Information about Asia and the Pacific Asia y el Pacífico
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Cambodia: Selected Issues and Statistical Appendix

International Monetary Fund
Published Date:
March 2003
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II. Fiscal Reform: Achievements and Remaining Agenda3

30. Since the restoration of political and economic stability in late 1998, fiscal reform has been the cornerstone of Cambodia’s macroeconomic program. Fiscal revenue improved, substantial increase in social spending was achieved, and domestic financing of the budget was avoided. Despite this progress, Cambodia’s revenue and social spending still lag behind the average of countries at a similar development stage. This chapter provides a fresh look at fiscal developments in Cambodia since the early 1990s. Section A discusses fiscal reforms in the 1990s. Section B describes the main achievements during the last 4 years. Section C summarizes the reform agenda. Section D concludes.

A. Fiscal Reform in the 1990s4

Fiscal developments during 1990-1994

31. The revenue efforts undertaken in the early 1990s were initiated from extremely low levels of revenue collection. After all, a modern taxation regime did not exist under the socialist regime in the 1980s. Under these circumstances, during 1990-93, total revenues represented only 4-6 percent of GDP and were 4-5 percent of GDP lower than expenditures. Moreover, with limited external financing, central bank financing averaged 3-4 percent of GDP annually, contributing to hyperinflation of over 100 percent.

32. The first steps toward revenue reform were made during 1992-94. In 1992, a major fiscal reform was initiated with assistance from foreign experts, followed by a significant revenue effort by the new government formed after the UN-sponsored free election in 1993. Revenues increased to about 9½ percent of GDP in 1994, and, together with substantial concessional lending, eliminated reliance on central bank financing.

Cambodia: Total Tax Revenue

(Central Government)

33. The reform program covered all aspects of Cambodia’s revenue system in tax policy and tax and customs administration. The increase in revenue was attributed to growth in the tax base and policy measures. The contribution from administrative improvements, nevertheless was negative despite several efforts made in this area.5 The most effective policy measures related to revenue from international taxes, which increased from almost nil in 1991 to about 5 percent in 1995. The main measures were: (i) a consumption tax on imports, which was introduced in 1993, and generated about 1 percent of GDP in 1994; (ii) a higher ad valorem duty rate on petroleum products, which increased gradually from 3-5 percent in 1992 to about 50 percent in 1994, and generated duty collections of about 1 percent of GDP in 1994—compared to virtually zero in 1991.

Fiscal developments during 1995-1998

34. During 1995-1998 further attempts were made to deepen Fiscal reform. New taxes were introduced in 1995-96, such as a tax on personal income, a 20 percent excise tax on gasoline, a higher duty on petroleum products, and an increase in the turnover tax. To improve tax policy and tax administration, a new Law on Taxation (LOT) was adopted in 1997.6 Government’s efforts also focused on broadening the tax base, especially in the area of domestic taxes where improvements in tax administration were significant.7 Efforts included the establishment of a Large Enterprise Bureau in the Tax Department and a computerized database of large tax payers.

Cambodia: Domestic Taxes

(Central Government)

35. Despite these efforts, during 1995-1998 total tax revenue stagnated at about 6 percent of GDP, mainly due to a deterioration in customs administration, while non-tax revenue decreased to 2 percent of GDP. Fiscal policy was undermined by political and military intervention, resulting in a weakening of the authority of the Ministry of Economy and Finance (MEF) to collect revenue, widespread ad-hoc exemptions of tax customs duties, smuggling, accumulation of arrears on tax and non-tax revenue, and significant loss in forestry revenue. Indeed, reflecting the overall deterioration in governance, forestry revenue over 1995-98 amounted to 0.4 percent of GDP per annum, while proper resource pricing and monitoring of Cambodia’s forest resources should have yielded revenue of about 3-4 percent of GDP per annum.8 Under these circumstances, coupled with difficulties in restraining military and security spending, in 1998 the government used central bank financing of the budget for the first time since 1994.

Cambodia: Customs Revenue

B. Fiscal Reform during 1999-2002

36. Fiscal performance improved considerably in 1999. With regained economic vitality, total revenue strengthened from 8⅓ percent of GDP in 1998 to 10½ percent in 1999. Expenditure was restrained, and government’s net debt with the central bank was reduced by 0.6 percent of GDP. The reform to the tax system which began to be implemented in January 1999 also contributed to the revenue increase. The reform of the tax system aimed at moving away from direct taxation on trade and income to indirect taxation, relying on a 10 percent value added tax (VAT) that replaced the turnover tax and consumption tax on imports. The VAT enhanced revenue and improved the efficiency of the tax system by simplifying the tax structure, widening the coverage, and reducing cascading.

37. The fiscal reform momentum that started in early 1999 was strengthened during 2000-02 under the PRGF arrangement. The critical elements of the strategy were to increase revenue further to meet expenditure needs and redirect defense and security spending to priority social sectors. As a result, revenue increased to 11¾ percent of GDP in 2001, and is estimated to have reached about 12 percent in 2002. Tax policy aimed at strengthening the revenue structure and overall administration. Hence, except for increases in 2002 in petroleum taxes and excises on cigarettes and beer to offset a reduction in customs duties relating to tariff restructuring as part of a comprehensive trade liberalization program, revenue was not increased through changes in tax rates since 1999.

38. Although most of the growth in revenue since 1999 is attributed to the expansion of the tax base, recent efforts to enhance tax and customs administration should not be underestimated (see Annex 2 in the Staff Report). The assistance being provided through the Technical Cooperation Action Program (TCAP), adopted in May 2001, has been instrumental in improving administration, including the expansion of VAT coverage to increase the number of tax payers.9 Indeed, during 2001-02 improvements in customs administration contributed for the first time in a decade to an increase in revenue. Efforts focused on ensuring a more efficient use of preshipment inspection services, and increased transparency to reduce hidden costs in customs procedures. Moreover, anti-smuggling operations have been recently strengthened through enhanced inter-agency cooperation and the establishment of anti-smuggling units in key border provinces.10 Improvements in tax administration during 2001-02 include an initial exchange of information between government departments and strengthening tax auditing strategies and capabilities. As a result of these initial steps, tax arrears have started to be collected. If effective, all of these reforms should set the stage for positive contribution from tax and customs administration in the period ahead.

39. However, much remains to be done to broaden the revenue base. In particular, revenue from international taxes would have been much larger in the absence of large tax and customs duties exemptions. Indeed, during 1998-2001, about 50 percent of all imports were exempted from customs duty, mostly under the 1994 Law on Investment (Box 1). In addition, while a recent clearing of the backlog of applications for tax exemptions helped to improve transparency, it seriously undermined the domestic tax base, more than halving the projected profit tax in 2003.

40. Regarding nontax revenue, several measures were implemented over the last 4 years, but actual collections have been below expectations. Indeed, nontax revenue only increased from 2.8 percent of GDP in 1999 to about 3.4 percent in 2002. The main policy measures introduced in 1999 included: (i) transparent collection of garment quotas through regular auctions; (ii) introduction of a quota management fee and a garment export license fee on garment factories, and (iii) increasing the timber royalty to an average of US$54/m3, helping to maintain forestry revenue at the 1998 level despite a sharp reduction in the volume of logging—in 2002, however, forestry revenue declined as all logging activity was suspended pending the establishment of a forestry concession system based on a sustainable practice. Main policy measures since 1999 comprised the revision of the contract terms of the entrance tickets at the Angkor temple complex in 2000 and 2002, the introduction of visa stickers in December 2001; in addition, in 2002, royalty fees from casinos were increased and the share of garment quotas to be auctioned was raised. Despite these measures, there are still significant arrears from telecommunications, civil aviation and state-owned enterprises and immobile assets leased to the private sector. Moreover, the signing of contracts with private firms (to provide certain government services) has undermined the transfers to the treasury, particularly in the telecommunication and civil aviation sectors.

Cambodia: Non-Tax Revenue

Box 1.The Law on Investment

The 1994 Law on Investment (LOI) has given rise to a serious tax erosion problem. Revenue from customs duties—which currently represents 75 percent of total tax revenue—would have been even greater had there not been an erosion in the scope of dutiable goods. Indeed, total import duties paid were almost the same as exempted import duties. The law provides very generous tax incentives to investors compared to other Exempted Import Duties by Exemption Regime (In percent of GDP) countries. In particular: (i) tax holidays are permitted up to 8 years; (ii) profits are taxed at a reduced rate of 9 percent (instead of the normal rate of 20 percent) after the end of the holiday period, (iii) reinvestment of profit is tax free, and (iv) repatriation of earnings and other income is tax free.

Exempted Import Duties by Exemption Regime(In percent of GDP)
Total Exempted Import Duties 1/
Diplomatic missions and international organizations0.
Investment Law provisions3.63.94.95.S
International aid0.
Memorandum item
Total Import Duties 1/
Source: Data provided by the Cambodian authorities; and Fund staff estimates.

Includes all tax exemptions on imports (i.e. customs duties, excises and value added lax).

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

Includes all tax exemptions on imports (i.e. customs duties, excises and value added lax).

Amendments to the LOI were recently submitted to the National Assembly—and were supported by revisions to the Law on Taxation under which investors can choose to be subject to a special depreciation schedule rather than to the tax holidays provisions under the LOI. The amendments to the LOI eliminate the cumbersome matrix determining the length of the tax holiday, the reduced tax rate on profits of investment companies (except for those already entitled to the 9 percent rate), exemptions on dividends, and increases transparency by defining clear procedures for granting exemptions. However, the amendments continue to provide extensive tax and customs duty exemptions, including projects located in Export Promotion Zones, differential tax holidays by economic sector that could complicate tax administration, and go beyond the maximum 3-year tax holiday advised by the Fund staff. The gains on revenue collection of replacing the 9 percent tax rate on profits with a 20 percent tax rate will likely be offset by a reduction in the number of taxpayers resulting from the streamlined procedures for granting exemptions.

41. Over the last four years, the level of current expenditure was consistent with a current budget surplus of 1-1½ percent of GDP, ensuring sufficient funding for local development projects and helping to avoid any domestic financing of the budget. The full demobilization program initiated in late 2001 has been instrumental in reorienting expenditure to priority areas (agriculture, rural development, health, and education) and is expected to be completed in 2003. As a result, military and security spending was reduced from 4 percent of GDP in 1998 to 3 percent in 2001, while priority social spending was raised from 1 1½ percent of GDP to almost 3 percent. Still, despite these improvements, education and health expenditures still lag behind the average of countries at a similar development stage. Regarding the overall wage bill, it has been contained to below 40 percent of current expenditure to ensure adequate funding for operating expenditure, under a civil service reform strategy aimed at improving remuneration incentives and delivery of public services. However, even after the 35 percent wage bill increase in 2002, the average wage of civil servants is only US$28 a month—a third of the average of the garment sector and a little more than half the wages paid to low-skilled garment workers.

Cambodia: Social Expenditures

(In percent of GDP)

42. Shortcomings in public expenditure management have been difficult to resolve. The use of the banking system for government transactions is still very limited, several offsetting arrangements exist with suppliers whereby overdue taxes are offsetting government obligations, and the practice of separating US dollar and national currency revenues and expenditures persists. As a consequence, the cash management system is fragmented leading to poor budget execution, marked differences between the budget plan and actual spending, and a significant bunching of disbursements towards the end of the year. As discussed in the Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER) currently being prepared by the World Bank, these weaknesses have led to misuse of funds, underdeclaration of revenues by agencies collecting fees, and the accumulation of arrears despite the existence of a current budget surplus.

43. Because the bunching of expenditure is partly due to extensive pre-auditing by the MEF, an attempt to resolve this problem was made through the introduction of the Priority Action Program (PAP) in 2000. The PAP was intended to ensure that the health and education sectors could gain access to their full budget allocation by, among others, obtaining 25 percent of the budget allocation automatically on a quarterly basis, replacing pre-audits by post-audits, and reducing details in the budget plan for PAP allocations. However, despite some initial success in increasing the disbursement ratios, the old pre-audit arrangements have not been successfully replaced, the PAP budget plan has not been fully disbursed, and funds have been available only very late in the year.

44. Recent assistance through the TCAP has focused on broad based reforms in the areas of cash management, budget and treasury. In 2002, efforts have focused on improving cash management, as this was regarded as the root of the shortcomings in the budget execution. As a result, revenue accounts held by line ministries were integrated with the National Treasury single account and the operation of the Cash Management Committee (CMC) was improved by implementing a specific format for cash management procedures and enhancing the coordination between the National Treasury (NT) and the Foreign Currency Unit (FCU) of the MEF.11 Full information is now provided to the NT by the FCU on the accounts it manages, including direct access by the NT to information held at the National Bank of Cambodia. On the treasury area, the Working Group at the NT finalized a report containing recommendations on standardized accounting procedures and methodology for the public sector. This report is expected to improve the monitoring and execution of the budget. Moreover, with the assistance from the AsDB, a medium-term expenditure framework (MTEF) is being developed. In most countries the MTEF plays an important role in bringing spending within the overall resource envelope. In Cambodia, however, the main contribution of the MTEF should be to improve resource allocation and the efficiency of the budget process.

C. Remaining Agenda

45. Despite significant progress, further improvements in fiscal performance are required over the medium term. Cambodia’s fiscal revenue ratios—especially tax revenue—remain very low compared to other countries at similar stages of development. Increasing fiscal revenue to about 14 ½ percent of GDP by 2007 is considered to be a realistic target and will be necessary to meet the expenditure needs underlying the government’s development strategy, while allowing for increased debt service payments arising from the expected completion of external debt rescheduling agreements with the United States and the Russian Federation. 12 In this context, fiscal policy should continue to aim at maintaining a current budget surplus of about 1 to 1½ percent of GDP, with an overall deficit (excluding grants) declining over time fully financed by external concessional resources.

Cambodia Comparison of Tax Revalue Structure with Other Selected Countries
Fiscal revenue 1/
Tax revenue
Totalof which:Per capital
Total revenueDirect taxesIndirect taxesTrade taxesrevenue 2/(U.S. dollar)
(In percent of GDP, unless otherwise total)
PRGF Asian countries16.
Lao P.D.R.
Sri Lanka17.014.72.410.22.12.3830
Mangolin 3/28.520.85.313.42.17.7400
PRGF Sub-Suharan African Countries17.613.
of which: selected agriculture-based countries14411.
Quirea Bissan19.510.
(In 2001)

Data refer to average OF 1999-2001.

Includes notes and capital revenue.

Other revenue includes only contax.

Data refer to average OF 1999-2001.

Includes notes and capital revenue.

Other revenue includes only contax.

46. The required cumulative increase of 2 percentage points of GDP in fiscal revenue over the medium term should be achievable through containing further erosion of the revenue base and strengthening customs and tax administration. To achieve lasting improvements, broadening the revenue base should focus on continuing to avoid ad-hoc exemptions and reducing the scope of existing tax and duty exemptions. In this regard, a simple and transparent investment regime with lower tax rates could be more attractive to potential investors than a system that provides for large exemptions, especially when lack of capacity makes enforcement problematic. Moreover, to improve tax and customs administration it will be important to focus on addressing staff integrity, enhancing procedures and the information system, and strengthening collection enforcement. To address staff integrity, the government has committed to expand the role of the audit units to cover internal audit functions. On customs administration, the future automation of customs procedures is expected to improve the capacity of the Customs Department and to reduce hidden costs. In addition, the audit unit should investigate the causes for the discrepancy between the amounts stated in the PSI reports and the customs declaration form. The success of anti-smuggling operations will depend on an efficient operation of the recently established anti-smuggling units in key border provinces.

Cambodia: Medium-Term Fiscal Framework. 1999–2007(In percent of GDP)
Fiscal sector
Tax revenue7.
Of which: quota auctions1.
International Taxes6.
Nointax revenue2.
Of which: quota suctions0.
Capital Revenue0.
Revenue Measures0.
Expenditure (cash basic)14.716.417.718.919.019.119.419.720.2
Civil Administration1.
Defere and security2.
Interest payments0.
Memo item: Social spending 1/
current balance1.
Overall balance−4.05.2−6.0−6.8−6.3−5.7−5.5−5.5−5.6
Overall balance (including grants)−1.3−2.3−3.1−3.3−3.4−2.9−2.7−2.6−2.8
Domestic financing−0.1−0.10.1−0.3−
External financing 2/
Sources: Data provided by Cambodian authorities; and Fund staff estimates and projections.

Includes components of wages paid in the social sectors.

Includes disbursements for the financing gap in 2003.

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

Includes components of wages paid in the social sectors.

Includes disbursements for the financing gap in 2003.

47. Improvements in tax administration should lead to stepped-up collection of tax arrears. As part of the enforcement measures, it is expected that bank accounts will start to be frozen, exportation/importation goods will be held at the customs department until outstanding amounts are paid, and licenses will be cancelled. Strengthening the tax department will also involve its computerization, clarifying its roles and responsibilities, and the introduction of an operational management information system, including further staff training, and completion of audit and collection manuals. Among others, these efforts should lead to a reduction in tax avoidance, additional expansion of VAT coverage through increases in the number of tax payers, and enhanced compliance through the acceleration of VAT refund procedures.

48. Greater transparency over the terms governing the use of state assets will also be key to transfer the appropriate amount of revenue to the budget. In particular, efforts should be made to: (i) ensure that procurement procedures are based on competitive biding, and applied to all public acquisitions and contracts; (ii) respect the government’s commitment to have all contracts reviewed by MEF and approved by the Minister of Finance; (iii) publicly disclose the terms of all (past and future) contracts, subject them to audit by the National Audit Authority, and carry out periodic external audits of some contracts, disclosing the results. Besides improving transparency, these measures could help offsetting future declines in some nontax revenue items, Indeed, revenue from the auction of garment quotas would end if the quota system is phased out after 2004, as scheduled; and export licensing requirements could eventually be eliminated. Strengthening broad-based reforms in the areas of cash management, budget and treasury could also have an indirect positive effect on non-tax revenue. Indeed, by reducing back loading of disbursements over the year, these reforms could diminish the incentive of the agencies to underestimate revenue collected at the budget planning stage and to subsequently keep the overrun.

49. Achieving the government’s revenue target will be key to maintaining fiscal sustainability. Even if the revenue target is achieved, Cambodia’s fiscal position appears to be only marginally sustainable over the medium term due to the implications of an eventual rescheduling of external debt agreements. Indeed, to retain public debt sustainability, the primary deficit would need to be reduced from 3 percent of GDP in 2002 to below 2¼ percent of GDP over the medium term. Since debt service would increase by about 1 percent of GDP, about 70 percent of the increase in revenue will be needed just to meet additional debt service obligations and to facilitate the reduction of the primary deficit. Accordingly, given that the ratio of debt service to government revenue would average 7¾ percent of GDP over 2003-07, a fundamental adjustment in expenditure priorities would be required.

Cambodia: Indicators of Debt Sustainability(Percent of GDP; unless otherwise indicated)
Public-debt stabilizing primary deficit 1/
Primary deficit
including grants2.
excluding grants5.86.65,,9
Public external debt outstanding66.265.635.
Public external debt service (cash basis)
in percent of revenue1.
in percent of exports of goods and services1.11.12 12.62.4222.3
Memorandum item:
Public external debt service (accrual basis)
in percent of exports of goods and services3.
Source: Cambodian authorities; and IMF staff estimates.

Assumes 2.5 percent interest rate and 6.5 percent annual GDP growth.

Source: Cambodian authorities; and IMF staff estimates.

Assumes 2.5 percent interest rate and 6.5 percent annual GDP growth.

50. Therefore, maintaining a sustainable fiscal framework will also require a restructuring of public expenditures. The government’s current civil service reform plan focuses on increasing the remuneration of all civil servants to a level equivalent to the minimum wage paid in the private sector, while maintaining the overall size of civil servants. However, in view of the projected revenue increase and the impact of the expected completion of external debt rescheduling agreements with the United States and the Russian Federation, this plan appears inconsistent with increasing social spending while providing sufficient non-interest operational expenditures. Indeed, even if the annual wage bill is limited to 5 percent of GDP, non-interest operational expenditures on non-priority sectors will probably have to be reduced as percent of GDP if social spending over the medium term is to achieve the target set in the National Poverty Reduction Strategy (NPRS).

51. Improvements in public expenditure management will crucially depend on solving the current cash management problems to ensure effective budget execution. In the short term, it is expected that commitments will flow from very close to the beginning of 2003 as monthly revenue flow estimates and ministries’ spending plans should have been finalized by the Budget and Financial Affairs Department (BFAD) and ministries notified before January 1. Moreover, through the CMC, consultation among the BFAD, NT and the revenue departments should be continuous. In addition, the BFAD and the Investment and Cooperation Department are expected to start collaborating on the preparation of a monthly domestic expenditure plan based on known and likely commitments. In this regard, the staff has suggested that a rule could be adopted whereby any domestic capital commitment in excess of that planned for the month would have low payment priority.

52. Over the medium term, improving the cash management process should include: (i) phasing out the use of offsetting arrangements; (ii) eliminating the practice of separating US dollar and national currency revenues and expenditures; and (iii) increasing the use of the banking system for receiving revenues and making payments. Moreover, as discussed in the IFAPER, a broad based budget reform is expected to be based on improving the operations of the CMC, enhancing revenue forecasting, upgrading the financial management information systems, and reducing ad hoc spending decisions that are not included in the budget plan. In addition, capacity building in spending ministries should be enhanced to ensure adequate financial management skills and the development of performance indicators, which are key to gradually introduce accountability for the results. Further development of the MTEF will also be required to ensure predictability of medium term resources and facilitate the integration of the recurrent and capital budgets.

D. Conclusion

53. Despite progress made during the last four years, reform efforts need to be continued and strengthened in several areas. Fiscal reform should continue to be the cornerstone of the macroeconomic program. A sustained increase in revenue is expected to be achieved by containing further the erosion of the tax base, enhancing tax and customs administration, and improving performance of nontax revenue. Maintaining a sustainable fiscal framework will also depend on deepening public expenditure reform, including civil service and completion of military demobilization, as well as broad-based measures in the areas of cash management, budget and treasury. Technical assistance has been key in setting the foundation for improvements in all these areas, and further support is likely to be needed.

Prepared by Alejandro Lopez-Mejia (ext. 34334).

For a broader discussion of reforms in the 1990s, see: IMF Staff Country Report No.00/135.

Revenue from tax administration measures (TA) in time t is derived as: TR, - e*TRt-1∆B- PM; where TR is total revenue collected (actual); e measures the buoyancy oftaxes and is assumed to be equal to 1; ∆B is the change in the proxy of the tax base (i.e., ODP for domestic taxes and retained imports, excluding those related to the garment sector, for customs); and PM is the impact of policy measures, as reported in various staff reports. The results presented in this chapter should be taken as illustrative. For example, the impact of improvements in tax administration could have been larger if buoyancy was assumed to be less than 1, which could be the case in growing economic sectors with widespread exemptions (e.g., the garment sector).

However, the main measures in the LOT, including the VAT, only began to be implemented in 1999. The LOT divided the Cambodian tax system into a real and estimated regimes. The real regime, which defines the base of VAT taxpayers, covers incorporated businesses regardless of size of turnover, but excludes unincorporated businesses, many ofwhich may be large enterprises.

However, improvements in tax administration over this period should be viewed relative to the poor state in the base year. Even with these notable improvements, IMF staff reported that by 1999 there were serious non-compliance and tax arrears problems under the “real regime” and highly discretionary tax assessments under the “estimated regime” (sec, IMF Staff Country Report No. 00/135).

Proper resource management would have yielded much lower revenue since logging took place at highly unsustainable rates.

The coverage of the VAT is much wider than the turnover and consumption tax, exempting only: (i) public postal services; (ii) hospital and medical services; (iii) public transportation; (iv) insurance and financial services; (v) imports for personal use; (vi) nonprofit activities in the public interest, and (viii) imports of goods by diplomatic missions and international organizations.

Howevcr, anti-smuggling efforts led to a reduction of the taxable base: as of end-October 2002, actual volumes of beer, gasolinc and diesel declined by 40, 12 and 5 percent, respectively, compared to 2001.

The FCU carries out treasury functions for those parts of the budget denominated in foreign currency.

Figures in this chapter assume concessional rescheduling in mid-2003 under Naples terms with a 40-year maturity (16 year grace period) and the original interest rate of 3 percent for the U.S. debt, and a DSR option with a flow operation under Naples terms on pre-cut off date Russian debt and a nonconcessional deferral with a 15 year maturity (5 year grace period) for the post-cut off Russian debt. For a discussion of other possible rescheduling scenarios, see EBS/02/13.

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