Mongolia is facing another political and economic decline. The Asian Development Bank (ADB) has recently projected that Mongolia’s economy will grow by 2.3 percent this year, which is seven times less than it was four years ago. The tugrug rate against the USD has reached 2,000 while the amount of bad loans in commercial banks has increased by 40 percent within a year. The bad loans currently comprise 7.3 percent of total loans. The public budget, which was amended early this year, is expected to run a deficit of one trillion MNT by the end of the year.
Although it is widely perceived that the majority of the reasons that caused the decline are due to external factors, there are also many internal factors.
One of the external factors is the slowdown of China’s economic growth, which turns out to be around 6.8 percent compared to the expected 7.2 percent. This slump is making it difficult for those countries that supply raw materials to China. Mongolia has been hit the hardest. The ADB experts discovered that, when China’s economic growth decreases by 1 percent due to reduced consumption of raw materials, electric power, and metals, the economic growth of its supplier countries slow down by 0.7 percent. Mongolia’s exports are almost entirely composed of copper concentrate, coking coal, gold, iron ore, and oil, which are all transported to China. Copper exports solely make up 36 percent of total exports and account for 16.4 percent of GDP.
Too many years have passed by whilst our politicised oligarchs fight each other instead of building a railroad and making use of our geographic location. It made us miss an opportunity to take advantage of a boom in the mining cycle. Our decision making lacks sustainability because we have political instability and ever-changing laws. As a result, we are not able to cleanse the corrupt political parties full of populist politicians in favor of social care for everyone. This situation can be regarded as an internal factor to the political and economic decline today.
These external and internal factors led to the 2009 crisis. Mongolians were not able to review the politics, economic policy, actions, and systems to identify what was right and what was wrong, and what needed to change. Due to the rapid increase in commodity prices in 2010, Mongolia got out of the crisis having seen the budget revenue hike. In 2015, we see a different scenario – a big fall in commodity prices, China’s economic growth being lower than before, and Mongolia soon having to pay back the huge loans raised from abroad. This is why the economic decline we face today is expected to continue and have more difficult implications.
Therefore, we should see this decline as an opportunity to review our politics, economic policy, actions, and mistakes so that any faults can be fixed. As a society we need to accept the current situation, demand the authorities be accountable and transparent, and ask the civil society to form a system to oversee the public governance.
We need to look over why Mongolia has not done anything despite all the talks about how our country is overly dependent on sales of commodities and how we need to undergo a structural change that would allow development of non-mining industries and exports.
The fiscal policy pursued by our government has been disrupting the normal flow of the market and has not been compatible with the reality of our economy.
For example, the authorities kept saying that the price stabilisation program would continue to be implemented, and this created false expectations in the construction industry. In Ulaanbaatar today, 40,000 apartments are sitting empty and unsold, whilst 170,000 families in the ger districts are not able to find an apartment that suits their needs. It clearly shows the huge gap and misperception between the supply and the demand of apartments.
Furthermore, the agricultural industry also has defects today. A fund to support crop farmers is loaning petrol to crop growers. However, the price of the loaned petrol is 27 percent higher than the wholesale prices in the market. Can it be called support then? The actual cost of the bread we are eating has become much higher than its retail price.
All programs and projects implemented by the government with the purpose of restricting prices always end up this way disrupting the normal market relations, creating false demand and oversupply, inflating budget expenditures, and expanding deficits. There has been an enormous cost to implement and review these programs, which has only made some decision makers in the industry wealthier.
The government is now trying everything they can, including raising loans domestically and from abroad, to fund these programs that produce such negative consequences. Our government is currently giving 12 percent of its budget revenue to pay for the domestic bonds it issued, 25 percent by the end of the year, and the whole budget by 2018.
Since we can no longer borrow more, either from domestic market or from abroad, the only choice is to reduce our budget expenditure. It led Saikhanbileg’s government to make the decision last week to decrease the salary of public servants by 30 percent, and freeze the funds allocated for government organisations to hold or attend training and conferences in Mongolia and abroad, and to purchase furniture.
In order to increase budget revenue, the government is also about to increase the special tax on petroleum, and sell some shares of state-owned companies such as MIAT Mongolian Airlines and the Khutul cement plant within this year. This should have been done much earlier.
The parliament is soon to discuss amending the 2016 budget and the 2015 budget (for the second time). It is inevitable that the budget should be projected realistically reflecting the interest payments and principal payments of domestic and foreign loans. Making up the deficit must also be carefully considered. The fall session of Parliament needs to look at the budget from today, in three years’ time. That way there will be realistic preparations for repaying the Chinggis bond principal payment, 500 million USD, in January 2018. Unfortunately, the budget is estimated to have the biggest deficits in election years. Anticipating the election, every Member of Parliament will commence making huge investments in their constituencies just for the sake of its appearance. It seems like it will be the same again this time.
Mongolia truly needs to review its economic development policy and the actions that are being taken.
2015.09.30