MONGOLIA ECONOMIC UPDATE Partial Recovery and Lingering Risks April 2023 World Bank with external contributions. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the World Bank, the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this report. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/ The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, email pubrights@worldbank.org. MONGOLIA ECONOMIC UPDATE – APRIL 2023 Contents ACKNOWLEDGEMENTS ..........................................................................................................................5 EXECUTIVE SUMMARY ...........................................................................................................................6 Chapter I: Recent Economic Developments and Outlook .................................................................14 1. Recent Economic Developments ............................................................................................ 14 1.1. Robust but incomplete economic recovery ................................................................... 14 1.2. Inflation pressures remained significant while credit was timid................................. 17 1.3. The fiscal position improved, but debt remains high and fiscal risks are increasing 20 1.4. A large external imbalance remains despite a rebound in exports............................. 22 2. Outlook, Risks, and Policy Recommendations ...................................................................... 25 2.1. Outlook and Risks ............................................................................................................ 25 2.2. Policy Recommendations ................................................................................................ 29 Chapter 2: Labor Market Challenges and a Jobs Strategy for Mongolia ..........................................32 1. Mongolian Labor Market Challenges ..................................................................................... 32 2. Constraints Behind These Challenges.................................................................................... 33 3. A Jobs Strategy for Mongolia .................................................................................................. 36 ANNEX....................................................................................................................................................40 References .............................................................................................................................................48 1 MONGOLIA ECONOMIC UPDATE – APRIL 2023 List of boxes, figures and tables Boxes Box I.1. Mining commodity exchange platform ................................................................................ 27 Box II.1. Examining the causal effect of the Child Money Program (CMP) on women’s labor force participation in Mongolia .................................................................................................................... 35 Figures Figure ES.1. Real GDP in Mongolia reached its pre-pandemic level in 2022, in line with most East Asia and Pacific countries ........................................................................................................... 10 Figure ES.2. However, output is yet to catch up to its pre-pandemic trend ................................... 10 Figure ES.3. Inflation accelerated in H1 2022, driven by the rising prices of imported goods .... 10 Figure ES.4. A small fiscal surplus was recorded in 2022 ................................................................ 10 Figure ES.5. Budget revenue (including taxes) was robust in 2022 ................................................ 11 Figure ES.6. Expenditure remained significantly higher than pre-pandemic levels ...................... 11 Figure ES.7. External imbalances keep widening ............................................................................. 11 Figure ES.8. Reserves declined due to widening imbalances and sizable Bank of Mongolia interventions ........................................................................................................................................ 11 Figure ES.9. Labor has mostly moved from agriculture to lower productivity services sectors ... 12 Figure ES.10. Labor force participation of women declined rapidly in the past decade ............... 12 Figure I.1. Real GDP in Mongolia reached its pre-pandemic level in 2022, in line with most EAP countries ............................................................................................................................................... 14 Figure I.2. However, output is yet to catch up to its pre-pandemic trend ...................................... 14 Figure I.3. Growth was mainly driven by a recovery in exports, robust consumption, and buildup of inventories … ................................................................................................................................... 15 Figure I.4. … and it was robust in most sectors, except mining ...................................................... 15 Figure I.5. The reopening of the economy allowed a robust recovery in employment ................. 16 Figure I.6. However, labor force participation is yet to fully recover from the pandemic ............ 16 Figure I.7. Inflation accelerated in H1 2022, driven by the rising prices of imported goods ....... 17 Figure I.8. In 2022, the inflation rate in Mongolia was higher than in most EAP countries ......... 17 Figure I.9. Production cost increases were substantial in the water supply, trade, and transportation sectors … ..................................................................................................................... 18 Figure I.10. … which were transferred to final consumers through increased prices of domestically produced goods and services ....................................................................................... 18 Figure I.11. Passthrough to lending rates was weaker ..................................................................... 19 Figure I.12. Credit growth declined, as subsidized loans were scaled down and commercial loans were subdued ....................................................................................................................................... 19 Figure I.13. Banks mainly issued less risky consumer loans ............................................................ 19 Figure I.14. Deposits remained weak ................................................................................................. 19 2 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Figure I.15. Budget revenue (including taxes) was robust in 2022 … ............................................. 20 Figure I.16. … in line with the economic recovery and higher international trade ....................... 20 Figure I.17. Expenditure remained significantly higher than pre-pandemic levels ....................... 21 Figure I.18. Large investments and pension outlays kept government spending elevated .......... 21 Figure I.19. A small fiscal surplus was recorded in 2022 … ............................................................. 22 Figure I.20. ... supporting some reduction in the public debt-to-GDP ratio ................................... 22 Figure I.21. External imbalances keep widening .............................................................................. 23 Figure I.22. High commodity prices and increased coal exports supported exports receipts ...... 23 Figure I.23. Investment, consumption, and fuel continued to dominate the import bill .............. 24 Figure I.24. The decrease in FDI contributed to balance-of-payments pressures ......................... 24 Figure I.25. Capital outflow from the EMDE’s in relation to the FED’s tightening has been large … ............................................................................................................................................................ 24 Figure I.26. … resulting in depreciation pressures ............................................................................ 24 Figure I.27. Reserves declined due to widening imbalances and sizable BOM interventions ...... 25 Figure I.28. Foreign currency rationing amid deteriorating market confidence widened the spread between non-bank and interbank exchange rates ............................................................... 25 Figure II.1. Labor has mostly moved from agriculture to lower-productivity services sectors ..... 33 Figure II.2. Labor force participation of women declined rapidly in the past decade ................... 33 Figure II.3. Mongolia has become more and more concentrated in mining, a capital-intensive sector .................................................................................................................................................... 34 Figure II.4. Certain aspects of the business environment limit the private sector’s activities and thus demand for labor ......................................................................................................................... 34 Figure II.5. Despite increased enrollment in tertiary education, youth unemployment increased and has remained high since 2018 .................................................................................................... 34 Figure BII.1. Mothers who receive CMP benefits participate less in the labor force ........................... 36 Figure A2.1. Even before the pandemic, Mongolia stood out in terms of the size of social assistance spending … ......................................................................................................................... 42 Figure A2.2. … which was further increased during the pandemic ................................................. 42 Figure A2.3. The amount of CMP benefits is also high compared to the average wage ............... 43 Tables Table ES.1. Key macroeconomic indicators ....................................................................................... 12 Table I.1. Key macroeconomic indicators .......................................................................................... 26 Table A2.1. Regression results ............................................................................................................................ 46 3 MONGOLIA ECONOMIC UPDATE – APRIL 2023 ABBREVIATIONS ALMP Active Labor Market Program AQR Asset Quality Review BOM Bank of Mongolia CMP Child Money Program CPI Consumer Price Index DBM Development Bank of Mongolia EAP East Asia and Pacific region EMDE emerging markets and developing economies ES Executive Summary ETT Erdenes Tavan Tolgoi FDI foreign direct investment FED U.S. Federal Reserve FHF Future Heritage Fund FSP Food Stamp Program GDP gross domestic product HEI higher education institution HSES Household Socio-Economic Survey LATE Local Average Treatment Effect Estimation LFP/LFPR Labor Force Participation Rate MEU Mongolia Economic Update MNT Mongolian tugrug MOF Ministry of Finance, Mongolia NSO National Statistics Office, Mongolia OT Oyu Tolgoi RDD Regression Discontinuity Design SOE state-owned enterprise TVET Technical and Vocational Education and Training y-o-y year-over-year 4 MONGOLIA ECONOMIC UPDATE – APRIL 2023 ACKNOWLEDGEMENTS This edition of the Mongolia Economic Update (MEU) was prepared by Jose Luis Diaz Sanchez (Senior Economist), Undral Batmunkh (Economist), and Dulmaa Enkhtuya (Extended Term Consultant) with contributions from Elitza Mileva (Lead Economist). Chapter II benefited from contributions of Natalia Millan (Economist), Yang Huang (Economist), Maria Ana Lugo (Lead Economist), Carola Gruen (Consultant) and Anne-Lore Fraikin (Consultant). The MEU was prepared under the guidance of Mara K. Warwick (Country Director), Sebastian Eckardt (Practice Manager), and Benjamin Musuku (Acting Country Manager). The team is grateful to Javkhlan Bold-Erdene (External Affairs Associate) and Sukhchimeg Tumur (Program Assistant) for their support on communication and administrative affairs. The findings, interpretations, and conclusions expressed in this update are those of World Bank staff and do not necessarily reflect the views of the Executive Board of the World Bank or the governments they represent. For information about the World Bank and its activities in Mongolia, please visit https://www.worldbank.org/en/country/mongolia. For questions and comments on the contents of this publication, please contact Jose Luis Diaz Sanchez (jdiazsanchez@worldbank.org). The cutoff date for this edition of the MEU is March 31, 2023. 5 MONGOLIA ECONOMIC UPDATE – APRIL 2023 EXECUTIVE SUMMARY Chapter I: Economic Development and Outlook Recent Economic Developments Despite global financial tightening, high oil favorable weather conditions. Increased and food prices, and border restrictions with livestock slaughter in anticipation of a China in the first half of the year, the harsher 2023 winter boosted both Mongolian economy recovered in 2022. agricultural and manufacturing growth Economic growth is estimated at 4.7 percent (through meat production). A rebound in in 2022 (up from 1.6 percent in 2021), with services was associated with the easing of real GDP surpassing its pre-pandemic level pandemic-related restrictions. The weak (figure ES.1). Nevertheless, it is yet to fully performance in the mining sector was driven heal from the COVID-19 shock, as economic by lower gold and copper content extracted activity remains below its pre-pandemic from the concentrates mined at the Oyu trajectory, that is, its expected level of Tolgoi (OT) mine, leading to reduced mining activity in the absence of the pandemic value added compared to 2021. In contrast, (figure ES.2). coal mining production increased amid easing border restrictions, catching up Economic growth was driven by a rapid partially with its pre-COVID-19 levels. recovery in exports and robust consumption, while private investment remained subdued. The economic rebound resulted in robust After being dragged down by border employment growth and a low restrictions with China in H1 2022, exports unemployment rate, but labor force (particularly coal) surged in H2 2022 as these participation remains below its pre- restrictions eased. Meanwhile, consumption pandemic level. The reopening of the remained robust due to higher household economy resulted in an expansion of income and to consumers drawing on employment and the lowest unemployment savings built during the pandemic. The rate since mid-2000, despite a gradual higher cost of inputs, together with banks’ withdrawal of the 2021 subsidized lending limited risk tolerance and a decrease in program to support firms in retaining their foreign direct investment (FDI), explain the employees. The labor force participation rate slowdown in private investment. In line with improved slightly from 2021 but remained the economic recovery and large public below its pre-pandemic level. investment projects, import demand Supply bottlenecks and pressures on the remained elevated despite high import prices of imported energy and food, together prices and transportation costs. with a significant exchange rate From the supply side, growth is explained by depreciation, resulted in high inflation rates. the increased number of livestock and a The headline inflation rate recorded an rebound in services, while overall mining average of 15.2 percent in 2022. Increases in sector output contracted, despite higher coal import prices such as oil and food (especially production. Agriculture sector growth during H1 2022) due to supply disruptions reached a seven-year high, supported by caused by Russia’s invasion of Ukraine and 6 MONGOLIA ECONOMIC UPDATE – APRIL 2023 the prolonged border disruptions with China, policy tightening, supported capital inflows together with a significant weakening of the and the exchange rate. exchange rate drove domestic price Despite persistently high fiscal increases, since about half of the consumer expenditures, public finances slightly basket consists of imported goods (figure improved owing to a strong rebound in ES.3). While the growth of import prices revenue performance (figure ES.4). Budget started to moderate in H2 2022, increases in revenue collection improved in 2022, production costs were accentuated during reflecting the overall economic and labor that period, slowing the decrease in inflation market recovery and strong international rates. In addition, sustained government trade-related revenues (figure ES.5). In spending and a strong recovery in private contrast, fiscal expenditures slightly consumption have been pushing up decreased (in percent of GDP), but they consumer prices from the demand side. remained substantially higher compared to Banks remained cautious despite improving pre-pandemic levels (figure ES.6). Increases economic prospects. Credit growth in investment, pensions, salaries, and large decelerated sharply in 2022, as the spending on the Child Money Program (2.8 government’s subsidized credit programs percent of GDP in 2022) explain these were rolled back. Banks were also prudent persistently high expenditure levels. Public ahead of the Asset Quality Review (AQR) debt remains elevated, despite a slight conducted before the banks’ mandatory decline in 2022 (in percent of GDP), with initial public offering process and undertook large fiscal risks, particularly contingent some balance sheet adjustments liabilities related to the Development Bank immediately following the AQR results. The of Mongolia (DBM)s’ fragile financial lack of significant improvement in situation and offtake coal contracts of nonperforming loans continues to limit bank Erdenes Tavan Tolgoi (a state-owned coal lending especially to risky sectors, with mine) with Chinese state companies. banks mainly focusing on less risky loans Rising demand for imports, together with including retail loans backed by salaries, higher import prices, led to a large external pensions, and deposits. imbalance in 2022 despite a significant Faced with rapidly rising prices and inflation increase in exports. Owing to elevated expectations, as well as widening external commodity prices and the rapid recovery in imbalances, the central bank hiked its policy coal exports associated with the easing of rate to a seven-year high and adjusted its border restrictions, export revenues rose in macroprudential ratios. The policy interest 2022 (figure ES.7). However, higher exports rate was raised five times by a total of 700 were more than offset by a larger import bill basis points to reach 13 percent in December resulting from elevated prices of imported 2022; however, the impact of the policy food and energy due to Russia’s invasion of tightening on domestic demand was Ukraine, increased cost of transportation weakened by distortions associated with the amid border restrictions, substantive government’s ongoing subsidized loan increases in the demand for imports programs. At the same time, the reserve associated with rising household income, requirements on foreign currency liabilities and higher imports of investment goods were lowered, which, together with the 7 MONGOLIA ECONOMIC UPDATE – APRIL 2023 linked to public investment projects, the central bank to avoid a sharper including those of state-owned enterprises. depreciation led to a loss in foreign reserves. Gross international reserves fell to US$3.4 An expanding current account deficit, low billion (3.1 months of import coverage) by capital inflows, and sizable interventions by end-2022 (figure ES.8). Economic Outlook In 2023, economic growth is expected to double between 2023 and 2025, the mine accelerate to 5.2 percent, driven by a rapid would progressively increase government recovery in mining production resulting from revenues, reduce balance-of-payments the removal of border restrictions and the pressures, and boost foreign reserves. commencement of the OT underground Nevertheless, the persistent focus on mining mining stage, and by the continued services activities has led to a loss of competitiveness sector recovery from the pandemic. From the in non-resource tradable sectors, which are demand side, higher exports (linked to typically a source of productivity growth, and China’s economic rebound), sustained increased vulnerability to commodity price household consumption (on the back of shocks. Also, the macroeconomic volatility continuous improvements in the labor emanating from mining price fluctuations market), and large public investment (and amplified by often procyclical policies), (through the budget and quasi-fiscal has discouraged the sustained investment activities) are expected to support growth needed for productivity growth. (table ES.1). With the rapid recovery in Risks to the outlook are tilted to the domestic demand, inflation is likely to downside. Downside risks include further remain elevated throughout 2023 (an deterioration of the external and fiscal average of 9.5 percent), despite some easing balances and additional inflationary in external and supply-related pressures. pressures resulting from a protracted Notwithstanding robust government Russia’s invasion of Ukraine, a larger-than- expenditures, solid mining revenue would expected tightening of monetary policy in contain fiscal imbalances in 2023 (with a advanced economies, risks associated with fiscal deficit of 1.2 percent of GDP expected sizable government contingent liabilities this year). The balance-of-payments pressure (including those related to DBM), and is expected to remain significant, with uncertainty related to existing large (and sustained import growth and sizable confidential) offtake coal export agreements. external bond payments due. Most recently, the banking sector difficulties The medium-term growth outlook remains in advanced economies could heighten the favorable, with substantial improvements risk aversion of investors and lead to further expected in mining output, but the need for tightening of global financial conditions, further economic diversification persists. thereby hindering Mongolia’s ability to The economy is expected to continue to attract capital while raising financing costs. benefit from OT investment in the development of its underground project. This context emphasizes the importance of With production expected to more than fiscal discipline and reforms to enhance 8 MONGOLIA ECONOMIC UPDATE – APRIL 2023 governance to build macro-fiscal resilience payments pressure. In the medium term, the and improve fiscal sustainability. Exchange effectiveness of government reform policies rate flexibility, project prioritization, and on diversification will be critical in ensuring boosting export revenues and capital inflows growth sustainability and resilience to are key to rebuilding Mongolia’s foreign domestic, external, and climate shocks. exchange reserves and easing balance-of- Chapter II: Labor Market Challenges and a Jobs Strategy for Mongolia Job creation is fundamental to support the (i) Labor demand: Make labor demand ongoing economic recovery (after the large more dynamic by strengthening employment shock experienced during the macroeconomic and fiscal pandemic), but also for more sustained management, creating a more economic development. The government has favorable business environment, and produced a long-term development diversifying exports beyond the framework, Mongolia Vision 2050, and more resource sector recently a blueprint for economic recovery (ii) Labor supply: Upgrade the workforce and diversification in the New Recovery by improving the quality and relevance Policy. Employment should be a key of the education and skills and consideration in implementing these plans, enabling social assistance as the capacity to create good jobs and beneficiaries to work promote a productive labor force are (iii) Labor market functioning: Improve essential to improving the living standards labor market functioning by building a and eradicating poverty. Indeed, a more comprehensive labor market dynamic labor market will lead to higher information system, transforming productivity and to a more diversified and active labor market programs into sustainable economy, as more productive effective employment, and reforming jobs replace less productive ones. unemployment insurance to better protect workers. In Chapter 2, we present a jobs strategy to address major labor market challenges in Mongolia. Mongolia faces two main labor market challenges: (i) to create more and better jobs that are also more diversified across sectors than in the recent past (figure ES.9); and (ii) to develop a more inclusive labor market where more women, youth, and urban residents are encouraged to participate in the workforce (figure ES.10). To address these labor market challenges, the chapter proposes a multidimensional jobs strategy from three different perspectives: 9 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Figure ES.1. Real GDP in Mongolia reached its pre- Figure ES.2. However, output is yet to catch up to its pre- pandemic level in 2022, in line with most East Asia and pandemic trend Pacific countries Local currency real GDP, index 2019 = 100 Real GDP of Mongolia, constant prices 115 32,000 in billion MNT Cambodia 110 China 30,000 Output Indonesia loss 105 28,000 Lao PDR Malaysia 26,000 100 Mongolia 24,000 Philippines GDP in constant prices 95 Thailand 22,000 GDP outlook forecasted in 2019 Vietnam 90 20,000 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Bank. Sources: NSO and World Bank staff estimates. Figure ES.3. Inflation accelerated in H1 2022, driven by Figure ES.4. A small fiscal surplus was recorded in 2022 the rising prices of imported goods Headline inflation and contributions, percent Budget balance indicators, percent of GDP Domestic goods & services 6 4 3.3 Other imports 16.9 2.3 18 Imported fuel 2 1.0 0.8 Imported food 0 7.0 12.3 13 Headline inflation -2 -1.1 -2.0 -1.8 -4 -3.0 6.4 8 4.5 -6 -8 -6.7 -6.5 3.2 4.1 3 -10 Overall balance -9.1 2.3 1.0 0.8 -12 Structural balance -11.7 -2 -14 Primary balance Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 2019 2020 2021 2022 2021 2022 2023 Source: NSO. Source: Ministry of Finance and World Bank staff estimates. 10 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Figure ES.5. Budget revenue (including taxes) was Figure ES.6. Expenditure remained significantly higher robust in 2022 than pre-pandemic levels Budget revenue, percent of GDP Budget expenditure indicators, percent of GDP Tax revenue (excluding royalties) Total revenue 40 36.7 Salary and 40 35.0 services 34.0 34.8 35 31.8 32.0 30.8 30.9 28.3 Pension 30 30 27.6 12.8 10.5 25 9.7 10.6 Capital 20 20 expenditure 10.2 6.4 5.7 15 6.2 25.8 5.4 24.2 24.7 24.4 Social welfare 21.4 10 5.5 6.7 10 8.0 transfers 7.1 8.0 5 4.9 7.5 5.4 4.8 Total 2.7 2.5 0 0 expenditure and 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 net lending Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Figure ES.7. External imbalances keep widening Figure ES.8. Reserves declined due to widening imbalances and sizable Bank of Mongolia interventions Current account and its components, percent of GDP Capital inflows, BOM FX intervention, and gross international reserves of BOM, US$ million Capital inflows, RHS Income balance Services balance FX supplied to the market, RHS Imports of goods Exports of goods Current account balance Official foreign reserves 4892 80 5,000 4366 1,000 60 4,000 3400 800 58.3 40 50.6 52.5 53.2 2696 3,000 600 20 2,000 400 0 1,000 200 -20 -42.4 -39.3 -44.3 0 0 -40 -51.3 -10.9 -14.0 -11.0 -60 -13.4 -1,000 -200 2019 2020 2021 2022 Jan Apr Jul Oct Jan Apr Jul Oct 2021 2022 Source: BoM. Source: BoM. Note: FX = foreign exchange; RHS = right-hand scale. 11 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Figure ES.9. Labor has mostly moved from agriculture Figure ES.10. Labor force participation of women to lower productivity services sectors declined rapidly in the past decade Average value added per worker and share of employment in Labor force participation rate (LFPR), by gender three decades, by sector 60% Total LFPR Male Female 2011-2021 Industry Share of people employed in the sector 1991-2000 75% 50% Agriculture 2001-2010 70% 40% Services 2001-2010 65% 1991-2000 30% 60% 2011-2021 2011-2021 20% 55% 1991-2000 10% 2001-2010 50% 0% 45% 0 5000 10000 15000 20000 2010 2012 2014 2016 2018 2020 2022e Value added per worker (in 2015 constant US$) Sources: UNdata; NSO; World Bank staff estimates. Updated version of figure 3.9 in World Bank (2020). Sources: NSO; World Bank staff estimates. Table ES.1. Key macroeconomic indicators 2021 2022 2023f 2024f 2025f Real GDP Growth, at constant market prices 1.6 4.7 5.2 6.3 6.8 Private Consumption -5.9 7.4 7.0 6.6 6.1 Government Consumption 9.2 5.4 11.5 14.7 8.1 Gross Fixed Capital Formation 17.7 0.3 18.0 7.0 0.0 Exports, Goods and Services -14.6 31.3 14.1 15.2 15.6 Imports, Goods and Services 13.6 30.5 5.0 11.5 10.7 Real GDP Growth, at constant factor prices 0.4 3.9 5.2 6.3 6.8 Agriculture -5.5 12.0 0.9 5.5 5.5 Industry (including mining) -2.2 -2.8 7.7 9.0 10.6 Services 3.9 5.5 5.2 5.1 5.1 Inflation (CPI, period average) 7.1 15.2 9.5 6.8 6.0 Current Account Balance (% of GDP) -13.4 -15.8 -14.4 -9.8 -5.6 Fiscal Balance (% of GDP) -3.0 0.8 -1.2 -0.5 0.3 Debt (% of GDP) 64.5 63.8 60.8 58.5 56.0 Source: World Bank staff estimates. Note: Public debt does not include contingent liabilities or the BoM’s liability under the People’s Bank of China swap line (11 percent of GDP in 2022). 12 MONGOLIA ECONOMIC UPDATE – APRIL 2023 13 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Chapter I: Recent Economic Developments and Outlook 1. Recent Economic Developments 1.1. Robust but incomplete economic recovery Despite global financial tightening, high oil and as in most other East Asia and Pacific (EAP) food prices, and border restrictions with China, countries (figure I.1).1 However, it is yet to fully the Mongolian economy recovered in 2022. heal from the COVID-19 shock, as economic Economic growth is estimated to have reached activity remains below its pre-pandemic 4.7 percent in 2022 (up from 1.6 percent in 2021), trajectory, that is, expected level of activity in the with real GDP surpassing its pre-pandemic level, absence of the pandemic (figure I.2). Figure I.1. Real GDP in Mongolia reached its pre- Figure I.2. However, output is yet to catch up to its pre- pandemic level in 2022, in line with most EAP countries pandemic trend Local currency real GDP, index 2019 = 100 Real GDP of Mongolia, constant prices 115 Cambodia 32,000 in billion 110 MNT China 30,000 Indonesia Output 105 loss 28,000 Lao PDR Malaysia 26,000 100 Mongolia 24,000 Philippines 95 GDP in constant prices Thailand 22,000 GDP outlook forecasted in 2019 Vietnam 90 20,000 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Source: World Bank. Sources: NSO and World Bank staff estimates. On the demand side, economic growth was driven income following the recovery in labor market by a rapid recovery in exports and robust conditions (which raised real wages), sustained consumption (figure I.3). After being dragged social assistance, a discretionary rise in pensions, down by border restrictions with China in H1 and household savings built during the 2022, exports (particularly coal) surged in the pandemic. Public consumption also rose, second half of the year (especially in Q4 2022) as especially in Q4 2022.2 Driven by the domestic these restrictions eased. Meanwhile, private demand recovery, demand for imported goods, consumption remained robust throughout the especially durable goods, also remained elevated year principally due to an increase in household throughout 2022, in line with the economic 1 Growth was higher than widely expected. Indeed, forecasts produced in early 2022 by the government, Bank of Mongolia, and key International Financial Institutions (including the World Bank) showed economic growth between 1 and 3 percent, assuming that the border restrictions that crippled the mining sector would not be resolved in 2022. 2 Public sector wages increased, reflecting the introduction of a performance-based wage system in the health sector. 14 Economic Performance and Prospects – April 2023 recovery and large public investment projects, did not contribute to economic growth in 2022 despite high imported prices and transportation due to lower private investment. The higher cost costs. In addition, inventories in 2022 were of inputs, together with banks’ limited risk mainly supported by higher birth of livestock, tolerance and a decrease in foreign direct while coal inventories, which accumulated from investment (FDI), mainly explains the slowdown H2 2021 to H1 2022 due to border restrictions, in private investment, while monetary tightening were drawn down. may have played only a minor role (see Section 1.2). The demand for imported goods, especially Investment remained subdued. Despite increased durable goods, remained elevated throughout public capital expenditures and off-budget 2022, in line with the economic recovery and investment by state-owned enterprises (SOEs) large public investment projects, despite high (see Section 1.3), gross fixed capital formation import prices and transportation costs. Figure I.3. Growth was mainly driven by a recovery in Figure I.4. … and it was robust in most sectors, except exports, robust consumption, and buildup of inventories mining … Demand-side contribution to GDP growth (percentage points) Supply-side contribution to GDP growth (percentage points) 25% 5.6% Private 6% 20% consumption 4.8% Net taxes 15% Public consumption 4% Other 10% services 4.7% Gross fixed 5.5% 1.6% cap. form. 2% Trade 5% 1.6% Changes in Other 0% inventories industry 0% -5% Exports Mining -4.4% -10% -2% Agriculture Imports -15% -4% GDP growth GDP growth -4.6% -20% -25% -6% 2019 2020 2021 2022 2019 2020 2021 2022 Source: NSO. Source: NSO. On the production side, the increased number of production). Meanwhile, following two livestock, higher meat production, and, to a consecutive years of decline, the construction lesser extent, a rebound in services, explain the sector slowly recovered, mainly owing to railway robust growth performance (figure I.4). construction works for coal transportation. A Agriculture sector growth reached a seven-year rebound in services, particularly for hospitality, high, as favorable weather conditions allowed tourism, and entertainment, was associated with both a higher number of offspring and a lower the easing of pandemic-related restrictions. loss of livestock compared to 2021. Increased However, financial intermediary services were livestock slaughter in anticipation of a harsher impacted by weak lending and deposit activities 2023 winter boosted both agriculture and in 2022 (see Section 1.2). manufacturing growth (through meat 15 MONGOLIA ECONOMIC UPDATE – APRIL 2023 In contrast, mining sector production contracted, unemployment rate, but labor force participation despite a rebound in coal production. The weak remains below its pre-pandemic level. The performance in the mining sector was mainly reopening of the economy led to an expansion of driven by lower gold and copper content employment by 5.0 percent in 2022, with a extracted from the concentrates mined at the substantial improvement in manufacturing, Oyu Tolgoi (OT) mine, leading to reduced mining transportation, and public services (figure I.5), value-added compared to 2021. However, coal and to a low unemployment rate (5.3 percent by mining production increased by 22 percent in end-2022, the lowest since the mid-2000s). This 2022, catching up with its pre-COVID-19 levels, sound performance was achieved despite the despite a sharp slowdown in the first half of the withdrawal of the subsidized lending program to year due to the border restrictions. 3 Other support firms in retaining employees established minerals such as crude oil and iron ore contracted as part of the government’s economic recovery due to mishaps between local residents and package. Also, more fixed and short-term jobs foreign crude oil miners, and to reduced logistic were created than permanent ones. 4 The labor capacity (mainly due to the high volume of force participation rate (LFPR), however, imports and coal exports). remained below its pre-pandemic level (57.9 percent by end-2022 compared to 60.6 percent in The rebound in economic activity resulted in 2019), and the large gender gap persisted (figure robust employment growth and a low I.6). Figure I.5. The reopening of the economy allowed a Figure I.6. However, labor force participation is yet to robust recovery in employment fully recover from the pandemic Decomposition of change in employment by sectors Labor force participation rate (LFPR) by gender and unemployment rate Agriculture Manufacturing Unemployment rate, RHS LFPR Other industry Transportation LFPR, male LFPR, female Public services Other services 70% 12% Total employment 4% 10% 65% 2% 8% 0% 60% 6% -2% 55% 4% -4% 50% -6% 2% -8% 45% 0% 2019 2020 2021 2022 2019 2020 2021 2022 Source: NSO. Source: NSO. 3 Coal mining production was limited by border restrictions starting in mid-2021. In terms of coal production and exports, 2021 was the worst-performing year since 2016. 4 The percentage of employment contracts other than permanent (including fixed- and short-term contracts) expanded to 36.8 percent in 2022, up from 27.2 percent in 2021. 16 Economic Performance and Prospects – April 2023 1.2. Inflation pressures remained significant while credit was timid Supply bottlenecks and pressures on energy and consumer goods, and higher than in most EAP imported food prices, together with a significant countries (figure I.8).5 Given that about half of the exchange rate depreciation, resulted in high consumer basket consists of imported goods, inflation. The headline inflation rate recorded an inflation was mainly driven by higher import average of 15.2 percent in 2022, accelerating prices for oil and food (especially during H1 from 7.1 percent in 2021 (figure I.7). Price 2022), which were compounded by a large increases were large and widespread across exchange rate depreciation (see Section 1.4). 6 Figure I.7. Inflation accelerated in H1 2022, driven by Figure I.8. In 2022, the inflation rate in Mongolia was the rising prices of imported goods higher than in most EAP countries Headline inflation and contributions, in percent Inflation index for EAP countries (derived from national CPI indexes (2019=100) Domestic goods & services 135 Other imports 130 Cambodia 18 Imported fuel 16.9 Imported food 125 China Headline inflation 12.3 Indonesia 13 7.0 120 Lao PDR 115 6.4 Malaysia 8 4.5 110 Mongolia 3.2 4.1 Philippines 3 105 2.3 1.0 Thailand 0.8 100 Vietnam -2 95 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 2021 2022 2023 2019 2020 2021 2022 Source: NSO. Source: World Bank. Higher production costs and demand-driven and healthcare services (figure I.10). Sustained inflationary pressures pushed up the prices of government spending and a strong recovery in domestically produced goods and services. While private consumption (see Sections 1.3 and 1.1, the growth of import prices started to moderate respectively) also pushed up consumer prices in the H2 2022, increases in production costs from the demand side. persisted, keeping inflation elevated. Indeed, To respond to the rapidly rising prices and producer price increases exceeded 25 percent in manage inflation expectations, as well as limit 2022 in water supply, trade, and transportation the widening external imbalances, the central (figure I.9). This translated into higher costs for bank hiked its policy rate to a seven-year high end-consumer products, with the largest and adjusted its macroprudential ratios. The increases observed in food (including flour and monetary policy rate, which had remained at a flour-based goods), transportation, hospitality, 5 Half of the consumer basket items recorded increases of at least 10 percent in 2022 (2 percentage points higher than the central bank’s upper target on inflation rate), and more than one-third of the items recorded price increases of at least 20 percent. 6 Approximately 46 percent of the consumer basket comprises imported goods, including food and fuel (World Bank staff estimates using 2020 as the reference year). 17 MONGOLIA ECONOMIC UPDATE – APRIL 2023 historical low of 6 percent throughout 2021, was changes to lending and time deposit rates were raised five times by a total of 700 basis points to relatively limited during this period (figure I.11). 13 percent in December 2022. However, the Mixed with macroprudential measures that impact of the interest rate channel on domestic loosened the reserve requirement on foreign demand was weakened by distortions associated currency liabilities, the policy tightening with the government’s ongoing subsidized loan supported capital inflows and the exchange rate programs. Indeed, the passthrough of policy rate (see also Section 1.4). Figure I.9. Production cost increases were substantial Figure I.10. … which were transferred to final consumers in the water supply, trade, and transportation sectors through increased prices of domestically produced goods … and services Production prices index, y-o-y increase Headline inflation and price increases in selected items -5% 5% 15% 25% 35% 0% 5% 10% 15% 20% 7.3% Food manufacturing Headline inflation 15.2% Electricity & heating Food items Water supply Housing utility Trade Healthcare Transportation Transport Hotels Recreation & culture 2021 2021 Restaurants Education 2022 2022 Restaurants & hotels Source: NSO. Source: NSO. Banks remained cautious despite improving Review (AQR) undertaken before the banks’ economic prospects.7 Credit growth decelerated mandatory initial public offering process and sharply in 2022 (from 21.3 percent in 2021 to 6.5 undertook some balance sheet adjustments percent in 2022, implying negative growth in real immediately following the AQR (completed in terms) as the government’s subsidized credit July 2022).9 In addition, the lack of significant programs were rolled back (in particular, the improvement in nonperforming loans continues subsidized loan program to protect jobs) (figure to limit bank lending to relatively risky sectors. I.12). In addition, banks adopted a wait-and-see Indeed, throughout 2022, banks mainly issued attitude, given the uncertainty regarding the less risky loans including retail loans backed by continuation of government-subsidized lending salary, pension, and deposits (figure I.13). Low programs and sectors to be supported.8 They credit growth moved in tandem with a drop in were also cautious ahead of the Asset Quality savings. Indeed, households drew down their 7 Low credit growth, together with declining net foreign assets, explain the weak money creation from the asset side. 8 These subsidized lending programs are “risk-free” for the banks, as the government provided a collateral guarantee and interest subsidies. While the bulk of the 2021 MNT 10 trillion subsidized lending program has been completed, significant lending to support the agriculture sector under the President’s food security program is expected to commence in 2023. 9 Banks’ credit contracted by 1.2 percent (y-o-y) in Q3 2022, partly because of the limited issuance of subsidized loans and higher bank risk aversion as a result of the jump in nonperforming loans following the AQR. 18 Economic Performance and Prospects – April 2023 savings accumulated during the pandemic for MNT demand deposit accounts (as part of the consumption purposes (figure I.14).10 In addition, pandemic measures, see Annex 1) help explain the negative real interest rates on savings and the reduction in depositors’ appetite to save. 11 the temporary removal of interest accrued on Figure I.11. Passthrough to lending rates was weaker Figure I.12. Credit growth declined, as subsidized loans were scaled down and commercial loans were subdued Interest rate on newly issued loans and deposits (flow) in local Growth of newly issued loans and contributions by type of loans currency relative to the policy rate Commercial Subsidized - Others Time-deposit rate (LC, flow) Subsidized - Mortgage Subsidized - Job support Lending rate (LC, flow) Credit growth (new issue) 16 Policy rate 50% 14 12 25% 10 8 0% 6 4 -25% Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan 2021 2022 2023 2021 2022 2023 Source: BoM. Source: BoM. Note: Lending rate is a weighted average of discounted and Note: The government’s subsidized loans under the MNT 10 trillion non-discounted lending rates. program includes loans for agriculture, mortgage, repo financing, and employment support loans. Figure I.13. Banks mainly issued less risky consumer Figure I.14. Deposits remained weak loans Growth of newly issued loans and contributions, by sector M2 money growth and contributions from the liability side Others Construction, Real estate MNT checking Mining Manufacturing 30% MNT deposits Trade Retail consumers FX checking, deposits Credit growth (new issue) 20% M2 growth 55% 45% 35% 10% 25% 15% 0% 5% -5% -15% -10% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 2021 2022 2023 2021 2022 2023 Source: BoM. Source: BoM. Note: M2 = broad money. 10 Foreign exchange current account balances and deposit account balances also increased, as households aimed to protect savings from the exchange rate depreciation. 11 Per year interest rates on time deposits averaged 8.8 percent (mean of monthly weighted averages) in 2022, while average headline inflation was 15.2 percent. 19 MONGOLIA ECONOMIC UPDATE – APRIL 2023 1.3. The fiscal position improved, but debt remains high and fiscal risks are increasing Budget revenue collection improved markedly in significantly impacted by border restrictions in 2022, reflecting the economic and labor market H1 2022, but strong coal exports boosted recovery and strong international trade-related royalties in the last two months of the year. In revenues. Total revenue reached 34.8 percent of contrast, revenues from oil and iron ore exports GDP (figure I.15), the strongest outturn in the remained low (see Sections 1.1 and 1.4). A portion past decade. High volumes and prices of imports of the royalties meant to be accumulated in the and exports, stronger economic activity and labor Future Heritage Fund (FHF) (an intergenerational market (see Section 1.1), and a robust wage wealth fund) was repurposed to finance the Child increase explain this robust performance. The Money Program (CMP), a universal cash transfer government collected higher mining royalties, program covering all children aged zero to 18 value-added tax, income tax, and social security with a temporary exemption, and no funds were payments (figure I.16). Royalties were accumulated in the FHF in 2022. Figure I.15. Budget revenue (including taxes) was robust Figure I.16. … in line with the economic recovery and in 2022 … higher international trade Budget revenue in percent of GDP Y-o-y growth of budget revenue in 2022 and its growth contributions Tax revenue (excluding royalties) Total revenue 35% 30.0% 40 30% 34.8 35 31.8 32.0 25% 30.9 Increased tax revenue 27.6 explains 21 ppts 30 20% 25 15% 10% 7.6% 7.6% 20 4.8% 5.2% 3.5% 5% 1.5% 15 24.2 24.7 24.4 25.8 0% 10 21.4 VAT Non-tax Income taxes Other taxes Social security Royalties Total revenue payments 5 0 2018 2019 2020 2021 2022 Sources: MoF; World Bank staff estimates. Source: MoF. Note: Royalties include the accumulation in FSF. No funds were accumulated in the FHF in 2022. While fiscal expenditures decreased slightly as a capital investment, pensions, and salaries, and share of GDP, they remained elevated and large spending on the Child Money Program significantly above pre-pandemic levels. Total (CMP), explain these persistent high expenditure expenditure declined to 34.0 percent of GDP in levels (figure I.18). Capital expenditures rose 2022, down from 35.0 percent recorded in 2021 from 6.7 percent of GDP in 2021 to 7.1 percent (a (figure I.17), despite a nominal increase of 16.3 28 percent nominal increase), reflecting the percent. With the end of the pandemic-related completion of some projects that were delayed restrictions, the need of government support to during the pandemic, increased cost of households decreased. However, increases in investment inputs, and infrastructure 20 Economic Performance and Prospects – April 2023 investments by the Ulaanbaatar municipality to percent rebate on social security contribution tackle traffic congestion. Additional major public payments (considered as part of social welfare investments were financed off-budget through transfers) was made during May–December SOEs (for example, the construction of a railway 2022, the total cost of social welfare declined for coal transportation purposes). Due to a (from 7.5 percent of GDP in 2021 to 4.8 percent discretionary increase in pensions starting in in 2022) as the impact of the one-time top-up February 2022, total pension expenditure benefits offered during the one-month increased from 5.7 percent of GDP in 2021 to 6.2 quarantine in May 2021 dissipated. In addition, percent in 2022.12 While CMP spending remained some recurrent spending was cut following the elevated (2.8 percent of GDP in 2022), and a 50 Austerity Law.13 Figure I.17. Expenditure remained significantly higher Figure I.18. Large investments and pension outlays than pre-pandemic levels kept government spending elevated Budget expenditure in percent of GDP Y-o-y growth of budget expenditure and its growth contributions 40 36.7 35.0 Salary and 3.0% 34.0 services Salary and services 35 18% 30.8 28.3 Net lending 30 Pension 5.7% 5.2% 12.8 12% 25 10.5 Other recurrent 9.7 expenditures 10.6 Capital 20 4.9% Transfers to hospitals 10.2 expenditure 5.7 6% 6.4 9.4% 15 6.2 Social welfare transfers 5.4 Social welfare 5.3% 10 5.5 6.7 transfers 8.0 0% Pension 7.1 8.0 5 4.9 -1.1% -5.1% 7.5 Total Capital expenditure 5.4 4.8 2.7 2.5 expenditure and 0 net lending -6% 2018 2019 2020 2021 2022 2021/2020 2022/2021 Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Note: Performance-based bonuses for teachers are considered as salary expenditure. Owing to buoyant revenue performance and government as the overall fiscal balance net of contained expenditure growth, Mongolia’s fiscal fiscal saving funds) also improved, as its deficit balance improved. The headline budget balance narrowed substantially from 6.5 percent in 2021 recorded a surplus of 0.8 percent of GDP in 2022 to 2.0 percent in 2022 (figure I.19). The (the first surplus since the start of the pandemic), improvement in the structural balance also improving from a deficit of 3.1 percent in 2021. reflects the change in the financing of the CMP, Similarly, the structural balance (defined by the 12 This change represents a 30 percent nominal increase, the highest in the past six years, with the exception of 2020. 13 Under the Austerity Law enacted in April 2022, nonessential public recurrent spending was reduced, and some public investments were delayed. For instance, administrative expenses related to public events organization and travel and communication and transportation of public officials were cut, while some employment restructuring was done at SOEs to reduce salary spending. In addition, construction of some nonessential public offices and cultural centers was delayed. 21 MONGOLIA ECONOMIC UPDATE – APRIL 2023 which was shifted to the Future Heritage Fund decrease, as the majority of public debt (nearly but weakened long-term fiscal sustainability.14 95 percent of public and publicly guaranteed debt) is denominated in foreign currency. In Despite the improved fiscal position, public debt addition, fiscal risks, which were already remains high, with large and increasing fiscal substantial, continued increasing due to risks. A solid economic turnaround, a primary contingent liabilities related to offtake coal surplus, and payments of some external debt (the contracts of Erdenes Tavan Tolgoi (ETT), a state- Chinggis bond was fully paid in late 2022) owned coal mine, with Chinese state companies contributed to the small decline in public debt adding up to other existing fiscal risks such as (from 64.5 percent of GDP in 2021 to 63.8 percent those related to DBM’s fragile financial in 2022 [figure I.20]), while the large depreciation situation.15 (21 percent against the U.S. dollar) limited this Figure I.19. A small fiscal surplus was recorded in 2022 Figure I.20. ... supporting some reduction in the public … debt-to-GDP ratio Budget balance indicators in percent of GDP Public debt-to-GDP ratio Overall balance Structural balance Primary balance 85% 6 79.0% 3.3 4 2.3 76.6% 2 1.0 0.8 75% 0 -2 69.2% -1.1 -2.0 -1.8 -4 -3.0 64.5% -6 63.8% 65% -8 -6.7 -6.5 -10 -9.1 -12 -11.7 -14 55% 2019 2020 2021 2022 2018 2019 2020 2021 2022 Sources: MoF; World Bank staff estimates. Sources: MoF; World Bank staff estimates. Note: The DBM’s debt is included, but the BOM’s swap deal with the People’s Bank of China is not. 1.4. A large external imbalance remains despite a rebound in exports Rising demand for imports, together with higher (figure I.21). Owing to elevated commodity import prices, led to a larger external imbalance prices, a rapid recovery in coal exports associated in 2022, despite a significant increase in exports with the easing of border restrictions, and some 14 A share of royalties (specified in the Law on Future Heritage Fund [FHF]) must be accumulated in the FHF for future generations. However, the law was amended in 2021 to fund the increase in CMP benefits, resulting in a decrease of the share of royalties going to the FHF and an increase in the share allocated to structural revenue, thus automatically improving the structural balance. 15 In H1 2022, ETT received advance payments (estimated at US$603 million) on its coal exports to boost international reserves at a time when coal exports were severely restricted at the Chinese border and reserves were critically low. As of end-2022, the outstanding balance on ETTs advanced payments is estimated at US$480 million (representing four to five months of ETT’s export s). ETT has also engaged in offtake agreements with Chinese coal – importing SOEs. These agreements mobilize upfront financing for infrastructure investments against pledges of future coal exports. While some of these agreements remain confidential, the declassified offtake contracts amount to about US$3 billion payable in coal until 2027 (equivalent to almost 30 percent of total exports in 2022). 22 Economic Performance and Prospects – April 2023 improvement in logistics management (including goods linked to public investment projects, of hygiene requirements linked to the pandemic) including from SOEs (figure I.23). The services at border crossings, merchandise export revenue balance deficit was one of the largest in recent increased by 20 percent (y-o-y) in 2022 (figure years (13.4 percent of GDP), with increased I.22). However, this rise in exports was more than demand for transportation services related to offset by a 27 percent (y-o-y) increase in coal exports and tourism mainly driving the 37 merchandise imports due to the elevated prices percent (y-o-y) increase in services imports of imported food and energy associated with (reaching 20 percent of GDP, the highest since Russia’s invasion of Ukraine, a substantive 2019). These developments resulted in a increase in household demand for import goods widening of the current account deficit to 15.8 (following the removal of mobility restrictions percent of GDP in 2022, up from 13.8 percent in related to the pandemic and the economic 2021. rebound), and higher imports of investment Figure I.21. External imbalances keep widening Figure I.22. High commodity prices and increased coal exports supported exports receipts Current account and its components, percent of GDP Export revenue growth and percentage contributions of key commodities Income balance Services balance Others Imports of goods Exports of goods 60% Current account balance Coal 80 60 30% Copper 58.3 20.4% 40 50.6 52.5 53.2 20 Gold 16.4% 0 0% Total exports -20 -2.7% revenue (y/y, %) -42.4 -39.3 -44.3 -40 -51.3 Export price -10.9 index (y/y, %) -14.0 -11.0 -60 -13.4 -30% 2019 2020 2021 2022 2020 2021 2022 Source: BoM. Sources: Mongolian Customs; BoM; World Bank staff estimates. Note: Copper also covers gold content within OT’s copper concentrate. Financial tightening in advanced economies (in particular, by the U.S. Federal Reserve [FED]), impacted capital inflows (including FDI) into the which triggered capital outflows (figure I.25) and country. While foreign investments in the OT depreciation pressures (figure I.26) in emerging mine increased, FDI to other companies nearly markets and developing economies (EMDEs) halved in 2022, pushing the FDI-to-GDP ratio (figure I.26). The financial account was further down to 9.7 percent (its lowest level in six years) affected by the full payment of the Chinggis bond from an average of 14.2 percent during 2017–21 (a sovereign Eurobond). However, sizable trade (figure I.24). Similarly, a net outflow was recorded credit advances received in December 2022 under portfolio investment for the third year in a limited the decline in the financial account row. These developments can be explained partly surplus (which still fell to 11.8 percent of GDP in by the tightening cycle in advanced economies 2022, down from 13.0 percent in 2021). 23 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Figure I.23. Investment, consumption, and fuel continued Figure I.24. The decrease in FDI contributed to balance- to dominate the import bill of-payments pressures Imports bill growth and percentage contributions of key items Balance of payments and its components, percent of GDP 40% 25% Financial account (excl. FDI) 29.3% Fuel FDI (net inflow) 20% 27.2% Current and capital account 30% BOP 15% Investment items 20% 10% 16.3% 12.7% Industrial 13.5% 5% 9.7% input 10% 0% Consumer -4.3% goods 0% -5% -14.1% -13.0% -14.8% Total imports bill (y/y, %) -10% -10% Import price -15% -13.6% index (y/y, %) -20% -20% 2020 2021 2022 2019 2020 2021 2022 Sources: Mongolian Customs; BoM; World Bank staff estimates. Sources: BoM. Figure I.25. Capital outflow from the EMDE’s in relation Figure I.26. … resulting in depreciation pressures to the FED’s tightening has been large … Capital outflow in the weeks following a shock Nominal exchange rate of US$ against local currency GFC (2008) US$, billions 110 Taper tantrum (2013) China deleverage (2015) China 90 Covid (2020) Indonesia 20 Fed tightening (2022) 10 Malaysia 70 0 Index, Sep Philippines -10 2020=100 -20 50 Thailand -30 Vietnam -40 30 -50 Lao PDR -60 Mongolia 10 -70 Nov-21 Sep-20 Jul-21 Jun-22 Apr-21 Dec-20 Mar-22 Feb-23 Oct-22 0 10 20 30 40 50 Weeks since the beginning Source: World Bank 2023. Source: World Bank 2023. A large current account imbalance, reduced to end the year at US$3.4 billion (3.1 months of capital inflows, and sizable interventions by the imports coverage). This fall was due to the rapidly central bank to avoid a sharper depreciation led widening external imbalances, which resulted in to a loss in foreign reserves (figure I.27). Gross a balance-of-payments deficit of 4.3 percent of international reserves fell from a high of US$4.9 GDP (despite the strong improvement in coal billion (nearly five months of imports coverage) exports toward the end of the year and OT’s in April 2021 to as low as US$2.7 billion (about greater repatriation of exports revenue in Q4 2.5 months of imports coverage) in August 2022, 24 Economic Performance and Prospects – April 2023 2022).16 The BOM intervened to contain onset of Russia’s invasion of Ukraine), the exchange rate depreciation pressures resulting nominal exchange rate of the Mongolian tugrug from these widening external imbalances and to the U.S. dollar depreciated by 21 percent and from the appreciation of the U.S. dollar following banks rationed foreign exchange transactions in the FED’s monetary policy tightening. Even periods of high external pressures, resulting in a though the BOM supplied over US$5 billion significant gap between the official exchange through interventions in 2022 (about half of it rate and the parallel exchange rate at the non- within the first four months of 2022 amid the bank market (figure I.28). Figure I.27. Reserves declined due to widening Figure I.28. Foreign currency rationing amid imbalances and sizable BOM interventions deteriorating market confidence widened the spread between non-bank and interbank exchange rates Capital inflows, BOM FX intervention, and gross international Midpoint of nominal exchange rate of MNT/US$ reserves of BOM, in US$ million 3600 MNT/US$ Capital inflows, RHS 3500 FX supplied to the market, RHS Official foreign reserves 3400 4892 3300 5,000 4366 1,000 4,000 3400 800 3200 2696 3,000 600 3100 2,000 400 3000 Interbank (official) 1,000 200 Non-bank (parallel) 0 0 2900 -1,000 -200 2800 Jan Apr Jul Oct Jan Apr Jul Oct 21-Dec 25-Apr 22-Sep 22-Oct 24-Feb 26-Mar 25-May 23-Aug 21-Nov 24-Jun 24-Jul 2021 2022 Source: BoM. Source: BoM. Note: FX = foreign exchange; RHS = right-hand scale. Note: The central bank reports the midpoint of the daily nominal exchange rate announced by banks (interbank exchange rate). 2. Outlook, Risks, and Policy Recommendations 2.1. Outlook and Risks Economic growth is expected to accelerate to 5.2 continued recovery in services from the pandemic percent in 2023 driven by rapid recovery in (table I.1). Mining production is expected to mining production, resulting from the removal of rebound, recovering from the disruptions caused border restrictions and the commencement of the by border restrictions in 2022, while the official OT underground mining stage, and by the start of production at the OT’s underground mine 16 In this period, OT’s repatriation of exports revenue was larger than its usual monthly amount and was used to support operations and investment activities in the country. 25 MONGOLIA ECONOMIC UPDATE – APRIL 2023 (March 2023) is expected to contribute to the the back of continuous improvements in the labor increase in overall mining production.17,18 market), and large public investment (through Services (particularly tourism) are projected to the budget and quasi-fiscal activities) are continue recovering from restrictions associated expected to support growth. However, private with the pandemic, while sluggish agricultural investment is projected to remain low amid tight production due to the recent harsh winter is credit conditions, as banks prioritize less risky expect to weigh on growth. From the demand loans backed by stable income such as salaries, side, higher exports (linked to China’s economic and rising costs of production. rebound), sustained household consumption (on Table I.1. Key macroeconomic indicators 2021 2022e 2023f 2024f 2025f Real GDP Growth, at constant market prices 1.6 4.7 5.2 6.3 6.8 Private Consumption -5.9 7.4 7.0 6.6 6.1 Government Consumption 9.2 5.4 11.5 14.7 8.1 Gross Fixed Capital Formation 17.7 0.3 18.0 7.0 0.0 Exports, Goods and Services -14.6 31.3 14.1 15.2 15.6 Imports, Goods and Services 13.6 30.5 5.0 11.5 10.7 Real GDP Growth, at constant factor prices 0.4 3.9 5.2 6.3 6.8 Agriculture -5.5 12.0 0.9 5.5 5.5 Industry (including mining) -2.2 -2.8 7.7 9.0 10.6 Services 3.9 5.5 5.2 5.1 5.1 Inflation (CPI, period average) 7.1 15.2 9.5 6.8 6.0 Current Account Balance (% of GDP) -13.4 -15.8 -14.4 -9.8 -5.6 Net Foreign Direct Investment, Inflow (% of GDP) 13.1 9.7 11.7 9.7 8.1 Fiscal Balance (% of GDP) -3.0 0.8 -1.2 -0.5 0.3 Debt (% of GDP) 64.5 63.8 60.8 58.5 56.0 Primary Balance (% of GDP) -1.1 2.3 0.6 0.9 1.6 Source: World Bank staff estimates. Note: Public debt does not include contingent liabilities or the BoM’s liability under the People’s Bank of China swap line (11 percent of GDP in 2022). With the rapid recovery in domestic demand, expected to keep inflation elevated in 2023 due inflation is expected to remain elevated to expected improvements in wage income and throughout 2023, despite some easing of labor market conditions, as well as continued external and supply-related pressures. The accommodative fiscal and quasi-fiscal policies. inflation rate is expected to decrease from 15.2 percent in 2022 to 9.5 percent in 2023 as the Solid mining revenue performance is expected to impact of supply and external shocks dissipates. contain the fiscal deficit in 2023, despite However, domestic demand pressures are expansionary expenditures. Overall, 17 This underground mine phase is funded through a multisource project financing package (including US$2.2 billion in loans and guarantees from the International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA), with a total investment cost projected at US$7.1 billion. 18 OT’s total output is expected to grow by 16.2 percent in 2023, of which +20.0 percentage points will come from the undergroun d mine, while production from the open pit will decline. 26 Economic Performance and Prospects – April 2023 expenditures would continue increasing, with economy would continue to benefit from OT capital expenditures expected to reach their investment in the development of its highest level (in percent of GDP) since 2016, underground project (supporting FDI inflows), despite moderating recurrent spending amid with production expected to more than double some cost-saving measures and partial targeting compared to current levels by 2025, which would of the CMP. On the revenue side, the robust progressively increase government revenues, economic recovery would boost tax collection, reduce balance-of-payment pressures, and boost and the increase in the volume of mineral exports foreign reserves.20 would increase mining revenues (despite the expected lower prices of gold and copper this Risks to the outlook are tilted to the downside. year compared to 2022). Downside risks include further deterioration of the external balance and additional inflationary In 2023, balance-of-payments pressures are pressures resulting from a protracted Russia’s expected to remain significant, amid robust invasion of Ukraine, a larger-than-expected growth of imports and sizable bond repayments. tightening of monetary policy in advanced Export receipts would increase due to stronger economies, risks associated with the current mining production (although lower mining prices sizable contingent liabilities (including from would limit this rise) in the absence of border DBM), and uncertainty related to the large (and restrictions. On the import side, the continuous confidential) offtake coal export agreements. improvement in consumption and sustained Recent banking sector turmoil in advanced public investment (including from SOEs and economies could persist and lead to higher associated with offtake coal agreements) would investor risk aversion and further tightening in maintain the high demand for import products, global financial conditions, affecting Mongolia’s while low private investment would partially ability to attract foreign capital. Upside risks contain this expansion. In addition, sizable bond comprise higher-than-expected external demand payments, including on the debt of DBM, are still and commodity prices associated with China’s due in 2023 despite the recent rollover of two economic recovery, faster-than-expected Eurobonds.19 As a result, pressures on the balance completion of infrastructure megaprojects that of payments would persist. would facilitate an additional boost in export capacity, and successful development of a The medium-term growth outlook remains commodity exchange platform (see box I.1) that favorable, with substantial improvements could result in higher-than-expected coal expected in mining output, though the need for revenues due to enhanced price transparency. further economic diversification persists. The Box I.1. Mining commodity exchange platform Mongolia’s trading practices for mining commodities (in particular, coal) have long suffered from numerous challenges including lack of transparency, reduced bargaining power, and limited market information, leading to contract prices far below international market prices. These issues were accentuated following corruption accusations related to coal exports and the revelation of multiple confidential agreements on sizable advance payments and offtake barter agreements by a state-owned 19 In October 2022, the government issued a new five-year US$650 million Eurobond at relatively favorable terms, to roll over parts of two other Eurobonds maturing in 2023 and 2024 (Gerege and Khuraldai bonds), thus reducing near-term external debt servicing pressures. Mongolia, however, still faces large external payments linked to maturing Eurobonds (including from the DBM), amounting US$1.5 billion over 2023–24. 20 Note that government revenues would initially experience only a limited increase from the substantive increase in OT’s production due to payments owed to Rio Tinto (OT’s majority owner) on large investments linked to the underground project. 27 MONGOLIA ECONOMIC UPDATE – APRIL 2023 coal mine in late September 2022. These have not only limited coal exporters’ revenue repatriation and contributed to external imbalances, but have also triggered social protests. To address these challenges, the Mongolian government plans to trade mining products on a commodity exchange and has started a pilot for coal. By centralizing trade transactions into an organized marketplace, commodity exchanges allow effective competition among buyers and sellers and facilitate fair and transparent trading practices. Mongolia already has experience with the Mongolian Agricultural Commodity Exchange established in 2013. The exchange trades in seven main types of agricultural commodities under spot and forward contracts. As a first step toward the development of a mining commodity exchange, the Law on Mining Commodity Exchange was adopted in December 2022 (effective July 2023). A regulation on open electronic trading of coal for export purposes was also enacted to allow for a trial of coal trading on the Mongolian Stock Exchange platform until the law kicks in. Between January and March, 0.7 million tons of coal (about 5 percent of total coal exports over this period) were traded over 15 trading sessions. Note, however, that this modest amount traded is partly due to most coal exports being subject to previously signed contracts. Commodity exchanges have been established in developing countries over the past two decades. While commodities trading is mainly concentrated in global exchanges in advanced economies, developing countries have been setting up their own commodity exchanges to facilitate trade. Starting in the early 1990s in the Europe and Central Asia region, countries such as Belarus, Turkmenistan, and Uzbekistan established state-owned auction-type commodity exchanges that trade commodities ranging from agricultural products, metals, and petroleum products to industrial and consumer goods, not only for the domestic market but also for export purposes.a As operations of these types of exchanges expanded over the years, they began to introduce standardized contracts; adopt electronic trading systems; offer additional brokerage, clearing, and settlement services; and provide legal, customer protection, delivery, and deal guarantees. One recent initiative is the Egyptian Mercantile Exchange (EMX), which started operations in November 2022, and includes trading in markets such as wheat, rice, gold, and steel. Several prerequisite conditions affect the degree of success of commodity exchange operations: (i) sufficiently large market size and volume of exchange contracts, allowing for liquid transactions with good competition and low-price variability; (ii) a clearly defined, transparent set of rules for market entrants, participants, and public sector intervention, allowing for a robust institutional framework; (iii) sound financial management; (iv) sufficient willingness and commitment by purchasers to participate in exchange transactions; (v) presence of objectively and easily measured standard criteria, as well as quality control measures for traded commodities; and (vi) differentiation of contracts offered to avoid competition from other international exchanges.b Certain public policy measures may also help the successful implementation of a commodity exchange, including (i) providing more incentives in the form of tax waivers or reductions for trading through the exchange (only in particular cases and taking into consideration the fiscal country context); (ii) promoting standardized and independent third-party quality control services within the exchange; and (iii) coordinating major parties involved by getting them to agree on trading rules and frameworks and publishing information about prices, volumes, and number of contracts. c Sources: a. World Bank 2011a. b. World Bank 2011b. c. World Bank 2011b. 28 Economic Performance and Prospects – April 2023 2.2. Policy Recommendations Fiscal discipline and reforms to enhance exchange rate flexibility will help contain governance are crucial to build macro-fiscal imports and speculation on further depreciation, resilience and improve fiscal sustainability. In the thus preserving foreign exchange reserves (which short term, fiscal moderation would be required are still at low levels despite a recent increase). to free space for upcoming large debt payments. Also, given the sizable infrastructure investments Also, by limiting demand pressures, government expected under the New Recovery Policy, spending restraint would complement the selectivity and prioritization of projects (to avoid monetary policy efforts in releasing pressures on a larger import bill) will be necessary to avoid the balance of payments and prices. In particular, putting additional pressure on the balance of the government needs to aim for a more effective payments, especially considering the upcoming and responsive social protection system with sizable external debt payments and increased better targeting of programs, consider pension cost of finance at the international market. In the and energy tariff reforms to reduce fiscal medium term, addressing weaknesses in trade subsidies, and prioritize essential investment facilitation, logistics, and phytosanitary projects. Also, quasi-fiscal activities (including standards would help businesses boost exports. subsidized mortgages through the central bank In particular, the government should focus on and off-budget investments implemented by facilitating trade across borders by reducing the SOEs) should be limited to avoid additional costs and time involved in border clearance. demand pressures and reduce contingent Building high-quality logistics-related liabilities. In the medium term, the country’s fiscal infrastructure through more efficient public framework needs to be strengthened to enable investment projects and improving phytosanitary fiscal policies to mitigate rather than amplify standards and processes would also help macroeconomic volatility (driven by mining Mongolian firms participate in global value commodity price fluctuations). In particular, the chains. Also, the legal framework for investors definition of parameters and escape clauses in needs to be improved by amending the the fiscal rules need to be clarified to promote Investment Law to emphasize investor protection government savings in good times and support and promotion. This should be complemented by the economy in bad times, while building up the operationalization of the newly established savings for future generations (by restoring the Foreign Trade and Investment Agency. FHF as an intergenerational fund). The government also needs to improve public The effectiveness of government reform policies investment management and governance on diversification would be critical in ensuring (including of SOEs and public-private partnership growth sustainability and resilience to domestic, projects); increase civil service efficiency through external, and climate shocks in the medium term. performance-based funding systems; improve High dependence on mining activities in the past transparency in mining revenues (for example, by decade has led to a loss of competitiveness in further developing the recently created non-resource tradable sectors, which are commodity exchange); and raise non-mining typically a source of productivity growth. Also, revenues, including by broadening the tax base the macroeconomic volatility emanating from and raising revenues at the local level. mining commodity price fluctuations (and amplified by often procyclical policies), has often Exchange rate flexibility, project prioritization, resulted in costly boom-bust cycles and and boosting export revenues and capital inflows discouraged the sustained investment needed for are key to rebuilding Mongolia’s foreign productivity growth. Reform policies, including exchange reserves and easing the pressure on the the ongoing New Recovery Policy, need to balance of payments. In the short term, more promote the development of non-mining 29 MONGOLIA ECONOMIC UPDATE – APRIL 2023 industries by putting forward an ambitious a legal environment to foster exports and foreign business environment reform agenda that investment will make Mongolia’s exports more includes reforms of the legal framework (in competitive. Finally, a more dynamic labor enforcing contracts, insolvency and bankruptcy, market will complement these diversification competition, and property rights) and efforts by increasing productivity in non-mining streamlining of procedures for business activities sectors (see the proposed job strategy in Chapter (in customs, inspections, and licensing and II). registration).21 Also, putting in place policies and 21 World Bank 2022b. 30 Economic Performance and Prospects – April 2023 31 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Chapter 2: Labor Market Challenges and a Jobs Strategy for Mongolia Job creation is key to Mongolia becoming a In this chapter, we present a jobs strategy to dynamic economy and an inclusive society. The address major labor market challenges in government has produced a long-term Mongolia. We first summarize the major labor development framework, Mongolia Vision 2050, market challenges Mongolia is currently facing and, more recently, a blueprint for economic based on the World Bank’s “Mongolia Jobs recovery and diversification in the New Recovery Diagnostic.”22 We then identify the origin of these Policy. Employment should be a key challenges, or labor market constraints, from consideration in implementing these plans. The three perspectives: labor supply, labor demand, greater the country’s capacity to create good jobs, the more likely living standards will rise and and labor market functioning. Finally, we propose poverty will decrease. Job creation will also drive a jobs strategy, that contains specific actions and economic development as more productive jobs interventions that have the potential to create a replace less productive ones. A dynamic labor more dynamic and inclusive labor market for the market also has important social benefits by future.23 offering widespread opportunities to participate fully in society. 1. Mongolian Labor Market Challenges There are two major labor market challenges of a structural and long-term nature in Mongolia. i. Mongolia’s overarching employment ii. The country also needs to increase inclusion challenge is to create more and better jobs by raising women’s LFP, providing more that are more diversified than those created opportunities for young people, and over the past decade. Despite employment bringing more urban residents into the growth over the past two decades, job workforce. Less than 60 percent of the creation in Mongolia has not been strong working-age population (age 15 and older) enough to increase labor force participation participates in the labor market, and this (LFP) and reduce unemployment. Even rate has been slowly declining over time, though the private sector played an especially for women; the gender gap in LFP important role in job creation, the majority is now almost 15 percentage points (figure of jobs created between 2010 and 2020 II.2). The transition of young people into the were in low-wage sectors (figure II.1). The labor market is not going well, especially for country is also losing its export diversity, the less educated, who have low with greater concentration in a smaller participation rates and high unemployment. number of natural resources-related Mongolia’s urban LPF rate is low by products with limited job creation potential. international standards and is much lower than in rural areas. World Bank 2022c. 22 For the full study of labor market trends and prospects, and recommendations on how to create a more dynamic and inclusive labor 23 market in Mongolia, see World Bank (2022d). 32 Labor Market Challenges and a Jobs Strategy for Mongolia Figure II.1. Labor has mostly moved from agriculture to Figure II.2. Labor force participation of women declined lower-productivity services sectors rapidly in the past decade Average value added per worker and share of employment in Labor force participation rate (LFPR), by gender three decades, by sector 60% 2011-2021 Industry Total LFPR Male Female 1991-2000 Share of people employed in the sector 50% 75% Agriculture 2001-2010 Services 70% 40% 2001-2010 1991-2000 65% 30% 2011-2021 2011-2021 60% 20% 55% 1991-2000 10% 2001-2010 50% 0% 45% 0 5000 10000 15000 20000 2010 2012 2014 2016 2018 2020 2022e Value added per worker (in 2015 constant US$) Sources: UNdata; NSO; World Bank staff estimates. Updated Sources: NSO; World Bank staff estimates. version of figure 3.9 in World Bank (2020). 2. Constraints Behind These Challenges Various demand-side constraints hinder the overcome the geographic constraints and the private sector from becoming more dynamic, extremely low population density that challenge diversified, and innovative to generate more and the country’s ability to benefit from better jobs (figure II.3). Sustained private agglomeration effects. investment will require strengthened macroeconomic and fiscal management in the Some constraints to job creation have to do with country to reduce uncertainty and encourage labor supply. The country’s education and domestic saving and investment (especially FDI) training systems provide a large supply of as well as the efficient allocation of capital. Firms postsecondary graduates. Yet, their skills often also report that certain aspects of the business do not match those needed by sectors that are environment—which include political instability, critical to the country’s recovery plan and its distortionary taxes, lack of access to credit, and longer-term development strategy. This results in corruption—limit their operations (figure II.4). 24 higher youth unemployment despite increased Moreover, there is space to improve trade enrollment in tertiary education (figure II.5). 25 facilitation, logistics, and phytosanitary standards to encourage the growth of new Moreover, activation services and programs sectors beyond the resource sector and to (including active labor market programs), do not 24 The World Bank’s “Mongolia Business Environment and Competitiveness Assessment Report” (World Bank 2022b) provides a recent analysis of key constraints to firm development in Mongolia. 25 The World Bank’s “Mongolia Jobs Diagnostic” (World Bank 2022c) provides details on rate of employment depending on level and field of education. 33 MONGOLIA ECONOMIC UPDATE – APRIL 2023 adequately support the employment prospects. enter the job market, although evidence for this Finally, generous social welfare benefits may is limited (see box II.1). create disincentives for workers to enter or re- Figure II.3. Mongolia has become more and more Figure II.4. Certain aspects of the business environment concentrated in mining, a capital-intensive sector limit the private sector’s activities and thus demand for labor Decomposition of Mongolia’s exports Constraints to Mongolia’s business environment, percent Textiles Agriculture Minerals Services Others 100% Political instability 35.2 Tax rates 17.2 80% Access to finance 15.9 60% Corruption 9.1 Inadequately educated workforce 5.5 40% Customs and trade regulations 5.2 20% Business licenses and permits 4.5 Practices of the informal sector 4.2 0% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Tax administration 1.4 Sources: Atlas of Economic Complexity; World Bank staff Sources: World Bank Enterprise Surveys, Mongolia 2019. estimates. Note: Metals and stones are considered as minerals. Figure II.5. Despite increased enrollment in tertiary education, youth unemployment increased and has remained high since 2018 Enrollment in tertiary education and youth unemployment rate 20 2018 2021 Youth unemployment rate (%) 15 2010 2015 2000 2005 10 5 EAP countries (latest) Mongolia 0 0 10 20 30 40 50 60 70 80 Tertiary education enrollment rate (%) Source: World Development Indicators. 34 Labor Market Challenges and a Jobs Strategy for Mongolia The labor market in Mongolia is inefficient in Strengthening the capacity and effects of matching workers with jobs and in improving the Mongolia’s public employment service provision reemployment of job seekers. The function of the and active labor market programs would help labor market is to match people with jobs. Among address the country’s jobs challenges, especially other things, this requires accurate information concerning the inclusion of women and youth in on labor supply and labor demand. It also the labor force. In addition, the unemployment requires effective public employment services insurance system covers wage workers in the and active labor market programs to help the formal sector, but most of the unemployed do not unemployed, social assistance recipients, and job receive benefits—only about one-fifth of the seekers in general to find employment. unemployed qualify for benefits. Box II.1. Examining the causal effect of the Child Money Program (CMP) on women’s labor force participation in Mongolia Labor force participation (LFP) in Mongolia is recovering relatively slowly from the pandemic (see Chapter I, Section 1) in the context of generous social assistance, raising concerns about the disincentives created for workers to enter or re-enter the job market. In particular, the ongoing public and political debate on the theme “from welfare to jobs” centers around the need to reduce the existing generous welfare benefits (including the fivefold increase in the quasi-universal cash transfer program, CMP, starting in 2020) to decrease potential disincentives to participate in the labor market and ease the fiscal burden (see Annex 2 for stylized facts on Mongolia’s social assistance system and A nnex 3 for theory and international evidence on labor supply responses to welfare benefits). Empirical results on the causal effect of welfare benefits on LFP in Mongolia are mixed. A study using 2012 data found that women living in benefits-receiving households are less likely to participate and tend to work fewer hours, while men’s labor supply was found to be unresponsive to transfer payments. a The CMP was found to reduce female LFP and hours worked based on data from the 2000s.b However, a recent study using 2020 household survey data did not find a significant difference in the LFP of people living in households that receive welfare benefits and those that receive no benefits. Rather, the study finds that people who relied on welfare benefits for a longer period do not usually have the skills needed for existing jobs.c We contribute to the existing empirical literature by focusing on the CMP’s impact on mothers’ participation using the most up-to-date household survey data (which includes the recent fivefold increase in CMP benefits). At first glance, data seem to suggest that CMP benefits may indeed lead to lower female LFP. According to the Household Socio-Economic Survey (HSES) 2020, the participation rate of CMP recipient mothers with fewer than four children aged zero to 18 is lower than that of mothers who are not CMP recipients (figure BII.1.1). However, other factors may affect LFP (and could be correlated with CMP receipts) such as age, household size, education, financial needs, and location. Therefore, participation rates may be lower for recipient mothers because of factors other than the benefit received from the CMP. It is then essential to account for these factors to determine the welfare program’s true causal effect on LFP. Our empirical results do not support the hypothesis that the CMP disincentivizes mothers’ participation in the labor market. We ran an econometric fuzzy regression discontinuity design model on a sample of 2,175 mothers aged 30 to 60 with children aged 10 to 26, from the HSES 2020 data (see Annex 3 for technical details).d After trying various models, specifications, and parameters, we were unable to detect a significant causal impact of the CMP on mothers’ LFP. In addition, even though we find a negative correlation between CMP receipt at the household level and women’s LFP, this correlation is not 35 MONGOLIA ECONOMIC UPDATE – APRIL 2023 statistically significant. This suggests that although there is a negative effect associated with CMP receipt, the magnitude of the effect is too small to conclude with confidence that CMP has a negative impact on LFP. Figure BII.1. Mothers who receive CMP benefits participate less in the labor force Labor force participation rate of mothers according to number of children living in the household and CMP receipt status (household level) No CMP CMP 100% Labor force participation of 80% mothers, % 60% 40% 80% 82% 74% 66% 72% 64% 20% 0% 1 2 3 Number of children aged to 18 Source: World Bank staff estimates based on 2020 HSES data. Note: Mothers are defined as being the wife of the household head, aged 30 to 60, and living in a household with fewer than four children under age 18. Women seem to have other considerations (besides CMP benefits) in their decisions on whether to enter the labor market. The CMP amount may be insufficient for many mothers to quit working, since one additional child increases the financial needs of the household, making it difficult for households to give up employment.e Note that the methodology adopted in this study only allowed us to focus on mothers whose children are very close to the age 18 threshold. Results may differ if all welfare benefits are considered (instead of only CMP benefits). Indeed, households receive several other benefits (see Annex 2), and the whole welfare benefits package could have an impact on LFP. Note also that our empirical results need to be taken with caution due to data limitations, which lead us to rely on several assumptions (see Annex 3). Finally, it is important to recognize that rigorously identifying the causal impact of the CMP will require a randomized control trial, which is difficult to implement. Note: a. Gassmann et al. 2016. b. Dandarchuluun et al. 2020. c. National Academy of Governance (2022). d. Among these mothers, 1,666 (76.6 percent) were in the labor force, while 1,406 (64.6 percent) received CMP benefits for at least one child. e. The monthly benefit amount per child is equal to 54 percent of the 2020 national monthly per capita poverty line (MNT 184,747). 3. A Jobs Strategy for Mongolia This section proposes a multidimensional jobs strategy from three different perspectives: labor demand, labor supply, and labor market functioning. A. Make Labor Demand More Dynamic To increase the demand for labor, the macroeconomic and fiscal management to government needs to (i) strengthen encourage the sustained investment needed for 36 Labor Market Challenges and a Jobs Strategy for Mongolia job creation; (ii) create a business environment resource sector to promote job creation in new that supports a dynamic, innovative private economic sectors with lower volatility. Section sector and thereby demand for high-quality I.2.2 in this report presents policy labor; and (iii) diversify exports beyond the recommendations under these reform areas. B. Upgrade the Workforce Mongolia’s education and training systems need in order to develop occupational standards, to be enhanced to provide both current and enhance curriculums, and undertake peer reviews future workers with the relevant skills to meet of the performance of institutions and programs. the demands of the emerging economy. The school-to-work transition of graduates could Upgrade the quality and relevance of the education be facilitated by giving them experience in and skills development system workplaces and the labor market during their studies via internships, cooperative learning, and Providing more relevant and quality labor market job placements. With students’ future information to higher education and vocational employment in mind, higher education training institutions could help tailor their curriculums need to offer flexibility in choices for courses to labor market demands and the learning, including team-based and experiential country’s development priorities. Higher learning, to cultivate the most-needed soft, education institutions (HEIs) and Technical and cognitive, and professional skills (such as foreign Vocational Education and Training (TVET) language proficiency). Granting more autonomy institutions also need to regularly undertake their to educational institutions would facilitate own analysis of the job market in addition to reforms along these lines. consulting with employers and other stakeholders to understand employment trends Enable social assistance beneficiaries to work and skills mismatches and to assess the relevance of the programs they offer. Activation services and programs would improve the employment prospects of social assistance Financial incentives could strengthen the links of recipients. Intermediation services, including HEIs and TVET institutions with the labor market. counseling and job search assistance, can play an Incentives such as financial aid grants could be important role in helping social assistance used to encourage HEIs and TVET institutions to beneficiaries to find jobs, and active labor market align their programs and selection criteria with programs (ALMPs), including preemployment and identified labor market demands and the vocational training, on-the-job training, country’s economic development priorities. counseling, and wage subsidies, can prepare them to take those jobs. Programs promoting and The government should consider establishing a supporting productive self-employment also genuine partnership with the private sector in the have a role to play, especially for individuals area of skills development. A step in the right unable to access formal jobs, such as those in rural areas. direction would be to give professional and trade associations a legal status, mandate, and Tailored social services can increase the accountability. This would allow them to effectiveness of activation services. The public represent their professions on institutional and employment services (PES) would need to be national governing bodies and on the panels of equipped to refer individuals to any services that large-scale development and research programs 37 MONGOLIA ECONOMIC UPDATE – APRIL 2023 they do not provide, such as social care, child prepare beneficiaries to become self-sufficient care, elderly care, fee waivers for health and upon their exit from the program. educational services, finance, housing subsidies, transportation subsidies, substance abuse Moving from welfare to work will require counseling, or help with accessing identification adequate coordination of welfare and and basic legal documents. employment policies. Adopting such a holistic, case management approach requires To encourage work, social welfare recipients coordination across policies and institutions. should continue to temporarily receive a portion Welfare and employment policies must be of their transfers after finding employment. subject to adequate coordination at all Stopping a benefit when a recipient’s income institutional levels for planning, implementation, rises can be a disincentive to work. Instead, and delivery of services. reducing benefit levels over time can also C. Improve Labor Market Functioning Some reforms to labor policies and institutions Employment Promotion Law, which governs would help the labor market function more ALMPs, to tackle ALMP funding-related efficiently and inclusively. constraints, including the timeliness of fund transfers to the Employment Promotion Fund. As Build a comprehensive labor market information Mongolia urbanizes and formalizes, it needs to system prioritize the provision of employability and skills development programs that are aligned with Having a high-quality labor market information urban labor market needs. This includes training system (LMIS) is essential for a labor market to programs that are more demand driven and more function efficiently. There is currently a closely linked to workplaces. Another priority significant gap in information on labor market should be to introduce a systematic monitoring trends and prospects, including accessible and and evaluation system for ALMPs, which would accurate information on current and prospective be part of the enhanced labor market information demand for specific occupations and skills. system discussed above. Finally, the effective implementation of ALMPs will require enhancing The government should establish an open-access the ability of the public employment service to labor market information web portal and a labor counsel and provide job seekers with tailored market observatory responsible for managing the action plans. portal and generating labor market information. The web portal would be a one-stop shop for the Reform Unemployment Insurance to Better Protect labor market information needed by all relevant Workers stakeholders both inside and outside government. The labor market observatory would Policy makers should consider increasing the compile relevant data, monitor labor market support that unemployment insurance can conditions, and make information and analysis provide. One key change to consider is to reduce available through the portal. the nine-month requirement for continuous Transform ALMPs into Effective Employment Tools contributions, which is a lengthy time frame for eligibility given the seasonal nature and volatility The following measures could improve the of Mongolia’s economy. If affordable, the effectiveness of Mongolia’s ALMPs. The authorities could consider increasing the government is expected to revise the contribution rates and benefit duration, based on 38 Labor Market Challenges and a Jobs Strategy for Mongolia rigorous actuarial assessment. Enhancing In sum, making Mongolia’s labor market more activation services and ensuring that they are vibrant and inclusive will require all relevant tailored according to employment barriers would economic and social agencies to cooperate to also improve the employment prospects of tackle demand- and supply-side constraints in unemployment benefit recipients. close cooperation with the private sector. 39 MONGOLIA ECONOMIC UPDATE – APRIL 2023 ANNEX Annex 1: Pandemic-related government support and channels of economic impact in 202226 Law on “Prevention, Combat, and Mitigation of Social and Economic Impacts of COVID-19”: Effective May 2020 to December 2022, measures under this law aimed to support households and credit. Imposing a moratorium on monthly mortgage payments. This measure lowered the burden on household finances, as mortgage payments comprise approximately 30 percent of borrowers’ nominal income. A total of 276,000 borrowers (over 80 percent of all mortgage borrowers) requested to delay about MNT 1 trillion (US$285 million) in mortgage payments for 32 months starting in April 2020. This measure likely contributed to the robust recovery in private consumption during 2022. Removing interest rates on demand deposit accounts. This measure was intended to encourage banks to lower lending rates by reducing the cost of finance for banks. However, since banks were implementing the government’s subsidized programs and lending at rates significantly below market, there was some interest rate rigidity for banks to lower their lending rates, especially in 2022 in the context of monetary policy tightening. Despite this, the cost of finance freed up from the banks’ liabilities may have been redirected toward financing certain portions of the subsidized programs. “10 trillion Comprehensive Plan for Health Protection and Economic Recovery”: Introduced in March 2021 and still ongoing, this MNT 10 trillion program is financed through a mix of resources including banks’ excess reserves, government budget (mainly interest subsidies), and the central bank (subsidized mortgage program and long-term repo financing). As of January 2023, MNT 5.8 trillion has been spent in the following programs. Employment support loan. Interest rate subsidies of 600 and 700 basis points by the government for businesses and individuals, respectively, allowing final borrowers to receive loans at a 3 percent interest rate and a lump-sum principal repayment option at maturity. This measure aimed to support job retention by firms and reduce credit risk in the banking system and was mainly applied to trade and other services activities. This measure has contributed to the employment recovery since 2021. A quantitative analysis suggested that it was effective in protecting around 168,000 to 230,000 jobs in 2021 compared to a counterfactual under the absence of such package. 27 The program was discontinued in 2022, as the target of MNT 2 trillion was met by end-2021. Central bank long-term repo financing. The BOM provided liquidity of up to two years to banks that on-lent the funds to borrowers at an interest rate of 10.5 percent and with loans secured by real estate and movable assets. This measure initially targeted small and medium-sized enterprises and manufacturers of non- mineral exports and was later expanded to a wide range of sectors including trade, manufacturing, and services, likely contributing to the economic recovery of these sectors. In addition, fuel and food importers also received some funding to maintain the steady supply of essential goods in times of persistent bottlenecks. Housing mortgage subsidies. This measure consists of a fixed 6 percent interest rate. The subsidized housing mortgage program, effective since 2013, has been funded by a combination of central bank financing and 26 This annex was written by World Bank staff based on BOM and other open-source information. 27 World Bank 2022a. 40 ANNEX refinancing of mortgage payments by existing borrowers. To support the economic recovery, MNT 2 trillion was allocated to this program in March 2021. Mortgage loan issuances under this program were substantial in 2021 but started to dial down in 2022 due to a decrease in funds availability and reduced mortgage repayments (which support new mortgage issuances) resulting from the moratorium on monthly mortgage payments (aforementioned). Agricultural loan interest rate subsidies. The government provided 770 basis points in interest rate subsidies targeting herders and agricultural production of cashmere, wool, meat, and crops. This program provided financing support for purchases of wheat and oilseed in times of rapidly rising food commodity prices and weak crop production during 2022. 41 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Annex 2: Stylized facts on Mongolia’s social assistance system Mongolia has established a social safety net, comprising a set of diverse programs that reach a large part of the population and based on a robust legal foundation. Social assistance includes 16 programs that deliver more than 40 benefits, targeted to a specific social or demographic group, including the elderly, children under age 18, and the poor.28 Nearly half of these benefits are cash transfers, with transfer amounts varying significantly across programs. This welfare system is built on a strong legal foundation that outlines several core objectives, including building human capital and reducing vulnerabilities of at-risk population groups.29 Social assistance is generous and primarily targeted at families with children. Prior to the COVID-19 pandemic, Mongolia spent about 2.5 percent of its GDP on social welfare, much more than other lower middle-income countries (1.6 percent of GDP). This share was also higher compared with the average level in high-income countries (1.9 percent of GDP), which can typically afford a more comprehensive and generous welfare system (figure A2.1). 30 Excluding administrative costs, about 60 percent of Mongolia’s pre-COVID social expenditure targeted families with children through programs like the Child Money Program (CMP) (a quasi-universal program targeting children), a childcare allowance for children under age three, regular transfers to orphaned or disabled children, and the lifetime Mother Hero Program for women who gave birth to four or more children.31 Figure A2.1. Even before the pandemic, Mongolia stood Figure A2.2. … which was further increased during the out in terms of the size of social assistance spending … pandemic Public expenditure on social assistance programs (% of GDP) Social assistance spending as a percentage of GDP, 2019–21 Others 7.0 5.0 Upper 0.2 6.0 Social Assistance Spending as % of middle 0.2 Food stamp program 4.0 0.3 income 0.4 5.0 0.3 Percentage of GDP 1.74 0.3 Lower 0.4 Caregiver allowances middle 3.0 0.3 4.0 Mongolia income 2016 GDP 1.63 3.0 2.52 Social welfare pensions 2.0 High Low income 0.3 3.3 2.0 2.8 income 1.94 0.2 Allowances to support 1.18 1.0 0.3 1.0 0.3 families and expecting 0.6 mothers Child money program 0.0 0.0 2.0 3.0 4.0 5.0 2019 2020 2021 Log GDP Per Capita Source: Fraikin 2022. Source: Mongolian Statistical Information Service. Note: All estimates are obtained from the Atlas of Social Note: 2021 data do not include the exceptional income support Protection Indicators of Resilience and Equity (ASPIRE) and refer related to the pandemic such as the one-time cash transfer to pre-COVID years. Mongolia’s estimate is the average for provided in May 2021. Expenditures on pensions, benefits, and 2010–16. In ASPIRE, expenditure refers to the total statutory services, excluding administrative costs. social assistance program expenditure including spending on benefits and administrative costs. 28 Social protection systems are typically based on three pillars: social insurance, labor and employment services, and social assistance (also known as social welfare and considered exclusively in this chapter). 29 The current legislation on social assistance is comprised of six laws: Law on Cash Allowances for the Honored Mothers (2011); Social Welfare Law (2012); Law on the Rights of People with Disabilities (2016); Law on Social Protection of the Elderly; Law on Providing Benefits and Discounts to the Honored Elderly; and Law on Providing Benefits to Mothers, Single Parent with Multiple Children (2017). Amendments to the Social Welfare Law were approved by the Parliament in 2022. 30 Fraikin 2022. 31 Own calculations based on data retrieved from the Mongolian Statistical Information Service. 42 ANNEX To address the challenges brought by the COVID-19 pandemic, the government significantly increased welfare benefits, particularly the CMP. Support provided through two main programs, the CMP and the Food Stamp Program (FSP), expanded substantially in 2020, with the CMP, in particular, experiencing a fivefold increase (from MNT 20,000 per month to MNT 100,000 in May 2020) and expanding coverage to previously unenrolled families.32 CMP benefits alone increased from 0.6 percent of GDP in 2019 to 3.3 percent in 2021 (figure A2.2), accounting for nearly three-quarters of total social spending in 2021, up from 34 percent in 2019. Expressed as a percentage of the average wage in the country, the value of the CMP benefit also increased substantially, from 1.6 percent to 8.2 percent, much higher compared to rich countries with comparable child benefit schemes (figure A2.3). Figure A2.3. The amount of CMP benefits is also high compared to the average wage Value of child benefits as a percentage of the average wage 8.2% 5.5% 4.0% 3.3% 3.0% 2.7% 2.6% 2.5% 2.4% 2.4% 1.6% Source: Mongolian Statistical Information Service. Note: Own calculations based on ODI/UNICEF 2020, OECD, and World Development Indicators. Data refer to the most recent available year. The country’s diverse programs translate into an exceptionally high coverage rate, driven principally by the CMP. As of 2021, about 87 percent of Mongolians and all the poor (98.6 percent) benefited directly or indirectly (that is, to live in a household with at least one social assistance beneficiary) f rom the country’s social safety net.33 The high coverage is largely driven by the CMP, a quasi-universal program targeted to all children aged zero to 18 (see box II.1). In 2021, the program had more than 1.2 million beneficiaries (99 percent of children. Other welfare programs are much smaller. Indeed, taken together, various family- targeted programs registered about 538,000 beneficiaries. The FSP, which used to be one of the larger programs in the past, saw its beneficiary numbers drop significantly (from around 242,000 recipients in 2019 to 170,000 beneficiaries in 2021). 32 Measures that directly impacted household disposable income included a fivefold increase in the CMP benefit and a doubling of the support provided through the FSP. While the CMP benefit increase was extended beyond 2020, the additional support for the FSP ended in December 2020. 33 Posadas and Vandeninden 2020. The poor refers to the population in the bottom quintile of the welfare distribution. 43 MONGOLIA ECONOMIC UPDATE – APRIL 2023 Annex 3. Behavioral responses to cash transfers: Theory and empirical evidence Traditional labor market models predict a negative relationship between welfare payments and the propensity to work. Since regular transfers improve household resources, beneficiaries are likely to reduce their labor supply. If eligibility was determined through an income criterion, cash transfers provide additional disincentives to finding employment since higher earnings may disqualify recipients from getting benefits. In addition to short-run negative effects, longer-term welfare dependency may arise due to a lack of work experience or skills depreciation. 34 A more nuanced discussion, which better reflects the situation in many low- and lower-middle-income countries, shows that there are several channels through which cash transfers could increase labor supply.35 For example, when living standards are too low for people to engage in labor market activities, transfers could help destitute households escape the classic poverty trap. Cash transfers could also help close financial gaps and promote self-employment: When credit-constrained households are able to invest in productive assets, they are more likely to start or expand a business. Cash transfers could also finance risky but profitable activities, such as rural-urban migration. Finally, additional funds could have spillover effects through increased demand for local goods and services. With the theory being ambiguous, it is an empirical question of how individual labor supply reacts to welfare payments. Program design, the underlying economic situation, or local labor market conditions are considered drivers of the direction and magnitude of the behavioral response of social welfare beneficiaries. Despite the large variety of programs and country-specific factors, most studies conclude little to no effect on the overall labor supply. When impacts are identified, they are often small or significant only for a specific subgroup of the population. Rather than affecting the total labor supply, transfers might change the type of work that beneficiaries engage in. For example, a shift from formal to informal work or toward working within the household and self-employment has been documented in several countries. 36 Taken together, the existing body of empirical studies largely concludes no systematic evidence of (cash) transfer programs on labor supply. However, specific family-related programs could have a negative impact on female labor force participation. We estimate the effect of the Child Money Program (CMP) on labor force participation (LFP) of mothers using a Regression Discontinuity Design (RDD) model. RDD is an observational design that uses a threshold in a continuous variable to identify the effect of a treatment. This threshold creates a natural experiment, where individuals who are just above or just below the threshold are almost identical in all aspects except for their treatment status. Thus, RDD can be considered a quasi-experimental method that provides a credible causal estimate of the treatment effect. RDD also has the advantage of being transparent, simple to understand and implement, and requires fewer assumptions than other methods such as difference-in- differences or propensity score matching. Fuzzy RDD is used when the running variable is not perfectly correlated with the treatment status —in other words, in situations where it is difficult to identify a sharp cutoff point. In contrast to traditional RDD, where the treatment is perfectly determined by the running variable at the threshold, in fuzzy RDD, individuals have a different probability of being assigned to treatment based on their distance from the threshold. 34 IDB 2011. 35 Based on Banerjee et al. (2017). 36 See references in Banerjee et al. (2017). 44 ANNEX Fuzzy RDD requires the identification of a valid instrument that is correlated with the running variable, but not directly with the outcome, to obtain unbiased estimates of the treatment effect. Therefore, the analysis with fuzzy RDD typically involves two stages. In the first stage, the probability of treatment assignment is estimated, given the running variable and the instrumental variable. In the second stage, the treatment effect is estimated by regressing the outcome on the predicted probabilities of treatment assignment, along with controls for the running variable and other covariates. Our sample consists of mothers37 aged 30 to 60 whose children are aged 10 to 26. We specifically chose this age bracket for children to assess the impact of CMP receipt on the labor force participation of mothers with children around age 18, the age threshold for CMP benefits receipt. For the purpose of our study, we defined mothers as females who are wives of household heads and reside in the household, with at least one child aged 10 to 2638 and no child under age 10. In addition, any person aged 10 to 26 living in the household other than the household head is identified as a child. 39 Our comparability assumption of both groups just below or just above the threshold is somewhat questionable due to our sample selection process. In particular, our sample excludes mothers whose children have married or moved out of the household, which could lead to biased estimates if the fact that older children are still living in the household is related to specific individual-level or socioeconomic factors and affects mothers’ labor force participation. To address this concern, we include observable characteristics of mothers such as age and education in our analysis to account for any confounding factors that might impact the estimated effect of CMP receipt on LFP. We operationalize the running variable in our study as the difference between the minimum age of children living in the household, between ages 10 and 26, and the age of 18, where 18 is the cutoff point below and above which the probability of receiving the CMP is modified. To identify the most suitable specification for the running variable, we tested different approaches, including the average age of children and the average age multiplied by a binary indicator of whether the minimum child age is below 18. Ultimately, we chose the minimum age of children living in the household as our measure of CMP eligibility, as it accurately reflects household eligibility for CMP benefits, given that mothers with children under age 10 are not included in our sample. The selected running variable presents a clear discontinuity in CMP receipt at the household level at the threshold we have identified. The fuzzy RD model is expressed as follows: First stage: = + + + ′ + ̂ + ′ + , Second stage: = + + where i indexes mothers, and and α are the intercepts for the first stage and the second stage equations, respectively. The outcome variable, Y, represents the mother’s LFP status (1 for in the LFP). CMP is CMP 37 Our decision to examine the LFP of mothers is based on the assumption that they are responsible for managing social welfare benefits in the household budget. Moreover, we are specifically interested in investigating the decline of women’s LFP over t he last decade. 38 We select a sample of mothers with children aged 10 to 26, which is equal to the CMP age threshold of 18 [-8; +8]. We chose this particular age group as a compromise between group comparability and sample size. We have tried different age groups for children, such as 14 to 22 and 15 to 21, but these did not affect our results. 39 We also exclude as household members any individuals who are considered household heads, student members who have been away from the household for more than 11 months, and any other household members who have been away from the household for more than six months. 45 MONGOLIA ECONOMIC UPDATE – APRIL 2023 receipt at the household level (1 if the household receives CMP benefits for at least one child). The running variable, z, is the age difference between the minimum age of children who live in the household and 18. 40 The instrument, D, is the program status binary variable that is equal to 1 if ≤ 0. We assume that has no direct effect on mothers’ LFP after controlling for . X' is a vector of observable characteristics that may affect LFP (such as age of education).41 is a vector of coefficients, and and are error terms. RDD allows for local average treatment effects (LATE) estimation, which measures the effect of the treatment on individuals close to the threshold. The LATE is calculated as the difference in the average LFP between mothers whose children are just below and just above our threshold identified by the running variable. The estimated value of δ provides a measure of the LATE of CMP receipt on LFP. A positive and significant δ indicates that CMP receipt increases LFP, while a negative and significant δ suggests that CMP receipt decreases LFP. Table A3.1 shows the empirical results. While the results of this study provide valuable insights, there are opportunities for further research for a deeper understanding of the impact of CMP benefits on mothers. The econometric model employed in this study relied on several assumptions such as the use of a discrete age variable and the choice of parameters in the sample selection method (for example, children’s age bracket and the definition of mothers/children), but future research could explore other assumptions and use other econometric methods (if data availability allows it). In addition, while the study examines the effect of receiving CMP benefits or not, future studies could also consider the amount of the benefit and use a censored regression model to analyze the data. Finally, one potential area for future research could be exploring alternative running variables to better understand the influence of CMP benefits (received at the household level) on an individual-level labor force participation decision. Table A2.1. Regression results (1) (2) Variable Model 1a Model 2 Mother’s LFP status Mother’s LFP status CMP receipt (household level) [0,1] 0.0101 0.0167 (0.0398) (0.0520) Primary school or less [0,1] -0.0194 -0.0318 (0.0745) (0.0798) Secondary school [0,1] 0.0408 0.0440 (0.0686) (0.0724) College or higher [0,1] 0.162** 0.168** (0.0750) (0.0758) West Urban [0,1] 0.0263 -0.0142 (0.0421) (0.0361) 40 Following Lee and Card (2008), we control the group structure of the standard errors through clustering on the minimum age of children, since our age variable is only available at the year level and does not allow us to compare the outcomes for observations “just above” and “just below” the treatment threshold. 41 We add several explanatory variables to our model: age and its squared form, the region and the rural area where the household lives, the highest level of education attained by the mother (primary or below, secondary, or higher than secondary), an indicator of household members living away from the household, the sum of wages received by household members other than the mother, a binary indicator of own production means, a binary indicator of the mother attending school, a binary indicator of the children in the household all attending school, the number of dwellings owned and a binary indicator of the house being a ger. We also tried another specification with just age, education, region, and rural control variables, resulting in similar coefficients for the causal effect of the CMP. 46 ANNEX West Rural [0,1] 0.106*** 0.0333 (0.0374) (0.0405) Highlands Urban [0,1] 0.0813* 0.0577 (0.0439) (0.0405) Highlands Rural [0,1] 0.192*** 0.117*** (0.0237) (0.0271) Central Urban [0,1] 0.0971*** 0.0790*** (0.0270) (0.0278) Central Rural [0,1] 0.0874*** 0.0195 (0.0235) (0.0224) East Urban [0,1] 0.0867* 0.0592 (0.0492) (0.0459) East Rural [0,1] 0.154*** 0.0825*** (0.0185) (0.0191) >1 household member living away -0.0808** [0,1] (0.0339) Attending school [0,1] -0.151 (0.363) Household size -0.0176 (0.0130) Age 0.156*** 0.160*** (0.0158) (0.0175) Age squared -0.00185*** -0.00189*** (0.000173) (0.000194) Every child attending school [0,1] -0.00918 (0.0336) Total wage of other household 3.17e-09 members (2.07e-08) Household has own production means 0.103*** [0,1] (0.0229) One dwelling owned 0.0650 (0.0642) Two or more dwellings owned 0.127* (0.0667) Dwelling is not a ger -0.0138 (0.0249) Running variable 0.00121 -0.000113 (0.00508) (0.00468) Constant -2.560*** -2.685*** (0.352) (0.373) Observations 2,175 2,175 R-squared 0.125 0.143 47 MONGOLIA ECONOMIC UPDATE – APRIL 2023 References ADB (Asian Development Bank). 2022. “Mongolia: Building Capacity for an Effective Social Welfare System – Food Stamps and Employment Services.” Asian Development Bank, Manila. 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