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The Kingdom of Mongol Bank

A week ago Janet Yellen, Chair of the Federal Reserve System of the United States, announced that the Federal Reserve had increased its federal funds rate by 25 base points, after seven years at zero.

As soon as the news was out, international stock exchanges saw significantly increased trading, whereas the price of gold reached its six year low at 1,050 USD an ounce.

However, Mongol Bank has had its interest rates at 13 percent for a year. The United States has an economy as large as 18 billion USD and accounts for one fifth of global GDP. So, how does a difference of 25 base points in the federal funds rate affect a small, 10 billion USD economy such as Mongolia’s?

 

THE FEDERAL RESERVE SYSTEM

AND ITS CHAIR

 

The Federal Reserve System, also known as the Fed, was set up in 1913 after the enactment of the Federal Reserve Act. The Fed is the central bank of the United States, and is responsible for supervising and regulating commercial banks, and overseeing monetary policy,

The fifty states of the United States are divided into 12 districts, each of which has its own reserve bank. Commercial banks are supposed to become a member of the district reserve banks and purchase stock.

Every district reserve bank has the right to buy and sell government securities. In order to operate in all states, a commercial bank has to be a member of the Fed.

Every district reserve bank has nine directors, six of which are represented by member banks and businesses, with the rest being appointed by the Board of Governors of the Fed. The Board of Governors implements the monetary policy of the Fed through district reserve banks.

The Board of Governors has seven members serving a 14 year term, appointed by the President of the United States and ratified by the Senate. The President of the United States appoints the chair of the board, with a four year extension. Once a director is appointed the chair, they lose their voting rights.

The objective of the United States’ monetary policy is to eradicate unemployment, keep prices stable, and minimize inflation. Besides supervising the operations of commercial banks, the Fed set the maximum savings rate until 1986. Today, the Fed has a mechanism of loan control where they set the maximum amount of securities purchased with capital not borrowed from others.

The Fed uses three tools when implementing its monetary policy. They include setting the necessary amount of funds that depository institutions must hold in reserve, setting the discount rate, and setting the federal funds rate.

The third tool is to take part in the Federal Open Market Committee, which is also chaired by the Chair of the Federal Reserve System. The main goal of this committee is to increase the employment rate, support economic growth and price stability, and ensure stability of the financial market, loan interest rates, and currency exchange rates.

 

MONGOL BANK AND ITS CHAIR

 

The main objective of Mongolia’s monetary policy is to make sure that prices are stable. In other words, keeping the inflation rate at a minimum. But the objectives do not include macroeconomic goals such as reducing unemployment rates, like the Fed does. The Law of Mongolia on the Central Bank states that the President of Mongol Bank is to be appointed by Parliament to serve a six year term, with a recommendation from the Speaker of Parliament. The President of Mongol Bank also has a council to advise them on matters that are in the president’s portfolio. The President of Mongol Bank makes the final call on the formation of the council and its operational procedures.

The Council of Monetary Policy, for example, has twelve members. They include the President of Mongol Bank and eleven other members, six of which are internal members (seven if you count the president of the bank) such as the Deputy President of Mongol Bank and department directors, and five external members including the Deputy Finance Minister, representatives from the senior management of universities, and scholars.

According to the law, Mongol Bank is an organization dependent on the decision of a single person. Therefore, the person who makes the final decisions has to be held accountable for everything.

Decisions coming from the President of Mongol Bank directly affect the economy. N.Zoljargal, President of Mongol Bank, and N.Altankhuyag, then Prime Minister of Mongolia, signed a memorandum of understanding to cooperate on a price stabilization program in October 2012, and initiated the program to create a stable system for financing in April 2013.

In order to implement these programs, they have printed 3.8 billion MNT so far and injected the money into the market. The fact that the prices of goods and services should be set by the market for the market’s long term benefit, rather than by the government, has been ignored by the governments that have had ruling power in Mongolia. The reality today is that everything that has been done under the name of setting or stabilizing prices ends up leading to an economic decline.

Mongol Bank is supposed to be the institution that makes the strongest demands that the government should not set prices and ensures its independence from them. On the contrary, Mongol Bank has initiated these price-restricting policies and worked together with the government. An example of what happens is that housing prices have doubled and disrupted the relationship between demand and supply.

Today, Ulaanbaatar has 40,000 empty apartments and 17,000 households living in the ger districts, carrying their water and using wooden toilets. Soon, the commercial banks that have funded construction companies will have to take ownership of the apartment blocks they built. When the constitutional court allowed people to rent out the apartments they were using as collateral, commercial banks stopped providing the eight percent housing loans.

This proves that loans twice as cheap as the market rate cannot keep being issued for eternity. This means that the government can no longer make up for its deficits by acquiring loans.

Changes made to the federal funds rate by the Federal Reserve System of the United States affect every open economy. For instance, it affects the banks that are about to invest 4.4 billion USD into the largest project in Mongolia, and their decisions about when to transfer funds and what interest rates to use.

LIBOR has already increased by almost one unit. A stronger USD results in weaker currencies around the world, which affects the livelihood of everyone to some extent.

If Mongol Bank truly wants to target inflation, it is time for them to reduce their interest rates immediately. Mongolia currently has an inflation rate of approximately three percent. Isn’t it time they decreased their interest rate to a single-digit number at least? If that happens, commercial banks would also lower their interest rates, forcing them to immediately resume granting loans.

However, despite what recommendations might come from the Council of Monetary Policy, it is all up to the President of Mongol Bank – the King of Money – who will make the final decision.

 

Trans. by B.AMAR

Short URL: http://ubpost.mongolnews.mn/?p=17631

Posted by on Dec 28 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.

1 Comment for “The Kingdom of Mongol Bank”

  1. The King of Money is related to the Monghol bank in a way to keep the prices as they are today. The rent for the apartment is also increasing and the people living in the Ger need the toilets and water everyday.

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