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http://zgm.mn/post/1809/

Higher gold royalty poses threat to FX reserves

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http://zgm.mn/post/1809/


Due to consecutive failure to form the quorum, the Parliament has delayed its plenary sessions for two months. One of the key items on the order list was a bill on extending 2.5 percent gold royalty for another three years, which was supposed to be ratified before the turn of the year. Thus, gold tax will now be set at pre-revision level at 5-10 percent, depending on the global price of gold.

According to a study conducted by the Bank of Mongolia (BoM), higher royalties lead to  lower gold purchase, which ultimately affects foreign exchange (FX) reserves. For instance, gold tax was at an unbearably high level of 68 percent with the sudden income tax in 2006-2013. As a result, gold purchase fell from 15.5 tons to 2.1 tons by 2010. In other words, the BoM’s treasury fund was almost drained empty.

Officials explain that the sudden income tax, which raised gold tax from 5 percent to 68 percent, was due to boom in copper price; however, the decision had more adverse effects than its benefits as the number of artisanal miners drastically increased as a result.

The 2.5 percent gold royalty was approved in 2014. The result was almost immediate as gold purchase consistently increased in an annual amount, reaching a record high of 22 tons last year, which is 10 percent higher than the previous record in 2017, expanding FX reserves by USD 800 million to a 15-year record.

Therefore, the increased gold royalty is raising concern over a potential tax avoidance of gold producers, reduced gold purchase and increased illegal transportation of gold. A spokesperson of the BoM previously stated, “This law was ratified to boost the economy that was collapsing in 2014. The 9 percent royalties will increase budget revenue by only MNT 50 billion. BoM views the 2.5 percent royalties should be extended by at least 3 years.” BoM estimates to increase foreign exchange (FX) reserves by USD 750 million this year. The 2019 Monetary Policy Guidelines ratified by the Parliament stated to increase FX reserves to USD 6.5 billion in the middle-term.

As for other countries, gold royalty stands at 3 percent in the U.S, 5 percent in Brazil, 4 percent in Indonesia and 2.5 percent in India. This shows that the current 5-10 percent tax is higher than average. 

Miners and investors seek favorable tax environment. China, for instance, deduct only CNY1.2-7 per ton of gold depending on the capacity of the mine, technical conditions and locations, as well as 2 percent royalty on import golds.

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Ulaanbaatar city competitiveness index rises 7 percent

District competitiveness index released

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The Economic Policy and Competitiveness Research Center (EPCRC) disclosed the results of research on district competitiveness, which was conducted for two years since 2017.

In this survey, the overall competitiveness index of Ulaanbaatar city was valued at 0.557 points. KhanUul, Bayangol, and Bayanzurkh districts are leading the Competitiveness ranks, while the isolated districts, including Baganuur, Bagakhangai, and Nalaikh stands at the bottom. The purpose of this study is to measure and evaluate the competitiveness of Ulaanbaatar city and its nine districts, and to create a comprehensive database that provides citizen participation. The competitiveness of districts is measured by 150 criteria in five categories, namely quality of life, environment, safety, governance, and economy.

The competitiveness index is rated from 0 to 1. For example, Ulaanbaatar's competitiveness rate is about 0.5 points, which is relatively competitive or moderate.

Ulaanbaatar's overall competitiveness increased by seven percent compared to last year. Experts emphasize that our country's key driver in retreating competitiveness is governance issues. "The Governance remains unstable. Not only the authorities but also the structure is unstable. In the past three decades, structural organizations of all ministries have changed 2-6 times. Mongolia is facing a crisis of instability. Names, addresses, policies, and personnel are all sensitive. It is not hard to fix it. Although people have changed, the policy should remain the same,” remarked the head of the executive board of the EPCRC.

The survey concludes a difficult economic situation in remote districts. Therefore, it is important for local citizens to have access to public services. This survey can be used by district and city governors. Experts emphasized that the study will be the basis for district planning. Deputy Governor of the Capital City said that the division will be divided into two sub-districts to build a new committee to bring public services closer to citizens.

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Former President Enkhbayar Nambar calls for terminating Oyu Tolgoi contract

Former President denounces OT claiming it fraud

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The third President of Mongolia Enkhbayar Nambar has made a special guest appearance on the “Uncensored Talk” program of C1 Television channel. Among the range of discussions, one particular topic raised a public resentment as the former President displayed enmity towards the Oyu Tolgoi (OT) agreement, claiming it a fraud. The public has been criticizing the late President for intentionally slandering the major international-level investment that was established under the Law of Mongolia at an instruction of certain people.

Mr. Enkhbayar told the show, “The OT agreement was established because the then-Prime Minister Bayar Sanjaa persisted on concluding the deal. I, on the other hand, was an outcast in the National Security Council. But the council’s decision required a 100 percent vote to be valid. We were unable to conclude the OT agreement because I was against it. Therefore, they had only one option of ousting me for the agreement. I lost the election in 2009 and later in October, the OT agreement was effective immediately.”

“Only a single structural change was made in the National Security Council at the time. The then Parliament Speaker Demberel Damdin and Prime Minister Bayar Sanjaa were still in office. The only adjustment was that Elbegdorj Tsakhia was in place of Enkhbayar Nambar. The OT agreement was ratified without an obstacle at once that year,” said the former President, expressing strict opposition against the project.

The OT ’s total cashspent in Mongolia totaled USD 8.7 billion in 2018

The Government of Mongolia, Ivanhoe Mines, and Rio Tinto signed the deal in 2009 with the Mongolian Government holding 34 percent stake of the OT.

The public agrees that the OT arrangement was the best deal for Mongolia’s long-term sustainable development, future prosperity, and financing upcoming achievements. Over the last decade, a massive new era of mining investment has begun in the Gobi desert in Mongolia. Out of them, the largest and most succesful project is the Oyu Tolgoi. The company is now the biggest taxpayer in Mongolia and its impact on the country’s economy is already visible. For instance, the OT expended USD 6.5 billion in investment and operational costs between 2010 and 2013, while Mongolia’s gross domestic product stood at USD 11.1 billion with total revenue of USD 2.7 billion in 2016.

The OT’s total cash spent in Mongolia totaled USD 8.7 billion in 2018. Furthermore, the company paid USD 322 million on taxes, fees, and other payments, USD 439 million on national procurement last year, and is employing over 17,000 workers as of today. The OT also continues to lead internationally with its operational safety and increased its copper and gold output in 2018, overperforming their production plan.

In addition, the business community has expressed concern over potential harm of such populist statements to the future of the project, which will ultimately drive out investors that are interested in Mongolia and tarnish the country’s reputation among foreign investors.

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Standing committee passes bills on foreign loans

Standing Committee on Budget discusses agreements with international organizations

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Parliamentary Standing Committee on Budget discussed the bill on the Government’s rights to draw loans from foreign countries and international organizations, and passed the General Financing Program between the Government of Mongolia and the Asian Development Bank (ADB) and the draft amendment on the general agreement and conditions between the Mongolian Government and the Government of the Republic of Poland.

The Government has negotiated with the ADB to cooperate on finance, agriculture, education, health, and agriculture in 2017-2020. In this context, USD 334 million will be allocated to Mongolia. The fund will be used in five projects including vegetables, border services, irrigation, regional roads, and free economic zones.

Plus, the European Bank for Reconstruction and Development (EBRD) offered to grant loans up to USD 300 million. The loan will have a maturity of 10-16 years with a moratorium of three years. Up until today, the EBRD has invested 99 projects that amount to EUR 1.6 billion and the financing of this project was directed entirely towards private sectors.

However, Mongolia will use the current loan to build the road from Darkhan to Ulaanbaatar. The road will have four lanes and two lanes will be constructed by the ADB and the remaining two lanes will be built by the EBRD. The spending of remaining funds is still unclear, but the Finance Minister Khurelbaatar Chimed said that the total amount of fund will USD 300 million.

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Parliament’s irregular session opens

Order list includes tax package, procurement and minerals laws

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The Parliamentary irregular session commenced with 81.3 percent attendance yesterday.

Reading the final wording of the bills that were adopted at the end of the fall session, including the revision to mining exploitation fee, tax package, and replacement of several authorities of law enforcers, Parliament Speaker Zandanshatar Gombojav remarked, “The 2018 fall session of the Parliament has been interrupted for a while. The irregular session is starting due to piled up bills on the order list that need to be resolved immediately. In terms of natural resources and territory, Mongolia is one of the leading countries; however one out of three people are poor. For instance, the debt pressure that will come in the next few years is likely to affect the economic security of the country. Since the social transformation in 1990, Mongolia has been hit by a crisis due to the irresponsibility of authorities and uncoordinated laws and regulations. Therefore, it is time to unite and consolidate our power for Mongolia.”

He then called for Parliament members to cooperate in three directions:

“First, to strengthen Parliamentary governance and implement reforms. Implementing the provisions of procedure rule on improving the discipline and accountability of Parliament members is unique for this session. In addition, a working group responsible for revising the procedure rule, introducing international standards, and revising the Parliament’s strategic plan, has been established. Secondly, to amend the Constitution. Parliament is in charge of ensuring equality of state power by adding amendments to the Constitution, ensuring the independence of the judiciary, and conducting administrative and territorial reforms. They will discuss it at the spring session. Thirdly, implementing parliamentary oversight functions. The lack of parliamentary oversight has led to a Government crisis; thus, it is important that we ensure human rights and justice,” addressed Mr. Zandanshatar.

At the Irregular Session, the Parliament Speaker has ordered to discuss the following bills.

• General Tax; 

• Corporate Income Tax; 

• Personal Income Tax; 

• Procurement of Goods, Works, and Services from State and Local Funds; 

• Minerals; 

• Appointment of the General Staff of the Armed Forces; 

• Consent to the deputies of the General Prosecutor General; 

• Appointment of the Head and Deputy Head of the Independent Authority Against Corruption.