IMF official: Mongol Bank not to blame for rising gas prices
Steven Barnett, the head of the Asia and the Pacific Department of the International Monetary Fund (IMF), recently answered our correspondent’s questions.
Q: Petroleum importers in Mongolia have increased gasoline prices from MNT 230 to MNT 300 since January 6, and they have explained that the increase relates to the tugrik’s rate falling against the U.S. dollar.
Do you agree with the petroleum importers’ explanation?
A: IMF officials have not studied Mongolia’s petroleum market and I can not make any conclusions about the situation. But I want to emphasize that the international market price of petroleum is driven by the U.S. dollar, and the domestic market price in each country depends on the international market price and currency rates. There is a common principle that the domestic market price changes along with the world market price and currency rate fluctuation, while the price of petroleum should be correlated to its cost.
Q: Many business leaders and economists believe that Mongol Bank should take responsibility for the increase in the price of gasoline. What do you say about that?
A: I do not agree with them. The IMF has approved Mongol Bank’s implementation of a flexible rate structure and it will approve it in the future. The bank’s inflexible rate was a reason for the economic crisis in Mongolia in 2008. That is why the continuance of a flexible rate structure is important to prevent another crisis. Also, a flexible rate structure is important because increasing state spending could overheat the economy. This has raised inflation and imports have been drastically increased. These factors have directly influenced the tugrik’s rate. But Mongol Bank’s action is correct to form conditions to stabilize the tugrik’s rate along the principle of market supply and demand.
Q: Do you think Mongolia’s foreign currency reserve of USD 2 billion is enough?
A: The current reserve of foreign currency in Mongolia is sufficient to implement a flexible rate structure. I want to remind you that the inflexible rate was a reason for the economic crisis, and Mongol Bank intervened to protect the tugrik’s rate at that time. The foreign currency reserve was almost exhausted after the crisis was faced. So the main conclusion is that a flexible rate structure is important for preventing another crisis.
Q: What is main reason for the rise of the U.S. dollar in Mongolia?
A: Economists have had difficulty predicting currency rate changes over short periods of time or even over a year. It is difficult to explain what influences rate fluctuations. The tugrik’s falling rate could be due to many factors. For instance, the tugrik’s falling rate could be due to foreign factors, such as the world market avoiding risks. And the U.S. dollar rate was strengthened while the euro rate fell in 2011. A domestic factor could be economic stability weakening due to the Government’s budget policy.
Q: What policies and measures could strengthen the tugrik’s rate and lower consumer goods prices, in your opinion?
A: Mongol Bank should not attempt to strengthen the tugrik’s rate by force. A flexible rate structure is the right choice. The best way to control inflation is implementation of a responsible budget policy. The main factor in rising prices is the high budget expenditures in 2011 and 2012. Citizens’ complaints about the cost of living are legitimate, and those complaints should be directed to budget policy makers, but not to Mongol Bank.
Q: Petroleum importers in Mongolia have increased gasoline prices from MNT 230 to MNT 300 since January 6, and they have explained that the increase relates to the tugrik’s rate falling against the U.S. dollar.
Do you agree with the petroleum importers’ explanation?
A: IMF officials have not studied Mongolia’s petroleum market and I can not make any conclusions about the situation. But I want to emphasize that the international market price of petroleum is driven by the U.S. dollar, and the domestic market price in each country depends on the international market price and currency rates. There is a common principle that the domestic market price changes along with the world market price and currency rate fluctuation, while the price of petroleum should be correlated to its cost.
Q: Many business leaders and economists believe that Mongol Bank should take responsibility for the increase in the price of gasoline. What do you say about that?
A: I do not agree with them. The IMF has approved Mongol Bank’s implementation of a flexible rate structure and it will approve it in the future. The bank’s inflexible rate was a reason for the economic crisis in Mongolia in 2008. That is why the continuance of a flexible rate structure is important to prevent another crisis. Also, a flexible rate structure is important because increasing state spending could overheat the economy. This has raised inflation and imports have been drastically increased. These factors have directly influenced the tugrik’s rate. But Mongol Bank’s action is correct to form conditions to stabilize the tugrik’s rate along the principle of market supply and demand.
Q: Do you think Mongolia’s foreign currency reserve of USD 2 billion is enough?
A: The current reserve of foreign currency in Mongolia is sufficient to implement a flexible rate structure. I want to remind you that the inflexible rate was a reason for the economic crisis, and Mongol Bank intervened to protect the tugrik’s rate at that time. The foreign currency reserve was almost exhausted after the crisis was faced. So the main conclusion is that a flexible rate structure is important for preventing another crisis.
Q: What is main reason for the rise of the U.S. dollar in Mongolia?
A: Economists have had difficulty predicting currency rate changes over short periods of time or even over a year. It is difficult to explain what influences rate fluctuations. The tugrik’s falling rate could be due to many factors. For instance, the tugrik’s falling rate could be due to foreign factors, such as the world market avoiding risks. And the U.S. dollar rate was strengthened while the euro rate fell in 2011. A domestic factor could be economic stability weakening due to the Government’s budget policy.
Q: What policies and measures could strengthen the tugrik’s rate and lower consumer goods prices, in your opinion?
A: Mongol Bank should not attempt to strengthen the tugrik’s rate by force. A flexible rate structure is the right choice. The best way to control inflation is implementation of a responsible budget policy. The main factor in rising prices is the high budget expenditures in 2011 and 2012. Citizens’ complaints about the cost of living are legitimate, and those complaints should be directed to budget policy makers, but not to Mongol Bank.
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