Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 14565-MOG

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE

WORLD BANK GROUP

FOR

MONGOLIA

JUNE 2, 1995

Country Department IIEast Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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DATE OF LAST CAS

No previous CAS

CURRENCY EQUIVALENTS(As of December 31, 1994)

Currency Unit Tugrik (Tug)Tug 1.0 $0.002

$1.00 = Tug 414

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRONYMS

AsDB - Asian Development BankCAS - Country Assistance StrategyCEM - Country Economic MemorandumCMEA - Council for Mutual Economic AssistanceERC - Economic Rehabilitation CreditESAF - Enhanced Structural Adjustment FacilityESW - Economic and Sector WorkFIAS - Foreign Investment Advisory ServicesGDP - Gross Domestic ProductGEF - Global Environment FacilityGNS - Gross National SavingsICOR - Incremental Capital Output RatioIFC - International Finance CorporationILO - International Labor OrganizationIMF - International Monetary FundMETS - Economic Transition Support CreditMIGA - Multilateral Investment Guarantee AgencyNGOs - Nongovernmental OrganizationsPFP - Policy Framework PaperTAC - Technical Assistance CreditUNDP - United Nations Development Program

MONGOLIAN TERMGer - Nomad's felt tent

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A COUNTRY ASSISTANCE STRATEGY

FOR MONGOLIA

1. This is the first CAS on Mongolia, which joined the Bank in February 1991. In1990, the country abandoned communism, introduced a democratic system, opened itself tothe world and announced the intention to build a market-oriented economy. These rapidpolitical changes set the stage for economic reform. The stabilization and reform program isworking. Inflation is falling rapidly and economic growth resumed in 1994 after fourconsecutive years of economic contraction.

1. THE ECONOMY

A. Background1 "

2. Mongolia attained formal independence in 1921. After that, it integrated fullywith the former Soviet Union, isolating itself from the rest of the world. With an area of 1.6million square kilometers (half the size of India and almost as big as Indonesia) and apopulation of only 2.2 million people, Mongolia has one of the lowest population densities inthe world. Mongolia followed the Soviet model of a centrally-planned command economy,emphasizing the development of industry and energy. The country is well-endowed withnatural resources. Its pastures and grasslands are home to over 24 million head of livestock,or over 10 per person (Argentina has less than 3). Arable land is relatively abundant at 0.63hectares per capita (China has only 0.08 hectares per person and Vietnam 0.10), albeit oflow productivity. Mongolia has sizeable reserves of copper and other minerals. Finally, thecountry has a well educated population with an adult literacy rate of 96 percent.

3. The country's economy is relatively well diversified. The agricultural sector(including livestock) accounts for about 20 percent of the GDP. Livestock comprises three-quarters of agricultural value added (meat, hides, wool, cashmere), while crops make up therest (low quality wheat and vegetables for domestic consumption). Industry accounts foraround 45 percent of GDP, and includes mining (which earns over 40 percent of all foreignexchange), processed wool, cashmere, leather, and food (mostly meat, and dairy products),and construction materials. The services sector accounts for almost 35 percent of GDP. Itincludes a large govermuent sector, a weak banking system, and an underdeveloped whole-sale and retail trading sector.

" For more analysis, please refer to "Mongolia: Country Economic Memorandum",Report No. 13612-MOG, dated October 31, 1994.

|Ths document has a restricted distribution and may be used by recipients only in the performance of theirofflcial duties. Its contents may not otherwise bc disclosed without World Banks authorization.l

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4. Until 1990, Mongolia received substantial aid from the Soviet Union, equivalentto 30 percent of its GDP. It used this assistance to build an industrial/mineral base (coppermines, leather and cashmere/wool plants, food processing industries). The Soviet Unionhelped build the transport system, provided cheap fuel, supplied and ran the power plants,and financed fellowships for several thousands of students (5,000 students were studying inCMEA countries in 1990). Mongolia enjoyed a "captive" market for its products in CMEAcountries. Under this system, the economy grew by over 6 percent a year during the firstpart of the 1980s, slowing to about 4-5 percent in the latter half.

5. When Soviet aid stopped in 1990 and trade with the CMEA was disrupted,Mongolia suffered tremendously. Real GDP declined by 20 percent in 1990-93; exports fellby 10 and 58 percent in 1990 and 1991 respectively, but recovered somewhat in 1992.Imports declined even more: by 16 percent in 1990, 74 percent in 1991, and 15 percent in1992 (see Table 1). The initial shock was compounded by shortages of spare parts andmachinery from the former Soviet Union, which were used extensively in Mongolianindustries. Mongolia began to trade in hard currency and at international prices at a time offalling commodity prices and deteriorating terms of trade. External reserves fell sharply andthe budget deficit widened. Inflation accelerated to 100 percent in 1991 and continued torise, reaching 331 percent in 1993 (as an average for the whole year).

Table 1: Selected Indicators(% Growth Rates)

1990 1991 1992 1993 1994*GDP Growth -2.0 -9.9 -7.6 -1.3 2.5Imports of GNFS -16.6 -73.7 -15.8 0.9 3.1Exports of GNFS -10.8 -58.2 7.8 8.3 -5.6GDP Deflator -0.5 100.6 146.6 330.9 62.4

* Estimates

6. Economic hardship and student demonstration precipitated political change. Aninterim Government was formed, religious freedoms restored, and multiparty elections held.A coalition government emerged following the election, comprising cabinet members fromdifferent parties and with divergent views regarding the pace of reform. This governmentlasted until July 1992, when general elections under a new democratic constitution were held.The Mongolian Peoples' Revolutionary Party (MPRP), the former Communist Party, won the1992 election. Presidential elections were held in June 1993. Mr. Orchirbat, the incumbentPresident, won the elections as an opposition candidate, without the support of the MPRP,which fielded a more conservative candidate.

B. Recent Developments: The Stabilization and Reform Program

7. Following the political changes of 1990, Mongolia implemented a series ofeconomic reforms aimed at stabilizing and restructuring the economy. Inflation moderated toless than 55 percent per year in February 1995 (See Figure 1), and the economy grew by 2.5percent in 1994. Shortages of goods, evident until late 1992, have subsided. The balance ofpayments crisis seems to have eased. Net reserves increased from practically nothing in1992 to almost eight weeks of imports by end-1994. The. exchange rate has remained stableat around Tug 400 per US dollar since the unification of the rate in May 1993 until early thisyear, and has subsequently depreciated to about T450-460 per US Dollar. Government sav-ings, which had been negative since the mid-1980s, increased to almost two percent of GDPin 1993 and 2.5 percent in 1994.

8. Economic decline has not been as severe in Mongolia as in most Republics of theFormer Soviet Union (FSU). The cumulative decline of GDP in Mongolia for the period1990-94 was about 20 percent. All FSU countries experienced larger cumulative declinesduring the same period, ranging from 25 percent in Uzbekistan to over 80 percent inArmenia. Moreover, only the Baltic States resumed economic growth in 1994: between 1and 2 percent in Latvia, around 2 percent in Lithuania, and 4 to 5 percent in Estonia.Several factors account for Mongolia's relative success in ameliorating the decline andresuming economic growth faster than most other comparable economies:

(a) In agreement with the IMF and the Bank, Mongolia has implemented toughmonetary, fiscal and exchange rate measures to create a comparatively stablemacroeconomic environment. Credit ceilings are enforced by the Mongol Bank(the Central Bank). Prices and trade have been liberalized and the exchange ratewas unified in May 1993. Import licensing has been eliminated and the privatesector's export earnings are no longer subject to foreign exchange surrenderrequirements. Export taxes have been abolished and import duties are low anduniform (15 percent), although there are several import duty exemptions.Production and distribution activities that are still in the hands of the Governmentmust compete with the private sector in most cases.

(b) As a result of an early privatization program (1990), virtually all herds and smallenterprises have been transferred to the private sector. Almost 44 percent ofstate-owned assets has been privatized so far. The private sector now generatesabout half of GDP. The early privatization program created favorable conditionsfor supply response and ameliorated the economic decline suffered during 1990-93.

(c) The international community reacted rapidly to the initial crisis in 1990 withlarge humanitarian and balance of payment support. This assistance has contin-ued. However, as the crisis reduced its intensity, support has shifted towardproject financing and technical assistance. The prompt and continued assistanceby the international community ameliorated the impact of the crisis and preventeda major collapse of the institutional fabric of Mongolia.

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(d) The country has enjoyed political stability while the institutional frameworkundergoes rapid changes to adapt it to a market oriented economy. Several newlaws have been enacted: Bankruptcy, Company, Anti-Monopoly, Labor, andPension. Proper implementation of these laws needs to be assured, however.The Foreign Investment Law allows foreign firms to invest in practically anysector of the economy and also allows for free repatriation of capital and bene-fits.

(e) The Government is committed to reforms. When controversial decisions need tobe taken, reform-oriented views have prevailed within the Cabinet and Parlia-ment. The Government, and society at large, are aware that a return to the pastis impossible and emphasize that a market-oriented economy based on democraticprinciples is central to their development philosophy.

9. The economic recovery is most noticeable in the service sector. Thirty thousandMongolians are engaged in small-scale trading in a triangular arrangement, providingMongolian raw materials to China and Chinese consumer goods to Russia in exchange forcash or, sometimes, gasoline. Many new shops and hotels have opened since the reformswere introduced. In Ulaanbaatar, for example, in 1993 alone the number of food shopsincreased by 39 percent. Wool, cashmere, and other textile enterprises are emerging in theform of private or joint-ventures companies. There are now 14 wool and cashmere process-ing plants in Mongolia; there was only one four years ago. Gold production is increasing.Copper production recovered somewhat. Meat and meat products are exported in increasingamounts, particularly to China.

10. As a result of trade liberaliza- ANNUAL INFLAT ION RATE

tion, the composition of Mongolia's exports -00

by market of destination is becoming in-creasingly diversified. For example, trade .-0 _ i _

with Russia and former CMEA countriesdeclined from 89 percent of total trade in . 00

1989 to about 56 percent in 1993. Tradewith China, on the other hand, increased 200 - -

from less than two percent of the total in1989 to almost 25 percent in 1993, mostly 1DO _ _ _ _

due to increased exports of cashmere, wooland meat. Trade with Japan has also aincreased from 1.9 percent of the total in1989 to almost five percent in 1993, mostly Figure 1owing to expansion of cashmere and copperexports. And trade with West European countries, negligible in 1990, is growing fast.Textile products are exported to the USA where they face no quota restrictions. To sum up,Mongolia is taking advantage of its proximity to the fastest growing market in the world(China), and of its new ties with industrial countries (Japan, Europe, the USA). At the sametime, the country values its traditional relations with Russia, still the main partner.

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C. External Environment

11. Trade Prospects. Mongolia's products have large and accessible markets abroad.China, offers market opportunities for the sale of meats, hides, wool, live animals, cash-mere, coal, copper, precious metals, and petroleum-opportunities that are already beingcaptured by the Mongolians. Manufactures, such as processed leather, wool, cashmere, andgarments, are finding markets in Europe, Japan, and the U.S.A., which applies no restrictionto textiles/garments imported from Mongolia. In addition, the new openness of the countryis resulting in a visible growth in tourism. The lack of trade restrictions is facilitating thegrowth in both exports and imports.

12. Capital Flows. Under a base case scenario of economic prospects describedbelow, Mongolia would need about $100 million per year in external financing during thenext three or four years to finance its balance of payments requirements (including increasesin reserves). Most of this would need to be grants and official development assistance(ODA) soft loans.

13. The levels of external financing requirements are large-but obtainable, provideda sustained effort is made at mobilizing donor assistance. The country will need to improveits absorption capacity for project-related inflows. Donor assistance amounted to more than$100 million in 1991, 1992 and 1993 and is gathering momentum as project preparationactivities come to an end and as balance of payments support to help the reform efforts isprovided by the IMF, the Bank and AsDB. Mongolia also receives financial and technicalassistance from a growing number of bilateral donors (China, Denmark, Germany, Japan,Korea, Netherlands, United States, France, UK, and others).

D. Creditworthiness

14. Even under a scenario of full commitment to reforms, Mongolia's short andmedium-term balance of payments prospects are subject to considerable uncertainty due to itsheavy dependence on copper exports to Russia, as well as the import-intensive nature of itseconomy. However, these weaknesses could diminish as non-traditional exports grow,changes in relative prices result in a less import-intensive economy, and as new marketsdevelop for both imports and exports. Improvements in the domestic situation within Russiawould also have a positive impact.

15. Mongolia's debt in convertible currency amounted to $407 million at the end of1994. There is practically no short-term debt and only a small amount of arrears remainunpaid. The additional debt in non-convertible currency is owed mostly to Russia. Sensitivedebt negotiations involving a debt of more than Transferable Rubles 10 billion are ongoingwith Russia. The way this debt is settled will greatly affect Mongolia's balance of paymentsprospects. If, as a result of the negotiations with Russia, substantial debt servicing is

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required over the next ten years, the balance-of-payment outlook would change drasticallyand the proposed Bank strategy would need to be revisited.2 '

16. The debt-service ratio for the rest of the decade is likely to be low. Excludingservice payments to Russia, the debt-service ratio is projected to fall slowly-as most of thenon-concessional debt is gradually paid off-from 10.6 percent of exports in 1994 to 5.8percent by 2000. It may rise slightly in the next century. Given Mongolia's vulnerablebalance of payments position, the country will continue to require grant and concessionalassistance for the foreseeable future. Mongolia is unlikely to be sufficiently creditworthy totap commercial sources of finance in the medium term.

2. CHALLENGES FACING MONGOLIA

A. Development Objectives and Policy Agenda

17. The development priorities facing the Mongolian authorities include the need tostabilize the economy, accelerate the transition to a market economy through private sectordevelopment, protect vulnerable groups most affected by the transition, removeinfrastructural bottlenecks, and protect the environment. This broad agenda will requireaggressive efforts on the part of the Government to move forward on a program of structuralreforms that reinforces progress made on the macro-stabilization front. Public enterprisereforms are prerequisites for modernizing the banking system; and financial sector reformsare required to implement the monetary policies necessary to sustain stability. Furthermore,the social repercussions of a tight stabilization program must be matched by measures toprotect vulnerable groups affected by the transition.

18. Stabilizing the Economy and Improving Economic Management. Althoughsubstantial progress has been made in slowing inflation, ensuring macroeconomic stability isstill a major goal. The inflation rate was below 55 percent for the twelve months precedingFebruary 1995. Expansion in credit is tightly controlled by the Bank of Mongolia andbudgetary savings have been increasing. Tax reform has been fruitful, and Mongolia nowhas in place corporate and personal income taxes, a sales tax, a fuel tax, and import duties.The tax on fuel was increased (from 13 to 20 percent) in 1994. But the situation remainsfragile, not least because electricity, heating and transport tariffs still need substantial adjust-ments. Further efforts will also need to be directed toward reducing expenditures, particular-ly subsidy to urban transport, social security, and energy use (including coal). Reducing theannual rate of inflation to seven percent by 1997, as agreed in the ESAF program, will proveextremely challenging. Subsidized credit to support public enterprises absorbed almost 30percent of total credit in 1994 (these credits finance flour mills, agricultural activities,transport companies, gold projects and petroleum stocks).

2/ The base case projections assume that the debt to Russia will not have to be servicedbefore 2003.

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19. Important progress were made by the public sector in improving its capacity todesign and implement public policy. But it remains still weak. The central government isoverstaffed. A tentative estimate indicates that at least 15-20,000 government employees(from a total of 160 thousand) are redundant, although civil service reform and staffreduction were initiated in some Ministries in 1992. Moreover, a comprehensive publicenterprise reform will need to be implemented to secure the success of the stabilizationprogram. In this regard, some initial plans are being formulated with external TA.

20. The banking sector has made important progress: the Bank of Mongolia hasbegun to supervise commercial banks (12 in total; mostly publicly owned) more effectively,interest rates are basically liberalized, and more and better banking services are available.But the banking sector remains underdeveloped with important issues that need to beresolved. Foremost among them, non-performing bank loans account for over 25 percent ofthe total portfolio of banks. The present system of direct controls to manage credit expan-sion will need to give way to indirect monetary management as appropriate instruments andinstitutions are developed. In addition, the Central Bank's supervisory capabilities will needto be enhanced further and prudential regulations covering capital-adequacy standards,liquidity ratios, and loan-loss provisions will need to be developed and enforced. Specificmeasures (and timing) to deal with most stabilization issues have been negotiated as part ofthe second PFP presented to the Committee of the Whole in November 1994. Thesemeasures include, on the fiscal front, the removal of customs duty and sale tax exemptions,the broadening of the sales tax to include services, holding increases in the civil service wagebill below inflation levels, phasing out urban transport and rural electricity subsidies,introduction of a new social security system including phased increases in employer andemployee contributions, and the computerization of the revenue and expenditure accountingsystem. Monetary policy measures include the elimination of directed credits, the initiationof open market operations and the enforcement of banking regulations with a view toeliminating ceilings on commercial bank lending.

21. Developing the Private Sector and Implementing Growth-Promoting Reforms.Several of Mongolia's industries suffer from excess capacity, its infrastructure requiresmodernization, and the public sector needs downsizing. The industrial sector (excludingmining) employs over 100,000 people (an eighth of the labor force). Those firms thatdepended exclusively upon the now-extinct CMEA market employ over 35,000 people(leather, wool processing, meat and dairy processing). This is where the bulk of theadjustment is taking place (employment in the industrial sector dropped by seven percent in1993 and, probably, by a similar percentage in 1994).

22. Some sectoral measures need to be implemented soon. For example, the landand mining laws, now approved, need to be implemented. Implementation of the land law iscrucial for the effective privatization of agricultural activities and for the regulation ofgrazing lands. The enforcement of the urban property law will require the creation ofcompetent cadastral registration offices. The privatization of herders and small enterprises iscomplete and has been the driving force behind the ongoing economic recovery. Thevoucher privatization of large enterprises, on the other hand, succeeded in ownership transferbut resulted in a wide-spread shareholder diffusion and weak corporate governance. Asecondary market for shares and remaining vouchers is needed to consolidate the ownership

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structure of newly privatized enterprises. In this regard, the securities law has been recentlypassed to provide the legal framework for secondary trading. The Government hasannounced the remaining public enterprises that are planned to be fully or partially privat-ized. These include important enterprises such as the copper company, a cashmere factoryand most coal mines. As a general criteria, public utilities will remain fully publicly-owned,with the exception of telecommunications while other public enterprises are scheduled forcash privatization in the coming years. The recent economic recovery has resulted in anincrease in domestic savings as evidenced by investments by successful local traders in thenewly privatized companies. However, the Government has announced that cash privatizationwill be opened to foreign investors.

23. In recent years, the volume of legislation enacted in Mongolia has been impres-sive. But it is equally important to recognize that enactment of a law is only a first step;actual implementation will prove difficult and will depend on adequate institutional capacityamong other things. External assistance is being provided to overcome such constraints.For example, the Banking Rehabilitation Credit is currently identifying measures that arelikely to have a direct and positive impact on the legal framework underpinning commercialbanking operations. Other donors are also providing similar type of assistance.

24. Alleviating Poverty and Protecting the Most Vulnerable Groups. The emergenceof poverty in Mongolia is a recent phenomenon, largely resulting from the collapse ofexternal trade in 1991/92, the deterioration in the terms of trade, the loss of large amounts ofsubsidies from the former Soviet Union, and the hardships imposed by the need to stabilizethe economy. According to official estimates, 26 percent of the population lives in poverty.Registered unemployment has reached 8.5 percent, 30 percent of school age children do notattend schools, maternal mortality doubled from 0.12 percent in 1990 to 0.24 percent in1993, the number of female-headed households rose rapidly and the real value of pensionsand other social benefits declined substantially. When privatizing herds, the priority wasgiven to people who, according to the Government, could take better care of the animals.Unfortunately, this policy adversely affected women (who were heads of families) andchildren. Moreover, about 50,000 new entrants to the labor force are anticipated every year.On the assumption that reforms continued to implemented as planned, GDP growth isprojected to be 4.5 percent per year; but this may not be sufficient to absorb the new entrantsinto the labor force and create enough jobs to stem the increase in the unemployment rate.

25. The Government launched a comprehensive Poverty Alleviation Program (PAP)aimed at reducing the proportion of the population living below the poverty line from 26percent to 10 percent by the year 2000. The cost of the PAP is estimated at about US$80million for 1994-2000. The Government plans to contribute about half of this total andintends to approach the donor community to obtain the rest. Subject to resource availability,IDA could contribute about 35 percent of the total PAP over the next five years. The bulk ofthe PAP finances programs for job creation, and social funds for the poorest families. ThePAP also includes programs to alleviate rural poverty, to assist women living in poverty andto improve the management and institutional capacity to deal with poverty issues.

26. There are several funds and pilot programs to ease the situation of the poor andvulnerable groups. The Government has created a Poverty Fund within the budget (although

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the budgeted amount in 1994 was low-0.2 percent of GDP). Fees charged to citizens whenprivatization vouchers were distributed are to be used for retraining and job creation. TheGovernment has established a severance pay system for redundant workers. It plans tointroduce elements of cost recovery for health and education services, but will also adoptspecial provisions for those unable to pay. Current policies on labor mobility and wages arequite liberal, and promote job creation. The reduction in social expenditures has been imple-mented with a degree of rationality. For example, investments in new hospitals were stoppedas they were not a priority for health services; reduction in non-teacher personnel has takenprecedence over other reductions in educational expenditures. Other subsidies benefiting thepoor, such as medicines and children's clothing, have been kept in the budget (about onepercent of GDP in total in 1993). Donors have provided some relief contributions; USAID,for example, provided over $15 million in commodity assistance (grain and butter). TheAsDB is providing $3 million for job creation and general poverty alleviation. Counterpartfunds generated from AsDB's $30 million Industrial Sector Program Loan will be partiallyused for general poverty alleviation. A conference on Poverty Alleviation took place inUlaanbaatar in late June 1994. The Bank has been participating in these activities whilepreparing the Poverty Alleviation for Vulnerable Groups Credit.

27. Removing Infrastructural Bottlenecks. Poverty reduction and job creation bothrequire sustained economic growth; economic growth in turn requires the development ofMongolia's infrastructure. The infrastructural needs of Mongolia are formidable both interms of rehabilitation and new investment. While donor support has been forthcoming,financing of infrastructural requirements will demand substantial amounts over the next tenyears. In many cases, foreign assistance for infrastructural projects are yet to be obtained.Unfunded infrastructural projects to be implemented over the next eight years exceed US$700million, almost 100 percent of GDP. Power plants are old, and unreliable electricity supplydisrupts economic activity. The total cost of replacing the largest of the existing four powerplants in the capital, which is both unreliable and obsolete, exceeds 25 percent of theMongolian GDP. The lack of telecommunications facilities is an impediment to private sectordevelopment. The railways system needs to improve maintenance and to carry out newinvestments, particularly at the border with China for transshipment facilities. Roads andbridges require maintenance. Airport facilities are inadequate to meet the needs of an openeconomy. A comprehensive investment program is underway to remove infrastructuralbottlenecks. AsDB, Japan, Germany, USA, and IDA are providing assistance to rehabilitatethe energy system. The telecommunications systems is being modernized with assistancefrom Japan, AsDB, and France. The railways system is being improved with assistancefrom Japan and IDA. Japan is also financing a transshipment facility at the border withChina. Airport facilities at Ulaanbaatar are being enhanced with financing from AsDB. Aprogram to improve the road system is being financed by AsDB. In addition, the Govern-ment has created a Road Fund with the proceeds of a 20 percent taxation on gasoline anddiesel.

28. Protecting the Environment. Additional measures and programs to safeguard theenvironment are needed, particularly to eliminate air pollution in urban centers, contamina-tion around tailing ponds in copper mines, and soil erosion in pasturelands. Environmentalproblems in Mongolia are region-specific and tend to be "localized" in specific areas. Subsi-dies to fodder transport have resulted in livestock moving into environmentally fragile areas,

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but the reduction in these subsidies is helping to reverse the situation. The Government,with the help of external donors (UNDP, AsDB, DANIDA, Japan), is dealing with theseissues. For example, the Global Environmental Facility has allocated $3 million to protectMongolia's biodiversity. Moreover, the Government has prepared a National EnvironmentalAction Plan that will include the introduction of new legislation to protect the environmentand specific public investments designed to tackle environmental problems. The rapidpopulation growth (2.7 percent per year) could negatively affect the social well being ofMongolians and the environment over the medium term. However, there are some indica-tions that population growth may be falling as a result of declining birth rates. The UNFPAis implementing a family planning program, and social attitudes on family planning seem tobe changing. While important progress have been made to deal with environmental issues,institutional and absorptive capacities to address the environmental problems remain verylimited.

B. Macroeconomic Prospects

29. Resumption and sustainability of growth in Mongolia require: (i) a continuation(and deepening) of stabilization and reforms; (ii) an improvement in infrastructural services(particularly telecommunication, power and transport); and (iii) more efficient Governmentinstitutions to support the transition to a market economy. However, these domesticconditions alone are insufficient to ensure continued economic growth in Mongolia. Thecountry's economic prospects also depend, critically, on the availability of external aid, anddevelopments in its main trading partners, Russia and China. Two scenarios have beenelaborated to illustrate how these internal and external conditions might evolve over thecoming decade: one in which a virtuous cycle of political and economic stability, risinginvestment, and positive growth is established (the base case); and another, in which thepolitical coalition in favor of reform weakens or fractures, slowing or even reversing thereform process, and causing a less favorable outlook for growth and poverty alleviation.

Base Case

30. The base case assumes that the government will continue to implement its stabili-zation and reform program with little or no slippage. It also assumes that Mongolia does notencounter further large external shocks of the kind it faced in the early 1990s and that thecurrent stable political environment is maintained. Under this scenario, GDP growth isexpected to rise to 4.5 percent a year by 1996 and to remain at that level until 2003.

31. These projections recognize the many difficulties Mongolia is likely to face incoming years. Chief among these are a relatively low savings rate, inadequate infrastructure,a harsh terrain, and a landlocked and isolated location that raises transport costs and makesthe economy dependent on other countries for transhipment of exports and imports.

32. These difficulties notwithstanding, several factors suggest that Mongolia stands agood chance of achieving and sustaining relatively healthy growth in the medium and longerterm. First, the Mongolian economy contracted significantly during the first four years ofthe 1990s. To some extent, then, the growth expected in coming years represents a recoverytoward previous production levels, especially in agriculture and services. Indeed, even with

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an average annual growth rate of 4.3 percent over the next five years, Mongolia's GDP in1999 would be only marginally higher than a decade earlier. And GDP per capita projectedfor 2003 (the end of the projection period) would be below the level achieved in 1989.

33. Second, improvements in the allocation of resources are expected to be a majorcontributor to growth. The economy has seen rapid reforms and fundamental changes to itsincentive structure-elimination of price controls, realistic prices for fuel and other govern-ment-administered goods and services, market-determined exchange rates, the freedom ofprivate enterprises to hire and fire personnel, and positive interest rates in real terms. TheICOR is projected to decline from 7.6 in 1994 to about 5 by the turn of the century.Effective resolution of still-pending governance issues pertaining to newly privatizedenterprises should also spur higher productivity.

34. Third, an important legacy to Mongolia from its communist past is a relativelyhealthy and well-educated labor force. The adult literacy rate is 96 percent; the primaryschool enrollment rate for girls is 100 percent and the secondary school enrollment rate is 77percent. Cross-country evidence is strong that productivity growth is closely related toinvestment in human capital and the prevalence of a relatively undistorted economic environ-ment. Both conditions exist in Mongolia. With an educated labor force, new skill formationwill be faster, and adjustment to new systems, technologies, and production techniques willbe less difficult. Foreign managers of new garment factories have attested to the adaptabilityand trainability of Mongolian labor.

35. Fourth, as referred before, Mongolia's products have large and accessiblemarkets abroad, particularly in China.

36. Fifth, and finally, the services sector is expected to see some growth, especiallyas increased international trade revitalizes the retail and wholesale sectors. Similarly, effortsto resuscitate the banking system eventually will generate more and better financial services,and the transport sector is expected to revive as infrastructure is rehabilitated and developed.Tourism also shows good prospect.

37. The share of fixed investment in GDP is expected to rise from about 18 percentin 1993 to about 23 percent by the end of this century. The initial impetus is expected tocome from renewed inflows of aid as western donors respond to Mongolia's foreignexchange needs. Public investment is expected to rise as major infrastructural projects areimplemented. At the same time, some increase in private (including foreign) investment isalso expected; recent evidence suggests this process is already underway (for example in anew garment factory, a few new hotels in Ulaanbaatar, cashmere processing factories, and soon). Investment in new construction (or completion of suspended works) is evident in themain cities.

38. Central to the projection of positive GDP growth is the growth of national sav-ings. As a share of GDP, savings are projected to rise from 12 percent in 1993 to about 17percent by 2003, still significantly below the levels achieved by Mongolia's East Asianneighbors. The projected rise in the GNS/GDP ratio of 5 percentage points over the comingdecade is moderate, particularly in view of the large increase achieved between 1992 and

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1993 alone. Present policies are aimed at increasing public savings by one percentage pointof GDP per year to reach about 5.5 percent of GDP in 1997 (it was 2.5 percent of GDP in1994). To achieve this, the Government will need to improve the efficiency of tax collec-tion, minimize import duty exemptions, and reduce subsidies to urban transport, electricityand social security (the ESAF include policy conditions on these matters). Private savingsare likely to be stimulated by positive GDP growth, more profitable investment possibilities,and a wider range of economic activity suddenly made accessible to the private sector.Positive real interest rates will help, although they would influence more the share of finan-cial savings than the level of total savings. The marginal national saving rate for the rest ofthe century would be about 19 percent, which would leave room for raising per capita con-sumption, particularly private consumption.

39. The base case envisages steady export growth in Mongolia's chief exports, withChina expected to continue to be Mongolia's fastest growing export market. Exports ofgoods and non-factor services are expected to grow by around 5.8 per year for the rest of thecentury. The volume of copper exports is expected to remain more or less the same. Theseoverall rates of (export) growth are somewhat below projected growth in world trade (sixpercent per year during the rest of the century).

40. Imports are expected to grow rapidly, reversing the long period of importcompression following the loss of Soviet aid. The elasticity of imports with respect to GDPis projected to be somewhat above one for 1994-2003. The rapid growth of imports relativeto exports in the first three years of the projection period implies an increase in the currentaccount deficit, to over $100 million by the turn of the century. As a share of GDP,however, it is expected to decline from about 10 percent in 1995 to about seven percent by2003. This point highlights Mongolia's continuing dependence on foreign aid.

41. Current account deficits of the magnitude projected in the base case are consis-tent with our expectations of external finance available from the international donor commu-nity and with the country's projected absorption capacity for (mostly project-related)assistance in the coming years.

A Less Favorable Outcome

42. Mongolia will face economic decline if the reform process is interrupted. Themost extreme case would be a combination of unfavorable external events (sharp decline incopper prices and increase in petroleum prices combined with adverse developments in thedebt negotiation with Russia, for example) and a reversal of reform measures. A retreatfrom the reform program would elicit a strong negative reaction from the international donorcommunity. Although the authorities might act to protect the main state-dominated sectors,much of the currently emerging private sector (in agriculture, livestock, processing industriesand services) would also be hurt by a retreat from market-oriented policies. Under suchcircumstances, the decline in the economy could be deep and prolonged.

43. In a less extreme scenario, external conditions would not be disruptive but thereform process could be interrupted due to internal political conditions. Trade with Chinaand Russia could continue as before, while donors continue to assist the country with some

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long-term investments. However, trade restrictions, anti-export and import-substitutionpolicies likely to prevail in an unfavorable policy environment would reduce export earningssteadily, except, perhaps for copper. The GDP would continue to decline, but at a slowerrate. Even under this scenario, a crisis point eventually would be reached, especially in thetransport and energy sectors. As the scarcity of foreign exchange became more acute, theGovernment would resort to administrative policies to implement an inward-looking strategy.Widespread unemployment and a deterioration in the provision of basic health and educationservices would become a characteristic feature of the urban economy. This would be a caseof long-term, steady decline, similar to the experience of some African countries (low-casescenario in Table 2).

Table 2: Comparative Scenarios

Low Case Base Case

GDP Growth-Factor Cost (%)1994-97 -0.8 3.71997-2003 -1.2 4.5

Export Growth (%) Total1994-97 -2.6 3.51997-2003 -0.6 5.5

Non-Copper Export Growth (%)1994-97 -2.2 5.11997-2003 -0.9 8.0

Import Growth (%)1994-97 -1.1 5.21997-2003 -2.2 4.5

Current Account Deficit (US$ Mil.)1994 -59.4 -59.41997 -67.8 -81.22003 -53.2 -110.2

Current Account Dericit (% of GDP)1994 -8.0 -8.01997 -7.8 -7.82003 -5.6 -7.1

Debt Service to Exports (%)1994 10,6 10.61997 6.3 5.12003 7.6 7.3

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3. BANK ASSISTANCE STRATEGY

44. The Bank's central objectives in Mongolia are to support its transition to amarket-oriented economy, sustain economic growth and improve the living conditions of thepoor. To achieve these objectives, the Bank's intends to assist the Government of Mongoliain improving macroeconomic management, developing the private sector and financialinstitutions, removing infrastructural bottlenecks, designing and implementing sustainablepoverty alleviation measures, and protecting the environment. The scope and degree of theBank's assistance in each of these areas takes into account the assistance provided or plannedby other donors. The proposed strategy has a short-term, medium-term and longer-termhorizon.

* In the short term, the Bank's strategy is to strengthen the Government's macro-economic management capability through technical assistance and continueddialogue on policy issues, in close consultation and coordination with the IMF.Designing and implementing a sustainable poverty alleviation and human re-source development strategy, including the protection of vulnerable groups isalso an integral part of our strategy.

* In the medium term, the Bank's strategy is to support market transition throughdevelopment of the private sector and financial institutions.

* In the longer term, the Bank's strategy is to help the Government develop andimplement a strategy to remove infrastructural bottlenecks for sustainablegrowth. In addition, the Bank will assist the Government protect the environ-ment.

45. The proposed strategy is based on the need to overcome the main obstacles toeconomic growth and social improvement. First, Mongolia's long tradition as a centrally-planned economy manifests itself in a lack of economic management skills appropriate to thenew economic environment. Second, the collapse of the "captive" Soviet market, the sharpdecline in fiscal resources available for social services, and the increase in unemploymentassociated with economic restructuring have resulted in a marked increase in the number ofpoor. This situation is likely to persist for many years. Third, the institutions and regula-tions needed to facilitate the development of the private sector are at best embryonic andfragile. In particular, the absence of efficient financial institutions hinders private sectordevelopment. Fourth, having remained politically and economically isolated for many years,Mongolia has not built the modem infrastructure it needs for integration with the rest of theworld. Finally, there is a need to address environmental problems at an early stage.

46. The Bank's strategy will be pursued through a combination of projects, ESW andtechnical assistance. There are several donors active in Mongolia, some of which contributemore financial assistance than the Bank (Japan, AsDB), and a growing number of NGOs.Therefore, the Bank's strategy is to identify areas of high priority in which it can make asignificant contribution while complementing the activities of other agencies. Table 3

- 15 -

summarizes the key objectives, strategy, bank instruments (assistance programs) andmonitorable indicators.

A. Areas of Focus

47. Supporting Stabilization and Macroeconomic Management. The public sector'scapacity to design and implement public policies using market-oriented instruments is limited.The Bank has assisted the Government to overcome this technical and financial limitation.First, through policy dialogue, the Bank has helped to develop the agenda on such issues astrade reform, public expenditure rationalization, and infrastructural rehabilitation. Dialogueon macroeconomic issues takes place in the context of the projected annual PFPs, the IMFESAF review missions (in which the Bank participates), and the planned CEMs. Discussionswith the authorities emphasize overall reform policies, especially stabilization, public invest-ment priorities (including maintenance), protection of vulnerable groups, and private sectordevelopment.

48. Second, the main concern in macroeconomic management is to strengthen coreeconomic ministries-Ministry of Finance, National Development Board and the Bank ofMongolia. The Bank assisted the Government in setting priorities for budgetary expendituresand investment programs through the recent CEM and as part of regular ESAF reviewmissions. The Bank is also assisting in strengthening the commercial banking systemthrough an ongoing Financial Sector Technical Assistance. The proposed study on PublicEnterprises (FY96) would assist the Government in designing policies toward enterprisesstill in the hands of the Government. This study would complement our ongoing work onthe financial sector. The IMF also assists Mongolia on macroeconomic management, mainlyon monetary and fiscal matters, while UNDP provides technical assistance on public sectormanagement and economic planning.

49. Finally, the country's technical and financial resources to cope with its pressingneeds are also limited. Donor assistance has been forthcoming and the Bank played animportant role as coordinator. Since 1991, the Bank has co-chaired, with the Government ofJapan, an annual Assistance Group Meeting in Tokyo. These meetings have been instrumen-tal in eliciting donor assistance and coordination. Initially, the assistance focussed on urgentrelief and balance of payment support. More recently, longer-term project-type assistancehave been emphasized. The Bank plays a central role in organizing and setting the agendafor these meetings. The last meeting took place in November 8-9, 1994. There is consensusamong the donors and the Mongolian Government on the need to continue with theAssistance Group Meeting in its present format. Bank, IMF and AsDB missions meetsregularly with representatives of donor Governments in Ulaanbaatar, under the auspices ofUNDP. These frequent meetings have strengthened coordination among donors andfacilitated an exchange of views on project implementation.

50. Assisting the Transition to a Market Economy. A successful transition to amarket economy requires the rapid development of the private sector and the implementationof a program to ameliorate the negative impact of the transition on vulnerable groups. TheBank has been assisting the Mongolian Government on both fronts.

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51. Private Sector Development. Through formal ESW and as part of the ESAFreview missions, the Bank has reviewed and suggested ways to improve the privatizationprocess. In the area of legal reform, the Bank has been providing advise under the TechnicalAssistance Credit (for the foreign investment law, the mining law and the environmentalregulations for mining). The bulk of assistance for legal reform, however, comes from theAsDB, supplemented by training for judges and lawyers financed by USAID and the AsiaFoundation.

52. The Bank is currently assisting in the preparation of a Financial Sector Review toidentify the main bottlenecks to the development of the banking sector. Subject to thefindings and recommendations of the financial sector review, a financial sector operation(Banking System Rehabilitation Credit) is planned for FY97. Our assistance to thebanking sector is coordinated with the IMF and AsDB, which are also assisting Mongolia'sbanking sector. The AsDB and Germany are assisting Mongolia in the development of theindustrial sector, particularly small, export-oriented industries.

53. The bulk of external assistance to the agriculture sector, in particular for thedevelopment of the livestock and forestry sub-sectors, has come from DANIDA and AsDB.This assistance basically covers the urgent needs of the sector and there is no need foradditional assistance from the Bank Group at this stage.

54. The IFC has been examining areas of interest for its potential involvement.Recently, it has been exploring the possibility of participating in the petroleum sector.Creating a favorable environment for foreign investment is another important area where theBank has been active. The Bank, in collaboration with FIAS, reviewed the draft ForeignInvestment Law before it was enacted in early 1993; and reviewed a draft of the MiningLaw, recently approved.

55. Poverty Alleviation and Vulnerable Group Protection. The Bank's strategy isto support the Government's efforts to implement a broad and affordable program-includingthe identification and design of effective delivery mechanisms-to protect vulnerable groups.At the same time, present liberal labor policies create incentive for labor-intensive activitiesand will be strongly supported. Payroll taxation on wages reduce employment. Therefore,in its dialogue with the country the Bank will discourage the introduction and/or increase ofsuch taxes. The Bank is assisting the country in the preparation of a Living StandardsMeasurement Survey that will help identify more precisely who and where are the poor andwill assess the extent and causes of poverty in Mongolia. A Poverty Assessment will beundertaken in FY96. Several pilot programs targeted to specific groups are being imple-mented as part of the project preparation for the Poverty Alleviation for Vulnerable GroupsCredit in FY95. This credit would focus on short-term, quick impact activities to createemployment for the poor and absolute poor, to raise enrollment rates in basic education, toreduce maternal mortality, and to provide assistance to handicapped persons, includedmentally retarded children.

56. The proposed Urban Sector Credit in FY97 focuses on bringing basic water andsanitation services to the poor living in the ger areas around the capital. As a complement,the project will assist the Government to arrest the decay in urban infrastructure through

Table 3. SUMMARY OF BANK'S KEY OBJECTIVES, STRATEGY,BANK INSTRUMENTS AND MONITORABLE INDICATORS

OBJECTIVES ACTION/STRATEGY BANK ROLE AND INSTRUMENTS MONITORABLEINDICATORS

ESW (FY95-97) LENDING (FY96-98)

1. Macroeconomic Management and * Focus policy dialogue on strengthening core Eco- * Financial Sector Review * Baoking Rehabilitation Credit * Achieve PFP TargetsStabiization nomic Ministries * CEM * Implementation of he Program of

* Agree with Government on a Plan of Action to * Annual Donor Meeting in Tokyo: Prepa- Action for the Banking Sectorreform the banking system ration of Documentation

* Provide informal assistance on ways lo improveallocation of public expenaditures

2 Private Sector Development * Focus policy dialogue on institutional improvement * Public Enterprise/Privauization * Banking Rehab Credit also * Privatization for cash of housingand more privatizatioo of public assets * Prospects for Wheat Production applicable and productive public enterprises

3. Poverty Alleviation * Assist Government in identifying and implementing * Poverty AssessmentfHousehold Survey * Poverty Alleviation and * Reduction in the number of poorand Vulnherable measures to alleviate poverty, particularly protecting (LSMS) Human Resource Development Pro- * Improving basic services for infor-Group Protection the most vulnerable groups from hardships of transi- ject mal urban settlements ("gert areas)

tion * Urban Sector Credit

4. Remnoval of Infrastructural Bottle- * Identify programs and policies to promote reha- * Energy Survey * Coal Rehabilitation Credit * Reverse declining trend in coalnecks bilitatbon of energy/power, transport, and urban * Transport StraLegy Paper * Energy 11 production and improve delivery to

infrastrucntre * Urban Sector Credit also power plantsapplicable * Improve financial situation of

transport enterprises

t Improve urban services (sewage,waste disposal)

5. Environmental Protection * Cooicentrate efforts on identifying measures to * Assist Goversment oan its Envirounental * Environmental components in cred- * Improved enforcement and inter-prevent: (i) soil erosion from over-grazing and Action Plan its, i.e. coal rehabilitation and urban ministerial coordinationsurface traffic; and (u) air and water pollution from sector * Reducuon of water and air polu-power plants and mines tion, particularly in areas close to

mines and power plants

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urgently required rehabilitation. Mongolia's urban population in Ulaanbaatar comprises over25 percent of the total population; half of these people live in gers. Urban infrastructure haslong been decaying with a lack of proper maintenance and with no sizable new investmentssince 1989. In light of a rise in rural-urban migration, this neglect is causing strains on theurban economy. This operation is likely to include an environmental component.

57. The Bank's work on poverty alleviation is being carefully coordinated with otherdonors active in this area-AsDB, UNDP, UNICEF, UNFPA, ILO, the Red Cross, andother relief organizations. The Bank has worked closely with bilateral aid agencies andNGOs in this area. For example, Save the Children Fund (UK) participated in a Bankeconomic mission. The outcome was a jointly produced World Bank Discussion Paper onvulnerable groups in Mongolia. Committed external financing for poverty alleviationaccounts for about 70 percent of the total external financing requirements.

58. Removing Infrastructural Bottlenecks. The Bank's infrastructure investment covertransport and power/energy.3 ' These areas have been chosen because public investmentneeds are large, and there are important issues of pricing, planning, and prioritization inwhich the Bank's analytical work can help. As indicated before, the removal ofinfrastructural bottlenecks is crucial for sustainable growth and, therefore, for employmentcreation and poverty reduction.

59. Transport. The Bank's strategy is to assist in concentrating sector investmentinitially on the rehabilitation of the existing transport network, principally roads andrailways, where demand is significant and network deterioration is already a serious concern(the already approved Transport Rehabilitation Credit addresses, to some extent, theseconcerns). A Transport Strategy Paper is proposed for FY96 to refine the Bank's sectoralstrategy for future years. Emphasis will be placed on assisting the Government to ensurethat adequate and proper maintenance work is carried out on the existing infrastructure. Newinvestments will be supported only if they are considered appropriate according to thementioned Transport Strategy Paper. In that regard, the Bank will coordinate its work withAsDB which has prepared a Road Master Plan. Assistance to the transport sector is beingprovided by Japan (railways and transhipment facility at the border with China) and AsDB(airport rehabilitation, roads). External financing requirements for the transport sector in themedium term are almost fully covered by the donor community.

60. Energy/Power. At present no long-term investment program for energy andpower exists to guide activities in the sector. To remedy this problem, the Bank is conduct-ing an Energy Survey in FY95 that will identify priority investments in the power sector.This work is being coordinated with AsDB's Energy Master Plan. The Bank is also coordi-nating the forthcoming Energy Survey with GtZ-Germany (which is involved in the rehabili-tation of one of the power plants), USAID (which is involved in the rehabilitation of the

3' Assistance for air transportation improvement is being provided by AsDB (airport im-provements) and Korea (through the donation of some planes). A master plan ontelecommunications has been completed. Investments are funded by AsDB, Japan, andFrance.

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main power plant in Ulaanbaatar, as well as the coal mines), and Japan (which is alsoinvolved in one power plant and will undertake a study on coal). The studies will also lookat rehabilitation of the coal mines, which provides the main fuel in the overall energy supplychain. We anticipate that the sectoral investment needs identified by these studies will besubstantial. The proposed Coal Rehabilitation Credit in FY96 will contribute to the assis-tance required in this sector. The size and scope of the Bank's further assistance to the ener-gy/power sector will be determined upon the completion of the energy survey and masterplans. However, a Second Energy Credit has been tentatively identified for FY98.Financing for investments in the energy sector for the next two years has been obtained fromexternal donors. However, the medium-term investment program is still unfunded and willrequire, at least, US$700 million, an amount equivalent to the country's annual GDP.

61. Protecting the Environment. The Bank assisted the Government to prepare itsNational Environmental Action Plan. The key priority areas include: (1) urban air andwater pollution; (2) urban solid wastes; (3) land degradation; (4) water management andconservation; and (5) environmental degradation from mining and petroleum extractionactivities. The total cost of environmental programs for the next 5-10 years amounts toabout US$ 120 million. Availability of local funds to implement the NEAP is very limited.External financing has covered, so far, less than 10 percent of the total cost of the NEAP.Japan is helping to reduce air pollution by installing scrubbers in one of the power plants inUlaanbaatar. IDA, through the proposed Urban Sector Project, would assist the Governmentwith water supply, sewerage and solid waste management. To assist the country mitigate theenvironment degradation from mining activities, IDA's Economic Transition Support Creditis financing a study to assess the environmental degradation resulting from the mining andprocessing of copper. In the same vein, IDA has also financed the replacement of oldgasoline pumps with new ones to reduce leakages. The Bank also undertakes periodicreviews of the public sector investment program, and in this context, the Bank is assisting theGovernment to integrate environmental concerns in its public investments. IDA is expectedto finance about US$30 million of the NEAP as key components in its lending program overthe next ten years. While most areas covered under the NEAP are receiving attention, muchis needed in the area of land degradation and deforestation where programs are stillunfunded. Progress in this area will depend not only on implementing identified programsbut also on the type of incentive structures adopted by the country.

B. Economic and Sector Work (ESW) and Lending Program

62. Economic and Sector Work. The majority of the ESW is intended to provide ananalytical basis for subsequent proposed lending operations. Appendix 1 contains aninventory of the proposed ESW for FY95-97, including the main objectives of each study.Under the base case scenario, eight ESW tasks are envisaged: four are directly related toimproving economic management, two to private sector development and two to improvingthe country's infrastructure. Three of the envisaged tasks will be informal, short reports toaddress operational and policy needs of Mongolia. Three pieces of ESW have been complet-ed already in FY95. Given its long-term orientation, the Economic and Sector Work wouldnot change under low and base case scenarios.

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63. Lending Program. The Bank assistance strategy proposes lending levels andcomposition for two scenarios (see Table 4 below). Under the base case scenario, the pro-posed lending program consists of five operations totalling $92 million for FY96-98. Theprojects are of different levels of complexity and scope; this manifests itself in the disparateresource inputs required and results in a certain lumpiness in the pipeline. The proposedlending program is consistent with assisting the Government in poverty alleviation: inaddition to the Poverty Alleviation for Vulnerable Groups Project (FY95), a new povertyalleviation project is proposed for FY98. Moreover, the Urban Sector Credit, proposed forFY97, will assist the poor living in the "ger" areas around the capital. The proposed lendingprogram is also consistent with infrastructural improvement, particularly for the coal andenergy sector. It includes a Coal Rehabilitation Credit under preparation (FY96) andenvisages an Energy Project for FY98. Finally, a Banking System Rehabilitation Credit isunder preparation and envisaged for FY97. Its design and scope are subject to the findingsof technical work currently undertaken. IDA will continue to assist the Government onenvironmental matters through the ongoing Technical Assistance Credit and the EconomicTransition Support Credit. Appendix 2 shows the proposed lending under the base-casescenario.

Table 4: Proposed IDA Lending Program FY96-FY98

Low Case :Base CaseNumber of Credits 3 5Total ($ mil.) 57 92Average ($ mil./year) 19.0 30.6Per Capita Lending (annual avg.- $) 8.6 13.9

64. If the reform process stalls, and the country faces mounting macroeconomicproblems (the low-case scenario), we propose three operations totalling $57 million forFY96-98. In such an event, the lending program would concentrate only on basic infrastruc-ture and poverty alleviation.

65. Trigger Points. Two lending scenarios are assumed. First, the base-casescenario assumes that the reform program continues, that is, Mongolia satisfactorilyimplements its stabilization and reform program as stipulated in the ESAF program and PFP.In particular, Mongolia continues to comply with agreed ceilings on: net domestic assets ofthe banking sector, net domestic credit to the Government, and new nonconcesional externalborrowing contracted and/or guaranteed by the public sector. Also, the Governmentcontinues its program of privatization. The compliance with the ESAF program and PFPwill continue to be monitored by periodic IMF/World Bank Missions. Second, if anIMF/World Bank Review Mission concludes that the Government is not implementing theESAF/PFP Program satisfactorily, a low-case scenario should be considered for lendingpurposes. This conclusion would entail that key elements of the stabilization and reformprogram are not observed (e.g., compliance with monetary ceilings and/or implementation of

- 21 -

the privatization program). However, if a Review Mission determines that public policiesare in line with the ESAF and PFP but Mongolia suffers from negative external factors (e.g.,a marked deterioration in the terms of trade), the Bank would respond by redesigning someof the proposed credits included in the base-case scenario to allow for quick-disbursingsupport. For example, the Banking System Rehabilitation Credit could become a quick-disbursing adjustment credit. By the same token, Energy II could assist Mongolia infinancing urgent import requirements of the sector.

66. Cost Sharing and Local Cost Financing. We propose that, as a general rule, thecost-sharing guidelines allowing IDA to finance up to 90 percent of total project cost. In ex-ceptional cases, such as in social sector projects, IDA financing of up to 95 percent could beconsidered. Total foreign financing, where cofinancing is involved, would not exceed 90percent of total project costs.

67. Portfolio Implementation. Since 1991, IDA has approved four projects amountingto about US$85 million. To support the stabilization effort and to assist Mongolia infinancing its critical import needs, the Bank approved a quick-disbursing Economic Rehabili-tation Credit (ERC) for $30 million in late 1991. Simultaneously, to strengthen the technicalcapacity of the Government to manage a market economy, a Technical Assistance Credit(TAC) for $5 million was also approved in late 1991. The ERC was completed in 1994.4'The implementation record of the TAC is satisfactory. A second $20 million import supportoperation, the Economic Transition Support Credit (METS), was approved by the Board inOctober 1993. This operation includes $2 million in Technical Assistance. Implementationof this project is satisfactory. Finally, a Transport Rehabilitation Credit for US$30 millionwas approved in 1994. This project supports improvements of railways, urban transport androad transportation. It includes a technical assistance component. Disbursements areexpected to start soon. Overall progress for the Transport Rehabilitation Project is onschedule. During the implementation of the TAC and TA components of other operations,the country's capacity to utilize TA resources has improved notably.

68. The Government has improved its capacity to implement projects, particularly todeal with international procurement and project administration. Implementation capacity hasbeen boosted substantially by the Technical Assistance Credit, which provides support forproject implementation and training of local officers in international competitive bidding.Despite progress, local capacity for project accounting and auditing remains weak. Untilmore experience is obtained, Mongolia will continue to need assistance in project implemen-tation, for example through TA components.

69. Supervision. Substantial inputs for supporting and monitoring project implemen-tation are anticipated. As Bank lending to Mongolia has a very short history, there is littlethat can be said about portfolio management. However, the early experience with preparingIDA projects in Mongolia has revealed some potential problems, including weak implementa-tion capacity and lack of experience in the preparation of disbursement and procurement

4/ See Implementation Completion Report, No. 13762-MOG, December 1994.

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documents. The Bank is devoting time and resources, through supervision missions andtraining, to build the country's implementation capacity.

70. Technical Assistance. The choice of a Technical Assistance Project as theBank's first operation in Mongolia reflected the priority attached to human resource andinstitutional capacity development. Given the commitments of other bilateral and multilateraldonors in this area, the need for self-standing Bank TA projects is no longer necessary.Nevertheless, TA components as part of proposed lending operations are needed in mostcases or will be determined in the context of project preparation.

71. Cofinancing. The Bank will actively seek opportunities for cofinancing withother donors. The Technical Assistance Project has already received cofinancing from theJapan Grant Facility. The METS credit has parallel financing from the AsDB's IndustrialProgram Loan and from USAID, and, similarly, the Transport Rehabilitation Credit hasparallel financing from Japan.

C. Cooperation with the IMF

72. The IMF has played a leading role in the stabilization and reform process ofMongolia. An ESAF program has been under implementation since May 1993. The ESAFincludes several quantitative criteria and benchmark targets (limits on net domestic assets, oncredit to Government, and on public and publicly-guaranteed external borrowing; targets fornet official international reserves and for the elimination of external arrears). It also includessome structural performance benchmarks (for example, elimination of domestic publicarrears, establishment of a Treasury function within the Ministry of Finance, no new exportlicensing and export taxes, enactment of the securities law, progress in the privatizationprogram, etc.). The Bank's macroeconomic work has been closely coordinated with theIMF; and the Bank played an important role in developing the structural benchmark targetsof the ESAF Program. The Bank has participated in reviews of the ESAF program, and itsinputs (on public investment and privatization) were included in a mid-term review paperpresented to the Fund's Board. By the same token, IMF staff participate in the Bank'smissions. As mentioned before, progress in the implementation of the PFP/ESAF Programshould constitute a trigger point to judge Mongolia's economic performance.

D. IFC, MIGA. FIAS

73. After the first IFC mission visited Mongolia in 1991, several longer-terminvestment opportunities and privatization possibilities were identified. Possible investmentsare being examined at present (i.e., petroleum sector). FIAS has reviewed the foreigninvestment law and identified constraints to foreign investment.

74. Mongolia signed the MIGA Convention in June 1991 and ratified it the followingyear. However, it has not contributed its portion of MIGA's capital. Therefore, MIGA canonly register investment projects in Mongolia, thereby maintaining eligibility for coverageonce Mongolia becomes a member, but cannot issue guarantees until all membership require-ments are fulfilled. There are no investment projects in Mongolia currently registered withMIGA. Once Mongolia has completed all membership requirements, MIGA will be able to

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assist the country to attract foreign investment through its investment marketing andguarantee activities.

E. IDA Eligibility

75. . Mongolia's IDA-only status is unlikely to change through the rest of thecentury. The country's income per capita is below US$400. About one-fourth of thepopulation lives below the poverty line. In addition, as noted above, the country is not ex-pected to attain international creditworthiness for commercial borrowing in the period underreview.

F. Issues for Board Consideration

76. The investment required for Mongolia to rehabilitate its infrastructure (inparticular the power sector), to carry out a comprehensive poverty alleviation program, andto implement its National Environment Action Plan are indeed onerous. Donors contribu-tions, including IDA's, are expected to finance the most critical requirements to sustainMongolia's stabilization and reform programs. Given the magnitude of Mongolia's needsand limits on local and donors resources, projects should be selected extremely carefully,taking into account the development priorities of the country. This requires coordinationbetween the donor community and the Mongolian authorities in evaluating priority needs.The Bank has played a central role both in assisting Mongolia to establish its overallinvestment priorities and in donor coordination. The Board may wish to discuss whether theselective focus of IDA's intervention is appropriate.

77. The Bank staff has consulted with Mongolian authorities in the preparation ofthis CAS. Board endorsement is sought of the proposed assistance strategy to Mongolia.

Washington, D.C.June 2, 1995

James D. WolfensohnPresident

- 24 - Appendix 1

Economic and Sector Work (ESW)

The majority of the ESW is intended to provide an analytical basis for subsequent proposed lendingoperations. This Appendix provides an inventory of the proposed ESW for FY95-97 under the base case scenario.Eight ESW tasks are envisaged: four are directly related to improving economic management, two to private sectordevelopment and two to improving the country's infrastructure.

CEM (FY95)The CEM takes stock of the overall economic situation after the previous (and only) CEM in 1992. The

CEM examines three basic issues concerning the economic transformation of Mongolia: (i) supply response, that isresumption of growth and economic prospects; (ii) impact of the economic transformation on vulnerable groups; and(iii) the redefinition of the public investment program under the new environment. (Formal study; completed).

Energy SurveyThere are several studies on partial aspects of the energy sector on Mongolia. However, no overall master

plan has been identified. The purpose of this report is to review the existing studies on energy and to produce a planof the sector that could guide the Government of Mongolia and the donor community on future sectoral policies andinvestment decisions. It has been coordinated with the work of other donors (AsDB, Japan, USAID, Germany).(Formal study; almost completed).

Financial Sector ReviewAn assessment of the financial sector and the development of the commercial banking sector will be the main

subjects of this study. It should provide the basis for a Banking Rehabilitation Credit. This brief report will be basedon the findings of the Financial Sector TA under implementation. (Informal study; underway).

Prospects for Wheat ProductionThis work studies the viability of wheat production in Mongolia, paying attention to policies and technology.

(Formal study: completed).

Poverty AssessmentThis study will provide a comprehensive analysis of the poverty issue in Mongolia. (Formal).

Transport Strategy PaperThere is a great deal of knowledge developed on the transport sector by AsDB and IDA. The TSP will

articulate the main issues existing in the sector and present a menu of policies and investments to tackle them overthe next ten years. (Informal note).

Public Enterprise/Privatization ReviewAt the time of this review, the first, "grand" privatization should be completed. An assessment of what is in

the hands of the public sector, including management and institutional arrangements will be opportune. The studyshould identify further steps for restructuring public enterprises; institutional/management issues, potential for newinvestments, additional privatization, etc.. Prospects for additional privatization will be investigated. (Informal note).

CEM (FY97)Topics to be determined. However, an integrated study of public expenditures is likely to be the central

topic. (Formal).Proposed Economic and Sector Work

FY95 FY96 FY97

* CEM * Financial Sector Review * CEM* Energy Survey * Transport Sector Strategy* Prospects for Wheat Production * Public Enterprise Review

* Poverty Assessment

- 25 - Appendix 2

Lending Program

Under the base case scenario, the proposed lending program consists of five operations totallingUS$92 million for FY96-98. The proposed operations are described below.

* The Bank is reviewing the financial sector to identify the main bottlenecks to the development ofthe banking sector. Subject to the findings and recommendations of this review, a financial sectoroperation (Banking System Rehabilitation Credit) is planned in FY97.

* The Bank is assisting Mongolia to conduct a Living Standards Measurement Survey to helpidentify, more precisely, the poor and to provide an assessment of the extent and causes of povertyin Mongolia. Several pilot programs targeted to specific groups are being implemented as part ofthe project preparation for the Poverty Alleviation for Vulnerable Groups Credit in FY95. Thisproject would help ameliorate the social cost of transition. A follow-up, second PovertyAlleviation and Human Resource Development Credit is envisaged for FY98.

* The proposed Urban Sector Credit (FY97) focuses on bringing basic water and sanitationservices to the poor living in the ger areas around the capital. As a complement, the project willassist the Government to arrest the decay in urban infrastructure through urgently requiredrehabilitation. This operation is likely to include an environmental component.

* The Bank is conducting an Energy Survey that identifies the priority investments needs in thepower sector. This work is being coordinated with AsDB and other donors involved in the sector.The proposed Coal Rehabilitation Credit in FY96 will provide a small part of the assistancerequired in this sector. It is proposed to further refine the size and scope of the Bank's assistanceto the power sector upon the completion of the energy survey. A Energy Credit is proposed forFY98.

Summary of Proposed Operations(Base Case)

| FY96 FY97 FY98

Coal Rehabilitation (US$35 m) Urban Sector (US$15 m) Poverty Alleviation and HumanBanking System (US$15 m) Resource Development (US$ 7 m)L __________________________ J_____________________ _ -Energy II (U S$20 m )

Annex Al

MONGOLIA--Selected Indicators ofBank Portfolio Performance and Management

Indicator FY92 FY93 FY94 FY95(current)

Portfolio Performance

Number of Projects under implementation 2 2 3 3

Average Implementation Period (years) n.a. n.a. 3 n.a.

Percent of Problem Projects rated U or HU 0 0 0 0(for past years, rated 3 or 4)

Development Objectives 0 0 0 0Implementation progress (or overall 0 0 0 0

status for past years)

Canceled during FY (US$ million) 0 0 0 0.13

Disbursement ratio (%) /a 0.0 6.1 57.1 1.0

Disbursement lag (%) 0.0

Memorandum item: % completed projectsrated unsatisfactory 0 0 0 0

Portfolio Management

Supervision resources (total staff weeks) 29 39 25 30

Average supervision (staff weeks/project) 14.4 19.4 8.3 10

Supervision resources by location (in %)% headquarters 100 100 100 100% resident mission 0 0 0.0 0

Supervision resources by rating category(staffweeks/project)

Projects rated HS or S 14.4 19.4 8.3 10Projects rated U or HU 0 0 0 0

Memorandum item: date of last/next CPPR AP-94 FY96

/a Excludes adjustment credits.

Annex A2Page 1 of 2

MONGOLIA--Bank Group Fact Sheet, FY92-98IBRD/IDA Lending Program, FY92-98

Category Past Current la Planned la lbFY92 FY93 FY94 FY95 FY96 FY97 FY98

Commitments (US$m) 35 - 55 10 35 30 27Sectors (%)

Agriculture 22Industry/Finance 8 50Energy/Power 37 8 100 74TelecommunicationsTransportation 14 60EnvironmentUrban Development 20Water supply and sanitation 30Education 10 3Population, Health & Nutrition 90 23Technical Assistance 27 24

TOTAL 100 100 100 100 100 100

Lending instrument (%)Adjustment loansSpecific investment loans and others 100 100 100 100 100 100

TOTALDisbursements ($USm) 15.6 12.7 14.5 14.8 15.3 22.8 24.8Repayments (US$m) 0 0 0 0 0 0 0Interest (USSm) 0 0 0 0 0 0 0

/a Planned, as of 12/12/94./b Planned ranges reflect the base case scenario./c As of 12/31/94.

Annex A2Page 2 of 2

MONGOLIA-IFC and MIGA Program, FY93-95

Past

CateRorv FY93 FY94 FY95 la

IFC approvals (US$m)Sector (%)

AgribusinessCapital MarketsChemicals/ferEilizersInfrastructureManufacturingOil/mining

TOTAL

Investment instrument (%)LoansEquityQuasi-equity /a

TOTAL

MIGA guarantees (USSm)

MIGA commitments (US_m)

/a As of December 31, 1994

Annex A3

MONGOLIA--Summary of Economic and Sector Work(No.of formal outputs)

Category FY95 FY96 FY97

Agriculture 1IndustryFinanceEnergy 1PowerTelecommunicationsTransportationUrban developmentHuman resourcesEducationPopulation, health and nutritionSocial sectorPublic sector managementEnvironmentTrade policy reformOther non-sector-specificOther economic work

Poverty assessmentPrivate sector assessmentCountry economic memorand 1 1

Total economic and sector work 3 1

Annex A4

Mongolia Page 1 of 2

Most Same region/income group NextLatest single year recent higher

Unit of estimate East Low. incomeIndicator measure 1970-75 1980-85 1988-93 Asia income group

Priority Poverty IndicatorsPOVERTYUpper poverty line local curr.

Headcount index % of pop. .. 12 19Lower poverty line local curr.

Headcount index %of pop. .. 9

GNP per capita USS .. 390 820 380 1,590

SHORT TERM INCOME INDICATORSUnskilled urban wages local curr-.Unskilled rural wagesRural terms of trade .. ..

Consumer price index 1987=100Lower income .. .. ..

FoodUrbanRural

SOCIAL INDICATORSPublic expenditure on basic social services % of GDP .. .. 4.1Gross enrollment ratiosPrimary % school age pop. 108 103 89 118 108 104Male III 102 96 123 116Female 104 104 100 115 101

MortaliryInfant mortality per thou. live births 98.0 78.0 58.4 35.5 63.1 39.0Under 5 mortality .. .. 78.0 60.5 101.4 61.5

ImmunizadionMeasles % age group .. 18.0 86.0 93.0 87.3 77.6DPT .. 83.0 84.0 SS.0 89.9 82.2

Child malnutrition (under-5) .. .. .. 24.1 40.3Life expectancyTotal years 54 59 64 68 62 67Female advantage 2.5 2.5 2.7 3.6 2.1 5.9

Total fertiliry rate births per woman 5.8 5.3 3.5 2.3 3.6 2.9Matemal morr;liry rame per 100.000 live births .. 140 140 116

Supplementary Poverty IndicatorsExpenditures on social security % of total gov't exp. . 17.7Social security coverage % econ. active pop. .. .. ..Access to safe water: total % of pop. .. 66.0 67.1 67.0

Urban 58.0 .. 78.0 83.5 78.7Rural .. .. 50.0 61.3 62.0

Access to health care .. 100.0 100.0

Population growth rate GNP per capita growth rate Development diamonda

6+- (annual average. percent) (annual average. percent) Lfe expectancy

1 0+{ T4_ 5 .__ lfepeac

2 + +----|- - -L 9 - -- E ----------- F*7 GNP Gross2- 0pe prmy

capita enrollment

0'

1970-75 1980-85 1988.93 1 1970-75 1980-85 1988-93 Access to safe waer

_ Mongolia _ Mongolia- Low-income Low-income

aThe development diamond, based on four key indicators. shows the average level of development in the countrycomparcd with its income group. See the introduction.

Annex A4

Page 2 of 2

MongoliaMost Same region/income group Next

Latest single year recent higherUnit Of estimate East Low- income

Indicator measure 1970-75 1980-85 1988-93 Asia i.ncome group

Resources and ExpendituresHUMIAN RESOURCESPopulation (mnre=1993) thousands 1,447 1,909 2.318 1.713,883 3.091,764 1,096,665Age dcpendency ratio ratio 0.88 0.83 0.74 0.54 0.67 0.69Urban % of pop. 48.7 55.0 59.7 31.3 27.6 54.7Population growth rate annual % 2.8 2.8 2.2 1.4 1.9 1.6Urban '4.3 3.8 3.2 4.0 3.9 2.9

Labor force (15-6.4) thousands 668 894 1.120 942.977 1.442,452 459,196Agriculture % of labor force 44 40 0Industry 21 21 0Female 45 46 46 41 33 31Females per 100 malesUrban number . ..

RuralNATURAL RESOURCESArea thou. sq. km 1,566.50 1,566.50 1,566.50 16,367.91 39,091.96 40,682.67Density pop. per sq. km 0.92 1.22 1.45 103.27 77.60 26.52Agricultural land % of land area 89.81 79.53 80.56 4.4.21 52.82 39.61Change in agricultural land annual % 0.00 -0.02 0.16 0.24 0.03 -0.13Agricaltural land under irrigation %0.02 0.05 0.06 14.68 18.02 12.66Forests and woodland thou. sq. km .. 0.15 0.34 4.06 7.15 5.95Deforestation (net) annual % ... 0.87

INCOMEHousehold incomeShare of top 20% of households % of income . ..

Share of bottom 40% of households-Share of bottom 20% of households . ..

EXPENDrIUREFood % of GDP ... 37.1

Staples . 15.4Meat, fish, milk, cheese, eggs ... 14.3

Cereal imports thou. metric tonnes 56 71 182 30.036 34,420 66.281Food aid in cereals ... 9 447 8,334 5,477Food production per capita 1987= 100 136 103 68 115 113 101Fertilizer consumption kgtha 0.0 0.2 0.1 76.4 59.9 48.0Share of agriculture inGODP % ofGDP .. 0.1 18.2 17.1 26.3 15.7Housing % of GDP ... 13.9Average household size persons per household . ..

UrbanFixed investment: housing * of GDP ... 5.4Fuel and power % of GDP ... 3.8Energy consumption per capita kg of oil equiv. 753 1.211 1.089 632 364 1.595Households with electricity

Urban % of households . ..

RuralTransport and communication % of GDP ... 2.9Fixed investment: transport equipment ... 1.2Total road length thou. km . ..

INVESTMENT IN HUMAN CAPITALHealthPopulation per physician persons .. 4.582 6,030 1.063 .. 3.277Population per nurse ... . 1.490Population per hospital bed .. 21,171 24.166 612 1.016 604Oral rehydyration therapy (under-5) % of cases ... 65 32 38EducationGross enrollment ratioSecondary % of school -age pop. 8 1 90 77 53 4 1 53Female 84 95 .. 47 34

Pupil-teacher ratio: primary pupils per teacher 3 1 32 .. 23 39Pupil-teacher ratio: secondarv 1 5 22 1 8 1 6 20Pupils reaching grade 4 % of cohort ... .92..-

Repeater rate: primary % of total enroll .I..6

Illiteracy % of pop. (age 15+) ... 22 41 1 9Female % of fem. (age 15+) ... 36 53

Newspaper circulation per thou, pop. 77 93 92 ... 74World bank Intemanatonal Economic.s Department. April 1995

MONGOLIA - Key Economic Indicators

Annex ASPage 1 of 3

Actual Estimated Projected

1990 1991 1992 1993 1994 1995 1996 1997

National Accounts tX GOP atcurrent market prices)

Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture /a 15.5 13.6 28.8 18.2 18.1 17.9 17.7 17.5

Industry /a 30.1 21.3 31.6 40.4 39.5 37.8 36.4 35.0

Services /a 48.1 45.8 30.0 28.6 29.6 30.6 31.3 32.0

Consumption 84.8 89.3 90.6 83.9 84.7 84.6 84.1 84.6

Gross investment 42.3 28.9 14.5 19.0 20.9 23.7 22.6 21.3

Private investment .. .. .. .. ..

Goverrnment investment .. .. .. .. ..

Exports GNFS /b 22.0 48.9 36.3 63.3 56.1 51.7 50.0 50.0

Imports GNFS /b 49.1 67.2 41.4 66.3 61.8 60.0 56.6 55.8

Gross domestic savings 15.2 10.7 9.4 16.1 15.3 15.4 15.9 15.4

Gross national savings 13.2 9.6 6.1 12.6 12.9 13.2 14.0 13.5

Memorandun items

Gross domestic product (million 2241 756 1077 619 741 889 974 1045USS at current prices)

Gross national product per capita 1390 641 460 320(USS, Atlas method)

Real annual growth rates(X, calculated from 1987prices)

Gross domestic product -2.0 -9.9 -7.6 -1.3 2.5 3.5 - 4.5 4.5at market prices

Gross Domestic Income -1.7 -9.8 -8.2 -1.1 3.0 3.3 4.4 4.4

Real annuaL per capitagrowth rates (X, calculatedfrom 1987 prices)

Gross domestic product -4.5 -11.5 -8.7 -2.8 -0.2 0.9 2.0 2.1at market prices

Total consumption -7.2 -20.9 5.3 -8.8 -1.2 -1.9 2.9 3.3

Private consumption -12.9 -16.9 12.7 -13.5 6.8 -2.7 9.3 6.9

/a GDP components are estimated at factor cost./b 'GNFS" = "goods and nonfactor services."/c Includes net unrequited transfers excluding official capital grants./d Includes use of IMF resources./e National goverrment./f An increase in USS/Tugrik denotes appreciation.

MONGOLIA - Key Economic IndicatorsAnnex A5

Page 2 of 3

ActuaL Estimated Projected

1990 1991 1992 1993 1994 1995 1996 1997

Balance of Payments (USSm)

Exports (GNFS) /b 492.8 370.1 390.8 391.8 415.9 459.3 486.4 522.5

Merchandise f.o.b. 444.8 346.5 355.8 365.8 392.1 433.0 453.6 488.2

Imports (GNFS) /b 1100.6 508.1 445.6 410.0 457.4 533.4 551.1 583.6

Merchandise f.o.b. 1023.6 486.5 418.4 374.5 416.2 485.7 504.8 531.2

Resource balance -607.8 -138.0 -54.8 -18.2 -41.5 -74.1 -64.7 -61.1

Net current transfers /c 0.0 0.0 -2.7 -0.1 -0.1 -0.1 -0.1 -0.1(including official currenttransfers)

Current account baLance -644.0 -104.2 -52.2 31.1 5.2 -70.3 -68.5 -70.6(after official capital grants)

Net private foreign direct 0.0 0.0 2.0 7.7 5.3 5.9 7.1 8.5investment

MLT loans (net) 16.2 142.3 115.0 48.0 26.3 93.9 81.8 76.8

official 0.0 87.1 104.0 83.9 54.5 117.1 99.4 80.8

Private 16.2 55.2 11.0 -35.9 -28.2 -23.2 -17.6 -4.0

Other capital (net, including 574.5 -66.9 -70.9 -64.2 -26.8 0.0 0.0 0.0errors and omissions)

Change in reserves C- = increase) /d 53.3 28.8 6.1 -22.6 -10.0 -29.5 -20.3 -14.8

Memorandum items

Resource balance (X of -27.1 -18.2 -5.1 -2.9 -5.6 -8.3 -6.6 -5.8GDP at current marketprices)

Real annual growth rates(1987 prices)

Merchandise exports .. .. .. . .. .(f.o.b.)

Primary .. .. .. .. .. .. ..

Manufactures .. .. .. ..

Merchandise imports .. . . . .. .. .(c.i.f.)

Public finance (X ofGDP at current marketprices) /e

Current revenues 50.5 47.4 30.0 30.2 24.1 25.0 26.0 26.0

Current expenditures 51.9 51.7 31.1 28.3 21.6 21.0 21.0 20.5

/a GDP components are estimated at factor cost./b "GNFS" = "goods and nonfactor services."/c Includes net unrequited transfers excluding official capital grants./d Includes use of IMF resources./e National government./f An increase in USS/Tugrik denotes appreciation.

MONGOLIA - Key Economic IndicatorsAnnex A5

Page 3 of 3

Actual Estimated Projected

1990 1991 1992 1993 1994 1995 1996 1997

Current account surplus (+) -1.4 -4.3 -1.1 1.9 2.5 4.0 5.0 5.5or deficit (-)

Capital expenditure 12.2 5.4 11.6 16.5 14.3 17.0 15.0 14.0

Foreign financing 10.5 9.7 11.2 15.6 12.3 13.1 9.9 8.4

Monetary Indicators

M2/GDP (at current market 61.7 52.4 30.3 23.3 25.2 25.3 25.8 26.7prices)

Growth of M2 (%) 26.9 53.5 31.7 227.6 79.5 32.9 16.3 14.6

Private sector credit 62.0 1116.5 144.0 90.0 243.1 128.8 120.0 124.6growth/total credit growth(X)

Price indices (1987=100)

Merchandise export price .. .. .. ..index

Merchandise import price .. .. .. ..index

Merchandise terms of trade .. .. .. ..index

Real exchange rate .. .. .. .. .. ..(USS/Tugrik /f)

Real interest rates .. .. .. .. ..

Consumer price index (X .. . .. .. ...

growth rate)

GDP deflator (X growth -0.5 100.6 146.6 331.0 62.4 27.5 9.2 6.2rate)

/a GOP components are estimated at factor cost./b 'GNFS" = "goods and nonfactor services.,/c Includes net unrequited transfers excluding official capital grants./d Includes use of IMF resources./e National goverrwnent./f An increase in USS/Tugrik denotes appreciation.

MONGOLIA - Key Exposure Indicators

Annex A6Page 1 of 1

Actual Estimated Projected

1990 1991 1992 1993 1994 1995 1996 1997

Total debt outstanding and disbursed 25.4 190.1 366.0 391.0 407.5 518.3 607.9 695.5(TDO) (USSm) /a

Net disbursements (USSm) /a 16.2 157.7 119.0 61.0 18.5 108.7 90.6 86.6

TotaL debt service (TDS) (USSm) /a 1.4 1.1 67.0 17.0 44.5 41.7 '7.7 27.0

Debt and debt service indicators (X)

TOO/XGS /b 5.2% 51.4% 93.7% 99.8% 96.7% 111.4% 122.9% 130.7%

TDO/GDP 1.1% 25.1% 34.0% 63.2% 55.0% 58.3% 62.4% 66.5%

TDS/XGS 0.3% 0.3% 17.1% 4.3% 10.6% 9.0% 5.6% 5.1%

Concessional/TDO 0.0% 47.0% 48.1% 56.8% 68.1% 76.5% 81.4% 82.9%

IBRD exposure indicators (%)

IBRD DS/pubLic DS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Preferred creditor/public DS 0.0% 9.1% 1.5% 13.3% 4.3% 7.9% 8.9% 9.0%

IBRD DS/XGS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

IBRD portfoLio share 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

IFC (USSm)

Loans

Equity and quasi-equity /c .. .. .. .. ..

MIGA

MIGA guarantees (USSm)

/a. Includes public and pubLicly guaranteed debt, private nonguaranteed,use of IMF credits and net short-term capital.

/b. "XGS" denotes exports of goods and services, incLuding workers'remittances./c. Includes equity and quasi-equity types of both Loan and equity instruments.

Annex A7Page 1 of 2

Status of Bank Group Operations in MONGOLIAIBRD Loans and IDA Credits in the Operations Portfolio

As of March 1995 (in millions SDR)

Difference Last ARPPbetween supervision ratings

actual and Implemen-expected Develop- tation

Project Fiscal Cancel- Undis- disburse- ment progressID year Borrower Purpose IBRD IDA lations bursed ments objectives status

Board date

Cr. 2320 92 12/19/91 GOM Economic Rehabilitation 22.2 0.08 - I 1Cr. 2321 92 12/19/91 GOM Technical Assistance 3.7 1.4 S SCr. 2551 94 10128/93 GOM Economic Transition Support 14.2 3.4 S SCr. 2615 94 5124/94 GOM Transport Rehabilitation 21.6 21.5 HS HS

Total Disbursed (1BRD and IDA) 35.4Of which repaid

Total now held by IBRD and IDA 61.7Amount sold of which repaid 0Total undisbursed 26.3

Annex A7Page 2 of 2

Statement of IFC Investments(as of September 30, 1994)

Amount in US$ millionsFiscal year Obligor Business Loan Equity

Total Commitments now Held by IFC

Total Undisbursed

MONGOLIA -- Key Indicators Table

+--------------Annual Growth Rates-------------- --5-Year Rates/Indicators-iMain Macro Aggregates 1992 1993 1994 1995 1996 1997 1984-89 1989-94 1994-99

GDP -7.6% -1.3% 2.5% 3.5% 4.5% 4.5% 6.4% -4.5% 4.4%GDP per capita /a -8.7% -2.8% -0.2% 0.9% 2.0% 2.1% 3.9% -6.3% 1.9%Investment -53.6% 29.4% 12.7% 17.4% -0.6% -1.5% 1.2% -21.9% 4.3%Consumption 6.6% -7.3% 1.4% 0.7% 5.5% 5.8% 10.4% -5.4% 4.3%Consumption per capita /a 5.3% -8.8% -1.2% -1.9% 2.9% 3.3% 10.0% -7.1% 1.8%

Exports GNFS 7.8% 8.3% -5.6% 7.4% 7.0% 5.4% 4.8% -17.0% 5.8%Imports GlIFS -15.8% 0.9% 3.1% 11.7% 3.5% 2.7% 6.4% -30.8% 5.0%

ICOR -3.8 -11.4 7.6 6.0 5.3 5.0 8.5 -8.0 5.1Import Elasticity 2.1 -0.7 1.2 3.3 0.8 0.6 1.0 6.8 1.2

Debt/Liquidity Indicators (%) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

Current Account/GDP -29.1% -19.3% -8.4% -6.4% -8.0% -10.5% -8.5% -7.8% -7.9% -8.4% -7.0%Overall Budget Balance/GDP -13.5% -9.7% -12.7% -14.6% -11.8% -13.0% -10.0% -8.5% -8.5% -9.0% -8.0%

Interest Due/XGS 0.0% 0.1% 2.8% 2.3% 2.0% 1.9% 1.8% 1.9% 1.8% 1.9% 2.5%Repayments DuelXGS 0.2% 0.2% 14.3% 2.0% 8.5% 7.1% 3.8% 3.2% 1.7% 2.1% 3.4%Total Debt Service Due/XGS 0.3% 0.3% 17.1% 4.3% 10.6% 9.0% 5.6% 5.1% 3.5% 4.2% 7.3%

DOD/GDP 1.1% 25.1% 34.0% 63.2% 55.0% 58.3% 62.4% 66.5% 70.1% 74.0% 84.5%DO0/XGS 5.1% 51.0% 93.6% 99.6% 96.7% 111.4% 122.9% 130.7% 137.2% 14.3% 158.7%

Gross Reserves (mos. imports) 1.85 2.92 1.03 1.80 1.87 2.24 2.59 2.73 2.79 2.90 3.56

+--------Period Averages (USS, millions)-------+Financing PLan 1989-91 1992-94 1995-97

Official capital grants 18 58 16Private Investment 0 5 - 7Net Long Term Borrowing 53 63 84All other capital ftows 581 -54 0

Total financing /b -651 -72 -107

/a Calculated using IECSD population series to be embedded in survey questionnaire diskette./b Total financing = CAB + Change in reserves.

MONGOLIA -- National Accounts

+--------- --- Actual ------------ +Estimate -------------------Projection-------------------1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

A. In Current Prices (Mil. Tugrik)

GDP at market prices 10465 18910 43087 183327 305168 402707 459545 509998 565991 628131 952826Net indirect taxes 660 3641 4150 23572 39165 55260 66918 78615 91810 104301 166053GDP at factor cost 9805 15269 38937 159755 266002 347447 392627 431383 474181 523830 786773Agriculture 1620 2576 12396 33276 55121 72036 81417 89491 99316 110220 169607Industry 3153 4025 13614 74024 120668 152337 167407 178483 191779 208479 298490of which manufacturing

Services 5031 8668 12928 52455 90213 123073 143803 163410 183086 205131 318676

Resource Balance -2838 -3451 -2192 -5393 -17106 -33562 -30551 -29834 -34253 -40122 -39615Exports (GNFS) 2301 9252 15632 116090 171346 208065 229576 254956 283767 316130 500346Imports (GNFS) 5140 12703 17824 121483 188452 241627 260127 284790 318021 356251 539960

Total expenditures 13303 22361 45279 188720 322274 436268 490096 539832 600244 668253 992440

Consumption expenditures 8876 16896 39031 153888 258494 340827 386468 431457 477141 528493 761380Government 2752 3947 8467 32233 41777 56134 52392 56263 59742 64159 90039Private 6124 12949 30564 121655 216717 284692 334077 375195 417400 464334 671341

Gross Domestic Investment 4427 5465 6248 34832 63780 95441 103627 108375 123103 139759 231060Government 1204 402 273 3293 8600 20135 25275 28050 31129 34547 52405Private ..

Total fixed investment 3381 4027 7326 32999 63780 95441 102478 107100 121688 138189 228678Total investment in stocks 1046 1438 -1078 1833 0 0 1149 1275 1415 1570 2382

Domestic saving 1589 2014 4056 29440 46674 61880 73076 78541 88850 99638 191445+ Net factor income (NFY) -204 -194 -1328 -6400 -7345 -8517 -8647 -9719 -10596 -12430 -27008+ Net current transfers (NCT) 0 0 -108 -30 -41 -45 -47 -49 -51 -52 -60

= National saving 1385 1820 2620 23010 39288 53318 64382 68773 78203 87155 164377

Gross National Product 10261 18716 41759 176927 297823 394190 450898 500279 555395 615700 925818Gross Nat't Disposable Income 10261 18716 41651 176898 29T782 394144 450851 500230 555345 615648 925758

B. Shares of GDP (current prices)

Gross domestic product 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Net indirect taxes 6.3% 19.3% 9.6% 12.9% 12.8% 13.7% 14.6% 15.4% 16.2% 16.6% 17.4%Agriculture value added 15.5% 13.6% 28.8% 18.2% 18.1% 17.9% 17.7% 17.5% 17.5% 17.5% 17.8%Industry value added 30.1% 21.3% 31.6% 40.4% 39.5% 37.8% 36.4% 35.0% 33.9% 33.2% 31.3%of which manufacturing

Services value added 48.1% 45.8% 30.0% 28.6% 29.6% 30.6% 313% 32.0% 323% 32.7% 33.4%

Resource Balance (X-14) -27.1% -18.2% -5.1X -2.9% -5.6% -8.3% -6.6% -5.8% -6.1% -6.4% -4.2%Exports (GNFS) 22.0% 48.9% 36.3% 63.3% 56.1% 51.7% 50.0% 50.0% 50.1% 50.3% 52.5%Imports (GNFS) 49.1% 67.2% 41.4% 66.3% 61.8% 60.0% 56.6% 55.8% 56.2% 56.7% 56.7%

Total expenditures 127.1% 118.2% 105.1% 102.9% 105.6% 108.3% 106.6% 105.8% 106.1% 106.4% 104.2%

Goverranent consumptio6 26.3% 20.9% 19.7% 17.6% 13.7% 13.9% 11.4% .11.0% 10.6% 10.2% 9.4%Private consumption 58.5% 68.5% 70.9% 66.4% 71.0% 70.7% 72.7% 73.6% 73.7% 73.9% 70.5%Goverranent investment 11.5% 2.1% 0.6% 1.8% 2.8% 5.0% 5.5% 5.5% 5.5% 5.5% 5.5%Private investment

Gross domestic saving 15.2% 10.7% 9.4% 16.1% 15.3% 15.4% 15.9% 15.4% 15.7% 15.9% 20.1%Gross national saving 13.2% 9.6% 6.1% 12.6% 12.9% 13.2% 14.0% 13.5% 13.8% 13.9% 17.3%

Memorandum items:

GOP deflator t% change) -0.5% 100.6% 146.6% 331.0% 62.4% 27.5% 9.2% 6.2% 6.2% 6.2% 6.2%Consumer price index (% change)

Total GDP (mitlion current USS) 2241 756 1077 619 741 889 974 1045 1119 1198 1575Conversion factor used (Tugrik/USS) 4.67 25.00 40.00 296.30 412.00 453.00 472.00 488.00 505.86 524.12 604.89

Per capita gross national product 1390 641 460 320 .. .. . .. ..[Atlas method in US$1

[continued on next page]

MONGOLIA -- National Accounts

+------------Actual------------+Estimate+-------------------Projection------------------+

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

C. In Constant 1987 Prices

GDP at market prices 10761 9693 8958 8844 9065 9382 9805 10246 10707 11189 13343GDP at factor cost 10083 7826 8095 7707 7966 8255 8620 9002 9371 9789 11682Agriculture 1673 1588 1525 1418 1446 1483 1534 1588 1660 1734 2098Industry 3389 2958 2725 2540 2550 2524 2540 2550 2580 2641 2973of which manufacturing .. .. .. . .. ..

Services 5021 3280 3844 3749 3970 4248 4545 4864 5131 5413 6611

Resource Balance -2854 -403 -116 -42 -139 -201 -168 -140 -151 -163 -113Exports IGNFS) 2259 944 1018 1102 1040 1117 1195 1260 1320 1386 174Imports (GNFS) 5113 1347 1134 1144 1179 1317 1363 1400 1471 1548 1858

Total expenditures 13615 10096 9074 8886 9204 9583 9972 10386 10858 11351 13456

Consumption expenditures 9063 7294 7775 7206 7310 7360 7762 8209 8529 8862 10221Government 2830 2023 1760 1918 1513 1574 1278 1113 1112 1110 1209Private 6233 5271 6015 5287 5797 5786 6483 7096 7417 7753 9012

Gross Domestic Investment 4553 2801 1299 1680 1894 2223 2210 2177 2328 2489 3235Goverrnent 1312 522 1039 1456 .. .. .. .PrivateTotal fixed investment 3477 2064 f1523 1592 1894 2223 2186 215i 230i 246i 3202Total investment in stocks 1075 737 -224 88 0 0 25 26 27 28 33

Terms of trade (TT) effect 30 37 -23 -9 32 18 8 -6 -8 -12 -23Gross domestic income 10792 9730 8934 8835 9097 9400 9812 10239 10699 11177 13320Domestic saving (TT adjusted) 1729 2435 1159 1630 1787 2040 2050 2030 2170 2315 3099

D. Annual growth rates (1987 prices)

GDP at market prices -2.0% -9.9% -7.6% -1.3% 2.5% 3.5% 4.5% 4.5% 4.5% 4.5% 4.5%Agriculture -2.0% -5.1% -4.0% -7.0% 2.0% 2.5% 3.5% 3.5% 4.5% 4.5% 5.0%Industry -0.3% -12.7% -7.9% -6.8% 0.4% -1.0% 0.6% 0.4% 1.2% 2.4% 3.6%

(of which manufacturing] .. .. .. .. .. .. ..Services 4.5 -34.7% 17.2% -2.5% 5.9 7.0% 7.0% 7.0% 5.5% 5.% 5.%

Exports (GNFS) -10.8% -58.2% 7.8% 8.3% -5.6% 7.4% 7.0% 5.4% 4.8% 5.0% 6.3%Imports (GNFS) -16.6% -73.7% -15.8% 0.9% 3.1% 11.7% 3.5% 2.7% 5.1% 5.3% 4.6%

lotal expenditures -6.6% -25.9% -10.1% -2.1% 3.6% 4.1% 4.1% 4.1% 4.5% 4.5% 4.3%Consumption -4.8% -19.5% 6.6% -7.3% 1.4% 0.7% 5.5% 5.8% 3.9% 3.9% 3.5%Investment -10.0% -38.5% -53.6% 29.4% 12.7% 17.4% -0.6% -1.5% 7.0% 6.9% 6.7%

Gross domestic income -1.7% -9.8% -8.2% -1.1% 3.0% 3.3% 4.4% 4.4% 4.5% 4.5% 4.5%Gross domestic savings 18.7% 40.9% -52.4% 40.5% 9.7% 14.2% 0.5% -1.0% 6.9% 6.7% 7.9%

Per capita growth rates:

Per capita GDP (mp) -4.5% -11.5% -8.7% -2.8% -0.2% 0.9% 2.0% 2.1% 2.1% 2.2% 2.6%Per capita totat consumption -7.2% -20.9% 5.3% -8.8% -1.2% -1.9% 2.9% 3.3% 1.5% 1.6% 1.6%Per capita private consumption -12.9% -16.9% 12.7% -13.5% 6.8% -2.7% 9.3% 6.9% 2.1% 2.2% 1.7%

Actual Estimate ProjectedE. Period Average Indicators 1984-89 1989-94 1994-99

Marginal national saving rate -16.6 7.0 18.4

Incremental capital-output ratio 8.5 -8.0 5.1

Import elasticity 1.0 6.8 1.2

MONGOLIA -- EXPORTS AND IMPORTS

+------------ActuaL -.----------- Estimiate+------------------Projection------------------+1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

A. Value in current prices (USS mtl.)

Totat merchandise exports (fob) 444.8 346.5 355.8 365.8 392.1 433.0 453.6 488.2 524.2 563.6 772.3Primary products 420.4 295.4 272.3 226.4 226.4 240.5 247.9 262.9 277.9 293.1 347.5of which Copper 260.4 213.1 160.1 155.1 148.8 153.1 154.8 163.3 170.5 178.0 189.8of which Other mineral 55.9 27.2 32.1 22.7 20.2 21.7 23.2 25.0 27.0 27.9 32.3of which Cashmere 54.3 20.8 52.5 33.5 39.3 44.9 47.8 51.0 55.0 59.6 85.8of which Leather 49.8 34.3 27.6 15.1 18.2 20.8 22.1 23.6 25.4 27.6 39.7

Manufactured goods .. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other goods 24.4 51.1 83.5 139.4 165.7 192.5 205.7 225.3 246.3 270.5 424.8

Total merchandise imports (cif) ........ 486.5 418.4 374.5 416.2 485.7 504.8 531.2 572.4 619.2 811.7Food .. 37.2 21.3 58.2 80.9 104.1 108.8 109.3 110.0 111.5 129.3Other consumer goods .. 59.0 48.3 47.0 49.5 55.5 60.3 64.8 69.5 75.2 95.6POL and other energy .. 138.0 88.3 108.7 113.5 122.7 129.3 146.8 165.2 185.8 251.7Intermediate goods (n.e.i.) .. 86.4 123.5 72.8 75.0 75.6 77.9 80.3 83.3 87.3 106.8

Primary products .. .. .. .. 22.3 23.6 25.0 25.7 26.3 27.0 29.8Manufactured goods .. .. .. .. 52.7 51.9 52.8 54.6 57.0 60.3 77.0

Capital goods .. 165.9 137.0 87.8 97.3 127.9 128.4 130.0 144.3 159.2 228.3

B. Vatue in constant 1987 prices (USS mIL.)

Total merchandise exports (fob) . .. .. .. . .

of which Food .. .. .. .. .. .. .. ..of which PetroLeum .. .. .. .. .. .. .. ..Commodity 3 .. .. .. .. .. .. ..Commodity 4 .. .. .. .. .. .. ..

Manufactures .. .. .. .. .. .. ..Other exports .. .. .. .. .. .. ..

Total merchandise imports (cif) .. .. .. .. .. .. ..FoodOther consumer goods .. .. .. .. .. .. ..POL and other energy .. .. .. .. .. .. ..Intermediate goods n.e.i. .. .. .. .. .. .. ..Primary products .. .. .. .. .. .. ..Manufactured goods .. .. .. .. .. .. ..

Capitat goods .. .. .. .. .. .. ..

Memorandum items

Export volume growth rate .. .. .. .. .. .. ..Import voLume growth rate .. .. .. .. .. .. .. .. .

C. Price Indices (1987 m 100)

Merchandise exports .. .. . . .. .. .. .. .Merchandise imports .. .. .. .. .. .. ..Merchandise terms of trade .. .. .. .. .. .. ..

0. Non-factor Services(indices base 1987 = 100)Exports-- of _S _-- voumei- dx-----------Exports of NFS -votume index . . . . . . . . . . .Exports of NFS - price index .. .. .. .. .. .. .. ..

Imports of NFS - volume index .. .. .. .. .. .. .. ..Imports of NFS - price index .. .. .. .. .. .. .. ..-- - - - - - - - - - - -- - - - - - - - - - - -- - - - - - -- - - - - - -- - - - - - -- - - - - - -- - - - - - -- - - - - -

MONGOLIA -- BALANCE OF PAYMENTS[in billions of USS at current prices]

+------------Actual------------+Estimate+------------------Projection-------------------1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

Total exports of GNFS 492.8 370.1 390.8 391.8 415.9 459.3 486.4 522.5 561.0 603.2 827.2Merchandise (fob) 444.8 346.5 355.8 365.8 392.1 433.0 453.6 488.2 524.2 563.6 772.3Non-factor services 48.0 23.6 35.0 26.0 23.8 26.3 32.8 34.2 36.8 39.6 54.9

Total impoorts of GNFS 1100.6 508.1 445.6 410.0 457.4 533.4 551.1 583.6 628.7 679.7 892.7Merchandise (FOB) 1023.6 486.5 418.4 374.5 416.2 485.7 504.8 531.2 572.4 619.2 811.7Non-factor services 77.0 21.6 27.2 35.5 41.2 47.7 46.3 52.3 56.3 60.5 81.0

Resource balance -607.8 -138.0 -54.8 -18.2 -41.5 -74.1 -64.7 -61.1 -67.7 -76.6 -65.5

Net factor income -43.6 -7.8 -33.2 -21.6 -17.8 -18.8 -18.3 -19.9 -20.9 -23.7 -44.6Factor receipts 5.1 2.9 0.2 0.8 5.4 6.1 8.2 9.7 10.8 11.8 11.3Factor payments 48.7 10.7 33.4 22.4 23.2 24.9 26.6 29.6 31.7 35.6 55.9Interest (scheduled) 0.2 0.2 11.0 9.0 8.5 8.7 8.7 10.0 10.2 11.8 21.2

Total interest paid (DRS) 0.2 0.2 11.0 9.0 8.5 8.7 8.7 10.0 10.2 11.8 21.2Due but not paid .. .. .. .. .. .. ..

Other factor payments 48.5 10.5 22.4 13.4 14.7 16.2 17.8 19.6 21.6 23.7 34.8

Net private current transfers 0.0 0.0 -2.7 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Current Receipts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

of which workers remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Current Payments 0.0 0.0 -2.7 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1

Net official current transfers .. .. .. .. 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Current account balance -651.4 -145.8 -90.7 -39.9 -59.4 -93.0 -83.1 -81.2 -88.8 -100.4 -110.2

Official capital grants 7.4 41.6 38.5 71.0 64.6 22.7 14.6 10.6 5.0 5.0 10.0

Private investment (net) 0.0 0.0 2.0 7.7 5.3 5.9 7.1 8.5 8.9 9.3 11.1Direct foreign investments 0.0 0.0 2.0 7.7 5.3 5.9 7.1 8.5 8.9 9.3 11.1Portfolio investments .. .. .. .. .. .. .. .. .

Net long-term borrowing 16.2 142.3 115.0 48.0 26.3 93.9 81.8 76.8 89.1 105.0 120.2Disbursements per DRS 17.4 143.2 171.0 57.0 62.3 126.9 100.8 93.8 98.9 118.0 148.5Repayments (scheduled) 1.2 0.9 56.0 8.0 36.0 33.0 19.0 17.0 9.8 13.0 28.4

Total principal repaid (DRS) 1.2 0.9 56.0 8.0 36.0 33.0 19.0 17.0 9.8 13.0 28.4Due but not paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -1.3 -11.5

Other long-term inflows (net) 500.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adjust. to scheduled debt service 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Debt service not paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Red. in arrears/prepayments (-) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other capital fLows 74.0 -66.9 -70.9 -64.2 -26.8 0.0 0.0 0.0 0.0 0.0 0.0Net short-term capital 66.8 -23.4 -57.6 -38.6 -17.1 0.0 0.0 0.0 0.0 0.0 0.0Capital flows n.e.i. -0.1 51.1 -22.2 -30.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0Errors and omissions 7.3 -94.6 8.9 5.2 -9.7 0.0 0.0 0.0 0.0 0.0 0.0

Changes in net intern'l reserves 53.3 a.8 6.1 -22.6 -10.0 -29.5 -20.3 -14.8 -14.3 -18.8 -31.3[- indicates increase in assets]

Memorandum itefm:

TotaL Gross Reserves of which: 177.4 126.3 41.1 64.9 74.9 104.4 124.7 139.5 153.8 172.6 281.1Total reserves minus gold .. .. .. .. .. .. .. ..

Gold (at year end London price) .. .. .. .. .. .. . ..

Total Gross Res. in Months Imports 1.85 2.92 1.03 1.80 1.87 2.24 2.59 2.73 2.79 2.90 3.56

Exchange RatesAnnual average (Yuan/US$) 5 25 40 296 412 453 472 488 506 524 605At end-year (Yuan/USS) 5 40 40 397 .. .. .. .. ..

Index real avg. X-rate (1987 = 100) .. .. .. .. .. .. .. .. ..

Current account balance as % GOP -29.1% -19.3% -8.4% -6.4% -8.0% -10.5% -8.5% -7.8% -7.9% -8.4% -7.0%

MONGOLIA -- External Debt Stocks and Flows

+------------Actual-------------Estimate+------------------Projection-------------------

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

A. Gross Disbursements

Public and pub(ically guaranteed 17.4 143.2 171.0 57.0 62.3 126.9 100.8 93.8 98.9 118.0 148.5Official multilateraL 0.0 13.0 43.0 15.0 26.0 38.8 43.0 55.0 57.3 58.5 64.5of which IDA 0.0 0.0 27.0 3.0 14.5 14.8 15.3 22.8 24.8 27.5 30.0of which IBRD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Official bilateral 0.0 74.1 44.0 28.0 35.5 85.4 66.4 35.8 50.3 49.0 52.8Private creditors (guaranteed) 17.4 56.1 84.0 14.0 0.8 2.8 -8.6 3.0 -8.6 10.6 31.3

of which bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Private creditors non-guaranteed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total LT loan disbursements 17.4 143.2 171.0 57.0 62.3 126.9 100.8 93.8 98.9 118.0 148.5

Short-term credit (net) .. .. .. .. .. .. ..Orawings from IMF 0.0 15.4 4.0 13.0 9.3 14.9 8.9 9.7 0.8 0.0 0.0Total disbursements (LT+ST+IMF) 17.4 158.6 175.0 70.0 71.6 141.7 109.6 103.6 99.8 118.0 148.5

B. Amortization

Public and pubLically guaranteed 1.2 0.9 56.0 8.0 36.0 33.0 19.0 17.0 9.8 13.0 28.4Official multilateral 0.0 0.0 0.0 0.0 1.0 1.0 0.0 0.0 0.0 0.0 2.0

of which IDA 0.0 0.0 0.0 0.0 D.0 0.0 0.0 0.0 0.0 0.0 1.0of which IBRD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Official bilateral 0.0 0.0 0.0 0.0 6.0 6.0 10.0 10.0 4.0 11.5 27.1Private creditors (guaranteed) 1.2 0.9 56.0 8.0 29.0 26.0 9.0 7.0 5.8 1.6 -0.7

of which bonds 0.0 0.0 0.0 0.0 27.0 21.0 4.0 2.0 1.0 1.0 1.0

Private creditors non-guaranteed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total LT loan net disbursements 1.2 0.9 56.0 8.0 36.0 33.0 19.0 17.0 9.8 13.0 28.4

Net credit from IMF 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.3 11.5Total repayments (LT+IMF) 1.2 0.9 56.0 8.0 36.0 33.0 19.0 17.0 9.8 14.3 39.9

C. Net Disbursements

Public and publically guaranteed 16.2 142.3 115.0 49.0 26.3 93.9 81.8 76.8 89.1 105.0 120.2official multilateral 0.0 13.0 43.0 15.0 25.0 37.8 43.0 55.0 57.3 58.5 62.5

of which IDA 0.0 0.0 27.0 3.0 14.5 14.8 15.3 22.8 24.8 27.5 29.0of which IBRD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Official bilateral 0.0 74.1 44.0 28.0 29.5 79.4 56.4 25.8 46.3 37.5 25.6Private creditors (guaranteed) 16.2 55.2 28.0 6.0 -28.2 -23.2 -17.6 -4.0 -14.4 9.0 32.0

of which bonds .. .. .. .. .. .. ..

Private creditors non-guaranteed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total LT loan net disbursements 16.2 142.3 115.0 49.0 26.3 93.9 81.8 76.8 89.1 105.0 120.2

Short-term credit (net) 66.8 -23.4 -57.6 -38.6 -17.1 0.0 0.0 .0.0 0.0 0.0 0.0Net credit from IMF 0.0 15.4 4.0 13.0 9.3 14.9 8.9 9.7 0.8 -1.3 -11.5Total net disb. (LT+ST+IMF) 16.2 157.7 119.0 62.0 35.6 108.7 90.6 86.6 90.0 103.7 108.6

D. Interest and charges

Public and publically guaranteed 0.2 0.1 9.0 6.0 7.0 7.7 7.8 9.5 10.0 11.6 21.0Official multilateral 0.0 0.0 0.0 1.0 0.0 1.2 1.5 1.9 2.4 3.1 6.1

of which IDA 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.2 0.4 0.5 1.4of which IBRD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Official bilateral 0.0 0.0 0.0 1.0 3.0 3.6 4.3 5.9 6.7 8.0 13.2Private creditors (guaranteed) 0.2 0.1 9.0 4.0 4.0 2.9 2.0 1.7 0.8 0.6 1.7

of which bonds 0.0 0.0 0.0 0.0 3.0 2.0 1.0 1.0 1.0 1.0 0.0

Private creditors non-guaranteed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total interest on LT loans 0.2 0.1 9.0 6.0 7.0 7.7 7.8 9.5 10.0 11.6 21.0

Interest on short-term credit 0.0 0.0 1.0 2.0 0.6 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1Interest on IMF drawings 0.0 0.1 1.0 1.0 0.9 1.1 1.0 0.6 0.3 0.3 0.3Total interest (LT+ST+IMF) 0.2 0.2 11.0 9.0 8.5 8.7 8.7 10.0 10.2 11.8 21.2

MONGOLIA -- External Debt Stocks and Flows

-- ---- - ---- -- --- --------- ,_ . --. - - - -..- -----..- - --- - -- - -- -- - -- -- -- -- -- ---- -- --- -- -- --- --- -- - ---- -- --- --- -- -- - -- ---......---- -- ---- --- --- -... .

+------------Actual-------------Estimater------------------Projection------------------+1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

E. External Debt (DOD)

PubLic and publically guaranteed 25.3 173.8 288.0 344.0 368.3 464.2 545.0 622.8 710.9 814.9 1292.5Official multilateral 0.0 13.4 56.0 71.0 97.0 135.8 178.8 234.8 292.0 350.5 587.5

of which IDA 0.0 0.0 27.0 30.0 45.5 60.3 75.5 98.3 123.0 150.5 266.0of which IBRD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Official bilateral 0.0 75.9 120.0 151.0 180.5 260.9 316.3 342.1 387.4 424.9 577.9Private creditors (guaranteed) 25.3 84.5 112.0 122.0 90.8 67.6 50.0 46.0 31.5 39.5 127.1

of which bonds 0.0 0.0 0.0 0.0 68.0 47.0 43.0 41.0 40.0 38.0 34.0

Private creditors non-guaranteed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total LT DOD 25.3 173.8 288.0 344.0 368.3 464.2 545.0 622.8 710.9 814.9 1292.5

Short-term debt 0.0 0.2 59.0 15.0 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1Use of IMF credit 0.0 16.1 19.0 32.0 41.3 56.1 65.0 74.7 75.6 74.3 40.5

Total DOD (ST+LT+IMF) of which: 25.3 190.1 366.0 391.0 407.5 518.3 607.9 695.5 784.4 887.1 1330.9Principal arrears 0.0 0.0 0.0 0.0 .. .. .. ..

Interest arrears 0.0 0.0 0.0 0.0 .. .. .. ..

F. Debt & Debt Burden Indicators

Total debt service (mil USS) 1.4 1.1 67.0 17.0 44.5 41.7 27.7 27.0 20.0 26.1 61.1Interest (LT+ST+IMF) 0.2 0.2 11.0 9.0 8.5 8.7 8.7 10.0 10.2 11.8 21.2Principal (LT+IMF) 1.2 0.9 56.0 8.0 36.0 33.0 19.0 17.0 9.8 14.3 39.9

For total DOD and total debt service (TDS):DOD / exports (GNFS+WR) ratio 5.11 51.0% 93.6% 99.6% 96.7% 111.4% 122.9% 130.7% 137.2% 144.3% 158.7%DOD / GOP ratio 1.1% 25.1% 34.0% 63.2% 55.0% 58.3% 62.4% 66.5% 70.1% 74.01 84.5%TDS / exports (GNFS+WR) ratio 0.3% 0.3% 17.1% 4.3% 10.6% 9.0% 5.6% 5.1% 3.5% 4.2% 7.3%

IBRD exposure indicators:IBRD DS / public loan DS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0X 0.0m 0.0% 0.0%Preferred creditor DS / public 0S 0.0% 10.0% 1.5% 7.1% 2.1% 3.0% 4.2% 3.0X 3.3% 8.4% 28.7%IBRD DS / exports (GNFS+WR) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Country share in I[RO portfolio 0.0% .. .. .. .. .. .. ..

.......---------.. .....-..--------...------- _.-.-.....------.. ......----------.. _---_ _ ......... ..------......-----................ .... _._. _._._.__.

MONGOLIA -- Public Finance

+------------Actual------------ 4Estimate+ ------------------Projection------------------1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

Goverrnent budget (Mil Tugrik)

Total current revenues 5288 8964 12912 55304 73430 100677 119482 132600 147158 163314 247735Direct taxes 2088 2586 5475 25036 22888 33742 38892 38812 38510 40326 53335Indirect taxes 2406 5492 5798 27445 44964 59287 71513 83715 97469 110582 175581

on domestic goods and services . .. . .. .. .. .. .. .. .

On international tradeNon-tax receipts 794 886 1639 2823 5578 7648 9076 10073 11179 12406 18819

Total current expenditures 5434 9777 13401 51910 65830 84568 96504 104550 116028 128767 195329Interest on external debt 71 345 186 2031 3570 3947 4115 4880 5135 6192 12816Interest on domestic debt .. .. .. .. .. .. . . .Transfers to private sector 0 0 0 0 0 0 0 0 0 0 0Transfers to other NFPS 865 3634 3100 13773 16979 20460 35402 38307 45491 52134 82946Subsidies 1746 1851 1648 3873 3504 4027 4595 5100 5660 6281 9528Consumption 2752 3947 8467 32233 41777 56134 52392 56263 59742 64159 90039

Wages and salaries .. .. .. .. .. .. -

Other consumption .. .. .. .. .. .. .. .

Budgetary savings -146 -813 -489 3394 7600 16108 22977 28050 31129 34547 52405Capital revenues 6 0 12 0 0 0 0 0 0 0 0Total capital expenditures 1276 1019 4997 30189 43600 68460 68932 71400 79239 91079 128631

Capital transfers 72 617 4724 26896 35000 48325 43657 43350 48109 56532 76226Budgetary fixed investment 1204 402 273 3293 8600 20135 25273 28050 31129 34547 52405

OveraLl balance (- = deficit) -1416 -1832 -5474 -26795 -36000 -52352 -45954 -43350 -48109 -56532 -76226

Sources of financing 1416 1832 5474 26795 36000 52352 45954 43350 48109 56532 76226Official capital grants 35 1040 1540 21037 26615 10283 6891 5173 2529 2621 6049External borrowing (net) 1063 786 3268 7526 10855 42532 38597 37495 45075 55028 72691Monetary system credit 596 -213 -998 -4069 7251 248 390 77 -1490 1046 -3021Other domestic financing -278 219 1664- 2301 -8721 -711 76 606 1995 -2162 507

Shares of GOP at current prices

Current revenues 50.5% 47.4% 30.0% 30.2% 24.1% 25.0% 26.0% 26.0% 26.0% 26.0% 26.0%Current expenditures 51.9% 51.7% 31.11 28.3% 21.6% 21.0% 21.0% 20.5% 20.5% 20.5% 20.5%Budgetary savings -1.4% -4.3% -1.1% 1.9% 2.5% 4.0% 5.0% 5.5% 5.5% 5.5% 5.5%

Capital revenues 0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Capital expenditures 12.2% 5.4% 11.6% 16.5% 14.3% 17.0% 15.0% 14.0% 14.0% 14.5% 13.5%Overall balance (- z deficit) -13.5% -9.7% -12.7% -14.6% -11.8% -13.0% -10.C% -8.5% -8.5% -9.0% -8.0%

Official capital grants 0.3% 5.5% 3.6% 11.5% 8.7% 2.6% 1.5% 1.0% 0.4% 0.4% 0.6%External borrowing (net) 10.2% 4.2% 7.6% 4.1% 3.6% 10.6% 8.4% 7.4% 8.0% 8.8% 7.6%Monetary system credit 5.7% -1.1% -2.3% -2.2% 2.4% 0.1% 0.1% 0.0% -0.3% 0.2% -0.3%Other domestic financing -2.7% 1.2% 3.9% 1.3% -2.9% -0.2% 0.0% 0.1% 0.4% -0.3% 0.1%

Government Debt (DOD at end of the year)

External debt in millions of TugrikExternal debt in millions of US$Debt to monetary system (Tugrik mil)Other domestic debt (Tugrik mil)Total government debt (Tugrik mil)Total goverrment debt as percent GOP

Tax burden indicators (%)

Direct taxes / GOP 20.0% 13.7% 12.7% 13.7% 7.5% 8.4% 8.5% 7.6% 6.8% 6.4% 5.6%Indir. taxes on domestic GUS / GOP .. .. .. .. .. .. .. .. .. .. .

Indir. taxes dom G&S / priv. consum. .. .. .. .. .. .. .. .. ..

Taxes int'l trade I merch. imports .. .. .. .. .. .. .. .. ..

MONGOLIA -- Monetary Survey

*------------ActuaL------------+Estimate+------------------Projection------------------1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2003

A. Annual flows during the year

Net international reserves -38 592 223 23154 5106 13364 9594 7214 7213 9865 18921

Domestic credit 1731 4487 5182 7686 28963 6458 7038 10112 5027 3476 -89To Government 596 -213 -998 -4069 7251 248 390 77 -1490 1046 -3021

Goverrment budget 596 -213 -998 -4069 7251 248 390 77 -1490 1046 -3021Other non-fin'lp ublic sector 0 0 0 0 0 0 0 0 0 0 0

To rest of the economy 1135 4700 6180 11755 21712 6210 6647 10035 6517 2430 2932Private sector 87 3655 2793 2952 29094 6130 6417 9780 6489 3058 3123Other financiaL institutions 1048 1045 3387 8803 -7382 81 230 255 28 -628 -191

Total assets = liabiLities 1694 5079 5405 30840 34069 19822 16632 17326 12Z39 13341 18832

Money and quasimoney 1371 3456 3139 29710 34014 25260 16632 17326 12239 13341 18832

Other liabilities (net) 323 1623 2266 1130 55 -5438 0 0 0 0 0

8. End-of-year stock

Net international reserves 270 862 1085 24239 29345 42709 52303 59516 66729 76595 139052

Domestic credit 6552 11039 16221 23907 52870 59328 66366 76478 81504 84980 89024To Government (NFPS) -1454 -1667 -2665 -6734 517 765 1155 1232 -258 787 -4965

Government budget -1454 -1667 -2665 -6734 517 765 1155 1232 -258 787 -4965Other non-fin'l public sector 0 0 0 0 0 0 0 0 0 0 0

To rest of the economy 8006 12706 18886 30641 52353 58563 65211 75246 81763 84193 93989Private sector 478 4133 6926 9878 38972 45102 51519 61300 67788 70846 85492Other financial institutions 7528 8573 11960 - 20763 13381 13462 13691 13946 13975 13346 8497

Total assets liabilities 6822 11901 17306 48146 82215 102037 118669 135994 148234 161575 228076

Money and quasimoney 6458 9914 13053 42763 76777 102037 118669 135994 148234 161575 228076

Other liabilities (net) 364 1987 4253 5383 5438 0 0 0 0 0 0

C. Factors accounting formonetary expansion (as 2 MO)

Net international reserves 4.22 8.7X 8.3% 56.7X 38.2X 41.9X 44.1% 43.82 45.02 47.42 61.0XCredit to government (NFPS) -22.52 -16.82 -20.42 -15.7% 0.7% 0.72 1.02 0.92 -0.22 0.52 -2.2%Credit to rest of the economy 124.02 128.22 144.72 71.72 68.22 57.42 55.02 55.32 55.22 52.12 41.22Other liabilities (net) C-) 5.62 20.02 32.62 12.62 7.12 0.02 0.02 0.02 0.02 0.02 0.02

Total increase M2 100.02 100.02 100.02 100.02 100.02 100.02 100.02 100.02 100.0% 100.02 100.02

0. Memorandum items

Net internationaL reserves .. . .. ..-.. .. .. .tin millions of US$1FLow during the year 53 29 6 -23 -10 -30 -20 -15 -14 -19 -31Stock at end-of-year 364 1987 4253 5383 75 104 125 140 154 173 281

E. Money, Credit and Prices

M2 / GDP 61.72 52.42 30.32 23.32 25.22 25.32 25.82 26.72 26.22 25.72 23.9XAnnuaL growth rate M2 26.92 53.52 31.7% 227.6% 79.52 32.92 16.32 14.62 9.02 9.02 9.02Annual growth private credit .. .. .. .. .. .. .. ..

Increase in private credit as 2of increase in domestic credit

MONGOLIA -- Projected Arrears, Reschedulings, etc.

Estimate +---------------------Projection----------------------ES millions at current prices] 1994 1995 1996 1997 1998 1999 2003

Interest payments

Interest due on base year LT debtPlus interest due on new LT debtPlus IF service chargesPius interest on short-term debtSub-total: originally scheduled interest

Net arrears of interestCommercial reschedulingInterest saved throughDebt-Equity swapsDebt buybacksOther debt conversionDebt forgiveness

Total interest paid per SOP

Disbursements

Disbursements on existing LT debtPlus disbursement on new LT debtPlus IMF purchasesPlus net short-term capitatTotal disbursements per SOP

Principal repayments

Amortization due on base year LT debtPlus amortization due on new LT debtPlus IMF repurchasesSub-totat originalty scheduled principal repayments

Adjustment (+/-) with respect to scheduled repaymentsPlus debt-equity swaps at market valuePlus buybacks at market vaLueLess net arrears on principalLess official reschedulingLess corrercial reschedulingLess amrtization saved through

Debt-Equity swapsDebt buybacksOther debt conversionDebt forgiveness

Total principal repaid per SOP

Debt outstanding (end of period)

Base year Long-term debtNew long-term debtUse of IMF creditsNet short-term debt

Subtotal: debt before adjustmentsLess reduction from

Debt-Equity swapsDebt buybacksOther debt conversionDebt forgiveness

Plus exchange valuation adjustmentsTotal debt outstanding and disbursed of whichPrincipal arrearsCapitalized interest

Memorandum Item:Interest arrears not yet capitalized

IMAGIN,'T

Eiepur t Nc 14565 1-114 , i -,T

Typ e: C'AI.