Economy

In search of state policy to overcome recession

2019  |  October   |  023

Economists are worried the economy may just face a deep recession in the coming years. International institutions have started warning that the growth of global economies is slowing due to several factors including the trade war between the US and China. Especially our country, which is heavily dependent on China in terms of economy, may face a major challenge. The GDP growth, which slumped to 1.2 percent in 2016 has now restored to 7.3 percent, however, it remains on the brinks of collapse. Mongolia has been included on the “grey-list” of the most unreliable and uncertain countries and the unique feature of its economy is the fact that it shrinks when the prices of minerals fall and its demand contracts.

Economists are warning that the biggest issue is that Mongolia is not taking action to prevent the risks as the trade war and other downside factors are setting up the stage for a global economic slump. An example is the stretched fiscal deficit on the 2020 budget draft, which is already submitted to the Parliament. The revenue stands at MNT 11.8 trillion, while the expenditure is MNT 14 trillion. Over MNT 2 trillion in deficit. Although they expect the deficit to be recovered by the IMF program, it is no secret that the IMF is doubting the continuation of its program. Of course, the same dream of earning big from the mining sector lingers. Despite the constant suggestions of international financial institutions for the healthy economic and social state of Mongolia, the Parliament and the Cabinet ignore their review and decide against them, further affecting the domestic demand. The most prominent economists in Mongolia advised focusing on internal risks aside from the external ones.

For any investor to enter the market freely, the laws and regulations must be precise and stable

The Bloomberg Economists’ Club highlighted that this is the biggest risk for a country with deep corruption at every stage and the populist decision-makers without a shred of knowledge in the economy. The economists’ club convened in April and held its regular “Business Forum”, holding discussions in “Trade war and Economic Risk”, “Opportunities and Limitations in doing business in Mongolia”, and “Legal Environment for Investing in Mongolia” for potential solutions. 

The forum was attended by the members of the Bloomberg Economists’ Club, the President of the Economic Research Institute B.Tuvshintugs, Chairman of the University of Finance and Economics (UFE) R.Amarjargal, Professor at the UFE J.Delgersaikhan, General Director of the “Deloitte Onch Audit” LLC D.Onchsuren, Economists Sh. Altantsetseg, B.Lkhagvajav, D.Ganbold, Ts.Davaadorj, business representatives, and President of the Mongolian Coal Association J.Zoljargal, President and CEO of Southgobi Sands LLC Ch.Munkhbat.

How is the state of Mongolia’s economic environment?

Mongolia has been talking relentlessly about providing a favorable environment for investment and stability, making policies and planning activities; however, it is yet to yield actual results. The politicians that the public relied upon to fix, improve and support the situation have been making questionable decisions, pressuring the private entities, and will make it impossible for them to do their business peacefully. It will end up scaring away foreign investors. This same process has been repeated for 27 years. There has not been much of an improvement. This situation was touched upon at the “Legal Environment on Investing in Mongolia” by economists, who have also mentioned that “The public deserves the state they entrusted”. For instance, the policy on the mining industry has to be very clear. For any investor to enter the market freely, the laws and regulations must be precise and stable. But after when investors bring in their assets, the Parliament and the Cabinet abruptly change their policies. If there seems to be something wrong, they rush to suspend and strangle their business. Drawing the attention of the entire society, they make investors seem like an oligarchy and briber to the public by tossing and turning all the mishaps to them. Just to make themselves look like a public hero that caught and corrected the wrongdoings. Foreign investors close their business and leave as this situation repeats with every election cycle. The local companies end up with nothing but distress. This is the real image of the current business environment of Mongolia.

Economist B.Lkhagvajav clearly defined the current state of the business environment, saying “The State provides the right to implement a certain job and changes its mind too afterward. That is a document received after negotiating with the State. Our mining companies are not fighting for that license. The law on property protection was not there in the last 27 years, so the top-level politicians split those assets. If the Oyu Tolgoi agreement is implemented quickly and the underground operations are started, the banking system can be saved in the next decade. But certain people from the MPRP including N.Enkhbayar and S.Ganbaatar are offering “free apartments”. This is the so-called deadlock. University Professors and scholars should not be called professionals if they cannot intervene in this.” 

A Nigerian politician called on the Parliament to “not be like Mongolia”. Economist D.Ganbold mentioned that Mongolia has become a bad practice in Nigerian practice. He voiced his position, stating “It is futile to talk about the current economy. Those people who are ignoring the written suggestions of foreign research institutions will not care about the things we talk about today. Also, they are picking up the worst and failed practices of other countries. Let us stop talking about external risks. All the risks exist internally. Who have voiced their opinion when the Parliament members split the small financing pool of the SMEs. They simply gave up. But these good-for-nothing bunches are attempting to amend the Constitution. Not one of them is specialized in their respective industries. They only care about how to raise election money.” Not only do the decision-makers have to have the necessary knowledge and talents, but they must also be accountable. The discussion highlighted the fact that our biggest mistake is not being able to take the State to be accountable for its actions. The third part of the forum covered the opportunities and limitations of doing business in Mongolia. Mongolia’s economy is currently dependent on commodity prices and FX rates. For private entities to create jobs and do business, they must face many headwinds and obstacles. Indeed, people cannot find high-paying jobs with secure social welfare because of it.

A member of economists’ club Ts.Davaadorj gave a reminder to focus on another issue for businesses, remarking “Most companies used to talk about how to raise capital. Now they are worried about how to discipline the company management and build the capacity of the staff. This shows that companies know about their state. They make attempts to solve market issues.” While the President and CEO of Southgobi Sands Ch.Munkhbat highlighted, “There are many favorable things including tax exemptions. To give an example, Mongolia has a double tax treaty with about 40 countries. We have agreements on supporting investment and protecting investments with other countries. In terms of the legal environment, there are certain positive opportunities.” President of the Business School of the NUM N.Enkhbayar addressed, “Businesses have their development pattern. Although our legal environment is unstable with high risks, it is still following its development pattern. Of course, there are many difficulties and challenges. Human resource management has to be focused on. The management structure needs to be correct.”

Regardless, companies have a clear and positive opportunity in terms of the legal environment and are attempting to solve market issues according to their discussions. Only that companies need to be responsible and ethical, and the state policy has to be precise and the legal environment needs to be healthy for fair businesses to develop, reminded the economists.  



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