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Cambodia: Staff Report for the 2004 Article IV Consultation

Author(s):
International Monetary Fund
Published Date:
October 2004
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I. Background

1. Economic growth in the 1990s was robust, albeit from an exceptionally low base given the damage from the 20-year civil war. UN-sponsored elections in 1993 yielded a coalition government but internal tensions persisted, undermining the rebuilding process. Elections in 1998 produced a more durable coalition government that oversaw a period of generally positive economic performance. More recently, tensions between the former coalition partners in the wake of the July 2003 elections delayed the formation of a new government with sufficient parliamentary support until mid-July 2004.1 Economic reforms largely came to a halt during the eleven-month stalemate.

2. Large aid inflows and the boom in the garment and tourism sectors have helped Cambodia develop a formal sector around the main urban areas. The rural areas, however, where most of the poor live as subsistence farmers with highly volatile incomes, were left behind. The average household expenditure in the rural area has declined from 33 percent of that in Phnom Penh in 1993/94 to 28 percent in 1999, and is estimated to have declined further to about 25 percent in 2002. Moreover, the minimum wage, which is high relative to average wages and increasingly being applied to all industries in the formal sector, reduced employment opportunities for the growing labor force.

Contribution to GDP growth

(Annual growth rates in percent)

3. Accordingly, only limited progress has been made in alleviating poverty since the beginning of reconstruction efforts. Cambodia remains one of the poorest countries in the region with 36 percent of the population in poverty as of 1999. Moreover, Cambodia is seriously off-track from the MDGs in several aspects (Box 1).

4. Cambodia’s development program was supported by a three-year PRGF arrangement for SDR 58.5 million (67 percent of quota), approved on October 22, 1999. The sixth and final review was completed in February 2003, after which a disbursement of SDR 8.4 million raised total Fund credit and loans outstanding to Cambodia to SDR 70 million (80 percent of quota). The National Poverty Reduction Strategy Paper (NPRS), together with a Fund-Bank joint staff assessment, was also endorsed by the Fund and Bank Boards in February 2003. The National Bank of Cambodia (NBC) prepares its audited financial statements in accordance with International Financial Reporting Standards, as required under the Fund’s safeguards policy. An IMF safeguards assessment mission in January 2004 found that progress has been made and proposed measures to strengthen the remaining weaknesses of NBC’s control framework.

Box 1.Poverty in Cambodia

Cambodia is one of the poorest countries in the world, with a per capita gross national income less than half of the East Asia and Pacific average. Based on the World Bank Atlas Method, Cambodia’s per capita gross national income is US$300, the lowest in the East Asia region with the exception of Myanmar. It has some of the worst human development indicators in the world, ranking 130th out of 173 countries, with a national poverty level of 36 percent. The population is deprived of basic physical and institutional infrastructure as a result of decades of political and social instability until the early 1990s.

Despite steady growth during the last decade, poverty and inequality have remained stubbornly high. Thirty-six percent of the population had incomes below the poverty line of $0.40-0.63 per day in 1999, only marginally below the 39 percent in 1994.1 In addition, the GINI index of 40 percent implies a high level of inequality. The 20 percent of households with the lowest (per capita) income only receive 7.5 percent of the total income, while the highest quintile receives 46 percent of total income.

Poverty Indicators
Poverty Headcount Ratio
Cambodia36(1999)
Lao PDR39(1998)
Malaysia16(1989)
Thailand13(1992)
Vietnam29(2002)
GNI Per Capita, Atlas Method (US$)
Cambodia300(2002)
Lao PDR310(2002)
Malaysia3,540(2002)
Thailand2,000(2002)
Vietnam430(2002)
Source: World Development Indicators, 2004.
Source: World Development Indicators, 2004.

Cambodia is off-track in pursuing the Millennium Development Goals:

  • Food security is lagging. At 36 percent, the proportion of people suffering from hunger is far from the 2015 target of 19.5 percent. Poverty is worse in rural areas. The high proportion of under-weight children under age 5 persists owing to inadequate food intake, lack of health care, and poor sanitation.
  • Child mortality has increased over the past ten years, particularly post-neonatal mortality. The main causes have been diarrheal diseases, acute respiratory infections, and vaccine-preventable diseases, particularly measles where the coverage rate of immunization is only 59 percent, well-below the 2015 target of 90 percent. Despite progress, the maternal mortality rate remains extremely high at around 437 per 100,000 live births.
  • Cambodia could achieve primary education for all by 2015, but is unlikely to reach its secondary education and gender equality targets. At 20.3 percent in 2001, the youth illiteracy rate was much higher than the 3 percent average in East Asia and the Pacific.
Rural Social Conditions, 2001
Forest area (% of land area, 2000)52.9
Arable land (% of land area)21.0
Irrigated land (% of cropland)7.1
Permanent cropland (% of land area)0.6
Rural population (% of total population)82.6
Poverty headcount (1999)
Rural39.2
Urban17.7
Access to sanitation facilities (% of population)
Rural10.0
Urban56.0
Access to safe driking water (% of population)
Rural26.0
Urban54.0
Source: World Development Indicators, 2004.
Source: World Development Indicators, 2004.

Health and sanitary conditions are very poor: only 30 percent of the population has access to safe drinking water and only 17 percent has access to sanitation facilities. The conditions are especially poor in rural areas where only 10 percent has access to sanitation. More resources are needed to improve basic household amenities, especially in remote areas. Given the rural concentration of the poor, meaningful poverty reduction will require more broad-based growth based on agriculture diversification and higher agricultural productivity.

Cambodia: Selected Poverty Indicators
1985-891990-941995-01Latest data2015 MDG Target
Goal 1 - Eradicate extreme poverty and hunger
Poverty Headcount139.036.035.9 (1999)19.5
Undernourished people (as % of total population)41.036.036.0 (2000)20.5
Under-weight children under 552.450.345.0 (2001)26.2
Share of poorest 20 percent in national income7.37.27.5 (1999)11
Goal 2 - Achieve universal primary education
Net school enrollment rate, primary93.095.4 (2000)100
Net school enrollment rate, secondary17.416.7 (2000)100
Youth illiteracy rate (% of people ages 15-24)28.525.622.320.3 (2001)0
Goal 3 - Promote gender equality and empower women
Ratio of girls to boys in primary education (%)9090 (2001)100 2
Ratio of girls to boys in secondary education (%)6060 (2001)100 2
Ratio of girls to boys in tertiary education (%)4040 (2001)100
Goal 4 - Reduce child mortality
Under 5 mortality rate (per 1,000 live births)152.5115.0131.0138.0 (2002)38.3
Immunization, measles (% of children under 12 months)41.238.457.052.0 (2002)90
Goal 5 - Improve maternal health
Maternal mortality ratio (per 100,000 live births)900.0513.5437.0 (2000)250
Births attended by skilled health staff (% of total)34.034.431.8 (2000)80
Contraceptive prevalence (% of women ages 15-49)19.623.8 (2000)100
Goal 6 - Combat HIV/AIDS, malaria, and other diseases
HIV prevalence ratio among adults (15-49 years) (%)1.03.32.8 (2000)1.8
Goal 7 - Ensure environmental sustainability
Access to sanitation facilities (% of population)17.017.0 (2000)
Access to safe drinking water (% of population)30.030.0 (2000)
Goal 8 - Develop a global partnership for development
Fixed line and mobile telephones (per 1,000 people)0.30.88.530.1 (2002)
Personal computers (per 1,000 people)1.02.0 (2002)
Memorandum Items:
GDP per capita (U.S. dollars)237.6256.5287.6296.3 (2002)
GDP growth7.75.86.45.5 (2002)
Population growth3.23.12.22.6 (2002)
Aid (% of GDP)13.213.314.1 (2002)
Investment (% of GDP)11.516.022.2 (2002)
GINI index 340.440.4 (1997)
Source: World Development Indicators, 2003; Human Development Report, 2004; United Nations Development Goals (Cambodia 2001); and IMF staff estimates.

The poverty headcount ratio is the proportion of population below the poverty line.

Preferably by 2005.

A value of the GINI index of 100 denotes perfect distribution or equality.

Source: World Development Indicators, 2003; Human Development Report, 2004; United Nations Development Goals (Cambodia 2001); and IMF staff estimates.

The poverty headcount ratio is the proportion of population below the poverty line.

Preferably by 2005.

A value of the GINI index of 100 denotes perfect distribution or equality.

1 Using the poverty line of US$1 per day (based on purchasing power parity exchange rates), the poverty headcount ratio for 1999 was 41.5.

5. During the 2002 Article IV Consultation, Directors welcomed progress under the PRGF. However, they noted the widespread poverty, narrow production base, low revenue to GDP, and pervasive governance concerns. They underscored the need to strengthen government capacity and promote broad-based economic growth through investment and a vibrant private sector. The accompanying Ex-post Assessment report provides a detailed account of the Fund’s contribution to Cambodia’s recent economic growth.

II. Recent Economic Developments and Prospects for 2004

6. Macroeconomic performance in the past few years was generally good. With the advent of political stability in 1999, private sector activities, reportedly also in the informal sector, flourished in urban areas. Annual real GDP growth averaged 6-7 percent, reflecting both favorable external developments and prudent macroeconomic policies (Table 1). In particular:

  • Exports soared following a bilateral trade agreement with the united States that effectively reduced the average U.S. tariff rate for garments produced in Cambodia from 50-70 percent to 10-20 percent. The 1996 trade agreement attracted a large number of foreign investors, which contributed to a sharp increase in garment exports to the U.S. from nearly zero in 1995 to $500 million in 1999 and to more than $1 billion in 2003, which is about 70 percent of total garment exports (Table 2). The benefit to the domestic economy, however, was limited as almost all non-labor inputs were imported.
  • Large aid inflows, which averaged 12 percent of GDP, helped finance domestic investment and fueled construction activities. About half of the inflows were grants in the form of donor-financed projects and technical assistance, all of which were outside the budget. Aid inflows were used to improve health and education, rebuild physical infrastructure, and strengthen economic and social institutions.
  • Prudent fiscal policy has been key to ensuring price stability in Cambodia’s highly dollarized economy. As much as 95 percent of total liquidity, including estimated U.S. dollars in circulation, is in dollars. With few monetary policy instruments, the task of ensuring that aggregate demand does not become a source of inflation necessarily falls to fiscal policy. This task has been made easier in recent years because of low inflation in U.S. dollar terms in trading partners.
Table 1.Cambodia: Selected Economic Indicators, 1999–2004
Nominal GDP (2002):$3,996 million
Population (2002):13.5 million
GDP per capita (2002):$296
Fund Quota:SDR87.5 million
199920002001200220032004
6th RevPrelim.Proj.
(Percent change)
Real economy
Real GDP10.87.05.75.55.05.24.3
GDP deflator2.1-1.7-0.32.13.71.62.0
CPI Inflation (end of period)-0.5-0.80.73.73.70.53.2
(In percent of GDP)
Domestic investment17.017.321.222.216.921.020.0
Government investment5.46.36.67.87.17.47.3
Non-budgetary grant-financed investment5.46.15.54.95.35.2
Nongovernment investment6.24.99.19.59.88.37.4
Of which: change in inventories1.5-1.42.1-0.4
National saving11.814.420.121.313.918.616.7
Government saving1.61.41.11.21.1-0.61.2
Nongovernment saving10.313.019.020.212.819.215.4
(In percent change, unless otherwise indicated)
Money and credit
Broad money17.326.920.431.120.515.314.1
Of which: riels in circulation-3.81.016.832.622.018.616.0
Net credit to the government 1/-6.1-6.9-4.3-2.00.0-0.30.0
Velocity of money 2/9.77.87.26.05.15.65.0
(In percent of GDP)
Government budget
Revenue (incl. capital revenue)10.210.410.711.212.710.411.9
Of which: Tax revenue7.47.67.87.98.57.38.2
Nontax revenue2.72.62.93.23.63.13.3
Additional revenue0.40.00.4
Expenditure14.115.316.317.819.017.418.0
Current expenditure8.58.99.610.111.411.010.7
Capital expenditure 3/5.56.56.77.97.37.37.3
Overall budget balance-3.9-4.9-5.5-6.7-6.3-7.0-6.1
Overall budget balance (incl. grants)-1.3-2.1-2.8-3.8-3.4-4.5-3.8
Net Foreign financing3.95.15.27.06.56.06.1
Domestic financing (including outstanding operations) 4/0.0-0.20.3-0.4-0.20.90.0
(In millions of U.S. dollars; unless otherwise indicated)
Balance of payments
Domestic exports9971,2831,4621,6381,5711,9602,117
Retained imports-1,490-1,849-2,010-2,228-2,041-2,524-2,836
Current account (excl. official transfers)-456-421-348-359-405-429-489
(in percent of GDP)-13.2-11.7-9.4-9.0-10.4-10.2-10.8
Current account (incl. official transfers)-180-104-45-48-118-101-151
(in percent of GDP)-5.2-2.9-1.2-1.2-3.0-2.4-3.3
Capital account814291107133133156
Overall balance-99-62456014335
Financing gap 5/3120
Gross official reserves422484548663696737782
(in months of imports of goods and services)2.72.62.73.03.32.92.8
Net internationa reserves349411468567604633670
Public external debt 6/2,3152,3942,4892,7351,6712,9812,088
(in percent of GDP)66.566.867.268.439.870.846.3
Public debt service (accrual basis)131.4136.262.063.154.071.254.3
(in percent of domestic exports of goods and services)10.28.03.12.82.62.92.0
Memorandum items:
Nominal GDP (in billions of riels)13,13113,81014,54415,66715,65016,74817,815
(in millions of U.S. dollars)3,4433,5833,7063,9993,8914,2084,507
Exchange rate (riels per dollar; end of period)3,7753,9103,9003,9354,0953,980
Sources: 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 net lending, and compensation payments to Thailand in 2003.

Includes funds in transit and payment orders in excess of cash released.

The financing gap is expected to be closed either by a PRGF and World Bank’s PRSC or by lower reserve accumulation.

A Paris Club rescheduling under Naples terms (67 percent NPV reduction) is assumed in 2004.

Sources: 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 net lending, and compensation payments to Thailand in 2003.

Includes funds in transit and payment orders in excess of cash released.

The financing gap is expected to be closed either by a PRGF and World Bank’s PRSC or by lower reserve accumulation.

A Paris Club rescheduling under Naples terms (67 percent NPV reduction) is assumed in 2004.

Table 2.Cambodia: Balance of Payments, 2000-09(In millions of U.S. dollars)
2000200120022003200420052006200720082009
Projections
Current account (excluding official transfers)-421-348-359-429-489-545-565-567-566-567
Current account (including official transfers)-104-45-48-101-151-197-206-198-190-183
Trade balance-538-523-564-537-692-813-912-993-1,071-1,151
Exports, f.o.b.1,4011,5711,7492,0762,2302,0262,0382,1602,3162,486
Domestic exports1,2831,4621,6381,9602,1171,9161,9302,0542,2122,382
Garment9861,1561,3381,6071,7941,5871,5901,6991,8391,991
Non-garment297306300353323329341355373392
Forestry100683825272830333638
Re-exports118109111117113110107106105103
Imports, f.o.b.-1,939-2,094-2,314-2,613-2,922-2,839-2,949-3,153-3,387-3,637
Retained imports, f.o.b.-1,849-2,010-2,228-2,524-2,836-2,755-2,867-3,072-3,307-3,558
Garments sector-529-601-699-822-879-763-748-784-832-882
Petroleum-339-372-371-434-489-453-434-442-454-473
Imports for re-export, f.o.b-91-84-85-90-86-84-82-81-80-79
Services and Income (net)-263756-543093170240310388
Services (net)101177230120200260316379444519
Credit4285256045246346977758669691,085
Of which: Tourism (credit)304380454386463534608687777878
Debit-328-347-374-404-434-437-459-487-525-566
Income (net)-127-140-175-174-170-167-146-139-135-131
Credit67585144485575828792
Debit-194-197-225-218-219-223-221-221-222-223
Private transfers (net)144137149163174175177186195197
Official transfers (net)317303312328338348358369376384
Capital and financial account4291107133156193218248255286
Medium- and long-term loans-2464133120170164187183184172
Disbursements9098168160187180206205212208
Amortization-114-35-34-40-17-16-18-22-28-36
Foreign direct investment14214213977838391105121133
Short-term flows and errors and omissions-75-115-165-65-97-54-61-41-50-19
Overall balance-624560335-4115065104
Financing62-45-60-33-54-11-50-65-104
Change in gross official reserves-62-64-115-73-45-22-34-48-49-85
Use of Fund credit499-2-10-9-6-11-16-18
Purchases/disbursements11212112000000
Repurchases/repayments71212131096111618
Debt restructuring 1/0-16001,69000000
Debt forgiveness0-150096300000
Debt rescheduling0-10072700000
Change in arrears (- = reduction)120264642-1,65900000
Financing Gap 2/00002034291000
Memorandum items:
Trade balance (in percent of GDP)-15.0-14.1-14.1-12.8-15.4-17.2-18.2-18.4-18.4-18.2
Current account balance
Excluding official transfers (in percent of GDP)-11.7-9.4-9.0-10.2-10.8-11.5-11.3-10.5-9.7-9.0
Including official transfers (in percent of GDP)-2.9-1.2-1.2-2.4-3.3-4.2-4.1-3.7-3.2-2.9
Gross official reserves4845486637377828048388869351,021
In months of imports of goods & services2.62.73.02.92.82.92.92.92.92.9
Net international reserves411468567633670681702752817921
Public debt service, incl IMF (accrual basis)136.262.063.171.254.358.460.570.483.695.3
Public debt service ratio, include IMF (accrual basis)8.03.12.82.92.02.22.22.42.62.7
Public external debt2,3942,4892,7352,9812,0882,2832,4992,6842,8533,008
Public external debt (in percent of GDP)66.867.268.470.846.348.349.949.748.947.6
Sources: Data provided by the Cambodian authorities; and Fund staff estimates and projections.

Assumes conclusion of debt rescheduling agreement with the Russian Federation and the United States in mid-2004.

The financing gap is expected to be closed either by a PRGF and World Bank’s PRSC, or by lower reserve accumulation.

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

Assumes conclusion of debt rescheduling agreement with the Russian Federation and the United States in mid-2004.

The financing gap is expected to be closed either by a PRGF and World Bank’s PRSC, or by lower reserve accumulation.

Total Garment Exports, Imports, and FDI

(In millions of U.S. dollars)

Uses of Aid Flows

(average 1999-2003)

7. Fiscal revenue improved from 8.1 percent of GDP in 1998 to 11.2 percent in 2002 owing in part to strengthened tax and customs administration. The latter was supported by an extensive technical assistance program under the Technical Cooperation Action Plan (TCAP). Nevertheless, total revenue remains low—about 11 percent of GDP compared with an average of 16 percent of GDP in neighboring low-income countries—severely constraining priority spending. For example, civil service wages remain well below private sector wages, and roads and other public facilities are poorly maintained. Although recourse to domestic bank financing of the fiscal deficit was largely averted, arrears to domestic suppliers have accumulated.

Contribution to Changes in Central Government Tax Revenue

(% of total tax revenue)

8. More recently, nonagricultural growth slowed to 3.2 percent in 2003 due to the SARS-related drop in tourism and election-related uncertainties. However, overall GDP still grew by 5.2 percent, mainly because a lower Mekong river level—due to lower rain fall—exposed a larger area of arable land that allowed a strong rebound in agricultural production. Revenue collection was disappointing, partly reflecting low nonagricultural growth, but more importantly due to greater tax evasion and smuggling by importers.2 Election-related spending during the year helped to boost consumption, which, however, required a sharp curtailment of non-priority expenditure toward the end of the year, especially given the poor revenue collection. The external current account deficit (excluding official transfers) widened by 1¼ percent to 10¼ percent of GDP due to buoyant merchandise imports, lower tourism receipts, and higher petroleum prices. The vulnerability of the deposit base of the banking system was apparent during the July elections when foreign currency deposits declined by 20 percent in a matter of 1-2 weeks. They recovered, however, later in the year (Table 3).

Table 3.Cambodia: Monetary Survey, 2000-04
200020012002200320042004
Dec.Dec.Dec.Dec.Jan.Feb.Mar.Apr.Dec. Proj.
(In billions of riels; end of period)
Net foreign assets2,5883,0813,7384,0264,1114,1314,2654,2394,320
National Bank2,1022,4293,2203,4943,5403,6573,7213,7113,750
Deposit money banks (DMBs)486651517533571474544527570
Net domestic assets-758-917-849-698-636-545-606-549-523
Domestic credit9048689421,2091,2251,2941,2561,2811,430
Government (net)3-75-119-128-109-104-133-147-128
Public enterprises372000000
Private sector8989361,0591,3371,3351,3981,3891,4281,558
Other items (net)-1,662-1,784-1,791-1,907-1,861-1,839-1,861-1,829-1,953
Of which: capital-1,791-1,959-1,943-2,090-2,070-2,072-2,099-2,067
National Bank-1,000-1,035-1,134-1,229-1,205-1,202-1,241-1,201
DMBs-791-924-809-861-865-870-858-866
Broad money1,8312,2042,8883,3293,4753,5863,6593,6903,797
Narrow money5406108139389629911,0071,0291,076
Currency in circulation4955787669089309569739961,054
Demand deposits453247293235343223
Quasi-money1,2911,5942,0752,3912,5132,5952,6522,6612,721
Time deposits465674828387889093
Foreign currency deposits1,2451,5392,0012,3102,4302,5082,5642,5722,627
(12 - month percent change)
Net foreign assets28.219.021.37.78.39.214.615.57.3
Net domestic assets (+ decrease)31.521.0-7.4-17.8-24.7-31.6-15.7-21.6-25.1
Private sector17.74.213.126.227.331.123.524.516.5
Broad money26.920.431.115.317.720.021.824.314.1
Of which: currency in circulation1.016.832.618.620.721.923.920.516.0
(Contribution to annual growth of broad money; in percent)
Net foreign assets39.526.929.810.010.611.618.119.28.8
Net domestic assets-12.6-8.73.15.27.18.43.75.15.3
Domestic credit2.0-2.03.49.29.711.06.75.46.6
Government (net)-6.9-4.3-2.0-0.30.00.0-2.0-4.10.0
Private sector9.42.15.69.69.711.18.89.56.6
Other items (net)-14.5-6.7-0.3-4.0-2.6-2.6-3.0-0.3-1.4
Memorandum items:
Foreign currency deposits (in millions of dollars)318395508580609628643643669
Foreign currency deposits (in percent of broad money)687069697070707069
Riel component of broad money5866658881,0201,0451,0781,0951,1181,170
(in percent of broad money)323031313030303031
Credit to the private sector (in millions of dollars)230240269336335350348357397
Velocity 1/7.87.26.05.65.55.45.45.35.0
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.

9. Only modest progress on structural reforms has been made since 1999. Basic institutions were set up and various laws ranging from commercial contracts to accounting were adopted. A Financial Institutions Law was passed that provided the legal basis for successful bank re-licensing. However, progress has been particularly slow in civil service and judicial reform due to political resistance. The pace of structural reforms slowed across all sectors in the run-up to, and aftermath of, the July 2003 election. The 2004 budget and a range of legislation needed to complete WTO accession still await approval by the National Assembly.

10. More importantly, the reconstruction efforts have not yet been able to establish a strong foundation for sustainable growth, even in urban areas. In particular, structural weaknesses, complicated by deeply rooted governance problems, remain in the following three inter-related areas:

  • An underlying deterioration of competitiveness has been masked by favorable external developments. Poor public administration and weak governance—partly due to slow progress in legal and judicial reform—have exacerbated uncertainty in the business environment and allowed the rich to set their own rules. In addition, embryonic and poorly maintained infrastructure and high wages have kept operating costs high (Box 2).3
  • Agricultural development has stagnated due to limited access to arable land and markets (Box 3). Slow growth in agriculture has pushed Cambodia further away from meeting the MDGs and reduced its capacity to absorb the growing number of entrants to the labor market over the medium term.
  • Government capacity remains severely constrained by lack of human capital and entrenched governance problems. The quality of the civil service remains poor, and fiscal revenue, currently at 10.4 percent of GDP, is hardly enough to meet basic priority spending needs (Table 4).
Table 4a.Cambodia: General Government Operations, 2000-04(In billion of riels)
20002001200220032004
BudgetPrelim.BudgetProj.
Total revenue1,4421,5611,7622,0741,7462,1672,126
Of which: central government1,4081,5201,7262,0221,6952,1062,072
Tax revenue1,0551,1281,2451,4311,2181,5001,461
Tax revenue (central government)1,0261,0881,2101,3901,1791,4501,419
Direct taxes136140132159150173156
Of which: Profit taxes10111388129118132121
Indirect taxes500572654746634772780
Excise taxes113155210256198265238
VAT (net VAT refunds)371403429479410490513
Trade taxes390376424484395505484
Tax revenue from provinces29413542395042
Nontax revenue356424501617525642590
Central government351424500607513631578
Provinces50110121112
Capital revenue31916253253
Additional revenue72
Total expenditure2,1192,3672,8062,8742,9143,0273,209
Current expenditure1,2231,3911,5791,8141,8432,0021,901
Wages512488587619615664651
Civil administration211214304336327368347
Defense and security301274282283287297304
Nonwage6778669691,1061,1431,2761,199
Operating expenditure497602690737736779728
Economic transfers31305134601736
Social transfers104109136125165134133
Interest212228253445114
Reserve funds13553516989
Of which: Payment of domestic arrears7050
Other nonwage111036413011413299
Provincial expenditure (net subsidy)33372389856151
Capital expenditure8969751,2411,0601,2441,0251,307
Locally financed 1/301262338360334325275
Externally financed 2/5947139037009107001,032
Cash adjustments 3/1517300
Net lending 4/-2800
Current balance188161181235-99140222
Overall balance-677-806-1,044-800-1,168-860-1,083
Overall balance (including grants)-293-409-593-400-756-340-683
Financing6778061,0448001,1688601,083
Foreign financing (net)7087631,1038001,0108601,084
Budget support grants2436910521200
Budget support loans8918871258365119
Project grants360360360400360400400
Project loans 2/234353543300550300632
Amortization 5/0-4-8-25-36-25-66
Domestic financing (net, incl. outstanding operati-3043-591580
Bank financing (net)-100-78-44124-90
Other 6/70121-151670
Memorandum items:
Defense and security outlays446400407409411433432
Health, education, rural development, and agricul299382512589529654677
Tax department revenue (including VAT refunds)243259279345344353347
Customs department revenue7978389521,0658751,1151,063
GDP13,81014,54415,66716,72116,74818,40217,815

For 2003 and 2004, data include compensation payments to Thailand.

Includes CR 137 billion from bilateral donors for 2002, CR 92 billion for 2003, and CR 116 billion for 2004.

Cash payments on expenditure committed in the previous year (-); or expenditure committed but for which cash has not yet been disbursed (+).

Includes CR 28 billion of early repayment by the water supply company on onlent World Bank loan, and CR 16 billion loan by the electricity company.

Includes $2.8 million repayment to IDA in 2003.

Includes funds in transit and payment orders in excess of cash released.

For 2003 and 2004, data include compensation payments to Thailand.

Includes CR 137 billion from bilateral donors for 2002, CR 92 billion for 2003, and CR 116 billion for 2004.

Cash payments on expenditure committed in the previous year (-); or expenditure committed but for which cash has not yet been disbursed (+).

Includes CR 28 billion of early repayment by the water supply company on onlent World Bank loan, and CR 16 billion loan by the electricity company.

Includes $2.8 million repayment to IDA in 2003.

Includes funds in transit and payment orders in excess of cash released.

Table 4b.Cambodia: General Government Operations, 2000-04(In percent of GDP)
20002001200220032004
BudgetPrelim.BudgetProj.
Total revenue10.410.711.212.410.411.811.9
Of which: central government10.210.511.012.110.111.411.6
Tax revenue7.67.87.98.57.38.18.2
Tax revenue (central government)7.47.57.78.37.07.98.0
Direct taxes1.01.00.81.00.90.90.9
Of which: Profit taxes0.70.80.60.80.70.70.7
Indirect taxes3.63.94.24.53.84.24.4
Excise taxes0.81.11.31.51.21.41.3
VAT (net VAT refunds)2.72.82.72.92.42.72.9
Trade taxes2.82.62.72.92.42.72.7
Tax revenue from provinces0.20.30.20.20.20.30.2
Nontax revenue2.62.93.23.73.13.53.3
Central government2.52.93.23.63.13.43.2
Provinces0.00.00.00.10.10.10.1
Capital revenue0.20.10.10.10.00.10.0
Additional revenue0.4
Total expenditure15.316.317.817.217.416.418.0
Current expenditure8.99.610.110.811.011.210.7
Wages3.73.43.73.73.73.73.7
Civil administration1.51.51.92.02.02.11.9
Defense and security2.21.91.81.71.71.71.7
Nonwage4.96.06.26.66.86.96.7
Operating expenditure3.64.14.44.44.44.24.1
Economic transfers0.20.20.30.20.40.10.2
Social transfers0.80.70.90.71.00.70.7
Interest0.20.10.20.10.20.20.6
Reserve funds0.10.00.30.20.90.5
Of which: Payment of domestic arrears0.40.3
Other nonwage0.10.70.40.80.70.70.6
Provincial expenditure (net subsidy)0.20.30.10.50.50.30.3
Capital expenditure6.56.77.96.37.45.67.3
Locally financed 1/2.21.82.22.12.01.81.5
Externally financed 2/4.34.95.84.25.43.85.8
Cash adjustments 3/0.11.00.00.0
Net lending 4/-0.20.00.0
Current balance1.41.11.21.4-0.60.81.2
Overall balance-4.9-5.5-6.7-4.8-7.0-4.7-6.1
Overall balance (including grants)-2.1-2.8-3.8-2.4-4.5-1.8-3.8
Financing4.95.56.74.87.04.76.1
Foreign financing (net)5.15.27.04.86.04.76.1
Budget support grants0.20.20.60.00.30.70.0
Budget support loans0.60.10.60.70.50.40.7
Project grants2.62.52.32.42.12.22.2
Project loans 2/1.72.43.51.83.31.63.5
Amortization 5/0.00.00.0-0.1-0.2-0.1-0.4
Domestic financing (net, incl. outstanding operation-0.20.3-0.40.90.0
Bank financing (net)-0.7-0.5-0.3-0.10.0
Other 6/0.50.8-0.11.00.0
Memorandum items:
Defense and security outlays3.22.82.62.42.52.42.4
Health, education, rural development, and agricultur2.22.63.33.53.23.63.8
Tax department revenue (including VAT refunds)1.81.81.82.12.11.91.9
Customs department revenue5.85.86.16.45.26.16.0

For 2003 and 2004, data include compensation payments to Thailand.

Includes CR 137 billion from bilateral donors for 2002, CR 92 billion for 2003, and CR 116 billion for 2004.

Cash payments on expenditure committed in the previous year (-); or expenditure committed but for which cash has not yet been disbursed (+).

Includes CR 28 billion of early repayment by the water supply company on onlent World Bank loan, and CR 16 billion loan by the electricity company.

Includes $2.8 million repayment to IDA in 2003.

Includes funds in transit and payment orders in excess of cash released.

For 2003 and 2004, data include compensation payments to Thailand.

Includes CR 137 billion from bilateral donors for 2002, CR 92 billion for 2003, and CR 116 billion for 2004.

Cash payments on expenditure committed in the previous year (-); or expenditure committed but for which cash has not yet been disbursed (+).

Includes CR 28 billion of early repayment by the water supply company on onlent World Bank loan, and CR 16 billion loan by the electricity company.

Includes $2.8 million repayment to IDA in 2003.

Includes funds in transit and payment orders in excess of cash released.

Box 2.Competitiveness

Cambodia’s garment exports have risen rapidly since the late 1990s, mainly reflecting two factors. The first is the 1996 bilateral trade agreement with the United States that substantially reduced the effective tariff rate on garments produced in Cambodia. The second factor is the large economic rent for Cambodian exporters to the U.S. market reflecting the U.S. quotas imposed on Chinese garment exporters. The underlying weaknesses of Cambodia’s competitiveness can be gleaned from two key observations.

Main Categories of Garment Exports to the U.S. Subject to U.S. Quota, 2003
Total Garment Exports to the U.S.Exports Subject to QuotaCotton TrousersCotton Knit ShirtM-MF Knit ShirtsNon-Knit ShirtsCoats
Exports to the U.S. by category
Quota utilization ratio, in percent639381506579
Exports, in million US$1,123711386182394029
Sources: Ministry of Commerce of Cambodia and U.S. Department of Commerce, Office of Textiles and Apparel.
Sources: Ministry of Commerce of Cambodia and U.S. Department of Commerce, Office of Textiles and Apparel.
  • Cambodia is unable to fully utilize its allocated quota. Most of Cambodia’s garment exports are in categories that are subject to U.S. quotas on imports from China. However, Cambodia’s garment exports are below their quota in the U.S. market, and almost negligible in non-U.S. markets such as in Japan, while Chinese products dominate the market in the same categories.
  • Non-garment exports have remained flat in U.S. dollar terms. The business community estimates that a 15-30 percent cost reduction is required for Cambodia to remain competitive relative to China. Recent proposals to move garment manufacturers to export processing zones will have limited impact since Cambodia already provides extensive tax incentives.

There are many reasons for Cambodia’s weak competitiveness.

Competitiveness is impeded by poor infrastructure, corruption, and red tape. According to the World Bank’s recent Investment Climate Survey and Value Chain Analysis, the average cost of starting a business is estimated to be as high as 553 percent of per capita income, compared with 30 percent in Vietnam and 7 percent in Thailand. The “bribe tax” is estimated at 5¼ percent of sales in manufacturing, more than double the rate in Bangladesh, Pakistan, and China. Moreover, it takes an average of 18 days to obtain export customs clearance in Cambodia, compared with 11 days in India and 7 in China.

Cambodia: Exports by Category of Goods

(In millions of U.S. dollars)

High labor cost has been another factor. At a minimum wage of $45 a month and an average of $61 a month in the garment sector, Cambodia’s wages are higher than in several neighboring countries, including Vietnam, India, and Sri Lanka. Moreover, foreign investors are subject to a 100 percent wage premium for night shifts, are restricted from operating on weekends or any of the 22 national holidays to meet temporary demand surges, and face frequent labor strikes.

Box 3.Impediments to Agricultural Growth

About 80 percent of the poor depend on agriculture for their livelihood. Agriculture contributes 40 percent to GDP and accounts for 70 percent of employment. During 1994-2003, the sector grew at an annual average of less than 4 percent, contributing very little to employment growth. The average rice yield, estimated at 2.1 tons per hectare in 2001, is the lowest in Southeast Asia, reflecting in part low labor productivity. For example, a worker in Cambodia produces 44 kg of rice compared with 62 kg in Thailand.

GDP Growth
Share inGrowth 1Poverty
GDPEmployment1994-2003Incidence
(in 2000)(in 1999)
Agriculture0.380.703.878.9
Industry0.240.1015.03.8
Services0.350.204.911.0
Total1.001.006.693.7
Sources: NPC Statistics, MOP: A Poverty Profle of Cambodia 1999, and Cambodia Socio-Economic Survey 1999.

Average annual growth rates.

Sources: NPC Statistics, MOP: A Poverty Profle of Cambodia 1999, and Cambodia Socio-Economic Survey 1999.

Average annual growth rates.

Pro-poor growth will depend on addressing key constraints faced by the rural economy in agriculture:

Lack of access to arable land

  • Lack of land availability. Only 1 percent of land area is used for permanent cropland and only 7 percent of this is irrigated. Cultivated land rose gradually from 1.4 million hectares in the mid-1980s to about 2.4 million hectares in the late 1990s, and has not increased since. Furthermore, most of the new land from de-mining (0.1 million hectares) and forest clearance (2.5 million hectares) has reportedly been allocated to the rich, who do not use the land for cultivation. This is partly corroborated by NGO reports that claim the government has approved 0.8 million hectares as land concessions in the past few years. However, official data show no expansion in cultivated land.
  • Lack of property rights. Only 10 percent of farmers have formal title to their farming land. With no property rights, most farmers are hesitant to engage in long-term investment and have no access to collateralized lending.

Limited access to economic opportunities

  • Inadequate rural roads and poor road maintenance impede commercialization. Of the 12,323 km of the existing road network, only 16.20 percent is paved. In comparison, Thailand has 98 percent of its road network paved, Malaysia 76 percent, and Vietnam 25 percent. There are no secondary roads and tertiary roads often feed directly into the primary network. Moreover, the rail system is in need of major rehabilitation.
  • Weak marketing systems. Only small scale informal trading of surplus rice occurs with Vietnam and Thailand. Cambodian farmers have weak bargaining power due to limited information on market prices. In addition, lack of warehouses contributes to huge price swings between post- and pre-harvest seasons (close to 100 percent sometimes), damaging poor farmers. The absence of agricultural associations and cooperatives also slows agricultural development.
  • Lack of modern farming techniques and advanced technology. Farmers use traditional seeds that produce low crop yields. Moreover, even though good quality fertilizers are imported from Thailand, these are diluted by middleman before reaching the farmers.
  • Limited access to formal financial services. The state-owned Rural Development Bank acts as a wholesale bank, mainly in lending to NGO microfinance institutions. So far six micro-finance institutions have been licensed and the largest (Acleda) has recently obtained a commercial bank license. None of the other commercial banks lend to farm households. It is estimated that only 15 percent of the rural population has access to financial institutions. As a result, farmers are under-capitalized and have no means of adopting new technology, improving seeds, or using fertilizers.
  • Barriers to public health. Due in large part to the low pay of public sector health workers, the public must pay fees to obtain free public health services. This limits farmers access to health care and their ability to earn income.

Limited access to forestry and fisheries

Forest and fisheries resources, which were previously a source of supplementary food and income to farmers, have become increasingly difficult to access. Recent changes in natural resource management policies have left vast areas of the country (30 to 40 percent of total area) with unclear management arrangements.

Actual Social Spending and NPRS Target

(In percent of GDP)

11. The outlook for economic growth in 2004 is tinted by weaker prospects for agricultural production. The Avian flu earlier in the year, the smaller fish catch due to the lower Mekong river level, and agricultural production that is unlikely to be much higher than last year’s bumper crop indicate weaker output growth. While non-agricultural growth is expected to rebound strongly due to a recovery in tourism, overall GDP would most likely increase by 4-4½ percent. The impact of still-high petroleum product prices is expected to widen the external current account deficit by another ½ percent of GDP. Inflation is also likely to inch up reflecting price developments in trading partner countries.

III. Medium-term Prospects and Challenges

12. Urgent reform in the agricultural sector is essential to achieve the NPRS objective of reducing poverty. As a small open economy with ample unused arable land and a large unskilled labor force, agriculture is widely recognized to be Cambodia’s comparative advantage. Promoting agriculture is the best strategy to secure a key source of growth that could help absorb a part of the expected increase in the labor force, address poverty more directly, and provide a more rapid expansion of domestic market for manufactured products. A more dynamic agricultural sector may also encourage foreign investment, which has been weak, partly because the population of 13 million does not provide a sufficiently large domestic market.

13. Cambodia can no longer rely on the garment sector as the engine of growth. Efforts should focus on improving competitiveness to dampen the impact from the expected decline in garment exports and encourage diversification of its export base. This is particularly urgent because the elimination of the quota system in January 2005 will expose Cambodian exporters to direct competition from China, where production costs are estimated to be 15 to 30 percent lower than in Cambodia. It will take some time before Cambodia’s exports could recover, even if all identified reforms are undertaken. The value of garment exports could decline by 12 percent in 2005, which might reduce GDP growth to below 2 percent. A depreciation of the exchange rate is likely to have only a limited impact on competitiveness because most costs, including wages, are denominated in U.S. dollars.4 The overall impact of the quota removal on the balance of payments, however, would be modest as garment-related inputs, almost all of which are imported, and profit remittances would also drop. Cambodia could earn some time if the U.S. takes recourse in either the so called “product specific” safeguard against Chinese imports, available until 2013, or the special textiles safeguard, which expires in 2008. However, it would be highly risky for the government to formulate its economic strategy on the uncertain assumption that the U.S. will adopt either of these two options. Furthermore, additional tariff reduction by the U.S. or relaxation of rule of origin requirements by the EU and Canada would have only a marginally favorable impact.

14. Even under the best case scenario, which assumes improved governance and reduced costs, growth would only reach the annual NPRS target of 6-6½ percent by 2009 (Table 5). Under this scenario, public debt, which was 75 percent of GDP at the end of 2003, is expected to be sustainable. Assuming that Cambodia reaches a debt rescheduling agreement with the Russian Federation and the United States on comparable terms to the 1995 Paris Club agreement, Cambodia’s net present value (NPV) of public debt at the end of 2004 would be reduced to 33 percent of GDP.5 However, the NPV of public debt would still represent around 235 percent of total revenue (280 percent excluding grants); a significant strengthening of the revenue effort would be needed to reduce this below 200 percent after 2013 (Annex II).

Table 5.Cambodia: Medium-Term Macroeconomic Framework, 2002–09(In percent of GDP, unless otherwise indicated)
20022003200420052006200720082009
Prelim.Projections
Real sector
Real GDP (percent change)5.55.24.31.94.35.55.96.1
Real Per capita GDP (in riels; percent change)2.83.11.7-0.61.82.93.33.5
CPI Inflation (end-period; percent change)3.70.53.22.82.53.03.03.0
GDP deflator (percent change)2.11.62.02.92.52.93.03.0
Domestic Savings (excl. transfers)9.56.95.33.34.25.66.77.7
National saving21.318.616.714.314.915.816.516.9
Government saving1.2-0.61.21.11.01.31.41.8
Private saving20.219.215.413.213.914.515.115.1
Domestic investment22.221.020.018.519.019.519.719.8
Government investment7.87.47.37.27.06.76.46.2
Non-budgetary grant-financed investment4.95.35.25.05.04.84.64.4
Private investment9.58.37.46.37.07.98.79.2
Fiscal sector
Revenue11.210.411.912.312.913.313.614.0
Tax revenue7.97.38.28.08.18.28.18.1
Of which: Domestic Taxes1.61.81.91.81.81.91.81.9
International Taxes6.15.26.06.06.06.06.06.0
Nontax revenue3.23.13.32.83.03.03.13.1
Of which: quota auctions0.50.40.50.00.00.00.00.0
Capital Revenue0.10.00.00.00.00.00.00.0
Revenue Measures0.00.41.61.82.12.42.7
Expenditure17.817.418.018.418.918.718.618.4
Current10.111.010.711.211.911.912.212.2
Wages3.73.73.73.84.04.24.54.7
Civil administration1.92.01.92.32.62.83.13.3
Defense and security1.81.71.71.51.41.41.41.4
Interest payments0.20.20.60.70.80.70.70.6
Social spending (excluding wages)2.01.92.12.22.32.42.52.7
Payment of arrears0.30.60.60.50.50.5
Other4.25.24.03.94.24.14.03.7
Capital 1/7.97.37.37.27.06.76.46.2
Current balance1.2-0.61.21.11.01.31.41.8
Primary balance (including grants)-3.6-4.3-3.2-3.1-3.1-2.7-2.5-2.1
Overall balance-6.7-7.0-6.1-6.1-6.0-5.4-5.0-4.4
Overall balance (including grants)-3.8-4.5-3.8-3.8-3.8-3.4-3.2-2.7
Domestic financing (including outstanding operations)-0.40.90.00.00.00.00.00.0
External financing7.06.06.16.16.05.45.04.4
Monetary sector
Broad money (percent change)31.115.314.113.016.016.716.516.1
Velocity (GDP/M2)6.05.65.04.64.34.13.83.6
Private sector credit (percent change)13.126.216.515.216.716.716.115.1
External sector
Domestic exports (percent change)12.119.68.0-9.50.76.47.77.7
Retained imports (excl. garments, percent change)5.411.314.91.96.38.08.28.1
Current account balance (excluding transfers)-9.0-10.2-10.8-11.5-11.3-10.5-9.7-9.0
Current account balance (including transfers)-1.2-2.4-3.3-4.2-4.1-3.7-3.2-2.9
Foreign direct investment (in millions of US$)13977838391105121133
Capital account balance107133176228247257255286
Overall balance1.50.80.1-0.10.20.91.11.6
Gross official reserves (in millions of US$)6637377828048388869351,021
(in months of imports of goods and services)3.02.92.82.92.92.92.92.9
Net capital flows 2/11.410.649.011.411.310.29.38.5
External debt 3/68.470.846.348.349.949.748.947.6
External public debt-service ratio, accrual basis 4/2.82.92.02.22.22.42.62.7
External public debt-service ratio, cash basis0.91.21.92.22.22.42.62.7
Sources: Data provided by Cambodian authorities; and Fund staff estimates and projections.

Includes net lending and compensation payments to Thailand in 2003.

Net official disbursement, exceptional financing, financing gap, and official transfers.

Assumes conclusion of debt rescheduling agreement with the Russian Federation and the United States in mid-2004.

As percent of domestic exports of goods and services. The decline in 2004 reflects the tailing off of payments to the Russian Federation.

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

Includes net lending and compensation payments to Thailand in 2003.

Net official disbursement, exceptional financing, financing gap, and official transfers.

Assumes conclusion of debt rescheduling agreement with the Russian Federation and the United States in mid-2004.

As percent of domestic exports of goods and services. The decline in 2004 reflects the tailing off of payments to the Russian Federation.

Cambodia: Baseline and Non-adjustment Scenarios(In percent of GDP, unless otherwise indicated)
20022003200420052006200720082009
Baseline scenario
Real GDP growth (percent change)5.55.24.31.94.35.55.96.1
Of which: Garment (percent change)21.015.012.0-12.0-1.05.87.27.2
Of which: Agriculture (percent change)-2.79.20.43.23.73.83.94.2
Of which: Other (percent change)7.90.44.94.96.06.46.86.9
Government revenue11.210.411.912.312.913.313.614.0
Current Expenditure, of which10.111.010.711.211.911.912.212.2
Wages3.73.73.73.84.04.24.54.7
Other6.37.37.07.47.97.77.77.5
Of which: Social spending (excluding wages)2.01.82.12.22.32.42.52.7
Primary deficit3.64.33.23.13.12.72.52.1
Garment export (in US$ million)1,3381,6071,7941,5871,5901,6991,8391,991
Current account balance, excluding official transfers (in US$ million)-359-429-489-545-565-567-566-567
Gross international reserves (in US$ million)6637377828048388869351,021
Non-adjustment scenario
Real GDP growth (percent change)5.55.24.30.92.73.13.43.7
Of which: Garment (percent change)21.015.012.0-15.0-5.0-2.00.03.0
Of which: Agriculture (percent change)-2.79.20.43.23.33.12.72.7
Of which: Other (percent change)7.90.44.94.04.04.24.54.5
Government revenue11.210.411.110.910.910.911.011.0
Current Expenditure, of which10.111.010.310.09.99.99.99.9
Wages3.73.73.63.53.53.53.53.5
Other6.37.36.76.56.46.46.46.4
Of which- Social spending (excluding wages)2.01.81.91.91.91.91.91.9
Primary deficit3.64.33.73.33.13.12.82.8
Garment export (in US$ million)1,3381,6071,7941,5791,5161,4901,4951,545
Current account balance, excluding official transfers (in US$ million)-359-429-489-621-639-647-599-575
Gross international reserves (in US$ million)663737782728688656672749
Source: Fund staff estimates.
Source: Fund staff estimates.

15. Failure to press ahead more resolutely with reform will limit growth to 2-4 percent annually in the medium term. A new government that lacks a strong commitment to improve governance is likely to fail to improve the business environment, which will make a recovery from the negative shock of the quota elimination highly unlikely; and with lower revenue collection, the government will be unable to meet even priority spending needs. Moreover, long-run growth will be jeopardized if agricultural sector reforms are not implemented. In this non-adjustment scenario, the NPV of public debt will reach about 230 to 250 percent of fiscal revenue, threatening fiscal sustainability. While the economy is not likely to experience a financial or balance of payment crisis, the lack of reform will slow progress toward poverty alleviation, which in turn could lead to social unrest.

IV. Policy Discussions

16. The authorities were more sanguine than the mission about short- and medium-term economic prospects. They considered that their current efforts to reduce red tape, together with close adherence to core labor standards—which they believe will support demand for made-in-Cambodia garments—would be adequate to ensure only a modest slow down in growth after the quota phase out. Moreover, they have recently received new investment proposals in the garment sector from Vietnam, where the U.S. quota will remain beyond early 2005 until Vietnam accedes to the WTO. They agreed that agricultural development was important to reduce poverty and raise long-term growth, and to consider, in consultation with donors, the possibility of reorienting aid flows.

A. Fiscal Issues

17. Supported by robust first quarter results, the government was cautiously optimistic that fiscal revenue collection, which declined in 2003, would recover in 2004. They indicated that the low collection by the customs department partly reflected delayed payments of taxes. Moreover, the government has also started implementing some of the fiscal measures announced late last year.6 The mission, however, argued that additional tax policy measures equivalent to 0.8 percent of annual GDP during the second half of 2004 would be needed to meet their revenue target (inclusive of measures announced last December). The authorities expressed doubts about their ability to do this during the remainder of the year, but agreed that there was substantial scope for additional revenue from strengthened anti-smuggling efforts. Even if the revenue target is met and recurrent spending contained, domestic-financed capital spending will be substantially compressed because of compensation payments to Thailand, higher interest payments following possible closure of their debt rescheduling negotiations, and settlement of a portion of the stock of arrears to domestic suppliers.7

Revenue Buoyancy

(Percent change in revenue over percent change in non-agricultural GDP)

18. To meet the NPRS targets, total cumulative revenue measures equivalent to about 2½ percent of GDP will be needed over 2004-09. This requirement would rise further if foreign financing were to decline from current levels. The authorities agreed with the need to introduce additional revenue measures, but indicated that they would not want to pre-commit to any specific measure at this stage. They assured the mission, however, that they would continue to avoid recourse to domestic bank financing, which has helped contain riel inflation. On the spending side, a continued tight lid on non-wage and non-social spending will allow a modest increase in the wage bill, from an average salary of $34 a month in 2003 (compared with an average garment worker’s wage of $60 a month) to $80 a month by 2008, while improving the primary balance to a level that is consistent with a sustainable fiscal path by 2007.

19. The authorities agreed that computerization of the revenue departments will help better capitalize on the technical assistance provided so far by reducing paperwork and keeping track of collections, a key to reducing corruption. The authorities are currently reviewing least cost options, but one that could be easily expanded to other departments in future. In addition, they will continue to collect arrears (receivables) to institute a tax-paying culture. They were also receptive to the mission’s recommendation to restructure the organizational structure of the Tax Department to one based on taxpayer services, education, and self-assessment. With regard to customs reforms, they agreed that passage of the Law on Customs, which the new government should re-submit to parliament without further delays, is crucial to strengthen enforcement and reduce smuggling. The authorities indicated that they would, in collaboration with other law enforcement agencies, also monitor closely large urban distribution centers where smuggled products are alleged to be sold.

20. The authorities are now more cautious in awarding government contracts. Most of the Build-Operate-Transfer contracts in recent years were awarded through direct negotiations that resulted in actual payments to the Treasury, through either profit sharing or taxes, that were well below expectations.8 While noncommittal, the authorities agreed about the need for the National Audit Authority to audit the operations of existing contract holders with significant fiscal implications to verify compliance with the terms of the contracts. For new contracts, the World Bank’s proposed overhaul of the procurement and concession legislation, which stresses competitive bidding, is expected to help address part of the problem in the medium term. Recently, the Ministry of Economy and Finance (MEF) stopped awarding a power project to a private company and asked the IFIs to provide an assessment of the proposal. In response, the World Bank and the AsDB will identify the least cost national power development plan, against which the current and any future projects can be compared.

21. The public expenditure management reform agenda remains large (Table 6). Reform of the Treasury slowed in 2003: about two thirds of line ministries still do not provide timely reports of their transactions to the Treasury, and foreign currency units within the MEF manage their accounts separately. Partly reflecting a revenue shortfall, the Cash Management Committee was unable to smooth out the government’s spending commitments during 2003, resulting in yet another late-year bunching of spending and earmarking of next year’s tax receipts. The authorities noted, however, that disbursements under the Priority Action Plan for social spending had accelerated, and the backlog was expected to be fully cleared by early 2005. To better coordinate and monitor public expenditure management (PEM) reform, the MEF has established a reform committee, which will also serve as the counterpart to a donor technical working group under a Sector-Wide-Approach to PEM reform. The authorities were also committed to improving the effectiveness of public spending once lessons are learned from the World Bank’s ongoing expenditure tracking study.

Table 6.Cambodia: Fiscal Reform Agenda
AreaMeasuresTiming
I. Tax Policy Reforms
Implement measures in 2004 H2 to yield 0.8 percent of GDP2004
Enforce Tax Law amendments on depreciation, withholding on payments to non-residents, and provisions related to NGOs and IFIs2004
Introduce additional measures to reach revenue target of 14 percent of GDP2006-09
II. Revenue Administration
a. Tax AdministrationCollect tax arrears, including through escalating penalty measures2004-07
Adopt new organization structure, expand staff and training, and add Appeals Unit2004-06
Complete de-registration program and implement new audit program2003-07
Extend the same procedures for Large Taxpayer Unit to medium taxpayers2004-06
Establish new computerization program for collection, audit, and cross-checking2004-05
Provide training on international audit and tax avoidance2006-07
b. CustomsAdopt Law on Customs and promulgate supporting regulations2004
administrationContinue to strengthen anti-smuggling effortscontinuous
Automate Customs systems and procedures2004-05
Reduce number of required inspections to facilitate trade2004-05
Implement new organization structure2005-06
Establish Customs Fraud Investigation Unit2005-07
c. Nontax revenueConsolidate various non-tax revenue units in one department2004-05
administrationIdentify and start collecting nontax arrears2004-06
Audit operations of contracts and leases to verify compliancecontinuous
Review financial terms of contracts with significant fiscal implications2005-07
III. Expenditure Policy
a. Reduce arrearsMake provisions in annual budgets for eliminating arrears by 20082004-08
b. Social spendingRaise spending to reach NPRS target of 37 percent of current expenditure2005
Reduce the share of spending on executive functions and overheads2005-07
c. DefenseReduce spending to meet NPRS target of 19.4 percent of current expenditure2005
d. Civil serviceBased on studies completed in 2004, begin implementation of reforms, including decompressing the wage structure2005-07
IV. Budgetary Process
a. Budget systemEstablish an Interdepartmental Committee to implement reforms2004
Adopt first phase reform program under an enhanced framework of donor coordination2004
Use input from revenue departments and line ministries on monthly projections2003-07
Gradually unify the budget system, including foreign currency units2003-06
b. MTEFSynchronize preparation of MTEF with annual budget cycle2004-07
Expand coverage of MTEF to include all ministries2005-06
Integrate MTEF with the medium-term wage framework and public investment program2005-06
c. Treasury reformIntroduce new chart of accounts and revise coding system2003-06
Transfer the banking function of the NT to banks2004-06
d. Cash managementDevelop financial control and internal audit within ministries2004-06
e. ProcurementStrengthen legal framework and create Central Procurement Monitoring Office2004-05

22. The government will complete the ongoing studies before making a decision about overhauling the structure of the civil service and wages. Public employment, at some 2½ percent of the total population, and an associated wage bill of less than 4 percent of GDP are within international norms. However, civil service wages are well below that of the formal private sector, and the wage structure is highly compressed. The authorities indicated that they are reluctant to downsize the civil service because of social concerns, especially when unemployment was rising. However, they now expect to complete key studies, which have been substantially delayed, within the next few months, which are critical inputs to formulating a comprehensive civil service reform strategy in consultation with the World Bank. The studies include functional reviews to determine appropriate institutional arrangements, organization, processes, and staffing of government functions; and labor market analyses to identify adequate remuneration. The government was, however, less committal on demobilization, which had stalled since the first phase was completed in late 2002.

B. Monetary and Exchange Rate Policy

23. The central bank will continue to intervene in the foreign exchange market to stabilize excessive fluctuation of the exchange rate. Domestic currency cash injected by government spending is normally retained in circulation as the transaction demand for riel continues to rise with economic growth. Exchange rate instability typically arises when government spending accelerates and the central bank is slow to absorb the excess supply in riel. Mindful of the shallowness of the market and that exchange rate policy has only limited effects on competitiveness, the mission supported the NBC’s policy to stabilize “oriel” inflation at a low level by maintaining a broadly stable exchange rate. At the same time, the authorities should not preclude an exchange rate adjustment if there are fundamental changes in underlying market conditions exerting pressure in the foreign exchange market.

24. The mission agreed with the NBC that Cambodia would benefit from de-dollarizing the economy in the long run. In addition to the loss of seigniorage, the lack of monetary policy independence and the central bank’s inability to act as a lender of last resort could eventually threaten financial stability. Moreover, although the United States now accounts for 25 percent of Cambodia’s gross external trade, this is expected to decline after the elimination of the quota system. Hence, the potential benefits of lower transactions cost from certainty about the value of the riel vis-à-vis the U.S. dollar will be more limited. De-dollarization initiatives, such as requiring that all government transactions be conducted in domestic currency, could also be considered. But forceful administrative measures or political uncertainty could immediately translate into capital flight, as there is still lack of confidence in riel.

25. The authorities acknowledged that commercial banks have played only a limited role in facilitating investment finance. While successful bank restructuring during 2000-02 contributed to financial deepening, bank loans in percent of GDP remain well below those in other countries in the region. Even then, the NBC agreed to closely monitor credit expansion, especially since banks’ credit risk assessment capacity is weak, legal infrastructure including the enforceability of financial contracts is not in place, and reliable borrower information is not available. In this regard, passage of the Negotiable Instruments and Payment Transactions Law, the Secured Transaction Law, the Insolvency Law, and the Securities and Exchange Law, is expected to reduce payment system risks and provide a legal basis for collateral-based lending. Early completion of the implementation of the new chart of accounts and the accounting law will provide banks better information on potential borrowers.

C. Private Sector Regulatory Environment and Governance

26. Private sector activities are deterred by the high costs of inputs and governance problems, as confirmed in a recent World Bank analysis.9 The high input cost associated with poor infrastructure and human capital needs to be addressed. In the short run, the authorities will consider revisiting the provisions for overtime, nightshift, and holiday pay—while upholding core labor standards—to reduce labor costs. The mission emphasized that greater wage flexibility is also needed. Moreover, the minimum wage was segmenting the labor market, hindering growth in employment. On governance, the authorities agreed that establishing an independent and well functioning judiciary within a transparent legal framework is a basic prerequisite to creating a conducive business environment. The mission noted that, additionally, a strong political commitment is required to urgently address administrative impediments to investment and the high informal fees, not only to help the garment sector recover quickly, but also to promote export diversification.

Comparison of Customs Clearance Costs

($ per 40 foot container)

27. Only in recent years has work begun to strengthen the legal and judicial system in conjunction with WTO accession. Most of the laws, however, are still in draft form. Once the accession package is adopted by the National Assembly, Cambodia will become, along with Nepal, one of the first low-income countries to join the WTO.10 Benefits are expected to be wide-ranging as accession requires adoption of 46 pieces of legislation over the next several years, ranging from judicial reform to trade related property rights. But equal effort needs to be placed on proper implementation of the legislation. In response to criticism from some NGOs that Cambodia’s WTO accession would expose the country to open competition for which it is not ready, government officials indicated that Cambodia was already fully open, and that WTO accession would provide an opportunity to put in place an orderly environment in which Cambodia will be able to better compete.

28. The government has recently increased salaries of judges and established the Royal School of Judges and Prosecutors. Some progress has also been made by the working groups tasked with producing an action plan to implement the Strategy for Legal and Judicial Reform. Donors were resistant, however, to providing more assistance noting that not much had been done even though the legal and juridical reform has been on the government’s agenda for the past 10 years. While donor assistance would undoubtedly help, there are measures that could be implemented in the short term for which, above all, political will is required. These include adopting the law on the status of judges and prosecutors, embarking on the implementation of a long pending reform of the Supreme Council of Magistracy, and establishing a commercial court (Box 4). The authorities cautioned, however, that judiciary reform, especially reform of the Supreme Council of Magistracy, would likely be delayed as it was a sensitive issue and needed to honor an understanding that was reached between the political parties as part of their power-sharing agreement.

D. Rural Development and Aid Allocation

29. The authorities acknowledged that progress in agricultural development has been slow. The mission questioned why cultivated land area had not increased since the late 1990s even though there is ample unused land. In this regard, the mission recommended auditing the already awarded land concessions, and reviewing the transfer process of ownership of de-mined and de-forested land.11 Combined with the limited land use and low agricultural productivity, population growth is estimated to have worsened poverty. The authorities noted that progress was already being made in distributing land to farmers, and did not agree that poverty was on the rise. They were, however, concerned about demographic developments that would see large inflows of young people enter the labor market in coming years.

Poverty Headcount Ration and Land Use Index


1997 = 100

30. Lack of roads and information on prices limits the ability of, or incentive for, small scale farmers to sell their produce in competitive markets. Moreover, the absence of a clear land registration system has weakened incentives to improve land productivity by building irrigation systems. The authorities indicated that they would consider helping farmers set up agricultural associations and cooperatives that would, as a group, have better access to market information and a stronger bargaining position. Such associations could also improve farmers’ access to financial resources. On the latter, the mission endorsed the NBC’s strategy to reduce lending rates in rural areas through increased competition among lending institutions. Donors and the IFIs are providing support in a few areas: the AsDB is providing assistance in commercialization of agriculture, diversification of crops, and land management, while the World Bank is focusing on land concessions and titling.

Box 4.Legal and Judicial Reform

The existing legal framework and judicial institutions are weak, and their reform is substantially behind schedule, constituting a major impediment to private sector growth and foreign investment.

Legal and judicial system

Cambodia’s legal system is based on civil law. The Constitution adopted in 1993 provides for the separation of powers, and establishes the judiciary as an independent institution. The Supreme Council of Magistracy is charged with helping the King to ensure judicial independence and to discipline judges and prosecutors.

Cambodia’s judicial institutions comprise provincial and municipal courts, which adjudicate the majority of civil and commercial disputes, Appeals Court, Supreme Court, and military courts. At present, there are no specialized commercial courts or independent arbitration with the exception of the recently established labor arbitration council, whose decisions are neither mandatory nor subject to enforcement.

There are currently 195 judges and prosecutors (also referred to as “magistrates”). Judges have little expertise or experience to handle commercial disputes, and are widely perceived to lack independence from political influence and vested interests. Enforcement of court decisions is unpredictable and costly.

Recent developments in legal and judicial reform

While the legal and judicial reform has been on the government’s agenda for the past 10 years, work has only recently begun on drafting new legislation in conjunction with preparation for the WTO accession. Most of the laws are still in draft form.

On the positive side, salaries of judges were raised in 2003 from $25-30 a month to $200-400 a month, and the Royal School of Judges and Prosecutors was established. The School enrolled the first 55 students in November 2003, for graduation in 24 months. In June 2003, the government adopted the Strategy for Legal and Judicial Reform. Working groups have been tasked to produce an action plan that will prioritize reform measures by mid-2004 and be used to solicit assistance from the international community.

Where do we go from here?

In the medium term Cambodia’s accession to the WTO is expected to strengthen the legal system. Commitment of the authorities will be required to embark on reforming the judiciary. While Cambodia will require significant donor assistance, some measures that require little or no such assistance can and should be implemented in the short term. These include:

  • Adopting the law on the status of judges and prosecutors that would establish an appointment process and the terms and conditions of service, including a code of conduct.
  • Taking concrete steps to ensure the independence and the transparency of the operation of the Supreme Council of the Magistracy, to enable it to fulfill its functions set forth in the Constitution.
  • Establishing a commercial court that will specialize in commercial dispute resolution. A law on the commercial court is currently being prepared and is expected to be passed in 2005.
  • Passing an anti-corruption law that establishes an effective framework for investigation and prosecution of corruption offences and provides for declaration of income and assets by government officials; and preparing the implementing regulations.
  • Publishing all court decisions and creating a repository of all laws in Khmer and in English.

31. The authorities saw a need to review, together with donors, the current allocation of foreign aid flows. Although weak administrative capacity may have required that about 50 percent of all aid flows be used for technical cooperation, a re-allocation may be needed to more directly address poverty and boost long-term growth. The enormous investment needs of the agricultural sector argue for greater allocation of resources for building infrastructure that could support irrigation systems and roads to markets.

Type of Aid Hows

(average 1999-2003)

32. Unsustainable logging has destroyed a valuable source of income and contributed to soil erosion. Although the ban on logging remains in place, monitoring of log transportation and other forest crime prevention schemes remains weak. The authorities reiterated their commitment to retain the ban on logging until sustainable forest management plans are put in place. A plan for community based forestry to safeguard the livelihood of local communities is also being considered. In particular, more forceful action is required by the government to incidents reported by the Société Générale de Surveillance, the new independent forestry monitoring firm.

E. Other Issues

33. The authorities are continuing their dialogue with the Russian Federation and the United States to reach agreement on debt rescheduling. The latest proposal from the Russian Federation involves an upfront cash payment and substantial debt cancellation. The Cambodian authorities have indicated that they are seeking further clarification on the Russian proposal, and intend to intensify negotiation with the United States.

34. In accordance with Cambodia’s commitment under ASEAN, its tariff lines were recently reclassified to the ASEAN Harmonized Tariff Nomenclature (AHTN). The authorities confirmed that even after the conversion to AHTN, their unweighted average tariff remained unchanged at 15 percent—Cambodia’s average tariff was reduced from 16.5 percent in 2003 to 15 percent under the old tariff nomenclature.

35. Cambodia’s statistical framework is being upgraded but substantial weaknesses remain. The authorities agreed on the need to start relying more on their own resources and training to strengthen technical capacities. However, the revenue situation makes it unlikely that any meaningful amount of resources would be allocated to statistics from the budget.

36. A draft comprehensive anti-money laundering law is being prepared with the assistance of LEG and MFD. An interministerial working group was charged with this task, headed by the NBC. The Prime Minister has also instructed that a Financial Investigation Unit be set up at the NBC, indicating his commitment to anti-money laundering.

F. Ex-Post Assessment of Longer-Term Program Engagement

37. Cambodia’s longer term program engagement was reviewed in the context of the Ex-Post Assessment report discussions.12 The authorities welcomed the draft EPA report as a useful review and foundation for future reform plans. They noted that the EPA gave appropriate consideration to the adverse initial conditions, provided a good description of developments under Fund-supported programs, and presented a balanced assessment of the strengths and weaknesses of the policies pursued during the period under review. They agreed with the main finding of the report that, despite important progress achieved in many areas, poverty remained pervasive and governance problems widespread. They also agreed with the key elements of the strategy proposed in the EPA for future engagement with the Fund, and reiterated their desire to start discussions on a new PRGF soon. However, the authorities had a number of observations.

  • The report could have emphasized more the challenges faced in the transition to a market economy. In particular, the challenges posed by people’s attitude toward the role of the government—they had grown to depend too much on government actions during the central planning period—and the problems faced in rebuilding and reestablishing trust in, and credibility of, key institutions. Deepening confidence is key for future development.
  • As regards the thrust of macroeconomic policies, the authorities agreed that it will be critical to maintain stability to achieve high growth and reduce poverty. In line with the EPA recommendations, they believe fiscal policy will continue to play a central role. They will continue in their efforts to enhance revenue and strengthen expenditure control. The authorities also agreed not to resist fundamental pressures on the exchange rate, but noted that the impact of a flexible exchange rate may be very limited as long as the market remains shallow and dollarization continues to be widespread. That said, they agreed with the steps outlined in the report to achieve de-dollarization.
  • The authorities agreed that pervasiveness of poverty was a serious problem but warned against an unqualified comparison of indicators across countries, particularly given the differences in data quality and methodologies used in calculation. They reiterated their intention to gear their policy efforts toward meeting the NPRS goals, especially by expediting structural reforms that would enhance the impact of growth on poverty reduction.
  • The authorities agreed that much remains to be done in the governance area and reiterated their determination to address it forcefully. They noted, however, that governance problems were not exclusive to the public sector. In this regard, they thought the report could have also discussed the extent of transparency and accountability problems outside the government sector, including in the corporate sector and the NGOs.
  • The authorities thought the report covered well long-term issues and policy requirements relating to agricultural development; their focus has been on measures with a short-term impact, such as, for example, enhancing marketing channels and institutionalizing micro-finance activities in rural areas.
  • On external financial assistance, the authorities agreed that there was a need to enhance the informational database to analyze aid effectiveness, and noted that actual aid inflows may be less than recorded because they include donors’ overhead costs in their respective countries. They considered that aid in the form of technical cooperation was adequate given their depleted human capital, but noted that donors would have helped promote greater ownership by using more local staff, which would have saved scarce financial resources. Finally, they pointed to several ongoing efforts at enhancing donor coordination, for example, the progress achieved so far in developing a framework to enhance the public sector’s financial management in consultation with the Bank, Fund, and other donors.

38. The authorities requested that the Fund continue to provide policy advice, more focused technical assistance, and financial support. They reiterated their desire to start discussions on an economic program to be supported by a PRGF arrangement. In addition to helping to strengthen Cambodia’s official international reserve position and contain possible adverse effects from the forthcoming elimination of the garment quota, an arrangement with the Fund would help underpin a framework for donor coordination and encourage domestic reform efforts within the government. While underscoring their responsibility for ensuring that technical assistance is used effectively by choosing the right counterparts, they emphasized the importance of training local trainers to ensure that the transmission of skills proceeds more smoothly.

V. Staff Appraisal

39. Cambodia has come a long way in rebuilding its economy from the ruins of decades-long civil strife. However, poverty alleviation remains a challenge that the recent, narrow based growth has not been able to address. Nurturing the agricultural sector, where Cambodia has a natural comparative advantage, becomes all the more urgent as Cambodia will no longer be able to rely on the garment sector after the elimination of the quota system in early 2005. With most of the poor living in rural areas, agricultural development is the only way to address poverty directly.

40. Limited access to arable land is a key impediment to agricultural growth. The staff urges the government to focus more on land issues, including auditing the already awarded economic concessions, reviewing the transfers of ownership of de-mined and de-forested land, and speeding up land registration. It is also important that the government review, together with donors, the current allocation of foreign aid flows with a view to refocusing it on agricultural development.

41. Cambodia also needs to intensify its efforts to promote growth in other sectors, for which it will need to attract foreign investment. It is recognized, however, that reducing the high input costs associated with poor infrastructure and human capital, and establishing a sound regulatory environment, can only be achieved in the long run. There is considerable scope for improvements in the short run, however, by cutting cumbersome red tape and the high informal fees, and by allowing greater wage flexibility. These are especially important in a dollarized environment where the exchange rate can not be used to improve competitiveness.

42. The staff urges that judicial reform be accelerated to address governance problems that are deeply rooted in all aspect of economic activities. The weakness of the judiciary is evident: there have been no reported cases of prosecution for any business-related activities or corruption since reconstruction efforts began in the early 1990s. The staff looks forward to the adoption of the anti-corruption law and the law on the status of judges and prosecutors, which would establish an appointment process and the terms and conditions of service, and to the establishment of a commercial court that will specialize in commercial dispute resolution. WTO accession will be helpful in putting in place a legal framework given the many laws required for membership. The staff notes, however, that the benefits of adopting the WTO accession package will only be realized if the laws are properly and forcefully enforced.

43. The staff commends the authorities for maintaining macroeconomic stability that has helped Cambodia to achieve robust growth in the recent past. Fiscal policy will need to continue to play a central role, and for this, it will be important to enhance revenue and strengthen expenditure control in the period ahead.

44. Attaining the government’s medium-term fiscal objectives hinges critically on the success of additional revenue mobilization. To meet the 2004 revenue target, additional tax policy measures equivalent to 0.8 percent of GDP (inclusive of measures announced last December) will be needed in the second half of this year. Over the medium term, attaining the NPRS targets of higher social spending and rural infrastructure development will require a serious commitment by the government to improve revenue collection, through both additional tax policy measures and strengthening tax and customs administration. In this respect, computerization in the revenue departments and the passage of the Law on Customs will be crucial to strengthen enforcement capabilities.

45. The agenda for fiscal management reform is large. The establishment of the MEF reform committee promises a new opportunity to promote ownership and internalization of technical assistance. On awarding contracts, the staff recommends that the National Audit Authority audit the operations of existing contract holders with significant fiscal implications to verify compliance with the terms of the contracts. The audit reports should be made available to the public.

46. To improve the effectiveness of the government, overhauling the civil service and its wage structure is essential. Early completion of the ongoing studies, which have been substantially delayed, will be critical to prepare a comprehensive civil service reform strategy in consultation with the World Bank.

47. The staff supports the central bank’s policy of intervening in the foreign exchange market to stabilize excessive fluctuations of the exchange rate. Mindful that the exchange rate policy does not have much impact on improving competitiveness, the staff suggests maintaining a broadly stable exchange rate, barring fundamental changes in market conditions.

48. The staff agrees with the NBC that Cambodia would benefit from de-dollarizing the economy in the long run. De-dollarization initiatives, such as requiring that all government transactions be conducted in domestic currency and issuing a larger denomination note, could be considered. But forceful and abrupt administrative measures or political uncertainty could immediately translate into capital flight.

49. Strengthening the legal infrastructure is key to promoting sound financial intermediation of banks. The staff looks forward to an early passage of the Negotiable Instruments and Payment Transactions Law, the Secured Transaction Law, the Insolvency Law, and the Securities and Exchange Law, all of which are needed to reduce payment system risks and to ensure a legal basis for collateral-based lending. Early completion of the implementation of the new chart of accounts and the accounting law will provide banks better information on potential borrowers.

50. Failure to push the reform agenda forward, especially measures to improve the business environment and accelerate agricultural reforms, will jeopardize attaining the NPRS targets. In particular, governance related reforms, especially that of the judiciary, will require a strong political commitment. Further delays could lead to reduced donor financing and threaten fiscal sustainability.

51. The staff welcomes continued dialogue with the United States and the Russian Federation to seek ways to complete the debt rescheduling negotiation, and looks forward to an early completion.

52. Cambodia’s statistical framework is being upgraded but substantial weaknesses remain. In the coming years, there is a need to rely more on domestic resources and training to strengthen technical capacities. If donor financing is lacking, this may require a shift of resources within the current budget.

53. The mission welcomes progress made in the preparation of a new comprehensive anti-money laundering law and looks forward to its adoption.

54. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Chart 1.Cambodia: Selected Economic Indicators, January 1997- June 2004

Source: Data provided by the Cambodia authorities

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

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

Chart 2.Cambodia: Performance Indicators, 1998-2004

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

Table 7.Cambodia: Schedule for Enacting Laws for WTO Conformity
2001200220032004 12005 12006 1
Judicial Reform
1 Law Establishing the Commercial CourtExpected
2 Ratification of the New York Convention on the Enforcement of ForeignAdopted
Arbitral Awards
3 Commercial Arbitration LawExpected
4 Ratification of the ICSID ConventionAdopted
5 Civil CodeExpected
6 Civil Procedure CodeExpected
7 Criminal CodeExpected
8 Criminal Procedure CodeExpected
Trade-Related Intellectual Property Rights (TRIPS)
1 Law on Trademarks and Acts of Unfair CompetitionAdopted
2 Law on Protection of Patent, Utility Models, and Industrial DesignsAdopted
3 Law on Copyrights and Related RightsAdopted
4 Law on Geographical Indications Including Appellation of OriginExpected
5 Laws on Layout Designs of Integrated CircuitExpected
6 Law on Plant Variety ProtectionExpected
7 Law on Protection of Undisclosed InformationExpected
Technical Barriers to Trade (TBT), and Sanitary and Phytosanitary (SPS) Measures
1 Sub-degree on Inquiry Points for (1) Services, (2) SPS, and (3) TBTAdopted
2 Sub-Decree on Animal QuarantineAdopted
3 Sub-Decree on Plant QuarantineAdopted
Custom Valuation
1 Custom CodeExpected
2 Law on Rule of OriginExpected
3 Law on Anti-dumping Measures and on Countervailing MeasuresExpected
Trade-Related Investment Measures (TRIM)
1 Amendment of Law on InvestmentAdopted
2 Law on Export Processing ZonesExpected
Financial Intermediation
1 Negotiable and Payment Transaction LawExpected
2 Accounting LawAdopted
3 Insolvency LawExpected
4 Secured Transaction LawExpected
5 Securities and Exchange LawExpected
6 Commercial Leasing LawExpected
Other areas
1 Postal Service LawAdopted
2 Water Supply LawExpected
3 Water Resources Management LawExpected
4 Telecommunication LawExpected
5 Tourism and Entertainment LawExpected
6 Civil Aviation LawExpected
7 Merchant Shipping LawExpected
8 Land Traffic Law (Highway Code)Expected
9 Fisheries LawExpected
10 Forestry LawAdoptedExpected
11 Land LawAdopted
12 Royal Decree on CooperativeAdopted
13 Commercial Contracts LawExpected
14 Commercial Agency LawExpected
15 Competition LawExpected
16 Law on Safeguard MeasuresExpected
17 Law on Business EnterprisesExpected
Source: The Cambodian authorities

Due to the political impasse, the expected dates of enactment are now delayed by about a year.

Source: The Cambodian authorities

Due to the political impasse, the expected dates of enactment are now delayed by about a year.

ANNEX I Cambodia: Fund Relations

As of June 30, 2004

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

II. General Resources Account:

SDR MillionPercent Quota
Quota87.50100.00
Fund Holdings of Currency87.50100.00

III. SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation15.42100.00
Holdings0.150.99

IV. Outstanding Purchases and Loans:

SDR MillionPercent Quota
PRGF arrangements65.5074.86

V. Financial Arrangements:

TypeApproval DateExpiration DateAmount Approved (SDR Million)Amount Drawn (SDR Million)
ESAF/PRGF10/22/199903/05/200358.5058.50
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
5/30/200420042005200620072008
Principal--2.805.874.187.5210.86
Charges/Interest--0.300.580.550.520.47
Total--3.106.454.738.0411.34

VII. Safeguards Assessment:

Under the Fund’s safeguard assessment policy, the National Bank of Cambodia (NBC) is subject to a full safeguard assessment with respect to a possible successor PRGF Arrangement. The assessment was completed on March 24, 2004 and specific measures were proposed to address a few weaknesses.

VIII. Exchange Rate Arrangement:

Since November 8, 1992 the exchange rate arrangement for 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 by the foreign exchange market, applies to all other transactions. The official exchange rate is adjusted so as to limit the spread between the official rate and the market rate to no more than 1 percent on a daily basis. On July 25, 2004, the official exchange rate was CR 4,024 per U.S. dollar and the market rate CR 4,038 per U.S. dollar. Cambodia accepted the obligations of Article VIII, Sections 2, 3, and 4 on January 1, 2002. Cambodia maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

IX. Article IV Consultation:

Cambodia is subject to the provisions on consultation cycles approved on July 15, 2002. The Executive Board concluded the last Article IV consultation on February 20, 2003.

X. Technical Assistance:

Following discussions between the Government, the IMF, UNDP, and other interested multilateral and bilateral donors, a comprehensive Technical Cooperation Action Plan (TCAP) was adopted in May 2001. The TCAP arrangement ended in mid-2004, following a six-month extension. Fund’s technical assistance to Cambodia remains intensive, but will be gradually phased out (Annex VI). A resident Treasury Advisor was assigned in June 2004 for a period of 6 months. An FAD review mission will take place in October 2004 to review overall progress with revenue administration reforms and assist the authorities in defining the overall framework for future reforms in this area.

XI. Resident Representative:

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

ANNEX II Cambodia: Debt Sustainability

1. Under the staff’s baseline scenario, Cambodia’s debt is expected to be sustainable.1 The baseline scenario assumes sustained real GDP growth of 6 percent, export growth of 9 percent, and broadly stable foreign aid in nominal U.S. dollars. On the fiscal front, budgetary consolidation is expected to begin with the 2004 budget, which would require discretionary tax revenue measures and improvements in tax and customs administration.

A. The Current Situation

2. Cambodia’s total external public debt was $3.0 billion (71 percent of GDP) at end-2003, of which $1.9 billion was owed to the United States and the Russian Federation. Other external debts were owed largely to multilateral creditors on highly concessional terms. Domestic public debt, all denominated in local currency, accounted for about 5 percent of GDP.

3. Restructuring Cambodia’s debts to the United States and the Russian Federation in highly concessional terms, which together account for 64 percent of total external debt, is critical for securing debt sustainability. The baseline scenario assumes that agreement is reached with the U.S. by mid-2004 on comparable terms to the 1995 Paris Club agreement (i.e., flow rescheduling on Naples terms). It assumes a 40-year maturity, a 16-year grace period, and an interest rate of 3 percent. Similar terms are assumed on the debt owed to the Russian Federation, after an initial upfront discount of 70 percent. The restructured debt would amount to $1.7 billion at the end of 2004. The total stock of outstanding debt at the end of 2004 would amount to $2.1 billion (46 percent of GDP), or 29 percent of GDP in net present value (NPV) terms.

B. Public Debt Sustainability

4. Cambodia’s stock of public debt is projected to decline after an initial increase from 34 percent of GDP in 2004 to 35 percent of GDP in 2006 in NPV terms. In the baseline scenario, total public sector debt in NPV terms is expected to fall to 16 percent by 2023 if the primary deficit is kept to about 2½ percent of GDP over the medium term and to about 3 percent of GDP in the longer run. The NPV of the debt-to-revenue ratio at 237 percent in 2004 is high, reflecting the weak revenue base. Hence, failure to improve revenue collection steadily over time would undermine public debt sustainability.

5. Sensitivity tests suggest that the debt dynamics are vulnerable to a real depreciation, to debt-creating flows in the medium term, and to lower GDP growth in the long term. A one-time 30 percent real depreciation in 2004 (test B5) would increase the NPV of the debt-to-GDP ratio from 34 percent of GDP in the baseline to over 50 percent of GDP, and the NPV of the debt-to-revenue ratio to more than 300 percent in the medium term. A 10 percent of GDP increase in debt-creating flows in the first projected year (test B6), such as might arise from an unexpected realization of contingent liabilities, would increase the NPV of the debt-to-GDP and debt-to-revenue ratios to 40 percent and 270 percent, respectively. If the real GDP growth rate were to fall by two standard deviations from its recent average (test B4), which corresponds broadly to the difference between the GDP growth shown in the non-adjustment scenario and the baseline presented in the main text (see paragraph 14), the NPV of the debt-to-revenue ratio would reach about 240 percent in the medium term.

C. External Debt Sustainability

6. In the baseline scenario, all debt indicators are projected to improve over time. The NPV of the debt-to-GDP ratios are expected to fall below 20 percent, the NPV of the debt-to-exports ratios to fall below 30 percent and the debt service-to-exports ratio would decline to below 2 percent in the long run.

7. The debt dynamics are most vulnerable to a real depreciation and export decline. A one-time 30 percent real depreciation would push up the NPV of the debt-to-GDP ratio to about 45 percent in the near term. A one-time two standard deviation shock in exports, which is about twice as large as the shock assumed in the non-adjustment scenario in the main text, would raise the debt service-to-exports ratio to 4.8 percent compared with 3.4 percent in the baseline scenario, and the NPV of the debt-to-exports ratio would rise to 91 percent compared with 58 percent in the baseline scenario in 2013. Even then, these ratios are not high enough to threaten external viability.

D. Conclusion

8. The key vulnerability in Cambodia’s debt dynamics is its weak fiscal revenue base. While the nominal stock of debt and service payments are modest relative to GDP, the revenue base, currently at 11 percent of GDP, may pose difficulties in servicing debt. A one-time real depreciation is also a source of risk as it increases the size of the stock of debt relative to GDP and fiscal revenue.

Table 1.Cambodia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2000-2023(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
200020012002Historical Average 5/Standard Deviation 5/2003200420052006200720082003-08 Average201320232009-23 Average
Public sector debt 1/68.869.072.275.351.152.353.252.250.641.022.7
o/w foreign-currency denominated66.867.268.470.846.348.349.949.748.939.921.7
Change in public sector debt-0.60.23.23.1-24.31.20.9-1.0-1.6-2.0-1.8
Identified debt-creating flows4.5-0.10.51.6-23.02.00.7-0.4-0.7-0.21.7
Primary deficit2.02.73.62.01.24.33.23.13.12.72.53.12.53.32.8
Revenue and grants13.213.514.112.914.214.615.115.315.515.214.5
of which: grants2.82.72.92.52.22.32.22.01.81.20.5
Primary (noninterest) expenditure15.216.117.717.217.417.718.118.017.917.817.8
Automatic debt dynamics-0.8-3.5-4.2-3.7-4.8-1.1-2.4-3.0-3.2-2.8-1.6
Contribution from interest rate/growth differential-5.7-5.0-4.4-4.5-3.2-1.0-2.4-3.0-3.2-2.7-1.6
of which: contribution from average real interest rate-1.2-1.3-0.8-0.9-0.1-0.1-0.2-0.3-0.3-0.3-0.2
of which: contribution from real GDP growth-4.6-3.7-3.6-3.6-3.1-0.9-2.2-2.8-2.9-2.4-1.4
Contribution from real exchange rate depreciation4.91.50.20.7-1.6-0.10.00.00.00.00.0
Other identified debt-creating flows3.30.71.11.0-21.40.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (fflPC and other)3.30.71.11.0-21.40.00.00.00.00.00.0
Bank recapitalization0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes-5.10.42.71.5-1.3-0.70.2-0.6-0.8-1.8-3.5
NPV of public sector debt58.959.962.163.933.534.234.834.833.526.916.4
o/w foreign-currency denominated56.958.058.259.428.830.231.532.331.725.915.4
o/w external56.958.058.259.428.830.231.532.331.725.915.4
NPV of contingent liabilities (not yet officially recognized in public sector
Gross financing need 2/2.33.24.15.04.44.34.34.03.94.14.1
NPV of public sector debt-to-revenue ratio (in percent) 3/446.0445.1439.4495.8236.5233.7231.3227.7216.3176.8113.3
o/w external431.1431.2412.2460.9203.0206.2209.1211.1205.0169.9106.1
Debt service-to-revenue ratio (in percent) 3/4/2.63.83.75.18.88.38.48.79.310.06.1
Primary deficit that stabilizes the debt-to-GDP ratio2.62.40.41.26.11.82.23.64.14.65.1
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)7.05.75.56.52.75.24.31.94.35.55.94.56.06.06.0
Average nominal interest rate on forex debt (in percent)0.30.30.30.30.00.40.81.61.61.51.51.21.41.31.3
Real exchange rate depreciation (in percent, + indicates depreciation)7.72.50.31.53.81.1-2.4-0.20.00.00.0-0.2-0.1-0.1-0.1
Inflation rate (GDP deflator, in percent)-1.7-0.32.13.05.71.62.02.92.52.93.02.53.03.03.0
Growth of real primary spending (deflated by GDP deflator, in percent)17.012.216.014.12.72.05.34.06.74.55.74.76.06.05.9
Major commodity price0.00.00.00.00.00.00.00.00.00.00.00.00.00.00.0
Grant element of new external bonowing (in percent)49.347.648.848.049.250.148.851.351.051.1
Sources: Country authorities; and Fund staff estimates and projections.

General government gross debt

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are derived over the past 5 years.

Sources: Country authorities; and Fund staff estimates and projections.

General government gross debt

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are derived over the past 5 years.

Table 2.Cambodia: Sensitivity Analyses for Key Indicators of Public Sector Debt, 2003-2023
EstimateProjections
20032004200520062007200820132023
NPV of Debt-to-GDP Ratio
Baseline6434343535332716
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages6433323232312614
A2. Primary balance is unchanged from 20036434353737373426
B. Bound tests
B1. Real GDP growth is at baseline minus two standard deviations in 20056434363738373122
B2. Primary balance is at baseline minus one standard deviations in 2004-20056434353636342817
B3. Combination of 2-3 using one half standard deviation shocks6434363636352816
B4. Long-run real GDP growth is at baseline minus two standard deviations6434353737373436
B5. One time 30 percent real depreciation in 20046458575654513823
B6. 10 percent of GDP increase in other debt-creating flows in 20046439394040383118
NPV of Debt-to-Revenue Ratio 1/
Baseline496237234231228216177113
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages49623222121521220217294
A2. Primary balance is unchanged from 2003496241242243245238226181
B. Bound tests
B1. Real GDP growth is at baseline minus two standard deviations in 2005496237247247245236205154
B2. Primary balance is at baseline minus one standard deviations in 2004-2005496240240237234222181116
B3. Combination of 2-3 using one half standard deviation shocks496241242239235222180113
B4. Long-run real GDP growth is at baseline minus two standard deviations496239240241242235224244
B5. One time 30 percent real depreciation in 2004496406389370354330252157
B6. 10 percent of GDP increase in other debt-creating flows in 2004496274269265259246201127
Debt-to-GDP Ratio
Baseline7551525352514123
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages7550494948474017
A2. Primary balance is unchanged from 20037552555757575439
B. Bound tests
B1. Real GDP growth is at baseline minus two standard deviations in 20057551565757564832
B2. Primary balance is at baseline minus one standard deviations in 2004-20057552545554524223
B3. Combination of 2-3 using one half standard deviation shocks7552545554524222
B4. Long-run real GDP growth is at baseline minus two standard deviations7552545656565455
B5. One time 30 percent real depreciation in 20047584848381776033
B6. 10 percent of GDP increase in other debt-creating flows in 20047561626361594726
Debt Service-to-Revenue Ratio 1/
Baseline598899106
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages598889106
A2. Primary balance is unchanged from 200359899101210
B. Bound tests
B1. Real GDP growth is at baseline minus two standard deviations in 20055999910118
B2. Primary balance is at baseline minus one standard deviations in 2004-20055989910106
B3. Combination of 2-3 using one half standard deviation shocks5999910106
B4. Long-run real GDP growth is at baseline minus two standard deviations59899101212
B5. One time 30 percent real depreciation in 200451011111112128
B6. 10 percent of GDP increase in other debt-creating flows in 20045910101011127
Debt Service-to-GDP Ratio
Baseline0.71.31.21.31.31.41.50.9
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages0.71.21.11.21.21.31.50.8
A2. Primary balance is unchanged from 20030.71.31.21.31.41.61.81.4
B. Bound tests
B1. Real GDP growth is at baseline minus two standard deviations in 20050.71.31.31.31.41.61.71.2
B2. Primary balance is at baseline minus one standard deviations in 2004-20050.71.31.21.31.41.51.50.9
B3. Combination of 2-3 using one half standard deviation shocks0.71.31.31.31.41.51.60.9
B4. Long-run real GDP growth is at baseline minus two standard deviations0.71.31.21.31.41.61.81.7
B5. One time 30 percent real depreciation in 20040.71.41.61.61.71.81.81.1
B6. 10 percent of GDP increase in other debt-creating flows in 20040.71.31.51.51.51.61.81.0
Sources: Country authorities; and Fund staff estimates and projections.

Revenues are defined inclusive of grants.

Sources: Country authorities; and Fund staff estimates and projections.

Revenues are defined inclusive of grants.

Table 3.Cambodia: External Debt Sustainability Framework, Baseline Scenario, 2000-2023 1/(In percent of GDP, unless otherwise indicated)
ActualHistorical Average 6/Standard Deviation 6/EstimateProjections
2000200120022003200420052006200720082003-08 Average201320232009-23 Average
External debt (nominal) 1/66.867.268.470.846.348.349.949.748.939.921.7
o/w public and publicly guaranteed (PPG)66.867.268.470.846.348.349.949.748.939.921.7
Change in external debt-0.40.31.22.5-24.52.01.6-0.2-0.8-2.0-1.8
Identified net debt-creating flows-3.7-4.8-7.2-2.8-1.31.60.3-0.8-1.5-2.4-2.5
Non-interest current account deficit2.50.80.82.92.22.02.83.43.43.02.61.71.71.8
Deficit in balance of goods and services29.527.827.931.032.329.628.527.426.422.218.4
Exports33.838.139.240.142.139.739.640.040.744.754.3
Imports63.365.967.271.774.569.368.067.467.166.972.7
Net cunent transfers (negative = inflow)-12.8-11.9-11.5-11.31.3-11.7-11.3-11.1-10.7-10.3-9.8-6.8-3.0-5.6
Other cunent account flows (negative = net inflow)-14.2-15.1-15.7-17.9-18.2-15.1-14.4-14.1-14.0-13.7-13.7
Net FDI (negative = inflow)-4.0-3.8-3.5-5.01.7-1.8-1.8-1.8-1.8-1.9-2.1-2.3-3.1-2.5
Endogenous debt dynamics 2/-2.2-1.8-4.5-2.9-2.2-0.1-1.3-1.8-2.0-1.8-1.0
Contribution from nominal interest rate0.40.40.40.40.60.70.70.70.70.50.3
Contribution from real GDP growth-4.5-3.7-3.4-3.4-2.8-0.8-2.0-2.5-2.7-2.3-1.3
Contribution from price and exchange rate changes1.91.4-1.5
Residual (3-4) 3/3.35.28.45.3-23.20.41.30.60.70.40.7
o/w exceptional financing3.30.71.11.0-21.40.00.00.00.00.00.0
NPV of external debt 4/56.958.058.259.428.830.231.532.331.725.915.4
In percent of exports 9/168.6152.5148.4148.068.376.179.680.778.057.928.3
NPV of PPG external debt56.958.058.259.428.830.231.532.331.725.915.4
In percent of exports 9/168.6152.5148.4148.068.376.179.680.778.057.928.3
Debt service-to-exports ratio (in percent) 7/9/1.11.41.31.72.93.13.13.33.53.41.6
PPG debt service-to-exports ratio (in percent) 7/9/1.11.41.31.72.93.13.13.33.53.41.6
Total gross financing need (billions of U.S. dollars)0.1-0.10.00.10.10.10.10.10.10.1-0.1
Non-interest current account deficit that stabilizes debt ratio 8/2.90.5-0.4-0.55.91.51.83.13.43.73.5
Key macroeconomic assumptions
Real GDP growth (in percent)7.05.75.56.52.75.24.31.94.35.55.94.56.06.06.0
GDP deflator in US dollar terms (ehange in percent)-2.8-2.12.3-0.42.40.02.73.01.02.01.92.12.12.1
Effective interest rate (percent) 5/0.60.60.70.60.00.70.91.61.01.51.51.31.41.21.3
Growth of exports of G&S (US dollar terms, in percent)25.116.611.323.013.27.612.4-1.15.69.09.87.210.410.510.4
Growth of imports of G&S (US dollar terms, in percent)20.47.710.118.512.812.311.2-2.44.00.87.56.68.79.58.8
Grant element of new public sector bonowing (in percent)49.347.648.848.049.250.148.851.351.051.1
Memorandum item:
Nominal GDP (billions of US dollars)3.63.74.04.24.54.75.05.45.88.719.2
Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(l+g)]/(l+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value. The restructured debts are excluded in 2002 and 2003.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 5 years.

Debt-services before 2003 are cash basis.

Debt forgiveness in 2004 is excluded.

Excluding garment-related imports and re-exportable imports

Source: Staff simulations.

Includes both public and private sector external debt.

Derived as [r - g - ρ(l+g)]/(l+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value. The restructured debts are excluded in 2002 and 2003.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 5 years.

Debt-services before 2003 are cash basis.

Debt forgiveness in 2004 is excluded.

Excluding garment-related imports and re-exportable imports

Table 4.Cambodia: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2003-23(In percent)
EstimateProjections
20032004200520062007200820132023
NPV of debt-to-GDP ratio
Baseline5929303132322615
A. Alternative Scenarios
A1. Key variables at their historical averages in 2004-23 1/5928272626251810
A2. New public sector loans on less favorable terms in 2004-23 2/5930323536363323
B. Bound Tests
B1. Real GDP growth at baseline minus two standard deviation in 20055929323334332716
B2. Export value growth at baseline minus two standard deviation in 2005 3/5929353737373017
B3. US dollar GDP deflator at historical average minus one standard deviation in 2004-055930343536362917
B4. Net non-debt creating flows at historical average minus one standard deviation in 2004-05 4/5929303132312615
B5. Combination of B1-B4 using one-half standard deviation shocks5929272829292415
B6. One-time 30 percent nominal depreciation relative to the baseline in 2004 5/5941434446453722
NPV of debt-to-exports ratio
Baseline14868768081785828
A. Alternative Scenarios
A1. Key variables at their historical averages in 2004-23 1/14866686765614018
A2. New public sector loans on less favorable terms in 2004-23 2/14871828891907342
B. Bound Tests
B1. Real GDP growth at baseline minus two standard deviation in 200514868768081785828
B2. Export value growth at baseline minus two standard deviation in 2005 3/148681221261271229142
B3. US dollar GDP deflator at historical average minus one standard deviation in 2004-0514868768081785828
B4. Net non-debt creating flows at historical average minus one standard deviation in 2004-05 4/14868757980775728
B5. Combination of B1-B4 using one-half standard deviation shocks14865535657554121
B6. One-time 30 percent nominal depreciation relative to the baseline in 2004 5/14868768081785828
Debt service ratio
Baseline1.72.93.13.13.33.53.41.6
A. Alternative Scenarios
A1. Key variables at their historical averages in 2004-23 1/1.72.93.02.93.13.43.31.1
A2. New public sector loans on less favorable terms in 2004-23 2/1.72.93.23.43.84.24.32.5
B. Bound Tests
B1. Real GDP growth at baseline minus two standard deviation in 20051.72.93.13.13.33.53.41.6
B2. Export value growth at baseline minus two standard deviation in 2005 3/1.72.94.24.54.75.14.82.6
B3. US dollar GDP deflator at historical average minus one standard deviation in 2004-051.72.93.13.13.33.53.41.6
B4. Net non-debt creating flows at historical average minus one standard deviation in 2004-05 4/1.72.93.13.03.23.53.41.6
B5. Combination of B1-B4 using one-half standard deviation shocks1.72.72.52.32.52.72.61.2
B6. One-time 30 percent nominal depreciation relative to the baseline in 2004 5/1.72.93.13.13.33.53.41.6
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/5050505050505050
Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Source: Staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1.Cambodia: Indicators of Public Debt Under Alternative Scenarios, 2003-2023 1/

(In percent)

Source: Staff projections and simulations.

1/ Most extreme stress test is test that yields highest ratio in 2013.

2/ Revenue including grants.

Figure 2.Cambodia: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2003-2023

(In percent)

Source: Staff projections and simulations.

1/ Debt service in 2003 is cash basis. The difference between cash and accrual basis comes from arrears for the U.S. and the Russian Federation.

ANNEX III Cambodia: World Bank Policy Dialogue and Its Relation with the IMF1

The World Bank’s policy dialogue in Cambodia covers public financial management, private sector development, legal and judicial reform, military demobilization, the national poverty reduction strategy, rural development, decentralization, the national transportation strategy, governance and anti-corruption, and forestry management. The pace of the Bank’s dialogue has been affected by delays in forming a government since the July 2003 elections.

National Poverty Reduction Strategy (NPRS)

Following completion of the NPRS in December 2002, the JSA was presented to the Board in February 2003, and highlights a number of strengths and challenges/weaknesses, some of which the government, with the Bank support, has worked to address. The Bank provided technical assistance (TA) and financial support to the General Secretariat of the Council for Social Development (GSCSD) in the Ministry of Planning (MoP) under an IDF grant, and has also mobilized a multi-donor trust fund to continue this support and supported the wide dissemination of the NPRS at local levels. The TA has focused on coordinating inputs from donors and government on the annual progress report (APR) for the NPRS, and specifically on updating the policy action matrix and integrating the NPRS and the Cambodian Millenium Development Goals (CMDG) indicators into one monitoring framework. The WB/IMF have consolidated comments on two drafts of the APR to the government and prepared a joint JSA.

The Bank is assisting in the design of the NPRS architecture, a roadmap for implementing the NPRS and developing the government’s next five year strategy (2006-2010). As part of this process, the Bank has been convening informal donor meetings to discuss the restructuring of the Technical Working Groups (TWGs) and planning an inclusive participatory process for producing the National Poverty Assessment (NPA) 2005, which will combine the results (Poverty Profile) of the current Cambodian Socio-Economic Survey (CSES) (which the Bank is supporting along with UNDP and SIDA), as well as participatory, qualitative poverty assessments currently being undertaken by ADB and WB. The NPA will aim to ensure broad-based buy-in from all stakeholders and form the analytical basis for the next five year plan.

The NPRS process has been challenging from the start, and most recently due to delayed formation of the government. In addition, there has been confusion as to the respective roles of MOP and MEF in the NPRS process. As a result the Bank has not been able to proceed with a formal dialogue regarding the NPRS architecture and the National Poverty Assessment, but these will be taken up with the new government.

Other Poverty and Gender Initiatives. The Bank is coordinating a multi-stakeholder PSIA on Social Land Concessions as key policy reform issue, and is preparing a Land Allocation for Social and Economic Development project. The Bank has recently completed a Country Gender Assessment (in collaboration with ADB/UNDP/UNIFEM). The Bank has provided an IDF grant to the Ministry of Women’s and Veterans’ Affairs (MoWVA) for building capacity for gender policy analysis and gender budgeting.

Public Financial Management. The Government and some partners have worked to prioritize reforms to the public expenditure and financial management system following Technical Cooperation Assistance Program (TCAP) and the joint WB-ADB Integrated Fiduciary Assessment and Public Expenditure Review, 2003 (IFAPER). A joint effort of ten of Cambodia’s development partners committed in January 2004 to assist in strengthening the Government’s ability to lead and implement this agenda and to provide fully coordinated support via a sector wide approach (SWAp). The collaborative approach is supported by the Public Expenditure and Financial Accountability (PEFA) secretariat, as envisioned in the recent Bank-Fund board paper.2 It is expected that the Government will develop a prioritized, sequenced, and costed annual PFM work program (on a rolling basis) over the new few months with implementation starting in August 2004 or so.

The IFAPER, which is the basis for the Bank’s engagement in this sector, found that though Cambodia has made significant headway in reforming public expenditure policy and management, it will have to make much more progress on three principal fiscal, fiduciary, and institutional challenges in order to implement its development agenda. Indeed, in comparative perspective, Cambodia’s PFM system ranks below average (as compared to the low income countries assessed by a joint World Bank-IMF diagnostic tool), indicating the need for substantial upgrading. (move this paragraph first).

Civil Service Reform. The IFAPER found serious problems afflicting the civil service—low pay, pay compression, low skills, and thus low capacity. Low public sector wages provide a breeding ground for corrupt practices and low pay is a leading cause of Cambodia’s relatively poor standing on public sector performance. The World Bank’s CPIA ranks Cambodia in the fourth lowest quintile among fellow low income countries on issues pertaining to public sector management and institutions. Though the Government has recently made some progress, including an increase in average remuneration in 2002, carrying out of a civil service census, and the development of an automated payroll system, much more is required. In some of these areas, such as workforce control, key measures such as the introduction of an establishment register will allow the Government to build productively on its previous successes, while in other areas, notably pay and employment policy, the Government will be challenged to push itself farther and faster than currently envisioned. Decompression of salaries coupled with average salary increases is a key element of the Government’s reform program.

The Bank has provided the Government with a significant amount of grant funding to carry out an agreed set of studies that would provide the analytical groundwork for reform. These studies cover: (i) labor market pay comparator analysis, (ii) pay and employment sustainability analysis, (iii) reallocation and retrenchment analysis, (iv) development of a functional analysis methodology and its application to select ministries, and (v) preparation of an establishment register. Work on the studies has only recently commenced and is thus far behind schedule.

Private Sector Development. While there is broad appreciation for efforts to improve the foreign investment regime, develop a pro-poor trade strategy, and create a Private Sector Forum to facilitate a reform dialogue with the private sector, the Government needs to place a higher priority on structural reforms to support sustainable, private-led growth. The Bank, working with the MPDF, IFC and PPIAF, has provided an input to the Government’s Private Sector Development Strategy through an Investment Climate Assessment and Value Chain Analysis. The objective of this effort is three-fold: to remove impediments to productivity growth, to help diversify the economy, and to increase the role of the private sector in service delivery. The findings of the work to date have identified overlapping trade facilitation, inspection, and licensing processes of various agencies as contributing to an excessive regulatory burden and a high incidence of corruption associated with the Cambodian investment climate. In light of these findings, the Bank is focusing its efforts on operationalizing the reform recommendations through a potential SWAp on private sector development. Initial focus areas for the SWAp are trade facilitation, inspection mandates, reform of PPI governance arrangements, and value chain development.

Legal and Judicial Reform, Governance, and Anti-Corruption. With support from the Bank, the Government devised a Legal and Judicial Reform (LJR) Strategy in 2002 that was formally adopted in June 2003 and published an ambitious draft Plan of Action. This plan was then the subject of a Government-sponsored National LJR Workshop in December 2003. Various follow-up working groups have proposed action plan interventions that are now being prioritized with a view to fixing a sequenced work program for the remainder of 2004 and beyond with emphasis on: (a) access to legal and judicial services and the collection and dissemination of relevant legal and judicial information; (b) empowering the market economy and legal and judicial reforms in support of private sector development; and (c) the creation and support of alternative dispute resolution mechanisms.

Both external and internal perception-based surveys indicate high levels of corruption in Cambodia. The 2001 Governance Action Plan (GAP) was seen as a road map to guide a comprehensive reform of governance in Cambodia. The GAP covered five cross-cutting issues: legal and judiciary system, public administration, decentralization and deconcentration, public finance, anti-corruption and gender issues, and two sectoral areas of special focus, armed services reform and natural resource management (land, forestry and fisheries). The NPRS notes that the GAP was a comprehensive and ambitious program and that “controlling and eliminating corrupt practices is a long term and difficult process.” While some ground work has been done in many areas, it has not as yet amounted to significant action that shifts the incentives in a way that discourages corrupt behavior.

The Bank’s new Country Assistance Strategy (CAS) will focus on four key cross-cutting areas that have strong linkages to a governance agenda: (i) improved public financial management and public administration reform, (ii) private sector development, (iii) improved local governance and accountability, and (iv) improved access of the poor to productive assets. To be included in the Bank’s assistance program, interventions will need to support reforms and results in at least one of these four areas.

Military Demobilization. The first phase of the full-scale demobilization program was completed early 2003 with the distribution of the reintegration packages to 15,000 demobilized soldiers. At the same time, the second phase was postponed for various reasons including the proximity of elections, and an investigation by Bank’s Institutional Integrity Unit. In June 2003, the Bank declared misprocurement on a contract for $6.9 million resulting in the cancellation of $6.3 million from the IDA credit, and a further $0.6 million from a Dutch Grant. A total of almost $2.8 million dollars is required to be repaid by the government to the Special Account. The Government has postponed the next phase of the Demobilization program since early 2003. Discussions on the future of the program will take place once the new government has been formed. If a decision is made to continue with the program, and with the IDA funding, several outstanding areas of concern including the inflated payroll lists, and the project design, will need to be addressed.

Transportation Sector Strategy. Despite significant diagnostic work and investment in reconstruction and development of infrastructure, transport remains a constraint to overall as well as equitable growth. There is no agreed transport sector strategy and Cambodia’s management of its considerable transport assets remains poor. The transport sector strategy note, originally developed with the ADB’s support, is currently being updated with Bank support and will take stock of the current state of the sector, including the Government’s views and priorities, the areas of engagement of other donors, the views of transport users, consultant assessments and the like. The resulting note will serve as input to the joint CAS process, suggest possible avenues for Bank and other donor engagement in the sector over the next 3 to 5 years. This informal note will be completed before the end of the current FY.

World Bank-IMF Collaboration

Bank-Fund collaboration in Cambodia takes place at two levels: (i) through the policy-based lending program; and (ii) through analytical and advisory services. It is expected that there will be close coordination between the Fund’s upcoming PRGF program and the Bank’s proposed PRSC. The first PRSC is likely to focus on public financial management and private sector development (and subsequent PRSCs would broaden the coverage to priority sectors). It is expected that the Bank and Fund will work under streamlined conditionality arrangements. Lending operations and non-lending instruments are described in the following tables. The Bank’s current portfolio grew from 10 to 18 credits over the previous CAS period, rising from US$245 million to $364 million, supporting a sectorally and geographically diverse set of projects. Disbursement levels have been above the average for the region. The new CAS is expected to go to the Board in January 2005.

World Bank’s Main Non-Lending Services: Issues and Instruments(Recently completed and ongoing, as of July 2004)
IssueInstrument
Civil Service ReformIFAPER (2003), PHRD grant on public sector reform (ongoing), IDF grant on civil service reform (ongoing), and pay and employment study on the education sector (to be completed in 2005).
EnvironmentCambodia Environment Monitor (2003), Phase II Cambodia, Lao PDR and Vietnam Poverty-Environment Nexus Study (ongoing).
GenderCambodia Gender Assessment (April 2004), and IDF grant on gender (ongoing).
GovernanceGovernance and Corruption Diagnostic Report (2001), IDF grant on governance (2002), and PHRD grant on public sector reform (ongoing).
Human DevelopmentPSIA on evaluating conditional means-tested school subsidies (ongoing), “Quality Basic Education for All” study on determinants of schooling participation (ongoing), and PHRD grant on social sector reform (ongoing).
Legal and Judicial ReformJustice for the Poor study (to be completed by early 2005)
Poverty Reduction and EconomicsPoverty Assessment (2000), PRSP/JSA (February 2003), APR/JSA (September 2004), IDF grant on poverty reduction (completed 2003), Poverty Reduction Strategy Trust Funds (ongoing), Sources of Growth (to be completed by mid-2005), Moving out of Poverty study (to be completed in late 2005), National Poverty Assessment (to be completed in late 2005), and PSIA on WTO Accession (to be completed by early 2005).
Private Sector Development and TradeFIAS report on FDI (2001), Integration and Competitiveness Study (2002), Seizing the Global Opportunity: Investment Climate Assessment and Reform Strategy (June 2003), and PPIAF grant to develop an interim regulatory framework (ongoing).
Public Financial ManagementIFAPER (2003), Policy and Human Resource Development (PHRD) grant on public sector reform (ongoing), Country Procurement Assessment Report (2004), Public Expenditure Tracking Survey—Education (to be completed by mid-2005), and IDF grant to assist with development of private sector accounting capacity.
Rural and AgricultureRice Value Chain Study (2002), PSIA on social land concessions (2004), Rural Sector Strategy (2004).
IDA: Commitments and Disbursements to Cambodia(In millions of dollars, as of July 8, 2004)
ProjectEffective DateCommittedDisbursed
Credits:
Emergency Rehabilitation Project [Closed]January 13, 199462.7062.70
Technical Assistance Project [Closed]March 23, 199517.0017.00
Economic Rehabilitation Credit Project [Closed]December 18, 199540.0040.00
Phnom Penh Power Rehabilitation Project [Closed]December 20, 199540.0040.00
Social Fund Project [Closed]December 21, 199520.0020.00
Urban Water Supply ProjectJune 2, 199830.9630.88
Road Rehabilitation ProjectJune 14, 199945.3132.69
Social Fund Project (02)July 7, 199925.0024.84
Northeast Village Development ProjectNovember 11, 19995.004.85
Education Quality Improvement ProjectDecember 20, 19995.004.10
Structural Adjustment Credit Project [Closed]March 28, 200030.0030.00
Biodiversity & Protected Area ProjectMay 3, 20001.910.80
Forest Concession Management and Control Pilot ProjectOctober 20, 20004.822.62
Flood Emergency Rehabilitation ProjectJune 4, 200135.0028.21
Social Fund Project (02)September 27, 200110.009.69
Land Management and Administration ProjectJune 19, 200224.300.61
Demobilization and Reintegration ProjectJuly 1, 200218.407.69
Economic and Public Sector Capacity Building ProjectFebruary 10, 20035.50-0.72
Health Sector Support ProjectAugust 14, 200317.200.21
Rural Investment and Local Governance ProjectSeptember 16, 200322.002.57
Provincial and Peri-Urban Water and Sanitation ProjectNovember 16, 200316.90-0.50
Provincial and Rural Infrastructure ProjectMarch 16, 200420.000.30
Rural Electrification And Transmission [Approved]40.00-1.09
Total Credits537.00358.09
Grants:
Disease Control and Health Development [Refinanced]July 4, 19961.501.50
Agriculture Productivity Improvement ProjectJune 20, 199727.0020.71
Disease Control and Health Development [Closed]June 23, 199730.4030.40
Social Fund Project (02)June 9, 19980.400.40
Road Rehabilitation ProjectOctober 29, 19980.350.35
Demobilization and Reintegration Project [Closed]August 17, 20000.350.35
Provincial and Rural Infrastructure Project [Refinanced]July 6, 20010.210.21
Rural Electrification And Transmission ProjectNovember 6, 20010.290.29
Provincial and Rural Infrastructure ProjectSeptember 9, 20020.110.11
Health Sector Support ProjectAugust 14, 20037.800.65
Health Sector Support ProjectAugust 14, 20032.00-0.14
Provincial and Peri-Urban Water and Sanitation ProjectNovember 16, 20033.00-0.38
Total Grants73.4154.45
ANNEX IV Cambodia: Relations with the Asian Development Bank

From 1992 through June 2004, the Asian Development Bank (AsDB) approved $773.6 million in low-interest loans to Cambodia to finance 26 projects and 5 structural reform programs. To date 10 projects, for a total of $256.0 million, have been completed: (i) the Special Rehabilitation Assistance Project [approved in 1992]; (ii) Power Rehabilitation Project [approved in 1994]; (iii) Agriculture Sector Program [approved in 1996]; (iv) Basic Skills Project [approved in 1995]; (v) Rural Infrastructure Improvement Project [approved in 1995]; (vi) Basic Education Text Book Project (approved in 1996); (vii) Basic Health Services Project [approved in 1996]; (viii) Phnom Penh Water Supply and Drainage Project [approved in 1996]; (ix) Siem Reap Airport Project (approved in 1996); and (x) Financial Sector Program, Subprogram I [approved in 2001]. Of the remaining loan projects, $251.8 million were for economic infrastructure, $107.0 million for social infrastructure, and $118.81 million for agriculture and rural infrastructure, and $40 million for finance and governance.

During the same period, the AsDB also designed and administered 113 technical assistance projects amounting to $73.5 million. They were financed through grants from the AsDB ($27.4 million), the Japanese Special Fund ($32.8 million), and other sources ($13.3 million). In 2003, the AsDB approved five national loans: Agriculture Sector Development Program; Agriculture Sector Development Project; Northwest Irrigation Project; GMS Power Transmission; and Provincial Towns Improvement (Supplement).

The AsDB’s draft Country Strategy and Program (CSP) for 2005-2009 has been developed in close collaboration with the World Bank and DFID and senior government officials at technical level. The draft CSP will focus on pro-poor sustainable growth, social development, and good governance. The AsDB will foster broad-based economic growth through investments in physical infrastructure, support for greater regional integration, sustainable development of small and medium-scale enterprises and investments in agriculture. It aims to improve the welfare and reduce vulnerability of the poor through increasing their access to physical assets, land, human capital and services. It’s work on governance will concentrate on directly supporting improvements in public financial management, decentralization and deconcentration initiatives, and improving public service delivery. These will be accomplished through AsDB’s program of assistance in the following four priority sectors: (i) agriculture and water resources; (ii) education; (iii) finance; and (iv) transport. The draft CSP has its geographical focus in the Tonle Sap Basin.

AsDB: Loan Commitments and Disbursements to Cambodia, 1992-2004(In millions of U.S. dollars)as of June 30, 2004
Loan ApprovalsContract Awards/CommitmentsDisbursements
199267.70.00.0
19930.04.45.4
199428.235.912.2
199545.128.135.9
1996105.015.332.1
19970.041.510.7
199840.029.129.3
199988.017.026.2
2000109.6114.250.8
200175.240.748.3
2002116.564.478.9
200398.362.073.3
2004 (projected)45.083.4103.2
Total818.6536.0506.3
ANNEX V Cambodia—Statistical Issues

Extensive technical assistance from the Fund, the UNDP, the AsDB, and the World Bank has contributed to substantial improvements in macroeconomic statistics. Since October 2001, a long-term IMF advisor was placed in the National Institute of Statistics (NIS) to assist the authorities in upgrading economic and financial statistics. An expanded edition of the statistical yearbook was published in September 2003. An IFS page for Cambodia has been published since April 1996. In March 2002 Cambodia began participation in the Fund’s General Data Dissemination System, and Cambodia’s metadata were posted on the Dissemination Standards Bulletin Board. Despite significant shortcomings in some areas, core data are generally adequate for program design and monitoring and are provided on a timely basis.

National accounts. Official GDP estimates are provided annually under peripatetic expert support from the AsDB. Revised national accounts series for 1993-2002 were officially released in July 2003. The quality of GDP estimates remains hampered by the lack of comprehensive and reliable sectoral information. A National Accounts Concepts, Sources and Methods Manual was finalized and submitted for publication.

Prices. The NIS provides a monthly CPI with a five-week lag. NIS has recently updated the CPI for Phnom Penh with new expenditure weights (July-December, 2000 = 100). In addition, the NIS has compiled a quarterly urban CPI for five major provincial cities and Phnom Penh since July 2000. An ongoing project, financed by the AsDB and supported by STA, is developing a quarterly producer price index commencing in December 2003.

Government finance statistics. The Ministry of Economy and Finance provides monthly fiscal data broadly based on GFS standards on a timely basis with a four-week lag. There are still weaknesses regarding the reliability of data sources, the coverage and the economic and functional classifications of expenditure. Donor-specific data on investments financed by project are available only with considerable lags. Further improvements will require an increase in human resources devoted to government finance statistics compilation and will depend heavily on the ongoing measures to improve expenditure management, including a revision of public accounting.

The authorities have provided monthly fiscal data for publication in IFS since 2001. The last reported data are for December 2002.

Monetary statistics. The NBC provides data on the monetary authorities and deposit money banks on a monthly basis with a four-week lag. An IMF mission in April 2002 assisted the authorities in strengthening the framework for compiling monetary statistics. In addition to the accounts of the monetary authorities and deposit money banks, the NBC also compiles the sectoral balance sheet for central bank and a central bank survey. It plans to compile a depository corporations survey in accordance with the methodology recommended in the IMF’s Monetary and Financial Statistics Manual after all banks have fully implemented the uniform chart of accounts.

External sector statistics. The NBC is responsible for compiling balance of payments statistics. Customs data have substantial coverage and valuation problems arising from the nonrecording of nondutiable imports, under reporting of re-exports, and the weakness of customs controls. While there have been improvements in the quality of foreign direct investment data, private capital flows are believed 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. Data on external debt are provided by the Ministry of Economy and Finance, but timely information on disbursements by bilateral donors is weak. In January 2003, the authorities implemented an International Transactions Reporting System (ITRS) to collect data on international transactions via the banking system to improve balance of payments estimates. A balance of payments mission in March-May 2004 reviewed source data used for compiling the balance of payments and recommended improvements.

Cambodia: Core Statistical Indicators as of July 27, 2004
Exchange RatesInternational Reserves1Central Bank Balance SheetReserve/Base MoneyBroad MoneyInterest RatesConsumer Price IndexExports/ImportsCurrent Account BalanceOverall Government Balance2GDP/GNPExternal Public Debt/Debt Service
Date of Latest ObservationJul. 25Jun. 2004May 2004May 2004May 2004May 2004May 2004Mar. 2004Dec. 2003Dec. 20032003 preliminaryDec. 2003
Date ReceivedJul. 6, 2004Jul. 6, 2004Jul. 6, 2004Jul. 6, 2004Jul. 6, 2004Jul. 6, 2004Jul. 6, 2004Jul. 6, 2004May 11, 2004May 11, 2004May 11, 2004May 11, 2004
Frequency of DataDailyDailyMonthlyWeeklyMonthlyMonthlyMonthlyQuarterlyQuarterlyMonthlyAnnualMonthly
Frequency of ReportingDaily one-day lagDaily one-day lagMonthly five-week lagWeekly one-week lagMonthly five-week lagMonthly five-week lagMonthly five-week lagDuring missionsDuring missionsMonthly one-month lagAnnualMonthly eight-month lag
Source of DataNBCNBCNBCNBCNBCNBCNISNBCNBCMEFNISMEF
Mode of ReportingFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFaxDuring missionsFax or Email
ConfidentialityNoYesNoNoNoNoNoNoNoNoNoYes
Frequency of PublicationDailyN/AMonthlyMonthlyMonthlyMonthlyMonthlyAnnuallyAnnuallyAnnuallyAnnuallyN/A

Refers to gross and net international reserves.

Refers to general government balance.

Refers to gross and net international reserves.

Refers to general government balance.

ANNEX VII Cambodia—Summary of Technical Assistance Provided by the Fund, 1999-June 2004
PurposeAssistance and Timing (person-months)
Fiscal
  • Tax policy and customs administration
September 1999; (2)
  • Technical Cooperation Action Plan (TCAP) mission
March-April 2000; (3¾)
  • Tax administration and policy
March 2001; (1)
  • Public expenditure management
April 2001; (1)
  • Long-term customs advisor
April 2001; (21)
  • Long-term treasury advisor
August 2001; (14)
  • Long-term tax advisor
October 2001; (14)
  • Income tax changes regarding new Law on Investment
April 2002; (½)
  • Review of draft customs law
May 2002; (¼)
  • Long-term budget advisor
August 2002; (6)
  • Tariff restructuring
October 2002; (1)
  • Regulations on taxation
November/December 2002; (¾)
  • Customs administration
May 2003; (½)
  • Budget advisor
July-August 2003; (½)
  • Revenue mobilization
August/September 2003; (1)
  • Tax policy and administration
August-October 2003; (3)
  • Customs administration expert
October-November/Dec. 2003 (1)
  • Tax administration
November 2003; (¼)
  • Budget advisor
December 2003; (7)
  • Tax administration expert
February 2004; (2)
  • Tax administration follow-up
February-March 2004; (½)
  • Tax administration IT
February 2004-February 2005 (4)
  • Customs administration
March 2004-January 2005 (4)
  • Budget management
December 2003-June 2004 (6)
  • Treasury advisor
June-November 2004 (6)
Monetary
  • General advisor
1999; (1)
  • Bank supervision advisor
2000 - 2002; (1)
  • Banking system restructuring
April 2001; (1)
  • Banking system restructuring and payments system development
August and November 2001; (2)
  • Law on negotiable instruments and payment transactions
March and May 2002; (½)
  • Banking system restructuring and supervision
July and December 2002; (2)
  • Foreign exchange management
September 2002; (¾)
  • Banking system restructuring and accounting
January 2003; (1)
  • Banking, accounting and foreign exchange management
April 2003; (2)
  • Banking supervision expert
November 2003; (6+12)
  • Banking, accounting and foreign exchange management
December 2003; (1)
  • AML/CFT
December 2003; (¼)
  • Accounting
May 2004; (½)
  • Mission on Central Bank internal audit
June 2004; (1)
Statistics
  • Government finance statistics
April 2001; (1)
  • Long-term multisector statistics advisor
November 2001; (12)
  • General data dissemination system
November -December 2001; (1)
  • Monetary statistics
March -April 2002; (1)
  • Balance of payments compilation expert
April-June; Oct.-Nov. 2002; (6)
  • Balance of payments compilation expert
March-May 2003; (3)
  • Producer price statistics
July-August 2003; (1)
  • Consumer price index
October 2003; (½)
  • GFS follow-up
December 2003; (½)
  • Multisector statistics advisor
January 2004; (12)
  • Balance of payments statistics
March 2004; (½)
Legal
  • Insolvency Law
November 2000; (½)
  • Insolvency Law
July 2001; (½)
  • Insolvency Law
February and December 2002; (1)
  • AML/CFT
December 2003; (¼)
Finance
  • Safeguards assessment
January 2004; (¾)
1Hun Sen’s party solidified its seats in the July 2003 national elections but not by enough to rule. A power-sharing agreement with one of the main opposition parties in June 2004 paved the way to the formation of a new coalition government in mid-July 2004.
2Tax collection by the customs department declined from an average 15 percent of retained non-garment imports in 2001-02 to below 13 percent in 2003 (notwithstanding the modest decline in the unweighted average tariff, which is estimated to have negligible revenue implications).
3See Chapter 2, “Implications of Removal of Quotas in 2005,” in the accompanying Selected Issues paper, which shows Cambodia to be one of the most vulnerable countries among Asian low-income countries to the garment quota elimination.
4Chapter 4, “Pro-Poor Exchange Rate Policy: a Poverty and Social Impact Analysis,” in the Selected Issues paper discusses the potential impact on the poor from different policy responses to the quota elimination.
5If reaching an agreement is further delayed, Cambodia’s external cash flow position will improve in the near term to the extent that the current interest charges on the stock of debt (which are largely in arrears) are negligible.
6The measures include subjecting all telecom charges and airline tickets to a 10 percent excise, and introducing a specific tax on kerosene, bicycles, and air-conditioners at 10 percent. The full-year revenue impact of these measures could be as high as 0.35 percent of GDP. However, faced with strong resistance, the authorities are not yet fully enforcing these measures. Moreover, the announced increase in the ad-valorem tax on beer from 20 percent to 30 percent has been put on hold.
7While comprehensive data are not available, the mission estimated total domestic arrears at end-2003 to be around 3 percent of GDP, including unsettled outstanding operations from previous years and payment orders during 2003 in excess of cash released.
8The mission estimated that foregone revenue from three key contracts signed in recent years could be as much as $15 million a year.
9“Seizing the Global Opportunity: Investment Climate Assessment and Reform Strategy,” June 2003.
10In view of the political impasse, the WTO has granted an extension to September 2004, by which time the accession package needs to be adopted by parliament (Table 7).
11Lack of enforcement of property rights is reported to have favored those with power, rather than small farmers, in land disputes.
12The accompanying EPA report was prepared by a separate team led by Mr. Valdivieso (APD).
1Standard Fund templates for low income countries and sensitivity tests are used to assess Cambodia’s debt dynamics. Tests involve applying temporary deviations of key variables from the baseline with magnitudes based largely on historical deviations.
1Contact person on this note: Mr. Rob Taliercio, World Bank (473-0071)
2“Bank/Fund Collaboration on Public Expenditure Issues,” February 14, 2003.

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