Identifier
Created
Classification
Origin
06ULAANBAATAR591
2006-08-03 08:52:00
CONFIDENTIAL//NOFORN
Embassy Ulaanbaatar
Cable title:  

IMF PUTS NEW PROGRAM NEGOTIATIONS WITH MONGOLIA ON

Tags:  EFIN EAID PREL PGOV SOCI MG 
pdf how-to read a cable
VZCZCXRO9005
OO RUEHLMC
DE RUEHUM #0591/01 2150852
ZNY CCCCC ZZH
O 030852Z AUG 06
FM AMEMBASSY ULAANBAATAR
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0189
INFO RUEHBJ/AMEMBASSY BEIJING 5152
RUEHRL/AMEMBASSY BERLIN 0059
RUEHLO/AMEMBASSY LONDON 0039
RUEHML/AMEMBASSY MANILA 1218
RUEHMO/AMEMBASSY MOSCOW 1553
RUEHFR/AMEMBASSY PARIS 0021
RUEHRO/AMEMBASSY ROME 0028
RUEHUL/AMEMBASSY SEOUL 2380
RUEHKO/AMEMBASSY TOKYO 2181
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0334
C O N F I D E N T I A L SECTION 01 OF 03 ULAANBAATAR 000591 

SIPDIS

NOFORN
SIPDIS

TREASURY PASS USEDS TO WORLD BANK AND IMF
LONDON PASS USED TO EBRD
MANILA PASS USED TO ADB
STATE FOR EAP/CM AND EB/IFD/ODF
STATE PASS EXIM AND OPIC

E.O. 12958: DECL: 08/04/2011
TAGS: EFIN EAID PREL PGOV SOCI MG
SUBJECT: IMF PUTS NEW PROGRAM NEGOTIATIONS WITH MONGOLIA ON
HOLD


Classified By: DCM - Brian L. Goldbeck. Reasons: 1.5 (B) and (D).

C O N F I D E N T I A L SECTION 01 OF 03 ULAANBAATAR 000591

SIPDIS

NOFORN
SIPDIS

TREASURY PASS USEDS TO WORLD BANK AND IMF
LONDON PASS USED TO EBRD
MANILA PASS USED TO ADB
STATE FOR EAP/CM AND EB/IFD/ODF
STATE PASS EXIM AND OPIC

E.O. 12958: DECL: 08/04/2011
TAGS: EFIN EAID PREL PGOV SOCI MG
SUBJECT: IMF PUTS NEW PROGRAM NEGOTIATIONS WITH MONGOLIA ON
HOLD


Classified By: DCM - Brian L. Goldbeck. Reasons: 1.5 (B) and (D).


1. (C/NF) SUMMARY: Local IMF Resident Representative Jang
(strictly protect) told Emboffs August 3 that the IMF had
decided to postpone further discussion with the Government of
Mongolia (GOM) over a new IMF program to replace its
long-lapsed program. Jang was now informing key donors and
would advise the GOM within a day or so. The IMF,s
management made this decision because of the widening gap
between what the current government said it would do and what
actually transpired; in other words, the GOM lacked
credibility. That said, Jang saw some limited improvements
in Bank of Mongolia (BOM) supervision, a positive trend, and
the IMF plans to provide several technical assistance
missions. He thought new program negotiations might resume
in December. END SUMMARY.


2. (C/NF) Newly-arrived USAID Director Barry Primm,
accompanied by DCM and USAID Senior Program Manager, paid a
courtesy call August 3 on IMF Resident Representative Byung
Kyoon Jang. Jang (strictly protect) began the discussion by
advising that the IMF had decided to postpone further
discussions with Government of Mongolia (GOM) on a new IMF
program, noting he planned to so advise the GOM in the next
day or so of the IMF,s decision. Jang said he was now in
the process of alerting a few key donors of this decision.
Thus the IMF,s August mission would center around the usual
Article IV consultations and not/not include negotiations for
a new program to succeed the previous program which lapsed in
July 2005.

IMF CONCERNED ABOUT BUDGET DEFICIT
AND SUSTAINABILITY
--------------


3. (C/NF) Jang was critical of the Embassy,s recent press
release (which congratulated the GOM for its passage of key

tax reforms) for insufficient focus on fiscal sustainability,
although he noted the release did flag the need to maintain
budget discipline and fiscal neutrality. He added that the
new Mongolian tax laws themselves were not yet available in
their final form so it is difficult to develop a full
assessment of the financial impact of the new laws. Thus the
size of the potential deficit is still in question, but he
expected the budget deficit to be smaller than the initial
forecasts and within the manageable range. He too was
concerned about the political trend toward increased social
spending. Jang said the IMF is generally opposed to
increases in import tariffs as contrary to promoting trade.
(NOTE: The Embassy,s press release was designed to
inoculate the USG from a potential GOM attempt to scape-goat
its budget deficits and failure to meet IMF conditions by
laying the blame on "tax reform advice provided by the U.S.,"
when in fact the USAID advisory team only provided
value-neutral analytical and "modeling" assistance to the GOM
and SGH decision-makers, who made the tax decisions.)

CREDIBILITY AND CLARITY GAPS
--------------


4. (C/NF) Offering his analysis of the IMF,s decision to
postpone additional new program negotiations, Jang said the
IMF,s management had made this decision &much earlier8
largely because the GOM lacked &credibility.8 Basically,
there is a gap between the GOM,s statements or promises and
what it actually delivers -- the end results, Jang said. For
example, statements made by the Minister of Finance during
the spring IMF/World Bank meetings about the GOM,s actions
were not realized as the State Great Hural (Mongolia,s
Parliament) adopted different paths on budget expenditures.
The GOM said the VAT would not be touched yet it was reduced,
and there was no mention at all of possible increases in
import tariffs. The absence of clarity on these and other

ULAANBAATA 00000591 002 OF 003


issues, coupled with the GOM,s declining credibility, had
"triggered8 the IMF,s decision to postpone further new
program discussions until perhaps December or so, Jang said,
provided the GOM,s autumn budget situation is reasonable.
(NOTE: During a separate meeting with TDY Treasury Rep, Jang
emphasized that the Finance Minister is well-intention and
has a clear understanding of the need for fiscal discipline,
but he exerts no control over Parliament, so the credibility
problem is structural in nature. Jang also said he does not
envision fiscal policy discipline taking hold in Parliament
unless a new Prime Minister with stronger leadership skills
and solid grasp of the issues were appointed.)

TA MISSIONS PLANNED
--------------


5. (C/NF) Meanwhile the IMF had decided to provide several
technical assistance missions to provide: 1) legal
assistance to the tax department, 2) support to flesh out
implementation of taxation related to the new mining law, 3)
operation of the new &development8 fund (previously known
as the &stability fund8 stocked with proceeds from the
newly-enacted gold/copper windfall profits tax),4) a review
of the Bank of Mongolia,s gold purchase/sales operations, 5)
banking supervision, and, 6) statistics. Jang said it was
highly unusual for any country to have more than perhaps two
such missions and the large number of missions reflects the
IMF,s commitment to Mongolia and its future.

POSITIVE TREND AT BOM INCREASES IMF,S COMFORT LEVEL
-------------- --------------


6. (C/NF) Asked whether the IMF,s earlier concerns about the
Bank of Mongolia had been resolved, Jang said a May IMF
supervision mission had looked at governance issues and taken
note of steps being taken to remedy the IMF,s concerns. For
example, the BOM had begun the process of identifying and
interviewing possible non-executive members for the BOM,s
board. A new central bank law will be put before the SGH in
August or September. Jang also noted an improvement in BOM
senior management,s attitude, which coupled with increased
IMF technical assistance (meaning increased access and
knowledge of BOM activities),had given the IMF greater
comfort.

COMMENT
--------------


7. (C/NF) The IMF,s doubts about the GOM,s credibility and
ability to deliver are not surprising, and are shared by
post. Indeed, the IMF's decision to postpone further
negotiations with this government are probably warranted,
given the frequent rumors that it may/may fall at any time.
Post agrees there have been a few small but promising signs
regarding BOM supervision, but it,s too early to tell if
those are real or substantive. Jang also surmised that
current BOM Governor Chuluunbat might be reappointed to a
second term, concerns about corruption, etc. notwithstanding.
The IMF local mission had earlier expressed concern to
Embassy officials about the nature of the tax reform advice
being given by the USAID advisory team to the GOM and SGH,
especially the assertion by some GOM and SGH officials that
the USAID team was urging a reduction in the VAT tax, a
measure that the IMF has strongly discouraged. Subsequent
meetings of Embassy officers, USAID advisory team leaders,
IMF and GOM officials seemed to clear the air: the USAID
advisory team's role was merely to crunch numbers and run a
computer model that provided analysis of the impact of
various tax proposals. While the IMF,s postponement
decision was taken before much earlier and for other reasons,
it would appear that the Embassy's press release provides
convenient cover for the IMF,s decision and explains its
initial pique. (The Embassy,s press release can be found at

ULAANBAATA 00000591 003 OF 003


http://mongolia.usembassy.gov/7/19/06.html.) END COMMENT.
SLUTZ