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 2004-2006: Mongolia

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II. Implementation of the Country Strategy and Program

A. Progress Under the Partnership Agreement on Poverty Reduction

10. Mongolia was the first developing member country to enter into a Poverty Partnership Agreement (PPA) with ADB. Since its signing in March 2000, the document, which adopted the MDGs as its strategic goals, has served as the general strategic framework guiding ADB operations in the country. The PPA is also regarded by the Government as one of its fundamental documents, on the basis of which the PRSP has been developed.

11. Annual review of the implementation of PPA noted the efforts made by the Government to refine and finalize the PRSP. It confirms the observations made in the Country Strategy and Program Update for 2003–2005 (the last CSPU) that Mongolia is on the right track to achieving many of the MDGs. With assistance from external funding agencies including ADB, good progress has been made in addressing non-income poverty, through maintaining and further improving the achievements in human development. Poverty reduction is hindered by slow economic growth that is unable to create sufficient jobs or ensure steady improvement of income, particularly for the poor. This situation, if continued, will limit the effectiveness and sustainability of the achievements attained in addressing non-income poverty.

B. Progress in the Country Strategy and Program Focus Areas

12. The last CSPU noted that agriculture, finance, public sector reform, social services, urban development, and roads should continue to be the strategic focuses of ADB operations in Mongolia. It also highlighted the importance of involving Mongolia more actively in subregional cooperation. The planned CSP process will allow ADB to have a systematic review of its operations in Mongolia. It is envisaged that the planned CSP process will develop a more selective and focused operational strategy in view of the resource availability and comparative institutional advantages of ADB in the country. Prior to the new CSP, the current update is made selectively to present specific progress that has been made over the year in light of the last CSPU.

1. Financial Sector Reform

13. Since the mid-1990s, ADB has provided continued assistance, in cooperation with other external funding agencies including the World Bank, to promote the development of a sound financial sector to support private sector-led growth. These interventions have strategic importance in support of economic growth for poverty reduction. Mongolia has experienced rapid growth in financial intermediation over the past few years. During the period from 1999 to 2002, both bank deposits and bank loans increased very fast, at a compound annual rate of 86% and 38% respectively. Interest rates, although still high, have been declining, and the margins tightening, due to strengthened competition triggered by the entrance of new banks and, particularly, nonbank financial institutions (NBFIs).

14. Despite the progress made though, the financial sector in Mongolia remains undersized relative to the real economy. However, the rapid growth in bank lending and NBFI activity has increased systemic risk and fragility. Although the reported ratio of nonperforming loans remained relatively low in 2002 at about 7.2%, there is a growing concern that lending quality and long-term sustainability will be jeopardized if risk management practices are not strengthened in a timely manner. To minimize the risk of adverse sector development and develop a sound financial sector through continued reforms, ADB and the Government have agreed that strengthening risk management (including supervision), and promoting long-term contractual savings and capital markets should be the priority of the next phase of financial sector reform. A project preparatory technical assistance (TA) is programmed for 2003. The ensuing loan is programmed for 2005 and is on stand by for 2004, subject to project preparedness and resource availability. The possibility of having equity investment by the Private Sector Operations Department of ADB in the newly privatized Trade and Development Bank is also being examined. Furthermore, a comprehensive private sector development assessment for Mongolia is under way, which includes a more detailed analysis of the critical role of the financial sector in promoting private sector-led growth.

2. Governance Reform

15. Mongolia’s government sector is relatively large. On average, there is one public sector agency for every 350 people. The consolidated government expenditures account for about 39% of GDP, of which about 70% are required for current expenditures. Despite the moderate salary level of civil servants, the public sector wage bill, which stands at about 8.2% of GDP, is among the highest in the region in terms of its share in GDP. ADB has been involved in public sector reform since 1995. Supported by the Governance Reform Program (GRP)² and a series of TAs from ADB, the Government introduced public sector reforms, initially at six pilot agencies. Based on the lessons learned and experiences obtained from GRP, a general legal framework to guide comprehensive and systematic reforms across the public sector has been established through adoption of the Public Sector Management and Finance Law (PSMFL) in 2002.

16. ADB has been undertaking a country governance assessment for Mongolia. It has highlighted the importance of continued support for public sector reform and, particularly, the need for strengthening the Government’s institutional capacity to implement the PSMFL in a gradual manner. Accordingly, ADB has helped the Government develop the second phase governance reform program. The purpose of the second phase is to support the implementation of administrative and financial management reforms to improve efficiency and accountability. As noted in the country governance assessment, these require enormous efforts for capacity building at both the central and local government levels, and administrative consolidation and institutional restructuring across the public sector. Given the complexity of the reforms involved, the second phase of the governance reform program will be implemented in a gradual manner, from 2003 to 2009 and will be supported through a cluster approach by two lending packages. The initial package comprising the first subprogram loan of $13.5 million and a TA loan of $2 million is in preparation and will be submitted for consideration by the Board of Directors within 2003. A TA for preparation of the follow-on lending package and the second subprogram loan are tentatively programmed for 2005 and 2006, respectively.

3. Provision of Essential Social Services

17. As a major thrust to reduce poverty, ADB has been active in improving provision of essential social services to the poor, including education, health, municipal services, and social security services. Apart from supporting rehabilitation and construction of social infrastructure, ADB has placed increased emphasis on policy and institutional issues to improve the efficiency and sustainability of service delivery systems and to ensure improved access of the poor, through integrated interventions for public sector reforms in general, and for specific social sectors in particular. Under the second phase governance reform program, ADB has attached great importance to supporting the implementation of reforms in the education, health, and social security sectors. The implementation of the ongoing Social Security Sector Development Program³ has made good progress in formulating a social security sector strategy to guide reforms in social insurance, pensions, and social assistance systems. Special attention has been given to assisting people with disabilities—the most vulnerable group among the poor. TA is provided in association with the Second Health Sector Development Project⁴ to support health sector reform, particularly the health insurance system. Subject to good progress in implementation of this project and the associated TA and the findings and recommendations of the planned CSP process, a project preparatory TA for further intervention in the health sector is tentatively programmed for 2005–2006. As part of the planned CSP process, ADB will also undertake a country gender assessment in coordination with the World Bank (see para. 23).

18. The challenge resulting from internal migration calls for a review of the geographical focus of ADB support to ensure that social services be provided to meet the emerging needs in the expanded population centers on a timely basis. It should be recognized that this migration is driven by the forces of the market economy, and should lead to a generally more rational distribution of the population within the country in accordance with economic opportunities. A TA has been provided to help the Government develop its capacity for regional development planning. Assistance will also be provided under the second phase governance program to support the reforms in the service delivery systems through administrative consolidation. Subject to further review during the planned CSP process, a TA for integrated development for selected economic centers is tentatively programmed for 2004 to further study the options to address this emerging challenge.

19. In the education sector, following the approval of the loan for the Second Education Sector Development Project⁵ in 2002, ADB has been working jointly with the Government and external funding agencies to explore the possibility of taking a more strategic and sector-wide approach to coordinate their activities. A TA for project preparation has been programmed for 2004 accordingly.

4. Support for Agriculture Sector and Rural Development

20. Agriculture is a vital sector for the economy, accounting for 21% of GDP and 45% of employment. Rural Mongolia is the home of 43% of the poor, many of whom may have to join the urban poor if they cannot find jobs or other economic opportunities. The agriculture sector has, therefore, a very important role to address poverty, both in rural and urban areas.

21. Successive harsh winters and severe droughts have kept agricultural output falling for the last few years, particularly due to losses in livestock. The agriculture sector has become a bottleneck constraining overall economic growth. To diversify the rural economic base and address rural poverty, the Government has attached high priority to promoting crop production and requested ADB support. The recently completed project preparatory TA for crop production project has revealed, however, the associated challenges and difficulties. These include the extreme climatic conditions, the relatively weak comparative advantage, and the lack of market-oriented physical and institutional support from both the public and private sectors. This has required more time to undertake an adequate and accurate assessment of the crop production sector, before an economically viable public sector intervention could be properly designed. As discussed and agreed with the Government, subject to availability of resources and project preparedness, the proposed crop production project has been rescheduled from the indicative lending program for 2003 to the indicative lending program for 2004. Furthermore, a TA for an agricultural sector study is being prepared as part of the process for the planned CSP next year.

5. Regional Cooperation

22. Given the geographical features of the country, support for Mongolia to participate in regional cooperation has two general dimensions, one in connection with the subregional cooperation initiatives in Northeast Asia and the other the subregional cooperation in Central Asia, both involving one of its two neighbors—the PRC. It has been agreed between the PRC and Mongolia that transport, environment, and trade and investment should be the three common priority areas for ADB-supported regional cooperation initiatives. Continued priority is attached to completing the north-south trunk road under the proposed regional road development project in 2004, and to link the road systems between the Russian Federation and the PRC through the major economic centers in Mongolia including Ulaanbaatar. Mongolia has also been actively involved in an ADB-supported regional cooperation initiative to establish a regional cooperation mechanism for prevention and control of the dust and sandstorms in Northeast Asia. A TA has been provided to help the Government undertake a review of its trade policy. In the general context of subregional cooperation in Central Asia, a new regional TA is in preparation in cooperation with the United Nations Economic and Social Commission for Asia and the Pacific to assess the viability of a newly proposed trunk road corridor between Xinjiang Uygur Autonomous Region, PRC and the Russian Federation through western Mongolia. This road is expected to help Mongolia break the isolation and remoteness of its less developed western region, and provide access to the markets in its two neighboring countries.

C. Highlights in Coordination of External Funding and Partnership Arrangements

23. ADB has been the lead agency among the external funding agencies in many sectors, particularly in the social sectors. At the Consultative Group Meeting in July 2002, ADB and the World Bank agreed to strengthen coordination, at country strategy level, through formulation of their respective medium-term operational strategies, i.e., the CSP of ADB and the Country Assistance Strategy of the World Bank. Through follow-on coordination consultations, it was further agreed that the two institutions should jointly coordinate their sector and thematic analysis during strategy formulation, and further strengthen information sharing and policy and operational coordination, particularly in the areas of country performance assessment, governance reforms, sector interventions, and portfolio management. Collaboration with other external funding agencies has also been strengthened, particularly through the Mongolia Resident Mission (MNRM). For instance, in cooperation with the European Bank for Reconstruction and Development, TA has been provided to help the country develop a civil aviation policy with a view to promoting private sector involvement in the sector. An updated development coordination matrix is provided in Appendix 1, Table A1.5.

24. In conjunction with its lending program, ADB will continue to actively pursue cofinancing, particularly from grant and concessional cofinancing sources, to effectively address the important thematic priorities for ADB operations in Mongolia. In 2004, continued efforts will be made by ADB to help the Government mobilize cofinancing from concessional sources for the third road development project. To support the indicative lending program for 2005, specific efforts will be made to explore cooperation and cofinancing opportunities for the third education sector development project within the overall framework of the education sector master plan to be developed under the ongoing project preparatory TA. During the recent presidential visit of the PRC to Mongolia, a substantive bilateral aid package was announced. The assistance from the PRC, if provided on concessional terms in a transparent manner, might present an opportunity for cofinancing in conjunction with ADB lending. The implications of growing assistance from the PRC warrant assessment during the planned CSP process.

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