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Cambodia’s reform efforts have been hampered by the undeveloped state of basic institutions necessary to support a market economy. For example, the fiscal position is severely constrained by an extremely low ratio of revenue to gross domestic product (GDP) by international standards and a pressing need to rebuild infrastructure and increase social outlays. Accordingly, the highest priority has been granted to strengthening revenue collections, while redirecting military and security expenditures toward health, education and rural development. Cambodia has already increased revenue by about 3 percentage points of GDP since 1999, but further revenue efforts are needed to meet expenditure needs over the medium term. Military expenditure has been reduced in tandem with increased social expenditure relative to GDP and further reductions are underway under a recently initiated demobilization program supported by the WB and donors. Progress in fiscal restructuring has been achieved while maintaining macroeconomic stability, as current budget surpluses have remained at about 1½ per cent of GDP; and overall deficits, including development expenditure, have been contained below 6 per cent of GDP (excluding grants). Cambodia has avoided domestic financing of the budget since 1999, thus providing room for an expansion in private credit. Since 1999, the authorities have simultaneously pursued a prudent monetary policy aimed at low inflation and a stable exchange rate. The increase in broad money has been largely accounted for by an increase in net foreign assets, while net domestic assets of the banking system declined, owing to the improved fiscal position. On the liability side, the bulk of the increase in broad money has stemmed from foreign currency deposits. Interest rates have stayed relatively high, reflecting the perception of a high risk premia in the lending market. Mirroring the monetary policy stance, the riel has been relatively stable in US dollar and real effective terms since late 1998; and official international reserves have increased to about three months of imports of goods and services. The external current account deficit has remained broadly stable at around 10 per cent of GDP (excluding official transfers), largely due to the strong performance of garment exports and tourism receipts. The liberalization of the trade regime is underway in the context of meeting requirements of the Association of South East Asian Nations (ASEAN) and the World Trade Organization (WTO). Cambodia’s exchange system is free from restrictions on payments and transfers for current international transactions. Cambodia has made substantial progress in implementing key structural reforms since 1999, although there were delays in some important areas. In an effort to improve governance and combat corruption, the government established a National Audit Authority (NAA) and approved a comprehensive Governance Action Plan (GAP) in early 2001. Initial steps to improve governance in the forestry sector have also been taken in recent years, through increased monitoring of illegal logging and forestry concessions and preparation of a new forestry law. The authorities have made strides in restructuring the country’s banking system and further efforts are underway to broaden financial intermediation and establish a modern payments system. In addition to military demobilization, Cambodia has also embarked, with WB and donor support, on a broad administrative reform program. Following a census of civil servants, the creation of a computerized civil service payroll, and the design of comprehensive reform strategy for 2002–06, civil service reform is aimed at providing higher incentives to senior managers and strengthen capacity-building, while maintaining fiscal sustainability. Medium term macroeconomic framework While initial performance under the reform effort is commendable, there is little room for complacency given Cambodia’s vulnerability and pressing need to alleviate poverty. Significant actions will be needed in the period ahead to firmly establish a basis for promoting sustainable growth and reducing poverty. Governance and transparency issues are at the forefront of Cambodia’s reform agenda. In this regard, strict adherence to the actions and timetable set forth in the GAP will be critical. As part of the latter, facilitating independent operations of the NAA and establishing a modern legal and judiciary system that provide for a clear rule of law and modern commercial laws and regulation are crucial. In addition, efforts to improve fiscal transparency and establish a reliable statistical framework will be instrumental in strengthening governance. Further fiscal restructuring will be required in the period ahead and the main challenge to that end is to improve revenue mobilization and reorient spending away from defense and security toward social sectors. The government’s medium term framework is centered on maintaining a current budget surplus of at least 1½ per cent of GDP. Overall fiscal deficits, inclusive of development expenditure, are expected to be contained below 6 per cent of GDP and fully financed by concessional foreign assistance. Cambodia’s external viability will depend on sustained and timely implementation of reform policies. The current account deficit (excluding transfers) at around 10 per cent of GDP is expected to decline steadily to 8 per cent by 2006. Significant official financing on concessional terms and debt relief will continue to be required over the medium term. The baseline scenario presented below (see Appendix A and tables 1.2 and 1.3) is derived from an assessment based on the macroeconomic conditions that prevailed in mid 2001. At this juncture, it is premature to assess the full impact of the recent events in the US on Cambodia’s economy. The medium term framework also includes a sensitivity analysis reflecting four alternative trade related scenarios. The downside risks stemming from the deterioration of internal security and political situation and policy implementation slippages that could thwart the medium term outlook are not addressed in this exercise. 1.3 Cambodia: balance of payments, 1997–2006
a Includes estimates for unrecorded
forestry exports and unrecorded petroleum imports. Sources: Data provided by the Cambodian
authorities and IMF staff estimates and projections. |