Cambodia: Second Review Under the Poverty Reduction and Growth Facility
Author: International Monetary Fund
Publication Date:
06 Feb 2001
eISBN:
9781451821666
Language:
English
Keywords:
ISCR; CR; dollar clearing; staff appraisal; government; rice stock; SDR; current account; debt service; central bank; balance of payments; Cambodian authorities; Budget planning and preparation; Poverty reduction strategy
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Performance under the first year of Cambodia’s Poverty Reduction Growth Facility (PRGF)-supported program was strong, with a resumption of growth, low inflation, and significant progress in major areas of structural reform. External developments have reflected increased garment exports and tourism earnings, sharply higher oil imports, and higher capital inflows. The IMF staff urges the authorities to make effective use of planned technical assistance under the Technical Cooperation Action Plan. Structural reforms for 2001 will focus on those areas critical for achieving the macroeconomic objectives.

Abstract

Performance under the first year of Cambodia’s Poverty Reduction Growth Facility (PRGF)-supported program was strong, with a resumption of growth, low inflation, and significant progress in major areas of structural reform. External developments have reflected increased garment exports and tourism earnings, sharply higher oil imports, and higher capital inflows. The IMF staff urges the authorities to make effective use of planned technical assistance under the Technical Cooperation Action Plan. Structural reforms for 2001 will focus on those areas critical for achieving the macroeconomic objectives.

I. Introduction

1. In concluding the first review under the PRGF arrangement and the 2000 Article IV consultation, Executive Directors commended the authorities for their economic performance and emphasized that achieving sustained growth and poverty reduction will require continued strong efforts on a wide front. Critical elements would include an increase in fiscal revenue, and a continued redirection of expenditures to priority social objectives in an environment of improved governance. Directors also stressed the need to refrain from nonconcessional borrowing, and to follow through on agreed structural measures relating to civil service reform, military demobilization, and forestry policy.

2. In the attached letter to the Managing Director, the authorities request completion of the second PRGF review. In the accompanying Memorandum of Economic and Financial Policies (Attachment), the authorities report on progress made under the PRGF-supported program, describe their policies for the second program year, and establish performance criteria through end-2001. The program continues the main thrust of policies established under the first-year program centering on revenue mobilization, expenditure management, bank restructuring, and forestry policy. The program has been designed to support the objectives of the authorities’ Interim Poverty Reduction Strategy Paper (I-PRSP).

II. Performance Under the Program in 2000

3. Performance under the first year of Cambodia’s PRGF-supported program was strong, with a resumption of growth, low inflation, and significant progress in major areas of structural reform. The political situation has stabilized since the current coalition government was formed in November 1998, providing Cambodia with an improved environment to implement reforms that have restored growth momentum (Table 1 and Charts 1 and 2). Quantitative benchmarks and performance criteria, and structural performance criteria, have been observed through end-November 2000 (Tables 2–3). Delays have been experienced in some areas of structural reform because of weak implementation capacity, difficulties in reaching internal consensus, or delays in donor financing.

Table 1.

Cambodia: Selected Economic Indicators, 1997–2001

Nominal GDP (1999 est.) US$3,008 million

Population (1999 est.) 11.7 million

GDP per capita (1999 est.) US$256

Fund Quota SDR 87.5 million

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

Contributions to 12-month percent change of broad money.

Ratio of nominal GDP to average stock of broad money.

Includes expenditure committed but not yet allocated to the accounts of the government agencies that execute the budget.

Includes externally financed technical assistance for implementation of capital projects.

Excludes re-exports.

October 2000.

November 2000.

October 2000; annualized totals relative to projected annual GDP.

November 30, 2000. Gold reserves are evaluated at end-1999 gold price.

Ratio of current reserves to 2000 projected imports of goods and services.

December 15, 2000.

CHART 1
CHART 1

CAMBODIA: SELECTED ECONOMIC INDICATORS, 1997–2000

Citation: IMF Staff Country Reports 2001, 035; 10.5089/9781451821666.002.A001

Source: Data provided by the Cambodian authorities.1/ Includes US $117 million associated with the return in 1998 of Cambodian gold previously held by the BIS.
CHART 2
CHART 2

CAMBODIA: INDICATORS OF PROGRAM PERFORMANCE, 1997–2001 1/

Citation: IMF Staff Country Reports 2001, 035; 10.5089/9781451821666.002.A001

Sources: Data provided by the Cambodian authorities, and Fund staff estimates.1/ Data for 2000 are projections.
Table 2.

Cambodia: Quantitative Performance Criteria and Benchmarks, 2000

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

Performance criteria (as set in EBS/00/186 Attachment).

Net domestic assets are defined as broad money minus net foreign assets of the banking system, adjusted for valuation changes arising from the difference between program and actual exchange rates.

For purposes of verifying compliance with the program, the ceiling for net domestic assets, net credit to the government from the banking system, and net domestic financing of the budget were adjusted upward by CR18.2 billion in September 2000 due to shortfalls in external nonproject budget support.

Maturity based on original contract.

Ceiling applies to amount outstanding. Excludes normal import-related credit and any borrowing associated with debt rescheduling.

Excludes amounts contracted under the government loan agreement with China dated July 26, 2000 for a maximum loan amount equivalent to US $12 million.

Continuous performance criterion.

For purposes of verifying compliance with the program, the floor on net official international reserves was adjusted downward by US $4.8 million in September 2000 due to shortfalls in external non-project budget support. For program purposes, valuation Effects on the stock of gold holdings are excluded, and gold holdings will be evaluated at the end-December 1999 gold price.

Table 3.

Cambodia: Key Structural Policy Actions for 1999–2000

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Condition for review or prior action.

Structural benchmark.

Originally intended as a structural performance criteria for end-June 2000, it was converted to a prior action, owing to delays in completing the first review.

4. For the first half of 2000, economic activity was buoyant. Manufacturing activity, particularly in the garment sector, increased significantly, tourist arrivals increased by 40 percent from the previous year, and good agricultural output led to substantial declines in food prices. As a result, economic growth was projected at mid-year to reach 5½ percent for 2000 with inflation under 5 percent (on an end-of-period basis).

5. However, in July-November 2000, Cambodia was hit by unusually severe flooding. The flooding affected about 20 percent of the population, and the government’s preliminary estimate indicates that 30 percent of rice fields were damaged, major parts of key roads and irrigation facilities were washed away, and a number of schools and hospitals were damaged. Total damage, including rehabilitation needs, was estimated by the AsDB at about US $100 million (3 percent of GDP) (Box 1).

Cambodia: Effects of the Flooding

Background

During the second half of 2000 Cambodia suffered the worst flooding in 70 years, directly affecting 2.2 million people (20 percent of the population) in 18 of the 24 provinces, primarily in rural areas. The flooding has taken a major human and economic toll: (i) 350 deaths and 200,000 people displaced; (ii) 350,000 ha. of cropland damaged (30 percent of the total); and (iii) extensive damage to economic infrastructure. The information below provides a preliminary assessment of the main effects of the flooding based on information available as of end-November 2000; a full assessment is expected in early 2001.

Flooding impact1/

Real Sector: Real GDP growth is now projected to slow to 4 percent as against 5½ percent in the program, reflecting a flood-related loss in agricultural output. Agriculture accounts for 40 percent of GDP and about 80 percent of the rice harvest takes place during the wet season (June–October).

End-period inflation is projected to rise to about 8 percent, compared with the program target of 5 percent, largely due to higher food prices. Despite timely food aid relief, retail rice prices increased by 38 percent during July–October.

Damage to infrastructure and equipment (i.e. roads, irrigation equipment and facilities, and education and health facilities) is officially estimated at US $105 million (3.2 percent of GDP).

Fiscal: Current expenditure for flood relief in 2000 is estimated at 0.3 percent of GDP, while rehabilitation of infrastructure will be carried out primarily through donor-financed projects beginning in 2001. Program targets for end-December 2000 have been adjusted to reflect this additional spending while avoiding domestic financing of the budget.

External sector: The external current account deficit (excluding transfers) is expected to remain broadly unchanged at 13 percent of GDP, as total flood-related imports are not large relative to overall imports.

Structural reforms: The process of establishing a computerized civil service payroll was temporarily delayed, owing to the interruption of fingerprinting operations in the provinces. More generally, limited administrative capacity has also been diverted to focus on flood relief and rehabilitation.

International Response

International emergency relief—US $10.7 million, 0.3 percent of GDP—has been provided in response to the authorities’ request. Further assistance, equivalent to 3 percent of GDP, has been envisaged under concessional loans from the AsDB (US $55 million) and the World Bank (US $40-45 million), to assist the government in the rehabilitation of key infrastructure which will be reflected in the budget for 2001 and following years.

1/ Although the deviations of key macroeconomic aggregates from the program’s projections are largely attributable to the flooding, the high oil prices have also been a contributing factor.

6. The serious flooding, and to a lesser extent sustained higher oil prices, are adversely affecting economic growth and inflation. Growth in real GDP is now estimated at 4 percent, reflecting a sharp fall in agricultural production in the final quarter of the year. Although the domestic retail prices of petroleum products rose, the increases have had only a marginal impact on the CPI because of a relatively low weight for petroleum products in the index.1 However, food prices began to pick up after July, and further increases are expected owing to flood-induced shortages. As a result, the 12-month CPI inflation rate is projected to reach about 8 percent by end-2000 before falling back to less than 5 percent by the end of 2001.

uA01fig01

Consumer Price Index

(12-month percent change)

Citation: IMF Staff Country Reports 2001, 035; 10.5089/9781451821666.002.A001

7. Fiscal policy in 2000 has been prudent, with improved revenue mobilization, and expenditure restraint. The government has implemented the budget cautiously in the first ten months of the year, making room for spending for flood relief without a significant deterioration in the underlying fiscal balance. Current expenditure for flood relief in 2000 is estimated at 0.3 percent of GDP. Reflecting expenditure savings in other areas, the current budget surplus is projected at 1.3 percent of GDP, compared with the program target of 1.4 percent (Table 4). Improved implementation of donor-financed capital expenditure will lead to an increase in the overall deficit to 5.7 percent of GDP, compared with the program estimate of 4.6 percent. Taking into account available foreign financing, domestic financing of the budget would only marginally exceed the original program target, leading to a small reduction in the government’s net indebtedness to the banking system by CR 20 billion (1½ percent of broad money).

Table 4.

Cambodia: General Government Operations, 1997–2001

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

Cash basis.

Includes a 10 percent base wage increase, effective January 1, 2001. The additional cost for the wage increase is estimated to amount to CR15 billion, formerly budgeted as contingency funds.

Includes expenditure committed but not yet allocated to the accounts of the government agencies that execute the budget.

1,500 soldiers were discharged in 2000, and 10,000 soldiers will be discharged in 2001. A cost per soldier is US $1,500.

The government’s financial contribution to the demobilization program is US $240 of cash payment per soldier.

8. Underlying revenue performance has improved, and is likely to reach 11½ percent of GDP in 2000, close to the program target.2 Revenue from direct and indirect taxes, in particular profit tax from large companies and value-added tax (VAT), performed strongly, and above expectations. The increase partly reflects the revenue-enhancing measures implemented during mid-2000.3 However, revenue from trade taxes has continued to be weak and is expected to fall short of the program target. The poor performance in trade taxes reflects changes in the composition of imports (especially a decline in cigarette imports), and relatively slow progress in improving customs administration.

uA01fig02

Total Revenue

(3-month moving average, In billions of riels)

Citation: IMF Staff Country Reports 2001, 035; 10.5089/9781451821666.002.A001

uA01fig03

Tax Revenue

(3-month moving average, In billions of riels)

Citation: IMF Staff Country Reports 2001, 035; 10.5089/9781451821666.002.A001

9. Overall expenditure was contained, but only limited progress was made in increasing social sector spending. The wage bill has been kept within the program target, and expenditure for defense and security is projected to decline in nominal terms in 2000 for the first time in more than a decade. Social sector spending was budgeted to increase by ½ percentage point of GDP over 1999. However, owing to a delay in the implementation of the Priority Action Program (PAP), and technical difficulties in administering spending at the district level, actual disbursements in the first ten months of the year have been lower than targeted.4 Disbursements are expected to increase considerably during the last two months of the year, and total funds committed for the social sectors are expected to be broadly in line with the program.

10. Monetary developments have reflected the prudent fiscal policy and increased activity by the private sector. The growth rate of currency in circulation is expected to remain under 10 percent at end-2000, reflecting, in part, net repayments by the government to the banking system, and the overall importance of fiscal operations on changes in local currency. Broad money is expected to increase by 35 percent, in line with the program target. The increase in broad money is led by a rise in foreign currency deposits, reflecting increased economic activity and improved confidence in the context of a highly dollarized economy. Private sector credit growth picked up in mid-2000 from a very low base (about 8 percent of GDP) and is expected to increase by about 26 percent for the whole year (Table 5).

Table 5.

Cambodia: Monetary Survey, 1999–2001

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

Nominal GDP divided by the average stock of broad money.

Table 6.

Cambodia: Summary Accounts of the National Bank of Cambodia, 1999–2001

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