Introduction

Cambodia has completed the first two years of the PRGF program successfully. Macroeconomic stability has been maintained and significant advancements in structural reforms have been accomplished. Noticeable progress has been achieved in sustaining economic growth, reducing poverty, and accelerating economic reconstruction. All quantitative and structural performance criteria for the fourth review were observed with good progress in banking sector rehabilitation, forestry policy reforms, fiscal restructuring, and promotion of good governance.

Macroeconomic Developments

Despite the negative impact of drought followed by floods (affecting more than two million people) on domestic production, coupled with the impact of the global economic downturn in the fourth quarter of 2001, preliminary estimates are that annual output grew by 5.3 percent, slightly below the program target. Recent developments, however, indicate that garment exports and tourist arrivals continued to grow in the last quarter of 2001, providing some upside potential that growth could be somewhat better than the existing forecast. Given the global economic slowdown, the projected rate of growth in 2002 has been revised downwards to 4.5 - 5.0 percent.

Continued tight monetary policy pursued by the Cambodian authorities has helped to curb inflation, which remained slightly negative over the past three years. At the same time, the exchange rate continued to be generally stable. Gross official reserves increased gradually, reaching US$548 million at end-December 2001, equivalent to three months of imports. Reflecting strong export performance, the current account deficit (excluding grants) is estimated to have declined to 9.0 percent of GDP in 2001 from 10.0 percent the previous year, or about a percentage point below the program target.

Consistent with the authorities’ commitment to the international financial community and to facilitate international payments, Cambodia has accepted Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement, with effect from January 1, 2002.

Fiscal Policy

The Cambodian authorities have continued to rigorously implement economic and fiscal reforms so as to consolidate macroeconomic stability. Budget management has been improved during 2000-2001 and fiscal performance has been in line with the program targets. In 2001, government revenue rose to about 12.5 percent of GDP, and is expected to increase further to 13.5 percent of GDP in 2002. The rise in revenue in 2001 was attributable to improved collection of tax and non-tax revenues. However, there was some slippage in collection of customs revenue in the second-half of 2001 owing to the decline in import volumes and administrative constraints. Both the Tax as well as the Customs and Excise Departments have initiated their reform action plans to further strengthen their administrative and operational capacity with technical assistance from the Technical Cooperation Action Plan (TCAP) program. The government will focus on (i) enhancing the Large Taxpayer Unit (LTU), (ii) broadening the tax base, (iii) improving the collection of non-tax revenue (from telecommunications and leases of public property), (iv) enhancing the pre-shipment inspection (PSI) system, and (v) curbing smuggling, in order to achieve the 2002 revenue target.

As for expenditures, the formulation of a comprehensive reform strategy for public expenditure management is in progress. The reform strategy covers (i) expenditure control, (ii) cash management, (iii) treasury reforms, and (iv) adopting standardized accounting and fiscal reporting systems with TCAP technical assistance. The government is committed to a pro-poor fiscal policy and will divert more resources from defense and security to the social sector. As an outcome of the on-going military demobilization exercise, defense and security spending is expected to decline to 2.8 percent of GDP in 2002 from 3.2 percent in 2001. On the other hand, social sector spending is budgeted to increase to 3.7 percent of GDP in 2002 from 3.2 percent in 2001.

Financial Sector Reforms

In 2001, the National Bank of Cambodia (NBC) continued to implement its banking sector restructuring plan. Accordingly, 12 banks were closed, of which 8 were liquidated smoothly, while judicial liquidation in accordance with the court ruling has been initiated for the remaining 4 banks. Another 13 banks were given conditional licenses to operate under Memoranda of Understanding (MOUs), and the NBC monitors them closely and assesses their performance in accordance with a preset timetable. Most of these banks have fulfilled the requirements of their MOUs, and a final decision on the liquidation of those banks that failed to meet the requirements is expected to be made by end-February 2002. Various measures have been adopted to upgrade the supervisory capacity of the NBC. These include the plan to implement a standardized accounting system for the banking sector in consultation with the Bankers’ Association in order to improve the reporting system. In the meantime, a strategy for the development and supervision of micro-finance business is being formulated to boost activities in support of the poverty reduction strategy. A blueprint for financial sector development has also been completed with the assistance of the Asian Development Bank to strengthen overall financial sector development.

With regard to the restructuring of the Foreign Trade Bank (FTB), an outside director has been appointed to the Board of Directors and a foreign expert has been engaged to help upgrade the bank’s management and prepare it for eventual privatization by end-2002. At end-March 2002, the Ministry of Economy and Finance (MEF) will issue government bonds to replace the bridge financing provided by NBC in FTB’s capital base.

With the successful implementation of the US dollar clearing system alongside the local currency clearing system, the NBC has made significant progress towards establishing a modern payment system in Cambodia. In this regard, preparation of the draft bills on negotiable instruments and payment transactions is progressing earnestly and the final draft will be submitted to the Council of Ministers in May 2002. An international audit firm has completed its audit of the accounts of the NBC and the report has been published in compliance with the policy on safeguards in the use of Fund resources.

Governance Action Plan

The Cambodian authorities consider that good governance is a prerequisite for sustainable socio-economic development and social justice in Cambodia. Accordingly, the Governance Action Plan (GAP) has identified two categories of governance reform that will be critical to the country’s development over the near and medium-term. The first involves four overlapping areas, namely legal and judicial; public finance; civil service and administration; and anti-corruption. The second includes two specific policy areas-natural resource management and demobilization of the armed forces. The authorities have disseminated the GAP in December 2001 to the public as a milestone for its implementation. Within the GAP framework, the National Audit Authority will commence operations in 2002 and undertake audits of public revenues and expenditures in order to improve transparency and accountability.

Forestry Policy

The Cambodian authorities also consider that the sustainable management of its natural resources and the protection of the environment are among the main elements of its strategy for combating poverty in Cambodia. In the forestry sector, the government issued a decree requiring the concession companies to submit their forestry management plans by end-September 2001 as a condition for extending their logging licenses. Unfortunately, the plans that were submitted did not provide an adequate basis for sustainable forestry management. Consequently, the government took decisive action, effective from January 2002, to suspend the operations of 17 logging concessionaires throughout the country in order to preserve the forestry resources. The ban will only be lifted and the logging licenses extended when adequate forestry management plans are submitted and approved by the government.

Administrative reform, Civil Service Reform and Military Demobilization

On administrative reforms, the government has shifted from a centralized to a decentralized management system by introducing technical devolution of power from the central to the local levels. This will strengthen public services and increase public participation in the government’s decision-making process. The starting point for this process was the communal elections that were held on February 3, 2002.

The implementation of the nationwide computerized payroll system for the civil service has been successfully completed, resulting in annual savings of up to US$ 2.2 million from the elimination of about 9,000 irregular (ghost) workers from the payroll. A strategy for further civil service reform in 2002-2006 has been developed in order to improve administrative efficiency in the delivery of public services. The strategy provides the foundation for (i) reviewing job classifications, (ii) providing incentives to core groups (AA and Priority Management Group) while at the same time, successively raising salaries in line with improved public revenues, and (iii) rationalizing the size of the civil service with special focus on the increasing needs of the education sector. Given the current budget constraint, financial assistance from donors would help expedite implementation of such a program.

Military demobilization has been undertaken with the objective of transferring all demobilized soldiers into productive economic sectors. At the same time, savings from the reduced military expenditure will be allocated to the development of public infrastructure, and the social and economic sectors. The government has completed the first phase of the demobilization program by discharging 15,000 soldiers in December 2001. In the second phase, another 15,000 soldiers will be discharged by end-2002.

Poverty Reduction Strategy Papers

The establishment of the Council of Social Development (CSD) and its General Secretariat (GSCSD) would advance the preparation of the full PRSP, expected to be completed by October 2002. Although much needs to be done to improve coordination and cooperation amongst all stakeholders as well as overcome the human resource constraints, the institutional arrangements and work plan that have been put in place will allow the preparations to progress forward. Using the second Socio-Economic Development Plan 2001-2005 (SEDP II) as the foundation for the poverty reduction strategy, the CSD will now focus on poverty diagnosis and monitoring, identifying priority public actions, and stimulating the participatory process. Despite the above arrangements, the CSD will encounter tremendous challenges to resist compromising on the priority actions because of pressures from the urgent needs throughout the country and the serious capacity constraints in human, institutional and financial resources. External support would be urgently needed and close monitoring and frequent adjustments may be necessary as the strategy is implemented.

World Trade Organization—Trade for Poverty Reduction

The Cambodian authorities are committed to better integrate their economy into the regional and international community. In recent years, Cambodia has been actively fulfilling its obligations towards possible accession to the WTO. The law on trademarks has been adopted and other key legislations such as the bankruptcy law and secured transactions law are forthcoming. Tariff rates and the number of tariff bands have been reduced. A national workshop was held in November 2001 to foster a comprehensive integrated framework for Cambodia’s trade strategy to serve as one of the pillars for its poverty reduction strategy.

Debt Resolution

As the staff report clearly indicates, the Cambodian authorities have taken a number of steps since the last Board meeting to advance discussions toward resolving outstanding debt obligations. A meeting between a Cambodian delegation and their Russian counterparts in Moscow in September 2001 marked further progress in the resolution of Cambodia’s debt to the Russian Federation. The Prime Minister of Cambodia was initially scheduled to visit Moscow in October to further the debt rescheduling discussions, but this was cancelled following the events of September 11. The next round of discussions is now scheduled for this month in Moscow. The Cambodian authorities have confirmed in written communication to the Russian authorities their readiness to be flexible regarding all aspects of a potential rescheduling agreement.

Similar efforts have been made vis-à-vis Cambodia’s debt arrears to the United States. The plan to discuss the debt issues with the United States during the occasion of the IMF-World Bank Annual Meetings in September 2001 did not materialize due to the cancellation of the Annual Meetings. The Cambodian delegation is now scheduled to visit Washington DC this month for meetings with their US counterparts. Progress has also been made in finalizing agreements with other creditors.

As noted in staffs analysis, Cambodia’s financial capacity remains very weak. It would therefore be important for the Cambodian authorities to be able to reschedule their outstanding debts on very concessional terms. Otherwise, there could be major implications on Cambodia’s ability to make progress in its poverty reduction efforts.

Conclusion

In conclusion, Cambodia has made impressive progress under the PRGF program despite its significant capacity constraints and its still fragile political situation. These successes would not have been possible without the strong commitment of the authorities and the continuous support of the international community. However, the authorities recognize that there is still a long journey ahead to reduce and eradicate poverty. Much more assistance will be needed in the years ahead to support the authorities’ ongoing efforts. In this regard, my Cambodian authorities are grateful for the assistance and support received from the international community and various bilateral donors. The Cambodian authorities would like to thank the Executive Board, Management and staff, for their continuous support.