongolia's economy expanded by 4.2% in the first quarter of 2017, thanks to a rise in the price of coal globally. The resource-rich country benefitted from the commodities boom over the last 15 years and economic growth peaked at 17.5% in 2011. But the fall in commodities prices worldwide since then dealt a severe blow to the economy, exacerbated by a massive outflow of investments. Together with a fall in the value of its currency, the tugrik, the government racked up debts of nearly 90% of gross domestic product by end-2016.

Lingering doubts

But experts question if the government will have the wherewithal to spend the IMF loan wisely. Luvsandorjiin Oyun, a professor at the school of economic studies at Mongolian National University, said: "I have doubts that the money will be spent effectively. There are no projects announced to spend on. Our authorities don't know what to do with it. It is exactly the same situation as the Chinggis bond raised in 2012 for which the spending was decided only after the funds were raised."

Mongolia sold $1.5 billion of sovereign debt, known as Chinggis bonds, to finance infrastructure projects in 2012. But in October last year, the former chief executive of the country's Development Bank of Mongolia, which was established to manage the bond sale, was arrested for wrongly channeling money from the country's sovereign debt fund.

Mongolians have also taken to social media to express their worries that some of the aid package might be siphoned into the offshore accounts of politicians. Oyun said that the government lacks checks and balances to ensure that the money is not misused. She said: "Mongolia lacks a system and an independent body to control or monitor the spending. Expenditure is monitored by politicians always."

But IMF representative Neil Saker tried to assuage those worries. He told Nikkei Asian Review: "The funds will go to the central bank for balance of payment support, not to the Ministry of Finance. It is different from other donors. The IMF is totally confident that the systems of Bank of Mongolia will make sure the money is safe. The IMF is going to work closely with the government to improve the decision-making process as well as work with Bank of Mongolia, the financial regulatory committee to improve the legal framework around money laundering to stop money going overseas in corrupted activities."

Parliament, controlled by the People's Party, which defeated the Democratic Party last July, waved through legislation to raise vehicle, alcohol, tobacco and fuel taxes in April. It also agreed to raise the retirement age and cut allowances to children and pensioners.

But whether the People's Party will stick to its pledge to move the country to a more progressive tax regime remains to be seen as Mongolia will hold presidential elections in June.

For now, CEO of Frontier Securities Masa Igata is optimistic that with the IMF funds, Mongolia will see greater foreign direct investment and forecasts that the economy will grow 8-10% in 2018. In remarks made before the IMF decision, Igata said: "We believe the rating agencies will hike their ratings or at least change the status as stable or positive rather than negative. The economy is up to the IMF."

Credit agency S&P affirmed Mongolia's B- long-term sovereign credit rating in April, in view of the IMF decision, citing weak public finances and fluctuating commodities prices.

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