One policy, four different standpoints

It is difficult to launch a business by acquiring a loan with 20 percent interest per annum, and since the value of the tugrug, the Mongolian currency, is so low, it is no exaggeration to affirm that Small and Medium Enterprises (SME) are faced with the near impossibility of expanding, although it is them who create most jobs. Meanwhile, larger companies can obtain loans from abroad, or raise capital on the international stock exchange. Everybody complains that the loan interest rate is too high. However, nobody can come up with a solution on how to lower it. For business entrepreneurs, the most important issue is whether or not there will be a decrease of the loan interest rate. Nevertheless, if it is more important for the Central Bank of Mongolia to keep the tugrik currency stable, it seems more of a priority for the Government to keep its political promises of distributing cash to its citizens. In short, despite the fact everybody is aware of the necessity of lowering interest rates, not everybody seems to be keen on cooperating in achieving this goal…

Experts cite several economic reasons behind the unrelenting high loan interest rate. First of all, the high loan interest rates are connected to the high savings interest rates. If the savings interest rate is well below the inflation rate then nobody would keep their money in the banks and capital will not be raised to issue loans. Consequently, it is inevitable that banks which have accumulated their capital from high interest savings issue even higher interest loans based on the sum of its operational costs, risk estimates and profits. Last year the national inflation rate stood at 13 percent, while in Ulaanbaatar it was 14.3 percent. The high interest rate is directly connected to inflation. The inevitable question that arises is why the inflation rate is so high.

Mongolia imports the majority of its consumer goods and is almost 100 percent dependent on fuel import. Such a situation significantly impedes the sustainability of consumer prices. Meanwhile, the populist policies of the Mongolian Government such as the distribution of cash and the salaries raise create further favorable conditions for the increase of the inflation rate. This is an experience that has been proven in theory and practice. A while ago, when the prices of gold and copper topped the world market in 2008, the Government started to distribute cash handouts and the inflation rate rose to a record 34 percent. However, what will happen this year, in times of economic recovery, when the Government promised to distribute cash handouts worth 805.2 billion tugrug? International organizations warn that the inflation rate might rise above 20 percent. In such a situation and despite its efforts, it seems extremely difficult for the Central Bank to decrease its policy interest rate.  So what will happen when the Central Bank, in order to achieve its goal of keeping the inflation rate at one digit number, will not loosen but tighten its monetary policy?

Hopefully, the dream of “fast-track development” will not fade away, but it is highly unlikely that times of high interest rate loans will foresee an expansion of the domestic production in Mongolia. And there is the danger that the “Employment support year” will fail to achieve its goals.  So, instead of blaming each other for the high interest rates loans, the Government, the Central Bank and the Parliament of Mongolia should join their forces in comprehensively resolving this issue. “Mongolian Economy” has interviewed several representatives from governmental and non-governmental organizations on their opinion on the implementation of monetary policy by the Central Bank in 2011.