Document of The WorldBank FOROFFICIAL USEONLY ReportNo. 28419-MOG MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL,DEVELOPMENTASSOCIATION TO THE EXECUTIVE DIRECTORS ONA COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR MONGOLIA April 5,2004 SoutheastAsia andMongoliaCountryUnit East Asia andPacificRegion has a restricted distribution andmay be usedby recipients only inthe performance o f their official duties. Its contents maynot otherwise bedisclosed without World Bank authorization. CURRENCY EQUIVALENTS (as o f March 3 1,2004) Currency unit = Tugrik(Tg) US$l=Tg 1177 FISCAL YEAR January 1-December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities NGO Nongovernmental Organization ADB Asian DevelopmentBank N P V Net Present Value CAE Country Assistance Evaluation ODA Official Development Assistance CAS Country Assistance Strategy PETS Public Expenditure Tracking CG Consultative Group Survey CPIA Country Policy and InstitutionalAssessment PHRD Policy and HumanResources CPPR Country Portfolio Performance Review Development ECTAC Economic Capacity Technical Assistance Credit PIU Project ImplementationUnit EGSPRS Economic Growth Support and Poverty Reduction PRGF Poverty Reduction and Growth Strategy Facility EU European Union PRSC Poverty Reduction Support Credit FA0 Food and Agriculture Organization PRSP Poverty Reduction Strategy Paper FIAS Foreign Investment Advisory Service PSD Private Sector Development GDP Gross Domestic Product PSDC Private Sector Development Credit GEF Global Environment Facility PSMFL Public Sector Management and GFMIS Government Financial Management and Finance L a w Information System QPPR Quarterly Portfolio Performance GTZ Gesellschaft fur Technische Zusammenarbeit Review HIES Household Income and Expenditure Survey SDR Special Drawing Rights ICT Information and Communication Technology SLP Sustainable Livelihoods Program IDA International DevelopmentAssociation SME Small and Medium Enterprise IDF Institutional Development Fund SWAP Sector-Wide Approach IFC International Finance Corporation TA Technical Assistance IMF International Monetary Fund TF Trust Fund JBIC Japan Bank for International Cooperation UN UnitedNations JICA Japan International Cooperation Agency UNDP UnitedNations Development JSA Joint Staff Assessment Programme LSMS Living Standards Measurement Study U S A I D United States Agency for M&E Monitoring and Evaluation Intemational Development MDG Millennium Development Goals WBI World Bank Institute MPRP Mongolia People's Revolutionary Party WTO World Trade Organization MTEF Medium-Term Expenditure Framework World Bank Vice President: Jemal-ud-din Kassum Country Director: Ian C. Porter Task Team: Saha Dhevan Meyanathan Zafar Ahmed Christopher Finch Lynne Sherburne-Benz FOROFFICIAL USEONLY MONGOLIA COUNTRY ASSISTANCE STRATEGY Table of Contents ExecutiveSummary ......................................................................................... i I CountryContext . A.Political Transition ................................................................................ .......................................................................................... 1 1 B.Economic Transition .............................................................................. C. Poverty: Profile andTrends ....................................................................... 1 4 I1 CountryDevelopmentProgramandProspects . A. Country Priorities ................................................................................. ..................................................... 7 7 B.KeyDevelopmentChallenges ................................................................... 8 D.DebtandCreditworthiness....................................................................... C. Medium-termEconomic Outlook ............................................................... 10 11 I11 The World BankinMongolia:BuildingonExperience . ......................................... 11 A.Key Findings from RetrospectivesandConsultations....................................... 11 B.LessonsLearned .................................................................................. 13 I V BankGroupAssistance Strategy . .................................................................. 14 A.BankGroup Activities .......................................................................... 14 CAS Objective I: Consolidatingthe Transition ....................................... 17 CAS Objective 2: Reducing Vulnerabilities ............................................ 20 CAS Objective 3: Strengthening the Alignment of Policies and Resources B.AssistanceProgram .............................................................................. Around Results ...................................................... 23 26 D.MonitoringImplementation ..................................................................... C. Portfolio Management ........................................................................... 29 29 E. Scenarios andTriggers ........................................................................... 30 V Risks . ........................................................................................................ 31 VI ConcludingRemarks . ................................................................................... 33 This document has a restricted distribution andmay be used by recipients only in the performance of their official duties Its contents may not be otherwise disclosed . without World Bank authorization . Text Tables Table 1: Mongolia and Millennium Development Goals ........................................ 5 Table 2: Mongolia: Urban-Rural Differences, ..................................................... 6 Table 3: EGSPRS Pillars and CAS Objectives ................................................... 16 Table 4: 17 ReducingRural and Urban Vulnerability ............................................... Consolidatingthe Transition .............................................................. Table 5: 21 Table 6: Strengthening Alignment o f Policies and Resources with Development Results ,.24 Table 7: ProposedAssistance Program: Base Case .............................................. 28 Table 8: CAS Triggers ............................................................................... 31 Text Figures Figure 1: Mongolia's CPIA Comparedto IDA Average .......................................... 2 Figure 2: GDP GrowthRate .......................................................................... 4 Figure 3: 4 4 4 4 Foreign Direct Investmentto GDP ........................................................ Total Revenue and Expenditure to GDP ................................................. Current Account Balance to GDP ......................................................... Change inConsumer Prices ............................................................... Sectoral Composition o f GDP ............................................................ Figure 4: Figure 5: Figure 6: Figure7: 4 Text Boxes Box 1: 2 Regional Development Strategy .......................................................... Comparative GDP Performance inTransition Economies ............................. Box 2: 9 Box 3: Effective TA: Debt Management inMongolia .......................................... 13 Box 4: Major Donor Activities .................................................................... 25 Box 5: The IFCinMongolia ...................................................................... 26 Attachments Attachment 1: CAS Matrix Attachment 2: Mongolia: Phases o f Transition Attachment 3: Mongolia: Debt Analysis Attachment 4: Mongolia: Country Assistance Evaluation: Summary Attachment 5: Client Survey: Summary o f Findings Attachment 6: Mongolia: Toward Environmental Sustainability Attachment 7: EGSPRS - CAS Priorities and Donor Activities Standard CAS Annexes Annex A1: Key Economic and Program Indicators Annex A2: Mongolia at a Glance Annex B2: Selected Indicators o f Bank Portfolio Performance and Management Annex B3: IBRDIIDA Program Summary ProposedIDA Base Case Lending Program IFC and MIGA Program Annex B4: Summary o f Nonlending Services Annex B5: Mongolia Social Indicators Annex B6: Key Economic Indicators Annex B7: KeyExposure Indicators Annex B8: Status o f Bank Group Operations inMongolia Operations Portfolio (IBRD/IDA and Grants) Statement o f IFC's Portfolio Annex B10: CAS Summary o f Development Priorities Map (IBRD31531) EXECUTIVE SUMMARY Achievements, Challenges,andWorld BankRole i. Mongolia has made significant strides in achieving macroeconomic stability and fundamental structural reforms since its transition to democracy and a market-based system in 1990. The next development challenge i s to improve the lives and welfare o f its people and reduce poverty by accelerating sustained and equitable economic growth. This vision i s articulated in its Economic Growth Support and Poverty Reduction Strategy (EGSPRS), a comprehensive medium-term framework o f strategies, policies, and programs to raise average annual growth to the country's potential o f 5-6 percent-and to reduce poverty from its current incidence o f 36 percent. ii. Mongolia faces considerable challenges inachieving the objectives ofthe EGSPRS. Capacities for public sector management and service delivery are not aligned with the overall strategy. And the vulnerabilities to climatic and terms-of-trade shocks continue. It i s in this context o f opportunities and risks that this four-year (FY05-FY08) Bank Group Country Assistance Strategy (CAS) i s presented. iii. The Govemment's EGSPRS represents a commendable effort. Country-owned and participatory, it aims to reduce urban and rural vulnerabilities, engender sustainable human development, emphasize good govemance and gender equality-by accelerating private-sector- led, broad-based equitable growth, and improving the efficiency o f public expenditures. Couched inthe localizedMillenniumDevelopment Goals (MDGs),the strategy is aimedat: 0 Ensuringmacroeconomic stability andpublic sector effectiveness. 0 Supporting production and exports and improving the environment for private-sector-led development. 0 Enhancingregional and rural development and environmentally sustainable development. 0 Fostering sustainable human development. 0 Promoting good governance, and implementing and monitoring the strategy. Previous reforms have established the policy, legal, and institutional framework for the market economy. The focus now i s on buildingcapacities for implementation and enforcement. iv. The Bank's CAS would support the Government inits efforts to overcome the challenges o f implementing the EGSPRS by enhancing measurable results on the ground. Based on extensive consultations and retrospective reviews, the CAS i s broadly aligned with the EGSPRS and would directly support a selected subset o f the EGSPRS priorities that reflect key development areas where the World Bank has a comparative advantage. The new CAS, departing from previous approaches in its strategic objectives and directions, builds on the evolution o f Bank assistance in recent years. Bank lending to Mongolia represents about 11 percent o f the country's overall Official Development Assistance (ODA) flows, implying the need to be selective and to complement and help enhance other donor efforts. The CAS initiates a results- based approach that relates outcomes to the country's longer term EGSPRS goals, including results that integrate these goals with the MDGs. v. Managing risks in implementing this CAS will be essential for effective Bank support. Faltering commitment to the EGSPRS i s a minor risk given the broad consultations, participation, and ownership. But, implementation involves other internal challenges: the need for tight management o f public expenditures and for increasing the limited institutional capacity o f the Government. It also involves mitigating climatic and terms-of-trade shocks. Working with other donors, the Bank's proposed program reflects innovations in supporting the Government to overcome these challenges. CAS ObjectivesandResults vi, The CAS proposes that World Bank assistance to Mongolia focus on three objectives with the following expectedoutcomes: Consolidating the economic transition through institutional reforms that improve public sector and market eficiency. Expected outcomes: (i)improved public sector effectiveness through strengthened public expenditure management and a reformed civil service, (ii) further consolidation o f market reforms to establish a sound institutional and regulatory environment for the private sector, (iii)improved efficiency and distributive impact o f infrastructure investments, and (iv) strengthened institutional capacity to deliver social services. Addressing growing equity concerns and reducing rural and urban vulnerabilities. Expected outcomes: (i)reduced loss o f livestock from weather-related shocks, (ii)improved environmental governance and management, (iii) improved municipal service delivery for vulnerable populations in peri-urban areas, and (iv) helped the Government to analyze the viability o f options to support its regional development objectives. Aligningpolicies and resources around results. Expected outcomes: (i) strengthenednational institutional framework for implementing and monitoring the EGSPRS, (ii)improved articulation and implementation o f sector strategies linked to the EGSPRS, and (iii) strengthened the Government's ability to coordinate aid and harmonize donor procedures. BankAssistance vii. To achieve these results, the Bank proposes a judicious mix o f adjustment, investment, and non-lending services. A key program feature i s the proposed use o f annual, single-tranche Poverty Reduction Support Credits (PRSCs) to support the implementation o f priority EGSPRS objectives, starting with areas where high levels o f consensus and agreement have already been reached. Investment operations will be undertaken selectively and based on clear, shared, and agreed-upon sector and thematic strategies that emphasize sector-wide approaches (SWAPS) to be supported by all external partners. The Bank's non-lending program will focus on developing economic and sector work in the areas o f growth, poverty monitoring and analysis, and knowledge-building to support the planned PRSCs and selected areas o f investment lending and will inform the policy dialogue. The CAS also emphasizes the importance o f the current International Development Association (IDA) portfolio to deliver on these goals. The International Finance Corporation's (IFC's) program will complement the Bank's support by continuing to focus on the financial sector through a mix o f investment and technical assistance activities. viii. A four-year, base case IDA lendingenvelope o f about SDR 60 millionis envisaged. It is characterized by satisfactory performance on macroeconomic management, implementation o f the key elements o f the EGSPRS (such as public expenditure management and civil service reforms), improvements in governance and transparency (including procurement processes), and a well-performing IDA portfolio. Ina possible highcase scenariwto be triggered by strong and early implementation o f EGSPRS policies on the public investment program, pension reforms, and the financial sector-additional resources o f about 30 percent will be channeled through increased PRSC amounts. In the low case, lending levels would be reduced and adjustment lendingdeferred untilconducive conditions return. Agenda for BoardConsideration ix. Given this assessment and proposal, Board members may wish to discuss, among others, the following aspects o f this CAS: 0 The CAS focus on Mongolia's particular development challenges: (1) consolidating the transition to a market economy, (2) reducing vulnerabilities, and (3) aligning donor efforts around EGSPRS development results. 0 The proposed CAS approach (in the light o f constrained IDA allocations) to combine PRSCs and selected investment lending. MONGOLIA -- COUNTRY ASSISTANCE STRATEGY 1. Mongolia's last Country Assistance Strategy (Report No. 17604-MOG), discussed by the Bank's Board o f Directors inApril 1998, covered FY99-FYO1. The follow-on CAS was held back until Mongolia's EGSPRS (Report No. 26563-MOG)-the country's Poverty Reduction Strategy paper (PRSP)-was completed to enable the Bank to align its program with the country's strategy. In September 2003 the EGSPRS was discussed by the Board o f Directors. This CAS reflects the guidance provided by the Board on that occasion. I. COUNTRYCONTEXT 2. Endowed with an area of 1.6 million square kilometers and a population of 2.4 million, Mongolia is the least densely populated country in the world. Landlocked between Russia and China, the country has a per capita income o f only US$440, making it one o f the poorest in the region. Inflicted with a cold, harsh climate and short growing season, Mongolia also experiences frequent droughts and occasional severe winters, known as "dzuds." About half o f Mongolians live in rural areas; two-thirds o f them engaged in livestock herding. In 2003 the agriculture sector accounted for about 20 percent o f gross domestic product (GDP), compared with 30 percent in 1993, and more than 45 percent o f employment. It mainly comprises livestock, which provides rural residents food, clothing, and shelter, as well as raw materials for the commercial production o f cashmere, other wools, meat, and leather products. Copper and gold mining, a small manufacturing sector, and the services and trading sector complete the undiversifiedeconomic base. A. PoliticalTransition 3. Mongolia made a successful transition to a democratic political system starting in 1990. Democratic elections since then have led to wide shifts in political power. In 1996 a Democratic Coalition, including two relatively new opposition parties, won a majority o f seats in Parliament from the long-ruling Mongolian People's Revolutionary Party (MPRP). However, the Coalition was challenged continuously by remaining MPRP members in Parliament and by internal strife among members. This resulted in three successive governments serving from 1998 to 2000, followed by the MPRP's return to power (it won a landslide victory over the Democratic Coalition in the 2000 elections, capturing 72 o f the 76 parliamentary seats). The next elections are scheduled for June 2004. Whichever party wins, it i s expected that the leadership will be pro-reform, continuing on the path toward a market economy and budget discipline, and favoring private-sector-led growth. 4. The political process has been accompanied by the emergence of a dynamic civil society. Mongolian society i s largely open, with an expanding civil society, including a growing number o f nongovernmental organizations (NGOs) and a largely free media-although transparency and accountability mechanisms linking the Government with citizens are still developing and generally remain weak. Women are active in most arenas o f the economy and society, although significant gender-based disparities persist inpoverty, vulnerability, economic opportunities, and working hours. B.Economic Transition 5. Since the early 1990s, Mongolia has made steady progress in its transition to a market economy. The country moved quickly to dismantle the command economy and began to establish a framework o f laws, policies, and institutions to support a market-based system. The progress has placed Mongolia at the forefront o f rapid reformers among transition economies (box 1). These achievements are also reflected in the Country Policy and Institutional Assessment (CPIA), which shows that Mongolia compares favorably with other IDA countries (figure 1). Mongolia scores as well or better than the IDA average in most areas rated for the CPIA, with neither glaring weaknesses nor star - 2 - performances. The fiscal rating i s below average due to the high tax burden imposed on the private sector, and there are outstanding issues of environmental management. I Box 1:Comparative GDP PerformanceinTransition Economies, 1990-2001 Despite temporary setbacks, Mongolia's economic ComparativeCDP PerformanceinTramition transition and adjustment process compares favorably to Economies,1990.2001 (I 00) 9904 most transition countries. Mongolia experienced a smaller initial contraction in GDP immediately following transition, and better subsequent growth performance overall than did the Baltics, Commonwealth o f Independent States (except Uzbekistan), and the poorer performers o f Central and Eastern Europe. Cheng (2003) attributes Mongolia's relatively smooth transition to the combined effects o f the early adoption o f appropriate adjustment policies and market-based reforms and some favorable initial conditions, such as a relatively simple economic structure, which reduced the complexity of initial market reforms, and a peaceful and relatively stable social and political environment. Source: Kevin C. Cheng: Growth and Recoveql in Mongolia During Transition,IMF Working Paper No. 03/217, November I.2003 Figure 1:Mongolia's CPlA Compared to IDAAverage, 2003 Macroeconomic balances Revenue Mobiliza evelopment Program Budget Management Property fights and Govemance Financial Stability Banking Efficiency Social Protection and Lab Pnvate Sector Environment Gender -Mongolia'sCPlA2003 IDAAverages 2003 1 6. Despite a harsh initial shock, the country moved ahead with economic reforms. During 1990- 93, the collapse o f the Soviet Union and breakdown o f monetary and trade relations among the Comecon states resulted in a sharp contraction o f Mongolia's real GDP (falling by about 23 percent between 1989 and 1993) and high inflation (peaking at 321 percent in late 1992). The country moved quickly to liberalize the exchange rate, trade, and prices, and open up the financial sector (details in Attachment 2). Stabilization and recovery followed between 1994 and 1996, although the scope and pace o f reforms slowed. Buoyed by increasing livestock production and favorable international prices for copper and gold, GDP growth averaged 3.6 percent. - 3 - 7. Poor external conditions and political gridlock affected economic performance between I997 and 2000. The 1997-98 East Asian and Russian crises exposed Mongolia's underlying structural inefficiencies. With sharp falls in the export prices o f the main commodities, large revenue shortfalls resulted. By 1998 the country's deficit reached an all-time high o f 14.3 percent o f GDP. To maintain public confidence and protect the most vulnerable income groups, the Government increased public employment and cash transfers to the population. Three successive governments between 1998 and 2000 also slowed the pace o f reform implementation. The Government's deficit reduction to 7 percent o f GDP in2000 stemmed mainly from its stepped up efforts to mobilize revenues. 8. SigniJcant progress has been made in structural reforms in the last three years. To strengthen public expenditure management, the Government introduced a Treasury Single Account, adopted the Public Sector Management and Finance Law (PSMFL), initiated installation o f a Government Financial Management and Information System (GFMIS) and initiated the implementation o f the Medium-Term Expenditure Framework (MTEF). In the financial sector, rehabilitation o f the banking system, following the crises o f the 1990s, improved confidence, as reflected in increased re-intermediation and monetization. The legal environment for loan recovery and bank competition improved with legislation to facilitate bank seizures o f collateral on non-performing loans, rehabilitation and privatization o f the Agricultural Bank (AgBank), privatizationo f the Trade and Development Bank, and startups by various foreign-based credit institutions o f operations in Mongolia. State enterprises were the target o f some recent reforms (including sales), while privatization o f other large enterprises, such as the Gobi cashmere factory (which i s still carrying out loss-making activities), was delayed. Mongolia ratified key International Labor Standards conventions and drafted the Anti-Money Laundering and Combating the Financingo f Terrorism law. 9. Gradual diversijkation and better weather contributed to stronger growth in 2002 and 2003, though the economy remains vulnerable to natural disasters and other external shocks. After three harshwinters, Mongolia's GDP growth has climbed steadily--from 1percent in2001, to 3.9 percent in 2002, and 5.3 percent in 2003. This rise reflects stronger and more diversified non-agricultural growth and the recovery o f the agricultural sector (figures 2 and 3). Inflation declined steadily from a high o f 8.1 percent in 2000 to 1.7 percent in 2002, and remained at 4.7 percent in 2003 (figure 4). In2003 the current account balance, excluding official transfers, fell to 15.2 percent o f GDP (figure 5), with good export performance (19.7 percent growth). 10. The transition has been accompanied, however, by a heavy tax burden on the private sector and continued public sector dominance. Although strong gains inrevenue mobilization inrecent years have kept pace with rising public expenditures, there are concerns about the sustainability o f the revenue effort and its impact on private sector activity. During 1996-2002 revenues as a share o f GDP increased from 28 percent to 39 percent and expenditures from 36 percent to nearly 45 percent (figure 6). Since 1999 the fiscal deficit has begun to narrow, from 12 percent to about 6 percent. Over 1990- 2002 the average budget deficit for Mongolia was 9 percent o f GDP, compared with 5 percent for the Kyrgyz Republic and 4 percent for Hungary. 11. Foreign aid and investment levels have been relatively high. Over 19962002, domestic investment ratios remained at about 33 percent o f GDP, while domestic savings accounted for 13 percent o f GDP. Foreign direct investment reached about 7 percent o f GDP in2002 (figure 7). Since the initial transition the country has received more than US$2.6 billion in aid (half as loans), heavily concentrated inthe economic sectors (transport, industryand construction, and electricity and heating). The main sources o f Official Development Assistance (ODA) have been Japan, the Asian Development Bank (ADB), the World Bank, Germany, and the United States. - 4 - Figure2: GDP GrowthRate Figure3: SectoralCompositionof GDP 6.0 P. j (2.0): 9 9 2000 g ; 3 / e (8.0) 1 Figure4: Changein Consumer Prices Figure5: CurrentAccountBalanceto GDP 200.0 - 1997- 1990-93 1994-96 2000 2001 2002 2003ie 5.0 T 40.0 -- 20.0 -- (20.0) 1. I 1990-93 1994-96 1997- 2001 2002 2003/e +Current account balance, excludingofficialtransfers 2000 -Current account balance, including official transfers Figure6: Total RevenueandExpenditureto GDP Figure7: ForeignDirectInvestmentto GDP 60.0 ` ` O T 7.0 -- 6.0 -- 5.0 -- E 20.0 10.0 3.0 -- I E 4.0 -- I 2.0 -- 1990- 1994- 1997- 2001 2002 2003/e 93 96 2000 I I -Total revenue -at-Totalexpenditure 1990-93 1994-96 1997- 2001 2002 2003/e 2000 C. Poverty: ProfileandTrends 12. Mongolia has managed to protect high levels of human development inherited from the socialistperiod, but progress toward several Millennium Development Goals (MDGs) has been mixed. After the transition, indicators for secondary school enrollment and infant mortality deteriorated significantly, but these negative trends have been largely reversed. Mongolia shares many characteristics with other transition economies (table 1). It i s well on track to achieve universal primary education. The goal o f eliminating gender disparities in education has been achieved at the primary level and i s considered attainable at secondary and tertiary levels, despite the so-called "reverse gender gap" (where male enrollment rates are lower than those o f females) that increases at progressively - 5 - Table 1:Mongolia andMillenniumDevelopmentGoals Millennium Development Situationin EastAsia and Situationin Europe and Current situation in Goal the PacificRegion CentralAsia Region Mongolia Goal 1 Income-povertyreduced Proportion of people living in 35 percent of people living on Halve, between 1990 and from 32 percent to 24 poverty: 5 percent below $1 $0.70or less a day; growing 2015, the proportion of percent over last decade. and 19.5 percent below $2 a income inequality; people living in poverty Region could achieve target day. Goal is achievable given xhievement o f this goal i s and who suffer from o f 17 percent but target on annual average o f 3.6 percent :onsidered difficult unless hunger hunger i s likely to be missed. income growth, but seven growth rates accelerate and are countries unlikelv to meet coal. maintained. Goal 2 Little progress as primary Most countries are well on Mongolia i s well on track and Achieve universal enrollment remained static at track; only five countries are likely to achieve this goal as primary education 93 percent; some countries unlikely to meet the goal. enrollment rate o f 91 percent may achieve target. (2000) i s increasing at 2 percent annually. Challenge i s improving the completion rate. Goal 3 Gender balance i s improving Goal i s likely to be met, except Achieved inprimary Eliminategender faster than expected. inAzerbaijan, Tajikistan and education; higher female disparity in primary and Disparities in secondary Turkey. enrollment rates in secondary secondary education by enrollment are lower than and tertiary; goal i s attainable 2005 and to all levels of primary. given rates o f annual increases education by 2015 inmale enrollment. Goal 4 Progress from 59 per 1,000 ECA's rate o f 44 in year 2000 Progress from 87.5 in 1995 to Reduce under-five in 1990to 44 in2001, but was lower than inother 42.4in 1998; declining trend mortality rate by two- not adequate to achieve regions; still, many countries puts Mongolia well on track. thirds between 1990 and target. are unlikelyto meet the target. MDGtarget is likely to be 2015 achieved ifresources continue at current levels. Goal 5 Wide variation across the Trends indicate that most Decline from 200 in 1992 to Reduce by three-quarters, region (high mortality in Lao Commonwealth o f Independent 109 in2003 i s not sufficient between 1990 and 2015, PDR, Cambodia and States (CIS) countries are to reach the target of 50 (per the maternal mortality Indonesia, but low in unlikely to achieve this goal. 100,000 live births)by 2015. ratio Thailand and China). Goal 6 L o w HIV prevalence rate High risk and rapid spread o f Very low AIDS incidence but Halt and reverse spread of compared to South Asia and HIV inCIS countries. High highriskfactors. TB HIV/AIDS and Africa, but TB incidence i s incidence o f TB. Most low incidence increasedfrom 70 to tuberculosis higher than world average. income countries are unlikely 141 (per 100,000) inthe last Thailand and Cambodia to meet the goal. decade and i s closely linkedto made good progress. poverty and unemployment. Goal off track but still achievable. Goal 7 Rapid industrial All countries are on track for Increasing pasture and forest Reverse loss of development increasingly targets on water supply and degradation, urbanpollution, environmentalresources. stresses the environment. slumdwellers, but water loss o f biodiversity. Estimated Halve, by 2015, the Target on water supplyis quality and sewage systems are 40 percent o f population lack proportion of people likely to be missed. inserious problem. Seriously access to safe water. without accessto safe Coverage o f effective off track on energy efficiency Increasing rural-urban water. Achieve a sanitation is very low; target and carbon emission. migration (45 percent increase significant improvement off track. inUlaanbaatar population inthe livesof slum over last decade) is a dwellers by 2020 challenge to improving ger district conditions. This goal will be difficult to achieve Goal 8 Inmany countries, trade Ten countries are in Liberal trade regime inplace, Develop an open trading doubled during the decade; negotiations to join EU. Most but underdeveloped financial and financial system; goal is attainable given countries benefit from EU markets. Improvedtransport (deal with the debt and increased trade benefits. reduced trading barriers. High- infrastructure i s keyto address special needs of Declining ODA needs to be income countries are landlocked status. Debt landlocked Mongolia) reversed to achieve MDG. committed to reverse declining currently at sustainable level. trend o f ODA. This goal i s achievable. - 6 - higher levels o f the educational system. Mongolia i s also likely to reduce under-five mortality by two- thirds between 1990 and 2015. But the matemal mortality rate, while falling, is not declining fast enough to achieve the MDG. And while the incidence o f HIV/AIDS remains low, the incidence o f tuberculosis has increased from 70 (per 100,000) to 141 over the last decade. As in many transition economies, highlevels o f alcohol consumption i s o f particular concem. 13. Highpoverty levels havepersisted throughout the transition. In1998 more than one-third o fthe population was poor; inequality, as measured by the Gini coefficient, was 35 percent. Province or "aimag" centers had the highest poverty rates, with a poverty incidence o f 45 percent, while one-third o f rural residents were poor. There are no reliable estimates o f changes inpoverty incidence since 1998. Three harsh winters in 1999-2001 clearly hurt rural incomes, but rural growth recovered in 2003. The 2003 Living Standards Measurement Study/Household Income and Expenditure Survey (LSMS/HES) i s expected to redress this knowledge gap, and data analysis i s under way. 14. Poverty has been accompanied by the emergence of multiple sources of vulnerability. With the initial transition and privatization o f state-owned collectives and enterprises, people tumed to livelihoods based on their own production inthe informal sector and as livestock herders. Formal safety nets and systems to manage risks weakened, and household vulnerability increased dramatically. Increased rural vulnerability-at both household and macroeconomic levels-was illustrated vividly in 1999-2001, when more than 20 percent o f the national livestock herd was lost in successive "dzuds." 15. Rising environmental insecurity is closely tied to local overexploitation of natural resources. Rapid depletion o f Mongolia's scarce forest resources eliminates key sources o f fuel and vital watershed protection (a Bank-supported forestry assessment makes the preliminary conclusion that the depletion o f Mongolia's forests i s occurring at rates o f up to four times sustainable levels). Available evidence suggests that urban air pollution i s correlated to high levels o f respiratory diseases that particularly afflict the poor. Mongolia has weak institutional capacity to enforce its fairly progressive set o f environmentallaws and regulations. Table 2: Mongolia: Urban-Rural Differences, 2002 Indicator Urban Rural HumanDevelopment Index 0.723 0.636 GDP per capita (PPP, US$) GDP per capita (Purchasing Power Parity, US$) 3,423 1,246 3500 Population without access to safe water (%)* 9.2 65.6 Population living ingers (%) 28.3 78.3 2500 Infant mortality (per 1,000 live births) 25.3 33.0 1500 Matemal mortality (per 100,000)* 121.1 189.5 500 *Datafor 2000 1999 2000 2001 2002 Sources: Mongolia Human Development Report 2003; Ministry offiealth +Urban Rural 16. Inequalities are widening between and within rural and urbanpopulations. While inequality in Mongolia i s within the range observed in other countries that have recently experienced the transition to a market economy, strong disparities exist between regions and within urban and rural areas (table 2). Income i s strongly differentiated between the larger cities of Ulaanbaatar (with average incomes 165 percent above the national average) and Erdenet (125 percent) and all other areas of the country (below average). Migration to urban areas, particularly to Ulaanbaatar, has been increasing rapidly; - 7 - Ulaanbaatar now accounts for about 30 percent o f the country's total population. Rural residents have less access to education, health care, safe drinking water, information, and basic services than do their urban counterparts. Their life expectancy i s lower, and their mortality and incidence o f disease are higher. Within rural Mongolia, economic opportunities and access to basic and social services differ significantly between herders and the residents o f smaller provincial centers and towns. InUlaanbaatar and the few other larger urban settlements, income, employment, and access to basic services are strongly differentiated between residents o f expanding peri-urban "ger" (Mongolian felt tents) areas and apartment dwellers. 11. COUNTRY DEVELOPMENT PROGRAMAND PROSPECTS A. CountryPriorities 17. The EGSPRS represents the Government of Mongolia's vision to accelerate pro-poor growth and reduce poverty. Several years o f work have culminated in taking on the challenges o f widespread and persistent poverty, large spatial disparities, widening inequalities, and increasing vulnerability. This has resulted in the development o f an overall strategy to increase GDP growth in order to reduce poverty and improve people's living standards. The strategy has been developed ina fully participatory manner with many consultations with various stakeholder groups-including donors, NGOs and the private sector as well as the Government and inboth urban and rural areas and at various decentralized levels. Line ministries and agencies were part o f the process o f developing sectoral and thematic programs, and the overall strategy i s couched within the macroeconomic program supported by the International Monetary Fund's (IMF) Poverty Reduction and Growth Facility (PRGF). The EGSPRS, discussed by the Boards o f the Bank and the Fund in September 2003, was endorsed by both institutions as providing the basis for continuing support and concessional financial resources. 18. The EGSPRS, a major step forward in the development dialogue in Mongolia, shifts the county's focus to medium-term policy directions. To manage development and results for poverty reduction, while continuing to maintain stability and consolidating the transition process, the development framework emphasizes private-sector-led growth and economic restructuring, and underscores participation and the overriding importance o f implementingand monitoring the EGSPRS. 19. The EGSPRS articulates key development challenges and priority actions organized around five main pillars: 0 Ensuringmacroeconomic stability and public sector effectiveness. 0 Supporting production and exports and improving the environment for private-sector-led development. 0 Enhancing regional and rural development and environmentally sustainable development. 0 Fostering sustainable human development. 0 Promoting good governance, and implementing and monitoring the strategy. 20. The Bank-Fund Joint Staff Assessment (JSA) of the EGSPRS recognizes the Government strategy 's strongpoints. The EGSPRS begins to align national development goals-as articulated inthe MDGs-with sectoral strategies and development programs. It shifts Mongolia's poverty reduction approach from income transfers and safety nets to growth-promoting reforms and sustainable human development. The JSA notes that the EGSPRS has great potential for aligning donors and civil society withnational development goals and strategies. 21. The JSA also suggests areas where the EGSPRS is weak and where subsequent updates could result in improvements. The EGSPRS reflects the strengths and weaknesses o f the country's sectoral and thematic strategies. In areas for which there i s agreement on strategic priorities, concrete programs - 8 - and actions should be developed to fit within existing budgetary resources (e.g., energy). Areas in which the underlying strategic framework i s weak because o f inadequate diagnostic work or lack o f consensus on priorities require more systematic, diagnostic work. For example, in private sector development, where commitment to private-sector-led growth i s clear, more diagnostic work i s needed to better understand the constraints to private sector activity. Specific actions and policy measures to enhance transparency, predictability, and accountability o f public policies should also be developed. Poverty diagnostics should be updated once results o f the ongoing LSMS/HIES exercise are available. Finally, as with many Poverty Reduction Strategy Papers (PRSPs), the EGSPRS i s not well prioritized or costed, and the monitoring and evaluation plans and capacities can be further improved. B. Key DevelopmentChallenges Ensuringmacroeconomicstability and publicsector effectiveness 22. This first pillar of the EGSPRS recognizes the importance of prudent monetary and fiscal policies to maintaining overall macroeconomic stability, and captures the breadth of the ambitious public sector reform agenda launched by the Government beginning with passage of the PSMFL. It highlights the need to further consolidate progress in public expenditure management. This includes strengthening the linkage between policymaking and budget allocation, improving the financial sustainability o f key social services, further articulating a medium-term expenditure framework linked to a system o f output-based evaluation, and developing improved rules and regulations for public procurement. The EGSPRS also notes key challenges related to the civil service reform agenda, including unreliable and multiple estimates o f the number o f existing civil servants; fragmentation, duplication, and overlap o f administrative structures and functions; and an inappropriate functional composition, compensationregime, and slulls mix. 23. The JSA agrees with the critical importance of theforegoing challenges. In the area o f public sector reforms, it notes the need for greater comprehensiveness and transparency in the public investment budget-a critical factor in achieving the EGSPRS objectives. For civil service reform, the EGSPRS stops short o f discussing the politically difficult measures needed to contain the growth o f Mongolia's wage bill, which has been fueled by large, successive wage increases inrecent years. Supporting production and exports andimprovingthe environment for private-sector-led development 24. The EGSPRS recognizes that the private sector must be the driving force for sustainable growth and poverty reduction. It acknowledges the importance o f continuing privatization and promotion o f small and medium enterprises (SMEs). It recognizes the importance o f creating an adequate policy environment for the development o f Mongolia's mineral sector. It further recognizes the importance o f infrastructure for overcoming the country's difficult physical constraints and creating a more favorable business environment. Ensuring that the public investment program i s based on economic considerations and insulated from political pressures will be critical if infrastructure investments are to support national growth and poverty reduction goals effectively. 25. The JSA notes the remaining challenge of converting the broad policy statements of the EGSPRS into a coherent private sector strategy. Specific policy actions are needed for a smaller, more efficient govemment; better integration o f Mongolia's private sector into regional and global markets, and removing the remaining physical, legal, and financial constraints to create a level playing field and an enabling investment climate. K e y challenges include the need to develop further an effective legal system and an efficient, competitive, and well-governed banking system. For the private sector development o f minerals, the JSA emphasizes the importance o f maintaining a legal and regulatory regime based on the country's progressive Minerals Law. Effectively implementing the energy strategy - 9 - and further updating the transport strategy (paying strong attention to the quality o f the public- investment program and the cost and sustainability o f proposed investments, including the Millennium Road) are further challenges identified inthe JSA. Enhancing regional and rural development and environmentally sustainabledevelopment 26. The EGSPRS highlights the need to address the rural-urban disparities in economic growth and service delivery that have emerged since the transition-and the Government's vision for addressing them in its regional development strategy. It notes the central role o f Ulaanbaatar in Mongolia's economy and the challenge o f improving the poor living conditions o f residents in "ger" districts, which have spread with migration. It strongly emphasizes the importance o f the livestock sector for rural livelihoods and the national economy. It acknowledges the challenges related to increased vulnerability caused by structural changes in the economy, the more than doubling o f the numbers o f herders in the 1990s as former workers took up herding, the breakdown of key support systems and services, and the consequences of increased concentrations o f herds and overgrazing. The EGSPRS also recognizes that the sound management o f natural resources and the environment i s a necessary dimension o f sustainable growth over the long run. And it stresses the need for Mongolia to improve environmental quality, reduce degradation of the natural resource base, and clearly articulate the linksbetweenpoverty reductionandimproved environmental management. 27. TheJSA recognizes the Government's desire to give equal opportunities to all, but stresses the needfor careful assessment of financial costs and benefits of alternatives, including examining other country experiences with regional development. Improving municipal finance and administrative capabilities will be important to achieving sustainable improvements in the efficiency and equity o f municipal service delivery. The JSA notes the importance o f further prioritizing and articulating the actions proposed in the Rural Development Strategy, (box 2) including those that strengthen pastoral risk management, improve rural financial intermediation, and improve rural access to infrastructure, setting them in the context o f the regional development agenda. The Government has progressed considerably in defining an environmental strategy, though challenges remain in strengthening national and local institutional and legal capacity and costing and prioritizing policy interventions and actions. Box 2: RegionalDevelopment Strategy The Government's approach to the Regional Development Strategy reveals tensions between interventionist and market-based policies. While regionally-balanced development i s clearly important, the Government's proposed strategy relies o n large infrastructure investments, the development of designated urban centers as growth poles, and the identification o f designated production activities for each region. The economic feasibility o f the approach--as well as its implications for debt sustainability, potentially hidden fiscal liabilities, and lack o f successful international experience with similar approaches-- raise concerns. Fostering sustainable human development 28. The EGPRS makes the linkages among growth, poverty reduction, and human development, presenting a strategy to meet the social sector MDGs. In education it recognizes the challenges o f increasing access to schooling, rural-urban and gender disparities, improving quality, and strengthening the overall sector framework. The health strategy identifies medium-term actions to lower infant and maternalmortality, control the incidence o f infectious diseases, improve primary health care and access for the poor, and ensure broader coverage o f health insurance. The employment and social welfare strategy recognizes the high and rising budgetary burden of current transfer programs (pensions) and needed short and medium-term actions (such as raising the retirement age). - 10- 29. The JSA notes that the strategy should further address issues of resource allocation, private sector participation, and financial sustainability. The EGSPRS does not address private provision o f educational inputs or the limited analysis o f resource allocation among primary, secondary, and tertiary levels. Nor does it address the lack o f clarity on the financing or sequencing o f options for addressing gender and age-at-entry issues. The health strategy omits two key issues: sector reforms to broaden the coverage o f the health insurance system and make health financing more sustainable, and restructuring hospital services (mainly those concentrated inthe capital city). The JSA points to the need for stronger discussions on labor market and employment policies, more specificity in social assistance reforms, and addressingthe equity, sustainability and governance o f the pension system. Promotinggood governanceandimplementingand monitoringthe strategy 30. The EGSPRS emphasizes good governance, participatory processes, and the importance of monitoring strategy implementation. Priority areas for sound governance include improving accountability and transparency, ensuring an independent judiciary, and fighting corruption. Extensive participation o f civil society will be sought through collecting bottom-up feedback and undertaking consultations, outsourcing delivery o f selected services to NGOs, and open exchanges with the media and other community groups (businesses). 31. The EGSPRS also notes the crucial role of effective aid coordination and donor alignmentfor successful implementation. Given that the Mongolian economy's share o f ODA i s fairly large, it i s important that donor programs support government priorities articulated in the EGSPRS. The Government needs to lead in coordinating financial flows, allocating resources, streamlining procedures, increasing transparency, and aligning its policies and documents to provide clear signals to external partners. 32. TheJSA concludes that while key monitoring indicatorsfor EGSPRS implementation are linked to the MDGs,further refinements are needed. These could be improved to include energy and private sector development, disaggregations by region and gender, and better links to such priority outcomes as educational quality. The major challenge i s to buildinstitutional mechanisms that engage stakeholders, improve public access to information, create agency and line-ministry monitoring capacity, strengthen statistical facilities and personnel, and buildon existing data. C. Medium-termEconomicOutlook 33. TheEGSPRS is based on aplausible macroeconomic framework, with strong economic growth projected over the next four to five years. Under the baseline scenario, GDP growth i s projected to average 5.5 percent a year-significantly higher than growth in the past decade. The non-agricultural sector averaged annual growth rates o f more than 10 percent during 2000-02. So, even if non- agricultural growth slows markedly over the medium term, reversion to a more normal pattern o f agricultural growth (about 3.8 percent) should suffice to attain the growth rates envisaged in the baseline scenario. Within a sound macro environment, the expected sources of growth (in addition to agriculture) are private sector activities through privatization o f remaining public enterprises; mining, expected to grow at 8 percent a year between 2004 and 2007; small and medium enterprises; and tourism, given Mongolia's unique culture and unspoiled terrain. Export volumes are expected to grow at about 6 percent a year, slightly higher than GDP, while import growth i s projected to remain strong, reflecting the higher imports of capital equipment associated with strong investment activities. 34. Mongolia should benefitfrom greater integration with the rest of Northeast Asia. Mongolia has been a member of the World Trade Organization (WTO) since 1997. To take advantage o f the WTO and the large markets that open with China's entry to it, Mongolia must do more to attract foreign investment, improve the skills mix of the population and adjust to external demand. China's entry to the - 11- WTO and Russia's imminent entry will provide an opportunity for Mongolia to discuss removal o f main tariff and non-tariff barriers constraining its exports. D.Debt andCreditworthiness 35. At the end of 2003, Mongolia's total stock ofpublic debt was estimated at US$1.4 billion, of which US$1.2 billion was external debt equivalent to 103percent of GDP and 147.3percentof exports of goods and services. This includes debt o f US$212 million contracted to settle Transferable Ruble debt obligations. In December 2003, the Government negotiated a debt settlement agreement with Russia to close its pre-1991 debt, estimated at US$11.4 billion or about 10 times Mongolia's GDP. The agreement provided for a writing off o f 97.8 percent o f Mongolia's pre-1991 debt, with the remaining US$250 million (about 20 percent o f Mongolia's GDP) to be paid in full by the end of 2003. While the settlement o f the Russian debt i s a welcome event, as it provides international investors more certainty regarding Mongolia's credit standing, more information on the nature o f the transaction i s needed to assess the full impact on short-term macro-sustainability. The total extemal debt-to-GDP ratio in Net Present Value (NPV) terms rose from 59.4 percent in 2002 without the Russian debt to 70.1 percent after the Russian debt settlement. With strong growth projected over the medium-term, the extemal debt-to-GDP ratio inNPV terms i s expectedto decrease incrementally to about 58 percent by 2008. 36. The revised Debt Analysis finds Mongolia's external debt sustainable, although export-led growth is critical to continue lowering the debt-service burden over the coming years. At the policy level, structural reforms, particularly fiscal consolidation, should continue to be aggressively pursuedto avoid incurring additional debt (Attachment 3). Contracting loans on non-concessional terms should be avoided to the extent possible. It i s expected that Mongolia will remain creditworthy for concessional IDA credits at levels envisaged under current allocation norms. Also required is the expansion of foreign direct investment, which, in turn, will require structural reforms to promote private-sector-led growth, including continued privatization. Prudent macroeconomic policies, including a flexible exchange rate that adequately reflects Mongolia's external competitiveness, are keys to this strategy. 111. THE WORLD BANKINMONGOLIA: BUILDINGONEXPERIENCE 37. The present CAS is Jirmly rooted in the findings and lessons from an extensive set of evaluations, reviews, and consultations. The Bank's Operations Evaluation Department issued a Country Assistance Evaluation (CAE, CODE2002-0013) in March 2002, and has undertaken Project Audits and Quality o f Supervision Reviews. A Client Survey, an informal review o f the last CAS, a Country Portfolio Performance Review (CPPR), follow-up quarterly reviews, project Implementation Completion Reports, and extensive consultations with various stakeholders have all been undertaken. These reviews and consultations note Mongolia's significant advance-but highlightkey structural and institutional weaknesses that contribute to lack o f progress on reducing poverty, improving equity, and achieving overall development outcomes. A. Key FindingsfromRetrospectivesand Consultations 38. The Countq Assistance Evaluation found that Bank services were of high quality but had limited influence on institutional development. The CAE found that the overall professional quality o f the Bank's services was good, objectives were relevant, and interventions were selective (see Attachment 4 for a summary). The CAE recognizedthat the Bank's program helped to avoid a collapse o f key public services and industriesduringthe initial transition, improve macroeconomic management, and provide income support to many o f Mongolia's poor. Even though the outcome o f Bank assistance was rated as moderately satisfactory, the C A E found that institutional development was modest and sustainability unlikely. It noted the Bank's relatively late shift away fi-om emergency-type, short-term support and the limited linkages between the lending program and the policy and institutional reform - 12- agenda, All donor outcomes could have been better if agreements on strategic frameworks could have been reached for more sectors. The CAE also noted the limited effect o f capacity-building efforts. While initial technical assistance (TA) helped to change the thinlungtoward a market-based economy (particularly within the Ministry o f Finance and the Central Bank), many aspects o f the institutional framework for a market-based economy remain fragile (lack o f compliance with new laws and regulations, weak institutional capacity and resources, and poor accountability o f public service delivery). 39. The Country Portfolio Performance Review found satisfactory project outcomes, but weak implementation capacity. The 2002 CPPR found that, while completed projects had satisfactory outcomes, projects in Mongolia face high risk o f not achieving their development outcomes, largely because implementation capacity remains a major constraint. The CPPR diagnosed three core problem areas: (i)lack o f project readiness and significant delays in project start-up; (ii) complex design and scope o f project components, which constrain project implementation, given weak capacities; and (iii) lack o f implementation capacity inProject Implementation Units (PIUs) and line ministries. The CPPR developed performance criteria, now regularly used to monitor progress in the Quarterly Portfolio Performance Reviews (QPPR), and highlighted the need to enhance focus on policy and institutional reforms and strengthenproject Monitoringand Evaluation (M&E) systems. 40. Informal reviews of performance under the 1998 CASfound that while most objectives were achieved, external factors, shifting client commitment, and a weak CAS monitoring system limited the impact. The first three CAS objectives-supporting macroeconomic stabilization, facilitating private sector development, and developing infrastructure-were largely reached, albeit with delays. Progress under the fourth CAS objective-improving equity in development-was limited. External factors (including political instability, terms-of-trade shocks, and natural disasters) impacted on both client and Bank performance. Sustained dialogue with the Government and alignment with the IMF and other donors helped to build consensus on macro policy and public and energy sector reforms. Insome other areas, lack o f consensus on the policy and institutional reform agenda restricted progress. Shifting commitments to implement key reforms (such as rebalancing utility tariffs, cessation o f quasi-fiscal activities) limited the sustainability and impact o f development initiatives in several sectors. Establishment o f the country office in 1998 increased Bank participation in policy dialogue and improved overall effectiveness. Deliberate disengagement in certain sectors where other donors had lead roles (e.g., social) ledto critical gaps in Bank knowledge and ability to provide policy advice. The varying quality and relevance o f CAS monitoring indicators, and limitations inthe systems to measure them, complicated monitoring and the assessment o f development impact. 41. The Client Survey identiJied policy advice as the Bank's greatest value. A Client Survey conducted inearly 2003 solicited the views o f a range o f local stakeholders on Mongolia's development and Bank assistance (see Attachment 5 for key findings). Clients reported that Mongolia's primary challenges are its economy, corruption, and poverty, followed by education. Areas identified as important for Bank involvement included economic growth, followed by strengthening the financial system and the private sector, and helping to reduce poverty. Respondents identified the Bank's greatest value inMongolia as policy advice, followed by financial resources and donor coordination. The strong importance attached to policy advice i s notable, as Client Surveys in most IDA countries identify financial resources as the Bank's highest value. The Bank i s perceivedpositively for its work in donor coordination and i s considered effective, but familiarity with the Bank i s fairly low. Respondents also believe the Bank i s less effective in building community-level capacity and including local communities and civil society in strategy development. 42. CAS consultations underscored the need to place greater emphasis on development results, Extensive consultations conducted in preparation for the CAS included a two-day retreat with the Mongolian Prime Minister and Cabinet and various consultation events with a wide range o f - 13 - stakeholders: government officials, members o f Parliament, civil society representatives, the private sector, local and international NGOs, donors, and project staff inUlaanbaatar and provincial centers. In the consultations the Prime Minister emphasized the need to move from emergency support to longer term development needs, and from drafting laws and regulations to implementing and enforcing them. In line with Client Survey findings, participants in the CAS consultations highlighted the need for economic growth, rather than direct transfers, as key to poverty reduction. Consultation participants strongly urged greater attention to governance, rural needs, and the sustainable use o f environmental resources. Participants at several consultations raised questions about donor effectiveness and called for greater civic engagement inthe design, implementation, and monitoring o f development projects. B.LessonsLearned 43. Key lessons can be drawnfrom Bank assessments and direct stakeholder feedback. The lessons focus on placing more emphasis on building capacity and institutions, building shared strategic frameworks, building on the Bank's strength in policy work, maintaining a sustained dialogue on critical issues, undertaking measures to enhance project effectiveness and outcomes, and increasing field presence. 44. Sharper focus is needed on capacity-building and institution-building. Improving these efforts will require greater attention to sequencing and selectively integrating capacity-building support within overall public sector reforms, establishing effective M&E systems to measure desired results, and emphasizing participatory approaches. Buildingon lessons of experience, some recent Bank-supported TA has been effective in building capacity (box 3). Strengthening institutional accountability mechanisms and civic engagement (such as transparency and information-sharing systems; consultation processes; and mechanisms to engage Civil Society Organizations and the private sector in policy development, implementation, and monitoring) are also key to improving the impact and sustainability o f institution-building efforts. Box 3: Effective TA: Debt Management in Mongolia The Bank has been able to provide effective TA to Mongolia to strengthen capacities and institutions in several areas. An example i s the recent Bank-supported TA component which has significantly improved Mongolia's debt management system. The debt database was upgraded to the UNCTAD Debt Management and Financial Analysis System (DMFAS) in 2002 under a newly-established Debt Management Division in the Ministry o f Finance and Economy. Using a unified system linked to the Central Bank, the unit can now provide timely information on external and domestic debt, onlending activities and repayment schedules on a loan-by-loan basis, and can analyze debt sustainability and liquidity positions for decision-making. This enhanced capacity was effectively used in the negotiations to settle the outstanding pre-transition Russian debt. Mongolia i s one o f the countries which can electronically report up-to-date data to the Bank's Debt Reporting System in a process that now takes only hours compared to months previously. Factors contributing to the success o f this component included commitment and ownership at all levels o f government, a good procurement process, effective collaboration with the vendor, high quality o f the technical staff, valuable study tours, and extended training and change management with a resident advisor inplace. 45. Building and implementing shared strategic frameworks that align donor and government resources with development results are crucial. Given the large amount o f ODA available to Mongolia, better alignment o f donor resources i s a key leverage point for improving development effectiveness. Considerable progress has been made in developing strategic frameworks-including the EGSPRS and certain sector strategies. But, the alignment o f development resources and the quality and comprehensiveness o f strategies vary considerably across sectors. Continuing effort will be needed to further refine the results frameworks, translate strategic priorities into specific actions in sectors where consensus has been largely achieved (as inenergy and the public sector), and strengthen the knowledge base and facilitate dialogue insectors where consensus has not yet been reached. - 14- 46. The Bank should build on its strength in policy work. As Mongolia places high value on the Bank`s policy work, the Bank should build on this strength, focusing more on policy work while maintaining selectivity in lending. It should also work to integrate better its Analytical and Advisory Activities (AAA) with lending and technical assistance to improve its impact. Undertaking AAA more collaboratively i s another important way to enhance results and support capacity-building. Involving government counterparts at each stage o f the AAA cycle, providing adequate resources for dissemination and dialogue around findings, and ensuring linkage o f policy work with sector strategies and projects are all important. Analytical work in non-lending sectors o f the Bank i s desirable to support key reforms, strengthen the Bank's knowledge base, and contribute to the development o f shared strategic frameworks. 47. Sustained dialogue is criticalfor developing consensus on complex issues. Extended and timely Bank engagement with the Government has been a particularly important success factor in supporting reforms. Sustained dialogue i s key to addressing areas where progress on structural reforms has been more limited (as with rebalancing utilitytariffs). It i s also important that the Bank engage and sustain a dialogue in areas where significant tensions exist between advocates o f interventionist and open-market policies (as with the regional development strategy). 48. Better eficiency and outcomes could be gained at the project level. Assessments highlight the need for more attention on outcome-oriented development objectives inproject design, supervision, and M&E systems. Specific measures may include retrofitting existing projects with outcome/impact indicators. Strengthening the Government's capacity to establish effective M&E systems that monitor project outcomes, as well as process indicators, can also improve project effectiveness. 49. The Bank's field presence is critical to donor-coordination efforts, sustained dialogue, and improved project implementation. Improving the Bank's development impact requires efforts to enhance the capacity and responsibilities o f the local office. Efforts to deepen the Bank's engagement insector dialogue, donor alignment, and institutional capacity-building, all ofwhich are labor-intensive and time-consuming, will place increased demands on the local office and will require efforts to build and strengthen office systems and capacity. IV. BANK GROUP ASSISTANCE STRATEGY A. BankGroup Activities 50. The World Bank strategy for FY05-FY08 reflects the Government's development priorities, as laid out in its EGSPRS, lessons from Bank engagement through the last CASperiod, and the Bank's comparative advantages. Though it represents a significant departure from the strategic objectives and approach o f the previous CAS, the strategy reflects and builds upon the ongoing evolution o f the World Bank's assistance inrecent years. 5 1. The CAS strategic objectives target a subset of EGSPRSpriorities. Within the comprehensive EGSPRS agenda, Bank assistance will focus selectively on addressing core systemic and institutional constraints to growth and poverty reduction to complement and enhance the impact o f other development resources (table 3). The CAS objectives are: Consolidating the transition. The first CAS objective supports critical remaining transition challenges that cross-cut EGSPRS pillars. Under this objective, the Bank will support the Government's efforts to implement expenditure and administrative reforms across public sector institutions. These reforms aim to improve service delivery for human development, the enabling environment for the private sector, and macroeconomic stability. Support for civil service reforms in particular, will be important for improving the impact o f capacity-building - 1 5 - efforts throughout the public sector. Reflecting the strong consensus built around the Government's public sector reform agenda, its alignment with the findings o f Bank analytical work, and the good partnership that has evolved, the Bank will support these reforms with a broad mix o f instruments, complementing the support o f ADB and others. For the related reforms in the infrastructure and social sectors, and for private sector development, the Bank will place greater emphasis early in the CAS period on analytical and strategy work to build agreement around reform agendas. 0 Reducing vulnerabilities. The second CAS objective supports EGSPRS pillar 3-"Enhancing regional and rural development and environmentally sustainable development"-with interventions that address underlyingand differing sources o f rural and urban vulnerability. In rural Mongolia, the deterioration o f multiple systems that supported the livestock sector and rural economic activity (pasture and fodder management, veterinary services, well maintenance, collection and distribution) has sharply increased vulnerability at the household and macro levels. Increasing rural-urban migration has led to the rapid growth o f vulnerable populations living in temporary, peri-urban "ger" districts around city centers. In addition to support under Objective 1 to improve the sustainability o f key services (social protection, health, education) important for vulnerable populations, Bank assistance will build on analytical work and previous operations as well as the assistance o f other donors. Support will be provided to scale-up and institutionalize innovative rural approaches to reduce vulnerability, strengthenthe financial sustainability o f municipal service delivery to peri-urban populations, and assist in the effective costing and analysis o f national programs to promote balanced regional development. Aligning policies and resources with development results. The third CAS objective directly supports EGSPRS pillar 5-"Promoting good governance and implementing and monitoring the strategy", while building linkages with related activities supported under the first two CAS objectives, inparticular, the public sector reforms which are central to improving governance. Closely linked to these reforms, this objective supports the Government's efforts: (i) at the national level: to strengthen the institutional framework for EGSPRS implementation and monitoring, further refining priority results and indicators, aligning public expenditures and donor resources across sectors, and building participatory monitoring systems that provide feedback to resource allocation decisions; (ii) at the sector level: to strengthen sector strategies that prioritize and sequence reforms and build institutional capacity and systems that in turn support national development results; and (iii) the project level: to strengthen the linkages o f at projects with larger development outcomes, including efforts to streamline and harmonize project and government processes. Buildingon continuing assistance provided by the Bank and other donors (such as the UNand ADB) to support parts o f this framework, this objective will assist inthe buildingo f linkages among these often compartmentalized initiatives. 52. The new CAS objectives reflect a shift from the previous CAS, changing client needs and priorities, and on assessment of lessons learned and the Bank's comparative advantage. Compared with the last CAS, key differences in objectives include: (i)less Bank emphasis on support for macroeconomic stability, reflecting the continuing lead o f the IMF and the significant progress inrecent years; (ii) more emphasis on core transition issues, given their critical importance for macro stability, the performance o f the public sector, the enabling environment for the private sector, and better service delivery; (iii) more emphasis on vulnerability, in view o f the complex nature o f these issues in the Mongolia context and the requests for enhanced Bank support; and (iv) sharper focus on results, in view o f the importance o f the Bank complementing and increasing the impact o f other development resources, including public expenditures and donor support. - 16- Table 3: EGSPRSPillarsand CAS Objectives EGSPRS PILLARS CAS OBJECTIVES nsuringmacroeconomic stability and public sector work (below) effectiveness Supportingproduction Support development o f the PSD strategy; strengthenregulatory framework for and exports and _____________________________ _________________-_________________________------- financial sector; judicial and legal reforms to improve private sector environment _---_-___ ................................................ improvingthe Support infrastructure reforms to develop comprehensive Public Investment environment for private- Program, rebalance tariffs, encourage private participation sector-led development Fosteringsustainable Improve financial sustainability and targeting- o f social protection, health, - Enhancingregionaland rural development,and environmentally sustainabledevelopment Promotinggood governance, and implementingand monitoringthe strategy 53. To enhance impact, the Bank will also introduce further changes in the way of doing business, reflecting the evolution of the portfolio and the lessons learned. Key elements o f this new approach include: Sharpening the focus on buildinginstitutional capacity to deliver key development results. More emphasis on building partnerships and agreement on common strategic frameworks that prioritize and sequence policy and institutional reforms and capacity-building efforts to strengthen institutions. A carefully sequenced program o f policy work that is conducted in a collaborative way to ensure that analytical findings inform sector dialogue and strategies as well as project interventions. Greater integration o f the Bank's program with the policy and institutional reform agenda by sequencing analytical work and support for sector strategies ahead o f Bank adjustment and investment lending with more policy content. Modulating Bank support to the level o f consensus and knowledge, engaging with a broader mix o f instruments where there is strong agreement (such as in the public sector), and with more policy work where there are knowledge gaps or agreements have not been reached. Piloting innovative, bottom-up approaches. - 17- CAS Objective1:Consolidatingthe Transition 54. TheJirst CAS objective supports elements of the EGSPRSpillars to deepen the transition to a market economy by removing the remaining structural barriers to effective public service delivery and a vibrant private sector. Under this CAS objective, the Bank will support reforms to build a more performance-oriented public sector -- closely linked to reforms and investments to improve the delivery o f key infrastructure and social services, and reforms to improve the financial, legal, and regulatory environment for the private sector. The broad lines o f the results expected to be achieved over the CAS period can be found below (table 4) and are detailed inAttachment 1. Table 4: Consolidatingthe Transition Longer-term/ higher order CAS outcomes the Bank expects Instruments supporting country outcomes to influence infour years outcomes Improvedservice deliveryand Strengthenedsystems and capacitiesto alignpublic Portfolio: macroeconomicstability through expenditureswith policy priorities FiscalTA; EconomicCapacity better efficiency and effectiveness Comprehensive,rollingMTEF alignedwith TA Credit of the public sector EGSPRS priorities inplace andannually Lending: Budgetdeficit decreasesfrom updatedbasedon feedback fromnational PRSC-I,11,111, IV; 6.2% in2004 to 4.5% in 2006 M&E systems JudicialandPublic Sector Wage bill as share of GDP Generalpublic have access to all budget m:Public ReformTA decreasesfrom 8.5% in2003 documents on timely basis Expenditure Incentive-basedcivil service established Review/IntegratedFiduciary Salaryrange broadenedby 25% Assessment Effective humanresourcessystemimproves sectoral staffingmix consistentwith MTEFIEGSPR~ goals Growing, vibrant private sector Constraintsto avibrant privatesector identified Portfolio: Financial Sector Adj FDIas a share of GDP throughthe InvestmentClimateAssessment, and Credit; FinancialCapacity increasesfrom 7%to 11% by key obstacleseither removedor inprocess of being DevelopmentProject;Private 2007 removed SectorDevelopment Strongerdiversificationof Government anddonor consensuson Credit-I economicbase prioritized PSDagenda Lending: PRSC-11; PSDC-11; Exportsas share of GDP Improvedperformanceo fthe bankingsector Judicial andPublic Sector increases from47% to 60% by with reductioninnon-performingloans from ReformTA 2007 8% of assets to 5% &: InvestmentClimate Assessment, PSD Strategy; FinancialSector Mid-term Review Improvedefficiency and More cost-efficientand sustainable infrastructure Portfolio: Transport distributiveimpactof infrastructure investments DevelopmentProject; Energy investmentsto support service Costedpublic investment program, consistent Credit delivery andprivatesector with the MTEF andEGSPRS, prioritized Lending:UlaanbaatarServices- m:Sector 11; InfrastructureProjects (2) development across sectors Strategies Dealwith specialneedsof Adequateresourcesallocatedfor maintenance Mongolia as alandlocked Greater privatesector participationin nation. provision of infrastructure Strengthenedhumancapital Improvedfinancial sustainabilityof health, Portfolio: EconomicCapacity Under-5 mortality decreases education, socialprotection TA Credit from 87 per 1,000 to 29 by Improvedallocationof healthandeducation Lending:PRSC-I; 11, 111, IV; 2015 expenditures; hospital spendingdecreased Social SectorTA Primaryenrollmentincreases from 85% to 70% of total healthspending m:Sector Strategies; to 100%by 2015 Improvedtargetingand sustainabilityof social PovertyAssessment/PETS assistance programs, including pensions 55. Consolidating reforms for a more performance-based public sector. The Bank will intensify support for the Government's public sector reform agenda under the PSMFL, which i s well-aligned - 1 8 - with the findings of extensive analyticalwork by the Bank and other donors. Public sector reforms will be supported through a mix o f instruments - including a series o f single-tranche Poverty Reduction Support Credits (PRSC), the first o f which focuses primarily on the public sector and institutional reform agenda (with follow-on actions in subsequent PRSCs), an ongoing Economic Capacity TA Credit (ECTAC), and an ongoing program o f analytical work and policy dialogue. The Bank i s collaboratingwith other donors active inthe sector, including the ADB and the IMF. e Strengthen public expenditure management to improve the alignment of budgets withpolicies and the efJiciency of public spending. The Bank will support reforms to articulate and institutionalize a full-fledged MTEF that aligns budgets with policy priorities set in the EGSPRS, improve budget coverage and financial management through implementing a Government Financial Management and Information System, improve public procurement processes, and strengthen access to public expenditure information. e Reform and restructure the civil service and introduce performance-based incentives for public servants. The Bank will support the further articulation and implementation o f a comprehensive civil service reform program designed to streamline the size o f the civil service, strengthen performance-based salary and bonus systems, and integrate fragmented management systems, in part through introducing a HumanResource Management and Information System. 56. Establish a sound enabling environment for the private sector. The Bank's support will focus on further consolidation o f market reforms to establish a sound institutional and regulatory environment for the private sector. Support will be provided through adjustment lending (the PRSCs, particularly PRSC 11, and an ongoing financial sector adjustment loan), and analytical work to address key knowledge gaps and to inform the development o f a private sector strategy. Support development of a comprehensive private sector development strategy. Ongoing analytical work, including analysis o f sources o f growth (mining, cashmere, and trade), an investment climate assessment, and a supply-chains study, will be integrated with work by the Govemment and other development partners, including USAID, ADB, JICA and GTZ, into an overall assessment o f the sources o f growth for Mongolia and the strategy for private sector development. Follow-up activities will be supported by measures inPRSC I1and I11to further strengthen the regulatory and incentive framework for private sector development, and explore ways to address training needs. e Support deepening ofJinancial intermediation. Support to strengthen the regulatory framework for banks and improve commercial bank risk-management will be continued under the PRSCs and the ongoing financial capacity building project. The Bank will support (with the ADB) a financial sector mid-term review, which has provided the framework for donor interventions. Inaddition, the Bank i s planning a follow-on Private Sector Development Credit that will build on the experience with an earlier project to provide financing for PSD. The PRSC will support measures to improve the regulatory framework for the insurance industry and effective livestock insurance. It will also be closely linked to interventions that target reduction o f rural vulnerability (the ongoing Sustainable Livelihoods Project and a proposed pilot index-based livestock insurance project). IFC support will continue to focus on the financial sector, including possible further investments-and TA to recently privatized banks, TA to develop the enabling environment for a leasing industry, and efforts to enable banks to increase their lending to SMEs. 0 Support the strengthening and effective implementation of judicial and legal reforms and the rule- oflaw to facilitate private sector activities. The Bank-supported Legal Reform Project has been instrumental in improving access to legal information, establishing specialized courts, and improving legal education. Progress over the past few years will be reviewed in FY05 with the Government and other donors involved in supporting the sector through an update o f the Legal - 19- Needs Assessment (done in 2000). The priorities identified could be supported by a follow-on project. In addition, PRSC-I1 will focus on streamlining government processes and improving the transparency o f regulations. 57. Support reforms to improve the eficiency and distributive impact of infrastructure investments. Provision o f infrastructure i s critical for supporting service delivery and economic activities given Mongolia's vast, isolated territory and harsh climate. However, the impact o f the considerable investment devoted to infrastructure has been limited by weak capacity to cost and prioritize, and develop sustainable financing mechanisms. While recognizing the long-termnature o f the challenges in the sector, Bank assistance will place greater emphasis on reforms that strengthen institutional capacity to manage infrastructure in support o f objectives for equitable growth and improved service delivery. These objectives will be supported through assistance in developing a comprehensive infrastructure strategy, closely linked to public expenditure reforms, to build agreement on outstanding issues such as tariff rebalancing, and more closely link Bank investments in essential infrastructure with these reforms. Develop an integrated infrastructure strategy with the Government, donors, and other stakeholders. This strategy will be aligned with a comprehensive public investment program and the MTEF to cost and set priorities for the many infrastructure needs, build a more comprehensive and better sequenced policy and regulatory reform agenda, and address inequities in infrastructure service delivery resulting fkom hidden subsidies. The strategy will underpin future Bank support for infrastructure development, including cross-sectoral support. Support reforms to improvefinancial sustainability and create an enabling environmentfor public- private partnerships in the energy sector. Based on dialogue in the energy sector with the Government and major donors, the Bank will support the Government inestablishing commercially viable public-private investment partnerships to mobilize internal and external resources to achieve universal access to affordable energy (heat/electricity) services inrural and peri-urban areas-and to implement high-priority infrastructure investments (such as hydropower, urban heating, transmissioddispatch reinforcement, integrated road/energy urban services). This will be achieved through the Energy Credit to ensure the financial sustainability o f electricity distribution companies, PRSC-I1to consolidate the Energy Regulatory Agency and implement pricing reforms, and new lending to facilitate the establishment o f public-private partnerships, takmg regional dimensions into account. Strengthen institutional capacity to manage the road network to meet the objectives of equitable growth and service delivery. The Bank will collaborate with the ADB and JICA on updating the roads sector strategy and strengthening the investment program to account for recurrent costs. The Transport Development Project has been supporting better accessibility o f isolated and remote central and western regions, and a subsequent project i s envisaged to finance priority segments identified within the overall sector strategy and integrated network. Increase access to ICT services through articulation of a universal access strategy and establishment of a universal servicefund. The Bank will support activities to develop an enabling environment and funding mechanism to increase access to Information and Communication Technology (ICT) infrastructure and services, particularly in rural areas. Policy and regulatory reforms, seed financing o f the universal service fund, and technical assistance in ICT sector interventions will be supported under the PRSCs, planned AAA and infrastructure investments. 58. Strengthen institutional capacity to support human development. While other donors, including the ADB and Japan, will continue to take the lead in assisting the Government inthe social sectors, the Bank will play an increasing, but narrowly-focused role in supportingreforms to improve the financing - 20 - and targeting o f social sector programs. Bank support will be aligned within the strategic frameworks that the Government and lead donors are implementing in these sectors, and linked with the sequenced program o f policy and institutional reforms supported under the PRSCs. Initial PRSC reforms will target public spending, transparency in financial management, and fiscal sustainability. Later PRSCs (particularly PRSC 111) will put more emphasis on sectoral policies and human development outcomes. The PRSCs will be complemented by capacity-building work under the ongoing ECTAC, PHRD and LDF grants, a possible stand-alone TA project, and the ongoingAAA program closely coordinated with the ADB and Japan International Corporation o f Welfare Services. The Bank will support reforms and actions to: 0 Improve thefinancial sustainability and targeting of the pension and social insurance programs. The Bank will support a series o f measures-through PRSCs, AAA, and capacity building-to help reform the pension system and improve the administration and targeting o f social protection systems. 0 Deliver better health sewices by strengthening transparency and sustainability of the health financing system, improving access to essential drugs, and strengthening the enabling environment for private participation. Within the Government's health sector strategic framework, the Bank will assist inrationalizing health assets and expenditures to better target health needs, including support to develop a hospital optimization plan, strengthen the system to procure and distribute essential drugs, and develop better standards to regulate private participationinthe sector. 0 Improve delivery of education services through better linkage of expenditures with needs and strengthened systems in higher education accreditation and M&E of educational outcomes. For public expenditures, the Bank will support the development and implementation o f more efficient education financing norms for primary, secondary, and tertiary education, in line with MTEF targets and policies. It will also support strengthening the accreditation system for private, higher education institutions and upgrading the student assessment system to better measure educational outcomes nationwide. CAS Objective 2: Reducing Vulnerabilities 59 TheBank will continue to expand its support to strengthen systems that reduce risk and enable improved sewice delivery to key vulnerablepopulations. The Bank will continue to pursue innovative approaches to reduce rural vulnerability, support better management o f environmental resources that improve human security, strengthen the financial sustainability o f key services to vulnerable urban populations, and provide options to strengthen the effectiveness o f national initiatives to balance rural, regional, and urban development (table 5). Interventions to strengthen the delivery o f social protection, health, and education services under CAS objective 1will also support this objective. 60. Address key sources of rural vulnerability. The Bank will continue to support new approaches to identify, strengthen, and replicate local and national mechanisms to reduce rural vulnerability. These include innovative mechanisms that reduce risk from climatic shocks, as well as initiatives that reduce vulnerability by improving the environment for rural economic activity. The Sustainable Livelihoods Program has been intensively pilot-testing new approaches to reduce risk and support growth in eight selected "aimags" (provinces). The second phase o f the Program (SLP-11) would scale up and "scale out" the tried and tested institutional innovations to the national level from the pilot "aimags," and will likely place a greater emphasis on activities related to rural growth, including support for livestock marketing and production systems. These efforts will be strongly linked with further Bank support for the Government's rural development strategy, and a greater emphasis on buildingsynergies with rural - 21 - Table 5: ReducingRuralandUrbanVulnerability Longer-terdhigher order CASoutcomes the Bank expects to injuence Instruments supporting infour years outcomes Systems strengthened, and new mechanisms Portfolio: Sustainable service delivery to reduce rural- established on a pilot basis, to reduce rural Livelihoods Project urban disparity vulnerability. Improved community pastoral Lending: SLP-11; Livestock production riskmanagement intarget regions [ndex-BasedLivestock increases by 3.5% per year 0 Proportiono f herders making adequate [nsurance Project; Animal losses from winter winter preparations increased by 30% in Land Administration disasters decreases by half eight target provinces Management Project; PRSC-V; and households losing all Herders covered by livestock insurance inm:Poverty Assessment; animals reduced by 60% by pilot provinces increased from zero to 3- Decentralization Study 2014 7% Enhanced enabling environment for rural investment 20% o f target group have access to microfinance services Improved mechanismto target rural expenditures on infrastructure through greater participation Improved sustainable Improved environmental and natural resource Lending: PRSC-11, 111;Forestry management o f natural management Project resources to reduce income Public participation inEIA process and m:Natural ResourceUse variation and support steady access to data and i n f o m t i o n o n Strategy growth environment systematically allowed Others: IDFto Ministryo f Forest cover does not Nature and Environment decrease from 8% 0 Community-based forest management leads to reduction inforest loss inthree Carbon dioxide emissions pilot "soums" (counties) reduced from 4.19 tons per person in2000 Proportion o fpopulation Strengthened municipal govemance and Lending: Ulaanbaatar Services- without access to safe drinking service delivery to serve vulnerable 11;PRSC-IV water halvedby 2015, from populations 45% in 1990 Number o f persons per water kiosk down from 1,490 in2004 to 1,275 in2008 Proportion o f population using Municipal and donor resources aligned to adequate sanitation facilities Ulaanbaatar city development strategy increased from 25% in2000 to 50% in2015 Sustained reductions inregional Options to improve impact and sustainability &: Regional Development disparities ineconomic growth o f regional development expenditures PolicyNote; Investment Climate and humandevelopment provided and Supply Chain studies; CEMi Regional development interventions Development Policy Review; better costed and prioritized inframework Decentralization Study; o f MTEF and EGSPRS; reflect Integrated Infrastructure international experiences, good practices Strategy projects supported by numerous donors, including ADB, Japan, EU, USAID, FAO, and UNDP, on a wide range of rural issues (including veterinary services, cooperatives, integrated crop and livestock management). - 22 - Pilot and scale-up mechanisms topreparefor and mitigate riskfrom periodic episodes of unusually severe winter weather through better monitoring and forecasting of climatic and pasture conditions, fodder reserve systems, and disaster responseplanning. Inaddition to ongoing support for these activities provided by the ongoing SLP project, the Bank will extend efforts to develop a pilot index-based livestock insurance system through an anticipated stand-alone project. Further support to improve pasture management will be provided through a planned Land Administration and Management Project, building on previous Bank-supported analytical work to assess possible options to strengthen the management o f Mongolia's open access pastures. Support new approaches to improve the environment for rural economic growth. Rural vulnerability will be further addressed through efforts to improve the environment for rural economic growth and increases in productivity, complementing the work o f other donors. These include initiatives to extend access to rural microcredit and financial services, improve the targeting and efficiency o f rural infrastructure investments through increased participation, and analytical work (on supply chains, decentralization) to identify possible approaches to address key rural barriers to growth. 61. Improve environmental governance and management of natural resources. In recognition o f the strong linkages between vulnerability and the increasing exploitation o f natural resources that has accompanied transition, the Bank will support efforts to improve environmental governance. at the national and local levels (Attachment 6). At the national level, analytical work under an ongoing Institutional Development Fund(IDF) grant will support reforms to strengthen the existing institutional framework for environmental management and enforcement. Reforms will be supported by the PRSCs, particularly the overall public sector improvementsbeing sought, and complemented by M A including regular environment monitors. Improvements will include the broadening o f public participation in the Environmental Impact Assessment process and increasing the overall access to environmental data and the ability to incorporate this information into policies and programs. At the local level, the Bank will support the piloting o f community-based use and management o f forestry resources to reduce over- exploitation o f rapidly-dwindling forest resources that provide key sources o f fuel, watershed protection, and critical habitat for biodiversity under a proposed forestry project. These efforts may be supplemented by Global Environment Facility (GEF) funds. Support will be closely coordinated with other donors active inthe sector including the ADB, UNDP, USAID, Germany (GTZ), the Netherlands, and Sweden. 62. Improve municipal service delivery for vulnerablepopulations in peri-urban areas. The Bank will continue to build municipal government capacity inUlaanbaatar and other major urban centers to effectively and sustainably provide services to the growing numbers o f rural migrants living in "ger" districts surrounding these cities. Further support will be provided through the Second Ulaanbaatar Services Improvement Project to improve the access o f "ger" district residents to clean water through investments in physical infrastructure and increased emphasis on TA to strengthen financial sustainability and administration o f the municipal water authority. Based on the new project and ongoing dialogue with the municipality o f Ulaanbaatar and donors (including ADB, UN, USAID, World Vision, and Japan) within the context o f the city's development strategy, the Bank will address broader municipal governance issues by supporting further alignment o f donor and municipal resources around priority needs in municipal administration, land management, and development o f integrated urban strategies for Darhan and Erdenet. The poverty assessment and related analytical work will shed light on the composition and characteristics o f vulnerable populations inperi-urban areas and on rural- urban linkages, particularly migration. It i s also anticipated that this work will build on the successful cooperation among the Municipality o f Ulaanbaatar, international and local NGOs including World Vision, Save the Children-UK, and the Christina Noble Foundation, and the Bank ina nearly-completed Japan Social Development Fund-supported project to help street children. - 23 - 63. Assist the Government in analyzing the viability of options to support its regional development objective. While there i s widespread support for the underlying objectives o f the Government's regional development strategy, concems continue to be raised about the costs and benefits o f the approaches proposed - including large infrastructure investments, free trade zones, and support for specific industries -- in the strategy, particularly given the limited success o f similar approaches in other countries. Analytical work on the regional development strategy, the integrated infrastructure strategy, and on decentralization will seek to assist the Government in assessing options for achieving regional development objectives based on analysis o f costs and benefits and international experience. The analytical work on regional development and decentralization will be done in close collaborationwith the Government, ADB, Japan, GTZ, and other donors, and will draw upon findings o f the integrated infrastructure strategies and the investment climate assessment and supply chains study. It will analyze prospects for economic growth in the various regions and the proposed "growth poles" and will contribute to the debate on their economic and financial viability. It will also assess the implications o f this analysis for the overall decentralization program. After the first three PRSCs, consideration will be given to addressing issues o f regional development and decentralized public administration, including needed analytical work to fill knowledge gaps, inthe context o f subsequent PRSCs. CAS Objective 3: Strengthening theAlignment of Policies and ResourcesAround Results 64. The third CAS objective directly supports the fifth pillar of the EGSPRS, but it reflects the Bank's evolving approach in Mongolia -- emphasizingpartnership and collaboration at multiple levels to improve results. It i s aimed at buildingsynergies among substantive priorities and approaches at the national, sectoral, and project levels. Many o f the elements o f this approach have been pursued in the context o f previous Bank assistance including Consultative Group (CG) meetings, sector work, individual projects, and ongoing formal and informal coordination efforts. This new approach seeks, by contrast, to support the Government inbuildinglinkages that integrate disparate systems and initiatives, funded by domestic resources and ODA, toward the national development priorities for poverty reduction and growth (table 6). 65. Strengthen the national institutional framework for further developing, implementing, and monitoring the EGSPRS. The Bank will continue to provide support to strengthen key elements o f the institutional framework for implementing the EGSPRS. It will support the Government in the annual updates o f the EGSPRS using mechanisms (Trust Funds [TFs], consultants) similar to those used for supporting the EGSPRS itself. It will also support government efforts to develop and strengthen mechanisms to improve public participation in EGSPRS implementation and monitoring through the PRSP TF, a small-grants program, AAA on civic engagement, and Bank-Netherlands Partnership Program grants. The Bank will work with the UNDP and the ADB through ongoing AAA and the use o f trust funds to help the Government strengthen the reliability and frequency o f the national poverty monitoring system and enhance the capacity o f the National Statistical Office. Support will also be provided to strengthen sector ministerial M&E systems (especially in infrastructure, agriculture, education, social welfare, and environment) and better integrate them with the national EGSPRS monitoring system. To ensure that Bank support on these initiatives i s well aligned with support from others, the Bank will participate inthe multi-sector Government-Donor Working Group that i s about to be formed and in the ongoing UNThematic Group on the MDGs. The Working Group will focus on integrating EGSPRS and MDG M&E systems, harmonizing procurement and project management procedures, supporting public sector reforms, and integratingrural and regional development. 66. Facilitate the development and implementation of sector strategies linked with the EGSPRS. This support, embedded throughout the Bank's assistance program, forms a common and critical set of interventions that will contribute to the development and implementation o f the EGSPRS. Sector strategies are already inplace for a number o f sectors (energy, education, and health). Inmany others, efforts are needed to further articulate and implement strategies (private sector development, transport, - 24 - agriculture). The Bank plans to increase its emphasis on strategic frameworks to build agreement around outstanding reforms and prioritize investments. Shared sector strategies based on collaborative analytical work will provide an important opportunity for the Bank and others to take a new approach to institution-building efforts by setting measurable goals for institutional capacity in a given sector, sequencing and integrating reforms o f institutional systems with capacity building efforts, and emphasizing initiatives that strengthen institutional mechanisms to promote accountability and civic engagement. Table 6: StrengtheningAlignment of PoliciesandResourceswith DevelopmentResults Longer-term/ higher Instruments supporting order country outcomes Expected CAS outcomes infour years outcomes Institutional structure for Oversightandlineministrieshaveappropriate national-level m:Poverty EGSPRS implementation implementationandM&E frameworks to facilitate alignmentof AssessmentPETS;Civic enables effectivepublic govemmentanddonor resources, reliably assess progress engagement assessment sector anddonorresponses toward EGSPRS goals, and adjust allocationofresourcesbased Others: PRSPTrust Fund to support development on M&E feedback for monitoring (with priorities (see also CAS EGSPRSgoals further prioritized andcostedinframework UNDP); Multi-sector Objective 1) of MTEF; updates reflect findings of M&E systemand Govemment- Donor revisionsinsector strategi,es Working Group EGSPRSmonitoringsystem strengthenedwith indicators reflectingnationalpriorities, fully integratedwith MDGs, andreliably andregularlymonitored Civic engagement mechanismsinstitutionalizedin implementationandmonitoringof EGSPRS Improvedresultsfrom the Greater consensus andalignment amongdonors andthe AAA:Sector strategiesin implementationof sector Govemmenton costedandprioritized sector strategiesthat are PSD, infrastructure,social strategies linked to MTEFIEGSPRS (including infrastructure,social sectors, etc.; sector, andpublic sector management) Others:Participationin Goa.-Donor Working Groups; Consultative Grouomeetings Strengthenedgovemment Govemmentuses CGmeetingsas amechanismto align donor Others: Govt.-Donor capacity andsystems to resourceswith EGSPRSpriorities, informedby M&E feedback coordinate ODA insupport Working Groups; o f EGSPRSandnational Government-DonorWorking Groups institutionalizedand serve ConsultativeGroup(CG) development results as mechanismto align donor resourceswith nationalpriorities meetings; harmonization and strategies, informedby M&E systems Harmonizeddonor andgovemmentprocessesallow more efficient use of donor resourcesinsupport o f development priorities, reducedtransaction costs andburden on govemment The Govemmentandmajor donors use harmonized procurementproceduresleadingto reducedprocurement time andincreasedtransparency Govemmentreviewsof donor portfolios harmonizedand focused on developmentoutcomes PIUs consolidated, integratedwith counterpart agencies and sector strategies 67. Strengthen the Government's efforts to coordinate aid and harmonize donor procedures. The Bank will continue to participate actively in aid coordination and harmonization efforts. As co-chair (with the Government) o f the CG meetings, the Bank will focus attention on the implementation o f the EGSPRS, and the need for donor alignment around this. The C G meetings and continuing dialogue will provide opportunities for the donor community to receive and discuss progress reports and updates on EGSPRS implementation and plans linked to the medium-term expenditure framework. The Bank will also enhance its participation inGovernment-Donor Working Groups inline with the lead donor(s) - 25 - concept: social sector Working Group (with the ADB, Japan, and the UN agencies in the lead); infrastructure Working Group (with the Bank, ADB and Japan taking the lead); and a multi-sector Working Group to address public sector management and govemance issues, procurement and project financial management, regionallarea-based development, and overall EGSPRSMDG implementation and monitoring. The Bank will continue its work with the ADB to support streamlining and harmonizing procurement processes. The Bank has agreed with the ADB and other donors to collaborate on addressing PIU issues-improving joint project financial management standards, aligning multiple donor PIUs with sector strategies, and where possible, consolidating and integrating multiple PIUs in a given sector to ensure that project implementation capacity i s retained in the government agency. The Bank i s pursuingjoint portfolio performance reviews (with the ADB) to emphasize project outcomes. It will expand efforts, with the donor community, to engage China and Russia indonor-coordination efforts (box 4 and Attachment 7). Box 4: Major Donor Activities United Nations. The UNDP supports the Govemment in aid coordination efforts and, with other UN agencies, provides assistance to key capacity and institution-building efforts. Inparticular, the UNsystem is helping the Govemment develop and monitor the Mongolia MDGs and providing support through its specialized agencies in each goal area. The UN system also supports good govemance and human security, enterprise restructuring, environment and natural resource management, early- childhood and non-formal education, nutrition and sanitation programs, and education. The Bank works very closely with the Government and UN system in aid coordination, aligning the EGSPRS goals with the MDGs, environment, governance and poverty research support. IMF. An IMFprogramunderthe PRGFis inplace, andthe first and secondreviews were concluded inSeptember 2003. The EGSPRS macroeconomic framework is the programbasis for the short and mediumterms. The Bank collaborates closely and regularly with the I M F on macroeconomic developments, the fiscal framework and public sector reforms (particularly wage- bill implications of civil-service reforms), the financial sector, private sector development and investment regimes, and poverty. The two institutions produce the JSAs for the PRSPs and monitor their implementation. ADB. The ADB is developing its assistance program for Mongolia for the coming years, aligning it with EGSPRS priorities. ADB activities have emphasized the financial sector (bank-risk management, capital markets, and insurance), public sector accounting and auditing, development o f highways, agricultural services (veterinary, well development, irrigation, and seeds), urban services in provincial towns, housing finance and mortgage market development, education and health services investment, and welfare systemreform. The Bank has indicated that it will take part inthe development o f infrastructure and social sector strategies and in other donor harmonization efforts with the ADB. ADB will also explore ways o f cofinancing PRSCs I1and 111. Japan. Through the JICA grant facility and JBIC concessional lending, Japanhas emphasizedthe economic sectors o fenergy, transport, railway rehabilitation, agriculture, and water supply, as well as support to tourism development, health, and education (including capacity building). It i s also updating its Mongolia assistance strategy to align it with the EGSPRS. It i s expected that the Bank and Japan will collaborate closely in the energy, transport, education and health sectors and in rural development. USAID. A major focus o f USAID is improving the private sector policy environment, development o f business capabilities, entrepreneurship, support for privatization and sector competitiveness, and urban micro business development. Other areas of concentration include legal andjudicial reform, economic policy advice, creating markets for herders, govemance and support for democracy, and environmental protection. The Bank works closely with their advisors in energy policy, financial sector and privatization policy and the minerals sector development. Over the CAS period, the Bank will closely coordinate efforts in private sector development, the urban sector and in legal andjudicial reforms. EuropeanUnion. The EUhas focused on a number o f activities that have included health, environment, democracy and rule of law and administrative support at provincial levels; assistance for statistical capacity, vocational education and training; support for SME and banking management capabilities, and aid coordination. Looking forward, the Bank will work closely with the EUincofinancing PRSC I1and 111. Germany. Germany continues to focus in generating rural sector growth, emergency relief, rural finance and cooperative development, privatization o f veterinary services, and environment and natural resource management apart from providing assistance in legal andjudicial reforms and the training o f legal professionals. Other areas include supporting policy reforms in the financial and energy sectors, training and support for SMEs and the development o f ICT inthe westem aimags. The Bank has collaborated with Germany in energy sector reforms and in the financial sector. Further collaboration will take place over the CAS period inrural and regional development, environment, energy and PSD. Sweden. Sweden has been focusing efforts in strengthening govemance and the public sector, supporting poverty research, capacity building in urban land administration, civil aviation, environment, and rehabilitation o f the transmission grid. The Bank i s working with Sweden to cofinance PRSC Ithat will focus on public sector reforms. - 26 - B.Assistance Program 68. The proposed four-year program to support the CAS objectives integrates Bank instruments around a core set of policy and institutional reforms that support implementation of the EGSPRS. Building on the high value attached to the Bank's policy work in Mongolia, a program o f ongoing, collaborative analytical work will inform the reforms to be supported. A stronger emphasis on Bank participation in ongoing sector dialogue and strategy work will seek to support greater agreement around reform agendas and alignment o f resources to the reforms. Lending will support these policy and institutional reforms -- through the sequenced series o f PRSCs, investment operations with a greater policy component linked to the sector strategies, and selected technical assistance in support of key public sector reforms. The instruments will be integrated and sequenced for the highest impact- adjustment lending supporting needed policy reforms that make selected investment lending more effective, AAA and dialogue to fill knowledge gaps and build consensus, TA Credits and training activities to address critical capacity constraints, and IFC partnerships with the private sector to complement public policies (box 5). The World Bank Institute (WBI) will also address training needs and critical capacity constraints. Box 5: The IFC inMongolia Inrecent years, IFC's focus inMongolia has been directed toward: (i) enabling financial intermediaries increase lending to SMEs; (ii) TA initiatives aimed at improving the investment climate; and (iii) larger natural resource projects. IFC currently has two projects in Mongolia. One i s a loan to XacBank to help expand lending operations and improve liquidityaccompanied by TA from SME Capacity Building Fund, designed to introduce international operating and governance standards and building o f institutional capacity. The second i s a loan extended to a leather processing facility in 1997, which i s currently undergoing restructuring. IFC is also providing advisory services and TA through the Private Enterprise Partnership to develop Mongolia's leasing industry. The project seeks to establish a conducive legislative environment for leasing; build capacity o f the proposed leasing regulator; create opportunities for investments in the sector; provide training and consulting services to enterprises interested in leasing; and conduct a public campaign to educate private enterprises, financial institutions, and regulatory agencies about leasing. T o support SMEs, IFC plans to localize its SME Toolkit inMongolia; it will provide small businesses access to Web and CD-ROM-based interactive tools and training. IFC undertook a sector study on mining in 2002. This work has been followed up by the Bank with a review on the current performance and future potential for growth inthe sector which will be the basis for a policy note and recommendations to the Government. The Foreign Investment Advisory Service (FIAS) has provided assistance o n improving the foreign investment climate inMongolia. FIAS has also offered training to the Foreign Investment and Foreign Trade Agency (FIFTA), the foreign investment promotion agency, to help it restructure. Over the CAS period, IFC will continue its focus o n the financial sector through a mix o f investment and TA activities. IFC is investigating post-privatization investment opportunities in the Trade and Development Bank and has reviewed possible participation to help the AgBank extend its rural network. Itis undertaking an initiative to identify opportunities to provide TA to Mongolian SMEs associated with the mining sector. This initiative is expected to enable Mongolian SMEs to become suppliers o f products and services to mining companies; respond to the needs o f mining SMEs in management training, business consulting, and finance; and create alternative business opportunities or formalize illegal "artisanal" mining activities. IFC plans to help Mobicom, the country's largest mobile phone service provider, to assess the viability o f a capital increase and stock listing. - 27 - 69. Adjustment lending will be provided through a series of annual single-tranche PRSCs (with actions fulJlled prior to credit effectiveness) to support selected key elements of the reform agenda in the EGSPRS. The PRSCs will be sequenced based on requisite analytical work, agreement, consensus, ownership, commitment, and readiness to implement. PRSC-I will focus on supporting the Government's public sector and institutional reform agenda within the first EGSPRS pillar. PRSC-I1 will support the second EGSPRS pillar, which aims to establish a sound institutional and regulatory environment to complete the transition to a market economy and enable the private sector to become an engine o f growth. PRSC-I11 will focus on implementingreforms inthe social sectors, and as with PRSC 11, continue to support public sector reforms. Future annual PRSCs would follow up on various policy issues and support other priorities determined by EGSPRS updates and reviews o f progress. The Bank will work closely with key donors to develop the policy reform agenda around the PRSCs and seek cofinancing opportunities (there have been initial expressions o f interest from the ADB, EU, and Sweden). 70. Proposed investment lending will be selective andfocus onpriority areas agreed upon among the Bank, the Government, and other donors within sector-wide approaches (SWAP) where possible. Lending decisions will take into account the poverty impact and results, EGSPRS alignment, country and Bank experience, and activities o f other donors and partners. In most cases, lending will be undertaken only when there i s clear articulation, consensus, and agreement on broad sector strategies among stakeholders. Working with others to strengthen the sectoral and other Government-Donor Working Groups, the Bank will help develop shared sector strategies and multiyear investment programs. This will enable the Bank to move toward SWAPS and greater collaboration with other donors (with increased co-financing) in investment operations in infrastructure, and also possibly in rural development, environment, and other sectors .Selected TA operations will buttress adjustment and investment lending.Where possible, IDA lending will be supplemented by donor grant resources. The use o f TF grants, beneficial inthe past, i s expected to continue. GEF resources will help Mongolia address its priorities inbiodiversity conservation, climate change, and sustainable land management. 71. The Bank's program of assistancefor FY0.5-FY08 includes lending for adjustment, investment, and TA credits. The notional base case lending program (table 7) includes annual, single-tranche PRSCs (about 40 percent o f lending) and up to two additional projects per year depending on progress on project preparation, readiness o f the client, and overall pace o f implementation o f the program. PRSC-I and the Second Ulaanbaatar Services Improvement Project are expected to be delivered in FY04. For the CAS period, the proposed operations are: A pilot Index-Based Livestock Insurance Project (FY05) to support a private-company scheme on a full commercial basis with internationalreinsurance. A second Private Sector Development Credit (FY05), buildingon the success of the first credit to finance capital investment by SMEs through commercial banks. A Social Sector TA (FY06) to complement PRSC I11to assist the Government to implement the policy conditions, buildcapacity in social sector ministries, and provide limited investment. e The second phase o f the Sustainable Livelihoods Program (FY07) to expand institutional innovations from the eight pilot "aimags" under the first SLP to the national level and continue with activities inpastoral riskmanagement, microfinance, and the Local Initiatives Fund. e Follow-up to the ECTAC and Legal Reform LIL to continue support for capacity enhancement to implement the EGSPRS and undertake relatedpolicy analysis (FY07). e A Land Administration and ManagementProject (FYO8) to support implementation o f the new Land Law, focused on bothpasture and arable lands. e A ForestryProject (FY08) to address issues o f sustainable forestry and livelihoods. e Two infiastructure projects are also envisaged in the second and fourth year o f the CAS period (FY06 and FY08). The components are expected to be based on results o f the integrated - 28 - infrastructure strategy work being undertaken and agreement on priorities and possible SWAP arrangements. These could focus on providing basic infrastructure services (heat, electricity, ICT, roads, and clean air) to urban, rural, and peri-urban areas by rationalizing delivery o f infrastructure services, as well as transport sector investments. Table 7: ProposedAssistanceProgram:BaseCase Year Lending AAA FY05 PRSC-11: PSD Issues (US$lOm) Poverty Assessment' Public Expenditure Tracking Index-Based Livestock Insurance Survey Project (US$5m) PSD Strategy (Investment Climate Assessment' Private Sector Development Credit-I1 Supply Chains) (US$4m) Integrated Infrastructure Strategy Social Sector Strategy Regional Development Policy Note Financial Sector Mid-term Review Monitor: Economicl Environment FY06 PRSC-111: HD Issues (US$ 1Om) Country Economic Memorandud Development Social Sector TA (US$3m) Policy Review (Sources o f Growth) Infrastructure Project: (to be Decentralization Study determined) (US$13m) Livestock Support Services Study Social Sector AAA Judicial Reform Review Civic Engagement Assessment Monitor: Economicl Social FY07 PRSC-IV (US$9m) Integrated Public Expenditure Review1Integrated Second Sustainable Livelihoods Fiduciary Assessment Project (US$Sm) Natural Resource Use Strategy Judicial and Public Sector ReformTA ICTStrategy (US$3m) Infrastructure AAA Monitor: Economicl Environment FY08 PRSC-V (US$9m) Investment Climate1Private Sector Assessment Infrastructure Project: (to be Financial Sector Assessment determined) (US$Sm) HumanDevelopment Assessment LandAdministration and Management Monitor: Economicl Social Project/ Forestry Project (US$6m) 72. AAA will emphasize more collaborative approaches and stronger implementation, policy linkages, consensus-building, and dissemination within the new multi-year framework being instituted in the East Asia and Pacijic region of the Bank. AAA will stress collaboration with the Government and other donors, and involve local research institutes, academia, civil society, and the private sector. Major tasks will support the CAS themes: a Public Expenditure Reviewhtegrated Fiduciary Assessment and a Public Expenditure Tracking Survey (PETS) will inform the public sector reform agenda; an Investment Climate Assessment (ICA) and Supply Chains Study, the mid-term Financial Sector Review, and the PSD Strategy will provide critical data and analysis to design Bank support to strengthen the environment for PSD; a Poverty Assessment, the Public Expenditure Tracking Survey (PETS), and a Decentralization Study will update the information on the dimensions o f poverty and service delivery in rural and urban areas; the Country Economic Memorandum will focus on consolidating the ongoing work on sources o f growth (such as mining, cashmere trade, ICT); the Investment Climate Assessment (ICA) and Supply Chains Study along with a Regional Development Policy Note will form the basis for the dialogue on regional development issues, where the Bank has misgivingswith regard to cost-benefit and macroeconomic implications o fproposed interventions. The collaborative development o f agreed strategies for the key sectors (infrastructure, social sectors, natural - 29 - resource use) will be necessary for identifying investment priorities and the design o f possible SWAPS. Analytical work will fill knowledge gaps and update information in such areas as livestock services, legal reforms, civic engagement, and human development, and the Bank will continue to produce regular topical monitors and updates. C.PortfolioManagement 73. Ongoing projects will be aligned more closely with the objectives of this CAS. Mid-term reviews will assess the need for restructuring to align project development objectives with the new CAS priorities, enhance linkages to AAA, and implement M&E systems to monitor outcomes. Most attention will be given to the six (out o f nine projects) that are not currently near completion and which will likely have the greatest impact on outcomes duringthe CAS period. These six projects are: Transport Development (reducing isolation o f remote regions), Sustainable Livelihoods (addressing rural vulnerability and local capacity building), Legal Reform (core reforms in the legal and judicial area), Energy (restructuring, privatization, and development o f the regulatory system), Financial Capacity Development (institutional capacity building o f the banking sector), and Economic Capacity Technical Assistance (improving budgetary and public expenditure management). Of these, the reviews o f the Energy and Transport Development projects will thoroughly assess the need for any restructuring; for the others the focus will be on the intended sector results. 74. Supervision activities will continue to receive the highest priority in the allocation of the administrative budget and managementfocus. The field-based QPPRs are provingbeneficial in spotting generic and project-specific problems early on and will be conductedjointly with the Government (and the ADB). The QPPR performance benchmarks will be monitored for early diagnosis and remedies. Other priority measures include: (i)use o f project readiness filters to reduce start-up delays by addressing key issues during project preparation rather than after implementation has begun; (ii) support to the Government (together with the ADB and Japan) to develop and implement a common training program for project counterparts on key implementation skills (procurement, financial management, disbursements, safeguard policies, and M&E]; (iii) collaboration with the ADB to assist the Government in amending the procurement process to streamline and harmonize various requirements; and (iv) assistance to the Government and implementing agencies to improve their financial management and control procedures and skills, in line with Bank financial reporting requirements (this measure should also support the goal o f enhancing project implementation mechanics and safeguards against corruption inBank-financedprojects). 75, While portfolio risk and performance remains acceptable, there are generic implementation issues related to delayed start-ups, project readiness, slow procurement, and disbursements. The CAS proposes to improve portfolio management by addressing each o f these issues. The Bank has adopted the CPPR recommendation to use project readiness filters to ensure that projects are set for implementation by testing such key elements as project management, fiduciary aspects, counterpart funding, M&E, and social and environmental assessments. Along with the ADB, the Bank will support implementation o f the revised Public Procurement Law o f Mongolia (an IDF grant i s in place). The Bank will also provide assistance to strengthen weak areas o f financial management, audit compliance, and project M&E. D.MonitoringImplementation 76. The Bank will regularly monitor the implementation of the CAS. The results fi-amework outlined inthe tables in Section IV.A establishes the priority outcomes-and the intermediate indicators to track implementation-that the Bank expects to influence through its interventions. This framework further links the expected CAS outcomes to the higher order development objectives o f Mongolia and the key constraints related to these results. This will serve as the basis for monitoring and evaluating the - 3 0 - Bank's performance and help to adjust the strategy as needed during the four-year implementation period. Along with strong monitoring o f the portfolio, annual reviews will be held with the Government to take stock o f CAS implementationprogress. 77. The Bank will strengthen its field presence to better implement and monitor the CAS. To enhance its capacity to implement the new CAS-including institutional capacity-building, policy dialogue, and donor coordination-the Bank will continue to reinforce its regional and country office capacity. Beginning in FY05, responsibility for Mongolia will be transferred from the present South East Asia Country Management Unit to the China Country Management Unit.In addition to logistical advantages, this transfer will facilitate increased Bank efforts to engage at the sub-regional level. The Bank will also continue to build and strengthen the capacity o f the country office to support the portfolio by expanding and strengthening national staff and strengthening office information systems. The Bank will pay particular attention to building national staff and partner capacities related to donor coordination and to managing for results-including greater emphasis on outcome-oriented indicators, project M&E systems aligned to nationalresults, and results-basedQPPRs. E. Scenarios and Triggers 78. The Bank proposes a base case lending scenario of about US$88 million over FY05-FY08 consistent with current IDA allocations. Mongolia is currently considered to be in the base case which includes annual PRSCs and two additional investment and capacity-building operations every year. However, to remain inthe base case, certain requirements would need to be fulfilled and several actions taken. These monitorable triggers (table 8) encompass sound performance o f the macro-economy, prudent financial sector management, steady EGSPRS implementation, satisfactory implementation o f the public sector reformprogram, good governance, and a well-performing IDA portfolio. 79 I n a low case scenario, about US$50 million in IDAJlows are envisagedfor thefour-year CAS period. The program will shift to the low case in the event o f major deteriorations in economic performance and the policy environment. The Bank will form a judgment on such slippages through assessments on the basis of the triggers specified for the base case. Inthe low case scenario, there will be no adjustment (PRSC) lending, but continued support to poverty-reducing activities and capacity- building. However, any slippages o f the PRSCs could also mean that related lending (such as the Judicial and Public Sector Reform TA or the Social Sector TA) could be deferred to synchronize with the associated policy lending. Furthermore, as noted, the development o f and consensus around sector strategies would be prerequisite for investment lending. 80. The CAS also providesfor a high case scenario where up to 30 percent more (over base case) IDA resources would become available. For this scenario to occur, all base case triggers must be met continuously; in addition, there will be indications o f a faster pace o f reforms through the early implementation of several o f the more complex EGSPRS policies in public sector management (the public investment program, pensions) and financial sector (regulations for holding companies). The CAS specifies the following additional triggers for the high case: (i) preparation and adoption o f adequate cost-benefit analysis o f the public investment program to guide and inform projects; (ii) adoption o f the pensionreform strategy and implementation o f key recommendations on increasing the retirement age and specifying mechanisms for transition from the pay-as-you-go system to the Notional Defined Contribution scheme; and, (iii) putting in place the legal and regulatory framework for financial holding companies. The additional resources could be made available through modulated PRSC amounts, andor, given the extent o f cofinancing available for the PRSCs, through larger investment projects. The faster pace o f reforms (such as on pensions) would have costs associated with them and would require more budgetary support. - 31 - Table 8: CAS Triggers Trigger areas Trigger/(Timing) Means of verijication To stay inthe base case Satisfactory and sound macroeconomic Regular monitoring and reviews in e environment performance with prudent fiscal and collaboration with the IMF's monetary stances and avoidance o f review o f the PRGF program prolonged inflation above single digits (Continuous) Financial sector At least 90 percent o fthe banks (interms Regular monitoring and reviews o f share o f assets) are liquid and in compliance with Bank o f Mongolia prudentialnorms (Continuous) Satisfactory implementation o f the Review o f progress and M&E Implementation EGSPRS; regular reporting on progress reports; JSAs and M&E (Continuous) ~ Adoption o f rolling multi-year MTEFs Review and assessments within reforms based on credible macroeconomic the context o f the PRSCs projections (starting 2004) Adoption and the initiation o f the implementationo f Civil Service Reform Strategy (Mid-2005) Govemance Adoption and implementation o f the Assessment inthe context o f Public Procurement Law (2004) PRSCs; IDF 0 Annual release o f audits o f budget NewspapersiGazettes execution (Continuous) NewspapersiGazettes Annual publication o f detailed budgets Surveillance incollaboration with with sector and aimag-level IMF disaggregation (starting 2005) Absence o f non-transparent quasi-fiscal activities and contingent liabilities (Continuous) Unsatisfactory ratings o fprocurement and QPPRs; Supervision financial management inless than 30 percent o fprojects (Continuous) Public sector Adequate cost-benefit analysis o f the Review and assessments within management public investment program the context o f the PRSCs Adoption o f pensionreform strategy and implementationo f key recommendations o n (i)increasing the retirement age for men and women; and (ii) specification o f the transition mechanismfrom the pay-as- you-go systemto the Notional Defined Contribution Scheme Financial sector Legal and regulatory framework for Assessment o f law passed financial holding companies inplace V. RISKS 81. Implementing the CAS faces various risks, both internal and external. The risk that the Government's commitment to the poverty reduction strategy enunciated and embraced inthe EGSPRS will change i s minor, given the wide consultations, participation, and ownership. The political risks are also small, because both the MPRP and opposition groups are expected to stay the course on reforms and poverty reduction strategy. The Bank will maintain a dialogue with key elements within the MPRP - 32 - and with main opposition parties. But implementing the EGSPRS poses major challenges, and the Bank's CAS, along with other donor assistance programs, i s geared toward overcoming them. Several other risks and downside scenarios could materialize and require mitigating measures from the Bank, where feasible. 82. Macroeconomic risks. Current hard-earned, macroeconomic stability remains fragile, as pressures to increase wages and pensions and other social welfare programs continue. The contracting of recent loans and other liabilities (some on nonconcessional terms) as part o f the Russian debt settlement has also burdened the Government with short-term repayment obligations. These developments underscore the need for prudent macroeconomic policies, particularly for holding the line on expenditures and fiscal management. The Bank will remain fully engaged with the Government on these issues, in close collaboration with the IMF and other partners, and will regularly monitor developments. The ongoing ECTAC and proposed PRSCs-which will focus initially on public expenditure management and budget execution as well as on civil service reforms-will squarely address this risk. The Bank-supported debt management system will continue to be helpful in undertaking debt management and analysis. The joint financial sector work with the ADB will help identify any risks arising from what i s considered an over-banked system. Maintaining a stable macroeconomic environment i s also a trigger for staying in the base case and for continued access to quick-disbursingresources under the PRSCs. 83. External risks. Given Mongolia's undiversified economic and export base and its geographical location, severe external shocks in the form o f terms-of-trade deteriorations or "dzuds" may well materialize. Inboth cases, herders and rural dwellers generally are particularly vulnerable. The price prospects for Mongolia's major exports and imports are projected to be stable. Assisting the Government to address vulnerabilities o f the rural and urban poor (such as pastoral risk management and pilot livestock insurance) and strengthening public sector management to increase efficiency o f expenditures and improve service delivery (including social safety nets) are major objectives o f the CAS. The lending program, A A A s , and the policy dialogue are designed around these goals. The Bank will work with its CG partners to mobilize additional resources if external shocks severely affect incomes. 84. Governance risks. It i s possible that increased instances o f corruption and deteriorating governance could emerge (unreported quasi-fiscal/contingent liability operations, or fiduciary malfeasance at the macro or project levels). The CAS strongly supports the EGSPRS emphasis on addressing governance issues. This includes greater emphasis on government effectiveness, accountability, and transparency to target sources o f corruption, as well as monitoring (with the IMF) the implementation o f laws and guidelines by the Bank o f Mongolia and the Ministry o f Finance and Economy. The PRSCs are designed to focus on improving public sector transparency and accountability and access to fiscal information, audits, and expanded budget coverage. The Bank will encourage participatory M&E o f EGSPRS implementation, and the PETS should bring resource leakages to light. The CAS program will strengthen institutions and capacity-building, giving particular emphasis to improving processes and systems. The Bank's support to legal reforms and its integrated fiduciary assessments go beyond ensuring that the IDA portfolio adheres to international accounting and procurement standards. With the IMF, the Bank will jointly monitor fiscal and debt developments for instances o f quasi-fiscal activities. Several o fthe base case triggers directly tackle governance. 85. EGSPRS implementation risks. The greatest challenges and risk stem from the Government's limited capacity to implement the policies and reform program envisioned in its ambitious poverty reduction and growth strategy by translating them into prioritized and funded action programs. There i s also concern that interventionist central planning tendencies, evident in the EGSPRS, may lead to costly, unsustainable investments. As noted earlier, the Bank intends to remain fully engaged in this dialogue with the Government and others and bring to bear its analytical work and international cross- - 33 - country expertise. The CG process will also be used to receive progress reports on EGSPRS implementation and provide a forum for donor alignment and identification o f resource needs. But the greatest mitigation o f this risk will stem from support to the Government and other stakeholders through a range o f vehicles: dialogue, policy advice, outreach and communication, PRSCs, investment lending, U s , and TA. These vehicles will build capacities, institutions, and systems-and incorporate participatoryprocesses into implementing and monitoring the EGSPRS. VI. CONCLUDINGREMARKS 86. The coming years are both promising and challenging for Mongolia as it embarks on implementing its EGSPRS program and strives to move to a higher growth path to reduce poverty. The CAS, designed to align the Bank Group's support to this effort, i s proposing a results-based framework to evaluate the attainment o f these objectives and its own performance. Mongolia will continue to need concessional assistance from its international partners. This CAS provides the basis for the continuing support through IDA and other resources. James D.Wolfensohn President By: Shengman Zhang Washington, D.C. April 5,2004 Attachment 1 Page 1of9 Attachment 1 Page 2 of 9 Attachment 1 Page3 of 9 Attachment 1 Page4 of 9 L. Attachment 1 Page 5 of 9 Attachment 1 Page 6 of 9 Attachment 1 Page 7 o f 9 .-C Attachment 1 Page 8 of 9 Attachment 1 Page 9 of 9 .-M 4-3 3 E8 I e, v) U U U Attachment 2 MONGOLIA: PHASESOF TRANSITION Four economic phases have characterized the Mongolian economy since the transition began. These phases have been influenced by political instability, external conditions, and commitment to economic reforms. e Transition (I990-1993). Mongolia's macroeconomic transition to a market economy was resolute. During 1990-1 992, the country's Coalition government was headed by the Mongolia People's Revolutionary Party (MPRP). The collapse o f the Soviet Union and breakdown o f monetary and trade relations among the Comecon states resulted in a sharp contraction o f real GDP, which fell by about 23 percent between 1989 and 1993, and high inflation, which peaked at 321 percent in late 1992. To arrest the decline in macroeconomic fundamentals, the Government moved quickly to liberalize the exchange rate, trade and prices, and open up the financial sector, including the establishment o f a two-tiered banking system and privatized the livestock sector. Stabilization, reforms, and growth (1994-1996). The 1994-1996 period was one o f stabilization and significant economic recovery; the MPRP remained in power through 1996. The recovery was buoyed by increasing livestock production and favorable international prices for copper and gold; GDP growth averaged 3.6 percent. However, the scope and pace of reforms slowed-insufficient attention was paid to the institutional framework required to buildan internally competitive economy. The financial sector collapsed, following the bankruptcy o f Mongolia's two largest banks; and the Government continued to subsidize state-owned enterprises, particularly in the agriculture sector. With increasing stability, donor assistance shifted the emphasis from emergency support to rehabilitating essential infrastructure, macroeconomic stability, and policy and legal reforms. Poor external conditions, poor performance, and political gridlock (1997-2000). The 1997-1 998 East Asian and Russian crises exposed Mongolia's underlying structural inefficiencies. Export prices o f its main commodities fell sharply: gold prices fell by 42.5 percent, copper by 28 percent, and cashmere by about 12.5 percent. Large revenue shortfalls resulted, as corporate income-tax contributions and dividend payments from major state-owned enterprises dried up. By late 1998, revenue collection had dropped by more than 5 percentage points o f GDP, while expenditures during 1997-1998 increased by more than 17 percent. In 1998, the deficit reached an all-time high o f 14.3 percent. To maintain public confidence and protect the vulnerable from further income erosion, the Government increased public employment and cash transfers to the population. However, the deficit was reduced to 7 percent o f GDP in 2000, mainly because o f the Government's enhanced revenue mobilization efforts. This period was also marked by political turbulence (three successive governments between 1997 and 2000), which crippled the reform agenda. Political stabiliv, sound structural performance, but climatic shocks (2000-2003). During this period, the Government launched a renewed effort to restore macro balances with mixed results. Inflation dropped to 5 percent; the deficit was reduced to about 6 percent o f GDP; and the post-1991, debt-to-GDP level decreased to 88.9. However, the current account deficit worsened to 14percent of GDP, while overall government expenditures increased to more than 45 percent o f GDP. The pace and scope o f the structural reform agenda accelerated and deepened over this period, as evidenced by the adoption o f the Public Sector Management and Finance Law (PSMFL) and the privatization o f large state-owned enterprises, such as the Trade and Development Bank. L o w growth during 2000- 2002, which reflected large losses in the livestock sector due to three consecutive harsh winters, has since accelerated. Throughout the period, Official Development Assistance (ODA) focused increasingly on policy reforms. Attachment 3 Page 1of 2 MONGOLIA: DEBTANALYSIS 1. At the end of 2003, Mongolia's total stock o f public debt was estimated at US$1.4 billion, o f which US$1.2 billion was external debt equivalent to 103 percent o f GDP and 147.3 percent o f exports o f goods and services. This includes debt o f USS212 million contracted to settle Transferable Ruble debt obligations as part o f the December 2003 debt settlement agreement with Russia to close Mongolia's pre-1991 debt, estimated at US$11.4 billion or the equivalent o f about 10 times Mongolia's GDP. The agreement provided for a writing o f f o f 97.8 percent o f Mongolia's pre-1991 debt, with the remaining US$250 million (about 20 percent o f Mongolia's GDP) to be paid in full by the end o f 2003. While the settlement o f the Russian debt i s a welcome event as it provides international investors more certainty regarding Mongolia's credit standing, further information on the nature o f the transaction i s needed to assess the full impact on short-term macro-sustainability. The total external debt-to-GDP ratio in Net Present Value (NPV)terms rose from 59.4 percent in 2002 without the Russian debt to 70.1 percent after the Russian debt settlement. With strong growth projected over the medium-term, the external debt-to-GDP ratio in NPV terms i s expected to decrease incrementally to about 58 percent by 2008. 2. Multilateral debt i s estimated at US$735.3 million (62 percent o f GDP), o f which 31 percent i s owed to the World Bank, 59 percent to ADB, and 7 percent to the IMF. Bilateral debt accounts for 36.7 percent o f total external loans (US$ 433 million). Japan i s the largest bilateral creditor (US$264 million in 2003). The total scheduled external debt service in 2003 reached an estimated 3 percent o f GDP and 4.8 percent o f exports o f goods and services. Impact of Pre-TransitionRussianDebt Settlementon ExternalDebtIndicators Debt stock to GDP 88.9 103.0 Net present value o f debt NPV o f debt to GDP 59.4 70.0 NPV of debt to exports of GNFS 92.9 100.3 NPV of debt to govt revenues 65.3 57.4 Debt service Inpercent ofexports ofgoods andservices 4.5 34.0 1 Inpercent ofGDP 2.9 23.8 Net official reserves (US$M,end-period) 225.9 129.0 Source: Ministry of Finance and StaffEstimates 2004 3. The US$250 million needed as cash payment for the Russian debt settlement was raised by the Government in the following manner: USS25 million was drawn from accumulated government reserves; US$lOO million was borrowed from the Bank o f Mongolia, drawing down on Net International Reserves to be repaid within 10 years; USS13 million was obtained as an advance on tax payments from Erdenet (state-owned copper mine); US$37 million was borrowed from the Bank o f Mongolia to be repaid within the first quarter of 2004; US$50 million was generated by selling one-year maturity T-bills to the copper miningcompany Ivanhoe Mines; and US$25 million was raised by selling T-bills to the Trade and Development Bank. On post-1991 Russian debt (US84.9 million), agreement has been reached between the Russians and the Mongolians to postpone payments on any arrears untilnext year. Attachment 3 Page 2 o f2 4. While the resolution of the Russian debt issue i s a positive development, the settlement weakened Mongolia's short-term macroeconomic position. Net international reserves dropped from 16 weeks o f imports in November 2003 to 10 weeks in January 2004. Net credit to the Govemment from the Bank o f Mongolia has exceeded authorized limits; net foreign assets o f the central bank have decreased substantially as a result o f the US$lOO million interest-free borrowing by the Govemment; and finally, the US$50 million loan (external debt) from Ivanhoe mines and the US$25 million credit from the Trade and Development Bank were contracted on nonconcessional terms, substantially increasing the short-term debt burden o f the Govemment. 5. Inthe short-term, the Government will needto repay US$112millionto boththe Bank o f Mongolia and Ivanhoe Mines. The Government i s exploring two options: (i)rescheduling the short-term debt; or, (ii) borrowing concessionally from the international community to meet its obligations. Medium-termProspects (2006-2008) 6. It is expected that the economy would be able to maintain a sustainable growth o f about 5.5 percent in the long-term provided that Mongolia maintains prudent macroeconomic policies and the momentum for reforms in the areas o f trade, public enterprises, and the financial sector. Such a growth rate would need to be supported by investment o f around 28 percent o f GDP, o f which 23 percent would be from the private sector. Continued foreign savings (about 11percent) would be important to attain the growth objectives. 7. Inthe medium-term, export growth is projectedto be about 6 percent per year. Import growth would remain at about 5 percent a year, reflecting good investment activities. Debt service as a percent o f exports o f goods and services would average around 4.8 percent and i s projectedto remain at the same level in the outer years. This development reflects the inflows of loans and foreign direct investment inthe past several years. 8. Inorder to satisfy extemalfinancingneeds andbuildupinternationalreserves equivalent to about 18 weeks o f imports, while maintaining a manageable debt service burden, continued international support in the form o f disbursements from concessional loans and grants in the range o f 10-15 percent o f GDP would be needed annually. 9. The baseline medium-term outlook described above i s based on the government's MTEF projections and i s sensitive to the assumptions made on domestic macroeconomic and structural policies and the regional environment. In particular, weaker export performance would reduce both exports and growth. 10. To test the sensitivity o f the outlook presented above to changes in export performance, the alternative scenario assumes that annual growth o f exports will be lower to about 4.8 percent. With lower investment and export growth, the real GDP growth rate is expectedto be at about 3.5 percent. Imports are expected to grow on average at about 2.7 percent, reflecting weaker investment activities. The sensitivity analysis shows that in the long-run, prolonged weaker export performance could adversely affect overall economic growth and lead to further import compression, and the need for additional extemal financing. Attachment 4 Page 1of 2 MONGOLIA: COUNTRY ASSISTANCE EVALUATION: SUMMARY 1. Mongolia i s a former socialist country, land-locked between Russia and China. With 2.5 million inhabitants and an area almost the size o f Mexico, it i s the most sparsely populated country in the world, and with a 1999 per capita income o f US$390, among the poorest countries inEast Asia. Assets include gold and copper deposits; some 30 million livestock, which provide raw materials for cashmere, wool, meat, and leather products; and proximity to large potential markets in China and Russia. Major development constraints include a lack o f market-oriented institutions resulting from 70 years o f isolation; a small domestic market; distance from a seaport; protective barriers to key markets; and a highly dispersed rural population, a rugged terrain, and severe weather, which together contribute to the high costs o f public service and infrastructure provision. 2. Mongolia's transition experience since 1991 has been positive, but difficult. Significant progress was made toward the goal o f replacing the command economy with a market-driven one, although considerable challenges remain in furthering the policies, institutions, and behaviors required to achieve broad-based and sustainable growth. Duringthe decade, Mongolia stabilized the economy inthe face o f a series o f external shocks and implanted a range of reforms including removal o f most price controls, privatization o f small and medium industries, and changes in laws and regulations to enable private sector activity. A positive supply response to these reforms was seen by 1995 in the form o f increased investment in gold, greater livestock production, and an increase in small-scale service and trading activities in urban areas. Along with significant public infrastructure investments, these activities contributed to an average annual GDP growth o f 3 percent a year since 1994 and a rise in GDP per capita from US$330 in 1995 to US$390 in 1999. However, the sources o f growth have remained narrow, yielding only limited public revenues and employment and they have not reduced Mongolia's vulnerability to shocks. Since 1995, the percent of poor has remained constant at 36 percent o f the population, while income inequality increased. Limited urban employment opportunities and declining public social services have yielded apparent public discontent with social and economic conditions. 3. The Bank made a positive contribution to progress inthe 1990s, although its influence in several important areas was limited. Among its positive impacts were: an easier transition and avoidance o f a collapse in key public services and industries in the early 1990s; improved macroeconomic management; an improved legal and regulatory framework; and income support to a large number of poor. At the same time, efforts to help remove some key policy and institutional impediments to sustainable growth met with less success: key elements o f the enabling environment for private investment are still lacking; interventions in energy, direct transfers, and public transport conferred immediate benefits but did not stimulate broader sustainable changes in the respective sectors; assistance in banking and enterprises proved inadequate to address extensive underlying problems. The outcome o f Bank assistance i s thus rated as partially satisfactory, institutional development as modest, and sustainability as unlikely. 4. Factors underlying the Bank's positive contribution include a strong commitment at senior government levels to the general direction o f reforms; timely Bank responses to an uncertain and difficult environment in the early 1990s; and good collaboration with the IMF to support macro-economic stability. The Bank practiced selectivity by not engaging in areas well Attachment 4 Page 2 of 2 covered by other donors; its ESW was o f good quality and well-received by the government and other donors; and it played an important role inmobilizing external donor aid. Factors inhibiting a greater Bank contribution include (i) delayed shift away from emergency support in its a assistance strategy; (ii) linkage between the lendingprogram and policy recommendations limited inESW; (iii) inadequate agreement with other donors on strategic frameworks in some sectors; (iv) frequent changes ingovernment after 1996,which adversely affectedcontinuity; (vi) political sensitivity and anticipated adverse short-term consequences, which caused hesitancy to implement some reforms; and (vii) several significant adverse external shocks. 5. The Bank accounts for only 10 percent o f total aid flows to Mongolia, but it offers a unique perspective on many o f Mongolia's problems because of its worldwide experience on transition economies. OED recommends that future Bank assistance remain selective and that it focus on improving the private investment environment and strengthening fiscal management. At the same time, the Bank should collaborate with the government and other donors to develop strategic frameworks in eachkey sector, even ifdirect lending i s not planned. Gregory K.Ingram Director-General Operations Evaluation Attachment 5 Page 1o f 2 MONGOLIA CLIENT SURVEY: SUMMARY OF FINDINGS The Mongolia Client Survey was conducted to gather the opinion o f key stakeholders towards the World Bank and its role in development in Mongolia. The survey was undertaken by an independent consultant in January and February o f 2003 using the standardized Bank Client Survey questionnaire (with a few questions modified to fit the Mongolian context). Out o f the 483 mail-in questionnaires sent out, 282 responded (58 percent response rate). The survey solicited the opinions o f a cross-section o f clients and stakeholders including senior government officials, staff inthe ministries, local government officials, staff o f bilateral and multilateral donor agencies, individuals from the private sector, international and national non-governmental organizations, the media, and members o f academia. While the majority o f respondents were employees o f ministries, there were also a large number o f respondents from the private sector and non-government organizations. Because o f the small number o f respondents from academia and the media, responses from these groups can be considered suggestive at best. The survey measured attitudes towards: 0 The general economic environment inMongolia; 0 Perceived overall value o f the Bank; 0 The Bank's overall effectiveness inMongolia; 0 The Bank's programs; 0 The Bank's day to day operations inMongolia; 0 The Bank's effectiveness at donor coordination; 0 The Bank's effectiveness at resource mobilization; and, 0 The Bank's effectiveness at working with others inthe country. Summary of Key Findings The Client Survey findings provide insight into the stakeholders' views o f the Bank's work in Mongolia as well as their overall assessment o f the current environment in the country. Overall, the views are quite positive about the work o f the Bank. Below are some o f the main findings: 0 Stakeholders report that the primary challenges in Mongolia are the economy, corruption, and poverty, followed by education. These are reported as challenges uppermost on the minds o f stakeholders. 0 Stakeholders identify the greatest development priorities as: corruption, strengthening the financial sector, followed by infrastructure development,and education. Poverty reduction appears to be quite low on the development priority list o f stakeholders. 0 Respondents identify infrastructure along with economic growth as the two areas that are important for Bank involvement inMongolia. These are followed closely by helping to strengthen the financial system, strengthen the private sector, and helping to reduce poverty. Other than poverty reduction, these closely mirror the areas that stakeholders inMongolia consider their greatest development challenges. 0 Within this environment, stakeholders report that the Bank's greatestvalue is its policy advice. When asked about the second greatest value brought by the Bank, financial resources and donor coordination emerge fairly consistently. This i s an interesting finding in an IDA country like Mongolia where one might expect the Bank to be most Attachment 5 Page 2 o f 2 valued for its financial resources (as i s the case in nearly all other Client Surveys conducted inIDA countries.) 0 It is interesting to note that familiarity with the Bank is fairly low inMongolia. Other studies show that the more experience and exposure stakeholders have with the Bank, the more positive they are about the institution. Hence, it would probably be to the Bank's advantage in Mongolia to have a greater presence and more exposure with its stakeholders. 0 The Survey indicates a range o f views toward the Bank's overall effectiveness. Members o f academia and local government officials appear to be quite positive, whereas, NGOs, bilateral and multilateral donors, and representatives o f private sector organizations appear to be less sanguine about the Bank's effectiveness giving an overall average rating score below 7 on a 10 point scale. 0 Specifically, the Client Survey shows that inthe areas that stakeholders believe the Bank should be focusing its work, the views are quite positive. The highest mean effectiveness scores go to the Bank's support to strengthen infrastructure development, helping to bring about economic growth, and helping to strengthenthe financial system. 0 The Survey findings show clearly that stakeholders enjoy workmg with Bank staff. Stakeholders report that for the most part they consider Bank staff accessible and respectful. 0 The responses indicate that there are two areas where the Bank i s seen less positively, and may want to explore in further detail: building capacity at the community level and including local communities and civil society instrategy development. 0 The Bank's advice and knowledge i s considered useful and sound according to the findings. In addition, stakeholders report that the Bank makes available its studies and analyses. However, the mean score drops slightly when asked whether the Bank i s able to "adapt its knowledge to Mongolia's needs." This may be worth further exploration to identify ways that the knowledge could be better adapted. This finding regarding the adaptability o f Bank's knowledge emerges innearly every Client Survey done recently in other countries. The findings indicate that the Bank i s perceived very positively in terms o f its work in donor coordination. Stakeholders believe that it i s important for the Bankto be involved in donor coordination and their view of the Bank's effectiveness in this area is very positive. The analysis o f the responses indicates that the Bank should stay involved. This is the same case for resource mobilization. Attachment 6 Page 1of 4 MONGOLIA: TOWARD ENVIRONMENTAL SUSTAINABILITY Since Mongolia's transition and loss o f Soviet subsidies, rapid economic changes generated new pressures on the country's fiagile and unique ecosystems exacerbated by lack of coordination among ministries and agencies concerned with environmental management, and inconsistent monitoring o fnatural resources and environmental quality parameters. To address these challenges, the Government o f Mongolia (GOM) has enacted a series o f environmental laws, expanded its system o f nature reserves, and invested in energy efficient technologies and pollution abatement schemes. In addition, GOM started the revision and updating o f the 1995 National Environmental Action Plan, mainstreamed environmental concerns into its official Good Governance for Human Security Programme, and began working with international organizations and civil society to promote the understanding o f the fundamental contribution that natural resources and a healthy environment can make to the country's economic growth and development for current and future generations. Three environment and natural resources management issues continue to stand out as critical challenges for Mongolia for the short-to medium-term: (i)Institutional capacityfor environment and natural resources management is weak. Coordination among ministries and government agencies remains limited without either a systematic dialogue or a formal feedback system on sectoral issues. Inspite of 3,900 employees currently working for the Ministry o f Nature and Environment (MNE) at the national and local levels, human and financial capacity seem to be inadequate for the existing implementation, monitoring, and enforcement responsibilities o f MNE. Moreover, environmental agencies at aimag, soum and bag levels have weak administrative structures, and coordination with national authorities on overall policy direction i s carried out on an ad-hoc basis. The transition to a free market economy may have brought prices closer to the market equilibrium but challenges in addressing market failures remain and depend on adequate design and implementation o f environmental regulations. (ii)Pollution-related and other urban environmental challenges pose considerable pressure on people's health and natural resources. Air quality i s under threat due to increasing pollution from urbanization, motorization, and power generation and heating; high level o f SO2, NO2 and particulates are responsible for a sharp increase of the number o f children under the age o f five suffering from respiratory diseases over the past five years. Poor solid and hazardous waste management i s degrading land, air and water, contributing to flooding and also having adverse impact on human health. Sewerage coverage i s one o f the lowest in Asia, and this i s causing widespread contamination o f surface and groundwater both inUlaanbaatar and secondary cities. (iii) andother natural resourcesareunderpressure. The forestry sector israpidly Forest approaching a crisis for which it seems largely unprepared. The present estimated levels o f forest harvesting are unsustainable. Between 36 and 80 percent o f total harvest i s illegal, and ifalternative sources o f domestic fuel are not developed, and current levels o f forest depletion continue unabated, serious fuelwood shortages will be experienced in urban areas by the end o f this decade. The existing forestry industry i s unable to attract the capital it needs to modemize for greater efficiency. The Government has tended to Attachment 6 Page 2 of 4 focus on peripheral issues, such as an outmoded forest inventory system, fire control, insect and disease control, instead o f dealing constructively with the primary problem o f unsustainable resource exploitation and lack o f consistent enforcement o fregulations. EnvironmentalLinkages to CAS Objectives and Proposed Approach to Environment and NaturalResourcesManagement Long-run economic growth and poverty reduction can be significantly underminedby the over-exploitation and degradation o f the natural resource base; the Bank thus recognizes the environment= (Natural Resource Management) theme as containing key cross-cutting issues crucial to addressing the challenge that Mongolia faces in pursuing sustainable growth and poverty alleviation as embedded in all three objectives o f its assistance strategy. Objective 1: Consolidatingthe Transition Revision and updating o f existing institutional and legislative frameworks would improve environment and natural resources management capacity at national and local levels. The forestry, water resources management, mining and urban sectors would benefit particularly from such an improvement. One o f the pre-conditions for increasing private sector investments and promoting competitiveness i s clarity o f environmental regulations and standards, and their consistent, predictable enforcement. Environment, thus, would be one o f the many dimensions o f the proposed reforms o f the public sector, civil service reformand financial management. Malung information on environmental trends accessible to decision-makers and civil society i s essential to an informed public debate on the environment. The Government should improve access to and disclosure o f information on environmental quality and management (i.e. Environmental Impact Assessments, air and water quality standards), natural resources management, and biodiversity conservation. Inaddition, public participation o f civil society and local governments in decision-making processes pertaining to environment and natural resources management use and conservation would be encouraged. The above would be dealt with through (i) addressing environment and natural resources management concerns in AAA, TAs; and lending operations (both investment and programmatic lending); and (ii) completing the implementation o f the on-going IDF Grant to MNE; and (iii) developing self-standing analytical pieces. Objective2: ReducingVulnerabilities e Laws and regulations governing use and management o f natural resources were originally enacted with primary emphasis on simple exploitation rather than the sustainable use of natural resources. Short-term revenue maximizing behavior and the lack o f transparency in the allocation o f property rights to natural resources are leading to rapid depletion o f the overall resource base. The Government needs to promote the understanding o f the fundamental contribution that natural resources and a healthy environment make to the country's economic growth and development agenda. The above would be dealt with on the following fronts: (i) ensuring that environmental and social impacts (from projects) are minimized, and that effective mitigation and compensation measures are built into project design (e.g. through the safeguards process); (ii)exploring synergies in project design by using GEF funds associated with energy projects to reduce Attachment 6 Page 3 o f 4 emissions, andor to promote biodiversity conservation and protection; (iii) developing stand- alone lending operations centered on the sustainable management o f natural resources such as forestry; and (iv) enhancing institutional capacity as stand-alone projects and policy advice or components o f projects in the overall macroeconomic and regulatory framework and specific sectors and regions where investments are likely to take place. Objective 3: StrengtheningAlignment of PoliciesandResources Around Results 0 Improving MNE ability to prioritize among issues and costing needed to implement effective environmental intervention, and to coordinate with the international donor community. 0 Strengthening MNE capacity to use environmental data to improve decision-making and implementation o f environmental programs and projects, and increase its responsiveness to public concerns on environmental issues. The above would be dealt with through addressing environment and natural resources management concerns in AAA, TAs and lending operations (both investment and programmatic lending). EnvironmentalIndicators Inthe case of Mongolia, reliable data for environmental indicators are generally scarce, scattered across different sources, and not necessarily available ,for the entire country. The table on the next page has been drawn from the 2003Little Green Data Book. Attachment 6 Page 4 o f 4 Environmental stralegylaction I GROUP DATA ,SdS 6,4120 -I1 53 81 90 80 76 76 353 67 70 77 93 90 30 463 4.4 2 30 3 3 48 72 72 78 44 12% Attachment 7 Page 1of 2 - P E a88 2 B Q t:i !E i C z ::i 4 E6 v E ! f v c 9 L v $ e 28 6 3 Attach1 U i; i c 5E P 5C W e E E fE W : W Annex A2-1 Mongolia at a glance 8120103 East POVERTY and SOCIAL Asia& Low- Mongolia Pacific income Develoment diamond' 2002 Population, mid-year (millions) 2.4 1,836 2,495 GNI per capita (Atlas method, US$) 440 950 430 GNI (Atlas method, US$ millions) 1,088 1,740 1,072 Life expectancy Average annual growth, 1998-02 Population (%) 1.3 1.o 1.9 Labor force (%) 1.6 1.2 2.3 Most recent estimate (latest Year available, 1996-02) Poverty(% ofpopulationbelownationalpoverty line) 36 Urban population (% of totalpopulation) 57 38 30 Access to an Life expectancy at birth (years) 63 69 59 improved water infant mortality(per 1,000live births) 30 33 81 source Child malnutrition(% of childrenunder5) 13 15 Access to an improvedwater source (% ofpopulation) 60 76 76 Illiteracy(% ofpopulation age 15+) 2 13 37 Gross primaryenrollment (% of school-agepopulation) 97 106 95 Male 95 105 103 Female 99 106 87 KEY ECONOMIC RATIOSand LONG-TERMTRENDS I Economic ratios 1982 1992 2001 2002 Gross domestic GDP (US$ billions) 1.o 1.1 investment Gross domestic investmenVGDP 70.2 32.6 35.8 29.0 Exportsof goods and SeNiCeS/GDP 26.3 36.8 62.6 63.9 Gross domestic savingslGDP 32.0 23.2 5.7 4.1 Gross national savingsiGDP 23.3 24.7 29.7 19.6 Total debt ExwRs Of goods and Currentaccount balancelGDP -6.1 -9.5 IGDP services InterestDavmentsiGDP 0.9 1.o Total externaldebtiGDP 87.6 90.6 Total debt serviceiexports 17.3 5.3 4.5 Presentvalue of debtiGDP 57.7 59.4 Presentvalue of debtiexports 91.7 92.6 Gross domestic savings 1982-92 1992-02 2001 2002 2002.08 (average annualgrowth) GDP 2.5 1.4 1.o 3.9 5.1 I-Mongolia -Low income 1 GDP per capita 0.5 0.0 -0.4 2.6 6.8 ~ Exportsof goods and services 2.2 0.5 10.1 STRUCTURE of the ECONOMY 1982 1992 2001 2002 (% of GDPJ t l5T Agriculture 15.8 30.2 24.9 20.7 A Industry 34.3 33.9 22.0 22.5 io Manufacturing 8.1 6.3 Services 49.9 35.9 53.1 56.5 -GDI +GDP Importsof goods and services 64.5 46.2 81.5 65.4 I 1982-92 1992-02 2001 2002 (average annualgrowth) Agriculture 2.6 -2.7 -16.5 -10.7 Industry 2.9 1.9 16.2 5.4 Manufacturing 31.6 22.1 Services 2.0 4.0 8.2 12.2 10 Privateconsumption 14.3 14.8 5 General government consumption 16.8 8.0 0 Gross domestic investment -1.1 -19.0 Importsof goods and services 2 2.5 6.6 5 Gross national QrOdUCt 3.6 2.6 1.1 1.2 Note 2002 data are preliminePyeslimates Thls tablewas producedfrom the DevelopmentEconomicscentraldalabarie .The diamonds$how four key indiCstDIE~nthe coun1w On bold) compared With its incomegroup averqe If data we mmng the diamondwill PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices 1 (% change) 350 T Consumer prices 325.5 6.3 0.9 Implicit GDP deflator 2.0 176.4 5.8 6.2 Government finance (% of GDP, includes current grants) Current revenue 29.3 37.7 38.1 Current budget balance -1.1 4.8 4.4 1992 2001 I Overaii surplus/deficit 0.0 -5.4 -6.0 -rDi TRADE 1982 1992 2001 2002 (US$ millions) Total exports (fob) 356 523 524 750 Copper 160 147 140 Meat 11 18 20 Manufactures 500 Total imports (cif) 418 693 753 Food 13 53 57 Fuel and energy 88 138 123 250 Capital goods 137 215 210 0 Export price index (1995=100) -12 -5 98 97 98 99 00 01 02 Import price index (1995:lOO) -2 2 Terms of trade (1995=100) -10 -7 Exports Imports BALANCEof PAYMENTS 1982 1992 2001 2002 (US$millions) Exports of goods and services 568 391 637 709 Imports of goods and services 1,394 479 829 947 l5 1 Resource balance -826 -88 -192 -238 Net income -20 -28 -2 -5 Net current transfers 0 -3 25 64 Current account balance -90 -169 -178 Financing items (net) 13 -15 -66 Changes in net reserves -4 6 -20 -66 -10 1 Memo: Net Reserves including gold (US$ millions) 5 160 226 Conversion rate (DEC, /oca//US$) 1,102.0 1,125.0 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 12002 Data (US$ millions) Total debt outstanding and disbursed 355 902 986 IBRD 0 0 0 I G 44 IDA 27 155 181 Total debt service 68 34 32 IBRD 0 0 0 IDA 0 1 2 Composition of net resource flows Official grants 37 92 53 Official creditors 86 66 74 Private creditors 19 2 29 Foreign direct investment 2 43 78 Porifoiio equity 0 0 0 World Bank program A IBRD E Bilateral Commitments 0 64 29 B IDA -- D. Other multilateral F Private -- Disbursements 27 24 14 C-IMF G Short-term . Principal repayments 0 0 1 Net flows 27 24 13 Interest payments 0 1 1 Net transfers 27 23 12 Note: This table was produced from the Development Economics central database. Annex B2 Selected Indicators* of Bank Portfolio Performance and Management As of March 29, 2004 Indicator 2001 2002 2003 2004 Portfolio Assessment Numberof Projects Under Implementationa 8 9 10 9 Average ImplementationPeriod (years) 2.9 1.9 2.6 3.0 Percent of Problem Projects by Numbera, 12.5 0.0 0.0 0.0 Percentof Problem Projects by Amount 2.6 0.0 0.0 0.0 Percent of Projects at Risk by Numbera, 12.5 0.0 0.0 0.0 Percentof Projects at Risk by Amount a, 2.6 0.0 0.0 0.0 Disbursement Ratio (%) e 34.1 13.2 13.1 23.5 Portfolio Management CPPR during the year (yesho) No Yes No Yes ** Supervision Resources (total US$) 453,417 608,555 657,352 670,000 Average Supervision (US$/project) 56,677 67,617 65,735 67,000 MemorandumItems Since FY 80 Last Five FYs Projects Evaluated by OED by Number 8 4 Proj Eva1by OED by Amount (US$ millions) 138.9 72.8 % of OED Projects Rated U or HU by Number 12.5 0.0 % of OED Projects Rated U or HU by Amt 7.0 0.0 a. As shown in the Annual Report on Portfolio Performance(except for current FY). b. Average age of projects in the Bank'scountry portfolio. c. Percentof projects rated U or HU on developmentobjectives (DO) and/or implementationprogress (IP). d. As defined under the Portfolio ImprovementProgram. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investmentprojects only. * All indicators are for projects active in the Portfolio,with the exception of DisbursementRatio, which includes all active projects as well as projectswhich closed during the fiscal year. ** Quarterly Portfolio PerformanceReviews (QPPR) started in FY04. z z z E E E Z Y u e, 2 .T E t- Annex B3 Mongolia- IFCandMIGA Program,FY2001-2003 IFCapprovals (US$m) 0.40 0 0 Sector (YO) FINANCE& INSURANCE 100 0 0 Total 100 0 0 Investmentinstrument(%) Loans 100 0 0 Equity 0 0 0 Quasi-Equity 0 0 0 Other 0 0 0 Total 0 0 0 MIGA guarantees(USJm) 0 0 0 Annex 84 Mongolia Summary of Nonlending Services - Product CompletionFY Recent completions Mongolia Energy Strategy FY02 Country FinancialAccountabilityAssessment FY02 Public ExpenditureReview FY02 Trade Policy Study: Cashmere FY03 Municipal Finance Study FY03 MongoliaCPAR FY03 Consultative Group Meeting FY03 EnvironmentMonitor (1 and 2) FY03 Underway EnergyStudy (Phase 2) FY04 Mining Study (input to CEM) FY04 Rural Policy Note FY04 FinancialSector Work FY04 Gender Assessment FY04 Civil Society Assessment FY04 ConsultativeGroup Meeting FY04 Planned PovertyAssessmenUPublic ExpenditureTracking Survey FY05 PSD Strategy (InvestmentClimatelSupply Chains) FY05 Integrated InfrastructureStrategy FY05 Social Sector Strategy FY05 Regional DevelopmentNote FY05 FinancialSector Review FY05 EconomiclEnvironmentMonitor FY05 Consultative Group Meeting FY05 CEMlDPR (Sources of Growth) FY06 DecentralizationStudy FY06 LivestockSupport Services Study FY06 Social Sector AAA FY06 Civic EngagementAssessment FY06 Country ProcuremenUFinanciaIAssessments (CPAWCFAA) FY06 EconomiclSocial Monitor FY06 Consultative Group Meeting FY06 Public Expenditure Reviewllntegrated FiduciaryAssessment FY07 Natural Resource Use Strategy FY07 ICT Strategy FY07 InfrastructureAAA FY07 Social Sector AAA FY07 RegionalTrade Study FY07 Environmentand Social DevelopmentAAA FY07 EconomiclEnvironmentalMonitor FY07 Consultative Group Meeting FY07 InvestmentClimatelPrivate Sector Assessment FY08 Human DevelopmentAssessment FY08 Financial Sector Assessment FY08 InfrastructureAAA FY08 Environmentand Social DevelopmentAAA FY08 Economic/SocialMonitor FY08 Consultative Group Meeting FY08 Annex 65 Mongolia Social Indicators Latest single year Same regionlincomegroup East Asia 8 LOW. 1970.75 1s8o-a51996-2001 Pacific income POPULATION Total population, mid-year(millions) 1.4 1.9 2.4 1,822.5 2,505.9 Growth rate (% annual averagefor period) 2.0 2.8 1.3 1,l 1.9 Urban population (Ohof population) 48.7 55.0 57.6 37.3 30.8 Total fertility rate (birthsper woman) 5.6 5.0 2.5 2.1 3.5 POVERTY (% of population) National headcount index 35.6 Urban headcount index 39.4 Rural headcount index 32.6 INCOME GNI per capita (US$) 428 900 430 Consumer price index (1995=100) 241 Foodprice index (1995=100) 1a4 INCOMUCONSUMPTIONDISTRIBUTION Share of income or consumption Gini index 35.0 Lowest quintile (% of income or consumption) 5.6 Highest quintiie (YOof income or consumption) 51.2 SOCIAL INDICATORS Public expenditure Health(Ohof GDP) 4.6 i.a 1.1 Education(%of GDP) 10.9 2.3 2.3 2.8 Socialsecurityand welfare (% of GDP) 7.2 Net primary school enrollment rate (% of age group) Total 102 93 Male 102 92 Female 103 93 Access to an improved water source (% of population) Total 60 76 76 Urban 77 93 90 Rural 30 67 70 Immunization rate (% under 12monfhs) Measles i a 95 76 60 DPT ao 95 77 61 Child malnutrition(Ohunder 5 years) 9 15 Life expectancy at birth (years) Total 55 60 67 69 59 Male 54 59 65 67 58 Female 57 62 69 71 60 Mortality Infant (per 1,000 live births) 9a a7 30 34 ao Under5 (per 1,000 live births) 145 124 76 44 121 Adult (15-59) Male (per 1,000 population) 391 320 280 184 312 Female(per 1,000 population) 331 273 199 129 256 Maternal (modeled, per 100,000live births) 65 Births attendedby skilledhealth staff (%) 100 97 ao Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate:break in series between 1997and 1998due to changefrom ISCED76to ISCED97; ratios exceeding 100 indicatediscrepancies betweenthe estimates of school-agepopulation and reportedenrollment data. Source: 2003 World Development Indicators CD-ROM, World Bank Annex B6 Page 1of 2 Mongolia Key Economic Indicators - Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 National accounts (as % of GDP)' Gross Domestic product 100 100 100 100 100 100 100 100 Agriculture 37 29 2s 21 20 26 26 25 Industry 21 22 22 23 22 17 18 18 Services 42 49 53 56 58 57 56 51 Total consumption 85 86 83 93 91 89 87 87 Gross domestic fixed investment 37 36 36 29 27 27 28 28 Govemment investment 15 12 17 11 11 11 11 10 Private investment 22 24 19 18 16 16 17 18 Exports (FOB) so 57 51 47 53 56 51 so Imports (CIF) 63 71 68 68 69 70 64 64 Gross domestic savings 15 10 6 4 8 11 12 13 Gross national savingsb 30 30 30 20 18 20 21 22 Memorandum items: Gross domestic product 906 946 1016 1109 1193 1282 1406 1524 (US$millionincurrentprices) GNIper capita (US$,Atlas method) 390 390 410 440 460 500 540 580 Real annual growth rates ("h,calculated from 1986prices) Gross domestic product at marketprices 3.2 1.1 1.o 3.9 5.0 5.3 5.5 5.5 Gross Domestic Income 3.2 1.1 1.o 9.5 4.0 5.0 5.2 5.6 Real annual per capita growth rates ("A,calculated from 1986prices) Gross domestic product at marketprices -5.4 3.9 5.8 7.5 6.4 3.8 3.9 4.1 Total consumption -1 -3.2 3.6 1.4 4.3 2.0 3.9 3.1 Private consumption 0.4 -5.5 2.8 2.1 4.2 1.o 4.3 3.3 Balanceof Payments (US%millions) Exports (GNFS) 555 640 637 709 834 938 902 964 Merchandise FOB 454 536 523 524 627 721 711 763 Imports (GNFS) 675 789 829 947 1069 1164 1119 1197 Merchandise CIF 567 676 693 753 827 901 907 973 Resourcebalance -121 -149 -192 -238 -235 -22s -217 -233 Net current transfers 5.9 8.0 25.0 64.4 68.7 74.4 70.0 77.0 Current account balance -127 -153 -169 -178 -181 -167 -164 -175 Net private foreign direct investment 34 40 43 78 113 110 75 79 Long-term loans (net) 97 81 69 102 -141 22 69 72 Other capital (net, incl. errors &omissions) 13 99 77 73 52 55 61 59 Change in reserves` -31 -35 -20 -66 97 -67 -36 -29 Memorandum items: Resourcebalance (% o f GDP) -13.3 -15.7 -18.9 -21.5 -19.7 -17.6 -15.6 -15.4 Annual growth rates Exports, f.0.b. (annual growth) -1.8 18.0 -2.4 0.1 19.7 14.9 8.7 7.3 Imports, c.i.f. (annual growth) -2.6 19.2 2.5 8.6 9.9 8.9 6.3 7.3 (Continued) Annex B6 Page2 of 2 Mongolia Key EconomicIndicators - (Continued) Actual Estimate Proiected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 Publicfinance(as % of GDP at market prices)d Current revenues 26.5 34.0 37.7 38.1 35.7 37.5 36.9 36.9 Current expenditures 26.7 30.8 32.9 33.7 32.8 32.6 32.2 31.6 Current account surplus (+) or deficit (-) -0.2 3.2 4.8 4.4 2.9 4.9 4.1 5.3 Capital expenditure 12.7 10.6 11.0 11.0 11.1 11.5 10.8 10.4 Overall balance (including capital grants) -12.2 -7.0 -5.4 -6.0 -5.9 -5.9 -5.5 -4.5 Monetary indicators M2lGDP 23.8 25.4 29.7 38.2 51.6 Growth of M2 e?) 31.7 17.4 28.1 41.9 49.6 Private sector credit growth -34.6 44.9 152.3 77.4 91.4 Total credit growth (%) -16.3 -16.9 101.5 70.3 87.3 Price indices Export price index change -7.0 13.6 -11.6 -4.1 6.6 8.4 2.1 0.3 Import price index change -2.4 2.5 -2.3 2.3 5.4 2.8 -0.2 1.2 Terms o f trade (percent change) -4.8 10.8 -9.5 -6.9 1.1 5.4 REER,period average(1995=100)e 109 113 118 114 107 100 100 100 Real interestrates Consumer price index (% change) 7.6 11.6 6.3 0.9 5.0 5.0 5.0 5.0 GDP deflator (% change) 9.7 11.6 5.8 6.2 5.5 5.0 5.0 5.0 a GDP at marketprices. Includes net unrequitedtransfers excludingofficial capital grants. * Includesuse o f IMFresources. Consolidated central govemment. eAn increase denotes appreciation. Annex B7 Mongolia Key ExposureIndicators - Actual Estimate Proiected Indicator 1999 2000 2001 2002 2003 2004 Total debt outstandingand disbursed(TDO) (US$m)a 860 879 902 985 1416 1487 Net disbursements (USSm)a 12 13 69 94 91 84 Total debt service (TDS) (US$m)b 32 24 34 32 36 38 Debtanddebt service indicators(%) TDOKGS~ 154.9 137.4 139.9 143.0 169.8 142.4 TDO/GDP~ 94.9 92.9 87.6 90.6 118.7 91.8 TDS/XGS~ 5.7 3.8 5.3 4.5 4.8 4.6 IDA TDO (us$mId 130.0 137.0 155.0 181.0 192.0 214.0 IFC (US$m) 0.4 0.4 0.4 0.4 Loans 0.4 0.4 0.4 0.4 Equityandquasi-equitye MIGA MIGA guarantees(USSm) Note: aIncludes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits and net short- term capital. Excluding Russianrescheduled debt service for 2003 and 2004. "XGS" denotes exports o f goods and services, including worker's remittances. Includes present value o f guarantees. eIncludes equity and quasi-equity types o f bothloan and equity instruments. h 6 YS W aP am E -m.- p! v 0 n 0 .-m u) E 0 C ix 0 -.-..m 0 0 E E 0 m Annex B8 MONGOLIA Statement of IFC's Committed and Outstanding Portfolio (Amounts in US$ Millions) Loan All Loan All committed Committed Outstanding Outstanding FY Approva Company IFC Participants IFC Participants 1997 SEF G&M Leather 0.00 0 0.00 0 2001 SEF XacBank 0.40 0 0.40 0 Total Portfolio 0.40 0 0.40 0 Approvals Pending Commitment Loan Equity Quasi Participants 0 0 0 0 Annex B9 Country Program Matrix This Annex has been replaced by Attachment 1: CAS Matrix Annex B10 Mongolia- CAS Summary of Development Priorities Reconciliation of Country Country Bank country and Bank Network area performance Major issue priority priority priorities Poverty Reduction& Economic Management Poverty reduction Fair Widespreadpoverty; higher inruralareas High High and aimags; increasinginequality; monitoring improving Economic policy Good Low inflation; budget deficits decreasing; High High open trade regime Public sector Fair Public sector reformlaw passed, being High High implemented; civil servicereforms underway Gender Fair Low enrollment rates for boys; Moderate Moderate women disproportionatelyaffectedby poverty Human Development Department Education Fair Increaseefficiency and access Moderate Moderate Health, nutrition & population Fair Increase efficiency and access Moderate Moderate Social protection Fair Long-runsustainabilityunder threat Moderate Moderate Environmentally & Socially SustainableDevelopment Rural development Fair Vulnerability and pastoralrisks Moderate High Increasedemphasis on riskmanagementinnext project; AAA Environment Fair Land degradation; urban air pollution Moderate Moderate Social development Fair Inequalities:urban-rural Moderate Moderate Finance, PrivateSector & Infrastructure Financial sector Fair Strengthenfinancial sector; access to credit High High Private sector Good Enablingenvironment; regulations and laws, High High taxes, clarity of public-private roles, Energy& mining Good Implementationof laws; artisanal mining High High Infrastructure Fair Weak infrastructure;arrears; public-private High High partnerships; low efficiency; maintenance and recurrent costs MAP SECTION