Full picture of MPP’s deceit
Our debt-ridden, yet lavish government organized a press conference on 22 February 2017 and publically announced that they reached an agreement on the Extended Fund Facility (EFF) programme with the International Monetary Fund (IMF) at an operational level.
The government stated that the parliament would convene on an extraordinary session in March, make amendments to the 2017 budget, and submit their proposal to the IMF Executive Board within March 2017. It was also disclosed that – under the EFF programme – Mongolia would receive a soft loan of 425 million USD in the first phase, which will be followed by a loan of 2.5 billion USD from donor countries and development banks, and an extension of the swap agreement (worth 2.5 million USD) between the People’s Bank of China and Mongolbank.
However, the parliament went back on their words and did not have their extraordinary session. Although the 2017 budget was approved at the parliament session in April, the IMF Executive Board had their meeting on 28 April, but postponed the discussion on Mongolia’s proposal.
When a wrestler deceives his opponent’s expectations and beats him using his own power, Mongolians refer to it as ‘deceitful wrestling’. The Mongolian People’s Party (MPP) is using the same technique to deceive not only the Mongolian people but also their foreign partners. If we look at the bigger picture, what would be the reason behind Mongolia’s hesitation in participating in the program, why has it become an uncertainty, and what are the consequences of not signing up for the EFF?
Deceiving international partners
The MPP leadership suddenly postponed the extraordinary parliament session that was supposed to be held in March. It is because they sensed an opportunity to capitalize on the preliminary agreement reached with the IMF. Subsequently, the government issued new bonds (Khuraldai bonds worth 600 million USD) to the market. It was their last resort to pay off the debt of 580 million USD from the Development Bank bonds. This is how the government closed one debt with another as the foreign interest payment paid by Mongolia increased by 2 percent to reach 7-8 percent. Our external debt was extended by seven years and increased by 20 million USD. This was the first time the MPP deceived the international partners.
Mongolia now has a trend where an incumbent government does not worry about the increase in debt, especially if the next government is to be responsible for paying it off. Having avoided a default, the MPP started viewing that the budget expenditure should not be trimmed down because the likely rise in the prices of coal and copper, leading to greater budget revenue. The exact same scenario happened in 2009 when Mongolia managed to pay its debt back to IMF, taking advantage of the sudden surge of coal and copper prices.
The MPP, who secured 65 parliament seats out of 76, made amendments to the new budget on 17 April and approved it after making small cuts to the public investment and decided not to reduce the operational expenditure. On the same day, the government sent its request to partake in the IMF’s EFF program, which was followed by Finance Minister B.Choijilsuren and Mongolbank President N.Bayartsaikhan’s visit to Washington D.C. to attend the IMF spring meeting and have engagements ahead of the Executive Board meeting.
Deceiving the people
When the parliament issued its resolution on approving the 2017 budget amendment on 20 April, a new clause was included “due to the pressure coming from some MPs.” On the same day, it was picked by foreign investors who became alarmed by the clause. The investors sensed the alarm because the clause was about “increasing the foreign currency reserves by increasing the benefits of investment agreements with foreign-invested mega projects and transferring their sales income through banks in Mongolia.”
The total capital of Mongolian banks is too small, and it is risky to transfer hundreds of millions of dollars through current accounts. Also, there was a previous case where Oyu Tolgoi’s account was frozen by a tax inspector. Therefore, foreign companies aim to transfer funds through international banks which are larger and more reliable than Mongolian banks.
On the other hand, the Internal Finance Corporation (IFC) and the IMF are both members of the World Bank group. After the Dubai Agreement was made to fund the Oyu Tolgoi underground development, it was the IFC, one of the 15 biggest international banks in the world, who provided the first one billion USD funding and called for others on to join.
As soon as the Finance Minister and the Mongolbank President landed in Washington D.C., there was an unexpected commentary around this clause, which did not support foreign investors. It suddenly became uncertain whether Mongolia could obtain the loan. Having become nervous about the situation, the Finance Minister briefed the Prime Minister and managed to have the names of Oyu Tolgoi and China’s Dachin Tamsag removed from the clause. Then, he returned to Mongolia.
However, the IMF’s Executive Board postponed its discussion on Mongolia’s loan due to factors, including the uncertainty around protecting foreign investors and the Mongolian government not acting as they agreed. The MPP leadership knew that it was going to happen, and deliberately put the EFF program on hold.
The MPP did this on purpose because they had already managed to increase seven types of taxes (including personal income, social insurance, light vehicles, and savings income taxes), claiming that these tax increases were conditions tabled by the IMF. Some of the changes have been effective from 1 May.
This is how the MPP has avoided participation in the IMF program and deceived the people by increasing taxes. In any case, the people have now started paying for the debts raised by the political party and government leaders who have been extravagant in their spending and increasing their own wealth.
The authorities have been tactically playing cat and mouse with the IMF, and have been attempting to avoid the tough conditions of budgetary discipline. Another IMF requirement was to have independent audits done on Mongolia’s commercial banks, check on their total capital, and reassess them. This requirement was avoided by the commercial banks, who have managed to activate their lobbyists in the government.
What will happen now is that the MPP government will make various decisions and present them to the IMF. But, it is clear that the IMF Executive Board will take time in their decision making to double check and verify the circumstances. Neil Saker, the IMF representative in Mongolia, said that the IMF is seeking clarity on the Clause 11 of the parliament resolution regarding the flow of investor funds, and that more time is needed to understand the nature of the specifics of the measure and whether the macroeconomic framework of the program remains valid.
It is becoming obvious that the MPP leadership is acting like the previous government, expending the budget carelessly, and pursuing a policy to pay off the previous debts with another debt at all costs.
In any case, they will not be issuing new bonds (like Khuraldai bonds) to settle the debt from the Chinggis bonds in January next year. Now the only choice for Mongolia is China, who does not table any conditions first. Unless a dollar loan is obtained from somewhere, the tugrug rates will weaken starting from the day after the presidential elections, and supply-induced inflation will start, following a deficit in consumer goods.
When that happens, what deceit will MPP come up with? This is the full picture of our economy today.