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Country Report February 2004

Mongolia

February 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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Mongolia 1

Country Report February 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

2 Summary

3 Political structure

4 Economic structure4 Annual indicators5 Quarterly indicators

6 Outlook for 2004-056 Political outlook7 Economic forecast

9 The political scene

12 Economic policy

14 The domestic economy

17 Foreign trade and payments

List of tables12 Central government budget, Jan-Nov 2003

List of figures

5 Foreign reserves5 Money supply9 Gross domestic product9 Consumer price inflation13 Total World Bank lending to Mongolia, 1991-200216 Employment by sector, 2000

2 Mongolia


Summary February 2004

The ruling Mongolian People’s Revolutionary Party (MPRP) appears to be in anunassailable position as the 2004 general election approaches. Unity betweenthe opposition parties remains fragile. Mongolia’s relations with Russiaimproved significantly in 2003, and several high-level exchanges are plannedfor 2004. Russia has cancelled 98% of Soviet-era debt totalling Rb11.4bn. Therouble debt settlement has removed a considerable financial burden fromMongolia and will raise foreign investor confidence. The government will keepa close watch on its spending in 2004 to keep the budget deficit within 6% ofGDP. The Economist Intelligence Unit estimates that annual GDP growth willpick up to around 6% in 2004-05. The merchandise trade deficit may fall ifcopper and gold prices continue to rise.

Parliament has completed its autumn session. The opposition Civil WillRepublican Party has fallen apart. The proposed opposition alliance has hitproblems. Hunger strikers have demanded their human rights. The Inter-Parliamentary Union has issued a resolution regarding a murdered member ofparliament. The prime minister, Nambaryn Enkhbayar, has visited the UK. TheMPRP has joined the Socialist International. Mongolia is to benefit from theMillennium Challenge Fund. A donor conference has taken place in theJapanese capital, Tokyo. Regional security was discussed during Mr Enkhbayar'svisit to South Korea.

Government spending has been kept under control. Mongolia's burgeoningshipping fleet has provided a new source of revenue. The largest insurancecompany, Mongol Daatgal, has been privatised. The privatisation of GobiCashmere has fallen through on a technicality. Commercial land has beenauctioned. Donors have pledged US$335m in aid for 2004. Aid from the EU islikely to increase. The government is tackling falling water levels.

Industrial output grew marginally in 2003. Parliament has approved plans toestablish new industrial parks, which will support exports. The annuallivestock census has taken place. Agricultural yields and production improvedin 2003. Mongolia will need humanitarian aid in 2004. A Canadian company,Entrée Gold, has conducted an exploration programme for gold. A Russian-Mongolian joint venture, Erdenet, may build a new plant. Gold productioncould significantly boost GDP. The Sharyn Gol coal mine has been sold. Thegovernment has cut value-added tax on imported energy. A new rail freightservice has begun to operate. The state-owned airline, MIAT, has reduced itsflight schedules.

Trade grew strongly in 2003. Russia has banned Mongolian meat imports again.Tourism infrastructure has improved.

Editors: Gareth Price (editor); Graham Richardson (consulting editor)Editorial closing date: January 19th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

Mongolia 3


Political structure

Mongolia

Republic

The cabinet is made up of members of the ruling Mongolian People’s Revolutionary Party(MPRP)

The president, Natsagiin Bagabandi

A single-chamber parliament, the State Great Khural, which has 76 members, of whom 72are members of the MPRP

May 18th 1997 (presidential) and July 2nd 2000 (parliamentary); the next elections are dueby June 2004 (parliamentary) and May 2005 (presidential)

Government: MPRP. Opposition: Democratic Party (DP), Civil Will-Republican Party(CWRP), Mongolian Democratic New Socialist Party (MDNSP)

Prime minister Nambaryn Enkhbayar

Defence Jugderdemidiin GurragchaaEducation, culture & science Ayurzanyn TsanjidEnvironment Ulambayaryn BarsboldFinance & economy Chultemiin UlaanFood & agriculture Darjaagiin NasanjargalForeign affairs Luvsangiin ErdenechuluunHealth Pagvajavyn NyamdavaaIndustry & trade Chimidzorigiin GanzorigInfrastructure Byambyn JigjidJustice & internal affairs Tsendiin NyamdorjSocial welfare & labour Shiilegiin BatbayarWithout portfolio Olziisaikhany Enkhtuvshin

Ochirbatyn Chuluunbat

Sanjbegziin Tomor-Ochir

Key ministers

Official name

Form of state

The executive

Head of state

National legislature

National elections

Main political organisations

Central bank governor

Chairman of the State GreatKhural (national assembly)

4 Mongolia


Economic structure

Annual indicatorsa

1999 b 2000b 2001b 2002b 2003GDP at current prices (Tg m)c 925,346 1,018,885 1,115,641 1,231,330 n/aGDP (US$ m)c 905.5 946.3 1,016.3 1,109.0 n/a

Real GDP growth (%)c 3.2 1.1 1.0 4.0 n/aConsumer price inflation (av; %) c 7.6 11.6 8.0 1.5 n/aPopulation (m) 2.48 2.50 2.53 2.56 n/a

Merchandise exports fob (US$ m) 454.3 535.8 523.2 524.0 n/aMerchandise imports fob (US$ m) 510.7 608.4 623.8 680.2 n/a

Current-account balance (US$ m) -112.2 -156.1 -154.2 -158.0 n/aReserves excl gold (year-end; US$ m) 136.5 178.8 205.7 349.7 n/aTotal external debt (US$ m)d 914.1 896.4 885.0 n/a n/a

Exchange rate (av; Tg:US$) 1,021.9 1,076.7 1,097.7 1,110.3 n/a

a Derived from the IMF, International Financial Statistics, unless otherwise indicated. b Actual. c Asian Development Bank. d World Bank, GlobalDevelopment Finance.

Main origins of gross domestic product 2002a % of total Components of gross domestic expenditure 2002a % of totalAgriculture, hunting & forestry 20.6 Private consumption 77.5

Trade & services 27.6 Government consumption 18.4Mining & quarrying 8.6 Gross fixed capital formation 23.9

Transport, storage & communications 14.0 Change in stocks 5.1Manufacturing 9.5 Net exports of goods & services -16.1Electricity, gas & water 3.3 Statistical discrepancy -8.8

Principal exports 2002a US$ m Principal imports 2002a US$ mMinerals 173.4 Machinery & mechanical appliances 134.4Textiles 145.4 Mineral products 132.7

Main destinations of exports 2002a % of total Main origins of imports 2002a % of totalChina 47.4 Russia 33.6

US 32.5 China 19.7Russia 8.6 South Korea 11.9Italy 2.1 US 9.5

UK 1.0 Japan 4.2Japan 1.5 Germany 3.6

a Asian Development Bank.

Mongolia 5


Quarterly indicators2001 2002 20033 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Financial indicatorsExchange rate Tg:US$ (av) 1,098.20 1,100.29 1,103.13 1,103.78 1,112.55 1,121.77 1,134.43 1,133.28Exchange rate Tg:US$ (end-period) 1,099.00 1,102.00 1,104.00 1,105.00 1,117.00 1,125.00 1,140.00 1,139.00Bank rate (end-period; %) 9.9 8.6 11.4 11.5 13.0 9.9 3.9 15.5Deposit rate (end-period; %) 13.4 17.2 13.2 12.9 12.8 14.0 14.0 14.0Lending rate (end-period; %) 28.7 31.0 29.9 28.5 27.9 27.3 26.3 25.5M1 (end-period; Tg m) 151,808 156,126 146,903 187,680 181,056 187,699 180,081 209,388M1 (% change, year on year) 5.8 19.4 18.9 21.0 19.3 20.2 22.6 11.6M2 (end-period; Tg m) 317,428 331,035 345,843 400,950 437,336 470,097 504,219 533,526M2 (% change, year on year) 20.0 27.9 27.9 27.7 37.8 42.0 45.8 33.1Foreign reservesReserves excl gold (end-period) 207.49 205.70 206.60 210.32 256.73 349.65 279.55 293.17

Source: IMF, International Financial Statistics.

6 Mongolia


Outlook for 2004-05

Political outlook

As the 2004 general election approaches, the ruling Mongolian People’sRevolutionary Party (MPRP) appears to be in an unassailable position. Itcontinues to be seen as the most capable political party, according to recentopinion polls, and the prime minister, Nambaryn Enkhbayar, is viewed as themost able politician. The government scored several successes in 2003, holdinga successful international conference for new and restored democracies andreceiving pledges of aid worth US$335m from international donors in Novem-ber. Further substantial sums are expected from China, Germany, the EU andthe US Millennium Challenge Fund. However, the most significant achievementof Mr Enkhbayar’s government was the cancellation, announced on December31st, of 98% of the Soviet-era debt of Rb11.4bn, the present value of which hasbeen a cause of dispute.

The MPRP's strength also stems from its opponents' weakness. Unity betweenthe opposition parties and among their leaders remains fragile, and thequestion of co-operation in the 2004 general election remains unresolved.After a protracted struggle, Mendsaikhany Enkhsaikhan took control of theDemocratic Party (DP) in January 2003, but some of his colleagues are opposedto an alliance with another opposition party, the Mongolian Democratic NewSocialist Party (MDNSP). The third opposition party represented in parliament,the Civil Will-Republican Party (CWRP), split in December. These three are theonly parties capable of mounting an election challenge to the MPRP, but noneis likely to win by campaigning separately. Their inability to form an allianceplays into the hands of the MPRP, suggesting to the electorate that theopposition would be incapable of forming a stable government.

There has been some debate in the media suggesting that a strongerpresidential system would eliminate party bickering and provide more stablegovernment. A constitutional amendment along these lines is unlikely beforethe 2005 presidential election, although the election laws will be amendedwhen the State Great Khural (parliament) reassembles in April. The governmenthas already circulated two draft proposals. At present there are 76 one-seatconstituencies. One proposal is to reduce the total number of constituencies,but to increase the number of seats in each. However, proportionalrepresentation is unlikely to be introduced, and the final outcome may do littlemore than tighten up on campaign procedures to eliminate opportunities forcorruption. Before the current government steps down there are also plans tointroduce laws preventing opposition members of parliament (MPs) fromdisrupting the opening session of parliament.

Mongolia has received international praise for its human rights strategy, and ahuman rights programme was launched in December. However, there will bepressure to tackle several issues in particular. The police attracted publicity in2003 for acting aggressively and at times illegally in their handling ofindividuals and peaceful demonstrations. In December they confiscated the

Domestic politics

Mongolia 7


gers (tents) of a group demonstrating in freezing temperatures outside the USEmbassy. Prison conditions have also been criticised. In 2003 several journalistswere obstructed in their work, and some were punished under libel laws. Thegovernment plans to tighten libel and slander laws further in the near future.The law on state secrets is likely to be amended in 2004. In 2003 a formerintelligence chief, J Baatar, was investigated for allowing documents said tocontain state secrets to become public knowledge and to be used by theopposition to attack the minister of justice, Tsendiin Nyamdorj. Mr Baatar wassentenced to seven years' imprisonment at a secret trial on January 8th.

Mongolia’s relations with Russia improved significantly in 2003. The issue ofpre-1991 rouble debt has been resolved, a new five-year agreement on thecopper-producing joint venture, Erdenet, was signed in July, and Russian-ownedproperties in Mongolia are being transferred into Mongolian hands. TheRussian minister of foreign affairs, Igor Ivanov, visited Ulaanbaatar in January,and several other high-level exchanges are planned for 2004, including a statevisit to Russia later in the year by Mongolia's president, Natsagiin Bagabandi.Bilateral trade, particularly between Siberia and Mongolia, is likely to increase,as are Russian participation in Mongolia’s privatisation programme and levelsof Russian foreign investment.

Senior government officials travelled extensively in 2003. The most significantdestinations were Russia, the US, China and Japan, and these countries willcontinue to be Mongolia’s most important foreign partners. Mongolia is keen tobe seen as playing an active role in the fight against international terrorism andthe search for a peaceful solution to the problem of North Korea’s nuclearweapons programme. The latter was an important issue during Mr Enkhbayar'svisit to the two Koreas and Japan in November. In 2004 Mongolia will closelymonitor the progress of the six-party talks on North Korea’s nuclearprogramme, and will seek to continue to use its contacts with North Korea inorder to ameliorate tension. The reopening of the North Korean embassy in theMongolian capital, Ulaanbaatar, later in 2004 will facilitate this. Mongolia willalso support US initiatives in Iraq, and will continue to make troops availablefor service there.

Economic forecast

On December 31st it was announced that Russia had cancelled 98% of theRb11.4bn owed by Mongolia to the former Soviet Union. Under the agreement,which was largely finalised during Mr Enkhbayar's visit to Moscow in July2003, Mongolia is to pay just US$250m to Russia (indicating that the total debthas been valued at US$12.5bn). US$150m will come from foreign-exchangereserves and the remainder from the sale of Treasury bills, which will mature atthe end of 2004. An international mining company, Ivanhoe, has boughtUS$50m of bills. Ivanhoe has extensive copper and gold mining concessionsdeposits in Omnogov’ aimag (province). The implications of the debt settlementcould be substantial. It removes a considerable financial burden from Mongoliaand is likely to raise confidence among foreign companies, which previouslyconsidered the financial risk of investing in Mongolia too high. Some

International relations

Policy trends

8 Mongolia


opposition parties have criticised the arrangement, saying that the agreementacknowledges that the debt really exists. However, the agreement will make iteasier for Mongolia to manage post-1991 debts, which amount to more thanUS$1bn but are mostly concessional.

The government will keep a close watch on its spending in 2004 to keep thebudget deficit within 6% of GDP, as advised by the IMF. It may be tempted tocut taxes and raise salaries in the run-up to the general election, and it has cutsome business taxes. However, such taxes are still high in Mongolia, and thecuts are intended to boost production and discourage tax avoidance. Pensionsand other benefits will also rise in 2004, although the IMF will be consultedover a proposed increase in state wages and salaries. Additional revenue willcome from privatisation. The delayed sale of the country's main oil importer,Neftimport Concern (NIC), is due to be completed in February. Other com-panies on offer in 2004 include the state airline, MIAT, shares in a Mongolian-Russian fluorspar-producing joint venture, Mongolrostsvetmet, and the GobiCashmere factory, the sale of which collapsed on a technicality in December.

The Economist Intelligence Unit forecasts that real GDP growth will pick up toaround 6% a year in 2004-05. Growth in the manufacturing sector willcontinue, and mining production will improve. The decline in the herdingsector was arrested in 2003, and the improvement will continue in 2004, withthe added benefit of upgraded rural infrastructure supported by an AsianDevelopment Bank rural development programme and the improvement ofwater resources. Increases in arable production are less certain, as the sectorneeds restructuring and investment and is also vulnerable to adverse weatherconditions during the short, 100-day growing season.

The merchandise trade deficit may fall if copper and gold prices continue torise. The mining and mineral sector will continue to be the major foreign-exchange earners. There continues to be a considerable demand for copper inChina, which is the reason for recent growth in exploration and productionlicences, especially in the south of Mongolia. Other factors boosting trade in thelonger term could be the development of free economic zones (FEZs). Theconstruction of services for the Altanbulag FEZ on the Siberian border will beput to tender in the first part of 2004. There will be similar developments onthe southern border at Zamyn Uud, and parliament recently approved plans toset up another FEZ in Bayan Olgii aimag in the north-west. Plans for majorzonal developments will go forward. A national committee was organised inDecember, and five regional councils handling the five development zones willbe developed in 2004. These moves, together with the decision to set up nineindustrial parks, are intended to boost exports and improve living standardsacross the country.

Economic growth

External sector

Mongolia 9


The political scene

The autumn session of the State Great Khural (parliament) was extended fromDecember 10th to January 14th to allow time for a debate on water resources.The autumn session introduced new laws on water transport, moves to tackleiodine deficiency, and the establishment of a free-trade zone at Tsagaan Nuur inBayan-Olgii aimag (province). A tax law on fixed assets, and a maritime law,were also passed. In addition the 2004 budget was passed, and existing anti-alcohol and health laws were amended—the latter amendment providingretirement bonuses to doctors serving in rural communities.

On December 3rd the opposition Civil Will Republican Party (CWRP) fell intodisarray. Its former vice-president, B Jargalsaikhan, left the party with a group ofsupporters to reconstitute the Republican Party (RP). The RP and the CivilCourage (Will) Party had previously merged to form the CWRP in February2002. Mr Jargalsaikhan left because he was opposed to any co-operation withother opposition parties in the forthcoming general election. Many ordinarymembers also objected, but most members of the CWRP’s governing body,the Political Council, were in favour. A leadership struggle in the PoliticalCouncil culminated on December 6th with the sacking of the chairman,Sanjaasurengiin Oyun. This left an acting chairman, S Otgonbayar, in charge.The new leaders say that they want to co-operate with the Mongolian Demo-cratic New Socialist Party (MDNSP). However, the legal status of the CWRPsince the departure of the RP is unclear, and Mr Oyun said in January that theCWRP was still legally registered and that the leadership had not changed.

The Democratic Party (DP) and the MDNSP had been expected to sign anagreement to fight a joint campaign for the 2004 general election due onDecember 6th. However, some DP leaders who opposed the proposedcandidate quotas blocked this move. There seems to have been an attempt atthe same time to unseat the DP chairman, Mendsaikhany Enkhsaikhan, but hehas remained in the post. The two parties appear to be going ahead with a

The proposed oppositionalliance hits problems

Parliament completes itsautumn session

The Civil Will-RepublicanParty falls apart

10 Mongolia


campaign alliance, and an election platform is being drafted, although whetherthe alliance will last remains to be seen.

On December 10th—International Human Rights Day—police prevented ademonstration in Freedom Square in the capital, Ulaanbaatar, claiming that itwas illegal. Most of the demonstrators had paid a Mongolian organisation,Zoolon Ekh Kholboo, to find work placements for them in Japan. However,they received nothing, and the company is now under investigation. Thedemonstrators mounted a hunger strike outside the US embassy, anddemanded that the Ministry of Social Welfare and Labour compensate them fortheir losses. The protesters threatened to commit suicide if their demands werenot met by December 17th. However, the ministry does not accept liability inthe case. This is not the first time a Mongolian company has defrauded peopleregarding commitments to send them abroad. The hunger strike was largelyignored in the press, although the police were criticised for treating the strikersaggressively and confiscating their gers (tents).

The deputy speaker of parliament, Jamsrangiin Byambadorj, and a member ofparliament (MP), Nyamaagiin Enkhbold, attended the 109th session of theInter-Parliamentary Union (IPU) in Geneva, Switzerland, on October 1st-3rd. InSeptember an IPU official had visited Mongolia to gather information about themurder in 1998 of an MP, Sanjaasurengiin Zorig. The IPU human rightscommittee discussed a report of the visit during the session, and the IPUgoverning council adopted a new resolution on the case. Concern wasexpressed that the murder had not been resolved and that no parliamentarygroup is monitoring the case under the present government. The council saidthat parliament had a duty to ensure that the murderers were identified andbrought to trial. The human rights committee will consider the case again at the110th IPU assembly in April 2004.

On October 22nd the prime minister, Nambaryn Enkhbayar, arrived in the UKfor a visit lasting several days. He was accompanied by the minister ofeducation, Ayursanyn Tsanjid, the mayor of Ulaanbaatar, MiyeegombynEnkhbold, and a trade delegation. Mr Enkhbayar met the British prime minister,Tony Blair, the foreign minister, Jack Straw, and the president of the EuropeanBank of Reconstruction and Development (EBRD), Jean Lemierre. Mongoliawants its membership of EBRD upgraded to give it drawing rights.

Mr Enkhbayar left the UK on October 25th to attend the 27th Congress of theSocialist International in Brazil as leader of the Mongolian People’s Revo-lutionary Party (MPRP). He delivered a report on sustainable development andsecurity in Mongolia. On October 27th the MPRP was made a full member ofthe Socialist International, having had observer status since 1999.

A third round of political consultative talks between the US and Mongolia tookplace in Washington on November 24th. The deputy minister of external rela-tions, Sukhbaataryn Batbold, attended the talks. Consular issues, tradeconcessions, air agreements and Mongolia’s support for US policy towards Iraqwere discussed. Mongolia is one of the first countries to be allowed to apply for

Mongolia is to benefit from theMillennium Challenge Fund

The MPRP joins the SocialistInternational

The prime minister visitsthe UK

The IPU issues a resolutionover a murdered MP

Hunger strikers demandhuman rights

Mongolia 11


assistance from the US Millennium Challenge Fund, which will provide sub-stantially more US aid than previous arrangements.

Mr Enkhbayar began a tour of East Asia with a visit to the North Korean capital,Pyongyang, in November. The delegation included the minister of trade andindustry, Chimidzorigiin Ganzorig, and Mr Enkhbold. Mongolia wants to playan active role in promoting regional security and achieving a peaceful solutionto the problem of North Korea’s nuclear weapons programme, and these topicswere discussed with the North's premier, Pak Pong Ju. Mr Enkhbayar and PakPong Ju also discussed opportunities to expand co-operation, particularly in thearea of infrastructure, and North Korea offered the use of ports to Mongolia.Agreements on investment, double taxation and co-operation between the twocapital cities were signed. North Korea said that it would reopen its embassy inUlaanbaatar, which was closed in 1999.

Mr Enkhbayar then moved on to the Japanese capital, Tokyo, where heattended a donor conference of the Mongolia Assistance Group, and held talkswith the Japanese prime minister, Junichiro Koizumi. International terrorism,the war in Iraq and the problem of North Korea’s nuclear weapons programmewere also discussed. During the visit Mr Enkhbayar said that Mongolia wouldreturn the remains of around 3,500 Japanese soldiers killed in the battle ofKhalkhin Gol, which took place on the border with Manchuria in 1939.Mr Enkhbayar also reported that he had spoken to North Korean officials insupport of Japan’s position over Japanese citizens who had been abducted byNorth Korea.

Mr Enkhbayar visited South Korea during November 24th-26th. He met thepresident, Roh Moo-hyun, and the prime minister, Goh Kun, with whom hediscussed bilateral trade, tourism and North Korea’s nuclear programme.Mr Enkhbayar also discussed regional security with the minister of unification,Jeong Se-hyun, and talked about the possibility of South Korean companiesbecoming involved in construction projects in Mongolia with the minister ofconstruction and transport, Choi Jong-chan.

The Mongolian president, Natsagiin Bagabandi, arrived in Japan for a six-dayvisit on December 3rd. His last state visit had taken place in 1998. He metEmperor Hirohito and Mr Koizumi, both of whom he thanked for aid andJapan’s role in organising the recent Mongolian Assistance Group meeting inTokyo. Mr Bagabandi and Mr Koizumi discussed issues raised duringMr Enkhbayar's visit to Japan in November. These included internationalterrorism, efforts to find a peaceful solution to the North Korean nuclear issue,and Mongolia’s support for Japan’s position over the case of Japanese citizenskidnapped by North Korea in the 1970s and 1980s. Mr Bagabandi also handedover information regarding more than 100 of the Japanese who had died at thebattle of Khalkhin Gol.

The president visits Japan

A donor conference takes placein Tokyo

Regional security is discussedin Seoul

The prime minister visitsNorth Korea

12 Mongolia


Economic policy

In the first 11 months of 2003 the budget deficit fell by Tg1bn (US$900,000)year on year. Tax revenue increased by 20.9%, while revenue from excise taxrose by 15.4%. Strengthening trade resulted in trade-related taxes rising by 32.5%,while value-added tax (VAT) rose by 21.3% year on year.

Mongolia: central government budget, Jan-Nov 2003(Tg bn)

Total revenue & grants 486.4 Current revenue 476.9Total expenditure 526.5 Current expenditure 384.9

Total deficit -40.1Current balance 92.0

Source: Press reports.

In the 2004 budget, passed on November 28th last year, government incomewas set at Tg555.3bn and expenditure at Tg639.3bn. The deficit of Tg84bn isequivalent to 5.7% of GDP—the level recommended by the IMF. The present 40%corporate income tax rate will be reduced to 30% for companies earning overTg100m (US$90,000) to help improve the investment environment and boosteconomic growth. There will also be reductions in other taxes, includingproperty tax, to bring the average tax bill for companies down by 25%. Thegovernment hopes the cuts will encourage tax compliance by businesses.Spending on the social sector, particularly education, will increase in 2004. Thebasic monthly pension will rise on January 16th to Tg32,000 (US$29). Childcareallowances will rise by 20% on March 1st. However, a pay rise planned for stateemployees in February will first be discussed with the IMF.

About 300 ships have been entered on the Mongolia Shipping Registry and willprovide the country with some additional income. The registry was formed in2003 and is administered by an agency in Singapore. Mongolia cannot registerthe largest vessels until permission is granted by the International SeaOrganisation.

On December 2nd Mongolia’s largest insurance company, Mongol Daatgal,which had been valued at US$1.2m, was sold to the Angara-SKB Consortiumfor US$5.8m. Five other competitors participated. The consortium, which wasformed specifically to bid for Mongol Daatgal, comprises the Chingis KhanBank and Angara-SKB, a Siberian insurance company.

A consortium consisting of Itochu Wool of Japan, Cashmere Products ofGermany and MSC Holdings of Mongolia beat four other competitors with abid of US$11.7m for the state’s 70% holding in the Gobi Cashmere factory. Theminimum price was US$11.6m. However, the State Property Committee (SPC)immediately cancelled the sale because the documentation submitted for theproposal was incomplete. The four other proposals were not considered, andthe SPC intends to put Gobi out to tender again in 2004. The SPC first tried to

The privatisation of GobiCashmere falls through

The country's largest insurancecompany is sold

Mongolia's shipping fleetprovides some new revenue

Taxes are to be cut andpensions will rise in 2004

Government spending is keptunder control

Mongolia 13


sell Gobi two years ago, but buyers were unwilling to meet the minimum price.The company was revalued before going on sale again in 2003.

The first auction of land for shops and "public conveniences" was held in thecapital, Ulaanbaatar, on December 22nd. The city received Tg270m in revenuefor the lease of 11 sites in the city for between 15 and 60 years. The bids werewell above the asking prices. However, applications by families to acquire landunder the 2002 land privatisation laws continue to be slow. A total of 16,000plots were acquired in 2003, of which 12,000 are in Ulaanbaatar. A numberof amendments to the land laws will be discussed when parliament recon-venes in April.

The tenth consultative meeting of the Mongolia Assistance Group was held inTokyo on November 19th-21st November 2003. The prime minister, NambarynEnkhbayar, the minister of finance and the economy, Chultemiin Ulaan, andrepresentatives of 16 countries and 14 international organisations attended themeeting. At the conference, donors pledged US$335m in loans and grants in2004. Japan was the leading bilateral donor, pledging US$42.2m in grants, 40%of which consists of technical assistance. Aid from donors in the past focusedon medium-term infrastructure development projects. From 2004 a largerproportion of the aid will be for longer-term development projects. At themeeting donors expressed some concern that earlier assistance had neitherreduced poverty nor promoted sustainable growth sufficiently. However, theywelcomed the government’s Economic Growth Support and Poverty ReductionStrategy (EGSPRS), published in 2003. They also urged the government to take aleading role in co-ordinating aid and to be cautious about taking on new debt,although they considered that the current level was manageable. Mongolia hasreceived US$1.1bn in loans since the first donor conference in 1991. The nextdonor meeting is scheduled to be held in November 2004 in Ulaanbaatar.

At a meeting of the seventh EU-Mongolia Joint Committee on November 4th,the EU said that aid to Mongolia would increase under the EU’s Asian andLatin American (ALA) programme. Mongolia is also eligible to sign up for fiveadditional EU programmes. Previously the EU had funded Mongolia through

More aid will come fromthe EU

Donors pledge US$335m in aidfor 2004

Commercial land is auctioned

14 Mongolia


the Technical Assistance to the Commonwealth of Independent States (TACIS)programme. In the past ten years the EU has supported projects in Mongolia tothe tune of €2m (US$2.5m), and it regards Mongolia as one of the moresuccessful countries undergoing economic transition. In 2004 Mongolia couldreceive as much as €3m for project aid.

The government has declared 2004 to be the year of water resources. Waterlevels in many rivers in the northern belt have fallen to dangerously low levelsbecause of industrial use, and many water courses are badly polluted as aresult of gold mining. The planned improvement of water resources includesmeasures to reduce pollution, and some placer mines will be closed over thenext decade. In other areas water-cleansing facilities, which fell into disrepairafter the herding collectives and state farms were disbanded in 1991, willbe restored.

The government has also declared 2004 to be the year of support for the family.A law on family support will be approved before the end of the currentparliamentary term. A six-year poverty reduction programme began in 2003in Arkhangai, Bulgan and Khentii aimags (provinces) aimed at vulnerableherding families. This project is backed by the International Fund forAgricultural Development and will involve 90% of the population in theseaimags. A strategic plan for the development of family life will be implementedfrom 2005-2010 with Dutch government aid through the World FamilyPlanning Society.

The domestic economy

In the first eleven months of 2003 total industrial output at 1995 prices wasTg251.7bn, an increase of 1.1% year on year. In the same period the mining andmineral sector produced goods worth Tg120.9bn (at 1995 prices), a fall of 2.4%year on year, and manufacturing sector production was worth Tg90.6bn,representing growth of 5.8% year on year. In the first 11 months of 2003 broadmoney stood at Tg627.5bn (US$566m). Bank deposits grew in the same period,and the value of loans to businesses and individuals rose by 102.9% toTg429.2bn. Around 78% of loans were to the private sector. Net foreign-exchangereserves rose by 32.2% year on year to reach US$266.7m, the equivalent of fourmonths of import cover, at end-November. The consumer price index rose by5.2% year on year in November. Prices of food, particularly beef and mutton,increased in November, as did those for clothing and footwear, but housing,heating and electricity prices fell.

In early December parliament approved plans to set up industrial and technicalparks throughout the country to boost export production and regional sustain-able development. Nine sites have been identified so far: Darkhan, Erdenet,Choibalsan, Sukhbaatar, Khovd, Nalaikh, Zuun Mod, Bagakhangai and Choir.Their development will take place in two stages, 2004-08 and 2008-12.

New industrial parks willsupport export production

Projects to support the familyare being introduced

The government takes actionto tackle falling water levels

Industrial output growsmarginally in 2003

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The annual census of livestock took place in December, although the resultshave been delayed. The total head count is expected to be higher than inDecember 2002.

The harvest in the first ten months of 2003 stood at 164,400 tonnes of wheat,78,000 tonnes of potatoes and 58,100 tonnes of vegetables. Although the areasown was smaller than in 2002, the yield per hectare improved. Wheatproduction grew by 30% year on year. The Green Revolution, a government-sponsored project to help families and small enterprises to grow crops, hascontributed to the rise in arable production. The number of participants in thescheme, which began in 1997, had grown to 1,570 enterprises and 125,000families by 2003.

In spite of the good harvest in 2003, Mongolia is far from self-sufficient in grainand will require humanitarian aid before the 2004 crop is harvested. The firstconsignment of 19,000 tonnes of wheat, donated by Japan, arrived in August,and the US will supply 24,000 tonnes, all of which is destined for flourproduction, before the next harvest is due. Wheat may also be imported fromKazakhstan and the Kyrgyz Republic this year. However, not all of the importedwheat is used to produce flour. A considerable amount is also used to makealcohol—a fact that has raised some concern recently, given the nationalproblem of alcoholism.

A Canadian mining company, Entree Gold, acquired a 100% royalty-free interestin Shivee Tolgoi in 2003. The 179,590 ha concession has gold and copperreserves, and borders on the Oyu Tolgoi concession held by Ivanhoe, aninternational mining company, in Omnogov’ aimag (province). A geophysicaland soil chemistry exploration programme was conducted in 2003, and furtherexplorations will be undertaken this year.

Erdenet, a Russo-Mongolian copper-producing joint venture, is consideringbuilding a new plant with an annual capacity of 25,000 tonnes of coppercathode in 2004. It currently sells most of its output to China, where copper isin high demand. However, Erdenet is likely to face competition from Ivanhoe inthe future. Copper concentrate production at Erdenet has fallen since 2001,partly because of outdated plant and technology. The joint-venture agreement,which reaffirms Mongolian and Russian shares at 51% and 49% respectively,was renewed for five years in July.

In spite of rumours circulating in autumn 2003, Robert Friedland, Ivanhoe'schairman, said on December 1st that the company did not intend to sell itsconcessions at Oyu Tolgoi, and plans to develop the copper and gold reservesitself. A new president of Ivanhoe, John Macken, has been appointed to leadthe management team to develop production at Oyu Tolgoi. Ivanhoe has a60-year licence, and has invested US$60m in the venture over the pasttwo-and-a-half years. Ivanhoe’s discoveries have attracted other internationalmining companies to the region.

Ivanhoe will developproduction at Oyu Tolgoi

Erdenet may build a new plant

Entree Gold explores for gold

Mongolia continues to rely onfood aid

Yields and production improvein 2003

The yearly livestock censustakes place

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The Boroo Gold Company in Selenge aimag, which put a US$75m processingplant into operation in 2003, began producing gold bars in December. Thecompany is owned by Boroo Mongolian Mining Company, based in theBahamas, which is 56% owned by a Canadian company, Cameco. The com-pany expects the new plant to raise Mongolia’s gold production by 45%, whichcould boost GDP by 5-7%.

The Sharyn-Gol coal mine was privatised through a tender to a Siberian-basedcompany, Kraso, in November. The new owners say that they will not increasecoal prices, and that they intend to expand into gold production and con-struction. The Sharyn-Gol mine supplies the Darkhan power station.

The government has come to the aid of the struggling western energy grid,which is regularly threatened with power outages by its Russian suppliers if itdoes not repay its debts. The grid will be exempt from customs and VAT onenergy purchased from Russia in 2004.

A rail cargo service on the 1,700-km route between Ulaanbaatar and Tianjinport, run by the Mongolian and Chinese railways, began operating onNovember 8th. The decision to open the service was reached in October byMongolia, China, North Korea, Kazakhstan, South Korea and Russia, and is partof the Trans-Asian Railway project co-ordinated by the UN Economic and SocialCommission for Asia (ESCAP).

A foreign management team from an Irish company, Air Consulting, ispreparing the state-owned national airline, MIAT, for privatisation. The airline'sflight schedules have been changed and the number of direct flights in thewinter timetable reduced. The direct flight to Frankfurt, Germany, has been cut,there are changes to services to China, Japan and South Korea, and air freighttransport also takes longer. Staff numbers have also been cut, and MIAT officesabroad have been closed to save the company Tg650m (US$570,000) a year.MIAT was faced with the unexpected problem of the regional Severe AcuteRespiratory Syndrome (SARS) outbreak in 2003, which reduced travel to andfrom Mongolia. Between January and November MIAT's revenue fell by Tg6bn

MIAT management cuts flights

A new rail freight service is inoperation

Gold production could boostGDP significantly

The Sharyn Gol coal mineis sold

The government cuts VAT onimported energy

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compared with same period of 2002. The cuts led to a public outcry and themanager, Brendan Donahue, was obliged to justify the company’s actions to theminister of infrastructure, Byambyn Jigjid. Under the management agreementthe government is not allowed to interfere with the running of the airline.

Foreign trade and payments

In the first ten months of 2003 total trade grew by 16% in US-dollar terms toUS$1.1bn. Exports stood at US$451.1m and imports at US$659.8m. Exports ofminerals, textiles, and skins and hides grew, but those of precious metals, liveanimals and animal products declined. Sales of copper concentrate increasedby 8% in volume terms and by 9.8% in US-dollar terms during the same period,as a result of improved export prices. Imports of machinery, equipment,vehicles and food increased, but imports of textiles and products of vegetableorigin fell year on year in value terms.

In the first 11 months of 2003, 11,200 tonnes of meat and 570 tonnes of meatby-products were exported to Russia, compared with a target for the year of20,000 tonnes. In 2001 the meat export trade had been severely disrupted byfoot-and-mouth disease. In 2003, 10,000 animals were vaccinated and Mon-golia was declared free of "A-category" animal disease. However, Russia bannedall imports of Mongolian meat (other than horsemeat) from November 5th inresponse to a case of brucellosis regarding which Mongolia had not providedRussia with the necessary test information.

The government had marketed 2003 as "Visit Mongolia Year". However, theexpectation that 230,972 tourists would arrive proved overoptimistic. Arrivalsfell 10% short of the target, as only 190,000 visitors actually came. Touristsarrivals from China rose by 5,319 to 75,750 in the first ten months of the year,but those from Russia fell by 11,000 to 44,586. The disappointing results weremainly due to the outbreak of SARS in East Asia in the first half of the 2003.However, over Tg1bn (US$900,000) of foreign direct investment was spent onimproving the country's tourism infrastructure during the year. The number ofhotels grew by 15%, and employment in the tourism sector rose by 20%. Threenew national and six local tourist routes were opened, creating 2,000 new jobs.In December the number of four-star hotels in the capital, Ulaanbaatar, rosefrom one to four. The Ministry of Infrastructure has decided to extend "VisitMongolia Year" into 2004.

Tourist infrastructure isimproving

Russia bans Mongolian meatimports again

Trade grows strongly in 2003

mongolia - iuj.ac.jp · company, mongol daatgal, has been privatised. the privatisation of gobi...

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