It is said that Mongolia has developed most rapidly for the last 20 years. It was not a long ago that a statesman from Myanmar exclaimed “Your country is a developed country, not a developing one!” having seen the skyscrapers, wide and narrow roads, fancy cars, and uniquely named restaurants and hotels.
However, the high economic growth has not reached the most of our population, which left a small number of people having too much income and the majority being battered by the price increase in consumer goods and weakening currency rates. It keeps highlighting the difference between the rich and the poor. The small group of people who have high income is controlling the most of wealth today in Mongolia.
As our mining-dependent economy repeatedly goes into crisis, the majority who has low income are seeing more unemployment leaving more people wanting to work abroad. An essential factor that tells the difference between the wealthy and the poor is access to infrastructure, which includes electric power, road, and fresh water and sanitation system. In countries such as India and the Philippines where one half of the population are poor, the difference between the luxury districts of the rich and the muddy slums of the poor can be easily seen. In Mongolia, although half of our population is living in the capital city and tens of thousands of apartment blocks are being built, the number of people who reside in ger district is not going down. In terms of access to fresh water and improved sanitation facilities, Mongolia is behind North Korea.
A democratic society provides everyone with an opportunity to work hard. However, if people keep working hard but are not able to improve their livelihood, they start losing faith in government and seek for opportunities to express their discontent for the difference in income. On the other hand, only a small number of families seize the ruling power while a monopoly establishes itself in the economy. The Philippines, where the participation and involvement of ordinary people were weak, has been ruled by 17 families only. As instability emerges in the country, those families decide to spend the public funds on strengthening the military. As a result, the rich build walls around their homes and hire a small army to protect their families from getting kidnapped. Do we have to let the same situation take over in Mongolia?
INFRASTRUCTURE IS THE SOLUTION
GDP per capita is not the only indicator that shows the difference between the developed countries and the developing ones. Access to infrastructure, including road, electric power, and fresh water and sewage system, is an important indicator. The nations who provided good access to infrastructure discuss about the quality of education and medical services whereas the countries who have not ensured good access to infrastructure talk about the access. In order for Mongolia to make infrastructure accessible, a lot of capital will be required.
The investment that went into Ulaanbaatar in the recent years was definitely necessary and timely. If the roads and junctions had not been widened, the traffic in the capital city would have stopped. Going forward, we need to provide the half of the population of the capital city with heating and fresh water, and to give every household an opportunity to buy an apartment that fits their purchasing power. The project to re-plan the ger district and build apartments in the ger district areas close to downtown has basically stopped.
The reason why the project is on hold is funding. In the last three years, the supply side of many housing projects was funded by the Chinggis and Development Bank bonds while the demand side was handled by printing currency and providing 8-percent housing mortgages. However, this arrangement is neither stable nor sustainable because the cost of government bonds is too high to spend it on infrastructure.
The economic growth of Mongolia has decreased five times compared to the 17 percent four years ago. Nevertheless, the construction of infrastructure should not stop. But where the required funding comes from has become the headache of the government.
INFRASTRUCTURE IS NOT FUNDED BY BONDS
Building infrastructure is the most important condition conducive to improved economic productivity. Infrastructure requires a great deal of initial investment, but it makes the economy bigger after it starts being used.
The financial market of most developing countries are based on commercial banks and lacks insurance and pension funds because they are not developed. Also, there are only a few investors, and the most of population do not have bank accounts. The interest rate offered by non-bank financial institutions is very high, and there are no joint funds. In addition, there is only a small number of daring investors. These factors make it difficult to find funding for infrastructure in developing countries.
Infrastructure can generally be funded in four ways. The first funding mechanism is funding by tax income from the government. The second is funding through state-owned banks using long-term savings of people. The third is funding by investors using insurance and pension funds. The fourth is to attract foreign investment.
Mongolia has been using the funding mechanism one to fund the infrastructure in Mongolia, but it has not been enough due to small population, small economy, and huge territory. Also, the operating expenditure of the government is more than 800 billion MNT a year (400 million USD at currency rates today), which is clearly lower than the need.
The State Bank of Mongolia is basically a commercial bank that inherited the previous banks that went bankrupt. Also, postal savings system has not developed in Mongolia.
Some countries that have small population and lack banking sector have been using postal savings system where people could deposit their money with low interest rate. In Mongolia, Khanbank has a branch in every soum, however it is a commercial bank and is not able to use long-term, low interest rate loans to make infrastructure investments. That is why the Development Bank of Mongolia was established to attempt issuing government-guaranteed bonds and fund infrastructure.
Mongolia’s health and social care fund belongs to the government. Those funds always run deficits, thus are not capable of investing in infrastructure. However, if we manage to set up private insurance and pension funds, there is an opportunity for long-term investment.
When it comes to the fourth funding mechanism, Mongolia has only one choice to attract investment from international development banks rather than foreign private investment. It would be better for Mongolia to raise funds for infrastructure from the World Bank, the Asian Development Bank, and the European Bank of Reconstruction and Development. The investment from these institutions brings not only money but also highly detailed estimations, engineering drawings, and performance monitoring.
These development banks all have AAA ratings, which means that they assess the risks very carefully to meet their standards. When these banks provide loans, they study whether the country can repay or not, and gives recommendations on what needs change and how it should be done. The Asian Infrastructure Bank, which is expected to be formed next month, opens up a new opportunity for Mongolia. If we acquire their 30-year loan with an interest rate of less than one percent to be repaid seven years later, it would be far more profitable than the funding from bonds, the interest rate of which today has almost reached 10 percent.
Infrastructure mirrors the development of country and is key to removing the difference between the rich and the poor.
It is said that Mongolia has developed most rapidly for the last 20 years. It was not a long ago that a statesman from Myanmar exclaimed “Your country is a developed country, not a developing one!” having seen the skyscrapers, wide and narrow roads, fancy cars, and uniquely named restaurants and hotels.
However, the high economic growth has not reached the most of our population, which left a small number of people having too much income and the majority being battered by the price increase in consumer goods and weakening currency rates. It keeps highlighting the difference between the rich and the poor. The small group of people who have high income is controlling the most of wealth today in Mongolia.
As our mining-dependent economy repeatedly goes into crisis, the majority who has low income are seeing more unemployment leaving more people wanting to work abroad. An essential factor that tells the difference between the wealthy and the poor is access to infrastructure, which includes electric power, road, and fresh water and sanitation system. In countries such as India and the Philippines where one half of the population are poor, the difference between the luxury districts of the rich and the muddy slums of the poor can be easily seen. In Mongolia, although half of our population is living in the capital city and tens of thousands of apartment blocks are being built, the number of people who reside in ger district is not going down. In terms of access to fresh water and improved sanitation facilities, Mongolia is behind North Korea.
A democratic society provides everyone with an opportunity to work hard. However, if people keep working hard but are not able to improve their livelihood, they start losing faith in government and seek for opportunities to express their discontent for the difference in income. On the other hand, only a small number of families seize the ruling power while a monopoly establishes itself in the economy. The Philippines, where the participation and involvement of ordinary people were weak, has been ruled by 17 families only. As instability emerges in the country, those families decide to spend the public funds on strengthening the military. As a result, the rich build walls around their homes and hire a small army to protect their families from getting kidnapped. Do we have to let the same situation take over in Mongolia?
INFRASTRUCTURE IS THE SOLUTION
GDP per capita is not the only indicator that shows the difference between the developed countries and the developing ones. Access to infrastructure, including road, electric power, and fresh water and sewage system, is an important indicator. The nations who provided good access to infrastructure discuss about the quality of education and medical services whereas the countries who have not ensured good access to infrastructure talk about the access. In order for Mongolia to make infrastructure accessible, a lot of capital will be required.
The investment that went into Ulaanbaatar in the recent years was definitely necessary and timely. If the roads and junctions had not been widened, the traffic in the capital city would have stopped. Going forward, we need to provide the half of the population of the capital city with heating and fresh water, and to give every household an opportunity to buy an apartment that fits their purchasing power. The project to re-plan the ger district and build apartments in the ger district areas close to downtown has basically stopped.
The reason why the project is on hold is funding. In the last three years, the supply side of many housing projects was funded by the Chinggis and Development Bank bonds while the demand side was handled by printing currency and providing 8-percent housing mortgages. However, this arrangement is neither stable nor sustainable because the cost of government bonds is too high to spend it on infrastructure.
The economic growth of Mongolia has decreased five times compared to the 17 percent four years ago. Nevertheless, the construction of infrastructure should not stop. But where the required funding comes from has become the headache of the government.
INFRASTRUCTURE IS NOT FUNDED BY BONDS
Building infrastructure is the most important condition conducive to improved economic productivity. Infrastructure requires a great deal of initial investment, but it makes the economy bigger after it starts being used.
The financial market of most developing countries are based on commercial banks and lacks insurance and pension funds because they are not developed. Also, there are only a few investors, and the most of population do not have bank accounts. The interest rate offered by non-bank financial institutions is very high, and there are no joint funds. In addition, there is only a small number of daring investors. These factors make it difficult to find funding for infrastructure in developing countries.
Infrastructure can generally be funded in four ways. The first funding mechanism is funding by tax income from the government. The second is funding through state-owned banks using long-term savings of people. The third is funding by investors using insurance and pension funds. The fourth is to attract foreign investment.
Mongolia has been using the funding mechanism one to fund the infrastructure in Mongolia, but it has not been enough due to small population, small economy, and huge territory. Also, the operating expenditure of the government is more than 800 billion MNT a year (400 million USD at currency rates today), which is clearly lower than the need.
The State Bank of Mongolia is basically a commercial bank that inherited the previous banks that went bankrupt. Also, postal savings system has not developed in Mongolia.
Some countries that have small population and lack banking sector have been using postal savings system where people could deposit their money with low interest rate. In Mongolia, Khanbank has a branch in every soum, however it is a commercial bank and is not able to use long-term, low interest rate loans to make infrastructure investments. That is why the Development Bank of Mongolia was established to attempt issuing government-guaranteed bonds and fund infrastructure.
Mongolia’s health and social care fund belongs to the government. Those funds always run deficits, thus are not capable of investing in infrastructure. However, if we manage to set up private insurance and pension funds, there is an opportunity for long-term investment.
When it comes to the fourth funding mechanism, Mongolia has only one choice to attract investment from international development banks rather than foreign private investment. It would be better for Mongolia to raise funds for infrastructure from the World Bank, the Asian Development Bank, and the European Bank of Reconstruction and Development. The investment from these institutions brings not only money but also highly detailed estimations, engineering drawings, and performance monitoring.
These development banks all have AAA ratings, which means that they assess the risks very carefully to meet their standards. When these banks provide loans, they study whether the country can repay or not, and gives recommendations on what needs change and how it should be done. The Asian Infrastructure Bank, which is expected to be formed next month, opens up a new opportunity for Mongolia. If we acquire their 30-year loan with an interest rate of less than one percent to be repaid seven years later, it would be far more profitable than the funding from bonds, the interest rate of which today has almost reached 10 percent.
Infrastructure mirrors the development of country and is key to removing the difference between the rich and the poor.