Big middle class, small inflation

Parliament has been discussing what 2013’s monetary policy will look like since October 4. It has been the talk of the town since the government started distributing cash social subsidiaries.
The aim of monetary policy is to support economic growth by creating a stable price network. However, many unwanted issues sometimes arise. Such issues are causing headaches for many common citizens as well as professional economists. Social subsidiaries and cash flow from the mining industry demand more cleverness on wise spending. 

Mongolia is a country with a strict monetary policy that focuses on tackling inflation. While some argue it is best to enforce a rigid monetary policy, others argue against it, especially during times of fast economic growth. The responsibilities and effectiveness of the basic instruction for implementing a policy should be specific. 

The newly appointed president of the Bank of Mongolia, Naidansuren Zoljargal, and the State Great Khural owe the public a suitable, innovative policy. Although he is new to his position, Zoljargal is an experienced economist and has worked at the central bank for years. A Harvard graduate in social sciences, he served as the vice president there from 2010 to 2012. All that is left is to wait and see what he can achieve now that he is heading the bank.

One of his duties is enforcing the direction of the monetary policy. Can he soften a strict monetary policy that has been argued over for so long? Can he tackle inflation and invigorate business? These are some of things people expect of him. 

The central bank president has already defined many of his goals for the country is economy. Zoljargal has planned for the central bank to continue enforcing a strict monetary policy while aiming to establish a wealthy middle class and lower inflation for 2013. 

That is nothing new. The Bank of Mongolia has spoken of promoting the middle class and lowering inflation before. That is why the bank strengthened the monetary policy in the first place. 

Unfortunately inflation has not lessened as it had aimed. The new central bank president is confident he can bring down inflation to eight percent, and further to seven percent from 2014 to 2015. 

As a professional banker and a young leader, Zoljargal is certain that he can take on the challenges to accomplish all the goals the bank has set forth. Previous leaders of the bank could not establish a mutual understanding between the central bank and government. Zoljargal has said that research should be done at the bank, while Parliament enforces its policy. He also noted that Parliament’s involvement in creating monetary policy is important, and therefore discussion and debate are essential. Also, reducing inflation would contribute to better lives for people living in Mongolia. 

Both the bank and the government should acknowledge their respective duties. Before, a rivalry existed where one instigated inflationary pressures with cash distributions while the other enforced a policy aimed at eliminating it. Having acknowledged this, Zoljargal has bravely decided to end the chaos.

“Up until today, the monetary policy attempted to maintain total assets to bonds instead of loans. Nothing is wrong with that. However, the supply of meat is not stable, flour imports are frequently halted, and taxes and prices jump up and down. Products are halted at Zamiin Uud. All this is related to the chaos in supply”, said Zoljargal.

“With such problems, the central bank cannot tackle inflation all by itself. The government must pay attention, too. For that reason, we are seeking for close cooperation with the government”.

The government must impose strict controls on oil prices, as it the most commonly used good. The Bank of Mongolia has initiated the development of an adjunct programme to combat the situation. But the most important factor to commodity prices is transportation costs. Thus, officials have researched and discussed the factors that create price fluctuations. 

The Zamiin Uud border currently can allow the passage of 250.000 tonnes of goods monthly. Construction materials for Oyu Tolgoi are always traveling through this port. In spring, when the construction season starts, the amount of imported materials such as cement and paints increases, which results in the delay of other imported goods. Vendors offer bribes so that their goods can pass through the border, which is reflected by the prices on store shelves. 

Four years ago about 11 percent of expenses from all products coming from China were from transportation costs. Today, that figure has grown to 25 percent. The central bank warns this is not a good sign because it affects base inflation. The bank of Mongolia is working with government to resolve the issue. From these efforts, five projects are ready to be implemented.

Praise Courage

While Zoljargal has been commended by the media for his brave direction, they argue that it might not be possible to bring inflation to the single digits as long as the government continues to offer cash payments. The new government has already decided it will give MNT 20,000 a month to every child under 18. Further, the Human Development Fund is already responsible for the MNT 21,000 monthly payments as well as MNT 1 million to the disabled and pensioners.

In response, Zoljargal said to journalists,“I am cautious, of course. Fifty percent of the entire economy comes from the state budget. But I and my team are confident about the monetary policy we have developed”. 

“We have presented specific issues on macroeconomic stability, infrastructure for the financial market and its institutional strength. Macro-economic stability means ending useless subsidiary policies. I personally believe that creating a wealthy middle class makes stable economic growth”.

Zoljargal identified inflation as his worst enemy. The Bank of Mongolia wants to create a wealthy middle class, a pool of skilled human resources, and a suitable economic policy with transparent law enforcement. 

Unfortunately, the living standards of Mongolia’s middle class remain low. Strengthening the middle class is a priority of monetary policy. High inflation, countless social welfare payments have caused Mongolia’s middle class to suffer. According to a study from the Bank of Mongolia, if inflation reaches over 10 percent price pressures over low-income citizens will reach 82 percent and 50 percent for the middle class. Meanwhile, the country’s wealthiest will only feel as much as 1 percent from inflation. 

What does that mean for 15 percent inflation?

If Mongolia holds MNT 7 trillion in assets with inflation of 15 percent, then MNT 1 trillion will fall from people’s pockets annually. Thus the Bank of Mongolia is aiming to save at least half the money it holds and so has made 8 percent its target for inflation.

If the bank can make this goal a reality, it would result in more credit and business activity.