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Social welfare programs contain the impact of economic crises on the poor.

The engagement of the Asian Development Bank’s (ADB) in earlier economic crises across Asia and the Pacific has highlighted the importance of (i) strengthening and implementing social protection systems and welfare programs, and (ii) providing development assistance to contain the impact on the poor of the crises and subsequent economic adjustments. The experience of this program reinforces that lesson. ADB was able to respond quickly and work with the government to ensure that the economic deterioration and resulting fiscal consolidation did not harm the poor. While poverty rose significantly during 2014–2016, based on past evidence, it is highly likely that poverty would have increased more had social expenditure not been maintained. Interviews with government officials confirmed the positive impact of the program in containing the adverse effects of the crises and still ongoing fiscal consolidation on the poor.

Aligning social welfare programs with fiscal consolidation goals boosts the likelihood of success in both areas of endeavor.

Fiscal consolidation immediately reduces available resources for government expenditure, resulting in a heightened competition for the remaining resources. In designing social welfare programs, it would thus be important to understand and consider the depth and magnitude of the fiscal consolidation that must take place. For example, this program’s size of $150 million was designed to meet a little more than half of the 2015 budget deficit and the policy actions that were supported encompassed the key requirements for restoring fiscal stability and improving budget transparency. While progress was set back by the unanticipated fiscal indiscipline in the lead-up to the 2016 election, many of the program accomplishments would remain intact, providing the basis for the remarkable fiscal consolidation since 2017.

Consolidation of social welfare reforms needs time and sustained engagement.

ADB has successfully introduced targeted schemes that provide significant welfare benefits to Mongolia’s neediest. Under this program, it worked with the government and other partners to ensure that such schemes would do more during the difficult economic period. Specifically, the Food Stamp Program’s coverage and benefits were expanded, resulting in a 60% increase in social transfers to the poorest households. However, as only initial steps had been taken and more time and effort are required to complete the consolidation of social welfare reforms, ADB should continue to engage government in deepening the reforms under the ongoing second phase of this program. Particularly, it should help ensure that enhanced poverty−targeting, greater synergy and collaboration, and tighter fiscal discipline should work together to reverse the increasing poverty experienced by Mongolia in recent years.

Background

Strong economic growth, driven by years of economic reforms and the country’s vast mineral wealth, supported Mongolia’s rise to middle-income status in 2011. It also bolstered fiscal revenues and allowed the government to strengthen its social welfare programs, which was crucial for inclusive growth as the mining sector, which comprised the main driver of growth, provided less than 4% of employment. There was also strong evidence linking poverty reduction to social transfers that accounted for about 40% of the poor’s income during program appraisal. Specifically, poverty incidence that declined from 38.6% in 2010 to 21.6% in 2014 would have been 10 percentage points higher in 2014 without social welfare programs.

But as the economy became highly dependent on mining and foreign direct investment (FDI) flows to the sector, it also became highly vulnerable to external shocks. Falling commodity prices in 2012−2013, particularly for coal, severely strained Mongolia’s mineral production and consequently its fiscal revenues. FDI, which fell by 55% in 2013 and 80% in 2014, exacerbated the problem, resulting in a sharp decline in economic growth to 3.0% in the first half of 2015 from a peak of 17.3% in 2011.

Faced with a severe economic crisis and the consequent need for fiscal consolidation, the government requested the Asian Development Bank (ADB) for assistance in maintaining its social welfare expenditure. In response, ADB approved a 2-tranche, policy-based loan of $150 million for the Social Welfare Support Program, which sought to ensure that the adjustment forced by the economic slowdown did not come at the expense of Mongolia’s poverty-reducing social welfare expenditure.

The program’s intended outcome was maintenance of social welfare programs. It had 2 planned outputs: (i) improved fiscal management and (ii) improved policies and regulations to support targeting and consolidation of social welfare programs. The program results were to be realized through 18 policy actions: 11 under tranche 1 and 7 under tranche 2, all of which were successfully implemented, 9 months ahead of schedule.

Under output 1: policy actions to restore fiscal stability and improve budget transparency were undertaken, key of which were the approval of the Comprehensive Macroeconomic Adjustment Program, amendment of the Fiscal Stability Law, implementation of the Budget Transparency Law, and termination of the Price Stabilization Program.

Under output 2: policies and regulations to enhance existing schemes and poverty-targeting and begin the consolidation of social welfare programs were put in place. The Food Stamp Program’s coverage and benefits were expanded; health insurance subsidies were mandated; the use of integrated household information database (IHID) was required in government programs; allocations were made to update the IHID; and preparatory work for the consolidation of welfare programs were begun.

Notwithstanding the setback caused by the large off-budget spending surrounding the 2016 election, many of the program achievements had remained intact, providing the basis for the remarkable fiscal consolidation since 2017.

ADB’s East Asia Department rated the project highly successful. The Ministry of Finance was the executing agency, and the Ministry of Population Development and Social Protection, the implementing agency.

Project Information
Project Name: 
MONGOLIA: Social Welfare Support Program
Report Date: 
June, 2018
Country: 
Project Number: 
Project/Modality: 
Loan
Report Rating: 
Highly successful

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