It has been half a year since Mongolia nearly became insolvent due to its debt. As a result, the government spent six months looking for money abroad. In the end, Mongolia reached an agreement on an IMF extended fund facility program for 440 million USD, which is expected to be followed by three billion USD from Asian Development Bank, World Bank, Japan, and South Korea. Also, China announced that the swap agreement with our central bank would be extended. This brings the total sum of external funding to 5.5 billion USD. Meanwhile, people are demanding that the government disclose how the huge amount of money previously borrowed was spent, which authorities stole it, and who needs to be held responsible. This demand is fully justified because it is the people – not the politicians – who will be paying off the previous and new debt.
Act I: El Dorado
In 2011, Mongolia experienced globally recognized economic growth of 17.6 percent and experienced record-setting currency appreciation. Investors called Mongolia “El Dorado” (“the Golden Nation” in Spanish) because our country gave birth to many national and foreign millionaires, just like other resource-rich countries.
Believing that the fairytale would not end well, the government started taking out huge loans within four months after record growth had been established. As a result of the 2012 general elections, Prime Minister N.Altankhuyag, who led the Mongolian People’s Party and Democratic Party coalition government, and his team issued 1.5 billion USD in bonds and named them “Chinggis”. Under Altanomics (Altankhuyag economics), the government continued borrowing in the form of Samurai bonds, Dim Sum bonds, and Development Bank loans with government guarantees. Within five years and through the terms of three different governments, Mongolia’s debt of 10 billion USD equaled its national economy. If private sector debt is taken into account, Mongolia’s total debt is 1.7 times larger than its economy.
In the beginning, the government spent a whole year paying interest, without knowing how to actually spend the financing. As if they had received a sudden wake up call, the government spent some of the funds on infrastructure projects which were supposed to be financed by 20 to 30-year development loans. The infrastructure loans were granted to companies that had never built roads before. Having received the money, the companies were actively looking for contractors to do the job. A few months ago, it was announced that the repayment of these loans was only at seven percent, and neither the government (who was accountable for half of the Development Bank’s loans) or the companies financed (who were responsible for the other half of the loans) were making loan payments. Where are the people who know where this financing went, by whose decision financing was granted, what was done, and where the rest of the money is?
In order to appear fair and just, the authorities started pretending that they cared for the people and began handing out 20,000 MNT each month to children, using a small part of the loans. The central bank (Mongol Bank) distributed eight trillion MNT to commercial banks in the name of price stabilization and offering mortgage loan financing and also gave some money to private companies, despite not having the right to grant loans.
The repayment date is here, but it is still unclear where the people who granted the loans and those who spent the funds are today. Where could they be? Getting a tan on a beach? What portion of the loans is now in offshore accounts, and in which country?
Act II: Hellas
Our government is unable to pay off its debt today because those who granted, spent, or acted as intermediaries for distribution of funds are nowhere to be found today. In order to avoid declaring insolvency, the government is now attempting to acquire new loans and repay its previous and new debt by collecting more taxes from the people and the private sector. The Greeks, who call their country Hellas, were in the same situation in 2010. The Hellas government saw its debt grow as large as 1.7 times larger than its economy in 2016 (just like Mongolia), after running a deficit in their state budget for years. Their budget deficit equaled 12.5 percent of its GDP in 2009. Within five years, Greece’s economy shrank by 25 percent, while unemployment soared to 26 percent.
The Greeks first froze pay increases in 2010 and then did the same to pensions, and VAT rose from 19 percent to 21 percent. They first increased taxes on fuel, gas, alcohol, tobacco, and luxury goods. The tax increases were followed by salary reductions for public sector employees. Greece also extended the retirement age for women by five years to 65.
The Greek people protested these austerity measures for 48 hours in two big cities, which ended in three deaths. In 2015, the Hellas budget deficit reached 7.5 percent of its GDP.
In compliance with the IMF’s extended fund facility program, Mongolia is going to freeze salaries and pension increases; raise VAT from 10 to 15 percent; increase special taxes on fuel, alcohol, and tobacco; raise personal income tax from 10 to 25 percent in phases; and start imposing special taxes on savings interest income and vehicles. It appears that the government does not have any other choice but to take these measures to repay its debt and revive our economy.
The Greeks point to their two biggest political parties (the left wing New Democracy Party and the right wing PASOK Party) as the culprits responsible for the financial collapse, and they also blame the government’s institutions and rules.
Mongolians should also point to our two biggest political parties (the DP and MPP) and the political and economic institutions that only serve the political parties and their associated businesses.
In Greece and Mongolia only a handful of people spend public funds, while the burden of reckless spending is borne by the people.
Act III: Harare or Helsinki?
The IMF extended fund facility program which is about to be implemented in Mongolia is the only proper choice we had in our current circumstances. This program can be likened to giving a parachute to someone who has no choice but to jump out of a plane. A parachute can help you land better, but where you land is a different matter. Mongolia could jump and land on its feet, like the prosperous five million strong nation of Finland, or like Zimbabwe, which has a population of 14 million but has four million people who have fled their homeland.
Where you land after a bailout depends on two conditions. The first condition is that after the completion of the program, Mongolia becomes a multi-pillared, competitive economy. The second condition depends on whether or not Mongolia is able to improve its governance and carry out government reform. The IMF and other partners have not said a word about the second condition.
If Mongolians build an economy based on free market principles, reduce state ownership or assets, free up prices, and support competition, we will acheive competitiveness. If the corrupt people who are stealing public funds are stopped and held responsible, we will have the opportunity to strengthen our political institutions and undergo government reform. These two conditions are mandatory to land soundly like Finland.
In other words, these two factors could revive our private sector and foster prosperity. Soon enough, we will see our “national heroes” saying that the reason why we are in the program is not the fault of Mongolians, but the fault of foreigners, and they’ll be calling for a fighti against foreign interests. Our key challenges are understanding that the problem lies with Mongolia, not the IMF, and changing our mindset and attitude to reform our governance, turning underground resources into aboveground value, and using our intellectual wealth to enter the global market.
Act II of the Debt Drama begins now.
Translated by B.Amar