Twenty-five years ago Mongolia’s economy was fully dependent on the Soviet Union. Following the collapse of the socialist system in Eastern Europe and the dissolution of the Soviet Union, the 400 million USD USSR-Mongolia barter trade agreement dissolved in 1991. This cut 80 percent of Mongolia’s imports as a cold winter loomed. Our economy basically went bankrupt, and stores had only two things: shop clerks and salt.
At the time, Mongolians started the transition from a system dominated by a single political party to a parliamentary democracy, and from a centrally-planned economy to a market economy. If we look at this historical time today, there are many areas where we fell short, although we accomplished a lot. This political and economic transition could not have been fathomed without soft loans and aid from donor countries and international development organizations.
DEVELOPMENT LOANS AND AID
Mongolia became a World Bank member country in 1991, on February 14, Lunar New Year’s Eve. In the lead up to this milestone, we had become a member of the International Monetary Fund (IMF) and Asian Development Bank (ADB). Having established these cooperation agreements and acquired new partners, we welcomed the Year of the Iron Sheep. Given a lack of experience, Mongolians had to learn from our new partners and develop our economic and fiscal policies together to establish our democracy and free market system.
In order to overcome the economic crisis and tackle new challenges, Mongolia concluded negotiations with the IMF in August 1991 and started a stand-by program with the objective of reducing the trade deficit. It was followed by agreements to receive financial and technical support, and soft loans from World Bank, the ADB, and partnering countries, especially Japan. The top priority for the spending of the loans and aid was buying the required equipment, materials, and spare parts for the agriculture, energy, coal extraction, and fuel sectors.
Since then, Mongolia has worked with the IMF to align our budgetary and fiscal system with international standards, have a centralized account for state funds, change the policy for budget revenue, clarify the tax environment, and reform the banking, financial, and insurance sectors.
In cooperation with World Bank, Mongolia worked to improve public governance, enhance urban development, take education services to a better place, strengthen Ulaanbaatar’s management, reduce air pollution, make management of the mining sector stronger, develop local infrastructure, protect the environment, and develop government policies related to these issues.
Another project that was carried out with World Bank was index-based livestock insurance, which is running successfully even today. This insurance takes into account Mongolia’s climate and weather conditions and is based on the needs of herders.
Under the Sustainable Livelihood project, local development funds were set up in accordance with the revised budget law. By registering properties in the countryside, increasing civic engagement, developing microfinance, and reducing the centralization of budget allocation at the local level, this initiative increased the opportunities for investing in the countryside.
The ADB has provided Mongolia with a total of 1.6 billion USD in funding so far, and implemented more than 276 loans, aid, and technical assistance projects in many sectors, such as education, health, finance, infrastructure, and urban planning. The ADB is one of Mongolia’s biggest partners.
With ADB funding, Mongolia’s road network in the western region will soon be commissioned, creating a corridor connecting our two big neighbors as well as Asia and Europe. Also, projects implemented in the education sector include transitioning to a 12-year education system and reforming the curricula, standards, and teaching methodologies. In health, the ADB established the framework for planning hospital infrastructure and investment, built a model district hospital in Songinokhairkhan, and carried out many initiatives on safe blood transfusions, medical waste management, health and safety at hospitals, and disease prevention.
The Government of Mongolia received a total of 5.6 billion USD in official development assistance (ODA) from partner countries and international organizations in 1991-2014. Approximately 54 percent (3 billion USD) was soft loans, and 46 percent was aid.
In the same period of time, Mongolia’s GDP per capita increased tenfold and has now reached 4,000 USD. Mongolia has moved from an underdeveloped country to a developing country. At this stage, we have increased opportunities to acquire huge loans with favorable conditions.
BENEFITS ACHIEVED AND LESSONS LEARNED
So far, Mongolia has spent 31 percent of its soft loans from abroad on infrastructure, 12 percent on power and energy, and 11 percent on the banking and financial sector. If we look at development aid, 15 percent has been spent on human development, 11 percent on emergency aid, 10 percent on power and energy, 10 percent on agriculture, and nine percent on roads and transportation.
For some time, several institutions, including the Ministry of Foreign Affairs, the Ministry of Trade and Industry, and Mongol Bank, managed the internal distribution of loans acquired from abroad. With the enactment of the Law on Foreign Loans and Aid in 2003, the Ministry of Finance assumed the role of managing the distribution process. This meant that all receipts and documents for loans went to the government’s register.
Receipt of foreign loans and development aid is largely dependent on the transparency of the government and its accurate reporting of expenditure.
However, Mongolia’s government is not known for its stability, and our mid and long-term development policies are weak. Also, the government officers who are in charge of implementing foreign loans and aid keep getting replaced. These factors contribute to projects being disrupted, duplicated, and not being aligned with government policies.
Going forward, we need to increase the actual benefits of development projects, improve reporting mechanisms, and direct foreign loans and aid to serving the objective of diversifying our economy, which is greatly dependent on a single sector: mining.
Currently, Mongolia is still dependent on foreign loans and development aid, despite the expansion of our economy. A clear example is that although we implemented an IMF stand-by program in 1991 and in 2009, we are now negotiating for another one to be implemented in 2017.