Abstract
This Selected Issues paper analyzes the potential impact of oil on economic growth and policy for Cambodia. It shows that a hypothetical moderately sized oil sector would have a significant, but not overwhelming, impact on macroeconomic prospects; but reaping the benefits while avoiding economic problems would depend, in particular, on sound fiscal policies. The paper looks at the role of wage and employment policies within the broader civil service reform agenda. It also analyzes wage bill developments since the 1990s and proposes steps to accelerate pay and civil service reforms.
I. Introduction
1. This volume of Selected Issues provides background information to the staff report for the 2007 Article IV consultation. Each of the following chapters deals with one of the central issues of the consultation’s policy discussions on Cambodia’s medium-term prospects: the potential impact of oil on economic growth and policy, the role of wage policy in broader civil service reforms, the risks to the banking sector from recent rapid increases in monetary growth, and tax system development.
Oil
2. Recent exploration suggests that Cambodia could have significant offshore oil and gas resources, including in, but not limited to, an overlapping claims area with Thailand. Oil production could significantly increase national income and provide vital financing for government development spending, as well as allowing saving for future generations. However, there is still considerable uncertainty over its scale and timing. The second chapter shows that a hypothetical moderately sized oil sector would have a significant, but not overwhelming, impact on macroeconomic prospects but that reaping the benefits while avoiding economic problems would depend, in particular, on sound fiscal policies.
Civil Service Reform
3. Public administration reform is vital for the government to make a greater contribution to poverty reduction in Cambodia. The third chapter looks at the role of wage and employment policies within the broader civil service reform agenda. It analyses wage bill developments since the 1990s and proposes steps to accelerate pay and civil service reforms. It concludes that there is a pressing need to develop a comprehensive civil service reform strategy that can be sustainably financed and that promotes efficiency.
Monetary Growth and Banking Sector Risk
4. The rapid growth in banking sector deposits and credit to the private sector is not, at present, causing inflationary pressures but the significant prudential risks have the potential to undermine macroeconomic prospects. The fourth chapter finds that the most significant risks stem from the banks’ exposures to individual sectors and customers. Exposure to the booming land and real estate market is a particular concern. Vigilant and firm supervision from the National Bank of Cambodia can be instrumental in minimizing the potential impact.
Tax System
5. The fifth and final chapter updates the summary of the Cambodian tax system provided in the Selected Issues volume for the 2006 Article IV consultation. It also provides a brief overview of the key features and weaknesses of the tax system and compares its performance to other countries in the region.