Monetary Policy of Mongolia: Will it Finally Hit its Targets in 2013?
March 28 (Mongolian Economy) The Bank of Mongolia has been criticized for several years now for not being able to pursue monetary policies that had effective results. Undeniably, policy targets proposed within the monetary policy, especially with regard to inflation rate were rarely met in the past.
Increasing policy rate as a tool to reduce inflation rate has proven to be not effective. Reasons for this include anomalies of the Mongolian economy which prevent efficient policy rate channeling to real markets. Existence of an informal sector, inefficiencies in product supply chain and large volume of foreign investments inflows can be mentioned among anomalies that influence to inefficiency of the policy rate channel. As a result, bulk of local businesses that most are dependent on local bank loans as means of corporate financing get hurt most, creating discontent in the business environment.
Of course there were a number of reasons to the failure to hit inflation target pertaining not only to the Bank of Mongolia, but also to overall
macroeconomic factors and government decisions. For example, we all know one of the most cited explanations that the Government was not sticking to the line and pursued pro-cyclical expansionary fiscal policies. Indeed, publicly announced public sector salary and pension increases, as well as generous welfare cash distributions negate Central Bank's efforts to tighten monetary policy and are very quick to have effect on the market.
Is it different for 2013?
The proposed Monetary Policy for 2013 is being discussed at the Parliament, and one can tell that there are no totally new policy directions as proposed by the Bank of Mongolia. Most of the previous policy lines are proposed to be carried on in 2013. The only noticeable difference is that the target inflation rate was clearly pronounced to be at 8 percent, the first time since 2009. And there are reasons to predict that this target rate may actually be met. First of all, economic growth slowing down resulted by lowering commodity prices and shrinking demand for our exports products. As China's growth is decelerated, it also expected that imported inflationary pressures will be minimal.
Most importantly though, the Government is willing to have consented action with the Central bank on managing inflation and inflation expectation, for example, the Law on Structural Budget will be effected from 2013. Moreover, and it has been openly pronounced in the Government's platform for 2012- 2016 that it will not have expansionary policies and cash distributions, and most importantly it will not support overall salary increases, and if salaries need to be increased will be done in an implicit ways so that inflation expectations are not hiked.
If the stage is set to tame inflation rate, it might be not so easy for currency exchange rate targets. It is foreseen that increasing trade balance deficit and conservative foreign investment environment will present challenges for the Central Bank as may lead depleting FX reserves.
Could the Bank of Mongolia do a better job?
The Bank of Mongolia has improved a lot in terms of research base and public information disclosure measures. One can download now most of the banking related data from its official website in a timely manner. To take just one example, inflation sentiment sample study is taken from 1000 respondents as a leading indicator on a monthly basis, and results are publicly accessible.
However, the can be more mindful about the end results the bank wants to achieve strategically for the national economy and financial sector especially in the light of the newly approved Government Agenda for 2012-2016. There should be more efforts done towards improving the efficiency of the financial markets both in terms of bank operations (reducing operational and systemic risk) as well as of financial sector infrastructure. These will help to drive cost funding down, and also improve the efficiency of monetary policy tools of the bank.
More focus can be given to actual economic growth objectives, bearing in mind that non-mining sector growth is not high and sustainable, and that one third of the population is still poor. Mining sector led expansion should be diverted to real economy through seemless and harmless channels. Local real sector businesses are in acute need of affordable source of funding, which will help the country to achieve economic diversification policies and nurture wider middle class.
Equal opportunities to benefit from economic growth and making it accessible should be done not through cash support to selected industries, but through supporting development of institutional investors and investment funds. More action could be taken to transfer informal cash based economy to formal economy.
Of course there were a number of reasons to the failure to hit inflation target pertaining not only to the Bank of Mongolia, but also to overall
macroeconomic factors and government decisions. For example, we all know one of the most cited explanations that the Government was not sticking to the line and pursued pro-cyclical expansionary fiscal policies. Indeed, publicly announced public sector salary and pension increases, as well as generous welfare cash distributions negate Central Bank's efforts to tighten monetary policy and are very quick to have effect on the market. Is it different for 2013?
The proposed Monetary Policy for 2013 is being discussed at the Parliament, and one can tell that there are no totally new policy directions as proposed by the Bank of Mongolia. Most of the previous policy lines are proposed to be carried on in 2013. The only noticeable difference is that the target inflation rate was clearly pronounced to be at 8 percent, the first time since 2009. And there are reasons to predict that this target rate may actually be met. First of all, economic growth slowing down resulted by lowering commodity prices and shrinking demand for our exports products. As China's growth is decelerated, it also expected that imported inflationary pressures will be minimal.
Most importantly though, the Government is willing to have consented action with the Central bank on managing inflation and inflation expectation, for example, the Law on Structural Budget will be effected from 2013. Moreover, and it has been openly pronounced in the Government's platform for 2012- 2016 that it will not have expansionary policies and cash distributions, and most importantly it will not support overall salary increases, and if salaries need to be increased will be done in an implicit ways so that inflation expectations are not hiked.
If the stage is set to tame inflation rate, it might be not so easy for currency exchange rate targets. It is foreseen that increasing trade balance deficit and conservative foreign investment environment will present challenges for the Central Bank as may lead depleting FX reserves.
Could the Bank of Mongolia do a better job?
The Bank of Mongolia has improved a lot in terms of research base and public information disclosure measures. One can download now most of the banking related data from its official website in a timely manner. To take just one example, inflation sentiment sample study is taken from 1000 respondents as a leading indicator on a monthly basis, and results are publicly accessible.
However, the can be more mindful about the end results the bank wants to achieve strategically for the national economy and financial sector especially in the light of the newly approved Government Agenda for 2012-2016. There should be more efforts done towards improving the efficiency of the financial markets both in terms of bank operations (reducing operational and systemic risk) as well as of financial sector infrastructure. These will help to drive cost funding down, and also improve the efficiency of monetary policy tools of the bank.
More focus can be given to actual economic growth objectives, bearing in mind that non-mining sector growth is not high and sustainable, and that one third of the population is still poor. Mining sector led expansion should be diverted to real economy through seemless and harmless channels. Local real sector businesses are in acute need of affordable source of funding, which will help the country to achieve economic diversification policies and nurture wider middle class.
Equal opportunities to benefit from economic growth and making it accessible should be done not through cash support to selected industries, but through supporting development of institutional investors and investment funds. More action could be taken to transfer informal cash based economy to formal economy.
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