because of the same problems. The communication and transportation network systems requires substantial overhail and expansion to enable them to meet demand and play a proper role in the transformation to a market economy.

## 3 -1-2 Economic Indicators

The real growth rate of GDP fell 1.3 percent in 1993 (see Appendix 1). It reflects a fall in livestock output. The declines will continue for four years, and the level of GDP is the same as that of 1983. Price liberalization and the shortage of supply have been major causes of the high rates of inflation, officially announced fourteen times since the beginning of price liberalization. The price of bread increased from 3 to 60 Tugriks.

## 3 -1-3 Finance

The tax law adopted in 1991 was suitable at the time, but, given the background of privatization, price liberalization and the new legal environment for businesses, it has become necessary to establish a new tax system. And in order to keep government expenditure under control and limit inflation, all subsidies given to enterprises from the state budget were stopped in 1992. Also, expenditure in the administrative, cultural, educational, social and health sectors has been reduced by 5-10 percent. In 1992 the deficit stood at 9.9 percent of the GDP, and government expenditures have been sharply reduced from 64.1 percent of the GDP in 1990 to 39.4 percent in 1992 (see Appendix 11). This decline resulted mostly from cuts in subsidies and purchases of goods and services. Further reforms came into effect with the passing of new tax laws in 1993. The old “turnover” taxes on the price differentials have been eliminated. Under the new Customs Law, exports are not taxed and imports pay uniform 15 percent tax. A 10 percent sales tax on imports and domestic production has been introduced. The Tax Law introduced income taxes for individuals and for enterprises (and cooperatives), replacing then-existing profit transfers. However, income taxes have barely been collected because (1) no system of tax collection has yet been set up; and (2) because of very bad economic conditions, enterprises have no “taxable” incomes.

## 3 -1-4 Foreign Trade and Balance of Payment

A large decline in the value of both Mongolia's exports (by 44.1 percent) and its imports (by 51.0 percent) compared to the previous year was seen in 1991. In 1992, imports fell by 20.2 percent, but exports increased by 2.7 percent (see Appendix 5,6). This indicated some weak growth tendency as the result of the undertaken policy measures towards trade liberalization and devaluation of tugliks against US dollars. However, the Russian Republic remains Mongolia's largest trading partner and the prospect of exports is still negative, owing to the breakdown in the Russian economy, changes in the COMECON trade and payments system, and declining world prices of copper and cashmere, and the recession in the industrial countries. Imports from the former Soviet Union also sharply decreased, (by 63 percent in 1991) and domestic production was seriously curtailed by the shortage of imports such as fuel, energy, spare parts and raw materials. The reduction of the trade deficit in 1992 was caused by the decrease of imports, not by the increase of exports. Foreign currency reserves also reduced. Foreign external assistance from the donor countries and international institu-