Mongolia : Social Welfare Support Program

Project Name

Social Welfare Support Program

Project Number

49210-001

Country / Economy

• Mongolia

Project Status

Closed

Project Type / Modality of Assistance

• Loan

Source of Funding / Amount

Loan 3297-MON: Social Welfare Support Program

Source	Amount
Ordinary capital resources	US$ 150.00 million

Strategic Agendas

• Inclusive economic growth

Drivers of Change

• Gender Equity and Mainstreaming
• Governance and capacity development

Sector / Subsector

• Public sector management / Social protection initiatives

Gender

Some gender elements

Description

The program will provide budget support during the country's fiscal consolidation process for reforms to (i) improve fiscal policy management, and (ii) develop policies and regulations to support targeting and consolidation of social welfare programs. Through these reforms, the program will help sustain financing for social welfare programs.

Project Rationale and Linkage to Country/Regional Strategy

Development problems and opportunities. Mongolia's vast mineral wealth, estimated at $3 trillion, has attracted significant foreign direct investment (FDI) to the country. FDI inflows averaged 40% of the gross domestic product (GDP) in 2011-2012, turning Mongolia into the fastest growing economy in the world in the same period. Accelerated economic growth made Mongolia a middle-income country in late 2011. Per capita income stood at $4,000 in 2013. Long-term prospects for the country are promising. Large ongoing mining projects are expected to turn the balance of the fiscal budget and the balance of payments into surpluses by 2020.

Due to limited economic diversification, Mongolia is highly dependent on the mining sector, which relies heavily on FDI inflows. This exposes the economy to external shocks, in particular swings in commodity prices and the economic cycles of its trading partners. The current unfavorable external environment, characterized by falling commodity prices and growth moderation in the People's Republic of China, is adversely affecting Mongolia's mineral production and fiscal revenue collection. This is compounded by plummeting FDI, which fell by 55% and 80% in 2013 and 2014, respectively, due to political instability and weak investor confidence, delaying the startup of large revenue-generating mining projects.

Against this background, GDP growth started to decline from its peak of 17.3% in 2011, prompting the government to launch expansionary fiscal and monetary policies in 20122013 to stimulate the economy. They failed to significantly spur growth but aggravated macroeconomic imbalances. Public debt increased from 32.7% of GDP in 2012 to 77.4% in 2014 to offset fiscal revenue shortfalls caused by falling commodity prices. Currency depreciation and large liquidity injections increased inflation eroding living standards, in particular those of the vulnerable and the poor. The central bank loosened the monetary stance and embarked on the provision of programs of quasi-fiscal policy loans to support diverse sectors in the economy. The largest program, the Price Stabilization Program, provided highly subsidized loans that were exempt from limits on large exposure and industry concentration, and kept off-budget. Through quasi-fiscal operations, the central bank injected liquidity equivalent to 20% of GDP, bringing credit growth up to 54% in 2013.

The expansionary fiscal stance adopted during 2012-2014 to arrest the economic downturn resulted in off-budget expenditures channeled through the Development Bank of Mongolia (DBM). The DBM was established as a state-owned entity in 2011 with the mandate to support the financing of major projects and programs for the country's development. However, the bank's lending activities have generated large additional fiscal deficits that were kept off-budget to circumvent the requirements of the Fiscal Stability Law (FSL). The Law caps fiscal deficit and public debt at 2% and 40% of GDP, respectively. The consolidated fiscal budget, including the off-budget expenditures of the DBM, stood at 11.6% of GDP in 2014.

The weakening growth momentum continues. GDP growth declined to 7.8% in 2014, and to 4.4% in the first quarter of 2015. Official labor market data does not yet reflect the economic slowdown, as many employers are responding by reducing working time and increasing unpaid leave rather than firing staff. These trends could slow down poverty reduction in Mongolia. The last World Bank figure puts poverty at 21.6% of the population as of year-end 2014, a significant decline from 38.8% in 2010.

Government action plan. The government, which assumed office in November 2014, has taken important steps to stabilize the economy and consolidate fiscal expenditure. Parliament approved the government's Comprehensive Macroeconomic Adjustment Program (CMAP) in February 2015. The CMAP covers 2015-2016, and contains a wide range of short- and medium-term policy actions targeting macroeconomic stabilization and structural reforms to lay the foundations for sustainable growth. In addition to actions for fiscal consolidation and improved debt management, the CMAP includes measures to strengthen social welfare, employment generation, and the investment climate.

Improved fiscal policy management stands at the core of the CMAP. Policy actions implemented to date include a budget amendment in January 2015 to reduce fiscal expenditure, downsizing of government ministries and agencies, postponement of civil servants salary increase, and reductions in capital expenditure. Efforts to boost revenue collection include an 80% increase in excise taxes for fuel in January 2015, which reported additional MNT228 billion ($118 million) to the budget. The FSL was amended to include off-budget expenditures from the DBM under its requirements ending a large source of off-budget expenditures.

The FSL was also amended to reflect the adoption of a medium-term fiscal framework targeting the gradual decline of the fiscal deficit and debt levels to 2% and 40% of GDP, respectively, by 2018. To mitigate the impact of the adjustment costs during fiscal consolidation, social welfare protection was prioritized in the budget amendment. Pensions and welfare programs were increased in January 2015 to offset the impact of inflation on purchasing capacity. In particular, resources for the Food Stamp Program, which is vital for the country's poorest, were augmented by 80%.

Fiscal gap. Despite government efforts, the short-term contractionary effect of the adjustment program, compounded by the persistent unfavorable external environment, has resulted in additional fiscal revenue shortages. The current fiscal gap amounts to MNT500 billion ($260 million).The size of the gap implies that in order to meet the requirements of the FSL for 2015, social welfare programs will have to be curtailed. It is thus essential to develop policy actions to ensure social welfare funding to protect the vulnerable and the poor during the country's adjustment program.

Social Welfare Programs. Social welfare in Mongolia is an integral part of social protection. Public expenditure for social welfare in 2015 amounts to MNT285 billion ($148 million). The Child Money Program contributed additional MNT246 billion ($127 million) in 2015. The combined funding amounts to 2.7% of GDP. Mongolia compares favorably against an average 1.6% of GDP in emerging economies, highlighting the government's commitment to welfare protection. Social welfare programs are generally pro-poor and a significant share of the benefits accrues to the poorest. It is estimated that 35% of the benefits reach the 20% poorest in Mongolia. This compares with about 20% of benefits in Thailand reaching the 20% poorest.

Welfare programs in Mongolia focus on the provision of social pensions, allowances, and services to citizens with special needs who are in poor state of health, lack family, and are not capable of living an independent life. Programs also support individual household members requiring social welfare assistance or care in order to meet their minimum needs. The Ministry of Population Development and Social Protection administers 71 social welfare programs, which can be grouped in seven broad categories. These programs reached about one third of the total population in 2014. Expenditures for all programs have been increased since 2010 to reflect demographic trends in an expanding population, and offset the impact of inflation on real incomes.

Impact

Adverse effects of fiscal consolidation on the poor mitigated (Comprehensive Macroeconomic Adjustment Plan, 2015-2017).

Project Outcome

Description of Outcome

Social welfare programs maintained

Progress Toward Outcome

Implementation Progress

Description of Project Outputs

1. Fiscal policy management improved

2. Policies and regulations to support targeting and consolidation of social welfare programs improved

Status of Implementation Progress (Outputs, Activities, and Issues)

The second tranche comprises seven policy actions focusing on two output areas: (i) improved fiscal policy management (to maintain social welfare during the fiscal consolidation progress); and (ii) improved policies and regulations to support targeting and consolidation of social welfare programs. The government has complied with the seven policy actions and submitted all the verification documents.

Geographical Location

Nation-wide

Safeguard Categories

Environment

C

Involuntary Resettlement

C

Indigenous Peoples

C

Summary of Environmental and Social Aspects

Environmental Aspects

Involuntary Resettlement

Indigenous Peoples

Stakeholder Communication, Participation, and Consultation

During Project Design

During Project Implementation

Contact

Responsible ADB Officer

Magee, Declan F.

Responsible ADB Department

East Asia Department

Responsible ADB Division

Urban and Social Sectors Division, EARD

Executing Agencies

Ministry of Finance (formerly Ministry of Finance and Economy)

Timetable

Concept Clearance

18 Jun 2015

Fact Finding

10 Jun 2015 to 24 Jun 2015

MRM

12 Aug 2015

Approval

29 Sep 2015

Last Review Mission

-

Last PDS Update

30 Mar 2016

Funding

Loan 3297-MON