Report and Recommendation of the President to the Board of Directors

Transcription

1 Report and Recommendation of the President to the Board of Directors Sri Lanka Project Number: June 2009 Proposed Asian Development Fund Loan and Grant and Technical Assistance Grant Mongolia: Social Sectors Support Program

2 CURRENCY EQUIVALENTS (as of 2 June 2009) Currency Unit togrog (MNT) MNT1.00 = $ $1.00 = MNT1,427 ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund CMP child money program CWG cabinet-level working group FGP family group practice FNSWPP Food and Nutrition Social Welfare Program and Project GAP gender action plan GDP gross domestic product IEC information, education, and communication IMF International Monetary Fund JICA Japan International Cooperation Agency LSWO Labor and Social Welfare Office MDG Millennium Development Goal MOECS Ministry of Education, Culture, and Science MOF Ministry of Finance MOH Ministry of Health MRTCUD Ministry of Roads, Transportation, Construction, and Urban Development MSWL Ministry of Social Welfare and Labor MUB Municipality of Ulaanbaatar NSO National Statistics Office PMT proxy means test PSC program steering committee PSU program support unit SHC soum health center SHI social health insurance SSIGO State Social Insurance General Office TA technical assistance UNDP United Nations Development Programme

3 GLOSSARY aimag largest subnational political unit; province ger traditional tent khoroo smallest administrative unit in Ulaanbaatar soum subnational administrative district below the aimag NOTES (i) (ii) The fiscal year of the Government and its agencies ends on 31 December. In this report, "$" refers to US dollars. In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

4 Vice-President C. Lawrence Greenwood Jr., Operations 2 Director General K. Gerhaeusser, East Asia Department (EARD) Director A. Leung, Social Sectors Division, EARD Co-Team leaders Team members C. Bodart, Senior Health Specialist, EARD W. Walker, Social Development Specialist, EARD M. Gupta, Social Development Specialist, EARD J. Hansen, Financial Sector Specialist, EARD I. Lonjid, Social Sector Officer, EARD S. Popov, Principal Environment Specialist, EARD S. Zaidansyah, Counsel, Office of the General Counsel

5 CONTENTS Page GRANTS AND PROGRAM AND PROJECT SUMMARY i MAP I. THE PROPOSAL 1 II. THE MACROECONOMIC CONTEXT AND ITS SOCIAL IMPACT 1 III. THE SECTOR 3 A. Sector Description and Performance 3 B. Issues and Opportunities 7 IV. THE PROPOSED PROGRAM 11 A. Impact and Outcome 11 B. Policy Framework and Actions 11 C. Important Features 17 D. Financing Plan 18 E. Implementation Arrangements 19 V. TECHNICAL ASSISTANCE 21 A. Components and Outputs 22 B. Cost Estimates and Implementation Arrangements 23 VI. PROGRAM BENEFITS, IMPACTS AND RISKS 24 A. Benefits 24 B. Impacts 25 C. Social Safeguards 26 D. Environmental Aspects 26 E. Risks 26 F. Assumptions 27 VII. ASSURANCES AND CONDITIONS 28 A. Specific Assurances 28 B. Conditions for Loan and Grant Effectiveness 28 VIII. RECOMMENDATION 29 APPENDIXES 1 Design and Monitoring Framework 30 2 Sector Analysis 34 3 Policy Matrix 48 4 Development Coordination Matrix 53 5 Ineligible Items 56 6 Development Policy Letter 57 7 Summary Poverty Reduction and Social Strategy 61 8 Gender Action Plan 64

6 SUPPLEMENTARY APPENDIXES (available on request) A B C D E F G H I J Macroeconomic Context Problem Tree Analysis Detailed Description of the Policy Reforms and Measures SSSP Synergies with other ADB and JICA Supported Programs and Projects Donor Coordinated Implementation Schedule Technical Assistance Cost Estimates, Financing Plan, and Outline Terms of Reference of Consultants Beneficiaries of Program Policy Reforms Poverty and Social Assessment Economic and Financial Analysis Environmental Analysis

7 LOAN, GRANT, AND PROGRAM SUMMARY Loan and Grant Recipient Proposal Classification Environment Assessment Social Safeguard Assessment Program Description Rationale Mongolia Support to Mongolia for the Social Sectors Support Program through (i) a loan in various currencies equivalent to Special Drawing Rights of 28,129,000 ($43,100,000) and (ii) a grant not exceeding $16,900,000 to mitigate the effect of the economic crisis on the poor, both from the Special Funds resources (Asian Development Fund) of the Asian Development Bank (ADB). The report includes a proposed technical assistance (TA) grant for Strategic Capacity Development for Social Sectors from the TA Special Fund in the amount of $700,000. Targeting Classification: Targeted Intervention (TI-M) Sector: Multisector health and social protection (health finance); education (education sector development); and urban sector development Themes: Social development (other vulnerable groups), gender equity (gender equity in empowerments and rights) Location impact: National (medium) Partnership: Japan International Cooperation Agency Category C. The environmental assessment concluded that there is no need to conduct either an initial environmental examination or a strategic environmental assessment for the proposed Program. Involuntary resettlement: Category C Impact on indigenous peoples: Category C No involuntary resettlement or adverse impact on indigenous peoples is expected from the Program. The Program will support the fiscal adjustment necessary for Mongolia's economic stabilization program and help to ensure that the budget for social sectors expenditures remains adequate. The Program will protect the poor during the financial crisis by implementing a set of policy measures in the social welfare, health, and education sectors to provide essential social services, and to initiate longer-term reforms to improve the targeting of social assistance and living conditions of the poor, especially in ger areas of Ulaanbaatar. The global financial and economic crisis has had immediate and very negative fiscal and economic consequences for Mongolia and compromises the Government s capacity to sustain high social spending. The current crisis comes close on the heels of high inflation and severe increases in food prices in 2008, which have weakened the coping capacity of many households in Mongolia, especially those of the poor. With one-third of Mongolia s population living in poverty, unless the Government is able to bring about an orderly adjustment to this external shock, the social consequences will be severe,

8 ii potentially unwinding the gains of recent years and threatening the attainment of the Millennium Development Goals (MDGs). In close coordination with other development partners and donors, the Program will help the Government to limit social sector expenditure cuts in 2009 and Lessons from the Asian financial crises provide clear evidence of the importance of protecting expenditures, in particular for nutrition and health outcomes. Through specific short-term policy measures, the Program will also help to reduce out-of-pocket expenditures of poor households for health care and increase micronutrient consumption. At the same time, the policy measures will improve the long-term sustainability of social expenditures through better targeting and rationalization of social transfers in the health, health insurance, education, and social welfare sectors. About 22% of Mongolia's poor are concentrated in Ulaanbaatar. The present crisis provides opportunity to ensure long-term improvements to the living conditions in poor ger areas around the capital city. The Program directly supports government plans to mitigate the effect of the crisis on the poor and supports the country partnership strategy's focus on inclusive social development. The Program is in line with the development agenda of inclusive economic growth in ADB s longterm strategic framework (Strategy 2020) and ADB's global economic crisis response strategy of striving to rebalance economies and provide support to the poor. Impact and Outcome Program Loan and Grant Amount Program Period and Tranching The impact of the Program will be to ensure that the poverty levels and per capita consumption of the poor do not deteriorate after the implementation of the Government's economic stabilization program. The outcome of the Program will be assured funding of priority basic services in and the initiation of reforms to increase the efficiency of social welfare spending and improve living conditions of the poor. The effect of the economic crisis on the poor is mitigated in the short term by ensuring pro-poor funding of priority programs for basic services and in the long-term by initiating reforms to increase the efficiency of social welfare assistance and improve living conditions of the poor. It is proposed that ADB support the Government by providing a loan in various currencies equivalent to Special Drawing Rights 28,129,000 ($43.1 million) and a grant of $16.9 million to support the country's economic stabilization program. The Program will be cofinanced by the Japan International Cooperation Agency (JICA), under a parallel cofinancing arrangement, for an amount of $50 million. The implementation period of the Program is 21 months. It will be completed by 31 December ADB and JICA have prepared a joint policy matrix. The Program amount will be released in two tranches upon compliance with relevant tranche release conditions.

9 iii Executing Agency and Implementation Arrangements Procurement Consulting Services Counterpart Funds Benefits and Beneficiaries The Ministry of Finance (MOF) will serve as the Executing Agency and assume overall responsibility for the implementation of the Program. The Ministry of Social Welfare and Labor (MSWL); Ministry of Health (MOH); Ministry of Education, Culture and Sciences (MOECS); Ministry of Roads, Transportation, Construction and Urban Development (MRTCUD); and the Ulaanbaatar Municipal Office will serve as the implementing agencies. The MOF will establish a program steering committee (PSC) to be chaired by the state secretary of the MOF. The members of the PSC will be senior representatives of the implementing agencies. In accordance with the simplified disbursement and procurement procedure for program loans, the loan and grant proceeds may be utilized to procure goods and services (excluding local duties and taxes) produced in and procured from ADB s member countries, other than those specified in the list of ineligible items, those financed by other multilateral and bilateral official sources, and imports from non- ADB member countries. ADB reserves the right to audit the use of the loan and grant proceeds and to verify the accuracy of the Government certification. All ADB-financed procurement for the accompanying TA will be in accordance with ADB s Procurement Guidelines (2007, as amended from time to time). The accompanying TA will require a total of 19 person-months of international consultants and 46 person-months of national consultants to support the outlined activities. Counterpart funds will be used to support the country's economic stabilization program. The International Monetary Fund (IMF) has estimated that Mongolia will need $284 million of external financing in 2009 and $153 million in The IMF stand-by arrangement will provide $139 million in 2009 and $93 million in The ADB program support will provide $60 million in 2009, the Government of Japan through JICA will provide $30 million in 2009 and $20 million in 2010, and the World Bank will provide $40 million in 2009 and $20 million in These combined disbursements will cover most of the financing shortfall, with a gap of $15 million in 2009 and $20 million in 2010 which the Government envisages covering through assistance from other donors. The key benefits and beneficiaries of the Program are as follows. Beneficiaries and Fiscal Sustainability. By strengthening and reforming social welfare systems, and especially by improving targeting, the Program will improve the performance and fiscal sustainability of the Government. By converting the child money program into a targeted benefit, the IMF estimates that MNT61,033 million (about $43 million) could be saved. By targeting other social benefits more efficiently, another MNT12,206 million could be saved. With these savings, equivalent to 1.16% of gross domestic product (GDP) in 2009, the Government will be able to increase the benefit levels for the poorest households without creating an unsustainable

10 iv fiscal burden. Fiscal sustainability will provide a basis for sound economic recovery, and thereby diminish the burden on the state to provide for the unemployed and other groups made vulnerable by the financial crisis. Consolidation of Welfare Benefit. The Program will significantly improve the institutional capacity of the Government to consolidate and target social welfare benefits. Key to this is the creation of the cabinet-level working group and the related working groups at ministerial level. The Program will improve the policy framework to consolidate social transfers and will therefore facilitate the objectives of the ongoing Food and Nutrition Social Welfare Project to rationalize social welfare. Paving the Way for Associated Projects. The policy measures to target social welfare benefits will pave the way for associated projects in health (the medicard program and household micronutrients) and education (school textbooks). These projects will help very poor households meet their basic needs during the financial crisis. The Program will also build on the Food and Nutrition Social Welfare Program and Project to extend the proxy means test (PMT) to the health and education sectors so that these benefits are well targeted. Harmonization of Development Efforts. Program interventions are harmonized with international efforts (e.g., those by the IMF, JICA, the United Nations Development Programme, and the World Bank), and the Government s broader plans and programs (e.g., social welfare reform) and will therefore directly benefit the Government by preventing duplication of effort and ensuring the efficiency of social welfare programs and targeting in health and education. Improved Government Capacity. The reform measures emphasize improving the capacities of the Government to deliver consolidated and targeted welfare assistance. The capacity provided through an accompanying TA project will pave the way for a nationwide PMT, the results of which will enable Government to establish and manage a unified social security database that serves the needs of many sectors. Capacity building for urban planning will focus on ensuring that expertise is available to build social and environmental safeguards into planning exercises. Institutional Impact. Government institutions particularly MSWL, MOH, and MOECS, will be better able to reform themselves and to deliver social welfare services. The unified database will create a tool that different sectors can use to target their services to meet the basic needs of the population. Poverty Reduction. Mongolia s social welfare system has had a limited impact on poverty reduction because of its poor targeting. Under the Program, benefits will be consolidated and targeting will be greatly improved, resulting in significant cost savings. This will create an opportunity to increase the size of key benefits thereby helping

11 v households in the lowest quintile, many of whom depend on such benefits. Poverty reduction will be achieved by ensuring greater availability of essential drugs in primary health care and outpatient facilities. Out-of-pocket expenses will decline and fewer poor patients will require hospitalization. With regard to nutrition, the measures will help malnourished children receive critical micronutrients in their own homes. Gender Benefits. Social welfare reforms will have consequences for virtually all citizens, male and female. More women than men use primary health care facilities, and girls have higher school and tertiary education enrollment than boys. Efforts will be made to address these disparities in the reform and targeting programs. A gender action plan has been prepared with the goal of maximizing opportunities for gender impact in design and implementation and providing adequate data for monitoring and evaluating the Program. Risks and Mitigation The major risks and mitigation measures are as follows. High Expectations. The universalization of previously targeted welfare benefits was based on promises made during election campaigns. From July 2006, at a time of rapid economic growth, all households with children under 18 years became accustomed to receiving cash grants. The Government may therefore face opposition when it reverts to targeted child benefits. There is a lack of consensus on this issue in the government and promises of large unconditional cash grants of over MNT1 million for each Mongolian made by candidates in the recently concluded presidential elections may increase public opposition to a shift toward targeted conditional transfers. This risk will be mitigated through an intense education and consensus building initiative targeting members of parliament, the media, civil servants, and the public. This will be done through the TA attached to the Program. Deepening Macroeconomic Instability. If the Government is unable to implement the economic stabilization program agreed with the IMF or if the global economy does not recover over the medium term, the macroeconomic situation could deteriorate, with negative implications for the social sectors. This risk will be mitigated through continuous high-level policy dialogue by ADB and other major donors. Overoptimistic Expectations of Recovery. The price of copper is volatile. Sudden increases (such as that in mid-april 2009) can easily be misinterpreted as a sign of economic recovery. Targeting may be opposed in the expectation that small increases in minerals prices will be sustained and that the economy will recover. This risk will be mitigated by advocacy work conducted by the accompanying TA project. This will aim to raise awareness among parliamentarians of the need for targeting to maintain long-term fiscal stability and savings. The policy dialogue that is part of IMF quarterly macro assessment under the IMF stand-by arrangement will also help to maintain the commitment of the Government to reform targeting.

12 vi Delays in Establishing the National Database of Poor Households. It will take time for the new PMT national database to function efficiently. This might increase the reluctance of MOECS, MOH, and MSWL to adopt the PMT. Likewise, it might increase the reluctance of the Parliament to approve a comprehensive overhaul of the social welfare system and introduce and reform targeting in health, health insurance, and education. This could also delay the implementation of the medicard program. Therefore, a transition strategy will be adopted, which will help to improve targeting (e.g. through the creation of a list of people who do not need social assistance) until the PMT and the national database becomes available. The transition strategy will be part of the plan to reform social welfare. The accompanying TA together with the ongoing Food and Nutrition Social Welfare Project will accelerate the development of the PMT through specific activities geared at field testing the PMT, collecting information on households, and designing the national database of poor households.

13 96 o 00'E 111 o 00'E R U S S I A N F E D E R A T I O N MONGOLIA SOCIAL SECTORS SUPPORT PROGRAM Hanh 50 o 00'N Ulaanbayshint Dayan Tsengel BAYAN- OLGIY Yarantay UVS Tsagaannuur Olgiy Olgiy Hovd Uyench Ulaangom Naranbulag Manhan HOVD Dariv Togrog Tayshir Burgastay Tes Tudevtey ZAVHAN Altay GOVI-ALTAY Tsagaan-Uul Tsahir Uliastay Buutsagaan Hatgal HOVSGOL Bayanhongor BAYANHONGOR Altanbulag Moron Suhbaatar BULGAN SELENGE Selenge Darhan Hutag-Ondor Erdenet DARHAN-UUL Bulgan ORHONSumber ARHANGAY HENTIY ULAANBAATAR Hishig Ondor ULAANBAATAR Battsengel Batnorov Baganuur Lun Nalayh Zuunmod Tsetserleg Maanit TOV Ondorhaan Harhorin GOVISUMBER Arvayheer Nariynteel OVORHANGAY Choyr Mandalgovi DUNDGOVI Saynshand Bayan-Uul DORNOD Choybalsan Monhhaan Baruun-Urt Ereentsav Matad Erdenetsagaan Bichigt SUHBAATAR Havirga Tamsagbulag 50 o 00'N Dalanzadgad Tsogt-Ovoo DORNOGOVI Zamyn-Uud 42 o 00'N OMNOGOVI Bayan-Ovoo 42 o 00'N Gashuun Suhayt National Capital Provincial Capital N PEOPLE'S REPUBLIC OF CHINA City/Town Main Road Provincial Road Railway River HR Kilometers 96 o 00'E Provincial Boundary International Boundary Boundaries are not necessarily authoritative. 111 o 00'E

14 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) a proposed grant, both to Mongolia for the Social Sectors Support Program. The report also describes a proposed technical assistance (TA) for Strategic Capacity Development for Social Sectors, and if the Board approves the proposed loan and grant, I, acting under the authority delegated to me by the Board, will approve the TA. The design and monitoring framework is in Appendix 1. II. THE MACROECONOMIC CONTEXT AND ITS SOCIAL IMPACT 2. Since its transition from socialism in 1992, Mongolia has made significant economic progress. Fundamental economic reforms have been undertaken in price liberalization giving Mongolia one of the least restrictive trade regimes in Asia, and a relatively liberal foreign investment environment. The country s vast mineral resources, notably copper, have attracted significant direct foreign investment. Mongolia has held a series of free and fair elections. A new coalition government was formed following short-lived political disturbances after the June 2008 parliamentary elections. 3. The economic reforms, and a buoyant world economy, put Mongolia s economy on a strong growth trajectory well into Gross domestic product (GDP) grew by an estimated 8.9% in 2008, down from the previous year s double-digit rate but close to the average of the previous 5 years. Agriculture, which supports about 40% of the population, grew by 5.0%, aided by favorable weather and fiscal incentives to produce wheat. Services output climbed by 15.9% and growth in banking services was spurred by double-digit expansion in real estate, retail trade, and communications. Above all, mining expanded with the price of copper reaching a record high of $8,700 per ton in April 2008, contributing to about one third of Government revenue, primarily through increased windfall taxes. 4. The economic boom allowed the Government to grant large wage increases and untargeted social transfers, which rose with the increased revenue. Although growth was widespread, Mongolia remained highly dependent on mining, leaving it vulnerable to fluctuations in commodity prices. 5. The price of copper fell by 60% to $3,500 per ton in March 2009 because of rapidly falling demand. This had immediate and very negative consequences for the fiscal account, the real economy, the balance of payments, the exchange rate, and the Government s capacity to sustain provision of universal social transfers. 1 With one third of Mongolia s population living in poverty, unless the Government is able to execute an orderly adjustment to this external shock, the resulting social consequences will be severe, potentially unwinding the gains of recent years. 6. The financial crisis comes in the wake of severe spikes in food and oil prices in The inflation rate reached 33% in May 2008, much higher than in most other Asian countries. 3 The prices of wheat (primarily imported) and meat (domestically produced) contributed to nearly half of 1 The price of copper has since increased but demand remains volatile due to the weak global economy. 2 Palanivel, T Policy Note on the Soaring of Food and Oil Prices in Mongolia: Causes, Consequences and Responses at the Macro Level. Colombo: United Nations Development Program/Regional Center in Colombo (UNDP/RCC). 3 Inflation reached an 11-year high in the People s Republic of China (8.7% in February 2008), a 9-year high in the Republic of Korea (5.5% in June 2008), a 26-year high in Singapore (7.6% in April 2008), and a 12-year high in Viet Nam (25.2% in May 2008).

15 2 the overall inflation, 4 with oil prices accounting for a small but growing proportion. The inflation was due partly to an overheated domestic economy and rising global food and fuel prices although the provision of untargeted social benefits and rising wages also played a key role. 7. Government revenue has fallen sharply. The International Monetary fund (IMF) predicts that export proceeds will fall by more than one third to $800 million. While revenue, as a share of GDP, is at 2005 levels, government spending is almost one-third higher than it was then, fueled in part by distribution of universal social benefits. Since the third quarter of 2008, the current account balance has deteriorated further because of dramatic declines in export revenues from minerals and agricultural products. 8. The IMF predicts that the current account deficit will be about 6.5% of GDP in 2009, seriously hampering the Government s capacity to maintain social services, and that GDP growth will drop to 2.75%. The decline is increasingly worrying since the fall in exports and investment flows into the mining sector has spread to a slowdown in domestic demand as credit flows have dried up and a freeze has been imposed on public sector employment. Higher unemployment will reduce tax income and income to the national Health Insurance Fund. The current financial crisis exposes vulnerabilities in Government revenue sources and social assistance policies. However, it also presents an opportunity to improve targeting for the poor and to strengthen the fiscal sustainability of social assistance. More information on the macroeconomic context is in Supplementary Appendix A. 9. Social Impact of the Crisis. Mongolia is among the 29% of all developing countries categorized by the World Bank as "highly exposed" to the poverty effects of the crisis. This is due, in part, to a reliance on the volatile mining revenue for the Government budget and a large percentage of the poor. 5 In , some 35.2% of the population was classified as poor. 6 Progress in reducing poverty is threatened by the evolving economic crisis. Pressure on spending for essential services and social welfare will have a particular impact on the poor, who rely on affordable access to social assistance as a basic coping strategy, especially in times of economic stress. 10. In recent years, urbanization and changing livelihoods have resulted in new vulnerable populations. The current crisis comes on the heels of the massive spikes in inflation in 2008 (particularly for food items) provoked by the global food crisis. Social analysis carried out in preparation for the Food and Nutrition Social Welfare Program and Project (FNSWPP) 7 demonstrated that the poor were directly affected by rising prices and immediately cut back on the quality and amount of food consumption, and reduced or eliminated expenditures for health, education, transport, and energy. Evidence from the 1997 Asian financial crisis clearly demonstrates that social sectors, if not strongly protected, will weaken during a crisis, with longterm deficits in health and education being particularly detrimental to younger generations. 11. The Mongolia Country Poverty Assessment 8 highlights several important dynamics of poverty that will directly affect how the financial crisis will impact the poor. These include: (i) rising inequality (the overall strong growth has not translated into poverty reduction); 9 (ii) worsening 4 This is because food prices increased (on a year-on-year basis) the most in 2008: 59% in May 2008 and 57% in June 2008, compared with about 7% during the corresponding months in Wheat prices have increased by 47% and meat products by 49% since the beginning of World Bank Financial Crisis Could Trap 53 Million More People in Poverty. Available: WBSITE/EXTERNAL/NEWS/0,contentMDK: ~pagePK: ~piPK:437376~theSitePK:4607,00.html 6 National Statistics Office Household Socio Economic Survey Ulaanbaatar. 7 ADB Report and Recommendation of the President to the Board of Directors on Proposed Asian Development Fund Grants to Mongolia for the Food and Nutrition Social Welfare Program and Project. Manila. 8 ADB Mongolia Country Poverty Assessment. Manila. 9 NSO data shows that the Gini coefficient worsened by some 15% since

16 spatial inequalities (although poverty has declined in Ulaanbaatar, it has significantly worsened in soum and countryside areas); (iii) fewer social safety nets and insufficient coping mechanisms in both rural and urban areas; (iv) a high reliance on social welfare especially the child money program (CMP) by the poor; 10 (v) difficulty in paying for school expenses; (vi) the inefficiency of the health insurance system in reaching the poor; 11 and (vii) poor infrastructure and access to basic services in urban ger areas On 1 April 2009, within this context, the Executive Board of the IMF approved an 18-month stand-by arrangement for Mongolia equivalent to SDR153.3 million (about $229.2 million) to support the country's economic stabilization program. This is based on an agreed budget deficit of 6% for 2009 and 4% for 2010, with the corresponding fiscal gap estimated at $144 million for 2009 and $60 million for The economic program is built on four main planks: (i) adjusting the budget for 2009 and 2010 to put Mongolia's public finances in order and restore the deficit to a sustainable range, and to strengthen the institutional framework for fiscal policy; (ii) implementing a pro-active monetary policy that will seek to safeguard international reserves; (iii) ensuring that the poorest segments of society are protected through a comprehensive overhaul of social transfer programs, improving targeting and raising the level of social support to the very poor; and (iv) strengthening the banking system by improving the current framework for deposit guarantees and enhancing bank supervision. 3 III. THE SECTOR A. Sector Description and Performance 13. The increase in poverty as a result of the current financial crisis will depend on the length and depth of the crisis. The 1997 Asian financial crisis led to large increases in unemployment and poverty, which triggered a deterioration in education and health outcomes. When poverty rises and public finances are tight, there is a greater likelihood of higher infant mortality, child malnutrition, and school dropout rates. The situation after the Asian financial crisis eventually stabilized only after massive government intervention. Cash transfers played a critical role in alleviating poverty while education, nutrition, and health care programs helped contain long-term adverse effects. 13 This key lesson has been applied in the design of the proposed Program. The problem tree analysis is in Supplementary Appendix B. 14. The Program will support the Government s fiscal adjustment and, at the same time, protect the basic needs of the poor by implementing policy reforms in the social sectors. During the current financial crisis, the growing number of poor will find it increasingly difficult to meet such basic needs as food consumption, access to health care, access to education, and decent living conditions. The 1997 Asian financial crisis showed that it is essential for Government to maintain the critical services that sustain these basic needs. In the face of mounting budget cuts, this can be achieved by: (i) targeting benefits at the poor; (ii) consolidating social transfer programs to make them more efficient and cost effective; and (iii) implementing policy reforms that will increase the poor's access to health and nutrition services, health insurance, and education. This section summarizes the issues facing the three key ministries mandated to provide for the basic needs of 10 The poor and near-poor rely on welfare benefits and particularly the CMP to meet basic needs and day-to-day survival. The poor in both urban and rural areas often literally live on their future benefits pawning their benefit booklets at local stores to purchase foodstuffs credited to their future benefits. Any change to the social welfare system will have to acknowledge this aspect of "living in the future." 11 Lack of civil registration and limited benefits for drug coverage and tests for outpatients results in significant out-ofpocket expenses for the poor. 12 Rapid urban growth primarily in ger areas combined with insufficient attention to pro-poor urban development has led to sustained lack of basic services such as water and sanitation. 13 UNICEF Economic Crisis and Its Social Impact: Lessons from the 1997 Asian Economic Crisis. New York (prepared for UNICEF conference in Singapore, 6 7 January 2009).

17 4 the poor the Ministry of Social Welfare and Labor; the Ministry of Health; and the Ministry of Education, Culture, and Science in view of the significant budget cuts they now face. It also discusses the issues facing the urban poor and their access to services in light of the financial crisis and budget reduction. 15. Social Welfare Sector. The Government adopted a social security sector strategy paper in 2003 to rationalize the scope of social welfare services and improve cost efficiency. Based on this, in 2005, the Government introduced the CMP, and the first social welfare assistance programs to use a proxy means test (PMT) to target poor households. However, in May 2006, Parliament made the CMP a universal entitlement for all children below 18 years of age and provided other new benefits for newlyweds and mothers. This raised two immediate concerns: (i) making the benefits universal was not consistent with the Government's commitment to implement targeted support for the poor, and (ii) the fiscal sustainability of such welfare measures was unclear. 16. Social transfers rose sharply from 2006 to With the universalization of the CMP, the number of social welfare beneficiaries soared from 160,000 in 2004 to more than 1 million in The increases were not related to poverty incidence, but to the interplay of political pressures and the universal coverage of social cash transfers. One of the Government s immediate responses to the 2008 food crisis was again to increase welfare benefits by a further 20% in January The escalations in expenditures up to 2009 and the creation of an entitlement system now present the Government with the challenge of cutting back entitlements to restore fiscal sustainability. More non-poor than poor use social welfare services: 70% of social welfare beneficiaries are considered non-poor Targeted support for food consumption by the poor is being addressed through a Government-funded food stamp program to address the severe food price inflation in The program is supported by the Asian Development Bank (ADB) FNSWPP. The food stamp program will be implemented until at least December Budget Cuts in Social Welfare. The 2009 amended budget for social welfare services has been reduced by MNT78.4 billion, a decrease of 18.6% from the 2009 approved budget. Recurrent expenditures declined significantly (nearly 20% of the cuts have been to the administrative and operational costs of the ministry). The amended budget shows that the largest cuts will be made to goods and services. The capital budget will be cut by 11.5%. For the programs that are strictly targeted at the poor and vulnerable, there has been either no decrease or small cuts. The following universal programs will be cut: (i) the pregnant/feeding mother s benefit by 12.8%, (ii) the newlywed program by 38%, and (iii) the CMP by 35%. 19. A planned across-the-board cut in the CMP will affect the poor disproportionately as many are almost entirely dependent on these payments for their daily subsistence. The current crisis environment provides an opportunity to reform the social assistance system from an entitlementbased sytem to a needs-based system. Targeting needs to be introduced so that: (i) non-poor households can be removed from this list, (ii) benefits can be increased to those who remain, and (iii) unreached poor can be included (it is estimated that 40% of the poorest households and 25% in the poorest quintile, receive no social assistance at all) (footnote 14). 20. The CMP is the largest social benefits program, so rationalizing it would provide the greatest potential for savings. The upper two quintiles consist of approximately 1.2 million people. Assuming 70% of those individuals (the non-poor that are awarded social benefits) receive benefits at an average of MNT136,000 per year, eliminating them would yield a savings of MNT59 billion. 14 World Bank, Consolidating the Gains, Managing Booms and Busts, and Moving to Better Service Delivery A Public Expenditure and Financial Management Review. Washington, DC.

18 By converting the CMP into a targeted benefit, the IMF estimates that MNT61,033 million could be saved. By targeting other social benefits more efficiently another MNT12,206 million could be saved. 15 With these savings, the Government could increase benefit levels for the poor, improve targeting methodologies, and monitoring. The overall impact on the budget is expected to remain neutral, or possibly positive. 21. Health Sector. The Government aims to make services accessible through a variety of measures, including free access to primary health care and essential public health services, such as maternity care, treatment of communicable diseases, and emergency services. Historically, Mongolia has had relatively high levels of health expenditure, equivalent to 3.2% of GDP and 10% of overall government expenditures in 2008 (footnote 14). However, allocation of government expenditures has been heavily oriented toward the secondary and tertiary levels, with referral hospitals providing a large proportion of outpatient services and managing many cases that could be dealt with at primary level. An estimated 40% of all hospital admissions are thought to be clinically unnecessary. A key reason for this is the poor availability of subsidized essential drugs at primary health care and hospital outpatient facilities. Because hospitalized patients receive free drugs (along with other services) there is an incentive for people to by-pass the primary health care levels. Further, when patients at the primary level are unable to afford prescribed non-subsidized drugs, their condition may deteriorate, resulting in hospitalization that could have been prevented if the drugs were more easily available. 22. To improve access, a universal and compulsory health insurance scheme was introduced in This currently accounts for about 25% of overall Government health expenditures. The state subsidy for health insurance does not adequately serve the needs of the poor. This is because state contributions are based on categories of people (such as children under 16, soldiers, and students), not on levels of poverty. As a result, many non-poor are included, and many poor are excluded. Another reason relates to civil registration; many categories of the poor, such as unregistered migrants, street children and the homeless, are unregistered and, consequently, cannot obtain health insurance. 23. Health Budget Cuts. The Mongolian Parliament amended the 2009 budget in March The health sector budget was cut from MNT229.6 billion to MNT206.8 billion, a 10.2% reduction that affected both recurrent costs and capital investments. In the recurrent costs section of the budget, this cut has primarily affected salaries and wages, which have been cut by 9.25%; heating, electricity, stationery, fuel and transportation, which have been cut by 17.3%; and medicines and vaccines which have been cut by 20%. Funding has been decreased for all health centers and hospitals. Salaries for family group practices (FGPs) have also been cut by MNT million. 24. Access to health care by the very poor and vulnerable especially in the rural and urban ger communities may be significantly affected by the erosion of the quantity and quality of the health care caused by budget cuts to facilities in these areas. Out-of-pocket expenses will increase as funding cuts affect the delivery of essential health services at the soum health center (SHC) and FGP levels since these services depend on the provision of capitation-based funding provided by the state budget. While funding from the Health Insurance Fund has not been reduced, declines in the state budget will affect the SHCs and FGPs which are primarily used by the poor. 25. Education Sector. Mongolia is highly ranked in terms of education expenditures, enrolment, and completion. However, poverty has had a significant impact on school attendance 5 15 IMF Mongolia Public Expenditure Review, Ulaanbaatar. The elimination of universal benefits to those who do not depend on them for well-being provides an additional avenue for potential savings. Under the current Social Welfare Law of 2006, the Mongolian government awards four different types of universal benefits to citizens; Child Money, the Newlywed benefit, Newborn benefit, and the benefit given to pregnant women. In 2008, these benefits amounted to MNT147,970 million.

19 6 and school quality. Even before the financial crisis, the costs of education to parents, including textbooks, stationery, school uniforms, and travel to school were major concerns. Surveys showed that textbooks were the highest expenditure item in household spending on education. For the poorest segment of the population, textbook costs account for over 50% of educational expenditures. In theory, the Government provides textbooks to 20% of the students who are deemed poor. However, the existing targeting program is administered inefficiently as there is leakage to the non-poor and coverage is low, with only 9% of the students reporting having received free textbooks. 26. Education Budget Cuts. The education budget has been reduced by MNT billion (10.8%) compared with the 2009 budget. Even before the financial crisis, there were funding gaps, and it is anticipated that these will increase during the crisis. The 2009 approved budget for the ministry was MNT432 billion 16 but this has been decreased to MNT386 billion; a reduction of MNT46 billion, affecting both recurrent costs and capital investments. 17 In the recurrent costs segment of the budget, cuts have primarily affected salaries and wages and related expenditures, which have been reduced by 9.1%. Other cuts are for line items such as stationery, electricity, heating, and transportation, which have been cut by 22.3%. Budget cuts will result in re-phasing the construction of schools, dormitories, and kindergartens. The crisis will severely curtail the expansion plans for primary schools. 27. The ongoing economic crisis and budget cuts threaten the achievement of education goals. The immediate concerns are increases in: (i) unemployment and consequent decreases in income for parents and guardians; (ii) the number of parents unable to afford school textbooks; (iii) school drop-out rates and the number of out-of-school children, especially within poor communities; (iv) child labor, due to falling household incomes, further increasing the school drop-out rate; and (v) urban migration, resulting in more urban schools having to work in shifts to accommodate rising numbers of students. 28. Urban Sector. The population of Ulaanbaatar City is growing rapidly and is now 40% of the national total. Much of this growth has taken place in ger districts in an ad hoc fashion and as a result, roads, utilities, and other infrastructure in these areas are inadequate. The populations of the ger districts are predominantly poor, with living standards and access to basic services such as water and sanitation very unsatisfactory. The provision of basic services is exacerbated by the ad hoc pattern of settlement, rapid increases in population and outdated legislative frameworks. Piecemeal measures to develop the ger areas are costly and have not resulted in adequate improvements in living standards. 29. Unless a proper plan is developed and implemented, urban sprawl and uncontrolled development will continue to take place. Given the weak legislative framework on land ownership and management, further unplanned and uncontrolled development would not only diminish the aesthetics of the city and reduce the potential for economic growth, it would also reduce living standards. The poor in the ger districts would be worse off because of the deterioration in services and lack of economic opportunities. Taking social and environmental considerations into account in the planning process will be the key to a harmonious improvement in living conditions, especially for the poor living in poor ger areas. A detailed sector analysis is in Appendix MOECS Proposal on Budget Support in Response to Financial Crisis in Education. Ulaanbaatar Amended Budget for Mongolia, Ministry of Finance.

20 7 B. Issues and Opportunities 1. Issues 30. Overreliance on Mineral Revenue as a Funding Source for Social Assistance. Mongolia has relied on mining as a source of expanding government revenue and, for several years, the sector delivered beyond expectations. Windfall taxes enabled the Government to invest in development activities and fulfill election promises, including universalizing child benefits. However, reliance on mineral revenue, as a primary funding for social welfare benefits such as the CMP is affected by fluctuating mineral prices and therefore needs to be minimized. 31. Lack of Targeting in Current Social Programs. The lack of poverty targeting in social welfare assistance programs results in large inclusion and exclusion errors. About two-thirds of social assistance goes to the non-poor at enormous cost to the Government. A significant portion of poor households are excluded from the government assistance. A unified approach to targeting across sectors, using a common data base of poor households, would improve the pro-poor focus, impact and efficiency of current social transfers. 32. Fragmented Social Welfare Transfers. Social assistance includes 48 programs and 156 different types of social services. In many cases, programs overlap. The absence of an effective centrally operated management information system leads to duplication of benefits and other inefficiencies. Unless the fragmentation of the social assistance system is addressed, it will be difficult to make it more efficient. The fragmentation also means that numerous types of beneficiaries (e.g., the elderly, disabled, newly wed, and care-givers) may resist any consolidation process. Consolidation has only recently become part of the policy dialogue on reforming social welfare so advocacy and effective public communication will be needed. 33. Creating Additional Benefits. In recent elections the Government promised that up to MNT1.5 million from the revenues of the mining sector would be given out to all Mongolians as a motherland benefit. The purpose of this benefit is to share the profits of the mineral wealth directly with all citizens, but its feasibility will need to be reconsidered in light of the current economic and financial situation. 34. Lack of Impact Measurement and Inadequate Monitoring and Evaluation. Inadequate monitoring and evaluation systems and impact measurement mean that the Government has only a limited understanding of the impact of welfare programs. For example, at present there is no central database of CMP beneficiaries which hampers efforts to reduce coverage for those who do not need such assistance. 35. Limited Access to Social Assistance. The complexities of the civil registration system limit the access of poor households to social assistance, particularly those households who have recently moved to urban areas, but have lost documents or have other difficulties with the registration system. The social welfare system currently relies on self-registration for benefits and has no outreach programs to reach those without proper civil registration. 36. Poverty and Inequality. One of the key findings of the recent poverty data ( ) is the growth in inequality. The strong growth of the past few years has not transferred benefits to the broader population, especially the poor. The financial crises may exacerbate growing inequality and undermine Mongolia s progress towards achievement of the Millennium Development Goals (MDGs). Unless mitigation measures are put in place, rising unemployment will swell the ranks of the poor and push up social welfare expenditure, even with good targeting systems in place.

21 8 37. Proxy Means Test Development and Need for a Transition Strategy. Mongolia has experience of successful proxy means testing under the initial targeted CMP program in It is important to underline that the changes to universal coverage were prompted by access to mining revenue and political promises, not because of the failure of the original CMP to target those in need. 38. During the development of the FNSWPP in 2008, broad consensus was reached with stakeholders on the need to target the new form of social assistance. Re-development of the PMT was envisioned in one of the pilots to be implemented in In response to the financial crisis and the needs outlined and agreed upon in the Program policy matrix, this process is now being fast-tracked. The World Bank has agreed to carry out the new PMT calculations and estimations based on poverty data from the household socioeconomic survey This work will be carried out in collaboration with the Ministry of Social Welfare and Labor (MSWL) and National Statistics Office (NSO). The MSWL has created a working group on PMT development and is also the coordinating agency for an intersectoral working group on the same topic. The new PMT estimations and questionnaire are expected in June It is estimated that full national coverage of the PMT will take 8-12 months. Many of the poor can be covered quickly by using available poverty mapping data developed under United Nations Development Programme (UNDP) assistance. Initial pilot testing of the tools will be carried out under the FNSWPP. Rapid validation will be conducted by a nongovernment organization or university contracted for such purpose. 39. Given the time needed to design and implement the PMT, it is clear that a transition strategy is needed. An MSWL social welfare plan is required under the IMF agreement and is a first tranche condition of the Program. The plan will analyze the options and outline the transition strategy including using available databases and documentation to create a list of people who can be taken off the list of CMP beneficiaries. This would include civil servants, employees in the formal sector, and others for whom the assistance is not absolutely necessary. Working from both sides of the beneficiary list at the same time (i.e., identifying those who need to be on the list via PMT and those who can safely be excluded through existing databases), the MSWL will develop a list of poor in need of social assistance within a reasonable timeframe and without undue social shocks. 2. Opportunities 40. Quick Response to Immediate Budget Support Need. The Government has taken prompt action to steer the country back to recovery. This rapid response by Government and support from its development partners provide a firm footing for recovery. 41. Creating a National System of Targeting the Poor. The Government has accepted a range of policy measures that will create a solid foundation for a national system that supports poverty targeting across sectors over the long term. This will ensure that those most in need are beneficiaries of Government programs aimed at reducing poverty in the country. 42. Growing Appreciation of the Need for Targeting. The current financial crisis has created a realization that fiscal sustainability is critical and that universal benefits are likely to undermine this. There is growing awareness of the need to prioritize beneficiaries and put in place adequate identification and monitoring systems. These systems will increase the efficiency of social assistance programs and will operate across sectors. 43. Improving Efficiency of Social Transfers. The policy measures proposed are budget neutral. They are intended to help the Government address basic needs more efficiently, including health, education, welfare, and urban living conditions.