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 Levels

Country Strategy and Program Update 2005-2006: Mongolia

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II. Implementation of the Country Strategy and Program

A. Progress in Poverty Reduction

8. Mongolia was the first developing member country to enter into a poverty partnership agreement with ADB 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. However, poverty remains unchanged and greater efforts are needed to translate growth into reduced poverty incidence. Continued growth is helping to lift living standards, but the benefits are not equally distributed among the population, as revealed by widening income inequality and unchanged poverty incidence.

9. The Government completed the PRSP in 2003, known in Mongolia as the Economic Growth Support and Poverty Reduction Strategy. The strategy aims to reduce urban-rural disparities, foster sustainable human development and pro-poor growth, and promote good governance through the strengthening of further private sector developments and public expenditure efficiency gains.

10. In 2003 the Government presented to the United Nations General Assembly the first Mongolian Millennium Development Goals Progress Report. The country has made good progress in addressing non-income poverty, with increasing school enrollment rates, declining infant and under-5 mortality rates, and improved overall health care. Maternal mortality is declining, though it remains high compared with that of other countries at similar income levels. The benefits of improvements have not been shared equally, however. Rural areas and settlements of urban ger (Mongolian traditional tents) on the outskirts of Ulaanbaatar lag well behind established urban areas in nearly all health and education indicators. In terms of gender equality, Mongolia has higher enrollment rates for women than for men at all levels of education, but women are underrepresented in private sector management and in the top echelons of government. The most challenging goal is to halve the incidence of poverty by 2015.

B. Progress in the Country Strategy and Program Focus Areas

11. The previous CSPU identified agriculture, finance, public sector reform, social services, as strategic focuses of ADB operations in Mongolia. It also highlighted the importance of involving Mongolia more actively in subregional cooperation. The ongoing CSP process will allow ADB to have a systematic review of its operations in the country, taking into account important recent economic and social developments. Looking to the future, the challenge will be to remain engaged in key areas under a limited loan and technical assistance (TA) envelope. It is envisaged that ADB’s future strategy will focus on themes rather than specific sectors, and will result in a narrow range of sector interventions. From this perspective the following themes are considered: (i) capacity building and governance reform (ii) private sector development (iii) internal migration and its implications for rural and urban development (iv) efficient delivery of social sector services and (v) subregional cooperation.

1. Capacity Building and Governance Reform

112. Mongolia has a relatively large public sector, measured against a relatively small population of 2.47 million. Public administration is highly decentralized: 21 aimags (provinces), and the Ulaanbaatar capital city administration are further subdivided into 346 soums (districts) and 1,681 baghs (villages) that provide services at the lower tiers of the government. Over 7,000 public sector entities rely on budgetary support in Mongolia, or about one public sector agency for every 350 people.

13. Mongolia has embarked on a complex reform process involving public sector financial management and civil service reform. The Government formulated a comprehensive program of public sector governance reforms to be implemented over 10 years starting from 1999, supported by ADB-financed Governance Reform Programs I and II. In the transition from governance by bureaucracy to governance by the rule of law, Mongolia has enacted a large body of legislation to improve the environment for private sector development, including a state-of-the art mining law, a new banking law, and a revised foreign investment law. But there is a lag between enactment and application of laws and regulations, both in the government and in the judiciary. ADB has undertaken a country governance assessment that highlights the need for strengthening the Government’s institutional capacity to implement the Public Sector Management and Finance Law, a framework to guide comprehensive and systematic reforms across the public sector. TA and a new program loan, Governance Reform III, are programmed to assist the country in the years ahead.

2. Private Sector Development and Financial Sector

14. The private sector in Mongolia has grown considerably since 1991. Starting virtually from zero, the private sector now generates about 85% of GDP, and more than 90% of all enterprises are privately owned. Progress was achieved through a decade-long program of privatization and the creation of an enabling environment generally supportive of new private enterprises. Nevertheless, according to ADB’s recently completed private sector assessment, substantial challenges remain if Mongolia is to integrate fully with world markets and raise GDP to rates that will permit significant levels of poverty reduction. Most challenges are institutional, although there remain concerns about the course of fiscal and monetary policy. Throughout the private sector, skill levels are low; technology is obsolete or highly inefficient; and governance standards related to accounting, financial analysis and reporting, environmental consciousness, and investor relations are still poor. Most of the basic institutions needed in a market economy have been created, but often they do not receive sufficient resources to ensure robust internal development. Commercial laws are modeled after laws in developed markets, some with a different legal system, and have not been effectively harmonized. Laws generally provide a relatively basic structure and lack accompanying regulations, leading to excessive discretion and a growing problem of corruption.

15. A sound banking sector is crucial to foster private sector development. After a decade of bank failures, confidence in the sector in Mongolia began to improve from 2000. The privatization of Trade and Development Bank and recovery and privatization of Agriculture Bank, as well as entry of several healthy commercial banks have all contributed to increased mobilization of domestic savings, a gradual fall in the still high lending rates, and increased credit. The past few years have also witnessed a dramatic increase in nonbank financial institutions including credit cooperatives and financing companies, but the sector lacks an adequate regulatory framework. Recent growth in the number of banks and rapid expansion of outstanding credit are becoming a cause for concern. Increased competition and a planned doubling of capital adequacy requirements will spur consolidation in the sector, but whether that process is orderly will depend on the discipline of the regulator. In 2005, Financial Sector Program III aims to help the Government strengthen the regulatory and supervisory framework for nonbank financial institutions, and to address the remaining policy and structural impediments to the development of the sector.

3. Internal Migration and Implications for Urban and Rural Development

16. In recent years the share of the total population living in Ulaanbaatar has substantially increased, with undocumented but visual evidence of continued in-migration from rural areas and the central region to Darkhan, Edenet, and especially Ulaanbaatar, over the past 4 years. If this trend continues, half of the population of the country will live in Ulaanbaatar before 2015. The majority of the migrants is in the economically active age groups, 15-40 years, and represent a disproportionately high share of the urban unemployed. According to the 2000 census, the primary reason for migration to cities is search for employment, followed by access to education. Health indicators show that the general health status of migrants to Ulaanbaatar has not improved relative to conditions in the migrants’ areas of origin. This is an indication of the pressures placed on public services due to the rapid urbanization of the population. The pressure on infrastructure is equally severe, with a housing shortage, and large communities living without adequate water supplies, sanitation, or transport. A construction boom in Ulaanbaatar indicates some private sector response to the demand for housing and office space, and the new land law should be a crucial step in promoting mortgage-backed lending. A TA in 2005 will address the human resource and regulatory constraints to implementing ambitious land reforms.

17. Agriculture is a vital sector of the economy, accounting for 20% of GDP and over 40% of employment. While poverty statistics indicate a relatively even distribution of the poor between rural and urban areas, some challenges unique to rural areas are masked. For example, delivery of social services including public health programs and education has declined markedly in rural Mongolia relative to urban centers. With the exception of mining, jobs created through domestic and foreign investment, and expansion of the services sector have occurred mainly in Ulaanbaatar, while many of jobs were lost in rural areas with closure of factories (meat processing in particular) and privatization of state farms and herds. The crop subsector also collapsed after privatization due to high risks of rain-fed irrigation, poor management, lack of inputs such as quality seed, competition from neighbors, and lack of access to affordable credit for maintaining or replacing machinery. These shortcomings demand a holistic approach and an innovative rural development strategy. The goal will be not only to develop a more marketoriented and sustainable agriculture sector capable of attracting private sector investments, but also to reduce poverty by providing the rural population with increased income opportunities, rural infrastructure, access to credit, and social services. To respond to this challenge, a new ADB intervention is planned in 2006, Agriculture Sector Development Program II.

18. The Government’s response to rapid urban migration and geographically unbalanced growth is described in the rural development strategy (RDS) and law, adopted in 2003. The RDS divides the country into five economic regions, each with one or two cities designated as growth pillars. The strategy is supposed to guide future investments by the Government and aid agencies, and is also reflected in recently approved development policies for agriculture and livestock, and a number of infrastructure initiatives. A recent advisory TA³ examined the RDS in detail and concluded that it needs better grounding in economic analysis. Some of the information needed to assess the viability of the RDS as currently conceived will become available by the end of 2004, including (i) a World Bank-financed nationwide investment climate survey, (ii) the results of the living standards measurement survey and its poverty analysis, (iii) the ADB-financed labor force survey, and a joint ADB-World Bank participatory poverty assessment. These studies will inform the CSP and guide ADB response to the rural-urban development challenge.

4. Social Sectors Services

19. As a major thrust to reduce poverty, ADB has been active in improving provision of essential social services to the poor—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. A project preparatory TA for further intervention in the health sector is tentatively programmed for 2006. In the education sector, following the success of the Education Sector Development Program, and in parallel to the implementation of the Second Education Sector Development Project, 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 new education loan has been programmed for 2005 accordingly.

20. The challenge resulting from internal migration calls for a review of the geographical focus of ADB support to ensure that social services are 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. Further support is provided through additional TA and a new project loan, Urban Development III, to facilitate economic growth in urban areas, enhance the access of the poor to urban services, and improve urban environmental management.

5. Subregional Cooperation

21. Mongolia's landlocked status and remoteness from major markets clearly constrain its economic development. Long-term economic development and living standards are very much dependent on how well the country can take advantage of emerging opportunities and integrate its economy with those of its immediate neighbors. Economic recovery in the Russian Federation and continued strong economic growth in the PRC offer the prospect of intensifying economic links in a range of areas. Economic cooperation between Mongolia and its neighbors can be based on developed market principles and using models of subregional cooperation developed by ADB in other subregions. ADB has begun this process with regional TAs to support cooperation between three eastern provinces of Mongolia and one prefecture of the PRC, and to establish a regional cooperation mechanism for prevention and control of dust and sandstorms in northeast Asia. In addition, to link the road systems between the Russian Federation and the PRC through major Mongolian economic centers, priority has been given to the completion of the north-south trunk road under the Regional Road Development Project. TA also will be provided to assess the viability of a newly proposed corridor between Xinjiang province in the PRC and the Russian Federation through western Mongolia. Inclusion of Mongolia in the Central Asia Economic Cooperation Forum was a major step forward in 2002, but the scope for joint projects is likely to be limited. A more comprehensive approach to subregional cooperation with a focus on Mongolia will be explored under the new CSP.

C. Highlights in Coordination of External Funding and Partnership Arrangements

22. ADB has been, and remains, the lead agency among the external funding agencies in many sectors, particularly in the social sectors. During 2003 ADB, the World Bank, and the Government of Japan further strengthened coordination efforts at country strategy level through tripartite consultations. ADB and the World Bank succeeded in improving information sharing and policy and operational coordination, and in coordinating their sector and thematic analysis during strategy formulation, particularly in the areas of country performance assessment, governance reforms, sector interventions, and procurement. In addition the two agreed to undertake joint portfolio reviews and harmonization of procurement. Collaboration with other external funding agencies has also been strengthened, particularly through the Mongolia Resident Mission proactive approach. An updated development coordination matrix is in Table A1.5.

23. At the Mongolia Consultative Group Meeting in November 2003, the Government agreed to establish working groups to pursue harmonization in Mongolia. Subsequent workshops hosted by the Ministry of Finance and Economy established working groups for infrastructure (focusing initially on transport, and cochaired by ADB and the World Bank), social sectors (focusing initially on health and education and cochaired by ADB and Japan), private sector development, and overall aid coordination (cochaired by the United Nations).

24. In conjunction with its lending program, ADB will continue to actively seek cofinancing, particularly from grant and concessional cofinancing sources, to effectively address the thematic priorities for ADB operations in Mongolia. 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.

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