An International Monetary Fund staff team led by Geoff Gottlieb visited Ulaanbaatar from October 18-30, 2017 to conduct discussions on the first and second reviews of the three-year extended fund facility program. Shortly after, the IMF Executive Board completed the first and second reviews of Mongolia’s performance under the program and approved the 79.1 million USD disbursement. Geoff Gottlieb, IMF’s mission chief for Mongolia, gave an exclusive interview to Unuudur and The UB Post.
The IMF’s resident representative, Neil Saker, made a statement last December. He noted, “There have been several positive changes as part of the IMF extended fund facility.” He said that foreign capital and investment has increased, economy and tugrug exchange rate have stabilized, also the interest rate of bonds in the international market has decreased. In your opinion, what are the most important improvements of the past?
The first key improvement came in early 2017 when the authorities agreed to a comprehensive mix of sound policies to stabilize the economy. This strong commitment allowed the authorities to secure substantial financial assistance from the international financial community and thus avert a potential financial crisis which was a real risk earlier last year. The second key improvement is that authorities have followed through on these commitments and used the better than expected external environment to over-perform on their key macroeconomic targets, particularly with respect to the fiscal balance and foreign exchange reserves. This performance has helped stabilize the exchange rate and reduce borrowing costs. The final critical improvement is with respect to the growth outlook. While much of the recent momentum is a function of external events, there has been renewed momentum in other sectors including manufacturing.
Coming into effect on January 1, 2018, some taxes will be increased as agreed upon with the International Monetary Fund. The decision to increase the personal income tax for high-income individuals was made last year. Many people are opposed to this decision. What do you think of this?
A flat income rate at 10 percent is not appropriate for a country like Mongolia especially given rising income inequality. A progressive tax system where richer people pay proportionally more is typical globally and is more equitable. The changes are structured to be pro-poor as the threshold before which the tax rates kick in has been raised from 84,000 MNT to 120,000 MNT and will gradually rise to 240,000 MNT by 2021. 85 percent of citizens will pay less tax than before. The highest rate of 25 percent is still low by international standards and will only apply to those who earn 3.5 MNT per month (three and a half times the average wage). There is scope for further reforms to improve the efficiency and fairness of the tax system and they will be a focus of the program going forward.
I heard that IMF told the Finance Ministry that there was an opportunity to erase the debt. Is it possible? As you know Mongolian debt is still high. Bonds will be maturing in the 2020s.
We are not familiar with this comment. In most cases, debt is not “erased”. Rather the government can ensure that it becomes less of a burden to the economy by reducing the ratio of debt to GDP. This primarily occurs by generating strong GDP growth while limiting the extent of new borrowing with strong fiscal performance. The government can also improve the debt-GDP ratio by lowering their interest bill which can be achieved by exchanging expensive debt with cheaper obligations as confidence returns and Mongolian debt becomes more attractive to investors.
Stepping back, from the outset of this program, we have believed that Mongolia’s debt will become safe and sustainable over the medium term provided the authorities pursued the appropriate policies, mainly with respect to a prudent fiscal policy, stronger financial supervision, and steady completion of mega-construction projects related to the mining sector. Debt is still high but the authorities have made considerable progress since program approval and the current trajectory for public debt is now considerably better than it was before. Public debt is currently approximately 85 percent of GDP and is now projected to fall to 73 percent of GDP by 2022. As a general matter, the fund does support efforts by authorities to take advantage of good market conditions to ensure a smooth repayment profile and low average interest cost.
The economic situation is becoming better because of increased coal export revenue. But I think there are risks. For example, maybe there are downside risks to the coal sector. What risks are there for the future of the Mongolian economy?
All economies that have a significant dependence on commodities are vulnerable to changes in global demand. Mongolia is not alone in this regard. The key is that the authorities use the policy tools at their disposal to limit the scope of these changes to destabilize the Mongolian economy. In particular, during periods of strong commodity revenues, the authorities need to reduce debt and build foreign exchange reserves. Such policies are the focus of the IMF program.
Legal reforms will be made in the banking sector. What is the main impact of legal reforms?
The objectives are to update the legal environment both to reflect the significant changes in the banking system in recent years and to be in line with global reforms passed as a response to the global financial crisis. The reforms will also improve the governance of the Bank of Mongolia (BOM) and its operations, improve the regulatory and supervisory framework, and strengthen the financial sector safety net.
Mongolian commercial banks were going through an AQR. Can you tell us about the results?
The BOM hired outside advisors to conduct the AQR and those advisors are still finalizing the report. We understand that the BOM wishes to make a public statement about the report once it is complete.
A fiscal council will be established. How will the council work?
The Fiscal Council is intended to be a high-level body with the aim of ensuring that the fiscal stance and the annual budget are consistent with the fiscal rules that Mongolia adopted in 2012, including the Fiscal Stability Law. Adherence to this framework would avoid the debt problems of recent years and would strengthen macroeconomic stability. Fiscal councils have been adopted in several countries in recent years and have generally helped in ensuring prudent fiscal policies.
When will an IMF staff team visit Mongolia?
The current plan is to visit Mongolia in the second half of January as part of the Third Review Mission.
Do you think the Mongolian economy will have a full recovery when the IMF program ends?
The main goal for the program is to ensure that key macro-policies (e.g. fiscal balance and exchange rate policy) and structural reforms (toward a more stable banking system, a stronger tax code) are adequate to lay the groundwork for high and sustainable growth. If this is achieved, vulnerabilities will have been substantially reduced. Nonetheless, given the size of challenges that Mongolia faced at the time of program approval, more time may be needed for a full recovery.