Countries and Regions

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p. 1 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 2004-2006: Mongolia

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I. Current Development Trends and Issues

1. After 2 years of stagnation in 2000 and 2001, Mongolia's economy showed signs of improvement in 2002. Despite another harsh winter followed by severe droughts and the continued unfavorable conditions on the international market for copper concentrates and cashmere, the economy grew by 3.9%. Substantial investment in social services and social infrastructure has helped the country maintain a relatively high level of achievement in terms of human development indicators. As assessed in 2002, most of the Millennium Development Goals (MDGs) appear to be achievable, except the goal to halve the proportion of the poor. Since 1995, the proportion of people living below the poverty line has remained almost unchanged at about 36%. This can only be addressed through sustained pro-poor growth over the medium to long term that diversifies the highly vulnerable economic base of Mongolia, and creates jobs and economic opportunities for the poor. Appendix 1, Table A1.1, indicates the country's progress toward the MDGs.

A. Recent Political and Social Developments

2. The political situation in Mongolia has been stable since July 2000, when the Mongolian People's Revolutionary Party took office through a landslide victory in parliamentary elections. This stability has made it possible for the Government to restore macroeconomic stability and to introduce new policy reform initiatives prior to the next parliamentary elections due in 2004. The recent visit by the President of the People's Republic of China (PRC) to Mongolia and the Mongolian Prime Minister's visit to the Russian Federation have further strengthened bilateral relations between Mongolia and its two neighbors-Mongolia's gateway to the world market, its major trading partners, and an important source of foreign aid and investment.

3. With assistance from external funding agencies, the Government has been working to finalize the Poverty Reduction Strategy Paper (PRSP). The persistent high incidence of poverty remains a source of major concern, a situation exacerbated by widening inequality. In addition, increased migration to a few population centers, particularly Ulaanbaatar and its outlying districts, for better access to essential social services and market opportunity, has created new challenges for social and human development that demand a prompt response.

B. Economic Assessment and Outlook

4. In 2002, Mongolia enjoyed a relatively stable macroeconomic situation. In view of the shortfall in tax revenue from the largest taxpayers, including Erdenet copper mine and Gobi cashmere factory, the Government, in line with advice from the International Monetary Fund (IMF), made greater efforts to restore macroeconomic stability, including withdrawing from the publicly announced 20% wage increase for public employees. The fiscal deficit was contained at 5.6% of gross domestic product (GDP), below the target (6.5%) agreed with IMF under the stabilization program supported by the Poverty Reduction and Growth Facility (PRGF). Annual inflation was low at 1.6%, compared with 8.0% in 2001.

5. Macroeconomic stability provided the basis for strong growth of 22.5% in the manufacturing sector in 2002, particularly in textiles and meat processing. The overall growth of industrial output was moderate at 4.7%, however, mainly due to a 7.2% decline in the mining sector. Construction grew by 11.0%, due particularly to the ongoing real estate boom in Ulaanbaatar. Services expanded by 12.0% due to good performance in financial services, transport and communications, and wholesale and retail trade. Agriculture, which is highly vulnerable to weather conditions, experienced another year of decline by 10.5%, after an 18.5% decline in 2001. A milder winter helped cushion the losses in the livestock sector.

6. In 2002, exports slightly improved, posting 0.5% growth despite the decline in copper concentrate and cashmere exports, while imports increased by 8.3% in line with the economic recovery. These led to a widening of the trade deficit that stood at 15.2%. The current account deficit increased to $175 million but given the higher rate of economic growth, declined slightly as a proportion of GDP to 16%. The overall balance of payments showed a $42.6 million surplus, indicating a large inflow of external assistance and overseas remittances. At the end of 2002, international reserves reached $225.9 million, which is equivalent to about 17.8 weeks of imports. The exchange rate of the national currency, the togrog, depreciated moderately (2.1%) against the US dollar.

7. At the end of 2002, the total external debt (excluding the pre-1991 debt to the Russian Federation) had increased from $904.8 million to $966 million, which is equivalent to about 88.3% of GDP compared with 88.8% of GDP reported at the end of 2001. Since most of the external debt consists of loans from multilateral or bilateral sources on concessional terms, the debt situation has remained manageable with a debt service ratio of 4.9%. The pre-1991 debt to the Russian Federation, estimated at 10.5 billion transferable rubles, has yet to be resolved. The governments of Mongolia and the Russian Federation have established a joint working group to examine all the options for settling the pre-1991 debt, with a view to minimizing the negative impacts on the development process of Mongolia. The external debt, particularly the progress in settling the pre-1991 debt, warrants close monitoring.

8. In the short term, the major economic concern is whether the Government will be able to sustain the achieved macroeconomic stability, under growing pressure for more expansionary fiscal and monetary policies in a year leading to a general election. (More detailed analysis of the economy is available in the recent Economic Update for Mongolia.¹ ) Detailed country economic, poverty and social, and environment indicators are provided in Appendix 1, Tables A1.2, A1.3, and A1.4.

C. Implications for Country Strategy and Program

9. To help Mongolia achieve the MDGs, the Asian Development Bank (ADB) needs to continue to help promote economic growth for job creation and improve provision of essential social services for the poor. Persistent high incidence of income poverty and continued external imbalances require greater emphasis on accelerating economic growth as the main means to reduce poverty. Finalization of the PRSP by the Government will necessitate a review by the major external funding agencies of their own poverty reduction strategies in the country. This will coincide with the scheduled preparation of a full Country Strategy and Program (CSP) for Mongolia to be finalized in 2004. This will provide a good opportunity for ADB to strengthen coordination at a country strategy level with other major external funding agencies through the CSP process.

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