The Economic Recovery Program of Mongolia 2016-2020 (“Recovery Program”)

The Recovery Program (initially the “Program to Overcome Economic Difficulties and Achieve Economic Stabilization”) was approved by Parliament Resolution No.71 dated 24th of November 2016 and the draft of this Resolution was initially submitted to Parliament on the 27th of October 2016. The Recovery Program was produced as part of the Action Plan of the Government 2016-2020 which provided for the enactment of a program to overcome economic difficulties in the short term as well as to stabilize the economy. According to the introductory document submitted with the draft Resolution, in recent years the economy and the budget conditions of Mongolia have been strained, global commodity prices have dropped, the balance of payments has faced a deficit and economic growth has decreased in the first half of 2016 to 1.4%, whilst unemployment increased to 10.4%. Inaction in these past years in relation to modifying the budget policy and the structure of the banking and finance sectors have resulted in an increase in the risks of loans and foreign debts, lack of budget stability, depletion of foreign reserves and credit quality deterioration. Therefore, in order to facilitate the Action Plan of the Government 2016-2020, and in order to achieve economic growth and stability, policies must be adjusted.

The program is divided into two main strategies, namely the 1) “Implementation of policy to stabilize the macro economy” and the 2) “Restructuring of the economy in the medium term to facilitate sustainable growth and alleviate debt pressures”:

Strategy 1:

1.1 implement policy aimed at decreasing the budget deficit and maintaining its financial stability.

This aspect of the Strategy will involve expanding the sources of income of the budget, offering tax incentives to domestic producers, particularly business supplying workplaces who will be supported with loan policies. Another aspect of this Strategy is to enforce budgetary discipline and shift to a “saving mode” in accordance with budget norms and normative. A “National Savings” program will be developed and the efficiency of the expenditure of the Rural Development Fund will be analyzed and made transparent for citizens. The trading of Government Bonds will be regularized, take place through the Stock Exchange and the involvement of broker companies will be increased. The domestic market will be protected through tariff and non-tariff based measures, policy measures, and a legal environment will be introduced to encourage domestic spending. The access to the stock market will be increased and past, present concession projects will be evaluated whilst a list of future projects to be implemented will be approved and the methods of its implementation will be clarified for investors.

1.2 implement monetary policy to decrease balance of payments pressures and maintain the stability of inflation rates.

This will involve creating a legal environment for specialized asset management institutions, implementing flexible interest rate policies to support material economic growth and stability, keeping banking system indicators at an appropriate level and stabilizing the foreign currency reserves. The 8% mortgage program will be continued and an “Investment Fund” will also be established to finance large projects supporting economic growth. A national program to support exports will be implemented as well as domestic export producers through the establishment of Export Credit Insurance.

1.3 increase the inflows of foreign currency, and to determine the source of funds to repay foreign debts due in the short term.

The “Gold” program will be renewed and a plan for the repayments and refinancing of bonds of the Government and the Development Bank of Mongolia (DBM) will be produced and implemented. Also in relation to bonds of the Government and the DBM, their contingent liabilities must be researched and action will be taken to prevent possible risks. The legal environment for Foreign Direct Investment must be improved and provide for sustainable operations in the long term. A council to protect the interests of foreign investors is also to be established, the transparency of the bank, financial system is to be improved and research will be carried out into the possibilities of establishing branches of foreign banks. Projects with completed feasibility studies and a confirmed investor are to be supported and its operations intensified.

Strategy 2:

2.1 increase the income of the exports of non-mining sectors and lay out the foundations for economic diversification.

In relation to this part, advanced technology will be introduced to commercial flights, and the number of transit flights will be increased. Trade with neighboring countries will be increased as well as the transit of shipments through the country. In relation to tourism, stop-points and service complexes are to be built along the main travel routes and the legal environment to facilitate Casino activities as well as betting on Horse Racing shall be established. As for the construction sector, domestic production of construction materials to substitute imports will be encouraged through policy measures. In the agriculture sector, the production of food products will be intensified and the use of import substitution products will be encouraged. Furthermore, the “Third Atriin Campaign” will be continued and the demand for grain, potatoes and main vegetables will be fulfilled by domestic production. The “Healthy Livestock” and “Wool” programs will also be newly implemented. As for other sectors, software and hardware for exports purposes will be developed. Measures will also be taken by the State to allow citizens to work abroad for a certain period of time. Indexes such as the credit ratings issued by international organizations, entrepreneurship, competitiveness and ability to attract investment will be improved.

2.2 large projects in order to support material growth of the sector will be started and works to build infrastructure will be intensified.

In relation to this, the Tavantolgoi 450MW power plant project will be implemented and the capacity of the 3rd Thermal Power Plant and the Choibalsan Power Plant by 250MW and 50MW respectively. The development of the Tavantolgoi-Gashuun Sukhait, Nariin Sukhait-Shiveekhuren, Zuunbayan-Khangi, Erdenet-Ovoot, Khuut-Bichigt rail roads will be supported and the construction of the Bogd Khan railroad will begin. In the energy sector, power plants, sub-stations and power transmission lines will be newly constructed or expanded to achieve security and reliability of operations in the sector. The general plan regarding the city to be established alongside the new international airport in ‘Khushig Valley’ needs to be clarified, a general partial plan is to be produced and the urban planning is to begin.

2.3 strengthening of responsible governance for the support of economic growth and the stabilization of the legal environment.

As part of this aspect of the strategy, the legal environment must also be created whereby the budgetary limits stipulated in the State Budget are not to be exceeded in the course of Parliament Sessions. Furthermore, the governance structure of the Central Bank of Mongolia is to be improved to meet international standards, also the independence of the management of the Central Bank is to be strengthened, the implementation of the monetary policy to be improved and in order to clarify the activities of the Central Bank, amendments should be made to the Law on the Central Bank of Mongolia. Also in relation to law, the Law on Currency Regulation is to be restated and amended to improve the regulation of currency flows. The financial market is to be secured, foreseeable risks evaluated, prevented and the Financial Regulatory Commission is to be developed to become a policy coordinated institution through amendments to the Law on the Legal Status of the Financial Regulatory Commission. The relationship of the DBM with the State Budget will be updated, foreseeable risks decreased, the governance of the DBM, its transparency and reporting is to be improved, the scope of its activities to be widened and its independence increased through the restatement and amendment of the Law on the Development Bank of Mongolia, as well as through structural changes. A national program for the development of the financial market of Mongolia until 2025 is to be developed and enacted.

The number of Special Licenses issued by the Government to businesses will be decreased by threefold, duplicate checks by Specialized Inspection, Tax, Social Insurance, Law Enforcement authorities and excessive procedures will be removed. With respect to the renewal of the civil service, a legal environment must be established to ensure that the structure and composition of state authorities are specialized and responsible. As for employment, unemployed citizens will be given an opportunity to find work, through the organization of specialized courses and recruitment for part-time work.

Laws to be Enacted in Priority:

The Resolution also contains an Annex which lists the Laws which must be drafted and enacted in priority. The list includes the Law on the Budget of Mongolia for 2017, which has been subsequently enacted. It also includes the Law on the Framework of the Integrated Budget for 2017 and the Concept of the Budget of Mongolia 2018-2019, as well as the Amendment Law to the Law on Corporate Income Tax. A draft Law on the Assets Management Institution is to be developed, as well as a Draft Amendment Law to the Law on Investment as well as other related laws to improve the investment environment for foreign investors. A Draft Law on Casinos is also to be developed as well as a Draft Law on Horse Racing Betting by the Spring Session of the Parliament of 2017. The list also includes a Draft Amendment Law to the Law on the Central Bank, a Draft Law on the National Payments System, a Draft Restated and Amended Law on Currency Regulation, a Draft Amendment Law on the Legal Status of the Financial Regulatory Commission and a Draft Restated and Amended Law on the Development Bank of Mongolia.

BATTUSHIG.B, Partner (battushig@gtsadvocates.mn, tel+976 331020)

KHULAN.B, Paralegal (khulan@gtsadvocates.mn, tel+976 331020)


gtsadvocates: 16 12 2016