1. The four chapters in this volume of Selected Issues provide background information to the staff report for the 2006 Article IV consultation. Each of the chapters deals with one of the four central topics of that consultation’s policy discussions on Cambodia’s medium-term prospects, namely: poverty and growth, private sector development, public financial management reform, and debt sustainability. The second chapter briefly summarizes recent results of a Poverty Assessment by the World Bank, showing a more pronounced and growth-driven decline in poverty over 1994–2004 than had previously been thought. Chapter 3 describes the current Cambodian regime of tax incentives for private investment, comparing it with the regimes of Cambodia’s neighbors. The chapter also discusses the costs and limits of this regime. In Chapter 4, a summary assessment of Cambodia’s Public Expenditure Management system is followed by a description of the broad outlines of its ambitious Public Financial Management Reform Program (PFMRP) adopted at the end of 2004. The chapter highlights the key reform priorities for the short and medium term. Chapter 5 provides historical background on Cambodia’s external and domestic debt. Finally, this volume includes a statistical appendix, and a summary of Cambodia’s tax system.
2. A new perspective on trends in poverty in Cambodia, and its link to economic growth, has emerged from the new poverty estimates based on the 2004 Cambodia Socio-Economic Survey. Poverty remains high, with an estimated 35 percent of the population falling below a national poverty line. However, the evidence also suggests that there have been significant gains in the last 10 years, on par with economic growth. This is in sharp contrast to a previously-held view, that despite substantial economic growth and job creation in the 1990s, poverty had remained stubbornly high. The degree and nature of poverty reduction mirror economic developments: rapid growth in the urban economy—driven by garment and tourism—has allowed urban poverty to decline; in contrast, gains have been more modest in rural areas, still home to a majority of the population. Further poverty reduction thus requires growth to be more broadly based and public infrastructure and services to be geared to providing access by the poor to social services, as well as to strengthening the urban-rural linkages.
3. In Cambodia, investment incentives are provided under an investment law recently amended to simplify the qualifying criteria for incentives and improve its consistency with the tax code. In terms of duration of the tax holiday and terms of eligibility for direct and indirect tax exemptions, investment incentives in Cambodia appear to be broadly as generous as those provided in neighboring countries. However, tax holidays, in Cambodia as elsewhere, remain a policy of questionable cost effectiveness: the fiscal costs can be high (while often hidden, and poorly assessed) while the international evidence is not overwhelming about their effect on FDI. The chapter concludes by noting that Cambodia’s investment climate would more convincingly benefit from enhanced governance in the short run, and better infrastructure in the longer term.
Public financial management
4. Public Expenditure Management (PEM) is an important instrument of fiscal policy and must support overall economic policy goals, including maintaining overall fiscal discipline, achieving an allocation of resources consistent with policy priorities, ensuring prudent management of the government’s financial resources. The authorities are acutely aware of the need to improve their PEM system. A comprehensive assessment conducted in December 2005, in the context of the Multilateral Debt Relief Initiative (MDRI), showed that Cambodia only met 5 out of 16 PEM benchmarks, compared with an average of 6–7 for the 26 Highly Indebted Poor Countries (HPIC) assessed in 2004. The authorities had formulated a comprehensive Public Financial Management Reform Program, formally adopted by the Government in December 2004. That 10-year program, drawing on lessons learned from prior technical assistance, aims at making the budget more credible in terms of timely and predictable delivery of funds, and improved financial accountability. The chapter concludes with a set of nine priority measures for short-term reform.
5. A detailed quantitative analysis of Cambodia external debt sustainability is given in a Debt Sustainability Analysis attached to the Staff Report for the 2006 Article IV consultation. This fourth chapter sheds lights on the historical context under which much of Cambodia’s bilateral debt was contracted. The focus is on obligations to two of its largest creditors—the Russian Federation and the United States. The chapter concludes with a discussion of the agenda looking ahead.