Contributions of mineral resources to the national economy

Размещено на http://www.allbest.ru/

Contributions of mineral resources to the national economy

BatzorigGansukh

Mineral resources are critical for Mongolia's development. Compared with economic sectors, mining is capital intensive, with high risks due to the inaccessibility and scarcity of mineral resources. Most of the mineral resources are non-renewable. From an economic aspect, they are thus not so much a source of income rather than an asset. Moreover, the non-renewable minerals or resources give rise to a large array of political and economic impacts that produce adverse on the economy.

Mining has been received with hope and enthusiasm in many less development countries (hereinafter LDC) as it is perceived as a key determinant of development and economic growth. As remarked in introduction, 53 countries are mineral dependent where mining in these countries accounts for more than 5 percent of their annual GDP and plays a significant role in earning of their export revenue. According to the research of L. Ross, 27 mineral dependent countries have mineral exports that accounted for more than 20 percent of GDP.

Table 1 - High mineral dependent countries in the World

The table-1 presents that Mongolia is the country which is one of the mineral dependent country which took 24^thplace.

As a result of opening and democratic change in Mongolian society, has created more friendly legal environment as advocated in a neo-liberal adjustment program, foreign direct investment (hereinafter “FDI”) has increased dramatically. Mining, construction, infrastructure and communication have attracted the greatest in FDI. mineral resource economic renewable

Many people have doubt on which category Mongolia includes, according to the World Bank classification, the Mongolia is one of the lower middle income countries; annual per capita income is USD 5300 (estimated by CIA in 2012). Also the country substantially endowed with mineralresources such as gold, copper and coal etc., but still now almost 39% of the population living in poor condition or in absolute poverty. Generally the reason of low income status could be traced with inaccurate or wrong economic decisions of various governments, I am writing that because in the most of the time vital economic decisions bothering the country are politically and individually motivated and in the long run it is unable to serve the good of the country.

Mining, especially copper mining has been important to the Mongolian economy and its' development. Together with gold and coal, export of copper is among the most important sources of foreign exchange.

Almost 420 companies hold mining licenses, the vast majority of which are small Mongolian companies. Over 69% of licenses are for gold, 9% for coal, 6% for aggregates and 3% each for copper and fluorite. There are also a small number of licenses for iron, uranium, and zinc, rare earth elements, tungsten and salt.

Figure 1 - Mineral license holders by type

According to the figure-1, 69% of licenses engaged gold extraction license type, which means the national economy heavily dependent on non-renewable resources and market demands. As reported by the Mineral Resource Authority of Mongolia, over 70% of license holders hold less than 100 hectares and rest hold less than 50 hectares.

Mining contribution to the national economy:

I will try to figure out how FDI influence in national economy, especially the FDI in mining sector.

Since the 1990s Mongolian economy growth has been driven by mining sector which rose from 10 percent of output in 1995 to 24.4% in 2005 before falling slightly to 22% in 2009 following the collapse in commodity prices.

Since 1994 the most important mineral was copper. Other relatively minor minerals currently include molybdenum, coal, gold, ad fluorspar.

Figure 2 - Copper production of Mongolia

From 2004, many policy reforms have been introduced which have led to increased investment, particularly by foreign firms, which new mines comes into production. In 2009 Mongolia's mines produced 346, 8 thousand ounces, but in 2010 the country produced 213 thousand ounces which influenced by the world demand of mineral products.

The estimated value of total reserves in Mongolia is US$1.3 trillion, including 1,170 mineral deposits and 7,654 occurrences that have been identified to date. These occurrences include over 60 types of minerals, primarily including copper, gold, coal, molybdenum, iron ore, uranium, tin, tungsten, silver, zinc and fluorspar.

Mongolia remains one of the most dependent countries in the world on FDI. Considering the significant role that foreign investment plays in the economy, it was only a matter of time until politicians realized that populist rhetoric was going to bring Mongolia to its knees.

Figure 3 - Foreign Direct Investment of Mongolia (First quarter of 2011) mill.USD

The figure 3 shows the variation of FDI in first quarter of 2011-2013, in the end of the FY2011 the FDI has reached 8724.7 million of USD, in the FY2012 it has increased up to 13458.2millions of USD, which mainly invested in mining and quarrying sector. 15384.4 millions of USD has been invested in Mongolia in the 3^rd quarter of FY2013, now let us explore in which sector the FDI mainly invested:

Figure 4 - FDI by sectors (the end of the FY2011)

The figure-4 shows, that almost 85% of FDI flowed to the mining and quarrying sector. Now let us explore how much money or currency flowed into the FDI.

Table 2 - FDI by sector flow of currency (the 2^nd quarter of FY2011)

If we look at these graphs and tables more carefully which indicated in this part, the mining sector has attracted domestic and international attention and investment. Soon I will figure out how the mining sector influence to the GDP, export and government revenue which is really critical issue of Mongolian development.

Hence, according to the government decisions and some revised law (FDI law has revised in 2013) FDI declining rapidly, and becoming a downside risk to the economy. In 2012 the net FDI inflow declined by 17 percent to 3.8 billion USD, from USD 4.6 billion of the previous year. In 2013, the slowdown has been accelerating; the net FDI inflow dropping by 41 percent and 74 percent in January and February respectively.

The FDI inflow for the first two months is only 42 percent of the level during the same period in 2012. The rapid decline of the FDI has an important implication on the economic outlook in Mongolia. With no well-functioning capital market and highly limited access to the international capital markets, foreign investment is important financing channel to private investment, which has been the main driver of growth for the last two years.

Mining contribution to exports

The Mongolian economy is highly dependent from mineral exports. The five most important non-fuel mineral export commodities are copper, iron ore, bauxite, tin and phosphate rock. These 5 minerals account for approximately 80% of the total value of least development countries (hereinafter “LDC”) mineral exports. Another 4 menials-zinc, nickel, lead and manganese ore-account for an additional ten percent of total LDC mineral exports.

Hence in the mid-1990s mineral products have been the largest export in Mongolia. Between 1995 and 2008 mineral products contributed an average 64% of the value of total exports. Between 2005 and 2008 however, the annual average share rose to over 78%. Some individual LDCs have become more heavily dependent on mineral exports, as the result if major new mineral projects coming into development; in Mongolian case Oyu-Tolgoi coal and gold project, Tavan-Tolgoi coal project etc.

Figure 5 - Mineral and Non mineral product export of Mongolia.

The World Bank data (figure-5) identified that over 89 percent of export is the mineral products, which the country is heavily dependent from its resources and export. Examining the mineral products; copper, gold coal and crude oil is the main exporting minerals in Mongolia. Those non mineral products are textile, natural stones and hides, skin.

Figure 6 - Main mineral product export

The variation of the mineral products (figure-6) is affected by the emerging market demand in the world.

Figure 7 - Main non mineral product export

As from figure-7, non-mineral products are agricultural and pastoral goods which explain the country is not improved its industrial sector.

In 2011, 8 of the 10 most important exports by value were mineral products including copper ores and concentrates, gold, zinc ores and concentrates, coal, molybdenum ores and concentrates, petroleum products, fluorspar and refined copper. Between 1996 and 2007 the most important single export product was copper which was accounting for on average of 36 percent of the total export in this period.

Mining contribution to the GDP

In spite of the rapid growth in export income from gold mining in Mongolia, the mining sector, in which gold, copper, coal are by far the most important products, have in recent years only contributed between fifteen and twenty percent of the country's GDP.

Figure 8 - Real growth of GDP by percentage

The figure-8 expresses, mining and minerals still contributing the country's GDP in every year.

Figure 9- Mineral Revenue Trend

As figure-9, the economy is heavily dependent upon mineral exports and the revenue, which is affected by the fluctuation in global price. In 2008-2009 global copper prices declined sharply and put the country's economy into negative territory. Total mineral revenue (0.8 trillion MNT) declined by 35.6 percent from 1.3 trillion MNT during the previous year, reflecting falling external demand for coal in the latter half of the year. Coal exports -accounting for over 40 percent of total exports- fell by 15 percent in 2012. Reduced mineral export was translated into the contraction of mineral revenue. Corporate income tax revenue from mining sector dropped by 50 percent, royalty by 46.4 percent and customs duties by 62.6 percent respectively. As a result, the percentage share of mineral revenues among total revenue declined to 16.4 percent in 2012, a significant fall from 28.2 percent in 2011 (Figure 9).

Mining contribution to the government revenue

The mining sector is an important source of fiscal revenue, but it is also a source of revenue volatility. The current fiscal regime for the minerals sector is governed by the Minerals Law and various tax laws. The regime includes a royalty, an income tax, VAT exemption of most mining exports, and state participation. The Minerals Law provides that a holder of a mining license who undertakes to invest at least US$50 million during the first 5 years of its mining project can enter into an investment agreement with the government to provide a stable operational environment, including a stable tax environment (fiscal stability). The duration of the investment agreement depends on the amount of investment over the first 5 years of the project. For large mining projects--investment over US$30 million--the investment agreement is for 30 years. I am concluding that mining sector growth could influence positively in economic development but affected negatively in industrial and pastoral sectors where there need investment and government attention. Growth in the mining sector should increase GDP and GNP as the per-unit returns to labor and capital raise an average and the supply of natural resources increases. Where capital and labor have to be imported to make up for domestic shortages, the impact on GDP should be larger that otherwise. But historically, major problem of mining sector development in some of developing countries that could not successfully managed the structural adjustment that occur as a single sector. This has been so prevalent that much of the literature on the impact of mining sector growth on economic development focuses on the so called “resource curse” which was described the failure of resource-rich countries to benefit from their natural wealth. Mineral rich economy always faces a high risk of fluctuation in global commodity prices.

Bibliography

1. Emil M. Sunley, Jan Gottschalk, and Alistair Watson “The fiscal regime for mining--a way forward” (2010)

2. Keith Slack “The role of mining in the economies of developing countries Time for a new approach” (In Mining, society and a sustainable world, Jeremy Richards 2009)

3. M.L. Ross “Mineral Wealth, Conflict and Equitable Development” (In Institutional Pathways to Equity: Addressing Inequality Traps Anthony Bebbington, Anis Danj, Arian de Haan and Michael Walton 2008)

4. Macartan Humphreys, Jeffrey Sachs, Joseph E. Stiglitz “Escaping the resource curse” 2007

5. W.Gluchke, N.Iwase, S.Zorn “Mineral resources and the impact of mining on LDCs” (1980)

6. World Bank Group in Mongolia, Mongolian Economic Update April 2013

7. www.ot.mn;

8. www.tavantolgoi.mn; Tavan Tolgoi project

9. http://databank.worldbank.org; World Bank Database

10. https://www.cia.gov

11. http://mram.gov.mn

12. http://www.indexmundi.com

13. http://www.emergingfrontiers.com

14. http://www.mongolbank.mn

Размещено на Allbest.ru