Next Steps

Unfortunately, in reality, often Government ducks. Moreover, at times Government even doesn’t budget the funds. In other words, the Government simply “forgot” to include the funds it owes to the road building companies in its budget! While the government officials were in the protracted spell of “oblivion“, the companies were besieged under loan interest rates. It remains a secret how many companies’ tender funds the Government failed to compensate. The government officials have been evading to respond to any inquiries on the issue citing that “it was impossible to talk about the issue as it is a delicate and complicated matter”. The above leads to a conclusion that the Government itself is a defaulted borrower from the Anod bank. D. Enkhtur, Executive Director of the Bank addressed a letter to the PM concerning the issue, soon after which he was detained and the PM headed to a clinic due to a heart problem.

The incidence whereby the Government itself violated the Public Procurement Law should not be repeated. Businessmen recall similar violations not only with roads and energy bids, but also with purchases of medicines and other products and services. The companies which won Government-announced tenders have been waiting for months and even years after they supply medicines and products to clinics and hospitals for Government compensations. The Law on Public Procurement was amended in 2007. According to the amendments, the Government would conclude contracts with the companies to lay energy transmission lines and roads. It’s a normal practice when in the process of the tendered work the volume of that work increases. On the other hand, the costs of laying roads and energy lines in the countryside increase due to local conditions and settings. And it is precisely when the Government officials diligently but heftily enforce the all-mighty contract. They as if evaporate after importantly declaring that the payment will be made after they inspect the quality of work on the site.

While Mr. X of the ministry keeps moaning and groaning around to finally make the conclusions, the bank-indebted companies would be deeply sunk in the tides of bank debts. Strangely enough, there has not been a case, a single case of the Mongolian government begging its citizens, Mongolian companies, a pardon. If the Government is reminded to pay its debts, it would harass the one who reminds by immediate imprisonment. This is a mistake, a shameful mistake of the Mongolian government that is never to be repeated.

The next steps should not repeat past mistakes.

First of all, the pending revision to the state budget for 2009 should drastically cut the government expenditures. If Mongolia fails to curtail its fiscal expenditures, the IMF will again refuse to implement a program in Mongolia. Mongolia will remain in the lower ranks of creditworthiness. If the IMF turns down Mongolia’s request for a loan, we will have to resort only to bilateral arrangements. This leaves no choice for Mongolia – either China, Russia, South Korea or Japan will be approached but the terms will be tough. Finance Minister S. Bayartsogt says, all in all governments of 6 countries were approached with a request for credit, of which China responded positively. This is the worst alternative. As MP Ch. Ulaan cast a warning to the Finance Minister to see not to get indebted to another neighbor just after unbinding debts of the other one.

Mongolia finds her in a tough financial stance right at the moment of negotiating the investment agreements on the deposits of strategic importance. Some circumspection is there not to tie up the temporary needs of the economy to the major deposits of the greatest future. This caution was expressed by the nine members of the Mongol-Japan Parliamentary Group of the Mongolian Parliament.

The development of the deposits of strategic importance should identify the third economic neighbors, views MP D. Gankhuyag. Japan, for instance, wants to cooperate with Mongolia on uranium, copper, coal and rare earths. Given this fact, MPs propose that Mongolia could request a loan from Japan. In fact, on January 9 the MPs presented their official proposal to the Prime Minister. From the very start of the new year the MPs have been looking for chances to find the so badly needed money for Mongolia. They  started exerting pressure on the Prime Minister to undertake certain steps, in which return the PM established a Working Group with an unusually long title (on January 11 the Government resolved to establish a Working Group to Develop a Plan for Comprehensive Measures to Prevent the Possible Risks of the Global Economic and Financial Crisis). The Working Group has begun meeting since the second week of January and started with the question:”What should be the next step?”

It was not only the Parliament which was pressing the Government to take actions. The New National Party released a statement on January 11, addressed at the Governing Council of the MPRP. The statement demanded that actions were needed to prevent the possible brewing of the prevailing realities into a state-social crisis. In response to the demand, the MPRP Governing Council organized a consultative meeting in the Government house on how Mongolia sees the effects of and is to respond to the crisis. The elite of the Mongolian society gathered and discussed what would be our next move. The academia, scholars, researchers, businessmen, government officers, bankers – all emphasized the same important idea: the next most crucial step would be the Government rectifying its policy mistakes. They unanimously concurred that the state and the society at large would be hit by a larger crisis if the policy mistakes were ignored today. The participants also called for a unanimous savings and rationalization regime in our modus operandi.

The next steps should not repeat past mistakes.

The Mongolbank let the MNT (Mongolian National Tugrug, Mongolia’s currency unit) rate free. A US dollar can be bought for 1330 MNT, or for even more than that. The Mongolbank let it float freely, not to repeat the past mistake. In September, October, November 2008 the Mongolbank made interventions with almost the half of its reserves. It was too faithful to the number “2” not to let the rate go beyond 1220 MNT. Today when the Mongolbank intervenes the money market with whatever it can afford, you, dear reader, perhaps would recall what the situation was like in South Korea. The South Korean Government, wrestling with the rides on won, let its exchange rate free, to preserve its reserves. The South Korean Government took such a measure to shoulder the heavy dollar by itself, with its people, at the time when it started recording exports decline. The Russian Government abides by the same policy. Russian leaders had let the poor rouble go free just before the new year and the people are now worried that a dollar would soon hit 40 roubles. The lower the oil price, the sooner Russia’s forex reserves drain. Uh, not the right time to care about the prestige of the rouble. V. Putin left the rouble unattended to face the crisis shoulder to shoulder with his peoples.

Seemingly, the Mongolbank would also “grant freedom” to a dollar for some time. After all, it can’t intervene into the market with all of its 600 million USD reserves. At the moment, the Mongolbank is incapable to make any further steps in its monetary policy. It’s left but with a hope that the Government would bring “home some bacon” from somewhere. For almost 2 months they kept talking about the procedures for placing the Risk Fund money in commercial banks. While the talk goes on, the Fund will be depleted and what remains would barely be enough to close the budgetary gap. Even if the Fund does have funds, the banks would be cautious to indebt themselves trusting the Mongolbank-Government joint product, the aforementioned procedures, which read quite far off the real life. To this date, no commercial bank has volunteered to guillotine itself by subscribing to a half-a-year-term government’s loan. Bankers, in abstention, cite trivial excuses – the procedures are too complicated, time consuming, somewhat bureaucratic. They want to secure long term financial support, totally independent of the modest reserves of the Risk Fund.

The next step should start with revising the 2009 government budget. B. Batjargal, Head of the Fiscal Policy Coordination Department of the Ministry of Finance, says:”The words of the fiscal and monetary policy makers do not reach the decision makers. Since long ago, the Finance Ministry Fiscal Policy department’s proposals are not recognized by the Cabinet”. It’s been quite a few years when it became virtually impossible to define fiscal and monetary policy in Mongolia. We know that since July 2007 the Mongolbank started implementing a policy to contract the budget. This was not a state monetary policy, rather it was an attempt to offset the inflationary pressures caused by quarterly increases in wages and pensions by M. Enkhbold’s government, which was followed by S. Bayar’s election “warm-up” further sapping the budget. The record high 34% inflation in September 2008 was an aftermath of the policy mistakes of the named governments. The Mongolbank had constantly been asking the Cabinet to cut the budget expenditures. It should have been demanding so. Oil had hit its record high 147USD per barrel on the global market in July 2008. Everybody knows that exactly one month later a world market price turns into a Russian export price. “On the occasion of the oil going crazy in August” the Government replenished its oil reserves. The 44 billion MNT used for this purpose was thus “buried alive”. Although the Cabinet lacked the ability to sense the market, it never listened to the professionals and specialists of the Ministry of Finance and the Mongolbank. Oil price was kept at standstill for 5 months to accommodate the Parliamentary election needs. Meanwhile, a promise was made to annul the VAT to compensate for the losses of oil importers. Election passed, the promise was not kept. The importers drastically increased their prices in August, popping up the inflation to 34%. The Mongolbank was blamed as guilty and the pain was borne by the people. Business circles, fearful, would sit mum. The poor businessmen – timid, toeing the line of erred policies.

2009 is again an election year. Noteworthy, the budget revision would hopefully leave it with nothing to gamble in dribs and drabs for the election marathon. I’d just ask the Premier to put aside politics for a while and ruminate the country’s economy more when making the next steps.

“We need to have gold sold to banks. Not necessarily to the central bank, but to any bank in our banking system” – this was almost the first utterance of the new Governor of the Mongolbank. The Governor makes this statement at the time when forecasts for 2009 indicate that an ounce of gold won’t go any lower than 800 USD. His goal is to increase gold exports and restock the forex reserves. This is all to remind the new Governor about the old mistakes. But to remind the shrewd reader, the very “wise” idea of his own to impose windfall profits tax on gold, materialized when the Governor headed the Budget Standing Committee of the Parliament, destroyed the formal gold sector to the level of ninjas.

In spring 2006 when the draft law on windfall profits tax for copper was being discussed the MPRP faction in the Parliament urgently convened a meeting where it decided to extend this law onto gold as well not to offend the “Erdenet” Russians. Combined with the effect of the diesel fuel price increase, the irresponsible decision of MPs L. Purevdorj and others have resulted in informalizing Mongolian gold sector. The policy mistake cost us 565 million USD. This is a revenue that would have been collected through gold royalty and corporate income tax in 2006-2008. This huge loss to the budget is your mistake, Mr. Governor. Wish your next steps entail fewer mistakes.

 
Mongolia lacks a policy to make her next step right. I can’t foretell the cost of today’s crisis of lacking a policy. At the end of my article, I recap my observations on just one example of state policy making. South Korea is interested in participating in the development of deposits of strategic importance, especially Tavan Tolgoi deposit. South Korea has been expressing her interest since quite a while ago and this interest was reaffirmed during the official visit of the Mongolian Premier to South Korea past October. The South Korean party mentioned about a possibility to involve Mongolia in an international project to lay a railroad from the Korean peninsula to Europe and introduced its project to lay a railway in eastern Mongolia jointly with Russia. At the moment South Korea is implementing a project to develop the Dornod province of Mongolia. It has been active in Mongolia through KOICA, Korean International Cooperation Agency. In October-December 2008 Mongolia hosted a series of delegations from Korea – Minister of Resources, Energy Committee representatives and others. The visits continue. Most recently, a South Korean delegation on environmental reclamation traveled to Mongolia. Mongolian citizens will become able to travel to South Korea with up to three months long visa. Shortly, around the Mongolian Lunar New Year the two parties will exchange notes and formalize this arrangement. Another good news about Korea is that the South Korean Government informed its Mongolian counterpart that it could possibly buy Mongolian Government bonds. Our Finance Minister gladly reported to the people of Mongolia that South Korea was ready to purchase 40-100 billion MNT worth bonds. South Korean Government made quite an educated proposal at the time when Mongolia’s budget deficit was approaching 400 billion MNT. Briefly, South Korean policy is already being materialized. They have already planned their next steps.

The next step of the Mongolian Government, sources say, will be ready on February 4. The days when no mistakes are allowed have come.