Tuesday, November 23, 2010
The government duty is to build a favorable fair-competition environment for private companies and on the other hand to make infrastructure investment through taxes and other levies.
Unfortunately, in today’s Mongolia, the government serves as a tool to make some group of people get richer and richer instead of fulfilling the above duties, further deviating the business principles and its normal operation instead of building favorable conditions for businesses, which led to disappearance of fair and free competition. Finally, ordinary businessmen “buy” their favorable business conditions by corruption. Though the corruption has been spreading in Mongolia and in our northern neighbor, it is different in terms of their concept.
In Russia, the corruption is feudalizing. There, a few number oligarchs has built close links with authorities and became an extraordinary social class, who machinates with authorities to sell Russia’s rich natural resources and who outbids to buy the world’s most expensive real estates. Meanwhile, ordinary citizens of Russia remain poor. However, because Russians can see and sort out who creates and spreads corruption, they have possibilities to clear out and get rid of them under a certain historical conditions.
In case of Mongolia, the corruption is democratizing. The corruption has penetrated deep into every branch of our social life, becoming a basic survival condition for ordinary citizens. All businesses, no matter big or small, are being fed by corruption.
In order to win a tender bid, which is machinated by decision makers, citizens and individuals race with each other to give bribe in each decision making levels. Ordinary citizens fight each other to have even little connection to any part of mineral resources development. A main reason why the corruption is democratizing in Mongolia faster than its society is that every person began to see the corruption as an only opportunity or only approach available to get or acquire what he wants. As the corruption serves as basic conditions for the existence of society in Mongolia, chances to clear out and get rid of corruption system have been disappearing.
If it continues at current speed, we will soon be among the countries, where the corruption is more democratized than society, where authorities in power get richer and richer while ordinary citizens get poorer and poorer. Economic branches are politically and economically controlled by leaders of machinated political parties in power, under such fancy names as coalition or consensus. Meantime, most of population is gradually getting poorer, increasing the number of people isolated from the society.
So far, one generation that only the minority benefit from quality or international standard education is behind us and the power of government is now passing to inherits of those who ruled the country for the past two decades. In a normally developing country, the income of population grows at relatively same speeds and order to ensure it there must be a real political opposition party in the government. In Mongolia, only few people rule and control the whole country and do whatever they want, under the name of coalition or consensus.
On the name of the state, they threat, rob and shoot to death its citizens. It is getting more likely that soon there will be no one left to say against the words ordered by them. Those who are believed to be smart, intelligent, just and wealthy, go abroad in exodus for various reasons and started to purchase real estates in the country, to which they go. In order to stop this sorrowful trend, first we need a strong political opposition party.
Secondly, we need the involvement of well-informed and intellectual citizens capable to affect decision making. In other words, we lack a strong civil society. These two factors are major guarantees for democratizing the society faster than the corruption.
Friday, November 5, 2010
In a normal and healthy economy, changes to these two rates should be made simultaneously and proportionally. The banking sector standing on the floor of a firm savings rate, while being pushed down by the roof of a falling loan interest rate and which living space is getting tighter and tighter, suffers the most fever heat and shaking. Though official number says that there are 65 thousand registered companies in Mongolia, only half of them are active and 80% of this half employs the staff up to twenty persons, according to the National Chamber of Commerce and Industry.
According to a sample survey conducted by the National University of Mongolia, only 40% of active business entities got loan from banks. They don’t want to take loans as interest rate offered by banks is too high. It is indeed not easy to repay the loan with monthly interest rate of 2% and with maturity of one year only. Because the money is very expensive in Mongolia, all big companies capable to bear risk now take loans from abroad. Because of high interest rate business gets into money shortage and grey economy is growing, which are demonstrated by the fact that non-banking financial service has expanded and their monthly loan interest rates have even reached 5-8 percents in recent times. There is no chance for small and medium enterprises, a major composition in Mongolia’s economy, to expand and grow. A number economic reasons support the interest rate to stand high.
The most important three factors are: first fundamental reason is the pressure by ongoing savings interest rate; the second is inflation; and the third is the Bank of Mongolia itself. A main reason for high savings interest rate is that depositors place their money in those commercial banks that offer higher rates.
In other words, the market supply cost is high. These commercial banks, who collected main funds thank to high savings rate, issue loans with high interest to the entities in need of capital, by adding operation costs, risk costs and profit. The other party in excess cash or the depositors place their money for a high but risky profit. As there is almost no capital market in Mongolia, savings interest rate is not expected to go down for a long period.
A key reason why the capital market cannot develop in Mongolia is the lack of credit in Mongolian companies that issued shares and the lack of a mechanism to guarantee the trustworthiness of all information the companies provide. This is beyond the business scope of Bank of Mongolia. Savings’ interest rate must be higher than the inflation rate for the reason that purchasing power can be kept stable provided only that the money saved in bank would be growing higher than real inflation rate at least.
Another key reason for savings’ interest rate remains high is going-up inflation rate. Bank of Mongolia reported that average increase of inflation rate was 6.5% between 2000 and 2004 and 11.5% in following five years. A major factor which makes the inflation rate go high is the Government which is getting more cumbersome.
They recover cumbersome budget expenditures by means of hiking tax on private sector in various ways or forcing mining companies to pay down-payment. Our authorities have converted state budget, which is supposed to be used to manage macro economic policy of the country, into their means of implementing their pre-elections promises and raising their political image. The budget expenditure has been increasing at astronomic speed, while the accountability related to budget spending has been vanishing at higher speed.
This year budget expense got higher than loans to be issued to businesses and the Government is becoming bigger than all businesses combined. The events like elites of two ruling parties amended the Constitution in the way only beneficial to them and parliamentarians obliged to pass law became members of executive governance or the Cabinet, have created favorable conditions for making the Government more cumbersome and for constant increase of inflation rate. Because legislative, executive and all controlling systems are mixed together, the subject to bear responsibility has lost somewhere and few irresponsible bastards have been doing what they want. As result, the price is now fixed not through market ratio of demand and supply but by political decision, leading to failure to control the inflation anyhow. Inflation is the robbery that authorities do from its citizens.
Third reason responsible for high savings interest rate is opportunistic or timeserving policy of Bank of Mongolia. In a country like Mongolia, which has two banking systems or where the central bank is not engaged in business but controls monetary policy, while commercial banks issue loans to businesses, the management of the central bank must pursue an independent policy free from the Government. However, the management of Bank of Mongolia has become representation of an attempt to balance political power of two ruling parties and therefore cannot take independent and proper actions as soon as it gets alert from market.
Authorities of the Bank of Mongolia are the ones who surely know about who is the biggest borrower of all commercial banks and about how the loan repayment is being made. They are the ones who must inspect operation of commercial banks at any time to reveal deficiencies and violations and who must take necessary steps promptly. Because commercial banks are owned by top officials of political parties, who became principal decision maker of the Parliament and the Cabinet, the Bank of Mongolia do not dear to speak out though they are the only one who is well aware of about why the banking sector which is the most affected by politics, still cannot change interest rates. They also have been silent for many years though they first felt the consequences of a cheap political play to distribute cash. But it is good that they started to speak out past few months.
The policy rate of Bank of Mongolia yet cannot affect savings interest rate of a country like us, whose economy is fever-affected. Monetary policy of central bank only influence minor any impact to money supply into real economy. The above three challenges must be addressed in order to reduce loan interest rate and each of three reasons urge Bank of Mongolia and competent government agencies function intelligently and fairly. Above all they remind ruling parties to be responsible.
Do you remember A.Einstein said once that “We can’t solve problems by using the same kind of thinking we used when we created them”?