Ch.Khashchuluun: Shutting down mining is akin to suicide

We spoke with economist Ch.Khashchuluun who is a Ph.D. and Professor of National University of Mongolia, about the influence of the mining sector to the country’s economy. 

-How do you assess the current economic situation?

-The country’s economy is relatively in a pleasant state this year. Domestic investors increased significantly as well as a budget investment due to private sector investment and the approaching election year. This is especially the case in the infrastructure sector. In recent years, consumer spending has surged. So, generally put, key economic indicators including investment and consumption have an upward performance. The annual GDP growth was 7.3 percent by the first half of this year. Q3 results will be available in a few days. Among a general growth in all sectors according to preliminary observations, the industrial sector including mining grew by 15 percent, which we consider as a good performance.

Also, we’ve had a positive budget balance and a stable domestic currency rate. Consumer product price growth was at nine percent by the first nine months, exceeding targeted levels by one percent. However, as food prices go down in fall, growth may fall back down to the targeted eight percent.     

-How did the mining sector impact this positive economic performance?

-Mining indeed played a key role in this good performance. Despite providing five percent of the total workforce, Mongolia’s mining sector brings in one-third of the budget revenues and 90 percent of total export revenues, making it an indispensable part of the economy. It is safe to say the mining and agricultural sectors shoulder the majority of the country’s economy. The mining sector is unique in that it acts as the main source of foreign currency revenues and provides a positive and balancing effect on other sectors.    

Sustainable development of this sector means many other sectors including logistics, finance and food production will join the supply chain and be able to develop to their extents. In other words, it creates a positive impact on the service industry growth.

-Time is coming to discuss next year’s budget and monetary policy. How do you forecast the coming years?

-Although we are talking about the mining sector as a whole, individual minerals and metals sectors including copper, copper or gold have different impacts. As mining commodities are Mongolia’s main exports, they are highly dependent on foreign market conditions and fluctuations. In terms of external factors, it must be noted that the demands for our export products are relatively stable. Although global economic distress indeed creates negative impacts, we have yet to feel it. This year, I believe coal and copper sales are going according to plan. Despite a recent drop in prices, there’s nothing to be alarmed about so far.  
In connection to winter preparations, coal prices tend to go up in the fall. Furthermore, steel demands are stable due to major domestic infrastructure projects undertaken by our neighbor China. This supports the demands of the main steel manufacturing ingredients – coking coal and iron ore, allowing our exports to remain steady. 

Without mining, one third of the state budget revenue would be gone

Gold prices have hiked in the past months. For us, this is creating an interesting case of a positive side-effect of the trade war. Such an increase in gold prices is connected to the policy implemented by China’s Central Bank to increase its gold reserves. On one side, the uncertainty produced by the trade war would inevitably create negative impacts for us. On the other hand, however, we haven’t necessarily experienced a panic situation. Risks are always there. After all, special purpose funds including the Stabilization Fund and the Future Heritage Fund have been established to be prepared for this exact risk. The main revenue of these funds is constituted by tax profits from the mining sector price growth.     

-The purpose of the funds is to equally distribute mining profits among the citizens in the long term. However, high-ranking officials of the government are making short-term decisions and statements that deviate from this purpose. There are even talks of a no-mining policy. What is your take on this?  

-Our economy cannot survive without mining. Tugrug rates would plummet immediately, hundreds of thousand people would be out of a job, foreign currency reserves would diminish and one-third of the state budget revenue would be gone. In other words, three trillion tugrugs of revenue would be thrown out the window straight away. Such a drop in revenues would result in an equal austerity measure.  

Therefore, we must try hard to develop the mining sector instead. As it requires massive resources to develop this sector, the state should implement a policy to support private investments and attract foreign and domestic investors instead of dedicating large amounts of government investment. Such a policy has been in place in the past 20 years and it should remain the same in the future. Issues of environmental pollution and rehabilitation indeed persist. But it’s also possible to resolve them.

Mining is not a new sector that emerged within the past 10 years in Mongolia. Its importance was recognized as far back as the early 20th century and from Bogd Khan’s times when the first mines were established and operated. In the future, the focus must be directed towards effectively spending the revenues it generates. Secondly, mining companies need to be pushed on their social responsibility. Thirdly, instead of fantasizing about developing the country without mining revenues, we must use realistic situation assessment to formulate how to advance the sectoral development and accelerate the country’s economy.  

-What are the opportunities to make mining revenues effective and accessible?

-The key approach is to concentrate the revenues in the budget and finance key social development areas. Otherwise, merely dividing up the cake is not the point. Most importantly, it needs to contribute to the country’s prosperity and create material resources. 

-What are some possible impacts from recent political statements and decisions on the present and future economy?

-Removing one of the two main pillars of the economy is akin to committing suicide. There are numerous examples of countries that created constant economic growth through developing their mining industry. The clearest example is our northern neighbor – Russia. Mining products including oil and natural gas make up 66 percent of its total exports. Likewise, our southern neighbor’s mining sector is immense, being the largest coal producer in the world. We can also mention others such as our coal competitors Australia and Indonesia, or copper competitors Chile and Peru. As an underdeveloped nation, we still have many needs and challenges such as infrastructure and apartment housing accessibility that desperately needs financing from mining. If we manage to allocate it effectively, we have a chance to improve the economy. It depends on us how to take advantage of this opportunity. 

-You mentioned agriculture as one of the pillars of our economy. However, what is the difference between mining? 

-When mining hasn’t yet matured in Mongolia, the only solid sector was agriculture. Similar to mining, agriculture is providing value to the state by utilizing natural resources. While one uses resources that are underground, the latter uses resources on the land. However, agriculture does not provide as much export as expected and almost ceased to generate revenues to the state budget. Herders, for instance, do not pay taxes. Yet, their products have very high prices. The public is critical of this, rightly so. Also, short-term unsustainable agricultural practices have proliferated, such as overgrazing to yield more cashmere. Recent studies have shown that 90 percent of adverse environmental impacts are created by the agricultural sector. 


Шинэ дугаар 2020/5-6

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