2.3    MONETARY AND FISCAL PERFORMANCE

49.    Monetary developments in 2001 have reflected the improved fiscal position. Broad money supply grew by 20.7 percent in 2001, largely owing to increased foreign currency deposits, while continued fiscal restraint has provided room for private credit to increase by 4 percent. Gross international reserves reached the equivalent of over 3 months of import coverage at the end of 2001. The market exchange rate has been broadly stable against the U.S. dollar and in real effective terms. Despite the deterioration in garment exports and tourism receipts in the last quarter of 2001, the current account deficit in 2001 (excluding official transfers) was smaller than previously projected (10 percent of GDP), reflecting the strong performance in the first nine months.

50.    Prudent monetary policy and fiscal discipline pursued by the government have been successful in maintaining low inflation and stable exchange rate and in supporting economic growth. Despite the shrinkage in the number of banks following the introduction of the bank-restructuring program, money supply continued to expand at a reasonable pace, as public preference for monetary assets persisted. Liquidity of the banking sector recorded a robust growth of 20.7 percent, out of which 4.3 percent was contributed by local components, as compared to 1.5 percent a year earlier. Domestic currency outside banks accelerated faster than expected as the introduction of new bank notes and the need of the private business to make tax payments in local currency induced higher demand for the Riel. Foreign currency deposits, the largest component of broad money, recorded an increase of 24%, indicating strong confidence in the banking sector and in the economic policies of the RGC in spite of the general slowdown globally following the September events. Credit to the private sector rose by 4%, while government's recourse to bank financing remained negligible. Capital and reserves of the banking system continued to rise, up by 9.6% over last year, reflecting the banks' efforts to strengthen their capital base in compliance with the recent requirements of the law.

51.    Balance of Payments: In 2001, Cambodia had an overall balance of payments surplus of US$71 million. As a result, gross foreign reserves have increased and would be sufficient to finance about 3.4 months of total imports of goods and services. The data on external transactions for 2001 show that deficit on current account (excluding official transfers) contracted by 13.5% to US$219.4 million, and represented 6% of GDP. The main contributing factors were declines in deficit on both trade balance (14 percent) and income account (18.3 percent). In 2001, the value of domestic exports amounted to US$1,198.8 million, an increase of 10% over last year. One contributing factor was the increase of 13 percent in exports under Generalized System of Preferences. Retained imports increased slightly, up by 5.2% in 2001. During the same period, estimates by the Ministry of Tourism and the Ministry Interior suggested a sustained development in the tourism sector as passenger arrivals in Cambodia continued to rise by about 30%. This reflected the confidence of foreign tourists in the political stability and safety within Cambodia In 2001, receipts of official transfers were estimated to be US $ 274 million, a slight increase of 1.1 percent relative to 2000. Foreign investment flows were estimated to be flat at US $ 113 million due to global economic slowdown even before the September 11 events. Capitalization of the banking sector rose by US $ 27 million, showing the bank’s efforts to comply with the provisions of the law concerning the new minimum capital requirements.

REVENUES

52.    Progress has been made in implementing fiscal reforms in 2001. Following are key policy actions taken by the Ministry of Economy and Finance in 2001 to enhance revenue collection and strengthen governance:

•  Treat all diesel sales as final sales for VAT purposes;
• Improved enforcement of the 10 percent tax on entertainment services;
• Implement stamp system for taxes on cigarettes;
• Establish a Large Taxpayers Unit (LTU), with the direct payment by check or transfer to the National Treasury accounts at the NBC for the largest taxpayers; and
• Reduce the number of tariff bands from 12 to 4 and lower the maximum tariff rate to 35 percent, with associated increase in excise rates in the context of tariff restructuring;
• Conducting a study on the viability on the expansion of the real regime to another five provinces. The real regime has been expanded in 2001 to five provinces: Sihanoukville, Battambang, Siem Reap, Kompong Cham and Koh Kong.
• Expansion of VAT coverage to include 150 additional firms.
• Preparing for implementation of government decision (by Prime Ministerial Order), which specifies the means for strengthening inter-agency cooperation to reduce smuggling, and detailing assistance requirements and practical arrangements among

TABLE 2:  NATIONAL BUDGET INDICATORS

Source: Ministry of Economy and Finance

• the Customs Department, the Armed Forces, the Military Police, the Police and the local authorities. 

53.    As part of additional revenue measures, the Ministry of Economy and Finance (MEF) has taken the following steps to recover non-tax revenue:

• Reinforce procedures to collect tax and non-tax arrears, especially the arrears on telecommunications and from state assets;

• Improved collection of visa fees and introduce a sticker visa;

• Review the contract on the sale of tickets to the Angkor temple complex;

• The establishment of a taskforce between the MEF and the line ministries to provide for a monitoring mechanism for leases of state assets and increase efforts to collect arrears and payments due on leases of state assets;

• Initiate inventory of state assets;

• Prepare the assessment report with the Ministry of Post and Telecommunications in order to review the contract for the second international gateway and to ensure appropriate transfer of revenue to the budget. 

54.    Having taken the above revenue-enhancing measures, domestic tax revenue increased modestly in 2001. In nominal terms, domestic revenues increased 7 percent and current revenues by 9 percent, compared to 2000, reflecting increased collection of non-tax revenue. This largely reflects a boost in domestic revenues from new measures introduced in the second half of 2001. In 2001, non-tax revenues have increased almost 19 percent over last year, because of higher collections compared to last year from civil aviation (40 billion riels, compared to 25 billion riels); tourism income (14 billion riels, compared to only 6 billion riels); visa fees (31 billion riels compared to 20 billion riels), post and telecom (33 percent higher than last year), casino royalties (20 billion riels); and quota (104 billion riels compared to 88 billion riels).

55.    The overall revenue performance, however, has been adversely affected by shortfalls in excise revenue collection as a result of the consolidation of the tariff bands and the capping of the highest rate at 35 percent. It is, however, only a temporarily problem. The international trade tax collection has met the budgetary target.

56.    Tax revenue collection increased modestly and was only 5 percent higher than last year, mostly attributed to the payroll tax (44 percent above last year), excise (43 percent above last year), VAT (7 percent above last year) and international trade tax (a slight reduction of 4 percent). As part of the tariff restructuring, the maximum tariff rate was reduced to 35 percent and the tariff bands were streamlined from 12 to 4. To offset customs tariff reduction, the government increased the excise rates. Combined together international trade tax and excise collection increased by 5 percent, partly due to an abnormal increase in the imports of petroleum products in December 2001, in anticipation of an introduction of an additional petroleum tax in 2002. Such an increase will have an impact on the collection of international trade tax in the first quarter of 2002. It is also important to highlight the fact that with the expansion of the real regime to five provinces, domestic VAT collection increased by 17 percent. The collection of profit tax experienced a decrease of 2 percent, due to arrears recovery last year. Turnover tax collection decreased by 23 percent compared to the previous year, as more companies have been transferred from the estimated to the real regime.

57.    Governance has been strengthened in revenue collection through the implementation of the Strengthening Economic and Financial Management (TCAP) Project, which consists of reforms in budget management, customs, taxation and treasury. Measures have also been taken to prevent leakages, especially by combating smuggling and strengthening customs administration. An inter-agency cooperation initiative, covering both the central and provincial levels, was launched by the RGC to combat smuggling. Through this initiative support will be provided to strengthen practical cooperation arrangements between the Customs Department, the Armed Forces, the Military Police, the Police and the local authorities to prevent and crack down on smuggling. At the same time, the government has taken steps to increase collection of telecommunications revenue and non-tax revenue.

PUBLIC EXPENDITURE

58.    On the expenditure side, the following actions have been taken to improve public expenditure management:

• Continue to remove ghost workers and ghost soldiers from civilian, defense and security payroll;

• Improve spending priorities by providing adequate funding and meet budget targets for spending on social and economic sectors, such as health, education, agriculture and rural development;

• Improve the implementation of the Priority Action Program (PAP) to increase budget disbursement to the priority sectors;

• Increase public investment in rural infrastructure;

• Repair and maintain national roads and bridges and strengthen institutional capacity;

59.    The 2001 Budget was implemented cautiously to make room for financing the commune elections, provide support to flood relief efforts of the RGC, and to reach the targeted fiscal balance. The increased spending on flood relief in 2000 has had a major impact on the fiscal position in 2001. The financing of commune council elections put an additional constraint on budget execution in 2001. However, total expenditure has been contained below targets, thus minimizing the need for domestic budget financing. In 2001, the overall fiscal deficit (excluding grants) has been contained at 5 percent of GDP, while the current surplus was maintained at 1½ percent of GDP.

60.    In 2001, concrete steps were taken to implement RGC’s policies to shift spending priorities by providing adequate funds for social and economic sectors, and for public investment in rural infrastructure. Although progress has been achieved in reorienting government spending away from defense and security, the pattern of disbursements for social sector spending has remained irregular, reflecting primarily inefficient cash management at the national and provincial levels. Military spending continued to decline from 6.4 percent of GDP in 1994 to 4.1 percent in 1999 and 3.1 percent in 2001. At the same time social spending has increased from 2.1 percent of GDP in 1994 to 2.6 percent in 1999 and 3.5 percent in 2001. Over the last five years, disbursements of Health budget have almost tripled from 45 billion CRs in 1997 to 130 billion CRs in 2001, while disbursements for Education budget more than doubled from 83 billion CRs in 1997 to 212 billion CRs in 2001. In real terms, Health and Education spending has increased from 1.5 percent of GDP in 1994 to 2.6 percent of GDP in 2001. Capital expenditure increased by 4 percent in 2001.

61.    Through rigorous implementation of the fiscal reforms along with stringent budget management and revenue enhancing measures introduced in 2001, the RGC succeeded in containing expenditures at a level that was required to maintain macroeconomic stability. To strengthen governance in public expenditure management, in 2001, the RGC started the  full implementation of the procurement procedures in four priority ministries: Ministry of Education, Youth and Sports, Ministry of Health, Ministry of Agriculture, Forestry and Fisheries, and the Ministry of Rural Development.

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