Since adopting a two-tier banking system in 1991, the central bank has played a vital role in stabilizing the national currency and reducing the inflation rate.

After the fall of the Soviet regime upon which Mongolia depended, the nation faced a crisis. However, through timely changes and the guidance of the central bank, Mongolia’s economy is on the right track

MONGOLIA’s severe climate, wide expanses of land and scattered population have all been important factors that have historically limited its economic growth. Economic activity has traditionally been based on, and limited to, agriculture and livestock. However, eventually the country realized its potential to exploit its extensive mineral resources such as coal, copper, molybdenum, and gold.

During most of the 20th century, Mongolia depended heavily on the Soviet Union which, at its peak, accounted for 30 percent of the country's GDP. The collapse of the Soviet system in the early 1990s coincided with a succession of harsh winters and summer droughts in Mongolia. The resulting livestock die-off, coupled with political stagnation, contributed to a zero or negative GDP in the years immediately following the transition. However, during a decade of difficult political and economic reforms, the central bank emerged as a stabilizing influence and was instrumental in turning the economy around. New, reform-embracing, free-market economics, privatization of the formerly state-run economy, an easing of price controls and a liberalization of international and domestic trade set Mongolia on the right track.

While the nation initially had a banking system suitable for a centrally planned economy, changes were taking place and it became clear that the lack of central banking regulations was a problem. The central bank had no control over commercial banks. While some laws were eventually adopted to regulate the system, the sector was essentially in chaos. When the Asian financial crisis hit in the late 1990s, Mongolia was not spared. Many banks ended up in the red and the population lost its confidence in the sector.

Nevertheless, parliamentary elections in 2000 returned the former Communist MPRP party to power, which successfully set new goals for the banking sector. Mr. Ochirbat Chuluunbat (INTERVIEW), Governor of the central bank and a key player in the reforms, explains, "The new laws tightened financial discipline in the banking sector, which has helped immensely and brought order to the system. After three or four years the sector regained the market's confidence." Since then, the system, albeit still in a transition period, is doing well.

The central bank took on its typical duties in a market economy such as issuing banknotes, ensuring the stability of the national currency, the tugrug, unifying interest rates, managing government lending, and determining the reserve ratio of commercial banks.

Now enjoying financial and social stability, the development of the banking sector has also allowed Mongolia to reduce poverty and raise living standards, and the central bank has played a key factor in the process. "Our main function is maintaining financial and monetary stability, and preserving the confidence of foreign investors. Foreign investment is a key factor for the fast development of Mongolia," says Mr. Chuluunbat. Mongolia has also revived its economic and business relationships with China, which is now one of the biggest economic factors affecting the nation's development. China has become Mongolia's number one trading and investment partner. Also, the foreign exchange rate has been stable for the last five years, and the depreciation rate is a little more that 10 percent to the American dollar.

Mongolia, which has one of the most liberalized financial regimes in Asia, places no restrictions on foreign exchange. This has been the source of controversy, as economists worried that a liberalized regime would cause Mongolia to lose all foreign exchange overseas; however, the opposite occurred. “The reform process is a learning process, and we are working to improve the economic environment in Mongolia, but there is no success without mistakes,” says Mr. Chuluunbat. The government is still looking to pass further reforms with the aim to create a more favorable tax regime to absorb more foreign investment, and get local businesses to invest more in the domestic market. Furthermore, Mongolia, which joined the World Trade Organization (WTO) in 1997, is working hard and hoping to expand its participation and integration into Asian regional economic and trade regimes.