A legal cap on interest rates should not be introduced
Today our foreign-exchange reserves have reached 3 billion USD while the budget deficit has decreased by 2 trillion MNT. We are currently seeing positive economic trends with an improving external economic environment, better stability, and our economic growth shifting from 1 per cent to the 4-5 per cent range.
If we compare 2017 to 2016, Mongolia’s economy saw the following changes in terms of money supply and foreign assets. The numbers show that last year our coal export income increased by 1.3 billion USD, and foreign direct investment grew by 1.3 billion USD. The overall inflow of foreign capital increased by approximately 4 billion USD in 2017 for reasons such as the IMF program, loans from foreign governments, sovereign bonds traded on international markets, gold monetization, and increase of foreign-exchange reserves due to intervention.
High interest rates mean that risk levels are high. Therefore, the government needs to target their efforts at resolving the underlying problems in our economy, reducing overall risk levels, and dealing with the factors that are causing high risks. It does not make sense to fight the symptoms, but not the cause of the problem.
This means the government should implement policies aimed at maintaining low inflation rates and increase domestic assets when the external environment is conducive. When doing so, it will be key to support the right economic structure rather than trying to boost consumerism. The government should invest in jobs, domestic investment, accumulation, the middle class, agriculture, and production of organic food, and they have enough authority to do so.
A legal cap on interest rates should be introduced
If you look at the reports from commercial banks in the last four years, it is evident that these banks are not even able to sustain the costs of savings interest rates. According to the consolidated report published by Mongolbank, the banking system generated a net profit of 240 billion MNT in 2017. It tells you that the banks are operating at a profit and doing business normally. However, the reality is a completely different picture because those banks obtained 600-700 billion MNT from the government as well as the central bank to make that amount of profit. Commercial banks have barely granted loans for the last three or four years. They can no longer do their job.
The loans that these banks were not able to issue were made up by the 600-700 billion MNT provided by the government. It was all taxpayers’ money. So, the claim to have made a profit of 240 billion MNT actually shows that the banks have operated with a deficit of 400-500 billion MNT. This is a clear indication of how wrong our banking system has become today. The banks can continue their existence only if laws are changed.
The side that argues against the proposed legal cap responds to the question around continuation of housing mortgage loans:
The government can recognize a targeted segment or an industry as a priority and support them by creating a source of funding within the boundaries of specific fiscal policies. This is how the 8-per-cent housing mortgage came into existence. The intention of this policy, which was started during the years of economic decline, was to expand Mongolia’s middle class. At the time, banks used their own capital and were offering housing mortgages at an interest rate of 16-17 per cent. Due to the high interest rates, no more than 30,000 people signed up for this deal in 20 years.
The side that argues for the proposed legal cap responds to the question around the correlation between inflation and savings rate:
Throughout history, all countries have dealt with inflation. This is a challenge to everyone, and not exclusive to Mongolia. Our financial market and economy have had the most inaccurate understanding that the savings rate must be greater than inflation rate. However, the policies from the government, central bank, and commercial banks have always been developed on that premise.
The number of people who have savings must grow from 9,900 to 99,000 and even to 990,000. This is how our nation gets prosperous. For the last 27 years we have been protecting only those 9,900 people from inflation. But, when the inflation rate hits 8 per cent, it means that the government takes 8 per cent of everyone’s money. So, they have been using the money collected from everyone to make up for the damage caused by inflation to those 9,900 people.
The side that argues for the proposed legal cap responds to the question of supporting capital markets:
Mongolia’s financial market today is based solely on banks. There are three key reasons why our capital market is unable to develop.
Firstly, when the old law on bank savings was in place, the government used to guarantee all savings in banks without receiving a penny from those banks.
Secondly, we had 27 years of unequal tax regulations. We used not to tax the income from interest payments on savings accounts. But taxes are imposed when you buy shares or securities. Starting from last year, we began receiving tax payments on interest income from saving accounts for the first time.
Lastly, all projects and programmes implemented by the government, the Asian Development Bank, or the World Bank always go through commercial banks. The government does not provide any support for the stock exchange and brokering companies. Government policies were not able to develop Mongolia’s capital markets.
Trans. by B.Amar
2018.02.21