Mongol Bank Governor tells MPs why interest rates cannot be reduced

Large foreign companies have borrowed USD760 million to finance their work in Mongolia but all of this is from foreign sources. With the Central Bank’s policy interest rates high, commercial banks cannot charge lower interests and thus cannot service loan demands. The Central Bank fears that pumping money into the market at the moment may destabilize the economy.

The situation was discussed yesterday by the Standing Committee on the Economy during its review of the monetary policy for 2011. The mining industry is bringing in foreign currency to Mongolia at a time when the MNT has abruptly become stronger. This is the classic initial sign of the Dutch disease. Its spread can be very bad for the economy.

The remedy lies in raising the competence of industries besides mining. If Mongolia fails to do this, Oyutolgoi and Tavantolgoi alone cannot take the economy forward. Members urged the Mongol Bank to be bold and to reduce its policy interests.

The view of the Bank’s President. L.Purevdorj, is that inflation has to be controlled and kept stable before Mongol Bank can reduce policy interests. He also wants the Government to reduce the allowances paid to citizens There is also no certainty that even if the Central Bank lowers rates, commercial banks would follow suit. He felt the Government should revise its guarantee of citizens’ savings with banks as this encourages banks to attract deposits on tempting terms. “Only when these are done, can the Central Bank reduce its rates,” he said.

With banks very much the source of capital for businesses in Mongolia, the Government, Parliament and the Mongol Bank should work together to keep the Dutch disease at bay.