Economy and Trade

Economic Performance in 2006-2007

Mongolia’s economy has performed very well in recent years. Aided by the sustained run-up in copper and gold prices, real GDP growth has averaged 9 percent over the past four years, and per capita income has more than doubled. High minerals prices and improvements in tax administration have generated rapid growth in government revenues, and the budget recorded significant surpluses over the past three years. The external position also remains comfortable, with gross international reserves reaching a record level and the net present value of external debt declining to 24 percent of GDP at end-2007.

Mongolia's fiscal framework has evolved significantly since the beginning of 2006. Changes include the addition of new spending measures in the amended budget, a new mining law, and new personal income tax, corporate income tax, and VAT laws which went into effect on January 1, 2007. Despite a cut in the employer social security contribution rate, revenues reached a record 44.5 percent of GDP, reflecting continued high minerals prices, ongoing improvements in tax administration, and continued strong growth. However, the spending is expected to increase even more rapidly to a record 47 percent of GDP. In March 2008, a tax amnesty program was put into effect, which provides an opportunity for taxpayers to correct their tax information without penalty.

The current fiscal regime for the mining sector is governed by the Minerals Law and various tax laws. The direct taxes under the regime include a royalty, a corporate income tax (CIT), withholding tax (WT), and the windfall profit tax (WPT), which applies to copper and gold sales. The windfall tax introduced in June 2006 is intended to capture a higher share of the revenues accruing to mining companies from high export prices. The 68 percent tax rate tax applies to copper revenues from prices exceeding the sum of a base price (US$2,600 per ton) and smelting costs (projected at US $l, 580 per ton), and gold revenues from prices exceeding US$500 per ounce.

In addition to the "windfall" tax, the new mining regime enacted in July 2006 provides for: (i) a doubling of royalties on metals from 2.5 percent to 5 percent; (ii) an increase in mining license fees and a shortening of the license's duration to discourage speculation and under-utilization of mining licenses; and (iii) a doubling (up to 30 years) of the maximum duration for investment contracts, which may include stability clauses on the tax regime. The mining law also establishes the possibility of government equity participation up to 34 percent in mines deemed to be "strategic deposits," and up to 50 percent for strategic deposits discovered with government support. A Development Fund was also established to ensure that revenues from the "windfall" tax are allocated as follows: (i) one third of total for saving; (ii) one third for capital expenditure; and (iii) one third for children and family allowances.

Real GDP growth has averaged 8 percent since 2004, aided by sharp increases in copper and gold prices and a recovery of livestock herds after three devastating winters. As incomes have grown, the expansion has spilled over to other sectors of the economy, including construction, financial services, and the retail sector. After a brief upward spike in 2005, inflation has been brought back down to the mid-single digits, and the budget and external current account balances have moved into surplus. International reserves, which were heavily drawn down in late 2003 in connection with the settlement of Mongolia's pre-l991 debt to Russia, have been reconstituted to more comfortable levels. Near-term economic prospects remain favorable, with growth likely to be sustained by still-high minerals prices and large-scale foreign investment in a major new mining project. Despite these significant achievements, poverty remains high (36 percent), and much remains to be done to achieve the Millennium Development Goals. The current account balance is projected to swing from a surplus of 2.5 percent of GDP in 2007 to a deficit of 9-13 percent of GDP in 2008-2010, reflecting large-scale imports of capital equipment for new mining projects financed by foreign direct investment. When the mine subsequently comes on stream, the current account would be expected to revert to a large surplus.

In terms of foreign trade, for the first 11 months of 2006, total external trade turnover equaled 2713.8 mln. US dollars, of which exports 1377.4 mln. US dollars and imports 1336.4 mln. US dollars. Total external trade balance turned a surplus of 41.0 mln. US dollars. This surplus provided by increasing of copper market price and volume of creezy cashmere, tops of cashmere, etc. As compared with the same period of the previous year, total external trade turnover increased by 39.6 percent, exports by 53.3 percent and imports by 27.8 percent respectively

Within infrastructure, the country has moved from a situation of frequent blackouts and limited utility access to spreading the benefits and quality of network connectivity. Urbanization, focused around Ulaanbaatar and mining areas, the exploitation of new mines, and continued growth in Russia-China trade all provide hope for economic expansion, but also demand infrastructure rollout and improvement. At the same time, there is a desire to extend the benefits of wealth to regional growth poles within the country.

Combined with the high technical standards required by equipment that can operate in Mongolia's environmental extremes and the short construction season this makes the construction of new infrastructure very expensive by international standards.

The current long list of proposed new infrastructure investments at the sectoral level adds up to $7.3-7.7 billion over the next ten years, not accounting for any subsidies or transfers to cover operations and maintenance or losses. It is perhaps worth comparing this number to current GDP of around $1.2 billion.

Mongolia's non-fuel mineral sector has been the main pillar of Mongolia's development. It is the fourth largest sector, contributing 27 percent of GDP but accounting for about 64 percent of export earnings and 16 percent of tax revenue. However, despite its overall economic importance, the mining sector accounts for only about 4 percent of the labor force, due to its highly capital intensive nature. Dutch disease risks are limited because of idle capacity, including high unemployment but continued appreciation of the togrog in connection with increasing capital flows and foreign exchange earnings may impact nonmineral sector competitiveness in the longer run.

Copper output (30 percent of exports), is currently derived exclusively from the Erdenet mine but is expected to be boosted in the medium term by the coming on stream of the Oyu Tolgoi mine and the development of the Tsagaan Suvarga deposit.
ERDENET. Mongolia's largest mine, has been in operation since 1978 under a Russian-Mongolian government joint venture. The mine produces copper concentrate together with molybdenum and is also engaged in a variety of non-¬mining activities (e.g., farming) and provides extensive local social support. The mine's output has been declining and is expected to deteriorate further as copper grade decreases with depth. However, investments are underway to compensate the output decline by producing higher value copper cathode. Erdenet's, annual copper concentrate output is about 130,000 tons. It reserves of 1.5~ billion tons have a 30-year lifespan.

OYU TOLGOI copper and gold deposit. Situated in South Gobi region of Mongolia, it is one of the most significant mineral deposits under development. World mining leader Rio Tinto and Canadian mining company Ivanhoe Mines will jointly engineer, construct and operate Oyu Tolgoi copper-gold mining complex. Negotiations are still in process between the government and the license holder. Initial annual copper concentrate output would be 300,000 tons with a 1 million ton peak to be reached within six years. Copper reserves (28 million tons) would provide for a 40-year lifespan.
Gold output (31 percent of exports), has been declining in recent years. Gold is also widely mined by Mongolian and Mongolian-Russian-Australian-Canadian joint ventures, comes as a by-product of the Erdenet copper mine and is subject to widespread artisanal mining ("ninjas" miners). Gold prospects depend on timely development of the Oyu Tolgoi and Gatsuurt deposits, both of which critically hinging upon finalizing investment contracts with the government.

Other minerals. Mongolia is also a significant producer of fluorite under Mongolrostsvetmet, a Russian-Mongolian joint venture and Mongolia's second largest mining company. In addition, the Tumurtiinovoo zinc mine, a Chinese-Mongolian joint venture has been operational since 2005 with an expected 14-year lifespan. Phosphate mining from the Burenkhaan deposit is in the process of being developed. In the longer term, considerable coal reserves from the Tavan Tolgoi deposit (5 billion tons), and the Turmurtei iron deposit (229 million tons), as well as identified natural gas and petroleum reserves are expected to provide further growth impetus.

Mongolia's agriculture industry is potentially attractive to niche international markets. The sector could offer production processes such as chemical free methods, environment friendly practices, free range livestock, combined with its unique culture of nomadic lifestyle, family production, traditional relationship with animals and nature, and boutique practices that contrast with the mass production methods of its neighbors. According to the 2007 livestock census, a number of livestock of Mongolia has reached 40 million heads which is 13.4 percent increase compared to the previous year. It is the greatest number reached in the history since the 1924.

Tourism industry has enjoyed rapid development during the last 18 years. Today more than 450 private tourism-related companies are registered -- of which 59 have foreign investment and receive tourists predominantly from Japan, France, UK, Germany and/or USA. In 2006 tourism industry made up 18 percent of GDP while the number of inbound tourists increased by 14 percent. According to the Ministry of Road, Transport and Tourism of Mongolia about 500 thousand tourists visited Mongolia in 2007. The number of tourists visiting Mongolia each year increases by 15-20% per year.

Mongolian tourism association - http://www.travelmongolia.org/

National Tourism Development Board - http://www.tripmongolia.com/ - in 5 languages