Tough challenges in 2014
It is worth noting that the government, led by Prime Minister Altankhuyag, has worked hard in the passing year. Ministers have taken fewer trips abroad this year and a new norm of holding cabinet meetings every Saturday has been set. The construction of 1,800 km of paved roads was completed within an impressive timeframe, increasing the former 3,000 km of paved roads by 60 percent. This is the longest road Mongolia has managed to build in such a short period of time. It became apparent to the people that such great results can be achieved if there is more investment and no further “dealings” after ministerial decisions.
Altannomics will face some tough challenges next year. Overcoming those challenges will play a decisive role for not only the current government but also the future of Mongolia.
First challenge: Recovering exports
The priority challenges are to increase mineral export competitiveness, start the operations of Oyu Tolgoi’s underground mine, and begin washing coal before exporting. It will save more time if many issues such as cost reduction and Oyu Tolgoi project financing are resolved by their own board of directors, and not by the parliament.
The reason for the decline in Mongolia’s exports after China’s coal imports increased is closely associated with Mongolia’s competitiveness. It is impossible to achieve high competitiveness when trucks are used to transport coal. Therefore, the government will have to hold discussions with its two neighbors about building a railroad to create a transit route.
The key to overcoming this challenge is the railway track gauge. Balanced, stable relations between Mongolia, China and Russia can be made if a rail connection is built, and Mongolia will be able to provide transportation services to both neighbors. It is a win-win situation for everyone, if the two neighbors choose to invest in this project.
Second challenge: Keeping the budget deficit under two percent of GDP
In terms of capital and revenue, it has actually been a luxurious year for the government. Despite the formal budget passed by the parliament, our government had another “budget” acquired through the provision of loan guarantees and the issuance of bonds. The formal budget has been managed by the entire cabinet while the other one has been handled by a single cabinet member. A reality check needs to be done for that cabinet member who is under the impression that he possesses a “divine power” after putting the nation in substantial debt. Also, the projects that are currently being handled by the Development Bank need to be included in the public budget spenditure. A country has to have a single budget, and revenue and expenditure must be transparent. The Fiscal Stability Law states that the budget deficit must not exceed two percent of the GDP. The government must abide by this law. If the law is breached, the government has to be held accountable.
Third challenge: Keeping public debt under 40 percent of GDP
Mongolia will pay a coupon payment of 70 million USD each year for the Chinggis Bond until the principal, 500 million USD, is repaid in 2017. On top of this, having been granted permission by the parliament to issue bonds worth up to five billion USD, the government is currently marketing its Samurai Bonds worth 290 million USD (30 billion JPY). Two years ago, the government provided a loan guarantee for 580 million USD to the Development Bank. When all these debts are taken into account, our external debt has reached almost half of our GDP. A prognosis by the International Monetary Fund (IMF) said that Mongolia’s economy will experience single-digit growth and the inflation rate will increase by a two-digit number.
The next government will not be able to make the payments for the 500 million USD bond in 2017. Therefore, the current government must immediately start creating an accumulation fund. One way to create this accumulation is to carry out a planned privatization of state-owned companies.
As Mongolia’s economic growth and budget revenue drops, there is a need to combine the many existing government funds into one and establish a sovereign wealth fund. This fund must be managed by an expert team elected by the fund’s board and be independent of the government.
In order to spend the budget efficiently, social investments should be made effectively, and social care and subsidies should only be provided to those who truly need them. People who are extremely poor or have disabilities ought to be provided with a payment card with designated uses. The middle class must be provided with stable jobs rather than cash handouts. Jobs are only produced by the private sector as a result of free competition.
Fourth challenge: Creating a good business environment
A good business environment means good availability of infrastructure and non-bureaucratic public services. However, in the current conditions, businesses are negatively influenced by a lack of low-interest loans, high inflation and abrupt fluctuation of the MNT to USD exchange rate. Another difficulty is that there is a lack of skilled workers and people who are willing to do hard labor.
The IMF warned that the price stabilization measures implemented by the Central Bank of Mongolia, in collaboration with the government, have a risk of increasing inflation rates in the long term. On the other hand, the IMF said that a good, flexible policy for MNT and USD exchange rates is being implemented that lets the market determine the rates. When USD rates rise, it has a positive effect on the sales of commodities produced in the country.
Businesses in Mongolia currently acquire loans from commercial banks in USD and repay them with MNT. Therefore, these businesses are particularly vulnerable to unstable exchange rates and inflation. Furthermore, they have suffered from the pressure exerted by the department of taxation, which in turn is frustrated by the interruptions in budget revenue. Foreign investment, which is essential to development, only goes to countries with a stable business environment that has clear rules and laws.
Fifth challenge: Reforming the government
The socio-economic development of Mongolia will start slowing down significantly unless we manage to shift from a big government to a smart government. The livelihood of the next generation of Mongolia will depend on whether this timely initiative, put on the table by President Elbegdorj, can be implemented in time.
This reform to transform a big government into a smart government will greatly influence the fate of not only the current government but also of all Mongolians. Mongolia must rid itself of corruption within the government and put an end to this disastrous situation where only a few people prosper while the rest fall into poverty. Otherwise, the existence of democracy and a free market economy will be at risk.
If this reform is not felt by ordinary people through improvement in their lives, they will lose faith in the government and grow intolerant of their actions. Expressions of strong disapprovals will be made, especially at a time like this, when there is unfair distribution of natural resource revenue while commodity prices rise, and salaries and pensions are not enough to sustain living costs.
Our lives and our future will depend on whether the government, led by N.Altankhuyag, does everything it can in order to overcome each of these challenges.
Translated by B.AMAR
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