World Bank advises strengthening fiscal foundation and spending on health and education

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The World Bank’s new “Public Expenditure Review: Growing without Undue Borrowing” report calls on Mongolia to strengthen its fiscal foundation for rapid and inclusive growth. 

The report underscores special spending needs in health and education, which are defined by the World Bank as key sectors that play an essential role in the country’s long-term development and the fight against poverty. 

“With high public debt, low tax rates and high exemptions, the Mongolian economy remains extremely vulnerable to external factors, including shifts in global demand, commodity prices, and exchange rate and interest rate shocks. There is a clear need to strengthen fiscal buffers through increased savings during years of prosperity,” said World Bank Country Manager for Mongolia Andrei Mikhnev. 

At an average of around 11 percent of GDP between 2010 and 2016, Mongolia’s capital expenditure has been among the highest in the world, experts noted. However, the returns of this spending has been low due to poor project selection, long delays in implementation, high cost overruns, and low maintenance budgets.

“The report lays out key actions the country can take to enhance the efficiency of public investment. Development and implementation of a national road map to improve the efficiency of these investments is the top priority,” said Jean-Pascal Nganou, senior country economist and a lead author of the report. 

Given Mongolia’s highly volatile revenue performance, the report recommends reducing the dependence of government revenue on the mineral sector by embarking on a gradual reform of the tax system. This includes measures to increase low statutory tax rates, revise the number and size of tax exemptions, and broaden the tax base. The report illustrates that VAT and excise taxes in Mongolia are regressive in nature as their burden is larger among the poor than among the non-poor.
Another issue highlighted is the wage bill – currently the fastest growing and the largest component of recurrent expenditures. 

“The Public sector wage bill is closely linked to increased staff turnover owing to frequent reorganization of ministries. This reinforces the need to reform the civil service to create a professional and an apolitical cadre of civil servants,” said D.Badamchimeg, public sector specialist and co-author of the report.

In the social sectors, success is mixed. There is near-universal coverage of basic education and the country’s education spending ratios are average when compared with similar countries. However, there are persistent issues related to poor planning of resources, and the low budget allocations to basic classroom learning materials in contrast to high spending on expensive equipment. Access to quality early childhood education, notably for herder families, remains to be addressed.

In the health sector, the spending as a share of GDP is currently much lower than it was in 2003, and lower than that in most other middle-income countries. Despite Mongolia’s strong performance in maternal and child health, the report identifies critical reforms needed to address the growing burden of non-communicable diseases. These include reorganizing services to address the growing share of chronic illness by focusing on high-quality primary care, enhancing the efficiency of spending, and improving management at the local and provider levels.

The report highlights the urgent need to strengthen the pension system to meet the needs of Mongolia’s ageing population. The government set target for a maximum state subsidy for pensions of two percent of GDP by 2030. However, due to measures allowing many workers to purchase a pension for life at retirement age at a fraction of the cost that other workers have paid during their work lives, reducing herders’ retirement ages, and others, the current subsidy of two percent of GDP is projected to rise to six percent in 2030 and 11 percent in 2050 unless reforms are undertaken.

Finally, the report examines the roles, responsibilities and coordination of key institutions in fiscal matters. The report indicates that the performance and effectiveness of these institutions vary and suggests to a series of reforms on fiscal issues aimed to improve the effectiveness of existing institutions.

Dulguun Bayarsaikhan