## 1. Fund-Supported Programs, 1993–2003 ## Source details **Canonical URL:** [1. Fund-Supported Programs, 1993–2003](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04324.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04324.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04324.pdf.json) --- ### Introduction and program history - Purpose: assesses Cambodia’s progress in implementing economic stabilization, reconstruction, and reform programs supported by the Fund during 1993–2003 and draws lessons for future Fund involvement. - Fund arrangements since 1993: - A Systemic Transformation Facility (STF) arrangement approved in mid-1993; Cambodia drew only the first of the two STF tranches. - A three-year Enhanced Structural Adjustment Facility arrangement (ESAF-I) in early 1994; the mid-term review of the second annual program under ESAF-I could not be completed and ESAF-I expired. - A three-year ESAF/Poverty Reduction and Growth Facility arrangement (ESAF-II/PRGF) in 1999; completed all six reviews with some delays in structural reforms. - Program aims by period: - STF and ESAF-I: rehabilitation, reconstruction, restoring price stability, basic institutional development; ESAF-I expected to initiate structural reforms supportive of growth, governance, and institutional development. - ESAF-II/PRGF: consolidate stability and develop basis for high and sustained growth to address poverty using the PRSP framework; a comprehensive National Poverty Reduction Strategy (NPRS) developed only in the last part of ESAF-II/PRGF and operationalization still at initial stages. ### Macroeconomic performance and initial conditions - Legacy and pre-program conditions: - Khmer Rouge era (1975–79) destroyed institutions, infrastructure, and domestic currency; post-1979 rebuilding within centrally planned framework with Soviet and CMEA assistance; market-oriented reforms began in 1985–86. - Prior to normalization with the Fund: rapid inflation, exchange rate depreciation, government money creation to finance fiscal deficits, negative real interest rates, low financial intermediation. - Effects of the informal 1992–93 monitoring arrangement: - Anchored monetary stability by strict control of domestic deficit financing. - Required positive real interest rates for riel deposits and limited spread between official and parallel market exchange rates. - Result: money growth dropped sharply, inflation plummeted, depreciation of the riel slowed (temporary early-1993 setbacks due to elections). - Price stability, exchange rate, and growth: - Inflation: dropped to single digit levels in the mid-1990s and remained moderate through the review period, peaking at 13¼ percent in 1998. - Exchange rate: unified under a market-based regime after mid-1993; official reserves grew steadily. - Dollarization increased markedly due to foreign currency inflows and fears of de-monetization. - Real GDP growth: on average robust but volatile and narrowly based; urban growth driven mainly by the garment sector. - Garment exports increased from near-zero in 1994 to almost 40 percent of GDP in 2003, and account for about 85 percent of total exports. - Staff estimates: net trade impact of phasing out Phase IV garment quotas in 2005 could be between 2 to 4 percentage points of GDP. - Rural economy: more than 80 percent of the population lives in rural areas; agricultural output suffered from lack of investment, shortage of land amid population growth, and natural disasters (repeated floods in 2000–02). - Poverty: remained high and pervasive, particularly in rural areas. ### Fiscal policy, revenue, and expenditure management - Fiscal stance and deficits: - Current fiscal deficit shifted gradually from a deficit into a moderate surplus starting in 1998, then declined to near balance in 2003 due to contraction in tourism-related receipts and increased smuggling. - Overall fiscal deficits before grants were indicative targets and broadly consistent with available foreign financing and zero recourse to domestic bank credit, except in 1998 when domestic bank credit was accessed. - Revenues and administration: - Total revenues rose from 4½ percent of GDP in 1992 to 8½ percent in 1994; between 1994 and 2003 total revenues rose by only 2 percentage points of GDP, roughly half of the targeted increase under Fund-supported programs. - Recurrent revenue shortfalls attributed to lack of ownership, frail political will, corruption, and weaknesses in revenue administration. - Problems: delays in implementation of measures due to political pressures; erosion of tax base from ad-hoc exemptions and holidays; nontax revenue losses from opaque contracts and illegal logging. - Revenue administration capacity constraints: low wages, acute shortage of qualified personnel, widespread absenteeism, corruption, inadequate resources; customs faced porous borders, smuggling, and outdated legislation. - Expenditure management and arrears: - Expenditures were compressed below target to meet fiscal and domestic financing goals, often without clear criteria, resulting in payment arrears. - In 2002 current expenditures and operating expenditures were about 1½ and ½ percentage point of GDP lower than envisaged in the ESAF-II/PRGF program. - Social expenditures: 1½ percent of GDP in 1998 (a third of the average for low-income countries), rising to nearly 3 percent of GDP by 2001. - Recorded arrears rose rapidly to about 4¾ percent at end 2003, reflecting pre-2003 election spending pressures; most arrears owed to private sector suppliers, the road maintenance credit and on wages. - Practices such as offsetting arrears against suppliers’ tax liabilities reduced revenue collections and perpetuated expenditure compression and further arrears. - Capital expenditures and aid alignment: - Capital expenditures—mostly donor financed—remained high; alignment with government priorities and implementation capacity was unclear. - Programs did not explicitly analyze medium-term implications of development expenditures on the current budget or quasi-fiscal development expenditures financed outside the budget. ### External financing, aid composition, and debt management - External assistance flows: - Between 1993 and 2003, Cambodia received about US$5 billion in external assistance, equivalent to an average of about 13 percent of GDP annually. - Budgetary assistance averaged about 6 percent of GDP annually, with an average of 1 percent of GDP annually for budgetary support and the rest for project support. - General budgetary support declined to negligible magnitudes by 2000–03 while project support rose. - Only about half of all external financing was channeled through the budget. - Aid composition and sectoral allocation: - Functional classification: about 40 percent of total financial assistance (US$2 billion) spent on free-standing technical cooperation (reportedly mostly to pay foreign experts), and another 40 percent allocated to investment projects. - Economic classification: most aid channeled to education, health, institution building and infrastructure; only about 8 percent of total financial assistance directly allocated to agriculture and rural development despite 80 percent of the poor living in rural areas. - Key debt and financing statistics: - About 80 percent of total external financial support was in the form of grants, although composition changed toward loans in recent years. - Between 1999 and 2003 Cambodia borrowed about $600 million on concessional terms mainly from the World Bank and AsDB. - Cambodia’s external public debt was about 70 percent of GDP at end-2003. - Two-thirds of the external public debt is in arrears mainly to Russia, but also to the United States; the rest is mostly to multilaterals. - Per capita aid averaged of about US$350 since 1993, more than 50 percent above the average for Sub-Saharan countries in Africa. - Need for debt management strategy: - Rising debt levels and slow progress in fiscal sustainability highlight need for a debt management strategy. - Programs called for orderly resolution of public debt with the United States and Russia. - Under ESAF-II/PRGF it was concluded debt would be manageable only if Cambodia were granted rescheduling terms similar to Paris Club Agreement of 1995 (i.e., Naples terms). - Rescheduling terms required to achieve debt sustainability need definition as part of a comprehensive medium-term fiscal sustainability plan. ### Monetary policy, dollarization, and exchange rate regime - Policy framework: - Programs prescribed monetary restraint and exchange rate flexibility; tight limits on bank financing of the deficit and zero net credit to state-owned enterprises. - Monetary policy relied on bank-specific credit targets in absence of indirect instruments; reserve requirements and refinancing facilities adopted but largely ineffective. - Following unification of official and parallel market rates from mid-1990s, official intervention geared toward building international reserves; NBC intervened occasionally to resist disruptive downward pressures. - A currency board arrangement (CBA) was considered in 1998 but judged premature. - First issuance of treasury bills in April 2003, following a promissory note amounting to CR 40 billion in 2002 connected with FTB recapitalization. - Cambodia accepted the obligations of Article VIII, Sections 2, 3, and 4 on January 1, 2002. - Dollarization and currency circulation (exact figures preserved): - Dollarization, measured as the ratio of foreign currency deposits to broad money: - under 1 percent in 1991 - 26 percent in 1992 - over 60 percent in 1996 - plateaued around 70 percent since the Asian financial crisis - Riels in circulation grew from almost 2½ percent of GDP in 1994 to over 5 percent in 2003. - Dollarization limited exchange rate’s role as short-term shock absorber and monetary policy as countercyclical tool; significant unrecorded foreign currency cash in circulation. - De-dollarization considerations: - Measures needed: political stability, require all government domestic transactions be paid in local currency, promote riel-denominated deposits and rural banking services. - IMF multi-country study (IMF WP/98/28) estimated underlying dollarization for Cambodia in 1995–96 at about 65 percent. - Monetary independence and NBC capacity: - Pursuit of flexible exchange rate and progress toward de-dollarization would allow monetary policy independence. - Riel in circulation grew at an average of about 18 percent a year (over 1994–2003), yielding seigniorage to the NBC equivalent to more than 6 percent of government revenues. - Important to enhance NBC capacity to design and conduct monetary policy as demand for riel grows. ### Institutional development, structural reforms, and governance - Fiscal and public financial management: - Key measures: organic budget law (1993), assignment of financial controllers, procurement procedures, and cash budget management system. - Continued weaknesses: fragmented budget department, proliferation of government accounts in NBC, poor budget execution. - Privatization of SOEs largely completed by 1996; divestiture of seven major rubber plantations and the Foreign Trade Bank delayed. - Forestry and natural resources: - Forestry management fell short; illegal logging continued. - Government revenues from forestry averaged less than ½ percent of GDP during 1995–98, compared with estimated revenue losses of about 4 percent of GDP due to inadequate resource pricing. - A sustainable forestry policy was estimated to generate government revenues of about 1–1½ percent of GDP by 2002. - Financial sector: - Reforms established basis for a two-tier banking system and improved bank soundness. - Following closure of 15 banks and FTB recapitalization, capital adequacy reached 50 percent in 2002. - Private sector credit rose from 3½ percent of GDP in 1994 to 8 percent at end 2003, but mostly in foreign currency and trade-related; limited intermediation in rural areas. - Governance, civil service, demobilization: - Governance problems and corruption pervasive. - Since 2001 Governance Action Plan: improvements in forestry management, competitive bidding in some ministries, and establishment of a National Audit Authority (NAA). - Civil service reform: new recruitment rules, census performed, ghost workers eliminated; remunerations remained low; acute staff shortages and absenteeism. - Demobilization: program beset by ghost soldiers/dependents; expenditures declined but remained high; renewed effort began in 2000 but suspended since early 2003 partly because of elections and misprocurement evidence. - Military expenditure in 2001 estimated at 3 percent of GDP. ### Fund–Bank collaboration and technical assistance - Close Fund–Bank policy collaboration; Bank led public sector reform, forestry management, legal reform, governance, and since 2002 public expenditure management. - Technical assistance coordination: - Under STF and ESAF-I: UNDP, AsDB, World Bank, and IMF jointly provided TA to build macroeconomic institutions. - During ESAF-II/PRGF: TCAP coordinated TA of Fund, UNDP, and AsDB on fiscal management and financial sector reform; World Bank complemented on public expenditure management, civil service reform, governance, and poverty reduction. - Since 2000 CG meeting, TA programs discussed with a high-level committee to address duplicative TA and enhance coordination. - Fund TA included support for import tariff reform and WTO accession preparatory work. ### Program conditionality, compliance, and outcomes - Macro objectives broadly met: inflation low, external position strengthened, average growth robust, institutional/structural progress in some areas. - Programs had little impact on reducing poverty, particularly in rural areas. - Compliance: - Cambodia complied with most quantitative performance criteria and benchmarks for STF, first two reviews of ESAF-I, and all reviews under ESAF-II/PRGF. - Compliance stronger in fiscal management and financial sector reform; weaker in civil service reform (80 percent of structural benchmarks not met under ESAF-II/PRGF) and forestry conditionality. - Program design reflections: - Collapse of ESAF-I partly due to government decision not to stop revenue erosion from illegal logging. - Targeted revenue increases under ESAF-II/PRGF were not achieved, limiting social expenditures and causing arrears. - Retrospective measures that could have strengthened program architecture: direct conditionality on revenues, closer monitoring of arrears and a repayment plan, additional conditionality to protect priority expenditures. - Conditionality metrics: - A total of 113 prior actions, performance criteria and structural benchmarks were introduced, most under ESAF-II/PRGF. - Average number of conditions per review declined from 20 under ESAF-I to 12 under ESAF-II/PRGF. ### Lessons for policy and program design (policy recommendations and suggested program elements) - Overarching goal: maintain macroeconomic stability and place the economy on path of high and sustained private sector-led growth to foster human development and reduce poverty. - Fiscal policy (center of strategy): - Strengthen revenue performance, expand tax base, attack tax evasion and smuggling, and revise tax incentives and government concessions. - Strict control of expenditures, timely budget execution to avoid arrears, reduce corruption by upgrading quality and pay of public servants. - Align donors’ assistance with government priorities, enhance the medium-term expenditure framework, and initiate a combined sources budget. - Develop a deficit financing strategy, normalize outstanding external debts on terms consistent with fiscal sustainability, and develop the securities market. - Program fiscal conditionality should target the primary deficit (not the current balance), with an indicative path for the overall deficit consistent with a sustainable public debt path; revenues could be subject to a floor target with contingent measures or projected conservatively with mechanisms to increase expenditures as additional revenues become available. - Agreements should be reached on definition, measurement, and timetable for elimination of expenditure arrears. - Exchange rate and monetary policy: - Maintain a flexible exchange rate policy; limit official intervention to smoothing fluctuations and not resist pressures reflecting fundamental market changes. - Include steps to broaden use of the riel as sole legal tender, provided they do not entail distortionary administrative measures. - Enhance NBC capacity to design and implement monetary policy as de-dollarization progresses. - Public administration and civil service reform (urgent): - Provide revenue-collecting agencies with effective, well-paid, and accountable staff while streamlining the rest of the civil service. - Strengthen the Treasury: accelerate adoption of integrated cash management system and budget accounting policies in line with best practices. - Structural reforms to promote broad-based growth and reduce poverty: - Strengthen land titling procedures, ownership transfer and property rights; audit existing land concessions; upgrade access to markets and infrastructure. - Promote financial market development: strengthen legal framework for contract enforcement and collateral-based borrowing; upgrade corporate accounting and disclosure standards; promote banking services in rural areas. - Create an environment conducive to broad-based private investment: strengthen legal framework, liberalize labor market regulations consistent with WTO accession commitments, and combat corruption. - Immediate TA priorities: - Governance: finalize sustainable forestry plans, improve logging monitoring, adopt and enforce anti-corruption law. - Fiscal: fundamentally strengthen revenue-collecting agencies, review government contract concessions, ensure medium-term expenditure framework includes comprehensive review of current expenditure implications of investment projects. - Civil service: urgently address wage issues and staffing of key agencies. - Resource implications: - NPRS estimates financing requirements in the order of $200 million per year over the next five years. - Fund likely to be asked to provide policy advice, TA, and possibly catalytic financial support; access to be determined by program strength and public debt dynamics. - Graduation from Fund resources is unlikely in the near term; progress toward MDGs, reduced reliance on concessional external resources, and increased policy flexibility should be tests at the approval of each yearly program. ### Main risks to a medium-term program - Lack of political cohesion undermining commitment to reforms. - Insufficient progress in fiscal management, institutions, accountability, transparency, and governance. - Complacency on governance issues and delays in legal and judicial reforms. - A larger and more disruptive-than-anticipated adverse impact from removal of garment quotas. ### Selected measures and outcomes (Box summaries and tax reform highlights) - Box 3 (Measures to Increase and Restructure Revenues, 1993–2002) — selected outcomes: - By 2002: - Trade taxes represented about 35 percent of tax revenues. - Indirect taxes accounted for 55 percent of tax revenues. - Direct taxes accounted for 10 percent of tax revenues. - Cross-country comparisons: Cambodia’s trade tax ratio averaged 2¾ percent of GDP over the review period. - Box 4 (Debt and Fiscal Sustainability) — key statistics (preserved exactly): - External public debt: US$3 billion at end-2003 - External public debt as percent of GDP: about 70 percent - External public debt as percent of revenues (excluding grants): almost 700 percent - Share of external debt in arrears: Two-thirds - Rise in multilateral claims since end-1999: almost US$600 million - Domestic public debt share of total public debt at end-2003: about 5 percent - Cash-basis increase in scheduled debt service after Naples-terms restructuring: about 5-10 percent of projected revenues (excluding grants) - External debt after assumed upfront 70 percent discount on Russian debt: about 350 percent of 2004 revenues (excluding grants) - Public external debt in NPV terms: about 70 percent of exports (net of re-exports and garment imports) - HIPC threshold referenced: 250 percent of revenues - Effect of a 30 percent real depreciation: NPV of debt after restructuring to more than 300 percent of government revenues - Projected loan disbursements under NPRS: averaging US$ 200 million annually over the next five years *Source: IMF staff assessment, Cambodia: Fund-Supported Programs, 1993–2003 (IMF Staff Report excerpt).* ### 1. Fund-Supported Programs, 1993–2003 .......................................................................22 ### 1. Fund-Supported Programs, 1993–2003 ### Introduction - Purpose: assesses Cambodia’s progress in implementing economic stabilization, reconstruction, and reform programs supported by the Fund during 1993–2003 and draws lessons for future Fund involvement. - Fund arrangements since 1993: - A Systemic Transformation Facility (STF) arrangement approved in mid-1993 in support of a program for 1993–94; Cambodia drew only the first of the two STF tranches. - A three-year Enhanced Structural Adjustment Facility arrangement (ESAF-I) in early 1994; the mid-term review of the second annual program under ESAF-I could not be completed and ESAF-I expired. - A three-year ESAF/Poverty Reduction and Growth Facility arrangement (ESAF-II/PRGF) in 1999; completed all six reviews with some delays in structural reforms. - Program aims varied by period: - STF and ESAF-I: rehabilitation, reconstruction, restoring price stability, basic institutional development; ESAF-I expected to initiate structural reforms supportive of growth, governance, and institutional development. - ESAF-II/PRGF: consolidate stability and develop basis for high and sustained growth to address poverty using the PRSP framework; comprehensive National Poverty Reduction Strategy (NPRS) developed only in the last part of ESAF-II/PRGF and operationalization still at initial stages. ### Background and Initial Conditions - Legacy of conflict: - Khmer Rouge regime of 1975–79: population decimation, economy reverted to agrarian barter, industrial base and infrastructure destroyed, social services ceased, banking system and domestic currency abolished. - Post-1979: rebuilding within centrally planned framework with Soviet and CMEA assistance; market-oriented reforms introduced starting in 1985–86. - Prior to normalization with the Fund: waves of rapid inflation and exchange rate depreciation due to government money creation to finance fiscal deficits as external assistance withered; negative real interest rates and low financial intermediation and confidence. - Informal monitoring arrangement (1992–93): - Anchored monetary stability on strict control of domestic deficit financing. - Called for establishment of positive real interest rates for domestic currency bank deposits. - Imposed a limit on the spread between the official exchange rate and the parallel market rate as a step toward a unified flexible exchange rate regime. - Result: money growth dropped sharply, inflation plummeted, depreciation of the riel slowed; temporary setbacks in early 1993 due to election-related uncertainty. ### Experience under STF, ESAF-I, and ESAF-II/PRGF — Macroeconomic Performance - Price stability and growth: - Inflation dropped to single digit levels in the mid-1990s and remained moderate through the review period, peaking at 13¼ percent in 1998. - Following massive devaluations of the riel up to mid-1993, the exchange rate was unified under a market-based regime and remained relatively stable; official reserves grew steadily. - Dollarization increased due to significant foreign currency inflows and fears of de-monetization. - Real GDP growth: on average robust but volatile and narrowly based; urban growth driven mainly by the garment sector. - Garment exports increased from near-zero in 1994 to almost 40 percent of GDP in 2003, and account for about 85 percent of total exports. - Phasing out of Phase IV garment quotas among WTO members in 2005 could create competitive pressures; recent staff estimates indicate the net trade impact could be between 2 to 4 percentage points of GDP. - Rural growth: more than 80 percent of the population lives in rural areas; agricultural output suffered from lack of investment, shortage of land amid population growth, and natural disasters (repeated floods in 2000–02). - Poverty remained high and pervasive, particularly in rural areas (see Annex II). - Institutional progress and limitations: - Improvements: fiscal management and control at central government level; strengthened role of central bank; two-tier banking system. - Privatization of SOEs largely completed by 1996. - Trade liberalization with ASEAN and WTO accession preparations spurred legal reforms (commercial law, civil and criminal codes, intellectual property rights, customs laws, trade-related investment measures). - Weaknesses: civil service remained weak and ineffective; corruption pervasive; slow progress in critical structural areas. ### Main Factors Contributing to Macroeconomic Performance — Fiscal Policy - Role of fiscal policy: - Fiscal policy key to stability; current fiscal deficit shifted gradually from a deficit into a moderate surplus starting in 1998, then declined to near balance in 2003 due to contraction in tourism-related receipts and increased smuggling. - Overall fiscal deficits before grants were indicative targets and broadly consistent with available foreign financing and zero recourse to domestic bank credit, except in 1998 when domestic bank credit was accessed. - Revenues: - Tax and revenue trends: - Total revenues rose from 4½ percent of GDP in 1992 to 8½ percent in 1994; between 1994 and 2003 total revenues rose by only 2 percentage points of GDP, roughly half of the targeted increase under Fund-supported programs. - Recurrent revenue shortfalls due to lack of ownership, frail political will, corruption, and weaknesses in revenue administration. - Specific revenue-related problems: - Delays in implementation and enforcement of measures due to political pressures and erosion of tax base from ad-hoc tax and customs exemptions and holidays. - Nontax revenue affected by lack of transparency, control, and accountability of government contracts (including telecommunications and civil aviation) and income foregone from the forestry sector due to lack of effective forestry management and substantial illegal logging. - Revenue administration problems: low wages, acute shortage of qualified personnel, widespread absenteeism, corruption, inadequate resources and facilities; customs faced porous borders, smuggling, and outdated legislation. - Expenditure management and arrears: - To meet current balance and domestic financing targets given revenue shortfalls, expenditures were compressed below target, often without clear criteria, leading to payment arrears. - Current expenditures, the wage bill, and operating expenditures were kept below target; in 2002 current expenditures and operating expenditures were about 1½ and ½ percentage point of GDP lower than envisaged in the ESAF-II/PRGF program. - From 1998 the government was able to counter some compression of priority expenditures by using space created by declining defense and security expenses and continued nonpayment of debt service on portions of external debt to the United States and Russia. - Social expenditures: 1½ percent of GDP in 1998 (a third of the average for low-income countries), rising to nearly 3 percent of GDP by 2001. - Expenditure arrears: - Arrears have arisen on several occasions; until 2003 budgets did not contain special allocations to pay arrears. - Recorded arrears rose rapidly to about 4¾ percent at end 2003, reflecting pre-2003 election spending pressures. - Most arrears owed to private sector suppliers, the road maintenance credit and on wages. Definitions of arrears vary; figures are indicative only. - Practices such as offsetting arrears against suppliers’ tax liabilities reduced revenue collections and contributed to a cycle of expenditure compression and further arrears. - Capital expenditures and aid alignment: - Capital expenditures—mostly donor financed—remained high; unclear alignment with government priorities, project selection criteria, and government project implementation capacity. - Programs did not explicitly analyze: (i) medium-term implications of development expenditures on the current budget, or (ii) quasi-fiscal development expenditures financed outside the budget that could become budgetary responsibilities. ### Deficit Financing, External Financial Assistance and Debt Management - External assistance and financing flows: - Between 1993 and 2003, Cambodia received about US$5 billion in external assistance, equivalent to an average of about 13 percent of GDP annually. - Of this, budgetary assistance averaged about 6 percent of GDP annually, with an average of 1 percent of GDP annually for budgetary support and the rest for project support. - General budgetary support declined to negligible magnitudes by 2000–03 while project support rose. - Fund financial support was relatively small, but large increases in external financial assistance were generally preceded by approval of Fund programs. - Only about half of all external financing was channeled through the budget. - Composition and effectiveness of aid: - External financial assistance to Cambodia was significantly higher than to other low income countries, but available information does not permit comprehensive analysis of effectiveness and alignment with development priorities. - Functional classification: about 40 percent of total financial assistance ($2 billion) spent on free-standing technical cooperation (reportedly mostly to pay foreign experts), and another 40 percent allocated to investment projects. - Economic classification: most aid channeled to education, health, institution building and infrastructure; only about 8 percent of total financial assistance directly allocated to agriculture and rural development despite 80 percent of the poor living in rural areas. _Source: IMF staff assessment, Cambodia: Fund-Supported Programs, 1993–2003._ ### 14. About 80 percent of total external financial support was in the form of grants, ### _cr04324 - 14. About 80 percent of total external financial support was in the form of grants, ### External financial support and public external debt - About 80 percent of total external financial support was in the form of grants, although the composition changed toward loans in recent years. - Between 1999 and 2003 Cambodia borrowed about $600 million on concessional terms mainly from the World Bank and AsDB. - Cambodia’s external public debt was about 70 percent of GDP at end-2003. - Two-thirds of the external public debt is in arrears mainly to Russia, but also to the United States; the rest is mostly to multilaterals. - Per capita aid averaged of about US$350 since 1993, more than 50 percent above the average for Sub-Saharan countries in Africa. ### Need for a debt management strategy - Rising debt levels and slow progress in ensuring fiscal sustainability highlight the need for a debt management strategy. - Programs called for an orderly resolution of public debt with the United States and Russia. - Under ESAF-II/PRGF it was concluded that debt would be manageable only if Cambodia were granted rescheduling terms similar to those obtained under the Paris Club Agreement of 1995 (i.e., Naples terms). - Difficulties in raising revenues and competing priority expenditures have limited Cambodia’s ability to repay debt. - Rescheduling terms required to achieve debt sustainability need to be defined as part of a comprehensive medium-term plan for fiscal sustainability. ### Monetary and exchange rate policy - Programs prescribed monetary restraint and exchange rate flexibility. - Tight limits on bank financing of the deficit and zero net credit to state-owned enterprises made private sector credit and a build-up in official reserves the major sources of liquidity expansion. - Monetary policy relied on bank-specific credit targets in the absence of indirect policy instruments. - Reserve requirements and refinancing facilities for commercial banks were adopted at the outset of ESAF-I but remained largely ineffective; the absence of government securities limited use of the refinancing facility. - Following effective unification of official and parallel market rates from the mid-1990s, official intervention (particularly under ESAF-II/PRGF) was geared toward building-up international reserves. - The NBC intervened occasionally to resist disruptive downward pressures to avoid adverse inflationary pressures. - The tight domestic credit stance and official intervention contributed to stabilize the riel and lower inflation. - A currency board arrangement (CBA) was considered by staff in 1998 but judged premature given banking system weaknesses and low budgetary revenues. - The first issuance of treasury bills took place in April 2003, following a promissory note amounting to CR 40 billion in 2002 connected with the recapitalization of the Foreign Trade Bank (FTB). - In line with staff recommendations, Cambodia accepted the obligations of Article VIII, Sections 2, 3, and 4 on January 1, 2002. ### Dollarization and currency circulation - Dollarization rose significantly despite low inflation and a stable riel, limiting the exchange rate’s role as a short-term shock absorber and monetary policy as a countercyclical tool. - Dollarization was particularly acute in urban areas, while demand for riel continued to rise steadily mainly in rural areas and for transaction purposes. - Dollarization, measured as the ratio of foreign currency deposits to broad money, soared from under 1 percent in 1991 to 26 percent in 1992, rose rapidly to over 60 percent in 1996, and plateaued around 70 percent since the Asian financial crisis. - There are significant, largely unrecorded, amounts of foreign currency cash in circulation. - Riels in circulation grew from almost 2½ percent of GDP in 1994 to over 5 percent in 2003. ### Institutional development and structural reform - Early efforts focused on building the central institutions of macroeconomic management, particularly the central bank and the ministry of finance. - Key fiscal institutional measures included introduction of an organic budget law (1993), assigning financial controllers to each ministry, defining procurement procedures, and implementing a cash budget management system. - Fiscal management continued to suffer from fragmented budget department, proliferation of government accounts in the NBC, and poor budget execution. - Fiscal area: - Some progress in privatizing state owned enterprises (SOEs) and reforming forestry sector management. - Divestiture of seven major rubber plantations and the Foreign Trade Bank were delayed; little progress in privatizing small enterprises. - Forestry management did not reach desired efficiency; illegal logging continued; sector contribution to the budget was well below its notional fiscal incidence. - During 1995–98, government revenues from forestry averaged less than ½ percent of GDP, compared with estimated revenue losses of about 4 percent of GDP due to inadequate resource pricing. - A sustainable forestry policy was estimated to generate government revenues of about 1–1½ percent of GDP by 2002. - Financial area: - Reforms established the basis for a two-tier banking system, strengthened banking soundness, and introduced comprehensive regulatory and supervisory regime. - Key bank soundness indicators improved visibly. - Following the closure of 15 banks and recapitalization of FTB, capital adequacy reached 50 percent in 2002. - Private sector credit in percent of GDP rose from 3½ percent in 1994 to 8 percent at end 2003, but was mostly in foreign currency and trade-related; financial intermediation remained very limited, especially in rural areas. - Governance, civil service, and demobilization: - Only limited progress on improving governance, civil service reform, and demobilization. - Governance problems and corruption were pervasive, with examples from ad-hoc exemptions of tax and customs laws to ineffective forestry management. - Since adoption of a more systematic Governance Action Plan in 2001, progress included: (1) improving forestry management; (2) introducing competitive bidding for government contracts at line ministries; and (3) establishing a National Audit Authority (NAA). - Further progress depends on civil service reform and legal reform (adoption of civil and penal codes, and an anti-corruption law). - Civil service reform: new recruitment rules implemented, a census carried out, ghost workers eliminated; civil service remunerations remained low; acute shortage of qualified personnel and widespread absenteeism. - In 2002, the government committed to develop a pay and employment program; the World Bank provided full funding but progress was minimal. - Demobilization: program beset by ghost soldiers and dependents; related budgetary expenditures started to decline but remained high by international standards; renewed effort began in 2000 but was suspended since early 2003 partly because of elections and evidence of misprocurement on a contract. - By 2001 Cambodia’s military expenditure was estimated at 3 percent of GDP. ### Fund–Bank collaboration and technical assistance - Fund-Bank collaboration on policy advice was generally close; the Bank took the lead on public sector reform, forestry management, legal reform, governance, and since 2002 on public expenditure management. - Specific recommendations in these areas became structural performance criteria or benchmarks; Bank structural conditionality complemented Fund-supported program conditionality. - Division of responsibilities was broadly clear; some contradictory advice in fiscal institutional area was resolved by enhancing communication, sharing work plans and terms of reference, and agreeing joint support. - Coordination of technical assistance (TA) involved multiple multilateral agencies. - Under STF and ESAF-I, UNDP, AsDB, World Bank, and IMF jointly provided TA to build central macroeconomic institutions. - During ESAF-II/PRGF, the technical assistance and cooperation action plan (TCAP) coordinated TA of the Fund, UNDP, and AsDB on fiscal management and financial sector reform; the World Bank provided complementary TA on public expenditure management, civil service reform, governance, and poverty reduction. - Since the 2000 CG meeting, all TA programs have been discussed with an official high-level committee to address complaints about overwhelming and occasionally duplicative TA, meeting donors’ calls for greater accountability and enhanced coordination to ensure ownership and prioritization. - Fund technical assistance on fiscal management included support for reform of import tariffs and preparatory work for accession to the WTO. ### Evaluation of program conditionality and compliance - Macro-economic objectives of the programs were broadly met: inflation reined in and low, external position strengthened, growth on average robust, progress on institutions and structural reforms in some areas. - Foundations for sustainable growth and poverty reduction remain fragile; programs had little impact on reducing poverty, particularly in rural areas. - Cambodia complied with most quantitative performance criteria and benchmarks for STF, first two reviews of ESAF-I, and all reviews under ESAF-II/PRGF. - Persistent fiscal pressures resulted from chronic revenue underperformance and difficulties compressing non-priority expenditures (notably military outlays until ESAF-II/PRGF and World Bank SAC). - Collapse of ESAF-I was partly caused by government decision not to introduce measures to stop significant revenue erosion due to illegal logging. - Targeted increases in fiscal revenues under ESAF-II/PRGF were not achieved, limiting funds for social expenditures, causing accumulation of expenditure arrears in critical areas, and compromising fiscal sustainability. - In retrospect, measures that could have strengthened program architecture include: direct conditionality on revenues, closer monitoring of arrears and a repayment plan, and additional conditionality to protect priority expenditures—though compliance ultimately depended on government will. - Structural conditionality covered a wide range reflecting Cambodia’s needs and was streamlined over time; core conditions related to fiscal management and financial sector reform. - A total of 113 prior actions, performance criteria and structural benchmarks were introduced, most under ESAF-II/PRGF. - Average number of conditions per review declined from 20 under ESAF-I to 12 under ESAF-II/PRGF. - Compliance tended to be better in fiscal management and financial sector reform; by contrast, 80 percent of structural benchmarks in civil service reform under ESAF-II/PRGF were not met. - Compliance with forestry conditionality remained a problem; the only structural performance criterion on forestry concessions under ESAF-II/PRGF was converted into a benchmark in 2001, and Cambodia complied with Bank conditionality on forestry only after ESAF-II/PRGF had expired. - Prior actions increased between ESAF-I and ESAF-II/PRGF, mainly in the fiscal area (from one in ESAF-I to nine in ESAF-II/PRGF), but their impact was generally transitory as revenue shortfalls followed. ### Lessons for policy and program design - Long-term Fund engagement was needed due to the evolving role of the Fund for low income countries and Cambodia’s changing transition from postconflict to market economy needs. - Achieving fiscal sustainability, enhanced governance, and successful implementation of development and poverty reduction agenda will require significant efforts and political determination. - Fiscal policy lessons: - Revenue mobilization received great attention in program design, but key expenditure priorities should have been better sheltered from compression during revenue shortfalls. - The tax structure appears broadly adequate; problems in mobilizing revenue stem more from compliance and self-inflicted reductions in the tax base. - Future revenue-enhancing efforts require strong political support and should focus on enhancing governance and transparency in revenue collection bodies and decision-making on exemptions, tax holidays, and contract concessions. - Expenditure management remains weak, as evidenced by rising arrears and the inappropriate practice of offsetting them against tax liabilities. - The medium term expenditure framework should better incorporate medium-term implications on current expenditure of high levels of aid-financed development expenditures. - A short term deficit financing strategy needs development to support day-to-day expenditure management. - Efforts to normalize relations with foreign creditors should seek the most favorable terms within a medium-term fiscal sustainability context that assigns expenditure priorities and is based on realistic revenue projections. - Progress in raising outlays for social priority expenditures (health, education, and rural development) has been supported by the PRSP process; implementation through the MET and budget requires adequate costing of measures and a transparent consultative mechanism to adjust social spending priorities annually in line with needs and funds. - The absence of a combined-sources development expenditure plan is conspicuous and needs to be addressed with donors; collecting information on quasi-public investments supported outside the budget is essential because they could eventually revert to the government. *Source: _cr04324 - 14. About 80 percent of total external financial support was in the form of grants,* ### 29. Reliance on a flexible exchange rate and a firm control over domestic credit ### 29. Reliance on a flexible exchange rate and a firm control over domestic credit ### Flexible exchange rate and official foreign exchange intervention - Official intervention in the foreign exchange market should be limited to smoothing fluctuations. - The authorities should not resist pressures on the exchange rate that reflect fundamental changes in underlying market conditions. - While acknowledging dollarization's limitations on the short-term impact of exchange-rate changes, a flexible exchange rate should be maintained. ### De-dollarization: measures and considerations - De-dollarization requires: - Maintaining political stability as the ultimate anchor of confidence in the riel. - Addressing the lingering trauma of demonetization, including by requiring that all government domestic transactions be paid in local currency. - Promoting the supply of basic banking services to rural areas by offering high-yield riel denominated deposits and facilitating access to credit. - It is important to research further what other factors influence Cambodian investors to hold most of their financial portfolios in foreign currency. - Empirical note: A Fund multi-country study (IMF WP/98/28) estimated underlying dollarization for Cambodia in 1995–96 at about 65 percent, close to measured dollarization; results for shorter and more recent periods are sensitive to the measures used. ### Monetary policy independence and central bank capacity - Pursuit of a flexible exchange rate combined with progress toward de-dollarization would allow monetary policy to be conducted independently. - Monetary policy could, over time, complement fiscal policy in addressing unanticipated short-term shocks. - Riel in circulation grew at an average of about 18 percent a year (over 1994–2003), yielding significant seigniorage to the NBC equivalent to more than 6 percent of government revenues. - With growing demand for the riel, it is important to continue enhancing NBC’s capacity to design and conduct monetary policy. ### Institutional and structural reform priorities - Institutional weaknesses undermining macroeconomic policy implementation and social service delivery: - Limited progress in strengthening budgetary processes. - Delays in civil service reform. - Insufficient progress in combating corruption. - Implementation gaps persist despite plans, drafted regulations, and significant technical assistance; need to break reform plans into manageable steps and emphasize knowledge transfer. - Financial sector reform experience indicates a sound banking system alone is insufficient to promote financial intermediation and growth; further development and enforcement of an adequate legal framework is required. - Agricultural and rural development lag has hampered poverty reduction; rural population accounts for 90 percent of Cambodia’s poor. - Private sector-led growth has been robust but concentrated in the export-oriented textile sector; structural impediments to broad-based growth include weaknesses in governance, an inadequate and poorly enforced legal framework, and a limited supply of skilled workers. ### Bank-Fund collaboration and immediate technical assistance needs - Intense Bank-Fund collaboration will continue to be necessary; success of future programs depends on substantive inputs from multilateral donors, in particular the Bank. - With TA becoming more selective and focused on know-how transfer, collaboration must be strengthened and preparation of specific action plans expedited in governance, civil service reform, and fiscal management. - Immediate assistance needs: - Governance: finalize plans for sustainable forestry, improve monitoring of logging, adopt and enforce an anti-corruption law. - Fiscal: fundamentally strengthen revenue-collecting agencies; review government contract concessions to the private sector; ensure the medium-term expenditure framework includes a comprehensive review of current expenditure implications of government- and donor-financed investment projects. - Civil service: urgently address wage issues and staffing of key agencies. ### Strategy implications for future Fund relations - Financing requirements for Cambodia’s development and poverty reduction agenda are likely to be high; NPRS estimates are in the order of $200 million per year over the next five years. - The Fund is likely to be asked to provide policy advice, technical assistance, and possibly catalytic financial support to: - Implement the unfinished poverty reduction agenda. - Help confront the likely adverse impact of the imminent elimination of the garment quotas. - A medium-term strategy supported by a successor arrangement could meet these needs, with access to be determined by program strength and public debt dynamics. - Graduation from Fund resources is unlikely in the near term; progress toward MDGs, reduced reliance on concessional external resources, and increased policy flexibility should be tests at the approval of each yearly program. ### Suggested program elements and policy strategy - Goals: Maintain macroeconomic stability and place the economy on a path of high and sustained private sector-led growth to foster human development and reduce poverty. - Fiscal policy (center of strategy) should emphasize: - Strengthening revenue performance, expanding the tax base, attacking tax evasion and smuggling, and revising tax incentives and government concessions. - Strict control of expenditures, timely budget execution to avoid arrears, and reducing corruption by upgrading quality and pay of public servants. - Aligning donors’ assistance priorities with government priorities, enhancing the medium-term expenditure framework, and initiating a combined sources budget. - Developing a deficit financing strategy, normalizing outstanding external debts on terms consistent with fiscal sustainability, and developing the securities market. - Program fiscal conditionality should target the primary deficit (not the current balance), with an indicative path for the overall deficit consistent with a sustainable public debt path; revenues could be subject to a floor target with contingent measures, or projected conservatively with mechanisms to increase expenditures as additional revenues become available. Agreements should be reached on definition, measurement, and timetable for elimination of expenditure arrears. - Exchange rate and monetary policy: - Maintain a flexible exchange rate policy. - Include steps to broaden the use of the riel as the sole legal tender, provided they do not entail distortionary administrative measures. - Contain steps to enhance NBC’s capacity to design and implement monetary policy as de-dollarization progresses. - Public administration reform (urgent, sectoral focus): - Provide revenue-collecting agencies with effective, well-paid, and accountable staff while continuing to streamline the rest of the civil service. - Strengthen the Treasury by accelerating adoption of an integrated cash management system and budget accounting policies in line with best practices. - Other structural reforms to promote broad-based growth and reduce poverty: - Strengthen land titling procedures, ownership transfer and property rights; audit existing land concessions; upgrade access to markets and infrastructure. - Promote financial market development: strengthen legal framework for contract enforcement and collateral-based borrowing; upgrade corporate accounting and disclosure standards; promote banking services in rural areas. - Create an environment conducive to broad-based private sector investment: strengthen legal framework, liberalize labor market regulations consistent with WTO accession commitments, and combat corruption. ### Main risks to a medium-term program - Lack of political cohesion undermining commitment to reforms and adversely influencing economic conditions and outlook. - Insufficient progress in fiscal management, fiscal institutions, accountability, transparency and governance, and a continued lack of policy options to address shocks. - Complacency on governance issues and delays in implementing legal and judicial reforms. - A larger and more disruptive-than-anticipated adverse impact from removal of garment quotas. *IMF Staff Report excerpt (chapter section provided).* ### Box 3. Cambodia: Measures to Increase and Restructure Revenues, 1993–2002 ### Box 3. Cambodia: Measures to Increase and Restructure Revenues, 1993–2002 ### Tax Measures - Trade: - Switching from specific to ad valorem tax rates for the consumption tax on imports (1993). - Rationalizing the tariff structure (1993). - Imposing a tax on car imports. - Imposing a 10 percent export tax on rubber (1995). - Tariff bands reduced from 12 to 4, lowering the maximum tariff to 35 percent, and adjusting excises (2001). - Reducing ad hoc tax and customs exemptions. - Consumption: - Increasing petroleum duties from 8–10 percent to 20 percent (1993), and from 20 percent to 35 percent (1994). - Increasing the turnover tax from 1–2 percent to 4 percent (1996). - Imposing an export tax at 10 percent, and a reforestation tax. - Services: - 10 percent hotel room tax extended to other hotel services. - Tax on rents extended to domestic residents. - 10 percent tax on entertainment services (2001). - VAT: - Introduced in connection with the Law on Taxation. - Coverage expanded to include more firms in 2001, and diesel purchases treated as final sales starting 2001. - Excises: - Introducing 10 percent excise on selected goods (1995). - Excise on gasoline increased to 20 percent (1996) and further in 2002, with an increase for beer. - Income: - Wage tax imposed on monthly salaries exceeding US$200 at rates of 10–40 percent. - Law on Investment amended (2003) to eliminate certain exemptions and make procedures more transparent. ### Nontax Measures - Imposing a tax on construction permits (1993). - Introducing permit fees for casinos. - Increasing fees and royalty payments from tourist service providers. - Implementing the timber royalty US$14/m3 to US$54/m3 (1999). - Introducing a system of stamps for taxing cigarettes (2001). ### Administrative Measures - Improving the capacity for tax auditing and to collect tax arrears. - Establishing a large tax payers unit. - Clarification of customs codes and legislation. - Simplification of customs procedures. - Automation of duty calculation. - Regular rotation and professional training of customs officers. - Strengthening incentives and discipline for tax and customs officers. - Implementing preshipment inspection. - Intensive efforts to collect revenue from the telecommunications and civil aviation companies. - Urging line ministries to transfer revenue to the Treasury. ### Outcomes, Comparisons, and Remaining Issues - The reforms made the tax system more neutral, efficient, and equitable, and more revenue productive and elastic, and less dependent on trade taxes. - By 2002: - Trade taxes represented about 35 percent of tax revenues. - Indirect taxes accounted for 55 percent of tax revenues. - Direct taxes accounted for 10 percent of tax revenues. - Cross-country comparisons and structural imbalances: - Cambodia’s tax structure relies more on trade taxes than a group of selected Southeast Asian countries. - The average trade tax ratio of 2¾ percent of GDP over the review period was more than twice that of Lao PDR and 1 percentage point of GDP higher than that of Thailand. - The share of direct taxes is about 3 to 7 times lower than that for Lao PDR, Thailand, and Vietnam, reflecting generous investment tax concessions and low salaries for civil servants. - The share of excises in total taxes is significantly less than in these other countries. - Continued widespread use of tax holidays and other tax exemptions has narrowed the income tax base. *Box 3. Cambodia: Measures to Increase and Restructure Revenues, 1993–2002* ### Box 4. Cambodia: Debt and Fiscal Sustainability ### Box 4. Cambodia: Debt and Fiscal Sustainability ### External and domestic debt stock and composition - External public debt totaled US$3 billion at end-2003, or about 70 percent of GDP and almost 700 percent of revenues (excluding grants). - Two-thirds of external public debt continue to be in arrears (mainly to Russia, but also to the United States), despite repeated efforts at regularization. - The remainder of external debt is owed mainly to multilateral institutions, whose claims on Cambodia have risen by almost US$600 million since end-1999. - Domestic public debt accounted for about 5 percent of total public debt at end-2003. ### Critical considerations for debt sustainability - Liquidity: - If a debt restructuring agreement on Naples terms is reached with Russia and the United States, Cambodia’s scheduled debt service would decrease on an accrual basis, but increase on a cash basis by about 5-10 percent of projected revenues (excluding grants), implying a significant additional demand on public resources. - Debt overhang: - Even after the assumed upfront 70 percent discount on Russian debt and concessional rescheduling, external debt would still be equivalent to about 350 percent of 2004 revenues (excluding grants), provided revenue targets for the year are met. - In net present value terms, public external debt would be equivalent to about 70 percent of exports (net of re-exports and garment imports), and not much below the HIPC threshold of 250 percent of revenues. - Concerns about fiscal sustainability may thus persist and possibly deter private capital needed for reducing Cambodia’s reliance on international aid over the long term. - Vulnerability to shocks: - A real exchange rate depreciation, a decline in revenues, or a decline in GDP could severely worsen the NPV of debt-to-revenues ratio and exacerbate liquidity problems. - For instance, a 30 percent real depreciation would increase the NPV of debt after restructuring to more than 300 percent of government revenues. - Dependence on foreign project financing: - Continued heavy reliance on multilateral loans implies that debt ratios would remain high, even if bilateral debt were to be gradually amortized. - External financing requirement under the NPRS includes projected loan disbursements averaging US$ 200 million annually over the next five years. ### Implications and policy considerations - The need to reduce the public external debt burden should be considered within a comprehensive assessment of factors affecting fiscal sustainability, including: - possible future economic shocks; - increases in social-priority outlays; - implementation of non-priority expenditure cuts; and - revenue-enhancing measures. - In the absence of a credible medium-term fiscal plan, it is not clear what debt rescheduling terms would be appropriate for Cambodia. ### Key statistics (preserved exactly as presented) - External public debt: US$3 billion at end-2003 - External public debt as percent of GDP: about 70 percent - External public debt as percent of revenues (excluding grants): almost 700 percent - Share of external debt in arrears: Two-thirds - Rise in multilateral claims since end-1999: almost US$600 million - Domestic public debt share of total public debt at end-2003: about 5 percent - Cash-basis increase in scheduled debt service after Naples-terms restructuring: about 5-10 percent of projected revenues (excluding grants) - External debt after assumed upfront 70 percent discount on Russian debt: about 350 percent of 2004 revenues (excluding grants) - Public external debt in NPV terms: about 70 percent of exports (net of re-exports and garment imports) - HIPC threshold referenced: 250 percent of revenues - Effect of a 30 percent real depreciation: NPV of debt after restructuring to more than 300 percent of government revenues - Projected loan disbursements under NPRS: averaging US$ 200 million annually over the next five years *IMF staff box: "Box 4. Cambodia: Debt and Fiscal Sustainability"* ### 1. STF (1993–94) ### 1. STF (1993–94) ### Fiscal management - Introduce new budget nomenclature and accounting procedures (December 1993). - Benchmark: Met. ### Financial sector - Introduce reserve requirements for commercial bank deposits (December 1993). - Benchmark: Met. - Centralize management of official foreign reserves at the National Bank of Cambodia. - Benchmark: Not met, contingent upon delivery of technical assistance; performance criterion under first ESAF arrangement. - Maintain the interest rate provided under the three-month riel deposit scheme positive in real terms. - Benchmark: Met. ### External sector - Maintain the spread between the official and parallel market exchange rates, averaged over any two-week period, within the margin of 5 percent through December 1993 and within 3 percent through June 1994. - Benchmark: Met. ### 2. ESAF-I (1994–97) ### Fiscal management - Formulate the 1994 budget. - Prior action: Conduct mid-term budget review (August 1994). Benchmark: Met. - Formulate medium-term tax reform plan (December 1994). - Benchmark: Met with delays; outline of reform plans presented in MEFP of August 1995. - Formulate budget for 1995 consistent with program targets (December 1994). - Benchmark: Met. - Formulate budget for 1996 consistent with program targets (December 1995). - Benchmark: Met. - Issue decree announcing competitive bidding for government projects and contracts (September 1995). - Benchmark: Met. - Enact harmonization of excise duty rates (September 1995). - Performance criterion: Met. - Assign financial controllers to each ministry (October 1995). - Benchmark: Met with significant delays. - Institute a direct payments system by the Treasury for procurement over a specified amount by the 5 largest spending ministries (October 1995). - Benchmark: Partially met with significant delays. ### Financial sector - Present new central bank law to parliament to strengthen central bank independence and limit central bank credit to Government (June 1994). - Benchmark: Met, but law was pending approval. - Centralize official foreign reserve management in the National Bank (June 1994). - Performance criterion: Partially met with delays; working group set up to review all public sector foreign exchange accounts. - Clarify status of Foreign Trade Bank with view to privatization (December 1994). - Benchmark: Met; privatization options under consideration in mid-1995. - National Bank circular specifying only minimum deposit rates (June 1994). - Benchmark: Met. - Establish credit window at National Bank (June 1994). - Benchmark: Met. - Maintain positive real interest rates on riel deposits (throughout 1994). - Benchmark: Met. - Define and introduce foreign exchange exposure limits on banks and design prudential ratios to be observed by banks (December 1994). - Benchmark: Met with delays. - Enact the central bank law (September 1995). - Benchmark: Met with minor delays. - Present draft commercial bank law to National Assembly (December 1995). - Benchmark: Met with significant delays. - Complete the shift to the new plan of accounts for the National Bank, and establish a profit and loss statement on that basis (December 1995). - Performance criterion: Met. - Privatize the Foreign Trade Bank and the Municipality Bank (June 1996). - Benchmark: Not met, but protracted process underway. ### External sector - Unify the exchange rate system. - Prior action: Introduce new foreign exchange law (June 1994). Benchmark: Met with significant delays; in mid 1995 only draft under consideration. - Eliminate ban on rice exports (December 1994). - Performance criterion: Met with minor delays. - Introduce new foreign investment legislation (June 1994). - Benchmark: Met with minor delays. - Eliminate external arrears to official creditors (November 1994). - Benchmark: Met with significant delays; discussions with creditors ongoing in mid-1995. - Nonaccumulation of new external payments arrears. - Performance criterion: Met. - Establish a system for regular reporting and monitoring for foreign investment inflows (December 1995). - Performance criterion: Partially met, but monitoring system incomplete. ### Civil service reform - Formulate civil service reform program (June 1994). - Benchmark: Met with significant delays, in part contingent upon TA provided by UNDP. - Announce new rules and conditions for entry in the civil service (July 1994). - Benchmark: Met with delays. - End automatic civil service recruitment of high school graduates (July 1994). - Benchmark: Met. - Keep number of civil servants at or below 143,855 (throughout 1995). - Benchmark: Not met. - Avoid increase in civil service wage rates (throughout 1995). - Benchmark: Benchmark not well defined; salaries of top officials raised, benefits adjusted for rice prices. - Develop a plan to increase the efficiency of the military service (March 1996). - Benchmark: Met. ### Public enterprise reform - Formulate privatization strategy with timetable for privatization of SOEs during 1995 and 1996 (September 1994). - Performance criterion: Met. - Clear cross-debts among the SOEs and the Government (March 1994). - Benchmark: Partially met; cross debt cleared with significant delays. - Offer the trading company, KAMPEXIM, and the petroleum distribution company, CKC, for sale (December 1995). - Benchmark: Partially met; considerations on KAMPEXIM by Council of Ministers ongoing. - Announce timetable for privatization of additional SOEs during 1995, and finalize list of firms to be privatized (September 1995). - Benchmark: Met with significant delays; list approved by Council of Ministers in July 1996. ### Legal reform - Present commercial code to the National Assembly (June 1994). - Benchmark: Approval by National Assembly subject to significant delays. ### Environmental management - Prepare and publish a revised forest management code (December 1995). - Benchmark: Met with significant delays with submission to National Assembly in October 1996. However, the second annual ESAF review was never completed and the ESAF expired in 1997 due to protracted governance problems in forestry. ### 3. ESAF-II/PRGF (1999–2002) ### Fiscal management - Rigorously implement timber royalties of $54 per cubic meter. - Prior action. - Full and timely transfer to the budget of garment quota management fees and all revenue from quota auctions, and the use of this transfer to reduce the government's net debt to the NBC. - Prior action. - Meeting monthly targets for revenue and expenditure for June-August 1999 including for defense and priority spending, as agreed with the Fund staff. - Prior action. - Continue to strictly avoid ad hoc exemptions, unify customs duty on cigarette imports, and launch an open tender for PSI service provider. - Prior action. - No ad hoc tax exemptions to be granted any time during the program period. - Benchmark: Met; remaining exemptions limited to those specified under Investment Law and duty free shops in border regions. - Submission of the 2001 budget to the National Assembly according to the agreed framework and with the tariff reforms and new tax measures as described in the MEFP. - Prior action. - Timely transfer to the budget of revenue from ticket sales at the Angkor Temple Complex according to the terms of the revised contract of September 1, 2000. - Prior action. - Implement several of the other tax measures as specified in Annex I, including: (i) treatment of diesel sales as final for VAT purposes; (ii) improved monitoring of visas (visa sticker); and (iii) additional adjustment in selected excise rates. - Prior action. - Establish large taxpayers unit, with the possibility of direct payment by check or transfer into National Treasury accounts at the NBC for the largest taxpayers (October 2001). - Performance criterion: Met. - Submit the 2002 budget to the National Assembly (November 2001) according to the agreed framework, and with new tax measures (from the options recommended by FAD) and legal authorization for the issuance of FTB recapitalization bonds. - Benchmark: Met with minor delays. - Implement remaining tax measures agreed in 2001, including application of tax stamps for cigarettes at the factory level and use of visa stickers. - Prior action. - Review telecommunications contract for the second international gateway and prepare assessment report to ensure appropriate transfer of revenue to the budget. - Prior action. - 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 (January 2001). - Benchmark: Met. - Submit the Law on Negotiable Instruments and Payments Transactions to the Council of Ministers (May 2002). - Benchmark: Met with minor delays. - Reduce the number of government accounts by integrating revenue accounts held by line ministries with the National Treasury single account (March 2002). - Performance criterion: Met. - 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 is to be completed by end-July 2002. - Benchmark: Revised to incorporate 100 largest taxpayers. - Identify the 100 largest accounts in the tax department 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 is to be completed by end-July. - Benchmark: Met. ### Financial sector - Approval by National Assembly of the Financial Institutions Law. - Prior action. - Complete on-site inspections of the remaining commercial banks (December 1999). - Benchmark: Met. - Following adoption of the Financial Institutions Law, subject all banks to relicensing and move to close insolvent or noncomplying banks accordingly (June 2000). - Benchmark: Met with delays; initial steps taken to close three banks and decisions on remaining banks pending. - Complete evaluation of all remaining banks that have reapplied for a banking license, and announce relicensing decisions. - Prior action. - Award banking license and provide initial capital injection to the Foreign Trade Bank. - Prior action. - Begin dollar clearing and settlement service (January 2001). - Benchmark: Met. - First quarterly review of performance of relicensed banks against their MOUs (April 2001). - Benchmark: Met with minor delays. - Appoint outside directors and prepare an updated business plan outlining commercial prospects of FTB (June 2001). - Benchmark: Met. - Complete final recapitalization of FTB (June 2001). - Performance criterion: Met. - Preparation of the first quarterly report by the NBC on the implementation of the banks' MOUs and on actions taken against noncomplying banks. - Prior action. - Prepare a new chart of accounts for fully licensed banks based on international standards, to be operational by January 2002. - Benchmark: Partially met; new chart of accounts finalized in September 2001, dates for full implementation to be agreed with Bankers' Association. - Complete quarterly reports on the implementation of the banks' MOUs (August 2001 and October 2001) indicating actions to be taken against non-complying banks, with a view to consolidating further the banking system. - Benchmark: Met. - Publish the 2000 external audit report of the NBC. - Prior action. - Revoke banking licenses for banks that have not met the requirements under their MOU, including additional closures if necessary (February 2002). - Benchmark: Met with minor delays. - Complete an unqualified audit of the 2001 accounts of the Foreign Trade Bank (March 2002). - Performance criterion: Partially met with delays; 2001 audit was qualified; 2002 audit was unqualified and submitted in June 2002. - Finalize a new chart of accounts for fully licensed commercial banks based on international standards and begin implementation (July 2002). - Benchmark: Met with significant delay; implementation expected in July 2003. - Initiate privatization of the Foreign Trade Bank by issuing a public notice (November 2002). - Benchmark: Met with minor delays. ### External sector - Initiate dialogue with major creditors with a view to concluding rescheduling agreement. - Prior action. - Commit to reduce the maximum tariff rate to 30 percent and the average tariff rate to 13-14 percent by 2002. - Prior action. - Reduce the average tariff rate to below 15 percent in the context of the 2002 budget (November 2001). - Benchmark. - Issue subdecree to reduce the number of tariff bands from 12 to 4 and to lower the maximum tariff rate to 35 percent, with associated adjustments in excise rates. - Prior action. - Submit a new customs code (in line with WTO requirements) to the Council of Ministers (March 2002). - Benchmark: More comprehensive revisions than envisaged necessary; revised law to be submitted by end-July 2002. - Implement the next stage of tariff restructuring to reduce the unweighted average rate below 15 percent (September 2002). - Benchmark. - Taking into account technical assistance recommendations, complete proposal for the next stage of tariff restructuring to reduce the unweighted average rate below 15 percent (October 2002). - Benchmark: Delayed; based on TA report in October 2002, tariff restructuring is expected to be completed by June 2003. ### Civil service reform and governance - Remove redundant workers from civilian payroll of at least 1,200 and ghost soldiers from defense (12,868) payrolls. Adopt a strict limit (920) on new hiring for the civil service. - Prior action. - Complete census to ascertain the precise number and status of civil servants and military personnel (March 2000). - Performance criterion: Met. - Formulate a medium-term strategy and reform program for the civil service entailing annual phasing for downsizing (June 2000). - Benchmark: Met with significant delays; based on studies and TA from World Bank, AsDB, and UNDP. - Preparation of a financial and technical assessment of the pilot demobilization program. - Prior action. - Using the computerized payroll for the central administration, verify that "ghost" employees and other irregular cases were removed as directed by the August 15 subdecree. - Prior action. - Complete computerization of the civil service payroll (July 2001) and eliminate irregular cases as they arise. - Benchmark. - Formulate, in consultation with the World Bank, a civil service reform strategy (March 2001). - Benchmark: Met with minor delays; finalization under discussion with World Bank. - Launch the first phase of military demobilization involving at least 10,000 soldiers (May 2001). - Benchmark: Delayed, but expected to include 15,000 soldiers after approval of a World Bank project. - Establish and staff the National Audit Authority (March 2001). - Benchmark: Partially met with delays; candidate to head NAA proposed to National Assembly at end-June 2001. - Prepare a comprehensive blueprint in consultation with donors, outlining specific and financial requirements for implementing the Governance Action Plan (March 2001). - Benchmark: Partially met with delays; specific financing requirements not outlined. - Propose a candidate to head the National Audit Authority to the National Assembly. - Prior action. - Establish the Steering Committee for preshipment inspection (PSI), as defined in the PSI contract. - Prior action. - Release second quarter allocation of the Priority Action Program (PAP). - Prior action. - Complete civil service census, and fingerprinting and registration of civil servants, in all provinces (July 2001). - Benchmark: Met with minor delays. - 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. - Prior action. - Establish anti-smuggling unit in key-border provinces with clear definition of roles and responsibilities (April 2002). - Benchmark: Partially met; provisional units set up in border provinces. - 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 (October 2002). - Performance criterion: Met. - Pursue further centralization of accounting in the National Treasury as defined in the technical memorandum of understanding (October 2002). - Benchmark: Partly met; Line ministries and department of investment and cooperation not integrated. ### Public enterprise reform / Legal reform - Submit two commercial laws (as part of a comprehensive commercial code) to the National Assembly for approval (December 1999). - Benchmark: Partially met with delays, contingent upon delivery of technical assistance from the World Bank and the Fund (LEG). - Submit two draft laws to the National Assembly covering corporate insolvency and secured transactions (December 2001). - Benchmark. - Submit the Payments Transactions Law, the Law on Bills of Exchange, and the Law on Checks and the Collection and Payments of Checks to the Council of Ministers (May 2002). - Benchmark. ### Environmental management - Publish the list of log collection quotas that have been repealed. - Prior action. - Establish forestry crime monitoring unit, and submit the first quarterly report of the Unit to Council of Ministers and to the public. - Prior action. - Submit subdecree on concession management to Council of Ministers. - Prior action. - Complete review of concession contracts and cancel concessions in violation (June 2000). - Benchmark: Met; three concessions were canceled and others severely restricted. - Submit a revised forestry law to the National Assembly, to provide a permanent framework for sustainable logging (February 2001). - Benchmark: Met with minor delays. - Cancel remaining forestry concessionaires that have not completed restructuring agreements with the government (September 2001). - Performance: Converted into benchmark. - Cancel licenses of forestry concessions that have not submitted restructured concession agreements (September 2001). - Benchmark: Submitted plans deemed insufficient with all logging operations suspended as of January 1, 2002. - Issue Prakas suspending all logging activity by concessionaires with effect from January 1, 2002 until sustainable management plans have been approved. - Prior action. - Suspend all logging activity by concessionaires with the effect from January 1, 2002 until sustainable management plans have been approved. - Benchmark (continuous): Partially met; staff notes need to upgrade enforcement. ### Poverty reduction - Submit a PRSP preparation status report to the Bank and the Fund. - Prior action. *Source: _cr04324 - 1. STF (1993–94)* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04324.pdf_