Mongolia: Economy

Economic activity in Mongolia has traditionally been based on herding and agriculture, although development of extensive mineral deposits of copper, coal, molybdenum, tin, tungsten, and gold have emerged as a driver of industrial production. Soviet assistance, at its height one-third of GDP, disappeared almost overnight in 1990-91 at the time of the dismantlement of the U.S.S.R., leading to a very deep recession. Economic growth returned due to reform embracing free-market economics and extensive privatization of the formerly state-run economy. Severe winters and summer droughts in 2000-2001 and 2001-2002 resulted in massive livestock die-off and anemic GDP growth of 1.1% in 2000 and 1% in 2001. This was compounded by falling prices for Mongolia's primary-sector exports and widespread opposition to privatization. Growth improved to 4% in 2002, 5% in 2003, 10.6% in 2004, 6.2% in 2005, and 7.5% in 2006. Because of a boom in the mining sector, Mongolia had high growth rates in 2007 and 2008 (9.9% and 8.9%, respectively). Due to the severe 2009-2010 winter, Mongolia lost 9.7 million animals, or 22% of total livestock. This immediately impacted meat prices, which increased twofold; GDP dropped 1.6% in 2009. Growth began anew in 2010, with GDP increasing some 7% as Mongolia emerged from the economic crisis.

Besides mining (21.8% of GDP) and agriculture (15% of GDP), dominant industries in the composition of GDP are trade and service, transportation and storage, and communication. Mongolia's economy continues to be heavily influenced by its neighbors. For example, Mongolia purchases nearly all of its petroleum products from Russia. China is Mongolia's chief export partner and a main source of the "shadow," or "gray," economy. The gray--largely cash--economy is estimated to be at least one-third the size of the official economy, but actual size is difficult to quantify since the money does not pass through the hands of tax authorities or the banking sector. Remittances from Mongolians working abroad, both legally and illegally, constitute a sizeable portion. Money laundering is growing as an accompanying concern. Mongolia, which joined the World Trade Organization in 1997, is the only member of that organization to not be a participant in a regional trade organization. Mongolia seeks to expand its participation and integration into Asian regional economic and trade regimes.

Because of Mongolia's remoteness and natural beauty, the tourism sector offers potential for growth. Prior to the onset of the global economic crisis, spiking international commodity prices led to a surge of international interest in investing in Mongolia's minerals sector despite the absence of a policy environment firmly conducive to private investment; the end of the crisis brought a return of the attention of foreign investors. How effectively Mongolia mobilizes private international investment around its comparative advantages (mineral wealth, small population, and proximity to China and its burgeoning markets) will ultimately determine its success in sustaining rapid economic growth. Tax reforms enacted on January 1, 2007 and other mining policies helped government revenues jump 33% in 2007. Meanwhile, major amendments to the minerals law allowed the government to take an equity stake in major new mines. Major development slowed in late 2007 and early 2008 as Mongolia's parliament proved unwilling to move on major deals and declined to reform mining laws that observers said substantially varied from best practices. This frustrated many foreign and domestic investors and others who hoped to see Mongolia's promising mining sector grow rapidly. In 2009, sharp drops in commodity prices and the effects of the global financial crisis began to be felt in Mongolia's economy. The local currency dropped some 40% against the U.S. dollar, and two of the 16 commercial banks have since been taken into receivership, but a series of quick and effective moves, including a Stand-By Arrangement with the International Monetary Fund (IMF), helped maintained stability and has kicked off a broad discussion on fiscal and financial reforms. That program concluded successfully in late 2010, but both the IMF and World Bank have since criticized Mongolia for returning to potentially dangerous pro-cyclical policies in 2011.

In summer 2009 the government negotiated an “Investment Agreement” with Rio Tinto and Ivanhoe Mines to develop the Oyu Tolgoi copper and gold deposit. On August 25, 2009, parliament passed four laws--one repealing the windfall profits tax, one adjusting corporate tax structures to accommodate large-scale projects, and two involving infrastructure--necessary to allow the signing of the deal. The deal was concluded in a gala signing ceremony on October 6, 2009, and the agreement went into full legal force 6 months later, on April 6, 2010.

Environment
Based on a tradition going back to the era of Chinggis Khan, the government of Mongolia expresses public commitment to restoring and protecting its natural resources. As a result of rapid urbanization and industrial growth policies under the socialist regime, however, Mongolia's deteriorating environment remains a major concern. The burning of soft coal by individual home or "ger" (yurt in Russian) owners, power plants, and factories in Ulaanbaatar has resulted in severely polluted air. Continued overgrazing, increased crop production, and mining development have increased soil erosion and polluted waters. Protecting what remains has policy priority over reclaiming damaged land, although the government recently created a special restoration fund financed by polluter fees. In addition, the government is making significant efforts to introduce sustainable energy projects in an effort to reduce reliance on aging power plants.

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