WT/TPR/S/145 Trade Policy Review 
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IV. TRADE POLICIES BY SECTOR 
(1) OVERVIEW  
1. The contribution to GDP of Mongolia's differe nt sectors has changed substantially over the 
last decade.  The services sector di splaced agriculture (including hunting and forestry) to become by 
far the largest sector, accounting for 61.0% of GDP in 2003 (37.9% in 1995);  agriculture (including 
hunting and forestry) declined from 38.0% to 20.1% of GDP, and manufacturing fell from 12.1% to 6.2%.  The main service subsectors are wholesal e and retail trade, transport, storage, and 
communications.  The services sector is also the major employer, accounting for 46.4% of total employment in 2003 (39.8% in 1995), followed by agriculture and forestry with 41.8% (46.1% in 
1995), and industry with 11.8% (14.1% in 1995).  These compositional changes in GDP and 
employment reflect substantial structural adjust ment in the economy, largely in response to the 
comprehensive reforms undertaken in Mongolia's transition from a centrally planned to a market 
economy.   
2. Livestock herding is the main agricultural activ ity.  Labour productivity in agriculture is little 
more than one third of the level in rest of the economy, and declining.  Some 30% of exports are 
agriculture based.  Agricultural re forms, including privatization a nd price de-regulation, advanced 
rapidly in the 1990s under Mongolia's transition to  a market economy.  This caused substantial 
adjustment, largely out of crops reliant on state support, especially wheat, into cashmere and other 
livestock activities.  However, droughts and harsh winters reduced herds, and along with disease and malnutrition from nomadic over-grazing of state land,  have reduced productivity and contributed to 
land degradation. 
3. Agricultural policy is directed at reversing declining productivity and achieving greater self-
sufficiency, especially in milk, flour, potatoes, and other vegetables, by promoting private participation and investment.  Greater self-sufficien cy is encouraged on grounds of food security.  
Meat and flour along with cereal seeds, salt, wheat , and drinking water are considered "strategic 
products".   The Government intends to expand wheat pr oduction to meet 60-70% of domestic demand 
for flour.  Greater domestic processing for expor t of livestock products, such as cashmere, meat, 
hides, and furs, is also a high priority.  Mongolia has staunchly resisted protectionist pressures, including in agriculture, with few exceptions.  Flour and certain vegetables have higher seasonal 
tariffs of 15% (instead of 5%) for most of the year, and limited state support for wheat growing has resumed through the State Agricultural Fund.  Unpr ocessed cashmere exports are taxed to provide 
cheaper supply to promote domestic processing.  Ho wever, such measures may have contributed to 
excess processing capacity, since up to half of Mongo lia's raw cashmere is smuggled into China to 
avoid the tax.  Such protective policies, includi ng the dominance of and at times assistance provided 
to the majority state-owned firm, Gobi, have stifled cashmere processing and have not expanded 
value-added activity, despite benefiting processors through lower cashmere prices at the expense of 
herders.  Exports of raw hides and skins are prohibite d, also with the intent of encouraging domestic 
processing by lowering prices to processors, but ag ain at the expense of herders and with little 
economic merit. 
4. Forests are being depleted.  Annual allowabl e cutting quotas are set as much as four-fold 
higher than seemingly sustainable levels, and subs tantial illegal logging exists (accounting for as 
much as 80% of the total annual harvest).  Export taxes of US$150 per cubic metre (m
3) effectively 
ban exports, and were extended from unprocessed to  semi-processed timber products to promote 
domestic processing.   Mongolia WT/TPR/S/145 
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5. Mining, mainly of gold, copper, coal, and fluo rspar, is the economy's industrial backbone.  
Mineral processing accounts for two thirds of exports  (gold and copper).  St ate-owned firms dominate 
mineral production, including coal.  The largest stat e-owned enterprise in this sector produces copper 
concentrate and is a government joint venture, 49% owned by the Russian Government and 51% by 
the Mongolian Government.  Gold production has expa nded substantially and is mined privately.  The 
Government aims to double mining's contribution to GDP (12.7% in 2003).  Most foreign investment is in mining.  New minerals legislation in 1997 accorded foreigners greater security and access to 
mineral exploration and development.   
6. The state monopoly on petroleum importation a nd distribution was abolished in 1990.  The 
tender for the highly indebted state-owned Neft Oil Import Concern (NIC) was concluded in early 
2004.  Domestic interests acquired the State's 80% e quity.  Oil income is exempt from income tax.  
The Government aims to establish an oil refining industry.  Restructuring of the highly indebted 
state-owned electricity sector started in 2001 with market reforms.  The former Energy Authority's 
operations were unbundled into 18 companies se parating generation, which was de-regulated, 
transmission, and distribution.  Privatization efforts are continuing.  The Energy Regulatory Authority 
was created in 2002. 
7. The manufacturing sector, consisting mainly of food, beverages, textiles and clothing, has 
been substantially restructured.  State equity in manufacturing (e.g. cashmere products) remains 
significant.  The Government has prioritized as ke y industries copper and meat processing, leather and 
cashmere products, carpets, and wool.  Removal of cl othing quotas by the United States, Mongolia's 
major market, in 2005 may threaten production if foreign joint ventures leave as a result. 
8. Mongolia made various GATS' commitments as part of its accession to the WTO.  Several 
banking crises in the 1990s closed major banks a nd required costly government-funded rescue plans.  
However, the level and rising va lue of bank and other non-performi ng loans (albeit well down on 
1990 levels) raises prudential concerns.  The capita l market remains thin.  Prudential requirements 
and supervision, especially of banks and non-bank fi nancial institutions, are being strengthened along 
with institutional capacities and corporate governance,  based on international practices.  There are no 
non-prudential restrictions on foreign banks or other financial institutions, including insurance 
companies.  Bank privatization, including sales of a ssets to foreign interests, has advanced.  State 
equity has fallen from 60% in 2001 to currently 4%, and bank assets are 31% foreign owned.  Two 
insurance companies have been full y privatized, the largest to a cons ortium with overseas interests, in 
2003. 
9. The majority state-owned Mongolia Telecom (MT), has a statutory monopoly on domestic 
basic telecommunications until 2015.  International calls were de-regulated in 2002.  Two mobile 
operators exist.  Prices, including mobile services, are regulated on a full-cost-recovery basis, and cross subsidies apply on basic services.  New legisl ation in 2001 laid the foundations for further de-
regulation, by creating in 2002 the Communi cations Regulatory Committee and introducing 
interconnection and other competition safeguards.  However, the MT monopoly greatly limits their 
practical significance. Government policy is to end this as soon as possible, subject to re-negotiation 
of an agreement concluded in 1995 with Korea Telecom on the terms of MT's privatization.  
Transportation services, other than domestic air services, are heavily regulated, and restructuring, including private participation, is envisaged.  The national air carrier and railways are state-owned;  
MIAT is to be privatized in 2005.   Tourism is a priority sector.  
(2) A
GRICULTURE AND RELATED ACTIVITIES  
10. The share of agriculture (including hunting a nd forestry) in Mongolia's GDP declined from 
37.0% in 1999 to 20.1% in 2003 (Table IV.1);  it accounted for 41.8% of total employment in 2003 WT/TPR/S/145 Trade Policy Review 
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(Table IV.2).  Labour productivity in agriculture has declined and is less than one third of the national 
average.  Over three quarters of agricultura l output is livestock production, which has grown 
substantially relative to crops.1  However, disease (foot and mouth) and especially harsh winters 
(dzuds) and droughts have substan tially reduced livestock numbers in recent years.  Agriculture 
accounts for about 30% of exports, mainly cashmere, hides and skins, meat, and camel wool.  Most 
wheat, flour, fruit, and vegetables are imported.   
Table IV.1 
Share of GDP by sector, 1995 and 1999-03 
(Per cent) 
 Share of GDPa 
 1995 1999 2000 2001 2002 2003 
Agriculture, hunting and forestry 38.0 37.0 29.1 24.9 20.7 20.1 
Non-agriculture 62.0 63.0 70.9 75.1 79.3 79.9 
Mining and quarrying 12.0 8.6 11.5 9.0 10.1 12.7 
Manufacturing 12.1 5.9 6.1 8.1 6.3 6.2 
Services 37.9 48.5 53.3 58.0 62.9 61.0 
Construction 1.7 2.5 1.9 2.0 2.3 3.1 
Electricity, gas, and water supply 1.8 3.6 2.4 3.0 3.8 3.4 
Wholesale and retail trade and motor 
cycle and motor vehicle repairs  17.0 20.7 24.0 26.7 27.7 26.5 
Transport, storage, and communications 6.4 9.2 11.0 13.0 14.7 13.9 
Financial intermediation 1.2 2.2 2.5 3.1 3.2 3.8 
Other services 9.9 10.2 11.4 10.3 11.1 10.4 
a Nominal GDP (at current prices).  Shares do not add to 100 due to rounding. 
Source:  Mongolian authorities. 
Table IV.2 
Share of employment by sector, 1995 and 1999-03 
(Per cent) 
 1995 1999 2000 2001 2002 2003 
Employment (thousand persons) 767.6 813.6 809.0 832.3 870.8 926.5 
Agriculture and forestry 46.1 49.5 48.6 48.3 44.9 41.8 
Non-agriculture 53.9 50.5 51.2 51.7 55.1 58.5 
Industrya 14.1 12.1 11.2 11.2 11.4 11.8 
Services 39.8 38.4 40.2 40.5 43.7 46.4 
Construction 3.8 3.4 2.9 2.5 2.9 3.8 
Transport and communications 4.1 4.3 4.2 4.2 4.5 4.3 
Education 6.3 5.3 6.7 6.6 6.8 6.0 
Health 5.0 4.3 4.1 4.0 4.0 4.0 
Other 20.5 21.1 22.3 23.2 25.5 28.3 
Unemployed (thousand persons) 45.1 39.8 38.6 40.3 30.9 33.3 
Labour force (thousand persons)b 812.7 853.4 847.6 872.6 901.7 959.8 
a Includes those employed in manufacturing, mini ng, and electricity, gas, and water sectors. 
b Economically active population registered  at the Employment Regulation Office . 
Source:  Mongolian authorities.  
                                                      
1 Livestock grazing, especially for cashmere, was an important safety net during the 1990s for persons 
displaced from other activities, and is the principal activity for Mongolia's poor. Mongolia WT/TPR/S/145 
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(i) Policy framework and developments 
11. Privatization of farms and agri-processing activiti es, such as flour milling, advanced rapidly 
during the 1990s.  All farms and agri-processing ente rprises are privately owned with a few notable 
exceptions.  Two meat-processing enterprises, two cashmere companies, and one flour mill remain 
state-owned.2  Agricultural prices were also  liberalized relatively quickly.   The State Reserve Fund 
buys grain, flour, and fodder at market prices only to maintain emergency reserves for natural 
disasters.  Overall agricultural production expanded as market reforms, such as price deregulation and 
trade liberalization, induced significant farm ad justment.  However, wheat and certain livestock 
products reliant on state intervention, including meat and dairying, declined.   
12. Agricultural policy is currently aimed at revers ing declining labour productivity to achieve 
greater self-sufficiency, especially in  milk, flour, potatoes, and other vegetables, by raising private 
sector participation and investment to incr ease food security.  The Government's Food and 
Agriculture Policy, released in 2003, emphasized inv estment in irrigated vegetables and production of 
cereals and fruit, accompanied by greater domestic pr ocessing.  The policy's objective is to raise the 
production and export of key products and to reduce imports;  in addition, it provides for a number of 
programmes to increase agricultural productivity, including technology improvements, irrigation, 
intensified farming, and improved animal and seed qua lity.  The policy is to be implemented in two 
stages, 2003-08 and 2008-15.  The Government has also highlighted greater domestic processing and export of livestock products, especially cashmere pr oducts, meat, hides, skins, fur, and flour.
3  Meat 
and flour are regarded as "strategic products" (F ood Supply Law, 1995).  The Government announced 
in 2000 that it aimed to expand wheat production to  meet 60-70% of flour requirements, largely 
through enhanced seed production.  The programm es have had little impact on Mongolia's production, 
however;  Mongolia continues to import two thirds of its wheat consumption. 
13. A high priority is to improve services provided by the Agriculture Extension Centre.  A mid-
term development programme for extension services is being implemented in two stages, 2004-07 and 
2008-10 (Order of the Minister of Food and Agriculture No. A/141, 31 December 2003).  It is aimed 
at extending the Centre's branches to all aimags  and soums and to improve extension techniques based 
more on producers' priorities. 
(ii) Main subsectors 
(a) Livestock 
14. The livestock industry, consisting mainly of sh eep, goats, horses, cattle, and camels, is based 
on nomadic grazing of state-owned land using public wa ter wells.  However, many of these collective 
facilities, including veterinary services, have co llapsed, and malnutrition impede production and 
contribute to low productivity in this sector.  Agricultural extension services are weak, and nomadic herding, combined with over-stocking, has led to  land degradation and other ecological problems.  
Crop and livestock production are not integrated , and there is little improvement in pasture 
development.
4  A 2001-05 national relief programme to help  protect livestock producers from dzuds is 
                                                      
2 The remaining state-owned enterprises account for about half of total meat exports, 40% of industrial 
meat-processing capacity, and over half of cashmere-processing capacity.  Provisions contained in inter-
governmental technical assistance agreements have hampered privatization of the two meat-processing 
companies, Bagahangain and Darkhan-Mah.  The state-owned Khar khorin flour mill has been renovated and is now being considered for privatization.  The only non -privatized farm is a state-owned seed farm (Asian 
Development Bank, 2002). 
3 Government of Mongolia (2003), p. 32. 
4 Over 95% of fodder requirements  come from natural pastures.   WT/TPR/S/145 Trade Policy Review 
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being implemented (the Nationa l Program on Protecting the Livestock Sector from Dzuds and 
Drought, 2001).  It involves increased emergency f odder reserves, including at regional level, and 
better management and coordination of activities between the central and regional governments.  The 
Government provides subsidized fodder and other di saster relief through the State Reserve Agency 
(formed and merged with the Stat e Emergency Fodder Fund).  Fodder subsidies cost an estimated Tog 
12 billion in 2001 (1.1% of GDP), when reserve s rose from under 20,000 tonnes to over 300,000 
tonnes.   The Government also previously restocked herds free of charge. 5  
15. Limited voluntary livestock insurance is availa ble commercially.  The Mi nistry of Food and 
Agriculture drafted legislation to introduce manda tory livestock insurance against adverse weather 
conditions.  However, responsibility for livestock insurance was transferred to the Ministry of Finance 
and Economy in 2000, which has been cooperating with the World Bank to implement a pilot 
index-based livestock insurance system.  This consis ts of developing a risk index to assess risks from 
weather-related disasters. 
16. Most wool is used for domestic carpet production.  There are some 45 wool-processing firms 
(two foreign), two major carpet producers, and one blanket manufacturer (all privatized).  A medium-
term wool sub-programme for 2002-04 and a l ong-term programme for 2002-10 were adopted in 
2001.  A sub-programme was also adopted for hides a nd skins in 2001, along with an action plan to 
raise production and export of  meat and meat products.   The meat programme aimed to expand 
exports by raising quality to meet standa rds set by developed-country markets. 
Cashmere 
17. Mongolia produces about 25% of the world's cashmere (second behind China);  annual 
production doubled during the 1990s to around 3,000 to nnes.  It is Mongolia's third largest export 
(after copper and gold), the single largest employer, and the major income earner for over a third of 
inhabitants.6  The industry has experienced a series of booms and busts, exacerbated by unsatisfactory 
public sector policies, adverse weather conditions, a nd external factors.  The share of cashmere in 
Mongolia's total exports fell from 16.8% in 1996 to 8.6% in 2002.   
18. Nomadic herders produce most cashmere using public land and water facilities.  Cashmere 
quality has declined.  There are over 30 cashmere-pro cessing and de-hairing firms, many with foreign 
partners, for example from China, United States, Japa n, and Italy.  Exports involve mainly un-carded 
or de-haired cashmere.  The industry suffers from se veral inadequacies, especially falling cashmere 
quality, inadequate marketing and distribution syst ems, and poor public and private institutional 
capacity.  Mongolian production has moved marginally  up the value-added chain, and processors are 
losing competitiveness. 
19. There is substantial excess processing capacity, aggravated by a domestic shortage of raw 
cashmere.  Exports of raw and washed cashmere are taxed at Tog 4,000 per kg. (equivalent to 13% 
based on 2001 prices, but can be as high as 35% when world prices are depressed).7  The objective 
was to ensure sufficient cashmere at lower prices to  assist processors and raise domestic value added.  
However, the measure appears to have backfired,  exacerbating the domestic supply shortage, since it 
is estimated that half of the cashmere produced is  smuggled into China to avoid the export tax.  
Mongolia's recorded exports have therefore re mained stagnant, and smuggled cashmere reduced 
                                                      
5 Restocking is claimed to have been at levels exceeding long-term sustainability (World Bank, 2003b, 
Chapter 9). 
6 This section draws on World Bank (2003a).  
7 This replaced the export ban in 1997.  Export taxe s also apply to camel maine and wool.  Mongolia WT/TPR/S/145 
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official exports by an estimated US$100 million from 1996-01.8  The export tax has not increased 
value-added activity, and overall has depressed offi cial cashmere exports.  It reduced domestic raw 
cashmere prices below world market levels, and tr ansferred income estimated at US$72 million over 
1996-01 from herders to processing firms.  The total estimated net efficiency loss to the economy of 
the tax was US$20 million from 1996 to 1999.  Key polic y reforms to be considered to improve the 
industry's efficiency include abolition of the expor t tax and privatization of the major cashmere 
processor (Gobi), which remains 70% state owned, despite several privatization attempts.  The Government has periodically interven ed to assist Gobi acquire raw cashmere, such as in 2001 when it 
subsidized Gobi's cashmere purchases.  Gobi is  scheduled for full privatization in 2005. 
20. The Government adopted a cashmere programme for 2001-04 in 2000.  It also initiated the 
Wholesale Marketing Network in 2002 to re-estab lish a collection system for cashmere and other 
livestock-based raw materials.  The Mongolian Tex tile Institute classifies cashmere and sets quality 
standards. 
(b) Crops 
21. Before privatization, the State heavily subs idized wheat production (e.g. through credit).  
Despite a rise in wheat prices after liberaliza tion, production fell sharply during the 1990s (from 
687,000 tonnes in 1989 to 138,700 tonnes in 2001).
9  Mongolia's dependence on wheat and flour 
imports has generated food security concerns.  Li mited government support to maintain a minimum 
level of wheat production has resumed through the State Agricultural Fund (SAF), including subsidized credit to buy fuel during 2001- 02 and on-going concessional loans to buy seed. 
22. Wheat flour is protected by a seasonal tariff on im ports of 15% (instead of 5%) applied from 
1 August to 1 April, thereby providing additional protection for most of the year.  There are no  other 
restrictions on wheat imports.  The seasonal tariff is intended to assist farmers, but could assist millers more, since millers can import wheat at the normal tariff rate.  This is even more likely if the 
substantial amount of wheat aid sold annually significantly depresses domestic wheat prices, as 
claimed.
10  The seasonal tariff also applies to certain ve getables (potatoes, onions, cabbages, turnips, 
and carrots). 
(iii) Forestry 
23. Mongolia's forestry resources consist of the north ern coniferous and southe rn Saxaul forests.  
Total intact forests are estimated to cover 12.4 million hectares, many located in inaccessible areas.11  
Forests provide a range of commercial activities,  including firewood and logs, and subsistence 
activities.  Mongolia meets its own timber require ments.  Since 1995, a tax of US$150 per cubic 
metre (m3) on round log exports has effectively banned  them (illegal expor ts are apparently 
negligible).  The tax was extende d to semi-processed products, such as railway sleepers,  sawn timber 
(green and dried) and balks (milled house logs).12  The tax is intended to stop round log exports and 
                                                      
8 World Bank (2003b), Chapter 9. 
9 In 2002, cereals accounted for 92% of cropped area, of which 97% was wheat.   
10 In addition to importing about 40% of wheat requ irements commercially, Mongolia receives another 
30% as wheat aid mainly from the United States and Japan.  This is sold domestically, for Tog 175,000 per 
tonne in 2004.  This reportedly depressed domestic wheat prices to below production costs at Tog 185,000 per 
tonne ( The UB Post , "Wheat assistance could be damaging market", 14 October 2004, p. 4). 
11 This has fallen from an estimated 18.3 million hect ares in the mid 1990s.  This section draws on 
World Bank (2004c). 
12 Only secondary and finished (end-use) products are exempt from the export tax, such as peeled 
veneers, and finished, fully assembled furniture (ready- to-assemble furniture compon ents are not exempt).  WT/TPR/S/145 Trade Policy Review 
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thereby to promote domestic processing.  Timber processing comprises numerous sawmills, several 
particle and plywood plants, a cardboard mill, a match factory, and a tissue paper plant.  
24. The Ministry of Nature and Environment is r esponsible for forest ma nagement, in conjunction 
with aimag and soum governors who license its use within limits set by the Ministry.  The basic 
forestry legislation is the 1995 Forests Law.  The policy framework guiding the protection, 
conservation and utilization of forests is the 2001  Forestry Programme.  This replaced the 1998 
National Forest Policy and placed more emphasis on conservation and protection than utilization.  
Forests are divided into designated "strict" and "protected" zones, and "utilization zones".13 
Commercial harvesting is restricted to forests in the utilization zone.  These cover about 1.19 million 
hectares or 7% of forests and are inadequate to  support a viable modern wood-based industry.  
Stumpage fees apply to harvested trees, includi ng commercial and subsiste nce felling (Law on Fees 
for the Harvest of Timber and Fuel Wood).  Howe ver, such fees are only collected on commercially 
cut logs.14  In 2003, stumpage revenue was estimated  at US$444,000 (US$516,000 in 2001).  Such 
fees averaged US$1.80 per m3 for round wood and US$0.60 per m3 for firewood in 2001.   
25. Commercial logging requires a licence (per mit).  According to the authorities, Soum  
governors allocate annual harvest permits (use tenure)  based on requests.  The Ministry approves an 
annual allowable cut (AAC), which is determined administratively based on a percentage of the 
ecological and economic assessment of the valu e of timber and firewood.  Ministry-approved 
contractors must do the logging.  Since 1997, long -term forest concessions (possession tenure) have 
been also allowed for up to 60 years (extendable by  40 years), and are allocated like annual permits.  
The AAC has been demand driven  and exceeds sustainable levels, even thought it has fallen from 
about 1.8 million m3 in the 1990s to 620,000 m3 in 2003 (94% for firewood).  This is estimated to be 
at least four times the sustainable AAC on forests in  the utilization zone, or at least 1.75 times if 25% 
of forests in the protected zone were made comme rcial.  Widespread illega l logging, thought to be 
between 36% and 80% of the total annual harvest (e stimated at 965,000 to 3.0 million m3) compounds 
the problem.  Illegal logging for round wood is es timated to be costing the Government between 
US$540,00 and US$1.7 million annually in unpaid stumpage fees.   
26. The Government provides limited resources for reafforestation programmes (US$400,000 to 
US$600,000 annually).  These funds partially reimbur se contractors for the costs of replanting as 
required in their permits.  
(3) MINING  
27. Mining (and quarrying) contributed 12.7% of GDP in 2003 (8.6% in 1999), and accounted for 
3.4% of total employment.  Mineral processing, mainly of gold, copper, molybdenum, coal and 
fluorspar, is Mongolia's single largest industry, acc ounting for over 60% of industrial output and two-
thirds of export earnings (copper and gold).  Most fo reign investment is in mining.  State-owned firms 
dominate mineral production.  Erdenet Copper Mi ning Company, a government joint venture 49% 
owned by the Russian Government, is the only c opper and molybdenum mining company.  It accounts 
for about 40% of export receipts and 25% of governme nt revenue.  Four state-owned companies mine 
                                                      
13 Strict zones are forest areas that are defined as sub-alpine and those th at lie in special protected areas, 
national parks etc.;  exploitation is limited to regulated gathering of local fire wood and certain subsistence 
activities, such as collecting pine nuts.  Protected zones are broad-scale "green areas" established, for example, 
within certain distances from rivers, lakes, roads, and on slopes too steep to be cleared;  exploitation is also regulated as for strict zones.  Utilization zones are in  a default category that covers all other forests.  
Commercial harvesting is permitted subject to permits and stumpage fees
. 
14 An inventory fee of Tog 9,500 per hectare (Tog 240 per m3), applied to finance state forest surveys, 
is only collected on legal logging, and rarely on fire wood.  Total annual revenue is estimated at US$10,000. Mongolia WT/TPR/S/145 
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coal and another, Mongolrostsvetment (also a Mongolian-Russian Government joint venture), 
produces over 90% of fluorspar output.15  Erdenet and Mongolrostsvetment, Mongolia's two largest 
companies, are not scheduled to be privatized, a nd instead are seeking technical alliances to improve 
competitiveness.  Several major gold and copper mines are due to commence production shortly. 
28. Gold production rose tenfold during the 1990s in line with the Government's 
"gold programme" adopted in 1991.  In 2003, ove r 120 companies mined gold totalling 10.8 tonnes, 
almost entirely from placer (alluvial) deposits.  Most  gold is sold to the central bank, despite the 
market being deregulated in 2001 to allow producers to export directly.  The gold export tax of 10% 
was also abolished in January 2002.16  Copper, mainly concentrate, is exported primarily to Russia.  
Erdenet, faced with financial problems in 1999, h as restored limited profitability by rationalizing 
costs, including through labour reductions.17  Another company, Erdmin, exports pure copper 
(cathodes) extracted from Erdenet's tailings, but operat es at about half capacity.  Coal production, of 
5.7 million tonnes in 2003, is used mainly for elect ricity generation.  A licence to exploit the Ulaan 
Ovoo coal mine was granted to a Mongolian-Chinese joint venture in 2003.18  Coal mining is to be 
increasingly privatized, including the Baganuur an d Shivee-Ovoo joint-stock companies once they 
have been restructured.   
29. The Ministry of Industry and Trade is respons ible for mineral policy.  The Government 
released the 2000-10 Geology and the Minera ls Sector Programme in 2002 (Government 
Resolution No. 103):  mining is a priority sector, and it intends to double the mining sector's contribution to GDP.   The Minerals Law, adopted in 1997 , provides a competitive and enabling 
environment for exploration and de velopment that promotes private- sector participation and foreign 
investment.  Policy guidelines, issued in 2002, outlined mineral development goals for 2002-10, and 
reinforced the Government's commitment to a favou rable legal environment for private exploration 
and processing based on market-driven projects regulated by the Government.  
30. Tax incentives apply to mining investments.  These include a three-year income tax 
exemption and 50% reduction for the subsequent three years for mining enterprises with foreign 
investors.  Eligible heavy machinery and mini ng equipment (excluding drilling equipment) are 
exempt from tariffs and VAT.  To provide a stable  tax structure for long-term projects, a licensee 
proposing to invest above US$2 million in a project can apply for a ten-year stability agreement (15 
years if investment exceeds US$10 million) with the Finance Ministry.
19  
31. Foreigners can hold exploration licences, incl uding for mining, provided they operate as 
locally incorporated companies.  All licences are issued on a first-co me first-served basis and there is 
no discrimination between private and state-owned mineral enterprises.20  There are no annual work 
or expenditure requirements.  Exploration licences are issued for three years, extendable twice for 
two years each time.  Mining licences are issued for 60 years, renewable once for 40 years.  Licensed 
                                                      
15 Mongolia is the world's fourth largest fluorite producer.  
16 This was introduced in 1999.  To compensate for the removal of the tax and maintain tax revenue, 
the VAT was amended to make gold exempt from VAT (instead of being simply zero-rated if exported), thereby 
removing eligibility for VAT credits on  inputs for goods and services.  
17 Erdenet Copper Mining Company is a high cost producer averaging US$0.57 per pound of copper in 
2002 (World Bank, 2004d).  It is also largely responsible  for maintaining the third largest city, Erdenet, and has 
various farming and other non-mining activities as well as an extensive social support programme, which added 
about 5% to costs in 2002. 
18 The Chinese partner is to construct 350 kilometres of the Millennium Road. 
19 These agreements cover income tax rates but not,  it appears, the rules determining taxable income 
(World Bank, 2004d). 
20 Government can only participate in exploration and mining through registered business entities.  WT/TPR/S/145 Trade Policy Review 
Page 52 
 
 
exploration holders have exclusive right to mine discovered minerals without  state involvement, and 
to sell at market prices either domestically or abro ad.  Total exploration and mining licence fees from 
July 1997 to September 2004 amounted  to US$16.2 million.  Royalties are set at 7.5% for placer gold 
and 2.5% for other minerals (including hard rock gold).21  Income of mining companies is taxed at the 
standard rates of 15% on the first Tog 100 million,  and 30% (reduced from 40% in 2004) thereafter.  
All mining tax revenue accrues to the Central Gove rnment and there are no formal revenue-sharing 
arrangements with regional provinces. 
32. The Mineral Resources Authority of Mongolia (M RAM) regulates mining, and is responsible 
for issuing licences, conducting geological surveys and compiling industry information.  There were 
4,692 licences, mainly for exploration, as at Se ptember 2004.  Approximately 16% were held by 
wholly foreign-owned entities registered in Mongolia, 75% by local companies and individuals, 8% by joint ventures, and 0.7% by foreign companies (not registered in Mongolia) or individuals.  Exploration budgets totalled US$35.3 million in 20 03 (US$20.5 million in 2002), 95% incurred by 
foreign operators.  In 2003, private investment  in mine development fell from US$41.6 million to 
US$33.2 million. 
33. Export taxes apply to several scrap metals, such as iron and steel and certain copper and 
aluminium, to promote domestic processing and valu e added.  However, given Mongolia's limited 
mineral processing and production base, no minera l exports are currently subject to the tax. 
(4) E
NERGY  
(i) Petroleum and petroleum products 
34. All petroleum products are imported.  In  2003, these totalled 430,000 tonnes, or 
US$144.9 million (US$70.2 million in 1996).  Imports (m ainly petrol and diesel) are primarily from 
the Russian Federation (over 90%) and China;  on e company imports diesel oil from Kazakhstan.  
Mongolia's proven oil reserves comprise mainly 1.5 bi llion barrels in the Tamtsag Basin.  Since 1996, 
small quantities of unprocessed oil (totalling 736,000 ba rrels) have been exported by road and railway 
to China (137,000 barrels in 2003).  The Petroleu m Sector Policy up to 2010 was released in 2002 
(Government Resolution No. 267).  Petroleum is a priority sector.  The Government aims to develop 
oil exploration and production to become self-suffi cient in petroleum products, and to establish a 
domestic oil refinery in the eastern region with annual capacity of 100-150,000 tonnes.  It is 
considering constructing a refinery to process crude  oil from the Tamtsag Basin, possibly by 2007. 
35. Following de-monopolization of petroleum importation and distribution in 1990, the 80% 
state-owned Neft Oil Import Concern (NIC) has con tinued to lose market share, from 74.4% in 1997 
to 32.7% in 2000 for gasoline, and from 38.8% to 14.9% for diesel.  NIC, which had accumulated 
large losses and government debt (equivalent to 1%  of GDP in 2001) through supplying subsidized 
products to remote areas, was fully privatized in February 2004.22  Eight private petroleum companies 
currently supply the Mongolian market.  Petroleu m prices are unregulated and set by the market 
according to import parity, adjusted for do mestic taxes and transportation costs.  
36. The Petroleum Authority of Mongolia (PAM) is  responsible for oil and gas exploration, 
production, processing, transportation, and storage.   It forms production-sharing contracts with 
foreign firms in accordance with the Petroleum La w, 1991, as amended, and related regulations.  
                                                      
21 The royalty on placer gold was increased from 2.5% to 7.5% in 2003.  Mineral royalties are 
deductible for income tax purposes. 
22 NIC's return on investment fell from 26.3% in 1998 to 3.7% in 1999 and to 2.7% in 2000 (Bank of 
Mongolia, 2002c, p. 34). Mongolia WT/TPR/S/145 
 Page 53 
 
 
Exploration terms are for five years,  extendable twice for two years each.23  Development licences 
may be issued for up to 20 years, extendable twice for up to five years each.  Oil production is subject 
to negotiated royalties of up to 12.5%, and to nor mal income taxes on domestic sales.  Production 
shares are negotiable in the contract, net of royalti es and the contractor's allowable production for cost 
recovery (limited to 40%  of annual production).24  Contractors' income from their share of petroleum 
was fully exempted from tax in 2000 as part of a fiscal incentives package introduced to attract 
foreign exploration and development.  Other ex emptions included VAT and tariffs on machinery, 
equipment and materials used for petroleum expl oration and production, and excise tax on gasoline 
and diesel used in these activities.  Eligible foreign investors may also enter into a stability agreement 
to protect against tax changes.   Foreign investment in oil since 1994 totals US$131.4 million.  An oil 
processing facility with a capacity of 50,000 tonn es annually was established in Erdenet, but has 
ceased operating.  PAM is also participating in ne gotiations with Russia, China, South Korea, and 
Japan to construct a natural gas pipeline from th e Russian Federation to Korea and Japan through 
Ulaanbaatar.  A draft law on import, processing, trade, transportation and storage of petroleum products is currently before Parlia ment.  Mongolia is a member of the North-East Asian Gas Pipeline 
Forum.  
(ii) Electricity 
37. High energy consumption reflects Mongolia's ha rsh climate.  About two thirds of the 
population have access to electricity and central  heating.  Maximum generation capacity is 
3,100 GWh.  Four coal-fired power plants supply the Central Electrical Grid that serves the 
three largest cities.  Two plants are in Ulaanbaatar, and the others in Erdenet and Darkhan.  Electricity 
is imported from Russia during peak times through the Central and Western Energy Systems.  It is also imported from China through three border points  (Zamiid-Uud, Khavirga, and Bichigt).  Imports 
account for about 10% of consumption, and are subject to a tariff of 5% and VAT of 15%.  Two major hydro plants, one at Durgun in Hovd aimag  and the other at Ulaanborn/Taishir are being 
developed.
25  Several small hydro plants complement re gional power supplies.  Stand-alone diesel 
generators mainly supply non-connected rural areas.   
38. The Ministry of Fuel and Energy (established recently following the restructuring of the 
Ministry of Infrastructure) is responsible for energy  policy.  The state-owned sector, formerly run by 
the Energy Authority (EA), had accumulated larg e losses, which rose from US$4.3 million (0.5% of 
GDP) in 1999 to US$17.1 million (1.8% of GDP) in 2000.26  These reflected low generation 
efficiency, large leakages in transmission and di stribution, tariffs below costs by 25-50%, and 
payment arrears by major state-owned electricity users.27  It had also accumulated large outstanding 
debts with state-owned enterprises, totalling Tog 35 billion (3.4% of GDP) in 2000, especially with its 
main coal supplier, the Bagannuur Coal Company.28  While electricity and heating (under the 
centralized system of pumping steam throughout Ulaa nbaatar) tariffs were raised in December 2000 
for the first time in five years, by 14.2% and 100% respectively, and again by 15% in July 2002, retail 
                                                      
23 In December 2003, the Petroleum Law was amended to  allow exploration licences to be extended for 
up to five years.  PAM applied such extensions on several licences in January 2004.   
24 Producers can export their oil share, but may be requested to provide it for domestic consumption.  
25 Loan agreements were signed with the Kuwait Fund for Arab Economic Development in 1999 and 
with the Abu Dhabi Fund for Development in 2002;  Parliament approved them in April 2003. 
26 IMF (2002), p. 28. 
27 Including Erdenet copper mine, which consumes about one third of Mongolia's electricity.   
28 Many of these debts were met by government-guaranteed foreign loans, and have therefore 
contributed substantially (40% during the 1990s) to Mongolia's external debt (World Bank, 2004a, p. 9).  WT/TPR/S/145 Trade Policy Review 
Page 54 
 
 
tariffs are still below supply costs.29  Further tariff increases of 10.1% for electricity and 25.3% for 
heating are envisaged in 2004 to meet rising costs.  Uniform prices generally apply among users.  However, major business consumers, especially Erde net Mining Corporation, receive a 7% discount. 
39. The sector's restructuring commenced in 2001 under the Government Resolution on Energy 
Sector Restructuring and the new Energy Law, 2001, which provided the legal basis for the 
restructuring.  The Energy Sector Restructuring Action Plan is aimed at  improving the sector's 
competitiveness, efficiency, and long-run viabilit y through market-based reforms.  The Energy 
Regulatory Authority (ERA) was created in 2002.  Its main functions are to issue licences to 
operators, set and supervise tariffs, ensure complia nce with government policies and regulations, set 
standards for energy production and distribution, even ly protect consumers' and producers' interests, 
and to create a competitive electricity market.  Generation was de-regulated, and the former EA's 
operations unbundled into 18 state-owned corpor ations, separating generation, transmission, and 
distribution.
30  The first stage of restructuring covered unbundling and separation, together with 
corporatization and commercialization, designed to introduce market principles into the energy sector. 
40. The second stage includes the gradual privati zation of power generation and distribution 
companies.   A management contract was awarded for the h eating plant at Nalaikh in 2003.  Darkhan 
Selenge Electricity Distribution Ne twork and Baganuur Gas Energy St ation were privatized by open 
tender.  The Mongolia Integrated Power System Pr ogramme is also being implemented to develop 
reliable, affordable energy and to contribute to regional development.   The Energy Price Control 
Council, under the Ministry of Fuel and Energy, regulates prices in conjunction with the ERA.   
41. A law on conservation and energy is due to be enacted in 2004.  It will establish a fund for 
fuel conservation and efficiency and a revolving  credit facility to help businesses invest in 
energy-efficient facilities. 
(5) MANUFACTURING  
42. Manufacturing's share in GDP has fluctuated over the period under review, but fell from 
12.1% in 1995 to 6.2% in 2003 (5.9% in 1999).  Th e sector has undergone considerable restructuring.  
Many industries, such as machinery, chemicals, metal, transport, and electrical products, which were 
dependent on past state intervention, have contr acted.  The main manufacturing industries are labour-
intensive livestock-based products, such as food, bevera ges, leather, textiles, clothing, and footwear.  
Prioritized key industries are copper and meat pro cessing, leather and cashmere products, carpets and 
wool.  The main manufactured exports are textiles, cl othing, leather, and footwear.  State equity in 
manufacturing is still significant, for example in cashmere products (section 2(ii)(a)). 
43. The clothing industry has expanded based on several Chinese and Korean joint ventures, 
which are located in Mongolia to export free of quot a to the United States, the predominant market.  
However, Mongolia could have difficulty compe ting with Chinese and other low-cost clothing 
exporters in the United States without such advant ages.  The expected abolition of U.S. quotas in 
2005 may adversely affect Mongolia's clothing in dustry if these foreign investors re-locate overseas.31 
                                                      
29 Retail electricity prices of US$0.042 per KWh are below estimated marginal costs of 
US$0.055-US$0.065 per KWh (IMF, 2002, p. 31). 
30 Comprising eight generating entities, four electricity  distributors (plus retail), two heat distributors 
(plus retail), one transmission compan y, one dispatch company (National Di spatch Centre), and two stand-alone 
systems (Eastern Electricity System and Western Electricity System).  Shares in these enterprises are held by the 
Ministry of Fuel and Energy  (41%), the State Property Committee (39%), and the Ministry of Finance (20%).  
31 UNDP (2002). Mongolia WT/TPR/S/145 
 Page 55 
 
 
(6) SERVICES (OTHER THAN ENERGY ) 
44. Services have expanded substantially and accounted for 61.0% of GDP in 2003, up from 
48.5% in 1999 (37.9% in 1995).  The largest subsector in 2003 was wholesale and retail trade 
(26.5%), followed by transport, storage, and communications (13.9%), financial intermediation 
(3.8%), and electricity, gas, and water (3.4%).  Em ployment in services, rose to 46.4% in 2003 after 
falling from 39.8% of the employed work force in 1995 to 38.4% in 1999.  Labour productivity in services is higher than in agriculture and manufacturing. 
45. Mongolia made various GATS' commitments during its 1997 WTO accession (Table IV.3).
32  
While it did not participate in the extended negotia tions on financial services (Fifth Protocol, adopted 
14 November 1997) and telecommunications (Fourth Protocol, adopted 30 April 1996), its accession 
commitments on services covered certain of these subsectors.  Its commitments included no limitations on market access or national treatment  for the cross-border supply (mode 1), consumption 
abroad (mode 2), and commercial presence (mode 3)  in postal, courier and insurance services, as well 
as in many value-added telecommunication subsecto rs (e.g. electronic and voice mail and on-line 
information and data retrieval), most insuran ce services, and many banking and other financial 
services (e.g. acceptance of public deposits).  Sim ilar commitments were made in several business 
services (e.g. accounting, management consulting, services incidental to mining, and engineering services), and almost all tourism-related services (hotel and restaurants, travel agencies and tour operators, and tourist guide services).  Distribution services (excluding commission agents' services) were scheduled, including commitments to have no market access or national treatment limitations on 
supply modes 1, 2 and 3 for wholesale trade and on mode 2 for retail trade.  No commitments were 
made for retail services supplied by modes 1 or 3.  Installation and assembly construction and related 
engineering services were also scheduled, and incl uded commitments for no limitations on modes 2 
and 3.  No mode 4 (presence of natural persons) commitments were made for any service.
33  Mongolia 
made no MFN exemptions. 
Table IV.3 
Commitments on services under GATS 
   Market accessa National treatmenta 
 Modes of supply:          
  Cross-border supply 1    1    
  Consumption abroad  2    2   
  Commercial presence   3    3  
  Presence of natural persons    4    4 
 Commitments (■ full;  ◨ partial;  □ no commitment) 
Horizontal limitationsb    □c    □c 
Commitments in specific sectorsd         
1. Business services         
 A. Professional services         
  (b) Accounting ■ ■ ■ □e ■ ■ ■ □e 
  (e) Engineering services (CPC 8672) ■ ■ ■ □e ■ ■ ■ □e 
 F. Other business services         
  (c) Management consulting services ■ ■ ■ □e ■ ■ ■ □e 
  (e) Technical testing and analysis services (CPC 8676) ■ ■ ■ □e ■ ■ ■ □e 
 Table IV.3 (cont'd)  
                                                      
32 WTO document WT/ACC/MNG/9/Add.2, 27 June 1996. 
33 They were unbound, except for measures affecting the entry and temporary stay of people with 
managerial or technical skills in short supply, and fallin g in the categories of business visitors, intra-corporate 
transferees, and professionals under a service contract.  WT/TPR/S/145 Trade Policy Review 
Page 56 
 
 
   Market accessa National treatmenta 
 Modes of supply:          
  Cross-border supply 1    1    
  Consumption abroad  2    2   
  Commercial presence   3    3  
  Presence of natural persons    4    4 
  (h) Services incidental to mining (CPC 883 and 5115) ■ ■ ■ □e ■ ■ ■ □e 
  (m)  Scientific and technical consulting services  
    (CPC 8675) ■ ■ ■ □e ■ ■ ■ □e 
2. Communications services         
 A. Postal services (CPC 7511)  ■ ■ ■ □e ■ ■ ■ □e 
 B. Courier services (CPC 7152)  ■ ■ ■ □e ■ ■ ■ □e 
 C. Telecommunication services          
  (h) Electronic mail ■ ■ ■ □e ■ ■ ■ □e 
  (i) Voice mail ■ ■ ■ □e ■ ■ ■ □e 
  (j) On-line informa tion and data retrieval ■ ■ ■ □e ■ ■ ■ □e 
  (k) Electronic data interchange  ■ ■ ■ □e ■ ■ ■ □e 
   (l) Enhance/value added fa x services, store and forward 
    and retrieve ■ ■ ■ □e ■ ■ ■ □e 
  (m) Code and pr otocol conversion ■ ■ ■ □e ■ ■ ■ □e 
  (n) On-line information and/or data processing  
    (including transaction processing) ■ ■ ■ □e ■ ■ ■ □e 
3. Construction services          
C. Installation and assembly work □f ■ ■ □e □f ■ ■ □e 
D. Building completion & finishing work □f ■ ■ □e □f ■ ■ □e 
4. Distribution services          
 B. Wholesale trade services  ■ ■ ■ □e ■ ■ ■ □e 
 C. Retailing services □ ■ □ □e □ ■ □ □e 
7. Financial services 
        
 A. Insurance, reinsurance and transportation insurance ■ ■ ■ □e ■ ■ ■ □e 
 B. Banking and other financ ial services (excluding  
  insurance)         
  (a) Acceptance of deposits and other repayable funds  
    from the public  ■ ■ ■ □e ■ ■ ■ □e 
   - Negotiable loans and advances for the purpose   
    of financing trade, commercial and fixed  
    investment  ■ ■ ■ □e ■ ■ ■ □e 
  (d) Payments, money collection and transmission  
    services ■ ■ ■ □e ■ ■ ■ □e 
  (e) Guarantees and commitments ■ ■ ■ □e ■ ■ ■ □e 
  (f) Trading for own account or for the account of 
customers on an exchange or an over-the-counter market, the following: cheques and other bills of 
exchange;  foreign exchange ;  forward exchange rate 
agreements;  approved securities;  other negotiable 
instruments;  customers f und management;  financial 
and investment advisory services;  provision and transfer of financial info rmation and financial data 
processing;  advisory and other auxiliary services, 
excluding intermediation, relating to banking and 
other financial services;  and participation in issues 
of all kinds of securitie s, including underwriting and 
provision of services related to such issues ■ ■ ■ □
e ■ ■ ■ □e 
 Table IV.3 (cont'd)  Mongolia WT/TPR/S/145 
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   Market accessa National treatmenta 
 Modes of supply:          
  Cross-border supply 1    1    
  Consumption abroad  2    2   
  Commercial presence   3    3  
  Presence of natural persons    4    4 
9. Tourism and travel services          
 A. Hotels and restaurants  ■ ■ ■ □e ■ ■ ■ □e 
 B. Travel agencies and tour operators  ■ ■ ■ □e ■ ■ ■ □e 
 C. Tourist guide services  ■ ■ ■ □e ■ ■ ■ □e 
a Negotiated as part of Mongolia's WTO accession, eff ective 29 January 1997, and reproduced in WTO documents 
WT/ACC/MNG/9/Add.2, of 27 June 1996, and GATS/SC/123, of 28 August 1997. 
b Applicable only to services included in Mongolia's Schedule of Commitments. 
c Except for measures affecting th e entry and temporary stay of natural persons w ith managerial and technical skills that are i n 
 short supply in Mongolia, and falling within the categories of  business visitors, intra-corpor ate transferees, and professiona l 
 under a service contract. d Services are listed according to the services sectoral classi fication used by Members to schedule commitments (WTO document 
 MTN.GNS/W/120, 10 July 1991). 
e Except as indicated in horizontal limitations (see footnote c).  
f Due to lack of t echnical feasibility.  
Source:  WTO Secretariat.  
(i) Financial services 
(a) Introduction 
46. Reforms in Mongolia's financial sector are impor tant because of the sector's key role in 
channelling savings into the most profitable inv estments across various sectors of the economy.  
Mongolia's financial sector consists  mainly of the central bank, the Bank of Mongolia (BOM) and, at 
end 2003, 17 commercial banks, 88 non-bank financ ial institutions (NBFIs),  about 570 saving and 
loan associations, 43 securities companies, over 41 exchange bureaus, a state pension fund, other financial corporations, and 23 insurance companies.
34  The BOM, formed in 1991, supervises and 
licenses banks, regulates their operations, and undert akes enforcement measures;  it is required to 
maintain, inter alia , financial market and banking system stability (Central Bank Law, 1996).35  The 
BOM's prudential regulation and supervision of NBFIs (other than mainly savings and credit 
cooperatives, professional securities market partic ipants, and insurance companies, brokers and 
agents) was also strengthened in 2003 (N on-bank Financial Ins titutions Law, 2002). 
47. Mongolia began developing a market-based financia l system during its transition to a market 
economy by introducing a two-tiered banking structur e of commercial banks overseen by a central 
bank.  However, despite notable progress, financ ial sector development was slow, and the banking 
system, where most efforts were directed, performed badly in the 1990s, due mainly to inadequate 
institutional and central bank supervisory and prudential capacity, along with poor corporate 
governance and management of commercial banks.   
48. Financial sector performance has improved sin ce 2000, reflecting mainly greater stability and 
the revival of the banking sector after substantial restructuring and reforms, such as enhanced BOM 
prudential supervision.  A relatively large number of commercial banks exist, and NBFI numbers and 
                                                      
34 Bank of Mongolia (2004b). 
35 This replaced the 1991 Banking Law, which provided the legal basis for changing the banking 
system.  Other relevant banking legislation includes the Deposits, Loans and Banking Transactions Law, 1995, the Currency Settlements Law, 1994, and the Treasury Law, 1995. WT/TPR/S/145 Trade Policy Review 
Page 58 
 
 
services have expanded rapidly.  Financial interm ediation has increased, with the ratio of broad 
money to GDP rising from 37.9% to 51.6% in 2003 (19.9% in 1996).36  Total financial sector assets 
(mainly banks, NBFIs, and savings and loan cooperatives) rose from 25.3% of GDP at end 2000 to 65.5% at end-2003, and total loans from Tog 68.3 billion (6.5% of GDP) to Tog 465.3 billion 
(34.2%).
37    
49. However, despite the recent expansion and r estored public confidence, the financial sector, 
including banking, remains under-developed, and furt her restructuring and deepening is required.  
Financial services accounted for only 3.8% of GDP in  2003.  The money and capital markets are thin, 
and the Mongolian Stock Exchange (MSE), establishe d in 1991, became dysfunctional in the late 
1990s.38  Reviving the capital market would deepen financial intermediation and provide competition 
for banks to lower interest rates.  Continued bank rehabilitation is essen tial to boosting financial 
intermediation and achieving an effi cient and sound financial sector.39   
50. The ongoing growth in the amount of non-perfo rming loans (NPLs) raises possible prudential 
concerns.40  In 2003, NPLs of the financial sector, incl uding of banks, rose by Tog 7.8 billion (14.4%) 
to Tog 37.7 billion.  While the sect or's total share of NPLs, of 8.1%  at end 2003, was only slightly 
above the end 2002 level of 7.0% and remained we ll below previous leve ls (above 50% in 1996 and 
1999 for banks alone), these recent trends understate  the increase in NPLs because of the rapid rise in 
total financial sector loans (by 80% in 2002 and 74% in 2003).41  Moreover, the share of bank NPLs 
also rose from 7.2% to 7.9% in 2003, and while lower for NBFIs (6.5% at end 2003), it was much 
higher for savings and loan cooperatives (11.2%).  These accounted for almost one third of deposits 
held outside the banking system in 2003.  To  help counter these developments, the BOM is 
strengthening prudential and supervisory requirem ents for banks, NBFIs, and savings and loan 
cooperatives, as a high priority, including detecti on and enforcement powers.  While all banks met 
minimum capital requirements in 2003, some NBFIs a nd many savings and loan cooperatives did not, 
thereby heightening exposure to financial risk.42 
(b) Policy objectives and framework 
51. Resolving the banking crises of the 1990s has been technically and politically difficult, and 
has required a comprehensive ongoing strategy to  restructure banks as well as to implement 
institutional and legal reforms, along with significan t fiscal costs, including budgetary costs and funds 
raised from government bonds to finance bank rescue plans.43  Banking and other financial sector 
reforms accelerated in 2001-02, in line with the Government's commitment  to a new adjustment 
programme to revitalize reforms.  Its ten-year vision, approved by the BOM in 2000, is to limit 
                                                      
36 Broad money (M2) is M1 plus quasi-money i.e. time and foreign currency deposits.  However, this 
ratio may overstate the degree of intermediation because it includes substantial foreign currency deposits due to 
the economy's significant unofficial "dollarization".  The share of foreign currency deposits to total money, an 
indicator of dollarization, was 33.6% at end June 2004, well up on levels in the mid 1990s (Bank of Mongolia, 2004b, and Bank of Mongolia, 2002b). 
37 Bank of Mongolia (2004b). 
38 Bank of Mongolia (2002a), p. 69. 
39 Greater financial intermediation raises efficiency by allowing the financial market to mobilize and 
allocate savings (both domestic and foreign) into more productive investment, thereby contributing to growth. 
40 Bank of Mongolia (2002a), p. 96. 
41 NPLs were increased during the mid 1990s by wi despread government directives to the BOM to 
extend large loans through st ate commercial banks to support industry and investment, prepare power stations 
for the winter, and finance farm activities, such as harvesting and cultivation (Bank of Mongolia, 2002a, p. 65).  
Such practices have ceased. 
42 Bank of Mongolia (2004b). 
43 Enoch, et al. (2002). Mongolia WT/TPR/S/145 
 Page 59 
 
 
intervention in the financial sector to maintaining systemic stability, based on effective prudential 
regulation and supervision by an autonomous centr al bank that allows prompt corrective action to 
close banks not meeting minimum capital adequacy ratios.44  Other key objectives are to promote 
competition by having a relatively small numb er of domestic and foreign commercial banks 
competing with an expanded NBFI network, and eliminating state-owned banks.  The Government's 
medium-term strategy to reform the financial sect or is based on Mongolia's disappointing experience 
with reforms during the 1990s (Box IV.1).  Key re forms are also incorporated in the BOM's annual 
monetary policy guidelines, and in th e Government's 2000-04 Action Programme.  
Box IV.1:  Financial sector reforms 
The Government's medium-term strategy for the development of the financial sector was approved by 
Parliament in 2001, and involves introducing reforms that: 
 - establish the foundations for a market-based financial system, including the development of 
modern banking skills, enhancement of auditing and accounting standards, the enforcement 
of financial contracts and the establishment of an exit policy process for troubled banks; 
 - signal the Government's commitment to uphold private property rights and financial 
contracts, beginning with the timely servicing of interest payments on government bonds 
held by banks; 
 - reduce the pervasive role of the State in the allocation of financial resources; 
 - facilitate the development of sustainable rural financial institutions to provide payment 
systems and banking services appropriate to conditions in sparsely populated country such as 
Mongolia; 
 - prompt consolidation of the banking system by doubling minimum capital requirements to 
Tog 2 billion (US$1.9 million); 
 - strengthen the legal framework for effective supervision and regulation by the central bank 
including the requirement for prompt corrective action; 
 - develop a resolution and liquidation framework for failed banks;  and 
 - provide the foundations for the development of a market for government bonds. 
The Government believes that:  (a) reforms must be pr operly sequenced to ensure that the essential building 
blocks for a market-based financial system and a credible government commitment to honour contracts and 
protect property rights are first established;  (b) pervasive state involvement in allocation of financial 
resources is incompatible with developing a market-based system;  (c) re-capitalization of insolvent state 
banks leads to greater future losses;  (d) liberal entry requirements allow too many poorly managed banks;  (e) 
a legal and institutional framework is needed to enc ourage debtors to meet commi tments to creditors.   
The Bank of Mongolia's State Monetary Guidelines for 2004 included: 
 - policies to develop long-term financial markets such as mortgage, apartment, land and 
immoveable property; 
 - in order to support fair competition in the financial market, and to strengthen control by 
customers over banks, correct information and transparency will be provided, bank 
accounting standards will be improved to in ternational requirements, and financial 
responsibilities of shareholders increased; 
 - rules and regulations on banks and non-bank financial institutions will continue to approach 
international standards, and the legal framework protecting interests of bank customers and 
depositors and information confidentiality improved; 
 - legislation to fight money laundering and terrorism financing;  and  
 - directions to improve the bank's management capability and legal environment, to strengthen 
data, and to keep information exchange open will be followed. 
Source:   Bank of Mongolia, Government's Medium-Term Strategy for the Development of the Financial 
   Sector , and State Monetary Policy Guideline for 2004 . 
                                                      
44 Bank of Mongolia (2000). WT/TPR/S/145 Trade Policy Review 
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(c) Banking services 
52. Mongolia's banking sector suffered systemic cri ses in 1994, 1996, and 1998.  Each involved 
major bank insolvencies, closures, and costly govern ment-funded rescue plans.  The cost of the 1994 
restructuring programme was estimated at over 2% of GDP.45  The 1996-98 rescue plan was much 
larger, costing some 8% of GDP.46  Impaired loans of closed banks, totalling Tog 47 billion between 
1997 and 2001, were transferred to an established collection agency , the Mongolian Asset Realization 
Agency (MARA).47  The BOM had also extended exceptiona l liquidity support, totalling about 
Tog 5 billion, to troubled banks  without required safeguards.48  Bank restructuring was funded mainly 
from issuing government reconstruction bonds to  replace troubled loans and to compensate 
commercial banks for losses on government-directed  credits.  These bonds totalled Tog 47.9 billion 
(5.2% of GDP) at end 1999 (Tog 38.6 b illion or 3.4% of GDP at end 2001).49  The ongoing direct cost 
to Government of financing these bonds was estimated at over 0.6% of GDP in 2001.50   
53. Several factors undermined the banking sector 's performance in the 1990s.  These included 
the legacy of directed lending and the limited consequences for loan default pre-1991, as well as 
excessive government borrowing and failure to honour payments.  Poor accounting, banking 
standards, and skills also contributed to the sector 's difficulties.  However, it has expanded rapidly 
since 2000, with total bank assets rising from 22.1% of GDP to 60.6% at end 2003. 
54. Domestically-owned, especially state, banks no longer dominate the banking system.  The 
largest bank, Trade and Development Bank (TDBM), was fully privatized in May 2002, followed by 
the Agricultural Bank in March 2003, by sale to foreign interests.51  Both banks have contracted 
international managers.52  State equity in the banking system was reduced from 60% in 2001 to 
currently around 4%.  There remains one fully stat e-owned bank (Savings Bank) , which is due to be 
privatized in 2005, and two partially state-owned banks.53  Foreign-owned banks, primarily TDMB 
and the Agricultural Bank, now represent a substantial share (30.6%) of total bank assets;  one private 
foreign bank operates in Mongolia.  However, the banking sector remains highly concentrated;  the 
largest five banks account for over 80% of the urban market, and the Agricultural Bank provides by 
far most of the rural market.  Bank net profitabilit y rose by 25.5% in 2003, but return on assets fell to 
3.1%. 
55. The substantial spread between commercial ba nk lending and deposit inte rest rates reflects 
many factors, including NPLs, risk premiums on lo ans with inadequate collateral and high corporate 
risk.  It also indicates bank inefficiencies, and provi des a useful guide to the degree of competition in 
supplying banking services.  Although still wide, the narrowing in the interest rate spread since 2000, 
as banks have reduced lending rates while maintain ing deposit rates to attract funds, possibly reflects 
enhanced competition and bank efficiency.  Fo r example, the average commercial bank lending 
                                                      
45 World Bank (2002), p. 55. 
46 World Bank (2004b), p.5.  Total losses by the Reconstruction Bank, ITI Bank, and Agricultural Bank 
in 1998 were Tog 21.1 billion, or 2.4% of GDP (Bank of Mongolia, 2002e).   
47 MARA, formed in 1996, was not expected to recover a large shar e of non-performing loans.  By 
June 1997, its recovery rate was about 17% (IMF, Working Paper WP/02/56, March, 2002). 
48 IMF, Working Paper WP/02/56, March 2002;  and World Bank, Report No. 24439-MOG, June 2002. 
49 Tog 37.4 billion by end April 2002 (Bank of Mongolia, 2002e). 
50  World Bank (2002), p. 55. 
51 The divestment covered the State's 76% equity in TDBM (24% was owned by its employees and 
other shareholders) to joint Swiss and U.S. interests, an d 100% equity in the Agricultural Bank to a consortium 
of mainly Japanese interests;  equity of 40% was subsequently re-sold to domestic interests.   
52 Trade and Development Bank signed management cooperation contracts with ING Bank in 2003. 
53 Ulaanbaatar City Bank is 20.0% state-owned, and the Capital Bank is almost 80% foreign owned and 
9.0% state-owned.  Past attempts in 2002 and 2003 to divest these holdings were unsuccessful. Mongolia WT/TPR/S/145 
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interest rate on short-term loans has fallen fro m around 30.3% in 2000 to currently around 25.6%, 
while the average deposit rate has remained largel y unchanged at about 14.0%, thereby reducing the 
spread from over 16% to 11.6%. 
56. While Mongolia has no deposit insurance schem e, the Government intervened from 1996 to 
1999 to compensate depositors of bankrupt banks, at a total cost of Tog 70 billion, equivalent to 40% 
of government revenue, or 7% of GDP.54  The Government is introduc ing a deposit insurance scheme, 
and draft legislation has been prepared;  it will be administered by an independent body.  Commercial 
bank premiums will be supplemented by government funds pooled from the BOM and the Ministry of 
Finance;  deposits of up to Tog 5 million will be covered. 
Regulatory and prudential framework 
57. Four new banking licences were issued in 2001, and one each in 2002 and 2003.55  Foreign 
and domestic banks are subject to the same prudentia l requirements.  However, foreign banks wishing 
to operate in Mongolia must submit additional doc umentary licensing requirements, such as evidence 
of their home registration.  BOM grants a licence based on, inter alia , prudential requirements, such 
as meeting minimum paid-up capital levels, and whether the new bank would have any "adverse 
effect on national economic security" (Banking Act, Ar ticle 20).  According to authorities, this is not 
an economic needs test but is concerned with ensu ring the integrity of the financial system.  BOM 
licences state- and privately-owned banks.  Bank licence applications are to be processed within 
60 days.  There is no limitation on the number of lic ences issued, including to foreign banks.  Foreign 
banks may operate in Mongolia as either subsidiaries or  joint ventures, with no cap on foreign equity.  
Foreign bank branches and representative offices must  also be licensed (Banking Act, Article 19).  
One foreign branch (Russian) currently operates.  Foreign banks can offer the same commercial bank 
services as Mongolian-owned banks, and no restricti ons apply to location of branches or their 
numbers.  Banks, foreign and domestic, are prohib ited from performing non-banking activities, such 
as insurance, management of investment funds, and securities business.56  BOM must approve 
opening and closure of all bank branches.  This is  for prudential reasons and such permission is 
readily given provided the bank is pr udentially compliant.  At least 70% of the staff of foreign banks, 
irrespective of business form, must be Mongolian resi dents.  There are no restrictions on the use of 
automatic teller machines by foreign or Mongolian banks.   
58. Minimum equity capital requirements were raised  from Tog 1 billion to Tog 2 billion in 2000, 
and to Tog 4 billion in September 2001.  Existing bank s had until April 2004 to comply and did so.  It 
is anticipated that this may also encourage bank consolidation through me rgers and acquisition of 
smaller banks.  With this main aim in mind, the minimum capital level has been further increased to 
Tog 8 billion for new banks;  existing banks have until 2006.  All banks have met the total risk-
weighted minimum capital adequacy ratio of 10% si nce 2000;  the average ratio for the banking sector 
was 19.1% in September 2004.57  The sector's average liquidity ratio of 41.1% in 2003 is also well 
above minimum prudential requirements of 23.1%,  thereby indicating banks could further expand 
lending, but remain reluctant to enga ge in longer-term commercial loans. 
                                                      
54 Bank of Mongolia (2002a), p. 73. 
55 Eleven licensed banks operated before 1993.  Since then, 20 new licences have been issued, and 
14 revoked due to prudential non-compliance, seven of these were revoked in 1999. 
56 However, some uncertainty is created by the Banking Law defining banking activities to include the 
issuing, buying and selling of securities and the provision of investment, financial consultancy, and/or 
information services (Article 6).   
57 Minimum capital adequacy ratios were increased from 4% to 10% for total capital and from 2% to 
5% for tier 1 capital in 1996.  All loans are risk-weighted at 100% for capital adequacy requirements. WT/TPR/S/145 Trade Policy Review 
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59. Enhancing bank regulation and supervision, including greater enforcement of compliance 
through prompt corrective action, is a high priority  of the BOM's Policy Reform Programme.  It has 
taken steps to upgrade and strengthen the prud ential and supervisory fr amework in line with 
international standards to incorporate greater risk-based approaches to monitoring banks.  In 
November 2002, BOM had reportedly achieved satis factory compliance, compared with other 
developing countries, with the 25 core principl es on banking supervision and prudential regulations 
issued by the Basle Committee on Bank Supervision.58  In the non-compliance areas, namely 
consolidation and cross-border supervision, the authorities indicate that corrective action has since 
achieved compliance.  To reduce bank credit risks,  guidelines on asset classification and provisioning 
were revised to raise requirements for past due loans and to allow additional provisions as needed.59  
Revised guidelines were also issued on credit, market, and operational risk assessment in 2003.  A 
Model Charter was prepared for banks.   
60. BOM also issued guidelines on good corporate governance practices, including measures to 
strengthen internal control mechanisms, based on BIS recommendations.  On-site and off-site banking 
supervision has been expanded in line with the revised Supervision Handbook, completed in 2002.  
Recent examination has focused on evaluating bank liquidity, asset quality, compliance with 
prudential ratios, and on provisioning and profitabili ty analysis.  BOM's statutory powers to regulate 
and supervise banks are relatively ex tensive, and remedial actions in clude appointment of a controller 
and signing of memoranda of understanding with the deficient bank to improve its financial 
position.60  Changes to accounting standards have reflect ed international practices.  Banks must be 
audited annually by external independent intern ationally recognized firms approved by BOM, and 
meet disclosure requirements. 
61. The Credit Information Bureau has been enha nced, including greater links with taxation 
authorities and other relevant agencies, to improve financial records for assisting banks to assess the credit risks of potential borrowers.
61  Amendments to the Civil Law in 2001 strengthened 
arrangements for banks to seize co llateral on NPLs.  However, the new Civil Code of September 2002 
also introduced a contradictory provision that created ambiguity and removed a strong incentive 
borrowers had to meet commitments.  Foreclosure pr ovisions are therefore uncertain and slow.  Banks 
continue to be financially disadvantaged by their inability to enforce non-performing borrowers to exit 
the market through bankruptcy or restructuring procedures.62 
(d) Insurance 
62. Insurance services cover mainly cars and shippi ng.  Total premiums amounted to 0.5% of 
GDP in 2002.  Mongol Daatgal, which has about 90% of the market, was fully privatized in 2003 to a 
financial consortium with foreign a nd domestic interests.  Tushing Insurance Company was also fully 
privatized in 2002.  Since 2001, only premiums for "compulsory" insurance have been tax deductible.  
                                                      
58 Bank of Mongolia (2002a), p.98.  The IMF report on which this assessment was made concluded that 
the overall standard of banking supervision was "reasonab le".  Mongolia complied with four core principles, 
largely complied with nine, and materially complied with eight principles. 
59 Regulations strictly limit the re-scheduling of loan s to hide a borrower's inability to pay.  Loan loss 
reserve provisions were increased to a 1% reserve for performing loans and from 1% to 5% for NPLs.  Loans 
are classified as overdue if interest is late, even if principal repayments are curr ent (Asian Development Bank, 
2003b, p. v.). 
60 These include written warnings, remedial action by a due date, limiting or stopping bank activities, 
administrative punishments, appointment of a controller, conservatorship (administration) for up to 12 months or a receiver, and revocation of licence (A rticle 31 of the Banking Law).    
61 The Bureau's database has been expanded to cover all aimags  and information on property under 
bank loan collateral as well as criminal records of individuals.  
62 Bank of Mongolia (2002a), p. 69. Mongolia WT/TPR/S/145 
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The Government aims to broaden insurance coverage  by diversifying the types of insurance available, 
and improving accountability and disclosure requirements.63 
63. Current insurance legislation entered into fo rce in 1998 (Insurance Law 1998).  The Ministry 
of Finance is responsible for licensing insurance co mpanies (but not insurance intermediaries) and a 
non-independent agency operating under its superv ision, the Insurance Supervisory Unit (ISU), 
administers the legislation by making recommendati ons on licensing to the Minister and supervising 
compliance by insurance companies.64  New legislation, passed in April 2004, will be operative from 
January 2005 (Insurance Law, 2004).  It has substa ntially strengthened the licensing and prudential 
requirements.  It will also transfer supervisory,  prudential, and licensing responsibilities from the ISU 
to a designated regulatory agency, the State Central Administrative Organization (SCAO).65  It will 
conduct compliance monitoring of insurance comp anies to ensure enforcement of prudential 
regulations and requirements, us ing a range of powers, includi ng inspection of premises and 
documents, and various sanctions fo r contravening licensing conditions.  An insurance licence will be 
issued unless, inter alia , the SCAO believes it would be "against th e public interest" (Article 16).  It is 
envisaged to establish an agency, the Financial Re gulatory Council, from January  2005 to regulate all 
NBFIs, including insurance companies.  Relevant le gislation, the Financial Sector Law, is currently 
before Parliament. 
64. Foreign suppliers may provide insurance servi ces as subsidiaries, joint ventures without 
equity limits, or as branches, subject to being li censed.  Foreign representative offices must also be 
licensed.  The licensing and prudential requirements do not discriminate against foreign suppliers or 
impose special conditions.  There are no restrictions  on the types of insurance services offered, on the 
number of branches or their location. 
65. Insurance intermediaries i.e. insurance broke rs, agents or loss adjusters are currently 
unregulated.  However, as from 2005, they will be subject to similar prudential and licensing 
provisions to be applied to insurance compan ies (Insurance Intermediaries Law, 2004).  The 
designated regulatory agency is also the SCAO, and responsibility is likely to be transferred to the 
Financial Regulatory Council following its creation. 
(e) Other financial services 
NBFIs 
66. NBFIs started in 1999, and have grown rapidly.   Total NBFI assets rose by 51.7% in 2003, 
equivalent to 2.3% of total banking sector asset s (1% at end-2000).  They cannot accept deposits from 
the public, but may provide a range of activities, including lending, factoring, financial leasing, 
issuing payment instruments, investment in shor t-term financial instruments, and financial and 
investment consultancy services. 
67. New legislation, effective from February 2003, simplified licensing procedures (Non-bank 
Financial Institutions Law, 2002).  Despite improvements, NBFI re gulation and supervision remain 
fragmented, and below international standards.66  To be licensed by BOM, NBFIs must meet certain 
                                                      
63 Government of Mongolia (2000), p. 6. 
64 The ISU therefore has only superv isory responsibility.  Development of regulatory policy, including 
authority to license insurance companies, resides with th e Ministry of Finance.  The ISU reports directly to 
Parliament through the Office of the Prime Minister. 
65 The State Central Administrative Organization is a generic term used in some Mongolian laws where 
a specific supervisory agency has not yet been designated as having regulatory or supervisory responsibility. 
66 Asian Development Bank (2003d), p. 2.  WT/TPR/S/145 Trade Policy Review 
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prudential requirements, such as minimum capital le vels and capital adequacy ratios.  The minimum 
equity capital was raised from Tog 30 million to Tog 100 million for NBFI's incorporated in Ulaanbaatar in 2003.
67  BOM must authorize all NBFI branches.  Prudential and licensing 
requirements are applied equally to domestic and foreign NBFIs, and foreign suppliers are not 
restricted.  They may provide services as subsidia ries, joint ventures without equity limits, or as 
branches.  Three foreign-owned NBFIs were grante d licences in 2003.  At end 2003, the six foreign 
NBFIs held some 20% of total NBFI capital.  The envisaged Financial Regulatory Council will be 
responsible for regulating NBFIs from January 2005.   
68. However, NBFI legislation excludes savings  and credit cooperatives.  These are largely 
unregulated, being principally self-regulated by the Association of Co-operatives under the broad 
supervision of a unit within the Tax Department of  the Ministry of Finance.  Their regulation and 
supervision is being reviewed, and it is likely that such responsibility will be transferred either to the 
BOM or to the impending Financial Regulat ory Council under a revised law on cooperatives.    
Capital market 
69. The capital market remains thin and under-devel oped.  New legislation covering trade in 
securities replaced the 1994 Securities Law (Securiti es Market Law, Decemb er 2002), which became 
operative from 2003.  The legislation was also ame nded in 2004.  It regulates and supervises the 
public offering of securities, trading, protection of  public shareholders' rights, and also covers 
supervision of operators in securities, such as brokers, underwriters, and investment funds.  The 
Securities Exchange Committee (SEC), established in 1994, regulates the securities market.  The SEC 
must license all professional operators in the securiti es market, including stock exchanges, securities 
dealers' trading centres, brokers, dealers, underwr iters, investment managers, and advisers.  The SEC 
may grant commercial banks or insurance companies a special licence to issu e or trade in securities 
provided the BOM or the ISU are consulted (Secur ities Market Law), although it is unclear whether 
either of these regulatory bodies can refuse SEC's decision.   
70. The poorly performing Mongolian Stock Excha nge (MSE), established to facilitate voucher 
privatization, is being revived.  The 2002 Secu rities Market Law covers activities of the stock 
exchange.  Revised regulations on listing procedures have been adopted.  There are 34 brokers, and by 
end 2002 there were 403 listed companies (up from 153 at end 2001).  However, only 37 companies 
actively traded shares.  In 2002, Tog 1.4 billion wort h of shares were traded, and market capitalization 
was Tog 52 billion at end-2002 (5% of GDP).  Over 95% of securities traded on the MSE are bonds, 
predominantly government paper ( over 90% or Tog 41.7 billion in 200 2).  Company bonds were first 
traded in 2001, and sales occurred in the secondary market in 2002.  No restrictions apply to 
foreigners buying shares on the MSE.  The Law on Bills governs the  issue of bills of exchange and 
promissory notes.  
(ii) Telecommunications 
71. Telephone density is low.  Total (fixed and mobile) telephone dens ity is about 17%.  
Mongolia's 135,500 fixed telephone lines at end 2003 c overed some 5% of the population, about 1% 
in rural areas.  The waiting list for a fixed telephone  is around 19,000 (6 to 9 months).  The network 
was largely digitalized by 2000.  There were some 319,000 mobile subscribers at end 2003.  Communications revenue increased substantially in 2003 from Tog 38.7 billion to Tog 92.4 billion 
(6.3% of GDP).  The Master Plan for Developmen t of the Rural Telecommunication Sector up to 
                                                     
 
67 The increase also applied to existing NBFIs.  Minimum equity capital requirements remained at 
Tog 10 million for Darkham and Erdenet, and Tog 1 million for other rural areas.  Different minimum capital requirements were extended to rural areas to help  attract NBFIs to these locations in 2002.   Mongolia WT/TPR/S/145 
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2021 was adopted in 2002 to improve access to communications in rural areas using mainly 
microwave services.  A medium-term policy statement on telecommunications was also released in 2001.  The Information, Communication and Technol ogy Agency formulates telecommunications 
policy.
68   
72. The majority state-owned supplier, Mongolia Telecom (MT), has a monopoly in wired 
domestic (local and national) telephone servi ces until 2015 under the 1995 agreement with Korea 
Telecom (KT).69  MT leases the public network from the PTA (now the Information, Communication 
and Technology Agency).70  The international call market was de regulated in January 2002, when the 
monopoly agreement with KT on these services expired.  Five licensed private operators compete 
with MT to supply these services.71  International call charges have fallen substantially as a result of 
competition, from US$4-5 per minute in 1995 to US$0.7-0.9 in 2002.72  There are two licensed mobile 
carriers:  Mobicom with a GSM network and 80% of the market, and Skytel.73  These licences were 
auctioned in 1996 and 1999, respectively.  MT do es not provide mobile services.  A third mobile 
licence has been tendered four times, but bids were rejected for being too low.   
(a) Regulatory arrangements 
73. The Government aims to achieve an open and competitive telecommunications sector, and 
has introduced regulatory reforms (Communications Law, 2001) (Box IV.2).  Since 2000, the number of communications and IT companies has grown subs tantially to some 140.  However, while these 
legislative reforms provide an impor tant framework for further deregulation, their practical impact is 
largely blocked by MT's monopoly on non-internati onal basic services.  Government policy is to 
abolish this monopoly as soon as possible before 2015,  but this would require re-negotiating the KT 
agreement.  The Government plans to further pr ivatize MT and would consider full divestment.   
Deregulating basic services to promote competition by ending MT's monopoly is likely, however, to 
provide greater economic benefit.   There are no foreign investment restrictions in 
telecommunications, including mobile services.   
                                                     
 
68 This replaced the recently restruct ured Ministry of Infrastructure.  It is under the Office of the Prime 
Minister, and was formed by combining the Ministry's Department of Information, Communications and Technology with the Post and Telecommunications Agen cy (PTA).  The PTA (initially called the Mongolian 
Communications Assets Company) wa s created in December 1996 to own the public telecommunications 
infrastructure after MT's formation.  This separated network ownership from the operator, and left the Government responsible for infrastructure maintenance and development. 
69 The fully state-owned Mongolian Telecommunications  Company was partially privatized in 1995 to 
form MT by selling 40% to Korea Telecom.  Another 5.6% was later sold to MT staff and other Mongolian interests.  A second land-line company (Mongolian Railways Company) provides restricted telephone services 
to customers near the railway, using its fibre optic cable through MT's network, or to circuits in the Russian 
Federation and China.  It had 11,000 customers in 2002.  
70 General revenue accrues to the Government as lease charges, taxes, and dividends from MT 
(US$79 million-US$49 million in lease payments from 1995 to 2002).  Government is considering whether to end this separation by transferring ownership of switching equipment to MT, while retaining ownership of the 
trunk lines.  This would require substantially more equity  from MT's private partner or dilution of its ownership. 
71 The internet market was also opened.  Th ere are currently eight providers and some 
46,000 subscribers.  Voice-over-internet was also allowed for long-distance and international communication.   
72 Asian Development Bank (2003c), p. 12.  The authorities indicate that per minute call charges to the 
United States have fallen from US$7  to currently well under US$1.   
73 Mobicom is 80% Japanese and 20% locally owned.  Skytel is 70% Korean and 30% locally owned. WT/TPR/S/145 Trade Policy Review 
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Box IV.2:  Telecommunications regulatory reforms 
The Communications Law, enacted in 2001, contains regulatory reforms aimed at safeguarding competition, 
overseen by a new independent body, the Communications Regulatory Commission (CRC). 
The legislation requires th e operator of a "backbone telecommunications network" to provide "connection 
conditions without hindrance".  A "backbone network" is  defined as the public network, which consists of 
international and domestic long-distance transmission,  and international long-distance switching facilities 
(Article 17).  The PTA, as owner of the state-owned public network, is responsible for, inter alia , organizing 
investment and concluding network operation contracts with providers (Article 10).  Licences to establish and 
operate a telecommunications network stipulate that the holder is to provide others with interconnection.  The 
CRC must approve the "general terms of interconnection agreements between network operators" (Article 8, 
Communications Law), and interconnection fees are to be "subject to the methodology set by CRC" (Section 
3, Licensing Terms and Conditions).  Given MT's monopoly on non-international basic services, the only 
interconnection arrangements to date  cover access to the network negotiate d by international call providers 
with MT, following the de-monopolizing of this service in 2002.   These confidential interconnection 
agreements are somewhat dated, and ma y need to be reviewed (ADB, p. 38).    
The CRC "monitors" telephone charges for services "dom inating a market", and must approve the accounting 
methodologies used to set them (Article 9, Communications Law).  Licensees have the right to determine 
tariffs based on CRC methodologies (Article 25), and licences are co nditional on operators using CRC 
methodologies to set tariffs. 
The CRC is authorized to "create conditions for fair co mpetition" (Article 9).  Licensees are to "keep away 
from acts of blocking competition in a communication's market, overusing its rights as well as 
discrimination" (Terms and Conditions of Licences).  A ny licensee is also subject to the Unfair Competition 
Law.  The Communications Law also established a univer sal service obligation fund to construct and expand 
networks to provide "necessary services" to remote areas (Article 11).  The fund, yet to operate, is to be 
disbursed by the PTA.  Its funding is  currently being reviewed, including the possibility of introducing a levy 
on operators.  MT and the two mobile carriers are currently responsible for providing universal services. 
While the new legislation lays the foundations for moving to an open and independently regulated 
competitive sector, should MT's monop oly be abolished, it may have seve ral weaknesses.  These include the 
inclusion of postal matters with telecommunications, th e vagueness of funding arrangements for the universal 
service obligation fund, and having it controlled by the PTA (ADB, pp. 4-5). 
Source: Communications Law, 2001;  and ADB (2003), Project Performance Audit Report on the 
    Telecommunications Project (Loan 1300-MON[SF]) in Mongolia . 
74. As the first telecom regulatory body, formed in 1996, proved ineffective, the Communications 
Regulatory Committee (CRC) was established in  June 2002 (Communications Law, 2001).  Its 
independence is yet to be demonstrated.74  The CRC is the licensing authority, and is mainly financed 
from licence fees, which are structured to provide incentives for infrastructure development in remote 
regions.75  Licences are granted for up to 20 years.  Type A licences are to establish and operate a 
basic telecommunications network and type B licences cover most other services, including 
international, domestic long-distance, and cellular calls.76  There are no limitations on foreign entities 
holding licences, either as a subsidiary or a jo int venture without equity limits, and licensing 
                                                      
74 Asian Development Bank (2003c), p. 5.  According to the authorities it is fully independent;  having 
the Prime Minister appoint its members for six-year terms contributes to CRC's independence.   
75 Licensing fees depend on the type of licence and serv ice.  They are flat rate  fees, except for type A 
licences, where ad valorem  fees apply to operators exceeding minimu m annual revenue levels.  These standard 
fees do not apply to MT, Mobicom, and Skytel;  their fees are set by government agreement.   Fee discounts of 
50% for three years apply to holders establishing servic es in remote regions (Regulatory Fees, Order of the 
Minister for Infrastructure of Mon golia, No. 361, 26  December 2002).  
76 Some services, such as LAN installation and in ternet, require only registration with the CRC. Mongolia WT/TPR/S/145 
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provisions do not discriminate against them.  As already indicated, however, MT is the only licensed 
provider of basic non-international services. 
75. CRC regulates telephone charges on a cost basis.  It recommends proposed tariff changes to 
the Information, Communication and Technology Agen cy.  Mobile call charges are set by regulating 
those of the dominant provider, Mobicom.  MT's tariffs for basic services contain significant cross-
subsidies from profitable international calls to fund losses on local calls.77  The cross-subsidy has 
declined following lower international call prices.   Significant cross-subsidies also apply favouring 
residential over business subscribers.  The Governme nt intends to move progressively to full cost-
recovery on local calls and to re-balan ce tariffs to remove cross-subsidies. 
(b) Information technology 
76. IT development is being fostered in accord ance with the "Concept of Information and 
Communications Technology Development in Mongo lia up to 2010", adopted by Parliament in 
February 2000.  It provides for the establishmen t of a state fund to develop information and 
communications technology, and state support to construct IT infrastructure based on national 
satellites.  The National ICT Committee, formed in  April 2001 and consisting of government and 
private sector representatives, advises government on implementation strategies.  It has proposed a 
medium-term strategy for IT development, and its  recommendations to the Government include VAT 
exemption for electronic goods, products, and services that use IT, and having a third mobile phone 
provider.  Developing IT and the internet is part of the Government's 2000-04 Action Programme.  
The Government adopted a Medium-term Strategy for Development of ICT and an Action Plan in 
2002. 
77. Regulatory arrangements for the IT industry are contained in the Information Technology 
Law, 2003.  In addition to reaffirming relevant provisions of the Communications Law, it covers 
e-governance, e-signature, and e-commerce. 
(iii) Transportation  
(a) Air transport 
78. Mongolia depends on air transport for intern ational access and domestic communications.  
Some high value goods are exported by air, such as gold, cashmere products, and small quantities of 
horsemeat to Japan.  Mongolia has 22 airports, in cluding Buyant Ukhaa International Airport (BUIA) 
at Ulaanbaatar.  Traffic volumes at BUIA expande d by 4.2% annually, on average, between 1993 and 
2002.  It currently handles about 6,000 aircraft m ovements and 330,000 passengers per year.  Most 
recent growth has been in international traffic, but domestic passengers still account for the majority 
(60% in 2003).  BUIA's airport charges and fees, last amended in 2000, follow ICAO principles;  
according to the authorities, the changes compare fa vourably with other airports in the North Asian 
region.  Total air freight carried in 2003 was 2,200 tonnes. 
79. Airport facilities are state-owned (Civil Avia tion Law, 1999) and managed and operated by 
the Mongolian Civil Aviation Authority (CAA), whic h was formed in 1991 to regulate and upgrade 
the sector's safety, in accordance with the National Air Safety Master Plan.  Its main source of revenue is fees from significantly increased over-flying international aircraft.
78  The Ministry of 
                                                      
77 Local calls cost MT a minimum of Tog 13 per minute to supply while the current tariff is Tog 7 per 
minute.  Mobile calls range from Tog 150-250 per minute (Asian Development Bank, 2003c , p. 38).  
78 Much of CAA's revenue accrues to the Government as accelerated loan repayments, taxes, dividends, 
and other withdrawals.  WT/TPR/S/145 Trade Policy Review 
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Roads, Transport and Tourism, following the recent rest ructuring of the Ministry of Infrastructure, is 
responsible for formulating air transport policies a nd regulating the sector.  In particular, it approves 
procedures for licensing of air carriers, and regulates matters related to the designation of air carriers performing international flights, determination of flight routes,  certification of air carriers, 
establishing fares and rates, and joint ownership and lease of aircraft.   
80. The Mongolian Civil Aviation Air Transport Company (MIAT) operates the fully 
state-owned national carrier, Mongolian Airlines, under the control of the Ministry of Roads, Transport and Tourism.  Operational control is de legated to the CAA.  MIAT provides both domestic 
and international services, and eight of its fleet of 18 aircraft are in commercial service (three on 
international routes).  MIAT's commercial viability is  weak, due mainly to the current fare structure 
set on full-cost recovery basis, a nd domestic operations have been curt ailed due to continual losses.  It 
was placed under external management in May 2 003, which is due to end in November 2004.  
Significant cost reductions have been implemente d, including reducing staff from 900 to 700.  Its 
privatization is planned for 2005.  Foreign equity is limited to 49%.    
81. The Government regulates domestic airfares.  MI AT's fares have historically been kept below 
cost, but steps are being taken to raise them to prof itable levels.  They were raised by 25% in 2004 
(10% in February and 15% in A ugust).  Several small private air lines operate scheduled commercial 
domestic services in competition with MIAT.  The Mini stry must approve private airfares.  There are 
no restrictions on provision of domestic air services, including by locally incorporated foreign firms.  However, cabotage is prohibited, and foreign ca rriers providing international services cannot operate 
domestic services.  Charter flights are allowed in accordance with related legislation and procedures. 
82. International air services are governed by bila teral air service agreements.  The Ministry 
negotiates these agreements.  Mongolia currently has 29 agreements, but only six are operational due 
to insufficient commercial interest by other fore ign carriers.  These cover international services 
between the Russian Federation, China, Japan, Ko rea, Germany, and Kazakhstan.  Rights provided 
are mainly "third and fourth freedoms".  No new agreements are currently being negotiated.  MIAT 
operates limited international services, su ch as to Moscow, Beijing, and Berlin.   
83. There are many private travel agents, mostly IATA-approved, which provide services in 
accordance with related agreements signed with airlines.   There are no restrictions on foreigners 
supplying these services.  Airports, including BUIA, are run by the CAA and incur losses;  there are 
no plans to privatize them.  All ground-handling,  maintenance, and airport services are provided by 
government-owned bodies, such as CAA, MIAT, or BUIA.  The authorities in dicate that there are no 
restrictions on private, including foreign, operators  providing these services.  Fuel services at BUIA 
are provided privately. 
(b) Land transport 
84. A landlocked country, Mongolia relies heavily on ro ad and rail transport.  In 2003, some two 
thirds of freight was carried by rail (down from 86% in 2002), and 30% by road (14% in 2002).
79  It 
depends upon road and rail access to China and the Russian Federation for trade, and for transit to 
access other markets.  Mongolia's main port, Tian jin in China, is reached through Zamyn-Uud and 
Erlian.  Major exports, such as copper concentrate to Russia, textile products in containers to Tianjin, 
and meat products to the EU through the Russian Fe deration, are transported by  rail.  Transit goods by 
rail between the Russian Federation and China, especially liquid petroleum and timber from the 
Russian Federation, are a major source of government revenue.    There are about 30 companies in 
                                                      
79 Rail accounts for about 95% of passengers. Mongolia WT/TPR/S/145 
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Mongolia operating multi-modal transportation services.  The authorities indicate that there are no 
restrictions on foreigners providing these services. 
85. Mongolia is negotiating a Transit Transport Fr amework Agreement with China and Russia.  
The sixth meeting is scheduled for December 2004.  It is to cover all road transport, including freight 
and passengers.  This agreement will replace Mongolia's  historical bilateral agreements with China 
and the Russian Federation. 
Road 
86. Mongolia's road network covers about 11,000 kilometres.  Some 12% of roads are paved;  
three quarters are natural earth roads.  A major ro ad project has recently been approved to complete 
the north-south road corridor by constructing a road from Choyr to Zamyd-Uud in China.  It will link 
China with the Russian Federation and pass th rough major economic centres in Mongolia.  The 
Government is funding the eight-year "Millennium road " project that will link together major centres 
from east to west.  The Department of Roads is r esponsible for road constr uction and maintenance.  
The Ministry of Roads, Transport and Tourism is responsible for formulating road transport policy, 
implementation, and coordination. 
87. The main legislation is the Law on Roads, 1998, as amended.  A Road Fund, comprising 
revenue from mainly fuel taxes, road fees, transit fees, and government grants, is used to develop and 
maintain roads.  These funds totalled Tog 46.5 b illion from 1991 to 2001 (Tog 10.7 billion in 2001). 
88. Road transportation is dominated by the private sector.  Informal taxis and minibuses 
principally provide passenger services.80  Several private companies, including with foreign interests, 
provide taxi services in Ulaanbaatar.  Taxi services are subject to special licensing requirements 
aimed at ensuring safety and other minimum standards.  There are no limits or restrictions on undertaking taxi services, including by foreigners.  City authorities set maximum taxi fares allowing 
for full cost recovery.  Four financially non-viable  public bus companies provide passenger services in 
Ulaanbaatar (consisting of 250 buses and 90 trolleybuses).  Efforts are under way to privatize them.  Several private companies provide urban and inter-urban bus services.  City authorities set maximum 
urban bus fares, which are set below cost.  Certain passengers, such as students, travel free of charge.  
Government subsidies to private bus companies total about Tog 700 million annually.  Inter-urban 
passenger services are auctioned for particular rout es every three years and limited to one operator.  
The authorities indicate that there are no restrictions  on foreigners bidding to provide such services.   
89. There are about 25,000 trucks in Mongolia, and private haulers carry road freight.  There are 
no restrictions on entry, including by foreigners , and freight rates are market determined.  No 
government subsidies exist. 
90. Transit rights are governed by historical bilate ral agreements with the Russian Federation and 
China.  Chinese and Russian buses and haulers can operate in Mongolia, subject to certain 
conditions.
81  Cabotage is prohibited, and operations are rest ricted to specified routes.  However, the 
lack of an adequate road network connecting Mongolia with China and the Russian Federation 
severely limits transit road traffic. 
                                                      
80 Bikales et al. (2000), p. 16.  
81 The authorities indicate that Mongolian haulers an d busses cannot in practice operate in either the 
Russian Federation or China. WT/TPR/S/145 Trade Policy Review 
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Rail 
91. Mongolia's railway system consists of 1,815 k ilometres of track.  The main route, the 
Trans-Mongolian Railway, links Ulaanbaatar to Na ushki in the Russian Federation and Erlian in 
China.  Parliament is yet to approve the ten-year  Master Plan for developing the railway sector.  
Railways are owned and operated by  Mongolian Railways, an equal joint venture of Russian and 
Mongolian transport ministries.  There are no plans to restructure or privatize it.  The Ministry of Roads, Transport and Tourism is responsible for formulating rail transport policies.  The  Railway 
Authority  is the implementing agency for providing freight and passenger services.   Mongolian 
Railways operates profitably, helped by the substa ntial transit fees received on rail transit traffic, 
especially on fuel products and timber.  Rail freight is equally divided between  local and international 
activity.  Transit freight represents about two thir ds of international freight.  Mongolian Railways 
incurs substantial losses on domestic transpor tation of coal from state-owned mines. 
(iv) Tourism 
92. Tourism is a government priority.  It accounts for an estimated 10% of GDP (equivalent to 
US$130 million in 2002) and 1% of total employment.  The sector has expanded due to increased 
numbers of foreign visitors, which grew by ove r 40% during 1999-02, but fell by 12% in 2003 to 
about 201,000.  Internationa l tourism receipts also fell in 2003, from US$167.4 million to 
US$149.1 million (US$7.8 million in 1999).  Foreign tourists are mainly from China, Russian Federation, South Korea, and Japan. 
93. The Ministry of Roads, Transport and Touris m formulates tourism policy.  The independent 
Mongolian Tourism Board (re-named in 2000 from th e National Tourism Board, established in 1999) 
handled tourism promotion and sector regulation until its recent closure.  The Ministry's Department 
of Tourism Policy and Coordination is currently r esponsible for tourism promotion.  The Tourism 
Law, 2000 (as amended) covers t ourism promotion, engagement in  tourism activities, and provision 
of tourism services.  Legislative amendments in November 2001 introduced mandatory grading of 
hotels and tourism resorts, and special licences for "high level" hotels (three star and above).  The 
legislation also established the Tourism Council, under the Office of the Prime Minister, to advise on 
tourism-related policies.  A new 15-year Master Plan has been adopted to develop the tourist sector. 
94. Total annual tourist capacity  is estimated at 450,000.
82  Hotels and tourism resorts catering for 
foreigners receive the same support and depreciati on allowances as other expor t-related enterprises.  
Tourism-related services were exempted from VAT in 2001.   The authorities indicate that a bed tax 
may be considered, but if introduced, would ap ply to both domestic and foreign tourists.   
95. A tourism fund has been established to fina nce tourism infrastructure and promotion 
(Tourism Law, Article 19).   It is financed mainly by the state budget and donations.   
96. The authorities indicate that there are no restric tions on foreigners providing tourism services, 
other than guide-interpreters, which must be Mongo lian citizens and meet certain training and grading 
requirements.  There are currently over 500 private tourism companies.  Both foreign and domestic 
operators require the same permission to enter na tional protected areas in order to safeguard the 
environment.  Land can be leased for between 20 and 60 years. 
                                                      
82 There are 116 hotels with 5,000 beds in Ulaanbaatar, 81 provincial hotels with 3,000 beds and 
118 tourist camps with 5,200 beds. Mongolia WT/TPR/S/145 
 Page 71 
 
 
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