Mongolia’s foreign debt equals 220% of national GDP, warns UN independent expert

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While Mongolia’s external debt currently amounts to 220 percent of the national GDP, public debt reaches 58.9 percent of GDP, reported Juan Pablo Bohoslavsky, a United Nations independent expert on foreign debt and human rights who recently visited Mongolia.

The UN expert worked in Mongolia from September 2 to 11 with objectives to examine debt and macroeconomic policies from a human rights perspective; understand to what extent mineral rents are translated into inclusive and comprehensive social and environmental policies, contributing to the progressive realization of human rights and to sustainable development; assess some efforts deployed by the government to prevent and combat illicit financial flows and their impact on human rights; and look into lending for infrastructure and mining projects and other foreign direct investments from a human rights perspective. He also got acquainted with the activities of Oyu Tolgoi, the largest ongoing mining project in Mongolia during his mission.

Bohoslavsky presented the preliminary findings and conclusions of his visit on Wednesday morning, highlighting that sharing of mineral revenue should help secure human rights.

“The 58.9 percent of GDP current public debt isn’t alarming. But, debt sustainability analysis should include human rights dimension so that the implications of debt levels on these rights are duly taken into account by the relevant financial authorities,” he said.

The UN expert stated that private debt amounts to half of Mongolia’s domestic debts (mortgages, consumption and companies) and advised to “prudentially manage” the debt as “the high very high level of private debt poses systemic risks to the economy”.

Bohoslavsky commended Mongolia’s commitment to diversifying its economy while increasing competitiveness and encouraged the country to deploy additional efforts on the matter. He noted that Mongolia needs to take concrete steps to implement the industrial policy, adopted in 2015, and ensure policy coherence to further improve the economic diversification. He was also impressed with the government’s establishment of the Fiscal Stabilization Fund and Future Heritage Fund, which can, as Bohoslavsky put, play a key role as instruments of macroeconomic stabilization and intergenerational equity respectively.

The independent expert added, “In line with Mongolia’s acknowledgement of its need to  build up buffers during good times”, it is however of paramount importance that, in the meantime, public revenues from the mining sector and other domestic revenues such as taxation and social insurance contributions are mobilized to create sustainable intergenerational and interclass linkages.”

Tax and illicit financial flows

In Mongolia, the tax rate for business income up to three billion MNT is of 10 percent and of 25 percent thereafter. The government is currently considering raising the threshold to six billion MNT, allowing a greater number of enterprises to benefit from the 10 percent rate.

While “fiscal over performance” was registered by IMF in 2018, it is of concern that Mongolia’s individual income tax system is solely based on a 10 percent flat rate, complemented by a 0.6 to one percent real estate tax, says Bohoslavsky. In this regard, he underlined the importance of domestic resource mobilization, which can be a tool to ensure the realization of human rights and promote inclusive growth, and increasing government revenue more directly depends on robust redistributive and progressive taxation regimes.

“Some of my interlocutors brought to my attention the considerable share of Mongolia’s shadow economy. The government should consider conducting a study on the matter in order to assess the importance of untapped fiscal revenue, to ensure a better tax mobilization and collection while ensuring potential accountability,” the expert noted. “I commend the government for having joined the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2018 and the Inclusive Framework on Base Erosion and Profit shifting. Nevertheless, I am concerned about the recent amendment to the status of limitation of tax crimes, now being reduced from five to four years as well as the recurrent adoption of tax amnesty laws and the fact that information on taxes and taxpayers who received an amnesty is not publically available.”

Mongolia’s rank on the Transparency International Index has significantly improved in the last year, going from the 103rd place in 2017 to 93rd place in 2018. However, a number of people told Bohoslavsky their concerns about corruption, and potential impact of this economic crime on public revenue and development. The expert was particularly worried about the high prevalence of corruption in the business sector.

Bohoslavsky says Mongolia has gaps in its efforts to prevent and fight corruption. In this regard, he recommended an effective regulation for tackling lobbying of various sectors, creating more robust protection of whistle-blowers in line with international human rights standards, and conflict of interest.

Next, he talked about taxes, advising Mongolia to ensure clear and concise laws and regulations that make it illegal to intentionally incorrectly or inaccurately state the price, quantity, quality or other aspect of trade in goods and services in order to move capital or profits to another jurisdiction or to manipulate, evade or avoid any form of taxation, including customs and excise duties. Another recommendation was for the government to require their customs officials to use available databases of information about comparable pricing of world trade in goods to analyze imports and exports and identify transactions that require additional scrutiny.

“Tax agreements, such as the one included in the investment agreement concluded to develop the Oyu Tolgoi mine between the government and the company Rio Tinto in 2009, have paramount tax implications for the country. For instance, this agreement included a tax stabilization clause for 30 years, meaning that the tax rate agreed upon in 2009 would remain valid for the following three decades. Furthermore, there have been controversies regarding whether extraordinary and non-expected profits could be taxed or not,” Bohoslavsky pointed out.

“In my view, this tax stabilization clause can be read from at least two perspectives. First, as inclusive growth was one of the explicit goals of this mining project, it is hard to argue that the full private appropriation of these profits – which are produced at expense of the natural resources of Mongolia – is socially and politically legitimate. Second, from an international legal perspective, if certain profits were not envisaged when the stabilization clause was included, a fundamental change of circumstances (such as windfall profits) may be argued to allow distributing them between state and investor.”

“One way to solve this controversy is renegotiating the contract and implementing a floating royalty system in which the rate evolves according to the market price. This system is currently used with success in a number of mining businesses in Mongolia. It should not be forgotten that development is not only about shared economic growth but also about shared losses for society.”

Mining, environment and human rights

In terms of mining, UN independent expert Bohoslavsky shared concerns of the Committee on Economic Social and Cultural Rights. He says the compensation of mining companies to local communities, such as community development agreements, are not always fully implemented or do not result in concrete benefits for local populations, particularly those affected by mining activities.

“The government needs to take further steps to support the ability of affected communities and civil society at large to provide parallel information to assessment processes,” he stressed.

While visiting Oyu Tolgoi mine during his visit, Bohoslavsky was impressed by the adherence to high standards in safety within the industry as well as efforts for creating jobs in the region and support local businesses through its procurement policy. He noted that Oyu Tolgoi is committed to promoting gender equality among employees and advised to integrate these efforts with targeted policies to balance the structural asymmetric distribution of unpaid care work responsibilities among men and women.

Oyu Tolgoi has put in place a program to help herders to pump water from deeper streams to address water scarcity. However, this solution comes with complications, the expert said.

“First, it does not prevent pastures from drying out, with irreversible consequences for the biodiversity in the Gobi desert. Second, it requires that herders have and use water pumping machines in the middle of the desert. Not all of them are able to pump water and this fact obviously has affected their livestock. Underground waters in deserts are particularly sensitive and with very low or zero renovation rate, so a run to the deep can only make access to water more and more difficult. And third, the increasing difficulties to access to water is altering how herders and their animals move around as many of the millennial water holes do not exist anymore. Ancestral practices are being changed,” Bohoslavsky assessed.

The expert made the following recommendations in connection to Oyu Tolgoi:

  • To conduct a human rights and social impact assessment (in particular on herders) of the underground mining operation and ensure the prevention of its impacts.
  • Oyu Tolgoi to continue its conversations with local communities until a satisfactory solution to all parties is reached in line with international human rights standards, or consider other alternative water sources for the continuation of the project.
  • Government to establish a permanent multi-stakeholders platform to channel discussions between mining corporations operating in the country and potential affected communities. Mining, environmental and human rights authorities, along with corporations and those affected, should be part of these discussions.

Infrastructure projects

The goal of a number of investments and loans is to enhance the country’s economic development so that it is important that projects truly benefit the population. In the context of Ulaanbaatar Urban Redevelopment Plan, various projects are currently conducted including some of them supported by ADB, as evaluated by the UN expert.

For instance, the bank is currently implementing its Ulaanbaatar Urban Services and Ger Areas Development Investment Program to “help Mongolia upgrade basic infrastructure and services in ‘ger’ or peri-urban areas of Ulaanbaatar, where majority of the capital city’s poor residents live”. The project intends to develop roads and water infrastructure social services.

“In Selbe, a number of residents have been (and will be) relocated with serious impact on a number of their rights, particularly on their right to housing. Complaints were submitted to the bank mechanism highlighting many deficiencies in the development of this project including when it comes to informed consultation and compensation. While a recent report states that many of the residents were satisfied with the outcomes of the resolution of one complaint, other important aspects still need to be addressed such as adequate compensation for those who were not satisfied,” stated Bohoslavsky. “In addition, the implementation of such projects can result in important issues related to the right to adequate housing such as homelessness, land issues, involuntary resettlement and the right to information. In this context, I urge those implementing the project to offer adequate compensation that allows people to access to an alternative housing, and ensure informed consultations and transparent updates in the future.” 

He recommended international financial partners in their various projects – be it related to mining activities, energy, or roads and infrastructure – to establish more robust frameworks to assess the human rights implications of the projects, covering both substantive and procedural rights.

Conclusion

Concluding his visit, Bohoslavsky noted that the mining sector should play a “truly transformative role” in Mongolia and serve as a catalyst to spur social and economic development, which he advised to be intergenerational, more equitable and respectful of the environment.

He says this work requires deploying consistent macroeconomic, monetary, regulatory, social, environmental and industrial policies.

“Capture, management and sharing of mineral revenue should pay tribute to this goal. This rights-based approach goes well beyond mitigating the negative social, economic and environmental impacts of the mining sector, as most international financial institutions seem to assume,” Bohoslavsky finished.

Dulguun Bayarsaikhan

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