Mongolia Seeks Financial Assistance from International Monetary Fund

Faced with a declining export industry, the new governing party of Mongolia requested a loan from the International Monetary Fund in late September to stave off financial panic. The new government, the Mongolian People’s Party, won a landslide victory in the seventh parliamentary elections in Mongolia’s history, securing 85 percent of seats in the parliament. The then-incumbent Democratic Party paid a costly price for the economic mess that it created. The Democratic Party took power in 2011, at a time when Mongolia’s GDP was still growing at an annual rate of 17 percent. Five years later, that number is likely to drop under one percent, according to the Asian Development Bank.

Mongolia’s economy relies heavily on exports, especially to China. With a strong mining industry, it sells coal, copper, gold and other natural resources to the Chinese government and companies. According to the World Bank, in 2013 Mongolia sent 86 percent of all its exports to China. The business model proved lucrative when demand from China remained strong and steady. Nevertheless, the lack of diversification inevitably backfired when China started to experience an economic slowdown. The deteriorating Chinese economy not only decreased demand from within the country, but lowered commodity price on the international market as well. The Democratic Party of Mongolia, however, did not realize the problem until too late. The ruling party was on a spending spree when the tide turned.

Even the new government has had a difficult time saving the country from sinking even more into this financial quagmire. Mongolia’s budget deficit now equals 20 percent of its GDP. Total external debt rose to almost $24 billion, 200 percent of its GDP. While Mongolia has struggled to pay off its debt, foreign investors have fled the country in search for better alternatives. This capital flight resulted in serious depreciation of tögrög or tughrik, the official currency of Mongolia. In the past five years, the currency has plunged 43 percent against the U.S. dollar and 40 percent against the Chinese yuan. Notably, Mongolia is actually a significant global issuer of bond. It raised $3.6 billion on the global bond markets between 2012 and 2016. The continued depreciation of the currency will drive up borrowing costs for Mongolia even further.

The new government of Mongolia turned to the International Monetary Fund (IMF) for help. The IMF said on September 30 that Mongolia submitted a formal request for financial assistance in order to address balance of payments pressures and to support its economy. If the IMF provides funding for Mongolia, it will also impose its economic policies and restructure the economy as it sees fit.

This is not the first time Mongolia sought assistance from the IMF. In 2009, the country took out a loan of 153.3 million SDR (USD $229.2 million) in order to “support the country’s economic stabilization program.” Mongolia successfully paid the loan back early with the help of rising commodity prices in the ensuing two years.

Discussions over the details of this assistance program has begun since a week ago during the IMF annual meeting. The IMF will send delegation to Mongolia to evaluate the exact economic situation and the level of assistance needed in the coming months.