YPO Mongolia NGO recommends setting boundaries for government involvement in businesses

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The following is an interview with chairman of the Young Presidents’ Organization (YPO) Mongolia NGO and member of the organizing committee of the Mongolia Economic Forum Ts.Erdenebat about the upcoming Mongolia Economic Forum 2016, the business environment in Mongolia, and other important topics.

The Mongolia Economic Forum 2016 will be taking place from March 30 to 31. 

Mongolia is taking a wide range of measures to improve its legal environment. Has the business environment improved?

The business environment is improving in some areas, but drawing back in other areas. International credit rating agencies have lowered the credibility of Mongolia. Loans for businesses and the private sector are directly dependent on the nation’s credit rating. They attract financing by paying slightly higher interest rates than Mongolian bond yields. Businesses have limited opportunities for taking out long-term loans required for expanding their operations. The stock and insurance market must develop.

The legal environment hasn’t become specific because there isn’t a general concept and understanding of what the state should do and not do. Many challenges await businesses in the future.

Mongolia changed its legislation and legal environment related to investment. The situation will not improve immediately. There are tons of work to do. A boundary needs to be set for the works the state should manage and works the private sector should handle. The legal environment hasn’t become specific because there isn’t a general concept and understanding of what the state should do and not do. Many challenges await businesses in the future.

The new VAT Law has created an unfavorable environment for foreign investors regarding input credits and refunds. It states that any input of VAT incurred on a business’ capital expenditure for foreign services will not be deducted as input credits or refunds. This is causing considerable difficulty for some businesses.

How is Mongolia’s taxation system? Mongolia is said to be a low-tax country, but aren’t small businesses displeased with the new VAT system?

The tax system is a relative concept. Norway, which has a natural resource fund, imposes 60 to 70 percent in taxes. European countries like France have high tax rates and many stages. Compared to these countries, Mongolia’s tax rate is reasonable and affordable. However, the tax system isn’t quite accurate.

For example, VAT is supposed to support wealth creators. This form of tax has become a burden to consumers in Mongolia, which is unable to primarily use domestically produced products. VAT is increasing business’ expenditure instead. It should be a value-added tax for creating wealth, not a value-adding cost.

Producers should be supported in a roundabout way. I personally don’t believe that VAT is essential to Mongolia nor supportive to businesses and producers.

The Mongolia Economic Forum 2016 will take place from March 30 to 31. Will it cover boundaries for state involvement in businesses?

Yes. In general, the Mongolia Economic Forum raises the most important topic of the year and discusses it among representatives from the government, private sector and academics. The forum aims to use participants’ opinion, ideas and recommendations for resolving economic and social issues.

The Mongolia Economic Forum will be organized for the seventh time this year. Many issues were submitted for discussion as the forum has been running for many years and receives the most number of attendees. This year’s theme has been decided as “Lessons Learned, Facing Challenges, Solutions Pending”.

You emphasized setting a boundary for the state’s involvement in businesses. How can we achieve this?

The cabinet, Parliament and other level organizations that impact decision-making, including political parties and provincial agencies, must reach a general agreement on principles. People might think that government involvement is necessary for some businesses, but we must consider which option is the most beneficial in general. There’s no such thing as an option beneficial to all sides. All sides should sit together and discuss this issue. I think the Mongolia Economic Forum is a good place to discuss this.

Besides the state and entrepreneurs, academics who’ve been doing research for many years attend the forum. Everyone should look at the bigger picture by taking account of development trends and visions of Mongolia and then, deter-
mine development directions. Parties can have different views, but boxing the legal environment and policy too much impacts negatively on the nation’s development.

In an open environment like the Mongolia Economic Forum, the government, entrepreneurs, academics and economists should discuss and seek solutions together based on scientific findings, studies and statistics. I’d like to encourage everyone to find more information about the forum on meforum.mn and share your opinions and creative ideas.

There have been countless occasions where government involvement ruined a sector or a company that was running successfully. I don’t think it’s right for the state to forcefully control product prices in specific sectors. As I’ve mentioned before, the state and private sector should establish a boundary and openly privatize state-owned companies that don’t need to be state-owned.

There are many large state-owned mining companies in Mongolia. In general, is it correct to have many state-owned companies? Should they be privatized?

State-owned companies are privatized to attain more capital during economic difficulties. The state already monitors and gets involved in businesses anyway. Whether they should own them or not is the question.

Most importantly, it’s pointless for the state to get involved in sectors that can be managed by the private sector alone. It’s always hard for businesses to compete against the state because it has financial sources and power.

There have been countless occasions where government involvement ruined a sector or a company that was running successfully. I don’t think it’s right for the state to forcefully control product prices in specific sectors. As I’ve mentioned before, the state and private sector should establish a boundary and openly privatize state-owned companies that don’t need to be state-owned.

Representatives from the private sector often complain about state control and burden on businesses. Can you comment on this?

I would definitely say that businesses receive high pressure and burden from the state. Government agencies, established to fight corruption among high-ranking officials, had inspected and tormented the private sector the most. Statistics indicate that Mongolia has around 80,000 operating entities. Reportedly, less than five percent of these entities provide more than 80 percent of total tax revenue of Mongolia. Most of these companies had to be inspected or received some kind of pressure from the state. It’s unfortunate that they had to spend valuable time on dealing with state inspection agencies rather than focusing on running their businesses or producing wealth.

Some entrepreneurs’ rights to travel abroad are restricted for several years even though they haven’t been ruled guilty by the court. Arresting people for suspected involvement in a crime gives higher credit to officials in government organizations than acquitting the innocent. Under this type of system, pressure and violation of rights of people in the private sector will not decline.

Is that why you insist on having both sides determine common interests and objectives together?

Voters, decision-makers, candidates and political parties should put aside their conflicting problems and instead focus on the general and common qualities as this year is an election year. They can be conflicted on the nation’s development direction but they shouldn’t tilt too much to one side. Basic rights are violated when the rights of a specific group, parties or individuals dominate.

Many people used to say that Mongolia can develop without mining and destroying the nature. Then an investment law was approved specifically for the mining sector, which is strategically significant to the nation. Others considered investors as destroyers of the economy and chased them away. Yet, investment is crucial for the development of any nation. We have to have capital to purchase foreign products and services. There are only few ways to generate capital, such as taking out a loan, receiving financial aid and grant, selling gold, through foreign direct investment, and exporting goods.

Mongolia exports copper, cashmere and gold. However, their prices have dropped. Now that Mongolia’s foreign currency resource is diminishing, the Mongolian economy is in urgent need of foreign direct investment. Our many years of experience have taught that it’s not easy to bring back investors by simply changing the law. It doesn’t establish credibility. A considerable amount of time is required for creating mutual credibility and trust. That’s why I advise politicians, especially candidates running for election, to stop giving false promises and promises that cause damages to the economy.

Politicians’ promises have impacted greatly on ordinary people’s lives and became a huge lesson. The overall image of Mongolia isn’t improving because politicians are too focused on winning elections, all the money from foreign loans are distributed to the public, investors are chased away or oppressed and businessmen are banned from travelling abroad, because businesses are going to arbitration for violation of their rights. These things decrease Mongolia’s credibility. Even though the current state is trying to fix previous mistakes and improve the situation, it can be seen that it’s difficult to raise credibility and trust within a short period. The solution is what I mentioned before – establishing and focusing on common rights and interests.

How do you envision the external business environment for Mongolia?

I predict that the external environment will be quite risky this year and the next few years. The economy of both Russia and China are questionable at the moment. Russia has an economic veto and prices in the oil market, their main export market and biggest source for foreign exchange currency, have fallen. Economic growth of China has slowed down. Economists noted that China has major urgent issues to resolve regarding their bad loans in the financial department.

Looking at the bigger picture, the global economic growth is uncertain. The impacts of these difficulties and challenges on the domestic economy from 2016 to 2018 and future measures will be discussed at the Mongolia Economic Forum. Besides foreign and domestic situations, Mongolia will hold an election and the ASEM Summit this year. I hope that parties likely to form the next government can discuss the nation’s interests and common interests of the state and private sector, as well as seek solutions to prevent the economy from becoming boxed in.

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