Independence of Central Bank should be ensured to stabilize economy

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        A joint Mongolian-Russian bank, called the “Trade and Industry Bank of Mongolia” was opened in 1924 in Altanbulag with a single branch and 22 staff members which further became the foundation of the Bank of Mongolia. The main functions of the Bank of Mongolia were circulating the Mongolian national currency, Tugrik, financing trade activities, regulation of supply and prices of products, issuance of loans to business entities due to monetary reform in 1920.

As of today, the structure of the Bank of Mongolia has surely expanded to the point where it oversees banking sector stability within 13 banks and more than 1,350 branches running their operations in all parts of the country with over 13,000 employees providing banking services to business entities, organizations, and individuals. Although its structural development has expanded, it is hard to say the bank is working well considering the harsh economic reality that citizens have to face in their daily lives such as radical increases in commodity prices, growing inflation, rising currency values, loans with high interest, dependence on mining sector, and over reliance on two trading partners. Then, what are the main causes behind the Central Bank not being able to work efficiently?

Today, in most countries, it is agreed that the Central Bank should be a professional organization that operates independently of politics. This principle is strictly applied in Japan, the US, and European countries that are leading the global economic development. In the context of Mongolia, since the democratic revolution of 1990, separating the Central Bank from the government was undoubtedly a step forward and is regulated by law. According to the current Law on Central bank, the Central Bank activities shall be independent from the Government. This clause complies with the international standard and in any country, the law regulates what the Central Bank shall do and how it should operate. In more specific, the law formulates the main objectives of the Bank of Mongolia such as Article 4 of the Law on Central Bank implies the main objectives of the bank to ensure the stability of the national currency and to support balanced development of the national economy by ensuring the stability of the financial market and banking system. In short, the main objective of monetary policy pursued by the Central bank is sustained low inflation. In other words, the Bank of Mongolia should primarily aim to keep inflation at a low and stable level and the Government, on the other hand, defines and implements more macroeconomic policies to ensure economic growth, such as budget, employment, and foreign trade.

The method to measure independence of the bank depends on whether the Central Bank can define its main objective of price stability independently without any influence from external forces, mainly the budgetary and political pressure. If it does so, then the objective of independence is considered to be attained. However, in the context of Mongolia, it is not misleading to say that in reality, monetary policy is not implemented independently and the Bank of Mongolia fails to fulfill its main objective when looking at increased inflation rate. For instance, the current inflation rate reflects consumer price inflation in Mongolia averaged 7.4 percent in the ten years to 2022, which is above the Asia-Pacific regional average of 2.1 percent, reports the Focus Economics. The 2022 average figure was 15.2 percent which doubled the previous year. In 2023, then current inflation rate stands at 10.9 percent, still above two-digit number and higher than the regional average. The fact that the Bank of Mongolia falls short of fulfilling its objective to maintain sustained low inflation mainly has to do with its lack of independence. Vice-Rector and Associate Professor at the Institute of Finance and Economics B.Munkhzaya emphasized in her report titled Independence and Financial Stability of the Central Bank that only 50 percent of the six operational independence criteria are met and 42 percent of the seven political independence criteria are met in the context of Mongolia. Based on the outcome of her assessment, it concludes the Central Bank is not independent. According to the studies on international data that proves that the inflation of countries, in which the central banks are considered to be independent, are usually low, reports the International Monetary Fund. In addition, the comprehensive report on measures of transparency and independence of more than 100 central banks indicates that the variability of inflation is significantly affected by both central bank transparency and independence.

The issue is not new. In fact, the scientific conference centered on the Central Bank's independence and legal regulation took place in 2021. Scientists and researchers from the field presented their research and recommendations on legal framework for improving independence of the Central Bank. The attendees emphasized that the independence of the Central Bank is a prerequisite for ensuring monetary and financial stability and a support for long-term economic development and attempted to pinpoint the main factors that limit the independence of the Central Bank specified by law.


The Law on Central Bank was approved on January 18, 2018. With its approval, it regulates that the most important decisions including monetary policy and decisions affecting financial stability and economy of the country shall be made with the involvement of Bank of Mongolia. In addition, it prohibits the Government from ordaining directions to the Bank of Mongolia in any form and negotiating contracts. However, it is criticized that the law is not as precise as it should be. There is only one sentence in the Law on Central Bank that says “The Central Bank is independent of the government”. Yet, it does not go in detail explaining how and by which method. The governing law being not so precise is the disadvantage. From legal perspective, international lawyers perceive that more comprehensive, thorough, and precise the law is, better implementation it achieves.

Therefore, legal changes should be made to strengthen independence. At the very beginning, the question can be asked whether the Governor of the Central Bank must be appointed by the Speaker of the Parliament.


The fact that the Bank of Mongolia is affected by political influence is represented by a few evident examples. First, there is no specific targeted annual inflation rate stated in accordance with the Law on Central Bank. On the other hand, the targeted inflation rate proposed by the Bank of Mongolia is officially approved only after being discussed at the parliament of Mongolia. This implies that the objective of independence is not fully attained for the case of Bank of Mongolia. In the case of fiscal policy stance not being achieved, the Government proposes to finance budget deficit by Central Bank loan. It is specified that the amount of Central Bank loan issued to the government shall not exceed 10 percent of the average of the past three years’ budget revenue in the Law on Central bank. It is reported that this condition is not only hindering the development of government security market, but also burdening the process of the financing being accumulated without any inflationary pressures.

Speaking of the loan, another example illustrating evident political influence has to do with certain business groups trying to get concessional or policy loan from the Central Bank by lobbying the government. Such types of loans lead to lots of negative outcomes such as inappropriate usage of loan, financial discipline being lost, deterioration of loan repayment, and a significant increase in the budget deficit. According to the government’s direction given to the Central Bank during a particular period in the past, policy loans were issued to metallurgic, meat, mining, and flour industry and construction companies. Most of these loans had not been repaid according to schedule and had not been solved through court, reports the Bank of Mongolia. Moreover, in 2013-2015, the Bank of Mongolia injected a huge amount of money to finance quasi-fiscal spending focused on certain sectors to support economic growth and tackle the supply-driven inflation pressures. These short-term policies accompanied by the high volatile inflation makes it difficult to identify the changes in inflation persistence due to framework shifts.

In addition, a legal power to appoint the President of the Central Bank rests in the hands of the Speaker of the Parliament which is questioned by many economists. It looks clear from the reports that there was not enough stability in the management level at the Bank of Mongolia before COVID-19. This has to do with frequent changes in the government in a very short period of time which makes the President of the Central Bank unable to fully exercise its power and duties and to have short term of office, said T.Munkh-Erdene, Professor at Law School of the National University of Mongolia. Between 2013 and 2016, when N.Altankhuyag and Ch.Saikhanbileg were Prime Ministers and N.Zoljargal was appointed as the President of the Central Bank, huge amount of banknotes was printed which caused high inflation and increase in exchange rates. This is also a classic example of political influence.

In the interview with D.Tuvshinjargal, Senior Lecturer and Researcher of the Department of Econometrics at the Institute of Finance and Economics, he said both the Central Bank and the government aim to develop the country's economy and improve the lives of people. However, in some cases, the objective of the government may conflict with that of Central Bank in the short term for the sake of short lived interests that includes, for instance, to win the election. The benefit of having independent Central Bank is entrenched in protecting the economy from such type of short-lived interests. D.Tuvshinjargal also noted that politicians swing stable economy for political purposes. Right before the election, rapid increase emerges in the state budget spending or in debt. In this way, the economy fluctuates radically and perpetuates uncertainty. This in itself has a negative impact on long-term economic growth. A strong central bank with long-term goals is the place to limit such things. If there is a strong central bank with very good policies, politicians can't do anything, added D.Tuvshinjargal.

The Central Bank accepts the fact that due to a lack of knowledge regarding monetary policy
and its final objectives, it has to face increased responsibilities that are irrelevant to monetary
policy operations. This could lead to negative consequences of not being able to define and im-
plement policy measures and operational instruments independently by the Central bank.


To measure central bank independence, international researchers suggest that first, a central bank is categorized as more independent if its President is appointed by the board of the central bank and not by the prime minister or minister of finance, and is not subject to dismissal, and has a long term in office.These features of the appointment process are important for separating the head of the central bank from political pressures. Second, independence is taken as greater when policy decisions are made without direct government involvement. Third, a central bank is classified as more independent if its charter states that price stability is the sole or primary goal of monetary policy. Finally, independence is bigger when there are limits on the ability of the government to borrow from the central bank, researched by international researchers on economics, Crowe and Meade in their 2018 report. According to the research, the countries pay great importance to the independence of the central bank, and ensure its independence in their Constitution and with detailed organic laws. The Constitution of
Mongolia only says that the Bank of Mongolia is one of the few organizations that regulate the economy of the state and nothing on its independence. In other words, the economic (objective) and the political (operational) independence of Central bank should be legalized by law. Mongolia may need to discuss the issue of ensuring independence of the Central Bank to the level of making amendments to the Constitution. With the advent of new technologies in the financial sector, oversight, control and accountability mechanisms should be adopted as well.

Amarjargal Munkhbat