Mongolia strategy overview

After the ratification by all member countries in June, Mongolia became a country of operation of the Bank on 15 October 2006. This is therefore the first country strategy for Mongolia. As such the Bank will endeavour to apply its experience and knowledge from elsewhere in the region in order to support the transition and development of Mongolia. To date the donor support and contribution, especially donors to the Mongolia Cooperation Fund, have been valuable in this process. The country is now a beneficiary of the Early Transition Countries Initiative, which will allow the Bank to mobilise all appropriate facilities to accelerate Mongolia’s transition and the development of private sector. 

Mongolia has a multi-party system, a pluralistic society, and is making good progress towards the market-orientation of its economy as envisaged in Article 1 of the Agreement Establishing the Bank. The country has a vibrant network of NGOs, the media is relatively free, and there is increasing adherence to human rights standards. In January 2006 a new coalition Government was formed, and declared its strong commitment to continue with political and economic reforms.

Mongolia is a large, land-locked country bordered by China and Russia. The population is growing moderately but remains small at 2.6 million. The country is a low-income country with per capita GDP of USD710 in 2005, and approximately 36% of the population officially live in poverty. Unemployment and disparities between rural and urban areas and generations are growing concerns for society. The authorities have created a national development plan in the form of the Economic Growth Support and Poverty Reduction Strategy to combat these concerns.

Economic performance has improved significantly in recent years. GDP growth has been strong, reaching 10.6 per cent in 2004 and 6.2%in 2005, thanks to good weather conditions, high international mineral prices and consumer spending supported by higher incomes and growing remittances. Fiscal performance has also improved with increased tax revenues and improved expenditure management, and the budget recorded a surplus of 3 per cent of GDP in 2005, the first time a surplus was recorded in recent history. Externally the current account also turned into surplus, in part due to higher mineral prices and growing remittances. 

Mongolia has managed to settle its pre-transition debt obligations to Russia without endangering macroeconomic sustainability. As a result the external debt situation has improved significantly. Although the public debt remains large at 62% of GDP in nominal terms, most of the outstanding liabilities are on concessional terms and debt service does not currently constitute a large part of Government expenditure. Careful management of the sovereign debt capacity should remain a priority for the Government, and for these reasons the authorities will continue to refrain from incurring non-concessional borrowings.

Mongolia has made good progress in a number of liberalisation and structural reform areas, including price and trade liberalisation as well as privatisation. The country joined the WTO in 1997 and maintains a floating exchange rate regime with full currency convertibility. The privatisation process is at an advanced stage (private sector already accounts for 70% of GDP). However, post-privatisation restructuring and corporate governance are considered weak and need to be improved in the future. While the Government has made progress in financial sector reform, the cost of and access to finance remain obstacles to doing business for enterprises. Infrastructure is underdeveloped and the development of market-oriented institutions is at an early stage. Against this background, Mongolia’s main transition challenges are to: (i) improving the business environment and corporate governance, (ii) develop the financial sector further, (iii) developing competitive and transparent framework in the natural resources sector, and (iv) promote commercialisation and private sector participation in public infrastructure.

Given, therefore, the macroeconomic environment and the stage of reforms mentioned above, the Bank will focus on the following operation priorities in the strategy period:

Financing enterprise development

The development of private businesses will be the main pillar of the Bank’s strategy. The Bank will explore possibilities of direct financing in a number of key sectors, including agribusiness, hotel and tourism, infrastructure, property, services and, most importantly, natural resources. The Bank will also look for opportunities to support the remaining large privatisations, as well as increased commercialisation and corporatisation of large state-owned enterprises. The Bank will seek to attract strong and reputable international investors.

Inclusion of Mongolia within the ETC Initiative, providing access to the Medium-Sized Co-Financing Facility, the Direct Investment Facility and Direct Lending Facility as well as due diligence TC, will enhance opportunities to develop local projects. In its efforts to support SME development, the Bank will build on its experience with the Turn Around Management Programme and move to establish a BAS Programme.

In view of the structure of the emerging private sector, the Bank will put a special focus and priority on micro businesses through further development of micro and small business credit lines administered by local private banks, especially in the more remote regions.

Strengthening the financial sector

Support for the financial sector will be a key priority for the Bank, where there is currently limited access to term finance available for commercial banks and the cost of finance is high. The Bank will seek to strengthen financial intermediation and bank consolidation, and therefore to improve access to finance in the country, through the provision of various forms of credit lines and debt products to commercial banks meeting the Bank’s financial and integrity criteria. The Bank will actively roll out the Trade Facilitation Programme (TFP) to several banks as trade finance is in high demand. The Bank will increase financing sources for micro and small enterprises through credit lines to commercial banks and to non-banks, particularly outside the capital. Since the ratification, EBRD has signed its first project in Mongolia with the leading micro lending institution to support rural financing needs.

The Bank will pursue opportunities for equity participation in banks, which will strengthen the local banks’ capital base and improve corporate governance. The Bank will also endeavour to support the development of non-banking financial institutions such as non-bank micro financial institutions (NBFIs), leasing, residential mortgage loans, consumer finance, insurance and pensions.

To support institution building and ensure sustainability of the transferred skills in the relatively young Mongolian financial sector, the Bank will seek donor funding for technical assistance in such areas initially as credit lines for Micro Small and Medium Enterprises, TFPs and NBFIs followed by leasing, residential mortgages, insurance and pensions. 

Active policy dialogue with the Bank of Mongolia will be pursued, with a focus on improving supervision, encouraging consolidation, and on specific issues such as the prevention of money laundering.

Developing in sustainable manner the natural resources sector

Mongolia has a huge mineral endowment, which represents significant potential for its future and poverty alleviation. Although good progress was made with the launch of the WB-sponsored Minerals Law in 1997, delays in implementation of secondary regulations, and more recently the introduction of the Windfall Tax on gold and copper producers, have resulted in increased costs in doing business in the sector. There is a need to clarify the debates raised by the introduction of this tax. The rapid rise in mineral exploration in Mongolia after the 1997 law was not followed by actual investments in mine development. This law has been superseded by the 2006 Mineral Law. Although the provisions are not as clearly defined and friendly towards investors as the 1997 Law, this is the Government’s attempt to increase the actual investment in the mine development. The Bank intends to support the sustainable development of this sector with a particular focus on transparency, governance, environment and regulation. 

Furthermore, implementation of Extractive Industry Transparency Initiatives (EITI) remains a challenge. Following policy dialogue with the Bank and the WB, the Government announced its intention to adopt the EITI in late 2005, however progress was slow. The Bank is closely working with the WB, the Government, industry players and the NGO community towards the full implementation of EITI.

Support for critical Infrastructure

The investment needs in infrastructure are significant, but constrained by limited public resources and the restriction on sovereign borrowing conditional upon the availability of at least 35% grant element. This being the case, the Bank will explore opportunities for financing non-sovereign infrastructure which produces cash flows to meet debt repayments without recourse to sovereign guarantees. Such opportunities may exist in the areas of aviation, telecommunications and selected utilities and eventually in the construction of new power and transport infrastructure to support development of the mining industry. Moreover, the Bank will investigate the potential for bankable renewable energy projects including hydro and wind power.

The Bank would be ready to finance public infrastructure with a sovereign guarantee on a selective basis, on the assumption of being able to attract donors’ grants to co-finance with its resources in order to increase affordability, and to achieve the necessary concessional terms. The ETC initiative and bilateral support will enhance the availability of such funds.  By focusing on small-scale, well targeted projects (possibly not of a sufficient overall size to be covered by the other IFIs) the Bank might achieve a significant impact. 

Cooperation with the ADB, the WB and key bilateral donors including Millennium Challenge Corporation (MCC) should also allow the Bank to participate in airport, road, railways and power transmission projects. Given the long experience of WB and ADB in Mongolia, the Bank will seek to establish a very close relationship with them to avoid any duplication and identify projects where its added value can be an obvious compliment to their respective programmes. In all cases the Bank will coordinate closely with other donors, IFIs and the Mongolian Government on the overall investment priorities in the country.

Policy dialogue

Based on the unique experience and knowledge that it has accumulated in the region, the Bank will engage in comprehensive policy dialogue with the authorities in order to promote capital market development, improve the business environment and support reform efforts. Further liberalisation and commercialisation, good governance and better dialogue between foreign and local investors and the Government are some of the issues which should be addressed with the Bank’s direct engagement. In this respect, the Bank proposes to work with the authorities to form a new consultative council on investment climate. The Bank has shared with the Government and Parliament its willingness to support them in finding a long term sustainable and fair solution in the development of the mining industry. The Bank will coordinate closely with other IFIs and the business community. The Bank’s Environmental Policy and Public Information Policy will apply to all projects developed in Mongolia.