Few weeks ago, in October 2018, some Mongolian investigative journalists like Ch.Bolortuya, and others revealed several corruption cases related to the Small Medium Size Enterprises (SME) Support Fund in Mongolia. The SME Support Fund was established in the mid-2000s and is one of 29 special funds that are financed from the state budget.

Since the first revelation the names of politicians and public officials who borrowed from this fund through their family business at an astonishingly low rate with extended periods of repayment are revealed, many other revelations have been made through online newspaper and social media almost every day.

As of November 7, nine members of Parliament and two ministers were involved in the scandal. The first acknowledged case was that of the country’s minister of food, agriculture and light industry and member of Parliament B.Batzorig, whose spouse’s company received a soft loan of more than one billion MNT at a three percent annual rate. Economists believe that if this loan was provided to real small businesses, then up to 100 businessmen could have borrowed 10 million MNT each and this could have generate at least 100 jobs and support about 400 people’s livelihoods. Some suspicions arose about how politicians may have channeled this soft loan into their own Non-Banking Financial Organizations to lend at much higher, market rates.

Four officials from the fund have been arrested by the Independent Authority Against Corruption and are currently being investigated. Due to the increasing public outrage on social media, TV and newspapers, B.Batzorig has since resigned from his minister’s position. However, the attempt to revoke his legislator’s immunity by the state chief prosecutor has not yielded results. Due to the scandal, Finance Minister Ch. Khurelbaatar promised to conduct a thorough assessment of all 29 funds and the public is waiting for the results.

Can Mongolia afford to spend wastefully, to be used by politicians for their own companies? Not really. As we all know, in 2017 the executive board of the International Monetary Fund (IMF) approved a three-year extended arrangement under the Extended Fund Facility (EFF) for Mongolia to support the country’s economic reform program.

Other financing partners, including the Asian Development Bank, the World Bank, Japan, Korea and the People’s Bank of China, have also committed to provide budgetary support. In sum, the total financing pack-age amounts to about 5.5 billion USD.

From here, we can conclude that the state budget includes IMF and other donors’ budgetary support loan.

What IMF understood about its program’s aims is well known and discussed and documented. The program promised to lay the foundation for sustainable, inclusive growth in the future and the program will discipline fiscal policy; improve the central bank’s independence, governance, and focus on core responsibilities; strengthen the financial sector; foster economic diversification and inclusive growth; and protect the most vulnerable in society.

What the government of Mongolia needs to understand is its obligations such as to stabilize the economy, reduce the fiscal deficit and debt, increase foreign exchange reserves, strengthen the central bank’s governance, assess the financial sector’s regulatory and supervisory framework, support private sector, and protected venerable groups, according to IMF.

What the country’s citizens understood is that the program will stabilize the economy, increase number of jobs in the economy, and will make the banking sector of the country stronger, thus more favorable towards small, medium and large size companies to receive loans, expand their business and provide a comfortable living condition.

What economists of the country, including the writer of the article, understood is that the program will stabilize the balance of payment problems and restore debt sustainability and most importantly, it will build a strong foundation for financial and fiscal discipline.

Following the IMF executive board’s decision in 2017, Mitsuhiro Furusawa, deputy managing director and acting chair, said, “Mongolia was hit hard by the sharp decline of commodity prices and the slowdown in key export markets. Efforts to mitigate these shocks through expansionary policies were unsuccessful and resulted in unsustainable public debt, falling international reserves, and lower growth.

Against this background, the Mongolian authorities are implementing a program to maintain macroeconomic stability, pave the way to economic recovery, and protect the most vulnerable during the adjustment process.

Fiscal consolidation is a critical element of this program, including cuts of non-essential expenditures, a move to progressive taxation, pension and public financial management reforms, and steps to strengthen and better target the social safety net. A number of structural fiscal reforms, including an independent fiscal council, will help to bolster budget discipline.”

According to IMF’s fifth review of Mongolia’s performance under the program, “Mongolia continues to perform well under the program. The combination of strong policy implementation and a supportive external environment has helped the authorities meet all end-September 2018 quantitative targets under the program, with significant over-performance on fiscal targets. Progress has also been made on structural reforms, albeit with some delays”.

Since receiving the loan from the fund, the macroeconomic situation, the rate of the economic growth and external debt payment situation, as well as the financial indicators of the country look quite positive. However, the embezzlement from the SME Support Fund that is part of the central government budget by its ministers and members of Parliament is not in line with IMF policy.

It seems that politicians of the country embezzled not only the country’s taxpayers’ money but IMF’s aid. The particular aims of the program stated by Mitsuhiro Furusawa regarding “fiscal consolidation is a critical element of this program, including cuts of non-essential expenditures, a move to progressive taxation, pension and public financial management reforms, and steps to strengthen and better target the social safety net” have not been met.

The scandal of the SME Support Fund embezzlement is an evidence of the government’s inability to implement the program effectively. For the 2019 budget spending, the government allocated about 3.6 trillion MNT or about 1.4 billion USD for the above mentioned 29 special funds. How this money will be managed is under question. There is another evidence as to why the government is unable to implement the program, which is the continuation of ongoing discussion in Parliament on amending the existing Law on Regulation of Exchange Rates.

We all know that a market-determined exchange rate usually strengthens the economy’s resilience to external shocks. These impending changes in the existing law will go against the aims and visions of the IMF program and the expectation of the private sector, including domestic and foreign businesses.

Since there are limited influence on decisions for the successful implementation of the program, the technocratic team of the fund was stretched only to the overall macroeconomic situation such as the economic growth rate, the balance of payments’ deficit or surplus, and financial indicators such as the banking system soundness, balances, the asset quality review, thus hindering the ability to implement a comprehensive strategy that would rehabilitate the banking sector to improve its supervisory and regulatory framework, reduce corruption channels, and strengthen the Anti-Money Laundering and Countering Financing of Terrorism regime, in order to improve the business environment.

As an economist I usually seeks to know the utility functions of the players of any economic exchange, the utility function of the Mongolian government in this deal was just to overcome the external debt threat and seek to obtain as much finance as possible. The utility function of IMF is a desire to maximize policy changes towards stabilizing the economy. This bargaining model seems to not include us -- ordinary people who want to borrow up to five million MNT to start up a small business or up to 20 million MNT to extend his or her small business, which will increase employment, boost economic growth and improve the livelihoods of the population.