Economist and researcher M.Chimeddorj gave a lengthy interview on timely social and economic matters, including solutions for stimulating the economy, the state budget, and more.
The Mongolian state budget and financial situation is in a dire state. As an expert, what do you think the main cause of the current economic difficulty is?
Our nation doesn’t have a general social and economic policy. We only think about ways to cope today and tomorrow. On top of that, a sudden increase in wealth has made us stuck-up and arrogant. In short, all these things are at the root of the current politicized economy and irresponsible budgeting. An economy that is heavily centralized on minerals and raw materials have led to inefficient state budget, momentary economic growth, purposeless government loans, and above all, bad economy.
Aside from the fact that the state budget is being approved with a deficit, Mongolia will have to repay its national debt in two months. Politicians are looking at the Stand-By Arrangement and Chinese lenders to find ways out of economic difficulty. What would you recommend for recovering the economy?
There is a saying: After eating too much, one must fast on the day after. We must tighten our belts, develop an appropriate economic policy and improve governance. Mongolia must urgently shift to a frugal mode. The International Monetary Fund’s Stand-By Arrangement will assist in this. Implementing this program will improve state budget discipline and fix errors in the macroeconomic policy, which we weren’t able to do. Taking a long-term loan from China with a low interest, on the other hand, will indicate that we still haven’t realized our strategic error and that we can’t manage our finances properly. This will eradicate all credibility and plunge the value of bonds the government released internationally. In other words, taking a loan from China is not an act that will rectify previous mistakes but an attempt to conceal the error with funds with political agenda.
…Our nation doesn’t have a general social and economic policy. We only think about ways to cope today and tomorrow. On top of that, a sudden increase in wealth has made us stuck-up and arrogant…
Should Mongolia utilize the Stand-By Arrangement? Some economists fear that Mongolia will get into the same situation as Kazakhstan if the government gets a loan from China. Can you comment on this?
Right at this moment, the monetary policy interest rate of the Central Bank is at its highest point, 15 percent. Improving budget discipline will make it possible to overcome the current economic difficulty. We must also acknowledge that we need certain amount of financial assistance and guarantee. I believe that the International Monetary Fund can help in this matter. Like I said before, a Chinese loan will only lead Mongolia away from chances for fixing its problems. Programs and projects to be implemented with Chinese loans and participation from Chinese companies require that Mongolia use Chinese workforce and buy their materials. I fear that these requirements will eventually lead to political lobbying to open a Chinese bank in Mongolia. This also applies to the project to build a railway from Tavan Tolgoi mine, which urges the increase of Chinese involvement.
Overall, the government’s loans are present more and more risks to the nation. The first sovereign bond was named Chinggis and the second bond from Japan was named Sakura. If we were to name the bond that is to be sold in China by its risk factor, it would be named “Gamin” bond.
Mongolia’s welfare and pension funds are nearly empty now. During the peak of the economic growth in 2011, many initiated to establish a Wealth Fund to shoulder potential risks but it wasn’t carried out. What must Mongolians do to establish this kind of a risk reduction fund?
Countries with mineral-based economies advance to their next development stage by creating an accumulation of their key mineral. These countries which are based on mineral resources rather than human involvement have low control of their state budgets. In other words, because the budget expansion doesn’t require the government to directly increase taxes, it isn’t dependent on the public. This exact situation led many countries to go bankrupt. Looking at practices of successful countries dependent on mineral resources, they were able to benefit from world-class corporations by maintaining budget discipline, centralizing state revenues to specific foundations, investing in local businesses and expanding the private sector, and using any remaining money to invest in foreign businesses. After becoming more economically stable, they further developed a certain sector through the cluster mode and were able to strengthen their place in the global market.
As for welfare funds, Mongolia established the Human Development Fund, a political populism fund, and distributed cash to the public when Mongolia’s economy rapidly grew in 2011. The government took a loan from Aluminum Corporation of China Limited with the aim to distribute money to the public, which was promised during the 2012 election campaign, through the Human Development Fund. To this day, this loan hasn’t been repaid due to coal price drops.
The pension fund is in an even worse situation. The money, previously accumulated in the Social Insurance Fund, was projected into the state budget and completely spent. In other words, we haven’t got savings right now. According to the World Bank’s estimation, the Pension Insurance Fund is expected to face a deficit equal to seven percent of the GDP by 2030. This is partially connected to low birth rate, increasing average life expectancy, and increasing population age. Currently, four out of 10 employed people have reached pension age. By 2040, this index is expected to double, with eight out of 10 employed people expected to reach pension age.
An independent fund needs to be established within a short period and the government needs to repay the amassed debt. Moreover, Mongolia needs to set up a mechanism that urges the government to pay insurance money of students and herders, whose insurances are provided by the state, on time and increase labor age to ensure regular income to the fund and invest correspondingly with the Health Insurance Fund.
…a Chinese loan will only lead Mongolia away from chances for fixing its problems. Programs and projects to be implemented with Chinese loans and participation from Chinese companies require that Mongolia use Chinese workforce and buy their materials. I fear that these requirements will eventually lead to political lobbying to open a Chinese bank in Mongolia…
Lately, there have been countless discussions about opening foreign banks in Mongolia. Most people view that opening a foreign bank could lower loan interest rates but also pose a threat to the national security. What is the main leverage for lowering bank interest rates?
The banking sector makes up 94 percent of our financial market. It’s impossible to lower loan interest rates within a short period of time because savings interest rate is too high. Local banks aren’t capable enough to compete against foreign banks. The time to reform the financial sector has come. Above all, the stock market needs to be expanded and inoperative commercial banks need to be activated by separating the Social Insurance Fund from the state budget and creating accumulation in a Wealth Fund. Another thing that banks need to do is to increase their capital by raising their stock price. This way, the stock market will intensify and commercial banks will enhance their competitiveness. As a result, the loan interest rate will decrease and provide favorable conditions for opening a foreign bank in Mongolia. Unless these conditions have been met, Mongolia could face the potential risk of losing its financial sector to foreign banks.
What can Mongolia do to reduce poverty and expand the middle class, as well as help people advance to a higher social class? These types of talks were covered during the election.
Increasing the middle class isn’t something that can be done with a mere election promise. This issue can only be settled by enhancing the wealth distribution system and promoting public involvement. Basically, efforts should be focused on increasing wages, establishing stock companies that openly report on corporate and GDP yields, increasing Pension Insurance Fund, and ensuring income guarantee for pensioners. A basic mechanism also has to be formed for increasing the economic yield from mineral resources. This is called participatory development. Now, participatory development is viewed worldwide as the foundation for a stable economic growth and development. Therefore, many are attempting to establish a new mechanism for income distribution.
Politics is considered to be the main factor obstructing the economy from developing naturally. State-owned companies are unable to work efficiently due to government involvement. How can the economy be detached from political populism?
Several measures must be taken to depoliticize the economy. Cabinet members should stop sucking up to Members of Parliament and trying to be on their good terms to secure their position. They should work together, not individually. Secondly, at least two thirds of large state-owned companies need to be privatized. It’s essential to reform the education and health sectors without jeopardizing its stability.