Development Bank to accelerate Mongolia’s reconstruction and growth

Mongolia is experiencing a rapid economic growth. For the last ten years, it’s economy grew by approximatly by 7 percent, and it is predicted that this growth will double during the next five years. The country’s rapid economic growth should be accompanied by a development of its infrastructure and production industries. In order to ensure such development, Mongolia plans to establish a Development Bank (DB) whose role will be to focus on and support initiatives implying low effectiveness operations and requiring long-term investments. For the past year and after intensive discussions at decision-making level, progresses seem to have finally been made concerning the DB and last month, a discussion on the Development Bank draft law at the Budgetary Permanent Committee was held. The Korean Development Bank (KDB) has been selected as its management team and has taken the decision to work non-profit in its effort to raise the level of development of the Mongolian nation. The role of the DB will differ from that of commercial banks by investing in areas where commercial banks do not, and not attracting savings like commercial banks do. Certain parts of financing will come from the state budget, while the rest will be drawn from international loans, programs, aids, etc. 

In addition, if, on the one side, the Mongolian Development Fund has a responsibility to direct capital accumulated from the mining industry on to projects related to social welfare and infrastructure, the DB, on the other side, will focus on financing projects aimed at reconstruction and development issuing long-term and low interest loans.
Although the KDB was chosen to manage the newly established DB, clarifying at least one issue out of many, members of Parliament have overwhelmed the Minister of Finance with questions during the first discussion of the draft Law concerning the DB, which shows the issue is still a hot topic.

Members of Parliament were concerned that the draft law includes a clause on the Government’s responsibility to provide guarantees when it comes to  implementing projects effective.   
The draft Law on the DB currently undergoing discussion will have to be carefully considered discussed in order to avoid mistakes; otherwise it is the state budget that will bear the responsibilities. Therefore, members of Parliament warned about the necessity to produce a law providing the right conditions to run a stable, profitable, and independent bank.
Alarm has also been raised regarding the fact some hidden interest might have been overseen as the Representative Managing Council (RMC) and the management team were established and selected prior to the adoption of the law. Moreover, some members of Parliament are complaining that a management tender bid has been announced and a foreign state owned bank selected.

However, Finance Minister S. Bayartsogt asserts that the Development Bank will be 100 percent state owned, adding that as the bank will be established for the purpose of speeding up reconstruction and development, the Government has adopted its statute and will run its operations, and that after the adoption of the law, the tender bid will be reviewed again.
The Budgetary starding Committee was able to make a resolution out of the many issues that attracted criticism. For instance, it was agreed to guaranty the independence of the DB that decisions to provide projects with investment loans will be carried out by the Representative Managing Council and not by proposals of Government members, and that other banks would have a right to finance projects that are issued with guarantees.
In addition, it was decreed that no less than a third of the Representative Managing Council members will be selected from independent experts in the field. Chief of the Development Bank Representative Managing Council and Chairman of the National Development and Innovation Committee, Ch. Khashchuluun said “though preliminary results of the tender bid have come out, the issue has yet to be discussed in detail. Teams from Korean KDB and Japanese Development Financing Institution participated to the final round. Korean Development Bank or KDB was selected based on its experience and the scale of its capital. They had the advantage of turning a post-war Korea with a low GDP per capita into a modern, highly developed and technologically advanced industrial country. However, an official agreement has yet to be signed. After the adoption of the DB Law, the current proposal will need to be improved accordingly. It is necessary to look back into the content again.”

Ch. Khashchuluun added after the adoption of the law, procedures for establishing agreements and other issues will become clear. The participating parties’ team composition and the detailed review of activity projects are being processed. Meanwhile, consultative cooperation with experienced, internationally renowned organizations and large corporations providing development financing is ongoing. For example, we met with the representatives of the Japanese Development Bank, German Development Bank (KFW), and Citibank. Many options are still open.”
Whichever options are taken, the key to the DB success is a good management team. As Mongolia lacks experience in the financial sector development, it is understandable that a decision to build up a team from experienced foreign and domestic experts is considered best and after the adoption of the law, undoubtedly, many issues surrounding the DB will be clarified.
In any case, the main role of the Development Bank will be to boost the development of industries and high technological sector which usually requires decades to occur, and this is what the DB will be judge for, its capacity to finance investment projects to spur the reconstruction and growth of the nation.