Director of the Economic and Research Institute under Mongol Bank S.Demberel delved into the Mongolian economic environment and potential policy solutions for improvement in the following interview.
How do you see the current economic situation in Mongolia? Some politicians and economists say that the country’s economic crisis will deepen and the economy will go into default, while others conclude that the economy is on its way to recovery.
The economic situation has not recovered. In the first quarter of this year, the economy shrank by 3.8 percent. In general, the economy of any country is strongly connected to the factors of globalization. This has a strong impact on the economy. Considering the business environment, our country’s economy has not entered the stage of expansion. The first signs of economic recovery from the recession are emerging. Household consumption has increased and investment activities are improving. Exports are also growing, but not at the projected level. However, import is becoming active. Inflation has become the biggest problem faced by Mongolia just like other countries in the world. The annual growth of inflation has reached 16.1 percent. It reached 13 percent at the end of 2021. Since then, it has fluctuated between 14 and 16 percent.
Since 2000, inflation in Mongolia decreased, except for in 2021. From 2000 to 2020, the inflation rate used to decrease between March and September. From 2020 to 2021, the average inflation was set to be 0.5 percent higher or lower than 8 percent. I expect inflation to decline from the end of this year. Inflation was 3.8 percent at the beginning of last year but reached 13 percent at the end of the year. The average rate was 7.1 percent. In other words, Mongol Bank achieved its goal of keeping inflation below 8 percent. Many say that the bank failed to meet its goal and allowed inflation to hike. According to my calculations, the inflation average was only 7.1 percent. So, we should not be depressed that inflation has increased. But this does not mean that nothing should be done to reduce inflation.
Joe Biden, the president of the US, the world’s largest economy, made a plan to fight inflation. Mongolia has regulated the prices of the main products. The main factor affecting inflation is transport and logistics. Now we are talking about improving the transport and logistics conditions and increasing the capacity of border ports. The economy is expected to grow this year.
Mongolia will not declare default. There are many financial mechanisms that manage debt without the need to declare default. But it is true that the government’s debt burden is increasing. The country must strictly adhere to its fiscal rules. The government’s debt limit is set in the Fiscal Stability Law. Mongol Bank adjusts this limit based on the current real debt. Even the annual budget deficit should be considered as debt and should be adjusted to a sustainable level. The budget deficit will be covered by debt. We should add this deficit to the government debt and compare it to the GDP to get the real economic picture. The central bank also aims to keep inflation at a stable single digit. However, overexpanding the budget and creating dominance leaves no room for implementing monetary policy. It also makes the central bank dependent and obscures the conditions for the implementation of its objectives. Now, Mongol Bank is unable to operate independently. First, it is necessary to ensure the independence of the bank. Secondly, budget expenditures and financing should be carefully considered. Starting with the prime minister, everyone is now talking about using the available opportunities to increase the budget revenue without increasing taxes. For instance, the prime minister raised the issue of coal theft. This is how we should take care of our economy.
Recently, the physical volume of coal exports has been increasing. Coal export earnings are expected to have a significant impact on economic growth this year. What’s your position on this?
It is necessary to divide the economy into mining and non-mining industries. Looking at the economy as a whole, the economic growth is not only driven by the mining sector. The growth of many sectors such as agriculture and trade and services affects it. Of course, the increase in the physical volume of coal exports is a good thing. This could lead export to exceed import and create favorable conditions for the increase of foreign trade profit. The price increase of imported goods accounted for 9.2 percent of the total inflation rate of 16.1 percent in Mongolia. Mongol Bank cannot reduce imported inflation through monetary policy. But the government can reduce it by boosting customs turnover and facilitating trade. The premier needs to meet the big importers of Mongolia and review the obstacles and pressures they face to effectively reduce inflation. Over the past 30 years, 90 percent of exports have been mining products. Only now, we are starting to talk about the issue of non-mining exports. But no real action has been taken. The experience of other countries dominated by the export of mining products shows that when prices are high, they start to support other sectors of the economy. The time has come for Mongolia to intensify its big projects and focus on non-mining exports. It will have a huge impact on improving the economy.
At present, the government does not have a “motivation” or “mechanism” to improve non-mining exports. There are industries that are running on their own without government support. In particular, cashmere has reached the level of international branding. The government should take initiatives to improve and increase non-mining exports.
Mongol Bank included a provision in its 2022 monetary policy to support non-mining exports. The bank and the government are planning to organize a forum for non-mining exporters in September or October this year. This forum will discuss what ideas and mechanisms are needed to increase the percentage and types of non-mining exports. The issue of free competition mechanism and financing will also be discussed. Many foreign trade financing instruments are used by other countries. Through this forum, the prime minister should convey the message that our country should become an exporting nation. Mongolia looks like an exporting nation but it is very biased because mining products make up the majority.
The main goal of Mongol Bank is to ensure the stability of the national currency, which was stipulated in the law 20 years ago. Now this concept has internationally changed. Other countries started working to create price stability. The central bank has focused on price stability as well. Three years ago, Mongol Bank tried to include this in the law, but Parliament did not support it. This indicates that the bank is unable to ensure its independence. There are no provisions in the central bank laws of other countries that allow its governor to be fired if he or she does a bad job. But there is such a provision in our law. The law stipulates that the central bank will operate independently from the government. However, the COVID-19 Law continues to attack the independence of the bank. The national currency can remain stable by ensuring the independence of the bank. Our people misunderstand that ensuring the stability of the national currency means not only achieving the goal of keeping inflation at a low level but also maintaining the exchange rate. In accordance with the law, the exchange rate must be determined according to market principles. Mongol Bank intervenes in the official foreign exchange reserves to eliminate excessive exchange rate fluctuations. But the bank is being pressured to increase its foreign exchange reserves. The law only states that the central bank will manage the official foreign exchange reserves of Mongolia. We can increase our foreign exchange reserves by increasing exports. So this is the government’s job.
China’s State Councilor and Minister of Foreign Affairs Wang Yi recently paid an official visit to Mongolia. During the visit, the issue of connecting Gashuunsukhait and Gantsmod checkpoints by railway was finalized. The sides also agreed to improve the border checkpoints’ capacity and develop the checkpoints. Mongolia sees this as increasing its export potential. What do you think?
Recently, the government has been talking about missed opportunities. Opportunities should not be missed. Now we have to implement mega projects by following the right policy. The country needs to solve the problems related to ports and transportation. For instance, it was difficult to transport watermelons from Khovd Province to Ulaanbaatar due to road problems. Now, because the province is connected by a paved road, watermelons are transported to the city in just a day. In other words, by intensifying macro-scale projects, micro businesses will get the opportunity to expand their markets. A country with poor infrastructure development like Mongolia can get high benefits in the long term by investing in this type of development.
There have been many political deadlocks and conflicts of interest in the implementation of large projects. Now we need to get rid of them. The government says it will hold accountable those who are stalling big projects. Stalling mega projects is an act of economic sabotage. The Criminal Code has accountability mechanisms. Now we should look in the same direction and prepare for long-term development. But if the country borrows from foreign partners to implement big projects and the government issues bonds, the national debt will just increase. Therefore, we need good debt management. Two major political parties have divided the government’s debt among the population and argued about their work. This is nonsense. There is nothing in economics that divides debt by population. Debt sustainability analysis should be done in the medium and long term. Decisions should be made based on the efficiency of projects. The state should not dominate the implementation of big projects. It should act as a dispatcher. These projects should be implemented through public-private partnerships. Public-private partnership is when both sides create mutual understanding and cooperation in order to move toward the same goal. The current government is focusing on public property management. The government started saying that they would improve their management. Rather than forcing banks to do IPOs, the government should issue shares in state-owned companies and subject them to public scrutiny. It is important to speed up this process. This will improve the transparency and open reporting of companies. There are state-owned companies in our country that make secret contracts that not even the finance minister or even the prime minister can detect.
Can you elaborate on the issue of transparency of state-owned companies?
The reporting of state-owned and private companies, the main importers of mining, should be improved. During the parliamentary session, the prime minister said that there is a big mining theft going on in the country. There was hardly anyone in the history of the Mongolian government who dared to say that. But since then, he has been silent and inconsistent. A state-owned company should not hide information about how much per ton the product is going to be sold to, where and to whom from the government. It should not be considered a trade secret. But they can report to the government confidentially. Ensuring transparency and openness of state-owned companies can increase foreign exchange reserves, export and fiscal revenues. There are cases where some companies misreport the price and quantity of products during customs inspection. This is called the misdeclaration of trade documents. This happens a lot in countries rich in natural resources. There is research in this field in Mongolia.
In 2018, a study was conducted on the export of coal, copper concentrate, and iron ore. In fact, iron ore is exported by private companies. But the research revealed some violations. The government should establish a large task force that includes the Ministry of Finance, the General Intelligence Agency, the Mongolian National Audit Office and the National Police Agency to deal with this issue. Contracts and documents of state-owned companies should be viewed confidentially. Then everything will become clear. There are relatively few problems with coal. But journalists expose many of the problems related to coal.
Mongolians talk about opportunities that were missed due to not building a railway for 10 years. Is not selling the wealth at the global market price and not being able to collect the appropriate taxes and fees also a lost opportunity?
Missed opportunities happen every day in our lives. For instance, we lose a lot of time in traffic jams. If we convert this into monetary terms, it becomes an economic concept. It’s good that we’re starting to talk about lost opportunities. This issue should be resolved in court. Now is the time to take advantage of every opportunity. Transparent and open reporting governance should be established in state-owned companies. This opportunity is in the hands of the government.