Mongolia Public Expenditure and Financial Management Review (PEFMR) Overview Genevieve Boyreau Senior Economist 1
What this report does Assesses the achievements and challenges for public expenditures and financial management in Mongolia Fiscal management Review of effectiveness of implementation of PSMFL Key service delivery sectors (health, education), social protection, agriculture Reflects on Mongolia's experience during the last five years of economic expansion and proposes practical policy recommendations Review of progress and achievements between 2002 and 2008. Assessment of future priorities, with pragmatic recommendations. 2
How this report was prepared A team of 10 World Bank staff In collaboration with the cross-ministerial working group appointed by Ministerial decree as official counterpart of the PEFMR Bank team. Series of Bank-Government workshops to share preliminary findings and get feedback. Findings to feed in policy dialogue and reforms. 3
The context: Recent economic developments Copper price - $/mt Mongolia external outlook is drastically deteriorating as it faces sharp reductions in the copper price in turn caused by the global downturn. Fiscal and current account balances swung from a surplus into deficit Economic growth is slowing down markedly Togrog depreciated 20 percent Loss in international reserves Question: what needs to be done to address short term imbalances, medium-term sound macro-management? 4
2008 outturns 2007 2006 2005 2004 2003 2002 2001 2000 45% 40% 35% 30% 25% 20% The context: Before the bust: the boom Before the global downturn, Mongolia has seen the most rapid increase in public revenues in decades with large revenues from mining flowing into a fast growing economy. Non-mining revenues Mining revenues 15% 10% 5% 0% Non-mineral growth Mineral growth -5% -10% -15% -20% -25% Non-mineral revenue and grants (%GDP) Mineral revenue (%GDP) Non-mining GDP growth share (%) Mining GDP growth share (%) Overall budget balance (%GDP-right axis) Overall non-mining balance (%GDP) 5
MNT billions 2008 2007 2006 2005 2004 2003 2002 2001 2000 The context Pro-cyclical fiscal policies 3,000 2,500 Capital expenditure Purchase of goods and services Mongolia saved little during the boom years, and instead increased dramatically public spending on wages, untargeted social transfers and public investment. 2,000 Social welfare Maintenance investment is very low 1,500 1,000 500 0 Social security funds Wages and salaries Net lending Subsidies to public enterprises Interest payments Powerful parliament pushing for more public spending with little legal limit. The extent to which mining revenues translate into sustainable development depend on how much the medium-term fiscal space is managed towards maintaining macroeconomic stability, smoothing expenditures, accumulating physical and human assets. 6
Short term Priorities Reduce public spending while maintain propoor pro-growth expenditures Revisit spending priorities to reduce spending and create fiscal space for key long-standing reforms (targeted and fair social protection, public investment program geared towards medium-term development priorities, differentiated public wage policy) Preserve maintenance investment Manage the commodity boom and bust cycle for sustainable development Delink public spending decisions each year from the revenues from the mining sector that year. Adopt fiscal rules which apply to the Medium Term Budget Framework and General Budget to keep the non-mineral deficit under control. Review Parlliament s role in budget formulation. To do so, Mongolia benefits from relatively strong public legal and systemic financial management foundations. 7
Philippines Indonesia Vietnam Cambodia Mongolia Achievements Successful implementation of first generation of core public financial reforms Introduction of an internally consistent legal framework Medium-term and annual budget framework Centralization of revenues and expenditures Integrated financial management information system with treasury single account. PFM Component Elements Operational Treasury Single Account System Yes No No No No Integrated Chart of Accounts Consistent with International Accounting Standards Integrated Budget and Treasury System Linked to the Central Bank Updated Debt Management System Providing Input to the Integrated Treasury and Budget System Treasury System Linked with the Revenue Collection Agency(s) Yes No Yes No No Yes No No No No Yes Yes Yes Yes No No No No 8
Achievements This has contributed to: Reduced leakages in public finances Improved budget execution significantly Largely eliminated arrears accumulation Clarified roles and responsibilities of budget entities Increased transparency of public finances But role of parliament in budget formulation has to be clarified. 9
Future Priorities: Deepen reforms by focusing on sectors Integrate sectoral perspective, donor programs, budget entities and local government needs, civil society demand for accountability and transparency into budget cycle. Focus priorities and role of government (e.g. agriculture) Procurement: limit direct contracting and allow more foreign competition. Audit: build capacity in National Audit Office. Transparency: Institutionalize posting of budget information and forum with civil society on budget priorities. 10
Achievements in sectors Mongolia ranks high among comparators in terms of expenditure allocation and final outcomes in health and education. Education/Health: improvement in allocation methodology for costs (education: variable costs allocated on a nationwide basis; health: move away from line item budgeting to case-based payment with 2006 reforms). The 2003 Social Security Master Plan aimed at consolidating and rationalizing an overly complex social system and the Child Money Program initially responded successfully to this attempt. The NDC scheme improved intergenerational sustainability, equity, and predictability of the Pension Insurance Fund 11
Challenges ahead in sectors Cost-efficiency of service delivery Rural to urban migration challenges the efficiency and equity of service delivery in a large sparsely populated country such as Mongolia. Scope for increasing cost-efficiency of spending in service delivery units without adverse consequence for outcomes or equity. Cost allocation: fixed costs allocation in education do not encourage saving, while there may be teething problems of case-based payments in health. Domestic investment underfunded in service delivery units, increasing the cost of infrastructure maintenance and heating. Low maintenance investment. Social insurance and assistance: Health insurance coverage is declining and leaves a quarter of population having to pay out of pocket hospital services While representing a significant share of GDP, social assistance is poorly or untargeted, leaving the most needy without adequate safety net. Social insurance has long standing issues identified long ago, but left unaddressed. 12
Priorities in sectors Focus service delivery on poor and most vulnerable and increase cost-efficiency. Education: Health Reduce heating costs Promote multi-grade and multi subject teaching Use a combination of poverty targeting and merit to allocate tuition aid. Refocus services to most vulnerables and monitor of outcomes of health services usage Refine geographic resource allocation according to determinants of unit costs. Hospital rationalization: how to bring reform forward? 13
Priorities in sectors Social assistance and insurance Maintain service delivery (health, education) spending. Clarify role of Health insurance. In social assistance, revert to targeting the poor and vulnerable and make benefit conditional to human capital investment. In social insurance (pension), engage the longstanding reform of pension parameters (retirement age, benefit indexation, minimum pension provisions, the wage base, disability benefit) 14
Looking ahead Short-term: Policymakers will have to make tough decisions in the short-term to reduce fiscal imbalances. i. commitment to macroeconomic stability and sustainability that smoothes public consumption over time (fiscal rules). Improving service delivery cost-efficiency will require: i. a clear and credible medium-term revenue allocation priorities for public spending. ii. to adapt public services to the country s changing structural characteristics: a. A completed transition to a market economy with a change in the government s role from a planner to a regulator and facilitator of private sector growth; b. A rural- urban transition with migration causing spatial inefficiencies and inequities in accessing public services; c. An increasing economic reliance on mining, with large and cyclical amounts of public revenues calling for smoothing revenues over time. To take up the challenge, Mongolia benefits from strong legal, institutional and systemic PFM foundations. Opportunity to implement reforms to address past excess and short-sighted public spending and truly use Mongolia s mining revenues as catalyst for mediumterm development. 15