Consumer government

Consumerism is a social and economic order that encourages the acquisition of excessive goods and services and creates incentives for customers to take on unsustainable levels of debt, which can contribute to financial crises and recessions. This phenomenon has already spread out from individual and household levels to overwhelm our nation entirely. Chinggis bond which was released in 2014 to raise 1.5 billion USD and other bonds, has brought in nothing but budget deficit and debt distress. Now, we are again faced with no other choice but to release a new bond.

Time to pay back our unproductive spending

Not far off is the day when we repay the debt of Chinggis bond and other bonds, which describe vividly that the decision-makers are not competent enough to manage public money. As of the second quarter of 2019, Mongolia’s gross external debt reached 29.7 billion USD, an amount 5 times greater than it was 5 years ago and equaled 56 percent of the GDP, informed N.Bayartsaikhan, the former governor of the Bank of Mongolia (BoM).

By 2022, debt payment should have twice as much as a burden on the state budget.

Gross external debt, Mongolia is due to pay between 2020-2024 is 14.4 billion USD, and it is 3.7 times more than the current foreign exchange reserve of the BoM. Of these, 2.9 billion USD is the sovereign bonds while 1.8 billion USD is payment of currency swap agreement between the BoM and the People’s Bank of China. The remaining 9.7 billion USD is the debt of commercial banks and the private sector. The one with the most immediate maturity date is payment of the currency swap agreement which should be due in August 2020. Since the central banks first entered into the swap agreement in 2011 with 5 billion RMB, the swap line was extended two times in 2012 and 2014. This time around, it was specified in the Monetary policy of 2020 that the bilateral currency swap agreement would be extended again and, the amount would be reduced without causing a burden to the currency exchange rate and balance of payment, said D.Gan-Ochir, a chief economist of the BoM.

Moreover, bonds released in 2012 by the Coalition government which pursued policies to increase economic growth and by the later governments, have maturity dates starting from 2021. By 2022, debt payment should have twice as much as a burden on the state budget. Payment of debt service, for example, equals 19 percent of the state budget in 2020, 29.2 percent in 2021 and 38.4 percent in 2022 respectively, it was stated in the strategic document on debts. If we ensured efficient expenditure of the debts and took advantage of them to diversify the economy, the repayment shouldn`t have had such a huge burden on the budget. At the least, successful implementation of the Tavan Tolgoi power plant project should have enabled us to remain in the country the estimated 170 million USD, Oyu Tolgoi currently pays China for electricity each year. However, 14.8 million USD granted to the Tavan Tolgoi power plant project unit had yielded almost no outcome and the plant, which should have provided a reliable and cost-effective source of power to the South Gobi region is still not in place. Besides, 200 million USD was budgeted for the construction of 267 km Tavan Tolgoi-Gashuun sukhait railway, the main export gateway for Mongolia, of which 164.2 million USD was already spent. The construction of the railway which ultimately should have improved competitiveness of Mongolia`s mining sector and contribute enormously to the economy now has become a favorite topic of tabloids and the eternal waiting game for exporters.

As a result of 2 trillion MNT budget deficit, the government debt equals almost 10 trillion MNT

Amongst other things, the “Street” project, which covered the expansion of 16 intersections, construction of Yarmag bridge and Khui Doloon khudag complex has never helped to reduce increasing traffic jams in Ulaanbaatar. On top of this, we must not forget 570 billion MNT which was spent on road construction projects. In other words, it can be said that the decision-makers have never invested in economically beneficial projects. Then next to the “Chinggis” bond comes 30 billion yen (260 million USD), a 10-year “Samurai” bond, which was supposed to invest in much-needed infrastructure projects. Yet how the proceeds from the bonds were used is still uncertain. 24.3 billion of 30 billion yen was received by the Development Bank of Mongolia. Most of the amount was distributed among the Trade and Development Bank of Mongolia, Ulaanbaatar City Bank, KHAN bank and Capital bank. Yet when we made inquiry about the spending and payment of the bond, the Development Bank of Mongolia replied “The bond is different from Chinggis bond for having no breakdown and we are unavailable to provide with detailed information on this issue, because some of the projects are financed by both bond and the bank funding”.

Risk of the bond cost increase is around the corner

Now, we are facing some serious challenges of paying back those bonds which were spent without any sound calculation and unfortunately, we don’t have a sound solution to this. Even though macro-environment factors showed solid improvement this year, the economy is nonetheless dependent on the external environment and fiscal expenditure is increasing in line with revenue, and that leaves Mongolia with nothing but to release another bond to repay its current debts. “The executive board of the International Monetary Fund concluded Article IV consultation with Mongolia. The organization underscored that fiscal policy should remain tight to bring public debt down to a safe level. Hence, we must have a very real economic outlook for 2020, otherwise, we might face budget amendments and quite possibly Mongolia`s credit rating downgraded. In 2020, Mongolia has none other choice to repurchase previous bonds by using the debt refinancing method because there is a very limited source of financing for Mongolia” says B.Lakshmi, director of Economic Policy and Competitiveness Research Center.

The government repaid Chinggis, Dim Sam, and Mazaalai bonds which were believed to invest in projects, programs and fiscal deficit by applying for a new loan named Khuraldai and Gerege bonds, worth 1.4 billion USD. These new bonds have a maturity date of 2023 and 2024 respectively.

Current government debt equals 2.9 billion USD or 7.8 trillion MNT. Add 2020 budget deficit of 2 trillion MNT, then we owe to pay the debt which equals almost 10 trillion MNT. First and foremost, the IMF approved a total financial package worth around 5.5 billion USD to help support Mongolia’s efforts to reduce the fiscal deficit. Regrettably, one of the biggest programs in IMF history in terms of countries’ GDPs has contributed little to ease the debt burden on the Mongolian public. Current government policy on a debt has been nothing but the sequel of the previous governments’. The new bonds might have a lower interest rate and longer maturity date yet they still are debt.

Here, the main blunder was we have hardly paid enough attention or care to the spending of the bonds. In 2016-2018, for example, only 5 percent of external credit has been used to invest in economically beneficial sectors, such as energy, mining, and agriculture. The remaining was spent on projects in the social and infrastructure sectors. Though, we don’t have enough time to wait for the outcome of these projects. For 5 straight years, we must repay 2 to 3 billion USD external debts per year. Some 90 percent of the debt is in foreign currency, of which 63 percent is in USD. Therefore, business entities who took credit in foreign currency are under intense pressure and it could hurt the economy.