POLICY AND RATE

UB Post

May 21, 2010

Last week the Central Bank of Mongolia had published in all daily newspapers own interview with itself about its new decision to launch a program so-called “banking capacity building and supporting banks with equity increase” and first of all increase its “policy rate” by one percent reaching 11 percent.


It is said that our Central Bank has decided to toughen its monetary policy, according to world practice that all central banks of the world increase their interest rate as the inflation grows. 
Though commercial banks made Wednesday their proposal of purchasing the securities worth of MNT337 billion following this news, the Central Bank sold CBS (Central Bank Securities) worth of MNT290 billion with weighted average rate of 10.21 percent. Commercial banks slowed substantially thier lending to local businesses.

The owners of commercial banks in Mongolia are very lucky guys indeed. It is very nice to operate in a country whose Central Bank policy interest rate almost doubles world’s commercial banks loan rates. It is enough just to import cheap money from foreign banks and invest in CBS. If the dollar inflation risk is managed carefully, it is safer and more reliable than issuing credits to business in Mongolia.

Commercial banks gets another luck: to increase their equity capital at the cost of taxpayers. This is another legitimate way of equity in commercial banks, that are under the control of high ranking public officials, especially of ruling political parties, without any interest. Sharing any return on policy is one thing where the two ruling political parties coalistion exercises its consensus. Money does not make differences among poltical parties.

The idea of making sure that Mongolian commercial banks maintain their required ratios in capital is a good one. Increasing equity in this way alone is like if one treats the symptom of serious chronic illness in the monetary system that provides liquidity to the economy.

We must address the causes of the illnesses. Central Bank do not talk openly and bravely that basic reason of such chronic illness is outside banks. The position of President of Central Bank is the one that must clearly express its position on such important matter to decide the destiny of the country and that must fight for this.

The major reason of Mongolians large migration abroad is because Mongolian businesses get bank loans with the world highest interest (20-25 percent). This cost of financing makes the private sector (especially those who is not connected to authorities) not priftable and the economics not competitive. The latest example is that last night 3,000 young people, stood in a queue all night long just to register for selection for works in South Korea.

Why the loan interest rate, which is the cause of all these problems, is so high?

The major reason is that saving interest rate of commercial banks is very high (16-19 percent). This is the result of price war between commercial banks not to lose the few depositors of huge saving accounts. Because of non taxes on profit from saving interest earning, lending money to commercial banks is much easier than running own busineses in here. Besides it is quite risky to operate in private sector under current circumstance where corruption spreads and flourishes by walls of of public offices.

It is even more risky if you buy shares of companies listed in Mongolian stock exchange because the companies release not correct information about their businesses and financials. Another reason is commercial banks are not able to issue loans for longer, extended period because the maximum savings term is only one year.

The condition under which there will be more depositors and more money to save in banks is that the a lot of money should be accumulated in hands of people as a result of their hardwork. A country can be stable provided that there are large segment of middle and above middle class in the society, capable of accumulating the capital and investing. It is difficult for employers to purchase equipmet in order to improve their productivity as they cannot find a cheaper financial source for the term more than ne year. Plus, companies are not willing to expand and grow because government impose more tax on them as they employ more people.

The source that inspires and creates the requirement to improve the productivity is healthy and fair competition. Unfortunately, it is replaced by machination and conspiracy, in all sectors of economy. 
It has become an accepted standard of governance that a group of few people in the name of their poitical parties swindles properties of the country and capital city in close “partnership” with their partners, relatives and tribes. 
The third reason of high tugrug interest rate is the inflation that is about to gallop. Economists say sometimes that inflation is the robbery of government. The government inceases budget expense at any time they wish to, saying it is for the sake of people. In fact cost of increase and disbursement is almost and always higher than the help it selp. Becuase the assistance is organized so that people in close contact with political parties, their friends and relatives benefit first. The same princeiple is governing almost all state owned enterprises.

The devaluation of money can be limited if, only the budget expense is less than 17 percent of GDP and its growth is less than the growth of GDP. Those in Central Bank of Mongolia, who prepared the above mentioned program, surely know that if we fail to eliminate the above factors affecting the bank policy, then the monetary policy will fail to achieve its objectives.

The Central Bank is the most politicized institution like any other institution that are supposed to be free from political influence. Even if the Central Bank authorities want to say something, those who appointed them will shut their mouth by giving a black look only once.

Should taxpayers continue to pay for prodigal expenses of irresponsible government? How long Mongolia people must serve as a guinea pig?

Translated by P.Shinebayar