Statement at Donor Meeting

Cambodia Consultative Group Meeting Statement by Robert P. Hagemann, IMF Resident Representative in Cambodia

January 16, 2002

Excellency Samdech Hun Sen,
Royal Highnesses,
Excellencies,
Ladies and Gentlemen

As co-chair of the Fiscal Reform Working Group, I have the honor of making a few brief remarks on behalf of the working group, which convened recently under the very able chairmanship of His Excellency Senior Minister Keat Chhon to take stock of progress made to date in this very broad but crucial area, and to identify priorities for the coming period.

The Royal Government of Cambodia (RGC) is to be congratulated for its fiscal performance in 2001. While final data are not yet available, the cautious approach to budgetary implementation enabled the government to broadly reach its overall targets for revenue, expenditure, and domestic financing. This achievement was partly due to the implementation of revenue measures and reforms to revenue administration, the full-year effect of which should provide a solid base on which to boost revenue in 2002 and over the medium term. Higher government revenue will enhance the government's ability to meet pressing priority spending needs.

We note that the budget for 2002 has been formulated to pursue the government's medium term fiscal objectives. First, revenue is budgeted to increase further, to be boosted in part by several new revenue measures. Sustaining improvements in revenue performance, however, will require steadfast strengthening of tax and customs administration through the wide ranging action plans under the Technical Cooperation Assistance Program (TCAP), forceful and observable implementation of the Prime Minister's Order on inter-agency cooperation on anti-smuggling, and appropriate increases in non-tax revenues. A very important goal should be to increase significantly the sharing of information among all ministries and government agencies involved in the collection of state revenues. Second, current spending is to increase further, notably through improvements in spending in the social sectors while reducing defense and security outlays. Effectively increasing priority spending will require, however, stepped up efforts to improve expenditure management, and here too the Government will have to make diligent use of the advisory and material resources provided under TCAP.

Donors have noted the government's efforts to use the budget to help reduce poverty, as reflected, for instance, in the increase in social spending. Many donors thus feel that the Priority Action Programs (PAPs) have helped to improve budget access, although not in all chapters (notable Chapter 11 in the social sectors), and a more informed assessment will have to await the availability of final end-year data. But there is a shared view that much more needs to be done to have the desired impact on poverty reduction. Donor suggestions include:

• Set within-year benchmarks for priority spending, in terms both of budgetary allocations and as a percent of GDP. More broadly, more obvious linkages of the budget to the government's poverty reduction strategy (e.g., as laid out in its I-PRSP, the SEDP-II and the eventual full PRSP) would be helpful in assessing progress.

• Set targets for social spending over longer horizons in the broader context of medium-term expenditure plans and a medium-term fiscal framework.

• Develop further "Performance Budgeting" and "Performance Auditing." The quality and effectiveness of spending are even more critical than the volume of spending.

• Develop local delivery capacity in provinces through training, including on financial procedures.

• Improve the quality of public service by moving assertively forward with full civil service reform, with an aim to improve incentives in the public sector through better but financially sustainable pay.

• Implement with vigor and consistency in the four priority sectors Decree No. 60 on public procurement procedures.

More generally, improving expenditure management should be given a high priority. In this regard, steps are urgently needed to streamline budgetary procedures, address deficiencies in overall cash management to reduce cash shortages of provincial treasuries, and eliminate institutional rivalries by creating a broader sense of shared mission throughout government. Finally, although the establishment of the National Audit Authority is of course a commendable accomplishment, making it truly fully operational will be the true test of commitment to this reform.

In closing, the donor community wishes to commend the government on its achievements in the area of fiscal reform. But it also wishes to remind the government of the enormous challenge it confronts to implement further deep and broad public sector reforms, and notes that achieving this will require a truly Herculean effort. We wish you good luck, and re-affirm our commitment to help in any way possible.