Mongolia is the second largest landlocked country in the world and the one with the lowest population density, some of which, around 30 percent, continue to maintain nomadic and rural-pastoral traditions.
Instability is one of the main characteristics of the Mongolian political system, characterized by frequent sectarian conflicts, endemic governance problems and widespread popular discontent. The Mongolian People’s Party (PPM) won a landslide victory in the June 2020 Mongolian unicameral parliament (State Great Khural) general election, thanks in part to initial successes in containing public health damage from COVID-19.
However, due to the spread of a large series of outbreaks, the government imposed periodic lockdown measures, from the end of 2020 to May 2021, with a significant impact on economic activities and employment, generating widespread discontent which, in January 2021 , forced the resignation of Prime Minister Ukhnaa Khurelsukh who, however, was subsequently elected President of the country on 9 June 2021, achieving a landslide victory. Its success has consolidated the PPM’s dominance of the political scene, as the ruling party also controls 62 of the 76 seats in parliament, and the government is therefore free to implement its own policy agenda, in the absence of significant domestic opposition, at least until 2024 when the next general elections will be held.
In 2021, the economy showed encouraging signs of recovery, with GDP growth estimated at 5.2%, according to the October 2021 edition of the Monetary Fund’s World Economic Outlook, mainly induced by statistical base effects and the of international demand which has driven mining exports, favored by the increase in the respective prices, with positive effects on private investments in the sector Private consumption has suffered a contraction that has not occurred since 2016, despite the substantial government aid to households and small and medium enterprises. This is in particular due to the stagnation of household incomes, the impact of the pandemic on the labor market and the increase in food prices, due to the stagnation of agricultural production and the increase in the prices of imported products.
Main sectors of economy
Mongolia’s economy is traditionally based on agriculture and pastoralism and above all on the mining sector on which it is heavily dependent, above all for exports of coal and copper to China. The country is, in fact, endowed with significant mineral deposits, such as copper, coal, molybdenum, tin, tungsten and gold, widely exploited during the period of Soviet influence, which feed a large industrial production.
In 2020, the economy suffered the strong impact of the pandemic and real GDP recorded an annual decline of 5.3%, one of the worst contractions since the 1990s. In particular, the mining sector was significantly affected by the sharp reduction in international demand for raw materials and the closure of the borders with China. The service sector has also been hit hard by restrictions on mobility and reduced disposable income.
The weakness of the economy was also exacerbated by the adverse climatic conditions which negatively affected the agricultural product. These dynamics have reverberated on the labor market, even if the generous economic policies implemented by the government have managed to cushion their impact.
Main products exported from Mongolia in 2020 were coal, copper, gold, iron and zinc ores, hides, and other minerals (feldspar, molybdenum, lead, tin, etc.).
On the import side, China in 2020 accounted for 35.7% of the total, followed by Russia with 26.4%, Japan (7.7%), the United States (4.6%), Korea from the South (4.4%) and from Germany (3.5%). Italy ranked thirteenth among the supplier countries, with a market share of 0.8%.
The main products imported from Mongolia in 2020 were petroleum products, motor vehicles, tractors, railway rails, machinery and medicines.
Taxation for businesses in Mongolia
In Mongolia it is possible to establish sole proprietorships, partnerships, companies (exclusively with limited liability or joint stock) and agricultural cooperatives. Currently, only two tax rates are envisaged, respectively 10 per cent and 25 per cent.
As far as foreign companies are concerned, they are granted equal rights with respect to local ones. On the contrary, in favor of foreign investors, the Mongolian government has provided tax and customs duty concessions; moreover, for companies operating in sectors of great importance for the country such as transport, telecommunications and energy, there is a total exemption from paying taxes for the first three years of activity as well as a reduction in the taxation of the 50 percent for the next five years.
Even more advantageous are the companies operating in sectors of strategic importance for Mongolia such as the mining, chemical and electronic sectors for which a total exemption from the payment of taxes is envisaged for the first five years of activity, in addition to the already visa abatement of taxation by 50 per cent for the following five years.
The value added tax has a fixed rate of 10 per cent, down from the previous rate of 15 per cent. As regards mining taxes, royalties have more than doubled from 2 to the current 5 percent with a simultaneous increase in taxes on licenses for the extraction and exploitation of natural resources. Turning now to Mongolia’s customs system, we underline how the country presents today, unlike what happened in the past under the communist regime, an essentially very open and free market.
As a rule, imports are not subject to quotas and there are no particular restrictions. However, the exceptions are precious metals, weapons and ammunition, alcoholic beverages, cultural and artistic works and rare animal species which in fact are subject to severe limitations both as regards the quantities that can be imported and those that can be exported.
The general measure of the duty on imports is equal to 5 per cent, while on the introduction into the country of certain agricultural products, such as potatoes and beets, a surcharge of between 10 and 15 per cent is applied. On the other hand, imports of medical equipment, certain animal species such as horses, pigs and cows, and the equipment necessary in the mining and energy sector are exempt from taxation. Exports, and we recall that Mongolia mainly exports large quantities of gold and copper, are usually exempt from taxes, except in a few cases, first of all the export of raw cashmere.
Investing in Mongolia
From the previous government, Mongolia inherited the recovery of foreign investor confidence and a new economic vitality even if the excessive dependence on foreign direct investment (FDI) made the Mongolian economy subjugated to international private actors. With the intention of increasing the confidence of foreign investors, the previous government in fact entered into an agreement in May 2015 with the Rio Tinto company to resume mining activity at the Oyu Tulgoi mine, which was followed by the package of financial measures adopted in December of last year which provided for a fund of 4.4 billion dollars aimed at reducing the economic and fiscal pressure.
The objective shared by the Ulaanbaatar government together with the World Bank is to increase and diversify national exports by focusing more attention on the world of small and medium enterprises (SMEs) operating in the non-mining sector.
The geographical position of Mongolia and the connections with the People’s Republic of China, the Russian Federation and Central Asia allow the Mongolian market to have access to an even wider market such as that of the Eurasian Economic Union or that linked to the Beijing strategy of New Silk Road 2.0 (also known as One Belt, One Road). Investing in the Mongolian territory and starting a business, guaranteed by the 2013 Investment Law, allows a company to take advantage of significant logistical and commercial advantages, factors that cannot be overlooked when analyzing the opportunities of a country.