Q&A With Mongolia Central Bank Governor Byadran Lkhagvasuren

International Finance: Is stagflation more likely to take maintain in Mongolia?

Byadran Lkhagvasuren: Mongolia is sandwiched between Russia and China. Subsequently, inflationary pressures arising from pandemic-related provide chain shocks are magnified considerably. Based on our estimates, greater than 60% of inflation dynamics are defined by a rise within the costs of imported items and the current sharp will increase in oil costs.

We’re seeing a gradual restoration in financial exercise. Within the first half of 2022, the economic system grew by 1.9%, and we anticipate development to succeed in 3% for the total yr. Though development within the mining, transportation and development sectors continues to be weak, we’re seeing a restoration within the companies, commerce and manufacturing sectors. We anticipate the mining and transportation sectors to recuperate as soon as logistical points are totally resolved in early 2023.

Though we’re seeing a gradual restoration, actual wage development has been reasonable and demand stays comparatively weak. The Financial institution of Mongolia will proceed to take applicable coverage measures to deliver inflation all the way down to our goal vary. Since 2021, the coverage price was elevated by 400 foundation factors, and reserve necessities and different prudential necessities have been tightened. Based on our forecasts, we anticipate inflation to say no to our goal vary in late 2023.

GF: What’s the medium-term development outlook for Mongolia?

Lkhagvasuren: Regardless of short-term challenges, the medium- to long-term financial outlook stays robust. As a part of the New Restoration Coverage, the federal government of Mongolia is implementing reforms that can speed up financial development. As a part of this system, Mongolia is constructing two new railroads to China that be accomplished in 2022 and considerably enhance export quantity and scale back transportation prices. As well as, the Oyu Tolgoi copper mine will begin sustained manufacturing within the first half of 2023, which is able to greater than triple copper exports at peak manufacturing.

With continued strong demand for commodities similar to copper, coal, gold and iron ore, and the completion of key transportation infrastructure, the Mongolian economic system will get pleasure from robust development for a few years to return.

GF: What’s the scenario relating to BOM’s endeavor quasi-fiscal operations and the necessity to meet the Worldwide Financial Fund’s necessities?

Lkhagvasuren: In an effort to strengthen the Financial institution of Mongolia’s  independence, governance and transparency, parliament amended the central financial institution legislation in 2018. One of many primary amendments was to ban the central financial institution from implementing any quasi-fiscal operations. Since then, the Financial institution of Mongolia stopped all quasi-fiscal operations besides the sponsored mortgage program.

On the onset of the pandemic in 2020, the parliament of Mongolia handed the anti-pandemic legislation to mitigate the antagonistic socioeconomic results of Covid-19. As outlined within the legislation, the Financial institution of Mongolia is required to proceed the sponsored mortgage program and sure different operations till the tip of 2022. As soon as the legislation expires on the finish of 2022, the Financial institution of Mongolia will discontinue all quasi-fiscal operations. We’ve got been totally clear with the IMF and different worldwide organizations about our operations.

GF: How does BOM intend to handle overseas change dangers and speculative assaults on the tugrik?

Lkhagvasuren: Alternate price flexibility is a vital shock absorber. Nonetheless, we have to have applicable coverage toolkits to mitigate the dangers to the monetary sector and the economic system.

Since 2018, we steadily elevated reserve necessities for overseas forex liabilities of banks to 18%. Consequently, the share of banks’ overseas forex deposits declined from 30% in 2018 to twenty% in 2021. As well as, we launched regulatory measures to discourage banks from offering overseas forex loans, particularly to debtors with out overseas forex earnings.

GF: What’s the standing relating to the Mongolian financial institution IPOs?

Lkhagvasuren: The Mongolian banking system is at present present process vital reforms. All 5 systemically essential banks must publicly supply public shares earlier than the tip of June 2023. Nonetheless, the choice to begin the process earlier than the deadline stays open and we’d endorse such initiatives.

As worldwide greatest observe would recommend, all reforms are fraught with dangers. For instance, there could also be supervisory overlaps, gaps, dangers of miscommunication between the regulatory authorities and elevated compliance dangers for banks resulting from supervision by each the Financial institution of Mongolia and the Monetary Regulatory Fee. Nonetheless, the Financial institution of Mongolia stays steadfast in executing this reform efficiently.