This edition of the TMO Forum focuses on Mongolia’s foreign trade and economic cooperation, two sectors that are critical for the country’s economy. Taking part in today’s forum is Dr. Vorshilov ENKHBOLD, Director General of the Department of Foreign Trade and Economic Cooperation of the Ministry of Foreign Affairs of Mongolia. The session is facilitated by Dr. Batnasan, Professor at the School of Business of the National University of Mongolia.
Batnasan: What accomplishments were there in the past one year in Mongolia’s economic foreign relations and cooperation? In which area did you ministry put its main focus us?
Enkhbold: Some indicators of foreign economic ties have improved and foreign trade balance has become positive. To illustrate, in the first half of 2017, our country traded with 142 countries around the world, and total goods turnover was $5036.4 million, which compared to the same period in 2016 recorded an increase by 36 percent. Export reached $3105.8 million, import – $1930.6 million and trade balance was positive by $1182.8 million. Export and import, as compared to the same period of last year, had grown by 42 and 29 percent respectively.
The Mongolian Government has been mainly focusing on extending mutually-beneficial trade and economic ties with our two immediate neighbors – Russia and China, and with the third neighbors. In this respect, concrete actions were taken to study the possibility of concluding bilateral as well as multilateral treaties and agreements to create favorable roads and transportation conditions for transit transportation through their territories, for the effective utilization of their sea ports and for the liberalization of trade, and in this connection, improve the implementation of national laws and legislation. Actions were also taken to attract foreign investment by way of creating a stable and a favorable legal and legislative framework, diversify the country’s foreign export structure, and to reduce tariff and non-tariff barriers.
Mongolian Prime Minister and Foreign Minister have visited China and Russia, and have signed agreements on extending trade and economic cooperation. The Prime Minister, during his official visit to China, for example, signed memorandums of understanding (MoU) between the foreign ministries of the two countries, one on strengthening trade, investment and economic cooperation, and another one on launching a research into the possibility of concluding a free trade agreement between the two countries. Apart from the above, at the active initiative of Mongolia and within the framework of the Economic Corridor program between Mongolia, Russia and China, a trilateral meeting of experts was organized, where the mechanism for the program implementation was outlined.
We signed the Economic Partnership Agreement with Japan more than one year ago. As a continuation, we have already set up research teams that are already looking into the possibility of concluding free trade agreements with some of our third neighbors, while talks are being held to start joint research into the possibility of reaching free trade agreements with China and the Eurasian Economic Union.
Mongolia became the 100th country to ratify the Trade Facilitation Agreement (TFA) of the World Trade Organization. Under TFA Mongolia, as a landlocked country, will be able to implement projects and programs designed at facilitating trade and seek support and assistance from development partners, cut down on foreign trade costs, promote exports, address transit transport infrastructure issue, and step up cooperation between border and customs agencies.
A Mongolia-Canada Foreign Investment Promotion and Protection Agreement (FIPA) has come into force. In keeping with the independent, open and multi-prop foreign policy, Mongolia as part of FIPA, will be able to expand economic ties with Canada, create the environment for a stable investment, introduce progressive technology from Canada, and all this will help review investor confidence in the country.
A beginning has been made for the promotion of cooperation between Mongolia and the Eurasian Economic Union (which includes Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan) with the signing of an MoU and subsequent establishment of an intergovernmental working group. We encounter tariff and non-tariff barriers in our export to Russia. In particular, with the objective of removing the non-tariff barrier we invited V. N. Koreshkov, EEU Minister to visit Mongolia to address issues related to standardization, technical regulation as well as veterinary and plant quarantine and as part of this visit, we now are ready to sign an MoU and a joint action program.
This, in brief, is what we have been doing to extend external cooperation.
Batnasan: The Government of Mongolia attaches significant importance to dealing with the neighboring countries. From recent developments we can see that the Government is giving a lot of importance to China’s Road and Belt Initiative (RBI), and Russia’s Eurasian Bridge project. How important are these projects for Mongolia and what could be the country’s involvement in them?
Enkhbold: In today’s world of globalization, countries and nations are complementing their disadvantages with the advantages of the regional and partner countries, thus promoting a much more effective economic cooperation. One such alternative is China’s RBI, which aim is to promote cooperation on the principles of peace, openness, unity and win-win policy, engage through infrastructure, reduce trade barriers, promote humanitarian ties, and set up economic integration. In this sense, RBI not only dovetails with Mongolia’s development policy but also our country stands to benefit significantly as a county lying along the Road and Belt route.
Proceeding from this premise Mongolia, Russia and China agreed to establish an Economic Corridor during the third summit meeting of the Presidents of the three countries in Tashkent in June 2016.
This program includes some 32 projects which focuses on developing motor and railway corridors and transit transportation, facilitating industrial, border and customs inspections, intensifying cooperation in energy, tourism, environment protection and customs, and promoting cooperation in education, science, technology, humanitarian, agriculture and health sectors.
The implementation of these projects will help remove trade barriers between our three countries, ensure much more free trade, improve the competitiveness of the goods and products, reduce internal and cross-border transportation costs, develop tourism and in particular, provide Mongolia with new opportunities for free access of Mongolian goods to the world market.
Batnasan: More than 90 percent of Mongolia’s export and around 60 percent if its import fall on our neighbors. What kind of progress is being, if any, in extending ties with the third countries?
Enkhbold: Extension of trade and economic cooperation with the third countries is an important component of Mongolia’s foreign policy and our ministry is active in this regard. The Economic Partnership Agreement (EPA) signed with Japan is a major step in this respect and our Ministry is working hard to ensure its implementation and increase its impact. Together with South Korea we are also jointly researching into the possibility of signing an EPA as well and talks with South Korea, in this regard, will commence. We have proposed a free trade agreement with EEU and the agreement on partnership and cooperation with EEU is now at its final stage. We are confident that such cooperation with the third neighbors will bring about positive changes in Mongolia’s economy.
Batnasan: Two years have elapsed since the signing of an EPA with Japan. Both of us spent a lot of time and effort for this EPA and I personally feel that this EPA with Japan would not have been possible without your involvement. What do you think needs to be done in the years ahead to extend, in the real sense of the word, this Economic Partnership Agreement with Japan?
Enkhbold: Japan is a major and an important foreign trade and investment partner. It is one year since the EPA came into force. In terms of trade, import constitutes the bulk in trade turnover, while export to japan is only about 10 percent. Therefore, the two parties need to make more effort to change such a disbalance in trade, and to improve the outcome of the EPA.
Our country needs to improve the quality of our products to meet Japanese standards, give more information about the EPA and its significance to the private businesses, and enhance the skills and capacity of our human resources. At the Mongolia-Japan government and private sector consultative meeting on trade and investment, which was held in early July this year, the Japanese side emphasized the need for significantly improving the skills and capacity of human resource development in Mongolia.
We are planning joint actions with other ministries in the country for implementing the commitments under EPA, and tapping into new possibilities provided by this EPA.
Batnasan: Foreign investment in Mongolia shrank quite a lot in the last couple of years. Investment is important for the economic revival. What, if any, gain has been made in terms of increasing foreign investment in the country?
Enkhbold: The country is faced with the imminent challenge of expediting economic and social development so that it can keep abreast of the global development trend in the 21st century. We also need to create immunity against all kinds of economic crises, we must diversify our economic structure, and take actions to overcome the economic downtrend, ensure macroeconomic stability, and sustainable growth.
This objectives can be achieved by way of streamlining the investment policy, improving the investment environment, by comprehensively increasing domestic and foreign investment, and on this basis, enhancing investment outcome.
Foreign investment is playing a big role in the country’s economic growth.
Foreign direct investment (FDI) in Mongolia began to gradually grow starting in the year 2000. In 2009 this trend increased suddenly with investment in 2010 reaching $1 billion, and $4.7 billion in 2011 (see graph top) primarily due to the launching of major mining projects, including Oyu Tolgoi, which attracted huge foreign investment.
However, FDI structurally is quite lopsided. Almost 75 percent of the total FDI is in the mining industry, which has a negative impact on diversifying both the economic and export of the country.
One of the fundamental directions of our investment policy has been and remains the streamlining the investment environment to be compatible with international standards, and improving the competitive edge in this area. As part of this effort, the percentage of tax levied on businesses and entities, under the revised package of tax laws, has been lowered by 5 points at 10 and 25 percent, and value added tax is 10 percent, which is a big incentive to investors as they are the lowest at the regional level.
Foreign investors, as a rule, attach importance to a particular country’s stable tax environment. The country is providing a Stabilization certificate for an investment not less than MNT10 billion (1USD = MNT2,440. TMO), and if the investment is more than MNT500 billion, the Government of Mongolia will sign the investment agreement, which becomes a legal guarantee ensuring the stability of the business.
However, the sudden growth, observed in 2010, 2011 dropped by 48 percent in 2013 and by almost 76 percent in 2014, owing to the following few factors:
One, in 2012, 2013 global prices of commodities such as coal, copper, iron ore dropped. And globally, FDI shrunk by 18 percent. China reduced its foreign investment in developing countries by 49 percent or by $22.6 billion.
Two, the first phase of Oyu Tolgoi development, which is considered as a key factor in the economic growth in 2009-2011, ended and the next phase of investment was uncertain, and consequently, direct and indirect investment, connected with the Oyu Tolgoi project, decreased. In other words, we must take into consideration the level of FDI in Mongolia without the Oyu Tolgoi project. In the first stage of Oyu Tolgoi development, $6.1 billion in investment was made in 2010-2013 and the company started exporting copper concentrate. The underground mining finances were delayed owing to specific reasons, which impacted FDI size and environment.
Three, Mongolia’s political situation was not stable because of the parliamentary elections in 2012 and 2016, and the formation of new governments. It has bene observed that foreign investors either withdraw their investment, or stick to a wait-and-see policy in an election year.
Four, domestic legal and legislative regulation had been somewhat obscure. Investment was restricted under the 2012 Law on regulating foreign investment in strategic sectors, as well as the so-called Long-Name law, corruption, license-related issues had a negative impact on investment.
Five, there is much foot dragging in terms of expanding domestic economy, creating a structure that can ensure hook up with foreign economic networks, and in particular, attracting investment by way of developing and implementing major projects.
Six, sudden economic growth policies are contributing to budget deficit, increasing foreign loans, and to lowering of credit rating, which have undermined investor confidence in the country.
Finally, investment cannot be measured only through cash flow. It includes machinery and technology coming into the country from overseas. Today, we do not have a real data or statistics as to how much FDI has come into Mongolia and by what percentage it has decreased.
Following actions are being taken to address and put aright legal and legislative issues that are contributing to these and other problems:
a) Actions are being taken to streamline end ensure compatibility with other laws and legislation the Investment Law which came into force as of 1 November 2013;
b) A lot has been and is being done to inform about the structure and significance of the new law to both domestic and foreign investors through business forums and meetings.
c) Work is being done to streamline Public Private Partnership and effort is being made to ensure implementation of the 2010 Concession Law. 14 concession agreements were signed in 2015 and their total project value is almost MNT6 trillion.
d) Investors are being supported by way of giving investment and stability agreements for investing in concrete projects of socio-economic significance. Investment agreements worth MNT5.3 trillion were signed with the investors in the Tsagaan Suvrag copper deposit, the Khökh Tsav cement plant, Moncement company, Bööröljüüt and Tsavantolgoi power plants. And stability certificates were provided to 12 projects worth MNT3.9 trillion.
e) The much-awaited Mongolia-Canada Foreign Investment Promotion and Protection Agreement was finally signed and ratified and the Mongolia-Japan EPA came into force as of last June. They will help increase foreign investment.
f) An investor protection council has been newly created. It’s objective is to ensure stability and set aright policy factors that could have a negative impact on FDIs, positively address conflicts with foreign investors, and thus create a positive atttitude overseas, which will thus help increase both domestic and foreign investment.
FDI is expected to grow with the second phase development of the Oyu Tolgoi mining project, as well as the commencement of the Tavantolgoi power plant project. If investments are made under these two projects, FDI would grow by more than $1 billion.
What’s more, foreign investor confidence is likely to revive and so would investment increase if Mongolia is able to address, without delay, conflicts and arguments related to major projects with foreign investment.
Batnasan: Recent years have witnessed economic slowdown. What can and needs to be done, in the framework of economic cooperation, in order to speed up economic growth?
Enkhbold: First of all the program of overcoming the economic challenges and the set of foreign relations measures outlined in the program must be implemented to ensure that the following are achieved:
– Ensure the stability of the legal environment for investment, and create a pro-business environment;
– Provide investors will correct information about Mongolia’s business environment, and on this basis win back investor confidence. In this respect Mongolia’s diplomatic missions in foreign countries have an important role to play;
– Increase and diversify exports, promote the development of industry and services that can replace imports, and in this respect, actions must be taken to introduce international norms and standards especially in some sectors of the country’s agriculture;
– Improve the coordination and cooperation among border, customs and specialized inspection agencies by doing away with duplication in their work and dealing with redtape, thus helping cut down on cost and time companies spend on foreign trade;
– Mongolia must join regional economic integration, establish agreements on trade, investment and transit transportation with the main trade partners, and reduce tariff and non-tariff barriers by way of signing Free trade agreements, and ensure there is a growth in the supply of Mongolian goods in other markets.