COVID-19 Rapid Response Program

Report and Recommendation of the President to the Board of Directors

Project Number: 54174-001 May 2020

Proposed Countercyclical Support Facility Loan Mongolia: COVID-19 Rapid Response Program

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Access to Information Policy after excluding information that is subject to exceptions to disclosure set forth in the policy.

CURRENCY EQUIVALENTS (as of 27 March 2020)

Currency unit togrog (MNT) – MNT1.00 = $0.000361141

$1.00 = MNT2,769.00

ABBREVIATIONS ADB – Asian Development Bank AIIB – Asian Infrastructure Investment Bank CDEP – countercyclical development expenditure program COVID-19 – coronavirus disease CPRO – COVID-19 Pandemic Response Option DSA – debt sustainability analysis FDI – foreign direct investment EFF – extended fund facility GDP – gross domestic product GPA – Government Procurement Agency IMF – International Monetary Fund MOF – Ministry of Finance MSMEs – micro, small, and medium-sized enterprises MNCCI – Mongolian National Chamber of Commerce and Industry PRC – People’s Republic of China VAT – value-added tax WHO – World Health Organization

NOTE

In this report, "$" refers to United States dollars.

Vice-President Ahmed M. Saeed, Operations 2

Director General James P. Lynch, East Asia Department (EARD)

Directors Xiaoqin Fan, Public Management, Financial Sector, and Regional Cooperation Division (EAPF), EARD Pavit Ramachandran, Mongolia Resident Mission (MNRM), EARD

Team leaders Declan Magee, Senior Country Economist, MNRM, EARD Bold Sandagdorj, Senior Economics Officer, MNRM, EARD Hans van Rijn, Principal Public Sector Management Specialist, EAPF, EARD Team members Tahmeen Ahmad, Financial Management Specialist, Public Financial Management Division, Procurement, Portfolio and Financial Management Department Aaron Batten (Advisory Capacity), Senior Planning and Policy Specialist, Strategy, Policy and Business Process Division, Strategy, Policy and Partnerships Department (SPD) Tsolmon Begzsuren, Senior Social Development Officer (Gender), MNRM

Gail Oliver Domagas, Senior Financial Control Specialist, Loan Administration Division—Loan and Grant Disbursement, Controller’s Department Battseren Enkhbaatar, Operations Assistant, MNRM, EARD Abigail D. Garrovillas, Senior Operations Officer, EARD Najibullah Habib, Health Specialist, Urban and Social Sectors Division (EASS), EARD Altantuya Jigjidsuren, Senior Social Sector Officer, MNRM, EARD Junkyu Lee, Chief of Finance Sector Group, SDSC-FIN, SDCC Genny Mabunga, Operations Assistant, EAPF, EARD Veronica Mendizabal Joffre, Social Development Specialist (Gender and Development), EARD Edith Joan Nacpil, Economics Officer, EAPF, EARD Kaukab Naqvi, Senior Economist, Economic Analysis and Operational Support Division, Economic Research and Regional Cooperation Department Jayati Nigam, Health Specialist, EASS, EARD Ongonsar Purev, Senior Environment Officer, MNRM Pamela Kristie A. Puspus, Project Analyst, EAPF, EARD Aysha Qadir, Principal Counsel, Office of the General Counsel (OGC) Mailene Radstake, Principal Social Development Specialist (Safeguards), EARD Hanif A. Rahemtulla, Senior Public Management Specialist, Thematic and Advisory Service Cluster—Governance (SDTC- GOV), Sustainable Development and Climate Change Department (SDCC) Susann Roth, Principal Knowledge Sharing and Services Specialist, Knowledge Sharing and Services Center, SDCC Pauline Marie A. Ruiz, Senior Operations Assistant, EAPF, EARD Yashna Shwarani, Counsel, OGC Deepak Taneja, Principal Treasury Specialist, Treasury Client Solutions Unit, Treasury Department Guoliang Wu, Principal Results Management Specialist, Results Management and Aid Effectiveness Division, SPD Peer reviewer Bruno Carrasco, Chief of Governance Thematic Group, SDTC- GOV, SDCC

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page PROGRAM AT A GLANCE I. THE PROPOSAL 1 II. PROGRAM AND RATIONALE 2 A. Background and Development Constraints 2 B. Rapid Response to COVID-19 Pandemic and ADB’s Value Addition 6 C. Impact, Outcome, and Outputs 8 D. Development Financing Needs and Budget Support 9 E. Implementation Arrangements 10 III. DUE DILIGENCE 11 IV. ASSURANCES 13 V. RECOMMENDATION 13

APPENDIXES 1. Design and Monitoring Framework 14 2. List of Linked Documents 16 3. Development Policy Letter 17 4. Assessment of Compliance with the Eligibility Criteria for the Countercyclical Support Facility and COVID-19 Pandemic Response Option 20 5. Additional Information on the Response Measures to the COVID-19 Pandemic and the Countercyclical Development Expenditure Program 27 6. Additional Information on the Macroeconomic Framework 30

Project Classification Information Status: Complete

PROGRAM AT A GLANCE 1. Basic Data Project Number: 54174-001 Project Name COVID-19 Rapid Response Program Department/Division EARD/EAPF Country Mongolia Executing Agency Ministry of Finance Borrower Mongolia (formerly Ministry of Country Economic Indicators https://www.adb.org/Documents/LinkedD Finance and Economy) ocs/?id=54174-001-CEI Portfolio at a Glance https://www.adb.org/Documents/LinkedD ocs/?id=54174-001-PortAtaGlance 2. Sector Subsector(s) ADB Financing ($ million) Public sector management Public expenditure and fiscal management 60.00 Social protection initiatives 30.00 Health Health system development 10.00 Total 100.00

3. Operational Priorities Climate Change Information Addressing remaining poverty and reducing inequalities Climate Change impact on the Low Accelerating progress in gender equality Project Strengthening governance and institutional capacity Sustainable Development Goals Gender Equity and Mainstreaming SDG 1.5, 1.a Effective gender mainstreaming (EGM) SDG 3.8, 3.c, 3.d SDG 5.c Poverty Targeting SDG 8.1 General Intervention on Poverty SDG 10.4 4. Risk Categorization: Complex . 5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C . 6. Financing Modality and Sources Amount ($ million) ADB 100.00 Sovereign Countercyclical Support Facility Lending (Regular Loan): Ordinary 100.00 capital resources Cofinancing 0.00 None 0.00 Counterpart 0.00 None 0.00 Total 100.00 Currency of ADB Financing: US Dollar

Source: Asian Development Bank This document must only be generated in eOps. 27042020160149679992 Generated Date: 27-Apr-2020 16:02:01 PM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to Mongolia for the COVID-19 Rapid Response Program under the Countercyclical Support Facility COVID-19 pandemic response option (CPRO).1

2. COVID-19 is triggering a severe economic slowdown in Mongolia. The country’s limited economic diversification and dependence on mining expose it to external shocks, particularly to swings in commodity prices. The current turmoil in the global economy and commodity markets has reduced revenues, increased balance of payment pressures, and accentuated financial sector risks. The most vulnerable groups in Mongolia are impacted most, as social transfers account for about 40% of the poor’s income. The Asian Development Bank (ADB) forecasts gross domestic product (GDP) growth in 2020 at 2.1%, down from an earlier estimate of 6.1%.2

3. The spread of COVID-19 also poses a serious public health threat to the country. Mongolia’s proactive response to the outbreak3—strict border closures, a suspension of air passenger travel, enforced quarantine for arriving passengers, and restrictions on daily life—has kept the number of COVID-19 cases low, but vulnerabilities remain. 4 The government has identified 20% of the population at high risk in the context of a strained health system already suffering from a shortage of beds, essential medical equipment, and health care professionals.

4. The proposed program will help the Government of Mongolia mitigate the severe negative health and economic impacts resulting from the COVID-19 pandemic. The program will support the government’s ongoing initiatives, including (i) a National Emergency Response Plan to contain the spread of COVID-19 and strengthen the health system; and (ii) a countercyclical development expenditure program5 (CDEP), which contains cash transfer schemes and other social protection measures targeting poor and vulnerable groups, households, and businesses. 6 Table 1 summarizes Mongolia’s compliance with the access criteria of the CPRO.7

Table 1: Compliance with Access Criteria for CPRO

CPRO Access Criteria ADB Staff Assessment 1. Adverse impact of ADB forecasts growth will fall to between –0.4% and 2.1% in 2020 from exogenous shocks 5.1% in 2019. Employment loss is estimated at 16%–20% of total employed. Financing needs have largely increased as revenues will fall by 9.2%, expenditures will increase by 11.7%. The fiscal balance will deteriorate from 1.4% of GDP in 2019 to -2.7% of GDP in 2020. 2. Countercyclical The government announced plans to spend $1.8 billion under a targeted development expenditure CDEP to support public health ($71.8 million), social protection ($474 million), and economic measures to mitigate the adverse impact of the pandemic ($1.3 billion). The CDEP targets the most vulnerable individuals and companies.

1 ADB. 2020. Policy Paper: ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 ADB. 2020. Asian Development Outlook 2020: What Drives Innovation in Asia? Manila. 3 A summary of the Government of Mongolia’s response to COVID-19 is in Appendix 5. 4 As of 5 May, the total number of confirmed cases was 40 with a further 466 people under observation. These are all imported cases. 5 Government of Mongolia. 2020. Deputy Prime Minister Order No. 26: Strategic Preparedness and Response Plan to Stop Further Transmission of Coronavirus. Ulaanbaatar. 20 March. 6 The design and monitoring framework is in Appendix 1. The list of linked documents in in Appendix 2. The Development Policy Letter is in Appendix 3. 7 Details on compliance with the access criteria are in Appendix 4. 2

CPRO Access Criteria ADB Staff Assessment 3. Pre-shock record of Annual average growth was 5.9% during 2017–2019. Macroeconomic generally sound management pre-COVID-19 was generally sound. Mongolia has macroeconomic management reduced debt by 30 percentage points since end 2016 and ran fiscal surpluses in both 2018 and 2019.8 Inflation has been below target (8%) since 2017. Despite weaknesses in the banking sector, macroeconomic indicators were robust in 2019. Exports hit a historic high of $7.6 billion in 2019, and FDI remained stable at $2.1 billion. The balance of payments recorded a surplus of $0.5 billion, bringing gross foreign exchange reserves up to $4.4 billion (5.8 months of imports) in 2019. 4. Structural reforms The National Emergency Response Plan includes quarantine protocols, travel restrictions, school closures, border closures, and imports of essential equipment. The government is also planning several measures to strengthen the health sector’s response over the medium- term. These include strengthening national standards for infection prevention and control, improving national standards to manage severe acute respiratory infections patients, and increasing the speed at which suspected cases are confirmed. 5. Debt sustainability ADB’s baseline scenario shows that the public debt–GDP ratio will rise by 7.3 percentage points to 86.4% in 2020 (slightly above the 2019 level). Debt-to-GDP is expected to resume its pre-COVID-19 downward trajectory in 2021. This scenario is consistent with the IMF’s views. 6. Coordination with To support macroeconomic reforms in Mongolia, the IMF established International Monetary Fund an EFF in May 2017, which will close in May 2020. The EFF also provides a platform for coordination and dialogue among international financial institutions and major development partners. ADB is in close dialogue with the IMF on macroeconomic monitoring, particularly on the impact of COVID-19 on the economy, fiscal responses, and debt sustainability. The IMF has provided an assessment letter. ADB = Asian Development Bank, CDEP = countercyclical development expenditure program, CPRO = COVID-19 Pandemic Response Option, EFF = Extended Fund Facility, FDI = foreign direct investment, GDP = gross domestic product, IMF = International Monetary Fund. Source: Asian Development Bank.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints

5. Mongolia’s narrow economic base makes it vulnerable to external shocks across multiple sectors. Mining alone accounts for 24% of GDP and almost 90% of exports, with two commodities—copper and coal—representing more than 60% of exports.9 Mongolia is heavily dependent on trade with the People’s Republic of China (PRC), which receives 89.1% of Mongolia’s exports. The deceleration of the PRC’s economy has triggered a sharp fall in export prices in Mongolia (Figure 1), the ramifications of which have depressed economic activity in the transport, tourism, retail trade, and services sectors. Mobility restrictions and supply chain disruptions have severely impacted trade. When compared with 2019, March 2020 merchandise exports contracted by 41.5%, resulting in a loss of about $700 million in export revenues (Figure 2) and dragging on the current account and balance of payments in the first quarter of 2020

8 The debt-to-GDP ratio decreased from 109.1% in 2016 to 79.1% in 2019. 9 Copper makes up 24% of exports, and coal makes up 40% of exports, according to ADB estimates that are based on statistical data from the Customs General Administration of Mongolia (2020).

(Figure 3). Budget revenues for 2020 are expected to be 9.2% lower than in the originally approved budget.10

Figure 1: Export Price Index, Figure 2: Export Value, Year-Over-Year Year-Over-Year (%) (%)

40% 100% 30% 20% 50% 10% 0% 0% Total exports -10% -50% Coal -20% Copper concentrate -24.1%

-30% -100%

Jul-19

Jul-18

Jul-19

Jul-18

Jan-20

Jan-19

Jan-18

Mar-20

Mar-19

Mar-18

Nov-19

Sep-19

Nov-18

Sep-18

May-19

May-18

Jan-20

Jan-19

Jan-18

Mar-20

Mar-19

Mar-18

Nov-19

Nov-18

Sep-19

Sep-18 May-19 May-18 Sources: Customs General Administration of Mongolia, Sources: Customs General Administration of Mongolia, Bank of Mongolia statistics, and 2020 Asian Bank of Mongolia statistics, and 2020 Asian Development Bank estimates. Development Bank estimates.

Figure 3: Balance of Payments Figure 4: Budget Revenues, ($ million) Year-over-Year (%) 118.3% 600 Q1-2019 482 458 120% 341 Q1-2019 300 Q1-2020 220 90% Q1-2020 51 60% 46.6% 0 22.0% 21.8% 30% 19.5% -300 -183 -398 -350 0% -600 -4.1% -3.0% -3.0% -555 -30% -8.6% -900 -767 -60% -43.6% Current Goods & Foreign Portfolio Balance of Total Structural Tax CIT Future account services direct investment payments revenue revenue revenue revenue heritage deficit balance investment fund Source: Bank of Mongolia statistics (2020). Source: National Statistical Office of Mongolia (2020).

6. The government estimates that 20% of the population are at risk to the public health threat posed by COVID-19. Despite Mongolia’s early response to the outbreak, poor and vulnerable groups are especially at risk. The peri-urban ger (traditional tent) settlements in Ulaanbaatar are highly exposed, with cramped and poorly ventilated houses, limited access to water and sanitation, and inadequate health facilities. Poor air quality in Mongolia means a high incidence of chronic respiratory diseases, adding to the underlying vulnerability of the country. The 20% of the population identified to be at high risk include the elderly (400,000 people); people with chronic diseases (350,000); and people with cancer, immunocompromised people, and those requiring hemodialysis. The health system in Mongolia is poorly equipped to respond to a massive influx of COVID-19 patients. Testing capacity for COVID-19 is inadequate, and there is a lack of essential health care equipment and trained medical personnel. There are 18,669 hospital beds

10 Ministry of Finance. 22 April 2020. Draft Medium-Term Fiscal Framework.

4 in Mongolia, but isolation wards and intensive care services are limited. Nursing care centers are also at high risk because they lack the capacity to respond properly.

7. Women and small businesses are particularly vulnerable. Women are facing greater hardship because of (i) the increased burden of unpaid care work; (ii) their predominant role in health care (82% women); and (iii) their active participation in family and sole-entrepreneur-owned businesses (nearly 60% of entrepreneurs are women), which have been affected by the economic slowdowns and mobility restrictions. Further, the crisis has had an impact on gender-based violence, as evidenced by the large increase in the number of hotline calls and women resorting to shelters since the start of the pandemic.

8. Mongolia has a pre-pandemic record of generally sound macroeconomic management following a difficult economic period before 2017. Given its dependency on commodity prices, Mongolia suffers from a pronounced boom-bust economic cycle. Following the last episode of economic slowdown, Mongolia entered into an International Monetary Fund (IMF) 3-year extended fund facility (EFF) in May 2017. Economic growth has been robust since then, growing by 5.3% in 2017, 7.2% in 2018, and 5.1% in 2019. Mongolia’s other key macroeconomic performance indicators were positive and/or stable in 2019. The overall fiscal balance was 1.4% of GDP, the second consecutive year of an overall fiscal surplus. The structural budget deficit was a modest 1.7% of GDP and consistent with the Law on Fiscal Stability.11 Total exports hit a historic high of $7.6 billion, foreign direct investment (FDI) remained stable at $2.1 billion, and the balance of payments recorded a surplus of $0.5 billion. This brought gross foreign exchange reserves up to $4.4 billion (5.8 months of imports) in 2019.

9. Fiscal policy tightening and growth recovery in recent years have reduced debt, but challenges remain. Revenues have steadily increased since 2017, supported by improved tax administration and stronger demand for Mongolia’s exports. Expenditures have been more tightly controlled, and the public investment program has been strengthened. This has reduced public debt (including central bank liabilities) from 109.1% of GDP in 2016 to 79.1% of GDP in 2019. It has also turned a fiscal deficit of 15.3% of GDP in 2016 into surpluses of 2.6% in 2018 and 1.4% in 2019. The less favorable economic outlook is combining with a considerable amount of external debt repayments, including maturing bonds during 2020–2024, to present important challenges for fiscal policy.12 Average inflation increased from 6.8% in 2018 to 7.3% in 2019 but remains below the inflation target of 8.0%. The Bank of Mongolia gradually tightened its monetary policy stance from the end of 2018 because of increased downward pressure on the currency and the pass-through to inflation. 13 Underlying issues in the banking sector around asset quality deterioration remain, and bank recapitalization is still incomplete. These issues were identified in the IMF program and constitute important policy priorities going forward.

10. The CDEP and monetary policy easing demonstrate Mongolia’s comprehensive response to the COVID-19 pandemic. On 27 March 2020, the government launched the CDEP, announcing its intention to introduce $1.8 billion worth of measures to counter the negative impacts of the COVID-19 pandemic. Planned financing will come from budget savings (24%), forgone government revenue (23%), and the public investment program (53%). Under the current financing scenario, the overall fiscal balance for 2020 will deteriorate by 4.1 percentage points of

11 Under the law, the structural budget deficit shall not exceed 2% of GDP. Law of Mongolia on Fiscal Stability (certified translation): http://www.iltod.gov.mn/wp-content/uploads/2010/12/Law-of-Mongolia-on-Fiscal-Stability.pdf (last accessed on 16 April 2020). 12 Total external debt repayment during 2020–2024, including international bonds, external loans, and government guarantees, is forecast to be $5.9 billion. 13 More information on monetary policy and inflation is included in Appendix 6.

GDP from the 2019 level to –2.7%. The Bank of Mongolia reduced the policy rate twice (in March and April 2020), by 2 percentage points to 9.0%. It also lowered the mandatory reserve requirements for local currency liabilities, reduced the minimum prudential requirement on liquidity ratios by 5 percentage points to 20%, and waived consumer and housing mortgage credit repayments. The CDEP covers three areas (Appendix 5):14

(i) Measures supporting citizens. At least 1.8 million people will benefit from social protection support for vulnerable households and individuals affected by the crisis. The planned spending is $474 million. (ii) Support to vulnerable businesses and fiscal stimulus measures. An estimated 30,000 companies and 233,000 herder households will be reached by measures to support vulnerable businesses. Micro, small, and medium-sized enterprises (MSMEs) will receive financial support to protect jobs. This package includes (a) fiscal stimulus measures, such as support for enhanced preparation at border crossing points to facilitate exports (e.g., through vehicle disinfection); and (b) increased financial assistance for heightened monitoring of manufacturing, service, and catering facilities in their efforts to comply with regulations aimed at preventing the spread of infection. Spending equivalent to $1.3 billion is planned, although this package is not yet fully financed. (iii) Public health protection. Planned spending of $71.8 million will finance measures that protect lives, health, and safety by (a) preparing for and responding to a potential COVID-19 epidemic within the country; and (b) investigating and controlling case clusters with testing, contact tracing, and isolation. The added expenditure will increase health sector spending in 2020 by 14.9% over 2019.

11. The CDEP is aligned with the country’s macroeconomic framework, and public debt remains sustainable. The government’s expenditure program is consistent with the Law on Fiscal Stability. The government aims to use existing programs (such as the Child Money Program) and channels (such as income tax, sales tax, and social security contributions) to deliver the program, ensuring that the funds can reach intended targets quickly and efficiently. As Mongolia has been under an IMF program since 2017, it was subject to regular IMF reviews until the end of 2018. The IMF conducted a debt sustainability analysis (DSA) as part of the Article IV Consultation in September 2019. 15 The DSA indicates that, although debt is high, positive dynamics related to high nominal growth, access to concessional financing, and strong fiscal performance mean that the debt ratio has been declining and is expected to fall significantly up to 2024. Updated analysis conducted by ADB indicates that public debt will rise by 7.3 percentage points to 86.4% in 2020 (slightly above the 2019 level) before resuming its downward trajectory in 2021 and decreasing steadily through 2025.16 The planned assistance under this program of $100 million, at 0.9% of current public debt, increases the debt–GDP ratio by 0.7 percentage points and falls within a sustainable fiscal framework to manage the potential impact on debt and fiscal sustainability. Further, the spread on Mongolian government bonds in international bond markets has widened by 5.76%–8.72% since 27 February 2020, indicating that other sources of external finance are not currently cost-effective options.

14 Further details are provided in section B. 15 IMF. 2019. Mongolia 2019 Article IV Consultation. Washington, DC (accessible from the list of linked documents in Appendix 2). 16 Debt Sustainability Assessment (accessible from the list of linked documents in Appendix 2). ADB has consulted with the IMF on this matter.

B. Rapid Response to COVID-19 Pandemic and ADB’s Value Addition

12. Mongolia has taken prompt and decisive actions to respond to the COVID-19 pandemic and remains on high alert.17 Shortly after the initial outbreak in the PRC, the National Security Council imposed restrictions to contain the spread of COVID-19 and limit regional transmission. A $4.3 million allocation from the state budget in February 2020 was used to procure medical equipment and supplies to ensure that dedicated hospitals and health institutions can prevent transmission and respond to COVID-19 cases. The National Emergency Commission issued six directives between 21 February 2020 and 22 March 2020 that imposed bans on international travel―currently no commercial air routes are available to enter or exit Mongolia. Given Mongolia’s strategic location in connecting the PRC and the Russian Federation, the country’s control of the spread of COVID-19 and subsequent efforts to strengthen testing and disease control protocols will have important benefits for its neighbors and for East Asia and Europe. The CDEP contains measures that will support economic recovery through trade and safeguard critical supply chains, thus planting the seeds for a recovery based on regional trade and integration. The government has formulated the National Emergency Response Plan, which identifies that $240 million is required to support the procurement of 10,000 units of priority emergency medical equipment, increase surveillance capacity, ensure adequate supply of medicines, strengthen laboratory and testing protocols, and provide essential support to vulnerable populations including food, fuel, and medical support.

13. ADB’s value addition. As Mongolia’s largest development partner, 18 ADB has a major role to play in convening all stakeholders. ADB’s COVID-19 support is consistent with pillar 1 (economic and social stability) of ADB’s country partnership strategy for Mongolia 19 and operational priority 1 (addressing remaining poverty and reducing inequalities) of ADB’s Strategy 2030. 20 The program supports implementation of the regional cooperation and integration operational plan under Strategy 2030— particularly its pillar on promoting regional public goods, which include joint control of transboundary health risks.21 It is also aligned with the Central Asia Regional Economic Cooperation (CAREC) 2030 operational cluster on human development, which highlights “addressing pandemic risks and control of communicable diseases” as critical regional public goods with significant positive externalities.22

14. ADB’s package of support for COVID-19 in Mongolia includes rapid response measures such as reallocating $1.4 million in early February under an existing health sector operation to support the procurement of emergency health equipment, preparing a small-scale technical assistance project for emergency response systems in the health sector, and approving a $1.0 million grant from the Asia Pacific Disaster Response Facility to support further procurement of emergency medical equipment.23 It also includes short- and medium-term responses, such as a

17 The initial outbreak has led to a United Nations resolution on global solidarity on COVID-19 that emphasizes the need for regional and global cooperation. 18 ADB represents 35% of all official development assistance flows to Mongolia. 2018 data taken from https://stats.oecd.org/. Last accessed on 7 April 2020. 19 ADB. 2017. Country Partnership Strategy: Mongolia, 2017–2020―Sustaining Inclusive Growth in a Period of Economic Difficulty. Manila. 20 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 21 ADB. 2019. Strategy 2030 Operational Plan for Priority 7: Fostering Regional Cooperation and Integration, 2019−2024. Manila. 22 ADB. 2017. CAREC 2030 – Connecting the Region for Shared and Sustainable Development. Manila. 23 Reallocation from ADB. 2012. Fifth Health Sector Development Project. Manila. $30 million additional financing for the Fifth Health Sector Development Project is under preparation (Emergency Assistance for COVID-19). Support

7 proposed $30 million loan to support disease control in the health sector, a proposed $50 million loan to strengthen social protection measures to provide direct support to vulnerable groups, and technical assistance resources to strengthen the capacity of the domestic violence response in the country. ADB is also repurposing $24 million under ADB’s support to the Credit Guarantee Fund to directly support small and medium-sized enterprises in distress. 24 The proposed COVID- 19 Rapid Response program under the pandemic response option will support these efforts by helping the government manage the economic impact and respond to the health and social protection needs the pandemic has created.

15. ADB’s experience in each of these sectors can help the government translate these responses into permanent structural improvements. ADB has long been a major development partner in Mongolia’s health sector, supporting systemic reforms (notably the Health Law of 2016 and laws related to health insurance, medicines, and medical devices) and medical care and services. ADB has combined this support with investment lending, including a $163.51 million multitranche financing facility committed in 2019.25 ADB’s engagement in social protection has included support for the design and financing of social welfare programs, as well as ADB’s first- ever stand-alone operation to combat domestic violence. ADB is also deeply involved in helping Mongolia strengthen disaster response and resilience and is planning its first lending operation in this sector for 2021. ADB is supporting Mongolia’s efforts to diversify the economy and become less dependent on mining through investments in agriculture and tourism. Finally, ADB’s long- standing engagement with the government on fiscal and macroeconomic management is a major advantage. This enabled ADB to help the government shape its response to the COVID-19 pandemic and the CDEP, including the policies to reduce expenditures and raise revenues to help finance the CDEP. ADB has also worked with the government to sharpen the CDEP’s focus on women, including more explicit targeting, and to strengthen the arrangements for monitoring the implementation of both the CDEP and the proposed ADB COVID-19 rapid response program.

16. Coordination with IMF and other development partners. Close coordination with the IMF is facilitated by the presence of the EFF, which provides a regular mechanism for coordination and dialogue among international financial institutions and major development partners. To ensure that COVID-19 pandemic responses are well-aligned and complementary, ADB is also working on an almost daily basis through the resident mission with the IMF and the World Bank, other development partners, and various United Nations agencies, including the Humanitarian Country Team. This operational coordination has been complemented by high-level discussions with the IMF, the World Bank, and the government at a senior management level. The result is that all development partners share a common understanding with the government of the impact of COVID-19 and the required response. The World Bank has approved a $26.9 million investment loan in the health sector. Other development partners, including the United Nations, the Japan International Cooperation Agency, and the United States Agency for International Development, have all made contributions to the COVID-19 response. The Asian Infrastructure Investment Bank (AIIB) has expressed an interest in budget support; discussions are ongoing, and ADB teams have shared their experience. The IMF is exploring the possibility of a loan from

for emergency response systems is provided under ADB. 2020. Support for Improving the Preparedness and Response to Novel Coronavirus. Manila. Finally, to facilitate purchase of screening equipment at selected border crossing points, $75,000 was reallocated from ADB. 2016. Regional Improvement of Border Services. Manila; ADB. 2020. COVID-19 Emergency Response Project. Manila (Grant 0688). 24 ADB. 2015. Report and Recommendation of the President to the Board of Directors: Supporting the Credit Guarantee System for Economic Diversification and Employment Project. Manila. 25 ADB. 2019. Report and Recommendation of the President to the Board of Directors: Proposed Multitranche Financing Facility to Mongolia for Improving Access to Health Services for Disadvantaged Groups. Manila. The focus of pipeline ADB health support will broadly be in underserved ger (traditional tent) areas in Ulaanbaatar and other cities. There will be a focus on primary health care and hospitals.

8 its Rapid Financing Instrument. The IMF has provided ADB with an assessment letter for this operation, which summarizes the economic impact of the COVID-19 crisis on Mongolia and highlights the main vulnerabilities and key challenges facing the country.26

C. Impact, Outcome, and Outputs

17. The impact of the proposed program will be that the adverse effects of the COVID-19 pandemic on the economy are mitigated and poverty is alleviated. The outcome will be negative health and economic effects of the COVID-19 crisis on vulnerable groups mitigated. The program will have the following three outputs:

18. Output 1: Measures and increased fund allocation for social protection programs for the most vulnerable groups implemented. This output will provide social protection support to vulnerable households under the CDEP. The CDEP will increase the allocation under the Child Money Program by 50% to MNT30,000 per child per month, and this is expected to reach 1.1 million children. Private sector workers will be exempt from personal income tax for 6 months starting from 1 April 2020. This is targeted at employees at risk of losing their jobs, so public sector workers are not included. As women are overrepresented in the public sector (60.4%), which is not covered by the program, the target is to ensure that at least 45% of the beneficiaries are women. Companies whose activities have been stopped because of the government restrictions for controlling the spread of the COVID-19 pandemic will receive a monthly stipend of MNT200,000 per employee retained by such companies. Individuals will receive reimbursement of the value-added tax (VAT) paid in the first quarter of 2020. This is expected to benefit 860,000 citizens, with each gaining an average of MNT47,000. Until September, households will not be disconnected or penalized if their electricity bills are not paid on time.

19. Output 2: Measures to safeguard productive sectors and micro, small, and medium- sized enterprises from the downturn implemented. To protect jobs, support will be provided to MSMEs, including those engaged in international trade, particularly the import of critical food and medical supplies. These measures will not apply to any public or semipublic company or any private company that is implementing public procurement contracts. Businesses whose operations have been impacted will be eligible for a 6-month exemption from the payment of social insurance. At least 50% of these businesses will be owned or run by women. The businesses will be exempt from interest and penalties due on unpaid social insurance premiums before 1 April 2020. Companies with annual sales of less than MNT1.5 billion will be exempt from paying corporate income tax for 6 months. This is expected to benefit 30,448 vulnerable MSMEs. Baseline data suggests that 34.2% of MSMEs are women-owned or run, so a target of reaching at least 34.0% of businesses owned by women has been set. Entities that voluntarily reduced lease rates for businesses affected by the economic situation will receive tax exemptions on lease revenue. There will a 2-month deferment of customs duties and VAT due on staple products, including imported goods such as rice, wheat, sugar, and vegetable oil. MSMEs will be provided with increased access to guarantees on loans of less than MNT30 million. Cashmere producers (one of the most affected industries) will receive concessional loans, benefitting 233,000 herder households and 47 companies. Agri-companies will receive a 50% reduction on the purchase of agricultural equipment, assisting 1,500 companies.

20. Output 3: Measures to strengthen infection prevention and control established. These measures will include (i) procuring and supplying essential health care equipment, as well as hospital supplies for disinfection and decontamination; (ii) increasing surveillance capacity; (iii)

26 IMF Assessment Letter (accessible from the list of linked documents in Appendix 2).

9 strengthening laboratory and testing protocols; (iv) enabling the health authorities to increase the availability of frontline health workers to promptly respond to the crisis; and (v) exempting drugs and health products used for the diagnosis and treatment of COVID-19 from customs duties and VAT. These short-term responses will be complemented by a set of medium-term measures outside of the CDEP, targeting 2022 achievement, proposed in the government’s National Emergency Response Plan. These include (i) strengthening 35 hospitals to meet national infection prevention and control standards, (ii) improving 210 hospitals to meet national standards to manage Severe Acute Respiratory Infection patients, and (iii) enhancing testing capacity and ensuring that 75% of samples from suspected cases of COVID-19 and/or Severe Acute Respiratory Infection are confirmed within the standard time.

D. Development Financing Needs and Budget Support

21. In addition to the pandemic’s effect of reducing government revenues, the CDEP response to the crisis will raise expenditures by 11.7% over 2019 (Table 2). The overall fiscal balance will deteriorate by 4.1 percentage points to –2.7% ($379 million), and the structural fiscal balance by 3.4 percentage points to –5.1%. According to the Law on Fiscal Stability, the government is required to finance the structural deficit. This results in financing needs of $713 million. The government plans to increase external borrowing by $495 million to finance 69.4% of the structural deficit. The remainder is to come from the stabilization fund and other sources now under consideration, including mobilizing domestic financing. The proposed program will account for 20.2% of the government’s planned external borrowing. The government is in discussions with other development partners, including the IMF, the World Bank, the European Union, and the AIIB on meeting the remaining external financing needs.

Table 2: Revised Budget Forecasts and Domestic Financing Needs 2019 Budget 2020 Revised Forecast (Pre-COVID-19) (Post-COVID-19) Item (% of GDP) (% of GDP) ($ million) Total revenues 32.4 30.3 4,231 Total expenditures 31.0 33.0 4,610 Overall balance 1.4 (2.7) (379) Structural balancea (1.7) (5.1) (713) Financing plan 5.1 713 External loans 3.5 495 ADB CPRO 0.7 100 Other ADB COVID-19b 0.2 30 Other development partnersc 1.6 227 External financing gapd 1.0 138 Stabilization Fund 0.3 36 Other (under consideration) 1.3 182 () = negative, ADB = Asian Development Bank, COVID-19 = Coronavirus disease, CPRO OVID-19 Pandemic Response Option, GDP = Gross Domestic Product a The structural balance refers to structural revenue minus total expenditure. Structural revenues are total revenues adjusted by long-term average price estimates of Mongolia’s export commodities. b This reflects the Proposed Emergency Assistance Loan for Additional Financing Mongolia: Fifth Health Sector Development Project. ADB is also considering support to social protection beyond the CDEP. c This is an indicative estimate based on early discussions with Asian Infrastructure Investment Bank, the International Monetary Fund, the World Bank, the European Union, and the Government of Japan. d Further discussions are under way, including with ADB, to seek additional external lending to fund this gap. Sources: National Statistical Office of Mongolia. 2020. The Ministry of Finance revised budget forecasts for 2020 (Medium-term fiscal framework); Asian Development Bank estimates.

22. The government has requested a regular loan of $100,000,000 from ADB’s ordinary capital resources to help finance the program. The loan will have a 15-year term, including a grace period of 3 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan agreement. Based on the annuity method, the average maturity is 10.9 years, and there is no maturity premium payable to ADB.27

E. Implementation Arrangements

23. The Ministry of Finance (MOF) will be the executing agency for the program. The proceeds of the loan will be withdrawn in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time). As the CDEP is part of the government budget, it will be subject to audit by the National Audit Office. This audit will be finalized and shared with ADB for monitoring purposes in June 2021. The program will be implemented in coordination with the ongoing and planned regional technical assistance under the CAREC framework, especially for policy dialogue and information sharing on the control of the COVID-19 pandemic. The loan will be withdrawn as a single tranche. The implementation period is 1 March 2020–30 June 2021.

24. Monitoring and evaluation. Several of the initiatives under the CDEP are using existing government mechanisms, such as the Child Money Program and the tax administration system. These mechanisms are subject to their own monitoring arrangements, which will be used to assess the effectiveness of the CDEP. The MOF has also requested that ADB help strengthen monitoring of the CDEP, including sex-disaggregated data monitoring, under an existing technical assistance project.28 The MOF will monitor, evaluate, and regularly report to ADB on areas that will include (i) developments in its macroeconomic and fiscal conditions, including the CDEP; (ii) impacts of the CDEP on poor and vulnerable groups, disaggregated by sex, including the number of beneficiaries of cash transfer schemes and other social assistance programs; (iii) implementation of its National Emergency Response Plan; and (iv) progress on gender-related targets and indicators in the design and monitoring framework and gender monitoring matrix. In addition, there are several instruments for health status monitoring in Mongolia, including the annual reports and statistics produced by the Ministry of Health, the annual United Nations Sustainable Development Goals monitoring undertaken by the government and the United Nations Development Programme, as well as the monitoring of health status by the World Health Organization. Finally, ADB’s East Asia Department is preparing a specific tool in the form of a regularly updated monitoring report to track the impact of the COVID-19 pandemic on key indicators, such as employment and poverty. ADB will also establish a platform approach involving regular engagement with government, civil society, the private sector, and development partners to monitor the situation and assess the effectiveness of the CDEP.29

27 Assessment on risk-bearing capacity has been completed by the Office of Risk Management, and this is reflected in ADB. 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 28 ADB. 2016. Technical Assistance to Mongolia for Macroeconomic Advisory Support. Manila. 29 Poverty monitoring will be greatly facilitated by the already existing Integrated Household Database, which is based on a proxy means test survey and is also referred to as the PMT database. A household's PMT score determines eligibility for five types of social welfare programs: food stamps, child grants (the Child Money Program), cash allowances for emergency cases, health care fee waivers, and legal advocacy services for the poor.

III. DUE DILIGENCE

25. Safeguards. No adverse environmental, involuntary resettlement, or indigenous peoples impacts under ADB’s Safeguard Policy Statement (2009) have been identified. The program is category C for environment, involuntary resettlement, and indigenous peoples.

26. Governance. Mongolia has strong financial management legislation (e.g., Integrated Budget Law and the Law on Development Planning), governance structures, and operational public financial management systems in place, including a functional Treasury single account, a unified and consistent chart of accounts, and an integrated government debt and financial management information system. Despite this, there remain areas for improvement related to the efficiency, effectiveness, and transparency of the public financial management system. 30 To address this, MOF has adopted the Public Financial Management Reform Strategy, 2018–2020, supported by ADB, the World Bank, the European Union,31 and the IMF.32 The strategy aims to strengthen alignment of expenditures and revenue outputs with the originally approved budget, improve the quality of cash flow forecasts and unpredictability in availability of funds, strengthen budget credibility to support public policy effectiveness, and enhance accounting policies and reporting frameworks. Over the medium term, ADB will continue to stay engaged.33

27. The revised Public Procurement Law adopted in 2013 introduced significant changes in the public procurement system. Responsibility for procurement was transferred to the Government Procurement Agency (GPA), now a division of the State Property Administration Authority after internal restructuring. Local governments were given more responsibility for procurement. The revised law also includes provisions that genuflect to the need to make procurement processes more transparent and participative. The implementation of these ambitious reforms is ongoing. The Public Procurement Law was amended in 2019 with the aim of strengthening transparency and accountability. ADB supported the preparation of this amended law by providing technical assistance.34 While it is well documented that vulnerability to corruption can undermine accountability throughout the economic and political sphere, Mongolia has also addressed these vulnerabilities, e.g., through its active membership of the Anticorruption Initiative for Asia and the Pacific, which is supported by ADB and the Organisation for Economic Co- operation and Development.35 The main governance risks and (proposed) mitigation measures are summarized in Table 3.

28. Social, poverty, and gender. Despite growth in recent years, impacts on poverty reduction have not kept pace, and 28.4% of the population still live below the poverty line. Children

30 World Bank. 2019. Public Expenditure Review. Growing Without Undue Borrowing. Washington, DC. 31 The Strengthening Governance in Mongolia Project, funded under the European Union Trust Fund with the World Bank, has since 2018 supported the government’s efforts to improve fiscal discipline, public financial management, and transparency and accountability for strengthened governance in Mongolia. With total grant financing of €4.8 million by the European Union, the project has been providing technical assistance to the Ministry of Finance, the Fiscal Council, and the Mongolian National Audit Office to implement the priority actions in the government’s Public Financial Management Strategy and Action Plan (2018–2022). 32 IMF. 2019. Mongolia Selected Issues. Washington, DC. 33 ADB. 2018. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Mongolia for Strengthening Information and Communication Technology Systems for Efficient and Transparent Public Investment and Tax Administration Project. Manila. This ongoing project will be complemented by a pipeline knowledge sharing technical assistance project focused on improving efficiencies in public expenditure management and strengthening tax data analysis. 34 ADB. 2016. Technical Assistance to Mongolia for Strengthening Public Procurement for Improved Project Implementation. Manila. 35 Organisation for Economic Cooperation and Development.https://www.oecd.org/site/adboecdanti- corruptioninitiative/. Last accessed on 13 April 2020.

12 remain among the most vulnerable (40% of poor people are children under the age of 15). Poverty concentration is growing in urban areas, with reductions in rural areas attributable to increased demand for livestock and price increases. The 14.9% of people living just above the poverty line are highly vulnerable to shocks. A recent poverty assessment also found that social transfers have contributed to reducing poverty in rural and urban areas.36

29. The program is categorized as effective gender mainstreaming. Women are being affected by the COVID-19 pandemic in multiple ways. Quarantine measures and school closures have increased unpaid household and care work, the bulk of which is traditionally carried out by women. Women also play a key role in the health sector, comprising 82% of the health sector workforce. Economically, women will be affected as business owners and workers, particularly as they are concentrated in sectors likely to suffer impacts including agriculture, services, and retail trade. The packages under the CDEP have set targets to ensure vulnerable female employees benefit from tailored social protection and job retention programs, suspension of personal income tax, and compulsory and voluntary social insurance premiums. The packages will also support MSMEs owned by women and businesses where women make up a significant number of employees. Sex-disaggregated data on business ownership is not available, and ADB will use additional technical assistance resources to ensure that the social insurance and tax payment holidays are monitored so that this disaggregation can be clearly measured. Furthermore, ADB will strengthen the availability of sex-disaggregated data in tax administration systems as part of a proposed technical assistance project for 2020. This program will also benefit from complementary operations planned by ADB to address domestic violence, targeted social protection response measures, and improved sex-disaggregated data availability to strengthen gender design for upcoming projects to support MSMEs.

Table 3: Summary of Risks and Mitigating Measures Risks Mitigation Measures Prolonged COVID-19 crisis An extended crisis heightens the socio- Close monitoring of the situation and crisis so that ADB economic impact requiring a more significant can support early detection and response. ADB is response that is beyond the government’s exploring additional resources to provide support later in capacity to provide. the year. ADB is using its leadership role to ensure there is a consortium of development partners ready to respond and support the government. Public financial management High level of budget proposals based on ADB is assisting the government to strengthen its budget overestimated revenue forecasts, leads to planning, execution, and monitoring, as well as the sound deterioration of budget credibility. forecasting of revenue sources.a Low capital output ratios because of ADB will address this in a proposed public finance-related inefficiencies in public expenditure technical assistance project, focusing on support for management. improvements in expenditure management. Procurement Limited use of GPA and fragmentation of ADB provides technical assistance to central procurement functions across administration procurement entities, such as the GPA, as well as local may lead to mis-procurement. Inadequate procurement units; and it uses these entities for budgets for training of procurement procurement under ADB-funded projects to the maximum professionals may constrain execution of extent possible. It also advocates the use of GPA in procurement processes. Lack of sector suitable forums.b expertise in the GPA may slow procurements.

36 National Statistics Office of Mongolia and World Bank. 2018. Mongolia Poverty Update, 2018: Main Report of Household Socio-Economic Survey 2018. Mongolia.

Vulnerability to corruption Vulnerability to corruption can undermine ADB supports the strengthening of institutions that are accountability throughout the economic and vital for Mongolia's integrity system, such as the political sphere. Mongolian National Audit Office and citizens’ participation in monitoring budget-financed activities. ADB facilitates an active role for Mongolia in international anticorruption initiatives.c ADB = Asian Development Bank, GPA = Government Procurement Agency. a ADB. 2018. Technical Assistance to Mongolia for Strengthening Information and Communication Technology Systems for Efficient and Transparent Public Investment and Tax Administration Project. Manila. b ADB. 2016. Strengthening Public Procurement for Improved Project Implementation. Manila. c ADB. 2019. Mongolia: Strengthening the Supreme Audit Function. Manila; ADB. 2014. Transparency and Efficiency in Public Financial Management (Financed by the Japan Fund for Poverty Reduction). Manila. Mongolia is also an active member of the Anticorruption Initiative for Asia and the Pacific, which is supported by ADB and the Organisation for Economic Co-operation and Development (https://www.oecd.org/site/adboecdanti- corruptioninitiative/). Source: Asian Development Bank.

30. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government.

IV. ASSURANCES

31. The government has assured ADB that implementation of the program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan agreement.

V. RECOMMENDATION

32. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $100,000,000 to Mongolia for the COVID-19 Rapid Response Program, from ADB’s ordinary capital resources, in regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 15 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Masatsugu Asakawa President 5 May 2020

14 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Country’s Overarching Development Objective

Adverse effects of the COVID-19 pandemic on the economy mitigated and poverty alleviateda

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks Effect of the reform a. By 1 July 2020, government a. Audit of the Child provided 1.1 million children Money Program Newly elected Negative health and with MNT30,000 per month (Mongolian National Audit government economic effects of under the Child Money Office) changes COVID-19 crisis on Program (sex-disaggregated) expenditure plan vulnerable groups (March 2020 baseline: after June 2020 mitigated.b MNT20,000 per month for 1.1 elections million children) b. By 31 December 2020, b. Audit of 2020 budget women comprise at least (Mongolian National Audit 45.0% of vulnerable Office) employees benefiting from tailored social assistance-cum- job retention programs (Partial baseline available only, social insurance beneficiaries disaggregated by sex as per indicator 2b; Sex- disaggregated data for all programs to be collected during the program) c. Ministry of Health

reporting c. By 2021, 50% of samples from suspected cases of COVID-19 and/or SARS that are confirmed within the standard time (2019 baseline: 0) Outputs 1a. By 1 July 2020, the 1a–1b. Audit of the 2020 Measures are 1. Measures and increased allocation to Child Money budget. difficult to fund allocation on social Program increased to implement in protection programs for the MNT30,000 per child (sex- 1a. Monitoring of Child practice most vulnerable groups disaggregated) (Baseline: Money Program because of high implemented MNT20,000 per child) transaction costs. 1b. By 31 December 2020, suspension of personal income tax for at least 699,753 vulnerable employees (at least 45% women) for 6 months implemented (March 2020 baseline: 45.1% female taxpayers)

Appendix 1 15

Performance Indicators with Data Sources and Results Chain Targets and Baselines Reporting Mechanisms Risks 2. Measures to safeguard 2a. By 31 December 2020, 2a–2b. Audit of the 2020 productive sectors and suspension of corporate budget MSMEs from the downturn income tax for at least 30,448 implemented vulnerable MSMEs, of which at least 34.0% are businesses owned by women for 6 months implemented (December 2019 baseline: 34.2% businesses owned by women) 2b. By 31 December 2020, suspension of compulsory and voluntary social insurance premiums for around 704,000 vulnerable employees (at least 50% women) for 6 months implemented (March 2020 baseline: 278,648 women [48.8%] covered by compulsory scheme; 84,056 women [63.2%] by voluntary scheme)

3. Measures to strengthen 3a. By 2021, the number of 3a–3b. Reports from the infection prevention and hospitals meeting national National Emergency control established standards related to infection Commission prevention and control increased to 25 (2020 baseline: 19) 3b. Number of hospitals meeting national standards to manage SARS patients increased to 210 (2020 baseline: 0)

Budget Support ADB: $100,000,000 ordinary capital resources loan ADB = Asian Development Bank; COVID-19 = coronavirus disease; MSMEs = micro, small, and medium-sized enterprises; SARS = Severe Acute Respiratory Syndrome. a National Emergency Response Plan. b Due to uncertainties in how the outbreak will unfold, its economic effects, the need for government responses to be flexible as the situation evolves, and because new data collection and reporting systems to monitor the crisis are being developed and evolving, it is not yet possible to set more specific and realistic effect of the program targets than those presented in the DMF. Additional indicators to measure the effects will be identified at a later stage and used to report on the program’s effectiveness as comprehensively as possible in the project completion report. Possible indicators include, the reduction of COVID-19 spreading rates and number of cluster outbreaks; share of SMEs which benefited support measures that are still in business, and food consumption of poor households retained at or close to pre-COVID-19 levels. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54174-001-3

1. Loan Agreement 2. Sector Assessment (Summary): Health 3. Development Coordination 4. Contribution to ADB Results Framework 5. Country Economic Indicators 6. Summary Poverty Reduction and Social Strategy 7. Risk Assessment and Risk Management Plan 8. List of Ineligible Items 9. International Monetary Fund Assessment Letter 10. Gender Monitoring Matrix 11. Debt Sustainability Analysis 12. Safeguard Assessment Matrix 13. International Monetary Fund September 2019 Article IV Consultation Press Release; Staff Report and Statement by the Executive Director for Mongolia

Appendix 3 17

DEVELOPMENT POLICY LETTER

18 Appendix 3

Appendix 3 19

Appendix 4 20

ASSESSMENT OF COMPLIANCE WITH THE ELIGIBILITY CRITERIA FOR THE COUNTERCYCLICAL SUPPORT FACILITY AND COVID-19 PANDEMIC RESPONSE OPTION

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators 1. Adverse Impact of Exogenous Mongolia has taken decisive actions to contain the spread of the Shocks coronavirus disease 2019 (COVID-19) in the country but the socioeconomic impact and the pressure on the country’s health systems are severe.

Major slowdown in economic growth. ADB has revised the 2020 growth forecast down from 6.1% to 2.1%. A protracted global economic crisis because of the COVID-19 pandemic further worsens this outlook considerably. Mongolia was already vulnerable coming into this crisis with growth in Q4 2019 affected by falling growth in the People’s Republic of China and moderating commodity prices.

The slowdown puts a fiscal strain on the country. Total government revenue has fallen by 10.6% year over year as of February 2020. Government revenue will drop by at least 9.2% for 2020 from the approved 2020 budget. This will result in a budget deficit equal to 2.7% of GDP (or $379 million), an increase of 4.1 percentage points from the 2019 budget.

The balance of payments is also under severe pressure. In the first quarter of 2020, the current account balance deteriorated by 92.7% mainly because of lower inflows of merchandise exports in FOB terms (–49.2%) and tourism receipts (–56.6%). Net foreign direct investment (FDI) and portfolio investment decreased by 5.0% and 85.2%, respectively, resulting in the shrinkage of the financial account surplus by 26.1%. As a result, the overall balance of payments deteriorated by 259.5% to $350 million in deficit, and this extremely negative trend is expected to continue.

Social Impacts. The government estimates that about 20% (over 772,000 persons) of the population are at “high risk”. These include elderly people (250,000), people with chronic diseases (350,000), and other categories of people, including those dealing with cancer, hemodialysis, and immunosuppression. There are 18,669 hospital beds in Mongolia, of which 2,916 beds (including only 633 intensive care beds) are dedicated to COVID-19 treatment. The health system in Mongolia is poorly equipped to respond to a massive influx of COVID-19 patients. Given that many people have respiratory pre- conditions because of the poor air quality in Ulaanbaatar and other urban areas in the country, this would quickly overburden health facilities and lead to a disproportionally high level of deaths

Appendix 4 21

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators Significant job losses and increased poverty. The national poverty line was 28.4% in 2018, and the pattern in Mongolia shows that poverty is impacted significantly by economic downturns and recovers slowly. A further 14.9% of people live just above the poverty line and are highly vulnerable to shocks. According to the annual survey of Mongolian National Chamber of Commerce and Industry (MNCCI) (released in April), business confidence in Mongolia is much weaker in 2020 than it was last year. The survey results show that businesses expect a rising trend in unemployment and poverty, and a two-fold decline in expected earnings. The MNCCI also estimates that as many as 20% of all jobs could be lost. Micro, small, and medium-sized enterprises (MSMEs) will bear the brunt of these difficulties, which will have a knock-on impact on employment. Despite limited data on social and gender impacts of the COVID-19 for Mongolia, women are facing greater hardship because of an increased burden of unpaid care work and their predominant role in the health sector operations (82% women). Women comprise more than 60% of entrepreneurs in the country. Most of them run micro and family-owned businesses in industries that have been adversely affected by the economic impact of the COVID-19 pandemic, such as wool, cashmere, farming, services, and retail.

2. Countercyclical development Government has introduced a major countercyclical expenditures development expenditure program (CDEP) to respond to the COVID-19 pandemic. The CDEP includes three areas of support:

Measures supporting citizens The CDEP increases income support to poor and vulnerable groups and households. Particularly, it will increase the allocation under the Child Money Program by 50% to MNT30,000 ($11) per child per month. It will reach 1.1 million children. The CDEP also supports a full exemption for private sector workers of personal income tax from 1 April 2020 for 6 months. This is targeted at employees deemed at risk of losing their jobs (public sector workers have not been included in this measure). Companies whose activities were stopped because of the government restrictions for controlling COVID-19 will receive a monthly stipend of MNT200,000 ($72 equivalent) per employee. Individuals will receive reimbursement of the VAT paid in Q1. This will benefit 860,000 citizens, each gaining an average of MNT47,000 ($17 equivalent). Households will not be disconnected nor will they receive a penalty in case their electricity bill is paid late. This measure is in place until September 2020.

Support to MSMEs and wider economic stimulus measures. Businesses whose operations have been impacted will be eligible for a 6-month exemption from the payment of social insurance. These companies will be exempt from interest and penalties due on unpaid social insurance premiums before 1 April 2020. Companies with sales lower than MNT1.5 billion ($541,000 equivalent) will be exempt from paying corporate income tax for a duration of 6 months. This is expected to benefit 28% of private sector entities or 30,448 companies. Entities that voluntarily reduced lease rates for businesses affected by the economic situation will receive tax exemptions on lease revenue.

22 Appendix 4

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators There will be a 2-month deferment of customs duties and VAT due on staple products, including such imported goods as rice, wheat, sugar, and vegetable oil. The purpose of this support is to help and incentivize these companies to retain their employees to minimize the impact on unemployment in the country.

The economic stimulus measures include enhanced preparation at border crossing points, such as vehicle disinfection, to facilitate exports; as well as provision of increased support to and heightened monitoring of manufacturing, service, and catering facilities in their efforts to comply with regulations related to the prevention of the spread of infection. A large number of public capital projects (1,500) will be brought forward to aid more than 15,000 contractors and 150,000 employees. MSMEs will be provided with an increased access to guarantees on loans of less than MNT30 million ($10,000 equivalent). Cashmere producers, one of the largest affected sectors, will receive concessional loans. This is expected to benefit 233,000 herder households and 47 companies. Agri-companies will receive 50% reduction on the purchase of agriculture equipment. This is expected to assist 1,500 companies.

Public health protection. Under this package, measures that protect human lives, health, and safety will be implemented. It comprises a significant increase of funding in the health sector, which will be under strain because of the COVID-19 pandemic. The additional funding will be used for (i) the procurement and supply of essential health care equipment, and hospital supplies for disinfection and decontamination; (ii) increasing surveillance capacity; (iii) strengthening laboratory and testing protocols; (iv) enabling the health authorities to increase the availability of front line health workers to promptly respond to the crisis; and (v) exempting drugs and health products used for the diagnosis and treatment of COVID-19 from customs duties and VAT.

3. Pre-shock record of generally In 2019, Mongolia’s key macroeconomic performance sound macroeconomic indicators were positive and/or stable. The overall and primary management fiscal balances both recorded surpluses—for the 2nd consecutive year—equal to 1.4% and 3.7% of GDP, respectively. The structural budget deficit was a modest 1.7% of GDP and thus consistent with the Law on Fiscal Stability. Total exports hit a historical high at $7.6 billion, FDI remained stable at $2.1 billion, and the balance of payments had a surplus of $0.5 billion, enabling an increase of gross reserves to $4.4 billion. GDP growth remained robust at 5.1%.

Fiscal performance has greatly improved since 2017. Revenues have steadily increased since 2017, supported by measures to improve tax administration and benefitting from stronger demand for Mongolia’s exports. Expenditures have been more tightly controlled, and efforts have been made to strengthen the public investment program. This positive performance has allowed the government to reduce government debt (including central bank liabilities) from 109.1% of GDP in 2016 to 79.1% of GDP in 2019 (a 30 percentage point reduction) and to turn the fiscal deficit of 15.3% of GDP in 2016 to a surplus of 2.6% in 2018 and 1.4% in 2019. Challenges remain

Appendix 4 23

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators over the composition of expenditure, optimization of expenditures structure, and fiscal governance.

Monetary policy was consistent with promoting external balances, restoring confidence, and enabling increasing net domestic credit. Although average inflation increased from 1.1% in 2017 to 7.3% in 2019, this was still below the Parliament-approved inflation target of 8%. The Bank of Mongolia (BOM) cut the policy interest rate from 11.0% to 10.0% in March 2020, reduced the reserve requirement for MNT by 2 percentage points to 8.5%, and narrowed the interest rate corridor to plus and minus 1% from the policy interest rate. The BOM also made amendments to the Asset Classification and Provisioning Procedure to (i) extend loan classification terms from 15 days to 90 days for consumer loans, from 31 days to 91–120 days for past-due arrears, and from 90 days to 121 days for non-performing loans; (ii) ease requirements on impaired consumer and business loans; (iii) waive conservation buffer requirements on the banks’ capital; and (iv) reduce the minimum liquidity ratio from 25% to 20%. Further, all banks were asked to reduce small transaction fees by 20%–100% during the emergency period. In April 2020, the BOM allowed banks to postpone housing mortgage loan (impaired) repayments by 3 months. The BOM also cut the policy interest rate by a further percentage point to 9.0% and allowed banks to postpone consumer loan (impaired) repayments by up to 12 months.

Challenges remain in the banking sector. The following three structural benchmarks under the IMF program in the banking sector were not met: (a) Banks will book the provisioning gap identified by the asset quality review (AQR) and reclassify their assets to the non- performing category in line with the AQR; (b) Based on the AQR findings and advice provided by external experts, regulation on asset classification and provisioning to be further improved in consultation with IMF staff; (c) Financial Stability Council finalization and publication of an non-performing loan (NPL) resolution strategy. The recapitalization of the banks is still incomplete. Banking sector reform will therefore be an important policy area going forward. Recently, the BOM submitted a draft Banking Sector Reform Program for 2020–2023 for parliamentary discussion. This medium-term program includes 5 core objectives and 49 reform actions, including the recapitalization. The draft program will address (i) bank ownership concentration and governance, (ii) modernization of bank supervision, (iii) the IMF program, (iv) improvement of the AML-CTF system, and (v) modern banking operations and FinTech. This provides some confidence that these issues are at the top of the policy reform agenda.

4. Structural Reforms Mongolia has taken decisive action to respond to the COVID-19 situation. Shortly after the initial outbreak in the PRC, the National Security Council (comprising the President, the Prime Minister, and the Speaker of Parliament) imposed restrictions on air travel movements across borders and nationwide school closures to prevent community transmission.

24 Appendix 4

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators The National Emergency Commission (chaired by the Deputy Prime Minister) was convened and is currently the responsible body overseeing the government’s response. It issued six directives between 21 February 2020 and 22 March 2020, which imposed additional restrictions on international travel to the point where currently no commercial air routes are available to enter or exit Mongolia. Further measures included the cancellation of public events, mandatory quarantine measures, and restrictions on retail services. The government has assigned the highest possible risk rating to the emergency under the Law on Disaster Protection. It has allocated $4.3 million from the state budget to respond to urgent needs. The endorsed National Emergency Response Plan requires around $240 million to support the procurement of emergency medical equipment, increase surveillance capacity, ensure adequate supply of medicines, strengthen laboratory and testing protocols, and provide food, fuel, medical and other essential support to vulnerable populations including.

The country remains in a state of high preparedness. Respiratory diseases make up a high proportion of the burden of disease in Mongolia; the Ministry of Health (MOH) has identified 20% of the population (over 772,000 citizens) to be at high risk. The $4.3 million allocated from the state budget in the first quarter of 2020 has been used to procure medical equipment and supplies to ensure that dedicated hospitals and health institutions can prevent transmission and respond to COVID-19 cases. In anticipation of the worsening emergency, the government is planning to further increase the expenditure in the health sector to strengthen the response capacity of local health authorities and medical facilities. In Ulaanbaatar as well as provincial level hospitals, there is a shortage of essential priority equipment and medical supplies. Overall, 10,000 units of priority medical equipment and supplies nationwide are needed to respond to the COVID-19 pandemic.

The government is planning medium-term improvements to the health sector. As part of the National Emergency Response Plan, the government will enhance testing, diagnosis, and disease control systems in the country. In addition, ADB is preparing additional financing under an existing operation,a which will increase diagnostic and treatment capacity of hospitals to manage Severe Acute Respiratory Infection patients, establish a national medical countermeasures stockpile in Ulaanbaatar , and expand the project sites for upgrading sterilization departments in tertiary and secondary hospitals nationwide.

5. Debt Sustainability The countercyclical expenditure plan does not affect the overall sustainability of Mongolia’s debt. The International Monetary Fund (IMF) conducted a debt sustainability analysis as part of the Article IV Report produced in September 2019.b

According to the IMF, the public debt–GDP ratio under the baseline scenario is forecast to fall significantly by 16 percentage points from 2018 to 2024. The baseline scenario for 2020–2024 assumed and reflected the following:

Appendix 4 25

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators

(i) high nominal GDP growth around 12.5% per annum, based on a moderate and stable level of real GDP growth of around 5.4% per annum; (ii) a moderate level of annual inflation of 6.7%, which is consistent with the Bank of Mongolia (central bank) current inflation target of 8.0% and the medium-term target of 6.0%, and a stable exchange rate; (iii) The primary fiscal balance is projected to remain in the range of –0.5%–3.0%, showing no significant and adverse pressure on the overall fiscal position; and (iv) Mongolia would retain access to concessional budget support and project loans so that annual average effective interest rate remains low at 2.7% over 2020–2024.

The IMF assessment also highlighted that the public debt and financing needs are sensitive to shocks to (i) GDP growth, (ii) exchange rate depreciation, and (iii) financial sector contingent liabilities related to banking sector recapitalization.

Since this assessment was conducted last year, growth forecasts for Mongolia have fallen significantly, and fiscal revenues will decline. The Government of Mongolia’s countercyclical expenditure program will result in an increase in expenditure by 11.7% over the 2019 level. Consequently, the overall and structural fiscal balances will deteriorate by 4.1 percentage points and 3.4 percentage points, respectively, to deficits of 2.7% ($379 million) and 5.1% ($713 million).

ADB, in close consultation with the IMF, has calculated the public debt–GDP ratio for two scenarios and has assumed no change in central bank liabilities. Both scenarios show a temporary increase in the debt–GDP level in 2020 before a return from 2021 to 2025 to the previous trend and downward trajectory. This assumes that an economic recovery would start in 2021, and that there is a stable growth trajectory from 2022–2025. The ratio remains sensitive to risks associated with GDP growth, balance of payments shocks and their impact on exchange rate and fiscal balances, and the realization of contingent liabilities. For more detail, please refer to the Debt Sustainability Analysis (Linked Document 11).

6. Coordination with the IMF The IMF’s Extended Fund Facility (EFF) provides for a regular mechanism for coordination and dialogue among international financial institutions and major development partners. The IMF is in discussion with the government for a loan from its Rapid Financing Instrument designed to provide support in the event of balance of payment challenges. ADB maintains a close ongoing dialogue with the IMF, and this has continued since the onset of the pandemic with regular sharing of analysis on the economic situation.

The Article IV of September 2019 highlighted the vigorous recovery of Mongolia’s economy from the recent downturn. Economic growth accelerated to 8.6% in the first quarter of 2019, overall fiscal balance turned into surplus in 2018, Gross

26 Appendix 4

COVID-19 Pandemic Response Asian Development Bank’s Assessment Option: Criteria and Indicators international reserves have increased by $2.5 billion since 2016. The recovery stems from a stronger policy framework, significant official financing, and a rebound in external demand. Notwithstanding the progress, Mongolia remains vulnerable to external shocks given its high debt levels and the economy’s dependence on mineral exports.

The IMF has provided an assessment letter to ADB that updates the assessment of Mongolia’s economic conditions and policies since the 2019 Article IV consultation. As a result of slowing growth in the PRC and a fall in commodity prices, the Mongolian economy had already decelerated in 2019 and now faces strong headwinds due to the global COVID-19 outbreak. To mitigate the negative impact, both fiscal and monetary policies are poised to loosen materially. The challenge will be to support economic output while preserving macroeconomic stability. Key challenges include large near-term external refinancing needs and limited international reserves. The sixth review under the EFF remains delayed, and the program is scheduled to expire in May 2020. a ADB. 2012. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Mongolia for the Fifth Health Sector Development Project. Manila. b IMF. 2019. Mongolia 2019 Article IV Consultation. Washington DC. c IMF definition. This does not include central bank liabilities, which is main reason this differs from the ADB definition quoted in the main text of the report and recommendation of the President to the Board of Directors.

Appendix 5 27

ADDITIONAL INFORMATION ON THE RESPONSE MEASURES TO THE COVID-19 PANDEMIC AND THE COUNTERCYCLICAL DEVELOPMENT EXPENDITURE PROGRAM

Table A5.1: Summary of Measures to Bring the COVID-19 Pandemic under Control Measure Description COVID-19 The National Emergency Response Plan was prepared by the government with Pandemic extensive inputs from the international community, led by the United Nations. The Response Plan plan is overseen by the State Emergency Commission, and the National Emergency Management Agency leads the implementation. The plan’s key measures include the setting of the level of quarantine needed; closures of borders; the conduct of surveys of the current situation; the importation of essential equipment, food, and fuel; the training of health personal on emergency preparedness; the creation of a database on the health conditions of people aged 60 and above; and the improvement of health facilities. The protocols are divided into pre-pandemic, pandemic, and post-pandemic phases. Initial estimates from the National Emergency Response Plan suggest overall needs are currently about $240 million, of which $50 million is required for the health sector alone. Social distancing The governments has introduced social distancing measures to contain the protocols disease, such as a ban on mass gatherings and celebrations, the closure of schools until 1 September, partial closure of restaurants and bars, encouragement to companies to work from home, and guidance on the use of face masks and handwashing. A hotline has been established by the government to support surveillance measures. Travel No commercial airlines can travel to Mongolia. Initial restrictions were imposed on travel from the People’s Republic of China in February and have gradually been extended to cover all destinations in March. The current ban lasts until 31 May but may be extended further. Some government-organized charter flights have been arranged to facilitate the return of Mongolian nationals living abroad. Restrictions are also in place on internal travel between aimags (provinces). A total of 51,742 vehicles and 70,981 passengers have been checked at border points (as of 17 April 2020). Disinfection and observation protocols are in place at border points. Observation and Since the outbreak, almost 5,000 people have been put under observation. A total testing of 1,687 were under observation as of 17 April 2020. A total of 6,611 individuals had been tested as of 17 April 2020. Enhanced health In addition to increased quarantine, observation, and testing, the government will sector support increase (i) procurement and supply of essential health care equipment, and hospital supplies for disinfection and decontamination; (ii) increase surveillance capacity; (iii) strengthen laboratory and testing protocols; (iv) enable the health authorities to increase the availability of frontline health workers to promptly respond to the crisis; and (v) exempt drugs and health products used for the diagnosis and treatment of COVID-19 from customs duties and VAT. The government is also planning several measures to strengthen the health sector’s response over the medium term. These include strengthening the number of hospitals meeting national standards related to infection prevention and control, improving national standards to manage Severe Acute Respiratory Infections patients, and increasing the speed at which suspected cases are confirmed. ADB will support these measures under a complementary operationb that will increase diagnostic and treatment capacity of hospitals to manage Severe Acute Respiratory Infections patients, establish a national medical countermeasures stockpile in Ulaanbaatar, and expand the project sites for upgrading sterilization departments in tertiary and secondary hospitals nationwide. Social protection The government has announced several measures under the Countercyclical measures Development Expenditure Program (CDEP) to support the most vulnerable groups. These measures are as follows: 28 Appendix 5

i. It will increase monthly cash grants to children under the Child Money Program by 50% to MNT30,000 per child (aged 0–17) per month for 3 months until the end of June. This reaches 59.8% of households and 93.6% of all children. ii. Private sector workers will be exempt from income tax payments for a period of 6 months. This will reach 699,753 vulnerable employees. iii. Companies whose activities have been stopped because of the government restrictions for controlling the spread of the COVID-19 pandemic will receive a monthly stipend of MNT200,000 for employee they have been retained in their jobs. iv. Individuals will receive reimbursement of the value-added tax (VAT) paid in the first quarter of 2020. This is expected to benefit 860,000 citizens, each gaining an average of MNT47,000. ADB is preparing an additional operation to further support the government in extending and expanding the social protection response. Economic The second component of the CDEP is the main vehicle for government-led measures stimulus measures. These measures include a 6-month exemption from the payment of social insurance for businesses affected by COVID-19; a 6-month holiday from the payment of corporate income tax for affected businesses; a 2- month deferment of customs duties and VAT due on staple products, including imported goods such as rice, wheat, sugar, and vegetable oil; increased access to guarantees on loans of less than MNT30 million; tax exemptions on lease revenue for entities that voluntarily reduced lease rates for businesses affected by the economic situation; concessional loans for cashmere producers; and a 50% reduction on the purchase of agricultural equipment. The Bank of Mongolia has taken several measures to ease credit conditions. These include cutting the policy interest rate to 9.0%, allowing commercial banks to postpone consumer loan and housing mortgage loan repayments by 3 to 12 months; easing asset classification and provisioning regulatory requirements; reducing the minimum liquidity ratio to 20%; and reducing the MNT reserve requirement to 8.5%. Further, the BOM is submitting a draft Banking Sector Reform Program for 2020– 2023 for parliamentary discussion and approval. This medium-term program includes 5 core objectives and 49 reform actions, including banking sector recapitalization. The draft program will address (i) bank ownership concentration and governance, (ii) the modernization of bank supervision; (iii) the IMF program; (iv) the improvement of the AML-CTF system; and (v) modern banking operations and FinTech. ADB = Asian Development Bank, CDEP = Countercyclical Development Expenditure Program a Government of Mongolia. Deputy Prime minister Order No. 26. 20 March 2020. Strategic Preparedness and Response Plan to Stop Further Transmission of CORONA virus. Mongolia. b Asian Development Bank. Proposed Loan for Additional Financing: Fifth Health Sector Project (Emergency Assistance for COVID-19). Manila. April 2020. Source: Asian Development Bank.

Appendix 5 29

Table A5.2: Summary of Countercyclical Development Expenditure Program ($ million) Details Amount Measures Supporting Citizens 154.6 Personal Income Tax exemption 63.2 Job Retention Allowance 18.4 Child Money Program 12.4 VAT Refunds 14.4 Erdenes Tavan Tolgoi Dividends Payouta 46.2 Support to vulnerable businesses and fiscal stimulus measures 1,567.9 Exemption on Social Insurance 288.2 Social Insurance Penalty exemption 4.2 Corporate Income Tax exemption 10.8 Exemption for tax penalties and fines 5.4 Rental Relief 7.2 Import Tax and Duties exemption of food products 3.6 Guarantees 39.0 Cashmere sector support 118.1 Discount on Agricultural Equipment 12.3 Capital projects (of which two-thirds does not yet have financing) 1079.1 Health Sector Measures 71.9 Total 1,794.4b a Erdenes Tavan Tolgoi is a state-owned enterprise where each Mongolian citizen owns a share. b This number has been rounded up to $1.8 billion in the main text and linked documents where referenced. Note: Exchange rate is $1 = MNT2769.00 (the official exchange rate on 27 March, when the CDEP was announced). Source: Ministry of Finance.

Appendix 6 30

ADDITIONAL INFORMATION ON THE MACROECONOMIC FRAMEWORK

Inflation dynamics and the monetary policy stance

1. Historically, Mongolia has experienced high inflation (often double-digit inflation) mainly due to commodity boom and bust cycles, procyclical fiscal expansions, supply shocks, balance of payments crises and their negative transmissions to inflation through exchange rate depreciation. However, inflation has been below the Bank of Mongolia (BOM)’s target since July 2015 and has remained consistent with the target since the (Figure A6.1).

2. In 2018 and 2019, annual inflation moved closer to the BOM target due to economic recovery, supply-side factors, and exchange rate pass through on imported goods and services. Inflation moderated towards the end of 2019 and in 2020 in response to slower economic growth, significantly lower credit growth, the fading impact of supply shocks and a more stable exchange rate. The continued increase in foreign exchange reserves since 2017 has enabled reserves to reach 5.8 months of merchandise goods and services import cover, which has positively affected foreign exchange market expectations (Figure A6.2).

3. As of March 2020, inflation reached 6.4%, and annual average inflation is expected to moderate from 7.3% in 2019 to 6.6% in 2020 according to Asian Development Bank ADB forecasts1 as the economy slows, demand-pull inflationary pressure falls, and the demand for foreign exchange decreases in line with reduced imports of goods and services. The International Monetary Fund, World Bank, and the BOM’s inflation forecasts in 2020 all remained lower than the targeted level of inflation.

Figure A6.1: Inflation and policy rate (%) Figure A6.2: Exchange rate and FX reserves

16 2900 5 14 MNT/USD exchange rate, 2600 4 12 Policy rate LHS 10 Central bank target 2300 3 8 Gross FX 6 2000 reserves, RHS 2 4 Annual ($ billion) inflation 2 12-month… 1700 1 0

-2 1400 0

2020

2019

2018

2017

2016

2015

2020

2019

2018

2017 2016 2015 Sources: The Bank of Mongolia. 2020. Statistical Bulletin; National Sources: The Bank of Mongolia. 2020. Statistical Bulletin; ADB Statistical Office. 2020. Statistical Database; ADB estimation estimation

4. BOM’s monetary policy stance has been accommodative in line with the inflation outlook. Significantly lower oil prices in international market and the large decline in the imports of consumer goods have supported stability in the foreign exchange market. Therefore, BOM has reduced its policy interest rate twice since March 2020 by a total of 200 basis points to 9.0%, maintaining positive real interest rates. The recent monetary easing aims to support macroeconomic and financial stability and to promote financial intermediation and economic activities without disrupting monetary policy objectives.

1 ADB. 2020. Asian Development Outlook: What Drives Innovation in Asia? Manila.