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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). 
 
¶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