FOR OFFICIAL USE ONLY Report No: ICR00006164 IMPLEMENTATION COMPLETION AND RESULTS REPORT IDA-61300 AND IBRD-90030, IDA-64710 ON A DEVELOPMENT POLICY LOAN US$100 MILLION EQUIVALENT COMPRISING: IBRD LOAN IN THE AMOUNT OF US$20 MILLION AND IDA CREDIT IN THE AMOUNT OF US$80 MILLION (SDR 58.1 MILLION) TO MONGOLIA FOR THE ECONOMIC MANAGEMENT SUPPORT OPERATION FIRST AND SECOND DEVELOPMENT POLICY FINANCINGS May 1, 2023 Macroeconomics, Trade And Investment Global Practice East Asia And Pacific Region The World Bank Second Economic Management Support Operation (P167485) CURRENCY EQUIVALENTS (Exchange Rate Effective {Dec 31, 2020}) Mongolian Tugrug Currency Unit = (MNT) MNT2849.89 = US$1 1.44US$ = SDR 1 GOVERNMENT FISCAL YEAR January 1 - December 31 Regional Vice President: Manuela V. Ferro Country Director: Mara K. Warwick Regional Director: Hassan Zaman Practice Manager: Sebastian Eckardt Task Team Leader(s): Jean-Pascal Nganou ICR Main Contributor: Farrukh Iqbal The World Bank Second Economic Management Support Operation (P167485) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank AQR Asset Quality Review BOM Bank of Mongolia CAR Capital Adequacy Ratio CPF Country Partnership Framework DBM Development Bank of Mongolia DPF Development Policy Financing EFF Extended Fund Facility EMSO Economic Management Support Operation ERP Economic Recovery Policy GAAR General Anti Avoidance Rule GDP Gross Domestic Product GOM Government of Mongolia ICR Implementation Completion and Results Report IFC International Financial Corporation IMF International Monetary Fund IPC Investor Protection Council IPO Initial Public Offering JICA Japan International Cooperation Agency PER Public Expenditure Review PPR Peste de Petits Ruminants PROST Pension Reform Options Simulation Toolkit PSIA Poverty and Social Impact Analysis PSP Price Stabilization Program SFFS Strengthening Fiscal and Financial Stability Project SME Small and Medium Enterprises TFA Trade Facilitation Agreement WTO World Trade Organization The World Bank Second Economic Management Support Operation (P167485) TABLE OF CONTENTS DATA SHEET .......................................................................................................................... 1 I. PROGRAM CONTEXT AND DEVELOPMENT OBJECTIVES .................................................... 5 II. ASSESSMENT OF KEY PROGRAM DESIGN AND OUTCOMES .............................................. 8 III. OTHER OUTCOMES AND IMPACTS ................................................................................ 24 IV. BANK PERFORMANCE ................................................................................................... 27 V. RISK TO SUSTAINABILITY OF DEVELOPMENT OUTCOMES .............................................. 30 VI. LESSONS AND NEXT PHASE ........................................................................................... 31 ANNEX 1. RESULTS FRAMEWORK ......................................................................................... 33 ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES ....... 37 ANNEX 3. BORROWER, CO-FINANCIERS, AND OTHER DEVELOPMENT PARTNERS’/STAKEHOLDERS’ COMMENTS ............................................................................ 39 ANNEX 4. SECTORS AND THEMES ......................................................................................... 41 ANNEX 5. SUPPORTING DOCUMENTS .................................................................................. 44 The World Bank Second Economic Management Support Operation (P167485) DATA SHEET BASIC INFORMATION Program Series Project ID Short Name Full Name Economic Management Support P162402 Economic Management Support Operation First DPF Operation P167485 EMSO 2 Second Economic Management Support Operation Series Details (USD) Project ID Approved Amount Disbursed Amount P162402 120,000,000.00 122,742,924.67 P167485 100,000,000.00 100,251,786.73 Total 220,000,000.00 222,994,711.40 KEY_D PF_OPTI ONS_ TBL P162402 P167485 Policy-Based Guarantees No No IBRD- Ln/Cr/TF IDA-61300 90030,IDA- 64710 Concept Review 23-May-2017 16-May-2019 Decision Review 23-May-2017 22-May-2019 Approval 30-Nov-2017 30-Jul-2019 Effectiveness 14-Dec-2017 24-Dec-2019 Original Closing 31-Jul-2018 23-Jul-2020 Actual Closing 31-Jul-2018 23-Jul-2020 Page 1 of 46 The World Bank Second Economic Management Support Operation (P167485) Crisis or Post-Conflict Yes No Regular Deferred Drawdown Option No No Catastrophe Deferred Drawdown Option No No Sub-National Lending No No Special Development Policy Lending No No Organizations Series Project Borrower Implementing Agency P162402 P167485 Mongolia MINISTRY OF FINANCE Program Development Objective (PDO) Program Development Objective (PDO) (From last operation in the series) The Program Development Objective is to support the Government of Mongolia in restoring debt sustainability, strengthening the social protection system, and enhancing competitiveness. PROGRAM FINANCING DATA (USD) World Bank Administered Financing Approved Amount Actual Disbursed P162402 120,000,000 122,742,925 IDA-61300 P167485 20,000,000 20,000,000 IBRD-90030 80,000,000 80,251,787 IDA-64710 Total 220,000,000 222,994,711 RATINGS SUMMARY Page 2 of 46 The World Bank Second Economic Management Support Operation (P167485) Program Performance Overall Outcome Relevance of Prior Actions Achievement of Objectives (Efficacy) Moderately Satisfactory Satisfactory Moderately Satisfactory Bank Performance Satisfactory ACCOUNTABILITY AND DECISION MAKING At ICR: Regional Vice President Country Director Director Manuela V. Ferro Mara K. Warwick Andrei Mikhnev Practice Manager Task Team Leader(s) Sebastian Eckardt Jean-Pascal Nganou At Approval: P162402 Regional Vice President Country Director Director Victoria Kwakwa Bert Hofman James Anderson Practice Manager Task Team Leader(s) Deepak K. Mishra Jean-Pascal Nganou, Taehyun Lee P167485 Regional Vice President Country Director Director Victoria Kwakwa Martin Raiser Andrei Mikhnev Practice Manager Task Team Leader(s) Deepak K. Mishra Jean-Pascal Nganou Page 3 of 46 The World Bank Second Economic Management Support Operation (P167485) Page 4 of 46 The World Bank Second Economic Management Support Operation (P167485) I. PROGRAM CONTEXT AND DEVELOPMENT OBJECTIVES A. Context at Appraisal Context 1. This Implementation and Completion Results Report (ICR) assesses the implementation and outcomes of the First and Second Economic Management Support Operations (EMSO1 and EMSO2) for Mongolia. These two Development Policy Financing (DPF) operations aimed at (a) restoring debt sustainability (b) strengthening social protection and (c) enhancing competitiveness. Initially, a third operation (EMSO3) was also envisaged. However, this operation was dropped as progress in certain key structural reform areas stalled and the onset of Covid19 in FY20 changed priorities for both the GoM and the Bank. Nevertheless, the assessment carried out in this ICR is based on the policy actions and results anticipated for the full program. 2. When EMSO1 was launched in 2017, Mongolia faced a number of macroeconomic and social development challenges. On the macroeconomic side, a sharp drop in commodity prices starting in 2014 had ended the boom experienced during 2011-13 and led to three years of very slow growth (see Table 1). Since the minerals sector attracted the bulk of foreign direct investment, falling prices also led to a sharp drop in such inward flows resulting in a deterioration of the capital account and of the overall balance of payments position. The GoM sought to offset the contractionary impact of falling commodity prices through high spending sustained by external borrowing, which led in turn to a worsening fiscal and public debt situation. The ratio of government debt to GDP jumped from 50 percent in 2013 to 87 percent in 2016 and the international reserves position weakened substantially. On the social side, slowing economic growth had led to rising poverty, from 27 percent in 2012 to 29.6 percent in 2016, while unemployment rose to 10 percent. 3. Faced with these challenges, the authorities embarked on a macroeconomic stabilization program . The policy shift emphasized three broad objectives: stabilization of debt and the fiscal account, maintenance of social protection, and diversification of the economy. This strategy was embedded in the Economic Reform Program adopted by the Government in November 2016 and was reinforced by commitments made to external development partners through such operations as a three-year Extended Fund Facility (EFF) with the International Monetary Fund (IMF) in May 2017, a three-part DPF series with the World Bank in October 2017, and by similar arrangements with development partners including the Asian Development Bank, Japan, China and Korea. 4. Against this backdrop, there were several good reasons for the Bank to initiate the DPF operation in 2017. First, there was evidence of reform commitment on the part of the Government in the Economic Reform Program (ERP) passed by Parliament in November 2016. The ERP contained objectives and strategies that were aligned with the Bank’s own Country Partnership Framework (CPF), including an emphasis on fiscal sustainability and economic diversification. Second, the Government reinforced this commitment to reform through prior entry (in May 2017) into an Extended Financing Facility (EFF) with the IMF. This provided the macroeconomic framework necessary for the Bank to help with structural issues. Third, there existed a body of analytical work that provided guidance as to key policy priorities. The Bank was aware of risks to the program, but the overall assessment was that these could be managed. Page 5 of 46 The World Bank Second Economic Management Support Operation (P167485) Table 1: Key Economic Indicators at Initiation of EMSO1 (in 2017) and EMSO2 (in 2019) 2013 2014 2015 2016 2017 2018 2019 Real GDP (annual percent change) 11.7 7.9 2.4 1.2 5.3 6.9 7.2 Mineral GDP (annual percent change) 18.5 18.5 14.1 0.2 2.7 4.2 4.7 Overall budget balance (percent of GDP) -8.9 -10.5 -8.5 -15.1 -3.5 2.8 -0.9 General government debt (percent of GDP) 49.0 57.9 60.1 87.6 84.6 74.8 70.5 Foreign direct investment (million US$) 2098 276 183 121 1446 1924 1805 Gross international reserves (months imports) 3.9 4.0 2.8 2.4 4.3 4.8 5.8 Details of expenditures and revenues Budget expenditure (percent of GDP) 32.2 32.1 31.2 39.5 32.0 28.5 32.2 Recurring expenditure (percent of GDP) 23.7 23.8 25.0 27.4 25.0 22.9 22.9 Capital expenditure (percent of GDP) 8.3 8.3 6.0 9.9 5.9 5.0 9.0 Budget revenues (percent of GDP) 30.9 27.9 25.3 24.4 28.5 31.3 31.3 Tax revenues (percent of GDP) 26.4 23.4 22.1 20.2 22.1 25.6 24.5 Nontax revenues (percent of GDP) 4.3 4.5 3.2 3.7 3.6 3.2 3.2 Source: Data for 2013-15 and 2016-19 are taken from Table1 of the Program Documents for EMSO1 and EMSO2. Original Program Development Objective(s) (PDO) (as approved) 5. The operation was built around three development objectives: (1) To restore debt sustainability through rationalizing public expenditures, increasing revenues and improving the efficiency of public investment; (2) To strengthen the social protection system by enhancing budget allocations to low income households and by rationalizing the budget subsidy to the pension fund; and (3) To enhance competitiveness through making it easier for businesses to operate, by resolving investor grievances, by making it less expensive to move goods through customs, and by improving livestock health facilities so as to promote diversification via meat exports. Original Policy Areas/Pillars Supported by the Program (as approved) 6. The original policy areas/pillars of the DPFs were: Restoring Debt Sustainability; Strengthening the Social Protection System and Enhancing Competitiveness. While sub-objectives were not explicitly set out in the policy and results matrix, the write-up of prior actions and intended results in the program documents suggest the following listing. Pillar 1: Restoring Debt Sustainability Objective 1.1: Disengaging the DBM from off-budget expenditures Objective 1.2: Phasing out quasi-fiscal expenditures of the BoM Objective 1.3: Strengthening revenue mobilization and reducing tax base erosion Objective 1.4: Supporting capital expenditure adjustment Pillar 2: Strengthening the Social Protection System Objective 2.1: Safeguarding the protection of the poor Objective 2.2: Enhancing the financial sustainability of the pension system Pillar 3: Enhancing Competitiveness Objective 3.1: Enhancing the investment and business environment Objective 3.2: Improving the competitiveness of livestock products Objective 3.3: Facilitating trade and improving border clearance process Page 6 of 46 The World Bank Second Economic Management Support Operation (P167485) B. Significant Changes During Implementation 7. Over the first two years of the operation, a number of important changes occurred that modified the context in which EMSO2 was appraised and launched in 2019. The elections of August 2017 had led to significant changes in political leadership such that the key ministers implementing EMSO1 were not the ones who had negotiated it. While remaining committed to the overall objectives of the program, the GoM now sought to change some aspects in light of changed macroeconomic conditions. Commodity prices (for coal, copper and gold, for example) were rising and the fiscal and debt positions had improved substantially. For example, as shown in Table 1, the fiscal balance improved from a deficit of 15 percent of GDP in 2016 to a surplus of 2.8 percent of GDP in 2018. During 2017-18, current and capital spending were both reduced while revenues increased. The level of government debt fell from 87.6 percent of GDP in 2016 to 74.8 percent in 2018. On the external side, foreign direct investment had started flowing again, rising from barely US$121 million in 2016 to US$1.9 billion in 2018. The gross international reserves position had improved from barely 2.4 months of prospective imports cover in 2016 to 4.8 months in 2018. These developments formed the context in which modifications were made to the Policy and Results Matrix for EMSO2. 8. When political and economic conditions changed during 2017-18, the Bank had to make a decision on whether or not to continue with the DPFs. It decided to stay engaged because there continued to be sufficient evidence of Government commitment. While some fiscal measures were suspended, others remained in the program and the overall macroeconomic situation was improving, not deteriorating. In these circumstances, the Government’s interest in following through on the thrust of the program and in accepting some new areas of reform signaled a continuation of commitment. There remained also the prospect that pension reforms could be reintroduced in a third operation when Parliament would have had enough time to undertake the necessary legislative changes. While the sixth review of the IMF EFF had been delayed, consultations continued between the Bank and the IMF on reform priorities and strategies. Ensuring the soundness of the banking system through measures related to capital adequacy ratios for banks entered EMSO2 as an additional focus of reform relevant to macroeconomic stability. Revised Program Development Objectives (PDOs) 9. There was no change in the Program Development Objectives across the two completed operations. Revised Policy Areas/Pillars supported by the Program 10. There was no change in the overall orientation of the pillars. However, there were some adjustments to sub- objectives in the second pillar. These are discussed in the section on assessment. Other Changes 11. There was a change in schedule as EMSO2 was delayed by a year, pushing the envisaged end of the DPF series to the end of FY20. There was also a change in scale of financing as EMSO3 was cancelled due to the change in priorities that occurred with the onset of the COVID19 pandemic in early 2020. Page 7 of 46 The World Bank Second Economic Management Support Operation (P167485) II. ASSESSMENT OF KEY PROGRAM DESIGN AND OUTCOMES Indicative Triggers (from Indicative Triggers Prior Actions for DPF1 DPF1) (from DPF1) Results Indicators (original (DPF1) and revised) and and Prior Actions for DPF2 Prior Actions for DPF3 PILLAR 1 Prior Action 1: Indicative Trigger 1: Indicative Trigger 2: Result Indicator 1: Capital expenditure financed by the DBM The Government has Prior Action 1: To improve Prior Action 1: no through non-commercial loans. terminated DBM’s Development Bank of change financing to capital Mongolia (DBM) corporate Baseline (2016): MNT252 billion expenditure through governance through Target (2020) (From final operation in series): MNT0 billion noncommercial loans. transparency, the Recipient Current status (2021): MNT0 billion has publicly disclosed the comprehensive external Assessment: Achieved. special review on DBM’s operations from 2012–2017. Prior Action 2: Indicative Trigger 2: Indicative Trigger 2: Result Indicator 2: Net financing from the BoM to the Housing The BoM has Prior Action 2: Prior Action 2: Mortgage Program. discontinued net To phase out the Bank of financing to the Housing Mongolia (BoM)’s quasi- Baseline (2016): MNT404 billion Mortgage Program. fiscal activities, the Target (2020): MNT0 billion Recipient has restructured Current status (2021): MNT250 billion the Housing Mortgage Program to support Assessment: Partly achieved. Page 8 of 46 The World Bank Second Economic Management Support Operation (P167485) affordable housing in a more cost-effective way, and with a time-bound plan for BoM to fully exit the Housing Mortgage Program. Prior Action 3: To improve Result Indicator 3: Legal and regulatory framework of mortgage the Bank of Mongolia (BoM) securitization. corporate governance through transparency, the Baseline (2016): Legal/regulatory flawed. Recipient has publicly Target (2020): Formal decision and action plan to strengthen disclosed the independent elements of legal/regulatory framework. special external review on Current (2021): Working group formed but no action plan BoM’s quasi-fiscal issued. operations, including the Housing Mortgage Program, Assessment: Partly achieved. Price Stabilization Program, and financial support to Results Indicator 4: BoM’s outstanding assets for Price companies. Stabilization Program (PSP) and companies in balance sheet. Baseline (end-2016): Outstanding loans to the PSP (MNT 32.9 billion) and outstanding corporate bond holdings (MNT 815 billion). Target (end-2019): Outstanding loans to the PSP fully withdrawn and outstanding corporate bond holdings are no more than MNT 815 billion. Current (2021): Outstanding loans to PSP fully repaid by October 2018 and no new loans made. Bond holdings were at 470 billion MNT in 2019 and at 255.5 billion MNT in 2021. Page 9 of 46 The World Bank Second Economic Management Support Operation (P167485) Assessment: Achieved. Results Indicator 5: The recapitalization of banks is advanced to meet prudential norms. Baseline (2017): The banks are undercapitalized based on the AQR results. Target (2020): The banks are recapitalized to meet the Capital Adequacy Ratio (CAR). Current (2021): Bank of Mongolia confirms that all five domestic systemically - important banks met prevailing CAR conditions at end-2021 (and end-2022). Assessment: Achieved. Prior Action 3: Prior Action 4: To improve Results Indicator 6: Tax exemptions and incentives are reduced. The Government has efficiency of revenue raised the personal mobilization, the Recipient Baseline (2016): 14.5 percent of total tax revenue income tax rates on high has established a framework Target (2020): Reduction of at least 1.5 percentage points income groups and the to evaluate the tax compared with the baseline. excise taxes on alcohol a expenditure system in terms Current (2021): Relevant ratio reported as 10.7 percent in 2020. tobacco, with a gradual of the costs and benefits increase of the minimum aimed to reduce ineffective Assessment: Achieved. income tax threshold to tax incentives and reduce tax burden on exemptions, starting with Results Indicator 7: Legal inclusion of General Anti-Avoidance lower income groups. the 2020 budget. Rule. Baseline (2016): Not included. Target (2020): GAAR established in tax laws. Current (2021): GAAR still in tax laws. Page 10 of 46 The World Bank Second Economic Management Support Operation (P167485) Assessment: Achieved. Prior Action 4: Prior Action 5: To improve Result Indicator 8: Capital expenditure for the clearance of The Government has the efficiency of ongoing promissory notes is removed. terminated the and new investment Promissory Note projects in the budget, the Baseline (2016): MNT 672 billion Program, to prevent Recipient has adopted a Target (2017-20): MNT 0 billion using deferred payments regulation to enhance Current (2021): Promissory notes not being used for capital to finance capital appraisal, prioritization and expenditures since 2017. expenditure. selection of projects. Assessment: Achieved. Result Indicator 9: Efficiency of public investment portfolio improved. Baseline (2016): Public investment portfolio costly. Target (2020): Restructuring of all non-performing projects based on Rationalization Guideline, evidenced by project performance evaluation document included in 2019-2020 Guideline. Current (2021): Not all non-performing projects have been restructured. Assessment: Partly achieved. Result Indicator 10: Improved selection of new public investment projects Baseline (2016): Inefficient selection of public investment projects. Page 11 of 46 The World Bank Second Economic Management Support Operation (P167485) Target (2020): Selection of new public investment projects based on appraisal criteria of Guidelines. Current (2021): Most new projects now selected using Guidelines or related methodologies. Assessment: Achieved. Prior Action 6: To improve Result Indicator 11: Disclosure of beneficiaries (legal entities transparency of and individuals) information (including names, amount, terms, Government Special Funds, and repayment status) from Government Special Funds. the Recipient has improved the legal, governance, and Baseline (2018): Limited disclosure. monitoring framework of Target (2020): Public disclosure of govt. special funds in the Government Special accordance with relevant laws. Funds that extend loans and Current (2021): Disclosure made for SME Fund but not for all grants. special funds. Assessment: Partly achieved. Result Indicator 12: Government Special Funds are extended through banks with good standing. Baseline (2018): Limited use of the banks. Target (2020): Government Special Funds extend loans and grants channeled exclusively through banks in good standing as assessed by the Asset Quality Review of BoM. Current (2021): MoF confirms that Government Special Funds extend loans and grants through banks whose prudential ratios are above regulatory minimum. Assessment: Achieved. Page 12 of 46 The World Bank Second Economic Management Support Operation (P167485) PILLAR 2 Strengthening the Social Protection System Prior Action 5: Prior Action 7: To increase Indicative Trigger 3: Result Indicator 13: The coverage and benefit size of the Food The Government has protection of the poor, the Prior Action 3: Stamp Program and other poverty-targeted programs maintained budget Recipient has increased the allocation for Food total budget allocation for Baseline (2016): Budget allocation for the Food Stamp Program Stamp Program, in the the Food Stamp Program is MNT 18.1 billion and no budget is allocated for other 2017 Supplementary (FSP) and other poverty- poverty-targeted programs. budget, excluding targeted programs in 2019 Target (2020): Total budget of Food Stamp and poverty- administrative costs, at compared to the 2016 level, targeted programs tripled relative to 2016. least at the level of the in line with MTFF Current (2021): FSP budget above MNT 55 billion. 2017 original budget. allocations. Assessment: Achieved. Result Indicator 14: Pension reform options simulation toolkit (PROST) model projections of the state subsidy to the pension fund used as basis for estimating baseline and projection with reforms Baseline (2017 projection): State subsidy is projected to reach 6 percent of GDP in 2030 under the current growth assumptions. Target (2020 projection with reform): State subsidy to pension fund projected to reach sustainable level by 2030 under current growth assumptions. Current (2021): Off track since 2017. Assessment: Not achieved PILLAR 3 Enhancing Competitiveness Page 13 of 46 The World Bank Second Economic Management Support Operation (P167485) Prior Action 7. The Prior Action 8. To improve Result Indicator 15: Number of permits and licenses. Government has ease of doing business, the established the Investor Recipient has submitted a Baseline (2016): 890 (2013). Protection Council (IPC), revised Permit Law to Target (2020): Number of permits and licenses reduced by aimed at fostering the Parliament, listing all more than 10 percent from baseline. timely and systematic licenses and permits Current (2021): Number of relevant permits and licenses resolution of investor granted by public reported as 454 for 2020. grievances. administrations and reducing their number. Assessment: Achieved. Result Indicator 16: Share of investor grievances successfully treated by the IPC to the total number of investor grievances received by the IPC Baseline (2016): 0 percent Target (2020): At least 70 percent Current (2021): No complaints received in 2021. In 2020, all registered complaints were addressed. Assessment: Achieved. Prior Action 8: The Prior action 9: To improve Result Indicator 17: Number of outbreaks of, and small Government has competitiveness of livestock ruminants vaccinated against PPR (Peste des Petits Ruminants) submitted a draft product exports, the in western region. legislation on animal Recipient has approved a health to the Parliament, package of regulations, Baseline (2016): (a) 126 cases of PPR reported in western region proposing the adoption ordinances or guidelines to (Khovd aimag). (b) 10.4 million small ruminants vaccinated of an animal health legal operationalize the Livestock against PPR in region. framework which is and Animal Health Law, Initial target (2020): (a) The western region (aimags of Khovd, consistent with including the modalities of: Bayanulgii, Gobi-Altai, Uvs and Zavkhan) is maintained free of international standards (i) animal disease free zone PPR. (b) A cumulative number of at least 20 million small Page 14 of 46 The World Bank Second Economic Management Support Operation (P167485) as these are set forth by establishment, (ii) ruminants are vaccinated against PPR in the western region by the World Organization international quarantine 2019–20. for Animal Health. procedures, (iii) major Current (2021): No outbreaks reported in 2017-20 but virus still transboundary animal circulating among unvaccinated animals. Cumulative diseases control plans, and vaccinations reached 8.3 million by 2020. (iv) herders’ obligations. Assessment: Partly achieved. Prior Action 9: The Prior action 10: To improve Result Indicator 18: Proportion of shipments selected for Parliament has ratified trade environment, the physical inspection. the WTO Trade Recipient has adopted the Facilitation Agreement institutional framework for Baseline (2016): 90 percent (TFA). the TFA implementation, Target (2020): 70 percent including (i) a time-bound Current (2021): n.a. action plan for its full implementation; (ii) the Assessment: Data not available. establishment of an interagency coordination Result Indicator 19: Average customs clearance time. mechanism for the TFA; and the establishment of a trade Baseline (2016): 12 hours and 35 minutes information portal (TIP). Target (2020): 20 percent reduction in average customs clearance time Current (2021): n.a. Assessment: Data not available. Page 15 of 46 The World Bank Second Economic Management Support Operation (P167485) A. Relevance of Prior Actions Rating: Satisfactory 12. Overall, prior actions in the program were logically related to intermediate and final program objectives, reflecting a credible theory of change in each case. They were also based on prior analytic work and there was broad consistency between indicative triggers in the first operation and prior actions in the second, although some links had to be modified in the final design of EMSO2. The changes that were introduced were of a pragmatic nature that maintained a connection with overall program objectives. However, after approval of DPO2, the COVID-19 pandemic and economic crisis dramatically, and unexpectedly, altered the economic context, shifting policy priorities towards immediate crisis management and support to an ailing economy, households, and enterprises. Against this backdrop, the initially planned third operation was suspended, since continued implementation of the envisaged longer-term structural and fiscal reforms was longer feasible, given the urgent need to respond and manage the COVID-19 crisis. Pillar 1: Restoring Debt Sustainability The first objective of the DPF series was the restoration of debt sustainability. This was to be achieved through actions relating to both public expenditures and revenues. On the expenditures side, the three most important sub- objectives were disengaging the DBM from off-budget spending, phasing out quasi-fiscal spending of the BoM, and modifying the financing and selection of public investment projects. On the revenue side, the goal was to strengthen revenue mobilization and reduce tax base erosion. The overarching objective of restoring debt sustainability was justified by the prevalence of high and rising fiscal deficits during 2013-2016 as well as rapidly rising government debt (see Table 1). The implied theory of change was that the rationalization of public expenditures and a rise in revenues would reduce the fiscal deficit, leading to a moderation of debt growth. 13. Rationalization of government expenditures. For the first operation, Government was required to take three prior actions to rationalize expenditures: (a) terminate the use of the DBM as a source of non-commercial loans for capital expenditures (b) discontinue the use of the BoM as a source of funds for the Housing Mortgage Program, and (c) terminate the Promissory Note Program so as to prevent the use of deferred payments as a way of financing capital expenditures. The focus on the DBM arose from the fact that off-budget operations of this organization had contributed significantly, about 75 percent, to the widening of the consolidated public sector fiscal deficit in 2013-15. The focus on the BoM arose from the concern that both fiscal and monetary discipline were affected by the BoM’s being involved in quasi-fiscal activities such as financing the Housing Mortgage Program and the Price Stabilization Program. The focus on the Promissory Note Program was due to the fact that such notes were used to support a level of public investment that could not be financed by available revenues. These notes were not counted as expenditure until paid, thus understating true annual public expenditures. Such notes were used to increase public investment by 2.8 percent of GDP in 2016 alone. 14. For the second operation, prior actions were designed to undertake and publish external reviews of relevant operations of both the DBM and BoM as well as an audit of the 2017 operations of the DBM. The expectation was that the information thus generated would provide guidelines to entrench the reforms and reorient these agencies towards objectives more closely suited to their mandates and governance structures more likely to prevent inappropriate use of public funds. Prior actions were also designed to rationalize the public investment program and achieve savings through a focus on fewer but better-performing projects. Included in this was the preparation of Public Investment Rationalization Guidelines to be used to identify and manage poorly performing projects in the Page 16 of 46 The World Bank Second Economic Management Support Operation (P167485) existing portfolio as well as to improve prioritization and preparation of new projects. With respect to governance, new prior actions and triggers were introduced in EMSO2 to improve the transparency of Government Special Funds. These were occasioned by concerns about the potential improper use of the Small and Medium Enterprises Development Fund. 15. Enhancing revenues. As a prior action for the first operation, Government was required to raise personal income tax rates on high income groups as well as excise taxes on alcohol and tobacco. These measures arose from the recommendations of technical analysis done by Bank staff in 2016. Mongolia had a low and flat income tax rate of 10 percent at the time which generated revenues of only 2.1 percent of GDP, very low in comparison with international standards. Accordingly, it made sense to move towards a progressive rate system with a higher revenue yield over time. To maintain a higher degree of progressivity, the minimum income tax threshold needed to be raised as well. Targets for higher excise taxes were carefully chosen to be products (tobacco and alcohol) with high negative externalities for public health. These measures promised not only to raise revenues but also to improve the design of the tax system. 16. For the second operation, Government was required to address revenue leakages by reducing several tax exemptions and incentives through the use of a framework to assess the costs and benefits of each exemption and incentive. Tax expenditures were believed to amount to 12.4 percent of revenues with the biggest part originating in exemptions and incentives. Some of these could, of course, apply to useful economic activities that public policy should support. However, Mongolia did not have a system for assessing costs and benefits relating to tax expenditures. Hence this item was put into the second operation and technical assistance was offered in 2017 to enable the assessment system to be set up. 17. Changes to Pillar 1. Changes of varying degrees of materiality occurred during implementation (see Annex 5). Minor changes involved changing the target dates for some results indicators from end-FY19 to end-FY20 as the launch of EMSO2 was delayed. Changes of a more substantive nature included (i) removing specific policies for the growth of revenues from personal income taxes and excises on alcohol and tobacco; (ii) reducing the prospective targeted gain from modifying tax exemptions from 10 percent to only 1.5 percent; and (iii) revising a condition involving restructuring of the public investment portfolio so that there was no longer a numerical target for cost- savings. Finally, some changes were introduced that promised positive effects on the fiscal and financial system. These included the introduction of new results indicators requiring (i) a formal decision by Government with respect to strengthening specific elements of the legal and regulatory framework relating to mortgage securitization; (ii) banks to be recapitalized to meet prudential capital adequacy ratios following the Asset Quality Review (AQR) of 2017 and (iii) government special funds to explicitly disclose beneficiary information (including names, amounts, terms and repayment status) and to disburse exclusively through banks determined to have good standing via the AQR. Pillar 2: Strengthening the Social Protection System The second objective of the DPF series was strengthening the social protection system. This was interpreted as requiring both an increase in the generosity of assistance for targeted poverty groups as well as putting pension arrangements on a sustainable footing. This objective was justified by the prevalence of high poverty (above 29 percent in 2016) and the fact that the pension program administered by the government contained non-sustainable features. The implied theory of change was that giving more to the poor through targeted programs and rationalizing pension obligations would strengthen the social protection system. Page 17 of 46 The World Bank Second Economic Management Support Operation (P167485) 18. Increasing generosity of social protection system. This was to be done in two steps. In the first stage, noted as a prior action for EMSO1, the budget allocation for the Food Stamp Program was to be maintained at least at the level specified in the original 2017 budget. In the second stage, noted as a prior action of EMSO2, the budget allocation for the Food Stamp Program and other poverty-targeted programs, was to be increased relative to 2016 levels. These measures were thought necessary in light of the prevailing high levels of poverty and the relatively inadequate coverage of existing social protection programs, as revealed in prior Bank analytic work. In particular, the Food Stamp Program, important for nutritional assistance to the poorest households, covered less than 5 percent of households and provided less than 5 percent of poverty incomes for a family of five. An additional cash-transfer program was also thought necessary for poor households to be identified through a proxy means test. 19. Enhancing financial sustainability of the pension system. The first step in this process was to be the amendment of relevant laws to increase both the pension insurance contribution rate and the retirement age. This was deemed necessary because the fiscal cost of the Mongolian pension system had been rising in recent years (reaching 2 percent of GDP in 2016) due to changes introduced in 2012 that increased the number of beneficiaries and the average payout. Further changes adopted in 2017 threatened to raise the fiscal cost even more to 6 percent of GDP by 2030 and as much as 11 percent by 2050. A comprehensive package of reforms was to be submitted to Parliament in 2018, guided by the Pension Reform Option Simulation Toolkit (PROST) of the World Bank. Based on analytic work already done, these prior actions were considered relevant to improving the functioning and sustainability of the pension system. Additional technical support would be provided by the Bank through the SFFSP (Strengthening Fiscal and Financial Stability Project). 20. Changes to Pillar 2. As noted above, this pillar had two main areas of implementation, one relating to the generosity of anti-poverty programs and the other to the financial viability of the pension system. In the first area, the expectation of much higher budgetary allocations for social welfare programs was maintained but specific language requiring the use of proxy means testing was dropped (see Annex 5). In the second area, the GoM reversed a prior action of EMSO1 relating to the retirement age for pension eligibility. All mention of a need to submit a comprehensive pension reform package to Parliament was dropped although it was noted that this would become part of a future EMSO3, giving the client more time to arrange necessary legislation. Also dropped was a specific target for the subsidy to be provided to the pension system; language requiring the relevant subsidy projections to reach less than 2 percent of GDP by 2030 was changed to language requiring that a fiscally sustainable level be projected for 2030 using the Bank’s PROST model. Pillar 3: Enhancing Competitiveness The third objective of the DPF operations was to enhance competitiveness. This was to be done through measures improving the business environment, facilitating trade, and raising the competitiveness of livestock products. These were thought to be necessary to generate more domestic and foreign investment for Mongolia and to diversify the sources of growth in the economy. 21. Improving the investment and business environment. A key prior action in EMSO1 was establishing an Investor Protection Council (IPC) to facilitate the timely resolution of investor grievances. This was based on the understanding, developed in part through an IFC survey done in 2013-14, that as much as 81 percent of companies thought that some part of their current investments were at risk due to unresolved grievances and that this put future investment plans at risk. Some cases had gone to international tribunals and had resulted in large settlements against Mongolia. Foreign investment had declined dramatically during 2013-17, although much of this could be due to low commodity prices. Given this context, it was appropriate for there to be a prior action to stimulate greater Page 18 of 46 The World Bank Second Economic Management Support Operation (P167485) confidence in the Mongolian regulatory and legal system. This was followed by another prior action, to be implemented for EMSO2, requiring the submission to Parliament of a Revised Permit Law listing all licenses and permits needed for the operation of businesses and aiming at a reduction of the same over time. Publicly listing all required licenses and permits would make the system more transparent and reducing these over time would make it easier to conduct business. This prior action was appropriate to the challenge at hand. 22. Enhancing the competitiveness of livestock products. A prior action for EMSO1 asked for Government to submit to Parliament draft legislation on animal health consistent with international standards. This was followed in EMSO2 by a prior action requiring a package of specific regulations and guidelines to be approved so as to operationalize the Animal Health Law. These prior actions were deemed necessary in view of prior analytic work that had shown the Mongolian livestock sector to have significant potential to export meat provided adequate measures were put in place to address issues of animal health. The sector was well placed to wrest greater market share in an environment of rising global demand, especially from such countries as China and Vietnam. Given this analytic context, and the need to diversify the export basket of the country to reduce dependence on minerals, these prior actions were clearly relevant. 23. Facilitating Trade. A prior action for EMSO1 required Parliament to have ratified the WTO Trade Facilitation Agreement (TFA) followed by one for EMSO2 that required Government to have adopted an institutional framework for TFA implementation, including a time-bound action plan, an inter-agency coordination mechanism and a repository of regulations pertaining to imports and exports. These prior actions were thought necessary to facilitate and diversify trade hamstrung by opaque regulations, inconsistent procedures and poor logistics. Mongolia was ranked 100 out of 160 countries in customs and border management in 2016. Given the need for a more diverse export basket and economy, and given the welfare benefits of low-cost trade transactions, this set of prior actions was appropriate. 24. Changes to Pillar 3. Target dates for results were shifted to end-2020 given the delay in negotiating and approving EMSO2 (see Annex 5). One result indicator, relating to the cumulative number of vaccinations for small ruminants, was dropped from 25 million to 20 million. B. Achievement of Objectives (Efficacy) Rating: Moderately satisfactory 25. The discussion in this section focuses on the extent to which (a) results indicators were met under each pillar and (b) progress was made towards the overarching program development objectives. Pillar 1: Restoring Debt Sustainability 26. Various policy actions under this pillar sought to enhance debt sustainability by rationalizing certain expenditures, increasing certain revenues and improving public investment efficiency. Indeed, a fiscal consolidation effort -reinforced through the actions supported by the DPO1 and DPO2- helped restore fiscal discipline. The budget balance moved into surplus and the debt-to-GDP ratio fell significantly from 84.6 percent of GDP in 2017 to 70.5 percent of GDP in 2019. While this progress was short-lived and undone by the onset of the global COVID-19 pandemic and ensuring economic disruption that started in early 2020, it helped at least partially rebuild fiscal Page 19 of 46 The World Bank Second Economic Management Support Operation (P167485) buffers that could be deployed during the COVID-19 crisis. The subsequent dramatic deterioration of the macro-fiscal environment necessitated significant countercyclical fiscal support to mitigate economic shocks including on households and enterprises. Despite the significantly worsened economic context, all result indicators under pillar 1 were either fully or partially achieved. 27. Two key measures involved disengaging the DBM from making loans for government expenditures and phasing out the quasi-fiscal spending of the BoM on such items as housing mortgages and price stabilization. On the revenue side, targets were set initially for raising personal income tax rates on high income groups and excise taxes on tobacco and alcohol. These were abandoned mid-stream leaving only measures to reduce tax exemptions. Financial sector risk was to be reduced through an Asset Quality Review exercise, followed by measures to get banks recapitalized as needed. Public investment efficiency was to be raised through some process improvements in the selection and implementation of projects and greater transparency in the use of Government Special Funds. 28. At the level of individual results indicators under this pillar, results were mixed. With regard to disengaging the DBM from off-budget spending, the relevant legislation, policies and institutional actions were undertaken by early 2017. By March 2017, the MoF and DBM had undertaken internal adjustments and reconciled their accounts to bring DBM’s loan portfolio repayable from the state budget to a zero balance. So this specific objective was achieved.1 29. There was progress as well in winding down the Price Stabilization Program of the BoM and in discontinuing the practice of using promissory notes to finance government spending. But phasing out quasi-fiscal spending by the BoM proved more difficult. The status of net financing from the BoM to the Housing Mortgage Program is mixed: outgoing financing was less than incoming flows of principal and coupon payments during FY18-20. So net financing may be considered to have fallen below zero over this period. However, loan repayment deferrals were approved as part of a package of Covid19 relief measures in 2020 with the result that net financing rose above zero in FY21 (and is likely to be above zero for the next two years). Furthermore, in May 2020, the transfer of the Housing Mortgage Program from the BoM to the GoM was extended to 2024. With regard to the legal and regulatory framework for mortgage securitization, a working group was established in 2019 but its work has not yet been completed. 30. Results related to the implementation of Capital Adequacy Ratios (CARs) for banks were mixed. On the one hand, an Asset Quality Review (AQR) was undertaken in 2017-18 and capital shortfalls were identified. New capital was then raised by the affected banks. The quality of this capital was assessed via a forensic review and two systemically important banks were judged to be compliant with the required CARs in 2020. On the other hand, not all banks were subjected to the same discipline. Concerns about the soundness of some small banks were present in 2020 and have continued to linger. In particular, there was a round of forbearance for banks in the aftermath of Covid19 in 2020 which affected the quality of their balance sheets. It was decided in 2021 that banks should raise capital through IPOs and a fresh AQR was commissioned to provide guidance for the rollout of the IPOs. The rollout period for the IPOs has been extended into 2023 to provide adequate time for the local financial market to adjust to the post-pandemic situation and absorb emerging information about the underlying quality of the banks proposing to raise funds through the stock market. 1However, concerns about DBM’s balance sheet and governance continue and were highlighted in the concluding statement of the IMF’s most recent staff visit in May 2022. This may be accessed at: https://www.imf.org/en/News/Articles/2022/05/12/mongolia-concluding-statement-2022-imf-staff-visit Page 20 of 46 The World Bank Second Economic Management Support Operation (P167485) 31. Similarly mixed results were obtained for the revenue actions under this pillar. The initial objective of raising personal income tax rates and selective excise taxes was abandoned at the time of EMSO2 and targets for these were no longer part of the results matrix. However, there was good progress on tax exemptions which were reduced by 3.8 percentage points by 2020, more than twice as much as the target of 1.5 points. Furthermore, tax reforms in 2018 and 2019 introduced agreed international tax and accounting standards into domestic tax laws. 32. With regard to the quality of public spending, progress has taken place in the transparency of spending through the largest Government Special Fund that supports SMEs. There is more disclosure now of pertinent information on the terms and repayment status of each loan though information on beneficiaries is not always clear or complete. Certain process improvements have also taken place and guidelines created for the pre-funding appraisal of public investment projects. But it is difficult to assess how effectively these guidelines are applied. Meanwhile, guidelines on dealing with non-performing projects have not been implemented across the board, with the GoM preferring to let some such projects continue to overrun budgets and go past deadlines rather than redesign, restructure and possibly even cancel them. 33. At the macroeconomic level, progress towards restoring debt sustainability was interrupted in 2020 when the ratios of the fiscal deficit and external debt to GDP rose sharply (see Table 2). Much of this must be attributed to the adverse effect of Covid19. There is a clear pattern of deterioration in 2020-21 after improvement in 2018-19. At the same time, the political economy of Mongolia may have exacerbated these vulnerabilities. In response to the crisis and under pressure from Parliament, the GoM resorted to expansive fiscal and quasi-fiscal measures in 2020 and 2021. The IMF’s Article IV consultation (report dated November 2021) noted a weakening of bank balance sheets and interference with the BoM’s operational autonomy. The IMF also judged international reserves to be inadequate in the face of considerable external liabilities and called for a stronger fiscal consolidation effort to move the public debt ratio towards a recommended anchor of 50 percent of GDP.2 Table 2: Progress towards Program Development Objectives 2016 2017 2018 2019 2020 2021 2022 Debt Sustainability Overall budget balance (percent of GDP) -15.1 -3.5 2.8 1.4 -9.4 -3.1 -4.8 External public debt (percent of GDP) 67.5 71.0 68.8 62.0 73.9 76.3 71.3 Gross official reserves (months imports) 2.4 4.3 4.8 7.1 5.8 4.7 4.6 Social Protection System Pension system financing gap (percent of 2 2 2.8 3.3 3.8 GDP) National poverty rate 29.6 28.4 27.8 Competitiveness Time to export (in hours; Doing Business) 152 230 230 230 Time to import (in hours; Doing Business) 137 163 163 163 Efficiency of customs clearance index (LPI) 2.39 2.22 Sources: Public debt and official reserves data taken from IMF 2021 Article IV Consultation Staff Report; Competitiveness data taken from World Bank Doing Business and World Bank Logistics Performance Index, various years. Other items from World Bank Mongolia Economic Update, various issues. 2The relevant press release on the IMF’s 2021 Article IV consultation may be accessed here: https://www.imf.org/en/News/Articles/2021/11/29/pr21350-imf-executive-board-concludes-2021-article-iv-consultation-with- mongolia Page 21 of 46 The World Bank Second Economic Management Support Operation (P167485) 34. Some results indicators under this pillar suffered from lack of clarity. For example, one result indicator was specified as “public disclosure of the government special funds in accordance with the relevant laws.” However, it was not made clear which special funds were covered, just the big ones dealing with SMEs and agricultural development or smaller ones as well. No guidance was provided either regarding the expected quality of the public disclosure. In the event, we have received confirmation of public disclosure only for the fund dealing with SMEs. Pillar 2: Strengthening the Social Protection System 35. The DPFs used budget allocations to poverty targeted programs (such as the Food Stamp Program) and various measures to rationalize the pensions system as key instruments to strengthen the social protection system. The GoM increased its budget allocations to the Food Stamp Program and met the targets set under the DPFs. The latest poverty assessment for Mongolia shows the official poverty rate as having declined to 27.8 percent in 2020, from 28.4 percent in 2018 and 29.6 percent in 2016. Overall results under this pillar were mixed. One result indicator -on social assistance programs- was achieved, although the authorities adopted wide-ranging social assistance measures to provide broad-based support to households during the COVID-19 crisis. The result indicator on pension reform was not achieved with reforms stalling already before COVID-19 and then went completely off-track during COVID-19 when the focus shifted decisively to short-term crisis management. 36. At the same time, the GOM deviated substantially from the measures agreed for the reform of the pensions system. While some of these deviations assure larger pensions for vulnerable income groups (such as herders), the overall effect has been that of putting the pension system on a more unsustainable path, an aspect which makes the objective of restoring debt sustainability more difficult as well. Real increases in benefits took place in 2017 (in part through an increase in the retirement age for herders, a substantial though relatively poor beneficiary group). The Cabinet approved a draft pensions law in 2021 which includes a funded scheme that will increase fiscal costs substantially. Furthermore, there was a large increase in the minimum pension in 2022. Some initially agreed actions were never undertaken (for example, inflation-based indexation) or were reversed (for example, increase in the contribution rate). The budget subsidy has been increasing and is projected to exceed 6 percent of GDP in 2030 (see Figure 1). Indeed, in draft legislation, the authorities have not even accepted the parametric changes needed to achieve the 2030 target that they had themselves established in 2015. Figure 1: Pension System Financing Gap Projections (% of GDP) Source: Mongolia Economic Update, World Bank, 2022. Page 22 of 46 The World Bank Second Economic Management Support Operation (P167485) Pillar 3: Enhancing competitiveness 37. The DPFs sought to enhance competitiveness by making it easier for businesses to operate, resolving investor grievances in a transparent manner, making it less time consuming to clear goods through customs and taking animal health measures to improve the productivity of the livestock sector. Progress under this pillar was mixed. Out of five result indicators under this pillar two were achieved, one was partially achieved, and two -both related to customs reform could not be assessed due to a lack of data. Some progress has taken place towards these objectives. The number of permits and licenses applicable to starting and operating businesses was reduced over time and easier access was provided to investors to register complaints with a newly – formed Investor Protection Council and have them addressed. 38. Meanwhile, it has proved difficult to get verifiable data on progress with respect to customs operations. The difficulty of assessing changes in the efficiency of customs clearance processes is due in part to the lack of clarity surrounding the chosen indicator. The indicator refers to “average customs clearance time” but does not clarify whether this applies to exports or imports or to the type of transport involved, air, rail or road. Table 2 provides two additional sources of information on this. The Doing Business report for 2019 (its last year of publication) shows no improvement between 2017 and 2019 in the time taken for document checking and border procedures for both exports and imports; the number of hours reported for these two processes are far higher than the baseline and targeted level of the DPF indicator. The Logistics Performance Index for efficiency in Mongolia’s customs clearance processes shows a slight decline over 2016-18. 39. Both target indicators for livestock health presented problems of interpretation as well. The first target required the western region to be kept free of Peste de Petits Ruminants (PPR). The GoM confirmed that no positive cases of PPR were found in that region in 2019 and 2020. However, some field studies suggest that the virus is still present in unvaccinated animals.3 The absence of outbreaks does not necessarily mean that the region is free of PPR though this interpretation may not have been shared by the concerned parties at the start of the DPFs. The second target required a certain cumulative number of vaccinations to be carried out against PPR by 2020. However, since no cases were detected in 2019 and 2020, the concerned agencies saw no need to conduct additional vaccinations. The ambiguity here is whether the agencies were required to conduct vaccinations even when no outbreaks had occurred. A. Overall Outcome Rating and Justification Rating: Moderately Satisfactory 40. With regard to the achievement of outcomes, most results have been achieved or partially achieved, despite a significant, and unexpected external shock related to the COVID-19 pandemic which not only caused economic disruption but also hampered implementation of the DPO policy program and led to the suspension of the final operation of the series. Prior to the impact of the global COVID-19 pandemic progress in terms of restoring debt sustainability was substantial with the debt-to-GDP ratio falling by almost 9 percentage points between 2017 and 2019. This helped rebuild fiscal buffers that contributed to fiscal space the authorities could deploy to counter the macroeconomic and social impacts of COVID-19. This was underpinned by implementation of fiscal and structural reforms, supported by the DPOs, including those related to the DBM, tax exemptions and off-budget spending. Progress towards increasing the generosity of the social protection system was also encouraging. Progress in other 3 Information provided by Bank sector staff. Page 23 of 46 The World Bank Second Economic Management Support Operation (P167485) areas, such as pensions and the progressivity of the tax system was more limited. Some slippages in policies and results were undoubtedly due to the adverse impact of Covid19 but some -notably the limited traction on pension, tax policy and banking sector reforms- must be attributed to a challenging political economy. Out of 19 result indicators, 11 were achieved, 5 were partially achieved, and 3 were not achieved (2 of which could not be assessed due to lack of data). Due to these shortcomings, the overall efficacy of the DPFs is being assessed as having been Moderately Satisfactory. Combined with the Satisfactory rating of the relevance of prior actions, the overall outcome rating is Moderately Satisfactory. III. OTHER OUTCOMES AND IMPACTS A. Poverty, Gender and Social Impacts 41. The DPFs were designed to affect poverty through several channels. First, direct spending on the poor was to be increased, through the Food Stamp Program and other poverty-targeted programs. Second, modifications were to be made to income and excise taxes that could affect the poor. Third, changes were to be introduced to the Animal Health Law which could have an impact on the incomes of herders who account for a large proportion of the poor. 42. A PSIA conducted at the initiation of EMSO1 showed that the combined effect of more progressive income taxes, higher excise taxes on alcohol and tobacco, changes in social security contributions and the expansion of the food stamp program were likely to have a pro-poor impact. The bottom two deciles of the per capita income distribution were likely to experience an increase of 10 percent in disposable income while the top two deciles were likely to experience a decline of 7 percent. Finally, changes in the Animal Health Law were estimated to be neutral to positive, depending on the assumptions. The simulation exercises conducted for the PSIA projected a moderate reduction in poverty by 2019 arising both from the measures discussed above and the pro-poor effects of an expected recovery of growth from improvements in the business climate and an expansion of non-mining activities. 43. No fresh PSIA was done at the initiation of EMSO2 in 2019. By this time, growth had recovered strongly due to an uptick in commodity prices and foreign investment and so a decline in poverty was widely expected. The budget for the Food Stamp Program had been increased providing another reason to expect a decline in poverty. Indeed, calculations based on an expected increase of 300 percent (between 2016 and 2019) in budgetary allocations to poverty-targeted programs suggested a 2.5 percent drop in poverty. 44. A recent update based on the Household Socio-Economic Survey of 2020 confirms a decline in the national poverty rate in recent years, from 29.6 percent in 2016 to 28.4 percent in 2018 and further to 27.8 percent in 2020.4 Despite this positive outcome, there remain concerns about Mongolia’s ability to reduce poverty in a sustainable fashion, arising from the following observations. First, growth in Mongolia tends to come primarily from the capital- intensive mining sector and this does not have a substantial spillover on low-skilled workers. Second, growth also comes from rising livestock prices. These have a beneficial effect on rural poverty but not as much on urban poverty. Indeed, urban poverty declined only modestly from 27 percent between 2016 and 2018 to 26.5 percent in 2020 while rural poverty declined from 34.9 percent in 2016 to 30.8 percent in 2018 and further to 30.5 percent in 2020. Herders, who were among the poorest in 2010, have recently enjoyed rising incomes and only a third are now 4This information can be accessed at: https://www.worldbank.org/en/news/press-release/2021/12/30/mongolia-s-2020-poverty-rate- estimated-at-27-8-percent Page 24 of 46 The World Bank Second Economic Management Support Operation (P167485) estimated to be poor. Meanwhile, a numerically larger proportion of the poor are now concentrated in urban areas. Third, we do not yet know the impact of COVID19 on poverty trends. This must await analysis of the next Household Socio-Economic Survey. 45. The DPFs were not designed to have any specific gender effects. Most of the actions called for were broad in nature and were not expected to have impacts differentiated by gender. However, a few actions could. For example, an expansion of the Food Stamp Program could conceivably improve the position of female-headed households who have a slightly higher share among the poor than male-headed ones. Overall economic growth could have more substantive effects. Almost half of working age women in Mongolia are economically inactive and the female labor force participation rate remains low. To the extent that rising prosperity improves gender equity and leads to a higher rate of female labor force participation, the DPFs could be expected to play a positive role. However, there is no empirical data available yet to establish this. A. Environmental, Forests, and Natural Resource Aspects 46. At initiation, no measure included in the DPF series was expected to have an adverse impact on the country’s environment and natural resources while some measures could plausibly have a positive impact. For example, measures aimed at improving methods of project selection in the public investment program (in Pillar 1) could be expected to enhance the government’s ability to direct funds to environmental priorities. Indeed, the new guidelines called for social and environmental impact assessments to be among the criteria used for selecting projects. Similarly, measures to enhance competitiveness (in Pillar 3) could have a positive impact on the environment. This would include the requirement that award of business permits be responsive to environmental concerns. Finally, improvements in livestock health through vaccination should enhance the resilience of herder households and possibly slow down land degradation. No prospective environmental impact, however, was included in the policy and results matrix since this aspect was not considered central to the objectives of the DPF operations. B. Institutional Change/Strengthening 47. Institutional change was the objective of measures introduced under the DPFs to restructure non-performing projects using the newly developed Rationalization Guidelines, adopt a methodology for improving the selection of new public investment projects, and take steps to improve the use of Government Special Funds. Complementary operations were also used for institutional strengthening. These included the Strengthening Fiscal and Financial Stability Project (SFFS), a Bank-financed lending TA project managed by the GOV global practice covering many areas of the DPF such as macro-fiscal, financial, public financial management, and social protection. Technical assistance was provided under this project to prepare guidelines to improve the quality at entry of new investments and establish specific provisions for rationalization of the existing portfolio of public sector projects. The assessment of efficacy provided earlier (see paragraph 32) suggests that some progress was indeed achieved. New procedures for project preparation and prioritization have been adopted by the relevant government agencies although one could argue that more needs to be done to entrench a culture of hard-nosed analysis. Technical assistance was also provided (to the MoF) to rationalize tax exemptions and incentives using a costs and benefits framework. The evaluation framework was adopted through a ministerial order on May 1, 2019 (Ministerial Order № 99). The success of this initiative in reducing tax exemptions (see paragraph 31) indicates that positive institutional change has occurred in the relevant implementation agencies. 48. Other TA activities led by the Finance and Competitiveness and Innovation Global Practice (leveraging the Page 25 of 46 The World Bank Second Economic Management Support Operation (P167485) Korean Development Trust Fund) supported the preparation of the comprehensive external special review of DBM’s operations from 2012–2017, the independent special external review of BoM’s quasi-fiscal operations (including the Housing Mortgage Program, Price Stabilization Program, and financial support to companies); and the restructuring of the Housing Mortgage Program including its securitization. Finally, IFC provided technical assistance for the preparation of the trade facilitation agreement (TFA), trade portal, as well as a time-release study to inform cross- border trade reforms. Unlike some of the other reforms noted above, there is not much evidence that the relevant customs agencies have accepted and adopted the practices recommended by the time-release study. The institutional improvements expected from the two customs-related measures in the DPF policy matrix have not yet been achieved. C. Other Unintended Outcomes and Impacts 49. Two EMSO measure generated an unintended impact in the form of additional private investment. One arose from reducing the role of the BoM in the Housing Mortgage Program. During FY18-20, net financing from the BoM was reduced to zero, though it rose later for reasons related to Covid19 (see para 29). Over roughly the same period, additional private capital in the amount of US$50 million flowed into the mortgage market. This outcome was unintended in the sense that the rationale for the original measure was to strengthen the credibility of fiscal and monetary policy and not so much to stimulate private investment in the mortgage sector. In addition, supported by prior actions 1.8 and 2.9 on animal health reforms foreign direct investment to the agriculture sector increased by US$8 million as well (see table 3). Table 3: Private Capital Enhancement (PCE) Relevant PA, Trigger or Results Indicator identified by Identified PCE per Indicator ($m) IPG team to include PCE. Prior Actions DPL 1 (PA 1.2) The BoM agreed to only recycle principal repayments The BoM has to refinance the mortgage program as the agent of discontinued net financing to the the Government, therefore containing its outstanding Housing Mortgage Program. balance-sheet exposure to the mortgage program at no more than the 2016 level. Prior Actions DPL 2 (PA 2.2) To phase out the Bank of Mongolia (BoM)’s quasi- Assuming that the PCM is a ratio between public and fiscal activities, the Recipient has restructured the private capital utilized for the subsidy, recent Housing Mortgage Program to support affordable modifications of the mortgage financing scheme housing in a more cost-effective way, and with a supported by the EMSO series (jointly with EFF) have time-bound plan for BoM to fully exit the Housing led to 40% participation rate by the private sector Mortgage Program. compared to fully 100% BOM funding. Put differently, for every $1.0 of mortgage loan there is $0.6 of public Results Indicator 2: capital and $0.4 of private capital. Net financing from the BoM to the Housing Mortgage Program The gradual exit of BoM from the scheme has Baseline: MNT 404 billion in 2016 catalyzed funding from the private sector Target: MNT 0 billion in 2019–20 (commercial banks). In fact, balance of mortgage loans funded by commercial banks increased by above US$50 million between June 2017 and March 2020 (prior to the Pandemic Law. Page 26 of 46 The World Bank Second Economic Management Support Operation (P167485) Prior Actions DPL 1 (PA 1.8) Strengthening animal health management, supported The Government has submitted a draft legislation on by the EMSO program has been critical element for animal health to the Parliament, proposing the promoting livestock production and exports as one of adoption of an animal health legal framework which the major sources of non-mineral exports. is consistent with international standards as these are set forth by the World Organization for Animal In between 2017 and 2019, annual amount of meat Health. and livestock exports increased by US$30.2 million (+45%). FDI in the agricultural sector increased by Prior Actions DPL 2 (PA 2.9) US$8 million (+11%), during the same period. To improve competitiveness of livestock exports, the Recipient has approved a package of regulations, In addition, to the animal health reforms supported ordinances or guidelines are approved to by the EMSO program the Bank provided an IPF on operationalize the Animal Health Law, including the livestock commercialization, including leveraging modalities of: (i) animal disease free zone private sector opportunities. An ongoing Solutions establishment, (ii) international quarantine Marketplace in the context of this project, has procedures, (iii) major transboundary animal diseases generated significant enthusiasm with several control strategic plans, and (iv) herders’ obligations. proposals on animal health services (animal health, animal breeding) submitted under productive partnerships route. IV. BANK PERFORMANCE Rating: Satisfactory Design/Preparation. 50. The Bank’s performance was satisfactory in each of three areas relevant to preparation: Analytical underpinnings; Risk identification and mitigation; and Coordination with development partners. 51. Analytic underpinnings. The operations were well supported by prior analytic work. Measures under each of the three pillars were backed by World Bank or IMF reports and staff analysis. The availability of such reports and extensive sector knowledge among World Bank Group staff proved useful in designing key prior actions and triggers. An illustrative set of analytic items, organized by issues and objectives, is provided in Table 4 below. Table 4: Analytical Underpinnings Issues and Objectives Analytical References Pillar 1: Restoring Debt Sustainability Mongolia Economic Update, World Bank, 2015 Phasing out DBM’s off-budget spending IMF Article IV Consultation Report, 2015 Phasing out BOM’s quasi-fiscal expenditure Just in time PER, World Bank, 2016 Improving capital adequacy of banks Financial Sector Note, World Bank, 2019 Efficient management of tax expenditures SFFS Project, TA for Financial Sector, WB, 2017 Efficient management of public investment Mongolia Public Expenditure Review, WB, 2018 Governance of special government funds IMF PIMA Report, 2018 Page 27 of 46 The World Bank Second Economic Management Support Operation (P167485) Pillar 2: Strengthening Social Protection System Review of Social Welfare Programs, WB, 2015 Safeguarding the poor and vulnerable Systematic Country Diagnostic, 2018 Enhancing financial sustainability of pensions WBG Staff Analysis, 2016 Pillar 3: Enhancing Competitiveness Investor Protection in Mongolia, WBG, 2016 Enhancing investment and business environment Doing Business Report, WBG, 2016 Facilitating trade and improving border clearance Investment Reform Map, WBG, 2018 process Agriculture Productivity and Marketing Study, WB Improving competitiveness of livestock products 2015 Mongolia’s Red Meat Value Chain, WBG, 2017 Source: Annex 3, Program Document, Economic Management Support Operation, June 2019 52. Risk identification and mitigation. Both DPF operations were considered vulnerable to political, macroeconomic and institutional performance risks. Political risks, in particular, affected the implementation of both operations, and ultimately contributed to the cancellation of an envisaged third operation. 53. The first operation, approved in October 2017, noted high political risks and the “possibility of backsliding of reforms” arising from rising commodity prices and political pressures already evident in 2017. This possibility was considered offset in part by the “overwhelming victory of the majority party in the 2016 general elections” that had campaigned on a platform of fiscal discipline. The operation sought to mitigate political risk through such measures as disengaging the DBM and BoM from fiscal roles. Understandings were also in place, under the IMF’s EFF program, that an Independent Fiscal Council would keep an eye on fiscal discipline. In the event, commodity prices rose in 2017-18 and the GoM abandoned some policies agreed to under the first operation, especially those relating to income and excise taxes and to the long-term financial sustainability of the pension system. The budget balance improved significantly due to the underlying improvement of terms of trade but an opportunity for structural reform was missed. 54. The second operation, approved in June 2019, also noted high political risks arising from upcoming parliamentary elections in 2020, commenting that “loose fiscal policy prior to elections has been a norm rather than an exception in Mongolia’s democratic history.” Among mitigating measures were steps taken under the first operation to reduce quasi-fiscal activities for the DBM and BoM and new measures to improve the governance and transparency of Government Special Funds, especially that of the SME Fund. Moreover, the budget balance had been in surplus in 2018 and trends in the first five months of 2019 had been better than expected. In the event, the onset of Covid19 led to a significant deterioration in the budget deficit (see Table 2) over the next few years, helped along by renewed pressure by Parliament for both fiscal and quasi-fiscal measures. While some additional spending could be justified for at least a few years given the adverse effects of Covid19, the resumption of some quasi-fiscal measures marked an opportunity lost for sustaining structural reforms. 55. Significant macroeconomic risks were noted in both operations. They were thought to arise from cyclicality in commodity prices and the lack of progress in the resolution of border bottlenecks with China. While the latter issue required continuing diplomatic efforts, the former could be mitigated by steps to diversify the economy away from commodity dependence and build larger fiscal and external buffers, as aimed for by various measures under the two operations. This was a reasonable position to take given the context. In the event, the biggest macroeconomic shock came not from commodity prices but from the onset of the Covid19 pandemic. Page 28 of 46 The World Bank Second Economic Management Support Operation (P167485) 56. Institutional performance risks were identified as arising not from the lack of institutional frameworks, which had been significantly strengthened since 2009, but from weak implementation in the face of political pressures. Among mitigating measures were the availability of a Fiscal Council to oversee fiscal discipline and continued technical support from donors in such areas as tax reform, public investment rationalization, social protection, pension reform, and business climate enhancement. From the side of the World Bank Group, resources for the needed assistance were available through another project entitled Strengthening Fiscal and Financial Stability Project. Again, given the context of Mongolia, these measures seem appropriate. 57. Design coordination with development partners. The operations were marked by extensive consultation and coordination among development partners, especially the multilateral ones, namely, the IMF, the Asian Development Bank and the World Bank. The EFF launched by the IMF in 2017 provided an appropriate macroeconomic framework and anchor for EMSO1 as well as some policy-based loans (PBLs) initiated by the ADB. The ADB committed funds in the amount of USD900 million of which USD600 million were proposed as PBLs and USD300 million as investment projects. There was a high degree of complementarity as all three multilateral donors were supporting various elements of banking sector reforms and the WB and ADB were supporting social welfare reforms. In addition, the ADB arranged PBLs in the area of air quality improvement, a major issue for Mongolia and one likely to be sidelined during the fiscal consolidation process started in 2017 unless external support was available. Other important partners, such as China, Japan and South Korea, were also pulled into coordination mechanisms and discussions. Because several donors had country-based staff, there was a lot of useful and timely information exchange. Implementation 58. The Bank’s performance was Satisfactory both in supervision and implementation coordination. 59. Supervision. The first operation in the series (EMSO1) was approved in November 2017, but two of its prior actions (related to the progressivity of taxes and the sustainability of pensions) were partially reversed in February 2018. The GoM argued that these reversals were done in response to citizens’ demands and would be fiscally neutral. The World Bank then engaged in further discussions to ascertain the government’s willingness to stay the course of reform. While no official supervision was conducted until June 2018, active dialogue was maintained, enabled in particular by field-based staff. 60. A supervision and pre-identification mission was conducted during June 25-29, 2018, and a follow-up (preparation) mission during October 1-10, 2018. These convinced the World Bank team that the GoM remained fully committed to the reforms. More specifically, the team noted: (i) over-performance on fiscal and debt outcomes; (ii) steady progress on all existing prior actions and triggers for EMSO 2 and 3; and (iii) a reformist budget for 2019, including measures such as the revival of the Sovereign Wealth Fund, a mechanism to adjust spending in case of a revenue shortfall, and postponement of actions that would have raised pension costs. This facilitated the pre- appraisal of EMSO2 in mid-March 2019. 61. Throughout the preparation and implementation of the DPFs, the Bank conducted consultation meetings and public presentations on the proposed structural reforms with relevant standing committees of parliament, local government officials, academics, and the business community on the proposed reforms. The Bank team held an extensive dialogue on the pension and social welfare policy reforms given their complexity. In addition, it leveraged the SCD and CPF consultations in August-September 2017 and January 2019 to discuss reform priorities with a broad Page 29 of 46 The World Bank Second Economic Management Support Operation (P167485) range of stakeholders in Mongolia. 62. Implementation coordination with partners. Collaboration was maintained with partners, such as the IMF, ADB, JICA, and Korea, throughout the two completed operations. Assessments of the macro‐economic framework and policy recommendations were exchanged between the World Bank and the IMF, through the World Bank’s regular Mongolia Economic Updates and the IMF’s Article IV missions and sequential reviews of its EFF program. The World Bank and ADB joined a staff‐level mission of the IMF and closely coordinated on key reform areas supported by each institution. Bank economists frequently provided updates on Mongolia’s economic performance and the status of the economic reforms at the monthly meetings of Development Partners. 63. Coordination was highlighted in two episodes during implementation. The first occurred in the second half of 2018 when EMSO2 was being prepared. The change in political conditions in Mongolia during 2017-18 led to slippage on key parts of the IMF’s EFF (such as banking system reforms) and undermined some aspects of the Bank’s EMSO series as well (such as tax rate and pension system reforms). The improvement in economic conditions at the same time meant that there was less need for external funds and less of an urgency felt by the government to tackle politically difficult structural reforms. This led to renewed discussions among the multilateral donor partners on the future of the adjustment program. In consultation with the IMF and the ADB, the World Bank decided to proceed with a redesigned EMSO2 that had less stringent fiscal conditions but more ambitious structural reform conditions such as the recapitalization of certain banks to meet prudential norms. Linked to the IMF’s EFF, this item became a trigger for the next operation in the series. The second episode occurred in mid-2020 when it had become clear that the recapitalization of banks was not being met per schedule and in the manner envisaged by the Bank and IMF. The Bank decided not to proceed with EMSO3 and the ADB did not initiate new projects under the rubric of its 2017 commitment. Meanwhile, the COVID pandemic had started, and new priorities had emerged for both Government and donors. Donors agreed to shift the composition of their assistance to accommodate pandemic-related needs for Mongolia. 64. Based on the foregoing assessments of design/preparation and implementation, the Bank’s overall performance in this category is judged as Satisfactory. V. RISK TO SUSTAINABILITY OF DEVELOPMENT OUTCOMES 65. The Program Documents for both operations noted the presence of substantial risks. While some of these were ex-ante in nature and applied to the probability of key reforms being undertaken during the course of the operations, the key risk areas identified apply also to the ex-post sustainability of outcomes achieved. These include, in particular, risks arising from political, macroeconomic and institutional performance considerations. 66. Political risks. The importance of political risks was demonstrated, during implementation, by the reversal of reforms relating to taxes and pensions. Income and excise tax reforms agreed to in the first operation were abandoned within a few months due to a political shift in Parliament. Many pension reforms were abandoned and even reversed over the next few years. Such risks continue to apply to key program achievements, namely, the disengagement of the DBM from making capital loans to the GOM, the winding down of corporate bond purchases by the BOM, the elimination of promissory notes as a means of funding capital expenditure by the GOM and the reduction of tax exemptions. Mongolia’s relatively volatile political system with frequent changes in Parliament and Government imply risks of reversals in some of the policy changes, supported by the series. Political risks should be Page 30 of 46 The World Bank Second Economic Management Support Operation (P167485) considered substantial. 67. Macroeconomic risks. Mongolia remains a commodity-based economy subject to high macroeconomic risks arising from commodity price shifts. The two operations aimed to reduce such risks through a number of measures aimed at enhancing debt sustainability. Despite initial progress made during the implementation of EMSO1, the prospects for debt sustainability worsened subsequently, due in part to the onset of the Covid19 pandemic, necessitating higher public spending and borrowing, and in part to the political economy of Mongolia featuring low taxes and high subsidies for middle and higher income groups.5 These structural features will continue to influence Mongolia’s economic management in ways that will continue to place it at high risk of macroeconomic distress in the face of commodity price shocks or other emergencies. 68. Another source of macroeconomic risk resides in the financial sector. Some recent actions undertaken in response to Covid19, such as financial forbearance for banks involving a moratorium on loan classification and provisioning, have heightened risks for macroeconomic stability down the road. While such forbearance resulted in an improvement (during 2021) of the reported ratio of non-performing loans to total loans, this ratio is expected to deteriorate in 2022-23 as the forbearance period has come to an end.6 Furthermore, while most banks remain adequately capitalized, some concerns exist about the capital ratios of smaller banks, especially if subjected to certain stresses. According to the IMF, the “capital deficiency of some banks could present a systemic stability risk” in certain circumstances.7 Over the medium term, this could translate into macroeconomic instability while also affecting the ability of the private sector to grow and diversify. 69. Institutional risks. Some components of the DPF operations aimed to strengthen institutional performance directly through requiring the disclosure of funds channeled through the SME Fund, the use of guidelines to revamp public investment projects that were over-budget and off-schedule and improving the efficiency of customs processes to reduce dwell time. Some success was achieved in these areas, but it cannot be taken for granted that the relevant implementing agencies are fully committed to meaningful information disclosure (as for the SME Fund) or transaction efficiency over revenue generation (as in customs). Sustainable improvement in these areas requires a culture shift and this can only be achieved over time, with improved governance and with further capacity building. In addition, there are risks emanating from the activist stance of the Parliament, much in evidence both prior to and during the two completed operations. It is not easy to resist political pressures in a democratic set-up. Thus, while the frameworks and building blocks are in place for better institutional performance in the future, the risk of slow progress remains high. VI. LESSONS AND NEXT PHASE A. Lessons Learned 70. A complex political economy affected the ability of the DPFs to achieve progress in key areas. Program efficacy was affected by the lack of progress with proposed structural reforms in three areas: taxes, pensions and banking. Political interests kept the tax system from becoming more progressive, the pensions system from becoming more sustainable and the banking system from becoming sounder. Political interests became evident soon after EMSO1 5 Such risks are also enhanced for landlocked Mongolia by its trade flows being affected by border disruptions, as has been the case for many years at the border with China. 6 For details, see Mongolia Economic Update, April 2022, pages 27-28. 7 For details, see IMF Article IV Staff Report, Annex IX on Banking Sector Stability, November 2021. Page 31 of 46 The World Bank Second Economic Management Support Operation (P167485) was launched as certain tax and pension measures were abandoned or reversed. Given this experience, the Bank should balance carefully ambition and political feasibility in designing policy programs, including by focusing on fewer reform areas with firm and broadly shared commitment. It is also important to assess the pre-conditions for DPOs, including the robustness of the reform commitments and plans before commencing on a DPO and reflecting policy measures in a program. In a context of high political volatility, shorter series with two operations with a more manageable timeframe may be more appropriate. Finally, frontloading of the most challenging policy actions could help test commitment and mitigate risks of slippages in later operations. 71. Slow culture change in key institutions affected the pace of improvement in the investment climate. There have been improvements in institutional performance in such areas as addressing investor grievances and reducing redundant permits and licenses for business operations. In other areas, however, a slow pace of institutional change has limited progress. For example, concerns persist that customs staff are not yet oriented towards efficiency as opposed to revenue and other goals. There is not much evidence of improvements with regard to physical inspections and dwell time of goods passing through customs. Progress in this area will likely require incentives to nudge customs staff to be more efficient in their operations without sacrificing security concerns. 72. Lack of clarity for some results indicators made monitoring and impact assessment more difficult. For customs performance, for example, it would have been better if the indicators had been more precise with regard to whether air, rail or road operations were being targeted. For animal health vaccination, it would have been better had it been clear whether the objective was the elimination of disease outbreaks or that of relevant viruses. If Bank and GoM staff did have some initial understandings on how specific indicators would be measured it would have been better if these had been written down in an annex of the Program Document. 73. Good coordination among development partners facilitated implementation. Such coordination was most evident at two points, in 2019 when the second EMSO was being finalized and in 2020 when the third operation was cancelled. In both cases, difficult decisions were arrived at in a consultative fashion among the three key multilateral partners (the World Bank, the IMF and the Asian Development Bank). As Covid19 began to affect the economy of Mongolia in early 2020, all were able to pivot and reorient their assistance to operations designed to help Mongolia manage the consequences of the pandemic. 74. A staffing model built around field-based task team leaders and sector specialists was useful in building a good relationship with the client and responding quickly and flexibly to changing circumstances. When difficulties arose with the tax-related measures of EMSO1, staff were quickly able to identify other measures (relating to financial soundness of commercial banks and greater transparency in the use of Government Special Funds) to maintain the focus of the operations on key areas of structural reform. This was possible because field-based staff had good knowledge of the relevant areas and moved quickly to put the issues on the table with key government officials. B. Next Phase 75. While there has been limited progress in macroeconomic policy or structural reform commitments, the Bank continues to support the GoM through technical assistance and advisory work including on targeting mechanisms for the Child Money Program, a Public Expenditure Review, a trade competitiveness diagnostics, and financial deepening in Mongolia. . Page 32 of 46 The World Bank Second Economic Management Support Operation (P167485) ANNEX 1. RESULTS FRAMEWORK A. RESULTS INDICATORS Pillar: Pillar I: Supporting Restoring Debt Sustainability through Fiscal Adjustments Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Capital expenditure financed by Amount(USD) 101,220,000.00 0.00 0.00 the DBM through non- commercial loans 31-Dec-2016 31-Dec-2020 20-Jan-2020 Comments (achievements against targets): Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Net financing from the BoM to Amount(USD) 162,279,600.00 0.00 106,670,783.80 the Housing Mortgage Program 31-Dec-2016 31-Dec-2020 31-Dec-2020 Comments (achievements against targets): Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion The recapitalization of banks is Text Six banks were identified The banks are recapitalized The 2017-18 Asset Quality Review advanced to meet prudential to be in short of capital to meet the Capital (AQR) revealed that six banks did not meet the requirement on Page 33 of 46 The World Bank Second Economic Management Support Operation (P167485) norm needed to meet the CAR. Adequacy Ratio (CAR). capital adequacy ratio (CAR) set by the Bank of Mongolia (BOM). Of which, one bank was liquidated and the other banks raised some capital to meet the requirement. However, the independent forensic audit recommended by the IMF completed in November 2019 revealed that most of the capital raised post-AQR was either non- compliant with BOM regulations, illicit, or fictional. Later, two systemically-important banks were judged to be compliant with the required capital adequacy ratios in 2020. In early 2020, the BOM suspended the administrative measures and accepted new capital raises without independently validating the transactions. Efforts to ensure a well-capitalized and well-regulated banking sector have, therefore, taken a major step back. The authorities also introduced a forbearance measure on bank assets amid the COVID-19 pandemic starting early 2020. 31-Dec-2017 31-Dec-2020 31-Dec-2020 Page 34 of 46 The World Bank Second Economic Management Support Operation (P167485) Comments (achievements against targets): All banks meet the prudential norm following the 2018 AQR and a forensic audit on the raised capital in 2019. Two systemically-important banks are reported to have met the CAR in 2020 but this has not been confirmed for all banks. Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Tax exemptions and incentives Percentage 14.50 13.00 10.70 31-Dec-2016 31-Dec-2020 31-Dec-2020 Comments (achievements against targets): Tax exemptions as a percent of total tax revenue was to be reduced by at least 1.5 percentage points from the baseline. It was met. Pillar: Pillar 2: Strengthening the Social Protection System Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Pension reform options Text State subsidy is projected State subsidy to pension The Government of Mongolia simulation toolkit (PROST) model to reach 6 percent of fund projected to reach abandoned some policies agreed to projections of the state subsidy GDP in 2030 under the sustainable level by 2030 under the first operation relating to to the pension fund used as basis growth assumptions under current growth the long-term financial for estimating baseline and made in 2017. assumptions. sustainability of the pension projection with reforms system. These included reversing the increase in pension insurance contribution rates and the retirement age. This has been off- track since 2017. Page 35 of 46 The World Bank Second Economic Management Support Operation (P167485) 31-Dec-2017 31-Dec-2020 31-Dec-2020 Comments (achievements against targets): Sustainability of the state subsidy to pension fund Pillar: Pillar 3: Enhancing Competitiveness Indicator Name Unit of Measure Baseline Target Actual Achieved at Completion Number of permits and licenses Number 890.00 801.00 454.00 to do business 31-Dec-2016 31-Dec-2020 01-Jul-2020 Comments (achievements against targets): The target was to reduce number of permits and licenses by more than 10 percent from baseline. The achieved reduction is 46 percent. Page 36 of 46 The World Bank Second Economic Management Support Operation (P167485) ANNEX 2. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES A. TASK TEAM MEMBERS P162402 Jean-Pascal Nganou (Task Team Leader), Taehyun Lee (Task Team Leader), Regis Thomas Cunningham (Financial Management Specialist), Angar Enkhtur (Team Member), Arailym Murat (Team Member), Pagma Genden (Team Member), Achim Daniel Schmillen (Team Member), Davaadalai Batsuuri (Team Member), Tsolmongerel Tsiilaajav (Team Member), Gantuya Paniga (Team Member), Tungalag Chuluun (Team Member), Rabia Ali (Team Member), Jigjidmaa Dugeree (Team Member), Badamchimeg Dondog (Team Member), Judy Yang (Team Member), Stephane Forman (Team Member), Ria Nuri Dharmawan (Counsel), Julian Latimer Clarke (Team Member), Raul Felix Junquera- Varela (Team Member), Bekele Debele Negewo (Team Member), Mombert Hoppe (Team Member), Yiren Feng (Social Specialist), Peter Leonard (Safeguards Advisor/ESSA), Alejandro Alcala Gerez (Counsel), Aparnaa Somanathan (Team Member), Sebastian Eckardt (Peer Reviewer), Jay-Hyung Kim (Team Member), Ulle Lohmus (Team Member), Mohan Nagarajan (Team Member), Samuel Freije-Rodriguez (Team Member), Altantsetseg Shiilegmaa (Team Member), Hoon Sahib Soh (Team Member), Otgonbayar Yadmaa (Team Member), Elena E. Glinskaya (Team Member), Ivailo V. Izvorski (Peer Reviewer), Richard Stern (Team Member), Mark Charles Dorfman (Team Member) P167485 Jean-Pascal Nganou (Task Team Leader), Erdene Ayush (Financial Management Specialist), Angar Enkhtur (Team Member), Undral Batmunkh (Team Member), Ikuko Uochi (Team Member), Davaadalai Batsuuri (Team Member), Tungalag Chuluun (Team Member), Jigjidmaa Dugeree (Team Member), Linh Thi Anh Jennings (Team Member), Badamchimeg Dondog (Team Member), Sitaramachandra Machiraju (Team Member), Carolina Luisa Vaira (Team Member), Andrey Milyutin (Team Member), Ulle Lohmus (Team Member), Poonyanuch Chulsukon (Team Member), Altantsetseg Shiilegmaa (Team Member), Mark Charles Dorfman (Team Member) B. STAFF TIME AND COST P162402 Page 37 of 46 The World Bank Second Economic Management Support Operation (P167485) Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation 36.681 193,326.70 FY17 31.900 115,169.48 FY18 .375 586.95 FY19 Total 68.96 309,083.13 Supervision/ICR Total 0.00 0.00 P167485 Staff Time and Cost Stage of Project Cycle No. of staff weeks US$ (including travel and consultant costs) Preparation 36.681 193,326.70 FY17 31.900 115,169.48 FY18 32.930 115,211.74 FY19 3.688 31,450.93 FY20 Total 105.20 455,158.85 Supervision/ICR 9.475 62,961.74 FY20 2.225 18,698.01 FY21 Total 11.70 81,659.75 Page 38 of 46 The World Bank Second Economic Management Support Operation (P167485) ANNEX 3. BORROWER, CO-FINANCIERS, AND OTHER DEVELOPMENT PARTNERS’/STAKEHOLDERS’ COMMENTS Page 39 of 46 The World Bank Second Economic Management Support Operation (P167485) Page 40 of 46 The World Bank Second Economic Management Support Operation (P167485) ANNEX 4. SECTORS AND THEMES . SECTORS AND THEMES P162402 Sectors Mitigation Co- Adaptation Co- Major Sector/Sector (%) benefits (%) benefits (%) SECTOR_TBL Agriculture, Fishing and Forestry 11 0.00 0.00 Livestock 11 0 0 SECTOR_TBL Public Administration 34 0.00 0.00 Central Government (Central Agencies) 34 0 0 SECTOR_TBL Financial Sector 11 0.00 0.00 Other Non-bank Financial Institutions 11 0 0 SECTOR_TBL Social Protection 22 0.00 0.00 Social Protection 22 0 0 SECTOR_TBL Industry, Trade and Services 22 0.00 0.00 Other Industry, Trade and Services 22 0 0 Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Economic Policy 33 Fiscal Policy 33 Fiscal sustainability 33 Trade 11 Trade Facilitation 11 Private Sector Development 11 Business Enabling Environment 11 Page 41 of 46 The World Bank Second Economic Management Support Operation (P167485) Regulation and Competition Policy 11 Public Sector Management 22 Public Finance Management 22 Public Expenditure Management 11 Domestic Revenue Administration 11 Social Development and Protection 11 Social Protection 11 Social Insurance and Pensions 11 Urban and Rural Development 11 Rural Development 11 Rural Infrastructure and service delivery 11 P167485 Sectors Mitigation Co- Adaptation Co- Major Sector/Sector (%) benefits (%) benefits (%) SECTOR_TBL Agriculture, Fishing and Forestry 10 0.00 0.00 Livestock 10 0 0 SECTOR_TBL Public Administration 40 0.00 0.00 Central Government (Central Agencies) 40 0 0 SECTOR_TBL Financial Sector 20 0.00 0.00 Banking Institutions 20 0 0 SECTOR_TBL Social Protection 10 0.00 0.00 Social Protection 10 0 0 SECTOR_TBL Industry, Trade and Services 20 0.00 0.00 Other Industry, Trade and Services 20 0 0 Page 42 of 46 The World Bank Second Economic Management Support Operation (P167485) Themes Major Theme/ Theme (Level 2)/ Theme (Level 3) (%) Economic Policy 30 Fiscal Policy 30 Fiscal sustainability 30 Trade 10 Trade Facilitation 10 Private Sector Development 10 Business Enabling Environment 10 Regulation and Competition Policy 10 Jobs 10 Public Sector Management 30 Public Finance Management 30 Public Expenditure Management 20 Domestic Revenue Administration 10 Public Administration 10 Public Assets and Investment Management 10 Social Development and Protection 10 Social Protection 10 Social Insurance and Pensions 10 Urban and Rural Development 10 Rural Development 10 Rural Infrastructure and service delivery 10 . Page 43 of 46 The World Bank Second Economic Management Support Operation (P167485) ANNEX 5. SUPPORTING DOCUMENTS Comparison of Triggers and Prior Actions (Annex 4 of Program Document) Triggers EMSO 1 Prior Actions EMSO 2 Changes #2.1. A comprehensive external #2.1. To improve Development Minor change in special review on the DBM’s Bank of Mongolia (DBM) formulation to operation from 2012‐2016 and an corporate governance through expand coverage of annual audit on the DBM’s operation transparency, the Recipient has external audit. during 2017 have been publicly publicly disclosed the disclosed on the DBM’s website. comprehensive external special review on DBM’s operations from 2012‐2017. #2.2. The Housing Mortgage Program #2.2. To phase out the Bank of No change. is restructured through a joint decree Mongolia (BoM)’s quasi‐fiscal by the BoM and the Government to activities, the Recipient has better serve the purpose of restructured the Housing supporting affordable housing in a Mortgage Program to support more cost‐effective way, with a time affordable housing in a more cost‐ bound plan for the BoM to fully exit effective way, and with a time‐ the program. bound plan for BOM to fully exit the Housing Mortgage Program. #2.3. An independent special external #2.3. To improve the Bank of No change. review on the BoM’s quasi‐fiscal Mongolia (BoM) corporate operations—including Housing governance through transparency, Mortgage Program, Price Stabilization the Recipient has publicly disclosed Program, and financial support to the independent special external companies—has been publicly review on BOM’s quasi‐fiscal disclosed on the BoM’s website. operations, including the Housing Mortgage Program, Price Stabilization Program, and financial support to companies. #2.4: The Government has submitted #2.4: To improve efficiency of Change is justified by amendments to tax laws and revenue mobilization, the pending regulations to reduce tax exemptions Recipient has established a methodology and incentives, based on a cost‐ framework to evaluate the tax provided by the Bank benefit analysis of individual tax expenditure system in terms of the through a technical incentive and exemption programs. costs and benefits aimed to reduce assistance which was ineffective tax incentives and delayed. exemptions, starting with the 2020 budget. #2.5. The Public Investment #2.5. To improve the efficiency of Minor change in Rationalization Guideline has been ongoing and new investment formulation to approved by the Cabinet to reduce projects in the budget, the reflect the the cost for on‐ going investment instrument used. Page 44 of 46 The World Bank Second Economic Management Support Operation (P167485) projects, starting with the 2018 Recipient has adopted a regulation budget. to enhance appraisal, prioritization and selection of projects. #2.6. To improve transparency of New prior action. Government Special Funds, the Recipient has improved the legal, governance, and monitoring frameworks of the state budget‐ financed Government Special Funds that extend loans and grants. #2.6. The Government has increased #2.7. To increase protection of the No change. the coverage and benefit size of the poor, the Recipient has increased Food Stamp Program and/or other the total budget allocation for the social welfare programs that are Food Stamp Program (FSP) and poverty‐targeted based on the PMT‐ other poverty‐targeted programs in based Integrated Household 2019 compared to Database. the 2016 level, in line with MTFF allocations. #2.7. A comprehensive reform Postponed to EMSO3. Client needed more package to the Pension Insurance time for Scheme is submitted to the preparation. Parliament, to maintain the financial sustainability of the pension system. #2.8: The Government has submitted #2.8: To improve ease of doing No change. a revised Permit Law to Parliament, business, the Recipient has listing all licenses and permits submitted a revised Permit Law to granted by public administrations Parliament, listing all licenses and and reducing their number. permits granted by public administrations and reducing their number. #2.9. A package of 13 regulations, #2.9. To improve competitiveness No change except ordinances or guidelines are of livestock exports, the Recipient the reference to approved to operationalize the has approved a package of the exact number Livestock and Animal Health Law, regulations, ordinances or of regulations to be including the modalities of: (i) animal guidelines are approved to included in the disease free zone establishment, (ii) operationalize the Livestock and package has been international quarantine procedures, Animal Health Law, including the removed. (iii) major trans‐boundary animal modalities of: (i) animal disease diseases control strategic plans, and free zone establishment, (ii) (iv) herders’ obligations. international quarantine procedures, (iii) major transboundary animal diseases control strategic plans, and (iv) herders’ obligations. Page 45 of 46 The World Bank Second Economic Management Support Operation (P167485) #2.10. The Government has adopted #2.10. To improve trade No change. the institutional framework for the environment, the Recipient has TFA implementation, including: (i) a adopted the institutional time‐bound action plan for its full framework for the TFA implementation; (ii) the implementation, including (i) a establishment of an inter‐agency time‐ coordination mechanism for the TFA; bound action plan for its full and (iii) a complete repository of all implementation; (ii) the import and export regulations and establishment of an interagency procedures to increase transparency coordination mechanism for the and reduce arbitrary application. TFA; and the establishment of a trade information portal (TIP). Page 46 of 46