Housing loans (mortgage) play a significant role in raising the standard of living for citizens. That is why, in some developing countries, the government provides soft loans and pays the difference through budget subsidies. In developed countries, housing loans are provided with respect to the principles of the free market, and diversified investors engage in this business. We are all aware of the good quality of great property asset that is built in these countries, thanks to the low level of government involvement.
You can see that even though the Central Bank initiated subsidized housing loans in our country and declared their transfer to the government, they do continue to manage and keep them on their balance sheets, which exacerbates inflation and the descending tugrik value.
Successive governments have been delaying it for years because if the government transfers mortgage loans to itself, the budget deficit will increase. In that case, the government would have to cut other expenses to the same extent.
The pandemic’s emergency law deferring mortgage payments nationwide has resulted in banks reducing their lending. The law should be repealed by the end of this year, now that covid-19 is over, but members of parliament have now started talking about postponing mortgage payments until the second half of next year.
The Central Bank has been giving money to commercial banks at 0 percent interest, with the banks passing it on to citizens as loans at 6 percent interest. On average, mortgage loans totaling 600-800 billion tugriks, which is an amount equivalent to 2% of GDP, are issued annually.
It has become impossible to control inflation because such a large amount of money is no longer relevant to the monetary policy of the Bank of Mongolia. As of now, the policy interest rate is 12%, while mortgage interest remains at 6 percent. Inflation will hit 13 percent this year. In such a scenario, 6 percent interest loans will become attractive and the demand will soar.
Although subsidized mortgages boost the construction industry, the increasing imports of goods and materials, which make up half of the construction expenses, continue to cause the depreciation of the tugrik. Moreover, after the pandemic, people’s consumption of imported goods and services increased, as well as their tendency to travel abroad. Following such trends, the exchange rate of the tugrik dropped sharply where 3400 tugriks can now buy 1 US dollar, showing a 18 percent depreciation within one year.
In this situation, until China’s customs are opened, transportation returns to normal, and until the government pays off its foreign debt in 2023, if subsidized housing loans are not temporarily suspended or transferred to the budget while limiting other expenses or investments, we face the looming threat of skyrocketing inflation and plummeting tugrik.
Politicians, who do anything to get elected, are well aware of the threats. However, they are not discussing mortgage loans. On the contrary, they are even discussing postponing payments in anticipation of the 2024 elections.
The Bank of Mongolia must not work in the same way as the state budget. Because its president is appointed by the Parliament, fully autonomous control of the monetary policy is impeded due to pressure by politicians. The President of the Bank of Mongolia is caught between a rock and a hard place.
You, the citizen with the lowest income, are inflicted the most damage, you are paying the most. Are you aware that the citizens paying the real difference of all discount loans and expenses through inflation and exchange rates, are suffering a great loss?
2022.11.09
Trans. by Riya.T and Munkh-Erdene.D