Mongolbank), and two state commercial banks. The Bank of Mongolia's chairman is responsible to the legislature, thus making the central bank independent of the government. The commercial banking activities of the former State Bank have been transferred to seven new commercial banks, which have taken over most of the former State Bank's branches. The interest rate on central bank loans to commercial banks has been increased to 35-60 percent in August 1992. Mongolbank imposes tight restrictions on lending to commercial banks. All commercial banks enjoy the right to set interest rates according to their own policies and commission for money deposits and credits. Although the separation of the central bank from the commercial banks has been the centerpiece of reform in the financial sector, the speed of reform has made it difficult for the new commercial banks to become competitive and adapt to the environment of the market economy. Initial steps have been taken to improve supervision of the commercial banks but they still are ineffective. Weak loan portfolios inherited from the former State Bank have resulted in the unhealthy financial conditions of some of the banks. Delays in raising interest rates to attract new deposits, together with a deterioration of public confidence with the new banks, have led to some liquidity problems.

## 2 -3 Price Liberalization

Under the planned economic system practically all prices were controlled by the government. For instance, with the 1978-price as the base (=100), wholesale prices have risen to 138.0 in 1985 and 165.4 in 1989. In the meantime, retail prices changed little: 103.1 in 1985 and 102.1 in 1989 (see Table 2 -IV -4). In Mongolia retail prices of main consumer goods were unchanged from 1960s. Wholesale prices were set according to the cost of production or importation and transportation. Over the last three years important strides were made in price liberalization. These measures were implemented in several steps. As a first step, the government liberalized 60 percent of state-controlled prices. The second step was made in October 1991. The number of commodities subject to price control was reduced to 17 at the retail level, including basic necessities sold under the ration system, key goods for rural areas, and items for children. Energy prices, rents and tariffs for public utilities and services remained under control. Third and fourth steps were made in October and December 1992, and the last, decisive step was made in June 1993. The introduction of a floating exchange rate system at the end of May 1993 represented a major step toward the creation of prices consistent with market forces. In June 1993, prices of electricity and tariffs for public utilities, including urban public transportation in Ulaanbaatar, housing and services, which had remained under administrative control, were freed. At the same time, ration systems of meat and flour were abolished. State control of the wage level was also abolished, with the exception of the minimum wage. At present, the average wage per month is 5000 Tugriks, compared with 539 Tugriks in 1989.

## 2 -4 Enterprise Reform and Privatization

Mongolia’s privatization program was initiated in May 1991. According to the government program, 60 percent of the country’s fixed assets, amounting to 24 billion Tugriks, will be privatized. This figure represents 18 billion Tugriks of assets under major privatization.