The Monetary Policy Committee of Mongol Bank held a meeting on December 14, and decided to lower the central bank’s policy interest rate by one percent, making it 14 percent.
The committee explained that the decision was made in order to encourage investment in the private sector and to assist in activating certain sectors. They underlined that the effectiveness of this decision will depend on a number of factors, including future monetary policy, policy on attracting foreign investment, budgetary discipline, and the repayment of foreign debt.
On August 15, the Monetary Policy Committee raised the policy interest rate from 10.5 to 15 percent. The reasoning provided for the decision was the dramatic depreciation of the MNT after the election cycle. At one point, the MNT exchange rate for one USD had reached 2,600 MNT. The committee concluded that the increase in August helped in preventing further depreciation and contributed to the stabilization of the financial standing of the country.
The members of the committee predict that inflation in 2017 will be lower than forecast, and that the pressure of inflation will be alleviated to a certain extent. They also highlighted that due to an improved outlook for foreign trade, the flow of currency coming into the country will surge, and the balance of payments and budget revenue will also improve as a result. Due to amendments made to the state budget law, many of the members of the committee predict that budgetary discipline will tighten and the outlook for medium and long-term debt will be stable.
The decision to lower the policy interest rate was announced during a Mongol Bank press conference. After the press conference, President of Mongol Bank N.Bayartsaikhan answered questions from the media regarding the decision and current issues.
When will negotiations with the IMF be finished?
The negotiations with the International Monetary Fund (IMF) are ongoing. An IMF team paid a working visit to Mongolia in August in order to get familiar with the situation. In October, an international team of expert analysts paid a visit to familiarize themselves with the current state of the country’s economic and financial situation. We were informed that the team of expert analysts presented their findings to the administration of the IMF. Another IMF delegation was scheduled to arrive in December, but due to Christmas celebrations in Europe, the meeting has been postponed to January 2017. We are anticipating their arrival. The IMF requires that a member country maintain at least a three-month supply of cash for imports. Currently, our reserve stands at five months. We are working to maintain this number. One reason for the surge in the policy interest rate was to protect our cash reserves.
Was it possible to lower the policy interest rate to less than 14 percent?
The policy interest rate is not something that we raise or lower at will. The rate is a very vital economic mechanism. Accordingly, we treated the situation very carefully when making the decision to lower the rate. Currently, there are many undetermined factors that are affecting our economy. This includes the negotiations with the IMF and the uncertainty of copper, gold, and coal prices in 2017. There are also many uncertain factors affecting the global economy. For instance, if the central bank in the U.S decides to increase their policy interest rate, cash reserves from other countries flow to the U.S. Because of the uncertainty of different internal and external factors, we were very careful when discussing lowering the interest rate. Since this decision will affect the livelihoods of many people and businesses, it is not something that can be decided recklessly or in order to appease to some people. Assessing our current situation, we reached the decision to lower the rate by one percent. Mongol Bank is not the sole decider of the policy interest rate. All countries use their policy interest rate in an effort to improve their economic standing. We looked at the situation from many perspectives before coming to the decision. Monetary policy changes according to the status of the economy.
What effect does decreasing the policy interest rate have on the economy?
One component of the government’s way of affecting the economy is monetary policy. We have increased the policy interest rate in the past, but we have seen that changing the monetary policy alone is not enough to stabilize the economy and to foster economic growth. Our past experience has shown us the importance of cooperation between the government and Mongol Bank. The effectiveness of monetary policy is affected by a number of factors, including future monetary policy, policy for attracting foreign investment, budgetary discipline, and the repayment of foreign debt.
What is Mongol Bank doing about the increase in the USD exchange rate?
The main factor affecting the increase in the exchange rate of the USD is the country’s cash reserves. We are also working to stabilize the MNT. The policy interest rate does not directly affect the exchange rate. Increasing the policy interest rate is used by countries in crisis to protect cash reserves. This is acknowledged internationally. This is the reason why we raised the rate this past August. When I first took the position of president, the cash reserve of the country was at 1.2 billion USD. Currently, the reserve stands at 1.18 billion USD. I believe this can be attributed to the hasty decision to raise the rate in August.
Some economists say that the current economic hardship is due to the conflicting policies that the government and Mongol Bank have had. What are your thoughts on this?
The conflicting policies that Mongol Bank and the government have had are the main reasons for the economic hardship. A big step taken by the new government is the consolidated budget. In the past four years, Mongolia has had many different budgets designed by different agencies. For instance, the budget approved by Parliament and the budget of Development Bank. In the past, Mongol Bank had financed many different projects without consulting Parliament. Also, without informing the Finance Ministry, the previous administration signed a consensus agreement. The new government consolidated all these budgets. Even though the budget for 2016 had an 18 percent deficit, it was a big accomplishment to consolidate the budget. Mongol Bank and the government are working together to lower the budget deficit to 9.1 percent of the GDP.
Was the debt to be repaid in March of 2017 included in the budget? There are murmurs that the government does not have the money to repay the debt.
The bond issued by Development Bank was backed by the government. Money to repay the debt was included in the budget. If we cannot pay this debt, it means the country would go into default. If we cannot pay back our bond debt, foreign investors will not look at Mongolia for the next five to seven years. There is no instance in which a country has not been able to repay its first bond debt. The bond debt to be repaid in March 2017 is from the first bond issued by Mongolia.
Is the sale and purchase of gold helping to increase cash reserves? There were reports that Mongol Bank purchased 17 tons of gold.
Mongol Bank bought 17 tons of gold this year. This is being held in secure banks abroad. One way of increasing cash reserves is to buy gold. We are working to buy gold at prices lower than listed on the international metal exchange and to sell it to other exchanges. Mongol Bank will buy gold at prices similar to those on the London Metal Exchange. According to our estimates, Mongolia produces around 40 tons of gold annually. Of those 40 tons, 17 tons is being sold through Mongol Bank. The rest is sold through different exchanges. Gold exchanges are buying gold at prices similar to those offered by Mongol Bank, so we are telling gold exchanges to sell their gold to us.