Mongolia: Social Welfare Support Program

Transcription

1 Completion Report Program Number: Loan Number: 3297 June 2018 Mongolia: Social Welfare Support Program This document is being disclosed to the public in accordance with ADB s Public Communications Policy 2011.

2 CURRENCY EQUIVALENTS Currency unit togrog (MNT) At Appraisal At Program Completion 20 August June 2016 MNT1.00 = $ $ $1.00 = MNT1,991.5 MNT1,966.0 ABBREVIATIONS ADB Asian Development Bank CMAP Comprehensive Macroeconomic Adjustment Program DBM EFF Development Bank of Mongolia extended fund facility FDI foreign direct investment FSL Fiscal Stability Law GDP IHID IMF gross domestic product integrated household information database International Monetary Fund MOF MPDSP Ministry of Finance Ministry of Population Development and Social Protection NOTE In this report, $ refers to United States dollars. Vice-President Stephen P. Groff, Operations 2 Director General Amy S.P. Leung, East Asia Department (EARD), Country Director Yolanda Fernandez Lommen, Mongolia Resident Mission (MNRM), EARD Team leader Team members Declan Magee, Senior Country Economist, MNRM, EARD Reynaldo Ablanida, Senior Operations Assistant, EARD Battseren Enkhbaatar, Operations Assistant, MNRM, EARD Abigail D. Garrovillas, Senior Operations Officer, EARD 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.

3 BASIC DATA CONTENTS Page I. PROGRAM DESCRIPTION 1 II. DESIGN AND IMPLEMENTATION 2 A. Program Design and Formulation 2 B. Program Outputs 3 C. Program Costs and Financing 4 D. Disbursements 4 E. Program Schedule 4 F. Implementation Arrangements 4 G. Technical Assistance 4 H. Safeguards 5 I. Monitoring and Reporting 5 III. EVALUATION OF PERFORMANCE 5 A. Relevance 5 B. Effectiveness 7 C. Efficiency 9 D. Sustainability 9 E. Development Impact 10 F. Performance of the Borrower and the Executing Agency 11 G. Performance of the Asian Development Bank 11 H. Overall Assessment 11 IV. ISSUES, LESSONS AND RECOMMENDATIONS 12 A. Issues and Lessons 12 B. Recommendations 13 APPENDIXES 1. Design and Monitoring Framework Status of Compliance with Loan Covenants Policy Matrix Country Economic Indicators 20 i

4 A. Loan Identification BASIC DATA 1. Country Mongolia 2. Loan number and financing source 3297 ordinary capital resources 3. Program title Social Welfare Support Program 4. Borrower Government of Mongolia 5. Executing agency Ministry of Finance 6. Amount of loan $150,000, Program completion report number Financing modality Policy-based loan B. Loan Data 1. Appraisal Date started Date completed 2. Loan negotiations Date started 10 June June August August 2015 Date completed 3. Date of Board approval 29 September Date of loan agreement 28 October Date of loan effectiveness In loan agreement Actual Number of extensions 6. Program completion date Appraisal Actual 7. Loan closing date In loan agreement Actual Number of extensions 26 January November December June December June Financial closing date Actual 15 June Terms of loan Interest rate Maturity Grace period 10. Disbursements a. Dates Initial Disbursement 20 November 2015 Final Disbursement 3 May 2016 London interbank offered rate % 15 years 3 years Time Interval 5 months Effective Date 13 November 2015 Actual Closing Date 15 June 2016 Time Interval 7 months

5 ii b. Amount ($ 000) Category Original Allocation (1) Increased during Implementation (2) Cancelled during Implementation (3) Last Revised Allocation (4=1+2 3) Amount Disbursed (5) Undisbursed Balance (6 = 4 5) Total 150, , , C. Program Data 1. Program cost ($ 000) Cost Appraisal Estimate Actual Foreign exchange cost 150,000 Local currency cost 0 Total 150, Cost breakdown by program component ($ 000) Component Appraisal Estimate Actual First Tranche 100,000 Second Tranche 50,000 Total 150, Program performance report ratings Implementation Period Ratings 1 December December 2016 No ratings in eops for program loans D. Data on Asian Development Bank Missions Name of Mission Date Reconnaissance May 2015 Fact-finding June 2015 Negotiation August 2015 Review March 2016 Program completion review April 2018 No. of Persons No. of Person-Days Specialization of Members 2 3 a, b 5 15 c, a, b 3 3 c, a 1 3 a 2 3 a a = economist, b = programs officer, c = counsel.

6 I. PROGRAM DESCRIPTION 1. Mongolia became a middle-income country in 2011 on the back of a decade of strong economic growth driven by years of economic reforms and the country s vast mineral wealth. Foreign direct investment (FDI), mostly in the mineral sector, made up 40% of gross domestic product (GDP) in , making Mongolia the fastest-growing country in the world in The strong economic performance bolstered fiscal revenues and allowed the government to strengthen its social welfare programs. This was crucial for more inclusive growth because the mining sector, which is the main driver of growth, provides less than 4% of employment. Evidence shows that the social welfare programs have been positive. Accounting for about 40% of the poor s income, social transfers in Mongolia have significantly reduced poverty. Poverty declined by 17 percentage points from 38.6% in 2010 to 21.6% in 2014 and the poverty rate would have been about 10 percentage points higher in 2014 in the absence of social welfare programs Limited economic diversification means that Mongolia is highly dependent on mining and the flows of FDI to this sector. Mongolia s economy is therefore highly vulnerable to external shocks, particularly commodity price shocks and the economic cycles and levels of FDI of its main trading partners. Falling commodity prices in 2012 and 2013, particularly for coal, severely strained Mongolia s mineral production and consequently its fiscal revenues. Exacerbating the problem, FDI fell by 55% in 2013 and then by a further 80% in This resulted in a sharp slowdown in GDP, which fell to 3.0% in the first half of 2015 from a peak of 17.3% in The economic slowdown reduced economic opportunities and increased the vulnerability of the poorest. The macroeconomic imbalances associated with the slowdown also threatened the continuation of social welfare programs and therefore risked aggravating further the already critical situation of poor Mongolians. A cessation or major reduction in these programs would have risked further reversing some of the gains in poverty reduction realized in the past. Given the positive impact of social welfare programs on poverty reduction, continued support for them was vital. Furthermore, despite the gains that had propelled Mongolia into middle-income status in 2011 and significantly reduced poverty, one in five Mongolians still lived in poverty in 2014 and were highly dependent on welfare benefits for basic subsistence. Nomadic families, households headed by women, and rural urban migrants have a particularly high poverty incidence and are more vulnerable to the country s harsh climate and extremely cold winters. 4. The Social Welfare Support Program was developed in response to a request from the Government of Mongolia to close an important fiscal gap in the 2015 budget and support fiscal consolidation efforts while improving the efficiency of social welfare expenditure. 2 The basic objective was to ensure that adjustment forced by the economic deterioration did not come at the expense of Mongolia s poverty-reducing social welfare expenditure. The program was prepared in close coordination with key development partners and supported the recommendation of the International Monetary Fund (IMF) to strengthen safety nets during the adjustment process to protect the poor and improve the targeting of benefits. 3 The program aimed to introduce reforms in fiscal policy management and social welfare that would (i) address the need to sustain social welfare programs and protect the poor during the implementation of the Comprehensive Macroeconomic Adjustment Program (CMAP) a program approved by Parliament in 2015 that aimed to increase macroeconomic stability, and (ii) help strengthen sector mechanisms to ensure 1 National Statistics Office of Mongolia and the World Bank Poverty Profile in Results of the Household Socioeconomic Survey Ulaanbaatar. 2 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to Mongolia for the Social Welfare Support Program. Manila. 3 IMF Article IV Consultation Staff Report. Washington, DC.

7 2 the sustainability and impact of social welfare programs in the future. 5. The program size of $150 million from the ordinary capital resources of the Asian Development Bank (ADB) was designed to meet a little more than half of the fiscal gap in the 2015 budget. The Ministry of Finance (MOF) was the executing agency, responsible for overseeing and coordinating the implementation of policy actions. The Ministry of Population Development and Social Protection (MPDSP) was the implementing agency. A steering committee was set up comprising senior officials from both ministries and chaired by the state secretary of the MOF. The intended impact of the program was the mitigation of the adverse effects of fiscal consolidation on the poor. The intended outcome was the maintenance of social welfare programs. The targeted outputs were (i) improved fiscal management, and (ii) improved policies and regulations to support targeting and consolidation of social welfare programs. These are described in more detail in the design and monitoring framework in Appendix 1. II. DESIGN AND IMPLEMENTATION A. Program Design and Formulation 6. The program was designed to support the government in implementing the CMAP, and thus was closely aligned with Parliament-approved government plans. The CMAP included measures to improve fiscal consolidation and debt management, as well as to strengthen social welfare programs to mitigate the impact of the adjustment costs on the poor, boost employment, and bolster the investment climate. Despite the government s efforts, the fiscally contractionary measures in the CMAP, coupled with a continually challenging external environment, resulted in major fiscal revenue shortages that culminated in a fiscal gap of MNT500 billion in The program was developed to help the government maintain the important fiscal commitments in the CMAP but also included policy actions and funding to ensure the continuation of the government s poverty reduction efforts through social welfare. 7. The program was consistent with the main pillars in ADB s interim country partnership strategy for Mongolia, sustainable growth and inclusive social development. 4 The program s focus on inclusive economic growth and social protection was closely aligned with ADB's Strategy 2020 and its midterm review. 5 Thus the program was highly relevant at appraisal, design, and completion. 8. The program introduced reforms that (i) addressed the immediate need to sustain social welfare programs and protect the poor during the implementation of the CMAP, and (ii) helped strengthen sector mechanisms to ensure the sustainability and impact of social welfare programs. Policy actions were selected based on international best practice and in-depth sector analyses. The actions chosen built on the policy dialogue and reforms achieved through engagement by ADB and other development partners. The actions also strengthened the use of the targeting database created under the Food and Nutrition Social Welfare Program and Project and expanded its use to other programs. 6 The choice of a policy-based loan financing modality was appropriate because the program supported government-led plans and used the government s 4 ADB Interim Country Partnership Strategy: Mongolia, Manila. 5 ADB Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, Manila; and ADB Midterm Review of Strategy 2020: Meeting the Challenges of a Transforming Asia and Pacific. Manila. 6 ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grants to Mongolia for the Food and Nutrition Social Welfare Program and Project. Manila.

8 3 own systems to improve (i) overall resource allocation through fiscal consolidation, and (ii) the efficiency of social welfare spending. B. Program Outputs 9. The program outputs were (i) improved fiscal policy management, and (ii) improved policies and regulations to support targeting and consolidation of social welfare programs. The program supported a policy framework with corresponding outputs and policy actions, as detailed in the policy matrix (Appendix 3). The program had 18 policy actions, 11 in the first tranche and 7 in the second tranche. All policy actions were complied with. 10. Output 1: Improved fiscal policy management. Under this output, the program aimed to improve fiscal policy management to maintain social welfare during the fiscal consolidation process. Improved fiscal management was important to help protect the most vulnerable by (i) increasing the availability of funding for the government s Food Stamp Program, which targets the poorest households in the country; and (ii) providing funding to subsidize health insurance contributions for household members in need of welfare services. This output contained nine policy actions, including two under the second tranche. All were complied with. The actions can be broadly categorized into fiscal stability and debt management, and budget transparency. 11. Policy actions to restore fiscal stability included (i) approval of the CMAP, (ii) amendment of the Fiscal Stability Law (FSL) to gradually reduce the fiscal deficit and public debt ceilings by 2018, (iii) and amendment of the 2015 fiscal budget to reduce fiscal expenditures to comply with the requirements of the revised law and increase fuel tax revenue. A policy action was included on establishing a sovereign wealth fund to mitigate the impact of future swings in commodity prices and FDI inflows. Another policy action was included for the government to adopt a mediumterm debt management strategy to strengthen debt sustainability. 12. Policy actions to improve budget transparency include (i) consolidating the budgetary expenditures of the Development Bank of Mongolia (DBM) under the state budget to eliminate off-budget spending, (ii) terminating the Price Stabilization Program to reduce quasi-fiscal operations in the central bank, and (iii) making the Budget Transparency Law effective to strengthen public financial management. 13. Output 2: Improved policies and regulations to support targeting and consolidation of social welfare programs. Under this output, the program sought to strengthen poverty targeting and consolidate social welfare programs to improve the effectiveness of social welfare spending during challenging macroeconomic times. This output contained nine policy actions, including five under the second tranche. All were complied with. The actions can be categorized into poverty targeting and the consolidation of social welfare programs. 14. To strengthen poverty targeting, the Cabinet issued a resolution requiring at least two ministries to use the poverty-targeted integrated household information database (IHID) to allocate benefits in selected programs. Another policy action was to allocate resources in the 2016 budget to maintain and update the database to capture the new poor resulting from the economic stabilization and adjustment process. Furthermore, the 2016 budget allocated additional resources to the Food Stamp Program, expanding its benefits and coverage. The 2016 budget also allocated additional resources to subsidize health insurance contributions and expand access for needy household members.

9 4 15. To increase social welfare effectiveness, the government established a working group of ministries to prepare a plan to consolidate social welfare programs with the aim of reducing administrative and implementation costs and benefits duplication. The program ensured funding for the quarterly implementation of the Household Socioeconomic Survey to strengthen monitoring and evaluation of social protection to gauge future performance and enable further consolidation in the future. C. Program Costs and Financing 16. ADB provided $150 million from its ordinary capital resources. The loan was disbursed in two tranches. The first tranche of $100 million was disbursed upon loan effectiveness. The second tranche of $50 million was disbursed on achievement of the second tranche policy actions. D. Disbursements 17. The disbursement for the program was $150 million. The first tranche of $100 million was disbursed on 20 November 2015 and the second tranche of $50 million was disbursed on 3 May E. Program Schedule 18. The program was implemented over a 25-month period from 1 December 2014 to 31 December The program was approved on 29 September 2015 and the loan became effective on 13 November The program was completed on 15 June F. Implementation Arrangements 19. The implementation arrangements designed at appraisal were satisfactory and no changes were made during the program. The MOF was the executing agency, with responsibility for overseeing and coordinating the timely implementation of the policy actions and implementing policy actions related to fiscal consolidation. The MPDSP was the implementing agency and responsible for implementing policy actions related to social welfare. MOF set up a program steering committee, comprising senior representatives from the MOF and the MPDSP and chaired by the MOF secretary. The committee managed coordination of policy actions and monitored progress in achieving program outputs. The ADB coordinated closely with other partners involved in social welfare, including the World Bank, the Government of Japan through the Japan International Cooperation Agency, and United Nations agencies. ADB also maintained coordination with the IMF, and the overall program was consistent with their recommendations. G. Technical Assistance 20. The program did not include technical assistance because it built on extensive policy dialogue and reforms achieved in ADB s earlier engagement with the government on social welfare. Furthermore, it aimed to expand the use of the targeting database created under the Food and Nutrition Social Welfare Program and Project, which included technical assistance to support several of the policy actions under the program. This technical assistance included support for updating the intersectoral database and developing policy options for expanding targeting and consolidating benefits. Furthermore, ADB staff and staff consultants assisted the government in specific efforts to improve the targeting and consolidation of welfare programs.

10 5 H. Safeguards 21. Program activities were limited to policy reforms. None of the policy actions was judged likely to result in or lead to involuntary resettlement or adversely affect indigenous peoples. The program was categorized C for environment, involuntary resettlement, and indigenous peoples. ADB assessed the potential safeguard impacts of policy reforms as part of the preparation of the program. 7 The report provided a summary assessment of the impact of each policy reform on social safeguards and the environment. It showed that eight of the policy actions would have the positive social impact of benefiting poor and vulnerable groups by increasing or improving the targeting of benefits to these people. The only possible adverse impact would be a reduction in benefits to the non-poor because of better targeting. This was not an issue of concern given that the program aimed to safeguard the social welfare of the poor, not the non-poor. 22. Two of the policy actions were deemed to have potential environmental impacts. The assessment concluded that increased fuel tax under policy action 3 would have a net positive impact on the environment. It also determined that expanding the Food Stamp Program would not have a negative impact on the environment because it compensated the poor for food price inflation by increasing their food purchasing power rather than expanding food production. Overall, the assessment of potential safeguards issues was appropriate for the program. I. Monitoring and Reporting 23. The government successfully achieved all policy actions under the program and complied with all the program assurances, conditions, and covenants in the loan agreement (Appendix 2). The program steering committee met on a quarterly basis to manage coordination and monitor progress in achieving outputs. 24. The program documents provided a brief assessment of public financial management in Mongolia, which was based on the comprehensive Public Financial Management Performance Report of the World Bank (included as a linked document in the report and recommendation of the President). 8 The program contained measures to mitigate the public financial management challenges identified, including policy actions to promote compliance with the FSL and the effectiveness of the Budget Transparency Law. These aimed to strengthen fiscal discipline by reducing the procyclical nature of fiscal policy and increasing the transparency of public entities and their financial reporting and auditing standards. III. EVALUATION OF PERFORMANCE A. Relevance 25. The program design was highly relevant. Major macroeconomic adjustments became necessary after commodity prices fell in 2012 and 2013, and plummeting FDI in subsequent years resulted in a major economic slowdown. The program enabled the government to undertake the necessary fiscal consolidation without having to reduce social welfare expenditure. Maintaining 7 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to Mongolia for the Social Welfare Support Program. Potential Safeguard Impacts of Policy Reforms (accessible from the list of linked documents in Appendix 2). Manila. 8 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to Mongolia for the Social Welfare Support Program. Public Financial Management Performance (accessible from the list of linked documents in Appendix 2). Manila; and World Bank Mongolia: Public Financial Management Performance Report. Washington, DC.

11 6 such expenditure was important to mitigate the impact on poverty of the deterioration in economic conditions. Social welfare programs have a solid record of reducing poverty in Mongolia, so it was greatly in the interests of poverty reduction to maintain expenditure on these programs. The program enabled the government to implement the CMAP, which was designed to undertake the required fiscal consolidation, while maintaining government poverty reduction efforts through social welfare programs. The CMAP was approved by Parliament in 2015 and thus enjoyed strong political support within Mongolia. Despite initial efforts to tighten the fiscal situation, the government faced a fiscal gap of MNT500 billion in 2015, and the program helped finance this gap. 26. The program s policy actions entailed important reforms to improve fiscal policy management, including measures to consolidate off-budget expenditures from the DBM, reduce quasi-fiscal operations in the central bank, increase budget transparency, and amend the FSL to restore fiscal stability. These measures were highly relevant because they enabled the government to increase budget transparency while taking some key steps to strengthen fiscal stability. The measures to consolidate and strengthen targeting of social welfare programs were well designed and enabled the government to improve the efficiency of social welfare expenditure. 27. The program remains highly relevant after completion. Both the challenge of protecting social expenditure in an economy vulnerable to external shocks and the policy direction that this program initiated remain integral to the policy challenges Mongolia faces, including the implementation of an IMF program (para. 28). 28. Mongolia s economic performance continued to deteriorate after Growth fell to 1.2% in 2016 and unemployment rose to 8.6%. Fiscal performance continued to worsen due to large off-budget spending in the lead-up to the 2016 elections, with the fiscal deficit reaching 15.4% of GDP in 2016 and general government debt rising to 83.7% of GDP. This culminated in IMF engagement under an extended fund facility (EFF), which began in As highlighted under the Social Welfare Support Program s risk assessment and risk management plan, 9 ADB s continued engagement with the government, building on ADB s involvement in social welfare in Mongolia since 2001, would be necessary to make lasting progress. To this end, ADB prepared a second phase of the program. Approved by ADB s Board in 2017, the second phase builds on the program by further improving fiscal policy management, mostly by deepening reforms related to the DBM and the Future Heritage Law and augmenting the work on targeting and consolidation of social welfare programs The program played a vital role in enabling the government to establish the policy framework to strengthen fiscal management and to improve targeting and consolidate social welfare programs. The government confirmed that the program helped them take the necessary initial steps toward improving and expanding targeting and consolidating social welfare programs. The government strengthened targeting by (i) issuing a resolution to use the poverty-targeted IHID across government programs; (ii) allocating funding to update the poverty-targeted IHID; and (iii) preparing a draft resolution requiring the Ministry of Justice to adopt proxy means testing to provide free legal services to the poorest households, and for the Ministry of Education to do the same for secondary school textbook provision to this group. 9 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to Mongolia for the Social Welfare Support Program. Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2). Manila. 10 ADB Report and Recommendation of the President to the Board of Directors: Proposed Policy-Based Loan to Mongolia for the Social Welfare Support Program Phase 2. Manila.

12 7 30. In addition, the government increased funding for the Food Stamp Program by 80%, which expanded both its benefits and coverage. The government also took steps to support consolidation of welfare benefits by establishing an interministerial working group to analyze options. The working group helped the government draft the Future Heritage Law to establish a sovereign wealth fund, which will play an important role in strengthening the management of revenues from the mining sector in the future. It also initiated the work to consolidate off-budget expenditure from the DBM and quasi-fiscal expenditure by the central bank. These reforms have all been key to reforms initiated under phase 2 of the program and the EFF. B. Effectiveness 31. The government allocated MNT285 billion for social welfare in the 2015 budget, and this was maintained in the budget amendment approved by Parliament in October Thus the program achieved its intended outcome of maintaining social welfare expenditure at MNT285 billion in 2015, thereby ensuring that the country s economic difficulties did not result in a reduction of social welfare support. 32. All 18 program actions in the policy-based loan and all 13 output indicators and targets in the design and monitoring framework were achieved. The timing and sequencing of the policy actions were appropriate. The second tranche focused on actions that followed logically from the policy actions of the first tranche, such as a second budget amendment or items related to the 2016 budget, actions that required further preparation, and actions that would provide a basis for continued policy reform. Paras describe the status of the outputs. 33. Output 1: Fiscal policy management improved. This output included the following five output indicators. (i) Parliament approves Comprehensive Macroeconomic Adjustment Program by October Parliament approved the CMAP in February (ii) The government makes Budget Transparency Law effective by October The government approved the law in July 2014 and made it effective in early (iii) Parliament approves amended Fiscal Stability Law by October Parliament approved the amended FSL in February (iv) Government terminates Price Stabilization Program and transfers outstanding loans from central bank to state budget by October The Price Stabilization Program was terminated, and outstanding loans were transferred from the central bank to the state budget subject to the FSL in the first half of (v) Government submits to Parliament second budget amendment to 2015 budget to adjust fiscal expenditure by December 2015, maintaining funding for social welfare programs. The government submitted to Parliament a second budget amendment reflecting further expenditure cuts in compliance with the government action plan for fiscal consolidation. The amended budget maintained the MNT285 billion allocation for social welfare programs. Parliament approved the budget amendment in October Output 2: Policies and regulations to support targeting and consolidation of social welfare programs improved. Output 2 included the following eight output indicators.

13 8 (i) Total poverty-targeted transfers to poorest households increased in 2015 by 60%. This was achieved through the expansion of the benefits and coverage of the Food Stamp Program in the 2015 budget. Monthly benefits for children were expanded from MNT5,000 in 2014 to MNT6,500 per child in 2015; monthly benefits for adults rose from MNT10,000 to MNT13,000 per adult in the same period. (ii) Parliament approves Revised Citizens Health Insurance Law to subsidize health insurance contributions for household members in need by October Parliament approved the revised law. (iii) Cabinet issues decree to use poverty-targeted integrated household database across government programs by October The Cabinet issued a decree to this effect. (iv) Government allocates funding to maintain and update the integrated household information database by October The government allocated funding under the MPDSP budget to maintain and upgrade the IHID, including its capacity to disaggregate data by sex, to capture the new poor and improve targeting. (v) Government issues ministerial order requiring Health Insurance Organization to ensure health insurance coverage for household members in need by June The MPDSP issued a ministerial order in accordance with the Social Welfare Law in January Under the order, the Health Insurance Organization fully covers the cost of health care services for households that (a) are recipients of social welfare services, (b) were not covered before, and (c) would otherwise be unable to afford health care. The order establishes that the MPDSP s Regulatory Office of the Social Protection Policy Implementation is tasked with monitoring its implementation. (vi) Government prepares draft resolution for at least two ministries to use proxy means testing in selected programs by June A draft government resolution was prepared in March 2016 establishing that the Ministry of Justice would adopt proxy means testing to target the provision of free legal services to the poorest households and the Ministry of Education would do the same for secondary school textbook provision. (vii) Prime Minister establishes interministerial working group to analyze options and prepare a plan to further consolidate social welfare programs. The MOF established the interministerial working group in February 2016 through Ministerial Order No. 78. ADB participated in the meetings of the group, which included representatives from the MOF and the MPDSP. The MPDSP administers 71 social welfare programs. Consolidating the programs and improving their targeting would reduce administrative and implementation costs, and duplication of benefits. However, this is a long-term process that requires in-depth analysis of the impact of consolidation on the recipients of welfare benefits. The working group took the first steps by identifying proposals for consolidation that would be achieved at zero cost. It considered the following proposals: the introduction of a poverty benefit, the reform of benefits for honored mothers, and the role of a disability allowance through which both cash and services could be provided. It also discussed steps to refine the scope of the proposed reforms, including due consideration of gender aspects in the consolidation process. (viii) Government strengthens monitoring and evaluation of social welfare

14 9 programs by ensuring budget allocations for quarterly preparation of 2016 household socioeconomic survey by December The 2016 budget, approved in November 2015, allocated MNT1.1 billion for the quarterly preparation of the Household Socioeconomic Survey. This was critical for strengthening the monitoring and evaluation of social welfare programs to ensure their effectiveness. 35. The program was successful in meeting the outcome and output targets despite an extremely challenging economic and political environment. It is therefore rated highly effective. C. Efficiency 36. The implementation of the program was highly efficient. All policy actions were completed 9 months ahead of the deadline and no policy waiver was required. The program was closed 6 months ahead of the established closing date. The rating was confirmed in discussions with government counterparts. D. Sustainability 37. The program is likely sustainable. This rating reflects both the program s success at safeguarding social welfare spending and the institutional changes it achieved in the areas of fiscal consolidation and improving the efficiency of social welfare expenditure. Continued engagement by ADB and other development partners in this area has been important to the sustainability of some of the key results so far, and future sustainability will depend on continued engagement. Mongolia is highly vulnerable to external shocks, particularly from commodity price movements. Building up fiscal buffers and the economic diversification required to manage external shocks will take time, and ADB needs to continue to work closely with Mongolia to provide support. 38. The program s sustainability should be viewed in the context of the continued deterioration of Mongolia s economy after This put pressure on unemployment, fiscal deficits, and government debt. In addition, continued weak external demand and the sharp drop in commodity prices widened the current account deficit and put pressure on the balance of payments. This culminated in the agreement with the IMF on an EFF in 2017 to improve fiscal policy management, enhance monetary and central bank governance, strengthen the banking system, and boost competitiveness. The follow-up Social Welfare Support Program Phase 2, approved in 2017, sought to build on the program by deepening the improvements to fiscal policy management and the targeting and consolidation of social welfare expenditure. Economic performance improved in 2017 due to more positive external conditions. However, many underlying vulnerabilities remain, and poverty increased by 8 percentage points during to 29.6%. The reforms initiated by this program therefore remain relevant to the economic policy decisions facing Mongolia today. 39. The program funded short-term revenue shortages in 2015 which, if unaddressed, would have resulted in significant cuts in welfare programs. These cuts would have had a disproportional effect on the poor many of whom depend heavily on benefits for daily subsistence, pushing more Mongolians into poverty. Despite continued challenging economic conditions, expenditure on social welfare increased to MNT297 billion in 2016, MNT319 billion in 2017, and is planned to reach MNT483 billion in The program s outcome of maintaining social welfare programs has therefore been sustained beyond the program period. The increase in poverty during If the Child Money Program is included, overall social expenditure declined slightly overall in 2016 before rising in 2017 to substantially higher than 2015 levels.

15 reinforces the need for social protection but also highlights the need for further efforts to protect Mongolia s poor from the economic cycles to which the country is exposed. 40. The program supported reforms under the economic adjustment plan to improve fiscal policy management to ensure the sustainability of welfare programs and to develop policies and regulations to improve targeting and consolidate social welfare programs. These helped mitigate the adverse effects of the government s fiscal consolidation plan on the poor and sustained financing for social welfare programs. The program also made important changes to fiscal management by improving budget transparency through consolidating off-budget expenditure from the DBM and quasi-fiscal expenditure from the central bank. However, it could not anticipate the excessive spending that occurred in the lead-up to the election in 2016, which temporarily undermined progress. Despite this, many of the budget transparency measures the program initiated are in place today and are playing an important role in ensuring that current economic plans underpinned by the IMF EFF are based on a sound understanding of the budgeting situation. The important measures taken under this program are unlikely to have been sustainable without continued support from ADB and other development partners. 41. A significant area of reform under the program focused on improving policies and regulations to support targeting and consolidation of social welfare programs. To strengthen poverty targeting, a Cabinet resolution was issued requiring at least two ministries to use the poverty-targeted IHID to allocate benefits in selected programs. The 2016 budget allocated resources for maintaining and updating the database to capture the new poor resulting from the economic crisis and austerity measures under the economic stabilization and adjustment process. To increase social welfare effectiveness, the MOF established a working group of representatives from different ministries to prepare a plan to consolidate social welfare programs. The program established a policy framework to improve targeting and consolidate social welfare programs. This framework largely remains intact and has created the space to develop and implement tangible policy actions to achieve better targeting. In 2016, Parliament agreed to reduce the coverage of the Child Money Program Mongolia s largest social welfare program to 60%. The government has initiated steps in 2018 to increase this to 80% in response to the rise in poverty (para. 38). 12 Many challenges remain, including that of further consolidating many other social welfare programs. The program successfully established a framework, but continued engagement will be needed if Mongolia is to reap the full benefits that stronger consolidation can achieve. E. Development Impact 42. The program s development impact was satisfactory. The program successfully safeguarded social welfare expenditure during a difficult economic period. The program could not have anticipated the rise in fiscal indiscipline that preceded the 2016 election, which undermined the principal of the program. Despite this setback, many of the program s achievements remained intact and have been important to the remarkable fiscal consolidation achieved since Although poverty worsened significantly during , given the strong record of social welfare programs in reducing poverty in Mongolia, it is highly likely that poverty would have increased further had social welfare expenditure not been maintained. However, this is difficult to quantify. The government regards the program as successful in maintaining social welfare expenditure and reducing the impact of the economic deterioration on the poor. 12 Parliament originally approved targeting of 60% to be implemented in In July 2017, this was delayed until the beginning of The Prime Minister signed a decree to increase targeting to 80% in April 2018, which was approved by parliament in June 2018.

16 11 F. Performance of the Borrower and the Executing Agency 43. The performance of the Government of Mongolia and the executing agency were highly satisfactory. Both the MOF and the MPDSP demonstrated strong commitment to the program and the agreed policy actions. The program steering committee ensured strong coordination and delivery against the agreed policy actions. This is demonstrated by the fact that all policy actions were met well ahead of time and all program assurances were adhered to. The program did not require any extension and was closed 6 months before the expected date. Furthermore, as the achievement of the outcome indicator was wholly within the government s control, this is a strong indication of good performance by the government. It should be highlighted that these were difficult reforms to make in the context of deteriorating economic conditions and drastic fiscal consolidation efforts. G. Performance of the Asian Development Bank 44. ADB s performance was highly satisfactory. This program continued the long-term engagement between ADB and the government on social welfare in the country. It was processed in less than 4 months given the critical need for support to mitigate the impact of the economic adjustment program on the poor and vulnerable. Despite the short processing time, ADB coordinated closely with other development partners to ensure complementarity, especially with the IMF and the World Bank, which were working in similar areas. The program is an important building block for the existing IMF EFF, and the working relationships ADB has formed with development partners in preparing this program have helped ensure consistent support for Mongolia over this period. ADB also made strong efforts to ensure the program closely followed government priorities and plans by directly linking the program to the CMAP. ADB carefully chose the program amount and linked it closely to the fiscal shortfall in 2015, strengthening the credibility of the program in relation to the objectives it sought to deliver. Overall, this was a timely intervention by ADB that was delivered with the necessary speed and efficiency to avoid any reduction in social welfare expenditure precipitated by the rapidly deteriorating economic conditions. H. Overall Assessment Overall Ratings Criteria Rating Relevance Highly relevant: Program outcomes were closely aligned with country and ADB development priorities, and the program was well designed to ensure achievement of outcomes. Effectiveness Highly effective: All program outcomes and outputs were achieved. Efficiency Highly efficient: Program outputs were delivered in a timely manner. Sustainability Likely sustainable: Overall level of political commitment was good despite some setbacks in the lead-up to the 2016 elections. Overall Assessment Highly successful: The program demonstrates success overall based on ratings on relevance, effectiveness, efficiency, and sustainability. Development impact Satisfactory: Poverty increased but, based on past evidence and interviews with government officials, the likely impact of the program was positive. Borrower and executing agency Highly satisfactory: Coordination and delivery against program targets was good. Performance of ADB Highly satisfactory: ADB s timely intervention was delivered quickly and efficiently. ADB = Asian Development Bank. Source: Asian Development Bank.

17 12 A. Issues and Lessons IV. ISSUES, LESSONS AND RECOMMENDATIONS 45. After the program was approved, Mongolia s economy worsened before showing signs of improvement in Mongolia remains vulnerable because of its high debt levels, a fragile banking sector, and higher poverty rates. Nevertheless, it remains on track to stabilize its economy and exit the current IMF EFF in a stronger position than when it entered it. This improved outlook has required a great deal of effort on the part of the authorities to make the necessary adjustments. The program played an important role in initiating a framework for fiscal consolidation without withdrawing the much-needed social welfare support for the poor at a time of economic difficulty. There is more work to do, both to ensure the hard-won fiscal prudence is sustained and the expenditure allocated to social welfare is used as efficiently as possible through better targeting and consolidation. These challenges continue today and should remain a focus of ADB s engagement in Mongolia. 46. This program built on lessons learned from previous ADB assistance programs in Mongolia. Key lessons from ADB s engagement in earlier economic crises across Asia and the Pacific on how to contain the impact of poverty highlight the importance of (i) strengthening and implementing social protection systems and welfare programs, and (ii) providing development assistance to expand social protection in countries with limited fiscal space. The experience of this program reinforces this lesson. ADB was able to respond quickly to a major economic deterioration and work with the government to ensure that the necessary fiscal consolidation did not harm the poor. 47. Another important lesson is the need to work on both fiscal consolidation and improving social welfare expenditure in the event of an economic crisis. Fiscal consolidation immediately reduces available resources for government expenditure and thus heightens the competition for remaining resources; hence it is important to understand the realities of the fiscal consolidation to gain the necessary credibility to support the government in safeguarding social welfare expenditure. 48. A major lesson from the program is the need for sustained engagement in view of the longterm commitment required to implement social welfare reforms. While ADB has been successful in introducing poverty-targeted mechanisms to distribute welfare benefits and establishing the Food Stamp Program, less progress has been achieved by the government in consolidating welfare programs. This takes time, because of the need to identify and compensate those affected by the consolidation process, and it requires continued support through long-term engagement. Furthermore, setbacks can be expected during or after implementation. The pre-election expenditure in 2016 in the aftermath of this program is a good example. Despite this setback, many of the policy actions that had been introduced through the program remained intact. ADB s decision to reengage after the election was pragmatic, as it abled ADB to not only respond to the worsening economic situation, but also to build on the hard-won reforms introduced earlier. 49. Another key lesson is the need for a realistic policy framework with manageable policy actions to achieve the intended results and successfully implement the reforms. All policy actions under the program were fully achieved 9 months ahead of the deadline, illustrating this important lesson. This also ensures that the policy actions are more likely to stay in place for longer after the program closes.

18 13 B. Recommendations 50. Future monitoring. ADB should continue to engage with the government through policybased lending support, the IMF EFF, and strategically focused technical assistance. Regular review missions and dialogue with key stakeholders deepen the impact of the policy reforms in current and future programs. 51. Covenants. The covenants were relevant and ADB should retain them in their existing form. 52. Further action or follow-up. ADB should continue to engage in social welfare support through existing programs, including the Social Welfare Support Program Phase 2, the IMF EFF, and future policy-based loans. ADB should also continue to work closely with the government to ensure that they have the assistance they need to make further reforms. ADB should aim to engage on this issue at least into the medium term and into the next country partnership strategy, planned to start in ADB should also ensure that future engagement continues to focus on the differentiated social welfare requirements of men and women, and future support should consider deepening engagement on this issue. 53. Timing of the program performance evaluation report. ADB s Independent Evaluation Department could assess the cumulative effect of the two interrelated policy-based loans the Social Welfare Support Program and the Social Welfare Support Program Phase 2 once the completion report for phase 2 is finalized.

19 14 Appendix 1 DESIGN AND MONITORING FRAMEWORK Impact the Program is aligned with Adverse effects of fiscal consolidation on the poor mitigated Design Summary Performance Indicators and Targets Program Achievements Outcome Social welfare programs maintained Outputs 1. Fiscal policy management improved 2. Policies and regulations to support targeting and consolidation of social welfare programs improved Social welfare expenditure maintained in 2015 at MNT285 billion 1a. Parliament approves the CMAP by October b. The government makes the Budget Transparency Law effective by October c. The parliament approves the amended FSL to (i) include budgetary expenditures financed by the DBM under the state budget; and (ii) reflect a gradual reduction of fiscal deficit and debt levels to the original targets of the law by 2018 (2% and 40% of gross domestic product, respectively), by October d. The government terminates the Price Stabilization Program and transfers the outstanding loans from the central bank to the state budget to be subject to the FSL by October e. The government submits to Parliament the second budget amendment to the 2015 budget to adjust fiscal expenditure, ensuring that funding for social welfare programs is maintained, by December a. Total poverty-targeted transfers to poorest households increased in 2015 by 60% (2014 baseline: MNT10 billion) 2b. Parliament approves the Revised Citizens Health Insurance Law to subsidize health insurance contributions for household members in need of social welfare services by October c. The cabinet issues a decree to use the poverty-targeted integrated household information database across The government allocated MNT285 billion to social welfare in the 2015 budget and this was maintained in the budget amendment approved by parliament in October 2015 Approved in February Budget Transparency Law made effective in early Amended FSL was approved by Parliament in February 2108: (i) included budgetary expenditures financed by the DBM under the State budget; and (ii) reflected gradual reduction of fiscal deficit and debt levels to 2% and 40% of GDP, respectively, by Price Stabilization Program was terminated and outstanding loans transferred from central bank to State budget subject to FSL in the first half of Second budget amendment was approved by Parliament in October 2015 to support fiscal consolidation. Allocation for social welfare programs remained intact at MNT285 billion. Funding for Food Stamp Program increased by 80%, expanded both benefit (from MNT5,000 to MNT6,500 per month per child, and MNT10,000 to MNT13,000 per month per adult) and coverage (increased by 8,700 households in 2015 compared to 2014). Revised Citizens Health Insurance Law to subsidize health insurance contributions for household members in need of social welfare services was approved by Parliament. A resolution to use the poverty-targeted Integrated Household Information Database across government programs was issued by Cabinet.