Cambodia and the IMF

News Brief: IMF Completes Fourth Review of Cambodia's PRGF Program and Approves US$10.4 Million Credit

Country's Policy Intentions Documents

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Cambodia—Letter of Intent,
Memorandum of Economic and Financial Policies,
and Technical Memorandum of Understanding


December 26, 2001

The following item is a Letter of Intent of the government of Cambodia, which describes the policies that Cambodia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Cambodia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Mr. Horst Köhler
Managing Director
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431

Dear Mr. Köhler:

1. The attached memorandum summarizes key developments during the second year of the PRGF-supported program and sets forth the economic, financial, and poverty alleviation policies that the Royal Government of Cambodia intends to implement in 2002. It also updates the medium-term macroeconomic framework, in light of the recent global downturn. During the first two years of the program macroeconomic stabilization has been strengthened and significant progress has been achieved in key structural reforms, especially banking sector rehabilitation, forestry reform, fiscal restructuring, and preparation of a Governance Action Plan. Growth and inflation performance as well as the fiscal outcome in 2001 have been in line with program targets. All quantitative performance criteria for end-September 2001 were observed as well as the structural performance criteria for the Fourth Review under the PRGF.

2. Despite the anticipated slowdown resulting from the recent deterioration of the international economic environment, growth and inflation prospects in 2002 remain broadly favorable. The 2002 budget framework is consistent with the medium-term fiscal objectives under the PRGF-supported program. The Government has recently launched the first phase of the full military demobilization program. The resulting reduction in defense and security outlays will thus pave the way for further spending toward priority social sectors. Comprehensive reforms in the areas of tax and customs administration and expenditure management will be implemented in 2002. A broad-based reform strategy for the civil service will be initiated in 2002, and financial sector reform will be broadened to include payments system reform and improvements in bank supervision.

3. The Government has recently adopted the Second Socio-Economic Development Plan (SEDP II, 2001-05) that will serve as the foundation for the full PRSP under the leadership of the Council for Social Development (CSD). Taking into account the need to prepare a high quality document through broad consultation between government ministries, and a wide spectrum of development partners, the Government intends to finalize the full PRSP by October 2002.

4. The Government believes that the policies and measures described in the attached memorandum are adequate to achieve the objectives of the program for 2002, and stands ready to take additional measures that may become necessary for this purpose. The Government will consult with the Managing Director, at the initiative of either party, and will provide the IMF with such information as it requests on the progress made in policy implementation and the achievement of program objectives. In any event, Cambodia will conduct with the IMF the next review of the arrangement no later than end-July 2002.

5. In continuing with our policy of transparency, we consent to the publication, including on the IMF's website, of the attached Memorandum of Economic and Financial Policies and the accompanying Executive Board documents prepared by the IMF staff. In addition, we have published the audited accounts of the National Bank of Cambodia for 2000, in compliance with the requirements under the IMF's Safeguard Assessment.

Sincerely yours,

/s/
Keat Chhon
Senior Minister
Ministry of Economy and Finance
   /s/
Chea Chanto
Governor
National Bank of Cambodia


CAMBODIA

Memorandum of Economic and Financial Policies for 2002

December 26, 2001

I. Introduction and Recent Developments

1. The Government's PRGF-supported program aims at sustaining economic growth, reducing poverty, and accelerating economic reconstruction. This memorandum reviews the implementation of the second year-program and sets out policies for the third year. Major strides have been achieved in the first two years of the program and economic performance has met program expectations. Stabilization efforts have been successful, with annual GDP growth averaging 5-6 percent and inflation having remained subdued. At the same time, key structural reforms have been initiated, paving the way for sustained growth over the medium term.

2. Economic developments during the first three quarters of 2001 have generally been favorable, but growth is expected to decline in the fourth quarter, owing to the deterioration in the world economic environment. Garment exports and tourist arrivals increased strongly through September. As a result, real GDP growth for 2001 is projected at 5¼ percent compared to 6 percent previously projected, and inflation is anticipated to remain well below 5 percent. All quantitative performance criteria for end-September 2001 were met, and the structural performance criterion on establishing the large taxpayers unit (LTU) has also been observed. Other key structural measures aimed at fiscal reform, banking restructuring, and sound governance have also been implemented.

3. The implementation of the 2001 budget has been consistent with financing targets under the program. The overall fiscal deficit (excluding grants) will be contained below 5 percent of GDP, while the current surplus will be maintained at 1½ percent of GDP. Government revenue has continued to improve and is budgeted to reach 12 percent of GDP. This largely reflects a boost in domestic tax revenue from additional measures introduced in the second half of the year. The overall revenue performance, however, has been adversely affected by shortfalls in customs revenue compared to budget targets. Overall expenditure has been contained below targets, thus contributing to the avoidance of domestic budget financing. Although progress has been achieved in reorienting government spending away from defense and security, social sector spending has remained short of expectations, reflecting primarily inefficient cash management procedures among line ministries at the national and provincial levels.

4. Monetary developments in 2001 have reflected the improved fiscal position. Broad money is projected to grow by 22 percent in 2001, largely owing to increased foreign currency deposits, while continued fiscal restraint has provided room for private credit to increase by 10 percent. Gross international reserves are expected to reach the equivalent of about 3 months of import coverage at end-2001, as programmed. The market exchange rate has been broadly stable against the U.S. dollar and in real effective terms. Despite the recent deterioration in the outlook for garment exports and tourism receipts, the current account deficit in 2001 (excluding official transfers) is expected to be smaller than previously projected (10 percent of GDP) reflecting the strong performance in the first nine months.

5. Progress has been made in implementing most structural reforms in 2001. Bank restructuring has proceeded as envisaged, with the liquidation of nonviable banks progressing and improved performance of banks operating under Memoranda of Understanding (MOUs). Preparations for payments system reform and a new chart of accounts for banks have also been initiated. A large taxpayer unit (LTU) aimed at strengthening revenue collection was established in October 2001. Actions aimed at strengthening governance are mostly reflected by the adoption of the Governance Action Plan (GAP) and the establishment of the National Audit Authority (NAA) in July 2001. The full military demobilization program was launched in mid-October, financed by domestic resources, the World Bank, and other donors. The automated payroll for the civil service has been completed and a reform strategy is being finalized. A comprehensive Forestry Law was approved by the Council of Ministers and submitted to the National Assembly in August 2001, and a new Land Law was adopted by the National Assembly in October 2001. However, there has been considerable delay in completing the restructuring of forestry concessions, as most concessions have submitted pro forma management plans which do not provide a basis for sustainable operations. There have also been delays in establishing effective operations of the Forestry Crime Monitoring Unit (FCMU), reflecting donor funding problems in the initial stages, and a lack of internal coordination.

II. Macroeconomic and Structural Policies for 2002

6. The macroeconomic outlook for 2002 is expected to be affected by the recent deterioration in the world economic environment. Under the revised macroeconomic framework for 2002, GDP growth is projected to slow down to 4½-5 percent, compared to 6 percent previously envisaged. The anticipated lower economic growth is expected to result from a sharp reduction in the growth of garment exports and tourism earnings. Inflation, however, is expected to remain below 5 percent. 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. The external current account deficit is projected to widen to 11 percent, as against 9¾ percent programmed before the external shock. Also taking into account the deterioration in the international environment, the increase in gross international reserves in 2002 is targeted at $55 million, which would maintain gross reserves at about 3 months of imports.

7. Achieving the revenue target of 13 percent of GDP in 2002 is crucial for meeting expenditure needs. This target is expected to be met through a combination of new revenue measures, and the full-year impact of measures introduced in the second half of 2001. The main new revenue measures in the 2002 budget are described in Annex II. The newly created LTU in conjunction with upgraded auditing will be instrumental in enhancing tax revenue collection in the period ahead. As a first step to strengthen collection enforcement, the LTU will identify the 50 accounts with the largest arrears, investigate relevant information concerning each of these arrears, take corrective actions to begin to collect these arrears by end-May 2002, and prepare a first quarterly report on performance in collecting arrears by end-July 2002. The Tax Department will also review tax legislation to ensure that enabling authority exists to take appropriate collection action. Regarding nontax revenue, an inventory of state assets involving all ministries will be completed by June 2002, and assets will be confiscated from companies with arrears to the government. The government will increase revenue from the tourist sector by modifying the contract for ticket sales at the Angkor monument complex when visitors exceed 200,000, increase the monthly casino royalty and review other aspects of the taxation of casinos, and collect VAT from airport departure fees and other services. The telecommunications contract for the second international gateway will be reviewed by end-December 2001 to ensure appropriate transfer of revenue to the budget, and will be subject to an independent audit in 2002.

8. Strengthening the enforcement capabilities of the Customs and Excise Department (CED) is urgently needed for improving revenue collection. As a first priority, the Government will intensify anti-smuggling efforts by: (i) allocating more resources for the anti-smuggling program; (ii) issuing by end-December 2001 a government decision (through a Prime Ministerial Order) specifying the means for strengthening inter-agency cooperation, and detailing assistance requirements and practical arrangements among the Customs Department, Armed Forces, and Police; (iii) establishing anti-smuggling task forces in several key provinces by end-April 2002; (iv) developing an anti-smuggling strategy targeting key revenue sources, high-risk items, and prime locations by end-April 2002; and (v) expanding the inspection of selected garment factories to assess compliance with exemptions granted under the Law on Investment and prepare a preliminary report of findings by end-April 2002. To complement the limited capabilities of the CED, the government will continue to use the preshipment 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). In this context, the upgrading of revenue analysis and data processing capabilities will be given a high priority. A new Customs Code, complying with WTO requirements, will be submitted to the Council of Ministers by end-March 2002.

9. Amendments to the Law on Investment (LOI) are near finalization. The amended LOI is aimed at establishing a transparent and sound system of incentives for both domestic and foreign investment. The adoption of the amended LOI is critical for allowing the second tranche release of $15 million under the World Bank's Structural Adjustment Credit (SAC). The Government intends to submit the amended LOI to the National Assembly by end-March 2002. Under the LOI amendments, which resulted from broad discussions with the private sector, all qualifying projects will be approved automatically by the Council for the Development of Cambodia (CDC) and incentives for each activity will be specified in the law. Notwithstanding a five-year grandfathering period for investors already in the country, the profit tax rate for investment companies will be unified at the standard rate. The tax exemption on re-invested profits and on repatriation of earnings will be abolished. Investment companies will be allowed to select either the announced tax holiday system or the incentives derived from standard investment allowances and accelerated depreciation that will be reflected in the Law on Taxation.

10. 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) launching 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 will also step up efforts to improve the expenditure process, strengthen procurement practices, and upgrade cash management. In addition, the Government will prepare in 2002 the legal framework required for implementing administrative and financial decentralization in the future.

11. Comprehensive reform of budget and cash management will be implemented in 2002 (see Annex III). 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; (vi) 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.

12. The initial stage of the full military demobilization program is proceeding as planned under a $42 million World Bank and donor-supported program. The discharge of 15,000 soldiers (11½ percent of the military) is expected to be completed by end-2001. An additional 15,000 soldiers will be discharged by end-2002. As a result, defense and security spending is expected to decline to 2¾ percent of GDP in 2002, compared to 3 percent in 2001. The departure package will be jointly financed by the Government, the World Bank, and other donors. The Government is committed to contribute to the departure package as part of a CR 40 billion contingency fund included in the budget.

13. A comprehensive civil service reform, aiming at providing adequate incentives and improving service delivery, will be launched in 2002. The Government's strategy (2002-06) provides for new job classification and compensation system, a major restructuring of the civil service workforce, and is consistent with medium-term fiscal sustainability. The overall wage bill will be contained below 4 percent of GDP, reflecting savings from military demobilization and the removal of about 9,000 irregular cases identified by the computerized payroll. Government employment policy under civil service reform reflects staffing needs in priority sectors, especially education. Accordingly, a net increase of 3,000 civil servants is expected for education in 2002, while staffing in the non-education sector will be reduced by 300, mainly through natural attrition. Further staff reductions through contracting out and privatization will be carried out in 2003, contingent on establishing a donor supported social safety net.

14. The monetary program for 2002 will be consistent with growth and inflation objectives. With improved confidence in the banking system, broad money is expected to rise by 19 percent, reflecting a continuing trend decline in velocity. It is expected that foreign currency deposits will remain the main engine behind broad money growth, while continued fiscal discipline will allow for private sector credit growth of about 13 percent.

15. The flexible exchange rate arrangement will be maintained, with the spread between the official exchange and market rates limited to 1 percent. However, in view of the uncertain economic environment in the period ahead, the Government will proceed gradually toward achieving full unification of the exchange rate. The NBC will adhere to the established intervention policy of using any increased demand for the riel to bolster international reserves and not resisting downward pressure on the exchange rate, except in the event of temporary disorderly market conditions.

16. The Government is committed to pursue further trade liberalization. Trade reform will be implemented in the context of Cambodia's membership in the ASEAN free-trade area (AFTA) and the ongoing accession process to the World Trade Organization (WTO). This effort will entail further rationalization of the tariff structure, and reduction of the maximum and average tariff rates. As part of the Government's poverty reduction strategy, a comprehensive trade strategy is in the process of being formulated with multilateral support under the Integrated Framework (IF) for trade. The strategy, which has been widely discussed during a workshop held in Phnom Penh in November 2001, will be fully reflected in the government's forthcoming Poverty Reduction Strategy Paper (PRSP). With Cambodia's trade and exchange arrangement being free of restrictions on current account transactions, the Government intends to accept the obligations of Article VIII of the IMF's Articles of Agreement by end-2001.

17. The Government has taken steps to advance discussions with the Russian Federation and the United States to resolve outstanding debt issues. In September, an official delegation held discussions with the Russian authorities in Moscow, and also with the Paris Club Secretariat. Scheduled high-level discussions with US officials in Washington in late September, as well as a visit of the Prime Minister to Moscow in early October, were canceled owing to security concerns after September 11. The Government remains fully committed to continue its efforts to resolve outstanding debt issues with the Russian Federation and the United States in good faith, with a view to reaching agreement in 2002. If there is not significant progress in resolving the issue bilaterally, the Government is ready to proceed within the Paris Club framework. Further discussions with these creditors is envisaged in the period immediately ahead. A letter has been sent to the US authorities inviting a delegation to come to Phnom Penh. A letter has also been sent to the Russian authorities indicating the government's willingness to discuss the issue and proposing that a delegation visit Moscow. The Government will continue maintaining a prudent debt management policy, and in this regard, will refrain from contracting or guaranteeing any nonconcessional debt, as defined in the technical memorandum of understanding.

18. The first phase of bank restructuring is proceeding as planned and will be largely completed by end-2001. Since late 1999, five banks have fully met the requirements under the Financial Institutions Law and have been awarded a full banking license. Twelve banks that were insolvent or failed to meet the requirements under the law were closed, and the liquidation (including voluntary liquidation) of 8 of them was completed. For the remaining four banks, judicial liquidation by order of the court has been initiated. Thirteen banks have been given a conditional license to operate under Memoranda of Understanding (MOUs) which include commitments regarding recapitalization and other corrective actions. Most of these banks are expected to fulfill requirements under their MOUs by end-2001, while 3 banks have not made satisfactory progress and are likely to be closed with liquidation procedures initiated in early 2002.

19. The bank supervision department of the NBC will be further strengthened in 2002. The NBC will establish a framework for improved bank supervision, including finalizing a new uniform chart of accounts for the banking system consistent with IAS, and taking into account IMF technical assistance recommendations, by end-July 2002. The adequacy and effectiveness of the existing prudential regulations will also be reviewed and new regulations adopted, if necessary. The role and definition of specialized banks will be clarified and associated regulations reviewed by end-June 2002, taking into consideration the government's medium-term financial sector development strategy. Until then, the NBC will not issue any new licenses for specialized banks.

20. Restructuring of the Foreign Trade Bank (FTB) will proceed to prepare for future privatization. The Ministry of Economy and Finance (MEF) will issue recapitalization bonds by March 2002 to replace bridge financing provided by NBC. In consultation with the external auditor, the FTB will resolve discrepancies in its accounts by end-2001 (if necessary by provisioning against unresolved discrepancies) to allow for the completion of an unqualified audit of the 2001 accounts by end-May 2002. Further to the recent appointment of an outside director to the Executive Board, outside management assistance is expected to be in place by February 2002 to help restructure the bank and initiate privatization through public notification by end-November 2002.

21. Preparations are also underway to further develop the payments system in 2002. To reduce the risks involved in payment and cash settlement, the legal foundation for the payments system needs to be strengthened. As a first step towards establishing a sound market-based system, a Payments Transactions Law, a Law on Bills of Exchange and Promissory Notes, and a Law on Checks and Collection and Payment of Checks will be finalized, taking into account technical assistance from the IMF, and will be submitted to the Council of Ministers by end-May 2002.

22. The Government is taking action to strengthen the implementation of effective forestry reforms. Government efforts continue to be directed at establishing sustainable management practices, improving the monitoring of forestry crimes, and ensuring the full and timely transfer of forestry revenue to the budget. The Forestry Law, which establishes the legal conditions for sound forest resource management has been submitted to the National Assembly and is expected to be adopted in the near future. The issuing of logging permits in 2001 had been restricted with no new logging permits having been granted since mid-August 2001, and no new permits will be granted during the remainder of 2001. To support the need to complete the restructuring of concession agreements in line with sustainable practice, all logging activity will be suspended with effect from January 1, 2002 until concessionaires have submitted management plans and inventory assessments that are fully in line with sustainable practice, as defined in the subdecree on forest concession management. Restructured concession agreements--including adjustments to the royalty system--are expected to be in place by end-September 2002. Efforts are also underway, in consultation with the World Bank and other donors, to address the recent difficulties experienced by the Forest Crime Monitoring Unit (FCMU), including the possibility of strengthening monitoring and reporting responsibilities at the Council of Ministers. To improve the monitoring of logs and help ensure the appropriate transfer of revenue to the budget, a new system of log tracking using electronic monitoring through bar code devices will be developed for implementation by the next logging season (September 2002).

23. The Government is firmly committed to press ahead with the governance and anti-corruption agenda. Broad dissemination of the Governance Action Plan (GAP) among government partners and stakeholders will be launched by end-2001 through a series of workshops, both at the national and local levels. As part of the GAP, and consistent with the administrative reform framework, preparations are underway (with AsDB support) to deconcentrate and devolve decision-making and financial management to provincial and communal authorities. To reflect recent progress in GAP implementation in several areas, and the Government's emphasis on combating corruption and promoting social and economic development, an updated GAP will be prepared ahead of the next Consultative Group Meeting tentatively scheduled for mid-2002. To ensure full operations of the National Audit Authority (NAA), adequate provisions have been contained in the 2002 budget. The NBC will comply with the required actions under the IMF's safeguard assessment, including the publication of the full financial statements and audit report for 2000 in a forthcoming NBC bulletin.

24. Efforts to upgrade social and economic statistics will be intensified in 2002. The Government has obtained support from the IMF to develop a comprehensive statistical framework and broaden data dissemination. A permanent multisector statistics advisor has been assigned in November 2001 to the Ministry of Planning to assist the ministry in the coordination of statistical compilation among government agencies. To provide a consistent framework, and help coordinate donor support, further statistical development is expected to take place in the framework of the IMF's General Data Dissemination System (GDDS). Monthly fiscal data have been recently published in International Finance Statistics (IFS) and annual data will be submitted for publication in the Government Finance Statistics Yearbook in 2002. The NBC will also publish in the near future economic and financial data, as well as banking regulations and studies, in a new monthly bulletin. In compliance with PRSP requirements, significant progress has been made in developing a comprehensive framework for social data.

25. Preparation of the full PRSP has been delayed, but is now being accelerated following the completion of the Socio-Economic Development Plan for 2001-05 (SEDP II). In the meantime, as required under PRSP guidelines, a PRSP preparation status report will be prepared by end-December 2001. The newly created Council for Social Development (CSD), chaired by the Minister of Planning and comprising representatives of eleven ministries and government agencies, will coordinate the preparation of the PRSP through a broad participatory process involving development partners, NGOs, and civil society. The full PRSP is expected to be completed by October 2002.

26. Actions to be taken prior to the IMF Executive Board consideration of the fourth review and performance criteria and benchmarks are shown in Annex I and Tables 12. Quantitative performance criteria for 2002 include: (i) a ceiling on net domestic assets of the NBC; (ii) a ceiling on net bank credit to the government; (iii) a ceiling on net domestic financing of the budget; (iv) a zero ceiling on publicly contracted or guaranteed nonconcessional foreign currency loans; and (v) a floor on net official international reserves of the NBC. Structural performance criteria for 2002 will include: (i) completing the first unqualified audit of the Foreign Trade Bank by end-May 2002; (ii) reducing the number of government accounts by integrating revenue accounts held by line ministries into the National Treasury single account by end-March 2002; and (iii) issuing the final report of the working group on standardized accounting procedures and methodology for the public sector by end-October 2002. The fifth review under the program is expected to be completed by end-July 2002 and will focus primarily on improved revenue mobilization, budget implementation, including military demobilization and civil service reform, forestry and bank reforms, and progress in resolving outstanding external debt issues. The Government requests two disbursements in the third year of the arrangement for the equivalent of SDR 8.357 million and SDR 8.358 million. An extension of the arrangement through February 28, 2003 is also requested in order for the final disbursement to be made.

Actions to be Implemented Prior to Board Presentation of the Fourth PRGF Review

Action

Status

1. Implement remaining tax measures agreed in 2001, including application of tax stamps for cigarettes at the factory level and use of visa stickers

The application of cigarette stamps began on Dec.15, 2001, and the application of visa stickers began on Dec. 26, 2001.

2. Publish the 2000 external audit report of the NBC

The report was published in the NBC monthly bulletin for December 2001.

3. Issue Prakas suspending all logging activity by concessionaires with effect from Jan. 1, 2002 until sustainable management plans have been approved.

The Prakas was issued on Dec. 13, 2001.

4. Issue government decision (by Prime Ministerial Order) specifying the means for strengthening inter-agency cooperation to reduce smuggling, and detailing assistance requirements and practical arrangements among the Customs Department, Ministry of Interior, and Ministry of Defense.

The Prime Ministerial Order was issued on Dec. 19, 2001.

5. Review telecommunications contract for the second international gateway and prepare assessment report to ensure appropriate transfer of revenue to the budget.

The assessment report was completed and signed on Dec. 20, 2001.

6. Submit a PRSP preparation status report to the Bank and the Fund by Dec. 28, 2001.

The status report was approved by the Prime Minister on Dec. 24, 2001, and transmitted to the World Bank and IMF on Dec. 26, 2001.

Cambodia: Main Revenue Measures Affecting the 2002 Budget

I. Revenue Measures Introduced in the Second Half of 2001

  • Increases in selected excise rates in the context of tariff restructuring.

  • Introduction of a tax stamp system for cigarettes.

  • Introduction of stickers for increasing revenue collection from visas.

  • Expansion of VAT coverage to include 150 additional firms.

  • Treating all diesel sales as final sales for VAT purposes.

  • Establishing a Large Taxpayers Unit (LTU).

II. New Revenue Measures Under the 2002 Budget

A. New 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 and Excise Department of all aspects of taxation of motorcycles and motorcycle parts with a view toward subjecting domestically assembled motorcycles to VAT and other taxes specified in the Law on Taxation. A full assessment report will be prepared by end-March 2002.

B. Nontax Measures

  • Intensify efforts to collect arrears on 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, after the threshold of 200,000 tourists is reached.

C. Tax and Customs Administration Improvements

  • Strengthen tax auditing strategy and capabilities.

  • Improve coordination between the Customs (CED) and Tax Departments, especially regarding exchanges of information pertaining to large taxpayers. A Prakas will be issued to clarify reporting relationships between CED and other MEF departments.

  • 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 CED 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.

Cambodia: Main Government Expenditure and Budget Management Measures in 2002

  • Issue Prakas detailing a specific format for cash management procedures as a basis for improving the operations of the Cash Management Unit and establishing better coordination between the National Treasury and the Foreign Currency Unit by end-January 2002.

  • Reduce the number of government deposit accounts by integrating revenue accounts held by line ministries into the Treasury single account by end-March 2002.

  • Provide daily information on transactions in government accounts, and monthly account balances, to the Treasury for all government accounts at the NBC and FTB.

  • Allow tax payments by transfer or check to the Treasury single account with NBC, especially for the large taxpayers.

  • Develop internal auditing capabilities within key spending ministries (i.e., Ministry of Economy and Finance, Education, Health, Agriculture and Rural Development).

  • Strengthen budgetary procedures for the ministries under the Priority Action Program (PAP) to meet the social expenditure targets set forth under the poverty alleviation strategy.

  • Establish a working group in the National Treasury, with assistance from the IMF's resident advisor, to prepare standardized accounting procedures and methodology for the public sector in line with international standards. The final report of the working group would be submitted by end-October 2002.

  • Finalize a revised chart of government accounts meeting international standards, for implementation from January 1, 2003.

  • Enhance budget preparation by improving macroeconomic and budget revenue and expenditure analysis and projections and develop budget programming in a three-year rolling budgetary framework.

Table 1. Cambodia: Quantitative Performance Criteria and Benchmarks,
December 2001–02

  2001
  2002
  End-Dec.   End-Mar.1 End-June End-Sept.1 End-Dec.
 
Est.
 
Program

  (Cumulative change from beginning of year)
Net domestic assets of the central bank
(in billions of riels)2,3
-157   18 -26 -28 -10
             
Net credit to the government from the banking system (in billions of riels)3,4 -53   20 -20 -20 0
             
Net domestic financing of the budget
(in billions of riels)3
0   20 -20 -20 0
             
Contracting or guaranteeing of external debt by the public sector4            
   Up to one-year maturity5  
   1–5 year's maturity  
   Medium-and long-term nonconcessional debt6  
             
External payments arrears 7  
             
  (Cumulative change from beginning of year)
Net official international reserves
(in millions of U.S. dollars)8
56   4 27 36 46
             
  (Cumulative flows from beginning of year)
Memorandum items:            
Foreign currency budget / BOP support
   (in millions of U.S. dollars)
20   0 19 24 29
Total nonproject budget support
   (in billions of riels)
142   0 74 94 137
             
  (Stock at end of period)
Net domestic assets of the central bank
   (in billions of riels)
-1,099   -1,081 -1,125 -1,127 -1,109
Net credit to the government from the banking
   system (in billions of riels)
-49   -29 -69 -69 -49
Net official international reserves
   (in millions of U.S. dollars)
467   471 494 503 512
             
  (At end of period)
Exchange rate (riels per U.S. dollar, end of period) 3,900   3,900 3,900 3,900 3,900

Sources: Data provided by the Cambodian authorities; and Fund staff estimates.           
1Performance criteria.
2Net domestic assets are defined as reserve money minus net foreign assets of the central bank, adjusted for valuation changes arising from the difference between program and actual exchange rates.
3For purposes of verifying compliance with the program, the ceiling for net domestic assets, net credit to the government from the banking system, and net domestic financing of the budget will be adjusted upward (downward) by any shortfall (excess) in external nonproject budget support from the program estimates. The adjustments for shortfalls in nonproject budget support will not exceed $10 million.
4Maturity based on original contract.
5Ceiling applies to amount outstanding. Excludes normal import-related credit and any borrowing associated with debt rescheduling.
6Excludes amounts contracted under the government loan agreement with China dated July 26, 2000 for a maximum loan amount equivalent to $12 million.
7Continuous performance criterion.
8For purposes of verifying compliance with the program, the floor on net official international reserves will be adjusted downward (upward) by any shortfalls (excess) in external nonproject budget support from the program estimates. The adjustments for shortfalls in budget support will not exceed $10 million. Valuation effects on the stock of gold holdings are excluded, and gold holdings in 2001 and 2002 are evaluated at the end-December 2000 and end-2001 gold price, respectively.

Table 2. Cambodia: Structural Policy Actions for 2002
Policy Action Program Monitoring

1. Structural Benchmarks and Performance Criteria to be
    Assessed During the Fifth Review
 
a. ISuspend all logging activity by concessionaires with effect from January 1, 2002 until sustainable management plans have been approved. Structural benchmark (continuous)
b. Issue Prakas detailing a specific format for cash management procedures as a basis for improving the operations of the Cash Management Unit and establishing better coordination between the National Treasury and the Foreign Currency Unit by end-January 2001. Structural benchmark
c. IRevoke banking licenses for banks that have not met the requirements under their MOU, including additional closures if necessary, by end-February 2002. Structural benchmark
d. ISubmit the Payments Transactions Law, the Law on Bills of Exchange, and the Law on Checks and the Collection and
Payment of Checks to the Council of Ministers by end-May 2002.
Structural benchmark
e. IReduce the number of government accounts by integrating revenue accounts held by line ministries (as specified in the Technical Memorandum of Understanding) with the National Treasury single account by end-March 2002. Structural performance criterion
f. ISubmit a new Customs Code (in line with WTO requirements) to the Council of Ministers by end-March 2002. Structural benchmark
g. IComplete an unqualified audit of the 2001 accounts of the
Foreign Trade Bank by end-May 2002.
Structural performance criterion
h. IEstablish anti-smuggling unit in key border provinces with
clear definition of roles and responsibilities by end-April 2002.
Structural benchmark
     
2. Structural Benchmarks and Performance Criteria to be Assessed
    During the Sixth Review
 
a. Identify the 50 largest accounts in the LTU that are in arrears, complete an analysis of the arrears, and establish an action plan with collection targets and reports on performance. The first performance report to be completed by end-July 2002. Structural benchmark
b. Finalize a new chart of accounts for fully licensed commercial banks based on international standards and begin
implementation by end-July 2002.
Structural benchmark
c. Issue final report of the working group in the National Treasury
on standardized accounting procedures and methodology for the public sector in line with international standards by end-October 2002.
Structural performance criterion
d. Implement the next stage of tariff restructuring to reduce the unweighted average rate to below 15 percent by end-September 2002. Structural benchmark
e. Initiate privatization of the Foreign Trade Bank by issuing a
public notice by end-November 2002.
Structural benchmark

CAMBODIA

Technical Memorandum of Understanding

This memorandum sets out the understandings between the Cambodian authorities and the IMF staff regarding the definitions of the quantitative performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF), and the related reporting system of monetary and financial data.

1. Net official international reserves of the National Bank of Cambodia (NIR*) is defined as the unencumbered (i.e., readily available) gross official reserves of the National Bank of Cambodia (NBC) less foreign liabilities of the NBC. Under the program, the floor for NIR* will be: (i) decreased (increased) by the amount of a shortfall (excess) in external nonproject support from program estimates--any downward adjustment would not exceed $10 million; and (ii) decreased by any foreign-currency costs associated with bank restructuring. For purposes of monitoring performance against the program target for NIR, valuation effects on the stock of gold holdings will be excluded, and gold holdings will be evaluated at the gold price in effect on December 31st of the previous year.1 Similarly, the level of foreign assets and liabilities will be evaluated at the U.S. dollar/SDR exchange rate in effect on December 31st of the previous year. NIR* data will be transmitted to the IMF weekly with a lag of no more than one week.

2. Net Domestic Assets of the National Bank of Cambodia (NDA*) are defined as reserve money minus net foreign assets of the NBC, adjusted for valuation changes arising from the difference between the program and the actual exchange rates. Reserve money is defined as the sum of notes and coins issued by the NBC, excluding NBC holdings of currency, and deposits of commercial banks and domestic nongovernmental sectors at the NBC. Reserve money excludes all NBC securities. The program ceilings for NDA* will be adjusted upward (downward) for any shortfall (excess) in nonproject external budgetary support from program estimates--any upward adjustment will not exceed $10 million. The ceilings will also be adjusted upward for costs associated with bank restructuring. NDA* data will be transmitted monthly within four weeks.

3. Net credit to the government from the banking system (NCG) is defined as claims on the general government by the banking system less deposits of the general government with the banking system. General government is defined to include central government, provinces, and communes. The program ceilings for NCG will be adjusted upward (downward) for any shortfall (excess) in nonproject external budgetary support from program estimates--any upward adjustment would not exceed $10 million. NCG data (as reflected in the monetary survey) will be transmitted monthly within four weeks.

4. Net domestic financing of the budget (NDF) is defined as the sum of NCG and any nonbank financing of the general government. The program ceilings for NDF will be adjusted upward (downward) for any shortfall (excess) in nonproject external budgetary support from program assumptions--any upward adjustment would not exceed $10 million. For purposes of program monitoring, actual levels of NDF will not include any flows associated with "outstanding operations" (committed spending that has not yet been executed) or any "exchange rate adjustment" (valuation effects on government deposits from exchange rate fluctuations). Details on all transactions associated with outstanding operations and exchange rate adjustment will be reported at all test dates. For purposes of program monitoring, any accumulation of domestic payments arrears will be included as part of NDF. NDF data (as reflected in the consolidated report on government operations (TOFE) table) will be transmitted monthly within four weeks.

5. The contracting or guaranteeing of external debt by the public sector is defined as foreign currency borrowing contracted or guaranteed by the public sector in Cambodia. Public sector is defined to include the Royal Government of Cambodia, the NBC, publicly-owned enterprises, or any other agency acting on behalf of the government. The program has ceilings for all debt below five years maturity and all nonconcessional debt for maturities beyond five years (both ceilings are set at zero). The coverage of debt includes financial leases and other instruments giving rise to external liabilities on nonconcessional terms.2 Details on any such borrowing should be reported within three weeks. Nonconcessional debt is defined as a debt with a grant element (NPV discount relative to face value) of less than 35 percent, based on the currency- and maturity-specific discount rates reported by the OECD (commercial interest reference rates).

6. External payments arrears are defined as the stock of external arrears on debt contracted or guaranteed by the public sector (as defined above), excluding debts subject to rescheduling or debt forgiveness.

7. Completing an unqualified audit of the 2001 accounts of the Foreign Trade Bank (FTB) (by end-May 2002) will involve resolving discrepancies in FTB's accounts in close consultation with the external auditor and provisioning against unresolved discrepancies.

8. Reducing the number of government accounts by integrating revenue accounts held by line ministries with the National Treasury single account will involve the transfer of funds and closing of the following government accounts: #35.1211-T051 (Civil Aviation); #35.1211-T052 (Ministry of Industry); #35.1211-T053 (Ministry of Posts and Telecommunications); #35.1211-T054 (Department of Forestry and Fisheries); #39.1212-A006 (Ministry of Public Works and Transport); #35.1212-A006 (Ministry of Public Works and Transport); #35.1212-A007 (Ministry of Culture and Fine Arts); #35.1212-A008 (Ministry of Foreign Affairs and International Cooperation).

Summary of data reporting requirements

    (i) Data on daily average selling and buying exchange rates (official and market rates) to be transmitted daily.

    (ii) NIR* to be transmitted weekly with a lag of one week.

    (iii) Monetary survey and consolidated balance sheets of the NBC and commercial banks to be transmitted monthly within four weeks.

    (iv) Consolidated report of government operations (TOFE) to be transmitted monthly within four weeks.

    (v) CPI data to be transmitted monthly within five weeks.

    (vi) Flash report of NBC accounts to be transmitted weekly within one week.

    (vii) Quarterly monitoring reports on banks' under Memoranda of Understanding (MOUs) to be transmitted within one month.

    (viii) Trade data to be transmitted monthly within ten weeks.

    (ix) Any publicly contracted or guaranteed nonconcessional borrowing to be transmitted within three weeks.

    (x) Any external payments arrears to be transmitted monthly within three weeks.

    (xi) The outstanding stock of tax and nontax arrears, and any expenditure arrears, to be transmitted quarterly within four weeks.


1For example, gold holdings in 2002 will be evaluated at the end-December 2001 gold price.
2This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are amounts contracted under the government loan agreement with China, dated July 26, 2000, for a maximum loan amount equivalent to $12 million. For purposes of program monitoring, the ceilings on external debt also exclude normal short-term trade-related credits and any borrowing associated with debt rescheduling.

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