OBG talks to Ch. Ganhuyag, Vice-Minister of Finance and Founder, Mongolia Economic Forum

Interview: Ch. Ganhuyag

How will policy makers ensure that the rapid growth in the sector will not lead to a bubble?

GANHUYAG: The growth is not driven by an artificial rise in demand, but rather by physical foreign capital and investments. Whether the increase in demand will lead to a bubble is not entirely up to us, because the growth is driven by commodities exports.

As long as China and the rest of the world keep buying coal, copper and other commodities, revenues and income will continue to flow to Mongolia. The government has a clear vision of how we want to manage our resources. We are tasked with assigning revenues to good causes, including education, infrastructure development and health via government spending and direct cash distribution. Many people argue that direct cash distribution is unwise, but Mongolia is a democratic country, and these choices were made collectively. We have gone through 70 years of socialism and 20 years of transition, and during the last 20 years we have experienced many hardships. We understand that people want to see the benefits now and not in 20 years, so we are raising salaries and providing cash handouts. As a small country we have the means to quickly have a positive impact on people’s lives.

We also have the benefit of looking back at other countries’ experiences, successes and failures to draw lessons. In 2012 we plan to increase public workers salaries by an average of 53%, a choice that has been criticised by both the private sector and international observers and institutions. If the government does not support other sectors of the economy, however, we will lose our talent as well as our capital to the mining sector and become a truly mining-dependent economy.

How do you respond to claims that the Mongolian economy is experiencing “Dutch disease”?

GANHUYAG: There is some truth in that, because salaries in the mining industry are substantially higher than in all other sectors. Every day people are leaving their current positions to seek opportunities in the mining industry. We are losing both capital and talent to the mining sector. When I saw that interest rates were raised, I was a little disappointed. While high interest rates will not impact miners, as the sector is generally insensitive to interest rate hikes, the move will have an impact in other sectors like agriculture, manufacturing and services – the areas where we need capital and talent most. Recently the government has implemented several supportive mechanisms with different types of subsidies for our agriculture and manufacturing sectors. Looking ahead, we must continue to guard against inflation, but at the same time we must aim to deliver sustained economic growth and protect our local industries against the threat of Dutch disease.

What is the government’s strategy to support the non-mining industries, such as tourism?

GANHUYAG: Both tourism and light industries, which includes cashmere, are mostly driven by the private sector, according to the government’s wish that the private sector take the lead in developing these areas.

Our priority is to provide them with a stable, functioning and favourable environment for business to flourish. Of course, the mines are of strategic importance to the development of Mongolia. The state has to be directly involved in this industry because our private sector does not have the capacity. Most of our partner companies in our strategic mines are larger than our entire GDP so the counter partner by default becomes the government in the name of the people.

The mining boom has produced an important source of revenue, supporting the emergence of new industries and sectors. However, in tourism and agriculture we rely more on the private sector, and our role is to create a favourable environment to facilitate foreign investment and entrepreneurship in these industries.

Furthermore, we must work to cut red tape and build a business-friendly environment. It will take time for revenues to flow to the budget so we can slowly start developing and supporting these different industries.