This noon, a working group established by the order of Speaker in April presented its’ conclusion to the Economic Standing Committee. In brief, the conclusion covered areas of world economics, and its effects on the local economy, consequences and ways to tackle the obstacles. It also included summary from the analysis on ‘Internal and external factors in Mongolian economy, an analysis on development process, conclusion and further policies’ by the sub-working group. Figures are based on the data from May, 2013.
1. External economic environment and relations.
-Solution is needed for accumulated issues on foreign relations, foreign investment, and major project due to unclear and unstable external economic environment.
-Trade deficit might be increased due to the full dependence on import goods and mining sector – price volatility of copper, coal and iron ore which affects net foreign currency flow into the country.
-Financial instability might occur due to consequent current account deficit showing no signs of decrease which makes the economy more sensitive.
-In parallel with the current account deficit, external debt increase may cause negative effects on long-term economic stability.
-Mongolia’s credit rating has been decreased.
-Difficulties occurring on debt service repayment, and some payments are behind schedule created a re-financing risks.
-Dependence on few markets, few commodity export, and over-dependence on import goods is creating a difficulty, and economic cooperation with China is prevailing.
-Our third neighbours perceiving our economy as a risky and unstable investment environment.
2. Major projects that has a significant effect on the economy.
-Despite as a factor for mid-term economic growth force, for further development of the mining sector, inefficient and underdeveloped logistics service, power, water supply and infrastructure is creating difficulties. Improvement on investment and sales agreements and contracts is creating obstacles on implementing these projects.
-Cancellation of licenses of the environmentally irresponsible companies is negatively affecting the world-class companies as well.
-Due to needed capital for implementing major projects precise schedule must be created.
-Inefficient spendings are occurring due to lack of investment and project analysis, and incompetency of feasibility studies.
-New railway system has not been constructed to this day and current system doesn’t have efficient legal framework of coordination.
-Due to inefficient and weak corporate governance and responsibility of state-owned enterprises, many of them facing financial difficulties.
3. Foreign Direct Investment.
-Since 2000, foreign direct investment has been steadily increasing. However, due to world and regional decrease in investment the amount has decreased. Completion of initial phases of the significant projects, change in legal environment caused FDI to decrease from 2012.
-Despite the effort made on attracting foreign investment, irresponsible statements and confusing news is causing investors to abstain from investing in the country.
-85 percent of the FDI was for the mining sector, showing the one-sidedness of FDI in the country, proving its’ dependence on few commodities.
-If we don’t pay attention on sources of the FDI in the country, China is leading and offshore zones such as Netherlands, Luxembourg and Virgin Islands is increasing.
-Comparing to other countries the FDI is in a normal level, however the country is still classified as a risky destination. Taxation level, restriction and customs tariffs are in the same level as developing countries. However, bureaucracy, human capital, corruption, infrastructure, and development level financial sector is considered as weak.
-The country lacks incentives and advantageous conditions for investments, and system on attracting investments by industries.
-Due to unclear taxation, penalty, fine, sentencing based law and lack of knowledge in specific areas of judges investors faces loss in court. It makes difficult to re-kindle their investment appetites.
-Be informed about Mongolia being classified as frontier markets with the rating of below BBB-.
-Create foreign investment incentives, improving legal environment, and system that encourages investment on industries that are in need of investment.
4. Macro-economic condition.
-Receiving pre-payments from unrecognized revenue, massive distribution to the general public caused budget deficit and other negative economic consequences.
-Despite the forecast of 13-16% growth, prevailing unclear condition of the economy is being perceived as instability. If OT starts operating in June, substantial growth will be resulted.
-In last 3 years, due to mining sector growth, foreign trade revenue was more than the GDP, the 93% of the export revenue was created by mining sector making our economy more sensitive to sudden external shocks
-Bond investment might add to inflation due to growth rate is higher than the actual production rate encumbering private investments. Due to time needed for projects’ finalizing and planning period the bond investment maybe delayed
-Due to budget policy expansion based on cycles it still creates a risk for stable and steady economic growth. In the time of commodity price shock, Ministry of Finance is not equipped enough to take decisive measures
-Optimistic budget planning is under a risk for budget deficit of 6-8%. Meanwhile, the planned investment could disrupted
-Price stabilization and subsidization programs, financing for Development Bank, and Chinggis Bond may create pressure on the state budget
-Insufficient resource in the stabilization fund makes the economy sensitive to commodity price volatility
-Imbalance of financial sector, prevailing banking sector in the financial system that is not catching up with the economic growth might create an obstacle
-Supportive policy for stock market, legal environment, lack of service, and service of professional firms are not being sufficient
-There is a need for macro-economic development model and improvement of coherency between state agencies and their cooperation
-Utilization of macro-economic tools such as national accounts, inter-branch accounts, balance of payment indicators, GNI, and CCI on policy making process is not sufficient.
-National mechanism to prevent currency crisis is needed.
-Due to coherency between budget and monetary policy it may look as if the policy is anti-cyclical. However, in reality both are implementing expansion policies that heats up the economy, creating a risk of instability.
-Budgetary expansion policy is weakening the monetary policy that is targeting the inflation.
-Separate planning of investment and maintenance budget is making it hard to have a consolidated budget. Dividing responsibilities between Ministry of Finance and Ministry of Economic Development might had negative effect.
-Because the Mongolian strategic planning and policy is not coherent with state investment plan, the policy is being aimed at only for satisfying the election ‘promises’.
-Support from government to private sector is unclear, state interference is high, and bureaucracy is a major issue.
-Policy on developing SMEs in unclear, implementation is insufficient, financing mechanism is inefficient, and also bureaucracy is an issue.
The fifth section of the conclusion covered the other issues such as environment, green development, health, poverty, procurement and government role in economy.