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Mongolian Parliament Passes Legislation to Establish Sovereign Wealth Fund

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Mongolian Parliament Passes Legislation to Establish Sovereign Wealth Fund

Can Mongolia finally ensure that its mineral wealth benefits the people?

Mongolian Parliament Passes Legislation to Establish Sovereign Wealth Fund
Credit: Depositphotos

On April 19, the Mongolian parliament passed major legislation to launch a national sovereign wealth fund. This legislation aims to reallocate money gained from the country’s exploitation of its strategic natural resources to benefit the Mongolian people and rebalance the overlapping of business and politics. 

The establishment of such a fund sparks a deeper conversation on mining conglomerates, corruption, as well as allocation, and redistribution of wealth. 

Mongolia’s economy has been dependent on its mining sector for over three decades. The impetus for the sovereign wealth fund is Mongolia’s recognition of its socioeconomic dependence on its finite supply of natural resources, and the need to create a system that future generations can benefit from. Past experiences have shown that Mongolia’s natural resource exploitation benefitted a handful of mining conglomerates, while the shrinking middle class and the population at large have yet to see the rewards.  

In Mongolia, currently there are 16 strategic natural resource sites, and seven of them are state-owned.

In a statement made to the parliament, Mongolian Prime Minister Oyun-Erdene Luvsannamsrai highlighted the country’s need to reallocate and rebalance the wealth of mining giants. Oyun-Erdene asked them to comply with new regulations and reminded the conglomerates how much they have benefitted from Mongolia’s natural resources. 

The proposed sovereign wealth fund was initiated in 2019, as part of the constitutional amendment, particularly pertaining to Mongolia’s long-term development goals and plans. 

One of the most important components of the new legislation concerns the redistribution of Mongolia’s wealth from natural resources, an effort to rebalance the overlapping of mining businesses and politics. Under the new rules and regulations, Mongolia’s mining giants would need to participate in a form of profit-sharing. 

The legislation creates new diversified funds, which aim to be directly allocated toward the development of the Mongolian people. The legislation introduced three major funds: the National Development Fund, Funds for Future Generations, and the National Savings Fund. 

Articles 10.1.2 to 10.4 of the law describe the details of these funds and their utilization. For example, the National Savings Fund will be allocated to sectors such as health and wellness, education, and housing, and the Development Fund will support Mongolia’s medium- to long-term development projects and economically beneficial programs. The Funds for Future Generations will be placed in the Mongolbank, Mongolia’s central bank. (The 2023 draft of the legislation can be viewed here.) 

The legal document also specified that the Ministry of Finance and the Mongolbank will be in charge of financial transactions and allocation of these funds. On a governance level, the legislation discusses using digital platforms as part of the government’s effort to combat corruption by providing for the new funds’ account transparency and accessibility. 

According to Mongolia’s National Sovereign Wealth Fund Concept, the findings were based on international experience in funds management, drawing from countries such as Kuwait, Saudi Arabia, Singapore, China, and Norway. The experiences of these countries include funds in a variety of sectors, including but not limited to education, pension, and health. The concept also made emphasized the potential of the funds as a protection against global shocks, especially for a country like Mongolia, vulnerable to global commodity shocks. 

Despite the government’s attempt to clarify many elements of the sovereign wealth fund, implementation will still require amendments to many laws and regulations. 

If the proposed sovereign wealth fund and its correlating legislation are put into effect, it can help tackle some of Mongolia’s long-standing issues such as infrastructure, transportation, air pollution, energy, clean water, and shortages of modern technologies in the medical sector. While these are hopeful projections, corruption is a looming issue that needs to be addressed in both the legislative and executive branches of the government. 

Embezzlement from existing government funds supposed to go toward education and small-to-medium enterprises continues to eviscerate the people’s trust in the government. Hence, serious attention needs to be paid to the discussions and questions on how these newly proposed funds are going to be managed, monitored, and allocated to the people’s needs. The legal elements need to be thorough and extremely transparent. How does the government plan to implement these regulations?

Moreover, another issue that may arise is how Mongolia’s mining giants and investors react to such a measure. The very concept of redistribution of national resources may meet resistance from Mongolia’s mining conglomerates. In the big picture, this could also mean an effort to dismantle the overlapping of business and politics. 

Recognizing Mongolia’s dependency on its mining sector, the Mongolian people need to benefit from the country’s resources – not through cash payouts but through a stable and modern healthcare system, high-quality education, work opportunities, and a healthy environment in which to raise their families. 

As government spending continues to grow, more financial resources need to be available to fund an increasing social welfare system. For example, between 2020 and 2023, the percentage of mining profits going to government spending has consistently increased: from 25.7 percent in 2020 to 28.9 percent in 2021, 35.1 percent in 2022, and 33.3 percent in 2023. Given the current political trajectory, government spending is likely to increase in the next decade. 

The new legislation highlights a turning point in how Mongolia manages its natural resources. The upcoming June election is also relevant here. For the first time in modern Mongolia’s history, the country will have an enlarged legislative branch, going from 76 to 126 seats after the polls this June. How the electorate reacts to the new sovereign wealth fund will determine the make-up of Mongolia’s newly enlarged parliament.