The State Great Khural has repealed the highly controversial subclause 11 in the revised budget legislation that would have required foreign companies to deposit foreign exchange sales revenues in Mongolian banks. The board of directors of the International Monetary Fund (IMF) had postponed approval of the Mongolia bailout package, scheduled for April 28, because of concern about that clause. The IMF will now re-examine the amended budget law and proceed towards a decision. The mandatory bank deposit clause was not in the Government’s original bill but rather was added by MPs during the Budget Committee consideration of the bill.

Besides erecting a major new impediment to FDI, and throwing a scare into overseas financial markets that were beginning to incline towards taking another chance on Mongolia, the provision would have been a clear violation of existing Investment Agreements (IA) and Production Sharing Contracts (PSC), which guarantee investors no changes in tax and performance requirements beyond those in effect at the time the IA or PSC was signed. Foreign companies making multi-billion dollar investments in projects with life spans of 30 to 60 years must have a stable tax and regulatory environment in order to secure the necessary capital. Among the foreign investors with major stakes in the sanctity of Investment Agreement contracts are the IFC and MIGA, members of the World Bank Group, which arranged US$2.2 billion in debt and guarantees to support the Oyu Tolgoi copper. Mongolia concluded its Investment Agreement on Oyu Tolgoi in 2009. The International Monetary Fund and the World Bank Group are sister organizations that were both created at the international Bretton Woods Conference (New Hampshire, USA) in July 1944. The IMF and the World Bank Group hold their semi-annual meetings together at the same time and place because of the close ties between the two.

However, comments made by a Mongolian People’s Party (MPP) leader when the MPP announced that they would support repeal of subclause 11 with their 85% majority in parliament have reignited worries among foreign investors about whether this issue will come back again. MP Khayankhyarvaa Damdin, MPP floor leader in the State Great Khural, told a Mongolian reporter for Nikkei Asian Review that, yes, the parliament would “change the new regulation again [i.e., repeal and delete subclause 11],” but he went on to explain, “Because the economy is in a dire state, Mongolia first needs to be part of the [IMF] grant,.” However, he concluded, “after that, we will discuss whether foreign investment should go through a Mongolian bank."

Some observers suggest that the IMF board – and the global financial community – might welcome, if not require, reassurances of stability and transparency in the form of an official statement from the Mongolian Government declaring that proposals requiring mandatory bank deposits would not again be raised during the life of the current government, which runs until the next parliamentary election in 2020. One Canadian financial analyst told us, “The [Mongolian] Government offered an undertaking to China last December that promised no future visits by the Dalai Lama for the duration of the incumbent government and that same modus vivendi regarding forced bank deposits may well be a good idea now.”

Published Date:2017-05-11