The IMF and its partners have come to an agreement to provide Mongolia with an economic stabilisation package worth $5.5bn (£4.43bn).
Rapid growth in Mongolia’s commodities sector had resulted in a fast pace of economic growth, reaching double digit figures between 2011-2013. A sharp decline in commodity prices, plus a fall in foreign direct investment, and a widening deficit, has hit the Mongolian economy in more recent years.
Annual growth slowed to one per cent last year, the lowest rate experienced for seven years. Economic pressures have left the government based in Ulaanbaatar with budget shortfalls and looming debt repayments.
As part of the package, the People’s Bank of China is expanding a swap line worth 15 billion yuan (£1.76 bn) and the IMF is providing three year loans worth $440m. China borders Mongolia and is the largest export market for the country’s copper and coal exports.
"Fiscal consolidation is a key priority, as loose fiscal policy in the past was a major driver for Mongolia's current economic difficulties and high debt," said Koshy Mathai, IMF's team leader for the package.
The Asian Development Bank, the World Bank, and banks in Japan and South Korea, will also be providing funds for the bailout. It is hoped that the new deal will help the Development Bank of Mongolia repay a $580m bond that is due next month.
There are fears that the country could slip into recession when the austerity measures brought about as part of the stabilisation package start to take effect. According to Mongolian finance minister, Battogtokh Choijilsuren, Mongolia will continue to fund measures such as a universal allowance for the children most in need and a subsidy for some drug costs.
Nadmid Bayartsaikhan, president at Mongolia’s central bank said the country would no longer be supporting “fiscal policy programmes”, such as a subsidy for certain mortgages.
“Monetary policy will remain appropriately tight, given the objective of price stability,” the IMF’s Koshy Mathai said.
“Over time, however, as the economy normalises, it may be appropriate to cut the policy rate if external and inflation indicators permit. The exchange rate will continue to move flexibly, with intervention limited to smoothing excessive volatility and preventing disorderly market conditions.”
"I think we're looking at a pretty good outlook for Mongolia."