G.Bumchimeg: A stable tugrug is not necessarily good for competitiveness

G.Bumchimeg, managing director of the Mongolian Economic Analysis and Research Center (MEARC), addressed the recent depreciation of the tugrug in a recent interview. In what was a record high amount, the tugrug to US dollar exchange rate reached 2,500 MNT against one USD.

The following is the interview where G.Bumchimeg delves into the recent depreciation of the tugrug and why it may not necessarily be all bad.

The tugrug to US dollar exchange rate reached a record high amount of 2,500 MNT against one USD. How would you explain that despite the fact that the foreign exchange reserves held by Mongol Bank have tripled, the tugrug has not appreciated but inversely has depreciated?

First of all, growth of imports outpaced growth of exports. In addition, despite the fact that the foreign exchange reserve has exceeded 2.9 billion USD, two billion USD of this amount was provided from by the People’s Bank of China through a swap agreement. When the two billion USD owed through the swap agreement is repaid, the reserves will be less than one billion USD. This essentially means that we will not have the capacity to repay any large external debt obligations. Therefore, we cannot consider the foreign exchange reserves as sufficient. The majority of the increase in the reserves is directly attributed to the IMF program.

Mongol Bank has focused its efforts on increasing gold purchases, even launching several campaigns to encourage individuals and companies to sell to the central bank. Do you perceive this as a significant contribution in increasing the overall reserves?

The central bank purchases gold from individuals and companies mining gold in exchange for tugrug. Then, Mongol Bank turns the gold into US dollars and stores it in the reserve. So you can say that purchasing gold is a type of market intervention to issue tugrug. The idea that increased gold purchases by Mongol Bank are helping the reserves increase exponentially while also increasing gold exports do not seem to represent reality. It is essentially the same process as a commercial bank purchasing gold, selling it on the international market and then selling the US dollar proceeds to the central bank. Of course, this does not mean that the central bank should or will stop purchasing gold.

Would you agree with the explanation that the recent tugrug depreciation was caused by seasonal conditions? Personally, I have perceived the tugrug to be rather stable recently. Another explanation is that

the central bank is giving tugrug in exchange for gold. In turn, these companies could buy imported machinery or equipment. This in turn increase the demand for US dollars.

Based on the projection of the tugrug included in our 2016 study, we had believed that the tugrug was performing better than expected, until recently of course.

On the other hand, a relatively high rate of inflation is helping keep the current exchange rate stable. This is affected by not only the nominal exchange rate but also the real exchange rate. For instance, one USD has reached 2,500 MNT. But if the price of domestic products increases, it will become cheaper to purchase imported products. Therefore, maintain a stagnant exchange rate is not necessarily good for our competitiveness globally. In addition, there are large debt obligations Mongolia has to repay sooner than later and having a “weak” exchange rate is ideal for repayment, maybe around 2,500 MNT or 2,600 MNT.

What do you think will be a suitable measure by Mongol Bank in response to the depreciation?

Mongol Bank needs to keep accumulating as much reserves it can from the market. If the central bank purchases dollars from the market, the tugrug will depreciate. But if the central bank cannot do this, once the debt owed as part of the swap agreement with the People’s Bank of China is repaid, there will not be enough money to repay other upcoming obligations. This could result in a repeat of what we saw in 2016, in which we saw a depletion of the foreign exchange reserves.

In general, we have only made minor improvements since 2016 in terms of this and the systemic issue has not been fully resolved. So, I believe the best course of action is to continue increasing the reserves.

The Monetary Policy Commission is set to convene in the near future. What are your expectations for the decisions that will come out of this meeting? Also, what are your thoughts on the currently policy of the central bank?

Inflation is increasing significantly. Therefore, the central will likely not lower the policy interest rate any further. I personally believe the decision to enact a debt-to-income ratio (DTI) limit for consumer loans was a smart decision. It is better for the economy in the long-term if consumer loans are curbed and loans go towards more investment in businesses.

On the other hand, if the government keeps increasing fiscal expenditure as fiscal revenue increases, we will have an economic crisis on our hands later down the line. Fiscally, smart and sound investments must be made or else we will be back in a situation facing debt pressure.