## _cr05406

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---

### Progress Report preparation and institutional framework
- Government prepared the first Progress Report of the Economic Growth Support and Poverty Reduction Strategy (EGSPRS); it was discussed by the Cabinet in May 2005 and sent to Parliament for hearing in June.
- The Progress Report assesses implementation of the EGSPRS presented to the Executive Boards of the International Development Association (IDA) and the International Monetary Fund (IMF) in September 2003.
- Preparation took about two years, delayed by:
  - the change in government after the 2004 elections;
  - a subsequent policy reorientation following implementation of some election promises by the incoming “Grand Coalition” government (including a child transfer program targeted to poor households);
  - and a reaffirmation by the new government of its commitment to the earlier-agreed EGSPRS framework.
- Preparation process included consultation and participation by relevant stakeholders under the EGSPRS monitoring and evaluation institutional framework established by government Resolution No. 96 (2004).
- Institutional structure:
  - (a) data collection and analysis: Poverty Research Group (Ministry of Finance), National Statistical Office (NSO), Monitoring and Evaluation (M&E) Divisions of line ministries, NGOs, donors and other data producers and users;
  - (b) strategic management: EGSPRS Policy committee (Ministry of Finance, line ministries, local governments) and five sub-committees (line ministries, local governments, donors, NGOs and other groups).
- Each committee actively contributed to preparation and commenting on the EGSPRS Progress Report.

### Performance evaluation and recommended improvements
- Current status:
  - EGSPRS process is isolated from other government strategic processes and is not used effectively to feed into policy design and budgeting.
  - Government has an initiative to improve consistency of the Socioeconomic Guidelines and the State Budget documents and has adopted an M&E framework.
- Staff recommendations to strengthen EGSPRS effectiveness:
  - Elaborate key linkages between different strategic documents and corresponding reporting mechanisms.
  - Position EGSPRS to set economic growth and poverty reduction priorities, with the Medium-Term-Budget Framework (MTBF) and public investment program (PIP) translating strategic decisions into a costed multi-year policy program with identified financing.
  - Place the MTBF at the core to link planning and budgeting functions and ensure full involvement of line ministries.
  - Create a single unified M&E reporting system to evaluate implementation progress, avoid duplication of reporting documents, and reduce overburdening key officials.
- Specific M&E suggestions:
  - Include a quantitative evaluation of performance in the Progress Report showing outturns relative to benchmarks defined in the EGSPRS, accompanied by qualitative analysis.
  - Next progress report should include a monitoring and evaluation table covering EGSPRS priority areas, implementation of policies, government systems and institutions, and results.

### Data availability and statistical capacity
- Data situation:
  - Availability of data to monitor policy implementation has improved, but a disparity remains between the supply and demand of statistics.
  - Line ministries' administrative data for annual socio-economic guidelines are useful but incomplete/inadequate to monitor policy implementation and assess social sector outcomes.
- Staff advice:
  - Either NSO or line ministries' data departments need to increase staff capacity to produce outcome statistics (e.g., mortality rates by income quintiles or by regions) beyond simple averages.
  - Alternatively, enhance EGSPRS staffing capacity to analyze such information.

### Poverty diagnosis and monitoring
- Progress and baseline:
  - Adoption of the Statistics Law to improve public access to data.
  - The first nationally representative household survey, the Living Standards Measurement Survey (LSMS) 2002-03, was completed in late 2004, in parallel to the Household Income and Expenditure Survey (HIES) conducted annually by NSO.
  - Based on HIES-LSMS 2002-03 data, NSO disseminated official baseline poverty estimates in December 2004.
  - Progress Report prepared on the basis of 2002-03 data.
- Staff caution and recommendation:
  - Mongolia experienced significant GDP growth since 2002-03 that may have affected poverty levels and structure.
  - Staffs strongly recommend NSO undertake without delay the next HIES-LSMS to provide recent poverty trends to inform policy decisions, especially for social protection of poor and vulnerable households.
- Data timeliness, quality, accessibility:
  - Timeliness: staff urge NSO to harmonize HIES and LSMS by combining a core set of LSMS questions with HIES; propose diary recording of household expenditure be a one month exercise instead of three months to reduce cost.
  - Quality: HIES-LSMS 2002-03 design was a substantial improvement over 1995 and 1998 LSMS; future household surveys should replicate the HIES-LSMS 2002-03 design to ensure comparable poverty estimates over time.
  - Accessibility: all NSO data, including HIES-LSMS 2002-03, remain inaccessible to the public; staffs urge government to make all survey data public.
- Vulnerability of herder households:
  - Vulnerability to livestock mortality shocks remains high and contributes directly to declines in household consumption.
  - EGSPRS highlights rapid increase in national livestock numbers approaching levels last seen in 2000 prior to devastating dzuds from 2000 to 2002.
  - Staffs welcome government efforts to set up a market-based livestock insurance scheme with World Bank support, but note insurance is only part of the solution.
  - Recommend broader risk management: early warning systems, improved pasture management, and effective disaster response systems.

### Macroeconomic performance and outlook
- Recent developments:
  - Real GDP growth exceeded 10.5 percent in 2004.
  - Real GDP growth is expected to remain robust, at about 5.5 percent in 2005, driven by recovery in livestock production and strong mining sector activity.
  - Fiscal performance strengthened: overall deficit narrowed to about two percent of GDP in 2004—the lowest since the start of the transition in the early 1990s—supported by strong minerals export prices and improved expenditure control.
  - Inflation has recently accelerated after being tamed earlier in the decade; initial acceleration spurred by supply-side factors (large price increases for petroleum products and meat) and accommodated by a relatively loose monetary policy.
- Government objectives:
  - Authorities aim for growth rates of at least five to six percent over the medium term, while generating sustained private sector employment growth, reductions in unemployment, and poverty reduction.
- Policy orientation in the Progress Report:
  - Macroeconomic policies geared toward financial stability and further structural reform.
  - Monetary policy will focus on containing inflation to approximately five percent.
  - Efforts to strengthen the financial system include programs to expand financial services in rural areas and work to develop a deposit insurance system.
- Fiscal outcomes and recommendations:
  - PRSP originally envisaged an overall budget deficit in the range of 4.5-5.5 percent of GDP in 2004-06.
  - Actual overall budget deficit narrowed to 2.2 percent of GDP in 2004, and could decline to below 2 percent of GDP in 2005, provided expenditure remains within budgeted levels and the revenue windfall is saved, as staffs recommended.
  - For 2006 onward, a deficit on the order of 3-3¼ percent would be consistent with maintaining strong growth and reducing debt-related vulnerabilities to adverse shocks.
  - Government proposes realignment of budget structure with total government expenditure declining in relation to GDP through reductions in general administration wage bill and other costs via improved efficiency.
  - IMF technical assistance identified possible efficiency gains in health and education through: (i) increasing the weekly norm for teaching hours; (ii) consolidating public tertiary education institutions; (iii) reducing public spending on health services of a purely private nature; and (iv) means testing the provision of free public health insurance.
- IMF/World Bank staff observations and risks:
  - Staffs support macroeconomic objectives and policy strategy but consider additional steps may be needed for full achievement and implementation.
  - A detailed discussion of future macroeconomic policies, projections, and risks would have been welcome in the Progress Report.
  - Against rising inflationary pressures, Bank of Mongolia should tighten monetary policy through indirect instruments including issuance of central bank bills.
  - Central bank should eschew quantitative credit controls except when required for prudential supervision, consistent with banking laws.
  - In the medium term, while government debt service will not exceed 10 percent of GDP, reliance on external debt financing should be reduced and foreign direct investment encouraged.
  - Joint IMF/World Bank Debt Sustainability Analysis suggests relaxing prudent approach to contracting external debt could have serious consequences; large scale non-concessional external borrowing would worsen the situation.
  - Taking on contingent liabilities (e.g., central bank guarantees on private sector borrowing) would pose additional risks.

### Selected key issues — Governance, accountability, transparency, effectiveness
- General observations:
  - Progress Report states government will focus governance measures on enhancing civil service effectiveness, deepening legal reforms, and promoting private sector development, but does not present specific short-to-medium term measures to operationalize these intentions.
  - Staffs encourage authorities to articulate explicit plans to translate high-level policy decisions into specific measures addressing: perception of growing corruption; government transparency and accountability; and financial and real sector soundness.
- Corruption and governance indicators:
  - World Bank Institute global governance indicators recorded declines for all six indicators in Mongolia from 2000 to 2004, with sharp drops in government effectiveness and control of corruption.
  - Public opinion surveys since 1995 indicate increasing public concern over corruption.
  - Positive steps: implementation of Administrative Court System on a pilot basis in Ulaanbaatar and Darkhan with good results.
  - Draft laws prepared but awaiting enactment by Parliament: (i) draft Anti-Corruption Law; (ii) revision of Procurement Law; (iii) Law on Use of Contingency Funds.
- Specific governance areas and recommendations:
  i. Government Financial Management
    - Implementation of an integrated Government Financial Management Information System (GFMIS) is an important step to improve public finance management.
    - Need effective systems to consolidate into the full budget process budgets of administrative entities that generate their own revenues and function outside government accountability mechanisms.
  ii. Civil Service Reform
    - Civil Service Reform Strategy approved by Parliament in 2004; implementation ongoing.
    - Strategy aims to ‘right size’ civil service by increasing pay for a smaller, more efficient civil service and improving the skill mix by increasing technical staff.
    - Successful implementation requires close coordination among Civil Service Council, Ministry of Social Welfare and Labor, and Ministry of Finance, and significant political will.
    - Progress Report is silent on this strategy and action plans; advisable for government to develop an implementation plan and report progress in subsequent EGSPRS progress reports.
  iii. Civil society participation and information access
    - From 2005 government published aggregate budget information on the internet, but citizen access to government information remains limited.
    - No formal mechanisms exist for citizen consultation in law-making; NGOs participate in legislative working groups on an ad hoc basis.
    - Staffs advise making available to the public all budget documents that OECD Best Practices on Budget Transparency recommends: a pre-budget statement, the executive’s budget proposal, the budget, a mid-year review, a year-end report, and an auditor’s report or attestation.
- Financial system soundness and central bank governance:
  - Priorities recommended:
    - Enhance legal framework, oversight, and structure of the Bank of Mongolia and ensure adequate capital base for monetary policy and improved supervision of commercial banks.
    - Significant governance improvements needed at the Bank of Mongolia, including developing stronger framework for central bank autonomy and accountability.
  - Observations:
    - Supervisory Board establishment was an important step, but its statutory role in reporting to Parliament is comparatively passive and its resources are limited.
    - Concern over central bank’s reserve management strategy using relatively risky investment techniques that could generate significant capital losses under adverse conditions.
    - Banking supervision quality is improving but still shows forbearance; important breaches of supervision laws and regulations have occurred without prompt corrective action by BOM.
    - Action needed to strengthen supervision of the growing NBFI sector, ensuring resources are not shifted away from banking system supervision.

### Private sector activity and structural constraints
- Private sector activity has remained brisk, particularly in the retail, catering, construction and small-scale processing industries.
- Mongolia’s medium-term growth prospects are influenced by important remaining structural rigidities.
- EGSPRS lacks specificity on concrete policy actions to alleviate these constraints.
- Vigilance needed to resist calls for increased trade and industrial protection, such as recent proposals for new export tariffs on metal products and raw cashmere.
- Tax policy and administration:
  - Lowering of the top tax rates on corporate and personal income in January 2004 reduced the tax burden on firms and individuals.
  - Tax reform needs to go beyond changes to the tax code to restructuring operations of key agencies: tax department, customs administration, and inspection agency.
  - Further effort needed to address corruption, red tape, distortions in the tax regime, weak tax administration, and regulatory burden.

### Mining sector and revenue transparency
- Progress Report emphasizes mining sector’s importance for financing EGSPRS priorities but remains silent on government policies in this sector.
- For mining to realize its potential, policy needs to:
  - provide adequate incentives for mining activities;
  - enable employment to pick up;
  - collect revenues to finance needed expenditures.
- Transparency in the extractive industry is necessary to minimize potential for rent-seeking.
- Staffs welcome government’s willingness to consider participating in the Extractive Industries Transparency Initiative (EITI).
- Staffs recommend government consider developing an integrated framework for sharing mining benefits through a trilateral dialogue between government, civil society, and the mining sector.

### Social service delivery
- Education:
  - Progress Report shows overall improvement in access to education, but rural-urban disparities need differentiated policies.
  - System expanded to serve 7 year olds this school year.
  - World Bank policy note: enrollment rates in rural areas increased by 10 percentage points between 1998 and 2002.
  - Rural children fare significantly worse in access, completion and performance than children in soum centers, aimag centers or UB.
  - Urban areas face double and triple shifting to meet growing demand for schooling.
  - Current policy and funding mechanism do not sufficiently differentiate to meet needs of rural and poor area schools.
- Health:
  - Progress Report captures main health sector issues but needs more extensive analysis of required steps for health reform.
  - Little progress in improving family planning and addressing transmission of sexually transmitted infections.
  - Infant and maternal mortality rates have fallen over the last few years.
  - Pressing needs:
    - Number of hospitals and hospital beds, especially in the capital, seems disproportionately too high relative to demand.
    - Allocation biased toward hospital sector; insufficient funding for public health and primary care.
    - Family Group Practices, hospitals and private providers should be organized in a coordinated framework to correct bypassing of primary care.
    - Availability, quality and accessibility of pharmaceuticals should be addressed in more detail.
- Social security and targeted assistance:
  - Staffs welcome the Social Security Master Plan aimed at rationalizing social assistance and improving targeting, and encourage implementation.
  - Need to revise current social assistance program:
    - Many programs need better targeting; some groups receive multiple benefits while other needier groups (e.g. herders) are left out.
    - LSMS data analyzed in the World Bank Poverty Assessment indicate a large share of government social assistance has leaked to non-poor households while many poor households are excluded.
    - Problems remain in weak preparation of new programs; lack of monitoring and evaluation; and limited implementation capacity.
- Child Money program:
  - New Child Money program (not part of Master Plan) is well designed but requires more careful implementation.
  - Features and concerns:
    - Conditions benefits on household behaviors (e.g. sending the children to school).
    - Targets poor households using a proxy-means test; methodology needs refinements.
    - Concerns about requirement to have an ID card, which biases against the poorest.
    - Concerns about political interventions in selection of beneficiaries.
  - Recommendations:
    - Facilitate access to identification for the poorest.
    - Use only objective criteria-based methodology to select beneficiaries.
    - Staffs welcome adoption of targeting principle and recommend other programs use this principle.

### Regional development, infrastructure, and public investment management
- Regional development:
  - Actions since 2003: outline of a strategy and legal framework; creation of regional development national committee; nomination of heads of regional councils; design of development strategies for each region and pillar center; studies for new administrative structure.
  - Staff recommendations: focus on reforms to improve investment climate; prioritize multipurpose non-sector specific public investments (infrastructure and human capital); assess infrastructure needs of new aimag centers based on forecasted demand.
- Infrastructure monitoring and strategy:
  - Progress in increasing availability of infrastructure is not reflected in EGSPRS monitoring indicators.
  - Staffs strongly recommend next implementation report include adequate M&E indicators for the infrastructure sector.
  - Government preparing an Infrastructure Strategy to address growth and poverty reduction and ensure affordable provision of infrastructure services using fiscally sustainable channels.
  - Update of the Transport Strategy is being prepared with ADB support; ongoing Trade Competitiveness Study by the World Bank will review logistics efficiency.
  - Staffs strongly support these studies and view their implementation as an important indicator of government recognition of infrastructure’s role.
- Financial and public investment management concerns:
  - Staffs urge government to pay attention to financial conditions of the infrastructure sector and address lack of comprehensiveness and transparency in the public investment budget.
  - Progress Report has not advanced prioritizing/costing of the public investment program as recommended by the JSA.
  - Staffs recommend government evaluate need for maintenance of roads, power generation and water supply and for new investment in energy.
  - Public Investment Program (PIP) remains fragmented and lacks rigorous procedures and economic criteria for project selection and budget incorporation.

### Rural development and environment
- Rural development challenge: find cost effective means to facilitate private sector development to achieve strategic objectives.
- Institutional priorities:
  - Strengthen Ministry of Food and Agriculture (MoFA) to monitor outcomes and prepare policies and investments.
  - Enhance role of local government and communities.
- Specific focus areas:
  - (i) develop institutional framework for pastoral risk management at central and local levels;
  - (ii) create conditions for market-led intensification and integration of livestock and crop farming;
  - (iii) strengthen measures to support cooperation among local producers.
- Environment strategy progress:
  - Progress in water resources and urban environmental management and mainstreaming environment and natural resources management into poverty reduction programs.
  - Need more attention to institutional development and forest resources management.
  - Improve institutional capacity for national and local management, particularly Water Resources Authority implementing new Law on Water.
  - Illegal timber production and increased fuel wood use, especially by the rural poor, are unsustainable practices of concern.
  - Despite little evidence of success, attention and resources continue to be devoted to tree planting and forest pest control programs.
- Staff recommendations for environment and forest management:
  - Develop and implement economic and tenurial incentives, provisions for sustainable harvesting (especially in community-based schemes), and planting of non-timber forest products in planned forest management programs.
  - Focus on strengthening institutional and legal capacity at national and local levels; developing sustainable forestry management policies; and broadening understanding of environmental implications and assessing environmental and natural resources management impacts resulting from the Regional Development Plan.

### Conclusion — implementation progress and challenges
- Implementation highlights over the past two years:
  - Updating national poverty statistics and poverty profile based on the 2002 HIES.
  - Adoption of an updated monitoring and evaluation system in government with refined indicators and targets.
  - Better articulation of institutional arrangements for monitoring implementation progress.
- Four challenges looking forward:
  i. Better alignment and clearer linkages needed between the strategy, planning, and budgeting processes (EGSPRS, MTBF, and the PIP); use MTBF as core instrument linking planning, budgeting and reporting.
  ii. Need to develop an action plan for private sector development and a thorough review of the PIP that includes prioritization and costing of proposed projects, especially for infrastructure.
  iii. Need to improve governance beyond anti-corruption measures and include civil service reform, pension reform, and greater transparency in public sector decision-making.
  iv. Need to ensure timely availability of data to the public on monitorable outcome-based indicators to track progress in implementation of the government’s poverty reduction strategy.
- As stated in government Resolution No. 96 on the EGSPRS institutional framework, an update of the current EGSPRS will be prepared by the government in 2006 for the period covering 2007 to 2009.

*Source: IMF staff assessment as presented in the EGSPRS Progress Report summary.*

### 1. The government of Mongolia prepared the first Progress Report of the

### 1. The government of Mongolia prepared the first Progress Report of the

### Progress Report preparation and institutional framework
- The government prepared the first Progress Report of the Economic Growth Support and Poverty Reduction Strategy (EGSPRS); it was discussed by the Cabinet in May 2005 and sent to Parliament for hearing in June.
- The Progress Report assesses implementation of the EGSPRS presented to the Executive Boards of the International Development Association (IDA) and the International Monetary Fund (IMF) in September 2003.
- Preparation took about two years, delayed by:
  - the change in government after the 2004 elections;
  - a subsequent policy reorientation following implementation of some election promises by the incoming “Grand Coalition” government (including a child transfer program targeted to poor households);
  - and a reaffirmation by the new government of its commitment to the earlier-agreed EGSPRS framework.
- The preparation process included consultation and participation by relevant stakeholders under the EGSPRS monitoring and evaluation institutional framework established by government Resolution No. 96 (2004).
- The institutional structure comprises two components:
  - (a) data collection and analysis: undertaken by the Poverty Research Group (Ministry of Finance), the National Statistical Office (NSO), Monitoring and Evaluation (M&E) Divisions of line ministries, NGOs, donors and other data producers and users;
  - (b) strategic management: undertaken by the EGSPRS Policy committee (Ministry of Finance, line ministries, local governments) and five sub-committees (line ministries, local governments, donors, NGOs and other groups).
- Each committee actively contributed to preparation and commenting on the EGSPRS Progress Report.

### Performance evaluation and recommended improvements
- Current status:
  - The EGSPRS process is isolated from other government strategic processes and is not used effectively to feed into policy design and budgeting.
  - The government has an initiative to improve consistency of the Socioeconomic Guidelines and the State Budget documents and has adopted an M&E framework.
- Staff recommendations to strengthen EGSPRS effectiveness:
  - Elaborate key linkages between different strategic documents and corresponding reporting mechanisms.
  - Position EGSPRS to set economic growth and poverty reduction priorities, with the Medium-Term-Budget Framework (MTBF) and public investment program (PIP) translating strategic decisions into a costed multi-year policy program with identified financing.
  - Place the MTBF at the core to link planning and budgeting functions and ensure full involvement of line ministries.
  - Create a single unified M&E reporting system to evaluate implementation progress, avoid duplication of reporting documents, and reduce overburdening key officials.
- Specific monitoring and evaluation suggestions:
  - Include a quantitative evaluation of performance in the Progress Report showing outturns relative to benchmarks defined in the EGSPRS, accompanied by qualitative analysis.
  - In the next progress report, include a monitoring and evaluation table covering EGSPRS priority areas, implementation of policies, government systems and institutions, and results.

### Data availability and statistical capacity
- Data situation:
  - Availability of data to monitor policy implementation has improved, but a disparity remains between the supply and demand of statistics.
  - Line ministries' administrative data for annual socio-economic guidelines are useful but incomplete/inadequate to monitor policy implementation and assess social sector outcomes.
- Staff advice:
  - Either NSO or line ministries' data departments need to increase staff capacity to produce outcome statistics (e.g., mortality rates by income quintiles or by regions) beyond simple averages.
  - Alternatively, enhance EGSPRS staffing capacity to analyze such information.

### Poverty diagnosis and monitoring
- Progress and baseline:
  - Government progress includes adoption of the Statistics Law to improve public access to data.
  - The first nationally representative household survey, the Living Standards Measurement Survey (LSMS) 2002-03, was completed in late 2004, in parallel to the Household Income and Expenditure Survey (HIES) conducted annually by NSO.
  - Based on HIES-LSMS 2002-03 data, NSO disseminated official baseline poverty estimates in December 2004.
  - The Progress Report was prepared on the basis of 2002-03 data.
- Staff caution and recommendation:
  - Mongolia experienced significant GDP growth since 2002-03 that may have affected poverty levels and structure.
  - Staffs strongly recommend NSO to undertake without delay the next HIES-LSMS to provide recent poverty trends to inform policy decisions, especially for social protection of poor and vulnerable households.
- Data timeliness, quality, and accessibility:
  - Timeliness: staff urge NSO to harmonize HIES and LSMS by combining a core set of LSMS questions with HIES; this could be done at no additional cost by making diary recording of household expenditure a one month exercise instead of three months.
  - Quality: the HIES-LSMS 2002-03 design was a substantial improvement over 1995 and 1998 LSMS; future household surveys should replicate the HIES-LSMS 2002-03 design to ensure comparable poverty estimates over time.
  - Accessibility: all NSO data, including HIES-LSMS 2002-03, remain inaccessible to the public; staffs urge the government to make all survey data public to promote in-depth analyses and constructive debates.
- Vulnerability of herder households:
  - Vulnerability to livestock mortality shocks remains high and contributes directly to declines in household consumption.
  - EGSPRS highlights rapid increase in national livestock numbers approaching levels last seen in 2000 prior to devastating dzuds from 2000 to 2002.
  - Staffs welcome government efforts to set up a market-based livestock insurance scheme with World Bank support, but note insurance is only part of the solution.
  - Greater efforts recommended to promote broader risk management: early warning systems, improved pasture management, and effective disaster response systems.

### Macroeconomic performance and outlook
- Recent developments:
  - Real GDP growth exceeded 10.5 percent in 2004.
  - Real GDP growth is expected to remain robust, at about 5.5 percent in 2005, driven by recovery in livestock production and strong mining sector activity.
  - Fiscal performance strengthened: overall deficit narrowed to about two percent of GDP in 2004—the lowest since the start of the transition in the early 1990s—supported by strong minerals export prices and improved expenditure control.
  - Inflation has recently accelerated after being tamed earlier in the decade; initial acceleration spurred by supply-side factors (large price increases for petroleum products and meat) and accommodated by a relatively loose monetary policy.
- Government objectives:
  - Government views strong, sustainable economic growth as cornerstone of poverty reduction.
  - Authorities aim for growth rates of at least five to six percent over the medium term, while generating sustained private sector employment growth, reductions in unemployment, and poverty reduction.
- Policy orientation in the Progress Report:
  - Macroeconomic policies will be geared toward financial stability and further structural reform.
  - Monetary policy will focus on containing inflation to approximately five percent.
  - Efforts to strengthen the financial system include programs to expand financial services in rural areas and work to develop a deposit insurance system.
- Fiscal outcomes and recommendations:
  - The PRSP originally envisaged an overall budget deficit in the range of 4.5-5.5 percent of GDP in 2004-06.
  - Actual overall budget deficit narrowed to 2.2 percent of GDP in 2004, and could decline to below 2 percent of GDP in 2005, provided expenditure remains within budgeted levels and the revenue windfall is saved, as staffs recommended.
  - For 2006 onward, a deficit on the order of 3-3¼ percent would be consistent with maintaining strong growth and reducing debt-related vulnerabilities to adverse shocks.
  - Government proposes realignment of budget structure with total government expenditure declining in relation to GDP through reductions in general administration wage bill and other costs via improved efficiency.
  - IMF technical assistance identified possible efficiency gains in health and education through: (i) increasing the weekly norm for teaching hours; (ii) consolidating public tertiary education institutions; (iii) reducing public spending on health services of a purely private nature; and (iv) means testing the provision of free public health insurance.
- IMF/World Bank staff observations and risks:
  - Staffs support macroeconomic objectives and policy strategy but consider additional steps may be needed for full achievement and implementation.
  - A detailed discussion of future macroeconomic policies, projections, and risks would have been welcome in the Progress Report.
  - Against rising inflationary pressures, Bank of Mongolia should tighten monetary policy through indirect instruments including issuance of central bank bills.
  - Central bank should eschew quantitative credit controls except when required for prudential supervision, consistent with banking laws.
  - In the medium term, while government debt service will not exceed 10 percent of GDP, reliance on external debt financing should be reduced and foreign direct investment encouraged.
  - Joint IMF/World Bank Debt Sustainability Analysis suggests relaxing prudent approach to contracting external debt could have serious consequences; large scale non-concessional external borrowing would worsen the situation.
  - Taking on contingent liabilities (e.g., central bank guarantees on private sector borrowing) would pose additional risks.

### Selected key issues — Governance, accountability, transparency, effectiveness
- General observations:
  - Progress Report states government will focus governance measures on enhancing civil service effectiveness, deepening legal reforms, and promoting private sector development, but does not present specific short-to-medium term measures to operationalize these intentions.
  - Staffs encourage authorities to articulate explicit plans to translate high-level policy decisions into specific measures addressing: perception of growing corruption; government transparency and accountability; and financial and real sector soundness.
- Corruption and governance indicators:
  - A key challenge is maintaining high economic growth while ensuring equitable development; government must address public perception that corruption is increasing.
  - World Bank Institute global governance indicators recorded declines for all six indicators in Mongolia from 2000 to 2004, with sharp drops in government effectiveness and control of corruption.
  - Public opinion surveys since 1995 indicate increasing public concern over corruption.
  - Positive steps: implementation of Administrative Court System on a pilot basis in Ulaanbaatar and Darkhan with good results; public views these courts as fast and effective means to obtain redress and combat corruption.
  - Draft laws prepared but awaiting enactment by Parliament: (i) draft Anti-Corruption Law; (ii) revision of Procurement Law; (iii) Law on Use of Contingency Funds.
- Specific governance areas and recommendations:
  i. Government Financial Management
    - Implementation of an integrated Government Financial Management Information System (GFMIS) is an important step to improve public finance management.
    - Effective systems are needed to consolidate into the full budget process budgets of administrative entities that generate their own revenues and function outside government accountability mechanisms.
  ii. Civil Service Reform
    - Civil Service Reform Strategy approved by Parliament in 2004; implementation ongoing.
    - Strategy aims to ‘right size’ civil service by increasing pay for a smaller, more efficient civil service and improving the skill mix by increasing technical staff.
    - Successful implementation requires close coordination among Civil Service Council, Ministry of Social Welfare and Labor, and Ministry of Finance, and significant political will.
    - Progress Report is silent on this strategy and action plans; advisable for government to develop an implementation plan and report progress in subsequent EGSPRS progress reports.
  iii. Civil society participation and information access
    - Progress mixed on improving civil society participation in Parliament and government decision-making, implementation, and monitoring.
    - From 2005 government published aggregate budget information on the internet, but citizen access to government information remains limited.
    - No formal mechanisms exist for citizen consultation in law-making (e.g., public hearings on draft laws); NGOs participate in legislative working groups on an ad hoc basis.
    - Staffs advise making available to the public all budget documents that OECD Best Practices on Budget Transparency recommends: a pre-budget statement, the executive’s budget proposal, the budget, a mid-year review, a year-end report, and an auditor’s report or attestation.
- Financial system soundness and central bank governance:
  - Strong, sustainable growth depends on a sound financial system (central bank, commercial banks, NBFIs) that earns public confidence.
  - Priorities recommended:
    - Enhance legal framework, oversight, and structure of the Bank of Mongolia and ensure adequate capital base for monetary policy and improved supervision of commercial banks.
    - Significant governance improvements needed at the Bank of Mongolia, including developing stronger framework for central bank autonomy and accountability.
    - Supervisory Board establishment was an important step, but its statutory role in reporting to Parliament is comparatively passive and its resources are limited.
    - Concern over central bank’s reserve management strategy using relatively risky investment techniques that could generate significant capital losses under adverse conditions.
    - Banking supervision quality is improving but still shows forbearance; important breaches of supervision laws and regulations have occurred without prompt corrective action by BOM.
    - Action needed to strengthen supervision of the growing NBFI sector, ensuring resources are not shifted away from banking system supervision.

*Source: IMF staff assessment as presented in the EGSPRS Progress Report summary.*

### 17. Although private sector activity has remained brisk, particularly in the retail,

### _cr05406 - 17. Although private sector activity has remained brisk, particularly in the retail,

### Private sector activity and structural constraints
- Private sector activity has remained brisk, particularly in the retail, catering, construction and small-scale processing industries.
- Mongolia’s medium-term growth prospects are influenced by important remaining structural rigidities.
- There is a lack of specificity in the EGSPRS regarding concrete policy actions that the authorities intend to implement to alleviate these constraints.
- Vigilance will be needed to resist calls for increased trade and industrial protection, such as the recent proposals for a new export tariffs on metal products and raw cashmere.
- The persistence of protectionist proposals has proved a drag on more robust private sector development.
- Tax policy and administration:
  - The lowering of the top tax rates on corporate and personal income in January 2004 has resulted in a reduction in the tax burden on firms and individuals.
  - Tax reform efforts need to go beyond changes to the tax code to restructuring the operations of the key agencies—the tax department, the customs administration, and the inspection agency—that directly interact with private firms and individuals.
  - Further effort needs to be directed toward addressing the problems of corruption, red tape, distortions in the tax regime, weak tax administration, and regulatory burden, which continue to be major impediments on the operation and growth of Mongolian businesses.

### Mining sector and revenue transparency
- The Progress Report emphasizes the importance of the mining sector for potentially contributing, through fiscal channels, to the financing of EGSPRS priorities, but remains silent on government policies in this sector.
- The mining sector has potential to contribute significantly toward economic development in Mongolia by generating employment and revenues.
- For this potential to be realized, mining sector policy needs to:
  - provide adequate incentives for mining activities to take place,
  - enable employment to pick up,
  - collect revenues to finance needed expenditures.
- Transparency in the extractive industry is necessary to minimize the potential for rent-seeking.
- The staffs welcome the government’s willingness to consider participating in the Extractive Industries Transparency Initiative (EITI).
- The staffs recommend that the government consider developing an integrated framework for sharing the benefits accruing from the mining sector through a trilateral dialogue between the government, civil society, and the mining sector.

### Social Service Delivery — Education
- The Progress Report shows overall improvement in access to education, but rural-urban disparities need to be addressed through differentiated policies.
- The system was successfully expanded to serve 7 year olds this school year.
- According to a recent World Bank policy note on education, enrollment rates in rural areas have increased by 10 percentage points between 1998 and 2002.
- Rural children fare significantly worse in terms of school access, completion and performance than children living in soum (district) centers, aimag (province) centers or UB.
- Urban areas face challenges associated with double and triple shifting to meet the growing demand for schooling.
- The current policy and funding mechanism do not differentiate much to meet the needs of schools serving students in the rural and poor areas.

### Social Service Delivery — Health
- The Progress Report captures the main issues related to the status of the health sector, but would benefit from a more extensive analysis of the required steps for health reform.
- The report underlines that little progress has been made in improving family planning and addressing the transmission of sexually transmitted infections.
- Infant and maternal mortality rates have fallen over the last few years.
- Pressing needs to be addressed:
  - The number of hospitals and hospital beds, especially in the capital, seems disproportionately too high relative to the demand.
  - The current allocation is biased toward the hospital sector and not enough funding is devoted to public health and primary care.
  - Family Group Practices, hospitals and private providers should be organized in a coordinated framework to correct the tendency to by-pass existing primary care facilities and shift primary care burden to hospitals.
  - The availability, quality and accessibility of pharmaceuticals should be addressed in more detail.

### Social Security and targeted assistance
- The staffs welcome the Social Security Master Plan, aimed at rationalizing social assistance and improving targeting, and encourage the government to implement the plan.
- Need to revise the current social assistance program:
  - Many programs need to improve their targeting; some groups receive multiple benefits while other needier groups (e.g. herders) are left out.
  - LSMS survey data analyzed in the context of the ongoing World Bank Poverty Assessment indicate a large share of the government’s social assistance in Mongolia has leaked to non-poor households while many poor households are excluded.
  - Problems remain in weak preparation of new programs; lack of monitoring and evaluation to learn about program effectiveness; and limited implementation capacity.

### Child Money program
- The new Child Money program, which is not part of the Master Plan, is well designed but requires more careful implementation.
- Features and concerns:
  - Conditions benefits to household behaviors (e.g. sending the children to school).
  - Targets poor households using a proxy-means test, though the methodology needs refinements to be effective as a screening device.
  - Concerns about requirement to have an ID card, which is a bias against the poorest accessing the program.
  - Concerns about political interventions in the selection of beneficiaries.
- Recommendations:
  - Access to identification should be facilitated for the poorest.
  - Only the objective criteria-based methodology should be used to select beneficiaries.
  - Staffs welcome the adoption of the targeting principle for social assistance programs and recommend other existing programs use this principle as well.

### Regional development and infrastructure
- The design and pace of regional development will have significant implications for implementation and outcomes of the EGSPRS.
- Government actions since 2003:
  - Outline of a strategy for regional development and an associated legal framework.
  - Creation of the regional development national committee.
  - Nomination of the heads of regional councils and design of development strategies for each region and pillar center.
  - Studies for the design of a new administrative structure initiated.
- Staff recommendations as implementation proceeds:
  - Focus on reforms that improve the overall investment climate.
  - Prioritize public investments favoring multipurpose non-sector specific projects, including in infrastructure and human capital development.
  - Pay more attention to infrastructure needs of the new aimag centers based on an assessment of the forecasted demand.
- Infrastructure monitoring and strategy:
  - Progress has been made in increasing the availability of infrastructure, yet this is not reflected in the monitoring indicators of the EGSPRS Progress Report.
  - Evidence should be available from the LSMS and HIES and compared with surveys in comparable countries.
  - The staffs strongly recommend that the next implementation report include adequate M&E indicators for the infrastructure sector.
  - The government is working on the preparation of an Infrastructure Strategy expected to address economic growth and poverty reduction issues and ensure affordable provision of infrastructure services using fiscally sustainable channels.
  - An update of the Transport Strategy is being prepared with financial support from the Asian Development Bank and in collaboration with other development agencies (this update was a recommendation of the World Bank and IMF Joint Staff Assessment (JSA) on the EGSPRS).
  - The ongoing Trade Competitiveness Study by the World Bank will provide a review of how best to increase the efficiency of logistics.
  - The staffs strongly support these studies and consider their implementation an important indicator of government recognition of infrastructure’s role in growth and poverty reduction.
- Financial and public investment management concerns:
  - The staffs urge the government to pay attention to the financial conditions of the infrastructure sector and to address the lack of comprehensiveness and transparency in the public investment budget.
  - The EGSPRS Progress Report has not progressed toward prioritizing/costing of the public investment program as recommended by the JSA.
  - The staffs recommend the government evaluate the need for maintenance of the roads, power generation and water supply and for new investment in energy.
  - The Public Investment Program (PIP) remains fragmented, and does not benefit from rigorous procedures and economic criteria for selection of projects and their incorporation in the government’s budget.

### Rural development and environment
- Rural development implementation challenge: finding the most cost effective means of facilitating private sector development to achieve strategic objectives.
- Institutional priorities:
  - Greater attention to institutional strengthening within the Ministry of Food and Agriculture (MoFA) to monitor and assess outcomes and prepare policies and investments.
  - Enhance role of local government and communities.
- Specific focus areas:
  - (i) developing an institutional framework for pastoral risk management at central and local levels;
  - (ii) creating conditions for market-led intensification and integration of livestock and crop farming;
  - (iii) strengthening measures to support cooperation among local producers.
- Environment strategy progress:
  - Progress in water resources and urban environmental management and in mainstreaming environment and natural resources management into poverty reduction programs.
  - Need more attention to institutional development and forest resources management.
  - Improve institutional capacity for national and local management, in particular regarding the Water Resources Authority tasked with implementing the new Law on Water.
  - Illegal timber production and increased fuel wood use, especially by the rural poor, are unsustainable practices and an important concern.
  - Despite little evidence of success, attention and resources continue to be devoted to tree planting and forest pest control programs.
- Staff recommendations for environment and forest management:
  - Develop and implement economic and tenurial incentives, provisions for sustainable harvesting (especially in community-based schemes), and planting of non-timber forest products in planned forest management programs.
  - Focus on (i) strengthening institutional and legal capacity at national and local levels; (ii) developing sustainable forestry management policies; and (iii) broadening understanding of environmental implications and assessing environmental and natural resources management impacts resulting from the Regional Development Plan.

### Conclusion — implementation progress and challenges
- Implementation highlights over the past two years:
  - Updating national poverty statistics and poverty profile based on the 2002 HIES.
  - Adoption of an updated monitoring and evaluation system in government with refined indicators and targets.
  - Better articulation of institutional arrangements for monitoring implementation progress.
- Four challenges looking forward:
  i. Better alignment and clearer linkages are needed between the strategy, planning, and budgeting processes (i.e., between the EGSPRS, the medium-term budget framework, and the PIP). Using the MTBF as the core instrument linking the planning, budgeting and reporting processes would help strengthen policy design and implementation. The EGSPRS process needs to be integrated into the other government strategic processes.
  ii. The need to develop an action plan for private sector development and a thorough review of the PIP that includes a prioritization and costing of proposed projects, especially for infrastructure.
  iii. The need to improve governance beyond anti-corruption measures and include civil service reform, pension reform, and greater transparency in public sector decision-making.
  iv. The need to ensure timely availability of data to the public on monitorable outcome-based indicators to track progress in implementation of the government’s poverty reduction strategy.
- As stated in the government’s resolution No. 96 on the EGSPRS institutional framework, an update of the current EGSPRS will be prepared by the government in 2006 for the period covering 2007 to 2009.

*IMF staff assessment as presented in the EGSPRS Progress Report excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05406.pdf_