EBRD in Mongolia - better late than never

By bne IntelliNews July 17, 2008

Ben Aris in Kyiv -

"Mongolia has successfully passed through the transition period and today is developing quickly," Batlsereg Namdag, vice minister for finance, told delegates to May's EBRD annual meeting in Kyiv who attended the Mongolia session.

The room assigned to this country presentation was small, but it was full. Mongolia didn't manage to attract the same level of attention that the Azerbaijan session commanded, where half the would-be listeners were kept out as the room was too full. But then Mongolia is only growing by 10.1% this year compared with Azerbaijan's 25%-plus rate - and it doesn't have oil.

The Mongolia session is a new one for the EBRD, which only opened an office there last year. One of the big topics of conversation at this year's annual meeting was how many more meetings there will be, given that the development bank is now moving to the very fringes of its patch, which is itself indicative that its job is almost done.

Indeed, John Chomel-Doe, the new EBRD head of mission to Mongolia, said the bank was surprised to find how much reform had already taken place in Mongolia, which in many ways is more advanced that many of the other CIS states, and so it doesn't seem that the EBRD has much to do there either.

In 1991, Mongolia was the most backward country in the world. It grasped the nettle in 1996 and elected what is arguably the only true democratic government in the whole of the former Soviet space, and since about 2000, the economy has begun to roar - helped in no small part by the escalating price of commodities. The country put in strong growth of 8.6% between 2005 and 2007, according to the Finance Ministry, and the transition to a market economy has been surprisingly rapid and complete. Today, 80% of GDP is now produced by the private sector, up from the 1990s when private commerce only accounted for 3% of GDP.

To-do list

The government has been steadily working its way down the to-do list of necessary reforms long before the EBRD arrived. The banking sector is stable and growing. Chomel-Doe estimates the Mongolian bank sector to be slightly behind that of Moscow and Southeast Europe in terms of development, but ahead of the other CIS countries. "The banking sector is already very competitive and they have access to talent coming in from outside, but they still need better access to long-term financing and still have a lot of work to do to develop things like retail banking, mortgages, trade financing and the like," Chomel-Doe said.

He singled out the tax system for special praise, calling it "one of the best in Asia." It is a model of the simple system that many CEE countries have adopted: corporate, personal income and VAT are all a flat 10% rate. "In this environment, business has been able to flourish," Chomel-Doe said. "In the last 10 years, the level of foreign investment has increased 10-fold."

Since opening its doors in 2007, the EBRD has made six investments worth $75m and plans to increase that to $100m in 2008. Three of the 2007 investments were equity investment and three debt, though only one was in the mining sector. The Mongolian administration is aware of its addiction to mining and is at least saying the right things about diversification. "A priority is the agricultural sector, especially food processing, small- and medium-sized enterprise, construction and retail," said Namdag. "We have a lot of potential, but we lack the skilled labour force which understands modern technology. But we have launched a programme of training to deal with this issue."

Even so, mining is key to the country's long-term health. Conscious of the size of its two neighbours Russia and China, the government has gone out of its way to ensure that while its giant neighbours are key partners - both for trade and investment - companies from every country have been invited to invest and awarded concessions in the mining sector in order to ensure no one country is in position to bully the government. "We are good friends with both China and Russia and they are important trade partners," says Namdag, "but we are not dependent on them."

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