An IMF mission visited Phnom Penh during May 12–22, 2003 to take stock of developments since completion of the 2002 Article IV Consultation and the sixth review under the first PRGF-supported program in February 2003. Approval by the IMF's Executive Board of the sixth and final review under the PRGF was accompanied by a seventh disbursement, of SDR 8.4 million (about US$ 12 million), bringing total disbursements under the IMF-supported program to SDR 58.5 million (US$ 80 million). Total outstanding purchases by Cambodia from the IMF since Cambodia accessed Fund credit in 1994 stood at SDR 75.8 million as of end-April 2003. Under the program, macroeconomic stability was generally maintained, and progress was made on structural reforms, including: strengthening of customs and tax administration, restructuring the banking system, introducing various laws such as the Land Law, Forestry Law, and amending the Law on Investment and the Law on Taxation. However, difficulties were experienced in implementing reforms in some key areas. Progress has been particularly slow with regard to forestry policy, legal and judicial reform, and, more broadly, improving governance. During the interim period leading up to a possible successor arrangement under the PRGF, the authorities are committed to sustaining the reform agenda agreed during the sixth review.

The recent mission confirmed that growth in 2002 had been relatively buoyant, but found that events since the beginning of the year have had adverse effects on the economy. Revised national accounts data show that real GDP grew by an estimated 5½ percent during 2002, reflecting robust construction activity in Phnom Penh and a strong rebound of exports and tourism receipts during the final quarter of the year. In turn, the current account deficit (excluding official transfers) fell from 12½ percent of GDP in 2001 to around 11 percent of GDP in 2002. The exchange rate against the U.S. dollar remained broadly stable and inflation below 4 percent, and gross international reserves reached US$ 661 million at end-December 2002, equivalent to 3 months of imports of goods and services. The current budget surplus stood at 1¼ percent of GDP, while the overall budget deficit (excluding grants) reached 7¼ percent of GDP. The overall deficit was somewhat larger than previously estimated due to an acceleration of spending toward the end of the year.

During the first five months of 2003, economic growth was adversely affected by the anti-Thai riots in January and more recently the SARS outbreak. These events reduced revenue collection, especially duties and taxes paid on imports and taxes from tourism-related activities. Sluggish revenue, compensation to Thailand for the damages to the Embassy of the Royal Government of Thailand, and sustained claims on cash from end-2002 spending commitments, led to a drawdown of government deposits. This, in turn, disturbed the stability of the exchange rate. The riel had depreciated against the US dollar from CR 3,935 at end-December 2002 to CR 4,005 at end-May 2003, depreciating briefly even further in the interim. Even with an optimistic outlook on agricultural production, growth in 2003 is projected to slow down to 4¾ percent, due especially to the drop in tourist arrivals since March.

The attention of authorities of RGC is presently focused on implementation of the National Poverty Reduction Strategy (NPRS) which was completed in December 2002 and approved by the IMF and World Bank's Executive Boards. The NPRS spells out the government's strategy--formulated in consultation with all stakeholders, including development partners, civil society, and NGOs--for durably reducing poverty in Cambodia. The NPRS is not a static document, however, and is to be updated on a continuous basis, as reflected in recommendations provided in the Joint Staff Assessment.

The Royal Government of Cambodia, jointly with the United Nations Development Program (UNDP), held a National Workshop on Macroeconomics of Poverty Reduction during March 27–28, 2003. The workshop aimed at disseminating a UNDP case study on macro-poverty linkages in Cambodia. Among other things, the report called for higher inflation and larger budget deficits by increasing public investment, financed by the sale of Treasury bonds to commercial banks. However, higher inflation and larger deficits will not reduce poverty in Cambodia in present circumstances. First, increased inflation would result, among other things, in a depreciation of the riel which would, in turn, hurt the poor. Second, a larger public deficit would increase public debt yet further than already anticipated and beyond what would be sustainable given Cambodia's medium-term outlook at present.