Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 28419-MOG

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL, DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE

WORLD BANK GROUP

FOR

MONGOLIA

April 5,2004

Southeast Asia and Mongolia Country Unit East Asia and Pacific Region

has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (as o f March 3 1,2004)

Currency unit = Tugrik (Tg)

FISCAL YEAR January 1 - December 3 1

WEIGHTS AND MEASURES Metric System

U S $ l = T g 1177

ABBREVIATIONS AND ACRONYMS

AAA Analyt ical and Advisory Activi t ies ADB Asian Development Bank CAE Country Assistance Evaluation CAS Country Assistance Strategy CG Consultative Group CPIA Country Policy and Institutional Assessment CPPR Country Portfolio Performance Review ECTAC Economic Capacity Technical Assistance Credit EGSPRS Economic Growth Support and Poverty Reduction

EU FA0 F I A S GDP GEF GFMIS

GTZ H I E S ICT IDA IDF IFC IMF JBIC JICA JSA L S M S M&E MDG MPRP MTEF

Strategy European U n i o n Food and Agriculture Organization Foreign Investment Advisory Service Gross Domestic Product Global Environment Faci l i ty Government Financial Management and Information System Gesellschaft fur Technische Zusammenarbeit Household Income and Expenditure Survey Information and Communication Technology International Development Association Institutional Development Fund International Finance Corporation International Monetary Fund Japan Bank for International Cooperation Japan International Cooperation Agency Joint Staff Assessment L i v ing Standards Measurement Study Monitoring and Evaluation Mi l lennium Development Goals Mongolia People’s Revolutionary Party Medium-Term Expenditure Framework

NGO N P V ODA PETS

P H R D

PIU PRGF

PRSC PRSP PSD PSDC P S M F L

QPPR

SDR SLP S M E SWAP TA TF UN U N D P

U S A I D

WBI WTO

Nongovernmental Organization N e t Present Value Off icial Development Assistance Public Expenditure Tracking Survey Policy and Human Resources Development Project Implementation Unit Poverty Reduction and Growth Faci l i ty Poverty Reduction Support Credit Poverty Reduction Strategy Paper Private Sector Development Private Sector Development Credit Public Sector Management and Finance L a w Quarterly Portfolio Performance Review Special Drawing Rights Sustainable Livelihoods Program Small and M e d i u m Enterprise Sector-Wide Approach Technical Assistance Trust Fund Uni ted Nations Uni ted Nations Development Programme Uni ted States Agency for Intemational Development W o r l d Bank Institute W o r l d Trade Organization

World Bank Vice President: Jemal-ud-din Kassum Country Director: Ian C. Porter Task Team: Saha Dhevan Meyanathan

Zafar Ahmed Christopher Finch Lynne Sherburne-Benz

FOR OFFICIAL USE ONLY

MONGOLIA COUNTRY ASSISTANCE STRATEGY

Table of Contents

Executive Summary ......................................................................................... i

I . Country Context .......................................................................................... 1

C . Poverty: Profile and Trends ....................................................................... 4

A . Political Transition ................................................................................ 1 B . Economic Transition .............................................................................. 1

I1 . Country Development Program and Prospects ..................................................... 7 A . Country Priorities ................................................................................. 7 B . Key Development Challenges ................................................................... 8 C . Medium-term Economic Outlook ............................................................... 10 D . Debt and Creditworthiness ....................................................................... 11

I11 . The World Bank in Mongolia: Building on Experience ......................................... 11 A . Key Findings from Retrospectives and Consultations ....................................... 11 B . Lessons Learned .................................................................................. 13

I V . Bank Group Assistance Strategy .................................................................. 14 A . Bank Group Activities ..........................................................................

CAS Objective I: Consolidating the Transition ....................................... CAS Objective 2: Reducing Vulnerabilities ............................................

14 17 20

Around Results ...................................................... 23 CAS Objective 3: Strengthening the Alignment of Policies and Resources

B . Assistance Program .............................................................................. 26 C . Portfolio Management ........................................................................... 29 D . Monitoring Implementation ..................................................................... 29 E . Scenarios and Triggers ........................................................................... 30

V . Risks ........................................................................................................ 31

VI . Concluding Remarks ................................................................................... 33

This document has a restricted distribution and m a y be used by recipients only in the performance of their official duties . I t s contents m a y n o t be otherwise disclosed without W o r l d Bank authorization .

Text Tables Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8:

Text Figures Figure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7:

Text Boxes B o x 1: B o x 2: B o x 3: B o x 4: B o x 5:

Attachments Attachment 1 : Attachment 2: Attachment 3 : Attachment 4: Attachment 5: Attachment 6: Attachment 7:

Mongolia and Mi l lennium Development Goals ........................................ 5 Mongolia: Urban-Rural Differences, ..................................................... 6 EGSPRS Pillars and CAS Objectives ................................................... 16 Consolidating the Transition .............................................................. 17 Reducing Rural and Urban Vulnerability ............................................... 2 1 Strengthening Alignment o f Policies and Resources with Development Results ,. 24 Proposed Assistance Program: Base Case .............................................. 28 CAS Triggers ............................................................................... 3 1

Mongolia’s CPIA Compared to IDA Average .......................................... 2 GDP Growth Rate .......................................................................... 4 Sectoral Composition o f GDP ............................................................ 4 Change in Consumer Prices ............................................................... 4 Current Account Balance to GDP ......................................................... 4 Total Revenue and Expenditure to GDP ................................................. 4 Foreign Direct Investment to GDP ........................................................ 4

Comparative GDP Performance in Transition Economies ............................. 2 Regional Development Strategy .......................................................... 9 Effective TA: Debt Management in Mongolia .......................................... 13 Major Donor Activities .................................................................... 25 The IFC in Mongol ia ...................................................................... 26

CAS Matr ix Mongolia: Phases o f Transition Mongolia: Debt Analysis Mongolia: Country Assistance Evaluation: Summary Client Survey: Summary o f Findings Mongolia: Toward Environmental Sustainability EGSPRS - CAS Priorities and Donor Activities

Standard CAS Annexes Annex A1 : Annex A2: Annex B2 : Annex B3: IBRDIIDA Program Summary

K e y Economic and Program Indicators Mongolia at a Glance Selected Indicators o f Bank Portfolio Performance and Management

Proposed IDA Base Case Lending Program IFC and MIGA Program

Annex B4 : Annex B5: Mongol ia Social Indicators Annex B6: K e y Economic Indicators Annex B7 : Key Exposure Indicators Annex B8:

Summary o f Nonlending Services

Status o f Bank Group Operations in Mongol ia Operations Portfolio (IBRD/IDA and Grants) Statement o f IFC’s Portfolio

Annex B 10: CAS Summary o f Development Priorities

Map (IBRD 3 153 1)

EXECUTIVE SUMMARY

Achievements, Challenges, and World Bank Role

i. Mongolia has made significant strides in achieving macroeconomic stability and fundamental structural reforms since i t s transition to democracy and a market-based system in 1990. The next development challenge i s to improve the lives and welfare o f i t s people and reduce poverty by accelerating sustained and equitable economic growth. This vision i s articulated in i t s Economic Growth Support and Poverty Reduction Strategy (EGSPRS), a comprehensive medium-term framework o f strategies, policies, and programs to raise average annual growth to the country’s potential o f 5-6 percent-and to reduce poverty f rom i t s current incidence o f 36 percent.

ii. Mongolia faces considerable challenges in achieving the objectives o f the EGSPRS. Capacities for public sector management and service delivery are not aligned with the overall strategy. And the vulnerabilities to climatic and terms-of-trade shocks continue. I t i s in this context o f opportunities and r i sks that this four-year (FY05-FY08) Bank Group Country Assistance Strategy (CAS) i s presented.

iii. The Govemment’s EGSPRS represents a commendable effort. Country-owned and participatory, i t aims to reduce urban and rural vulnerabilities, engender sustainable human development, emphasize good govemance and gender equality-by accelerating private-sector- led, broad-based equitable growth, and improving the efficiency o f public expenditures. Couched in the localized Mi l lennium Development Goals (MDGs), the strategy i s aimed at:

Ensuring macroeconomic stability and public sector effectiveness. Supporting production and exports and improving the environment for private-sector-led development. Enhancing regional and rural development and environmentally sustainable development.

Promoting good governance, and implementing and monitoring the strategy.

0

0

0

0 Fostering sustainable human development. 0

Previous reforms have established the policy, legal, and institutional framework for the market economy. The focus now i s o n building capacities for implementation and enforcement.

iv. The Bank’s CAS would support the Government in i t s efforts to overcome the challenges o f implementing the EGSPRS by enhancing measurable results o n the ground. Based on extensive consultations and retrospective reviews, the CAS i s broadly aligned with the EGSPRS and would directly support a selected subset o f the EGSPRS priorities that reflect key development areas where the Wor ld Bank has a comparative advantage. The new CAS, departing f rom previous approaches in i t s strategic objectives and directions, builds o n the evolution o f Bank assistance in recent years. Bank lending to Mongolia represents about 11 percent o f the country’s overall Off ic ia l Development Assistance (ODA) flows, implying the need to be selective and to complement and help enhance other donor efforts. The CAS initiates a results- based approach that relates outcomes to the country’s longer term EGSPRS goals, including results that integrate these goals with the MDGs.

v. Managing r isks in implementing this CAS will be essential for effective Bank support. Faltering commitment to the EGSPRS i s a minor risk given the broad consultations, participation, and ownership. But, implementation involves other internal challenges: the need for tight management o f public expenditures and for increasing the l imi ted institutional capacity o f the

Government. It also involves mitigating climatic and terms-of-trade shocks. Working with other donors, the Bank’s proposed program reflects innovations in supporting the Government to overcome these challenges.

CAS Objectives and Results

vi, with the fol lowing expected outcomes:

The C A S proposes that Wor ld Bank assistance to Mongolia focus on three objectives

Consolidating the economic transition through institutional reforms that improve public sector and market eficiency. Expected outcomes: (i) improved public sector effectiveness through strengthened public expenditure management and a reformed c iv i l service, (ii) further consolidation o f market reforms to establish a sound institutional and regulatory environment for the private sector, (iii) improved efficiency and distributive impact o f infrastructure investments, and (iv) strengthened institutional capacity to deliver social services.

Addressing growing equity concerns and reducing rural and urban vulnerabilities. Expected outcomes: (i) reduced loss o f livestock f rom weather-related shocks, (ii) improved environmental governance and management, (iii) improved municipal service delivery for vulnerable populations in peri-urban areas, and (iv) helped the Government to analyze the viabil ity o f options to support i t s regional development objectives.

Aligningpolicies and resources around results. Expected outcomes: (i) strengthened national institutional framework for implementing and monitoring the EGSPRS, (ii) improved articulation and implementation o f sector strategies l inked to the EGSPRS, and (iii) strengthened the Government’s abil ity to coordinate aid and harmonize donor procedures.

Bank Assistance

vii. To achieve these results, the Bank proposes a judicious mix o f adjustment, investment, and non-lending services. A key program feature i s the proposed use o f annual, single-tranche Poverty Reduction Support Credits (PRSCs) to support the implementation o f priority EGSPRS objectives, starting with areas where high levels o f consensus and agreement have already been reached. Investment operations will be undertaken selectively and based on clear, shared, and agreed-upon sector and thematic strategies that emphasize sector-wide approaches (SWAPS) to be supported by al l external partners. The Bank’s non-lending program wil l focus o n developing economic and sector work in the areas o f growth, poverty monitoring and analysis, and knowledge-building to support the planned PRSCs and selected areas o f investment lending and will in form the pol icy dialogue. The CAS also emphasizes the importance o f the current International Development Association (IDA) portfolio to deliver o n these goals. The International Finance Corporation’s (IFC’s) program will complement the Bank’s support by continuing to focus o n the financial sector through a mix o f investment and technical assistance activities.

viii. A four-year, base case IDA lending envelope o f about SDR 60 m i l l i on i s envisaged. I t i s characterized by satisfactory performance on macroeconomic management, implementation o f the key elements o f the EGSPRS (such as public expenditure management and c iv i l service reforms), improvements in governance and transparency (including procurement processes), and a well-performing IDA portfolio. In a possible high case s c e n a r i w t o be triggered by strong and early implementation o f EGSPRS policies o n the public investment program, pension reforms,

and the financial sector-additional resources o f about 30 percent will be channeled through increased PRSC amounts. In the l o w case, lending levels would be reduced and adjustment lending deferred until conducive conditions return.

Agenda for Board Consideration

ix. the fo l lowing aspects o f this CAS:

Given this assessment and proposal, Board members may wish to discuss, among others,

0 The CAS focus on Mongolia’s particular development challenges: (1) consolidating the transition to a market economy, (2) reducing vulnerabilities, and (3) aligning donor efforts around EGSPRS development results.

0 The proposed CAS approach (in the light o f constrained IDA allocations) to combine PRSCs and selected investment lending.

MONGOLIA -- COUNTRY ASSISTANCE STRATEGY

1. Mongolia’s last Country Assistance Strategy (Report No . 17604-MOG), discussed by the Bank’s Board o f Directors in April 1998, covered FY99-FYO1. The follow-on CAS was held back until Mongolia’s EGSPRS (Report N o . 26563-MOG)-the country’s Poverty Reduction Strategy paper (PRSP)-was completed to enable the Bank to align i t s program with the country’s strategy. In September 2003 the EGSPRS was discussed by the Board o f Directors. This CAS reflects the guidance provided by the Board o n that occasion.

I. COUNTRY CONTEXT

2. Endowed with an area of 1.6 million square kilometers and a population of 2.4 million, Mongolia is the least densely populated country in the world. Landlocked between Russia and China, the country has a per capita income o f only US$440, making it one o f the poorest in the region. Inf l ic ted with a cold, harsh climate and short growing season, Mongolia also experiences frequent droughts and occasional severe winters, known as “dzuds.” About ha l f o f Mongolians l ive in rural areas; two-thirds o f them engaged in livestock herding. In 2003 the agriculture sector accounted for about 20 percent o f gross domestic product (GDP), compared with 30 percent in 1993, and more than 45 percent o f employment. It mainly comprises livestock, which provides rural residents food, clothing, and shelter, as wel l as raw materials for the commercial production o f cashmere, other wools, meat, and leather products. Copper and gold mining, a small manufacturing sector, and the services and trading sector complete the undiversified economic base.

A. Political Transition

3. Mongolia made a successful transition to a democratic political system starting in 1990. Democratic elections since then have led to wide shifts in polit ical power. In 1996 a Democratic Coalition, including two relatively new opposition parties, won a majority o f seats in Parliament f rom the long-ruling Mongolian People’s Revolutionary Party (MPRP). However, the Coalition was challenged continuously by remaining MPRP members in Parliament and by internal strife among members. This resulted in three successive governments serving f rom 1998 to 2000, followed by the MPRP’s return to power (it won a landslide victory over the Democratic Coalition in the 2000 elections, capturing 72 o f the 76 parliamentary seats). The next elections are scheduled for June 2004. Whichever party wins, it i s expected that the leadership will be pro-reform, continuing o n the path toward a market economy and budget discipline, and favoring private-sector-led growth.

4. The political process has been accompanied by the emergence of a dynamic civil society. Mongolian society i s largely open, with an expanding c i v i l society, including a growing number o f nongovernmental organizations (NGOs) and a largely free media-although transparency and accountability mechanisms linking the Government with citizens are s t i l l developing and generally remain weak. Women are active in most arenas o f the economy and society, although significant gender-based disparities persist in poverty, vulnerability, economic opportunities, and working hours.

B. Economic Transition

5. Since the early 1990s, Mongolia has made steady progress in its transition to a market economy. The country moved quickly to dismantle the command economy and began to establish a framework o f laws, policies, and institutions to support a market-based system. The progress has placed Mongol ia at the forefront o f rapid reformers among transition economies (box 1). These achievements are also reflected in the Country Policy and Institutional Assessment (CPIA), which shows that Mongolia compares favorably with other IDA countries (figure 1). Mongolia scores as wel l or better than the IDA average in most areas rated for the CPIA, with neither glaring weaknesses nor star

- 2 -

performances. The fiscal rating i s below average due to the high tax burden imposed o n the private sector, and there are outstanding issues o f environmental management.

I Box 1 : Comparative GDP Performance in Transition Economies, 1990-2001

Despite temporary setbacks, Mongolia's economic transition and adjustment process compares favorably to most transition countries. Mongol ia experienced a smaller ini t ial contraction in GDP immediately fol lowing transition, and better subsequent growth performance overall than did the Baltics, Commonwealth o f Independent States (except Uzbekistan), and the poorer performers o f Central and Eastern Europe. Cheng (2003) attributes Mongolia's relatively smooth transition to the combined effects o f the early adoption o f appropriate adjustment policies and market-based reforms and some favorable init ial conditions, such as a relatively simple economic structure, which reduced the complexity o f ini t ial market reforms, and a peaceful and relatively stable social and pol i t ical environment.

Comparative CDP Performance in Tramition Economies, 1990.2001

(I 9 9 0 4 00)

Source: Kevin C. Cheng: Growth and Recoveql in Mongolia During Transition, IMF Working Paper No. 03/21 7, November I. 2003

Figure 1 : Mongolia's CPlA Compared to IDA Average, 2003

Macroeconomic balances

Revenue Mobiliza evelopment Program

Budget Management

Property f ights and Govemance Financial Stability

Banking Efficiency

Social Protection and Lab Pnvate Sector Environment

Gender

- Mongolia's CPlA 2003 IDA Averages 2003 1

6. Despite a harsh initial shock, the country moved ahead with economic reforms. During 1990- 93, the collapse o f the Soviet Un ion and breakdown o f monetary and trade relations among the Comecon states resulted in a sharp contraction o f Mongolia's real GDP (fall ing by about 23 percent between 1989 and 1993) and high inflation (peaking at 321 percent in late 1992). The country moved quickly to liberalize the exchange rate, trade, and prices, and open up the financial sector (details in Attachment 2). Stabilization and recovery followed between 1994 and 1996, although the scope and pace o f reforms slowed. Buoyed by increasing livestock production and favorable international prices for copper and gold, GDP growth averaged 3.6 percent.

- 3 -

7. Poor external conditions and political gridlock affected economic performance between I997 and 2000. The 1997-98 East Asian and Russian crises exposed Mongolia’s underlying structural inefficiencies. With sharp falls in the export prices o f the main commodities, large revenue shortfalls resulted. By 1998 the country’s deficit reached an all-time high o f 14.3 percent o f GDP. T o maintain public confidence and protect the most vulnerable income groups, the Government increased public employment and cash transfers to the population. Three successive governments between 1998 and 2000 also slowed the pace o f reform implementation. The Government’s deficit reduction to 7 percent o f GDP in 2000 stemmed mainly f rom i t s stepped up efforts to mobilize revenues.

8. SigniJcant progress has been made in structural reforms in the last three years. T o strengthen public expenditure management, the Government introduced a Treasury Single Account, adopted the Public Sector Management and Finance L a w (PSMFL), initiated installation o f a Government Financial Management and Information System (GFMIS) and initiated the implementation o f the Medium-Term Expenditure Framework (MTEF). In the financial sector, rehabilitation o f the banking system, fo l lowing the crises o f the 1990s, improved confidence, as reflected in increased re-intermediation and monetization. The legal environment for loan recovery and bank competition improved with legislation to facilitate bank seizures o f collateral o n non-performing loans, rehabilitation and privatization o f the Agricultural Bank (AgBank), privatization o f the Trade and Development Bank, and startups by various foreign-based credit institutions o f operations in Mongolia. State enterprises were the target o f some recent reforms (including sales), while privatization o f other large enterprises, such as the Gobi cashmere factory (which i s s t i l l carrying out loss-making activities), was delayed. Mongolia ratif ied key International Labor Standards conventions and drafted the Anti-Money Laundering and Combating the Financing o f Terrorism law.

9. Gradual diversijkation and better weather contributed to stronger growth in 2002 and 2003, though the economy remains vulnerable to natural disasters and other external shocks. After three harsh winters, Mongolia’s GDP growth has climbed steadily--from 1 percent in 2001, to 3.9 percent in 2002, and 5.3 percent in 2003. This rise reflects stronger and more diversified non-agricultural growth and the recovery o f the agricultural sector (figures 2 and 3). Inflation declined steadily f rom a high o f 8.1 percent in 2000 to 1.7 percent in 2002, and remained at 4.7 percent in 2003 (figure 4). In 2003 the current account balance, excluding official transfers, fe l l to 15.2 percent o f GDP (figure 5), with good export performance (19.7 percent growth).

10. The transition has been accompanied, however, by a heavy tax burden on the private sector and continued public sector dominance. Although strong gains in revenue mobilization in recent years have kept pace with rising public expenditures, there are concerns about the sustainability o f the revenue effort and i t s impact on private sector activity. During 1996-2002 revenues as a share o f GDP increased from 28 percent to 39 percent and expenditures f rom 36 percent to nearly 45 percent (figure 6). Since 1999 the fiscal deficit has begun to narrow, f rom 12 percent to about 6 percent. Over 1990- 2002 the average budget deficit for Mongolia was 9 percent o f GDP, compared with 5 percent for the Kyrgyz Republic and 4 percent for Hungary.

11. Foreign aid and investment levels have been relatively high. Over 19962002, domestic investment ratios remained at about 33 percent o f GDP, whi le domestic savings accounted for 13 percent o f GDP. Foreign direct investment reached about 7 percent o f GDP in 2002 (figure 7). Since the init ial transition the country has received more than US$2.6 b i l l ion in aid (half as loans), heavily concentrated in the economic sectors (transport, industry and construction, and electricity and heating). The main sources o f Off ic ia l Development Assistance (ODA) have been Japan, the Asian Development Bank (ADB), the W o r l d Bank, Germany, and the United States.

- 4 -

Figure 2: GDP Growth Rate Figure 3: Sectoral Composition of GDP

6.0

P. j (2.0) : 9 9 g ; 3 / e 2000

(8.0) 1

Figure 4: Change in Consumer Prices

200.0 -

40.0 -- 20.0 --

I 1990-93 1994-96 1997- 2001 2002 2003/e

2000

Figure 6: Total Revenue and Expenditure to GDP

60.0

E 20.0 10.0

I I 1990- 1994- 1997- 2001 2002 2003/e

93 96 2000

-Total revenue -at- T o t a l expenditure

Figure 5: Current Account Balance to GDP

1997- 1990-93 1994-96 2000 2001 2002 2003ie

5.0 T

(20.0) 1. + Current account balance, excluding official transfers

- Current account balance, including official transfers

Figure 7: Foreign Direct Investment to GDP

E

‘ ‘ O T 7.0 --

6.0 -- 5.0 --

4.0 --

3.0 --

2.0 --

I I 1990-93 1994-96 1997- 2001 2002 2003/e

2000

C. Poverty: Profile and Trends

12. Mongolia has managed to protect high levels of human development inherited from the socialist period, but progress toward several Millennium Development Goals (MDGs) has been mixed. After the transition, indicators for secondary school enrollment and infant mortality deteriorated significantly, but these negative trends have been largely reversed. Mongol ia shares many characteristics with other transition economies (table 1). I t i s wel l on track to achieve universal primary education. The goal o f eliminating gender disparities in education has been achieved at the primary level and i s considered attainable at secondary and tertiary levels, despite the so-called “reverse gender gap” (where male enrollment rates are lower than those o f females) that increases at progressively

Millennium Development Goal

Goal 1 Halve, between 1990 and 2015, the proportion of people living in poverty and who suffer from hunger

- 5 -

Table 1: Mongolia and Millennium Development Goals

Goal 2 Achieve universal primary education

Goal 3 Eliminate gender disparity in primary and secondary education by 2005 and to all levels of education by 2015 Goal 4 Reduce under-five mortality rate by two- thirds between 1990 and 2015

Goal 5 Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio Goal 6 Halt and reverse spread of HIV/AIDS and tuberculosis

Goal 7 Reverse loss of environmental resources. Halve, by 2015, the proportion of people without access to safe water. Achieve a significant improvement in the lives of slum dwellers by 2020

Goal 8 Develop an open trading and financial system; (deal with the debt and special needs of landlocked Mongolia)

Situation in East Asia and the Pacific Region

Income-poverty reduced from 32 percent to 24 percent over last decade. Region could achieve target o f 17 percent but target on hunger i s l ikely to be missed.

Litt le progress as primary enrollment remained static at 93 percent; some countries may achieve target.

Gender balance i s improving faster than expected. Disparities in secondary enrollment are lower than primary.

Progress f rom 59 per 1,000 in 1990 to 44 in 2001, but not adequate to achieve target.

Wide variation across the region (high mortality in Lao PDR, Cambodia and Indonesia, but low in Thailand and China). L o w HIV prevalence rate compared to South Asia and Africa, but TB incidence i s higher than world average. Thailand and Cambodia made good progress.

Rapid industrial development increasingly stresses the environment. Target on water supply i s l ikely to be missed. Coverage o f effective sanitation is very low; target o f f track.

In many countries, trade doubled during the decade; goal i s attainable given increased trade benefits. Declining O D A needs to be reversed to achieve MDG.

Situation in Europe and Central Asia Region

Proportion o f people l iv ing in poverty: 5 percent below $1 and 19.5 percent below $2 a day. Goal i s achievable given annual average o f 3.6 percent income growth, but seven countries unlikelv to meet coal. Most countries are well on track; only five countries are unlikely to meet the goal.

Goal i s l ikely to be met, except in Azerbaijan, Tajikistan and Turkey.

ECA’s rate o f 44 in year 2000 was lower than in other regions; st i l l , many countries are unlikely to meet the target.

Trends indicate that most Commonwealth o f Independent States (CIS) countries are unlikely to achieve this goal.

H igh risk and rapid spread o f HIV in CIS countries. H igh incidence o f TB. Most l o w income countries are unlikely to meet the goal.

Al l countries are on track for targets on water supply and slum dwellers, but water quality and sewage systems are in serious problem. Seriously o f f track on energy efficiency and carbon emission.

Ten countries are in negotiations to j o in EU. Most countries benefit from EU reduced trading barriers. High- income countries are committed to reverse declining trend o f ODA.

Current situation in Mongolia

35 percent of people l iv ing on $0.70 or less a day; growing income inequality; xhievement o f this goal i s :onsidered difficult unless growth rates accelerate and are maintained. Mongolia i s well on track and likely to achieve this goal as enrollment rate o f 91 percent (2000) i s increasing at 2 percent annually. Challenge i s improving the completion rate. Achieved in primary education; higher female enrollment rates in secondary and tertiary; goal i s attainable given rates o f annual increases in male enrollment. Progress from 87.5 in 1995 to 42.4in 1998; declining trend puts Mongolia well on track. MDG target i s likely to be achieved if resources continue at current levels. Decline f rom 200 in 1992 to 109 in 2003 i s not sufficient to reach the target o f 50 (per 100,000 live births) by 2015.

Very l o w AIDS incidence but high risk factors. TB incidence increased from 70 to 141 (per 100,000) in the last decade and i s closely linked to poverty and unemployment. Goal off track but still achievable. Increasing pasture and forest degradation, urban pollution, loss o f biodiversity. Estimated 40 percent o f population lack access to safe water. Increasing rural-urban migration (45 percent increase in Ulaanbaatar population over last decade) i s a challenge to improving ger district conditions. T h i s goal w i l l be difficult to achieve Liberal trade regime in place, but underdeveloped financial markets. Improved transport infrastructure i s key to address landlocked status. Debt currently at sustainable level. T h i s goal i s achievable.

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higher levels o f the educational system. Mongolia i s also l ikely to reduce under-five mortality by two- thirds between 1990 and 2015. But the matemal mortality rate, while falling, i s not declining fast enough to achieve the MDG. And while the incidence o f H IV /A IDS remains low, the incidence o f tuberculosis has increased from 70 (per 100,000) to 141 over the last decade. As in many transition economies, high levels o f alcohol consumption i s o f particular concem.

13. High poverty levels have persisted throughout the transition. In 1998 more than one-third o f the population was poor; inequality, as measured by the Gini coefficient, was 35 percent. Province or “aimag” centers had the highest poverty rates, with a poverty incidence o f 45 percent, while one-third o f rural residents were poor. There are n o reliable estimates o f changes in poverty incidence since 1998. Three harsh winters in 1999-2001 clearly hurt rural incomes, but rural growth recovered in 2003. The 2003 Living Standards Measurement Study/Household Income and Expenditure Survey (LSMS/HES) i s expected to redress this knowledge gap, and data analysis i s under way.

14. Poverty has been accompanied by the emergence of multiple sources of vulnerability. With the in i t ia l transition and privatization o f state-owned collectives and enterprises, people tumed to livelihoods based on their own production in the informal sector and as livestock herders. Formal safety nets and systems to manage risks weakened, and household vulnerability increased dramatically. Increased rural vulnerability-at both household and macroeconomic levels-was illustrated vividly in 1999-2001, when more than 20 percent o f the national livestock herd was lost in successive “dzuds.”

15. Rising environmental insecurity is closely tied to local overexploitation of natural resources. Rapid depletion o f Mongolia’s scarce forest resources eliminates key sources o f fuel and vital watershed protection (a Bank-supported forestry assessment makes the preliminary conclusion that the depletion o f Mongolia’s forests i s occurring at rates o f up to four times sustainable levels). Available evidence suggests that urban air pollution i s correlated to high levels o f respiratory diseases that particularly affl ict the poor. Mongolia has weak institutional capacity to enforce i t s fairly progressive set o f environmental laws and regulations.

Table 2: Mongolia: Urban-Rural Differences, 2002

Indicator Human Development Index GDP per capita (Purchasing Power Parity,

Population without access to safe water (%)* Population l iving in gers (%) Infant mortality (per 1,000 live births) Matemal mortality (per 100,000)*

US$)

*Da ta for 2000 Sources: Mongolia Human Development Report 2003;

Ministry offiealth

Urban 0.723

3,423 9.2

28.3 25.3 121.1

Rural 0.636

1,246 65.6 78.3 33.0 189.5

GDP per capita (PPP, US$)

3500

2500

1500

500 1999 2000 2001 2002

+Urban Rural

16. Inequalities are widening between and within rural and urban populations. While inequality in Mongolia i s within the range observed in other countries that have recently experienced the transition to a market economy, strong disparities exist between regions and within urban and rural areas (table 2). Income i s strongly differentiated between the larger cities o f Ulaanbaatar (with average incomes 165 percent above the national average) and Erdenet (125 percent) and a l l other areas o f the country (below average). Migrat ion to urban areas, particularly to Ulaanbaatar, has been increasing rapidly;

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Ulaanbaatar now accounts for about 30 percent o f the country’s total population. Rural residents have less access to education, health care, safe drinking water, information, and basic services than do their urban counterparts. Their l i fe expectancy i s lower, and their mortality and incidence o f disease are higher. Within rural Mongolia, economic opportunities and access to basic and social services differ significantly between herders and the residents o f smaller provincial centers and towns. In Ulaanbaatar and the few other larger urban settlements, income, employment, and access to basic services are strongly differentiated between residents o f expanding peri-urban “ger” (Mongolian felt tents) areas and apartment dwellers.

11. COUNTRY DEVELOPMENT PROGRAM AND PROSPECTS

A. Country Priorities

17. The EGSPRS represents the Government of Mongolia’s vision to accelerate pro-poor growth and reduce poverty. Several years o f work have culminated in taking on the challenges o f widespread and persistent poverty, large spatial disparities, widening inequalities, and increasing vulnerability. This has resulted in the development o f an overall strategy to increase GDP growth in order to reduce poverty and improve people’s living standards. The strategy has been developed in a fully participatory manner with many consultations with various stakeholder groups-including donors, NGOs and the private sector as wel l as the Government and in both urban and rural areas and at various decentralized levels. L ine ministries and agencies were part o f the process o f developing sectoral and thematic programs, and the overall strategy i s couched within the macroeconomic program supported by the International Monetary Fund’s (IMF) Poverty Reduction and Growth Facil ity (PRGF). The EGSPRS, discussed by the Boards o f the Bank and the Fund in September 2003, was endorsed by both institutions as providing the basis for continuing support and concessional financial resources.

18. The EGSPRS, a major step forward in the development dialogue in Mongolia, shifts the county’s focus to medium-term policy directions. T o manage development and results for poverty reduction, while continuing to maintain stability and consolidating the transition process, the development framework emphasizes private-sector-led growth and economic restructuring, and underscores participation and the overriding importance o f implementing and monitoring the EGSPRS.

19. five main pillars:

The EGSPRS articulates key development challenges and priority actions organized around

Ensuring macroeconomic stability and public sector effectiveness. Supporting production and exports and improving the environment for private-sector-led development. Enhancing regional and rural development and environmentally sustainable development.

Promoting good governance, and implementing and monitoring the strategy.

0

0

0

0 Fostering sustainable human development. 0

20. The Bank-Fund Joint Staff Assessment (JSA) of the EGSPRS recognizes the Government strategy ’s strongpoints. The EGSPRS begins to align national development goals-as articulated in the MDGs-with sectoral strategies and development programs. I t shif ts Mongolia’s poverty reduction approach f rom income transfers and safety nets to growth-promoting reforms and sustainable human development. The JSA notes that the EGSPRS has great potential for aligning donors and c iv i l society with national development goals and strategies.

2 1. The JSA also suggests areas where the EGSPRS is weak and where subsequent updates could result in improvements. The EGSPRS reflects the strengths and weaknesses o f the country’s sectoral and thematic strategies. In areas for which there i s agreement on strategic priorities, concrete programs

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and actions should be developed to fit within existing budgetary resources (e.g., energy). Areas in which the underlying strategic framework i s weak because o f inadequate diagnostic work or lack o f consensus on priorities require more systematic, diagnostic work. For example, in private sector development, where commitment to private-sector-led growth i s clear, more diagnostic work i s needed to better understand the constraints to private sector activity. Specific actions and policy measures to enhance transparency, predictability, and accountability o f public policies should also be developed. Poverty diagnostics should be updated once results o f the ongoing LSMS/HIES exercise are available. Finally, as with many Poverty Reduction Strategy Papers (PRSPs), the EGSPRS i s not well prioritized or costed, and the monitoring and evaluation plans and capacities can be further improved.

B. Key Development Challenges

Ensuring macroeconomic stability and public sector effectiveness

22. This first pil lar of the EGSPRS recognizes the importance of prudent monetary and fiscal policies to maintaining overall macroeconomic stability, and captures the breadth of the ambitious public sector reform agenda launched by the Government beginning with passage of the PSMFL. I t highlights the need to further consolidate progress in public expenditure management. This includes strengthening the linkage between policymaking and budget allocation, improving the financial sustainability o f key social services, further articulating a medium-term expenditure framework linked to a system o f output-based evaluation, and developing improved rules and regulations for public procurement. The EGSPRS also notes key challenges related to the c i v i l service reform agenda, including unreliable and multiple estimates o f the number o f existing c i v i l servants; fragmentation, duplication, and overlap o f administrative structures and functions; and an inappropriate functional composition, compensation regime, and s lu l ls mix.

23. The JSA agrees with the critical importance of the foregoing challenges. In the area o f public sector reforms, i t notes the need for greater comprehensiveness and transparency in the public investment budget-a critical factor in achieving the EGSPRS objectives. For c i v i l service reform, the EGSPRS stops short o f discussing the polit ically diff icult measures needed to contain the growth o f Mongolia’s wage bill, which has been fueled by large, successive wage increases in recent years.

Supporting production and exports and improving the environment for private-sector-led development

24. The EGSPRS recognizes that the private sector must be the driving force for sustainable growth and poverty reduction. I t acknowledges the importance o f continuing privatization and promotion o f small and medium enterprises (SMEs). I t recognizes the importance o f creating an adequate pol icy environment for the development o f Mongolia’s mineral sector. It further recognizes the importance o f infrastructure for overcoming the country’s di f f icul t physical constraints and creating a more favorable business environment. Ensuring that the public investment program i s based on economic considerations and insulated from polit ical pressures will be critical if infrastructure investments are to support national growth and poverty reduction goals effectively.

25. The JSA notes the remaining challenge of converting the broad policy statements of the EGSPRS into a coherent private sector strategy. Specific pol icy actions are needed for a smaller, more efficient govemment; better integration o f Mongolia’s private sector into regional and global markets, and removing the remaining physical, legal, and financial constraints to create a level playing f ie ld and an enabling investment climate. K e y challenges include the need to develop further an effective legal system and an efficient, competitive, and well-governed banking system. For the private sector development o f minerals, the JSA emphasizes the importance o f maintaining a legal and regulatory regime based on the country’s progressive Minerals Law. Effectively implementing the energy strategy

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and further updating the transport strategy (paying strong attention to the quality o f the public- investment program and the cost and sustainability o f proposed investments, including the Mi l lennium Road) are further challenges identified in the JSA.

Enhancing regional and rural development and environmentally sustainable development

26. The EGSPRS highlights the need to address the rural-urban disparities in economic growth and service delivery that have emerged since the transition-and the Government’s vision for addressing them in its regional development strategy. It notes the central role o f Ulaanbaatar in Mongolia’s economy and the challenge o f improving the poor living conditions o f residents in “ger” districts, which have spread with migration. I t strongly emphasizes the importance o f the livestock sector for rural livelihoods and the national economy. I t acknowledges the challenges related to increased vulnerability caused by structural changes in the economy, the more than doubling o f the numbers o f herders in the 1990s as former workers took up herding, the breakdown o f key support systems and services, and the consequences o f increased concentrations o f herds and overgrazing. The EGSPRS also recognizes that the sound management o f natural resources and the environment i s a necessary dimension o f sustainable growth over the long run. And it stresses the need for Mongolia to improve environmental quality, reduce degradation o f the natural resource base, and clearly articulate the links between poverty reduction and improved environmental management.

27. The JSA recognizes the Government’s desire to give equal opportunities to all, but stresses the need for careful assessment of financial costs and benefits of alternatives, including examining other country experiences with regional development. Improving municipal finance and administrative capabilities will be important to achieving sustainable improvements in the efficiency and equity o f municipal service delivery. The JSA notes the importance o f further priorit izing and articulating the actions proposed in the Rural Development Strategy, (box 2) including those that strengthen pastoral risk management, improve rural financial intermediation, and improve rural access to infrastructure, setting them in the context o f the regional development agenda. The Government has progressed considerably in defining an environmental strategy, though challenges remain in strengthening national and local institutional and legal capacity and costing and priorit izing policy interventions and actions.

Box 2: Regional Development Strategy

The Government’s approach to the Regional Development Strategy reveals tensions between interventionist and market-based policies. Whi le regionally-balanced development i s clearly important, the Government’s proposed strategy relies o n large infrastructure investments, the development of designated urban centers as growth poles, and the identif ication o f designated production activities for each region. The economic feasibility o f the approach--as we l l as i t s implications for debt sustainability, potentially hidden fiscal liabilities, and lack o f successful international experience with similar approaches-- raise concerns.

Fostering sustainable human development

28. The EGPRS makes the linkages among growth, poverty reduction, and human development, presenting a strategy to meet the social sector MDGs. In education it recognizes the challenges o f increasing access to schooling, rural-urban and gender disparities, improving quality, and strengthening the overall sector framework. The health strategy identifies medium-term actions to lower infant and maternal mortality, control the incidence o f infectious diseases, improve primary health care and access for the poor, and ensure broader coverage o f health insurance. The employment and social welfare strategy recognizes the high and rising budgetary burden o f current transfer programs (pensions) and needed short and medium-term actions (such as raising the retirement age).

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29. The JSA notes that the strategy should further address issues of resource allocation, private sector participation, and financial sustainability. The EGSPRS does not address private provision o f educational inputs or the l imited analysis o f resource allocation among primary, secondary, and tertiary levels. N o r does it address the lack o f clarity o n the financing or sequencing o f options for addressing gender and age-at-entry issues. The health strategy omits two key issues: sector reforms to broaden the coverage o f the health insurance system and make health financing more sustainable, and restructuring hospital services (mainly those concentrated in the capital city). The JSA points to the need for stronger discussions o n labor market and employment policies, more specificity in social assistance reforms, and addressing the equity, sustainability and governance o f the pension system.

Promoting good governance and implementing and monitoring the strategy

30. The EGSPRS emphasizes good governance, participatory processes, and the importance of monitoring strategy implementation. Priority areas for sound governance include improving accountability and transparency, ensuring an independent judiciary, and fighting corruption. Extensive participation o f c i v i l society will be sought through collecting bottom-up feedback and undertaking consultations, outsourcing delivery o f selected services to NGOs, and open exchanges with the media and other community groups (businesses).

3 1. The EGSPRS also notes the crucial role of effective aid coordination and donor alignment for successful implementation. Given that the Mongolian economy’s share o f ODA i s fairly large, i t i s important that donor programs support government priorities articulated in the EGSPRS. The Government needs to lead in coordinating financial flows, allocating resources, streamlining procedures, increasing transparency, and aligning i t s policies and documents to provide clear signals to external partners.

32. The JSA concludes that while key monitoring indicators for EGSPRS implementation are linked to the MDGs, further refinements are needed. These could be improved to include energy and private sector development, disaggregations by region and gender, and better links to such priority outcomes as educational quality. The major challenge i s to build institutional mechanisms that engage stakeholders, improve public access to information, create agency and line-ministry monitoring capacity, strengthen statistical facilities and personnel, and build o n existing data.

C. Medium-term Economic Outlook

33. The EGSPRS is based on a plausible macroeconomic framework, with strong economic growth projected over the next four to five years. Under the baseline scenario, GDP growth i s projected to average 5.5 percent a year-significantly higher than growth in the past decade. The non-agricultural sector averaged annual growth rates o f more than 10 percent during 2000-02. So, even if non- agricultural growth slows markedly over the medium term, reversion to a more normal pattern o f agricultural growth (about 3.8 percent) should suffice to attain the growth rates envisaged in the baseline scenario. Within a sound macro environment, the expected sources o f growth (in addition to agriculture) are private sector activities through privatization o f remaining public enterprises; mining, expected to grow at 8 percent a year between 2004 and 2007; small and medium enterprises; and tourism, given Mongolia’s unique culture and unspoiled terrain. Export volumes are expected to grow at about 6 percent a year, slightly higher than GDP, while import growth i s projected to remain strong, reflecting the higher imports of capital equipment associated with strong investment activities.

34. Mongolia should benefit from greater integration with the rest of Northeast Asia. Mongolia has been a member of the Wor ld Trade Organization (WTO) since 1997. T o take advantage o f the WTO and the large markets that open with China’s entry to it, Mongol ia must do more to attract foreign investment, improve the sk i l l s mix of the population and adjust to external demand. China’s entry to the

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WTO and Russia’s imminent entry will provide an opportunity for Mongolia to discuss removal o f main tar i f f and non-tariff barriers constraining i t s exports.

D. Debt and Creditworthiness

35. At the end of 2003, Mongolia’s total stock ofpublic debt was estimated at US$1.4 billion, of which US$1.2 billion was external debt equivalent to 103 percent of GDP and 147.3percent of exports of goods and services. This includes debt o f US$212 m i l l i on contracted to settle Transferable Ruble debt obligations. In December 2003, the Government negotiated a debt settlement agreement with Russia to close i t s pre-1991 debt, estimated at US$11.4 b i l l ion or about 10 times Mongolia’s GDP. The agreement provided for a writing o f f o f 97.8 percent o f Mongolia’s pre-1991 debt, with the remaining US$250 m i l l i on (about 20 percent o f Mongolia’s GDP) to be paid in full by the end o f 2003. W h i l e the settlement o f the Russian debt i s a welcome event, as it provides international investors more certainty regarding Mongolia’s credit standing, more information o n the nature o f the transaction i s needed to assess the full impact on short-term macro-sustainability. The total extemal debt-to-GDP ratio in Net Present Value (NPV) terms rose from 59.4 percent in 2002 without the Russian debt to 70.1 percent after the Russian debt settlement. With strong growth projected over the medium-term, the extemal debt-to-GDP ratio in NPV terms i s expected to decrease incrementally to about 58 percent by 2008.

36. The revised Debt Analysis finds Mongolia’s external debt sustainable, although export-led growth is critical to continue lowering the debt-service burden over the coming years. At the pol icy level, structural reforms, particularly fiscal consolidation, should continue to be aggressively pursued to avoid incurring additional debt (Attachment 3). Contracting loans on non-concessional terms should be avoided to the extent possible. It i s expected that Mongolia will remain creditworthy for concessional IDA credits at levels envisaged under current allocation norms. Also required i s the expansion o f foreign direct investment, which, in turn, will require structural reforms to promote private-sector-led growth, including continued privatization. Prudent macroeconomic policies, including a flexible exchange rate that adequately reflects Mongolia’s external competitiveness, are keys to this strategy.

111. THE WORLD BANK IN MONGOLIA: BUILDING ON EXPERIENCE

37. The present CAS is Jirmly rooted in the findings and lessons from an extensive set of evaluations, reviews, and consultations. The Bank’s Operations Evaluation Department issued a Country Assistance Evaluation (CAE, CODE2002-00 13) in March 2002, and has undertaken Project Audits and Quality o f Supervision Reviews. A Client Survey, an informal review o f the last CAS, a Country Portfolio Performance Review (CPPR), follow-up quarterly reviews, project Implementation Completion Reports, and extensive consultations with various stakeholders have al l been undertaken. These reviews and consultations note Mongolia’s significant advance-but highlight key structural and institutional weaknesses that contribute to lack o f progress o n reducing poverty, improving equity, and achieving overall development outcomes.

A. Key Findings from Retrospectives and Consultations

38. The Countq Assistance Evaluation found that Bank services were of high quality but had limited influence on institutional development. The C A E found that the overall professional quality o f the Bank’s services was good, objectives were relevant, and interventions were selective (see Attachment 4 for a summary). The C A E recognized that the Bank’s program helped to avoid a collapse o f key public services and industries during the init ial transition, improve macroeconomic management, and provide income support to many o f Mongolia’s poor. Even though the outcome o f Bank assistance was rated as moderately satisfactory, the C A E found that institutional development was modest and sustainability unlikely. I t noted the Bank’s relatively late shift away fi-om emergency-type, short-term support and the l imited linkages between the lending program and the pol icy and institutional reform

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agenda, All donor outcomes could have been better if agreements on strategic frameworks could have been reached for more sectors. The CAE also noted the limited effect o f capacity-building efforts. Whi le in i t ia l technical assistance (TA) helped to change the thinlung toward a market-based economy (particularly within the Ministry o f Finance and the Central Bank), many aspects o f the institutional framework for a market-based economy remain fragile (lack o f compliance with new laws and regulations, weak institutional capacity and resources, and poor accountability o f public service delivery).

39. The Country Portfolio Performance Review found satisfactory project outcomes, but weak implementation capacity. The 2002 CPPR found that, while completed projects had satisfactory outcomes, projects in Mongolia face high risk o f not achieving their development outcomes, largely because implementation capacity remains a major constraint. The CPPR diagnosed three core problem areas: (i) lack o f project readiness and significant delays in project start-up; (ii) complex design and scope o f project components, which constrain project implementation, given weak capacities; and (iii) lack o f implementation capacity in Project Implementation Units (PIUs) and l ine ministries. The CPPR developed performance criteria, now regularly used to monitor progress in the Quarterly Portfolio Performance Reviews (QPPR), and highlighted the need to enhance focus on pol icy and institutional reforms and strengthen project Monitor ing and Evaluation (M&E) systems.

40. Informal reviews of performance under the 1998 CAS found that while most objectives were achieved, external factors, shifting client commitment, and a weak CAS monitoring system limited the impact. The f irst three CAS objectives-supporting macroeconomic stabilization, facilitating private sector development, and developing infrastructure-were largely reached, albeit with delays. Progress under the fourth CAS objective-improving equity in development-was limited. External factors (including polit ical instability, terms-of-trade shocks, and natural disasters) impacted o n both client and Bank performance. Sustained dialogue with the Government and alignment with the IMF and other donors helped to build consensus on macro pol icy and public and energy sector reforms. In some other areas, lack o f consensus on the policy and institutional reform agenda restricted progress. Shifting commitments to implement key reforms (such as rebalancing utility tariffs, cessation o f quasi-fiscal activities) l imi ted the sustainability and impact o f development initiatives in several sectors. Establishment o f the country office in 1998 increased Bank participation in pol icy dialogue and improved overall effectiveness. Deliberate disengagement in certain sectors where other donors had lead roles (e.g., social) l ed to critical gaps in Bank knowledge and abil ity to provide pol icy advice. The varying quality and relevance o f CAS monitoring indicators, and limitations in the systems to measure them, complicated monitoring and the assessment o f development impact.

41. The Client Survey identiJied policy advice as the Bank’s greatest value. A Client Survey conducted in early 2003 solicited the views o f a range o f local stakeholders on Mongolia’s development and Bank assistance (see Attachment 5 for key findings). Clients reported that Mongolia’s primary challenges are i t s economy, corruption, and poverty, followed by education. Areas identified as important for Bank involvement included economic growth, followed by strengthening the financial system and the private sector, and helping to reduce poverty. Respondents identified the Bank’s greatest value in Mongolia as pol icy advice, followed by financial resources and donor coordination. The strong importance attached to pol icy advice i s notable, as Client Surveys in most IDA countries identify financial resources as the Bank’s highest value. The Bank i s perceived positively for i t s work in donor coordination and i s considered effective, but familiarity with the Bank i s fairly low. Respondents also believe the Bank i s less effective in building community-level capacity and including local communities and c iv i l society in strategy development.

42. CAS consultations underscored the need to place greater emphasis on development results, Extensive consultations conducted in preparation for the CAS included a two-day retreat with the Mongolian Prime Minister and Cabinet and various consultation events with a wide range o f

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stakeholders: government officials, members o f Parliament, c iv i l society representatives, the private sector, local and international NGOs, donors, and project staff in Ulaanbaatar and provincial centers. In the consultations the Prime Minister emphasized the need to move f rom emergency support to longer term development needs, and f rom drafting laws and regulations to implementing and enforcing them. In l ine with Client Survey findings, participants in the CAS consultations highlighted the need for economic growth, rather than direct transfers, as key to poverty reduction. Consultation participants strongly urged greater attention to governance, rural needs, and the sustainable use o f environmental resources. Participants at several consultations raised questions about donor effectiveness and called for greater civic engagement in the design, implementation, and monitoring o f development projects.

B. Lessons Learned

43. Key lessons can be drawn from Bank assessments and direct stakeholder feedback. The lessons focus on placing more emphasis o n building capacity and institutions, building shared strategic frameworks, building o n the Bank’s strength in pol icy work, maintaining a sustained dialogue on critical issues, undertaking measures to enhance project effectiveness and outcomes, and increasing field presence.

44. Sharper focus is needed on capacity-building and institution-building. Improving these efforts will require greater attention to sequencing and selectively integrating capacity-building support within overall public sector reforms, establishing effective M&E systems to measure desired results, and emphasizing participatory approaches. Building on lessons o f experience, some recent Bank-supported TA has been effective in building capacity (box 3). Strengthening institutional accountability mechanisms and civic engagement (such as transparency and information-sharing systems; consultation processes; and mechanisms to engage C iv i l Society Organizations and the private sector in pol icy development, implementation, and monitoring) are also key to improving the impact and sustainability o f institution-building efforts.

Box 3: Effective TA: Debt Management in Mongolia

The Bank has been able to provide effective TA to Mongol ia to strengthen capacities and institutions in several areas. An example i s the recent Bank-supported TA component which has significantly improved Mongolia’s debt management system. The debt database was upgraded to the UNCTAD Debt Management and Financial Analysis System (DMFAS) in 2002 under a newly-established Debt Management D iv i s ion in the Ministry o f Finance and Economy. Using a un i f ied system l inked to the Central Bank, the unit can n o w provide timely information o n external and domestic debt, onlending activities and repayment schedules o n a loan-by-loan basis, and can analyze debt sustainability and liquidity positions for decision-making. This enhanced capacity was effectively used in the negotiations to settle the outstanding pre-transition Russian debt. Mongol ia i s one o f the countries which can electronically report up-to-date data to the Bank’s Deb t Reporting System in a process that n o w takes only hours compared to months previously. Factors contributing to the success o f t h i s component included commitment and ownership at a l l levels o f government, a good procurement process, effective collaboration with the vendor, high quality o f the technical staff, valuable study tours, and extended training and change management with a resident advisor in place.

45. Building and implementing shared strategic frameworks that align donor and government resources with development results are crucial. Given the large amount o f ODA available to Mongolia, better alignment o f donor resources i s a key leverage point for improving development effectiveness. Considerable progress has been made in developing strategic frameworks-including the EGSPRS and certain sector strategies. But, the alignment o f development resources and the quality and comprehensiveness o f strategies vary considerably across sectors. Continuing effort will be needed to further refine the results frameworks, translate strategic priorities into specific actions in sectors where consensus has been largely achieved (as in energy and the public sector), and strengthen the knowledge base and facilitate dialogue in sectors where consensus has not yet been reached.

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46. The Bank should build on its strength in policy work. As Mongolia places high value on the Bank‘s pol icy work, the Bank should build on this strength, focusing more o n policy work while maintaining selectivity in lending. I t should also work to integrate better i t s Analytical and Advisory Activities (AAA) with lending and technical assistance to improve i t s impact. Undertaking AAA more collaboratively i s another important way to enhance results and support capacity-building. Involv ing government counterparts at each stage o f the AAA cycle, providing adequate resources for dissemination and dialogue around findings, and ensuring linkage o f policy work with sector strategies and projects are al l important. Analytical work in non-lending sectors o f the Bank i s desirable to support key reforms, strengthen the Bank’s knowledge base, and contribute to the development o f shared strategic frameworks.

47. Sustained dialogue is critical for developing consensus on complex issues. Extended and timely Bank engagement with the Government has been a particularly important success factor in supporting reforms. Sustained dialogue i s key to addressing areas where progress on structural reforms has been more l imi ted (as with rebalancing utility tariffs). I t i s also important that the Bank engage and sustain a dialogue in areas where significant tensions exist between advocates o f interventionist and open-market policies (as with the regional development strategy).

48. Better eficiency and outcomes could be gained at the project level. Assessments highlight the need for more attention on outcome-oriented development objectives in project design, supervision, and M&E systems. Specific measures may include retrofitting existing projects with outcome/impact indicators. Strengthening the Government’s capacity to establish effective M&E systems that monitor project outcomes, as wel l as process indicators, can also improve project effectiveness.

49. The Bank’s field presence is critical to donor-coordination efforts, sustained dialogue, and improved project implementation. Improving the Bank’s development impact requires efforts to enhance the capacity and responsibilities o f the local office. Efforts to deepen the Bank’s engagement in sector dialogue, donor alignment, and institutional capacity-building, a l l o f which are labor-intensive and time-consuming, will place increased demands on the local office and will require efforts to build and strengthen office systems and capacity.

IV. BANK GROUP ASSISTANCE STRATEGY

A. Bank Group Activities

50. The World Bank strategy for FY05-FY08 reflects the Government’s development priorities, as laid out in its EGSPRS, lessons from Bank engagement through the last CASperiod, and the Bank’s comparative advantages. Though it represents a significant departure f rom the strategic objectives and approach o f the previous CAS, the strategy reflects and builds upon the ongoing evolution o f the Wor ld Bank’s assistance in recent years.

5 1. The CAS strategic objectives target a subset of EGSPRS priorities. Within the comprehensive EGSPRS agenda, Bank assistance will focus selectively o n addressing core systemic and institutional constraints to growth and poverty reduction to complement and enhance the impact o f other development resources (table 3). The CAS objectives are:

Consolidating the transition. The f i r s t CAS objective supports critical remaining transition challenges that cross-cut EGSPRS pillars. Under this objective, the Bank will support the Government’s efforts to implement expenditure and administrative reforms across public sector institutions. These reforms a im to improve service delivery for human development, the enabling environment for the private sector, and macroeconomic stability. Support for c iv i l service reforms in particular, will be important for improving the impact o f capacity-building

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efforts throughout the public sector. Reflecting the strong consensus built around the Government’s public sector reform agenda, i t s alignment with the findings o f Bank analytical work, and the good partnership that has evolved, the Bank wil l support these reforms with a broad mix o f instruments, complementing the support o f ADB and others. For the related reforms in the infrastructure and social sectors, and for private sector development, the Bank wil l place greater emphasis early in the CAS period on analytical and strategy work to build agreement around reform agendas.

Reducing vulnerabilities. The second CAS objective supports EGSPRS pil lar 3-“Enhancing regional and rural development and environmentally sustainable development”-with interventions that address underlying and differing sources o f rural and urban vulnerability. In rural Mongolia, the deterioration o f multiple systems that supported the livestock sector and rural economic activity (pasture and fodder management, veterinary services, wel l maintenance, collection and distribution) has sharply increased vulnerability at the household and macro levels. Increasing rural-urban migration has l ed to the rapid growth o f vulnerable populations living in temporary, peri-urban “ger” districts around ci ty centers. In addition to support under Objective 1 to improve the sustainability o f key services (social protection, health, education) important for vulnerable populations, Bank assistance wil l build on analytical work and previous operations as wel l as the assistance o f other donors. Support will be provided to scale-up and institutionalize innovative rural approaches to reduce vulnerability, strengthen the financial sustainability o f municipal service delivery to peri-urban populations, and assist in the effective costing and analysis o f national programs to promote balanced regional development.

Aligning policies and resources with development results. The third CAS objective directly supports EGSPRS pi l lar 5-“Promoting good governance and implementing and monitoring the strategy”, while building linkages with related activities supported under the f i r s t two CAS objectives, in particular, the public sector reforms which are central to improving governance. Closely l inked to these reforms, this objective supports the Government’s efforts: (i) at the national level: to strengthen the institutional framework for EGSPRS implementation and monitoring, further refining priority results and indicators, aligning public expenditures and donor resources across sectors, and building participatory monitoring systems that provide feedback to resource allocation decisions; (ii) at the sector level: to strengthen sector strategies that prioritize and sequence reforms and build institutional capacity and systems that in turn support national development results; and (iii) at the project level: to strengthen the linkages o f projects with larger development outcomes, including efforts to streamline and harmonize project and government processes. Building on continuing assistance provided by the Bank and other donors (such as the UN and ADB) to support parts o f this framework, this objective will assist in the building o f linkages among these often compartmentalized initiatives.

0

52. The new CAS objectives reflect a shift from the previous CAS, changing client needs and priorities, and on assessment of lessons learned and the Bank’s comparative advantage. Compared with the last CAS, key differences in objectives include: (i) less Bank emphasis o n support for macroeconomic stability, reflecting the continuing lead o f the IMF and the significant progress in recent years; (ii) more emphasis o n core transition issues, given their critical importance for macro stability, the performance o f the public sector, the enabling environment for the private sector, and better service delivery; (iii) more emphasis o n vulnerability, in view o f the complex nature o f these issues in the Mongolia context and the requests for enhanced Bank support; and (iv) sharper focus o n results, in view o f the importance o f the Bank complementing and increasing the impact o f other development resources, including public expenditures and donor support.

EGSPRS PILLARS

nsuring macroeconomic stability and public sector effectiveness Supporting production and exports and improving the environment for private- sector-led development Fostering sustainable

Enhancing regional and rural development, and environmentally sustainable development

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Table 3: EGSPRS Pillars and CAS Objectives

Promoting good governance, and implementing and monitoring the strategy

CAS OBJECTIVES

work (below)

Support development o f the PSD strategy; strengthen regulatory framework for financial sector; judicial and legal reforms to improve private sector environment Support infrastructure reforms to develop comprehensive Public Investment Program, rebalance tariffs, encourage private participation

Improve financial sustainability and targeting o f social protection, health,

_____________________________ _________________-_____ ____________________------- _---_-___ ................................................

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53. To enhance impact, the Bank wi l l also introduce further changes in the way of doing business, reflecting the evolution of the portfolio and the lessons learned. K e y elements o f this new approach include:

Sharpening the focus o n building institutional capacity to deliver key development results. More emphasis o n building partnerships and agreement o n common strategic frameworks that prioritize and sequence pol icy and institutional reforms and capacity-building efforts to strengthen institutions. A carefully sequenced program o f pol icy work that i s conducted in a collaborative way to ensure that analytical findings in form sector dialogue and strategies as wel l as project interventions. Greater integration o f the Bank’s program with the pol icy and institutional reform agenda by sequencing analytical work and support for sector strategies ahead o f Bank adjustment and investment lending with more policy content. Modulating Bank support to the level o f consensus and knowledge, engaging with a broader mix o f instruments where there i s strong agreement (such as in the public sector), and with more pol icy work where there are knowledge gaps or agreements have not been reached. Piloting innovative, bottom-up approaches.

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CAS Objective 1: Consolidating the Transition

54. TheJirst CAS objective supports elements of the EGSPRSpillars to deepen the transition to a market economy by removing the remaining structural barriers to effective public service delivery and a vibrant private sector. Under this CAS objective, the Bank will support reforms to build a more performance-oriented public sector -- closely l inked to reforms and investments to improve the delivery o f key infrastructure and social services, and reforms to improve the financial, legal, and regulatory environment for the private sector. The broad lines o f the results expected to be achieved over the CAS period can be found below (table 4) and are detailed in Attachment 1.

Table 4: Consolidating the Transition

Longer-term/ higher order country outcomes

Improved service delivery and macroeconomic stability through better efficiency and effectiveness of the public sector

Budget deficit decreases from 6.2% in 2004 to 4.5% in 2006 Wage bi l l as share o f GDP decreases from 8.5% in 2003

Growing, vibrant private sector FDI as a share of GDP increases from 7% to 1 1 % by 2007

economic base Exports as share of GDP increases from 47% to 60% by 2007

Stronger diversification o f

Improved efficiency and distributive impact of infrastructure investments to support service delivery and private sector development

Deal with special needs of Mongolia as a landlocked nation.

Strengthened human capital Under-5 mortality decreases from 87 per 1,000 to 29 by 2015 Primary enrollment increases to 100% by 2015

CAS outcomes the Bank expects to influence in four years

Strengthened systems and capacities to align public expenditures with policy priorities

Comprehensive, rolling MTEF aligned with EGSPRS priorities in place and annually updated based on feedback from national M&E systems General public have access to a l l budget documents on timely basis

Incentive-based civil service established Salary range broadened by 25% Effective human resources system improves sectoral staffing mix consistent with MTEFIEGSPR~ goals

Constraints to a vibrant private sector identified through the Investment Climate Assessment, and key obstacles either removed or in process o f being removed

Government and donor consensus on prioritized PSD agenda Improved performance o f the banking sector with reduction in non-performing loans from 8% of assets to 5%

More cost-efficient and sustainable infrastructure investments

Costed public investment program, consistent with the MTEF and EGSPRS, prioritized across sectors Adequate resources allocated for maintenance Greater private sector participation in provision of infrastructure

Improved financial sustainability o f health, education, social protection

Improved allocation o f health and education expenditures; hospital spending decreased from 85% to 70% o f total health spending Improved targeting and sustainability o f social assistance programs, including pensions

Instruments supporting outcomes

Portfolio: Fiscal TA; Economic Capacity TA Credit Lending:

Judicial and Public Sector Reform TA m: Public Expenditure Review/Integrated Fiduciary Assessment

PRSC-I, 11,111, IV;

Portfolio: Financial Sector Adj Credit; Financial Capacity Development Project; Private Sector Development Credit-I Lending: PRSC-11; PSDC-11; Judicial and Public Sector Reform TA &: Investment Climate Assessment, PSD Strategy; Financial Sector Mid-term Review Portfolio: Transport Development Project; Energy Credit Lending: Ulaanbaatar Services- 11; Infrastructure Projects (2) m: Sector Strategies

Portfolio: Economic Capacity TA Credit Lending: PRSC-I; 11, 111, IV; Social Sector TA m: Sector Strategies; Poverty Assessment/ PETS

55. Consolidating reforms for a more performance-based public sector. The Bank will intensify support for the Government’s public sector reform agenda under the PSMFL, which i s well-aligned

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with the findings o f extensive analytical work by the Bank and other donors. Public sector reforms will be supported through a mix o f instruments - including a series o f single-tranche Poverty Reduction Support Credits (PRSC), the f i rs t o f which focuses primarily o n the public sector and institutional reform agenda (with follow-on actions in subsequent PRSCs), an ongoing Economic Capacity TA Credit (ECTAC), and an ongoing program o f analytical work and pol icy dialogue. The Bank i s collaborating with other donors active in the sector, including the ADB and the IMF.

e Strengthen public expenditure management to improve the alignment of budgets with policies and the efJiciency of public spending. The Bank wil l support reforms to articulate and institutionalize a full-fledged MTEF that aligns budgets with policy priorities set in the EGSPRS, improve budget coverage and financial management through implementing a Government Financial Management and Information System, improve public procurement processes, and strengthen access to public expenditure information.

e Reform and restructure the civil service and introduce performance-based incentives for public servants. The Bank wil l support the further articulation and implementation o f a comprehensive c iv i l service reform program designed to streamline the size o f the c iv i l service, strengthen performance-based salary and bonus systems, and integrate fragmented management systems, in part through introducing a Human Resource Management and Information System.

56. Establish a sound enabling environment for the private sector. The Bank’s support will focus o n further consolidation o f market reforms to establish a sound institutional and regulatory environment for the private sector. Support will be provided through adjustment lending (the PRSCs, particularly PRSC 11, and an ongoing financial sector adjustment loan), and analytical work to address key knowledge gaps and to in form the development o f a private sector strategy.

Support development of a comprehensive private sector development strategy. Ongoing analytical work, including analysis o f sources o f growth (mining, cashmere, and trade), an investment climate assessment, and a supply-chains study, will be integrated with work by the Govemment and other development partners, including USAID, ADB, JICA and GTZ, into an overall assessment o f the sources o f growth for Mongolia and the strategy for private sector development. Follow-up activities will be supported by measures in PRSC I1 and I11 to further strengthen the regulatory and incentive framework for private sector development, and explore ways to address training needs.

e Support deepening ofJinancial intermediation. Support to strengthen the regulatory framework for banks and improve commercial bank risk-management will be continued under the PRSCs and the ongoing financial capacity building project. The Bank wil l support (with the ADB) a financial sector mid-term review, which has provided the framework for donor interventions. In addition, the Bank i s planning a follow-on Private Sector Development Credit that wil l build o n the experience with an earlier project to provide financing for PSD. The PRSC will support measures to improve the regulatory framework for the insurance industry and effective livestock insurance. I t will also be closely l inked to interventions that target reduction o f rural vulnerability (the ongoing Sustainable Livelihoods Project and a proposed pi lot index-based livestock insurance project). IFC support will continue to focus o n the financial sector, including possible further investments-and TA to recently privatized banks, TA to develop the enabling environment for a leasing industry, and efforts to enable banks to increase their lending to SMEs.

0 Support the strengthening and effective implementation of judicial and legal reforms and the rule- oflaw to facilitate private sector activities. The Bank-supported Legal Reform Project has been instrumental in improving access to legal information, establishing specialized courts, and improving legal education. Progress over the past few years wil l be reviewed in FY05 with the Government and other donors involved in supporting the sector through an update o f the Legal

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Needs Assessment (done in 2000). The priorities identified could be supported by a follow-on project. In addition, PRSC-I1 wil l focus on streamlining government processes and improving the transparency o f regulations.

57. Support reforms to improve the eficiency and distributive impact of infrastructure investments. Provision o f infrastructure i s critical for supporting service delivery and economic activities given Mongolia’s vast, isolated territory and harsh climate. However, the impact o f the considerable investment devoted to infrastructure has been l imi ted by weak capacity to cost and prioritize, and develop sustainable financing mechanisms. While recognizing the long-term nature o f the challenges in the sector, Bank assistance will place greater emphasis o n reforms that strengthen institutional capacity to manage infrastructure in support o f objectives for equitable growth and improved service delivery. These objectives will be supported through assistance in developing a comprehensive infrastructure strategy, closely l inked to public expenditure reforms, to build agreement on outstanding issues such as tar i f f rebalancing, and more closely link Bank investments in essential infrastructure with these reforms.

Develop an integrated infrastructure strategy with the Government, donors, and other stakeholders. This strategy will be aligned with a comprehensive public investment program and the MTEF to cost and set priorities for the many infrastructure needs, build a more comprehensive and better sequenced pol icy and regulatory reform agenda, and address inequities in infrastructure service delivery resulting fkom hidden subsidies. The strategy will underpin future Bank support for infrastructure development, including cross-sectoral support.

Support reforms to improve financial sustainability and create an enabling environment for public- private partnerships in the energy sector. Based on dialogue in the energy sector with the Government and major donors, the Bank will support the Government in establishing commercially viable public-private investment partnerships to mobilize internal and external resources to achieve universal access to affordable energy (heat/electricity) services in rural and peri-urban areas-and to implement high-priority infrastructure investments (such as hydropower, urban heating, transmissioddispatch reinforcement, integrated road/energy urban services). This will be achieved through the Energy Credit to ensure the financial sustainability o f electricity distribution companies, PRSC-I1 to consolidate the Energy Regulatory Agency and implement pricing reforms, and new lending to facilitate the establishment o f public-private partnerships, takmg regional dimensions into account.

Strengthen institutional capacity to manage the road network to meet the objectives of equitable growth and service delivery. The Bank wil l collaborate with the ADB and JICA o n updating the roads sector strategy and strengthening the investment program to account for recurrent costs. The Transport Development Project has been supporting better accessibility o f isolated and remote central and western regions, and a subsequent project i s envisaged to finance priority segments identified within the overall sector strategy and integrated network.

Increase access to ICT services through articulation of a universal access strategy and establishment of a universal service fund. The Bank will support activities to develop an enabling environment and funding mechanism to increase access to Information and Communication Technology (ICT) infrastructure and services, particularly in rural areas. Policy and regulatory reforms, seed financing o f the universal service fund, and technical assistance in I C T sector interventions will be supported under the PRSCs, planned AAA and infrastructure investments.

5 8. Strengthen institutional capacity to support human development. W h i l e other donors, including the ADB and Japan, will continue to take the lead in assisting the Government in the social sectors, the Bank wil l p lay an increasing, but narrowly-focused role in supporting reforms to improve the financing

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and targeting o f social sector programs. Bank support wil l be aligned within the strategic frameworks that the Government and lead donors are implementing in these sectors, and linked with the sequenced program o f pol icy and institutional reforms supported under the PRSCs. In i t ia l PRSC reforms will target public spending, transparency in financial management, and fiscal sustainability. Later PRSCs (particularly PRSC 111) will put more emphasis o n sectoral policies and human development outcomes. The PRSCs will be complemented by capacity-building work under the ongoing ECTAC, PHRD and LDF grants, a possible stand-alone TA project, and the ongoing AAA program closely coordinated with the ADB and Japan International Corporation o f Welfare Services. The Bank will support reforms and actions to:

0

0

0

59

Improve the financial sustainability and targeting of the pension and social insurance programs. The Bank will support a series o f measures-through PRSCs, AAA, and capacity building-to help reform the pension system and improve the administration and targeting o f social protection systems.

Deliver better health sewices by strengthening transparency and sustainability of the health financing system, improving access to essential drugs, and strengthening the enabling environment for private participation. Within the Government’s health sector strategic framework, the Bank will assist in rationalizing health assets and expenditures to better target health needs, including support to develop a hospital optimization plan, strengthen the system to procure and distribute essential drugs, and develop better standards to regulate private participation in the sector.

Improve delive ry of education services through better linkage of expenditures with needs and strengthened systems in higher education accreditation and M&E of educational outcomes. For public expenditures, the Bank wil l support the development and implementation o f more efficient education financing norms for primary, secondary, and tertiary education, in l ine with MTEF targets and policies. I t will also support strengthening the accreditation system for private, higher education institutions and upgrading the student assessment system to better measure educational outcomes nationwide.

CAS Objective 2: Reducing Vulnerabilities

The Bank wi l l continue to expand its support to strengthen systems that reduce risk and enable improved sewice delivery to key vulnerable populations. The Bank will continue to pursue innovative approaches to reduce rural vulnerability, support better management o f environmental resources that improve human security, strengthen the financial sustainability o f key services to vulnerable urban populations, and provide options to strengthen the effectiveness o f national initiatives to balance rural, regional, and urban development (table 5). Interventions to strengthen the delivery o f social protection, health, and education services under CAS objective 1 wil l also support this objective.

60. Address key sources of rural vulnerability. The Bank will continue to support new approaches to identify, strengthen, and replicate local and national mechanisms to reduce rural vulnerability. These include innovative mechanisms that reduce risk f rom climatic shocks, as well as initiatives that reduce vulnerability by improving the environment for rural economic activity. The Sustainable Livelihoods Program has been intensively pilot-testing new approaches to reduce risk and support growth in eight selected “aimags” (provinces). The second phase o f the Program (SLP-11) would scale up and “scale out” the tried and tested institutional innovations to the national level f rom the p i lo t “aimags,” and will l ikely place a greater emphasis o n activities related to rural growth, including support for livestock marketing and production systems. These efforts will be strongly l inked with further Bank support for the Government’s rural development strategy, and a greater emphasis o n building synergies with rural

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Table 5: Reducing Rural and Urban Vulnerability

Longer-terdhigher order

service delivery to reduce rural- urban disparity

Livestock production increases by 3.5% per year Animal losses f r o m winter disasters decreases by ha l f and households losing a l l animals reduced by 60% by 2014

Improved sustainable management o f natural resources to reduce income variation and support steady growth

Forest cover does not decrease from 8% Carbon dioxide emissions reduced from 4.19 tons per person in 2000

Proportion o f population without access to safe drinking water halved by 2015, from 45% in 1990

Proportion o f population using adequate sanitation facilities increased f r o m 25% in 2000 to 50% in 2015 Sustained reductions in regional disparities in economic growth and human development

CAS outcomes the Bank expects to injuence in four years

Systems strengthened, and new mechanisms established o n a p i lo t basis, to reduce rural vulnerability. Improved community pastoral risk management in target regions 0 Proportion o f herders making adequate

winter preparations increased by 30% in eight target provinces Herders covered by livestock insurance in pi lo t provinces increased f r o m zero to 3- 7%

Enhanced enabling environment for rural investment

20% o f target group have access to microfinance services Improved mechanism to target rural expenditures o n infrastructure through greater participation

Improved environmental and natural resource management

Public participation in EIA process and access to data and i n f o m t i o n o n environment systematically al lowed

0 Community-based forest management leads to reduction in forest loss in three p i lo t “soums” (counties)

Strengthened municipal govemance and service delivery to serve vulnerable populations

Number o f persons per water k iosk down f r o m 1,490 in 2004 to 1,275 in 2008 Munic ipa l and donor resources aligned to Ulaanbaatar c i ty development strategy

Options to improve impact and sustainability o f regional development expenditures provided

Regional development interventions better costed and priorit ized in framework o f MTEF and EGSPRS; reflect international experiences, good practices

Instruments supporting outcomes

Portfolio: Sustainable Livelihoods Project Lending: SLP-11; [ndex-Based Livestock [nsurance Project; Land Administration Management Project; PRSC-V; m: Poverty Assessment; Decentralization Study

Lending: PRSC-11, 111; Forestry Project m: Natural Resource Use Strategy Others: IDF to Ministry o f Nature and Environment

Lending: Ulaanbaatar Services- 11; PRSC-IV

&: Regional Development Pol icy Note; Investment Climate and Supply Chain studies; CEMi Development Pol icy Review; Decentralization Study; Integrated Infrastructure Strategy

projects supported by numerous donors, including ADB, Japan, EU, USAID, FAO, and UNDP, on a wide range o f rural issues (including veterinary services, cooperatives, integrated crop and livestock management).

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Pilot and scale-up mechanisms toprepare for and mitigate risk from periodic episodes of unusually severe winter weather through better monitoring and forecasting of climatic and pasture conditions, fodder reserve systems, and disaster response planning. In addition to ongoing support for these activities provided by the ongoing SLP project, the Bank will extend efforts to develop a pi lot index-based livestock insurance system through an anticipated stand-alone project. Further support to improve pasture management will be provided through a planned Land Administration and Management Project, building on previous Bank-supported analytical work to assess possible options to strengthen the management o f Mongolia’s open access pastures.

Support new approaches to improve the environment for rural economic growth. Rural vulnerability will be further addressed through efforts to improve the environment for rural economic growth and increases in productivity, complementing the work o f other donors. These include initiatives to extend access to rural microcredit and financial services, improve the targeting and efficiency o f rural infrastructure investments through increased participation, and analytical work (on supply chains, decentralization) to identify possible approaches to address key rural barriers to growth.

6 1. Improve environmental governance and management of natural resources. In recognition o f the strong linkages between vulnerability and the increasing exploitation o f natural resources that has accompanied transition, the Bank will support efforts to improve environmental governance. at the national and local levels (Attachment 6). At the national level, analytical work under an ongoing Institutional Development Fund (IDF) grant will support reforms to strengthen the existing institutional framework for environmental management and enforcement. Reforms wil l be supported by the PRSCs, particularly the overall public sector improvements being sought, and complemented by M A including regular environment monitors. Improvements will include the broadening o f public participation in the Environmental Impact Assessment process and increasing the overall access to environmental data and the ability to incorporate this information into policies and programs. At the local level, the Bank will support the pi lot ing o f community-based use and management o f forestry resources to reduce over- exploitation o f rapidly-dwindling forest resources that provide key sources o f fuel, watershed protection, and critical habitat for biodiversity under a proposed forestry project. These efforts may be supplemented by Global Environment Facil ity (GEF) funds. Support will be closely coordinated with other donors active in the sector including the ADB, UNDP, USAID, Germany (GTZ), the Netherlands, and Sweden.

62. Improve municipal service delivery for vulnerable populations in peri-urban areas. The Bank will continue to build municipal government capacity in Ulaanbaatar and other major urban centers to effectively and sustainably provide services to the growing numbers o f rural migrants living in “ger” districts surrounding these cities. Further support will be provided through the Second Ulaanbaatar Services Improvement Project to improve the access o f “ger” district residents to clean water through investments in physical infrastructure and increased emphasis on TA to strengthen financial sustainability and administration o f the municipal water authority. Based o n the new project and ongoing dialogue with the municipality o f Ulaanbaatar and donors (including ADB, UN, USAID, Wor ld Vision, and Japan) within the context o f the city’s development strategy, the Bank wil l address broader municipal governance issues by supporting further alignment o f donor and municipal resources around priority needs in municipal administration, land management, and development o f integrated urban strategies for Darhan and Erdenet. The poverty assessment and related analytical work wil l shed light o n the composition and characteristics o f vulnerable populations in peri-urban areas and o n rural- urban linkages, particularly migration. I t i s also anticipated that this work will build on the successful cooperation among the Municipality o f Ulaanbaatar, international and local NGOs including Wor ld Vision, Save the Children-UK, and the Christina Noble Foundation, and the Bank in a nearly-completed Japan Social Development Fund-supported project to help street children.

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63. Assist the Government in analyzing the viability of options to support its regional development objective. While there i s widespread support for the underlying objectives o f the Government’s regional development strategy, concems continue to be raised about the costs and benefits o f the approaches proposed - including large infrastructure investments, free trade zones, and support for specific industries -- in the strategy, particularly given the l imited success o f similar approaches in other countries. Analytical work on the regional development strategy, the integrated infrastructure strategy, and o n decentralization will seek to assist the Government in assessing options for achieving regional development objectives based o n analysis o f costs and benefits and international experience. The analytical work on regional development and decentralization will be done in close collaboration with the Government, ADB, Japan, GTZ, and other donors, and will draw upon findings o f the integrated infrastructure strategies and the investment climate assessment and supply chains study. I t will analyze prospects for economic growth in the various regions and the proposed “growth poles” and wil l contribute to the debate on their economic and financial viability. It will also assess the implications o f this analysis for the overall decentralization program. After the f i rs t three PRSCs, consideration will be given to addressing issues o f regional development and decentralized public administration, including needed analytical work to fill knowledge gaps, in the context o f subsequent PRSCs.

CAS Objective 3: Strengthening the Alignment of Policies and Resources Around Results

64. The third CAS objective directly supports the fifth pil lar of the EGSPRS, but it reflects the Bank’s evolving approach in Mongolia -- emphasizing partnership and collaboration at multiple levels to improve results. I t i s aimed at building synergies among substantive priorities and approaches at the national, sectoral, and project levels. Many o f the elements o f this approach have been pursued in the context o f previous Bank assistance including Consultative Group (CG) meetings, sector work, individual projects, and ongoing formal and informal coordination efforts. This new approach seeks, by contrast, to support the Government in building linkages that integrate disparate systems and initiatives, funded by domestic resources and ODA, toward the national development priorities for poverty reduction and growth (table 6).

65. Strengthen the national institutional framework for further developing, implementing, and monitoring the EGSPRS. The Bank will continue to provide support to strengthen key elements o f the institutional framework for implementing the EGSPRS. I t will support the Government in the annual updates o f the EGSPRS using mechanisms (Trust Funds [TFs], consultants) similar to those used for supporting the EGSPRS itself. It will also support government efforts to develop and strengthen mechanisms to improve public participation in EGSPRS implementation and monitoring through the PRSP TF, a small-grants program, AAA o n civic engagement, and Bank-Netherlands Partnership Program grants. The Bank will work with the U N D P and the ADB through ongoing AAA and the use o f t rust funds to help the Government strengthen the reliabil i ty and frequency o f the national poverty monitoring system and enhance the capacity o f the National Statistical Office. Support will also be provided to strengthen sector ministerial M&E systems (especially in infrastructure, agriculture, education, social welfare, and environment) and better integrate them with the national EGSPRS monitoring system. T o ensure that Bank support on these initiatives i s we l l aligned with support f rom others, the Bank will participate in the multi-sector Government-Donor Work ing Group that i s about to be formed and in the ongoing UN Thematic Group on the MDGs. The Work ing Group wil l focus on integrating EGSPRS and MDG M&E systems, harmonizing procurement and project management procedures, supporting public sector reforms, and integrating rural and regional development.

66. Facilitate the development and implementation of sector strategies linked with the EGSPRS. This support, embedded throughout the Bank’s assistance program, forms a common and critical set o f interventions that will contribute to the development and implementation o f the EGSPRS. Sector strategies are already in place for a number o f sectors (energy, education, and health). In many others, efforts are needed to further articulate and implement strategies (private sector development, transport,

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agriculture). The Bank plans to increase i t s emphasis on strategic frameworks to build agreement around outstanding reforms and prioritize investments. Shared sector strategies based o n collaborative analytical work will provide an important opportunity for the Bank and others to take a new approach to institution-building efforts by setting measurable goals for institutional capacity in a given sector, sequencing and integrating reforms o f institutional systems with capacity building efforts, and emphasizing initiatives that strengthen institutional mechanisms to promote accountability and civic engagement.

Table 6: Strengthening Alignment of Policies and Resources with Development Results

Longer-term/ higher order country outcomes

Institutional structure for EGSPRS implementation enables effective public sector and donor responses to support development priorities (see also CAS Objective 1)

Improved results from the implementation o f sector strategies

Strengthened govemment capacity and systems to coordinate ODA in support o f EGSPRS and national development results

Expected CAS outcomes in four years Oversight and line ministries have appropriate national-level implementation and M&E frameworks to facilitate alignment o f govemment and donor resources, reliably assess progress toward EGSPRS goals, and adjust allocation of resources based on M&E feedback

EGSPRS goals further prioritized and costed in framework of MTEF; updates reflect findings of M&E system and revisions in sector strategi,es EGSPRS monitoring system strengthened with indicators reflecting national priorities, fully integrated with MDGs, and reliably and regularly monitored Civic engagement mechanisms institutionalized in implementation and monitoring of EGSPRS

Greater consensus and alignment among donors and the Govemment on costed and prioritized sector strategies that are linked to MTEFIEGSPRS (including infrastructure, social sector, and public sector management)

Govemment uses CG meetings as a mechanism to align donor resources with EGSPRS priorities, informed by M&E feedback

Government-Donor Working Groups institutionalized and serve as mechanism to align donor resources with national priorities and strategies, informed by M&E systems

Harmonized donor and govemment processes allow more efficient use of donor resources in support o f development priorities, reduced transaction costs and burden on govemment

The Govemment and major donors use harmonized procurement procedures leading to reduced procurement time and increased transparency Govemment reviews of donor portfolios harmonized and focused on development outcomes PIUs consolidated, integrated with counterpart agencies and sector strategies

Instruments supporting outcomes

m: Poverty AssessmentPETS; Civic engagement assessment Others: PRSP Trust Fund for monitoring (with UNDP); Multi-sector Govemment- Donor Working Group

AAA: Sector strategies in PSD, infrastructure, social sectors, etc.; Others: Participation in Goa.-Donor Working Groups; Consultative Grouo meetings Others: Govt.-Donor Working Groups; Consultative Group (CG) meetings; harmonization

67. Strengthen the Government’s efforts to coordinate aid and harmonize donor procedures. The Bank will continue to participate actively in aid coordination and harmonization efforts. As co-chair (with the Government) o f the CG meetings, the Bank will focus attention on the implementation o f the EGSPRS, and the need for donor alignment around this. The C G meetings and continuing dialogue will provide opportunities for the donor community to receive and discuss progress reports and updates o n EGSPRS implementation and plans l inked to the medium-term expenditure framework. The Bank wil l also enhance i t s participation in Government-Donor Working Groups in line with the lead donor(s)

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concept: social sector Working Group (with the ADB, Japan, and the UN agencies in the lead); infrastructure Working Group (with the Bank, ADB and Japan taking the lead); and a multi-sector Working Group to address public sector management and govemance issues, procurement and project financial management, regionallarea-based development, and overall EGSPRSMDG implementation and monitoring. The Bank will continue i t s work with the ADB to support streamlining and harmonizing procurement processes. The Bank has agreed with the ADB and other donors to collaborate o n addressing PIU issues-improving jo in t project financial management standards, aligning multiple donor PIUs with sector strategies, and where possible, consolidating and integrating multiple PIUs in a given sector to ensure that project implementation capacity i s retained in the government agency. The Bank i s pursuing jo in t portfolio performance reviews (with the ADB) to emphasize project outcomes. I t will expand efforts, with the donor community, to engage China and Russia in donor-coordination efforts (box 4 and Attachment 7).

Box 4: Major Donor Activities

United Nations. T h e UNDP supports the Govemment in aid coordination efforts and, with other UN agencies, provides assistance to key capacity and institution-building efforts. In particular, the UN system i s helping the Govemment develop and monitor the Mongolia MDGs and providing support through i t s specialized agencies in each goal area. T h e UN system also supports good govemance and human security, enterprise restructuring, environment and natural resource management, early- childhood and non-formal education, nutrition and sanitation programs, and education. The Bank works very closely wi th the Government and UN system in aid coordination, aligning the EGSPRS goals wi th the MDGs, environment, governance and poverty research support. IMF. An IMF program under the PRGF i s in place, and the first and second reviews were concluded in September 2003. T h e EGSPRS macroeconomic framework is the program basis for the short and medium terms. T h e Bank collaborates closely and regularly wi th the I M F on macroeconomic developments, the fiscal framework and public sector reforms (particularly wage- bill implications o f civil-service reforms), the financial sector, private sector development and investment regimes, and poverty. The two institutions produce the JSAs for the PRSPs and monitor their implementation. ADB. The ADB i s developing i t s assistance program for Mongolia for the coming years, aligning it with EGSPRS priorities. ADB activities have emphasized the financial sector (bank-risk management, capital markets, and insurance), public sector accounting and auditing, development o f highways, agricultural services (veterinary, well development, irrigation, and seeds), urban services in provincial towns, housing finance and mortgage market development, education and health services investment, and welfare system reform. T h e Bank has indicated that i t w i l l take part in the development o f infrastructure and social sector strategies and in other donor harmonization efforts w i th the ADB. ADB will also explore ways o f cofinancing PRSCs I 1 and 111. Japan. Through the JICA grant facility and JBIC concessional lending, Japan has emphasized the economic sectors o f energy, transport, railway rehabilitation, agriculture, and water supply, as well as support to tourism development, health, and education (including capacity building). I t i s also updating its Mongolia assistance strategy to align it with the EGSPRS. I t i s expected that the Bank and Japan w i l l collaborate closely in the energy, transport, education and health sectors and in rural development. USAID. A major focus o f U S A I D i s improving the private sector policy environment, development o f business capabilities, entrepreneurship, support for privatization and sector competitiveness, and urban micro business development. Other areas o f concentration include legal and judicial reform, economic policy advice, creating markets for herders, govemance and support for democracy, and environmental protection. T h e Bank works closely with their advisors in energy policy, financial sector and privatization policy and the minerals sector development. Over the CAS period, the Bank w i l l closely coordinate efforts in private sector development, the urban sector and in legal and judicial reforms. European Union. T h e EU has focused on a number o f activities that have included health, environment, democracy and rule of law and administrative support at provincial levels; assistance for statistical capacity, vocational education and training; support for SME and banking management capabilities, and aid coordination. Looking forward, the Bank w i l l work closely wi th the EU in cofinancing PRSC I1 and 111. Germany. Germany continues to focus in generating rural sector growth, emergency relief, rural finance and cooperative development, privatization o f veterinary services, and environment and natural resource management apart from providing assistance in legal and judicial reforms and the training o f legal professionals. Other areas include supporting policy reforms in the financial and energy sectors, training and support for SMEs and the development o f I C T in the westem aimags. The Bank has collaborated with Germany in energy sector reforms and in the financial sector. Further collaboration will take place over the CAS period in rural and regional development, environment, energy and PSD. Sweden. Sweden has been focusing efforts in strengthening govemance and the public sector, supporting poverty research, capacity building in urban land administration, c iv i l aviation, environment, and rehabilitation o f the transmission grid. T h e Bank i s working with Sweden to cofinance PRSC I that will focus on public sector reforms.

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B. Assistance Program

68. The proposed four-year program to support the CAS objectives integrates Bank instruments around a core set of policy and institutional reforms that support implementation of the EGSPRS. Building o n the high value attached to the Bank’s policy work in Mongolia, a program o f ongoing, collaborative analytical work will in form the reforms to be supported. A stronger emphasis on Bank participation in ongoing sector dialogue and strategy work wil l seek to support greater agreement around reform agendas and alignment o f resources to the reforms. Lending will support these policy and institutional reforms -- through the sequenced series o f PRSCs, investment operations with a greater pol icy component l inked to the sector strategies, and selected technical assistance in support of key public sector reforms. The instruments will be integrated and sequenced for the highest impact- adjustment lending supporting needed policy reforms that make selected investment lending more effective, AAA and dialogue to fill knowledge gaps and build consensus, TA Credits and training activities to address critical capacity constraints, and IFC partnerships with the private sector to complement public policies (box 5). The Wor ld Bank Institute (WBI) will also address training needs and critical capacity constraints.

Box 5: The IFC in Mongolia

In recent years, IFC’s focus in Mongol ia has been directed toward: (i) enabling financial intermediaries increase lending to SMEs; (ii) TA initiatives aimed at improving the investment climate; and (iii) larger natural resource projects. IFC currently has two projects in Mongolia. One i s a loan to XacBank to help expand lending operations and improve liquidity accompanied by TA f r o m S M E Capacity Bui ld ing Fund, designed to introduce international operating and governance standards and building o f institutional capacity. The second i s a loan extended to a leather processing faci l i ty in 1997, which i s currently undergoing restructuring.

IFC i s also providing advisory services and TA through the Private Enterprise Partnership to develop Mongolia’s leasing industry. The project seeks to establish a conducive legislative environment for leasing; build capacity o f the proposed leasing regulator; create opportunities for investments in the sector; provide training and consulting services to enterprises interested in leasing; and conduct a public campaign to educate private enterprises, financial institutions, and regulatory agencies about leasing. T o support SMEs, IFC plans to localize i ts S M E Toolkit in Mongolia; it wil l provide small businesses access to Web and CD-ROM-based interactive tools and training.

IFC undertook a sector study o n mining in 2002. This work has been fo l lowed up by the Bank with a review on the current performance and future potential for growth in the sector which wil l be the basis for a po l icy note and recommendations to the Government. The Foreign Investment Advisory Service (FIAS) has provided assistance o n improving the foreign investment climate in Mongolia. F I A S has also offered training to the Foreign Investment and Foreign Trade Agency (FIFTA), the foreign investment promotion agency, to help it restructure.

Over the CAS period, IFC wil l continue i t s focus o n the financial sector through a mix o f investment and TA activities. IFC i s investigating post-privatization investment opportunities in the Trade and Development Bank and has reviewed possible participation to help the AgBank extend i ts rural network. I t i s undertaking an init iative to identi fy opportunities to provide TA to Mongol ian SMEs associated with the mining sector. This init iative is expected to enable Mongol ian SMEs to become suppliers o f products and services to mining companies; respond to the needs o f mining SMEs in management training, business consulting, and finance; and create alternative business opportunities o r formalize i l legal “artisanal” mining activities. IFC plans to help Mobicom, the country’s largest mobi le phone service provider, t o assess the viabi l i ty o f a capital increase and stock listing.

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69. Adjustment lending wil l be provided through a series of annual single-tranche PRSCs (with actions fulJlled prior to credit effectiveness) to support selected key elements of the reform agenda in the EGSPRS. The PRSCs will be sequenced based on requisite analytical work, agreement, consensus, ownership, commitment, and readiness to implement. PRSC-I will focus o n supporting the Government’s public sector and institutional reform agenda within the f i rs t EGSPRS pillar. PRSC-I1 wil l support the second EGSPRS pillar, which aims to establish a sound institutional and regulatory environment to complete the transition to a market economy and enable the private sector to become an engine o f growth. PRSC-I11 will focus on implementing reforms in the social sectors, and as with PRSC 11, continue to support public sector reforms. Future annual PRSCs would fo l low up on various pol icy issues and support other priorities determined by EGSPRS updates and reviews o f progress. The Bank will work closely with key donors to develop the pol icy reform agenda around the PRSCs and seek cofinancing opportunities (there have been in i t ia l expressions o f interest f rom the ADB, EU, and Sweden).

70. Proposed investment lending wi l l be selective and focus on priority areas agreed upon among the Bank, the Government, and other donors within sector-wide approaches (SWAP) where possible. Lending decisions will take into account the poverty impact and results, EGSPRS alignment, country and Bank experience, and activities o f other donors and partners. In most cases, lending will be undertaken only when there i s clear articulation, consensus, and agreement on broad sector strategies among stakeholders. Working with others to strengthen the sectoral and other Government-Donor Working Groups, the Bank will help develop shared sector strategies and multiyear investment programs. This will enable the Bank to move toward SWAPS and greater collaboration with other donors (with increased co-financing) in investment operations in infrastructure, and also possibly in rural development, environment, and other sectors . Selected TA operations will buttress adjustment and investment lending. Where possible, IDA lending will be supplemented by donor grant resources. The use o f TF grants, beneficial in the past, i s expected to continue. GEF resources will help Mongol ia address i t s priorities in biodiversity conservation, climate change, and sustainable land management.

7 1. The Bank’s program of assistance for FY0.5-FY08 includes lending for adjustment, investment, and TA credits. The notional base case lending program (table 7) includes annual, single-tranche PRSCs (about 40 percent o f lending) and up to two additional projects per year depending on progress o n project preparation, readiness o f the client, and overall pace o f implementation o f the program. PRSC-I and the Second Ulaanbaatar Services Improvement Project are expected to be delivered in FY04. For the CAS period, the proposed operations are:

e

e

e

e e

A pi lot Index-Based Livestock Insurance Project (FY05) to support a private-company scheme o n a full commercial basis with international reinsurance. A second Private Sector Development Credit (FY05), building on the success o f the f i rs t credit to finance capital investment by SMEs through commercial banks. A Social Sector TA (FY06) to complement PRSC I11 to assist the Government to implement the pol icy conditions, build capacity in social sector ministries, and provide l imi ted investment. The second phase o f the Sustainable Livelihoods Program (FY07) to expand institutional innovations f rom the eight pi lot “aimags” under the f i rst SLP to the national level and continue with activities in pastoral risk management, microfinance, and the Local Initiatives Fund. Follow-up to the E C T A C and Legal Reform LIL to continue support for capacity enhancement to implement the EGSPRS and undertake related policy analysis (FY07). A Land Administration and Management Project (FYO8) to support implementation o f the new Land Law, focused on both pasture and arable lands. A Forestry Project (FY08) to address issues o f sustainable forestry and livelihoods. T w o infiastructure projects are also envisaged in the second and fourth year o f the C A S period (FY06 and FY08). The components are expected to be based on results o f the integrated

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Year FY05

F Y 0 6

F Y 0 7

F Y 0 8

infrastructure strategy work being undertaken and agreement on priorities and possible SWAP arrangements. These could focus on providing basic infrastructure services (heat, electricity, ICT, roads, and clean air) to urban, rural, and peri-urban areas by rationalizing delivery o f infrastructure services, as wel l as transport sector investments.

Table 7: Proposed Assistance Program: Base Case

Lending PRSC-11: PSD Issues (US$lOm) Index-Based Livestock Insurance

Private Sector Development Credit-I1 Project (US$5m)

(US$4m)

Social Sector TA (US$3m) Infrastructure Project: (to be determined) (US$13m)

PRSC-111: HD Issues (US$ 1 Om)

PRSC-IV (US$9m) Second Sustainable Livelihoods Project (US$Sm) Judicial and Public Sector Reform TA (US$3m)

PRSC-V (US$9m) Infrastructure Project: (to be determined) (US$Sm) Land Administration and Management Project/ Forestry Project (US$6m)

AAA Poverty Assessment' Public Expenditure Tracking Survey PSD Strategy (Investment Climate Assessment' Supply Chains) Integrated Infrastructure Strategy Social Sector Strategy Regional Development Pol icy Note Financial Sector Mid- term Review Monitor: Economicl Environment Country Economic M e m o r a n d u d Development

Decentralization Study Livestock Support Services Study Social Sector AAA Judicial Reform Review Civic Engagement Assessment Monitor: Economicl Social Integrated Public Expenditure Review1 Integrated Fiduciary Assessment Natural Resource Use Strategy ICTStrategy Infrastructure AAA Monitor: Economicl Environment

Financial Sector Assessment Human Development Assessment Monitor: Economicl Social

Pol icy Review (Sources o f Growth)

Investment Climate1 Private Sector Assessment

72. AAA wi l l emphasize more collaborative approaches and stronger implementation, policy linkages, consensus-building, and dissemination within the new multi-year framework being instituted in the East Asia and Pacijic region of the Bank. AAA wil l stress collaboration with the Government and other donors, and involve local research institutes, academia, c iv i l society, and the private sector. Major tasks will support the CAS themes: a Public Expenditure Reviewhtegrated Fiduciary Assessment and a Public Expenditure Tracking Survey (PETS) will inform the public sector reform agenda; an Investment Climate Assessment (ICA) and Supply Chains Study, the mid-term Financial Sector Review, and the PSD Strategy wil l provide critical data and analysis to design Bank support to strengthen the environment for PSD; a Poverty Assessment, the Public Expenditure Tracking Survey (PETS), and a Decentralization Study will update the information o n the dimensions o f poverty and service delivery in rural and urban areas; the Country Economic Memorandum will focus on consolidating the ongoing work on sources o f growth (such as mining, cashmere trade, ICT); the Investment Climate Assessment (ICA) and Supply Chains Study along with a Regional Development Policy Note will form the basis for the dialogue o n regional development issues, where the Bank has misgivings with regard to cost-benefit and macroeconomic implications o f proposed interventions. The collaborative development o f agreed strategies for the key sectors (infrastructure, social sectors, natural

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resource use) will be necessary for identifying investment priorities and the design o f possible SWAPS. Analytical work will fill knowledge gaps and update information in such areas as livestock services, legal reforms, civic engagement, and human development, and the Bank will continue to produce regular topical monitors and updates.

C. Portfolio Management

73. Ongoing projects wi l l be aligned more closely with the objectives of this CAS. Mid-term reviews will assess the need for restructuring to align project development objectives with the new CAS priorities, enhance linkages to AAA, and implement M&E systems to monitor outcomes. Most attention will be given to the six (out o f nine projects) that are not currently near completion and which will likely have the greatest impact on outcomes during the CAS period. These six projects are: Transport Development (reducing isolation o f remote regions), Sustainable Livelihoods (addressing rural vulnerability and local capacity building), Legal Reform (core reforms in the legal and judicial area), Energy (restructuring, privatization, and development o f the regulatory system), Financial Capacity Development (institutional capacity building o f the banking sector), and Economic Capacity Technical Assistance (improving budgetary and public expenditure management). Of these, the reviews o f the Energy and Transport Development projects will thoroughly assess the need for any restructuring; for the others the focus will be o n the intended sector results.

74. Supervision activities wi l l continue to receive the highest priority in the allocation of the administrative budget and management focus. The field-based QPPRs are proving beneficial in spotting generic and project-specific problems early o n and will be conducted jo in t ly with the Government (and the ADB). The QPPR performance benchmarks will be monitored for early diagnosis and remedies. Other priority measures include: (i) use o f project readiness filters to reduce start-up delays by addressing key issues during project preparation rather than after implementation has begun; (ii) support to the Government (together with the ADB and Japan) to develop and implement a common training program for project counterparts on key implementation sk i l l s (procurement, financial management, disbursements, safeguard policies, and M&E]; (iii) collaboration with the ADB to assist the Government in amending the procurement process to streamline and harmonize various requirements; and (iv) assistance to the Government and implementing agencies to improve their financial management and control procedures and ski l ls , in l ine with Bank financial reporting requirements (this measure should also support the goal o f enhancing project implementation mechanics and safeguards against corruption in Bank-financed projects).

75, While portfolio risk and performance remains acceptable, there are generic implementation issues related to delayed start-ups, project readiness, slow procurement, and disbursements. The CAS proposes to improve portfolio management by addressing each o f these issues. The Bank has adopted the CPPR recommendation to use project readiness filters to ensure that projects are set for implementation by testing such key elements as project management, fiduciary aspects, counterpart funding, M&E, and social and environmental assessments. A long with the ADB, the Bank wil l support implementation o f the revised Public Procurement L a w o f Mongol ia (an IDF grant i s in place). The Bank will also provide assistance to strengthen weak areas o f financial management, audit compliance, and project M&E.

D. Monitoring Implementation

76. The Bank wi l l regularly monitor the implementation of the CAS. The results fi-amework outlined in the tables in Section IV.A establishes the priority outcomes-and the intermediate indicators to track implementation-that the Bank expects to influence through i t s interventions. This framework further links the expected C A S outcomes to the higher order development objectives o f Mongolia and the key constraints related to these results. This will serve as the basis for monitoring and evaluating the

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Bank’s performance and help to adjust the strategy as needed during the four-year implementation period. A long with strong monitoring o f the portfolio, annual reviews will be held with the Government to take stock o f CAS implementation progress.

77. The Bank wil l strengthen its field presence to better implement and monitor the CAS. T o enhance i t s capacity to implement the new CAS-including institutional capacity-building, policy dialogue, and donor coordination-the Bank will continue to reinforce i t s regional and country office capacity. Beginning in FY05, responsibility for Mongolia will be transferred from the present South East Asia Country Management Unit to the China Country Management Unit. In addition to logistical advantages, this transfer will facilitate increased Bank efforts to engage at the sub-regional level. The Bank wil l also continue to build and strengthen the capacity o f the country office to support the portfolio by expanding and strengthening national staff and strengthening office information systems. The Bank will pay particular attention to building national staff and partner capacities related to donor coordination and to managing for results-including greater emphasis o n outcome-oriented indicators, project M&E systems aligned to national results, and results-based QPPRs.

E. Scenarios and Triggers

78. The Bank proposes a base case lending scenario of about US$88 million over FY05-FY08 consistent with current IDA allocations. Mongol ia i s currently considered to be in the base case which includes annual PRSCs and two additional investment and capacity-building operations every year. However, to remain in the base case, certain requirements would need to be ful f i l led and several actions taken. These monitorable triggers (table 8) encompass sound performance o f the macro-economy, prudent financial sector management, steady EGSPRS implementation, satisfactory implementation o f the public sector reform program, good governance, and a well-performing IDA portfolio.

79 I n a low case scenario, about US$50 million in IDAJlows are envisaged for the four-year CAS period. The program will shift to the l o w case in the event o f major deteriorations in economic performance and the policy environment. The Bank wil l form a judgment o n such slippages through assessments on the basis of the triggers specified for the base case. In the l o w case scenario, there will be n o adjustment (PRSC) lending, but continued support to poverty-reducing activities and capacity- building. However, any slippages o f the PRSCs could also mean that related lending (such as the Judicial and Public Sector Reform TA or the Social Sector TA) could be deferred to synchronize with the associated pol icy lending. Furthermore, as noted, the development o f and consensus around sector strategies would be prerequisite for investment lending.

80. The CAS also provides for a high case scenario where up to 30 percent more (over base case) I D A resources would become available. For this scenario to occur, a l l base case triggers must be met continuously; in addition, there will be indications o f a faster pace o f reforms through the early implementation of several o f the more complex EGSPRS policies in public sector management (the public investment program, pensions) and financial sector (regulations for holding companies). The CAS specifies the following additional triggers for the high case: (i) preparation and adoption o f adequate cost-benefit analysis o f the public investment program to guide and in fo rm projects; (ii) adoption o f the pension reform strategy and implementation o f key recommendations o n increasing the retirement age and specifying mechanisms for transition f rom the pay-as-you-go system to the Notional Defined Contribution scheme; and, (iii) putting in place the legal and regulatory framework for financial holding companies. The additional resources could be made available through modulated PRSC amounts, andor, given the extent o f cofinancing available for the PRSCs, through larger investment projects. The faster pace o f reforms (such as o n pensions) would have costs associated with them and would require more budgetary support.

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Table 8: CAS Triggers

Trigger areas Trigger/(Timing) Means of verijication

environment

Adequate cost-benefit analysis o f the publ ic investment program Adopt ion o f pension reform strategy and implementation o f key recommendations o n (i) increasing the retirement age for m e n and women; and (ii) specification o f the transition mechanism f rom the pay-as- you-go system to the Notional Defined Contribution Scheme Legal and regulatory framework for f inancial holding companies in place

e Financial sector

Review and assessments within the context o f the PRSCs

Assessment o f l a w passed

Implementation

reforms

Govemance

Public sector management

Financial sector

To stay in the base case Satisfactory and sound macroeconomic performance with prudent fiscal and monetary stances and avoidance o f prolonged inf lat ion above single digits (Continuous) At least 90 percent o f the banks (in terms o f share o f assets) are liquid and in compliance with Bank o f Mongolia prudential norms (Continuous) Satisfactory implementation o f the EGSPRS; regular reporting on progress and M&E (Continuous) Adopt ion o f ro l l ing multi-year MTEFs based o n credible macroeconomic projections (starting 2004) Adopt ion and the init iation o f the implementation o f Civil Service Reform Strategy (Mid-2005) Adopt ion and implementation o f the Public Procurement L a w (2004) Annual release o f audits o f budget execution (Continuous) Annual publication o f detailed budgets with sector and aimag-level disaggregation (starting 2005) Absence o f non-transparent quasi-fiscal activities and contingent liabilities (Continuous) Unsatisfactory ratings o f procurement and financial management in less than 30 percent o f projects (Continuous)

0

Regular monitoring and reviews in collaboration with the IMF’s review o f the PRGF program

Regular monitoring and reviews

Review o f progress and M&E reports; JSAs

~

Review and assessments within the context o f the PRSCs

NewspapersiGazettes NewspapersiGazettes Surveillance in collaboration with

Assessment in the context o f PRSCs; IDF

IMF

QPPRs; Supervision

V. R I S K S

81. Implementing the CAS faces various risks, both internal and external. The risk that the Government’s commitment to the poverty reduction strategy enunciated and embraced in the EGSPRS will change i s minor, given the wide consultations, participation, and ownership. The polit ical r isks are also small, because both the MPRP and opposition groups are expected to stay the course on reforms and poverty reduction strategy. The Bank will maintain a dialogue with key elements within the MPRP

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and with main opposition parties. But implementing the EGSPRS poses major challenges, and the Bank’s CAS, along with other donor assistance programs, i s geared toward overcoming them. Several other r isks and downside scenarios could materialize and require mitigating measures f rom the Bank, where feasible.

82. Macroeconomic risks. Current hard-earned, macroeconomic stability remains fragile, as pressures to increase wages and pensions and other social welfare programs continue. The contracting of recent loans and other liabilities (some on nonconcessional terms) as part o f the Russian debt settlement has also burdened the Government with short-term repayment obligations. These developments underscore the need for prudent macroeconomic policies, particularly for holding the l ine on expenditures and fiscal management. The Bank will remain fully engaged with the Government on these issues, in close collaboration with the IMF and other partners, and will regularly monitor developments. The ongoing ECTAC and proposed PRSCs-which will focus init ially on public expenditure management and budget execution as wel l as on c iv i l service reforms-will squarely address this risk. The Bank-supported debt management system will continue to be helpful in undertaking debt management and analysis. The jo in t financial sector work with the ADB wil l help identify any r i sks arising f rom what i s considered an over-banked system. Maintaining a stable macroeconomic environment i s also a trigger for staying in the base case and for continued access to quick-disbursing resources under the PRSCs.

83. External risks. Given Mongolia’s undiversified economic and export base and i t s geographical location, severe external shocks in the form o f terms-of-trade deteriorations or “dzuds” may wel l materialize. In both cases, herders and rural dwellers generally are particularly vulnerable. The price prospects for Mongolia’s major exports and imports are projected to be stable. Assisting the Government to address vulnerabilities o f the rural and urban poor (such as pastoral risk management and pi lot livestock insurance) and strengthening public sector management to increase efficiency o f expenditures and improve service delivery (including social safety nets) are major objectives o f the CAS. The lending program, A A A s , and the pol icy dialogue are designed around these goals. The Bank will work with i t s CG partners to mobilize additional resources i f external shocks severely affect incomes.

84. Governance risks. It i s possible that increased instances o f corruption and deteriorating governance could emerge (unreported quasi-fiscal/contingent l iabi l i ty operations, or fiduciary malfeasance at the macro or project levels). The CAS strongly supports the EGSPRS emphasis on addressing governance issues. This includes greater emphasis o n government effectiveness, accountability, and transparency to target sources o f corruption, as wel l as monitoring (with the IMF) the implementation o f laws and guidelines by the Bank o f Mongol ia and the Ministry o f Finance and Economy. The PRSCs are designed to focus o n improving public sector transparency and accountability and access to fiscal information, audits, and expanded budget coverage. The Bank wil l encourage participatory M&E o f EGSPRS implementation, and the PETS should bring resource leakages to light. The C A S program wil l strengthen institutions and capacity-building, giving particular emphasis to improving processes and systems. The Bank’s support to legal reforms and i t s integrated fiduciary assessments go beyond ensuring that the IDA portfolio adheres to international accounting and procurement standards. With the IMF, the Bank wil l jo in t ly monitor fiscal and debt developments for instances o f quasi-fiscal activities. Several o f the base case triggers directly tackle governance.

85. EGSPRS implementation risks. The greatest challenges and risk stem f rom the Government’s l imited capacity to implement the policies and reform program envisioned in i t s ambitious poverty reduction and growth strategy by translating them into prioritized and funded action programs. There i s also concern that interventionist central planning tendencies, evident in the EGSPRS, may lead to costly, unsustainable investments. As noted earlier, the Bank intends to remain fully engaged in this dialogue with the Government and others and bring to bear i t s analytical work and international cross-

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country expertise. The CG process will also be used to receive progress reports on EGSPRS implementation and provide a forum for donor alignment and identification o f resource needs. But the greatest mitigation o f this risk will stem from support to the Government and other stakeholders through a range o f vehicles: dialogue, policy advice, outreach and communication, PRSCs, investment lending, U s , and TA. These vehicles will build capacities, institutions, and systems-and incorporate participatory processes into implementing and monitoring the EGSPRS.

VI. CONCLUDING REMARKS

86. The coming years are both promising and challenging for Mongolia as it embarks on implementing i t s EGSPRS program and strives to move to a higher growth path to reduce poverty. The CAS, designed to align the Bank Group’s support to this effort, i s proposing a results-based framework to evaluate the attainment o f these objectives and i t s own performance. Mongolia will continue to need concessional assistance from i t s international partners. This CAS provides the basis for the continuing support through IDA and other resources.

James D. Wolfensohn President

B y : Shengman Zhang

Washington, D.C. April 5,2004

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Attachment 2

MONGOLIA: PHASES OF TRANSITION

Four economic phases have characterized the Mongolian economy since the transition began. These phases have been influenced by polit ical instability, external conditions, and commitment to economic reforms.

e Transition (I 990-1993). Mongolia’s macroeconomic transition to a market economy was resolute. During 1990-1 992, the country’s Coalition government was headed by the Mongolia People’s Revolutionary Party (MPRP). The collapse o f the Soviet Union and breakdown o f monetary and trade relations among the Comecon states resulted in a sharp contraction o f real GDP, which fel l by about 23 percent between 1989 and 1993, and high inflation, which peaked at 321 percent in late 1992. To arrest the decline in macroeconomic fundamentals, the Government moved quickly to liberalize the exchange rate, trade and prices, and open up the financial sector, including the establishment o f a two-tiered banking system and privatized the livestock sector.

Stabilization, reforms, and growth (1994-1996). The 1994-1996 period was one o f stabilization and significant economic recovery; the MPRP remained in power through 1996. T h e recovery was buoyed by increasing livestock production and favorable international prices for copper and gold; GDP growth averaged 3.6 percent. However, the scope and pace o f reforms slowed-insufficient attention was paid to the institutional framework required to build an internally competitive economy. The financial sector collapsed, following the bankruptcy o f Mongolia’s two largest banks; and the Government continued to subsidize state-owned enterprises, particularly in the agriculture sector. With increasing stability, donor assistance shifted the emphasis f rom emergency support to rehabilitating essential infrastructure, macroeconomic stability, and policy and legal reforms.

Poor external conditions, poor performance, and political gridlock (1997-2000). The 1997-1 998 East Asian and Russian crises exposed Mongolia’s underlying structural inefficiencies. Export prices o f i t s main commodities fell sharply: gold prices fel l by 42.5 percent, copper by 28 percent, and cashmere by about 12.5 percent. Large revenue shortfalls resulted, as corporate income-tax contributions and dividend payments f rom major state-owned enterprises dried up. By late 1998, revenue collection had dropped by more than 5 percentage points o f GDP, while expenditures during 1997-1998 increased by more than 17 percent. In 1998, the deficit reached an all-time high o f 14.3 percent. T o maintain public confidence and protect the vulnerable f rom further income erosion, the Government increased public employment and cash transfers to the population. However, the deficit was reduced to 7 percent o f GDP in 2000, mainly because o f the Government’s enhanced revenue mobilization efforts. This period was also marked by polit ical turbulence (three successive governments between 1997 and 2000), which crippled the reform agenda.

Political stabiliv, sound structural performance, but climatic shocks (2000-2003). During this period, the Government launched a renewed effort to restore macro balances with mixed results. Inflation dropped to 5 percent; the deficit was reduced to about 6 percent o f GDP; and the post-1 99 1, debt-to-GDP level decreased to 88.9. However, the current account deficit worsened to 14 percent o f GDP, while overall government expenditures increased to more than 45 percent o f GDP. The pace and scope o f the structural reform agenda accelerated and deepened over this period, as evidenced by the adoption o f the Public Sector Management and Finance L a w (PSMFL) and the privatization o f large state-owned enterprises, such as the Trade and Development Bank. L o w growth during 2000- 2002, which reflected large losses in the livestock sector due to three consecutive harsh winters, has since accelerated. Throughout the period, Off ic ia l Development Assistance (ODA) focused increasingly o n pol icy reforms.

Attachment 3 Page 1 o f 2

MONGOLIA: DEBT ANALYSIS

1. At the end o f 2003, Mongolia’s total stock o f public debt was estimated at US$1.4 billion, o f which US$1.2 b i l l ion was external debt equivalent to 103 percent o f GDP and 147.3 percent o f exports o f goods and services. This includes debt o f USS212 mi l l ion contracted to settle Transferable Ruble debt obligations as part o f the December 2003 debt settlement agreement with Russia to close Mongolia’s pre-1991 debt, estimated at US$11.4 b i l l ion or the equivalent o f about 10 times Mongolia’s GDP. The agreement provided for a writing o f f o f 97.8 percent o f Mongolia’s pre-1991 debt, with the remaining US$250 m i l l i on (about 20 percent o f Mongolia’s GDP) to be paid in full by the end o f 2003. Whi le the settlement o f the Russian debt i s a welcome event as it provides international investors more certainty regarding Mongolia’s credit standing, further information on the nature o f the transaction i s needed to assess the full impact on short-term macro-sustainability. The total external debt-to-GDP ratio in N e t Present Value (NPV) terms rose f rom 59.4 percent in 2002 without the Russian debt to 70.1 percent after the Russian debt settlement. With strong growth projected over the medium-term, the external debt-to-GDP ratio in NPV terms i s expected to decrease incrementally t o about 58 percent by 2008.

2. Multilateral debt i s estimated at US$735.3 mi l l ion (62 percent o f GDP), o f which 31 percent i s owed to the Wor ld Bank, 59 percent to ADB, and 7 percent to the IMF. Bilateral debt accounts for 36.7 percent o f total external loans (US$ 433 million). Japan i s the largest bilateral creditor (US$264 mi l l ion in 2003). The total scheduled external debt service in 2003 reached an estimated 3 percent o f GDP and 4.8 percent o f exports o f goods and services.

Impact of Pre-Transition Russian Debt Settlement on External Debt Indicators

Debt stock to GDP 88.9 103.0 N e t present value o f debt

N P V o f debt to GDP 59.4 70.0 N P V o f debt to exports o f GNFS 92.9 100.3 N P V o f debt to govt revenues 65.3 57.4

Debt service In percent o f exports o f goods and services 4.5 34.0 In percent o f GDP 2.9 23.8

1 Net official reserves (US$M, end-period) 225.9 129.0 Source: Ministry of Finance and StaffEstimates 2004

3. The US$250 m i l l i on needed as cash payment for the Russian debt settlement was raised by the Government in the following manner: USS25 m i l l i on was drawn f rom accumulated government reserves; US$lOO mi l l ion was borrowed f rom the Bank o f Mongolia, drawing down o n Net International Reserves to be repaid within 10 years; USS13 m i l l i on was obtained as an advance on tax payments f rom Erdenet (state-owned copper mine); US$37 mi l l ion was borrowed from the Bank o f Mongol ia to be repaid within the f i rst quarter o f 2004; US$50 m i l l i on was generated by selling one-year maturity T-bills to the copper mining company Ivanhoe Mines; and US$25 mi l l ion was raised by selling T-bills to the Trade and Development Bank. On post-1991 Russian debt (US84 .9 million), agreement has been reached between the Russians and the Mongolians to postpone payments o n any arrears until next year.

Attachment 3 Page 2 o f 2

4. Whi le the resolution of the Russian debt issue i s a positive development, the settlement weakened Mongolia’s short-term macroeconomic position. N e t international reserves dropped from 16 weeks o f imports in November 2003 to 10 weeks in January 2004. Ne t credit to the Govemment f rom the Bank o f Mongolia has exceeded authorized limits; net foreign assets o f the central bank have decreased substantially as a result o f the US$lOO mi l l ion interest-free borrowing by the Govemment; and finally, the US$50 mi l l ion loan (external debt) f rom Ivanhoe mines and the US$25 mi l l ion credit f rom the Trade and Development Bank were contracted o n nonconcessional terms, substantially increasing the short-term debt burden o f the Govemment.

5. In the short-term, the Government will need to repay US$112 m i l l i on to both the Bank o f Mongolia and Ivanhoe Mines. The Government i s exploring two options: (i) rescheduling the short-term debt; or, (ii) borrowing concessionally f rom the international community to meet i t s obligations.

Medium-term Prospects (2006-2008)

6. I t i s expected that the economy would be able to maintain a sustainable growth o f about 5.5 percent in the long-term provided that Mongolia maintains prudent macroeconomic policies and the momentum for reforms in the areas o f trade, public enterprises, and the financial sector. Such a growth rate would need to be supported by investment o f around 28 percent o f GDP, o f which 23 percent would be from the private sector. Continued foreign savings (about 11 percent) would be important to attain the growth objectives.

7. In the medium-term, export growth i s projected to be about 6 percent per year. Import growth would remain at about 5 percent a year, reflecting good investment activities. Debt service as a percent o f exports o f goods and services would average around 4.8 percent and i s projected to remain at the same level in the outer years. This development reflects the inflows o f loans and foreign direct investment in the past several years.

8. In order to satisfy extemal financing needs and build up international reserves equivalent to about 18 weeks o f imports, while maintaining a manageable debt service burden, continued international support in the form o f disbursements f rom concessional loans and grants in the range o f 10- 15 percent o f GDP would be needed annually.

9. The baseline medium-term outlook described above i s based on the government’s MTEF projections and i s sensitive to the assumptions made o n domestic macroeconomic and structural policies and the regional environment. In particular, weaker export performance would reduce both exports and growth.

10. T o test the sensitivity o f the outlook presented above to changes in export performance, the alternative scenario assumes that annual growth o f exports will be lower to about 4.8 percent. With lower investment and export growth, the real GDP growth rate i s expected to be at about 3.5 percent. Imports are expected to grow on average at about 2.7 percent, reflecting weaker investment activities. The sensitivity analysis shows that in the long-run, prolonged weaker export performance could adversely affect overall economic growth and lead to further import compression, and the need for additional extemal financing.

Attachment 4 Page 1 o f 2

MONGOLIA: COUNTRY ASSISTANCE EVALUATION: SUMMARY

1. Mongolia i s a former socialist country, land-locked between Russia and China. With 2.5 mi l l ion inhabitants and an area almost the size o f Mexico, it i s the most sparsely populated country in the world, and with a 1999 per capita income o f US$390, among the poorest countries in East Asia. Assets include gold and copper deposits; some 30 mi l l ion livestock, which provide raw materials for cashmere, wool, meat, and leather products; and proximity to large potential markets in China and Russia. Major development constraints include a lack o f market-oriented institutions resulting f rom 70 years o f isolation; a small domestic market; distance f rom a seaport; protective barriers to key markets; and a highly dispersed rural population, a rugged terrain, and severe weather, which together contribute to the high costs o f public service and infrastructure provision.

2. Mongolia’s transition experience since 199 1 has been positive, but diff icult. Significant progress was made toward the goal o f replacing the command economy with a market-driven one, although considerable challenges remain in furthering the policies, institutions, and behaviors required to achieve broad-based and sustainable growth. During the decade, Mongolia stabilized the economy in the face o f a series o f external shocks and implanted a range o f reforms including removal o f most price controls, privatization o f small and medium industries, and changes in laws and regulations to enable private sector activity. A positive supply response to these reforms was seen by 1995 in the form o f increased investment in gold, greater livestock production, and an increase in small-scale service and trading activities in urban areas. Along with significant public infrastructure investments, these activities contributed to an average annual GDP growth o f 3 percent a year since 1994 and a rise in GDP per capita f rom US$330 in 1995 to US$390 in 1999. However, the sources o f growth have remained narrow, yielding only l imi ted public revenues and employment and they have not reduced Mongolia’s vulnerability to shocks. Since 1995, the percent of poor has remained constant at 36 percent o f the population, while income inequality increased. Limited urban employment opportunities and declining public social services have yielded apparent public discontent with social and economic conditions.

3. The Bank made a positive contribution to progress in the 1990s, although i t s influence in several important areas was limited. Among i t s positive impacts were: an easier transition and avoidance o f a collapse in key public services and industries in the early 1990s; improved macroeconomic management; an improved legal and regulatory framework; and income support to a large number o f poor. At the same time, efforts to help remove some key pol icy and institutional impediments to sustainable growth met with less success: key elements o f the enabling environment for private investment are s t i l l lacking; interventions in energy, direct transfers, and public transport conferred immediate benefits but did not stimulate broader sustainable changes in the respective sectors; assistance in banking and enterprises proved inadequate to address extensive underlying problems. The outcome o f Bank assistance i s thus rated as partially satisfactory, institutional development as modest, and sustainability as unlikely.

4. Factors underlying the Bank’s positive contribution include a strong commitment at senior government levels to the general direction o f reforms; timely Bank responses to an uncertain and diff icult environment in the early 1990s; and good collaboration with the IMF to support macro-economic stability. The Bank practiced selectivity by not engaging in areas wel l

Attachment 4 Page 2 o f 2

covered by other donors; i t s ESW was o f good quality and well-received by the government and other donors; and it played an important role in mobil izing external donor aid. Factors inhibiting a greater Bank contribution include (i) a delayed shift away f rom emergency support in i t s assistance strategy; (ii) limited linkage between the lending program and pol icy recommendations in ESW; (iii) inadequate agreement with other donors o n strategic frameworks in some sectors; (iv) frequent changes in government after 1996, which adversely affected continuity; (vi) political sensitivity and anticipated adverse short-term consequences, which caused hesitancy to implement some reforms; and (vii) several significant adverse external shocks.

5. The Bank accounts for only 10 percent o f total a id flows to Mongolia, but it offers a unique perspective o n many o f Mongolia’s problems because o f i t s worldwide experience on transition economies. OED recommends that future Bank assistance remain selective and that i t focus o n improving the private investment environment and strengthening fiscal management. At the same time, the Bank should collaborate with the government and other donors to develop strategic frameworks in each key sector, even if direct lending i s not planned.

Gregory K. Ingram Director-General

Operations Evaluation

Attachment 5 Page 1 o f 2

MONGOLIA

CLIENT SURVEY: SUMMARY OF FINDINGS

The Mongol ia Client Survey was conducted to gather the opinion o f key stakeholders towards the Wor ld Bank and i t s role in development in Mongolia. The survey was undertaken by an independent consultant in January and February o f 2003 using the standardized Bank Client Survey questionnaire (with a few questions modified to fit the Mongolian context). Out o f the 483 mai l - in questionnaires sent out, 282 responded (58 percent response rate). The survey solicited the opinions o f a cross-section o f clients and stakeholders including senior government officials, staff in the ministries, local government officials, staff o f bilateral and multilateral donor agencies, individuals f rom the private sector, international and national non-governmental organizations, the media, and members o f academia. W h i l e the majority o f respondents were employees o f ministries, there were also a large number o f respondents f rom the private sector and non-government organizations. Because o f the small number o f respondents f rom academia and the media, responses from these groups can be considered suggestive at best.

The survey measured attitudes towards: 0

0

0

0 The Bank’s programs; 0

0

0

0

The general economic environment in Mongolia; Perceived overall value o f the Bank; The Bank’s overall effectiveness in Mongolia;

The Bank’s day to day operations in Mongolia; The Bank’s effectiveness at donor coordination; The Bank’s effectiveness at resource mobilization; and, The Bank’s effectiveness at working with others in the country.

Summary of Key Findings

The Client Survey findings provide insight into the stakeholders’ views o f the Bank’s work in Mongol ia as wel l as their overall assessment o f the current environment in the country. Overall, the views are quite positive about the work o f the Bank. Below are some o f the main findings:

0 Stakeholders report that the primary challenges in Mongol ia are the economy, corruption, and poverty, followed by education. These are reported as challenges uppermost o n the minds o f stakeholders.

Stakeholders identify the greatest development priorities as: corruption, strengthening the financial sector, followed by infrastructure development, and education. Poverty reduction appears to be quite l o w on the development priority l i s t o f stakeholders.

Respondents identify infrastructure along with economic growth as the two areas that are important for Bank involvement in Mongolia. These are followed closely by helping to strengthen the financial system, strengthen the private sector, and helping to reduce poverty. Other than poverty reduction, these closely mirror the areas that stakeholders in Mongolia consider their greatest development challenges.

Within this environment, stakeholders report that the Bank’s greatest value i s i t s policy advice. When asked about the second greatest value brought by the Bank, financial resources and donor coordination emerge fair ly consistently. This i s an interesting finding in an IDA country l ike Mongolia where one might expect the Bank to be most

0

0

0

Attachment 5 Page 2 o f 2

valued for i t s financial resources (as i s the case in nearly a l l other Client Surveys conducted in IDA countries.)

I t i s interesting to note that familiarity with the Bank i s fairly low in Mongolia. Other studies show that the more experience and exposure stakeholders have with the Bank, the more positive they are about the institution. Hence, it would probably be to the Bank’s advantage in Mongolia to have a greater presence and more exposure with i t s stakeholders.

The Survey indicates a range o f views toward the Bank’s overall effectiveness. Members o f academia and local government officials appear to be quite positive, whereas, NGOs, bilateral and multilateral donors, and representatives o f private sector organizations appear to be less sanguine about the Bank’s effectiveness giving an overall average rating score below 7 o n a 10 point scale.

Specifically, the Client Survey shows that in the areas that stakeholders believe the Bank should be focusing i t s work, the views are quite positive. The highest mean effectiveness scores go to the Bank’s support t o strengthen infrastructure development, helping to bring about economic growth, and helping to strengthen the financial system.

The Survey findings show clearly that stakeholders enjoy workmg with Bank staff. Stakeholders report that for the most part they consider Bank staff accessible and respectful.

The responses indicate that there are two areas where the Bank i s seen less positively, and may want to explore in further detail: building capacity at the community level and including local communities and c iv i l society in strategy development.

The Bank’s advice and knowledge i s considered useful and sound according to the findings. In addition, stakeholders report that the Bank makes available i t s studies and analyses. However, the mean score drops slightly when asked whether the Bank i s able to “adapt i t s knowledge to Mongolia’s needs.” This may be worth further exploration to identify ways that the knowledge could be better adapted. This finding regarding the adaptability o f Bank’s knowledge emerges in nearly every Client Survey done recently in other countries.

The findings indicate that the Bank i s perceived very positively in terms o f i t s work in donor coordination. Stakeholders believe that i t i s important for the Bank to be involved in donor coordination and their v iew o f the Bank’s effectiveness in this area i s very positive. The analysis o f the responses indicates that the Bank should stay involved. This i s the same case for resource mobilization.

0

0

0

0

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Attachment 6 Page 1 o f 4

MONGOLIA: TOWARD ENVIRONMENTAL SUSTAINABILITY

Since Mongolia’s transition and loss o f Soviet subsidies, rapid economic changes generated new pressures on the country’s fiagile and unique ecosystems exacerbated by lack o f coordination among ministries and agencies concerned with environmental management, and inconsistent monitoring o f natural resources and environmental quality parameters.

T o address these challenges, the Government o f Mongolia (GOM) has enacted a series o f environmental laws, expanded i t s system o f nature reserves, and invested in energy efficient technologies and pollution abatement schemes. In addition, GOM started the revision and updating o f the 1995 National Environmental Act ion Plan, mainstreamed environmental concerns into i t s official Good Governance for Human Security Programme, and began working with international organizations and c iv i l society to promote the understanding o f the fundamental contribution that natural resources and a healthy environment can make to the country’s economic growth and development for current and future generations.

Three environment and natural resources management issues continue to stand out as critical challenges for Mongolia for the short-to medium-term:

(i) Institutional capacity for environment and natural resources management is weak. Coordination among ministries and government agencies remains l imi ted without either a systematic dialogue or a formal feedback system o n sectoral issues. In spite o f 3,900 employees currently working for the Ministry o f Nature and Environment (MNE) at the national and local levels, human and financial capacity seem to be inadequate for the existing implementation, monitoring, and enforcement responsibilities o f MNE. Moreover, environmental agencies at aimag, soum and bag levels have weak administrative structures, and coordination with national authorities on overall pol icy direction i s carried out o n an ad-hoc basis. The transition to a free market economy may have brought prices closer to the market equilibrium but challenges in addressing market failures remain and depend o n adequate design and implementation o f environmental regulations.

(ii) Pollution-related and other urban environmental challenges pose considerable pressure on people’s health and natural resources. Air quality i s under threat due to increasing pollution f rom urbanization, motorization, and power generation and heating; high level o f SO2, NO2 and particulates are responsible for a sharp increase o f the number o f children under the age o f f ive suffering f rom respiratory diseases over the past five years. Poor solid and hazardous waste management i s degrading land, air and water, contributing to flooding and also having adverse impact on human health. Sewerage coverage i s one o f the lowest in Asia, and this i s causing widespread contamination o f surface and groundwater both in Ulaanbaatar and secondary cities.

(iii) Forest and other natural resources are under pressure. The forestry sector i s rapidly approaching a crisis for which it seems largely unprepared. The present estimated levels o f forest harvesting are unsustainable. Between 36 and 80 percent o f total harvest i s illegal, and if alternative sources o f domestic fuel are not developed, and current levels o f forest depletion continue unabated, serious fuelwood shortages will be experienced in urban areas by the end o f this decade. The existing forestry industry i s unable to attract the capital i t needs to modemize for greater efficiency. The Government has tended to

Attachment 6 Page 2 o f 4

focus on peripheral issues, such as an outmoded forest inventory system, fire control, insect and disease control, instead o f dealing constructively with the primary problem o f unsustainable resource exploitation and lack o f consistent enforcement o f regulations.

Environmental Linkages to CAS Objectives and Proposed Approach to Environment and Natural Resources Management

Long-run economic growth and poverty reduction can be significantly undermined by the over-exploitation and degradation o f the natural resource base; the Bank thus recognizes the environment= (Natural Resource Management) theme as containing key cross-cutting issues crucial to addressing the challenge that Mongolia faces in pursuing sustainable growth and poverty alleviation as embedded in al l three objectives o f i t s assistance strategy.

Objective 1: Consolidating the Transition

Revision and updating o f existing institutional and legislative frameworks would improve environment and natural resources management capacity at national and local levels. The forestry, water resources management, mining and urban sectors would benefit particularly f rom such an improvement.

One o f the pre-conditions for increasing private sector investments and promoting competitiveness i s clarity o f environmental regulations and standards, and their consistent, predictable enforcement. Environment, thus, would be one o f the many dimensions o f the proposed reforms o f the public sector, c iv i l service reform and financial management.

Malung information on environmental trends accessible to decision-makers and c iv i l society i s essential to an informed public debate o n the environment. The Government should improve access to and disclosure o f information o n environmental quality and management (i.e. Environmental Impact Assessments, air and water quality standards), natural resources management, and biodiversity conservation. In addition, public participation o f c iv i l society and local governments in decision-making processes pertaining to environment and natural resources management use and conservation would be encouraged.

The above would be dealt with through (i) addressing environment and natural resources management concerns in AAA, TAs; and lending operations (both investment and programmatic lending); and (ii) completing the implementation o f the on-going IDF Grant to MNE; and (iii) developing self-standing analytical pieces.

Objective 2: Reducing Vulnerabilities e Laws and regulations governing use and management o f natural resources were originally

enacted with primary emphasis o n simple exploitation rather than the sustainable use of natural resources. Short-term revenue maximizing behavior and the lack o f transparency in the allocation o f property rights to natural resources are leading to rapid depletion o f the overall resource base. The Government needs to promote the understanding o f the fundamental contribution that natural resources and a healthy environment make to the country’s economic growth and development agenda.

The above would be dealt with o n the fol lowing fronts: (i) ensuring that environmental and social impacts (from projects) are minimized, and that effective mitigation and compensation measures are built into project design (e.g. through the safeguards process); (ii) exploring synergies in project design by using GEF funds associated with energy projects to reduce

Attachment 6 Page 3 o f 4

emissions, andor to promote biodiversity conservation and protection; (iii) developing stand- alone lending operations centered on the sustainable management o f natural resources such as forestry; and (iv) enhancing institutional capacity as stand-alone projects and policy advice or components o f projects in the overall macroeconomic and regulatory framework and specific sectors and regions where investments are l ikely to take place.

Objective 3: Strengthening Alignment of Policies and Resources Around Results

0 Improving MNE abil ity to prioritize among issues and costing needed to implement effective environmental intervention, and to coordinate with the international donor community.

Strengthening MNE capacity to use environmental data to improve decision-making and implementation o f environmental programs and projects, and increase i t s responsiveness to public concerns on environmental issues.

The above would be dealt with through addressing environment and natural resources management concerns in AAA, TAs and lending operations (both investment and programmatic lending).

Environmental Indicators

0

In the case o f Mongolia, reliable data for environmental indicators are generally scarce, scattered across different sources, and not necessarily available ,for the entire country. The table o n the next page has been drawn from the 2003 Litt le Green Data Book.

Attachment 6 Page 4 o f 4

Environmental stralegylaction GROUP DATA I

,SdS 6,4120

- I1 53 81 80 76 353 67 77 93 30 463

2 30 48 72 78 44

90 76 70 90 4.4 3 3 72

12%

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Annex A2-1

Mongolia at a glance 8120103

POVERTY and SOCIAL

2002 Population, mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ millions)

Average annual growth, 1998-02

Population (%) Labor force (%)

Most recent estimate (latest Year available, 1996-02)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Illiteracy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1982

GDP (US$ billions)

Gross domestic investmenVGDP Exports of goods and SeNiCeS/GDP Gross domestic savingslGDP Gross national savingsiGDP

Current account balancelGDP Interest DavmentsiGDP Total external debtiGDP Total debt serviceiexports Present value of debtiGDP Present value of debtiexports

70.2 26.3 32.0 23.3

1982-92 1992-02 (average annual growth) GDP 2.5 1.4 GDP per capita 0.5 0.0 Exports of goods and services

Mongolia

2.4 440

1,088

1.3 1.6

36 57 63 30 13 60 2

97 95 99

1992

32.6 36.8 23.2 24.7

17.3

2001

1 .o -0.4 2.2

East Asia& Low- Pacific income

1,836 2,495 950 430

1,740 1,072

1 .o 1.9 1.2 2.3

38 30 69 59 33 81 15 76 76 13 37

106 95 105 103 106 87

2001 2002

1 .o 1.1

35.8 29.0 62.6 63.9 5.7 4.1

29.7 19.6

-6.1 -9.5 0.9 1 .o

87.6 90.6 5.3 4.5

57.7 59.4 91.7 92.6

2002 2002.08

3.9 5.1 2.6 6.8 0.5 10.1

Develoment diamond'

Life expectancy

Access to an improved water

source

I Economic ratios

Gross domestic investment

ExwRs Of goods and services

Total debt IGDP

Gross domestic savings

~

I - Mongolia - Low income 1

STRUCTURE of the ECONOMY

(% of GDPJ Agriculture Industry

Services Manufacturing

Imports of goods and services

(average annual growth) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services Gross national QrOdUCt

Manufacturing

1982

15.8 34.3

49.9

64.5

1982-92

2.6 2.9

2.0

3.6

1992

30.2 33.9

35.9

46.2

1992-02

-2.7 1.9

4.0

2.6

2001 2002

24.9 20.7 22.0 22.5 8.1 6.3

53.1 56.5

81.5 65.4

2001 2002

-16.5 -10.7 16.2 5.4 31.6 22.1 8.2 12.2

14.3 14.8 16.8 8.0 -1.1 -19.0 2.5 6.6 1.1 1.2

l5 T

io t A

-GDI +GDP I

10

5

0

5 2

Note 2002 data are preliminePyeslimates Thls table was produced from the Development Economics central dalabarie

.The diamonds $how four key indiCstDIE ~n the coun1w On bold) compared With its incomegroup averqe If data we m m n g the diamond will

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government finance (% of GDP, includes current grants) Current revenue Current budget balance Overaii surplus/deficit

TRADE

(US$ millions) Total exports (fob)

Copper Meat Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (1995=100) Import price index (1995:lOO) Terms of trade (1995=100)

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net)

Changes in net reserves

Memo: Net Reserves including gold (US$ millions) Conversion rate (DEC, /oca//US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Porifoiio equity

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1982

2.0

1982

1982

568 1,394 -826

-20 0

-4

1982

1992

325.5 176.4

29.3 -1.1 0.0

1992

356 160 11

418 13 88

137

1992

39 1 479 -88

-28 -3

-90

13

6

5

1992

355 0

27

68 0 0

37 86 19 2 0

0 27

0 27 0

27

2001

6.3 5.8

37.7 4.8

-5.4

2001

523 147 18

693 53

138 215

-1 2 -2

-10

2001

637 829

-192

-2 25

-169

-15

-20

160 1,102.0

2001

902 0

155

34 0 1

92 66 2

43 0

64 24 0

24 1

23

2002

0.9 6.2

38.1 4.4

-6.0

2002

524 140 20

753 57

123 210

-5 2

-7

2002

709 947

-238

-5 64

-178

-66

-66

226 1,125.0

2002

986 0

181

32 0 2

53 74 29 78 0

29 14 1

13 1

12

1 350 T

I 1992 2001 -rDi

750

500

250

0 98 97 98 99 00 01 02

Exports Imports

l5 1

-10 1

1 2002 Data

I G 44

A - IBRD B - IDA D. Other multilateral F - Private C- IMF G . Short-term

E - Bilateral

Note: This table was produced from the Development Economics central database.

Annex B2

Selected Indicators* of Bank Portfolio Performance and Management As of March 29, 2004

Indicator 2001 2002 2003 2004 Portfolio Assessment Number of Projects Under Implementation a

Average Implementation Period (years) Percent of Problem Projects by Number a,

Percent of Problem Projects by Amount Percent of Projects at Risk by Number a,

Percent of Projects at Risk by Amount a,

Disbursement Ratio (%) e Portfolio Management CPPR during the year (yesho) Supervision Resources (total US$) Average Supervision (US$/project)

8 2.9 12.5 2.6 12.5 2.6 34.1

No 453,417 56,677

9 1.9 0.0 0.0 0.0 0.0 13.2

Yes 608,555 67,617

10 2.6 0.0 0.0 0.0 0.0 13.1

No 657,352 65,735

9 3.0 0.0 0.0 0.0 0.0

23.5

Yes ** 670,000 67,000

Memorandum Items Since FY 80 Last Five FYs Projects Evaluated by OED by Number 8 4 Proj Eva1 by OED by Amount (US$ millions) 138.9 72.8

12.5 0.0 7.0 0.0

% of OED Projects Rated U or HU by Number % of OED Projects Rated U or HU by Amt

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which closed during the fiscal year. ** Quarterly Portfolio Performance Reviews (QPPR) started in FY04.

Y u e, .T 2

z z z

t-

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E E E Z

Annex B3

Mongolia - IFC and MIGA Program, FY 2001-2003

IFC approvals (US$m) 0.40 0 0

Sector (YO) 100 0 0 FINANCE & INSURANCE

Total 100 0 0

Investment instrument(%) Loans 100 0 0 Equity 0 0 0 Quasi- Equity 0 0 0 Other 0 0 0 Total 0 0 0

MIGA guarantees (USJm) 0 0 0

Annex 8 4

Mongolia - Summary of Nonlending Services

Product Completion FY

Recent completions

Mongolia Energy Strategy Country Financial Accountability Assessment Public Expenditure Review Trade Policy Study: Cashmere Municipal Finance Study Mongolia CPAR Consultative Group Meeting Environment Monitor (1 and 2)

Underway Energy Study (Phase 2) Mining Study (input to CEM) Rural Policy Note Financial Sector Work Gender Assessment Civil Society Assessment Consultative Group Meeting

Planned

Poverty AssessmenUPublic Expenditure Tracking Survey PSD Strategy (Investment ClimatelSupply Chains) Integrated Infrastructure Strategy Social Sector Strategy Regional Development Note Financial Sector Review EconomiclEnvironment Monitor Consultative Group Meeting CEMlDPR (Sources of Growth) Decentralization Study Livestock Support Services Study Social Sector AAA Civic Engagement Assessment Country ProcuremenUFinanciaI Assessments (CPAWCFAA) EconomiclSocial Monitor Consultative Group Meeting Public Expenditure Reviewllntegrated Fiduciary Assessment Natural Resource Use Strategy ICT Strategy Infrastructure AAA Social Sector AAA Regional Trade Study Environment and Social Development AAA EconomiclEnvironmental Monitor Consultative Group Meeting Investment ClimatelPrivate Sector Assessment Human Development Assessment Financial Sector Assessment Infrastructure AAA Environment and Social Development AAA Economic/Social Monitor Consultative Group Meeting

FY02 FY02 FY02 FY03 FY03 FY03 FY03 FY03

FY04 FY04 FY04 FY04 FY04 FY04 FY04

FY05 FY05 FY05 FY05 FY05 FY05 FY05 FY05 FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY06 FY07 FY07 FY07 FY07 FY07 FY07 FY07 FY07 FY07 FY08 FY08 FY08 FY08 FY08 FY08 FY08

Annex 65

Mongolia Social Indicators

Latest single year Same regionlincome group

East Asia 8 LOW.

1970.75 1s8o-a5 1996-2001 Pacific income

POPULATION Total population, mid-year (millions)

Urban population (Oh of population) Total fertility rate (births per woman)

POVERTY (% of population) National headcount index

Urban headcount index Rural headcount index

Growth rate (% annual average for period)

INCOME GNI per capita (US$) Consumer price index (1995=100) Food price index (1995=100)

INCOMUCONSUMPTION DISTRIBUTION

Share of income or consumption Gini index Lowest quintile (% of income or consumption) Highest quintiie (YO of income or consumption)

SOCIAL INDICATORS

Public expenditure

Health (Oh of GDP) Education (%of GDP) Social security and welfare (% of GDP)

Net primary school enrollment rate (% of age group)

Male Female

Total

Access to an improved water source (% of population)

Urban Rural

Total

Immunization rate (% under 12 monfhs)

Measles DPT

Child malnutrition (Oh under 5 years)

Life expectancy at birth (years)

Total Male Female

Mortality Infant (per 1,000 live births) Under 5 (per 1,000 live births)

Male (per 1,000 population) Female (per 1,000 population)

Births attended by skilled health staff (%)

Adult (15-59)

Maternal (modeled, per 100,000 live births)

1.4 1.9 2.0 2.8

48.7 55.0 5.6 5.0

55 54 57

9a 145

391 331

10.9

i a ao

60 59 62

a7 124

320 273

100

2.4 1,822.5 2,505.9 1.3 1 , l 1.9

57.6 37.3 30.8 2.5 2.1 3.5

35.6 39.4 32.6

428

1 a4 241

35.0 5.6

51.2

900 430

4.6 i .a 2.3 2.3 7.2

102 93 102 92 103 93

60 76 77 93 30 67

95 76 95 77 9 15

67 69 65 67 69 71

30 34 76 44

280 184 199 129 65 97 ao

1.1 2.8

76 90 70

60 61

59

60 58

ao 121

312 256

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97; ratios exceeding 100 indicate discrepancies between the estimates of school-age population and reported enrollment data.

Source: 2003 World Development Indicators CD-ROM, World Bank

Annex B6 Page 1 of 2

Mongolia - Key Economic Indicators Actual Estimate Projected

Indicator 1999 2000 2001 2002 2003 2004 2005 2006 National accounts (as % o f GDP)’ Gross Domestic product

Agriculture Industry Services

Total consumption Gross domestic fixed investment

Govemment investment Private investment

Exports (FOB) Imports (CIF)

Gross domestic savings Gross national savingsb Memorandum items: Gross domestic product (US$ mil l ion in current prices) G N I per capita (US$, Atlas method)

100 37 21 42

85 37 15 22

so 63

15 30

906

3 90

Real annual growth rates (“h, calculated from 1986 prices) Gross domestic product at market prices 3.2 Gross Domestic Income 3.2

Real annual per capita growth rates (“A, calculated from 1986 prices) Gross domestic product at market prices Total consumption -1

-5.4

Private consumption 0.4

Balance o f Payments (US% millions) Exports (GNFS)

Merchandise FOB Imports (GNFS)

Merchandise CIF Resource balance Net current transfers Current account balance

555 454 675 567

-121 5.9

-127

Net private foreign direct investment Long-term loans (net) 97

34

13 Other capital (net, incl. errors &omissions)

Memorandum items:

Annual growth rates

Change in reserves‘ -3 1

Resource balance (% o f GDP) -13.3

Exports, f.0.b. (annual growth) -1.8 Imports, c.i.f. (annual growth) -2.6

100 29 22 49

86 36 12 24

57 71

10 30

946

390

1.1 1.1

3.9 -3.2 -5.5

640 536 789 676

-149 8.0

-1 53

40 81 99

-35

-15.7

18.0 19.2

100 2s 22 53

83 36 17 19

51 68

6 30

1016

410

1 .o 1 .o

5.8 3.6 2.8

637 523 829 693

25.0 -192

-169

43 69 77

-20

-18.9

-2.4 2.5

100 21 23 56

93 29 11 18

47 68

4 20

1109

440

3.9 9.5

7.5 1.4 2.1

709 524 947 753

-238 64.4 -178

78 102 73

-66

-21.5

0.1 8.6

100 20 22 58

91 27 11 16

53 69

8 18

1193

460

5.0 4.0

6.4 4.3 4.2

834 627

1069 827

-235 68.7 -181

113 -141

52 97

-19.7

19.7 9.9

100 26 17 57

89 27 11 16

56 70

11 20

1282

500

5.3 5.0

3.8 2.0 1 .o

938 721

1164 90 1

-22s 74.4 -167

110 22 55

-67

-17.6

14.9 8.9

100 26 18 56

87 28 11 17

51 64

12 21

1406

540

5.5 5.2

3.9 3.9 4.3

902 711

1119 907

-217 70.0 -164

75 69 61

-36

-15.6

8.7 6.3

100 25 18 5 1

87 28 10 18

so 64

13 22

1524

580

5.5 5.6

4.1 3.1 3.3

964 763

1197 973

-233 77.0 -175

79 72 59

-2 9

-15.4

7.3 7.3

(Continued)

Annex B6 Page 2 o f 2

Mongolia - Key Economic Indicators (Continued)

Actual Estimate Proiected Indicator 1999 2000 2001 2002 2003 2004 2005 2006

Public finance (as % of GDP at market prices)d Current revenues Current expenditures Current account surplus (+) or deficit (-) Capital expenditure Overall balance (including capital grants)

Monetary indicators M2lGDP Growth o f M2 e?) Private sector credit growth Total credit growth (%)

Price indices Export price index change Import price index change Terms o f trade (percent change) REER, period average (1995=100)e

Real interest rates Consumer price index (% change) GDP deflator (% change)

26.5 26.7 -0.2 12.7

-12.2

23.8 31.7

-34.6 -16.3

-7.0 -2.4 -4.8 109

7.6 9.7

34.0 37.7 30.8 32.9

3.2 4.8 10.6 11.0 -7.0 -5.4

25.4 29.7 17.4 28.1 44.9 152.3

-16.9 101.5

13.6 -11.6 2.5 -2.3

10.8 -9.5 113 118

11.6 6.3 11.6 5.8

38.1 33.7

4.4 11.0 -6.0

38.2 41.9 77.4 70.3

-4.1 2.3

114 -6.9

0.9 6.2

35.7 37.5 36.9 36.9 32.8 32.6 32.2 31.6

2.9 4.9 4.1 5.3 11.1 11.5 10.8 10.4 -5.9 -5.9 -5.5 -4.5

51.6 49.6 91.4 87.3

6.6 8.4 2.1 0.3 5.4 2.8 -0.2 1.2 1.1 5.4

107 100 100 100

5.0 5.0 5.0 5.0 5.5 5.0 5.0 5.0

a GDP at market prices. Includes net unrequited transfers excluding official capital grants. Includes use o f IMF resources.

* Consolidated central govemment. e An increase denotes appreciation.

Annex B7

Mongolia - Key Exposure Indicators Actual Estimate Proiected

Indicator 1999 2000 2001 2002 2003 2004

Total debt outstanding and disbursed (TDO) (US$m)a

Net disbursements (USSm) a

Total debt service (TDS) (US$m)b

Debt and debt service indicators (%) TDOKGS~ TDO/GDP~ TDS/XGS~

IDA TDO (us$mId

IFC (US$m) Loans Equity and quasi-equitye

MIGA

860

12

32

154.9 94.9 5.7

130.0

879

13

24

137.4 92.9

3.8

137.0

902

69

34

139.9 87.6 5.3

155.0

0.4 0.4

985

94

32

143.0 90.6 4.5

181.0

0.4 0.4

1416

91

36

169.8 118.7

4.8

192.0

0.4 0.4

1487

84

38

142.4 91.8 4.6

214.0

0.4 0.4

MIGA guarantees (USSm)

Note:

a Includes public and publ ic ly guaranteed debt, private nonguaranteed, use o f IMF credits and net short- t e r m capital.

Excluding Russian rescheduled debt service for 2003 and 2004. “XGS” denotes exports o f goods and services, including worker’s remittances. Includes present value o f guarantees.

e Includes equity and quasi-equity types o f bo th loan and equity instruments.

h

Y S

6 W E m a P a m p!

0 v

.- - 0

u) E 0

n

.- C m

0 ix .. m 0 0 E 0

.- -

E

m

Annex B8

MONGOLIA

Statement of IFC's Committed and Outstanding Portfolio (Amounts in US$ Millions)

Loan All Loan All committed Committed Outstanding Outstanding

FY Approva Company IFC Participants IFC Participants 1997 SEF G&M Leather 0.00 0 0.00 0 2001 SEF XacBank 0.40 0 0.40 0

Total Portfolio 0.40 0 0.40 0

Approvals Pending Commitment

Loan Equity Quasi Participants 0 0 0 0

Annex B9

Country Program Matrix

This Annex has been replaced by Attachment 1 : CAS Matrix

Annex B10

Mongolia - CAS Summary o f Development Priorities

Reconciliation of Country Country Bank country and Bank

Network area performance Major issue priority p riority priorities

Poverty Reduction & Economic Management

Poverty reduction

Economic policy

Public sector

Gender

Human Development Department

Education Health, nutrition & population

Social protection

Environmentally & Socially Sustainable Development

Rural development

Environment Social development

Fair

Good

Fair

Fair

Fair Fair

Fair

Fair

Fair Fair

Widespread poverty; higher in rural areas and aimags; increasing inequality; monitoring improving

Low inflation; budget deficits decreasing; open trade regime

Public sector reform law passed, being implemented; civil service reforms underway

Low enrollment rates for boys; women disproportionately affected by poverty

Increase efficiency and access Increase efficiency and access

Long-run sustainability under threat

Vulnerability and pastoral risks

Land degradation; urban air pollution Inequalities: urban-rural

High High

High High

High High

Moderate Moderate

Moderate Moderate Moderate Moderate

Moderate Moderate

Moderate High Increased emphasis on risk management in next project; AAA

Moderate Moderate Moderate Moderate

Finance, Private Sector & Infrastructure Financial sector Fair Strengthen financial sector; access to credit High High Private sector Good Enabling environment; regulations and laws, High High

taxes, clarity of public-private roles,

Energy & mining Good Implementation of laws; artisanal mining High High

Infrastructure Fair Weak infrastructure; arrears; public-private High High partnerships; low efficiency; maintenance and recurrent costs

MAP SECTION