## _cr06264 - 2004. At that time, Directors stressed the need for broad-based growth and poverty ## Source details **Canonical URL:** [_cr06264 - 2004. At that time, Directors stressed the need for broad-based growth and poverty](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06264.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06264.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06264.pdf.json) --- ### Executive summary — key findings and projections - Growth and poverty: - Growth averaged around 10 percent annually in recent years; Real GDP growth rose to 13½ percent in 2005. - Despite robust growth, rural poverty remained stubbornly high. - Sector drivers (2005): - Agriculture growth: ~17 percent in 2005. - Tourism: tourist arrivals rose by 35 percent in 2005 to nearly 1½ million. - Garments, tourism, and construction underpinned activity. - Prices and monetary: - Inflation: 6¾ percent at end-2005; eased to below 5 percent by end-April 2006. - Broad money and bank deposits growth: about 16 percent (year-on-year) in 2005. - Fiscal and external: - Overall fiscal deficit: 3½ percent of GDP in 2005 (down from 4¾ percent in 2004). - Revenue-to-GDP ratio in 2005: 10½ percent. - External debt: 51 percent of GDP in 2005 (peak 60 percent in 2003). - Reserves: over US$1 billion in May 2006 (around 2½ months of imports). - Fund MDRI relief: about US$82 million forgiven. - Risks: - (i) difficulty implementing reforms due to entrenched interests; (ii) capacity constraints reflecting Cambodia’s level of economic development. ### Background: macroeconomic and governance context - Growth, demographics, and debt: - Growth averaged more than 10 percent annually over the last three years prior to the report. - Working age population growth: 3 percent annually. - External debt: 51 percent of GDP in 2005 (peak 60 percent in 2003). - Poverty and distribution: - National poverty rate: 35 percent in 2004 (down from 47 percent in 1994). - More than 90 percent of the poor live in rural areas. - Consumption Gini coefficient: about 0.42 in 2004. - Proportion of landless rural households: rose from 13 percent in 1997 to 20 percent in 2004. - Poverty line estimates in 2004: about US$160 per capita in rural areas to US$215 in Phnom Penh. - Governance and international assistance: - Transparency International CPI rank: 130 (out of 158 countries). - Donor pledges at March 2006 Consultative Group: combined US$600 million (10 percent of 2005 GDP) for 2006; comparable figure for 2005 was US$500 million. - World Bank suspended three projects for fraud concerns (total value around US$70 million). - PRSO expected in second half of 2006. ### Recent economic developments — sectoral detail and indicators - Growth composition (2005): - Agriculture: about 17 percent growth in 2005 (exceptionally favorable weather after 2004 drought). - Garments: continued expansion in 2005 despite MFA quota removal and safeguard restrictions. - Tourism: arrivals up 35 percent in 2005 to nearly 1½ million; tourism-related construction increased. - Construction strengthened by tourism and donor-financed projects. - National accounts revisions: - Household final consumption expenditures about 17 percent higher than previously estimated after incorporating 2004 Cambodia Socio-Economic Survey. - National accounts broadened to include cash crops from commercial agricultural exploitation, gem and gold mining, insurance and micro-finance, privately-provided education and health services. - Monetary and financial sector: - Bank credit to private sector annual growth approached 30 percent; private sector credit averaged less than 10 percent of GDP in 2005. - Dollarization extremely high: only 4 percent of deposits and 6 percent of bank loans are in riel. - Market concentration: two banks account for around 40 percent of total deposits after acquisition of FTB. - ANZ entry introduced modern practices and mobilized deposits. - Riel fairly stable with little evidence of NBC intervention. - External sector: - Current account deficit (excluding transfers): widened to 9½ percent of GDP in 2005. - Financing via upswing in FDI concentrated in garment, tourism, and construction sectors. - Reserves: over US$1 billion in May 2006 (around 2½ months of imports); accumulation aided by increases in value of NBC’s gold holdings. - Fiscal developments: - One-off capital revenue transfer from privatization of FTB improved 2006 deficit position by around 1 percent of GDP. - Revenue collection increased with stepped-up arrears-collection; revenue-to-GDP ratio remained low at 10½ percent in 2005. - Early 2006 domestic tax collection through April in line with revised 2006 projections; nontax and trade taxes somewhat behind target. ### Policy discussions — strategy, reforms, and program parameters - NSDP 2006–10: - Approved by the National Assembly in May 2006. - Focus: broadening growth, increasing access to social services, promoting rural development through improved irrigation, land allocation and access to credit. - PRGF successor arrangement: - Understandings on parameters were reached; progress impeded by delays in resolving outstanding debt issues with official creditors. - Fiscal policy and PFM: - Need to fortify revenue collection to finance higher social spending and infrastructure. - PFM reform program being implemented to address weaknesses identified in MDRI assessment. - Monetary and financial sector: - Policies: keep inflation low, limit volatility of the riel, allow exchange rate to reflect fundamentals. - Banking supervision requires much improvement despite progress on Chart of Accounts implementation. - Other structural reforms: - Land policy: issuance of sub-decrees on economic land concessions and on state land management significant. - Strengthening rule of law and addressing corruption emphasized. ### Policy recommendations and priorities - Accelerate reforms for broader-based growth and poverty reduction: - Agricultural sector reforms to boost rural productivity and incomes. - Governance reforms to establish rule of law and reduce corruption. - Strengthen public financial management and revenue administration to raise revenue-to-GDP ratio above 10½ percent. - Enhance financial intermediation to increase private sector credit (private sector credit was less than 10 percent of GDP in 2005). - Improve banking supervision and reduce concentration risks in the banking sector. - Prioritize public spending to strengthen rural-urban linkages and support NSDP objectives. - Manage macro risks: - Prepare for balance of payments vulnerability from sustained high oil prices and non-garment import growth. - Continue cautious fiscal policy to contain overall deficit (3½ percent of GDP in 2005) while mobilizing revenue and donor financing. ### Risks and constraints - Implementation risks: - Entrenched interests within and outside the bureaucracy may impede reform implementation. - Capacity constraints reflecting Cambodia’s level of economic development. - Fiscal vulnerability: - Low revenue collections leave risk of debt distress despite reduced debt-to-GDP (51 percent in 2005) post-MDRI. - External vulnerability: - Current account deficit (excluding transfers) widened to 9½ percent of GDP in 2005; reliant on FDI inflows and donor financing. ### Commitment, arrears, and debt profile - Performance and arrears: - Authorities performed strongly against agreed quantitative and structural indicators for a possible PRGF arrangement but could not request such an arrangement because long-outstanding arrears to official creditors remained unresolved. - Bilateral creditor positions: - United States: - Agreement on outstanding principal amount of US$162 million. - Outstanding interest payments estimated at $155 million by the United States. - Bilateral agreement being drafted; overdue obligations to be rescheduled in the context of the Paris Club. - Russian Federation: - Agreement on valuing outstanding nominal debt stock at US$1.5 billion; with an agreed up-front discount this would be reduced to about US$457 million. - No agreement yet on concessionality for short-term debt and debt contracted after December 31, 1985; discussions ongoing. - Public Debt Outstanding, 2005 (In millions of U.S. dollars): - External debt: 3,180 - Multilaterals: 1,149 - IMF81 1/ - IDA461 - AsDB568 - Bilateral: 2,031 - Russia 1,525 - United States302 - Domestic Debt: 210 - Total: 3,391 - 1/ In January 2006, MDRI erased outstanding debt to the Fund of SDR56.8 million (valued at US$82 million at the time of transaction.) ### Medium-Term Outlook — growth, inflation, external balance, and resources - Growth and inflation projections: - Real GDP: 2006 5.0; 2007 6.5; 2008 6.1; 2009 5.8. - Inflation (average): 2006 5.0; 2007 4.0; 2008 3.5; 2009 3.5. - External and reserve projections: - External current account (excl. transfers) expected to narrow to 9¼ percent of GDP by 2009 (high oil prices widen near-term deficit). - International reserves projected: 2006 1,050 (US$ millions); 2007 1,161; 2008 1,331; 2009 1,502. - Public debt: - Public debt projected to drop from 51 percent of GDP in 2005 to 34 percent in 2006 once rescheduling with Russia and the United States is concluded and including IMF MDRI debt relief. - Oil prospects: - Contracts awarded for four of six offshore blocks; one block could contain around 700 million barrels of oil. - Initial estimates suggest oil could start flowing from 2010. - Additional annual government revenues within a few years could significantly exceed total fiscal revenue collected in 2005. - Agreed macro framework (selected indicators): - Government Revenue: 2006 12.0; 2007 11.3; 2008 11.8; 2009 12.3. - Public Sector Primary Balance (Incl. Grants): 2006 -0.8; 2007 -2.2; 2008 -1.8; 2009 -1.4. - External Current Account Balance (Excl. Transfers): 2006 -10.7; 2007 -11.3; 2008 -9.9; 2009 -9.3. - Gross International Reserves (In millions of U.S. Dollars): 2006 1,050; 2007 1,161; 2008 1,331; 2009 1,502. ### Fiscal policy and public sector reforms (medium term) - MEF medium-term objectives: - Enhance revenue collection to meet priority spending needs while avoiding domestic debt financing. - Target around 12½ percent of GDP by 2009 through broadening the effective tax base and better administration. - Budget and expenditure: - A current surplus of around 1¼ percent of GDP is projected despite higher interest costs as U.S. and Russian debt begin to be serviced after rescheduling. - Capital spending to remain around 5½ percent of GDP. - Overall deficit (after grants) expected to increase from 1¼ percent of GDP in 2005 to around 2½ percent in 2007, but decline in the medium term. - Revenue administration measures: - Capture informal sector, strengthen audits, reorganize tax department, major IT investment for customs (ASYCUDA), update anti-smuggling plan, strengthen risk management. - Authorities committed not to grant tax exemptions beyond provisions already allowed in law. - Fiscal program (selected percent of GDP figures, excluding MDRI transactions): - Total revenue: 2005 10.5 / 2006 Proj. 10.8 / 2007 Proj. 11.3 - Tax revenue: 2005 7.7 / 2006 8.3 / 2007 8.6 - Total expenditure: 2005 13.9 / 2006 15.0 / 2007 15.5 - Current expenditure: 2005 8.2 / 2006 9.3 / 2007 9.4 - Capital expenditure: 2005 5.6 / 2006 5.6 / 2007 5.9 - Current balance: 2005 1.6 / 2006 1.2 / 2007 1.8 - Overall balance: 2005 -3.4 / 2006 -4.1 / 2007 -4.0 - Overall balance (including grants): 2005 -1.3 / 2006 -2.3 / 2007 -2.4 ### Monetary, exchange rate, and financial sector policies - Monetary targets and credit: - Inflation target around 5 percent at end-2006. - Broad money projected to grow by around 20 percent in 2006. - Year-on-year growth in credit to the private sector around 40 percent in 2006 (net domestic credit from banking system to the government projected to remain unchanged).7 - 7 Excluding the impact of MDRI debt relief on government deposits. - Exchange rate and de-dollarization: - NBC will stabilize excessive fluctuations in the dollar exchange rate; adjustments reflecting fundamentals should not be resisted. - NBC developing a framework paper for de-dollarization; technical assistance requested. - Staff supported encouraging increased use of the riel while avoiding imposing restrictions on foreign currency use. - Supervision and prudential norms: - NBC aims to enforce prudential norms more strictly; noncompliance with key prudential regulations is common. - Average prudential ratios (2005, 18 commercial banks): - Liquidity >50%: Prudential Benchmark 50% : 2005 118% : Number of banks in breach 0 - Net worth to risk-weighted assets >15%: Prudential Benchmark 15% : 2005 32% : Number of banks in breach 1 - Loan to Deposit <100%: Prudential Benchmark 100% : 2005 61% : Number of banks in breach 8 - Large exposure loans to net worth < 20%: Prudential Benchmark 20% : 2005 50% : Number of banks in breach 7 - Non-performing loans: 2005 7.5% (number of banks in breach not fully specified) ### Debt restructuring and sustainability (ANNEX II highlights) - Baseline and restructuring assumptions: - DSA assumes debt restructuring agreements with the United States and Russia in 2006. - Under this assumption, Cambodia’s NPV of external debt-to-GDP ratio would drop from 40½ percent at end-2005 to 22½ percent in 2006. - MDRI effect: impact on NPV of external debt-to-GDP ratio about 1¼ percentage points; MDRI provides around 1¼ percent of additional revenue in 2006. - Indicators and projections: - NPV of public debt-to-revenue ratio: 348 percent at end-2005; around 182 percent after assumed 2006 bilateral restructurings. - Projected decline of NPV public sector debt-to-GDP ratio from 54 percent (end-2005) to 36½ percent in 2006 (around 25 percent in NPV terms in 2006). - Under baseline, NPV public sector debt-to-GDP ratio projected to drop to 8½ percent by 2026 given gradual improvement in primary deficit. - Risks and stress tests: - Debt-to-revenue threshold breached for multiple years under all bounds tests. - One-time exchange rate depreciation (Test B4) would raise NPV debt-to-GDP ratio by 9 percentage points and NPV debt-to-revenue ratio by 70 percentage points in 2007 relative to baseline. - Export shock (one standard deviation negative, 12 percent) could breach NPV debt-to-GDP threshold in 2008–09. - Policy implication: - Strengthen revenue base (currently less than 11 percent of GDP) and maintain prudent borrowing policy; limit less-concessional borrowing and assess contingent liabilities. ### Technical assistance, statistics, and capacity building - IMF TA and delivery: - TCAP (2001–03) was most significant period of TA. - Cambodia is one of ten countries participating in the IMF’s pilot Country Technical Assistance Strategy Note exercise; TA to be gradually scaled back in intensity but focused on key macro constraints. - Current resident advisors: Banking advisor; Treasury advisor; multi-sector Statistics advisor. - Achievements and remaining gaps: - Banking TA: improved supervisory capacity and Chart of Accounts; remaining needs in supervision, internal audit, payments system. - Fiscal TA: LTU implementation, improved audits, customs IT (ASYCUDA) underway; PFM Reform Program launched end-2004 but challenges remain. - Statistical improvements: revised national accounts (2001–04), new CPI, improved BOP and GFS; shortcomings remain in coverage and timeliness for some series. - Data dissemination and surveillance: - Cambodia participates in the Fund’s General Data Dissemination System; core data generally adequate for surveillance despite shortcomings. ### Staff appraisal and Executive Board recommendations - Macroeconomic assessment: - Authorities commended for sound macro policies; despite surge in oil prices, inflation stayed low and debt declined in GDP terms. - Growth robust but narrowly based; widespread rural poverty persists. - Priority recommendations: - Strictly enforce current tax regulations and ensure all revenue collected is transferred to the National Treasury. - Accelerate PFM reform: introduce new Chart of Accounts for 2007 Budget and rationalize government bank accounts. - Strengthen bank supervision, limit exemptions on prudential requirements, and monitor rapid private credit growth (focus on two large banks with high combined market share). - Promote trade facilitation (prompt introduction of ASYCUDA and single window) and deepen regional integration. - Anti-corruption: finalize anti-corruption law of international standard and promptly establish anti-corruption secretariat with financial and operational autonomy. - Manage petroleum proceeds prudently and consider participation in the Extractive Industries Transparency Initiative. - Continue prudent borrowing policy and limit non-concessional foreign financing. ### Authorities' stance and commitments (Introduction highlights) - Authorities: - Agree broadly with staff’s assessment and policy recommendations. - Emphasize country ownership of national policies and effective international support. - Intend to use MDRI proceeds transparently and initially to support rural irrigation: plan to utilize initial $33.38 million of MDRI resources for irrigation projects in eastern provinces. - Seek concessional financing from China and AsDB for infrastructure including energy, while staff urges securing concessional financing. - Hope to resolve bilateral debt issues to enable a PRGF arrangement to support NSDP implementation. *Source: IMF staff report (Selected excerpts from _cr06264 PDF chapter).* ### 2004. At that time, Directors stressed the need for broad-based growth and poverty ### _cr06264 - 2004. At that time, Directors stressed the need for broad-based growth and poverty ### Executive summary — key findings and projections - Despite robust economic growth, rural poverty remained stubbornly high; growth averaged around 10 percent annually in recent years. - Real GDP growth rose to 13½ percent in 2005, driven by agriculture (~17 percent in 2005), garment exports, tourism, and construction. - Inflation rose to 6¾ percent at end-2005 and eased to below 5 percent by end-April 2006. - The overall fiscal deficit declined to 3½ percent of GDP in 2005, from 4¾ percent in 2004. - Revenue-to-GDP ratio in 2005 was 10½ percent. - External debt fell to 51 percent of GDP in 2005, from a peak of 60 percent in 2003; the Fund forgave about US$82 million through the MDRI. - Reserves reached over US$1 billion in May 2006 (around 2½ months of imports). - Risks: (i) difficulty implementing reforms due to entrenched interests; (ii) capacity constraints reflecting Cambodia’s level of economic development. ### Background: macroeconomic and governance context - Growth and stability: - Growth averaged more than 10 percent annually over the last three years prior to the report. - Working age population growth: 3 percent annually. - External debt: 51 percent of GDP in 2005 (peak 60 percent in 2003). - Poverty and distribution: - National poverty rate: 35 percent in 2004 (down from 47 percent in 1994). - More than 90 percent of the poor live in rural areas. - Consumption Gini coefficient estimated at about 0.42 in 2004. - Proportion of landless rural households rose from 13 percent in 1997 to 20 percent in 2004. - Poverty line estimates in 2004: about US$160 per capita in rural areas to US$215 in Phnom Penh. - Governance and political environment: - Cambodia ranks 130 (out of 158 countries) in Transparency International’s Corruptions Perceptions Index. - Political tensions eased; constitutional amendment reduced lawmakers required to form a government; coalition continued despite leadership changes. - International support: - Donor pledges at March 2006 Consultative Group: combined US$600 million (10 percent of 2005 GDP) for 2006; comparable figure for 2005 was US$500 million. - World Bank suspended three projects for fraud concerns (total value around US$70 million). - World Bank Country Assistance Strategy focus areas: public financial management, private sector development, natural resource management, local governance. - PRSO expected in second half of 2006. ### Recent economic developments — sectoral detail and indicators - Growth composition: - Agriculture: about 17 percent growth in 2005 (exceptionally favorable weather after 2004 drought). - Garments: continued expansion in 2005 despite MFA quota removal and safeguard restrictions; sector received tax concessions. - Tourism: tourist arrivals rose by 35 percent in 2005 to nearly 1½ million; tourism-related construction increased. - Construction: strengthened by tourism and donor-financed projects. - National accounts revisions: - Revised GDP estimates incorporated 2004 Cambodia Socio-Economic Survey; household final consumption expenditures about 17 percent higher than previously estimated. - National accounts broadened to include cash crops from commercial agricultural exploitation, gem and gold mining, insurance and micro-finance, privately-provided education and health services. - Price developments: - Inflation 6¾ percent at end-2005; eased to below 5 percent by end-April 2006. - Higher petroleum prices were a main driver of 2005 inflation. - Monetary and financial sector: - Broad money and bank deposits grew by about 16 percent (year-on-year) in 2005. - Bank credit to private sector annual growth approached 30 percent; private sector credit averaged less than 10 percent of GDP in 2005. - Dollarization extremely high: only 4 percent of deposits and 6 percent of bank loans are in riel. - Market concentration: acquisition of government-owned Foreign Trade Bank (FTB) by owners of largest private bank; together two banks account for around 40 percent of total deposits. - Entry of ANZ Bank introduced modern practices and mobilized deposits. - Riel fairly stable with little evidence of NBC intervention. - External sector: - Current account deficit (excluding transfers) widened to 9½ percent of GDP in 2005. - Financing: upswing in foreign direct investment concentrated in garment, tourism, and construction sectors. - Reserves: over US$1 billion in May 2006 (around 2½ months of imports); accumulation aided by increases in value of NBC’s gold holdings. - Fiscal developments: - Overall deficit 3½ percent of GDP in 2005 (down from 4¾ percent in 2004). - One-off capital revenue transfer from privatization of FTB improved 2006 deficit position by around 1 percent of GDP. - Revenue collection increased with stepped-up arrears-collection; revenue-to-GDP ratio remained low at 10½ percent in 2005. - Expenditure declined as share of GDP; capital spending trended downward in line with external financing. - Early 2006: domestic tax collection through April in line with revised 2006 projections; nontax and trade taxes somewhat behind target. - Data and surveillance: - Cambodia accepted obligations of Article VIII, Sections 2, 3, and 4 in January 2002; maintained an exchange system free of restrictions on payments and transfers for current international transactions. - Core economic and financial data provided to the Fund are generally adequate for surveillance despite significant shortcomings in some areas. ### Policy discussions — strategy, reforms, and program parameters - National Strategic Development Plan (NSDP) 2006–10: - Approved by the National Assembly in May 2006. - Focus: broadening growth, increasing access to social services, promoting rural development through improved irrigation, land allocation and access to credit. - Parliamentary support emphasized: macroeconomic stability, strengthening government role and effectiveness, improving financial intermediation and governance. - NGOs supportive but sought broader involvement in implementation. - PRGF successor arrangement: - Authorities and staff reached understandings on parameters for a successor PRGF arrangement to support NSDP implementation. - Progress on the proposed arrangement impeded by delays in resolving outstanding debt issues with official creditors. - Fiscal policy and public sector reforms: - Need to fortify revenue collection to finance higher social spending and infrastructure development. - Public financial management (PFM) reform program being implemented to address weaknesses identified in MDRI assessment. - Monetary, exchange rate, and financial sector policies: - Policies expected to focus on keeping inflation low and limiting volatility of the riel while allowing the exchange rate to reflect changes in fundamentals. - Banking supervision requires much improvement despite progress on bank Chart of Accounts implementation. - External sector issues: - High petroleum prices adversely affected the external position in 2005; continued high oil prices pose risks to balance of payments and growth, but limited direct fiscal impact given full pass-through. - Other structural reforms: - Initial progress noted, especially in fiscal and legal areas; governance reforms remain essential. - Land policy: issuance of sub-decrees on economic land concessions and on state land management significant. - Strengthening rule of law and addressing corruption emphasized as necessary to maintain fiscal integrity and improve competitiveness. ### Policy recommendations and priorities - Accelerate reforms to achieve broader-based growth and poverty reduction, with emphasis on: - Agricultural sector reforms to boost rural productivity and incomes. - Governance reforms to establish rule of law and reduce corruption. - Strengthening public financial management and revenue administration to raise revenue-to-GDP ratio above 10½ percent. - Enhancing financial intermediation to increase private sector credit (private sector credit was less than 10 percent of GDP in 2005). - Improving banking supervision and reducing concentration risks in the banking sector. - Prioritizing public spending to strengthen rural-urban linkages and support the NSDP objectives. - Manage macroeconomic risks: - Prepare for balance of payments vulnerability from sustained high oil prices and non-garment import growth. - Continue cautious fiscal policy to contain overall deficit (3½ percent of GDP in 2005) while mobilizing revenue and donor financing. ### Risks and constraints - Implementation risks: - Entrenched interests within and outside the bureaucracy may impede reform implementation. - Capacity constraints reflecting Cambodia’s level of economic development. - Fiscal vulnerability: - Low revenue collections leave risk of debt distress despite reduced debt-to-GDP (51 percent in 2005) post-MDRI relief. - External vulnerability: - Current account deficit (excluding transfers) widened to 9½ percent of GDP in 2005; reliant on FDI inflows and donor financing. *Source: IMF staff report (Selected excerpts from _cr06264 PDF chapter).* ### 13. The authorities have shown commitment to implementing this strategy, which ### _cr06264 - 13. The authorities have shown commitment to implementing this strategy, which ### Commitment, arrears, and debt profile - Authorities have performed strongly against agreed quantitative and structural indicators for a possible PRGF arrangement but have not been able to request such an arrangement because a resolution of long-outstanding arrears to official creditors has not been reached. - Box 3 — Debt Obligations to the Russian Federation and the United States: - United States: - Agreement on outstanding principal amount of US$162 million. - Outstanding interest payments are estimated at $155 million by the United States. - A bilateral agreement to formalize this is currently being drafted. - Overdue obligations will be further rescheduled in the context of the Paris Club. - Russian Federation: - Agreement on valuing the outstanding nominal debt stock at US$1.5 billion. - With an agreed up-front discount, this would be reduced to about US$457 million. - No agreement yet on concessionality for short-term debt and debt contracted after December 31, 1985; discussions ongoing (last bilateral discussions March 2006). - Public Debt Outstanding, 2005 (In millions of U.S. dollars): - External debt: 3,180 - Multilaterals: 1,149 - IMF81 1/ - IDA461 - AsDB568 - Bilateral: 2,031 - Russia 1,525 - United States302 - Domestic Debt: 210 - Total: 3,391 - 1/ In January 2006, MDRI erased outstanding debt to the Fund of SDR56.8 million (valued at US$82 million at the time of transaction.) ### A. Medium-Term Outlook — growth, inflation, external balance, and resources - Growth projections and composition: - Overall growth expected to slow to 5 percent in 2006, but will average about 6 percent in the medium term. - Garment exports, construction, and tourism expected to underpin near-term activity but to decelerate in the medium term as the broader private sector makes a greater contribution. - Agricultural output: return to more normal weather conditions likely to lead to a fall in agricultural output in 2006; rural reforms (increasing irrigation and land allocation) could improve agricultural performance, with significant effects anticipated more in the medium term. - Inflation and external balance: - Inflation should ease slightly, to about 5 percent in the near term, and decline in the medium term to about 3 percent (level of trading partners). - High oil prices will dampen near-term growth and widen the external current account deficit (excluding official transfers) before narrowing to 9¼ percent of GDP by 2009. - International reserves projected to recover to around 2¾ months of imports by 2009. - Public debt outlook: - Public debt projected to drop from 51 percent of GDP in 2005 to 34 percent in 2006 once rescheduling with Russia and the United States is concluded and including IMF debt relief under the MDRI. - Oil discoveries: - Contracts awarded for four of six offshore blocks; one block could contain around 700 million barrels of oil. - Initial estimates suggest oil could start flowing from 2010. - Additional annual government revenues within a few years could significantly exceed total fiscal revenue collected in 2005. - Medium-term framework and the DSA to be updated in 2007 as more information emerges. - Agreed macroeconomic framework (selected indicators; annual percent change or percent of GDP as presented): - Real GDP: 2006 5.0 2007 6.5 2008 6.1 2009 5.8 - Consumer Price Inflation (average): 2006 5.0 2007 4.0 2008 3.5 2009 3.5 - Government Revenue: 2006 12.0 2007 11.3 2008 11.8 2009 12.3 - Public Sector Primary Balance (Incl. Grants): 2006 -0.8 2007 -2.2 2008 -1.8 2009 -1.4 - Public Sector Current Balance: 2006 1.2 2007 1.8 2008 2.1 2009 2.4 - External Current Account Balance (Excl. Transfers): 2006 -10.7 2007 -11.3 2008 -9.9 2009 -9.3 - Gross International Reserves (In millions of U.S. Dollars): 2006 1,050 2007 1,161 2008 1,331 2009 1,502 - Risks to the outlook: - Breakdown in fragile political stability could affect confidence and growth. - Phasing out of safeguards restrictions on China and WTO accession of regional competitors could adversely affect garment exports. - Banking sector remains a source of weakness despite gains. - High vulnerability to domestic or regional outbreak of avian flu; weak health and epidemic control systems and lack of business continuity plans for the financial sector. ### B. Fiscal Policy and Public Sector Reforms - MEF medium-term fiscal objectives: - Enhance revenue collection to meet priority spending needs while avoiding domestic debt financing. - Total revenue remains below 11 percent of GDP despite nominal growth; target around 12½ percent of GDP by 2009 through broadening the effective tax base and better administration. - Fiscal outlook and budget: - 2006 Budget (basis for targets, adjusted for higher revenues, donor aid, higher debt service, and MDRI impact). - A current surplus of around 1¼ percent of GDP is projected despite higher interest costs as U.S. and Russian debt begin to be serviced after rescheduling. - Capital spending to remain around 5½ percent of GDP. - Overall deficit (after grants) expected to increase from 1¼ percent of GDP in 2005 to around 2½ percent in 2007, but decline in the medium term. - Revenue administration and policy measures: - Strong emphasis on improved revenue administration and full, equitable enforcement of the Law on Taxation. - Key measures: capture informal sector, strengthen audits, reorganize tax department, major IT investment for customs (ASYCUDA), update anti-smuggling plan, strengthen risk management. - Non-tax receipts have fallen as a share of GDP; privatization reduced dividend receipts. New non-tax departments in MEF to ensure revenues are transferred promptly to the Treasury. - Prime Ministerial Order (PMO) 2005 requires cessation of swaps of public lands and initiates transparent bidding for concession contracts. - MEF accepted that tax policy measures would need to be considered for the 2007 Budget and beyond, including proposals from 2003 FAD mission: amending VAT rates and thresholds, increasing excise rates, re-considering property taxation in urban areas, and clarifying petroleum-sector taxation policy with FAD support. - Authorities committed not to grant tax exemptions beyond provisions already allowed in law. - Expenditure priorities: - Current expenditure projected to increase by about 1¼ percent of GDP in 2006 to make room for capital spending. - Social spending (excluding wages) increased to 1½ percent of GDP; more resources for rural development. - Gradual increase in civil service pay and decompression of wage structure within broader civil service reform. - Savings from MDRI to finance new rural irrigation projects; such spending projected to be about $6 million in 2006. - Infrastructure development, including power sector, is a priority; financing options include public-private partnerships and borrowing from China and AsDB; staff urged securing concessional financing. - Public financial management (PFM) reforms: - PFM reform program seen as key; staff urged acceleration. - Priority: adopt new Chart of Accounts for 2007 Budget to identify and track poverty-reducing spending and regularize exceptional spending procedures (Priority Action Programs). - Authorities prefer to first address shortcomings (rationalize government bank accounts; construct database of payment arrears) before abandoning exceptional procedures. - Fiscal program (selected percent of GDP figures, excluding MDRI transactions): - 2005 Actual / 2006 Proj. / 2007 Proj. - Total revenue: 10.5 / 10.8 / 11.3 - Tax revenue: 7.7 / 8.3 / 8.6 - Nontax revenue: 2.3 / 2.2 / 2.4 - Other capital revenue: 0.5 / 0.3 / 0.1 - Total expenditure: 13.9 / 15.0 / 15.5 - Current expenditure: 8.2 / 9.3 / 9.4 - Wages: 2.8 / 3.1 / 3.0 - Nonwage: 5.4 / 6.2 / 6.3 - Capital expenditure: 5.6 / 5.6 / 5.9 - Locally Financed: 1.2 / 1.8 / 2.0 - Current balance: 1.6 / 1.2 / 1.8 - Overall balance: -3.4 / -4.1 / -4.0 - Overall balance (including grants): -1.3 / -2.3 / -2.4 - Foreign financing (net): 4.8 / 4.4 / 4.4 - Domestic financing: -1.4 / -0.3 / -0.5 ### C. Monetary, Exchange Rate, and Financial Sector Policies - Monetary program and targets: - Inflation target of around 5 percent at end-2006. - Broad money projected to grow by around 20 percent in 2006 as money demand rises. - Reserve money growth largely driven by net international reserve accumulation. - Net domestic credit from the banking system to the government projected to remain unchanged, allowing year-on-year growth in credit to the private sector of around 40 percent in 2006.7 - 7 Excluding the impact of MDRI debt relief on government deposits. - Exchange rate policy and de-dollarization: - NBC will stabilize excessive fluctuations in the dollar exchange rate; exchange rate adjustments reflecting market fundamentals should not be resisted. - NBC considering strategies for de-dollarization and will develop a framework paper to guide medium-term monetary and exchange policy instruments; requested technical assistance due to limited internal capacity. - Staff supported encouraging increased use of the riel while avoiding imposing restrictions on foreign currency use. - Financial sector supervision and prudential norms: - NBC aims to enforce prudential norms more strictly to prevent rapid private credit growth from weakening bank balance sheets. - NBC recently began compiling financial soundness indicators showing noncompliance with key prudential regulations is common. - Concerns about connected lending and overdependence on real estate collateral given weak contract enforcement and deficient classification of non-performing loans. - NBC allows many exemptions on large exposure limits (often with guarantees from foreign parents); Governor agreed to introduce more extensive supervision based on newly-completed accounting standards and to enforce prudential regulations more strictly. - Systemically-important banks should be closely supervised; NBC committed to a thorough review of current practices and to refrain from granting new approvals for large exposure loans unless detailed due diligence on guarantees has been undertaken by NBC. - Average Prudential Ratios for Cambodia's 18 Commercial Banks (Indicator / Prudential Benchmark / 2005 / Number of banks in breach): - Liquidity >50%: 118% : 0 - Net worth to risk-weighted assets >15%: 32% : 1 - Loan to Deposit <100%: 61% : 8 - Large exposure loans to net worth < 20%: 50% : 7 - Non-performing loans...: 7.5% : ... - Box 4 — Exchange Rates and Competitiveness (key points): - Managed floating exchange rate policy broadly appropriate; allowed market determination while limiting bilateral U.S. dollar fluctuations. - Cambodia’s CPI-based real effective exchange rate experienced substantial depreciation over 2002-04, only partly unwound in 2005, maintaining competitiveness by this measure. - Other competitiveness constraints: poor infrastructure, corruption, red tape; mixed evidence of progress in reducing administrative burdens. - In a largely dollar-priced economy, depreciation of the U.S. dollar against other currencies could have limited effect on U.S.-bound garment exports, could improve competitiveness against countries with appreciating currencies, and could make tourism more attractive; but imports from neighbors could become more expensive, contributing to higher inflation that would hurt the poor and partially mute export gains. *Source: IMF staff report text in _cr06264 - 13. The authorities have shown commitment to implementing this strategy, which* ### 27. The authorities are pursuing a number of initiatives to reduce impediments to ### _cr06264 - 27. The authorities are pursuing a number of initiatives to reduce impediments to ### Financial intermediation and legal framework - Absence of reliable borrower information and lack of enforceability of financial contracts have hampered financial sector development, particularly for small- and medium-size enterprises. - The financial sector blueprint, currently being updated with the assistance of AsDB, contains a broad range of initiatives to deepen intermediation. - Staff supported NBC’s action to address these issues, including: - implementing a program of legislative and administrative reforms to establish a secure and reliable payments system; - the establishment of a credit information system. - A Negotiable Instruments and Payment Transactions Law was passed and a Secured Transactions Law submitted to the National Assembly in 2005. - A draft Insolvency Law, developed in collaboration with the Ministry of Commerce, is close to finalization. ### Central bank safeguards and anti-money laundering (AML) - NBC officials reiterated their commitment to implement safeguards recommendations and proceed with anti-money laundering (AML) efforts. - The safeguards assessment completed in March 2004 noted weaknesses in: - financial reporting; - internal audit; and - internal control systems. - Actions taken and planned by the NBC: - creation, at end-November 2005, of a new internal audit department and Board-level audit committee; - implementation of an action plan to address weaknesses identified in the safeguards assessment; - draft AML legislation and regulations aimed at meeting international standards are under consideration; - NBC issued a decree on bank guidelines for identifying money laundering and introducing provisions to combat the financing of terrorism. - Timing and compliance considerations: - Draft legislation will need to be passed into law and implementation commenced by the first quarter of 2007 to enable it to be taken into account when Cambodia is assessed for its compliance with the international standards in 2007. - The safeguards assessment update is scheduled for the second half of 2006. ### External sector and trade facilitation - Authorities are undertaking trade facilitation reforms to improve competitiveness and support export diversification. - Reforms under the World Bank supported Trade Facilitation and Competitiveness Project focus on reducing administrative costs and consolidating the trade inspection process. - Staff urged a swift decision on implementation arrangements for the single window system for processing trade documents to enable customs modernization. - Commitments under WTO accession and the ASEAN Free Trade Area (AFTA) are expected to facilitate international trade: - For AFTA, tariff rates under the Common Effective Preferential Tariff Scheme will be reduced to a maximum of 5 percent by 2010; - all items in the temporary exclusion list will be transferred to the inclusion list by 2007. - Staff urged authorities to reduce tariffs further on a nonpreferential basis to avoid trade diversion. ### Debt restructuring - Authorities stressed commitment to finalizing agreement on debt restructuring with the United States and Russian Federation. - United States and Cambodian authorities have agreed on the total amount of debt principal and rescheduling of outstanding obligations is planned in the context of a new Paris Club agreement. - Recent negotiations with the Russian Federation made progress but did not yet yield agreement over the nature of one claim and the repayment terms for post cut-off debt. ### Other structural reforms: governance, land, and judiciary - Anti-corruption and business environment: - A further draft of legislation on anti-corruption (a core theme of the NSDP) is close to being completed. - Substantial technical assistance has been provided to ensure consistency with international standards. - Staff emphasized safeguarding financial and operational autonomy of the anti-corruption secretariat in the draft submitted to the National Assembly. - Reforms supported: streamlining administrative procedures for registering a company, strengthening commercial arbitration processes with World Bank support. - Legal and judicial measures: - Measures include a Law on the Status of Judges and Prosecutors and revisions to the draft penal code to establish a credible and transparent legal and judicial system. - Land policies: - Land concessions have been granted by discretion; only about 7 percent of the area granted as concessions for agricultural purposes has been cultivated. - Authorities’ approach includes a program of land titling (proceeding at a steady rate for undisputed land) and ensuring land concessions are granted on a fair and transparent basis. - Staff urged consistency of the land concession sub-decree with the provisions of the 2001 Land Law and strong provisions for dealing with unsolicited bids to minimize scope for discretion and corruption. ### Staff appraisal: macroeconomic performance and policy recommendations - Recent macroeconomic performance and risks: - Authorities commended for implementing sound macroeconomic policies; despite surge in world oil prices, inflation stayed low, and debt declined in terms of GDP. - Growth has been very robust, but narrow growth base and widespread rural poverty persist; income disparities growing. - Overall medium-term prospects are favorable; growth expected to remain robust—and could well exceed the projected rate—and inflation moderate. - Risks: further escalation of oil prices; phasing out of garment safeguards restrictions on China could adversely affect medium-term prospects. - Opportunity: oil exploitation will likely significantly boost the economy in the longer run if well managed. - External debt path is sustainable but risks of distress exist because of the low revenue base; prudent borrowing policy recommended—limiting foreign finance wherever possible to concessional resources. - Revenue, expenditure, and public finances: - Almost one-third of public expenditure is financed by aid. - Cambodia’s revenue-to-GDP ratio continues to be among the lowest in the world. - Recommendations on revenue: - Strictly enforce current tax regulations and ensure all revenue collected is transferred to the National Treasury. - Strengthen capacity in the tax and customs department, update the anti-smuggling plan, and clarify petroleum-sector tax provisions. - Tax policy measures may be needed in the 2007 budget. - Expanding the scope of tax exemptions would undermine the revenue effort and have only marginal effectiveness in attracting foreign investment. - Expenditure reorientation: - Plan to reorient expenditure toward social spending (MDGs) and infrastructure is welcome. - Funds freed up by the MDRI will provide additional resources for poverty-reducing priorities. - Avoid new expenditure arrears and recourse to domestic financing to maintain fiscal integrity and low inflation. - Public financial management and civil service: - Strong ownership and implementation of PFM reform program combined with civil service reform would improve budget credibility and effectiveness. - Priority measures: introduction of the new Chart of Accounts and rationalizing government bank accounts. - Medium-term objective: move to a smaller, better-qualified and better-paid civil service to complement revenue and financial management efforts and combat corruption. - Monetary, exchange rate, and trade policy: - Monetary objectives and exchange rate and trade policies are appropriate. - Monetary aggregates expected to reflect increase in financial intermediation. - De-dollarization should remain a long-term objective; coercive measures could jeopardize public confidence. - Staff supports NBC’s approach to stabilize excessive exchange rate fluctuations while allowing adjustment to market fundamentals. - Authorities encouraged to strengthen competitiveness through improved trade facilitation (prompt introduction of ASYCUDA and the single window) and further regional integration. - Financial sector supervision and legislation: - Strengthening framework through enhanced supervision enforcement and adoption of remaining legislation is key to promoting sound financial intermediation. - Monitor impact of rapid private sector credit growth on banks’ balance sheets, with particular attention to two large banks that are now jointly owned. - NBC needs to limit exemptions on prudential requirements, especially on capital requirements and large exposure limits. - Staff looks forward to implementation of the laws on negotiable instruments and secure transactions to create a better functioning payments system. - Submission of the draft anti-money-laundering law to the National Assembly is welcome; continued measures needed to address weaknesses in NBC control, accounting, reporting, and auditing procedures as indicated by the safeguard assessment. - Anti-corruption and state asset management: - Addressing widespread corruption will enhance business environment and strengthen revenue collection. - Anti-corruption law should provide an important pillar for future efforts; staff encourages addressing weaknesses in the draft and prompt establishment of the anti-corruption secretariat. - Use current laws and procedures immediately to guard against misuse of funds and investigate irregularities. - Commitment welcomed to cease state asset transactions inconsistent with the Land Law and to subject all government concession contracts to open and transparent competitive bidding to strengthen non-tax revenue. - Statistics and program support: - Efforts to improve statistics welcomed; continued collaboration and adequate budget resources for statistical operations are warranted. - Authorities have demonstrated ownership of a credible structural reform program; NSDP provides a road map though some sectoral elements and costing need finalization. - Once outstanding debt arrears issues are resolved staff would support a request for a new PRGF arrangement to support the program and help close the financing gap in the medium-term balance of payments. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06264.pdf* ### 46. It is recommended that the next Article IV consultation take place within the standard ### _cr06264 - 46. It is recommended that the next Article IV consultation take place within the standard 12-month cycle. ### Growth, inflation, and composition of growth - Growth described as "robust" and inflation "under control" based on sustained non-agricultural growth. - Figure summary (2000–06): Real GDP Growth and Inflation shown; composition highlights Agriculture, Garment, Tourism and Construction, Other. - Key numeric highlights from tables and figures: - Nominal GDP (2005): $6287 million - Population (2005): 13.9 million - GDP per capita (2005): $454 - Fund Quota: SDR87.5 million - Real GDP: 6.28.610.013.45.06.5 - Real GDP excluding agriculture: 10.76.914.312.08.87.3 - Real agricultural output: -2.212.11.216.6-3.44.3 - GDP deflator: 1.40.25.35.75.24.0 - CPI Inflation (end of period): 3.70.55.66.75.04.0 ### Fiscal position and public finances - Summary assessment: "The fiscal deficit has been more-than financed externally... and public debt is sustainable. However, revenue is low and dominated by trade taxes ......while capital expenditure is being restrained." - Government operations (selected figures): - Revenue 3/10.59.710.410.512.011.3 - Of which: Tax revenue7.46.77.87.78.38.6 - Expenditure 16.715.715.213.915.015.5 - Current expenditure9.410.19.08.29.39.4 - Capital expenditure 4/7.56.66.15.65.76.2 - Overall budget balance-6.3-6.0-4.7-3.4-3.0-4.2 - Overall budget balance (incl. grants)-3.6-3.7-3.0-1.3-1.3-2.7 - Foreign financing, net6.75.54.84.84.44.4 - Domestic financing 5/-0.40.5-0.1-1.4-1.4-0.2 - Table 2 (2003–07, selected line items in billions of riels and percent of GDP): - Total revenue (2003–07): 1,7762,2092,6539592,8733,3663,501 (and percent of GDP) 9.710.410.53.411.912.011.3 - Total expenditure (2003–07): 2,8683,2053,5218233,7784,2034,817 (and percent of GDP) 15.715.213.92.915.615.015.5 - Overall balance (2003–07): -1,092-997-869135-905-837-1,316 (and percent of GDP) -6.0-4.7-3.40.5-3.7-3.0-4.2 - Financing (2003–07): 1092997869-1359058371,315 (percent of GDP) 6.04.73.4-0.53.73.04.2 - Revenue composition noted: revenue is low and dominated by trade taxes; total revenue (percent of GDP) and breakdowns preserved above. ### Monetary aggregates, reserves, and external sector - Monetary indicators: "Monetary aggregates are increasing ......driven by increases in foreign assets and private credit." - Monetary survey (selected series): - Broad money3,3214,3294,5014,6294,9945,0255,7116,0307,176 - Broad money (percent change)15.030.423.019.119.816.126.920.019.0 - Private sector credit (percent change)26.235.929.439.519.915.516.911.615.8 - Net foreign assets 4,0274,7974,8835,0845,3915,4756,4106,7147,398 - Gross international reserves (in millions of U.S. dollars): 6637378069151,0501,161 - Reserves accumulation: "International reserves have steadily accumulated......while the exchange rate has remained broadly stable." - External sector and balance of payments: - Trade balance deterioration noted in 2005: "The trade balance deteriorated markedly in 2005...with financing from aid and increased FDI." - Exports and imports (selected levels): Exports 6/1,6591,9702,4542,7733,0813,296; Imports 6/-2,275-2,579-3,166-3,822-4,441-4,894 - Current account (excl. official transfers) (2003–07): -406-497-440-594-719-824 (in percent of GDP) -9.5-10.8-8.4-9.5-10.7-11.3 - Current account (incl. official transfers) (2003–07): -104-170-122-268-377-469 (in percent of GDP) -2.4-3.7-2.3-4.3-5.6-6.4 - Capital account composition and financing: FDI, loans (net), official transfers and other capital inflows finance the external gap; "financing from aid and increased FDI." - Balance of Payments summary (Table 4, projections 2003–09): Current account (excluding official transfers)-497-440-594-719-824-790-806; Current account (including official transfers)-170-122-268-377-469-424-434 - Gross official reserves projections (2003–09, in millions of US$): 7378069151,0501,1611,3311,502 ### Medium-term projections and macro framework - Medium-term macro framework (Table 5, 2003–11 projections, percent of GDP unless indicated): - Real GDP (percent change)8.610.013.45.06.56.15.85.85.8 - GDP deflator (percent change)0.25.35.75.24.03.03.03.03.0 - National saving17.815.215.414.714.315.616.117.718.3 - Domestic investment21.517.519.720.320.720.921.121.321.8 - Revenue9.710.410.512.011.311.812.312.713.1 - Expenditure15.715.213.915.015.515.515.415.215.3 - Overall balance-6.0-4.7-3.4-3.0-4.2-3.7-3.2-2.5-2.2 - Overall balance (including grants)-3.7-3.0-1.3-1.3-2.7-2.3-1.8-1.4-1.2 - External public debt (percent of GDP)59.856.650.633.934.334.233.833.132.3 - Gross official reserves (in millions of US$)7378069151,0501,1611,3311,5021,7472,007 ### Social and development indicators - Cambodia Millennium Development Goals (selected indicators and targets as presented): - Population, total (millions): 9.611.212.713.213.414 - GNI per capita, Atlas method (current US$): ..280280290300320 - Net primary enrollment (%) and other social indicators shown in Table 6; figures presented as in source. *Sources: Data provided by the Cambodian authorities; and Fund staff estimates and projections.* ### ANNEX I ### ANNEX I — Cambodia: Fund Relations (As of April 30, 2006) ### I. Membership Status - Joined: 12/31/1969 - Article VIII ### II. General Resources Account (Quota and Fund Holdings) - Quota: 87.50 SDR Million — 100.00 percent of quota - Fund Holdings of Currency: 87.50 SDR Million — 100.00 percent of quota ### III. SDR Department - Net cumulative allocation: 15.42 SDR Million — 100.00 percent allocation - Holdings: 0.15 SDR Million — 0.92 percent ### IV. Outstanding Purchases and Loans - PRGF arrangements outstanding: 0 SDR Million — 0 percent of quota ### V. Financial Arrangements (Approved and Drawn) - ESAF/PRGF: - Approval Date: 10/22/1999 - Expiration Date: 02/28/2003 - Amount Approved: 58.50 SDR Million - Amount Drawn: 58.50 SDR Million - ESAF: - Approval Date: 05/06/1994 - Expiration Date: 08/31/1997 - Amount Approved: 84.00 SDR Million - Amount Drawn: 42.00 SDR Million ### VI. Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs) - Principal (Forthcoming 2006–2010): 0, 0, 0, 0, 0 - Charges/Interest: - 2006: 0.40 - 2007: 0.54 - 2008: 0.54 - 2009: 0.54 - 2010: 0.54 - Total (2006–2010): - 2006: 0.54 - 2007: 0.54 - 2008: 0.54 - 2009: 0.54 - 2010: 0.54 ### VII. Multilateral Debt Relief Initiative (MDRI) - IMF Executive Board approval date: January 5, 2006 - Relief: 100 percent of debt incurred by Cambodia to the IMF before January 1, 2005 - Amount forgiven: SDR 56.8 million (about US$82 million) - Intended use by authorities: spend the resources over a number of years, initially on rural irrigation projects - Transfer of proceeds: National Bank of Cambodia (NBC) transferred the full MDRI proceeds to the Ministry of Economy and Finance, effective March 2006 ### VIII. Safeguards Assessment - NBC subject to a full safeguard assessment with respect to the successor PRGF Arrangement - Assessment completed: March 2004 - Findings / measures proposed: address weaknesses in financial reporting, internal audit and internal control systems - Update expected: second half of 2006 ### IX. Exchange Rate Arrangement - Regime: managed float with no pre-announced exchange rate path - Since November 8, 1992 the riel arrangement uses two rates: - Official exchange rate: expressed in riels per U.S. dollar; applies to all official external transactions by the government and state enterprises - Market rate: determined by the foreign exchange market; applies to all other transactions - Policy: Official exchange rate is adjusted to limit the spread between official rate and market rate to no more than 1 percent on a daily basis - Rates on April 30, 2006: - Official exchange rate: CR 4,096 per U.S. dollar - Market rate: CR 4,102 per U.S. dollar - Article VIII obligations accepted: January 1, 2002 - Exchange system: free of restrictions on the making of payments and transfers for current international transactions ### X. Article IV Consultation - Consultation cycle provisions applicable: approved on July 15, 2002 - Last Executive Board conclusion of Article IV consultation: September 13, 2004 (Country Report No. 04/328) ### XI. Technical Assistance (Resident advisors and summary) - Current resident advisors (as of document): Banking advisor; Treasury advisor; multi-sector Statistics advisor - Detailed summary of technical assistance activities (1999–February 2006) provided in annex (selected entries preserved verbatim): - Fiscal: - Tax policy and customs administration — September 1999; (2) - Technical Cooperation Action Plan (TCAP) mission — March-April 2000; (3¾) - Tax administration and policy — March 2001; (1) - Public expenditure management — April 2001; (1) - Long-term customs advisor — April 2001; (24) - Long-term treasury advisor — August 2001; (14) - Long-term tax advisor — October 2001; (24) - Income tax changes regarding new Law on Investment — April 2002; (½) - Review of draft customs law — May 2002; (¼) - Long-term budget advisor — August 2002; (6) - Tariff restructuring — October 2002; (1) - Regulations on taxation — November/December 2002; (¾) - Customs administration — May 2003; (½) - Budget advisor — July-August 2003; (½) - Revenue mobilization — August/September 2003; (1) - Tax policy and administration — August-October 2003; (2) - Customs administration expert — October-November/Dec. 2003 (1½) - Tax administration — November 2003; (¼) - Budget advisor — December 2003; (7) - Tax administration expert — February 2004; (2) - Tax administration follow-up — February-March 2004; (½) - Tax and Customs administration IT — February 2004-April 2005 (4¾) - Customs administration — March 2004-May 2005 (4¾) - Budget management — December 2003-June 2004 (6) - Tax administration expert on audit circulars and training — July-November 2004 (4) - Treasury advisor — June-November 2004 (6) - Tax and Customs administration follow-up — Sept. 2004 (3/4); February 2005 (3/4) - Treasury Advisor — January-June 2006 (18) - Tax Policy (oil, gas) — June 2005 (1½) - Tax administration mission — July 2005 (1½) - Customs administration expert — October 2005, January 2006 (1½) - Tax Computerization — October 2005 (1) - Monetary: - General advisor — 1999; (1) - Bank supervision advisor — 2000 – 2002; (1) - Banking system restructuring — April 2001; (1) - Banking system restructuring and payments system development — August and November 2001; (2) - Law on negotiable instruments and payment transactions — March and May 2002; (½) - Banking system restructuring and supervision — July and December 2002; (2) - Foreign exchange management — September 2002; (¾) - Banking system restructuring and accounting — January 2003; (1) - Banking, accounting and foreign exchange management — April 2003; (2) - Banking supervision expert — November 2003; (6+12+2) - Banking, accounting and foreign exchange management — December 2003; (1) - AML/CFT — December 2003; (¼) - Accounting — May 2004 (3/4) - Mission on Central Bank internal audit — May 2004; February 2005; June 204 (3) - AML/CFT Legislation — July 2004 (1/2) - Prakas on AML/CFT — October 2004 (1/2) - Banking supervision, reserve management and TA review — September 2004 (3) - Central bank restructuring — January 2005 (1) - Banking supervision — February 2005 (2) - Seminar on Draft Law on Negotiable Instruments — March 2005 (1/4) - Central bank operations and banking supervision mission — July 2005 (3) - Banking advisor — July 2005 (12) - Payment System Regulation — October, December 2005 (2) - Bank Supervision — October 2005 (1) - Central Bank Restructuring — January 2006 (1) - Statistics: - Government finance statistics — April 2001; (1) - Long-term multisector statistics advisor — November 2001; (24) - General data dissemination system — November –December 2001; (1) - Monetary statistics — March –April 2002; (1) - Balance of payments compilation expert — April-June; Oct.-Nov. 2002; (6) - Balance of payments compilation expert — March-May 2003; (3) - Producer price statistics — July-August 2003; (1) - Consumer price index — October 2003; (½) - GFS follow-up — December 2003; (½) - Multisector statistics advisor — January 2004; (6) - Balance of payments statistics — March 2004 (½) - Producer price statistics — June 2004 (½) - Multisector statistics advisor — November 2004 (12) - Multisector statistics advisor — November 2005 (12) - Government finance statistics — April 2005 (½) - Government finance statistics — February 2006 (½) - Legal: - Insolvency Law — November 2000; (½) - Insolvency Law — July 2001; (½) - Insolvency Law — February and December 2002; (1) - AML/CFT — December 2003; (¼) - Anti-Corruption — August 2005 (½) ### XII. Resident Representative - Resident representative office: closed in October 1997, re-opened at end-October 1999 - Current Resident Representative: Mr. Nelmes *ANNEX I — Cambodia: Fund Relations. As of April 30, 2006.* ### ANNEX II ### ANNEX II ### A. The Current Situation - At end-2005, Cambodia’s total external public debt was about $3.2 billion (50½ percent of GDP); domestic debt amounted to 3½ percent of GDP, denominated entirely in local currency. - External debt constitutes over 90 percent of Cambodia’s public debt; almost 60 percent of external debt is owed to the United States and the Russian Federation. - The DSA assumes a debt restructuring agreement with the United States and Russia in 2006. Under this assumption: - Cambodia’s NPV of external debt-to-GDP ratio would drop from 40½ percent at end-2005 to 22½ percent in 2006. - United States bilateral issue: - Agreed total obligation of US$162 million after clarification of legal issues. - Next steps: signing a bilateral agreement based on the 1995 Paris Club (Naples terms: 40-year maturity, 16-year grace period, interest rate of 3 percent) and calculating arrears; expected request to reschedule arrears through the Paris Club. - Russian Federation bilateral issue: - Agreement on, after applying stipulated exchange rate and 70 percent upfront discount, total debt of US$457 million. - Interest rate for pre-cut-off-date debt about 0.8 percent with concessional repayment schedule. - Dispute on classification of US$40 million (pre- vs. post-cut-off-date) and interest rate on post-cut-off-date debt. - Fund staff macroeconomic assumption: disputed US$40 million is classified as post-cut-off-date debt and interest rate for post-cut-off-date set according to the Russian offer at the latest bilateral meeting. - Policy/institutional assessment: - Cambodia ranks as a ‘weak performer’ in World Bank CPIA. - Indicative debt-burden thresholds for this category: NPV of external debt-to-exports 100 percent; to GDP 30 percent; to revenues 200 percent; debt service ratios to exports 15 percent and to revenues 25 percent. ### B. Public Debt Sustainability - Key baseline assumptions: - Real GDP growth sustained at 6 percent; exports grow around 9 percent a year. - Foreign aid broadly stable in nominal U.S. dollar terms. - Fiscal consolidation begins with the 2006 budget; primary balance improves over the medium term. - New borrowing is projected to be highly concessional. - External debt owed to United States and Russian Federation assumed restructured in 2006. - Cambodia receives MDRI Fund debt relief of SDR57 million (US$82 million). - Effects of MDRI: - Impact on NPV of external debt-to-GDP ratio about 1¼ percentage points. - Debt relief provides around 1¼ percent of additional revenue in 2006 to be spent over the medium term on poverty reducing projects. - Indicators and projections: - NPV of public debt-to-revenue ratio: 348 percent at end-2005; around 182 percent after assumed 2006 bilateral restructurings. - Projected decline of NPV public sector debt-to-GDP ratio from 54 percent (end-2005) to 36½ percent in 2006 (around 25 percent in NPV terms in 2006). - Under baseline, NPV public sector debt-to-GDP ratio projected to drop to 8½ percent by 2026 given gradual improvement in primary deficit and long-run primary deficit at about 1 percent of GDP. - Risk and sensitivity: - Debt-to-revenue threshold breached for multiple years under all bounds tests. - Continuation of 2005 fiscal performance would lead to a greater decline in NPV public debt-to-GDP ratio than baseline (Test A2). - Maintenance of primary deficit at 2004 level (3 percent of GDP) would keep NPV public debt-to-GDP ratio above 30 percent and NPV debt-to-revenue ratio above 200 percent. - One-time exchange rate depreciation (Test B4) would raise NPV debt-to-GDP ratio by 9 percentage points and NPV debt-to-revenue ratio by 70 percentage points in 2007 relative to baseline. ### C. External Debt Sustainability - Baseline conclusions: - External debt burden indicators likely to remain below indicative thresholds following rescheduling agreements, but NPV of debt-to-revenue ratio remains close to the threshold in the medium term. - NPV of external debt-to-GDP ratio remains below 30 percent indicative threshold in medium term, though some stress tests produce breaches. - NPV of debt-to-exports ratio is 32½ percent in 2006 (below 100 percent threshold). - Debt service-to-exports ratio remains between 1 and 1½ percent in the long term reflecting high concessionality of new borrowing. - Vulnerabilities: - Export shock: a one standard deviation negative shock (12 percent) would breach the NPV debt-to-GDP threshold, producing NPV debt-to-GDP above 30 percent in 2008 and 2009 and remaining above in the medium term. - Under such export shock, NPV debt-to-export ratio would deteriorate by 19 percentage points to 53 percent in 2008 (relative to baseline) yet remain below its 100 percent threshold. - Debt service ratios remain below indicative thresholds even under extreme stress tests due to assumed high concessionality of new borrowing. - No-rescheduling scenario: - If no agreement is reached with United States and Russian Federation, external debt-to-GDP ratio remains high; debt service payments remain low since Cambodia is not servicing those creditors currently. ### D. Impact of Less-Concessional Loan - Authorities plan potential borrowing on less concessional terms (e.g., AsDB OCR lending; possible additional resources from China). - AsDB OCR characteristics (noted): interest rate in line with market rate; lending period 15-20 years; grace period 2-7 years. - Risks and recommendations: - Less concessional borrowing could add to debt burden and have implications for future expenditure given low revenue base and weak institutions. - Careful assessment, monitoring, and transparency required for large infrastructure investments. - If loans to private sector are accompanied by government political risk guarantees, contingent liability implications must be considered. - Simulation result: - If less-concessional borrowing limited to US$20 million per year, revenue impact would be about ½ to ¾ percent in the medium-term. ### E. Conclusion and Policy Implications - Overall staff judgement: - Cambodia’s debt is on a sustainable path, but the current risk of debt distress remains high. - Once rescheduling agreements are concluded, risk will moderate sharply provided baseline assumptions (improved revenue performance and sustained growth) hold. - Key quantitative outcomes: - NPV of public sector debt-to-GDP ratio falls below indicative threshold in the medium-term after rescheduling of United States and Russian debts. - NPV debt-to-revenue ratio remains near its indicative threshold of 200 percent in the medium-term under the baseline and is highly sensitive to macroeconomic and fiscal parameter fluctuations. - NPV external debt-to-GDP ratio is slightly below its indicative threshold in the medium-term; extreme export shocks could substantially increase probability of debt distress. - Policy priorities: - Strengthen revenue base (currently less than 11 percent of GDP) to improve the primary balance. - Maintain prudent economic policies and export diversification. - Monitor and manage debt strategy carefully, especially regarding less concessional loans, to avoid impairing sustainability given low revenue base and weak institutions. - Potential upside: - Positive impact of oil production on exports and revenues in the longer term would reduce risks, but oil effects were not included in baseline or alternatives due to uncertainty about scale, timing, and fiscal return. *Source: Cambodia: Debt Sustainability Analysis (ANNEX II), IMF/World Bank joint DSA projections and staff assessment.* ### ANNEX III ### ANNEX III ### IMF technical assistance (TA) and delivery modalities - Over the previous decade, Cambodia has received considerable IMF technical assistance (TA). - The most significant period was during the Technical Cooperation Assistance Program (TCAP) from 2001–03. - Cambodia is one of ten countries participating in the IMF’s pilot Country Technical Assistance Strategy Note exercise. - The Cambodia strategy note (discussed with the authorities in March) envisages Fund TA to be gradually scaled back from the high intensity of recent years and to have a narrower focus on key macroeconomic constraints. - Modes of delivery would emphasize building local capacity and favor subject-specific missions and visits over resident advice. - Despite the planned scaling back, substantial capacity gaps and the importance of cementing past gains mean Cambodia will continue to be a major recipient of Fund TA. - Current resident advisors in Cambodia: a Banking advisor; a Treasury advisor; and a multi-sector Statistics advisor. ### Banking sector TA: objectives, impacts, and remaining gaps - Objective: create a robust and efficient banking system through bank relicensing, strengthening regulations, and improving bank supervision. - Impact of TA: mostly satisfactory — capacity of the authorities increased, banking sector soundness improved, banking supervision strengthened, and the new Chart of Accounts was developed. - Remaining needs: - Further capacity building in banking supervision. - Strengthening internal audit and control. - Development of a payments system based less on cash. ### Fiscal TA: revenue administration, customs, and public expenditure management - Focus: strengthening revenue administration and budget management. - Tax administration results: - Implementation of a large taxpayer unit (LTU). - Improved audits and taxpayer services. - Computer system enhancement. - Identification of missing or improperly classified taxpayers. - Commencement of a functional restructuring. - Customs assistance: - Drafting of the new customs law and implementing regulations. - WTO accession support. - Anti-smuggling operations. - IT development. - Budget/preparation and execution support (since 2001): - Focused on treasury reforms, strengthening cash management, and addressing payment arrears. - TA in this area yielded only limited tangible results during the TCAP period. - Diagnosis of the PEM system contributed to the development of the Public Financial Management Reform Program (PFMRP) launched at the end of 2004. - More headway has been made recently under the PFMRP, but significant challenges remain. ### Legal TA and anti-corruption / AML-CFT assistance - Legal TA aimed to improve the financial sector legal framework, e.g., insolvency. - More recent TA provided for: - Drafting of the anti-corruption law. - AML/CFT work, including development of specialized institutional capacity in financial investigations and supervision. - Cooperation by the authorities has been mixed. ### Statistical TA: achievements and remaining issues - Statistical TA has been very effective in improving: - National accounts. - Price and foreign trade data. - Balance of payments. - Government finance statistics. - Money and banking statistics. - Progress indicators: - Creation of a new consumer price index. - Improvement in the availability, quality, and compilation methodologies of data. - Considerable progress in producing monthly and quarterly GFS reports. ### Donor coordination - Strong focus on donor coordination has been an important element of recent TA delivery (for instance in the government’s Sector Wide Approaches (SWAps)). - Donor coordination was an important characteristic of TCAP but was less effective than envisaged, particularly in PEM reform. - SWAPs emphasize discussions and agreements at the diagnosis and design stages. - TA efforts by donors (IMF, World Bank, AsDB, UNDP, AusAID, and JICA) — especially in public financial management and legal and judicial reform — are coordinated through various technical working groups, some including private sector participation. - Recently, donors have started to coordinate closely TA activities related to oil and gas exploration (an area not covered explicitly under the PFMRP). ### ANNEX IV — Cambodia: Statistical Issues (key findings) - Core economic and financial data provided to the Fund are generally adequate for surveillance despite significant shortcomings in some areas. - In March 2002, metadata were posted on the Dissemination Standards Bulletin Board, and Cambodia began participation in the Fund’s General Data Dissemination System. - Extensive TA from IMF, UNDP, AsDB, and World Bank has contributed to substantial improvements in macroeconomic statistics. - A long-term IMF advisor has worked in the National Institute of Statistics (NIS) since October 2001 (with a one-year interruption). - A new Statistics Law was passed by the National Assembly in March 2005. - UNDP technical assistance will facilitate implementation of the Statistics Law provisions related to governance, coordination, dissemination mechanisms, and general statistical training. ### National accounts and prices statistics - Official GDP estimates are produced annually with support from the AsDB’s peripatetic expert and a long-term IMF advisor. - Revised national accounts series for 2001–04 and preliminary estimates for 2005 have been completed and will soon be released. - These estimates show an upward revision of GDP growth rates for 2001–04 due to the incorporation of the results of the 2004 household expenditures survey. - GDP growth rates for 2001–04 have been revised to 7.7, 6.2, 8.6 and 10 percent, respectively. - Good progress is being made in preparing quarterly national accounts estimates for 2000 onwards. - Quality of GDP estimates remains hampered by lack of comprehensive and reliable sectoral information. - CPI: - NIS provides a monthly CPI with a five-week lag. - CPI was recently updated with new expenditure weights and rebased to July–December, 2000 = 100. - Since July 2000, NIS has compiled a quarterly urban CPI for five major provincial cities and Phnom Penh. - PPI: - A quarterly producer price index was developed with support from STA and financing from the AsDB. - Experimental PPI was released in April 2005 and a manual entitled “Cambodian Prices Statistics: Concepts, Sources and Methods” was recently published. - Compilation of the PPI has been discontinued owing to resource constraints. ### Government finance statistics (GFS) - Ministry of Economy and Finance provides monthly fiscal data (broadly based on GFS standards) with a four-week lag. - Remaining weaknesses: reliability of source data, coverage, economic and functional classifications of expenditure. - Data on donor-financed projects are available with a considerable lag. - Ongoing reforms: - With support of a Treasury advisor (FAD) and a Statistical Advisor (STA), authorities are reforming the government accounting system and budgetary nomenclature (based on Government Finance Statistics Manual 2001 classification). - Several STA missions to improve GFS compilation procedures and assist implementation of new methodology have taken place (latest in February 2006). - In 2005, authorities resumed providing monthly fiscal data for publication in IFS after an interruption and for the first time reported data for publication in the Government Finance Statistics Yearbook. ### Monetary and financial statistics - National Bank of Cambodia (NBC) provides monthly data on monetary authorities and deposit money banks with a four-week lag. - NBC compiles sectoral balance sheet and survey for central bank and other depository corporations in accordance with IMF’s Monetary and Financial Statistics Manual methodology. - Since August 2005, NBC has reported monetary and financial statistics to STA using the Standardized Report Forms (SRFs). ### External sector statistics - NBC is responsible for compiling balance of payments statistics. - Customs data have substantial coverage and valuation problems due to: - Nonrecording of nondutiable imports. - Underreporting of re-exports. - Weaknesses in customs controls. - Improvements in quality of foreign direct investment data noted, but private capital flows are believed to be large and not fully captured. - A range of international transactions by enterprises (payments for imported services, income payments, portfolio investment abroad) are not included in the data. - Gross external debt data provided by Ministry of Economy and Finance, but missing: - Public and publicly guaranteed debt by maturity. - External debt service schedule. - Timely information on disbursements by bilateral donors. - In January 2003, authorities implemented an International Transactions Reporting System (ITRS) to collect data on international transactions made through the banking system. - An STA balance of payments statistics mission in March–May 2004 reviewed source data and recommended improvements; a multisector statistics advisor is currently residing in Cambodia to assist in improving external sector statistics. ### Table of Common Indicators Required for Surveillance (selected entries, As of June, 2006) - Exchange Rates - Date of latest Observation: Apr. 2006 - Date Received: May 2006 - Frequency of Data: M - Frequency of Reporting: M - Frequency of Publication: M - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Date of latest Observation: Mar. 2006 - Date Received: April 2006 - Frequency of Data: D - Frequency of Reporting: D, two day lag - Frequency of Publication: N/A - Reserve/Base Money - Date of latest Observation: Feb. 2006 - Date Received: Apr. 2006 - Frequency of Data: M - Frequency of Reporting: M, 5 week delay - Frequency of Publication: M - Broad Money - Date of latest Observation: Feb. 2006 - Date Received: Apr. 2006 - Frequency of Data: M - Frequency of Reporting: M, 5 week lag - Frequency of Publication: M - Central Bank Balance Sheet - Date of latest Observation: Feb. 2006 - Date Received: Apr. 2006 - Frequency of Data: M - Frequency of Reporting: M, 5 week lag - Frequency of Publication: M - Consolidated Balance Sheet of the Banking System - Date of latest Observation: Feb. 2006 - Date Received: Apr. 2006 - Frequency of Data: M - Frequency of Reporting: M, 5 week lag - Frequency of Publication: M - Interest Rates - Date of latest Observation: Dec 2005 - Date Received: Feb 2006 - Frequency of Data: M - Frequency of Reporting: M, 5 week delay - Frequency of Publication: M - Consumer Price Index - Date of latest Observation: Feb. 2006 - Date Received: April 04, 2006 - Frequency of Data: M - Frequency of Reporting: M, 5 week lag - Frequency of Publication: M - Revenue, Expenditure, Balance and Composition of Financing – General Government - Date of latest Observation: June 2005 - Date Received: April 10, 2005 - Frequency of Data: M - Frequency of Reporting: M, 6-12 week delay - Frequency of Publication: M - Revenue, Expenditure, Balance and Composition of Financing – Central Government - Date of latest Observation: June 2005 - Date Received: April 10, 2005 - Frequency of Data: M - Frequency of Reporting: M, 6-12 week delay - Frequency of Publication: M - Stocks of Central Government and Central Government-Guaranteed Debt - Date of latest Observation: Dec. 2004 - Date Received: April 10, 2005 - Frequency of Data: M - Frequency of Reporting: M, 6-12 week delay - Frequency of Publication: M - External Current Account Balance - Date of latest Observation: Dec. 2004 - Date Received: Mar. 2005 - Frequency of Data: Q - Frequency of Reporting: Missions, email - Frequency of Publication: A - Exports and Imports of Goods and Services - Date of latest Observation: Dec. 2004 - Date Received: Mar. 2005 - Frequency of Data: Q - Frequency of Reporting: Missions, email - Frequency of Publication: A - GDP/GNP - Date of latest Observation: Dec. 2004 - Date Received: June 2005 - Frequency of Data: A - Frequency of Reporting: Missions, email - Frequency of Publication: A - Gross External Debt - Date of latest Observation: Dec. 2004 - Date Received: Mar. 2005 - Frequency of Data: M - Frequency of Reporting: M, 3 month lag - Frequency of Publication: A *Source: _cr06264 - ANNEX III* ### ANNEX V ### ANNEX V Cambodia: IMF-World Bank Relations ### Governance and Strategic Coordination - The Royal Government of Cambodia’s (RGC) Rectangular Strategy for Growth, Employment, Equity and Efficiency in Cambodia (2004) identifies improved governance as “the most important precondition to economic development with sustainability, equity and social justice.” - World Bank Country Assistance Strategy (CAS) focuses policy dialogue on: public financial management, private sector development, natural resource management, and local governance, while also addressing the national poverty reduction strategy, legal and judicial reform, rural development, decentralization, social sector development, and infrastructure. - Bank-Fund collaboration occurs via: (i) the policy-based lending program; and (ii) analytical and advisory services, including technical working groups. ### National Strategic Development Plan (NSDP, 2006-2010) - NSDP Secretariat chaired by the Ministry of Planning (MOP) with inputs from the Supreme National Economic Council (SNEC); NSDP approved by the National Assembly in May 2006. - NSDP is the RGC’s second poverty reduction strategy and implements the Rectangular Strategy (RS) to help achieve the Cambodian MDGs. - Donor coordination and inputs: - ADB, the UN system, and World Bank cooperated in 2005 to coordinate technical support to the NSDP Secretariat. - The Bank and the UN Resident Coordinator both serve as co-lead donor coordinators in the Technical Working Group on Planning and Poverty Reduction (TWG-PPR). - Bank technical inputs to NSDP: public financial management, civil service reform, and private sector development. - Recent analytical inputs include: national Poverty Assessment, Rural Sector Strategy Note, Sources of Growth study, and transport sector strategy. - The Fund has ensured the macroeconomic framework is consistent with its projections and recommendations and engaged on key structural policy issues. ### National Poverty Assessment and Related Initiatives - The Bank led a national Poverty Assessment released at the CG Meeting in March 2006 with local partners EIC and CDRI. - Data and methods: - Based primarily on the 2004 Cambodia Socio-Economic Survey (CSES) household consumption data. - Complemented by mixed methods research (Moving out of Poverty Study). - Key findings: - Poverty has fallen by between 10 and 15 percent in the decade since the first household survey in 1993/4. - Inequality increased: Gini coefficient is now 0.42. - Benefits of growth were uneven: living standards rose far faster in urban areas and in the highest quintile. - Note: prior poverty estimates were over eight years old before this assessment. ### Sources of Growth Study - Objectives: - i) Review relative sectoral contributions to economic growth and employment over the last decade. - ii) Identify and rank key binding constraints to sustained higher growth and employment. - iii) Assess potential growth and employment feasible if constraints are eased. - The Fund participates in a peer review capacity. ### Rural Sector Strategy - Context: - 85 percent of the population live in rural areas. - 79 percent of the poor mainly depend on agriculture and natural resources for their livelihoods. - The Bank prepared the Rural Sector Strategy Note (RSSN) finalized in June 2005 to identify critical rural development issues and options. - The Bank is preparing a Land Allocation for Social and Economic Development project. ### Transportation Sector Strategy - Transport remains a constraint to overall and equitable growth despite reconstruction and diagnostic work. - Key issues: - Weak transport sector management. - Absence of a sustainable road maintenance funding mechanism. - Technical work on a road law to govern road sector management is near completion. - Government progress on a comprehensive transport sector strategy has been limited. ### Social Sector Policy Dialogue (Health and Education) - Health sector policy priorities: - Improved effectiveness of health financing through sector-wide planning and budgeting processes, equity funds, and contracting with NGOs. - Pay and employment reform in the Ministry of Health. - Joint health sector performance review established maternal and child health as priorities. - Education sector policy priorities: - Address disparities in participation by region, income, and gender. - Improve efficiency and quality of education delivery across levels. - Strengthen local management capacity and reliability of education finance disbursements. - Implement pay and employment reform. - Both sectors are undertaking public expenditure tracking surveys. ### Public Financial Management (PFM) - IFAPER (2003) conclusions: - Cambodia made some progress on public expenditure policy and management but needs much more progress on fiscal, fiduciary, and institutional challenges. - Cambodia’s PFM system ranks below average compared to low income countries assessed by a joint World Bank-IMF diagnostic tool. - Government response: - Public Financial Management Reform Program (PFMRP) launched December 2004 with a detailed action plan, performance management framework, and organizational reform measures. - Ten development partners committed to coordinated support via a sector wide approach (SWAp). - Bank involvement: - Support through the Public Financial Management and Accountability Project (Board presentation scheduled for June 2006) to finance computerization of government accounting and payment systems. - The Bank manages a multi-donor trust fund to support PFMRP implementation. - Fund involvement: - Extensive TA in tax and customs administration and selected areas in budget management and Treasury operations. - Collaborative framework is supported by the Public Expenditure and Financial Accountability (PEFA) secretariat. ### Civil Service Reform - IFAPER identified problems: low and compressed pay, low skills, and low capacity—factors contributing to corruption and weak public sector performance. - Bank-supported analytical studies (grant-funded) provide the foundation for reform and cover: - (i) labor market pay comparator analysis; - (ii) pay and employment fiscal sustainability analysis; - (iii) reallocation and retrenchment analysis; - (iv) development of a functional analysis methodology and its application to select ministries; - (v) preparation of an establishment register. - Progress: - Work on studies commenced but the program is behind schedule. - Merit Based Pay Initiative (MBPI) agreed as a government program, to be piloted in the Ministry of Economy and Finance, providing substantial remuneration increases for a small group of officials selected on merit. - The Fund supported the MBPI pilot in the Ministry of Economy and Finance within the PFM reform program. ### Private Sector Development (PSD) - The Government needs higher priority on structural reforms to support private-led growth. - World Bank Group and IFC inputs: - Support via Government Private Sector Forum, investment climate assessment, value chain analysis, and Private Sector Development Strategy. - Findings: - Overlapping trade facilitation, inspection, and licensing processes across agencies contribute to excessive regulatory burden and high incidence of corruption. - Bank-Fund joint initiatives: - 2005 Trade Facilitation and Competitiveness Project to streamline import and export processes; customs automation collaboration between Bank and Fund. - A sector-wide approach (SWAp) on PSD is being reviewed with donors; initial focus areas: trade facilitation, SME development, PPI, and investment climate. ### Legal and Judicial Reform (LJR), Governance, and Anti-Corruption - Rectangular Strategy identifies LJR and fighting corruption as key factors. - Government adopted a Legal and Judicial Reform (LJR) Strategy in 2002 (formally adopted June 2003); priority actions agreed at CG meeting December 2004. - Priority legislative agenda (eight laws) included: Criminal Code; Criminal Procedure; Civil Code; Civil Procedure; Law on Anti-Corruption; Law on the Supreme Council of the Magistracy; Law on the Organization and Functioning of the Courts; and Law on the Status of Judges and Prosecutors. - As of May 2006 none of these eight laws had been passed. - Donor focus: improve TWG coordination among government agencies active in LJR. - RGC core reform areas: (a) access to legal and judicial services and dissemination of legal information; (b) strengthen market economy and legal reforms supporting PSD; (c) create and support alternative dispute resolution mechanisms. - Bank actions: - Support (through Trade Facilitation and Competitiveness Project) to Ministries of Justice and Commerce and courts to create a national database of legal information relevant to the private sector. - Analytical work toward the design of an IDA grant supporting access to justice initiatives and greater citizen participation in local governance. ### Poverty Reduction Support Operation (PRSO) - Proposed PRSO-1 focuses on: public financial management, private sector development, and land resources management (subsequent PRSOs to broaden coverage). - Design features: - Strengthen linkage between results and donor assistance. - Support implementation of the RS and NSDP policy agendas. - Closely linked to joint monitoring indicators (JMIs) agreed at the 2004 and 2006 CG Meetings. - Prior actions for PRSO-1 (subset of CG JMIs) must demonstrate government commitment to reform and address fiduciary safeguards. - Proposed prior actions: - Land resources management: state land management and economic land concessions. - PSD: trade facilitation and investment law. - Public financial and human resource management: budget process and treasury operations, procurement, and meritocratic pay and employment reform. - Bank-Fund coordination: - Staff coordinated closely on proposed PRGF and PRSO programs with streamlined conditionality arrangements. - Conditionalities in both programs are complementary and mutually reinforcing without overlapping on specific areas. - Consultations ongoing, including during the Fund mission in May 2006 and at country office level. ### Lending Operations and Financial Summary (IDA commitments and disbursements) - Table summary header: "IDA: Commitments and Disbursements to Cambodia (In millions of dollars, as of January 10, 2006)" - Total Credits: - Committed: 597.20 - Disbursed: 450.00 - Total Grants: - Committed: 51.37 - Disbursed: 6.25 - Selected project entries (effective date / committed / disbursed): - Biodiversity and Protected Areas Management Project — May 3, 2000 — 1.91 — 1.47 - Economic and Public Sector Capacity Building Project — February 10, 2003 — 5.50 — 0.98 - Education Sector Support Project — September 12, 2005 — 8.00 — 0.30 - Health Sector Support Project — August 14, 2003 — 17.20 — 3.97 - Land Management and Administration Project — June 19, 2002 — 24.30 — 9.62 - Provincial and Peri-Urban Water and Sanitation Project — November 16, 2003 — 16.90 — 2.95 - Provincial and Rural Infrastructure Project — March 16, 2004 — 20.00 — 10.93 - Rural Investment and Local Governance Project — September 16, 2003 — 22.00 — 11.41 - Road Rehabilitation Project — June 14, 1999 — 45.31 — 43.13 - Rural Electrification and Transmission Project — March 29, 2005 — 40.00 — 2.02 - Agriculture Productivity Improvement Project [Closed] — June 20, 1997 — 21.80 — 20.02 - Cambodia: Flood Emergency Rehabilitation Project [Closed] — June 4, 2001 — 35.00 — 37.03 - (Further closed and ongoing projects listed in the source; totals above reflect full portfolio.) - Grants (selected): - Provincial and Peri-Urban Water and Sanitation Project [H0340] — November 16, 2003 — 3.00 — 0.16 - Health Sector Support Project [H0150] — August 14, 2003 — 7.80 — 2.95 - Education Sector Support Project [H1610] — September 12, 2005 — 20.00 — 0.52 - Cambodia Trade Facilitation and Competitiveness — December 12, 2005 — 10.00 — - - Biodiversity and Protected Areas Management Project (GEF TF023524) — May 3, 2000 — 2.75 — 1.99 - Rural Electrification and Transmission Project (GEF TF053036) — February 6, 2001 — 5.82 — 0.31 ### World Bank’s Main Non-Lending Services (issues and instruments, recently completed and ongoing as of January 2006) - Civil Service Reform: IFAPER (2003), grant on public sector reform (ongoing), grant on civil service reform (ongoing), and pay and employment study on the education sector (2006). - Environment: Cambodia Environment Monitor (2003), Phase II Cambodia, Lao PDR and Vietnam Poverty-Environment Nexus Study (ongoing), Environment Monitor (FY06). - Gender: Cambodia Gender Assessment (April 2004) and grant on gender (ongoing). - Governance: Annual Report to the CG Meeting (12/04), grant on public sector reform (ongoing). - Human Development: PSIA on evaluating conditional means-tested school subsidies (ongoing), “Quality Basic Education for All” study (ongoing), Social Protection Policy Note (2005), Safeguards Research (2006), Child Labor Study (2006). - Infrastructure / Urban / Water and Sanitation: Urban Water and Sanitation Strategy (2006). - Legal and Judicial Reform: Justice for the Poor study (FY06). - Poverty Reduction and Economics: IDF grant on poverty reduction (2003), Poverty Reduction Strategy Trust Funds (ongoing), Sources of Growth (2006), Moving out of Poverty study (2006), Annual Report to the CG Meeting (3/06): National Poverty Assessment; CG Report on Inequality (2007). - Private Sector Development and Trade: FIAS report on FDI (2001), Integration and Competitiveness Study (2002), Private Sector Development Strategy/Investment Climate Assessment (2004), Investment Climate Assessment (FY05), PPIAF grant to develop an interim regulatory framework (ongoing). - Public Financial Management: IFAPER (2003), grant on public sector reform (ongoing), Country Procurement Assessment Report (2004), Fiduciary Review (2005), Public Expenditure Tracking Survey—Education (2005), Public Expenditure Tracking Survey – Health (2006), grant to assist development of private sector accounting capacity (ongoing). - Rural and Agriculture: Rice Value Chain Study (2002), PSIA on social land concessions (2004), Rural Sector Strategy Note (2005), Land Taxation & Valuation Study (2005), Land Policy and Strategy (FY06). *Source: _cr06264 - ANNEX V (PDF), "Cambodia: IMF-World Bank Relations."* ### ANNEX VI ### ANNEX VI ### Asian Development Bank (AsDB) support and portfolio to Cambodia (1992–31 December 2005) - Total AsDB approvals: $973.4 million in low-interest loans (including $42 million in grants in 2005) to finance 28 projects and 8 structural reform programs. - Completed loan projects (13 projects; total $333 million): - Phnom Penh High Voltage Transmission [approved in 1970, and closed in 1993] - Special Rehabilitation Assistance Project [approved in 1992] - Power Rehabilitation Project [approved in 1994] - Agriculture Sector Program [approved in 1996] - Basic Skills Project [approved in 1995] - Rural Infrastructure Improvement Project [approved in 1995] - Basic Education Text Book Project (approved in 1996) - Basic Health Services Project [approved in 1996] - Phnom Penh Water Supply and Drainage Project [approved in 1996] - Siem Reap Airport Project (approved in 1996) - Financial Sector Program, Subprogram I [approved in 2001] - Education Sector Development Program [approved in 2001] - Emergency Flood Rehabilitation [approved in 2000] - Remaining portfolio by sector (amounts stated exactly as in source): - agriculture and natural resources ($58.6 million) - education ($40 million) - energy ($62.9 million) - finance ($30 million) - health, nutrition and social protection ($20 million) - industry and trade ($35.6 million) - law, economic management and public policy ($10 million) - multi-sector ($43.2 million) - transport and communication ($158 million) - water supply, sanitation and waste management ($26.3 million) - Technical assistance (1992–31 December 2005): - 129 technical assistance projects amounting to $82.13 million - Financing sources: Technical Assistance Special Fund ($30.6 million), Japanese Special Fund ($33.4 million), other sources ($18.3 million) - 2005 approvals: Tonle Sap Water Supply and Sanitation; Financial Sector Program Loan I (Cluster III); Tonle Sap Sustainable Livelihoods. ### AsDB Country Strategy and Program (CSP) priorities and cross-cutting themes - Overarching goal: sustainable poverty reduction. - CSP focus areas: - Broad-based economic growth: - investments in physical infrastructure - development of the financial sector - sustainable development of small and medium-scale enterprises - investments in agriculture and irrigation - Inclusive social development: - basic education - empowering vulnerable groups such as women and ethnic minorities - control of communicable diseases - provision of rural water supply and sanitation facilities - community-based sustainable management and conservation of natural resources in the Tonle Sap Basin - Good governance: - improving accountability and service delivery - supporting legal, regulatory and policy reforms - strengthening institutional capacity building - improving efficiency and effectiveness of project implementation - Geographic/subregional emphasis: - focus on the Tonle Sap basin to address geographical disparities in development - subregional focus to benefit from AsDB’s Greater Mekong Sub-region program - Four cross-cutting themes to support poverty reduction: governance, private sector development, gender, and the environment. - CSP development process: based on wide ranging consultations with the Government, donors, civil society, and the private sector; joint strategic planning with World Bank, DFID, and UN agencies resulting in shared analysis and assessments. ### IMF Article IV Consultation — Key background and 2005 developments (Public Information Notice No. 06/78; July 20, 2006) - Macroeconomic stability supported by prudent fiscal and monetary policies. - Labor market/demographics: - working age population growth: 3 percent annually - Poverty and growth: - overall poverty decline: from 47 percent in 1993 to 35 percent in 2004 - growth narrowly based on garment exports and tourism; rural poverty remains high - External debt burden: - eased to 51 percent of GDP in 2005, from a peak of 60 percent in 2003 - 2005 real GDP growth and sectoral drivers: - Real GDP growth: 13½ percent in 2005 - Agriculture output grew by around 17 percent (exceptionally favorable weather following 2004 drought) - Garment exports continued to expand in 2005 despite MFA quota termination and safeguard restrictions - Tourist arrivals rose by 35 percent in 2005 to nearly 1½ million - Inflation: - at end-April 2006, inflation had eased to below 5 percent - Fiscal developments: - overall deficit declined to 3½ percent of GDP in 2005, from 4¾ percent in 2004 - revenue to GDP ratio in 2005: 10½ percent - decline in capital spending; current spending grew only moderately - Financial sector and dollarization: - broad money and bank deposits grew by about 16 percent (year-on-year) in 2005 and picked up in early 2006 - private sector credit averaged less than 10 percent of GDP in 2005 - banking system remains relatively undeveloped and concentrated - External sector: - current account deficit (excluding transfers) widened to 9½ percent of GDP in 2005 - deficit financed by an upswing in foreign direct investment concentrated in garment, tourism, and construction - riel was fairly stable against dollars and partner country currencies - Structural reforms and policy actions: - implementation of flagship public financial management (PFM) reform program - issuances of sub decrees on economic land concessions and on state land management ### Executive Board assessment — findings and policy recommendations - Commendations: - sound macroeconomic policies contributing to strong growth - improved fiscal position and controlled inflation - implementation of key structural reforms and significant poverty reduction - Priorities and recommendations: - improve governance and the investment climate to enable faster and broader-based private sector growth and reduce long-term reliance on aid - reorient expenditure toward achieving Millennium Development Goals (MDGs) under the National Strategic Development Plan (NSDP); channel more resources to increasing agricultural productivity - strengthen costing and prioritization of the NSDP - use resources freed by the Multilateral Debt Relief Initiative (MDRI) to strengthen poverty reduction efforts - increase revenue collection: - full enforcement of current tax regulations - reining-in of tax exemptions - enhance revenue administration - consider additional tax policy measures in the 2007 budget - manage future petroleum proceeds prudently; participate soon in the Extractive Industries Transparency Initiative - monetary policy approach endorsed given high dollarization; de-dollarization a long-term objective - stabilize excessive exchange rate fluctuations while allowing adjustment to fundamentals; continue regional integration - strengthen financial infrastructure: - enhanced supervision, especially of dominant banks - stronger enforcement and development of a more effective payments system - limit exemptions on prudential requirements (capital requirements and large exposure limits) - address weaknesses in NBC internal control, accounting, and auditing as identified in safeguards assessment - support draft law to combat money laundering and the financing of terrorism - continue prudent borrowing policy and limit non-concessional foreign financing - resolve outstanding official bilateral debt issues to facilitate potential Fund financial support within the PRGF framework - accelerate structural reforms to promote equitable growth and competitiveness - hasten implementation of PFM reforms, in particular: - introduce the new Chart of Accounts for the 2007 budget - rationalize government bank accounts - improve governance and civil service reform to fight corruption; promulgate an anti-corruption law of international standard and promptly establish an anti-corruption secretariat - ensure adequate budget resources for statistical improvement to monitor NSDP macroeconomic and social objectives ### Selected economic indicators, 2002–2005 (as presented) - Output and prices (Annual percent change) - Real GDP: 2002: 6.2 2003: 8.6 2004: 10.0 2005 Est.: 13.4 - GDP deflator: 2002: 1.4 2003: 0.2 2004: 5.3 2005 Est.: 5.7 - CPI Inflation (end of period): 2002: 3.7 2003: 0.5 2004: 5.6 2005 Est.: 6.7 - Money and credit - Broad money: 2002: 33.0 2003: 15.0 2004: 30.4 2005 Est.: 16.1 - Net credit to the government: 2002: -2.0 2003: -0.3 2004: -2.4 2005 Est.: -4.9 - Private sector credit: 2002: 13.1 2003: 26.2 2004: 35.9 2005 Est.: 29.4 - Government budget (In percent of GDP) - Total Revenue: 2002: 10.5 2003: 9.7 2004: 10.4 2005: 10.5 - Expenditure: 2002: 16.7 2003: 15.7 2004: 15.2 2005: 13.9 - Of which: current expenditure: 2002: 9.4 2003: 10.1 2004: 9.0 2005: 8.2 - Current budget balance: 2002: 1.1 2003: 0.4 2004: 1.3 2005: 1.6 - Overall budget balance: 2002: -6.3 2003: -6.0 2004: -4.7 2005: -3.4 - Overall budget balance (incl. grants): 2002: -3.6 2003: -3.7 2004: -3.0 2005: -1.3 - External sector (In millions of U.S. dollars; unless indicated) - Current account (excl. official transfers): 2002: -406 2003: -497 2004: -440 2005: -594 - (in percent of GDP) 2002: -9.5 2003: -10.8 2004: -8.4 2005: -9.5 - Exports: 2002: 1,659 2003: 1,970 2004: 2,454 2005: 2,773 - Imports: 2002: 2,275 2003: 2,759 2004: 3,166 2005: 3,882 - Gross official reserves: 2002: 663 2003: 737 2004: 806 2005: 915 - (in months of imports of goods and services) 2002: 2.9 2003: 2.8 2004: 2.6 2005: 2.4 - Public external debt (millions): 2002: 2,492 2003: 2,740 2004: 2,976 2005: 3,180 - (in percent of GDP) 2002: 58.2 2003: 59.8 2004: 56.6 2005: 50.6 - Exchange rate (riels per dollar; end of period): 2002: 3,935 2003: 3,980 2004: 4,031 2005: 4,116 *Source: ANNEX VI; AsDB relations and IMF Public Information Notice No. 06/78 (Article IV Consultation with Cambodia, July 2006).* ### Introduction ### _cr06264 - Introduction ### Overview and authorities' stance - Authorities express thanks to Executive Directors, Management, donor countries, and development partners for continued support and for provision of debt relief under the Multilateral Debt Relief Initiative (MDRI) early this year. - Authorities are in broad agreement with staff’s assessment and policy recommendations and thank staff for the constructive policy dialogue during the recent Article IV consultation. - Authorities emphasize strong country ownership of national policies and effective international support as key to progress. ### Recent economic performance and poverty reduction - Real GDP growth averaged over 7.6 percent per annum over the last 12 years. - Poverty fell from 47 percent in 1993 to 35 percent in 2004. - 2005 highlights: - Real GDP growth in 2005 was at a record high of about 13½ percent. - Growth drivers: continued high export growth, healthy tourism receipts, robust construction activity, and strong agriculture production bolstered by favorable weather and conducive government policies. - Inflation rose to 6¾ percent in 2005 due largely to higher oil prices, but was subsequently contained below 5 percent by the end of April 2006. ### Prospects and risks for 2006 and medium term - Authorities agree with staff’s projection for real GDP growth of 5 percent in 2006, but view potential upside exists given progress in structural reforms and prudent macroeconomic management. - Factors underpinning favorable prospects: political stability, active private sector initiatives, progress in reform efforts, continued aid flows and foreign direct investment. - Main risks to the outlook: an avian flu pandemic, high oil prices, uncertainty in the garment export market, and weather-dependence of the agriculture sector. - Policy commitment: accelerate reform program under the National Strategic Development Plan (NSDP) 2006–2010 to support diversification, agricultural productivity, and regional integration. ### Fiscal policy: performance and orientation - 2005 fiscal outcomes: - Overall deficit declined to 3½ percent of GDP in 2005 from 4¾ percent in 2004, reflecting restrained expenditure and slower donor project execution. - Revenue collection exceeded annual budget projections but remained low at 10.8 percent of GDP. - Revenue mobilization targets and measures: - Authorities working to achieve total revenue of 11.3 percent of GDP for 2006. - Measures: enforce the Law on Taxation, broaden tax base on the informal sector, strengthen tax audit, reorganize the tax department, modernize the customs department, create a non-tax revenue department, and upgrade the anti-smuggling plan. - All tax revenue collected must be immediately deposited into the National Treasury; prohibition of tax exemptions beyond the limit allowable under the Law on Investment. - 2005 Prime Minister Order initiated a transparent bidding procedure for future government concession contracts. - Expenditure priorities: - Social spending projected to be about 1½ percent of GDP in 2006 with more resources for rural development. - Current expenditure projected to increase by only about 1¼ percent to provide greater resources for capital spending. - Civil service salaries projected to increase gradually under civil service reform. - Use of MDRI resources and financing: - Plan to utilize the initial $33.38 million of freed-up MDRI resources to support an irrigation project in the eastern part of the country. - Authorities seeking concessional financing from China and the Asian Development Bank (AsDB) for infrastructure investment, including the energy sector. - Medium-term fiscal objectives and reforms: - Enhance revenue performance and re-orient expenditures to meet pro-poor priority spending. - Adoption of the Public Financial Management Reform Program (PFM), a comprehensive multi-year reform program, in late 2004. - Need to improve budget management in the 2007 budget, including adoption of the new chart of account and development of a system for tracking poverty spending. ### Monetary and exchange rate policy; financial sector reform - Monetary policy stance: - National Bank of Cambodia (NBC) maintains a prudent monetary policy aimed at price stability. - Inflation objectives: kept below 5 percent in the near-term and at about 3½ percent over the medium-term. - Monetary and credit developments: - During 2005, broad money and bank deposits grew by about 16 percent (year-on-year) with an upward trend into early 2006. - Credit to the private sector grew by about 30 percent but accounts for only around 10 percent of GDP. - Low financial intermediation attributed to an inadequate legal framework. - Legal and market infrastructure improvements: - Adoption of the law on the Negotiable Instruments and Payment Systems in 2005 to support development of a money-market, inter-bank market and payment system with IMF and AsDB assistance. - Exchange rate policy: - Continued managed float exchange rate policy; interventions only to limit exchange rate volatility, not to target a specific level. - High dollarization: share of local currency, riel, in total bank deposits and lending was 4 percent and 6 percent respectively. - Authorities prefer encouraging greater use of local currency but will not impose restrictions on the use of foreign currency. - Banking supervision and prudential measures: - Banking system restructuring in 2000–01 contributed to sector stability. - NBC capacity for on-site and off-site supervision enhanced; normally all banks receive at least one on-site examination every two years, with higher frequency for those requiring closer oversight. - High concentration: two local banks have high market share and are subject to at least annual on-site examinations. - NBC engaged with a bank not complying with prudential regulations to enhance operational and credit risk management. - Exemptions for large exposure limits to be granted only where due diligence shows loans are fully secured and risk fully covered. - AML/CFT and Financial Intelligence Unit: - Additional banking regulations issued on anti-money laundering and combating financing of terrorism pending approval of the AML/CFT law. - Draft AML/CFT law discussed at inter-ministerial level, awaiting approval by the National Assembly. - Draft law envisages establishment of the Financial Intelligence Unit (FIU) at the NBC with participation of related ministries. ### Structural reforms and private sector development - Reform focus in 2005: private sector development, competitiveness, and trade facilitation following WTO accession in 2004. - Trade facilitation supported by the World Bank to reduce time and cost for import and export clearance. - Regulatory and framework developments issued in 2005: - Sub-decree on risk management strategy. - Sub-decree on creation of special economic zones. - Law on Concessions. - Sub-decree for the amended Law on Investment. - SME development and financial access: - Launch of the Small and Medium Enterprise Development Framework as a blueprint for SME sector development. - NBC introduced the Credit Information System (CIS) and prepared legal framework for leasing activity to improve SME access to financing. ### Multilateral Debt Relief Initiative (MDRI) - Authorities committed to using freed-up MDRI resources transparently, accountably, and efficiently to accelerate poverty reduction towards meeting the Cambodian Millennium Development Goals (CMDGs). - MDRI proceeds focused on rural investment due to persistent rural poverty. - Government initiated a three-year project amounting to $33.38 million of MDRI proceeds for irrigation projects in the eastern provinces to improve agriculture production and reduce rural poverty. ### Governance and anti-corruption - Anti-corruption law is being revised to comply with international standards. - Authorities will ensure the Anti-Corruption Secretariat has independent status and that requisite financial resources will be earmarked in the 2007 budget. ### Debt issues and debt relief negotiations - Outstanding debt issues viewed as main impediment to economic growth and poverty reduction. - Royal Government committed to resolving outstanding debt issues within Cambodia’s financial capacity without compromising poverty reduction and CMDGs. - MDRI provision acknowledges limited financial capacity and poverty level. - Authorities urge major creditors, especially the United States and the Russian Federation, to consider concessional terms and to reach consensus to allow Cambodia to enter into a new PRGF program. - Status of creditor negotiations: - Total debt stock with the United States has been reconciled after numerous bilateral rounds of verification and adjustments. - A few differences remain with the Russian Federation after the March 2006 meeting; authorities urge Russian consideration for concessional terms for post 1985 debt. ### National Strategic Development Plan (NSDP) and public investment - NSDP is a unified national poverty reduction strategy building on the 2004 Rectangular Strategy, the second Socio-Economic Development Plan for 2001-05, and the National Poverty Reduction Strategy for 2003-05. - NSDP formulated through an inclusive process with wide-ranging consultations; presents consensus on priority strategies. - Emphasis on implementation of the focused and prioritized Public Investment Program (PIP), a three-year rolling program adopted in January 2006, as key to NSDP success. - Authorities express strong ownership of the NSDP and commitment to align resources with development partners to achieve goals. ### Conclusion and PRGF outlook - Donor community welcomed achievements and agreed to work in partnership to help lift Cambodia out of poverty. - Authorities have maintained a strong and stable macroeconomic environment with a credible poverty reduction strategy despite absence of an IMF program. - Authorities optimistic about a PRGF program in the near future to support development and reform efforts, evaluate reform progress, and provide impetus for achieving the CMDGs. - Authorities hope Executive Directors will support Cambodia’s request for the PRGF program. *Source: _cr06264 - Introduction* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06264.pdf_