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Press Release No. 99/51
October 22, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves ESAF Arrangement for Cambodia

The International Monetary Fund (IMF) today approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF)1 for Cambodia in an amount equivalent to SDR 58.5 million (about US$81.6 million) to support the government's economic program for 1999-2002. There will be seven disbursements, each in an amount equivalent to SDR 8.357 million (about US$11.7 million). The first disbursement is available immediately; the next disbursement will become available after Cambodia meets the performance criteria for March 2000 and the conditions for the first review. Disbursements during the second and third years of this arrangement shall be subject to phasing, and conditions to be determined following future reviews.

In commenting on the Executive Board's discussion of the request by Cambodia, Stanley Fischer, First Deputy Managing Director of the IMF made the following statement:

"Directors approved an ESAF-supported program with Cambodia. The main goals of the program are to protect macroeconomic stability, rebuild the Cambodian economy, and reduce poverty.

"Directors considered that decisive fiscal reform is the central element in the ESAF reform agenda, and urged the authorities to formulate the 2000 budget in line with the agreed fiscal framework. To improve budgetary management and meet the fiscal objectives, emphasis is being placed on avoiding ad hoc customs duty exemptions, continuing to broaden the tax base, improving customs administration, and strengthening administrative capacity. Furthermore, to address pervasive poverty--a cornerstone of the program--government spending will be re-oriented toward the social sectors by fully implementing the plans for military demobilization and civil service reform, and by improving administrative procedures to meet existing spending targets for the social sectors.

"Directors attached great importance to improving transparency and accountability as well as to adherence to the rule of law. Noting that managing forest resources effectively and transparently is among the most difficult governance issues, Directors encouraged the government to ensure the effectiveness of the Forest Crime Monitoring Unit, to overhaul forest concession management, and to cooperate fully with the World Bank, other multilateral and bilateral donors, and civil society. They urged the authorities to implement strictly the recently approved Financial Institutions Law, starting with subjecting all commercial banks to re-licensing. Directors agreed that, over the medium term, external viability will depend on the sustained implementation of policies, continued donor support, and debt relief on favorable terms.

"Directors concluded that continued improvements in governance and determined implementation of the ESAF program would contribute greatly to rebuilding the economy and reducing widespread poverty," Fischer said.

ANNEX

Background

Under Cambodia's previous ESAF arrangement, covering 1994-97, performance was mixed. Initially under the ESAF-supported program, Cambodia experienced robust economic growth, low inflation, and progress in structural reforms. Performance began to weaken in 1995, however, and the midterm review of the second annual arrangement under the ESAF was not completed. Discussions for a third annual arrangement were concluded, but agreed commitments were not followed through, and the arrangement expired in August 1997. Cambodia's economic performance continued to deteriorate through 1998. The regional financial crisis exacerbated domestic weaknesses, inflation increased, and growth stagnated. Fiscal performance was weak, reflecting revenue shortfalls, lack of foreign budgetary support, and an increase in unproductive spending.

Since the elections for the National Assembly in July1998, Cambodia's political environment has stabilized. A coalition government was formed in late 1998, and the more stable political situation has improved the environment for implementing reforms. The government has publicly committed itself to undertake broad fiscal reform, reduce unproductive spending, and effectively tackle governance issues. Credible actions have been taken over the past year to strengthen budgetary management and governance, while economic developments thus far in 1999 have been favorable. Tourism in the first half of the year increased by 13% compared with the previous year, and has nearly returned to the previous peak levels of 1996. With improved weather conditions, a rebound in the agricultural harvest is also in prospect. Cambodia's rate of economic growth is expected to recover to 4% in 1999. Inflation declined to an annual rate of 3% in August 1999, and is expected to remain below 5% for the year as a whole. The current budget balance is expected to record a surplus of 1.5% of GDP in 1999 (compared to a deficit of 0.5% of GDP in 1998), with the overall deficit declining to 3.5% of GDP from 6% in 1998. The exchange rate and international reserves have been stable, and a further significant increase in garment exports will contain the rise in the external current account deficit to 12% of GDP in 1999. The government's program of structural reforms launched in 1999 has been maintained and extended with specific measures in several key areas.

Medium-Term Strategy

Objectives of the ESAF-supported program are to raise economic growth and per capita income, and reduce poverty. The main challenges are to rebuild the economic infrastructure and strengthen the business environment, while addressing governance problems that impede sustainable development. The ESAF program focuses on major efforts to strengthen revenue to support increased government expenditure; reduce unproductive spending and implement administrative reforms; strengthen public resource management, particularly in forestry; and build the legal framework and economic institutions for the private sector.

Cambodia's medium-term macroeconomic framework for 1999-2002 is aimed at raising economic growth to 6%, lowering inflation to 4%, containing the external current account deficit to 13% of GDP, and increasing gross official reserves to about four months of import coverage. Effectively managing forestry resources is among the most difficult challenges facing the authorities. Measures taken so far have demonstrated the government's commitment to redress past mistakes and move toward an environmentally sustainable policy. In the area of structural reforms, the reform of the banking system will be essential to support development needs. It will be important to use the recently approved Financial Institutions Law to subject all commercial banks to relicensing. The central bank's supervisory capacity also needs to be strengthened.

Cambodia joined the IMF on December 31,1969; its quota2 is SDR 87.50 million (about US$122.1 million). Its outstanding use of IMF financing currently totals SDR 46.17 million (about US$64.4 million).

Cambodia: Selected Economic Indicators, 1995-1999

           
 

1995

1996

1997

1998

1999

         

Proj.

           
 

(Percent change, unless otherwise indicated)

Real economy

         

Real GDP

7.6

7.0

1.0

1.0

4.0

GDP deflator

9.1

7.1

9.2

17.1

6.7

Consumer prices (final quarter-basis)

3.5

9.0

9.1

12.6

5.0

           

Money and credit

         

Broad money (incl. foreign currency deposit)

44.3

40.5

16.6

15.7

16.9

Net credit to government 1/

1.1

-3.1

-8.1

11.7

-4.4

Velocity of money 2/

13.7

10.6

9.7

9.7

8.9

           
 

(In percent of GDP)

Government budget

         

Revenue (incl. capital revenue)

8.9

9.1

9.7

8.7

11.2

of which: tax revenue

6.2

6.5

6.6

6.3

8.0

non-tax revenue

2.6

2.1

3.0

2.1

3.0

Expenditure

16.7

17.5

13.9

14.5

14.5

Current expenditure (cash basis)

9.6

9.9

9.0

8.7

9.5

Capital expenditure

7.1

7.6

5.0

5.8

5.0

Current budget balance (cash basis)

-0.8

-1.2

0.6

-0.3

1.6

Overall budget balance (cash basis)

-7.8

-8.4

-4.3

-5.8

-3.3

Foreign financing

7.8

8.2

4.9

4.7

3.9

Domestic financing

0.0

0.2

-0.7

1.1

-0.5

           

Domestic investment

21.8

25.9

19.0

15.1

18.9

Of which: government investment 3/

7.1

7.6

5.0

5.8

5.0

National saving

4.4

10.2

10.8

6.0

6.6

Of which: government saving

-0.8

-1.2

0.6

-0.3

1.6

           
 

(In millions of U.S. dollars, unless otherwise indicated)

Balance of payments

         

Exports 4/

268

295

534

579

548

Imports 4/

-714

-771

-799

-802

-898

Current account (excl. off. transfers)

-513

-493

-254

-261

-386

(In percent of GDP)

-17.4

-15.7

-8.2

-9.1

-12.3

Capital account

88

123

-46

-38

77

Overall balance

-79

-70

-90

-105

-102

Gross official reserves

182

234

262

390

426

(In months of imports of g & s)

1.5

2.1

2.4

3.6

3.5

(In percent of broad money)

70.8

69.5

85.1

119.9

112.5

Net official reserves

110

164

197

323

355

Debt service 5/

130

145

132

124

132

(In percent of dom. exports of g&s)

32.8

29.5

17.8

16.5

17.7

           

Memorandum items:

         

Exchange rates (riel per dollar, end-of-period)

2,526

2,713

3,460

3,780

.....

Terms of trade (percent change)

.....

-5.1

0.0

3.1

0.4

           

Source: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

           

1/ Change as a percent of beginning period broad money.

2/ Ratio of nominal GDP to average stock of broad money.

3/ Includes externally financed technical assistance for implementation of capital projects.

4/ Excludes re-exports.

5/ In percent of domestic exports of goods and services (after debt relief).


1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5% and are payable over 10 years with a 5 -year grace period.

2A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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