Consultative Group Meeting on Cambodia

Statement by the Representative of the International Monetary Fund
on Behalf of the Macro-Economic Reform Working Group
Phnom Penh, January 29, 2001

Excellencies, Ladies, and Gentlemen:

I am pleased to report that ten days ago, the Executive Board of the International Monetary Fund (IMF) completed the second review of Cambodia's reform program supported by the Poverty Reduction and Growth Facility (PRGF), as well as that of the Cambodian authorities' interim Poverty Reduction Strategy Paper (PRSP). A few days later, the Executive Board of the World Bank also considered the interim PRSP, thereby clearing the way for continued concessional financial and technical assistance to Cambodia from the donor community. While welcoming the interim PRSP, Executive Directors emphasized the need to improve coordination and effectively prioritize activities in the preparation of the full PRSP and of the second Social Economic Development Plan.

As indicated in the background paper and Senior Minister Keat Chhon's statement, macroeconomic stabilization has continued in 2000, in spite of the twin shocks of the worst flooding in 70 years and significantly higher international petroleum prices. The flooding between July and November 2000 had a severe social and economic impact, affecting directly one fourth of the population, damaging crops and infrastructure, and costing the equivalent of 0.6 percent of GDP in immediate budgetary flood relief, on top of sizable international emergency assistance. Yet, economic growth, while lower than initially expected, is estimated to have exceeded 4 percent, inflation has remained in check, and the exchange rate has remained broadly stable. Based on preliminary data, all quantitative benchmarks and performance criteria under the program were observed through end-December, some with comfortable margins. The authorities have also reported continued avoidance of ad hoc tax exemptions and public borrowing on commercial terms. Progress was also achieved in the strengthening of the financial sector. However, delays have been experienced in military demobilization and civil service reform. It is the donor community's understanding that the authorities are implementing corrective actions in both areas forcefully in order to minimize the slippages. There have also been recent reports of a surge in illegal logging activities, which have governance and budgetary implications. Donors urge the Government to avoid complacency and to crack down on perpetrators effectively.

During the recent IMF Board meeting, Executive Directors noted the progress in macroeconomic stabilization but they also stressed the daunting tasks confronting the Government, which will need to be addressed if the current reform program is to be successful. In addition to moving forward with military demobilization and administrative reform, this will need to involve further increase in government revenue, improving the efficiency of expenditure, and continuing the reform effort in areas where some progress has been made but much work remains to be done--for example, forestry and financial sector restructuring. Public finances remain fragile. In spite of sustained efforts, preliminary data indicate that revenue in 2000 fell somewhat short of the budget target. The performance of revenue collected on foreign trade was disappointing and this calls for a redoubling of efforts in reforming customs administration. In this context, pre-shipment inspection of imports was reinstituted in October last year, tariff reduction in line with Cambodia's membership in ASEAN's Free Trade Agreement is underway, and the Law on Investment is being revised with a view to rationalizing and streamlining incentive for foreign investors. We trust that the last two regulatory reforms will be implemented promptly, as agreed, and that the reform of customs administration will be stepped up in order to contribute substantially to meeting this year's ambitious revenue target. On the expenditure side, the Government made commendable, if somewhat belated, efforts in order to try to meet the objectives set for in the 2000 budget for the priority social sectors. In this regard it is crucial to improve the budget disbursement profile, as the unpredictable timing of disbursements greatly hampers the effective implementation of social policies. The authorities should now start developing a medium-term expenditure framework based on mutual commitment: on the part of the funding authority to provide the pledged resources in a timely manner, and on the part of the executing agency to use the resources effectively and to achieve the agreed objectives and outputs. This approach has the potential to increase "value for money" of services delivered. Similarly, ex-post financial auditing and procurement control need to be considerably improved.

In a broader spectrum, the booming gambling sector contributes only symbolically to the national budget. It is therefore the donors' recommendation that the long-awaited Law on Gambling be finalized and presented to the National Assembly in the near future. Similarly, there has been recently an upsurge in contracts between the Government and the private sector, in which the former has leased out important public services or public properties in exchange for a portion of the revenue collected. While it can be argued that some of those services cannot yet be carried out effectively by the Government, it is important to scrutinize such deals closely by outside auditors and to ensure that adequate Government revenue directly accrues to the national budget in a transparent manner. In our last meeting in April, I called for the establishment of an "effective, appropriately structured, and independent external" National Audit Authority (NAA) and the appointment of an auditor general. Donors continue to urge the authorities to complete the setting up of the NAA expeditiously, so that this much-needed body can start to work on the many governance issues involved in public resources management.

With regard to the strengthening of the financial system, the donor community has been pleased with the timely fashion in which the relicensing process has been conducted so far and with the setting up of a clearing house for checks denominated in U.S. dollars at the beginning of this year. We trust that the monetary authorities will appoint the liquidators required by the law promptly in order to assure an orderly restructuring process and to protect the rights of depositors.

Finally, I would like to note that timely, accurate, and transparent economic information is essential for conducting macroeconomic policy. In this regard, donors urge the authorities to proceed swiftly with the presentation of a Statistics Law to the National Assembly. We commend the authorities for their acceptance of the publication of the PRGF and interim PRSP documents, thereby demonstrating their confidence in their macroeconomic strategy and their desire for enhanced transparency. I am pleased to inform the audience that the IMF's Resident Office now has a local web site where Government and donor agencies alike will be able to find timely economic information on Cambodia.

Thank you.