Q: – When will loan rates of Mongolian banks get reduced from double digit to a single digit?
A: – When our economy stands on both of its legs rather than just one of them.
The engine of economy is fueled by money. To be more specific, it is the free flow of money that feeds the economy. However, due to a missing fuel tank, our economy has constantly been running out of fuel and failing to operate normally.
Due its hiking price, we have been having shortages of money for years, which means not having enough fuel for the economy. Annual interest rates of loans provided by our commercial banks are not going below 24 percent.
The two fuel tanks of economy are capital and money markets. Combined, they are called ‘financial market’. The capital market tank provides fuel for long term use while the money market tank offers money to be used only in short term (up to a year). Mongolia only has one of the two tanks – the money market. That is why our economy limps and is forced to be supported by a cane. The cane, in our case, is the foreign loans we acquire to contribute to the public budget.
In a healthy economy, surplus capital in one part is collected, split into packages and lent with certain conditions to the other part that needs the money. This intermediary role is fulfilled by the financial market.
Why cannot we create and utilize the tank that provides Mongolia with long-term capital? How can we develop the financial market and inject long-term capital into our economy?
The part where there is a lack of capital
Mongolia needs an enormous amount of capital for its development. Almost 50-60 billion USD is required to transform ger districts in Ulaanbaatar into apartment blocks, construct water pipelines allowing the supply of running cold and hot water, supply electricity, improve city lighting and connect the new buildings that are being constructed to the existing infrastructure.
The past years showed us that our banks cannot fund long-term investments because their source is short-term. Furthermore, those banks provide loans only when there is enough collateral. It makes it impossible for the hundreds of thousands of people who do not own enough property for loan collateral to start a new business. Therefore, those people are now supporting their livelihood by their daily income from buying and selling common goods only.
For example, the airlines industry cannot develop if there are no planes. The Mongolian Airlines (MIAT) has recently welcomed a brand new plane, which is the first one in its history. They made it happen by borrowing money that had been raised by selling the bonds issued by the Development Bank. This move has added more loan pressure on the MIAT, especially during this time where the so-called national company MIAT is not privatized and those who claim to represent the public properties have been stealing quite a lot from this company that it has almost led to bankruptcy.
If MIAT had been a shareholding company, the representatives of the true shareholders in its Board of Representatives would have never allowed anyone to have an opportunity to steal. On the contrary, they would have raised the money for the new plane from international capital markets instead of acquiring a loan.
Since the government is reliable and responsible for the payback of large projects that need long-term capital such as road and power plant, a public-private partnership (PPP) can be carried out and the first round funding can be provided by investment funds.
Mongolian private companies need to attract investment in order to expand their businesses. Also, there are many transparent, socially responsible and professionally managed companies that wish to raise money for funding from the domestic capital market.
The part where there is a surplus of capital
The biggest accumulation of capital in our society is social insurance and pension funds that altogether deduct almost 10 percent of everyone’s salary. Certain parts of these funds are used for long-term investments to develop infrastructure.
However, we can no longer see any report that tells us how much capital the Mongolian pension fund has and where it is today. Mongolians now do not know how much money they have in their accounts. A total of 800 billion MNT is collected by the pension fund a year, but they spend it all on the provision of pension. Therefore, capital accumulation is currently out of the question.
Many international experiences show that a large amount of capital can be accumulated and grown further through the capital market by establishing private pension funds and employers raising a good volume of capital in accordance with the capital contributed by their employees. Despite not being a legal entity, XacBank, Golomt Bank and Wagner Asia Company are running a pension accumulation account in Mongolia.
Although the Government of Mongolia established more than 30 specialized funds at its ministries and they claim that the total accumulated capital has been put into a special account of the state fund, no reports on revenue and expenditure are available to the public.
It is said that the most savings in commercial banks are owned by only a handful of people. If this kind of money has more income than commercial bank rates, it goes to the capital market very quickly.
Connecting bridge
There is a surplus of capital on one side of the river and a lack of capital on the other side. However, the financial soft infrastructure that can connect the two has not been formed in Mongolia yet. Therefore, our financial market development is not progressing from its initial stage.
Many governments have believed in managing commercial banks through the central bank, developing the money market and implementing the budget policy in good alignment with them. However, this attempt of theirs to go on the heavy gear is not helping the loan rates to be reduced or the shortage of money to cease.
Is the government not aware of the existence of a great amount of capital if utilized correctly? Or, are they not paying enough attention to it? We need to collect this capital, reallocate into the parts of economy that need it, establish the necessary institutions, create the relevant soft infrastructure and, particularly, pass the new securities law.
Mongolian laws are passed in order to control, restrict or wipe out anyone who came up with an initiative rather than focusing on developing specific industries or sectors. The new securities serves a similar purpose. The investment fund law must be passed along with the securities law.
Translated by B.AMAR
2013.05.15