MP S.Demberel evaluates economic development solutions

Business and government leaders covered pressing economic issues at the annual Mongolian Economic Forum (MEF) last week and created a common ground for accelerating the development in the country.

The following is an interview with Member of Parliament and head of Civil Will Green Party S.Demberel about some discussions and ideas raised at the forum and other economic issues.

The Asian Development Bank evaluated that Mongolia’s current economic situation and outlook need to be improved during the MEF. It stated that Mongolia will face difficulties starting from 2017, when the sovereign bond repayment starts. Can you comment on this?

Everybody is saying this. We’ve practically memorized every word. The economy is looked at through three different perspectives. The first is the perspective of producers, including people in industry, agriculture and mining sectors. The development of small and medium-sized entities can be discussed for the industrial sector. We’ve talked about this for many years and the public now has extensive knowledge about industries. This is very good.

The second perspective belongs to families that review final products, as well as public and government consumption. Every economy creates savings. This perspective monitors net exports, and the difference between Mongolia’s total exports and imports. All these factors contribute to economic growth. If we look closer at household consumption, Mongolian households don’t have savings. Everyone is using their income. It’s impossible to create savings. Some banks are now talking about creating savings. To achieve this, we need to create an income source through several channels or open new stable jobs.

Mongolia began receiving bond money from February 2012. Roads were built and factories received investment through loans. Yet, household income plunged rather than increasing. Savings went into negative values from late 2014. This is a problem. It’s definitely a challenge that needs a solution. We need to talk about ways to boost real household income, but no one is raising this issue. I’ve already spoken out about this so I’m hoping people would start discussing household income issues soon.

Economists talked about creating a wealthy middle class. Would this be effective for preventing economic slowdown and crisis?

People’s income isn’t increasing, poverty has stopped at one spot, and even the middle class is stuck at one place, unable to raise their livelihood. Financial opportunities that arise naturally haven’t been freed. This is the main cause for herders’ high debt

Yes, but it all depends on internal factors. Those with poor lifestyles will get a slightly better life. The lower middle class will be raised to middle class and the middle class will try to become richer and advance to upper class. This is mankind’s inherent desire. Looking at Mongolia’s social structure, around 30 percent of the population is poor, 40 to 45 percent fit in the lower middle class, and merely some 20 percent belong to the middle class. Six to seven percent of the population fit in the upper class.

We can launch the “Tsakhiur Tumur” policy, which involves confiscating livestock of the rich and distributing it to the poor. It’s a policy that opens everyone’s opportunities and supports the poor. There are similar policies, such as pawnshops. It’s a daily financial service. However, we don’t know who’s in charge of pawnshops even to this day. The Financial Regulatory Commission has been in charge of pawnshops in accordance with the one-sentenced law. Offices doing not so well these days are all rented by financial organizations. During economic difficulties, people get loans from financial businesses no matter how high their interests are because they need money. A pawnshop owner said that the annual interest rate of most pawnshops in Mongolia is 48 to 60 percent.

This is internationally known as a money laundering business. Yet, Mongolia has allowed this business for over 20 years. People’s income isn’t increasing, poverty has stopped at one spot, and even the middle class is stuck at one place, unable to raise their livelihood. Financial opportunities that arise naturally haven’t been freed. This is the main cause for herders’ high debt: pawnshops’ dreadfully high interest rate and high interest rate of business loans.

Economists and experts in this field say that the economy needs to be stimulated. The public must have cash. Increasing the maximum pension amount for the lowest social class is one way we can financially support the public. Everything would go smoothly if the minimum pension rate is increased to 60,000 MNT.

The state is unable to pay off the state budget deficit. Where would funds for additional pension come from?

 The state has adequate funds for this. It can reallocate funds. It’s nice to have new statues and concert halls at soum centers, but they are useless for the public. The state should try to increase people’s income and keep present employment stable.

Rather than creating jobs though large companies, it’s possible to create jobs through small businesses using loans with low interest rates. People wouldn’t be able to repay loans with 36 to 40 percent annual interest rate. The economy must be released from its trap. Economic issues are discussed at conferences every year. I want to see results from them.

First of all, it’s important for the public and businesses to have income. At the moment, families are unable to create savings with their household income. Let’s think about this first. The stock exchange can be discussed later.

Economists mentioned many ways to develop the financial market at the MEF. Are Mongolian companies able to work efficiently for developing the securities market?

I’m not so positive about it. I’m sure people will be upset, but it’s important to develop the stock exchange and make financing accessible in the financial sector. This way, people can create savings, and based on their savings, they can choose whether to save it in a bank or invest on the stock exchange. The legal environment has been created for the stock market.

First of all, it’s important for the public and businesses to have income. At the moment, families are unable to create savings with their household income. Let’s think about this first. The stock exchange can be discussed later. The financial sector must switch to a mechanism where people have regular income. Income shouldn’t be stopped, reduced or changed in any way.

Reportedly, Parliament will amend the VAT Law. Do you agree with this decision?

Mongolia is a baffling nation that poorly implements good regulations and laws. Sometimes, the main views and objectives are lost. The main purpose of the VAT Law is to expose and improve transparency to eliminate the hidden economy. I personally worked on the new General Law on Taxation. That law has eliminated all sorts of pressure. I reviewed the General Law on Taxation in detail. When we were getting into work, everyone started blabbing about cash registers. Two inspectors were assigned to review whether small shops and stores have cash registers. They demanded shops without a cash register to purchase one within two days or they would hold vendors accountable.

I sent a message to the Prime Minister and Speaker of Parliament two weeks ago. The head of the General Taxation Office contacted me, saying what we were doing was wrong. It’s true. This has become the general attitude of tax inspectors. They have been pressuring small businesses and embezzling money from them for many years. This situation has led to amending the law. It’s not because the law is inaccurate or wrong. The General Tax Office includes everything related to taxes, including simplified financial balance of small businesses and their accounting. Amending the law means changing and adding new provisions, not changing VAT Law’s general concept or objectives.

The USD exchange rate has exceeded the projection in the state budget. Currently, one USD is exchanged for 2,050 MNT. What measures will be taken to regulate this? Will financial organizations stay still because investment isn’t coming in?

MNT indicates two things: firstly, the value of domestic currency, and secondly, the value of foreign currencies. An exchange rate between two currencies is the rate at which one currency will be exchanged for another. The state budget projected USD will be valued at 2,030 MNT.

There’s also something called exchange rate regime. It defines how a nation should manage its currency. Around 90 percent of any nation’s currency is regulated through either a managed floating regime or free-floating regime. Most nations have a free floating regime, the same as Mongolia’s. Countries usually manage its exchange rate by managing the value of domestic currency; in other words, through inflation.

The state annually orders Mongol Bank to keep inflation low at a stable level. A secondary target is given to fulfill the main target. It involves keeping the Mongolian currency exchange rate at a level that doesn’t impact the inflation rate. The state doesn’t give specific rates. Currency interventions are allowed for reducing extreme fluctuation of exchange rates only when Mongol Bank has sufficient foreign currency reserve. There are many institutes interested in floating the currency even though they have more than sufficient capital. The state revenue and expenditure can either benefit or lose half of its amount if the exchange rate continues to rise.

These things are accounted when the state budget is amended. Economists evaluate that the exchange rate is poor when inflation starts to impact our pockets. Increasing the Mongolian currency rate is beneficial to the state budget, but not very effective if import volume isn’t reduced. Mongolia’s current inflation rate is recorded at two percent. The exchange rate for USD was 2,000 MNT at the beginning of 2016, now it has reached nearly 2,050 MNT. The authorities must pay attention on the payment system of investment and tender so that the currency exchange rate doesn’t float. Mongol Bank isn’t the only organization in charge of keeping currency exchange rates stable. The government should also help out. The Financial Stability Board is actually in charge of completing this task. It should also do its job.