Statement at Donor Meeting

Remarks on Macroeconomic Developments, Public Financial Management and Private Sector Development Delivered by the IMF Representative on Behalf of Development Partners at the Cambodia Development and Cooperation Forum

June 19, 2007

Excellencies, Ladies and Gentlemen:

It is an honor to participate in the first Cambodia Development and Cooperation Forum, and to deliver on behalf of the Royal Government of Cambodia's development partners some remarks on macroeconomic developments and policies, public financial management (PFM), and private sector development (PSD) reforms.

Overall macroeconomic developments have been impressive in the period since development partners and the Royal Government met at the Consultative Group meeting a little over one year ago. Growth has remained very high and inflation low, government revenues have grown significantly, and budgets have increasingly focused on priority development objectives in line with the National Strategic Development Plan. Public financial management reforms being put in place are increasingly lending credibility to the budget, while the business environment is improving through private sector development initiatives.

Development partners commend the Royal Government for their policy implementation efforts in these areas, and the clear successes that have resulted. Cambodia is one of the fastest growing economies in the world today, in no small measure as a result of sound and prudent implementation of macroeconomic policies and structural economic reforms, and strong financial and technical support from development partners. Moreover, as pointed out in the World Bank's Equity and Development Report, the benefits of this growth have been shared reasonably equally over the period between 1997 and 2004. This is very good news.

Macroeconomic, public financial management, and private sector development reforms have contributed to the positive outcomes both directly and indirectly. Together, they provide a stable and predictable environment necessary for growth, address governance in the management of public resources and help to channel those resources efficiently and transparently toward achieving the Cambodian Millennium Development Goals (CMDGs), and they broaden the base of economic activity and strengthen linkages between growth and poverty reduction.

In conjunction with rising economic fortunes are higher hopes and expectations for tackling some of the more difficult reforms that have not progressed as quickly as earlier planned. One must not lose sight of the fact that poverty continues to be widespread even after considering the gains made over the past decade, with deep pockets in rural areas, and significant income gaps remain between the rich and the poor. New issues have also emerged, including in particular developing the legal and policy framework to maximize the benefits of Cambodia's oil discovery while managing the risks.

The challenge now is to take advantage of the very positive environment to make progress on some of the key development issues facing Cambodia, so that deeper inroads can be made in reducing poverty and achieving the CMDGs. In this light, development partners would like to raise the following issues in the spirit of constructive dialogue, on which the views of the Royal Government would be most welcome:

• The discovery of oil has major policy implications, even if the amounts ultimately recoverable were to be less than early estimates. Progress in preparing the legal, regulatory and taxation regimes should be made in advance of actual oil production, to ensure that the kitchen is ready when the fish is finally pulled from the water. There are similar issues that arise for other industries, such as mining. What are the government's priorities for these sectors, and how can development partners assist?

• Recently acquired sovereign credit ratings open the door to government borrowing from international financial markets. While some limited borrowing on commercial terms for high-return infrastructure projects is consistent with debt sustainability, such borrowing would imply large debt-servicing costs and divert scarce government resources from other activities. What are the government's views on these considerations?

• A comprehensive reform of the civil service is needed to underpin implementation of the NSDP as well as improvements in governance. How can different views over the broad direction to be taken be reconciled, so that Government can develop a high performing civil service capable of meeting the challenges of the 21^st century?

• Public financial management reforms are progressing very well, and the focus over the coming year is to complete Platform 1 activities, and begin laying the foundation for Platform 2. Reforms will increasingly rely on active participation of the line ministries. How does the government see that process evolving?

• Private sector development reforms are critical for broadening the base of economic growth and strengthening linkages between growth and poverty reduction. Progress has been made in improving the business environment, and in implementing trade facilitation reforms. However, the high cost of informal fees and the lack of a complete framework of commercial laws, including the anti-corruption law, are hindering this progress. What does the government see as the most important steps for addressing these problems over the coming year?

Once again, let me congratulate the Royal Government for the successes that have been achieved, and reiterate that development partners remain committed to working closely with you in pursuit of your development reform agenda. We look forward to a fruitful and constructive dialogue at this first CDCF meeting.