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Cambodia: Staff Report for the 2000 Article IV Consultation and First Review Under the Poverty Reduction and Growth Facility

Author(s):
International Monetary Fund
Published Date:
October 2000
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I. Introduction

1. The government embarked on a reform program in early 1999 in a break from Cambodia’s past record of inconsistent policy implementation and poor governance. Under the new government, cooperation between the coalition partners has facilitated the implementation of reforms, and strong actions have been taken in key areas such as fiscal reform, forestry policy, and military demobilization.

2. A three-year PRGF program for the equivalent of SDR 58.5 million (67 percent of quota) was approved by the Executive Board on October 22, 1999. At that time, Directors considered decisive fiscal reform to be central to the policy agenda, including revenue mobilization and a reorientation of government spending toward the social sectors. Directors also stressed the importance of continued improvement in governance, particularly with respect to the management of forest resources. A World Bank SAC of SDR 21.7 million was approved on February 29, 2000.

3. Policy implementation in 1999 and through mid-2000 was consistent with the program. Macroeconomic objectives for 1999 were achieved (Table 1), quantitative benchmarks for December 1999 and June 2000, and performance criteria for March 2000, were observed (Table 2), and structural performance criteria and benchmarks were also observed, albeit with some delays (Table 3). In the attached letter to the Managing Director, the Cambodian authorities have requested completion of the first review under the PRGF program to enable a disbursement from the Fund in an amount equivalent to SDR 8.357 million (9.6 percent of quota). A supplementary Memorandum of Economic and Financial Policies which updates the authorities’ program is attached to the letter to the Managing Director.1

Table 1.Cambodia: Selected Economic indicators, 1996-2000
Nominal GDP (1999 est.)$ 3,008 million
Population (1999 est.)11.7 million
GDP per capita (1999 est.)$ 256
Fund QuotaSDR 87.5 million
1996199719981999Most2000
PRGF prog.Est.recentProj.
(Percent change; unless otherwise indicated)
Real economy
Real GDP5.13.71.84.05.05.5
GDP deflator4.66.013.16.73.83.2
Consumer prices (final quarter-basis)9.09.112.65.00.0-3.3 1/1.6
Money and credit
Broad money (incl. foreign curren. deposit)40.516.615.716.917.339.1 1/35.5
of which: riels in circulation19.518.843.09.8-3.811.3 1/4.1
Net credit to Government 2/-3.1-8.111.7-4.4-6.1-2.9 1/-3.2
Velocity of money 3/10.79.79.58.68.57.4
(In percent of GDP)
Government budget
Revenue (incl. capital revenue)9.09.69.011.611.511.2 4/11.7
of which: tax revenue6.46.86.58.38.38.3 4/8.6
non-tax revenue2.13.02.23.23.12.9 4/3.1
Expenditure16.113.814.915.015.914.3 4/17.0
Current expenditure9.88.88.99.89.68.1 4/9.8
Capital expenditure6.44.96.05.26.36.1 4/7.2
Current budget balance-1.20.7-0.31.71.83.1 4/1.8
Overall budget balance-7.1-4.1-6.0-3.4-4.4-3.0 4/-5.3
Overall budget balance (incl. grants)-0.3-0.5-2.7-1.0-1.50.6 4/-1.7
Foreign financing6.94.94.84.04.54.8 4/6.0
Domestic financing-0.3-0.71.1-0.6-0.4-1.1 4/-0.4
Outstanding operation0.5-0.10.10.00.3-0.6 4/-0.3
Domestic Investment13.513.012.914.115.817.5
Government investment 5/5.94.85.75.16.26.1 4/7.0
Non government investment7.68.27.39.09.610.5
National saving7.411.711.68.411.711.9
Government saving-1.20.7-0.31.71.83.1 4/1.8
Non government saving8.711.011.96.79.910.1
(In millions of U.S.dollars; unless otherwise indicated)
Balance of payments
Exports 6/295534610548695730
Imports 6/-771-798-803-898-990-1099
Current account (excl. off. transfers)-493-252-230-386-346-428
(In percent of GDP)-15.5-8.1-8.2-12.3-11.5-13.1
Current account (incl. off. transfers)-193-43-36-179-126-185
(In percent of GDP)-6.1-1.4-1.3-5.7-4.2-5.6
Capital account413-47-69772892
Overall balance219-90-105-102-98-93
Gross official reserves234262390426422468 7/494
(In months of imports of g & s)2.12.43.63.53.33.4 8/3.5
(In percent of broad money)69.585.1119.91125110.597.7 9/97.8
Net official reserves164197323355349398 7/408
Debt service14513212413213237
(In percent of dom. exports of g&s)29.517.815.917.714.73.9
Memorandum items:
Nominal GDP (in billions of riels)8,3259,14910,53111,47011,47012,489
(in millions of U.S. dollars)3,1723.1052,8133,0083,0083,267
Exchange rates (riels per dollar, end-of-period)27133,4523,7803,8003,7753,900 10/3,870
Terms of trade (percent change)-5.10.13.10.415.5-4.6
Source: Data provided by the Cambodian authorities, and Fund staff estimates and projections.

June 2000; 12-month percentage change.

Contributions to 12-month percent change of broad money.

Ratio of nominal GDP to average stock of broad money.

June 2000; annualized totals relative to projected annual GDP.

Includes externally financed technical assistance for implementation of capital projects.

Excludes re-exports.

August 18, 2000.

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

June 2000.

August 28, 2000.

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

June 2000; 12-month percentage change.

Contributions to 12-month percent change of broad money.

Ratio of nominal GDP to average stock of broad money.

June 2000; annualized totals relative to projected annual GDP.

Includes externally financed technical assistance for implementation of capital projects.

Excludes re-exports.

August 18, 2000.

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

June 2000.

August 28, 2000.

Table 2.Cambodia: Quantitative Performance Criteria and Benchmarks, 1999-2000
199819992000
Stock at

End -Dec.
End-Sep.End-Dec.End-March 1/End-June
Act.Proj.Act.Prog.Adj. ProgAct.Proj.Adj. ProgAct.Prog.Adj. ProgAct.
(Maximum) cumulative change from beginning of year
Net domestic assets of the banking system (in billions of riels) 2/3/-498-75-106-98-62-86744-50133-78
Net credit to the government from the banking system (in billions of riels) 3/179-79-85-54-18-76-1918-9-49-17-62
Net domestic financing of the budget (in billions of riels) 3/-89-122-64-28-40-1918-32-49-17-70
Publicly contracted or guaranteed foreign currency loans 4/
Up to one-year maturity 5/
1-5 year’s maturity
Medium- and long-term nonconcessional debt
External payments arrears 6/
(Minimum) cumulative change from beginning of year
Net official international reserves (in millions of US dollars) 7/8/323131938292913325261744
Memorandum items:
Cumulative flows from beginning of year
Nonproject budget support (in millions of US dollars)1011002011
Stock at the end of period
Net domestic assets of the banking system (in billions of riels)-498-573-604-596-561-584-577-540-634-583-551-662
Net credit to the government from the banking system (in billions of riels)179100941251601038412194548641
Net official international reserves (in millions of US dollars) 8/323336342361352352362352375375367393
Exchange rate (riels per US dollar, end of period)3,7803,8003,9003,8003,8003,7753,8003,8003,8203,8003,8003,865
Sources: Data provided by the Cambodian authorities; and Fund staff estimates.

Performance criteria.

Net domestic assets are defined as broad money minus net foreign assets of the banking system adjusted for the valuation changes arising from the difference between the program and actual exchange rates. The original quantitative benchmark for December 1999 was adjusted downwards by CR 31 billion due to an excess in the September 1999 outcome relative to the program estimates.

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 upwards by CR 35.6 billion in December 1999, by CR 37.0 billion in March 2000, and by CR 32.2 billion in June 2000 due to shortfalls in external nonproject budget support.

Maturity based on original contract.

Ceiling applies to amount outstanding. Excludes normal import-related credit.

Continuous performance criterion.

The original quantitative benchmark for December 1999 was adjusted upward by US$6 million to US$38 million due to an excess in the September 1999 outcome relative to the program estimates. For purposes of verifying compliance with the program, the floor on net official international reserves was adjusted downward by US$9.4 million in December 1999, by US$9.7 million in March 2000, and by US$8.7 million in June 2000 due to shortfalls in external nonproject budget support.

Net official international reserves for December 1999 are evaluated at the end-September 1999 gold price, and those for 2000 are evaluated at the end-December 1999 gold price.

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

Performance criteria.

Net domestic assets are defined as broad money minus net foreign assets of the banking system adjusted for the valuation changes arising from the difference between the program and actual exchange rates. The original quantitative benchmark for December 1999 was adjusted downwards by CR 31 billion due to an excess in the September 1999 outcome relative to the program estimates.

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 upwards by CR 35.6 billion in December 1999, by CR 37.0 billion in March 2000, and by CR 32.2 billion in June 2000 due to shortfalls in external nonproject budget support.

Maturity based on original contract.

Ceiling applies to amount outstanding. Excludes normal import-related credit.

Continuous performance criterion.

The original quantitative benchmark for December 1999 was adjusted upward by US$6 million to US$38 million due to an excess in the September 1999 outcome relative to the program estimates. For purposes of verifying compliance with the program, the floor on net official international reserves was adjusted downward by US$9.4 million in December 1999, by US$9.7 million in March 2000, and by US$8.7 million in June 2000 due to shortfalls in external nonproject budget support.

Net official international reserves for December 1999 are evaluated at the end-September 1999 gold price, and those for 2000 are evaluated at the end-December 1999 gold price.

Table 3.Cambodia: Structural Performance Criteria and Benchmarks, 1999-2000
Policy ActionStatus as of end-July 2000
1. Structural Performance Criteria
a. Completion of census to ascertain the precise number and status of civil servants and military personnel. (end-March 2000)Military census was completed in December 1999 and civil service census in March 2000.
2. Structural Benchmarks:
a. Complete review of concession contracts and cancel additional concessions in violation of contract terms or Cambodian law. (end-June 2000) 1The AsDB-sponsored concession review was completed in May 2000. On the basis of this review, the government has canceled 3 concessions and severely restricted logging activity of other concessions.
b. No ad hoc tax exemptions to be granted any time during the program period. (continuous)Remaining exemptions are limited to those specified under the Law on Investment and a few duty-free shops in border regions.
c. Complete on-site inspections of the remaining commercial banks. (end-December 1999)Remaining on-site inspections were completed in November 1999.
d. Following the adoption of the Financial Institutions Law, subject all banks to relicensing and move to close insolvent or noncomplying banks accordingly. (end-June 2000)The re-licensing process has been initiated with MAE technical assistance. Initial steps have been taken to close 3 banks in early August. Decisions on remaining banks will be taken by end-November 2000.
e. Submit two commercial laws (as part of a comprehensive commercial code) to the National Assembly. (end-December 1999)First drafts of five laws have been completed. One law was submitted to the National Assembly in November 1999 and several others are close to being finalized. Technical assistance is being provided by the World Bank and LEG.
f. Formulate a medium-term strategy and reform program for the civil service entailing annual phasing for downsizing. (end-June 2000)With the completion of the civil service census, 6,091 irregular cases will be removed from the payroll. Specification of a reform strategy will be made in March 2001 based on on-going studies and technical assistance from the World Bank, the UNDP, and the AsDB.
3. Conditions for Review
a. Complete review of timber revenue mechanism, in consultation with the Bank and the Fund.Preliminary studies have been carried out by the Bank and the Department of Forestry and Wildlife. The government has decided to keep the existing royalty level of $54 per cubic meter pending a broader consultative process, including input expected to be received from the industry association by end-December 2000.
b. Initiate preshipment inspection for imports (PSI), based on FAD technical assistance recommendations.Negotiations were completed, and a new contract signed on August 14, 2000.
c. Initiate national consultations on revised forestry legislation.Draft legislation has been prepared and the consultation process was initiated in June 2000.
d. Formulation of a medium-term strategy and reform program for the military, entailing annual phasing.1,500 soldiers have been discharged under the pilot demobilization program, and the first stage of the full demobilization program is expected to be initiated by November 2000.
e. Review of forestry policy and budget management.Significant progress has been made and additional measures agreed as described in the updated MEFP.

The authorities intended for this measure to be an end-June 2000 structural performance criterion for the availability of the second disbursement. However, because it was envisaged, at the time the arrangement was approved, that the second disbursement would take place before end-June 2000, this measure was accordingly not set as a performance criterion.

The authorities intended for this measure to be an end-June 2000 structural performance criterion for the availability of the second disbursement. However, because it was envisaged, at the time the arrangement was approved, that the second disbursement would take place before end-June 2000, this measure was accordingly not set as a performance criterion.

4. The government remains committed to the reform program, but much more remains to be done as the process of rebuilding basic institutions is still in the early stages. The steadfast implementation of reform policies, including strong efforts to improve governance, will continue to press against vested interests.

5. At the Consultative Group meeting (May 24-26, 2000 in Paris), donors were cautiously optimistic in view of the progress that had been made in the past year while noting that Cambodia still had a long way to go. They urged the authorities to improve governance in key areas to provide the basis for sustainable economic growth and for reducing poverty over the medium term. Central to the authorities’ governance action plan is a broad program of public administrative reform, within which donors stressed the need for short-term actions such as the regular publication of laws, improvements in customs administration, and better management of state assets and public procurement.

II. Economic Developments in 1999 and Early-2000

6. Economic conditions improved considerably in 1999 and were broadly in line with program projections:

  • Real GDP growth is estimated to have risen to 5 percent, compared to the program target of 4 percent. Buoyant growth in several sectors, particularly garments, tourism, non-forestry agriculture, and construction, offset the impact of a significant reduction in logging activity.2
  • Inflation fell to an annual average of 4 percent compared to the program target of 5 percent, reflecting falling food prices owing to the improved supply of rice and other crops, and restrained budgetary policy.
  • The external current account deficit widened to 11 ½ percent of GDP (4 percent of GDP including grants), reflecting a recovery in imports and higher petroleum prices. Nonetheless, gross official reserves increased, as expected, to US$422 million, equivalent to 3 ¼ months of imports of goods and services, reflecting increased capital inflows.

7. The source of economic growth in 1999 was more broadly based than in previous years. Improved weather conditions led to a recovery in agriculture (excluding forestry), which grew by nearly 8 percent. Manufacturing output grew by 9 percent, led by rapid increases in textile production for export, and the services sector by 6 percent primarily reflecting a recovery in tourism.

8. Budgetary performance strengthened considerably. Revenue increased by 2½ percentage points to 11 ½ percent of GDP in 1999 reflecting a structural improvement in tax collection, and some exceptional increases in nontax revenue. The value-added tax (VAT), introduced on January 1, 1999, performed strongly, leading to an increase in indirect tax collections by nearly 1 ½ percent of GDP, in excess of budget estimates (Table 4). Trade taxes remained, however, at about 3 ¾ percent of GDP, as the collection rate began to fall in the fourth quarter of the year reflecting increased smuggling and disruptions to re-export trade. Nontax revenue increased to 3 percent of GDP (from 2 ¼ percent in 1998) entirely due to exceptional revenue associated with the administration of garment quotas received from the United States.

Table 4.Cambodia: Central Government Operations, 1998-2000
1998

Actual
Budget1999

PRGF prog-
ActualBudget2000

PRGF prog.
Rev. Projection
Billions

of riels
Percent

of GDP
Billions

of riels
Percent

of GDP
Billions

of riels
Percent

of GDP
Billions

of riels
Percent

of GDP
Billions

of riels
Percent

of GDP
Billions

of riels
Percent

of GDP
Billions

of riels
Percent

of GDP
Total revenue9439.01,24510.91,33111.61,31611.51,47511.81,46611.71,46011.7
1. Tax revenue6796.58537.49548.39488.31,0358.31,0938.81,0688.6
Direct taxes560.5810.7660.6830.71040.8830.71150 9
Indirect taxes2482.43322.94383.84323.84393 54954.05014.0
o.w. Excise taxes (incl. on imports)760.7800.71000.9920.8940.71060.81211.0
VAT (incl. on impels) 1/231103142.73152.73292.6355283652.9
Trade taxes3763.64413.84503.94333.84923.55154.14523.6
2.revenue2302.23673.23623.23553.14203.43482.83813.1
o.w. Timber Royalties230.2730.6300.3360.3520.4610.5480.4
PTT870.81611.41201.01090.91501.21100.91201.0
Quota Auction00.0800.78708100.1100.1180.1
Garment licenses00.0180.2210.2360.3220.2460.4
3. Capital revenue330.3250.2150.1140.1200.2250.2100.1
Total expenditure2/1,57114.91,48012.91,72515.01,82515.92,24218.02,03716.32,12517.0
1. Current expenditure9418.91,1009.61,1259.81,0979.61,28510.31,26710.11,2289.8
Wages4514.34824.25294.65254.55274.25354.35274.2
Civil administration1541.51671.51991.71941.72181.72201.82181.7
Defense and security2972.83152.73302.93312.93092.53152.53092.5
Non-wage4904.76185.45975.25725.07586.17325.97015.6
Operating expenditures3723.53963.53953.44103.65054.05014.05114.1
Civil administration2202.12652.32642.32762.43763.03703.03823.1
Defense and security1521.41311.11311.11341.21291.01311.01291.0
Economic transfers140.1440.4440.4120.1460.4170.1110.1
Social transfers710.7940.81010.91040.91170.91140.91170.9
Civil administration6306850.7920.8950.81000.81050.81000.3
Defense and security80.190.190.190.1170.190.1170.1
Interest150.1130.1240.2220.2250,2250.2250.2
Other non-wage180.2220.220,0210.2250.2500.4150.1
Reserve funds00.0440.4250.200.0360.3250.2200.2
Election00.060.160.120.050.000.020.0
2. Capital Expenditure6306.03803.36005.27286.39577.77706.289772
Locally financed1201.11801.61801.62241.92572.12732.22622.1
Externally financed5104.82001.74203.75044.47005.64964.06355.1
CURRENT BALANCE-32-0.31201.01911.72051.81701.41741.42221.8
OVERALL BALANCE-628-6.0-235-2.0-394-3.4-509-4.4-767-6.1-571-4.6-666-5.3
OVERALL BALANCE (incl. grants)-286-2.7-185-1.6-119-1.0-167-1.5-217-1.7-134-1.1-209-1.7
FINANCING6286.02352.03943.45094.47676.15714.66665.3
1. Foreign financing (net)5034.82432.24584.05154.58436.86475.27506.0
o.w. Project aid5044.82001.74203.75114.57005.64964.06355.1
Budget support (grant)20.0500.4400.340.01501.21531.21221.0
2. Domestic financing1171.1-13-0.1-64-0.6-45-0.4-76-0,6-76-0.6-46-0.4
Central bank financing1201.1-130.0-54-0.5-70-0.6-76-0.6-76-0.6-46-0.4
Non bank financing-40.000.0-10-0.1260.200.000.000.0
3. Outstanding operations 3/60.100.000.0380.300.000.0-38-03
Memorandum items:
Defense and security outlays4574.34554.04704.14774.24553.54553.64553.6
Revenue from forestry250.2780.7350.3490.4520.4610.5480.4
Total revenue (excl. garment quotas)9439.01,24510.91,25110.91,22910.71,46511.71,45611.71,44211.5
Health, Education, Rural dev. (commitment)1491.42081.82081.82322.03122.52672.13122.5
Customs department revenue5275.06685.87966.98506.88626.9
GDP10,53111,47011,47011,47012,48912,48912,489
Source: Data provided by Cambodian authorities, and Fund staff estimates and projections.

VAT refunds are adjusted.

Total expenditure is based on a mixture of cash and accrual data.

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

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

VAT refunds are adjusted.

Total expenditure is based on a mixture of cash and accrual data.

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

9. Improvements were also made in budgetary implementation in 1999. Current expenditure was kept within budgeted levels. More importantly, for the first time in several years, spending for defense and security was close to budgetary appropriations and social sector spending on a commitment basis slightly exceeded budgetary provisions.3 Development expenditure exceeded budget projections as the improved budgetary situation provided room for an expansion in locally financed development projects.

10. Budgetary financing was in line with program targets. The current budget surplus increased to 1.8 percent of GDP, as targeted, while the overall deficit declined to 4 ½ percent of GDP (1 ½ percent of GDP including grants). With substantial external financing (4 ½ percent of GDP), the government was able to significantly reduce its debt, built up during 1997-98, to the central bank.

11. Monetary and exchange rate policies in 1999 were supportive of improved economic conditions. The 17 percent increase in broad money was fully reflected in an increase in net foreign assets (Table 5). Net domestic assets declined (as programmed), reflecting a sharp reduction in credit to the government, while private sector credit increased by 17 percent. The exchange rate remained stable at around CR 3,800 per U.S. dollar throughout 1999, and was also stable in real and nominal effective terms. The National Bank of Cambodia (NBC) has adjusted the exchange rate as necessary to keep any difference with the parallel market rate at less than 1 percent, as agreed under the program (Chart 3).

Table 5.Cambodia: Monetary Survey, 1998-2000
199819992000
Dec.JunSept.Dec.Max.JuneSept.Dec.
Proj.ActProj.Proj.
(In billions of riels)
Net foreign assets1,7281,9092,0432,0192,3732,4042,5142,5202,566
National Bank1,4251,5441,6271,6492,0062,0372,1192,1272,174
Deposit money banks (DMBs)304365416370367367395393392
Net domestic assets-498-593-637-576-640-617-683-626-611
Domestic credit839804867876883908909949996
Government (net)179809410394110414557
Public enterprises65121099899
Private sector655719762763779789860895930
Other items (net)-1,337-1,397-1,504-1,453-1,523-1,525-1,592-1,576-1,607
Of which: capital-1,530-1,600-1,703-1,638-1,679-1,747
Broad money1,2301,3161,4061,4431,7331,7871,8311,8931,955
Narrow money543500501532550563545549552
Currency in circulation509454461490505518505508510
Demand deposits344641424545414142
Quasi-money6878179049111,1831,2241,2861,3441,403
Time deposits202425323737333435
Foreign currency deposits6677938798791,1461,1861,2531,3101,368
(12 month percent change)
Net foreign assets47.516.021.216.826.425.931.723.427.1
Net domestic assets425.75.05.115.613.94.115.2-1.76.1
Domestic credit20.5-7.6-1.24.43.612.913.09.513.7
Government (net)231.7-38.3-46.5-42.3-43.137.7-48.2-51.5-44.3
Private sector2.8-2.19.416.614.59.719.517.521.9
Other items (net)69.0-2.61.48.67.79.213.94.810.7
Broad money15.721.730.117.331.835.839.134.735.5
(Contribution to 12 month percent change of broad money)
Net foreign assets52.424.333.023.637.737.646.033.937.9
Net domestic assets-38.0-2.6-2.9-6.3-5.9-1.8-6.90.7-2.4
Domestic credit13.4-6.1-1.03.02.37.98.05.98.3
Government (net)11.7-4.6-7.5-6.1-5.42.3-2.9-3.4-3.2
Private sector1.7-1.46.08.87.55.310.79.511.6
Other items (net)-51.43.5-1.9-9.4-8.3-9.7-14.8-5.1-10.7
Memorandum items:
Foreign currency deposits
In millions of US dollars176208225233300312324339353
In percent of broad money546063616666686970
Credit to private sector (millions of US dollars)173189195202204208222231240
Net official reserves (millions of US dollars)323328342349375380393398405
Velocity 1/9.58.57.4
Exchange rate (riels per U.S. dollar)3,7803,8053,9003,7753,8203,8003,8653,8703,870
Source: Data provided by the Cambodian authorities; and Fund staff projections.

Nominal GDP divided by average stock of broad money.

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

Nominal GDP divided by average stock of broad money.

Table 6.Cambodia: Balance of Payments, 1996-2000(In millions of U.S. dollars)
19961997199819992000
Prog.Est.Prog.Proj.
Current account excluding official transfers-493-252-230-386-346-448-428
Current account including official transfers-193-43-36-179-126-231-185
Trade balance-476-263-193-350-294-398-370
Exports618786854821933913942
Domestic exports295534610548695608730
Of which: Garments102279392434536473589
Forestry 1/148224178781058967
Re-exports322252245273238305212
Imports, f.o.b.-1,093-1,0501,048-1,171-1,227-1,311-1,311
Retained imports, f.o.b.-771-798-803-898-990-1,005-1,099
Of which: Garments sector-71-195-275-304-375-331-412
Petroleum-128-91-111-150-153-166-219
Other-511-417-443-461-508-469
Service (net)-63-49-97-106-122-123-131
Receipts198205171198202229229
Of which: Tourism82684563638080
Payments-261-254-268-304-324-352-359
Of which: Interest-14-17-18-17-17-38-38
Private transfers46606070707272
Official transfers299210194207220217243
Capital account123-47-6977289592
Medium- and long-term loans-56-81-69-61-68-35-28
Disbursements75354660528693
Amortization-131-115-115-121-121-121-121
Foreign direct investment294168120120120130120
Short-term flows and errors and omissions-115-135-12018-2400
Overall balance-70-90-105-102-98-136-93
Financing70901051029813693
Change in gross official reserves-52-28-11-36-32-60-72
Use of Fund credit00-1881516
Debt rescheduling 2/0001,19001171,320
Change in arrears (- = reduction)122118117-1,0831220-1,206
Financing Gap0002306435
Memorandum items:
Trade balance (in percent of GDP)-15.0-8.5-6.9-11.1-9.8-11.6-11.2
Current account balance
Excluding official transfers (in percent of GDP)-15.5-8.1-8.2-12.3-11.5-13.1-13.0
Including official transfers (in percent of GDP)-6.1-1.4-1.3-5.7-4.2-6.8-5.6
Gross official reserves 3/234262390426422486494
In months of imports of goods and services2.12.43.63.53.33.53.5
Net international reserves164197323361349399405
Sources: Data provided by the Cambodian authorities; and staff estimates and projections.

Includes estimates for unrecorded forestry exports.

Assumes the stock of debt rescheduling of pre-cutoff date debt to Russia, United States and non-Paris Club creditors on Naples terms. Assumes also a nonconcessional deferral of post-cutoff date arrears and maturities falling due in 2000 on the debt to Russia. Debt figures are baaed on the Cambodian authorities’ records.

Includes $117 million associated with the return of Cambodian gold holdings by the BIS in 1993.

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

Includes estimates for unrecorded forestry exports.

Assumes the stock of debt rescheduling of pre-cutoff date debt to Russia, United States and non-Paris Club creditors on Naples terms. Assumes also a nonconcessional deferral of post-cutoff date arrears and maturities falling due in 2000 on the debt to Russia. Debt figures are baaed on the Cambodian authorities’ records.

Includes $117 million associated with the return of Cambodian gold holdings by the BIS in 1993.

12. Good progress was made in the implementation of the structural reform agenda. As called for in the program, the military census was completed in December 1999, and the civil service census in March 2000. Also, the AsDB financed review of forestry concessions was completed in May 2000; on that basis, the government took initial actions toward implementing a comprehensive reformulation of the concession management system by canceling several concessions and severely restraining the activities of others.4 Other structural reforms are described in Table 3. All structural benchmarks and conditions for the first review were observed with two exceptions. First, only one commercial law was presented to the National Assembly by end-1999, but drafts of several other important pieces of legislation were completed and are expected to be presented to the National Assembly during 2000. Second, the formulation of a medium-term reform strategy for the civil service has been delayed pending the completion of several ongoing initiatives in this area (see Section III). Contacts were also continued toward completing the two outstanding rescheduling agreements under the Paris Club framework with the United States and the Russian Federation.

13. The overall macroeconomic outlook for 2000 continues to be positive. Economic activity has continued to be robust, especially for tourism-related services as tourist arrivals as of end-May increased by 50 percent from the previous year. Inflation remained in check with the average inflation rate continuing to decline. The outlook for the remainder of 2000 is for continued real GDP growth (of around 5 ½ percent) with relatively low inflation. Even allowing for some delayed impact of higher oil prices, the annual average inflation rate is expected to remain below 5 percent. Monetary policy has been restrained as net credit to the government continued to decline allowing for increased private credit in line with economic recovery. By end-July, the exchange rate has depreciated by 2 percent reflecting the strengthening of the U.S. dollar; in nominal and real effective terms the rate has been stable, and gross international reserves increased to $466 million, or 3 ½ months of projected imports.5

III. Policy Discussions and the Program for 2000

A. Medium-Term Framework

14. The policy discussions focused on macroeconomic and structural policies needed to achieve the key medium-term growth and poverty objectives under the PRGF-supported program. The program aims at raising real GDP growth to 6 percent, keeping inflation to low single digits, containing the external current account deficit to a level consistent with available concessional financing and FDI flows, and increasing gross official reserves to the equivalent of four months of imports by the end of the three-year program period (Table 7). The projected increase in output growth is premised on rising levels of investment (both public and private) and savings. Broad-based development and poverty reduction will depend on sustained growth in the agricultural sector. Accordingly, advancing rural development and improving agricultural productivity are important elements of the government’s poverty reduction strategy (see Section V).

Table 7.Cambodia: Medium-Term Macroeconomic Framework, 1997-2004

(in percent of GDP, unless otherwise indicated) 1/

19971998199920002001200220032004
Est.Projections
BASELINE SCENARIO
Real Sector
Real GDP (percent change)3.71.85.05.56.06.06.06.0
CPI Inflation (e.o.p.; percent change)9.213.3-0.55.03.73.73.73.7
GDP deflator (percent change)6.013.13.83.25.03.73.53.5
Per capita GDP (U.S. dollars)282249257272292313336363
National saving11.711.611.711.910.112.111.613.9
Of which: Government saving0.6-0.31.81.81.41.31.21.1
Domestic investment13.012.915.817.517.518.018.018.5
Fiscal Sector
Revenue9.69.011.511.712.113.013.513.5
o/w: tax revenue6.56.58,38.69.19.710.110.1
o/w: nontax revenue3.02.23.13.12.93.13.33.3
Expenditure13.814.915.917.017.818.118.218.4
Current8.98.99.69.810.611.612.212.3
Capital4.96.06.37.27.26.56.06.1
Current balance0.6-0.31.81.81.41.31.21.1
Overall balance-4.2-6.0-4.4-5.3-5.6-5.0-4.7-4.9
Domestic financing (cash)-0.51.1-0.4-0.4-0.1-0.10.00.0
Monetary Sector
Broad money (percent change)16.615.717.335.520.020.020.020.0
Velocity (GDP/M2)9.79.58.57.46.55.95.44,9
External Sector
Domestic exports (percent change) 2/81.014.213.95.017.212.711.910.1
Retained imports (percent change)3.50.723.211.113.89.48.56.9
Current account balance (excl. transfers)-8.1-8.2-11.5-13.1-12.8-11.9-11.1-10.0
Current account balance (incl. transfers)-1.4-1.3-4.2-5.6-7.4-5.4-6.4-4.6
Overall balance-2.9-3.7-3,3-2.8-1.0-0.1-0.70.1
Financing gap3561277754
Gross official reserves (millions of US$)262390422494564634705787
(in months of imports)2.43.63.33.53.63.83.94.1
External debt 3/6673703537383939
External debt (NPV) 4/2592237778787776
Debt service ratio 5/17.815.914.73.94.13.83.74.3
Sources: Data provided by Cambodian authorities; and staff estimates and projections.

Ratios to GDP are based on a revised set of national accounts statistics for 1993-98 released by the National Institute of Statistics. The revised series estimates nominal GDP in 1998 about 5 percent lower than the series used in EBS/99/188, thus affecting the ratios to GDP calculated under the program.

Includes estimates for unrecorded forestry exports. Beginning in 1999 exports are estimated to have returned to a sustainable level with a sharp reduction in illegal timber exports.

Figures include bilateral debt with former CMEA countries and the United States that is assumed to be rescheduled in 2000.

In percent of 3-year moving average of total exports of goods and services. The NPV of debt is computed from projected yearly debt service payments, including interest payments.

In percent of domestic exports of goods and services. Figures for 1997-99 are based on scheduled debt service.

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

Ratios to GDP are based on a revised set of national accounts statistics for 1993-98 released by the National Institute of Statistics. The revised series estimates nominal GDP in 1998 about 5 percent lower than the series used in EBS/99/188, thus affecting the ratios to GDP calculated under the program.

Includes estimates for unrecorded forestry exports. Beginning in 1999 exports are estimated to have returned to a sustainable level with a sharp reduction in illegal timber exports.

Figures include bilateral debt with former CMEA countries and the United States that is assumed to be rescheduled in 2000.

In percent of 3-year moving average of total exports of goods and services. The NPV of debt is computed from projected yearly debt service payments, including interest payments.

In percent of domestic exports of goods and services. Figures for 1997-99 are based on scheduled debt service.

B. Macroeconomic Policies

Fiscal policy for 2000

15. The budget for 2000 was programmed to achieve a current surplus of 1.4 percent of GDP, based on a further broadening of the tax base and a strengthening of customs and tax administration. An additional revenue effort (adjusted for the one-off impact of the auction of garment export quotas in 1999) of 1.0 percent of GDP is to be derived from expanding the VAT tax base, and from strengthening customs administration through the installation of preshipment inspection (PSI). On the expenditure side, the budget aims to reduce spending for defense and security, contain the civil service wage bill to 1.8 percent of GDP, and to increase spending for the social sectors and for development projects. The overall deficit was budgeted to increase to 6 percent of GDP, primarily due to higher levels of foreign-financed development expenditure. Domestic financing would remain under tight control with projected budgetary support to be used in part to reduce the government’s net debt position with the central bank.

16. Revenue performance in early 2000 was lower than projected, primarily on account of collections of tax revenue—particularly for customs, continuing the trend which emerged in late 1999. At the time of the discussions, the staff team estimated that, based on these early trends and current tax policy, revenue in 2000 would fall short of the program target by CR 50 billion (0.4 percent of GDP).

17. In view of the revenue performance, the expenditure program in early 2000 had been implemented cautiously to keep domestic financing in line with program targets. Both current and capital expenditures were contained below the indicative targets. As a result, central bank and overall domestic financing for the budget during this period were well within program targets. However, new commitments for social sector spending have lagged below indicative targets.

18. The mission commended the authorities for their disciplined approach to the budget, and focused discussions on how to bring revenue performance back on track. It was agreed that the revenue gap in 2000 should be filled through the following new measures: further broadening of the VAT base to include 500 additional large companies (beyond the largest 1,500 already registered in the VAT base), and increased royalty payments from tourist service providers and casinos, visa fees, and stepped up collection of arrears from telecommunications and the leasing of state assets (as described in paragraph 12 of the MEFP).6 As a result of these measures, by end-July, additional revenue of CR 20 billion has been collected. In total, the new revenue measures are estimated to substantially cover the estimated gap, and should raise revenue in 2000 to 1 1¾ percent of GDP which would be close to the original PRGF program target. Moreover, expenditure savings have been identified to fill the remaining gap. These include: (i) delaying further increases in civil service wages until an agreement has been reached on a civil service reform strategy; and (ii) postponing expenses related to local elections which have been delayed until 2001. The authorities also reiterated their commitment to disburse outlays for locally financed development projects cautiously and in line with revenue developments to protect the financing targets.

19. Revenue performance in 2000 and beyond will depend critically on sustained efforts to improve customs and tax administration. The recent conclusion of a new contract for preshipment inspection (PSI) will help in this regard, particularly concerning governance problems7. The mission shared the authorities’ emphasis on the need for further technical assistance in these areas, including in the context of the proposed Technical Cooperation Action Plan (TCAP), currently being formulated. Also, it was agreed that, consistent with the program’s medium-term revenue target of 13 percent of GDP by 2002, the 2001 budget will need to rely on new tax measures, including excises taxes, to compensate for any revenue losses associated with tariff reform.

20. On the expenditure side, further efforts need to be directed at improving service delivery in the priority social sectors. Various institutional initiatives are being introduced in 2000 (as described in the Selected Issues Paper), but most of these have had only limited effect thus far. The staff encouraged the authorities to enhance the effectiveness of these measures, including in the context of the World Bank SAC program. In particular, it was emphasized that, as the fiscal situation improved and given the risks from weak governance, it was important to ensure adequate provision for operation and maintenance spending for the public investment program, and that increased capital spending is well-directed to priority areas. Furthermore, competitive and transparent procurement procedures would be essential, in line with established priorities under the public investment program.

Medium-term fiscal framework

21. The fiscal program will build on recent gains to secure a sustainable position over the medium term (Table 7). In order to increase funding for priority social sectors and economic infrastructure, enhanced revenue mobilization will be required, and defense and security spending will need to be reduced from 4.2 percent of GDP in 1999 to 2.5 percent of GDP in 2002. Maintaining a current budget surplus of about 1-1½ percent of GDP would ensure sufficient funding for local development projects while sustaining the authorities’ policy of not allowing any domestic financing of the budget. The mission stressed that meeting these budgetary aims will require further progress in the implementation of military and administrative reform.

22. The discharge of soldiers under the pilot phase of the military demobilization program was completed in July, paving the way for launching the full program later this year. As envisaged, a total of 1,500 soldiers were demobilized in four provinces (see Box 1); several donors expressed broad support for the program, subject to satisfactory assessment of the pilot. The authorities stressed that they were firmly committed to the implementation of the next phase of the program to begin demobilization of 10,000 soldiers in November 2000 and hoped that delays in securing the release of donor funding would not adversely affect the implementation of the program. They agreed with the mission that successful demobilization was essential for achieving the desired reorientation of expenditure policy.

Box 1.Pilot Military Demobilization Program

In January 2000, the Cambodian government presented to the donor community the first draft of the pilot military demobilization program, in which it laid out the framework and methodology for the demobilization exercise and reconfirmed its aim to downsize the army from 133,817 (as of March 2000) to fewer than 100,000 soldiers. Based on results of the identification and registration process, completed in October 1999, 15,551 “ghost” soldiers have already been eliminated from the payroll, and care for 6,153 spouses of dead soldiers has been transferred to the Ministry of Women’s and Veterans Affairs; there are an additional 3,275 widows waiting to be transferred during the program period. Under a pilot program, 1,500 soldiers in four provinces, have been discharged between May and July. This will be followed by a joint evaluation by the government and donors. The next phase of demobilization will commence later in 2000 affecting 10,000 additional soldiers, followed by 10,000 soldiers in 2001, and another 10,000 soldiers in 2002.

The total cost of the pilot program on a per soldier basis is about $1,500 consisting of cash payment ($240), in-kind assistance such as rice allowance ($741), expenses associated with the discharge centers ($333), and administrative costs ($122). This total cost per soldier is expected to apply as a ceiling for the entire demobilization exercise. Donor commitment to support the program was sought at the Consultative Group meeting in May. The staff estimates the program’s total cost at around $47.5 million (1.6 percent of GDP), to be covered mainly by donor financing on concessional terms.

23. Fundamental civil service and administrative reform is necessary for improving governance, but needs to be done in the context of the agreed medium-term fiscal framework. The recently completed civil service census revealed a larger size than previously estimated, but after the removal of 6,091 irregular cases, the size of the civil service is close to previous estimates. Current pay levels are, however, extremely low (averaging about US$25 per month), compared with a minimum wage of US$45 per month in the garment sector, and have been identified as a key impediment to improving governance. While the completion of the census and ongoing finger-printing and computerization are significant steps that would improve monitoring and control of the civil service, little progress has been made toward developing a basic reform strategy, including how to implement downsizing.

24. The mission emphasized that owing to the potential fiscal burden of salary increases (which could apply to the military as well), a strategy for rationalizing the civil service would be needed before the salary problem could be addressed in order to keep the fiscal program sustainable. With these considerations, the authorities indicated they were developing (in consultation with the World Bank, UNDP and AsDB) an ambitious medium-term plan for administrative reform (see Box 2), but were reluctant to commit to any targets for downsizing before completing a number of studies and simulations concerning the civil service. Against this background, it was understood that no further wage increase would be granted until a reform strategy is formulated, in consultation with the World Bank, by March 2001, taking into account the results of these studies (MEFP paragraph 13).8

Box 2.Civil Service Reform

The size of the civil service

The precise number and status of civil servants were not available when the PRGF program was approved in October 1999. At that time, the payroll of the Ministry of Economy and Finance (MEF) in 1998 (156,761) was used as an approximation for the size of the civil service. The census, which was completed in March 2000, revealed the size of the civil service to be 164,589, including 6,091 irregular cases. Although this number is higher than previously expected, with the removal of the irregular cases, the size (158,498) is close to that originally estimated by the MEF.

The reform program

Cambodia’s civil service employment as a percentage of the labor force, as well as its associated wage bill as a percentage of GDP, are not high when compared with the average of selected low income countries. However, the payscale needs a major adjustment, as the average pay is well below the minimum wage in the private sector (e.g. the garment industry), with attendant problems of corruption and absenteeism. To contain the wage bill of the public sector within affordable levels, the current size of the civil administration will need to be trimmed to provide scope for new hiring and higher salaries for people with professional skills in priority sectors. The government’s PRGF-supported program called for formulation of a medium-term strategy and civil service reform program by end-June 2000, following a complete census and a functional review of all ministries. However, there have been considerable delays in completing the functional review, as well as the computerization of the payroll system, partly due to technical difficulties and delays in external assistance.

The government presented a comprehensive plan on administrative reform at the Paris CG meeting in May, based on technical assistance provided by the World Bank, the UNDP, and the AsDB. The plan is directed at rationalizing the size of the civil service while improving management and worker incentives, and represents a key part of the authorities’ governance action plan. The following steps are to be taken in the near- to medium-term: (i) completion of the finger printing operation currently being implemented; (ii) completion of the computerization of the payroll system to establish budgetary control; (iii) World Bank simulations on possible reform scenarios; (iv) UNDP-sponsored review of the remuneration system, safety nets, and re-employment options; (v) designing a strategy and implementation plan to establish priority groups; and (vi) conducting a functional analysis of the civil service. Based on steps (i)-(iv) and sufficient results from (v) and (vi), the government intends to define a plan for civil service reform by March 2001, aimed at rationalizing employment and remuneration. In the meantime, no wage increase will be granted until a reform strategy is formulated.

Monetary and exchange rate policies

25. The return of confidence has led to a sharp increase in foreign currency deposits, and broad money growth increased by 39 percent in the year ending June 2000. With respect to the objectives of the monetary program for 2000, the NBC agreed that inflation may increase from its existing low levels owing to the lagged impact of higher oil prices and the fact that further declines in food prices cannot be expected. Altogether, the 12-month inflation rate could increase to 5 percent by end-2000, but this would still be consistent with containing the average CPI inflation rate to 2 percent. Given expected real GDP growth of 5½ percent, broad money growth is targeted at 35 percent with a further decline in velocity associated with increasing monetization from a very low base currently (broad money accounts for 13 percent of GDP), and would be fully reflected in increased net foreign assets. The improved fiscal position (with net credit to government expected to decline by 3 percent of broad money) would provide room for further growth in private sector credit—also from a very low base (7 percent of GDP)—which is expected to grow by 22 percent, in line with buoyant activities in trade and services sectors.

26. The riel has been broadly stable in nominal and real effective terms over the last 1½ years. The staff team recommended that the current flexible exchange rate policy be continued and urged the authorities to unify the exchange rate by linking the official rate with the market rate. The authorities felt that the current system whereby the official exchange rate is set within a maximum margin of 1 percent from the market rate had given them the opportunity to provide a stabilizing signal to a thin foreign exchange market during times of turbulence. Since there are no restrictions on current transactions, the mission urged the authorities to accept the obligations of Article VIII sections, 2, 3, and 4. The authorities agreed with this objective, but requested further Fund technical assistance to ensure that current practices are fully in line with the obligations of Article VIII. The authorities are also committed to continue the policy of using any increased demand for national currency to bolster the international reserve position, but not to intervene to resist downward pressure on the exchange rate except in circumstances of disorderly market movements. It was also agreed that de-dollarization should be promoted through the maintenance of stable macroeconomic conditions and financial sector reforms to establish riel-denominated assets; no administrative controls would be used 9. No external audits of the central bank have been conducted. The authorities, however, have agreed to provide annual financial statements, share all documentation regarding their internal procedures, and submit to an external audit by internationally accredited auditors in the future.

C. Key Structural Policies

Banking Sector Reform

27. Steps have been taken toward restructuring the banking system. Under the new Financial Institutions Law, all banks were required to apply for a new banking license by May 31, 2000. An initial review of these applications suggested that a significant number of banks were nonviable, and on this basis, NBC has already revoked the licenses of three banks. The process of finding administrators for these banks has been initiated and the licensing applications of remaining banks will be evaluated by end-November 2000. The next steps in the restructuring of the banking system, as well as for the reform of the Foreign Trade Bank (one of the two remaining state-owned commercial banks), and payments system development, have been defined with the help of MAE technical assistance (see Box 3). To address the risks of asset stripping, close monitoring of banks’ balances in the NBC will be required, and NBC staff will be placed in banks as necessary. Under current indications, the fiscal cost of bank reforms is expected to be minimal in 2000.

Box 3.Banking System Reform

The Cambodia banking system is composed of 31 banks: 2 state-owned commercial banks, 22 privately owned commercial banks, and 7 foreign bank branches (as of June 2000). The banking system provides only limited banking services, and functioning interbank markets do not exist. As of end-June, the total asset size of all commercial banks is only 17 percent of GDP, and loans and deposits represent only 6-7 percent of GDP. The low level of intermediation mainly reflects lack of public confidence in the banking system and limited investment opportunities.

Under the new financial institutions law promulgated in November 1999, all 29 existing private commercial banks are required to be re-licensed by the end of November 2000. Re-licensing procedures have been designed with MAE technical assistance, providing the authorities with the opportunity to scrutinize the viability of every commercial bank and strengthen the whole banking system. The reform of the commercial banking system is also accompanied by the restructuring of the state-owned Foreign Trade Bank (FTB), which is the largest bank in Cambodia.

Bank re-licensing

All commercial banks except one have submitted re-licensing applications by the end of May. Based on an initial review, the National Bank of Cambodia (NBC) has already closed three banks, including the one that did not apply, and started liquidation of these banks. For the other banks, final decisions regarding re-licensing will be made by November 2000 and will be based on the following steps:

  • External auditors will assist the NBC in reviewing financial statements to verify whether the statements are truthful, especially regarding information on loan classification and provisioning, and whether internal controls on risk and credit management are accurately reported.
  • The NBC will classify the banks into three categories: (i) viable and fully capitalized banks without need for restructuring; (ii) potentially viable banks that require some time to implement reforms; and (iii) nonviable banks. The classification of banks will be made based on (i) the review of the financial statements of the banks, (ii) the business plan of the banks, which must clearly identify the core business and the clients of the banks and must be linked to the financial projections, and (iii) the quality of management (ensuring that the shareowners and managers are “fit and proper”).
  • The banks falling into the second category (potentially viable banks) will be required to submit a memorandum of understanding to be approved by the NBC. The memorandum will describe the details of the restructuring plan with a timetable of actions with specific targets, including a schedule of “phasing in” of minimum capital requirements.
  • The banks falling into the third category (nonviable banks) will be liquidated. As soon as the decision is made, the NBC will place a temporary administrator in these banks to prevent asset stripping. Experienced international audit firms will assist the NBC in liquidation procedures, particularly with regard to asset valuation and disposal.

Foreign Trade Bank

Currently, the FTB is essentially operating a commercial banking business as a department of the NBC. The size of its assets and liabilities, particularly in local currency, are the largest among commercial banks. With effective restructuring, the FTB has the potential to play a key banking role in Cambodia. The NBC has already issued a regulation to define the FTB as an independent entity, and the Memorandum and Articles of Association have been prepared to define the new management and operational structure of the bank including its conversion to a corporate status.

The most critical next steps in the restructuring of the FTB include (i) the assessment of the balance sheet of the FTB to calculate its capital deficiency, (ii) its re-capitalization to satisfy the minimum capital requirements defined in the financial institutions law, and (iii) preparing a business plan. The International Finance Corporation and the Asian Development Bank are preparing technical assistance in the area of audit, portfolio valuation, and restructuring. By December 2000, it is expected that the FTB will be licensed under the same conditions as other commercial banks.

28. The mission urged the authorities to take decisive and transparent action according to the envisaged timetable. The authorities argued that they needed to move carefully in closing banks, and indicated that they were having difficulties in finding administrators and liquidators for banks that would need to be closed. The need for continued technical assistance throughout this process was also emphasized. The mission indicated that to maintain credibility, the authorities needed to avoid delays in the next steps of the process, including for the restructuring and eventual privatization of the Foreign Trade Bank.

Forestry policy

29. A fundamental reorientation of forestry policy has taken place since January 1999, in close consultation with the World Bank and the AsDB. Illegal activity has been reduced, a Forestry Crime Monitoring Unit (FCMU) was established with full participation of outside observers, national consultations with relevant stakeholders have been initiated on a new draft Forestry Law, and a review of the concession system was completed.10 On the basis of this review, the government has taken action to cancel three additional concessions, sharply curtail the activities of the remaining concessions, restrict logging activity in protected areas, and improve the overall system of concession management. Still, many important actions remain to be implemented to establish a viable and sustainable system of concession management. Together with the World Bank, the mission emphasized the importance of continuing to take transparent and credible actions in response to reports of illegal activities. The authorities reaffirmed their commitment to continue to improve the management of forest resources, but expressed some concern that no mechanisms were in place to police areas that had been taken out of the concession system with the potential of an increasing risk of illegal activities in those areas. For this reason, they pledged further efforts to improve the operations of the FCMU.

30. A review of the forestry revenue system is underway. The average royalty level was raised from US$14 per cubic meter to US$54 in the 1999 budget. Despite initial complaints by the industry that the new royalty was too high for current market conditions, concessionaires are now paying the higher royalty which has helped maintain budget revenues from forestry at ½ percent of GDP. The government has completed its own internal review and remains committed to the US$54 level. However, the authorities have agreed to receive an industry-financed study of the revenue system to be carried out by external consultants. Any subsequent revisions would be taken in consultation with World Bank and Fund staff.

Other structural policies

31. 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. Multilateral negotiations are scheduled to begin in August, and the authorities are hoping to have Cambodia’s membership approved in 2001.

32. Technical discussions have continued for the conclusion of rescheduling agreements with the United States and the Russian Federation. 11 The mission urged the authorities to continue to make best efforts toward completing these rescheduling arrangements, as well as those with other creditors where comparable action to the 1995 Paris Club rescheduling is needed. The mission also urged the authorities to carefully monitor all external borrowing to ensure observance of the program commitment to refrain from nonconcessional borrowing.12

33. Other key structural policies necessary for achieving macroeconomic objectives and supporting sustainable growth and development focus on developing a well-functioning legal framework and further state enterprise divestment. To make progress in economic and financial reform, a number of basic laws—particularly in the areas of private and commercial law—need to be adopted. Important priorities in the period ahead are the establishment of new legal regimes for corporate insolvency, secured transactions, and enforcement of contractual claims. Public enterprise reform efforts in the period ahead will continue to focus on the divestment of state-owned rubber plantations, with the first plantation expected to be privatized by end-2001.

D. Statistical Issues and Fiscal Transparency

34. The coverage and quality of economic statistics have gradually improved in recent years, and are generally adequate for the purpose of surveillance by the Fund. National accounts and consumer price statistics are available on a reasonably timely basis and have been improved with assistance from the AsDB. Improvements have also been made in the compilation of government finance, money and banking, and balance of payments statistics. However, there is a need for substantial further progress. The main priorities for the near term are to improve the coverage of government finance statistics, the statistical base underlying national accounts estimates, compilation methodology in money and banking statistics, and balance of payments statistics in line with existing technical assistance recommendations. The authorities agreed that it would be desirable for Cambodia to participate in the General Data Dissemination System (GDSS) as a means of promoting statistical improvements over the medium term.

35. Despite significant improvements in the conduct of fiscal policy, the preparation and execution of the budget still reflect a number of weaknesses in governance, as well as an extreme shortage of qualified and competent public finance specialists and line managers. While significant progress has been made in recent years in bringing the aggregate fiscal position under control, the budget still falls well short of providing an effective instrument of government policy. Programs to raise social well-being through improved health, education and welfare services are among the least effective, as a result of major institutional problems in program design, resourcing, delivery, and evaluation. Considerable technical assistance (to be provided by the Bank, the ASDB and the Fund) will be required to make further improvements in budget preparation, execution, and reporting.

IV. External Outlook and Policies, and Capacity to Repay the Fund

36. The projected external current account deficit should be sustainable over the medium term in view of prospective net official long-term borrowing and debt relief. Given recent satisfactory macroeconomic performance in line with the program, the medium-term framework (Table 7) was judged to be essentially unchanged from October 1999 (EBS/99/188)13. The external current account deficit (excluding official transfers) is expected to stay in the range of 12-13 percent of GDP during 2000-2001, and then decline steadily to about 10 percent in 2004. Including official transfers, the deficit would decline from about 6 percent of GDP in 2000 to 5 percent of GDP in 2004. The medium-term outlook will continue to be vulnerable, and external viability needs to be enhanced through sustained implementation of sound macroeconomic policies and structural reform. The main risks to external sustainability are slower export growth, and reduced inflows of official or other capital owing to political instability. Failure to achieve the desired restructuring of public finances would lead to lower savings, lower levels of social sector development, and would ultimately undermine donor support for the program.

37. Cambodia should have no difficulty in continuing to service its obligations to the Fund. Cambodia has a good recent record in meeting scheduled payments, and the targeted level of international reserves under the current scenario provides sufficient room for future repayments. Cambodia’s debt service payments, including on Fund credit, are projected to remain at 4 percent of gross current receipts in 2000-03, equivalent to 6 percent of gross official reserves (Tables 7 and 8).14

Table 8.Cambodia: Indicators of Fund Credit, 1998-2011
19981999200020012002200320042005200620072008200920102011
Act.Prog.
(In millions of SDRs)
Outstanding Fund Credit47.253.164.671.979.169.762.756.050.241.029.317.68.42.6
GRA5.24.23.12.11.00.00.00.00.00.00.00.00.00.0
SAF/PRGF42.049.061.569.878.169.762.756.050.241.029.317.68.42.6
PRGF loan disbursements0.08.416.716.716.70.00.00.00.00.00.00.00.00.0
Total debt service to the Fund1.52.95.89.99.99.97.47.06.19.411.911.89.35.9
Repurchases of GRA1.01.01.01.01.01.00.00.00.00.00.00.00.00.0
Repayments of SAF/PRGF0.01.44.28.48.48.47.06.75.89.211.711.79.25.9
Charges0.50.40.60.40.40.50.40.30.30.20.20.10.10.0
(In percent)
Fund credit outstanding
In percent of total public external debt3.13.47.77.67.56.04.94.03.32.41.60.90.40.1
In percent of quota72.660.773.882.190.479.771.764.057.446.933.520.19.62.9
Debt service to the Fund
In percent of total public external debt service1.72.921.230.029.327.716.112.110.314.516.514.610.15.6
In percent of exports of g & s0.20.40.60.90.90.90.60.60.50.70.80.80.60.3
(In millions of SDRs; unless otherwise indicated)
Memorandum items:
Cambodia’s quota in the Fund65.087.587.587.587.587.587.587.587.587.587.587.587.587.5
Total public external debt150715448349431053115712741409154416891844200321622341
Total public external debt service91972733343646585965728192105
Total exports of goods and services73379997310731104114811941242130813791453153416191702
Total debt service ratio in percent of exports of g & s12.512.12.83.13.13.13.84.74.54.75.05.35.76.1
Source: IMF Treasurer’s Department; and Fund staff estimates and projections.
Source: IMF Treasurer’s Department; and Fund staff estimates and projections.

V. Poverty Reduction Strategy

38. The Government has formed a High Level Committee headed by the Minister of Economy and Finance with broad inter-ministerial representation to take responsibility for producing an Interim Poverty Reduction Strategy Paper (I-PRSP). The I-PRSP is expected to elaborate on the following issues: (i) poverty diagnostics—the extent and nature of poverty, and trends over time; (ii) a work plan for preparing a full PRSP; (iii) a strategy for ensuring full participation of donors, NGOs and other stakeholders in the PRSP process; and (iv) a list of policy measures (matrix) supporting the achievement of poverty objectives (see Box 4). Good progress has been made since the launch of the I-PRSP process in May 2000. A workshop on the draft I-PRSP was held on August 9 involving line ministries, representatives from the Parliament, donors, NGO representatives, and private sector representatives. The IPRSP is expected to be finalized by late 2000 and presented along with the second review of the program. The preparation of the full PRSP will be coordinated by the Ministry of Planning to ensure consistency with the authorities’ second five-year socioeconomic development plan currently under preparation with assistance from the AsDB. The full PRSP is expected to be ready by late 2001.

Box 4.Poverty in Cambodia

Cambodia is one of the poorest countries in the world, with GDP per capita estimated at only $256 in 1999, and key social indicators lag behind other low-income countries (Table 9). The lack of consistent survey data, or a time series of monitorable indicators, makes poverty diagnostics particularly difficult. The first Poverty Assessment, prepared by the government in 1999, reports that about 36-50 percent of the population live below the poverty line, which is based on food consumption of 2,100 calories per capita per day plus a small allowance for non-food consumption.1 Poverty is concentrated in rural areas, with rural households accounting for almost 90 percent of the poor. In addition, poverty is higher among households that are larger, have more children, headed by males or farmers, have less education, and have less access to public services in general.

Table 9.Cambodia: Social and Demographic Indicators
Same region/Income group
YearUnit of measureCambodiaEast Asia &Low Income /1
Pacific /1
Population1998millions11.51,817.13,536.0
Of which: male1998percent48.451.250.8
female1998percent51.648.849.2
Population growth rate1998percent2.31.21.7
GDP per capita1998U. S. dollars262990520
Life expectancy at birth1998years53.868.663.0
Crude birth rate1998per 1,000 persons33.318.932.1
Crude death rate1998per 1,000 persons12.37.510.8
Mortality
Infant mortality rate1998per 1,000 live birth101.635.367.6
Under 5 mortality rate1998per 1,000 live birth143.042.592.1
Access to safe water1/percent of population12.983.973.0
Urban1/percent of population20.089.179.7
Rural1/percent of population12.081.774.3
Population per physician1994per 1,000 persons0.11.4
Adult illiteracy rate1998percent62.615.031.0
male1998percent42.68.734.1
female1998percent80.122.757.4
Primary school enrollment ratio1997percent, gross113.3119.0107.0
male1997percent, gross122.9121.0112.0
female1997percent, gross103.5121.0102.0
Source: 2000 World Development Indicators CD-ROM, World Bank.

Most recent estimate.

Source: 2000 World Development Indicators CD-ROM, World Bank.

Most recent estimate.

The current relatively high poverty levels are a legacy of devastation and civil strife during the past three decades. Inadequate public services—especially insufficient education and health services—underdeveloped markets, poor communications and infrastructure, and lingering security concerns are all important factors that contribute to poverty. In particular, extremely low productivity in agriculture, lack of access to credit, and lack of a land law are the major constraints facing the rural poor.

Reducing poverty is the primary development objective stated by the government, as it is seen as an integral part of the national reconciliation process and the key to the maintenance of political stability. The overall thrust of the government’s poverty reduction strategy is to create the conditions for broad-based and fast economic growth, while simultaneously reducing the barriers for the poor to participate in the growth process. Its main elements include prudent macroeconomic management, sustainable development of the agricultural sector, better governance, fostering investment in human resources and physical infrastructure, undertaking land reform, improving access to credit for the poor, and protecting the environment.

1 Different estimates for poverty incidence arise from different survey results which have not yet been fully reconciled.

VI. Implementation Capacity, Technical Assistance, and Program Monitoring

39. While there are risks to the program, as the implementation of key reforms will be politically difficult, the overall capacity for program implementation is being strengthened. Government ownership and commitment to the program have been evidenced by the difficult reforms already initiated in the past year, especially with respect to banking, customs administration, forestry policy, and military demobilization. The authorities’ efforts have been broadly endorsed by the donor community, and semi-annual donor’s meetings in and outside Cambodia will continue to ensure effective monitoring of performance. Donor representatives have participated actively in the PRSP discussions and the design of a TCAP. Finally, the opening of the resident representative office in October 1999 has played a key role in monitoring program implementation.

40. Technical assistance in key reform areas will continue to be critical. Given Cambodia’s extremely limited administrative capacity, current technical assistance efforts by the Fund are being concentrated in financial sector reform, tax policy and administration, legal reform and statistics. To support program objectives, a comprehensive TCAP is being developed in consultation with other multilateral agencies and key bilateral donors (for details, see Annex V).

41. Quantitative benchmarks and performance criteria under the program are set out in Table 2 of the MEFP. Structural performance criteria and benchmarks cover bank restructuring, civil service reform, demobilization and tariff reforms. The next review under the PRGF-supported program is expected to be completed by end-December 2000 with the schedule for future disbursements listed in Table 10.

Table 10.Cambodia: Proposed Schedule of Remaining Disbursements Under the PRGF Arrangement, 2000-2002
AmountAvailable DateConditions for Disbursement
SDR 8,357,000

(9.6 percent of quota)
September 15, 2000Observance of the end-March 2000 performance criteria and completion of the first review.
SDR 8,357,000

(9.6 percent of quota)
December 15, 2000Observance of the end-Sept. 2000 performance criteria and completion of the second review.
SDR 8,357,000

(9.6 percent of quota)
June 15, 2001Observance of the end-March 2001 performance criteria and completion of the third review.
SDR 8,357,000

(9.6 percent of quota)
December 15, 2001Observance of the end-Sept. 2001 performance criteria and completion of the fourth review.
SDR 8,357,000

(9.6 percent of quota)
June 15, 2002Observance of the end-March 2002 performance criteria and completion of the fifth review.
SDR 8,358,000

(9.6 percent of quota)
December 15,2002Observance of the end-Sept. 2002 performance criteria and completion of the sixth review.

VII. Staff Appraisal

42. Under the PRGF-supported program, Cambodia has made significant progress, but reform efforts need to be sustained and strengthened in key areas. Confidence has improved, and economic performance and prospects have strengthened considerably on the basis of a prudent fiscal policy, sound monetary management, and appropriate structural reforms. However, substantial further efforts are needed to raise and sustain economic growth in the context of macroeconomic stability, while making meaningful and lasting reductions in poverty.

43. Revenue mobilization will continue to be the central element of the reform agenda. Improved revenue performance in 1999 provides a strong start, and the staff urges the authorities to persevere with their efforts to further enhance revenue to achieve the 2000 budget targets, including through the introduction of new measures if necessary. Further revenue efforts will also be essential in the context of the 2001 budget to raise the revenue ratio to GDP, which is very low by international standards, and to remain on track with the medium-term fiscal targets. Achieving these targets will require sustained efforts to improve tax and customs administration, and effective use of technical assistance resources. Ad hoc tax exemptions must continue to be avoided, and the recent reinstallation of PSI will be critical in this regard.

44. Achieving medium-term expenditure targets will also depend on successful military and administrative reform. Following the implementation of the pilot demobilization program in the first half of 2000, the initiation of the full program—and associated donor support—will be essential to ensure the desired reduction in defense and security spending. Reforming the civil service will also be needed to keep the overall wage bill consistent with medium-term fiscal constraints, and to help improve governance. In this regard, the staff urges the authorities to continue to link any wage increase to the adoption, in consultation with key development partners, of an effective strategy for civil service reform in order to address the unsustainably low level of civil service wages. Overall budgetary control and the allocation of budgetary funds for the social sectors have been strengthened, but further improvements are required to ensure effectiveness of and appropriate priorities for increased spending. The staff urges the authorities to work closely with the World Bank to improve institutional procedures for social sector spending. To promote transparency and better governance, budgetary control and procedures will need to be enhanced, in particular, by introducing procedures for internal and external audit, and by implementing transparent and competitive procedures for public procurement.

45. Cambodia’s external position is expected to be manageable over the near to medium term. The staff urges the authorities to maintain their current flexible exchange rate policy while moving toward exchange market unification and acceptance of the obligations of Article VIII, Sections 2, 3, and 4 during the PRGF-supported program period. The projected external current account deficit would be financed by higher aid inflows and foreign direct investment. Over the medium term, external viability will depend on the sustained implementation of policies and continued donor support and debt relief. In this regard, the staff strongly urges the authorities to continue to pursue a dialogue toward resolving outstanding bilateral rescheduling agreements.

46. Continuing efforts with respect to key structural reforms will be critical for achieving program objectives and supporting development needs. The staff urges the authorities to follow through with agreed actions regarding the re-licensing of commercial banks on a consistent and timely basis. The authorities will need to continue to strengthen the NBC’s supervisory capacity and to actively prepare the Foreign Trade Bank for eventual privatization. The authorities should be commended for the significant actions taken in the forestry sector, especially with respect to the establishment of the FCMU and the requisite measures following completion of an external review of all forest concessions. For the period ahead, further decisive actions will be needed to implement a new system of concession management, revise forestry legislation, and strengthen the operations of the FCMU. The staff also urges the authorities to make further progress in the establishment of a basic legal framework for economic activity. Staff also welcomes the progress the authorities have made in the preparation of an I-PRSP.

47. While the quality and timeliness of statistics have improved and are adequate for surveillance purposes, further improvements are needed. Cambodia is encouraged to participate in the GDSS.

48. Cambodia has made a strong effort in implementing its PRGF-supported program. Reforms that have already been implemented—many in politically difficult areas—are an indication of the authorities’ determination and commitment to the program. Nonetheless, risks to program implementation will continue in the period ahead, stemming from a fragile governance environment as reforms continue to push against entrenched interests, and from weaknesses in administrative capacity. To address these risks, close program monitoring will be continued, while enhanced technical assistance under the TCAP will support the limited administrative capacity. In view of these considerations, the staff recommends approval of the authorities’ request for completion of the first review under the PRGF arrangement. Continued good performance under the PRGF-supported program will facilitate the flow of external assistance, on which much of the program’s success depends.

49. It is proposed that the next Article IV consultation with Cambodia take place on the standard 12 month cycle.

VIII. Proposed Decision

The following decision, which may be adopted by a majority of the votes cast, is proposed for adoption by the Executive Board:

1. Cambodia has consulted with the Fund in accordance with paragraph 2(d) of the three-year arrangement for Cambodia under the Poverty Reduction and Growth Facility (PRGF) (EBS/99/188, Supplement 1) and paragraph 3 of the letter dated September 29, 1999 from the Minister of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia, in order to review program implementation and reach understandings regarding the phasing and conditions for disbursements during the second year of the arrangement.

2. The letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated August 31, 2000 (“the August 2000 Letter”), with its attached Memorandum of Economic and Financial Policies (“the August 2000 Memorandum”), shall be attached to the three-year PRGF arrangement for Cambodia, and the letter dated September 29, 1999 from the Minister of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia, and the Memorandum attached thereto, shall be read as supplemented by the August 2000 Letter and the August 2000 Memorandum.

3. Accordingly, the PRGF arrangement for Cambodia shall be amended as follows:

(a) the following shall be added as a new paragraph l(cc):

“During the second year of this arrangement:

(i) the third disbursement, in an amount equivalent to SDR 8.357 million, will be available on December 15, 2000, at the request of Cambodia and subject to paragraph 2 below; and

(ii) the fourth disbursement, in an amount equivalent to SDR 8.357 million, will be available on June 15, 2001, at the request of Cambodia and subject to paragraph 2 below.”;

(b) the following shall be added as a new paragraph 1 (dd):

“The phasing of, and conditions for, disbursements during the third year of this arrangement shall be established during the third review. The timing of the third review shall be established during the second review contemplated in paragraph 2(dd) below.”;

(c) paragraph 2(a)(v) of the arrangement shall be amended to read as follows:

“(v) the ceiling and sub-ceilings on publicly contracted or guaranteed foreign currency loans;”

(d) paragraph 2(a)(vi) of the arrangement shall be deleted; and

(e) the following shall be added as new paragraphs 2(aa), 2(bb), 2(cc) and 2(dd):

“(aa) Cambodia will not request the third disbursement referred to in paragraph l(cc)(i) above if the Managing Director of the Trustee finds that the data as of September 30, 2000 indicate that any of the ceilings and floors referred to in paragraphs 2(a)(i) to 2(a)(v) of this arrangement, as specified in Table 2 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated August 31, 2000, was not observed. Cambodia will not request the fourth disbursement referred to in paragraph 1(cc)(ii) above if the Managing Director of the Trustee finds that the data as of March 31, 2001 indicate that any of the ceilings and floors referred to in paragraphs 2(a)(i) to 2(a)(v) of this arrangement, as specified in Table 2 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated August 31, 2000, was not observed.

“(bb) Cambodia will not request the third disbursement referred to in paragraph 1(cc)(i) above if the Managing Director of the Trustee finds that Cambodia has not carried out its intentions with respect to the structural performance criteria specified in Table 1 of the Memorandum of Economic and Financial Policies attached to the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated August 31, 2000.

“(cc) Cambodia will not request the third and fourth disbursements referred to in paragraph l(cc) above if it has taken any of the actions specified in paragraph 2(c) above.

“(dd) Cambodia will not request the third disbursement specified in paragraph 1(cc)(i) above until the Trustee has determined that the second review referred to in paragraph 4 of the letter from the Senior Minister of the Ministry of Economy and Finance of Cambodia and the Governor of the National Bank of Cambodia dated August 31, 2000, and paragraph 22 of the Memorandum of Economic and Financial Policies attached thereto, has been completed. Cambodia will not request the fourth disbursement specified in paragraph l(cc)(ii) above until the Trustee has determined that the third review under this arrangement has been completed. The timing of the third review shall be established during the second review referred to above.”

4. The Fund decides that the first review contemplated in paragraph 2(d) of the PRGF arrangement for Cambodia is completed, on the condition that the information provided by Cambodia on the implementation of the measures specified in Section I of Table 1 of the August 2000 Memorandum is accurate.

CHART 1CAMBODIA SELECTED ECONOMIC INDICATORS, 1997-2000

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 2CAMBODIA INDICATORS OF PROGRAM PERFORMANCE, 1996-2000

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

CHART 3CAMBODIA CONSUMER PRICES AND EXCHANGE RATE DEVELOPMENTS, 1994-2000

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

1/ National Bank consumer price index through December 1995; thereafter, NBC index based on change in CPI of National Institute of Statistics, which has been adopted as the official consumer price index.

2/ Riels per US Dollar, end-period buying rate.

3/ Based on the official exchange rate; an upward movement indicates appreciation of the exchange rate.

CHART 4CAMBODIA FISCAL DEVELOPMENTS, 1994–2000

(In percent of GDP)

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

ANNEX I Cambodia: Fund Relations

As of July 31, 2000

I. Membership Status: Joined: 12/31/1969; Article XIV

II. General Resources Account:

SDR MillionPercent Quota
Quota87.50100.0
Fund Holdings of Currency91.15104.2

III. SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation15.42100.0
Holdings1.419.1

IV. Outstanding Purchases and Loans:

SDR MillionPercent Quota
Systemic Transformation3.654.2
PRGF arrangements47.5654.4

V. Financial Arrangements:

ApprovalExpirationAmount ApprovedAmount Drawn
TypeDateDate(SDR Million)(SDR Million)
ESAF/PRGF10/22/199910/21/200258.508.36
ESAF05/06/199408/31/199784.0042.00

VI. Projected Obligations to Fund: (SDR Million; based on existing use of resources and present holdings of SDRs):

OverdueForthcoming
2/29/200020002001200220032004
Principal---3.39.49.49.47.0
Charges/Interest---0.51.00.90.80.7
Total---3.810.410.310.27.7

VII. Exchange Rate Arrangement:

Since November 8, 1992, the exchange rates of the riel for currencies of all countries have consisted of the following two rates. First, the official exchange rate, which is expressed in riels per U.S. dollar, applies to all official external transactions conducted by the government and state enterprises. Second, the parallel market rate, which is determined freely through interactions of foreign exchange traders in the private sector, applies to all other transactions. The official exchange rate is adjusted so as to limit the spread between the official rate and the riel-U.S. dollar rate prevailing in the parallel market. From the beginning of 1994, the spread between the official and parallel market exchange rates was limited to no more than 2 percent on a daily basis and, from March 1994, to no more than 1 percent on a daily basis, thus de facto unifying the dual exchange rate system 1. On July 31, 2000, the official exchange rate was CR 3,880 per U.S. dollar and the private market rate CR 3,893 per U.S. dollar.

VII. Article IV Consultation:

Cambodia is on a 12-month consultation cycle. The Executive Board concluded the last Article IV consultation on March 17, 1999 (SM/99/47, 2/23/99). The 2000 Article IV consultation took place during April 19-May 3.

IX. Technical Assistance:

STA missions on balance of payments compilation visited Phnom Penh in December 1998, and in February 2000. An FAD mission on tax policy and customs administration took place in September 1999. A TCAP mission was conducted in July, based on inputs developed by missions of FAD and MAE in March 2000 and of LEG in April.

The principal advisor post (MAE) at the National Bank of Cambodia has been extended for another year. Further requests for Fund technical assistance will be considered on a case-by-case basis. A resident custom advisor was installed at the MEF in early February 2000, but due to personal reasons he resigned in early March. His replacement is scheduled to be installed in July.

X. Resident Representative:

The resident representative office was closed in October 1997, but it was re-opened at end-October 1999. Mr. de Zamaroczy is currently the resident representative.

ANNEX II Cambodia—Statistical Issues

At the start of Cambodia’s reform program in 1993, its statistical base was largely nonexistent. Substantial improvements have been made since then, and an IFS page for Cambodia was published in April 1996. Nevertheless, significant problems remain, even though a considerable amount of technical assistance has been provided by the Fund, the UNDP, the AsDB, and the World Bank. Core data are generally provided on a timely basis (see Table), although there have been occasional delays.

National accounts

The National Institute of Statistics (NIS) of the Ministry of Planning provides official estimates of the components of GDP. The available statistical base on which the national accounts are estimated is extremely weak and fragmentary, and data for most sectors are not collected on a systematic basis. GDP deflators are estimated mainly from CPI data, as most other price data are not available. For several years, the Asian Development Bank has been providing technical assistance and financial support to improve the quality of the national accounts. Surveys of the main economic sectors need to be strengthened, and significant improvement of the national accounts database will take a number of years. The latest edition of the national accounts cover transactions between 1993 and 1999, with the estimates for 1999 highly preliminary.

Prices

Prior to 1996, three consumer price indices were compiled separately by the National Bank of Cambodia (NBC), the MEF, and the NIS. All three indices measured inflation in Phnom Penh only, and substantial discrepancies arose between them owing to differences in coverage and weighting systems. A STA technical assistance mission on consumer price indices in 1995 concluded that the NIS index provides the most reliable measure of inflation in Cambodia. The Cambodian authorities subsequently agreed to adopt the NIS index as the official CPI and ceased the publication of the NBC and the MEF indices from January 1996. However, the February 1997 STA mission found that, although the timeliness of the CPI had been improved significantly since the 1995 mission, issues relating to the price collection procedures and the treatment of specific problems encountered in the compilation of consumer price indices were still to be resolved. No producer or wholesale price indices are available.

Government finance statistics

Fiscal data, compiled on the basis of GFS methodology, have improved during the last three years through substantial technical assistance financed in large by the World Bank, but the authorities have not yet provided fiscal data for publication in IFS and GFS Yearbook. There are still weaknesses as regards the coverage and the economic classification of expenditures. Information on external financing of the budget has improved significantly, but detailed donor-specific data on investments financed by project aid are available only with considerable lags.

Monetary statistics

Data on the monetary authorities and deposit money banks are reported by the National Bank of Cambodia on a monthly basis, with a lag of one to two months. Substantial improvements have been made in the past few years, particularly with the shift to the new plan of accounts by the National Bank in January 1996, and the introduction of an IFS page for Cambodia in April 1996. Monetary statistics in Cambodia cover riels in circulation and domestic bank deposits in riel and foreign currencies. However, data on the large amount of foreign currency in circulation in Cambodia are not available. As a result, the effective money stock in Cambodia is underestimated by the amount of foreign currency in circulation, which leads to overestimates of the income velocity of money.

Mr. Khay Phousnith, Deputy Director of the Economic Research Department of the National Bank of Cambodia, is scheduled to come to STA as a Special Appointee for one year, beginning in November 1999.

External statistics

While significant improvement has been made by the Research Department of the National Bank of Cambodia in the compilation of balance of payments statistics, aided in large part by a previous long-term advisor, weaknesses remain in several areas. Customs data have substantial coverage and valuation problems arising from the non-recording of non-dutiable imports and tax-exempt exports and the weakness of customs controls. Also, the bulk of re-exports to neighboring countries are included under customs’ import data but are under-reported in total exports. Estimates of the trade balance are therefore subject to considerable uncertainty. While efforts have been made to compile better data on foreign direct investment, private capital flows are likely to be large and not fully captured by official data. A range of international transactions by enterprises, such as payments for imported services, income payments, and portfolio investment abroad are not included in the data. An STA mission which visited Phnom Penh in February 2000 made recommendations to address these issues. The February 2000 mission worked out an arrangement for a stronger collaboration between the National Bank of Cambodia and the Cambodia Customs Directorate to ensure a timely submission of foreign trade statistics. By contrast, it noted that lack of expertise and logistical difficulties has hampered success in direct investment surveys.

Cambodia: Core Statistical Indicators as of August 14, 2000
Exchange

Rate
International

Reserves
Central

Bank

Balance

Sheet
Reserve/

Base

Money
Broad

Money
Interest

Rates
Consumer

Price

Index
Exports/

Imports
Current

Account

Balance
Overall

Government

Balance
GDP/GNPExternal

Public

Debt/Debt

Service
Date of Latest ObservationAugust 14 2000August 8 2000June 2000June 2000June 2000June 2000June 2000December 19991999June 200019991999 (preliminary)
Date ReceivedAugust 14 2000August11 2000July 25 2000July 25 2000July 25 2000August 11 2000July 14 2000April 2000April 2000July 14 2000April 2000April 2000
Frequency of DataDailyDailyMonthlyWeeklyMonthlyMonthlyMonthlyMonthlyQuarterlyMonthlyAnnualAnnually
Frequency of ReportingDailyWeekly with one week lagMonthly with five weeks lagWeekly with one week lagMonthly with five weeks lagMonthly with five weeks lagMonthly with five weeks lagDuring missionsDuring missionsMonthly with one month lagAnnualAnnually
Source of DataNBCNBCNBCNBCNBCNBCNational Institute of StatisticsNBC and Customs OfficeNBCMinistry of Economy and FinanceNational Institute of StatisticsNBC
Mode of ReportingFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailFax or EmailDuring missionsDuring missionsFaxDuring missionsDuring missions
ConfidentialityNoYesNoNoNoNoNoNoNoNoNoYes
Frequency of publicationDailyN/AMonthlyMonthlyMonthlyMonthlyMonthlyAnnuallyAnnuallyAnnuallyAnnuallyN/A
ANNEX III Cambodia: Relations with the World Bank Group 1

Cambodia became a member of the World Bank on July 22, 1970 but did not borrow from the Bank until 1993. Relations between Cambodia and the Bank were interrupted between 1975 and 1992. In September 1992, Cambodia decided to resume active participation in the Bank, appointing a representative on the Bank Board of Governors and designating the National Bank of Cambodia as the depository institution for Bank assets in Cambodia. In February 2000, the World Bank approved a Country Assistance Strategy for fiscal years 2000-2003, focusing on alleviation of poverty, enhancing governance, and advocating stronger partnership with other donors and nongovernmental organizations in the delivery of projects, policy advice and services. At the same time, the Bank Board also approved a Structural Adjustment Credit for US$30 million which focuses on fiscal and governance issues. In January 1997, an office was opened in Phnom Penh to assist in the implementation of the Bank’s assistance program and facilitate communication with the government and other donors.

To date, 14 projects have been approved for Cambodia ($383 million). Recent projects have focused in the following areas:

  • In 1996, a Disease Control and Health Development Project was approved to support rehabilitation and expansion of the public health system, with a focus on control of communicable diseases, tuberculosis, malaria and HIV/AIDS.
  • In 1997, an Agricultural Productivity Improvement Project was approved, focusing on institutional development at the Ministry of Agriculture, including rehabilitation of training facilities, retraining of staff, and sponsoring pilot field activities.
  • In 1998, an Urban Water Supply Project was approved to improve water facilities in both Phnom Penh and Sihanoukville.
  • In 1999, four IDA projects were approved: a Social Fund II Project to finance small scale social-infrastructure projects at the local level, basically inheriting and extending the objectives from the previous Social Fund Project, a Road Rehabilitation Project to improve accesses to rural areas, a North East Rural Development Project, and an Education Quality Improvement Project.
  • In the first half of 2000, a Biodiversity and Protected Areas Project, Structural Adjustment Credit and a Forest Concession Management and Control Pilot Project were approved.

Cambodia became a member of the IFC in March 1997. The IFC is expected to provide entrepreneur training and business services for small and medium enterprises under the Mekong Project Development Facility. In addition, the IFC has approved an investment in a Cambodian power project. The IFC is also providing technical assistance to transform a Cambodian microfinance NGO into a commercial bank.

With regard to recent analytical work, the Bank prepared a Forest Policy Assessment report in June 1996 jointly with the UNDP and the FAO, a Public Expenditure Review in February 1999, and more recently a poverty assessment and strategy report, and a power sector strategy. A diagnostic study on governance and corruption was also prepared.

IDA: Commitments and Disbursements to Cambodia, 1993-2000(In millions of U.S. dollars, as of June 30, 2000)
ProjectDate of approvalCommitteeDisbursed
Emergency RehabilitationOct.26, 199362.7064.86
Technical AssistanceDec.6, 199417.0013.40
Social FundJun.8, 199520.0018.42
Economic Rehabilitation CreditSep.28, 199540.0036.91
Phnom Penh Power RehabilitationSep.28, 199540.0032.02
Disease Control and HealthDec.24, 199630.406.65
Agricultural Productivity ImprovementFeb.28, 199727.001.17
Urban Water SupplyFeb. 17, 199830.963.75
Social Fund IIMar.23, 199925.001.33
Road RehabilitationMar.23,199945.310.00
North East VillageMay 18, 19995.000.00
Education Quality ImprovementAug. 31, 19995.000.00
Biodiversity and Protected Areas LILFeb. 8, 20001.900.20
Structural Adjustment CreditFeb. 29, 200030.009.61
Forest Concession Management and Control LILJun. 5,20004.800.00
Total385.07188.32
ANNEX IV Cambodia: Relations with the Asian Development Bank

From 1992 through June 30, 2000, the AsDB approved $394 million in low-interest loans from the Asian Development Fund to Cambodia to finance twelve projects and one structural reform program. Only the first project (the $68 million Special Rehabilitation Assistance Project, approved in 1992) is completed. Of the remaining project and program loans, $151 million is in economic infrastructure, $100 million in social infrastructure, and $75 million in agriculture. Because of events in July 1997, no loans were approved in 1997. Normal operations were resumed in December 1998 with the approval of the $40 million loan for the Greater Mekong Subregion: Phnom Penh to Ho Chi Minn City Highway Project, a regional project under which the AsDB extended loans to both Cambodia and Viet Nam.

The AsDB also designed and administered 70 technical assistance projects during this period. These were financed through $51 million in grants from the AsDB ($19 million), the Japanese Special Fund ($23 million), UNDP ($2 million), Sweden ($6 million), Denmark ($1 million) and Australia ($1 million), and the Netherlands ($0.3 million). The distribution of these projects by value is: 44.5 percent in macroeconomic management and project implementation; 16.7 percent in agriculture; 20.9 percent in social infrastructure; 11.5 percent in transport; and 6.5 percent in finance, industry, and energy.

The AsDB completed a new Country Operational Strategy in July 2000 that emphasizes poverty reduction through interventions in four areas—rural economic development, social development, governance, and improvement of the conditions for private investment. The AsDB will place particular emphasis on facilitating Government leadership of sector development initiatives in water resource management, education and transportation. This will be accomplished through efforts to coordinate the activities of aid agencies, build local capacity to finance and manage development programs, and fund priority investments.

AsDB: Loan Commitments and Disbursements to Cambodia(In millions of U.S. dollars)(as of June 30, 2000)
Loan ApprovalsContract Awards/

Commitments
Disbursements
199428.235.912.2
199545.128.135.9
1996105.015.332.1
19970.041.510.7
199840.029.129.3
199988.417.026.2
2000 (through June)20.031.816.2
ANNEX V Cambodia: Technical Assistance and Technical Cooperation Action Plan (TCAP)

In view of Cambodia’s extremely limited implementation capacity, the Government would require a substantial amount of technical assistance to meet reform objectives. To this end, the Government of Cambodia has requested the IMF’s assistance in designing a comprehensive program of technical assistance covering principle areas of reform related to macroeconomic policy including fiscal reform (tax administration and policy, customs administration, and budget management), banking reform, statistics, and the legal framework. Following discussions between the Government, the IMF, UNDP, and other interested multilateral and bilateral donors a comprehensive Technical Cooperation Action Plan (TCAP) is being prepared. The full TCAP document is expected to be finalized before the end of this year.

A comprehensive program of technical assistance was previously provided during 1994-97 (see table attached). Assistance provided during this period achieved notable successes, including the preparation of the 1997 tax law, setting up a legislative framework for the banking system, and improvements in economic statistics. This broad success was undermined, however, by a serious deterioration in governance, and the expected benefits of improved administrative capacity—for example, with respect to enhanced revenue mobilization—did not materialize. The failure to build local capacity led to some further slippage in progress in all of these areas during 1997-99.

A comprehensive review of this assistance was conducted in early 1997 and concluded that crucial factors behind the progress that was achieved were well-defined and limited goals, and strong commitment by the authorities at the highest levels (at least in the initial stages). Shortfalls from the program’s original objectives largely stemmed from: (i) overly ambitious objectives in the original project; and (ii) less than full collaboration between local staff and project advisors, including with respect to training. The Cambodian government has agreed with this assessment and emphasized that the two main impediments to successful implementation of previous technical assistance were: (i) the inability of the government to coordinate external assistance; and (ii) a lack of commitment to ensure sustainability of projects through the designation of counterparts and appropriate use of trained staff.

In response to this past experience, the current TCAP program has set realistic and specific objectives in the context of strong government ownership. In addition, inter-ministerial coordination of the program will be carried out by a Government Steering Committee, chaired by the Ministry of Economy and Finance, consisting of senior officials of the National Bank of Cambodia, government agencies and departments involved in the implementation of the Program as well as representatives of other concerned ministries. The program is divided into four main areas each of which is further divided into operative components:

1. Fiscal Sector Reform: To improve capacity in tax policy and administration, customs administration, and overall budget management.

2. Banking System Reform: To strengthen the banking system by supporting the following objectives: (i) relicensing of commercial banks; (ii) strengthening NBC supervision capacity; (iii) restructuring the Foreign Trade Bank; and (iv) reform of the payments system.

3. Economic Statistics: To strengthen the government’s capacity to collect, compile, analyze, and disseminate broad economic statistics through reform of the statistical institutional framework.

4. Legal Framework: This program, as part of the overall legal reform program for Cambodia, will strengthen the government’s capacity to improve the overall legal framework, a precondition for further private sector development, by contributing to the formulation and implementation of a comprehensive legal reform strategy, with specific follow-up technical assistance from the Fund in the areas of corporate insolvency, secured transactions and enforcement of contractual claims.

Attachment
Cambodia: Summary of Technical Assistance Provided by the Fund, 1994-2000
PurposeAssistance and timing

(person-months)
Funding Sources
Tax Policy and Tax Administration
• Establish economic forecasting unit, including medium-term programming and flash reporting24, from January 1994IMF/UNDP
• Reform of tax administration (advisor)24, from March 1994IMF/UNDP
• Tax policy mission2, September 1994IMF
• Long-term fiscal advisor24, from July 1995IMF
• Inspection mission1/2, June 1996IMF
• Reform of tax administrationl1/2, January 1997IMF
• Tax policy and customs administration2, September 1999IMF
Technical cooperation action plan (TCAP) mission3 ¾ March-April 2000IMF
• Customs Administration (advisor)1, February 2000IMF
Monetary Policy and Central Bank Operation
• Cash management and currency reform4, from October 1994IMF/UNDP
• Implement accounting system for the NBC44, from November 1994IMF/UNDP
• Develop NBC’ s bank inspection and supervisory capacity32, from November 1994IMF/UNDP
• Foreign exchange management20, from November 1994IMF/UNDP
• Development of research and analysis capability24, from February 1994IMF/AsDB/UNDP
• Reform of financial institutions legislation6, from March 1994IMF/AsDB/UNDP
• Assist the NBC in implementing monetary policy12, from February 1995IMF
• Monetary operations and banking supervision1, May 1996IMF
• Central bank operations12, January 1997IMF
• Long-term advisor28, from January 1998IMF
• Banking system reform3, March 2000 and 3 June 2000IMF
Statistics
• Establishment of reporting procedures and formal for GFS
• Development of balance of payments statistics18, from April 1994MF/UNDP
• Development of monetary statistics24, from May 1995IMF/UNDP
Improvement of consumer price indices2, from May 1995IMF/UNDP
• Balance of payments compilation½ December 1998IMF
• Balance of payments compilation½ February 2000IMF
Legal
• Review of Technical Assistance Needs1/2, April 2000IMF
1The original program is described in the previous Memorandum of Economic and Financial Policies (EBS/99/188) and the Policy Framework Paper (PFP) for 1999-2002 (EBD/99/119).
2National income developments are based on new national accounts estimates prepared by the National Institute of Statistics as described in the Selected Issues Paper.
3Social sector spending targets for 1999 were achieved by a large additional appropriation in the last two months of the year, especially for the health sector. Much of this appropriation was executed in early 2000.
4For details see the Selected Issues paper.
5The increase in the international reserve position included foreign assets ($14.5 million) associated with a former state-owned commercial bank in Cambodia, held in an account with a Swiss bank. Legal ownership of these funds by the NBC was confirmed in February 2000.
6The staff also proposed the introduction of a 10 percent tax on hotel services (already provided for in the 1997 tax law), but the authorities felt that, while the recovery in tourist arrivals was strong, it was still too early to implement this tax in view of the weak competitiveness of tourism in Cambodia.
7The new contract includes a much broader coverage of imports subject to PSI than the previous one that was in effect until July 1999.
8A 30 percent wage increase was granted in April 1999.
9Issues on dollarization in Cambodia are covered in the Selected Issues Paper.
10For further details on forestry reforms see the Selected Issues Paper.
11Given the ongoing rescheduling discussions, the corresponding claims do not constitute arrears for program purposes.
12The authorities contracted on July 26, 2000 a medium-term loan from the EXIM Bank of China for onlending to a foreign investment project, for a maximum amount equivalent to $12 million. The authorities considered that the discount rate for assessing concessionality which applied during the time of the 1994-96 ESAF arrangement was still relevant. However, using a current discount rate, the concessionality falls short of the 35 percent level specified for PRGF programs. The staff has clarified with the authorities the understanding to refrain from contracting nonconcessional loans. The performance criterion governing foreign borrowing was inadvertently omitted from the text of the PRGF arrangement, and the staff is now proposing to rectify this.
13One minor exception is the projected trajectory for velocity, where a slightly faster declining trend is now projected, taking into account the more recent experience of a relatively rapid monetization of the economy.
14A full debt sustainability analysis is contained in EBS/99/188.
1The spread exceeded 4 percent on a few occasions in August 1998 as the authorities supported the official rate through intervention when the parallel market depreciated.
1Prepared by the Fund staff based on information provided by the World Bank, as of end-June 2000.

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