A wrong direction in the steppe
“THINGS really get messy when politicians see money,” mused Tsakhiagiin Elbegdorj, Mongolia’s president, earlier this month. He was discussing his country’s request for an emergency loan from the IMF to help ward off a balance-of-payments crisis. The messiness might be avoided, Mr Elbegdorj added, if the IMF forced Mongolia to observe a little more budgetary discipline than it is used to.
Although sparsely populated and vastly endowed with mineral wealth, Mongolia has yet to set its economy on a stable footing. Squabbling and delays over big foreign investments in mining projects, along with low global commodity prices, have stemmed inflows of foreign currency, prompting the local currency, the togrog, to wilt. It has declined 17% against the dollar since late June. The government’s lavish spending in expectation of big mining revenues, meanwhile, has boosted its debt to almost 80% of GDP, much of it denominated in dollars. The togrog’s slide has prompted fears that the government will struggle to service its foreign debt.
When the IMF last came to Mongolia’s rescue, in 2009, it seemed to be providing just the leg-up the country needed. Mongolian politicians and IMF officials took to a hotel ballroom in Ulaanbaatar in 2010 to celebrate the successful conclusion of a $242m bail-out. Champagne and optimism flowed freely. Mongolia’s “determined policy implementation”, the IMF said, had fostered “a remarkable economic turnaround”. Foreign reserves were up; the budget deficit and inflation were down. Arrears on foreign debts had been paid, and confidence in the currency restored.
For the next three years Mongolia enjoyed double-digit growth. But the good times did not last. Growth dipped below 8% in 2014 and was just 2.3% last year (see chart). To succour the togrog and sap inflation, the central bank raised interest rates in August by 4.5 percentage points, to 15%, further slowing the economy. The budget deficit has swelled to around 20% of GDP.
In a parliamentary election in June, the Mongolian People’s Party (MPP) triumphed over the Democratic Party (DP), which Mr Elbegdorj leads. The change in government provided a convenient opportunity for Mongolia to turn to the IMF again, says Julian Dierkes of the University of British Columbia. It will be easier for the new government to accept conditions imposed by the IMF early in its term, he says, when it can still blame the previous one for all the country’s problems.
It remains unclear just how severe the IMF might be. If its proposed terms seem too onerous, Mongolia could always turn to China, which has extended it some credit in recent years and seems prepared to offer more. Many Mongolians fret, however, over the political and commercial leverage this would give their giant neighbour. Either way, Mongolia will find itself beholden to China. In spite of all the upheaval, the share of Mongolia’s exports going to China has hovered steadily between 80% and 90% over the past six years.