Mongolia reaches $5.5bn IMF deal as debt repayments loom

Final approval conditional on parliament approving fiscal discipline measures

Mongolia has reached a $5.5bn bailout agreement with the International Monetary Fund just weeks before the country’s development bank faced repayments on a $580m bond.

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The IMF will provide Mongolia with funds totalling $440m, with the World Bank, Asian Development Bank, Japan and South Korea offering $3bn in preferential loans. The mining-dependent country has been buffeted by the steep slump in coal, copper and other commodity prices over the past five years. It is now anticipating a recovery in the commodities cycle and new investment in giant mines in the Gobi desert. Mongolia is in separate negotiations with the Chinese government over a three-year extension of a Rmb15bn ($2.2bn) central bank swap agreement, which has been its largest single source of foreign financing. N. Bayartsaikhan, governor of the Bank of Mongolia, told reporters that China has “agreed in principal” to extend the swap. Mongolia has sought support from the US, Japan and Europe as part of its “third neighbour” policy to avoid domination by China and Russia.
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“[Mongolia’s] long-run future is promising,” the IMF said in a statement. “But in recent years it has been hit hard by the sharp decline of commodity prices and a collapse in foreign direct investment.” The fund projected that economic growth will recover to 8 per cent by 2019 as foreign exchange reserves reach $3.5bn — a level not seen since 2012. The Bank of Mongolia shocked international markets in August by raising interest rates 450 basis points to 15 per cent. Mongolia’s currency, the tugrik, has fallen almost 30 per cent against the dollar since June. Final approval of the IMF-led package is conditional on Mongolia’s parliament approving fiscal discipline measures, including the repeal of a politically popular cash subsidy for all families with children. “Fiscal consolidation is a key priority as loose fiscal policy was a major driver of Mongolia’s current economic difficulties and high debt,” the IMF said. It added that budget deficits would be “reduced steadily”, but not at the expense of “priority” social spending. The “staff-level agreement” is also subject to final approval by the IMF’s executive board. The IMF agreement comes a month before a $580m payment is due on a bond issued by the Development Bank of Mongolia. It is the first of several payments over the next year that together amount to about $2bn, or about one-sixth of the country’s gross domestic product. On Sunday, the government said it planned to launch an exchange offer this week for the DBM bonds, swapping them for government debt. No maturity for the new bonds was given. Extending the swap agreement with China — which Mongolia has mostly drawn down at interest rates of about 6 per cent — will allow Mongolia to defer a hefty repayment. According to people familiar with the bailout negotiations, the ADB intends to lend Mongolia about $300m per year over the next three years in budgetary support. That will replace previous loans of a roughly equivalent amount that primarily went towards infrastructure construction and poverty alleviation programmes.

Source:Financial Times
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