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.