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Corruption-restraining capital market

Since signing a memorandum of understanding with the government, Mongol Bank has printed approximately 3.5 trillion MNT in three years, and injected the money into the economy through commercial banks under many different programs. This amount of money, which equals 75 percent of Mongolia’s budget revenue, has gone to banks with an interest rate almost three times lower than the market’s rates. Having calculated their costs and profits after receiving the money, the commercial banks have increased their interest rates by three to four percent when lending to clients.
In this fashion, only a few commercial banks keep receiving billions of tugriks with an interest rate of five to six percent under the programs for price stabilization and housing loans. However, they are getting the money with no specific terms or any restrictions, such as a requirement to return the money if they are not able to lend it out. It appears that the banks have significantly cut their lending to people since 2014.
By the end of 2014, approximately 100 companies acquired loans under the “Export Promotion and Export Substitution 888” project. Some companies are still not able to get loans despite participating in the project and having all required documentation ready. As a last resort, those companies established an NGO named “The Group of 777” and held a press conference to demand that the government not show discrimination.

WHO PROFITS FROM GOVERNMENT BONDS GOING THROUGH BANKS?

Simultaneously, with the price stabilization program, the government started issuing a large amount of short term bonds. In other words, the government started covering its operational costs using loans. The government issued bonds worth 2.5 trillion MNT and 2.6 trillion MNT in the fiscal years of 2013 and 2014 respectively. This year they will issue bonds worth 3.4 trillion MNT, 2.1 trillion, of which is already out in bonds.
It catches one’s attention that the largest amount of bonds have been purchased by a small number of commercial banks only. Only four or five commercial banks are artificially increasing the interest rate of the government bonds, which becomes the base price in the economy. It is causing other interest rates to hike. This is one of the reasons why the interest rates offered by commercial banks are very high and are not going down.
The interest rate of government bonds was nine percent on average in June 2014. However, banks increased it to 16 to 18 percent in only three to four months.
Nevertheless, these high interest rates are financed by the public budget, i.e. taxpayer money. From here, one can see who profits from increasing the interest rate of government bonds through commercial banks and who pays to allow them to gain profit. It is smart to keep the private sector profitable. However, the people must know everything around the expenditure of public budget.
Mongol Bank does not publically disclose which commercial banks of Mongolia are acquiring those soft loans, or under what criteria. It is believed by Mongol Bank that such detailed information of private banks does not need to be made public. However, the people are not aware that the government bonds come from the public budget, which is made up by the taxes we pay.
Suspicion arises when the commercial banks receive cheap resources from Mongol Bank, purchase six month government bonds with an interest rate of 16 percent, and postpone lending the money to clients for unidentified reasons to make a profit of ten percent. Mongolia currently does not have a mechanism for independent audit that could verify this hypothesis and investigate how private banks are handling public funds. The reason that we lack such a system is because the owners of almost all banks eventually become members of parliament who make the laws, is it not?
In contrast to almost all industries struck by economic decline, who are caught in debt and seeing their biggest companies unable to pay employee salaries on time, the commercial banks have thrived. Those banks made a profit of 330 billion MNT in 2014. It shows how privileged this sector is.
The private sector should obviously be profitable. Nevertheless, the people must know everything when it comes to the expenditure of the public budget. The private companies that have barely managed to acquire a loan with an annual interest rate of 24 percent and are struggling to pay the monthly rate of two percent want to know more about it.

WHO PROFITS IF GOVERNMENT BONDS GO THROUGH THE STOCK EXCHANGE?

As previously stated, government bonds (tugrik loans) go through Mongol Bank only, and are purchased by a small number of commercial banks. Private companies and individuals are not able to buy them. However, by the end of 2014, there was a decision to have the government bonds placed on the stock exchange, which stopped commercial banks from acting as brokers. However, it did not take long before a new chairman of the financial regulatory commission reinstated the previous process. As the commercial banks retrieve their monopoly, they are still conducting all transactions.
Over the course of a few months, when the government bonds went through the stock exchange, approximately 150 domestic and foreign investors were newly registered in the capital market and purchased bonds worth 80 billion MNT. The senior management of the stock exchange claims that an additional 60 billion MNT of bonds is currently in demand.
When the trade of government bonds was regulated by the market for the first time in history, the secondary market started functioning. It made the interest rate of government bonds go down, which has had positive impacts on budget expenditure. On the other hand, it allowed the 700 billion MNT reflected in the 2015 public budget as payment of government bonds to be allocated to thousands of individuals and companies, instead of the owners of a few banks.
It means that the government bonds, which are most guaranteed to be repaid when they are on the stock exchange, could be bought with money from the social insurance fund paid by you and me, and placed in an account in a commercial bank with a ten percent rate only. The only way to keep the public funds under public scrutiny, rather than private control, is the capital market.
It is currently impossible to know how much the decision makers are being rewarded for putting public funds into commercial banks. On the contrary, if they were on the stock exchange, there would not be any room for corruption, as buyers and sellers do not meet face-to-face.
Another example of how the lawmakers are stealing from public funds has recently been revealed on the internet (http://www.mass.mn/n/36105). It appears that some members of parliament acquired loans from Development Bank, claiming that they would implement various projects using the names of the companies that were included in their income statements.
M.Enkhbold received a loan of ten million MNT, M.Garamgaibaatar 30 million, S.Byambatsogt 23 million, L.Enkh-Amgalan 34 million, J,Enkhbayar 14 billion, Su.Batbold 500 million, and N.Nomtoibayar 55 million MNT. Is this true? Isn’t it the time to restrain members of parliament from taking money out of public funds? Speaker Enkhbold, did they become a member of parliament to steal from public funds? If they want to have a piece of public funds, they can turn their private companies into public shareholding companies.
Public funds must be on the stock exchange, regulated by market principles. The stock exchange is a financial market where it is easy to have public scrutiny, set prices in a fair way, and restrain corruption.

Trans. by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=15155

Posted by on Jun 30 2015. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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