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Contents

Special Issue January 2009

Economics Today

EIC Projects Economic Growth to Slow to 7% in 2008, 6% in 2009

Cambodia posted its fourth consecutive year of double digit economic growth in 2007, but the rate of economic growth has been on a successive decline. The growth rate dropped from 13.3 percent in 2005 to 10.2 percent in 2007. Given current local and global economic trends and available data for the first ten months of 2008, Cambodias economic growth is likely to continue to slow significantly to about 7 percent in 2008. (page 12)

On the Cover:

The present bi-annual 60 page special issue is meant to present the countrys latest economic performance and prospects based on the analysis of current data from Cambodia Economin Watch.
In this Issue

Introduction 8 Inflation Soars as Garment, Construction Sectors Slow Economic Growth 12 13 15 16 17 18 EIC Projects Economic Growth to Slow to 7% in 2008, 6% in 2009 Industrial Growth Wanes in 2008 Due to Garment, Construction 26 25

to Strengthen Supervision of Growing Financial Sector What Cambodias Bankers Said Labor Force & Income 2007 Socio Economic Survey Should Shed Light on Labor, Income As Youth Unemployment Soars, Foreigners Fill Labor Gaps Raising Incomes: Rural people find creative ways to earn money Reforms Summary 29 Key Reforms in Cambodias Trade Openness and Investment Policy (20012008) Key Cambodian Policy Reforms in Private Sector Development (2001-2008)

Remain Stable in 2009 39 ASEAN to Create Single Market Fiscal Policy & Debt 42 45 Government Revenues on Target in 2008 Government Progresses to Platform 2 after Completing First Phase of Reforms Reforms 48 50 52 140 Legal Texts Adopted as of June 2008 Government Revises Merit-Based Pay Program Government Set to Distribute Land to Poor Economic & Financial Indicators Main Economic Indicators Monetary Survey (Billion Riel) Budget Operations (Billion Riel) Balance of Payment (Million US$)

27

Cultivated Areas Expanded in 2008; 28 Growth Pegged at 5.5% The Time is Ripe to Invest in Cam bodian Agriculture Services to Grow in 2008, But not by Double Digits Tourism Law to Improve Services, Competition, Says Private Sector Price & Money 30

32

19 22 23

Inflation Accelerates; US-Riel Exchange Rate Remains Stable Swept Up in a Silent Tsunami NBC Continues 35

Cambodia Key Reforms in Public 54 Financial Management and Banking (2001-2008) 54 Trade & Investment Trade Deficit to Widen in 2008 but 56 57

Contents

Special Issue January 2009

Economics Today

Cultivated Areas Expanded in 2008; Growth Pegged at 5.5%

The year 2008 has been especially rainy and has followed equally wet years in 2007, 2006 and 2005. The agricultural sector continues to be natural resource-based and growth is expected to increase slightly to 5.5 percent in 2008 from 5.1 percent in 2007. Growth has been bolstered by an expansion in cultivated areas, higher prices for exported agricultural products, and a continued increase in livestock production. However, agro-investment has remained weak, despite soaring prices and demand on the global market. (page 15)

Economics Today
Cambodias Business Magazine

Publisher: Sao Sonita Editor-in-Chief: Kim Natacha Managing Editor: Alanna Jorde Photographer: Kong Socheat Designers: Ouk Vibol, Sreng Veseth Business Development: Socheat Kanharith (016) 979 757 Marketing: Ourng Chansy (012) 431 194 Kim Nida (012) 274 739 Ofce: Room 233, Second Floor, Building A, Phnom Penh Center, Phnom Penh, Cambodia Phone/Fax: (855-23) 987 943 etm@etmcambodia.com Printer: Ganad Khmer Printers Co,. Ltd Economics Today magazine (ETM) ordinary issue is published in English twice a month. ETMs mission is to provide and inform readers about current news and local events so that they can make better decisions and take control of their own lives. Readers can send their comments to: etm@etmcambodia.com

Swept Up in a Silent Tsunami

Centuries from now, history books likely will mark the first decade of the 21st century as the end of the era of cheap food. Sustained steep fuel costs and rising world demand for crops that can be eaten or converted into biofuels have caused dramatic spikes in food prices around the world. The growing hunger for biofuels has created food shortages in some parts of the globe. (page 22)

Raising Incomes: Rural people find creative ways to earn money

When Touch Veng isnt busy in his 2 hectare Prey Veng rice field, he can usually be found at his fishing pond. He dug the pond a couple of years ago, thinking it would be a good way to supplement his income and his hunch has paid off. Today, he earns more money raising fish than growing rice. (page 28)
The team of Economics Today magazine would like to thank the World Bank Group and the Economic Institute of Cambodia for their contribution to make the publication of this special issue possible.

Copyright 2008. Economics Today . All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from Economics Today.

Introduction

Special Issue January 2009

Economics Today

Report Highlights

Inflation Soars as Garment, Construction Sectors Slow

Cambodia posted its fourth consecutive year of double digit economic growth in 2007, but the rate of economic growth has been on a successive decline. The growth rate dropped from 13.3 percent in 2005 to 10.2 percent in 2007. Given current local and global economic trends and available data for the first nine months of 2008, Cambodias economic growth is likely to continue to slow significantly to about only 7 percent in 2008. The downward trend is likely to carry over to 2009, when the economic growth rate is expected to slow to about 6 percent. Cambodias 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 are adversely affecting the growth of Cambodias garment industry. Safeguarding measures were imposed by the US and European Union against Chinese exports. Residential construction growth is likely to slow to a negative rate in 2008 as a result of drops in prices for imported construction materials and land as well as housing loan credit restrictions. Meanwhile, the number of foreign tourist arrivals in Cambodia continues to increase steadily, but at a slightly slower pace because of the global economic slowdown as well as disputes along the Thai-Cambodian border. The financial sector continues to boom. 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. 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. Cambodias economic growth could be speeded up if significant progress were to be 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

Economic growth expected to slow to 6% in 2009

Trade deficit to widen to 16.7% of GDP in 2008

Total exports increased by only 5.5 percent, while total imports increased by 29.9 percent during the first eight months of 2008. The total trade deficit is expected to widen by 37.6 percent and reach about 16.7 percent of gross domestic product (GDP) in 2008. Despite a significant increase in balance of services and a surplus in transfer accounts, 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 4.3 percent of GDP. Foreign grants, loans and direct investment will finance the bulk of the deficit. The overall balance of payments for 2008 is likely to be a surplus of about 2.1 percent of GDP. Beside, growth in external trade is expected to slow in 2009 because of a slowdown in Cambodian garment exports as well as imports of raw materials used in the garment and construction industries. The balance of payments for 2009 is expected to be in deficit of about 0.4 percent of GDP. The Council for the Development of Cambodia approved 62 invest-

Economics Today

Special Issue January 2009

Introduction

Only few CDC-approved investment projects involved agro-industry in 2008

ment projects (most of which were mega projects) worth about US$8.8 billion in fixed assets during the first eight months of 2008. That represented a 26.2 percent decrease in the number of investment projects, but a four-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 few investments in agro-industry were approved, despite increases in agricultural prices and a relatively high rate of agricultural production in 2008. 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

Inflation soared in the first ten months of 2008

Inflation soared during the first ten months of 2008, jumping to 18.1 percent in October 2008 compared to only 8.7 percent in October 2007. The price of food rose 28.7 percent, household goods 26.9 percent, transportation 17.6 percent and medical expenses 11.1 percent in October 2008, compared to increases of 16.8 percent, 0.8 percent, 5.6 percent and 5.6 percent, respectively, in October 2007. Other consumer prices increased slightly during this period. Informal exports contributed to soaring food prices during the first ten months of 2008 despite an active agricultural sector and near capacity production of crops, livestock and fish. A significant amount of Cambodian food products (mainly paddy and fish) continued to be informally exported to neighboring countries, where they are subsequently sold for considerably higher prices. When this creates shortages of some items in the local market, Cambodia must 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.

Overall inflation in December 2008 likely to reach 18%

Based on trends from previous years, the overall inflation in December 2008 is expected to be about 18 percent, which is much higher than that of December 2007. However, given that the price of crude oil has been declining on the international market, the inflation rate is expected to decrease in 2009. The riel has been relatively stable against the US dollar and Vietnam dong but depreciated against the Thai baht by 7.2 percent in 2008. The relative strength of the riel was mainly a result of the US economic slowdown and the National Bank of Cambodias prudent monetary policies. A sluggish US economy has continued to weaken the US dollar and boost the balance of payment surplus, thereby enabling the Government to maintain a stable exchange rate against the US dollar.

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Introduction

Special Issue January 2009

Economics Today

Depreciation of riel against the Thai baht causes consumer prices to rise

Besides a fixed rate with the US dollar, fluctuation of the riel against other trade partner currencies, such as the Thai baht, are also important to the Cambodian economy. Cambodias 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. Instead, it causes domestic consumer prices to rise because limited local production capacity forces Cambodians to purchase higher imported products. Fiscal Development The central Government collected CR4,338 billion in revenue during the first ten months of 2008 or 8.5 percent already higher than the total it had expected to collect for the entire year. Beside capital revenue which reached only 30 percent of the plan of the entire year, other revenues were more than 10 percent higher than their total that were planned for entire year. A high average inflation rate during the period contributed to these nominal increases. In real terms, however, the central Government is expected to achieve only what it had planned.

Taxes rose sharply in 2008

During this period, taxes on income, profit, and capital gain have increased significantly in 2008 and were about 12.7 percent higher than the total amounts that were expected to collect for entire year. Meanwhile, about 82.8 percent of projected export taxes and 82.0 percent of import taxes on petroleum were collected. A slower growth in garment exports and a Government subsidy on gasoline import taxes explain why revenue remained below their targets in the Government budget. Informal exports and petroleum imports from neighboring countries were also to blame for state revenue leakage. Given the pattern of economic activity so far in 2008 and taking into account previous trends, the Government is only expected to meet its target in real terms 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 82.8 percent of its budget plan during the first ten months of 2008. About 79.5 percent and 88.2 percent had been used for current expenditure and capital expenditure, respectively. The Government spent 83.9 percent of the total it had budgeted for civil administration and 140.6 percent for defense and security. The spending on civil administration wages had reached only what was planned. In the wake of high inflation, the current salary is certain to compromise the ability of civil servants to survive especially given that their salaries already tend to be low. Spending on national defense and security may increase significantly during the year due to the border dispute between Thailand and Cambodia.

Total Government expenditures expeced to meet targets for 2008

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.

Economics Today

Special Issue January 2009

Introduction

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Overall budget deficit likely to reach CR 1,684 billion in 2008

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 financed mainly by international borrowing and foreign assistance. 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 remain given the low level of Government revenues, the continued existence of external arrears and the potential for contingent liabilities. Progress on Structural Reforms The NBC granted licenses to a new commercial bank and two specialized banks became commercial banks in 2008. The NBC also issued a Prakas on the Maintenance of Reserve Requirements against Commercial Banks Deposits and Borrowings, which increased the reserve requirement to 16 percent for foreign currencies. The move aimed to reduce the amount of currency circulating, tighten loans, and reduce the use of the 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 drafted a sub-decree on micro-insurance.

Grovernment began phase 2 of financial management reform plan in 2008

Platform 1 of the Public Financial Management Reform, focusing on budget credibility, was completed in December 2007 with the exception of a few tasks. Activities that were planned for platform 1 but were not done have been included in the action plan for platform 2 (financial accountability), which initially was 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 approved at the 13th ASEAN summit, was ratified by the king on March 31, 2008 and was forwarded to the ASEAN Secretary-General on April 2, 2008. ASYCUDA was officially launched in May 2008 at Sihanouville port, which is helping to reduce time spent on custom declarations from one hour to around 20 minutes. However, traders are still familiarizing themselves with system. As far as administrative reforms go, 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. Merit Based Performance Incentives (MBPI) were revised at a meeting of the Council for Administrative Reform, Ministry of Economy and Finance and other ministries as well as development partners. 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 (D&D) process. In an effort to establish sub-national financial management as part of the overall D&D reforms, the law on Public Financial System was adopted and promulgated in May 2008. It is recognized as a fundamental law that was passed to manage Cambodias national and sub-national public finances.

Three legal codes were adopted in 2008

In the area of legal and judicial reform, up to 140 legal texts, including three main codes, were adopted as of June 2008.

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Economic Growth

Special Issue January 2009

Economics Today

Overview

EIC Projects Economic Growth to Slow to 7% in 2008, 6% in 2009

Cambodia posted its fourth consecutive year of double digit economic growth in 2007, but the rate of economic growth has been on a successive decline. The growth rate dropped from 13.3 percent in 2005 to 10.2 percent in 2007. Given current local and global economic trends and available data for the first ten months of 2008, Cambodias economic growth is likely to continue to slow significantly to about 7 percent in 2008. That was mainly explaned by the slower growth rate of garment, construction and tourism sector, and soaring prices for imported raw materials and consumer goods. The downward trend is likely to carry over to 2009, when the economic growth rate is expected to slow to about 6 percent.

Moderate economic growth of 7% projected for 2008

Economic Growth Share by Sector and Quarter in 2008 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

Q1-2008 Q2-2008 Q3-2008 Q4-2008 Others Tourism Paddy Tex le Construc on

Finance

Real Estate

Economic Growth Share by Sector and Quarter in 2008

...due to downturns in garments and construction

Cambodias 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 are adversely affecting the growth of Cambodias garment industry. Safeguarding measures were imposed by the US and European Union against Chinese exports. Residential construction growth is likely to slow to a negative rate in 2008 as a result of drops in prices for imported construction materials and land as well as housing loan credit restrictions. Meanwhile, the number of foreign tourist arrivals in Cambodia continues to increase steadily, but at a slightly slower pace because of the global economic slowdown as well as disputes along the Thai-Cambodian border. The financial sector continues to boom. 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. 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.

Reforms and anti-corruption policies would help accelerate economic growth

Cambodias economic growth could be speeded up if significant progress were to be 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.

Economics Today

Special Issue January 2009

Economic Growth

13

Industry

Industrial Growth Wanes in 2008 Due to Garment, Construction

Industry sector growth is continuing its downward trend in 2008 due to slowerthan-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, growth in the industrial sector is likely to continue to slow in 2009 due to anticipated downturns in the construction and garment sectors. That said, progress in Government reforms in line with effective anti-corruption policies could accelerate industrial growth.

Industrial growth to slip to 6.4 % in 2008

Garment industry remained strong but its rate of growth is slowing

The garment industry, the industrial sectors main contributor, has remained strong in 2008. But its rate of growth continues to slow. According to the Customs Department of the Ministry of Economy and Finance (MEF), the number of garment exports rose by 13.8 percent in the first eight months of 2008, roughly 4 percent point lower than the increase posted during the same period in 2007. Exports to the US grew by 13.6 percent and those to other markets, mainly the EU, jumped only 8.9 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, particularly the Chinese yuan. A labor compliance project monitored by the International Labor Organization (ILO) that has created a niche market for Cambodian apparel, Cambodias WTO membership and a reduction in export transaction bureaucracy also is helping to maintain the sectors growth.

The price of Cambodian apparel is declining in the face of stiffer competition

However, the price of Cambodian apparel continues to decline as competition for the US garment market especially from Vietnam and China intensifies and the US seems headed towards an economic recession. 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. Prices for Cambodian garment exports declined by 7.3 percent in average in the first eight months of 2008. Prices for garments exported to the US market declined by 11.0 percent while those to other markets increased slightly. The value of garment exports during the first eight months of 2008 increased by only 5.2 percent. The value of exports to the US rose by only 1.2 percent while the value of exports to other markets such as the EU remained strong.

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Economic Growth

Special Issue January 2009

Economics Today

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 given current global financial crisis and 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 Cambodias garment factories are owned by foreigners, many of whom are Chinese. Low labor costs and high labor standards could help the sector stay strong... 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. 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. Still, Cambodian garment industrial growth will fluctuate along with global demand in the coming years. Its 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 43.2 percent during the first ten months 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 is expected to decline in next quaters. Beside, prices for imported materials used in the construction sector increased significantly. The price of imported steel, for instance, increased roughly by about 20 percent. On other hand, sale prices for newly-constructed residences were 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 0.3 percent in 2008, compared to increases 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 banks to restrict credit for housing loans also help to reduce potentially negative impacts of downturns in the construction sector. Negative growth is likely to widen in 2009 for the construction industry Koreans own most of the mega construction projects currently underway in Cambodia. The construction sectors negative growth is likely to carry on before it recovers since the global financial crisis inevitably will adversely impact Korean investors. Negative growth is likely to widen to 5.7 percent in 2009 given that sale prices are either stagnant or on the decline. The food, beverage and tobacco sector has grown at a faster rate in 2008 as food prices have spiked, 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 continue for the next few years. 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.

...or there could be troubled times ahead

Economics Today

Special Issue January 2009

Economic Growth

15

Agriculture

Cultivated Areas Expanded in 2008; Growth Pegged at 5.5%

The year 2008 has been especially rainy and has followed equally wet years in 2007, 2006 and 2005. The agricultural sector continues to be natural resource-based and growth is expected to increase slightly to 5.5 percent in 2008 from 5.1 percent in 2007. Growth has been bolstered by an expansion in cultivated areas, higher prices for exported agricultural products, 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

Rain bolstered agricultural production, but investment remains low

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Economic Growth

Special Issue January 2009

Economics Today

Agriculture

sector is the main source of income for the countrys poorest inhabitants. Based on current trends, agricultural sector growth is expected to be about 5.3 percent in 2009. Growth prospects remain slim in the coming 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. As a result, paddy value-added should increase at a moderate pace of about 6.2 percent in 2008. Growth prospects will remain slim. Data available for the first ten months of 2008 suggested value-added for livestock will increase moderately by 6.6 percent in 2008, an increase of 2.9 percent over 2007, due to rising food prices, improved accessibility to credit in rural areas and the imposition of Government restrictions that suspended some livestock product imports. However, a lack of initial capital together with high interest rates or complexities inherent in accessing credit 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 trend, the growth prospected for livestock sector remains moderate in next coming years.

The rubber sector is expected to post negative growth in 2009 .

Based on available data for the first ten months of 2008, fishery production is expected to be relatively the same as in 2007. Small fish, used for the production of a popular salt fish pt, remain abundant while production of other fish continues to lag behind. An alarming number of illegal fishing complaints, the use of illegal fishing instruments and the destruction of essential fish rearing habitats have led to declining fish stocks and a reduction in the number of places available for fish to breed. Thus, the prospects are slim that fish stocks will expand in coming years. Growth in the forestry sector is expected to be about 1.6 percent in 2008. But the sectors growth potential is expected to remain weak for the next few years. The rubber sector is expected to post a negative 2.6 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. Thus, rubber growth is expected to remain flat in coming years.

The Time is Ripe to Invest in Cambodian Agriculture

Ten years of research, including a recent survey of 3,000 households, has economist Chan Sophal convinced that Cambodias top five cash cropsrice, maize, soybean, cassava and rubberwill prove very profitable in the years ahead. According to his projections, revenue generated from the crops should increase at least 50 percent, he told prospective investors at a Leopard Cambodia forum last month. Prices for food have soared in the past year and most analysts believe that they will remain high due to a combination of factors; most notably, sustained steep fuel costs and rising world demand for crops that can be eaten or converted into biofuels. Whats more, tens of thousands of hectares of arable land that could be purchased on the cheap are sitting idle, the Cambodia Development Research Institutes senior research manager pointed out. When Central Asia Development Group (CADG) was looking to expand its agricultural operations into Southeast Asia to cash in on Asias surging food needs, it studied Vietnam, Laos and Indonesia before deciding to target Cambodia first, said business development manager Michael Lambert. Qatar and Kuwait have recently visited Cambodia to explore opportunities for securing long-term food supplies for their countries. The time is ideal for investment in Cambodias agricultural space, he insisted. Not only does Cambodia have adequate transport links to regional markets and is integrating quickly into the regional and global economy, it is one of the few places left on Earth where people are willing to sell arable land, he said. Prices for Cambodian farmland and labor costs may be among the lowest in the region, but making money from farming still requires significant investment. And those investing in the agricultural sector must be prepared to get your hands dirty and change the way people farm, he said. Since agriculture is a five- to 25-year investment, a little patience wouldnt hurt either. Initially, CADG expects to invest about US$12-15 million to acquire more than 6,000 hectares of land near Phnom Penh to grow cassava, rice and vegetables as part of a joint venture with Paragon Corp, said Michael Lambert. The first crop should be in the ground by the end of 2009. By 2010, Paragon CADG Agros goal is to own and operate 30,000-50,000 hectares of Cambodian farmland.

Economics Today

Special Issue January 2009

Economic Growth

17

Services

Services to Grow in 2008, But not by Double Digits

The services sector is unlikely to post double-digit gains in 2008 because 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. 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, growth likely will remain strong but will slow slightly over the next few years.

Tourism, economic activity boosted growth in the services sector to 8.4% in 2008

Trade, transport and communication continue to flourish...

Trade accounts for the bulk of Cambodias service sector, followed by transport and communication. The sectors grew at a significant pace as a result of the countrys solid economic performance during last decade. However, soaring prices for imported oil products and high inflation are expected to slow the 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. The hotel and restaurant sector contributed significantly to overall service sector growth in 2008. The number of foreign tourist arrivals in Cambodia during the first ten months of 2008 increased by only 10.2 percent compared to 18.7 percent during the same period in 2007. The number of tourists who arrived in Cambodia via Siem Reap airport declined by 9.7 percent and those who came through Phnom Penh airport and by land or boat increased by 10.4 percent and 36.5 percent, respectively. The global economic slowdown likely explains these figures and Thai political instability could also be a factor. The tourism sector is expected to expand by about 9.3 percent in 2008, a drop in growth of about 1 percent compared to 2007. However, the number of foreign tourist arrivals is expected to grow in next coming years, but at a slower pace. Therefore, the hotel and restaurant sector likely will remain strong but slow somewhat to about 8.6 percent in 2009 from 23.4 percent in 2004 before recovering. The financial and real estate sectors performed well during the first half of 2008. For the second half of 2008, the financial sector is expected to continue to grow moderately due to an expansion of economic activities and confidence in banks. But the real estate sector will slow significantly as a result of anticipated declines in the price of land and residential construction as well as the imposition of credit restrictions by banks.

...but border troubles and the global economic slowdown has inpacted tourism-related businesses

Financial sector grew 32% in 2008

In 2008, the financial sector is projected to grow 32 percent and the real estate sector 5.8 percent, 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.

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Economics Today

Services

Tourism Law to Improve Services, Competition, Says Private Sector

Policy and regulatory uncertainty has impeded even stronger growth in the tourism industry, a 2007 Foreign Investment Advisory Services (FIAS) study concluded. Industry stakeholders complain that multiple and sometimes even conflicting parkas and subdecrees from various ministries and agencies that currently govern Cambodias tourism sector make it difficult for them to do business. To address private sector demands for a simpler and more predictable legal framework with the aim of promoting growth in the sector, the Ministry of Tourism recently submitted a draft Law on Tourism to the Council of Ministers. Minister of Tourism Thong Khon said he expects the law will help Government and the private sector improve services and encourage competition. He added that the law has support both from the private sector and Government and therefore he does not anticipate any snags in its adoption. The Ministry of Tourism also has signaled its willingness to include a requirement in the law that input from the private sector be sought prior to any future changes to tourism regulations and that an accreditation system be established to enhance the quality of tourism services. Mohan Gunti, a Phnom Penh-based consultant in tourism services, said the law on tourism will help the countrys tourism sector develop. As an advisor for the Cambdodia Association of Travel Agents (CATA), Mohan Gunti worked for over two years on the drafting of the law. The draft law addresses at least four issues that are of particular interest for the development of the sector, according to the International Finance Corporation (IFC), the private sector arm of the World Bank. These include: requiring Government consultation with the private sector on legal and regulatory issues; addressing quality assurance; defining the role of the Ministry of Tourism in facilitating the development of tourism sector business associations; and defining the role of Ministry of Tourism in dispute resolution. The process must be streamlined and made more efficient, according to Trevor Atherton, an IFC consultant on the tourism law. The tourism law needs to confirm the authority of the Ministry of Tourism to prepare and review the Tourism Development Plan and for it to be incorporated into the National Economic Plan so as to be a policy and strategy for the whole of Government. This begins with the process of aligning the actions of many ministries and authorities involved in implementation. If this is not done, the Tourism Development Plan is likely to fail, he is quoted as saying in an IFC bulletin. Since multiple agencies claim to be in charge of managing the hotel industry in Cambodia, hoteliers spend a great deal of time and money dealing with officials who are duplicating each others work, Cambodian Hotel Association President Philip Set Kao has said. Om Pharin, vice president of CATA, is convinced the requirement that Government consult with the private sector to develop a legal framework for the industry will be a win-win. Internationally, accreditation schemes have proven to be an effective tool in encouraging quality improvements and building the reputation of hotels and tourism operators. Such a scheme is expected to do the same for Cambodia. The draft law calls for the establishment of a clear system for classifying hotels and tourist accommodation services. But the IFC cautions against regulating quality through licensing procedures, which can drive up the cost of doing business, distort the competitiveness of the tourism industry and increase opportunities to impose informal charges.

Eco-tourism activities have potential to drive the tourism sector.

The Ministry of Tourism will play a key role in developing the sector and cooperating with private stakeholders.

Draft Law Calls for Greater Consultation According to the draft law, the Ministry of Tourism shall consult with the private sector in the issuance of parkas and sub-decrees that govern the sector, including: (i) establishment of the Cambodia Tourism Marketing Promotion Board; (ii) determination of criteria for tourism licenses; and (iii) determination of standards and requirements for quality assurance.
Source: IFC Business Issues Bulletin No. 15

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Overview

Inflation Accelerates; US-Riel Exchange Rate Remains Stable

Inflation doubled in 2008 as a result of soaring food prices and transportation costs. At the same time, the exchange rate of the riel against the US dollar remained relatively stable while the amount of riel in circulation increased significantly compared to that of the US dollar. 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 caused higher inflation. These problems have persisted in 2008. Data for the first ten months of the year revealed that inflation jumped to 18.1 percent in October 2008 compared to only 8.7 percent in October 2007. The price of food rose 28.7 percent, household goods 26.9 percent, transportation 17.6 percent and medical expenses 11.1 percent in October 2008, compared to increases of 16.8 percent, 5.1 percent, 5.6 percent, and 5.6 percent, respectively, in October 2007. Other consumer prices increased slightly during this period.

Soaring food and fuel prices caused inflation to balloon

Food prices are rising in spite of the countrys active agricultural sector due to informal exports

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 on the international market. These informal exports create shortages of local supply to local demand for food. The 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. Cambodia does not produce these items nationally and therefore remains highly dependent on imports. The depreciation of the riel against other currencies also accelerates inflation. Based on trends from previous years, the overall inflation in 2008 is expected to be about 18 percent, which is much higher than that of December 2007.

The riel remains stable against the US dollar...

The riel remained relatively stable against the US dollar during the first ten 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. On average, the riel appreciated about 1 percent against the US dollar during the first ten months of 2008 compared to 2007. This relative strength of the riel was due to the economic crisis in the US and increasing demand for the riel in rural areas during the

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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 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. 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, especially from Vietnam and Singapore. Total money supply continues to rise sharply... Total money supply continued to rise sharply during the first ten months of 2008. Total money supply (M2) reached CR11,881 billion in October 2008, a 19.5 percent increase from October 2007 and 5.0 percent increase from December 2007. During this period, the pace of local currency in circulation increased faster than foreign currency deposits because the Government tends to increase the amount of riel in circulation in the market when the US dollar depreciates. Growth of foreign currency deposits slowed to only 18.3 percent in October 2008 compared to 65.0 percent in October 2007; whereas the amount of local currency in circulation increased 23.1 percent in October 2008 compared to only 13.6 percent in October 2007. As a percentage of GDP and based on current trends, the total money supply is expected to reach 40.9 percent in 2008 compared to 32.3 percent in 2007 due to the sharp increase in the amount of local currency in circulation. 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 increasing significantly during the year, representing about 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

... but depreciated against the Vietnam dong and Thai baht

...but growth of foreign currency deposits slowed

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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 about 75.5 percent in October 2008 up from 67.1 percent in October 2007. Credit is expanding due to drops in interest rates for borrowing... 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. Credit to the private sector is expected to reach 33.4 percent of the GDP in 2008. The average interest rate on 12-month deposits and loans in riel increased slightly to 7.6 percent and 22.5 percent in October 2008 from 7.0 percent and 22.3 percent in October 2007, respectively. This slight increase resulted from a shortage of and growing demand for loan credit in riel, especially in rural areas, given favorable climate conditions during the last three years and rising prices for agro-products. ...while interest rates for deposits are gradually increasing Average interest rates of a 12-month deposit in US dollars continued to increase gradually to about 6.2 percent in October 2008, up from 5.0 percent in October 2007. Nevertheless, the average interest rate of 12-month loans decreased slightly to 15.9 per-

cent in October 2008, a 1 percent point decrease from October 2007, due to increased competition among the commercial banks that are providing credit. The drop occurred despite an increase in bank reserve requirements by the National Bank of Cambodia. Interest rates for bank loans are expected to increase in 2009 Interest rates for loans are expected to increase in 2009 because loans by local banks are believed to have peaked while demand for credit continues to increase among the real estate and construction sectors. Interest rates 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. These factors force banks to charge higher interest rates than they would in other countries. Many Cambodians in rural areas are unable to benefit from economic growth because they are short on initial capital 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, and particularly those in rural areas, tend to be short of initial capital and are unable to benefit from the countrys economic growth. Lower interest rates would encourage them to invest, thereby spurring economic growth in rural areas.

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Ination

Swept Up in a Silent Tsunami

Centuries from now, history books likely will mark the first decade of the 21st century as the end of the era of cheap food. Sustained steep fuel costs and rising world demand for crops that can be eaten or converted into biofuels have caused dramatic spikes in food prices around the world. The growing hunger for biofuels has created food shortages in some parts of the globe. The situation is so dire that earlier this year World Food Program chief Josette Sheeran described it as a silent tsunami.

Cambodians have to spend about 47% more than they did last year to get enough to eat

If incomes do not increase enough to offset soaring food prices Cambodians could be swept up in the silent tsunami, warned Chan Sophal, a senior research manager at Cambodia Development Resource Institute (CDRI). Speaking at a recent workshop, he said the price of ricethe Cambodian food staplehas doubled while the price of rice on the international market has increased 180 percent in the past year. At the same time, the price of beef jumped about 15 percent and pork 50 percent causing some Cambodians to turn to cheaper less conventional sources of protein such as dog and rat. Cambodians have to spend about 47 percent more than they did last year to get enough to eat, a recent CDRI study on the impact of inflation in Cambodians found. An average Cambodian household spent about 11,000 riels in May 2008 compared to 7,500 riels a day in May 2007. Increases in the price of rice are likely to have a significant impact on the living standards of the majority of Cambodians and particularly the poor, said Chan Sophal. About 40 percent of the population is living in relative or absolute poverty and spending on food accounts for 70 percent of their total household expenditures, according to the 2004 Cambodia Socio-Economic Survey (CSES-2004). Cambodians who have stable jobs or who have the opportunity to find additional work are coping with rising food prices, said Chan Sophal. However, he noted, farmers in provinces such as Kompong Speu, Prey Veng, and Svay Rieng do not have such opportunities and as a result are suffering. Food supplies low in some households The survey, which was conducted four to five months prior to the countrys late rice harvest, predicted that about 74 percent of households would run out of rice, forcing them to supplement their household stockpile by purchasing rice at the market. Farmers will have to buy cheaper food and rice or theyll have to borrow money to buy food, said Chan Sophal. Households that are most vulnerable to food insecurity are located in the Tonle Sap and plain regions, he added. In theory, increasing prices of agriculture commodities should boost the income of farmers who manage to produce a surplus of crops. But since most farming in Cambodia is done on a smallscale, only about a quarter of Cambodian farmerswho produce dry season rice, cassava, maize and/or soybeansare reaping the benefits of higher food prices, the CDRI study found. To cope with higher food prices, the majority of the countrys farmers are finding additional work in construction, forestry, or weeding, planting or harvesting crops for larger farms. Kem Khek, 51, owns a small rice field that produces around 1,700 kg a year. One ton and a half of paddy rice is not enough to feed my 10 children, said Kem Khek, who lives in Prey Veng provinces Sothear village. We have to buy more at the market. To supplement his rice supply, Kem Khek climbs palm trees to collect palm syrup or works in construction for four months of the year.

Inflation has soared

The rate of inflation, which is based on 227 consumer items of goods and services that are measured by the National Institute of Statistic (NIS), was 22.3 percent in July 2008 on a year-on-year basis. High oil prices, which peaked at over US$140 a barrel a few months ago, also have driven up the cost of transportation, which increased 50 percent, and diesel, which was up 80 percent compared to last year. While food, fuel and transportation prices have spiraled, prices for a few commodities such as clothing and footwear have remained stable.

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Price & Money

23

Banking & Financial Sector Reform

NBC Continues to Strengthen Supervision of Growing Financial Sector

The National Bank of Cambodia (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 NBC provisions during the first half of 2008, according to NBC reports. 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.

NBC issued Parkases on reserves reguirements, financial leasing and anti-money laundering

The NBC issued three new Prakases during the first half of the year 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, issued April 25, raised the reserve requirements in riel to 8 percent and foreign currencies 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, issued May 30, introduced a transaction on leases for movable property allowing lessors to lease or sublet to lessees moveable property they have either purchased or leased from suppliers. A Prakas on Money Laundering and Terrorist Financing was issued May 30. A Financial Intelligent Unit (FIU) was established Jan. 29, 2008 through sub-decree. Led by a board of directors, the FIU has a permanent secretariat-general, who is under the supervision of the NBC. 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. On-site inspections include a review of financial statements, business operations, and are designed to supervise regulations issued by the NBC.

Five on-site inspections of banks were completed

NBC reported in the first semester of 2008 that it had conducted full on-site inspections at five commercial banks, including a foreign bank branch. The NBC has used the Cambodia Offsite Banking Report for prompt corrective Action (COBRA) 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.

Banks are sharing data throngh a new credit information system

Several banks 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) has provided technical assistance to the NBC 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.

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For loans in US dollars, interest rates were slightly lower in June than in March, with rates shifting from 0.10 percent to 0.16 percent, according to the NBCs quarterly bulletin. For deposits in US dollars, 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. The Government introduced new regulations for the insurance sector There has also been 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. The MEF issued a Prakas on an Instruction Principle Accounting for General Insurance Business on July 30, 2008. After feasibility studies, the MEF issued a Prakas on Life Insurance Business on Aug. 12, 2008. To accelerate micro-insurance transactions, a Sub-Decree on Micro-Insurance has been drafted and is in progress. The MEF has prepared regulations to support the Law on Issuance and Trading of NonGovernment Securities to speed up company registrations. Training on the stock exchange is currently being conducted with assistance from Korea. Staff for the future stock exchange is mostly being recruited from the private sector. The Draft Law on Financial Leasing has been forwarded to the inter-ministerial meeting and is awaiting approval from the Council of Ministers (CoM). Financial lease operations for commercial and specialized banks are governed by the Prakas. Microfinance contributes significantly to Cambodias development since it is used primarily to support Small and Medium Enterprises (SME) as well as the agricultural sector. Credit volume and customer base is increasing for MFIs Microfinance entities reported an increase in credit volume and customers in the first half of 2008. microfinance institutions (MFIs) and rural credit 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 half 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 remained unchanged as of June, when there were 17 MFIs, 26 registered NGOs and 60 unregistered NGOs. 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 CMAs 2007 annual report pegged its membership at 14 MFIs. Investment and enhanced supervision is improving the sector 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.

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25

Banking

What Cambodias Bankers Said

velopments especially in its infrastructure. So there are plenty of opportunities for banks to grow. Demand for credit is there and other sectors besides the garments are very encouraging and promising in terms of generating positive growth to the countrys economy.

About the number of banks in Cambodia

In Channy, CEO and President, ACLEDA Bank : In 2007, there were 24 commercial and specialized banks in all. But in the first half of 2008, five new commercial banks opened or upgraded from specialized banks. Thats 27 banks this year to divide the same cake. So competition is there. Its good for the customers. But its good for the banks too because it pushes us to be more proactive and active to improve our products and services. Not just for the pricing because at some point we cant continue to reduce the price. But we can always improve our service quality, our bank infrastructure and include electronic banking. Its also good for Cambodia because it shows more confidence in the country. In the eyes of the public, both internationally and locally, Cambodia is a good place to invest in banking. Stephen Higgins, CEO, ANZ Royal Bank: The number of new banks has been remarkable. And my concern is that it might not be good for Cambodia. I think that having a strong banking sector is important to any country. But as Cambodia experienced a decade ago, and the US today, it can be very disruptive to the economy if you have problems with banks. Therefore, I think its better to have a smaller number of banks that are very strong, rather than a large number of small banks that can make it more difficult for the regulator to supervise. What happens in most of the economies around the world, particularly around Asia, is banking consolidation. The big players keep winning, while the smaller players will consolidate. Phan Ying Tong, Country Head, Cambodian Public Bank : Competition will probably increase. There will be more new entrants in the banking business and the existing banks will have to strengthen and improve their operations so as to continue to stay relevant in the business. The banks will also have to compete for qualified and experienced human capital, which will ultimately increase the cost of doing business. Still, there are rooms for expansion in business and banks in general. The country still requires a lot of de-

About remaining competitive in the sector

In Channy: For ACLEDA Bank, our strategy relies on scale by having offices everywhere, close to the customers, while other banks do not have the same facilities. I believe in scale, in broad branch network to do more at the local level in terms of deposits, lending and means of payment. In 2007 we were a local bank, but starting from now we are a regional bank. So weve branded ourselves and our new vision is to be a regional bank, starting with Laos. After our operations go well and are profitable in Laos, we will move to the next country, including China and Vietnam. But we need three to five years of preparation to move from one country to another. Stephen Higgins: We do mystery shopping, which means that market research firms go to our banks and pose as customers to assess customer care. We also do market research to help us understand how ANZ Royal compares to our competitors. Back in 2004, there was a big gap between ANZ Royal and everyone else. Today, there has been a bit of a catch-up and some of our competitors are doing a lot better in terms of customer service than what the surveys were showing back in 2004. We still think its a key strength for us though, and well look to build on that. Phan Ying Tong: In the face of increasing competition in the banking business today coupled with the number of new entrants, especially foreign banks, Campu Bank will continue to be resilient and prudent in its lending. We count on three key areas to sustain this position. Firstly, we are one of the pioneer banks in Cambodia. The people and customers generally know and have confidence in Campu Bank and its trusted PB branding. Secondly, we have strong backing from our parent company. Campu Bank is part of a dynamic group that focuses on a wide range of banking and financial services among others commercial banking, retail wealth management, investment banking, stock broking and card business. This wide network and well-diversified financial services provide a leveraging for Campu Bank to expand its business in Cambodia. Finally, Campu Bank offers full fledged banking services namely: deposits, loans, credit, ATMs, and cash management. Our staffs are experienced and well-trained to provide services in an efficient and friendly manner. We strive to provide the best customer care.

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Labor Force & Income

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Economics Today

Overview

2007 Socio Economic Survey Should Shed Light on Labor, Income

Updated labor force data is expected with the release of findings from the 2007 Cambodia Socio Economic Survey (CSES). The 2004 CSES pegged the total labor force at about 7.5 million, or 56 percent of the total population, with approximately 200,000 people entering the labor market every year. Based on these figures, Cambodias 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.

Total labor force estimated at 8.6 million in 2008

Pace of job growth in garment section is slowing

The pace of job creation in the garment sector slowed significantly in 2008. About 348,000 garment workers were employed at export-oriented garment factories in August 2008, which was a 3.8 percent increase over August 2007. The number of garment sector jobs is expected to increase by about 4.1 percent in 2008, which would be a 4 percent drop in the job growth rate. At the same time, the job growth rate in the tourism sector is expected to be about 5.6 percent in 2008, a drop of about 1 percent over 2007. The 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. Total employment was expected to grow about 1.5 percent in 2008, a drop of about 1 percent compared to 2007. The number of new jobs created in 2008 is expected to be enough to absorb only about 47 percent of the new labor force entrants in 2008.

Daily earnings of vulnerable people increased from 2006-2007: Study

Regular daily earning surveys conducted by the Cambodia Development Research Institute suggest 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 increase, 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.

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27

Employment Trends

As Youth Unemployment Soars, Foreigners Fill Labor Gaps

While the youth unemployment rate soars, employers continue to recruit foreigners to plug gaps that, thus far, the Cambodian labor force has been unable to fill. According to Ministry of Labor and Vocational Training data, 4,536 foreign workers are currently working in Cambodia legally. Thousands more are working illegally in the country, the ministry has said. Entrepreneurship has been improving in Cambodia and so have education standards. More and more students are being trained but their areas of study and skill dont match employer demands, which means Cambodia has no choice but to allow foreigners unrestricted access to jobs, Oum Mean, under-secretary of state at Ministry of Labor and Vocational Training (MLVT), has said. Labor demands have been changing in recent years with Cambodians who lack the skills and experience to meet the needs of employers increasingly at risk of being excluded from the labor market. These days, employers are looking for workers who are adaptable and can transfer specialized and technical skills. Lok Sihakmony, director of Mony Sokmeng Construction Co., Ltd., spends a great deal of time and money hiring construction sector professionals from Thailand. Hed like to recruit Cambodians but he said he cant find Cambodians who have the skills to get the work done properly. He also needs foreign workers to satisfy his customers and maintain his companys reputation, he added. A recent survey by HR Inc. found that only 13 percent of university graduates in Cambodia have the skills needed to land a job. Cambodia is mostly lacking experienced and skilled candidates to fill important positions in the private sector and nongovernmental organizations (NGOs), said Yim Meng Chhorn. The perception among Cambodian employers is foreigners are reliable, work more quickly and tend to be more professional than Cambodian workers, he added. As a result of this perception, employers believe their customers and partners will have more confidence doing business with them if they employ foreigners. But hiring foreign workers is expensive especially if employers are expected to provide airfare and accommodation, said Yim Meng Chhorn. Even though Cambodian workers generally lack skills and experience, sometimes foreigners are employed for positions that could be filled by equally qualified Cambodians, he added. While many of Cambodias university graduates lack the skills to land jobs, some employers simply are reluctant to hire them because they dont have a lot of faith in the countrys education system, said Chan Sophal, president of Cambodia Economic Association. To reduce its dependence on foreign workers, Cambodia must do more to support institutions of higher learning and the institutions should tailor courses based on domestic labor market demands. The Cambodia Government should develop human resources and prepare academic programs in response to the labor market, he told Economics Today. The unemployed, under-employed and those at risk of becoming unemployed should receive special grants to study at institutions of higher learning and vocational training facilities, added Chan Sophal. The MLVT and Ministry of Education, Youth and Sport are taking coordinated steps to strengthen the labor force and reduce unemployment, said Oum Mean. Students are being encouraged to pursue study areas that will improve their odds of finding work once they graduate.

Young people are not getting the education they neet to land jobs...

...some companies are having to hire foreigners to ll gaps in the conhtrys labor market.

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Income Generation

Raising Incomes: Rural people

When Touch Veng isnt busy in his 2 hectare Prey Veng rice field, he can usually be found at his fishing pond. He dug the pond a couple of years ago, thinking it would be a good way to supplement his income and his hunch has paid off. Today, he earns more money raising fish than growing rice. He stocks the pond with fish fry he buys from Vietnam for 200 riels per fish. After six months or so, when the fish reach half a kilogram, he sells them for about US$1 each. Its cheap to rear fish, says Touch Veng, who feeds them household food scraps.

find creative ways to earn money

Pig breeding is one way Cambodians are supplementing their incomes on the farm...

The 50-year-old rice and fish farmer estimates he has earned about 2 to 3 million riels from his fish pond in the past six months and he is optimistic that he will have enough funds to send his five children to high school. Ghen Thorng was farming rice in Prey Veng up until a year ago. He says perennial water shortages prevented him from being able to produce enough food to feed his family so he sold his land. He became a trash collector, selling recyclables to Vietnamese vendors, but he still couldnt earn enough to support his family. Then he got the idea to set frog traps, which he does every morning before he sets out for a day of refuge collection. On average, he catches about 2 kilograms of frogs, which earns him about 10,000 riels per day Development specialists say its encouraging, particularly in the wake of recent high food prices, that rural Cambodians like Touch Veng and Ghen Thorng are finding creative ways to supplement their earnings. In addition to raising fish and trapping frog, rural Cambodians also rear pigs, ducks, chickens and cattle to boost their incomes, according to Pok Samkol, community development coordinator at the Center for Livestock and Agriculture Development (CelAgrid). CelAgrid was established in 1997 to help Cambodian farming communities improve their livelihoods through innovative agricultural production practices. The organization also provides technical training to reduce rural poverty. The Cambodian Development Resources Institute estimates that 65 percent of rural Cambodian families have less than 1 hectare of land upon which to farm. These families also have much to gain from raising fish and livestock since their crop yields tend to be insufficient to meet family food needs.

...others raise cattle as the demand for beef increases in the country.

Such families are the target beneficiaries of many of the Asia Foundations programs, said program officer Seng Thuy, who added that 1.5 million Cambodians in 13 provinces have benefited from foundation projects that aim to improve farming and animal husbandry techniques. The Food and Agricultural Organization (FAO), a United Nations agency, has found that incomes generally are higher among farmers who raise livestock. The FAO recently launched a pilot project to boost livestock production and food security in the Sopove Lun district of Battambang province. A recent FAO report predicted that the livestock sector has the potential to absorb some of the 150,000 to 250,000 workers who join the labor force each year Livestock currently accounts for about 14 percent of Cambodias agricultural production. But Cambodias Ministry of Agriculture, Forestry, and Fisheries has indicated that it sees tremendous things for the livestock sub-sector and expects it to figure prominently in the countrys development.

Economics Today

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Reforms Summary

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Reforms-Summary
Key Reforms in Cambodias Trade Openness and Investment Policy (20012008)
2001:
Cambodia benefited from the European Unions Everything But Arms (EBA) initiative, which grants duty-free and quota-free access for all exportsbesides weapons. However because Cambodias textile sector was not well-developed, Rules of Origin (ROOS) requirements could not be met, resulting in the imposition of a 12 percent average rate of duty. The Cambodian government 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 percent, 7 percent, 15 percent and 35 percent. The average un-weighted tariff rates are lowered to 16.5 percent, in comparison with 17.3 percent in 2000 and 18.4 percent in 1997. The rate was further lowered to 14.7 percent in 2005. ing countries, duty-free access to the US markets. The TRADE is meant to provide special access of textile and clothing exports to the US markets. In July, representatives from the Government and from Cambodias Garment Manufacturer Association (GMAC) lobbied the US government to pass the TRADE bill. China granted Cambodia duty-free access to its market for 83 more products. In total, Cambodia is entitled to export 380 products at 0 percent tariff rate to China.

2006:
In July, the Minister of Commerce visited the US to call for duty-free access to its market for 15 LDCs in Asia. The duty-free access is deemed crucial for Cambodias garment industry survival, so that it can compete with other exporters, such as China and Vietnam. The TRADE billstill under examination by the Congresswould eliminate 17 to 20 percent of tariffs currently imposed on Cambodian garment exports to the US. The US had already approved this policy for Africa. On July 14, Cambodia and the US signed a Trade and Investment Framework Agreement (TIFA). On August 2, Vietnam granted SPT treatment duty-free accessto 40 Cambodian agricultural products. 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, Vietnam, to discuss the development of an economic triangular area. Prime Minister Hun Sen indicated during the meeting that the plan will include the provinces of Ratanakkiri, Mondolkiri and Stung Treng. These provinces are slated to become a major economic engine through mining, agroindustry and ecotourism activities by 2015.

2003:
Cambodia was approved to become the 147th member of the World Trade Organization (WTO) member during the 5Th WTO Ministerial Conference in Cancun, Mexico. Cambodia achieved full membership on October 13, 2004. Cambodia signed the ASEAN-China Free Trade Areas Early Harvest scheme, in July. Under the scheme, Cambodia is entitled to a Special Preferential Tariff (SPT) treatment for 297 products at 0 percent tariff rates for Chinese markets, effective from January 1, 2004.

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 Chinese textile imports to 7.5 percent a year. The move was followed on June 10, by the signing of similar safeguard agreement between the EU and China to limit Chinese textile imports between eight and 12.5 percent. This safeguard system is planned to 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 develop-

2007:
On January 16, the Office of the Council of Ministers (OCM) submitted the second protocol of the Greater Mekong Sub-region (GMS) on Facilitation

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of Cross Border Transport of Goods and People to the National Assembly (NA) for approval. On February 12, the first Joint-Council meeting was held between US trade representatives and government officials, led by the Minister of Commerce, in Siem Reap. This meeting was the follow-up of the 2006 TIFA. Discussions focused on understanding Cambodias economic and political structures, as well as challenges in the trade sector, and on legal framework, capacity building, intellectual property, Sanitary and Phytosanitary Standard (SPS), and Generalized System of Preference (GSP). On June 14, Cambodia and Japan signed an agreement for liberalization, promotion and protection of investment, which binds Cambodia to guarantee free market, privatization and facilitation of procedures for prospective Japanese investors. Russia agreed to a preferential treatment of Cambodian garmentbesides woolexports to its market. It includes a duty-free and quota-free access, subject to a 25 percent rule of origin condition. The EU requires 45 percent rule of origin for Cambodian exports. The Minister of Commerce and GMAC representatives conducted a 4th lobby trip to the US to call for the adoption of the TRADE Act. The lobbying did not completely succeed as the US is considering the introduction of a more comprehensive bill that will provide duty-free and quotafree access to all LDCs. Under the ASEAN Harmonized Tariff Nomen clature (AHTN) of ASEAN Free Trade Area, Cambodia tariff lines were reduced further from about 11,000 lines to around 8,500 lines. The implementation would reduce Cambodias aver-

age un-weighted tariff rate from 14.90 percent to 14.38 percent. Cambodia and Pakistan signed an agreement on promotion and protection of investment. As of 2007, Cambodia is granted SPT treatments by: - the US for more than 6,000 items - 27 EU countries under the EBA initiative - Japan, with a duty-free and quota-free access for 98 percent of Japanese tariff list - China for 380 items - South Korea for 78 Items - the ASEAN under the AISP, including Thai land (340 items), Brunei (8 items), Indonesia (70 items), Malaysia (180 items), and the Philip pines (62 items). On October 19, the US Congress considered the Draft Law on Duty-Free Garment Access. 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.

2008:
January 16: the NA adopted the agreement on Liberalization, Promotion and Protection of Investment between Cambodia and Japan, which was signed in June 2007 February 26: the NA adopted the ASEAN Charter. The charter represents 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.

Key Cambodian Policy Reforms in Private Sector Development (2001-2008)

2002:
The Ministry of Commerce 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. The Law on Marks, Trade Names and Acts of Unfair Competition is adopted. adopted in January. The Amended Law on Investment is passed in February to make investment climate more conducive to growth. The Law on the Amendment of the Law on Taxation and the Law on Patents, Utilities Model, Certificates and Industrial Design is passed.

2004:
The World Banks Investment Climate Assessment Report is released in August. It maps out a 12-point action plan to tackle impediments in the private sector that the government and donors

2003:
The Law on Copy Rights and Related Rights is

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identified. The 12-point plant aims 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. The MoC reduced 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 (MoCs 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 the MoC is reduced from 11 to eight. The processing time for the issuance of those documents is reduced from 16 to 12 business hours.

2003 to 6.6 days in July 2005. Average costs per transaction for processing exports 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. The Law on Negotiable Instruments and Payment Transactions is adopted. The Prime Minister signed the Sub-decree on the Establishment and Management of Special Economic Zones (SEZs), effective from December 29. 14 SEZs are approved in 10 provinces, where a One-Stop-Service approach is used in each zone. The RGC adopted the Small and Medium Enterprise (SME) Development Framework as its strategy for SME development until 2010.

2006:
The Law of Commercial Arbitration is adopted by the NA in March. The Law on Management of Factories and Handicrafts is adopted by the NA. The Prime Minister approved the Sub-decree on Risk Management. The Government approved the Civil Protection Code. The RGC issued a Sub-decree on the 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. On April 18, the Government signed an ASYCUDA-World project document package with the United Nations Conference on Trade And Development 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.

2005:
The Council for the Development of Cambodia (CDC) cancelled the deposit requirement to secure project implementation by investors; and foreign companies are entitled to a 100% ownership of their businesses except ownership of land. An Investment Proposal Review Sub-committee is established in provinces to allow approval of investment projects of less than US$2 million. Each committee comprises: i) the Provincial Governor, as Chairman of the Investment Sub-committee, ii) the First Deputy Governor, as Vice-Chairman, iii) the Second Deputy Governor, as Vice-Chairman, and 13 other members from different municipal departments. The MoC reduced costs and time required for Commercial Registration. Time and procedures were also reduced for application of C/O, Visa of Certified Invoice and Export Licenses. In addition the Certificate of Processing (C/P) was 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. The Law on Commercial Enterprise is passed by the NA on May 17. 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

2007:
Export Management Fee reduced from 1% to 0.9% of total export value. The Law on Secured Transaction was adopted on April 06. This law aims to promote economic activity through a unified set of rules on securing obligations with collaterals. On April 25, the NA adopted the Law on Cambodian Standard. The law would create quality standards for Cambodian-made products, as well

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as standards for foreign companies importing goods into Cambodia. The law will permit the Commerce Ministrys CamControl department to inspect the quality standard of all goods entering the countrys market. The Cambodia Standards Institute will be an arm of the MIME, which has already implemented standards for drinking water produced for Cambodias domestic market. The NA adopted the Law on Customs on June 22. The NA adopted the Law on Concession on September 10. The law details the process by which the government can grant private concessions for state-owned infrastructure fixtures. The Prime Minister approved the Sub-Decree on the Mortgage and Transfer of the Rights over a Long-Term Lease or an Economic Land Concession on August 29. The Civil Code was adopted by the NA on October 05. On November 30, the MoC decentralized authority to its municipal and provincial representative offices to register Company Registry activities. The MoCs representative offices can issue a Provisional Company Registry Certificate for establishing a company, valid for 30 days. The original certificate is to be approved by the central management of the MoC.

month ban on rice exports due to concern of local market price volatilities. On May 26, the Government announced a partial lifting of the ban on rice exports, but stated it will continue to limit the amount of rice sold abroad, by setting a quota on exports of 1.6 million tons of rice. Exports of more than 100 tons must also be permitted by the MoC. The measures were to be in effect until December 31, 2008. The ASYCUDA system is officially launched at the Sihanoukville Autonomous Port in May. The Sub-Decree on the Organization and Functioning of Cambodian Standard Institution is adopted on June 04. A One Stop Service administrative office is opened in the Phnom Penh SEZ in September. The service aims to simplify application procedure for potential investors in the zone. The World Bank Group Doing Business survey showed Cambodia moving up 15 places in the Doing Business Report 2009, ranking 135 out of 181 economies worldwide. The improvement in ranking is a result of two reforms: the 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, and the passage of the Law on Bankruptcy in 2007, which regulates the closure of private businesses.
Source: Various Government Reports.

2008:
On March 27, the Government introduced a two-

Cambodia Key Reforms in Public Financial Management and Banking (2001-2008)

2001:
A visa sticker is introduced to avoid tax loss from visa revenues, as well as a stamp system on cigarettes. The Value-Added Tax (VAT) on real regime (self-assessment system) is expanded to additional 150 firms and a 10% excise tax on entertainment services is introduced. The minimum profit tax of 1% is eliminated on investment projects. the Accounting Profession was passed in June. A 15% withholding tax on interests earned by bank depositors is applied.

The Medium Term Expenditure Framework 2003-2005 is introduced. The system for controlling refunds and developed risk management techniques for the verification and approval of VAT refund claims is streamlined. A single operational structure for government bank accounts in the National Bank of Cambodia (NBC) is established. A structure for a Chart of Accounts (COAs) at the National Treasury is established. Direct payment to the NBC for large taxpayers is introduced.

2002:
The excise tax on beer is increased from 10% to 20% and the real tax regime, which means taxation based on accounting statement, is expanded to cover five more provinces, in addition to the five provinces in which it was already applied. The Law on Corporate Accounting, Audit and

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2003:
On March 2, the National Assembly (NA) adopted the Law on the Amendment of the Law on Taxation. The law changed the exemption period, introduced a 40% special depreciation for the Qualify Investment Project (QIP), for investors not entitled to use the exemption period, and increased the rate of salary tax for non-resident taxpayers from 15% to 20%, among other measures. The Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) is established to ensure promotion of the accountancy and auditing professions. The excise tax rate on beer is increased from 20% to 30%. The excise tax on air transportation and telecommunications is also increased from 2% to 10%, while the domestic and international tax bases are broadened.

On April 1, a Prakas on Determination of Solvency of Insurance Companies is issued. Insurance licenses are to be valid for a period of five years and companies must adequate funds for solvencya minimum of a US$1.5 million, which includes a deposit of US$700,000 at the NBC. Insurance companies are not allowed to distribute their profits as dividends to their stakeholders unless it is agreed in writing that the companies have met or will continue to meet solvency obligations in the near future. On June 1, an income tax for garment workers is introduced. 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. On June 3, the Unused Land Appraisal and Valuation Sub-commission is created. Its duties 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, the Accommodation Tax is introduced by Prakas. Due to complaints from the Tourism Association of Cambodia, this accommodation tax is to apply starting January 2007.

2004:
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. A Budget Monitoring and Cash Management Commission (BMC) is established 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 Treasurys capacity, and v) improve and monitor priority expenditure such as Priority Action Programme (PAP). In September, the reform of Public Financial Management (PFM) is launched by an 11-donor team, in which the World Bank is playing a crucial role. This sector-wide approach PFM reform is a multi-year 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.

2006:
On February 3, the Governance Action Plan II (2005-2008) is approved by the Office of the Council of Ministers. On March 13, the Ministry of Economy and Finance (MEF) introduced a special tax on telephone services. All telephone companies in Cambodia operating services inside and outside the country have to pay a specific 3% tax. Internal audit departments are established in line ministries. On June 9, the MEF promulgated the Code of Ethics for Internal Auditors and Internal Auditing Professional Standards. On March 3, the Law on the Audit of the Kingdom of Cambodia is promulgated. It requires respective ministries/institutions and public enterprises to create and strengthen Internal Management System and Internal Audit. On November 27, a Sub-decree on Rules and Procedures of Reclassification of Public Property of the State and State-owned Institutions indicates that leases on state properties should not be allowed to exceed 15 years. The NA passed the Law on State Securities on November 30. Its purpose is to provide a framework for effectively printing/issuing and managing state securities in order to guarantee obli-

2005:
The Department of Non-Tax Revenue is established, with the mission 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 licenses, ix) tourism, x) civil aviation.

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gation of settlement/payments in terms of the states financial requirements. 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. Direct payment of senior officers salaries into bank accounts is tried on at the MEF and the Ministry of Health. The Government agreed to adopt a Merit Based Pay Initiative and incorporate it in the annual budget of the MEF. The MBPI is funded by the Multi Donor Trust Fund under the PFMRP.

otherwise they would be subject to a fine consisting of additional taxation equivalent to 10%, 25%, and 40% of the amount of unpaid tax plus 2% interest rate for each month. On February 9, the Government approved the Financial Sector Development Strategy (Financial Blue Print) 2006-2015, which was officially launched in June to further strengthen the banking system in Cambodia. The NA adopted the Law on Combating Money Laundering and Terrorist Financing on April 30. The NA adopted the Law on the Issuance and Trading of Non government Securities on September 12. The law set the ground rules for the proposed Cambodian Securities Market and established the body that will regulate it.

2007:
A second wave of major measures in the PFMRP is 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 NSDP objectives, and iii) adoption of a new chart of accounts to improve expenditure reporting. The measures aim to improve the efficiency of the PFM system as well as reduce the fiduciary risk inherent in the system by reducing the threat of corruption. 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 commercial banks has been on trial (ACLEDA Bank) and is to be extended to ANZ Royal Bank. Investment risk ratings by Moodys and Standard & Poors in April put Cambodias first ever sovereign debt rating at B-plus (two notches lower than Vietnam). A Government Prakas in March 7 imposed that 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 US$1,000 worth of goods to Cambodia. Import tax must be paid by check to or through an account set up at the NBC. The MEF informed owners of unused land in provinces-municipalities and Phnom Penh that (i) unused land located in provinces/municipalities shall be subject to a tax on unused land, (ii) the tax rate is 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, and (iii) each owner of unused land is required to apply tax declaration of his or her land,

2008:
The draft Law on Public Financial System is approved by the CoM, and transmitted to the NA on February 29. The 2008 Budget Law contains regulations on borrowing, requiring the government not to borrow money at commercial interest, not to guarantee project with commercial interest and not to issue state bonds. The MEF issued a Prakas on Customs Bonded Warehouse on February 15. The Customs Bonded Warehouses are authorized to store goods and are subject to Customs Control for a specified period. The NA adopted the Law on Public Financial System on April 04. The law has been recognized a fundamental law and its basic principle is the whole management of public financial system, as well as the preparation of budget law. The NBC increased the Reserve Requirements for commercial banks operating in Cambodia from 8 percent to 16 percent of their deposits, effective from July. The NBC issued a directive on September 19 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. Specialized banks must also increase their capital requirements to 30 billion riels. The aim of this directive is 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. Commercial Banks and specialized banks will be allowed to maintain their current capital requirement if they have an influential shareholder 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.

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Overview

Trade Deficit to Widen in 2008 but Remain Stable in 2009

While garment exports have slowed, the value of imported cars, motorcycles, buses, trucks, tractors and alcohol has increased significantly in 2008, which has widened Cambodias trade deficit. However, revenue from foreign tourists, private and Government transfers and direct foreign investment are enough to finance the trade deficit as well as the income account deficit. Total exports in the first eight months of 2008 increased by 5.5 percent compared to 13.8 percent during the same period in 2007, according to available data from the Ministry of Economy and Finance (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.

The value of imports in 2008 soared because of high oil prices

In contrast, imports accelerated 21.5 percent during the first ten months of 2008 and imports of petroleum and raw materials, especially those used in the garment sec-

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

tor, made up the lions share of the increase. 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 46 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 services sector surplus continues to improve thanks to tourism 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. 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. 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 anticipated increases in foreign investment in Cambodia. To sum up, the overall

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The countrys balance of transfers and Government transfers, which represent foreign aid, remain high...

balance of payments is expected to reach a surplus of about US$231 million in 2008, which represents a 44.4 percent decrease compared to 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. Cement, for instance, is now being produced in Cambodia. 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, Cambodias trade deficit may reach only 15 percent of GDP in 2009 about 1.7 percent 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 4.3 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, which represented about 6.5 percent of GDP. Overall, Cambodias balance of payments for 2009 is expected to be in a deficit of about US$45 million.

... but there are risks that foreign direct investment will drop in 2009

The Council for the Development of Cambodia (CDC) approved 62 investment projects worth about US$8.8 billion in fixed assets during the first eight months of 2008. That represented a 26.2 percent decrease in the number of investment projects, but a four-fold increase in the value of the fixed assets compared to the same period in 2007 because most of the projects approved in 2008 have been mega projects. Most of the investment projects involved the garment and tourism sectors, which accounted for 27 and 11, respectively, of the approved investment projects and US$103 million and US$7.6 billion of fixed assets. The investment activity was bolstered by healthy garment exports and tourism activities during 2008. It is worth noting that only few investments in agro-industry have been approved, despite increases in agricultural prices and high agricultural production this year. 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

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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, and especially residential construction, is likely to fall in 2008 because of stagnant or declining 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. Looking ahead, the ongoing global financial crisis and limited local skills and resources are likely to have an adverse impact on the number of projects approved in 2009. However, the investment outlook is likely to remain 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. Productivity is the key to increased competitiveness and creating the sort of businesses that are attractive to investors. According to an Economic Institute of Cambodia 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. 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 2006 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 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 slow over the next few years.

Labor productivity will be key this year to attract investors

Increases in labor productivity in the services sector palliate decline productivity in the garment sector

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Trade Reform

ASEAN to Create Single Market

A new ASEAN Charter was signed by the leaders of the 10 ASEAN member states in Singapore at the ASEAN Summit on Nov. 20, 2007. 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. In addition to ASEAN community building, the new charter calls for creation of a single market. Cambodias National Assembly (NA) adopted the charter in February 2008 and it was ratified by the king on March 31, 2008. H.E Deputy Prime Minister Hor Namhong, Minister of Foreign Affairs and International Cooperation signed the ratification documents on April 2, 2008 and then forwarded them to the Secretary-General of ASEAN for deposit, according to a Government news release.

ASEAN single market steps forward with approved blueprint and scorecard to track implementation

After approving the ASEAN Economic Community (AEC) Blueprint, which serves as a 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 Blueprint. The Scorecard is designed to provide a comprehensive picture of how ASEAN is progressing towards establishing the AEC by 2015. Cambodias accession into World Trade Organization (WTO) has dominated Cambodias 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 The RGC has adopted several laws to fulfill its commitments for accession to the WTO. In the first half of 2008 and prior to the national election, two laws were promulgated. As of that time, the NA had adopted 29 of 46 laws it needs to pass to meet its obligations under the WTO. In responding to the requirement of the agriculture sector and intellectual property protection, the Law on Seed Management and Plant Breeder Rights was adopted April 8, 2008 and promulgated May 13, 2008. The law aims to ensure seeds are managed and developed sustainably and for the social, economic and environment benefit of Cambodians. The Ministry of Industry, Mines and Energy (MIME) governs the development of news seeds while the Ministry of Agriculture, Fisheries and Forests (MAFF) is responsible for seed management. The Law on Civil Aviation was adopted Dec. 5, 2007 and promulgated Jan. 19, 2008. The law is designed to give the Government authority to ensure civil air transportation is safe, reliable, orderly and economical. The law governs the management of airline services and air transportation enterprises as well as the development of civil airports.

In spite of steady promulgation of laws required by the WTO, Cambodia lags behind schedule

Overall, the Government continues to run behind its schedule for meeting WTOrelated commitments. Several legal texts are in various stages of design. Some are being reviewed by experts. Others are still under discussion at the Council of Ministers, according to interviews with key informants and literature released from a WTO work program in August 2008. The Draft Law on Tourism will be considered in a plenary meeting to be convened by the new Legislature. Technical assistance and human resource training will be required to complete a few of the new regulations.

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Trade & Investment

Special Issue January 2009

Economics Today

Economics Today

Special Issue January 2009

Trade & Investment

41

Several activities also have been planned to facilitate trade 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. Newly more efficient administration services facilitate trade proceedings The fourth point of the 12-point action plan is to introduce a risk management strategy that consolidates and rationalizes all of the examination requirements of the different control agencies. The strategy will be implemented in the Custom Excise Department (CED) first and then possibly expanded to other agencies. A Risk Management and Audit Office was recently established in the CED that will focus on inspection and clearance of imports and exports. 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 May 5, 2008 at the autonomous port of Sihanoukville. The time it takes traders to declare items at customs has dropped from an average of an hour to 20 minutes. The CED expects to introduce the system in other offices over the next two years. The ASYCUDA should help Cambodia meets its goal to be part of the ASEAN Single Window by 2012. Efficiency of processing times could be improved enhanced if the MoC were to adopt an automated key permit and license process for registered users. Paperwork must be completed manually for institutions that are not yet automated, which represents the main hurdle to a universal single window, the Trade Facilitation and Compositeness 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 Sept. 1, 2008 at PPSEZ to simplify application procedures for prospective investors. 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, administration chairman of the zone and the deputy secretary-general of the Cambodia SEZ Board. Cambodia moved up 22 places to rank 122nd in the Trading Across Borders (TBA) category in the International Finance Corporations 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.

Dr. Cham Prasidh, Minister of Connerce, visits the Bok Seng Dry Port at the Phnom Penh Special Economic Zone late last year.

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Fiscal Policy & Debt

Special Issue January 2009

Economics Today

Overview

Government Revenues on Target in 2008

The Government managed to earn much of the revenue it had planned to according to its budget. However, the amount collected 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. Cambodias debt situation remains on a sustainable path with moderate risk of debt distress.

Central Government expects to raise CR 3,997 billion in 2008

The central Government expects to raise CR3,997 billion in revenue in 2008, which would be an increase of 21.5 percent over its planned revenue for 2007, assuming Cambodias economy grows 6 or 7 percent in 2008. Taxation remains its main source of revenue and is expected to reach about CR3,307 billion, accounting for around 82.7 percent of total revenue, and 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 Customs Department accounts for 51 percent and domestic taxes 27.8 percent of total planned revenue. However, the share of domestic tax revenue as a portion of total tax revenue has been increasing gradually, from 6 percent in 1994 to about 27.8 percent of total planned revenue for 2008 due to the strong performance of the domestic private sector. By October 2008, the central Government already reached CR4,338 billion in revenue, or 8.5 percent higher than the total it had expected to collect for the entire year.

Tax revenue achieved 10.7 percent and other current revenues 11.6 percent higher than their planned budget for the entire year, respectively. A high average inflation rate during the period was the main factor in the nominal increase. In real terms, however, central Government revenue is expected to achieve only what was planned during the Income, profit and first ten months of 2008. capital gain taxes Taxes on income, profit, and capital gain increased significantly in 2008 and already rose sharply in 2008 achieved 12.7 percent higher than their total plan that was earlier expected for the entire

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Fiscal Policy & Debt

43

year, reflecting private sector activities. Revenues collected in international trade taxes also reached the projected total in nominal terms. Beside, about 82.8 percent of the projected export taxes and 82 percent of projected import taxes on petroleum were collected. A drop in garment exports and a Government subsidy on gasoline import taxes explain why revenue has not reached their targets in the Government budget. Informal exports and petroleum imports from neighboring countries are also to blame for state revenue leakage. Government to reach budget targets in real terms only Given the pattern of economic activity so far in 2008 and previous trends, the domestic revenue is expected to reach CR4,766 billion in nominal terms, which would be an 18.7 percent increase over 2007 and 10.8 percent of the GDP for 2008. However, the Government is expected to meet its budget targets in real terms only for 2008. 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. Expenditures to expand 22.7%... The Government expects to expand budget expenditures to about CR 5,673 billion in 2008, which was an increase of 22.7 percent from the 2007 budget plan and exceeds actual 2007 disbursements by 12.5 percent. Civil administration disbursements were expected to decrease by 6.2 percent, while spending on defense and security was expected to increase slightly by 1.4 percent in 2008. Spending for health, education, agriculture, and rural development is slated 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 expected to be lower than the average increase in spending for other sectors. Thus, Government funding of priority sectors is

... but funding to priority sectors is insufficient to meet the need

not expected to be sufficient to meet Cambodian needs in 2008. The unallocated portion of the budget will increase by 41.6 percent in 2008 due to an increase in the reserve budget and the amount of money budgeted for unexpected expenditures. The Government spent 82.8 percent of the total amount it had budgeted for expenditures in the by October 2008; 79.5 percent and 88.2 percent of their respective plan had been used for current expenditure and capital expenditure, respectively. The Government spent 83.9 percent of the total it had budgeted for civil administration and 140.6 percent

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Fiscal Policy & Debt

Special Issue January 2009

Economics Today

for defense and security. Thus, spending on civil administration wages had reached only the budget plan. Spending on defense and security increased significantly due to border disputes between Thailand and Cambodia. Total expenditures expected to slightly exceed targets for 2008 Based on previous trends and current situation, total expenditures are expected to be slightly higher than the plan for 2008, mainly due to unexpected extra-spending on national defense. As a share of GDP, total expenditure for 2008 is likely to increase 14.6 percent, a slight increase 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. During the first ten months of 2008, the deficit reached CR645 billion or 41.2 percent of what was planned in the budget law and was totally financed by foreign assistance. Restriction on disbursement and impressive increases in revenue during the period explain this low deficit. Nonetheless, based on previous trends and current situation, the budget deficit is expected to reach 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. This allows Cambodia to avoid domestic debt financing. 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 the Joint International Monetary Fund/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. Debt is on a sustainable path Given Cambodias 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, the risk of debt distress will decline further, though low revenue collection will continue to pose risks to debt sustainability.

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Special Issue January 2009

Fiscal Policy & Debt

45

Public Financial Management Reform

Government Progresses to Platform 2 after Completing First Phase of Reforms

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). 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. PFMRP is to be carried out in sequences. Platform 1 aims to make the budget more credible by providing timely and predictable delivery of funds. Platform 2 focuses on effective financial accountability. Platform 3 aims to achieve a fully affordable policy agenda through policy-budget linkages. Platform 4 is designed to produce effective program performance accountability.

15 indicators are being tracked to assess progress of public financial management reform program

Fifteen specific indicators are being tracked to monitor the PFMRPs 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 made up 41.3 percent and indirect tax 38.4 percent. 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. The RGC introduced the Public Finance Management (PFM) system to facilitate reforms effectively and efficiently. The successful completion of platform 1 confirms that it is a valid way to guide reforms. But improvements to organizational structures, staff management and motivation will be needed to successfully implement and integrate stage two of the reforms. PFM reforms ought to be linked with other reform programs, including decentralization and deconcentration, civil service reform, public service pay reform, and sector-based reform programs.

Participation from line ministries is key to reform success..

The participation of line ministries and other budget entities is vital to achieving platform 2 reforms. But participation, alone, is not enough and a coordination mechanism should be devised as detailed in the diagram. Platform 2 of the PFMRP should build on the progress made in improving budget credibility and financial accountability in platform 1. Therefore work plans to complete platform 2 should focus on completing tasks remaining from stage 1, identifying platform 2 objectives and launching pilot projects for activities that must be done in subsequent stages of the reform program.PFM Progress on platform 1 is continuing in parallel with the launch of platform 2. Brainstorming has been done to determine platform 2 target achievements. Progress was made on pilot projects in stage 1 and this work will continue in platform 2 even though some of the activities are not expected to be carried out until subsequent platforms.

... and capacity building is still needed

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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Fiscal Policy & Debt

Special Issue January 2009

Economics Today

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48

Reforms

Special Issue January 2009

Economics Today

Legal and Judicial Reform

Civil procedure code, civil code and criminal procedure code have been approved

140 Legal Texts Adopted as of June 2008

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 development partners. During the third legislature of the National Assembly (NA), 140 legal texts had been adopted as of June 2008, including three critical legal codes, the Civil Procedure Code, Civil Code and Criminal Procedure Code. As well, the Japanese International Cooperation Agency and French Cooperation (FC) have been helping to provide training on the codes to judges and other judicial officials.

Five draft laws have been in progress since 2004

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 Council of Ministers (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 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. The Government has not released details about the status of the draft Law on the Amendment of the Organization and Functioning of the SCM.

In the meantime, the French government and FC have initiated support and technical assistance for the preparation of two other important draftsthe Administrative Code and Administrative Procedure Code. The drafting of these codes is a medium/

Economics Today

Special Issue January 2009

Reforms

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long-term project since they cannot proceed without a strong legal framework and smooth-functioning judicial system. Several WTO-related pieces of legislation have been passed 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 March 7, 2008. Its 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 inter-ministries 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. In the interest of creating a neutral, independent and competent judiciary, the Government is endeavoring to draft a code of ethics code for legal professionals. The SCM approved an Ethic Code for Judges and Prosecutor Feb.5, 2007. A statute for clerks also is being prepared and a Training School for Clerks was established in 2007. Several training institutions have been established to build the capacity of legal human resouces... To build capacity of legal human resources in Cambodia, several training institutions have been established, including the Royal Academy for Judicial Professions (RAJP) and Professional Training Center for Lawyers (PTCL). A Royal School of Notary and Bailiff, the institution that will execute judgments, is also expected to be launched. A draft law on notary was finished in December 2007, the Council for Legal and Judicial Reform (CLJR) reported in March 2008. A pilot court has been launched in Kandal province that focuses on handling cases and technical matters of the courts. A team has been assembled to expand the pilot project to Phnom Penh, Kampong Cham, and Banteay Meanchey provinces. A specialized commercial court is also expected to be launched. The Ministry of Commerce has reviewed a draft Law on Establishing the Commercial Court. The draft stipulates the court structure, which will be established as part of the CoMs new mandate. Additional regulations are still required related to the courts functioning, and procedure. ...and the Government is seeking donor assistance to establish a National Arbitation Center Alternative dispute resolution (ADR) can often be a quicker mechanism for resolving disputes than the formal judicial system. There are three steps in the ADR processnegotiation, conciliation and arbitration. ADR was one of seven strategic objectives included in a legal and judicial reform agenda that was approved in 2003. Work on establishing an ADR system is about 50 percent complete, according to a dissemination workshop. A Law on Commercial Arbitration was adopted 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 Government is still seeking help from development partners to establish a national arbitration center. A pilot project establishing a Center for Justice Service at District is in place in four districts at Kampong Speu and Kampong Chhnang provinces and 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. 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. Until a national arbitration center is established, ADR in commercial disputes must take some other form such as mediation since businesspeople prefer it to more formal legal channels because it is cheaper and less time consuming.

50

Reforms

Special Issue January 2009

Economics Today

Public Administration

Government Revises Merit-Based Pay Program

The Government has adopted a two-pronged approach to public administrative reform. At the central level, reform has focused on improving civil servant remuneration, human resources capacity and human resources management. At the sub-national level, reforms have focused on decentralization and deconcentration to promote democratization and good governance. The Merit-Based Performance Incentives (MBPI) program was revised at a meeting of the Council for Administrative Reform, Ministry of Economy and Finance and other ministries, and development partners (DPs). Sub-decree No 29 on MBPI was subsequently approved April 2, 2008, which abrogates sub-decrees No 98 & 38, and stipulates that: MBPI will be deployed in support of strategic priorities requiring a 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.

Government merit pay system was revised in 2008

The MBPI 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. The MBPI includes all Priority Mission Groups (PMG) and civil servants whose job titles fall below the rank of deputy department director. The pay incentive is deposited directly into the individual bank accounts of participating civil servants.
Merit-Based Performance Incentives

According to sub-decree No 29, the following pay incentives shall apply: Director General: Deputy Director General: Department Director: Deputy Department Director: Administrative Official: Office Chief: Deputy Office Chief: Kramakar Official: Secretary: 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

The MBPI system has not been extended to all ministries and before it is, agreements must be put in place with relevant ministries and institutions prior to its extension. The MBPI system is being extended progressively to all DP-financed strategic reforms with a view to eliminating the distortionary effects of current supplementary salary schemes, harmonizing Government and partner approaches to incentives and addressing the broader need for civil service reform, according to a World Bank progress report. Progress is needed to complete human resource management and development policies Progress is also needed on completing Human Resource Management (HRM) and Human Resource Development (HRD) policies since draft concept papers on the subjects were circulated over a year ago, according to conversations at the 12th Government-Donor Coordination Committee (GDCC) meeting March 4, 2008.

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Reforms

51

A Royal Decree on Special Operating Agencies (SOA) was promulgated March 28, 2008. The SOA is a public service delivery instrument and the decree makes the unit consistent with other services implementation mechanisms. 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. OWOs to be established in 24 districts in 2009 Following the successful launch of pilot Window Office (OWO) services in two districts, Siem Reap and Battambang, the Government plans to establish OWOs in 24 districts around the country by early 2009 with support from the WB. Efforts to establish a pilot district ombudsmans office, which aims to strengthen local Government, are progressing, the WB reported in April 2008. Citizens can lodge complaints about local authorities with the ombudsman. 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. It is widely acknowledged that decentralization and deconcentration (D&D) helps promote democratization at the sub-national level. Reforms aimed at furthering decentralization at the commune level 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, a June 2008 focus group discussion with commune councils in Kampong Cham province found. 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 Governments work plan. Experiences with D&D in other countries, the three essential ingredients of successful D&D reform are: legal framework; decentralizing taxation; and, decentralizing human D&D Definitions resources. Decentralization: The Government The Law on Administration grants commune councils with the function, and Management of Capital, Provauthority, and resources it needs to respond inces, Municipalities, Districts and to local needs. The councils must be acKhans was adopted April 1, 2008 countable to citizens. to strengthen the D&D process Deconcentration: 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.

Law passed to strengthen D&D and sub-national administrative reform..

and sub-national administrative reform. The organic law sets out principles for the unified administration of the capital, provinces, municipalities, districts and khans to promote and sustain the democratic development through D&D. Councils at the sub-national level must prepare to have their own management, functions and resourcesfinancial, human, and assets. Each council will be tasked with facilitating services delivery and development in its own jurisdiction. At the same time, the law states that the sub-national councils, including Capital, Province, District and Khan councils, each having a five-year mandate. They are to be established though indirect election as stipulated in the Law on Election of Councils for Capital, Provinces, Municipalities, Districts and Khans, which was adopted April 2, 2008. A National Committee on Democratic Development is to be created at the subnational level with sub-national committees to assist with the tasks needed to carry out the organic law. Furthermore, under the national committee preparatory work plan, the national program on democratic development is set to run for 10 years, from 2010 to 2020.

... as well as sub-national finacial management

A sub-national financial management regime was established to operate parallel with D&D reforms under the Law on Public Financial System adopted April 4, 2008 and promulgated May 13, 2008. It is recognized as a fundamental law to manage national and sub-national public finances in Cambodia. Such management is done in concert with the preparation of a budget law.

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Reforms

Special Issue January 2009

Economics Today

Land and Natural Resources

Government Set to Distribute Land to Poor

A majority of Cambodians in rural areas rely on land and natural resources such as fisheries and forestry for their livelihoods. Improving access to land and natural resources alleviates poverty and therefore should be one of the main pillars of the Governments reform program and development strategy. Various mechanisms have been developed 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 Government had registered 1,061,414 land parcels and distributed 794,639 land titles, according to reports from the 12th meeting of the Government-Donor Coordination Committee (GDCC) on March 4, 2008.

Governement to distribute land to poor and landless Cambodians

Meanwhile, a total of 4,770.22 hectares has been registered as private state under the Land Allocation for Social and Economic Development (LASED) pilot project, a according to a statement by the chairman of The Working Group for Land at the 12th meeting of the GDCC. The land is located in Sombok and Changkrang communes in Kratie province and Choam Kravien commune in Kampong Cham province. It will be distributed to poor and landless families as part of the Social Land Concession (SLC) Program. As of January 2008, seven other communes also have been registered as private state land for use under the SLC. Another 13.5 hectares in Kbal Chay Sangkat in the province of Sihanouville is expected to be distributed to 259 poor and landless families as part of the SLC. Recent Government decisions have also been made about Economic Land Concessions (ELC), which affect how the countrys agriculture and natural resources are managed. ELCs can be granted at both the national and provincial level. But the process has not taken place in a transparent manner and regulations are usually not followed. Vast areas of land are being kept by non-producers for speculation while poor people who need to farm are denied access to the land. An increasing number of development partners argue that Cambodia should reduce the number of ELCs and increase the number of SLCs it grants to help the growing number of poor and landless families.

Pilot projects in Ratanakiri and Mondulkiri aim at addressing community land ownership challenges

Community land ownership is another issue of concern especially among indigenous people who are facing growing pressure to develop land that is rich in natural resources. A pilot Statute of Indigenous Community projects is being carried out by the inter-ministerial working group in three villages in two provincestwo in Ratanakiri and one in Mondulkiri. However the process of registering indigenous communal land generally has been very slow. A draft Policy on Registration and Use Rights of Indigenous Communal Land was submitted to the CoM in May 2007 and a draft sub-decree on the Registration of Indigenous Peoples 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 sub-decrees, regulations, and policies. The challenge is enforcing the existing legal provisions and implementing new policies. The Government should strengthen enforcement of existing laws and do more to implement existing legislation. Cambodia is endowed with forests, which could also be used to transform the lives of the countrys 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.

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Reforms

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Pressure is mounting to reform the commercial forestry conccession process

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. The number of forestry concessions has dropped considerably, which has made more of the countrys forested area available for others to manage, including local communities. Ongoing monitoring and evaluation of community forestry management projects is needed to ensure local people are benefiting from this valuable resource. The Working Group on Forestry and Environment has adopted a four-year Forestry and Environment Action Plan 2006-2010 consistent with the goals of the National Strategic Development Plan. 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. The second phase of the Rectangular Strategy calls for the Government to provide clear guidelines to the private sector for planting economically-viable private forests and managing degraded forested land. A Natural Protected Area Law, adopted Dec. 27, 2007, addresses biodiversity conservation and the sustainable use of natural resources. In sum, the Government should consider strict measures to eradicate illegal encroachment and to ensure forestry communities have input in how forests are managed.

Illegal logging and enroachment of forested land persists

447 fishing communities were set up in 2008

Fisheries are crucial to the countrys development, supporting the livelihoods and providing food security for millions of Cambodians. Ensuring access rights of local communities is one of the goals of the Governments fisheries reform program. The Fishery Administration (FA) has set a target of establishing 447 fishing communities and 62 fish shelter communities by the end of 2008, according to its 2007 annual report. As well, a sub-Decree on Community Fisheries broadens user rights for communities in public fishing areas. Phase II of the Rectangular Strategy also calls for increased action against illegal encroachment of flooded forests and illegal fishing gears and the Government has said it will work towards setting up a fishing market mechanism. A proclamation on the Functioning on the Fishery Administration has been discussed and currently is awaiting approval from the Ministry of Agriculture, Fisheries and Forestry, which should help the FA become a more effective service provider, especially at the commune council level where the demand for more effective fisheries management is greatest.

Code established to encourage responsible fisheries management...

The formulation of a Cambodian Code of Conduct for Responsible Fisheries is another notable achievement. It provides the framework for rural communities to benefit more from the development of the countrys fisheries. 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. In sum, considerable progress has been made in policy reform, but access rights to fisheries resources still lack clarity and incentives that would ensure the fisheries are managed in a sustainable manner are lacking.

... but access rights still lack clarity

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Economic & Financial Indicators

Special Issue January 2009

Economics Today

59

904

1,972

2,676

4,570

10,245

14,644

42

272

327

287

297

315

335

898

2,394

3,628

6,385

12,237

16,616

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Economic & Financial Indicators

Special Issue January 2009

Economics Today

Economics Today

Special Issue January 2009

Economic & Financial Indicators

57

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