Transition Report 2013 Stuck in transition?

Country assessments


Main macroeconomic indicators %
  2009 2010 2011 2012
GDP growth -1.3 6.4 17.5 12.3 13.0
Inflation (end-year) 4.1 13.0 10.3 14.0 9.6
Government balance/GDP -5.2 0.5 -4.8 -11.8 -11.3
Current account balance/GDP -9.0 -14.9 -31.7 -32.8 -26.6
Net FDI (in million US$) 496 1574 4620 4408 1664
External debt/GDP 46.0 49.2 45.0 143.9 n.a.
Gross reserves/GDP 28.2 36.6 28.1 39.8 n.a.
Credit to private sector/GDP 43.9 44.0 47.0 49.8 n.a.

2013 sector transition indicators





Source: EBRD.
Note: Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.


  • Mongolia’s economy continues to ride on the back of a mining boom. Economic growth reached 17.5 per cent in 2011 and 12.3 per cent in 2012. Commercial production has started at Oyu Tolgoi, one of the world’s largest copper deposits. Meanwhile, fiscal policies are procyclical, with risks of overheating.
  • Certain provisions of the foreign investment law have been relaxed. At the same time, significant foreign investments in mining, banking and other strategic industries remain subject to special government approval.
  • The government launched a comprehensive price stabilisation programme. A large component of the programme involves lending at below-market rates to eligible companies in certain industries. The funding is provided by the central bank – the Bank of Mongolia – via participating commercial banks.

Key priorities for 2014

  • The credibility of the fiscal framework established by the Fiscal Stability Law (FSL) needs to be restored. The FSL, which was passed in 2010, came into force in 2013. However, based on trends in the first half of 2013, fiscal targets prescribed by the law may be missed.
  • The Development Bank of Mongolia (DBM) needs to carefully balance social and commercial objectives. DBM is well positioned to develop valuable expertise in project finance and implementation, but the cost of its social programmes should be clearly accounted for within the overall fiscal framework.
  • Modalities of the new deposit insurance scheme need to be clarified. Once the newly established Deposit Insurance Corporation (DIC) is staffed, its powers, responsibilities and obligations with respect to setting risk premiums, and with respect to bank resolution in the event of a bank failure, should be further clarified.

Macroeconomic performance

Mongolia has been experiencing a mining boom. Growth rates of 17.5 per cent in 2011, and 12.3 per cent in 2012, were among the highest worldwide. Growth slowed only slightly, to 11.3 per cent year-on-year, in the first half of 2013. The trajectory of growth largely reflected the contributions of large mining projects, notably Oyu Tolgoi – one of the largest copper deposits in the world – developed by Rio Tinto, an international mining company. Commercial production at Oyu Tolgoi started in July 2013. Overall, foreign direct investment exceeded 35 per cent of GDP in 2012, before reducing somewhat in the first half of 2013.  The current account deficit widened to over 30 per cent of GDP in the same period, reflecting, in part, imports related to associated investment, but also domestic demand. High prices for copper and other commodities, and expansionary fiscal policy, have also contributed to the strong growth performance.

The fiscal stance remains highly procyclical. Weak revenue performance in 2012, coupled with a rapid growth of subsidies and transfers, resulted in a large fiscal deficit, at over 8 per cent of GDP, despite double-digit growth and a substantial under-execution of the budgeted capital expenditure. The fiscal stance – including the quasi-fiscal operations of the DBM – adds to inflationary and balance of payments pressures.

In November 2012 Mongolia successfully placed US$ 1.5 billion (15 per cent of GDP) worth of 5-year and 10-year sovereign bonds. This placement, which was heavily over-subscribed by investors, will cover immediate government financing needs. However, concerns remain as to whether fiscal policy will comply with the Fiscal Stability Law. The law, which was passed in 2010, but came into force only in 2013, imposes restrictions on government spending and the structural deficit, based on average historical prices of key commodities, such as copper. Inflation has remained volatile, predominantly at elevated levels (10 to 15 per cent), owing to significant increases in public sector wages and social transfers and, more generally, supply constraints in a rapidly growing economy.

The economic outlook remains strong, underpinned by large investments in mining. Tavan Tolgoi – a major coal deposit – carries very significant development potential. At the same time, as the economy’s dependence on copper, coal and gold grows, it becomes increasingly vulnerable to further falls in commodity prices.

Major structural reform developments

Amendments to the law on foreign investment, which were passed in April 2013, simplified certain approval procedures for large foreign direct investment projects. The original law, adopted in May 2012, subjected all investments by state-owned foreign entities to government approval. It also requires additional parliamentary approval of foreign ownership in excess of 49 per cent, in companies operating in mining, finance, media and telecommunications – industries which are designated as “strategic”. This provision applied to both private and state-owned foreign firms. Large transactions involving minority foreign stakes in these sectors are also subject to government approval. The law gives the government 45 days to consider such applications.

The amendments that were passed in April 2013 exempted private foreign companies investing in strategic sectors from the requirement of obtaining parliamentary approval. Parliamentary approval will now apply only to fully or partially state-owned foreign investors acquiring a shareholding of 49 per cent or more. Private foreign investors in strategic industries will still need to obtain government approval. The amendments aim to strike a delicate balance between the need to protect the interest of the Mongolian people, and the need to continue attracting foreign direct investment to key sectors of the economy, including mining and banking. Further revisions to the legal framework governing investments in key sectors of the economy are being considered.

In October 2012 the authorities launched a large preferential lending programme. The initiative, called the Price Stabilisation Programme, aims to combat high inflation by targeting supply in four key sectors: staple foods, fuel, key imported consumption goods and housing. Eligible companies in these sectors can obtain loans at a central bank-subsidised interest rate of 3.8 per cent through participating commercial banks. In addition, the programme seeks to diversify Mongolia’s fuel imports (currently sourced from Russia) and address cargo transportation bottlenecks. The programme is expected to expire after three years, and its cost is estimated at up to 720 billion tugrik (approximately US$ 500 million, or 5 per cent of GDP). However, as funding at below-market rates is currently provided to participating commercial banks by the central bank rather than by the government, the fiscal costs of the subsidies may not be fully accounted for. An additional programme is expected to support the provision of mortgages at below-market rates.

The recently established Development Bank of Mongolia began lending operations. DBM was inaugurated in 2011, and issued its first government-guaranteed bonds in 2012. Its portfolio is divided roughly equally between development projects of a commercial nature and social development projects, such as municipal roads, toll-free inter-province roads and subsidised mortgages.

Universal cash payments have been discontinued. Between 2009 and 2012 all citizens received payments in various amounts from the Human Development Fund, a state body established in 2009, which was designed to facilitate distribution of mining revenues to the population at large. From 2013 only children have been eligible to receive payments, currently an unconditional monthly amount of 21,000 tugrik (US$ 15).

Mongolia has established a Deposit Insurance Corporation. A blanket guarantee for all deposits was introduced in the aftermath of the 2008-09 financial crisis, which was set to expire in November 2012. Since then it has been extended, pending the adoption and implementation of a comprehensive deposit insurance scheme, and will remain in place until the new scheme becomes fully operational. The law underpinning the new scheme was adopted in January 2013. It left the responsibilities for responding to bank failures with the Bank of Mongolia – which performs the roles of bank supervisory authority and central bank – while the DIC will be responsible for compensating affected depositors in the case of the withdrawal of a banking licence. The initial capital of the DIC (100 billion tugrik – around US$ 71.4 million – or approximately 0.7 per cent of GDP) is to be contributed jointly by the Ministry of Finance and the Bank of Mongolia. Deposits up to 20 million tugrik (around US$ 14,000) are covered. Currently, this provision implies full coverage for over 99 per cent of individual depositors, and coverage of 20 to 30 per cent of total bank deposits.

A large commercial bank was declared insolvent in July 2013. The failure of the fifth-largest commercial bank in Mongolia – Savings Bank – occurred after a large borrower defaulted on its obligations to the bank. This is the third failure of a large bank in Mongolia since 2008. The assets of Savings Bank, including its extensive branch network, have been taken over by State Bank, a state-owned bank that was created following earlier bank failures.

A new agricultural exchange began operations. The exchange – launched in April 2013 – currently runs trial trading in wool and cashmere products, and is expected to gradually extend coverage to other agricultural products. In May 2013 Mongolia adopted a revised Securities Markets Law, which streamlines procedures for dual listings of shares on the Mongolian Stock Exchange and international stock exchanges.