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Tugrug depreciation during Naadam

 

As the holidays continue, naadams attended by our government officials were taking place everywhere in the countryside, the U.S. dollar rate against the Mongolian tugrug went through the roof and the people have already started to feel the effect. The dollar rate has gone past the threshold of 1,550 MNT, for an increase of 11 percent compared to what it was at the beginning of the year. The increase now requires Mongolians, who import most commodities and food except meat from China, to cut their expenditure and face the risk of having their wallets  emptied.

What are the primary factors that contributed to the shortage of U.S. dollars in our domestic foreign exchange market?

One: There was a sudden increase in the money injected into the economy. Mongol Bank has been implementing programs aimed at inflation, such as providing soft loans with lower interest rates in order to prevent an abrupt hike in fuel prices and promote the construction industry. The cash supply has increased by 12.6 percent since the beginning of the year to reach 836 billion MNT. Also, the M1 money supply increased for four months in a row (March to June) and has grown by 28 percent since January this year. The exchange rates were affected by the purchases Mongolians made in foreign countries after they accumulated foreign currency. It can be seen from the fact that savings in foreign currency decreased by 13 percent in April, increased by 15 percent in May, and fell again by 7.5 percent in June. Furthermore, checking account balances fell by one percent in April, increased by 21 percent in May and decreased by 5.5 percent in June.

Two: The balance of payments in the current account has a deficit of 1.6 billion MNT, which is eight percent more (120.4 million USD) than that of the same period of the previous year. Our trade deficit is also going up. When compared to the first half of 2012, imports and exports decreased by 10 and 7.7 percent respectively. However, the deficit of one billion USD has not been reduced. It is a huge deficit that equals about 10 percent of our GDP. Therefore, the deficit is too much of a burden on our economy. Furthermore, transactions that are coming into the current account have been brought down by 65 percent to reach 58.3 million USD. It shows that the amount of money sent home by Mongolians working abroad is drastically decreasing and, at the same time, expatriates are receiving less money from their offshore accounts to their accounts in Mongolia. In addition, many international companies and foreign business personnel have left Mongolia.

Three: Competitiveness is not improving. The revenue generated by the Chinggis Bond, worth 1.5 billion USD, is kept abroad and using it as warranty, Mongol Bank has injected money into the economy as mentioned before. The Ministry of Finance made the first coupon payment of 35 million USD on June 5. It took seven months to decide what the bond money should be used for. Now, after eight months, not even half of the money has been provided. We need to be cautious of the increasing gap between the benefits of the bond and its repayment time.

The bond capital is being allocated through the Development Bank without a tender. It is not really a good indicator for Mongolia, which is ranked 96th out of 200 countries on a corruption perceptions index, and many of our civil society organizations can be implicated in this.

What enhances competitiveness is fair competition. However, we need to remember that more government involvement in the economy gives unfair advantages to businesses that have political connections and imposes disadvantages on the ones without connections.

Four: After holding 47 auctions between the commercial banks and acquiring 855 million USD from the foreign exchange reserves, Mongol Bank injected the U.S. dollars into circulation and pulled Mongolian tugrug from the market. Nevertheless, this measure of theirs only slowed down the decline of the tugrug and was not effective enough to actually stop it. Now that the Central Bank has already let go of one fifth of its foreign exchange reserves, it looks like they are going to deploy the rest (3.1 billion USD) to decelerate a drastic hike in the dollar against tugrug exchange rate rather than reduce it. On top of that, the foreign exchange reserves use funding from the Chinggis Bond, which means that Mongol Bank does not have the right to use it all for sterilization (injection of foreign currency into the market and pull of domestic currency).

Five: External factors, including China’s economic growth slow-down, are also part of the equation . It had a significant effect on our coal exports, which fell by 50 percent compared  to the first half of last year. Currently, coal production comprises 17 percent of our total exports. Therefore, it had an impact on the deficit of foreign currency.

Thanks to the efforts of our highly capable members of parliament, who make laws based only on their “excitement”, the flow of foreign investment into our country fell significantly and currency influx lost its momentum. Despite the law on strategic investment initiated by G.Zandanshatar,  the former Minister of Foreign Affairs, which is applicable to state-owned companies, it still confuses investors today. Foreign investment in Mongolia was 3.2 billion USD in 2012, which was nearly half as much as what it was the year before. In the first six months of this year, foreign investment is 30 percent less than what it was in the same period last year.

The Oyu Tolgoi project solely comprised 30 percent of total foreign investment in 2011 and 60 percent in 2012. If Oyu Tolgoi continues its underground project this year, its share in foreign investment might even reach 80 percent.

If that is the case, what is going to happen to the dollar exchange rate in the future?

Although tugrug transactions will speed up as a new academic year starts, suppliers will mostly turn their tugrugs into foreign currency to prepare for the next business cycle. Also, tuition fees for students who study abroad are paid during this time. Therefore, the demand for foreign currency increases and exchange rates go up.

The roads that are being built with funding from bond capital will reduce the operational costs of businesses and bring about more turn-over. There will also be a wait of several years before the bigger projects, such as electric power, heat and railway, start exhibiting their benefits.

Even though some Mongolian companies have started producing domestic replacements for imports, there are only a few that have the capability to compete in the international market.

Budget expenditure reports have to be produced in ministries, the parliament, the president’s office and the judicial system (excluding the public costs associated with health, education and law enforcement) and they have to be accessible to everyone. Otherwise, the budget deficit will go unchecked. In compliance with the new fiscal stability law, the budget deficit must not exceed two percent of the GDP. However, our government has a bad habit of changing everything by claiming to make amendments to the budget.

The underground economy is expanding. Also, there have been unproven claims that most of the gold mines in Mongolia cross the border illegally. Only one or two border inspections have proven that there is some truth to that claim.

Half of Mongolian companies leave their revenue reports empty and only five percent of them make up 90 percent of collected taxes. The only approach that can increase the tax base in a country like Mongolia is to first reduce the tax rate, and then increase it gradually after a database that collects accurate information is created. However, a package of laws that will increase tax rates has been drafted.

Everything mentioned here points in one direction: The U.S. dollar rate against the tugrug will keep rising and could reach 1,650 MNT by the end of this year.

 


 

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Posted by on Aug 12 2013. Filed under Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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