External Debt Burden and Overdependence on Natural Resources are the Root Cause of Mongolia’s Economic Failure.
Oyu Tolgoi has Trouble with Legitimizing its $3 billion Cost Blowout in the First Phase of Development.
Though China’s president Mr. Xi’s visit and his promise of financial assistance to the country eased the tensions accumulated between the current incompetent government of Mongolia and its people, the trouble reemerged with renewed strength due to deteriorating economic situations in the country. Recently several NGOs headed by “Debtless Mongol” and “The Real Owners of Resources” have called for a press conference as a warning to the government about the dangers and ineffectiveness of the policies implemented by the government.
Two major problems were brought up by the NGOs:
• national external debt and
• natural resource curse that fell upon Mongolia (mainly problems evolving around Oyu Tolgoi mining)
With Democrats taking over the government, sovereign debt of Mongolia has more than doubled in the span of just a bit more than two years. Total foreign debt of Mongolia had marked $9 billion dollars at the beginning of 2012 but it jumped up to more than $20 billion dollars these days and growing day by day. The official figure of the government share of the total external debt is $5.6 billion which is already 51% of the $11 billion economy. Though many doubt the actuality of official number and suspect that the external debt is significantly underestimated, it’s indeed the official number and has already exceeded the legal debt limit indicated in the fiscal stability law. The fiscal stability law set government’s sovereign debt threshold at 40% of GDP and ironically it’s indeed the limit recommended by the World Bank and IMF, organizations that had much to do with current socio-economic predicaments of the country.
With national debt 53% percent of GDP, the current government isn’t even blinking eyes for its apparent violation of the fiscal stability law let alone taking responsibility for the risks emerging from debt burden. Many experts agree that with total external debt almost 200% percent of GDP and growing speedily and no realistic plan and potential to reverse the debt wheel, Mongolia is assuredly headed the path, sovereign debt vicious circle that many resource rich poor African countries such as Mozambique, Zambia, Zimbabwe, Nigeria and others had gone before.
Sensing the anger and extreme dissatisfaction of its people with the new government’s policy, the current government of Mongolia attempted to implement “100 days for Economic Efficiency” a plan to bring an economy out of crisis situation or at least to improve the situation to quell the growing dissatisfaction among population. Many saw this plan as nothing but a cheap way to buy some time before they can borrow more from foreign sources. “100 days for Economic Efficiency” that mainly included plans of changing legal environments to bolster foreign investment in mining sectors, freeing up previously revoked mining licenses and selling lands to foreign individuals and entities for ownership and most importantly borrowing more from international sources have met fierce resistance from public and had ended now in a complete failure.
The second issue brought up at the conference was poor management of natural resources. Natural resources are blessings, or at least supposed to be blessings, for most countries, but it’s not the case for late developing countries such as Mongolia , Nigeria and others. The cases of natural resource blessings turning into a curse are not rarity and it indeed is what’s happening in Mongolia. The researches by scholars and expert opinions showed that the sudden hike in external debt and poor socio-economic measurements are the clear signs that the economy is in deep trouble deeply rooted in the founding structures of the economy. When faced with hard economic factors such as 35% inflation hike for consumer goods, 46% increase in USD exchange rates, poverty upped to 40% and people can’t even afford to buy a loaf of bread and it takes two or more individuals to afford one, and some even living off of pet/dog food, it isn’t quite convincing for the government and its affiliated media entities and other so called economists to argue that the country is in good shape and the economy is far from being in recession. Finally, it’s this time that the Mongolians had to admit that the trouble is due to mismanagement of the resources and economy’s overdependence on natural resources. And it’s this time that more and more people started realizing that no selling land or mine, no freeing up previously revoked mining licenses and no increasing national debt will save the troubled economy but will suck the economy deeper into the vicious circle of debt from which the country may never get out.
Many see Oyu Tolgoi agreement and its ever growing debt as a clear display of resource mismanagement and a curse cast upon the country. Regarding OT, the NGOs rightfully named “Debtless Mongol” and “The Real Owners of the Natural Resources” advanced several requests to the government:
a. It’s been seven to eight months since the government sent a special audit group for “overall check” on OT operations. Though there surfaced, from time to time, news on breach of contracts from both sides and brazen violation of investment agreements and possible financial fraud by investors including overestimation of expenditure and operation costs and tax evasion, no official audit report has been published. Therefore, it’s necessary that the government audit group report the audit results that will answer the following questions
– Verification of over-expenditure of investment by $3 billion dollars and solutions on how these problems were resolved and present the evidences used in legitimizing unusually large investment expenditure
– Report on possible tax evasion by OT mine that includes but not limited to $127 million dollar dispute currently being held
b. Disclose original Shareholders’ Agreement that has never been revealed and kept confidential. OT is a public company and it’s a violation of public company rules to keep company’s shareholder’s agreement secret
c. Disclose the identities of individuals of Management Team mentioned in the Restated Shareholders’ Agreement. Management team members’ full name, address, and bank accounts must be disclosed
d. Legitimate explanation required for what purpose so called Management Fee was created and who this large sum of money, 3% of all investment expenditure before production and 6% after production, paid to?
e. Inform public on the negotiating process with Rio Tinto on terms of agreement for starting second phase development of OT mining, specifically $6 billion dollar additional investment and its legitimacy of the amount. Given 2010 original investment estimation at $6 billion dollars for both open and closed pit mining and with current investment expenditure exceeding $10 billion for the open pit only and additional $6 billion requested for the closed pit mining and the total amounting to $16 billion, it’s necessary to question the overestimation and over-expenditure by OT.
– the disclosure of the terms of agreement must include, the
– Interests and other terms the Mongolian government would have to pay to its partner Rio Tinto for raising investment money from international market or borrowing from one of its own affiliated financial entities.
f. Mongolian government must inform the public, the actual owners of the wealth, on the terms and total amount it has to pay to its partner, Rio Tinto, for the 34% ownership in the OT mine.
g. Legitimate explanation required for legitimacy of the act by the Mongolian government who is representing the actual owners of the wealth, peoples of Mongolia, for agreeing to borrow from and pay to Rio Tinto, its partner in business, interest bearing amount for 34% share of OT mine, that is the property of all peoples of Mongolia.
h. Legitimate explanation required for the odd agreement on why Mongolian government has to “borrow” 6-7% interest bearing investment fund from Rio Tinto, co-owner and investment partner, for financing 34% stake it holds in OT while the actual investment fund is raised on the international market with OT mine assets as collateral.
i. Inform the actual owners of the wealth on the process of act to increase Mongolia’s share in OT from current 34% to 50%. It’s not only a agreed term written in the contract, but also a promise by the Democratic party during the parliamentary election and it’s a time now for the Democrats, current rulers of the government, to carry out what was promised.
The non-governmental and nonpartisan organizations, “Debtless Mongol” and “The Real Owners of the Natural Resources”, representatives of people of Mongolia, demand that the government of Mongolia give clear and full answers to all the questions asked in this statement.