Mongolia Stages Dramatic Turnaround

Strong policy response to global crisis offsets fall in exports, copper prices

IMF program provided space to Mongolian authorities to implement changes

Bright outlook with pending boom in mineral sector

Mongolia's recovery has been assisted, in part, by a loan from the IMF which has given the authorities in Ulaanbaatar the breathing space to adopt the necessary policy measures.

As the global economic crisis unfolded, the Mongolian economy was hit hard. Demand for the country’s exports fell and world copper prices collapsed, putting Mongolia under enormous strain. By early 2009, growth was stalling, international reserves were rapidly being depleted, there was insufficient financing to meet the spending needs of the government, and the banking system was under pressure. The economy was on the verge of collapse.

18 months later, growth is expected to hit 8 percent this year, international reserves are at an all time high, public finances are on a sound footing, and the banking system has been strengthened.

Mongolia’s successful turnaround stems first and foremost from the authorities’ strong policy response to the crisis, supported by significant resources from the international community, including a loan from the IMF. In addition, the beginnings of the global recovery, strong demand from China, and an upswing in copper prices contributed to the rapid reversal of fortunes.

The main goal of the Fund-supported economic program—which included a stand-by loan of around $232 million, and was put in place in early 2009—was to ensure that Mongolia quickly returned to a path of strong, sustained, and equitable growth with low inflation. There were four pillars to this strategy:

• Flexible exchange rate to rebuild international reserves. In early 2009 the authorities implemented a flexible exchange rate regime that limited intervention to smoothing excess volatility and opportunistically building reserves. Intervention was exclusively and transparently carried out through twice-weekly auctions. This new regime was supported by an up-front 400-basis-point hike in the policy interest rate, which was effective in calming markets and attracting capital back into Mongolia. The foreign exchange market stabilized rapidly and international reserves have now reached an all time high of $1.6 billion.

• Restore health to public finances. Financing constraints forced a large fiscal adjustment in 2009, which was achieved mainly through a...