Thursday, August 7, 2014

Strict monetary policy’s long-term effects on the economy

On July 30, the Bank of Mongolia made a decision to increase its policy interest rate to 12 percent in order to relieve the balance of payments difficulty, maintain medium and long-term economic stability, avoid further risk facing the Mongolian macro economy, protect the public’s income, and to curb inflationary pressure.

Below are opinions from economists on the interest rate change.

D.Jargalsaikhan: Tightening monetary policy will pose challenges for businesses

The Central Bank of Mongolia did what it ought to do in the current situation. The policy interest rate of the bank was 14 percent during the 2014 economic crisis. The bank has since been reducing the policy rate. The rate was 10.5 percent as of February 2014. Increasing it by 1.5 percentage points is indeed a huge number. But the loan criteria became more challenging. As a result, the amount of loans on the market will decrease. This will pose challenges for businesses. Otherwise, everyone will face difficulties. The bank made such a decision. The amount of USD in the box called “the economy” is decreasing. Accordingly, the rate of the MNT is depreciating. Ultimately, we are paying the costs of erroneous government policy.

D.Batjargal, Ph.D: Government spending should be curtailed

Increasing the policy interest rate is a measure to curtail inflation. Since 2013, the Central Bank of Mongolia has been implementing lenient monetary policy in order to support the economy and the public, and to decrease the interest rate of investment loans for businessmen. However, on July 30, the bank decided to tighten its monetary policy, which means an increased policy interest rate. In my opinion, the interest rates for loans at commercial banks should be increased. The paramount problem in Mongolia is weak management of budget revenue and expenditure. This should be resolved first.

L.Oyun, Ph.D and Lecturer at National University of Mongolia: The Central Bank of Mongolia has no other choice than to increase the policy interest rate and implement strict monetary policy

I see the measure the Central Bank of Mongolia took as an effort to maintain macro economy stability. Although the Central Bank says it will restrict demands by increasing the policy interest rate to fight inflation, demands outside of the state budget aren’t enough to subside inflation. Therefore, state spending should also be decreased.

D.Lkhagvadorj, Ph.D and Head of the Economics Department of Mongolian State University of Agriculture: It was a decision that protected the economy from crisis

Although tightening monetary policy might curtail the operations of enterprises and the private sector, the decision was inevitable to maintain economic stability in the long term. Mongolia’s economy is hugely dependent on the mining sector, which accounts for 90 percent of overall exports and 83 percent of foreign direct investment. This magnificent reliance on one sector is making our economy vulnerable and sensitive. Also, according to the preliminary balance of payments for the first six months of 2014, the current account deficit stands at 915.1 million USD. Foreign direct investment to Mongolia decreased by 70 percent from the previous year. The Central Bank stated, “It has still been crucial to enhance foreign exchange inflows through increasing export proceeds and promoting foreign direct investments, and maintain fiscal stability in order to neutralize the balance of payments pressure and to overcome current economic challenges.” Therefore, measures to increase foreign exchange inflow should be taken.

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