1999: Financing and investing in the world’s most sparsely populated country

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ImageContinuing with our series of 25 years in 25 days, today we look at 1999. Mongolia’s economy grew by just over 3%, and inflation checked in at the relatively modest rate of 7.6%.  In 1991, under the old regime, the official exchange rate was 7 togrogs per US$.  As the end of the decade approached, the exchange rate on the Mongolian togrog passed 1,000 per US$.  Protests against globalization erupted in Seattle, while firms in Mongolia were looking for ways to enter the global markets.

A new transport strategy focused squarely on Mongolia’s oft-cited geographical disadvantages.  Taming the tyrannies of distance and isolation looked at international trade routes, internal integration, railroads, airways, and policy, regulation, and competition in all of them.  The report, which led to a project a couple years later, also highlighted the impact of neglect in the decade since Mongolia’s transition began.  “With historically scarce financial resources, infrastructure maintenance has received a very low priority. This is now resulting in high infrastructure reconstruction costs that could have been avoided, since with just 1% of GDP allocated to its maintenance, the economic and technical life of most transport infrastructure can be greatly extended. To avoid further costly reconstruction, at least this amount should be allocated to infrastructure maintenance.”

A key feature of Mongolia’s then-weak financial system was the lack of long-term credit for enterprises to finance their investment and growth.  While banking supervision and capacity were improving, the inability of firms to obtain long-term credit made it difficult for firms to invest for the long term.  The Private Sector Development Credit, approved in 1999, attempted to address this by providing funds for on-lending by commercial banks to firms.  The project aimed to support the development of private enterprise and financial sectors, and complemented technical assistance for commercial banks. In addition to a line of credit, technical assistance was provided to strengthen the institutional capacity of the banking system.  When the project closed a few years later, the ICR  reflected on the lessons that a stable banking environment and improved regulatory framework were prerequisites for the success of the line of credit, and the straightforward design of the operation and strong ownership of the project by the government and the central bank helped make the project a success. 

As 1999 ended, winter was coming and in early 2000 it became ferocious.  We look at that year next time.
 
Prepared in collaboration with Altantsetseg Shiilegmaa

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Authors

Jim Anderson

Lead Governance Specialist, World Bank

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