The
balance between macro-economic growth and poverty reduction, set out by the RGC
in the NPRS, is rooted in the idea of the promotion of “broad-based
sustainable growth with equity”. Rapid economic growth is central to the
strategy by which the poor gain increased “income opportunities”.
However,
as the NGO community made clear in the 2002 CG statement, such growth often
comes at the cost of environmental degradation, social disruption and increased
inequality, particularly where there are ineffective social and environmental
measures to control these potential impacts.
The
current economic indicators show that during the first half of 2003 Cambodia
suffered from a relatively poor economic performance. This has been blamed on
significant political instability and uncertainty, in particular following the
anti-Thai riots and in the run up to the National Assembly election. In
addition, the regional SARS outbreak adversely affected the tourism sector.
Negative
economic indicators include a 4.5% growth rate for 2003, down from 5.5% in 2002,
despite the RGC’s commitment to achieving 6-7%. This lower growth rate is
insufficient to reduce poverty headcount levels without significant
redistribution of wealth.
Government
revenue dropped by 1.7% through the first 11 months of 2003 compared to the same
period last year. However,
inflation in 2003 was just 1.2%, down from 3.3% in 2002.
Budget
execution continued to be poor. The
social sectors continued to be under-resourced, with the Ministry of Education
receiving just 79% of its budget, the Ministry of Health receiving 59%, and the
Ministry of Rural Development receiving just 54%.
By contrast, the Council of Ministers spent 109% of its budget, the
Interior Ministry spent 167%, and the Ministry of Economy and Finance spent
199%. Despite the commitment to
shifting expenditure from defence to the social sectors, in 2003, the Defence
Ministry ended up receiving US$ 1.25 million more than in 2002.[1]
As the WB
and ADB point out in their joint public expenditure review “the critical test
of a public expenditure management system is its ability to deliver a
predictable and timely flow of funds to the spending agencies….”[2]
This is clearly not happening in Cambodia. Critically, money is not disbursed
evenly or predictably throughout the year. This has the effect of leaving many
sectors with monetary “dry seasons” as will be discussed in Section 3.4 in
relation to health. The RGC must ensure that its expenditure management is
subject to effective performance assessment in order to ensure that money is
distributed on time and in full.
To the
extent that growth has occurred, it has taken on a narrow form that has
only benefited a minority of the population. Stakeholders support an emphasis on
equitable growth, but it will not occur without action to place the alleviation
of poverty firmly at the heart of all fiscal, monetary and trade policies, and
without a process to evaluate those policies.
Thus far there has been little sign of such an approach being adopted in
the implementation of the NPRS.
Low revenue collection hampers the ability of
government to expand social expenditure in Cambodia.
The commitments set out in the NPRS indicate that in the coming years there is a
significant need for the government to increase revenues. The WB and the ADB
have stated “without significant increases in revenues, there are serious
risks to both medium term macro-fiscal sustainability and the RGC’s medium
term poverty reduction program.”[3]
Revenue
collected through the taxation system remains low despite technical assistance
having been provided in this area. Better tax administration is needed.
Greater transparency and provision of public information regarding
economic and fiscal matters is essential if improvements in monitoring are to be
made, especially at the local level.
An
additional threat to future budget management is the increasing amounts that
will have to be devoted to debt repayments, which may amount to 9% or
more of current expenditures from 2005 onwards.[4]
While Cambodia is only moderately indebted, its low capacity to collect
revenues makes debt repayments a significant fiscal burden.
A significant part of Cambodia’s debt is owed to the United States, for
their support during the Lon Nol period, and to Russia, for the Soviet Union’s
support during the 1980s.
The RGC
recognises that the medium-term economic situation remains volatile, leaving the
country with serious challenges. In particular, the current reliance upon the
garment sector leaves the economy vulnerable to an economic downturn in response
to the discontinuation of quotas and the challenges of WTO accession
requirements.
Uncertainty
in all major economic sectors, including agricultural, industrial and service
sectors, makes it difficult to ensure a sound financial base for poverty
reduction and growth over the medium term. To achieve lasting growth, the RGC
needs to make real progress on the commitments set out in the NPRS. These
commitments include developing effective financial management, increasing
spending for the social sectors, improving governance, reforming the civil
service and reforming the legal and judicial systems.
Institutional
reform to reduce corruption and impunity and
foster equity and development is essential in the medium term. Such reform needs
to take in a number of key issues:
1.
The impact of corruption at all levels within the economy has a
significant negative effect upon economic growth, as does ongoing criminal
activity such as widespread smuggling, tax evasion and bribery.
2.
The capacity of institutions needs to be significantly
strengthened to encourage increased confidence in economic management.
3. Transparency within economic management is essential to all stakeholders so that they can understand and monitor the economic situation and the allocation of funds towards the reduction of poverty.
The NGO community once again calls for a comprehensive poverty and
social impact analysis of fiscal, monetary and trade policies in order that
the policy instruments that will most effectively target the poor are
embraced.
The NGO community recommends that the RGC
prioritise reform of the customs and taxation systems and put in place
effective enforcement arrangements.
The NGO community encourages the RGC to continue to reform the budget
disbursal system and strengthen internal and external systems of control
over budgets, for example through an effective audit system, increased
transparency, and strengthened institutional capacity.
Financial resources need to be provided to the ministries without
political bias.
Every effort must be made to reschedule the debts owed to the United
States and Russia. The United
States could consider some level of debt forgiveness as part of their aid to
Cambodia.
The National Assembly should debate the level of loans to be accepted
from international financial institutions, taking into consideration both
the country’s needs and its capacity to effectively absorb aid, in order
to limit the level of debt repayments on future budgets.
Non-concessional lending should be strictly avoided.
[1] Figures provided by MoEF, as quoted in The Cambodia Daily, January 29, 2004 and February 20, 2004.
[2] Cambodia: Integrated Fiduciary Assessment and Public Expenditure Review, September 2003, p.69.
[3]
In their joint report Cambodia: Integrated Fiduciary Assessment and
Public Assessment Expenditure Review, published in September 2003,
p.viii.
[4] MoEF, Medium Term Expenditure Framework, draft, Jan. 2004, Table 7.4.