Businesses Navigate Troubled Waters in Mongolia

December 14, 2016

By Amarzaya Naran, Diana Fernandez

Mongolia is facing challenging times economically, especially compared to four or five years ago when the country was growing at a breakneck speed of 17 percent, that today is down to just 1.3 percent. The drop is a result of slumping demand for minerals, and for mineral-rich Mongolia this has spelled bad news for business.

Small businesses, which are the main generators of employment in Mongolia, showed the highest level of dissatisfaction with the business environment in 2016. Photo/Kristin Kelly Colombano

With the lack of confidence in the current government’s ability to dig the country out of its malaise, increasingly people are looking to the local business community to help revive the economy. But what does the business community think about issues related to investment and business development in the country?

The latest Study on Private Perceptions on Corruption (STOPP), released last month by The Asia Foundation and the Sant Maral Foundation, reveals a decline in satisfaction among the business community with the current business environment. Conducted since December 2012, the 7th STOPP survey interviewed 330 senior-level managers of Mongolian businesses in Ulaanbaatar in October 2016.

This year, the satisfaction level was at an all-time low, with a quarter of respondents citing that they are “very dissatisfied” with the business environment. This decline appears to be strongly correlated with the drop in foreign direct investment, which fell from $4.5 billion in 2012 to $35.2 million in the first half of 2016. In the STOPP surveys, negative assessments of the business environment have almost doubled—from -0.58 in 2012 to -1 in 2016.

Small businesses, which are the main generators of employment in Mongolia, showed the highest level of dissatisfaction with the business environment in 2016. Although decreasing steadily from past years, more than a quarter of respondents say that investment conditions will improve in the next six months, a reflection of the government’s recent announcement that the economic crisis is expected to end and recovery to begin next year. The group most optimistic about investment prospects is large businesses, while medium and small enterprises are less hopeful.

Since 2012, the top three cited obstacles for businesses remain the same: high taxes, access to credit, and obtainment and renewal of licenses and permits. The Tax Office and the Specialized Inspection Agency are believed to be the two leading agencies creating obstacles, but as this survey focuses on perceptions it is not fully clear whether the agencies are indeed creating obstacles, or if they are just unpopular agencies based on their mandates of taxation and inspections, two things that no company welcomes.

The number of respondents who have experienced or heard of corrupt transactions in the last 12 months is 34.9 percent, compared to 48.5 percent in 2012. What is not clear is if this lower level of experiences with corruption is because the business environment is becoming more transparent, or that there are simply fewer transactions taking place in the declining economic environment, and thus fewer opportunities to seek bribes. Only 9 percent of respondents said that they had ever reported incidences of corruption (since 2012), and the number of surveyed firms that have a written policy to deal with corruption remains quite low at 14.8 percent. The percentage of companies that claimed to have actually taken steps to combat fraud or corruption remains the same as previous years at 13.3 percent.

One aspect of this low involvement from the business community in combating corruption could be due to the negative assessments of the existing legal environment as being “not effective at all.” The survey suggests that businesses have very little optimism in the government’s anti-corruption initiatives as well as existing laws against corruption: 19.1 percent of respondents in 2012 compared to 39.8 percent in 2016 who think the legal environment is not effective at all.

The government of Mongolia is trying to crawl its way out of the current financial crisis by taking some unpopular measures such as cutting welfare spending grants to university students, and is in discussion with the International Monetary Fund to bring the budget deficit to under 10 percent of GDP. The country is also trying to create a less erratic and more friendly and favorable legal environment for businesses to increase economic diversification, particularly in light of the boom-and-bust cycles of the resource industry. The government is also trying to incorporate pro-business and investor-friendly policies and accelerate trade, and not introduce any more tax increases.

However, as the STOPP survey shows, what also needs to be addressed is corruption and the legal frameworks and enforcement of those laws to protect businesses and investors. Businesses need to feel confident in pouring their money and hard work into the country, as they are ultimately key to its economic recovery.

Amarzaya Naran is deputy manager of The Asia Foundation’s Governance Program in Mongolia and Diana Fernandez is deputy country representative there. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation or its funders.

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