COUNCIL FOR THE DEVELOPMENT OF CAMBODIA (CDC)


4.1 MACROECONOMIC AND FISCAL MANAGEMENT

190. The macroeconomic outlook for 2002 might be affected by the deterioration in the world economic environment that began in mid 2001 and is just beginning to recover. As a result of the recent upturn in the global environment, the Ministry of Economy and Finance has revised its projections for 2002 upwards. GDP growth is now projected to increase by 5-5 ½ as compared to the previous projection of 4 ½ -5 percent. The anticipated higher economic growth is attributable to the dynamism of garment exports and the vibrant tourism sector. Agriculture is expected to rebound after recent devastating floods and drought. Inflation, however, is expected to remain low and the exchange rate stable. More employment will be created in the services sector. The current budget surplus will be maintained at about 1½ percent of GDP, while the overall fiscal deficit (excluding grants) will be contained at less than 6 percent of GDP and financed by external concessional resources and grants. The external current account deficit is projected to widen to 11 percent of GDP. Also taking into account the positive international environment, the increase in gross international reserves in 2002 is targeted to grow further to cover about 3 months of imports. 191. The spending priorities for the 2002 budget are: (i) holding the commune elections and the operationalization of the Commune-Sangkak Councils; (ii) implementing the full demobilization program; (iii) a speedy implementation of the Governance Action Plan (GAP); and (iv) executing the Interim Poverty Reduction Strategy Paper (IPRSP) by shifting further spending priorities from defense to social and economic sectors. The budget strategy will be geared towards further enhancing the mobilization of tax and non-tax revenues to meet the target of 13 percent of GDP through rigorous implementation of existing fiscal measures and the introduction of new tax policies, as well as continued efforts to collect tax arrears from the largest taxpayers, re-negotiation of contracts for the Angkor Wat temple complex and the telecommunications contract for the second international gateway. The fiscal reforms undertaken under the Strengthening Economic and Fiscal Management (TCAP) Project, which focuses on improvement in public expenditure management, tax, customs and treasury reforms, will be crucial for the revenue mobilization efforts and improvement in fiscal governance. 192. Achieving the revenue target of 13 percent of GDP in 2002 is crucial for meeting expenditure needs. This target can be met through a combination of new revenue measures, and the full-year impact of measures introduced in the second half of 2001. The newly created Large Taxpayer Unit (LTU) in conjunction with upgraded auditing will be instrumental in enhancing tax revenue collection in the period ahead. In 2002, the following administrative actions will be taken to enhance revenue collection: The LTU will identify the largest arrears, investigate relevant information concerning each of these arrears, and take corrective actions to begin to collect these arrears. Tax legislation will be reviewed to provide relevant agencies the authority to take appropriate actions to collect taxes. An inventory of state assets involving all ministries will be completed and assets will be confiscated from companies with arrears to the government. The monthly casino royalty will be increased and other aspects of the taxation of casinos will be reviewed. VAT on airport departure fees and other services will be collected. 193. Strengthening the enforcement capabilities of the Customs Department is urgently needed for improving revenue collection. As a first priority, the Government has intensified anti-smuggling efforts by: (i) allocating more resources for the anti-smuggling program; (ii) implementing the government decision to strengthen inter-agency cooperation, and directing the Customs Department, Armed Forces, Military Police, Police and the local authorities to combat smuggling; (iii) establishing anti-smuggling task forces in several key provinces; (iv) developing an anti-smuggling strategy targeting key revenue sources, high-risk items, and prime locations; and (v) expanding the inspection of selected garment factories to assess compliance with exemptions granted under the Law on Investment. To complement the limited capabilities of the Customs Department, the government will continue to use the pre-shipment inspection system (PSI), and the PSI Steering Committee will address disputes between the government and the service provider to strengthen contract performance. Customs Department organization, human resources, and the information technology framework will be modernized in line with the work plan designed under the Technical Cooperation Action Plan (TCAP). 194. Expenditure restructuring will also remain a key objective under the 2002 budget. Defense spending will be reduced further to allow for increased priority social outlays. Fundamental reforms of expenditure and liquidity management are also included in the program for 2002. Key priorities in the expenditure program include: (i) increasing funding to key social ministries (i.e., education, health, agriculture, and rural development); (ii) completing the discharge of soldiers under the full demobilization program; (iii) continuing civil service reform; (iv) providing contingency funds to cover new priorities (commune elections, international obligations, higher debt service); and (v) increasing domestically financed capital expenditure. As a result, spending in the priority sectors is budgeted to increase to 3½ percent of GDP in 2002, compared to 3 percent in 2001. The Government has also stepped up efforts to improve the expenditure process, strengthen procurement practices, and upgrade cash management. In addition, the Government has prepared in 2002 the legal framework required for implementing administrative and financial decentralization in the future. 195. Comprehensive reform of budget and cash management will be implemented in 2002. High priority will be assigned to: (i) reducing the number of government accounts by integrating more accounts with the National Treasury single account; (ii) strengthening the budgetary accounting framework and improving regulations and reporting procedures; (iii) improving the operations of the cash management unit; (iv) improving inter-agency cooperation, especially between the National Treasury, the Customs and Excise Department, the Tax Department, the Budget and Financial Affairs Department, and the NBC; (v) reporting by the NBC to the National Treasury of transactions in government budget accounts on a daily basis and full account balances and bank statements for all government accounts on a monthly basis; (v) allowing for direct payment of taxes to the National Treasury account at the NBC by transfer or check, especially for the largest taxpayers; and (vii) establishing the new financial framework for communes with the national and provincial treasuries. 196. The following measures will be implemented as part of the 2002 budget: A. Tax Measures Expand the coverage of the real regime to five additional provinces. Increase excise tax on beer from 10 percent to 20 percent. Collect VAT on airport departure fees. Implement 2 cents per liter excise tax on gasoline and 4 cents per liter on diesel as specified in the Financial Law. Conduct a joint review by the Tax Department and the Customs Department to improve collection of VAT. B. Non-tax Measures Intensify efforts to collect revenue from telecommunication services and leases of state assets. Contracts involving state revenue for telecommunications will be reviewed to ensure that appropriate funds are being transferred to the budget. Introduce increased royalty fees for casinos based on estimated turnover. Increase the share of garment quotas to be auctioned from 10 percent to at least 20 percent. Renegotiate contract with Sokha Hotel, the managing company for the Angkor monument complex, as the sales of entrance tickets to the Angkor complex increased by 28 percent to 239,091 in 2001. C. Tax and Customs Administration Improvements Strengthen tax auditing strategy and capabilities. Improve coordination between the Customs and Tax Departments, especially regarding exchanges of information pertaining to large taxpayers. Strengthen inter-agency cooperation between the Customs Department, Tax Department, and CDC in monitoring duty exemptions for investment companies and apply penalties for undocumented use of duty exemptions. Intensify monitoring, enforcement, and collection of tax arrears for the largest taxpayers. Strengthen the anti-smuggling unit within the Customs Department and establish formal assistance arrangements with the Armed Forces and the Police to enforce customs regulations, especially on sensitive products and in problem areas. Identify the 50 largest accounts in the large taxpayers unit (LTU) that are in arrears, complete an analysis of the arrears, and establish an action plan with collection targets and reports on performance. 197. Procurement constitutes an integral part of budget execution. A major proportion of public expenditure at every level of government is incurred through the procurement of goods and services and construction activity. The performance criterion for evaluating procurement activities is economy, i.e. acquisition at the lowest price without sacrificing quality and timely delivery. In 1995, the government adopted a decree No 60 on Public Procurement, which was drafted based on international standards and best practices. However, since 1997, which witnessed domestic political turmoil and regional financial cataclysm, some of the important provisions of this governmental decree have not been fully implemented. In an effort to remedy these shortcomings, the government made a decision in December 2001 requiring full implementation of public procurement procedures for four priority ministries, Education, Health, Agriculture and Rural Development in the acquisition of goods, services and construction activities, except for heavy capital investment in road, bridge and sewerage construction. 198. Overall, the 2002 budget allocations represent a fundamental commitment of the RGC to deepen the reform process in Cambodia, both within the RGC and the society at large. The most visible expression of this commitment is the mix of planned allocations for the delivery of public goods and services that will be provided to Cambodians from all walks of life, including the transfer of resources to the grassroots communities. The planned resource allocations should accelerate the process of change, that has now become now "the blood and bone of the Cambodian". This budget will promote further political stability and security in the country that is vital for the country's march toward democracy, development and poverty reduction. 199. The 2002 National Budget can be succinctly described as an instrument that will promote democracy, reduce poverty, strengthen good governance and empower women. The spending priorities for the 2002 budget are targeted towards meeting these goals. Strengthening good governance will be the hallmark of the 2002 budget execution. The 2002 budget will also significantly empower local communities through the financial devolution to the local levels that will strengthen democracy at the grassroots level. To operationalize the Commune Councils the Government has earmarked 20 billion CRs in the 2002 Budget, of which the first transfer of 10 billion CRs was made in May as block grants to the Commune Fund, which was established to facilitate fiscal decentralization. 200. FISCAL REFORMS: The Royal Government requires a substantial amount of technical assistance to meet reform objectives. Technical assistance (TA) is required in all principle areas of reforms related to macroeconomic policy, including fiscal reform (tax administration and policy, customs administration, and budget management), banking reform, statistics, and the legal framework. A number of donors are already providing assistance in many of these areas, that include IMF, ADB, UNDP, and the UK through the Strengthening Economic and Financial Management Project and the Technical Cooperation Assistance Project (TCAP). Japan also providing technical assistance in the area of taxation and human resource development. The TCAP focuses on: (i) fiscal reform, including improved budgetary management, broadening the tax base, avoiding ad hoc customs duty exemptions, and improving customs administration; (ii) re-orienting government spending to priority programs in agriculture, rural development, health and education; (iii) improving the quality and timeliness of economic and financial data; (iv) improving administrative procedures to ensure that social sector spending targets are met; and (v) improving public sector governance, transparency, accountability and adherence to the rule of law. 201. As part of the TCAP, the MEF will undertake the following actions: Budget Management: Budget formulation and implementation: raising the quality and effectiveness of public expenditures will involve three key improvements in budgetary management: Improving the design of budget programs, including the introduction of relevant performance measurement concepts; Introducing a Medium-Term Expenditure Framework (MTEF) for Health and Education; Integrating capital and recurrent budgets (and eventually aid budgets) not only at the aggregate and sector levels but also in terms of what each should contribute to the composition of improved programs and services; and Aligning program expenditures with appropriate responsibilities and accountabilities—between the MEF and line ministries and between line ministries and provincial authorities. 202. Budget execution: Modernizing treasury operations is a necessary component in improving overall budget management and fiscal control. At the same time, some automation of existing functions and financial reporting is desirable to improve efficiency and maintain morale, and to help develop a culture of technological change and improvement. 203. Internal and external audits: a priority requirement is to establish the appropriate structure within the MEF and to provide it, and the Auditor General, with necessary resources and capacity. The internal audit capacity will coordinate with the budget unit to ensure consistency of approach and methodology. 204. Treasury Reform: Document and streamline current accounting practices within the Royal Government of Cambodia; Establish a single operational structure of government bank accounts in the NBC under government control; Enhance current fiscal reporting system; Move the Treasury away from performing banking duties; Clearly define the institutional role and relationship of the National and Provincial Treasuries; Establish a revised structure for a chart of accounts at the Treasury, in conjunction with a revised budget classification system; Implement revised accounting practices; Establish and implement a plan for basic computerization in NT and all spending agencies; Unify the public accounting management into a structure according to the accounting procedures and regulations, under the Treasury. In particular, all national budget operations should be recorded in local currency (MEF, NBC and NT); Unify and improve cash management system under the Treasury, on the basis of the Treasury single current account in NBC; Improve consequently reporting system for both budget performance and cash transactions. 205. Customs Reform The development and implementation of a revised Law on Customs and related regulations, such as the Customs Code, to provide the legislative base for reform and to meet international commitments and standards. Implement the tariff restructuring program resulting in an un-weighted tariff rate of less than 15% in the year 2002/2003 The development and implementation of streamlined customs clearance procedures to enhance trade facilitation and improve effectiveness of operations. The development of expanded multi-lateral and bi-lateral relations, including accession to the World Trade Organization (WTO), membership in the World Customs Organization (WCO), ASEAN commitments, and development of bilateral trade agreements. Deriving maximum benefit from WCO, WTO, membership, ASEAN and from bi-lateral relations Development and implementation of an enforcement strategy and programs based on the principles of risk management in order to reduce smuggling and other illegal cross border activities. Automating Customs Systems and Procedures. All information technology (IT) opportunities will be exploited to improve business systems, operating efficiency and service to clients. The long-term goal is fully automated systems for all customs business processes. The implementation of a new organizational structure to better meet the needs of the Department, and the development and implementation of a comprehensive human resource plan, including training and development plans. Develop and implement a comprehensive and coordinated training and development program to strengthen management skills and technical expertise. The plan will include all training courses provided by donor organizations such as IMF, ASEAN Secretariat, WCO, and bilateral donors. 206. Tax reform Establish an unambiguous depreciation schedule for tax on profit based on the needs of all stakeholders; Revise the method of taxing dividends as it is currently unnecessary complex. Consideration of a thin capitalization provision as well as anti-avoidance rules; Review double taxation agreements and seek the first agreement with a small country. Widen the tax base. Review the exemption level of the tax on salary as it is excessively high. Review the VAT thresholds, with the possibility of lowering it slightly below the current threshold for goods, to an extent acceptable for Cambodia's level of economic development and revenue performance of its tax administration. Pursue implementation of the real regime in five main provincial towns. Adopt selective methods to detect fraudulent invoices-, these methods should be supported by improvements of audit activities. Introduce mandatory VAT payments through the National Bank of Cambodia banks for the largest taxpayers. Streamline the system for controlling refunds and develop risk assessment techniques for the verification and approval of VAT refund claims. Establish and implement a reporting system to follow up, at HQ level, the evolution of tax arrears and monitor collection enforcement activities of tax offices. Establish salient information including ageing of account by tax, interest and penalties collected, number of accounts, dollars outstanding, budget to actual, opening to closing inventory, collection to Establish a modern management information system within the Audit Operation. Increase the number of auditors through internal reallocation of resources and organize appropriate audit training programs for auditors, if needed, seek technical assistance to prepare and develop these programs. \| Content \| Back \| Top \| Next \|