‘Printing money has huge long-term consequences’

Head of the Economic Policy and Competitiveness Research Center B.Lakshmi delves into some of the challenges facing the Mongolian economy in the following interview with Daily News.

There are rumors that the central bank may print a hefty sum of money to reduce fiscal deficit and finance some projects. If this is true, is this the right decision to make considering the current economic state?

Countries facing economic slowdown and higher fiscal deficit in connection to the pandemic printed money. The objective of this is to overcome short-term difficulties. In other words, welfare, benefits and government supports expanded during the pandemic, while enterprises had to close down, leading to additional fiscal deficit. In such a case, some countries chose to print money and inject it into the economy as a countermeasure. However, the situation is different in Mongolia.

Right now, mineral prices are high, and the super cycle is upon us. This phase is usually short – lasting a year or two at most. Had we managed things right and used this growth to our advantage, we wouldn’t have had to print money. Basically, it was a matter of supporting mining companies, eliminating any obstacles they faced, removing bureaucracy, boosting exports, and speeding up freight transportation. Unfortunately, we’re getting in the way of ourselves. In the end, Mongolia is about to choose the worst option with high consequences to expand the economy.

Printing money tends to be effective in the short-term, but how does it affect the economy in the medium and long term?

Of course, you will not see the adverse impacts of money printing immediately. But it can bring serious problems in the longer run, especially on the inflation side. It could lead to price spikes of items we use from commodities to service to real estate properties, as well as all the things we’ll need in the medium to long term. A large indication of this was the drastic surge in property prices we had last May. The next spike is likely to occur in August. Printing money may seem like a good option for addressing short-term difficulties but it has huge consequences in the medium to long term.

The National Statistics Office recently released its semiannual report, outlining considerable rise in inflation due to higher prices of commodity, particularly imported goods. In addition, household income dropped 7 to 8 percent. These are heavily affecting families. How can inflation be contained now?

Incomes of some businesses shrank and their operations have been disrupted. Some are even shutting down their doors permanently. This is leading to a decline in household revenue. The Mongolian economy is not diverse enough. Most goods are imported, which requires foreign currencies. The volatility of the exchange rate can directly affect prices of commodities, which can add pressure to family budgets. Moreover, the increase in transportation cost heavily affected prices this year. Challenges at the border and customs disrupted the supply of products and goods for nearly two months.

There’s no way to directly protect the economy from price spikes. This can be regulated only by the management of demand and supply as we have a free-market economy. Most importantly, products need to be imported without difficulty or bureaucracy, and companies need to be supported. This way, we can curb the price spike.

The increased transportation cost will ultimately be paid by consumers. A possible countermeasure for this would be tax relief and exemption for companies. In the longer run, Mongolia will need to support its local producers and manufacturers to stabilize prices.

Coal export fell by 38 million USD in June compared to the previous month. How can Mongolia better benefit from the current super cycle in mining?

Mongolia is rich in natural resources, and right now, the pandemic is coinciding with the super cycle for mining, which has peaked prices of mineral products on the global market. This cycle is giving us the opportunity to get out of the pandemic-induced crisis. However, we’re hindering, burdening and paralyzing ourselves. As a result, Mongolia hasn’t been able to benefit from the robust growth. This is evident from the border disruptions and export decline. Locals had been despising the mining sector and mining companies over the years, but now, they could be our savior.

If we want to take advantage of the super cycle, we must first accelerate exports. Secondly, the government needs to support mining companies in all aspects and remove all barriers they face. In general, we must be quick on our feet to make the best out of this time. We failed to take advantage of previous super cycles and I fear that we might face the same results this time as well.

It’s still unclear when the COVID-19 pandemic will subdue. If the virus continues to mutate and pose bigger risks, what could happen to the Mongolian economy?

The current state indicates that the government agencies failed to work well amongst themselves. There’s no unified policy either. The border issues must be discussed and managed at a very high level. Only by working together can we resolve this problem. Had we been on the right track, Mongolia could have been well prepared even for the community COVID-19 outbreak and the government wouldn’t have had to be so involved in this matter. This is the consequence of failing to work efficiently together for many years.

In the case the pandemic isn’t put under control and the virus continues to mutate, the current border issues will worsen. Only good, efficient management could save us then. When the pandemic hit Mongolia about half a year ago, borders faced difficulties. I can understand that the authorities had to impose a lockdown back then since it happened so suddenly. However, half a year has passed since then and still it is not managed well. The public are paying the price. This demonstrates that the government is unable to deal with the problem or work efficiently together. If exports and imports can’t be conducted by trucks, they should switch to plan B. They should’ve already looked into opportunities to use the railway and made necessary arrangements. The disinfection gate and necessary arrangements for truck drivers should have been put in place. Yet, it took the government six months to do all of this. It’s not just Mongolia facing the pandemic – the whole world is. Yet, other countries are able to resume their border throughput normally. Why can’t Mongolia do the same?