The Mongolian Mining Journal /Sep.2021/
MMJ spoke with the economist N.Enkhbayar about opportunities to expand Mongolia’s economy, global technology trends, and the implementation of major projects as well as the potential to attract foreign direct investment.
How do you see the current state of the Mongolian economy and foreign investment?
In 2010 Mongolia’s economy “rocketed”. At that time, foreign investment exceeded GDP by almost 110 percent. Currently, the foreign investment stands at $2.7 billion, that does not reach even 20 percent of the GDP. Our politicians consider the 5 to 6 percent annual economic growth reported by statistical indicators as good. For us researchers, this is a small number and is considered insignificant for a small economy to grow at this rate for 30 years. Although Southeast Asian countries such as Vietnam, Cambodia, and other former socialist countries started like us, most countries have expanded their economies. At least their market system is fixed.
Over the past 30 years Vietnam’s economy has expanded to 42 times from the level it was in 1990. During the same period, Mongolia’s economy grew by 5.1 times. The only major growth that influenced Mongolia is the mining economy. Thanks to this growth, Mongolia’s GDP reached $7.2 billion in 2010, a 6.3 times increase from 2000, the fastest-growing years. Today, foreign investment is very small in terms of its share and contribution to the country’s GDP. There is a slight increase in investment due to demands in the mining sector. There have been no changes in other economic sectors. Mongolia’s per capita income ranges from $3,800 to $4,000. This indicates that out of 190 countries, we are at the lower level of the middle-income group.
Therefore, 5 to 6 percent growth is not an expansion, but an economy trapped by inertia and stuck at a lower middle-income level. There are many countries like this in Latin America, Africa, and Southeast Asia. Even the Philippines is one of them. Although they build many beautiful houses, citizens’ quality of life does not improve, the education and health indicators and most importantly the poverty level remains the same.
At a time like this, where the global economy is in crisis due to the COVID pandemic, our country’s main source of income comes from exporting minerals. Even in the past and during these difficult times, mining has been the only sector that supports the Mongolian economy. Is there a possibility to change and diversify this economic structure?
In recent years, $7 billion of the $7.5 billion in export revenue has come from mining raw materials, of which $ 2.5 billion comes from coal. The economy is very vulnerable as our income is dependent on the current rise in commodity prices where fluctuations do not dependent on us. Coal export performance will be about twenty million tons in 2021. Next year’s state budget will not meet the target of exporting 42 million tons of coal, and it is doubtful to export even 30 million tons of coal due to limited capacity to increase the volume of coal exports. Our logistical infrastructure capacity is at its peak and will require another 3-4 years to improve. It is unclear when the construction of the Tavan Tolgoi-Gashuunsukhait (TT-GS) railway will be completed. Even if the coal is transported by rail to Gantsmod port, which Chinese company will unload it? How can we transfer bulk cargo from the wide-gauge railway to a narrow-gauge railway? There are many similar questions and challenges. There is no reference or answers to these issues in the statements of the Ministry of Mining and Heavy Industry or the Ministry of Road and Transport Development. Even if the TT-GS railway project is completed, it will not be operational until 2024-2025. But Russian coal and railway projects are rapidly being implemented. The Russian government approved the “Coal Sector Strategy until 2035” in June of 2020. The strategy defines its market as the Asia-Pacific region, which is the target market for Mongolia. Additionally, Russia has issued a policy document on infrastructure development until 2023, which states an expansion of raw material railway capacity. This means that the country has defined its mineral export policy and allocated funds for its implementation. The government will attract private investment and implement the projects jointly. The BAM railway expansion work is going well with a help of Russian defence units. The construction cost of a 340-km railway is 3 billion rubles, less than it is for building a railway in Mongolia. If such railway projects are commissioned in two years, Mongolia’s coal exports will be adversely affected. If we had the right investment policy, today our coal exports would not have been suspended and imported goods would not be stuck at the port of Zamiin-Uud.
Can you describe the relationship between the Mongolian economy and foreign investment?
If Mongolia does not find a new way to change its economy in the future, it will not exceed the current 5 to 6 percent growth rate. We are facing a demand for change that is internationally known as “transforming” or “game-changer”. The core for the development of Mongolia in the coming years is primarily foreign investment, seconded by improving technology, and finally the development of skilled personnel. No “nice” goals can be achieved until we build these three core foundations. The advantage of any foreign investment is money that is followed by a technology. Globally, there are four types of foreign investment: raw materials, markets, capital, and efficiency with network and IOT emerging as a new category. Mongolia relies solely on raw material investments. We need to look for opportunities to attract the other four types of investments.
How do you see the big changes such as “transforming” or “game-changer” in the Mongolian economy?
Today in the world, all new and emerging business sectors are based on advanced technology and not just information technology. In addition to nanotechnology and biotechnology, “quantum computing and quantum computers” are currently attracting global attention, just like the internet and cell phones did in the past. Before 2000, very few people could imagine that cell phones and the Internet could bring such amazing changes. It was like a “fairy tale” for Mongolians to be able to make a video call to someone living and working overseas in a matter of seconds. Just as the internet and cellular revolution emerged to dominate, a technology-based economy and industry will emerge in the future. Our country needs to prepare for these future trends by studying the different types of technologies that can be introduced and used in various sectors. Mongolia was once based on the agriculture sector and it still accounts for 12-15 percent of the economy. However, regardless of future trend and development, one thing is clear: the 8 billion people in this world will continue to consume food. One of the biggest markets is our neighbor China. Some countries already occupy the Chinese commodity market. But there is an opportunity for us to compete in the Chinese market with biotech products and food commodities by 2030. What I am saying is the solution to the supply of food for a minimum of one hundred million people in China is through innovative technology. Let us assume that Mongolia starts exporting “cultivated meat” in 2030. The production requires raw materials (agriculture, animal husbandry), investment (foreign and domestic), technology (bio), human resources who understand the technology, and a stable, reliable energy supply. This means preparing competent professionals in finding and introducing new technologies. Our country’s main mistake was the failure to calculate, plan and develop each stage of the development of any sector. We deviate from the path at some point and select the wrong project without proper research. Mongolia’s current development policy and planning on “paper” is based on mining and agriculture. However, international organizations and researchers are advising us to create a completely new technology-based sector as well. The idea is to start building an economic base prepared to produce new goods that can compete on the world market. This is economic diversification. Foreign investment is essential to make such a change.
Which sectors in Mongolia do you think can attract foreign investment?
First, the geological exploration sector. The mineral sector continues to attract investors. Mongolia has deposits with probable reserves that have not been fully explored. First, we need to move forward the geological exploration work. The results of the exploration work take 10 years. The drilling work initiated by R. Friedland in 2000 yielded results in 2010. Exploration funded by the state budget only determines the probable reserves. When a private company finds the investment capital to complete the very expensive exploratory drilling, there is no guarantee it will lead to proven reserves. In other words, conducting mineral exploration with state funding is highly uncertain, costly, and very risky.
Second is the mining sector, the main sector that currently supports our economy.
Third, the infrastructure sector. There are railway and border projects that can be implemented in partnership with the International Finance Corporation, the Asian Development Bank, and other international organizations. Unfortunately, our country doesn’t fully utilize the Asian Development Bank’s infrastructure projects at the border. Even China, a financially viable country, has received long-term loans from the World Bank to develop its border crossings. Border development is not just Mongolia’s issue. Such projects are strongly supported by international organizations. Mongolia needs to have discussions related to cross-border trade with the Asian Development Bank and the World Bank on a regular basis to get suitable projects.
The post on your web page, were you quote an international report that states “Investing into politically sensitive sectors of the Mongolian economy - such as mining - carries higher risk” was interesting. Can you speak about that?
Every year in July, the US State Department produces Investment Climate Statement, and Mongolia was included in this report for the past decade. The report assesses the country’s investment climate. The report is seen by international investors as an important source. The 2021 report determined that “Mongolia’s investment climate is risky. In particular, the mining sector is risky and very dependent on politics”. This is the first such reference in a decade. This is a very negative signal for the foreign investment environment in our country, which, as you know, in the past appeared on the “grey list” or “blacklist”. Thus, investors would be hesitant to come to our country.
We have been discussing for many years about improving Mongolia’s investment climate and one of the issues is political instability. Where exactly is the problem and why it could not be solved?
As observed, Mongolian government was the most stable during 2000-2004. In those years, our economy grew, some revenue was collected, pensions and salaries were distributed. At that time the government was professional. But since the 2004 parliamentary elections, we’ve made mistakes.
If political leaders had a better vision, they would have chosen the next young successors from technocrats and industry professionals! Unfortunately, business owners have entered politics. Now our country has become, strictly speaking, an “oligarchy” government. Only a small number of wealthy people govern the state. The individual interests of politicians who own businesses will never meet. The type of government we want is either democratic or aristocratic. Didn’t we choose democratic governance so that the government would be handed over in a responsible manner and so there would be a continuation of policies? Very few countries have an aristocratic government that has policies based on knowledge, science, and research. That’s what we should be aiming for. Mongolia made a major change in the 1930s that separated the state and religion. We face the same thing now, just instead of religion now it is business. The interests of the state and private business must be separated. According to the standards of developed countries, people are appointed to high positions because they possess the required knowledge, skills, and experience. If we are talking about the future development of Mongolia, more technocratic individuals should lead in politics. Where are the people to lead the development of our country in 2030-2040? So far no one can tell. And that’s what investors are watching for and observing.
To restore confidence in foreign investment and create a favorable environment, the autumn session of the Parliament will discuss a draft amendment to the Law on Foreign Investment. Currently, there is ongoing work on a draft amendment to the Minerals Law. What are your views on the legal environment for investment?
There are enough laws in our country. Probably about 500-600. Looking at the list of laws to be discussed at the autumn session of the Parliament, I don’t think it is necessary to make amendments to so many laws. For example, the Law on Ethical Responsibility of Civil Servants will set to be discussed. This is nonsense, in fact, the “umbrella” law - the Civil Service Law is still in force. Would having a separate law make civil servants more ethical and responsible? In general, the more laws there are, the more conflicting it becomes. Ensuring the coherence of laws is a complex issue. Our country needs to ensure the stability of fundamental laws. Things that require changes can be managed by government regulations.
To some extent, one project depends on all levels of government. Is the government being able to communicate with foreign investors through “one window”?
This is a topic that our country has been talking about for many years. Here is an example of a bad management. During an official visit the Mongolian government agrees to accept a specific loan amount from the Government of the People’s Republic of China. Then our ministries compete on which projects will be implemented using this loan. It doesn’t make sense. Although ministries know that all projects should go through “one window”, nobody follows the policy and the government does not fully regulate this process. The government and the Ministry of Finance should prioritize projects and allocate funds accordingly to the ministries. As far as I know, the list of projects to be implemented with Chinese government loans has changed many times, and each ministry lobbies for their project, arbitrarily changing the list.
Is there a government agency that is in charge of attracting foreign investment?
No. When there was the Ministry of Economic Development, the Foreign Investment Agency was established and later dissolved. Currently, the National Development Agency is responsible for exchanging information with investors. The World Bank and IFC have jointly established a one-stop service for foreign investors in Mongolia under the National Development Agency. I understand the organization deals with investors in Mongolia rather than developing policies and plans to attract foreign investment. In May 2020, Mongolia adopted the Law on Development Policy and Planning. The law states that “The development policy issues shall be the responsibility of the state central administrative body”. However, a new Ministry of Economy responsible for project planning, implementation, and financing, has not yet been established.
But we had a Ministry of Economic Development?
The operation of the ministry went wrong by focusing on domestic investments. Therefore, we can’t repeat the previous mistakes when establishing the new Ministry of Economy. It starts with building a dedicated, knowledgeable, capable and professional staff. One of the functions of the Ministry of Economy is to prioritize projects in line with national development policies and objectives. It will just be another mess if we can’t establish a ministry with the right economic priorities.
As foreign investment declines the state debt increases. Will bonds be issued again?
In recent years, our country’s debt has increased by issuing bonds. It is not possible to issue new bonds. Basically, we reached our debt ceiling. Let’s look at where Mongolia’s foreign debt comes from. The first mistake was made when we issued the “Chinggis” bond in 2012. Funds are to be used when projects are ready to implement. For example, countries borrow money from the IFC and other banks and financial institutions only after the project has been discussed and approved. There is no need to pay interest during the time when the loan is not being used. However, our country received funds by first issuing the “Chinggis” bond, and later selecting 888 projects. Out of these projects, very few or almost none have been implemented today. The reasons are that no technocrats were in the Government and there was no understanding of “project management”. There are still very few professionals in the government now who know about this. Projects should have been pre-screened, evaluated, and prioritized by economic importance, carefully planned for implementation. Only then should funding have been raised. Since we did not follow these steps, the bond instead of helping our country became a financial burden and we have been paying a lot of interest. It should have been possible to complete at least one effective project during this time. The private sector has professionals who can accurately calculate the implementation, time, and efficiency of any project from the start to finish, but not the state. The dangerous side of bonds are the high interest rates. However, loans from international organizations have 20 year terms where only interest is paid for the first 5 years. That’s the kind of money Mongolia’s risky economy needs. One of the reasons for the growth of our foreign debt is the high interest of money spent on the wrong projects.
The next mistake is Mongolia’s budget. In 2016, the state budget expenditure was about MNT 7-8 trillion, but today it has doubled to MNT 13.8 trillion.
Was the budget increase necessary? No. Due to the COVID-19 pandemic, there was a need to increase the state budget for 2020-2021. But there was no need to increase budget expenditures by 20-30 percent in 2018 and 2019. For every change that occurred because of expenditure increases, our country’s external debt is increased. The budget deficit for 2021 is MNT 4.8 trillion. That is all debt. Wasteful expenses such as salaries of environmental inspectors and soum cultural center managers are among the budget expenditure that create debt. The Nalaikh road, Yarmag bridge, traffic police bridge, and wastewater treatment plant were built near Ulaanbaatar financed by a loan from the Chinese government. Our country had the funds to build essential roads and bridges. Instead, the domestic revenues were spent inefficiently at the local level, and the many important projects were financed with high-interest foreign loans. State debt continues to grow and accumulate due to poor planning and implementation of the public investment policy. Currently, the best thing we are “capable” of doing is increasing external debt.
The government has announced a “100+ projects” program to be implemented with foreign and domestic investment. There is concern that it will become another “wishlist”. What are your thoughts?
We did similar things in the 1990s. Over the last 30 years, there were many of those lists. Probably only 25-30 percent of them were small and medium projects that were well implemented. A bigger project funded by the state is the local “Millennium Road”. The selection of a “100+ project” can only be made by professionals who were trained in project management. The private sector plans to hold a workshop related to project management soon. That is the right thing to do. It is very good that the Project Management Institute (PMI) is developing in our country. Not only the private sector, but also the government, the National Development Agency, the Ministry of Mining and Heavy Industry, and the Ministry of Transport and Road Development, who are responsible for large projects, need to understand and learn about “project management”. As understanding improves, lists such as “100+ projects” will stop being made. Then just twenty projects will be selected based on their social and economic importance. The current government’s action plan has a target to “connect rural soums by road.” This is stupidity. We are talking about building roads to soums to support their small economies when no decision is being made on Zamyn-Uud, the largest trade port. This is not a problem that needs to be solved today. Now is the time for developing the human resource needed to build roads and raise funds required for construction.
The government decided to implement projects on the construction of new railway routes. 10 years ago you worked on the railway research. What is your position on the current implementation of railway projects?
Now is not the time to announce a new project. It is important to successfully complete projects that we have already started. Today’s most pressing issue is the problem of congestion in Zamiin-Uud. Implementing private sector projects on time and seeing domestic commodity prices rise depend on this. Our priority is to discuss the improvement of cargo turnover at all levels between the two countries. Kazakhstan, which has the same wide-gauge railway as Mongolia, has increased its goods turnover in just a few years by building broad and narrow-gauge railway in parallel at its port in Khorgos. The country’s transit traffic is booming. Why can’t we solve our problem the same way as Kazakhstan? Further, it is unclear how to connect the Tavan Tolgoi-Gashuunsukhait wide-gauge railway to the Chinese narrow gauge railway. The more projects that are announced and implemented at the same time, the more inefficiently capital will flow and there will be insufficient funds to implement important projects. The funds to complete the projects vital to our country’s development will be locked into smaller projects that are not important at this time. Personally, I do not understand the importance of the Tavan Tolgoi-Sainshand railway. It is an inefficient work that “locks” the flow of capital to the small economic region rather than a contribution to domestic infrastructure.
What can be done to address some of the issues of port access and railways in relation to neighbor countries?
Our neighbors Russia and China are members of the United Nations Security Council. This year Russia is to become a developed country in terms of per capita income. China is also close to becoming one of the developed countries. Both Russia and China, are powerful in terms of global economic and geopolitical influence and defense capabilities. We have learned to “talk loose” in the sense that we are neighbors, but the level of our relationships and influence is far from that of Russia and China. In my opinion, it is possible to involve third parties in some economic projects in the future. The railway project requires a lot of technical skill and other things that we cannot implement by ourselves. In such cases the project can yield results through negotiations with a third party in addition to Mongolia and China, such as the World Bank, the Asian Development Bank, or the World Trade Organization. These organizations have extensive knowledge and experience in implementing and advising projects internationally. China is a member of the World Bank and the Asian Development Bank and has a certain commitment to world trade. Therefore, it may be more effective for Mongolia to negotiate with China with the support of an international organization rather than alone.
Mongolia has a free trade agreement with Japan, the third-largest market, but no progress has been made so far?
Our Ministry of Foreign Affairs also indicates that we do not fully utilize the free trade agreement with Japan. It signed a free trade agreement with the European Union in early 2020. This is of a high economic importance and provides a huge advantage for our country. In 2018, the Mongolian Leather Association successfully tested a non-chemical, biological method of tanning cowhides. Exporting the cowhides to Japan with low taxes is our opportunity. Then, we can set up a joint venture in Japan and export leather bags and other products to the European Union tax-free. In other words, we can supply value-added products to a third market with low taxes. I see this as an opportunity for Mongolia to increase its exports. The main task for us is to export leather to Japan. Our cooperation with Japan and the European Union means that our products will be transported freely through China.
What would be the trend in the global economy post-pandemic and the “green” transition? What do we need to pay attention to?
In addition to COVID-19 and the “green” transition, climate change is taking hold around the world. As a result, a completely new economy based on advanced technology is likely to emerge. We need to know what the technological innovations will bring to the future. International researchers believe that “quantum computing”, same as mobile phones and the Internet, will change not only industrial and economic sectors but other sectors in the future. In response to emerging trends, we need to define our policies and directions for economic development. Universities should focus on preparing for a new generation of engineers. Nano and biotechnology may sound like a distant and very sophisticated concept. But it is close to our daily lives. During the COVID-19 pandemic, a bio-sensor that attaches to clothing and changes color in the presence of the COVID virus was developed in Germany. Such technological innovations are gradually entering our everyday life. Food and medicine are all biotechnology. If we continue to follow our traditional, passive 5-10 years development plans that we are unable to implement, and we fail to identify the right path to development, Mongolia will continue to lag global development.
Thank you for the interview.