Tuesday, December 28, 2010

Auditus

Ub Post
December 28, 2010

–źuditus is a Latin word meaning heard or accepted. In English language, it is widely used as auditing or examination and review and was developed as a definite management tool in those countries where private property relations developed highly.

It can be defined as an art of communication to provide evaluation and conclusion by a third party into the utilization of a private property when an owner of the property is different from the user of the property.

As Mongolia undergoes rapid development of private property relations, there is an emerging challenge to carry financial and operational examinations into business establishments and the role and importance of internal and third or independent auditing is growing.

The terminology ‘internal and independent auditing’ is gaining wide acceptance in the private sector and as private companies get bigger and bigger their owners tend to become more reliant on the traditional management approach and entrust the management of their firms to professional people. Undergoing such examination on annual basis is a ‘must-do’ in every country in order to sell shares in capital markets. As for the public or government sector, auditing is still just on paper and developing auditing in its real context is almost like committing suicide for our politicians. Our politicians, who are responsible for transparency and openness of all government activities, speak out about theory very glamorously.

Unfortunately, it is the total opposite in reality. A primary and most important tool to maintain transparency in the government activities is a true independent auditing. Indeed, the Government has specialized agencies institutions in order to control or audit its activities. These are internal auditing and because they are appointed by political parties to which they belong, they serve only their parties not citizens who are owners of property. Such internal auditing is more appropriate only in a country with a strong opposite political force.

State-run business entities of Mongolia really need a true independent auditing. A foreign professional institution would be the right option to assess business activities of state-run firms in a true and complete way.

It should be noted here that MP Ya.Batsuuri last week submitted a definite proposal regarding the hiring a foreign auditing organization for this purpose.

“Election-winning party appoints only its own persons to preside over important state-run firms such as the Erdenet ore-processing factory, the railway system and the national airline MIAT. In this way, the parties continue compensating the costs spent to win elections and raising funds to finance next elections from the so-called state milk-cow. In this situation, it is not possible to place trust on internal auditing. Thus, it is essential to bring an in internationally accepted prestigious auditing firms immediately in order to charge punishment to guilty officials” Batsuuri said.

If the MP’s proposal gets approved and each of above-mentioned “milk-cows” undergo auditing by a foreign professional firm to find and punish those guilty officials, “it will cause the stopping of functioning of the Mongolian state in many areas”.
A war might break out in Mongolia, where guilty ones are not punished, instead, the Cabinet would be changed if the foreign auditing firm would reveal and publicize only a small portion of big deficiencies which are hidden by domestic auditing examination. For this reason, Mongolian politicians talk about internal auditing reports only when they share state property for own wallet or when they cannot deal over how to share their gains. They become silent if they reach a deal after making some noise in the newspapers.

In our government, there is no deal possible, only the price is negotiable. Besides, there is no office tradable because they can create as many new sub-offices as they wish to. Precisely for this reason, foreign auditing must be brought to examine state-run factories and companies, prior to inviting a foreign management team.

Only in this way can we determine where exactly do deficiencies occur and who makes mistakes, after which it will be possible to punish guilty persons based on evidence. It would be cost-efficient to appoint a new management and results would be seen immediately as the tasks are clear. If we are able to make business activities of these “milk-cows” more transparent, then the people’s real interest and requirement to penetrate into politics would disappear, thereby the number of public officials would automatically decrease, opening up the path to receive many public services through Internet.

Only in this manner will a business-like attitude revive, encouraging the young people try their strength in the business sector.

Only Sweden, which managed to develop independent auditing and make government activities transparent under pressure of its people (all-level auditors are appointed and financial and operational auditing is carried into all-level government institutions and its report is published), Norway and Finland (auditing is carried mostly by certified auditors), Denmark (Auditing is responsible for controlling and examining the Government and audit reports are introduced to all-level councils. Since 1997, it passed law on operation auditing), had practically managed to eliminate corruption. These countries have proved that corruption and government have proportional relationships.

The people and taxpayers of Mongolia support, and are demanding the authorities also support, a proposal to bring foreign auditing into state-run big companies, into the State Property Committee and into the Ulaanbaatar City Administration.

Translated By P.Shinebayar

Friday, December 17, 2010

Netted Inflation

UB Post
December 17, 2010

The improvement of capacity to buy a foreign currency by a national currency means the national currency had strengthened. If we bought US$1 for MNT1470 as of January 12, 2010, and after eleven months exactly we buy it for MNT1211, it means the Mongolian tugrug has strengthened by 20 percent during this period.

However, inflation jumped by 11% as of first eleven months or the quantity of goods to buy for a certain amount of money has reduced and therefore money lost value by 11%. In a country where the currency is freely convertible, price changes to buy a foreign currency and to buy goods both should move in the same direction and more goods should be bought for a certain amount of money. For instance in Japan, the stronger the currency, then deflation is higher or prices goes down.

But how is it in Mongolia that prices are growing when the tugrug is getting stronger? The reason is that the national currency is not able to stop the price growth, despite the currency getting stronger and stronger. Then why the price is getting so high?

The inflation is enormous. Basically there are four types of inflation in the world, including demand-pull inflation, cost-push inflation, administered price inflation and industrial inflation. In Mongolia these four types are simultaneously taking place at different rates, netting whole inflation.

In Mongolia, economic volume per capita is low, one third of the population is poor and almost one third of consumer goods consists of only five kinds of foods, including meat, flour, rice, sugar and potato. In addition to these goods, the price of energy and petroleum has a remarkable impact on inflation and the population is very sensitive to price changes of these few types of goods. Fundamental inflation is the one that is computed excluding price changes of these goods.

In order not to allow the price of these few goods to grow, the Mongolian government takes every possible action. For instance, in order to prevent inflation it regulates the petroleum price by changing the import excise tax rate, regulates the meat price by stocking it in winter time for spring release when it is scarce, holds down the wheat price by purchasing wheat from growers by paying a subsidy and holds down the price of electricity by paying subsidy to cover the energy cost.

These costs are covered from the government budget by taxing a particular group and paying to other groups to reduce the price. The government regulates the price based on goods’ supply in an attempt to keep the price fluctuation stable. Basically, on a long-term basis the Government cannot keep the price stable anyhow.

Unfortunately, prices started to get higher because politicians began to distribute cash to everyone knowing its negative impact, in order to fulfill their election promises. According to the budget approved by the Parliament, the Government will distribute more MNT1 trillion in cash, which surely will increase the demand for consumer goods, meaning the government hardly keeps the price stable by one hand if it pulls the price up it by the other hand.

It is obvious that the supply cannot chase the increasing demand at the same speed and the reason for price growth is that they distribute it during the Naadam Holiday to make a PR as if they give it from own pocket. That is called demand-pull inflation.

This is the most common type of inflation. Another reason causing the price growth is the Government’s decision to raise the salary of public servants by 30% last month, which forced other private business sectors to follow suit and increase their salary. When salaries surpass productivity, it causes an increase in production and service costs leading to price growth.

Besides, health and social insurance tax burden is so high upon Mongolian companies and all these high taxes and levies, instead of supporting the supply through financial market as investment, boosts luxurious consumption in open or hidden ways thus increasing the demand. Cost-push inflation means the one which is caused by substantial increases in the cost of important goods or services where no suitable alternative is available.

The third type is administered price inflation. It is when a certain business can make more profit by raising the price and usually it occurs in an oligopoly-like business or in an industry whose market is completely occupied by just a few companies.

The press informs us that this is observed in the supply of oil products and meat. Basically this type of inflation occurs when there is an economic growth, but it is still observable in our country. The fourth type is the inflation of a particular industry.

Our country is still attempting to recover from the crisis in the construction industry. Though the price of many apartments has fallen because they remain unsold, the inflation forces the price to grow. There is no significant decrease of the price of apartments and in some cases it is getting higher. It should be noted here that people began to transfer their dollar savings into fixed capital, as the dollar exchange rate goes down.

This is the reason why the inflation continues to grow though the tugrug is getting stronger because of pressure of all types of inflation. If the tugrug did not get stronger, this growth could be almost two times higher. Anyway we have a low inflation thanks to an inflow of foreign currency.

Thus, with such politicians and government above us, Mongolia can maintain its speed of growth speed only if there is more foreign investment coming to Mongolia.

Translated by P.Shinebayar

Friday, December 10, 2010

The Armey’s Curve


UB Post
December 10, 2010



The 2011 Budget of Mongolia has been approved, setting three records in its modern or capital development history. First record is that it became the biggest budget in the history of Mongolia (MNT4.0 trillion). The second one is that the 2011 budget is the most cumbersome budget or more than the half GDP.

Third record is that the deficit in this budget will be equivalent to 1/10 of the economy for the first time. Let us analyze each of them in more understandable way. The biggest budget never seen in the history of Mongolia on one hand shows the beginning of rapid economic development of the country. On the other hand, it will be a huge challenge for the governance to pass MNT4.0 billion through the Government. The corruption will get even bigger, leading to expansion of black economy.

The queue of applicants wishing to get a job in government system will get longer and longer and the bureaucracy of government officials will get stronger and stronger. The consumption of government will get more luxurious. Budget of any country is compared to its economy or GDP to measure government’s portion in the economy. This proportion cannot be zero or if there is no government, then chaos will spread and economic creative actions will not create any accumulation or there will be no wealth.

This proportion cannot be 100 percent too. We had experienced it in our recent history. There has been continuing debate about what can be a proper proportion rate in order to make the economy more fruitful and U.S Congressman Richard Keith “Dick” Armey first applied graphics of such proportion and it is called the Armey’s Curve. It is believed that the highest possible proportion of government is that it should not exceed the half of economy. If it does, then it will negatively impact economic growth.

In other words, the government is just like meal. If you undereat or overeat a meal, both diets are bad for your health. Our budget of next year “overeat” by 2 percent reaching 52 percent. Economists claim that 15-17 percent is the most appropriate and proper rate. Does anyone remember that two years ago IMF had rescued our country from real bankrupt by granting a US$290 million credit and that Mongolian Government had pledged to keep budget deficit below 5 percent in order to receive this credit?

Though the European Union demands its member states to keep the budget deficit at 3 percent, Greece and Ireland was about to get bankrupt because their deficit reached to 13 percent and 16 percent respectively. They had to ask credit from abroad to rescue their countries. Mongolia plans to spend MNT4.0 trillion next year, which is more than total budget income by some MNT700 billion, which means budget deficit is about to reach 10 percent of the economy in 2011.

Since the country is going to spend more than it earns, somehow this gap must be financed from a source. There are only two options for the country in budget deficit: Print paper money or take credit from abroad or home sources. The former will directly create inflation.
The latter is to get loan and next generations will pay this loan. It will depend on expenditure purposes of the budget if the second option will create inflation or not. If the budget is spent to create value, there will be more job places and bring other resources into circulation and there will be no risk of inflation.

The inflation will get high if the final consumption grows. Mongolia is now at the risk of inflation because one third of that big budget spending is the cash of political promise to be distributed in the form of social allowance. If such a big money is spent for energy and infrastructure development, it would create more job places, improve economic productivity and exert positive impact to inflation.
This year’s government investment for energy and infrastructure hardly approximates with half of cash handout or with last year’s amount. As World Bank Country Economist for Mongolia Roger van den Brink said, there is a high probability that inflation rate reach up to 25 percent after one year. In that case, it means one fourth of social care will just disappear. It is also said that the inflation is a theft committed by the government.

In Mongolia, budget spending must be low and stable. We should not forget that the budget growth is caused by the growth of price of some minerals at international market, which means we did not create this growth ourselves.

Translated by P.Shinebayar

Friday, December 3, 2010

“Travelers”

UB Post
December 03, 2010

The most precious quality of an administration is its just deed and people’s confidence in its match of words said and actions done.

Unfortunately, such kind of confidence is an endangered thing in Mongolia. In a country like ours where the law pertains not to those who has power and money but only to ordinary citizens, who will believe in government?

Will you be surprised if a list of the biggest lawbreakers of Mongolian laws includes law-making parliament members, law-implementing Cabinet members and its agency heads, law-enforcing court and police officials of all generation? Just go to and look at Zaisan, Nukht and other valleys in the National Park of Bogd Khan Mountain. You will see disorderly and unplanned built luxurious houses, cottages and apartments, in which our lawmakers, law implementers and law enforcers mostly live.

We see how the press makes it public who and where lives taking their definite names and positions and we see how the number is increasing. The highest place to appeal lawmakers and the principal fundament for Mongolian legislation must be the Constitutional Court of Mongolia.

Unfortunately, our Constitutional Court itself settled in a new palace built right on the Zaisan Valley, a part of the Bogd Khan National Park, thereby calling the others for breaking the law. How should we understand that? Does it mean that we, the citizens, have got nothing left to address not to the Constitutional Court but to blue sky which is the only available option above the Constitutional Court, to ask how in all government administration levels the Article 12, Law of Mongolia on Specially Protected Area is insistently infringed by lawmakers, law implementers and law enforcers themselves. It is good that the number of shamans is on increase. Or are our authorities “the travelers”, who have permits to camp on the National Park stated in the above-mentioned law? If they are, then it appears that our “home” is ruled by some passers-by?!

Like Mongolians say “Don’t let someone, who will stay, load the cargo. Most of people who are in power in Mongolia, their puppets altogether machinate lands of Ulaanbaatar City for personal interest only in an open and hidden way, being a part of dirty land business directly and indirectly. These bad guys, who became masters in acquiring a land in the territory of the Bogd Khan National Park behind the name of license to run a tourism business, in order to build their luxurious houses and cottages jointly with their accomplices, have bought and subjugated leaders of political parties.

A pyramid of lobbies who buys the choice of citizens at high price and finance election expenses of particular politicians to make the decision making profitable for them only or of politicians who are pledged as debt security, has erected in Mongolia. Valleys in Bogd Khan National Park is the clear examples of how officials who was elected only serve its people, put their personal interests before the peoples’ interests and how such trend has “developed” into a day-to-day function standard of all recent administrations

The only method and chance to change such system is next elections. It is obvious that in next elections the people have no reason to believe in those “valley residents”, who took the law into their own hands and makes a mock of their people. We can do nothing with those who already settled in the Bogd Khan valleys. We just need to make this area a special zone of Ulaanbaatar City to charge relevant tax or fee and use this money to finance projects to turn ger districts into apartment blocks.
Even a goat understands that Ulaanbaatar City can be free from air pollution only after the ger districts turn into apartment blocks. Generally, it is already time to make political parties publicize their separate reports on origin and amount of election donations and their expenditure, on each of candidates. We can live a healthy and energetic life only if we will be reminding the politicians continuously and constantly that they are servants of the people. Today’s politicians are not able to do all these changes and reforms.

As they hostage each other, they can talk rhetorically, but are not able to do anything. Let them live in harmony. Otherwise, they might beat each other and tear down our home.

Anyway, next election is approaching. Very soon, a new young generation, who has sagacity, who loves their homeland, who are free from machinations and various dirty things and who are intelligent, will come to power as a new political force. But for today, Mongolia is ruled not by the governance of justice but by the law of governance.

Translated by P.Shinebayar