Will A Tax on Savings Interest Help Spur An Underdeveloped Stock Exchange?

As part of Mongolia's staff-level agreement with the International Monetary Fund to enroll in a 440 million USD extended fund facility (EFF), the government has accepted the responsibility to increase state budget revenue and cut its deficit. One of the biggest measures that will be taken is raising rates on seven taxes.

The one amendment that has been getting the most attention and scrutiny, is the proposed decision to tax all savings interest. The decision has been met with much opposition, as would any increase on taxes that impacts such a large number of people.

Analysts seem to be divided in their opinions about the measure, with one group worried that the new tax would only encourage informal savings and cut off the banking system's main source of income. Other economists have highlighted the potential long-term positive effects of the tax, such as the development of a more sophisticated financial systemIt is important to note that the new tax policy has not been approved, or even discussed, by Parliament.

However, it is likely that Parliament will have to approve the seven new tax policies in order for the country to enroll in the EFF. What has been discussed at this point is a ten percent fixed tax rate on savings interest, regardless of the duration and amount of the savings.

This means a person with 10,000 MNT in their bank account will be taxed at the same rate as a person with 100 million MNT in their account. At this point, however, it is not clear whether it will be a fixed interest rate on all savings or if there will be classifications.

This decision will ultimately be decided by the Mongolian People's Party (MPP) and their 65-seat majority in Parliament, as has been the case since June 2016. But what's different about this situation is the vocal opposition to the EFF amongst members of the MPP.

It is more than likely, however, that these critical MPs will bite their tongues and pass the necessary amendments and measures in order to implement the much needed EFF.The one prediction that most pundits have agreed upon is the notion that savings will most likely decrease.

A 15 percent savings interest rate has not only encouraged many people to place all their assets into safe and reliable institutions, it has been a lucrative source of income. For instance, a person with 100 million MNT in the bank receives 15 million MNT in savings interest annually.

Now, the decision to tax that lucrative return on savings may spur many...