Could you take us back in time and explain the context in which this transition proceeded, and what was the role of the monetary sector?

I would like to welcome you and I am happy to give an interview for your newspaper. I think it is the most readable newspaper in the world. As I mentioned, wherever I go I always take this newspaper to read, so thank you very much.

Let me begin with how we started market economy reforms 10-15 years ago in Mongolia when the Communist regime collapsed. We have gone through this very difficult time of reform in the banking sector. It was in the early '90s, precisely in 1991, when the law on the Central Bank was adopted by Ikh Khural. At that time it was not parliament, but Ikh Khural. Mongolia has a two-tiered banking system, while before it was only mono-tiered banking system. It was suitable for centrally planned economy. With a two-tiered banking system the beginning was quite difficult, because there were no central banking regulations. There were no instruments through which the central bank could have control over commercial banks. Some important laws regulating banking system were adopted by parliament later on in mid -90s when the banking system was in chaos.

Then the financial crisis hit the Asian counties and unfortunately it didn't pass by Mongolia. We were also hit by the Asian financial crisis of 1997-1998. At that time non-performing loans in the banking sector counted for 50% of the total portfolio and four or five banks went bankrupt. The banking sector lost the total confidence of market, of the population and of society in general. Then there was a parliament election in 2000 and our party won. At that time the chairman of the party, the prime minister, who is now the current president, has set new goals for Mongolia in all sectors including banking. He has invited me to join his team and I did it with pleasure. I would say that from 2000, our banking sector has been doing well.

I understand that in this period, in the past 4-5 years, you managed to reduce non-performing loans from 25% to 8%.

Now it's even lower. In November it was 6%. Inflation has been low for the last 4-5 years. On average it is 4 or 5%. For Mongolia it is quite good, but you can't compare it to the US or European standards.

But we still have to acknowledge that it is still in a transition period.

Yes. The foreign exchange rate is good as well. It has been stable during the last 4-5 years, and the depreciation rate was a little more than 10% to the US dollar.

You were talking about lost confidence after the Asian crisis. This is the situation you inherited when you became the governor of the Central Bank. Can you tell us how this confidence was regained? You have given us optimistic and positive statistics. How has this been restored to the point we see today?

Right after the elections in 2000 we submitted to parliament a number of amendments to regulate banking business. After very long and difficult discussions and considerations, parliament finally approved the laws, and this has tightened the financial discipline in the banking sector. It has helped a lot in order to bring good order to the banking sector. Then after 3 or 4 years, I would say almost in 2003, the banking sector again has the confidence of the market, but most importantly from foreign investors. That is why we successfully managed to sell two large government-owned banks to foreign investors. The largest was sold to a US-Swiss consortium and the second one, the Agricultural Bank, was sold to a Japanese financial group. These two banks are doing very well in the market.

They are the Agricultural Bank and the Trade and Development Bank? Can you tell us more about the privatization process? This is always very delicate issue in a transitional government. How has Mongolia managed to do it successfully? I understand that the entire sector, made up of 17 banks, now has only one of which is state-owned.

Yes. The privatization process started in the early 90s. We have gone through very difficult times. From a current point of view, some things we did well, and some we did not, but there is no success without mistakes. In principle we have done successful privatization in the banking sector. The two large banks were sold to foreign investors and foreign investors have brought not only investment-capital, but also skills for how to manage the modern banking business. They have brought international experience for how to run and how to evaluate and how to access risks in the modern world. All other domestic banks are following these banks, the TDB and Khaan Bank.

Could you give us an overview of the private banking sector? In the country with relatively low GDP (2 billion USD), can you tell us why there are so many banks? There are currently 17 private banks. Do you feel this is an appropriate, and how do you see this developing?

Yes. There are too many for this market and for population of 2,700,000 people. That is why the Bank of Mongolia has tightened the capital requirement. We have increased the capital requirement to no less than 8 million USD by end of first quarter of next year. We expect that the number of banks will be reduced and at least 3 or 4 banks will close. A lot of foreigners are coming to Mongolia to set up a bank here. We are advising them: instead of building a new one, take a look at small ones to possibly buy them. I think that is part of our strategy: to take investment to the country. Two memorandums have been signed by foreign investors to take over small banks in Mongolia.

Do you see this as proceeding consolidation of some of the small banks?

Yes. Consolidation is taking place everywhere - in the US, Europe and Japan. That is why we are also trying to consolidate banks here, pushing them into consolidation through policies and regulations.

In a lot of the research I did and articles that I read there are constant references to the Southeast Asian model. It's a model for international development and for attracting investment and thus gaining capital and expertise from more developed countries. How has this model been applied to Mongolia? Do you think it is applicable?

Yes. I think it has been working quite well for Mongolia, and the last 4-5 years of experience has shown this. Now GDP growth is quite high, living standards have grown, and inflow of foreign exchange has increased significantly.

So this has been important. In the development of the banking sector you talk about how you managed to reduce poverty and raise the living standard. Can you give us insight into what you feel is the role of the both the Central Bank and the private banking sector in distributing wealth and being a partner in Mongolia's development?

As a Central Band we are able to play a key role in ensuring high living standards for the people. It is one of the government's goals. But the Central Bank's main goal and its function today are maintaining financial and monetary stability, and not to break the stability we have maintained for the last four years. Our main goal for the time being is not to loose the confidence and transfer the foreign investors. Foreign investment is a key factor for the rapid development of Mongolia because we have had quite a low savings rate. In 1990 our savings rate was, on average 5 percent and after 2000 it rose to 15 percent. That is why if you look at the balance sheet of the money supply you will see fast growth. The fortunate thing is that without provoking any inflation in the country we allowed the market to grow faster than we expected.

In relation with the overall monetary situation, the budget deposit is in a very healthy situation, much more so than in recent years. You said however that you foresee in coming years that this could be reduced to 3 percent of GDP. How do you feel this is going to be possible?

It is true that the budget deficit was high. Five years ago it was around 15 percent of the GDP, but it has been declining steadily over the last 4 years. Last year it was 1.8 percent, and the year before it was 3 percent. This year we run with less than 1 percent - 0.8 percent. I think it has been possible in Mongolia thanks to good budget policy. We didn't significantly increase our budget at the same time as we improved the collection of the taxes throughout the country. Tax bases have been increased significantly over the last 4 years. In 2000-2001 the total revenue for the budget was around 300 million USD. Today it is more than 800 million. So how did we succeed in improving our budget situation? Even today our government is further improving goals, such as creating a more favorable tax regime and also giving domestic business investors the ability to invest more in the domestic market. Two years ago, for example, the government reduced the tax level from 40-30 percent for big companies. At that time some economists and politicians were arguing that the budget would be in a big deficit next year, but it didn't happen. What happened was that revenue increased.

I would like you to take our readers through how the stable banking sector in Mongolia plays a direct role in attracting foreign investment.

The most interesting thing is we have is one of the most liberalized financial regime on the Asian continent. There is no control, no restrictions on inflow and outflow of foreign exchange, etc. And the very interesting thing is, and keep in mind that I have been in the banking business in Mongolia for more than 25 years, and at the time of centrally planned economy there was very tough control over foreign exchange movements while inflow in the country was decreasing. When we liberalized, some economists were arguing that Mongolia would loose all foreign exchange overseas. In reality it didn't happen. In fact, we have more and more foreign exchange. Today if you look at the balance sheets of our commercial banks, almost half of the total deposits in the banking sector are foreign exchange. But we don't take any actions against the business tactics of our commercial banks, we let them do what they want.

What role did you have in the creation of this policy yourself? I know that if we go back to Europe and your career within the banking sector in Mongolia, and as far back as the 1990s, you were advisor to the governor in the State Bank of Mongolia. You worked previously in various different capacities before becoming governor in 2000. What was your role in developing this strategy?

It was not my role, but I am a person who predicts the behavior of the market and its currencies. That is why we let the market dictate its own roles and regulations in the market, also let the currencies behave as they like. Currencies also like stability, just like human beings.

In terms of your experience in other countries, I know that you were in NY for two years. Did you learn any technical ability there that you managed to bring back to Mongolia?

I have been in banking for more than 20 years. In1985 there was a small international foreign exchange department in the State Bank, and I actively traded very heavily in Moscow when I was chief trade director of the international bank for economic cooperation. I made many friends overseas in Europe, the US and Japan. Then in 1996 one of my friends invited me to join his team in NY. I thought that if I managed to gain some experience in the market I hoped to bring it back to Mongolia and to the Mongol Bank.

Speaking about the concept of international sharing, I know that Mongol Bank is prioritizing and cooperating with a lot of international agencies - The Asian Development Bank, World Bank, IMF, etc. You have taken very open and collaborative approach to planning and to stabilizing the financial sector. Is this important to you personally? Why do you believe this is a way to proceed?

First, Mongolia is a new player in the free market environment. We wanted to create a market economic infrastructure in Mongolia's Central Bank, but we had no experience or knowledge how to do it. At this very difficult time in early 1990s we asked IMF, World Bank and ADB to provide us with assistance, which they had already done and we are very thankful for that. They helped us create this market economy infrastructure and today the Mongolian economy can go forward.

To what extent do you feel it is a critical time for Mongolia? Do you feel that these years are going to be fundamental for Mongolia to further its investment and collaborations?

Yes, these are just the first 2 or 3 years after we achieved financial and social stability. This is the time when foreign investors are beginning to look at Mongolia. This is the time when we actively, heavily reactivated our business and economic relations with our biggest neighbor, China. China is almost one of the biggest economic factors now influencing development of the Mongolian economy. China is our number one trading partner, and it has become our number one investment partner. Also a lot of big names of the business world are looking at this opportunity - just because of China. Mongolia is a very small country, with a small market, and is not very attractive for big companies in the US, Europe or Japan. But in terms of mining, Mongolia could become very competitive in terms of some of the commodities that are being sold to the Chinese market.

Mongolia is benefiting a lot from the mining sector - benefiting from demand and high prices we seen for commodities. To what extent do you feel dependent on this? Do you feel there are any risks?

As the Chinese economy grows, as long as China spends a lot of money on commodities, because China gives us a stable demand, I think this demand will be sustainable over the next 20 years. We should take advantage of this situation.

Do you think that Mongolia is fully prepared to take this advantage or what left to be done? Obviously you are taking advantage of this. We see positive developments in mining investment for example. But how can Mongolia develop further and position itself even better to take advantage of this as a strategic trading partner?

The only way for us do it better is to attract foreign investment.

You've explained how the leadership of the public Central Bank is guiding the sector and attracting foreign investment. What the agencies and what are sectors have fundamental roles in this?

Another important window for foreign investment would have been the stock exchange. Unfortunately the stock exchange is still dead. Now the government and Mongol Bank are trying to reactivate the stock exchange. They are negotiating with foreign investors to take over the management of the stock exchange, which is what we have done with Agricultural Bank. Five or six years ago Ag Bank was in very bad shape and we signed a contract with the management team from abroad with the American Bankers Team to take over the management. They worked 2 or 3 years and all characteristic indicators are significantly improved. That is why we sold it successfully to the foreign investor. This is exactly the same method we are pursuing for a stock exchange. We think it is better to invite a foreign manager because Mongolians have no experience yet.

In terms of what you can provide to the international investors, would you like to communicate this directly to our IHT readership? These investors are interested to know what's going on in the banking sector, what you have to say about your sector, about your public leadership of this private sector and services that can be offered to potential investors.

I would say the Mongolian banking sector is in good shape. It is regulated by international standards. We are supervising all our commercial banks based on 25 core principles. Committees and banks are doing a good job, and also the market is very friendly to our commercial banks. There is a good financial discipline in Mongolia. Our legal environment is quite acceptable, and that is why the first foreign investors came to the banking sector. Also Mongolians are very friendly people to foreigners.

It is cold…

Yes, but Mongolia can provide warm hospitality.

Is there final message you would like to communicate, not simply about the banking sector, but about your country?

Please come to Mongolia to see it, even George Bush visited us - the land of Chinggis Khaan- to shake hands. If Chinggis Khaan were alive he would have been very happy to shake hands with Mr. Bush. Please come visit us!