TDB has organized the Gold Finance Conference with Bank of Mongolia. Please, share with us about issues were discussed at the conference?
Besides the financing of the gold mining industry, we have discussed many important issues such as increasing of gold production which is the most important factor to increase the Mongolian foreign currency reserves, reviewing of some legal issues related to the gold and providing the steadiness of the gold supply. On the other hand the forum was very specific, where the banking sector representatives and miners are both sat down together at the round table and had an open discussion. We really hope that the conference would make positive contribution to the Government tax regulation on the gold producing and possibility to raise a fund to finance gold mining projects. As well as the Parliament and government members, His Excellency Mr. S.Bayar, the Prime minister of Mongolia, gave a great importance to this conference organized by TDB and BoM and participated actively in the open discussion which made sufficient contribution to the confronting issues of the gold miners.
 Medree Balbar, CEO of TDB
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Mongolia’s economy is based on the mining sector and is vulnerable to commodity price fluctuations. The gold export plays an important role in the economy and it’s one of the major export products. |
The local miners gave more importance to the taxation rate of gold and made a proposal to the Government and Mongolian policy makers, especially to eliminate the windfall tax on gold. Do you agree with this?
The main purpose of the Windfall-tax or 68% tax on mining companies was to increase government revenues during high metal prices and contribute to the Development Fund of Mongolia. As a result, we collected some capital in the Development Fund of Mongolia, but not as much as we expected. Because the amount of gold sold to the Bank of Mongolia has decreased around 40 to 60 percent since the law came into force and the state budget suffered accordingly. According to some statistics the windfall-tax law forced gold miners into smuggling and boosted the underground economy. 40 percent of the Mongolian government’s revenues come from minerals. If we eliminate the windfall tax on gold, the amount of gold purchased by the central bank and the commercial banks would increase. This could lead to a quick increase in State budget and will attract more investment opportunities to the mining industry.
What difficulties is Mongolia facing, when the amount of gold sold to the Bank of Mongolia has decreased so much?
As of today, Mongolia has the highest tax rate on mining and it’s now an unquestionable fact that it’s the time to review the tax and legal environment. As I mentioned before the amount of gold sold to the Bank of Mongolia has decreased sharply. Despite the Windfall-tax law came into force, the state budget revenue from gold accounted MNT 4.9 billion in 2006 and MNT 34.2 billion in 2007 respectively. But in 2008 the state budget plan failed for over MNT 350 billion, which shows how much the tax revenues decreased. Although data shows that countries with access to rich natural recourse revenues, tend to have higher tax ratios, it is clear that today’s circumstance already doesn’t accept such tax policy. Rather we should revise laws and regulations concerning the reserve rental tax.
Many participants of the forum suggested including an amendment in the Sustainable Agreement with Boroo Gold, which sets a requirement to sell their gold only to the BoM and Commercial banks in Mongolia in order to increase gold reserves of the country. Otherwise, gold will still be carried out of the country. Besides, all gold mining companies should have the same rights, shouldn't they?
I think there are other histories of governmental support to the gold sector before the Windfall-tax law passed. How does banking sector support the gold sector?
Yes, there was. It’s now became a history. It was called “Gold Program-1, 2”, which had been supporting the gold miners in a systematic and proper way by the government. Before the implementation of “Gold Program-1, 2”, Mongolia had been extracted on average 722-899 kg of gold for 5 years. As a result of the program the gold production growth was increased 7.5 times in 1996 from the beginning of 1990s. This is not a small number. Statistic shows that the growth was increased 15 times in 2000. Nevertheless, sudden approval of the Windfall-tax law in 2006 was disappointed all the gold miners.
For all the time the banking sector was on the side of gold miners. TDB offers to our gold miners a range of loans from its own and external resources such as short-term business loan to finance working capital, short and long-term business loans to support production, advanced (preliminary) financing loan and short-term gold guarantee loan etc.
The Central bank and only several commercial banks, including TDB, actively involved in gold buying activity in Mongolia. TDB began buying gold in the year 2000 and now hold a significant presence in the market as well as considerable experience in gold trading.
Further, not only the financial organizations, but also the government should start paying attention to the gold mining industry. As I said before the mining industry is one of the strategic sectors to stimulate growth in our economy. At this time, when the commercial banks do not have enough sources to satisfy the miners’ financial needs, the government should consider financing of gold industry and constituting an adequate legal environment. Besides, to build up a defense against the financial crisis, we need a new gold program to follow up. As Mongolian gold production has become less competitive, gold companies have delayed their exploration activities, placer deposits are used up. In connection with starting the production at the main gold deposits, it will requIre a lot of investment on advanced equipments and technologies and of course skilled workers. There are some companies which have licenses of potential gold deposits but have only 2 equipments and bad manegement systems. How we should improve business operations of such companies? Is there any need of intermediate-operator company for these companies? Should we have a consortium instead of little companies? All these strategical issues should be included in the new gold program and implemented in the near future.
What is gold price prognosis at the world market ? What is the importance to increase gold reserves during this recession period? Would it affect the stability of foreign exchange rate?
Gold prices at the world market rose solidly since 2001. The reserve of the gold in the world is declining and the demand of the gold is still rising. The market prognosis shows that the price will be stable and internationally well known experts are expecting further growth. Overall forecast is that the gold price might be USD 1000 and over per ounce in the next 2-3 years. During a recession period, gold price likely rise up. In addition, US economy is in recession, so there is a expectation that the price of gold not likely to decrease in the near future. World financial professionnals argue that during a recession period gold plays dominant role in the international financial market as playing the role of main international currencies.
As a President of Mongolian Banking Association, do you think that now is the time for the Government to take part in financing the gold miners through the commercial banks?
I believe that all parts: government, commercial banks and gold industry understand and agree that we need to take urgent changes in tax and regulatory policies on gold mining, one of the main product of export, important part of the monetary policy and economic growth of Mongolia.
Commercial banks plan to do many things in the near future in cooperation of BoM, Parliament of Mongolia and Government. For example, the commercial banks would like to support the gold mining industry with the financial assistance of the Government. In plus, if the government reviews its Mineral Law, it would affect favorably the Mongolian export, foreign currency reserves and mining sector employment too.
