The Mongolian economy is deteriorating fast according to experts. Economists and researchers are seeking solutions for stabilizing the economy.
Unuudur newspaper interviewed professor of the Institute of Finance and Economics N.Delgerjargal about ways to stabilize the economy.
More and more economists are pointing out the instability of the economy. How do you view the current economic situation in Mongolia?
It’s said that Mongolia’s economic difficulty started two years ago. The public is split into two groups - people who say the economy is in crisis and those with conflicting opinions. As far as I know, economic challenges started arising a year ago and now, the economy has deteriorated quite a bit. The main indicator of this is Mongolia’s weak economy.
As observations show, key sectors went downhill from 2015 and early 2016. The only sectors showing positive results right now are mining, agriculture and trade. There’s no improvement in the processing industry.
Basically, indicators of real economic sectors are bad. News about Mongolia’s foreign debt burden and low investment has worsened the situation. The weakening economy also impacted the financial market. I see very high risks in the financial market. Positive indicators are scarce in today’s economy. Every indicator imply Mongolia’s dire state. Currency exchange rate is said to reflect the economy. USD to MNT exchange rate rapidly increased in the past two months.
How has this impacted Mongolia? Can you sum up this issue?
The Mongolian currency is losing its value. MNT has been weak since 2013 compared to other currencies. I’m still observing the latest currency fluctuation. Former Prime Minister Ch.Saikhanbileg’s government brought 700 million USD from abroad, lowering USD to MNT exchange rate to 1,950 MNT before the election. Overwhelming victory of one political party at the recent election is improving situations in foreign and local markets. Now, foreign investors see Mongolia in a good light.
Investors believe that the rising of one political party to power has established a united government, making decision-making faster. The Mongolian People’s Party promised to establish a professional government. This probably influenced investors as well. There’s been some favorable changes in the economy. Yet, the Finance Minister and President of Mongol Bank talked as if the economy has plunged. I think that this caused the USD to MNT exchange rate to swing. Besides that there isn’t any reason for the drastic change in USD inflow and outflow.
Foreign and domestic markets were anticipating good news from the new government. Investors are probably becoming more hesitant as more bad news are spread.
...News about Mongolia’s foreign debt burden and low investment has worsened the situation. The weakening economy also impacted the financial market. I see very high risks in the financial market. Positive indicators are scarce in today’s economy. Every indicator imply Mongolia’s dire state...
Talks about shortage of USD in Mongolia is everywhere. Businessmen and economists evaluate this issue as a result of the new government’s action. Do you agree with this?
It’s a fact that shortage of USD occurs in spring as business activities increase. This issue stabilizes when Mongolia receives more foreign currencies from cashmere trade in China. A momentary radical rise in the USD to MNT exchange rate was observed last winter due to Tsagaan Sar. People actively engaged in trade to prepare for the national celebration. This time, Mongolia’s foreign trade hasn’t increased that much. Mongolia’s economy is stagnant. The volume of imports and exports has decreased considerably. Extreme shrink in the import volume has created a balance in the foreign trade of Mongolia.
It’s true that our nation is facing foreign currency shortage, but it didn’t suddenly happen in the last 20 days. Currencies are gradually decreasing. The government has spent all the USD reserve brought before the election. The Mongol Bank doesn’t have a foreign currency reserve that could strongly impact the market. Even so, I doubt that the foreign currency short- age has reached to the extent that would increase the value of USD this much. The shortage will become more serious unless we take a strong countermeasure. Prime Minister J.Erdenebat announced to carry out a special economy program.
What kind of measures do you want the government to take? What’s your solution for overcoming the current economic difficulties?
For a fact, we need to find an escape plan from any economic challenge. At the moment, we have a limited number of options. Two years ago, I believed there was a way to overcome economic difficulties based on my own assessment. It was possible back then but now, the situation has turned against us. The due date for debt repayment is close and situation in the foreign market is poor. Obviously, finding a way out under such conditions is hard.
I hope the government will do three things. Firstly, I hope the government develops a supplementary budget for 2016, which corrects fiscal expenditure and improve discipline so that it can last for a long time. Although Mongolia’s legal environment related to the state budget is considered good, fiscal discipline and planning is still poor. We need to start accurately planning the state budget. If we can’t do this, there should be some kind of an accountability system.
Secondly, the government should develop a plan specifying measures to take for reducing potential burden on the state budget. In other words, a comprehensive solution is necessary for guiding what to do and how to relieve foreign debt burdens when the repayment date is near.
Thirdly, a plan is essential in three areas: prevent economic collapse within a short amount of time, put a stop of the collapse in the medium term, and develop the economy in the long term. Of course, a part of this plan will need to specify measures to improve fiscal discipline and ease debt burden.
On top of these things, an accurate monetary policy consistent with the economic development policy is required. I hope these four things are definitely included in the action plan.
...Mongolia isn’t a donatary but a partner country. So we can’t wait for donors. Getting a “developing country” status might seem good but on the other hand, it limits our opportunities for getting long-term concessional loans with low interest rates. Unless we approach international financial organizations, we will end up with commercial loans with high interest rates...
Must Mongolia get another loan to improve the economic situation?
A short-term measure against financial challenges is getting a loan. Getting USD by any means is the only way out. We could release another bond on the international financial market. This is an option to consider for overcoming financial challenges. However, it is a problematic option.
The current situation is very different from when Mongolia released Chinggis Bond on the international market at the end of 2012. Since then, Mongolia’s credibility dropped, its international reputation fell, and the nation’s debt burden, as well as fiscal deficit, continues to increase. These indexes lower Mongolia’s changes of getting a loan from abroad. Fiscal deficit alone reached a trillion MNT for three years in a row. The government set an interest rate of 11 percent on the latest bond they released before the election. Yield from Chinggis Bond grew significantly since January 2016. The yield had been decreasing since the election but rose again after an announcement by the Prime Minister. The bond yield is approximately 8.3 percent right now. Releasing a bond now will mean that the interest rate will be high. Changing a bond with low interest rate with one that charges high interest rate is financially unsuccessful and inappropriate.
The second option is to implement international programs such as the Stand-By Arrangement. I was against this program two years ago. Now, there’s no choice but to consider it. Mongolia’s economic situation deteriorated considerably in the last two years. Now, it’s time to implement the Stand-By Arrangement.
Why did you stop opposing the Stand-By Arrangement?
It’s become an option to consider for improving the economy. However, it’s not the only option. Stand-By is a medium term program with low cost. Mongolia needs more foreign currency in the medium and long term. It is definitely a low-cost option. I can’t deny that there will be additional requirements which many are concerned about. We probably will have to work on these areas. I assume Mongolia will be asked to improve fiscal discipline, establish a proper wage system, and tighten the monetary policy.
The previous government planned the state budget under a good strategy aimed to responsibly approve the state budget and tighten it. But the expenditure continued to increase. Some people who ran out of options are considering fixing some fiscal discipline related issues under foreign pressure.
This means that these people are willing to make changes according to restrictions of [foreign] financial organizations because they’re unable to do it on their own. These are the two options for bringing USD into the country. Getting a commercial loan means paying high interest rates. The financing with low cost will limit the government activity.
Is it possible for Mongolia to get a long-term loan with low interest rate from international organizations?
The International Monetary Fund’s Stand-By Arrangement has multiple options. It has around 20 types of arrangements. Our nation used to frequently get concessional loans from other countries, and during the government led by Su.Batbold, our status changed from a poor country to a developing country.
Now, Mongolia isn’t a donatary but a partner country. So we can’t wait for donors. Getting a “developing country” status might seem good but on the other hand, it limits our opportunities for getting long-term concessional loans with low interest rates. Unless we approach international financial organizations, we will end up with commercial loans with high interest rates. There are other options for increasing USD inflow, investment and export output. These two options are quite ambiguous. It’s impossible to improve export output in just a year. Good news is that the amount of gold reserve increased. The amount of gold purchased by Mongol Bank rose this year. This will boost foreign currency reserve even by a little. However, it’s not to the extent that could completely recover Mongolia’s economy.
