MP B.Javkhlan discusses new Law on Central Bank leading up to final discussions in Parliament
January 11 is the last day of discussion for the amendments being made to the Law on Central Bank. Member of Parliament B.Javkhlan, an author of the Law on Investment Banking, discussed all of the changes that were made in Parliament and what the final version of the law will look like.
The fundemental goal of the central bank is to maintain the stability of the tugrug. The new amendment to the Law on Central Bank sought to change this goal to maintaining price stability or inflation rate, but this was not supported and therefore was not changed. What is your position on this issue?
There are measures that the central bank can take within its full rights and ability. There are also things that it cannot do. What a central bank can do the best is to maintain price stability, or in other words, protect the integrity of the public’s income. A central bank can maintain a low inflation rate and implement its policy. The exchange rate of the tugrug is a direct reflection of the Mongolian economy. The main factor for the exchange rate is foreign trade.
The flow of currency into the country and the balance of payments ultimately determine the exchange rate of the tugrug. Yet, Mongol Bank lacks the capability to work on or affect the balance of payments, the flow of currency into the country, and foreign trade.
Mentioning one very simple example is that there is a lot of Mongolian patients going abroad to be treated in hospitals and a lot of money flows out of the country because of that. Mongolia has a trade deficit with its northern neighbor and is only able to balance that with trade with its southern neighbor. The central bank does not have the authority to manage these issues. Since Cabinet is comprised of politicians, members are reluctant to be connected to the management of the exchange rate since it is a very sensitive issue that brings a lot of criticism from the public.
As a result, this issue is left for the central bank to deal with. In the grand scheme, Mongol Bank does not have the mechanisms nor the authority to manage this issue. Basically, Mongol Bank only functions to announce the exchange rate. Yet, looking at the Law on Cabinet, there is nothing that requires Cabinet to maintain trade balance, balance of payments, or maintain the integrity of the tugrug. Therefore, another significant reform has been left in the dust with no accountability. Parliament was not able to discuss this issue at depth.
There is debate about whether or not Parliament will determine the salary of the governor of Mongol Bank. Can you please state your stance on this issue?
The fact that the salary of the governor of Mongol Bank is being discussed in Parliament is frankly embarrassing. During the session of the standing committees, Governor N.Bayartsaikhan said, “I did not think that this issue would be such a big topic. I wouldn’t have brought up the issue if this was going to happen.”
It is almost comedic that standing committees have nothing else to discuss. This does not concern policy.
Instead, discussions needed to be targeted towards maintain the stability of prices. The salary of the governor of Mongol Bank is lower than that of his employees. It has been this way for 30 years. This is in itself a bad system. Parliament will draft a guideline for the central bank to determine salaries for its employees. Of course, compensation for a governor will not be the same as that of executives in commercial banks.
Among the new amendments to the Law on the Central Bank, a monetary policy committee and a supervisory committee will be established. In addition, there is an article which states that the decisions of the central bank will be made on a consensus basis. What is the main significance of changing decision-making to be on a consensus basis?
It is a very significant step in the right direction for the decision-making process of the central bank to be changed to a consensus basis. Competing proposals and policies being brought up is a good thing. The most important aspect of this is that the decisions of the central bank will be more correct and realistic in connection to the monetary policy. In this aspect, the legal reform was important.
However, Parliament did remove a few key points. For instance, the monetary policy must be implemented for at least two years. Yet, the decision has been made to approve one every year. Changing the monetary policy annually brings a lot of politicization into the issue. Approving one every two years does not mean that Mongol Bank will be totally separate from Parliament.
The precedent to report information to Parliament and receive recommendations every quarter and six months is still in place. If the monetary policy is changed every two years, it would mean a lot more independence and autonomy for the central bank to implement its monetary policy.
There was a goal in the 2018 monetary policy to maintain inflation at eight percent. If the guideline was for two years, we believe it could have been lower, maybe at around five percent.
Let’s discuss the issue in connection to the Law on Banking. The central bank is mandated to regulate and improve the operations of commercial banks. Should a resident representative from the central bank be allowed to regulate the whole operations of a commercial bank? Or should a representative only be sent if there is a situation. There is also a lot of debate about the rights that a commercial bank has in restructuring. Can you elaborate on this?
In general, for every 10 MNT that a bank has in its account, it only owns around one MNT of that.
That nine MNT is the public’s money. Therefore, the central bank works to protect the security of the public’s money. Mongol Bank makes decisions on the public’s behalf. The better the regulation and supervision of Mongol Bank on commercial banks, the safer the money will be. The law concerning commercial banks is about 30 years old. This law has seen three economic crises. We learned a lot from those crises.
In order to overcome the next economic crisis and to minimize the loss of assets for the public, the mechanisms of regulation for the central bank is being improved.
There have been a lot of debate regarding the restructuring of banks. Some MPs are saying that this term has to be changed?
You are correct. For example, the term “Restructuring Fund” has been included in the Law on Banking. This was discussed in the working group and modified to “Stabilization Fund”.
Restructuring is not an issue that is directed towards investors. The new amendments are designed to improve the health of the banking system, ensure the security of its customers, and set a basis to overcome the next economic crisis. I want to clearly state that this issue is not concerning the owners of the bank and is not restructuring ownership.