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Country Report

Mongolia

May 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

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Mongolia 1

Country Report May 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

Mongolia

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook8 Economic forecast

10 The political scene

14 Economic policy

16 The domestic economy16 Economic trends16 Manufacturing16 Agriculture17 Mining18 Oil and gas18 Other services

19 Foreign trade and payments

List of tables13 Mongolia: central government budget, Jan-Mar 200416 Mongolia: livestock numbers 2003

List of figures6 Mongolia: foreign reserves6 Mongolia: bank rate10 Mongolia: gross domestic product10 Mongolia: consumer price inflation16 Mongolia: GDP growth

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2 Mongolia


MongoliaMay 2004

Summary

The ruling Mongolian People's Revolutionary Party (MPRP) is expected to win afurther term in government in the June 27th 2004 general election. Oppositionparties have united to challenge the MPRP, but divisions within the oppositionwill make this harder. The MPRP can point to rising economic growth during itsterm in office, but will find it harder to deal with questions about thepersistence of poverty. Economic growth will remain strong over the forecastperiod, boosted by the mining sector in particular.

The Democratic Party (DP), the Mongolian Democratic New Socialist Party(MDNSP) and the Civil Will-Republican Party (CWRP) have combined to set upthe Motherland-Democratic Coalition, which will highlight welfare issues in theupcoming election. The Republican wing of the CWRP has, however, left theparty to mount a separate challenge in the June poll. Hunger strikers protestingthe loss of funds placed with an organisation that promised to find them jobsin Japan will be helped by the Ministry of Labour and Social Welfare to findemployment in Taiwan. The London-based human rights non-governmentalorganisation, Amnesty International, has criticised human rights in Mongolia.The prime minister, Nambaryn Enkhbayar, has visited India, and the Russianforeign minister, Igor Ivanov, has paid a visit to Mongolia.

Mongolia recorded a sharp rise in tax collections in the first quarter of 2004,benefiting from strong economic growth. As a result, the fiscal balance recordeda surplus for the quarter. The privatisation of Neftimport Concern (NIC,Mongolia's main oil importer) has been delayed further. A series of state assetsare slated for privatisation this year.

Consumer price inflation rose to 6.2% year on year in March owing to a sharprise in food prices. Industrial production is rising. Agriculture is rebounding andlivestock numbers are rising as a result, but Mongolia will still need to sourcemuch of its domestic wheat requirement abroad. A plan to open mining inprotected areas has been put on hold following objections by the WorldwideFund for Nature and the UN Development Programme. An oil terminal on thesouthern border will aid imports from China.

Mongolia's exports rose by 1.7% year on year in the first quarter of 2004, but theincrease in imports was 10.8%. The tourism sector will rebound this year ashigh-spending Japanese tourists return.

Editors: David Webb (editor); Graham Richardson (consulting editor)Editorial closing date: April 30th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

Mongolia 3


Political structure

Mongolia

Republic

The cabinet is made up of members of the ruling Mongolian People's Revolutionary Party(MPRP)

The president, Natsagiin Bagabandi

A single-chamber parliament, the State Great Khural, which has 76 members, of whom 72are members of the MPRP

July 2nd 2000 (parliamentary) and May 20th 2001 (presidential); the next elections aredue on June 27th 2004 (parliamentary) and by May 2005 (presidential)

Government: MPRP. Opposition: Democratic Party (DP), Civil Will-Republican Party(CWRP), Mongolian Democratic New Socialist Party (MDNSP)

Prime minister Nambaryn Enkhbayar

Defence Jugderdemidiin GurragchaaEducation, culture & science Ayurzanyn TsanjidEnvironment Ulambayaryn BarsboldFinance & economy Chultemiin UlaanFood & agriculture Darjaagiin NasanjargalForeign affairs Luvsangiin ErdenechuluunHealth Pagvajavyn NyamdavaaIndustry & trade Chimidzorigiin GanzorigInfrastructure Byambyn JigjidJustice & internal affairs Tsendiin NyamdorjSocial welfare & labour Shiilegiin BatbayarWithout portfolio Olziisaikhany Enkhtuvshin

Ochirbatyn Chuluunbat

Sanjbegziin Tomor-Ochir

Key ministers

Official name

Form of state

The executive

Head of state

National legislature

National elections

Main political organisations

Central bank governor

Chairman of the State GreatKhural (national assembly)

4 Mongolia


Economic structure

Annual indicatorsa

1999 b 2000b 2001 b 2002b 2003b

GDP at current prices (Tg m)c 925,346 1,018,885 1,115,641 1,231,330 n/aGDP (US$ m)c 905.5 946.3 1,016.3 1,109.0 n/a

Real GDP growth (%)c 3.2 1.1 1.0 4.0 5.5Consumer price inflation (av; %)c 7.6 11.6 8.0 1.6 4.7Population (m) 2.48 2.50 2.53 2.56 n/a

Merchandise exports fob (US$ m) 454.3 535.8 523.2 524.0 n/aMerchandise imports fob (US$ m) 510.7 608.4 623.8 680.2 n/a

Current-account balance (US$ m) -112.2 -156.1 -154.2 -158.0 n/aReserves excl gold (year-end; US$ m) 136.5 178.8 205.7 349.7 236.1Total external debt (US$ m)d 914.1 896.4 885.0 n/a n/a

Exchange rate (av; Tg:US$) 1,021.9 1,076.7 1,097.7 1,110.3 1,146.5

a IMF, International Financial Statistics, unless otherwise indicated. b Actual. c Asian Development Bank, Asian Development Outlook, 2001.d World Bank, Global Development Finance.

Main origins of gross domestic product 2002a % of total Components of gross domestic expenditure 2002a % of totalAgriculture, hunting & forestry 20.6 Private consumption 77.5

Trade & services 27.6 Government consumption 18.4Mining & quarrying 8.6 Gross fixed capital formation 23.9

Transport, storage & communications 14.0 Change in stocks 5.1Manufacturing 9.5 Net exports of goods & services -16.1Electricity, gas & water 3.3 Statistical discrepancy -8.8

Principal exports 2002a US$ m Principal imports 2002a US$ mMinerals 173.4 Machinery & mechanical appliances 134.4Textiles 145.4 Mineral products 132.7

Main destinations of exports 2002a % of total Main origins of imports 2002a % of totalChina 47.4 Russia 33.6

US 32.5 China 19.7Russia 8.6 South Korea 11.9Italy 2.1 US 9.5

Japan 1.5 Japan 4.2UK 1.0 Germany 3.6

a Asian Development Bank.

Mongolia 5


Quarterly indicators2002 20031 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

Financial indicatorsExchange rate Tg:US$ (av) 1,103.13 1,103.78 1,112.55 1,121.77 1,134.43 1,133.28 1,151.81 1,166.65Exchange rate Tg:US$ (end-period) 1,104.00 1,105.00 1,117.00 1,125.00 1,140.00 1,139.00 1,159.00 1,168.00Bank rate (end-period; %) 11.4 11.5 13.0 9.9 3.9 15.5 11.3 11.5Deposit rate (end-period; %) 13.2 12.9 12.8 14.0 14.0 14.0 14.0 14.0Lending rate (end-period; %) 29.9 28.5 27.9 27.3 26.3 25.5 27.4 26.1M1 (end-period; Tg m) 146,903 187,680 181,056 187,699 180,081 209,388 214,403 212,819M1 (% change, year on year) 18.9 21.0 19.3 20.2 22.6 11.6 18.4 13.4M2 (end-period; Tg m) 345,843 400,950 437,336 470,097 504,219 533,526 609,327 703,282M2 (% change, year on year) 27.9 27.7 37.8 42.0 45.8 33.1 39.3 49.6Foreign reservesReserves excl gold (end-period) 206.60 210.32 256.73 349.65 279.55 293.17 343.18 236.08

Source: IMF, International Financial Statistics.

6 Mongolia


Outlook for 2004-05

Political outlook

As the June 27th 2004 general election approaches, the ruling MongolianPeople's Revolutionary Party (MPRP) appears set to win another term ingovernment. There is no obvious challenger, either within the MPRP or inopposition parties, to the prime minister, Nambaryn Enkhbayar, who continuesto be viewed as the most able politician. However, the opposition parties couldincrease their tally of seats from the current four (out of total of 76). The mainopposition parties—the Democratic Party (DP), the Mongolian Democratic NewSocialist Party (MDNSP) and the Civil Will-Republican Party (CWRP)—arecontesting the poll together as the Motherland-Democratic Coalition. However,differences within the opposition will hamper opposition attempts to offer aviable alternative to the MPRP. At least 11 parties will take part in the election,including a new party known as the National Women's United Party. TheRepublican faction of the CWRP has withdrawn from the party to mount aseparate electoral challenge in June.

The opposition coalition has already declared its electoral platform and will beattacking the present government's record on social welfare. The MPRP, for itspart, is likely to appeal to the electorate's desire for political stability. It willdraw attention to the achievements of the past four years: economic growth,single-figure inflation, a lowering of the budget deficit—a budget surplus wasrecorded in the first quarter of 2004—growth in manufacturing, the substantialaid packages and increased foreign direct investment (FDI) received since 2000that indicate confidence in Mongolia abroad, and confidence at home in astronger financial sector. The present government also secured late in 2003 thecancellation of 98% of Mongolia's Soviet-era rouble debt. However, the MPRPwill have to explain why poverty affecting one-third of the population haschanged little since the present government came to power in 2000 and whyunemployment is still a significant problem.

State control of the media and in particular the radio and television will also bechallenged in the election campaign. Successive governments have promised tofree up the broadcasting services. A draft law on public radio and televisionservices to replace the 1992 law has been under discussion over the past year.Non-governmental organisations and others have criticised the amount ofpolitical influence that the earlier draft would have permitted the governmentthrough selection of the board of governors and control of funding. They wishto see greater involvement by civil society in the running of the service. Thelatest draft does not seem to offer much change in this respect, since the primeminister would appoint nine of the governors and at present there is noadequate source of public financing such as a user's licence fee. The bill isunlikely to be approved before the election.

The focus of Mongolia's foreign policy is on regional and international stabilityand the struggle against terrorism. These issues were raised during the visit ofMr Enkhbayar to India in January (see The political scene). Russia is also keen

International relations

Domestic politics

Mongolia 7


to strengthen co-operation with Mongolia on regional security as indicated bythe visit of the Russian foreign minister, Igor Ivanov, to the Mongolian capital,Ulaanbaatar, in January and that of the chief of the Russian security council,Vladimir Rushailo, in March. Since Russia cancelled most of Mongolia's pre-1991debt in December 2003, relations between the two neighbours have beenpositive and Mongolia was assured by Mr Ivanov that Russia would supportsome involvement by Mongolia in the Shanghai Co-operation Organisation(which includes China, Russia and some Central Asian states). Mongolia is alsomaking an active contribution to peacekeeping efforts in the Middle East.Eighty-seven medical staff and engineers were sent in August 2003 to help torebuild Iraq. They completed their duties in February 2004 and were replacedby a second contingent of patrol troops in March. A team of military instructorsis also serving in Afghanistan. Although international security is a vital andlegitimate interest of Mongolia, active involvement brings other benefits to thecountry. Mongolia is brought into the spotlight within the internationalcommunity and stakes its claim to be seen as a genuine political partner ininternational affairs.

Economic forecast

The agreement on the cancellation of 98% of Mongolia's Rb11.4bn debt owed tothe former Soviet Union was finalised during Mr Enkhbayar's visit to Moscowin July 2003. Mongolia is to pay just US$250m to Russia (indicating that the totaldebt has been valued at US$12.5bn). US$150m will come from foreign-exchangereserves and the remainder from the sale of Treasury bills, which will mature atthe end of 2004. A Canadian mining company, Ivanhoe, has bought US$50m ofthese bills. Ivanhoe has extensive copper and gold mining concessions inOmnogov aimag. The implications of the debt settlement could be substantial.It removes a considerable financial burden from Mongolia and is likely to raiseconfidence among foreign companies, who previously considered the financialrisk of investing in Mongolia too high. Some opposition parties have criticisedthe arrangement for acknowledging the Soviet-era debt. However, theagreement will make it easier for Mongolia to manage post-1991 debts, whichamount to more than US$1bn, but are mostly concessional.

Strong revenue collections in March allowed Mongolia to record a budgetsurplus in the first quarter of 2004. Over the year as a whole, the governmentwill keep a close watch on its spending to keep the budget deficit within 6% ofGDP, as advised by the IMF. It has cut some business taxes. However, suchtaxes are still high in Mongolia, and the cuts are intended to boost productionand discourage tax avoidance. Pensions and other benefits will also rise in2004, although the IMF will be consulted over a proposed increase in statewages and salaries. Additional revenue will come from privatisation. The saleof the country's main oil importer, Neftimport Concern (NIC), has beendelayed again, but should be completed this year. Other companies on offer in2004 include the state airline, MIAT, shares in a Mongolian-Russian fluorspar-producing joint venture, Mongolrostsvetmet, and the Gobi Cashmere factory,the sale of which collapsed on a technicality in December 2003.

Policy trends

8 Mongolia


The Economist Intelligence Unit forecasts that real GDP growth will pick up toaround 6% a year in 2004-05. Growth in the manufacturing sector may havepeaked, but mining production will improve. The decline in the herding sectorwas arrested in 2003, and the improvement will continue in 2004, with theadded benefit of upgraded rural infrastructure supported by an AsianDevelopment Bank (ADB) rural development programme and the improvementof water resources. Increases in arable production are less certain, as the sectorneeds restructuring and investment, and is also vulnerable to adverse weatherconditions during the short, 100-day growing season.

After about 18 months of growth the manufacturing sector may have reached aplateau beyond which it will be difficult to proceed for the time being. At theMongolian Private Sector Development workshop held in the Chinggis KhaanHotel in Ulaan Baatar on January 28th 2004 it was suggested that job creationand labour productivity had declined in manufacturing. However, the prospectsfor mining, especially copper production, in 2004 are good. Mongolia's largesttaxpayer, the copper-molybdenum joint venture, Erdenet, expects to have agood year. There was uncertainty in 2003 before the joint-venture agreementwas renewed in July. Now the company's future is clearer. Substantial sums ofmoney owed to it have been repaid and prices for copper are going up. A newprocessing plant for molybdenum is due to go into operation soon and Erdenetwill be hoping to sell more of the processed product and earn more than itdoes now from exports of semi-processed molybdenum. Little change inagricultural production is expected in the next year. The livestock economy,which has contracted over the last three years, is now beginning to pick up.However, sustainable development of arable farming and food security is stillsome way off as a further fall in the grain harvest is forecast for 2004.Government initiatives to support agriculture and food production are neithersubstantial nor based on clear policies, and so short-term improvements arelikely to be modest.

Mongolia's foreign trade deficit remains high, and this is unlikely to change inthe near future. There is potential for increased trading with neighbours, Chinaand Russia, and in the longer term also with other nearby countries, such asKazakhstan and Kyrgyzstan. Even so, China and Siberia are likely to remain thelargest partners, with the former buying mineral products such as copper andoil from Mongolia, and the latter animals and animal products. More touristsare expected to come to Mongolia in 2004 following the recovery from theregional outbreak of Severe Acute Respiratory Syndrome (SARS) in early 2003.

In 2004 Mongolia will be looking both for aid and FDI for medium-termdevelopment. ADB funding for a new stretch of the east-west arterial road(Millennium Road) has been agreed and negotiations for another loan to buildthe road from Choir in Sumber Uul aimag to the Chinese border is under way.Mongolia will also be seeking support for projects to be implemented underthe Economic Growth Support and Poverty Reduction Strategy (EGSPRS), whichwas published last July. A new round of the regular conference of donors thathas supported Mongolia in its transition to a market economy since 1992 is dueat the end of the year. Mongolia also faces a new external support opportunity

Economic growth

External sector

Mongolia 9


in the new US Millennium Challenge Account (MCA). A total of US$1bn isavailable for bidding in 2004 and Mongolia has been approved as a countrythat may apply. The MCA fund is available to poor countries with income perhead below US$1,415 and a commitment to democracy, development and openmarkets. To some extent, Mongolia's short-term success in attracting aid andFDI will depend on the outcome of the election. However, even if there were tobe a change of government, which seems unlikely, general economic trendsand policies will not change much.

The political scene

The State Great Khural (the Mongolian parliament) opened on April 5th 2004for its final session before the general election on June 27th. Addressingparliament, the president, Natsagiin Bagabandi, the prime minister, NambarynEnkhbayar, and the deputy speaker, Jamsrangiin Byambadorj, spoke positivelyabout recent improvements in industrial production, the business environment,welfare and growth in public-sector wages and pensions. However, the fouropposition members of parliament (MPs) boycotted the opening because theywere not allowed to speak. Instead they published speeches in the press. Theycriticised the government's record in addressing social welfare problemsincluding poverty and unemployment. During the session parliament willdebate bills on water reform, arable farms, science and technology, andmeasures to combat terrorism and AIDS. Laws on income tax, company taxand on the Zamyn-Uud free-trade zone will be amended.

The election law will not be amended during the current session. During theparliamentary recess the ruling Mongolian People's Revolutionary Party (MPRP)proposed two alternative drafts of changes to the election law. Only one of thethree parliamentary opposition parties, the Civil Will-Republican Party (CWRP),responded. However, the CWRP, the Democratic Party (DP) and the MongolianDemocratic New Socialist Party (MDNSP) have all rejected any change.Domestic and foreign non-governmental organisations (NGOs) and

Parliament opens for the lasttime before the election

The election law will not bechanged

10 Mongolia


representatives of civil society were also critical of making changes so close toan election, saying that this would cause confusion among the electorate.

On February 23rd the DP, the MDNSP and the CWRP signed an electioncoalition agreement for the 2004 general election. The CWRP had previouslyheld back from the coalition, which is known as the Motherland-DemocraticCoalition, because it was unhappy about terms and conditions. However, withthe election looming the leader of the CWRP, Sanjaasurengiin Oyun, decidedthat it was better for the main opposition parties to campaign jointly ratherthan separately. Social welfare and economic policy are high on the coalition'scampaign agenda of 21 pledges, which include child allowances, housing, morestate support for students, cuts in import taxes, holding down the price of rawcashmere below Tg30,000 (US$26) per kg, a 50% reduction in unemployment,measures to combat corruption and the setting up of a free broadcastingservice.

The CWRP's leadership problems of December 2003 and January 2004 havebeen resolved for the time being. The party's leader, Dr Oyun, and the vice-chairman, B Jargalsaikhan, who were apparently ousted from their posts inDecember, were back among the party's leaders in January. However, when theCWRP joined the Motherland-Democratic Coalition on February 23rd,Mr Jargalsaikhan kept his promise and withdrew his supporters from theCWRP altogether. His supporters are former members of the Republican Party(RP), which merged with the Civil Will Party in February 2002. On April 15thMr Jargalsaikhan's group was registered with the Supreme Court as the RP andhe intends to fight an independent election campaign.

The minister of justice and internal affairs, Tsendiin Nyamdorj, has been tryingto sue a DP MP, Lamjavyn Gundalai, for libel over claims that the minister hadlinks with Chinese intelligence. In May 2003 Mr Gundalai handed over to thepress documents that were said to prove the charge against Mr Nyamdorj. Inthe course of investigations the police asked parliament to suspendMr Gundalai's membership of parliament since as an MP he cannot facecriminal charges. An extraordinary meeting of parliament was held on January29th. Mr Gundalai did not attend because he was working in his constituencyin Khovsgol at the time. In the event, MPs who favoured Mr Gundalai'ssuspension were thwarted by the standing committee on state structurebecause the police request was not submitted in accordance with theregulations.

The struggle between Mr Nyamdorj and Mr Gundalai is not merely personal,but a struggle between the minister and the DP, of which Mr Gundalai isdeputy leader. On March 1st Mr Nyamdorj filed charges of libel against aformer DP MP and finance minister, Bat-Erdeniin Batbayar, who is widelyknown as Baabar. The new charge is also linked to the revelations of May 2003,when documents held to contain state secrets were published, leading to theimprisonment of a former head of Mongolian intelligence, J Baatar, in autumn2003. Mr Baabar's "crime" is that he commented on the Baatar case and so hasbeen charged with blackening the good name of Mr Nyamdorj. Mr Baabar was

An opposition coalition isforged

The Republicans leave theCWRP

The justice minister tries to suean MP

The justice minister wants tosue a DP member for libel

Mongolia 11


not informed of the March 1st charges until March 24th. He denies that hecalled Mr Nyamdorj a spy. If the case goes to court and he is found guilty,Mr Baabar risks a five-year jail sentence.

A hunger strike staged near the US Embassy by an NGO called the New WaveMovement was brought to an end in February. The demonstrators had paid theZoolon Ekh Association (ZEA) to find them work placements in Japan, butsubsequently lost their money when the Nihonseishinkai Association of Japancancelled its contract with the ZEA. The demonstrators sought compensationfrom the Ministry of Labour and Social Welfare and had also appealed to theconstitutional court in February on the grounds of breach of their constitutionalrights. However, the constitutional court said that the matter was beyond itsjurisdiction. The ministry eventually agreed to help the victims to findalternative employment in Taiwan. The ZEA is bankrupt and its affairs areunder investigation.

Marubeni Hong Kong, a subsidiary of the Marubeni Corporation of Japan,agreed to sell machinery and equipment for cashmere production worthUS$18.8m to Buyan Holding, a local company, in 1996. Buyan failed to keep upthe payments and on August 17th last year Marubeni sued the Mongoliangovernment on the grounds that the former Ministry of Finance (MOF) hadguaranteed the loan. The case was heard on March 12th this year in theCommercial Court in London. Marubeni's claims were not upheld. The deputyminister of justice, Ts Monkh-Erdene, represented the government at thehearing and the former prime minister, Puntsagiin Jasrai, and Mongolianlawyers also attended. In spite of the outcome, the loan still remains to berepaid.

Mongolia was criticised by the London-based human-rights NGO, AmnestyInternational, over the treatment of a Mongolian national who was arrested inFrance and returned to Mongolia in May 2003. Damirangiin Enkhbat had beenjailed several times for serious crimes, but was released on health grounds in1998. He then went to France. According to the Mongolian authorities, he wasrearrested because he is now deemed fit enough to complete his sentence.Amnesty was alerted to the case by Mr Enkhbat's lawyer, L Sanjaasuren, whocomplained that he had not been allowed to see his client who, he claimed,had also been subjected to harsh interrogation techniques and torture in orderto extract confessions. The authorities say that they believe Mr Enkhbat isimplicated in the murder in 1998 of Sanjaasurengiin Zorig, an MP for theMongolian National Democratic Party. The Mongolian government is underpressure from the International Parliamentary Union (IPU) to solve the case.

The Russian foreign minister, Igor Ivanov, paid a two-day visit to Mongolia onJanuary 13th-14th, the first high-level visit since the announcement onDecember 30th last year that Russia had cancelled Mongolia's pre-1991 debt.The Mongolian side expressed appreciation for the cancellation. Mr Ivanov hadtalks with his counterpart, Luvsangiin Erdenechuluun, on security in north-eastAsia and north-east Asian integration. Mr Erdenechuluun said that Mongoliasupported the six-country talks in Beijing to find a solution to the North Korean

Hunger strikers get help to findwork abroad

Marubeni loses its claimagainst the government

Amnesty condemns torture inMongolia

Russia’s foreign minister visitsMongolia

12 Mongolia


nuclear weapons crisis. Other matters discussed were arrangements for thestate visit of Mongolia's president, Natsagiin Bagabandi, to Russia later this yearand the possibility of visa-free travel for Mongolians in Russia. Mr Ivanov saidthat he did not rule out that possibility in the future. A co-operation agreementand a two-year co-operation plan between the two foreign ministries weresigned before Mr Ivanov left.

Mr Enkhbayar paid an official visit to India on January 14th-19th. He hadmeetings with the Indian president, Abdul Kalam, the prime minister, AtalBihari Vajpayee, the defence minister, George Fernandes, and other seniorofficials and politicians. On January 16th India announced a soft loan ofUS$100m to Mongolia for the purchase of Indian goods and for India-linkedprojects. During the visit three co-operation agreements were signed on animalhealth and the dairy sector; space science and technology; and biotechnology.An extradition treaty and a treaty on legal assistance and legal representation incivil and commercial matters were also signed. The two prime ministers issueda joint statement condemning terrorism and giving their support to the six-party talks on security on the Korean peninsula. Mr Enkhbayar also told hishosts that Mongolia supports a permanent seat on the UN Security Council forIndia. He invited Mr Kalam and Mr Vajpayee to visit Mongolia in the nearfuture.

Vladimir Rushailo, the secretary of the Russian Security Council, arrived inMongolia on March 2nd for talks on international and regional security.Mr Rushailo and his counterpart, Dugerjavyn Gotov, signed a co-operation planfor 2004 and 2005 and agreed to co-ordinate further joint actions to strengtheninternational and regional security, in particular in the fight againstinternational terrorism. Also included in Mr Rushailo's delegation wererepresentatives of the Ministry of Economic Development, the MOF and theMinistry of Agriculture. There were talks on bilateral trade and somedocuments were prepared for signing when Mr Bagabandi visits Russia later inthe year.

The first session of the Mongol-Kyrgyz joint intergovernmental committee fortrade and economic, scientific and technical, and cultural co-operation was heldin the Kyrgyz capital, Bishkek, on March 1st. The two sides are seeking toincrease bilateral trade from its present level of US$3m per year. Mongoliahopes to export meat, leather and wool to Kyrgyzstan and to co-operate inagriculture and veterinary services, food processing, and transport andcommunications. Agreements were signed on transport, customs and tourism.

South Korea has decided to take 79,000 immigrant workers from eightcountries, including Mongolia. This is good news for both sides since SouthKorea has a labour shortage and Mongolia has high unemployment. A largenumber of Mongolian nationals are already working illegally in South Korea.However, they will not be employed legally, but expelled. Mongolia also has alabour export agreement with Taiwan and the first applicants are undergoinglanguage and professional training in Ulaanbaatar before applying for positionsin Taiwan, mainly in manufacturing.

The prime minister goes toIndia

Security officials meet inUlaanbaatar

Mongolia will export labour toSouth Korea and Taiwan

Mongolia welcomes theSwedish prime minister

Mongolia seeks co-operationwith Kyrgyzstan

Mongolia 13


Economic policy

Mongolia's general government budget recorded a surplus in the first threemonths of 2004, reflecting strong economic growth owing to a goodperformance by both the agricultural and services sectors in 2003. In the firstquarter tax revenue rose by 47.7% year on year. Revenue from taxes on foreigntrade rose by 72.7%, excise tax receipts by 36% and value-added tax (VAT)receipts by 38% year on year.

Mongolia: central government budget, Jan-Mar 2004(Tg bn)

Total revenue and grants 137.4 Current revenue 136.6Total expenditure and net lending 132.8 Current expenditure 116.9Balance 4.6Current balance 19.7

Source: National Statistical Office.

At the end of February 2004 broad money (M2) recorded a year-on-yearincrease of 47.1% (3.3% month-on-month), reaching Tg721.3bn (US$613m).Foreign-currency reserves stood at US$185.3m at the end of February and netinternational reserves at US$112.3m. Changes in the exchange rate continue tobe small, the togrog falling by 0.4% against the US dollar in February toTg1,176:US$1. Loans to individuals and businesses account for 84.9% of loansoutstanding, which amounted to Tg441.8bn at end-February, a fall of 0.1%compared with end-2003 and an increase of 3.5% compared with end-January.Around 8.7% of loans were non-performing in February. The weighted averageinterest rate in February was 32.4% on domestic-currency loans and 17.8% onforeign-currency loans.

In March the Bank of Mongolia (the central bank) raised the minimum capitalrequirement for commercial banks to Tg4bn. The limit will be increased toTg8bn by March 31st 2006, in line with ongoing structural reforms in thebanking sector under the guidance of the IMF and the World Bank. The centralbank is also reforming its own structure by closing or merging offices in someaimags. This will produce a saving of Tg25m (US$21,000) a year in each caseand is possible because of the centralisation of the banking clearing system inUlaanbaatar and the use of electronic means of transfer of funds. Newbanknotes in Tg500 and Tg1,000 denominations were issued in January. Theywere printed in Germany and incorporate security features to discourageforgeries.

On February 17th the state's 80% holding in Neftimport Concern (NIC), themain oil importer and distributor, was sold to a domestic competitor, Petrovis,for US$8.5m. Petrovis agreed to invest a further US$16m in the company overfive years. NIC had previously been sold in July 2003, but the sale wascancelled in September when the new owner, Eastern Oil Consortium, wasrumoured to have connections with the Russian mafia. Another bid by Olands

Tax income continues to grow

The central bank continues itsreforms

NIC privatisation is delayedagain

Broad money rises rapidly

14 Mongolia


Enterprises, a US company, was rejected because of its technical proposals.Olands protested and demanded that its technical proposals be re-examined byanother expert, and on March 26th the State Property Committee was orderedby the district court to halt proceedings.

The state earned Tg19.3bn from privatisation in 2003 and hopes to earn afurther Tg13.6bn in 2004. The No. 2 and No. 3 power stations in Ulaanbaatar,parts of the electricity distribution network, the Khotol cement company nearUlaanbaatar, shares in companies producing cashmere and metal production,and Mongolia's shares in the Mongol-Czech Metal joint venture and MongolTelecommunications are all listed for privatisation in 2004. Some coal mines,commercial banks and production industries will be prepared for privatisationat a later date.

Bids have been invited from domestic and foreign investors to develop andmanage the Zamyn-Uud free economic zone (FEZ) on the border with China.The deadline for submitting proposals is April 26th. Zamyn-Uud is the mainport of entry to Mongolia from China and the point where the railways of thetwo countries meet. It is to be developed as a centre for industry, commerceand tourism, and infrastructure for this is already being established. A new gasand oil terminal opened recently; construction of a paved road from Choir toZamyn-Uud will begin sometime in May; and on April 9th a bus service wentinto operation between Zamyn-Uud and the Chinese capital, Beijing. Chinesebanks are opening for business in the area and Mongolian and Chinesebankers have agreed that China's renminbi will become the main currency forbusiness in the FEZ.

The domestic economy

Economic trends

The Asian Development Bank (ADB) said at the end of April that Mongolia'sGDP growth would strengthen to 5.8% in 2004 and 6% in 2005, after achieving5.5% in 2003. The ADB pointed to the resolution of Mongolia's Soviet-era roubledebt with Russia as a major factor paving the way for better trade andinvestment relations. Other factors include the steady progress in Mongolia'sprivatisation programme and higher prices for key exports. A 21% fall in tourismin 2003 owing to the regional outbreak of Severe Acute Respiratory Syndrome(SARS) should be reversed this year.

Tg13bn of state assets are to besold in 2004

A free economic zone is put totender

The ADB expects faster growth

Mongolia 15


The consumer price index rose by 6.2% year on year in March and was 4.5%higher than at end-December 2003. The main reason was a 1.9% month-on-month rise in food prices in March. Prices for meat and meat products were upby 3.3%, flour and flour products up by 1.4%, and other foodstuffs up by 1.5%compared with the previous month. Prices of housing, heating and electricitydecreased in March, but there was no change in prices for medical care,clothing and footwear, transport and communications.

In the first two months of 2004 total industrial production grew by 2.6% yearon year to Tg34.1bn (US$29m). Output of the utilities grew by 4.7% in January-February. Mining production rose by 9.6%, but there was a decline inmanufacturing output of 1.2% year on year.

Manufacturing

The Darkhan Iron Works was almost bankrupt when the Mongol-Russian jointventure, Mongolrostsvetmet, took it over in 2001. It was brought back intoprofitability, but is finding it difficult to obtain the scrap iron that it needs for itsoperations. Much scrap is illegally exported to China, and the customsauthorities have not been able to stop this. As a result, the constructionindustry can expect to pay higher prices this year for the metal beams producedat Darkhan.

Agriculture

At the end of 2003 Mongolia had 25.3m head of livestock, an increase of 6.3%year on year. Herds of camels, sheep and goats increased, but horse and cattlenumbers declined year on year. The number of families owning livestockdeclined between 1999 and 2003 by 24,600 to 236,200 as a result of severewinters that cut herd numbers by 10%. However, conditions were better in thefirst three months of 2004. The survival rate for new-born stock was 98.9% andfewer adult animals were lost. In 2004 10.8m livestock are expected to givebirth.

Industrial output remainspositive

There is a shortage of scrapiron

More animals survive thewinter

Food is more expensive in thefirst quarter

16 Mongolia


Mongolia: livestock numbers 2003Camels 255,600Horses 2.0mCattle 1.8m

Sheep 10.7mGoats 10.6m

Source: National Statistical Office.

There were outbreaks of foot-and-mouth disease in parts of Dornogov,Dundgov and Sukhbaatar aimags in the south of Mongolia in February, Marchand April. These were contained by bans on stock movements and vaccinationand a number of animals were slaughtered. The disease is believed to havebeen spread by gazelles migrating from China.

In 2003 only one-third of Mongolia's wheat and flour requirement wasproduced domestically. The shortfall is being made up by imports and aid, andthe government is considering other measures such as a temporary cut in thevalue-added tax (VAT) levied on imported wheat, flour and rice. In February24,500 tonnes of wheat aid donated by the US arrived and was sold to fiveapproved buyers at market prices. The Japanese government is to provideTg100m (US$85,000) of wheat aid. In January 7,000 tonnes of rice was receivedfrom Taiwan and a further 2,000 tonnes are due in April. The income derivedfrom the sales of donated grain and flour will be used to support agriculturaldevelopment projects.

The steady decline in land under crops over the past decade was arrested in2003. However, only 180,000 ha of agricultural land is expected to be cultivatedin 2004, 40,000 ha less than in 2003, and a 20,000-tonne reduction in thewheat harvest is forecast. The reason is that some of the land previouslycultivated by farming companies is being reallocated under the 2002 land laws.However, investment in irrigation in 2004 will boost arable production.

On March 18th 350 delegates, including 60 from ten foreign countries, attendeda government-sponsored forum for investors in the food and agricultural sectorin Ulaanbaatar. Presentations covered opportunities for investment in the sectorand government policy. About 400 foreign companies have invested a total ofUS$74.1m in the sector, one-third of this since 2000, when the presentgovernment came to power. Foreign direct investment (FDI) in the sectoraccounts for 7.4% of total FDI in Mongolia.

Mining

A total of 557.4 kg of gold worth Tg7,242.3m were sold to the Bank of Mongolia(the central bank) in the first two months of 2004. This is 384.7 kg more than inthe same period of 2003. Most of the gold was produced by 21 companies, ofwhich the major operators are Altan Dornod, Mongol Gazar, Mongol Alt, ShijirAlt, Toson Alt and Bumbat.

Foot-and-mouth diseasesaffects the south

Mongolia needs more wheat

The cultivated area will bereduced in 2004

Mongolia wants FDI in foodand agricultural production

Gold sales increase

Mongolia 17


In December 2003 the government passed a resolution to release 3.11m sq kmof land for mining in four protected areas in the Gobi desert. However, theWorldwide Fund for Nature and the UN Development Programme condemnedthe decision, which, they say, not only damages the environment, butcontravenes international conventions to which Mongolia is a party. Theresolution was deferred for further consideration.

In April the Japanese International Co-operation Agency (JICA) published aresearch report on small-scale gold mining. The report highlighted illegalmining and the use of dynamite in strictly protected areas in the Gobi. It alsodiscussed the continued use of mercury by mining companies in Selenge andother northern aimags to extract gold. The Boroo river is particularly polluted.On March 16th the Konrad Adenauer Foundation and the Asia Foundation gavetheir support to a local non-governmental organisation (NGO) campaigning toprotect the Ongi River in Khentii aimag. Although laws exist to protect againstillegal and dangerous mining activity, they are not well implemented.Moreover, families who do the work freelance for some mining companies seeno alternative if they are to make a living.

St Mary's University in Halifax, Canada, has won funding from the CanadianInternational Development Agency (CIDA) for an education project to improvetechnical and managerial capacity in Mongolia's mining sector. The aim of theproject is to promote mining activities that are both environmentally andeconomically stable.

Oil and gas

Mongolia currently imports most of its petroleum from Russia. However, China,Singapore and India could be viable alternative sources in the future. Newfacilities to import and store both gas and petroleum went into operationrecently at Zamyn-Uud on the Chinese border. In the past, the difference in therailway gauges in the two countries has hindered large-scale movements of oil.This has been overcome by constructing two tracks to the terminal, one foreach gauge. Mongolian government provided two-thirds of the funding, and theEU one-third.

On January 29th liquid gas and associated equipment were exempted fromcustoms duty and VAT. This move aims to encourage the use of liquid gas fortransport and small-scale heating to cut pollution.

Other services

In the first quarter of 2004 Mongolia's railways transported 3.3m tonnes offreight and 1.03m passengers, an increase of 11.2% and 10.2% respectively yearon year. There was a 10.7% increase in passenger numbers on international airtransport routes. However, passenger numbers on domestic routes decreased by8.5% and air freight volumes also fell by 4.5% year on year.

Plans for mining in protectedareas are blocked

River pollution by gold minersis condemned

Canadian aid promotesenvironmentally stable mining

An oil terminal could improveimports from the south

Tax cuts encourage the use ofgas as a fuel for transport

Rail transport grows

18 Mongolia


Foreign trade and payments

In the first three months of 2004 Mongolia's foreign trade amounted toUS$316.3m, a rise of 6.8% year on year. Exports increased by 1.7% year on yearto US$131.4m, whereas imports grew by 10.8% year on year to US$184.9m,producing a deficit of US$53.5m. Exports of precious metals, furs, skins andhides, and animals and animal products all registered declines. However,mineral exports increased by US$21.4m year on year. Exports of copperconcentrate, which is the country's most important export commodity, rose involume terms by 14% year on year, but grew by 66.8% in US dollar terms owingto more favourable prices. Imports of machinery, textiles and food increased,but imports of mineral products, vehicles and spares decreased on a year-on-year basis.

A Mongolian exporter, Khatan Suikh, has won a contract to supply 5,000tonnes of tinned beef to South Korea and open up a new market for theindustry. Mongolia's meat export association has made considerable efforts toincrease export sales in recent years, but is hampered by international sanitaryregulations, outbreaks of animal diseases, Russian restrictions on meat importsand the high Russian customs duty. Russia is Mongolia's traditional market,taking about 90% of Mongolia's meat exports.

Income from tourism in the first two months of 2004 rose by 14.4% year onyear, although the number of tourists fell by 7.2%. The increase in tourismrevenue was possible because of the return of Japanese tourists to Mongolia;Japanese visitor arrivals had fallen dramatically in 2003 owing to the East Asianoutbreak of Severe Acute Respiratory Syndrome (SARS). Tourists from Japanspend, on average, US$126 per day in Mongolia, whereas the general average isUS$87 a day.

Exports rise in early 2004

Meat will be exported toSouth Korea

Japanese tourists spend abovethe average in Mongolia

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