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.