‘We don’t want to see another IMF program in Mongolia’

‘We don’t want to see another IMF program in Mongolia’

  • By Dulguun   -   Jul 18,2019
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Neil Saker has finished his term as the resident representative of the International Monetary Fund (IMF) in Mongolia. He left for Myanmar on July 17, entrusting his office to a new resident representative, Seok Hyun Yoon.
Before he left the country, Saker sat down with The UB Post and Unuudur to look back on his work, evaluate changes in the economy, and delve into important economic matters.

Your term in Mongolia is coming to end. Wrapping up your work, can you summarize your residence and experience here? How has it been for you?

It’s been a great time – very exciting – but one with a lot of challenges. Nevertheless, I think I’m leaving with a lot of positive energy. When I came at the end of 2014, the mood was very somber and it was a difficult time because the economy was stagnant and a lot of people were suffering. Now, the economy is much better. Although it can improve, the confidence is back, people are spending again, are happier, and construction has started. Generally, it’s a different atmosphere and the macroeconomic situation is much better. I think that the government that came in 2016 did a great job in changing the situation and we along with our colleagues and partners – ADB and the World Bank – as well as Mongolians and foreigners partnered well with the government. We did a great job in changing things around, especially with the Ministry of Finance.

I worked with two ministers of finance. Both of them were very committed to the Extended Fund Facility (EFF). The country is quite lucky in certain aspects. Export demand was very strong, especially from China, and the coal pickup. The ministers were so committed to the program that they didn’t spend the windfall of money and instead, saved it. That led the debt to come down very significantly. Before the crisis, the debt was heading to 100 percent of GDP but now it’s falling very sharply and I think that’s a very positive development and hope it continues. So, I think the minister of finance deserves a lot of credit for reducing debt and at the same time, the Bank of Mongolia also did a good job in raising reserves. As you remember, it was below a billion USD and falling. Now it’s well over three billion USD and rising. There’s still more work to be done on the reserve side but from what we’ve seen so far, it’s doing very good.

Looking back, the situation has much improved but risks remain because Mongolia is very dependent on the international outlook. We all know the kinds of risks that face the trade wars and other risks. The bottom line is that Mongolia needs to carry on building up the buffers. On the fiscal side, lower debts and on the central bank side, raise reserves. This will mean that if there’s another downturn, the country can survive it without a sharp drop in GDP growth. This is a very important part.

The second part is carrying on with the structural reforms, which is very important to make sure the boom and bust cycle doesn’t come back. What we want is a very strong banking system that can lend to not just mining but new elements of the economy such as small and medium-sized enterprises, agriculture, and female entrepreneurs. This will broaden out and give more strength to the economy and we want (banks) to lend the minimum interest rate. Before the program, banks were just buying treasury bills and were sitting on them, getting 18 percent for nothing and not lending to support the economy. We want a very sound banking system, which means that the Bank of Mongolia needs to have good, up-to-date regulations, enforce all of the regulations on other banks, and makes sure all of the other banks have adequate capital because it is the buffer for banks. This is the process that is ongoing right now. We hope the Bank of Mongolia will go ahead and take all of the required measures.

Looking ahead, it is also important to have good fiscal policies and good investment and business climate so that multinationals can come in, invest in the country, and make win-win situation for everyone. It will not only bring foreign direct investment and make export but also encourage the local economy and create local supplies.

You just mentioned about diversifying the economy and the need for new elements in the economy. How would you recommend Mongolia to approach this task?

Diversification is very important for a number of reasons, especially for creating jobs in the agricultural sector in the countryside. This is necessary to prevent Ulaanbaatar from getting bigger and bigger as well as in terms of the pollution problem. I think a modern export-oriented agricultural sector can be created in the countryside combined with tourism development. It’s very strange for me when I go to top hotels and while having breakfast, I look at the butter, for instance, and it’s made in France. They should use ones made in Mongolia. The idea is to increase the quality so that multinational hotels and other countries want to buy Mongolian produce, which are organic and deserve to have premium price. I think the demand is there but there’s a question of supply, especially in terms of making sure the disease-related issues are taken care of. I know that ADB and the World Bank are working on approaches for that.

It takes time but there is progress. We’ve seen meat export picking up, especially to China. The country has such a huge potential for meat and dairy exports, as well as agriculture. I think these are very important because it brings money to the country over the years. Also, tourism can contribute to that. So, how to get to that? From our point of view, there are certain economic issues but we can help with that. One of them is macroeconomic stability which is very important because it’s very difficult to diversify when the economy is not stable. Macroeconomic stability means low inflation, being prudent on the monetary policy, good fiscal situation, having competitive exchange rate. For a country like Mongolia, you always have something called the Dutch disease which makes the exchange rate uncompetitive. If you want to export agricultural produce, including cashmere, then you need to have a competitive exchange rate to compete with neighboring countries where they probably had a head start in textiles.

Since 2014, Mongolia’s macroeconomic situation has drastically changed and IMF played a big role in it. However, it is necessary for Mongolia to build defense mechanisms against economic challenges and become less reliant on international partners such as IMF. In this regard, what would you recommend?

I absolutely agree. We don’t want to see another IMF program. Hopefully, this is the last one. Mongolia had six IMF programs – some of them were in the 1990s, helping with the transition. Essentially, we had two programs connected with high volatility and it was all to do with the boom and bust cycle. What should happen is that you need to build a good fiscal policy so you save in the good times and spend when things are not so good. You need to follow fiscal rules that are in place.

Mongolia had good fiscal bill’s framework in 2010 but it has been kind of ignored for a long time. Simply, go back to that framework.

Are you suggesting that Mongolia should actually revert to its previous policies it had in 2010?

Certainly, new fiscal rules have been set in place to cement the good policies. We’ve set out a lot of rules and Mongolia should follow the core principles, which is to save from the surpluses when the economy is good and that will allow the country to spend later. We helped set up the fiscal council, which is important for ensuring the government follows its own rules. We’d like to see the fiscal council being strengthened.

It’s important to keep the debt under control and a lot of it becomes a virtual cycles – the lower the debt and the better the policies are, the better chance of lowering the interest rate the market charges. I think that having a sovereign wealth fund is something for the future. Mongolia is very unusual amongst quality exporters because during the super boom, it didn’t save any assets. In fact, it run up a debt. It’s important to avoid that situation. Right now, the debt is high so it should be paid off in the short-run. Get the sovereign wealth fund up and running too. This is especially important when Oyu Tolgoi starts its second phase, which will bring a big increase in exports and fiscal revenue, and of course, politicians will be tempted to spend it.

In our previous interview with Geoff Gottlieb, he mentioned a possibility of an extension to EFF or launch of a new program due to the delay in the sixth review. What is your opinion on this?

It’s really too early to be thinking about that. The program ends in May and the election is in June so there may be not much interest for politicians to have the program around that time but I guess it all depends on the situation this time next year. If policymakers follow current policies, then hopefully (extension or new program) will not be needed.

I think a staff monitored program or enhanced surveillance is more useful than an actual program. This way, we can maintain a close relationship with the government but it is not a money-type program but more focused on advice.

Your residence here is coming to an end and the new resident representative is already here. Do you have any advice for him?

It’s necessary to be patient and try to talk to as many people as possible. In Mongolia, you need to tailor advices – you can’t just take a model from somewhere else and apply it here. It’s important to understand the context here – historical period, 70 years of soviet and 25 years of transition. All of these adds complexity but on the other hand, you need to have interest in the job.

You need to also get out of Ulaanbaatar and explore the country. Especially in winter, it’s nice to get out the city and see the real countryside away from the air pollution and spend a night in a ger. It’s important to get a sense of the countryside because half the population live outside of Ulaanbaatar and you need to see from their point of view.

I’ve been lucky enough to travel to the four corners of Mongolia – Khag Lake, Bayan-Ulgii, Gobi Desert, and up north. They’re all amazing in their own rights so Mongolia is very lucky to have so many interesting landscapes in one country.

There will be a need to make some tough decisions, especially for pollutions and the amount of cars on the streets. There needs to be a general acceptance that if you want to drive, you’ll need to pay more because the air pollution and congestion is so bad. Given the current congestion situation, in 10 years’ time, it’ll be very difficult to drive. This is just an example for the need of longer-term visions.

How has your impression of Mongolia changed since you first arrived here?

I got a sense of how complex the country is because for an outsider, they see a small country with three million people. However, when you’re here, you realize it is really complicated and amongst the three million people, there are lots of different views. Some people are extremely keen on the traditional side, which is good, but other people are really cutting edge of technology – some even becoming Facebook addicts and using social media all the time. There’s kind of a lot of different stages all around.

In terms of banking, I think Mongolia is lead front of many developed countries. If you look at online banking, it’s very advanced compared to some of the richest countries in the world. No one uses things like checks here. They’ve moved on to mobile phones. So, that’s very impressive. Even herders trading their animals in the countryside are transferring money on their mobile phone.

What is the most fascinating thing you found in Mongolia?

It’s a sense of history. When you’re traveling, you can find history everywhere. While driving, you might find a Turkic stone statue from the 8th Century and then you might see some buildings from the Soviet period and then something modern that is Wi-Fi transmitted. You can see all of these things at the same time, so it’s basically living history.

Do you know where you’ll be posted next?

It’s Myanmar, just a country away. I’ll be going with a good background from here because Myanmar is a bit like how Mongolia was in the 1990s. It’s just opening up after being closed off for 60 years. I’m sure Mongolia can teach them a lot.

We’re at the end of our interview. Is there anything you’d like to add?

I’ve very much enjoyed my time here. It’s been a great experience and I think when we look back on the last four years, we can say that IMF has worked very closely with the government and we fully appreciate the work of the government. EFF is their program and we’re just supporting it. The prime minister, Bank of Mongolia and other partners have done a great job. We’ve taken tough decisions and taken a lot of critiques but I hope they carry on the program. Next year’s going to be a crucial test on whether they can get through the election and avoid the typical cycle. We’ve had a good start and let’s hope it continues.

Dulguun Bayarsaikhan