CAMBODIA Consultative
Group Meeting—Statement by the IMF Representative Phnom Penh, June 20—21, 2002 |
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Mr.
Chairman, Excellencies, and Distinguished Delegates, 1.
It is a pleasure to attend this Consultative Group Meeting and discuss
progress and prospects under Cambodia’s reform program. During the
last 3 years, economic growth and macroeconomic stability were restored,
and initial progress was made across a very broad range of structural
reforms. These achievements are clearly presented in the documentation
provided by the government for this meeting. The return of peace since
late 1998, together with credible efforts by the government, have made
these results possible. However, reform efforts need to be strengthened to
sustain growth and to ensure that this growth leads to lasting poverty
reduction. This meeting provides an appropriate opportunity for a candid
assessment of the government’s accomplishments, and the areas where
performance needs to be considerably strengthened. 2.
The Government’s program has received the support of the IMF
through an arrangement under the Poverty Reduction and Growth Facility (PRGF)
approved in October 1999. Reflecting
the progress achieved thus far, four semi-annual program reviews have been
completed broadly on schedule and completion of the fifth review is
expected in late July. The Government’s program, as reflected in the I-PRSP
and SEDP-II, is centered on improving revenue collection, shifting public
expenditure away from defense, creating a sustainable forestry policy,
strengthening governance, and improving the environment for private sector
activity. Progress has been made in all of these areas, but efforts need
to be continued and reinforced in several important respects. Above all,
there is no substitute for government ownership and commitment, and it is
this—supported by donor assistance— which will ultimately determine
the success of the government’s program. Progress
in program implementation 3.
Macroeconomic performance has been positive and in line with
program targets. Over the last 3 years, revised national accounts
estimates place economic growth at an average annual rate of 7 percent.
Inflation, at an annual rate of about 3 percent, has remained well under
control reflecting the implementation of prudent fiscal and monetary
policies. Budgetary performance has improved, the exchange rate has been
stable, and international reserves increased. All quantitative performance
criteria under the PRGF-supported program through March 2002 have been
observed. Structural benchmarks and performance criteria under the program
have also largely been adhered to, although there have been several delays
in meeting certain conditions. Looking ahead,
the macroeconomic outlook for 2002 remains favorable. While the growth in
garment production has leveled off--at a much lower rate than in the
past--tourist arrivals continue to increase. This, together with an
expected increase in production, should lead to economic growth in 2002 on
the order of 5 percent with continued low inflation. 4.
Fiscal performance has improved in recent years, but the job is far
from finished. Despite the extraordinary burdens of flood relief and
election expenses in the last two years, a current budget surplus of 1-1½
percent of GDP has been maintained. The overall deficit has been
contained at about 6 percent of GDP and fully covered through concessional
external assistance. Revenue has increased from 8 percent of GDP in 1998
to nearly 12 percent of GDP in 2001 and social sector spending has
improved. The 2002 budget targets an additional increase in revenue to 12¾
percent of GDP and further improvements in the composition of expenditure
with social sector spending projected to reach 3½ percent of GDP—well
in excess of defense spending for the first time in recent history. 5.
Significant structural
reforms have been initiated, but there have also been delays in several
priority areas. Key achievements include the completion of a bank
relicensing program; improvements in expenditure management, as well as in
tax and customs administration; the launching of the military
demobilization program; the computerization of the civil service payroll
and the start of civil service reform; the establishment of the National
Audit Authority; initial reforms in forestry policy; and progress in
meeting the accession requirements for WTO membership. This list reveals
the comprehensiveness of the government’s program. At the same time, the
number of areas where efforts need to continue also indicates the
fragility of the reform momentum. Priorities
for Strengthening Performance 6.
Given progress so far in improving the structure of public
finances, it is now time to further upgrade the efficiency of the budget.
This will need to involve further improvements in tax and customs
administration and overall expenditure management. Strong attention needs
to be given to further improving financial transparency and
accountability. The development and dissemination of the government’s
Governance Action Plan was a watershed event, but this is now the time to
shift this work from “planning” to more “action”. In this regard,
the National Audit Authority must be able to carry out its mandate with
full independence, and we look forward to its first report to the National
Assembly later this year on the implementation of the 2001 budget. 7. Despite recent gains, Cambodia’s revenue performance still lags behind that of comparable countries. The government’s development strategy underlying SEDP-II and the forthcoming PRSP will entail substantial expenditure commitments which, in turn, are predicated on further improvements in revenue. The current approach is to improve administration and broaden the tax base with limited increases in tax rates. This is appropriate, but requires strong government commitment to reduce illegal activities that lead to revenue loss (such as smuggling), collect existing tax arrears, and bring all parties into compliance with their tax obligations under the law. To succeed in this effort, there is an urgent need for much greater transparency over the financial terms governing the use of state assets. Indeed, the transparency surrounding the review of the government contract for the entrance fees for the Angkor temple complex was helpful in achieving more appropriate revenue for the government. This transparency needs to be extended to cover telecommunications, service contracts for the administration of airports, and many other leases of state assets. 8.
Advancing reforms in expenditure management will also contribute
to establishing policy credibility. Based on recent improvements in
cash management, budget and treasury reforms need to be directed at
limiting the issuance of government payment orders to projected cash
availability. This will ensure that the government can meet payment
commitments in a timely fashion, and will help support a more rigorous
application of the established guidelines on procurement policy, a
critical guarantee for the efficient use of public funds. In addition,
successful implementation of the military demobilization program and
administrative reform will continue to be important for achieving fiscal
objectives. 9.
There is also a need for the government to press ahead with
other aspects of the structural reform agenda. The bank relicensing
program has been completed, but further improvements in bank supervision
and the restructuring of the Foreign Trade Bank are needed to support a
larger and more effective role for the financial system. Forestry policy
will be discussed during another session, but we have always emphasized
the importance of forestry being based on sustainable policy and
appropriate transfer of revenue to the budget. There is a clear need for
the government to re-establish its credibility in this area, including
through a full report on the transfer of forestry revenue to the budget
during 200 1-02. More generally, the transparent pricing and transfer of
revenue derived from natural resources will become an even more important
issue in the future in view of on-going discussions on oil and gas
exploration. 10.
Efforts to develop a national poverty reduction strategy should
continue and be fully integrated with improvements in trade
facilitation identified in the Integrated Framework (IF) exercise. There
is a good opportunity in the coming months to link government initiatives
related to the IF study and WTO accession to other aspects of the reform
program to enhance the impact of trade and growth in reducing poverty.
Building on the I-PRSP and SEDP-II, the full PRSP is being developed
through a broadly participatory process. It will also need to prioritize
and fully cost reforms in the context of ongoing work to develop a
comprehensive medium-term expenditure framework. Medium-term
outlook 11. The medium-term macroeconomic objectives which underpin the poverty reduction strategy continue to be appropriate. These call for sustained economic growth averaging 6 percent per annum, while containing inflation to below 4 percent and the external current account deficit to 8—9 percent of GDP (2—3 percent of GDP including grants). Gross international reserves are targeted to reach about 4 months of imports of goods and services. To sustain growth over the medium term, existing constraints will need to be addressed, especially with regard to improving infrastructure, raising agricultural productivity, and promoting trade. As has been noted repeatedly, consistent implementation of the Government’s commitments is a prerequisite for achieving the medium-term objectives. Provided that strong implementation is maintained, donor support of about $1.4 billion over the next three years would be needed to finance this agenda. 12.
In addition to donor support, medium-term external viability will
depend on successfully concluding pending rescheduling agreements with
Cambodia’s bilateral creditors on concessional terms. In view of the
prospect for increased debt servicing costs, it will continue to be
critical to strengthen debt management and strictly avoid any borrowing on
nonconcessional terms. On the assumption of favorable debt rescheduling
terms, the external debt stock would be contained below 40 percent of GDP
over the medium term. IMF
support for Cambodia 13.
In closing, Mr. Chairman, it should be noted that, notwithstanding
the progress that has been made, Cambodia’s economic position continues
to be fragile. It will be a considerable challenge to strengthen
government performance in the required areas, but it is a challenge that
must be faced to accelerate poverty reduction. There is still a great deal
to be done to establish a sound financial and governance environment. The
IMF is prepared to continue with financial and technical assistance
provided that strong efforts to advance this agenda continue. With
confirmation of the authorities’ commitment, the Government of Cambodia
will deserve the full support of the donor community. |
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