Parliament targets exchange rates with new law
The parliamentary caucus of the ruling majority party, the Mongolian People’s Party (MPP), has introduced a controversial draft bill amending the Law on Foreign Currency Regulation that would allow Mongol Bank to set limits and restrictions on the trading of and transactions in foreign currencies.
MPP has been discussing the bill in its caucus meetings and has said that the bill is intended to protect stability of the financial sector and reduce the dollarization in the economy. This will be achieved through possible limits on incoming and outgoing transactions in foreign currencies by the central bank. Mongol Bank has underlined that a balance of payments (BOP) deficit has been a large contributing factor in the depreciation of the tugrug. In the first eight months of 2018, the BOP has reached a deficit of 361 million USD.
Parliament will decide this week whether or not the bill merits discussion and approval. Seeing as MPP has a 64-seat majority, the bill is likely to be discussed at the least. The Economic Standing Committee has already supported discussing the bill. The bill is likely to be discussed together with the bill on investment banking.
The MPP caucus D.Khayankhyarvaa underlined to the media that the bill is not inherently a legal mechanism targeted at controlling the tugrug to US dollar exchange rate. Instead, he explained, that it is a mechanism that would allow Mongol Bank to intervene in the foreign currency flow in the economy. He went on to emphasize that the depreciation of the tugrug was in part seasonal, due to the large increase in business activity and tourism in the summer months.
“In addition, in connection with an impending trade war between the largest economies in the world, currencies of developing countries are depreciating against the dollar. As demand for imports decreases and export of cashmere products increases, Mongol Bank assures us there is a possibility to maintain the exchange rate at its current levels,” said D.Khayankhyarvaa.
The parliamentary caucus leader of MPP also underlined that maintaining the integrity of the tugrug and exchange rates is not only the job of Mongol Bank but must be a concerted cooperative effort between Cabinet and Mongol Bank.
Many economists and analysts have been critical of the proposed amendment to the Law on Foreign Currency Regulation. There are concerns that limiting foreign transactions and giving the power of authority to the government will slowdown businesses and actively discourage investment.
Knee-jerk reactions to certain economic circumstances have been a common theme for this Parliament, evidenced by the now defunct proposal to enact a hard cap on interest rates. However, even if the new amendment was approved, it only gives Mongol Bank the authority to intervene where it saw fit. Governor of the central bank N.Bayartsaikhan has stated that having a flexible and floating exchange rate helps protect from external shocks and supports export prospects.
“Trying to forcefully maintain the exchange rate at a certain level has serious consequences in the long-term,” N.Bayartsaikhan has said on several occasions in the past.
The current Mongol Bank administration’s caution regarding hard caps or forceful regulations is a positive in the event that the law is ratified. The hope is that Mongol Bank will sparingly intervene in the market by restricting transactions in foreign currencies. Similar to its efforts in trying to instate a hard cap on interest loans, Parliament is seeking to remedy the problem by addressing the symptoms of the issue and not the cause.
The core issue is that Mongolia is in shortage of dollars more often than not. This is due to the fact that the country relies heavily on imported goods and exports barely enough to offset the large number of imports. Despite the fact that Mongolia is in a trade surplus, its BOP is not sufficiently balanced. The obvious short-term solution is to tackle the BOP deficit while maximizing mining exports. At the backdrop of that must be more of a concerted effort to reduce imports through alternative products offered domestically.
In addition, market speculation on the forex market has been a large factor in the depreciation of the tugrug. Any significant depreciation of the tugrug causes people to buy more dollars in fear of continued depreciation. This causes a shortage of dollars on the market, which only drives the exchange rate up. This is why reducing dollarization is important but the current proposed methods will do more harm than good.
Limiting, restricting, freezing, vetoing certain transactions and accounts based on suspicion of criminal activity, money laundering, or terrorism funding is something that is employed by nearly every country around the world. But deliberately restricting transactions in foreign currencies is potentially a rather serious violation of economic rights. It also carries the danger of creating an alarming precedent where Mongol Bank can restrict trading of foreign currencies and transactions on even a weak basis. While unlikely, it creates the threat that this can be employed in a way that is politically motivated. Entire sectors and countless businesses rely on foreign currency trading and transactions for their everyday operations. Limiting this could serve as not only a major infringement of economic rights but also hinder any meaningful development for businesses.