A.Batsukh, the president of Mongol Bank (Bank of Mongolia): It can’t be said that demand is decreasing because of only limited loan giving.
Q: Budget of year 2008-2009 and budget modification are under discussion. What is the position of Bank of Mongolia?
A.Batsukh: Basically, we need to pursue strict policy to shrink the budget. Budget expansion is recent years demanded increasing money supply. The increase of interest rate is the measure to limit money supply, but it results decreasing private investment. Therefore, harmony of flexible monetary and budget policy is required to avoid from creating negative impact of “push out private investment” from economy and double impacts of “price-salary-price”. I hope that the State Great Khural will understand it at the level of policy and make positive decision.
Q: Some economists are afraid of too wasteful budget. Bank of Mongolia put forward the issues of shrinking monetary policy and not to increase salary widely, in order to harness already soaring inflation. Can you give more details?
A.Batsukh: We are proposing not to increase salary of state officials and servants until harnessing inflation and stabilizing the economy. Because in Mongolia, there is a wrong standard was set that the increase of state workers salary is the guiding standard for the private sector’s salary increase. It intensifies the second wave of inflation and fuel up inflation further. I hope that there will be a progress in policy level in creating not temporary income source but the permanent ones. Over 50% of the income tax was formed through windfall taxation. If the copper price will decrease due to the world financial crisis, the tax income will be decreased. I think it will be correct way to optimize social welfare expenses not to be distributed to public widely, but focused on socially vulnerable part. Budget investment enormously supports the actions to create profitable and value added industry, to invest in the industries to replace imports and improving infrastructure.
Q: Once you said that the salary of state workers in bigger than their productivity. What is your opinion about the minimum rate of salary and average level of salary in Mongolia?
A.Batsukh: The salary must be set according to a worker’s productivity, products and market price of the service. But in the recent years salary was always higher than productivity increase. Also salary was increased several times with small time span and it created demand based inflation in the economy. The minimum rate of salary will be renewed by the Government. It can be calculated not by the fixed methodology, but by different calculation methods.
Q: Bank of Mongolia decreased the interest rate of bank’s minimum reserve. Can the policy of the Central Bank be effective against inflation?
A.Batsukh: Money and loan distribution exceeds their demand. Between 3 quarter of 2007 and 1st quarter of 2008, petroleum price increased occasionally and food price increased in the world market. Therefore, Bank of Mongolia pursued strict monetary policy in order to prevent inflation of money and “warming” of the Mongolian economy and soften the impact of “second wave” of the petroleum and food price increase. If the money supply will be the same as the previous years which is 45-50%, the inflation rate would be 5 points higher than 31.7% by September 2008 and 12 point higher by the end of this year.
Q: In relationship with the policy of Bank of Mongolia commercial banks limited and cut their loand especially housing loan, people don’t like this policy. Can this measure decelerate the inflation and decrease of price?
A.Batsukh: The real estate price “bubble” is blowing. It gives much more advantage to people. Housing price fall is much related to many reasons such as demand of buyers is falling and new construction number is decreasing. As for now, commercial banks and construction companies are studying to complete ongoing construction of buildings and apartments and sell them according to the market demand. Central Bank will support it. Of course, we will pay attention in implementing methodology based on market economy.
Q: How will the world economy crisis affect in Mongolia? People understand that US$ is getting weaker against MNT.
A.Batsukh: It can bring two sided effect; negative and positive impact.
Negative: Economy growth of our southern neighbor will decrease quite sharply, decrease of copper commodity, fell of indirect and direct investment. In relationship with these reasons our budget income will decrease, deceleration of economy growth and shortage of investment funding.
Positive: It teaches us how to calculate our export commodity price in mid and long term. Also it will decrease of crude oil price, cool down in economy warming and inflation in China will decrease. It can help our inflation to decrease.
… Banks can optimize their loan giving based on the close calculation, considering domestic and foreign market demand and development. 70% of our foreign trade is made in US$ or basically MNT and US$ exchange rate is based on domestic demand supply. Export income will decrease but import demand will be increased. US$ and its exchange rate is surging. It hard to predict the future trends.
Q: What is main index in the Mongolian economy? Can you explain pros and cons?
A.Batsukh: Mongolian economy index by September 2008:
Economy Growth: 10.2% /as predicted/
Loss of the state budget: 3.1 billion MNT
Loan interest (year) 21,5% /MNT/, 15.7% /currency/
М2 annual money growth 15.2%
Annual growth of total loan debt 46.1%
Annual gain of MNT exchange rate against US$ 3.2%
Export import ratio 0.72
It leads rejection of too costy expenses. Bank of Mongolia will take active part in bringing investment in strategic projects that can create workplaces in order to eliminate negative impact on economy growth and workplace.
Q: In relationship with inflation, Bank of Mongolia was less cooperative with the Government and less informative for the parliament. What is your opinion?
A.Batsukh: Criticism is always helpful. There are always issues of considering and pay attention. We know that inflation is soaring since the second half of last year. Therefore, Bank of Mongolia paid attention on the project of main principles regarding the State Monetary Policy. For example we are presenting explanation and presentation to the State Great Khural, studying inflation trend and its reason through money supply, total demand (including Government budget and its impact on economy), industrial expense, external sector factors categories. It was first work so it could have some mistakes. The policy of budget at time was under criticism. Not only Bank of Mongolia has all information, every ministry and agency have access to information. It better to be discussed by all of us, therefore, the budget composed on this basis.