As part of Mongolia’s staff-level agreement with the International Monetary Fund to enroll in a 440 million USD extended fund facility (EFF), the government has accepted the responsibility to increase state budget revenue and cut its deficit. One of the biggest measures that will be taken is raising rates on seven taxes.

The one amendment that has been getting the most attention and scrutiny, is the proposed decision to tax all savings interest. The decision has been met with much opposition, as would any increase on taxes that impacts such a large number of people. Analysts seem to be divided in their opinions about the measure, with one group worried that the new tax would only encourage informal savings and cut off the banking system’s main source of income. Other economists have highlighted the potential long-term positive effects of the tax, such as the development of a more sophisticated financial system.

It is important to note that the new tax policy has not been approved, or even discussed, by Parliament. However, it is likely that Parliament will have to approve the seven new tax policies in order for the  country to enroll in the EFF. What has been discussed at this point is a ten percent fixed tax rate on savings interest, regardless of the duration and amount of the savings. This means a person with 10,000 MNT in their bank account will be taxed at the same rate as a person with 100 million MNT in their account. At this point, however, it is not clear whether it will be a fixed interest rate on all savings or if there will be classifications. This decision will ultimately be decided by the Mongolian People’s Party (MPP) and their 65-seat majority in Parliament, as has been the case since June 2016. But what’s different about this situation is the vocal opposition to the EFF amongst members of the MPP. It is more than likely, however, that these critical MPs will bite their tongues and pass the necessary amendments and measures in order to implement the much needed EFF.

The one prediction that most pundits have agreed upon is the notion that savings will most likely decrease. A 15 percent savings interest rate has not only encouraged many people to place all their assets into safe and reliable institutions, it has been a lucrative source of income. For instance, a person with 100 million MNT in the bank receives 15 million MNT in savings interest annually. Now, the decision to tax that lucrative return on savings may spur many individuals to search for other ways to invest and save their money. According to Mongol Bank statistics in 2016, there are more than 2.4 million people with savings accounts in the nation’s 14 commercial banks. Of those 2.4 million people, 80 percent of them own only three percent of all savings. Three percent (72,000) of those 2.4 million people have large savings, and the remainder have small to medium-sized savings. There is an estimated 11 trillion to 12 trillion MNT in savings in the nation’s banking system, of which seven trillion to eight trillion MNT is attributed to personal savings accounts. As noted by the Deposit Insurance Corporation of Mongolia, the volume of savings has not grown in recent years due to the weak economy. The new savings interest tax policy could push that trend further.

Naturally, as commercial bank savings accounts becomes less attractive, it would be logical for people to turn to the stock exchange and consider investment. However, the Mongolian Stock Exchange (MSE) has been widely criticized for being underdeveloped as a result of government intervention and bureaucracy.

In January 2017, many news outlets reported that the stock exchange of war-torn Palestine had been named a frontier market by the FTSE index, while the MSE has made multiple unsuccessful requests to be considered for frontier market classification. Many pundits have criticized the government and called its handling of the MSE unsatisfactory. Proponents of privatization of the MSE have been vocal, with even the CEO of MSE, Kh.Altai, noting that the MSE is one of the last state-owned stock exchanges in the world. The privatization of the exchange has long been discussed, and it was even named by Parliament to be one of the seven state-owned enterprises that will be privatized in 2017.

In the past, many people have been reluctant to invest in the turbulent MSE, which has largely failed to meet expectations for growth. The security of the 15 percent savings interest rate offered by commercial banks has, in contrast, been a lucrative and attractive option for people with disposable income. Now, with the potential for people to begin looking for other investment opportunities for their savings, many analysts are banking on the hope that the MSE quickly brings its operational structure up to modern standards. The exchange could be an attractive option, as there are large domestic companies that trade stocks on the exchange and the government bonds issued on the exchange with 18 to 19 percent interest rates are seen as the most secure investments.

If the government is able to quickly privatize the MSE and carry out reforms and improvements in terms of operational management within the exchange, savings finding their way to the exchange could be the catalyst that the MSE needs to move out of its infancy.

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