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Morning is again in Mongolia's economy

Zorigt Dashdorj, 8 February 2018
Mongolia and IMF reache a staff-level agreement, as was announced during a joint press conference, on a completion of the third review under the Extended Fund Facility. Minister of Finance Ch.Khurelbaatar announced that “it became brighter in Mongolia’s economy and the morning is here” thanks to the help from the IMF and other donors. He announced during the press conference that the agreement has been reached, first, to bring the level of personal income tax back to flat 10 percent, second, the retirees will have a choice of retiring either at the currently mandated age of 55 and 60 for women and men respectively or at later age as was agreed previously with the IMF, third, public sector wages will be increased in the fourth quarter of 2018 in accordance with inflation.

These were all hotly contested issues and large demonstrations took place in January this year against the increase of personal income tax up to 25 percent.

The IMF representative made a following statement: “The economy is doing better than expected led by commodity exports and a pick-up in domestic demand. Growth is now projected at 5.0 percent in 2018 and 6.3 percent in 2019. The government’s adjustment program, supported by a $5.5 billion IMF-supported package, is showing positive results with the successful roll over of external bonds maturing in 2017 and 2018, a $1.8 billion increase in reserves, and a sharp reduction in government debt. These developments have resulted in a largely stable exchange rate, a fall in interest rates, and have greatly improved the government’s debt service schedule. Nevertheless, the growth outlook is subject to risks including a fall in external demand for commodities and higher fuel prices. In light of these risks and still limited buffers, fiscal and monetary policies should remain prudent.

“Macro-economic performance under the program has been positive, with all quantitative targets met by large margins. Fiscal results have been much better than expected, supported by stronger revenues and tight expenditure control. The overall fiscal deficit in 2017 was 1.9 percent of GDP compared to the target of 10.6 percent and 17 percent in 2016. The authorities’ program for 2018 envisages continued prudence in the deficit, while strengthening tax administration through new tax laws and improving budgetary controls on concessions, public investment projects and the operations of the Development Bank of Mongolia. The fiscal over-performance has provided some room for adapting program policies including a rise in civil service salaries in 2019 after several years of restraint.
“The authorities are moving ahead with the strengthening of the banking system and it is crucial that the key steps are implemented as planned. Important legal reforms including the Banking law and Bank of Mongolia law have been passed, a new deposit insurance law is expected shortly, and improvements to the regulatory and supervisory framework are under way. The results of the comprehensive Asset Quality Review have been communicated to banks individually and they are now in the process of preparing plans to reinforce, where needed, their capital adequacy. A law on bank recapitalization that delineates, in line with international best practice, when public funds can and should be used will be introduced in coming months. The authorities will also move ahead with putting in place an NPL resolution framework that will allow for more rapid improvement in banks’ balance sheets.

“The authorities and the team have reached staff-level agreement on the completion of the third review under the EFF arrangement, which is subject to the approval of the IMF Executive Board.”

What is quite intriguing in both these statements is that the Finance Minister and the IMF both agreed on the need of major tax overhaul. It was announced at meetings with businesses prior to the IMF agreement that in April the Ministry will unveil a new Tax law for public discussion. It is expected to be very favorable for businesses, especially for small and medium businesses as their rates are expected to go down dramatically.

See the IMF press release at