Contents include--The real economy: background and recent developments; public finance; fiscal developments during 1994-95 and budgetary policy in 1996; Money and banking; structure of the banking system;monetary policy instruments; monetary developments; and issues in banking supervision; the external sector; recent developments; external financial assistance; external debt; trade regimel; customs operations; and exchange system;the changing role of the state; enterprise reform; privatization; and foreign direct investment; forestry sector and forestry policy;trends and developments; recent concession policy; and a sustainable new forestry policy; statistical tables.


Contents include--The real economy: background and recent developments; public finance; fiscal developments during 1994-95 and budgetary policy in 1996; Money and banking; structure of the banking system;monetary policy instruments; monetary developments; and issues in banking supervision; the external sector; recent developments; external financial assistance; external debt; trade regimel; customs operations; and exchange system;the changing role of the state; enterprise reform; privatization; and foreign direct investment; forestry sector and forestry policy;trends and developments; recent concession policy; and a sustainable new forestry policy; statistical tables.

I. Introduction

1. Cambodia has successfully emerged from two decades of war, devastation, and internal turmoil. Under the process set in motion by the 1991 Peace Agreements, UN-sponsored free elections were held in May 1993, and a new national Government was formed in July 1993 within the framework of a parliamentary democracy. A new constitution was promulgated in September 1993 with a constitutional monarch as head of state. The new Government initiated a program aimed at macroeconomic stabilization and market-oriented liberalization, and re-established relations with the international financial community after years of separation.

2. In 1994, the Government launched a medium-term adjustment and reform program designed to consolidate the initial restoration of financial stability and to begin the process of rehabilitation and reconstruction of Cambodia’s economy. The program focused on macroeconomic stabilization, institutional strengthening supported by comprehensive technical assistance, and wide-ranging structural reforms aimed at enhancing saving, investment, and growth over the longer term. In support of the Government’s medium-term program, the Fund approved in May 1994 a three-year arrangement under the enhanced structural adjustment facility (ESAF). Support was also provided by the World Bank and the Asian Development Bank through quick disbursing balance-of-payments and budgetary assistance, and by other multilateral institutions and bilateral donors.

3. During the past three years, the Government has made considerable progress under its ESAF-supported program. The financial situation has stabilized, and the rehabilitation of the social and physical infrastructure is well underway with large-scale technical and financial support from the international community. Significant amounts of foreign direct investment-attracted by Cambodia’s liberal exchange, trade and investment regimes—have facilitated Cambodia’s rapid reintegration into the regional and world economy. The Cambodian economy, however, continues to suffer from the legacy of decades of war and internal strife. The past depletion of human resources has left Cambodia with very weak administrative and institutional capacities, and its needs for external assistance remain massive.

4. Macroeconomic developments under the Government’s medium-term program have been broadly favorable with robust economic growth, low inflation, and a strengthening of the international reserve position in the context of a broadly stable exchange rate. The Government also made considerable progress in some areas of structural reform, although at a slower pace than initially envisaged, while developments in other areas—notably civil service reform and the management of public resources, particularly forestry—have been marked by continued difficulties in policy implementation.

5. In reviewing these recent developments, this report focusses in particular on recent structural changes in the economy and the main institutions of economic policymaking. This structural focus reflects the significant changes in the Cambodian economy over the past three years which have not been examined previously.1 The focus is also dictated by the lack of comprehensive and reliable time series data.2

6. Chapter II presents the main developments in the real sector during the past three years, highlighting the structural features and changes in this still predominantly agricultural economy. Recent rapid growth has been concentrated in the urban areas, driven by buoyant activity in construction, tourism, and the textile sector. Growth in rural sector was severely affected by flooding and drought during the 1994/95 season. This was followed by a record rice harvest in 1995/96, but flooding in late 1996 again destroyed part of the rice crop.

7. Chapter III provides an overview of developments in public finance and discusses key institutional changes in budget formulation which—coupled with tight fiscal policies—were crucial to achieving economic and financial stability. Financial discipline was maintained over the past years, despite continued strong pressures arising from spending for security and defense and difficulties in revenue collection. The composition of public expenditure remains heavily skewed, and budgetary allocations for civilian non-wage expenditures, particularly for priority social spending, are severely compressed. Capital spending is largely foreign-financed.

8. Chapter IV reviews recent developments in money and banking. The scope for monetary policy remains limited in Cambodia’s highly dollarized and largely cash-based monetary system, but good progress is being made toward establishing a two-tiered banking system. The chapter also examines the functioning of the foreign exchange market and discusses the challenges to banking supervision posed by the recent proliferation of commercial banks. Chapter V describes developments in the external sector, which was marked by a sharp increase in the availability of external financing and a consequent large increase in imports.

9. Chapter VI reviews the progress in disengaging the public sector from economic activity and in attracting foreign direct investment, key elements of the Government’s development strategy of private-sector led growth. As the sustainability of Cambodia’s development hinges critically on an effective and transparent system of managing public resources, Chapter VII examines the Government’s recent policies in managing forests- Cambodia’s most valuable natural resource. Finally, Annex I reports on recent developments in implementing the wide range of legislation necessary for the functioning of a modern market economy.

II. The Real Economy3

A. Background

10. Cambodia’s economy over the past decades has been marked by devastation and severe internal disruptions. In the 1970s, the economic and social infrastructure was nearly completely destroyed under the Khmer Rouge regime. Continued internal strife and isolation from the international community during the 1980s thwarted attempts at rebuilding the economy in a centrally planned framework. Cambodia’s re-emergence started with the departure of foreign troops in 1989, which paved the way for the 1991 Peace Accords and the UN-sponsored free elections in 1993. The process of rehabilitation gained momentum under the Government’s economic reform program initiated in 1994, and reconstruction is now well under way. However, Cambodia continues to suffer heavily from the legacy of its recent past, and its per capita income is among the lowest in the world (Box 1).

Income and Population

Cambodia is one of the poorest countries in Asia. According to the most recent World Bank figures, Cambodia’s GNP per capita was just $240 in 1994. Only Vietnam ($190), Nepal ($200), and Bangladesh ($230) had lower income levels among Asian countries.

The 1993/94 Socio-Economic Survey put the Cambodian population at some 9 million in 1990, and growing at an annual rate of 2½-2¾ percent. Women accounted for almost two thirds of the adult population as a result of the high death rate among men during the late 1970s. Almost half the population was under age IS. The economically active population is currently estimated at some 4 million. The country is predominantly rural-the urban population is estimated at only about 15 percent. The major cities are Phnom Penh, with a 1990 population of 625,000, and Sihanoukville, with a population of 74,000. There is a high degree of ethnic homogeneity; the Khmer people comprise about 95 percent of the population and the remainder consists of some 30 ethnic groups.

11. Cambodia is usually classified as an economy in transition, because of its former membership in the Council of Mutual Economic Assistance (CMEA). However, it differs from other such economies in two important respects. First, the country’s experience with central planning was relatively brief and the state never established full control over this predominantly agricultural economy. Second, the state-owned industrial sector at the outset of reform was less important than in many other countries in transition. By the early 1990s, the Government administered less than 200 mostly small-scale enterprises accounting for less than 10 percent of GDP. A large share of these enterprises have since been transferred to the private sector. Most of the state-owned enterprises remaining under government control are slated for divestiture in the near future (see Chapter VI).

12. The continuing weaknesses of Cambodia’s national accounts statistics complicate quantitative assessments of economic growth and changes in the structure of the economy.4 In particular, the data base used for the compilation of the national accounts remains weak and fragmented. Data for many sectors have not been collected systematically since 1989, when the statistical reporting system all but broke down with the abandonment of central planning. As a basis for revising the national accounts, a Survey of Industrial Establishments and a Socio-Economic Survey were conducted in 1993-94. A comprehensive and consistent system of national accounts is now being developed with technical assistance from the World Bank and the Asian Development Bank. Until these revised accounts become available, however, data for the real sector remain subject to a considerable degree of uncertainty and must be interpreted with caution.

13. Assessments of recent economic performance are further complicated by difficulties in measuring economic activity in the burgeoning informal sector. Most households supplement their income from wage employment or agricultural activities with some form of private enterprise. Female entrepreneurs make up the majority of self-employed and family enterprises, as the result of Cambodia’s high female-to-male ratio and the consequently large share of households headed by women. Informal sector activity is widespread in both rural and urban areas. In rural areas, nearly every household has at least one member engaged in microenterprise activities, primarily of a seasonal nature and with minimal capital requirements.5 Data from the Socio-Economic Survey of 1993/94 indicate that rural households derive just under 40 percent of their income from these microenterprise activities. The informal sector also supports the majority of urban residents. Income from wage employment alone is usually not enough to support a family, and an estimated two thirds of the urban population is active in the informal sector.6

B. Recent Developments

14. Cambodia’s strong overall economic growth performance in recent years was driven by a rapid expansion of private sector activity in the urban areas. Real GDP grew at about 4 percent in both 1993 and 1994 even though agricultural output stagnated because of poor rice harvests. The recovery in the agricultural sector in 1995 boosted GDP growth to an estimated 7½ percent; preliminary estimates indicate output growth of 6½; percent in agriculture, combined with expansion of 9¾ percent in industry and 8 percent in services. In 1996, output growth continued at a strong, though somewhat slower pace, and became again less balanced between urban and rural areas, as agricultural production was adversely affected by flooding late in the year.


15. Cambodia’s economy remains dominated by agriculture, although its share in total output has declined in recent years from over one half to some 40 percent of GDP. Agriculture provides the livelihood for the vast majority of Cambodians, and is therefore key to sustained growth and development. Agricultural growth has, however, been severely constrained by poor infrastructure, outdated equipment, and inefficient farming techniques, including low and imbalanced use of fertilizers and limited availability of improved seed varieties. Moreover, the widespread presence of land mines continues to render large areas of fertile agricultural land unfit for cultivation.

16. The Government’s development strategy has placed high priority on alleviating these constraints. Progress has been made in a number of areas, including some improvement in the rural road network and in village water supplies. Multilateral and bilateral donors have initiated a wide range of agricultural and rural development projects to help restore the essential rural economic and social infrastructure. An important component of these projects has been the Food for Work program, which has offered food aid in return for participation in rural projects. Non-governmental organizations (NGOs) have also been very active in the rural sector.


17. The agricultural sector is dominated by the production of rice, the staple food. Rice production is mostly rain fed, and therefore heavily dependent on weather conditions. This dependency was particularly evident in the 1994/95 season, when adverse weather conditions—a flood followed by a drought—caused rice production to fall by 20 percent from its 1993 level. The rice shortfall, which resulted in widespread food shortages, was alleviated by commercial imports of rice in early 1995, combined with substantial additional food aid for rural areas, largely distributed by NGOs through the Food for Work programs.7 Rice output rebounded in 1995/96 with a return to normal weather conditions, increasing by over 24 percent to 3.2 million tons. More efficient use of fertilizers and high-yield varieties of seed, and some increases in the availability of irrigation facilities in key production areas, also boosted rice production. This bumper crop allowed for the first exports of rice since the 1960s.8

18. Inefficient farming techniques and very limited irrigation facilities have kept rice yields in Cambodia low compared to neighboring countries (Table 1). Moreover, while 2.6 million hectares are suitable for rice farming, only 1.8 million hectares were planted in 1995/96 because of the security situation and the presence of land mines. The current relatively low yields and potential large increases in planted area suggest significant scope for growth in rice output. An increase in yields to the level of Thailand, for example, combined with a 20 percent increase in planted area over a ten year period would double rice production, thus providing 7 percent average annual growth in rice output. Such growth rates over a ten-year period would lift large numbers of form households above the subsistence level and could return Cambodia to pre-1970 production levels, which allowed for regular rice exports at that time.

Table 1.

Comparative Rice Yields 1992-94

(In metric tons per hectare)

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Source: World Bank estimates.


19. Rubber has been Cambodia’s main cash crop. In the 1960s, Cambodia produced and exported over 50,000 metric tons of high-quality rubber yearly. During the Khmer Rouge years, rubber output shrank to a fraction of its previous level. The sector recovered during the 1980s, when rubber was Cambodia’s main export to its CMEA trading partners. Rubber output now stands at about two thirds of its pre-1970 level. The seven largest rubber plantations remain in the hands of the state. A program of major restructuring and modernization has been undertaken with bilateral assistance in preparation for privatization.

20. Several factors suggest a high potential for future growth in the rubber sector. First, only 61,000 hectares are currently under cultivation, less than one-fifth of the potential cultivation area. Second, yields are low. Yields per tapped hectare in 1993, for example, were only 43 percent of those in 1966. Finally, Cambodia has a large supply of low-cost labor, essential for a labor-intensive crop such as rubber. Significant output improvement could be achieved through replanting of older trees, more intensive use of fertilizers and water, and the opening up of new areas to cultivation. The required major capital investment would best be achieved through early privatization of the sector.

21. With improvements in the political and security situation, the production of rubber increased by 23 percent in 1994, to 28,000 tons, and by a further 14 percent in 1995, to 31,800 tons. Virtually the entire production was exported. Realized export prices remain, however, well below world market prices. In 1995, for example, the realized average export price for Cambodian rubber was $1,094 per ton, against an average world market price of $1,661 per ton. This is due in part to inefficient marketing, including high margins on intermediate transactions, as well as difficulties in grading and quality control.

22. The quality of Cambodian rubber has been improving. In 1995, less rubber was sold at a lower grade than in previous years, with two-thirds sold at the highest two grades, against less than half in 1994. A Cambodian rubber research institute is to be set up with bilateral assistance, which will certify Cambodian rubber with the objective of improving quality so that the highest possible prices can be obtained in world markets.

Livestock and fisheries

23. Livestock production is mostly carried out in small-scale family farming units and accounts for about 13 percent of GDP. The sector grew by 4 percent in both 1994 and 1995. The fisheries sector, which contributes 4 percent of GDP, derives most of its output from the large Tonle Sap lake, one of the richest fresh-water fisheries in the world. Fishery output declined in both 1993 and 1994, however, partly as a result of an increase in the illegal catch during the breeding season. The catch recovered in 1995.


24. The contribution of the forestry sector to GDP is very difficult to estimate. Officially recorded output in the sector has ranged from 3 to 5 percent of GDP in the past few years, but these figures do not take into account the widespread illegal logging and log exports, nor the sizeable extraction of fuelwood from the fringes of the forests. Developments in the forestry sector are reviewed in detail in Chapter VII.

The non-agricultural sectors

25. The non-agricultural sectors accounted for some 60 percent of GDP in 1995. Activities in these sectors are dominated by a large and growing number of primarily small- scale private enterprises most of which operate in the informal sector. The large share of activity undertaken in the informal sector means that quantitative indicators need to be interpreted with caution, particularly as regards the breakdown of activities among subsectors.


26. The state-owned manufacturing base, which had mostly been under the direction and control of the Ministry of Industry until the reforms of the early 1990s, has now for the most part been transferred to the private sector (see Chapter VI). The emerging private industrial sector is dominated by small and medium-sized enterprises (SMEs) that employ less than 50 workers. The World Bank estimates that as many as 50,000 SMEs are currently in operation in Cambodia, of which 26,000 are located in Phnom Penh.9 The 1993-94 Survey of Industrial Establishments found that enterprises with 1 to 9 employees were most common, operating predominantly in food and beverages, nonmetallic minerals, fabricated metals, furniture, and tobacco. The majority of enterprises with 10 or more employees were in the food, tobacco, and non-metallic minerals sectors.

27. Fueled by the rapid increase in the number of private-sector enterprises, industrial activity has been buoyant since the early 1990s. Starting from a very low base, industrial output growth averaged 10 percent per year during 1993-95. Output in industry now accounts for close to 20 percent of GDP, up from 11½ percent in 1990. Total industrial output growth in 1994 and 1995 was relatively uniform across major sub-sectors. Manufacturing output increased by 8 percent in 1994 and 10 percent in 1995, resulting from improvements in the supply of spare parts and raw materials and buoyant foreign direct investment (FDI).

28. The garment industry has seen particularly rapid growth, as a result of a number of factors, including: the possibility of small-scale investment; low labor costs; high potential returns; and Cambodia’s Most-Favored-Nation (MFN) status granted by the United States and General System of Preferences (GSP) status in Europe, which keeps tariffs on Cambodian garments low and allows for sizable exports. Most of the output from the textile industry is indeed exported, mainly to MFN/GSP countries including the United States, France, Germany, and other members of the European Union.


29. Construction has been the most buoyant sector over the last four years, mainly as a result of the arrival of a large expatriate community and rapid increases in tourism. The establishment of the United Nations Transitional Authority in Cambodia (UNTAC) and the arrival of close to 20,000 UN troops and support personnel boosted growth in the construction sector to 18 percent in 1993, with activity concentrated in and around Phnom Penh. Following the withdrawal of UNTAC after the 1993 elections, growth in the sector slowed to 7½ percent in 1994 and 10 percent in 1995. Construction activity has been concentrated in hotels and residential and commercial real estate, as well as roads, bridges, and power lines in Phnom Penh.

Transport and communications

30. Much of the transport and communications infrastructure was destroyed during the hostilities in the 1970s. Extensive repairs to the road network were carried out during the 1980s, but were unable to keep up with the continuing deterioration caused by intensive traffic and flood damage. More thorough rehabilitation work was started in 1992-93 with support from the UNDP, the Asian Development Bank (AsDB), the World Bank, and bilateral donors. The road from Sihanoukville to Phnom Penh is now in good condition and repairs continue on most major national roads. However, conditions on many roads and bridges remain poor. The 650 kilometer rail line from Poipet in the Northwest through Phnom Penh to Sihanoukville in the south, the major port, has suffered extensively, although most of the line is currently in operation after emergency repairs were carried out with assistance from the AsDB. Further improvements in the road and rail network are essential to alleviate transport bottlenecks, which currently hamper the expansion of internal trade and rural development.


31. The tourist industry is still in its infancy, but there is significant potential for growth in the Angkor Wat, Phnom Penh, and southern coastal areas. Tourist arrivals have increased sharply since 1993—monthly arrivals rose from about 5,000 in mid-1993 to over 15,000 by end-1995—and the hotel and restaurant sector grew at double digit rates in 1993-1995, supported by substantial foreign investment flows. With further improvements in infrastructure, tourism should continue to grow at a rapid pace in the coming years.


32. Electricity in Cambodia is generated in small and isolated systems, and is supplemented by the widespread use of privately-owned generators—an estimated 25,000 operate in Phnom Penh alone. By far the largest public power system is installed in Phnom Penh, with a notional capacity of 71 MW. Due to an ageing plant, lack of spare parts, and shortages of fuel, only 21 MW of power is generally available. Rehabilitation of the system operated by Electricité du Cambodge and provision of supplies from independent power producers should increase capacity by 40 MW in the capital. Over the medium term, construction of a grid is planned, first between Phnom Penh and Sihanoukville, and later between Phnom Penh and Battambang, Siem Reap, and Sisophon.


33. Cambodia has a wealth of mineral resources, including gold, copper, aluminum, tin, gem stones, and oil and natural gas. Much of this mineral wealth is located in the North and West of the country, areas that have been under the control of the Khmer Rouge, and its exploitation has therefore not been captured in the official statistics. Recorded mining output is estimated to have increased in 1994 and 1995, however, as extraction of metals, gems, and gold ore in the government-controlled areas picked up. Oil and gas deposits are located offshore in the Gulf of Thailand, where a number of exploration blocks have been assigned to foreign oil companies. Exploration has been slow to date because of an ongoing dispute with Thailand over the maritime boundaries of sovereignty, combined with the lack of a clear legal framework for oil and gas extraction. Provided the dispute can be resolved and exploration activity picks up, commercial exploitation could start within the next few years.

III. Public Finances

34. Fiscal policy has played the central role in maintaining macroeconomic stability through the elimination of deficit financing from the banking system. At the same time, the implementation of Cambodia’s fiscal program has had to cope with a number of structural problems. First, the revenue-to-GDP ratio (at some 9 percent of GDP in 1995) is very low by international standards, reflecting in large part administrative weeaknesses that have resulted in poor tax collections.10 Second, trade-related taxes provide the vast bulk of tax revenue. Third, public sector spending is heavily skewed toward defense and security outlays. As a result of these structural deficiencies, the domestic tax base remains very small and civilian nonwage expenditures, particularly for health and education, are severely compressed. External assistance has thus been necessary to help finance current outlays and virtually all capital expenditure.

A. Fiscal Developments During 1994-9511

Institutional and legal changes

35. An early priority of the Government under its economic program was a reform of budgetary institutions. Enactment of an organic budget law (the Loi Organique) in December of 1993 provided a new institutional framework for fiscal policy. Subsequent reforms have aimed at improving implementation capacity by strengthening budgetary procedures and enhancing transparency.

36. The Organic Budget Law lays out the procedures for the formulation and implementation of the Government’s fiscal program. The law provides for annual presentation of a budget to the National Assembly and specifies a precise timetable for preparation of the budget to ensure that the financial law is approved prior to the start of the fiscal year (which coincides with the calendar year). The budget revenue projections are to be based, among other factors, on the macroeconomic outlook, including the impact of inflation on the tax base and the yield of new tax measures; spending limits are to be negotiated on the basis of requests by line ministries.

37. The Organic Budget Law calls for a single unified national budget consolidating the receipts and payments of the central and provincial governments, in local as well as in foreign currency.12 The law assigns authority for revenue collection to the central Treasury in the Ministry of Economy and Finance (MEF), and authorizes the MEF to freeze spending by the line ministries to ensure that limits on annual budgetary allocations are not breached.13 The law also calls explicitly for the formulation and adoption by the National Assembly of a supplementary budget when the evolution of receipts and expenditures within the year indicates that the deficit targets will not be attained.14

38. Within the framework of the Organic Budget Law, the Government’s reforms during 1994 and 1995 aimed at strengthening budgetary control and at increasing the transparency of government operations. Specific steps included: (i) adoption of procedures to transfer all receipts of line ministries to the budget; (ii) assignment in June 1995 of sole authority to the Minister of Economy and Finance to contract external debt; (iii) requirement of competitive bidding for Government procurement and the setting-up of a Procurement Department in the MEF; and (iv) assignment of financial controllers to each ministry.

39. An important institutional feature of budgetary implementation is that expenditure authorizations are matched on a monthly basis with revenue collections and available programmed financing. Each month a committee composed of key MEF departments- Budget, Tax, Customs, Financial Affairs, and the Treasury—assesses the Government’s cash flow situation. Taking into account the stock of Treasury balances at the National Bank and at the Treasury’s provincial offices and projected revenues for the coming month, the MEF determines the proportion of budgeted expenditure authorizations to be processed during the following 30 days. The consistent application of these procedures has facilitated the implementation of restrained fiscal policy by ensuring that spending decisions are consistent with the budgeted level of bank financing.

Recent developments

40. Fiscal discipline was maintained in both 1994 and 1995 despite continued strong pressures arising from spending on defense and security (Table 2). Improved revenue performance in 1994 helped to offset a sizable overrun in defense and security spending early in the year stemming from the dry season offensive against the Khmer Rouge, but the Government had to severely compress expenditure in other areas to meet the deficit target.

Table 2.

Budgetary Outturn, 1993-95

(In percent of GDP)

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Source: Data provided by the Cambodian authorities.

Expenditure cuts fell heavily on civilian nonwage spending, particularly for health and education. The increase in budgetary revenue in 1994 resulted large receipts from forestry operations, improvements in customs administration, and introduction of some minor new taxes. The current deficit was held to 1½ percent of GDP in 1994, while the overall deficit—almost entirely financed by external budget support and project aid flows—reached 7 percent of GDP. Most importantly, there was no bank financing of the deficit, which played a key role in further reducing the rate of inflation.

41. Fiscal performance during 1995 was undermined by revenue shortfalls—arising from a weak administrative capacity and significant difficulties in bringing extrabudgetary revenue into the budget—and high military outlays arising from another dry season offensive, which pushed defense expenditures above the budget target early in the year.15 In response, the Government compressed nondefense current spending—notably operating expenditures—to below initially budgeted levels. Moreover, to help boost revenues, the Government introduced in a supplementary budget (approved by the National Assembly in late August 1995) a number of discretionary tax increases and brought into the budget a number of nontax revenues which had previously escaped the budgetary process—notably fees and commissions from government joint ventures. In the event, however, revenue performance fell short of the target set in the supplementary budget though the Government managed, through continued expenditure compression, to halve the current deficit relative to the budget target of 1½ percent of GDP. With an acceleration of disbursements of external project assistance, bank financing was kept below ¼ percent of GDP.

Revenue developments

42. Considerable advances have been made during the past few years to adapt Cambodia’s revenue structure to a market economy. The Government has introduced a number of new tax measures and increases of existing taxes, and is preparing a second phase of reform—to be initiated with the Financial Law of 1997—aimed at strengthening revenue performance over the medium term. The share of taxes in GDP has risen significantly, albeit from a low base (Table 3). However, trade taxes continue to provide the bulk—75 percent—of tax revenue, and the level of tax compliance remains low despite the Government’s efforts to improve tax administration.

Table 3.

Budgetary Revenue, 1993-95

(In percent of GDP)

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Source: Data provided by the Cambodian authorities.

Tax and customs administration

43. The Government’s efforts to improve the still rudimentary tax administration have concentrated in particular on expanding the information base for taxpayers. In 1995, the Direction Générate des Impôts (DGI) established a large taxpayer unit—the Bureau de Gestion des Grandes Entreprises (BGGE). The BGGE has facilitated the systematic tracking of the activities of the largest enterprises (1,400 enterprises are currently being tracked) and has conducted follow-up audits to verify compliance with the tax laws relating to the profits tax, the turnover tax, excise taxes, and the business license fee (or patente).16 Efforts have also been made, including through computerization, to increase information sharing between the Customs Office and the DGI during the past two years to monitor duty exempt imports. However, efforts to improve tax compliance have run up against political resistance and tax collections have been hampered by ad hoc tax exemptions, particularly for imports. In this context, the regulations clarifying taxpayer obligations under the Foreign Investment Code, which have recently been submitted to the Council of Ministers, should enhance the ability of the tax authorities at the DGI to enforce compliance with the tax laws.

44. In a significant move to improve customs revenue collection, the Government instituted a system of pre-shipment inspections in late 1995 in order to reduce revenue leakages from under-reporting of import values. Such under-reporting-through falsification of either the quantity or quality of imported goods—reduces the yield of tariffs and import duties. The pre-shipment inspections—conducted by Societé Generale de Surveillance (SGS)—include valuation verification by cross-checking values declared at import against values registered at the point of export. Under strong political pressures, the Government initially provided exemptions, however, notably to importers of petroleum and of raw materials and other production inputs entering under the Foreign Investment Law. The Government removed all exemptions from inspections beginning August 1, 1996.17

Changes in taxation18

45. The rise in the share of tax receipts in GDP—from 4¼ percent in 1993 to an estimated 6¼ percent of GDP in 1995—mostly reflects increases in indirect taxes (including on petroleum) and an increase in receipts from direct taxes due mainly to improvements in tax administration. The principal measures adopted in regard to taxation during 1994-95 are reported below.

46. Direct taxes are composed of taxes on salaries (the wage tax), profits, and rental income. The tax on wages, originally scheduled for introduction in 1994, was approved with the Financial Law of 1995. The wage tax is progressive, with rates ranging from 5-20 percent on a base that is subject to a high exemption threshold; monthly earnings under about $300 are not taxed. The yield of the wage tax remains negligible, reflecting the low level of wages in Cambodia, and a still rudimentary administrative system for taxing high-wage earners (many of whom are, however, tax-exempt expatriates).

47. Indirect taxes consist of a turnover tax, excise taxes, a consumption tax on imported products, a hotel tax, a vehicle registration fee, a stamp tax, and a slaughter tax.19 Significant changes to indirect taxes were introduced with the supplementary budget for 1995, which provided for a number of discretionary tax measures that took effect on October 1, 1995, including:

  • a doubling of the 2 percent turnover tax to 4 percent, leaving the 1 and 10 percent rates unchanged;20

  • unification of the excise tax at 10 percent on cigarettes, tobacco, alcoholic and nonalcoholic beverages, and ice cream;21 and

  • introduction of a 20 percent excise tax on gasoline;

48. Increases in petroleum taxation have been introduced on several occasions. In March of 1994, the duty rate on gasoline was increased from 35 percent to 45 percent, and to 50 percent in late 1994, along with an increase in the dutiable value, which is administratively set by the MEF. The dutiable values of both gasoline and diesel were increased further on July 1, 1995 from $275 to $320 per metric ton, and from $200 to $275 per metric ton, respectively. The import duty rates of 50 percent and 20 percent on gasoline and diesel, respectively, were left unchanged.

49. Import tariffs remained mostly unchanged during 1994-95.22 There are five primary tariff bands—0, 7, 15, 35 and 50 percent—which cover over 98 percent of the tariff lines and more than 30 additional effective rates for re-exports (see below). The principal change during the period affected passenger motor vehicles, for which a uniform rate of 50 percent was replaced by a four-tier tariff structure based on engine size. The new rates for vehicles range from 30 percent to 120 percent, with the highest rates on luxury vehicles.

50. A substantial share (estimated at some 30 percent) of Cambodia’s import-related receipts are obtained from re-export activities. Because Cambodia’s borders with neighboring countries are extremely porous, there is a substantial amount of transit activity originating in Cambodia. The Government imposes reduced tariffs on selected products in order to capture revenues from a portion of this trade.23 These products include, among other goods, gold, cigarettes, household audio-visual equipment, motorcycles, and beer.

51. There are also select export taxes on wood and rubber set at a 10 percent rate. Tax proceeds from wood—logs and sawn timber—fell considerably between 1994 and 1995. A 10 percent export tax on rubber was introduced in October 1995 to offset losses from reduced transfers to the budget of operating surpluses of the state-owned rubber plantations. The yield from this tax has been lower than expected, however, due to the granting of an exemption to one large intermediary in November 1995.

Nontax revenue

52. Nontax revenue accounted for slightly less than one third of budgetary receipts in 1994 and 1995. The principal sources of nontax revenue are royalty payments from forestry, fees and commissions paid to the Government in connection with government joint ventures and the granting of monopoly rights, and operating surpluses of the Ministry of Posts and Telecommunications. The ban on logging had a substantial impact on revenues from forestry. After reaching CR 106 billion (1.7 percent of GDP) in 1994, royalty and other payments related to forestry fell to CR 71 billion (1.0 percent of GDP) in 1995. Of these, CR 17.5 billion was obtained from government auctions of illegally cut timber that had been confiscated.24

53. Receipts from commissions paid to the Government by foreign investors in connection with joint ventures and the granting of monopoly rights have become increasingly important since mid-1994, though the coverage of such payments under the budgetary process remains incomplete. In 1995, the largest payments were made by Ariston (CR 3.8 billion) in the context of a tourism development project at Sihanoukville, and by the French/Malaysian consortium of Dumez/Muhiban Masteron (CR 12.5 billion) as part of a phased up-front payment in connection with the rehabilitation of Pochentong airport near Phnom Penh.25

Expenditure developments

54. Budgetary expenditures in Cambodia are heavily skewed toward wages and outlays for defense and security (Table 4). The sizable share of the wage bill reflects the large number of civil servants and defense and security personnel rather than high wages. Spending on defense and security-notably on operating expenditures—is high relative to other outlays and to GDP in part because of the ongoing conflict with the Khmer Rouge. As it has proved difficult to reduce these categories of expenditure, social spending and locally-financed capital expenditure remain very low.

Table 4.

Budgetary Expenditure, 1993-95

(In percent of GDP)

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Source: Data provided by the Cambodian authorities.

Current outlays

55. Expenditure developments in 1994-95 were dominated by outlays on defense and security. Defense and security spending reached a record high of 6½ percent of GDP in 1994—equivalent to over 60 percent of current outlays—and was substantially higher than the originally budgeted level of 4¾ percent of GDP. The overrun reflects in part carryovers from the previous year, and in part higher wage payments resulting from the higher-than-budgeted cost of rice allocations, which comprise a significant portion of military compensation. More significant, however, was initially unbudgeted spending on hardware and repairs financed largely by nonconcessional external borrowing contracted directly by the military.26 Higher spending was also directly financed—and initially not included in the budget—by earnings from timber exports over which the military was granted control during part of 1994. In 1995, tightened controls helped to reduce spending on defense and security to 5½ percent of GDP.

56. Faced with these pressures, the Government reduced civil administration outlays below the budgeted levels in both 1994 and 1995. With the civilian wage bill—which absorbed close to half of current expenditure—not amenable to reduction, spending on civilian operating outlays was especially constrained, declining by 1½ percentage points of GDP between 1994 and 1995. The pressures from high defense spending have also limited the Government’s ability to address the pressing social needs of the country. Expenditures on health and education amounted to just over 10 percent of total outlays (less than 2 percent of GDP) in 1995.27

Capital expenditure

57. Government capital spending is critical to Cambodia’s rehabilitation and reconstruction. Following years of war and neglect, the public infrastructure is severely degraded and outdated, and the resource requirements for reconstruction and development are commensurately substantial. Limited by inadequate budgetary resources, Cambodia depends almost exclusively on external grants and concessional loans for the financing of public investment; only a small share of total capital spending (about 25 percent in 1994 and 10 percent in 1995) is locally financed.28 Allocations of the local-currency counterpart of externally financed capital expenditures are also low compared with the levels required to sustain external financing for future capital spending.

58. With the acceleration of project aid disbursements following adoption in 1994 of the Government’s economic program, government capital expenditure reached 514 percent of GDP in 1994 and 7 percent in 1995. The project selection process has been gradually improving in recent years. A comprehensive listing of planned public investment projects was carried out in preparation for the Consultative Group Meeting in July 1996 and a mechanism for annual review of a three-year rolling investment plan was established with the assistance of the AsDB. This should help to provide a basis for the Government to establish project priorities and to determine its appropriate financial contribution.


59. Cambodia’s budget deficit has been wholly financed by the international donor community. The bulk of external financial assistance has consisted of project assistance to finance investment projects and technical assistance. Project aid consisted mostly of grants and reached a total of CR 454 billion ($180 million) in 1995, or 6¼ percent of GDP.29 Donors also provided direct budget support. All bilateral budget support, of which Japan is the largest provider, is in the form of grants. Commodity aid accounts for most bilateral budget support.30 Multilateral budget support has been provided in the form of concessional loans, principally by the World Bank.31 Although budget support declined in 1995 as a percent of GDP, it still accounted for close to a fifth of total financing.

B. Budgetary Policy in 1996

The budget for 1996

60. The budget for 1996 was formulated as a transition toward a sustainable medium-term fiscal position through: (i) a reduced reliance on external budget support for current expenditure through a durable increase in the revenue ratio; (ii) a shift away from trade-related receipts toward domestic revenue sources; (iii) a shift in spending from defense and security to rehabilitation and the social sectors; and (iv) a broadening of the coverage of fiscal operations to bring all extra-budgetary transactions into the budget and strengthened efforts to improve the transparency of budgetary operations.

61. The budget for 1996 targeted a revenue increase of about 1 percent of GDP relative to the outturn in 1995, to just under 10 percent of GDP. This was to be achieved through higher tax revenues from domestic sources. Nontrade tax receipts were projected to increase to 2½ percent of GDP, ¾ percent of GDP higher than in 1995. This increase reflected expected improvements in tax administration and the full-year effect of the tax measures adopted in the supplementary budget of 1995. Nontax receipts were to continue to contribute a sizable share of revenue (28 percent).

62. Expenditure policies in the 1996 budget were to initiate a gradual re-orientation of public spending toward public investment and the social sectors. Defense and security spending was budgeted to be reduced to 5 percent of GDP. By contrast, outlays on social transfers were budgeted at 1 percent of GDP, nearly ½ percentage point higher than the 1995 outturn. These additional allocations were to help accelerate a downsizing of the civil service through the provision of departure allowances. The budget also anticipated an increase in locally financed capital expenditure, including an increase in the local-currency counterpart of externally financed projects, to nearly ½ percent of GDP, to sustain disbursements of foreign project aid.

63. The current deficit was targeted to remain roughly unchanged relative to the budgeted outturn for 1995. The overall deficit was to fall slightly from 7¾ percent of GDP to 7½ percent and, as in the past, was expected to be financed mostly through external budget support (2¼ percent of GDP), together with disbursements from project aid (5¾ percent of GDP). Domestic bank financing was to be strictly limited to CR 12 billion (0.1 percent of GDP).

Budgetary developments through September 1996

64. Fiscal developments thus far in 1996 have repeated the pattern of the past two years, with weak revenue performance and strong pressures from spending on security and defense offset by tight controls over nondefense spending. Revenue collections through the first nine months of 1996 were 7 percent below the budget target despite buoyant economic activity, continuation of relative political and financial stability, and the implementation of new tax measures in the supplementary budget for 1995. In addition to persistent administrative difficulties in collecting taxes, revenue performance in 1996 has been negatively affected by customs duty exemptions on the import of automobiles and the export of rubber. Moreover, the MEF has made little headway in collecting tax arrears from enterprises despite the appointment of controllers to undertake audits of delinquent firms.

65. Overall budgetary expenditures have been contained during the year, almost exclusively through a compression of nondefense operating expenditures. Operating costs in the civil administration, which comprise the bulk of social expenditures, were running at only half of the budgeted level at end-September. The social ministries—education and health in particular—have been most affected by the expenditure compression relative to the budget. As in past years, operating costs for defense-security were marked by substantial overruns and already exceeded their budgeted level of CR 145 billion by end-September.

66. Despite the hiring of some 18,000 new civil servants during the year for political integration and pressures to increase the size of the military in the wake of recent Khmer Rouge defections, the wage bill appears to be on target, once the normal one-month lag in cash disbursement of wage payments is taken into account. Most of the new civil servants have yet to be added to the payroll. The military and civilian wage bills will still absorb an estimated half of current expenditures in 1996, reflecting a heavily overstaffed but poorly paid civil service and the large defense and security establishment. The civilian wage bill in late 1996 covered approximately 153,000 civil servants, as well as some 21,000 persons employed in the provincial and communal administrations. The wage bill for defense and security covered some 124,000 officers and enlisted persons, 57,000 para-military personnel, and 68,000 security officers. In total, over 400,000 persons (over 4 percent of the population) are receiving wages and salaries from the central government budget. At the same time, the average monthly civil service wage is low at approximately $20, while the average enlisted person receives about $25.

67. The compression of civilian operating expenditures has been sufficient to keep the fiscal program on track in 1996 despite the defense overruns and weak revenue performance. The deficit on current operations is running at less than 1 percent of GDP and foreign financing has exceeded the overall deficit, allowing a contraction in net bank financing

IV. Money and Banking

A. Overview32

68. Cambodia’s monetary system is characterized by a high degree of currency substitution and transactions are made mostly in cash. The use of riel, the domestic currency, is limited almost exclusively to small transactions and wage payments by the Government. Commercial banks deal practically only in foreign currency and private-sector bank deposits in riel are virtually non-existent. Foreign currency cash holdings are estimated to be significantly larger than the stock of measured broad money (which includes foreign currency deposits).33

69. The low trust in the domestic currency and in the banking system is a legacy of developments during the past decades. Money and banks were abolished under the Khmer Rouge regime. Money was re-introduced under a monobank system in 1980, but confidence in the domestic currency was eroded again by triple-digit inflation and the unsettled political and security situation in the late 1980s and early 1990s. The process of substitution into foreign currency was facilitated by foreign exchange inflows associated with UNTAC operations and the return of expatriate Cambodians following the formation of the new Government in mid- 1993. Currency substitution was also driven by the low denomination of riel notes, which made domestic currency an increasingly inconvenient medium for carrying out transactions in a highly inflationary environment. The progress in financial stabilization since 1994 has not yet resulted in a significant reversal of currency substitution, although the introduction in March 1995 of larger denominations of riel notes appears to have led to a one-time shift in currency portfolios towards domestic currency holdings.34

70. While the scope for the effective conduct of monetary policy remains limited in these circumstances, progress has been made over the past years toward a two-tiered banking system. Reform efforts have concentrated on laying the legal and institutional basis for the development of an effective system of financial intermediation, including a strengthening of the National Bank’s supervision capacity to cope with the challenges posed by the large number of commercial banks. This chapter describes the structure of Cambodia’s banking system and reviews the National Bank’s monetary policy instruments, and its management of riel liquidity through intervention in the foreign exchange market, reports on recent monetary developments and reviews their relationship to developments in inflation, and discusses issues that have arisen in banking supervision.

B. The Structure of the Banking System

71. Cambodia’s banking system consists of the National Bank of Cambodia (the central bank) and thirty-one commercial banks. The National Bank was established in 1980 as a monobank. In the late 1980s, the National Bank transferred some of its treasury functions to the Ministry of Economy and Finance, and its foreign trade banking department was turned into a commercial bank (the Foreign Trade Bank of Cambodia or FTBC). The opening up of Cambodia’s banking system to private and foreign banks in 1991 led to a rapid proliferation of commercial banks.

The National Bank

72. The National Bank operates since January 26, 1996, under a new central bank law. This new law represented an important step in the establishment of a modern legal framework for the financial system. The law gives the National Bank the primary mandate of maintaining price stability, and provides a number of monetary policy instruments. In particular, the law limits central bank credit to Government for any financial year to no more than ten percent of the Government’s budgetary revenues—excluding grants and proceeds from the sale of assets—of the previous year.

73. The scope for effective monetary control by the National Bank remains limited, however, primarily because a large part of reserve money (in the form of foreign currency cash holdings) is outside its direct control. The National Bank also lacks effective policy tools to control credit creation by the commercial banks as financial intermediation is conducted largely in foreign currency. The National Bank has, nevertheless, played a critical role in managing riel liquidity in the economy and helped maintain a broadly stable exchange rate through its periodic foreign exchange auctions.

Commercial banking system35

74. Cambodia’s commercial banking system currently comprises two state-owned (the FTBC and the Municipality Bank) and 29 private, mostly foreign-owned banks (including six branches of foreign banks and 3 joint ventures in which the National Bank has a minority share). Most of the banks were established during 1991-94. The National Bank ceased granting new licenses in June 1994 despite continued strong demand by a wide range of investors. Only recently were three new licenses issued in order to help promote the provision of banking services in the provinces. In spite of the large number of banks in Cambodia, banking offices do not exist outside of the few large cities, but plans are currently being developed for a rural credit program (see Annex III).

75. Cambodia’s commercial banking system is characterized by the following features:

  • Near complete dollarization of the banks’ portfolios. The vast bulk of lending activities consists of dollar-denominated short-term trade-related credits. Claims denominated in riel are very small and consist mostly of holdings of shares and other privately issued securities. The FTBC, which plays an important role in facilitating cash transactions for some government agencies and state-owned enterprises, is virtually alone in accepting deposits in riel (which account for only 3 percent, of the banks’ total liabilities).

  • The banks hold large amounts of foreign assets, mostly placed with correspondent banks. Two-thirds of the increase in bank deposits during 1995 and virtually all of the increase in the first nine months of 1996 were reflected in a strengthening of the net foreign asset position of the banks. This suggests a low level of financial intermediation, which is also apparent from the short maturities of both bank deposits and bank lending, which do not extend beyond one year.

  • A virtual absence of interbank transactions given the predominance of cash transactions. Banks manage their liquidity positions by holding large dollar cash reserves and maintaining credit lines with their correspondent banks. The small volume of dollar-denominated checks are cleared bilaterally by the banks concerned. The only formal payments system is an infrequent clearing session conducted by the National Bank for riel-denominated checks, with extremely small volumes.

  • A wide variation among the banks in the scale of activity. The five largest banks held nearly 50 percent of total banking system assets and extended half of all credit in 1995. The nature of the operations of some of the smaller banks, which extend essentially no credit and hold few deposits, has raised concerns about possible money laundering and the sources of their profitability.

C. Monetary Policy Instruments

76. Cambodia is still at a very early stage in the development of instruments of monetary control. Reserve requirements for commercial banks and refinancing facilities were introduced only recently. Open market operations are nonexistent in view of the lack of government- backed securities, such as treasury bills. Foreign exchange intervention by the National Bank has, however, proven to be effective in regulating riel liquidity and smoothing fluctuations in the exchange rate.

Reserve requirements

77. The reserve requirement has been applied at a uniform rate of 5 percent on all deposits since it was introduced in December 1993. Commercial banks have held reserves primarily in dollars in line with the composition of their deposit liabilities. The effectiveness of the reserve requirement as a tool of monetary control is limited by a number of factors:

  • The requirement on riel deposits is irrelevant in practice given the virtual absence of such deposits.

  • In view of the large cash reserves and deposits held with correspondent banks, any change in the reserve requirement could in principle be met by relatively low-cost portfolio adjustments with minimal impact on the banks’ lending operations.

  • There is no effective interbank market to redistribute excess reserves to deficient banks.

Refinance facility

78. A refinance facility was introduced in June 1994. In the absence of government-backed securities, riel-denominated trade bills are the only eligible asset for the facility. The system envisaged repurchase of the paper by the borrower before maturity with a loan amount at 70 percent of face value, but no bank has made use of the facility thus far.

Interest rates

79. The banks are free to set their own deposit and lending rates. Riel interest rates are not meaningful indicators of monetary conditions in light of the limited holdings of domestic currency.36 37 The structure of dollar interest rates is characterized by a high spread; annual interest rates on dollar deposits have ranged between 2-4 percent since mid-1994 while lending rates have ranged between 18-19 percent. The large spread reflects high risk premia demanded by the banks and the high costs they incur by holding large cash reserves.

The foreign exchange auction

80. The National Bank introduced periodic foreign exchange auctions in September 1993. The main buyers of dollars at the auction have been large importers and money changers in the parallel foreign exchange market (Box 2). With the exception of the FTBC, commercial banks have tended not to participate in the foreign exchange auction as they rarely conduct operations in domestic currency. The high overhead costs, among other factors, has deterred the banks from competing with money changers in the parallel market.

The Parallel Foreign Exchange Market

The parallel foreign exchange market in Cambodia is principally the domain of nonbanks, with over 1,000 money changers active in the market, some 400 of which are licensed by the National Bank. The initial purpose of licensing was to provide a stamp of approval, with the obligation of reporting data to the National Bank. The volume of transactions cm the parallel market is not known with certainty, but could be twice the daily volume of the National Bank’s auctions, which has averaged $400,000 during 1995.

The National Bank surveys three key parallel markets (one wholesale and two retail markets) several times a day to determine the official exchange rate. The official rate, which is currently based on the rate prevailing in the market early in the morning, is used primarily in transactions between the National Bank, the Treasury, and the FTBC. The spread between the official and parallel market rates has been gradually reduced over the years to generally no more than 1 percent since March 1994.

81. The National Bank auction served mainly to re-supply the Treasury with riel cash up to March 1995 in view of the small stock of domestic currency in circulation. Following the introduction of larger-denominated bank notes, the auction has been used mainly as a tool to smooth exchange rate fluctuations. To understand the operation of the auction, it is useful to distinguish between a “riel” circuit and a “dollar” circuit (Chart 1). As the Treasury spends riel cash (primarily in making wage payments), riels are exchanged for dollars on the parallel market as the public balances its dollar/riel portfolio. The “excess” riel disposed of by the public on the parallel market is in turn sold by money changers at the foreign exchange auction. The riel cash purchased by the National Bank at the auction is used to replenish the Treasury’s cash supply. As regards the dollar circuit, the Treasury obtains foreign currency from taxes and fees paid in dollars and external aid flows, which it sells to the National Bank as needed at the official exchange rate.

82. The FTBC, apart from fulfilling its own foreign currency requirements, frequently participates in the foreign exchange auction on behalf of the National Bank. The FTBC typically enters a bid to buy the entire amount offered at the auction at a rate slightly below the official exchange rate. Other market participants must therefore bid slightly above the FTBC to be competitive. The FTBC can sell excess dollars to the National Bank at the official exchange rate.

83. Cambodia has pursued a flexible market-based exchange rate policy and has relied on tight financial policies to ensure basic stability in the foreign exchange market. Interventions in the foreign exchange market have been geared toward raising the level of international reserves. The National Bank’s periodic foreign exchange auctions have, nevertheless, proven to be effective in smoothing exchange rate fluctuations. This was demonstrated by the National Bank’s successful intervention in August 1996 to fend off a brief speculative attack on the riel. Moreover, the introduction of the foreign exchange auction and the subsequent stabilization of the exchange rate have contributed to the sustained improvement in Cambodia’s economic environment in recent years.

D. Monetary Developments

84. Substantial improvements have been made in the past few years in the classification of the monetary accounts, particularly with the shift to the new plan of accounts by the National Bank in December 1995. The analysis of monetary developments continues to be seriously hampered, however, by the predominance of foreign-currency cash holdings, which are not captured in the monetary data. As a result, the measured growth rates of broad money provide a poor indicator of underlying liquidity conditions. The consequent apparent distortions in the money-price relationship are discussed further below.

85. Broad money (including foreign currency deposits) has grown rapidly since 1994 (Table 5). Notwithstanding this sharp increase, inflation, which was over 40 percent (final quarter basis) in 1993, dropped to 18 percent in 1994, and declined into single digits in 1995 and the first nine months of 1996 (see Tables 25-27 in the Appendix). The exchange rate remained broadly stable, in contrast with the large gyrations of earlier years.



Citation: IMF Staff Country Reports 1997, 009; 10.5089/9781451821628.002.A001

Table 5.

Sources of Broad Money Growth, 1994-96

(Twelve-month change in percent of beginning period broad money)

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Source: Data provided by the Cambodian authorities.

86. During 1994, the increase in broad money by 29 percent was fully accounted for by a rise in foreign currency deposits; domestic currency in circulation declined slightly. The increased liquidity in the banking system was, in turn, reflected in a strengthening of the banks’ net foreign asset (NFA) position. Net domestic assets (NDA) of the banking system declined by more than half during the year, reflecting both lower net claims on the Government and a sharp increase in commercial banks’ capital as a result of the establishment of new banks. Credit to the private sector increased rapidly, by 36 percent, albeit from a low base.

87. Monetary developments during 1995 were characterized by an acceleration in broad money growth to 44 percent. The rapid growth in broad money resulted mainly from a portfolio shift away from foreign currency in circulation toward domestic currency and foreign currency deposits, with a further strengthening of the NFA position of the banking system. After expansion in the first quarter in part associated with pre-financing of log exports, credit to the private sector declined in the second quarter, but picked up later in the year in line with the buoyant economic activity. Net claims on Government increased by only a small amount. The net international reserves of the National Bank increased to $110 million by end-1995 from $70 million at end-1994.

88. The expansion of broad money accelerated further in early 1996, but has slowed since the second quarter. Net claims on Government declined during January-September, while credit to the private sector expanded strongly during the same period. Net international reserves increased by $25 million during the first quarter, but then increased by only $11 million through September 1996, reflecting the slowdown in the growth of domestic currency in circulation.

The money-price relationship

89. The sharp decline in inflation since 1994 in the face of rapid monetary growth was likely due to the following factors:

  • A pronounced portfolio shift away from foreign currency cash holdings—which are not captured in the monetary statistics—to domestic currency following the introduction of new riel bank notes.

  • A similar shift in portfolios toward foreign currency deposits in the wake of the establishment of new banks.

  • Broad stability in the exchange rate which contributed to the reduction in inflationary pressures, given the rapid transmission of exchange rate movements to domestic prices in Cambodia’s highly dollarized economy.

  • Downward flexibility in prices, particularly food prices, which have a large weight in the consumer price index.

E. Issues in Banking Supervision

90. The proliferation of commercial banks during 1991-94 was due in part to the lax requirements for obtaining a license—mainly just a minimum capital requirement. Prudential concerns over the rapid increase in the number of banks prompted the authorities to impose a moratorium on new licenses in June 1994. The National Bank resumed granting licenses only in June of 1996 following the strengthening of prudential regulations and a desire to extend financial services in the provinces. Three more banks have since been established, including the first commercial bank to locate its head office outside the capital.

91. The large number of banks for a country of Cambodia’s size and stage of development places considerable strain on banking supervision. The National Bank’s shortcomings in this regard were highlighted in 1995 when one bank had its license withdrawn as result of large losses from speculation in the U.S. commodity markets, while another bank went into voluntary liquidation. The National Bank has strengthened bank regulation and supervision during the past two years, supported by technical assistance from the Fund and other institutions, notably, through:

  • Reorganization of its banking supervision department and addition of new staff in October 1995, and adoption of more comprehensive reporting forms in June 1996.

  • Off-site inspections since 1995, focusing initially on banks seeking a renewal of their license. In light of the weaknesses of the supervision department’s technical capacity and the urgent need for gaining knowledge of banks’ operations, the National Bank decided in June 1996 to employ an international audit firm for on-site inspections. One bank has so far been inspected and, based on the audit report, was closed by the National Bank in August 1996.

  • Divestiture of the National Bank’s interests in two of the five joint-venture banks to enhance the transparency of the prudential process. Preparations are underway for the divestiture of the three remaining joint-venture banks.

92. The legal framework for bank supervision has also been deficient. For example, the capital adequacy ratio of 5 percent is lower than the minimum standard of 8 percent recommended by the Bank for International Settlements. The rules regarding foreign currency exposure issued in early 1995 are irrelevant as most banks are not active in the foreign exchange market. Further, there are no rules on lending to related parties, although a limit of 20 percent of the bank’s capital has been imposed on lending to a single customer.

93. Many of these deficiencies are being addressed in a new commercial bank law, which was approved by the Council of Ministers in August 1996 and is under review by the National Assembly. The law clarifies the legal framework of the banking system and sets out comprehensive prudential measures and procedures for the supervision of banks, and should provide a sound basis for future development of the financial sector.

V. The External Sector

94. The Government’s external sector policies under its economic reform program have aimed at fostering Cambodia’s reintegration into the regional and world economy. These efforts have been underpinned by pursuit of a market-based exchange rate policy within a framework of liberalized exchange, foreign investment, and trade regimes. This policy has yielded significant benefits to the economy by protecting Cambodia’s external competitiveness while bolstering its international reserve position. At the same time, increased financial stability—combined with the liberal exchange and trade regimes—has helped to attract significant amounts of foreign direct investment. The success of Cambodia’s economic reform program, however, has been—and remains—critically dependent on large-scale financial assistance from official sources to meet Cambodia’s massive rehabilitation and reconstruction needs

95. Against this background, external sector developments over the past three years have been marked by a sharp rise in official aid flows, which helped finance a substantial increase in imports. As a result, the external current account deficit (excluding official transfers) doubled from an estimated 9½ percent of GDP in 1993 to nearly 16 percent in 1995.38 Nontraditional exports, particularly exports of garments, have grown rapidly, but Cambodia’s export base remains very small, equivalent to only 10 percent of GDP and less than half of retained imports in 1995. Porous borders and the liberal trade regime have also turned Cambodia into a major transit point for the re-export of consumer goods imported from third countries. Such re-exports to neighboring countries have actually exceeded “domestic” exports in recent years.

A. Recent Developments39

Merchandise exports

96. Domestic exports continue to be dominated by forestry products, although non- traditional exports—particularly garments—have increased sharply in recent years. Exports of logs and sawn timber are estimated to have risen from about $85 million in 1993 to nearly $200 million in 1995. These estimates are based on data for official exports but also include estimates of unrecorded exports of forestry products. As described in more detail in Chapter VII, illegal cutting and exporting of timber continued on a large scale despite the bans on logging and log exports. The problem has been particularly acute in the regions controlled by the Khmer Rouge in the northwestern part of the country, though illegal exports—mostly destined for other countries in the region—have also been a persistent problem in other border regions. The export estimates are therefore subject to a large margin of error. There are indications that the figures presented here are probably on the conservative side.

97. The second most important traditional export has been rubber. The volume of rubber exports nearly doubled between 1993-95, despite problems with poor quality and—more importantly-inefficient marketing arrangements.40 Export volumes of rubber could increase significantly in the future if quality can be improved and the cultivated area expanded. Other traditional recorded exports, which include mainly agricultural products and fish, have been negligible, though unrecorded trade with neighboring countries in these products is believed to be sizable.

98. The most promising recent development has been a marked change in the composition of exports away from traditional products toward non-traditional goods, including the products covered under the General System of Preferences (GSP)—especially textiles. Virtually nonexistent prior to 1995, non-traditional exports exceeded $40 million in 1995, and have continued to exhibit strong growth during the first half of 1996. Other products covered under the GSP include leather products, furniture, and tents.

99. Re-exports continue to be an important feature of Cambodia’s external trade. Re-exports result from discrepancies in import duties with neighboring countries on relatively high value-added consumer commodities, as well as gold.41 Most re-exports of consumer goods are to Vietnam, while the bulk of gold re-exports go to Thailand. Starting from about $117 million (over 50 percent of total exports) in 1993, re-exports jumped to an estimated $540 million (about 70 percent of total exports) during 1995. The two largest re-export items during 1995 and the first half of 1996 were cigarettes and gold, though re-exports of the former have fallen sharply in recent months.

Merchandise imports

100. Assessing developments in imports is hampered by deficiencies in the data collected by the Customs Department on goods destined for re-export and on tariff-exempt imports (such as imports procured by government, those related to official assistance, project disbursements, and foreign direct investments, as well as capital and intermediate goods used to produce exports). The estimates for retained imports, corrected for these deficiencies, reveal a doubling of retained imports between 1993-95, from US$305 million to US$650 million. Developments during the first half of 1996 suggest a further increase, though at a much more modest rate. Most of the retained imports not related to foreign aid and foreign direct investment consist of consumer products, e.g., cigarettes, motorcycles, beer, consumer electronics, and petroleum products. Petroleum products have in fact been the fastest growing imported commodities, increasing from under $35 million in 1993, to $60 million and $95 million in the subsequent two years. By the middle of 1996, imports of petroleum products had already reached $65 million. Tariff-exempt imports are estimated to have accounted for about 60 percent of retained imports during the past two years.


101. Cambodia’s services account has turned from a small surplus in 1993 to a deficit of $108 million in 1995. Tourism has become Cambodia’s largest foreign exchange earning service, growing from a negligible amount in 1993 to some $50 million in 1995. Other earnings come from the state airline Royal Air Cambodge and fees from communication services provided by foreign companies in Cambodia. On the debit side, transportation is the single most important item, which rose from about $35 million in 1993 to $85 million in 1995. Technical assistance related to foreign assistance has also risen in tandem with increased official transfers, although developments in the first half of 1996 indicate a decline in the level of technical assistance from $47 million in 1995 to $35 million in 1996.

Official disbursements

102. Official transfers in the form of budget support, project aid, and technical assistance rose sharply during 1993-95, from $150 million to $290 million, with Japan by far the most significant contributor (see also section C below). Gross disbursements from official creditors, primarily on concessional terms, reached $82 million during 1995, of which multilateral and bilateral creditors accounted for $60 million and $22 million, respectively.

Foreign direct investment

103. Total FDI related inflows are estimated to have reached $80 million in 1994, $151 million in 1995, and $130 million during the first three quarters of 1996. FDI inflows included investments in agriculture, airport construction, telecommunications, garments, and food processing (see also Chapter VI).


104. From $70 million at end-1994, net international reserves reached $110 million by end- 1995 even though the external current account worsened from 13.7 percent of GDP in 1994 to 16 percent in 1995. At the same time, gross official reserves burgeoned from $100 million at end-1994 to $182 million (equivalent to some 1.5 months of imports of goods and services) one year later. Gross official reserves strengthened further to $216 million by end-September 1996.

B. External Financial Assistance

105. The Cambodian Rehabilitation and Development Board (CRDB) oversees the overall execution and use of foreign aid, including that from the NGOs. Its recent Development Cooperation Report (1995/96), which contains detailed accounts of foreign aid extended to Cambodia on the basis of data provided by donors, put foreign assistance at some $353 million in 1994 and $460 million in 1995.42 In 1995, multilaterals provided roughly 40 percent of total assistance, with a broadly even distribution between the Fund, the World Bank, the Asian Development Bank (AsDB), and the European Union (EU). Among the bilateral donors, Japan has been by far the largest contributor, providing about 40 percent of total bilateral contributions, or about a quarter of overall contributions. Other bilateral donors providing large amounts of assistance include the United States, France, Australia, and Sweden. The ratio between grants and loans was 4:1 in 1994 and just over 3:1 in 1995. The bulk of the assistance was in the form of technical assistance, project aid, and emergency relief. Direct budgetary and balance of payments support accounted for some 16 percent of the total over the period 1992-95 (Table 6).

Table 6.

External Financial Assistance

(In millions of U.S. dollars)

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Source: Data provided by Cambodian authorities.

C. External Debt

106. External debt reached $568 million, or 19 percent of GDP, at end-1995, up from $487 million (20 percent of GDP) the year before. Debt to bilateral creditors accounted for nearly 70 percent of the total, mostly reflecting debts incurred prior to 1979 and some more recent debts contracted in 1994 for the purchase and repair of military hardware. The remaining debt is owed to multilateral institutions, comprising the World Bank (11 percent of the total), the AsDB (8 percent), and the Fund (13 percent). Cambodia’s debt contracted prior to 1979 and owed to creditors in the Paris Club (France, Germany, Japan, and the United States), was rescheduled in early 1995 on Naples terms. Since the related documentation was destroyed, Cambodia relied on creditor’s records in its bilateral discussions. Bilateral agreements have been signed with three of the creditors. Discussions with the remaining creditor are continuing.

107. Cambodia also has outstanding obligations to Russia amounting to CR 812 million. Negotiations regarding a rescheduling of these obligations in line with the Paris Club agreement have not yet started. These obligations are the residual outstanding balance (debit position) of Cambodia’s correspondent account at the Central Bank of Russia.43 As to the positions in the correspondent accounts with other countries, Cambodia had net debit positions with the Czech Republic, Hungary, and Poland before they were converted into loans. The total outstanding obligations to these countries is $5.7 million.44

D. Trade Regime

108. Cambodia’s trade system is relatively liberal. Currently, there is a temporary—and in practice nonbinding—export quota of 120,000 tons on rice for 1996, replacing a ban that had been in place until December 1995. In addition, there has been a ban on exports of unprocessed timber and sawn logs since May 1, 1995. This ban does not apply to processed wood products. Moderate export taxes (between 5 to 10 percent) are imposed on cut and sawn wood, cattle, fish, pork, precious stones, and rubber. At present, there are no quantitative restrictions on imports. However, ministerial authorizations are required on selected goods.45 Four primary tariff bands (7,15, 35, and 50 percent) are in effect. For imports intended to be re-exported, the applicable tariff rates incorporate assumed proportions of imports that are re-exported.46

109. Cambodia currently enjoys GSP status from 26 countries, and the United States recently granted MFN status. Under GSP, Cambodia has tariff-free access to its counterparts, with markets in annual quotas. The recent surge in the activities in the garment industry has been attributed to, in part, the fact that the neighboring countries are close to using up their quotas. The recent finding of violations involving labels identifying the origin of production for garment exports to countries in the European Union, which threatened to jeopardize GSP status, has recently resulted in closer inspection by the Government of such exports.

110. Cambodia currently holds an observer status in the WTO, and has decided to apply for full membership in the near future. Since 1993, the harmonized codes have been adopted. The authorities have not yet considered the likely impact of the Uruguay Round of negotiations.

E. Customs Operations

111. With some 1,100 customs officers and personnel, the Customs Department operates 67 border posts, including 2 sea ports, 7 river posts along the Mekong, and land posts along the borders with Thailand, Vietnam, and Lao, P.D.R. The most important posts are the deep sea port at Sihanoukville in the southwest, and the land posts at Bavet (Vietnam), Poipet (Thailand), and Dom Kralor (Laos). The sea port at Sihanoukville has a relatively good railroad connection as well as a highway leading to Phnom Penh, which is connected with Poipet via a railroad and with Baret via a highway. There are also 9 inland customs offices.

112. For imports worth less than $5,000, customs officers assess the value of the shipment and apply the appropriate import duty. For relatively homogeneous goods, the invoice is usually faxed to one of the inland offices for verification. Upon approval, duties are paid at the border. For shipments with values exceeding $5,000, pre-shipment inspection by Societé Generale de Surveillance is required.

F. Exchange System

113. Cambodia maintains a liberal exchange system, with no restrictions on the making of payments and transactions for current international transactions, and no discriminatory current account arrangements or multiple currency practices are in place. A new foreign exchange law, which will bring the legal regime in line with the current liberal de facto system, is currently under review by the National Assembly. The details of the operation of the foreign exchange market are provided in Chapter IV.

VI. The Changing Role of the State: Enterprise Reform, Privatization, and Foreign Direct Investment

114. Cambodia’s medium-term development strategy is based on private-sector led economic growth and disengagement of the public sector from direct involvement in the production and distribution of most goods and services. The Government has already transferred most of the state-owned enterprises (SOEs) to the private sector, undertaken a comprehensive reform of the framework in which SOEs operate, and is committed to privatizing most of the remaining enterprises. The Government is also increasing the role of the private sector in areas that have traditionally been served by the public sector through the establishment of joint-ventures and build/operate/transfer (BOT) arrangements with private investors.

115. The private-sector based strategy recognizes that much of the capital required for the development of Cambodia will need to come from abroad in the form of foreign direct investment, as a complement to financial support from official sources for the rehabilitation and reconstruction of its physical and social infrastructure. The participation of foreign investors in Cambodia’s development is facilitated by the liberal exchange and trade regime, and the liberal investment regime set out in the Law on Investment of 1994. This chapter reviews developments in these interconnected areas—SOE reform, privatization, and foreign investment—over the 1994-96 period.

A. The State-Owned Enterprise Sector

116. The role of state-owned enterprises in the Cambodian economy has been relatively small, especially when compared to other transition economies. The central planning framework-introduced in 1979 against the background of a completely devastated economy- proved difficult to implement. Industrial and commercial activities were carried out by the State, but agriculture, which accounted for well over half of GDP in the in the mid-1980s, was not collectivized (with the notable exception of rubber production and timber exploitation). Moreover, reconstruction of the industrial base proved a very slow process. Industrial output, largely from SOEs, accounted for only 5 percent of GDP in 1985, compared with nearly 20 percent in 1970. Finally, while external trade was run by state-run trading companies, internal trading by state-run enterprises was quickly supplemented by an emerging private sector.

117. The process of liberalizing the SOE sector started during the second half of the 1980s. Initially, enterprise accounts were separated from the national budget, though the budget continued to provide investment funds and operating subsidies. With the decision to move toward a mixed economy in 1989, the SOEs were given greater autonomy and an attempt was made to tighten their budget constraints. In practice, however, these reforms had little impact on the relationship between the state and the SOEs. The Government restricted their ability to set prices and retained tight control over their activities relating to investment, borrowing from banks, and foreign exchange operations. Enterprises were discouraged from laying off workers, and even enterprises that ceased operations often retained workers on the payroll at reduced salaries. Control of enterprises was relinquished only when they were privatized.

118. The privatization efforts started in 1989 with the passage of the Foreign Direct Investment Law. Transactions under the program concentrated on industrial and service- oriented enterprises that held urban real estate. Most of the privatization deals took the form of long-term leasing contracts rather than outright sales. With further sales and the establishment of joint ventures—mostly in the telecommunications sector—only 52 of 176 enterprises remained under state control as of mid-1996; 38 of these 52 are slated for early privatization or liquidation (Table 7).

Table 7.

The Status of State-Owned Enterprises, September 1996

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Source: Data provided by the Cambodian authorities.

119. The operationally most significant aspect of reform efforts for enterprises that remained under state control—instituted immediately after the launch of the 1994 reform program—was a decisive hardening of the budget constraints for the SOEs through elimination of new credit from the National Bank. Budgetary transfers were reduced and have since been strictly contained. An inventory of inter-enterprise debt was completed and procedures for clearing them were adopted. The procedures put in place to prevent accumulation of new inter-enterprise arrears have been largely effective. Bank credit outstanding to SOEs has been gradually reduced and stood at less than 1.5 percent of total credit extended by the banking system in mid-1996. Furthermore, the Government has sought to strengthen the efficiency of SOEs by allowing flexible pricing policies, reducing excess labor, and increasing managerial autonomy.

120. The second important step was the establishment of a new legal framework (loi-cadre) for SOEs, which was passed by the National Assembly in May 1996 (Box 3). Within this framework, line ministries will cease to undertake commercial activities, either directly or indirectly, and the autonomy of SOEs will be ensured. SOEs are restricted to activities related to natural resource exploration, public infrastructure, and utilities. In the context of implementing the framework, the Government is now in the process of assessing the assets and liabilities, formalizing the legal status (incorporation and registration), and appointing the Boards of Directors and government controllers for each SOE.

B. Privatization47

121. Between 1991 and 1996, 20 enterprises that had been under the control of the line ministries were sold to the private sector, yielding US$17.0 million. The bulk of these proceeds—US$14.1 million—was obtained from the sale in 1996 of just two companies. The predominant form of asset transfer has been through leasing arrangements, most of which were concluded in the pre-1994 period, though leases continued to be signed through May 1996.48 Among the 94 existing leases, long-term leases predominate: a total of 53 contracts were signed for 15 or 20 years, and 30 for periods longer than 20 years. Only 11 contracts were signed for leases of less than 10 years, mostly for land, buildings, and warehouses. The majority of leases were for enterprises and assets under the control of the Ministry of Industry (MOI).

122. All remaining SOEs with marketable activities are to be sold to the private sector, in accordance with the legal and regulatory framework established in 1995 (Box 4). Of particular importance in this context is a strengthening of the role of the Privatization Committee to ensure competitive bidding and transparency in the transfer of proceeds to the budget. Under the current privatization plan,. 38 of the 52 enterprises under state control will be privatized or liquidated. Of these, only 23 are fully operational, including 7 rubber plantations.49 Liquidation will be pursued for those companies that are idle or have reduced their commercial activities.

The Legal Framework for State-Owned Enterprises

A new legal framework for state-owned enterprises (SOEs) was adopted by the National Assembly in May 1996. It clarifies relations between SOEs and the state with the aim of identifying the responsibilities and obligations of each. To ensure the autonomy within SOEs, line ministries will cease to engage in commercial activities-either directly or indirectly. The main objective of the state enterprise sector will be to promote economic growth, employment, and income generation from activities related to natural resources, public infrastructure, and utilities. The key provisions in the Law Regulating the Public Enterprises are:

Legal Status. SOE’s become autonomous legal entities with full managerial and financial autonomy. The law allows for three distinct legal structures: (I) public economic corporations; (ii) fully state-owned companies whose entire share capital is held by the Government; or (iii) joint stock companies incorporated under commercial law, with more than 50 percent of shares or voting rights held by the Government.

Parity with non-state enterprises. State enterprises will be governed by the rule of corporate law- and any other commercial provisions—in matters relating to their establishment, functioning, liquidation, tax regime, and accounting and financial systems.

Control. Control over SOEs will be exercised by a Board of Directors. The appropriate sectoral ministry will have representatives on the Board of Directors, and the employees will elect one representative to the Board. Government representatives to the Board of Directors of joint stock companies will be appointed by sub-decree, as recommended by the Minister of Economy and Finance.

Government supervision. The ministerial representatives to die Board of Directors monitor the decisions of the Board to ensure they are consistent with the Government’s policies. The supervisory ministry has the right to voice its objection to a decision of the Board, but the Board has the right to disregard such an objection. The Ministry of Economy and Finance will assign a government controller to each state enterprise, who will attend Board meetings, but shall not have voting power. The controller’s duties will include ensuring that the public enterprise is in compliance with its obligations under the new law, that the decisions made by the enterprise’s managing bodies are properly implemented, and that the enterprise’s operations and transactions are lawful. The controller will report to the Minister of Economy and Finance. The Minister can order repeal or amendment of any Board decision found to be illegal or detrimental to the rights and interests of the enterprise or the Government, or inconsistent with the enterprise’s business.

The Legal Framework for Privatization

The legal framework of privatization was established in the Financial Law of 1995 and elaborated in Circular No. 280 issued by the two Prime Ministers on September 3, 1995. Its main features are:

• The scope of privatization includes: (i) public enterprises; (ii) public shares in joint ventures; (iii) industrial or commercial activities of the public administration, including telecommunications, airport management, fishing, and forestry exploitation; and (iv) all other public assets, such as buildings, or concessions for the exploitation of natural resources. Excluded from privatization are assets for which there is a strong national security or cultural interest.

• The privatization program is established on an annual basis by the Privatization Committee. The program consists of a list of enterprises and activities to be transferred to the private sector and a timetable for such transfers.

• The Privatization Committee, established in June 1995, is chaired by the Minister of Economy and Finance, and has 9 permanent members representing the Council of Ministers, the Ministries of Agriculture, Commerce, Industry, Justice, Planning, Social Action, Transport and Public Works, and the National Bank. The Secretariat of the Committee consists of staff at the Ministry of Economy and Finance. The Committee is charged with: (i) defining the privatization program on the basis of proposals made by line ministries; (ii) supervising the preparatory work, notably the evaluation of assets of state enterprises slated for privatization and, where applicable, the elaboration of a plan to reduce staff; (iii) approving the proposed privatization instruments; and (iv) ensuring that applicable procedures are followed, notably with regard to competitive bidding.

• All types of privatization are allowed, including: (i) total privatization; (ii) partial privatization in the form of joint ventures with the private sector; (iii) leasing, including of land and buildings; (iv) concessions; and (v) sale or liquidation of assets of nonviable enterprises.

• An evaluation of assets has to be undertaken by a qualified independent expert, assigned by the line ministry but subject to the approval of the Privatization Committee. The evaluation report is confidential and will be submitted directly to the Chairman of the Privatization Committee.

• The regulations stipulate competitive bidding as the general rule, with the widest possible publicity, except in cases of transfers to existing employees. In cases where competitive procedures are not deemed appropriate or where there are no offers, transactions are to be handled on a case-by-case basis.

• The selection of buyers is to be made by the Minister of Economy and Finance on the basis of proposals by the Privatization Committee. Special regulations govern the transfer of enterprises to existing or former employees, including lower purchase prices and longer-term payment schedules. The prior approval by the two Prime Ministers is required for large enterprises or activities of major impact on the economy.

• The proceeds from privatization operations are to be transferred to the budget through a special account of the Ministry of Economy and Finance. On approval by the two Prime Ministers, proceeds are to be used for:

(i) financial rehabilitation of enterprises to be privatized; (ii) financing of departure schemes for employees of public enterprises; and (iii) capital injections into public enterprises that remain in the public sector.

• Participation of foreign investors is governed by the Law on Investment of August 4, 1994. Privatized operations are eligible for all benefits that can be granted under the Law on Investment.

123. Apart from direct privatization through sale or lease of previously state-owned enterprises, the Government has been increasing the role of the private sector through establishment of joint-ventures with foreign investors-including BOT agreements-and the granting of long-term concessions in the natural resource sectors, especially forestry and oil and gas extraction. However, in undertaking such activities, the Government has frequently granted generous concessions, including exclusive rights over land use and monopoly powers, in exchange for comparatively small investments in infrastructure. In addition, the Government has often agreed to reinvest its share of profits in these ventures rather than transfer the proceeds to the budget.

Joint ventures

124. The Government has established a number of joint ventures with foreign investors, primarily in the telecommunication and transportation sectors. Some of the noteworthy recent joint ventures are:

  • Royal Air Cambodge (RAC) was established by the Government as a joint venture with the Malaysian firm MHS (the leading shareholder of Malaysian Airline System, or MAS). The joint company began its operations in January 1995 as the national carrier on international routes, and as the sole operator of domestic flight services within Cambodia. The airline is managed by MHS under a management agreement. The state holds 60 percent of the invested share capital, in return for which the Government has transferred the ownership of landing rights to its Malaysian partner. The government share in future profits of the joint venture will be applied to further capitalization of the venture.

  • Camintel was established by the Cambodian Ministry of Post and Telecommunications (MPT) as a joint venture with the Indonesian corporation Indosat. Camintel will renovate the domestic telephone network set up in 1992 by the UNTAC. The enterprise aims to add 10,000 lines to the country’s existing network of 25,000 lines by mid-1997. The MPT has also established three joint ventures with private operators from Malaysia and Thailand to provide cellular phone facilities. The three operators presently serve 10,000 subscribers using the Ministry’s local and international gateways. The cellular phone network has been subject to considerable congestion, however, and the International Telecommunications Union is assisting the MPT in drafting a master plan to develop and regulate the overall cellular system.

  • To deal with rapidly rising international communications traffic, in 1990 the Government established a 10-year business cooperation contract with the Australian company Telstra. Under this agreement, the Australian partner is assisting the MPT in the management and development of the telecommunications sector, particularly in the area of international traffic. The agreement is based on a revenue-sharing scheme which allows Telstra to receive, in return for its investment, 49 percent of international traffic payments for communications carried via INTELSAT. Telstra has built an Earth Station in Phnom Penh, and has set up international satellite lines between Phnom Penh and Australia.

BOT arrangements

125. For certain large projects, the Government has entered into Build-Operate-Transfer (BOT) arrangements. Prominent recent arrangements are:

  • The Government established a $120 million venture with a consortium comprising the French company Dumez and the Malaysian company Muhibban Masteron to operate and expand Phnom Penh’s Pochentong airport on a twenty-year BOT basis. Invested capital is to be composed of a $22 million contribution by the two private companies, together with a $20 million grant from the French Government, concessional loans from the World Bank and the AsDB totaling $30 million, long-term commercial debt of $30 million, and internal cash flow. All proceeds from landing and departure fees will accrue to the private operators for the 20-year BOT period. While the Government is not providing any direct capital, generous concessions are being granted to the consortium, including: (i) giving the consortium the right to develop all tourist-related business enterprises in the vicinity of the airport without having to share the profits with the Government; (ii) a Government commitment not to build any airport in the vicinity; and (iii) a Government commitment not to expand the existing airport in Siem Reap for 10 years.

  • The Government has signed an agreement with Beacon Hill Associates, Inc. to build and operate a 60 megawatt power plant in Phnom Penh over a 25-year period. Financing for the $70 million power plant will consist of 70 percent loans and 30 percent equity paid in by Beacon Hill Associates.

Natural resource concessions

126. The Government has signed concession contracts with a variety of private companies to exploit its rich natural resource base, including large tracts of fertile agricultural land that lie idle, vast forest areas, and off-shore oil and gas deposits. Recent new forest concessions have been linked explicitly to commitments of foreign investment in the wood-processing sector. These concession agreements have consisted of an “Investment Agreement,” in which the concessionaire agrees to establish wood processing facilities of a specified investment value. In return, the Government grants harvesting rights to a specified forest area and issues a forest license. In the license, the Government specifies the broad outlines of the concessionaire’s rights to conduct forest operations. To date, the Government has entered into approximately 30 such concessions.50

C. Foreign Direct Investment51

127. Foreign direct investment is expected to play a key role in the reconstruction and development of the Cambodian economy. Indeed, much of the capital associated with the various forms of private-sector involvement described earlier has come from abroad, and a large number of other foreign direct investment projects have been approved by the Council for the Development of Cambodia (CDC) (Box 5).

128. Foreign investors have found Cambodia attractive for a number of reasons:

  • Cambodia’s Law on Investment of 1994 established a favorable legal framework and provided tax incentives for investment projects in such sectors as tourism, agriculture, food processing, and manufacturing (Box 6);

  • The Government has provided a more secure environment for foreign investors by ratifying provisions of a number of bilateral investment protections agreements;

  • Labor costs are low, ranging from $35 to $40 per month; and

  • The potential returns on investment are high given the unexploited opportunities after the long period of isolation.


129. As the agency assigned to evaluate and approve all investment projects in Cambodia, the Council for the Development of Cambodia (CDC) approved 295 private-sector investment projects with investment commitments totaling approximately $2.6 billion between August 1994 and July 1996. Half of the value of these approvals consist of a proposal by the Malaysian company Ariston for $1.3 billion in investments to develop a resort on Naga Island and to upgrade the port and airport of Sihanoukville.

130. The tourism and hotel industry has received the largest FDI commitments, with over $400 million (excluding the Ariston project, which partly falls into this category), followed by the construction sector with over $250 million. The telecommunications and transportation sector has also received sizeable commitments, partly because a large part of the Ariston commitment is to be invested in infrastructure.

The Council for the Development of Cambodia—CDC

The Law on Investment of 1994 established the Council for the Development of Cambodia (CDC). The CDC is responsible for elaborating Cambodia’s overall long-term development strategy, and oversees all rehabilitation, development, and investment activities. It facilitates and coordinates ministerial interaction with donor countries, international organizations, and investors. The CDC has broad governmental representation, and is co-chaired by the two Prime Ministers. The Senior Minister in charge of Rehabilitation and Development, who is also the Minister of Economy and Finance, is the Vice-Chairperson of the Council.

The CDC consists of two functionally distinct units, the Cambodian Rehabilitation and Development Board (CRDB) and the Cambodian Investment Board (CIB). The CRDB is responsible for coordination and management of foreign aid provided by bilateral donors and multilateral institutions. As part of this responsibility, all grants and loans connected with public investment programs are submitted to the CRDB for approval. In addition, the CRDB coordinates the functions of the NGOs. The CIB is responsible for various aspects of private-sector investments, such as strategic planning of private sector investments and addressing legal issues relating to the investment law;

The CDC is designed to be a one-stop service for foreign investors in their dealings with the Cambodian authorities. As such, its responsibilities include:

  • evaluation of private-sector investments; all of which require prior approval by the Council;

  • determination of eligibility for tax incentives provided for in the Law on Investment;

  • monitoring of private-sector investment projects’ compliance with the tax provisions of the Law on Investment; and

  • maintaining a Foreign Investment Monitoring System to provide basic data on investment flows, duty- exempt imports, and repatriation of profits.

While many projects can be cleared by the CDC directly, it is required to submit certain project proposals for approval to the Council of Ministers. These projects:

  • involve a capital investment of at least $50 million;

  • relate to the exploration and exploitation of mineral and natural resources; or

  • are built on a Build-Own-Transfer, Build-Operate-Transfer, Build-Own-Operate or Build-Lease- Transfer basis.

The Law on Investment of 1994

A new investment law was approved by the National Assembly in August 1994. The law aims to stimulate FDI flows by offering tax incentives, making transparent and swift the investment approval process, and laying out the legal framework in which foreign investors operate. Key features of the investment law include the following:

• The law established the Council for the Development of Cambodia (CDC, see Box 6). The CDC’s main task is to implement Cambodia’s overall long-term development strategy. The CDC is responsible for evaluating and approving all investment projects, and is required to respond to an investment proposal within forty-five days.

• The ownership structure of foreign investments is not restricted. Investments can be channeled into branches of foreign-based companies, into wholly foreign-owned corporations, or into joint ventures with Cambodian nationals.

• Investors are to be treated in a non-discriminatory manner, except regarding the ownership of land. Land ownership for the purpose of carrying on promoted investment activities can be vested only in natural persons or in legal entities holding Cambodian citizenship. Investors are permitted, however, the use of land through long-term leases for a maximum period of 70 years.

Tax incentives are provided for investments in technology-intensive industries, tourism, agriculture, infrastructure, rural development, and environmental protection. Similar incentives are provided for investments that would generate jobs for Cambodian nationals or are export-oriented. Specifically, the law provides for the following incentives:

  • - a relatively low corporate tax rate of 9 percent on profits, with exemptions granted for profits from activities relating to the exploration and exploitation of natural resources (timber, oil, minerals, gold, and precious stones);

  • - an exemption from taxes on corporate profits of up to 8 years, with the exemption taking effect from the year the project derives its first profit. In addition, losses can be carried forward for 5 years and profits that are reinvested in Cambodia are exempted from all corporate tax. These tax exemptions are linked to a number of economic and social criteria, such as the share of output exported, use of local resources in production, technology and know-how transfers, and the number of employed women and disabled persons;

  • - no taxation of distributed profits;

  • - full exemption from import duties for construction materials, means of production, equipment, intermediate goods, raw materials and spare parts used by projects which export at least 80 percent of total output, projects located in Special Promotion Zones (SPZs), and projects in the tourism, energy, infrastructure, and agriculture industries;

  • - full exemption from export tax; and

  • - no restriction on employment of foreign nationals who are management experts, technical personnel, or skilled workers.

131. Over $2.1 billion of the committed resources has come from foreign investors, with Malaysia accounting for almost 60 percent of the total commitments (70 percent of foreign commitments), mainly because of the large Ariston project. Excluding the Ariston project, however, Malaysia still is the largest foreign investor in Cambodia, which together with Singapore makes up almost half of the remaining foreign commitments. Commitments from investors in industrialized countries total about 8 percent.

132. Overseas Khmer nationals have also played an important role in FDI in Cambodia, owing to their familiarity with the traditional culture of small-scale, family-oriented business operations. The overseas Khmer role is perceived as important in reducing anxieties about foreign investment. Over $475 million in investment commitments from Khmer sources has been approved by the CDC, of which over $70 million involves participation in projects with majority Khmer ownership. These projects are concentrated in the agricultural sector, reflecting the restrictions on foreign land ownership included in the Law on Investment. Whereas Cambodians are free to own land, foreigners are only allowed to lease land for up to 70 years.


133. Actual investment inflows have grown rapidly in the past few years. From negligilble amounts in 1993, FDI inflows are estimated to have increased to around $151 million in 1995. The recent inflows have been concentrated in a few major sectors—tourism, textiles, construction—and limited geographical areas—mostly in and around Phnom Penh, Siem Reap, and Sihanoukville.

134. In an attempt to monitor foreign investment flows and gather related statistics, a Foreign Investment Monitoring System was set up recently in the CDC. All foreign enterprises with approved investment projects are required to complete quarterly surveys that include questions on stocks and flows of equity and loans, imports subject to duty and free from duty, profits and interest paid abroad, and taxes paid. The system is not yet fully operational, however, and the data base remains seriously deficient, particularly as regards the monitoring of imports associated with foreign direct investment inflows. Efforts are underway to improve the quality of the monitoring and cover all major investors to ensure that investors comply with Cambodian laws and to provide a more solid basis for the granting of fiscal incentives. In addition, the scope for ad hoc exemptions in connection with foreign direct investment, which have resulted in significant revenue losses, could be sharply reduced with approval-expected in early 1997—of the long delayed implementing regulations for the Law on Investment.

VII. The Forestry Sector and Forestry Policy

A. Overview

135. Forests are Cambodia’s most valuable natural resource, and forest management policies are critical for the quality and sustainability of Cambodia’s economic development. The medium-term implementation of economically and environmentally sound forestry policies could generate, on a sustainable basis, some $100 million a year in Government revenue (equivalent to 3½ percent of 1995 GDP or over one third of 1995 budget revenue).52

136. During recent years, however, largely uncontrolled logging activities have led to rapid deforestation with little benefit to the Government budget. The Government’s efforts to gain control over forest sector activities through the imposition of bans on logging and log exports have met with very limited success, largely because of a lack of sustained political commitment to implement stated policies. Moreover, the Government’s current strategy to secure the longer-term viability of the forest resource base through awarding large, long-term concessions to the private sector has been pursued in an economically inefficient manner and—in the absence of credible monitoring—threatens to accelerate the pace of forest degradation.

137. The Government’s limited capacity to establish effective control—combined with institutional difficulties in assessing and collecting appropriate rents from cutting activities—has been an important impediment to the effectiveness of the bans. Substantial areas of prime forest land in the northwestern part of the country remain under the control of the Khmer Rouge for whom logging constitutes a major source of revenue.53 Elements of the Cambodian military and provincial authorities have also been involved in illegal logging and log exports. The vast bulk of illegal logs have been transported to neighboring countries either for their domestic use or for transshipment to a third country.

138. The Government’s failure to implement forestry polices in a consistent and transparent manner has, however, been the main reason for the lack of success in controlling logging. Periodic reinforcements of the bans were followed by ad hoc exceptions to allow various special interests to export timber. These exceptions provided incentives for renewed widespread—and mostly illegal—cutting, which was in turn followed by an explicit suspension of the ban to accommodate the export of already felled timber combined with the announcement of a new target date for the re-imposition of the ban. Since the first imposition of the logging ban in 1992, this policy cycle has been repeated several times.

139. The Government’s medium-term exploitation strategy—based on large-scale concessions—carries the risk of further accelerating the recent pattern of deforestation because the economic viability of capital investments associated with the concessions rests on an unsustainable level of timber exploitation. Nearly all of the commercially viable forests have been allocated to a few concessionaires at royalty rates that represent only a fraction of their economic value. This policy is economically inefficient because it: (i) is based on large implicit subsidies for the establishment of a capital-intensive domestic wood-processing industry; (ii) provides inadequate fiscal returns; and (iii) is unlikely to curtail illegal logging activities.

140. A reorientation of the Government’s forestry policy needs to address both short- and medium-term issues. First, in order to gain control of the situation, a significant strengthening of forest administration is required, including implementation of a monitoring and control system for exports. Effective implementation of such a system will also require close cooperation with the authorities of neighboring countries. Second, the medium-term strategy for sustainable exploitation needs to be based on transparent and market-oriented approaches that provide adequate returns to Cambodia.

141. This chapter discusses these issues in more detail. Section B describes the current state of Cambodia’s forests and reports on recent trends in policy implementation, Section C describes the Government’s current concession policy; and Section D summarizes the policy recommendations recently put forward by the joint World Bank/FAO/UNDP study.

B. Trends and Developments in the Forestry Sector

The current state of Cambodia’s forests

142. Until the early 1970s, forests covered over 13 million hectares, or nearly three quarters of Cambodia’s land area. War, internal strife, and mismanagement during the past two decades have taken a very heavy toll on the forest resource base. Available evidence points to a significant reduction in forest cover, though data limitations make quantitative assessments very difficult. The recent World Bank/FAO/UNDP study estimates forest cover at 60 percent, accompanied by severe degradation and loss of commercial value of much of the remaining forests.54 Other estimates indicate remaining forest cover may be as low as 35 percent, but do not make a distinction between deforestation and forest degradation.55

143. The main cause of the reduction in forest cover between 1973 and 1993 has been commercial exploitation together with fuelwood extraction. Expansion in urban and agricultural land use has played a relatively minor role since urban areas have declined, a legacy of the policy of forced resettlement to the countryside during the Khmer Rouge years. Agricultural land use has increased by more than 25 percent over the same period, but this increase has been due mainly to a conversion of previously abandoned lands back into agricultural use. The 1.4 million hectare decline in forest cover was thus broadly offset by a 1.2 million hectare increase in shrub lands (Table 8).

Table 8.

Changes In Land Use, 1973 and 1993

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Source: World Bank

144. Forest cover varies significantly by province, ranging from 2 percent in relatively densely populated Prey Veng province in the southeast of the country, to 90 percent of Koh Kong province in the Southwest. The flooded edaphic forests, such as the mangrove areas along the Gulf of Siam and the flooded forests around the Tonle Sap Lake, have suffered significant erosion. Of the dry land forests, evergreen species have experienced the greatest decline. Commercial logging has been the major source of damage in the northwestern parts of the country and fuelwood extraction is the likely source of degradation in the central part of the country along the fringes of the forests. Shifting cultivation has been an important factor in the Northeast.

145. Some observers have attributed the recent increase in the incidence of flooding and drought to a reduction in forest cover. In particular, deforestation may lead to the erosion of soil into rivers and lakes, and the resulting siltation exacerbates flooding during the rainy season. Moreover, rivers and lakes have become shallower, to the detriment of fish populations.

Recent policy implementation

146. Commercial exploitation of Cambodia’s forests began during the French colonial period. Following independence in 1953, commercial logging during the 1950s and 1960s extracted an average of 350,000 cubic meters of logs per year, which was considered sustainable at that time (Table 9). During the 1970s, annual logging yields dropped to 100,000 cubic meters as a result of war and political instability. By the end of the Khmer Rouge regime, the commercial forestry sector had been nearly eliminated: in 1981 only 19,000 cubic meters of logs were harvested. By the end of the 1980s, however, log production had recovered to its pre-1970 level. Log extraction rates increased sharply in the early 1990s, particularly in the northern and western parts of the country, as logging became a major source of revenue for the opposing military factions. Logging activity—mostly for export—has further increased in the mid 1990s despite the official bans on logging and log exports—with annual cutting rates in recent years estimated at 1.5 million cubic meters.

Table 9.

Log Production, 1960-95

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Source: World Bank estimates.

Policies during 1992-95

147. A first moratorium on exports of unprocessed timber was adopted in September 1992 by the Supreme National Council of Cambodia (over the objections of the PDK—the party of the Khmer Rouge). This moratorium was endorsed by the UN Security Council, which requested in November 1992 “States, especially neighboring States, to respect this moratorium by not importing [Cambodian] logs.”56

148. In October 1993, the new Government of Cambodia announced a temporary lifting of the moratorium until end-1993 to allow for a limited amount of log exports which were said to have been cut more than a year earlier. This suspension of the ban was subsequently extended until end-March 1994 because logs were said to be located close to the borders.57

149. The export ban was reimposed on April 1, 1994, but its implementation was quickly undermined by ad hoc exceptions. In mid-1994, the Ministry of Defense was given responsibility for the licensing of exports and was thus in a position to collect and dispose of the proceeds from licensing without the supervision and control of other Ministries, including the Ministry of Finance.

150. The ban was suspended and log exports were allowed from August 1994. At the same time, the Government announced that all logging activities would be banned from January 1, 1995, pending the implementation of its new forest concession policy (see section C below). The export of logs cut by end-1994 was allowed until April 30, 1995, but with a complete and permanent ban on all exports of logs and of sawn timber thereafter.

151. The ban became effective again as of May 1, 1995. Responsibility for enforcement of the ban was given to the Ministry of Agriculture, which could draw on the resources of other Ministries as needed. While implementation of the ban was initially strengthened, including through seizure of illegally felled logs and logging machinery, and auction of seized timber for domestic use, the ban appears to have had little effect on the volume of logging.58

Policies in 1996

152. New exceptions to the ban were granted in early 1996, when the two Prime Ministers signed agreements in principle with 20 Thai companies, which had indicated that they had up to 1.1 million cubic meters of logs—said to be felled before imposition of the previous export ban in May 1995—stockpiled near the Thai border. Most of these companies had not previously been engaged in log exports. The agreements raised strong concerns about transparency and the lack of specific procedures to guarantee the transfer of royalties to the budget. At the same time, the agreements raised concerns about renewed uncontrolled logging, as there were few indications that such a large volume of already felled logs actually existed.

153. In July, the Government clarified that the agreements did not constitute export permits but rather specified maximum amounts that could—in principle—be exported, provided the companies could demonstrate that the logs in question were indeed felled before April 1995.59 The precise procedures governing the export of logs were announced on June 19, 1996, in a communiqué jointly issued by the Ministry of Agriculture and the Ministry of Economy and Finance (Box 7). Timber found to have been cut illegally would be subject to seizure. The Government also committed to establish a strict monitoring and control system for log exports to ensure transparency and accountability of revenues, and to hire an internationally reputable firm with experience in this area to help verify the export of logs. The Government reaffirmed its commitments on forestry policy at the July Consultative Group meeting in Tokyo.

154. The Government established in early July the “National Committee on Cambodia’s Forestry Policy” as the focal and coordinating point of all aspects of Cambodia’s forestry policy. This high level steering committee is co-chaired by the two Prime Ministers, with the Ministers of Agriculture and Economy and Finance as co-vice-chairs, and representatives of the Council of Ministers, the CDC, and the Ministries of the Interior, Defense, Planing, Commerce, and Environment as committee members. The Technical Secretariat is located in the Ministry of Agriculture. As of mid-November, the Committee had not yet taken an active role in the formulation or implementation of forestry policy.

155. In the period between early July and mid-November, little progress was made in carrying out the log inspections and contract negotiations specified in the June communiqué. As of end-November, only two companies appeared to be in full compliance with the terms of the June communiqué. Nevertheless, the other agreements in principle have not been revoked by the Government Moreover, the Government began the process of identifying a suitable internationally reputable company to assist with the verification of log exports only in late September when it invited bids from three companies, and has yet to conclude contract negotiations.

Communique of June 19, 1996

The communique of June 19, 1996, laid out the following procedures for log exports:

• All companies wanting to export old logs were to register their requests by the end of June 1996. Sixteen companies registered export requests for a total of 877,000 cubic meters by that date. Later, a seventeenth company was added, requesting authorization for the export of up to 28,000 cubic meters of logs.

• Inspections of the inventories of old logs were to be completed by the end of August, certifying the quality and volume of logs. The timely completion of these inspections has been hampered by security concerns in the areas where inventories are said to be located. At end-September, inspections were completed for only two of the companies involved.

• Pricing of the wood was to be market-related in the range of $40-80 or more per cubic meter. Fines on wood found to be illegally cut were to be between 2 and 3 times the market value.

• Following inspection, the companies were to open an irrevocable, confirmed letter of credit in favor of the Ministry of Economy and Finance (MEF) payable into a special account with the Federal Reserve Bank of New York. A security deposit of 10 percent of the contract value was to be made at the time of signature of the contract between the firms and the Committee for Control and Auction. The contract then was to be approved by the Minister of Economy and Finance and the Minister of Agriculture.

• The Cambodian Government would officially notify the Government of Thailand of the nature and precise content of the export contract. Physical exports were to be subject to dual control at the border. Volume and quality was to be controlled by a group comprising representatives of the Department of Forestry of the Ministry of Agriculture, Customs (under control of the MEF), the Ministry of Defense, and the Thai Embassy in Phnom Penh. Similar controls were to be in effect on the Thai side of the border.

• Exports were to be completed by end-December 1996, after which the full ban would continue to take effect.

156. In late October, the Government took several steps that should improve the prospects for forest management over the medium term, including formal adoption by the Council of Ministers of the recommendations of a joint World Bank/UNDP/FAO study and of a Forestry Code. These two points are discussed in greater detail in section D below.

Regional dimensions

157. Developments in Cambodia’s forestry sector are also strongly affected by the policies of other countries in the region. Both Thailand and Vietnam, which share long borders with Cambodia, are net importers of wood products and compete for regional forest resources with other major markets in the region, including Japan and Singapore. Most of the illegal log exports from Cambodia go to neighboring countries—Thailand, Vietnam, and Laos—either for domestic use or transshipment to a third country. Despite some efforts by Cambodia’s neighbors in the past to control the flow of logs across their borders, there are no effective mechanisms in place to curtail the illegal trade.

Forestry policies and the government budget

158. The large-scale exports in recent years have brought only limited revenues to the government budget (Table 10). When exports were permitted, exporters that passed through legal channels paid on average of $50 per cubic meter (consisting of an average royalty of some $40 per cubic meter and the 10 percent export tax). The Government also collected revenue during 1995—following re-imposition of the export ban on May 1—and 1996 from the sale of seized timber for domestic use. However, the Ministry of Economy and Finance continues to experience difficulties in collecting all government revenues in a timely manner.

Table 10.

Budgetary Revenues from Forestry, 1992-96

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Sources: World Bank/FAO/UNDP; and the Cambodian authorities.

159. The actual revenue yields have fallen far short of the amounts that should have accrued to the Government on the basis of actual logging and log export activity.60 The estimated loss in government revenue from royalties on cutting alone is in excess of 2 percent of 1995 GDP. Exports of logs would have increased revenue further, not only because of the export tax, but also the possibility of collecting significantly higher royalties in line with world market prices.61

160. Current cutting rates—estimated by the World Bank at some 1.5 million cubic meters per year—are clearly unsustainable. More relevant are estimates based on sustainable rates of exploitation of Cambodia’s forests. The World Bank has estimated the potential annual contribution to the government budget over the medium term at $100 million, equivalent to 3.5 percent of 1995 GDP, on the basis of environmentally sound and economically sensible forestry policies. Implementation of such policies would imply much lower cutting rates, but significantly higher payments to the Government in the form of royalties, than is currently the case.

C. Recent Concession Policy

161. The Government announced in the fall of 1994 a new policy for the medium-term exploitation of forest resources. This policy relies on forest concessions to establish a domestic wood-processing sector and help to enforce a permanent ban on exports of unprocessed timber. The Government has granted at least 30 concession agreements covering most of the commercially operable forest. Eleven—mostly small-scale—agreements had already been signed prior to 1994. The more recent agreements were concluded to bring a much larger area under active management (thereby seeking to reduce illegal logging) and increase government revenues while maintaining the export ban on unprocessed logs. Analysis of the concession agreements has been severely hampered, however, by a lack of available information on the terms and conditions of many of the contracts and the absence of a comprehensive forest inventory.

162. Most of the concession agreements are tied to foreign investment commitments in wood processing industries. The two-part concession agreements consist of an “Investment Agreement” under which the concessionaire agrees to establish wood-processing facilities of specific investment value, and a “Forest Timber License” issued by the Government providing exclusive harvesting rights to a specified forest area. Cutting permits are only issued after the concessionaire has submitted a forest management plan and completed a forestry inventory process.

163. The information shown in Box 8 indicates that five companies have submitted a forest management plan, completed the required forest inventory process, and been issued a cutting permit; three of these companies have reportedly started to cut. For six companies, the forest inventory is pending, and for a further 18 companies, no further action has apparently been taken beyond the initial concession agreement.

164. The recent concession agreements raise a number of economic and environmental issues. Most importantly, the agreements were not awarded on the basis of competitive bidding, which is generally considered to be critical to avoiding collusion and financial irregularities in natural resource exploitation. Rather, the concessions were awarded and the terms of the agreements were established on the basis of bilateral negotiations between prospective concessionaires and senior government officials. Moreover, only very limited area survey work was completed before conclusion of the negotiations, and in no case were detailed ground surveys undertaken.

165. The bilateral negotiations on concessions have resulted in very low royalties. According to World Bank estimates, the negotiated royalties represent less than 20 percent of the actual stumpage value of the wood.62 These estimates take account of the exceptionally high costs associated with the administration of large-scale concessions and the transport of logs in the Cambodian environment. Moreover, the royalty rates are essentially fixed in nominal terms for the duration of the concession—which in many cases extends over 30 years—rather than indexed to world market prices for timber. The low royalty rates in effect subsidize the establishment of a domestic wood-processing sector at a very high financial cost.63

166. Third, the current concession policy is inconsistent with environmentally sustainable harvesting rates. The volumes of wood required to justify the proposed investments in processing are based on harvesting intensities of 40 to 50 cubic meters per hectare, 4 to 5 times the rate that is seen as environmentally sustainable. Forest growth in Cambodia has been estimated at only 0.3 cubic meters per hectare per year, about one-third of the growth rates expected in Indonesia and Malaysia. Assuming a cutting cycle of 35 years, this limits the sustainable cutting volume to 10 cubic meters per hectare, or about 3 trees per hectare.64 This rate of cutting is essentially the Cambodian standard as established in Article 3 of the “Regulations on forest resources exploitation,” which allows for extraction 30 percent of the total volume available for harvest.

Status of Current Forest Concessions

(as of October 1996)
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Source: Data provided by the Cambodia authorities.

D. A Sustainable New Forestry Policy

167. In response to a recent request by the Government for assistance in formulating a sustainable forestry policy, the World Bank, the FAO, and the UNDP have jointly proposed a comprehensive new policy approach. As noted above, this approach was formally adopted by the Council of Ministers on October 24, 1996. This re-orientation of the Government’s policy incorporates a market-based, export-oriented approach that aims to maximize the contribution of Cambodia’s forests to the country’s development, while ensuring its continued ecological viability. Implementation of this comprehensive approach will take a number of years and will require substantial technical assistance, particularly to the Ministry of Agriculture. It will also require determined implementation by the Government at all levels, as well as the cooperation of the authorities in neighboring countries.

168. The new market-oriented policy approach focuses in particular on establishing an appropriate incentive framework with the following key elements:

  • Concessions should be allocated through market-based mechanisms, and should include prior area identification by the Government, advertisement, competitive bidding, and evaluation of bids based on announced criteria.

  • Royalties should reflect economic rents and should encourage sustainable logging practices. Royalty rates should be established in auctions, subject to minimum price requirements to avoid collusion.

  • The Government has a critical regulatory role, including setting clear and enforceable forest management standards, monitoring of concession operations, and enforcement. Governance and organization of the sector should be strengthened, including through appropriate forestry legislation in line with constitutional requirements.

  • With a strengthening of the Government’s enforcement capacity, the trading ban should be lifted. Log exports would allow the market to allocate resources to the most economic alternatives, and provide appropriate incentives for industrial development.

169. A wide-ranging technical assistance program has been proposed with the help of the World Bank, FAO, UNDP, the international tropical timber organization and a number of bilateral donors, including the following specific projects:

  • Design of guidelines for forest management and forest harvesting operations.

  • Preparation of a forest resource inventory, specifying forest type and condition, average volume, and other information.

  • Establishment of an independent Forest Concession Inspection Service to ensure compliance with regulations and guidelines, and implementation of a log export control system.


Historical developments through end-1993 are reported in SM/94/108, which was subsequently published as IMF Economic Review No. 8 (1994).


The strong efforts in recent years to establish an economic data base and widen coverage have led to significant improvements, but the resulting pronounced breaks in the data series complicate quantitative assessments over time.


See Tables 11-14 in the Appendix.


While the statistical base is rapidly improving with large-scale bilateral and multilateral technical assistance, initial efforts have concentrated on the fiscal and monetary sectors to provide a solid basis for macroeconomic policy making.


Examples of microenterprise activity in rural areas include raising livestock, making palm sugar and rice wine, manufacturing oxcarts, and engaging in small-scale trade.


Microenterprise activities in urban areas are diverse, including a range of retail, service, and production activities, such as mechanical and electrical repair, tailoring, hairdressing, food processing, silk production, and trade.


A reliable rice demand and supply analysis is not available for 1994/95, and the widely varying estimates of rice production—which accounts for about 15 percent of GDP—illustrate the degree of uncertainty surrounding Cambodia’s output data. For example, in Prey Veng province, the wet-season rice yield estimates per hectare in the 1995/96 season vary from a low of 1.23 tons-in a FAO/WFP rice assessment survey-to a high of 2.06 tons-in the 1995 Rice Crop Pilot Survey conducted by the Ministry of Agriculture in cooperation with the FAO.


Most of these exports occurred in small-scale border trade with neighboring countries.


The majority of these firms are engaged in production, followed by trade and other services. See World Bank, Cambodia: From Recovery to Sustained Development, pp. 28-9.


Cambodia’s tax ratio, at about 6 percent of GDP, is one of the lowest in the world among low-income countries.


See Tables 15-20 in the Appendix.


Foreign currency receipts (e.g., from import duties) are converted to riel at the official exchange rate. Similarly, in the case of payments by the Government, foreign exchange is purchased by the Treasury at the official exchange rate (see Chapter IV).


While the Minister of Finance can temporarily freeze spending, only the Council of Ministers can rescind spending authorizations.


Supplementary budgets were required in each of the years 1993-1995, but not in 1996.


Part of the expenditures for military hardware were financed through external loans.


The DGI recently completed audits of some 136 large registered taxpayers. The audits uncovered approximately CR 49 billion (over ½ percent of GDP) in unpaid taxes.


Exemption from taxation does not imply exoneration from reporting to the tax and customs authorities. Moreover, such information is proving to be important for proper implementation of Cambodia’s system for monitoring foreign direct investment flows and assessing the budgetary costs of exemptions.


See Annex II for a summary of Cambodia’s tax system.


The turnover tax currently includes the hotel tax, which had previously been treated separately.


The doubling of the 2 percent rate was also intended to harmonize the turnover tax with the consumption tax, which is levied at a 4 percent rate.


This replaced an excise tax for which rates varied from 20-50 percent. Due to the relatively high rates, evasion was widespread. Harmonization at the lower rate was seen as a means of reducing incentives to evade the tax, though evasion remains a problem.


Import tariffs will have to be lowered in the future in the context of Cambodia’s eventual membership in ASEAN.


The tariff rate on re-exported products is effectively lowered through use of a set of reduction coefficients calibrated to reflect the authorities’ estimate of the share of these products that is presumed to be re-exported.


In addition to royalty payments, proceeds from forestry are also obtained from the 10 percent tax on exports of logs and sawn timber and from export license fees. The yield of this tax was CR 17.3 billion (¼ percent of GDP) while license fees brought in CR 1.3 billion in 1995.


Ariston is scheduled to make similar annual payments for a period of about ten years, while the consortium is expected to remit another CR 5 billion during 1996. See Chapter VI for a discussion of these foreign investment projects.


Over $30 million in nonconcessional debt from several suppliers was contracted by the military in 1994 with disbursements effected in 1994 and 1995. Disbursements totaled ¾ percent of GDP in 1994 and ½ percent of GDP in 1995.


This estimate includes outlays on salaries, operating costs, and contributions to international organizations. The low level of health expenditures is in part a reflection of the weak—though improving—administrative capacity at the Ministry of Health, together with unusually slow processing of payment orders by the MEF.


A singificant share of externally-financed capital expenditures in the budget includes salaries and emoluments paid to foreign advisors in Cambodia, suggesting that the amounts shown in the budget for capital expenditures overstate additions to the capital stock.


The amounts captured in the fiscal data understate total official assistance provided to Cambodia because a considerable amount of assistance does not flow through the budget, but is either disbursed directly or through the intermediation of foreign and local NGOs.


Commodity aid is provided in either cash or kind, as in the case of Japanese aid. In the specific case of petroleum products, which constitute the bulk of Japan’s commodity assistance, the procedure is as follows. The Japanese Government releases funds of a specific amount which the Cambodian Government can then use to purchase petroleum and other products on the international market. After the products are imported, they are sold at auction—including duties and taxes. The nontax portion is allocated below the line in the budget as financing, while the tax receipts are transferred to the Treasury’s revenue account at the National Bank of Cambodia.


The Bank approved an Emergency Rehabilitation Credit equivalent to $63 million beginning in late 1993 to provide critical imports in agriculture, transport, water supply, power, education and health, and subsequently approved an Economic Recovery Credit in an amount of $40 million to provide continued financial support for specific but critical imports. The full amount of both loans is expected to have been disbursed by end-1996.


See Tables 21-28 in the Appendix.


Foreign currency cash holdings cannot effectively be measured, of course. A MAE technical assistance report of June 1996 put the circulation of domestic currency in the range of 5-15 percent of total currency in circulation, based on extensive discussions with commercial banks and the National Bank. This suggests a stock of foreign currency cash holdings several times larger than measured broad money.


The highest denomination was increased from CR 500 (equivalent to about 20 US cents) to CR 100,000 (worth almost $40).


See Tables 29-31 in the Appendix.


Minimum rates on three-month riel-denominated deposits, which were introduced by the National Bank in December 1992, proved ineffective in strengthening demand for domestic currency and were abolished in June 1994.


There has been little change in riel savings deposit rates over the past three years, although three-month term deposit rates have declined, in part reflecting the drop in inflation.


While significant progress has been made in improving compilation and coverage of the balance of payments statistics, the data base remains very weak. Improvements in coverage since 1994 make analysis of time series particularly problematic.


See Tables 32-35 in the Appendix.


The declared sale prices of Cambodian rubber have remained substantially below world levels because of a combination of inconsistent quality, late deliveries, and underinvoicing. There are indications of substantial unrecorded exports.


Tariffs levied in Cambodia on goods for re-export are between 25 and 50 percent lower than those for retained imports. To prevent traders from exploiting this arrangement for domestic retained imports, a cap has been imposed on the share of imports of selected products (e.g., cigarettes, motorcycles, beer, VCRs, TV sets, audio cassettes, and gold) that can be declared as re-exports. For example, 80 percent of cigarettes imported are assumed to be re-exported, and duties are levied accordingly.


The data on foreign assistance compiled by the CRDB differ from those shown in the balance of payments because the latter do not fully capture grants provided to NGOs and technical assistance expenses incurred abroad.


A bilateral agreement concluded in 1991 converted these balances into an interest-free loan, repayable over 20 years. No payments have been made.


Cambodia has a small net credit position vis-à-vis Vietnam.


These include: pharmaceutical products; gold and silver; armaments and munitions; and various cultural and medical materials.


Details of the tariff regime are summarized in Annex II.


See Tables 36-40 in the Appendix.


In 1996, lease payments of US$3.2 million were due to the Ministry of Economy and Finance.


Rubber plantations are the potentially most valuable and economically important remaining state assets. Over 90 percent of Cambodia’s rubber production is accounted for by the 7 large state-owned plantations. These companies employ between 400 and 6,000 workers each and thus are a major source of rural employment. The rubber sector is also an important exporter.


Chapter VII contains a more detailed description of developments and policies in the forestry sector.


See Tables 41-44 in the Appendix.


As estimated in the recent World Bank/UNDP/FAO study of the forestry sector: The World Bank, the United Nations Development Programme, and the Food and Agriculture Organization of the United Nations, “Cambodia: Forest Policy Assessment,” East Asia and Pacific Region, World Bank, June 1996.


The defection of a large faction of the Khmer Rouge in mid-1996 and the current integration efforts are bringing most of the northwestern border region under Government control.


Based on 1993 Landsat remote sensing data and visual interpretation by the Land Use Mapping Office of the Ministry of Agriculture and the Remote Sensing Mapping Unit of the Mekong Secretariat.


For example, see Global Witness, “Corruption, War and Forest Policy: The Unsustainable Exploitation of Cambodia’s Forests,” February 1996.


Security Council Resolution S/RES/792 (1992), November 30, 1992, paragraph 13.


The procedures for exports during late 1993 and early 1994 involved four Ministries (Agriculture, Commerce, Economy and Finance, and Foreign Affairs). All log exports had to carry a certificate of origin, which was issued by the Customs Department only after inspection to ascertain quality, quantity, and age of timber exported, and after payment of the royalty or “standing timber charge” (ranging between $30 and $57 per cubic meter) and the export tax (at the rate of 10 percent of the estimated export value, equivalent to about $10 per cubic meter).


While relatively little data are available about logging for domestic use, there is evidence of continued widespread illegal cutting. For example, in May 1996 the Government gave one local company permission to purchase 150,000 cubic meters of wood on the domestic market and another company was granted permission to purchase 40,000 cubic meters. As with the export agreements with the Thai companies, these arrangements raised concerns about the lack of transparency of the negotiation process and the lack of specific procedures to guarantee timely transfer of royalties to the budget. Similarly, the agreements raised concerns about uncontrolled logging activities, since it is unlikely that such a large volume of legally-felled wood—cut prior to January 1995—could be purchased on the domestic market. Although there is no hard evidence, there have also been indications that illegal cutting has been taking place within areas allocated to concessionaires (see below) and within national parks and protected areas.


The new date of April 1995 implies that logs cut between end-December 1994 and end-April 1995 (in violation of the third ban) could be exported legally.


Since most forestry operations are taking place outside formal channels, the quantification of actual activity is very difficult. Moreover, in light of the Government’s basic policy over the past years to ban all logging activities, no official monitoring has taken place, except for customs declarations during periods when exports where allowed. Log trading data on imports officially registered by Thailand are believed to cover only a fraction of actual trade.


Even when exports where permitted, the declared fob value of Cambodian timber remained well below world market prices.


With estimated actual royalties at $14 per cubic meter and an estimated stumpage value of $74 per cubic meter (assuming a fob value of $170 and $96 in average transport and logging costs per cubic meter).


Current foreign investment commitments of $370 million in the wood-processing sector would create an estimated 9,000 jobs, at a cost of over $40,000 per job. In contrast, the ELO estimates capital costs per job created in the informal sector at less than $1,000 per job.


World Bank analysis of two recent concession agreements shows that capacity utilization levels of up to 80 percent are needed for the proposed processing facilities to operate profitably. Such capacity utilization rates imply a yearly raw material input of almost three-quarters of a million cubic meters of wood. With an operable forest area in the reviewed concession of 585,600 hectares and a cutting cycle of 35 years, this would imply harvesting rates of 43 cubic meters per hectare.


Table 11.

Cambodia: Gross Domestic Product by Sector, 1993-95

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Sources: Data provided by the Cambodian authorities; and Fund staff estimates.
Table 12.

Cambodia: Real Gross Domestic Product by Sector, 1993-95

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Sources: Data provided by the Cambodian authorities; and Fund staff estimates.
Table 13.

Cambodia: Sectoral Contribution to GDP at Constant 1989 Prices, 1993-95


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Sources: Data provided by the Cambodian authorities; and Fund staff estimates.
Table 14.

Cambodia: Deflators for Gross Domestic Product by Sector, 1993-95 1/

(Percent change over previous period)

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

The 1995 deflators were estimated from corresponding categories in the CPI.

Table 15.

Cambodia: Budgetary Operations, 1994-1996

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

Includes proceeds from asset sales and leases.

Includes external technical assistance for implementation of capital projects.

Table 16.

Cambodia: Structure of Revenue, 1994-96

(In billions of riels)

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Source: Data provided by the Cambodian authorities.