2.2   MACROECONOMIC PERFORMANCE

63.     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 resources of the 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.

64.     For the Royal Government, growth is the most powerful weapon in combating poverty and it remains committed to pursuing policies that encourage macroeconomic stability, shifting resources to more efficient sectors, and integrating 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 momentum for sustainable social and economic development.

TABLE 1:  SELECTED MACRO-ECONOMIC INDICATORS

65.     The Royal Government's focused efforts over the last five years to strengthen macroeconomic management and a vigorous implementation of the fiscal reforms have resulted in a robust average annual real GDP growth of around 6.8 percent over the last five years (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 CRs per dollar over the period of 1999-2003.

66.     In the year 2002, when the last CG Meeting was held, Cambodia’s economic performance 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 reform programs and the social development agenda. In spite of the natural disasters in Cambodia and the depressed global economic environment, 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 in2002 (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 at around 3,950 CRs to 1 US dollar. Gross bank reserves increased from 548 million dollars in 2001 to 663 million dollars in 2002 providing 3 months of import coverage.

67.     In the year 2003, in spite of the adverse effects of the outbreak of SARS in the region, the violent demonstrations in Phnom Penh in early 2003, the Iraq war and 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, in real terms, by 5.2 percent in 2003 as compared to 5.5 percent in 2002, led by continued growth in garment 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 2003, the Iraq war, and the outbreak of SARS across most of the region. However, the weakness in the services sector receipts was offset by continued strong growth in garment exports. Moreover, 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. During this period of uncertainty prices held firm and inflation was contained at 1.2 percent that is in sharp contrast to an inflation rate of 12 percent experienced during the elections of 1998.

68.     The sectoral composition of GDP has changed gradually over the last five years, reflecting the diversification of Cambodian economy. The agriculture sector's share in total GDP has declined while the share of the manufacturing has increased. In terms of the contribution of the main economic sectors to total GDP, the agriculture, fisheries and forestry sector accounted for 34.8 percent of GDP (in current prices) in 2003 as compared to 45.2 percent in 1998. Due to drought, late floods and declining forestry production, the real GDP growths 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 & poultry, 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 was at its lowest level since 1993. However, the agricultural production rebounded and grew by 9.2 percent in 2003 (in current prices), led by a 25.3 percent increase in crops, following a decline due to floods in 2002. The surge in crop production enabled the country to achieve self-sufficiency in rice and has kept food prices low.  Livestock and poultry declined slightly, the fisheries sector declined by 6.0 percent.

69.     The contribution of industrial sector continued to grow robustly by increasing from 17.2 percent of total GDP in 1998 to 26.7 percent in 2003, due to the rapid expansion in the textile, wearing apparel and footwear industry and continued strong construction activity. 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 of 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. 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 and 6.6 percent for the whole industry. 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.

70.     Although there has been significant growth in tourist oriented services, as a result of the rapid expansion in the industry sector, the share of the services sector in total GDP slightly declined from 33.6 percent in 1998 to 33.2 percent in 2003. 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 in 2002 totaled 786,524 according to the Ministry of Tourism, an increase of 30.0 percent over the previous year.  Tourists from overseas helped to contribute to the growth in the hotel and restaurant industry (11.4 percent); transport and communications industry (0.8 percent); and other services (16.8 percent). In spite of the general elections related uncertainties, the Iraq war, and the outbreak of SARS in 2003, the services sector grew by a modest 1.6 percent in 2003. However, the hotels and restaurants sector experienced a decline of 10 percent in 2003. Although tourism activity recovered somewhat in the second half of 2003, overall tourist arrivals declined from 786,524 in 2002 to 701,014 in 2003 or by around 11 percent.

TABLE 2:  NATIONAL BUDGET INDICATORS

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