December 2010
A new economic calendar of Mongolia started on October 1, 2010. It was ahistoric moment when our country was once again free to determine its own independent economic policy.
All Mongolians should be thankful to the IMF “Stand-by Arrangement” program for pulling the country from the brink of bankruptcy in the spring of 2009 but it also led to conflicts between the Government of Mongolia and international financial organizations on policy matters. Conditions laid down by The World Bank and the IMF were considered unsuitable for the situation on the ground. Mongolia finally said “good bye” to “Stand-by” in the third quarter of 2010. At the time GDP growth was higher than 8%. A remarkable change had also come out in the national economy. For the first time ever, earning from coal, iron ore and crude oil export exceeded the revenue of the Erdenet copper factory. The new road to development now had many lanes.
The economy will now move forward without foreign instruction and control. For starters, the Government is getting ready for an international bond sale. Market research is progressing for IPOs of state companies on international stock exchanges. Altogether 121 big projects have been suggested to foreign and domestic companies for investment and the Government will give loan guarantees on the basisof the Concession Law. The Government itself wants to take a commercial loan, something it cannot legally do now. But, the law has to change with the needs of changing times. The proposed Law of Government Financial Capital and Debt Managementis meant to give the Government certain legal rights without which it cannot follow its own economic, particularly investment, policy. The Finance Minister has been persuading Members of Parliament that this law is going to be as important as the Budget Stability Law.
Problem One: Growth with caution
The debate in Parliament on the 2011 budget revealed the contours of the new economy. Mongolia has never before adopted such a high-deficit budget. I do not wish to be critical of this but I do wonder why the Human Development Fund is made part of the state budget? Is it not possible to give the Fund a separate and independent identity? We did this with the Development Fund. Including pay-outs from the Fund in the budget increases the size of its deficit, risking a drop in Mongolia’s credit rating from the present “Stable B+”. International financial organizations are pushing the Government to rein in expenses from the Human Development Fund within the budget but their demand does not match the Government’s vision of a progressive economy. Suggestions that the Development Bank capital also should be part of the budget will make the budget crazily big.
The economy is hungry for investment. It needs not only the Development Bank but also investment banks. The industrial complex in Sainshand will start coming up in the new year, with the chief consulting company for the construction to be announced soon. This means demand for electricity will take a massive leap in the coming two years. Anoil refinery is essential and has been planned. Each of these needs billions and billions of MNT. At such a moment, international financial organizations are counselling caution and restraint, putting a limit on investments. This is the first conflict.
Problem Two: Political hysterics
Economic growth has no place for hysteria and overexcitement. What was the need to do away with the healthy savings system contained in the independent budget of the Development Fund? And why was it necessary to replace it with the MNT800-billion Human Development Fund? Who was behind the move?
This 800 billion can destroy our infant economy before it starts to grow up. We should not play around with our resources when the economy clamours for investment. The www.news.mn Website recently conducted a survey and found that an overwhelmingmajority of people favored using the Human Development Fund money on big constructions, with less than 20% preferring the monthly payment of MNT21,000 to each citizen.
The virus of populism will grow stronger as the 2012 parliamentary election comes nearer. So will the debate on the situation in both Oyu Tolgoi and Tavan Tolgoi. Some people have become very vocal about the need to make the Oyu Tolgoi shareholders’ agreement more profitable for Mongolia. They could surely have said this during the long period when the agreement was under discussion. Did our Parliament membersapprove the law without seriously and carefully assessing the draft, and have now suddenly woken up to demand a review of the agreement? Let’s hope that they start going through every section of an agreement and suggest improvements before it is approved, instead of demanding a halt to the Oyu Tolgoi construction after giving it their approval.
Choosing the operator(s) for Tavan Tolgoi will continue to be a burning issue until the 2012 election. Criticism will be flung at Government organizations, professionals and national companies – everybody involved. The attacks will be directed more by individual interests than by national concern. Our best move would be to select a consortium of international well known companies who would use modern technology. Single companies or a couple of them in combination will not be efficient. We still have not got from Russia or China the desired transit transportation rates for Tavan Tolgoi coal andpeople who only wish to use the topic for their political purpose should see the several other aspects of the problem. Personal ambition must not take precedence over what is good for the nation.
Wanted: A new mindset
Growth in the mining sector reached 13% in the third quarter. This also meant a remarkable increase in revenue and new jobs, particularly in mine operation and transportation. Mongolian companies raised USD715 million from foreign sources. This certainly indicates how domestic business is growing but at the same time exposes the lack of domestic credit sources. The Mongolian banking sector cannot measure up to the country’s economic expansion and new and increased demands. Several Mongolian companies are preparing to raise big amounts at international markets. The Government had announced that 2010 would see progress in developing the capital market, but not much has been achieved.
The mining industry is becoming a more and more powerful player in the economy. A discussion has just started on the main law for the sector. Will it be named Minerals Law, or Mining Law or Mineral Resource Law? Which laws from which other sectors should be incorporated in the proposed law to make it a comprehensive and model statute for the sector that is poised to take the economy forward? It should also be consistent with the thrust of the budget reforms. The law will hold up a new financial structure, giving more power and authority to local administrations and will distribute revenue from the mining industry more equitably. This is a key to ensure good governance, but nothing will come in a hurry. The Russian parliament has been debating a Draft Mineral Resources Law for three years.
Our Parliament decided in 2010 to stop granting exploration licenses. It seems a similar ban on new mining licenses will follow, particularly in gold mining, where a large number of licenses have been suspended. Decisions on mining license have often been ad hoc and have not shown any long-term strategy. Control and suspicion have marked Government policy for too long but as a new dawn breaks out itwould be nice to live under international standards and mining rules.