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Document of
The World Bank
Report No: ICR2165
IMPLEMENTATION COMPLETION AND RESULTS REPORT
(IDA-47760)
ON A
CREDIT
IN THE AMOUNT OF SDR 19.7 MILLION
(US$ 29.7 MILLION EQUIVALENT)
TO
MONGOLIA
FOR A
DEVELOPMENT POLICY CREDIT 2
March 31, 2012
Poverty Reduction and Economic Management
Mongolia Country Management Unit
East Asia and Pacific Region
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CURRENCY EQUIVALENTS
(Exchange Rate Effective as of January 15, 2012)
Currency Unit = Mongolian Tugrug
US$ 1.00 = MNT 1400
FISCAL YEAR
[January 1 – December 31]
ABBREVIATIONS AND ACRONYMS
ADB
BoM Asian Development Bank
Bank of Mongolia CPS Country Partnership Strategy DPC Development Policy Credit
ECTAC Economic Capacity and Technical Assistance Project EITI Extractive Industries Transparency Initiative FSAP Financial Sector Assessment Program
FSC Financial Stability Council FTF Fast Track Facility
GDP Gross Domestic Product GPF Governance Partnership Facility IBL Integrated Budget Law IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IFI International financial institution
IMF International Monetary Fund ISN Interim Strategy Note MoF Ministry of Finance MSWL Ministry of Social Welfare and Labor NPL Non-performing loan
OT Oyu Tolgoi PD Program Document PMT Proxy-means Test PRGF Poverty Reduction and Growth Facility PRSC Poverty Reduction Support Credit
SWL Social Welfare Law
SBA Stand-By Arrangement SDR Special Drawing Rights TA Technical Assistance
Vice President: Country Director:
Sector Director: Country Manager:
Task Team Leader:
ICR Primary Author:
Pamela Cox, EAPVP Klaus Rohland
Sudhir Shetty, EASPR Coralie Gevers, EACMF Rogier J. E. van den Brink, EASPR
Tehmina Khan, EASPR
MONGOLIA
Development Policy Credit 2
CONTENTS
Data Sheet
A. Basic Information .................................................................................................................... i
B. Key Dates ................................................................................................................................. i
C. Ratings Summary ..................................................................................................................... i
D. Sector and Theme Codes ....................................................................................................... ii
E. Bank Staff .............................................................................................................................. ii
F. Results Framework Analysis ................................................................................................. iii
G. Ratings of Program Performance in ISRs ............................................................................ vii
H. Restructuring ....................................................................................................................... vii
1. Program Context, Development Objectives and Design ............................................ 1
2. Key Factors Affecting Implementation and Outcomes .............................................. 5
3. Assessment of Outcomes .......................................................................................... 10
4. Assessment of Risk to Development Outcome ......................................................... 19
5. Assessment of Bank and Borrower Performance ..................................................... 21
6. Lessons Learned........................................................................................................ 23
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 24
Annex 1. Mongolia DPC2 Policy Matrix ..................................................................... 25
Annex 2. Bank Lending and Implementation Support/Supervision Processes ............. 27
Annex 3. Beneficiary Survey Results ........................................................................... 28
Annex 4. Stakeholder Workshop Report and Results ................................................... 28
Annex 5. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 28
Annex 6. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 28
Annex 7. List of Supporting Documents ...................................................................... 29
MAP IBRD 33449R1 ....................................................................................................32
i
Data Sheet
A. Basic Information
Country: Mongolia Program Name:
Mongolia -
Development Policy
Credit 2
Program ID: P117421 L/C/TF Number(s): IDA-47760
ICR Date: 04/02/2012 ICR Type: Core ICR
Lending Instrument: DPL Borrower: MONGOLIA
Original Total
Commitment: XDR 19.70M Disbursed Amount: XDR 19.70M
Revised Amount: XDR 19.70M
Implementing Agencies:
Ministry of Finance
Cofinanciers and Other External Partners:
B. Key Dates
Process Date Process Original Date Revised / Actual
Date(s)
Concept Review: 11/15/2010 Effectiveness: 02/26/2011
Appraisal: 04/05/2010 Restructuring(s):
Approval: 10/18/2010 Mid-term Review:
Closing: 06/30/2011 06/30/2011
C. Ratings Summary
C.1 Performance Rating by ICR
Outcomes: Satisfactory
Risk to Development Outcome: Moderate
Bank Performance: Satisfactory
Borrower Performance: Satisfactory
C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)
Bank Ratings Borrower Ratings
Quality at Entry: Satisfactory Government: Not Applicable
Quality of Supervision: Satisfactory Implementing
Agency/Agencies: Not Applicable
Overall Bank
Performance: Satisfactory
Overall Borrower
Performance: Satisfactory
ii
C.3 Quality at Entry and Implementation Performance Indicators
Implementation
Performance Indicators
QAG Assessments
(if any) Rating:
Potential Problem
Program at any time
(Yes/No):
No Quality at Entry
(QEA): None
Problem Program at any
time (Yes/No): No
Quality of
Supervision (QSA): None
DO rating before
Closing/Inactive status:
D. Sector and Theme Codes
Original Actual
Sector Code (as % of total Bank financing)
Banking 22 22
Central government administration 11 11
Mining and other extractive 34 34
Other social services 22 22
Roads and highways 11 11
Theme Code (as % of total Bank financing)
Environmental policies and institutions 12 12
Public expenditure, financial management and
procurement 22 22
Regulation and competition policy 22 22
Social safety nets 22 22
State-owned enterprise restructuring and privatization 22 22
E. Bank Staff
Positions At ICR At Approval
Vice President: Pamela Cox James W. Adams
Country Director: Klaus Rohland Klaus Rohland
Sector Manager: Sudhir Shetty Vikram Nehru
Program Team Leader: Rogier J. E. van den Brink Rogier J. E. van den Brink
ICR Team Leader: Rogier J. E. van den Brink
ICR Primary Author: Tehmina Shaukat Khan
iii
F. Results Framework Analysis
Program Development Objectives (from Project Appraisal Document) i) Fiscal Policy - Improve capital budget planning and execution, and prioritize the
maintenance of basic infrastructure.
ii) Social Protection - Contribute to poverty reduction and protecting the poor from
future shocks by better targeting social welfare interventions towards the poor.
iii) Financial Sector - Stabilize banking sector.
iv) Mining Sector - Further improve the policy framework for mining.
Revised Program Development Objectives (if any, as approved by original approving
authority)
The PDO or key indicators were not revised during implementation.
(a) PDO Indicator(s)
Indicator Baseline Value
Original Target
Values (from
approval
documents)
Formally
Revised
Target
Values
Actual Value
Achieved at
Completion or
Target Years
Indicator 1 :
Fiscal policy and management: Projects implemented during 2010 and
approved in the 2010-12 Medium Term Budget Framework, meet the criteria
of having the necessary feasibility studies and meeting an identified need.
Value
(quantitative or
Qualitative)
Annual budgets
contained large
numbers of capital
projects without
feasibility studies.
There were 204 such
projects (valued at
MNT 42 billion) in the
2010 budget and
contingent liabilities
from contractor funded
projects (amounting to
MNT160bn) were also
Reduce number of
projects without
feasibility studies
(by 197 projects
valued at MNT 40
bn in the 2010
budget) and reflect
contingent
liabilities in the
budget.
The July 2010
revised budget
eliminated 40
projects worth
MNT40bn without
feasibility studies.
Date achieved 12/31/2009 10/19/2010 12/31/2010
Comments
(incl. %
achievement)
Comprehensively addressing this problem is the Integrated Budget Law which
was passed in December 2011 mandating that appropriate costing studies be
done for capital projects and that the budget account for contingent liabilities
iv
Indicator 2 : Fiscal policy and management: Prioritize expenditures on repairs and
maintenance in 2010 budget.
Value
(quantitative or
Qualitative)
Baseline: Original 2010
budget allocation for
repairs and maintenance
of basic infrastructure
was MNT 28.2 billion
2010 budget
outturn has
maintained
allocation for
repairs and
maintenance of
basic infrastructure
at least MNT 28.2
billion.
The full-year
capital repair
expenditures in
2010 surpassed
target figure at
MNT 33.4 billion
Date achieved 12/31/2009 12/31/2010 12/31/2010
Comments
(incl. %
achievement)
Budget expenditures on maintenance and repairs have continued to rise since
2010.
Indicator 3 : Social protection: Progress on data collection for the national beneficiary
database based on a proxy-means-test formula.
Value
(quantitative or
Qualitative)
The existing social
protection system was
untargeted with
universal social
transfers. The prior
action aimed at moving
to a poverty-focused
system with targeting
based on a proxy-means
test (PMT).
The National
Statistical Office
has approved the
PMT methodology
as the official
targeting
mechanism for the
provision of social
welfare benefits in
Mongolia
The PMT
methodology was
approved by the
NSO
Date achieved 12/31/2009 10/19/2010 10/19/2010
Comments
(incl. %
achievement)
As of end December 2011, two of three surveys for the national beneficiary
database have been completed (223,000 households representing some 800,000
individuals) with a targeted transfer planned to be rolled out in June 2012
Indicator 4 : Social protection: The Government has issued a resolution outlining the main
design aspects of a new poverty-targeted benefit.
Value
(quantitative or
Qualitative)
The welfare system was
characterized by
universal transfers that
proved fiscally
unsustainable during
the 2008-09 downturn
The Ministry of
Social Welfare and
Labor (MoSWL)
has completed a
proposal defining
the parameters of
the new poverty-
targeted benefit
program, and has
submitted said
proposal to the
Cabinet for
approval.
The Social Welfare
Law was passed in
January. This
mandates the
introduction of a
means tested
poverty benefit that
is also fiscally
sustainable
v
Date achieved 12/31/2009 10/19/2010 01/25/2012
Comments
(incl. %
achievement)
Indicator 5 : Financial sector: Public confidence in banking system maintained as seen
through the absence of widespread bank runs.
Value
(quantitative or
Qualitative)
Two banks had failed
by the end of 2009 and
had to be taken into
and solvency concerns
for the banking sector
were a significant
concern in 2010
Special audits of 7
systemically
important banks
are undertaken and
those for another 3
are commenced
Banking sector
audits had been
completed
Date achieved 12/31/2009 10/19/2010 10/19/2010
Comments
(incl. %
achievement)
The three largest and systemically most important banks raised capital on a
voluntary basis in the latter half of 2010 and overall banking sector
performance also improved significantly
Indicator 6 : Financial sector: Good practice banking restructuring has paved the way for
development of sound and efficient banking system
Value
(quantitative or
Qualitative)
A comprehensive
banking restructuring
strategy that set out
stringent rules under
which public funds
would be injected into
failing banks was
missing, leading to
uncertainty in a period
of financial distress
BoM has adopted
and submitted to
Parliament a
comprehensive
bank restructuring
strategy, which
includes, as a last
resort tool, a
stand-by bank
recapitalization
facility with
proper covenants
to protect the
public funds.
Restructuring
strategy was
submitted to
Parliament, but not
discussed.
Date achieved 12/31/2009 10/19/2010 10/19/2010
Comments
(incl. %
achievement)
In the absence of approval by Parliament to date, the Bank of Mongolia moved
to bank-specific approach for macro-prudential regulation
Indicator 7 : Mining sector: Mining Tax Policy Paper developed with stakeholder
consultation and developed into a new Chapter in the Income Tax Law.
Value
(quantitative or
Qualitative)
The mining taxation
regime contained
disincentives (Windfall
Profits Tax, and VAT
laws on mining inputs)
to mining activity and
was not responsive to
the cyclical nature of
commodity prices.
Carry out a
systematic mining
tax review of
taxation to make it
more competitive,
and which allows
it to capture higher
levels of revenue
during elevated
periods of
Review was
partially
undertaken. The
Windfall Profits
Tax was effectively
abolished on
January 1, 2011 and
preparations are
ongoing to
introduce a
vi
commodity prices
without deterring
investment
progressive VAT
laws remain in
place. A new
chapter on mining
taxation is currently
under preparation
Date achieved 12/31/2009 12/31/2010 12/31/2011
Comments
(incl. %
achievement)
Indicator 8 : Mining sector: New Cadastre Regulations adopted and implemented.
Value
(quantitative or
Qualitative)
The process of mineral
license approval was an
opaque system of
internal ministerial
instructions. This was
open to discretionary
changes and reversals,
facilitating corruption
and discouraging
applications
Regulations on
operations and
processes of the
Mining Cadastre
need to be revised
Mongolia is still
operating without
adopting the full
body of revised
cadastre
regulations,
although some
revisions have been
adopted.
Date achieved 12/31/2009 10/19/2010 12/31/2011
Comments
(incl. %
achievement)
Indicator 9 :
Mining sector: Independent validation audit of Mongolia's national EITI
program completed, and the International EITI Board has found it to be
compliant.
Value
(quantitative or
Qualitative)
Mongolia had already
made significant
progress in the
implementation of the
EITI.
Documentation
required by the
International EITI
Board to assess
EITI compliance is
submitted.
Mongolia became
the fourth country
to be EITI
compliant in
Date achieved 12/31/2009 10/19/2010 12/31/2010
Comments
(incl. %
achievement)
Since 2005 Mongolia has published four payment reports and one Validation
Report. Coverage of EITI has expanded to include over 110 firms.
Discrepancies between company payments and government reciepts have
fallen substantially
vii
Indicator 10 : Mining sector: An online database of EIAs be made available to improve
public monitoring of environmental plans of mining projects
Value
(quantitative or
Qualitative)
Notwithstanding
progress in increasing
the role of civil society
in the sustainable
management of their
natural resources,
greater transparency on
environmental impacts
mining projects was
needed
An online a
searchable
database of
Environmental
Impact
Assessments for
mining and other
projects is made
available.
An online database
has been set up by
the Ministry of
Nature,
Environment and
Tourism (MNET)
Date achieved 12/31/2009 04/05/2011 10/19/2010
Comments
(incl. %
achievement)
(b) Intermediate Outcome Indicator(s)
Indicator Baseline Value
Original Target
Values (from
approval
documents)
Formally
Revised
Target Values
Actual Value
Achieved at
Completion or
Target Years
Indicator 1 : Not applicable
Value
(quantitative or
Qualitative)
Date achieved
Comments
(incl. %
achievement)
G. Ratings of Program Performance in ISRs
No. Date ISR
Archived DO IP
Actual
Disbursements
(USD millions)
H. Restructuring (if any)
Not Applicable
1
1. Program Context, Development Objectives and Design
1.1 Context at Appraisal
Mongolia was hit extremely hard by the global downturn in 2008-09, as copper prices
collapsed and external demand fell. With mineral revenues accounting for a third of fiscal
revenues and almost 80 percent of exports, both the fiscal and external current account balances
swung from surpluses into large deficits (Table 1). Foreign exchange reserve losses mounted as
the Bank of Mongolia attempted to defend the de facto currency peg and an overheated banking
sector experienced large local currency outflows. Two banks eventually failed and the economy,
which had experienced sustained growth of above 9 percent on average from 2004 to 2008,
contracted by 1.6 percent in 2009. Finally, severe winter conditions (―dzud‖) in 2009-2010
compounded the effects of the recession on the poor.
The shock exposed underlying weaknesses in the policy environment. These included
excessive budgetary reliance on volatile mineral revenues, inadequate savings during the boom
period which saw large increases in unsustainable expenditures and untargeted social transfers,
and an overheating and under-regulated banking sector.
Table 1. Mongolia selected economic indicators at the time of the original Program Document
2004 2005 2006 2007 2008 2009 2010
f
Real GDP growth (% yoy) 10.6 7.3 8.6 10.2 8.9 -1.6* 8.5
Consumer price index (end-period % yoy change) 10.9 9.6 5.9 14.1 23.2 1.9 12.0
Government balance (% of GDP) -1.8 2.6 3.3 2.8 -5.0 -5.4 -2.2
Total expenditures (% of GDP) 33.5 27.2 33.3 38.0 40.2 38.3 37.1
Total revenues and grants (% of GDP) 31.8 29.9 36.6 40.9 35.2 32.9 34.9
Current account balance (% of GDP) 1.3 1.3 7.0 6.7 -13.9 -9.8 -13.9
Gross FX reserves (months of imports of goods and services)
1.8 2.5 4.6 5.0 3.0 4.3 3.9
Exchange rate (MNT/USD, eop) 1209 1221 1165 1170 1268 1443 ---
Note: 2010 forecast from September IMF SBA Review (2010). *Recent NSO GDP revisions indicate that the economy contracted
by 1.3 percent versus the 1.6 percent contraction estimates provided at the time of original Program Document
Source: Bank of Mongolia, IMF, and World Bank staff estimates.
In late 2008, the government turned to the World Bank, IMF, the ADB and other donors
for assistance with growing balance of payments and fiscal deficits. Mongolia entered an 18-
month Stand-by-Arrangement (SBA) worth US$229 million with the IMF for balance of
payments support. The World Bank pledged US$60 million in early 2009 for budgetary support
in partnership with the ADB, Japan and Australia1. This was to take the form of two single-
tranche development policy credits (DPCs) – US$40 million for 2009 and US$20 million for
2010 (later increased to US $30million) – to help fill an initially estimated fiscal financing gap of
US$151 million for 2009 and US$67 million in 2010 (Figure 1).
1 The ADB pledged US$60 million, Japan US$50 million, Australia offered budget support of US$3.5 million for DPC1
2
Underlying both the Bank’s DPCs was a joint commitment with Mongolia’s development
partners to support a strong policy package targeting key policy reforms. The policies
included a set of fiscal, monetary, exchange rate and financial sector measures (as supported by
the IMF and the World Bank) and social welfare reforms supported by Japan, ADB and the
World Bank, along with improvements in mining sector policy (supported by the World Bank).
As part of this support, the Bank’s assistance strategy as laid out in its Interim Strategy Note
(ISN)2 exceptionally reallocated two-thirds of the IDA envelope of US$90 million to supporting
policy reforms in key areas in the form of two single-tranche DPCs (DPC1 and DPC2). They
were focused on reforms in four critical areas: namely fiscal policy and management, social
protection, financial sector and the mining sector.
Strong policy action successfully
stabilized the economy in 2009, allowing
donors to disburse their pledged amounts
during the course of the year.3 Rising
commodity prices and strong government
action to stabilize the economy, helped turn
the economy around faster than initially
expected. And medium and long term
prospects had also improved considerably
with the signing of a major mining project
(Oyu Tolgoi, OT). However, considerable
risks remained. Near term financing
pressures remained strong with a fiscal
financing gap for 2010 estimated at
US$41million at the start of 2010. Donor
financing was expected to dry up while
domestic debt financing carried the risk of
further crowding out the struggling private
sector. The banking system remained fragile: a major bank had failed at the end of 2009 while the
aggregate ratio of NPLs to assets hovered above 20 percent during the first half of 2010.
The DPC2 built on and sustained the momentum of the reforms begun under DPC14. With
the IMF SBA program on track, a second World Bank budget support operation was deemed
suitable, given that the prior actions were designed to promote medium-term reforms to enhance
the recovery and better manage a mineral-dependent economy. While DPC1 had focused on crisis
management, DPC2 focused on improving the policy framework. For instance:
DPC1 required banks to submit liquidity and asset quality information on a daily basis. DPC2
sought to improve information on and supervision of system wide risks by requiring audits of
systemically important banks and the preparation of a comprehensive bank restructuring strategy.
On social protection, DPC1 helped initiate reforms to consolidate the existing multitude of
transfers and to establish a national beneficiary database for a targeted poverty benefit, while
2 Given the economic crisis, far-advanced preparations for a new Country Partnership Strategy (CPS) were deferred in early 2009 in
favor of an Interim Strategy, which was approved in March 2009, to provide a bridging framework for an 18-month period until
economic conditions stabilized. 3 In total, the World Bank, Japan, the ADB and Australia disbursed US$133.5 million in 2009, while the IMF disbursed US$168
million. 4 World Bank (2009), Program Document for a Proposed Development Policy Credit, June (World Bank’s Documents and Reports website: http://go.worldbank.org/ROT5TQLVC0.
Figure 1. Fiscal Financing Gap* Estimates,
US$ mn
Notes: * Requiring to be filled through donor support
or donor program loans. Source: Various IMF SBA
reviews and Mongolia DPC1 PD
151 145 131
145 138 139
67 61 39 38 41 41
0 20 40 60 80
100 120 140 160
Initial Estimate, Mar '09
Aug'09 review
Nov '09 review
Dec '09 review
March 2010
review
Sep 2010 review
Fiscal Financing Gap for 2009
Fiscal Financing Gap for 2010
3
DPC2 was designed to lay the policy and technical basis for the introduction of a targeted poverty
benefit.
On fiscal issues, both DPCs remained focused on improving the public investment planning
and management process in Mongolia and protecting capital maintenance.
On mining, DPC2 built on reforms started under DPC1 that further clarified the policy
framework and increased transparency, also on the environmental impacts, in the sector driving
the recovery. Based on the successful outcome of DPC1 and the need to sustain the momentum for reform,
funds for DPC2 were raised to US$29.7 million from US$20million and the operation was
financed by IDA’s Crisis Response Window (CRW). As with DPC1, the single tranche
approach was adopted given the considerable economic and political uncertainties at the time of
the operation, including the absence of a medium-term policy framework. The operation was
financed by IDA’s CRW facility and followed its guidelines. The CRW’s objective is to mitigate
the impact of the global economic crisis and protect core spending on health, education, social
safety nets, infrastructure, and agriculture. All components of DPC2 were focused on mitigating
the impact of the global crisis on Mongolia, especially its impact on the poor.
In tandem with the preparation of DPC2, a US$12 million Multi-Sectoral Technical
Assistance Project (MTAP) was approved in June 2010 and became a key pillar of the
Bank’s assistance strategy. International, as well as Mongolian experience, strongly suggested
that the success and sustainability of reforms would be enhanced if they were accompanied by
technical assistance and targeted capacity-building. Therefore a new project was prepared in
parallel. The MTAP was specifically designed to support three out of the four policy reform areas
identified in the DPCs. The fourth – covering mining – was the focus of an already existing
mining TA project and therefore not expected to need additional resources.
1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved)
The DPC 2 was designed to support the government’s policy agenda in four key areas (see
the original policy matrix in Annex 1):
i) Fiscal Policy - Improve capital budget planning and execution, and prioritize the
maintenance of basic infrastructure. The prior actions (See Table 2 in Section 2.1 and
Annex 1) were designed to improve the budget process through more rigorous public
investment spending– thereby explicitly targeting attempts by parliamentarians to include
―pork barrel‖ projects in the budget – and by prioritizing maintenance of the badly neglected
existing infrastructure. They aimed to help Mongolia increase the efficiency with which
future increases in mineral revenues are invested and complemented other fiscal measures to
better manage the boom-and-bust cycle of mineral prices, notably the Fiscal Stability Law
(FSL) passed in June 2010.
The associated outcome indicators were that at least 28.7 billion Tugrik be allocated for
maintenance, up from 19.4 billion Tugrik in the original 2010 budget and that projects
implemented in 2010 and approved in the 2010-12 Medium Term Budget Framework were to
meet the necessary criteria of feasibility studies and of meeting identified needs.
ii) Social Protection – Contribute to poverty reduction and protecting the poor from future
shocks by better targeting social welfare interventions towards the poor. Prior actions in this
category built upon reforms started under DPC1, the centerpiece of which was a targeted
4
transfer program. Such a program would be part of a complete overhaul of the social welfare
system, supported by new legislation, whose design was being supported by Bank TA. The
objective was to lay the foundation for a more efficient, streamlined and cost-effective social
welfare system that better protected the poor and was more fiscally sustainable.
With the ADB and Japan targeting the passage of the necessary legislation as key
conditionality in their support package, the DPC2 prior actions focused on putting in place
the policy and technical building blocks of a targeted program in order to avoid cross-
conditionality (Table 2). Meanwhile, the MTAP started setting up a national PMT based
beneficiary database while the government issued a resolution outlining the main design
aspects of the new targeted benefit, both of which were key outcome indicators.
iii) Financial Sector – Stabilizing the banking sector. The failure of two banks, one in 2008 and
another in late 2009, highlighted significant system weaknesses relating to poor financial
system oversight and enforcement, poor auditing, insider and connected party lending,
inadequate risk management, and weak governance and internal controls. Complementing
IMF benchmarks to strengthen supervision and regulation, the prior actions required audits of
systemically important banks using internationally reputable auditors, and the submission of a
draft law to Parliament which outlined stringent conditions under which failing banks could
be recapitalized using public money.
It was anticipated that these prior actions would help to maintain confidence in the banking
sector, as evidenced by the absence of widespread bank runs and help the BoM accurately
assess the financial condition of individual banks so that it could take the appropriate
regulatory action. The approval by parliament was sought ex-ante so that in case intervention
was needed, the BoM could act swiftly without needing further parliamentary approval. By
ensuring compliance with prudential norms and strengthening corporate governance in
Mongolia’s banks they would increasing the banking system’s resiliency to future internal
and external shocks.
iv) Mining Sector - Clarifying the mining policy framework. Mongolia made significant
progress in mining sector reforms in 2009 with the landmark signing of the OT Investment
Agreement in October 2009, and later the repealing of the Windfall Profits Tax from January
2011 that had been considered punitive. But other measures were also introduced which
could act as disincentives to new exploration and mine development and forward movement
on important regulatory developments was also slow. The prior actions were aimed at
improving mining policies and increasing transparency with respect to Mining Cadastre
regulations under which mineral rights are allocated, documentation of revenues from the
mining sector as required for EITI compliance, and the environmental impacts of mining
projects (Table 2).
The outcome indicators were that the new cadastre regulations be implemented, that a Mining
Tax Policy Paper developed with stakeholder consultation be incorporated as a new chapter
in the Income Tax Law (and thereby improve the taxation framework), that Mongolia become
EITI compliant, and that an online EIA database be placed online and that it improve public
monitoring of the environmental plans of mining projects.
5
1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and
Reasons/Justification
The PDO or key indicators were not revised during implementation.
1.4 Original Policy Areas Supported by the Program (as approved)
This DPC supported reforms in the four policy areas most affected by the economic
downturn, and which were also targeted under DPC1. It continued the engagement on the
structural policy reforms needed to complete the policy response to the crisis, and lay the
groundwork for a better medium-term policy (see Section 3.1).
In the fiscal sector, improving the budget process through more rigorous screening of capital
projects, reducing off-budget financing of infrastructure projects, and prioritizing
maintenance of existing infrastructure was key to improving the efficiency of public
investment funded by rising mineral revenues and complemented other fiscal measures aimed
at managing a mining-dependent economy.
Putting in place a targeted poverty benefit would help ensure that the poor are protected from
future mining boom-and-busts in a fiscally affordable manner.
Banking sector audits and the submission of a draft law to parliament, which outlines
stringent conditions under which failing banks could be recapitalized using public money,
would help the BoM to assess systemic risks, take appropriate action, and help to prepare the
sector for the upturn in economic activity, investment and capital inflows associated with the
development of the mineral sector.
Finally, continued reforms in the mining sector and increasing its transparency would
enhance incentives for new exploration and environmentally and socially sustainable
development in a sector that is a key driver of medium- to long term economic growth.
1.5 Revised Policy Areas (if applicable)
None
1.6 Other significant changes
None
2. Key Factors Affecting Implementation and Outcomes
2.1 Program Performance (supported by a table derived from a policy matrix)
The DPC2 was a single-tranche operation leading to the disbursement of SDR 19.7 million
(US$29.7 million equivalent) on 29 September, 2010. There was some delay in achieving the
prior actions in the fiscal sector because of the insertion of investment projects lacking feasibility
studies in the 2010 budget and the lack of accounting for contingent liabilities. Consequently,
DPC2 went to the Board in September (versus June as originally planned) only after the budget
was duly amended by parliament in July, 2010. However, during preparation, the Bank
communicated to the government that the exact timing of the disbursement should matter less
than the full completion of the agreed-upon prior actions in order to keep the reform momentum
going. The prior actions were as follows:
6
Table 2: List of Prior Actions in DPC2 Single Tranche
List of conditions from Program Document Status
Capital budget planning and screening is improved, as demonstrated by the exclusion of
174 projects without feasibility studies and technical drawings from the 2010 budget and
accounted for contingent-liabilities from contractor funded liabilities, from the amended
Budget in July 2010.
Fulfilled
Capital expenditure for the maintenance of basic infrastructure is prioritized, as evidenced
by: (i) the increase in the ratio of capital repairs to new investments from 6.1 percent (in
the FY2009 Revised Budget) to 6.5 percent (in the FY2010 Budget); and (ii) the
allocation of 28.2 billion Tugrik therefore.
Fulfilled
The National Statistical Office has approved the Proxy Means Test methodology as the
official targeting mechanism for the provision of social welfare benefits in Mongolia.
Fulfilled
The Ministry of Social Welfare and Labor (MoSWL) has completed a proposal defining
the parameters of the new poverty-targeted benefit program, and has submitted said
proposal to the Cabinet for approval.
Fulfilled
BoM has: (i) completed a special banks assessment of seven (7) selected banks; and (ii)
commenced a similar assessment of another three (3) selected banks, with the assistance
of internationally reputable auditors.
Fulfilled
BoM has adopted and submitted to the Parliament a comprehensive bank restructuring
strategy, which includes, as a last resort tool, a stand-by bank recapitalization facility with
proper covenants to protect the public funds.
Fulfilled
The Recipient has revised the regulation on operations and processes of the Mining
Cadastre.
Fulfilled
The Recipient has submitted the documentation required by the International EITI Board
to assess the compliance of the Recipient’s national EITI Program.
Fulfilled
The Recipient has placed online a searchable database of Environmental Impact
Assessments for mining and other projects.
Fulfilled
2.2 Major Factors Affecting Implementation:
The operation remained centered on key policy areas, extending reforms started under
DPC1 and maintaining its partnership with other development institutions to support
reform momentum. Both DPCs were centered on areas in which the World Bank had a
comparative advantage in providing support to the authorities and on which there was on-going
intensive dialogue with senior policy makers, excellent collaboration with government and other
development partners, and supporting existing, or planned, technical assistance projects. As with
DPC1, the design and implementation of DPC2 was closely coordinated with other development
partners. This was the case both in terms of the respective policy matrices and in the supporting
analytical and technical assistance.
Cooperation and collaboration with the IMF in particular was exemplary, with the Joint
Management Action Plan (JMAP) internally cited within the IMF as best-practice. The
partnership was one of day-to-day joint teamwork, and the Bank participated in all the IMF
negotiations, while the IMF participated in the internal review process of the Bank’s DPCs, and
both jointly collaborated on analytical work and outreach.
Two landmark pieces of fiscal legislation were successfully enacted as a result of the
excellent partnership between government, parliament, the IMF and the Bank. The FSL (passed
June 2010) contains three fiscal rules to help anchor a sustainable, counter-cyclical medium-term
fiscal framework. The Integrated Budget Law (IBL, passed December 2011) is a comprehensive
law which strengthens the MTFF, improves the comprehensiveness of the budget, strengthens the
public investment planning and capital budgeting process, clarifies roles and responsibilities from
budget planning to execution and auditing, and significantly increases the authorities and
7
financial resources of local governments. With the IMF targeting the passage of the FSL as a
structural benchmark, the Bank focused on improving the efficiency of public expenditures to
avoid duplicating conditionalities (in accordance with recommendations from Bank
management) . However, both institutions worked hand-in-hand in building up a political
consensus on the FSL and IBL, and the Bank mobilized substantial resources, from its own
budget as well as by re-allocating expenditures from the on-going Economic Capacity and
Technical Assistance Credit (ECTAC) Project,
Bank and Fund staff also jointly provided technical assistance in expenditure management,
the FSL, the IBL and taxation of the mineral sector. Banking reforms were similarly tied together
to avoid unnecessary duplication of effort.
In social protection, the passage of the Social Welfare Reform Law (SWL) was a program
target supported by the ADB and Japan. The World Bank helped draft the law, but did not copy
its passage as a prior action into DPC2 as is best practice for development policy lending. Instead,
it focused on the technical area in which it was intensively engaged, namely the design and
implementation of the targeted poverty benefit mandated by the SWL.
The government and parliament showed a high level of commitment to the reforms, in spite
of the pre-election pressures which were steadily growing during 2010 and 2011. Actions
that demonstrated a bi-partisan resolve to improve the economic policy framework included:
The passage in June 2010 of the landmark FSL and in December 2011 of the IBL;
The formal adoption of the PMT formula for implementing a targeted benefit system by the
NSO in 2010 and the passage of the SWL in January 2012;
Amendments to banking legislation in January 2010 to improve the governance of the
banking sector by strengthening the central bank’s intervention powers and sanctions;
The submission of a bank restructuring plan to parliament in the summer 2010, and, when
parliament decided not to discuss it, because of the rapid improvement in the overall banking
sector situation, the BoM moved to implement supervisory action plans for weak banks.
The OT agreement taking full effect in March 2010 upon fulfillment of all conditions
stipulated in the October 2009 Investment Agreement by the government within the allocated 6-
month period.
DPC2 recognized that the reforms were not stroke-of-the pen reforms and instead required
sustained technical assistance for capacity and institution building. A key lesson from DPC1
was that turning crisis into opportunity also requires leveraging policy lending with TA
operations and capacity-building programs: the fiscal and mining sectors were better able to
achieve their objectives in DPC1 because analytical work was already in place, in contrast to
social sector reforms for which technical assistance had been mostly absent. While government
capacity was sufficient to take the strong, and often painful, policy actions supported by the
DPC1, the more complicated and complex reforms needed to strengthen the policy and
institutional framework, for instance on social welfare and banking, required developing more
capacity. The 4-year MTAP developed in parallel to DPC2 included targeted capacity building
(including training) in fiscal management, social welfare and banking sector issues as a key
activity.
The DPC2 operation was accompanied by intensive dialogue, consensus building and
information dissemination to garner support for complex and politically sensitive reforms,
with intensive outreach to Mongolia’s powerful parliament conducted directly and
indirectly through the media.
There were intensive efforts at consensus-building and dialogue between key stakeholders
across government and information dissemination through Monthly Economic Updates, an
8
Economic Retrospective5 and a report and follow-on policy note on improving public investment
management6. The Updates were an important platform for explaining the rationale for, and
progress on, reform measures along with covering macroeconomic developments. They were
distributed widely, receiving strong local press coverage, and have been made available on the
BoM’s website as well. The annual Economic Policy Conferences jointly organized by the World
Bank and the government provided another opportunity for discussing policy challenges amongst
the media, civil society, policy makers, and donors.
Study tours were organized to ensure continuous dialogue with parliamentarians : three to
Washington DC (jointly with the IMF), two to Chile and one each to Canada, Botswana, Estonia,
Poland and Slovenia. These aimed to provide policymakers and legislators with "cross-country",
cross-institutional, cross-regional, and cross-sector knowledge on how best to manage a mineral-
dependent economy, with topics including social welfare, public investment management, fiscal
decentralization, fiscal stability laws and investment strategies for stabilization funds. These
study tours are widely acknowledged to have been instrumental in ensuring parliamentary
passage of the FSL and the IBL.
This helped in building support for and securing the passage of major laws aimed at strengthening
institutions and the overall policy framework, namely: the FSL, the IBL, and the SWL. However,
political connections to the financial sector have meant that the proposed banking sector reforms
were viewed through a political lens and perceived to be biased, while rebounding mineral prices
and a booming economy fed the perception that the banking sector could grow its loan books and
reduce the NPL ratios. Accordingly, with the comprehensive bank restructuring plan not
approved (and unlikely to be so) by parliament, the BoM instead adopted a bank specific
supervisory approach based on banking sector audits.
A number of risks were identified as potentially affecting implementation. There was the
general risk that with the elections drawing closer, mineral prices reviving and with growing calls
for mineral wealth redistribution, the government’s commitment to medium-term reforms would
be weakened:
In the fiscal sector the risk was that fiscal consolidation would go off track and the
government would succumb to populist pressures for additional expenditures on a universal cash
transfer of OT prepayment funds or on housing subsidies, leading to large near term financing
pressures.
In the social sector, the risks were that slow consensus building and pressure for universal
benefits would hinder the passage of the SWL while institutional/ technical capacity constraints
would reduce the ability of the government to implement the proposed reforms.
In banking, the key risk was of a failure to deal with banks having insufficient capital levels
in an expedient and proper manner, with a potential negative fallout on confidence in the overall
banking system.
Risks in the mineral sector concerned the potential for a return to policy uncertainty, an
inability to address mining infrastructure needs to develop the country’s mineral wealth and a
revival of political interference in the sector in case mineral prices revived, affecting the
incentives of the exploration sector to invest in Mongolia.
5 Mongolia Economic Retrospective: 2008-2010 (World Bank, 2010)
6 Mongolia: Improving Public Investment Planning and Budgeting (World Bank, 2010); Mongolia: TA Mission Report on Improving
Public Investment Management (World Bank 2010)
9
These risks have partially materialized. This is evidenced by first, the increasing size of
government spending since 2010 (supported by rising mineral revenues) although overall
balances remain in good shape due to buoyant mineral prices. Second, since 2010, the
government has provided large universal cash handouts and there was a delay of nearly two years
in passing the necessary social welfare reform legislation. Third, the banking sector is once again
showing signs of overheating which leaves it susceptible to a shock, and while supervisory
actions plans were being implemented, three banks (including one systemically important bank)
benefited from regulatory forbearance. In the mining sector, the government also came under
election related pressure to revise the OT mining investment agreement, although it has held firm
on its commitments.
Mitigation factors include significant progress in setting in place a fiscal framework and the
introduction of laws that lock in prudent policies. These include the expenditure and structural
deficit rules of the FSL, which become binding in 2013, budget reforms under the IBL and
greater fiscal sustainability of social welfare system under the SWL. In addition, a new election
law passed in December 2011 forbids political parties from making promises of cash in the run-
up to elections. The Bank also remains engaged on these reform areas through its TA and
through its convening role. However, the Bank’s IDA and IBRD contributions (Mongolia
recently became eligible for IBRD funding) relative to the country’s huge infrastructure needs are
small, which will impact the Bank’s leverage. The IMF, meanwhile, has remained engaged
through regular post-program monitoring missions and discussions after the completion of its
SBA program.
2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization:
The monitoring and evaluation framework involved the dialogue of the Bank with the
government, along with development partners, combined with ongoing monitoring of data
indicators of performance. Regular monthly Economic Updates from April 2009 and Quarterly
Updates from July 2010 onwards (which are also available on the BoMs website) have allowed
policymakers and the public to follow macroeconomic developments in depth, and enhanced
awareness of the country’s economic challenges and policymakers’ options.
Macro data provided by the authorities are relatively wide-ranging and timely, but survey
data necessary for assessing social and poverty impacts are less insightful.
Macro data are of sufficiently high quality and frequency to allow monitoring on a monthly
basis and to benchmark progress against the outcome indicators in the fiscal and monetary sector.
However household and other survey data are not geared towards assessing poverty and
social outcomes in response to particular policies. For example labor force surveys are available
on a quarterly basis, but are not structured to gauge the impact of specific social transfer
programs.
To compensate for the lack of timely data on poverty trends, the World Bank conducts a
quarterly survey (undertaken since April 2009) of unskilled workers in informal labor markets in
Ulaanbaatar. While this is not a comprehensive survey, it tracks an important indicator in real
time: real wages for unskilled workers in the informal sector.
On mining, there is no data available to assess whether the publication of EIAs has improved
public monitoring of the environmental plans of mining projects. But EITI compliance has proved
extremely useful for marking progress towards greater transparency in the mining sector, notably
in reducing aggregate discrepancies between company mining payments to the government and
government tallies of mining receipts over the course of four reporting cycles.
10
2.4 Expected Next Phase/Follow-up Operation (if any):
A programmatic DPC centered within a new Country Partnership Strategy was considered
a possibility at the time of the DPC2 operation but is unlikely at the time of the ICR
assessment. The ISN will be replaced during FY11 with a four-year CPS due in FY12. Mongolia
has been classified as a middle-income country since July 2008, and became IBRD-creditworthy
during FY12. As Mongolia creates the fiscal space to comfortably finance its own investment
program, the Bank’s comparative advantage will increasingly shift towards providing policy
advice and technical assistance. The consultations leading up to the new CPS will be focused on
how to maximize the benefits for Mongolia of the Bank’s knowledge services. The 4-year MTAP
and continued outreach through regular economic updates continues to focus the government’s
policy agenda towards reforms initiated under the DPC operations.
3. Assessment of Outcomes
3.1 Relevance of Objectives, Design and Implementation
(to current country and global priorities, and Bank assistance strategy) Rating: Highly Satisfactory
The Highly Satisfactory rating reflects an assessment that the objectives, design and
implementation of the operation are highly relevant to Mongolia’s near- and medium-term
priorities, and that the operation formed an integral component of the Bank’s assistance
strategy to the country. The policy reforms embarked upon under DPC2 remain highly relevant
to prevent a repeat of the boom-bust cycle. At the time of the ICR assessment (January 2012), the
economy grew by 17.3 percent in 2011, up from 6.4 percent in 2010. Growth is being pushed by
infrastructure spending related to the development of the OT mine. The expansion of the mineral
sector represents a structural shock to the economy and is likely to have strong distributional
consequences while large mining sector inflows carry the risk of Dutch Disease. Meanwhile, with
revenues supported by high commodity prices, fiscal policy has been extremely loose (before the
rules under the FSL become binding in 2013), adding to overheating pressures. These events
underscore the continued necessity of aligning Mongolia’s development priorities with managing
its vast mineral wealth in a sustainable, equitable and affordable manner and protecting the poor
from boom-bust polices. Accordingly, the objectives, design and implementation of the DPC2
operation remain highly relevant.
The DPC2 operation, along with the first DPC operation, was a key pillar of the ISN setting
out the Bank’s engagement in Mongolia in the near-term. Shifting resources towards these
budget support operations entailed a trade-off between the desire to support the policy reforms
needed to contain the crisis and create a better medium-term policy framework, on the one hand,
and project-based investments, on the other. The two DPC operations represented around two-
thirds of the notional IDA envelope for 2009-2010.
3.2 Achievement of Program Development Objectives
(including brief discussion of causal linkages between policy actions supported by operations and
outcomes) Overall achievement of PDOs
Rating: Satisfactory
11
The broad context to the assessment of the achievement of the development objectives is the
strong recovery of the economy in the period since the operation (Table 3). Strong policy
actions undertaken by the government, supported by policy conditionality and donor financing of
the balance of payments and the budget, were instrumental in promoting a broad based economic
recovery in 2010. Growth has since accelerated, helped by a rebound in mineral prices,
development of OT and an expansionary fiscal policy stance. Assessing the exact causal linkages
of these developments to the DPC2 operation is however, made difficult by the multiple
influences on outcomes during the recovery period.
Table 3. Selected macro-economic indicators March 2010 to December 2011 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Sep-11 Dec-11
Real GDP growth, quarterly, % year-on-year 8.2 6.3 12.0 0.4 9.9 20.8 18.7
Trade balance (12-month rolling), US$ mn -609.6 -548.6 -648.0 -474.9 -766.6 -1670.9 -1746
Fiscal balance (12-month rolling) (percent of
interpolated GDP) -4.7 -3.1 -0.2 0.0 2.4 2.5 -3.5
CPI inflation, percent year-on-year 8.5 11.4 10.6 13.0 8.0 10.5 13.5
Exchange rate MNT per US$, monthly average
1413 1380 1326 1233. 1229 1260 1395
International copper price, US$/metric ton 7369 6719 7593 8648 9848 9126 7763
Net FDI (rolling 4-quarter sum), US$mn 1221.4 1476.9 1631.4 1629.7 2060.3 3214.2 3537 (Nov)
Source: Bank of Mongolia, National Statistical Office, Ministry of Finance, and World Bank staff estimates.
The rating of Satisfactory for the overall achievement of PDOs is based on an equal
weighting of the ratings across the four policy areas of the program.7 Progress in terms of
outcomes to date has been satisfactory in the fiscal sector, where the landmark FSL was passed
early on, and the IBL which comprehensively reforms the budget process and addresses concerns
regarding contingent liabilities and the feasibility and costing of capital budget projects was
passed in December 2011. Reforms on social welfare have been slow, but the SWL was finally
approved in January 2012 and a targeted poverty benefit is on track to be rolled out in July 2012
replacing universal cash transfers. Progress was also satisfactory in the mining sector, but
relatively more limited in the banking sector, where parliament failed to discuss and approve the
draft banking sector restructuring strategy, which would have set a strict deadline by which all
banks would have needed to be in compliance with the regulatory framework and clearly defined
the conditions under which a failing bank could be recapitalized using public money.
Fiscal Policy and Management
Rating: Highly Satisfactory
The main reform objectives of the DPC2 were institutionalized with the passage of the IBL in
December 2011, which significantly strengthens public investment planning and budgeting, and
supports the FSL in strengthening the medium-term fiscal framework. This significant progress
justifies the Highly Satisfactory rating.
7 The Satisfactory overall rating is based on the average of a simple mapping of the sectoral ratings to a numerical scale ranging from 6 for Highly Satisfactory to 1 for Highly Unsatisfactory.
12
While the DPC2 prior actions were all met, there were initial setbacks in the post-DPC2
2011 budget with regard to the outcome indicator on public investment projects and
contingent liabilities, reflecting the influence of parliament in a pre-election year. The 2011
Budget contained numerous projects that did not meet the necessary appraisal criteria, and the
Cabinet submitted a large number of projects for consideration to the newly formed Development
Bank of Mongolia (DBM), reducing the comprehensiveness of the budget and raising the risk of
off-budget financing with significant future budgetary implications. More generally, the fiscal
stance has been highly expansionary since 2010, with expenditure being raised to record levels in
successive budget plans and in excess of ceilings set out in the MTBFs. Although not in
contradiction to the rules contained in the FSL which become binding in 2013, it does run counter
to the spirit of the FSL.
The recently passed IBL comprehensively addresses these issues by reforming the budget
process, securing the implementation of the FSL, improving the selection of capital projects
and fully accounting for contingent liabilities. On fiscal stability, the IBL mandates that
budgets follow the fiscal rules set in the FSL and the expenditure limits set in the MTBF. The law
also explicitly states that the budget consists of the state (central government) budget, the Human
Development Fund, and the Social Insurance Fund, that the budget should list projects to be
executed through concessions contracts, and include information on government guarantees and
contingent liabilities, including those made to the DBM, thereby improving the budget’s
comprehensiveness. It significantly strengthens capital budgeting, mandating that only projects
that have gone through a proper appraisal process be considered for financing, and introduces the
concept of a rolling four-year public investment program for large projects (greater than 30
billion MNT) as a stock of potentially financeable projects that have passed a pre-feasibility study.
All capital projects have to include future maintenance expenditure requirements, and all
financing decisions — whether to fund projects from the budget, loans, concessions, or the
Development Bank — are then made by the MoF, abiding by the good principle of the MoF as a
single point of control on such matters.
The use of the Medium Term Budget Framework (MTBF) as an outcome indicator has
proved extremely useful for benchmarking policy commitment and progress. This is
particularly true with regard to the overall deficit targeted in the 2011 budget which was above
the ceilings laid out in the MTBFs for 2010 and 2011 (Table 4). With respect to public investment
expenditures, the government has more than met the floors specified by the MTBFs. However, it
remains hard to measure repair expenditures. Capital repairs in the budget continue not to reflect
expenditures funded directly by donor funding or by the Road Fund. Meanwhile, high frequency
measurable outcome-based indicators of the state of the public capital infrastructure were also
unavailable for this review.
Table 4. Aggregate indicators for the Budget Framework under the MTBF in comparison to 2011
approved and outturn numbers (% of the projected GDP) MTBF 2011 2011
Approved*
2011
Outturn
2012
planned* Guidelines for budget for given year as % of
GDP*
2011 2012 2013
Floor on total budget revenue 35.4 35.4 30.3 41.0 40.6 38.1
Ceiling on total budget expenditure 40.4 39.4 32.3 48.5 44.2 39.1
Ceiling on total budget deficit -5.0 -4.0 -2.0 -7.6 -3.6 -1.0
Floor on capital expenditure 6.3 6.0 4.7 11.8 9.9 12.4
Source: World Bank, MOF Budget document.* Budget Assumptions for GDP
13
On protecting government spending on the maintenance of public infrastructure, the
outcome indicators were more than met in the final 2010 budget passed in June 2010. Maintenance spending allocations were raised even further to MNT 37.9 bn, higher than the
MNT28.2bn targeted under the prior actions,. Spending has since continued to rise (Table 5)
clearly indicating greater policy prioritization of maintenance spending, compared to prior to the
Bank’s DPC operations. More fundamentally, the requirement in the IBL of robust estimation of
future maintenance needs for new capital project should help in the adequate maintenance of
capital assets. Going forward, maintenance to investment ratios are no longer suitable as
indicators given the increase in investment spending required to develop the mining sector. This
was appropriate during the crisis period when it aimed to protect existing spending when the
budget was being cut. Better indicators might be the ratio of current maintenance to new
investments lagged by 3-5 years.
Table 5. Maintenance to capital ratios MNT bn 2008 2009
Amended (Mar)
2009 Final (Jun)
2009 Outturns
2010 (passed Nov ‘09)
2010 Budget Final (Jul)
2010 Outturns
2011 Outturns
2012 Budget
Maintenance spending
36.5 21.6 21.6 20.7 28.2 37.9 33.4 52.4 235.5
of which financed by Road Fund
9.0 9.2 9.2 8.9 8.9 9.0 9.0 - 182.8
% annual increase 3.2 (40.9) (40.9) (43.5) 37.0 83.3 61.6 57.0 349.4
% of domestic investment
7.7 6.1 5.2 5.3 6.5 7.4 6.8 5.3 15.6
Source: NSO
The prior actions have been important building blocks in the overall fiscal reform agenda.
By drawing attention to political economy problems in Mongolia, namely a powerful parliament
influencing the capital budget via the insertion of unprepared pork-barrel projects, and the
maintenance of existing infrastructure, they helped focus the reform effort on these issues. In
addition, they are closely linked to other fiscal policy measures that aim to ensure that Mongolia’s
mineral wealth is invested prudently and that these investments are productive and efficient and
aligned with national priorities. In this context these prior actions appear to have been effective in
building domestic political appreciation of the merits of such rules and enhancing the likelihood
that the FSL and the IBL were adopted.
Social Protection
Rating: Satisfactory
The Satisfactory rating reflects the passage of the Social Welfare Law in January 2012, which
mandates the introduction of a means tested poverty benefit that is also fiscally sustainable. But it
also takes into account the introduction of a fiscally, macro-economically and socially costly
universal cash transfer in 2010, and delays in introducing a targeted social assistance and passing
the SWL in the first place.
The passage of the SWL in January 2012 is a major accomplishment: it lays the foundation
for a more efficient, cost-effective social welfare system in Mongolia that better protects the
poor and is more fiscally sustainable. The law includes three key features: (i) substantial
consolidation of categorical benefit programs; (ii) Introduction of the Poverty Targeted Benefit
(PTB) based on a Proxy Means Testing targeting; and (iii) Longer-term fiscal sustainability of
social welfare. The program is likely to be targeted to the bottom 20 to 30 percent of income
14
distribution of the population. This will mean a more streamlined and rational system of social
transfers, which targets the poor. The reformed system will be more coherent in terms of its
design and structure and more effective in protecting the poor at a lower cost to the budget.
But the social protection strategy has not been articulated well over the past two years, as
reflected in the introduction of a costly universal cash transfer program in 2010, and
without the recent passage of the SWL, we would have rated this area Moderately
Satisfactory. Entering the crisis, Mongolia had an extensive system of safety net programs (i.e.,
non-contributory transfers) that were mostly rooted in the system of fragmented and poorly
targeted categorical transfers and that proved fiscally unsustainable when the crisis broke. The
most expensive of these was the universal CMP costing 1.8 percent of GDP, but which covered
90 percent of the households in the poorest quintile. This was withdrawn at the start of 2010 and
replaced in the summer by universal cash transfers from the Human Development Fund (HDF) to
make good on earlier political promises. In the interim period, Mongolia experienced a ―dzud‖
(severe winter conditions in early 2010) that devastated its livestock and severely impacted
livelihoods. At this crucial time, the poor were left without any social assistance programs
targeted to specific vulnerable groups. The HDF cash transfers provided much needed relief, but
came late. Viewed as a mechanism to distribute mineral wealth rather than as a safety net, the
program was also extremely costly (about 9 percent of GDP) with adverse macroeconomic (high
inflation) and social implications (welfare dependency).
Sustained engagement through DPC2 and MTAP played an important role in building
support for a targeted social welfare system and achieving the associated outcome
indicators in DPC2, but consensus and reform momentum was hard to achieve in an
environment of strong economic growth and an increasing fiscal envelope. The goal was to
gradually roll out a new poverty benefit based on PMT-targeting, starting mid-2010 and the
necessary legislation was submitted to parliament in January 2010. But with revenues buoyed by
high commodity prices and broad based strong economic growth, there was less urgency to
undertake reforms. It has also taken time and experience with the impacts of such a large
universal cash transfer program on budgetary costs, on inflation which has stayed in double digits
for most of 2011, and on incentives to sink in and to solidify support for a targeted system. As a
result, parliament’s approval of the SWL was postponed for almost two years, despite good
progress on DPC2 outcome indicators, with the law passed only in January 2012.
Although a targeted system is on track to be provided in all major areas in mid-2012, there
remain a number of technical challenges. As part of the MTAP and the two DPCs, significant
time, resources and TA were expended, and continue to be provided, to build technical and
institutional capacity in Mongolia to develop a system of targeted benefits. However, technical
challenges, reflecting inexperience with building up such a system, remain to be addressed for the
program to be implemented successfully in 2012. Of the three rounds of PMT surveys planned in
order to set up a national beneficiary database, only two have taken place so far (223,000
households were surveyed representing about 800,000 individuals). The third round has been split
into a further two and the surveys are envisaged to be completed by June. The delay is due to
various procurement and bidding issues, including the fact that companies that had undertaken the
first round of surveys were not allowed to participate in the second, so that their accumulated
experience went unutilized while novice companies were left in charge of the second round.
Going forward, an open enrolment (on-demand application) and assessment system (to include
those missed by the surveys) is planned, supported by the MTAP project. In addition, extremely
high levels of growth require a reassessment of the PMT formula to distinguish between poor and
non-poor households.
15
The technical/institutional capacity requirements and time needed to implement targeted
poverty benefits suggests that they need to be phased in, starting with simpler reforms,
which are easier to implement and therefore can be rolled out quickly to ensure that the
poor are protected during and in the immediate aftermath of a crisis period. There were
efforts to revise and streamline the existing Child Money Program, but the government passed
these over in favour of comprehensively reforming the social welfare system, which despite all its
advantages, has taken very long to implement.
Financial Sector
Rating: Moderately Satisfactory
The Moderately Satisfactory rating for the achievement of PDOs in the financial sector reform
area weighs weaknesses in follow-up action on addressing banking sector weaknesses against the
progress made on the broad objective of stabilizing the banking sector as indicated by the absence
of bank failures since the end of 2009.
Policy action by the government, supported by the Bank’s DPC2 prior actions and outreach,
dialogue and TA, helped to reduce banking system stress considerably and achieve short-
term outcome indicators. Engagement on banking sector issues was significantly increased in
DPC2 compared to DPC1 in order to build up a wider understanding of solvency, regulatory and
supervision problems in the banking sector, including through the hiring of leading global
financial experts on banking crises with experience in Iceland, Sweden and Turkey. The DPC2
prior actions required intensive bank audits and the submission of a restructuring strategy to
parliament. These prior actions were met during 2010, and combined with strengthened
supervisory and regulatory powers for the BoM helped to lay the ground for good practice
banking restructuring. The outcome indicator for no banking failures has also been met – no bank
has experienced distress since late 2009.
The economic recovery and bank recapitalizations from private sources have obviated the
need for bank bailouts. Support for the system-wide restructuring plan waned as the economy
rebounded in 2010 and growth accelerated further in 2011, and the plan was not formally
discussed by Parliament. Still, it can be argued that the BOM’s continued focus under DPC2 on
banking solvency through detailed audits and the submission of a bank restructuring strategy to
parliament helped to pressure major banks to bring in additional capital. The three largest and
systemically most important banks raised capital on a voluntary basis in the latter half of 2010
and overall banking sector performance also improved significantly (Table 6). Capital adequacy
ratios climbed to over 16 percent by the end of 2010, more than three times their level in 2009.
Loan to deposit ratios, a measure of liquidity risk, also dropped back from 136 percent in 2009 to
75 percent in 2010.
It should be recognized, however, that the banking sector recovery since late 2009 is largely
due to a rapid recovery of the economy. This allowed banks to expand lending and hence
reduce the ratio of non-performing loans on its books. The amount of loans on banking sector
balance sheets rose by 14 percent in 2010, and by 73 percent in 2011. Such high levels of loan
growth have helped mask the large volume of non-performing loans from the last downturn,
while profitability has also increased (Table 6).
Despite sufficient legal powers assigned to the regulator, enforcement of improved
prudential norms by the BOM has lagged due to political pressures. Amendments to banking
legislation in 2010 strengthened the BoMs regulatory and supervisory powers. But there continue
16
to be difficulties in setting up a robust supervisory and enforcement regime,8 reflecting political
interference, capacity issues and ineffective coordination between the units in the BoM
responsible for supervision. A number of banks remain in chronic violations of exposure limits on
lending to related parties and large borrowers and, although system-wide capital adequacy ratios
are much better than at the peak of the crisis, there are significant variations among banks. The
BoM had to grant regulatory forbearance to three banks (including one systemically important
institution) that have been the subject of supervisory action plans since the beginning of 2011,
requiring the banks to reach compliance with prudential norms over a period of time instead.
More recently, the banking sector has shown signs of overheating once more with the 2011 IMF
FSAP indicating the build up of credit risks. The BoM is actively exploring the use of
countercyclical and macroprudential measures to contain the build-up of systemic risks. In
November 2011, the minimum liquidity ratio was raised to 25 percent, and additional capital
buffers for systemically important banks have also been introduced by the BoM.
The adoption of a bank-specific approach by the BoM is a second-best substitute for the
comprehensive banking restructuring strategy submitted to parliament in August 2010,
which remains to be approved. This is because instead of uniform standards being applied
across the banking sector in case a crisis materializes, the BoM will have to negotiate
recapitalization with individual banks, a process which leaves it open to political interference.
Table 6: Banking System – Performance parameters 2002 2004 2005 2006 2007 2008 2009 2010 Sep
2011
Total assets (MNT billion)
448 892 1,371 1,899 2,858 3,626 4,347 6,214 8,071
% growth 48.2 30.3 41.8 42.2 52.2 26.8 19.9 43.0 29.9
Capital adequacy ratio 20.0 20.0 18.2 18.1 14.2 11.4 5.5 16.2 14.3
Tier 1 ratio 17.7 17.4 15.4 15.6 11.8 8.7 2.3 12.1 10.8
Gross NPL ratio (%) 7.2 10.9 8.6 7.4 5.3 7.1 20.0 6.7 3.8
Loan growth
(% over previous year) 75.4 37.2 41.7 42.3 68.1 24.8 0.3 14.2 56.0
Deposit growth
(% over previous year) 57.4 23.0 40.4 36.8 56.7 -8.3 33.7 65.4 29.1
Loan to Deposit ratio 66.3 86.3 87.0 90.5 97.1 135.8 102.3 75.2 87.9
ROAA 4.3 2.5 2.2 2.7 2.5 -1.5 -5.6 1.8 2.9
ROAE 20.8 12.3 12.1 14.3 20.8 -21.2 -131.9 11.2 21.1
Source: Bank of Mongolia
Mining
Rating: Satisfactory
8 In January 2010, parliament amended the Law on the Central Bank/Mongol Bank and also approved the Banking Law of Mongolia.
The legislative changes included higher penalties for noncompliance, consolidated supervision, an improved bank resolution framework that more clearly defined the roles of the conservator and liquidator, legal protection for bank and nonbank supervisors and
a clearer definition of "group of connected parties." Prudential regulations on asset classification and loss provision were tightened in
August 2010.
17
The Satisfactory rating reflects the considerable success vis-à-vis EITI compliance, alongside
improvements in mining taxation policy accompanied by relatively slower progress on cadastre
regulations and revisions.
DPC2 engagement has played an important role in mining sector reforms and has served to
strengthen the Bank’s policy dialogue with the government in this area. This engagement has
focused attention on the need to provide a stable, transparent and sustainable mining investment
framework. There have been concrete results on the ground:
Mongolia became fully EITI compliant in 2010, demonstrating an improved level of
transparency that has been achieved in both government and company activities through
disclosure of national budget receipts and mining company payments. Mongolia joined the
Extractive Industries Transparency Initiative (EITI) in 2006 and since then has been publicly
disclosing payments and receipts from the extractive industries. When it became fully compliant
in 2010, it was the fourth country to do so (at the end of 2011, there were only 10 countries that
were compliant). To date, four EITI Reconciliation Reports and one Validation Report have been
prepared covering the period 2006-2009. Coverage of EITI in the country has expanded to
include over 110 firms which disclosed and reported their payments in 2008. Looking at the
company payments and government receipts reported under this initiative, aggregate
discrepancies between the reports have been dramatically reduced: from MNT 25 billion in 2006
to MNT 431 million in 2008.
In addition, there is ongoing and substantial progress with respect to mining taxation
framework even though the outcome indicator specified for taxation has not been achieved.
The outcome indicator had required that a mining tax policy paper be prepared by the government
and be incorporated into a new Income Tax Law, which has not been done. But compensating for
this, is the OT investment agreement which is regarded as a model for future mining projects,
including on taxation. Furthermore, the Windfall Profits Tax (WPT), which created a strong
disincentive to mining activity, was withdrawn at the start of 2011. The government with IMF
technical assistance and support from the Bank’s mining TA project, is well advanced with regard
to its preparations for introducing a more sophisticated mining tax in the place of the WPT,
namely a progressive royalty. This will allow the government to benefit from rising mining
revenues when commodity prices are high while at the same time, setting a ceiling on the
maximum revenue that mining firms would have to pay and injecting more certainty in the
mining tax environment. This will be a part of a new chapter on mining taxation that is currently
under preparation. Furthermore, in the course of 2011 the Government received analytical support
from the IMF and US Treasury in evaluating income tax provisions, value added taxation and
double taxation arrangements as they apply to the mining sector.
Finally, an online database of environmental impact assessment has been placed online
and is updated regularly. The intention was that this should increase monitoring of the
environmental plans of mining projects.
However progress has been slower on other fronts. Mongolia is operating without adopting
the full body of revised cadastre regulations. The revisions that have been adopted are being
used to assess the renewal of existing licenses but not the issuance of new licenses. Instead, there
is a moratorium on issuing new licenses that began once the government, through the President’s
Office, began to review the 2006 Mining Act and this has been rolled over every year, resulting in
a huge backlog in new license applications. Completion of mineral legislation reform has been
postponed until after the elections. Another drawback on the current cadastre policies is that it is
not possible to make applications online, although this is being currently addressed in the mining
technical assistance project.
18
Legislative reforms in mining have been pushed back until after the elections. In addition,
VAT laws changed in 2009, which prevented exporters of minerals from claiming back VAT
payments on inputs, remain in place. Although this has generated substantial revenues for the
government, it adds to investor perceptions that Mongolia’s fiscal regime is unstable and has the
potential to further deter exploration and mineral development if the global mining outlook
becomes uncertain (for instance if commodity prices fall) and reinforces investor calls for
stabilized tax environments under investment agreements.
3.4 Justification of Overall Outcome Rating
(combining relevance, achievement of PDOs)
Rating: Satisfactory The overall outcome rating of Satisfactory combines the Highly Satisfactory rating on the
relevance of the DPC’s objectives, design and implementation together with the Satisfactory
rating for the achievement of PDOs over the time frame since completion of the operation.
The DPC2 program design and implementation were well-focused and highly relevant given the
shortcomings in policy exposed by the downturn in 2009 and, going forward, the challenges
posed by the expansion of the mining sector in achieving sustainable, inclusive growth that
benefits the poor. The DPC2 and related World Bank analytical, TA and advisory work have been
used as an opportunity to support the government’s moves towards putting in place a better
medium-term framework and laying strong foundations for better institutions. However, given
the faster than expected turn-around, and with the economy growing by more than 17 percent in
2011, the urgency to undertake reforms has diminished. In this context, the legislative
developments at the end of last year and early in 2012 are even more remarkable. Accordingly,
the achievement rating has been given more weight (two-thirds versus one-third for relevance) in
determining the overall outcome rating.
3.5 Overarching Themes, Other Outcomes and Impacts
(if any, where not previously covered or to amplify discussion above) (a) Poverty Impacts, Gender Aspects, and Social Development
The social protection component will have a direct positive impact on poverty, but the other
areas, too, are expected to have a positive medium-term impact. Analytical work by the
World Bank indicates that poverty fell substantially in the high growth years prior to the crisis in
2008/09, with subsequent qualitative work suggesting that these gains may have been
significantly eroded as a result of the crisis. It also documented the role of cash transfers in
helping poorer households cope. Simulation analysis suggests that interventions to make social
safety nets in Mongolia better targeted and fiscally sustainable will help to protect the poor
against future shocks as well as to reduce poverty. Appropriate management of future mining
revenues, the prioritization of existing public infrastructure and avoiding boom-bust cycles
through fiscal reforms will have positive long-term effects on poverty reduction. Stabilizing the
financial sector would have a positive social impact by improving the access and efficient
allocation of financial resources to clients, minimizing the fiscal costs of future bank bailouts (if
any).
In the accompanying MTAP, an Indigenous Peoples Planning Framework has been prepared and
disclosed by the Ministry of Social Welfare and Labor to ensure that, within this reform process,
TA provided promotes the inclusion and support to vulnerable households within indigenous
communities. Environmental concerns only directly relate to the mining sector and were
19
addressed by the prior action supporting the availability of environmental impact assessments in
an online database, to improve monitoring of mining companies.
(b) Institutional Change/Strengthening
(particularly with reference to impacts on longer-term capacity and institutional development)
The DPC2 and the accompanying MTAP and analytical work are directly concerned with
strengthening the institutions of Mongolia. In particular, the main objective is to support the
development of institutions which can channel the future revenues from Mongolia’s substantial
mineral wealth into providing stable, sustainable and equitable growth and poverty reduction. As
part of this broad objective, each policy area targeted the development of specific institutions,
either directly through the prior actions or as medium-term outcomes (see discussion in Sections
1.2 and 3.2). For example:
Financial sector prior actions addressed the institutional arrangements surrounding the
supervision and regulation of banks and crisis prevention and resolution. There has been
significant progress with respect to strengthening the legal regulatory and supervision powers of
the BoM, although much work needs to be done to improve the BoM’s own capacity for
enforcement of regulation and also its independence from political pressure.
In mining the prior actions and outcome indicators related to the institutional framework for
the mining licensing regime, for greater transparency and openness through EITI compliance and
with regard to environmental impacts of mining projects.
Prior actions in the fiscal area focused attention on and played an important part in major
legislative reforms aimed at strengthening budget processes and the public investment program,
while at the same time mitigating the effects of Dutch Disease and boom-bust cycles associated
with mineral dependent economies.
Efforts to reform the social welfare system include critical support to strengthen the
institutions of social protection, including targeting and management information systems, and
government implementation capacity.
(c) Other Unintended Outcomes and Impacts (positive or negative, if any)
Not applicable.
3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops
(optional for Core ICR, required for ILI, details in annexes)
Not applicable.
4. Assessment of Risk to Development Outcome Rating: Moderate
The rating of Moderate takes into account downside risks to the realization of development
outcomes from the less than vigorous reform movement in the banking sector notably, combined
with the potential for weak implementation of reforms in other sectors in case of an adverse shock
to the economy in an uncertain global economic environment. However these risks are mitigated
by the following. The first is the upside risks to growth and revenues from the OT mining project
coming onstream. The second mitigating factor is the capacity for the government to undertake
strong policy actions when adverse shocks materialize as demonstrated in the aftermath of the
crisis in 2009.
20
There remain a number of risks to the development outcomes of the DPC2 program. The
economy, which is currently showing signs of overheating – in part due to highly expansive fiscal
policy over the past two years – is susceptible to adverse external shocks until revenues from the
OT mining project start to flow in. Compounding these risks, problems in the banking system
remain to be fully addressed, while the global economic environment also remains weak. There is
also a risk that in case of a negative shock, Mongolia falters in its commitment to reforms, and
delays their implementation. Finally, the new government sworn in after the elections in 2012
may lack the same resolve as the previous one to maintain momentum on reforms.
The greatest risks are in the banking sector, which is showing signs of overheating while the
quality of supervision remains weak. While the liquidity and capital positions have improved
markedly since 2009 as the economy rebounded, the inherent vulnerabilities that had caused the
previous banking crisis (i.e., weak risk management practices, inadequate corporate governance,
inconsistent enforcement of prudential norms) still remain. Credit is again growing fast, and
remains highly concentrated and directed towards sectors that suffered the most in the previous
bust. The liquidity risks are exacerbated by the chronic maturity mismatch stemming from the
banks’ reliance on local short-term deposits as the main funding source. While the overall
financial soundness indicators appear relatively strong for now, they mask significant variations
between banks. Given Mongolia’s record of macroeconomic volatility, there is a substantial risk
that an adverse internal and/or internal shock will expose the liquidity and credit risks in these
weaker institutions, with implications for the stability of the overall system.
Risks in the fiscal sector concern the paucity of short term financing options and a failure to
adhere to the FSL when it becomes binding, in case of an adverse event before net revenues
from OT flow into the budget. Although overall public balances in Mongolia remain in good
shape, with the country running a small deficit of 3.6 percent in 2011, this is mainly due to higher
than expected revenues rather than expenditure restraint. Policy has been highly pro-cyclical over
the past two years, contributing to boom-bust pressures in the economy at a time when there is
limited spare capacity. Meanwhile the external economic environment remains fragile, and in the
event of a synchronized sharp global downturn, there would be limited options for a first-time and
low-rated sovereign borrower like Mongolia to finance its deficit on international capital markets,
while domestic capital markets are small and carry the risk of crowding out the private sector.
Accordingly adherence to the rules set out in the FSL remains crucial until such time as net
revenues from the OT project flow into the budget (expected around late 2015).
In social protection, the key risks relate to technical capacity and institutional constraints.
The SWL passed in January 2012 is significant in legislating the provision of targeted benefits to
poor households, and sets in place a system for a fiscally sustainable social welfare system.
However, as discussed before, technical issues are a key challenge, in particular because of delays
in the completion of the beneficiary household database used to provide targeted benefits. In
addition, going forward, given high levels of economic growth in Mongolia, there will be a need
to revisit the PMT formula in order to effectively distinguish between the poor and non-poor.
These issues will need to be addressed through TA efforts (e.g., via the MTAP) to ensure the
effective implementation of the poverty-targeted benefit.
The most significant risks in relation to mining are the potential for a return to policy
uncertainty and the failure to address the significant infrastructure needs associated with
future large-scale mining projects. Although the government has made considerable progress in
preparing a new mining taxation chapter, progress on mining cadastre reforms remain stalled and
mining legislative reforms have been postponed until after the elections. As a result, there
remains uncertainty in the mining sector affecting the incentive to invest in exploration in
21
Mongolia. Meanwhile, the infrastructure needs of large-scale mining projects, for example in
terms of transportation and power, are considerable. There is a risk that the government may not
have sufficient capacity or finance to meet these needs or that the institutional and legal
framework is not in place to facilitate sufficient private sector participation. The realization of
these two risks would constrain the extent to which Mongolia’s resource activities are developed
relative to their potential.
Mitigating these risks is the fact that the government has shown itself capable of
undertaking painful and decisive reforms in past crisis, while the reforms undertaken over
the past two years have also significantly strengthened the policy framework. The passage of
the FSL, the IBL and the SWL, and EITI compliance are all substantial and real accomplishments,
and in the case of the IBL, which was passed only recently in December 2011, they further
strengthen the commitment to fiscal policy rules set out in the FSL. Going forward, these reforms
will have a significant impact on anchoring a counter-cyclical and prudent fiscal policy in place,
directing social welfare to those who need it the most in a sustainable manner, and increasing
transparency in the mining sector. In addition, there are also growing upside revenue risks arising
from the coming onstream of the Oyu Tolgoi mine (expected in late 2012), and a number of
export-oriented coal projects, which will significantly boost GDP growth. The ongoing programs
of IFIs in Mongolia, including the four-year World Bank MTAP, can serve as important anchors
supporting the policy reform agenda. Finally, it is worth noting that the outgoing government was
a coalition partnership between the two major parties and only dissolved at the end of 2011. The
reform actions taken so far and the reform agenda in general were accepted and supported across
the political spectrum as necessary for containing the effects of the crisis and supporting
Mongolia’s development in the medium to long term. Any incoming government, irrespective of
which party it is, is therefore unlikely to significantly deviate from this reform agenda.
5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues) (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending
phase)
Rating: Satisfactory
The rating of Satisfactory reflects an assessment of the Bank’s performance as timely, well-
focused, using an appropriate instrument and based on strong coordination with development
partners. The latter was demonstrated by the close and successful teamwork and the absence of
cross-conditionality in both the DPC1 and DPC2.
The single-tranche DPC2 that followed on from a single-tranche DPC1 operation was
supported from the initial stage of the project as an appropriate instrument. It was designed
with the objective of quickly building on the achievements of the first phase of the reforms under
DPC1 and laying the basis for a sound medium-term policy framework. Given the absence of any
robust medium-term plan of the government and given the urgency of the situation, the single
tranche nature of the instrument appears appropriate and timely. The DPC2 operation was
processed under the Crisis Response Window.
The design of the operation strongly reflected the objective, shared with the government, of
using the crisis as an opportunity to permanently strengthen the policy framework. The
operation was in line with the government’s medium term objectives regarding growth, poverty
reduction and infrastructure development as contained in the document and the Letter of
22
Development Policy. Because these reforms also required substantial technical assistance and
capacity building, DPC2 was supported by the four-year MTAP.
The complexity of the social welfare reforms are an area of concern: the institutional
capacity-building required to implement the comprehensive reforms envisaged has taken
more time than was optimal for the crisis-period. Ideally the proposed targeted benefit should
have replaced existing benefits when it was ready, as the need of the hour when the crisis first
broke in 2008-09 was the continued provision of a safety net to the poor. However the withdrawal
of the CMP which covered 90 percent of the poorest households did the opposite and came at a
time when Mongolia was suffering extremely severe winter conditions (the ―dzud‖) which
severely impacted livelihoods, especially in rural areas where poverty is the highest.
Overall collaboration among partners was highly successful. The operational design was
closely synchronized with those of other development partners. In particular, the partnership
between the IMF and the Bank was very strong, as detailed in the illustrative joint IMF/WB
policy matrix in the program document and in the participation of Bank staff in each of the IMF
preparation missions leading up to the SBA Board approval. A joint IMF/Bank mission was also
undertaken to Japan which ensured proper coordination with the authorities there. Collaboration
with the ADB has also been strong, in particular in the area of social protection and there has
been a general consensus on the priority actions and objectives.
(b) Quality of Supervision (including M&E arrangements)
Rating: Satisfactory
While the prior actions were completed before the loan went to the Board, the monitoring
and evaluation of the reform progress has been continuous through dialogue and ongoing
technical assistance and analytical work. This is the rationale for the Satisfactory rating on the
quality of supervision. This includes continuous monitoring of the economic situation (which is
published in the Monthly, and later Quarterly, Updates), dialogue with the government and
follow-ups on the prior actions served as a de facto form of supervision. Dialogue and supervision
was also supported through on-going technical under the MTAP project.
(c) Justification of Rating for Overall Bank Performance
Rating: Satisfactory
The Bank worked closely with the government and development partners to implement a
medium-term reform agenda that strategically addressed key development challenges
within a relatively short period of time. The satisfactory rating for overall bank performance is
based on the satisfactory ratings for both the quality at entry and quality of supervision
dimensions. The design of the operation was appropriate, a complementary TA operation was
prepared in record time, partnership with other donors was excellent, and policy dialogue was
conducted successfully across a broad range of stakeholders, including senior political leadership.
5.2 Borrower Performance
Rating: Satisfactory
The government and parliament showed a high level of commitment from the outset of the
operation, were cooperative in trying to pass all the prior actions and in relatively short
span of time, given the complexity of reforms in some sectors, have undertaken major and
23
laudable legislative steps. Although there appeared to be some weakening in commitment to
moving reforms forward with the economy recovering faster than initially expected – this was
especially noticeable in the banking sector – and the 2012 elections drawing closer, the
government has undertaken several major and landmark reforms in 2010 (FSL, EITI compliance),
2011 (IBL) and 2012 (SWL). The interaction with authorities was generally satisfactory and was
intensified through the accompanying MTAP.
(b) Implementing Agency or Agencies Performance
See section (a) on government performance.
(c) Justification of Rating for Overall Borrower Performance
Rating: Satisfactory
The overall borrower performance of Satisfactory reflects the fact that the government was
responsive to, and proactive with, the DPC2 operation and committed their resources and
personnel to facilitate the operation process. As a result, the program has been delivered on a
timely basis, with major reforms that lay the foundation for strong medium term policies and
institutions enacted less than two years after the operation closed in September.
6. Lessons Learned (both operation-specific and of wide general application)
The operation emphasized the crucial importance of understanding the political economy
context for policy reforms. The financial crisis highlighted the need for Mongolia to improve its
overall policy framework in order to prevent future boom-and-bust cycles, and provided a key
window of opportunity for engagement by the World Bank and other partners. With the economy
rebounding strongly in 2010 and 2011 and banking sector reforms viewed as partisan, the reforms
in the financial sector have faltered. However sustained engagement by the World Bank and other
donors across the political landscape have yielded excellent progress in the fiscal, mining and
social sectors through building understanding and implication of the reforms.
TA and analytical work, and the ability and resources to scale up such work quickly, are
essential for a successful and timely outcome in crisis-response operations, and particularly
when trying to lay the basis for sound medium term policy framework. A key lesson from
DPC1 was the need for substantial TA to accompany reforms that are complex and require
substantial institution building as is the case with social welfare reforms. The accompanying
MTAP has helped to substantially support the proposed reforms in the fiscal, banking and social
welfare sectors. For example, the fiscal policy sector and the mining sectors were better able to
achieve their objectives, because of the accompanying analytical work. In addition to analytical
work on poverty and inequality, World Bank technical assistance has been important to the
development of the new proxy means test that will form the basis for targeting the new poverty
benefit to the poor. The experience from the DPC2 (as with DPC1) highlights, however, that
sound analytical work and technical support may not be sufficient to implement quickly the range
of institutional improvements required to reform a system of social transfers in a low-capacity
environment such as Mongolia’s.
24
As with DPC1, the success of a program requires a flexible mindset of, and close
coordination and teamwork amongst, development partners. The donors cooperated and
coordinated well with respect to division of labor and complementing each others conditionalities
and TA work. The IMF and World Bank jointly organized conferences and workshops to increase
policy dialogue and discussion. On social protection Bank analytical work fed into the operational
work of the ADB and the Bank. Indeed, another lesson is that while a selective and focused
operational design is commendable, often donors and development partners may rely on World
Bank diagnostics and analysis in other areas. This requires the Bank to stretch its resources to be
responsive to such needs. Finally, bilateral partners provided valued support to the overall
program in a relatively short timeframe. Coordination with the borrower was also highly
satisfactory as was the recognition by the government (once the economy had stabilized) that the
window for reforms was closing. Indeed, this operation is a reminder of the opportunities that
crisis situations can present for concerted, and coordinated, action by the government with
development partner assistance in moving forward reforms that in ―normal‖ times would likely be
subject to greater obstacles. Such situations require the Bank to take a proactive approach, be
prepared to change its strategy of assistance as appropriate and to work in coordination, and be in
ongoing dialogue, with the government, politicians and other domestic stakeholders, and with
development partners such as the IMF.
It is important to gauge from the beginning of an operation the capacity, both technical and
political, of the borrower or the implementing agency to implement the proposed reforms.
Such an assessment has important implications for determining the priorities and sequencing of
reforms. This has been demonstrated amply in the social welfare sector. Complex reforms take
time to implement and significant investments to increase capacity and build institutions. They
may not be the most appropriate in times of, or in the immediate aftermath of a crisis period.
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies
(b) Cofinanciers
(c) Other partners and stakeholders (e.g. NGOs/private sector/civil society)
The preparation of this ICR involved discussions with the borrower (including the MoF, MSWL
and BoM) and civil society in Mongolia, development partners (IMF, ADB, and AusAID) which
are incorporated into the text of this report.
25
Annex 1. Mongolia DPC2 Policy Matrix
Objectives Key issues Prior actions Outcome indicators Areas of focus for medium-
term policy dialogue
Fiscal policy and
management
Improve capital budget
planning and execution
Poor planning and
screening of public
investment projects
The Recipient has amended the FY2010 Budget
to:
improve the public investment plan by
reducing by 197 (amounting to 40 billion
Tugrik) the number of projects that: a) do
not have the necessary feasibility studies
(technical drawings and accurate cost
estimates); and b) do not meet national
priorities; and
account for the contingent liabilities from
contractor-funded projects by specifying
these in the Amended FY2010 budget.
Baseline: 2009 budget and 2009-
2011 medium-term budget
Projects implemented during
2010 and approved in the 2010-
12 Medium Term Budget
Framework, meet the criteria of
having the necessary feasibility
studies and meeting an identified
need.
Public investment planning,
budgeting, monitoring and
implementation.
Prioritize maintenance of
basic infrastructure
Lack of prioritization of
maintenance of
infrastructure
The Recipient has prioritized the level of
capital expenditures for maintenance of basic
infrastructure (including the Road Fund), as
evidenced by: (i) the increase in the ratio of
capital repairs to new investments from 6.1
percent (in the FY2009 Revised Budget) to 6.5
percent (in the FY2010 Budget); and (ii) the
allocation of 28.2 billion Tugrik therefore.
Baseline: 2009 budget
The 2010 Budget outturn on
repairs and maintenance is at
least 28.7 billion Tugrik.
Costing and budgeting of
multi-year maintenance
requirements of new capital
projects.
Costing and budgeting of
multi-year budget implications
of PPP projects.
Social protection
Contribute to poverty
reduction and protecting
the poor from future
shocks by better targeting
social welfare
interventions towards the
poor
Social transfers
untargeted, inefficient in
attaining poverty
prevention/human capital
objectives, and fiscally
unsustainable
The National Statistical Office has approved
the Proxy Means Test methodology as the
official targeting mechanism for the provision
of social welfare benefits in Mongolia.
The Ministry of Social Welfare and Labor
(MoSWL) has completed a proposal defining
the parameters of the new poverty-targeted
benefit program, and has submitted said
proposal to the Cabinet for approval.
Process of compiling a
beneficiary database for a new
poverty-targeted benefit
program, using the PMT
methodology, has begun.
The Government has issued a
resolution outlining the main
design aspects of a new poverty-
targeted benefit.
Implementation aspects of roll-
out of new Poverty Benefit,
including targeting of
beneficiaries through the use of
the Proxy Means Test.
Development of a system for
monitoring and evaluating the
impact of the Poverty Benefit.
26
Objectives Key issues Prior actions Outcome indicators Areas of focus for medium-term policy dialogue
Financial sector
Stabilize banking
sector
Prompt corrective actions
are needed to address
system distress, and
maintain public
confidence
Bank resolution and
restructuring options
need to be carefully
evaluated based on
adequate information and
should be in the interest
of longer-term fiscal and
financial stability
BoM has: (i) completed a special banks
assessment of seven (7) selected banks;
and (ii) commenced a similar
assessment of another three (3) selected
banks, with the assistance of
internationally reputable auditors.
BoM has adopted and submitted to the
Parliament a comprehensive bank
restructuring strategy, which includes,
as a last resort tool, a stand-by bank
recapitalization facility with proper
covenants to protect the public funds.
Public confidence in banking
system maintained as seen
through the absence of
widespread bank runs.
Good practice banking
restructuring has paved the
way for development of
sound and efficient banking
system.
Review of the regulatory framework for implementing the
Banking Law and the Central Bank Law. Review of the
Corporate Law and Civil Code and Law on Foreclosure and
Collateral.
Development and adoption of a strategy for transition from
blanket guarantee to a limited deposit insurance guarantee
system.
Strengthening of BoM’s technical and enforcement capacity
for banking regulation and supervision.
Adoption of IAS/IFRS compatible financial accounting and
reporting regime for the financial sector and the corporate
sector.
Mining sector
Further improve
the policy
framework for
mining
Mining fiscal policy
framework remains
unstable and capacity for
mining sector regulation
requires strengthening
Transparency and public
participation are poor to
non-existent
The Recipient has revised the regulation
on operations and processes of the
Mining Cadastre.
The Recipient has submitted the
documentation required by the
International EITI Board to assess the
compliance of the Recipient’s national
EITI Program.
The Recipient has placed online a
searchable database of Environmental
Impact Assessments for mining and
other projects.
Mining Tax Policy Paper
developed with stakeholder
consultation and developed
into a new Chapter in the
Income Tax Law.
New Cadastre Regulations
adopted and implemented.
Independent validation audit
of Mongolia’s national EITI
program completed, and the
International EITI Board has
found it to be compliant.
Online EIA database
available to the general
public.
Publication of EIAs on the
internet has improved public
monitoring of the
environmental plans of
mining projects.
Ongoing development of the Draft Standard Investment
Agreements which further develop the concepts of
responsible mining practices consistent with the Equator
principles, and the utilization of such agreements in all
future major mining investments in strategic deposits.
Responsible mining practices followed and monitored
through enhanced regulatory capacity.
Continued implementation and development of EITI.
Monitoring of the manner in which EIA companies and
government agencies input new information into the
database.
Development of a means to collate and monitor the impacts
of public participation in development projects.
27
Annex 2. Bank Lending and Implementation Support/Supervision Processes
(a) Task Team members
Names Title Unit Responsibility/
Specialty
Lending
Rogier van den Brink Lead Economist EASPR TTL
Ashley D. Taylor Young Professional EASPR Country Economist
Altantsetseg Shiilegmaa Economist EASPR Country Economist
Tehmina Khan Consultant EASPR Country Economist
Munkhnasaa Narmandakh Consultant EASPR Country Economist
Zahid Hasnain Sr Public Sector Spec. EASPR Fiscal Policy
Andrew Mason Lead Poverty Specialist EASPR Social Protection
Lucilla Maria Bruni Junior Professional Associate EASHS Social Protection
Ernst Lutz Consultant EASPR
Tony Whitten Senior Biodiversity Specialist EASEN Mining and Envt.
Xiofeng Hua Senior Financial Sector Specialist EASFP Financial Sector
Alexander Pankov Sr Private Sector Dev. Spec. EASFP Financial Sector
Oleksiy Ivaschenko Senior Economist EASHS Social Protection
Trang van Nguyen Economist EASPR Social Protection
Graeme Eric Hancock Senior Energy Specialist, Mining COCPO Mining
Jiyoung Song Consultant EASPR
Lynn Gross Program Assistant EASPR
Martin M. Serrano Counsel LEGES Legal
Lhagvasuren Ochir Operations Officer EACMF
Supervision
Rogier van den Brink Lead Economist EASPR TTL
Tehmina Khan Consultant EASPR Country Economist
Zahid Hasnain Sr Public Sector Spec. EASPR Fiscal Policy
Alexander Pankov Sr Private Sector Dev. Spec. EASFP Financial Sector
Oleksiy Ivaschenko Senior Economist EASHS Social Protection
Andrew Mason Lead Poverty Specialist EASPR Social Protection
Bryan Land Senior Petroleum Specialist SEGOM Mining
(b) Staff Time and Cost
Stage
Staff Time and Cost (Bank Budget Only)
No. of staff weeks USD Thousands (including
travel and consultant costs)
Lending
Total: 93.8 523,128
Supervision/ICR
Total: 3.2 17,721
28
Annex 3. Beneficiary Survey Results
Not applicable
Annex 4. Stakeholder Workshop Report and Results Not applicable
Annex 5. Summary of Borrower's ICR and/or Comments on Draft ICR There were no major comments. Suggestions regarding differentiation between local and general
government budgets and greater information on the Integrated Budget Law including key
budgetary principles, establishment of budgetary processes, and roles and responsibilities of
subjects, were duly incorporated.
Annex 6. Comments of Cofinanciers and Other Partners/Stakeholders The preparation and drafting of the report reflected discussions with the IMF, ADB, AusAID.
29
Annex 7. List of Supporting Documents
Internal World Bank Documents
Decision Note: Regional Operations Committee: Concept Review Meeting of the Mongolia
Development Policy Credit (DPC)2 P117421
Mongolia DPC P117421: Appraisal Completion Note and Request for Clearance to Negotiate
Minutes of Negotiations for Financing Agreement Credit 4776 MN
Publicly available World Bank Document related to this Credit
Mongolia Development Policy Credit 2, Program Document (September 2010) and Program
Information Document (PID) February 2010 available at
http://web.worldbank.org/external/projects/main?pagePK=64283627&piPK=73230&theSitePK=
40941&menuPK=228424&Projectid=P117421
Other World Bank Reports
Mongolia Quarterly Reports February 2012, October 2011, July 2011, April 2011, January 2011.
Available at: www.worldbank.org/en/country/mongolia
Mongolia Economic Retrospective, 2008- 2010. Available at
http://publications.worldbank.org/index.php?main_page=product_info&products_id=23906
Interim Strategy Note For Mongolia CY 2009-10, April 20 2009, Report No. 48311 –MN.
Available at
http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2009/04/30/000350881_20
090430145844/Rendered/PDF/483110ISN0P102101Official0Use0Only1.pdf
Mongolia - Consolidating the Gains, Managing Booms And Busts, and Moving To Better Service
Delivery : A Public Expenditure And Financial Management Review, January 2, 2009. Available
at
http://imagebank.worldbank.org/servlet/WDS_IBank_Servlet?pcont=details&menuPK=6415415
9&searchMenuPK=64258124&theSitePK=501889&eid=000333037_20090208230004&siteNam
e=IMAGEBANK
Other Reports and Documents
IMF: Mongolia: Request for Stand-By Arrangement - Staff Report; Staff Supplements; Press
Release on the Executive Board Discussion; and Statement by the Executive Director for
Mongolia, April 21, 2009. Available at http://www.imf.org/external/pubs/ft/scr/2009/cr09130.pdf
IMF: Mongolia: First Review Under the Stand-By Arrangement - Staff Report; Press Release on
the Executive Board Discussion; and Statement by the Executive Director for Mongolia, August
14, 2009 Available at http://www.imf.org/external/pubs/ft/scr/2009/cr09254.pdf.
30
IMF: Mongolia: Second Review Under the Stand-By Arrangement and Request for Modification
of Performance Criteria, November 5, 2009. Available at
http://www.imf.org/external/pubs/ft/scr/2009/cr09311.pdf.
IMF: Mongolia: 2009 Article IV Consultation, Third Review Under Stand-by Arrangement, and
Request for Modification of Performance Criteria - Staff Report; Staff Supplement; Public
Information Notice and Press Release on the Executive Board Discussion; and Statement by the
Executive Director for Mongolia, February 24, 2010. Available at
http://www.imf.org/external/pubs/ft/scr/2010/cr1052.pdf
IMF: Mongolia: 2009 Mongolia: Fourth Review under the Stand-By Arrangement and Request
for Modification of Performance Criteria, March 29, 2010. Available at March 29, 2010
http://www.imf.org/external/pubs/cat/longres.aspx?sk=23760.0
IMF: Mongolia: 2010 Mongolia: Fifth and Sixth Reviews under the Stand-By Arrangement and
Rephasing of Purchases Series: Country Report No. 10/294, September 20, 2010. Available at
http://www.imf.org/external/pubs/cat/longres.aspx?sk=24755.0
IMF: Mongolia: 2011 Article IV Consultation - Staff Report; Staff Supplement; Public
Information Notice and Press Release on the Executive Board Discussion; and Statement by the
Executive Director for Mongolia, March 30, 2011. Available at
http://www.imf.org/external/pubs/cat/longres.aspx?sk=24755.0
IMF: Mongolia: Ex Post Evaluation of Exceptional Access Under the 2009 Stand-By
Arrangement Series: Country Report No. 11/77 Available at
http://www.imf.org/external/pubs/cat/longres.aspx?sk=24756.0
IMF Financial Sector Assessment - Mongolia, May 2011, Available at
http://www.imf.org/external/pubs/ft/scr/2011/cr11107.pdf
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90°E
90°E85°E
95°E
95°E
100°E 105°E 110°E
115°E
120°E
100°E 105°E 110°E 115°E 120°E
40°N
45°N
50°N
45°N
40°N
50°N
MONGOLIA
0 100 200
0 50 100 150 200 Miles
300 Kilometers IBRD 33449R1
JAN
UA
RY 2009
MONGOLIASELECTED CITIES AND TOWNS
PROVINCE (AIMAG) CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE (AIMAG) BOUNDARIES
INTERNATIONAL BOUNDARIES
