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Macroeconomic Stability and Budget Execution

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.

 Progress

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]

 Issues

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.

  Recommendations


[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.

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