Regions and Countries

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p. 10 of 20 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Private Sector Operations IV. Subregional Economic Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Mongolia : III. Sector Strategies

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B. Infrastructure

47. Developing physical infrastructure continues to be a priority for the Government because of the obstacles for the development of an efficient economy posed by the current infrastructure. Key issues relating to physical infrastructure include:

1. separating policy/regulatory functions from operations;
2. commercializing management and operations;
3. institutional strengthening and human resource development;
4. upgrading sector planning and improving management capabilities and performance;
5. improving tariff adjustments and cost recovery;
6. improving operation and maintenance; and
7. addressing environmental issues.

The level of investment in physical infrastructure needs to be addressed in the context of the Government’s limited fiscal resources. Limitations on ADB's available resources and introduction of private sector participation in provision of infrastructure services have necessitated a more selective and limited assistance being provided to infrastructure under the new COS.

1. Energy

48. Government policy in the energy sector aims at ensuring multiple sources of energy supply, promoting regional cooperation, electrifying rural areas, and reducing environmental pollution. Structural reforms are being undertaken to change coal mines, power stations, the power networks, and suppliers into independent enterprises. Privatization of these entities will be pursued within a framework of ensuring the long-term reliable functioning of the sector, enhancing economic efficiency, and protecting both employees and consumers.

49. In the energy sector, ADB’s strategy has centered on adjusting energy tariffs towards full cost recovery levels, improving the Energy Authority’s financial performance, commercializing operations in the energy sector, and promoting energy conservation. Loans have been provided to rehabilitate an existing power plant, improve energy conservation, and modernize the district heating and steam systems. An adequate supply of heat during the harsh winter months is essential in Ulaanbaatar which is one of the coldest capital in the world. Recognizing the importance of energy prices in the social sector and their impact on the fiscal budget, ADB is providing advisory assistance to seek means of providing affordable and decentralized energy. No new loans or TAs are planned in the 2001-2003 period.

2. Road Sector

50. In accordance with the master plan for road transport development, measures will be taken in the coming years to improve the transport network, particularly the north-south corridor linking the western and eastern economic regions and providing the main economic centers with paved road.

51. ADB is supporting the development of the north-south transport corridor through Ulaanbaatar linking the country with Russia and PRC. Developing this corridor will promote sustainable economic growth, providing more employment opportunities and generating additional incomes in poor areas thus contributing to poverty reduction. A loan project is being implemented to rehabilitate the 300 km main road from Ulaanbaatar to Altanbulag on the Russian border. The Second Roads Development Project, further developing the corridor, was approved in September 1999. Policy dialogue has focused on:

1. minimizing uncertainties in road funding by changing the Road Fund’s legal and administrative arrangements, including the enactment of legislation for adjusting the percentage of fuel tax allocated to the Road Fund and the establishment of an autonomous Road Board;
2. improving medium- to long-term cost recovery practices (e.g., by introducing road-user charges);
3. promoting policy reform and institutional strengthening;
4. supporting capacity building through training and human resources development;
5. facilitating privatization and private sector participation in road maintenance and development; and
6. introducing new design and construction standards.

52. The Government considers the development of a basic set of transport infrastructure as essential for Mongolia’s future economic development. The Government has informed ADB of its strong preference for support to the road sector to continue given the successful implementation of the ongoing road projects and the need to further support policy reforms, strengthen road sector institutions, and rehabilitate road infrastructure. A study of the importance of the road sector to contributing to poverty reduction and human development will be undertaken to provide a basis for considering future investments.

3. Finance

53. Mongolia’s impaired financial system is potentially the most significant constraint to achieving stable economic growth and the Government’s socioeconomic development objectives, including poverty reduction. The development of a sound, stable, and resilient financial system is imperative to avoid disruptions from protracted banking crises and improve financial intermediation. These disruptions have led to decreasing confidence in the banking system, as banks became insolvent and domestic savings were wiped out. Increases in intermediation spreads and higher bank restructuring costs have added to fiscal pressures and eroded macroeconomic stabilization.

54. Since 1996, the Government has accelerated financial sector reforms under ADB’s Financial Sector Program Loan (FSP), which was satisfactorily completed in June 1999. Notably, from mid-1998 the pace of banking reforms accelerated, and bold measures were introduced. Commercial banks’ prudential regulations were strengthened, eight insolvent banks were closed, bank licensing requirements were made more stringent, bank exit policies were tightened, and loan recovery became a priority. Subsequently, the Government adopted a comprehensive financial sector strategy that provides a long-term vision and medium-term strategy for the development of the sector. This strategy was unanimously supported at a donor coordination meeting on the financial sector in Ulaanbaatar in February 2000.

55. ADB’s strategy in the financial sector will aim at removing barriers to private sector growth and generating employment by improving the efficiency of financial intermediation and facilitating the development of alternative sources of financing. Special emphasis will be on governance reforms within the sector to introduce greater transparency and accountability at all levels of financial institutions and operations, and to build up the needed human skills in the banking industry to ensure its proper functioning in the future.

56. The financial sector strategy will support poverty reduction both directly and indirectly. Direct support will be primarily through the development of microfinance services. This will build on existing assistance and should be consistent with principles of subsidiarity, recognizing that any microfinance assistance needs to mobilize those institutions and agents that can best deliver microfinance credit. Indirect support will primarily involve promoting private-sector-led economic growth.

57. ADB’s strategy in the sector is to develop a competitive, viable, and stable financial system emphasizing support for:

1. deepening the financial reforms based on improved asset quality in the banking system and a more efficient banking intermediation process; and
2. gradually broadening the financial sector by establishing the supporting financial infrastructure needed to develop the debt and equity markets and voluntary contractual savings institutions. Parallel with these activities, the strategy will put in place mechanisms for building human skills in the industry to ensure that lack of human capacity does not undermine the proper functioning of the banking system.

58. In addition, and to follow up on implementation of policy reforms (i.e., the setting up of a supporting, functional legal and regulatory environment), ADB will target the extension of credit through on-lending operations:

1. to small and medium-size enterprises;
2. to rural enterprises and households;
3. for microfinance activities; and
4. for housing purposes. These activities are expected to contribute directly toward economic growth (i.e., microfinance) and indirectly support poverty reduction. A further umbrella financial sector operation is planned to support the planned rural, microfinance and housing sector lending.

59. The problems of the financial sector, unless successfully addressed, will jeopardize the Government’s macroeconomic stabilization program, and restrict the recovery of the productive sectors as well as the development of the private sector. Thus, strengthening the financial sector constitutes a key feature of ADB’s strategy. ADB is working closely with the World Bank to support the Government’s financial sector reform program. Under jointly prepared policy based loans approved in 2000 the World Bank has concentrated its assistance on banking sector reforms while the ADB Financial Sector Program Loan II is supporting the development of non-bank financial institutions and improving corporate governance in the banking sector.

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