As a mining cycle travels towards a boom, foresighted nations tend to accumulate and reserve capital. It is how Russia and Kazakhstan overcame an economic recession when their cycle came to a bust. In our case, we fell into debt, rather than accumulate capital, when the cycle moved towards a boom. As more income came from the mining sector, our government continued to take out loans. The income accumulated with the politicians, whilst ordinary people were left with a debt burden.
The authorities have wasted another Summer whilst attempting to replace the government at every chance, fighting over power and influence, and trying to get a bigger cut, instead of increasing the size of the pie. It was pointed out in my previous column that our country is trapped in debt and we are trailing in interest payments of external debts despite the projected economic growth of three percent this year.
Mongolia’s external debt today is not equal to 55 percent of our economy as the government claims. It is actually as big as 90 percent of our economy if we take into account the SWOP agreement established with China, and the amount of debts owed by companies owned by the Development Bank of Mongolia. The decline in the mining industry has reached the construction industry, as we see newly erected buildings empty, without buyers, and mortgage repayment rates gradually weaken. The increase in bad loans is negatively impacting the banking sector.
Our government has started repaying debts with more debts and is even raising high interest loans from the domestic market. It is inflating the financial risk of the government, reducing the faith of foreign investors, and giving them strong incentives to sell government bonds.
The Mongolian government today resembles a spoiled teenager who is swiping his parents’ credit card at his will, making expensive purchases.
It is becoming more difficult for Mongolia to escape from being trapped in debt. The longer we stay trapped, the harder it becomes to get out. What should our country do to escape from the trap?
STEP 1
Firstly, we need to take the credit card back from the kid who is buying things with money his parents do not have. The citizens are demanding that the government stop obtaining more loans. It is time to make the management of external debts transparent, increase involvement of civil society in monitoring the spending of loans, forbid distribution of loans to companies associated with politicians, and verify it on a case-by-case basis.
STEP 2
An amendment to the public budget needs to be done urgently to ensure the operating expenses stay the same, focus social care on the vulnerable groups only, and give salaries to public service officers first. The law that requires the budget deficit to be under two percent of GDP needs to be reinstated. The spending of the public budget needs to be revised in terms of priority as there is no choice but to reduce the investments that provide yields in the long term. This direction should be maintained when approving the budget for next year. It is time for the government to stop obtaining new capital and drastically reduce their expenses on visits to foreign countries.
STEP 3
The independency of Mongolbank must be reinstated. The work on maintaining the balance between housing mortgages and the price stabilization program is behind the schedule. Under pressure from the government, Mongolbank overdid the policy to make up for the budget deficit and has run out of foreign currency to restrict the weakening of the national currency. If the SWOP debt is taken into account, Mongolbank does not have any currency reserve left. Mongolbank itself must stop illegal loans, and the repayment of loans that are already granted must be supervised by the Ministry of Finance.
STEP 4
The macroeconomic stabilisation program, which Prime Minister Saikhanbileg had approved by Parliament, needs to be implemented immediately. It includes the progress on mega projects. Firstly, in order to progress Tavan Tolgoi, a joint consortium of Erdenes Tavan Tolgoi and Energy Resources need to be established so that the next steps can take place: selecting strategic investors, establishing an agreement, and starting construction of infrastructure.
STEP 5
Instead of pardoning the corrupt, it would come closer to justice if we make them pay for the damages occurred to public property, provide any outstanding salaries, and compensate for other costs. Unless they are pardoned after their right to hold a position in public office is stripped, they will keep coming back to offer ‘counsel’ and play with people’s heads, which will result in a waste of time and money.
Furthermore, isn’t it time to privatise the so-called state-owned, but actually political-party-owned plants by trading their shares on the stock exchange? This way unnecessary costs and subsidies will be removed, which will help in tackling a big corruption nest.
The government at least needs to take these five steps in order to get Mongolia out of the trap of debts and protect our economy from dependencies on mining cycles.
If these steps are taken, domestic and foreign investors will have more faith, and it would become cheaper for Mongolia’s commercial banks and financial and business institutions to raise capital, which is desperately needed for the economy today.