In terms of structure, it is viewed that consumption, government spending, investment, and net exports make up the economy. It is also called Gross Domestic Product (GDP). GDP per capita indicates the economic capability of a country. Economic growth is estimated by comparing GDP per capita to the previous year.
Economic growth is an important indicator because it shows whether the labour productivity of a country has improved or not. Another essential factor that greatly influences not only GDP components but also development trend is accumulation.
Accumulation is mostly referred to foreign-exchange reserves at the national level, wealth owned by people and their savings at an individual level, and accumulated earnings and profits and assets for businesses.
In countries such as Mongolia, which is dependent on mining industry, a sovereign wealth fund is also taken into account when talking about accumulation. This fund is designated to put mining revenue in an account abroad when the price of a given commodity is booming, and bring the revenue back into economy when the market slumps. It allows managing the effects of price fluctuations on the international market.
However, we do not have such a fund in our country. What we have is politicians promising to set up a sovereign wealth fund before every election.
DO MONGOLIANS HAVE SAVINGS?
We need to be discussing accumulation at a national level today. Having been shaken by consecutive crises and declines, our economy resembles a roller coaster ride at the children’s amusement park.
Accumulation is a major mechanism that softens the blow from an economic decline and supports economic growth. There have recently been discussions about accumulation in Mongolia.
Even though the recent discussions are revolving only around the banking sector, it is good to see that people are increasingly realising the importance of saving money and that young families are striving for accumulation.
For instance, Golomt Bank initiated the National Savings Program and signed a Memorandum of Cooperation with Mongolbank a month ago. Mongolia currently has approximately 820,000 households. It has been estimated that, despite everyone having a bank account, 90 percent of households do not have any savings.
It is also calculated that, if one third of the households that do not have any savings start putting 50,000 MNT aside from their income every month, they will have 13 million MNT after ten years. It would increase the savings and accumulation at national level by 3.3 billion MNT.
If the households manage to make it a habit, Golomt Bank will be encouraging them every year by providing a 20 percent bonus of their savings. In that case, what is stopping everyone from taking part in this program and getting the bonus every year?
Firstly, income levels are at many different levels, and the gap continues to widen. One fifth of our population is categorised as poor, meaning that their monthly income is not enough to meet basic needs such as food.
Twenty years ago, one third of the total population was poor. Half of the population is currently made up by middle class, whose income is enough to meet every day needs and still be able to save some of their income.
Secondly, it is difficult to embed the habit of saving money into the Mongolian mindset. People are more likely to prefer increasing their wealth using their livestock, rather than money, because we have been nomads who herd livestock for hundreds of years.
It has been a long time since the government stopped thinking about generating accumulation. Having obtained foreign loans without thinking ahead on how to use the loans or repay them, the government now only thinks about repaying debts by borrowing more.
As a result of implementing the long-term housing mortgages, people with average income started turning their expenditure into savings. It is a good step. However, the interest rate of this loan is half the market rates, which means it cannot be sustained in the long term.
Businesses are weaker in competitiveness and are not able to enter the international market and expand. It makes it impossible for them to expand their operations using their own capital, leaving them with the only option of borrowing.
The interest rates of banks in Mongolia incur higher costs whilst the capital market is not maturely developed. It is the reason businesses are paying almost 20 percent of their revenue in interest payments. The pressure exerted on businesses is enormous.
HOW DO WE HAVE ACCUMULATION?
The income levels are reported to be dependent on economic growth. The theory of marginal propensity to save suggests that savings increase as income grows. Most countries in the world have legislations that encourage people to have investments and savings.
Similarly, Mongolia has not been imposing taxes for many years on the income that comes from saving rates. The parliament is currently discussing whether this should continue for another two years.
Another incentive to increase accumulation and develop the capital market is allowing the companies registered on the stock exchange to have their dividends untaxed.
In order to have accumulation and savings at a national level, all resources must be fully utilised.
Mongolia’s health and social care funds, especially the pension fund, must be kept separate from the government or a monopoly of a ministry. Also, the funds need to be managed by experts.
The pension fund should always be ahead of inflation rates. The government now needs to establish a dedicated fund to repay foreign loans on time.
The private sector needs to strive for gaining international competitiveness, applying international standards in processes, and implementing new technologies of information and communications before our neighboring countries do.
It is time for everyone in Mongolia, including the government, the private sector, and the people to focus on accumulation and savings, and effectively manage our financial resources.
The total capital of banks should be as big as the GDP, and savings in banks should equal half of GDP in contrast to the 25 percent it is today. Only then, accumulation and savings can become a major driver of the economy.
Today, 92 percent of savings are owned by 17 percent of population. These savings should be owned by a far greater percentage of the population, which would become a reliable pillar for economic growth.
The history of the developed world proves that flourishing development can only come when everyone, including individuals and businesses, work hard, create value, save for years, and effectively manage capital.
2015.12.09