Cambodia: Staff Report for the 2001 Article IV Consultation and Fourth Review Under the Poverty Reduction and Growth Facility
Author: International Monetary Fund
Publication Date:
01 Mar 2002
eISBN:
9781451821727
ISBN:
9781451821727
Language:
English
Keywords:
ISCR; CR; government; reform effort; trade reform; IMF home; reform; priority government reform; General government operation; finance data; reform program; Cambodian authorities
Download PDF (3.5 MB)

This paper assesses Cambodia’s 2001 Article IV Consultation and Fourth Review Under the Poverty Reduction Growth Facility (PRGF). The PRGF-supported program approved in October 1999 aims at sustaining economic growth, reducing poverty, and accelerating economic reconstruction. In the first two years of the program, significant progress has been made. Priority structural policies for the third year of the PRGF arrangement focus on improving tax and customs administration, enhancing expenditure management, and continuing the bank restructuring program—including reform of the publicly owned Foreign Trade Bank.

Abstract

This paper assesses Cambodia’s 2001 Article IV Consultation and Fourth Review Under the Poverty Reduction Growth Facility (PRGF). The PRGF-supported program approved in October 1999 aims at sustaining economic growth, reducing poverty, and accelerating economic reconstruction. In the first two years of the program, significant progress has been made. Priority structural policies for the third year of the PRGF arrangement focus on improving tax and customs administration, enhancing expenditure management, and continuing the bank restructuring program—including reform of the publicly owned Foreign Trade Bank.

I. Introduction

1. The political environment stabilized in late 1998 and the government launched a reform program in 1999. The program is being supported by the PRGF arrangement, approved in October 1999, and by a World Bank SAC program, approved in February 2000. Assistance is also being provided by the AsDB and other multilateral and bilateral donors. The government remains committed to the program at the highest level, but capacity and political constraints have led to some delays and could continue to affect program implementation in the future. The success of the program will depend on the sustained implementation of reforms, including in the run up to local elections in early 2002 and national elections in 2003.

2. Performance during the first two years of the PRGF-supported program has been positive. GDP growth has been sustained and inflation kept very low. Government revenue performance has improved, the share of expenditure on defense and security has declined, and spending for the priority social sectors has increased. The improved fiscal position has allowed for an expansion of private credit, the exchange rate has been stable, and international reserves have increased steadily (Table 1 and Charts 1-2).

Table 1.

Cambodia: Selected Economic Indicators, 1998-2002

Nominal GDP (2000): $3,094 million

Population (2000): $13 million

GDP per capita (2000): 239 million

Fund Quota: SDR 87.5 million

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Contributions to 12-month percent change of broad money.

Ratio of nominal GDP to average stock of broad money.

Includes cash adjustments.

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

Excludes re-exports.

Chart 1.

Cambodia: Selected Economic Indicators, 1997-2001

A01ct01
Source: Data provided by the Cambodian authorities.1/ Includes US $117 million associated with the return in 1998 of Combodian gold previously held by the BIS.2/ Includes imports of steel, coment, and construction equipment.Chart 2.

Cambodia: Indicators of Program Performance, 1998-2002

A01ct02
Source: Data provided by the Cambodian authorities, and Fund staff estimates.

3. Significant structural reforms are underway. A comprehensive bank restructuring program is nearing completion, illegal logging activity has been reduced and forestry concessions suspended, the execution of public expenditure has improved somewhat through the introduction of Priority Action Programs for health and education, and tax administration is being strengthened. Key legislation has been approved by the parliament and a comprehensive governance action plan (GAP) was approved by the government and disseminated to stakeholders.

4. Despite this progress, the economy is still vulnerable. This reflects the huge task that confronted the authorities at the outset of the program to rebuild a country shattered by three decades of civil strife in the context of a fragile governance environment and severe capacity constraints. Accordingly, the program will continue to require close monitoring and extensive technical assistance.

5. In concluding the 2000 Article IV consultation, Executive Directors commended the authorities for their economic performance and emphasized that achieving sustained growth and poverty reduction would require continued strong efforts on a wide front. In concluding the third review under the PRGF arrangement, Directors welcomed progress made in bank reform, computerization of the civil service payroll, and the establishment of a comprehensive governance action plan. They called, however, for sustained reform efforts, especially with respect to revenue mobilization, expenditure management, civil service reform, military demobilization, and bank restructuring. Directors expressed concern with slow progress in resolving outstanding bilateral debt rescheduling agreements, and indicated that completion of further reviews under the PRGF arrangement will depend on continued progress in this area.

6. In the attached letter to the Managing Director, the authorities request completion of the fourth PRGF review. In the accompanying Memorandum of Economic and Financial Policies, the authorities report on progress made under the PRGF-supported program, and set out their policies for 2002 and the associated performance criteria and structural conditionality.

II. Recent Developments and Performance Under the 2001 Program

7. Macroeconomic performance and policy implementation in 2001 have been broadly consistent with the program. Objectives for 2001 have been largely achieved despite some slowing in the growth of garment exports and tourist receipts. Economic growth is estimated at 5¼ percent, slightly below the program target of 6 percent, while inflation has remained well below 5 percent. The exchange rate has been stable and international reserves have increased, reaching $548 million (3 months of imports) at end-December. Quantitative performance criteria for September 2001 and the structural performance criteria for end-October 2001 were observed, but there were delays in meeting a few structural benchmarks (Tables 2 and 3). Preliminary data indicate that the end-December 2001 quantitative benchmarks are likely to have been observed.

Table 2.

Cambodia: Quantitative Performance Criteria and Benchmarks, June-December 2001

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Performance criteria

Net domestic assets are defined as reserve money minus net foreign assets of the central bank, adjusted for valuation changes arising from the difference between program and actual exchange rate.

For purposes of verifying compliance with the program, the program ceiling for net domestic assets of the central bank, net credit to the government from the banking system and net domestic financing of the budget were adjusted upward by CR 2.5 billion in June 2001, and Cr 24.7 billion in September 2001 due to shortfalls in external nonproject budget support.

Maturity based on original contract.

Ceilings 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 $12 million.

Continuous performance criterion

For purposes of verifying compliance with the program, the floor on net official international reserves was adjusted downward by $5.4 million in September 2001.

Table 3.

Cambodia: Structural Benchmarks and Performance Criteria for the Fourth Review

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8. Economic activity in 2001 has remained relatively strong despite a slowing global economy. A modest recovery in agricultural production is expected, and both garment exports and tourist arrivals increased by more than 20 percent in the first nine months compared to the same period in 2000. The deterioration in the global economy since September was expected to adversely affect these key sectors. However, the growth of garment exports has been largely maintained through end-November as an expected negative impact on garment export volumes has been mitigated by a diversion of orders from other countries with a perceived higher security risk. Despite this, some slowing in the growth of garments is projected in the near term as prices for new orders are believed to have declined by 10-15 percent. There is also evidence that the tourism industry is being adversely affected. While continued arrivals from Asian countries have helped to offset a sharp decline from the United States and Western Europe, the growth of total arrivals has started to decline. Moreover, the higher end of the market and overall tourist receipts also seem to have been adversely affected. Based on these trends, and assuming a global rebound in mid-2002, the staff projects that economic growth in 2002 could be reduced to 4½ percent. Inflation is projected to remain well below 5 percent.

uA01fig01

Garment Exports, 2000-01

(3-month moving average, 12-month percent change)

Citation: IMF Staff Country Reports 2002, 036; 10.5089/9781451821727.002.A001

uA01fig02

Vistor Arrivals, 2000-01

(12-month percent change)

Citation: IMF Staff Country Reports 2002, 036; 10.5089/9781451821727.002.A001

9. The implementation of the 2001 budget has been consistent with financing targets under the program. Tax revenue from domestic sources has been in line with projections, and the measures agreed during the third PRGF review have been implemented. However, customs revenue in the second half of the year fell short of projections, reflecting lower import volumes and slow progress in improving customs administration. As a result, overall revenue in the first 10 months of the year was slightly below indicative program targets.1 Overall expenditure was also held below indicative targets, and budget financing has been well within program limits. For the year as a whole, the current surplus is projected at 1½ percent of GDP and the overall deficit at 5¾ percent of GDP, in line with program objectives (Table 4). Some progress has been made in raising spending for health and education through the use of Priority Action Programs (PAPs) which expedites the allocation of funds from the central level to line ministries, even though procedures among line ministries at provincial levels have continued to impede more rapid disbursements.

Table 4.

Cambodia: General Government Operations, 2000-02

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

CR-50 billion of cash disbursement projected for 2001 reflects the cash impact of expenditure committed at end-2000.

1,500 soldiers were discharged in 2000, 15,000 in 2001, and an additional 15,000 are expected in 2002. Cost per soldier is US$ 1,500.

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

10. Monetary and external developments have also been in line with the program. Broad money growth for 2001 is estimated at 22 percent, while the avoidance of bank financing of the budget has provided room for a further increase in private credit (Table 5-6). The external current account deficit (excluding grants) is estimated to have been 9 percent of GDP, slightly better than the program target, reflecting strong export performance (Table 7). Gross international reserves have reached the equivalent of three months of imports, and the exchange rate has been broadly stable against the U.S. dollar and in real effective terms (Chart 3).

Table 5.

Cambodia: Monetary Survey, 1999-2002

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Sources: 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, 1999-2002

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Sources: Data provided by the Cambodian authorities; and Fund staff projections.
Table 7.

Cambodia: Balance of Payments, 1997-2002

(In billions of U.S dollars)

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Includes estimates for unrecorded forestry exports and unrecorded petroleum imports.

Assumes a Paris Club rescheduling under Naples terms (67 percent NPV reduction) in 2002. Bilateral rescheduling agreement were reached with the Czech and Slovak Republics in 2001

Includes $117 million associated with the return of Cambodian gold holdings by the BIS in 1998.

Imports excluding imports for re-export and imports for garment sector.