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Financial and Fiscal Policies for Economic Sustainability in Mongolia,” Jointly Prepared by Dr 1 Financial and Fiscal Polices for Economic Sustainability in Mongolia Policy Research Paper Knowledge Partnership Project Financial and Fiscal Policies for Economic Sustainability in Mongolia March 2004 Korea Development Institute (KDI) Korea International Cooperation Agency (KOICA) 2 Financial and Fiscal Polices for Economic Sustainability in Mongolia Foreword Knowledge is a critical factor in economic and social development in the 21st century. Knowledge Partnership (KP) Project, a new cooperative framework established between the World Bank and the Korean government has endeavored to bridge the knowledge gap between developed and developing countries by disseminating Korea’s economic development experience. Amid the transition toward a market-based economy, the Mongolian economy is confronted with various challenges in the financial sector, which include weak banking sector, expanding distressed assets, low public trust and ineffective government regulations. This, in turn, increased the risk of financial instability, calling for appropriate policy responses from the government. The policy research paper “Financial and Fiscal Policies for Economic Sustainability in Mongolia,” jointly prepared by Dr. Dongsoo Kang, Dr. Moon Soo Kang, Dr. Seok Kyun Hur from KDI and Dr. Chiho Kim from the Korea Deposit Insurance Corporation, offers a comprehensive assessment on the sustainability of economic system in Mongolia. The paper presents in-depth analysis on major issues in financial and fiscal policies including the Non-Performing Loan (NPL) management, deposit protection, non-banking financial institutions, and fiscal sustainability and scrutinizes economic theories in order to provide relevant policy alternatives for the Mongolian government. In addition, the Korean experience as well as international practices was shrewdly reviewed for reference guide. KDI would like to express gratitude to all the members of research team for their hard work and scholarly endeavors. Also, we would like to thank the Mongolian Ministry of Finance and Economy (MOFE) for their cooperation during the consultation and research activities. Please note that opinions and recommendations of this report are those of the authors’ and full utilization of this report for relevant fields in other developing countries is allowed. 1 Financial and Fiscal Polices for Economic Sustainability in Mongolia Contents Chapter 1. Introduction ···················································································1 Chapter 2. Macroeconomy ···············································································4 2.1. Overview ····························································································4 2.2. Detailed Descriptions ·············································································6 2.3. Implication ························································································ 21 Chapter 3. Financial Sector ············································································ 23 3.1. Overview of Mongolia’s Financial Sector Development ······························· 23 3.2. Banking Sector ···················································································· 24 3.3. Other Financial Sectors ········································································· 30 Chapter 4. Resolution of Non-Performing Loans ··············································· 34 4.1. Financial Crisis in Mongolia ··································································· 34 4.2. The Mongolian Asset Recovery Agency ···················································· 34 4.3. Performance Evaluation of the MARA ····················································· 36 4.4. Future Policy Suggestions for Efficient Resolution of NPLs ··························· 38 Chapter 5. Deposit Insurance System ······························································ 43 5.1. Theoretical Background and Development of Deposit Insurance System ········· 43 5.2. Design and Management of Deposit Insurance System ································ 47 5.3. Deposit Insurance Systems of Major Countries ·········································· 49 5.4. Deposit Insurance System’s Direction of Development ································ 52 5.5. Policy Recommendations ······································································ 53 Chapter 6. Supervision on Non-Bank Financial Institutions ································ 57 6.1. Savings and Credit Cooperatives in Mongolia ··········································· 57 6.2. Non-Bank Financial Institutions in Korea ················································· 59 6.3. Policy Recommendation for Financial Supervisory Framework in Mongolia ····· 68 Chapter 7. Fiscal Sustainability of Mongolia ····················································· 72 7.1. Fiscal Sustainability ············································································· 72 7.2. Policy Recommendations ······································································ 74 Chapter 8. Conclusion ··················································································· 81 Reference ··································································································· 83 Appendix A. Law on Deposit Insurance ···························································· 85 Appendix B. Non-Banking Financial Operations Law ··········································· 93 Appendix C. The Amendment to the Cooperative Law ········································101 Appendix D. Korean Experiences in Distressed Asset Resolution ···························105 2 Financial and Fiscal Polices for Economic Sustainability in Mongolia List of Tables Table 2-1 Share of Real GDP ···········································································7 Table 2-2 Growth Rate of Real GDP ·································································8 Table 2-3 Gross Agricultural Output of Mongolia ················································9 Table 2-4 Number of Livestock and Household Animals ·······································9 Table 2-5 Export, by Groups of Commodities, Percentage to Total ························· 10 Table 2-6 Import, by Groups of Commodities, Percentage to Total ························· 11 Table 2-7 Export of Mongolia Categorized by Countries ······································ 12 Table 2-8 Import of Mongolia Categorized by Countries ····································· 13 Table 2-9 Main Indicators of Communication ··················································· 14 Table 2-10 Main Indicators of Transport ··························································· 14 Table 2-11 Correlation of Sectoral Growth Rates with Real GDP Growth Rate ············ 15 Table 2-12 CPI, CDP Deflator Change, M1 and M2 ·············································· 16 Table 2-13 Correlation of CPI and GDP Deflation Change and Growth Rate of M1, M2 ·················································································································· 17 Table 2-14 Exchange Rate & Interest Rate ·························································· 17 Table 2-15 Balance of Payments ······································································ 18 Table 2-16 Outstanding Debt ········································································· 19 Table 2-17 Outstanding Debt ········································································· 19 Table 2-18 Correlation of Sectoral Growth Rates with Real GDP Growth Rate ············· 20 Table 2-19 Correlation of Sectoral Growth Rates with Real GDP Growth Rate ············ 21 Table 2-20 Enrollment Rate (%)········································································ 21 Table 3-1 Chronology of Banking Sector before the 1996 Crisis ······························ 23 Table 3-2 Bank's Branches and Units (as of the End of 2002) ································· 25 Table 3-3 Main Indicators of Banking Sector ····················································· 26 Table 3-4 Changes in the Loan, Deposits and Currency outside Banks ···················· 28 Table 3-5 Bank Loans by Sector ····································································· 28 Table 3-6 Bank's Income and Expense ····························································· 39 Table 3-7 Securities Market Indicators ···························································· 30 Table 3-8 Premium and Insurance Payment ····················································· 32 Table 3-9 Insurance Premium (by Insurance Types) ··········································· 32 Table 3-10 Non-Banking Financial Institutions Key Indicators ································ 32 Table 4-1 Initially Transferred NPLs to the MARA ············································· 36 Table 4-2 Recovered NPLs as of the End of June 2003 ········································· 37 Table 4-3 Non-Performing Loans Held by the MARA (as of the End of June 2003) ······ 39 Table 4-4 Assets and Liabilities Managed by the MARA ······································ 40 Table 4-5 Income Statement of the MARA ······················································· 41 Table 5-1 Countries with Differential Insurance Premium Systems ··························48 Table 5-2 Recent Trend of Deposit Insurance System ·········································· 48 Table 5-3 Insured Financial Institutions in Korea (as of the End of June 2003) ···········
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