Jubilee Debt Campaign, an organisation that strives for breaking the chain of debts, published an interesting report last month. They named nine countries (Bhutan, Ethiopia, Ghana, Lao PDR, Mongolia, Mozambique, Senegal, Tanzania and Uganda) that have become fully dependent on external debts, and emphasised that the gap between the rich and the poor keeps widening despite their high economic growth. Their citizens are demanding that their governments stop raising more loans from the international capital market, and fully disclose the expenditure of previous loans in detail to the public.
These countries rely heavily on the mineral resources they export, rather than manufacturing and service industries. Therefore, their economy is highly dependent on commodity prices whilst most of their revenue goes to a few elites. The Jubilee Debt Campaign also said that these countries have too much external debt compared to the size of their economy, have a high risk of ending up not being able to pay off the debts, and have too much deficit in the operating cost of their public budget with increased likelihood of growing debt burden.
In economies that are almost fully dependent on a small number of mineral resources and their prices, the government has only two choices. It is time for Mongolians to discuss what these choices are, and what Mongolia’s choice should be in the future.
PATH THAT LEADS (LED) TO DEBT TRAP
On 10th August this year, China weakened their strictly controlled currency by two percent against the US dollar for the first time in 20 years. China’s government explained that they took this action to support their exports, which decreased by 8.6 percent within a year. As a result, international stock market indexes have started falling amidst the fear that China’s unlimited consumption could decrease.
If large investment funds start selling their securities related to China, a lot of companies will see drops in the price of their shares, and will have to downsize their business. Economies like Mongolia, which export their coal, copper and gold solely to China, are receiving another hit.
On the other hand, our government is incapable of thinking of something else other than acquiring another loan to settle principal repayment and coupon payments. It is forcing investors to sell their Mongolian bonds.
When Mongolia issued bonds worth 1.5 billion USD from the international capital market in 2012, the investors believed that Mongolia would be able to satisfy China’s never-ending demand for commodities, and were willing to purchase bonds worth 10 billion USD. However, the investors, who bought the bonds with a coupon rate of 4.5 percent on average, sold them with a presumed yield of 9 percent. It was written in the New York Times on 22nd August. It shows that Mongolia’s risk of not being able to make the payments on time has doubled. It is considered that, if the calculated yield of a bond being traded on the secondary market is higher than the initial coupon rate, there is a greater risk in regards to repayment.
After announcing their intention to obtain a long-term loan to repay debts from the previous short-term loans, Prime Minister Saikhanbileg’s government purchased China’s bonds at the cost of one million CNY, at a rate of 7.5 percent. It is a warning that the risk is growing. It means that, if Mongolia issues sovereign bonds today, the coupon rate will be 10 percent. Governments that issue bonds with such high rates are referred to as dubious borrowers on international market. The history of Greece’s bankruptcy began just like this – repaying debts with more debts whilst interest rates increase.
PATH THAT LEADS TO DEVELOPMENT
It is inevitable that a market economy occasionally suffers from a crisis caused by faulty policies and actions. If you cannot find your own mistake and fix it, the crisis will be repeated. A country like Mongolia, which is almost entirely dependent on a small number of mineral resources and commodity prices, should make a structural change to its economy, carry out economic diversification, and acquire the flexibility to respond to sudden changes in the external environment.
Those countries who have managed to do it, have first established a fund to manage changes. Initially they approve a public budget with a realistic estimation of major commodity prices. If the prices turn out to be higher than expected and more revenue is recorded, the extra revenue is accumulated in a special fund, such as a national fund or a sustainability fund. When the commodity prices are lower than envisioned, the fund is used to make up for the deficit, which protects the economy from price fluctuations.
Countries such as Norway and Chile have gained a lot of experience with this concept. Even though almost every parliamentarian in Mongolia and dozens of ministers have visited these countries to learn from their experiences, they have not put these learnings down on paper. It resembles the Mongolian phrase “A donkey would not know if there is gold or water in his ears.”
Furthermore, the government should use mining income to develop other industries, encourage participation of the private sector, support market competition, build necessary infrastructure, prepare workforce, and help businesses enter the international market.
CURRENT SITUATION
As Mongolia has already acquired too much loan for our capacity, we must first stop continuing to obtain new loans. We must decide how these loans should be repaid, and create an accumulation. An independent report must be done on where the capital raised by previous bonds went, and how their repayment prospects look. The information must be disclosed to the public.
The government today is doing nothing about how and when the loans should be repaid. Instead they are busy trading positions and seats of ministers. Mongolia’s authorities are about to pass a law to grant amnesty to each other’s associates who are under investigation for corruption charges. Although the President partially vetoed the proposed law, the bent lawmakers are still showing tendencies to oppose the veto and protect those who stole from public property and wasted the capital that came from bonds.
Our citizens are demanding that the government stop raising more loans from international capital markets and to publically disclose how the capital from previous bonds has been spent. We have the right to make this demand because it is us, the taxpayers, who will eventually pay for all external and internal debts the government has.
When the time comes to repay these huge loans, even Interpol would have trouble locating some of these politicians.