Research on economic crisis
Засагдсан: 2009/5/6. Лхагва гараг.
Currently, there is no comprehensive research work being done on how the economic crisis is affecting Mongolian people and their livelihood. Policy makers have been analyzing the situation based on assumptions without factual information. Social psychology, expectations, opinions and thoughts of people affect solutions for crisis.
Therefore, “Mongolian Marketing Consulting Group” LLC, (MMCG) conducted research on how the crisis is affecting the livelihood of Mongolian people in March, 2009. The research involved a total of 2383 people in representative regions, 5 aimags and the capitol city Ulaanbaatar.
We are hoping that our research can provide a valuable contribution to policy makers and individuals by offering insight and accurate information about the economic crisis facing Mongolia. Furthermore, our company is planning to conduct research on how the crisis is affecting businesses by each sector. We invite international organizations and Mongolian government bodies and businesses to cooperate with us in these research projects.
From the research findings...
ECONOMIC CRISIS IN MONGOLIA AND HOW TO "SOFTEN" IT
Development and Causes of the crisis
Public opinion differs on when the crisis started in Mongolia. However, nobody argues with the fact that the crisis has emerged in Mongolia. There are several symptoms of the crisis. The main symptom is growth which in many sectors of the economy fell sharply, and the number of unemployed rose sharply. During the 4th quarter of 2008, Gross Domestic Product (GDP) fell by 1.9% and this trend continued throughout the 1st quarter of 2009. The Number of unemployed by the start of 2009 increased by 4.9 thousand compared to the same period last year.
Simultaneously with the economic crisis, symptoms of decline in banking, finance, the budget deficit, and the devaluation of the Tugrik have been observed. For any country, banking and financial systems are the blood line of the economy. The primary cause of the world economic crisis originated from the USA banking and financial systems. Without sound banking and financial systems, Mongolia will not be able to recover from the crisis.
Due to the loss of equilibrium in supply and demand, prices of commodities and services fell. Inflation demonstrates that domestic demand exceeds supply. However, in a majority of the countries affected by the crisis, prices have tended to fall. It shows that these countries’ crises are due to a decrease in demand and not vice versa.
During the initial stage of the world economic crisis, the inflation rate in Mongolia was relatively high, however, according to latest data, the inflation rate is dropping.
Mongolian domestic supply consists of imports and domestic production. Domestic producers widely use imported equipment, raw materials, and spare parts. This may pump inflation and cause production costs to go up.
A major cause for the devaluation of the Tugrik is decreased export earnings and a slowdown in the flow of currency. Prices of major export commodities plunged, while prices of major import items except petroleum did not drop significantly. Therefore, the currency reserve of the country fell to a risky level.
The Mongolian government considers increasing the exchange rate of US$ against the Tugrik of key importance to reducing imports and increasing exports and thereby improving the payment balance. However, there is little likelihood that it will be so. According to theory, when a currency exchange rate increases, domestic consumption of certain goods falls and exports increase. However, the majority of Mongolian export items are mining commodities, specifically produced for international markets. Therefore, an increase of the exchange rate of the currency can not significantly increase exports.
In 2008, the inflation rate in Mongolia was about 22% according to official sources. However, deposit interest rates did not exceed beyond 10-15%. Low deposit interest rates caused a loss of consumer confidence in banks and increased cash flow out of the banking system. Although, total cash in the banking system is enormous, rural herders and people working in the agricultural and construction sectors lacked cash. In other words, cash is unequally distributed among some sectors and population segments. Without drawing cash that is in the hands of the population into economy, it will be difficult to restore the economy. By early 2009, Mongol Bank raised its policy rate which proved to be an important step in increasing rates of loans and deposits of the banking sector and draw the cash into the economy. On the other hand, reduction of cash in the economy designed to drop prices increased.
However, we have to remember that increases in interest rates might send costs skyrocketing and reduce investments. This would restrict business expansion and increase unemployment. If the unemployment level stays high, this will be place a big burden on government to deal with the deterioration of living standards and other social problems.
Mongol Bank, within its monetary policy framework as per its president, picked unemployment from inflation and unemployment issues. However, it is anticipated that monetary policy directed to fight against inflation will play an important role in keeping living standards of the population stable.
Due to the occurrence of the economic changes, the Mongolian government has implemented a large scale savings policy. Reduction of budgetary expenditures is an important step in easing off the tax burden on business entrepreneurs and protects their businesses from bankruptcy.
Mongolian public opinion on the crisis
It was difficult to consolidate the public opinion on the crisis. We have made this conclusion after combining findings of the survey conducted among 2383 residents of Ulaanbaatar, Orkhon, Zavkhan, Bayanhongor, Sukhbaatar and Dundgobi aimags in March by “MMCG” LLC.
24.9% of the surveyed believe Mongolia is about to face the crisis and 41.8% believe the crisis has already affected Mongolia. 25.6% of the surveyed said the economy is in a temporary difficult situation, but 1.3% considered the economy to be stable. 6.4% of all those surveyed said they don’t know what to conclude.
The percentage of people who believe Mongolia is about to face the crisis is higher amongst people living in urban areas, intellectuals, and 18-45 year olds. For instance, 28.6% of the Dundgobi residents surveyed said the crisis is already affecting the country and 45.8% of the Ulaanbaatar residents considered it so. 45% of the University-educated surveyed considered that the crisis is already started, and 9.4% of those surveyed with secondary school education, 0.4% of those surveyed with primary education and no education considered that the crisis already started.
Only 2% of those surveyed considered that the crisis is not affecting their livelihood and 30% considered that the crisis is affecting them badly. 61.3% of those who considered that the crisis is already affecting them stated their income dropped.
To the question “ how the crisis is affecting you” 27.6% of those surveyed said their income dropped and 19% said they could no longer save and 14% said they could no longer buy clothes and 12.2% said they reduced their food intake and 9.7% said they could no longer pay their loans.
The surveyed linked causes of the Mongolian economic crisis to poor, inefficient government activities, too much social spending based on election promises rather than the world economic crisis.
18% of those surveyed predicted that the crisis will last more than 3 years and, 22% predicted 2-3 years, and 35% predicted 1-2 years, and 20% predicted up to 1 year.
38.1% of the surveyed considered it necessary to cut expenditures in order to overcome the crisis, but only 26.0% said they would look for other sources of income in order to overcome the crisis. 17.9 % said they would work harder than before. For those who considered saving and reduced spending will negatively affect economic growth said it is necessary to cut expenditures and look for other sources of income and work harder than before as ways to overcome the crisis, the effect of the crisis is less than other correspondent groups.
According to the survey findings, people’s perception regarding ways to overcome the crisis and duration of the crisis is varied. This difference is due to the level of education, information sources, and efforts to overcome the crisis. Anticipation of people is important in defining the duration of the crisis. Current anticipation that the crisis will last a long period might negatively affect and reduce spending, investment and prolong the crisis. Therefore, it is necessary to change the psychology of the people from saving to spending wisely, from talking to doing and working harder.
Solutions for the crisis
Based on the above findings, it be said that the concept to overcome the crisis by “tightening the belt” or reduced spending has become popular among the public as well in government circles. This method is important in creating savings necessary for future growth and development, however, without investment, expansion of the economy and without generating other income sources, we can not overcome the crisis within a short period of time.
The government ought to tell people directly that in this current situation, it is hard to stop the crisis only through internal regulatory mechanisms of the economy.
Then, what we can cannot do? We think Mongolia should not do the following.
• Should not increase monetary supply
• Should not increase the tax burden
Increase of monetary supply will expand cash money which is already abundant and will worsen inflation. This kind of measure will be like “adding butter to fire” and is a very irresponsible method. Especially, cash injection to banks could cause an increased ratio of bad debt and worsen the situation.
Increased tax burden may choke already troubled businesses. If such a decision is made in order to reduce the budget deficit, it will be the worst solution for the current situation.
According to the latest IMF report, by 2009 the world economy will fall by 0.5-1.0 % and may start the recovery process by 2010. Therefore, Mongolia should not assume that we will be overcoming the crisis sooner than that. Mongolia is mainly an exporter of raw commodities, therefore, when the economies of industrialized countries pick up again and prices of commodities rise, Mongolia will recover from the crisis. Maybe, we will be the last country to recover from the crisis. However, Mongolia should not just support the mining sector and exports of raw commodities, but instead should support other sectors including national companies and invest in infrastructure and power development through job creation.
We don’t need to develop a long list of to-do’s which are impossible to implement in order to overcome the crisis. It is crucial to implement few measures based on good research and that can bear good results.
Based on the current Mongolian economy, there are some serious errors being committed. For instance, instead of purchasing goods and services with Mongolian Tugrik, for some time Mongolians have been using US$. Although, Mongol Bank is combating this phenomenon, this trend still survives partly due to a loss of confidence in the Tugrik. Use of US$ as a payment method within Mongolia fuels inflation and creates deficits for some goods. Therefore, Mongolia should continue pushing US$ out of circulation and equating goods and US$. This will prove useful in stopping the crisis. This should be our first step to combat the crisis.
Second step should be obtaining large amounts of soft loans and aid from abroad and increase the US$ supply. Through increased supply of US$, inflation rate and prices will be stabilized. Once inflation stabilizes, interest rates will drop and investment and supply will be increased and economic recovery will begin. During the Asian crisis of 1997-1998, South Korea obtained large amounts of loans from abroad and successfully overcame the crisis.
Wise spending of soft loans and foreign aid is far more important than obtaining them. As said before, Mongolia should not spend this on the banking sector. Instead, it should be spent for purchase of wheat, vegetables, meat, cashmere and other goods from herders, agricultural farmers and release them from loan burdens. This will indirectly support the banking sector and other economic sectors. Directly, it will protect vulnerable segments of the population against inflation. Also, it should use revenue generated from these soft loans and aid as investment tools and spending for support of economic recovery and growth.
Generally, it is not necessary to sell goods and commodities today as prices of export commodities have fallen sharply. As China is buying up resources at cheaper prices, Mongolia should reserve its commodity resources in order to be able to sell them when prices pick up again. For this reason, Mongolia should get more soft loan and foreign aid.
