“Mongolia’s external partners, although strongly applauding the Government’s excellent progress during recent months in addressing its economic crisis and implementing reforms, nevertheless reiterated the need to maintain momentum by using this opportunity to put reforms in place that will enable the country to better withstand future economic shocks,” said Arshad Sayed, the World Bank’s Country Manager and Resident Representative in Mongolia said while summarizing the October 30, 2009 External Partners Technical Meeting.

Mongolia’s new PM S. Batbold at the External Partners Technical Meeting

Mongolia’s new Prime Minister S. Batbold, on opening the meeting confirmed his full support of the Government’s Economic Reform Program.

During twice-yearly Technical Meeting, the Cabinet and Central Bank presented three key reform areas to the country’s external partners–in the social welfare, mining, banking sectors. These are key pillars on the Government’s reform agenda and, although important steps are being taken, major challenges remain for which further assistance is needed.

The Mongolian Government has drafted various new fiscal laws, including: a Fiscal Stability Law and an Integrated Budget Law to form the legal basis to put appropriate systems in place. The country’s partners noted the importance of having such regulations, particularly the need to de-link annual budget expenditure from variable incoming revenue in order to avoid recent years’ pro-cyclical spending that, in turn, contributed to the recent boom-and-bust magnitude, and the importance of maintaining a flexible exchange rate regime. The IMF and World Bank expect to continue actively supporting these reforms.

An IMF delegate noted that Mongolia’s economy has stabilized quickly, that the Government has managed to keep its deficit in check, that inflation is down to manageable levels, and that foreign currency reserves have been shorn up.

The rapidly rising Social Welfare payments during recent years, with concomitant increases in Budget expenditure, had largely been based on mining revenue income. Although the current level of expenditure is high compared to available budget resources, it is being regulated by several different laws with benefits being transferred through multiple channels. Comparing expenditure levels, T. Gandi the Social Welfare and Labor Minister, noted that these resources’ effectiveness is low, particularly in successfully reducing poverty. The Government is, therefore, pursuing a number of reforms seeking to consolidate multiple social welfare benefits and allowances and to move from universal to targeted benefits at household levels with greater emphasis on poverty reduction. To do this, the Government is seeking to streamline the present legal regime and to consolidate the present multiple programs and allowances –including allowances for households with numerous children, for poor households, for emergency assistance, and set up pilot schemes to test different approaches. The Government expects to implement these reforms in stages. Ms. Gandi thanked the ADB for actively supporting the reform program, with some assistance from the World Bank, but noted that further work is needed for public outreaches, to develop a targeting system, as well as the challenges of budgeting for emergency assistance allowances.

Conference participants urged the Government to maintain its reform momentum, and Finance Minister S. Bayartsogt, noted that the joint Government provides a major opportunity to push reforms through. External partners also stressed the need to focus on the poor and disadvantaged, also expressing concern about the current programs’ financial sustainability and, in particular, about the Government’s promised wealth distribution. Minister T. Gandi noted that benefits should not be based on cash, and that benefits need to be directed to people who have not benefited adequately from the current system, especially including informal workers and herders who have not contributed to the existing Social Insurance Fund. The partners stressed the need to have new programs completed and ready-to roll before stopping or consolidating existing reforms.

Referring to the mining sector, the partners congratulated the Government on the recently signed Oyu Tolgoi (OT) Agreement. Linked to the OT Agreement approval the, Minerals and Energy Minister D. Zorigt spoke about the recent progress made, including: the cancellation of windfall profits’ tax; revision of tax laws and regulations for losses carried forward; and amendments to water and road laws. The Minister helpfully compared the mining sector’s huge expectations and its major opportunities to the major challenges faced by the Government–to improve research, put infrastructure in place, improve competitiveness and attract additional investment. He also highlighted the diverse opinions in regard to creating and distributing proceeds from the country’s mineral wealth, and the need to reach consensus thereon.

Referring to the banking sector, it was noted that the economic crisis had revealed underlying problems in Mongolia’s banking sector and these will require both strong action to improve transparency and comprehensive reforms and restructuring to maintain a strong financial sector. Although Mongolia’s financial sector had limited exposure to the financial institutions and instruments at the center of the global crisis, it has been hard hit by the global downturn. Nevertheless, a key take-away point is that the crisis has uncovered significant problems in the financial sector, rather than caused them. The current problems are rooted in the rapid credit growth experienced by Mongolia during its boom years, and these problems reveal deficiencies in banking supervision and corporate governance that need to be addressed aggressively so as to avoid future banking crises. While noting the positive steps taken by the BoM during recent months, the partners again reiterated the need for prompt action to quickly and clearly assess these problems’ extent; something that can only be addressed with diagnostic audits and assessments, as have already been done for Anod and will now be undertaken at all the other banks.

Then, once the problems are clear, prompt and appropriate action will be needed. They noted that delays would be costly not only for the banking sector but to Mongolia’s economy as a whole. Also to be borne in mind is the critical ‘window of opportunity’ to put reforms in place to prevent and/ or mitigate future banking crises.

Some participants agreed with BoM’s plans to conduct diagnostic audits and assessments across the banking sector so as to uncover current problems’ full extent and to move forward with plans to restructure and strengthen the banking sector. They noted the importance of ensuring adherence to an appropriate monetary policy and strict financial regulations and oversight in order to maintain a strong and healthy financial sector.

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