68799 CAMBODIA ECONOMIC WATCH April 2008 ECONOMIC INSTITUTE of CAMBODIA Research Director: Sok Hach Project Team Leaders: Neou Seiha Authors: Chhun Dalin, Dourng Kakada, and Neou Seiha TABLE OF CONTENTS List of Abbreviations and Acronyms iii List of Tables and Figures vi Foreword ix Executive Summary xi Part I: Recent Economic Developments and Outlook 1 1. Cambodian Economic Growth 3 1.1. Agriculture 4 1.2. Industry 6 1.3. Service 10 2. Trade, Investment, and Productivity 13 2.1. External Trade and Capital Movements 13 2.2. Private Investment and Stock Capital 15 2.3. Productivity 17 3. Price and Monetary Development 19 3.1. Inflation 19 3.2. Exchange Rate 20 3.3. Money Supply 22 3.4. Interest Rates 23 4. Fiscal Development and External Debt 25 4.1. Budget Revenue 25 4.2. Budget Expenditure 26 4.3. Budget Financing and External Debt 28 5. Labor Force, Incomes, and Poverty 31 5.1. Employment 31 5.2. Incomes 32 5.3. Poverty 33 EIC - Cambodia Economic Watch – April 2008 i Part II: Structural Reforms: Current Implementation and Prospects 35 6. Banking and Financial Sector Reform 37 6.1. Banking 37 6.2. Microfinance 39 7. Public Financial Management 43 7.1. Progress Achievements of the Program 43 7.2. Perspective for the Platform 2 of the PFMRP 46 8. Trade Reform 49 8.1. WTO Commitments 49 8.2. Trade Facilitation and Private Sector Development 51 9. Administration Reform 53 9.1. Central Administration Reform 53 9.2. Sub-National Administrative Reform 55 10. Legal and Judicial Reform 57 10.1. Progress and Achievement of the Reform 57 10.2. Judicial Reform Outlook 58 11. Land and Natural Resource Reform 61 11.1. Land Reform 61 11.2. Forestry Reform 63 11.3. Fishery Reform 64 Bibliographic References 65 Appendix 1: Key Economic Indicators 67 Appendix 2: Key Structural Reforms 81 ii EIC - Cambodia Economic Watch – April 2008 LIST OF ABBREVIATIONS AND ACRONYMS BSP Budget Strategic Plan CAMEX Cambodia Stock Exchange Market CAR Council for Administrative Reform CDC Council for the Development of Cambodia CDCF Cambodia Development Cooperation Forum CDRI Cambodia Development Resource Institute CIS Credit Information Sharing CLJR Council for Legal and Judicial Reform CMA Cambodia Microfinance Association CMDG Cambodia Millennium Development Goals COBRA Cambodian Offsite Bank Reporting for Prompt Corrective Action CoM Council of Minister CR Cambodian Riel CSOs Civil Society Organizations D&D Decentralization and Deconcentration EIC Economic Institute of Cambodia ELC Economic Land Concession EU European Union FMIS Establishment of Financial Management Information System FSDS Financial Sector Development Strategy GDCC Government Donor Committee Coordination GDP Gross Domestic Product HRD Human Resource Development HRM Human Resource Management HRMIS Human Resource Management Information System IFC International Finance Corporation ILO International Labour Organization IMF International Monetary Fund EIC - Cambodia Economic Watch – April 2008 iii IRR Internal Rule and Regulation JMI Joint Government-Donors Monitoring Indicators MAFF Ministry of Agriculture, Forestry and Fisheries MBPI Merit Based Pay Initiative MDP Management Development Program MDTF Multi-Donor Trust Fund MEF Ministry of Economy and Finance MFI Microfinance Institutions MIS Management Information System MLMUPC Ministry of Land Management, Urban Planning, and Construction MoC Ministry of Commerce MoH Ministry of Health MoJ Ministry of Justice MoT Ministry of Tourism MTEF Medium Term Expenditure Framework NA National Assembly NBC National Bank of Cambodia NCDD National Committee for D&D NIS National Institute of Statistics NLA National Authority NLDA National Authority for Land Dispute Resolution NPAR National Program for Administrative Reform NSDP National Strategic Development Plan OWOs One-Window Offices PAP Priority Action Programs PDP Professional Development Program PFMRP Public Financial Management Reform Program PMG Priority Mission Group PPD Public Procurement Department RGC Royal Government of Cambodia iv EIC - Cambodia Economic Watch – April 2008 RSM Royal School of Magistracy SAD Single Administrative Document SCM Supreme Council of Magistracy TWGFE Technical Group on Forestry and Environment WB World Bank WEF World Economic Forum WTO World Trade Organization EIC - Cambodia Economic Watch – April 2008 v LIST OF TABLES Table 1.1: Cambodia's Real GDP Growth by Sector (%, 2000 prices) Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) Table 1.3b: Imports of Cement and Steel (000’s tons) Table 1.4: Trends of Service Sectors (% Increase, 2000 prices) Table 2.1: Cambodia's Balance of Payments (Millions of US Dollar) Table 2.2: Approved Private Investment Projects* Table 2.3: Productivity of Workers (% Increase, US$2000 price) Table 3.1: Cambodia’s Monetary Survey (Billions of Riel) Table 3.2: Cambodia’s Interest Rates (% per annum, end of period) Table 4.1: Cambodia’s Government Revenue (Billions of Riel) Table 4.2: Cambodia’s Government Expenditure (Billions of Riel) Table 4.3: Financing Cambodia’s Budget (Billions of Riel) Table 5.1: Cambodia’s Population and Labor Force (% Change) Table 6.1: Financial Sector Development Strategy (2006-2015) Immediate Priorities on Non-Bank Finance Table 6.2: Recent Developments in the Banking Sector, 2007 Table 7.1: Progress on Consolidated Action Plan Activities in 2006 Table 8.1: An Accomplishment of WTO Laws Approved in 2007 Table 8.2: Progress of Remaining Law for WTO Table 10: Recent Development of the Eight Fundamental Laws LIST OF FIGURES Figure 1.1: US Textile Import of Top Trading Partners (% increase) Figure 3.1: Cambodia’s Consumer Price Index (December 2002=100) Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100) vi EIC - Cambodia Economic Watch – April 2008 Figure 5.2: Real Terms of Daily Average Earnings of Vulnerable Workers (November 2000 prices, Cambodian Riel) EIC - Cambodia Economic Watch – April 2008 vii viii EIC - Cambodia Economic Watch – April 2008 FOREWORD With the aim of providing a broad-based economic analysis to policy makers and stakeholders, the Economic Institute of Cambodia (EIC) has great pleasure in presenting the latest issue of “Cambodia Economic Watch�. This EIC series of publications not only serves as a policy-oriented research paper, but also as a reference for all readers who wish to gain a snapshot of the Cambodian economy or monitor its development. As in previous issues, this edition presents the latest economic performance and prospects based on the analysis of current data from many reliable sources. It takes an in- depth look at the trends of the main economic indicators and the progress of reform policies. It also highlights the urgent measures that need to be taken to address any of the problems encountered. In 2007, Cambodia once again realized another double digit economic growth rate of 10.1 percent, after achieving 10.8 percent in 2006 and 13.3 percent in 2005. This growth was mainly boosted by tourism, garment exports and agro-business. With a moderate increase of 5.3 percent, the construction sector seems to be no longer the engine of growth in 2007, according to a preliminary estimation of the National Institute of Statistics. Together with high economic growth, inflation rate has jumped back to a peak level of about 10.8 percent in 2007, up from 2.8 percent in 2006. The inflation figure for 2007 was boosted mainly by the 20 percent increase in food prices and the 13 percent increase in transportation and communication costs. The dramatic increase of money supply was another factor contributing to high inflation. For 2008, EIC foresees that the tourism, garment and agro-business sectors will continue to expand steadily, while the construction sector will be on the downward trend. As a result, GDP growth will be more moderate, at 7 percent, and inflation rate will remain relatively high at 8 percent. We would like to thank the World Bank for its generous support. Special thanks to Chea Huot and his team for their invaluable comments, to Dane Hor, Chhim Rothsothea, and EIC research assistants for their excellent assistance, to all EIC staff for their enthusiasm, and to other institutions and individuals too numerous to list. Sok Hach, Director Economic Institute of Cambodia EIC - Cambodia Economic Watch – April 2008 ix x EIC - Cambodia Economic Watch – April 2008 EXECUTIVE SUMMARY In 2007, Cambodia once again realized another double digit economic growth rate of 10.1 percent, after achieving 10.8 percent in 2006 and 13.3 percent in 2005. This growth was mainly boosted by tourism, garment exports and agro-business. With a moderate increase of 5.3 percent, the construction sector seems to be no longer the engine of growth in 2007, according to a preliminary estimation of the National Institute of Statistics (NIS). Together with high economic growth, inflation rate has jumped back to a peak level of about 10.8 percent in 2007, up from 2.8 percent in 2006. The inflation figure for 2007 was boosted mainly by the 20 percent increase in food prices and the 13 percent increase in transportation and communication costs. The dramatic increase of money supply (+63 percent) was another factor contributing to high inflation. For 2008, the Economic Institute of Cambodia (EIC) foresees that the tourism, garment and agro-business sectors will continue to expand steadily, while the construction sector will be on the downward trend. As a result, GDP growth will be more moderate, at 7 percent, and inflation rate will remain relatively high at 8 percent. Economic Growth According to the NIS, Cambodia’s GDP growth for 2007 reached 10.1 percent, which came after growths of 10.8 percent in 2006, 13.3 percent in 2005 and 10.3 percent in 2004. Nonetheless, the real economy (excluding domestic tax revenue component) grew only by 8 percent in 2007 compared to 11 percent in 2006 and 13.8 percent in 2005. It is worth noting that the component “revenue from domestic tax less subsidy� of the GDP increased by 49.8 percent in 2007, compared to only 7 percent in 2006 and 4.4 percent 2005. Unlike 2006, the 2007 growth was mainly boosted by the expansion of garment exports, tourist activities, and crop productions; despite increases in prices during the year. Construction significantly slowed down. The growth of the agricultural sector expanded moderately to a 5.2 percent, whereas that of non-agricultural sectors was 12.1 percent in 2007. Cambodia’s economic growth rate for 2007 is one of the highest in East Asia, compared with an expected rate of 7 percent in Lao PDR, 4 percent in Thailand, and 8 percent in Vietnam, but was slightly lower than the 11 percent in China. Based on current economic trends, the garment industry appears to be questionable in 2008. Some external factors, such as current recession of US economy and the arrival to year-end of safeguarding measures imposed by US and EU against China export will affect the growth of Cambodia’s garment industry. The growth is expected to slowdown slightly. EIC - Cambodia Economic Watch – April 2008 xi Residential construction is expected to slightly decline, given housing loan credit restriction and higher prices of imported construction materials. Nevertheless, the number of foreign tourist arrivals in Cambodia will continue to increase steadily. If the agricultural sector were not to meet any serious problem such as severe drought or inundation, Cambodia would achieve an economic growth of around 7 percent during the next few years. Compared with other countries in the region, the Cambodian economic growth during 2008 will be relatively moderate. In the long run, the successful establishment of upcoming Cambodia Stock Exchange Market (CAMEX) and the revenue from oil and gas will substantially attract big investors to Cambodia. Thus, Cambodia’s economic growth could be speeded up if some critical reforms were in significant progress. These reforms, together with effective anti- corruption policies, could provide a preferred environment and opportunity for higher economic growth. Trade and Investment The total exports in 2007 increased by about 9.4 percent, while the total imports increased by 13.2 percent, resulting in an increase of trade deficit by 26.5 percent in 2007. The continued higher oil price contributed to the higher import cost. However, the customs data showed a decline of imports of construction material, such as cement and steel, as a result of a slowdown in the construction sector. Thanks to the surplus in tourism, the current accounts deficit was relatively stable, which was financed by increasing foreign aid under the form of grants, loans, and foreign direct investment. Overall, the balance of payments for 2007 improved, reaching 4.2 percent of GDP, from 3.4 percent in 2006. In 2007, the Council for the Development of Cambodia (CDC) approved 130 investment projects, representing US$ 2.7 billion of fixed assets. Compared to 2006, the number of investment projects increased by 31.3 percent, but the fixed assets were relatively the same, if the World City project (US$2 billion) is excluded. Most investment projects belonged to the garment (US$170 million), tourism (US$1.1 billion), and agro- industry sectors (US$160 million). For 2008, the growth of investment in garment factories will remain strong, because Cambodia could host many foreign investors moving out from Vietnam and China. Nonetheless, investment in construction and real estate sectors will be slim. xii EIC - Cambodia Economic Watch – April 2008 Prices, Money and Exchange Rate Together with high economic growth, inflation has jumped back to a peak level of about 10.8 percent in 2007, up from 2.8 percent in 2006. Inflation rate for 2007 was boosted mainly by 19.8 percent increase of food costs and 13 percent increase of transportation and communication. Other costs increased at the moderate pace of about only 5 percent. Higher food prices were linked to a worldwide increase of agricultural products, such as rice and meats. Higher price of imported foods is also the result of a weak dollar and the riel against other currencies. Higher transportation costs were pushed by the increase in crude oil prices on the international market. Dramatic increase in the money supply also contributed to higher inflation. Overall liquidity increased by 63 percent in 2007, while bank deposits as well as credit to the private sector rose by 76 percent. This sharp increase of money supply has pushed the National Bank of Cambodia (NBC) to tighten the amount of credit to private sectors, by strictly imposing a prudential ratio (bank nominal capital on loans) of 15 percent. Nevertheless, based on the current situation and recent past trends, inflation rate for 2008 would remain high reaching 8 percent on year on year basis, and 9 percent in year average. The riel in 2007 was slightly appreciated against the US dollar and the Vietnamese dong by about 1.2 percent and 1.8 percent, respectively, but depreciated against the Thai baht by 8.4 percent. Together with a prudent monetary policy of the NBC, the riel is expected to remain relatively stable against the US dollar at 4,000 riel/US$. Beside fixed-rate with the US dollar, fluctuation of the riel against other trade partner currencies, such Thai baht, should also be taken into consideration. Cambodia’s main import partners are Thailand, Vietnam and Singapore. The riel depreciation against the Thai baht encouraged Cambodia trading with Thailand, but yet it also increased the domestic consumer prices because of limited local production capacity that forced Cambodians to use higher price imported products. Fiscal Development The central Government’s revenue reached CR4,015 billion in 2007, about 38 percent more than that in 2006, and about 22 percent higher than the initial budget plan. This successful story came from a significant increase in tax paid by the private sector. Relative to GDP, the central government revenue rose to 11.5 percent of GDP, up from 9.8 percent in 2006. EIC - Cambodia Economic Watch – April 2008 xiii The main source of state income remained taxation in 2007, representing about 85 percent of the total domestic revenue. The share of domestic tax in the total tax revenue has increased gradually due to a good performance in the private sector. For 2008, the central government has planned to raise its revenue to CR3,987 billion. Given the projected economy for 2008, and the Government’s recent record in terms of collecting state revenue, the target would be reachable. The total state revenue for 2008 is expected to reach CR4,726 billion, an increase of 17.8 percent on 2007. It is about 11.7 percent of GDP, which remains low compared to that of other countries. To improve revenue collection, more effective measures must be taken to enforce the Law on Taxation: extension of the tax base to the informal sector, and strengthening of the tax audit in order to reduce revenues’ loss through corruption. On the expenditure side, in 2007 the central government expenditure reached CR5,041 billion, 11.5 percent higher than that of the plan. As a share of GDP, it reached to about 14.4 percent in 2007, up from 13.8 percent in 2006. Spending on civil administration rose by 16.3 percent, while that on defense and security increased by 31 percent. Expenditure on priority sectors rose only by 16.2 percent in 2007, it was the same pace as in other ministries. For 2008, the Government expects to expand disbursement to about CR5,673 billion, or 12.5 percent higher than the actual 2007 disbursement. It was planned that the civil administration disbursement would decrease by 6.2 percent, while that for defense and security would increase slightly by 1.4 percent in 2008. Except that of rural development, spending on other priority sectors in 2008 was lower than the average growth of other sectors. Nonetheless, the unallocated budget increased by 158.8 percent in 2008, reaching about 23.4 percent of the total planned expenditure. Budget revenue remains low compared to its expenditure. The deficit reached CR1,026 billion in 2007 attaining 2.9 percent of GDP. This was bankrolled mainly through foreign financing, amounting to about CR 1,615 billion in 2007 (65 percent was loans) since Cambodia is trying to avoid domestic debt financing. This trend will extend to 2008. The public debt stock is estimated at about US$3 billion. Reflecting to continued strong economic growth and the highly concessional structure of Cambodia’s lending, Cambodia’s debt is on a sustainable path. But, its moderate risks do remain, given the current low level of government revenues, the continued existence of external arrears and the potential for contingent liabilities. Progress of Structure Reform Some progress has been made in the Banking Reform. The National Bank of Cambodia (NBC) signed a Memorandum of Understanding on Cooperation with the State Bank of Vietnam in December 2007. Law on Anti-Money Laundering and Terrorist Financing have come xiv EIC - Cambodia Economic Watch – April 2008 into effect and the Financial Intelligent Unit will be established under the control of the NBC. In addition, with a technical assistance from ADB, the NBC has also been drafting Prakas to allow Microfinance Institutes an adequate ability in receiving deposit from clients, and checking the harmonization in the chart of account with the commercial bank. Beside, the Ministry of Economy and Finance also signed an agreement with South Korea’s stock exchange, the fourth largest exchange in Asia in January 2008, to accelerate the establishment of stock market by 2009 In the Public Financial Management Reform, progress is mixed up with some delay. Platform 1 of budget credibility was just finished in December 2007, but some actions do remain. Thus, incomplete actions in platform 1 will be included in the action plan of platform 2 (financial accountability) which will start in March-April 2008. An initiative to the amendment of the Organic Budget Law was substituted by the new law named Draft Law on Public Financial System. It was already in hand of the National Assembly since March 2008. The Law on Finance for 2008 Management was already promulgated in December 2007 and is being implemented. For trade reform, two additional WTO commitment laws, Insolvency Law and Civil Code, were adopted by the National Assembly in October 2007. Up to day, the National Assembly has thus approved only 27 laws out of 46 laws and regulations for the WTO conforming. Some progress was also made in the Trade Facilitation and Competitiveness Project. Much progress of the ASYCUDA project was achieved: the finalization of the ASYCUDA prototype version 1.0 as well as many other technical and legal preparations for the project implementation at the Pilot Site-Sihanoukville Port Customs, which will hopefully start from the first semester of 2008. For the public administrative reform, the index of basic salary of civil servants increased significantly, reaching CR600 in 2008. According to Joint Monitoring Indicators on remuneration and employment policy, the Government commits to increase salary by 20 percent per annum. The Draft Royal Decree on Special Operating Agencies was approved by the Council of Ministers (CoM) in March 2008 and is being sent to the National Assembly. The Special Operating Agency is the unit which acts as the public service delivery under individual structural ministry. For D&D reform, three draft laws were sent to the National Assembly since March 2008. They are Draft Law on Administration of Capital, Province, Municipality, District and Khan, Draft EIC - Cambodia Economic Watch – April 2008 xv Law on Election of Council for Capital, Province, Municipality, District and Khan, and Draft Law on Public Financial System. For the Legal Reform, many draft laws were put to the agenda and debated in the National Assembly meeting in early 2008. Among them, Law on Insolvency, Civil Code, Law on Education, Law on Finance for 2008 Management, and ASEAN Charter were already adopted. However, some draft laws, such as Draft Law on Peaceful Demonstration, Draft Law on Seed Management and Plant Breeder, and Draft Law Civil Aviation are being studied in the each specialized committee. For the Judicial Reform, up to early 2008, only three laws had been promulgated and other five draft laws are in several stages of progress. The Draft Criminal Code, Draft Law on Anti- Corruptions, and Draft Law on the Statute of Judges and Prosecutors are in the Council of Ministers. Draft Law on the Organization and Functioning of the Courts is still in the Ministry of Justice. Draft Law on the Amendment of the Organization and Functioning of the Supreme Council of Magistracy is in the Supreme Council of Magistracy. xvi EIC - Cambodia Economic Watch – April 2008 Recent Economic Part Developments and I Outlook EIC - Cambodia Economic Watch - April 2008 1 2 EIC - Cambodia Economic Watch – April 2008 Chapter 1 Cambodian Economic Growth In 2007, once again, Cambodia realized another double digit economic growth rate, about 10.1 percent; it came after a growth of 10.8 percent in 2006, 13.3 percent in 2005 and 10.3 percent in 2004. It is worth noting that revenue from net domestic tax (excluding subsidy) increased by about 49.8 percent in 2007, compared to only 7 percent and 4.4 percent in 2006 and 2005, reflecting the growth in private sectors. Nonetheless, the real economy (excluding domestic tax revenue) grew only by 8 percent in 2007 compared to the 11 percent and 13.8 percent in 2006 and 2005, respectively. Table 1.1: Cambodia's Real GDP Growth by Sector (%, 2000 prices) 2003 2004 2005 2006 2007e 2008p Agriculture 10.2% -1.0% 15.5% 5.5% 5.2% 5.0% Paddy 22.3% -12.2% 43.7% 4.3% 7.5% 4.5% Industry 12.4% 17.0% 12.9% 18.4% 8.0% 5.6% Garments 16.8% 24.9% 9.2% 20.4% 10.0% 8.3% Services 5.9% 13.2% 13.1% 10.1% 10.2% 9.4% Tourism -16.7% 23.4% 22.3% 13.7% 10.3% 11.0% Sub-Total 9.0% 9.4% 13.8% 11.0% 8.0% 7.0% Taxes less Subsidies -0.8% 29.4% 4.4% 7.0% 49.8% 7.4% Total GDP 8.5% 10.3% 13.3% 10.8% 10.1% 7.0% Non-Agriculture 7.7% 15.8% 12.3% 13.0% 12.1% 7.8% Sources: Compiled from NIS for2003-2007, EIC projection for 2008 Unlike 2006, the 2007 growth was mainly boosted by the continued expansion of garment exports, tourist activities, and an impressive increase in paddy and other crops production, despite the consequences of sharp increases in the prices during the year. Construction was significantly slowed down in 2007. The growth of the agricultural sector expanded moderately, whereas that of non-agricultural sectors was 12.1 percent in 2007, about 1 percent lower than in 2006. The country’s overall economic growth rate for 2007 remained high, compared with an expected rate of 7.1 percent in Lao PDR, 4.8 percent in EIC - Cambodia Economic Watch - April 2008 3 Thailand, and 8.5 percent in Vietnam, but was slightly lower than the 11.4 percent expected for China.1 Based on current economic trends, the main Cambodian economic growth-supporting industry, the garment industry, appears to be questionable in 2008. Some external factors, such as the current recession of the US and the arrival to year-end of safeguarding measures imposed by the US and EU against China export will affect the growth of Cambodia’s garment industry. The growth prospected for the garment industry will thus be slightly slowed down in 2008 and the next coming years. In addition, the residential construction growth is also expected to continue to slow-down significantly or even have negative, along with bubble risks, given higher prices of imported construction materials and housing loan credit restriction. Nonetheless, the number of foreign tourist arrivals in Cambodia is expected to continue to increase steadily. By contrast, the agricultural sector remains unpredictable since it is still dependent on weather conditions. The investment in agro-industry remains slim in 2008. If, and only if, this sector were not to meet any serious problems as a result of severe drought or inundation, Cambodia would only enjoy moderate economic growth during the next few years, beginning with an expected growth rate of about 7 percent for 2008. Compared with that of other countries in the region, Cambodian economic growth of 2008 is lower than the 9 per cent, 8.5 percent and 8.2 percent of China, Vietnam and Laos PDR, respectively. In addition, the growth remains narrow-based. However, it seems that the upcoming Cambodia Stock Exchange Market (CAMEX) and the exploitation of the Extractive Industry such as oil and gas in medium term are attracting the attention of many big investors to Cambodia. Thus, Cambodia’s economic growth could be speeded up if some critical reforms are seen in significant progress. These reforms, together with effective anti-corruption policies, could provide a preferred environment and opportunity for higher economic growth. 1.1. Agriculture 2007 was another rainy year, following an equally wet year both in 2006 and in 2005. The agricultural sector remained natural resource-based and achieved only 5.2 percent growth in 2007, down from the 5.5 percent in 2006. This growth was mainly boosted by the expansion of cultivated areas, higher exported agricultural product prices, and a continued increase in livestock production. 1 East Asia Update - April 2008, The World Bank. 4 EIC - Cambodia Economic Watch – April 2008 Effective irrigation and natural resource management systems are still urgently required in order to achieve sustainable agricultural growth and thus poverty reduction, since the agricultural sector is the main source of income for the country’s poorest inhabitants. Based on current trends, the growth of the agricultural sector remains slim for the next coming years, with about 5 percent in 2008. Crops, especially paddy, remained the main source of income for Cambodian farmers. The weather conditions in 2007 were considered as favorable as those in the last two years. Cultivated areas kept increasing in 2007, by about 32,000 ha for paddy, even though some places were flooded by rains and much cultivated land was sold to speculators. The sale prices increased higher than its cost of production, thanks to the impressive increase of demand from neighboring countries. As a result, during 2007, paddy value added increased significantly by about 7.5 percent compared with a 4.3 percent increase in 2006, and that of other crops also continued to grow at a significant rate of about 9 percent compared with the 6.5 percent in 2006. Based on the current situation, the paddy is expected to continue to increase in 2008 with a moderate rate, it is expected to be only 4.5 percent, whereas the growth rate of other crops remains strong. Livestock is a potential source of income for Cambodian farmers, besides the revenue they receive from crop cultivation. During 2007, the value added of livestock increased slightly by 3.7 percent, 4.5 percent lower than that of 2006, despite the fact that the government suspended many imported livestock products. Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) 2003 2004 2005 2006 2007e 2008p Paddy 22.3% -12.2% 43.7% 4.3% 7.5% 4.5% Other Crops 21.5% 9.5% 12.2% 6.5% 9.0% 10.1% Livestock 5.7% 3.9% 5.6% 8.2% 3.7% 6.6% Fishery 1.7% -1.7% 5.6% 3.8% 0.8% 0.8% Rubber & Forestry -3.8% -0.3% 3.5% 6.6% 3.8% 1.2% Total Agriculture 10.2% -1.0% 15.5% 5.5% 5.2% 5.0% Sources: NIS for2003-2007, EIC projection for 2008. EIC - Cambodia Economic Watch - April 2008 5 The limited initial capital, together with higher interest rate or inaccessibility of credit, would be the major constraints on livestock growth. Investment in this sector remained slim despite significant increase in local consumption. Cambodia continued to import large quantities of livestock products from neighboring countries. Based on the current situation in the last few years, the growth rate of livestock for the next few years will increase, but will remain moderate; it is expected to be about 6.6 percent in 2008. Investment incentive for Small and Medium Enterprises could speed up investment in this sector. Fishery production in 2007 was relatively the same as in 2006. In 2007, marine fish and aquaculture increased slightly by 5 percent and 3.1 percent respectively, whereas inland fish decreased by 6.4 percent. The fisheries’ value added is expected to grow slightly, by about 0.8 percent in 2007, down from the 3.8 percent in 2006. Small fish, used for the production of a popular salt fish pâté, remained abundant, while normal fish production continued to be low. However, the number of illegal fishing complaints, the use of illegal fishing instruments and the destruction of essential fish rearing areas, remain important concerns for the sustainable growth of the sector. These practices have led to the decline of fish stocks and a fewer number of places for the fish to breed. Thus, the prospects for expanding fish stocks in the coming years are slim. Regarding other agricultural sectors, the forestry sector growth was expected to be about 3.3 percent in 2007, down from the 7 percent in 2006. The growth prospected for forestry sector is still slim for the next coming years. Besides, the rubber sector is expected to grow at a significant rate, about 9.4 percent in 2007 due to the rubber price increase in the world market. However, the old-rubber trees were cut and were replaced by new-rubber trees, which are still young to provide the raw rubber. The rubber growth is thus expected to be flat in 2008. 1.2. Industry For the industry sector, its double-digit growth rate could not be maintained in 2007 due to the significant slower growth of the garment and construction sectors. The industrial growth rate grew only by about 8 percent in 2007, about 10 percent lower than in 2006. This growth continues to be boosted mainly by the expansion of the garment industry, combined with a moderate growth in other industries. Based on the current trend, the prospects for growth in the industrial sector will be moderate in the coming years. For 2008, industrial production 6 EIC - Cambodia Economic Watch – April 2008 is expected to reach about 5.6 percent in 2008, given assumption of a slower growth for the garment industry and a negative growth for construction. Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) 2003 2004 2005 2006 2007e 2008p Garments 16.8% 24.9% 9.2% 20.4% 10.0% 8.3% Food, Beverages & Tobacco 4.7% -5.3% 9.0% 3.3% 3.1% 5.5% Electricity, Gas and Water 8.7% 11.3% 12.7% 31.5% 11.7% 12.2% Construction 11.2% 13.2% 22.1% 20.0% 5.3% -2.5% Other industries 4.3% 9.3% 17.4% 14.1% 5.7% 8.0% Total Industry 12.4% 17.0% 12.9% 18.4% 8.0% 5.6% Sources: Compiled from NIS for2003-2007, EIC projection for 2008. The garment industry, the industrial sector’s main contributor, remained strong in 2007, but the growth was significantly slowed down. According to the Customs Department of Ministry of Economy and Finance (MEF), the quantity of garment exports for 2007 increased by only 11.7 percent from 2006, of which those to the US and EU markets grew by 10.9 and 4 percent respectively. This growth is mainly a consequence of the safeguarding measures imposed by the US and EU to restrain Chinese exports, and the labor compliance project monitored by the ILO, which created a niche market for Cambodian garment products. Cambodia’s WTO membership and the reduction of export transaction bureaucracy also helped to maintain the sector’s growth. It is worth noting that the growth of the quantity of the garment export in 2007 was significantly slowed down from that of the 32.5 percent in 2006, of which those to the US and EU markets were slowed-down from 34.3 percent and 23.6 percent respectively. In addition, the overall unit prices of Cambodian garment products on the world market during 2007 continued their slight decline, of about 3.1 percent, due to the emergence of many big competitors, especially China and Vietnam. Cambodia clothing exports to the US directly compete with most of those from Vietnam (88 percent) and China (70 percent). The US economic recession could be also the reason Cambodia garment exports slow down. In total, Cambodia’s garment industry posted another slower growth rate in 2007, of about 10 percent, compared with the 20.4 percent in 2006. The growth prospected for the Cambodian garment industry is very slim in the next coming years since the safeguarding measure, which is the EIC - Cambodia Economic Watch - April 2008 7 main factor for the growth of the Cambodian garment export, will be expired at the end of 2008. Rising competitors such as China as well as Vietnam would be a big concern for the Cambodian garment industry because Cambodia is seen as weak in term of international competitiveness compared to those countries.2 Data compiled from the US department of Commerce revealed that Cambodia was ranked 10th textile importer behind China, India and Vietnam that were the 1st, 3rd and 4th textile importer to US market respectively. In term of growth rate, the Cambodian garment product was ranked 3rd during 2007 after Vietnam and China which were ranked 1st and 2nd respectively. In addition, it is worth noting that the Cambodian garment product growth rate to the US market is on a downward trend, which is not by contrast the case for those from Vietnam and China. The growth of garment products exported from China and Vietnam to the US market is on the upward trend, which means that garment products produced in Vietnam and China are more competitive than those produced in Cambodia. Figure 1.1: US Textile Import of Top Trading Partners (% increase) Vietnam China Cambodia Nicaragua Italy Indonesia Bangladesh El Salvador Honduras India Malaysia Pakistan 2007 Thailand 2006 Sri Lanka Taiwan Mexico Philippines Korea, South Hong Kong Total -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% Sources: US department of Commerce, Census Bureau, Foreign Trade Division. 2 World Economic Forum report 2006-2007 8 EIC - Cambodia Economic Watch – April 2008 However, Cambodian garment products already created its niche market by a positive evaluation of the labor compliance project monitored by the International Labor Organization (ILO). Together with efforts of the Government to reduce bureaucracy of transaction export, such as one Window Service, and the World Trade Organization (WTO) membership, Cambodia seems to be able to keep its big clients/buyers in EU and US. In total, the Cambodian garment industrial growth will fluctuate to the trend of the global demand in the coming years. In addition, due to a recent increase of minimum wage of garment workers in Vietnam and China, hundreds of garment factories are expected to move elsewhere. Cambodia seems to be a potential place for them. Nonetheless, given the current US economic recession, and the validity of safeguarding measures of EU and US against China exports, the growth prospected for the Cambodian garment industry for 2008 is moderate; it is expected to be about only 8.3 percent. The growth may be speeded up if, and only if, Cambodia could get the US duty free under the US’ New Partnership for Development Act. For the construction sector, the growth was also slowed-down, even if the number and value of construction projects increased significantly. Construction projects were almost doubled in Phnom Penh; however, most of them were long term projects. According to data compiled from MEF, the imported cement and steel sectors decreased by 6 percent and 1.4 percent in term of quantity, while prices increased by 23.2 percent and 8.9 percent, respectively during 2007. Table 1.3b: Imports of Cement and Steel (000’s tons) 2006 2007 %change Cement 1,407 1,322 -6.0% Steel 147.1 145.1 -1.4% Sources: Cambodia’s Customs Department Thus, the growth rate for the construction sector was expected to be at only about 5.3 percent in 2007, down from an increase of 20 percent in 2006. The slowed-down trend of this sector will continue in 2008, given the continual increase of its import raw material. The construction projects are thus likely to decrease in 2008 compared to those of 2007. The expected growth of other industrial sub-sectors, such as food, beverage and tobacco, grew at a slower rate in 2007 given the investment in EIC - Cambodia Economic Watch - April 2008 9 these sectors remain limited. Normally, the depreciation of the riel against the Thai baht would help increase the competitiveness of local products against those imported from Thailand. But, Vietnamese products seem to replace Thai products in the Cambodian market. The growth rate is expected to slightly slow down reaching 3.1 percent in 2007, compared with the 3.3 percent in 2006. The growth of electricity, gas, water and other manufacturing sectors for 2007 was also significantly slowed-down compared to that of 2006. Growth prospected for these sectors is still moderate, as Cambodia starts to import more and more electricity from neighboring countries. 1.3. Service Last but not least, the service sector could maintain its significant growth in 2007. The service sectors, excluding public administration, expanded by about 10.2 percent in 2007, slightly down from the 10.6 percent in 2006 and 13.4 percent in 2005. This is mainly due to annual increases in the number of foreign tourist arrivals in Cambodia and a significant expansion of the economic activity, especially trade, transportation, communication, and financial service sectors. Based on current trends, the growth of the service sector in 2008 will remain strong; it is expected to be about 9.4 percent. Table 1.4: Trends of Service Sectors (% increase, 2000 prices) 2003 2004 2005 2006 2007e 2008p Transport & Communication 3.2% 9.5% 14.5% 2.1% 7.2% 6.2% Trade 3.7% 5.9% 8.5% 7.1% 9.5% 8.5% Hotels & Restaurants -16.7% 23.4% 22.3% 13.7% 10.3% 11.0% Other Private Services 17.4% 19.2% 13.5% 14.8% 12.2% 11.0% Total Private Services 6.5% 14.3% 13.4% 10.6% 10.5% 9.7% Public Administration -4.5% -6.7% 5.9% -1.3% 0.1% 2.7% Total Services 5.9% 13.2% 13.1% 10.1% 10.2% 9.4% Sources: NIS for2003-2007, EIC projection for 2008. The hotel and restaurant sector contributed significantly to the service sector’s growth, expanding by about 10.3 percent in 2007, about 3 percent less than in 2006. This is due to the increasing number of international tourist arrivals in Cambodia; up by about 18.3 percent in 2007, (to around 1.9 million), compared to an increase of 20 percent in 2006. 10 EIC - Cambodia Economic Watch – April 2008 Based on this trend, the number of foreign tourist arrivals in the coming year will continue to grow significantly. Thus, the hotel and restaurant sector will remain strong; it is expected to be about 11 percent in 2008. Trade makes up the most significant share of the service sector, followed by transport and communication. Because of the good performance of economic activities the last few years, the growth rate of these sectors continued to grow at a faster pace despite the high increase in oil prices. It is expected to be about 7.2 percent for trade and 9.5 percent for transport and communication in 2007, compared to a growth of only 2.1 percent and 7.1 percent respectively in 2006. However, the physical infrastructure remains poor, in particular roads and railways. Further rehabilitation and reconstruction of roads is still essential, in order to open up trading opportunities in remote areas of the country. Increased mobility of people, goods and services will in turn create a positive circle of market dynamics. In 2008, nonetheless, the growth of trade and transportation activities remains strong. Finally, during 2007 the financial and real estate sectors continued to grow significantly, by about 22.2 percent and 10.8 percent respectively, which was relatively the same as that of 2006, because of the continued increase in economic activities and bank trust. Other service sectors remained strong, but grew at slightly slower rates in 2007, averaging around 12 percent, according to the NIS. However, financial services are still basic and major providers are concentrated in Cambodia’s main cities. Credit in rural areas is available through a few commercial banks and specialized microfinance institutions, but its dominant source appears to be informal lending (usurers). Nonetheless, based on the current trend and economic activities, the growth prospect for these sectors remains strong for the next coming years. EIC - Cambodia Economic Watch - April 2008 11 12 EIC - Cambodia Economic Watch – April 2008 Chapter 2 Trade, Investment and Productivity External trade and FDI have contributed largely towards boosting the Cambodian economy during the last ten years. Exports of garment products and tourism have also made substantial contributions to the country’s balance of payments during that period. Cambodia’s FDI seems to have been on an upward trend since 2002, thanks to investments in the construction, hotel and garment sectors, and the up-coming Cambodia stock exchange market and impressive potential revenue from extractive industries. 2.1. External Trade and Capital Movements Data compiled from the National Bank of Cambodia revealed that the total exports (including re-exports) in 2007 increased only by 9.4 percent, to about US$4 billion, reflecting a slower growth in the export of garments. The export of agricultural products significantly increased, but remained low. Meanwhile, imports increase was also slowed-down to 13.2 percent and reached about US$5.4 billion. Imports of petroleum and raw materials, especially those related to the garment sector, made up the lion’s share of that figure. As a result, the total trade deficit widened, reaching more about US$1.3 billion in nominal terms, or about 15.5 percent of GDP, up from the 14.5 percent in 2006. Due to the significant increase in the number of foreign tourist arrivals in Cambodia, the income generated from tourist spending (travel) is estimated to have reached about US$1.1 billion in 2007, representing 17.8 percent up on 2006. Unfortunately, revenue from tourist transportation remained low, reaching only about US$210 million, since Cambodia does not yet have a stake in any of the airlines or other transportation industries serving the international markets funneling tourist arrivals into the country. To sum up, the surplus in the service sector continued to improve significantly in 2007, up by 29.2 percent from 2006, and reaching 7.5 percent of GDP. The income account for 2007 was in deficit by about US$360 million, and represented about 4.2 percent of GDP, up from 4 percent of GDP in 2006. This was mainly due to large outflows of income, such as dividends and the profits of foreign investments in the country, especially the garment EIC - Cambodia Economic Watch - April 2008 13 industry, and payments for foreign technical assistance by donors, which reached US$90 million. Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) 2003 2004 2005 2006 2007p 2008p Exports of Goods 2,087 2,589 2,910 3,694 4,042 4,527 Imports of Goods 2,668 3,269 3,928 4,749 5,377 6,513 Trade Balance -581 -681 -1,018 -1,056 -1,335 -1,986 Agriculture 258 179 350 401 532 674 Textiles & Garments 827 1,082 1,173 1,409 1,393 1,536 Oil & Gas -428 -610 -842 -1,123 -1,306 -1,956 Other Goods -1,239 -1,332 -1,698 -1,742 -1,953 -2,239 Balance of Services 114 291 471 504 651 851 Transportation -157 -194 -233 -271 -297 -383 Travel 353 556 743 841 1,012 1,274 Others -82 -72 -38 -65 -64 -40 Balance of Incomes -179 -221 -254 -290 -360 -430 Balance of Transfers 480 497 535 764 797 809 Private Transfers 153 176 209 315 381 383 Government Transfers 326 321 326 449 416 426 Current Accounts -167 -115 -265 -77 -247 -756 Financial Accounts 244 219 335 324 605 714 Official Loans (net of amortization) 149 154 144 123 120 125 Foreign Direct Investment (FDI) 141 279 381 408 475 558 Others -46 -214 -190 -206 11 31 Change in Foreign Reserves 77 105 70 246 359 -42 At the National Bank (NBC) 74 70 109 182 277 240 Outside NBC 3 35 -39 65 82 -282 Sources: Compiled from NBC for 2003-2007, EIC projection for 2008. During the same period, net private transfers increased by 20.8 percent and reached US$381 million in 2007. Combined with the large inflow of foreign aid, Cambodia’s transfers accounted for a surplus of about US$797 million in 2007, 9.2 percent of GDP. As a result, the current 14 EIC - Cambodia Economic Watch – April 2008 account deficit, including official transfers, increased to US$247 million and accounted for about 2.9 percent of GDP. Nevertheless, the financial accounts were in surplus by about US$605 million, reaching 7.1 percent of GDP in 2007. This surplus was almost doubled compared with 2006, because of a significant increase in foreign investment in Cambodia. To sum up, the overall balance of payments was in surplus by US$356 million in 2007, a 45 percent increase on 2006, and reached 4.2 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 the NBC’s foreign reserves, but also the foreign currency held by other economic agencies as well as households. For 2008, the growth of the external trade (both export and import) is expected to slow-down because of a slower increase of Cambodian garment exports, a slower growth of the importation of raw material used in the garment industry and the construction industry.3 Nevertheless, the trade deficit is expected to significantly deteriorate, because of sharp increase in prices of oil and other construction materials in the international markets. Therefore, Cambodia’s trade deficit may reach 19.6 percent of GDP in 2008, up from 15.5 percent in 2007. Despite the continuous improvement of balance of services, thanks to the expansion in the tourism sector, the deficit of current accounts is expected to reach 7.5 percent of GDP in 2008, up from only 2.9 percent in 2007. The deficit was partly financed by foreign aid, under the form of grants and loans, and foreign private investment in Cambodia, which represented about 7 percent of GDP. Overall, the Cambodia’s balance of payments for 2008 is expected to be slightly in deficit, for the first time since 2001. 2.2. Private Investment and Stocks of Capital In 2007, the Council for the Development of Cambodia (CDC) approved 130 investment projects and about US$2.7 billion of fixed assets. Compared to 2006, the number of investment projects increased by 31.3 percent, but the fixed assets involved was relatively the same, (excluding the World City project with US$2 billion of fixed assets in 2006). 3 Beside, the cement could be produced in Cambodia. EIC - Cambodia Economic Watch - April 2008 15 Most investment projects belonged to the garment, mining, tourism, and agro-industry, which accounted for 39, 19, 11 and 10 respectively of approved investment projects and US$170 million, US$31 million, US$1.1 billion and US$160 million of fixed assets. This was reflected in the high growth of garment exports, tourism and mining during 2007. It is worthy noting that investment in agro-industry has been increasing in recent years reflecting a higher price and high production of agriculture during these years. Table 2.2: Approved Private Investment Projects* 2002 2003 2004 2005 2006 2007 Number of Approved Investment Projects Total 37 66 60 104 99 130 Garments 16 31 35 53 49 39 Hotels 4 11 3 4 4 11 Others 17 24 22 47 45 80 Fixed Assets Approved (Millions of US Dollars) Total 240 314 231 695 4,451 2,667 Garments 18 75 85 118 212 171 Hotels 47 114 23 65 22 1,101 Others 175 125 123 512 2,217 1,395 Source: Compiled from CDC, Cambodian Investment Board, (*) Excluding registered investments of mega-projects of more than US$1 billion. Regarding the actual investment projects in 2008, the growth of investment in garment factories seems to increase in 2008, despite the approaching end of the validity of US and EU safeguard measures, because Cambodia could host many foreign investors moving out from Vietnam and China. Nonetheless, investment prospected in the construction sector is slim in 2008, because of the continued increase of imported raw materials used for construction. In addition, given a limited infrastructure development and a lack of skilled human resources, projected growth for the agro-industry is still moderate. Nonetheless, the coming Cambodian Stock Market and massif money exploited from oil and gas industry is still catching the attention of many foreign investors. To sum up, the growth of investment projects implemented in 2008 keeps increasing, but at a slower pace compared to that of 2007. The updated data from the CDC for January revealed that 6 investment projects were approved with US$27 million of fixed assets. 16 EIC - Cambodia Economic Watch – April 2008 Four of the six approved projects in January 2008 were those of the garment sector. 2.3. Productivity Productivity is the key to increased competitiveness and better businesses that are attractive to investors. According to an EIC estimate, the total productivity of workers (value-added per worker) in Cambodia increased by about 5.1 percent per annum during the last decade, while real GDP growth rose by 9.6 percent per annum. This growth has allowed Cambodia to keep its competitiveness relatively strong. Table 2.3: Productivity of Workers (% Increase, US$2000 price) 2003 2004 2005 2006 2007e 2008p Agriculture 7.7% -3.1% 13.0% 3.3% 3.5% 3.5% Paddy 19.3% -14.2% 40.5% 2.2% 5.6% 3.0% Industry 6.5% 7.4% 2.3% 6.2% 2.3% 1.1% Textile & Garment 10.8% 9.4% -0.7% 5.6% 1.7% 0.3% Private Services 2.4% 8.6% 5.1% 3.6% 6.5% 7.3% Tourism -14.3% 8.2% 7.9% 5.1% 3.9% 4.1% Total (*) 6.2% 6.1% 9.6% 7.0% 5.5% 5.0% Source: EIC Estimates. (*) Excluding Public Administration. The growth of the agricultural production in 2007, mainly paddy production, has increased the growth rate of its productivity. The labor productivity in the agriculture sector grew by 3.5 percent in 2007, up from 3.3 percent in 2006. Again, the agricultural sector remains almost totally dependent on weather conditions. The key strategy to keep steady productivity growth is to invest in the irrigation system. Based on the performance of the agricultural sector in 2008, the labor productivity is expected to increase by the same pace as the 3.5 percent in 2008. In the mean time, the productivity of the garment industry increased only by about 2.3 percent in 2007, down from the 6.2 percent increase in 2006. This is because of a slower growth of garment product exports, despite growing learning experiences and additional trainings at the factory middle management level. Labor productivity of the construction sector increased at a slower rate, while that of other industrial sectors continued their growth with a moderate rate. Based on the EIC - Cambodia Economic Watch - April 2008 17 performance of the industrial sector in 2008, the labor productivity is expected to increase by only 1 percent in 2008. In contrast, the labor productivity in the service sector (excluding public administration) increased at a faster rate of about 6.5 percent in 2007, up from the 3.6 percent increase in 2006. This is largely due to the significant increase of labor productivity in the real estate and financial sector, combined moderate growth of other service sectors. To sum up, the total annual worker productivity growth slowed down to 5.5 percent, reaching US$1,037 per worker in real term. Based on the economic performance in 2008, the growth of the total labor productivity is expected to carry on with 5 percent and reach US$1,089 in 2008, mainly supported by a 7.3 percent increase in labor productivity in the private service sector. 18 EIC - Cambodia Economic Watch – April 2008 Chapter 3 Price and Monetary Development The growth of Cambodia’s economy will be substantial if inflation and the Riel remain stable. Cambodia’s inflation is reaching the peak in 2007 after slowing down in 2006 due to a significant continued increase in transportation and communication prices, and the increase in food prices. The Riel was slightly appreciated against the US dollar because of the prudent monetary policy of the NBC and especially the US economic recession. The trend is expected to slow-down for the coming years. 3.1. Inflation Together with a high economic growth, inflation (December to December) has jumped to the peak level of about 10.8 percent in 2007, after slowing down by about 2.8 percent in 2006. Unlike 2006, 2007’s inflation figure was boosted mainly by high food costs and high energy costs. Impressive increase of credit for the private sector was also the reason. Figure 3.1: Cambodia’s Consumer Price Index (December 2002=100) Source: Compiled from National Institute of Statistics. The transportation and communication index rose by 13 percent in December 2007, up from the 7.4 percent in December 2006. The price of food rose by about 19.8 percent in December 2007 compared to only 2 percent in December 2006. In contrast, other costs continued to increase EIC - Cambodia Economic Watch - April 2008 19 at the moderate pace of about only 5 percent in December 2007 compared to the 2 percent in December 2006. Although the production of some food-based agricultural products, such as crops and livestock, is growing fast, food prices in Cambodia keep increasing significantly. This increase in prices at the local market is mainly due to over-exportation of local production to neighboring countries. In general, Cambodia exports unprocessed agricultural products, but imports finished goods. The Investment climate is yet good for investment in modern food processing. The growth of the price of transportation also increased significantly mainly due to the consecutive growth of the price of gasoline. This is mainly caused by the increase in crude oil prices on the international market during that period as well as the rigid decline in domestic gasoline prices. Other prices grew at a moderate rate in 2007, higher than in 2006. Based on the current situation and trends from previous years, the overall inflation in 2008 remains high and is expected to be about 9 percent in year average, 4 percent higher than that of 2007. Natural resource management for higher and sustainable growth of agricultural production and a stable exchange rate are crucial in order to reduce the inflation rate, and increase competitiveness of domestic products. 3.2. Exchange Rate In a dollarized economy, the country’s economic situation will depend largely on the US economic policy because local monetary policy is useless. The riel was relatively stable in 2006 and was slightly appreciated against the US dollar in year average by about 1.2 percent in 2007. The riel fluctuated at around the average exchange rate in 2007 about CR 4,056 per US dollar, compared to that of about 4100 per US dollar in 2006. The riel depreciated slightly in the first nine months of 2007 and re- appreciated from October 2007 to about less than CR4,000 per US dollar. Together with the prudent monetary policy of the NBC and the expansion in economic activities in rural areas for the last three years, especially activities related to agricultural products, the relative strength of the riel was mainly a result of the US economic recession. The riel is largely used in informal sectors that are mostly located in the rural and in some urban areas. In contrast, the slower growth expected in the agricultural sector, will lead to a slower increase in demand for the riel in coming years. 20 EIC - Cambodia Economic Watch – April 2008 Figure 3.2: Cambodian Riel against US$, Thai baht, and Vietnamese dong (December 2002=100) Source: Compiled from the International Financial Statistics of the IMF. On the other hand, surges in imports, especially of construction materials and vehicles, along with higher prices for imported petroleum, are factors that will lead to a stronger demand for foreign exchange, especially the US dollar. Furthermore, the sending of US dollars abroad, as well as the expected slowdown in the growth of the garment export industry, which accounts for the most significant inflow of US dollars into the country, will cause a shortage of that currency in Cambodia. To sum up, an expected strong demand for US dollars and shortage in their supply, as well as a slower increase in demand of the riel will then put some pressure on the riel against the dollar in 2008. Currency speculation during the election period could also reason in the depreciation of the riel in the coming years. Nonetheless, the extent of the US economic recession into 2008 would continue to weaken the US dollar and the surplus of the balance of payment would enable the government capacity to maintain a stable exchange rate of the Riel against the US dollar. Beside the US dollar, the Thai baht and Vietnamese dong are also widely used in Cambodian border provinces, because of strong border trade activities. The riel was slightly appreciated against the Vietnamese dong by about 1.8 percent in year average of 2007, trading at around CR25 for 100 dongs. But the riel significantly depreciated against the Thai baht, by about 8.4 percent in year average of 2007 compared to that of 2006. The appreciation of the Thai baht should thus be beneficial for border trading to Cambodian farmers. EIC - Cambodia Economic Watch - April 2008 21 A stable exchange rate is highly appreciated in the context of Cambodia situation since our export partner is the US4. Even so, Cambodia import partners are the ASEAN countries, mainly Thailand, Vietnam and Singapore. The riel depreciation against the Thai baht encouraged Cambodia trading with Thailand, but it also increased the domestic consumer prices because of limited local production capacity that forced Cambodia to use higher imported products. Thus, the fluctuation of the riel against other trade partner currencies, such the Thai baht and the Vietnamese dong, must also be taken into consideration in the government monetary policy. 3.3. Money Supply During 2007, the money supply increased significantly by 62.9 percent, reaching CR11,311 billion by December. This surge was due to an impressive increase in foreign currency deposits that reflected strong activity in sectors such as tourism, garments, and construction. As a proportion of GDP, the total money supply reached 32.3 percent in 2007, an increase from only about 23.3 percent in 2006. During 2007, the total money continued to be dominated by foreign currency, which represented about 80.8 percent of the total money supply and reached 26.1 percent of GDP. The riel liquidity remained limited during the same period, representing only about 17.6 percent of the total money supply recorded by the NBC and only 5.7 percent of GDP. Riel liquidity increased by 24.9 percent in December 2007 compared to December 2006, whereas foreign currency deposits expanded even more sharply, by about 75.9 percent in the same period. This trend is expected to continue into 2007, but at a slower pace because of an expected slower growth in the garment and construction industry. On the demand side, credit to the public sector continued to decline radically due to an increase in government deposits. Credit to the private sector increased by 76 percent in December 2007 compared to December 2006. This credit expansion was the result of the continued decline of interest rates, growth in the manufacturing and service sectors, and the expansion of the private banking system. However, a large amount of foreign currency, especially US dollars, was sent abroad, since many major investors are foreigners and Cambodia’s banking system is inadequate. These trends are expected to continue in 2008, but at a slightly slower pace. 4 The US is main market for about 70 percent of Cambodian garment products, which represent a lion share of total Cambodia export. 22 EIC - Cambodia Economic Watch – April 2008 Table 3.1: Cambodia’s Monetary Survey (Billions of Riel) 2003 2004 2005 2006 2007p 2008p Total Money Supply 3,329 4,329 5,025 6,942 11,311 14,216 Local Currency in Circulation 908 1,115 1,282 1,600 1,990 2,204 Foreign Currency Deposits 2,310 3,079 3,589 5,196 9,138 11,791 Other Liquidity 111 135 153 147 183 222 Total Money Demand 3,329 4,329 5,025 6,942 11,311 14,216 Credit to Private Sector 1,337 1,817 2,394 3,628 6,385 8,401 Credit to Public Sector -128 -209 -421 -951 -1,815 -1,061 Other Money Demand 2,120 2,721 3,052 4,266 6,741 6,876 Source: Compiled from NBC for 2003-2007, EIC projection for 2008. 3.4. Interest Rates According to the National Bank of Cambodia (NBC), the average nominal interest rate on 12-month deposits in riel and in dollar were 7.1 percent and 4.9 percent respectively in December 2007, which was higher than the 6.4 percent and 4.8 percent in December 2006, respectively. Such a slight increase resulted from a shortage of cash deposit to respond to recent impressive increase of credit demand of the private sector. The need of credit for housing loans and land speculation were the main reasons behind the increase of the total credit demand. Table 3.2: Cambodia’s Interest Rates (% per annum, end of period) 2003 2004 2005 2006 2007 Riel 12-month Deposit Rate 7.0 6.6 6.8 6.4 7.1 US$ 12-month Deposit Rate 4.0 3.7 4.0 4.8 4.9 Riel 12-month Lending Rate 21.1 18.7 18.6 23.1* 22.3* US$ 12-month Lending Rate 17.3 16.7 16.2 16.7 16.0 Inflation rate in riel (year on year) 0.5 5.6 6.7 2.8 10.8 Inflation rate in US$ (year on year) -0.6 4.6 4.1 3.5 12.6 Source: Compiled from NBC and NIS. * The higher figure shown in the table reflects the revised methods used by the NBC. EIC - Cambodia Economic Watch - April 2008 23 Beside, the nominal interest rate for loans in riel and dollar continues to decrease gradually, from 23.1 percent and 16.7 percent in December 2006 to 22.3 percent and 16 percent in December 2007, respectively. This was due to an increasing competition among banks and other credit providers, despite an expansion of credit demand from private sectors. Interest rates in riel were higher than for US dollars, mainly due to depreciation risks and the lack of riel loan credits. With gradually rising confidence in the financial system and economic expansion over the last decade, both deposit and lending rates would appear to decrease slightly on a regular basis. However, higher inflation expected for 2008 would, to a certain extent, keep interest rates, as well as the gap between real and nominal interest rates, high. Lending rates were more than 10 percent above deposit rates and were still high, because of a shortage of local deposits required to satisfy a strong demand for credit (resulting from economic expansion), and owing to the high risk of 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, forcing banks to charge higher rates. In addition, to avoid the high risk of unpaid loans, a large amount of local deposits have gone overseas, and are therefore unavailable for lending to local borrowers. In the construction sector, a significant part of credits for local borrowers come from development fund overseas. Thus, most Cambodians have limited access to credit, and annual interest rates on loans or deposits in riel and US dollars are quite high compared to those of neighboring countries. Cambodians, particularly those in rural areas, are mostly short of initial capital and unable to benefit from the economic growth. Lower interest rates would encourage them to invest, thereby contributing towards economic growth in these areas. 24 EIC - Cambodia Economic Watch – April 2008 Chapter 4 Fiscal Development and External Debt Overall, the Government has made significant improvements in the implementation of the 2007 revenue collection, since the economic activities are doing well. The total budget execution was done as planned, but was not yet conforms to what was planned for each ministry during 2007. For 2008, the Government planned to increase its revenue by about 21.5 percent and this remains relatively weak compared to the level of nominal GDP, as well as that of Government expenditure. The deficit will be mainly financed by foreign assistance, of which external loans account for about 45 percent. Cambodia’s debt situation remains on a sustainable path with a moderate risk of debt distress. 4.1. Budget Revenue The Government implemented well in terms of collecting the state revenue that it had planned during 2007. The central Government revenue was estimated to reach CR 4,015 billion in 2007, about 22.3 percent higher than the 2007 planned budget. This good performance was likely due to a better achievement in the economic growth. The expected economic growth rate in the planned budget for 2007 was only 7 percent, about 3 percentage point lower than that realized during the period. The main source of government income in 2007 was taxation, which represented about 85 percent of the total domestic revenue, whereas other sources of state income, non-tax revenues, only accounted for around 15 percent. The share of domestic tax in the total tax revenue has also increased gradually due to a good performance in the private sector. Due to an impressive increase on what had been planned in the state revenue in 2007, the amount of revenue in share of GDP increased to about 11.5 percent, which was about only 10 percent for the last few years. This reflected that the performance of the state revenue collection improved moderately in 2007 compared to that of previous years. Nevertheless, Cambodia government’ revenue (relative to GDP) remains among the lowest in Asia. For 2008, the central government has planned to raise its revenue to CR3,987 billion, a 21.5 percent increase on the 2007 planned budget, but slightly lower than the outturn for the year. EIC - Cambodia Economic Watch - April 2008 25 Therefore, EIC forecasts that total government revenue for 2008 should reach CR 4,729 billion, or about 18 percent higher than the planned budget. Table 4.1: Cambodia’s Government Revenue (Billions of Riel) 2003 2004 2005 2006 2007e 2008p Total Domestic Revenue (1) 1,765 2,127 2,626 2,918 4,015 4,729 Tax Revenue 1,220 1,577 1,911 2,271 3,396 4,053 Profit Taxes 110 117 172 262 388 481 Excise Taxes 198 304 380 418 731 898 Value Added Taxes 460 598 730 870 1,143 1,396 International Trade Taxes 395 513 573 645 1,020 1,143 Other Tax Revenue 57 44 56 76 114 135 Non-tax Revenue 545 549 715 647 619 675 Tourism Activity (2) 83 118 160 190 224 275 Quota & Export Licenses 146 76 123 123 123 123 Post & Telecommunications 120 94 123 83 77 111 Other Non-tax Revenue (1) 196 261 310 251 196 167 Memorandum Items Taxes from Petroleum Products 445 442 461 525 565 600 Tax Department Revenue 345 405 556 727 1,029 1,319 Customs Department Revenue 875 1,173 1,355 1,544 2,367 2,735 Sources: Compiled from MEF for 2003-2007, and EIC for 2008. (1) Including Capital Revenue, but excluding MDRI of CR 341 billion from IMF. (2) Including Tourism Income, Civil Aviation and Visa Fees. However, it remains low as a proportion of 2008’s projected GDP compared to that of other countries. To improve revenue collection, more effective measures must be taken to enforce the Law on Taxation, the tax base to the informal sector must be extended, and especially, the tax audit is to be strengthened in order to reduce revenues lost through corruption. Furthermore, anti-smuggling measures should be strengthened at each border checkpoint, since large-scale smuggling continues, especially petroleum, due to the high level of tax imposed in Cambodia compared to that of neighboring countries. 4.2. Budget Expenditure Regarding expenditure, the Government was expected to expense only the amount of its state budget disbursement plans since the Government is restricting its expenditure. Nonetheless, in 2007, the actual central government expenditure was expected to be about 11.5 26 EIC - Cambodia Economic Watch – April 2008 percent higher than what was planned and reached CR5,041 billion, about 10 percent higher than the 2008 planned budget. As a share of GDP, it reached to about 14.4 percent in 2007, up from the 13.8 percent in 2006. On average, spending on civil administration rose by 16.3 percent, while that on defense and security increased by 31 percent, 15 percent higher than 2006’s increase. Expenditure on priority sectors rose by only 16.2 percent in 2007, the same pace as that of other ministries and 6.4 percent lower than the 2006 increase. Table 4.2: Cambodia’s Government Expenditure (Billions of Riel) 2003 2004 2005 2006 2007e 2008p Total Expenditure 2,757 2,962 3,182 4,112 5,041 6,413 Current Expenditure 1,586 1,769 1,967 2,592 3,091 4,073 Civil Administration 1,175 1,346 1,516 2,072 2,410 3,095 Priority Sectors 529 573 644 791 919 1,035 Other Civil Ministries 646 773 872 1,281 1,491 2,060 Defense & Security 411 423 451 520 681 978 Defense 270 272 289 344 505 730 Security 141 151 162 176 176 248 Capital Expenditure 1,171 1,193 1,215 1,520 1,950 2,340 Through National Treasury 333 296 315 379 440 806 Externally Financed Directly 838 896 900 1,141 1,510 1,534 Memorandum Items Wages 615 640 711 822 1,243 1,621 Non-Wages Operating Costs 971 1,130 1,256 1,770 1,847 2,452 Sources: Compiled from MEF for 2003-2007, and EIC for 2008. For 2008, the Government expects to expand its budget expenditure to about CR 5,673 billion, which represents 22.7 percent higher than the 2007 plan or 12.5 percent higher than the actual 2007 disbursement. Compared to 2007’s expenditure, it was planned that civil administration disbursement would decrease by 6.2 percent, while that for defense and security would increase slightly by 1.4 percent during 2008. Also, spending for health, education, agriculture, and rural development would increase by 9 percent, 5.1 percent, 10.6 percent, and 25.9 percent, respectively, compared to the spending of these sectors in 2007. It is worth noting that the increase of these priority sectors, except that of rural development, in 2008 is lower than the average growth of other EIC - Cambodia Economic Watch - April 2008 27 sectors. In addition, the unallocated budget is increased by 158.8 percent in 2008, reaching about 23.4 percent of the total planned expenditure. Nonetheless, EIC expects that the total government expenditure for 2008 will be about 13 percent higher than the Government’s target, due to a better revenue collection, and the necessity of adjusting the salary of civil servants to high inflation. Budget disbursement on priority sectors may reach 2.6 percent of GDP, and expenditure on wages will increase slightly. However, the degree to which the public may benefit from this additional spending could remain limited, since expenditure, particularly on the priority sector, slightly increased and thus remains insufficient for Cambodian needs. In addition, the actual budget allocated to the priority sector is, as experienced from previous years, lower than what have been planned. Thus the budget expenditure policy will probably achieve little in terms of poverty reduction. 4.3. Budget Financing and External Debt Despite significant improvement in tax collection, 2007’s budget revenue was still lower than expenditure. The deficit reached CR1,026 billion, representing 2.9 percent of GDP. This deficit was largely -financed by the foreign aid (CR1,615 billion), of which 45 percent was grants and 65 percent was loans. For 2008, the government budget deficit is expected to increase, but totally financed by foreign aid. Table 4.3: Financing Cambodia’s Budget (Billions of Riel) 2003 2004 2005 2006 2007e 2008p Total Domestic Revenue 1,765 2,127 2,626 2,918 4,015 4,729 Total Expenditure 2,757 2,962 3,182 4,112 5,041 6,413 Total Deficit (cash basis) -992 -835 -556 -1,194 -1,026 -1,684 Foreign Financing 886 894 984 1,584 1,615 1,684 Grants 382 372 538 790 730 749 Loans (net) 504 522 446 794 885 935 Domestic Financing 106 -59 -428 -390 -589 0 Banks -3 25 -199 -333 -1,114 0 Others 109 -84 -229 -57 525 0 Memorandum Items Net Foreign Reserves at National Bank 2,532 2,836 3,336 4,388 5,496 6,458 Sources: MEF for 2003-2007, and EIC projection for 2008. 28 EIC - Cambodia Economic Watch – April 2008 No update data on the public debt yet is available. Nonetheless, the public debt stock was revised to about US$2.4 billion by the end of 2006, thanks to the reduction from US$1,5 billion to US$457 million of the debt owed to the Russian Federation. As percentage to nominal GDP, the public debt accounted for about 33.2 percent in 2006, down from about the 37.1 percent in 2005. Based on Joint IMF/World Bank Debt Sustainability Analysis 2007, the ration debt to GDP is 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.5 With regards to the continued strong economic growth and the highly concessional structure of Cambodia’s lending, debt is on a sustainable path. However, its moderate risks do remain, particularly given the current low level of government revenues, the continued existence of external arrears and the potential for contingent liabilities. If Cambodia reaches debt-rescheduling agreements with the two creditors and begins servicing debts in 2007, the risk of debt distress will decline further, though low revenue collections will continue to pose risks to debt sustainability.6 5 IMF, Cambodia 2007 Article IV Consultation 6 IMF, Cambodia 2007 Article IV Consultation EIC - Cambodia Economic Watch - April 2008 29 30 EIC - Cambodia Economic Watch – April 2008 Chapter 5 Labor Force, Incomes and Poverty 5.1. Labor Force and Under-Employment The latest data from the Cambodia Socio Economic Survey of 2004 revealed that the total labor force was about 7.5 million in 2004 or 56 percent of the total population. And there are more than 0.2 million persons entering into the labor market per year. Based on this trend, EIC estimated that the total labor force would reach about 8.4 million in 2007 and 8.6 million in 2008, of which about 20 percent are under eighteen. With a “narrow definition� of employment, which is, a person is considered to have job if he or she works at least one hour during the past reference survey week, the employment rate was more than 99 percent in 2004. Thus, it should be noted that, this rate included under-employment rate. Table 5.1: Cambodia's Population and Labor Force (% change) 2003 2004 2005 2006 2007p 2008p Population 1.7% 1.7% 2.1% 2.4% 2.0% 1.6% Labor Force 3.4% 3.4% 3.4% 3.3% 2.9% 2.6% Employment 2.6% 3.2% 3.7% 3.7% 2.2% 2.0% Formal Sectors 0.7% 6.4% 5.3% 6.6% 4.2% 4.2% Textile 5.4% 14.1% 9.9% 14.0% 8.2% 8.0% Tourism -2.9% 14.0% 13.4% 8.2% 6.2% 5.9% Others -1.3% 0.8% 0.9% 1.0% 0.6% 0.5% Informal Sectors 2.9% 2.7% 3.5% 3.2% 1.9% 1.6% Agricultural Sector 2.4% 2.2% 2.2% 2.1% 1.7% 1.4% Others 5.5% 4.6% 9.0% 7.9% 2.6% 2.3% Sources: EIC model projections Based on the good performance of the garment industry and tourism, jobs created in these two sectors continue their growth at a significant rate in 2007. For the garment industry, Garment workers employed in the GMAC factories members reached about 350,000 in 2007, about 7.6 percent higher than that of 2006. In total, garment workers are expected to increase by about 8.2 percent in 2007, about 5.8 percent lower than that in 2006 due to the slower growth rate of Cambodia garment product demand on the international market. At the same time, employment in the tourism sector EIC - Cambodia Economic Watch - April 2008 31 is expected to increase by about 6.2 percent in 2007, 2 percent lower than that of 2006. Nonetheless, despite a higher growth rate in the agricultural sector, new employments created in agriculture remains low because this sector hides significant numbers of under-employment. It is expected to be about only 1.7 percent in 2007, down from the 2.1 percent in 2006. The under- employment rate is still high. Most of the workers continue to migrate to Phnom Penh and other urban areas in other sectors which require lower skill, such as the garment factory, construction and tourism, as well as some other service sectors at the borders of the country. In sum, the total employment is expected to grow by about 2.9 percent in 2007, 1 percent lower than that of 2006. On the other hand, new jobs created in 2007 could absorb only about 57 percent of the new labor force. In terms of number, the new entrants in the labor market during the last five years averaged about 250,000 people per year, while new jobs created during the same period was estimated at about 150,000 jobs per year. The formal sectors, such as garment and tourism, contributed to about 25 percent of total new jobs created. Thanks to high economic growth, new jobs created in 2005 and 2006 reached the peak of 200,000 jobs per year. For 2008, based on the expected economic slowdown, employment is expected to increase by 2 percent compared to that in 2007, representing about 120,000 new jobs. 5.2. Incomes There are no updated data to examine the picture on the income for the whole of Cambodia or region by region. However, the regular daily earning surveys conducted by the Cambodian Development Research Institute provide a perspective on wage evolution for a number of vulnerable workers. Figure 5.2 depicts the daily earnings of vulnerable workers between 2006 and 2007. In real terms, the daily earnings of all vulnerable workers increased, except those of unskilled construction workers whose daily earnings decreased slightly. Daily earnings of motorcycle-taxi drivers increased significantly, by about 34 percent in average in 2007 compared to those of 2006; followed by those of small vegetable sellers and porters, whose daily earnings increased by about 25 percent and 20 percent in 2007 compared to those of 2006 respectively. The daily earnings of rice field workers and waitresses in 2007 were relatively the same as those of 2006. 32 EIC - Cambodia Economic Watch – April 2008 Figure 5.2: Real Terms of Daily Average Earnings of Vulnerable Workers (November 2000 prices, Cambodian Riel) Source: Data compiled from CDRI 5.3. Poverty Based on national poverty line, poverty rate in Cambodia has dropped from about 47 percent in 1994 to about 35 percent in 2004. The number of absolute poor declined from about 5 million to 4.7 million during the same period. On average, poverty has been reduced by about 1 percent, representing 30,000 persons per annum. This reduction pace is perceived slower than the 1.3 percent in Lao PDR or 3.2 percent in Vietnam, given its higher economic growth rate. At the same time, Gini coefficient increased from 0.347 in 1993 to 0.403 in 2004. This means that inequality in Cambodia has been high and rising. The slower reduction pace and higher inequality in Cambodia was well reflected to the pattern of the current economic growth. The growth has been mainly generated from the garment and tourism industries. Thus, the growth was concentrated mainly in the capital Phnom Penh and its peripherals, and the tourist town, Siem Reap-Angkor. The growth of the rural-based and agricultural sector, which is the main income source for the poorer and poorest, has been seen as very slow. This pattern of growth may lead to a slower rate of poverty reduction and an increase in inequality. EIC - Cambodia Economic Watch - April 2008 33 EIC made a qualitative survey with leaders of some villages surrounding Phnom Penh, which are seen to get benefit from the growth, and some villages surrounding Siem Reap centre, which are seen to remain poor. Qualitative interview with village chiefs surrounding Phnom Penh revealed that their villagers seem to be benefiting from the fast economic growth during the last decade. The Private sector seems to play a very important role in improving villagers’ living standard. In general, the living standards of our people are growing since their main income sources were changed from crop cultivation to jobs created by the garment industry, construction, and land price increase. Beside, qualitative interviews with village chiefs surrounding Siem Reap centre revealed that the living standards of their people seem to be slightly increased or seem to stay the same. They mostly rely on the crop production, mostly paddy production, which fluctutates greatly according to unpreditable wealther conditions. The benefit from the fast economic growth such as taking a second job at the village-centre such as in the construction sector seems to be messed up by a primary job such as crop cultivation. One drought or inundation is enough to put these villages back to poverty. Thus, their situation is almost unchanged during this period. 34 EIC - Cambodia Economic Watch – April 2008 STRUCTURAL REFORMS: Part CURRENT IMPLEMENTATION II AND PROSPECTS EIC - Cambodia Economic Watch - April 2008 35 36 EIC - Cambodia Economic Watch – April 2008 Chapter 6 Banking and Financial Sector Reform The Financial Sector Blueprint 2001-2010 was revised and replaced by the Financial Sector Development Strategy 2006-2015 (FSDS 2006- 2015). The progress of the blueprint was the important step for speeding up the reform financial sector which plays a crucial role in the Cambodian economy development. This chapter will describe the reform progress and the action plans of banking, non-banking and microfinance sectors. 6.1. Banking and Non Bank Finance The banking system has been growing since the year of reform. According to the 2007 annual report of the National Bank of Cambodia (NBC), there are 24 banks currently operating in Cambodia, of which 17 are commercial banks and seven are specialized banks. In addition, the country’s banking sector cooperated with that of other countries: the recent Memorandum of Understanding on Cooperation between the State Bank of Vietnam and NBC which was signed in December 10, 2007. Several action plans of NBC have been implemented to modernize the banking system as well as to supervise and facilitate the operation. Since, the Credit Information Sharing (CIS) system has been put into place. There are 17 banks which are members in this system and one bank, the CAMCO bank, is readjusting documents in order to become a member as well. However, there are several challenging issues in the CIS system. Some banks have no consent form with customers, some banks do not check the data in the CIS system before approving customers?, membership in the system is not a compulsory requirement for the banks, and there is a limited IT capacity of members 7. To overcome these challenges, the NBC has made an effort to improve this system to be able to be run smoothly, planned to promote all banks to be members, and spread out the CIS system for membership of microfinance institute in the future. While the banking system is significantly improving and diversified with new products/services such as automated teller machine (ATM), Credit Card, Debit Card, sales of points (SOP) and some services via internet and mobile, the NBC has continued to monitor banks’ activities through both off-site surveillance and on-site inspections. The 2007 annual report reported that full on-site inspections were conducted in 12 7 NBC, Workshop on Credit Bureau, CIS system February 2008. EIC - Cambodia Economic Watch - April 2008 37 commercial banks and two specialized banks. According to the NBC planning, 15 banks should be inspected in 2007. To further improve its monitoring capability, the NBC finalized the bank performance report and COBRA8 in 2007. The COBRA system was introduced as a trail period in the first semester of 2007; its result proved more effective than the hand-work, in terms of rapidity, analysis and accuracy. The system has facilitated the bank tasks and provided the detail data of each bank and ease to classify the commercial bank. There is also progress in non-banking finance. Subsequent to the Law on Anti-Money Laundering and Terrorist Financing coming into effect, the Financial Intelligent Unit (FIU) will be established under the control of NBC in the near future. Cambodia became a member of Asia Pacific Group (APG) in 2004 when NBC played primary contact point with the group. On March 2007, the Mutual Evaluation (ME) was led by the World Bank (WB) and APG. Through this assessment, Cambodia acknowledged 40 recommendations and 9 special financial action task forces and tried to achieve those issues step by step. The FSDS 2006-2015 clearly defined the priority for non-bank finance as well. Insurance industry and financial market are the priority areas of the non-bank sector. Together, the blueprint set the immediate priorities including regulatory framework for both areas above, improving micro-insurance, enactment the financial report standard, privatizing state- own insurance company (CAMINCO), finding out foreign partnership to assist developing capital market and so on. The Cambodian insurance industry was supervised by The Finance Industry Department, The Ministry of Economic and Finance (MEF). Regulations were enacted to supervise this sector as Law on Insurance was adopted in July 2000; sub decree on insurance to implement this law was approved in September 2001, and other series of regulations issued between 2001 and 2004. The General Association Insurance of Cambodia (CAIC) was established since 2005 with an objective to strengthen the insurance and reinsurance market in Cambodia, and develop the market to international standard. Presently, CAIC has six members of which five are insurance companies and one Reinsurance Company: • Cambodian Reinsurance Company (Cambodia Re) • Cambodian National Insurance Company (CAMINCO) • Forte Insurance Company (Cambodia) PLC. 8 Cambodia Offsite Banking Report for prompt corrective Action 38 EIC - Cambodia Economic Watch – April 2008 • Asia Insurance Company (Cambodia) Ltd. • Infinity General Insurance PLC • Campubank Insurance Longpac Table 6.1: Financial Sector Development Strategy (2006-2015) Immediate Priorities on Non-Bank Finance Insurance Capital Market • Review and upgrade the regulatory system • Development the appropriate regulatory framework: • Approve the financial reporting standards for insurance companies Enact the Law on Insolvency • Supporting supervisory development Development of the progressive graduate framework for companies • Privatization of CAMINCO • Enact the Law on the Issuance and Trading • Improving inter-ministerial collaboration Non Government Securities • Developing framework for micro- • Continuing improvement of insurance accounting/auditing capacity • Development life insurance through • Investor education and human resource feasibility studies development to support financial • Develop the appropriate strategy for life development market insurance together with the legal • Establish a partnership with a foreign framework securities exchange to assist developing domestic capital market Source: Financial Sector Development Strategy 2006-2015 Up to date, some immediate priorities goals were completed such as Law on Issuance and Trading of Non-Government Securities which was promulgated on October 19, 2007, Law on Insolvency which was promulgated on December 08, 2007, and the stage to establish the Securities and Exchange Commission of Cambodia (SECC) which is in progress. To accelerate the establishment of the stock market by 2009, the government of Cambodia (MEF) signed an agreement with South Korea’s stock exchange, (the fourth largest exchange in Asia), on January 20089. Furthermore, after the Draft Law on Financial Leasing was commended by the relevant institutions in the late 2007, it is still in the Council of Ministers (CoM) and waiting for approval. 6.2. Microfinance The Microfinance sector has been participating in the development of 9 The Cambodia Daily, Wednesday, January 23, 2008 EIC - Cambodia Economic Watch - April 2008 39 The Cambodian financial system. To take part in the development in this sector, an establishment of the Cambodian Microfinance Association (CMA) in 2004 clearly provides an opportunity? in representation of the sector. In general, the responsibilities of the microfinance sector have been defined between NBC and CMA with supporting policy development and funding coordination from the MEF. Regulation and supervision is the responsibility of NBC, and the CMA is responsible for operational aspects. Since the establishment year, the CMA has grown from a membership association serving seven members to 14 members to the end of 2007. An improvement of the microfinance sector has created? several institutions with particular operations. There are 17 Micro Finance Institutes (MFIs), 26 registered NGOs, and 60 unregistered NGOs operating in rural areas which are yet to be a part of the banking system and be under supervision. As mentioned in the above paragraph, the microfinance sector is under the supervision of the NBC; and the NBC reported that on-site inspection supervised nine licensed MFIs, seven rural credit operators and four NGOs that applied for registration as rural credit operators10. With a technical assistance from Asian Development Bank (ADB), the NBC issued Prakas Nº 7.07-163 to allow MFIs receive deposit with the specific condition11, on December 13, 2007. Upon meeting with the strict qualifications, the MFIs can only collect savings and fixed asset deposits individual client of not more than three percent of institution net worth. The institution shall permanently deposit at least 10% of its registered capital in the account maintained in the NBC and shall deposit as reserve requirement of eight percent of its client deposit. The trail of new products development—saving deposit and inter- branch transfer was introduced12. The NBC has allowed MFIs to collect public savings within their operation areas, the kinds of deposit services are: 1. Compulsory saving: some institutions require their customers to make small deposits while they receive loans. 2. Voluntary deposit is known as cheaper and a long term source of 10 NBC, 2007 Annual Report and Targets for 2008 11 The qualification that let MFIs to receive deposit: (1) Hold a license to carry out microfinance operation from NBC (2) Have good financial condition and sound management judged by the internal rating of the NBC (3) Have minimum paid up capital equivalent to 10 billion Reil (4) Have effective management information system (MIS) (5) Implement NBC uniform cart of account (6) Have sustainable profitability at least two consecutive years 12 Microfinance Summit 2007 Reaching New Heights, CMA, New Product Development of Microfinance within the Cambodia Context by Dr. Bun Mony, November 29, 2007. 40 EIC - Cambodia Economic Watch – April 2008 fund to support the sustainable growth of MFIs. This product consists of a passbook deposit and term deposit. 3. Inter-branch transfer: some institutions allow their clients to make payment at different branches that is used as a means to promote public deposit. 4. Other services: • Loan and deposit services via mobile phone allow clients to make payment, deposit, or receive credit through mobile phone. This product is effective in some countries but not yet started in Cambodia. • Micro insurance: some MFIs are trying to offer micro insurance in market. Overall, an improvement has been made with this sector to strengthen the supervisory which is the role of the NBC on microfinance institutions. Table 6.2: Recent Developments in the Banking Sector, 2007 Progress Remain Issues • May 24, 2007: Promulgation of Law on • Enactment of Law on Financial Secured Transaction Leasing • June 7, 2007: Financial Sector Development • Complete the CIS system Strategy 2006-2015 officially launched including MFIs as members of the system • June 24, 2007: Promulgation of the Law on Anti-Money Laundering and Terrorist • Complete the COBRA program Financing • Establish the Financial Intelligent • CIS System is in the progress of Unit (FIU) implementation • Drafting sub-decree, Prakas and • First Semester 2007: Trial introduction of circulars to implement the Law on COBRA program in offsite bank monitoring Anti-Money Laundering and Terrorist Financing • October 19, 2007: Promulgation of Law on the Issuance and Trading Non Government Securities was adopted by National Assembly • December 8, 2007: Promulgation of Law on Insolvency EIC - Cambodia Economic Watch - April 2008 41 42 EIC - Cambodia Economic Watch – April 2008 Chapter 7 Public Financial Management Reform The Public Financial Management Reform Program (PFMRP) is a 10 year reform program, supported by several donors via a Multi-Donor Trust Fund (MDTF) and under the supervision of WB. Together with other development partners it provides assistance to the program via a bilateral agreement. This chapter will demonstrate the outcome of the PFMRP as completed in the platform 1, and other activities for later platforms13. 7.1. Progress Achievements of the Program Platform 1 has been in progress since early 2005. It was planned for completion within 15 to 18 months; however a crucial progress has been made in the area toward the expected output of the platform. Overall achievements of the platform 1 have been seen in three main types14: • Activities which have been completed or largely completed and which are starting to become embedded in MEF department and line ministries • Activities which have been completed or largely completed but which have had very little take-up in departments and line ministries. (These activities are at risk of not being sustainable in the long term.) • Activities on which little or only moderate progress has been made To further an outcome of the completed activities mentioned above, the External Advisory Panel (EAP) reported those accomplishments on April 2007. The completed activities are implementing the amendment of Organic Budget Law15, a stronger relationship between budgeting and decisions on civil service expenditures, an improved process for post-budget supplementary approvals, a greater use of the banking system for revenue collection and payments, a preparation chart of accounts, and an initial design of The Financial Management Information System (FMIS). Activities which have been largely completed, but which have not been fully embedded, are in revision on the 13PFMRP based on sequenced platform approach: - Platform 1: Making the Budget more credible in terms of timely and predictable delivery of funds - Platform 2: Implementing effective financial accountability; - Platform 3: Achieving a fully affordable policy agenda through policy-budget linkage; - Platform 4: Achieving effective program performance accountability. 15 Law on Financial System promulgated on December 28, 1993 EIC - Cambodia Economic Watch - April 2008 43 budget calendar, new procurement procedures, and the establishment of internal audit function. Amongst Consolidated Action Plan (CAP) activities in 2006, several activities were completed, and some activities are ongoing for platform 2 as well as for later platforms. The progress of those actives is detailed in table 7.1. Table 7.1. Progress on Consolidated Action Plan Activities in 2006 Activities Progress 2007 budge more comprehensive than the 2006 Off-Budget Revenues, Changes to 1 budget Budget Law, and Capital Spending Incorporating of non-tax revenue in the budget Budget Impacts of Staffing and Improve the realism of budget forecasts of salary 2 Capital Projects expenditure Sub-actions and a number of the actions have been Strengthened Revenue completed. 3 Administration Other numbers are ongoing of strengthening tax and customs administration. Medium-Term Expenditure Framework was completed. Improved Macro-Fiscal Framework 4 Some improvements were also made to and Forecasting macroeconomic forecasting model and staff training was conducted. 80% of debt management was estimated as being 5 Strengthened Debt Management completed. Commitments and Payments New measures have been adopted to streamline the 6 Systems process, and take in place on January 2007. Greater use of banking system in collection Revenue Collection and Payments 7 revenue and payment under the responsible of the Systems in NT NT. Result of IMF review mission found that the Cash 8 Cash Management Management Unit's capacity to make accurate forecast is limited. Over 1800 accounts remained open and continue 9 Consolidation and Bank Accounts with difficulties in consolidating them into Treasury Single Account. 44 EIC - Cambodia Economic Watch – April 2008 The EAP considers good progress have been made in dealing with the areas problem. But it has not 10&11 Payment Areas been possible to determine whether an improvement of the PFMRP reform or high economic growth or the combination of both. Improved Process for Post-budget The objectives of the activity are considered to be 12 Supplementary Approvals fully met. Public Procurement Department has completed all 13 Procurement substantial actions, but the reform may not be sustainable. An integrate chat of accounts and budget Redesign and integrate accounting classifications are substantially complete, except for 20 and budget classification systems some technical modifications that should be considered. Planning for an FMIS is a Platform 1, prerequisite 21&28 FIMS and ICT Strategy for Platform 2 and later platforms. The EAP considers that the outcomes of these 22&23 Introduction of Internal Auditing activities are positive, although much more needs to be done during the Platform 2. The MEF has concluded that public expenditure tracking surveys are very resource intensive from Piloting of Public Expenditure 24 part of general accountability system in Cambodia Tracking Surveys and ministry so appears to consider this activity as completed. From 2007, budget preparation divided into three main phases: a strategic phase from March to May, a Redesign Budget Cycle and 25 budget estimates phase from June to September, and Institutional Arrangements a finalization and approval phase from October to December. Program was introduced on a trail in 2007 in a number of pilot ministries. 26 Program Budgeting Pilot The approach of the program cover only non- salary recurrent costs and total spending on program comprises only a small proportion of each ministry’s total budget. Prepare framework for platform 1 and implement in later platforms. 27 Fiscal Decentralization The activities become stalled because of an impasse in the ministerial-level committee. EIC - Cambodia Economic Watch - April 2008 45 State Property Department has complied inventories of state assets submitted by ministries, 29 Design Asset Register provinces and cities, and developed a simple database program. Sound progress has made, the actions important Platform 1 Capacity Development 30 remained to be completed and will require future Measures efforts at consolidation in coming period. The MBPI was developed and made operationally effective from 2005, it is not without problems. Due 31 Motivation Measures in MEF to shortfalls in scheme fund fail to provide a sustainable for effective civil service reform. The activity reveals there has been only limited systematic work undertaken of research or planning Motivation Measures within nature to support line ministries for the PFMR. 32 Ministries Efforts have been made to strengthen the capacities of pilot line ministries. Major organizational reforms introduced in 2005 33 Initial Reorganization within MEF seem appropriate and to be working reasonably well. Source: MEF, PFMRP, External Advisory Panel Report, April 20, 2007 Even though, an effort of reform is still in progress since the report of EAP was addressed. An initiative to the amendment of the Organic Budget Law was substituted by the new law named draft Law on Public Financial System. A final draft law was sent to The Council of Ministers, and recently approved in the plenary meeting and sent to The National Assembly in the beginning of 2008. Besides, to accelerate the reform accurate with the budget calendar, the Law on Finance for 2008 Management was promulgated on December 21, 2007. 7.2. Perspective for the Platform 2 of the PFMRP The Public Financial Management TWG reported16 that platform 1 was completed by December 2007, and continues to platform 2 with an objective of implementing effective financial accountability starting in March 2008. The initial strategic plan for stage 2 should be shifted from the incomplete actions in the stage 1 and should carry those remaining for a later platform. This is done obviously to prioritize the actions which are required to make a more realistic budget in order to achieve a “full credible budget�. Over the above mentioned, the highest priority should be given to the activities that help stage 2, which is of more effective financial accountability. 16 TWG Progress Report , October 2007 46 EIC - Cambodia Economic Watch – April 2008 The main decision in the meeting of “a fully credible budget� should be on: • Expanded information on non-tax revenue levied by ministries and institutions; • Completion of a revenue mobilization strategy; • Strengthening revenue forecasting; • Further streamlining of commitment and payment system; • Completing the consolidation of government bank accounts; • Ensuring that there is no emergence of new arrears; and • Continuation of effort s to strengthen institutional, systems, and human resources aspects of the capacity in MEF as well as pilot ministries. To strengthen the budget oversight, the capacity of the National Assembly is a main component of the PFMRP; but this element is not included in the formal PFMRP17. This component would assist the Finance and Bank Committee through making more understanding and review of the budget law, and lead the RGC to meet a standard of accountability. To sum up, putting all these new initiatives into practice still remains a challenge, and more tasks need to be performed to complete platform 1. At the same time, to ensure the effective enforcement of the reform, the government needs to pay more attention on the capacity building of the implementing government agencies to carry out the new approaches, laws, regulations and procedures. SNEC, Hang Chuon Naron, Cambodia Recent Macroeconomic and Financial Sector 17 Developments, February 2008, Page 75 EIC - Cambodia Economic Watch - April 2008 47 48 EIC - Cambodia Economic Watch – April 2008 Chapter 8 Trade Reform Cambodia’s trade reform has been characterized mainly by Cambodia’s accession into WTO. The government has been taking various instruments to strengthen trade facilitation and economic integration in order to grab the benefit from the membership and trade liberalization. This chapter will examine the accomplishment and the progress in the WTO laws enactment program during the last semester of 2007, as well as the government effort in facilitating the trade regime and investment climate. 8.1. WTO Commitments With an effort of The National Assembly (NA) in 2007, the satisfactory achievement was completed by approving the six laws related to WTO pledges which are addressed in the below Table 8.1. Since October 2007, two additional WTO commitment laws were adopted by the NA to fulfill and accelerate the requirements. There are the Insolvency Law approved on October 16, 2007, and the Civil Code approved on October 5, 2007. Up to day, the NA has approved 27 laws out of 46 laws and regulations for the WTO conforming. Table 8.1: An Accomplishment of WTO Laws Approved in 2007 Adopted October 16, 2007 and promulgated on December 08, 1. Law on Insolvency 2007 Adopted October 05, 2007 and promulgated on December 08, 2. Civil Code 2007 3. Criminal Procedure Code Adopted June 07, 2007 and promulgated on August 10, 2007 4. Law on Water Resources Adopted on May 22, 2007 and promulgated on June 29, 2007 Management 5. Law on Customs Adopted on June 22, 2007 and promulgated on July 20, 2007 6. Law on Secured Transaction Adopted on April 06, 2007 and promulgated on May 24, 2007 Source: Royal Gazette In response to the necessary demand of the agriculture sector of the country, the Draft Law on Seed Management and Plant Breeder Right recently EIC - Cambodia Economic Watch - April 2008 49 approved by the Council of Ministers (CoM) on January 18, 2008 refer to interviews with the official ministry18 on February 2008. Based on interviews with government officials in February 2008, the remaining committed laws are still in draft forms and are waiting for comments from the development partners. Few of them are available at the Ministry of Commerce (MoC). Those drafts need technical assistances from development partners. There are eight draft laws which are on hand of the NA while two draft laws are at the CoM. The other seven are at respective ministries and the last two are unidentifiable (see detail description in Table 8.2). To compare with the commitment schedule for passing the laws, progress has been very slow. Timeframes for the passing of several laws has been delayed. Therefore, executive and legislative branches should express the prospects for passing the crucial draft laws before the new national election. Table 8.2. Progress of Remaining Law for WTO 1. Law on Establishing the Commercial Draft law at MoC, it might be send to CoM at the end of Court April 2008. Draft law was ready discussed in the internal meeting of 2. Criminal Code CoM, and will be discussed in the inter-ministerial meeting of CoM. 3. Law on Geographical Indications Draft law at Intellectual Property Department, MoC. 4. Laws on Layout Design of Integrated Draft law was sent to the World Intellectual Property Circuit Organization (WIPO), waiting the comment from WIPO. 5. Law on Seed Management and Plant Draft law was approved by CoM on January 18, 2008, and Breeder Rights awaiting approval from NA. 6. Law on Protection of Undisclosed Draft law has been studying at MoC. Information 7. Law on Anti-dumping Measures and on Draft law at CoM, awaiting approval Countervailing Measures 8. Law on Financial Leasing Draft law at CoM, waiting for comment. Draft law at CoM, awaiting approval. It will be discussed in 9. Law on Clean Water and Hygiene CoM's meeting. After discussed this draft law at NA, this legal text was sent to CoM in order to adjust the chapter 3. Now this draft was 10. Law on Telecommunication ready discussed in the inter-ministerial meeting and sent to the Prime Minister in order to receive some comment. 18 Ministry of Industry, Mines and Energy 50 EIC - Cambodia Economic Watch – April 2008 Draft law has been discussed in the first meeting of CoM, 11. Law on Tourism Management in and will be discussed in the inter-ministerial meeting and Cambodia plenary meeting of CoM. Then send to NA at the early March 2008. 12. Law on Civil Aviation Draft law was being study in the ninth committee of NA. Draft law at MTPW. Final draft law may be finalized at the 13. Maritime Code early March 2008. 14. Law on Commercial Contract Draft law at MoC, awaiting Technical Assistant from ADB. Draft law at CoM. World Bank had assisted this draft but 15. Law on Commercial Agency now northing has been done. 16. Law on Competition Draft law at MoC. EU has assisted this draft. Preparation stage at MoC, waiting for Technical Assistant. 17. Law on Safeguard Measures Nothing has been done until now; need to train domestic human resource. 18. Royal Decree on Cooperative Unidentifiable 19. Law on Rule of Origin Unidentifiable Source: Base on consultation with various government ministries and agencies, February 2008. 8.2. Trade Facilitation In the trade facilitation area, the Sub-decree N0 21 on trade facilitation through a risk management approaches and inspection and clearance of imports and exports of goods was approved on March 2006. Subsequently, Sub-decree N0 209 on National Prohibited and Restricted Goods List was approved on December 2007. The result shows that all imported and exported items which are included in the list will be subject to physical inspection and will be uploaded into ASYCUDA19. Modernization of the customs legal framework, the Law on Customs, was adopted and promulgated on July 20, 2007. To implement the new law, 37 supporting regulations will be issued soon. The Prakas on Single Administrative Document (SAD) were issued on December 31, 2007 and implemented from January 01, 2008 under the Customs Law. The 2007 annual report on Trade Facilitation and Competitiveness Project reported that much progress of the ASYCUDA project has been achieved: the finalization of the ASYCUDA prototype version 1.0 as well as many other technical and legal preparations for the project implementation at 19 Automated SYstem for CUstoms DAta EIC - Cambodia Economic Watch - April 2008 51 the Pilot Site-Sihanoukville Port Customs which will hopefully start from the first semester of 2008. Furthermore, apart from the WTO commitments Cambodia will implement the WTO Customs Valuation Agreement by January 2009. To put consideration on the agreement, a preparation of the Cambodian valuation regulation consistent with the WTO rule and concept with regard to the Agreement on the Implementation of article VII of GATT 199420 is under way. Several legal texts were approved, and some are under preparation. A noticeable progress is an improvement of the Single Administrative Document which has resulted in reducing time required for investment approval, import and export processing, setting a transparent tariff for public service provision as well as streamlining the inter-ministerial procedures for goods inspection. SNEC, Hang Chuon Naron, Cambodia Recent Macroeconomic and Financial Sector 20 Developments, February 2008, Page 86 52 EIC - Cambodia Economic Watch – April 2008 Chapter 9 Public Administrative Reform The national public administrative reform is considered as the heart of the Government Rectangular Strategy. The RCG has been undertaking two different approaches in its administrative reform agenda. At the central level, the reform focuses on improving civil servant remuneration, human resources capacity and human resources management. At the sub-national level, the reform focuses on decentralization and deconcentration which is to promote democracy and good governance. 9.1. Central Administration Reform Through the national level reform, effective human resource management practices have to be set up to increase the motivation of civil servants. Some instruments of the motivation such as incentive scheme, capacity building program, redevelopment policy, and enforcement of human resource management information system have been implemented by the government. With the remarkable view, the basic salary of civil servants has increased the value index by 345CR in 2005, 400CR in 2006, 500 CR in 2007, and 600 CR in 2008. The joint monitoring indicators (JMI) on remuneration and employment policy reported the commitment of government effort to increase salaries by 20 percent per annum. An extra to the base salary increase, the government has also developed an allowance system that complements the base salary. With the national budget of the government, Priority Mission Groups (PMGs) were established to give special incentive to civil servants who perform for the government priority sectors with specific skill. The PMGs are designed into two types, special remuneration and capacity building. The establishment aims to provide and to strengthen this group for ministries/institutions, although process of the groups is still in progress. The special remuneration21 will be an extra over the salary of public servants, and will give priority to groups with capacity building. Nevertheless, the process of capacity building is not recognized as the smooth one yet, therefore it is important to re-enforce transparency and effectiveness With regards to the progress report of PAR TWG, October 2007, the PMGs cover 83 projects involving 1613 officials, another 59 projects are in the pipeline covering 1281 officials. According to the statement in the PMGs, category A: 520,000 CR/month, B: 350,000 21 CR/month, and C: 190,000 CR/month EIC - Cambodia Economic Watch - April 2008 53 Besides the above incentives, Merit Based Pay Initiatives (MBPIs) was made via the sub-decree Nº 98 on Implementation of MBPIs and approved on August 2005. The incentives from MBPIs are lead by the development partner budget by ministries. An enlargement of the MBPIs, mostly at MEF such as an agreement between MEF, and the Council for Administrative Reform (CAR), and development partners to pilot the program is under way. There are serious discussion on developing and implementing MBPIs in MoH, MoC, MoI, MoEYS, and MLMUPC; yet MBPIs is not be established in other ministries22. An effort to put into consideration the Human Resource Management (HRM) policy has been made, the draft policy and the implementation plan are ready for inter-ministerial consultations; however, the draft concept paper was circulated to partners in October 2006 but no feedback received23. Regarding another aspect of the reform, the Public Service Delivery (PSD) policy was approved by the CoM on May 05, 2006. The policy is being implemented via many instruments, for instance the Special Operating Agency (SOA) in which One Window Office (OWO) service has been integrated. The implementation of the OWO policy requires the particular attention from the RGC, and expects that the policy will simplify and enhance the PSD through reducing the unnecessary bureaucratic procedure. Thanks to the crucial function of the policy, the progress report PAR TWG reported that MoI has assumed responsibility for development of OWO as an integral part of decentralization and de-concentration. At the end of this year, the RGC plans to establish OWO service for 24 districts of the whole country due to the creation of one office for a district while the implementation of OWO in the two districts at Siem Reap and Battambang provinces reaches the satisfactory outcome24. Taken into account of the SOA is a special unit which acts as the service delivery and performs the job under individual structural ministry. Each SOA carries out its task base on Terms reference and Performance agreement which define the service quality, management, and agency obligation. In responding to the process of the unit, the Draft Royal Decree on Special Operating Agencies was discussed at CoM and approved on March 07, 2008. Overall, there is an improvement in the central administrative reform, especially the increment of the civil servants base salary and the development of relevant policies to strengthen human resources management practice as well as to enhance service delivery. However, there is still a lot of rooms left to deepen and speed up the reform process. 22 EIC, Cambodia Economic Watch, October, 2007, page 57&58 23 Progress Report PAR TWG, October 2007 24 Interview the government official at MoI on March, 2008 54 EIC - Cambodia Economic Watch – April 2008 9.2. Sub-National Administrative Reform Sub-national administrative reform in Cambodia is characterized by the implementation of the Decentralization and Deconcentration reform (D&D). It is a vital instrument for the government to promote and develop democracy at the sub-national level. The National Committee on Decentralization and De- concentration (NCDD) reform of the Ministry of Interior (MoI) was established on August 2006. With regards to the strong effort of the government, draft organic 25 laws , prepared by NCDD reform, were put into discussion at the National Consultation Workshop on “Concepts of the Draft Law on Administration of Capital, Province, Municipality, District and Khan�, at Sihanoukville on December 06, 2007. This is to get concern from all stakeholders, to comprehend the foundation, and to receive recommendation. At the same time, to accomplish both draft organic laws in the near future, the Prime Minister requested to amend article 145&146 of the RGC Constitution, and to ensure the amendment of the Law on Financial System which was promulgated on December 28, 1993. To hasten both significant draft laws related to the sub-national administration management, the NA approved the amendment of article 145&146 of the Constitution, on January 15, 200826. The New article 145 stated that “Territory of Kingdom of Cambodia shall be divided into capital, provinces/municipalities, districts/Khan, Khum/Sangkat.� Along the new article 146 stipulated that “Capital, provinces/municipalities, districts/Khan, Khum/Sangkat shall be governed in accordance with the organic law.� In response to the D&D reform the three draft laws were finalized and sent to the office of CoM. At the plenary meeting of CoM On February 29, 2008, the CoM approved the draft laws including Draft Law on Administration of Capital, Province, Municipality, District and Khan, Draft Law on Election of Council for Capital, Province, Municipality, District and Khan, and Draft Law on Public Financial System. The Draft Law on Administration of Capital, Province, Municipality, District and Khan proposed the concept of democratic and development through D&D to administrate the sub-national governance system and structure. This draft assures all citizens have equal rights to prepare and implement the local development plan. The council of the institutions proposed 25 Draft Law on Administration of Capital, Province, Municipality, District and Khan Draft Law on Election of Council for Capital, Province, Municipality, District and Khan 26 http://www.everyday.com.kh/non%5Fmembers/channels/news/khmer/2008/01/ EIC - Cambodia Economic Watch - April 2008 55 by the Draft Law on Election of Council for Capital, Province, Municipality, District and Khan was also established. Afterwards the draft will be adopted and promulgated, it will come into effect and be implemented, so that the election of the municipal, provincial, district and khan councils could be formed. Since the sub-national finance management regime is parallel to the D&D reform, the preparation of the amendment on the Financial System Law is the main point to be revised. An initial idea of the MEF proposes an amendment on the old law, but this is substituted by the Draft Law on Public Financial System27. The National Program on Sub-National Democratic Development will continue its performance under the leadership of the NCDD reform. To strengthen this program is mainly the concern of the management of each ministry and institution in order to ensure the effectiveness of local authorities and their assigned tasks in answering local needs. 27 Regard to the Result of the Plenary Meeting of CoM, February 29, 2008 56 EIC - Cambodia Economic Watch – April 2008 Chapter 10 Legal and Judicial Reform With the context of structural reforms in the Royal Government of Cambodia (RGC), legal and judicial reform is the key mechanism of legal development frameworks. This reform should define the modernization of the legal structure in Cambodia, the changing of the poor judiciary system particularly with the perspective on rule of law enforcement in the state. This chapter will examine the issue and demonstrates the achievement of the reform. 10.1. Progress and Achievements of the Reform A healthy legal reform consists in the development of the socio-economic sector. Legal framework is an alternative instrument to the enhancement of various sectors and act as the primary aspect as well. The specialized Council for Legal and Judicial Reform (CLJR) was established on June 2003; this institution has the mission to initiate and coordinate the reform process. Regarding to the session of NA at late 2007 and early 2008, many draft laws were put to the agenda and debated in the meeting, and a few important draft laws28 were adopted by NA. However, some draft laws29 were accelerated to be studied in the specialized committee of NA. After discussion the Draft Law on Telecommunication in NA was sent back to CoM to be adjusted to chapter 3. This draft was discussed in the inter-ministerial meeting and sent to receive comment from the Prime Minister with reference to the interview with the key informant on February, 2008. Up to early of 2008, some remaining laws of the commitment in the WTO accession are still in discussion? to find out partners to assist in the drafts30. Those are the Draft Law on Protection of Undisclosed Information, Draft Law on Commercial Agency, and Draft Law on Safeguard Measures. MoC has made an effort to finalize the Draft Law on Establishing the Commercial Court which will be sent to the CoM as soon as possible. As in the semester of 2007, some regulations are being studied at individual ministries, and some are waiting for comments from relevant institutions and donors before being debated at the CoM. Other draft laws and regulations were put into the agenda of the new session in order to be debated 28 Law on Insolvency, Civil Code, Law on Education, Law on Finance for 2008 Management, and ASEAN Charter 29 Draft Law on Peaceful Demonstration, Draft Law on Seed Management and Plant Breeder, and Draft Law Civil Aviation 30 Interviewed with the key informant at MOC on February, 2008 EIC - Cambodia Economic Watch - April 2008 57 and approved by the NA. Nevertheless, more laws are expected to be passed before the fourth national election in 2008. In conformity with the WTO, two laws were promulgated on December 8, 2007 to complete the pledge and to promote the trade development. The Civil Code was adopted on October 5, 2007, and the Insolvency Law was adopted on October 16, 2007. To sum up, 27 laws were promulgated and 19 draft legal texts still remain to be adopted. A platform to establish the specialized court for business dispute is upon the enactment of the Draft Law on Establishing the Commercial Court. The draft law creates an independent commercial court and arbitration body said MoC official in the Cambodia Daily, Monday, 18 February, 2008. Moreover, he hoped that the specialized court of business dispute will be formed by 2009. 10.2. Judicial Reform Outlook The Royal Academy for Judicial Professions (RAJP) and Professional Training Center for Lawyers (PTCL) was established to form and train judiciary officials and lawyers. These institutions have responded to the capacity building of legal human resource. Since the establishment of RAJP, there are four promotions for the training of judges. The fourth promotion of RAJP started at early 2008, 50 students were selected to train as judges. Furthermore, through the discussion31 at the office of CoM on January 10, 2008, the discussion was about the expanded goal for the future to establish the Royal School of Bailiff, the Royal School of Notary, and to control the ability to include the PTCL into the RAJP. After the adoption of the Law on Commercial Arbitration in 2006, the RGC needs some regulations to implement this law. The Draft Sub-decree on Organizing and Functioning of the National Arbitration Center was finalized and put in the discussion at Law, Tax & Good Governance Private Sector Working Group Meeting (LTGG PSWG Meeting) on January 10, 2008. To move forward, the government put considerable effort in developing eight fundamental laws, decided in the Consultative Group (CG) meeting in 2004. Among the eight fundamental laws, only three laws were promulgated, and the remaining five draft laws are in progress; and will be completed by the timeline. 31 Strengthen Rule of Law Globalization and Improvement to the Professional official by Providing Judiciary Service 58 EIC - Cambodia Economic Watch – April 2008 The remaining draft laws are in different places such as the CoM, the Supreme Council of Magistracy (SCM), and the Ministry of Justice (MoJ). The Draft Criminal Code was readily discussed in the internal meeting of the CoM, and this draft will be in the agenda of the inter-ministerial meeting. The Draft Law on the Organization and Functioning of the Courts has been discussed in the internal meeting with the French at the MoJ. The Draft Law on the Statute of Judges and Prosecutors is at CoM and waiting for approval. The Draft Law on the Amendment of the Organization and Functioning of the SCM has been discussed at the SCM. The Draft Law on Anti-Corruptions is being studied at the CoM. The four basic codes32 play the main role to the reforming structure of the judiciary system, particularly the criminal and civil court. Recently, the Civil Code was adopted and promulgated, an achievement of these three codes are the mechanism to speed up the reform. Credible and transparent legal framework together with independent judiciary will assist and speed up reform agendas of the RGC. Concrete action should be appropriately taken in accordance with what have been scheduled, especially basic draft legal texts which are set as the current reform agenda. Without the passing of these necessary instruments, other reform agendas, particularly Legal and Judicial reform would certainly make slow progress and it will be difficult to meet the target timeline. Table 10: Recent Development of the Eight Fundamental Laws Progress Remaining Draft Laws • Draft Criminal Code is at CoM. This draft was ready • Criminal Procedure Code promulgated discussed in the internal meeting, and will be put in the on August 10, 2007 discussion in the inter-ministerial meeting. • Civil Code adopted on October 16, • Draft Law on organization and functioning of the court 2007 and promulgated on December 08, had discussed in the internal meeting with French at MoJ. 2007. • Civil Procedure Code adopted on May • Draft Law on the Status of Judges and Prosecutors is at 26, 2006 and promulgated on July 06, CoM, and waiting for approval. 2006. • Draft Law on Amendment of the Organization and Functioning of the SCM has discussed at Supreme Council of Magistracy (SCM). • Draft Law on Anti-Corruption has been studying at CoM. Source: Royal Gazette and interviewed with various government officials, February 2008. 32 Civil Code, Civil Procedure Code, Criminal Code, Criminal Procedure Code EIC - Cambodia Economic Watch - April 2008 59 60 EIC - Cambodia Economic Watch – April 2008 Chapter 11 Land and Natural Resource Reform Land and natural resources such as fisheries and forestry are the sources of the livelihood for the majority of the Cambodian rural population. Improving access to land and natural resources is clearly one of the main pillars for the government reform program and development strategy that have direct impacts on poverty reduction. This section will look at the reform progress in the area of land, fisheries and forestry. 11.1. Land Reform Access to land is the burning point in the Cambodian context today. The RCG has been repeatedly committed to combat illegal land encroachment. The Land Law 2001, Strategy of Land Policy Framework, and a series of key sub-decrees have been signed by the Prime Minister aiming at increasing transparency, accountability in land management and land use. To deal with land dispute?, the RCG has developed various mechanisms such as the Land Dispute Committees settled in 1999, a Cadastral Commission System under the Land Law 2001, and the National Authority for Land Dispute Resolution (NLDA). Moreover, land tilling is also one of the significant methods to decrease the case of land deputes and to supervise the challenging issue. This subject has been included in both NSDP and CMDG. The government set the target of land titling or registration at one million parcels by 2007 and by 65% of the total land parcels by 2015. Up to June 2007, the land registration effort has resulted in 1,226,536 land titles issued, of which 107,569 titles were done in the first semester of 200733. To take the Economic Land Concessions (ELCs) into consideration, the effort of the government and progress in the management of agriculture and natural resources particularly via ELCs are necessary. The granting of ELCs can occur at both national and provincial levels; yet they have been granted in a non-transparent manner; the laws and regulations very often were not followed. These result in vast areas of land being kept by non- producers for speculation while poor people who need to farm for their livelihoods have no access to land. The implementation of the new sub-decrees on ELC including establishing and making a log book of ELCs, issued at provincial level, resulted the over size of land concession inconsistent with the sub-decree. There are 53 33Ministry of Land Management, Urbanization and Construction, Progress Report for First Semester 2007. EIC - Cambodia Economic Watch - April 2008 61 companies registered in the log book, five among eight companies which have ELCs of more than 10,000 hectares. These are being consulted for deduction, 14 ELCs companies are being reviewed, and seven ELCs are canceled34. In the Social Land Concession area, the MLMUC progress reported that the ministry plans to distribute land to 10,000 families by 2010. However, this target seems far from being achieved. By the end of the first semester of 2007, the work is still at the pilot stage in Kampong Cham and Kraties where the total of 5,490 hectares of lands were classified as state’s private land to be ready for use under the Social Land Concession Program. More progress in this area is reported by the National Authority (NLA), a certain portion of land confiscated from illegal land grabbing is being used under the Social Land Concession program. According to the NLA two separate Sub-decrees have been prepared for the permanent reservation of government land and provision of social concession land of at least 849 hectares35. In addition, the MLMUC is also working the establishment of inter- ministerial working group together with MAFF to evaluate the cancelled ELCs in Kampong Thom province in order to divert those lands into use under the social land concession program. Community Land is another issue of concern, especially the indigenous community who often lives in areas rich in natural resources and under strong pressure for development in the area. Despite the protection of the indigenous communal land provided under the Land Law, the rates of land alienation is still high and is increasing according to the NGO Statement to the first CDCF in June 2007. The progress in registration of indigenous communal land has been very slow. The inter-ministerial working group has been established for piloting the preparation of a Statute of Indigenous Community in three piloting villages36. Though statutes of the three communities have been registered and formally recognized by the Ministry of Interior, the registration process is not yet ready to be developed beyond the pilot project. The unregistered communal lands remain at risk. The RCG decided to use the procedures and method provided in the Sub-decree No. 118 on State Land Management as an interim measure to protect communal land before it is being registered. 34 Progress Report F&E TWG, October 2007 35 5 hectares in Takruok village, Treng commune, Rottanak Mondul district, Battambang province and 844 hectares in Trapeang Phleang communes, Chhouk district and Stung Keo commune in Kampot province 36 Two in Ratanakiri and one in Mondulkiri 62 EIC - Cambodia Economic Watch – April 2008 Overall, the RCG keeps working on various new legal texts such as sub- decrees, regulations, and policies. The challenges in the enforcement of these new legal provisions and the implementation of the new policies remain questionable. The RCG should put more focus on increasing the effectiveness of the enforcement and implementation of the existing legislations that are already reasonably sound. 11.2. Forestry Reform Forestry is the natural resource endowment that can be transformed into livelihood benefits. In Cambodia, higher poverty rates are observed for rural households mainly engaged in forestry activities. Therefore, securing access to forestry resources for the local users is vital for the livelihood and financial future of the rural poor. The commercial forest concession has shown a failure in the past decade and the government has been under pressure to take a serious reform in the forestry sector. A considerable number of forest concessions were reduced making more forest area available for the management under different schemes, namely community forest. The TWG F&E adopted a four-year Forestry and Environment Action Plan 2006-2010 in alignment with the NSDP. In addition, the Forestry Administration is making strong efforts in the development of a National Forest Program which will lead to an improved planning, implementing and monitoring of forest activities and will provide framework for prioritized action and investments. The progress in the demarcation of the forest estate is moving at a slow speed. The RCG planned to demarcate 320,000 hectares and 600 km of forest estate boundary. Despite the effort taken by the government, illegal logging is still taking place and the forest land encroachment is still common in various parts of the country. The coverage declined in 2005-2006 to 59% percent which is slightly below the CMDG target of 60%. The government has been taking measures combating illegal grabbing of forest land through National and Sub-committees for Prevention, Control and Suppression of Forest Land Encroachment for Private Entitlement with collaboration from NLDA. The first-half year report of the NLDA in 2007 specifies that strict administrative measures have been taken against government officials and traders who involve in the violation of regulations and guideline regarding land, forestry and fisheries management. For instance, the Forest Administration has been requested by NLDA to take administrative measure against 15 officials who violated the law. In another case, action against two environmental officials EIC - Cambodia Economic Watch - April 2008 63 and two traders in relation to illegal logging has been taken, though there is no detail of what kind of measure has been taken. 11.3. Fisheries Reform Fisheries are very crucial for the development and the livelihood of the Cambodian people. They support the livelihoods and food security of millions of Cambodians. Ensuring access rights to local communities is one the target in the fisheries reform program. As a result so far, 56.5% of commercial fishing lots were reduced in the benefit of small-scale or family fishing. In addition, 509 fishing communities have been established, of which 469 are fresh water fishing communities and 40 are marine fishing communities. The user rights of the communities on public fishing areas are broadly opened through Sub-Decree on Community Fisheries. In the area of policy reform, the Royal Decree on the establishment of community fisheries was signed in May 2005, and the Sub-Decree on community fisheries management was approved on June 2006. These legal texts provide a legal basis for the establishment of the community fisheries. The new Fisheries Law came into effect in May 2006. It indicates the roles and mandate s of the new Fisheries Administration for sector development. The proclamation on the Functioning on the Fisheries Administration has been discussed and is currently waiting approval from the MAFF. With the improved structure in the proceeding, the Department of Fisheries is expected to become a more effective service provider in the sector, especially at the commune council level where there are substantial fisheries’ demand. The formulation of a Cambodian Code of Conduct for Responsible Fisheries is another noticeable improvement. It expected to provide framework that benefit more for the development of rural communities. Moreover, the Guidelines on Community Fisheries that set out a legal framework to ensure transparent, accountable and equitable implementation of the communities has been finalized and is expected to be implemented soon. Therefore, there has been considerable progress in the policy reform, however, concern remains as to the clarity over access rights to use fisheries resources, and incentives to manage capture fisheries in a sustainable manner are still lacking. 64 EIC - Cambodia Economic Watch – April 2008 Bibliographic References CAR (2007), Announcement of CAR retrieved from CDC, “Report on Progress towards targets of 2006 Joint Monitoring Indicators, 2007� CDRI (2007), “Vulnerable Worker Survey�, 2007 EIC (2007), Cambodia Economic Watch, October 2007 IMF (2007), “Cambodia 2007 Article IV Consultation� MEF (2007), “Public Financial Management Reform Program, External Advisory Panel Report, 20 April 2007� MAFF (2007), “First Semester Report 2007� MLMUC (2007), “Progress Report for First Semester 2007� NIS, “Labor Force Survey of Cambodia 2001� _____“Consumer Price Index�, Phnom Penh, September 2007 _____“National Accounts of Cambodia 1993-2006�, No 11, 2007 _____“Economically Active Population Cambodia 2004� NLDA (2007), “First Half-Year Report� NBC (2007), “2007Annul Report and Targets for 2008� ______“Quarter Bulletin No 22, Quarter 4, 2007� ______“Financial Sector Development Strategy 2006-2015� SNEC (2008), Hang Chuon Naron, “Cambodia Recent Macroeconomic and Financial Sector Developments� World Bank, “East Asian Update – November 2007� _____World Bank, “Halving Poverty by 2015? Poverty Assessment 2006�. WEF, World Economic Forum Report 2006-2007 Other Data/Documents, Compiled from various Ministries and other Institutions EIC - Cambodia Economic Watch - April 2008 65 66 EIC - Cambodia Economic Watch – April 2008 Appendix KEY ECONOMIC I INDICATORS EIC - Cambodia Economic Watch – April 2008 67 68 EIC - Cambodia Economic Watch – April 2008 Table A6.1: Main Economic Indicators 1960 1990 2000 2006 2007p 2008p 2009p 2010p Nominal GDP (million US$) 577 1,404 3,649 7,275 8,627 10,129 11,457 12,802 Real GDP (% increase) 4.8% 4.5% 8.8% 10.8% 10.1% 7.0% 6.5% 7.3% GDP per Capita (US$) 83 136 288 514 597 690 768 845 GDP per Capita (% increase) - 9.5% 2.4% 12.9% 16.3% 15.5% 11.3% 10.0% Riel/Dollar Parity (year average) 35 537 3,859 4,103 4,056 4,000 4,000 4,000 Inflation in Riel (year average) 4.0% 141.0% -0.7% 4.7% 5.9% 9.3% 7.0% 5.0% Inflation in Dollar (year average) 4.0% 0.4% -1.8% 4.4% 7.1% 10.8% 7.0% 5.0% Budget Revenue (% GDP) 19.7% 3.1% 10.2% 9.8% 11.5% 11.7% 11.9% 12.2% Budget Expenditure (% GDP) 29.2% 15.9% 15.1% 13.8% 14.4% 15.8% 15.8% 15.9% Current Public Deficit (% GDP) -3.8% -11.9% 1.3% 1.0% 2.6% 1.6% 1.4% 1.5% Overall Public Deficit (% GDP) -9.5% -12.8% -4.8% -4.0% -2.9% -4.2% -3.9% -3.7% Export of Goods (% GDP) 6.0% 3.4% 38.3% 50.8% 46.9% 43.8% 43.1% 43.0% Import of Goods (% GDP) 18.4% 24.4% 53.0% 65.3% 62.3% 59.3% 58.6% 58.3% Trade Balance (% GDP) -12.4% -21.0% -14.8% -14.5% -15.5% -15.5% -15.5% -15.3% Current Account Balance (% GDP) -13.4% -22.7% -11.4% -7.2% -7.7% -7.9% -8.3% -8.5% Net Foreign Reserves (million US$) 57 0 411 1,097 1,374 1,614 1,871 2,142 Money - M1 (% GDP) 12.5% 5.3% 3.5% 5.4% 5.7% 5.9% 6.3% 6.6% Money - M2 (% GDP) 23.6% 1.8% 9.4% 17.9% 26.8% 32.6% 39.6% 47.4% Population (million) 6.9 10.3 12.7 14.2 14.4 14.7 14.9 15.2 Labor Force (% Population) 31.6% 47.0% 52.8% 57.6% 58.2% 58.8% 59.3% 59.8% Source: EIC, compiled from government and international organizations primary data. EIC - Cambodia Economic Watch – April 2008 69 Table A6.2: Budget Operations (Billion Riel) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Domestic Revenue 4 23 1,442 2,918 4,015 4,726 5,448 6,249 Current Revenue 4 23 1,412 2,882 4,006 4,717 5,439 6,240 Tax Revenue 3 13 1,059 2,271 3,396 4,051 4,724 5,474 Direct Taxes 1 1 136 331 480 591 716 858 Indirect Taxes 2 4 533 1,295 1,895 2,317 2,738 3,211 VAT 1 2 398 870 1,143 1,394 1,665 1,973 Excise duties 0 0 113 418 731 898 1,046 1,207 Others 1 2 22 7 21 25 28 31 Int'l Trade Taxes 1 9 391 645 1,020 1,143 1,269 1,405 Imports 1 9 373 617 879 996 1,122 1,258 Exports 0 0 16 24 141 139 139 139 Others 0 0 2 4 0 8 8 8 Non tax revenue 1 10 353 611 610 667 716 766 Fishery & Forestry 0 0 51 9 13 9 9 9 Civil Aviation 0 0 25 30 51 62 73 85 Royalties 0 0 12 2 2 2 2 2 PTT 0 0 92 83 77 111 125 139 Other non tax revenue 1 10 174 487 467 483 506 531 Capital Revenue 0 0 29 36 9 9 9 9 Expenditures 6 120 2,120 4,112 5,041 6,413 7,235 8,135 Capital Expenditures 1 7 897 1,520 1,950 2,340 2,442 2,652 Through Nat'l Treasury 1 7 303 379 440 806 804 908 Direct Foreign financed 0 0 594 1,141 1,510 1,534 1,639 1,744 Current Expenditures 5 113 1,223 2,592 3,091 4,073 4,793 5,482 Defense and Security 2 89 438 520 681 978 1,123 1,215 Salaries 1 9 301 327 390 514 590 639 Other 1 80 137 193 291 464 532 576 Civil Administration 3 25 785 2,072 2,410 3,095 3,670 4,267 Salaries 2 12 211 495 853 1,107 1,350 1,579 Other 1 13 574 1,577 1,556 1,988 2,320 2,688 70 EIC - Cambodia Economic Watch – April 2008 Table A6.2: Budget Operations (Billion Riel) -continued 1960 1990 2000 2006 2007p 2008p 2009p 2010p Current deficit -1 -90 190 290 915 644 647 758 Overall deficit -2 -97 -678 -1,194 -1,026 -1,686 -1,787 -1,886 Financing 2 97 678 1,194 1,026 1,686 1,787 1,886 Foreign financing 1 77 707 1,584 1,615 1,684 1,790 1,897 Grants 1 70 384 790 730 749 778 808 Loans (net) 0 7 323 794 885 935 1,012 1,089 Domestic financed 1 20 -28 -390 -589 0 0 0 Banks 0 20 -115 -333 -1,114 0 0 0 Others 0 0 86 -57 525 0 0 0 Source: MEF and EIC model projection. EIC - Cambodia Economic Watch – April 2008 71 Table A6.3: Balance of Payment (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Exports of Goods 35 47 1,397 3,694 4,042 4,436 4,936 5,500 Imports of Goods 106 342 1,936 4,749 5,377 6,004 6,708 7,458 Trade Balance -71 -295 -539 -1,056 -1,335 -1,568 -1,772 -1,957 Agriculture 26 19 251 401 532 674 811 947 Textiles & Garments -11 -18 495 1,409 1,393 1,536 1,685 1,880 Oil & Gas -4 -50 -323 -1,123 -1,306 -1,482 -1,558 -1,663 Other Goods -82 -246 -961 -1,742 -1,953 -2,295 -2,710 -3,122 service credit 2 2 428 1,296 1,557 1,841 2,133 2,432 service debit 4 29 328 792 906 1,040 1,218 1,411 Balance of Services -2 -27 101 504 651 801 915 1,021 Transportation -1 -8 -99 -271 -297 -316 -389 -468 Travel (Tourism) 1 3 271 841 1,012 1,199 1,420 1,656 Others -2 -21 -71 -65 -64 -82 -116 -167 income credit 1 0.4 67 90 112 131 147 162 income debit 5 0.0 190 380 472 550 624 697 Balance of Incomes -4 0.4 -123 -290 -360 -419 -476 -534 Balance of Current Transfers and Capital 42 9 461 764 797 809 821 833 Account Private Transfers 0 3 144 315 381 383 385 387 Government Transfers 42 6 317 449 416 426 436 446 Current Account (excluding offical transfers) -77 -318 -417 -527 -663 -802 -948 -1,085 Current Accounts and Capital Account -35 -312 -100 -77 -247 -376 -512 -638 Financial Accounts 35 312 184 324 605 714 768 884 Official Loans 0 130 75 123 120 125 139 149 Foreign Direct Investment 0 0 148 408 475 558 578 665 Others (net) 35 182 -40 -206 -51 -52 -52 -52 Overall Balance 0 0 83 246 359 339 256 246 Source: NBC and EIC model projection. 72 EIC - Cambodia Economic Watch – April 2008 Table A6.4: Monetary Survey (Billion Riel) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Net Foreign Assets 4 3 2,589 7,224 11,036 13,198 15,831 18,838 Foreign Assets 4 18 3,047 7,650 12,192 14,379 17,062 20,111 Foreign Liabilities 0 -15 -458 -426 -1,156 -1,182 -1,231 -1,273 Net Domestic Assets 3 58 -759 -282 576 2,403 5,205 8,816 Domestic Credit 3 59 904 2,676 4,570 7,062 10,475 14,704 Net Claims on Government 1 41 3 -953 -1,816 -1,993 -1,973 -1,953 Claims on Government 1 42 272 287 297 315 335 355 Deposits of Government 0 -1 -269 -1,240 -2,113 -2,308 -2,308 -2,308 State Enterprises 0 13 3 2 1 1 1 1 Private Sector 2 5 898 3,628 6,385 9,054 12,447 16,656 Other Items (net) 0 -1 -1,663 -2,959 -3,994 -4,659 -5,270 -5,888 Total Liquidity 7 61 1,831 6,942 11,311 15,600 21,036 27,654 Narrow Money 5 61 540 1,658 2,052 2,471 2,987 3,500 Currency outside Banks 3 46 495 1,600 1,990 2,392 2,886 3,375 Demand Deposits 3 15 45 58 62 79 101 125 Quasi-Money 2 0 1,291 5,285 9,259 13,129 18,050 24,153 Times and Savings Deposits 2 0 46 89 121 148 181 216 Foreign Currency Deposits 0 0 1,245 5,196 9,138 12,982 17,868 23,937 Source: NBC and EIC model projection. EIC - Cambodia Economic Watch – April 2008 73 Table A6.5: Investment and Saving (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Total Investment 80 94 668 1,407 1,714 2,041 2,283 2,590 Public investment 37 13 233 370 481 585 611 663 Domestic financed 6 13 72 85 108 173 173 199 Foreign financed 31 0 160 285 372 412 438 464 Private investment 43 81 436 1,037 1,234 1,456 1,673 1,927 Domestic financed 43 49 287 629 759 898 1,095 1,262 Foreign financed 0 32 148 408 475 558 578 665 Total Domestic financed 48 62 360 715 867 1,071 1,267 1,461 Total Foreign financed 31 32 309 693 847 970 1,016 1,129 Agriculture Products 14 25 32 57 71 82 91 98 Equipment 0 17 257 377 506 740 989 1,178 Construction 65 51 379 972 1,137 1,219 1,203 1,313 Total Saving 80 94 668 1,407 1,714 2,041 2,283 2,590 National saving 2 -225 251 881 1,051 1,239 1,335 1,505 Government -22 -167 49 71 226 161 162 189 Non Government 24 -58 202 810 826 1,078 1,174 1,316 Foreign saving 77 318 417 527 663 802 948 1,085 Grants 42 6 317 449 416 426 436 446 Non Grants 35 312 100 77 247 376 512 638 Source: EIC, compiled from government and international organization primary data. 74 EIC - Cambodia Economic Watch – April 2008 Table A6.6: GDP by Industry Origin at Current Prices (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Agriculture 302 764 1,329 2,231 2,601 3,022 3,384 3,709 Paddy 126 163 328 561 740 858 950 1,025 Other Crops 80 156 258 540 601 738 869 999 Livestock 26 102 204 336 377 447 511 571 Fishery 22 327 393 527 600 669 721 762 Rubber & Forestry 47 17 146 267 284 311 332 350 Industry 89 170 780 1,861 2,108 2,339 2,524 2,772 Garment 16 18 336 943 1,044 1,140 1,250 1,356 Food, Beverage & Tobacco 19 70 116 162 187 218 245 270 Other Manufacturing 16 48 114 202 228 270 308 348 Electricity, Gas & Water 5 6 15 40 48 59 71 84 Construction & Mining 33 28 198 514 601 651 649 714 Services 186 470 1,541 3,183 3,919 4,769 5,548 6,321 Transport & Communication 15 64 241 515 597 706 798 885 Trade 485 584 577 1,016 1,363 1,658 1,918 2,185 Hotel & Restaurants 16 3 135 318 375 461 543 635 Other Private Services -408 -212 490 1,208 1,419 1,749 2,071 2,384 Public Administration 77 31 98 126 165 195 219 233 Total GDP 577 1,404 3,649 7,275 8,627 10,129 11,457 12,802 Source: NIS and EIC model projection. EIC - Cambodia Economic Watch – April 2008 75 Table A6.7: GDP by Industry Origin at Constant 2000 Prices (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Agriculture 833 948 1,329 1,784 1,877 1,971 2,063 2,155 Paddy 179 197 328 490 527 551 570 586 Other Crops 289 133 258 409 446 491 538 588 Livestock 64 206 204 280 290 310 329 350 Fishery 219 285 393 459 462 466 470 474 Rubber & Forestry 82 127 146 146 152 154 155 157 Industry 549 221 780 1,794 1,937 2,045 2,138 2,286 Garment 104 5 336 1,004 1,104 1,195 1,294 1,387 Food, Beverage & Tobacco 121 87 117 130 134 141 149 157 Other Manufacturing 100 55 114 164 173 185 198 214 Electricity, Gas & Water 39 5 15 35 39 44 49 56 Construction & Mining 186 69 198 462 487 479 448 472 Services 1,529 712 1,541 2,740 3,144 3,431 3,731 4,069 Transport & Communication 125 100 241 395 423 449 476 505 Trade 480 561 577 850 1,059 1,144 1,229 1,338 Hotel & Restaurants 187 37 135 281 310 344 379 421 Other Private Services 142 -25 490 1,128 1,266 1,405 1,557 1,712 Public Administration 596 40 98 86 86 89 91 93 Total GDP 2,910 1,881 3,650 6,318 6,958 7,446 7,932 8,510 Source: NIS and EIC model projection. 76 EIC - Cambodia Economic Watch – April 2008 Table A6.8: GDP by Expenditure Categories at Current Price (%, increase) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Private Consumption 220 1,419 3,284 5,966 6,784 7,965 9,008 10,066 Government Expenditure 342 203 191 384 495 547 696 769 Gross Domestic Formation 88 103 640 1,495 2,050 2,401 2,626 2,920 Gross Fixed Capital Formation 80 94 668 1,407 1,714 2,041 2,283 2,590 Public 37 13 233 370 481 585 611 663 Private 43 81 436 1,037 1,234 1,456 1,673 1,927 Changes in Stocks 8 10 -29 88 336 360 342 330 Exports of Goods & NFS 37 49 1,826 4,990 5,599 6,278 7,070 7,932 Goods FOB 35 47 1,397 3,694 4,042 4,436 4,936 5,500 Domestic exports 35 -6 1,279 3,554 3,901 4,293 4,792 5,354 Re-exports 0 53 118 139 141 143 145 147 NFS 2 2 428 1,296 1,557 1,841 2,133 2,432 Imports of Goods & NFS 110 371 2,291 5,560 6,301 7,062 7,943 8,885 Goods FOB 106 342 1,963 4,768 5,395 6,022 6,725 7,474 Retained imports 106 289 1,845 4,629 5,254 5,879 6,581 7,328 Re-exports 0 53 118 139 141 143 145 147 NFS 4 29 328 792 906 1,040 1,218 1,411 Total GDP 577 1,404 3,649 7,275 8,627 10,129 11,457 12,802 Source: NIS and EIC model projection. EIC - Cambodia Economic Watch – April 2008 77 Table A6.9: GDP by Expenditure Categories at Constant 2000 Prices (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Private Consumption 1,176 1,820 3,284 5,317 5,654 6,111 6,531 7,027 Government Expenditure 1,580 263 191 333 398 373 436 459 Gross Domestic Formation 508 137 640 1,320 1,643 1,736 1,786 1,906 Gross Fixed Capital Formation 461 125 668 1,260 1,418 1,530 1,603 1,737 Public 210 33 233 332 388 429 420 437 Private 251 92 436 928 1,030 1,101 1,183 1,300 Changes in Stocks 48 13 -29 61 224 206 183 169 Exports of Goods & NFS 202 54 1,826 4,626 4,851 4,959 5,243 5,641 Goods FOB 190 52 1,397 3,395 3,470 3,464 3,615 3,856 Domestic exports 190 -7 1,279 3,267 3,349 3,352 3,509 3,753 Re-exports 0 58 118 128 121 111 106 103 NFS 12 2 428 1,231 1,381 1,495 1,629 1,785 Imports of Goods & NFS 556 394 2,291 5,278 5,588 5,732 6,064 6,523 Goods FOB 536 363 1,963 4,526 4,785 4,888 5,135 5,487 Retained imports 536 307 1,845 4,394 4,660 4,772 5,024 5,380 Re-exports 0 56 118 132 125 116 110 108 NFS 21 30 328 752 803 844 930 1,036 Total GDP 2,910 1,881 3,650 6,318 6,958 7,446 7,932 8,510 Source: NIS and EIC model projection. 78 EIC - Cambodia Economic Watch – April 2008 Table A6.10: Employment by Sector (000's) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Agriculture 1,922 2,962 3,625 4,145 4,215 4,275 4,332 4,383 Paddy 1,522 1,997 2,559 2,939 2,991 3,036 3,078 3,116 Other Crops 234 401 436 516 527 536 545 554 Livestock 65 327 343 400 408 414 420 426 Fishery 74 193 240 248 247 245 243 239 Rubber & Forestry 26 44 47 41 43 44 46 48 Industry 99 218 473 771 813 850 880 925 Garment 14 37 200 368 398 430 463 493 Food, Beverage & Tobacco 24 72 80 85 87 89 92 95 Other Manufacturing 28 50 55 75 78 81 84 88 Electricity, Gas & Water 2 3 6 10 11 12 12 13 Construction & Mining 30 57 132 233 240 237 228 235 Services 299 752 984 1,190 1,223 1,242 1,257 1,274 Transport & Communication 28 38 55 79 82 85 88 92 Trade 138 270 324 395 397 388 383 385 Hotel & Restaurants 21 5 60 95 101 108 114 122 Other Private Services 54 133 162 286 307 327 346 365 Public Administration 58 306 383 335 335 335 325 311 Total 2,320 3,932 5,082 6,106 6,251 6,367 6,469 6,583 Source: EIC, compiled from government and international organization primary data. EIC - Cambodia Economic Watch – April 2008 79 80 EIC - Cambodia Economic Watch – April 2008 Appendix KEY STRUCTURAL II REFORMS EIC - Cambodia Economic Watch – April 2008 81 82 EIC - Cambodia Economic Watch – April 2008 Box A2.1: Cambodia Key Reforms in Trade Openness Policy and Investment (2001–2008) 2001: • Since early 2001 Cambodia benefited from the EU’s Everything But Arms (EBA) initiative, which grants duty-free and quota-free access for all exports (except arms) originating from Cambodia. With Cambodia's entry into the Association of Southeast Asian Nations (ASEAN), the European Union (EU) granted Cambodia the Regional Cumulation and Derogation Benefit Status, offered under the EU Preferential Rules of Origin. The derogation was prolonged until the end of 2006. The EU is ranked as Cambodia’s second most important destination for exports, after the United States (US) and Cambodia’s third most important trade partner, after the US and Thailand. Since Cambodia does not have a well-developed textile sector, it has not always met the standard of the Rules of Origin (ROOS) requirements and this has made some of its garment exports to EU markets subject to 12 % average rate of duty. • The Royal Government of Cambodia (RGC) reduced maximum tariff rates from 120 percent to 35 percent and reduced the number of tariff bands from 12 to four. Structure of the four tariff bands are 0%, 7%, 15% and 35%, of which about 95% of the tariff lines are under three bands: 7%, 15% and 35%. • Average un-weighted tariff rates lowered to 16.5% from 17.3% in 2000 and 18.4% in 1997. The rate had been lowered to 14.7% by 2005. • The RGC imposed an absolute ban on exports of logs and an export quota on rice. Five items are subject to export licensing requirement: (i) processed wood products, (ii) garments, (iii) weapons, (iv) all vehicles and machinery for military purposes and, (v) pharmaceuticals and medical materials. Most non- trade barriers were eliminated in 2001. 2002: • Following the presentation of its Pro-poor Trade Strategy at the July 2001 third Consultative Group (CG) meeting in Tokyo, the RGC and donors agreed to prepare the Diagnostic Trade Integration Study (DTIS-IF). It was released in January, and was led by the World Bank (WB) and a team of national and international consultants. Most non-trade barriers were eliminated. Cambodia, one of the first three pilot countries under the revamped Integrated Framework for Trade-related Technical Assistance, was considered very successful and the concept has now been replicated in 20 other Least Developed Countries (LDCs). 2003: • Cambodia was approved to become 147th World Trade Organization (WTO) member at Cancun 5Th WTO Ministerial Conference (September 10-14, 2003) following a successful five rounds of working party negotiations with its multilateral and bilateral market partners. Cambodia achieved full membership of the WTO on October 13, 2004. • Cambodia became a signatory of the ASEAN-China Free Trade Area’s Early Harvest scheme, in July. Under the scheme Cambodia received a Special Preferential Tariff (SPT) treatment for 297 products at 0% tariff rates for Chinese markets, effective from January 1, 2004. Under ASEAN and LDC status, Cambodia also received SPT treatment from a number of other countries including the EU member states, Japan, Korea, Canada, Thailand, etc. 2005: • On January 1, the Bilateral Textiles Agreement with the US government, signed in 1999, expired. On May 27, the US Department of Commerce introduced a safeguard to limit the increase of its Chinese textile imports to 7.5% a year. The move was followed on June 10, by the signing of a European Union Memorandum of Understanding with China to limit Chinese textile imports to between eight and 12.5%. This safeguard will expire by the end of 2008. • The Tariff Relief Assistance for a Development Economy (TRADE) bill was introduced in both the US Senate and the House of Representatives. The bill would grant Cambodia, and 14 other developing EIC - Cambodia Economic Watch – April 2008 83 countries, duty-free access to the US markets. Modeled on the Africa Growth and Opportunity Act (AGOA), it provides special access of textile and clothing exports from lesser-developed countries in Sub-Saharan Africa to the US markets. • During July, representatives of the RGC and Garment Manufacturer Association (GMAC) lobbied the US government to pass the TRADE bill that had already been introduced in both the US Senate and the House of Representatives. If the TRADE bill were passed, it would obviously help the Cambodian garment industry achieve a more sustainable future. • China granted Cambodia an additional 83 products duty-free access to its markets. In total, Cambodia has received SPT treatment for 380 products at 0% tariff rate for Chinese markets. 2006: • In July, the Commerce Minister went to the US to call for duty-free access to US markets for 15 LDCs in Asia. It is seen as crucial for the health of Cambodia's garment industry, to enable it to compete with other exporters such as China and Vietnam. Since 2005, a bill entitled the TRADE Act 2005 has been before the US Congress to extend duty-free access to the 15 LDCs. It would eliminate 17-to-20-percent of tariffs currently imposed on Cambodian garment exports to the US. The US has already approved this policy for Africa. • On July 14, 2006, Cambodia reached an agreement and signed a Trade and Investment Framework Agreement (TIFA) with the US. • On August 2, Vietnam offered SPT treatment to 40 Cambodian agricultural products, giving them duty- free access to its markets. Tobacco and rice were excluded from the list and are subject to quota restrictions. Vietnam and Cambodia plan to establish seven Special Economic Zones (SEZs) along their border and open eight more international border checkpoints and nine national border checkpoints in order to expand trade. • On December 5-7, the Prime Ministers of Cambodia, Vietnam and Laos met in Dalat to discuss the development of an economic triangular area incorporating the three countries' mutual border provinces. The Prime Minister of Cambodia indicated during the meeting that the plan will include the Cambodian provinces of Ratanakkiri, Mondolkiri and Stung Treng and these provinces will become a major economic engine by 2015, focusing on mining, agro-industry and ecotourism. 2007: • June 14, 2007 – Cambodia and Japan signed an agreement for "liberalization, promotion and protection of investment". Cambodia guarantees a free market, privatization and facilitation of procedural work for prospective Japanese investors. This is in addition to what is stipulated in the investment law, which ensures no discrimination, nationalization or price intervention from the government, but requires domestic shares in foreign–owned companies. • On January 16, the Office of the Council of Ministers (OCM) submitted the second protocol of the Greater Mekong Sub-region (GMS) on Facilitation of Cross Border Transport of Goods and People to the National Assembly for approval. • On February 12, the first Joint-Council meeting was held between US trade representatives and RGC officials, led by the Commerce Minister, in Siem Reap. This meeting was the follow-up of TIFA which was signed in July 2006. The meeting aimed to strengthen relationships and give participants a deeper understanding of Cambodia’s economic and political structures, as well as the challenges faced by its trade sector. During the meeting, there were exchanges of views on the legal framework, standard and capacity building, intellectual property, Sanitary and Phytosanitary (SPS), Generalized System of Preference (GSP), etc. • Preparation of the Updated Diagnostic Trade Integration Study (Updated DTIS) or Enhanced Integrated Framework (IF) has been underway, lead by the Ministry of Commerce (MoC) and United Nations Development Programs (UNDP). The report is expected to be released by mid-2007. • June, 2007 Russia offers a preferential treatment of Cambodian garment (except wool) exports to its markets duty free and quota free with subject to a 25% rule of origin conditions. EU requires 45% of rule of origin for Cambodian exports penetrating its markets for duty and quota free status. 84 EIC - Cambodia Economic Watch – April 2008 • July 2007, Sr. Minister of Commerce and GMAC embarked on their 4th lobby trip on TRADE Act to Washington DC. Their earlier trips were in 2004-2006. This lobby had not been so successful because there is a momentum to introduce a larger Bill that will provide all LDCs duty free and quota free access to US markets. This is in view of the US commitments to the Doha Round Negotiations of the WTO. This bill is being spearheaded by Congressman Jim Mcdermit who is the father of the AGOA Bill. • Law on Insolvency was adopted by the NA on October 16, 2007 and promulgated on December 08, 2007. • Under the ASEAN Harmonized Tariff Nomenclature (AHTN) of ASEAN Free Trade Area, Cambodia tariff lines will be reduced further from a little over 11,000 lines to around 8,500 lines effective from September 1, 2007. The implementation would help reduce the Cambodia’s average un-weighted tariff rate from 14.90 percent to 14.38 percent. • October 12, 2007 – Cambodia approved agreement law between Cambodia and Pakistan on promotion and protection of investment. • As of 2007 the following countries granted SPT treatments to Cambodia - US – More than 6,000 Items - 27 EU countries – Everything But Arms (EBA) initiative - Japan – (April 2007) duty and quota free status on 98% of Japanese tariff list provided to Cambodia’s exports to its markets. - China – 380 Items - Korea (Republic) – 78 Items - ASEAN under the AISP – Thailand (340 items), Brunei (8 items), Indonesia (70 items), Malaysia (180 items), Philippines (62 items). Sources: Various Government Reports, IF Report. EIC - Cambodia Economic Watch – April 2008 85 Box A2.2: Cambodia Key Policy Reforms in Private Sector Development (2001-2008) 2002: • The MoC set its mission statement as “The Year of Decentralization and Deregulation�, aiming to reduce paperwork procedures in dealing with export activities. It introduced a computerized system, in coordination with the US Customs Department, for monitoring garment exports. • Law on Marks, Trade Names and Acts of Unfair Competition passed by the National Assembly. 2003: • In January, the Law on Copy Rights and Related Rights passed by the National Assembly. • In February, the Amended Law on Investment passed by the National Assembly to make investment climate more conducive to growth. • Law on the Amendment of the Law on Taxation passed by the National Assembly. • Law on Patents, Utilities Model, Certificates and Industrial Design passed by the National Assembly. 2004: • The government and donors, led by the World Bank, identified a 12-point action plan to tackle impediments in the private sector. These were mapped out in the World Bank Investment Climate Assessment Report released in August. The 12-point implementation plan is to improve competitiveness of Cambodian investment climate and trade facilitation. • The government established a Steering Committee of Private Sector Development, consisting of eight ministries/agencies, to lead and oversee the change process in private sector development reform. • Another three Sub-steering Committees of Private Sector Development also established by the government: (i) Sub-steering Committee on Investment Climate and Private Participation in Infrastructure (PPI) led by Sr. Minister of Economy and Finance, (ii) Sub-steering Committee on Trade Facilitation led by Sr. Minister of Commerce, and (iii) Sub-steering Committee on SME led by Minister of Industry, Mines and Energy. Each sub-committee is in charge of its relevant reform agenda. • A Trade Facilitation Reform Team established to work under the guidance and leadership of the Sub-steering Committee of Trade Facilitation, chaired by Sr. Minister of Commerce. • MoC reduced the Commercial Registration fees from US$630 to US$177 (Prakas #162 MoC/ M 2004, effective from September 01). It also reduced the time for the Commercial Registration to two and an half days (MoC’s announcement letter #1971 MoC/ M 2004, effective from September 01) and the minimum capital requirement for enterprise establishment from CR 20 million (US$5,000) to CR 4 million (US$1,000). • On May 12, the number of steps in the procedure and processing application for Certificate of Origin (C/O), Visa on Commercial Invoice and Export License at MoC reduced from 11 to eight. Processing time for issuance of application for C/O, Visa on Commercial Invoice, and Export License reduced from 16 business hours (March 2002) to 12 business hours from May 12, 2004. 2005: • The Council for the Development of Cambodia (CDC) cancelled the “deposit requirement� to secure project implementation by investors, and foreign companies have been entitled to a 100% ownership of their businesses except the ownership of land. • Investment Proposal Review Sub-committee established in provinces to allow approval of investment projects of less than US$2 million. Committees comprise: i) Provincial Governor, Chairman of the Investment Sub- committee, ii) First Deputy Governor, Vice-Chairman, iii) Second Deputy Governor, Vice-Chairman, and 13 other members from different municipal departments. • Costs and times reduced for Commercial Registration at the MoC. Also reduced times and procedures for application of C/O, Visa of Certified Invoice and Export Licenses. Certificate of Processing (C/P) no longer required by the Ministry of Industry, Mines and Energy (MIME). • The requirement of C/O for pre-shipment is no longer necessary. C/O can be submitted to post-shipment in 86 EIC - Cambodia Economic Watch – April 2008 order to speed up export of goods. • Separate on-site inspections by Customs and CamControl changed to joint simultaneous on-site inspections from September 1, where only one joint inspection document is used. • RGC offered to establish a permanent, joint Customs-CamControl Focal Point/Office in garment factories with over 2,000 employees, to facilitate and speed up the inspection and clearance process. • Improvements led to a reduction of time spent on import transactions with all government agencies from 30 days in 2003 to 10.5 days in July 2005 and export transactions reduced from 20 days in 2003 to 6.6 days in July 2005. Average per transaction costs for processing exports meanwhile declined from US$942 in 2003 to US$612 in July 2005 and average import costs fell from US$2,477 in 2003 to US$673 in July 2005. Informal fees also declined from 5% per total consignment value in 2003 to 2% in July 2005 - survey done by EMC in August 2005, commissioned by the WB-funded Trade Facilitation and Competitiveness Project (TFCP). • On May 17, Law on Commercial Enterprise passed by the National Assembly. • Law on Negotiable Instruments and Payment Transactions passed by the National Assembly. • On July 15, Law on Concession passed by OCM and submitted to the National Assembly for approval. • On September 27, the RGC issued Sub-decree #111 on implementation of amendment law of the Law on Investment of the Kingdom of Cambodia. • Prime Minister signed Sub-decree on the Establishment and Management of SEZs. Promulgation of Sub-decree effective from 29 December 2005. • 14 SEZs approved for 10 provinces and One-Stop-Service approach is employed in the zone. • The RGC adopted the Small and Medium Enterprise (SME) Development Framework in 2005 as its strategy for SME development through to 2010 2006: • The government adopted and issued Sub-decree #21, Risk Management Strategy, Guidelines for Implementation. The Prime Minister signed a single-package document containing Sub-decree on March 1, 2006. • In March, Law of Commercial Arbitration passed by the National Assembly. • Law on Management of Factories and Handicrafts passed by the National Assembly. • Sub-decree on Risk Management approved by the Prime Minister. • Civil Protection Code approved by the Government. • The RGC issued Sub-decree #84 on Creation of Anti-Corruption Entity. • Provincial Chamber of Commerce Offices opened in Phnom Penh, Battambang, Siem Reap, Sihanoukville, Kampong Cham, Kampot, Takeo, Kampong Speu, Posat, Banteay Meanchey and Kandal. No plan to open offices in all 24 provinces, as not enough trading/business activities. • The RGC signed a ASYCUDA-World project document package with UNCTAD on April 18, 2006 to automate its Customs and Excise Department (CED). ASYCUDA (Automated SYstem for CUstom DAta) is the most up- to-date version of the UNCTAD-designed Information Technology package for Customs automation and modernization. ASYCUDA funded under the World Bank’s Trade TFCP. 2007: • Export Management Fee reduced from 1% to 0.9% of total export value. • Law on Secured Transaction was adopted on April 06, 2007 and promulgated on May 24, 2007. This law aims to promote economic activity through a unified set of rules on securing obligations with collaterals • April 25, 2007, the National Assembly adopted the Law on Cambodian Standard and was promulgated by Royal Kram NS/RKM/0607 date June 24, 2007. The law would create quality standards for Cambodian-made products, as well as standards for foreign companies importing goods into Cambodia. The law will permit the Commerce Ministry's Camcontrol department to inspect the quality standard of all goods entering the country's market. The Cambodia Standards Institute will be an arm of the Ministry of Industry, Mines, and Energy, which has already implemented standards for drinking water produced for Cambodia's domestic market. EIC - Cambodia Economic Watch – April 2008 87 • 22 June 2007, Law on Customs was adopted by the National Assembly and promulgated on July 20, 2007 • The Law on Concession was adopted by the National Assembly on September 10, 2007 and promulgated on October 19, 207. Law details the process by which the government can grant private concessions for state-owned infrastructure fixtures. • August 29, 2007, the Sub-Decree on the Mortgage and Transfer of the Rights over a Long-Term Lease or an Economic Land Concession approved by the Prime. The purpose of this Sub-Decree is to determine principles and terms and conditions for granting rights to investors to put up as security and transfer of rights over a long-term lease or an economic land concession during the period of time not exceeding the period prescribed in the long-term lease agreement or the economic land concession agreement. • Civil Code was adopted by the NA on October 05, 2007 and promulgated on December 08, 2007. 2008: Source: Various Government Reports. 88 EIC - Cambodia Economic Watch – April 2008 Box A2.3: Cambodia Key Reforms in Public Financial Management and Revenue (2001-2008) 2001: • Introduced visa sticker to avoid tax loss from visa revenues, stamp system on cigarettes, expanded VAT on real regime (self-assessment system) to additional 150 firms (following the 2000 expansion by 500 companies) and introduced a 10% excise tax on entertainment services. • The minimum profit tax of 1% was eliminated on investment projects. 2002: • Raised additional tax on petroleum products, two cents per liter for gasoline and four cents per liter for diesel, excise tax on beer from 10% to 20% and expanded real tax regime (real tax regime means taxation based on accounting statement) to cover additional five provinces (it was previously applied to five provinces only)1. • In July, the Law on Corporate Accounting, Audit and the Accounting Profession was passed and promulgated. • Applied a 15% withholding tax on interest earned by bank depositors. • Introduced Medium Term Expenditure Framework 2003-2005. • Streamlined the system for controlling refunds and developed risk management techniques for the verification and approval of VAT refund claims. • Established a single operational structure for government bank accounts in the National Bank of Cambodia under government control. • Established a structure for a Chart of Accounts (COAs) at the national treasury. • Introduced direct payment to the National Bank of Cambodia (NBC) for large taxpayers. 2003: • Issued Treasury Bill for CR 50 billion. • Law on the Amendment of the Law on Taxation was adopted by the National Assembly on March 3. The main points of these amendments are as follows: - Changed exemption period - Introduced 40% special depreciation for the Qualify Investment Project (QIP), for investors not electing to use exemption period - Introduced new depreciation schedules (declining balance method) - Introduced additional profit tax on dividend distribution - Reduced withholding tax on payment to non-residents from 15% to 14% - Reduced withholding tax on interest payment from bank to resident taxpayers from 15% to 6% and from 5% to 4%. - Increased rate of salary tax for non-resident taxpayers from 15% to 20% - Eliminated 1% of turnover of minimum tax and pre-payment of profit tax on QIP - Strengthened collection enforcement • Expanded the coverage of Medium Term Expenditure Framework (MTEF) to: i) Ministry of Agriculture, Forestry and Fisheries (MAFF), ii) Ministry of Rural Development (MRD), iii) Ministry of Public Works and Transport (MPWT). MTEF possibly to be expanded to Ministry of Justice and Ministry of Women’s and Veterans’ Affairs. • The Prime Minister’s circular, ordered the Ministry of Economy and Finance (MEF) not to sign new 1 The real regime tax system was expanded in 2000 to five provinces: Sihanoukville, Koh Kong, Siem Reap, Kompong Cham and Battambang. In 2002, the real regime system was expanded to another five provinces: Kandal, Svay Rieng, Kampot, Kompong Speu and Kompong Chhnang. EIC - Cambodia Economic Watch – April 2008 89 payment orders without sufficient cash in the national treasury. • Established Kampuchea Institute of Certified Public Accountants and Auditors (KICPAA) to ensure promotion of the accountancy and auditing professions. • Increased excise tax rate on beer from 20% to 30%. Increased excise tax on air transportation and telecommunications from 2% to 10% and broadened both domestic and international tax base, effective from 1 January. 2004: • The MEF put stiffer pressure on Government’s private debtors and set January 31 as the deadline to all vehicle owners to pay tax or have vehicles confiscated. • The Government reduced import tax on luxury vehicles from 230% to 50% beginning January 1, with the expectation that reduction in tax would prompt and encourage people to pay it. • Established a Budget Monitoring and Cash Management Commission (BMC) to: i) prepare and monitor budget performance and its policies, ii) provide assistance and recommendation to budget law preparation, iii) set up reviews on a six-month basis of budget execution, iv) manage expenditure reflecting the National Treasury’s capacity, and v) improve and monitor priority expenditure such as Priority Action Programmed (PAP). • In September, reform of Public Financial Management (PFM) launched by an 11-donor team, in which the WB is playing a crucial role. This sector-wide approach PFM reform is a 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. Also some 200 individual actions to be undertaken at departmental level over a period of fifteen months. • MEF issued a Prakas letter to all large and medium tax payers to pay their taxes through the bank account of the NBC. 2005: • Department of Non-Tax Revenue established, with duties to develop policy and strategy to: i) manage non-tax revenue, ii) prepare standard letters on management of non-tax revenue, iii) sum-up non-tax revenues and debts on monthly basis, iv) collect information on non-tax revenues, v) manage revenue collection from post and telecommunications, vi) manage tax on embassies, vii) passports viii) garment licences, xi) tourism, x) civil aviation. It also has duties to manage other non-tax revenues other than State property and financial industries. It is bound to effectively implement measures for getting non-tax revenues under its competence, research sources of other non-tax revenue and participate in preparing the annual budget plan. • April 1, Prakas issued on Determination of Solvency of Insurance Companies. Insurance license to be valid for a period of five years and companies to have adequate funds for solvency - a minimum of a US$1.5 million. This amount includes a deposit of US$700,000 at the NBC which may be cash or check with permission from MEF or 30% of next premium revenue in the financial statement for the last year. Profits of insurance companies not allowed to be distributed as dividends to their stakeholders unless it is agreed in writing that the companies have met or may continue to meet solvency obligations in the near future. • On April 22, instructional circular on VAT Refund Mechanism issued. It states that VAT taxpayers meet the following conditions to request a VAT refund: (i) have monthly excess VAT input tax credits (for companies having exports as their main business and investment companies), or have excess VAT input tax credits for three consecutive months or more (for other taxpayers), (ii) have proof of input tax payment, (iii) have proof of exports subject to 0% rate, and (iv) have reliable accounting records. • On June 1, introduction of income tax for garment workers. Workers with over US$125 monthly income will be subject to 5% income tax, over US$250 be subject to 10% tax, over US$2,125 be subject to 15% tax and over US$3,125 be subject to 20% income tax. • Effective from June 1, Prakas issued to all taxpayers to make payments through NBC. Payments of more 90 EIC - Cambodia Economic Watch – April 2008 than CR 4 million to be paid by cheque; payments of less than CR 4 million to be paid either by cheque or in cash at NBC. • On June 3, creation of Unused Land Appraisal and Valuation Sub-commission. The duties of the Sub- commission are to publicize law on tax collection for unused land, identify unused land and estimate taxes to be paid to the government. • On July 14, Prakas issued to introduce Accommodation Tax. Due to complaints from the Tourism Association of Cambodia, this accommodation tax may not be applied until January 2007. • On September 19, MEF issued Prakas #578, using the Joint Financial Management Procedures. This is for projects sponsored by the WB and ADB and the procedure will also be implemented for financing projects from other donors if agreed. 2006: • On February 3, Governance Action Plan II (2005-2008) approved by OCM. • On March 13, MEF Notice #007 introduced the implementation of special tax on telephone services. All telephone companies in Cambodia operating services inside and outside the country to pay specific 3% tax, commencing April 1. • National Assembly approved the National Strategy Development Plan (NSDP) 2006-2010, in which the main objectives are to reduce the poverty rate to 25% and to lower the unemployment rate to less than 4%. • Establishment of internal audit departments along the government line ministries. • On April 26, OCM Prakas #665 issued to all ministries/institutions specifying that selection of civil servants must be done through a competitive examination. • On June 9, MEF Prakas issued for promulgating the document Code of Ethics for Internal Auditors and Internal Auditing Professional Standards. • On June 16, MEF circulated Prakas relating to the extension of tax exemption on profits, for two more years, for investment enterprises of export-oriented garment, textile and shoe manufacturing sectors. This only applies to investment enterprises which received CDC approval for investment in Cambodia before March 14, 2005. On June 27, The World Bank Board of Executive Directors approved the Public Financial Management and Accountability Project. The project will support the Government’s Public Financial Management Reform Program (PFMRP) in six specific areas: i) revenue management; ii) budget formulation; iii) budget execution; iv) capacity development; v) a Merit Based Pay Initiative (MBPI) – which will help reform the civil service; and vi) building the oversight capacity of Cambodia’s National Audit Authority. The Government-led Public Financial Management Reform program has been underway since 2004 and has already achieved results. Revenues have increased by 20% from 2004 to 2005; the amount of customs revenue collected through the banking system has increased from 0% in 2004 to 36% in 2005, and 86% of all Tax Department revenue is now collected through the banking system; the stock of old expenditure arrears has been reduced by over 40%; the procurement process has been streamlined and tightened; five line ministries have established internal audit departments; and, for the first time in Cambodia, a pilot program has been launched to pay civil servants through commercial banks instead of by cash. The reform program is supported by 11 donors — ADB, IMF, the WB, UNDP, Australia, European Commission, France, Germany, Japan, Sweden and United Kingdom – four of whom are contributing about US$17 million to the WB-managed multi-donor trust fund, set up to co-finance the implementation of this program. • On March 3, Law on the Audit of the Kingdom of Cambodia was promulgated. It requires respective ministries/institutions and public enterprises to create and strengthen Internal Management System and Internal Audit. • On November 27, Sub-decree #129 on Rules and Procedures of Reclassification of Public Property of the State and State-owned Institutions – indicated that the leases on state properties should not be allowed to exceed 15 years. • Sub-decree requiring an establishment of internal audit department at all line ministries issued. Five line ministries have established internal audit departments and two of them are operational. EIC - Cambodia Economic Watch – April 2008 91 • By end of 2006, 40 % of tax and non tax revenue collected through banking system (both customs and tax departments). In the same time, 29% of customs duties collected through banking system by the end of 2006. Strategy developed for gradually increasing revenue collected through the banking system based on geographical roll-out of requirement. • A booklet format of Macro-Fiscal data is being developed. • Prakas on fees on construction services implemented. • PAP to be replaced by program budgeting PB in 2007. The new initiative to be piloted in seven ministries, including the four PAP ministries. • Good progress made in strengthening debt management. An assessment of the institutional aspects of debt management is completed and progress made with selection of a new software package for debt management and with staff capacity building. Documents on Standard Operating Procedures, Procurement, and Financial Management produced, and staff training conducted. A draft Debt Management Manual for Department of International Cooperation for staff is completed. • A pilot for direct payment of senior officers’ salaries into bank accounts is trialled in MEF and MoH and will be extended to other ministries and two provinces. • Government agreed to contribute to MBPI and incorporate it in the annual budget of MEF. MBPI for government staff involved in the PFMRP introduced. Regular payments for the agreed 263 participants commenced in November 2005 (backdated to July 2005). MBPI was funded from the Multi Donor Trust Fund under the PFMRP. 2007: • The Law on State Securities was passed by the National Assembly on November 30, 2006 and promulgated on January 10, 2007. The purpose of this law is to provide a framework for effectively printing/issuing and managing state securities in order to guarantee obligation of settlement/payments in terms of the state’s financial requirements. The state securities may be printed either in local currency or foreign currency. • On February 26, RGC Sub-decree #14 applied to the Joint Procedures of Implementing Cooperation Financing Project from the WB and ADB: i) Joint Standard Operating Procedures, ii) Joint Financial Management Manual, iii) Joint Procurement Manual. • The Government’s PFMRP is continuing to yield results. Following on from achievements in 2005 and 2006, a second wave of major reform measures was initiated in January 2007, including: i) a far-reaching streamlining of budget execution procedures to speed disbursements to spending agencies, ii) the introduction of program budgeting to better align spending with priority National Strategic Development Plan objectives, and iii) adoption of a new chart of accounts to improve expenditure reporting. All of these measures will improve the efficiency of the PFM system as well as reduce the fiduciary risk inherent in the system by reducing the threat of corruption. • Macroeconomics-model developed and training provided. MEF is discussing with ADB for further assistance to add on features that enable it to integrate the use of this model into the budgetary cycle (macro-fiscal framework model). Meanwhile the Government Financial Statistics classification is being developed and applied in the State Budget Implementation Table (TOFE). • The 2007 Budget Document, for the first time, contained details of donor-financed capital spending by line ministries; payment of taxes through the commercial banks has been trialled (Acleda Bank) and will be extended soon to the ANZ Royal Bank. • 19 line ministries have established internal audit departments of which seven are operational. • These are some progresses of Performance Indicators in the PFMRP: i) revenue out-turn increasingly close to targeted level in approved budget; ii) no accumulation of new arrears and steadily declining arrears stock; iii) budget holders increasingly able to commit expenditure in line with budgets and cash flow forecasts; iv) 75%of payments to creditors and staff made through the banking system in 2006; v) 45%of total government tax revenue (excluded non tax revenues) collected through banks in 2006; vi) service delivery units (schools, health centers) receive an increasing proportion of funds targeted at their levels; vii) public procurement based on clear rules, consistently enforced and with no major delays in 92 EIC - Cambodia Economic Watch – April 2008 processing and payment; viii) composition of expenditure by type (staff costs, non-staff costs, etc.) close to approved budget; ix) better yield achieved from tax base through improved collection efficiency and planned use of non-tax sources; x) single orderly budget process producing good (and integrated) budget plans, Budget Document for 2007 integrates recurrent, capital and donor-financed expenditure plus data for government-owned agencies; xi) all significant areas of both public revenue and expenditure captured in both the budget and accounts of the Government; xii) clearer/more accurate overview of public finances (TOFE) regularly available based on improvements in the existing system pending introduction of the FMIS. TOFE submitted to senior management within two weeks of end of period. Quarterly review of TOFE by Internal Audit Department found to be accurate; xiii) system in place to ensure that proposals for post-budget supplementary expenditure credits are always accompanied by MEF report on realistic options for financing the expenditure involved. No spending proposals go forward without identification of source of funding/offsetting savings; xiv) institutionalized mid-year budget review feeding into second half-year budget implementation/budget preparation for next year. Clear evidence that the review was conducted, formalized and effective, and results implemented; xv) Annual forecasts of all inflows and outflows prepared and regularly updated (based on accurate revenue forecasts and good budget implementation plans). Cash released to spending agencies within plus or minus 5% of their quarterly cash flow forecasts, to improve fiscal decentralization in a robust, controlled and measured way. • April 2007, Investment risk ratings, by Moody's and Standard & Poor's, put Cambodia’s first ever sovereign debt rating: a B-plus (two notches lower than Vietnam). • Government Prakas in March 7, 2007, Import tax payments in cash are no longer accepted at the port of Phnom Penh and port of Sihanoukville for companies and individuals importing more than $1,000 worth of goods to Cambodia. Effective April 1 2007, tax paid on goods brought in through the two ports must be paid by check to the National Bank of Cambodia or through an account set up at the NBC. • Based on the notice # 010 (MEF) June 6, 2006 on the Management of Tax Collection on Unused Land. Pursuant to new article 30 of the Law on Financial Management 2007 promulgated by Royal Kram #NS/RKM/1206/035 dated December 29, 2006 and Prakas # 452 SHV.Brk.PD dated June 6, 2007 on amendment to the prakas on Tax Collection on Unused Land, the MEF wishes to inform owners of unused land at provinces-municipalities and Phnom Penh as following: 1. The unused land located in provinces/municipalities shall be subject to tax on unused land 2. This tax shall be paid in accordance with the tax rate of 2% on the tax base assessed by the Land Appraisal Committee based on market prices at each municipality and areas to be evaluated in accordance with price per m2 for each year. 3. Each owner of unused land shall be required to apply tax declaration of his land and should he fail to do so would be subject to be fined by additional taxation equivalent to 10%, 25%, and 40% of the amount of unpaid tax plus 2% interest rate for each month • February 9, 2007, the Council of Ministers (RGC) approved the Financial Sector Development Strategy (Financial Blue Print) 2006-2015, and official launched on June 2007 to further strengthen the banking system in Cambodia. • Law on Combating Money Laundering and Terrorist Financing was adopted by the National Assembly on April 30, 2007 and promulgated on June 24, 2007. • Law on the Issuance and Trading Non government Securities was passed by the National Assembly on September 12, 2007 and promulgated on October 19, 2007. Law will set the ground rules for the proposed Cambodian Securities Market and establish the body that will regulate it. Cambodia is planning to introduce its bond markets (Securities Market) by 2009. • Law on Finance for 2008 Management was promulgated on December 21, 2007. • December 26, 2007 Sub-decree Nº 204 on the Division of State’s General Budget by Chapter of Law on Finance for 2008 Management was approved. 2008: • February 29, 2008, Draft Law on Public Financial System approved by CoM, and passed to NA. Sources: Various government reports. EIC - Cambodia Economic Watch – April 2008 93 Box A2.4: Cambodia Key Reforms in Public Administrative, Civil Servant, (2001-2008) 2001: • October 2001, the Government approved the remuneration policies which aim at rationalizing, motivating and retaining qualified civil servants. • The Government introduced Human Resource Management Information System. • The Base Salary and the Allowances of Civil Servant was issued by Royal Decree on December 2001. 2002: • As a part of pay reform, the new remuneration and classification system was introduced in 2002. • Pay reforms increased average from US$19.5 per month in October 2001 to US$28.1 in May 2002. 2003: • In February 2003, the Economic and Public Service Capacity Building Project (EPSCB) was introduced as an initial response to identified needs in core functions that are common to all ministries. The project targets three groups of public servants: the most senior executives, middle manager and technical staff in such areas as policy analysis, financial management and personnel management. 2004: • Public Administrative Reform became one of the four core reforms in the “Rectangular Strategy� of the Royal Government of Cambodia (RGC) in its 3rd mandate on July 2004. • The Council of Administrative Reform (CAR) carried out six studies in order to rationalize the civil service: (1) improving public service delivery, (2) benchmarking for labor market, (3) reviewing operation, (4) enhancing remuneration to support performance, (5) enhancing employment to support service delivery, and (6) strengthening the management of the civil service work force. • National Program for Administrative Reform (NPAR) was drafted in August 2004. It is a competent and transparent public administration able to deliver high quality services to the people of Cambodia. • RGC increased index value of civil servant salary from 300 CR to 345 CR under sub-decree dated by 15 January 2005. 2005: • NPAR phase I was completed. The key accomplishments include census and removal of irregulars, computerized personnel management and fiscal balance simulation • A number of training courses and seminar awareness were conducted aiming at capacity building. As result the first promotion of management development program (MDP) and professional development program (PDP) which are parts of the Economic and Public Sector Capacity Building Project (EPSCB) were completed. • In early 2005, index value of civil servant salary was increased from 300 CR up to 345 CR. In August 2005, the government also increased functional allowances for middle and senior administration and priority sectors. • Agreement reached between Treasury and CAR on use of private banking system to reduce cash transactions in the payment of salary. • As a pilot, CAR and Ministry of Economic and Finance (MEF) have agreed to establish the PMG/MBPI (Merit- Based Pay Initiative) to cover an initial 300 centrally located civil servants working on high priority Public Financial Management (PFM) reform activities. 2006: • A strategy for phasing out salary supplementation practices has been prepared through a collaborative process within the Technical Working Group (TWG) of Public Administrative Reform (PAR) based on sub-decree No 98 of 2005. Its key achievements in 2006 are as followed: implementing of the approved sectoral action plans, establishing Priority Mission Group (PMGs) and PMG/Merit based pay initiatives (PMG/MBIs) in MEF, MOH and at least one other ministry. PMGs covering 170 civil servants have been approved, with consultation ongoing on other possibilities, including in health sector. About 160 central office staffs have been proposed of 94 EIC - Cambodia Economic Watch – April 2008 an MBPI and this proposal has been discussed between HOM, the health partner and CAR. • The medium term strategy and action plan to enhance remuneration and the policy and action plan of redeployment were developed and implemented in order to improve pay and employment condition in the civil service. • Design and Implement HRM policy and action plan to improve merit and performance management by introducing HRM guide and further developing HRM Information Systems (HRMIS) for the civil service. • Enhance service delivery through developing a one window offices (OWOs) policy, legal framework and implementation plan. Five OWOs have been established across Cambodia. 2007: • A meritocratic system has been introduced to encourage both wage reform and human capacity building within government ministries and institutions. These reforms result in public servants’ remuneration increasing by 15 percent per year. The average salary of civil servants has now reached approximately US$46 per month. • The salary of civil servants will be increase by 25% since July 2007 and start from 2008, the salary of civil servant, police and military personnel will be increased by 20% a year. Since January 2002 to July 2007, civil servants’ remuneration raised to US$51.3 per month. • RGC increased index value of civil servant salary from 500 CR to 600 CR under sub-decree Nº 198 dated by December 18, 2007. 2008: • Draft Organic Laws, Law on Administration of Capital, Province, Municipality, District and Khan and Law on Election of Council for Capital, Province, Municipality, District and Khan, approved by the CoM on February 29, 2008. The both draft laws passed to NA and waiting approval. Source: Various Government Reports, EIC: Cambodia Economic Watch issue 1 to 7 EIC - Cambodia Economic Watch – April 2008 95 Box A2.5: Cambodia Key Reforms in Natural Resource Management (2001-2008) 2001: • Land Law was adopted by the National Assembly on July 20, 2001 and promulgated on August 30, 2001. It provided legal protection to establish the security of land tenure and also a fundamental basis for the reduction of land disputes. • During 2001, government has also issued a note about stopping illegal possession, and a set of ministerial instruction (Prakas) regarding service fees for land registration. • The draft of forestry law contains 18 chapters and 109 articles was approved by the Council of Ministers on July 20, 2001 and officially submitted to the National Assembly dated 17 August, 2001. • The Prakas No 5721 was issued to suspend all logging activities by the government of Cambodia in December 13, 2001. • The Community Fisheries Development Office was established by Prakas No 084 of MAFF in January 21, 2001. 2002: • To accompany implementation of the Land Law, and provide several guidance in the land sector, the Council of Land Policy approved an Interim Land Policy Framework document in May 2002. • Ministry of Land Management, Urban Planning and Construction (MLMUPC) had prepared several sub-decrees to enable the effective implementation of the land law. Those sub-decrees were adopted by the Government of Cambodia in 2002, included 1) Sub-decree on the Organization and function of the Cadastral Commission, 2) Sub-decree on Systematic Registration, and 3) Sub-decree on Case-By-Case Registration. • Under supported by the World Bank, MLMUPC created Land Management and Administrative Project which was made effective in June 2002. • The National Policy for Forestry was issued by the Government on July 26, 2002. • Forestry Law was adopted by the National Assembly on July 30, 2002 and promulgated on August 31, 2002. 2003: • The Inland Fisheries Research and Development Institute (IFReDI) was inaugurated on February 18, 2003. The institute was established in order to provide scientific information through research and development capacity for freshwater fisheries in Cambodia. • Sub-decree on Social Land Concession was issued on March 07, 2003. • Sub-decree on Forest Community Management was adopted on December 15, 2003. • Council of Land Policy was established as focal point to facilitate the formulation of strategy and policy in land management. • Department of Forestry was renamed the Forest Authority by sub-decree No. 64 dated September 11, 2003 with a horizontal management structure nationwide to undertake policy reform of the forest sector. 2004: • RGC disclosed the location and legal status and process for termination of mining concessions, Military Development Zones, economic land concession and other development arrangements situated on forest land or in protected areas and inconsistent with law governing management of these areas. • Prime Minister’s Order No.01 on prevention, repression, and elimination of forest clearing, firing, bulldozing, and grabbing was issued on June 09, 2004. • The Council for Land Policy, in collaboration with development partners was developing Land Allocation for Social and Economic Development (LASED). • National committees and sub-national committees at the provincial level were established to implement the Order No.01. 2005: • Sub-decree No. 53 on establishment, classification, and Registration of Permanent Forest Estates issued on April 01, 2005 96 EIC - Cambodia Economic Watch – April 2008 • Decision No. 28 on establishment of Control and Evaluation Committee to Stop Encroachment on Inundated Sea Forests, Land Leveling and Land Filling Along Sea Side issued on August 14, 2005. • Sub-decree on State Land Management, sub-decree on Economic Land Concession, and sub-decree on Managing State Owned Land were passed by Council of Minister in late 2005. • Royal Decree No. 0505/240 on the Establishment of Fishing Community was issued on May 29, 2005. • Sub-Decree No. 80 on management of Fishing Community was issued on June 10, 2005. • The Community Fisheries Sub-Decree was approved by the Council of Ministers on 20 May 2005 2006: • A Royal Decree on the Community Fisheries Establishment was issued in May 2005 followed by an issuance of a sub-decree on the Community Fisheries Management in June 2006 • Fishery Law was adopted by the National Assembly on March 30, 2006 and promulgated in May 21, 2006. • A sub-decree on the transformation of the Department of Fishery (DoF) into Fishery Administration was signed in August 2006. • The National Community Forestry Program Strategic Paper was issued in May 2006, stipulating the Government's Plan to offer formal recognition to the already existing Community Forestry sites of 274 and further creating an additional 200 to 400 formally recognized Community Forestry sites. • Information on the Economic Land Concession was posted available to the public through MAFF website and a technical secretariat was established by decision No 27 dated June 30, 2006. • A Prime Minister's Order on the Prevention of Deforestation was issued in May 2006. • A District State Land Working Group was established to help the provincial committee in State Land Identification and Mapping. • Regarding the issue of land grabbing, a Prime Minister's Order was issued on the Prevention of Deforestation for Land Ownership in May 2006. • A Land Dispute Agency was established with a Royal Decree dated February 26, 2006 with the members from both the Government and the opposition party. 2007: • Marine conservation, a Ten-Year Action Plan for Coral Reefs and Sea-Grass has recently been adopted by Ministry of Agriculture, Fisheries and Forestry. • Law on Water Resource Management was adopted on May 22, 2007 and promulgated on June 29, 2007. • Agricultural Sector Strategic Development Plan, 2006-2010 is presented by MAFF. • Prakas on Guideline of Fisheries Community was approved on July 13. Source: Various Government Reports, EIC: Cambodia Economic Watch issue 1 to 7 EIC - Cambodia Economic Watch – April 2008 97 98 EIC - Cambodia Economic Watch – April 2008