Outline

Sectoral Contribution to GDP (1999-2004)

• The structure of sectoral shares in GDP have been changing gradually throughout the 1999-2004 period, reflecting the diversification of Cambodian economy
• The share of agriculture in total income is slowly falling, but instead the manufacturing activities are begun to rise.
• Although share of agriculture in GDP is still the highest in average, but it has been steadily declining from 39.4 percent in 1999 to 30.9 percent in 2004
• The share of industry in GDP has increased from 18.1 to 28.9 percent respectively.

1. Developments in 2005

• The economic growth in 2005 is estimated to be 7 percent, reflecting:
   

  • Stronger agricultural growth, 4.5% (benefiting from irrigation systems);

  • Continued growth of manufacturing (10.2%) and expansion of exports (12%);

  • Increased in construction activities (13%), fuelled by housing and infrastructure projects;

  • Tourist arrivals increased by 35% to 1.4 million visitors, bringing foreign exchange;

  • Inflation is high, at 5.8%.

1. Fiscal incentives for garment sector

• Particularly for garment exports, the Royal Government has provided financial incentives to support this sub-sector after the end of Multi-Fibre Agreement in early 2005.

• The RGC exempted payment of profit tax for 2 more years, resulting in loss to budget revenue of approximately CR71.5 Billion in 2006 and CR106.2 Billion in 2007. This does not include custom duties exemption of approximately CR1,211.8 billion a year.

1. Macroeconomic performance (cont…)

• Medium term outlook is good;

• The prospect of the robust economic growth will remain valid as Cambodia’s off-shore oil and gas exploration provides strong impetus to economic development of Cambodia.

• The government approved a number of infrastructure and real estate projects, which would imply that construction activities will drive GDP growth in the next 5-10 years;

1. Building foundation for sustainable development

• A wide range of reforms will sustain growth over the long term:

  • Public Financial Management Reform;

  • Financial Sector Development;

  • Private Sector Development particularly through improved trade facilitation such as single window, single administrative document, risk management, SME development and establishment of Special Economic Zones (SEZ);

  • Governance reform, including land management reform, administrative reform, as well as legal and judicial reform.

Overall Economic Growth Outlook
for 1999-2010

• Growth in 2006 is expected to increase to around 6 percent, driven by tourism and garment exports continue to increase - but at a slower rate

2. Public Financial Management Reform

• The Public Financial Management Reform has produced early results:
  Budget discipline;

  • Increase in revenue collection;

  • Improved expenditure management;

  • Drastic reduction in arrears;

  • Better incentives for government officials through Merit-Based Pay Initiative (MBPI);

2. Fiscal Developments

• The fiscal performance in 2005 has been good, with improved revenue mobilization and expenditure rationalization.

• On nominal term, revenue increased by 22% in 2004 and 17% in 2005;

• On real terms, domestic revenue in 2005 reached 11.7 percent of GDP, compared to 7.6 percent of GDP in 1995 and 11.3 percent of GDP in 2004.

• On real terms, tax revenue increased from 5.3 percent of GDP in 1995 to 8.7 percent of GDP in 2005, an increase of 3.4% of GDP.

2. Spending on Infrastructure

• RG attaches great importance to infrastructure development;

• Studies indicate that decreasing the distance from the village due to good road by one kilometer will enhance productivity by about 30 thousand Riel per hectare;

• Land with access to irrigation facilities during the dry season has 15 percent greater rental value and 10 percent higher sale value than land without irrigation;

• From 2000-2005 the disbursement for infrastructure and its maintenance amounted to about 1,324 billion riels.

2. Spending on Infrastructure (cont…)

• For the period 2004-2005, the Royal Government disbursed 270 billion riels for road-bridge infrastructure and 23 billion riels for irrigations;
   
• In 2006, the Government has allocated 115 billion riels for road-bridge infrastructure and 40 billion riels for irrigations

3. Monetary Policy and Performance

• Banking reform will continue;

• Greater confidence in the banking system leads to broad money recording a robust growth of 20 percent in 2005, due to the increase in foreign currency deposits and credit to the private sector.

• Credit to private sector rose by 40%, driven by the construction of hotels and real estate.

3. Foreign Investment

• The proposed investment projects include:

• US$2 billion new town project near Phnom Penh,

• US$200 million oil refinery,

• US$180 million cement factory,

• US$34 million hotel and golf club,

• US$30 million office building,

• US$27 million power station,

• US$19 million dry port,

• US$13 million industrial zone,

• US$3 million tobacco factory,

• US$5 million cigarette factor,

• US$9 million sea port at Kampot and others.

4. Inflation

• Despite high oil prices, the Royal Government has been successful in maintaining inflation under check and ensuring stable exchange rate in general.

• Inflation reached 5.8 percent at the end of 2005. This is in the range that can be managed.

4. Development of Microfinance,
insurance and capital markets

• Microfinance has transformed former Khmer strongholds into prosperous farms;

• The government will introduced life insurance;

• Draft laws and regulations are being prepared for the development of bond markets and stock exchange;

• Accounting and auditing standards were introduced and training is underway to improve corporate governance.

4. External sector performance

• There were signs of improvements, despite high oil prices;

• Provisional 2005 data indicated that the overall balance registered an increased surplus of 1.1 percent of GDP, compared with a surplus of 0.9 percent of GDP a year earlier;

• This improvement resulted mainly from a larger inflow into capital and financial accounts as against last year's performance, which was more than offset by the increase in the current account deficit.

• Domestic exports are expected to increase by 9.8 percent, while import will increase by 17.6 percent.

• Exports of textile, clothing and footwear, which accounted for 80 percent of Cambodia's domestic exports, continue to expand.

• Non-garment exports were estimated to have increased at a faster pace than the garment sector, albeit from a very low level, and produced only about 13 percent of Cambodia's total export earnings.

• This group includes traditional agricultural commodities such as rubber, wood products, fishery products, and paddy rice.

Cambodia's Performance

• The above figures include bilateral debt with the Russian Federation and the US and the decline in 2006 reflects the impact of completing rescheduling agreements on Naples terms with these creditors

5. Social Development: Education

• Cambodia has made impressive progress in financing and reforming the education sector, with the support of the development partners;

• A focus on primary education, backed with rising public spending, has resulted in more schools and trained teachers, lower direct costs to households;

• From 1994 to 2005, spending on education has increased more than four times in nominal terms, from 61.6 billion to 350.8 billion CRs respectively;

• The government spending has benefited to the poor;

5. Social Development: Education (cont…)

• Increasing net primary enrolment rates from 84% in 2000 to 91% in 2004 (particularly for girls and poor children).

• The percentage of children needing to repeat grades has fallen considerably from 26 percent in 1997 to 10 percent in 2003.

• Concerns for improving quality at all levels however continue and have to be addressed.

5. Social Development: Health

• Significant progress has been achieved in the Health sector as well.

• Health spending has also risen significantly from 30 billion CRs in 1994 to 224.5 billion CRs in 2005 (an increase more than six times).

• All health indices have shown considerable improvement but they are still high;

• IMR has declined from 93 per 1,000 live births in 1998 to 66 per 1,000 live births in 2003;

• Under 5 Mortality Rate declined from 124 to 97 for the same period;

• Life expectancy at birth increased for men from 52 to 60, and for women from 56 to 65 years.

5. Social Development: Health (cont…)

• A spectacular success story is the rapid decline in prevalence of HIV/AIDS (down to 1.9 percent among adults aged 15-49 in 2003, from 3 percent in 1997), brought about RGC's highly focused commitment and excellent collaboration with and among external development partners.
   
• TB and Malaria prevalence is on the decline.

5. Poverty Reduction

• Poverty in Cambodia has fallen by 10-15 percent between 1994-2004. Poverty headcount reduced from around 47 percent in 1994 to 35 percent in 2004.

• If based on geographic samples of surveys in 56% of total territories, the poverty headcount reduced from around 39 percent in 1994 to 29 percent in 2004.

• Per capita household consumption has risen 32 percent in real terms.

• Critical problems for the urban poor revolve around security of housing rights and opportunities for gainful income generation.

The Way Forward

• PFM Reform is crucial for Cambodia’s development;

  • Mainstreaming the Priority Action Program (PAP);

  • Program budgeting linking policies to financing;

  • Public accounting reform;

  • State enterprise reform – performance;

  • Performance based management;

  • Mainstreaming Meritocracy to improve government bureaucracy;

• Ensuring sustained growth;

• Agricultural development for poverty reduction.

Thank you for attention!