A Chance to Ascend From the Debt Trap

As a mining cycle travels towards a boom, foresighted nations tend to accumulate and reserve capital. It is how Russia and Kazakhstan overcame an economic recession when their cycle came to a bust. In our case, we fell into debt, rather than accumulating capital when the cycle moved towards a boom. As more income came from the mining sector, our government continued to take out loans. The income accumulated with the politicians, while ordinary people were left with a debt burden.

The authorities have wasted another summer attempting to replace the government at every chance, fighting over power and influence, and trying to get a bigger cut, instead of increasing the size of the pie. It was pointed out in my previous column that our country is trapped in debt and we are trailing in interest payments of external debt, despite the projected economic growth of three percent this year.

Mongolia's external debt today is not equal to 55 percent of our economy as the government claims. It is actually as big as 90 percent of our economy if we take into account the currency swap agreement established with China, and the amount of debt owed by companies owned by the Development Bank of Mongolia. The decline in the mining industry has reached the construction industry, as we see newly erected buildings empty, without buyers, and mortgage repayment rates gradually weakening. The increase in bad loans is negatively impacting the banking sector.

Our government has started repaying debt with more debt, and it is even raising high interest loans from the domestic market. It is inflating the financial risk of the government, reducing the faith of foreign investors, and giving them strong incentive to sell government bonds.

The Mongolian government today resembles a spoiled teenager who is swiping his parents' credit card at his will, making expensive purchases.

It is becoming more difficult for Mongolia to escape being trapped in debt. The longer we stay trapped, the harder it becomes to get out. What should our country do to escape this trap?

STEP 1

Firstly, we need to take the credit card back from the kid who is buying things with money his parents do not have. The nation's citizens are demanding that the government stop obtaining more loans. It is time to make the management of external debt transparent, increase the involvement of civil society in monitoring the spending of loans, forbid the distribution of loans to companies associated with...