Tag Archives: Economy

Mongolia Deliberates Major Tax Revamp

Under the leadership and coordination of the Ministry of Finance, consultations on the Ministry’s proposed tax amendments started on March 5. The first session was held with business sector representatives regarding tax law reforms and amendments at the Mongolian National Chamber of Commerce and Industry.

Ministry of Finance is conducting a public discussion on revising 24 tax-related laws, including General Taxation Law of Mongolia, Laws on Corporate Tax, Personal Income Tax and Value Added Tax, in order to hear voices of taxpayers and collect best proposals from the relevant parties. The Government noted that no fundamental changes and revisions were made to tax laws in the last decade and the taxation law ‘package’ was created to improve tax environment and decrease some taxes. The taxpayers expect favorable environment from this tax reform.

According to the proposed tax law amendment, if the annual revenue of enterprises operating in Mongolia is lower than MNT 1.5 billion, the government will return 90 percent of paid taxes. Furthermore, small and medium sized enterprises which have MNT 50 million of annual revenue, will be able to pay only one percent tax from sale revenue. The proposed amendments would also reduce the number of reports required from SMEs. Companies with an annual income of over three billion MNT would be required to issue tax reports four times a year, and those with less than three billion MNT in annual income would be required to file reports twice per year. The amendments include major changes to the VAT law.

The proposed amendments expect to be discussed and voted on during the spring parliamentary session and, if approved, will come into force on  January 1, 2019.

Mongolia Introduces Investment Protection Council

We would like to introduce the Investment Protection Council (IPC), one of the effective way to protect rights and interest of the investors and to resolve the disputes involving the foreign investors in Mongolia.

The Investor Protection Council needs to be established in concern with the facilitation of investment related dispute settlement and of favorable environment for the sustainable operation of investors. The Investor Protection Council is established based on an ordinance of the Prime Minister of Mongolia in Dec 2016. That council is composed of Chairman, 16 members, and Secretary. The main formation of the Council’s operation structure should be Council’s session. The decision will be made by majority of the Council members during the session.

The IPC’s Main Roles:

  • Preview and make preliminary prognosis on foreign investment related issues that will be discussed by Cabinet Session
  • Improve investment legal framework, remove duplications and breaches of laws, introduce investment related proposal that made by relevant organizations to Cabinet.
  • Make proposals on implementation of laws and resolutions related to investment, and introduce it to Cabinet. The council should be supernumerary and the Council’s operation should be permanent.

In addition above, one of the main roles of IPC is to protect investors’ right, and solve their grievance (except the cases examined under court or arbitrage). So far 83 compliant and claims submitted by investors to this Council’s Secretariat. As we have been classifying these complaint and claims, there are 40% of them was related to mining, 20% for road, transportation, construction, manufacturing, 10% for information, communication, space technology, 10% for bank, finance, tax, 5% for land, land proprietorship, utilization, 5% for national development, planning, and remaining percentage was claims related to fair competition, as well as supervision, pressure and burden, registration, and authorization activities of the law enforcement agencies.

For example, in relation to the dispute related to the termination of the license of Mobicom Corporation with 100% – a business entity 100% owned by Japan, by the Communications Regulatory Authority, it was further discussed at the Investor Protection Council Meeting and it supported to resolve the investor’s claim. In doing so, KDDI, the Japanese investor, will make additional investments to expand Mobicom’s operations, which indeed has not been resolved over the past 10 years.

LehmanLaw Mongolia LLP suggests our clients this amicable mechanism to resolve the disputes involving them in Mongolia.

Changes to Mongolian Central Bank Guarantee Independent Operation

Finishing our series (part one here, part two here) reporting on changes to the operations of the Mongolian Central Bank we present here the new provisions which will work to solidify and encode in the law the bank’s operations as an independent entity, not directly under the control of the executive branch of the government.

Independence of the Central bank from Government.

The amendments explicitly provide for the independence of the Central bank from the government. It is clear that the government should not provide any direction to the Central Bank regarding the agreements and transactions the bank enters into or in any other matter unless explicitly provided for in the law. The Central Bank of Mongolia should not directly or indirectly grant credit to the Government of Mongolia and may only purchase long and short-term securities of the Government from primary or secondary market except where explicitly provided for in the law.

Granting Credit to the Government

Under the new law, the Central bank of Mongolia may grant temporary credit or buy a short- term Government Bond in order to meet seasonal liquidity needs of the government, subject to repayment before the end of the financial year. If the Central Bank of Mongolia bought bond/securities issued by the Government, it will be added to the credit balance of the Government. In the frame of open market operation, the long -term securities of Government purchased by the Central Bank of Mongolia contingent upon repayment in short terms will not be included in the total amount of the balance of temporary credits.

Supervision of Bank Activities

The Central Bank of Mongolia will have authority to establish procedures, regulations and instructions, and make decisions, and carry out supervision and enforcement activities relating to the licensing to establish banks and operating activities of banks. This includes matters relating to the maintenance of adequate paid in capital and liquidity of bank assets, improving the security of the banking system, and regulation of banking activities for the purpose of protecting the interests of depositors and customers.

New amendment also updated the range of Central Bank’s activities.

In order to implement its objectives, the Central Bank of Mongolia will conduct the following activities:

  • issuing and regulating currencies into transaction;
  • formulation and implementation of monetary policy;
  • acting as the Government’s fiscal intermediary;
  • supervision of banking and entities specified in the law activities;
  • organizing, reconciling and supervising of local/national payments and settlements system;
  • holding and management of the State’s reserves of foreign currencies;
  • protecting right and interest of customer, depositor;
  • implement balanced/proper macro policy.

Changes to Mongolia Central Bank Managment

New Amendments to the Law of Mongolia on Central Bank

In our previous post, we introduced changes to the law on the governance of the Mongolia Central Bank. In this post, we will take a closer look at the most important changes.

Monetary Policy Committee

According to the new amendments to the Law of Mongolia on Central Bank, major changes are coming for the management committees’ roles. For instance, the Monetary Policy Committee will consist of 7 members including 4 adjunct members, and members will be appointed in terms of 6 years. Monetary Policy Committee will discuss and decide following matters: a) a draft of state monetary policy; b) determine interest of instrument of monetary policy; c) determine required reserves amount of bank, requirement of proper balance of percentage and amount. Form/ Formula of Monetary policy committee’s activity will be meeting.

The Monetary Policy Committee will decide matters via a majority vote of members participating in the meeting and the chairman will make a final decision in case of a tie. The meeting of the monetary policy committee will be held no less than 4 times a year. If President of Central bank of Mongolia or not less than 3 members of committee proposed to hold a meeting, special meeting will be conducted. Monetary policy committee’s decision will be issued by resolution type/form/format and certified by the signature of the chairman of meeting.

Monetary Policy Instrument

The Central Bank of Mongolia will use the following instruments to implement the state monetary policy.

1) Setting of the amount and proportion of compulsory reserves to be maintained by banks;

2) Grant a credit to the banks and use financial instruments;

3) pursuing a unified policy on interest rate;

4) conducting open market operations;

5) imposing a ceiling on credit outstanding to be granted by banks.

The Central bank will develop/draft the procedure for the determination, assessment, supervision of the required compulsory reserves of banks.

Supervision Committee of Bank:

Supervision Committee of Bank will discuss and issue recommendations on the following matters regarding to implement power of Central Bank to supervise on the banks.

  • To implement to supervise banks, regulate bank’s activity pursuant to the law, a draft of resolution, methodology, procedure, guidance, rule in connection with enforcement measure to the bank;
  • Report on the supervision of the banks;
  • Proposal to grant credit to the bank, Corporation of Savings Insurance in order to stabilize banking and financial system under the law.

The composition and rule of Supervision committee of Bank will be approved by the President of Central Bank of Mongolia.

Parliament Confirms Changes for Central Bank of Mongolia

The Parliament of Mongolia has approved amendments to the law governing the Central bank of Mongolia. The changes will effect the legal status of the bank and its independence. The Bank’s decision making process has been adjusted based on the standards, practices and principles implemented by central banks in other countries so the operations of the Central bank of Mongolia will comport with the international standard. The amendments will enter into force from the April 1, 2018.

One big change coming is that the bank’s involvement and influence with matters such as the state budget will be circumscribed, making the bank more independent from the Government. At the same time, there will be a mechanism in place to ensure clear lines of communication between the government and the bank.

This amendment will contribute to the increase of independence of the Central Bank, proper development of monetary policy, improvement of implementation of legal circumstance, promotion of further price stability at the macroeconomic level and will help to provide greater financial stability, and to maintain and promote long term economic stability for the slowly growing Mongolian economy

Most of world’s Central banks are responsible for balancing inflation and price level, and such responsibilities are clearly provided for in relevant laws. However, the Mongolian Central bank’s mission had been to balance and stabilizing the National currency. The new amendments help to more clearly define the Central Bank’s goal. The amendment defines the Central bank’s objective as the “Price Stability”, this objective and goals is meeting and complying with international level and standard.

This is undoubtedly a positive development for the Mongolian economy. We will keep you updated and will have a more detailed discussion regarding the exact nature of the new amendments in an upcoming blog.

Major New Mongolia Wind Energy Project Secures Funding

An international conglomerate has now closed a deal on financing to construct and manage a new 55 MW wind energy facility in Mongolia.

Located in Dornogobi province, the project will be Mongolia’s third and eventually its largest ever wind energy park. Turbines to power the park of 25 V110-2.0 MW turbines in 2.2 MW power-optimized mode, will be supplied by Danish company Vestas. European Investment Bank and the European Bank for Reconstruction and Development provide financing.

Traditionally Mongolia’s energy industry has been dominated by coal. Now, Mongolia’s wide open spaces and abundant wind allow for greater reliance on wind energy.

The new wind energy project will help Mongolia meet its energy needs resulting from higher demand, increased industrialization and urbanization trends.

Political Unrest in Mongolia Threatens IMF Review of Funding

The Executive Board of the International Monetary Fund (IMF) on May 24, 2017 approved a three-year extended arrangement under Extended Fund Facility (EFF) for Mongolia to support the country’s economic reform program. Other financing partners, including the Asian Development Bank, the World Bank, Japan, and Korea, have also committed to provide budgetary and project support, and the People’s Bank of China has agreed to extend its swap line with the Bank of Mongolia. In sum, the total financing package amounts to about $5.5 billion. The Board’s approval of the arrangement enabled the immediate disbursement of about $38.6 million. Addition of these funds to reserve currency of Bank of Mongolia had positive impact on the country’s economy and improves outlook for foreign investment.

Prior to each quarterly disbursement, IMF staff monitors and reviews if the country’s progress in meeting the conditions under the program justifies the continuation of disbursement. By this standard IMF staff team visited Ulaanbaatar from July 19 to August 2, 2017 to conduct discussions on the first review of the EFF arrangement. At the end of the visit the IMF staff team concluded that performance under the program has been good, with all quantitative targets on track. According to Bank of Mongolia’s report, the IMF staff’s positive conclusion enabled subsequent funding from above mentioned financing partners within the EFF arrangement. The IMF staff conclusion is subject to review by the management and Executive Board of the IMF. The Board is expected to consider the first review in late September, and this could lead to a disbursement of about $37.82 million.

In the midst of this positive news, Mongolian politics remains unwieldy. On August 23, 2017 thirty members of Mongolian People’s Party (MPP) group in the parliament signed and submitted a petition to dismiss the Prime Minister J.Erdenebat, and consequently, the Government. This is likely to cause some level of political destabilization. History of some countries (e.g. Argentina, Greece) shows that political destabilization may cause IMF to suspend or even cancel its financial aid altogether. Though we have high hopes that these political issues will not escalate to that point in Mongolia.

It is critical that this happens not long after the stir occurred during the Presidential election, in connection with payout of children’s money by the Government. The IMF staff team disapproved such action by the Government. Therefore the Government committed itself to target the Children’s Money Program to less affluent families, which partially led to overall positive preliminary findings of the IMF staff team. Thus any kind of political destabilization may not only affect the further implementation of EFF arrangement, as well as country’s further economic well-being.

According to the Constitution of Mongolia, the petition to dismiss Prime Minister should be discussed and resolved by the parliament within 15 days. We will keep you informed here of the outcome, and potential consequences.

Mongolia is in the Middle of a Constitutional Amendment Process

Mongolian Constitution has been in force for the last 25 years, dating from its adoption in 1992. It has been amended once in 1999 and again in 2001. It is the fourth Constitution of Mongolia since the first was adopted in 1924. Subsequent constitutions were put into place in 1940 and in 1960.

Mongolians today pay close attention to issues connected with the recent constitutional reform. A series of public consultations for Constitutional reform have been held in the Ulaanbaatar and in local aimags.

Several recommendations have been put forward for public discussion:

  • maintaining the current balance of power between the legislature and the executive branches of government;
  • strengthening the unity of the country;
  • consolidating how local administration is structured;
  • developing a professional, independent civil service;
  • strengthening the judiciary to improve the legal structure; and
  • creating a bicameral legislature that would include the State Great Hural and the State Congress. (Mongolians Discuss Constitutional Reform, supra.)

Taking the outcome of the public consultations into consideration, a consolidated proposal will be finalized and submitted to the parliament during the upcoming autumn session this year. However, the Democratic Party disagreed with this procedure and issued a statement demanding to hold a public referendum to hear voices of the people rather than organizing public consultations taking place in limited scope.

According to the Constitution, Constitutional amendments may be initiated by the President, members of the Parliament and the Government, as well as being proposed by the Constitutional Court to the parliament. A national referendum on constitutional amendment may be held where it is supported by at least two-thirds of the legislature. An amendment to the Constitution will have the same force as the Constitution when adopted by not less than three fourths of votes of all members of the parliament.

 At the moment, the general public is encouraged to provide inputs to the proposed amendments. More information may be found at the following website:  http://forum.parliament.mn/projects/171.

Mongolia Continues Cooperation with China on Mutual Free Trade Zone

Chinese news media is reporting that China and Mongolia are beginning a new process of conducting a feasibility study regarding development of a new Free Trade Zone (FTZ).

This comes in the contest of the second China-Mongolia Expo, held in Hohhot, the capital of China’s Inner Mongolia region. The conference will occur in late September, and will serve as a forum to discuss issues of mutual cooperation and development between China and Mongolia.

Mongolia’s trade with China in the first six months of 2017 has been USD $3.1 billion. This is a 44.2% increase year-on-year. China mainly exports gas, diesel, food, machinery and equipment to Mongolia, and imports natural resources, fur and raw materials.

Talk of the new FTZ comes after the China-Mongolia Cross-border Economic Cooperation Zone (CECZ) was announced in 2015. The CECZ is a 18 square kilometer  territory evenly divided along the China-Mongolia border. The CECZ is intended to facilitate import/export processing, logistics, warehousing, and e-commerce.

The increase in economic cooperation between China and Mongolia is a core part of the wider China-Mongolia-Russia economic corridor, which seeks to facilitate integration of Mongolia with the economies and infrastructure of China’s northern territories and Russia’s far east.

Mongolia Presidential Election Maintains Divide Between Presidency and Parliament

The people of Mongolia have just completed the election of the President of Mongolia. Battulga Khaltmaa, of the Democratic Party, is the victor. Mr. Khaltmaa follows Ts. Elbegdorj, also of the Democratic Party in serving as President. This will continue the previous dynamic of a Democratic Party President serving concurrently with a parliament dominated by the Mongolian People’s Party (MPP).

Mr. Khaltmaa achieved his win with 50.6% of votes cast, with a voter turn-out estimated at 60%. The MPP candidate received 41.2% of the vote, while 8.2% of ballots were returned in protest with no selection, a practice expressly allowed by the Election Law of 2015.

The MPP continues to hold a supermajority in parliament. Therefore, they will retain the capability to override any potential veto by Mr. Khaltmaa of proposed legislation. Still, his presence at the top is expected to force some concessions on the part of the parliament. Mr. Khaltmaa will be primarily responsible for foreign policy, and negotiations of treaties with foreign governments.

During the campaign, Mr. Khaltmaa advocated for state involvement in the economy, and management of natural resources. He has framed his pending presidency as a necessary balance against the MPP dominated parliament. It is expected that a period of adjustment will follow the election in which the parliament and Mr. Khaltmaa learn to work together and set boundaries.

Mr. Khaltmaa is called a Nationalist by Bloomberg. His campaign has promised to increase public access to wealth from Mongolia’s large resource mining projects. He has also promised to reduce trade imbalances Mongolia has with Russia China, a task which may be easier said than done. Even so, the rhetoric has not been overly hostile to foreign investment and the election is not expected to derail Mongolia’s recent efforts to revitalize its mining boom, or efforts to diversify its economy in the agricultural sector.