Countries and Regions

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p. 2 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Level

Country Strategy and Program Update 2003-2005: Mongolia

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II. Implementation of the Country Strategy and Program

A. Progress Under the Partnership Agreement on Poverty Reduction

12. Mongolia is the first developing member country to enter into a PAPR with ADB. Since March 2000, ADB has conducted two annual reviews of implementation of the PAPR, in April 2001 and March 2002. These reviews have proven useful in guiding annual updating and refining of ADB's strategy and operational program for Mongolia. The first annual review highlighted the coexistence of the income and nonincome aspects of poverty and emphasized the importance of improving provision of essential services to the poor. Based on the recommendations of the first annual review, the last CSPU underscored the importance of balancing urban and rural development, and confirmed the strategic importance of continued assistance to the road sector. In parallel to formulation of the last CSPU, the Social Security Sector Development Program³, Housing Finance Sector Project,⁴ and Rural Finance Project⁵ were processed and approved in 2001.

13. The second review confirmed that Mongolia is on the right track to achieving the millennium development goals. Good progress has been made in addressing nonincome poverty and achieving human development goals, particularly reducing infant and under-5 mortality, improving health care, and increasing school enrollment. Poverty reduction is hindered by economic growth that is unable to create sufficient jobs or ensure steady improvement of income, particularly of the poor. The second review recommended greater emphasis on accelerating economic growth while maintaining macroeconomic stability.

B. Progress in the Country Strategy and Program Focus Areas

14. The last CSPU's analysis of ADB's thematic priorities remains valid and relevant. Updating is done selectively to present specific progress or issues that may affect future operations to promote sustainable economic growth for poverty reduction.

1. Financial Sector Reform

15. The financial sector plays a key role in promoting economic growth. With joint support from ADB and the World Bank⁶, Mongolia has made good progress in the banking sector. The share of nonperforming loans in total bank lending declined significantly from over 20% in 2000 to about 8% in 2001, as a result of combined effects of (i) expansion of lending and (ii) improvement of loan repayment. Competition from new banks and emerging nonbank financial institutions (NBFIs) facilitated financial intermediation by lowering the average interest rate from 35% to 25%. The doubling of commercial credit in 2001 indicated the impacts of this encouraging development on investor's confidence and, therefore, economic growth.

16. However, the development of the financial sector is uneven. The regulatory framework for NBFIs is yet to be fully established, access to institutional finance is still limited, the capital market continues to be weak, and the cost of financial intermediation is still too high. To provide an enabling environment for private sector-led economic growth, the financial sector needs continued systematic interventions to ensure sound and orderly development. TA will be provided to help the Government study the financial sector strategy that will guide future interventions. Efforts will also be made to support the Government's privatization program in the sector (paras. 19 and 20).

2. Public Sector Governance Reform

17. Promoting sustainable economic growth requires continued governance reform to establish an efficient and effective public sector to manage the development process, promote private sector-led growth, and deliver government services responsibly and efficiently. With the support of the ADB Governance Reform Program Loan⁷, the Government launched a comprehensive public sector governance reform program that made progress among the pilot agencies during the first phase of implementation. The recent passage of the Public Sector Management and Finance Law (PSMFL) demonstrates strong local ownership of the governance reform, which is essential to the success of the program.

18. Based on the PSMFL, ADB will provide continued assistance to support the next steps of public sector governance reform through coordinated interventions in institutional restructuring and capacity building. Emphasis will be given to enhancing public finance management to improve efficiency and accountability. To provide timely support for implementation of the PSMFL, two TAs are being processed to help the Government improve public sector finance management and strengthen its accounting and auditing capacity.⁸ To help the Government take stock of the status of its governance, ADB is conducting a country governance assessment for Mongolia. The findings and recommendations of the assessment are expected to provide timely guidance for designing and programming of future governance reforms.

3. Privatization and Restructuring

19. The Government's policy is to increase private sector participation in development through privatization and restructuring of state-owned enterprises (SOEs). In May 2002, the Government sold its stake, accounting for 67% of equity, in the Trade and Development Bank (TDB), the largest and most profitable bank in Mongolia, to an international joint venture between the Banca Commerciale Lugano of Switzerland, and Gerald Metals of the United States. ADB and International Finance Cooperation (IFC) actively promoted the sale and are considering taking an equity stake to mitigate political risk for the private investors while ensuring good corporate governance. The privatized TDB, which ING Barings of the Netherlands will advise on management, is envisaged to introduce new banking skills and services and improve the efficiency and services of the banking sector through intensified competition. The intended ADB equity investment is under processing in collaboration with IFC.

20. Mongolia faces several obstacles to attracting foreign investment, including geographic isolation, small domestic market, and low external profile. The Government needs technical support to prepare a high-quality sector analysis or due diligence study to facilitate privatization of strategic and relatively complex SOEs.⁹ TA will be provided to facilitate the privatization of the Agriculture Bank of Mongolia in the context of overall financial sector reform. TA will also be provided to help the Government develop a forward-looking civil aviation sector policy and strategy to encourage private sector participation in developing the civil aviation sector, including restructuring and privatization of the Mongolian Airlines (MIAT), the flag carrier. This TA will be closely coordinated with the European Bank for Reconstruction and Development, which has offered to finance a management contract for MIAT and help formulate a long-term investment plan for the Civil Aviation Authority. Further interventions for private sector participation will be introduced based on the findings and recommendations of the private sector assessment that is to be concluded by the end of the year.

4. Improving Provision of Essential Social Services

21. ADB will provide continued assistance to improve provision of essential social services to the poor, including education, health, municipal services, and social security services. In this regard, ADB needs to consider the impact of internal migration of people to central provinces and Ulaanbaatar, which calls for a strategy to guide the spatial development for both service delivery and economic growth. A TA will be provided to help the Government formulate a rationalized regional development strategy.¹⁰ ADB should also focus on improving efficiency in service provision and financing mechanism to ensure long-term sustainability. In providing social services, ADB should encourage private sector participation and strengthened public and private sector partnership to improve operational efficiency and reduce reliance on the Government budget support.

5. Regional Cooperation

22. Starting with a moderate TA,¹¹ ADB helped Mongolia and the People's Republic of China (PRC) establish an effective institutional framework to promote and coordinate economic cooperation between the two countries. With ADB support, the two governments have identified cooperation in transportation, trade and investment, and environmental management as their common priority. Continued assistance will be provided to strengthen this cooperation.

23. Priority will be given to complete the north-south trunk road that will link the road systems of the PRC and Russia through the main Mongolian economic centers, including Ulaanbaatar. Along with road construction, TA will help Mongolia build up its capacity to operate the international transport corridor and manage cross-border traffic. TA will also help Mongolia analyze the challenges and opportunities presented by the PRC's recent accession to the World Trade Organization and Russia's future accession. In environmental management, priority will be given to solving the transboundary problem of dust and sandstorms in Northeast Asia, most of which originate from the deserts of Mongolia and the PRC.

24. In March 2002, Mongolia was accepted, together with Azerbaijan, as a full member of the ADB-supported subregional cooperation for the Central Asia Republics and PRC. This subregional cooperation will provide Mongolia with a new means to participate in geographically wider regional cooperation.

C. Coordination of External Funding and Partnership Arrangements

25. Coordination with multilateral and bilateral development partners in Mongolia has improved. To help the country achieve macroeconomic stability, ADB, World Bank, and IMF reached a consensus on assessment of the macroeconomic situation and actions needed to improve fiscal sustainability. Collaboration with the World Bank and IMF has been strengthened in public sector governance reform, as demonstrated by the passage of the PSMFL, which provides a legal framework for reform measures initiated by the three institutions jointly or individually.

26. Establishment of the Mongolia Resident Mission (MNRM) in January 2001¹² has played a key role in strengthening coordination with development partners in the country. Through MNRM, ADB has been actively involved in the local consultation process sponsored by the World Bank and United Nations Development Programme (UNDP) to help the Government formulate the Poverty Reduction Strategy Paper (PRSP), which is to be finalized this year. To facilitate the implementation of PRSP, TA has been programmed, in collaboration with the World Bank and UNDP, to further strengthen coordination of development partners at the sector level. The matrix for coordination of the development partners in Mongolia is in Appendix 1, Table A1.5.

27. To maximize the impact of its assistance to the education sector, ADB maintained close operational coordination with the Government of Japan and the Nordic Development Fund (NDF). This has resulted in cofinancing of a $45-million grant from Japan and $4.8-million concessional loan from NDF for the Second Education Sector Project. Potential areas for intensified collaboration with development partners have been identified: public sector governance reform, financial sector reform, construction of the north-south trunk road, and portfolio management, just to mention a few. To strengthen its operations in Mongolia, ADB will continue to pursue official cofinancing opportunities from grant and concessional sources.

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