Semiannual Report 2010
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Semiannual Report 2010
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Contents
1. Introduction ..................................................................................................... 3
2. Economic review for the first half of 2010 .................................................... 4
3. Preparations to the Meeting ............................................................................ 5
4. Overview of the Consultative Council Meeting ............................................. 6
5. Follow-up of Recommendations of the Consultative Council ....................... 9
6. Others ............................................................................................................ 10
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1. Introduction
Since the transition of the country to the market economy, the role of the private sector in the
Mongolian economy has never been so important as it is today. On October 6, 2009 the
Mongolian government reached a landmark agreement with Ivanhoe Mines and Rio Tinto on
Oyu Tolgoi, the world’s largest undeveloped copper-gold deposit. With the reserves of 34
million tonnes of copper and 1200 tonnes of gold, this US$4 billion project is set to have a
transformational effect to the Mongolian economy. It is expected that multi-billion dollar
investments in the mining sector will spur major development and investment opportunities
in Mongolia, especially in its South Gobi region, where both Oyu Tolgoi and Tavan Tolgoi,
the world’s largest untapped coking coal deposit, are located.
As a prerequisite to this event and with a view to further develop a sound private sector in
Mongolia, the Government of Mongolia together with the European Bank for Reconstruction
continued their efforts to support private sector and help to improve the business environment
and investment climate in Mongolia by providing direct high-level dialogue with private
sector representatives and investors with a view to find effective solutions for current
business and investment problems.
On 6 February 2007 the Consultative Council on Investment Climate and Private Sector
Development in Mongolia (hereinafter to be referred to as “Consultative Council”), a
consultative and advisory body, was established by the Government Resolution No.40 under
the Prime Minister of Mongolia. To ensure the effective participation of all parties, the
members of the Consultative Council consist of representatives of the state, the business
community and external partners through equal participation in the decision-making process.
Rotation of the members of the Council from international organizations and businesses made
it possible to broaden their representation in the Council. The Consultative Council meets
when necessary, but not less than once in a quarter.
So far the Consultative Council convened seven times. The rotational scheme of the
members of the Council enabled the participation of various private sector representatives
and external partners. The first meeting of the Council focused on evaluation of the current
investment climate and attempts to understand the needs and problems of the private sector,
and carried out message on responsibilities of a newly established body, which is to support
the development of private sector and create favorable investment climate. During the
following meetings of the Council, more specific and sector related issues were brought up
for discussions by private sector representatives and external partners. The details of follow-
up will be reflected later in the report.
The meetings of the Consultative Council were chaired either by the Prime Minister of
Mongolia or the First Deputy Prime Minister. Also the First Vice President of EBRD V.
Freeman co-chaired the second meeting of the Consultative Council on 23 October 2008 and
the Managing Director of the World Bank J.J. Daboub co-chaired the meeting on 11 June
2009, which is an excellent example of harmonization of donor’s practices.
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This report will reflect activities and performance of the Consultative Council and its
Secretariat in the first half of 2010, in particular the economic situation of Mongolia in the
first half of 2010, activities related to the preparation of the meeting of the Consultative
Council, overview of the Consultative Council meeting and follow-up of the decision of
previous meetings as well as other activities that the Secretariat of the Council was involved
during the duration of this report.
2. Economic review for the first half of 20101
The improvement in public finances since last year, coupled with buoyant revenue due to the
commodity price recovery, has led to growing pressures for increased government spending.
Recently approved budget amendments envisage a 4.5 percent of GDP increase in spending
on the originally approved 2010 budget, while the Mid-Term Budget Framework (MTBF) for
2011-2013 projects another 12.1 percent of GDP increase in spending in 2011.
The national consumer price index in June, 2010 decreased by 1.5 percent compared to the
previous month, increased by 11.4 percent compared to the end of the previous year and the
same period of the previous year, respectively. Decrease in national index compared to the
previous month was mainly due to the 4.0 percent decrease in food and non-alcoholic
beverages.
The adoption of, and adherence to, the Fiscal Stability Law – which was recently passed by
the Parliament – will be key in Mongolia’s efforts to constrain fiscal spending to prudent and
sustainable levels. The new law will also manage the huge revenue inflows expected from the
Oyu Tolgoi (OT) mine from 2016 onward.
In the first half of 2010, total revenue and grants of General Government budget amounted to
1239.6 bln.tog and total expenditure and net lending amounted to 1407.1 bln.tog,
representing a deficit of 167.5 bln.tog in the General Government budget overall balance,
which is down by 93.8 bln.tog compared to the same period of the previous year. Current
revenue of General Government amounted to 1205.6 bln.tog and current expenditure reached
1101.0 bln.tog. Thus, the budget current balance was in profit of 104.6 bln.tog. However,
with uncertain domestic and foreign financing conditions, continued fiscal consolidation
remains crucial for Mongolia.
Trade data shows a sustained recovery in Mongolia’s export. This is supported by upward
momentum in metal prices and increasing copper and coal imports by China, Mongolia’s
largest trading partner. The exchange rate against the US dollar has been stable, while
foreign exchange reserves are near record levels.
1 Source: Mongolia Quarterly Economic Update World Bank July, 2010 and National Statistical Bulletin
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In the banking sector, total lending growth increased as nominal lending and deposit rates
remain high. Loans outstanding at the end of June, 2010 amounted to 2882.6 bln.tog,
increased by 29.9 bln.tog or 1.0 percent compared to the end of May 2010, and by 323.7
bln.tog or 12.6 percent compared to the same period of the previous year. At the end of June,
2010, the non-performing loans over bank system reached 402.9 bln.tog, decreased by 11.9
bln.tog or 2.9 percent compared to the end of May 2010, and increased by 105.0 bln.tog or
35.2 percent compared to the same period of the previous year. A bank restructuring strategy
was recently drafted by the Bank of Mongolia, reflecting lessons from international
experience.
In the first half of 2010, the total industrial output increased by 93.8 bln.tog or 12.4 percent to
848.5 bln.tog (at 2005 constant prices) compared to the same period of the previous year. The
increase in the industrial output was mainly due to increase from 5.6 percent to 10.3 times in
main industrial products such as coal, crude oil, molybdenum concentrate with 47%, fluor
spar concentrate, all types of meat, milk, dairy products, wheat flour, alcoholic beverage,
wine, beer, soft drinks, juice, combed down, lime, metal sleeper, copper, metal foundries and
steel casting etc.
3. Preparations to the Meeting
During the first half of the year, the secretariat team of Consultative Council focused on
several issues such as enforcement of law on Application of National Currency, development
of meat and cashmere industries.
In 2008, Mongolia was hit by global economic and financial crisis. The Government of
Mongolia and Bank of Mongolia took emergency measures in order to halt the economic
downturn and increase the value of national currency. One of the measures was to amend the
Law on Currency, to adopt the law on Application of the National Currency and to enforce
legal entities to implement the law. The law prohibited the use of foreign currency for any
transactions in Mongolia. Penalties for broken the law was to stop business activity and to
transfer all revenues for the state fund. Companies run business in Mongolia criticized that
the enforcement of the law makes their price less competitive to compare with foreign
suppliers. In addition, the penalty measures are to ranking from light to heavy measures.
Business Council represents the private companies and submitted their proposal on
amendment to the law. Regarding this issue, the secretariat team met officials of Bank of
Mongolia, Financial Regulatory Committee and Ministry of Finance. The officials supported
the proposal and were willing to exchange their opinions on this issue during the CCIC
meeting.
Due to harsh dzud in winter of 2009, a number of livestock was reduced by 6 million. It led
to increased meat price in urban areas. However, herdsmen’s selling price was notably lower
than meat price in urban areas. In addition, Mongolia has many numbers of livestock and
opportunity to export meat. Though, it does not fully utilize its chance to export meat due to
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high sanitation requirements of foreign countries. Therefore, the Meat Association of
Mongolia raised these issues and proposed to improve meat market and develop meat
industry. The secretariat team studied their proposal and discussed with government officials
about their proposal several times.
There is a strong will to develop cashmere industry based into globally competitive industry
as Mongolia, compared to other countries, has fine quality of cashmere. However, lack of
state policy on raw cashmere supply, the industry faces challenges to compete with Chinese
cashmere industry. The Association of Cashmere Enterprises submitted proposals to reduce
the raw cashmere export and state financial support to purchase raw materials.
Mrs.Altantsetseg, Director of the Association, met the secretariat team and presented their
proposal in detail. Meantime, the issue was discussed at the Government level. The
cashmere supply is strongly influenced by seasonal forces, so the Government took an
initiative and urgent measure to support the industry.
4. Overview of the Consultative Council Meeting
The regular meeting of the Consultative Council on Investment Climate and Private Sector
Development in Mongolia was held on 11 May 2010 at the Ministry of Finance, Ulaanbaatar,
Mongolia. The meeting was chaired by H.E.S.Bayartsogt, Finance Minister of Mongolia. It
was attended by 12 members of the Consultative Council and 3 observers who were relevant
to the discussed topic (Annex 1).
The meeting started with opening remarks of H.E.S.Bayartsogt, in which he noted that the
Government continues its efforts towards bringing public services into actively developing
needs of the private sector. He mentioned that the year 2010 was announced as the year of
Business Enabling Environment Reform in order to provide opportunities to do business and
make public services easier, faster and more accessible to businesses.
H.E.S.Bayartsogt introduced to the members of the Consultative Council the agenda (Annex
2) of the meeting and welcomed Mr.Kh.Amarsaikhan, the Head of Secretariat, to brief on
follow-up of recommendations issued by the Council during its previous meetings.
Mr.Kh.Amarsaikhan updated the performance of decisions that are being implemented and
pointed out that a combination of government agencies and business community is the right
balance of forces, which enabled private sector to bring up and resolve its problems and
difficulties together with the public organizations rather than tackling them by their own.
The briefing of the Mr.Kh.Amarsaikhan was followed by the presentation of
Mr.B.Arvinbayar, Head, National Development and Innovation Committee on streamlining
the implementation of Action Plan of the Year on Business Enabling Environment Reform.
He stated that the Action Plan of Year of Business Enabling Environment Reform includes
131 goals and measures, out of which 105 measures are for reforming doing business
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environment at micro level and 26 measures are for development of infrastructure and
stabilization of macro economy. Members of the Consultative Council were informed that
measures taken in 1st and 2nd quarters are still under implementation stage and rigorous
efforts are needed to achieve objectives set in the Action Plan.
Next agenda point was raised by the Mr.B.Enkhbat, COO, Just Group on increasing
Mongolian suppliers’ competitiveness through mitigation of exchange rate risk.
Mr.B.Enkhbat stated that in Item No. 4.1 of Article No. 4 of the Law on Conducting
Settlement in National Currency, it inscribed that “Price of goods and services shall be
nominated by national currency only in the territory of Mongolia, transactions shall be
executed by it and unless specified otherwise than the provisions of Item No. 4.4. of this law,
setting price with foreign currency and tabulation unit, executing transactions, and
announcing and advertising are prohibited.” if price estimation is meant to nominate the price
by tugrug, then, one concept is repeated twice as price estimation by foreign currency and
tabulation unit is prohibited since this provision requires the price to be nominated by
national currency. Whereas, if price estimation is meant to cover activities including activities
of an individual and enterprises to estimate their goods and services’ economic costs, then,
this provision has become provision, which violates their right. Because the price setting
would inevitably be accounted by foreign currencies, since most of goods, services, material,
and equipments are imported from foreign countries by their currencies. Prohibiting this
would become fundamental factor of goods and services to be pushed into the risky situation
of currency rate difference.
Therefore, what we recommend or comment is that an issue of removing above two words
from the law could be discussed with respective institutions and of resolving it via the
Parliament and substantially important issue is hiding behind this proposal although it may
seems like ordinary thing.
Also he proposed to remove an Item No. 6.1.1 of Article No. 6 of this law or a provision of
public servant “to demand removing variance, collecting revenue and confiscating it as the
state income” and to change provisions of Item No. 6.1.3 into “if a legal entity with special
permission didn’t implement several times of requirements of removing violation imposed by
an authority, then measures shall be taken including suspension, invalidation, and
confiscation of revenues generated from it into the state fund in accordance to Articles No.
13, 14 of Law on special permission of business activity.” Failure to do so, would keep the
provision remained with its lack of logical sequences since it inscribed that respective
coordinating organization would first immediately confiscate the revenue and then takes
measure of imposing light penalty and charge.
N.Zoljargal, Deputy Governor of the Bank of Mongolia, commented that the Law on
Conducting Settlement in National Currency is in force for more than a year, and although
there were requests to review the law, the settlements shall be conducted in national currency.
He pointed out that there many companies, which main activities are trade, and these
companies, like everywhere in the world, take responsibility of the exchange rate by their
own.
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N.Oyunchimeg, Director of the Financial Regulatory Committee, said that the Financial
Regulatory Committee, is responsible for implementation of this law and we take relevant
measures if there are any problems. Our organization disseminated information on
implementation as well as penalties and violations of this law 14 days in advance before it
became to force. She stated that there were no significant problems with regard to
implementation of the law and this law was issued to prevent tugrug devaluation.
Jim Dwyer, Executive Director of The Business Council of Mongolia, commented that BCM
Legislative Committee established under the Business Council of Mongolia points out that
these provisions may create a situation where unit price of a given product could face
approximately 20% risk depending on currency rate difference during 1-6 months of
transportation period once a trade agreement is established with an importer in either USD or
the currency of another country and this creates a situation that domestic suppliers’ profitable
activity gets suffocated and furthermore could turn out to be a mechanism of supporting
Chinese and other foreign suppliers’ business.
At the end of the meeting, H.E.S.Bayartsogt expressed his appreciation for comprehensive
presentations, comments and criticisms regarding the discussed subjects, and announced the
following recommendation.
To advise S.Bayartsogt, Minister of Finance, L.Purevdorj, Governor of the Bank of
Mongolia, and D.Bayartsaikhan, Financial Regulatory Committee, to study possible
negative aspects of endorsing the Law on Conducting Settlement in National
Currency and take measures to prevent from them.
Findings and Conclusion of the Meeting. The recommendation of the Consultative Council
meeting was agreed by all its members and signed by the Finance Minister and Head of
Secretariat.
One of the objectives of the Council is to achieve a better understanding and the
strengthening of socio-economic partnership for all stakeholders: the government, businesses
and development institutions. Hereto, it should be noted that our international partners are
committed to support the activities of the Council and its Secretariat. During this and earlier
meetings of the Council, international financial institutions and partners expressed their
readiness to collaborate with Council and mobilize required human and intellectual resources
for the work aimed at improving the business climate.
The Consultative Council meetings involved active discussions and were held in friendly as
well as business like environment. Presenters received comments, feedback and clarification
not only from private sector representatives, but also from representatives of government
bodies. This demonstrates that presentations and issues raised touch the interests both private
and public sectors. The outcome of the meeting was a push forward, and a signal for further
actions to resolve these issues.
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Prior spade work to the meeting, interviews of the Head of Secretariat to newspapers, and
dissemination of information concerning the coming regular meeting of the Consultative
Council was an important component for a productive and efficient meeting. As a result, the
meeting as well as issues raised during the meeting attracted a lot of media and public
attention. The follow-up on earlier discussed issues during the Consultative Council
meetings, and close cooperation with business associations resulted in more trust from private
sector representatives and investment, and bringing up more delicate problems and issues that
they are facing in doing business. The Consultative Council proves to be an efficient as well
as effective mechanism that serves as a "bridge' between private and public sectors, and in
delivering voices of the private sector to earlier unreachable public agencies.
5. Follow-up of Recommendations of the Consultative Council
The aim of the Council is to serve as a “bridge” between the Government of Mongolia
and private sector representatives. The following are the major items that were initiated,
resolved and enforced through the meetings of the Consultative Council2.
Policy Actions:
The Government announced the 2010 as the Year of Business Enabling Environment
Reform in Mongolia. It was triggered by the recommendation of Consultative
Council to improve Mongolia’s business climate. Together with the World Bank a
team formulated a Doing Business Reform Action Plan for Mongolia. This plan
became a “skeleton” of the Government Action Plan to be implemented in 2010.
The Cabinet approved a “Government Policy to be pursued towards Public Private
Partnership” by its resolution of the Consultative Council on 15 October 2009.
The Ministry of Roads, Transportation and Urban Development has submitted a draft
law to the Cabinet to undertake structural or organizational reforms of the Civil
Aviation Authority of Mongolia.
Law Enforcement
The CCIC issued a resolution on 24 March 2009 to draft the Public-Private
Partnership law. Following this decision, the Concession Law was submitted and
ratified by the Parliament on 4 February 2010.
2All reports of the Secretariats of the Consultative Council in Mongolia are available on the EBRD website as
well as on the website of the Consultative Council, respectively:
http://www.ebrd.com/country/sector/etc/activities.htm
http://www.consultativecouncil.mn
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It was decided to establish “a single electronic window” for foreign trade facilitation,
which will significantly reduce the processing time and transaction cost of trade
operations.
On December 2009 the draft law on Credit Information Bureau has been submitted to
the Parliament for approval.
To stimulate the renewable energy usage, the Government issued a resolution to
subsidise the tariffs of wind energy.
To improve the business climate by making it easier and less costly for businesses to
comply with relevant legal and regulatory requirements for inspections, the
amendments to the Law on State Inspections was made on 10 June 2010. Following
this legislative change, the number of inspections regulations will be drastically cut
using a “guillotine” method by the end of the year.
Based on the decision of the Ministry of Roads, Transportation and Urban
Development, the State Property Committee and Civil Aviation Authority of
Mongolia to introduce competition among jet fuel importing and refueling companies,
new jet fuel importing and refueling companies entered the market, which enabled
competition as well as reduction in fuel prices.
Crisis Response
To assist the construction sector to overcome financial crisis, it was decided to issue
special discount bonds for the developers (approximately USD 140 million).
With the specific goal to assist to small and medium enterprises, the Government
approved additional budget support to establish a Loan Guarantee Fund. Few donor
agencies (GTZ, UNDP, Mercy Corps, etc.) committed additional financial
contributions to the Fund.
6. Others
The Monthly meeting of the BCM was held
Meeting for May of Business Council of Mongolia was held in 24 May in the Khan Bank
Theater. Over 65 members attended the meeting. The main discussions were competition
issue. Mr. D. Mandakh, Chairman, Authority for Fair Competition and Consumer Protection
of Mongolia made the presentation on this issue. The second issue was on MSE listed
Doing Business Reform shall be Streamlined
On the April 27, 2010, H.E.S.Batbold, Prime Minister of Mongolia, chaired the second
meeting of the Council to coordinate activities and measures taken under the Year of
Business Enabling Environment Reform. During the meeting, held in the Government
House, an implementation of the Action Plan was presented by ministers and heads of
relevant agencies.
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The Action Plan of Year of Business Enabling Environment Reform includes 131 goals and
measures, out of which 105 measures are for reforming doing business environment at micro
level and 26 measures are for development of infrastructure and stabilization of macro
economy.
Members of the Council informed that measures taken in 1st and 2nd
quarters are still under
implementation stage.
In his closing remarks H.E.S.Batbold stated that “it was general meeting. Next time, we
should not wait for gathering with an attendance of all members. In order to improve business
environment of specific sector or area such as mining, agriculture, state inspection and
customs, relevant organizations should hold a meeting every week and discuss
implementation of policy and plan of this year. Agenda of the regular meeting and outcome
of the meeting should be introduced to the Chairman of the Council”.
A draft of National Program for Development of
Corporate Governance was discussed
Discussion of a draft of National Program for Development of Corporate Governance was
held in the National Development and Innovation Committee. During the discussion,
S.Tulga, Deputy Director of Security Department of Financial Regulatory Committee,
introduced Codex of Corporate Governance and Mr.Kh.Ganbaatar, Executive Director,
Employers’ Federation of Mongolia, presented a concept of the Draft of National Program of
Corporate Governance.
Representatives of Mongolian Stock Exchange, Bank of Mongolia, Ministry of Finance,
Mongolian National Chamber of Commerce and Industry, researchers and scientists, NGO
and private sector attended the open discussion.
In Mongolia, the Codex of Corporate Governance was adopted by decision of Financial.
Regulatory Committee on 26 December 2007. Although the first draft of the National
Program for Corporate Governance, which was developed by Employers’ Association in
April, 2009, was supported by line ministries, it has not been approved by the Government.
The adoption of the Corporate Governance Program and its enforcement is vital to increase
accountability and responsibility of companies, protect investors’ and other stakeholders’
right and attract foreign investment to Mongolia.
Therefore, representatives encouraged to finalize the draft of the Program and supported the
National Development and Innovation Committee to submit the final draft to the Cabinet
Meeting under the framework of Year of Business Enabling Environment Reform in 2010.
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The Progress of Implementation of the Program
to Overcome Economic and Financial Crisis in Mongolia
The Development Policy and Strategic Planning Department of the National Development
and Innovation Committee reviewed the implementation progress of the program to
overcome economic and financial crisis and presented to the Deputy Prime Minister reviews
and preliminary results of the last year as well as issues that need a particular attention in
2010.
As a result of the action to obtain required funds to overcome the financial crisis with the
support of International Financial Organizations, the Government raised funds of over USD
300 million or 450 billion tugrugs and financed projects directed for recovery from financial
crisis.
Source: NDIC
A Memorandum to Foster Public, Private
Partnership in Taxation Sector is Signed
Both public and private sectors reached a common understanding that it is possible to develop
the country and resolve intricate issues by joint efforts of both side, and hence the year 2010
was announced a Year of Developing Public, Private Relations.
Within the framework of this year, the officials of the Mongolian Employer’s Federation and
General Taxation Office signed a Memorandum of Cooperation. The documents highlighted
issues on implementation of package of laws on taxation, dissemination of information on
activities and services of the General Taxation Office undertaken within the scope of program
on transparent reforms of taxation service, implementation of the principle of open and
transparent information availability, resolving by joint efforts the difficulties and problems
faced by tax payers, incorporating proposal of businesses in taxation laws and regulations and
enabling favorable business environment.
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Annex 1
10 May 2010, Meeting Room, Ministry of Finance
List of Members
Meeting of the Consultative Council on
Investment Climate and Private Sector Development in Mongolia
Members of the Consultative Council
1. S.Bayartsogt Minister of Finance, Vice Chairman of the Consultative
Council
2. L.Purevdorj Governor, Bank of Mongolia
3. Kh.Amarsaikhan Head of Secretariat
4. B.Batjargal Director, Ministry of Finance
5. N.Oyunchimeg Director, Financial Regulatory Committee
6. D.Delgersaikhan Head of Division, Bank of Mongolia
7. B.Enkhbat COO, Just Group
8. B.Bayar Director, ELC Law Firm
Representatives of Bilateral and Multilateral Organizations
9. Arshad M.Sayed Country Manager & Resident Representative, the World Bank
10. Adrian H. Ruthenberg Country Director, ADB
11. David Lawrence Program Manager, IFC
12. Jim Dwyer Executive Director, The Business Council of Mongolia
Observers
1. B.Khurenbaatar Director, Ministry of Finance
2. G.Ulziijargal Senior Officer, Ministry of Finance
3. Z.Shagdarsuren Executive Director, Mongolian Bankers Association
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Annex 2
AGENDA
Meeting of the Consultative Council on Investment Climate and Private
Sector Development in Mongolia
Date: 11 May 2010
Venue: Meeting Room, Ministry of Finance
Chairman: H.E.S.Bayartsogt, Finance Minister
15:00~15:05 Opening remarks
H.E.S.Bayartsogt, Minister of Finance
15:05~15:15 Follow-up of Decisions of Previous CCIC Meetings
Mr.Kh.Amarsaikhan, Head of Secretariat
15:15~15:25 Streamlining the Implementation of Action Plan of the Year on Business
Enabling Environment
B.Arvinbayar, Head, National Development and Innovation Committee
15:25~15:35 Discussions
15:35~15:45 Increasing Mongolian Suppliers’ Competitiveness through Mitigation of
Exchange Rate Risk
Mr.B.Enkhbat, COO, Just Group
15:45~15:55 Discussions
15:55~16:10 Wrap-up and Closing Remarks
H.E.S.Bayartsogt, Minister of Finance