Mongolia’s Future Wealth Tied to Mining, Budget Reform

Feb. 21 – Mongolia, a country landlocked between the giants of China and Russia, is seeing its fortunes change as a burgeoning mining sector is putting the country in the driver’s seat of its own development.

Realizing this opportunity, the government of Mongolia, in partnership with the private sector, recently held its first large economic discussion, a gathering that focused on addressing the nation’s problems and proposing solutions to them.

The Mongolia Economic Forum, held in the capital of Ulaanbaatar from February 8-9, was a chance for the country to “discuss and define what the goals are and how to achieve,” said Mongolian Prime Minister Sukhbaatar Batbold.

The primary objective of the forum was to build consensus around defining sustainable economic developmental polices and addressing pressing challenged faced by the country. To this end, one of the main areas the forum focused on was the country’s mining sector, and how, with the coming influx of mining revenue, would the state budget need to be reformed to provide stability and growth.

Mongolia sits on millions of dollars of copper, gold, uranium and coal reserves, a revenue generator that promises to completely change the economics of the country. But this promise of prosperity does not come without its problems or issues. There is concern among many in Mongolia that sudden prosperity may not significantly improve living standards – Nigeria and Venezuela have not seen their respective gross national products grow despite the presence of large oil exports.

Aware of past failures by other countries suddenly confronted by a largess of wealth, the Mongolian government has proposed a law that would save surplus mining revenues when prices are high to stabilize the budget when prices fall. However, a lack of consistency and stability in the application of taxes in the sector has undermined the efforts of the government to effectively develop Mongolia’s mineral resources. At the forum, several NGOs including the World Bank called on the Mongolian government to stabilize the tax regime and enforce environmental laws, saying the country’s polices were “not consistent with international practices.”

Calling the forum a place “to discuss very important issues,” Mongolian President Tsakhia Elbegdorj provided impetus to the discussions by inviting the Peruvian economist Hernando de Soto to deliver a keynote address on the second day of the conference. In the speech, de Soto laid out what he described as five necessities to achieve economic success: rule of law, trust, respect for nature and man and the rule of law, value is not only related to labor but also documentation, and political will.

That political will can be seen in the stance of the prime minister, who called for the country to retain full ownership of the huge coking-coal deposit, Tavan Tolgoi. During the forum, Mr. Batbold told reporters that he favors keeping Tavan Tolgoi under full government control and that ownership of key deposits other than Tavan Tolgoi would be decided on a “case-by-case basis.”

“Contracting mining is widely used in the U.S. and Australia, so this should be useful to Mongolia,” he said.

The prime minister indicated that his recommendation was still under discussion and that a task force would study the proposal before making a recommendation to the Mongolian parliament.

Under a contract mining arrangement, the government would bear the cost of developing Tavan Tolgoi and an outside company would do the extraction work. This approach however would put a lot of strain on the government as the high costs involved could be a challenge for Mongolia’s cash-strapped ministries.

The Mongolian government has targeted US$10 billion to US$15 billion in new mining investment over the next five years, with a priority on building infrastructure, which is seen as a key to stimulating the sector.



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