Mongolia strategy overview

Mongolia has an established multi-party system, a pluralistic society, and is making good progress towards the market-orientation of its economy in compliance with the principles of Article 1 of the Agreement Establishing the Bank. The latest parliamentary elections in June 2008 were considered by independent observers generally free and fair and, after a period of post-electoral uncertainty, resulted in the formation of a coalition government between the Mongolian People’s Revolutionary Party (MPRP) and the Democratic Party (DP), the two major political parties of the country. As a reflection of the democratic achievements of the country, the presidential election on 24 May 2009 brought victory to the opposition candidate, in an election recognised as fair by domestic and international observers.

Economic overview

Since the adoption of the first country strategy in 2006, Mongolia has experienced robust growth. The economy grew by 9 per cent on average during the past 3 years and per capita GDP increased from US$ 871 in 2005 to US$ 1,970 in 2008. However, there has been little improvement in poverty reduction as the poverty headcount ratio only declined from 36.1 per cent in 2003 to 35.2 per cent in 2008. The government continues to place poverty reduction as a national priority and launched a National Development Strategy in 2007.

Effects of the global financial crisis

The global financial crisis did not affect Mongolia up through the middle of 2008, however the country is now facing an economic downturn. The significant decline in global commodity prices in autumn 2008 – in particular copper prices – has negatively affected both fiscal and external accounts from the second half of 2008, both of which showed a deficit.. While the Mongolian banking sector is not exposed to external financing, conditions deteriorated during 2008 as the two main financial channels (i.e. deposits and interbank financing) became vulnerable. Commercial banks significantly reduced new lending and the banking sector could face challenges in terms of its capitalization and consolidation.

The government was relatively quick and comprehensive in responding to these difficulties, deciding to guarantee bank deposits and approving a US$ 1.1 billion economic stimulus plan in March 2009. Subsequently, the government agreed with the IMF on a US$ 229 million stand-by arrangement. In October 2009, the Mongolian Government signed an important investment agreement with Rio Tinto/Ivanhoe Mines for the exploitation of the Oyo Tolgoi copper and gold mine. It is possible that on the back of this, in 2010 other large mining agreements will follow, most notably related to the Tavan Tolgoi coal mine deposit.. Assuming the fiscal stimulus is effective and the major investment agreements materialise as mentioned before, the country may be back on the road towards robust and stable economic expansion.

Progress and outlook

Mongolia made good progress in a number of structural reform areas, including price and trade liberalisation as well as privatisation, while progress in corporate restructuring and governance lags behind. The banking system has grown in size and financial regulation has improved though the sector is currently facing significant challenges which need to be addressed. Some infrastructure improvements have been made, but commercialisation and private sector participation in infrastructure is at an early stage of development. Against this background, the transition challenges for the next Strategy period would be:

• Facilitating enterprise restructuring and improving corporate governance
• Consolidating and strengthening the financial sector
• Managing minerals wealth and diversifying the economy
• Improving the business environment
• Promoting commercialisation and private sector participation of public infrastructure.