Cambodia Economic Watch October 2008

CAMBODIA ECONOMIC WATCH

OCTOBER 2008

ECONOMIC INSTITUTE of CAMBODIA

Research Director

:

Sok Hach

Project Team Leaders :

Neou Seiha

English Editor

:

Alanna Jorde

Authors

:

Neou Seiha Chhun Dalin

TABLE OF CONTENTS List of Abbreviations and Acronyms

iii

List of Tables and Figures

v

Foreword

vi

Executive Summary

vii

Part I: Recent Economic Developments and Outlook

1

1. Cambodian Economic Growth

3

1.1. Agriculture

4

1.2. Industry

6

1.3. Service

8

2. Trade, Investment and Productivity

11

2.1. External Trade and Capital Movements

11

2.2. Private Investment and Stocks of Capital

13

2.3. Productivity

14

3. Price and Monetary Development

17

3.1. Inflation

17

3.2. Exchange rate

18

3.3. Money supply

19

3.4. Interest rate

20

4. Fiscal Development and External Debt

23

4.1. Budget Revenue

23

4.2. Budget Expenditure

24

4.3. Budget Financing and External Debt

26

5. Labor Force, Incomes, and Poverty

29

5.1. Employment

29

5.2. Incomes

30

5.3. Poverty

30

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Part II: Structural Reforms: Current Implementation and Prospects

33

6. Banking and Financial Sector Reform

35

6.1. Banking and Non Bank Finance

35

6.2. Microfinance

37

7. Public Financial Management Reform

39

7.1. Reform Outcomes: Revenue Collection and Budget Disbursement

39

7.2. Overall PFMRP Revisited and Process for Platform 2

40

8. Trade Reform

45

8.1. Economic Integration

45

8.2. Trade Facilitation

47

9. Public Administrative Reform

49

9.1. Central Administration Reform

49

9.2. Sub-National Administrative Reform

50

10. Legal and Judicial Reform

53

10.1. Achievements and Progress of Legal Reform

53

10.2. Judicial and Alternative Dispute Resolution (ADR)

54

11. Land and Natural Resource Reform

57

11.1. Land Reform

57

11.2. Forestry Reform

58

11.3. Fisheries Reform

59

Bibliographic References Appendix 1: Key Economic Indicators

63

Appendix 2: Key Structure Reforms

77

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EIC - Cambodia Economic Watch - October 2008

LIST OF ABBREVIATIONS AND ACRONYMS ADR AEC ASEAN BSP CAMEX CAR CDC CDRI CED CIS CLJR CMA CMDG COBRA

Alternative Dispute Resolution ASEAN Economic Community Association of South East Asian Nation Budget Strategic Plan Cambodia Stock Exchange Market Council for Administrative Reform Council for the Development of Cambodia Cambodia Development Resource Institute Custom Excise Department Credit Information Sharing Council for Legal and Judicial Reform Cambodia Microfinance Association Cambodia Millennium Development Goals Cambodian Offsite Bank Reporting for prompt corrective Action CoM Council of Minister CR Cambodian Riel CSES Cambodia Socio Economic Survey D&D Decentralization and Deconcentration EIC Economic Institute of Cambodia ELC Economic Land Concession EU European Union FA Fishery Administration FMIS Establishment of Financial Management Information System FSDS Financial Sector Development Strategy GDCC Government-Donor Coordination Committee GDP Gross Domestic Product HRD Human Resource Development HRM Human Resource Management HRMIS Human Resource Management Information System ILO International Labour Organization IMF International Monetary Fund JMI Joint Government-Donors Monitoring Indicators MAFF Ministry of Agriculture, Forestry and Fisheries MBPI Merit Based Pay Initiative MDTF Multi-Donor Trust Fund MEF Ministry of Economy and Finance MFI Microfinance Institutions MIS Management Information System MLMUPC Ministry of Land Management, Urban Planning, EIC - Cambodia Economic Watch - October 2008

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and Construction MoC Ministry of Commerce MoH Ministry of Health MoJ Ministry of Justice NA National Assembly NBC National Bank of Cambodia NCDD National Committee for D&D NIS National Institute of Statistics NLDA National Authority for Land Dispute Resolution NSDP National Strategic Development Plan OWOs One-Window Offices PFMRP Public Financial Management Reform Program PMG Priority Mission Group PPD Public Procurement Department RGC Royal Government of Cambodia RSM Royal School of Magistracy SAD Single Administrative Document SCM Supreme Council of Magistracy SSC-TD&TR Sub-Steering Committee on Trade Development and Trade-Related Investment TFCP Trade Facilitation and Competitiveness Project TWGFE Technical Group on Forestry and Environment VND Vietnam Dong WB World Bank WEF World Economic Forum WTO World Trade Organization

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LIST OF TABLES Table 1.1:

Cambodia's Real GDP Growth by Sector (%, 2000 prices)

Table 1.2:

Trends in the Agriculture Sector (% increase, 2000 prices)

Table 1.3:

Trends of Industry Sectors (% increase, 2000 prices)

Table 1.4:

Trends of Service Sectors (% increase, 2000 prices)

Table 2.1:

Cambodia's Balance of Payments (Million of US Dollar)

Table 2.2:

Approved Private Investment Projects*

Table 2.3:

Productivity of Workers (% Increase, US$2000 price)

Table 3.1:

Cambodia’s Monetary Survey (Billions of Riel)

Table 3.2:

Cambodia’s Interest Rate (% per annum, end of period)

Table 4.1:

Cambodia’s Central Government Revenue (Billion of riel)

Table 4.2:

Cambodia’s Central Government Expenditure (Billions of Riel)

Table 4.3:

Cambodia’s Financing Budget (Billion of Riel)

Table 5.1:

Cambodia's Population and Labor Force (000's)

Table 6.1:

Interest Rates as of June 2008

Table 6.2:

Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of August 2008)

Table 7.1:

Indicators Tracking PFMRP Progress

Table 7.2:

PFM Objectives and Key Indicators

Table 8.1:

Status of Remaining WTO-related Laws

Table 8.2:

Trading Across Borders

Table 10.1:

Adopted Legal Texts in Third Legislature by the NA

Table 10.2:

Progress on the Remaining Fundamental Draft Laws

LIST OF FIGURES Figure 3.1:

Cambodia’s Consumer Price Index (December 2002=100)

Figure 3.2:

Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100)

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FOREWORD

With the aim of providing a broad-based economic analysis to policy makers and stakeholders, the Economic Institute of Cambodia (EIC) has great pleasure in presenting the latest issue of “Cambodia Economic Watch”. This EIC series of publications not only serves as a policy-oriented research paper, but also as a reference for all readers who wish to gain a snapshot of the Cambodian economy or monitor its development. As in previous issues, this edition presents the latest economic performance and prospects based on the analysis of current data from many reliable sources. It takes an in-depth look at the trends of the main economic indicators and the progress of reform policies. It also highlights the urgent measures that need to be taken to address any of the problems encountered. In brief, two main phenomena have been noted in 2008. Firstly, the double digit economic growth rate could not be maintained due to slower growth expected for garment industry and negative growth rate anticipated for construction sector; despite tourism sector and financial sector remain relatively strong. These trends are likely to carry over 2009, and thus a lower economic growth rate is also expected accordantly. Secondly, inflation rate is doubled to that of 2007 because of soar in food prices and impressive increase in transportation, household good and medical care. Increase of prices of crude oil and food price in the international market and depreciation of the US dollar, as well as dependency on imported consumer goods, are main reasons for this huge inflation. We would like to thank the World Bank for its generous support. Special thanks to Chea Huot and his team for their invaluable comments, to Dane Hor, Chhim Rothsothea, and EIC research assistants for their excellent assistance, to all EIC staff for their enthusiasm, and to other institutions and individuals too numerous to list.

Sok Hach, Director Economic Institute of Cambodia

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EIC - Cambodia Economic Watch - October 2008

EXECUTIVE SUMMARY Economic Growth Besides the fourth consecutive year of double digit economic growth realized in 2007, data from 2005 to 2007 also showed a successive decline in the rate of economic growth in Cambodia from 13.3 percent in 2005 to 10.2 percent in 2007. Available data for the first nine months of 2008 and current local and global economic trends suggest that Cambodia’s economic growth is likely to continue to slow significantly in 2008. Cambodia’s two main economic growth-supporting industries, garments and construction, are continuing their downward trend in 2008. External factors, such as fears of a recession in the US and the anticipated end of safeguarding measures, which were imposed by the US and EU against Chinese exports, are adversely affecting the growth of Cambodia’s garment industry. Residential construction growth is expected to slow to a negative rate in 2008 and spark bubble risks, given drops in prices expected for residential construction and land, and housing loan credit restrictions. In the meantime, the number of foreign tourist arrivals in Cambodia is continuing to increase steadily, but at a slightly slower pace because of the global economic slowdown as well as current dispute along Thai and Cambodian border. The financial sector is still booming. And, the agricultural sector remains strong thanks to optimal weather conditions and expanding markets for agro-products. Still, investment in agro-industry has remained slim in 2008. In combination with soaring prices for imported raw materials and consumer goods during the year, Cambodia is expected to enjoy only moderate economic growth of 7 percent in 2008, 3.2 percent-point lower than that of 2007. The downward trend is likely to carry over to 2009, when the economic growth rate is expected to slow to about 6 percent. The anticipated launch of a Cambodia Stock Exchange Market and exploitation of the extractive industries such as oil and gas continue to attract attention and draw big investors to Cambodia. Cambodia’s economic growth could be speeded up if significant progress is made in critical reforms. These reforms, together with effective anti-corruption policies, would improve the economic and investment environment and potentially spur even higher economic growth. Trade and Investment During the first half of 2008, total exports increased by only 6.7 percent, while total imports increased by 36.3 percent. The total trade deficit is expected to EIC - Cambodia Economic Watch - October 2008

vii

widen by 37.6 percent in 2008, reaching about 16.7 percent of GDP. The widening of the trade deficit coupled with an expected income balance deficit will create a deficit of current accounts (including capital transfer) totaling about 3.9 percent of the GDP, despite a significant increase in balance of services and a surplus in transfer accounts. The deficit is expected to be financed by foreign grants, loans and direct investment. The overall balance of payments for 2008 is likely to be a surplus of about 2.1 percent of GDP. Growth in external trade is expected to slow in 2009 because of a slowdown in both in Cambodia garment exports and imports of raw materials used in the garment and construction industries. Following the same phenomenon, the balance of payments for 2009 is expected to reach a surplus of about 2.9 percent of GDP. During the first half of 2008, the Council for the Development of Cambodia approved 50 investment projects (most of which were mega projects) worth about US$4.4 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in value of fixed assets compared to the same period in 2007. Most of the investment projects involved the garment and tourism sectors. Only two investments in agro-industry were approved, despite increases in agricultural prices and the high rater of agricultural production so far this year. Prospects are slim that the number of projects approved in 2009 will increase significantly given the current global financial crisis and limited local skills and resources. However, the launch of the Cambodian Stock Market and oil and gas industry opportunities are likely to attract foreign investors and massive injections of foreign investment, which should make for a positive investment outlook for the next few years. Prices and Exchange Rate Data for the first eight months of 2008 revealed that inflation jumped to 22.6 percent in August 2008 compared to only 5.2 percent in August 2007. The price of food rose 36.9 percent, household goods 27.4 percent, transportation 25.8 percent and medical expenses 11.2 percent in August 2008, compared to increases of 9.9 percent, 0.5 percent, 2.9 percent, and 5.3 percent, respectively, in August 2007. Other consumer prices increased slightly during this period. Despite an active agricultural sector, and near capacity production of crops, livestock and fish, food prices continue to increase significantly. This is because large amounts of local food products (mainly paddy and fish) are informally exported to neighboring countries, where they are subsequently sold for considerably higher prices. That is causing shortages of local food supply; viii

EIC - Cambodia Economic Watch - October 2008

Cambodians thus import food mainly from Thailand, at higher prices than it was exported. This, in turn, pushes the price of food consumed in Cambodia up considerably. Recent spikes in transportation costs, meanwhile, are mainly due to sustained recent jumps in the price of crude oil on the international market. Oil accounts for a significant share of the production cost of food and other consumer items. Sustained increases for oil also push up prices for other consumer products such as medical care items and household goods because Cambodia does not produce these items nationally and therefore remains highly dependent on imports. Based on trends from previous years, the overall inflation in December 2008 is expected to be about 21 percent, which is much higher than that of December 2007. However, given a decrease in price of crude oil on the international market, inflation rate is expected to decrease in 2009. In year average, the riel in 2008 was relatively stable against the US dollar and Vietnam dong; but depreciated against the Thai baht by 7.2 percent. Together with prudent monetary policy of the NBC, the relative strength of the riel was mainly a result of the US economic recession. The extent of US economic recession into 2008 would continue weaken the US dollar and the surplus of the balance of payment would enable the government capacity to maintain a stable exchange rate against US dollar. Besides a fixed-rate with the US dollar, fluctuation of the riel against other trade partner currencies, such the Thai baht, should also be taken into consideration. Cambodia’s main import partners are Thailand, Vietnam and Singapore. In theory, the depreciation of the riel against the Thai baht should encourage Cambodia to increase trade with Thailand. But instead it results in increases in domestic consumer prices because limited local production capacity force Cambodians to use higher imported products. Fiscal Development During the first half of 2008, the central Government collected CR2,658 billion in revenue, or 66.5 percent of the total it had expected to collect for the entire year. Tax revenue reached 67.5 and other revenues 62.5 percent of the planned budget. A high average inflation rate of 20.9 percent during the period was the main factor in the nominal increase. In real terms, however, central Government revenue is perceived to achieve only what was planned during the first half of 2008. Taxes on income, profit, and capital gain have increased significantly in 2008 and about 77.4 percent of all tax revenue under the budget plan has been collected. Meanwhile, about 46.9 percent of projected export taxes and 41.8 percent EIC - Cambodia Economic Watch - October 2008

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of import taxes on petroleum were collected. A drop in garment exports and a Government subsidy on gasoline import taxes explain why revenue has fallen short of targets in the Government budget. Informal exports and petroleum imports from neighboring countries are also to blame for state revenue leakage. Given the pattern of economic activity so far in 2008 and previous trends, the Government is only expected to meet its budget targets in real term for 2008. Domestic revenue is expected to reach CR4,766 billion in nominal terms, which would be a 18.7 percent increase over 2007 and account for 10.8 percent of the GDP for 2008. On the expenditure side, the Government spent 44.9 percent of its budget plan total during the first half of 2008. About 44.5 percent and 45.6 percent had been used for current expenditure and capital expenditure, respectively. The Government spent 40.4 percent of the total it had budgeted for civil administration and 65.1 percent for defense and security. Late reporting from line ministries may explain why the spending figures were so low halfway through the year. However, it is worth nothing that spending on civil administration wages had reached only 41.5 percent of the plan. In the wake of high inflation, the late disbursement of pay is certain to compromise the ability of civil servants to survive given that their salaries tend to be low. Spending on national defense and security may increase significantly during the year due to the current border dispute between Thailand and Cambodia. Based on previous trends and given higher-than-expected revenue, total expenditures are expected to meet targets for 2008. As a share of GDP, total expenditure for 2008 is likely to increase slightly to 14.6 percent, from 14.4 percent in 2007. Budget disbursement as a share of GDP for priority sectors may reach 2.4 percent, which would include a slight increase in wages. To maintain living standards and achieve poverty reduction, spending on wages for civil administration and priority sectors should, at the very least, keep pace with the rate of inflation. Overall, the budget deficit is expected to be about CR1,684 billion in 2008, about a 64.1 percent increase over 2007. As a percentage of GDP, the deficit in 2008 is expected to be about 3.8 percent. The budget deficit is mainly financed by international borrowing and foreign assistance, of which external loans account for about 60 percent, which allows Cambodia to avoid domestic debt financing. Total public debt stock was about US$2.4 billion by the end of 2006 and was on a sustainable path. But, moderate risks do remain, given the current low level of Government revenues, the continued existence of external arrears and the potential for contingent liabilities. Progress of Structure Reform x

EIC - Cambodia Economic Watch - October 2008

For banking reform, the National Bank Cambodia granted licenses to a new commercial bank and two specialized banks were transformed to commercial banks. The National Bank also issued new Prakas on “the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings” which increased the reserve requirement to 16 percent for foreign currencies. This tool is aimed to reduce the amount of currency in circulating, tighten loans offering, and reduce the use of US dollar. There was also progress made in important reforms in non-banking finance, the insurance industry and financial market. The Ministry of Economy and Finance issued a Prakas on “Life Insurance Business” in August 2008 and sub-decree on Micro-Insurance has been drafting. Capacity building on the future stock exchange continues with the assistant from Korea. In the area of Public Financial Management Reform, platform 1 of budget credibility was completed in December 2007, but some actions do remain. The incomplete actions in platform 1 have been included in the action plan for platform 2 which was initially expected to start in March 2008. However, platform 2 has not been implemented as of yet. In the area of trade reform, the general ASEAN charter, which was signed at the 13 ASEAN summit, was ratified by the king on March 31, 2008 and was forwarded to the ASEAN Secretary-General on April 02, 2008. Beside, concerning with the WTO law enactment program, there are two laws were promulgated during the first semester of 2008. In total, 29 out of 46 promised regulations for the WTO were promulgated. th

ASYCUDA was officially launched in May 2008 at Sihanouville port. Average time of inputting a custom declaration had fallen from one hour to around 20 minutes. However, traders need time to familiarize themselves with system. One-stop service office was introduced in the Phnom Penh Special Economic Zone in September 2008 to simplify investor procedures in the zone. In the area of administrative reform, a royal decree on “Special Operating Agencies” was promulgated in March 2008 to improve the quality and capacity of public service delivery and to strengthen the professional ethics of officials. Beside, the revision of Merit Based Performance Incentives (MBPI) was revised at the meeting of CAR, MEF, ministries, and development partners. Then sub-decree “No 29 on MBPI” was approved in April 2008, which abrogates the sub-decree “No 98 & 38”. The law on “Administration and Management of Capital, Provinces, Municipalities, Districts and Khans” was adopted in April 2008 as part of the ongoing Decentralization and Deconcentration process. The law stipulates that sub-national councils will be established through indirect elections as required by the Law on “Election of Councils for Capital, Provinces, Municipalities, Districts and Khans,” which was adopted in April 2008. EIC - Cambodia Economic Watch - October 2008

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Due to the relation of sub-national financial management regime and the Decentralization and Deconcentration reform, law on “Public Financial System” was adopted and promulgated in May 2008. A scope of the law is recognized as a fundamental law to manage the national public financial as well as sub-national in Cambodia. In the legal and judicial reform, up to 140 legal texts, including 3 main codes, were adopted as of June 2008. The law on “Establishing the Commercial Court” which sets out the details for the court’s structure is being drafted and is expected to be reviewed after the Ministry of Commerce’s second roundtable discussion. The draft will be forwarded to the Council of Ministers. Besides judicial solution, Alternative Dispute Resolution is recognized as quickly mechanism in dealing with cases. A continuing process of the Alternative Dispute Resolution tasks have been confirmed by a pilot of Center for Justice Service at District and labor disputes solution via labor arbitration. Though, a national arbitration center has not been established yet since the draft sub-decree on “Organizing and Functioning of the National Arbitration Center” is not approved. For the land and natural resource reforms, as of December 2007, land systematic registration result in 1,061,414 land parcels and 794,639 land titles have been distributed by Royal Government of Cambodia. In the Social Land Concession area, a total amount of 4,770 hectares has been registered as state private land by the Land Allocation for Social and Economic Development pilot project and the land will be used for distributing land to poor and landless families, a statement by the chairman of TWG for Land in the 12th meeting of the GDCC. In a statement in phase II of its Rectangular Strategy, the Government encourages the private sector to plant economically-viable private forests, with proper and clear technical guidelines, especially on degraded forest land. According to the Fishery Administration’s 2007 annual report, 509 fishing and fish shelter communities, in both marine and fresh water, have been established, of which 447 are fishing communities and 62 are fish shelter communities. In line with its goals under phase II of the Rectangular Strategy to strengthen the fishery sector, the Government has said it will take serious action against illegal encroachment of flooded forests and illegal fishing equipment.

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EIC - Cambodia Economic Watch - October 2008

Part I

Recent Economic Developments and Outlook

EIC - Cambodia Economic Watch – October 2008

1

2

EIC - Cambodia Economic Watch – October 2008

Chapter 1

Cambodian Economic Growth Beside the fourth consecutive year of double digit economic growth rate realized in 2007, the series data between 2005 and 2007 also showed that Cambodia’s economic growth rate is slowing down successively, from 13.3 percent in 2005 to 10.2 percent in 2007. Available data for the first nine months of 2008 and current local and global economic trends suggest that Cambodia’s economic growth is likely to continue its downward trend significantly over to 2008. This downward trend is also expected to carry on into 2009. Table 1.1: Cambodia's Real GDP Growth by Sector (%, 2000 prices) 2004 Agriculture

2005

2006

2007

2008p

2009p

-1.0%

15.5%

5.5%

5.1%

5.5%

5.3%

Paddy

-12.2%

43.7%

4.3%

7.5%

6.2%

5.6%

Industry

17.0%

12.9%

18.4%

8.4%

6.4%

4.1%

24.9%

9.2%

20.4%

10.0%

8.8%

6.8%

13.2%

13.1%

10.1%

10.2%

8.4%

7.3%

23.4%

22.3%

13.7%

10.3%

9.3%

8.6%

Non-tax GDP

9.4%

13.8%

11.0%

8.1%

7.0%

5.8%

Total GDP

10.3%

13.3%

10.8%

10.2%

7.0%

6.0%

Non-Agriculture

15.8%

12.3%

13.0%

12.2%

7.6%

6.3%

Garments Services Tourism

Sources: Compiled from NIS for 2004-2007, EIC projection for 2008-2009

The Cambodia’s two main economic growth-supporting industries, garments and construction, are continuing their downward trend in 2008. External factors, such as fears of a depression in the US and the anticipated end of safeguarding measures, which have been imposed by the US and EU against Chinese exports, are affecting the growth of Cambodia’s garment industry. Residential construction growth is expected to slow to a negative rate in 2008, and spark bubble risks, given drops in prices for residential building and land, and housing loan credit restrictions. In the meantime, the number of foreign tourist arrivals in Cambodia is continuing to increase steadily, but at a slightly slower pace because of the global economic slowdown as well as current dispute along Thai and Cambodian border. The financial sector is still successful. And, the agricultural sector remains strong thanks to optimal weather conditions and expanding markets for agro-products. Still, investment in agro-industry has remained slim in 2008.

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In combination with soaring prices for imported raw materials and consumer goods, Cambodia is continuing its downward trend and enjoy only moderate economic growth of 7.0 percent in 2008, 3.2 percent-point lower than that of 2007. The downward trend is likely to carry on to 2009, when the economic growth rate is expected to slow to about 6 percent. The anticipated launch of a Cambodia Stock Exchange Market (CAMEX) and exploitation of the Extractive Industry such as oil and gas continue to attract attention and draw big investors to Cambodia. Cambodia’s economic growth could be speeded up if significant progress is made in critical reforms. These reforms, together with effective anti-corruption policies, would improve the economic and investment environment and potentially spur even higher economic growth rate. 1.1. Agriculture 2008 has been another rainy year, and has followed equally wet years in 2007, 2006 and in 2005. The agricultural sector continues to be natural resource-based and growth is expected to increase slightly to 5.5 percent growth in 2008 from 5.1 percent in 2007. Growth has been bolstered by an expansion in cultivated areas, higher exported agricultural product prices, and a continued increase in livestock production. However, agro-investment has remained weak, despite soaring prices and demand on the global market. Effective irrigation and natural resource management systems are urgently required to achieve sustainable agricultural growth and thus reduce poverty, since the agricultural sector is the main source of income for the country’s poorest inhabitants. Based on current trends, agricultural sector growth is expected to be about 5.3 percent in 2009 and growth prospects remain slim in the coming years. Crops, especially paddy, continue to be the main source of income for Cambodian farmers. Data available for the first nine months of 2008 suggest weather conditions and the volume of crop production have been as favorable as the previous three years. Cultivated areas continued to increase in 2008, by about 4,800 ha for paddy, even though some places experienced too little or too much rain and a significant amount of cultivated land was sold to speculators. In addition, sale prices increased at relatively the same pace as production costs thanks to impressive gains in export market prices. As a result, paddy value-added should increase at a moderate pace of about 6.2 percent in 2008, down from 7.5 percent in 2007, and growth prospects will remain moderate for the next few years. Other crops, meanwhile, grew at a significant rate of about 10.1 percent, up from 9 percent increase in 2007, and growth rates are expected to remain strong in coming years.

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EIC - Cambodia Economic Watch – October 2008

Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) 2004 Paddy

2005

2006

2007

2008p

2009p

-12.2%

43.7%

4.3%

7.5%

6.2%

5.6%

Other Crops

9.5%

12.2%

6.5%

9.0%

10.1%

9.6%

Livestock

3.9%

5.6%

8.2%

3.7%

6.6%

6.4%

Fishery

-1.7%

5.6%

3.8%

0.8%

0.8%

0.8%

Rubber & Forestry

-0.3%

3.5%

6.6%

1.8%

1.1%

1.2%

Total Agriculture

-1.0%

15.5%

5.5%

5.1%

5.5%

5.3%

Sources: NIS for2004-2007, EIC projection for 2008 and 2009

Besides revenue they earn from crop cultivation, livestock is another potential source of income for many Cambodian farmers. Data available for the first nine months of 2008 suggest value-added for livestock will increase moderately by 6.6 percent in 2008, a 2.9 percent-point increase over 2007, due to rising food prices, slightly improving accessibility to credit in rural areas and the imposition of Government restrictions suspending some livestock product imports. However, limited initial capital, together with high interest rates or current difficulty and complexity of accessibility of credit (even some improvement has been made), are likely to continue to constrain growth in the livestock sector. Investment in this sector remains slim despite significant increases in local consumption and prices. Cambodia continues to import large quantities of livestock products from neighboring countries. Based on the current situation, the growth rate for livestock is expected to increase in next coming years, but only moderately to about 6.6 percent in 2008. Investment for Small and Medium Enterprises could help to speed up growth in this sector. Based on available data for the first nine months of 2008, fishery production is expected to be relatively the same as in 2007. The fisheries’ value-added is expected to grow slightly, by about 0.8 percent in 2008, the same growth rate posted in 2007. Small fish, used for the production of a popular salt fish pâté, remain abundant, while normal fish production continues to lag behind. However, the number of illegal fishing complaints, the use of illegal fishing instruments and the destruction of essential fish rearing habitats remain important concerns for the sustainable growth of the sector. These practices have led to declining fish stocks and a reduction in the number of places available for fish to breed. Thus, the prospects that fish stocks will expand in coming years is slim. Growth in the forestry sector is expected to be about 1.6 percent in 2008, up slightly from 1.1 percent in 2007. But the sector’s growth potential will remain weak for the next few years. The rubber sector is expected to post a negative 2.6 EIC - Cambodia Economic Watch – October 2008

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percent growth rate in 2008 because old growth rubber trees have been replaced either by new trees that are still too young to produce raw rubber or other crops. Rubber growth is thus expected to remain flat in coming years. 1.2. Industry Industry sector growth is continuing on a downward trend in 2008 due to slower expected growth in garment exports and negative growth in the construction sector. Other industrial sectors are growing at a moderate pace. The total industrial growth rate has grown by only 6.4 percent in 2008, down from 8.4 percent in 2007 and 18.4 percent in 2006. Based on the current trend, the industrial growth rate is likely to continue its downward trend in 2009, due to expected continued downward trend of construction and garment sector, before get back to moderate growth in the next coming years. Progress in Government reforms in line with effective anti-corruption policies could accelerate industrial growth. Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) 2004

2005

2006

2007

2008p

2009p

Garments

24.9%

9.2%

20.4%

10.0%

8.8%

6.8%

Food, Beverages & Tobacco

-5.3%

9.0%

3.3%

3.1%

5.5%

5.5%

Electricity, Gas and Water

11.3%

12.7%

31.5%

11.7%

12.2%

11.2%

Construction

13.2%

22.1%

20.0%

6.7%

-0.3%

-5.7%

9.3%

17.4%

14.1%

6.4%

8.3%

7.2%

17.0%

12.9%

18.4%

8.4%

6.4%

4.1%

Other industries Total Industry

Sources: Compiled from NIS for2004-2007, EIC projection for 2008-2009

The garment industry, the industrial sector’s main contributor, has remained strong in 2008, but growth continues to slow. According to the Customs Department of the Ministry of Economy and Finance (MEF), the number of garment exports rose by 15.4 percent in the first half of 2008, roughly the same as the increase posted during the same period in 2007. Exports to the US grew by 13.4 percent and those to other markets, mainly the EU, jumped more than 20 percent. This growth is mainly due to safeguarding measures imposed by the US and EU to restrain Chinese exports, low labor costs and depreciation of the riel or dollar against other currencies, especially the Chinese yuan. A labor compliance project monitored by the International Labor Organization (ILO) that has created a niche market for Cambodian apparel, Cambodia’s WTO membership and a reduction in export transaction bureaucracy also is helping to maintain the sector’s growth.

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EIC - Cambodia Economic Watch – October 2008

However, the price of Cambodian apparel continues to decline as competition for the US garment market intensifies, especially from Vietnam and China, and US economic depression. Cambodian clothing exports to the US are in direct competition with Vietnam (88 percent) and China (70 percent). The sluggish US economy has also been a factor in declining prices for Cambodian apparel. Cambodia’s garment export prices declined by 7.4 percent in the first half of 2008. Prices for garments exported to the US market declined by 10.2 percent while those to other markets remained roughly the same. The value of garment exports during the first half of 2008 increased by only 7.8 percent. The value of exports to the US rose by only 2.2 percent while the value of exports to other markets such as the EU remained strong. The Cambodian garment industry is expected to grow by about 7.7 percent in 2008. But growth is likely to shrink in future years, especially as safeguarding measures, which have figured prominently in the sustained growth of the Cambodian garment industry, are set to expire at the end of 2008. Cambodia is seen as weak in terms of international competitiveness compared to China and Vietnam and most of Cambodia’s garment factories are owned by foreigners, many of whom are Chinese. The end of safeguards need not necessarily prove devastating, however. Cambodian garment producers have managed to create a niche market thanks to an ILO-monitored labor compliance project and relatively low labor costs. Together with Government efforts to reduce transaction export bureaucracy through such measures as one Window Service and its membership in the WTO, Cambodia seems poised to retain its major clients/buyers in the EU and US. Cambodian garment industrial growth will fluctuate along with global demand in the coming years. In addition, a recent increase in the minimum wage of garment workers in Vietnam and China is likely to prompt hundreds of garment factories to relocate elsewhere and industry analysts expect some will move to Cambodia. Nevertheless, it’s unlikely the industry will be able to post significant gains unless Cambodia can convince the US to grant it duty-free status under the US’ New Partnership for Development Act. Growth in the construction sector, meanwhile, is on a downward trend even though steel imports increased by 33.6 percent during the first half of 2008. The number of construction projects recorded by Phnom Penh Municipality during the first quarter of 2008 was roughly the same as 2007. But prices for imported materials used in the construction sector during the first half of 2008 increased significantly compared to the same period in 2007. The price of imported steel, for instance, increased by 18.2 percent. Sale prices for newly-constructed residences were perceived as stagnant during the first half of 2008 and are expected to decrease in the second half of 2008. The value-added for the construction sector is thus expected to decrease by EIC - Cambodia Economic Watch – October 2008

7

0.3 percent in 2008, compared to an increase of 6.7 percent, 20 percent, and 22.1 percent in 2007, 2006, and 2005, respectively. While such negative growth affects a few of the services sectors, and most notably real estate, it will not undermine the economy like it has in the US. This is because construction sector and real estate sales transactions are mostly done in cash in Cambodia. Timely actions from the banks to restrict credit for housing loans also help to reduce potentially negative impacts of downturns in the construction sector. Most of mega construction projects are owned to Korean. As current global economic crisis is affecting the Korean economy, the Cambodia construction sector’s growth is expected to carry on its negative growth rate before recovery. This negative growth is likely to widen to 5.7 percent into 2009, given that sale prices continued their stagnant or decline. The food, beverage and tobacco sector is growing at a faster rate in 2008 given higher food prices, according to available data for 2008. The depreciation of the riel against the Thai baht, ongoing Thai political instability and border disputes between Thailand and Cambodia should boost the competitiveness of local products against those imported from Thailand. However, because investment in agro-sectors remained weak during the first half of 2008, consumers in Cambodia simply swapped Thai products for Vietnamese and Chinese products. The food, beverage and tobacco sector is expected to grow at a slightly higher pace, reaching 5.5 percent in 2008, compared to 3.3 percent in 2007. This trend is expected to carry on in next few years. Other industrial sub-sectors such as electricity, gas, water and other manufacturing sectors are likely to grow at about the same pace they did in 2007. Moderate growth is projected for these sectors as Cambodia starts to import more and more electricity from neighboring countries as part of long-term investment programs. 1.3. Service Last but not least, the service sector may grow significantly in 2008, but it’s unlikely to post double-digit growth as growth is expected to slow somewhat in the tourism, trade and transport sectors. The overall service sector, excluding public administration, is expected to expand by only 8.7 percent in 2008, which is a drop from a growth rate of 10.5 percent in 2007 and 10.6 percent in 2006. Service sector growth has been bolstered by annual increases in the number of foreign tourist arrivals in Cambodia and a significant expansion in economic activity, especially the trade, transportation, communication, and financial service sectors. Based on current economic trends, service sector growth likely will remain strong but will slow slightly over the next few years. 8

EIC - Cambodia Economic Watch – October 2008

Table 1.4: Trends of Service Sectors (% increase, 2000 prices) 2004

2005

2006

2007

2008p

2009p

Transport & Communication

9.5%

14.5%

2.1%

7.2%

6.1%

6.2%

Trade

5.9%

8.5%

7.1%

9.5%

7.1%

6.5%

Hotels & Restaurants

23.4%

22.3%

13.7%

10.3%

9.3%

8.6%

Finance

20.6%

19.6%

23.9%

22.2%

32.0%

18.9%

Other Private Services

19.2%

13.1%

14.2%

11.5%

8.2%

7.0%

14.3%

13.4%

10.6%

10.5%

8.7%

7.5%

-6.7%

5.9%

-1.3%

0.1%

0.2%

0.8%

13.2%

13.1%

10.1%

10.2%

8.4%

7.3%

Total Private Services Public Administration Total Services

Sources: NIS for2004-2007, EIC projection for 2008-2009

Trade accounts for the biggest portion of Cambodia’s service sector, followed by transport and communication. The sectors continue to grow at a significant pace as a result of the current country’s economic performance. However, soaring prices for imported oil products and high inflation are expected slow growth of most services. Trade is expected to grow by 6.1 percent and transport and communication by 7.1 percent in 2008, compared to 7.2 percent and 9.5 percent, respectively, in 2007. Meanwhile, physical infrastructure remain poor, especially and roads and railways. Further rehabilitation and reconstruction of roads is essential to enhance trading opportunities in remote areas of the country. Increased mobility of people, goods and services will, in turn, create a positive circle of market dynamics. That said growth in trade and transportation activities will remain strong in the next few years. The hotel and restaurant sector contributed significantly to overall service sector growth. The number of foreign tourist arrivals in Cambodia during the first seven months of 2008 increased by only 11.9 percent compared to 22.5 percent during the same period in 2007. The number of tourists who arrived in Cambodia via Siem Reap airport declined by 7 percent, while those who came through Phnom Penh airport and by land/boat increased by 11.9 percent and 30.4 percent, respectively. The global economic slowdown likely explains these figures and Thai political instability could also be a factor. In combination with higher inflation during the year, the tourism sector is expected to expand by about 9.3 percent in 2008, a drop in growth of about 1 percent-point compared to 2007. However, the number of foreign tourist arrivals is expected to grow significantly, but with a slower pace, based on expected slower growth rate of global economy. This means that the hotel and restaurant sector will

EIC - Cambodia Economic Watch – October 2008

9

remain strong, but its growth rate will continue its downward trend to about 8.6 percent in 2009, from 23.4 percent in 2004, before recovery. The financial and real estate sectors performed well during the first half of 2008 and the financial sector is expected to continue to grow in the second of 2008 due to the expansion of economic activities and bank trust. But the real estate sector will slow significantly as a result of declining prices expected for land and residential construction, and credit restrictions imposed by banks. In 2008, the growth rate is projected about 32 percent for financial sector and only 5.8 percent for the real estate sector, compared to 22.2 percent and 10.8 percent, respectively, in 2007. Even though most real estate transactions were completed in cash rather than bank credit, a slowdown in growth in this sector may adversely affect growth in other service sectors such as entertainment activities. Other service sectors are expected to grow only about 8.2 percent in 2008, on average, down from 11.5 percent in 2007. These downward trends are expected to continue for the next few years.

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EIC - Cambodia Economic Watch – October 2008

Chapter 2

Trade, Investment and Productivity In 2008, Cambodia’s garment external trade is slowing down, but the value of imported cars, motorcycles, buses, trucks, tractors, and alcohol increased significantly. That leads to widen the Cambodia’s trade deficit. However, trade deficit, as well as income account deficit, is totally financed by revenues from foreign tourists, private and government transfers, and impressive foreign investment. 2.1. External Trade and Capital Movements Total exports in the first half of 2008 increased by 6.7 percent, compared to 12.6 percent during the same period in 2007, according to available data from the MEF. The drop reflects a slow down in the volume of garment exports. While exports of agricultural products rose sharply, their overall volume remained low and were made through informal channels, causing serious leakages in tax revenue. In contrast, imports accelerated 36.3 percent during the first half of 2008 and imports of petroleum and raw materials, especially those used in the garment sector, made up the lion’s share. While growth in the value of imported fabric slowed, the value of imported cars, motorcycles, buses, trucks, tractors, beer and other alcohol increased significantly. Growth in imports is a sign of an emerging middle class whose disposal income has grown as a result of land and housing speculation. The total trade deficit is expected to widen in 2008, reaching about US$1.8 billion in nominal terms or about 16.7 percent of GDP, up about 37.6 percent from 2007. Due to a significant increase in the number of foreign tourist arrivals in Cambodia, the income generated from tourist spending (travel) is expected to reach about US$1.5 billion in 2008, representing a 32.3 percent increase from 2007. Unfortunately, revenue from tourist transportation remains low and is likely to reach only about US$255 million in 2008, a 21.7 percent jump from 2007, since Cambodia does not have a stake in any of the airlines or other transportation industries serving international markets that are funneling tourists into the country. The service sector surplus continues to improve significantly in 2008 in nominal terms, up by 42 percent from 2007 and climbing to 8.3 percent of GDP. Outflows of income continue to figure prominently in 2008 and largely take the form of dividends and profits from foreign investments in the country, particularly in the garment industry, and payments for foreign technical assistance by donors. The 2008 income account is expected to reach a deficit of about US$430 million or about 3.9 percent of GDP, which is an increase of about 19.3 percent from 2007.

EIC - Cambodia Economic Watch – October 2008

11

Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) 2004

2005

2006

2007

2008p

2009p

Exports of Goods

2,589

2,910

3,694

4,089

4,823

5,358

Imports of Goods

3,269

3,928

4,749

5,424

6,660

7,230

Trade Balance

-681

-1,018

-1,056

-1,335

-1,837

-1,872

Agriculture

179

350

401

532

799

983

1,082

1,173

1,409

1,534

1,767

1,860

-610

-842

-1,123

-1,306

-2,119

-2,106

-1,332

-1,698

-1,742

-2,094

-2,284

-2,609

Balance of Services

291

471

504

644

915

1,085

Transportation

-194

-233

-271

-301

-407

-493

Travel

556

743

841

1,012

1,342

1,578

Others

-72

-38

-65

-67

-21

-1

-221

-254

-290

-360

-430

-487

497

535

764

797

809

821

Private Transfers

176

209

315

381

383

385

Government Transfers

321

326

449

416

426

436

Current Accounts

-115

-265

-77

-253

-543

-453

Financial Accounts

219

335

322

669

774

808

Official Loans Net

154

144

141

120

129

144

Foreign Direct Investment

279

381

408

866

724

550

-214

-190

-226

-317

-80

114

105

70

245

415

231

355

At the National Bank (NBC)

70

109

182

277

243

260

Outside NBC

35

-39

63

138

-12

95

Textiles & Garments Oil & Gas Other Goods

Balance of Incomes Balance of Transfers

Others Change in Foreign Reserves

Sources: Compiled from NBC for 2003-2007, EIC projection for 2008-2009

Net private transfers are expected to reach US$383 million in 2008, relatively the same as 2007. Combined with a large inflow of foreign aid, Cambodia is likely to have a surplus of about US$809 million in its transfers account in 2008, which represents about 7.3 percent of GDP. In total, its current account deficit, including official transfers, has increased to US$543 million or about 3.9 percent of GDP. Nevertheless, the financial account is expected to be in surplus by about US$774 million, reaching 7.3 percent of GDP in 2008, which is about a 15.7 percent increase from 2007 because of an impressive foreign investment expected during the year. To sum up, the overall balance of payments is expected to reach a surplus of

12

EIC - Cambodia Economic Watch – October 2008

about US$231 million in 2008, which represents a 44.4 percent decrease from 2007 and about 2.1 percent of the GDP. It is worth noting that since Cambodia is a dollarized economy, with individuals and institutions able to hold foreign currencies, the overall change in the balance of payments reflects not only foreign reserves held by the National Bank of Cambodia (NBC), but also economic agencies and households. Growth in external trade (both exports and imports) is expected to slow due to anticipated drops in the growth of Cambodian garment exports and of imports of raw material used in the garment industry and the construction industry. The trade deficit is expected to be relatively the same in 2008 because of an expected drop or stabilization in the prices of oil and other construction materials on international markets. Therefore, Cambodia’s trade deficit may reach only 15 percent of GDP in 2009, about 1.7 percent point lower than in 2008. Despite continuous improvement in balance of services, thanks to expansion in the tourism sector, the deficit in current accounts is expected to reach 3.6 percent of GDP in 2009, down from 4.9 percent in 2008. The deficit was partly financed by foreign aid in the form of grants and loans and foreign private investment in Cambodia, which represented about 6.5 percent of GDP. Overall, Cambodia’s balance of payments for 2009 is expected to reach a surplus of about US$355.

2.2. Private Investment and Stocks of Capital During the first half of 2008, the Council for the Development of Cambodia (CDC) approved 50 investment projects worth about US$4.4 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in value of the fixed assets compared to the same period in 2007 because most of the projects approved in 2008 were mega projects. Most of the investment projects involved the garment and tourism sectors, which accounted for 24 and 6, respectively, of the approved investment projects and US$25 million and US$4.1 billion of fixed assets. The investment activity was bolstered by healthy garment exports and tourism activities during 2008. It is worthy noting that only two investments in agro-industry have been approved, despite increases in agricultural prices and high agricultural production this year.

EIC - Cambodia Economic Watch – October 2008

13

Table 2.2: Approved Private Investment Projects* 2008 2003

2004

2005

2006

2007 (Jan-Jun)

Number of Approved Investment Projects Total

66

60

104

99

130

50

Garments

31

35

53

49

39

24

Hotels

11

3

4

4

11

6

Others

24

22

47

45

80

20

Fixed Assets Approved (Millions of US Dollars) Total

314

231

695

4,451

2,667

4,430

75

85

118

212

171

90

Hotels

114

23

65

22

1,101

4,108

Others

125

123

512

2,217

1,395

232

Garments

Source: Compiled from CDC, Cambodian Investment Board (*) Excluding registered investments of mega-projects of more than US$1 billion

In total, investment projects continued to increase in 2008, but at a slower pace than in 2007. Investment in garment factories continued in 2008 even though US and EU safeguard measures are slated to end soon because it is widely speculated that Cambodia will host some of the foreign investors who are expected to move out of Vietnam and China. Meanwhile, investment in tourism projects is likely to remain high. But investment in the construction sector is likely to fall in 2008, especially residential construction because of expected of the stagnant or decline in sale prices and restrictions on housing loans. Limited infrastructure development and lack of skilled human resources will keep projected growth in agro-industry to a moderate level. For 2009, together with global crisis and limited local skill and resources, expected number of approval projects became slim. However, the investment outlook remains optimistic for the next few years as the upcoming launch of the Cambodian Stock Market and oil and gas industry opportunities are likely to attract foreign investors and massive injections of foreign investment. 2.3. Productivity Productivity is the key to increased competitiveness and creating the sort of businesses that are attractive to investors. According to an EIC estimate, the total productivity of workers (value-added per worker) in Cambodia increased by about 6.1 percent per annum during the last decade, while real GDP growth rose by 9.3 percent per annum. This growth has allowed Cambodia to remain relatively strong competitively. 14

EIC - Cambodia Economic Watch – October 2008

Table 2.3: Productivity of Workers (% Increase, US$2000 price) 2004

2005

2006

2007

2008p

2009p

Agriculture

-3.1%

13.0%

3.3%

3.3%

4.0%

3.9%

Paddy

-14.2%

40.5%

2.2%

5.6%

4.6%

4.2%

Industry

7.4%

2.3%

6.2%

2.4%

1.0%

0.5%

9.4%

-0.7%

5.6%

1.7%

-0.3%

-0.2%

8.6%

6.5%

4.9%

6.6%

9.8%

4.6%

8.2%

7.9%

5.1%

3.9%

3.5%

3.3%

6.1%

9.8%

7.2%

5.5%

5.3%

3.9%

Textile & Garment Private Services Tourism Total (*)

Source: EIC Estimate (*) Excluding Public Administration

Growth in agricultural production in 2008 has spurred productivity. Labor productivity in the agricultural sector is expected to grow by 4 percent in 2008, up from 3.3 percent in 2007. Since the agricultural sector remains almost totally dependent on weather conditions, the key to maintaining steady growth in productivity is investing in irrigation systems. Based on projections for the performance of the agricultural sector over the next few years, labor productivity is likely to continue to increase at the same pace it did in 2008. In the meantime, productivity in the garment industry is expected to decrease by about 0.3 percent in 2008, compared to a 1.7 increase in 2007 as garment exports slow. The drop is expected despite a boost in training opportunities for mid-level factory management. Labor productivity in the construction sector is also expected to decrease, while that of other industrial sectors continues to grow at a very moderate rate. Total labor productivity in the industrial sector is expected to increase by only 1 percent in 2008, down from 2.4 percent in 2007. Based on the current performance of the industrial sector, labor productivity growth is likely to remain slim over the next few years. In contrast, labor productivity in the service sector (excluding public administration) is expected to increase at a faster rate of about 9.8 percent in 2008, up from the 6.6 percent increase in 2007. This is largely due to a significant increase in labor productivity in the real estate and financial sectors and moderate growth in other service sectors. To sum up, total annual worker productivity growth, excluding public administration is expected to slow to 4.8 percent, reaching US$1,143 per worker in real terms and is expected to continue to slow over the next few years.

EIC - Cambodia Economic Watch – October 2008

15

Chapter 3

Price and Monetary Development The inflation is accelerated during 2008 with double speed by soaring in food prices and transportation cost. At the same time, the exchange rate of the riel against US dollar is relatively stable; whereas the riel in circulation increased significantly compared to that of US dollar. 3.1. Inflation The inflation rate jumped to double digits in December 2007 to 10.8 percent from only 2.8 percent in December 2006. External factors such as soaring crude oil and food prices, fears of a US economic recession and weak economic performances in certain sectors of the Cambodian economy have caused higher inflation. These problems have persisted in 2008. Figure 3.1: Cambodia’s Consumer Price Index (December 2002=100)

Source: National Institute of Statistics

Data for the first eight months of the year revealed that inflation jumped to 22.6 percent in August 2008 compared to only 5.2 percent in August 2007. The price of food rose 36.9 percent, household goods 27.4 percent, transportation 25.8 percent and medical expenses 11.2 percent in August 2008, compared to increases of 9.9 percent, 0.5 percent, 2.9 percent, and 5.3 percent, respectively, in August 2007. Other consumer prices increased slightly during this period. Despite an active agricultural sector, and near capacity production of crops, livestock and fish, food prices continue to increase significantly. This is because large amounts of local food products (mainly paddy and fish) are informally 16

EIC - Cambodia Economic Watch – October 2008

exported to neighboring countries, where they are subsequently sold for considerably higher prices on the international market. These informal exports create shortages of local supply to local demand for food. The local market responds to such shortages by importing food (for higher prices than it was exported), mainly from Thailand. This, in turn, pushes the price of food consumed in Cambodia up considerably. Recent spikes in transportation costs, meanwhile, are mainly due to sustained recent jumps in the price of crude oil on the international market. Oil accounts for a significant share of the production cost of food and other consumer items. Sustained increases for oil also push up prices for other consumer products such as medical care items and household goods. Because Cambodia does not produce these items nationally and therefore highly dependent on imports and depreciation of the riel against other currencies is also the reason for higher inflation. Based on trends from previous years, the overall inflation in December 2008 is expected to be about 21 percent, which is much higher than that of December 2007. 3.2. Exchange Rate The riel remained relatively stable against the US dollar during the first six months of 2008 at around CR4,000 for one US dollar. The riel appreciated from CR4,077 in August 2007 to CR3,990 in February 2008 for one US dollar. The riel then began to depreciate against the US dollar in March 2008 and was down to CR4,078 for one US dollar in June 2008. In average, the riel appreciated about 1.3 percent against the US dollar during the first half of 2008 compared to the same period of 2007. This relative strength of the riel was due to an economic crisis in the US and increasing demand for the riel in rural areas during the farming season. Farmers need the riel to begin agricultural cultivation. Prudent monetary policy by the NBC and surplus of balance of payment are the main reasons. However, the US dollar began to re-appreciate against other currencies, including the Cambodian riel, in March 2008. Thus, prudent monetary policy and timely action is crucial to maintaining a stable exchange rate. The average exchange rate for 2008 is expected to be about CR4,081 for one US dollar, an appreciation of about 0.6 percent over 2007.

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17

Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100)

Source: EIC, Data compiled from the IMF and NBC

The riel depreciated slightly against the Vietnamese dong and Thai baht during the first half of 2008. The riel appreciated about 0.9 percent against Vietnamese dong, trading around VND4 for one riel, and depreciated about 7.2 percent against Thai baht, trading around CR124 for one baht during the first half of 2008. The depreciation of the riel against the Thai baht generally boosts the competitiveness of Cambodian consumer products, especially agricultural products, in terms of exports and local consumer products compared to Thai products. However, since the capacity of Cambodian producers tends to be static and/or limited, Cambodian consumers must continue to rely on higher-priced imported products from other countries, especially from Vietnam and Singapore. 3.3. Money Supply Total money supply continued to rise sharply during the seven months of 2008. Total money supply reached CR12,707 billion in July 2008, a 38.9 percent increase from July 2007 or 12.3 percent increase from December 2007. During this period, both local currency in circulation and foreign currency deposits increased at the same rate, because the Government tends to increase riel circulation in the market during depreciation of US dollar. Growth of foreign currency deposits slowed to only 38.7 percent in July 2008 compared to 57.9 percent in July 2007; whereas the amount of local currency in circulation increased 44.1 percent in July 2008 compared to only 14.7 percent in July 2007. As a percentage of GDP and based on current trends, the total money supply is expected to increase 40.9 percent of current 2008 GDP, compared to only 32.3 percent in 2007, thank to significant increase of local currency in circulation. 18

EIC - Cambodia Economic Watch – October 2008

Table 3.1: Cambodia’s Monetary Survey (Billions of Riel) 2003

2004

2005

2006

2007

Jul-08

3,329

4,329

5,025

6,942

11,311

12,707

908

1,115

1,282

1,600

1,990

2,424

2,310

3,079

3,589

5,196

9,138

10,050

111

135

153

147

183

233

3,329

4,329

5,025

6,942

11,311

12,707

1,337

1,817

2,394

3,628

6,385

9,493

Credit to Public Sector

360

360

327

287

297

270

Other Money Demand

1,632

2,153

2,305

3,028

4,629

2,944

Total Money Supply Local Currency in Circulation Foreign Currency Deposits Other Liquidity Total Money Demand Credit to Private Sector

Source: NBC

Foreign currency continues to dominate money supply in 2008, representing about 79.1 percent of the total money supply and 33.6 percent of GDP. Riel liquidity has remained limited, despite it increases significantly during the year, representing about only 19.1 percent of the total money supply and only 6.6 percent of the GDP. The growth in foreign currency reflects strong activity in sectors such as tourism and garments. At the same time, a large amount of foreign currency, and especially US dollars, was transferred out of the country by foreign investors to their respective countries. On the demand side, credit to the public sector continued to decline, together with an increase in Government deposits. Credit to the private sector continued its sharp increase, jumping 94.2 percent in July 2008 compared to 57.5 percent increase in July 2007. Lower interest rates in 2008 compared to 2007 and growing demand for credit among the trade, services (including real estate), agricultural and manufacturing sectors has resulted in the expansion of credit. The expanding private banking system, meanwhile, helped push interest rates down. It is worth noting that the demand for credit among the construction sector decreased by about 1.7 percent during the first half of 2008 compared to the same period in 2007. These trends are expected to continue in 2008. In total, credit to the private sector is expected to reach 33.4 percent of the GDP in 2008. 3.4. Interest Rate The average interest rate on 12-month deposits and loans in riel increased slightly to 7.6 percent and 22.5 percent in august 2008 from 7 percent and 22 percent in August 2007, respectively. This slight increase resulted from a shortage of and growing demand for loan credit in riels, especially in rural areas, given favorable climate conditions during the last three years and higher price of agro-products.

EIC - Cambodia Economic Watch – October 2008

19

Table 3.2: Cambodia’s Interest Rate (% per annum, end of period) 2004

2005

2006

2007

Aug-08

Riel 12-months Deposits Rate

6.6

6.8

6.4

7.1

7.6

US$ 12-months Deposits Rate

3.7

4.0

4.8

4.9

5.6

Riel 12-months Lending Rate

18.7

18.6

23.1

22.3

22.5

US$ 12-months Lending Rate

16.7

16.2

16.7

16.0

15.9

Inflation rate (yearly average, in riel)

3.9

5.8

4.7

5.9

-

Inflation rate (yearly average, in US$)

2.9

3.8

4.4

7.1

-

Source: NBC and NIS

Average interest rates of a 12-month deposit in US dollars continued to increase gradually to about 5.6 percent in August 2008, about 13.6 percent up from August 2007. Nevertheless, the average interest rate of 12-month loans decreased slightly to 15.9 percent in August 2008, about 4.5 percent decrease from August 2007, due to increased competition among the commercial banks that are providing credit. This came despite of an increase of bank reserve required by the National Bank. However, the average of interest rate loans is expected to increase in 2009. Because most of credit loans provided by the local banks are perceived to already reach the peak, while credit demand keeps increasing in real estate and construction sector. Interest rates loans have remained high because of a shortage of local deposits, which are required to satisfy the demand for credit resulting from economic expansion and the high risks associated with lending. The informality of businesses, the lack of infrastructure or a legal framework, and poor law enforcement are factors behind this high level of risk and uncertainty, which forces banks to charge higher interest rates than they would in other countries. In addition, to avoid the high risk of unpaid loans, a large amount of local deposits have gone overseas and are therefore unavailable for lending to local borrowers. At the same time, most local borrowers derive their credit from overseas. Thus, annual interest rates on loans or deposits in riel and US dollars are quite high compared to neighboring countries. Cambodians, particularly those in rural areas, are mostly short of initial capital and are unable to benefit from the country’s economic growth. Lower interest rates would encourage them to invest, thereby spurring economic growth in rural areas.

20

EIC - Cambodia Economic Watch – October 2008

EIC - Cambodia Economic Watch – October 2008

21

Chapter 4

Fiscal Development and External Debt During 2008, the Government also collected much revenue to what has been planned. However, this amount remained relatively stable compared to the level of nominal GDP, as well as that of Government expenditure. The deficit will be mainly financed by foreign assistance. Cambodia’s debt situation remains on a sustainable path with moderate risk of debt distress. 4.1. Budget Revenue In 2008, the central Government expects to raise CR3,997 billion in revenue, which would be an increase of 21.5 percent over its planned revenue for 2007, assuming Cambodia’s economy grows 6 or 7 percent in 2008. Taxation remains its main source of revenue and is expected to account for 82.7 percent of total revenue or 23.3 percent more than the amount the Government collected in taxes in 2007. Other sources of state income, including capital revenue, represent only about 17.3 percent of total revenue. Revenue from the Custom’s Department accounts for 51 percent of total planned revenue; whereas that of domestic tax represents only 27.8 percent. However, the share of domestic tax revenue as a portion of total tax revenue has been increasing gradually, up from 6 percent in 1994 to about 27.8 percent in 2008 of total planned revenue, due to the strong performance of the domestic private sector. During the first half of 2008, the central Government collected CR2,658 billion in revenue, or 66.5 percent of the total it had expected to collect for the entire year. Tax revenue reached 67.5 and other revenues 62.5 percent of the planned budget. An high average inflation rate of 20.9 percent during the period was the main factor in the nominal increase. In real terms, however, central Government revenue is perceived to achieve only what was planned during the first half of 2008. Taxes on income, profit, and capital gain increased significantly in 2008, of which about 77.4 percent of the plan was implemented, reflect private activities. Meanwhile, revenue collected in international trade taxes was only 58 percent of the projected total in nominal terms. About 46.9 percent of project export taxes were collected and 41.8 percent of import taxes on petroleum. A drop in garment exports and a Government subsidy on gasoline import taxes explain why revenue has been short of targets in the Government budget. Informal exports and petroleum imports from neighboring countries are also to blame for state revenue leakage.

22

EIC - Cambodia Economic Watch – October 2008

Given the pattern of economic activity so far in 2008 and previous trends, the Government is only expected to meet its budget targets in real term for 2008. Domestic revenue is expected to reach CR4,766 billion in nominal terms, which would be a 18.7 percent increase over 2007 and 10.8 percent of the GDP for 2008. Table 4.1: Cambodia’s Central Government Revenue (Billion of riel) 2004

2005

2006

2007e

2008p

2009p

Total Domestic Revenues

2,127

2,626

2,918

4,015

4,766

5,524

Tax Revenues

1,577

1,911

2,271

3,396

4,077

4,785

Profit Taxes

117

172

262

388

490

593

Excise Taxes

304

380

418

731

878

1,052

Value Added Taxes

598

730

870

1,143

1,430

1,707

International Trade Taxes

513

573

645

1,020

1,140

1,269

Other Tax Revenues

44

56

76

114

140

164

Non-tax Revenues (1)

549

715

647

619

688

739

Tourism Activity (2)

118

160

190

224

300

348

Quota Auction/Export License

76

123

123

123

123

123

Posts & Telecommunication

94

123

83

77

118

134

Other Non-tax Revenues (1)

261

310

251

196

148

134

Taxes From Petroleum Products

442

461

592

718

766

807

Tax Department Revenue

405

556

727

1,029

1,363

1,695

1,173

1,355

1,544

2,367

2,714

3,090

Memorandum Items

Customs Department Revenue

Sources: MEF for 2004-2007, and EIC for 2008-2009 (1) Including Capital Revenue (2) Including Tourism Incomes, Civil Aviation and Visa Fees

However, opportunities exist to further improve revenue collection. More effective measures have to be taken to enforce the Law on Taxation, to extend the tax base to the informal sector, and to strengthen tax auditing to reduce the amount of revenues lost by corruption. Large-scale smuggling continues, especially of petroleum, due to the high tax imposed in Cambodia compared to neighboring countries. To combat the illegal trade of petroleum and other products Cambodia should strengthen its anti-smuggling operations at each border checkpoint. 4.2. Budget Expenditure The Government expects to expand budget expenditures to about CR5,673 billion in 2008, which is an increase of 22.7 percent from the 2007 budget plan and exceeds actual 2007 disbursements by 12.5 percent. Civil administration EIC - Cambodia Economic Watch – October 2008

23

disbursements are expected to decrease by 6.2 percent, while spending on defense and security is expected to increase slightly by 1.4 percent in 2008. Spending for health, education, agriculture, and rural development is stated to increase by 9 percent, 5.1 percent, 10.6 percent, and 25.9 percent, respectively, compared to 2007. It is worth noting that the increase in spending for all of these priority sectors, with the exception of rural development, is still planned to be lower than the average increase in spending for other sectors. Thus, Government funding of priority sectors is not expected to be sufficient to meet Cambodian needs in 2008. In addition, the unallocated budget will increase by 41.6 percent in 2008, due to an increase of reserve budget and budget reserved for other unexpected expenditures. It shares about 23.4 percent of total planned expenditures. Table 4.2: Cambodia’s Central Government Expenditure (Billions of Riel) 2004

2005

2006

2007p

2008p

2009p

2,962

3,182

4,112

5,041

6,449

7,314

1,769

1,967

2,592

3,091

4,197

5,007

1,346

1,516

2,072

2,410

3,179

3,838

Priority Sector 1

573

644

791

791

1,060

1,282

Other Civil Ministries

773

872

1,281

1,619

2,118

2,557

423

451

520

681

1,018

1,169

Defense

272

289

344

505

763

861

Security

151

162

176

176

255

307

1,193

1,215

1,520

1,950

2,252

2,307

Through National Treasury

296

315

379

440

718

668

Direct External Financed

896

900

1,141

1,510

1,534

1,639

Wages

615

640

711

822

1,621

1,941

Non-Wages Operating Costs

971

1,130

1,256

1,770

2,576

3,066

Total Expenditure Current Expenditure Civil Administration

Defense & Security

Capital Expenditure

Memorandum Items

Sources: MEF for 2003-2006, and EIC for 2007-2008

The Government spent 44.9 percent of the total amount it had budgeted for expenditures in the first half of 2008, 44.5 percent and 45.6 percent had been used for current expenditure and capital expenditure, respectively. The Government spent 40.4 percent of the total it had budgeted for civil administration and 65.1 percent for defense and security. Late reporting from line ministries may explain why the spending figures were so low halfway through the year. However, it is worth nothing that, spending 1

health, education, agriculture, and rural development 24

EIC - Cambodia Economic Watch – October 2008

on civil administration wage reached only 41.5 percent of the plan. This late disbursement and low salary, together with higher inflation, would burden their survival life. The spending for national defense and security may increase significantly during the year due to current conflict between Thai and Cambodian on border issues. Based on previous trends and given higher-than-expected revenue, total expenditures are expected to meet targets for 2008. As a share of GDP, total expenditure for 2008 is likely to slightly increase to 14.6 percent, from 14.4 percent in 2007. Budget disbursement as a share of GDP for priority sectors may reach 2.4 percent, which would include a slight increase in wages. To maintain living standards and achieve poverty reduction, spending on wages for civil administration and priority sectors should, at the very least, keep pace with the rate of inflation. 4.3. Budget Financing and External Debt During the first half of 2008, the deficit reached CR157 billion or 6.3 percent of what was planned in the budget law to be totally financed by foreign assistance. Late disbursement and impressive increases in tax revenue during the period explain this low deficit. Nonetheless, based on previous trends, the budget deficit is expected to about CR1,684 billion in 2008, about a 64.1 percent increase over 2007. As a percentage of GDP, the deficit in 2008 is expected to be about 3.8 percent, up from 2.9 percent in 2007. The budget deficit is mainly financed by international borrowing and foreign assistance, of which external loans account for about 60 percent, which allows Cambodia to avoid domestic debt financing. Table 4.3: Cambodia’s Financing Budget (Billion of Riel) 2004

2005

2006

2007p

2008p

2009p

Total Domestic Revenue

2,127

2,626

2,918

4,015

4,766

5,524

Total Expenditure

2,962

3,182

4,112

5,041

6,449

7,314

-835

-556

-1,194

-1,026

-1,684

-1,790

894

984

1,584

1,615

1,684

1,790

Grants

372

538

790

730

749

778

Loans (net)

522

446

794

885

935

1,012

Domestic Financing

-59

-428

-390

-589

0

0

Banks

25

-199

-333

-1,114

0

0

Others

-84

-229

-57

525

0

0

2,836

3,336

4,388

5,496

6,468

7,508

Total Deficit (cash basis) Foreign Financing

Memorandum Items Net Foreign Reserves at NBC

Sources: MEF for 2003-2006, and EIC for 2007-2008

EIC - Cambodia Economic Watch – October 2008

25

Updated data on the public debt is not yet available. Nonetheless, the public debt stock was revised to about US$2.4 billion at the end of 2006, thanks to a reduction from US$1,5 billion to US$457 million in debt owed to the Russian Federation. As a percentage of nominal GDP, the public debt accounted for about 33.2 percent in 2006, down from about the 37.1 percent in 2005. Based on Joint IMF/World Bank Debt Sustainability Analysis for 2007, the ratio of debt to GDP was expected to further decline in 2007. External debt constitutes about 95 percent of public debt and about 35 percent of the external debt was owed to the Russian Federation and United States.2 Given Cambodia’s continued strong economic growth and the highly concessional structure of its lending, debt is on a sustainable path. However, moderate risks remain, particularly given the low level of current government revenues, the continued existence of external arrears and the potential for contingent liabilities. If Cambodia reaches debt-rescheduling agreements with the two creditors and begins servicing debts in 2007, the risk of debt distress will decline further, though low revenue collection will continue to pose risks to debt sustainability.3

2 3

IMF, Cambodia 2007 Article IV Consultation. IMF, Cambodia 2007 Article IV Consultation. 26

EIC - Cambodia Economic Watch – October 2008

EIC - Cambodia Economic Watch – October 2008

27

Chapter 5

Labor Force, Incomes, and Poverty 5.1. Employment Updated labor force data is expected with the release of findings from the Cambodia Socio Economic Survey (CSES) of 2007. The 2004 CSES pegged the total labor force at about 7.5 million, or 56 percent of the total population, with an approximated 0.2 million people entering the labor market every year. Based on these figures, Cambodia’s total labor force was an estimated 8.4 million in 2007 and is likely to reach about 8.6 million in 2008, of which about 20 percent are under 18 years old. It should be noted that a very narrow definition of employment was used for the purposes of the CSES, which included anyone who had worked at least one hour during the past reference survey week. The employment rate exceeded 99 percent in 2004, according to the CSES. Thus, the rate would have included the under-employed. EIC projects job growth to be 2 percent in 2008. Table 5.1: Cambodia's Population and Labor Force (000's) 2004

2005

2006

2007

2008p

2009p

13,550

13,829

14,164

14,446

14,679

14,915

Total Labor Force

7,646

7,907

8,165

8,402

8,624

8,844

Total Employment

5,677

5,879

6,085

6,231

6,325

6,425

371

411

463

499

521

557

Garment

294

323

368

398

414

445

Tourism

78

88

95

101

107

112

335

335

335

335

335

325

5,306

5,468

5,622

5,731

5,804

5,869

Rural

3,973

4,061

4,145

4,215

4,275

4,331

Urban

1,333

1,407

1,477

1,516

1,529

1,537

Total Population

Formal Sectors

Public Administration Informal Sectors

Sources: Ministry of Planning and EIC estimates

The pace of job created by garment sector slowed-down significantly in 2008. About 348 thousand of garment workers were employed at export-oriented garment factories in August 2008, which was a 3.8 percent increase over August 2007. Total job’s number of garment sector is expected to increase by only about 4.1 percent in 2008,

28

EIC - Cambodia Economic Watch – October 2008

which was a 4 percent drop in the job growth rate. Slower growth in garment product exports was to blame for the drop. At the same time, employment in the tourism sector was expected to be about 5.6 percent in 2008, about 1 percent point lower than in 2007. Job growth rate in agriculture remains low due to the significant volume of people who are under-employed in the sector. It was expected to be about 1.4 percent in 2008, relatively the same as that in 2007. The overall under-employment rate remains high, especially those are in the countryside. Thus, they are continuing to migrate to Phnom Penh and other urban areas in search of jobs, which require low skills, in garment factories, the construction and tourism sectors as well as service sectors at the border. Total employment was expected to grow about 1.5 percent in 2008, 1 percentpoint lower than that of 2007. On the other hand, the number of new jobs created in 2008 was expected to be enough to absorb only about 47 percent of the new 2008 labor force. 5.2. Incomes Up-to-date data on income is not officially available for either Cambodia as a whole or region by region. Latest daily earning surveys conducted by the Cambodia Development Research Institute showed that daily earnings of vulnerable workers increased from 2006 to 2007 with the exception of unskilled construction workers whose daily earnings decreased slightly. Motorcycle taxi drivers enjoyed the greatest increased a jump in earnings of about 34 percent compared to 2006; followed by small vegetable sellers and porters, whose daily earning increased by about 25 percent and 20 percent in 2007, respectively, compared to 2006. The daily earnings of rice field workers and waitresses in 2007 were relatively the same as 2006. 5.3. Poverty Up-to-date data on income is not officially available for either Cambodia as a whole or region by region. Updated poverty rate figures could be expected very soon from the CSES 2007. The poverty rate in Cambodia dropped to 35 percent in 2004 from about 47 percent in 1994. On average, poverty has reduced at a rate of about 1 percent or 30,000 persons per annum. Based on this trend and economic situation, poverty rate of 2008 in Cambodia is expected to be about 31 percent. However, this pace perceived as slow compared to other countries in the region. The slower pace of poverty reduction in Cambodia is reflected in the current pattern of economic growth. Growth has been primarily generated from the garment and tourism

EIC - Cambodia Economic Watch – October 2008

29

sectors mainly in the capital of Phnom Penh and tourist town of Siemreap. Growth of the rural–based economy and the agricultural sector, which is the main income source for the poor, has been sluggish and unless it improves may lead to a slower rate of poverty reduction.

30

EIC - Cambodia Economic Watch – October 2008

EIC - Cambodia Economic Watch – October 2008

31

Part II

32

STRUCTURAL REFORMS: CURRENT IMPLEMENTATION AND PROSPECTS

EIC - Cambodia Economic Watch – October 2008

EIC - Cambodia Economic Watch – October 2008

33

Chapter 6

Banking and Financial Sector Reform The Financial Sector Development Strategy 2006-2015 (FSDS 2006-2015) is an instrument to accelerate development of Cambodia’s financial sector. In line with financial sector and banking reform, the blueprint considers poverty alleviation part of overall economic development. This chapter summarizes recent progress in reforming the banking, non-banking finance, and microfinance sectors. 6.1. Banking and Non Bank Finance For many, a healthy banking sector signals political stability as much as it does a stable economy. Net Foreign Direct Investment (Net FDI) flows into banking and enterprise have bolstered the growth of Cambodia’s banking sector. Today, several licensed banks are currently operating under the supervision of the National Bank of Cambodia (NBC). The NBC granted a license to a new commercial bank, V.I.P bank, and two banks made the transition from specialized banks to commercial banks after meeting the NBC provisions 4 during the first half of 2008. Cambodia Agriculture Industrial Specialized Bank became MARUHAN Japan Bank PLC and Prosperity Investment Specialized Bank was renamed Prosperity Investment Bank PLC., As of June 2008, there were 25 licensed banks in Cambodia─20 commercial banks and five specialized banks. For the regulation accomplishment site, the NBC issued three new Prakases 5 during the first semester relating to maintenance of required reserves, financial leasing, and anti-money laundering and terrorist financing. The Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings raised the reserve requirements6 in CR equal 8 percent and foreign currencies equal 16 percent. This tool aims to reduce the amount of currencies in the market, tighten loan offerings by banks and to strengthen US currency utilized in Cambodia. The Prakas on Financial Lease introduced a transaction on leases for movable property—except land building, and the operation implements under a specific agreement. The agreement allows lessor to purchase movable property selected by

NBC, First Semester Report and Targets for Second Semester 2008 - Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings issued on April 25, 2008. - Prakas on Financial Lease issued on May 30, 2008. - Prakas on Anti-Money Laundering and Terrorist Financing issued on May 30, 2008 6An old reserve requirement was eight percent for both CR and foreign currencies, Regulation No B79702 dated December 26, 1997, on the Amendment of the Maintenance of Required Reserves against Deposit and Borrowing for the Financial Institutions. 4 5

34

EIC - Cambodia Economic Watch – October 2008

the lessee from the supplier, leases this moveable property to lessee and authorizes the lessee to periodically pay the lease payment7. A Financial Intelligent Unit (FIU) was established on January 29, 2008 through sub-decree No 10. The FIU is led by a board of directors and has a Permanent Secretariat-General, who is under the supervision of the NBC8. As the banking system evolves and new products and services are established, the NBC continues to monitor the activities of banks through both off-site surveillance and on-site inspection. For on-site inspections include a review of financial statements, business operations, and to supervise the regulations implementing which issued by the NBC. The NBC reported in the first semester of 2008 that it had conducted full on-site inspections of five commercial banks, including a foreign branch bank. The NBC has used the COBRA9 system to analyze the financial statements of banks as part of its off-site monitoring program. Analysis of financial statements from banks using the COBRA system in 2007 uncovered some problems, including: -

Deficit net worth as a result of the provision of loans and mortgages for real estate;

-

Low provisioning as credit rises rapidly;

-

Some banks offered loans that totaled more than 20 percent of their own net worth.

Several banks, meanwhile, are now sharing credit information though the Credit Information Sharing (CIS) system. However, certain technical constraints continue to plague the system. After a trial period, concerns were raised about the accuracy of reports and its slow data security system. The Asian Development Bank (ADB) provided technical assistance to the NBC during the first semester in an effort to address the problems and improve the quality of the CIS. Interest rates on loans in Cambodian riels (CR) remained stable during the first half of 2008, varying between 19 percent and 22.46 percent in June depending on the length of the loan compared to from 19.01 percent to 22.26 percent in March. For loans in US dollars, interest rates in June were slightly lower in June

Key words: - Lessor a person, natural or legal, who transfers the right of possession and use of movable property to lessee. - Lessee a person, natural or legal, who receives the right of possession and use of movable property to lessor. 8 Representative senior officials from ministries/institutes 1. Representative of the NBC. 2. Representative of MoJ. 3. Representative of CoM. 4. Representative of MoI. 5. Representative of MEF. 9 Cambodia Offsite Banking Report for prompt corrective Action. 7

EIC - Cambodia Economic Watch – October 2008

35

than in March, with rates shifting from 0.10 percent to 0.16 percent10. Interest rates on deposits in US$ and CR increased slightly in June compared to March 2008, depending on the length of deposit. For deposits in US$, interest rates varied from 0.05 percent to 0.07 percent for fixed accounts. Interest rates for fixed accounts in CR varied from 0.07 percent to 0.11 percent point. Table 6.1. Interest Rates as of June 2008 Weighted Average

Type of operation

CR

US$

Other Foreign Currency

Loans

19% - 22.46%

16.30% - 15.86%

18% - 23.73%

Deposits

4.45% - 7.26% (Fixed) 2.05% (Saving)

2.94% - 5.04% (Fixed) 1.02% (Saving)

4.98% - 6.81% (Fixed) 2.81% (Saving)

Source: NBC, “Quarter Bulletin No 25”, Quarter 3, 2008

There is also progress in non banking finance, the Finance Industry Department of the Ministry of Economic and Finance (MEF) has made an effort to become the supervisor and regulator of the insurance sector and has issued some important regulations that affect Cambodian insurance companies. Recently, the MEF issued a Prakas on an Instruction Principle Accounting for General Insurance Business on July 30, 2008. After feasibility studies on life insurance, the MEF issued a Prakas on Life Insurance Business on August 12, 2008 that covers the life insurance operation of the companies. To accelerate micro-insurance transactions, a Sub-Decree on Micro-Insurance has been drafted and it is in progress. For processing of financial market, the MEF has prepared regulations to support the Law on Issuance and Trading of Non-Government Securities to speed up company registrations in the near future. Training on the stock exchange is currently being conducted with assistance from Korea. Presently stock exchange trainings have been provided to human resources where mostly come from private sector. The Draft Law on Financial Leasing has been forwarded to the interministerial meeting and is awaiting approval from the Council of Ministers (CoM). Financial lease operations for commercial and specialized banks are governed by the Prakas. 6.2. Microfinance Microfinance contributes significantly to Cambodia’s development since it is used primarily to support Small and Medium Enterprises (SME) as well as the agricultural sector. Microfinance entities reported an increase in credit volume and customers in the first semester of 2008. Micro Finance Institutions (MFIs) and Rural Credit 10

NBC (2008), “Quarter Bulletin No 24 Quarter 2 and No 25 Quarter 3” 36

EIC - Cambodia Economic Watch – October 2008

Operators provided a total of CR 851 billion in credit and the number of borrowers reached about 672,725 people, which is a 25 percent increase over the second semester of 2007. MFIs and Rural Credit Operators received close to CR 23 billion in deposits from about 166,588 people, which is a 17 percent increase over the figure registered at the end of 2007. The number of MFIs and rural credit operators was the same at the end of June 2008 as December 200711. Onsite inspections were conducted in seven licensed MFIs and four rural credit operators, the NBC reported. While the NBC acts as a supervisor and regulator of MFIs, the Cambodian Microfinance Association (CMA) oversees operations. The CMA’s 2007 annual report pegged its membership at 14 MFIs12. In general, the sector has improved as a result of vigorous supervision and an increase in the number of development partners and investors who are helping to facilitate MFIs and the Rural Credit Operators. Table 6.2. Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of August 2008) Achievements

Remain Issues

Banking Sector

Banking Sector

•

January 29, 2008: Sub-Decree on Establish the Financial Intelligent Unit (FIU) approved

•

Enactment of Law on Financial Leasing

•

•

April 25, 2008: Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings issued

Drafting sub-decree, Prakas and circulars to implement the Law on Anti-Money Laundering and Terrorist Financing

•

•

May 30, 2008: Two Prakases issued

Draft Prakas and circulars to limit structure and function of the FIU

9

Prakas on Financial Lease

Insurance Industry

9

Prakas on Anti-Money Laundering and Terrorist Financing

•

Insurance Industry •

July 30, 2008: Prakas on an Instruction Principle Accounting for General Insurance Business issued

•

August 17, 2008: Prakas on Life Insurance Business issued

Approving Sub-Decree on Micro- Insurance

Financial Market •

Investor education and human resource development to support financial market in the coming year

•

Development of regulations to implement the Law on Issuance and Trading of NonGovernment Securities

Financial Market •

Cooperation with Korea on training human resources

17 MFIs, 26 registered NGOs, and 60 unregistered NGOs. 1) Angkor Mikroheranhvatho (Kampuchea) Co Ltd., 2) AMRET, 3) Cambodian Business Integrated in Rural Development, 4) Cambodian Entrepreneur Building Ltd., 5) CHC-Limited, 6) CREDIT Microfinance Institute, 7) Entean Akpevath Pracheachun Limited, 8) Hattha Kaksekar Limited, 9) Intean Poalroath Rongroeurng LTD, 10) MAXIMA MIKROHERANHVATHO., LTD, 11) PRASAC Microfinance Institute Co Ltd., 12) SEILANITHIN Ltd., 13) Thaneakea Phum (Cambodia) Ltd., 14) Vision Fund (Cambodia) Ltd. 11

12

EIC - Cambodia Economic Watch – October 2008

37

Chapter 7

Public Financial Management Reform Public Financial Management Reform Program (PFMRP) is a 10-year reform program supported by several donors via a Multi-Donor Trust Fund (MDTF) under the supervision of the World Bank (WB). Together with other Development Partners (DP) provide assistance to the program via a bilateral agreement. Platform 2 of the PFMRP is to be launched now that platform 1 has been completed. This chapter provides an overview of the activities that have been completed and those that remain13. 7.1. Reform Outcomes: Revenue Collection and Budget Disbursement Increasing budget credibility is the main objective of platform 1. Fifteen specific indicators (see details in Table 7.1) are tracked to monitor the PFMRP’s progress. One obvious outcome of the reform program was an increase, by CR 4,021 billion, of total domestic revenue in 2007, which was 22.5 percent higher than the approved budget. Tax revenue increased by 26.7 percent (direct tax: 41.3 percent and indirect tax 38.4 percent) and non-tax revenue increased by 7.8 percent. On the expenditure side, total disbursement for 2007 was CR 5,095 billion, which exceeded the target by 10 percent. There has also been a noticeable increase in the use of the banking system, with 72.5 percent of payments reportedly made through the banking system in 2007. About 92 percent of tax revenue was collected through the banking system, which vastly exceeded the target of 45 percent for 2007. Table 7.1. Indicators Tracking PFMRP Progress Indicator 1. Revenue outturn increasingly closer to approved budget targets. 2. No accumulation of new arrears and steadily declining stock.

3. Budget holders increasingly able to commit expenditure in line with budgets and cash flow forecast.

13

Progress as of first semester 2008 22.5 % higher than approved budget in 2007. Software to record age profile arrears and spending agency was installed under the computerized accounting system of the new chart of account (COA) in 2007. ƒ Accumulated expenditure 110% ƒ First phase of streamlined expenditure process implemented in January 2007. ƒ 23 Ministries have established internal audit departments and 11 are operational ƒ 72.5 % of payments to creditors and staff were made through banking system compared to the target of 75 %. ƒ 92 % of tax revenue was collected through banking system to compare to the target of 45 %.

PFMRP will be carried out based on a sequenced platform approach: - Platform 1: Making the Budget more credible in terms of timely and predictable delivery of funds; - Platform 2: Implementing effective financial accountability; - Platform 3: Achieving a fully affordable policy agenda through policy-budget linkage; - Platform 4: Achieving effective program performance accountability. 38

EIC - Cambodia Economic Watch – October 2008

ƒ Discussions on identifying proxy are underway (MoEYS, MoH, DP and MEF). ƒ Agreement has not been reached. A working group will have to be established between MEF and line ministries (LM). ƒ Procurement rules and policy have improved through an amendment of sub-decree No. 60, sub5. Public procurement based on clear rules that are consistently enforced. No major delays in processing decree No. 105 and Prakas No.045 on Procurement Decentralization. and payment. ƒ Procurement Manual was issued in January 2007. ƒ Salaries 98.5 % (target 98 %). 6. Composition of expenditure by type (staff costs, ƒ Goods/Services 102.6 % (target 95 %). non-staff costs etc) close to approved budget. ƒ Capital 80.5 % (target 85 %). ƒ Tax revenue increased 26.7 % compared to the 7. Better yield achieved from tax base through target 20.6%. Direct tax 41.3% and Indirect taxes 38.4. %. improved collection efficiency and planned use of non-tax sources. ƒ Non-tax revenue increased 7.8 % compares to the target of 2.4 %. ƒ The budget strategic plan (BSP) preparation has been improved and a technical workshop was held 8. Single and orderly budget process (and integrated with LM. in budget plans). ƒ Budget Law 2008 was approved by Council of Ministers. ƒ MEF continues to reduce number of inactive 9. All significant areas of both public revenue and Government bank accounts, currently at 187. expenditure captured in both the budget and accounts ƒ Database system is being developed to improved of the Government. capturing/monitoring of external financing. ƒ Working group works closely with CAR to establish a mechanism for a systematic flow of information and clearer roles and processes for MEF and LM in improving human resource 10. Budget has direct influence over nominal staff roll management. (establishment). ƒ Civil Service Secretariat consolidated a requested for new recruitment from LM and sent to CAR for final decision and copy to MEF for budget 2008 preparation. 4. Service delivery units (schools, health centers) receive an increasing proportion of funds targeted at their levels (and of goods and services meant to be procured for them).

11. Clearer/more accurate overview of public finances ƒ TOFE submission is not always within 2 weeks. regularly available (TOFE) based on improvements of ƒ No review was made by the internal audit. existing system pending introduction of FMIS. ƒ Supplementary expenditure credit is based on 12. System in place to ensure that proposals for postpriority and urgency and the provision has always budget supplementary expenditure credits are always been caped within contingency fund. accompanied by an MEF report on realistic options for financing the expenditure involved. 13. Institutionalized mid-year budget review feeding into 2nd half year budget implementation and budget preparation for next year.

Mid-year review was conducted in July 2007 and review results were used for the implementation of the second half of the year.

14. Annual forecasts of all in-flows and out-flows prepared and regularly updated (based on accurate revenue forecasts and good budget implementation plans).

ƒ Quarterly revenue and expenditure plan becomes routine work. ƒ The cash management unit has been functioning.

15. To improve fiscal decentralization in a robust, controlled and measured way.

ƒ Financial System Law adopted April 4,2008 ƒ Law on Administration and Management of Capital, Provinces, Municipalities, Districts and Khans adopted April 1, 2008.

Source: MEF, Complied from PFMRP 2007 Annual Progress Report and MEF Data

7.2. Overall PFMRP Revisited and Process for Platform 2 The RGC introduced the Public Finance Management (PFM) system, which has its own unique set of characteristics14, to facilitate reforms effectively and efficiently. 14

Those characteristics include: EIC - Cambodia Economic Watch – October 2008

39

Due to an experience learn form the platform 1 confirms that it is a valid way to guide to the system. Although to commence the stage 2 of the reform, an extra characteristic need to add for supporting the system - organizational structures, staff management and motivation in relation to the PFM are focused on delivering the other PFM characteristic in an efficient and integrate way. Lesson learned distributes more about linkage between PFM reform with other reform programs, including decentralization and deconcentration, civil service reform, public service pay reform, and sector-based reform programs. On going the platform 2 of reform program, a participation of line ministries and other budget entities is vital to achieving platform 2 reforms. But participation as in platform 1 is not enough therefore the coordination mechanism have been organized as detailed in Box.7.2. Box.7.2. Coordination Mechanisms for Platform 2

Source: MEF, PFMRP Platform 2 in May 2008

Building on improved budget credibility toward achieving better financial accountability is a method of continuing the stage 1 and starting stage 2 of the PFMRP. Therefore work plans of the stage 2 have been developed by reflection of three elements such as going on should focus completing tasks remaining from stage 1, identifying stage 2 objectives and piloting works need to be performed for further stages of the reform program. Progress on platform 1 is continuing in parallel with the launch of platform 2, brainstorming has been done to determine stage 2 target achievements. Progress was made on pilot projects in stage 1 and this work will continue in stage 2 even though some of the activities are not expected to be carried out until subsequent platforms. 40

Budget formulation characteristics; Budget execution characteristics; Monitoring and review characteristics. EIC - Cambodia Economic Watch – October 2008

Targets can be divided into three main categories (see Table.7.2 for details.): platform 1 objectives, platform 2 objectives and, later platform objectives. Detailed activities have been laid out for each objective in the Consolidated Action Plan 2 (CAP 2). Table 7. 2. PFM Objectives and Key Indicators Platform 1 Objectives PFM Objective

Key Performance Indicators

11. Further improvement of revenue policy and administration. 12. Further improvement of debt management

Revenue policy used to guide budget measurement and collection process. Legal, systems and reporting framework for debt management implemented. Implementation of treasury single account mechanisms.

13. Further improvement of cash and bank account management 14. Further improvement of public procurement

Implementation of enhanced legal deconcentrated framework and strengthened oversight capacity.

Platform 2 Objectives PFM Objective

Key Output Required

21. Improved lines of accountability by clarifying roles, functions and responsibilities between levels of government and within spending institutions 22. Improved instruments for encouraging responsible financial management and enforcing accountability

MEF, line ministry PFM roles and responsibilities defined, regulatory framework established, capacity developed and operationalized. Practical and enforceable set of both sanctions and incentives for managing public funds effectively established and compliance review mechanisms developed. Classification implemented that is consistent with GFS/COFOG standards. Basis accounting progressively incorporates elements of modified accrual accounting. An ICT-based budget and financial management framework and capacity introduced that improves reporting, transaction processing, efficiency, integrity, comprehensiveness, provides the basis for effective control and for strengthened resource management. Establishment of accounting and management systems capable of informing effective resource management, but also acting as a basis for enforcing accountability for how public resources are used. The introduction of a style of auditing that can identify and advise managers of the need to address areas of financial management weakness, but also bring to the surface fraudulent or inappropriate action and failures in control systems.

23. Further improve the implementation of new budget classification and new chart of account

24. Improve budget implementation and financial management systems: - Improved efficiency of current systems - Implementation of the FMIS 25. Improve accounting, financial reporting and transparency

26. Improved auditing/inspection and response to/use of audit findings - Internal audit planning - Internal audit methodologies including use of ICT and reporting - Internal audit capacity 27. Strengthen and develop fiscal decentralization policy and strategy 28. Implementation of stage two of the capacity development plan

Momentum and initial steps towards greater decentralization of service delivery. Greater confidence in managing within the improved PFM systems being put in place, base on appropriate skill and work force motivated to acquire those skills.

Later Platform Objectives PFM Objective

Key Performance Indicators

31. Improving and expending the implementation of program budgeting 32. Further improving comprehensiveness and integration of the budget

Program budget implementation methodology and capacity strengthened at both MEF and line ministries. Progressive implementation of a multi-year fully integrated budget framework.

Source: MEF, PFMRP Platform 2 in May 2008

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41

Putting all of the new initiatives into practice will be challenging, and additional work is needed to complete platform 1. To ensure reforms are effectively enforced, the Government needs to focus more on building the capacity of Government agencies to carry out the new approaches, laws, regulations and procedures.

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43

Chapter 8

Trade Reform Cambodia’s accession into WTO has dominated Cambodia’s trade reform agenda. The Government has used various instruments to strengthen trade facilitation and economic integration in order to benefit from its WTO membership and trade liberalization. This chapter summarizes activities related to economic integration, progress in enacting laws related to the WTO and Government’s efforts to facilitate trade and improve the investment climate. 8.1. Economic Integration A new ASEAN Charter15 was signed by the leaders of the 10 ASEAN member states in Singapore at the ASEAN Summit on November 20, 2007. Various purposes were stipulated in the charter for member states of ASEAN, along with that two related purposes are creation of a single market and production, and ASEAN community building. After that event, the Cambodia’s National Assembly (NA) adopted the charter in February 2008 and it was ratified by the king on March 31, 2008. As well as H.E Deputy Prime Minister HOR Namhong, Minister of Foreign Affairs and International Cooperation signed the ratification documents on April 02, 2008 and then forwarded them to the Secretary-General of ASEAN for deposit16. After approving the ASEAN Economic Community (AEC) Blueprint17, which serves as the roadmap for transforming ASEAN into a single market and production base, ASEAN developed an AEC Scorecard mechanism to track the implementation of commitments in the Blueprint18. The Scorecard is designed to provide a comprehensive picture of how ASEAN is progressing towards establishing the AEC by 2015. The RGC has adopted several laws to fulfill its commitments for accession to the WTO, in spite of those carried out behind the schedule. In the first semester of 2008 prior to the national election, two laws were promulgated, added to the program. Therefore currently 29 adopted laws by the NA out of 46 regulations for the WTO conforming. In responding with the requirement of the agriculture sector and intellectual property protection, Law on Seed Management and Plant Breeder Rights was adopted on April 08, 2008 and promulgated on May 13, 2008. The law aimed at ensuring the management, motivation, and the development of seed with sustainable in order to benefit social, economic and environment. Together with the law states that providing right protection 15 The charter represents as a common vision and commitment to the development of ASEAN community as a region of lasting peace, stability, sustained economic growth, shared prosperity and social progress. 16 http://www.mfaic.gov.kh/e-visa/newsrelease.aspx 17 The 13th ASEAN Summit, “One ASEAN at the Heart of Dynamic Asia” Singapore, 20 November 2007 18 The Joint Statement of the 40th ASEAN Economic Ministers’ (AEM) Meeting helped in August 2008, Singapore

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of new seed is under the territorial of Ministry of Industry, Mines and Energy (MIME), and managing various seed is under the territorial of Ministry of Agriculture, Fisheries and Forests (MAFF). To enhance the fly of the civil aviations, Law on Civil Aviation was adopted on December 05, 2007 and promulgated on January 19, 2008. The purpose of this law is to maintain order and safety in operation, to manage airline service develop civil airport, to manage air transportation enterprise, and to promote the development in the civil air transportation with safety, relievable, and economical. Overall, the Government continues to run behind its schedule for meeting WTO-related commitments. Several legal texts are in various stages of design. Some are being reviewed by experts while others are still under discussion at the CoM, according to interview with key informants and literature review from WTO work program in August 2008. For instance, after the discussion in the inter-ministerial meeting of the CoM, the name of Draft Law on Tourism Management in Cambodia was changed to Draft Law on Tourism. The draft will be discussed in the plenary meeting of the new legislature. Additionally, technical assistance and human resource training will be required to complete a few of the new regulations (see Table 8.1 for more details). Take in to account of the trade facilitation is a key mechanism to speed up the process of the trade reform context. Many programs have been planned in the trade facilitation area; hence the process of tasks is reported in the next section.

Table 8.1. Status of Remaining WTO-related Laws

1. Law on Establishing the Commercial Court

Draft law at MoC. Comments from MoJ and JICA have been included. Final revised draft is expected to be submitted to the CoM in 2008.

2. Criminal Code

Draft code at CoM. It has been reviewed by the Council of Jurists meeting and will be forwarded for discussion to the inter-ministerial meeting.

3. Law on Geographical Indications

Draft law at MoC, the final draft is completed and will be submitted to the CoM in 2008.

4. Laws on Layout Design of Integrated Circuit

Draft law is being reviewed by MIME.

5. Law on Protection of Undisclosed Information and Trade Secret

Draft law at MoC, it is in the final stage of preparation.

6. Law on Financial Leasing

The draft has been sent to CoM. MoJ said that the draft contains some provisions that contradict existing laws. NBC and MoJ are now working to resolve the issues.

7. Law on Clean Water and Hygiene

Draft law at CoM, awaiting approval. The draft had been discussed in the inter-ministerial meeting. The draft will be discussed in plenary meeting.

8. Law on Telecommunication

After discussed this draft law at NA, this draft law was sent to CoM in order to re-adjust the chapter 3. Now this draft was ready discussed in the inter-ministerial meeting and sent to the Prime Minister in order to receive some comments.

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45

9. Law on Tourism

Draft law was discussed in the inter-ministerial meeting, where its name was changed from Law on Tourism Management in Cambodia. It will be discussed at the plenary meeting and then sent to the NA.

10. Maritime Code

Draft law at MTPW. Final draft was finished in August 2008. It will be reviewed at an internal meeting of MTPW, then sent to CoM.

11. Law on Commercial Contract

ADB provided consultant to re-draft this law in order to make it supplemented to civil code. Drafting is underway. Preliminary draft is being reviewed by the experts. Two meetings have been held with MoC staffs to collect comments.

12. Law on Commercial Agency

The draft has been completed by MoC. It awaits final review by the ministry. New review will include chapter on franchising.

13. Law on Competition

The final draft is in place. MoC is planning to hold a workshop to obtain input from stakeholders.

14. Law on Safeguard Measures

Preparation stage at MoC, awaiting technical assistance. Nothing can be done until domestic human resources are trained.

15. Law on Rules of Origin

Technical assistance is needed to prepare Cambodia's Rules of Origin so that it conforms to the WTO Agreement on Rules of Origin.

16. Law on Anti-dumping Measures and on Countervailing Measures

Unidentifiable

17. Royal Decree on Cooperative

Unidentifiable

Source: Based on consultation with various government officials and WTO work program, August 2008

8.2. Trade Facilitation A Sub-Steering Committee on Trade Development and Trade-Related Investment (SSC-TD&TRI) has been tasked with reducing complex and lengthy institutional processes associated with imports and exports, identifying and abolishing duplication of tasks among ministries/institutions, strengthening a single-window mechanism at international gates, and reforming laws and regulations that needlessly harm business. The fourth point among 12 point action plan, introduce an overall risk management strategy to consolidate and rationalize all examination requirements of different control agencies, is primary implementing in the Custom Excise Department (CED) while an expanding of this approach to other agencies are considered. A Risk Management and Audit Office was recently established in the CED that will focus on inspection and clearance of imports and exports trade. The CED also has developed risk indicators, selectivity criteria and a system to profile traders, which have been uploaded to ASYCUDA. ASYCUDA was officially launched on May 05, 2008 at the autonomous port of Sihanoukville. A utilization of the system is acknowledged as an opening of a new scanning machine. Expand on the implementation process of the system reported that traders taking time to familiarize themselves with data entry requirements, and average time to declare items at customs has dropped from an average of an hour to 20 46

EIC - Cambodia Economic Watch – October 2008

minutes19. The CED expects to introduce the system in other offices over the next two years. While the process of ASYCUDA has enhanced, its will help Cambodia meets its goal to be part of the ASEAN Single Window by 2012. Efficiency of processing times could be improved if the MoC were to adopt an automated key permit and license. The automation system and electronic process will allow the submission of applications and registered users through its. Despite matter still the concern of the international single window since other institutions, where need to involve in the system, have not automated yet, obviously base on manual paper, the Trade Facilitation and Competitiveness Project (TFCP) reported in June 2008. One stop service is being implemented in three Special Economic Zones (SEZs): Manhattan, Tai Seng, and Phnom Penh (PPSEZ). An administrative office opened its doors September 01, 2008 at PPSEZ to simplify application procedures for potential investors. Likewise investment laws state that proposals take at least 28 days to process, but the new one stop office will cut that time to three days, said Chea Vuthy 20 , administration chairman of the zone and the deputy secretary-general of the Cambodia SEZ Board. Along with Cambodia moved up 22 places to rank 122nd in the “Trading Across Borders (TBA)” category in the International Finance Corporation’s 2009 Doing Business survey, which ranks countries according to their ease of doing business. The improved ranking reflects reductions in the documentation, cost per container and time needed to export and import items. Likewise the TBA uses 11 documents for export/import while time needs for export and import were decreased follow by 37 to 22 days, and from 46 to 30 days. Table 8.2. Trading Across Borders 2008

Time and Cost to Export

Time and Cost to Import

2009

ƒ

37 days

ƒ

22 days

ƒ

US$ 722/container

ƒ

US$ 732/container

ƒ

46 days

ƒ

30 days

ƒ

US$ 852/container

ƒ

US$ 872/container

Source: http://www.doingbusiness.org/CustomQuery/ViewCustomReport.aspx

19 20

Trade Facilitation and Competiveness Project (TFCP) Restructuring Aide Memoire June 20, 2008 The Phnom Penh Post September 02, 2008. EIC - Cambodia Economic Watch – October 2008

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Chapter 9

Public Administrative Reform National public administrative reform is considered the heart of the Government Rectangular Strategy. The RCG has been undertaking two different approaches in its administrative reform agenda. At the central level, the reform focuses on improving civil servant remuneration, human resources capacity and human resources management. At the sub-national level, the reform focuses on decentralization and deconcentration which is to promote democracy and good governance. 9.1. Central Administration Reform The Merit-Based Performance Incentives (MBPI) program was revised at a meeting of CAR, MEF, ministries, and DPs. Sub-Decree No 29 on MBPI was subsequently approved on April 02, 2008, which abrogates sub-decrees No 98 & 38, and stipulates that: •

MBPI will be deployed in support of strategic priorities requiring high levels of skills;

•

MBPI shall be consistent with existing systems;

•

MBPI is not indicative of eventual salary policy;

•

MBPI conditions shall be limited to the program they support and not affect the unity, stability, and sustainability of the administration.

The MBPI21 applies to civil servants, who were selected to participate in projects that relate to their ministries/institutions, as a supplement to their salary and is financed by DPs. As well as the MBPI includes all Priority Mission Groups (PMG) and civil servants whose job titles fall below the ranking of deputy department director. The pay incentive is deposited directly into the individual bank accounts of participating civil servants. Although the current implementation of the MBPI in other ministries is not widely yet, thus an extending of its process should be made agreements with ministries/institutions implementing strategic program in other sectors. For instance, the system is being extended progressively to all DP-financed strategic reforms with a view 21

The statement in the Sub-Decree No 29: - Rank of Director General: - Rank of Deputy Director General: - Rank of Department Director: - Rank of Deputy Department Director: - Rank of Administrative Official: - Rank of Office Chief: - Rank of Deputy Office Chief: - Rank of Kramakar Official: - Rank of Secretary: 48

1,800,000 CR 1,480,000 CR 1,280,000 CR 1,080,000 CR 1,000,000 CR 932,000 CR 836,000 CR 772,000 CR 452,000 CR

EIC - Cambodia Economic Watch – October 2008

to eliminating current distortionary salary supplement schemes, harmonizing RGC and partner approaches to incentives, and beginning to address the broader needs for civil service reform22. According to the talking points 23 brought up at the 12th Government-Donor Coordination Committee (GDCC) meeting on March 04, 2008, progress is also needed on completing Human Resource Management (HRM) and Human Resource Development (HRD) policy since the draft concept papers on the subjects were circulated over a year ago. In line with an aspect of the reform, a Royal Decree on Special Operating Agencies (SOA) was promulgated on March 28, 2008. The SOA’s task is a public service delivery instrument unit consistent with other services implementation. The goals of the SOA include improving the quality and reach of public service delivery, strengthening the professional ethic officials, and developing service delivery capacity. Following the successful launch of pilot Window Office (OWO) services in two districts—Siem Reap and Battambang. The RGC plans to establish OWO in 24 districts around the country by early 2009 with support from the WB24. To future another piloted of the district ombudsman’s office25, which aims to strengthen local Government, have been successful, the WB reported in April 2008. In sum, progress has been made on central administrative reform as a result of Government efforts to improve motivation, develop policies to strengthen human resources management practices, and enhance service delivery. 9.2. Sub-National Administrative Reform It is widely acknowledged that Decentralization26 and Deconcentration27 (D&D) help promote democratization at the sub-national level. During the implementation of decentralization reform at the commune level for two mandates, the reform have boosted local development and improved the efficiency of services for citizen. But further efforts are needed to build the capacity of commune council members since their knowledge have limited as focus group discussion with commune councils in Kampong Cham province found in June 2008. Put another way, while considerable progress has been made in decentralization efforts at the commune level, capacity building of commune council members must become a higher priority in the Government’s work plan.

WB, Cambodia Country Assistance Strategy Progress Report, April 2008, page 17 H.E. Ngo Hongly, Secretary-General Council for Administrative Reform 24 Interview the Government official at MoI in September, 2008 25 The office receives complaints from citizen about the local authorities 26 The Government grants commune councils with the function, authority, and resources it needs to respond to local needs. The councils must be accountable to citizens. 27 The Government/ministries/institutions delegate functions, authority and resources in order to respond local needs. The council must be accountable to citizens in those matters. 22 23

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The Law on Administration and Management of Capital, Provinces, Municipalities, Districts and Khans was adopted on April 01, 2008 to strengthen the D&D process and sub-national administrative reform. The organic law sets out principles for the unified administration28 of the capital, provinces, municipalities, districts and khans to promote and sustain the democratic development through D&D. At the same time, the law states that the sub-national councils 29 , each having a five-year mandate, will be established though indirect election that its covers by the Law on Election of Councils for Capital, Provinces, Municipalities, Districts and Khans, which was adopted on April 02, 2008. A National Committee on Democratic Development is to be created at the subnational level, and has its own sub-national committees to assist the tasks refer to the statement in the organic law. Furthermore, under the national committee preparatory work plan, the national program on democratic development will be designed for 10 years, from 2010 to 2020. Since the sub-national financial management regime parallel with D&D reform, an adopted of Law on Public Financial System on April 04, 2008 and was promulgated on May 13, 2008. A scope of the law is recognized as a fundamental law to manage national and sub-national public finances in Cambodia. Supplementary, a whole management of public financial system, a preparation of budget law, as well an implementation processes of the public financial in the ministries/institutions and subnational administration is the basic principle of the public financial system law. Overall lesson learned form other countries, the three essential ingredients of successful D&D reform are: legal framework; decentralizing taxation; and, decentralizing human resources 30.

Councils’ at the sub-national level must prepare to have their own management, functions and resources—financial, human, and assets. Each council has ability to facilitate services delivery and development in its own jurisdiction. 29 Capital Council, Province Council, Province Council, District Council, and Khan Council 30 Statement of H.E SAR KHENG, Deputy Prime Minister, and Minister of Interior in the National Workshop on the Formulation of 2009 NCDD/AWPB, 09-10 September 2008 28

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51

Chapter 10

Legal and Judicial Reform The RGC has carried out legal and judicial reforms to create the legal frameworks necessary to complete phase I of the Rectangular Strategy and such reforms are continuing as the Government moves to phase II of the strategy. Reforms have modernized the country’s legal structures and judiciary system. This chapter outlines notable achievements and summarizes some of the issues that remain. 10.1. Achievements and Progress of Legal Reform A vigorous legal framework is an essential component of state legal reforms. To that aim, Cambodia has drafted numerous pieces of legislation with cooperation from relevant institutions and DPs. During the third legislature of the NA, 140 legal texts had been adopted as of June 2008, including three critical legal codes31. As well to further instruction of the basic codes, JICA and French Cooperation (FC) have been helping to provide training on the codes to judges and other judicial officials. Table 10.1. Adopted Legal Texts in Third Legislature by the NA Mandate

Pieces of Legislation Adopted

First

90

Second

86

Third

140

Source: EIC, Cambodia Economic Watch, October 2006 and List of Adopted Law from CoM, as up to June 2008

Thorough reviews and relevant technical tasks have been completed on eight fundamental laws. Since 2004, five draft laws have been in progress and in various institutions such as CoM, Supreme Council of Magistracy (SCM), and Ministry of Justice (MoJ). After it is reviewed by a technical team from the Council of Jurists (CoJ), the draft Criminal Code will be put on the agenda of the inter-ministerial meeting. The adoption of this code will hasten the completion of the Draft Law on Anti-Corruption. Meanwhile, the Draft Law on the Organization and Functioning of the Courts is still being discussed by the FC in MoJ’s internal meetings. The CoJ is considering the Draft Law on the Statute of Judges and Prosecutors and its passage will be part of the new mandate of the inter-ministerial meeting. Northing has been notified on Draft Law on the Amendment of the Organization and Functioning of the SCM.

31

Civil Procedure Code, Civil Code, and Criminal Procedure Code 52

EIC - Cambodia Economic Watch – October 2008

Table 10.2. Progress on the Remaining Fundamental Draft Laws • Draft Criminal Code is at CoM. This draft has been discussed in the CoJ meeting, and will be put forward for discussion at the inter-ministerial meeting. • Draft Law on organization and functioning of the court is at MoJ. The draft was discussed during internal meeting with FC before being forwarded to the CoM. • Draft Law on the Statute of Judges and Prosecutors is at CoM and is being considered by the CoJ. It will be forwarded to the inter-ministerial meeting. • Draft Law on Amendment of the Organization and Functioning of the SCM was discussed by the Supreme Council of Magistracy (SMC). • Draft Law on Anti-Corruption is being reviewed by the CoM. Source: Interviewed with various government officials, August 2008

In the meantime, the French government and FC have initiated support and TA for the preparation of two other important drafts—the Administrative Code and Administrative Procedure Code 32 . The process of drafting both codes is known as a medium/long-term perception since its need a smoothly enforcement of legal framework as well judicial system first. Nevertheless these tasks were indicated as a medium term in the strategic plan of the reform. Progress on creating a necessary legal framework for the WTO has continued, albeit with some notable delays, and several pieces of legislation have been adopted to fulfill commitments. A Committee for Facilitation Inter-Ministries on Practice Obligation and Cambodia Commitment in WTO was established via sub-decree No 20 dated on March 07, 2008. It’s the duty of the Committee for Facilitation Inter-Ministries to follow up and to guide relevant institutions through action plans and report back to the CoM at least every six months. In addition, the committee will set up a group composed of interministries to negotiate and resolve disputes related to the WTO framework. For legislation to be effective, an implementing framework must be established with input from judges, prosecutors, and judicial officials.

10.2. Judicial and Alternative Dispute Resolution (ADR) In the interest of creating a neutral, independent and competent judiciary, the RGC is endeavoring to draft a code of ethics code for legal professionals. The SCM approved an Ethic Code for Judges and Prosecutor on February 05, 2007. A statute for clerks also is being prepared and a Training School for Clerks was established in 2007. Responding to the capacity building of legal human resources, training institutions for the professionals were formed like Royal Academy for Judicial 32

Statement of H.E. SAM Sokphal in the Legal and Judicial Reform TWG Meeting, June 11, 2008 EIC - Cambodia Economic Watch – October 2008

53

Professions (RAJP) and Professional Training Center for Lawyers (PTCL). Furthermore, priority activities of the reforms have been included an establishment of Royal School of Notary and Bailiff33 as a future target. Although to achieve these goals, it bases on a readiness of legal framework, and other relevant mechanisms which leads to faster the process. To notify that draft law on notary was finished in December 2007, the Council for Legal and Judicial Reform (CLJR)34 reported in March 2008. A pilot court is practicing in Kandal province that focuses on handling cases and technical matters of the courts. At the same time, the scheme is being organized a senior team work and technical team work to broaden pilot court in Phnom Penh, Kampong Cham, and Banteay Meanchey provinces. Take into account of specialized commercial court is being prepared and reviewed draft Law on Establishing the Commercial Court after commented from the first and second round tables at the MoC. An elaborate court structure has been stipulated in the draft which will be sent to a new mandate of CoM. Additional regulations are still required related to the court’s functioning, and procedure. Besides judicial solution, ADR is recognized as quickly mechanism in dealing with cases. There are three steps in the ADR process ─ negotiation, conciliation and arbitration. ADR was one of seven strategic objectives35 included in a legal and judicial reform agenda that was approved in 2003. According to the dissemination workshop addressed that this priority activity for medium term supposes to reach around 50 percent since an adoption of Law on Commercial Arbitration in 2006. Commercial law is now one of the subjects studied in the RAJP program. A draft Sub-decree on Organizing and Functioning of the National Arbitration Center has not yet been approved and the RGC is still seeking DP to help establish a national arbitration center. Unlike a plan for strengthen ADR methodology, long term goal, achieves about 70 percent. An efficiency outcome has confirmed by a pilot of Center for Justice Service at District (CJSD), and labor deputes solution by labor arbitration. The CJSD has been piloted study in four districts at Kampong Speu and Kampong Chhnang provinces, and will be expanded to 22 districts in Siem Reap, Battambang, Mondulkiri, and Ratanakiri provinces by 2009. The program is being implemented by MoI and MoJ, with assistance from the Spanish government through the UNDP.

An institution for execution of judgment Workshop of the Dissemination on “Exchange Consultation Programme on Implement Action Plans of Legal and Judicial Reform with Civil Agencies, March 26, 2008” 35 The goal implies seven strategic objectives: 1. Improvement the protection if personal right and freedoms 2. Modernization of the legislative framework 3. Provide better access to legal and judicial information 4. Enhance quality of legal process and related services 5. Strengthen judicial service 6. Introduce alternative dispute resolution methods 7. Strengthen legal and judicial sector institutions to fulfill their mandate 33 34

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Meanwhile, arbitration is being used to settle labor disputes among employees and employers, particularly in factories. The Arbitration Council is supported by the ILO through the Arbitration Council Foundation. In short, the ADR for commercial cases should be accelerated by another alternative resolution, mediation, since a national arbitration center yet set up. And a perception of businessmen value time saving, thus the mediation will act as a significant means to deal with business deputes especially private sector.

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Chapter 11

Land and Natural Resource Reform Land and natural resources such as fisheries and forestry are the sources of the livelihood for the majority of Cambodians in rural population. Improving access to land and natural resources are clearly one of the main pillars for the government reform program and development strategy that have direct impacts on poverty reduction. This section examines recent land, fisheries and forestry reforms. 11.1. Land Reform Various mechanisms have been developed for to resolve land disputes such as the Land Dispute Committees, a Cadastral System and the National Authority for Land Dispute Resolution (NLDA). Moreover, land titling is also helping to reduce the number of disputes over land. As of December 2007, the land systematic registration result in 1,061,414 land parcels and 794,639 land titles have been distributed by RGC36. Meanwhile, a total of 4,770.22 hectares has been registered as state private land under the Land Allocation for Social and Economic Development (LASED) pilot project, according to a statement by the chairman of TWG for Land at the 12th meeting of the GDCC. This land, which is located in three communes in two provinces37, will be distributed to poor and landless families as part of the Social Land Concession (SLC) program. Along with this site, as of January 2008, seven other communes also have been registered as state private land for use under the SLC up to January 2008. To further the program and preparing the urban area, another 13.5 hectares in Kbal Chay Sangkat, Sihanouville was supported by the project for the purpose of SLC. And it has been planed to distribute to 259 poor and landless families. Recent Government decisions have also been made about Economic Land Concessions (ELC) that affect how the country’s agriculture and natural resources are managed. ELCs can be granted at both the national and provincial levels; yet it has been granted in a non-transparent manner, the laws and regulations very often were not followed. These results in vast areas of land are being kept by non-producers for speculation while poor people who need to farm for their livelihoods have no access to land. For instance, the concern of the DP raised that to push the land reform, a cancelled or reduced the ELC should increasingly be used the purpose of SLC since the growing number of poor and landless families38.

Statement by H.E. Chhann Saphan, Secretary of State of MLMUC and Chairman of TWG for Land in the 12th meeting of GDCC on March 04, 2008 37 - Sombok commune 3294.36 hectares and Changkrang 612.21 hectares, Kratie district, Kratie province - Choam Kravien commune, Memot district, Kampong Cham province 38 The statement of Mr. F.X. Ernest Loignon, Chargé d’affaires, Embassy of Canada, the 12th meeting of GDCC on March 04, 2008 36

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Community Land is another issue of concern especially the indigenous community who often live in the area that is rich in natural resources and under strong pressure for development in the area. A pilot project on the Statute of Indigenous Community has been performed by the inter-ministerial working group in three villages in two provinces—two in Ratanakiri and one in Mondulkiri. Thus the progress in registration of indigenous communal land has been very slow. Furthermore, the draft Policy on Registration and Use Rights of Indigenous Communal Land was submitted to the CoM since May 2007 and a draft sub-decree on the Registration of Indigenous People’s Community Land has been discussed within the General Secretariat of Council for Land Policy. Work continues on various new legal texts related to land reform such as subdecrees, regulations, and policies. The challenge is enforcing the existing legal provisions and implementing new policies. The RCG should strengthen enforcement of existing laws and do more to implement existing legislations. 11.2. Forestry Reform Cambodia is endowed with forests, which could also be used to transform the lives of the country’s poor. Poverty rates among Cambodians who rely on forests for their livelihoods tend to exceed the national average, which means securing local access to forestry resources would help boost the income levels of these rural poor people. Pressure is mounting for the Government to reform the commercial forestry concession process, which is deemed by many to have failed over the past decade. A considerable number of forest concessions were reduced making more forest area available for the management under different scheme such as community forest. In this sense, in order to develop rural livelihoods of the people, an ongoing monitoring and evaluation is necessary to promote the implementation of forest communities. The TWG F&E adopted a four-year Forestry and Environment Action Plan 2006-2010 consistent with the goals of the NSDP. In addition, the Forestry Administration is developing a National Forest Program which should improve the planning, implementing and monitoring of forestry-related activities and provide a framework for prioritized action and investment. In spite of these efforts, illegal logging and encroachment of forested land continues in various parts of the country. The government has taken measures to combat illegal grabbing of forest land through national and sub-committees for Prevention, Control and Suppression of Forest Land Encroachment for Private Entitlement in collaboration with the NLDA. Policy reform for the new mandate, statement in the phase II of the Rectangular Strategy, the government encourage the private sector in planting economically viable private forest with proper and clear technical guideline, especially on degraded forest land.

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57

A new adopted of Natural Protected Area Law, adopted on December 27, 2007, is the purpose of managing biodiversity conservation and to sustain the utilization of natural resources in the areas. In sum, the Government should consider strict measures to eradicate illegal encroachment and to ensure forestry communities have input in how forests are managed. 11.3 Fisheries Reform Fisheries are crucial to the country’s development, supporting the livelihoods and food security of millions of Cambodians. Ensuring access rights of local communities is one the target in the fisheries reform program. According to the annual report in 2007 and target for 2008 of the Fishery Administration (FA), 509 fishing and fish shelter communities, both marine and fresh water, have been established of which 447 are fishing communities and 62 are fish shelter communities. As well the user rights of the communities on public fishing areas are broadly opened through Sub-Decree on Community Fisheries. To further strengthen in the sector, action against illegal encroachment of flooded forests and illegal fishing gears has being serious considerate in the phase II of Rectangular Strategy. Additionally, due to the value of the fish truly reflect the family and state economies; the RGC makes an effort to establish a fishing market mechanism. In the area of policy reform, a Royal Decree on establishment of community fisheries was signed in May 2005 and a Sub-Decree on community fisheries management was approved in June 2006. These legal texts provide a legal basis for the establishment of the community fisheries. A new Fishery Law took effect in May 2006, which outlines the roles and mandate of the new FA for sector development. A proclamation on the Functioning on the Fishery Administration has been discussed and currently is awaiting approval from the MAFF. With the improved structure compare to in proceeding Department of Fisheries, the new structure is expect to become a more effective service provider, especially at the commune council level where the demand for more effective fisheries management is greatest. The formulation of a Cambodian Code of Conduct for Responsible Fisheries is another noticeable improvement. It expected to provide framework that benefit more for the development of rural communities. Moreover, Guidelines on Community Fisheries have been finalized and should be implemented soon. The guidelines set out a legal framework for ensuring that fisheries are managed more transparently and equitably. Therefore, there has been considerable progress in the policy reform, but access rights to fisheries resources still lack clarity and the incentives that would ensure the fisheries are managed in a sustainable manner are lacking.

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59

Bibliographic References

Council for Legal and Judicial Reform (CLJR) 2003, Legal and Judicial Reform, June 2003 Data and Information from Various Ministries Fishery Administration (FA) 2007, “Annual Report 2007 and Target for 2008” IFC (2008), http://www.doingbusiness.org/Custom Query/ViewCustomReport.aspx IMF (2007), “Cambodia 2007 Article IV Consultation” MEF (2008), “Public Financial Management Reform Program Platform 2, May 2008” ______ Public Financial Management Reform Program 2007 Annual and Progress Report NBC (2008), “First Semester Report and Target for Second Semester 2008” ______“Quarter Bulletin No 24, Quarter 2, 2008” ______“Quarter Bulletin No 25, Quarter 3, 2008” RGC (2008), “Rectangular Strategy” for Growth, Employment, Equity and Efficiency Phase II, September 2008 World Bank (2008), Cambodia Country Assistance Strategy Progress Report, April 2008 ______”Trade Facilitation and Competitiveness Project Restructuring Aide Memoire”

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EIC - Cambodia Economic Watch – October 2008

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EIC - Cambodia Economic Watch – October 2008

Appendix I

KEY ECONOMIC INDICATORS

EIC - Cambodia Economic Watch - October 2008

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64

EIC - Cambodia Economic Watch – October 2008

Table A6.1 : Main Economic Indicators 1960

1990

2000

2005

2006

2007

2008p

2009p

577

1,404

3,649

6,293

7,275

8,638

11,023

12,445

4.8%

4.5%

8.8%

13.3%

10.8%

10.2%

7.0%

6.0%

83

136

288

455

514

598

751

834

9.5%

2.4%

15.5%

12.9%

16.4%

25.6%

11.1%

35

537

3,859

4,092

4,103

4,056

4,000

4,000

Inflation in Riel (year average)

4.0%

141.0%

-0.7%

5.8%

4.7%

5.9%

21.0%

7.0%

Inflation in Dollar (year average)

4.0%

0.4%

-1.8%

3.8%

4.4%

7.1%

22.7%

7.0%

Budget Revenue (% GDP)

19.7%

3.1%

10.2%

10.2%

9.8%

11.5%

10.8%

11.1%

Budget Expenditure (% GDP)

29.2%

15.9%

15.1%

12.4%

13.8%

14.4%

14.6%

14.7%

Current Public Deficit (% GDP)

-3.8%

-11.9%

1.3%

2.0%

1.0%

2.6%

1.3%

1.0%

Overall Public Deficit (% GDP)

-9.5%

-12.8%

-4.8%

-2.2%

-4.0%

-2.9%

-3.8%

-3.6%

Export of Goods (% GDP)

6.0%

3.4%

38.3%

46.2%

50.8%

47.3%

43.8%

43.1%

Import of Goods (% GDP)

18.4%

24.4%

53.0%

62.4%

65.3%

62.8%

60.4%

58.1%

Trade Balance (% GDP)

-12.4%

-21.0%

-14.8%

-16.2%

-14.5%

-15.5%

-16.7%

-15.0%

Current Account Balance (% GDP)

-13.4%

-22.7%

-11.4%

-9.4%

-7.2%

-7.8%

-8.8%

-7.1%

57

0

411

834

1,097

1,374

1,617

1,877

Money - M1 (% GDP)

12.5%

5.3%

3.5%

4.9%

5.4%

5.7%

6.6%

7.6%

Money - M2 (% GDP)

23.6%

1.8%

9.4%

14.4%

17.9%

26.8%

34.2%

41.2%

6.9

10.3

12.7

13.8

14.2

14.4

14.7

14.9

31.6%

47.0%

52.8%

57.2%

57.6%

58.2%

58.8%

59.3%

Nominal GDP (million US$) Real GDP (% increase) GDP per Capita (US$) GDP per Capita (% increase) Riel/Dollar Parity (year average)

Net Foreign Reserves (million US$)

Population (million) Labor Force (% Population)

-

Source: EIC, compiled from government and international organization primary data.

EIC - Cambodia Economic Watch - October 2008

65

Table A6.2 : Budget Operations (Billion riels) 1960

1990

2000

2005

2006

2007

2008p

2009p

Domestic Revenue

4

23

1,442

2,626

2,918

4,015

4,766

5,524

Current Revenue

4

23

1,412

2,474

2,882

4,006

4,757

5,515

Tax Revenue

3

13

1,059

1,911

2,271

3,396

4,077

4,785

Direct Taxes

1

1

136

222

331

480

602

726

Indirect Taxes

2

4

533

1,116

1,295

1,895

2,335

2,790

VAT

1

2

398

730

870

1,143

1,430

1,707

Excise duties

0

0

113

380

418

731

878

1,052

Others

1

2

22

6

7

21

27

31

1

9

391

573

645

1,020

1,140

1,269

Imports

1

9

373

551

617

879

993

1,122

Exports

0

0

16

19

24

141

139

139

Others

0

0

2

3

4

0

8

8

1

10

353

563

611

610

680

730

Fishery & Forestry

0

0

51

10

9

13

9

9

Civil Aviation

0

0

25

30

30

51

67

78

Royalties

0

0

12

2

2

2

2

2

PTT

0

0

92

123

83

77

118

134

Other non tax revenue

1

10

174

398

487

467

483

506

Capital Revenue

0

0

29

152

36

9

9

9

Expenditures

6

120

2,120

3,182

4,112

5,041

6,449

7,314

1

7

897

1,215

1,520

1,950

2,252

2,307

Through Nat'l Treasury

1

7

303

315

379

440

718

668

Direct Foreign financed

0

0

594

900

1,141

1,510

1,534

1,639

Current Expenditures

5

113

1,223

1,967

2,592

3,091

4,197

5,007

Defense and Security

2

89

438

451

520

681

1,018

1,169

Salaries

1

9

301

306

327

390

514

590

Other

1

80

137

145

193

291

504

578

3

25

785

1,516

2,072

2,410

3,179

3,838

Salaries

2

12

211

405

495

853

1,107

1,350

Other

1

13

574

1,111

1,577

1,556

2,072

2,488

Current deficit

-1

-90

190

507

290

915

560

508

Overall deficit

-2

-97

-678

-556

-1,194

-1,026

-1,684

-1,790

2

97

678

556

1,194

1,026

1,684

1,790

1

77

707

984

1,584

1,615

1,684

1,790

Grants

1

70

384

538

790

730

749

778

Loans (net)

0

7

323

446

794

885

935

1,012

Int'l Trade Taxes

Non tax revenue

Capital Expenditures

Civil Administration

Financing Foreign financing

Domestic financed

1

20

-28

-428

-390

-589

0

0

Banks

0

20

-115

-199

-333

-1,114

0

0

Others

0

0

86

-229

-57

525

0

0

Source: Ministry of Economy and Finance.

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EIC - Cambodia Economic Watch – October 2008

Table A6.3 : Balance of Payment (Million US$) 1960

1990

2000

2005

2006

2007

2008p

2009p

Exports of Goods

35

47

1,397

2,910

3,694

4,089

4,823

5,358

Imports of Goods

106

342

1,936

3,928

4,749

5,424

6,660

7,230

Trade Balance

-71

-295

-539

1,018

-1,056

1,335

1,837

-1,872

Agriculture

26

19

251

350

401

532

799

983

-11

-18

495

1,173

1,409

1,534

1,767

1,860

1,306 2,094

2,119 2,284

Textiles & Garments Oil & Gas

-4

-50

-323

-842

-1,123

-82

-246

-961

1,698

-1,742

-2

-27

101

471

504

644

915

1,085

-1

-8

-99

-233

-271

-301

-407

-493

1

3

271

743

841

1,012

1,342

1,578

-2

-21

-71

-38

-65

-67

-21

-1

Balance of Incomes

-4

0.4

-123

-254

-290

-360

-430

-487

Current Transfers and Capital Account

42

9

461

535

764

797

809

821

0

3

144

209

315

381

383

385

42

6

317

326

449

416

426

436

Current Accounts

-35

-312

-100

-265

-77

-253

-543

-453

Financial Accounts

35

312

184

335

322

669

774

808

Official Loans

0

130

75

144

141

120

129

144

Foreign Direct Investment

0

0

148

381

408

866

724

550

Others (net)

35

182

-40

-190

-226

-317

-80

-52

Overall Balance

0

0

83

70

245

415

231

355

Other Goods Balance of Services Transportation Travel (Tourism) Others

Private Transfers Government Transfers

-2,106 -2,609

Source: NBC for 2000-2007, EIC model projection for 2008-2010

EIC - Cambodia Economic Watch - October 2008

67

Table A6.4 : Monetary Survey (Billion riels) 1960

1990

2000

2005

2006

2007

2008p

2009p

Net Foreign Assets

4

3

2,589

5,475

7,224

11,036

12,837

15,335

Foreign Assets

4

18

3,047

6,142

7,650

12,192

14,026

16,576

Foreign Liabilities

0

-15

-458

-667

-426

-1,156

-1,189

-1,241

Net Domestic Assets

3

58

-759

-450

-282

576

5,181

8,927

Domestic Credit

3

59

904

1,972

2,676

4,570

10,245

14,644

Net Claims on Government

1

41

3

-421

-953

-1,816

-1,993

-1,973

Claims on Government

1

42

272

327

287

297

315

335

Deposits of Government

0

-1

-269

-748

-1,240

-2,113

-2,308

-2,308

State Enterprises

0

13

3

0

2

1

1

1

Private Sector

2

5

898

2,394

3,628

6,385

12,237

16,616

0

-1

-1,663

-2,423

-2,959

-3,994

-5,064

-5,717

7

61

1,831

5,025

6,942

11,311

18,018

24,262

5

61

540

1,323

1,658

2,052

3,032

3,914

Currency outside Banks

3

46

495

1,282

1,600

1,990

2,928

3,772

Demand Deposits

3

15

45

41

58

62

104

141

2

0

1,291

3,702

5,285

9,259

14,986

20,348

Times and Savings Deposits

2

0

46

113

89

121

178

233

Foreign Currency Deposits

0

0

1,245

3,589

5,196

9,138

14,808

20,115

Other Items (net) Total Liquidity Narrow Money

Quasi-Money

Source: NBC for 2000-2007, EIC model projection for 2008-2010

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EIC - Cambodia Economic Watch – October 2008

Table A6.5 : Investment and Saving (million US$) 1960

1990

2000

2005

2006

2007

2008p

2009p

80

94

668

1,189

1,407

1,713

2,030

2,252

37

13

233

297

370

481

563

577

6

13

72

75

85

108

152

139

Foreign financed

31

0

160

222

285

372

412

438

Private investment

43

81

436

892

1,037

1,232

1,467

1,676

Domestic financed

43

49

287

511

629

757

916

1,125

0

32

148

381

408

475

550

550

Total Domestic financed

48

62

360

586

715

866

1,068

1,264

Total Foreign financed

31

32

309

603

693

847

962

988

Total Saving

80

94

668

1,189

1,407

1,713

2,030

2,252

2

-225

251

597

881

1,043

1,061

1,363

-22

-167

49

124

71

226

140

127

24

-58

202

473

810

818

921

1,236

77

318

417

591

527

670

969

889

Grants

42

6

317

326

449

416

426

436

Non Grants

35

312

100

265

77

253

543

453

Total Investment Public investment Domestic financed

Foreign financed

National saving Government Non Government Foreign saving

Source: EIC, compiled from government and international organization primary data.

EIC - Cambodia Economic Watch - October 2008

69

Table A6.6 : GDP by Industry Origin at Current Prices (million US$) 1960

1990

2000

2005

2006

2007

2008p

2009p

302

764

1,329

1,963

2,231

2,602

3,451

3,891

126

163

328

547

561

740

1,086

1,230

Other Crops

80

156

258

439

540

601

814

959

Livestock

26

102

204

293

336

377

492

562

Fishery

22

327

393

462

527

600

733

790

Rubber & Forestry

47

17

146

222

267

285

326

349

Industry

89

170

780

1,542

1,861

2,117

2,455

2,649

Garment

16

18

336

772

943

1,044

1,166

1,266

Food, Beverage & Tobacco

19

70

116

149

162

187

235

264

Other Manufacturing

16

48

114

169

202

230

294

336

Electricity, Gas & Water

5

6

15

30

40

48

64

76

Construction & Mining

33

28

198

422

514

609

696

708

186

470

1,541

2,788

3,183

3,919

5,118

5,905

15

64

241

465

515

597

752

853

485

584

577

906

1,016

1,363

1,783

2,073

16

3

135

273

318

375

502

584

Other Private Services

-408

-212

490

1,030

1,208

1,419

1,872

2,168

Public Administration

77

31

98

113

126

165

208

228

577

1,404

3,649

6,293

7,275

8,638

11,023

12,445

Agriculture Paddy

Services Transport & Communication Trade Hotel & Restaurants

Total GDP

Source: EIC, compiled from government and international organization primary data. Note: There have been a number of data revisions that impact to the series back to previous year.

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EIC - Cambodia Economic Watch – October 2008

Table A6.7 : GDP by Industry Origin at Constant 2000 Prices (million US$) 1960

1990

2000

2005

2006

2007

2008p

2009p

833

948

1,329

1,692

1,784

1,874

1,977

2,081

Paddy

179

197

328

470

490

527

560

591

Other Crops

289

133

258

384

409

446

491

538

64

206

204

259

280

290

310

329

219

285

393

442

459

462

466

470

82

127

146

137

146

149

151

152

Industry

549

221

780

1,516

1,794

1,944

2,069

2,153

Garment

104

5

336

834

1,004

1,104

1,201

1,283

Food, Beverage & Tobacco

121

87

117

126

130

134

141

149

Other Manufacturing

100

55

114

144

164

174

187

200

Electricity, Gas & Water

39

5

15

27

35

39

44

49

Construction & Mining

186

69

198

386

462

493

496

472

1,529

712

1,541

2,497

2,740

3,144

3,404

3,665

Transport & Communication

125

100

241

386

395

423

449

477

Trade

480

561

577

794

850

1,059

1,136

1,227

Hotel & Restaurants

187

37

135

247

281

310

339

368

Other Private Services

142

-25

490

982

1,128

1,266

1,393

1,507

Public Administration

596

40

98

87

86

86

87

87

2,910

1,881

3,650

5,704

6,318

6,962

7,449

7,899

Agriculture

Livestock Fishery Rubber & Forestry

Services

Total GDP

Source: EIC, compiled from government and international organization primary data.

EIC - Cambodia Economic Watch - October 2008

71

Table A6.8 : GDP by Expenditure Categories at Current Price (million US$) 1960

1990

2000

2005

2006

2007

2008p

2009p

Private Consumption

220

1,419

3,284

5,332

5,966

6,803

8,681

9,801

Government Expenditure

342

203

191

365

384

495

894

858

Gross Domestic Formation

88

103

640

1,162

1,495

2,049

2,389

2,591

80

94

668

1,189

1,407

1,713

2,030

2,252

Public

37

13

233

297

370

481

563

577

Private

43

81

436

892

1,037

1,232

1,467

1,676

8

10

-29

-27

88

336

359

338

37

49

1,826

4,028

4,990

5,637

6,843

7,687

35

47

1,397

2,910

3,694

4,089

4,823

5,358

35

-6

1,279

2,773

3,554

3,948

4,681

5,214

0

53

118

137

139

141

143

145

2

2

428

1,118

1,296

1,548

2,019

2,329

110

371

2,291

4,594

5,560

6,345

7,783

8,492

Goods FOB

106

342

1,963

3,947

4,768

5,442

6,678

7,247

Retained imports

106

289

1,845

3,810

4,629

5,301

6,535

7,103

0

53

118

137

139

141

143

145

4

29

328

647

792

903

1,105

1,244

577

1,404

3,649

6,293

7,275

8,638

11,023

12,445

Gross Fixed Capital Formation

Changes in Stocks Exports of Goods & NFS Goods FOB Domestic exports Re-exports NFS Imports of Goods & NFS

Re-exports NFS Total GDP

Source: EIC, compiled from government and international organization primary data.

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EIC - Cambodia Economic Watch – October 2008

Table A6.9 : GDP by Expenditure Categories at Constant 2000 Prices (Million US$) 1960

1990

2000

2005

2006

2007

2008p

2009p

Private Consumption

1,176

1,820

3,284

4,942

5,317

5,668

6,257

6,619

Government Expenditure

1,580

263

191

327

333

398

559

493

508

137

640

1,075

1,320

1,642

1,603

1,634

461

125

668

1,103

1,260

1,417

1,413

1,466

Public

210

33

233

271

332

388

401

385

Private

251

92

436

832

928

1,029

1,012

1,081

48

13

-29

-27

61

224

190

168

202

54

1,826

3,886

4,626

4,882

5,080

5,359

190

52

1,397

2,784

3,395

3,510

3,510

3,656

190

-7

1,279

2,652

3,267

3,389

3,406

3,558

0

58

118

131

128

121

104

99

12

2

428

1,102

1,231

1,372

1,569

1,702

556

394

2,291

4,527

5,278

5,627

6,049

6,206

Goods FOB

536

363

1,963

3,889

4,526

4,826

5,190

5,296

Retained imports

536

307

1,845

3,754

4,394

4,701

5,079

5,191

0

56

118

135

132

125

111

106

21

30

328

638

752

801

859

909

2,910

1,881

3,650

5,704

6,318

6,962

7,449

7,899

Gross Domestic Formation Gross Fixed Capital Formation

Changes in Stocks Exports of Goods & NFS Goods FOB Domestic exports Re-exports NFS Imports of Goods & NFS

Re-exports NFS Total GDP

Source: EIC, compiled from government and international organization primary data.

EIC - Cambodia Economic Watch - October 2008

73

Table A6.10 : Employment by Sector (000's) 1960

1990

2000

2005

2006

2007p

2008p

2009p

1,922

2,962

3,625

4,061

4,145

4,215

4,275

4,331

1,522

1,997

2,559

2,878

2,939

2,991

3,036

3,078

234

401

436

504

516

527

536

545

Livestock

65

327

343

391

400

408

414

420

Fishery

74

193

240

249

248

247

245

243

Rubber & Forestry

26

44

47

39

41

42

44

45

Industry

99

218

473

692

771

816

859

890

Garment

14

37

200

323

368

398

414

445

Food, Beverage & Tobacco

24

72

80

83

85

87

89

92

Other Manufacturing

28

50

55

69

75

78

101

105

Electricity, Gas & Water

2

3

6

9

10

11

12

12

Construction & Mining

30

57

132

208

233

242

243

235

299

752

984

1,126

1,169

1,200

1,191

1,205

28

38

55

78

79

82

85

88

138

270

324

363

374

375

339

339

Hotel & Restaurants

21

5

60

88

95

101

107

112

Other Private Services

54

133

162

262

286

307

325

341

Public Administration

58

306

383

335

335

335

335

325

2,320

3,932

5,082

5,879

6,085

6,231

6,325

6,425

Agriculture Paddy Other Crops

Services Transport & Communication Trade

Total

Source: EIC, compiled from government and international organization primary data.

74

EIC - Cambodia Economic Watch – October 2008

76

EIC - Cambodia Economic Watch – October 2008

Appendix II

KEY STRUCTURAL REFORMS

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Box A2.1: Cambodia Key Reforms in Trade Openness Policy and Investment (2001–2008) 2001: •

Since early 2001 Cambodia benefited from the EU’s Everything But Arms (EBA) initiative, which grants duty-free and quota-free access for all exports (except arms) originating from Cambodia. With Cambodia's entry into the Association of Southeast Asian Nations (ASEAN), the European Union (EU) granted Cambodia the Regional Cumulation and Derogation Benefit Status, offered under the EU Preferential Rules of Origin. The derogation was prolonged until the end of 2006. The EU is ranked as Cambodia’s second most important destination for exports, after the United States (US) and Cambodia’s third most important trade partner, after the US and Thailand. Since Cambodia does not have a well-developed textile sector, it has not always met the standard of the Rules of Origin (ROOS) requirements and this has made some of its garment exports to EU markets subject to 12 % average rate of duty.

•

The Royal Government of Cambodia (RGC) reduced maximum tariff rates from 120 percent to 35 percent and reduced the number of tariff bands from 12 to four. Structure of the four tariff bands are 0%, 7%, 15% and 35%, of which about 95% of the tariff lines are under three bands: 7%, 15% and 35%.

•

Average un-weighted tariff rates lowered to 16.5% from 17.3% in 2000 and 18.4% in 1997. The rate had been lowered to 14.7% by 2005.

•

The RGC imposed an absolute ban on exports of logs and an export quota on rice. Five items are subject to export licensing requirement: (i) processed wood products, (ii) garments, (iii) weapons, (iv) all vehicles and machinery for military purposes and, (v) pharmaceuticals and medical materials. Most non-trade barriers were eliminated in 2001.

2002: •

Following the presentation of its Pro-poor Trade Strategy at the July 2001 third Consultative Group (CG) meeting in Tokyo, the RGC and donors agreed to prepare the Diagnostic Trade Integration Study (DTIS-IF). It was released in January, and was led by the World Bank (WB) and a team of national and international consultants. Most non-trade barriers were eliminated. Cambodia, one of the first three pilot countries under the revamped Integrated Framework for Trade-related Technical Assistance, was considered very successful and the concept has now been replicated in 20 other Least Developed Countries (LDCs).

2003: •

Cambodia was approved to become 147 th World Trade Organization (WTO) member at Cancun 5 Th WTO Ministerial Conference (September 10-14, 2003) following a successful five rounds of working party negotiations with its multilateral and bilateral market partners. Cambodia achieved full membership of the WTO on October 13, 2004.

•

Cambodia became a signatory of the ASEAN-China Free Trade Area’s Early Harvest scheme, in July. Under the scheme Cambodia received a Special Preferential Tariff (SPT) treatment for 297 products at 0% tariff rates for Chinese markets, effective from January 1, 2004. Under ASEAN and LDC status, Cambodia also received SPT treatment from a number of other countries including the EU member states, Japan, Korea, Canada, Thailand, etc.

2005: •

On January 1, the Bilateral Textiles Agreement with the US government, signed in 1999, expired. On May 27, the US Department of Commerce introduced a safeguard to limit the increase of its Chinese textile imports to 7.5% a year. The move was followed on June 10, by the signing of a European Union Memorandum of Understanding with China to limit Chinese textile imports to between eight and 12.5%. This safeguard will expire by the end of 2008.

•

The Tariff Relief Assistance for a Development Economy (TRADE) bill was introduced in both the US Senate and the House of Representatives. The bill would grant Cambodia, and 14 other developing countries, duty-free access to the US markets. Modeled on the Africa Growth and Opportunity Act (AGOA), it provides special access of textile and clothing

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exports from lesser-developed countries in Sub-Saharan Africa to the US markets. •

During July, representatives of the RGC and Garment Manufacturer Association (GMAC) lobbied the US government to pass the TRADE bill that had already been introduced in both the US Senate and the House of Representatives. If the TRADE bill were passed, it would obviously help the Cambodian garment industry achieve a more sustainable future.

•

China granted Cambodia an additional 83 products duty-free access to its markets. In total, Cambodia has received SPT treatment for 380 products at 0% tariff rate for Chinese markets.

2006: •

In July, the Commerce Minister went to the US to call for duty-free access to US markets for 15 LDCs in Asia. It is seen as crucial for the health of Cambodia's garment industry, to enable it to compete with other exporters such as China and Vietnam. Since 2005, a bill entitled the TRADE Act 2005 has been before the US Congress to extend duty-free access to the 15 LDCs. It would eliminate 17-to-20-percent of tariffs currently imposed on Cambodian garment exports to the US. The US has already approved this policy for Africa.

•

On July 14, 2006, Cambodia reached an agreement and signed a Trade and Investment Framework Agreement (TIFA) with the US.

•

On August 2, Vietnam offered SPT treatment to 40 Cambodian agricultural products, giving them duty-free access to its markets. Tobacco and rice were excluded from the list and are subject to quota restrictions. Vietnam and Cambodia plan to establish seven Special Economic Zones (SEZs) along their border and open eight more international border checkpoints and nine national border checkpoints in order to expand trade.

•

On December 5-7, the Prime Ministers of Cambodia, Vietnam and Laos met in Dalat to discuss the development of an economic triangular area incorporating the three countries' mutual border provinces. The Prime Minister of Cambodia indicated during the meeting that the plan will include the Cambodian provinces of Ratanakkiri, Mondolkiri and Stung Treng and these provinces will become a major economic engine by 2015, focusing on mining, agroindustry and ecotourism.

2007 •

June 14, 2007 – Cambodia and Japan signed an agreement for "liberalization, promotion and protection of investment". Cambodia guarantees a free market, privatization and facilitation of procedural work for prospective Japanese investors. This is in addition to what is stipulated in the investment law, which ensures no discrimination, nationalization or price intervention from the government, but requires domestic shares in foreign–owned companies.

•

On January 16, the Office of the Council of Ministers (OCM) submitted the second protocol of the Greater Mekong Sub-region (GMS) on Facilitation of Cross Border Transport of Goods and People to the National Assembly for approval.

•

On February 12, the first Joint-Council meeting was held between US trade representatives and RGC officials, led by the Commerce Minister, in Siem Reap. This meeting was the follow-up of TIFA which was signed in July 2006. The meeting aimed to strengthen relationships and give participants a deeper understanding of Cambodia’s economic and political structures, as well as the challenges faced by its trade sector. During the meeting, there were exchanges of views on the legal framework, standard and capacity building, intellectual property, Sanitary and Phytosanitary (SPS), Generalized System of Preference (GSP), etc.

•

Preparation of the Updated Diagnostic Trade Integration Study (Updated DTIS) or Enhanced Integrated Framework (IF) has been underway, lead by the Ministry of Commerce (MoC) and United Nations Development Programs (UNDP). The report is expected to be released by mid-2007.

•

June 2007, Russia offers a preferential treatment of Cambodian garment (except wool) exports to its markets duty free and quota free with subject to a 25% rule of origin conditions. EU requires 45% of rule of origin for Cambodian exports penetrating its markets for duty and quota free status. July 2007, Sr. Minister of Commerce and GMAC embarked on their 4th lobby trip on TRADE Act to

•

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• •

• •

•

Washington DC. Their earlier trips were in 2004-2006. This lobby had not been so successful because there is a momentum to introduce a larger Bill that will provide all LDCs duty free and quota free access to US markets. This is in view of the US commitments to the Doha Round Negotiations of the WTO. This bill is being spearheaded by Congressman Jim Mcdermit who is the father of the AGOA Bill. Law on Insolvency was adopted by the NA on October 16, 2007 and promulgated on December 08, 2007. Under the ASEAN Harmonized Tariff Nomenclature (AHTN) of ASEAN Free Trade Area, Cambodia tariff lines will be reduced further from a little over 11,000 lines to around 8,500 lines effective from September 1, 2007. The implementation would help reduce the Cambodia’s average un-weighted tariff rate from 14.90 percent to 14.38 percent. October 12, 2007 – Cambodia approved agreement law between Cambodia and Pakistan on promotion and protection of investment. As of 2007 the following countries granted SPT treatments to Cambodia -

US – More than 6,000 Items

-

27 EU countries – Everything But Arms (EBA) initiative

-

Japan – (April 2007) duty and quota free status on 98% of Japanese tariff list provided to Cambodia’s exports to its markets.

-

China – 380 Items

-

Korea (Republic) – 78 Items

-

ASEAN under the AISP – Thailand (340 items), Brunei (8 items), Indonesia (70 items), Malaysia (180 items), Philippines (62 items).

US Congress on October 19, 2007 considered Draft Law on Duty-Free Garment Access. Cambodia, currently the fifth-largest exporter of garments to the US, has lobbied US lawmakers to reduce tariffs on clothing produced here, fearing that unfettered competition from countries such as China could reduce Cambodia's US market share. When US import quotas on garments expired in 2005, the US placed controls on specific imports of clothing from China, but these safeguards are due to expire at the end of 2008. While offering unlimited duty-free access to other least developed countries, the bill would allow Cambodia and Bangladesh to increase the volume of duty-free imports by 15 percent a year if they respect labor rights. GMAC acknowledged that “I think the bill will put us in a better position to compete with Vietnam and China".

2008 •

Agreement between Cambodia and Japan on "Liberalization, Promotion and Protection of Investment" which signed in June 2007 was adopted by the NA on January 16, 2008 and was promulgated on February 28, 2008.

•

ASEAN Charter was adopted by the NA on February 26, 2008 and was promulgated on March 31, 2008. The instrument of ratification signed by H.E Deputy Prime Minister HOR Namhong, Minister of Foreign Affairs and International Cooperation, on April 02 2008, has been forwarded to the Secretary-General of ASEAN for deposit. The charter represents as a common vision and commitment to the development of ASEAN community as a region of lasting peace, stability, sustained economic growth, shared prosperity and social progress.

Sources: Various Government Reports, IF Report.

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EIC - Cambodia Economic Watch – October 2008

Box A2.2: Cambodia Key Policy Reforms in Private Sector Development (2001-2008) 2002: •

The MoC set its mission statement as “The Year of Decentralization and Deregulation”, aiming to reduce paperwork procedures in dealing with export activities. It introduced a computerized system, in coordination with the US Customs Department, for monitoring garment exports.

•

Law on Marks, Trade Names and Acts of Unfair Competition passed by the National Assembly.

2003: •

In January, the Law on Copy Rights and Related Rights passed by the National Assembly.

•

In February, the Amended Law on Investment passed by the National Assembly to make investment climate more conducive to growth.

•

Law on the Amendment of the Law on Taxation passed by the National Assembly.

•

Law on Patents, Utilities Model, Certificates and Industrial Design passed by the National Assembly.

2004: •

The government and donors, led by the World Bank, identified a 12-point action plan to tackle impediments in the private sector. These were mapped out in the World Bank Investment Climate Assessment Report released in August. The 12-point implementation plan is to improve competitiveness of Cambodian investment climate and trade facilitation.

•

The government established a Steering Committee of Private Sector Development, consisting of eight ministries/agencies, to lead and oversee the change process in private sector development reform.

•

Another three Sub-steering Committees of Private Sector Development also established by the government: (i) Sub-steering Committee on Investment Climate and Private Participation in Infrastructure (PPI) led by Sr. Minister of Economy and Finance, (ii) Sub-steering Committee on Trade Facilitation led by Sr. Minister of Commerce, and (iii) Sub-steering Committee on SME led by Minister of Industry, Mines and Energy. Each sub-committee is in charge of its relevant reform agenda.

•

A Trade Facilitation Reform Team established to work under the guidance and leadership of the Substeering Committee of Trade Facilitation, chaired by Sr. Minister of Commerce.

•

MoC reduced the Commercial Registration fees from US$630 to US$177 (Prakas #162 MoC/ M 2004, effective from September 01). It also reduced the time for the Commercial Registration to two and an half days (MoC’s announcement letter #1971 MoC/ M 2004, effective from September 01) and the minimum capital requirement for enterprise establishment from CR 20 million (US$5,000) to CR 4 million (US$1,000).

•

On May 12, the number of steps in the procedure and processing application for Certificate of Origin (C/O), Visa on Commercial Invoice and Export License at MoC reduced from 11 to eight. Processing time for issuance of application for C/O, Visa on Commercial Invoice, and Export License reduced from 16 business hours (March 2002) to 12 business hours from May 12, 2004.

2005: •

The Council for the Development of Cambodia (CDC) cancelled the “deposit requirement” to secure project implementation by investors, and foreign companies have been entitled to a 100% ownership of their businesses except the ownership of land.

•

Investment Proposal Review Sub-committee established in provinces to allow approval of investment projects of less than US$2 million. Committees comprise: i) Provincial Governor, Chairman of the Investment Sub-committee, ii) First Deputy Governor, Vice-Chairman, iii) Second Deputy Governor, Vice-Chairman, and 13 other members from different municipal departments.

•

Costs and times reduced for Commercial Registration at the MoC. Also reduced times and procedures for application of C/O, Visa of Certified Invoice and Export Licenses. Certificate of Processing (C/P) no longer required by the Ministry of Industry, Mines and Energy (MIME).

•

The requirement of C/O for pre-shipment is no longer necessary. C/O can be submitted to postshipment in order to speed up export of goods.

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•

Separate on-site inspections by Customs and CamControl changed to joint simultaneous on-site inspections from September 1, where only one joint inspection document is used.

•

RGC offered to establish a permanent, joint Customs-CamControl Focal Point/Office in garment factories with over 2,000 employees, to facilitate and speed up the inspection and clearance process.

•

Improvements led to a reduction of time spent on import transactions with all government agencies from 30 days in 2003 to 10.5 days in July 2005 and export transactions reduced from 20 days in 2003 to 6.6 days in July 2005. Average per transaction costs for processing exports meanwhile declined from US$942 in 2003 to US$612 in July 2005 and average import costs fell from US$2,477 in 2003 to US$673 in July 2005. Informal fees also declined from 5% per total consignment value in 2003 to 2% in July 2005 - survey done by EMC in August 2005, commissioned by the WB-funded Trade Facilitation and Competitiveness Project (TFCP).

•

On May 17, Law on Commercial Enterprise passed by the National Assembly.

•

Law on Negotiable Instruments and Payment Transactions passed by the National Assembly.

•

On July 15, Law on Concession passed by OCM and submitted to the National Assembly for approval.

•

On September 27, the RGC issued Sub-decree #111 on implementation of amendment law of the Law on Investment of the Kingdom of Cambodia.

•

Prime Minister signed Sub-decree on the Establishment and Management of SEZs. Promulgation of Sub-decree effective from 29 December 2005.

•

14 SEZs approved for 10 provinces and One-Stop-Service approach is employed in the zone.

•

The RGC adopted the Small and Medium Enterprise (SME) Development Framework in 2005 as its strategy for SME development through to 2010

2006: •

The government adopted and issued Sub-decree #21, Risk Management Strategy, Guidelines for Implementation. The Prime Minister signed a single-package document containing Sub-decree on March 1, 2006.

•

In March, Law of Commercial Arbitration passed by the National Assembly.

•

Law on Management of Factories and Handicrafts passed by the National Assembly.

•

Sub-decree on Risk Management approved by the Prime Minister.

•

Civil Protection Code approved by the Government.

•

The RGC issued Sub-decree #84 on Creation of Anti-Corruption Entity.

•

Provincial Chamber of Commerce Offices opened in Phnom Penh, Battambang, Siem Reap, Sihanoukville, Kampong Cham, Kampot, Takeo, Kampong Speu, Posat, Banteay Meanchey and Kandal. No plan to open offices in all 24 provinces, as not enough trading/business activities.

•

The RGC signed a ASYCUDA-World project document package with UNCTAD on April 18, 2006 to automate its Customs and Excise Department (CED). ASYCUDA (Automated SYstem for CUstom DAta) is the most up-to-date version of the UNCTAD-designed Information Technology package for Customs automation and modernization. ASYCUDA funded under the World Bank’s Trade TFCP.

2007: • •

•

82

Export Management Fee reduced from 1% to 0.9% of total export value. Law on Secured Transaction was adopted on April 06, 2007 and promulgated on May 24, 2007. This law aims to promote economic activity through a unified set of rules on securing obligations with collaterals. April 25, 2007, the National Assembly adopted the Law on Cambodian Standard and was promulgated by Royal Kram NS/RKM/0607 date June 24, 2007. The law would create quality standards for Cambodian-made products, as well as standards for foreign companies importing goods into Cambodia. The law will permit the Commerce Ministry's Camcontrol department to inspect the quality standard of all goods entering the country's market. The Cambodia Standards Institute will be an arm of the Ministry of Industry, Mines, and Energy, which has already implemented standards for

EIC - Cambodia Economic Watch – October 2008

• •

•

• •

•

drinking water produced for Cambodia's domestic market. 22 June 2007, Law on Customs was adopted by the National Assembly and promulgated on July 20, 2007 The Law on Concession was adopted by the National Assembly on September 10, 2007 and promulgated on October 19, 207. Law details the process by which the government can grant private concessions for state-owned infrastructure fixtures. August 29, 2007, the Sub-Decree on the Mortgage and Transfer of the Rights over a Long-Term Lease or an Economic Land Concession approved by the Prime. The purpose of this Sub-Decree is to determine principles and terms and conditions for granting rights to investors to put up as security and transfer of rights over a long-term lease or an economic land concession during the period of time not exceeding the period prescribed in the long-term lease agreement or the economic land concession agreement. Civil Code was adopted by the NA on October 05, 2007 and promulgated on December 08, 2007. Inter-Ministerial Prakas #679 (MEF) on Administrative Fees for Commercial Registration (August 07, 2007). Administrative fees for commercial registration shall be allowed to be charged. Administrative fees for commercial registration deregistration and issuance of certificates shall be determined as follows: (1) Commercial Company: 420,000 Riel for commercial registration, 200,000 Riel for deregistration and 60,000 Riel for certificate; (2) Sole Proprietorship or trader subject to tax on profit: 120,000 Riel for commercial registration, 60,000 Riel for deregistration and 20,000 Riel for certificate. Payment and receipt of revenue from the administrative fees for commercial registration shall be implemented through the revenue office at the MoC. Prakas #514 SHV.ThH, dated July 17, 2000, on Determination of Fees for Application Form for Commercial Registration, Deregistration or Issuance of Certificates of the MEF and Prakas # 162 MoC/M2004, dated August 23, 2004, on Determination of Fees for Application Form for Commercial Registration shall be repealed. Ministry of Commerce (Prakas #249 dated November 30, 2007) on Decentralization of Company Registration at the municipality and provincial towns. Decentralize authority to municipal and provincial representative offices of the Ministry of Commerce to register “Company Registry” activities. Upon receipt of all proper required documents, the municipal and provincial representative offices of the Ministry of Commerce can issue provisional certificate for opening-up the company (provisional company registry certificate) with 30 days validity. An original certificate to be approved by the central management of the Ministry of Commerce will be sent to the requesters through the municipal and provincial representative offices of the Ministry of Commerce.

2008: •

• • •

On March 27, 2008, Cambodian government introduced a two-month rice export ban due to concern of local market price volatilities. The Government on May 26, 2008 announced a partial lifting of a two-month-old ban on rice exports, but will continue to limit the amount of rice sold abroad. A 1.6 million tons export quota will be kept, and exports of more than 100 tons must be passed through government administration of the Ministry of Commerce (MOC). This will be in effect until December 31, 2008. Only two exporters, the state-run Green Trade and the Cambodian National Rice Millers Association, have been licensed to export shipments of more than 100 tons. Export shipment with less than 100 tons is not required for administrative permit from the MOC. While Cambodian farmers produced some 6.4 million tons of paddy rice in 2007, domestic consumption is only 4.0 million tons, leaving a sizable surplus for export. The government, through, the Rural Development Bank has provided US$14 million (in the first half of 2008) with 5% annual interest rate (15% market rate) to the Cambodian National Rice Millers Association for use in purchasing rice from farmers during their harvesting seasons. In the meantime, during the first half of 2008, the National Rice Miller Association sold 1,000 tons of rice with lower than the market price rate to urban towns/cities where price validities erupted. This is part of the government intervention in light of soaring rice prices in March-April 2008. The Association is planning to release another 7,000 tons or 10,000 tons in the next three of four months (until October 2008, and subject to market demands). In May 2008, ASYCUDA has been officially launched at Sihanoukville autonomous port. September 2008, One Stop Service, administrative office, was implemented in Phnom Penh SEZ. The service aims to simplify application procedure for potential investors in the zone. The Sub-Decree on Organization and Functioning of Cambodian Standard Institution was adopted on

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•

June 04, 2008. Recent World Bank Group Doing Business survey (DB-2009) showed Cambodia moving up 15 places in the Doing Business Report 2009. In 2007, Cambodia ranked 150 out of 181 economies worldwide; this year Cambodia improved 15 notches to 135 out of 181 economies surveyed. Cambodia’s strong improvements are a result of two reforms. The first was passage of the Law on Secured Transactions in 2007 which makes it possible for a business to use its moveable and intangible assets as security for a loan. Assets include equipment, vehicles, inventory, accounts receivable, and agricultural commodities. The second was the passage of the Law on Bankruptcy in 2007, Cambodia’s first law regulating the closure of private businesses. Cambodia’s environment on trading across borders has also been improved by reducing the time required to exports and imports and its procedures.

Source: Various Government Reports.

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EIC - Cambodia Economic Watch – October 2008

Box A2.3: Cambodia Key Reforms in Public Financial Management and Banking (2001-2008) 2001: •

Introduced visa sticker to avoid tax loss from visa revenues, stamp system on cigarettes, expanded VAT on real regime (self-assessment system) to additional 150 firms (following the 2000 expansion by 500 companies) and introduced a 10% excise tax on entertainment services.

•

The minimum profit tax of 1% was eliminated on investment projects.

2002: •

Raised additional tax on petroleum products, two cents per liter for gasoline and four cents per liter for diesel, excise tax on beer from 10% to 20% and expanded real tax regime (real tax regime means taxation based on accounting statement) to cover additional five provinces (it was previously applied to five provinces only) 1.

•

In July, the Law on Corporate Accounting, Audit and the Accounting Profession was passed and promulgated.

•

Applied a 15% withholding tax on interest earned by bank depositors.

•

Introduced Medium Term Expenditure Framework 2003-2005.

•

Streamlined the system for controlling refunds and developed risk management techniques for the verification and approval of VAT refund claims.

•

Established a single operational structure for government bank accounts in the National Bank of Cambodia under government control.

•

Established a structure for a Chart of Accounts (COAs) at the national treasury.

•

Introduced direct payment to the National Bank of Cambodia (NBC) for large taxpayers.

2003:

1

•

Issued Treasury Bill for CR 50 billion.

•

Law on the Amendment of the Law on Taxation was adopted by the National Assembly on March 3. The main points of these amendments are as follows:

-

Changed exemption period

-

Introduced 40% special depreciation for the Qualify Investment Project (QIP), for investors not electing to use exemption period

-

Introduced new depreciation schedules (declining balance method)

-

Introduced additional profit tax on dividend distribution

-

Reduced withholding tax on payment to non-residents from 15% to 14%

-

Reduced withholding tax on interest payment from bank to resident taxpayers from 15% to 6% and from 5% to 4%.

-

Increased rate of salary tax for non-resident taxpayers from 15% to 20%

-

Eliminated 1% of turnover of minimum tax and pre-payment of profit tax on QIP

-

Strengthened collection enforcement

•

Expanded the coverage of Medium Term Expenditure Framework (MTEF) to: i) Ministry of Agriculture, Forestry and Fisheries (MAFF), ii) Ministry of Rural Development (MRD), iii) Ministry of Public Works and Transport (MPWT). MTEF possibly to be expanded to Ministry of Justice and Ministry of Women’s and Veterans’ Affairs.

•

The Prime Minister’s circular, ordered the Ministry of Economy and Finance (MEF) not to

The real regime tax system was expanded in 2000 to five provinces: Sihanoukville, Koh Kong, Siem Reap, Kompong Cham and Battambang. In 2002, the real regime system was expanded to another five provinces: Kandal, Svay Rieng, Kampot, Kompong Speu and Kompong Chhnang.

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sign new payment orders without sufficient cash in the national treasury. •

Established Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) to ensure promotion of the accountancy and auditing professions.

•

Increased excise tax rate on beer from 20% to 30%. Increased excise tax on air transportation and telecommunications from 2% to 10% and broadened both domestic and international tax base, effective from 1 January.

2004: •

The MEF put stiffer pressure on Government’s private debtors and set January 31 as the deadline to all vehicle owners to pay tax or have vehicles confiscated.

•

The Government reduced import tax on luxury vehicles from 230% to 50% beginning January 1, with the expectation that reduction in tax would prompt and encourage people to pay it.

•

Established a Budget Monitoring and Cash Management Commission (BMC) to: i) prepare and monitor budget performance and its policies, ii) provide assistance and recommendation to budget law preparation, iii) set up reviews on a six-month basis of budget execution, iv) manage expenditure reflecting the National Treasury’s capacity, and v) improve and monitor priority expenditure such as Priority Action Programmed (PAP).

•

In September, reform of Public Financial Management (PFM) launched by an 11-donor team, in which the WB is playing a crucial role. This sector-wide approach PFM reform is a multiyear agenda, focusing on reducing fiducially risks of public expenditure and financial management, and improving fiducially accountability. The reform, which is key to reducing corruption, involves computerization of a number of key revenue departments, keeping track on revenue collections and expenditures, and timely reporting of transactions to the National Treasury. Also some 200 individual actions to be undertaken at departmental level over a period of fifteen months.

•

MEF issued a Prakas letter to all large and medium tax payers to pay their taxes through the bank account of the NBC.

2005: •

Department of Non-Tax Revenue established, with duties to develop policy and strategy to: i) manage non-tax revenue, ii) prepare standard letters on management of non-tax revenue, iii) sum-up non-tax revenues and debts on monthly basis, iv) collect information on non-tax revenues, v) manage revenue collection from post and telecommunications, vi) manage tax on embassies, vii) passports viii) garment licences, xi) tourism, x) civil aviation. It also has duties to manage other non-tax revenues other than State property and financial industries. It is bound to effectively implement measures for getting non-tax revenues under its competence, research sources of other non-tax revenue and participate in preparing the annual budget plan.

•

April 1, Prakas issued on Determination of Solvency of Insurance Companies. Insurance license to be valid for a period of five years and companies to have adequate funds for solvency - a minimum of a US$1.5 million. This amount includes a deposit of US$700,000 at the NBC which may be cash or check with permission from MEF or 30% of next premium revenue in the financial statement for the last year. Profits of insurance companies not allowed to be distributed as dividends to their stakeholders unless it is agreed in writing that the companies have met or may continue to meet solvency obligations in the near future.

•

On April 22, instructional circular on VAT Refund Mechanism issued. It states that VAT taxpayers meet the following conditions to request a VAT refund: (i) have monthly excess VAT input tax credits (for companies having exports as their main business and investment companies), or have excess VAT input tax credits for three consecutive months or more (for other taxpayers), (ii) have proof of input tax payment, (iii) have proof of exports subject to 0% rate, and (iv) have reliable accounting records.

•

On June 1, introduction of income tax for garment workers. Workers with over US$125 monthly income will be subject to 5% income tax, over US$250 be subject to 10% tax, over US$2,125 be subject to 15% tax and over US$3,125 be subject to 20% income tax.

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•

Effective from June 1, Prakas issued to all taxpayers to make payments through NBC. Payments of more than CR 4 million to be paid by cheque; payments of less than CR 4 million to be paid either by cheque or in cash at NBC.

•

On June 3, creation of Unused Land Appraisal and Valuation Sub-commission. The duties of the Sub-commission are to publicize law on tax collection for unused land, identify unused land and estimate taxes to be paid to the government.

•

On July 14, Prakas issued to introduce Accommodation Tax. Due to complaints from the Tourism Association of Cambodia, this accommodation tax may not be applied until January 2007.

•

On September 19, MEF issued Prakas #578, using the Joint Financial Management Procedures. This is for projects sponsored by the WB and ADB and the procedure will also be implemented for financing projects from other donors if agreed.

2006: •

On February 3, Governance Action Plan II (2005-2008) approved by OCM.

•

On March 13, MEF Notice #007 introduced the implementation of special tax on telephone services. All telephone companies in Cambodia operating services inside and outside the country to pay specific 3% tax, commencing April 1.

•

National Assembly approved the National Strategy Development Plan (NSDP) 2006-2010, in which the main objectives are to reduce the poverty rate to 25% and to lower the unemployment rate to less than 4%.

•

Establishment of internal audit departments along the government line ministries.

•

On April 26, OCM Prakas #665 issued to all ministries/institutions specifying that selection of civil servants must be done through a competitive examination.

•

On June 9, MEF Prakas issued for promulgating the document Code of Ethics for Internal Auditors and Internal Auditing Professional Standards.

•

On June 16, MEF circulated Prakas relating to the extension of tax exemption on profits, for two more years, for investment enterprises of export-oriented garment, textile and shoe manufacturing sectors. This only applies to investment enterprises which received CDC approval for investment in Cambodia before March 14, 2005. On June 27, The World Bank Board of Executive Directors approved the Public Financial Management and Accountability Project. The project will support the Government’s Public Financial Management Reform Program (PFMRP) in six specific areas: i) revenue management; ii) budget formulation; iii) budget execution; iv) capacity development; v) a Merit Based Pay Initiative (MBPI) – which will help reform the civil service; and vi) building the oversight capacity of Cambodia’s National Audit Authority. The Government-led Public Financial Management Reform program has been underway since 2004 and has already achieved results. Revenues have increased by 20% from 2004 to 2005; the amount of customs revenue collected through the banking system has increased from 0% in 2004 to 36% in 2005, and 86% of all Tax Department revenue is now collected through the banking system; the stock of old expenditure arrears has been reduced by over 40%; the procurement process has been streamlined and tightened; five line ministries have established internal audit departments; and, for the first time in Cambodia, a pilot program has been launched to pay civil servants through commercial banks instead of by cash. The reform program is supported by 11 donors — ADB, IMF, the WB, UNDP, Australia, European Commission, France, Germany, Japan, Sweden and United Kingdom – four of whom are contributing about US$17 million to the WB-managed multi-donor trust fund, set up to co-finance the implementation of this program.

•

On March 3, Law on the Audit of the Kingdom of Cambodia was promulgated. It requires respective ministries/institutions and public enterprises to create and strengthen Internal Management System and Internal Audit.

•

On November 27, Sub-decree #129 on Rules and Procedures of Reclassification of Public Property of the State and State-owned Institutions – indicated that the leases on state properties should not be allowed to exceed 15 years.

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•

Sub-decree requiring an establishment of internal audit department at all line ministries issued. Five line ministries have established internal audit departments and two of them are operational.

•

By end of 2006, 40 % of tax and non tax revenue collected through banking system (both customs and tax departments). In the same time, 29% of customs duties collected through banking system by the end of 2006. Strategy developed for gradually increasing revenue collected through the banking system based on geographical roll-out of requirement.

•

A booklet format of Macro-Fiscal data is being developed.

•

Prakas on fees on construction services implemented.

•

PAP to be replaced by program budgeting PB in 2007. The new initiative to be piloted in seven ministries, including the four PAP ministries.

•

Good progress made in strengthening debt management. An assessment of the institutional aspects of debt management is completed and progress made with selection of a new software package for debt management and with staff capacity building. Documents on Standard Operating Procedures, Procurement, and Financial Management produced, and staff training conducted. A draft Debt Management Manual for Department of International Cooperation for staff is completed.

•

A pilot for direct payment of senior officers’ salaries into bank accounts is trialled in MEF and MoH and will be extended to other ministries and two provinces.

•

Government agreed to contribute to MBPI and incorporate it in the annual budget of MEF. MBPI for government staff involved in the PFMRP introduced. Regular payments for the agreed 263 participants commenced in November 2005 (backdated to July 2005). MBPI was funded from the Multi Donor Trust Fund under the PFMRP.

2007: •

The Law on State Securities was passed by the National Assembly on November 30, 2006 and promulgated on January 10, 2007. The purpose of this law is to provide a framework for effectively printing/issuing and managing state securities in order to guarantee obligation of settlement/payments in terms of the state’s financial requirements. The state securities may be printed either in local currency or foreign currency.

•

On February 26, RGC Sub-decree #14 applied to the Joint Procedures of Implementing Cooperation Financing Project from the WB and ADB: i) Joint Standard Operating Procedures, ii) Joint Financial Management Manual, iii) Joint Procurement Manual.

•

The Government’s PFMRP is continuing to yield results. Following on from achievements in 2005 and 2006, a second wave of major reform measures was initiated in January 2007, including: i) a far-reaching streamlining of budget execution procedures to speed disbursements to spending agencies, ii) the introduction of program budgeting to better align spending with priority National Strategic Development Plan objectives, and iii) adoption of a new chart of accounts to improve expenditure reporting. All of these measures will improve the efficiency of the PFM system as well as reduce the fiduciary risk inherent in the system by reducing the threat of corruption.

•

Macroeconomics-model developed and training provided. MEF is discussing with ADB for further assistance to add on features that enable it to integrate the use of this model into the budgetary cycle (macro-fiscal framework model). Meanwhile the Government Financial Statistics classification is being developed and applied in the State Budget Implementation Table (TOFE).

•

The 2007 Budget Document, for the first time, contained details of donor-financed capital spending by line ministries; payment of taxes through the commercial banks has been trialled (Acleda Bank) and will be extended soon to the ANZ Royal Bank.

•

19 line ministries have established internal audit departments of which seven are operational.

•

These are some progresses of Performance Indicators in the PFMRP: i) revenue out-turn increasingly close to targeted level in approved budget; ii) no accumulation of new arrears

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and steadily declining arrears stock; iii) budget holders increasingly able to commit expenditure in line with budgets and cash flow forecasts; iv) 75%of payments to creditors and staff made through the banking system in 2006; v) 45%of total government tax revenue (excluded non tax revenues) collected through banks in 2006; vi) service delivery units (schools, health centers) receive an increasing proportion of funds targeted at their levels; vii) public procurement based on clear rules, consistently enforced and with no major delays in processing and payment; viii) composition of expenditure by type (staff costs, non-staff costs, etc.) close to approved budget; ix) better yield achieved from tax base through improved collection efficiency and planned use of non-tax sources; x) single orderly budget process producing good (and integrated) budget plans, Budget Document for 2007 integrates recurrent, capital and donor-financed expenditure plus data for government-owned agencies; xi) all significant areas of both public revenue and expenditure captured in both the budget and accounts of the Government; xii) clearer/more accurate overview of public finances (TOFE) regularly available based on improvements in the existing system pending introduction of the FMIS. TOFE submitted to senior management within two weeks of end of period. Quarterly review of TOFE by Internal Audit Department found to be accurate; xiii) system in place to ensure that proposals for post-budget supplementary expenditure credits are always accompanied by MEF report on realistic options for financing the expenditure involved. No spending proposals go forward without identification of source of funding/offsetting savings; xiv) institutionalized mid-year budget review feeding into second half-year budget implementation/budget preparation for next year. Clear evidence that the review was conducted, formalized and effective, and results implemented; xv) Annual forecasts of all inflows and outflows prepared and regularly updated (based on accurate revenue forecasts and good budget implementation plans). Cash released to spending agencies within plus or minus 5% of their quarterly cash flow forecasts, to improve fiscal decentralization in a robust, controlled and measured way. •

April 2007, Investment risk ratings, by Moody's and Standard & Poor's, put Cambodia’s first ever sovereign debt rating: a B-plus (two notches lower than Vietnam).

•

Government Prakas in March 7, 2007, Import tax payments in cash are no longer accepted at the port of Phnom Penh and port of Sihanoukville for companies and individuals importing more than $1,000 worth of goods to Cambodia. Effective April 1 2007, tax paid on goods brought in through the two ports must be paid by check to the National Bank of Cambodia or through an account set up at the NBC.

•

Based on the notice # 010 (MEF) June 6, 2006 on the Management of Tax Collection on Unused Land. Pursuant to new article 30 of the Law on Financial Management 2007 promulgated by Royal Kram #NS/RKM/1206/035 dated December 29, 2006 and Prakas # 452 SHV.Brk.PD dated June 6, 2007 on amendment to the prakas on Tax Collection on Unused Land, the MEF wishes to inform owners of unused land at provinces-municipalities and Phnom Penh as following: 1.

The unused land located in provinces/municipalities shall be subject to tax on unused land

2.

This tax shall be paid in accordance with the tax rate of 2% on the tax base assessed by the Land Appraisal Committee based on market prices at each municipality and areas to be evaluated in accordance with price per m2 for each year.

3.

Each owner of unused land shall be required to apply tax declaration of his land and should he fail to do so would be subject to be fined by additional taxation equivalent to 10%, 25%, and 40% of the amount of unpaid tax plus 2% interest rate for each month

•

February 9, 2007, the Council of Ministers (RGC) approved the Financial Sector Development Strategy (Financial Blue Print) 2006-2015, and official launched on June 2007 to further strengthen the banking system in Cambodia.

•

Law on Combating Money Laundering and Terrorist Financing was adopted by the National Assembly on April 30, 2007 and promulgated on June 24, 2007.

•

Law on the Issuance and Trading Non government Securities was passed by the National Assembly on September 12, 2007 and promulgated on October 19, 2007. Law will set the ground rules for the

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proposed Cambodian Securities Market and establish the body that will regulate it. Cambodia is planning to introduce its bond markets (Securities Market) by 2009. •

Law on Finance for 2008 Management was promulgated on December 21, 2007.

•

December 26, 2007 Sub-decree Nº 204 on the Division of State’s General Budget by Chapter of Law on Finance for 2008 Management was approved.

•

Number of ministries using program budgets: 7 ministries in 2007 and targeting 10 ministries by 2009 and as of August 2007, 23 Ministries have established internal audit department in which 13 are operational.

2008: •

February 29, 2008, Draft Law on Public Financial System approved by CoM, and passed to NA.

•

The 2008 Budget Law contains regulations on borrowing, requiring the government to not to borrow money at commercial interest, not guarantee project with commercial interest and not issue state bonds. The government can only borrow SDR 200 million and MEF with approval from NBC is eligible to print 100 billion riels worth of Treasury Bill.

•

MEF Note #010 (March 19, 2008) Starting from May 2, 2008, “Payment procedures of taxes-duties of medium taxpayers at provincial – municipal tax branches”. All enterprise companies which are subject to medium taxpayer management regime of the real regime system taxpayers at the provinces-municipalities shall be required to pay taxes directly to the NBC in their HQ or provincesmunicipalities branches.

•

MEF Prakas #116 (February 15, 2008) on Customs Bonded Warehouse. The Customs Bonded Warehouses are authorized to store goods and are subject to Customs Control for a specified period. Imported goods or domestic goods for exports can be placed at Customs Bonded Warehouse. Goods in the Customs Bonded Warehouse shall be suspended from application of duties or taxes for which they are liable.

•

Law on Public Financial System was adopted on April 04, 2008 by NA and promulgated on May 13, 2008. The law has been recognized as fundamental law and its basic principle is a whole management of public financial system, a preparation of budget law, as well an implementation processes of the public financial in the ministries/institutions and sub-national administration.

•

The National Bank of Cambodia (Central Bank) has increased “Reserve Requirements for commercial banks operating in Cambodia from 8 percent to 16 percent of their deposits, effective in July, 2008”. The National Bank of Cambodia (Central Bank) on September 19, 2008 issued a directive to require all commercial banks operating in Cambodia to increase their minimum capital requirement (or minimum “capital guarantee deposit”) from 50 billion riels to 150 billion riels with aim to tighten and strengthen the Cambodian banking sector and also to limit number of commercial banks to be in line with the economy and to keep it healthy (quality and well capitalized). Commercial Banks will be allowed to maintain their current capital requirement of 50 billion riels if those commercial banks have an “influential shareholders” that is a bank or financial institution with an “investment grade” rating from a “reputable rating agency”. The country six specialized banks must also increase their minimum capital requirements to 30 billion riels unless those specialized banks have an “influential shareholders” that is a bank or financial institution with an “investment grade” rating from a “reputable rating agency”. All commercial banks have to meet this new requirement by 2010.

•

Sources: Various government reports.

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Box A2.4: Cambodia Key Reforms in Public Administrative, Civil Servant, (2001-2008) 2001: •

October 2001, the Government approved the remuneration policies which aim at rationalizing, motivating and retaining qualified civil servants.

•

The Government introduced Human Resource Management Information System.

•

The Base Salary and the Allowances of Civil Servant was issued by Royal Decree on December 2001.

2002: •

As a part of pay reform, the new remuneration and classification system was introduced in 2002.

•

Pay reforms increased average from US$19.5 per month in October 2001 to US$28.1 in May 2002.

2003: •

In February 2003, the Economic and Public Service Capacity Building Project (EPSCB) was introduced as an initial response to identified needs in core functions that are common to all ministries. The project targets three groups of public servants: the most senior executives, middle manager and technical staff in such areas as policy analysis, financial management and personnel management.

2004: •

Public Administrative Reform became one of the four core reforms in the “Rectangular Strategy” of the Royal Government of Cambodia (RGC) in its 3rd mandate on July 2004.

•

The Council of Administrative Reform (CAR) carried out six studies in order to rationalize the civil service: (1) improving public service delivery, (2) benchmarking for labor market, (3) reviewing operation, (4) enhancing remuneration to support performance, (5) enhancing employment to support service delivery, and (6) strengthening the management of the civil service work force.

•

National Program for Administrative Reform (NPAR) was drafted in August 2004. It is a competent and transparent public administration able to deliver high quality services to the people of Cambodia.

•

RGC increased index value of civil servant salary from 300 CR to 345 CR under sub-decree dated by 15 January 2005.

2005: •

NPAR phase I was completed. The key accomplishments include census and removal of irregulars, computerized personnel management and fiscal balance simulation

•

A number of training courses and seminar awareness were conducted aiming at capacity building. As result the first promotion of management development program (MDP) and professional development program (PDP) which are parts of the Economic and Public Sector Capacity Building Project (EPSCB) were completed.

•

In early 2005, index value of civil servant salary was increased from 300 CR up to 345 CR. In August 2005, the government also increased functional allowances for middle and senior administration and priority sectors.

•

Agreement reached between Treasury and CAR on use of private banking system to reduce cash transactions in the payment of salary.

•

As a pilot, CAR and Ministry of Economic and Finance (MEF) have agreed to establish the PMG/MBPI (Merit-Based Pay Initiative) to cover an initial 300 centrally located civil servants working on high priority Public Financial Management (PFM) reform activities.

2006: •

A strategy for phasing out salary supplementation practices has been prepared through a collaborative

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process within the Technical Working Group (TWG) of Public Administrative Reform (PAR) based on sub-decree No 98 of 2005. Its key achievements in 2006 are as followed: implementing of the approved sectoral action plans, establishing Priority Mission Group (PMGs) and PMG/Merit based pay initiatives (PMG/MBIs) in MEF, MOH and at least one other ministry. PMGs covering 170 civil servants have been approved, with consultation ongoing on other possibilities, including in health sector. About 160 central office staffs have been proposed of an MBPI and this proposal has been discussed between HOM, the health partner and CAR. •

The medium term strategy and action plan to enhance remuneration and the policy and action plan of redeployment were developed and implemented in order to improve pay and employment condition in the civil service.

•

Design and Implement HRM policy and action plan to improve merit and performance management by introducing HRM guide and further developing HRM Information Systems (HRMIS) for the civil service.

•

Enhance service delivery through developing a one window offices (OWOs) policy, legal framework and implementation plan. Five OWOs have been established across Cambodia.

2007: •

A meritocratic system has been introduced to encourage both wage reform and human capacity building within government ministries and institutions. These reforms result in public servants’ remuneration increasing by 15 percent per year. The average salary of civil servants has now reached approximately US$46 per month.

•

The salary of civil servants will be increase by 25% since July 2007 and start from 2008, the salary of civil servant, police and military personnel will be increased by 20% a year. Since January 2002 to July 2007, civil servants’ remuneration raised to US$51.3 per month.

•

RGC increased index value of civil servant salary from 500 CR to 600 CR under sub-decree Nº 198 dated by December 18, 2007.

2008: •

Draft Organic Laws, Law on Administration of Capital, Provinces, Municipalities, Districts and Khans and Law on Election of Council for Capital, Provinces, Municipalities, Districts and Khans, approved by the CoM on February 29, 2008. The both draft laws passed to NA and waiting approval.

•

Law on Administration of Capital, Provinces, Municipalities, Districts and Khans was adopted on April 01, 2008 by NA, and promulgated on May 22, 2008. The purpose of this law is to administrate the capital, provinces, municipalities, districts and khans through a unified administration in order to promote and sustain the democratic development.

•

Law on Election of Council for Capital, Provinces, Municipalities, Districts and Khans was adopted on April 02, 2008 by NA, and promulgated on May 22, 2008. The law is cover an establishment of sub-national councils—Capital Council, Province Council, Province Council, District Council, and Khan Council through an indirect election and have its mandate five year.

•

Sub-Decree Nº 29 on Merit Based Performance Incentive, dated on April 02, 2008 which abrogates the sub-decree No 98 & 38.

•

Royal Decree on Special Operation Agencies promulgated on March 28, 2008. The purpose of the SOA preparation is to improve the quality and public service delivery reach the place, to strengthen professional ethic of the officials, and to develop capacity in service delivery.

Source: Various Government Reports, EIC: Cambodia Economic Watch issue 1 to 8

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Box A2.5: Cambodia Key Reforms in Natural Resource Management (2001-2008) 2001: •

Land Law was adopted by the National Assembly on July 20, 2001 and promulgated on August 30, 2001. It provided legal protection to establish the security of land tenure and also a fundamental basis for the reduction of land disputes.

•

During 2001, government has also issued a note about stopping illegal possession, and a set of ministerial instruction (Prakas) regarding service fees for land registration.

•

The draft of forestry law contains 18 chapters and 109 articles was approved by the Council of Ministers on July 20, 2001 and officially submitted to the National Assembly dated 17 August, 2001.

•

The Prakas No 5721 was issued to suspend all logging activities by the government of Cambodia in December 13, 2001.

•

The Community Fisheries Development Office was established by Prakas No 084 of MAFF in January 21, 2001.

2002: •

To accompany implementation of the Land Law, and provide several guidance in the land sector, the Council of Land Policy approved an Interim Land Policy Framework document in May 2002.

•

Ministry of Land Management, Urban Planning and Construction (MLMUPC) had prepared several sub-decrees to enable the effective implementation of the land law. Those sub-decrees were adopted by the Government of Cambodia in 2002, included 1) Sub-decree on the Organization and function of the Cadastral Commission, 2) Sub-decree on Systematic Registration, and 3) Sub-decree on Case-ByCase Registration.

•

Under supported by the World Bank, MLMUPC created Land Management and Administrative Project which was made effective in June 2002.

•

The National Policy for Forestry was issued by the Government on July 26, 2002.

•

Forestry Law was adopted by the National Assembly on July 30, 2002 and promulgated on August 31, 2002.

2003: •

The Inland Fisheries Research and Development Institute (IFReDI) was inaugurated on February 18, 2003. The institute was established in order to provide scientific information through research and development capacity for freshwater fisheries in Cambodia.

•

Sub-decree on Social Land Concession was issued on March 07, 2003.

•

Sub-decree on Forest Community Management was adopted on December 15, 2003.

•

Council of Land Policy was established as focal point to facilitate the formulation of strategy and policy in land management.

•

Department of Forestry was renamed the Forest Authority by sub-decree No. 64 dated September 11, 2003 with a horizontal management structure nationwide to undertake policy reform of the forest sector.

2004: •

RGC disclosed the location and legal status and process for termination of mining concessions, Military Development Zones, economic land concession and other development arrangements situated on forest land or in protected areas and inconsistent with law governing management of these areas.

•

Prime Minister’s Order No.01 on prevention, repression, and elimination of forest clearing, firing, bulldozing, and grabbing was issued on June 09, 2004.

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•

The Council for Land Policy, in collaboration with development partners was developing Land Allocation for Social and Economic Development (LASED).

•

National committees and sub-national committees at the provincial level were established to implement the Order No.01.

2005: •

Sub-decree No. 53 on establishment, classification, and Registration of Permanent Forest Estates issued on April 01, 2005

•

Decision No. 28 on establishment of Control and Evaluation Committee to Stop Encroachment on Inundated Sea Forests, Land Leveling and Land Filling along Sea Side issued on August 14, 2005.

•

Sub-decree on State Land Management, sub-decree on Economic Land Concession, and sub-decree on Managing State Owned Land were passed by Council of Minister in late 2005.

•

Royal Decree No. 0505/240 on the Establishment of Fishing Community was issued on May 29, 2005.

•

Sub-Decree No. 80 on management of Fishing Community was issued on June 10, 2005.

•

The Community Fisheries Sub-Decree was approved by the Council of Ministers on 20 May 2005

2006: •

A Royal Decree on the Community Fisheries Establishment was issued in May 2005 followed by an issuance of a sub-decree on the Community Fisheries Management in June 2006

•

Fishery Law was adopted by the National Assembly on March 30, 2006 and promulgated in May 21, 2006.

•

A sub-decree on the transformation of the Department of Fishery (DoF) into Fishery Administration was signed in August 2006.

•

The National Community Forestry Program Strategic Paper was issued in May 2006, stipulating the Government's Plan to offer formal recognition to the already existing Community Forestry sites of 274 and further creating an additional 200 to 400 formally recognized Community Forestry sites.

•

Information on the Economic Land Concession was posted available to the public through MAFF website and a technical secretariat was established by decision No 27 dated June 30, 2006.

•

A Prime Minister's Order on the Prevention of Deforestation was issued in May 2006.

•

A District State Land Working Group was established to help the provincial committee in State Land Identification and Mapping.

•

Regarding the issue of land grabbing, a Prime Minister's Order was issued on the Prevention of Deforestation for Land Ownership in May 2006.

•

A Land Dispute Agency was established with a Royal Decree dated February 26, 2006 with the members from both the Government and the opposition party.

2007: •

Marine conservation, a Ten-Year Action Plan for Coral Reefs and Sea-Grass has recently been adopted by Ministry of Agriculture, Fisheries and Forestry.

•

Law on Water Resource Management was adopted on May 22, 2007 and promulgated on June 29, 2007.

•

Agricultural Sector Strategic Development Plan, 2006-2010 is presented by MAFF.

•

Prakas on Guideline of Fisheries Community was approved on July 13.

•

Law on Natural Protected Area was adopted on December 27, 2007 with the purpose of managing biodiversity conservation and to sustain the utilization of natural resources in the areas.

2008:

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•

Law on Seed Management and Plant Breeder Rights was adopted on April 08, 2008 by NA and Promulgated on May 13, 2008. The law aimed at ensuring the management, motivation, and the development of seed with sustainable in order to benefit social, economic and environment. Together with the law states that providing right protection of new seed is under the territorial of MIME, and managing various seed is under the territorial of MAFF.

Source: Various Government Reports, EIC: Cambodia Economic Watch issue 1 to 8

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