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Cambodia: Second Review Under the Poverty Reduction and Growth Facility

Author(s):
International Monetary Fund
Published Date:
February 2001
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I. Introduction

1. In concluding the first review under the PRGF arrangement and the 2000 Article IV consultation, Executive Directors commended the authorities for their economic performance and emphasized that achieving sustained growth and poverty reduction will require continued strong efforts on a wide front. Critical elements would include an increase in fiscal revenue, and a continued redirection of expenditures to priority social objectives in an environment of improved governance. Directors also stressed the need to refrain from nonconcessional borrowing, and to follow through on agreed structural measures relating to civil service reform, military demobilization, and forestry policy.

2. In the attached letter to the Managing Director, the authorities request completion of the second PRGF review. In the accompanying Memorandum of Economic and Financial Policies (Attachment), the authorities report on progress made under the PRGF-supported program, describe their policies for the second program year, and establish performance criteria through end-2001. The program continues the main thrust of policies established under the first-year program centering on revenue mobilization, expenditure management, bank restructuring, and forestry policy. The program has been designed to support the objectives of the authorities’ Interim Poverty Reduction Strategy Paper (I-PRSP).

II. Performance Under the Program in 2000

3. Performance under the first year of Cambodia’s PRGF-supported program was strong, with a resumption of growth, low inflation, and significant progress in major areas of structural reform. The political situation has stabilized since the current coalition government was formed in November 1998, providing Cambodia with an improved environment to implement reforms that have restored growth momentum (Table 1 and Charts 1 and 2). Quantitative benchmarks and performance criteria, and structural performance criteria, have been observed through end-November 2000 (Tables 23). Delays have been experienced in some areas of structural reform because of weak implementation capacity, difficulties in reaching internal consensus, or delays in donor financing.

Table 1.Cambodia: Selected Economic Indicators, 1997–2001

Nominal GDP (1999 est.) US$3,008 million

Population (1999 est.) 11.7 million

GDP per capita (1999 est.) US$256

Fund Quota SDR 87.5 million

19971998199920002001
Orig. Prog. Rev. Prog. Most recentProg.
(Percent change; unless otherwise indicated)
Real economy
Real GDP3.71.85.05.54.06.0
GDP deflator6.013.13.83.24.05.7
Consumer prices (end-of-period)9.213.3-0.55.08.42.4 6/1.8
(annual average)8.014.84.02.30.48.9
Money and credit
Broad money (incl. foreign currence deposits)16.615.717.335.534.728.5 6/24.0
Of which: riels in circulation18.843.0-3.84.17.83.4 7/8.0
Net credit to the government 1/-8.111.7-6.1-3.2-1.4-6.0 6/-1.3
Velocity of money 2/9.79.58.57.47.06.2
(In percent of GDP)
Government budget
Revenue (incl. capital revenue)9.69.011.511.711.611.0 8/12.1
Of which: tax revenue6.56.56.38.88.68.1 8/8.7
non-tax revenue3.02.23.12.82.92.8 8/3.2
Expenditure13.814.915.916.317.315.2 8/17.9
Current expenditure8.88.99.610.110.28.4 8/10.5
Capital expenditure4.96.06.36.27.16.8 8/7.4
Current budget balance0.7-0.31.81.41.32.6 8/1.4
Overall budget balance-4.1-6.0-4.4-4.6-5.7-4.2 8/-5.8
Overall budget balance (incl. grants)-0.5-2.7-1.5-0.6-2.1-0.1 8/-2.0
Foreign financing4.94.84.55.25.95.6 8/5.9
Domestic financing-0.71.1-0.4-0.6-0.2-1.0 8/-0.2
Outstanding operation 3/-0.10.10.30.00.0-0.4 8/0.0
Domestic investment13.012.915.817.517.517.8
Government investment 4/4.85.76.26.07.16.8 8/7.2
Non-government investment8.27.39.611.510.410.6
National saving11.711.113.810.712.412.3
Government saving0.7-0.31.81.4132.6 8/1.4
Non-government saving11.011.412.09.311.110.9
(In millions of U.S. dollars; unless otherwise indicated)
Balance of payments
Exports 5/53460471560S9391,002
Imports 5/-79S-831-989-1,005-1,338-1,433
Current account (excluding official transfers)-252-246-281-448-408-437
(In percent of GDP)-8.1-8.8-9.3-13.1-12.7-12.4
Current account (including official transfers)-43-52-61-231-165-192
(In percent of GDP)-1.4-1.9-2.0-6.8-5.1-5.5
Capital account-47-53-3795100192
Overall balance-90-105-98-136-650
Gross official reserves262390422486434490 9/529
(In months of imports of goods and services)2.43.53.43.53.13.1 10/3.2
(In percent of broad money)85.1119.9110.597.097.1105.4 6/97.2
Net official reserves197323349399405412 9/445
External debt2,0502,0442,0591,1462,1321,339
(In percent of GDP)66.072.768.435.166.338.1
Debt service132124132372953
(In percent of domestic exports of goods and services)17.816.114.53.92.44.1
Memorandum items:
Nominal GDP (in billions of riels)9,14910,53111,47012,48912,40613,900
(in millions of U.S. dollars)3,1052,8133,0083,2673,2173,519
Exchange rate (riels per dollar, end-of-period)3,4523,7803,7753,9003,9003,905 11/4,000
Terms of trade (percent change)-4.912.611.8-4.6-9.73.6
Source: Data provided by the Cambodian authorities, and Fund staff estimates and projections.

Contributions to 12-month percent change of broad money.

Ratio of nominal GDP to average stock of broad money.

Includes expenditure committed but not yet allocated to the accounts of the government agencies that execute the budget.

Includes externally financed technical assistance for implementation of capital projects.

Excludes re-exports.

October 2000.

November 2000.

October 2000; annualized totals relative to projected annual GDP.

November 30, 2000. Gold reserves are evaluated at end-1999 gold price.

Ratio of current reserves to 2000 projected imports of goods and services.

December 15, 2000.

Source: Data provided by the Cambodian authorities, and Fund staff estimates and projections.

Contributions to 12-month percent change of broad money.

Ratio of nominal GDP to average stock of broad money.

Includes expenditure committed but not yet allocated to the accounts of the government agencies that execute the budget.

Includes externally financed technical assistance for implementation of capital projects.

Excludes re-exports.

October 2000.

November 2000.

October 2000; annualized totals relative to projected annual GDP.

November 30, 2000. Gold reserves are evaluated at end-1999 gold price.

Ratio of current reserves to 2000 projected imports of goods and services.

December 15, 2000.

CHART 1CAMBODIA: SELECTED ECONOMIC INDICATORS, 1997–2000

Source: Data provided by the Cambodian authorities.

1/ Includes US $117 million associated with the return in 1998 of Cambodian gold previously held by the BIS.

CHART 2CAMBODIA: INDICATORS OF PROGRAM PERFORMANCE, 1997–2001 1/

Sources: Data provided by the Cambodian authorities, and Fund staff estimates.

1/ Data for 2000 are projections.

Table 2.Cambodia: Quantitative Performance Criteria and Benchmarks, 2000
19992000
Stock at End-Dec.End-March 1/End-JuneEnd-Sept. 1/
ActualProg.Adj. Prog.ActualProg.Adj. Prog.ActualProg.Adj. Prog.Actual
(Cumulative change from beginning of year)
Net domestic assets of the banking system (in billions of riels) 2/3/-576744-57133-81-43-25-77
Net credit to the government from the banking system (in billions of riels) 3/103-1918-9-49-17-62-58-40-97
Net domestic financing of the budget (in billions of riels) 3/-1918-32-49-17-70-66-48-111
Contracting or guaranteeing of external debt by the public sector 4/
Up to one-year maturity 5/000000000
1–5 year’s maturity000000000
Medium- and long-term non-concessional debt 6/000000000
External payments arrears 7/000000000
(Cumulative change from beginning of year)
Net official international reserves (in millions of US dollars) 8/34913325261744433862
Memorandum items:
(Cumulative flows from beginning of year)
Nonproject budget support (in millions of U.S. dollars)10020113025
(Stock at end of period)
Net domestic assets of the banking system (in billions of riels)-576-569-532-634-575-543-657-619-601-653
Net credit to the government from the banking system (in billions of riels)103841219454864145636
Net official international reserves (in millions of U.S. dollars) 8/349362352375375367393392387411
(At end of period)
Exchange rate (riels per U.S. dollar, end of period)3,7753,8003,8003,8203,8003,8003,8653,8703,8703,880
Sources: Data provided by the Cambodian authorities; and Fund staff estimates.

Performance criteria (as set in EBS/00/186 Attachment).

Net domestic assets are defined as broad money minus net foreign assets of the banking system, adjusted for valuation changes arising from the difference between program and actual exchange rates.

For purposes of verifying compliance with the program, the ceiling for net domestic assets, net credit to the government from the banking system, and net domestic financing of the budget were adjusted upward by CR18.2 billion in September 2000 due to shortfalls in external nonproject budget support.

Maturity based on original contract.

Ceiling applies to amount outstanding. Excludes normal import-related credit and any borrowing associated with debt rescheduling.

Excludes amounts contracted under the government loan agreement with China dated July 26, 2000 for a maximum loan amount equivalent to US $12 million.

Continuous performance criterion.

For purposes of verifying compliance with the program, the floor on net official international reserves was adjusted downward by US $4.8 million in September 2000 due to shortfalls in external non-project budget support. For program purposes, valuation Effects on the stock of gold holdings are excluded, and gold holdings will be evaluated at the end-December 1999 gold price.

Sources: Data provided by the Cambodian authorities; and Fund staff estimates.

Performance criteria (as set in EBS/00/186 Attachment).

Net domestic assets are defined as broad money minus net foreign assets of the banking system, adjusted for valuation changes arising from the difference between program and actual exchange rates.

For purposes of verifying compliance with the program, the ceiling for net domestic assets, net credit to the government from the banking system, and net domestic financing of the budget were adjusted upward by CR18.2 billion in September 2000 due to shortfalls in external nonproject budget support.

Maturity based on original contract.

Ceiling applies to amount outstanding. Excludes normal import-related credit and any borrowing associated with debt rescheduling.

Excludes amounts contracted under the government loan agreement with China dated July 26, 2000 for a maximum loan amount equivalent to US $12 million.

Continuous performance criterion.

For purposes of verifying compliance with the program, the floor on net official international reserves was adjusted downward by US $4.8 million in September 2000 due to shortfalls in external non-project budget support. For program purposes, valuation Effects on the stock of gold holdings are excluded, and gold holdings will be evaluated at the end-December 1999 gold price.

Table 3.Cambodia: Key Structural Policy Actions for 1999–2000
Policy ActionStatus
I. Structural Performance Criteria
1. Complete census to ascertain the precise number and status of civil servants and military personnel by end-March 2000Military census was completed in December 1999 and the civil service census in March 2000.
2. Complete evaluation of all commercial banks that reapplied for a banking license by end-November 2000.Evaluations were completed and decisions made in November 2000. Public announcement was made in early December.
II. Other key structural policies
1. Financial Sector Development
a. Adoption of a new Financial Institutions Law.1The law was approved by the National Assembly in October 1999.
b. Complete on-site inspections of commercial banks by end-December 1999.2Completed in December 1999
c. Following adoption of the Financial Institutions Law, subject all banks to relicensing and begin process of liquidating nonviable banks by end-June 2000.2The relicensing process started as envisaged, and the first 3 banks were liquidated in August 2000.
d. Provide initial recapitalization of the Foreign Trade Bank (FTB) and issue a commercial banking license to the FTB by end-November 2000.2Implemented in November 2000.
2. Tax Administration
a. Implement 1997 Law on Taxation.VAT was introduced in January 1999.
b. Maintain higher timber royalties consistent with the 1999 Budget Law.Implemented.
c. Launch an open tender for a service provider for preshipment inspection (PSI) of imports and initiate PSI services.1A new contract for PSI was signed in August 2000.
d. Unify import duty rates for cigarettes.1Duty rates were unified in September 1999.
e. No ad hoc tax exemptions to be granted any time during the program period.1Remaining exemptions are limited to those specified under the Law on Investment and a few duty-free shops in border regions.
f. Complete review of timber revenue mechanism, in consultation with the Bank and the Fund.1Preliminary studies were carried out by the government and the World Bank. A consultant has been hired to present an independent study which will be completed by March 2001.
3. Forestry and Public Resource Management
a. Continue ban on log exports, stop granting new concessions) and cancel all permits for log collection.Implemented in the context of January 22, 1999 declaration.
b. Submission of revised subdecree on forestry concession management (in consultation with the World Bank) to the Council of Ministers.1The subdecree was submitted to the Council of Ministers in October 1999 and adopted in December 1999.
c. Establish a Forest Crime Monitoring Unit (FCMU) and publish quarterly monitoring reports.1The Unit was established in October 1999 and regular reports have been published.
d. Complete review of concession contracts and cancel additional concessions in violation of contract terms or Cambodian law by end-June 2000.3The review was completed in May 2000, 3 concessions were cancelled, and logging activity of others was restricted.
e. Initiate national consultations on a revised Forestry Law by June 2000 and submit the revised law to the National Assembly by December 2000.National consultations were initiated in June 2000 and the revised law was submitted to the Council of Ministers in December 2000. The law is expected to be submitted to the National Assembly by end-February 2001.
4. Civil Service and Military Reform
a. Adopt civil service policy entailing a strict limit on hiring of new workers, and a reduction in staff through eliminating “ghost” workers and normal attrition.Ghost workers are being eliminated during the process of establishing a computerized payroll. New hiring has been limited to teachers and medical graduates.
b. Formulation of a medium-term strategy and reform program for the civil service and military, entailing annual phasing by end-June 2000.2Specification of a reform strategy will be made by end-March 2001, based on ongoing studies and technical assistance from the World Bank, UNDP, and AsDB.
c. Complete pilot demobilization program and launch the first phase of military demobilization by end-2000, involving 10,000 soldiers.1Discharge under the pilot program was completed, but the first phase of the full program has been postponed until mid-2001 because of delays in securing donor financing.
5. Trade Reform
Commitment to reduce the maximum tariff rate to 30 percent and the average tariff rate to below 15 percent within the PRGF period.In the context of the 2001 budget, the maximum tariff rate was reduced to 35 percent, the number of tariff bands reduced to 4, and the average tariff rate reduced to less than 16½ percent.
6. Private Sector Development
Submit two commercial laws to the National Assembly by end-December 1999.2/Drafts of five laws have been completed. One was submitted to the National Assembly in November 1999 and the others are being finalized in 2001.

Condition for review or prior action.

Structural benchmark.

Originally intended as a structural performance criteria for end-June 2000, it was converted to a prior action, owing to delays in completing the first review.

Condition for review or prior action.

Structural benchmark.

Originally intended as a structural performance criteria for end-June 2000, it was converted to a prior action, owing to delays in completing the first review.

4. For the first half of 2000, economic activity was buoyant. Manufacturing activity, particularly in the garment sector, increased significantly, tourist arrivals increased by 40 percent from the previous year, and good agricultural output led to substantial declines in food prices. As a result, economic growth was projected at mid-year to reach 5½ percent for 2000 with inflation under 5 percent (on an end-of-period basis).

5. However, in July-November 2000, Cambodia was hit by unusually severe flooding. The flooding affected about 20 percent of the population, and the government’s preliminary estimate indicates that 30 percent of rice fields were damaged, major parts of key roads and irrigation facilities were washed away, and a number of schools and hospitals were damaged. Total damage, including rehabilitation needs, was estimated by the AsDB at about US $100 million (3 percent of GDP) (Box 1).

Box 1.Cambodia: Effects of the Flooding

Background

During the second half of 2000 Cambodia suffered the worst flooding in 70 years, directly affecting 2.2 million people (20 percent of the population) in 18 of the 24 provinces, primarily in rural areas. The flooding has taken a major human and economic toll: (i) 350 deaths and 200,000 people displaced; (ii) 350,000 ha. of cropland damaged (30 percent of the total); and (iii) extensive damage to economic infrastructure. The information below provides a preliminary assessment of the main effects of the flooding based on information available as of end-November 2000; a full assessment is expected in early 2001.

Flooding impact1/

Real Sector: Real GDP growth is now projected to slow to 4 percent as against 5½ percent in the program, reflecting a flood-related loss in agricultural output. Agriculture accounts for 40 percent of GDP and about 80 percent of the rice harvest takes place during the wet season (June–October).

End-period inflation is projected to rise to about 8 percent, compared with the program target of 5 percent, largely due to higher food prices. Despite timely food aid relief, retail rice prices increased by 38 percent during July–October.

Damage to infrastructure and equipment (i.e. roads, irrigation equipment and facilities, and education and health facilities) is officially estimated at US $105 million (3.2 percent of GDP).

Fiscal: Current expenditure for flood relief in 2000 is estimated at 0.3 percent of GDP, while rehabilitation of infrastructure will be carried out primarily through donor-financed projects beginning in 2001. Program targets for end-December 2000 have been adjusted to reflect this additional spending while avoiding domestic financing of the budget.

External sector: The external current account deficit (excluding transfers) is expected to remain broadly unchanged at 13 percent of GDP, as total flood-related imports are not large relative to overall imports.

Structural reforms: The process of establishing a computerized civil service payroll was temporarily delayed, owing to the interruption of fingerprinting operations in the provinces. More generally, limited administrative capacity has also been diverted to focus on flood relief and rehabilitation.

International Response

International emergency relief—US $10.7 million, 0.3 percent of GDP—has been provided in response to the authorities’ request. Further assistance, equivalent to 3 percent of GDP, has been envisaged under concessional loans from the AsDB (US $55 million) and the World Bank (US $40-45 million), to assist the government in the rehabilitation of key infrastructure which will be reflected in the budget for 2001 and following years.

1/ Although the deviations of key macroeconomic aggregates from the program’s projections are largely attributable to the flooding, the high oil prices have also been a contributing factor.

6. The serious flooding, and to a lesser extent sustained higher oil prices, are adversely affecting economic growth and inflation. Growth in real GDP is now estimated at 4 percent, reflecting a sharp fall in agricultural production in the final quarter of the year. Although the domestic retail prices of petroleum products rose, the increases have had only a marginal impact on the CPI because of a relatively low weight for petroleum products in the index.1 However, food prices began to pick up after July, and further increases are expected owing to flood-induced shortages. As a result, the 12-month CPI inflation rate is projected to reach about 8 percent by end-2000 before falling back to less than 5 percent by the end of 2001.

Consumer Price Index

(12-month percent change)

7. Fiscal policy in 2000 has been prudent, with improved revenue mobilization, and expenditure restraint. The government has implemented the budget cautiously in the first ten months of the year, making room for spending for flood relief without a significant deterioration in the underlying fiscal balance. Current expenditure for flood relief in 2000 is estimated at 0.3 percent of GDP. Reflecting expenditure savings in other areas, the current budget surplus is projected at 1.3 percent of GDP, compared with the program target of 1.4 percent (Table 4). Improved implementation of donor-financed capital expenditure will lead to an increase in the overall deficit to 5.7 percent of GDP, compared with the program estimate of 4.6 percent. Taking into account available foreign financing, domestic financing of the budget would only marginally exceed the original program target, leading to a small reduction in the government’s net indebtedness to the banking system by CR 20 billion (1½ percent of broad money).

Table 4.Cambodia: General Government Operations, 1997–2001
1997199819992000200119971998199920002001
BudgetProg.Rev. Proj.BudgetBudgetProg.Proj.Budget
(In billions of riels)(In percent of GDP)
Total revenue8819431,3381,5291,4661,4381,6839.69.011.712.211.711.612.1
1. Tax revenue5976799651,0831,0931,0711,2136.56.58.48.78.88.68.7
Direct taxes445683104831251310.50.50.70.80.71.00.9
o.w. profit taxes354261821051080.40.40.50.70.60.8
Indirect taxes2062484324694955226772.32.43.83.84.04.24.9
o.w. Excise taxes747692941061232480.80.70.80.80.81.01.8
Domestic1116162223230.10.20.10.20.20.2
Import636076721012250.70.60.70.60.81.6
VAT3153593553844172.72.92.83.13.0
Domestic437373860.40.60.60.6
Import2863163313312.52.52.72.4
Trade taxes3473764334925154073793.83.63.83.94.13.32.7
Tax revenue from provinces171818260.10.10.2
2. Nontax revenue2712303604263483574453.02.23.13.42.82.93.2
o.w. Timber Royalties372336526140550.40.20.30.40.50.30.4
Tourism income1114410150.00.00.00.00.00.10.1
Royalties (casino)01612160.00.10.10.1
PTT83871091501101011440.90.80.91.20.90.81.0
Quota Auction87101020100.80.10.10.20.1
Garment licenses21362246500.20.30.20.40.4
Revenue from Provinces66660.00.00.00.0
3. Capital revenue123314202510250.10.30.10.20.20.10.2
Total expenditure 1/1,2581,5711,8482,3592,0372,1502,48313.714.916.118.916.317.317.9
1. Current expenditure8069411,1201,3391,2671,2651,4588.88.99.810.710.110.210.5
Wages 2/3824515255275355075574.24.34.64.24.34.14.0
Civil administration1321541942182202122381.41.51.71.71.81.71.7
Defense and security2502973313093152943192.72.82.92.52.52.42.3
Nonwage4244905727887327358694.64.75.06.35.95.96.2
Operating expenditures3223724105055014895763.53.53.64.04.03.94.1
Civil administration1642202763763703664761.82.12.43.03.03.03.4
Defense and security1581521341291311231001.71.41.21.01.01.00.7
Economic transfers71412461717380.10.10.10.40.10.10.3
Social transfers68711041171141131220.70.70.90.90.90.90.9
Interest101522252525250.10.10.20.20.20.20.2
Other non-wage181821515040430.20.20.20.40.40.30.3
Reserve funds (chap. 40)002452551640.00.00.00.40.20.40.5
o.w. Floods039250.00.30.2
Provincial budget232423320.20.20.2
2. Capital expenditure4526307281,0207708851,0254.96.06.38.26.27.17.4
Locally financed1101202243202732703251.21.11.92.62.22.22.3
Externally financed3425105047004966157003.74.84.45.64.05.05.0
Current Balance63-322041701741632000.7-0.31.81.41.41.31.4
Overall Balance-377-628-510-830-571-712-800-4.1-6.0-4.4-6.6-4.6-5.7-5.8
Overall Balance (incl. grants)-36-286-168-280-134-259-275-0.4-2.7-1.5-2.2-1.1-2.1-2.0
Financing3796285098305717128004.16.04.46.64.65.75.8
1. Foreign financing (net)4465055158436477328254.94.84.56.85.25.95.9
Project grants2453413374002833364002.73.22.93.22.32.7
Project loans1061631743002132793001.21.51.52.41.72.3
Budget support (grant)96241501531171251.00.00.01.21.20.96.9
2. Domestic financing-57117-45-13-76-20-25-0.61.1-0.4-0.1-0.6-0.2-0.2
o.w. Central bank financing-75120-70-13-76-20-25-0.81.1-0.6-0.1-0.6-0.2-0.2
Nonbank financing18-42600000.20.00.20.00.00.00.0
3. Outstanding operations 3/-106380000-0.10.10.30.00.00.00.0
Memorandum items:
Defense and security outlays4154574774554554334334.54.34.23.63.63.53.1
Revenue from forestry412549526140550.40.20.40.40.50.30.4
Total revenue (excl. garment quotas)8819431,2511,5191,4561,4171,6739.69.010.912.211.711.412.0
Health, Education, Rural dev., Agriculture1441652533382893384151.61.62.22.72.32.73.0
Customs department revenue4865277968808389355.35.06.97.06.86.7
Total demobilization cost 4/9580.10.4
o.w. government’s expense 5/190.00.1
GDP9,14910,53111,47012,48912,48912,40613,900
Source: Data provided by the Cambodian authorities, and Fund staff estimates and projections.

Cash basis.

Includes a 10 percent base wage increase, effective January 1, 2001. The additional cost for the wage increase is estimated to amount to CR15 billion, formerly budgeted as contingency funds.

Includes expenditure committed but not yet allocated to the accounts of the government agencies that execute the budget.

1,500 soldiers were discharged in 2000, and 10,000 soldiers will be discharged in 2001. A cost per soldier is US $1,500.

The government’s financial contribution to the demobilization program is US $240 of cash payment per soldier.

Source: Data provided by the Cambodian authorities, and Fund staff estimates and projections.

Cash basis.

Includes a 10 percent base wage increase, effective January 1, 2001. The additional cost for the wage increase is estimated to amount to CR15 billion, formerly budgeted as contingency funds.

Includes expenditure committed but not yet allocated to the accounts of the government agencies that execute the budget.

1,500 soldiers were discharged in 2000, and 10,000 soldiers will be discharged in 2001. A cost per soldier is US $1,500.

The government’s financial contribution to the demobilization program is US $240 of cash payment per soldier.

8. Underlying revenue performance has improved, and is likely to reach 11½ percent of GDP in 2000, close to the program target.2 Revenue from direct and indirect taxes, in particular profit tax from large companies and value-added tax (VAT), performed strongly, and above expectations. The increase partly reflects the revenue-enhancing measures implemented during mid-2000.3 However, revenue from trade taxes has continued to be weak and is expected to fall short of the program target. The poor performance in trade taxes reflects changes in the composition of imports (especially a decline in cigarette imports), and relatively slow progress in improving customs administration.

Total Revenue

(3-month moving average, In billions of riels)

Tax Revenue

(3-month moving average, In billions of riels)

9. Overall expenditure was contained, but only limited progress was made in increasing social sector spending. The wage bill has been kept within the program target, and expenditure for defense and security is projected to decline in nominal terms in 2000 for the first time in more than a decade. Social sector spending was budgeted to increase by ½ percentage point of GDP over 1999. However, owing to a delay in the implementation of the Priority Action Program (PAP), and technical difficulties in administering spending at the district level, actual disbursements in the first ten months of the year have been lower than targeted.4 Disbursements are expected to increase considerably during the last two months of the year, and total funds committed for the social sectors are expected to be broadly in line with the program.

10. Monetary developments have reflected the prudent fiscal policy and increased activity by the private sector. The growth rate of currency in circulation is expected to remain under 10 percent at end-2000, reflecting, in part, net repayments by the government to the banking system, and the overall importance of fiscal operations on changes in local currency. Broad money is expected to increase by 35 percent, in line with the program target. The increase in broad money is led by a rise in foreign currency deposits, reflecting increased economic activity and improved confidence in the context of a highly dollarized economy. Private sector credit growth picked up in mid-2000 from a very low base (about 8 percent of GDP) and is expected to increase by about 26 percent for the whole year (Table 5).

Table 5.Cambodia: Monetary Survey, 1999–2001
199920002001
Dec.Mar.JuneJulyAug.SeptDec.MarchJuneSept.Dec.
Rev. Prog.Prog.
(In billions of riels; end of period)
Net foreign assets2,0192,3732,5102,4632,4892,4482,5342,6512,7652,8592,935
National Bank1,6492,0062,1152,1112,1262,0942,1792,2962,4102,5042,580
Deposit money banks370367395352363354355355355355355
Net domestic assets-576-640-679-621-635-656-591-577-573-542-526
Domestic credit8768339099799819421,0571,0851,1181,2031,273
Government (net)103944144446835132858
Public enterprises109887499999
Private sector7637798609279309329651,0251,1061,1661,206
Other items (net)-1,453-1,523-1,588-1,599-1,616-1,598-1,648-1,662-1,691-1,744-1,799
o.w. capital-1,638-1,679-1,748-1,745-1,731-1,737
Broad money1,4431,7331,8311,8421,8551,7921,9432,0752,1912,3182,409
Narrow money532550546549543540570578584605616
Currency in circulation490505505504502496528535540560570
Demand deposits4245414540444243444546
Quasi-money9111,1831,2861,2931,3121,2521,3731,4971,6071,7131,793
Time deposits3237333637343536373839
Foreign currency deposits8791,1461,2531,2581,2751,2181,3381,4611,5701,6751,755
(12 month percent change)
Net foreign assets16.826.431.531.128.719.825.511.710.116.815.8
Net domestic assets15.613.914.56.111.43.02.5-9.9-15.5-17.5-11.0
Domestic credit4.43.613.020.014.68.720.622.923.027.720.5
Government (net)-42.3-43.1-48.2-36.8-49.6-93.2-19.4-46.0-92.7339.9-30.1
Private sector16.614.519.525.221.822.426.431.528.625.125.0
Other items (net)8.67.713.614.213.36.313.49.16.59.19.2
Broad money17.331.839.142.436.027.534.719.719.629.424.0
o.w. currency in circulation-3.83.011.312.111.87.87.86.07.012.88.0
(Contribution to annual growth of broad money; in percent)
Net foreign assets23.637.745.745.140.828.835.716.013.922.920.7
Net domestic assets-6.3-5.9-6.5-2.8-4.7-1.4-1.03.75.76.43.3
Domestic credit3.02.37.912.69.25.412.511.711.414.611.1
Government (net)-6.1-5.4-2.9-2.0-3.2-6.2-1.4-2.5-2.11.2-1.3
Private sector8.87.510.714.412.212.114.014.213.413.112.4
Other items (net)-9.4-8.3-14.5-15.4-13.9-6.7-13.5-8.0-5.6-8.1-7.8
Memorandum items:
Foreign currency deposits
In millions of U.S. dollars233300324324327314343372398421439
In percent of broad money6166686869686970727273
Credit to private sector (In millions of U.S. dollars)202204222239238240247261280293302
Gross official reserves (In millions of U.S. dollars)422448464466468491405497504521445
Net official reserves (In millions of U.S. dollars)349375393396397411405415425435445
Average stock of liquidity1,3541,4501,5601,6051,6461,6791,7781,8561,9502,1322,248
Velocity 1/8.58.17.77.57.47.37.06.96.76.36.2
Exchange Rate (Riels per U.S. dollar; end of period)3,7753,8203,8653,8803,9003,8803,9003,9253,9503,9754,000
Source: Data provided by the Cambodian authorities; and Fund staff projections.

Nominal GDP divided by the average stock of broad money.

Source: Data provided by the Cambodian authorities; and Fund staff projections.

Nominal GDP divided by the average stock of broad money.

Table 6.Cambodia: Summary Accounts of the National Bank of Cambodia, 1999–2001
199920002001
Dec.MarchJuneJulyAug.Sept.Dec.MarchJuneSeptDec.
Rev. Prog.Prog.
(In billions of riels; end of period)
Net foreign assets1,6492,0062,1152,1112,1262,0942,1792,2962,4102,5042,580
Foreign assets1,9242,2792,3792,3712,3862,3892,4862,6172,7222,8482,916
Foreign liabilities-275-273-264-260-259-295-307-321-313-344-336
Net Domestic Assets-719-794-899-892-901-933-861-904-968-959-952
Claims on central government (net)107954244457845242959
Claims on deposit money banks (net)-77-78-80-81-82-81-90-92-94-96-100
o.w. restricted deposits-76-77-79-80-81-80-90-92-94-96-100
Claims on public enterprises (net)00000000000
Claims on private sector (net)00000000000
Other items (net)-749-811-861-855-864-859-854-863-877-891-910
o.w. capital-870-923-971-965-972-976
Reserve money9301,2121,2161,2191,2251,1611,3171,3921,4421,5451,628
Currency outside banks490505505504502496528535540560570
Currency in banks2018283128303233343536
Reserve deposits4206906836856956357578248689501,022
(12 month percent change)
Net Foreign Assets15.730.537.040.037.729.032.114.513.919.618.4
Net Domestic Assets15.526.429.426.828.821.119.813.97.72.810.5
Reserve Money (12 month percent change)15.933.443.151.645.035.641.714.818.633.123.6
o.w. currency outside banks-3.83.011.312.111.87.87.86.07.012.88.0
(Contribution to annual reserve money growth; in percent)
Net foreign assets27.951.667.274.968.854.657.023.924.235.330.5
Net Domestic Assets-12.0-18.2-24.0-23.4-23.8-19.0-15.3-9.1-5.7-2.2-6.9
Net credit to government-9.4-8.2-4.9-3.6-5.6-10.6-2.5-3.6-3.11.9-1.9
Net claims on banks-1.2-0.6-1.0-1.0-0.7-0.4-1.5-1.2-1.2-1.4-0.8
Other items (net)-1.4-9.4-18.1-18.8-17.6-8.0-11.3-43-1.3-2.7-4.2
Memorandum items:
Money multiplier (Broad Money / Reserve Money)1.61.41.51.51.51.51.51.51.51.51.5
Sources: Data provided by the Cambodian authorities; and Fund staff projections.
Sources: Data provided by the Cambodian authorities; and Fund staff projections.

11. External developments have reflected increased garment exports and tourism earnings, sharply higher oil imports, and higher capital inflows. As a result, the current account deficit for 2000 (excluding official transfers) is projected to reach 13 percent of GDP, in line with the original program target. Net capital inflows improved, and official international reserves increased to US $490 million (3 months of imports) as of end-November, in line with the program target (Table 7). The external value of the riel has remained broadly stable, while depreciating slightly against the U.S. dollar in the second half of the year (Chart 3).

Table 7.Cambodia: Balance of Payments, 1997–2001(In millions of U.S. dollars)
19971998199920002001
Prog. Rev. Prog.Prog.
Current account (excluding official transfers)-246-246-281-448-408-437
Current account (including official transfers)-37-52-60-231-164-192
Trade balance-263-227-273-398-398-431
Exports7868679489131,1401,207
Domestic exports5346047156089391,002
Of which: Garments279392567473851902
Forestry 1/224178111894755
Re-exports252263233305200205
Imports, f.o.b.-1,050-1,094-1,221-1,311-1,538-1,638
Retained imports, f.o.b.-798-831-988-1,005-1,337-1,433
Garments sector-195-275-397-331-587-622
Petroleum-91-111-131-166-271-279
Other retained imports-511-445-460-508-479-532
Imports for re-export, f.o.b.-252-263-233-305-200-205
Services (net)-43-79-77-123-82-80
Receipts205168195229251279
Of which: Tourism684455807293
Payments-248-247-272-352-332-358
Of which: Interest-17-18-15-38-28-31
Private transfers606070727274
Official transfers210194220217243244
Capital account-53-53-3795100192
Medium- and long-term loans-81-69-65-35-5957
Disbursements354656866196
Amortization-115-115-121421-121-39
Foreign direct investment168121129130130135
Short-term flows and errors and omissions-141-105-1020290
Overall balance-90-105-98-136-650
Financing9010598136650
Change in gross official reserves-28-11-32-60-62-45
Use of Fund credit0-1815410
Debt rescheduling 2/00011701,358
Change in arrears (- = reduction)1181171220122-1,322
Financing Gap0006400
Memorandum items:
Trade balance (in percent of GDP)-8.5-8.1-9.1-11.6-12.4-12.3
Current account balance (in percent of GDP)
Excluding official transfers-7.9-8.8-9.3-13.1-12.7-12.4
Including official transfers-1.2-1.9-2.0-6.8-5.1-5.5
Gross official reserves 3/262390422486484529
In months of imports of goods and services2.43.53.43.53.13.2
In months of core imports of goods and services 4/3.73.95.95.55.45.7
Net international reserves197323349399405445
Sources: Data provided by the Cambodian authorities; and Fund staff estimates and projections.

Includes estimates for unrecorded forestry exports.

Assumes the implementation of the 1995 Paris Club flow rescheduling on Naples terms (67 percent NPV reduction) and a hypothetical stock-of-debt operation in 2001. As to the debt to Russia, after an up-front discount of 70 percent is applied, pre-cutoff date debt is assumed to be subject to the stock of debt operation on Naples terms (67 percent NPV reduction), while the pre-cutoff date arrears and debt service due during 2001 is assumed to be subject to nonconsessional deferral with two year grace period, ten year repayments and the commercial interest rate. Outstanding debt and arrears to Russia are valued at the Gosbank exchange rate of US $1 = SUR0.6, where “SUR” denotes the former Soviet Union ruble. Debt figures are based on the Cambodian authorities’ records.

Includes US $117 million associated with the return of Cambodian gold holdings by the BIS in 1998.

Imports excluding imports for re-export and imports for garment sector.

Sources: Data provided by the Cambodian authorities; and Fund staff estimates and projections.

Includes estimates for unrecorded forestry exports.

Assumes the implementation of the 1995 Paris Club flow rescheduling on Naples terms (67 percent NPV reduction) and a hypothetical stock-of-debt operation in 2001. As to the debt to Russia, after an up-front discount of 70 percent is applied, pre-cutoff date debt is assumed to be subject to the stock of debt operation on Naples terms (67 percent NPV reduction), while the pre-cutoff date arrears and debt service due during 2001 is assumed to be subject to nonconsessional deferral with two year grace period, ten year repayments and the commercial interest rate. Outstanding debt and arrears to Russia are valued at the Gosbank exchange rate of US $1 = SUR0.6, where “SUR” denotes the former Soviet Union ruble. Debt figures are based on the Cambodian authorities’ records.

Includes US $117 million associated with the return of Cambodian gold holdings by the BIS in 1998.

Imports excluding imports for re-export and imports for garment sector.

CHART 3CAMBODIA: CONSUMER PRICES AND EXCHANGE RATE DEVELOPMENTS, 1994-2000

Sources: Data provided by the Cambodian authorities, and Fund staff estimates.

1/ NBC consumer price index through December 1995; thereafter, NBC index based on change in CPI of National Institute of Statistics, which has been adopted as the official consumer price index.

2/ Riels per US Dollar, end-period buying rate.

3/ Based on the official exchange rate; an upward movement indicates an appreciation of the exchange rate.

12. Further progress was made in the major structural areas, broadly in line with program expectations, except on civil service reform and demobilization.5

  • A new Financial Institutions Law was adopted at end-1999, and all banks were subject to relicensing under this law. After a period of supervisory assessment and MAE technical assistance, the National Bank of Cambodia (NBC) made final decisions on bank relicensing in November 2000. At the same time, the first phase of the Foreign Trade Bank’s recapitalization was completed and the bank was granted a conditional commercial banking license.

  • A civil service census was completed in March 2000. Following the initial census, the government has implemented a computerized payroll system for the central administration and will extend the system to the provinces in 2001. However, formulation of a strategy for rationalizing the size of the civil service (originally targeted for June 2000) has been delayed.

  • A military census was completed in December 1999, and the discharge of 1,500 soldiers under a pilot military demobilization program has been completed. Although implementation of the full program was delayed, the overall assessment of experience under the pilot has generally been positive, and a national workshop discussing this experience will be held by end-February 2001, as a key input into the preparation of the full program.

  • In the area of forestry, a review of concessions was completed, several concessions have been canceled, and logging activities have been severely restricted for others. A Forest Crime Monitoring Unit (FCMU) was established in October 1999 with external participation, and several monitoring reports have been issued. Also, steps have been taken to establish the legal framework for forestry activities, including preparation of a revised Forestry Law which is expected to be presented to the National Assembly by end-February 2001.

  • In tax and customs administration, the number of companies subject to VAT was increased, preshipment inspection for imports was reinstated in October, and ad hoc customs duty exemptions have continued to be avoided. The Ministry of Economy and Finance has also taken steps to improve the collection of tax arrears, and arrears associated with telecommunication charges and leases of state assets.

13. In line with these developments, all quantitative and structural performance criteria were met, and other conditions proposed during the last review for completing the second review were observed, except for that related to the timing of the military demobilization program.6 The completion of a pilot program for military demobilization has taken longer than expected because of significant delays in the release of committed donor financing. As a result, the first phase of military demobilization, involving 10,000 soldiers, is now expected to be launched by mid-2001. Since all of the donor funds have now been released for the completion of the pilot program, and measures are being taken to improve the mobilization of donor financing—including through a planned World Bank credit—prospects are good that the revised target date would be met, providing a basis for the completion of the second review.

14. The social effect of reforms initiated since 1999 has generally been considered to be positive. Cambodia emerged from conflict with basic economic institutions and overall governance that did not meet even minimal standards, and there was ample scope for reforms to improve the welfare of vulnerable groups. While there is not yet the quantitative basis for a full analysis, staff expect that the reforms already implemented will have a positive impact on the poor. A significant expansion in spending for social services and infrastructure has been financed by the introduction of the VAT (which applies only to large tax payers) and other fiscal measures. Initial steps have been taken to build a banking system that should better serve future development needs, and forestry policy reforms should pave the way for setting standards for community forestry in the future. Social safety nets have been prominent in the design of the military demobilization program and are expected to be incorporated as part of a civil service reform strategy (see paragraph 23). Further progress in all these areas is dependent on the steadfast implementation of reforms, which will require substantial effort by the authorities.

III. Policy Discussions and the Program for 2001

A. Poverty Reduction Strategy and Medium-Term Objectives

15. The government recently finalized an Interim Poverty Reduction Strategy Paper (I-PRSP).7 Unlike past poverty alleviation efforts primarily centered on promoting projects in the rural sector, the strategy outlined in the I-PRSP is broader and based on a multidimensional assessment of poverty. The new strategy provides for further strengthening macroeconomic stability to foster sustainable growth. The strategy also emphasizes the importance of improving access of the poor to employment opportunities and public services through human resource development and social sector spending. The strategy has been designed through a participatory process involving line ministries, civil society, the World Bank, the Asian Development Bank, other donors, and NGOs. The full PRSP is expected to address the areas of weakness identified in the Joint Staff Assessment (JSA) and to elaborate on the monitoring, sequencing, and costing of the policy actions identified in the I-PRSP, and will be completed by end-2001.

16. Sustained economic growth is the foundation of the government’s poverty reduction strategy. This strategy is fully consistent with the objectives of the PRGF-supported program’s macroeconomic framework.8 The medium-term program aims to restore economic growth to an annual average rate of 6 percent, keep inflation in low single digits, contain the external current account deficit to a level consistent with concessional financing and-FDI flows, and increase gross official reserves to about 4 months of import coverage (Table 8).9 Following the recent flooding, agricultural production is projected to rebound in 2001, and continued growth in industrial production, construction, and tourism-related services should contribute to an increase in GDP growth to about 6 percent. The projected increases in output growth over the medium term are envisaged to be broad-based, stemming from agricultural and rural development, further growth in industrial production, and tourism development, and are premised on rising levels of private investment and savings, and improved delivery of public services in the context of fiscal reform.

Table 8.Cambodia: Medium-Term Macroeconomic Framework, 1997–2005(In percent of GDP, unless otherwise indicated)
199719981999200020012002200320042005
Projections
Real Sector
Real GDP (percent change)3.71.85.04.06.06.06.06.06.5
CPI Inflation (end-period; percent change)9.213.3-0.58.41.83.73.73.73.7
GDP deflator (percent change)6.013.13.84.05.73.73.53.52.0
Per capita GDP (in U.S. dollars)282249257270289308331356375
National saving11.811.113.812.412.012.912.813.914.4
o.w. Government saving0.6-0.31.81.31.41.41.21.21.2
Domestic investment13.012.915.817.517.518.018.018.518.7
Fiscal Sector
Revenue9.69.011.511.612.113.013.513.513.7
o.w. tax revenue6.56.58.38.68.79.710.210.310.5
o.w. non-tax revenue3.02.23.12.93.23.23.13.13.1
Expenditure (cash basis)13.814.915.917.317.918.318.418.318.2
Current8.98.99.610.210.511.512.112.112.3
Capital4.96.06.37.17.46.76.36.25.9
Current balance0.6-0.31.81.31.41.41.21.21.2
Overall balance-4.2-6.0-4.4-5.7-5.8-5.2-4.9-4.8-4.6
Domestic financing-0.51.1-0.4-0.2-0.2-0.1-0.1-0.1-0.1
Monetary Sector
Broad money (percent change)16.615.717.334.724.020.020.020.016.0
Velocity (GDP/M2)9.79.58.57.36.45.85.34.84.4
External Sector
Domestic exports (percent change)81.013.018.431.46.77.25.07.39.2
Retained imports (percent change)3.54.219.035.37.25.64.55.37.7
Current account balance (excluding transfers)-7.9-8.8-9.3-12.7-12.4-11.7-10.9-10.1-9:9
Current account balance (including transfers)-1.2-1.9-2.0-5.1-5.5-5.1-5.2-4.6-4.3
Overall balance-2.9-3.7-3.3-2.00.00.1-0.30.40.2
Financing gap (in millions of U.S. dollars)0023404040
Gross official reserves (in millions of U.S. dollars)262390422484529599659741819
(in months of imports)2.43.53.43.13.23.43.63.83.9
External debt 1/667368663838383635
External debt (NPV) 1/6259572222222221
Debt service ratio 2/17.816.114.52.44.13.93.94.44.8
Sources: Data provided by Cambodian authorities; and Fund staff estimates and projections.

Figures include bilateral debt with former CMEA countries and the United States that is assumed to be rescheduled in 2001.

The decline in 2000 reflects the end of a large part of the scheduled payments to the Russian Federation.

Sources: Data provided by Cambodian authorities; and Fund staff estimates and projections.

Figures include bilateral debt with former CMEA countries and the United States that is assumed to be rescheduled in 2001.

The decline in 2000 reflects the end of a large part of the scheduled payments to the Russian Federation.

Table 9.Cambodia: Indicators of Fund Credit, 1998–2013
1998199920002001200220032004200520062007200820092010201120122013
Projections
(In millions of SDRs)
Outstanding Fund Credit47.253.156.263.570.869.762.756.852.645.134.322.612.55.00.80.0
GRA5.24.23.12.11.00.00.00.00.00.00.00.00.00.00.00.0
SAF/PRGF42.049.053.161.469.769.762.756.852.645.134.322.612.55.00.80.0
PRGF loan disbursements0.08.48.416.716.78.40.00.00.00.00.00.00.00.00.00.0
Total debt service to the Fund1.52.95.910.610.510.37.86.75.08.311.612.410.78.24.91.5
Repurchases of GRAto1.01.01.01.01.00.00.00.00.00.00.00.00.00.00.0
Repayments of SAF/PRGF0.01.44.28.48.48.47.05.94.27.510.911.710.07.54.20.8
Charges0.50.40.61.11.00.90.80.80.80.80.70.70.70.70.70.7
(In percent)
Fund credit outstanding
In percent of total public external debt3.13.53.56.36.45.95.04.43.93.12.21.40.70.30.00.0
In percent of quota72.660.764.372.680.979.771.764.960.251.639.225.814.35.71.00.0
Debt service to the Fund
In percent of total public external debt service1.73.026.826.625.924.615.211.08.413.216.416.514.010.66.52.1
In percent of exports of goods and services0.30.40.71.11.01.00.70.50.40.60.70.70.60.40.20.1
(In millions of SDRs; unless otherwise indicated)
Memorandum items:
Cambodia’s quota in the Fund65.087.587.587.587.587.587.587.587.587.587.587.587.587.587.587.5
Total public external debt1,5071,5061,6071,0131,0981,1821,2421,2931,3571,4381,5241,6221,7381,8902,0592,252
Total public external debt service91962240404251615963717577777575
Total exports of goods and services5696658979691,0391,0871,1661,2491,3641,4791,6031,7381,8842,0292,1862,355
Total debt service ratio
(in percent of exports of goods and services)16.114.52.44.13.93.94.44.84.34.24.44.34.13.83.43.2
Source: IMF Treasurer’s Department; and Fund staff estimates and projections.
Source: IMF Treasurer’s Department; and Fund staff estimates and projections.

B. Fiscal Policy

17. The budget for 2001 has been framed to be in line with the medium-term fiscal objectives of the program (Box 2). These objectives are to improve revenue mobilization, increase spending on essential public services, and maintain a sustainable fiscal position. The targeted restructuring of spending will rely heavily on a reduction in military and security spending. The staff emphasized the importance of further improving revenue mobilization to reach 13 percent of GDP in 2002.10 The 2001 budget, approved by the National Assembly in December, targets a current budget surplus of 1.4 percent of GDP and provides for additional measures to increase revenue to 12.1 percent of GDP. The authorities also indicated that a fundamental review of revenue policy and administration would be made in the context of the 2002 budget, taking into account technical assistance and support to be provided under the Technical Cooperation Action Plan (TCAP). Spending for priority social sectors and locally financed development expenditure is budgeted to increase further, but the overall fiscal deficit is targeted not to exceed 5¾ percent of GDP, similar to the estimated outturn in 2000. Taking into account projected external project financing and budget support, a further modest reduction in the governments’ net indebtedness to the banking system is programmed. In the event of shortfalls in nonproject budget support, the expenditure program will be implemented cautiously, and the budgeted increase in locally financed development spending reduced, if necessary, to achieve the domestic financing target. Further room for expenditure adjustment is provided by contingency and reserve items (about 0.5 percent of GDP).

Box 2.Cambodia: The 2001 Budget

In line with the medium-term fiscal objectives, the 2001 budget is aimed at raising total revenue by ½ percentage point of GDP to 12.1 percent, and restructuring total expenditure to direct more funds to the social sectors and away from security and defense. The current balance is budgeted to remain in surplus (1.4 percent of GDP), and with expected external financing on concessional terms, no domestic financing of the budget will be needed.

In addition to the full-year effect of policies introduced in mid-2000, additional measures to yield revenue of CR 40 billion (0.3 percent of GDF) include:

  • Expanding the VAT base by an additional 150 companies. Together with the full-year effect of FY2000 expansion by 500 companies, this broadening is projected to increase domestic VAT revenue by 10 percent compared to 2000.

  • Other new revenue measures: (i) a 10 percent excise tax on entertainment services; (ii) new license fees on casinos; (iii) the introduction of a stamp system for tobacco products; and (iv) adjustments in excise tax rates to offset tariff reductions, with additional increases expected for a few selected products.

  • In addition, the authorities will continue to strengthen revenue administration. The MEF will increase the number of qualified tax auditors and the number of companies subject to tax audits, and will improve the collection of visa fees. Pending the completion of revisions to the Law on Investment, the MEF will pay particular-attention to investment companies, so that they comply with monthly advance payments of profit tax on the basis of one percent of monthly turnover, as required under the Law on Taxation. The reintroduction of preshipment inspection should improve overall customs administration. Under Cambodia’s TCAP, a tax advisor (expected to be placed in early 2001) and customs advisor will assist the authorities in strengthening administration, and computer hardware and software will be provided. The authorities will also continue to strengthen nontax revenue collection, in particular from leased enterprises, the tourism sector, and telecommunication services.

On the expenditure side, the budget allocates increased funds for priority sectors.

  • Expenditure for health, education, agriculture, and rural development is budgeted at 3 percent of GDP up from 2½ percent in 2000, while expenditure for defense and security, is budgeted to fall to 3 percent of GDP from 3½ percent in 2000.

  • Recurrent expenditure will be contained, and appropriate contingency measures will be included, to avoid risks of expenditure overruns. The civil service wage bill will be kept at 1.7 percent of GDP, as the removal of irregular cases from the payroll has helped provide room for a 10 percent increase in basic wages. The budget includes CR 64 billion for contingencies, including for flood relief, and commune elections.

  • To effectively increase the flow of funding for the social sectors, the government will continue to make efforts to improve budget operations. A Budget Strategy and Enforcement Center established in 2000 will be strengthened to improve the operational efficiency of budget execution. In addition, the 2001 budget increases funds under the Accelerated District Development and Priority Action Programs to CR 68 billion (compared to CR 27 billion in 2000). These programs allow provincial and district budget managers discretion to execute allocated funds; 30 percent of the total health budget and 9 percent of the total education budget are allocated under these programs. However, additional training for provincial and district budget managers is required. Technical assistance in this area will be provided by the World Bank and the Fund.

18. The authorities are currently undertaking a comprehensive review of investment incentives in consultation with the World Bank, the Foreign Investment Advisory Service (FIAS), and the Fund (Box 3). To protect the revenue position, the staff argued that granting of additional, incentives for investors eligible for privileges under the Law on Investment should be considered as part of the ongoing comprehensive review of investment incentives, which is envisaged to include rationalization of several existing incentives that lead to significant revenue leakages. In the face of declining investment approvals in 2000, the authorities were concerned about the fragility of the garment sector and general difficulties in attracting foreign investors. During budget discussions in November 2000, they opted to eliminate the requirement for investment companies to pay the minimum profit tax (with effect from 2001), as a signal of the government’s intent to address investor concerns. The authorities believe the revenue impact of this measure in 2001 will be limited, since monthly advance payment of profit taxes should continue to be made and will give rise to refunds (if eligible) in 2002. The mission noted that this decision could nonetheless undermine tax compliance, with a potential negative impact on revenue (0.1-0.2 percent of GDP). To compensate for this loss, the authorities have formulated additional revenue measures to protect the revenue position and are accelerating work to complete revision of the Law on Investment to rationalize investment incentives and support improvements in overall tax administration.

Box 3.Cambodia: Reform of the Tax Incentive System for Investment

Rationalizing tax incentives by revising the Law on Investment is essential for broadening the tax base. The current law, which governs all investment projects by Cambodians and foreigners, provides a complex and generous system of tax incentives, even by regional standards. Moreover, the regime remains heavily distortionary, selective, and complex, with significant foregone revenue.

The government is revising the Law on Investment with assistance from the Foreign Investment Advisory Service (FIAS). The revisions mainly aim at simplifying the system to improve transparency, reduce distortions, and increase fiscal revenue by eliminating excessive tax incentives. Notable revisions are expected to include: (i) eliminating a reduced 9 percent profit tax for all new projects; (ii) gradually replacing the 9 percent profit tax with the statutory rate of 20 percent for existing projects; (iii) reducing the tax holiday period from 8 years to 3 years and rationalizing eligibility criteria; and (iv) eliminating customs duties exemption and subjecting all imports of investment companies to a reduced and uniform duty rate.

In response to concerns about the profitability of investment companies, the minimum profit tax of 1 percent is being eliminated in 2001. This tax secures revenue of about 0.4 percent of GDP annually (0.2 percent from investment companies), but as it applies to all companies making profits or losses, the tax is considered distortionary and negates many of the benefits under the Law on Investment. With the repeal of the minimum profit tax for investment companies, monthly estimated profit tax (1 percent of monthly turnover) would continue to be paid, and would be subject to potential refunds after the filing of 2001 tax returns in 2002. Envisaged revisions to the Law on Investment, would provide the compensating revenue sources for 2002.

19. Current expenditure is budgeted to increase in line with revenue. Total current expenditure is projected to increase to 10½ percent of GDP from 10 percent in 2000, reflecting increased spending for the priority sectors, as well as additional funds for flood relief. During the first PRGF review, the authorities had agreed that further wage increases would be tied to the formulation of a reform strategy for the civil service by end-March 2001. The staff team strongly urged the authorities to maintain this policy so that any wage increase could be announced at the same time as the reform strategy. This was particularly important because further fundamental adjustments in wages in the future, within an affordable fiscal envelope, will require well-designed plans for a rationalization in the size of the civil service.11 Nonetheless, in view of mounting social pressure for a salary adjustment, the authorities announced in December that basic wages for civil service, military and security forces will be increased by 10 percent with effect from January. The budget for wages and salaries will remain at 4 percent of GDP, as the increase applies only to basic wages (and not allowances) and the removal of irregular cases through the use of the recently established computerized payroll has limited the financial impact of the wage increase. The net cost of the increase for the whole year is estimated at CR 15 billion (0.1 percent of GDP) and will be financed by already approved contingency funds in the 2001 budget. In undertaking the wage increase, the authorities have reaffirmed their commitment to complete a rationalization plan for the civil service by end-March 2001 as agreed under the previous program review.

20. The efficiency of spending for the priority social sectors will be critical to the success of the poverty reduction strategy. The introduction of Priority Action Programs (PAP) in October 2000, although later than expected, should improve the delivery of funds to priority social areas. Funds provided to priority sectors under the program will be substantially expanded in the 2001 budget (by 0.5 percent of GDP) and capacity problems at the district level in the Ministry of Health will be addressed through training of district managers in the new disbursement procedures. The authorities were encouraged to advance the needed funds to the social sectors and to fully meet conditionality in this area as called for under the World Bank’s SAC program. Improving coordination between the Treasury and line ministries in the implementation and monitoring of government expenditure figures prominently in the technical assistance that will be provided under the TCAP program.

21. Further progress in reorienting public expenditure to priority areas is dependent on the timely implementation of the military demobilization program. Now that the pilot program is being completed, donors are beginning to come forward to finance the full program, but firm assurances will be needed in the coming months for implementation to begin by mid-2001, as now envisaged. Any further delays would affect the reorientation of expenditure for the social sectors—particularly for the 2002 budget. The staff urged the authorities to build momentum behind this important initiative and take necessary steps to secure donor financing and implement the program so as to demobilize 30,000 soldiers by the end of 2002, as targeted. The authorities emphasized their determination to fully implement the program and expressed frustration with delays in the disbursement of donor financing, including the delays that were experienced under the pilot program. In the meantime, the authorities are preparing the technical work for the full implementation of the program so that at least 10,000 soldiers can be demobilized in 2001 (Box 4).12

Box 4.Cambodia: Pilot Military Demobilization Program

Background

In January 2000, the Cambodian government presented to donors the first draft of the pilot demobilization program involving 1,500 soldiers in four provinces. The program included four components: registration, discharge, reinsertion and reintegration. The total cost of the pilot program on a per soldier basis was estimated at about US$1,500, consisting of cash payment (US$240), in-kind assistance, such as rice allowance (US$741), expenses associated with the discharge centers (US$333), and administrative costs (US$122). The first phase of the full-scale program was expected to begin in November 2000 with 10,000 soldiers to be discharged, followed by 10,000 soldiers each in 2001 and 2002.

Implementation of the Pilot Program

Under the pilot program, 1,500 soldiers in four provinces were discharged and reinsertion benefits were provided between May and July. However, the planned reintegration activities, which included the provision of shelter and agricultural assistance, were substantially delayed by the slow release of committed donor funds. As a result, it became impossible to launch the first phase of the full demobilization program by end-November. In late October, the remaining funds for the pilot program were received and will be disbursed through the administered account set up by the World Bank. Currently, the World Bank is preparing a US$ 15 million credit to finance the full-scale demobilization program, which is tentatively expected to be approved by the Bank Board in April 2001.

A roundtable meeting between the government and donors was held in November to discuss how to proceed with the rest of the pilot program. With donor funds available, the meeting focused on completing the pilot project, and drawing lessons and using them to finalize the design of the full program. The following agreements were reached:

  • The full-scale demobilization program would not start until all donor funds have been disbursed in the special account for demobilization;

  • The timing of launching the first phase of the full program should coincide with the agricultural season, implying no discharge during the rainy season (June to October);

  • The number of soldiers to be discharged in the first phase of the full program would not be limited to 10,000, provided that the funds are available and the government has adequate implementation capacity;

  • All demobilized soldiers would receive “equal value” in assistance, but under different forms of goods and services based on the assessed individual needs.

Preliminary Assessment of the Pilot Program

As part of the design and implementation of the pilot program, the socio-economic profiles of the demobilized soldiers have been updated to provide a more realistic assessment of the needs of soldiers and their families. The studies available so far include: (i) a labor market study, (ii) a baseline survey on the needs of vulnerable soldiers in two provinces, (iii) a study of the needs of vulnerable groups, (iv) a study of underage soldiers, and (v) a health assessment of demobilized soldiers. Some of the studies were not restricted to the four provinces involved in the pilot program, and actions are already under way to apply the results to the design of the full demobilization program.

The implementation of the pilot program has been closely monitored by the international community because of concerns about the surrender of weapons, the factional makeup of demobilized soldiers, and the potential for financial abuse. Key donors oversaw financial aspects, and monitored the discharge operations of the pilot program. Four assessment reports on the pilot program are available, including: (i) a report from the Working Group for Weapons Reduction in Cambodia, (ii) a report from a key donor, (iii) a review of the financial and accounting system of CVAP by Pricewaterhouse Coopers, and (iv) a review by an independent consultant commissioned by the donors.

The preliminary assessments have generally been positive. The handling of the pilot program by the government has exceeded expectations in many aspects, while also providing valuable input and lessons for the full-scale program, especially in the areas of the administration of donor funds and the provision of reintegration packages for discharged soldiers. The preliminary assessments found the pilot to be well-organized, and cost savings were identified in several aspects of the program. Although no evidence of financial mismanagement was discovered during the pilot, some shortcomings in the accounting system were noted and these will be addressed in the full-scale program.

Next Steps

With donor funds available, it is envisaged that the pilot program will be completed in early 2001, and a national workshop to evaluate and draw lessons for the full program is envisaged to take place before end-February 2001. As a result, the government plans to launch the first phase of the full-scale program before end-May 2001, and continue the process in late 2001 with a view to completing the program by end-2002.

22. Adopting a civil service reform strategy is also needed to improve the overall delivery of public services and ensure the medium-term viability of the fiscal program. The government has achieved significant progress in completing the census earlier in 2000. As a result, more than 6,000 “ghost” workers and irregular cases were identified (4 percent of the civil service), and these workers were ordered in August 2000 to be removed from the payroll. A monitoring committee has been established to verify removal of all of the irregular cases using the computerized payroll for central administration. Since the severe flooding delayed the finalization of the computerized payroll for provincial administration, the staff urged the authorities to complete the computerized payroll as soon as possible to establish a monitorable and controllable database as a necessary condition for effectively implementing the civil service reform strategy. The authorities reaffirmed that the delays in completing the computerized payroll would not affect their ability to formulate a strategy to rationalize the civil service, in consultation with the World Bank and other development partners, by end-March 2001.

23. The social impact of military demobilization and civil service reform will be an important issue as the reform program proceeds. The military demobilization program has been formulated in close consultation with the World Bank and major donors, and provides financial and in-kind assistance spread out over several years for the reintegration of soldiers into local communities. For civil service reform, the authorities have been. conducting a study of social safety nets, with technical assistance from the UNDP, as part of their preparation for formulating a comprehensive reform strategy.

C. Monetary Policy and Bank Restructuring

24. The monetary program for 2001 is designed to support the growth and inflation objectives. Reflecting the continued avoidance of bank financing of the budget, the net domestic assets of the NBC are programmed to decline by 7 percent of reserve money, and currency in circulation is projected to increase by 8 percent. The annual increase in broad money is targeted at 24 percent, owing to the continued growth in foreign currency deposits. Domestic credit is programmed to increase by 20 percent, with restrained fiscal policy providing room for a significant increase in private credit (25 percent) to support economic recovery. The implied further reduction in velocity in 2001 is consistent with the ongoing monetization of the economy from a very low base.13 Given the recent strong growth in private credit, and the risk that increased foreign currency deposits could lead to a further expansion of credit if and when financial intermediation improves, the staff emphasized that improving oversight and analysis of credit developments will become increasingly important. The NBC agreed with this concern, and noted that they had recently stepped up their monitoring of credit developments, including by requiring banks to make regular submissions of their business and credit plans. They also felt, however, that given the very low level of existing credit there was room for further strong growth in line with economic expansion.

25. Substantial progress has been made in bank restructuring in 2000 (Box 5). The staff welcomed the actions that have been taken to liquidate nonviable banks and initiate a restructuring process for others, including the state-owned Foreign Trade Bank (FTB). The authorities were encouraged to continue their strong cooperation with MAE technical assistance in implementing a well-designed bank restructuring strategy that would require consistent and timely action. In particular, it will be important to closely monitor steps taken by potentially viable banks against their MOUs, signed with the NBC, and to introduce a commercial culture in the FTB in 2001 to prepare the bank for eventual privatization by end-2001 as programmed. The authorities expressed their commitment to follow through in these areas, while also stressing difficulties they have faced in finding liquidators for nonviable banks. Regarding the accounts of the NBC, the data that has been provided comply with the Fund’s initial requirements under the Safeguards Assessment, and the authorities have agreed to undertake an external audit of the 2000 financial accounts by end-April 2001.

Box 5.Cambodia: Banking Reform

Cambodia’s banking system consists of 31 banks, comprising 2 state-owned banks, 7 foreign bank branches, and 22 privately-owned local banks. Total loans and deposits amount to only 8 percent and 14 percent of GDP, respectively, mostly denominated in foreign currency. With technical assistance from MAE, the NBC has made progress in restructuring the banking system since late 1999.

Private commercial bank reform

A major problem is the significant number of inactive banks. In the past, the NBC’s supervision capacity was weak and compliance with prudential regulations was limited. There was little transparency in banking activities, leading to lack of confidence on the part of the public and mutual distrust among the banks.

The new Financial Institutions Law adopted in November 1999 has strengthened the NBC’s supervision authority, enabling it to relicense all existing banks. As a first step, on July 31, 2000, the NBC closed three insolvent banks. For the remaining 26 banks, the NBC evaluated their viability using CAMELS rating methodology and on-site inspections, and classified them into three categories: those relicensed unconditionally (4 branches of foreign banks), relicensed with corrective measures (14 banks), and nonviable (8 banks).

On December 8, 2000, the NBC publicly announced that the 8 nonviable banks would be liquidated. Memoranda of Understanding (MOU) which detail the timetable of capital injection and corrective actions are being signed with the remaining banks that require corrective actions. The NBC will supervise these banks intensively and monitor their performance in accordance with the MOUs. If a bank fails to meet its commitments, the NBC will take additional action, including suspension or withdrawal of the banking license. The staff expects that several more banks will not be able to fully adhere to their MOUs and will require further corrective action in the future.

Thus far, the closure of banks has gone smoothly. Consistent support was received from the relevant government agencies and the Prime Minister. The highly segmented nature of the banking system also helped avoid bank runs and other systemic risks. The amount of total deposits and loans with nonviable banks is relatively small, and the impact on depositors and borrowers is limited. There are no interbank loans to nonviable banks, and an impact on other relicensed banks would not be a major concern.

Foreign Trade Bank (state-owned bank) reform1/

The purposes of the FTB restructuring are to: (i) separate it from the NBC as an independent entity; (ii) develop it as a market-oriented commercial bank; and (iii) privatize it by end-2001. The size of the FTB’s assets and liabilities in local currency is the largest among all banks (1 percent of GDP). With effective restructuring, the FTB can potentially play a major role in Cambodia’s banking sector.

In August 2000, the legal separation of the FTB from the NBC was completed. The NBC finalized a Memorandum of Understanding that established the FTB’s legal and operational independence and its Board of Directors. However, in the transition period, the NBC still owns the FTB, and the Board of Directors includes representatives of the NBC.

In early December 2000, the NBC gave the FTB a banking license. In October, Price Waterhouse Coopers completed the FTB audit and calculated its net worth as CR 3.9 billion (US$ 1 million). In November, the NBC transferred part of its physical assets, estimated at CR 6.4 billion (US$ 1.7 million), for the FTB’s headquarters. The total capital of FTB amounts to CR 10.3 billion, thus satisfying the initial minimum capital requirement of CR 10 billion.

To fully recapitalize the FTB to CR 50 billion (US$ 13 million), the Ministry of Economy and Finance (MEF) will issue a recapitalization bond by mid-2001. In January 2001, the NBC, the MEF, and the FTB set up a working committee to make preparations for a recapitalization bond. MAE will provide technical assistance in designing the details of the bond issue.

To support eventual privatization, modernizing the FTB’s management and introducing a market-oriented business culture is essential. The FTB is currently seeking an experienced manager as one of the Board members. The government is also requesting technical assistance from the International Finance Cooperation and the AsDB to complete the restructuring and prepare for privatization.

1/Another state-owned bank, the Rural Development Bank (RDB), is operating as a wholesale bank for microfinance institutions. The AsDB is providing technical assistance in improving the operation of the RDB and developing microfinance institutions.

D. External Sector Policies and Capacity to Repay the Fund

26. The program will continue the present exchange rate policy. Noting the commitment of the authorities to keep the margin between the official exchange rate and the private market rate at no more than 1 percent, the staff urged the authorities to move to eliminate the margin entirely and unify the rates. The authorities stressed the signaling effect provided by setting the official rate, and that this still plays a stabilizing role in the context of a thin foreign exchange market. They emphasized their commitment to keep any divergence at less than 1 percent, and have moved to eliminate the margin entirely during orderly market conditions. The authorities concurred with the mission’s recommendation to accept the obligations of Article VIII, Sections 2, 3, and 4 in the context of the 2001 Article IV Consultation.

27. The program provides for prudent external debt management and further trade liberalization. The prohibition on new nonconcessional borrowing will be continued, and the staff stressed the importance of a careful review of all external borrowing to ensure that any loan contracted is consistent with established concessionality criteria. The program assumes that Cambodia will reach agreement on the outstanding bilateral agreements under the 1995 Paris Club agreement, which provided for Naples terms treatment of Cambodia’s debt. Technical discussions have taken place, but have not been concluded, and the staff urged the authorities to make further progress in completing outstanding bilateral agreements (e.g., with the Russian Federation and the United States).14 Cambodia is liberalizing its trade system as part of the WTO accession process and the implementation of the ASEAN Free-Trade Agreement. The authorities have already provided answers to the WTO questionnaire in June and December 2000, and are hopeful that the accession process will be completed by 2002.

28. The staff welcomed the authorities’ decision to reduce the number of tariff bands to 4, and the maximum tariff rate to 35 percent in the context of the 2001 budget.15 They urged the authorities to continue this process in the formulation of the 2002 budget by further lowering the maximum rate to 30 percent and reducing the unweighted average to less than 15 percent as called for under the program, and in line with FAD recommendations for compensating revenue measures. The authorities reaffirmed their commitment to reduce the average tariff rate to below 15 percent, but expressed concern with the revenue implications of reducing the maximum rate from 35 percent to 30 percent. The mission emphasized that estimates of compensating revenue measures have been provided, and indicated that the modalities of meeting the target of an average tariff rate below 15 percent should be agreed in the context of the formulation of the 2002 budget, based on the experience with tariff reduction in 2001, and taking into account technical assistance support in customs administration to be provided under the TCAP program.

29. The projected external current account deficit should be sustainable over the medium term in view of prospective net official concessional financing and debt relief. Notwithstanding the recent floods and rising oil prices, the current account deficit (excluding official transfers) is expected to stay in the range of 12–13 percent of GDP during 2000–01, owing to the strong performance of garment exports and tourism. It is projected to decline gradually to about 10 percent in 2005, partly aided by the resumption of forestry exports and further export diversification. Including official transfers, the deficit would decline from about 5½ percent of GDP in 2001 to about 4 percent by 2005. The main risks to external sustainability would be slower export growth, perhaps due to economic slowdown or reduced market access to Cambodia’s primary market (the United States), and reduced inflows of donor support and other capital flows arising from delayed implementation of demobilization or other aspects of the reform agenda.

30. Cambodia should have no difficulty in continuing to service its obligations to the Fund. In addition to its recent good record of meeting scheduled payments, the targeted level of international reserves under the current medium-term scenario provides sufficient room for future payments. Given the highly concessional nature of Cambodia’s rescheduled debts, once outstanding bilateral agreements are concluded, debt service payments, including on Fund credit, are projected to remain at around 4 percent of goods and service receipts.

E. Other Structural Reforms

31. Structural reforms for 2001 will focus on those areas critical for achieving the macroeconomic objectives. Foremost among these are improvements in tax administration and expenditure management, bank restructuring, military demobilization, civil service reform, and trade liberalization—all discussed above. Other priority areas are forestry policy and legal reform. Additional structural policies for supporting the authorities1 poverty reduction efforts are described in detail in the I-PRSP.

32. Forestry policy has undergone a fundamental change in its orientation during the first year of the program.16 The staff team welcomed the progress that has been made and encouraged the authorities to continue with the important actions scheduled for the year ahead, including submission of a revised Forestry Law to the National Assembly by end-February 2001, conducting a review of forest revenue policy by end-April 2001, canceling further forestry concessions that do not complete restructured concession agreements by end-September 2001, and taking steps to further improve the operations of the FCMU.

33. Progress in preparing basic legislation to improve the legal environment for private sector activity has been slower than expected, but strong efforts will be made in the period ahead. The delays were caused primarily by an overloaded agenda of legal reform in the face of extremely limited implementation capacity. A draft law on commercial standards has already been approved by the National Assembly, a draft law on trademarks and commercial enterprises will be submitted to the Assembly in early 2001, laws on commercial contracts and arbitration by mid-2001, and laws on corporate insolvency (with technical assistance from LEG) and secured transactions by end-2001.

F. Economic Statistics and Fiscal Transparency

34. Key economic data needed for program monitoring and surveillance purposes are available, but Cambodia’s statistical capabilities need further upgrading. Revised national account estimates have been recently developed with AsDB assistance, but the reliability of the estimates remains uncertain, largely owing to difficulties in recording informal sector activities. The National Institute of Statistics is also in the process of updating the weights and coverage of the consumer price index. As a result, new inflation benchmarks covering five provinces and reflecting updated patterns of household consumption are expected to be available in the near future. Largely due to limited capacity in the Ministry of Economy and Finance and the NBC, earlier technical assistance recommendations in the areas of government finance, and balance of payments statistics fell short of full implementation. Recent experience has been more positive, and additional Fund assistance on government finance and balance of payments statistics has been scheduled for the first quarter of 2001. In the period ahead, compilation of relevant social indicators to improve poverty diagnosis and monitoring capabilities will be made a high priority to meet the requirements set under the full PRSP. The authorities have also indicated interest in participating in the General Data Dissemination System (GDDS) with a view to using GDDS as a framework for statistical development.

35. A comprehensive framework for enhancing governance and Sighting corruption has been agreed with donors and will be important for improving fiscal transparency. The Governance Action Plan (GAP) initially presented at the May 2000 Consultative Group Meeting has been amended following discussions with donors. The government plans to formally adopt the revised version by January 2001 and to prioritize reform actions within a timeframe agreed with donors while seeking adequate funding. The GAP calls for reforms in crosscutting areas where improvements are pre-requisites for addressing governance concerns, including reform in the judicial and legal system, civil service administration, and public finance management. Improvement of customs and tax administration, as well as budget management, are priority areas. Cambodia also still lacks an adequate legal framework that would establish the rule of law and underpin the development of basic economic institutions. A new Audit Law was recently adopted, but its implementation has been hampered by delays in appointing board members of the National Audit Authority. Civil and penal codes and procedures, as well as key land, natural resources and commercial legislation, are also under preparation.

G. Implementation Capacity and Program Monitoring

36. Thus far, sufficient internal consensus to move the program forward has been maintained, but important reforms fundamental to the success of the program remain to be implemented in the period ahead—in particular, revenue mobilization, expenditure management, and military and civil service reform. Significant progress has been made in the macroeconomic program and in key structural policies, particularly bank restructuring. However, delays have been experienced in some areas, owing to weaknesses in implementation capacity and difficulties in reaching internal consensus on reforms affecting entrenched interests. To strengthen administrative capacity, effective implementation of the forthcoming TCAP (Annex IV) will be critical. The TCAP program is aimed at strengthening basic economic institutions and improving capacity to conduct macroeconomic policy, with a focus on those components judged as most critical to achieve the objectives of the government’s poverty reduction strategy. The government will need to devote sufficient resources to the development of local capacity to make this program effective.

37. The program for 2001 will continue to be monitored through quantitative and structural performance criteria outlined in paragraph 25 of the MEFP. The quantitative benchmark/performance criterion on net domestic assets (NDA) of the banking system has been replaced with the NDA of the central bank to improve the authorities’ ability to monitor, control, and be accountable for the target. The coverage of the program ceiling on external debt has also been revised in accordance with the new guidelines. Structural conditionality in 2001 focuses on bank restructuring, tax administration, financial transparency, and forestry policy. Given the importance of administrative reform and military demobilization for achieving the fiscal and poverty reduction objectives, the program also sets structural benchmarks in these areas that will be monitored in close consultation with the World Bank. Semi-annual disbursements of SDR 8.4 million each are envisaged for the remainder of the arrangement (Table 10) subject to the observance of performance criteria and the completion of semi-annual reviews. The third review is expected to be completed by end-July 2001.

Table 10.Cambodia: Proposed Schedule of Remaining Disbursements Under the PRGF Arrangement, 2000–2002
AmountAvailable DateConditions for Disbursement
SDR 8,357,000

(9.6 percent of quota)
December 15, 2000Observance of the end-September 2000 quantitative performance criteria, relevant structural performance criteria, and completion of the second review.
SDR 8,357,000

(9.6 percent of quota)
June 15, 2001Observance of the end-March 2001 quantitative performance criteria, relevant structural performance criteria, and completion of the third review.
SDR 8,357,000

(9.6 percent of quota)
December 15, 2001Observance of the end-September 2001 quantitative performance criteria, relevant structural performance criteria, and completion of the fourth review.
SDR 8,357,000

(9.6 percent of quota)
June 15, 2002Observance of the end-March 2002 quantitative performance criteria, relevant structural performance criteria, and completion of the fifth review.
SDR 8,358,000

(9.6 percent of quota)
December 15, 2002Observance of the end-September 2002 quantitative performance criteria, relevant structural performance criteria, and completion of the sixth review.

IV. Staff Appraisal

38. Cambodia has made a good start in the implementation of economic reforms so far under its PRGF-supported program, but the reform agenda remains large. Further strong efforts are needed in the period ahead to build basic economic institutions, protect macroeconomic stability, improve governance, and make inroads to reducing pervasive poverty.

39. Economic performance in 2000 remained broadly satisfactory, despite the adverse impact of severe flooding in the second half of the year. This performance was due to further improvements in revenue mobilization and continued restraint in spending. These efforts have kept core inflation at a low level and made room for the needed emergency flood relief. Furthermore, good progress was made in key structural reforms, particularly in the areas of forestry policy, bank restructuring, and initial steps to improve tax and customs administration.

40. The second year of the PRGF-supported program seeks to build on this initial progress while addressing areas where reforms have been delayed or further improvement is required. Its main goals are to raise revenue and improve expenditure composition and budget management, continue bank restructuring, and deepen other structural policies that are key to macroeconomic stability and poverty reduction. Prudent monetary and exchange rate policies will continue to be needed, supported by the avoidance of domestic financing of the budget.

41. The staff welcomes the I-PRSP that the authorities have prepared. The Joint Staff Assessment notes the strengths of the authorities approach, particularly the detailed discussion of the existing strategy and a clear agenda for a participatory process. Coordination should be strengthened among government ministries, as well as with internal and external partners, to ensure the preparation of a high quality PRSP by end-2001.

42. Fiscal reform will continue to be the cornerstone of the economic reform effort. Initial progress has been made in improving revenue, albeit from a very low starting point. To meet the program’s revenue objective, it will be critical to implement the new tax measures and make further headway in improving tax and customs administration in 2001. More specifically, the staff urges the government to complete in a timely way revisions to the Law on Investment to rationalize tax incentives and improve transparency, while strengthening the application of existing provisions under the Law on Taxation. Further progress in improving the flow and efficiency of government spending for the priority social sectors will also be important for achieving poverty reduction objectives.

43. Successful implementation of military demobilization and civil service reform—both of which pose particular challenges—will be vital to the success of the government’s poverty reduction and growth strategy. Further reductions in defense and security spending will be necessary to allow increased spending for priority areas. The staff urges the authorities to build momentum to bring the demobilization program back on track—making up as much as possible the delays to date—and to complete the necessary preparation and secure donor financing to begin the first phase of the program by mid-2001. Administrative reform is one of the priority areas for preserving a sound fiscal position, improving the delivery of public services, and reducing corruption. The staff welcomes the progress that has been made in conducting a civil service census, eliminating irregular workers, and beginning to establish a computerized payroll system. It is essential that the computerized payroll system be completed to validate the results of the census and to provide a monitorable benchmark for the implementation of civil service reform. The staff would have preferred that the recently granted wage increase be timed with the announcement of a civil service reform strategy. While the recent increase was cautious and the macroeconomic impact has been contained, it highlights the importance of the government accelerating its efforts to formulate such a strategy consistent with resource constraints, and in consultation with the Bank and other development partners, by end-March 2001, as envisaged under the program.

44. Banking reform has proceeded successfully, as envisaged under the program. The staff welcomes the actions taken by the central bank—in line with MAE recommendations—to close nonviable banks, and initiate a restructuring process for other banks that are potentially viable. It will be critical for the central bank to closely monitor performance of these banks in the period ahead and continue to take timely action when banks do not meet the requirements of their restructuring agreements. It will also be important for the authorities to take follow-up steps to introduce a commercial culture in the Foreign Trade Bank, and fully prepare the bank for eventual privatization as programmed.

45. Cambodia’s external position is expected to remain manageable over the medium term. The external current account deficit widened in 2000, primarily reflecting strong growth in imports, in line with economic recovery. This deficit is expected to decline gradually over the medium term and be financed by higher aid flows and foreign direct investment. Over the medium term, external viability will continue to depend on the sustained implementation of policies and continued donor support. In this regard, successful conclusion of outstanding bilateral rescheduling agreements and prudent debt management will be key elements. The staff also welcomes the authorities’ commitment to complete the process for joining the WTO, and to further reduce average import tariff rates during the program period. The staff encourages the authorities to maintain their commitment to reduce maximum rates from 35 to 30 percent as agreed under the program.

46. The staff urges the authorities to make effective use of planned technical assistance under the Technical Cooperation Action Plan. The TCAP program will provide comprehensive support in key areas to support macroeconomic stability and poverty reduction objectives. It will be important for the authorities to take the necessary steps to ensure that envisaged improvements in local capacity will take place. The staff also urges the authorities to make further progress in improving economic statistics, especially for government finance, balance of payments, and national accounts statistics. Participating in the GDDS in the near future would be very useful as a framework for statistical development.

47. Cambodia has made good progress under the first year of the program and the staff supports the authorities’ request for the completion of the second review under the PRGF. Risks to program implementation continue, however, stemming from the still fragile governance environment, difficulties in reaching internal consensus given the complex nature of some reforms, and weak implementation capacity. Close program monitoring and a comprehensive program of technical assistance seek to address these risks. The policies for 2001 set out in the Memorandum of Economic and Financial Policies are designed to make further progress in implementing reforms and address areas where delays have been experienced, and provide a solid basis for the continuation of Fund support. Accordingly, the staff recommends that the Executive Board complete the second review under the PRGF.

V. Proposed Decision

48. The proposed decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board:

1. Cambodia has consulted with the Fund in accordance with paragraph 2(dd) of the three-year arrangement for Cambodia under the Poverty Reduction and Growth Facility (PRGF) (EBS/99/188, Supplement 1, 2/22/00) and paragraph 4 of the letter dated August 31, 2000 from the Senior Minister of the Ministry of Economy and Finance and the Governor of the National Bank of Cambodia, in order to review program implementation and reach understandings regarding the conditions for disbursements under the arrangement for the period through December 2001.

2. The letter dated December 18, 2000 from the Senior Minister of the Ministry of Economy and Finance and the Governor of the National Bank of Cambodia. together with its Memorandum of Economic and Financial Policies for 2001 (“the Memorandum”), shall be attached to the PRGF arrangement for Cambodia, and the letters dated September 29, 1999 and August 31, 2000 from the Senior Minister of the Ministry of Economy and Finance and the Governor of the National Bank of Cambodia, together with their respective attachments, shall be read as supplemented and modified by the letter dated December 18, 2000 and the Memorandum.

3. Accordingly, the PRGF arrangement for Cambodia shall be amended as follows:

  • a. the word “and” shall be deleted at the end of paragraph 1(cc)(i);

  • b. the full-stop at the end of paragraph 1(cc)(ii) shall be replaced with “; and”, and the following shall be added as a new paragraph 1 (cc)(iii):

    • “(iii) the fifth disbursement, in an amount equivalent to SDR 8.357 million, will be available on December 15, 2001, at the request of Cambodia and subject to paragraph 2 below.”;

  • c. paragraph 2(a)(i) shall be amended to read as follows:

    • “(i) the ceiling on the net domestic assets of the central bank, or”;

  • d. paragraph 2(a)(v) shall be amended to read as follows:

    • “(v) the ceiling and sub-ceilings on the contracting or guaranteeing of external debt by the public sector.”;

  • e. the second sentence of paragraph 2(aa) shall be replaced with the following:

    • “Cambodia will not request the fourth disbursement referred to in paragraph 1(cc)(ii) above if the Managing Director of the Trustee finds that the data as of March 31, 2001 indicate mat any of the ceilings and floors referred to in paragraphs 2(a)(i) to 2(a)(v) of this arrangement, as specified in fable 1 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated December 18, 2000, was not observed. Cambodia will not request the fifth disbursement referred to in paragraph 1(cc)(iii) above if the Managing Director of the Trustee finds that the data as of September 30, 2001 indicate that any of the ceilings and floors referred to in paragraphs 2(a)(i) to 2(a)(v) of this arrangement, as specified in Table 1 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated December 18, 2000, was not observed.”;

  • f. the following shall be added to the end of paragraph 2(bb):

    • “Cambodia will not request the fourth and fifth disbursements referred to in paragraph 1(cc)(ii) above if the Managing Director of the Trustee finds that Cambodia has not carried out its intentions with respect to the structural performance criteria specified in Table 2 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated December 18, 2000.”;

  • g. in paragraph 2(cc). the words “third and fourth” shall be amended to read as “third, fourth and fifth”; and

  • h. the second and third sentences of paragraph 2(dd) shall be replaced with the following:

    • “Cambodia will not request the fourth disbursement specified in paragraph 1(cc)(ii) above until the Trustee has determined that the third review referred to in paragraph 5 of the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated December 18, 2000, and paragraph 25 of the Memorandum of Economic and Financial Policies attached thereto, has been completed. Cambodia will not request the fifth disbursement specified in paragraph 1(cc)(iii) above until the Trustee has determined that the fourth review under this arrangement has been completed. The timing of the fourth review shall be established during the third review referred to above.”

4. The Fund has reviewed the Interim Poverty Reduction Strategy Paper (“IPRSP”) submitted by Cambodia and determines that it provides a sound basis for Fund concessional financial assistance.

5. The Fund adopts the following decision in principle, which shall become effective on the date on which the Fund decides that the World Bank has concluded that the IPRSP submitted by Cambodia provides a sound basis for World Bank concessional financial assistance:

“The Fund decides that the second review contemplated in 2(dd) of the arrangement for Cambodia under the Poverty Reduction and Growth Facility (PRGF) (EBS/99/188, Supplement 1, 2/22/00) is completed, and that Cambodia may request the third disbursement referred to in paragraph 1(cc)(i) of the arrangement, on the condition that the information provided by Cambodia on the implementation of the measures specified in Table 2 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated December 18, 2000 is accurate.”

ANNEX I: Cambodia: Fund Relations

As of November 30, 2000

I. Membership Status: Joined: 12/31/1969; Article XTV

II. General Resources Account:

SDR MillionPercent Quota
Quota87.50100.0
Fund Holdings of Currency90.63103.6

III. SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation15.42100.0
Holdings0.271.7

IV. Outstanding Purchases and Loans:

SDR MillionPercent Quota
Systemic Transformation3.133.6
PRGF arrangements53.1160.7

V. Financial Arrangements:

ApprovalExpirationAmount ApprovedAmount Drawn
TypeDateDate(SDR Million)(SDR Million)
ESAF/PRGF10/22/199910/21/200258.5016.71
ESAF05/06/199408/31/199784.0042.00

VI. Projected Obligations to Fund: (SDR Million; based on existing use of resources and present holdings of SDRs):

OverdueForthcoming
11/30/200020002001200220032004
Principal-----9.49.49.47.0
Charges/Interest---0.11.11.00.90.8
Total---0.110.510.410.37.9

VII. Exchange Rate Arrangement:

Since November 8, 1992, the exchange rate of the riel has consisted of the following two rates. First, the official exchange rate, which is expressed in riels per U.S. dollar, applies to all official external transactions conducted by the government and state enterprises. Second, the market rate, which is determined freely through interactions of foreign exchange traders in the private sector, applies to all other transactions. The official exchange rate is adjusted so as to limit the spread between the official rate and the riel-U.S. dollar rate prevailing in the market. From the beginning of 1994, the spread between the official and market exchange rates was limited to no more than 2 percent on a daily basis and, from March 1994, to no more than 1 percent on a daily basis.1 On December 14, 2000, the official exchange rate was CR 3,905 per U.S. dollar and the private market rate CR 3,908 per U.S. dollar.

VIII. Article IV Consultation:

Cambodia is on a 12-month consultation cycle. The Executive Board concluded the last Article IV consultation on September 15, 2000 (EBS/00/186, 8/31/00).

IX. Technical Assistance:

In addition to the formulation of the Technical Cooperation Action Plan (Annex IV), the following technical assistance has been provided during the last year:

  • (i) An FAD mission on tax policy and customs administration took place in September 1999. A resident custom advisor was installed at the Ministry of Finance in early February 2000, but he resigned for personal reasons in early March. His replacement was installed in September 2000. A budget advisor began an initial 3-month assignment in December 2000. A tax policy and administration mission will visit Phnom Penh in February 2001 to develop a reform strategy to improve the tax system and its administration.

  • (ii) The principal advisor post (MAE) at the National Bank of Cambodia has been extended for another year and several missions have taken place to support the bank restructuring process.

  • (iii) A STA mission on balance of payments compilation visited Phnom Penh in February 2000. A GFS mission is planned for February 2001.

  • (iv) A LEG mission to advise on corporate insolvency legislation took place in November 2000.

X. Resident Representative:

The resident representative office was closed in October 1997, but it was re-opened at end-October 1999. Mr. de Zamaróczy is currently the Resident Representative.

ANNEX II: Cambodia: Relations with the World Bank Group1

Cambodia became a member of the World Bank on July 22, 1970 but did not borrow from the Bank until 1993. Relations between Cambodia and the Bank were interrupted between 1975 and 1992. In September 1992, Cambodia decided to resume active participation in the Bank, appointing a representative on the Bank Board of Governors and designating the National Bank of Cambodia as the depository institution for Bank assets in Cambodia. In February 2000, the World Bank approved a Country Assistance Strategy for fiscal years 2000–2003, focusing on alleviation of poverty, enhancing governance, and advocating stronger partnership with other donors and nongovernmental organizations in the delivery of projects, policy advice and services. At the same time, the Bank Board also approved a Structural Adjustment Credit for US $30 million which focuses on fiscal and governance issues. In January 1997, an office was opened in Phnom Penh, that has recently, been upgraded to Resident Office, to assist in the implementation of the Bank’s assistance program and facilitate communication with the government and other donors.

To date, 15 projects have been approved for Cambodia (US $385 million). Recent projects have focused in the following areas:

  • In 1996, a Disease Control and Health Development Project was approved to support rehabilitation and expansion of the public health system, with a focus on control of communicable diseases, tuberculosis, malaria and HIV/AIDS.

  • In 1997, an Agricultural Productivity Improvement Project was approved, focusing on institutional development at the Ministry of Agriculture, including rehabilitation of training facilities, retraining of staff, and sponsoring pilot field activities.

  • In 1998, an Urban Water Supply Project was approved to improve water facilities in both Phnom Penh and Sihanoukville.

  • In 1999, four IDA projects were approved: a Social Fund II Project to finance small scale social-infrastructure projects at the local level, basically inheriting and extending the objectives from the previous Social Fund Project, a Road Rehabilitation Project to improve accesses to rural areas, a North East Rural Development Project, and an Education Quality Improvement Project.

  • In 2000, a Biodiversity and Protected Areas Project, Structural Adjustment Credit and a Forest Concession Management and Control Pilot Project were approved.

Cambodia became a member of the IFC in March 1997. The IFC is expected to provide entrepreneur training and business services for small and medium enterprises under the Mekong Project Development Facility. In addition, the IFC has approved an investment in a Cambodian power project. The TFC is also providing technical assistance to transform a Cambodian microfinance NGO into a commercial bank.

With regard to recent analytical work, the Bank prepared a Forest Policy Assessment report in June 1996 jointly with the UNDP and the FAO, a Public Expenditure Review in February 1999, and more recently a poverty assessment and strategy report, and a power sector strategy. A diagnostic study on governance and corruption was also prepared.

IDA: Commitments and Disbursements to Cambodia, 1993–2000(In millions of U.S. dollars, as of December 11, 2000)
ProjectDate of approvalCommitteeDisbursed
Emergency RehabilitationOct.26, 199362.7064.86
Technical AssistanceDec.6, 199417.0015.78
Social FundJun.8, 199520.0018.42
Economic Rehabilitation CreditSep.28, 199540.0036.91
Phnom Penh Power RehabilitationSep.28, 199540.0032.02
Disease Control and HealthDec.24, 199630.4015.56
Agricultural Productivity ImprovementFeb.28, 199727.004.18
Urban Water SupplyFeb. 17, 199830.969.00
Social Fund IIMar.23, 199925.0011.76
Road RehabilitationMar.23, 199945.310.76
North East VillageMay 18, 19995.000.47
Education Quality ImprovementAug. 31, 19995.000.81
Biodiversity and Protected Areas LILFeb. 8, 20001.900.11
Structural Adjustment CreditFeb. 29, 200030.009.61
Forest Concession Management and Control LILJun. 5, 20004.800.00
Total385.07220.25
ANNEX III: Cambodia: Relations with the Asian Development Bank

From 1992 through October 31, 2000, the AsDB approved US $410 million in low-interest loans from the Asian Development Fund to Cambodia to finance thirteen projects and one structural reform program. Only the first project (the US $68 million Special Rehabilitation Assistance Project, approved in 1992) has been completed. Of the remaining project and program loans, US $151 million is for economic infrastructure, US $100 million for social infrastructure, and US $91 million for agriculture.

The AsDB also designed and administered 74 technical assistance projects during this period. These were financed through US $51 million in grants from the AsDB (US $20 million), the Japanese Special Fund (US $23 million), UNDP (US $2 million), Sweden (US $6 million), Denmark (US $1 million), Australia (US $1 million), and the Netherlands (US $0.3 million).

The AsDB completed a new Country Operational Strategy in July 2000 that emphasizes poverty reduction through interventions in four areas: rural economic development, social development, governance, and improvement of the conditions for private investment The AsDB will place particular emphasis on facilitating government leadership of sector development initiatives in water resource management, education and transportation. This will be accomplished through efforts to coordinate the activities of aid agencies, build local capacity to finance and manage development programs; and fund priority investments.

In October-November 2000, the AsDB conducted an assessment of the flood damage to prepare a proposal for loan assistance to meet Cambodia’s rehabilitation requirements. The AsDB is currently preparing an Emergency Flood Rehabilitation Project, expected to amount to US $55 million. The project will cover rehabilitation of national transport network, irrigation, education and health facilities, and rural livelihood restoration.

AsDB: Loan Commitments and Disbursements to Cambodia

(In millions of U.S. dollars)

(as of October 31, 2000)

Loan ApprovalsContract Awards/CommitmentsDisbursements
199428.235.912.2
199545.128.135.9
1996105.015.332.1
19970.041.510.7
199840.029.129.3
199988.417.026.2
2000 (through October)36.0110.641.8
Total342.7277.5188.2
ANNEX IV: Cambodia: Technical Assistance and Technical Cooperation Action Plan (TCAP)

The TCAP program was formulated between April and September 2000, and the program document is expected to be finalized in January 2001. The program is primarily aimed at strengthening the government’s capabilities to formulate, implement and monitor sound fiscal and monetary policies supportive of Cambodia’s poverty reduction strategy, as set forth in the Interim PRSP. Actions scheduled under the TCAP are also part of a broad effort aimed at establishing an efficient governance framework and building the institutional capacity of selected key government agencies through broad training and upgraded information and management systems. The TCAP reflects concerted efforts by the IMF, the AsDB, the UNDP and several bilateral donors to achieve the above goals. Some US $6.3 million has been earmarked under the TCAP for implementing about 50 individual technical assistance projects within a three-year time frame.

Background

In view of Cambodia’s extremely limited implementation capacity, a substantial amount of technical assistance would be required to meet reform objectives. To this end, the Government of Cambodia has requested IMP assistance in designing a comprehensive program of technical assistance covering principle areas of reform related to macroeconomic policy, including fiscal reform (tax administration and policy, customs administration, and budget management), banking reform, statistics, and the legal framework. Following discussions between the government, the IMF, UNDP, and other interested multilateral and bilateral donors a comprehensive program has been prepared.

A program of technical assistance was previously provided during 1994-97 (Attachment I). Assistance provided during this period achieved notable successes, including the preparation of the 1997 Tax Law, setting up a legislative framework for the banking system, and improvements in economic statistics. This broad success was undermined, however, by a serious deterioration in governance, and the expected benefits of improved administrative capacity—for example, with respect to enhanced revenue mobilization—did not materialize. The failure to build local capacity led to some further slippage in progress in all of these areas during 1997-98.

A comprehensive review of this assistance was conducted in early 1997 and concluded that crucial factors behind the progress that was achieved were well-defined and limited goals, and strong commitment by the authorities at the highest levels (at least in the initial stages). Shortfalls from the program’s original objectives largely stemmed from: (i) overly ambitious objectives in the original project; and (ii) less than full collaboration between local staff and project advisors, including with respect to training. The Cambodian government has agreed with this assessment and emphasized that the two main impediments to successful implementation of previous technical assistance were: (i) the inability of the government to coordinate external assistance; and (ii) a lack of commitment to ensure sustainability of projects through the designation of counterparts and appropriate use of trained staff.

Key Components of the TCAP

In response to this past experience, the current TCAP program has set realistic and specific objectives in the context of strong government ownership. In addition, inter-ministerial coordination of the program will be carried out by a Government Steering Committee, chaired by the Ministry of Economy and Finance, and consisting of senior officials of the National Bank of Cambodia, government agencies and departments involved in the implementation of the TCAP, as well as representatives of other concerned ministries. The program is divided into four main areas each of which is further divided into operative components (Attachment II):

1. Fiscal Sector Reform: To improve capacity in tax policy and administration, customs administration, and overall budget management

2. Banking System Reform: To strengthen the banking system by supporting the following objectives: (i) relicensing of commercial banks; (ii) strengthening NBC supervision capacity; (iii) restructuring the Foreign Trade Bank; and (iv) reform of the payments system.

3. Economic Statistics: To strengthen the government’s capacity to collect, compile, analyze, and disseminate broad economic statistics through reform of the statistical institutional framework.

4. Legal Framework: This program, as part of the overall legal reform program for Cambodia, will strengthen the government’s capacity to improve the overall legal framework, a precondition for further private sector development, by contributing to the formulation and implementation of a comprehensive legal reform strategy, with specific follow-up technical assistance from the Fund in the areas of corporate insolvency and secured transactions.

ATTACHMENT I

Cambodia: Summary of Technical Assistance Provided by the Fund, 1994–2000
PurposeAssistance and timing (person-months)Funding Sources
Tax Policy and Tax Administration
• Establish economic forecasting unit, including medium-term programming and flash reporting24, from January 1994IMF/UNDP
• Reform of tax administration (advisor)24, from March 1994IMF/UNDP
• Tax policy mission2, September 1994IMF
• Long-term fiscal advisor24, from July 1995IMF
• Inspection mission½, June 1996IMF
• Reform of tax administration1½, January 1997MF
• Tax policy and customs administration2, September 1999IMF
• Technical Cooperation Action Plan (TCAP) mission3¾, March-April 2000IMF
• Customs administration (advisor)5, February 2000IMF
Monetary Policy and Central Bank Operations
• Cash management and currency reform4, from October 1994IMF/UNDP
• Implement accounting system for the NBC44, from November 1994IMF/UNDP
• Develop NBC’s bank inspection and supervisory capacity32, from November 1994IMF/UNDP
• Foreign exchange management20, from November 1994IMF/UNDP
• Development of research and analysis capability24, from February 1994IMF/AsDB/UNDP
• Reform of financial institutions legislation6, from March 1994IMF/AsDB/UNDP
• Assist the NBC in implementing monetary policy12, from February 1995IMF
• Monetary operations and banking supervision1, May 1996IMF
• Central bank operations12, January 1997IMF
• Long-term advisor36, from January 1998IMF
• Banking system reform4, March and June 2000IMF
• Banking system restructuring and central bank development2, October 2000IMF
Statistics
• Establishment of reporting procedures and format for GFS18, from April 1994IMF/UNDP
• Development of balance of payments statistics24, from May 1995IMF/UNDP
• Development of monetary statistics2, from May 1995IMF/UNDP
• Improvement of consumer price indices2, from June 1995IMF
• Balance of payments compilation1/2, December 1998IMF
• Balance of payments compilation1/2, February 2000IMF
Legal Framework
• Review of technical assistance needs1/2, April 2000IMF
• Bankruptcy Law1/2, November 2000IMF

ATTACHMENT II

Cambodia: Summary of the Technical Cooperation Action Plan (TCAP): 2000–02 1
PurposeAssistance (in person-months)Budget (in U.S. dollars)
Fiscal Reform342.44,993,000
Tax policy and administration108.3910,000
Customs administration125.3922,000
Budget management108.83,161,000
Banking System Reform36.5657,000
Central bank30.0540,000
Commercial banks6.5117,000
Economic Statistics22.5415,000
Legal Reform2.036,000
Program Administration52.0226,000
Total TCAP455.46,327,000
Of which:
IMF1,242,000
AsDB1,625,000
UNDP and others3,460,000

Status as of end-November 2000.

Status as of end-November 2000.

ANNEX V: Cambodia—Statistical Issues

At the start of Cambodia’s reform program in 1993, the statistical base was largely nonexistent. Substantial improvements have been made since then, and an IFS page for Cambodia was published in April 1996. Nevertheless, significant problems remain, even though a considerable amount of technical assistance has been provided by the Fund, the UNDP, the AsDB, and the World Bank. Core data are generally provided on a timely basis (Attachment I).

National accounts

The National Institute of Statistics (NIS) of the Ministry of Planning provides official estimates of the components of GDP, The available statistical base on which the national accounts are estimated is extremely weak and fragmentary, and data for most sectors are not collected on a systematic basis. GDP deflators are estimated mainly from CPI data, as most other price data are not available. For several years, the AsDB has been providing technical assistance and financial support to improve the quality of the national accounts. Surveys of the main economic sectors need to be strengthened, and significant improvement of the national accounts database will take a number of years. The latest edition of the national accounts shows revised estimates for 1993–1999.

Prices

The NIS provides official estimates of the CPI on a monthly basis with a lag of five weeks. In 1995, an STA mission made recommendations to improve the reliability of the statistics, and since then significant improvements have been made. However, problems relating to price collection procedures and the compilation of CPI remain, and the index covers only Phnom Penh. The NIS is currently revising the weights of the CPI basket to reflect upgraded patterns of household consumption and broadening the coverage to include five major provincial cities. No producer or wholesale price indices are available yet.

Government finance statistics

The MEF provides monthly fiscal data on a timely basis with a four-week lag. The quality of fiscal data, compiled on the basis of GFS methodology, has improved during the last three years, owing to substantial technical assistance mostly financed by the World Bank. However, the authorities have not yet provided any data for publication in IFS and the GFS Yearbook. There are still weaknesses as regards the coverage and the economic classification of expenditure. Information on external financing of the budget has improved significantly, but detailed donor-specific data on investments financed by project aid are available only with considerable lags. The authorities are committed to provide fiscal data for IFS and the GFS Yearbook by end-2001. To assist the authorities, an STA mission on government finance statistics has been scheduled for the first quarter of 2001

Monetary statistics

The NBC provides data on the monetary authorities and deposit money banks on a monthly basis with a lag of four weeks. Substantial improvements have been made in the past few years, particularly with the adoption of the new plan of accounts by the NBC in January 1996, and the introduction of an IFS page for Cambodia in April 1996. Monetary statistics in Cambodia cover riels in circulation and domestic bank deposits in riel and foreign currencies. However, data on the large amount of foreign currency in circulation in Cambodia are not available. As a result, the effective money stock in Cambodia is underestimated by the amount of foreign currency in circulation, which leads to overestimates of the income velocity of money.

Mr. Khay Phousnith, Director of the Economic Research Department of the NBC, is currently on secondment to STA as a Special Appointee.

External sector statistics

The NBC provides official estimates of balance of payments statistics. While a significant improvement has been made in compiling the statistics, aided in large part by a previous long-term advisor, weaknesses remain in several areas. Customs data have substantial coverage and valuation problems arising from the nonrecording of nondutiable imports and the weakness of customs controls. In addition, the bulk of reexports to neighboring countries are included under customs’ import data but may be under-reported in total exports. Estimates of the trade balance are therefore subject to considerable uncertainty. While efforts have been made to compile better data on foreign direct investment, private capital flows are likely to be large and not fully captured by official data. A range of international transactions by enterprises, such as payments for imported services, income payments, and portfolio investment abroad are not included in the data.

An STA mission which visited Phnom Penh in February 2000 made recommendations to address these issues. The mission worked out an arrangement for a stronger collaboration between the NBC and the Customs Department to ensure a timely submission of foreign trade statistics, but lack of expertise and logistical difficulties have hampered implementation of direct investment surveys. A follow-up STA mission on balance of payment statistics has been scheduled for the first quarter of 2001, which will focus on foreign direct investment.

Cambodia: Core Statistical Indicators as of December 15, 2000
Exchange RatesInternational ReservesCentral Bank Balance SheetReserve/Base MoneyBroad MoneyInterest RatesConsumer Price IndexExports/ImportsCurrent Account BalanceOverall Government BalanceGDP/GNPExternal Public Debt/Debt Service
Date of Latest ObservationDecember 15 2000November 30 2000October 2000December 8 2000October 2000October 2000October 2000June 20001999November 200019991999
Date ReceivedDecember 15 2000December 5 2000December 2000December 15 2000December 8 2000December 8 2000December 8 2000October 2000April 2000December 15 2000April 2000April 2000
Frequency of DataDailyDailyMonthlyWeeklyMonthlyMonthlyMonthlyMonthlyQuarterlyMonthlyAnnualAnnually
Frequency of ReportingDailyWeekly with one week lagMonthly with five weeks lagWeekly with one week lagMonthly with five weeks lagMonthly with five weeks lagMonthly with five weeks lagDuring missionsDuring missionsMonthly with one month lagAnnualAnnually
Source of DataNBCNBCNBCNBCNBCNBCNISNBC and MEFNBCMEFNISNBC
Mode of ReportingFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailDuring missionsDuring missionsFaxDuring missionsDuring missions
ConfidentialityNoYesNoNoNoNoNoNoNoNoNoYes
Frequency of PublicationDailyN/AMonthlyMonthlyMonthlyMonthlyMonthlyAnnuallyAnnuallyAnnuallyAnnuallyN/A

This reflects a relatively low dependence on petroleum products compared with more advanced economies, but also a need to revise the weights in the CPI. A new CPI series reflecting updated weights and covering additional provinces is expected in 2001.

After excluding exceptional revenue from the auction of garment export quotas in 1999, underlying revenue has improved from 10¾ percent of GDP in 1999.

These included a broadening of the VAT base to include 500 additional firms, increased royalties by tourist service providers (including from the Angkor Wat Temple Complex) and casinos, and stepped-up collection of arrears from telecommunications and leases of state assets.

Priority Action Programs aim to protect critical expenditures for such programs as primary education, basic health, and rural roads from possible revenue shortfalls.

A summary report on the implementation of structural reforms is contained in Table 3.

At the time of the first review, launching of the first phase of the full demobilization program by November 2000 had been included as a prior action for the second review.

See Cambodia—Assessment of the Interim Poverty Reduction Strategy Paper, EBS/00/123.

See for example paragraphs 2.13 and 3.18 to 3.24 of the I-PRSP.

The medium-term framework presented in Table 8 is consistent with the one presented in the I-PRSP, but has been updated to reflect recent estimates of the near-term impact of flooding. The medium-term objectives remain fully consistent with the authorities’ I-PRSP.

This will require a further broadening of the tax base, including through revisions to the Law on Investment. Weaknesses in the current revenue system and the reform agenda are described in the recent selected issues paper (SM/00/200, August 31, 2000).

The last increase in basic wages was a 30 percent increase granted in April 1999. Current wage levels are extremely low (averaging about $20–25 per month).

Implementing the military demobilization program forms part of the conditionality under the World Bank SAC program.

Reflecting the limited development of the banking system, the stock of broad money currently amounts to only 14 percent of GDP. Over the medium term, reductions in velocity are expected to level off, with the money supply eventually growing more in line with overall GDP growth.

With regard to very small amounts outstanding with other former CMEA countries where comparable action is needed, progress has been made toward completing rescheduling agreements with the Czech Republic and Slovakia.

This reduction is estimated to lower the average unweighted tariff rate from 17½ percent to about 16½ percent. Cambodia is currently rated 6 in the Fund’s trade restrictiveness index (moderately restrictive). The tariff changes being taken in 2001 would have only a marginal impact on the index. However, reducing the average tariff rate below 15 percent, and progress in eliminating more of the remaining nontariff barriers (e.g., on log exports) could reduce the rating to 2 by 2002.

The history of forestry policy and the overall reform effort is described in the selected Issues paper prepared for the 2000 Article IV consultation (SM/00/200).

The spread exceeded 4 percent on a few occasions in August 1998 as the authorities supported the official rate through intervention when the parallel market depreciated.

Prepared by the Fund staff based on information provided by the World Bank, as of December 11, 2000.

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