Lessons

Mongolia: Social Welfare Support Program Phase 2

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Lessons

Development assistance is critically important to expand social protection in countries with limited fiscal space.

This program played an important role in initiating a framework for fiscal consolidation without withdrawing the much-needed social welfare support for the poor at a time of economic difficulty. It built on lessons from previous ADB assistance programs in Mongolia, as well as key lessons from ADB’s engagement in earlier economic crises across Asia and the Pacific on how to contain the crises’ impact on poverty. These lessons highlighted the importance of strengthening and implementing social protection systems and welfare programs, and providing development assistance to expand social protection in countries with limited fiscal space.

Project Cycle Stage: 
Preparation

Fiscal discipline is vital to continually improving macroeconomic and fiscal management.

Mongolia has made significant progress in improving macroeconomic and fiscal management. However, like other governments, it has tended to engage in fiscally unsustainable expenditures, especially in times of economic boom or during political elections. A classic example was the excessive spending of the previous government in the lead-up to the general election in 2016, which aggravated the country’s fiscal difficulties and created complications to the program. While the complications were eventually remedied, maintaining fiscal discipline continues to be a risk that the government must mitigate with support from to ADB and other donors.

Project Cycle Stage: 
Preparation

Decisions about poverty targeting need to take account of both the changes in the country’s poverty profile and the fiscal implications of loosening on targeting.

The Social Welfare Support Program Phase 2 made significant strides towards improving the overall fiscal policy and increasing the efficiency of social welfare expenditure.  Nevertheless, further improvements are necessary, particularly to enhance targeting and the consolidation of social welfare programs. A comprehensive study is needed to measure the extent to which greater focus on the poor has been achieved; but the large proportion of non-poor that remained under the previous programs implies that a large amount of work still needs to be done. This program has also demonstrated that decisions on whether targeting should be more or be less stringent must consider both the changes in the poverty profile of the country and the fiscal implications of any loosening of targeting.

Project Cycle Stage: 
Preparation

Exploring other modalities can help enhance the Mongolian government’s social welfare interventions.

As it seeks to further strengthen its social welfare programs, the government can consider various enhancements including other modalities of social transfers. Among them are (i) further improvements in targeting to strengthen fiscal sustainability; (ii) inclusion of incentives for behavioral change among recipients to promote longer-term opportunities for poor households to move out of poverty; (iii) enhanced monitoring of welfare programs through improved and expanded databases on poor households; and (iv) temporary vertical and horizontal expansion of social welfare benefits in response to natural disasters or economic shocks, for example, shock-responsive social protection. These and other options may be considered in the next round of reforms.

Project Cycle Stage: 
Preparation

Long-term commitment is required to sustain the implementation of social welfare reforms in Mongolia.

While ADB, through the food stamp program, successfully introduced proxy means testing as a viable approach for poverty targeting, overall progress in replicating the approach in other programs has been understandably slow. The reform process is constrained by important factors such as maintaining the political will to sustain the reforms and veering away from the inefficiency of poorly targeted programs. Moreover, in the reform process, certain important factors need serious consideration by the policy makers. Among them is the potential resistance from and possibly the need to compensate those who will be negatively affected by better targeting and the consolidation of benefits. Such factors create setbacks risks, as experienced in this program and in other countries, which could further delay the reform process. Within this context, sustained engagement is even more necessary and ADB’s long history and institutional memory on social welfare reform in Mongolia will continue to be most valuable.

Project Cycle Stage: 
Preparation
Implementation

Careful calibration of policy actions will help ensure that they are realistic, manageable, and effective.

Given the often challenging political and economic environment within which fiscal and social welfare reforms need to be implemented, policy frameworks should be carefully calibrated in future reform programs to ensure they are realistic, manageable, and effective in achieving the intended results. All policy actions under the program were fully achieved according to the envisaged timing, illustrating this important lesson. Because of the program’s carefully calibrated policy actions, the results are more likely to stay in place and remain useful and relevant in future reform efforts. ADB’s continuous consultation and dialogue with the government and relevant stakeholders will strengthen the viability of envisaged policy actions. 

Project Cycle Stage: 
Preparation
Implementation
Background

Mongolia’s economy grew rapidly between 2004 and 2014.  This propelled the country into middle-income status by 2011 and allowed it to expand its social welfare programs through large fiscal surpluses and distributed mining income. Social transfers, which accounted for about 40% of the income of poor people, significantly reduced poverty.  Despite these gains, one in five Mongolians still lived in poverty in 2014 and relied on welfare benefits for basic subsistence. The subsequent economic slowdown jeopardized these welfare benefits and risked reversing some of the gains in poverty reduction.

At government’s request, the Asian Development Bank (ADB) approved a loan of $150 million for the Social Welfare Support Program (SWSP) in 2015.  The program was implemented to close an important gap in the 2015 budget and support fiscal consolidation efforts under the 2015 Comprehensive Macroeconomic Adjustment Program.  SWSP aimed to ensure that the adjustment forced by economic deterioration would not be at the expense of Mongolia’s poverty-reducing social welfare expenditure. Through this phase, ADB helped the government take the necessary initial steps toward improving and expanding targeting and consolidating various social welfare programs.

Mongolia’s economic situation deteriorated further the following year, with fiscal deficit reaching 15.4% of gross domestic product.  This resulted in the reduction of social welfare funding thus threatening to reverse the poverty reduction gains in the previous years. It was estimated that the poverty rate would be about 10 percentage points higher in the absence of appropriate social welfare programs.

Following the general election in August 2016, the new government requested a follow-up policy-based loan (PBL) from ADB.  It also sought assistance and reached an agreement with the International Monetary Fund on an Extended Fund Facility (EFF) that would entail the steady reduction of budget deficits as part of the fiscal consolidation process thus creating a risk to social welfare funding.  To help address the challenge, ADB approved Phase 2 of the SWSP (SWSP-2) in May 2017 for a two-tranche PBL of $150 million. 

SWSP-2 was designed to protect funding for social welfare programs for the poor and vulnerable people in Mongolia during the EFF implementation.  Its intended impact was mitigation of the adverse impacts of economic slowdown and fiscal consolidation on the poor and vulnerable people.  Its intended outcome was fiscal expenditure maintained for social welfare programs for the poor and vulnerable people. The program outputs were (i) improved fiscal policy management, and (ii) improved policies and regulations to support targeting and consolidation of social welfare programs. 

At program completion, the government successfully complied with the 18 policy actions required for the delivery of the two outputs.  The policy actions were carefully selected based on international best practice and in-depth sector analyses.  Implementation of the policy actions allowed the government to effectively pursue fiscal consolidation and achieve four main policy reforms, including (i) introducing poverty targeting to selected social welfare programs; (ii) updating the poverty-targeted databases; (iii) applying proxy means testing to the relevant programs of other government agencies; and (iv) consolidating the various social welfare programs to help improve the efficiency and effectiveness of these programs.  

As a result, the government was able to maintain its social welfare expenditure beyond what was targeted. Instead of the proposed 10% reduction from its 2016 level, actual social welfare expenditure in 2017 registered a 13% increase, indicating a high degree of effectiveness in the attainment of the program outcome, and consequently, the intended impact.

Mongolia’s basic economic indicators started to improve in 2017 and 2018. The proportion of the population living below the national poverty line, which had significantly increased from 21.6% in 2014 to 29.6% in 2016, dropped, albeit slightly, to 28.4% in 2018.  Many of the program’s achievements have remained intact and continue to be important to the challenging fiscal consolidation process as well as to the continuous improvement of Mongolia’s social welfare interventions.

The program had the Ministry of Finance as executing agency and the Ministry of Labor and Social Protection as implementing agency.

Project Information
Project Name: 
Social Welfare Support Program Phase 2
Report Date: 
August, 2020
Main Sector: 
Public Sector Management
Country: 
Mongolia
Project Number: 
50302-001
Report Type: 
PCR
Project/Modality: 
Policy-based loan
Themes: 
Inclusive Economic Growth
Gender Equity and Mainstreaming
Governance and Capacity Development
SDG: 
Goal 2: Zero Hunger
Goal 3: Good Health and Well-Being
Goal 16: Peace, Justice, and Strong Institutions
Sub Sector: 
Social protection initiatives
Loan Number: 
3532
Source of Funding: 
OCR
Date Approved: 
30 May 2017
Report Rating: 
Highly successful

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