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.
My Cambodian authorities would like to express their appreciation to the staff and management of the Fund for their continuous assistance and strong support in the implementation of the reform program under the Poverty Reduction and Growth Facility (PRGF) arrangement. The authorities have expressed their commitment to use the assistance received from international agencies judiciously towards building a strong base for sustainable economic growth and development in Cambodia. Their commitment has been clearly described in the Memorandum of Economic and Financial Policies and the Interim Poverty Reduction Strategy Paper (I-PRSP). The joint staff assessment and their recommendations will be very helpful in the preparation of the full PRSP.
During the first year of implementation of the PRGF, Cambodia’s general performance was encouraging as reflected in the resumption of economic growth, low inflation and improvement in public finances. All quantitative and structural performance criteria under the arrangement were observed. Structural reforms were implemented broadly as programmed with notable progress in the forestry and banking sectors.
Unfortunately, Cambodia’s recovery suffered a serious setback due to unusually severe flooding between July and November 2000, the worst in 70 years. The floods affected a fifth of Cambodia’s population, three-fourths of its provinces and a third of total agricultural land. Hundreds of people died and thousands were displaced. Major roads and irrigation facilities were washed away and a number of schools and hospitals were damaged. Consequently, the government was confronted with the onerous task of rehabilitating the displaced people by providing them with basic necessities and restoring the damaged infrastructure. The government mobilized all available internal resources and appealed for external assistance to provide immediate relief. The amount of flood relief was estimated at US $ 105 million. My Cambodian authorities would like to express their gratitude for the timely assistance from donor countries and institutions for immediate flood relief and rehabilitation of the economic infrastructure. With the support and assistance from the international community, in particular the IMF, my Cambodian authorities are determined to overcome these transitional challenges and continue with the structural reforms as outlined in the program.
I. Recent economic developments
Real GDP growth is estimated to slow to 4 percent in 2000, compared with the program target of 5½ percent, due to the flood. Agricultural output declined owing to damage to the rice crop. However, the garment and tourist sectors are expected to expand as projected. Food prices have not increased as feared, owing to the availability of existing stocks and donor assistance. According to the latest data released by the National Institute of Statistics (NIS), inflation for the year 2000 was minus 0.8 percent. The current account deficit, excluding official transfers, is estimated to remain at 13 percent of GDP as projected, despite higher imports due to higher oil prices. Nonetheless, gross official reserves are expected to increase from US $ 422 million in 1999 to US $ 484 million, or equivalent to 3.1 months of imports of goods and services.
In the fiscal area, the government has cautiously managed the budget to prevent a significant deterioration in the fiscal balance despite the impact of the flooding and higher oil prices. The overall budget deficit is expected to rise to 5.75 percent of GDP compared with the program estimate of 4.6 percent, owing to improved implementation of donor-financed capital expenditure. The current budget surplus is estimated at 1.3 percent of GDP, close to the program target of 1.4 percent, as a result of increased spending for flood relief. Revenue collection has improved. This was partly due to the revenue enhancing measures implemented during mid-2000. The revenue from profit tax and VAT was higher than expected. Revenue from trade tax was, however, lower-than-expected owing mainly to the decline in cigarette imports. Total revenue is estimated to reach 11.6 percent of GDP, close to the program target, but expenditure on defense and security is estimated to decline in nominal terms in 2000 for the first time in more than a decade. This will allow an increased flow of budgetary resources of about ½ percentage point of GDP to the social sectors. During the last two months, actual disbursements for education and health increased significantly to offset the slow pace experienced earlier in the year.
Monetary developments have been largely influenced by the fiscal position as well as the high dollarization of the economy. Based on preliminary estimates, broad money rose by 35 percent as targeted, primarily due to an increase in foreign currency deposits. In contrast, domestic currency in circulation rose by only 8 percent, due mainly to continued fiscal restraint. Bank credit to the private sector increased by 26.4 percent, reflecting the increase in credit demand related in part to higher oil prices, as well as an increase in private sector economic activity. The exchange rate remained relatively stable throughout 2000, except for a slight weakening during the second half of 2000 as a result of the stronger U.S. dollar. The National Bank of Cambodia (NBC) has pursued a flexible exchange rate policy to keep any difference between the official and parallel market exchange rate at less than 1 percent, as agreed under the program.
II. Structural policies for 2001
In the banking sector, the government has intensified reforms to increase public confidence and mobilize savings for investment. During 2000, significant progress was made to re-license commercial banks in line with provisions of the Financial Institutions Law. The NBC closed 3 insolvent banks in July 2000 and revoked the licenses of another 8 non-viable banks in December 2000, The NBC will appoint provisional administrators to prevent asset stripping and to ensure the banks are liquidated in an orderly manner. Fourteen potentially viable banks will be re-licensed subject to their signing a Memorandum of Understanding (MOU) that requires the banks to raise their capital to a minimum of CR 50 billion (about US $13 million) and comply with other regulatory requirements. The implementation of the MOUs will be closely monitored by the Bank Supervision Department. Four banks have been issued new licenses. To avoid any negative impact, the NBC has been in dialogue with lawmakers and government officials to help them better understand the ongoing re-licensing process. The measure is gaining support from the public.
Considerable efforts have been undertaken to prepare for the privatization of the Foreign Trade Bank of Cambodia (FTB). After the privatization of the FTB, the NBC will no longer be involved in the management of FTB, thus enabling the NBC to focus solely on its central banking responsibilities. A separate board of directors has been appointed to restructure the FTB, which will be re-capitalized and placed on the same footing as other commercial banks. The NBC has injected initial capital of CR 10 billion into FTB while the Ministry of Economy and Finance (MEF) will issue government bonds to raise FTB’s capital up to the minimum statutory requirement by June 2001. Representatives from the NBC and FTB have been nominated in mid-January 2001 to a working committee to prepare for the issuance of the re-capitalization bonds, with technical assistance from the IMF. The committee is expected to start its work by end of January 2001 when it composition is completed with the appointment of members from the MEF. The FTB will upgrade its management capability and seek private shareholders. Technical assistance from the IFC will start in February 2001 with the primary objective of advising FTB on the approach and methodology to restructure and privatize the FTB. The Cambodian government is seeking further assistance from AsDB to complete the restructuring and privatization process in a timely and orderly manner.
Starting with the year 2001 program, on January 2, 2001, the NBC established the U.S. dollar clearing and settlement system to complement the existing domestic currency-clearing house. By end-June 2001 the NBC will finalize the draft Payments Law that is needed to start a modern payments system.
In the forestry sector, the government has taken firm actions against illegal logging activities. The Forestry Crime Monitoring Unit (FCMU) was established in October 1999 with participation of outside observers. National consultations with relevant stakeholders have been initiated to draft a Forestry Law. The law is expected to be submitted to the National Assembly by end-February 2001. Following the review of concession contracts in May 2000, three concessions were cancelled and other logging activities were restricted.
The government has implemented reforms to rationalize the size of the civil service and military. The civil service census was completed in March 2000, leading to the removal of 6,000 “ghost” workers and irregular cases. To facilitate the rationalization of the civil service, a computerized payroll system is being set up. This was, however, delayed as resources were diverted to the more urgent need for immediate flood relief. A strategy to rationalize the size of the civil service is targeted for completion by end-March 2001 with technical assistance from the World Bank, UNDP and AsDB.
Around 1,500 soldiers were discharged under the pilot military demobilization program. The pilot phase had provided many useful lessons to ensure better preparation for the full demobilization program to minimize the potentially negative social impact. The government has taken firm but cautious steps to comply with the program target as well as to ensure smooth reintegration of the demobilized soldiers into the local communities. A comprehensive reform strategy will be discussed with the World Bank and other donor partners at a forthcoming workshop. The first phase of the full demobilization program of 10,000 soldiers is planned for mid-2001.
In the trade area, Cambodia has begun to reduce tariff rates in accordance with the requirements of the ASEAN Free-Trade Agreement (AFTA) and has started the process for WTO accession. The authorities have already completed the WTO questionnaires in June and December 2000, and are targeting for the completion of the accession process by 2002. In the 2001 budget, the maximum tariff rate was reduced to 35 percent, the number of tariff bands was reduced to 4, and the average tariff rate was reduced to less than 16½ percent.
III. Poverty reduction strategy
Owing to a long history of internal conflict, Cambodia is one of the poorest countries in the world, with GDP per capita estimated at only US $ 256 in 1999. The main agenda of government policy as expressed in the Interim Poverty Reduction Strategy Paper (I-PRSP) is to pull Cambodia up from the shackles of poverty. The preparation of the I-PRSP was made with the broad participation of representatives of government bodies, legislative bodies, donor community, and non-governmental organizations. The I-PRSP presents a detailed analysis of the multi-dimensionality of poverty in Cambodia and outlines the measures to reduce the incidence of poverty by promoting opportunities, creating security, strengthening capabilities and generating empowerment. The paper has consolidated the experiences from existing policies for poverty reduction, and formulated the priority actions for the short and medium term to ensure a cohesive and consensus-based development, with equity for all Cambodians. The authorities are committed to complete the full PRSP taking into consideration the comments in the joint staff assessment paper.
IV. Medium-term framework
Under the PRGF-supported program, Cambodia has so far achieved positive results, both in the macroeconomic fields as well as in the structural areas. However, the authorities are aware that there are still many challenges and difficulties to be overcome in the years ahead. The government will take additional macroeconomic policies and measures aimed at raising real GDP growth to 6 percent, keeping inflation low at single digit, containing the current account deficit to a level consistent with available concessional financing and FDI flows, and increasing gross official reserves to an equivalent of four months of imports by the end of the three-year program.
The 2001 budget was programmed to achieve a current surplus of 1.4 percent of GDP, based on enhanced revenue collection through broadening of the tax base and strengthening customs and tax administration with technical assistance from the IMF. In addition to the expansion of the VAT base and other revenue efforts, the government will review the investment law to eliminate any tax distortions. On the expenditure side, the budget aims to reduce spending for defense and security by ½ percentage point of GDP, and allocate the freed-up resources to the social sectors (health, education), agriculture and rural development projects. The civil service wage bill will be kept at 1.7 percent of GDP, providing room for a 10 percent increase in basic wage after the removal of irregular cases from the payroll. The overall deficit (excluding grants) is budgeted to increase slightly from 5.7 to 5.8 percent of GDP. Domestic financing will remain under tight control. The government’s net debt position with the central bank will be reduced. The government will make further efforts to improve budgetary operations in order to channel more resources to the social sectors. The Budget Strategy and Enforcement Center, established in 2000, will be strengthened to improve budget execution. In addition, in 2001, an increase in budget funds, from CR 27 million to CR 68 million will be allocated to the provincial and district budget as part of the government’s policy to enhance the de-concentration of the central budget under the Accelerated District Development and Priority Action program.
The success of the reform program will depend on a combination of domestic efforts and technical assistance from international organizations. The government will allocate sufficient resources to the efficient use of technical assistance under the TCAP program. In the statistics area, Cambodia has already expressed its intention to participate in the GDDS, but it will require technical assistance to further improve the quality of its statistics.
V. Conclusion
Over the first year implementation of the PRGF reform program, Cambodia has generally achieved a strong performance, despite the adverse impact of the severe flooding. For the second year of the program, the government remains fully committed to continue the reform program in order to build basic economic institutions, maintain macroeconomic stability, improve governance, promote sustainable growth and fight against poverty. Further actions will be focused on improving tax administration and expenditure management, bank restructuring, military demobilization, civil service reform, and trade liberalization. The other core priorities are to reform the forestry and legal areas. The full Poverty Reduction Strategy Paper will be completed within the targeted time frame in order to provide a clear road map to fight against poverty.
My Cambodian authorities will continue their close cooperation with the Fund and the World Bank to ensure a successful implementation of the program.
With the successful implementation of the program over its first year, my Cambodian authorities request the Board’s approval of the completion of the second review under the PRGF arrangement and the release of the third disbursement.
Once again, on behalf of my Cambodian authorities, I would like to express our appreciation to the staff, management and the Board for their strong support for the reform program under the PRGF arrangement as well as for their continuous assistance to Cambodia.