Economy is a comprehensive, living system just like a human body. In this metaphor, exchange rates could be seen as blood pressure. Looking at the tugrug to U.S. dollar rates from the past, we can observe that the blood pressure of our economy increased by 30 percent last year. This means one-third of the money you put aside to buy a new car has completely vanished.
This sudden decline of the Mongolian tugrug is the consequence of the policies that have been pursued by our government. It discloses Mongolia’s current need to revise its economic, monetary and financial policies and change the way the things have been done. Albert Einstein once said, “No problem can be solved from the same level of consciousness that created it.” Therefore, we have to turn up our thinking a notch to solve the problems we face today.
In order to strengthen our tugrug, we need to find the underlying cause, come up with an accurate diagnosis, and fix the problem in the same way a doctor treats disease. Let me present my personal opinion on how we can find the root cause and solve the problem.
CAUSES OF THE WEAKENING TUGRUG
Main cause: Government involvement has been expanding while more nationalization, instead of privatization, has been taking place. Moreover, an increasing number of state-owned companies have been established only to constantly run deficits that are made up by the public budget. In short, Mongolia is returning to socialism and it is being led by the Democratic Party itself. It is such an irony that this political party has changed its direction along the way, expanded government involvement, and allowed an economic collapse when two of the people who initially went on a hunger strike to establish democracy have now become the President of Mongolia and the Mayor of Ulaanbaatar. The Democratic Party today resembles a toothless lion that can only roar, but not bite. Having lost their power due to secret conspiracies with the former administration, the Democratic Party is currently not in a position to make significant economic decisions on their own.
Another cause: The authorities work with the sole purpose of retaining their power by getting re-elected rather than increasing economic growth and efficiency. For them, it is more important to obtain money by issuing bonds than wisely spending loans and repaying debt. Although the central bank attempted to “promote consumption and preserve employment levels” by injecting three billion MNT into circulation, the government failed to create new jobs. Mongolians today are consuming more than we create. The prices of fuel, electricity and meat are being set by the government, not the market.
Third cause: There are no proper regulations on ownership relations while public and private properties have become undistinguishable in our capital city. Ulaanbaatar, which is home to more than half of our total population, has unclear rules and procedures regarding the sale of public land. The authorities keep it that way on purpose in order to steal public property and the new management is doing nothing about it. Even our hero mayor is afraid of disclosing the “Zaisan-ing” at Yarmag. Lawmakers whose objective it is to redistribute wealth once they are in power have been changing the business and investment environment to their advantage. As a result, both domestic and foreign investors were scared away. Also, they have been getting rid of private property unless it belongs to their associates, which has forced domestic business owners to place their capital abroad.
WAYS TO STRENGTHEN THE TUGRUG
First and foremost: It is essential to significantly reduce government involvement in the economy, restore faith in the private sector, allow the private sector to take part in mining and other industries, and offer the state-owned 34 percent of strategic deposits on the international market. Also, government spending needs to be decreased and no more state-owned companies should be established. It would also be a good step to have an employment freeze in the public sector.
Two: We need to stop spending the public budget to make up for deficits run by state-owned companies. The state-owned companies should be privatized by offering their shares on domestic and foreign markets. In order to do so, we need to privatize our financial infrastructure, the stock exchange, first. A part of our stock exchange shares could be sold to the London Stock Exchange, which boasts high credibility internationally. If that happens, big international banks will open custodial accounts in Mongolia, which will allow a brand new currency flow into our country. It will open up an opportunity for Mongolian companies to offer their shares on both domestic and foreign markets at the same time.
Three: The government needs to stop setting prices for fuel, electricity, meat and other products so that market competition will produce real prices. In the long term, it will result in a more reliable supply of goods, reduced price fluctuations, and more investment opportunities. Furthermore, it will allow Mongolian coal mines and power plants to actually make profits and export their products.
Four: In order to make Mongolian companies internationally competitive in tourism, wool, meat, dairy products, mining services, information, and communication, we need to develop and implement a policy that is solely based on productivity. If we implement the experiences of Foundation Chile and increase our non-mining exports, the trade balance will become favorable.
Five: The government should only invest in education and the health sector, the current obsolete structures of which need fundamental changes. The management of schools needs to be handed over to a Board of Directors to be employed under contract. Insurance companies should start assessing the quality and price of health care services. Universities need to be ranked and enter into healthy competition. Also, industry and business need to be connected to university research programs.
Six: We need to stop the universally provided social welfare program and use these funds to provide services to those who truly need them. More hardworking people who are bringing benefits to society could even be given extra care. The government needs to fully support citizens who want to do business.
Seven: Political parties need to start producing financial reports, and those who’ve stolen public property should be held accountable, their position or political affiliation notwithstanding. As long as such politicians are in the government, they will keep making everything political, put their every effort towards obtaining ruling power, turn citizens against each other, and create instability within the nation. Their continued existence will prevent our country from developing despite the changes we make to laws.
WHAT SHOULD BE DONE?
When these measures mentioned above are implemented, we will be able to lower the blood pressure of our economy and restore its health. At that time, the tugrug to dollar rate would be kept stable at an appropriate level.
Since these measures cannot be put in place overnight, the only option readily available to lower our economic blood pressure is the International Monetary Fund. Regardless of whether we want it or not, Mongolia – as a member of the IMF – will acquire a loan from this fund. The recent decision by the government to increase its payment quota to the IMF proves that they are preparing to apply for a large loan.
From its experiences in 2009, our government is now well aware that an IMF loan will have some very tough conditions (Stand-by Arrangement) this time. There will be nothing surprising if the SBA requires the government to register the Development Bank loan with the public budget and if Mongolbank stops printing money. If such conditions are to be met, a pre-agreement between the Democratic Party factions will be broken and a new balance of power will be formed.
2014.03.05