Economic advisor to Prime Minister speaks candidly on Mongolia’s economy
N.Enkhbayar, economic advisor to Prime Minister J.Erdenebat sat down with itoim.mn to discuss the current state of the economy, the International Monetary Fund (IMF)’s extended fund facility (EFF), and the decisions that Cabinet will face going forward.
The Prime Minister proclaimed that a green light had been turned on for the economy. What basis does this statement have? From your view, what real economic change has taken place?
In fall 2016, when the current Cabinet was appointed, the number one priority given to them by Parliament was to implement an agenda to revive the economy.
Mongol Bank, the Financial Regulatory Commission, and Cabinet were all delegated responsibilities by Parliament. Around seven months have passed since then. Almost two months have passed since the government came to an agreement with the IMF to enroll in the EFF. These two agendas are very much intertwined. Both of them are programs intended to stabilize the economy in the short-term.
Due to the government losing sight in economic policy in the past couple of years, the current Cabinet had no choice but to implement a short-term program to stabilize the economy.
The previous administration of Mongol Bank and the previous Cabinet did not realize the consequences that pumping large amounts of MNT into the market would bring. The state budget and the currency system both expanded, leading to a loss of stability and economic health.
Our current work is focused on reversing this precedent and to correct past mistakes. One of the requirements of the IMF was to increase the independence and strengthen the governance of Mongol Bank’s operations.
There are ongoing discussions to made amendments to the Law on Central Bank in order to ensure the reforms to Mongol Bank. The main lesson to be learned is that we must determine how much the monetary policy determined by Mongol Bank will be intertwined with the state budget. The EFF and the Economic Stabilization Agenda both have limits on the expenditure of the budget. The government must abide by this limit.
For instance, in 2018, the expenditure of the state budget must not exceed 34 percent of the GDP and budget deficit must be maintained at around 9.5 percent. If we are able to maintain the expenditure within the limit, the state of the fiscal budget will begin to improve. It is also looking like the policy interest rate determined by Mongol Bank will be gradually lowered. It is very important to see how the budget will change as a result of the decrease. We cannot soften both our monetary and fiscal policy simultaneously. We cannot repeat past mistakes.
Looking at the money supply of countries around the world, the nations that have a growth of fewer than 20 percent in their money supply have stable economies. Nations with over 20 percent growth in money supply usually have economic troubles, such as in Portugal, Spain, Greece or Latin American countries.
Therefore, in order not to increase the money supply too much, Cabinet must not expand the budget. In a time when the EFF is in full implementation, we must maintain budgetary discipline. There does however need to be action taken to expand the monetary policy a bit and lower interest rates. This must be the focus in next year’s budget.
Cabinet has explained it has been able to undertake a lot of reform in order to enroll in the IMF program. Looking at the half-year statistics, while the budget revenue increased significantly, so did the expenditure. So can you say the budget amendments have accomplished what they were supposed to?
The only matter that Cabinet decides independently is the budget. The National Audit Office concluded that last year’s budget was not planned realistically. The market price of commodities was not accounted realistically; therefore the revenue of the budget was overestimated. Parliament used to overblow the forecast of copper prices, leading to an incorrect estimation of the state budget revenue.
For instance, in 2015, 13 months were taken into account as revenue for the whole year. But in reality, only 11 months of revenue was concentrated to the budget instead of 13 months. Due to the overestimation, there has been a large budget deficit which has been patched up with domestic bonds or foreign debt. This precedent is putting debt pressure on the nation and ruining the economy. This year’s budget revenue is doing rather well, which shows signs of improvement.
As of the first six months of 2017, the budget revenue was at around 500 billion MNT. Many analysts have said that this is caused by an increase in the volume of coal exports. Will the budget revenue continue to rise?
Some analysts have predicted that coal exports will reach 40 million tons by the end of the year. However, personally I am against this.
The reason is, it is not the time to rely on the revenue of coal exports. Our infrastructure is underdeveloped and the buyers decide how much to buy, therefore Mongolia can’t dictate the market. Under current circumstances, we must take very deliberate and careful measures concerning fiscal policy.
In light of favorable coal market conditions, does Cabinet have the opportunity to begin large-scale projects? Projects such as Tavan Tolgoi mine or the railway projects?
Looking at the short-term forecast of the coal market, our main importer and customer China’s use and production of steel might increase. The World Steel Association reported that in 2018 and 2019 the world demand of steel will increase by one percent. This is a very large relative increase. Specifically, the steel demand in China is very high. As global steel demand increases, the demand of coking coal follows suit. When dictating policy, we must take real studies such as the one by the World Steel Association into account. Unfortunately, there are few countries in the world that are transporting high demand commodities such as copper and coal by automobiles.
World-leading coal exporters such as Brazil, Canada, the Czech Republic, and Australia have ever-advancing technology in transporting their commodities. In Brazil they are exporting iron ores on three km trains and transport their exports even faster. Yet, in Mongolia, using vehicles for transport slows down the process significantly. A shipment that might take 10 days to get to its destination from Mongolia, takes only two to three days in other countries.
We have a deficiency of infrastructure. We must at least establish an international logistics system, otherwise this year’s 30 to 40 million ton coal export could decrease down to 10 to 15 million tons by next year.
Are there are any infrastructure projects being discussed by Cabinet? Is there any progress on the railway projects?
This year, Cabinet is focusing on improving the speed of transit through the Gashuunsukhait border crossing.
The working hours of the customs office is being extended and becoming more efficient. There are other unfinished projects in the way of implementing the railway project. The existing blueprint for the project does not run through the important border crossings. We need to have discussions with China to tweak the project to run through border crossings.
The Ministry of Roads and Transportation is probably focusing on this issue. After this issue is sorted out, another feasibility study will be conducted. Depending on the study, the cost of the rail will change. If we follow the existing blueprint, it will cost the project an additional 30 million USD. Therefore, the cost of the project is liable to change.
Therefore, if the blueprints and the feasibility study are not conducted soon, the stand-still of the project will continue. These types of projects are very beneficial in the long run.
Are there any beneficial projects in the short-term?
A project that would be beneficial in the short-term is gold. It does not require infrastructure and the owners of mines are ready. There are only environmental issues concerning gold mining. Outside of that, there aren’t any other beneficial
short-term projects.
Out of the 5.5 billion USD financial package that Mongolia will receive as part of the EFF, two billion USD will be invested into projects. Are the projects ready for financing?
The loan agreements made with supporting organizations and countries as part of the EFF were presented to Parliament by Cabinet.
The Asian Development Bank will be implementing two to three projects in finance and infrastructure. World Bank is focusing on an energy infrastructure project. In the fall session, the loan agreements will be discussed by Parliament, and if approved, it will begin to be implemented. The providers of the loan have all determined how the money will be spent. Mongol Bank, the Ministry of Finance, and the Japanese International Cooperation agency will hold discussions to decide how the 850 million USD that the Japanese government is providing will be spent.
The loan from the Japanese government will most likely be spent on improving the balance of payments. Loans that will be used to invest in active economic sectors are from the Chinese and Indian governments. The loan from the Indian government will be used to build a petroleum refinery while the money from the Chinese government will be used to build the infrastructure in ger districts.
Has foreign direct investment increased since the beginning of 2017? Is there any specific company or project that has been invested in?
The specific data is released by Mongol Bank. To name one company that is investing is Rio Tinto.
Rio Tinto has begun exploration activities for copper and gold in Umnugovi Province. Mining exploration activities are very expensive. They wouldn’t begin costly operations such as this one during bad economic times. Only an investor that has trust in the economy in the near three or four years would begin a large exploration expedition such as this one.
Looking at the financial market, there is a large amount of nonperforming loans in the banking system. Some economists are saying that the active assets of commercial banks are worsening. How much risk does this sector have?
When the economy was performing well, the majority of the loans were provided to the mining and construction sector. Once the economy faltered, these sectors have seen non-performing loans increase. Therefore, it has become clear that banks need to diversify their loan portfolio and make decisions based on research. In addition, in order to increase competition, there have been many commercial banks established, with 14 in operation today.
In the spring session, during discussions of the Investment Banking Law, there was mention that two or three domestic banks have unstable active assets. Implementing a measure in the whole banking system could address the non-performing assets of banks. In 2000, Japanese banks and financial institutions undertook major reform.
When their economy had stalled, the central bank and the financial regulatory body merged banks. Powerful banks such as Tokyo Mitsubishi came out from that.
In Mongolia’s case, banks do not need to merge but need to work together to improve their active assets. From the government’s side, legislation must be drafted to allow such measures.