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7. During its second mandate, 1998 to 2003, the Royal Government of Cambodia has made significant progress in implementing a macroeconomic framework, aimed at achieving equitable long-term economic growth and sustainable development. The focus of this framework has been on maintaining macroeconomic stability, strengthening the banking and financial institutions, implementing fiscal reform measures, ensuring a sound management of public property, and increasing public investment to develop the physical and social infrastructure and human resource of our nation. Over the last five years, Cambodia has made impressive strides in strengthening political and economic stability and re-integrating itself into the international community. 8. For the RGC, economic growth is the most powerful weapon in combating poverty and it remains committed to pursuing policies that encourage macroeconomic stability, shift resources to more efficient sectors, and integrate within the global economy. The renewed political stability, a greater sense of security in the country and the pace and pattern of economic recovery in the region have helped Cambodia consolidate, broaden and deepen the reforms underway and to maintain the momentum for sustainable social and economic development. 9. The RGC’s focused efforts over the last five years to strengthen macroeconomic management and a focused implementation of the fiscal reforms has resulted in a robust average annual real GDP growth of 6.8 percent over the period of 1999-2003 (Second Mandate of the RGC). The average annual rate of inflation over this period was around 1.6 percent which is far below the average annual rate of 7.4 percent experienced during the period of 1994-1998 (First Mandate of the RGC). Monetary developments over the last five years have reflected the improved fiscal position. Gross international reserves have remained equivalent to around 3 months of import coverage. The market exchange rate has been broadly stable against the U.S. dollar. In real effective terms, it was kept at an average of about 3900 Reils per dollar over the period of 1999-2003. 10. The sectoral composition of GDP has changed gradually over the last five years, reflecting the diversification of Cambodian economy. The share of agriculture in total income has slightly declined while the share of the manufacturing has increased. In 1999, the agriculture sectors' share in total GDP was 42.3 percent. By 2003, it has steadily declined to 34.8 percent of GDP. On the other hand, the share of the industrial sector in total GDP has increased from 18.1 percent in 1999 to 26.7 percent in 2003. Economic Performance in 2002 11. Cambodia’s economic performance in 2002 reflected the results of the strong commitment and resolve of the Royal Government of Cambodia to continue and accelerate the momentum in the implementation of its reforms program and the social development agenda. In spite of the natural disasters in Cambodia and the depressed global economic environment, in 2002 Cambodia’s economy achieved an overall GDP growth rate of 7.7 percent in current prices and a real GDP growth rate of 5.5 percent (at constant 2000 prices). In the previous two years, real GDP had grown at average annual rates of 5.7 (2001) and 7.0 (2000) percent. In 2002, the inflation rate was contained below 4 percent. The exchange rate was stable and stayed around 3,950 Riels to 1 US dollar. Gross bank reserves increased from 548 million dollars in 2001 to 663 million dollars in 2002 providing 3.0 months of import coverage. 12. Total Government revenues, in current prices, increased from 10.5 percent of GDP in 2001 to 11.1 percent in 2002. Total current expenditures, in current prices, increased from 9.7 percent of GDP in 2001 to 10.0 percent in 2002. 13. In terms of the contribution of the main economic sectors to overall GDP, in constant 2000 prices, the agriculture, fisheries and forestry sector in 2002 accounted for 33.5 percent of GDP compared with 45.4 percent in 1993. The contribution of industrial sector continues to grow, more than doubling from 12.8 percent in 1993 to 26.3 percent in 2002, due to the rapid expansion in the textile, wearing apparel and footwear industry and continued strong construction activity. Although there has been significant growth in tourist oriented services sector, as a result of the rapid expansion in the industry sector, the share of the services sector in total GDP has declined from 38.8 percent in 1993 to 34.3 percent. 14. Due to drought, late floods and declining forestry production, the output of the agriculture, fisheries and forestry sector declined in 2002 by 2.7 percent as compared to an increase of 2.2 percent in 2001. Crop production declined 5.8 percent, while livestock and fish production grew by 1.2 percent and 1.3 percent respectively. Forestry continued to decline, decreasing by 9.3 percent as a result of the crackdown on illegal logging and is at its lowest level since 1993. 15. The industry sector grew by 17.7 percent in 2002, as compared to 12.9 percent in 2001. The sector is dominated by manufacturing (72.7 percent) and construction (25.1 percent). Textile, wearing apparel and footwear manufacturing value added increased by 21.0 percent in 2002, following increases of 22.7 percent and 63.4 percent in 2001 and 2000 respectively. Exports in GSP products, mainly manufactured garments, have grown from negligible levels in 1993 to contribute 83.1 percent of Cambodia’s total goods exports in 2002. Construction value added also contributed strongly to 2002 growth, increasing by 26.8 percent compared to increases of 9.6 percent and 36.8 percent in 2001 and 2000 respectively. 16. The services sector grew by 4.5 percent in 2002, as compared to 4.2 percent in 2001. Tourism continues to be the main contributor to growth in the services sector, with travel receipts from overseas tourists increasing by 27.9 percent in 2002. International visitor arrivals for 2002 totaled 786,524 according to the Ministry of Tourism, an increase of 30.0 percent on the previous year. Tourists from overseas helped to contribute to growth in the hotel and restaurant industry (11.4 percent); transport and communications industry (0.8 percent); and other services (16.8 percent).
17. Estimated nominal per capita GDP in 2002 was 1.163 million Riels, an increase of 5.1 percent from 2001. It has grown at an average annual rate of 5.1 percent over the last four years. Population growth during the period has averaged 2.5 percent per annum. In real terms, annual GDP per capita was 1.142 million Riels, an increase of 2.9 percent from 2001. Real growth in GDP per capita has averaged around 4.6 percent over the last four years. 18. In the second half of 1997 and in 1998, purchasing power parity with the US dollar had declined with the rapid depreciation of the Riel. However, since 1999, with improvements in political and regional economic conditions, exchange rate depreciation has slowed significantly. As a result, per capita GDP in US dollars has shown modest real annual growth of around 3.5 percent over the past four years. 19. The progress in the implementation of structural reforms, in particular in revenue administration and public expenditure management, has yielded remarkable results. In 2002, domestic revenues collected increased from 1529.4 billion riels (US$ 389.8 million) in 2001 to 1,744.1 billion riels (US$ 445.2 million) in 2002, an increase of 14.0 percent. The domestic revenues in 2002, consisted of 1,227.2 billion riels in tax revenues, 500.6 billion riels in non-tax revenues, and 16.3 billion riels in capital revenues from privatization and other sources. 20. In 2002, expenditures processed through the National Treasury totaled approximately 1,922.4 billion riels or US$ 490.7 billion. These included 1,574.9 billion riels or US$ 402.0 million on current expenditures, and 338.4 billion riels or US$ 86.4 million on capital/development expenditures that were channeled through National Treasury. The total capital expenditure in 2002 was estimated to be 1388.2 billion riels or US$ 354.3 million. 21. In 2002, the total current expenditure of 1,574.9 billion riels on civil administration, defense and security, and interest on loan, were as follows:
22. In terms of changes in the composition of the total current expenditure in 2002, expenditures by Government Ministries/Agencies responsible for:
Economic Performance in 2003 23. Despite political uncertainty related to formation of the new Government after the July 2003 elections, economic growth in 2003 turned out to be better than expected. The Cambodian economy grew by 5.2 percent in 2003 as compared to 5.5 percent in 2002, led by continued growth in garments exports, a rebound in overall investments and an upward surge in agricultural production. The tourism sector declined by 10 percent due to the combined impact of the violent demonstration in Phnom Penh in early in 2003, the outbreak of SARS across most of the region and the political uncertainty in the lead up and the aftermath of the general elections. The drop in foreign direct investment due to prevailing uncertainties was offset by an increase in domestic private investment and higher domestic consumption as a result of higher public spending. The weakness in the services sector receipts was offset by continued strong growth in garments exports. During this period of uncertainty prices held firm and inflation was contained at 1.2 percent that is in sharp contrast to a rate of 12 percent experienced during the elections of 1998. 24. Agricultural production grew by 9.2 percent in 2003, led by a 25.3 percent rebound in crops, following a decline due to floods in 2002. The surge in crop production enabled the country to maintain its self-sufficiency in rice and has kept food prices low. Livestock and poultry declined slightly and fisheries sector declined by 6.0 percent. 25. Continued strength in garment exports was reflected in a 15 percent increase in 2003, underpinning a double-digit growth in manufacturing of 12.2 percent. The construction sector's output declined by 3.0 percent, compared to 14 percent growth in 2002. 26. The decline in foreign investment approvals was more than offset by strong growth in domestic investments. Investment project approvals in 2003 totaled US$312 million, of which US$139 million were proposed investments in the tourism sector. Proposed investments in manufacturing amounted to US$86 million, including 19 proposals to establish garment factories which are expected to create some 25,000 new jobs. There was a considerable increase in investments undertaken by Cambodian entrepreneurs in 2003, the total of which accounted for 42 percent of all investment projects. 27. The services sector grew by a modest 1.6 percent in 2003, due to the combined effect of the violent demonstrations and the outbreak of SARS. Hotels and restaurants dropped by 10 percent. Although tourism activity recovered in second half of 2003, overall tourism arrivals in 2003 were 11 percent lower than arrivals in 2002. 28. In 2003, about 40,000 jobs were created in manufacturing, mostly in SMEs, while about 200,000 new workers entered the labor market. It is clear that the development of a robust agricultural sector, labor-intensive industries and services are critical to absorbing the labor surplus. 29. Sustainable future economic growth in Cambodia remains heavily dependent on the ability of the government to diversify the economy and broaden the base for growth. The challenge for Cambodia is to strengthen governance in order to attract more private investments and ensure competitiveness vis-ŕ-vis neighboring countries. In particular, the country’s physical infrastructure framework needs to be expanded to serve the marketing requirements of the rural economy. Social infrastructure such as health and education need to be further enhanced. Greater domestic investment needs to be encouraged, preferably in industries that utilize domestic resources, like small-and-medium enterprises. Regional initiatives to further integrate Cambodia into ASEAN will be accelerated, particularly through the Economic Cooperation Strategy (ECS) partnership scheme with neighboring countries. 30. Ensuring appropriate level of public expenditure to achieve rapid economic growth is crucial for poverty reduction. As set out in the NPRS, the Royal Government aims to attain inclusive, broad-based economic growth at the rate of 6 to 7 percent per year that was achieved over the last five years, 1999-2003. However, current external and internal conditions indicate that a rate of 6 to 7 percent will be difficult to achieve in the medium term.
31. Cambodia is likely to face serious
challenges in the coming years, if the government fails to reduce costs of
doing business and combat smuggling, which creates a non-level playing
field for investors. While garments exports continued to grow in 2002 and
2003, the prospects of further growth is uncertain due to the ending of
the current regime of garments quota import into the US market under the
WTO Agreement on Textiles and Clothing (ATC). In order to maintain current
levels of activity the garment industry needs to become more competitive
vis-ŕ-vis other exporters, particularly the large-scale producers such as
India or China. |
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