Mongolia
has witnessed a dramatic turnaround in a year and a half. After teetering on
the verge of economic collapse, IMF economists now predict strong growth this
year for the landlocked country. As the global economic crisis unfolded, the
Mongolian economy was hit hard. The economy was on the verge of collapse. 18
months later, growth is expected to hit 8 percent this year, international
reserves are at an all time high, public finances are on a sound footing, and
the banking system has been strengthened.

Mongolia’s
successful turnaround stems first and foremost from the authorities’ strong
policy response to the crisis, supported by significant resources from the
international community, including a loan from the IMF. In addition, the
beginnings of the global recovery, strong demand from China, and an upswing in
copper prices contributed to the rapid reversal of fortunes.

The
main goal of the Fund-supported economic program—which included a stand-by loan
of around USD232 million, and was put in place in early 2009—was to ensure that
Mongolia quickly returned to a path of strong, sustained, and equitable growth
with low inflation.

There
were four pillars to this strategy:

•
Flexible exchange rate to rebuild international reserves. In early 2009 the
authorities implemented a flexible exchange rate regime that limited
intervention to smoothing excess volatility and opportunistically building
reserves. Intervention was exclusively and transparently carried out through
twice-weekly auctions. This new regime was supported by an up-front
400-basis-point hike in the policy interest rate, which was effective in
calming markets and attracting capital back into Mongolia. The foreign exchange
market stabilized rapidly and international reserves have now reached an all
time high of USD1.6 billion.

•
Restore health to public finances. Financing constraints forced a large fiscal
adjustment in 2009, which was achieved mainly through a reprioritization of
spending. The fiscal adjustment continued this year and, aided by the rebound
in copper prices and the economic recovery, the fiscal deficit is expected to
fall to 2 percent of GDP—well below the government’s original target. This
year, parliament passed a comprehensive fiscal responsibility law. This is a
landmark piece of legislation which builds the foundation for lasting fiscal
discipline and an end to the boom-bust fiscal policies of the past.

•
Protect the poor from the burden of adjustment. Social transfers were increased
during the program period in order to shield the most vulnerable from the
impact of last year’s recession. In addition, a new social transfer reform law
has been submitted to parliament and is expected to be passed in November. This
would introduce a well targeted poverty benefit that will strengthen the social
safety net and increase the resources available to protect the poorest, as well
as improve fiscal flexibility.

•
Bolster the banking system. Confidence in the system is being restored, and
risks have been contained even as two important banks were put into
receivership. Parliament has approved a revised banking law that will
strengthen the regulatory framework. A second piece of legislation to
recapitalize the banks has been submitted to parliament. Finally, tougher
supervision regulations have been issued and are now being enforced. These
steps will serve to bolster the banking system and ensure that banks can play
their crucial role in fostering development by providing credit to the private
sector.

The Fund-supported program
has provided confidence, financing, and breathing space for the authorities to
more gradually adjust policies. It has also catalyzed significant financial
contributions from the World Bank, Asian Development Bank, Japan International
Cooperation Agency, and many other bilateral donors.

The
success of the Mongolia program illustrates how the IMF has refocused its
lending. The program’s conditions were restricted to those areas necessary to
return the country’s economy to strong growth.

The
program also adjusted flexibly as economic circumstances evolved. When growth
in 2009 turned out to be weaker than expected, the fiscal deficit targets were
loosened to support the economic recovery. Likewise, the program was adapted
this year to provide scope for a modest increase in spending to raise pensions
and civil servant salaries.

Finally,
the resources made available to Mongolia reflected the reforms in IMF lending
instruments put in place in 2009, with a substantially increased level of
financial support. Throughout, the authorities have maintained strong ownership
of the program—determinedly meeting every single performance criterion of the
18-month arrangement and passing through every program review—which contributed
significantly to the program’s success.

The
outlook for Mongolia’s economy is extremely favorable. The signing of a
landmark investment agreement in late 2009 to develop the Oyutolgoi mine has
been a cornerstone for the development of Mongolia’s substantial mineral
resources.

The
development of other major projects, like the massive Tavantolgoi coal
deposits, is also under way. The economy is growing strongly and this ongoing
development of the mineral sector points to a bright future.

The
authorities’ policy reforms have laid a solid foundation for managing the
pending boom in the mineral sector and ensuring that Mongolia’s substantial
mineral wealth leads to a period of sustained economic growth that spreads
prosperity to all Mongolians.