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© 2003 International Monetary Fund

September 2003 IMF Country Report No. 03/277

Mongolia: Poverty Reduction Strategy Paper

Poverty Reduction Strategy Papers (PRSPs) are prepared by member countries in broad consultation with stakeholders and development partners, including the staffs of the World Bank and the IMF. Updated every three years with annual progress reports, they describe the country's macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing. This country document for Mongolia, dated July 3, 2003, is being made available on the IMF website by agreement with the member country as a service to users of the IMF website.

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International Monetary Fund Washington, D.C.

GOVERNMENT OF MONGOLIA

ECONOMIC GROWTH SUPPORT and POVERTY REDUCTION STRATEGY

ULAANBAATAR July 3, 2003

Table of Contents

Executive summary..... i

Overview of Economic and Social Development in the Past Decade..... 6

Introduction. 6

Chapter 1:          THE TRANSITION PERIOD IN MONGOLIA          1

1. The Macro-Economy........ 1
   1. Demographic Trends drawn from the Household Income and Expenditure Survey........ 4
      1. The Poverty Situation in Mongolia....... 10
      2. Gender Equality...... 15
         1. Insecurity........ 18
         2. Major Reasons for Poverty and Insecurity...... 20
            1. Government Efforts to Reduce Poverty..... 21
               1. Achievements and Lessons.... 23

Chapter 2:          ECONOMIC GROWTH SUPPORT AND POVERTY REDUCTION STRATEGY          25

1. Government Development Goals and Policy Priorities........ 25
   1. Extending Participation........ 26
      1. Sustainable Development and Pro-Poor Growth....... 28
      2. Acceleration of Economic Growth...... 30

Chapter 3:          PROMOTION OF ECONOMIC AND FINANCIAL SUSTAINABILITY          38

1. Budget and Finances........ 38
   1. Treasury Management........ 54
      1. Balance of Payments        57
      2. Monetary Policy...... 69
         1. Economic Re-structuring      71
         2. Accounting, Auditing and Inspection...... 74
            1. Service Reforms..... 83

Chapter 4:          IMPROVING ACCESS TO MARKETS          88

1. Creating a Favorable Operating Environment for Business........ 88
   1. Legal Reforms         88
      1. Infrastructure        92
      2. Promotion of Foreign Direct Investment...... 103
         1. Improving Access to Markets........ 104
         2. Regional and Rural Development...... 113
            1. 122

Chapter 5:          ENSURING SUSTAINABLE HUMAN DEVELOPMENT          125

1. Education........ 128
   1. Health........ 133
      1. Employment....... 142
      2. Social Welfare...... 149
         1. Gender Equality........ 154

Chapter 6:          IMPLEMENTING AND MONITORING THE STRATEGY          158

1. Good Governance......... 158
   1. Implementation and Operational Management         160
      1. Extending Participation....... 162
      2. Monitoring and Evaluation...... 163

Tables

Table 1:1:  Main economic indicators, 1990-2001......... 1

Table 1:2: Structure of average monthly total expenditure of household, national average, percent. 8

Table 1:3: Structure of average monthly total expenditure per household, by urban and rural areas, percent. 9

Table 1:4:  Monthly expenditure per person, by residence......... 9

Table 1:5:  Monthly Adult Foodstuffs Consumption, national average, Kgs......... 10

Table 1:6:  Daily Adult Calorific Intake, national average......... 10

Table 1:7: Poverty Indicators......... 11

Table 1:8:  Composition of Population by working age, and by location, as at 1998 (percent). 13

Table 1:9: The number of poor households, by head of household’s gender and income group. 17

Table 1:10: The number of poor households, by head of household and location, as at 1998 (percentages). 17

Table 2:1:  Economic Growth, percent......... 31

Table 2:2:  High Scenario with Economic Growth of 6.0 Percent.......... 33

Table 2:3:  Main Assumptions on Newly Exploited Deposits......... 34

Table 2:4:  Base Scenario with Economic Growth of 5.5 Percent......... 35

Table 2:5: Investment at Current Prices, MNT billion (based on GDP estimated by expenditure approach). 35

Table 2:6:  Summary of GDP Indicators, 2001-2007......... 36

Table 2:7:  Economic Structure by Major Sector......... 37

Table 3:1:  The ‘Financing Gap’ as a Percentage of GDP......... 44

Table 3:2.  Fiscal Projections Outline as a percentage of GDP (Base Case)......... 45

Table 3:3:  Budget Allocations to the Social Sector......... 46

Table 3:4: Performance Indicators......... 52

Table 3:5: Procurement Values......... 53

Table 3:6:  Balance of Payments, million US$, 1993-2002......... 61

Table 3:7:  Future Outlook, 2003-2006......... 62

Table 3:8:  Main Monetary Aggregates, 1998-2002, percent......... 69

Table 3:9:  Fiscal Reporting System......... 76

Table 3:10: Status of Accounting Reforms as at March 2003.......... 77

Table 3:11: Auditing Schedule......... 79

Table 4:1:  Structure of GDP, percent......... 105

Table 4:2:  Basic Economic Indicators by Region (as of 2000)......... 114

Table 4:3:  Livestock Husbandry’s Share in Total Agricultural GDP (percent)......... 116

Table 4:4:  Major Livestock Husbandry Products, thousand tons......... 117

Table 4:5:  Investments in Livestock Husbandry, MNT million......... 117

Table 5:1:  Fiscal Expenditures on the Social Sector......... 127

Table 5:2:  Preliminary Cost Estimates, US$ thousands......... 133

Table 5:3: Health Sector Financial Requirements Summary......... 142

Table 5:4: Employment Status of the Population at the year- end, 1995-2001, (thousand people). 144

Table 5:5: Pensions met by the Social Insurance Fund, (as of January 1, 2003)......... 151

Figures

Figure 2.1:  Real Economic Growth, 1989-2002......... 31

Figure 3.1:  Fiscal Trends......... 42

Figure 3.2: Loan Disbursement......... 60

Figure 3.3:  Exchange Rate Trend......... 70

Figure 4.1:  Road Investment, MNT billion......... 97

Boxes

Box  1-1: The impact of multifactor productivity on economic growth (empirical study)......... 2

Box  1-2:  Sources of Information on Poverty......... 11

Box  4-1:  Experience of the ‘Wholesale Trade Network’ pilot project......... 106

Box  5-1:  Human Development Index (HDI)......... 128

Executive summary

The Economic Growth and Poverty Reduction Strategy (EGPRS) is a strategy paper, which presents main policy directions of the government for the medium term with a focus on economic growth acceleration and poverty reduction efforts.

Since 1990 Mongolia has embarked on a path of building a democratic society which respects human rights and is committed to developing a market economy, undertaking sweeping changes and reforms touching all spheres of social life. Mongolia, with the assistance of international financial institutions and the wider donor community, has made substantial progress over the  past decade of democratic restructuring in laying down sustainable macroeconomic foundations and creating a private sector-led open economy. For the medium term economic growth rate targeted at 5.5 per annum, which will be achieved through economic restructuring, including public sector reforms, improving public expenditure management and rationalization of social safety nets with clear implications on improving public service delivery.

The overall transitional transition period of Mongolia covered all spheres of life, and the past decade was a decade of securing foundations for market-based transactions and implementing policies oriented toward sustainable growth and poverty reduction. In 2002, economic growth reached 3.9 percent with modest increase compare to the previous 3 years. The results of the 1995 Living Standards Measurement Survey (LSMS) concluded that 36 percent of the total population of Mongolia was living in poverty. The 1998 LSMS showed a poverty level of 35.6 percent, with 39.4 percent for the urban population and 32.6 percent for the rural population. However, natural disasters occurred during last three years and intensive migration of rural population to the urban has led to changes in the spatial distribution of poor from rural localities to capital city and other large towns.

Based on the poverty diagnosis the government of Mongolia is implementing a series of policy reforms oriented to enhance economic growth and reduce poverty with more pro-poor orientation during last three years. In the medium term the Government will implement policies aimed at accelerating private sector-led economic growth through the stablisation of macroeconomy, low and stable inflation, development of free market competition, and appropriate monetary, credit and tax policies, thus raising the living standards of the population. A further central goal of the EGSPRS in the medium term will be redistribution of the benefits of growth to the population equally, with a distictly pro-poor focus. However, this distribution will not be done in a passive manner, but through implementing specific projects and programs aimed at increasing employment among the poor and the near-poor to take their own initiatives to improve their situation.

Enhancement of economic growth and poverty reduction

Carrying-out restructuring as well as reforms undertaken within the social and political sphere have became an essential resource for ensuring economic growth. The prevalence of the private sector in the economy is another major source for ensuring enhanced economic growth. The Government has set itself the goal of reducing poverty through higher economic growth,   which

will be based on active private sector participation and an export oriented trade policy. Regional and sustainable development concepts will be incorporated in the general economic growth strategy. In addition a stable macroeconomic situation, investment and the building of human capital factors will play a significant role in ensuring growth and sustainable human development. Moreover, the development of more efficient mechanisms of budget and financial management as well as reforms in the public sector will be another important ingredient in securing economic growth.

Development framework

The following are the priorities defined in short term within the framework of Mongolian development goals:

• to deepen the reforms for ensuring macroeconomic stability, and to intensify the restructuring process;
• to improve the health of the banking and financial sectors;
• to recover and develop national industry, to ensure economic growth through supporting export oriented industry;
• to support regional as well as rural development, to intensively develop infrastructure;
• to create an equitable environment for ensuring human development, to improve all  levels of education, its quality, health service provision  and its accessibility;
• to reduce unemployment and poverty, to generally improve the living standards of population;
• to ensure sustainable development and ecological balance, to mainstream nature conservation and environmental policies as priorities within regional socio-economic development;
• to speed up the land reforms;
• to reduce the air, water and soil pollution in large cities and settlements; to improve the living environment of the people through the reprocessing of waste;
• to improve governance to ensure human security;
• To create a fair, moral and democratic society that protects concepts of democracy, basic human rights and the freedom of each citizen;
• To mainstream gender dimensions in poverty interventions to promote gender equality.

Private sector led growth support

The Government of Mongolia aims to enhance economic growth and maintain sustainable livelihoods of the population based on three main pillars, namely macroeconomic stability, improving business climate, and human capital enhancement.

The Government places a focus improving Mongolian Laws and Legislation up to Year 2004, including institutional and economic management laws. The reforms in the economic legislation will be aimed to create favorable and competitive business environment for all types of enterprises, eliminate unnecessary licenses and other administrative impediments. In addition access to the financial resources will be expanded, especially for rural entities and SMEs. The government policy priorities should be re-oriented towards those population groups most  affected by natural disasters through expanding financial and banking services in rural areas,

developing small and middle-size enterprises, stabilisation and expansion of agricultural activities.

Development of energy, road, communication and information is of vital significance for creating a favorable environment for businesses. The energy sector development, a major foundation for the business expansion, will be to ensure sustainable development of the energy sector, create environment for efficient production of energy, increase the economic efficiency of the sector, support the use of renewable energy resources and commercialize, and furthermore privatize in a step-by-step manner state owned shareholding companies of the energy sector. In the medium term the transportation sector development will be focused on rural area road network expansion with active participation of local communities, enhancing competition among transport service providers, improving the technical capacity through replacement of engines, expansion of freight and transit capacity. While ICT sector will focus on (i) establishing the appropriate policy, legal and regulatory framework; (ii) developing the key telecommunications and information infrastructure necessary for providing access to reliable and affordable connectivity; (iii) establishing an economic and business framework for the utilization of ICTs in governance and other applications; and (iv) developing human resources to effectively utilize ICTs.

Another pillar for the economic growth support is promotion of foreign direct investment and external trade facilitation, including maintaining stability of regulatory framework, simplification of business licensing, effective utilization of mechanisms to strengthen its position in the international arena, protect its rights, and determine and facilitation of its foreign trade policies in line with global and regional development trends.

The medium term policy will be focused on expansion of sources of economic growth, in particular the government is giving priority to the development of processing industry based on domestic raw materials, mining and extraction, tourism, IT, and infrastructure.

Joint efforts aimed to accelerate economic growth and reduce poverty by the government alongside  civil society and the private sector will be expanded.

Economic restructuring

The economic restructuring policy will be focused on privatization of large valuable entities, which enables an increase in the economic and financial efficiency of the companies, bringing in new technology, know-how and bridging them with new export markets. The restructuring in the energy sector will be continued by enhancing independent regulatory mechanisms, promoting private sector into the energy market, strengthening self-sustainability of energy companies and efficiency of their operations. Land reforms will be deepened to turn land into a productive asset to create opportunities for all people to create sustainable sources of income, in particular to implement land ownership and possession reforms. Social sectors restructuring, including education, health, culture and arts, will be carried out gradually without undermining public service delivery through management contract, management buyout, lease contracts. The reform measures will be supplemented by specific pro-poor measures to minimize negative consequences of the reform agenda.

Ensuring fiscal sustainability

Improvement in the access and quality of public services, and ensuring fiscal sustainability in the medium term are the main expected outcomes of the public sector reforms, which are underway. The public sector reform will comprise of 6 components, namely, treasury management, budgeting, accounting and reporting, output based management and auditing. The legislative basis for the reform is the Public Sector Finance and Management Law, the Law on the Consolidated Budget and other legislative acts and programs issued in  conformity with  the above. Implementation of these laws and programs will enable improvement of budget planning, raising efficiency of fiscal expenditures, consequently releasing public resources for low-income people and enabling implementation of pro-poor policies. The medium term public sector  reforms will be concentrated on carrying out comprehensive civil service reform aimed to increase accountability and credibility of civil servants, reporting and monitoring of performance based management. The securities market will be developed in accordance to the international standards to support economic growth through rationalization of the institutional framework, encouragement of private sector participation, increase their awareness. In line with reforms in the securities market activities the Trust fund law will be enforced. The insurance  policy priorities will be focused on improving the legal environment, rationalization of management  and enhancing monitoring of the insurance companies activities, expanding the types and coverage by the insurance activities, and introduction of international standards.

Ensuring sustainable human development

Although achievement of the sustainable livelihood and reduction of poverty depends on the  level of economic growth, it is also closely associated and interrelated with the ensuring sustainable human development, improvement of the access to, and quality of public services, and creation of sound governance. The human development objectives as they relate to the economic growth and poverty reduction strategy, are aimed at creating income-generation opportunities for the poor, engaging them in decision-making processes and thus securing their social protection. The policies for social services are focused on priorities in education, health, social welfare and employment sectors, including improving basic service delivery with pro-poor focus, better targetting, enhancing professional capabilities of the service providers, introducing accredation system for the public and private institutions. A special focus will be on improving maternal and infant health care, rationalization of financing schemes. The social welfare system reforms will be aimed to create foundations for the pension system reforms, expanding coverage and monitoring of the insurance system, re-organizing the social assistance management through pursuing the principle of community based services and streamlining criteria for better targeting and service delivery based on new type of household assistance benefits.

Employment promotion activities will be aimed to enhance capacity of skills of people and labor market operation.

Extending particpation

Further participation of the civil society will be sought in the process of making adjustments to the PRSP after a certain period of time and ensuring its sustainable implementation. In particular, working  groups  could  be  formed  at  aimag  and  soum  levels  with  civil society and business

representation to monitor and intensify the process of implementation of the PRS. Also, non- governmental organizations will be involved in monitoring and evaluation of the process of PRS implementation.

Implementation and monitoring

The overall implementation and monitoring of the EPSPRS will be coordinated by the MOFE. Within MOFE the Poverty Research Group will be a main acting body to coordinate implementation, monitoring and reporting for the EGSPRSP. The line ministries will be responsible for attaining of targets set for particular time period and implementation of specific programs within the framework of objectives. The local government and civil society will be involved through the working groups established during the I-PRSP dissemination. The progress report will be prepared on an annual basis and the strategy itself will be revised every three years and presented at the donor meetings to coordinate activities and funds of the donor community.

The prerequisite for the successful strategy is implementation of efficient monitoring and evaluation by two types of assessment, namely through monitoring benchmarks set by the government and civil society oversight. The Government, in order to monitor and evaluate the implementation of the poverty reduction strategy, will develop a system of appropriate tools and benchmarks for regular collection, monitoring, publishing of statistical indicators on the level of livelihood. However, civil society oversight, including NGOs, private sector, parliamentarians, citizens, donor representatives, will be conducted through various methods and approaches for monitoring and evaluation and the government will assist them in building of capacities to undertake monitoring and carry out the relevant assessments.

The government medium term main policy documents are the Government Action Plan, Medium term budget framework, the Socio-Economic Guidelines, sectoral papers and other policy papers

/ programs, signed agreements with international agencies. In addition following international practice the Government of Mongolia started an active participation in global initiatives such as PRSP process, MDG attainment, and Millennium Challenge account, specific programs to address greatest obstacles to the national development to spur economic growth and reduce poverty with an active participation of national stakeholders and coordination of external assistance. The MOFE will be a leading coordinating body to formulate, adopt, implement, and monitor these programs. Successful implementation of programs depends on efficient coordination of policy documents, reporting and alignment of processes, in particular the budgetary allocation in line with development priorities plays an important role in overall macroeconomic and sectoral management.

Financial requirements .

An implementation of the policy objectives included in the Economic Growth Support and Poverty Reduction Strategy requires resources equal to 40-45 percent of GDP per annum. These estimates are made based on targets included in the Medium term budget framework.

OVERVIEW OF ECONOMIC AND SOCIAL DEVELOPMENT IN THE PAST DECADE

Introduction

Since 1990 Mongolia has embarked on a path of building a democratic society which respects human rights and is committed to developing a market economy, undertaking sweeping changes and reforms touching all spheres of social life. Mongolia, with the assistance of international financial institutions and the wider donor community, has made a substantial progress over the past decade of democratic restructuring in laying down sustainable macroeconomic foundations and creating a private sector-led open economy. The past decade was a decade when secure foundations for market-based transactions were formed, enabling the implementation of policies oriented toward sustainable growth and poverty reduction. GDP per capita grew from Tg 21.7 thousand in 1992 to Tg 187.1 thousand in 1995, to reach Tg 270.1 thousand in 20021. Mongolia is now in 113th place among 173 countries ranked by their human development indicators2. Currently total Mongolian population reached 2.4 million with population density of 1.5 people per square kilometer and one third of population is concentrated in the capital city. The main stay of economy is nomadic style livestock. Currently there were 10 heads of livestock per capita.

Mongolia consists of 21 aimags and the capital city. The capital city Ulaanbaatar of Mongolia is a comprehensive administrative, territorial, economic and social complex with a special status and independent budget bearing specific functions, duties with own administration on a basis of the Constitution of Mongolia, Law on Legal Status of the capital city, Law on Territorial and Administration units as well as other relevant legal acts. The specific feature of the capital is concentration of one third of the total population and 40-50 percent of urbanization on 0.3  percent of the country’s territory with the population density being 100 time more than the nation average, having 8-10 times more people compared to other cities of the country. Due to specifics of socio-economic development of Mongolia, in recent years the number of people migrating from the countryside to the capital has increased significantly, leading to increased demand for civil service such as school, kindergarten, hospital, public transportation, and energy.

1 Statistical Yearbooks 1997, 2001

2 Human Development Report, UNDP, 2002

CHAPTER 1:   THE TRANSITION PERIOD IN MONGOLIA

1. The Macro-Economy

1.1                 The withdrawal of former Soviet Union assistance and collapse of COMECON left the Mongolian economy in an extremely difficult situation at the beginning of the 1990s. During 1990-1992, GDP decreased by more than 20 percent. The level of national savings rapidly declined, from about 35 percent of GDP in 1990 to 26 percent in 1995. Imports also decreased substantially, falling from US$924 million in 1990 to US$ 388.4 million in 1992. Inflation reached its peak of 325.5 percent in 1992, accompanied by growing unemployment. The number of the unemployed actively seeking jobs reached 54 thousand, as registered at the Labor Regulation Office. Multi-million rouble loans and assistance from the former Soviet Union abruptly ended in 1991.

1.2                 To address this economic situation, the Government of Mongolia launched a series of reforms starting in 1991. These reforms included: the phased liberalization of state-controlled prices and tariffs, privatization of state owned enterprises, establishment of a two-tier banking system, liberalization of foreign trade, adoption of a floating exchange rate system, implementation of tight monetary and fiscal policies aimed at reducing inflation, adoption and enforcement of laws to encourage fair competition, and creating a favorable environment for private sector development. Since 1993, and as a result of the policies and actions undertaken by the Government, the economy began to recover.

Table 1:1:  Main economic indicators, 1990-2001

* Preliminary

Source: Statistical Yearbook, Mongol bank Bulletin

1.3                 Macroeconomic stabilization which emerged during 2000-2002 has led to gradual improvement in overall economic performance and creating fundamentals for poverty reduction.

1.4            Economic growth: In the past decade GDP has fallen, but the economic situation was stabilized and the trend reversed from 1994 onward. The GDP growth rate increased to 2.3 percent in 1994 from a decline of 9.5 percent in 1992, and has remained positive since then. Importantly, the industrial sector (including the mining sector), which consistently declined at a rate of about 6 percent per annum revived, delivering 20 percent growth in 2002. The change brought up the share of this sector in GDP to 26.6 percent. In the same period, the major economic sector, agriculture, failed to realize its growth potential. The winters and springs of 1999-2002 brought extreme harsh climatic changes: droughts and excessive snowfalls led to Dzud which killed 3.5 million heads of livestock in 2000 and 4.7 million in 2001. In these years, 2.7-3.0 million female livestock miscarried. The total herd of 33.6 million heads of livestock in 1999 was reduced to 26.1 million in 2001, and 23.9 million by 2002. As a result, agricultural production fell, economic growth slowed and many thousands of herders were hit hard and left without any sources of income. This dependence on agriculture, the cornerstone of the economy, underlies the Mongolian people’s vulnerability to climatic events. Economic growth of a mere

1.0 percent in 2001, and 3.9 percent for 2002 (preliminary estimates) is a direct result of such vulnerability. Empirical evidence suggests that if there were no Dzud effects, economic growth would have reached about 8 percent per annum in recent years.

1.5   Mongolia’s economic base was fundamentally agricultural in character during the central planning period: between 1960 and 90 the economy was classified as agro-industrial. Equally in this period, all property was 100 percent owned by the state and cooperatives. Since 1990 however, restructuring and intensive privatization has led to fundamental changes in corporate structure and this along with changes in reporting, coverage and methodologies, is reflected in current summary statistics. Despite this process, whereby the economy is becoming more open, with capital and labor innovations brought by technological advance, the impact on the economy has not sufficient to lift performance; the contribution of GDP growth of these factors is estimated to be very low at only around 20 percent. This conclusion along with the estimated long term growth potential of the economy is derived from an empirical background paper prepared by the National University of Mongolia with financial support from the Japan International Cooperation Agency (see Box 1.1).

1.6   External economic factors: Factors such as the collapse of the former eastern-bloc economic cooperation and trade system (COMECON), a narrow export base deterioration of the terms of trade and the Asian financial crisis have upset Mongolia’s external economic conditions and affected its balance of payments position. A foreign trade deficit of 32 million US dollars was recorded for 1992, this initially reversed to a large surplus balance of 102.6 million US dollars by 1994, but rebounded and from 1996 to deficits have averaged of 110 million US dollars. The abolition of customs duties in 1997 was the key causal factor underpinning the increase in imports. In 2001, the trade deficit was 169.9 million US dollars, with the current account deficit/excluding official transfers/ reaching about -16.6 percent of GDP. This can be traced directly to commodity price volatility on international markets. The market price of copper, which constituted 33 percent of export revenue in 1999, was 3000 US dollars per tone in 1995, it sharply in 1999 to 1480 US$ per tone in 1999. The price recovered slightly in 2000, but again fell in 2001. These changes were accompanied by falling gold and cashmere prices on world markets. In addition, other factors such as the outbreak of food-and-mouth (FMD) disease resulted in an abrupt decrease in exports of raw agricultural materials to China, which has had a direct impact on the livelihoods of the rural population, particularly herders. Overall, a land locked location, remoteness from world infrastructure linkages, a narrow export structure, and poor international compositeness continue to impact unfavorably on Mongolia’s terms of trade.

1.7   At the same time though, the gold price has grown steadily since September 2001,  and net international reserves have increased substantially over the last decade from 4.6 million US dollars in 1992 to 40 million US dollars in 1994, and 160.1 million in 2001. By the end of 2002, net international reserves reached 225 million. A commitment to open economic policies during the transition period has led to a continual increase in donor aid. The outstanding debt of the Government reached about 84 percent of GDP at the end of 2002. Official development assistance worth 2.1 billion US dollars was received in the period 1991-2002, out of which 48 percent was represented by loans. As the country started to implement the open economy policy, the government jointly with international agencies and bilateral donors has organized 9 donor meetings with the active participation of the international community.

1.8   Financial and monetary sectors: Inflation has declined gradually since 1993, it reached 66.3 percent in 1994, averaged 27 percent between 1995 and 1999, 10 percent in 2000 - and single-digit level (1.6 percent) by the end of 2002. Money supply has been increased steadily during recent years, its annual growth rate has fluctuated at around 27 percent. Bank lending  rates remain approximately 35 percent p.a. This level of interest rates is not able to support production, services and economic growth. The budget has been in deficit in the past ten years, with loans from the banking system and foreign borrowings and assistance financing the fiscal gap.

1.9   Total budget revenues declined in 1998, mainly due to a sharp decline in corporate  tax revenues and dividends due to a deterioration in terms of trade. This has had a harmful affect

on the overall condition of the budget as the government failed to respond properly to falling revenues, and did not take serious action to improve public expenditure management. A crisis in the banking sector crisis was another factor that exacerbated the fiscal situation. Since 1996, 12 banks have gone bankrupt and the Government has been paying up to Tg 9 billion each year in interest payments for Government bonds which were issued to cover the losses of some of those banks. About 30 percent of total loans extended by commercial banks during 1996-99 were non- performing loans.

1.10   Due to the unfavorable external environment and an excessive burden on public finances, the budget deficit as a percent of GDP has continually increased, from 7.7 percent in 1996 to 12.5 percent in 1998 and 10.6 percent in 1999. Thus, the combination of the persistent falls in revenues and the excessive cost of economic restructuring have diverted already scarce resources from pro-poor programs and services. However, the budget deficit in the past two  years declined, paving the way for financial stabilization. According to 2002 fiscal outturn the overall fiscal deficit was 6.0 percent of GDP with current surplus of 4.4 percent of GDP.

1. Demographic Trends drawn from the Household Income and Expenditure Survey

1.11   The Population and Housing Census of 2000 counted 2373.5 thousand people residing in Mongolia, of which 56.6 percent live in urban areas (with 32 percent of population concentrated in Ulaanbaatar city) and 43.4 percent who live in rural areas. Of the total population, 50.4 percent are women and 49.6 percent are men, and 35.8 percent of the population are children aged 0-14. The population density is 1.5 persons per square km, making Mongolia the least densely populated country in the World.

1.12   During the 1990s Mongolia’s population growth averaged 1.4 percent per annum, with the total fertility rate remaining around 2.1 children per woman. The social and economic hardships that accompanied the transition were the main reasons for the decline in population growth. However, the fertility level of poor families is higher, and the structure of poor households is very young. For instance, within poor households 45 percent of their members are under age 15, while for the non-poor the proportion is 31 percent.

1.13   A set of monographs produced by the National Statistical Office drawing on the results of 2000 Population and Housing Census show that that the livelihood of people has undergone some changes.

1.14   Firstly, for example, the growth rate of the older population has remained lower than the total population over the last 20 years. The share occupied by elderly persons within the total population has been falling continuously. However, due to the favorable population growth conditions which have existed since the 1950s, the number of older people is projected to sharply increase between 2015 and 2020. Those born in the late 1950s and 1960s will move to the older age bracket in this period. According to median variant of the population projection based on 2000 population and housing census, the number of elderly people will increase by 16.2 percent or 20.1 thousand  in 2005 compared to  2000, and by 28.7 percent or 35.6 thousand by 2010.  This strongly suggest a requirement for facilitating the implementing the updating of some articles of the State Law on Population, the Law on Elders and various provisions relating to discounted services and other related legal acts and programmers.

1.15   Analysis of total national households as well as elderly households shows that the conventional type of household, with relatives and families living together still remains the mainstay. Of the total number of elderly people, 59.7 percent or 72.4 thousand are the head of their respective households. Of men who are head of household, 4,109 are single and the same position is found with the 8,453 women. Therefore, it is important that local administrations pay increased attention to the social issues and challenges facing single elderly people.

1.16   The willingness of the older population to work and participate in community work is quite high. The census revealed that one in every 9 older persons were working. Of the total  older population 12.3 percent or 15.3 thousand are economically active. As a matter of fact, the economic activity rate is high all in rural areas, both for the total population and older persons. On the whole the older population is more involved in agriculture and especially in herding. In urban areas there is a shortage of jobs for older people and moreover, establishments are not willing to employ them. The government believes it is necessary therefore, to take clear and unambiguous actions in official statements and in ensuring state population policy is enforced  and implemented at establishments of all types of organizations. The objectives of these policy statements are; the facilitation of a condition whereby older people especially of those aged up to 65 years can work taking advantage of their education and experience, hence making full use of investment made earlier into human resource development; making full use of their potential and capacity , passing on the rich life experience of elders to young generations; passing on traditional customs; encouraging elders to contribute to the country’s development; and enabling them live to an active life and ensuring the accurate and proper recognition of their input and merits .

1.17   Secondly the monograph on Education produced in connection with the Population and Housing Census of 2000 witnesses that the literacy rate and educational level of the population have reached closer to the level of developed countries. This is due to  greater attention paid by the Government of Mongolia towards the creation of a condition wherein children are fully enrolled in schooling and school drop-out rates are reduced. The Government took the action to establish a legal environment, which reflects well the country’s current stage of social and economic development, and to enforce the laws.

1.18   The ratio of number boys to girls is low at all of the stages of schooling in Mongolia School enrolment reduces by 9.2 points from primary level to secondary level. In numerical terms 44.7 thousand children of whom 64.0 percent are boys are out of schooling at the age of secondary level attainment. This is related to the fact that boys from herder households have had higher school drop-out rate as since livestock privatization. This tendency has moderated in the recent years but it is still in evidence. Another reason for the higher number of school drop-outs amongst boys is that poor and very poor households force boys to contribute to family incomes; their earnings enabling the purchase of essential food-stuffs for other household members.

1.19   School drop-out rates particularly among boys has deepened the imbalance in the sex ratio in educational attainment. Further down the line, this might lead to a shortage of labor supply in particular economic sectors especially those, which due to their specific conditions, require inputs by the skills traditionally provided by men.

1.20   The illiteracy rate amongst 15-19 year olds rose by 2.2 points in 2000 on the 1989 figures. In 2000 this rate is 4.2 percent meaning that 8.4 thousand 15-19 year olds are illiterate. Of this figure, 5.6 thousand are boys and 2.8 thousand are girls.

1.21   For the 20-29 age brackets, 1.8 percent of the population aged were found to be illiterate in 1989 and this indicator rose by 0.5 points in 2000. A total of 5.3 thousand people of this age group are illiterate with men representing 60.4 percent of this figure.

1.22   In relation to housing; almost half of the 54,1149 households (51 percent) enumerated during the Census reside in Gers and 49 percent in houses. When this is compared with 1989 census result the proportion of households residing in Gers is down by 9.3 percent and that of households in houses is higher by 9.3 percent. Overall, 72 percent of urban households reside in houses and 78 percent of rural households live in a Ger.

1.23   According to 1989 census 2.7 percent of the total households living in a house lived in a flat whereas this indicator rose to 3.2 percent (an increase of 0.5 point) in 2000. Also 1.3 percent of the population lives in a non-designated house and 0.3 percent in trenches, corridors, roofs and forests.

1.24   Of total Ger households 56.9 percent have no access to electricity and 69.9 percent have no telephone. In rural areas these percentages are higher; 75.2 percent lack electricity and

98.9 percent have no telephone.

1.25   On Migration the census reveals that by the beginning of 2000 74.3 percent of the total permanent residents in Mongolia were living in their birth place and 25.7 percent of the  total had migrated (moved to an area other than their place of birth) with 5 percent of which being return migrants (moved to another area and later returned to the place of origin).

1.26   Of the migrants 42.6 percent had migrated during the last three years – thus exposing the reality of intense migration which has taken place since the lifting of restrictions with the advent of the transition period in Mongolia.

1.27   Within the regions migration is highest in Khangai and lowest in western regions. A third of the people who took part in the inter-regional migration within Khangai moved to Orkhon aimag, making it the most attractive destination within this region. Recent statistics explain that there are 824.7 thousand people permanently residing in UB and almost one million people, including interim residents and incoming and outgoing guests, are residing, working and studying in the city. Just in recent 5 years the population has increased by over 70.0 thousand people through migration resulting in a significant rise of unplanned social service expenditures.

1.28   As for the central region, Darkhan-Uul aimag is the most attractive end-destination point. It absorbed about one third of the total in-migrants to this region. Net migration over the last five years has resulted in a 10 percent of increase in the population of 5 years of those aged and above in the capital city. Around 60 percent and 22.5 percent of the migrants from the western region moved to Ulaanbaatar and central region respectively. Of the total population enumerated during the census 13.7 percent had migrated during the last five years, mainly from the central and western regions. And almost 40 percent of them were 15-24 year olds – with the further break-down being 20 percent for 15-19 year olds and 19.6 percent for 20-24 year olds.

1.29   It should be noted that the school enrolment of one year migrant children of 8 and 9 years is lower than their non-migrant peers. This might be associated with the fact either there is  a shortage of schools in the destination place or in-migrants fail to get registered. Whereas households which moved to Ulaanbaatar city in 1999 were more likely to live in gers those who moved to the city after 1999 are more likely to reside in a house. When households moved to the capital city in 1999 and after 1999 are compared in terms of electricity the latter has poor access. Similarly, households which moved to Ulaanbaatar last year have poor access to telephone service than those migrated in 1999. Of the households moved to the capital city 4.0 percent resident in non-designated housing while of the non-migrants this percentage is less than 2.

1.30   The population’s migration has a number of causes and consequences. It affects the geographical distribution of population, on the one hand, by leading to concentration of population in Ulaanbaatar city and its outlying districts as well as in the central region and, on other hand, by sharply reducing the population levels and its distribution within other regions. Further it creates an imbalance of economic demand and supply - and presents challenges for social development.

1.31   In relation to marital status; the percentage of previously unmarried people aged 15 and above is some 8.9 percent and 11.2 percent higher for women and men respectively compared with 1979. The figures against 1989 levels are 8.3 and 7.4 points higher in the same order. This is related to the fact that young people particularly men, tend to get married later.

1.32   The proportion of divorced and separated people is also on the rise whereas that of  the widowed population is declining. This can be explained by the fact that divorced men are more likely to remarry than divorced women and there the highest percentage of widowed population occurs in the 60 and above age group. In the older age groups, women are more preponderant since they live longer than men do.

1.33   The average age of marriage increased by one and half years in the census period 1979 to 1989 whilst it rose by two and half years between 1989 and 2000. However, men and women in urban areas get married one year later than their rural counterparts. From this it can be inferred that late marriage among men can be explained by many reasons like; getting prepared for family life under market economy conditions, economic preparedness, studies and other factors. In addition, the commitment, feeling of duties and life skills of the young population  may well have changed.

1.34   In the context of all of the aforementioned, fertility, mortality and migration-borne changes and policy in the population arena have been incorporated in this economic growth and poverty reduction strategy paper through the line policies of health, gender, education, employment and other related areas.

1.35   Household Income and Expenditure. Changes in household incomes and expenditure in 1999-2002 are illustrated in the following by indicators such as monetary income, salary income, average salaries, monetary expenditure, savings etc. It is difficult to make comparisons between 1999-2000 household income and expenditure surveys (HIES). The 2002 HIES has used different sampling and methodology compared to the previous surveys which make difficult to make valid comparisons. The data for the 2002 HIES are preliminary.       It   is

apparent that Household monetary income increased by 82 per cent in 2002 from 1999.  However, the increase of monetary income in real terms was only a 54 percent. According to the Average Salary Survey, average salaries increased by 26 percent in 2002 from 1999 with the real increase being equal to 6 percent. Household monetary expenditure increased by 67 percent in 2002 from 1999 representing 41 percent in real terms.

1.36  Regarding Household expenditure; Indicators that better define changes in household living conditions are the household expenditure amount and expenditure structure measures. Average monthly household expenditure by expenditure item and structure as of 2000-2002 is shown in Table 2. For 2000-2002, the national average share of household monetary expenditure in total expenditure has declined, to 78.9 percent. This is related to an increase in consumption of food-stuffs prepared from household farms or own businesses and provided by others (families and friends) free-of- charge.

Table 1:2: Structure of average monthly total expenditure of household, national average, percent

1.37  Table 1.3 shows changes in the household expenditure structure with different figures quoted for urban and rural areas. In 2000-2002, the share of monetary expenditure in total household expenditure declined in both urban and rural areas with an increase in food consumption from household farms.

Table 1:3: Structure of average monthly total expenditure per household, by urban and rural areas, percent

1.38  Another key indicator that reflects changes in the living standards of the population is consumption expenditure per person. A breakdown of expenditures per person for 1999 and 2002 is as set out below (Table 4). The analysis divides the households that responded to the survey, into 5 equal quintiles from the smallest to largest in terms of total expenditure per person.

Table 1:4:  Monthly expenditure per person, by residence

1.39  This underlines the fact that income distribution in Mongolia is likely becoming increasingly unequal.

1.40  Food consumption of the population. The amount of food consumption, nutritional value and ingredients of the food consumed by the population was estimated on the basis of monthly consumption of an average adult equivalent. The comparison of actual consumption and recommended consumption per month is shown in Table 5. The recommended consumption is taken from the recommended amount of food and nutritional intake of the population adopted by resolution Number A/318 of the Health and Social Welfare Minister of 1997.

Table 1:5: Monthly Adult Foodstuffs Consumption, national average, Kgs

1.41  In all years, all food-stuffs except meat and milk have been below the recommended level. As a result of natural disasters such as drought and dzud in recent years, the consumption of milk and meat products has declined in 2002 from 1999. Although the consumption of flour, rise, eggs, potatoes and vegetables has increased in 1999-2002, these figures are still below the recommended level. Especially, consumption of potatoes, vegetables and fruits which are significantly below the recommendation.

Table 1:6:  Daily Adult Calorific Intake, national average

1.42  Although the daily nutritional intake did not reach the recommended level in 1999- 2001, in 2002 it increased because of high consumption of flour, flour products, eggs, potatoes and vegetables, all of which have a higher nutritional value. Also in 2002, protein and oils in food ingredients exceeded the recommended level.

1. The Poverty Situation in Mongolia

1.43  Definition. Poverty in Mongolia is defined using a the minimum living standards approach. According to the Law on Defining the Minimum Living Standards, the National Statistical Office determines the minimum levels differently by regions. Currently, the monetary equivalent of the poverty line ranges between Tg 19500 to 25300 per capita per month  depending on the region.   Households with income less than 40 percent of the minimum    living

standards level and who are unable to provide for their basic food needs are defined as households in ‘extreme poverty’.

Poverty assessment. The Government of Mongolia has conducted several living standards surveys with the support of international agencies.

1.44  From the various surveys conducted in Mongolia since 1995 (LSMS, PLSA), poverty was found to be preponderant among five categories of people; (i) single parent-headed households with many children, (ii) households with less than 100 heads of livestock (depending on the size and structure of the household), (iii) the unemployed, (iv) the uneducated (without basic education), (v) and specific vulnerable groups (elderly, disabled, street children  and orphan children).

Table 1:7:  Poverty Indicators

Source: Living Standard Measurement Survey, 1998

1.45  The results of the 1995 Living Standards Measurement Survey (LSMS) concluded that 36 percent of the total population of Mongolia was living in poverty. The 1998 LSMS showed a poverty level of 35.6 percent, with 39.4 percent for the urban population and 32.6 percent for the rural population. This means that compared with 1995, poverty has declined in Ulaanbaatar by 1998, whilst for other urban areas it has increased. The survey also showed that poverty was particularly concentrated in aimag centers, towns and other urban settlements. Methodology utilized in these surveys limit to conduct detailed comparisons of results in terms  of spatial and population groups distribution.

Survey with a new improved methodology. The Household Income and Expenditure/Living Standards Measurement Survey has 4 components which are:

1. Household income and expenditure survey /monthly/
2. Living standard measurement survey /quarterly/
3. Community questionnaire
4. Price questionnaire

For the HIES, a sample of 11,232 households in Ulaanbaatar city and 21 aimags is surveyed each year, at the rate of 2808 households per quarter. The integrated HIES-LSMS survey will visit 3744 households a year, at the rate of 936 households of surveyed HIES households per quarter or rotation approach is being utilized.

The expanded survey undertaken under the assistance of the international agencies is an integral part of comprehensive program to reform public sector, enhance economic growth and reduce poverty. The HIES is a main source for poverty reduction monitoring, attaining the MDGs, accomplishment of the MCA requirements.

1. The first survey to measure the living standards of the population was carried out in 1995 with the assistance of the World Bank. The survey sample included 1,500 households, which represents 0.3 percent of households in Mongolia. The second Living Standards Measurement Survey conducted by the National Statistical Office with the assistance of UNDP in 1998, and its results were widely disseminated. The survey became a standing component of published official statistics. The results of these two surveys are not however, directly comparable with one another.

1. The Participatory Living Standards Measurement Survey was conducted in 2000 with the assistance of the World Bank and other donor organizations to carry out a qualitative assessment of poverty. The survey provided an opportunity for the poor to make their voices heard to the Government about their concerns, and for policymakers to listen to their assessment and opinions about their quality of life, and assessment of Government’s policies to improve their livelihoods. The objective of the survey was to enrich poverty statistics with qualitative information, and to provide information complementary to Poverty Assessment and Living Standard Measurement Surveys conducted in 1995 and 1998. The survey was the first ever survey in Mongolia to be conducted using participatory methods.

1.46  Although the level of poverty has not significantly risen during 1994-2000, the depth of poverty has increased and income inequality has worsened. The Gini coefficient increased from 0.31 percent in 1995 to 0.35 percent in 1998, demonstrating growing income inequality, particularly that of the poor. The depth index which measures the total consumption inequality of the poor population reached 10.9-11.7 percent, while the poverty severity index increased by 0.8 percentage points since 1995. According to the Participatory Living Standards Assessment, distinct population segments, the so-called “rich and poor” have emerged during 1992-1995, and more so in 1995-2000. Thus the gap between these two groups has continued to deepen. The survey also showed that a substantial proportion of urban population lies within the extremely poor category. The view that the number of middle-class households declined during 1992-1995 was supported by survey participants’ responses that the number of poor and very poor households has grown. It is clear that income shortage is a major cause of poverty in Mongolia. The overwhelming majority of the poor live in gers, with 27-30 percent of them using water  from unprotected wells for daily consumption.

1.47  The poor and employment. Poverty has a direct relation with employment. Out of  total poor population of working age in urban areas, 27.3-38.8 percent are unemployed, while almost 60 percent of unemployed able bodied people of working age are poor. This is demonstrated by levels and composition of total household income. A third of household income comes from wages, pensions, benefits and incentives, over 20 percent comes from agriculture  and non-agricultural production, another 30 percent from household business, and 10 percent are

free gifts from others. This income composition largely depends on household location. For instance, 40-60 percent of income of the urban population is composed of wages, pensions and benefits, whereas in rural areas only 7 percent of the total income comes from this category, with over 60 percent coming from household business. However, the droughts and Dzud that occurred in the past years have left over 10 thousand herder households without any livestock, and many more thousands lost most of their livestock. As a result, members of these households fell into poverty, and many moved to urban centers, swelling the number of the urban poor.

Table 1:8: Composition of Population by working age, and by location, as at 1998 (percent)

1.48   Although, the poor are engaged in some types of economic activity, due to low incomes they are becoming more vulnerable. In other words, these people are mainly self employed, small traders, handicraft makers, and civil servants. The majority of extreme poor are unskilled and unemployed. Moreover cultural norms and mentalities dating to the socialist times have meant many within this group’s exhibit ready-made mentalities, are welfare dependent, and lack their own initiative to escape their current conditions.

Table 1:9:  Distribution of Average Income by Consumption Groups (percentage)

Source of information: Living standard measurement survey, 1998

1.49   The poor and social services. The cost of education and health services has become a heavy burden on poor families and, therefore, those families have almost no access to basic  health and education services. For example, household expenditure on education increased by 4 to 5 times by 1998 compared with 1995, while its share in total non-food consumption expenditure increased by 9.3 percentage points. The lower the level of expenditure per household member, the higher the weight of food expenditure in total household expenditures. For instance,

72.6 percent of households with less than Tg 8000 expenditures per person spend over 70 percent

of their expenditures on food, while only 22.6 percent of households with income per capita of Tg 60.1 thousand allocate over 70 percent of their expenditures on food3.

1.50            The school enrollment rate for children of aged 8-15 years is 86.5 percent (girls 89.6  percent and boys 83.4 percent) and the drop-out rate is 2.8 percent (girls 2.4 percent and boys 3.2 percent). The drop-out rate is higher in rural areas – 3.7 percent, as opposed to urban areas – 1.4 percent. Out of the total number of children not attending school, 43.8 percent do not attend due to low living conditions and the need to work. This increase in drop out rates has become one of main reasons of chronic poverty in the country.

1.51            Wealthier households benefit more from health services than do poor households. Monthly expenditure on health services per person for different categories of expenditure groups is 9  times higher in high income households than that in very poor households. Frequency of visits by the poor to health centers has declined too. This take-up of health services by of the poor and malnutrition has led to an increase in the number of invalids, forcing more people to rely on social safety net benefits alone.

1. Gender Equality

"Gender inequalities undermine the effectiveness of development policies in fundamental ways."

1.52            Mongolia has a good enabling environment to promote gender equality. The Constitution grants equal rights to men and women. The government has committed itself to various international conventions on rights and the equality of women, and has established the National Council for Gender Equality in 2001 to monitor and support the implementation of policy and to promote women and gender equality. Civil society organizations and movements to promote women's rights and equality are active. Despite this positive environment, gender disparities still persist in all dimensions of poverty and specifically; access to economic opportunity, capacity to access public services, vulnerability to economic and domestic violence, and political empowerment.

1.53            Gender inequalities not only reflect disparities in the capabilities and opportunities of individual men and women, but they potentially hinder efforts to improve economic growth and reduce poverty. Government, civil society and development agencies have conducted a series of workshops and pieces of research on various aspects of gender and poverty. The key gender issues facing Mongolia identified through these workshops are:

1.54 Gender and Economic Opportunity: Due to the lack of gender sensitive approaches during the structural reform policies, it has been challenging to evaluate the negative and positive impacts these policies have had on men and women. The experience of the past decade shows that women were affected negatively and have become victims of poverty as a result of socio- economic reform policies. Women, for example, were hit hard during structural reform and privatization which took place in the early 1990s. Many women working in light industries and services were transferred to the informal sector with little preparation. Woman faced  difficulties

3 Household Income and Expenditure Survey, Second quarter of 2002, NSO

in obtaining get credit and in managing their households because they were left with no rights to own capital after privatization.

1.55    Some of the laws and regulations adopted were distinctly unfriendly to women. For instance, the Pension law that was approved in 1991 imposed conditions, which made it more likely that women would either be made redundant or encouraged to quit their jobs by stating  that women with four or more children can receive state pensions early. The recently approved the Mongolian Land Law states that land will be given to the possession of household , while the Constitution stipulates this right is belong to the citizens of Mongolia. It is not clear whether and how the implementation of this law will affect men and women differently

1.56    Access to and the availability of credit and financial services, and hence the business environment are limited for women. Women work longer hours on household activities and have limited time to involve themselves in economic activities. Unpaid work never been evaluated and the contribution of the unpaid labor has never been calculated in the national accounts. Particularly in rural areas, livestock privatization and the movement from agricultural production towards household livestock herding, has resulted in and increased the level of unpaid family labor.

1.57    Opportunities for males and females in both employment and income, which are the main means of escaping poverty, are equal. Women in particular rely on the informal sector for  income and employment. Discrimination against women by their age, gender, physical appearance and their childcare duties commitments needs be considered urgently.

1.58    Women have limited authority over privatized assets, registered in the name of the head of household, who is usually male. This in turn restricts women’s ability to use such assets as collateral for loans and other business opportunities. Increased reliance on livestock herding, and the reduction of childcare services, has increased women’s hours of unpaid domestic and productive work (not included in the national accounts) and limited time for women to engage in economic activities.

1.59   Gender and Access to Public Services: Mongolia’s vast territory, low population density and poor infrastructure makes it difficult for all of the population to access to public services. Educational enrollment of both boys and girls is significantly lower today than in 1990, and boys’ enrollment levels are low particularly in the higher grades. High maternal mortality rates reflect widespread problems of access and quality of health services, especially in rural areas, and this has a particularly negative effect on women. Closure of health care centers in rural areas, has lowered the quality and pushed up the cost of services, whilst also increasing the distance between providers and patients contribute to problems.

1.60   Gender and Vulnerability: High incidence of domestic violence threatens women’s physical and emotional security. According to a study conducted in Ulaanbaatar, one third of women in Mongolia have experienced some form of domestic violence, and more than one-tenth have been beaten by their partners.

1.61    Since women’s higher levels of unemployment and high reliance on the informal sector for employment  and  their  livelihoods  mean  that  many  women  fall  outside  of  the  state   social

protection and benefit system. Female-headed households are especially prone to poverty. For instance, 24.6 percent of very poor households and 18.3 percent of the total poor households are female-headed households, although female-headed households make up only around 12-13 percent of the total.

Table 1:9: The number of poor households, by head of household’s gender and income group

Source: UNDP/ NSO 1999

1.62    As poverty deepens, the number of female-headed households in poverty is growing because these households tend to have more children and are lower income-earners. In addition, divorces affect women more economically and physiologically, thus increasing their insecurity. Female-headed poor households are more concentrated in aimag centers and soums due  to limited opportunities for them in the countryside to engage in business or to commute to urban centers for work. In addition they have poor access to the social safety net system.

1.63    Based on assessment of various data and reports, the Government has changed its approach to prioritizing equal rights for women in order to provide them with more opportunities. The new concept is based on securing gender equality, formulating and implementing new economic and social policies and programs. Many of the participants of the Regional Seminar on “From I- PRSP to F-PRSP” organized in February-March 2002, have mentioned that “Education is important to reduce poverty. People need to be taught the living/ survival skills from a young age. Men are seldom given the opportunity to participate in various training programs”.

Table 1:10: The number of poor households, by head of household and location, as at 1998 (percentages)

Source: Living Standard Measurement Survey, 1998

1.64 National Program on Gender Equality: One of important tasks of the Government of Mongolia is to provide an appropriate environment for gender equality in the fields of politics, economics and civil society, culture–and within the home to develop and implement appropriate gender sensitive policies in order to improve livelihoods and the quality of people’s lives and promote human development. Studies and research indicate that gender equality exists in Mongolia to some extent. Therefore, the Government of Mongolia approved the National Program  for  Gender  Equality  in  December  2002  in  order  to  regulate  these  issues; making

appropriate changes in the division of labor by lessening gender inequality in unemployment, effecting poverty reduction and equity in educational provision; counterbalancing gender inequality in politics, decision-making positions and in property relationships; and to formulate policies to decrease family violence in compliance with national economic and social policies. The National Program on Gender Equality sets goals and outlines activities for improving gender equality in:

Family welfare and development: to strengthen families and values, to ensure an equal burden is assumed by parents in child-rearing and domestic work; to address domestic violence through legislation and awareness rising; to balance rights and decision-making regarding household property, providing training and resources for poor families.

Economic relations: promote gender-sensitive macroeconomic policies and statistical monitoring and data collection to improve access to employment, health and social insurance, and ensure equality in domestic finances.

Rural development: improve rural education enrollment, particularly of boys, increase participation in regional development, reduce child and maternal mortality, provide equal opportunities for employment and small business activities

Empowerment and decision-making: develop enabling an environment for a greater level of women’s representation in government decision-making both for elected and career positions.

Strengthening the national mechanism for achieving national gender equality objectives: establishment of national secretariat, gender based research, mainstreaming gender perspective into policies, programs, and budgeting, and improving monitoring/evaluation of gender-related goals and programs.

Implementing the National Program on Gender Equality will require support for strengthening the national secretariat and the overall mechanisms established for securing gender equality.

1. Insecurity

1.65 Participants in the Participatory Living Standards Assessment made clear interrelationship between poverty and insecurity. In addition to the economic insecurity the PLSA demonstrated the prevalence of other forms of insecurity: social, safety, environmental and physical.

1.66    Economic insecurity is expressed mainly in terms of unemployment and remoteness from the market. As a result, many households rely on pensions and benefits as their only reliable source of cash income. Investment involving communities and based on participatory initiatives, would mitigate the risks associated with agricultural production and will prevent the decline of the agricultural economy.  Work insecurity and a lack of  job vacancies has exacerbated poverty.

Table 11. Employment Rate, at as 1998 (percent)*

*Share of employed population of working age in the total working age population Source: Living Standard Measurement Survey, 1998

1.67  Environmental insecurity has a damaging effect of livestock husbandry. The effects of natural disasters, droughts, ‘Dzud’, forest fires and parasitic infestations have been made worse by a growing over-concentration on grazing pressure, as the numbers of herders and livestock increased while pastoral mobility has declined since 1990s. These primary environmental problems affect population living standards and cause poverty. Environmental insecurity particularly affects new herders, as well as the supply of raw materials to national industry and the export of raw materials. Unemployment and poverty are rising in rural areas. For instance,  the total number of livestock has been continually increasing during 1994-1999. But the Dzud that occurred in the past years killed many animals, reducing the size of the herd to around 24 million animals by the end of 2002, which represents 29 percent less than in 1999 and 20 percent less than in 2000. At market prices, the value of the lost livestock is over Tg 270 billion. For Mongolia with its harsh climate, and the economic dominance of nomadic pastoralist population, the livelihood of the population is extremely vulnerable to environmental insecurity. Participants in the Regional Seminar on “From I-PRSP to F-PRSP” organized in February-March 2002, had intensive discussions about environmental and climatic difficulties and the lack of Government support to protect them.

1.68  Social insecurity leads to a weakening of traditional kinship relationships. Kinship has been weakening throughout the 1990s, while semi-commercial forms of intra-household transfers are increasing. The most vulnerable of all are those excluded from kinship and other social safety nets. In addition, as enterprises have closed leaving many people without a job, thus causing disruption and the lessening of friendship relations.

1.69       Many households are also prone to physical insecurities, particularly among the poorer groups. Unemployment and economic insecurity has led to widespread social malaise, alcohol abuse, a rising crime level, domestic violence and marital breakdowns. These insecurities create various shocks for households and lead them into stresses and poverty. For instance, 156 out of 10,000 adults over 18 have become victims of one or other form of violent crimes in 2001 (Statistical yearbook, 2001).

1.70       Economic crisis, social inequality, and breaking down of values and other negative trends in the society have created another type of vulnerable: street children. Street children live in the conditions  lacking  basic  human  needs  in  extreme  poverty  and  begging.  This  unacceptable

phenomenon is in contradiction with the basic rights of children and had a negative impact for the social progress and a matter of discussion of the international community moving beyond the national borders. The main reason for becoming “street” are as follows:

~  Absence of normal conditions of life at home

~  Subject of types of violence

~  Lack of love and care by parents

~  Having serious illness, health and physical development concerns

~  Malnutrition and physical weakness

~  Breaking ties with school or never attended school

~  Having difficult behavior

To address the issue of street children the city municipality has launched a comprehensive program aimed to return street children to their family environment and create a special environment for those who are lacking any care providers, including:

~ Adjust the status of special schools and pay attention to capacity and qualification building of teachers and social workers who work with children without adult supervision and have aggressive behavior as well as increase salaries of teachers and social workers.

~ Review the accountability system of parents who leave their children without supervision  and  introduce amendments to relevant laws.

~ Elaborate and undertake an appropriate policy for street youth who became adult and reached 18 being street children for a number of years since 1990.

1. Major Reasons for Poverty and Insecurity

1.71       The major reasons why a third of Mongolia’s population is poor are determined as follows:

• The economy started to the transition without a clear articulated direction through a holistic approach. The shocks of the transition to a market economy have caused many industrial and service enterprises to close down, leading to lay-offs in excess of a thousand employees,
• Macroeconomic instability was deteriorated, especially in terms of increases of prices for domestic and imported goods, external shocks, banking crisis and slowing down of economic activities leading to income losses.
• Many thousands were given livestock during livestock privatization. However, a lack of experience in livestock herding and a lack of preparedness to climatic hardships made many of them lose their livestock, stripping them of their income sources,
• Many children who left their school during the initial transition years were left uneducated and without opportunities to work,
• Government transfers and social safety benefits to the people, which were large before 1990, were reduced substantially,
• Finally, the real incomes of the whole population have declined substantially.

1.72            These findings were also confirmed by the Participatory Living Standard Assessment Survey and participants in the Regional seminar on “From I-PRSP to F-PRSP”, 2002.

1. Government Efforts to Reduce Poverty

1.73  The National Poverty Alleviation Program. The Government of Mongolia, jointly with United Nations affiliated agencies, other international financial institutions and donor countries formulated and approved the National Poverty Alleviation Program (NPAP) in June 1994. The program was implemented until 2000. The main objectives of this multi-sectoral program, are based on principles of decentralization and public participation, were to reverse the declining trend of living standards and halt the human capital deprivation of the Mongolian population. Within the NPAP more than 13 thousand small scale projects have been undertaken in remote soums, horoos and bags to create temporary jobs in rural areas, to support pre-school and basic education, to improve basic medical services for the rural population, to provide  technical training for adult disabled people by involving them in income generating activities, to provide education  to  disabled  children  through  raising  the  incomes  of  vulnerable  groups  and    the

development of social infrastructure. The impetus for these projects came from the communities themselves, which is what made these projects distinctive.

1.74   Other programs and projects. Parallel to the National Poverty Alleviation Program the Government of Mongolia with the assistance of international banks, financial institutions, development organizations and donor countries has implemented a number of projects in health, education, infrastructure, and environmental sectors that directly and indirectly affect the living standards of the population. For example, 26 percent of foreign loans and assistance received during 1991-2001, amounting to 287 million US dollars, were spent on the social sector.

1.75   Employment. Approval of the Law on the Facilitation of Employment made an important contribution to the development of national industries and the reduction of unemployment. The Law clearly set out mechanisms to accomplish the Government’s policy to support employment and financing mechanisms for a series of related actions. For example, the law requires that no less than 0.3 percent of annual budget revenues be allocated to the Employment Support Fund. According to this requirement, Tg 200 million was allocated to the Employment support fund from the central government budget in last two years. In addition, Tg 441.2 million was  generated in the form of fees from expatriate workers in Mongolia in the second half of 2001. Out of the total revenue of Tg 641.2 of the Fund,, Tg 400 million was allocated to 30 employment offices in aimags and capital city districts, enabling them to organize vocational training and to support employers, making important contributions to the effort to reduce unemployment. A total of 4.6 thousand citizens were trained in the first half of 2001, of which 41 percent were people with incomes under the minimum living standard level. Consistent with the policy of public works, 260 unemployed people, military servants and 240 convicts are engaged in  construction works on the Millennium Road project.

1.76   Income generating activities: The National Program for Household Livelihood Support, financed by the IDA, was approved in 2001 and is being implemented as a follow-up to the National Poverty Alleviation Program. The main objectives of this program are to remove the poor households from poverty, and to prevent the non-poor low-income households from falling into poverty through mobilizing the economic and social resources necessary to support human and development capabilities. Implementation of the first stage of projects under this program started in the second half of 2002.

1.77     Poverty assessments showed that female-headed households are more likely to be affected by poverty and vulnerability. Parallel with sub-projects to increase the incomes of women within the National Poverty Alleviation Program, the Government developed and integrated the National Program on Advancement of Women, which is modified and replaced by the National program on gender equality adopted in December, 2002. The former program has included ambitious objectives to reduce poverty among women, but its implementation was not successful due to improper implementation mechanisms and financial difficulties (source: Program assessment report).

1.78     Small and medium size enterprise support projects in agriculture, implemented by the Government of Germany were quite successful among many projects and programs implemented to support employment and income generation in rural areas.

1.79    In addition to special programs and projects, the Government of Mongolia implemented a series of increases in the wages of civil servants, other wages and pensions who are considered to be in the low-income group. In 2001-2002 pensions were increased by 41 percent on average, while the salaries of civil servants were increased   by 23 percent.

VIII. Achievements and Lessons

1.80    Achievements. Although the rate of increase in poverty has slowed and its spread has been limited as a result of policy actions, poverty remains one of the critical problems facing  Mongolia of today. The NPAP implementation has recorded the following achievements:

• Projects aimed at income generation activities and the creation of temporary jobs within public works, have secured increases of incomes of over 30 percent of poor households. Most of the participants have acquired skills and business knowledge, - and became more self confident and have escaped from poverty.
• In order to ensure the sustainable livelihoods of poor herder households over 2,200 herder households were given 107 thousand heads of livestock on a contract basis.  In addition  to the livestock re-stocking project, some herder households have diversified their activities by involving them in crop farming and support their livelihoods.
• Female participants have benefited more from income generation projects. For example, 65 percent of participants in income generating projects were female. At the same time female participants benefited from activities aimed to acquire skills on project development and management implemented by non-governmental organizations, rural health improvement projects, especially the maternal home restoration project.
• Community / public works projects have had a positive effect not only on creation of temporary employment, but have also had a long-term positive impact on the  development of local economies. Bridges, roads, dams and irrigation canals have provided sustainable and long-term benefits to rural population. Also, projects for the supply of safe drinking water, public bath facilities, heating systems and waste removal have contributed to fostering a healthier and cheerful community life.
• Projects on strengthening basic and preschool education and rural health improvement have been implemented all over the country, with the effect of increasing school and kindergarten enrollment, reducing school dropouts and levels of infant mortality.

1.81   In addition to specific projects aimed at alleviating poverty, policy measures have been undertaken to maintain and enhance macroeconomic stability during the recent period. Macroeconomic stability enables the building of sustainable livelihoods of the population, in particular for those of the poor. Stabilization of inflation and currency rates, increases in foreign and domestic investment, restoration of national industries, strengthening of the public sector including fiscal management, improvement of the level and coordination of foreign loans and assistance helps improve the access and quality of social service delivery with a pro-poor focus. The objectives of raising living standards and reducing poverty amongst the population, especially in the rural areas, by improving infrastructure and fostering technological and scientific advances leading to increase of productivity are stated as one priorities of the Government’s program.

1.82   As a result of economic restructuring, the share of the private sector increased and it now accounts for over 70 percent of total GDP. The Mongolian economy has become more open, all citizens of Mongolia have the right and the opportunity to set their own personal goals for their lives and a favorable environment for the growth of private initiatives has been established.

1.83   Participants in the seminar organized in March in Bayankhongor aimag noted that “Now we learned what is poverty, what causes poverty and the ways to eliminate poverty”. And that “Poverty is affected not only by national economic and social development, but also by the passive and submissive nature of the poor; we ourselves are not well organized.”

1.84 Lessons. We have learned that programs and projects for poverty reduction and social welfare enhancement should be implemented in combination with a broad range of policies for sustainable economic growth, intensification of structural reforms, improvement of banking and financial services, as well as enhancement of social safety nets. It means that a poverty alleviation program, no matter how sound in its concepts and principles, may not eradicate poverty unless it is harmonized with and supported by broad-based social and economic projects and programs, policies oriented toward enhancing human capabilities, increasing employment, and enhancing economic growth.

1.85    The key objective of EGSPRS is the formulation, implementation and monitoring of poverty reduction and supporting the sustainable livelihoods of the population, the improvement in the targeting of social safety nets, - and the narrowing of the income gap between the rich and the poor and between urban and rural development. In addition poverty reduction efforts should be pro-poor oriented, and strategies should utilize efficient mechanisms to distribute the benefits of the growth to the poor.

1.86    Mongolia’s extremely narrow structure of exports is very elastic to commodity price changes, leading to the economic vulnerabilities to externalities. The current level of economic growth is remains well below our requirements.

1.87    The banking system, which plays an important role in the economy, remains fragile. Competition is weak, resulting in persistently high interest rates and limiting access to domestic lending for the private sector. In addition the profitability of privatized enterprises is low, as human capacity and private sector management skills are not fully developed.

1.88    Components of good governance, such as transparency of government regulation, public policy management, monitoring, as well as participation of civil society are inadequate, leading to poor basic services in education and health, and in both poor quality and weak access to social safety nets.

1.89    In addition, past experience shows that besides targeting of programs to the poor, it is necessary to prevent vulnerable groups from slipping into poverty, within the overall poverty reduction framework. Thus the poverty reduction efforts should be directed not only to poor, but to people in danger of falling into poverty.

CHAPTER 2:    ECONOMIC GROWTH SUPPORT AND POVERTY

REDUCTION STRATEGY

1. Government Development Goals and Policy Priorities

2.1                 The Government has analyzed the economic situation since Mongolia adopted the market economy and defined its medium term economic and social development policies. Carrying-out restructuring as well as reforms undertaken within the social and political sphere have became an essential resource for ensuring economic growth. The prevalence of the private sector in the economy is another major source for ensuring enhanced economic growth. The Government has set itself the goal of reducing poverty through higher economic growth, which will be based on active private sector participation and an export oriented trade policy. Regional and sustainable development concepts will be incorporated in the general economic growth strategy.

2.2                 In addition to the Government’s pursuit of economic growth by using all possible and appropriate internal resources, it is also directing its strength to creating a sustainable livelihood, for all of the population and to reduce poverty through protecting nature and the environment based on the accomplishments of human civilization and improving social welfare. A stable macroeconomic situation, investment and the building of human capital factors will play a significant role in ensuring growth.

2.3                 The Government of Mongolia will renovate techniques and technology, upgrade the processing of raw materials, rehabilitate the industrial processing sector, ensure sustainable development conditions, recover and develop the agricultural sector, increase investment in education and health sectors, ensure human development through supporting both foreign and local investment in all sectors and establishing favorable conditions for investment.

2.4                 Besides reducing poverty within the country through ensuring higher economic growth, the policy on ensuring human development implemented in education, health and social welfare sectors will itself contribute and consolidate the economy’s growth potential. Moreover, the development of more efficient mechanisms of budget and financial management as well as reforms in the public sector will be another important ingredient in securing economic growth.

2.5                 The following are the priorities defined in short term within the framework of Mongolian development goals:

• to deepen the reforms for ensuring macroeconomic stability, and to intensify the restructuring process;
• to improve the health of the banking and financial sectors;
• to recover and develop national industry, to ensure economic growth through supporting export oriented industry;
• to support the regional as well as rural development, to intensively develop infrastructure;
• to create an equitable environment for ensuring human development, to improve all  levels of education, its quality, health service provision  and its accessibility;
• to reduce unemployment and poverty, to generally improve the living standards of population;
• to ensure sustainable development and ecological balance, to mainstream nature conservation and environmental policies as priorities within regional socio-economic development;
• to speed up the land reforms;
• to reduce the air, water and soil pollution in large cities and settlements; to improve the living environment of the people through the reprocessing of waste;
• to improve governance to ensure human security;
• To create a fair, moral and democratic society that protects concepts of democracy, basic human rights and the freedom of each citizen;
• To mainstream gender dimensions in poverty interventions to promote gender equality.

2.6                 At the beginning of the century the world has set itself global objectives to live without hunger and poverty in the next century. The Government of Mongolia has accepted the development goals set by the international community, and has committed itself to implementing them in the context of our country. With assistance of international agencies such as UNDP, ADB the Government has adopted and incorporated the MDGs in various policy documents.

2.7                 The Government of Mongolia is working along its objectives of enhancing economic growth, poverty reduction and meeting specific development goals. In this framework, the Government of Mongolia is supporting the Millennium development goals, and has set its own Millennium Development Goals for achievement by 2015. The Government will endeavor to meet goals such as; the reduction in the number of people in extreme poverty by 25 percent by year 2005, and by 50 percent by year 2015, to provide universal primary education to all people and to reduce infant and child mortality by 50 percent by year 2005 with mainstreaming gender issues in poverty reducing efforts.

2.8                 The Millennium Development goals have been incorporated in the EGSPRS, particularly in those sections dealing with health, education, employment, and other overall macro economic goals. These feature in the policy matrixes as well as monitoring section. Institutionally the government agencies jointly with civil society will undertake continuous monitoring of the process of achieving these goals, determined through annual plans and special reports during MDG implementation.

1. Extending Participation

2.9                 In preparation of EGSPRS preparation the participatory approach is being utilized effectively, including all stakeholders. The government working group was a main coordinating body for the preparation of the strategy. Based on I-PRSP JSA and recommendations from the Mongolian cabinet and parliament, other donors the technical working group started an intensive and iterative process, including defining policy priorities by sectors, consultations, comments, coordinating with related domestic and donor funded projects. During the process of preparation the government has organized the donor consultation on energy, ICT, health, social welfare sectors and rural and UB city development laying a base for the sectoral policies. In addition the reforms in governance, including gender issues and legislative environment was discussed intensively under the UNDP support. At the final stage of the process the MOFE organized a round table discussion with Cabinet and Parliament members on policy priorities included in  the

EGSPRS and time table for implementation and monitoring. Besides government coordinated activities in order to support the PRSP process, the international community, in particular the World bank has organized several seminars workshops on economic growth, trade and poverty issues, pro-poor policies, public sector reforms among all stakeholders. UNICEF has initiated a monitoring approach with extensive focus on rural household’s social sector services assess and quality which is intended to carry out in the further as one of main tools for monitoring of EPSPRS targets.

2.10             Extensive participation of non-government organizations was ensured, such as in conducting of research on specific issues and sectors, active participation in regional and consultative meetings, in sub-working groups as well as in the  National  Coordinating Committee. There are over 2500 non-governmental organizations currently in Mongolia. Compared to 1996, the number of NGOs increased 4.2 times. This was not only a qualitative growth. NGOs have matured financially, institutionally and in human capabilities. Most importantly, they became an active and responsible part of the development process. In the PRSP process, a working group comprising of representatives of 12 NGOs represented the civil society stakeholder and took an active part in the consultation process at all levels.

2.11             In order to broaden participation of the local governments and civil society in the process of development of the poverty reduction strategy, the first nation wide consultation in the form of series of regional seminars was organized in the first quarter of 2002 with assistance of the World Bank and the International Fund for Agricultural Development. During these  seminars, participants assessed poverty and discussed possible ways to reduce poverty. Participants concluded that in addition to a reduction in living standards of Mongolians, there is growing income inequality. Although the Government with the assistance  of  international donors is providing quite a substantial support and assistance, results are unsatisfactory. The participants also proposed that in developing and implementing the poverty reduction strategy, the definition of poverty should be clarified, the poor should trained in life skills, and basic social services and the system of assistance for the poor, their targeting mechanisms should be improved. They also underlined that financial support should be provided based on resources and specifics of particular regions, through local cooperatives and other similar institutions and to those able to do business and to repay loans. Poverty will be effectively reduced if the poor are cared by more able people. They also underscored that job creation, development of small and medium enterprises, extension of infrastructure to connect rural areas with the market, expansion of financial services and effective environmental and disaster management should be key priorities of the Government. NGOs were an essential component of whole exercise: they were involved in preparation and organization of the regional seminars and took a substantive part in them. It is worth noting that one third of participants in each seminar were representatives of  civil society. On the other hand, working groups participated in series of GDLN  regional seminars organized by the World Bank Institute with subsequent internal discussions. During the PRSP consultative process, meetings discussed the Road map which is in essence an action plan for implementation of the strategy. Thus, local and national level teams made a good start for further in-depth involvement in the implementation phase of the EGPRS, in particular in contracting out some governmental functions as well as monitoring of this implementation.

2.12            Series of consultative and business meetings as well as other events were organized on the national level.  These consultations involved members of Parliament and the Cabinet,  other high-ranking government officials on national and local levels, representatives of donor organizations, the private sector and non-government organizations, citizens, the poor and vulnerable in particular. Some of these participants including ministers, members of PRSP working group discussed their experience of the process on video and telephone conferences organized by the World Bank by sharing their views on specific issues, learnt experiences of other countries. Representatives of civil society presented their experience of PRSP process to  the World Bank President stressing the wide presentation and consultations on specific as well as general issues on poverty and economic growth in Mongolia. Also, Mongolian representatives participated in international conferences and seminars on national poverty reduction strategies where they shared the process of the development of the PRSP in Mongolia and learnt from the experiences in other countries, which found its reflection in the Mongolian PRSP. All this greatly enhanced the quality of the PRSP.

2.13            The Poverty Research Group under the UNDP Poverty Research and Employment Facilitation project is continuing to operate as a unit to assist in addressing research and data  gaps identified in the I-PRSP and its JSA through poverty research activities and developing recommendations for specific policy areas. The research in area of review of initial privatization policies, their impact on poor, of prevention of middle income groups from falling into vulnerability, of weather effects on environment and ways to approach sustainability of herders income have been sub-contracted to selected teams.

2.14            The specific project proposals, including Institutionalization of the participatory process, Improve pre-school education for the rural children, Improving participation of stakeholders and basic information, Support herders coalition have been screened by the  National steering committee and  main donors and  proposed to PRSP Trust Fund.

1. Sustainable Development and Pro-Poor Growth

2.15            The Mongolian government’s priorities are to accelerate economic growth and reduce poverty. Special focus is given to the involvement of poor people in development process through helping to improve their health and educational level, upgrade their skills, and most importantly the creation of a favorable environment for business development. Therefore one of the milestones of poverty reduction is acceleration of economic growth.

2.16            Pro-poor economic growth: Economic growth is the pre-requisite for poverty reduction, along with the narrowing of income inequality and, subsequently, ensuring sustainable development for the population. Mongolia’s average GDP growth of 3.3 percent during 1995- 1999, and around 2 percent in the past 3 years is not sufficient to reduce poverty. Therefore, the central objective of the EGSPRS is to reduce poverty by increasing an economic growth to 5-6 percent per annum in the medium term. Sustainable high economic growth creates opportunities for the people to study, work and develop. However, the government and civil society should focus on efficient mechanism for channeling the benefits of higher growth to the poor. The Government will place emphasize on encouraging citizens’ initiatives and creating a favorable economic and social environment in order to expand civil society participation in development.

2.17            In the medium term the Government will implement policies aimed at accelerating private sector-led economic growth through the stabilization of macro economy, low inflation, development of free market competition, and appropriate monetary, credit and tax policies, thus raising the living standards of the population.

2.18            Economic growth will be enhanced by coordinating macroeconomic policies with policy priorities in the sectors and economic and social sector restructuring. Based on results of LSMS, the incidence of poverty was uneven in 1998. The depth of poverty was highest in aimag centers. Since then, natural disasters in the past three years greatly affected the livelihoods of herders. Therefore, the government policy priorities should be re-oriented towards those population groups most affected by natural disasters through expanding financial and banking services in rural areas, developing small and middle-size enterprises, stabilization and expansion of agricultural activities. Joint efforts aimed to accelerate economic growth and reduce poverty by the government alongside civil society and the private sector will be expanded.

2.19            Pro-poor allocation of resources. A further central goal of the EGSPRS in the medium term will be redistribution of the benefits of growth to the population equally, with a distinctly pro-poor focus. However, this distribution will not be done in a passive manner, but through implementing specific projects and programs aimed at increasing employment among the poor and the near-poor to take their own initiatives to improve their situation. As well, the Government will undertake economic restructuring consistent with building economic capacity, including public sector reforms, improving public expenditure management and the rationalization of social safety nets.

2.20            Ensuring comprehensiveness of the poverty reduction strategy. In addition to incorporating the main objectives of the economic growth acceleration and poverty reduction into long-term development policy documents, policies will be encompassed in national medium-term development programs and the medium term budget framework, as well as the annual Economic and Social Development Guidelines and budget proposals, thus ensuring consistency and comprehensiveness of implementation of the strategy with enhanced accountability and transparency.

2.21            To achieve this objective macroeconomic management and coordination is essential. Therefore it is important to develop a system of “outputs envelopes”, which is consistent with new public sector management and finance environment and priorities of the macroeconomic  and sectoral policies.

2.22            The long term vision of Mongolia’s development is premised on a consensus of all stakeholders, including the government, civil society and the private sector. The business plan  for the medium term of entities is becoming an efficient mechanism to link this long term development vision with sectoral priorities - feed back loops regarding financial resource issues is provided by a much improved medium term budget framework. This sequence of activities  and their linking will provide a base for the formulation and implementation of pro-poor policies. The main objectives of the medium term plan will be included in the EGSPRS, and its implementation and monitoring will be done through annual Socio-Economic Guidelines.

1. Acceleration of Economic Growth

2.23    Within the framework set by the strategy, the Government is giving priority to acceleration of economic growth, ensuring macroeconomic stabilization, further opening of markets and the creation of a favorable environment for business. We believe that the  core objective of the economic growth and poverty reduction strategy is long-term macroeconomic stability. Macroeconomic stability is the cornerstone of economic growth enhancement and the increase in incomes of the population. The main engine of economic growth is private sector development, which is primarily based on privatization of state owned assets, improving business environment, enhancing business management, attraction of foreign investment and with overall enhancement of the macroeconomic stability.

2.24    Further, the Government will continue to support through policy measures, an open economy - and at the same time it will pursue a policy of accelerating the economic growth by attracting foreign investment and investing in efficient way. The Government will take measures to decrease the number of different kinds of trade permissions required, and simplify the overall procedure in order to support exports, industries and services in rural areas. It will pursue a policy of developing small and medium size enterprises, renovation of outdated technology, improving processing standards of raw materials and, therefore, boosting both production and the quality of the final product and increasing the number of small credit services. In relation to acceleration of economic growth, a favorable environment for service sector growth, particularly, development of the tourism sector, will be established.

2.25    The Poverty Reduction and Growth Facility Program, agreed between the Government of Mongolia and the IMF, is directed to ensure fiscal sustainability, to support private sector investment, to stabilize the macroeconomic situation and, hence, distribute the resources created as a result of economic growth for human development and poverty reduction. By implementing the PRGF, it is forecasted a solid basis for further economic development will be established and the economic growth is expected to be 5.5 - 7 percent in 2005-2008. Moreover, it  is projected that the current account deficit of the balance of payment will be reduced to 6.7  percent of GDP in 2004 and, further, policy measures will be pursued to sustain it at the level of

6.5 percent.

2.26  Mongolia, with her vast territory and pristine nature, endowed with natural, in particular mineral resources, its advantageous geo-political position and the associated multi- faceted international relations, relatively well-developed human resources and urbanization, has many advantages for development. However, Mongolia’s economy is extremely vulnerable to climatic changes and the impact of external ‘exogenous’ shocks. The narrow base of the economy, the small size of the population, the distance from the sea and the other attendant problems of  small economies also negatively affect national development. The main outcomes of this vulnerability are the sharp declines in prices of main export commodities and ‘shocks’ to the agricultural sector visited on the country in the past 2-3 years. Therefore, the implementation of any actions and mechanisms to accelerate economic growth in the medium term is only possible on the basis of careful study of these factors.

2.27  Overview of Mongolia’s economic growth in last 10 years. During the transition period after 1990 when Mongolia began its transformation into a market economy, investments

halted leading to an economic downturn; 1992 saw the largest decline a 9.5 per cent decrease in GDP from the previous year. This decline continued until 1993 when the economic downturn reversed.

Figure 2.1:  Real Economic Growth, 1989-2002

8

6

4

2

0

-2

-4

-6

-8

-10

-12

4.2

-2.5

-9.2

-9.5

2.3

-3

6.3

2.4

4.0

3.5

3.2

1.1

1.0

3.9

1989  1990  1991  1992  1993  1994  1995  1996  1997  1998  1999  2000  2001  2002*

2.28  The economic growth trend in last 10 years can be split into 3 periods; 1993-1995, 1996-1999 and 2000-2002.

Table 2:1:  Economic Growth, percent

2.29  Real terms economic growth was 1.1 per cent in 2000 and 1.0 per cent in 2001; and for 2002 it is expected to be at around 3.9 per cent. During the last 10 years, the growth rates of different sectors have not been stable due to structural changes in the economy, external economic conditions and climatic influences. In 1993-1999, growth in the primary sector of livestock husbandry was the main source of economic growth, yet the corresponding figures for industry, construction, transportation and communication remained unstable. In particular, growth of the industrial sector which declined by 6.4 per cent in 1993 recorded growth of 14.8 per cent in 1995. However, the sector experienced another decline of 3.6 per cent in 1996; yet in 1997-1999 it revived . The industrial sector, especially processing started its revival from 2000. Livestock husbandry which saw extensive growth between 1993-1999 comprising 36.8 per cent of GDP, declined by 16.6 percent in average due to unfavorable natural conditions. This resulted in an overall average economic growth rate of 2.0 per cent in between 2000 and 2002, in particular the processing sector delivered growth of 31.8 per cent in 2001, unprecedented since 1990. In 2002, its high growth continued at 22.1 per cent. In order to compile the requirements of Chinese external trade operations the technical standards MNS 4724:2001, MNS 3683:2001 have enforced for certain types of row materials, namely skins, wool.

2.30  The capital city UB is becoming one of chief contributors to economic growth.  Almost 36 percent of Mongolia’s GDP is produced in the capital; in 2001 the capital’s GDP increased by 20 percent reaching MNT 426.9-bil. In GDP, industry, construction, hotel, dining

hall, and financial services are delivering a more rapid growth. The share of the private sector on the capital’s GDP has been increasing in recent years and hit on 71.2 percent.  With the growth  in production, in 2002 budget revenue increased by MNT 5.5-bil from previous year  comprising

13.5 percent of the central budget.

2.31             Medium term government policy directions to enhance economic growth: Within the objective of attaining high economic growth in 2004-2007, the processing industry based on domestic raw materials, mining and extraction, tourism, IT, and infrastructure are considered to be main sources.

2.32             In the processing sector development livestock raw materials processing production, promoting export-oriented production of this type will be supported through SME’s promotion and their efficient allocation and development in line with regional development principles. This includes cashmere products, meat, skins and hides, fur, flour productions, extraction of oil, and development of facilities to process the raw oil into petroleum products. In this regard,  conditions to increase the extraction of oil will be provided.

2.33             For the mining sector, in order to utilize minerals and raw materials of Mongolia in the most effective and proper manner, measures will be taken to attract foreign and domestic investors into the mining sector and building favorable conditions for business operations. The government will encourage intensification of exploration, research and analysis works to open and utilize new deposits of minerals; and increases the extraction of gold, copper, coal, oil, zinc and other minerals. The production of final products with a high metal composition is a priority.

2.34             Within the framework of IT sector development, priority is given to IT  sectors through expansion of internet services, establishment of a unified e-information network, thereby improve software and conditions for quality training of personnel, design and sale of software, development and export of e-information processing services.

2.35             Within tourism development priorities, the number of foreign tourists is to be increased significantly by establishing an environment for development of tourism in Mongolia, especially increasing the number of international flights and ensuring comfortable travel conditions. Hotel service quality will be raised to meet international standards. The comfort ability in tourist camps and entertainment activities will be ensured. There is a need to upgrade marketing efforts of Mongolia’s tourism market. 2003 has been announced as to the year of visiting Mongolia – many important measures will be taken.

2.36             Regarding regions and infrastructure; a legal environment for regional development is to be established; priority is given to development of SME’s in the countryside – for this purpose infrastructure such as transportation, communication, road, and energy will be developed to improve the business environment. Gradually shift to regional economic planning to narrow the development gap between cities and countryside. This will enable active participation of rural areas in market relations and establishment of favorable conditions for market and business development in the countryside.

2.37             In regard to livestock husbandry and land cultivation sectors, set the start for developing intensified livestock husbandry, improve the pasture management and water  supply,

assist in building up of security stock of feeds. Protection systems for livestock against natural and weather disasters, assistance in technical and technological innovations in land cultivation are needed to be enhanced, in particular introduction of new environmentally friendly technology in soil processing, support land cultivation, establishment of an appropriate weather system with extensive preventive measures, and livestock insurance system.

2.38          Medium term economic growth trends: Consistent with the above priorities of the government economic policy and activities, the economic growth rate for 2003-2007 has been estimated in three scenarios.

2.39          In 2003, the real growth of GDP is projected to be 5.2 per cent, in the mid-term or 2004-2007 6 percent, as a high scenario.

2.40          In this scenario for livestock husbandry and crop sectors are projected based on assumptions to have very favorable weather conditions resulting in their revival and thereby providing a growth to processing, food production, and weaving sectors. Projections to attain 6 per cent economic growth in 2004-2007 assumed that the agricultural sector would grow by on average 4.2 per cent, mining and extraction sector by 8 per cent, processing industry by 7.9 -8.0 per cent – the main foundation for the economic growth. Hotel and restaurant services – 7.0 per cent growth.

Table 2:2:  High Scenario with Economic Growth of 6.0 Percent.

* - expected actual

** - projections

2.41             In this case for the medium term period external economic conditions are assumed to be extremely favorable. In addition, for mining and extraction sectors, some deposits, exploitation of which were planned to start, were considered as being exploited.

Table 2:3:  Main Assumptions on Newly Exploited Deposits

2.42             The second or base scenario is a GDP growth of 5.5 per cent in the mid term. In this scenario, the growth of agriculture, mining, extraction and processing sectors were taken slightly below the ones used in the 1st scenario.

In the 1st scenario (high) the following growth rates were projected:

-

-       Crop industry  – 4

-       Livestock husbandry – 4.3.

-       Agriculture as a whole – 4.2

-       Mining, extraction – 8

-       Processing – 8.0

-

In the 2nd scenario (base):

-       Crop industry  – 4

-       Livestock husbandry – 3.8

-       Agriculture as a whole – 3.8

-       Mining, extraction – 6.0-6.6

-       Processing – 7.3-7.9

Table 2:4:  Base Scenario with Economic Growth of 5.5 Percent

* - expected actual

** - projections

2.43       The 2nd scenario is a scenario, which is more realistic by providing relatively less growth to mining and processing sectors. In this scenario the livestock has a normal loss and  crop production and land cultivation a decent harvest. Regarding the external condition, it is the same as in 2000-2002.

2.44       Investment needs for the mid term are estimated as follows consistent with the economic growth trend.

Table 2:5:  Investment at Current Prices, MNT billion (based on GDP estimated by expenditure approach)

2.45       In the mid term Mongolia needs investment that equals to 24 per cent of GDP, almost 60 per cent of which is projected to be financed from foreign sources. The government will  meet

its investment requirements by utilizing budget investments, donor country loans and aid, mainly in education, health, infrastructure sectors and promoting regional development, and attracting direct foreign investment into mining, processing, hotel, trading businesses.

2.46       The 3rd scenario is the lower - case scenario with unfavorable situations for main economic sectors such as livestock husbandry and land cultivation. In this scenario the economic growth in the mid term is projected to be at 3.0-3.7 per cent. The risk exposure is continued in the agriculture – decline projected for up to 5 years in livestock husbandry and 4 years in crop industry. The main difference of this scenario from the 2nd one is the processing sector in  addition to livestock husbandry. In connection with the continued decline in the livestock husbandry, the processing industry is projected to grow by around 4.8 per cent assuming that main sub-sectors of the processing industry – food and weaving – will not deliver a decent growth. Furthermore, external condition is considered to be unfavorable, including continues commodity price volatility, declining world demand, political instability, outbreak human and animal diseases.

2.47       The above three scenarios provide for a conclusion that the economic growth in the mid term will be fluctuated at around 3 - 6 percent subject to external and  internal  circumstances.

Table 2:6:  Summary of GDP Indicators, 2001-2007

2.48       The 2nd scenario is considered to be the most consistent with the reality – no priority  is given to any sector, risk in the agricultural sector is taken into account, growth of livestock husbandry is 1.7 points below the average growth recorded in 1996-1999 (normal loss without risk exposures).

2.49       The following table shows the composition of the mid-term economy by sectors under the 2nd scenario:

Table 2:7:  Economic Structure by Major Sector

Source: MOFE

2.50       According to the 2nd scenario the economic structure will not be changed much. Due to growth in mining and processing sectors percentage of industry in GDP will increase by 1.5 points with a decrease of agriculture share by 1.4 percentage points.

CHAPTER 3:   PROMOTION OF ECONOMIC AND FINANCIAL

SUSTAINABILITY

3.1                 At the first half of 1990, when Mongolia has made her first steps toward market economy relations, her macroeconomic situation was unstable, the economy was in recession  that continued for a certain period of time. There was a gradual tendency toward macroeconomic stabilization in 1995-1999. However, not only the economic and financial crisis in South East Asia and overall economic slowdown in the world, but also the unstable internal political situation and unappropriate policy measures have affected Mongolian economy negatively.

1. Budget and Finances

3.2                 In the early 1990’s, the budget revenue constituted about 60 percent of GDP, but as a result of the economic crisis in Asia it dropped to 23.4-33.6 percent in 1995-1999. This was also affected by the following changes in the tax policy and legal environment in Mongolia. Measures taken in 1997-1999 within the taxation reform:

• Four-rate (15, 25, 35, and 40) corporate income taxation was changed into two-rate (15 and 40).
• Five-rate (2, 15, 27, and 40) personal income taxation was changed into three-rate (10, 20, and 40).
• All import taxes were annulled except the import tax rate of 15 per cent on alcohol beverages.
• Import tax rate on flour and vegetables of 15 per cent was linked to seasonal pattern.

3.3                 The taxation reform started in 2001 changing VAT rate to 15 per cent and increasing excise tax on alcoholic beverages and tobacco products by 50 percent with the aim of increasing budget income. The tax law on nullification of import duties was abolished imposing flat import duties on all imports. In addition, as a result of the Government’s policy to improve the tax collection, revenue as of GDP has increased to 36 per cent in 2001-2003. By the mid of the last decade the economy started to experience the positive growth rates, averaging at 3.3 percent. Since the transition the economic performance has been slowed down, and signs of recovery emerged by the mid of the last decade only. However, due to external shocks, including commodity price fluctuations, East Asian and Russian crisis, the world overall economic slowdown and natural disasters overall economic growth was quite concervative at around 2 percent, downwarded mainly by livestock sector performance. Despite a low economic growth, last three years were period of extensive measures aimed to improve the public finances. Compare to overall deficit of over 10 percent by the end of the previous decade, fiscal deficit  was reduced from 7.7 to 6 percent of GDP in 2000-2002. This strong performance was a result of sequenced policy measures aimed at enhancement of tax administration and expenditure management  with  strong  focus  on  reduction  of  dependence  of  budget  on  banking    sector,

elimination of domestic and external arrears, enhancing efficiency of intergovernmental fiscal relations. During 2000-2002 the government reduced domestic arrears twice and reached – 32.4 billion togrog.

3.4                 A number of measures have been taken achieving notable results with a view to raise the tax collection process by expanding the tax base as stated in the Government’s Action Plan, improve the tax imposition and control over the tax payments, rationalizing the tax debt workout management through strengthening the legal regulatory framework and to increase the real income of low-income citizen.

3.5                 It is expected that the real annual income of citizen will increase by 1.2 billion MNT each year due to the decision to postpone the starting date for the tax imposition on  the dividends, interest income received by permanent residents in Mongolia in order to promote personal savings, to January 1st, 2005.

3.6                 As the next stage of reform the government has undertaken a series of decisive measures to enhance budget planning, execution and monitoring, enhance transparency of fiscal operations by transferring from yearly planning to medium term, linking policy priorities with budget resources, improving comprehensiveness of budget, rationalization of the system of norms, introduction of the Treasury Single Account (TSA) system, improving reporting system. In overall, in the medium term, fiscal and tax policies shall be directed to macroeconomic stabilization, including financial sustainability, improvement of the fiscal balance, expansion of access to and improvement in the quality of social services, increased pro-poor orientation of public expenditures. These reform measures were grounded in the Public Sector Finance and Management Law (PSMFL), which was passed by the Parliament in June 2002. The Parliament has discussed and adopted the next year’s budget in a new manner not applied formerly consistent with the content of newly adopted laws.

• Budget financing and product payments are not dedicated for financing the budget institution, its staff and utility expenses, and will be provided in accordance with the performance results of their duties, tasks and subscriptions from the government.
• Budget expenditures and financing were distributed by expenditure items as well as by budget disposers or budgets were approved in bulk for each minister in charge of certain sectors.
• Next year’s budget financing will be made based on contracts on product supply and results.
• During the years, budget financing can be changed subject to operational result reports from budget institutions.
• Sectors located in the countryside but carry out nation-wide activities will be financed from the central budget under a contract not from the local budget.

3.7                 A tender selection process was initiated which led to the selection of 3 educational institutions to provide training to the civil servants at all levels on the new system for budget management. These institutions will conduct comprehensive on-site training and consultancy regarding the new system for budget management and involve about 8 thousand managers, general managers, and financial officers of 22 aimags and all the districts of the capital city for the period from May to July 2003.

3.8         These training events conducted at the local level will create the human resources capacity needed for preparing the 2004 budget proposal in accordance with the requirements set forth in the PSFML.

3.9         As set forth in the law on management and financing of budget institutions, a new principle of financing is applied on all levels of the budget – contract on product supply and  result agreement. As of the end of 2002, over 14.0 thousand economic entities operated in the capital and composed budget revenue of the capital; MNT 51.1-bil were mobilized to the capital budget and MNT 53.7-bil were spent on and financed operating cost of approx irately 500  entities in the field of education, health, culture, media, urban services and social order ending up with a budget deficit of MNT 73.9-million. Up to 2001 the capital city has had an independent budget capable to generate revenue to fund expenditures, however, in recent years the Ministry  of Finance and Economy while developing a draft budget makes constant adjustments to the capital city budget so that deteriorating the independent status of the capital city budget.

3.10    Under this law, budget institutions on all levels and general disposers of aimag and UB city budget will prepare quarterly and annual reports on product supply including which services, on which quality level, and how were performed using budget funds.

3.11    Mongolia is just starting the implementation of this new principle, thus we set out implementation targets as follows:

• At primary stage: fully comprehend the law concept, correctly define products, measure supplied products in proper criteria, learn to prepare reports correctly and in a timely manner.
• Secondly: Fully mobilize opportunities to deliver services at a possible low cost and highest quality, decrease the cost of products and services.
• The Ministry of Finance and Economy has developed several procedures and Government decrees related to the enforcement of the law management and financing of budget institutions and is preparing their enforcement, namely:
• Definition and approval of output types as set forth in the law on central budget;
• Criteria for enforcement and outputs monitoring specified in the concerned contracts;
• Regulations concerning establishment of Government contingency fund and its allocation;
• Defining and authorization to the organization on disposal of budget saving generated during the fiscal year.

3.12    The PSMFL aims to strenghthen governance within the  public  sector,  improve public sector performance, and clarify the roles, processes, and regulations governing the public sector performance. In accordance to the PSMFL the amendments were introduced into the concerned laws and legal regulations. The recent session of the Parliament ammended 78 laws, including the fundamental changes into the Consolidated Budget Law. According to the new system a series of and forms and regulations were adopted, namely Output contract, delegation of authorities, reports on outputs with concerned intsrutions, determinind of types and cost of outputs of public entity, business plan with comprehesive portfolio. All these regulations    lay foundations

for the deepening of public sector reforms aimed at improving public sector service delivery, its transparency and accountability.

3.13    If the major external shocks would not occur the fundamentals of macroeconomic stabilization will be maintained. Especially fiscal and public restructuring policy measures undertaken are conducive to the macroeconomic stability. The government has defined the following objectives with respect to the tax revenues for the purpose of ensuring the macroeconomic equilibrium for 2004-2006:

• To appropriately define the level of interdependence between economic growth and budget revenue; to intensify the tax imposition, collection and control within the legal framework; to further consolidate the progress of the last few years in terms of ensuring ongoing flow of budget financing;
• To relate the budget revenues and tax relations to the Civil Service Reform activities as well as the measures to be taken in the mid-term regarding the government’s social policies and the need to ensure budget balance and stability;
• To implement measures to reduce the tax burden on the economy and the population to the reasonable level without following the tax policy consistent with the state budget revenue increase.

3.14    The percentage of budget revenues in GDP expected to be 37.4 percent in 2004, dropping to 36.3 percent in 2005-2006. In this connection, the following measures will be taken within the mid-term budget framework in the next three years with respect to taxation:

3.15    The tax burden on the economy was 29.2 percent according to the 2002 actual and the policy will be pursued in the next three years to maintain it at this level. The income from social insurance fee payments will be calculated in relation to the personal real and cash income growth and the activities to improve the level of employment. Thus in 2004-2006 it is expected that the personal revenues will increase by 15 billion MNT or by 27 percent compared to 2003. A  system will be devised by which an excise tax is to be increase on cigarettes and it is expected that as a result the tax revenues will increase by about 3 billion MNT from 2004. It is expected that the revenues from land fees and payments will increase to a certain extent with the  beginning of land privatization. The policy towards reduction of the higher rate of the corporate taxes will be reviewed and introduced since 2005 only if the accompanied by offsetting current expenditures cuts. This will as an initial step towards unification of the corporate tax level.

3.16    The restructuring in the social sector will be undertaken in accordance to the Main guidelines on restructuring and privatization of social sector adopted by the Parliament. The list of social entities to be restructured in the medium term is approved by the Cabinet.

3.17    Fiscal sustainability: The fiscal sustainability is a key for the macroeconomic stability. Years of 1997-99 were a period of lower revenue accumulation due to poor tax policy, business collapse, external shocks, and Asian financial crisis. In  addition  the  public  expenditure management was poor, in particular in area of expenditure control and wage policy. In overall the budget performance was poor with large fiscal deficit and instability. The general structure of the Mongolia’s budget for 1993-2003 was as follows:

Table 9. Macro fiscal performance, 1993-2003 (as a percentage of GDP)

*plan

3.18             Mongolia has attained a remarkable success in reducing the budget deficit in last 10 years. In 1994 the budget deficit constituted 19.8 per cent of GDP; however we managed to reduce it in succeeding years down to 6.0 per cent in 2002. Although the current expenditure of the budget was increasing in terms of amount and percentage in the total expenditure, direct subsidies to state-owned enterprises had been reduced 3 times in 1995-2000.

Figure 3.1:  Fiscal Trends

3.19             Since 2001 the government started fundamental changes in area of public expenditure management with aim to enhance tranparency, accountability and improving service delivery. As an outcome of implemented policy actions on fiscal sustainability from 2001-2002, the fiscal macroeconomic indicators were improved, current budget was with positive number and expenditure financing supervision was upgraded.

3.20             As a result of efficient measures and actions undertaken by the Government on ensuring the fiscal sustainability, improving tax collection process and implementing rational tax policy, the fiscal sustainability has been improved from the second half of the 2000, access and quality of public services has been improved. The newly established Government (August 2000) undertook a series of decisive measures to improve the tax collection, repayment of domestic and foreign arrears, enhancement of fiscal discipline. As the first step the government repaid lending to the Mongolbank worth 12 billion togrogs. Further, as result of the above measures the arrears in wage bill of 8.2 billion togrog was retired and inter-agency arrears were reduced substantially. By the end of 2002, 16 aimags out of 21 have nullified their arrears. The Public Sector Financing and Management Law was adopted by the Parliament in June 2002 and enforced from 1st  of

January of 2003 in order to speed up fiscal reforms. 2003 budgeting was drafted according to the Public Sector Financial Management Law and start from 1 January 2003 the budget is enforced. The VAT has been increased by two points reaching 15.0 percent and enforced, and excise tax  on alcoholic beverages and tobacco products has been increased by 50 percent as  well  as customs tax by two points reaching 7.0 percent (The customs tax is being enforced within one year).

3.21             The intergovernmental transfer system was modified based on new equalization model: of 80 percent of excise VAT and 50 percent of special excise tax centralization and a reallocation based on various criteria. Key indicators of last 5 years of the capital’s budget and finance show that tax collections from corporate and individual income taxes have been increasing from year to year, but with the amendment into the Taxation law effective 2001 most part of VAT, effective 2002 corporate income and excise taxes, and effective 2003 individual income tax collections are mobilized to the central budget changing the budget structure of the capital and leaving its with a less budget base. Under the law on administration and financing of budget institutions, General portfolio manager of the capital or the Mayor shall bear the  following duties and mobilize funds required for performance of his/her duties from local sources:

1. Enhance infrastructure of local property, do road maintenance
2. Ensure the smooth running of water supply purifying facility
3. Take environmental protection measures and do furnishment, expansion and reform
4. Build flood barriers, fight against soil wear
5. Ensure the public sanitation, remove and destroy trash
6. Protect from fire
7. Destroy damage-causing animals
8. Fight against animal decease and deceases transferred from animals to humans, take preventative measures

However, education, culture, health, labor, social welfare, social security delivery and prevention measures are being supplied to the Government on a contractual basis under a new structure. Under the structure, the capital budget revenue is comprised of revenues with limited source that are imposed on one specific object such as immovable property tax, vehicle tax, stamp duty, land payments, rent for utilization of water, forest and minerals. This reflects the requisite to take actions towards identifying additional sources of revenues and expanding the tax base.

3.22             As a result of the measures aimed to maintain macroeconomic stabilization the macro fiscal indicators for 2001-2002 have improved substantially. The following Table describes the financing gap filling for the period of 1997-2003.

Table 3:1:  The ‘Financing Gap’ as a Percentage  of GDP

*Plan

3.23           As indicated in the Table 20, the fiscal deficit for 1997-1999 was primarily financed from the external resources, namely financial loans. Domestic resources, such as loans the banking sector, especially from Mongol bank were also utilized. Due to over reliance on the domestic sources for financing the fiscal deficit, the “crowding out effect” took place. However, the Government’s initiative to reduce the government credit from the banking sector and to finance the monthly and quarterly deficit through issuing short-term bonds have successfully implemented in 200-2002. The fiscal deficit for 2002 was financed, basically from the external project loans, extended to the Government of Mongolia on a concessional basis.

3.24           Based on EGSPRS and preliminary consultations with IMF, key indicators of the budget in its mid-term projection for 2004-2006 are projected to be on the following levels provided Mongolia’s GDP growth reaches 5.3 percent in 2004 and 5.5 percent in 2005-2006:

Table 3:2.  Fiscal Projections Outline as a percentage of GDP (Base Case)

** Expected Outturn

*** MTBF

3.25            In the mid-term, total budget expenditures and net lending to GDP ratio will be reduced steadily. For instance, by 2002 total expenditures constituted 44.8 per cent of GDP, which is targeted to drop to 43.3 per cent in 2004, and 41.8 in 2005. This will be attained through the following measures by the Government:

• Restructure some self-sufficient units of education, health and culture sectors into self- financed institutions, transform them into state owned entities, or contract out some services, and privatize;
• Carry out the civil service structural reform in phases, downsize the Government expenditures;
• Reduce subsidies to state-owned entities;
• Optimize the ODA utilization, in particular improve targeting an efficiency of loans extended from donor countries and international financial institutions, as one of key factors of economic growth through amendment the existing legislation on foreign investment and loans, and maintain debt level of Mongolia at manageable ratios.

3.26            The surplus of the current budget was 4.4 percent in 2002, and this will be kept above 4.7-5.4 percent in 2004-2006 for potential funding of domestic investment. The overall budget deficit will not exceed 5.9 percent of GDP in 2004 and 5.5-4.5 percent in 2005-2006.

3.27 Resource allocation.   The credible public sector policy flow  from  a     consensus of policy priorities with budget and official development assistance allocation. Therefore the Government Action Plan considers being a primary policy document which identifies the main directions of policy for the medium which were transferred into the sectoral strategies, projects and programs. The current fiscal reform aims to strengthen the linkage between policy-making with budget allocation, in particular with focus on pro-poor measures.

Table 3:3:  Budget Allocations to the Social Sector

3.28   Since 2000 the Government has focused its attention on the education sector, thus providing to one child of poor and herder families with free university education and dormitory fees, improving the educational environment, the budget allocation for this sector has been increased during last three years. The education and health sector financing is planned based on the expenditure norms per student or service person, and the financing of schools with many students is done sufficiently. These norms have been in force since 1998 and depending on the price changes, they have being increased annually. Despite, there are some cases when the allocated normative expenditure is not sufficient and lack of in remote schools with a small number of students and in soums hospitals with a small population. It is a common situation  when children of wealthy families with a large number of livestock go to study in province and capital schools, whereas, the children of poor families stay to study at soum schools. Therefore, the expenditure allocation must taken into account and be advanced, while children from poor families will be given an opportunity to study and health services for poor improved. In the medium term, the share of education and health sector to GDP will be increased gradually as result of comprehensive public sector reforms. This will be an opportunity for poor and mid- level people to raise their income resources, thus building a basis for poverty reduction. Although, there is a need to increase the pension rates, the government will not grant any pension increase for short-term, but in 2004 the government will expand options to rationalize public expenditures and increase pension’s level not more than the inflation rate. In addition the government will continue pursue policy of insurance, in particular pension reforms in terms of coverage and level in accordance to the employment expansion. The measures to secure individual pension account funding will implemented. In the medium term the policy will be re- oriented more towards pro-poor directions. Therefore, in the medium term the ratio of education, health and social welfare expenditures to GDP will be increased slightly with clear shift of resource allocation in line with policy priorities.

3.29   Despite that financial capacity of UB city has being strengthened there are still constraints to finance the renovation and modernization of engineering facilities and premises of public transportation, urban service, lighting, education, health and social order protection institutions the facilities of the city have become obsolete accumulating many pressing problems related to economic, social and urbanization issues.

3.30   The health sector financial sustainability depends not only on rational allocation of budget resources, but on efficiency of the Health Insurance Fund functioning, because majority of its financing are premiums paid by the government for the vulnerable groups, including low income people, invalids, children and elderly.  However pro-poor allocation resources under  the

Health Insurance Scheme are an essential element of financing reforms in the health sector. So for the medium term the challenge is to use resource more efficiently without undermining the quality of service delivery and target spending more towards poor.

3.31   Cash transfer programs under the Mongolian social protection system are one of the old structured payments in terms their administrating and targeting. Currently 18 percent of public expenditures transferred to population as pensions and benefits. However, despite this high ratio the amount per capita is very small due to poor targeting. The average pension is around US$ 22 per person, which can afford the minimum living standard only, while the  average benefit is even much lower with wide coverage. So for the medium term the policy priority will be centered on pension reforms and cash transfer system restructuring based on household support type.

3.32   In addition to pro-poor programs income gradation system was expanded: people  with an income less that 36000 tugriks were not imposed by tax and this level was extended up  to 48000 tugriks in order to increase the income of the population and people with low income. Moreover, it is decided not to impose a tax on bond share benefit, apportionment income and savings interest rate income from 1st January 2005.

3.33   The fiscal sustainability and transparency are major requisite for reaching objectives announced from the Government such as ensuring macroeconomic stabilization, facilitating economic growth and reducing poverty. An objective has been put to keep the budget deficit at 6 percent and less. In the medium term, the fiscal and tax policies shall be directed to macroeconomic stabilization, including financial sustainability, establishment of a favorable environment for developing private sector, improvement of fiscal balance, expansion of access to and improvement in the quality of social services, increased pro-poor orientation of public expenditures. With the purpose to establish an efficient budget expenditure system, the Government is working in cooperation with WB and ADB on formulating a comprehensive plan for public sector reform, which information is based on WB public expenditure management review. An intensive implementation of the medium term budget reforms will enable improvement of budget planning, raising efficiency of fiscal expenditure and, consequently, releasing public resources for low-income people.

3.34   Improvement in the access and quality of public services, and ensuring fiscal sustainability in the are the main expected outcomes of the public sector reforms which are underway. The public sector reform will comprise of 6 components, namely, treasury management, budgeting, accounting and reporting, output based management and auditing. The legislative basis for the reform is the Public Sector Finance and Management Law, the Law on the Consolidated Budget and other legislative acts and programs issued in conformity with the above. Implementation of these laws and programs will enable improvement of budget planning, raising efficiency of fiscal expenditures, consequently releasing public resources for low-income people and enabling implementation of pro-poor policies. The support of international organizations, donors is important to implement the above laws and regulations, and reforms.

3.35   Fiscal reforms. The Fiscal reforms were not fully undertaken during 1996-1999. Several important measures were undertaken during 2000-2003. First of all, in order to ensure  the transparency and reporting of fiscal expenditure financing, the Treasury Single Account

system was introduced to budget entities. “Zero balance” accounting system was piloted in 10 state organizations. In area of reporting the monthly reports are produced in accordance to GFS methodology. The preparation for the procurement of the comprehensive program GFMIS is underway. The Government is drafting a comprehensive program to implement the public sector reforms, including civil service reforms. From 1 January 2003, the line ministries have started to use outcome-based agreement on experimental basis.

3.36   The primary objective of the fiscal reforms is to reduce unproductive current expenditure based on improving budget formulation, monitoring and execution, undertaking credible civil service reforms, improving service delivery with a pro-poor orientation, and enhancing transparency and accountability. To improve transparency and accountability, contracts for public works, such as road building and major infrastructures, will avoid exchange- based financing arrangements such as the granting of mineral extraction rights in return for construction work.

3.37   The tax reforms aimed to utilise the tax as a powerful mechanizm for economic growth support, optimizing demand and supply side of the economy, rather than revenue accummulation tool. The tax reforms implementation is focused on expansion of tax base, reduction of various tax exemptions and holidays and creation a fair environment for the tax payers.

3.38   Within the framework of the Regional development concept the intergovernmental relations will be optimized to reduce rural and urban development disparities  and  support income generation and service delivery for rural residents. In this regard the local government accountability and civil socity participation will be enhanced.

3.39   The new fiscal system  based  on PSMFL creates incentives for budget managers to  be involved in the whole budget cycle, including formulation, execution, monitoring, reporting. Moreover, the process improves link between budget and sectoral policy priorities with focus on pro-poor orientation.

3.40   Reforms in reporting system are implemented through introduction of GFS methodology and procurement  of GIFMS.

3.41   Medium Term Budget Framework is powerful tool to enhance fiscal governance to manage poverty reduction efforts in the country. It becomes a center for the public finance management. Medium Term Budget Framework (MTBF) – an efficient mechanizm to link  policy priorities with financial resources allocation and accountability. The institutionalisation and development of adequate MTFE is long term process which requires capacities and commitments from all budget executors. The PSMFL is a legal background for its development, adoption and implementation.

3.42   As the priority measures the Government has initiated a formulation and approval of the Medium-term Fiscal Statement (MTFS), which is an essential part of the MTEF. During last 2 years the Political Steering Committee as an governing body for MTFS approval, which now legalised as  the Parliament.    Development of accurate forward estimates is another  component

of MTEF, which requires capacity building among policy makers. Another area of concern is building of capacity to manage an efficient allocation of resources in line with policy priorities.

3.43   Fiscal expenditure management Within the framework of fiscal reforms, the fiscal expenditure management, which was within the responsibility of the Ministry of Finance and Economy, within the city and province Governor’s office, has been transferred to sector management and commenced its activities since 2003. The fiscal expenditure management reform has been restructured in such a way that ministers of branch ministries have become the General budget managers and have the right to formulate and utilize the budget, thereinafter, to establish an output based contract and to finance delivered products and services. From February 2003 the finance and economic units were established within major ministries incorporating with budget planning and financing through sector ministries. In the medium term, according to the Public Management and Finance Law, the Ministry of Finance and Economy and General budget managers will have the right to monitor financial and non-financial operations of budget organizations and evaluate their performance. Action will be undertaken to build and strengthen the capacity of General budget manager and their working units during 2003-2005.

3.44   As part of the public sector reform, in the medium term the Government will improve the management and efficiency of public expenditures, based on output based evaluation. Within the framework of these actions, the Government will work to strengthen public expenditure management by undertaking civil service reform, commercialisation of the some social services, reforms in the social insurance and pension systems and further detailing the financing standards. In order to maintain the achieved level of financial sustainability the government and monetary authorities will rule out any quasi fiscal activities and granting an increase of civil servants  wages unless the crediable civil service reforms with comprehensive human resource management data base will be introduced. In addition evaluation criteria and feasibility analysis for foreign and domestically financed  projects will be enhanced.

3.45   The Ministry of Finance and Economy and General budget managers (Other  ministries and heads of local governments) are required to produce detailed plans, prepare a set  of manuals with specific rules, regulations and implementation guidelines for the  implementation. The key priority is strengthening of the capacity of all relevant civil servants regarding PSMFL implementation, output delivery contracts for each ministry and organization, its monitoring, analysis and evaluation.

3.46   Sequencing of reforms process: Implementation of the Public Finance and Management Law and the public sector reform will be carried out in three phases:

• Preparatory phase
• The first phase: Introducing output-based management system
• The second phase: Transfer of authority.

3.47   An appropriate determining of actions of reform process in the public sector reform and their sequencing is essential element of improving of public expenditure management, making the civil service more compact and more capable, and improving the access to and the quality of the public service.

3.48   In the first stage of budget and financial reform, the medium term budget statement will be formulated in 2003. It is planned to draft a full fiscal reform strategy from 2004. Within the framenwork of above two actions, public service reform program will be drafted. Moreover, depending on the capacity of business entities in education, culture, health and social welfare sectors to restructure social sector, intensification of reforms and financial independence, these entities will be commercialized.

3.49   The Government will define detailed asset and financial calculations as well as local and foreign resources required for public sector reform strategy. In connection with the implementation of public sector reform, the transfer of authority will be implemented in the next stage.

3.50   Government procurement. One of major changes occurred in the Government’s scope of duties was the purchase of goods and services needed by the public sector from the open market under contracts with the private sector.

3.51   With the transformation of Mongolia into market economy in 1990, an urgent need to build a public sector procurement system consistent with the market economy was on the table. Issues of efficient, economy-wise and transparent spending of tax payers or public funds, mutual reporting on spending, and improving liability principles covered all areas of social life facing requests and requirements from the community.

3.52   In order to regulate this issue, a procedure was adopted by a joint resolution of Finance and Infrastructure Ministers in 1996. However, the procedure was used only in selection of construction work contractors plus it could not become a common procedure for all line ministries – adopted only by Ministers of Finance and Infrastructure. Government organizations were making their procurements from a limited range of vendors which was in breach of the principle of efficient, economy-wise and transparent spending of public funds.

3.53   The Government of Mongolia in cooperation with ADB started a reform of Government procurement in 1999 with a purpose of establishing a system that provides saving, efficiency and fairness in state and local funds spending and ensuring the fair and transparent operation of the Government.

3.54   In order to build up a foundation of this brand new system, introduction of which is being started nation-wide, three key goals are being implemented in phases at first hand. Firstly, establishment of a legal framework for regulation of government procurement consistent with the market economy. Secondly, build up the capacity of government organizations to do procurement. Thirdly, establishment and enhancement of the management, monitoring and regulation structure.

3.55   A law on selecting contractors of goods and service to be procured by state and local budget funds was adopted in April of 2000 by the Parliament and entered into force in May of 2000. Key law enforcement procedures such as the Special Procedure on Selecting contractors, Special Procedure on Selecting Consultants, Ethical Norms of civil servants involved in procurement were adopted by Government Decree No. 1001 in June of 2000. In 2001-2003 6 more procedures have been adopted. In addition the Minister of Finance and Economics has

approved 15 procedures, instructions and standards. These procedures are inevitably necessary in enforcement of the law.

3.56   Thereby, a legal framework for public sector procurement consistent with international standards was established in Mongolia backing up the principles of efficiency, economy, transparency and fairness in spending of budget funds. Methodological, technical, management and organizational issues of efficient organization of tender selections was defined on a professional level.

3.57   The law on management and financing of budget institutions adopted with the purpose of facilitating the budget reform and changing the budget expenditure into an efficient form stipulates that government procurement shall be carried out under selection, which re- confirmed the importance of the law.

3.58   Although the legal environment was provided the Government did not have personal capacity - trained and experienced in government procurement and to enforce the operational laws and procedures – in place like other countries transiting from the socialist economy to a market one. This has resulted in misunderstanding, mal-enforcement or non-enforcement, inability to apply the laws, miss-selection of contractors, thereby increasing the government cost, prolonging the government project implementation, disgracing of the government reputation among the public, and violation of the laws due to intentional actions or lack of knowledge and skills.

3.59   In order to enhance the capacity of civil servants, the Government adopted a mid-term training program for government procurement in September of 2001. Under this program, elementary and intermediate level training was conducted in 2001-2002 for relevant staff in all government organizations. The training in-depth covered technical issues such as new procurement structure, basic info on the legislation, procurement methods and techniques, preparation of tender documentation, organization and assessment of tenders, granting the authority to make contracts. Under the program, higher level training will be conducted in 2003.

3.60   The Ministry of Finance and Economy is taking measures to improve the technical and personnel capacity of subscribers, attaching more importance to developing a transparent  and efficient information database. The database is directed towards implementing projects of subscribers, especially upgrading the organization and monitoring of procurement, data processing, and autoimmunization of and making exchange systems more reliable. Within this task, the following software has been developed in collaboration with ADB project.

1. Launched a website of government procurement
2. Developed a registry software of suppliers and contractors
3. Developed a monitoring system for procurement, initial version of project management database software.

3.61   The Government is giving a great importance to building an optimal management, regulation and monitoring structure consistent with the new system. The Procurement Policy and Regulation Division  is set up under the Ministry of Finance and Economy by government decree

No. 75 of 2001, with main duties to develop procurement policies, provide professional and methodological management to contractors, ensure and monitor the law enforcement.

3.62  The division is a qualified unit in charge of policy and regulation matters of government procurement and should assist in meeting objectives and provide necessary policy recommendations to the Minister of Finance and Economy with regard to issues assigned to him under the government procurement law.

3.63  One of duties of the division is a resolution of complaints regarding contractor selection on the prior-to-court level. However, the fact that the department is under the law enforcement structure poses a conflict in performing the above duty. Thus with the purpose of enhancing the monitoring of law enforcement and strengthening the status of the division it was moved to direct supervision of the Minister to be in charge of procurement policy development by a Finance and Economy Minister resolution from October 1, 2002.

3.64  In the future, there is a need to enhance the organizational structure, status, functions and personnel of the unit. As a result of the above mentioned measures, most organizations in all government levels are implementing the law. According to a survey of MOFE, government organization have organized 1,371 tenders and procured MNT 328.7 billion worth of goods and services in last 2 years.

Table 3:4:  Performance Indicators

3.65  The above table shows that government organization saved a total of MNT 13.8 billion in their procurement. Subscribers have gotten accustomed to procure construction and road works, building renovation and rehabilitation, equipment, medicine, and uniforms through tender selection. Tenders by sectors were as follows:

Table 3:5:  Procurement Values

3.66  Although it has been 3 years since the law adoption, its enforcement does not meet the requirement. In the enforcement of the law, it is difficult to fully enforce it in some sectors and organizations, and there is a need to update the law. On the other hand, the procurement legislation is good as it is consistent with international standards and covers key procurement principles; however, its weakness is management, organization, monitoring and liability structure of procurement is not provided clearly. These weaknesses pose problems in the successful implementation and monitoring of the law.

3.67  The fact that the enforcement of the law could not reach the desirable level is on one hand related to knowledge and skills of government staff and organization of procurement, but  on the other hand there are some problems and difficulties encountered in the enforcement as  well as the above-mentioned weaknesses of the law.

3.68  Thus the following measures have to be taken in order to improve procurement system and make procurement activities efficient and transparent:

• Enhance the legal environment of procurement;
• Amend the law and make it simple. The existing law stipulates the rate and ceiling price for procurement which lessens the law’s flexibility;
• In-depth indicate the management, organizational structure, monitoring and liability implications;
• Update procedures and regulations that should accompany the law. Ensure the law’s flexibility with amendments to procedures and regulations;
• Clearly define the tender committee, its composition, structure, operating principles, and liability.

3.69   In order to ensure the law enforcement and upgrading the monitoring mechanism, upgrade the status of the procurement policy department in charge of procurement policies and regulation with main duty to monitor the law enforcement and transform into an independent professional office.

• Intensify actions to improve the capacity of staff in government organizations.
• Regular training for procurement staff, abroad training to strengthen their knowledge and skills.
• Include a discipline of Government Procurement in the curriculum of state officer’s re- training and universities.

3.70   In 2001-2002 the Government of Mongolia has procured MNT 90 billion worth of goods and services through tenders using loans and aids from donor countries and international organizations. The lack of knowledge of procurement procedures of respective donors of Government staff conducting procurement with donor funds is resulting to prolonged procurement time and delay of project implementation. Furthermore because donor countries and international institutions have own procurement procedures government procurement staff lose time to learn these procedures posing difficulties in efficient and timely running of procurement activities. The main reason why Mongolia is in the lowest place in Asia Pacific in terms of donor funds utilization level and the implementation of projects is extended for a longer time is that procurement is not done according to the plan. Thus in order to solve this problem government staff should be taught the procedure of donors and procurement procedures have to be unified to ensure the timely implementation of projects.

1. Treasury Management

3.71   The Mongolian Government Action Plan states that “the system of cash management of the Treasury will be improved”. Prior to 2000 the Treasury unit was operated at the ministry  of Finance, however the different ministries and commercial banks administrated treasury main functions.

3.72   Due to inadequate quality of budget performance reports or failure to meet the reporting deadlines, the requirements set at decision-making were not met. In addition the functions of the budget formulation and execution were administrated by the Fiscal Department of the MOFE, which undermined accountability and transparency of fiscal activities.

3.73   Financial transactions of public (budgetary) organizations at the central and local levels were made through accounts opened at different banks lead to the poor monitoring and reporting, which lack coordination of payments resulting in accumulating of external and internal arrears and dependency on banking system.

3.74   Due to poor reporting system including a multiple accounts for public entity  in various banks, poor technical capacity of MOF and other budgetary bodies the annual budget reporting was delayed, in some cases the annual reports were consolidated in September-October with subsequent discussion at the Parliament in November. The delayed reports were useless for utilization in policymaking process.

3.75   The public entities have had a multiple number accounts at various banks without any permission or monitoring by the MOFE.

3.76   The account census of 2001 showed that out of total 5475 organizations, 1192 organizations hold more than one account, and this accounted for 21 percent of the total number of organizations. Public entities with more than 5 accounts comprise 11.6 percent or 139 organizations.

3.77   A tendency to overspend the budgeted funds for unplanned measures by budgetary organizations seems to become a customary and conventional practice. For instance, as 2001 budget performance indicated, the expenditure for purchase of furniture and the like exceeded  the planned amount by 4 times, and twice as much as planned was spent for repair activities.

3.78   The PRGF program concluded between the government of Mongolia and the IMF  puts greater emphasis on establishing a treasury system, which aims to introduce centralized payment system based on the Single Treasury Account (TSA) principles.

3.79   Based on IMF recommendations the system was introduced on phased manner with pilot period at 11 entities. The legal background was the cabinet decision Number 132 of 2001. The piloting indicated that “zero balance” account system is contradicted with Mongol bank regulation on “Interbank clearing procedure”. Therefore the centralized ledger system was introduced as a base for the TSA in Mongolia. The main aim of the system is establishment of an efficient treasury system with the core principle of unified, centralized payment and settlement relying upon the system of STA. It means that public funds are secured from various risks and prevent the unplanned expenditures.

3.80   Within framework of the fiscal reforms and government cash management the Integrated treasury system and structure has been established nationwide as of July 1, 2002. The treasury system structure encompasses the Department of Treasury Management and Coordination at MOFE, treasury departments at the municipality, aimag and district governments and treasury representatives in soums. The structure covers 331 soums of 21 aimags and 9 districts of the city municipality with total number of 2660 public entities. The TSA came into effect by closing the numerous accounts of budgetary organizations at commercial banks and opening under their respective names a current account to counteract with the Government’s central budget.

3.81   Under the government decree of Mongolia Treasury department was established and  is carrying out its activities in UB and districts effective from July 1, 2002. With the transition to the centralized treasury accounts system, a possibility to utilize the idling balance in budget accounts was provided enhancing the accounting control. This has produced relevant results in upgrading the bookkeeping quality of municipal finance, ensuring the enforcement of the law on budget and other legislation, reducing inefficient cost by enhancing the budget discipline, elimination of room for emergence of new arrears and debts, halting the financing of unplanned expenditures, and eliminating over-spending of the budget.

3.82   The new system shall see to preventing excessive concentration at the MOFE the power of decision-making on fund/financial allocations and shall strictly abide by rights and

powers granted by legislation.  A treasury department shall be established in the structure of  local state administrative organizations, and the local governments shall preserve their powers granted by budget law to approve, dispose, discuss the performance of and make decisions on its budget.

3.83   Since November 1, 2002, “Oracle” payment and settlement system has been installed at treasury departments and offices of 21 aimags, which are connected to the central treasury on  a Dial-up regime.

3.84      The main progress of transferring to the TSA can be summarized as following:

• A direct control of whether the tax revenues to the state central and local budgets are spent within the framework of the budget law has become possible. This creates possibilities to eradicate non-planned expenditures, budget overspending and abuse of budget funds.
• Conditions have been created for improving fiscal/budget planning. The need for budgetary organizations to realistically assess needs and correctly determine their income and revenues has emerged. In other words, we now have clearer understanding about the mistakes and errors made in the process of budget planning.
• Conditions have been created for timely, prompt and accurate issuance of budget performance reports and data. Basically, it becomes possible to process and release monthly budget performance report for budgetary organizations directly at the treasury.
• Fiscal cash planning and management have dramatically improved. The account balances of central budget organizations are now being used for ensuring the implementation of  the budget.

3.85   The full TSA creates an opportunity to full computerization of fiscal operations. So local authority have expressed concerns not to increase the number of staff, but their capacity to deal with book-keeping and reporting using computer software.

The following measures desired to enhance TSA transferring for the medium term:

1. Extending all government accounts to TSA in BOM will be completed

• Social Security Funds
• Government agencies
• Special accounts for international loans and aids.

1. Effective cash management system will be fully implemented

• Improved planning
• Financial asset and liability management
• Budget allocation based on procurement of goods and services

1. Budget control will be improved

• Increased accountability of budget general governors for budget preparation and execution
• Significant step to improve financial reporting and internal control of budget entities
• Improved commitment and expenditure control

1. Accounting practices of budget entities will comply with international standards.

• Reporting financial assets and liabilities
• Audited financial statements
• Revaluating real assets
• Cost accounting

1. Treasury information system will be implemented

• Extending information system to possible soums
• GFMIS to central and local Treasury offices
• International remittance will be implemented by the first quarter of 2003
• Treasury divisions in soums with reliable power resources will be connected with aimag Treasury divisions from April, 2003.
• Budget entities will be connected with Treasury offices to make banking and payment transactions
• Prior tasks to implement online payment processing system will be completed
• Possibility of cash transactions in local level will be studied as to prepare proposal.
• Payroll system should be changed to introduce

3.86   These arrangements will be implemented to strengthen TSA as to improve transparency of budget expenditure and reporting. Thus, reporting of money spent of poverty  will be transparent and resources will increase.

3.87   The above mentioned objectives will be fully adopted by the UB city municipality, in particular the whole budgeting process starting from budget planning and up to review, adoption, funding disbursements, spending and reporting will be inter-related through the single treasury management system. In addition, manual operations will be reduced and public participation in the budget execution and enforcement of financial legislation will be expanded, leading to transparent monitoring and implementation process.

1. Balance of Payments

3.88   Trade balance. Our trade balance was positive only in 1997, but in all the other financial years it was negative. Until 2001, the trade balance was calculated with 10 percent adjustments on import value. However, this adjustment factor was reduced to 5 percent for 2002 data, and it will be eliminated from 2003 to reflect the ongoing improvement in the coverage of import data by customs.

3.89   The percentage of exported goods and services to GDP was the highest in 1993 and equaled 93.1 percent, whereas, the import equaled 96 percent. In consequent years this percentage was steadily falling reaching its lowest level in 1995 when the export was 43.7  percent and the import reached 44.8 percent. Further trend shows that the both import and export has increased, however, the import has risen at faster pace than the export. Preliminary estimates indicate that the export and import equaled 63.9 percent and 85.4 percent of GDP accordingly in year of 2002.

3.90   The percentage of trade deficit on our goods and services to GDP has been increasing significantly in recent years and it has reached its highest level of -20.6 percent in the preliminary estimates of the year of 2002. In 1997 the percentage was 2.6 percent and positively contributed to GDP. The positive international economic environment and the high revenues from our main exported goods such as copper /$211.4 million USD/ and gold /$117.0 million USD/ are the direct contributors to higher GDP. However, in the recent years the export of our traditionally exported products has reduced and the international market prices as well as the demand for our main exported goods, which make up the most of our export, has decreased causing lower export revenues. In addition, by becoming a member of World Trade Organization, we adopted the policy of trade liberalization, which also encourages foreign investments to increase productions and to develop domestic infrastructure. This policy has increased the level of import further increasing the trade deficit.

3.91   In 1993 the service turnover was 55.5 million USD and increased to 107.5 million USD in 1997 and to $378.4 million USD by the preliminary estimates of 2002, 3.6 times more than 1997. Liberalization of the economy, increase of tourism, development of communication sector, insurance, financial services as well as passenger and air transportation sectors are the main factors of the increased service revenues.

3.92   The number of people studying abroad has increased. They usually work during their spare time fulfilling not only their needs but also their families at home by wiring funds to them from overseas. Improving their standard of living by working abroad has become common today and number of personal money transfer has increased. The financial institutions such as banks were quick to offer new services for these new customers. As a result, the statistical and financial reporting of such institution has become more accurate and comprehensive. In the year of 2002, the total of 64.4 million USD was wired from overseas which was a very positive contributor to the increased standard of living from previous years, especially from the years  from  1993 through 1995 when personal money transfers were almost nonexistent and, in some occasions, were even negative. In the near future, it is estimated that the volume of official transfers from overseas will be stable, over $70 million USD a year.

3.93   These money transfers are recovering certain percentage of our cash flow deficit. Official transfers of $47.7 million USD, the lowest, was used 1997 and the aid of $107.4 million USD, the highest, was used in 2001. In all the other years, this non-returnable aid was pretty much at same level and it did not change much. The volume of official transfers is projected to decrease in the mid-term future estimates.

3.94   Personal money transfers along with foreign aid and other official transfers  are written as direct revenue. This practice is one sided and some economist argue that, in order to see the real value of foreign economic trade, these transfers need to be subtracted from current balance. In that case, the current balance comes out negative for the years from 1993 to 2002, except the year of 1997. For instance, it was -7.7 percent of GDP in 1993, 1.9 percent in 1997,  -

13.2 percent in 1999, and by preliminary estimates of the year 2002 this deficit equals -16.1 percent of GDP. In the mid-term future estimates the current balance deficit projected to be -11.5 percent of GDP in 2006.

3.95    The current balance with official transfers included has been positive for years from 1993 to 1997, except the year of 1996, and became negative starting from 1998 to this date. For instance, the current balance was positive 6.2 percent in 1997 and by preliminary estimates of 2002 it is at the level which decreases GDP, -9.5 percent.

3.96    The negative balance caused by the increase of international trade deficit even though the official transfer has increased. With the trade deficit of expected to level off in the period ahead it is expected to narrow the current account deficit to 6-7 percent over the medium term.

3.97    Capital account. The Government is currently working on reduction of national debt burden, assuring on-time loan interest payment through cooperation and talks with major lender countries. The Government of Mongolia is paying specific attention on improvement of management of foreign aid and loans. Analysis of the performance for last 10 years indicates that the capital account was negative during 1994 to 1995 and it reached $157.5 million USD in 2002. The capital account was $4.2 million USD while direct foreign investments equaled $7.7 million USD in 1993. If Mongolia utilized $60.9 million USD of foreign loans, the due payment on the major debt came out $21.5 million USD, the short-term capital equaled -$42.9 million USD. Whereas, in 1994 capital account was negative and it amounted -$39.0 million USD due to following factors. Namely, the due payment on the major debt was $52.3 million USD, short- term capital totaled -$52.8 million USD causing a significant increase of payment balance. The capital account equaled -$16.9 million USD in 1995. In addition, $18.7 million US dollars were channeled in from foreign countries and organizations as long- and short-term trade loans to private and other entities. The direct investments increased to $9.8 million USD. In 1996, the capital account was $41.3 million USD and Mongolia’s use of foreign debt increased to $84.2 million USD and payment on major debt decreased from previous year to $39.4 million USD. In 1997, the capital account became $27.0 million USD. The use of foreign debt reached its highest level, $142.2 million USD. Also, the short-term capital reached its highest level, -$77.3 million USD and it is bad indicator in the sense of being short-term. The capital account increased to

$128.6 million USD in 1998. Mongolia’s use of foreign debt was $101.2 million USD, the short and long-term debt to private and other entities from foreign countries and organizations reached

$21.2 million USD in 1998. Short-term capital reached $4.5 million USD indicating some stabilization in 1998. In the period of 1999 through 2001 the capital account was gradually growing from $69.1 to 109 million USD and reached its highest level, $157 million USD, by 2002.

3.98    Mongolia has disbursed 87.1 million US dollars of concessional loan in the year of 2002, which was allocated as follows: 23.4 percent went to economic development of communication sector, 1.8 percent to manufacturing and construction, 15.8 percent to mining industry, 1.9 percent to agriculture, 16.1 percent to transportation, 7.3 percent to energy and 22.1 percent to improvement of other sectors. 10 million USD was disbursed to public service.

3.99    In the current year $21.5 million USD was paid off for debt reduction, the most of which went to due payment to Russian Federation 19.5 percent, to Japan 13.9 percent   Germany

5.1 percent. Our country’s outstanding foreign debt balance totaled $984.9 million USD in 2002.

3.100          The most of the Government loans came from ADB 30.4 percent, The World Bank

16.5 percent, Korea 18.5 percent, Japan 16.0 percent accordingly and totaled to 84.1 percent of all used up loans.

3.101 Private and other entity’s short and long-term loans from foreign countries and international organizations equaled to $98.2 million USD.

Figure 3.2: Loan Disbursement

3.102 According to the reports issued by the Foreign Direct Investment Coordinating Agency, $172.5 million US dollars were registered to be invested in Mongolia. The companies with Chinese participation $134.8 million USD, with Korean participation $14.9 million USD and with Canadian participation $5.9 million USD accordingly has applied and been issued licenses approving the proposed capital investments. In the period from 1990 to 2002 there were 2399 joint- and independent companies newly registered, 387 of which registered in 2002 alone. Out of 387 newly registered companies 121 registered in trade and restaurant sector, 21 in tourism, 34 companies in construction sectors accordingly. 51.9 percent of all foreign investment is going to trade and construction businesses, another 23.1 percent to mining industry including exploration, research and mining itself. The volume of foreign investments has increased from 2001 due to government’s policy encouraging foreign investments.

3.103 Overall balance. The performance data for last 10 years indicate that only in 1996, 2001 the payment balance were negative, in all other years the balance was positive. The payment balance is being calculated by the IMF’s method utilizing the World Bank’s directions. In the future, the capital account values will be maintained without sudden changes and, with decrease of current balance debt, the total balance will be positive.

3.104 The payment balance deficit is compensated from foreign currency reserve and loans provided by IMF.

Table 3:6:  Balance of Payments, million US$, 1993-2002

3.105  Trade deficit projected to narrow gradually towards a level of 10 percent of GDP in the mid-term future. This projection is based on following assumptions such as stable growth of production, successful implementation of government policies and programs, expansion of economic and international cooperation, positive international economy and favorable foreign conditions. In order to increase export and to improve an infrastructure, the stable macroeconomics conditions need to be set. To set satisfactory domestic conditions it is essential to pay attention to the following:

• Setting a policy supporting export oriented, value added, knowledge and new technology based production
• Marketing exported goods, establishing market research, creating exported goods technology and information centers, improving research potential, involving private companies and supporting their inputs and initiations
• Improving credit management policy through enhancement of collaboration between Mongol bank (Central Bank) and other commercial banks
• Establishing favorable conditions for the external trade  activities through enhancement  of tax law enforcement, implementation programs oriented to explore new export markets
• Enhance enforcement of international standards to improve quality of products for the exports

3.106  To improve the management of capital payment balance account, more advanced debt management practice and better utilization of foreign aid will be initiated and implemented, especially the government and monetary authority will rule out any quasi-fiscal activities unless  it has been stated in the medium term investment programs and other related policy documents. The accounting / reporting system will be improved in line with international standards. To  better manage and regulate donors’ activities, legal environment for foreign official development assistance will be established as well as determination of development and external financing priorities will be optimized in line with fiscal and debt sustainability. Mongolia’s external sustainability is projected to be at the manageable if the debt and fiscal management practice will be improved in line with overall public sector reforms. In the medium term the foreign direct investments expected to increase. The country’s long-term development trend defining regional development views, integrated energy system development program, “Millennium Road” projects are becoming the fundamental documents defining main development priorities. The various studies suggest that tourism, transportation, communication, banking, insurance, professional and business service sectors are main potential areas for foreign investments, so in the near future more attention will be paid in outlining new policies and regulations to attract investors in these sectors of economic growth.

Table 3:7:  Future Outlook, 2003-2006

3.107 Challenges: It is difficult to collect information on volume as well as utilization of loans given to private and other entities by foreign countries and international organizations. To resolve this problem the private and public entities need to include information on the usage of foreign loans and total loan volume in their yearly financial reports. This information needs to be further processed, registered and summarized as a report.

3.108 Information on direct foreign investments is collected using the data provided by foreign trade agencies. Usually, the data is simply the registration records of licenses issued to the parties intending to invest. Therefore, it is hard to give precise estimates on foreign investments and to resolve this matter all involved parties need to collaborate with each other  and develop integrated information network.

3.109 The payment balance calculation is based on double entry method and based on the assumption that the total of funds coming in and out needs to be equal to zero, so is the forecast error. However, in the reality the errors do occur and the main reasons for errors are unfocused statistical data and lack of systematic data. For instance, the data provided by customs on the imported goods arising from foreign investment, aid and loans usually differ from the total registered. Even though foreign investments licensed before coming in, not all the investments come in to the county in actual amount specified in the license, so it also creates an error. Moreover, the serving statistical data is collected from limited circles. Besides, the loans from foreign countries and international organizations to private sector currently are not being registered completely.

3.110 External sector management. Like other developing countries Mongolia has been resolving pressing economic and social issues and creating conditions for ensuring the  sustainable living of the population using foreign credits and aid to cover the resource shortage faced in this phase of the country’s development. Since the 1990’s Mongolia has received a total of USD 2.1 billion credits and aid from foreign countries and international institutions, 48 per cent of which was concessional loans. Since 1991 to the end of 2002 Mongolia has received a total of USD 1.25 billion credits and paid USD 265.3 million for principal and USD 86.3 million for interest and fee payments.

3.111 As of the end of 2002, Mongolia’s outstanding principal debt due to foreign countries and international financial institutions amounted to USD 984.9 million, which is expected to equal to 88.9 per cent of GDP in 2002. Under international principles, the ratio of the NPV of external debt to GDP, which determines the debt burden, was 58.4 per cent at the end of 2002. Debt due to Asian Development Bank constitutes 37.4 per cent of the Mongolia’s total external debt, Japan – 22.7 per cent, World Bank – 18.3 per cent, Germany – 6.2 per cent, and International Monetary Fund – 4.3 per cent.

The growth of external debt of Mongolia in last 10 years is shown on Figure 4.

Chart 4.Foreign debt outstanding of Mongolia

( last  10 year)

1 200.00

1 000.00

800.00

600.00

400.00

200.00

0.00

1992    1993   1994   1995    1996    1997   1998   1999    2000    2001   2002

year

Note: All outstanding are compared with exchange rate for 31 December 2002

38.4 per cent of the total external debt of Mongolia is bilateral concessional loans, 57.3 per cent multilateral concessional loans, and 4.3 per cent IMF loans (Figure 5).

Chart 5. Structure of external debt outstanding

Multilateral concessional loan

57.3%

International monetary fu

4.3%

ateral concessional loa

38.4%

3.112        Mongolia has disbursed MNT 98.0 billion equivalent concessional loans from donor countries and international financial institutions out of projected MNT 104.6 billion in 2002. The disbursement rate of project loans was 98.5 percent of originally planned. In  addition  67.3 percent or MNT 65.9 billion of total loans disbursed in 2002 was classified as project loans, 16.1 per cent or MNT 15.8 billion as transport loans, while 16.6 per cent or MNT 16.3 billion as financial loans. Chart 6 shows the composition of external loans disbursed in 2002.

Chart 6. Loan disbursement by classification in 2002

Project Loans

67.3%

Transport Loans

16.1%

Financial Loans

16.6%

Let’s look at external debt outstanding of Mongolia by economic sectors.

Chart 7.The structure of foreigndebt outstanding at the endof 2002

(byeconomicsectors)

The? structure of social service

The structure of economic activity

Health sector 22%

Housing and urban service

31%

education

21%

Social welfare, poverty

26%

Energy sector

15%

transport

25%

Agriculture

4%

communication

8%

Other

29%

Manufacturing construction

8%

Mining

11%

3.113       The above figures present that majority of loans has been disbursed for economic related activities, namely transportation, energy, and mining to a greater extent.

3.114       External debt service. Mongolia has paid a total of USD 265.3 million for principal and USD 86.3 million for interest and fee payments to donor countries and international financial institutions as credit service fee for all loans obtained since 1991. The chart 8 shows the comparison of debt servicing payments converted from credit original currencies into USD at the 2002 year-end exchange rate.

3.115       It can be seen from the table that the debt service of Mongolia were very high in 1992-1997 as a result of short-term commercial borrowings at high interest rate in the beginning of the 1990’s, payments of which had been a significant burden. It is essential for Mongolia to not make commercial borrowings.

3.116       In 2002, Mongolia repaid a total of MNT 37.0 billion equivalent loans to donor countries and international financial institutions in original currencies, including MNT 12.8 billion (34.7 percent) for interest and MNT 24.2 billion (65.3 per cent) for amortization. The repayment increased by MNT 4.6 billion as the amortization of nine new loans started in 2002. Majority of the total debt service in 2002 was paid to IMF (25.0 per cent), Japan (21.1 per cent), Russia (18.7 per cent) and ADB (10.9 per cent). Mongolia has been repaying concessional loans issued by donor countries and international financial institutions on a timely basis.

3.117       An amount of USD 6.1 million due in foreign currency out of USD 10.2 million due in 2002 were paid to Russia as payment of current debt. Out of which USD 4.1 million to be paid in commodities was postponed due to tender issues in Russia. It was repaid early in 2003. As a result, Mongolia retired all external arrears in 2002. The external debt sustainability analysis of Mongolia indicates that debt levels are at the manageable level, however debt related issues are still remain one of main areas of economic management. In order to improve the external debt management, the Government of Mongolia established a Debt Management Division under the Treasury Management Regulation Department of MOFE in 2001. The division has created data base with all records concerning individual loans borrowed since 1990s with specification of on- lending agreements. Around 73 per cent or USD 912 million of government loans from donor countries and international financial institutions had been transferred on-lending arrangements.

3.118       Revenue from on-lending agreements plays an important role in repayment of external debt. However, the principle of recovering external debt payments from repayments of loans extended under domestic on-lending arrangements is not sufficient. As a result, the repayment has improved delivering USD 5.5 million repayments in 2002. Under World Bank Fiscal TA, an international tender for debt management accounting software was announced in 2001. UNDP has been qualified in the tender and signed a contract in June of 2001. UNDP started the installation of Debt Management and Financial Analysis System /DMFAS/ in September of 2001, which was accompanied by a consultant. During the initial phase of the

project all data had to be input; the task was accomplished during the period of 8 months. By  May of 2002 the database was preliminarily completed. UNDP counts this project as one of the success stories. The success of the project was determined by efforts of the Debt Management Department of MOFE to a greater extent. One of progresses of DMFAS was linking MOFE to Mongol bank in one network. Some notable accomplishments are:

• Improved loans and debt registration;
• Created a basis for the debt sustainability analysis
• With utilization of DMFAS, Mongolia became able to monitor debt sustainability and debt burden, and a comprehensive system for debt management was established.

3.119                                 Although DMFAS included a series of data on external debt of Mongolia and is running smoothly to date, there are some problems too. The most important is statistics on grants received by the Government from donor countries and international financial institutions is under covered, undermining the debt management and data availability on external sector.

3.120                                 Our policy is to upgrade the debt management, including its repayment not posing additional burden on the budget, and improve the efficiency of external debt. The following actions have to be taken with regard to external debt:

• Mongolia should be receive  loans  only on concessional basis;
• An external debt strategy has to be developed;
• Do the following estimations and debt sustainability study with focus on:
  • Repayment capacity. The impact of additional external debt service payments for new loans on budget income and expenditure, and external trade balance, repayments from borrowers under domestic on-lending etc.
  • Endogenous economic benefit. What portion of the loan will be  spent domestically and what portion used abroad during the course of loan utilization project, how many jobs will be created, in what timeframe outcomes are expected etc.
  • Priority support to sectors with significant contribution to the economy.  For today, it would be effective to use the loan for development of export-oriented sectors.
  • Build a favorable legal framework for external debt, improve accounting and  reporting system in line with international methodology.
  • A liability mechanism has to be established with regard to the Council for ODA  coordination. Staff of the council proposes a loan to the Government and Parliament, but there is a lack of proper monitoring on utilization and efficiency. Thus, if the loan had low efficiency a monitoring mechanism for liability has to be in place.

3.121                                 For the purpose of trimming external debt burden, a policy is to investigate all possible aid sources and complete debt servicing basis. In the mid-term, debt service shall not exceed 10 per cent of GDP. Therefore, the utilization of foreign loans and aid shall be improved by further enhancing the registration and information data base on external debt, creating a legal framework for boosting the credit regulation, effectively identifying sectors that should be beneficiaries of credit and aid, and effectively administering with the priority policy.

3.122       Prior to making a transition into market relations, like other socialist countries Mongolia had received significant credits from Russia and some countries in Eastern Europe. As of 2002, Mongolia has generally resolved debt issues with all countries except Russia. The Government of Mongolia is making negotiations with Government of the respective countries to regulate convertible ruble debt and inherited receivables formed during the old structure; with some countries the negotiations are going well enough. Namely, Mongolia had an experience of negotiating on USD 1.00: 14.5 convertible rubles. Debt issues with Hungary, Czech, and Germany have been resolved and under process are negotiations with Poland, Bulgaria and Slovakia.

3.123       In the early 1990’s, the Government of Mongolia has negotiated with the Government of Russia discussed the “big debt” and agreed to extend the debt term not accruing interest. To date, there is information that Mongolia’s debt due to Russia amounts to 10.2 billion convertible rubles. Much effort was made towards resolving the debt issue in last two years, but no ultimate agreement has not been made yet. Consequent to high-level negotiations between Mongolia and Russia the following four basic principles to guide the debt regulation had been agreed upon:

• Take into account the historic situation of debt formation
• Consider the real potentials of Mongolia’s economy, apply internationally accepted approaches in debt regulation
• Consider the traditional friendly cooperation and relations between the two countries in debt regulation
• Promote investments towards increasing export capacity of Mongolia

3.124       MOFE is continuing negotiations with the Ministry of Finance of the Russian Federation on the technical level.

3.125       The long run external debt management policy is aimed to reduce gradually government borrowing and attract more direct foreign investment in business sectors. This will result in reduced debt payment burden on the budget, more funds dedicated to the poor and improve public service delivery, especially in the social sector.

3.126       The mid-term policy of foreign economic relations is defined as to continuing the open policy and using diversity of mutually beneficial cooperation methods and mechanisms.

3.127       Aid coordination. The donor community is playing a critical role in assisting to build democracy, in intensifying the transition to the market economy, in ensuring good governance, in improving the living standards of the people and in reducing poverty.

3.128       Today, Mongolia is reaching more mature stages of transition and the country is now becoming more focused on determining priorities and strategies for longer term social and economic development.

3.129       Between 1991 and 2001, gross disbursements of all types of ODA (made by the international donor community were US $ 2.1 billion. 52.4 percent of total ODA disbursements represent grants and 47.6 percent represent concessional loans.

3.130        The Government has undertaken a series of measures to optimize aid coordination  and management based on lessons and experiences of previous years in managing aid, including:

• Institutional framework: the amendment in the law on the Government mandates the MOFE with responsibilities for collecting and integrating information, concluding contracts and agreements, and conducting overall management of ODA;
• Regulatory framework: changes made to the composition and functions of the Foreign Investment and Aid Coordination Council.
• Legal framework: A draft law on ODA initiated by the MOFE, which develops the legal/administrative framework for aid coordination with a specific focus on strengthening of Government internal coordination and management in utilizing aid.
• A modern debt management database with the support of the World Bank is under installation at the MOFE, which will sustain working contacts with donors and improve debt service management.

3.131        The Government places importance on the relationships between core macro policies and ODA policy, which includes its work with donors:

• Moving to a three year fiscal planning framework will require close consultation and coordination with donors in terms of the medium term and annual policy and measures as the movement to three year expenditure planning intensifies;
• To maintain fiscal sustainability a careful selection and disbursement of concessional foreign borrowings, increase of grant level will be undertaken; and
• Higher potential public debt and public debt service levels in the medium term indicate there is a case for close scrutiny of new borrowings and pursuit of higher grant elements of ODA.

The Government is undertaking as series of measures to improve policy toward better aid coordination, namely:

• The Government of Mongolia fully supports the major international initiatives toward better use of ODA and appeals to the international donor community to critically review the portfolio of loans and grants so kindly provided by the international financial institutions, particularly with a view to decreasing debt levels and raising grant elements. Donor support and cooperation with the Government is called for in this regard. The balance of loans and grant provided by ADB and World Bank is 95/5 and 90/10, therefore, it is proposed that lenders reduce this sharp gap and gradually make closer the balance between loans and grants.
• Government policy in terms of the composition of aid is to substantially increase the volume of grant aid in the social sector, including, health and education and to gradually reduce the volume of loans in this sector.
• Furthermore, Mongolia is seeking to use ODA to promote more active involvement in regional cooperation. Mongolia is strongly interested in participation and implementation of regional projects and programs.
• Stronger private sector and civil society participation is promoted in issues that can be dealt through the private investments rather than the ODA.

1. Monetary Policy

3.132  The main objective of the long and medium-term monetary policy is to strengthen macroeconomic and financial stabilization, to create a growth-enabling monetary and financial environment, to deepen financial intermediation, and to expand the scope of financial  and banking services. The Government will continue to pursue the floating exchange rate policy,  with the exchange rate adjusted in accordance with the balance of payments and foreign currency demand and supply on the interbank market. The inflation level will be maintained at 5 percent in the medium-term, and net official international reserves will be increased to reach 18 weeks of imports.

Table 3:8:  Main Monetary Aggregates, 1998-2002, percent

3.133  The price level stabilized in recent years, declining since the second half of 2002. The year-on-year change in consumer prices was negative and by the end of the year reached 2 percent. Within the framework Economic Growth Support and Poverty Reduction Strategy, the Government will pursue the flexible monetary policy to ensure the money demand which is lacking in the economy and control the level of money supply without boosting inflation rate. The Government will improve consistency between monetary policy tools and efficient policy on Central Bank bills.

3.134  Despite pronounced seasonal patterns in the Mongolian economy and, subsequently, consumption, the annual inflation in the past years stabilized at single digits. This has a large positive effect on the livelihoods of the population, including the poor.

3.135  The Government has put an objective to maintain the inflation rate at 5 percent in the medium-term. Incorporated to implement the efficient monetary policy and to keep money reserve growth at an appropriate level. Moreover, the Government will continue to pursue a policy to improve the supply of commodities of the population.

3.136  The nominal exchange rate of togrog against the US dollar has also leveled out. The exchange rate is expected to reach togrog 1125 per US dollar by the end of 2002, which means 2-percent depreciation on the year earlier.

Figure 3.3:  Exchange Rate Trend

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3.137       The Central bank’s policy focuses on adequate linking of money supply management with the stabilization of inflation and exchange rate. Money supply grew by 42 percent in 2002, compared with the previous year, while foreign and domestic currency deposits increased by 55 - 62 percent. Despite high growth of money supply, some positive developments arise in the composition of money supply, and the confidence in the banking system is  growing continuously. As the economic activities have being activated, the demand for credit continues to expand. Currently, the average lending interest rates are 35 percent. Therefore, it is necessary to pursue credit and monetary policy to support economic activities, enhance competition among banks to reduce interest rates. In implementing the medium-term exchange rate policy, the Government will consider that appreciation of the domestic currency leads to erosion of competitiveness of our export products on the world markets, increase in unproductive imports and negative effects on the ability to repay external borrowing in the future. The Government  will implement its monetary  policy accordingly:

• Raise placement and interest rate of BOM bills,

• Enhance monitoring of on-lending activities,

• Upgrade supervisory and prudential framework,

• Restrain from any issuance of payments or loan guarantees for third parties, unless it has been included in government medium term policy documents or annual budgets.

3.138       Financial and banking system. The major indicators of financial intermediation, such as share of broad money, credit and deposits to GDP are gradually growing, indicating the deepening of financial intermediation in the economy. By the end of 2002, 16 banks and about 60 non-bank financial institutions operate in Mongolia with 502 branches. Although 85 percent of these institutions are located outside Ulaanbaatar, only 13 percent of loans were issued to borrowers in rural areas, pointing to a growing financial concentration. A recent survey conducted by the Bank of Mongolia showed that small businesses and rural customers have inadequate access to credit.

3.139       As a result of implementing policy directed toward expansion of financial services in rural areas, the Law on Non-bank Financial Institutions has been adopted by the end of year  2002 and legal amendments, supporting the development of saving and credit cooperatives, were

made in the Cooperatives Law and are enforced. The activities of bank and financial intermediaries will be expanded within this legal framework.

3.140       One of the priority policies to expand monetary and financial intermediation is to encourage foreign and domestic investors to facilitate fair competition, to introduce new  services, update the technology and improve supervisory mechanisms. As well, steps will be taken to expand financial services in rural areas, including measures to support activities of the non-bank financial institutions and saving–credit cooperatives. Privatization of state or partially owned commercial banks will be intensified in accordance with the privatization program, after completing the necessary preparation. The Trade and Development bank, one of the largest  banks of Mongolia, and the Agricultural Bank, which has many branches in rural areas, were privatized in 2002 and at the beginning of year 2003 respectively.

3.141       Accesses to credit and interest rates level have an exceptional importance for  business, particularly for development of small and middle-size enterprises. Therefore, actions will be taken to expand competition in order to reduce nominal interest rates on loans, to maintain real interest rates positive, and to reduce the flow of money outside banks. The policy  of reducing the large gap between deposit and lending interest rates will be intensified by channeling liquid assets of individuals, companies and organizations to banks. The expansion of banking and financial services, and improvement of service quality will upgrade money flow in the rural areas, thus affecting on creation of job opportunities and activation of economic activities in the regions and increase income of rural population, in particular poor.

3.142       Banks’ internal supervision will be enhanced in accordance with international standards, external auditing will be strengthened, transparency of information will be ensured  and mechanisms of credit risk-sharing between banks will be introduced.

3.143       In order to reduce money flow outside banks the new types of cash transactions will be introduced, and non-cash management network will be established at the national level.

3.144       The Parliament of Mongolia has adopted the Main guidelines for the development of the securities market for the medium term, including separation of functions of the Stock exchange and Securities payments and savings center, revise recording criteria - requirements  for securities, introduce needed amendments to the legal environment,  encourage participation of citizens in the securities market operations, increase their awareness. In line with reforms in the securities market activities the Trust fund law will be enforced.

3.145       The insurance policy priorities will be focused on improving the legal environment, rationalization of management and enhancing monitoring of the insurance companies activities, expanding the types and coverage by the insurance activities, introduction of international standards.

1. Economic Re-structuring

3.146       Creation of economic structure based on the private sector and subsequently increasing economic efficiency is one of the Government priorities in its policy to accelerate economic growth. The Government will, therefore, increase the private sector’s share in the

economy to 80 percent, while improving the composition of the industrial sector and exports. With this purpose, the Government will accelerate the privatization process with special focus on most valued companies and take actions to improve efficiency of already privatized enterprises.

3.147       A constructive solution towards privatization of large, valuable entities that play a major role in the Mongolian economy will have an important impact on further economic development. The Government’s policy will be focused to privatize these companies to strategic investors that will be capable of increasing economic and financial efficiency of the companies, bringing in new technology, know-how and bridging them with new export markets.

3.148       Restructuring will start with commercialization of the energy sector, a strategic sector for the economy. With adoption of the new Energy Law by Parliament in 2001, the legal base for restructuring in energy sector was established. The Government of Mongolia believes that the condition for enabling independent regulatory mechanisms, for promoting private sector into energy market, for introducing competitive environment in energy sector has been created, and important steps were implemented.

3.149       The Government will strengthen self-sustainability of energy companies and will accelerate the energy sector reforms. Energy sector restructuring will be stepped up, its monitoring will be improved, costs will be reduced by ensuring that companies directly collect their payments from customers, without intermediaries, thus eliminating various commissions. The distribution grid that deals with customers will be privatized, and non-technical losses and internal consumption of energy will be cut down.

3.150       In the context of the Government’s objective of turning land into a productive asset, the Government will expand opportunities for the people, including the rural and the poor population, to enable their engagement in business activities and thus create sustainable sources of income. The Government will undertake steps to implement land ownership and possession reforms. In this process the main focus will be on long-term leases, improvement of the land fee system and using the land as an incentive to develop production and crop farming. As well, the focus will be on using the land reform as the basis of economic growth sources. The implementation of the recently approved Law on Land and Law on Land Ownership will be stepped up, and the process of giving land to Mongolians for ownership will be started on the basis of detailed land registration and cadastral surveys. An effective pastoral management system will be created, considering the dependence of rural residents on the land and nature.

3.151       Social sectors restructuring, including education, health, culture and arts, will be carried out in a way that would not damage the access and quality of government services. The Government will encourage the various methods of restructuring, including management contract, management buyout, lease contracts in privatization of state owned educational institutions, hospitals, and cultural institutions, as well as encourage sustainable and high-quality services of private educational, health and cultural institutions. This process will be mainly guided by the Guidelines of restructuring and privatization in social sector approved by the Parliament. During the reforms the Government’s special pro-poor measures will be undertaken to minimize negative consequences of reform agenda.

3.152       In the medium term the city transport privatization will be continued and competition will be expanded in the transport services.

3.153       Local property will continue to undergone re-structuring in line with the overall privatization process. Following objectives and principles set forth in the general guidelines of state property privatization in 2001-2004 adopted by Parliament decree No. 10 of 2001 and General guidelines for reforms and privatization in the social sector adopted by decree No. 56 of 2002, the specific targets were set for UB city municipality to increase the participation of the private sector in socio-economic sector, promoting competition, improving the economic efficiency, and creating sources of investment.

3.154       In 2003 35 immovable properties will be privatized. Within the launching of social sector privatization, preparations are being made to privatize some institutions in the education and health sector, public transportation, housing utility services, heating kilns, media under management contract as pilot.

3.155       In implementing the restructuring policies to ensure that gender equality will be provided, and increase equal access for men and women to benefits from socio-economic policy through out gender analysis in the policies and programs related to structural changes in the socio-economic arena will be carried out. Therefore there is a need to conduct gender analysis on impacts of land reforms and actions should be taken to reduce negative effects. In particular, depending on external and local asset flow and allocation, it is affecting the livelihood of women in some ways. Therefore, in order to undertake restructuring in the economy, there is a need to conduct gender analysis on impacts of land reforms, labor relations, restructuring in the social sector and fiscal reforms should be taken to ensure gender balance and implement the National Program for Ensuring Gender Equality. Based on previous experience, the Government will pursue a long and medium term policy to ensure the social guarantee and avoiding poverty  during the restructuring process in the economy.

3.156       The medium term private sector led growth objective will be reached through deepening of restructuring and reforms in the various sectors of economy and social development, including energy, land, civil service, pensions, and taxes. The above areas of restructuring is along term and painful process affecting welfare of people, especially vulnerable groups. Therefore addressing the negative consequences and mitigating risks associated with restructuring is one of the areas of government concerns. The government has undertaken a number of initiatives to analyze impact of privatization and restructuring with assistance of the international agencies. The Mongolian government jointly with the World Bank started to implement a comprehensive program towards public sector reforms. USAID has initiated a series of studies on energy sector restructuring and development. However, the above mentioned  reform policies have a different impact on population groups welfare. Therefore in the medium term there is a need to evaluate impact of policy reforms with gender mainstreaming with participation of various stakeholders, including international experts, academics, and policy makers.

1. Accounting, Auditing and Inspection

3.157        Accounting. Since Mongolia’s transition to the market economy, for the first time the Law on Accounting was passed in 1993. The main objective of this Law was to introduce the International Accounting Standards (IAS) in Mongolia. At that time the prestige of accounting profession had fallen down and there was widespread understanding that accounting is not such a useful activity and there were no qualified experts familiar with the IAS. Therefore in 1993 with the financing of the World Bank and in 1995 with the financing of the ADB three projects were implemented leading to the provision of systematic training on the IAS to the key professionals and teachers.

3.158        The 1996 version of the IAS was translated and disseminated in 1998, but soon thereafter it underwent major revisions and eventually was not considered satisfactory. On the other hand a number of methodical instructions and manuals were produced by the MOFE in relation to the introduction of the IAS.

3.159        The curriculum of universities and colleges underwent changes in 1996 to include teaching of the IAS.

3.160        There are nearly 30 thousand accountants in Mongolia and one-third of them have been involved in 2-3 weeks training on the IAS.

3.161        In 1993-2000 no concrete actions were taken by the government to transfer the accounting systems of the budget entities and local financial institutions to the IAS. In 1999 the methodical instructions on transferring the accounting systems of the budget entities to the IAS began to be developed within the framework of the WB Fiscal Technical Assistance Project, but the process was rather slow.

3.162        In 2001 a national inspection was conducted into the accounts of all the enterprises and budget entities in Mongolia. The results of this inspection showed that all the budget entities had not transferred to the IAS, more than 30 per cent of the enterprises had not kept accounts, produced financial statements and had relationship with the taxation authorities, almost 40 per cent of them had not collected receipts for their transactions, and 27 per cent of the enterprises had introduced the IAS.

3.163        The government has made relevant conclusions and took some important measures, one of which was to make amendments to and renew the Law of Accounting in December 2001. The revised Law provided for all the budget entities and enterprises to transfer to the IAS. In some instances, it was found that some enterprises and budget entities would issue financial statements without keeping accounts, therefore, the revised Law provided for detailed procedures for accounting and also specified that each enterprise or budget entity should hire a full-time or part-time professional accountant. Also, the Law defines the rights and responsibilities of the accountants in terms of not violating the Law and not recording transactions without valid primary documentation. According to the Law, state accounting inspectors were established with

the function of conducting inspections and imposing penalties. In order to accelerate the process of implementation of the Law, the year 2002 was announced as the Year of Improving the Accounting System and a government Program for Developing the Accounting System for 2002- 2004 was developed and approved. The Government Action Plan provided that the introduction of the IAS should cover at least 50 per cent of all the enterprises in 2002, 70 per cent- in 2003  and 90 per cent- in 2004. The level of availability of primary level documentation should reach  at least 80 per cent in 2003 and from 2003 all the budget entities should transfer to the IAS.

3.164       In 2002 34 new methodologies and instructions were developed by the MOFE which led to the formation of an appropriate legal and regulatory framework for implementing the Law of Accounting. Also sufficient methodologies and instructions were provided to the business sector on the introduction of the IAS.

3.165       One of the notable achievements in 2002 was the introduction of the IAS in the state- owned enterprises and joint-stock companies. 55 per cent of the enterprises complied with the IAS. The remaining 45 per cent represent mainly small enterprises and this poses a critical challenge for us.

3.166       In 2002 within the WB Fiscal TA Project the Procedures for Transferring the Accounting Systems of Budget entities to the IAS were approved and these procedures are being enforced effective as of 1st January 2003.

3.167       In September 2002 training was organized on the above procedures for 60 consultant teachers leading to almost 2000 training events organized with the assistance of these consultant teachers in October and November 2002, which involved about 50 per cent of the accountants who needed to be trained. The new instructions and accounting formats have been delivered to  all the budget entities.

3.168       These instructions and formats were developed in accordance with the Public Sector Financial Management Law, which requires the government to develop the Annual Financial Statements according to the IAS. Also, the Law defined the deadlines for issuing the financial statements as follows:

Table 3:9:  Fiscal Reporting System

3.169       Instructions for transferring the treasury accounts to the accrual basis in 2003 have been developed. In April it is planned to conduct a workshop for the Treasury accountants on these instructions. However the requirement to transfer the Treasury to the accrual basis in 2004 became binding with the passing of the Public Sector Financial Management Law.

3.170       There is a need to appropriately evaluate the capital assets and to correctly determine the depreciation costs in order to determine the level of outputs of budget entities, to fully reflect the output costs as well as to show the economic capabilities of the budget entities.

3.171       Although methodologies are being developed on conducting a census, revaluation of state properties, reflecting the values in the accounts, establishing depreciation norms, there are many methodological challenges which need to be addressed. In particular, a number of issues should be solved such as what kind of properties are to be included in the census, how to convert the value of immovable properties such as the buildings procured in the previous years at varied prices to the current value, what should be the basis for evaluation of state-owned enterprises to be included in the TSA.

3.172       The central Treasury accounts and the financial statements do not reflect state-owned enterprises, budget entities, public roads and bridges and other items. This applies to the provincial levels as well. This situation prevents the demonstration of the economic potential of the government and hampers the implementation of the financing law.

According to the inspections conducted in 2001, all state-owned enterprises and businesses with state ownership have transferred to the IAS.

3.173                                   The March 2003 situation of public sector accounting is as follows:

Table 3:10: Status of Accounting Reforms as at March 2003.

3.174       It is not possible to produce the Financial Statements of the Public Sector because 3 accounting bases are used. Furthermore, it will be time and effort consuming to consolidate the financial outcomes of budget entities in the Government Financial Statements. However, it is hoped that in 2004 the said challenges can be overcome.

3.175       The International Accounting Standards for the Public Sector are being currently translated and it is hoped that the translation will be complete in 2003.

3.176       A national inspection of accounting was conducted in March 2003. The outcomes of the inspection are to be discussed in April 2004 at Accountants’ Conferences at the aimag/city level and in June 2003 at the National Accountants’ Conference. The positive results from these Conferences will provide further critical impetus to the improvement of the government accounting practices.

3.177       It is planned to train about 2000 accountants of budget entities who have not yet participated in the previous training events.

3.178       There is also a need to involve the Accountants-in-Chief of the aimag treasury departments and Budget General Managers.

3.179       There is a need to immediately conduct an inventory and revaluation of state properties and to register the properties in the accounts of relevant budget entities and the treasury accounts by their current value; to introduce the practice of calculating the depreciation costs and for this to develop the methodology and instructions to be applied throughout the country.

3.180       A methodology will be developed on recording the budget entity outputs and costs in the accounts.

3.181       The MOFE will provide the accountants of budget entities with individual assistance on introducing the IAS by sending experts to give on-site training and to help upgrade the accounts of at least 10 entities in each aimag and at least 500 in the country to the exemplary level.

3.182       The full version of the International Accounting Standards for the public sector will be fully translated, published and disseminated to all the entities.

3.183       Auditing. Until 2003 the function of fiscal regulation audits was fulfilled by the State Inspection Committee, the Financial Inspection Department of the MOFE and the Sector Inspection Departments at line Ministries (Environment, Health, etc.)

3.184       The State Inspection Committee operated under the Parliament and fulfilled the functions of financial inspection, performance inspection, inspection of the ethics of civil servants.

3.185       The State Inspection Committee did not conduct inspection for any entity and was mainly engaged in financial inspection, disclosure of discrepancies and irregularities and imposition of fines.

3.186       The Financial Inspection Department of the MOFE conducted scheduled financial inspection into the activities of budget entities and state-owned enterprises. It had a function of conducting financial inspection and disclosing irregularities and problems in their financial activities.

3.187       The inspection departments at line Ministries conducted investigation into the  harmful effects of sectoral production and service technologies on the environment and population.

3.188       There was a considerable overlap of activities of the above inspection institutions demonstrated by the fact that one economic entity could have several inspection organizations coming to conduct investigation at one time or receive a series of inspection visits one following the other. It was not uncommon that after an investigation and evaluation of the State Inspection Committee, the subsequent inspection of the Financial Audit Department revealed a considerable number of irregularities.

3.189       In January 2003 two laws were passed simultaneously, namely the State Audit Law and the State Inspection Law, followed by the restructuring of the State Inspection Committee into the National Audit Department.

3.190       The National Audit Department conducts the following two types of audits according to the Law:

• audits of the Financial Statements
• Performance audits

3.191                                The Professional Control Agency has the following duties:

• Control over the implementation of the laws
• Proposing improvements in the control legislation

3.192       Also a State Professional Control Agency was established under the Prime Minister’s Office thus merging 11 inspection agencies with various functions, which used to operate under the various sectoral ministries. The Financial Inspection Department of the MOFE was also included in the structure of the State Professional Control Agency.

3.193       With the above structural changes taking place, the National Audit Department assumed a function of conducting audits and issuing conclusions according to the international auditing standards on the financial statements of the Ministries, agencies, state-owned enterprises and economic entities with state ownership. The National Audit Department conducts the following audits according to the PSFML:

Table 3:11:  Auditing Schedule

3.194       However, the State Audit Law does not provide solution for all the issues and there are areas where some controversies are likely to arise, namely:

1. The National Audit Department is not authorized to impose payment of compensation or fines in the event of disclosure of substantial irregularities and mistakes while conducting the audit. In such cases is it sufficient only to issue an audit conclusion where these irregularities will be stated? This question is not explicit in the Law.

1. The accounts of private enterprises are done by the Certified Public Accountants and accountants with auditing license. However, the audit of large state-owned enterprises is to be done by the National Audit Department Inspectors, who are not qualified accountants. This does not comply with international practice and is not acceptable for other clients.

1. Audit is an independent and impartial investigation. However, can an audit conducted in  a state-owned enterprise by a state organization be considered as impartial and independent from the point of view of a third party?

1. After the National Audit Department conducts an audit and issues a positive conclusion,  it may be possible that the subsequent financial inspection of the Professional Control Agency could reveal substantial discrepancies. In this event the National Audit Department does not bear any responsibility.

1. It is not explicit also if the National Audit Department shall be liable if it makes mistakes in the auditing of the financial statements of the enterprises with state ownership and a situation arises similar to the bankruptcy of Enron Co.

Thus the activities of the National Audit Department can be considered as impartial for the public organizations, but cannot ensure independent and dispassionate point of view for the enterprises with state ownership.

1. The responsibility of reviewing and allocating the budgets of all the Ministries, agencies and other budget entities of Mongolia, of reviewing and accepting their financial statements, lies with the Ministry of Finance and Economy. Therefore, the audit conclusions of the National Audit Department are to be submitted to the MOFE. In the event the MOFE considers the conclusions unreasonable, there will be a need to repeat the audit inspection or to appoint an expert group to investigate the way the auditing was handled. However, the National Audit Department is a parliamentary body, yet it has to be responsible before a lower institution. This may create a contradictory situation in the management relations. Thus some difficulties may arise in the implementation of the Auditing Law.

• There is a need to review and refine the State Audit Law.
• The management of the local branches of the National Audit Department should be changed and replaced by the qualified accountants.
• The International Auditing Standards should be translated, published and disseminated to the auditors.
• There is a need to develop, obtain approval for and implement terms of reference and manuals for auditing activities as well as internal standards for the state financial audits.
• A broad training program is to be implemented for upgrading the knowledge and skills of the financial inspectors of the Professional Control Agency.
• The government programs are to be audited in 2003 which will allow the auditors to gain sufficient experience.

3.195       State Supervision: Since 1991, the supervision offices had operated under various structures and organization, and were mostly within the structures of policy sectors and departments.

3.196       Founding upon resolution #32 of September 1, 2000 of the Parliament on ”Reforming the state administrative system and revising the general scheme of structure”, and according to the Government resolution #139 of September 6, the following regulatory agencies were established. These were:

• “Infrastructure Supervision Office” within the functions to be managed by the Minister of Infrastructure;
• “State Labor and Social Protection Supervision Office” within the functions managed by the Minister of Social Protection and Labor
• “State Financial Supervision Office” under the functions managed by the Minister for Finance and Economy
• “State Supervision Office for Trade and Industry” under the functions managed by  the Minister of Trade and Industry
• “State Supervision Office for Food Security and Agriculture” under the functions to be managed by the Minister for Food and Agriculture
• “Environmental Protection Office” under the functions managed by the Minister for Environment
• “State Health Supervision Office” under the functions managed by the Minister for Health
• “State Education, Culture and Science Supervision Office” under the functions managed by the Minister for Education, Culture and Science. These agencies performed their respective functions and duties as described below.

3.197        The Infrastructure Supervision Office performed such core functions as to ensure the implementation and enforcement of the pertinent legislation in the area of auto-transport,  tourism, construction, geodesy, analysis and inspection of flight and related technical issues and cases, communication, fuel and energy, and to eradicate revealed shortcomings and violations. The number of staff under the Office was 66 persons.

3.198        The Labor and Social Protection Supervision Office with the staff of 28 persons ensured the implementation of the labor and social protection legislation and provided monitoring and control over enforcement of hygienic requirements, labor standards and conditions; formulation and spending of all types of funds, grants and credits to the social protection sector.

3.199        State Financial Supervision Office carried out factual inspection over the formulation and spending of the state central and local budgets, special purpose funds, utilization of loans  and grants taken through government lines; financial and accounting practices of the state fully and partially owned entities and public organizations, their financial statements, utilization, conservation and efficiency of property utilization; issued conclusions and assessments based on the inspection, and enforced measures to ensure eradication of revealed shortcomings and implementation of pertinent legislation. The number of staff at the Office was 200 persons.

3.200        The State Trade and Industry Supervision Office worked to ensure the implementation of geology, mining, trade, industry and services legislation; developed rules and procedures, consistent with international standards and practices on mineral exploration and exploitation, on trade, industry and service activities, and on oil products, and provided control over the security and safety of utilization and storage of explosives, explosion tools and devices, control over rehabilitation of lands, undergone mineral exploration and exploitation activities,  and over returning geologically explored and exploited areas.

3.201        The State Food Security and Agriculture Supervision Office worked to ensure the implementation and enforcement of laws and legislation on veterinary services, plant quarantine and control, legislation on meeting the quality requirements for livestock breeding, cultivated plants and protecting the health of herds and cultivated plants and on meeting safety  and hygienic requirements for food products.

3.202        Environmental Protection Office enforced legislation on protection of Specially Protected Areas and other legislation on environment and ecology, and performed duties to eradicate revealed violations and shortcomings.

3.203       The State Health Supervision Office supervised over the activities of health, border health, epidemiologists, pharmacy and medical treatment areas and enforced the implementation of legislation in these spheres. Under the Office, there were laboratories where analysis and tests were carried out to support the assessment and evaluations made by Office inspectors.

3.204       The State Supervision Office for Education, Culture and Science worked to ensure  the implementation of laws and legislation in primary, secondary and high education, science, technology, professional education, culture and arts. Like other Offices, it was authorized to take necessary measures to eradicate revealed shortcomings and violations.

3.205       The duties of these Offices in the local areas were carried out by the Financial Supervision Department, Environmental Supervision Department and Specialized Supervision Departments in the structure of the local Governments. The Specialized Supervision Department, which is the Government Regulatory Agency, was newly established according to the Parliament resolution number 58 of 2002 “Concerning revised approval of general scheme of framework  and organizational structure of state administrative organizations” and the Government  resolution number 162 of 2002 “Concerning the establishment of state regulatory and implementing agencies”.

3.206       The overall objective of the State Specialized Supervision Department is to enhance the Government responsibility, improve the efficiency and results of its activities with regard to the  population by supervising the enforcement and implementation of legislation.

3.207       Within this framework the purpose of the Specialized Supervision Department is to ensure the enforcement and implementation of rules, regulations, norms and standards  established by the law and state authorized organizations for public observance in sectors such as finance, insurance, social welfare, health, living environment, research of communicable diseases, pharmaceutics, health, labor, education, culture, science, radiation, environment, geodesy, mapping, standards, quality, measurement, contraction, roads, energy, communications, tourism, transportation, geology, mining, industry, trade, veterinary, growth, protection of plants, seeds, quarantine on food production and technology.

3.208       The state specialized supervision on the territory of Mongolia shall be implemented by the State Specialized Supervision Department, state general inspector, state senior inspector, state inspector, a local and border organization in charge of specialized supervision, state senior inspector, state inspector and environment inspector.

3.209       The State Specialized Supervision Agency has a vertically integrated management and has its offices in 21 aimags and districts of the capital city. These offices have two departments and 1 division.

3.210       The State Specialized Supervision Agency employs altogether 1250 state inspectors  at national level, of which 320 are placed in the center, 290 in the capital city, 560 in the aimags and local governments, and 120 in border supervision offices.

3.211       Difficulties and bottlenecks encountered in the process of implementation of supervision:

• Specialized supervision at national level necessitates a cohesive inspection information at the system-wide level. Besides, it involves communication with public organizations, which necessitates establishment of a unified computer network. The financial resources to resolve this issue represent a problem.
• Because the supervision offices were attached to the ministries and, thus, financed from the ministries’ budget, they could not build sufficient material base of their own. The limited budget was barely enough for current expenditures, and the supply of computers and other equipment, necessary for supervision purposes is not sufficient. Local inspectors do not have computer access, and few computers in use are obsolete. Supervision offices do not have funds to purchase necessary technical equipment and devices. The situation is likely to persist.
• Provision 9.2.3. of the Law on State supervision prescribes: ”undertaking measures to train, re-train specialized supervisors, and to create conducive working environment and guarantee social welfare of specialized supervisors”. As was mentioned above, at the system level, 1250 inspectors are employed. Totality of the inspectors has not been covered in training activities on market principles, and no re-training activities are carried out.
• It becomes imperative to train state supervisors in foreign languages, professional, computer and technical trainings. This is pertinent also to newly employed inspectors.
• In the process of supervision and enforcement of legislation, there occur many incidents, which reveal the need to improve and streamline legal provisions. It is necessary to establish an information and research center where the inspectors could study cases and do research. This is a legitimate and timely requirement for regular up gradation of the professional qualifications of specialized supervisors.

3.212       Our inspectors operate in all sectors and undertake relevant measures to enforce and supervise implementation of laws and legislation, and to rectify violations and shortcomings. In that process state inspectors encounter many forms of illegal practices and operations. Thus, it is necessary to create conditions conducive to encouraging honest and just discharge of duties and prevent corruption and bribery among supervisors.

3.213       Provision 11.1.1. of the Law on State Supervision stipulates that “in case state inspectors use public transportation (except taxis) in the process of discharging their official duties, the payment for public transportation shall be compensated to the inspectors according to the relevant procedures.” However, there are no financial resources to implement this provision of the law, and there are no possibilities to provide transportation to the local supervision offices and departments.

1. Civil Service Reforms

3.214       Civil service. Mongolia has started its transition to the market economy since 1990 and has been undertaking privatization processes and establishing an economic system with domination of the private sector. In parallel with these developments the structure of the administrative system, which plans and regulates the economy has been changed and the role of the public administration has been significantly modified. In conjunction with this, the reduction of public sector employees has been conducted several times since March 1990. Since 1994 an

effort to properly identify the role of the public sector in the market economic conditions has been taken, and a project on the “Reforms in the Public Administration and Civil Service” was implemented with support from the Swedish government. Under this project the public sector structure was changed in 1996 to having 9 ministries and over 60 agencies. Each ministry was to have the Minister, the Sate Secretary, departments and divisions. In 2000 the number of ministries were increased to 12, and a position of the Deputy Minister was adopted. But still the civil service, public administration and special civil service agencies have performed some government duties and services. Ministries, agencies and the Governor’s offices in aimags and the Capital City cannot develop adequately their strategic plans, and terms of reference  for certain positions are remaining unclear.

-               Due to the shortcomings in identification of an adequate number of civil servants to sustain the quality and accessibility of public services rendered by the State to the citizens, the resources for civil service vacancies, wages’ fund and social protection measures cannot be appropriately reflected in the state budget.

-               There is a shortage of necessary information needed for evaluation and assessment of the current situation with the public sector human resources, also the grass-root public organizations don’t fully include data on the employed civil servants into the statistical reports on the number of employees and developments in the civil service. Then the employment in the higher level of civil service is not stable.

-               No procedure on selection of the management level civil servants was adopted, so there is an absence of a proper mechanism of selection, and the civil servants lack of competence and expertise.

-               Also there are still many cases when the issue with registration of the people, who passed the Civil Service Qualification Exams, and their appointment to the open vacancies in government institutions is not transparent and fair.

-               There is a lack of objective criteria on identification of the civil servants’ performance and level of professionalism. So the subjective attitude of managers plays an important role in promotion of employees. In addition, there is no legal environment is established for receipt, revision and resolution of citizens’ complaints regarding the civil service employment issue.

-               No internal monitoring methodology or mechanism is built in any level of public service, and there is a lack of an appropriate integrated system to identify the performance measurement of ministries, agencies and local administration institutions, to plan, report and evaluate their performance, as well as to reward or make them accountable for the actions taken by the civil servants.

-               Although it is needed to employ in the public service only the people with a bachelor’s or higher level of education, there are more than 15,000 civil servants, who have just a basic or special secondary education and who need further training in public management.

-               There is only one state funded institution training civil servants and improving their qualifications- the Academy of Management. But its capacity, accessibility of the training and boarding facilities, level of refurbishment, services and students’ vacancies are not satisfactory to meet the current needs.

3.215       The medium term budget reform policy will support economic growth by providing the financing needed for deepening the structural changes in the civil service and social sectors, and should become an integrated approach that provides economic guarantees for the people released from the  civil service,  reduces  poverty and reforms the budget  management   process.

However, in order to maintain fiscal sustainability the government will not undertake any measures to increase civil servants’ wages in 2003, and increases for later years will depend on implementation of the broad-based civil service reform program.

3.216       One of the main objectives of the mid-term public sector reforms is to improve  budget management, specifically to get certain civil service duties performed by other  institutions on the basis of contracts and agreements, to commercialize the public sector, to eliminate overlaps in the vacancies and structures, to take strategic approaches in mid and long term budget planning, to link it to the pertinent development policies, to increase effectiveness of resource management and to improve the openness and transparency of the financial and functional performance measurement and monitoring systems.

3.217       The civil service reform or the introduction of a new model of result-based management is considered to be an inevitable part of the public sector reformations. The civil service reform aims to achieve maximum results at the minimum expenses, without decreasing quality and accessibility of public service. The reform shall cover the state administration, public service and special government agencies. In conjunction with this the privatization and structural changes of the social sector should be undertaken in line with main guidelines and list of institutions adopted by the Cabinet. Because the implementation of the government policies on poverty reduction can be assessed through the achievements in the health, education and social welfare sectors, a special importance should be attached to the reforms in planning and implementation of these sectors’ budgets. Potential negative conclusions of the public sector reforms should be foreseen in advance, and it is needed to prevent from the increase of poverty through rendering support to these sectors based on the specific criteria. Therefore, effective measures to identify the products to be provided by the state funded organizations, to conclude performance contracts, to monitor implementation of these contracts, to assess and evaluate the results, as well as to reward or make accountable for the performances shall be systematically put in place. For the implementation of the civil service reforms the following measures shall be taken in the coming years:

• Not to appoint people to the vacant positions.
• To  retire the civil servants, who reached the retirement age,
• To develop a procedure on allocation of the relevant allowances to people voluntarily leaving the civil service,
• To shift to the system of contracting outside performers to fulfill some duties and services,
• To reform the structure of ministries, agencies and Governor’s offices of aimags and the Capital City,
• To shift to the principle of self-financing at the appropriate organizations,
• To implement the privatization, changes and reforms in the social sector according to the recommendations issued by the State Great Hural.