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Chapter 6. First Things First: Creating and Safeguarding Fiscal Space

Author(s):
Olaf Unteroberdoerster
Published Date:
February 2014
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Tubagus Feridhanusetyawan and Jookyung Ree

In this chapter we describe Cambodia’s main fiscal challenges and outline policy priorities over the near and medium term. The chapter focuses on three main issues: mobilizing revenue to rebuild fiscal space; managing public debt to safeguard that space and ensure fiscal and debt sustainability; and strengthening public financial management to improve the effectiveness of government spending. We provide cross-country comparisons to illustrate Cambodia’s performance and the scope for improvement in the above areas relative to comparator countries in Asia.

The Fiscal Setting

Prudent fiscal policy and debt management serve as the bedrock of macroeconomic stability, given Cambodia’s high degree of dollarization and the limited role of monetary policy. Since the process of dedollarization and the development of more effective monetary policy will take time, sound fiscal policy and debt management will continue to play a critical role in anchoring macroeconomic stability. Sound fiscal policy is also important to generate the resources needed to achieve long-term development objectives and promote more inclusive growth by improving equity and alleviating poverty. At the same time, sound public debt management will help ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk. In fact, Cambodia’s prudent public debt management has helped preserve macroeconomic stability for the past decade, although the rapidly growing contingent liabilities related to the development of large power projects will create new challenges in the future.

Cambodia’s fiscal space—the room in its government budget to provide resources for fiscal policies—has declined substantially since 2009, and the progress of fiscal consolidation has been slow (Figure 6.1). Due to the absence of a market for government securities, government deposits serve as an important anchor for fiscal policy and as a buffer against shocks.1 There was a rapid increase in government deposits during 2005–08, but the fiscal easing to mitigate the impact of the global financial crisis in 2008–09 used up a substantial part of this fiscal buffer. Cambodia has sought to rebuild government deposits since the crisis, but fiscal consolidation has been slow and the stock of government deposits relative to GDP continued to decline until 2011. Although revenue performance was exceptionally strong in 2012 and government deposits started to increase relative to GDP, the deposits remained at about 60 percent of their peak in 2008.

Figure 6.1Fiscal Revenue and Government Deposits

(Percent of GDP)

Sources: Cambodian authorities; and IMF staff estimates.

Against this background, continued fiscal consolidation over the medium term remains the top priority (Figure 6.2). Fiscal and debt management will need to strike a balance between: (i) rebuilding fiscal buffers through effective revenue mobilization; (ii) maintaining prudent current spending while providing enough resources for large development needs; and (iii) ensuring long-run public debt sustainability. To these ends, the government of Cambodia should

Figure 6.2Medium-Term Fiscal Outlook

(In percent of GDP)

Sources: Cambodian authorities; and IMF staff estimates and projections.

  • continue to replenish the fiscal buffers in 2013 to lock in the gains from increased revenue received in 2012 and pave the way for further fiscal consolidation;
  • implement a comprehensive revenue mobilization strategy to help achieve the goal under the Public Financial Management Reform Program (PFMRP) to raise domestic revenue by half a percentage point of GDP annually over the medium term;
  • maintain broadly constant overall fiscal expenditure, relative to GDP, allowing the overall fiscal deficit to decline gradually by half a percentage point of GDP annually over the medium term and government deposits to rebound to 5–6 percent of GDP; and
  • continue prudent debt management and careful management of fiscal risks by monitoring contingent liabilities to help safeguard fiscal space and preserve debt sustainability.

All these efforts need to be complemented by the consistent implementation of public financial management reforms both to improve the efficiency and equity of government spending and to strengthen governance. The remainder of this chapter discusses in greater detail the above fiscal challenges and policy priorities that Cambodia faces.

Fiscal Challenges

Near-Term Challenges

Cambodia’s main fiscal challenge in the near term is to rebuild its fiscal buffers, which have been running thin in the aftermath of the 2008–09 global financial crisis. Fiscal easing to support aggregate demand during the crisis was financed by external loans and a drawdown of government deposits. Despite a strong fiscal performance in 2012, progress in fiscal consolidation has been slow, partly because of weak revenue performance up to 2011 and partly because additional spending was needed to address the destructive floods in 2011. As a result, most of the buildup in fiscal buffers during the period of strong fiscal consolidation in 2005–08 was depleted. Government deposits continued to decline, falling from nearly 8 percent of GDP in 2008 to 4½ percent in 2011, before increasing to nearly 5 percent of GDP at end-2012 (Figure 6.3).

Figure 6.3Government Deposits

(In percent of GDP)

Sources: Cambodian authorities; and IMF staff estimates.

Although the stock of government deposits remains above the minimum level needed to withstand shocks, which is estimated at 2¾ percent of GDP,2 fiscal space has become more limited. This reduction in Cambodia’s fiscal buffers has important bearings on its vulnerability, particularly given the still fragile global recovery, subjecting Cambodia’s economic outlook to considerable risks.

Medium-Term Challenges

Turning to medium-term challenges, Cambodia’s fiscal revenue, particularly tax collection, remains low by regional standards (Figure 6.4). Tax revenue—at almost 11 percent of GDP during 2010–12—is much lower than that in other low-income countries, including those in the region, indicating a large scope for improvement. Cambodia has also relied more on indirect taxation (e.g., value-added tax (VAT), excise taxes, and trade taxes), which contributes to about 80 percent of total taxes, a rate much higher than the regional average of 60 percent. This suggests a need to focus on increasing collections from direct taxation, such as through income, profit, and wealth taxes.

Figure 6.4Tax Revenue Indicators

Sources: Country authorities; and IMF staff estimates.

Note: LICs = low-income countries; VAT = value added tax.

Cambodia’s tax regime is competitive, but there are various tax exemptions, all contributing to a generally low tax take. The VAT rate is 10 percent, slightly lower than the regional average of about 12 percent. Direct tax rates are also typically lower than regional averages, with the corporate tax rate at 20 percent as compared with a range of 25 to 30 percent in the rest of the region. The highest personal income tax rate is at 20 percent, compared with a range of 25 to 45 percent in the region. Like many other countries in the region, Cambodia provides several types of tax incentives, including income tax holidays and exemptions from VAT, import duties, and excises for qualified investment projects. Companies operating in its Special Economic Zones are also entitled to import duty exemptions for production equipment and inputs and construction materials. These tax incentives involve a loss of current and future revenue, create inefficiencies, and produce opportunities for tax abuse and corruption, especially in a country where policy implementation is fragmented and weak.

Improving Tax Revenue

Various indicators suggest that improving tax productivity and tax efforts could generate substantial revenue gains.3 Estimates of the productivity of Cambodia’s corporate income tax and VAT are at around 0.04 and 0.30, respectively, below the regional average of 0.15 and 0.45.4 Another indicator of tax performance is tax effort, calculated as the actual tax collected relative to the estimated tax capacity, which is the maximum tax revenue for a country given its economic, social, institutional, and demographic characteristics. Cambodia’s tax effort, estimated at 0.35, also falls short of the regional average of 0.50, suggesting that it could raise revenue by 6½–8 percent of GDP by aligning itself with the regional standards. This estimate is broadly consistent with another study, which shows that Cambodia’s revenue-to-GDP ratio is about 5–7 percentage points below its potential (Box 6.1).

Although regional comparators provide only rough indicators and should be interpreted with caution, they suggest that by taking firm policy actions Cambodia could substantially increase revenue collection. They also indicate that while the scope for raising the tax yield is substantial, efforts will be needed in both tax policy reform and improved administration.

The pressure to increase revenue collection will become greater over time, as the base for trade taxes shrinks with the implementation of the ASEAN free trade area. Trade taxes, mostly in the form of import and export duties, contributed to about one-fifth of tax revenue during 2010–12. Since Cambodia is expected to eliminate its tariffs on goods imported from other ASEAN countries starting in 2015, the collection of trade taxes is projected to decline. However, the magnitude of this adverse impact is hard to estimate considering that the ASEAN free trade area trade preferences have been generally underutilized by ASEAN members, reflecting the costs of proving conformity with the rules of origin and uncertainties concerning the application of the system.

Further pressure on the revenue side arises from the fact that Cambodia has relied heavily on donor support, which is expected to decline over the medium term. Current and capital grants contributed to about one-fourth of total revenue in recent years, a substantially larger figure than the figure in comparator countries (Figure 6.5). This excludes other off-budget support, for example technical cooperation and assistance to nongovernmental organizations (NGOs). As Cambodia progresses toward middle-income status, donor support is expected to taper off, requiring the government to rely more on its own resources to meet development needs.

Figure 6.5Grants to Asian Low-Income Countries

(In percent of total revenue)

Sources: Country authorities; and IMF staff estimates.

Note: LICs = low-income countries.

1 Average of Bangladesh, Bhutan, Mongolia, and Nepal.

Composition of Spending

On the expenditure side, the composition of spending is comparable to that of other low-income countries in the region, although some challenges remain (Figure 6.6). Over the past decade, the ratio of current spending to total spending has remained flat at around 50–60 percent, broadly in line with comparator countries. After increasing rapidly during 2005–09, overall current government spending has also remained flat in terms of GDP, partly reflecting prudent fiscal policies in view of the limited fiscal space available. The scope for spending increases will continue to be limited over the medium term unless the revenue target is met with a large margin.

Figure 6.6Government Expenditure

Source: Cambodian authorities; and IMF staff estimates.

Note: LICs = low-income countries; Proj. = projection.

Box 6.1Revenue Norm Estimate for Cambodia

This box summarizes the findings from a regression-based analysis to estimate a revenue norm for Cambodia. The results indicate that Cambodia has considerable scope to increase revenues by aligning its revenue efforts with those of other low-income countries.

A cross-country comparison of revenue performance is analyzed by estimating a simple model linking a country’s revenue-to-GDP ratio with its economic fundamentals, such as economic size and structure, level of development, and foreign direct investment. The sample consists of 49 low- and medium-income countries across the world spanning three observation years: 2001, 2005, and 2009. We estimate the following:

GGRN_GDP_it = c + a · log(GPPC/ER_it) + b · log(GDP_it) + c · log(OILEXP_it) + d · DI_it + e · DI^2_it + u_it

where GGRN_GDP denotes the revenue (excluding grants) to GDP ratio; GPPC denotes GDP per capita; ER denotes the nominal exchange rate; GDP denotes the nominal GDP; OILEXP denotes oil exports; DI denotes direct investment; and DI^2 denotes direct investment squared (to allow for nonlinearities sometimes observed in the literature); with OILEXP and DI measured in U.S. dollars.

A pooled regression is estimated, with all explanatory variables statistically significant, while the signs of the estimated coefficients are broadly in line with expectations. Using these results, Figure 6.1.1 plots the estimated norm and the actual revenue-to-GDP ratio for all 49 countries in the sample in 2009, as represented by each diamond. Countries plotted above the 45 degree line are revenue underperformers relative to the norm, with Cambodia belonging to this group, given its actual revenue at 11.6 percent of GDP and its estimated norm at 16.8 percent. The figure also allows one to quantify the underperforming gap. Cambodia’s actual performance is 14 percentage points lower than the group average at 25.6 percent (segment a–c), but a large fraction of this gap (8.8 percentage points, segment b–c) is from the difference between the group average and Cambodia’s norm, representing Cambodia’s relatively low income level, lack of natural resources, and limited foreign investment. The residual segment (5.2 percentage points, segment a–b) represents the gap between the actual and the norm, showing revenue underperformance that cannot be attributed to economic fundamentals and which likely comes from weak revenue administration and poor governance. For a robustness check, two alternative models (the first one omitting DI squared and the second one omitting both DI and DI squared) were estimated; they yielded broadly the same results, showing that Cambodia’s revenue-to-GDP ratio is about 5 to 7 percentage points below its potential.

Figure 6.1.1Revenue to GDP Ratio: Norm vs. Actual

(In percent of GDP, 2009)

Where Spending Reforms Are Needed

Regarding current spending, the wage bill has increased rapidly since 2009 in an effort to catch up with rising wages in the private sector. Cambodia’s wage bill, at about 4¾ percent of GDP in 2013, is broadly comparable with that in other Asian low-income countries, but as a share of domestic revenue and current expenditure, its burden is higher than for most comparator countries.

Regarding capital spending, the lack of a timely and detailed recording of outlays, particularly those financed by development partners, continues to hamper the planning and analysis of this spending. Donor support is not fully coordinated with the government and its implementation is not reported on a timely basis in the budget. Budget documents have so far included only aggregate estimates and the reporting has been fragmented. Better budget classification is critical, since classifying all donor projects as capital spending does not provide a clear picture of development spending and therefore makes it difficult to plan and assess future development needs.

Spending on priority social sectors is largely in line with comparator countries, but spending efficiency could be improved (World Bank, 2011). The outcomes affected by public spending are also comparable, for example in terms of life expectancy, child mortality, primary school completion rates, and the ratio of girls to boys in school. Spending on agriculture and rural development (Figure 6.7) has continued to increase, and the level is broadly appropriate, but a complex set of structural constraints continues to hamper spending effectiveness and efficiency. These constraints include lack of continuity in public funding and poor rural infrastructure.

Figure 6.7Goverment Spending in Priority Sectors

(In percent of GDP)

Sources: Cambodian authorities; and IMF staff estimates.

Therefore, the main challenge is to reallocate spending within the existing envelope, for example by providing more resources for agricultural research and extension services, secondary irrigation canals, and rural roads. Overall spending on health has also increased, although large out-of-pocket spending continues to put a burden on the poor. However, there are inefficiencies, for example, in the procurement of pharmaceuticals, medical equipment, and supplies, so that any larger allocation of certain health spending should be financed by savings within the sector. In the area of education, the main challenge is to improve efficiency by reallocating spending from primary education to higher levels of education.

Addressing Debt Sustainability

Cambodia’s debt sustainability has improved, but foreign debt management remains a challenge, particularly in dealing with potentially large contingent liabilities (Figures 6.8 and 6.9). Cambodia’s debt distress rating improved in 2011 from a medium risk to a low risk, with the most recent joint IMF-World Bank Debt Sustainability Analysis indicating that its debt levels remain sustainable in the long run (IMF, 2013).

Figure 6.8External Public Debt

(In percent of GDP)

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

Note: LICs = low-income countries.

1 Average of Bangladesh, Mongolia, and Nepal.

Figure 6.9Public Debt and Debt Service

Sources: Cambodian authorities; and IMF staff estimates and projections.

Cambodia’s institutional and policy capacity, including debt management, have also improved, reflected by its upgrade to a medium performer based on the World Bank’s Country Policy and Institutional Assessment. However, risks could emerge from rapidly growing contingent liabilities related to power generation projects, as well as from government borrowing on less concessional terms. The government’s power generation expansion plan envisages the completion of more than 30 projects under public-private partnerships by 2020, with a total investment cost outside the government’s capital budget of about US$5½ billion (40 percent of 2012 GDP) over the intervening period.

The risks for the government by providing take-or-pay guarantees appear small in light of the need to resolve existing electricity shortages and the conservative demand forecasting scenarios underlying these projects. However, the sheer size of these projects and the difficulty in quantifying risks in advance for such complex infrastructure projects call for careful monitoring. If the risks and the potential contingent liabilities are not managed carefully, they could set back efforts at rebuilding fiscal space and jeopardize debt sustainability. As a result, fiscal space could be curtailed when it is most needed—that is, in the event of adverse economic shocks, when contingent liabilities are also more likely to be triggered.

Reforming Public Financial Management

Cambodia has made good progress in reforming public financial management, but various challenges remain (Box 6.2). The 2009 Public Expenditure and Financial Accountability assessment indicated that the credibility of the budget process has improved, with greater responsibility to program managers supported by enhanced internal controls and accountability mechanisms (Royal Government of Cambodia, 2010). The budget also provides a fair indication of the actual financial resources available, greater predictability of revenues, and good expenditure controls. The overall 2009 assessment score is broadly in line with the scores of other low-income countries in the region and reflects a strong performance, particularly in policy-based budgeting. However, progress in implementing the Financial Management Information System (FMIS) and in aligning government strategic goals, budget priorities, and donor support has been slower than expected. In addition, it will also be critical to integrate fiscal decentralization and public administration reforms with public financial management reforms.

Finally, establishing effective, accountable, and transparent governance will continue to be a major challenge (Figure 6.10). Progress has been made in developing effective governance after decades of conflict. However, various indicators, including the World Bank’s governance indicators and Transparency International’s corruption perception index, have revealed a strong persistence of weaknesses in governance. As discussed in Chapter 7, improving governance will play a critical role in mobilizing fiscal revenue.

Policy Priorities

In the near term, revenue mobilization is the most important reform to address fiscal challenges, and an integrated approach is needed to make the mobilization self-sustaining. Cambodia’s revenue mobilization strategy should rely on a three-pronged approach: (i) improving revenue administration; (ii) implementing fair and efficient tax policies; and (iii) strengthening governance. The simultaneous implementation of reforms in these three areas is critical because progress in one area will create positive feedback to the others, making revenue mobilization more effective and self-sustaining. For example, better tax administration focusing on good taxpayer services and collecting tax arrears would make the tax system fairer and more efficient while at the same time improving compliance and reducing the incentives for corruption and evasion. Successful tax reforms in many developing countries have relied on an integrated approach, where strengthening revenue administration and reforming tax policy, supported by strong political will and technical capacity, play a critical role in enhancing revenue collection.

Box 6.2Cambodia’s Public Financial Management Reforms

The weaknesses in Cambodia’s public financial management have deep roots. While shortcomings are common in many developing countries, Cambodia’s devastating civil war and genocide destroyed human and institutional capacities for public financial management and led to a severe fragmentation of cash management. Years later, a subsequent boom of donor support overstretched the government’s absorptive capacity and, as a result, many donor-funded projects remained outside the budget framework. In the early 2000s, Cambodia fell further behind comparable countries in its public financial management, particularly in the inadequacy of its budget formulation, its lack of credibility, its poor cash management, and the inappropriateness of its procurement framework. Cambodia launched the Public Financial Management Reform Program (PFMRP) in December 2004 and has made some progress since then. Implementation has focused on two platforms:

  • Platform One reforms (2004–07) focused on strengthening revenue administration, streamlining the budget management process, consolidating government accounts, establishing an internal audit function, and improving budget implementation. Important progress was made in cash management and budget formulation. For example, the census of government bank deposit accounts was undertaken in 2007 in accordance with the implementation of the Treasury’s Single Account roadmap; domestic payment arrears were cleared by end-2007; and the use of the banking system for revenue collection and expenditure payment increased substantially. Procurement rules and policies were also improved, with a reporting mechanism and post-review procedures introduced and a procurement manual issued. Finally, a better presentation of the capital budget, a midyear budget review, and laws on deconcentration and decentralization were introduced. However, progress in mobilizing revenue and improving expenditure composition remained limited.
  • Platform Two reforms (2008–10) targeted the establishment of a new chart of accounts and budget classification, effective internal audit procedures, the introduction of a Financial Management Information System (FMIS), and the relocation of decision making and accountability to line ministries. Progress in these reforms has been slower than expected, leading to a call for reprioritization. The FMIS experienced significant delays owing to problems within the government as well as with ensuring adequate donor support. Few gains were made as well in a commensurate devolution of spending authority to line ministries. Progress in strengthening the charts of accounts and budget classification has been slower than expected.

On the positive side, reform gains under Platform One have continued to be consolidated, including the implementation of the budget law and improved cash management.

Cambodia’s revenue mobilization strategy should prioritize policy actions that would generate substantial additional revenue, would create strong positive externalities, and could be implemented. These policy priorities include the following:

  • Revenue administration: Collecting tax debts and improving the performance of the Large Taxpayer Department will raise additional revenue in the near term. Reprioritizing reform plans toward revenue-generating activities, establishing taxpayer services, developing human resources and information technology, and strengthening revenue forecasting will sustain revenue efforts going forward.
  • Tax policy: Reforming the VAT and excise taxes will generate an immediate revenue impact. Continued tax policy reforms aimed at reducing exemptions and incentives, rationalizing corporate and personal income taxes, and implementing property taxes will help raise revenue over the medium term.
  • Governance: Strengthening oversight and accountability of tax institutions and promoting transparency are critical to improve the performance and credibility of tax institutions.

Careful monitoring and management of fiscal contingent liabilities would safeguard fiscal space and help ensure debt sustainability. Cambodia adopted a new debt management strategy in 2012 aimed at managing debt risks, coordinating and implementing debt management policies, and developing debt management capacity. The strategy also emphasizes the importance of monitoring contingent liabilities, including those related to power generation and distribution projects. Under Cambodia’s debt management strategy, continued efforts are needed to strengthen the evaluation, contracting, and monitoring of contingent liabilities, including the legal framework for public-private partnerships and the development of a new guarantee policy. It is also important to improve information sharing among government agencies regarding the size and status of contracts and embedded government guarantees. This could be done by setting up a central public-private partnership monitoring unit with “gateway powers” to evaluate and approve new partnership projects, enhancing fiscal transparency by adopting a ceiling on partnership guarantees, and listing all contingent liabilities and underlying guarantees in annual budget laws.

Stepping up efforts under the PFMRP will be critical to securing gains from enhanced revenue administration and to improve the effectiveness of priority spending. The efforts should include further strengthening the Platform One objectives, such as revenue mobilization, and at the same time moving toward achieving the goals under Platform Two (see Box 6.2). The priorities should be on those measures that are achievable in the near term and are of strategic importance, as follows:

  • Better recording and monitoring of donor-financed capital spending. Budget execution and recording continue to be fragmented, especially with regard to donor-financed capital spending, hampering an assessment of fiscal and quasi-fiscal activities and effective budget planning. Better collaboration among donors is also needed to produce expenditure reports on a timely basis for donor-financed projects using the government charts or accounts. The inclusion of all off-budget donor-funded projects, such as technical assistance and NGO support, is also critical to improve transparency and accountability. All of these will help align donor support with government strategic priorities and improve budget formulation.
  • Continuing improvements in cash management, procurement, and audit. This includes further strengthening government cash and bank account management, including cash flow forecasting and cash planning, as well as consolidating all government deposit accounts and using banks for transactions in all provinces. Enacting and implementing the new procurement law and moving toward the integration of the national public procurement systems under a single regulatory body would improve efficiency, transparency, and accountability. Strengthening the National Audit Authority and internal audit departments of agencies would improve both internal and external audits and help pave the way for the deconcentration process.
  • Designing and implementing a well-defined and integrated FMIS implementation action plan. This would involve bringing together the three working groups (line accountability, accounting standards, and budget execution) of the FMIS Steering Committee into a single plan that could be endorsed by development partners. The plan should also include a roadmap for a wider rollout of an FMIS that provides greater financial management and accountability for provincial and local administrations and line ministries. As a start, a further deepening of budget classifications at the line ministries is needed. All of these actions should be complemented by a comprehensive treasury support program to facilitate the implementation of the FMIS, and sustain and improve cash management as well as the movement toward the adaptation of international public sector accounting standards.
  • Ensuring that the PFMRP is aligned with and supported by two other public sector reforms, namely Public Administration Reform and Decentralization and Deconcentration Reform. Reforming public administration is important because any delays in comprehensive civil service and institutional reforms could put further progress of PFRMP at risk. Continued progress in decentralization and in strengthening the capacity, governance, and transparency of public administration is also needed to implement the PFMRP in the provinces, districts, and municipalities.

Finally, without improvement in governance, the progress of fiscal reforms will be limited. Cambodia has put good governance at the core of its Rectangular Strategy Phase 2, under the National Strategic Development Plan. It envisages four major reform areas to strengthen governance: fighting corruption, legal and judicial reforms, public administration as well as decentralization and deconcentration reforms, and reforms of the armed forces (Royal Government of Cambodia, 2012). In line with the objectives of the National Strategic Development Plan, consistent implementation of governance reforms is critical to support reforms in other areas.

References

    International Monetary Fund2011Cambodia: 2010 Article IV Consultation,IMF Country Report No. 11/45 (Washington).

    International Monetary Fund2012Cambodia: 2011 Article IV Consultation,IMF Country Report No. 12/46 (Washington).

    International Monetary Fund2013Cambodia: 2012 Article IV Consultation,IMF Country Report No. 13/2 (Washington).

    Royal Government of Cambodia2010Public Finance Management Assessment Cambodia Public Expenditure and Financial Accountability (PEFA) Report available atwww.pefa.org. (Washington: PEFA Secretariat).

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    Royal Government of Cambodia2012Mid-Term Review on the National Strategic Development Plan Update 2009–2013 (Phnom Penh).

    World Bank2011Cambodia: More Efficient Government Spending for Strong and Inclusive Growth Integrated Fiduciary Assessment and Public Expenditure Review World Bank Report No. 61694-KH (Washington: World Bank).

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1The fiscal buffers are also important since the central bank lacks a “lender of last resort” capacity and given the risk of a sudden stop in deposit flows due to banking system fragilities.
2This is based on two standard deviations of government financing over 1995–2010, and thus fluctuations of the government’s deficit related to the economic cycle.
3The estimates of tax performance indicators are taken from IMF (2011, 2012).
4This tax productivity measures the average yield in percent of GDP for each percentage point of the standard rates of corporate income tax and VAT. A low productivity indicates that various factors other than tax rates, such as tax incentives and low tax compliance, contribute to low revenue collection.

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