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Asia: Mongolia Begins To Find Its Own Economic Way

Washington, 4 September 1997 (RFE/RL) -- Mongolia, the world's most sparsely populated country, is often lost between its two giant neighbors -- Russia and China.

As Moscow and Beijing have kept the world's attention with different approaches to transforming from central planning to market economies, Ulaanbaatar has quietly bounced from one side to another.

But the International Monetary Fund (IMF), in its first review of Mongolia's economy -- known as an Article Four consultation -- released publicly, concludes that while important weaknesses still remain, Mongolian authorities are now on the right track and have been taking the tough steps necessary to put the country's economy on a path for sustained growth and development.

A program of transition and reform started in the early 1990s had gone way off track by 1995, with extensive central bank credit fueling both inflation and the budget deficit and trade barriers on both exports and imports causing the Asian Development Bank (ADB) and the U.S. to suspend assistance programs.

But the IMF says that in the second half of 1996, Mongolian authorities began implementing a wide-ranging program of monetary, fiscal and structural reforms designed both to reduce the public sector and promote rapid development of the private sector.

Most importantly, says the fund, authorities launched a major bank restructuring program which included the immediate closure of two large insolvent banks and the clearing of nonperforming loans that had been made previously by the banks at the direction of the government.

Along with a significant tightening of monetary policy by the central bank, these actions helped curtail inflation, stabilized the exchange rate and halt the decline in bank deposits.

The Executive Directors of the fund, in their discussion of Mongolia's situation, particularly praised what they called the authorities' "bold and ambitious approach to reforms."

Among those bold reforms were programs aimed at reducing distortions in the tax system and streamlining government operations. As a major first step, said the fund, the 1997 budget eliminated virtually all import duties, "making Mongolia one of the most open trade regimes in the world."

In addition, the fund says the government reduced direct taxes, extended the base of the sale taxes and raised excise taxes on alcohol, automobiles, and petroleum.

The executive directors -- the 24 officials who represent all the nations in the fund in handling its daily operations -- said the willingness of Mongolian leaders to take "politically difficult steps at an early stage" provided what they said was "convincing evidence of their strong commitment to the reform process."

Despite the progress, the executive directors said Mongolia still has a long way to go. Ulaanbaatar faces an economic situation that remains difficult with important risks, they said. Mongolia still has a weak banking system, a distortionary tax system, a large and inefficient public sector and an inadequate legal infrastructure.

The IMF's executive directors urged the Mongolian government to renew its attack on inflation, push ahead on tax reforms -- including imposition of a broad-based VAT (value-added tax) -- and put a new emphasis on privatization. They said this would require "early sales of large profitable (state) enterprises and the restructuring of some loss-making enterprises."

The IMF says it estimates Mongolia will record a real growth in GDP (gross domestic product, a measure of the size of the economy) of three percent this year and inflation of around 31 percent annually.

Mongolia, with a population of under 2.5 million people and a land area of over 1.5 million square kilometers, had a 1995 GDP of $767 million or $310 per person, according to the World Bank. That per capita GDP was lower than any former Soviet republic, putting Mongolia among the poorest nations of Africa and south Asia.