On the first Friday of the New Year, the petrol price increased by 17 percent. Following the price hike, the cost of some food products and taxi fares went up. Customers were upset and the Government found the culprit. They blamed “the petrol importers that have conspired to raise the price” and fined them. Furthermore, several officials from related Government agencies who permitted the price rise were fired. Then, supporters of Mongolian Democratic Party (MDP), which has recently quit the coalition Government, have criticized Mongolian People’s Party (MPP) claiming they intentionally increased prices for political purposes, as well as to raise money for the upcoming election.
Several members of parliament have come up with a proposal that the government should take control of petrol imports while owners of petrol stations would control petrol retail. The Labor Union has demanded that the USD to MNT exchange rate, which started the price rise in the first place, must constantly be at MNT 1300 and they also promised that there would be a general strike. Under pressure from the Government, the Bank of Mongolia loosened the exchange rate from MNT 1470 to MNT 1380 by issuing USD 100 million from its reserves of USD 2.5 billion. Is this the solution to all problems and there will not be any further petrol price increase in Mongolia? Who must be responsible for setting petrol prices anyways? How can Mongolia become less dependent on petrol and its crisis? People of Mongolia need answers to these questions. The bad news is that the government of Mongolia is currently not able to provide the answers.
Who should be setting petrol price?
According to the most basic law of market economy, prices of all products must be determined by supply and demand. It is hard to follow this law, but it is even harder if you choose not to. Every decision that ignores this law is like a mere attempt to defy gravity for a moment. All of our steps should lead us to the market.
The Government of Mongolia imposes special taxes on production and sales of alcohol, tobacco, petroleum and some other products. In November of 2008, S.Bayar’s Government established a commission for controlling supply and price of petroleum products for the first time ever so that price was set administratively through changing the special tax rate. A natural outcome is the recent price hike.
A ton of A-92 petrol cost USD 840 (including the special tax) in March last year while the price reached USD 1770 in July despite the fact that the special tax rate had become zero by then. As a result, retail prices were increased from MNT 1300 to MNT 1500 and reached MNT 1700 in December and MNT 2000 in January, 2012. This price hike followed a change in USD exchange rates and was influenced by importers that bought great amounts of USD at the start of the New Year. The main reason that the price was stable before this is that MNT grew stronger and importers kept bearing price increase alone when buying from abroad. However, when there was devaluation, having deficits, importers increased their prices. The market, not those importing companies, should be the one to tell if there is deficit or not. Price has been set administratively in the Russian Federation since the spring of 2011.
Domestic retail prices were kept stable in Russia, which forced Russian petroleum producing companies to take its petroleum and other products abroad. To stop them, taxes of 60 and 62 percent were imposed on exports of petroleum and petroleum products respectively. This has had a significant influence on countries such as Mongolia. However, Mongolia was able to buy Russian petroleum from Belarus at a cheaper price using the Customs Union between Russia, Belarus and Kazakhstan. We pay in USD when we buy petrol from abroad and the petrol is sold in MNT domestically. Therefore, it is inevitable that changes in exchange rates have influence on petrol price. We have to carefully calculate at what level we can manage this influence administratively and when the petrol supply is likely to stop.
Currently, the price of petroleum products can only be regulated through special taxes. Therefore, we should try to abandon special taxes along with the commission that sets prices and conduct a new policy so that price will be set with a more market-friendly approach. All imports belonging to the Government is just not right considering today’s condition of public governance in Mongolia. If the Government takes control of all petrol imports, there will be another corruption nest under the name of public property and Mongolia will directly go to the 146th place of 187 countries sitting right next to our friend, Nigeria, by the Corruption Perceptions Index (CPI), not the 122nd place, where we are now. In Norway, which some of our members of parliament are praising so much, “Statoil” is the largest petroleum company and the Government of Norway is the biggest shareholder in this public limited company with 67 percent of the shares. The company was originally established in 1972 by the Government to do exploration and mining in the Nordic Sea.
However, public governance in Norway is way different than that of Mongolia. Norway ranks sixth in the world by the CPI, which means it is one of the least corrupted countries, and Mongolian politicians should mention about establishing a public limited company like they have in Norway after Mongolia is at least included in the first hundred countries by CPI. We need time in order to have a market that regulates itself completely. When that happens, there must be a reserve that is capable of supplying the demand for at least three months. Furthermore, a shareholding company that is responsible for keeping and transporting that reserve has to be established with funds acquired from selling half of the shares to public. Most importantly, all of it has to be done and managed by transparent, good governance.
How can Mongolia quit being dependent on petrol?
Mongolians need to work on both supply and demand. First of all, we have to reduce, replace and save our consumption. The biggest step that will reduce consumption is to get rid of traffic jam of Ulaanbaatar. To take that step, we need to take measures in order to build highways that go around the city, stop city administration from stealing land, have a good urban planning, fix the roads well, have drivers follow the rules, modernize car parking and impose taxes so that it would be too expensive for a person to travel in the city by a car that consumes too much petrol.
The locals who use diesel fuel should use more solar and wind energy. All of this does not depend on the Russians – it can be done if only we can replace several frauds and follow the law. Also, an incentive system has to be introduced to encourage the use of liquefied petroleum gas and we have to make means of transport such as buses and taxis start running on liquefied gas. In order to become less dependent on only one country’s supply, we can seek for other sources, try transporting or grant tax reliefs for importers who import from countries other than Russia. In addition, we should start extracting liquid fuel from coal. However, this type of fuel will not be cheaper than petrol, but it will be an important step to reduce petrol dependency.
We also need to start processing the crude oil we export now. Furthermore, it has to be taken into account that, if we manage to produce fuel out of a half of our crude oil and use the other half for ourselves, basis of future chemical industry could be established. However, reserves explored as of today can only supply one fifth of our demand after producing petrol out of it. The prices wont be so cheap in the beginning.
In conclusion, unless the Government introduces new policies so that price of petroleum products can be set by the market, not administratively, it is very likely that there will always be petrol shortage and deficits in Mongolia. Therefore, consumers have to know that this price is dependent on the world market price.
If price was doubled all of a sudden, those glass buildings and fancy cars would probably be burnt down as they were in Nigeria. A law that allows spending some of taxes such as customs tax, value added tax and road tax on taking those measures mentioned above to decrease consumption has to be passed and implemented.
The basic principle of market economy has to be followed so that petrol price will be regulated by the market, not the government.
Translated by B.AMAR