A legislative threat flying under the radar
The SME loan controversy, which surrounds several key MPs and politicians allegedly siphoning funds from the SME Fund, has overtaken the political conversation in Mongolia in the past week and rightly so. But a key issue that could decide the fate of the country’s economic prospects is flying under the radar. Specifically, Parliament is currently discussing a draft bill which is an amended version of the Law on Foreign Currency Regulation.
The main controversial articles of the draft bill include allowing the government and several institutions such as Mongol Bank to set limits and restrictions on the trading of and transactions in foreign currencies. More specifically, the three articles in contention are listed below.
16.2. Mongol Bank will have authority to draft the procedure on placing a temporary restriction on foreign transactions and currency transfers . 17.1.3. The Financial Regulatory Commission will have the authority to restrict transactions that could potentially affect the exchange rate of the tugrug as it sees fit. 16.1.6 Mongol Bank will have authority to place restrictions or embargos on currency flows coming in and out of Mongolia.
The parliamentary caucus of the ruling majority party, the Mongolian People’s Party (MPP), introduced the bill. Seeing as the party has a 64-seat majority in Parliament, the bill has a very likely chance of being approved. This is mainly seen as a reaction to the dramatic depreciation of the turgug against the US dollar. The tugrug exchange rate has increased by 100 MNT to 2,567 against one USD in the last two months. MPP 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.
Criticism of the bill has mainly concerned the aforementioned three articles. Economists such as J.Delgersaikhan and other analysts have said the government is taking too much of a heavy handed approach and overstepping its boundaries in the financial sector.
“Article 16.2, which states that Mongol Bank will determine the procedure on restricting transactions is very vague. If passed, this article threatens to send a signal to investors that Mongolia will not allow free flow of money in or out moving forward. This will be seen as a restriction on the interests of investors in the international market,” said J.Delgersaikhan, a professor at the University of Finance and Economics.
In addition, Article 17.1.3, which would allow the FRC to place restrictions and embargoes on any transaction as it sees fit could pose a danger to investment or be seen as a deliberate restriction on free-market mechanisms, as J.Delgersaikan puts it.
“If the law is filtered well, it does have a lot of mechanisms that are beneficial to the economy. But the three articles in question will be detrimental to the otherwise crucial reform in Mongolia’s financial sector. If the draft bill is passed, we will be saying hello to the new law and goodbye to foreign investment. This would be very unfortunate,” underlined J.Delgersaikhan.
Looking at the current Law on Foreign Currency Regulation, there is basis for the law to be amended. It has not been amended since 1994 and as we all know, Mongolia is not the same country today as it was in 1994. Many economists have underlined that changes do need to be made to address modern advancements and circumstances. Besides the three aforementioned articles which have been the most controversial, most of the draft bill has been progressive in helping modernize regulation in the financial sector. One aspect of the bill which has been commended is the increased role and accountability of Cabinet in maintaining exchange rates stable. Specifically, Cabinet is responsible for maintaining the balance of payments (BOP) and supporting exports.
Mongol Bank has underlined that a 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. Therefore, a BOP surplus would do much more to help appreciation of the tugrug rather than archaic measures such as restrictions on transactions.
The MPP caucus head 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. Despite assertions by MPP, the three articles are largely seen as moves to appease an agitated public. Dramatic depreciation of the turgug has undoubtedly affected the livelihood of many people as it decreases purchasing power and handicaps a large portion of Mongolia’s economy.
But in our effort to curb the depreciation, we mustn’t forget what caused the depreciation that started in 2016. Falling commodity prices resulted in large-scale capital flight from the country. Dwindling investments meant lower cash flow into Mongolia, which limits the country’s options in making up the BOP deficit. A growing BOP deficit meant less dollars on the market, which inevitably causes dollar prices to skyrocket. This time around, the end result could very much be the same as we witness capital flight on a large scale, but it would very much be self-inflicted.