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3.1 Monetary Policy and Performance 24. The National Bank of Cambodia continued the adoption of tight monetary policy and managed floating exchange rate. Inflation and exchange rate performance was generally encouraging. This policy has so far greatly contributed to boosting public confidence in the macroeconomic environment of Cambodia and enabling the private sector in doing business and in investment. 25. In fact, the Cambodian economy enjoyed a low and stable price level for about five years in row since 1999 when average annual inflation rate moved just around one percent. Unfortunately, the year 2004 and this year the economy is being directly impacted by one of the country’s economic concerns, the unprecedented level of fuel prices. The higher fuel prices have negatively impacted on all sectors, consumers, producers, and the government as well. Higher petroleum prices and an increase in local food prices pushed inflation up to about 6 percent in 2005. The NBC has made various efforts to reduce inflation pressure, especially by controlling the monetary expansion. 26. Meanwhile, sharp fluctuations in the global currency markets also threw shadows on local foreign exchange market, as the riel-US dollar exchange rate became somewhat weaker in 2005 compared with the previous year. The riel depreciated year-on-year by about 2 percent in December 2005 as compared to 1 percent depreciation in the same period of last year, though this rate is still within a manageable range. 27. Monetary data for 2005 indicate that liquidity of the banking sector continues to maintain the rising trend, although at a slower pace. Broad money (M2) growth slowed down to 16 percent to 5,025 billion riel in December 2005 from 4,329 billion riel in December 2004. This growth was 14 percentage points lower than the 30 percent recorded during the corresponding period in 2004. The slight increase in total liquidity and the high economic growth rate of 7 percent in 2005 indicate that monetary expansion has been controlled effectively and the higher rate of inflation in 2004 and 2005 is attributable mainly to factors other than monetary causes. The growth in broad money during the period under review was largely on account of the increase in net foreign assets of the banking system, which increased by 14.2 percent as a result of an increase in foreign assets of 12 percent and a reduction in foreign liabilities of 2.6 percent. Currency outside banks increased by 15 percent albeit from a smaller base compared to foreign currency deposits. Growth in domestic credit slowed down to 21.3 percent (35.8 percent in December 2004). 28. Preliminary data on external sector developments show that growth in trade deficit widened to 43.7 percent in 2005 compared to 34.7 percent in 2004, mainly due to an increase in the value of petroleum imports. A sharp increase in tourism receipts helped to partly offset the deterioration in trade performance, leading to a small increase in current account deficit (excluding official transfers) to 10.5 percent of GDP (9.8 percent of GDP in 2004). Improved foreign direct investment flows, coupled with an increase in official transfers enabled the capital and financial account to record a surplus that is higher than the current account deficit. As a result, the country’s overall balance of payments recorded a surplus of 43.6 million USD and net international reserves expanded by 17.6 percent and was equivalent to about 2.5 months of imports in 2005. 3.2 Fiscal Policy and Performance 29. The objectives of Royal Government's fiscal policy are to maintain a sustainable fiscal balance with gradual increases in budget allocation for social and economic sectors by limiting and rationalizing public expenditure and by broadening the tax base, preventing leakages, and by strengthening the customs and tax administration to collect additional revues. The prudent fiscal policy has enabled the Royal Government to maintain price stability in Cambodia's highly dollarized economy. 30. The Royal Government's fiscal policies are designed to ensure a level of spending that is consistent with macroeconomic stability. The expenditure program is being restructured as part of a systemic reform package aimed at promoting domestic savings, productive investment, and efficient resource allocation. The fiscal performance in 2004 and 2005 has been good, with increased domestic revenue collection and public expenditure restraint. 3.3 Domestic Revenues 31. Total domestic revenues increased to 11.7 percent of GDP in 2005 from 11.3 and 10.2 percent in 2004 and 2003, respectively. Tax revenues increased to 8.7 percent of GDP in 2005 from 8.4 percent in 2004. The improvement in revenue collection reflects the effectiveness of several revenue collection measures introduced in the last quarter of 2003 and at the beginning of 2004. These included actions by the Ministry of Economy and Finance (MEF) to recover revenue from Posts, Telephone and Telecommunications (PTT), the lease of government assets, as well as some additional measures such as further expansion of the tax base; increased collection of visa fees and tourism income. 32. In 2005, total domestic revenues are expected to increase to 2,591 billion CRs (approximately US$ 629.2 million) from 2,212 billion CRs (US$ 550.7 million) in 2004, and 1776 billion CRs (US$ 446.7 million) in 2003. In 2005, domestic revenues collected consisted of 1,929 billion CRs in tax revenues, 555 billion CRs in non-tax revenues, and 106 billion CRs in capital revenues from privatization and other sources. 33. In 2004, total domestic revenue collected consisted of 1,648 billion CRs in tax revenues, 544 billion CRs in non-tax revenues, and 19 billion CRs in capital revenues from privatization and other sources. 3.4 Public Expenditure 34. In both 2004 and 2005, overall, the Royal Government has managed to contain total expenditure below targets, thus minimizing the need for domestic financing. In both years, total current public expenditures were lower than total domestic revenues collected both in nominal terms and as a percent of GDP. Total current expenditures decreased from 10.6 percent of GDP in 2003 to 9.5 and 9.3 percent in 2004 and 2005 (preliminary estimate). 35. In 2004, expenditures processed through the National Treasury totaled approximately 2,078.8 billion CRs (US$ 515.7 million). These included 1,745.7 billion CRs (US$ 433.1 million) on current expenditures, and 333.1 billion CRs (US$ 82.6 million) on capital/development expenditures that were financed from domestic sources and channeled through National Treasury. The total capital expenditure in 2004, from both domestic and external sources, was estimated to be 1260.6 billion CRs (US$ 312.7 million). 36. In 2004, the composition of the total current expenditure of 1,745.6 billion CRs on civil administration, defense and security, and interest on loan, was as follows:
37. The preliminary data on expenditures in the first eleven months of 2005 show that expenditures processed through the National Treasury totaled approximately 1,789.8 billion CRs. These included 1,475.8 billion CRs on current expenditures, and 314 billion CRs on capital/development expenditures that were financed from domestic sources and channeled through the National Treasury. The total capital expenditure during this period, from both domestic and external sources, was estimated to be 950 billion CRs. 38. The composition of the total current expenditure of 1,475.8 billion CRs in the first eleven months of 2005 on civil administration, defense and security, and interest on loan, was as follows:
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