Semiannual Report 2010

Transcription

1 1 Semiannual Report 2010

2 Contents 1. Introduction Economic review for the first half of Preparations to the Meeting Overview of the Consultative Council Meeting Follow-up of Recommendations of the Consultative Council Others

3 1. Introduction Since the transition of the country to the market economy, the role of the private sector in the Mongolian economy has never been so important as it is today. On October 6, 2009 the Mongolian government reached a landmark agreement with Ivanhoe Mines and Rio Tinto on Oyu Tolgoi, the world s largest undeveloped copper-gold deposit. With the reserves of 34 million tonnes of copper and 1200 tonnes of gold, this US$4 billion project is set to have a transformational effect to the Mongolian economy. It is expected that multi-billion dollar investments in the mining sector will spur major development and investment opportunities in Mongolia, especially in its South Gobi region, where both Oyu Tolgoi and Tavan Tolgoi, the world s largest untapped coking coal deposit, are located. As a prerequisite to this event and with a view to further develop a sound private sector in Mongolia, the Government of Mongolia together with the European Bank for Reconstruction continued their efforts to support private sector and help to improve the business environment and investment climate in Mongolia by providing direct high-level dialogue with private sector representatives and investors with a view to find effective solutions for current business and investment problems. On 6 February 2007 the Consultative Council on Investment Climate and Private Sector Development in Mongolia (hereinafter to be referred to as Consultative Council ), a consultative and advisory body, was established by the Government Resolution No.40 under the Prime Minister of Mongolia. To ensure the effective participation of all parties, the members of the Consultative Council consist of representatives of the state, the business community and external partners through equal participation in the decision-making process. Rotation of the members of the Council from international organizations and businesses made it possible to broaden their representation in the Council. The Consultative Council meets when necessary, but not less than once in a quarter. So far the Consultative Council convened seven times. The rotational scheme of the members of the Council enabled the participation of various private sector representatives and external partners. The first meeting of the Council focused on evaluation of the current investment climate and attempts to understand the needs and problems of the private sector, and carried out message on responsibilities of a newly established body, which is to support the development of private sector and create favorable investment climate. During the following meetings of the Council, more specific and sector related issues were brought up for discussions by private sector representatives and external partners. The details of followup will be reflected later in the report. The meetings of the Consultative Council were chaired either by the Prime Minister of Mongolia or the First Deputy Prime Minister. Also the First Vice President of EBRD V. Freeman co-chaired the second meeting of the Consultative Council on 23 October 2008 and the Managing Director of the World Bank J.J. Daboub co-chaired the meeting on 11 June 2009, which is an excellent example of harmonization of donor s practices. 3

4 This report will reflect activities and performance of the Consultative Council and its Secretariat in the first half of 2010, in particular the economic situation of Mongolia in the first half of 2010, activities related to the preparation of the meeting of the Consultative Council, overview of the Consultative Council meeting and follow-up of the decision of previous meetings as well as other activities that the Secretariat of the Council was involved during the duration of this report. 2. Economic review for the first half of The improvement in public finances since last year, coupled with buoyant revenue due to the commodity price recovery, has led to growing pressures for increased government spending. Recently approved budget amendments envisage a 4.5 percent of GDP increase in spending on the originally approved 2010 budget, while the Mid-Term Budget Framework (MTBF) for projects another 12.1 percent of GDP increase in spending in The national consumer price index in June, 2010 decreased by 1.5 percent compared to the previous month, increased by 11.4 percent compared to the end of the previous year and the same period of the previous year, respectively. Decrease in national index compared to the previous month was mainly due to the 4.0 percent decrease in food and non-alcoholic beverages. The adoption of, and adherence to, the Fiscal Stability Law which was recently passed by the Parliament will be key in Mongolia s efforts to constrain fiscal spending to prudent and sustainable levels. The new law will also manage the huge revenue inflows expected from the Oyu Tolgoi (OT) mine from 2016 onward. In the first half of 2010, total revenue and grants of General Government budget amounted to bln.tog and total expenditure and net lending amounted to bln.tog, representing a deficit of bln.tog in the General Government budget overall balance, which is down by 93.8 bln.tog compared to the same period of the previous year. Current revenue of General Government amounted to bln.tog and current expenditure reached bln.tog. Thus, the budget current balance was in profit of bln.tog. However, with uncertain domestic and foreign financing conditions, continued fiscal consolidation remains crucial for Mongolia. Trade data shows a sustained recovery in Mongolia s export. This is supported by upward momentum in metal prices and increasing copper and coal imports by China, Mongolia s largest trading partner. The exchange rate against the US dollar has been stable, while foreign exchange reserves are near record levels. 1 Source: Mongolia Quarterly Economic Update World Bank July, 2010 and National Statistical Bulletin 4

5 In the banking sector, total lending growth increased as nominal lending and deposit rates remain high. Loans outstanding at the end of June, 2010 amounted to bln.tog, increased by 29.9 bln.tog or 1.0 percent compared to the end of May 2010, and by bln.tog or 12.6 percent compared to the same period of the previous year. At the end of June, 2010, the non-performing loans over bank system reached bln.tog, decreased by 11.9 bln.tog or 2.9 percent compared to the end of May 2010, and increased by bln.tog or 35.2 percent compared to the same period of the previous year. A bank restructuring strategy was recently drafted by the Bank of Mongolia, reflecting lessons from international experience. In the first half of 2010, the total industrial output increased by 93.8 bln.tog or 12.4 percent to bln.tog (at 2005 constant prices) compared to the same period of the previous year. The increase in the industrial output was mainly due to increase from 5.6 percent to 10.3 times in main industrial products such as coal, crude oil, molybdenum concentrate with 47%, fluor spar concentrate, all types of meat, milk, dairy products, wheat flour, alcoholic beverage, wine, beer, soft drinks, juice, combed down, lime, metal sleeper, copper, metal foundries and steel casting etc. 3. Preparations to the Meeting During the first half of the year, the secretariat team of Consultative Council focused on several issues such as enforcement of law on Application of National Currency, development of meat and cashmere industries. In 2008, Mongolia was hit by global economic and financial crisis. The Government of Mongolia and Bank of Mongolia took emergency measures in order to halt the economic downturn and increase the value of national currency. One of the measures was to amend the Law on Currency, to adopt the law on Application of the National Currency and to enforce legal entities to implement the law. The law prohibited the use of foreign currency for any transactions in Mongolia. Penalties for broken the law was to stop business activity and to transfer all revenues for the state fund. Companies run business in Mongolia criticized that the enforcement of the law makes their price less competitive to compare with foreign suppliers. In addition, the penalty measures are to ranking from light to heavy measures. Business Council represents the private companies and submitted their proposal on amendment to the law. Regarding this issue, the secretariat team met officials of Bank of Mongolia, Financial Regulatory Committee and Ministry of Finance. The officials supported the proposal and were willing to exchange their opinions on this issue during the CCIC meeting. Due to harsh dzud in winter of 2009, a number of livestock was reduced by 6 million. It led to increased meat price in urban areas. However, herdsmen s selling price was notably lower than meat price in urban areas. In addition, Mongolia has many numbers of livestock and opportunity to export meat. Though, it does not fully utilize its chance to export meat due to 5

6 high sanitation requirements of foreign countries. Therefore, the Meat Association of Mongolia raised these issues and proposed to improve meat market and develop meat industry. The secretariat team studied their proposal and discussed with government officials about their proposal several times. There is a strong will to develop cashmere industry based into globally competitive industry as Mongolia, compared to other countries, has fine quality of cashmere. However, lack of state policy on raw cashmere supply, the industry faces challenges to compete with Chinese cashmere industry. The Association of Cashmere Enterprises submitted proposals to reduce the raw cashmere export and state financial support to purchase raw materials. Mrs.Altantsetseg, Director of the Association, met the secretariat team and presented their proposal in detail. Meantime, the issue was discussed at the Government level. The cashmere supply is strongly influenced by seasonal forces, so the Government took an initiative and urgent measure to support the industry. 4. Overview of the Consultative Council Meeting The regular meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia was held on 11 May 2010 at the Ministry of Finance, Ulaanbaatar, Mongolia. The meeting was chaired by H.E.S.Bayartsogt, Finance Minister of Mongolia. It was attended by 12 members of the Consultative Council and 3 observers who were relevant to the discussed topic (Annex 1). The meeting started with opening remarks of H.E.S.Bayartsogt, in which he noted that the Government continues its efforts towards bringing public services into actively developing needs of the private sector. He mentioned that the year 2010 was announced as the year of Business Enabling Environment Reform in order to provide opportunities to do business and make public services easier, faster and more accessible to businesses. H.E.S.Bayartsogt introduced to the members of the Consultative Council the agenda (Annex 2) of the meeting and welcomed Mr.Kh.Amarsaikhan, the Head of Secretariat, to brief on follow-up of recommendations issued by the Council during its previous meetings. Mr.Kh.Amarsaikhan updated the performance of decisions that are being implemented and pointed out that a combination of government agencies and business community is the right balance of forces, which enabled private sector to bring up and resolve its problems and difficulties together with the public organizations rather than tackling them by their own. The briefing of the Mr.Kh.Amarsaikhan was followed by the presentation of Mr.B.Arvinbayar, Head, National Development and Innovation Committee on streamlining the implementation of Action Plan of the Year on Business Enabling Environment Reform. He stated that the Action Plan of Year of Business Enabling Environment Reform includes 131 goals and measures, out of which 105 measures are for reforming doing business 6

7 environment at micro level and 26 measures are for development of infrastructure and stabilization of macro economy. Members of the Consultative Council were informed that measures taken in 1st and 2nd quarters are still under implementation stage and rigorous efforts are needed to achieve objectives set in the Action Plan. Next agenda point was raised by the Mr.B.Enkhbat, COO, Just Group on increasing Mongolian suppliers competitiveness through mitigation of exchange rate risk. Mr.B.Enkhbat stated that in Item No. 4.1 of Article No. 4 of the Law on Conducting Settlement in National Currency, it inscribed that Price of goods and services shall be nominated by national currency only in the territory of Mongolia, transactions shall be executed by it and unless specified otherwise than the provisions of Item No of this law, setting price with foreign currency and tabulation unit, executing transactions, and announcing and advertising are prohibited. if price estimation is meant to nominate the price by tugrug, then, one concept is repeated twice as price estimation by foreign currency and tabulation unit is prohibited since this provision requires the price to be nominated by national currency. Whereas, if price estimation is meant to cover activities including activities of an individual and enterprises to estimate their goods and services economic costs, then, this provision has become provision, which violates their right. Because the price setting would inevitably be accounted by foreign currencies, since most of goods, services, material, and equipments are imported from foreign countries by their currencies. Prohibiting this would become fundamental factor of goods and services to be pushed into the risky situation of currency rate difference. Therefore, what we recommend or comment is that an issue of removing above two words from the law could be discussed with respective institutions and of resolving it via the Parliament and substantially important issue is hiding behind this proposal although it may seems like ordinary thing. Also he proposed to remove an Item No of Article No. 6 of this law or a provision of public servant to demand removing variance, collecting revenue and confiscating it as the state income and to change provisions of Item No into if a legal entity with special permission didn t implement several times of requirements of removing violation imposed by an authority, then measures shall be taken including suspension, invalidation, and confiscation of revenues generated from it into the state fund in accordance to Articles No. 13, 14 of Law on special permission of business activity. Failure to do so, would keep the provision remained with its lack of logical sequences since it inscribed that respective coordinating organization would first immediately confiscate the revenue and then takes measure of imposing light penalty and charge. N.Zoljargal, Deputy Governor of the Bank of Mongolia, commented that the Law on Conducting Settlement in National Currency is in force for more than a year, and although there were requests to review the law, the settlements shall be conducted in national currency. He pointed out that there many companies, which main activities are trade, and these companies, like everywhere in the world, take responsibility of the exchange rate by their own. 7

8 N.Oyunchimeg, Director of the Financial Regulatory Committee, said that the Financial Regulatory Committee, is responsible for implementation of this law and we take relevant measures if there are any problems. Our organization disseminated information on implementation as well as penalties and violations of this law 14 days in advance before it became to force. She stated that there were no significant problems with regard to implementation of the law and this law was issued to prevent tugrug devaluation. Jim Dwyer, Executive Director of The Business Council of Mongolia, commented that BCM Legislative Committee established under the Business Council of Mongolia points out that these provisions may create a situation where unit price of a given product could face approximately 20% risk depending on currency rate difference during 1-6 months of transportation period once a trade agreement is established with an importer in either USD or the currency of another country and this creates a situation that domestic suppliers profitable activity gets suffocated and furthermore could turn out to be a mechanism of supporting Chinese and other foreign suppliers business. At the end of the meeting, H.E.S.Bayartsogt expressed his appreciation for comprehensive presentations, comments and criticisms regarding the discussed subjects, and announced the following recommendation. To advise S.Bayartsogt, Minister of Finance, L.Purevdorj, Governor of the Bank of Mongolia, and D.Bayartsaikhan, Financial Regulatory Committee, to study possible negative aspects of endorsing the Law on Conducting Settlement in National Currency and take measures to prevent from them. Findings and Conclusion of the Meeting. The recommendation of the Consultative Council meeting was agreed by all its members and signed by the Finance Minister and Head of Secretariat. One of the objectives of the Council is to achieve a better understanding and the strengthening of socio-economic partnership for all stakeholders: the government, businesses and development institutions. Hereto, it should be noted that our international partners are committed to support the activities of the Council and its Secretariat. During this and earlier meetings of the Council, international financial institutions and partners expressed their readiness to collaborate with Council and mobilize required human and intellectual resources for the work aimed at improving the business climate. The Consultative Council meetings involved active discussions and were held in friendly as well as business like environment. Presenters received comments, feedback and clarification not only from private sector representatives, but also from representatives of government bodies. This demonstrates that presentations and issues raised touch the interests both private and public sectors. The outcome of the meeting was a push forward, and a signal for further actions to resolve these issues. 8

9 Prior spade work to the meeting, interviews of the Head of Secretariat to newspapers, and dissemination of information concerning the coming regular meeting of the Consultative Council was an important component for a productive and efficient meeting. As a result, the meeting as well as issues raised during the meeting attracted a lot of media and public attention. The follow-up on earlier discussed issues during the Consultative Council meetings, and close cooperation with business associations resulted in more trust from private sector representatives and investment, and bringing up more delicate problems and issues that they are facing in doing business. The Consultative Council proves to be an efficient as well as effective mechanism that serves as a "bridge' between private and public sectors, and in delivering voices of the private sector to earlier unreachable public agencies. 5. Follow-up of Recommendations of the Consultative Council The aim of the Council is to serve as a bridge between the Government of Mongolia and private sector representatives. The following are the major items that were initiated, resolved and enforced through the meetings of the Consultative Council 2. Policy Actions: The Government announced the 2010 as the Year of Business Enabling Environment Reform in Mongolia. It was triggered by the recommendation of Consultative Council to improve Mongolia s business climate. Together with the World Bank a team formulated a Doing Business Reform Action Plan for Mongolia. This plan became a skeleton of the Government Action Plan to be implemented in The Cabinet approved a Government Policy to be pursued towards Public Private Partnership by its resolution of the Consultative Council on 15 October The Ministry of Roads, Transportation and Urban Development has submitted a draft law to the Cabinet to undertake structural or organizational reforms of the Civil Aviation Authority of Mongolia. Law Enforcement The CCIC issued a resolution on 24 March 2009 to draft the Public-Private Partnership law. Following this decision, the Concession Law was submitted and ratified by the Parliament on 4 February All reports of the Secretariats of the Consultative Council in Mongolia are available on the EBRD website as well as on the website of the Consultative Council, respectively: 9

10 It was decided to establish a single electronic window for foreign trade facilitation, which will significantly reduce the processing time and transaction cost of trade operations. On December 2009 the draft law on Credit Information Bureau has been submitted to the Parliament for approval. To stimulate the renewable energy usage, the Government issued a resolution to subsidise the tariffs of wind energy. To improve the business climate by making it easier and less costly for businesses to comply with relevant legal and regulatory requirements for inspections, the amendments to the Law on State Inspections was made on 10 June Following this legislative change, the number of inspections regulations will be drastically cut using a guillotine method by the end of the year. Based on the decision of the Ministry of Roads, Transportation and Urban Development, the State Property Committee and Civil Aviation Authority of Mongolia to introduce competition among jet fuel importing and refueling companies, new jet fuel importing and refueling companies entered the market, which enabled competition as well as reduction in fuel prices. Crisis Response To assist the construction sector to overcome financial crisis, it was decided to issue special discount bonds for the developers (approximately USD 140 million). With the specific goal to assist to small and medium enterprises, the Government approved additional budget support to establish a Loan Guarantee Fund. Few donor agencies (GTZ, UNDP, Mercy Corps, etc.) committed additional financial contributions to the Fund. 6. Others The Monthly meeting of the BCM was held Meeting for May of Business Council of Mongolia was held in 24 May in the Khan Bank Theater. Over 65 members attended the meeting. The main discussions were competition issue. Mr. D. Mandakh, Chairman, Authority for Fair Competition and Consumer Protection of Mongolia made the presentation on this issue. The second issue was on MSE listed Doing Business Reform shall be Streamlined On the April 27, 2010, H.E.S.Batbold, Prime Minister of Mongolia, chaired the second meeting of the Council to coordinate activities and measures taken under the Year of Business Enabling Environment Reform. During the meeting, held in the Government House, an implementation of the Action Plan was presented by ministers and heads of relevant agencies. 10

11 The Action Plan of Year of Business Enabling Environment Reform includes 131 goals and measures, out of which 105 measures are for reforming doing business environment at micro level and 26 measures are for development of infrastructure and stabilization of macro economy. Members of the Council informed that measures taken in 1st and 2 nd quarters are still under implementation stage. In his closing remarks H.E.S.Batbold stated that it was general meeting. Next time, we should not wait for gathering with an attendance of all members. In order to improve business environment of specific sector or area such as mining, agriculture, state inspection and customs, relevant organizations should hold a meeting every week and discuss implementation of policy and plan of this year. Agenda of the regular meeting and outcome of the meeting should be introduced to the Chairman of the Council. A draft of National Program for Development of Corporate Governance was discussed Discussion of a draft of National Program for Development of Corporate Governance was held in the National Development and Innovation Committee. During the discussion, S.Tulga, Deputy Director of Security Department of Financial Regulatory Committee, introduced Codex of Corporate Governance and Mr.Kh.Ganbaatar, Executive Director, Employers Federation of Mongolia, presented a concept of the Draft of National Program of Corporate Governance. Representatives of Mongolian Stock Exchange, Bank of Mongolia, Ministry of Finance, Mongolian National Chamber of Commerce and Industry, researchers and scientists, NGO and private sector attended the open discussion. In Mongolia, the Codex of Corporate Governance was adopted by decision of Financial. Regulatory Committee on 26 December Although the first draft of the National Program for Corporate Governance, which was developed by Employers Association in April, 2009, was supported by line ministries, it has not been approved by the Government. The adoption of the Corporate Governance Program and its enforcement is vital to increase accountability and responsibility of companies, protect investors and other stakeholders right and attract foreign investment to Mongolia. Therefore, representatives encouraged to finalize the draft of the Program and supported the National Development and Innovation Committee to submit the final draft to the Cabinet Meeting under the framework of Year of Business Enabling Environment Reform in

12 The Progress of Implementation of the Program to Overcome Economic and Financial Crisis in Mongolia The Development Policy and Strategic Planning Department of the National Development and Innovation Committee reviewed the implementation progress of the program to overcome economic and financial crisis and presented to the Deputy Prime Minister reviews and preliminary results of the last year as well as issues that need a particular attention in As a result of the action to obtain required funds to overcome the financial crisis with the support of International Financial Organizations, the Government raised funds of over USD 300 million or 450 billion tugrugs and financed projects directed for recovery from financial crisis. Source: NDIC A Memorandum to Foster Public, Private Partnership in Taxation Sector is Signed Both public and private sectors reached a common understanding that it is possible to develop the country and resolve intricate issues by joint efforts of both side, and hence the year 2010 was announced a Year of Developing Public, Private Relations. Within the framework of this year, the officials of the Mongolian Employer s Federation and General Taxation Office signed a Memorandum of Cooperation. The documents highlighted issues on implementation of package of laws on taxation, dissemination of information on activities and services of the General Taxation Office undertaken within the scope of program on transparent reforms of taxation service, implementation of the principle of open and transparent information availability, resolving by joint efforts the difficulties and problems faced by tax payers, incorporating proposal of businesses in taxation laws and regulations and enabling favorable business environment. 12

13 Annex 1 10 May 2010, Meeting Room, Ministry of Finance List of Members Meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia Members of the Consultative Council 1. S.Bayartsogt Minister of Finance, Vice Chairman of the Consultative Council 2. L.Purevdorj Governor, Bank of Mongolia 3. Kh.Amarsaikhan Head of Secretariat 4. B.Batjargal Director, Ministry of Finance 5. N.Oyunchimeg Director, Financial Regulatory Committee 6. D.Delgersaikhan Head of Division, Bank of Mongolia 7. B.Enkhbat COO, Just Group 8. B.Bayar Director, ELC Law Firm Representatives of Bilateral and Multilateral Organizations 9. Arshad M.Sayed Country Manager & Resident Representative, the World Bank 10. Adrian H. Ruthenberg Country Director, ADB 11. David Lawrence Program Manager, IFC 12. Jim Dwyer Executive Director, The Business Council of Mongolia Observers 1. B.Khurenbaatar Director, Ministry of Finance 2. G.Ulziijargal Senior Officer, Ministry of Finance 3. Z.Shagdarsuren Executive Director, Mongolian Bankers Association 13

14 Annex 2 AGENDA Meeting of the Consultative Council on Investment Climate and Private Sector Development in Mongolia Date: 11 May 2010 Venue: Meeting Room, Ministry of Finance Chairman: H.E.S.Bayartsogt, Finance Minister 15:00~15:05 Opening remarks H.E.S.Bayartsogt, Minister of Finance 15:05~15:15 Follow-up of Decisions of Previous CCIC Meetings Mr.Kh.Amarsaikhan, Head of Secretariat 15:15~15:25 Streamlining the Implementation of Action Plan of the Year on Business Enabling Environment B.Arvinbayar, Head, National Development and Innovation Committee 15:25~15:35 Discussions 15:35~15:45 Increasing Mongolian Suppliers Competitiveness through Mitigation of Exchange Rate Risk Mr.B.Enkhbat, COO, Just Group 15:45~15:55 Discussions 15:55~16:10 Wrap-up and Closing Remarks H.E.S.Bayartsogt, Minister of Finance 14