Loan amount should have certain restrictions whether the borrower is an individual or a company or a nation. Otherwise the concept of a loan starts to lose its meaning and financial sector bankrupts. Although legislatives in certain countries have power to approve the annual state budget, they still put a limit on government borrowing for additional spending.
This is a standard in Denmark and the USA for instance. Any government debt or borrowing capacity is directly related to economic size and its ability to pay off debt. The ceiling on borrowing domestically and internationally must be set clearly. If not, the government will borrow more and more in order to cover budget deficit for many years and one day unable to pay its debts will bankrupt and will be unable to cover its costs.
In such cases, normal economic functions in that country stop, public transportation shuts down, public schools and hospitals close doors. Last week, Greece reached the boundaries of bankruptcy once again and the EU member countries for the second time gave additional loans (120 trillion euro this time) as the Greek government received orders to drastically reduce government spending. As Greece’s citizens witnessed the cut back on salary, uprisings against government’s emergency actions sprang everywhere. Greece’s debt exceeded its GDP by 60 per cent equalling 160 per cent of its annual production. Overall, the annual budget deficit of a member country of the European Union must not exceed 3 per cent and a government’s total loan amount should not exceed 60 per cent of its GDP. In Greece, the budget deficit reached 16 per cent. Portugal and Spain are following in their footsteps.
The US economy is reaching the same situation as the government of the world’s most valued and largest economy struggles with follow-ups after a deep recession. The USA’s government debt has been steadily increasing since the Second World War. Today, it is at the limit reaching the debt ceiling. That is why the US government is not functioning normally. Some state governments are closing doors and giving unpaid vacations to their employees. The US government loan restrictions were set to the GDP’s amount and reached this limit on August 2nd2011. If the Congress does not give the right to the US government to continue to borrow, the economy will bankrupt. Bankruptcy means the government cannot pay back its debt. This incudes not being able to repay the short and long term bond payments, furthermore closing many government organizations.
If investors suffer a sizeable loss, they will lose confidence in USA’s government and investments will be made into other countries. Although President Barack Obama asked the Congress to allow higher US government debt ceiling by 10 per cent or by 1.4 trillion dollars, members of the Republican party are requesting the government to decrease spending and taxes, and to decrease state debt by 4 trillion dollars in the next ten years. Obama is faced with a strong objection from his Democratic party by intending to decrease all possible spending and extending the retirement age by two years to 67. The government of the world’s largest economy is being crushed by its debt ceiling as its future prospects remain unclear at this time. the US government bond values are plummeting on the financial market and influencing unfavourably other bond rates. The price of gold, the value of which is considered non-depreciable is sharply rising and has reached historically high levels. One ounce of gold is now 1600 dollars, as 1 euro costs 1.6 US dollar at exchange rate.
Young democratic nations such as Mongolia should pay close attention early on to these events happening to well-established government institutions of developed nations. First of all, we should keep close watch on the ballooning state budget and review once again the increasing foreign and domestic loans.
Up to now, Mongolians have been almost only exporting minerals. Although we are gaining more and more revenue from our natural resources, at the same time, government employees’ numbers are growing at an even faster rate. The government’s role in the economy is growing rapidly as never before with increasing state spending. As the government catches the mining fever, and having already caught the Dutch disease, state budget spending increases year after year and budget deficit has exceeded the GDP by 10 per cent. The living standards of Mongolian citizens are growing increasingly dependent on the government more than on individual effort. Especially when cash is being handed out to individuals every month, the interest to herd in the countryside is decreasing in individual outlooks.
Mongolia’s foreign and domestic debt is rapidly increasing. Since settling down the big debt to Russia, our foreign debt has been increasing very fast. In 2010, “the amount of loan borrowed from other countries during the past ten years has come up to half of the total GDP,” reported the Ministry of Finance. Yet the media has been reminding us that complete information on the total debt amount does not exist. A reliable information source that would regularly report on this topic is missing in Mongolia. As foreign debt increases from year to year, especially during the term of the present government, the government is issuing greatest amount of bonds and loans in its history. Foreign debt has increased in amount under the guise of discounted loans. The government has started to issue enormous amount of bonds or taking huge loans by putting the underground resources as collateral. Among the thousands of issued bonds are bonds designated toward Development bank, bonds for the development of cashmere and wool industries, bonds for grand manufacturing and others. How much can the Mongolian government borrow from overseas really?
Or is the plan to not set any restrictions? For example, the US government’s 8 per cent of the total debt is due to China. The US government now must be especially careful not to put too much pressure in communicating with China, its biggest lender. During the last visit by the Mongolian Prime Minister, the Chinese side proposed to give Mongolia a discounted loan of 600 million RMB. Who is going to make the final decision on accepting or not accepting the offer? In order to answer all these questions, it is important to follow closely the current disputes in the Capitol that are showing the US Congresses crucial influence in keeping the role of the government minimal and why it is important to set the government loan restrictions. Any issue should be reviewed not after but before it rises. Our history in solving the debt issue with Russia shows that the preventive measures are much cheaper and effects are less dire.
Translated by J.Ariunaa