68975 CAMBODIA ECONOMIC WATCH APRIL 2009 ECONOMIC INSTITUTE of CAMBODIA This report is made possible by generous support from the World Bank. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank. President : Sok Hach Team Leader : Neou Seiha English Editors : Sam Campbell & Tyler Marcus Authors : Neou Seiha Chhun Dalin TABLE OF CONTENTS 1. List of Abbreviations and Acronyms iii 2. List of Tables and Figures v 3. Foreword vi 4. Executive Summary vii 5. Part I: Recent Economic Developments and Outlook 1 1. Cambodian Economic Growth 3 1.1. Agriculture 5 1.2. Industry 7 1.3. Service 11 2. Trade, Investment and Productivity 13 2.1. External Trade and Capital Movements 13 2.2. Private Investment and Stocks of Capital 16 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 rate 24 4. Fiscal Development and External Debt 27 4.1. Budget Revenue 27 4.2. Budget Expenditure 29 4.3. Budget Financing and External Debt 30 5. Labor Force, Incomes, and Poverty 33 5.1. Employment 33 5.2. Incomes 34 5.3. Poverty 35 EIC - Cambodia Economic Watch – April 2009 i Part II: Structural Reforms: Current Implementation and Prospects 37 6. Banking and Financial Sector Reform 39 6.1. Banking and Non Bank Finance 39 6.2. Microfinance 43 7. Public Financial Management Reform 45 7.1. Key Outputs of the Preparation PFMRP Platform 2 45 7.2. Consolidated Action Plan for Platform 2 46 8. Trade Reform 49 8.1. Economic Integration 49 8.2. Trade Facilitation 51 9. Public Administration Reform 53 9.1. Central Administration Reform 53 9.2. Sub-National Administration Reform 54 10. Legal and Judicial Reform 57 10.1. Progress of Legal Reform 57 10.2. Judicial and Alternative Dispute Resolution (ADR) 58 11. Land and Natural Resource Reform 61 11.1. Land Reform 61 11.2. Forestry Reform 62 11.3. Fisheries Reform 63 Bibliographic References 65 Appendix 1: Key Economic Indicators 67 Appendix 2: Key Structure Reforms 79 ii EIC - Cambodia Economic Watch – April 2009 LIST OF ABBREVIATIONS AND ACRONYMS ADR Alternative Dispute Resolution AEC ASEAN Economic Community ASEAN Association of South East Asian Nation CAMINCO Cambodian National Insurance Company CAMEX Cambodia Stock Exchange Market CAP Consolidated Action Plan CAR Council for Administrative Reform CDC Council for the Development of Cambodia CDCF Cambodia Development Cooperation Forum CDRI Cambodia Development Resource Institute CFs Community Fisheries CIS Credit Information Sharing CLJR Council for Legal and Judicial Reform CMA Cambodia Microfinance Association COBRA Cambodian Offsite Bank Reporting for prompt corrective CoJ Council of Jurist CoM Council of Minister CR Cambodian Riel CSES Cambodia Socio Economic Survey D&D Decentralization and Deconcentration DANIDA Danish International Aid Agency EIC Economic Institute of Cambodia ELC Economic Land Concession EU European Union FiA Fishery Administration FMIS Financial Management Information System FSDS Financial Sector Development Strategy GDCC Government-Donor Coordination Committee GDCE General Department of Custom and Excise GDP Gross Domestic Product HRD Human Resource Development HRM Human Resource Management HRMIS Human Resource Management Information System ILO International Labour Organization JMIs Joint Government-Donors Monitoring Indicators MAFF Ministry of Agriculture, Forestry and Fisheries MBPI Merit Based Pay Initiative EIC - Cambodia Economic Watch – April 2009 iii 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, MoC Ministry of Commerce MoH Ministry of Health MoJ Ministry of Justice MPWT Ministry of Public Works and Transport MRD Ministry of Rural Development NA National Assembly NBC National Bank of Cambodia NCDD National Committee for D&D NCSNDD National Committee for Sub-National Democratic Development NFP National Forest Program NIS National Institute of Statistics NLDA National Authority for Land Dispute Resolution NSDP National Strategic Development Plan OWOs One-Window Offices PFMRP Public Financial Management Reform Program PFMRSC Public Financial Management Reform Steering Committee PMG Priority Mission Group PPD Public Procurement Department RGC Royal Government of Cambodia RSM Royal School of Magistracy SCM Supreme Council of Magistracy TDSP Trade Development Support Program TFCP Trade Facilitation and Competitiveness Project TWG F&E Technical Group on Forestry and Environment TWG-LJR Technical Group on Legal and Judicial Reform TWG-PAR Technical Group on Public Administration Reform UNIDO United Nations Industrial Development Organization VND Vietnam Dong WB World Bank WTO World Trade Organization iv EIC - Cambodia Economic Watch – April 2009 LIST OF TABLES Table 1.1: Cambodia's Real Economic Growth by Sector (%, 2000 prices) Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) Table 1.4: Trends of Service Sectors (% increase, 2000 prices) Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) Table 2.2: Approved Private Investment Projects Table 2.3: Productivity of Workers (% Increase, US$2000 price) Table 3.3: Cambodia’s Monetary Survey (Billions of Riel) Table 3.4: Cambodia’s Interest Rate (% per annum, end of period) Table 4.1: Cambodia’s Central Government Revenue (Billion of riel) Table 4.2: Cambodia’s Central Government Expenditure (Billions of Riel) Table 4.3: Cambodia’s Financing Budget (Billion of Riel) Table 5.1: Cambodia's Population and Labor Force (000's) Table 5.2: Daily Average Earnings of Vulnerable Workers (riel) Table 6.1: Loan for Property as of December 31, 2008, in CR millions Table 6.2: Interest Rates as of December 2008 Table 6.3: Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of March 2009) Table 7.2: PFM Objectives and Key Indicators Table 8.1: Status of Remaining WTO-related Laws Table 10.1: Progress on the Remaining Fundamental Draft Laws Table 10.2: JMI for 2nd CDCF Meeting, TWG-LJR Table 11. 1, 2&3: JMIs to be Implemented and Monitored between the 2nd and 3rd meeting of the CDCF LIST OF FIGURES Figure 1.1: 2008 Economic Growth by Quarter (%, 2000 prices) Figure 1.2: US garment import for the first two months of 2009 (Percent change) Figure 3.1: Cambodia’s Consumer Price Index (December 2002=100) Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100) EIC - Cambodia Economic Watch – April 2009 v FOREWORD With the aim of providing a broad-based economic analysis to policy makers and stakeholders, the Economic Institute of Cambodia (EIC) has great pleasure in presenting the latest issue of “Cambodia Economic Watch�. This EIC series of publications not only serves as a policy-oriented research paper, but also as a reference for all readers who wish to gain a snapshot of the Cambodian economy or monitor its development. As in previous issues, this edition presents the latest economic performance and prospects based on the analysis of current data from many reliable sources. It takes an in-depth look at the trends of the main economic indicators and the progress of reform policies. It also highlights the urgent measures that need to be taken to address any of the problems encountered. In brief, the global crisis seems to show its severe impact on Cambodia since the last quarter of 2008. Thus, Cambodia’s economic growth rate slowed significantly in 2008 due to slower growth of garment industry, construction sector and tourism. These trends are likely to carry over 2009, and thus a lower economic growth rate is also expected accordantly. 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 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 vi EIC - Cambodia Economic Watch – April 2009 EXECUTIVE SUMMARY Economic Growth The global crisis started its severe impact on Cambodia during the last quarter of 2008, especially on the garment industry, tourism and construction. Cambodia economic growth was only about 5.2 percent in 2008, which was down from a growth rate of 10.2 percent in 2007. The 2008 growth gained support from the moderate increase in foreign tourists, garment and banking business during the first half of 2008. The growth rate of the construction and real estate significantly slowed down in 2008. Other sectors kept their moderate growth with a slightly lower pace. Cambodia’s economy still largely depends on foreign trade, tourists and investments. In the US, EU, and Korea the global economic crisis seems to continue its effect in 2009, thus Cambodia’s economic growth rate is also expected to slow down to about 2 percent in 2009. The garment industry would decline because the global demand, especially the US and EU, is declining and the safeguarding measures imposed by the US and EU against Chinese export have expired. The construction and real estate activities would also decline significantly and have a negative growth rate as many residential and mega construction activities are being frozen and the bubble of residential prices is popping. The decline of these activities is likely to affect some commercial banks that invested and provided loans or credit in these sectors. The number of foreign tourist arrivals in Cambodia is also slim for 2009 as global revenue is declining. The agricultural sector appears to be the main source of growth for 2009, but unpredictable and slim as it is still dependent on weather conditions and agro- investment remains moderate. Other sectors’ growth will reach only moderate rates. The growth projected for the next few years would be also modest and also depend on global welfare. Nonetheless, it seems that the upcoming Cambodia Stock Exchange Market and the exploitation of Extractive Industries such as oil and gas are attracting the attention of many big investors to Cambodia. EIC - Cambodia Economic Watch – April 2009 vii Thus, Cambodia’s economic growth could be sped up in short run 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. Trade and Investment During 2008, total exports increased by only 15.2 percent, while total imports increased by 19.6 percent. The total trade deficit is expected to widen by 31.3 percent in 2008, reaching about 16.9 percent of GDP. The widening of the trade deficit coupled with an income balance deficit created a deficit of current accounts (including capital transfer) totaling about 7.3 percent of the GDP, despite a significant increase in balance of services and a surplus in transfer accounts. The deficit could not be totally financed by foreign grants, loans and direct investment. Thus, the overall balance of payments for 2008 was first time for a deficit of about 0.7 percent of GDP. Growth in external trade and foreign tourists and investment in Cambodia are expected to slow significantly in 2009. Following the same phenomenon, the balance of payments for 2009 is expected to widen its deficit to about 2.9 percent of GDP. During 2008, the Council for the Development of Cambodia approved 101 investment projects worth about US$10.891 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in value of fixed assets compared to the 2007. Most of the investment projects involved the garment and tourism sectors, and 7 investments in agro-industry were approved due to increases in agricultural prices and the high rater of agricultural production so far. Prospects are slim that the number of projects approved in 2009 will increase significantly given the current global financial crisis and limited local skills and resources. However, the launch of the Cambodian Stock Market and oil and gas industry opportunities are likely to attract foreign investors and massive injections of foreign investment, which should make for a positive investment outlook for the next few years. Prices and Exchange Rate Yearly average inflation was about 19.7 percent during 2008. It jumped to the peak of 25.7 percent in May 2008 and slowed down to 13.5 percent in viii EIC - Cambodia Economic Watch – April 2009 December 2008. Price of food rose to the peak of 45.8 percent, household goods 29.6 percent, transportation 29.4 percent, and medical expenses 17.5 percent in May-June 2008, before slowing down to 23.2 percent, 26.1 percent, 1.1 percent, and 10.6 percent, respectively, in December 2008. Other consumer prices were relatively stable. Farmers, the main producers of food, benefited from 2008 inflation because soaring prices of agro-products allowed producers to generate income higher than that of that of their expense. The origin of this inflation was mainly caused by external factors- soaring crude oil and food prices in the international market while Cambodia remained largely dependent on imports of food and raw materials. Based on the current decline in global demand, the overall inflation for 2009 is expected to slow down significantly to about 1or 2 percent. In a year average, the riel in 2008 was relatively stable against the US dollar and Vietnam dong; but depreciated against the Thai baht by 3.5 percent. Together with prudent monetary policy of the NBC, the relative strength of the riel was mainly a result of the US economic recession. Despite the US economic recession’s continued weakening of the US dollar, the expected 2009 deficit in balance of payments will pressure the government to maintain a stable exchange rate against US dollar. Fiscal Development The central Government collected CR5,290 billion in revenue in 2008, or 32.4 percent higher than the total it had expected to collect earlier in the year. Compared to what was implemented in 2007, revenue collected from international trade taxes increased only 15.7 percent, while other tax revenues increased steadily more than 33 percent. Beside a slower growth of garment exports and a Government subsidy on gasoline import taxes, informal exports and imports from neighboring countries are also to blame for state revenue leakage. The central Government spent US$6,337 in 2008, or about 14.0 percent over the total amount it had budgeted for expenditures earlier in the year. Compared to what was implemented in 2007, total expenditure increased by 14.4 percent and spending for civil administration and for defense and security increased by 21.1 percent and 17.8 percent. Spending on priority sectors EIC - Cambodia Economic Watch – April 2009 ix increased by 24.3 percent. Spending on wages increased by 12.3 percent in 2008, about 38.9 percent-point lower than that in 2007. In total, the 2008 deficit reached CR1,047 billion or only 67.1 percent of what was planned in the budget law. It was only about a 2.1 percent increase from 2007, or about 2.5 percent of GDP. The budget deficit was mainly financed by international borrowing and foreign assistance. External loans accounted for about 60 percent, allowing Cambodia to avoid domestic debt financing. Assuming Cambodia’s economy grows around 6 percent in 2009, the central Government expects to raise CR5,135 billion in revenue, a 28.8 percent increase over its planned revenue for 2008,. At the same time, the Government planned budget expenditures of about CR 7,259 billion in 2009. The deficit is still expected to be financed by foreign financing, of which 65.3 percent are loans. It is worthy noting that for 2009 civil administration disbursements were planned to increase by 25.3 percent in the 2008 budget plan, while spending on defense and security is expected to increase by 64.2 percent. In the 2008 budget plan spending for health, education, agriculture, and rural development was stated to increase by 24.5 percent, 19.4 percent, 16.2 percent, and 32.9 percent, respectively, Updated data on the public debt by the IMF revealed that the public debt stock would increase to about US$2.8 billion at the end of 2008, an 8.8 percent increase from 2007. As a percentage of GDP, the public debt accounted for about 26.8 percent in 2008, a slightly decrease from 29.7 percent in 2007. The ratio of debt to GDP was expected to slightly decline in 2009. Debt is on a sustainable path. However, moderate risks remain, particularly given the slower economic growth rate, low levels of current government revenues, the continued existence of external arrears and the potential for contingent liabilities. If Cambodia reaches debt-rescheduling agreements with the two creditors and begins servicing debts in 2009, the risk of debt distress will decline further, though low revenue collection will continue to pose risks to debt sustainability. Progress of Structure Reform For banking reform, after a meeting between the Board of Directors of the Association of Banks on January 23, 2009, the National Bank Cambodia (NBC) x EIC - Cambodia Economic Watch – April 2009 announced the reduction of reserve requirements from 16 percent to 12 percent and cancelled the 15 percent cap on loans to the real estate sector. The NBC decided to mitigate the requirement in order to ease funds for business as the real estate sector stagnated because of global problems. There was also progress made in important reforms in non-banking finance, the insurance industry and the financial market. The Cambodian National Insurance Company (CAMINCO) has been privatized, with the government share reduced to only 25 percent. Recently, the MEF signed a joint-venture agreement with a South Korean firm on March 23, 2009 that will give the government a 55 percent share in the exchange and the Korean Stock Exchange a 45 percent share. In the area of Public Financial Management Reform (PFMR), Platform 2, implementing effective financial accountability, was launched on December 03, 2008. Building on improved budget credibility toward achieving better financial accountability is a method of continuing stage 1 and starting stage 2 of the PFMR program. With this launching, there are 14 PFM objectives and 57 activities laid out with each objective. In the area of trade reform, The ASEAN Charter was ushered into force on December 15, 2008. The charter provides the legal and institutional framework for ASEAN to be a more rule-based, effective and people-centered organization, paving the way for realizing an ASEAN Community by 2015. Concerning the WTO law enactment program, the number of laws passed has remained the same as of the second semester of 2008. The Trade Development Support Program (TDSP) officially launched on March 23, 2009 with a budget of US$ 12.6 million. This program is financed by the European Commission, the Danish International Aid Agency (DANIDA), and the United Nations Industrial Development Organization (UNIDO). It will be administered by the World Bank (WB). The program is designed to facilitate trade by improving regulations and internal processes with a focus on legal reforms, trade facilitation and product standards. In the area of administrative reform, the Council of Administrative Reform (CAR) has prioritized facilitating the three mechanisms—Priority Mission Groups (PMGs), Merit-Based Performance Incentives (MBPI), and Special Operating Agencies (SOAs)—in 2009. On March 25, 2009, a Memorandum of Understanding between the MoH, MoI, MLMUPC, and CAR was signed with the development partners to implement the MBPI and PMGs. EIC - Cambodia Economic Watch – April 2009 xi Under the Law on Administrative Management of Capital, Provinces, Municipalities, Districts and Khans, the National Committee for Sub-National Democratic Development (NCSNDD) process has been enacted since January 2009. The NCSNDD has a general responsibility to ensure the implementation of the organic law. In legal and judicial reform, preparations for a specialized commercial court are underway with the Draft Law on Establishing the Commercial Court after comments from the roundtables at the MoC. The draft has to be rearranged in accordance with the new format required by the Council of Minister (CoM) but the contents have been kept without alteration. Since an adoption of the Law on Commercial Arbitration, an establishment of a national arbitration center is pending according to an unapproved draft of the Sub- decree on Organizing and Functioning of the National Arbitration Center. The draft was submitted to the CoM in May 2008. Presently, the draft is subject to ongoing discussions and the approval is expected in April 2009. For the land and natural resource reforms, the MAFF formed five working groups to review and evaluate 35 existing ELC companies in 13 provinces. This resulted in three companies asking to cancel contracts, two companies being warned and 30 companies pushed to implement the ELCs according to the third quarter 2008 progress report. A revision of the right to give Economic Land Concession (ELC) has been issued through sub-decree No 131 dated September 15, 2008 on Adjustment of ELC. The sub-decree states that all rights of decision making on ELCs at the provincial and municipal levels have been taken away. A National Forest Program will be finalized and approved in September and start implementation by the end of this year. It is set as a Joint Monitoring Indicator for the Technical Working Group Environment and Fishery. In the same line, more tasks have been put into consideration as related to forest boundaries, demarcation of protected areas, and community forest sites and protected areas. According to the Fishery Administration’s (FiA) second quarter report of 2008, CF legal documents, CF boundary demarcations, and fish sanctuaries have been created for 14 CFs in Sihanoukville and 14 CFs in Kampong Cham. xii EIC - Cambodia Economic Watch – April 2009 Recent Economic Part Developments and I Outlook EIC - Cambodia Economic Watch – April 2009 1 2 EIC - Cambodia Economic Watch – April 2009 Chapter 1 Cambodian Economic Growth The 2008 updated data suggested that Cambodia achieved only a modest economic growth rate of about 5.2 percent in 2008, which was down from a growth rate of 10.2 percent in 2007. This was because of the global crisis and its severe impact on Cambodia during the last quarter of 2008; especially on garment industry, tourism and construction, which were the three main sectors that pushed the country’s economic growth rate up to double-digits during 2004 and 2007. Table 1.1: Cambodia's Real Economic Growth by Sector (%, 2000 prices) 2004 2005 2006 2007 2008p 2009p Agriculture -1.0% 15.5% 5.5% 5.1% 4.8% 4.3% Paddy -12.2% 43.7% 4.3% 7.5% 3.6% 4.2% Industry 17.0% 12.9% 18.4% 8.4% 3.1% -3.3% Garments 24.9% 9.2% 20.4% 10.0% 2.0% -2.1% Services 13.2% 13.1% 10.1% 10.2% 6.7% 3.9% Tourism 23.4% 22.3% 13.7% 10.3% 5.7% 3.9% Total GDP 10.3% 13.3% 10.8% 10.2% 5.2% 2.0% Non-Agricultural GDP 15.8% 12.3% 13.0% 12.2% 5.4% 1.1% Sources: Compiled from NIS for2004-2008, EIC projection for 2009 Sectors that are the most vulnerable to the global crisis are those with a high concentration of foreign direct investment (FDI) and those that export their products. The garment sector is the most vulnerable sector, followed by the tourism, construction, and real estate sector. Cambodia’s agri-business does not show up as a vulnerable sector in terms of capital source and output. As evident, garment, construction and real estate growth slowed significantly during 2008; they declined sharply in the last quarter of 2008. The tourism sector grew only at a very moderate pace. The banking business was relatively healthy and other non-agricultural sectors kept, in average, their moderate growth with a lower pace. Thanks to the higher prices of agro-products in the world market and the favorable weather for crop production during 2008, the growth of the agricultural sector also kept its moderate pace. Non-agricultural sectors slowed EIC - Cambodia Economic Watch – April 2009 3 down to about 5.4 percent in 2008, about 6.8 percent-points lower than that of 2007. The global economic crisis seems to continue its effect into 2009, especially in the US, EU, Japan and Korea. The garment, tourism and construction sectors will be flat and decline as they still depend largely on foreign trade, tourists and investments. Thus, Cambodia’s economic growth will shrink in 2009. Figure 1.1: 2008 Economic Growth by Quarter (%, 2000 prices) Sources: Data compiled from NIS The garment industry is expected to decline in 2009 and have a negative growth rate because the global demand, especially from the US and EU, is declining and the safeguarding measures imposed by the US and EU against Chinese export have expired. The number of foreign tourist arrivals in Cambodia is also slim for 2009 as global revenue is declining. The construction industry, especially residential construction, and the real estate industry will also decline significantly and have a negative growth rate as many residential and mega construction activities are being frozen and the bubble of residential prices is popping. The decline of these activities is likely to affect commercial banks that invested and provided loans or credit in these sectors. As the growth of current economic activities is expected to slow down and people prefer to keep cash in hand rather putting it in the bank, the banking sector growth is expected to slow-down significantly. 4 EIC - Cambodia Economic Watch – April 2009 The agricultural sector appears to be the main source of growth for 2009. However, it remains unpredictable since it is still dependent on weather conditions. Investment in agro-industry is still moderate in 2009 and agro-product prices are also being down. If, and only if, the agricultural sector were not to meet any serious problems as a result of severe drought or floods, Cambodia’s economic growth rate will slow-down to about 2 percent in 2009. The growth prospected for the next few years will be also modest and depend on global welfare. Yet in the short term it seems that the upcoming Cambodia Stock Exchange Market and the exploitation of Extractive Industries such as oil and gas are attracting the attention of many big investors to Cambodia. Thus, Cambodia’s economic growth could be sped up in the coming years if some significant progress is made in critical reforms. These reforms, together with effective anti-corruption policies, could provide a preferred environment and opportunity for higher economic growth. 1.1. Agriculture 2008 has been another rainy year, and has followed equally wet years in 2007, 2006 and in 2005. The agricultural sector continues to be natural resource- based and growth increased only about 4.8 percent growth in 2008, down from a 5.1 percent increase in 2007. Growth was bolstered by an expansion in cultivated areas and higher agricultural product prices. The agro-investment has remained weak, despite soaring prices and demand on the local and global market. Despite the global crisis remaining in 2009 and prices of agro-products are going down, the agricultural sector growth is expected to keep the moderate growth pace of about 4.3 percent in 2009 as prospects remain moderate in the coming years. Promoting the agricultural sector is an urgent need to diversify the sources of growth. The garment and construction industries appear to be insufficient for the country’s economic growth in the coming years. Repeatedly, more effective irrigation, infrastructure, and natural resource management systems are required to speed up and achieve sustainable agricultural growth and thus reduce poverty, as the agricultural sector is the main source of income for the country’s poorest inhabitants. EIC - Cambodia Economic Watch – April 2009 5 Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) 2004 2005 2006 2007 2008p 2009p Paddy -12.2% 43.7% 4.3% 7.5% 3.6% 4.2% Other Crops 9.5% 12.2% 6.5% 9.0% 8.5% 8.6% Livestock 3.9% 5.6% 8.2% 3.7% 2.5% 4.4% Fishery -1.7% 5.6% 3.8% 0.8% 5.1% 0.8% Rubber & Forestry -0.3% 3.5% 6.6% 1.8% 1.2% 1.8% Total Agriculture -1.0% 15.5% 5.5% 5.1% 4.8% 4.3% Sources: NIS for2004-2008, EIC projection for 2009. Crops, especially paddy, are the main source of income for Cambodian farmers. 2008 data suggested weather conditions and the volume of crop production were as favorable as the previous three years. Cultivated areas continued to increase in 2008, but only 6,000 ha for paddy and some places, however, experienced too little or too much rain. Thanks to impressive gains in export market prices during the first half of 2008, paddy increased at a moderate pace of about 3.6 percent in 2008, down from 7.5 percent in 2007. The paddy growth prospects will remain moderate for the next few years, expected at about 4.2 percent in 2009, as opportunities for further cultivated land are decreasing. Other crops meanwhile grew at a significant rate of about 8.5 percent, slightly down from 9.0 percent increase in 2007. Growth rates are expected to remain strong in coming years, expected to remain at about 8.6 percent for 2009. Besides revenue they earn from crop cultivation, livestock is another potential source of income for many Cambodian farmers. 2008 data also suggested that livestock increased moderately by 2.5 percent in 2008, a 1.2 percent-point lower than 2007, due to limited initial capital, high interest rates and difficult access to credit (even though some improvement has been made). These constraints are likely to continue to restrain growth in the livestock sector in 2009. Cambodia is still expected to continue to import large quantities of livestock products from neighboring countries, as local investment in this sector remains slim. Based on the current situation, the growth rate for livestock is expected to increase at only a moderate pace in next coming years, of which about 4.4 percent is expected for in 2009. 6 EIC - Cambodia Economic Watch – April 2009 2008 data also revealed that fishery production was relatively the same as in 2007. As price of fish increased significantly in 2008, the fishery sector grew by about 2.0 percent in 2008, the 1.2 percent-point increases higher than the growth rate posted in 2007. Small fish, used for the production of a popular salt fish pâté, remained abundant while normal fish production was still limited. However, the number of illegal fishing complaints, the use of illegal fishing instruments and the destruction of essential fish habitats remain important concerns for the sustainable growth of the sector. These practices have led to declining fish stocks and a reduction in the number of places available for fish to breed. Thus, the prospect that fish stocks will expand in the coming years is slim, with an expected growth about 0.8 percent in 2009. Growth in the forestry sector grew about 0.6 percent in 2008, down slightly from 1.1 percent in 2007. The sector’s growth potential will remain weak for the next few years due to weak natural resource management. The rubber sector posted a 6.6 percent growth rate in 2008, 2.4 percent-point lower than that of 2007 because old growth rubber trees have been replaced either by new trees that are still too young to produce raw rubber or other crops. Rubber growth is expected to remain flat in coming years. 1.2. Industry The Industry sector’s growth is continuing on a downward trend in 2008 due to the current global crisis and its effect on garment exports and the construction sector. Other industrial sectors are growing at a moderate pace. The total industrial growth rate grew only by only 3.1 percent in 2008, down from 8.4 percent in 2007 and 18.4 percent in 2006. Based on the current trend, the industrial sector is likely to continue its downward trend in 2009 and have negative a growth rate of 3.3 percent due to mainly the expected decline of the construction and garment sectors. Progress in Government reforms in line with effective anti-corruption policies could accelerate industrial growth. The garment industry is no longer the main contributor to the industrial sector growth. The garment industry’s growth slowed down significantly in 2009 due to the significant decline in prices and lower demand from the US and EU market. EIC - Cambodia Economic Watch – April 2009 7 Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) 2004 2005 2006 2007 2008p 2009p Garments 24.9% 9.2% 20.4% 10.0% 2.0% -2.1% Food, Beverages & Tobacco -5.3% 9.0% 3.3% 3.1% 6.0% 5.5% Electricity, Gas and Water 11.3% 12.7% 31.5% 11.7% 10.5% 8.7% Construction 13.2% 22.1% 20.0% 6.7% 3.0% -13.0% Other industries 9.3% 17.4% 14.1% 6.4% 6.2% 3.8% Total Industry 17.0% 12.9% 18.4% 8.4% 3.1% -3.3% Sources: Compiled from NIS for2004-2008, EIC projection for 2009 According to the Customs Department of the Ministry of Economy and Finance (MEF), the quantity of garment exports rose by 9.5 percent in 2008, roughly one percent-point lower than the increase posted during 2007. Exports to the US grew by 9.4 percent, the EU only 6.5 percent and those to other markets jumped more than 16.0 percent. The US and EU took about 68.4 percent and 21.2 percent, respectively, of total Cambodia’s garment export. This growth was mainly due to safeguarding measures imposed by the US and EU to restrain Chinese exports and low labor costs and depreciation of the riel or dollar against other currencies, especially the Chinese yuan. Additionally, a labor compliance project monitored by the International Labor Organization (ILO) has created a niche market for Cambodian apparel, Cambodia’s new WTO membership and a reduction in export transaction bureaucracy have all helped to maintain the sector’s growth. However, the price of Cambodian apparel continued to decline steadily as competition for the US garment market intensifies, especially from Vietnam and China. Cambodian clothing exports to the US are in direct competition with Vietnam (88 percent) and China (70 percent). The sluggish US economy has also been a factor in declining prices for Cambodian apparel. At the same time, Cambodia’s average garment export prices declined by 6.7 percent in 2008. Prices for garments exported to the US market declined by 10.0 percent while those to other markets remained roughly the same. Thus, the value of garment exports increased by only 2.2 percent. The value of exports to the US decreased by 1.5 percent while the value of exports to the EU and other market increased by 6.0 percent and 20.8 percent, respectively. 8 EIC - Cambodia Economic Watch – April 2009 In sum, the Cambodian garment industry grew by only about 2.0 percent in 2008. The growth is likely to shrink in future years, especially as safeguarding measures, which have figured prominently in the sustained growth of the Cambodian garment industry, expired at the end of 2008 and US demand is decreasing. Data of the first two months of 2009 has been revealed that US garment imports from Cambodia were off from about US$199 million a month during the first two months of 2008 to US$161 million during the same period of 2009. This represented a 19.1 percent drop of US import from Cambodia compared to a 10.9 percent drop for the total US garment imports. That reflected Cambodia garment industry is more vulnerable to the decline than other countries. Figure 1.2: US garment import for the first two months of 2009 (Percent change) Sources: Compiled from US department data This data also revealed that Thailand and China was also off by only 12.9 percent and 3.1 percent, respectively; while Vietnam and Bangladesh have surprisingly kept increasing during the same period. Cambodia is thus seen as weak in terms of international competitiveness compared to Thailand, China and Vietnam. EIC - Cambodia Economic Watch – April 2009 9 Overall, since the US and EU are still in a crisis in 2009, Cambodian garment product export growth will continue its downward trend into 2009. Thus, overall Cambodia’s garment industry growth will also continue its downward trend in 2009, with an expected negative growth rate of about 2.1 percent. It’s unlikely the industry will be able to post significant gains in next coming years unless Cambodia can convince the US to grant it duty-free status under the US’ New Partnership for Development Act. Growth in the construction sector, meanwhile, was on a downward trend even though steel imports increased by 36.8 percent during 2008. Sale prices for newly constructed residences were perceived as stagnant during the first half of 2008 and are declining in the second half of 2008. The growth of the construction sector slowed to 3.0 percent in 2008, down from an increase of 6.7 percent, 20 percent, and 22.1 percent in 2007, 2006, and 2005, respectively. Slower growth in this sector reflected a slower growth of a few others of the services sectors, most notably real estate. The slower growth of real estate will not undermine the economy like it has in the US and Vietnam. This is because construction sector and real estate sales transactions are mostly done in cash in Cambodia. Timely actions from the banks to restrict credit for housing loans also helps to reduce potentially negative impacts of downturns in the construction sector. Most of the mega-construction projects are owned by foreigners. As the current global economic crisis is still lingering, many construction projects are on hold. The construction sector’s growth is expected to post a negative growth rate in 2009. This negative growth is likely to be to 13.0 percent into 2009, given that sale prices will continue to decline. The food, beverage and tobacco sector grew at a faster rate in 2008 given higher food prices, according to available data for 2008. The depreciation of the riel against other currencies, especially the Thai baht, boosted the competitiveness of local products against the imported products. However, because investment in agro-sectors remained weak during 2008, Cambodian consumers thus continued to use imported products, even with higher prices. In total, the food, beverage and tobacco sector continued to grow at a moderate pace of about 6.0 percent in 2008, up from 3.3 percent increase in 2007. This trend is expected to carry on in the next few years and achieve a 5.5 percent growth rate in 2009. More investment incentives along with credit 10 EIC - Cambodia Economic Watch – April 2009 and initial capital and entrepreneur skills are needed to speed up the sector growth. Other industrial sub-sectors such as electricity, gas, water and other manufacturing sectors grew at about the same pace they did in 2007. Moderate growth is projected for these sectors as Cambodia starts to import more and more electricity from neighboring countries as part of long-term investment programs. 1.3. Service Last but not least, the service sector growth also slowed down significantly because of the slower tourism, trade and transport sectors. The overall service sector, excluding public administration, is expected to expand by only 6.8 percent in 2008, which is a drop from a growth rate of 10.5 percent in 2007 and 10.6 percent in 2006. Service sector growth has been dependent on annual increases in the number of foreign tourist arrivals in Cambodia and a significant expansion in economic activity, especially the trade, transportation, communication, and financial service sectors. As these economic activities are expected to slow down in coming years, service sector growth will also slow in coming years and is expected to be about only 3.9 percent in 2009. Table 1.4: Trends of Service Sectors (% increase, 2000 prices) 2004 2005 2006 2007 2008p 2009p Transport 9.5% 14.5% 2.1% 7.2% 6.5% 4.9% Trade 5.9% 8.5% 7.1% 9.5% 6.5% 4.6% Hotels & Restaurants 23.4% 22.3% 13.7% 10.3% 5.7% 3.9% Finance 20.6% 19.6% 23.9% 22.2% 16.0% 4.9% Other Private Services 19.2% 13.1% 14.2% 11.5% 6.6% 3.2% Total Private Services 14.3% 13.4% 10.6% 10.5% 6.8% 3.9% Public Administration -6.7% 5.9% -1.3% 0.1% 4.5% 2.9% Total Services 13.2% 13.1% 10.1% 10.2% 6.7% 3.9% Sources: NIS for2004-2008, EIC projection for 2009 Trade accounts for the biggest portion of Cambodia’s service sector, followed by transport and communication. The sectors continue to grow at a significant pace as a result of the country’s solid economic performance during the last few years. However, soaring prices for imported oil products and high EIC - Cambodia Economic Watch – April 2009 11 inflation has slowed growth of most services. Trade grew by 6.5 percent, while transport and communication grew by 7.5 percent in 2008, compared to 7.2 percent and 9.5 percent, respectively, in 2007. Meanwhile, physical infrastructure remains poor, especially the roads and railways. Further rehabilitation and reconstruction of roads is essential to enhance trading opportunities in remote areas of the country. As economic activities are slowing down in 2009, the growth in trade and transportation activities would also slow and are expected to be about 6.5 percent for both sectors in 2009. The hotel and restaurant sector contributed significantly to overall service sector growth. The number of foreign tourist arrivals in Cambodia during 2008 increased by only 6.4 percent compared to 18.2 percent during 2007. The number of tourists who arrived in Cambodia via Siemreap airport declined by 12.1 percent, while those who came through Phnom Penh airport and by land increased by 6.5 percent and 30.5 percent, respectively. Both the global economic slowdown and Thai political instability likely explain these figures. In combination with higher inflation during the year, the tourism sector is expected to expand by about 5.7 percent in 2008, a drop in growth of about 4.5 percent-point compared to 2007. The downward trend is also expected to continue in 2009 with the expected slower growth rate of the global economy. The tourism sector growth is expected reach about 4.6 percent in 2009. The financial sector performed well during the first half of 2008 due to the increase in credit demand and bank trust; but it was also significantly slowed-down the second half of 2008 because of the decline in construction, real estate, and other economic activities. Many commercial banks were also invested in construction and real estate sector. In total, the financial sector grew by 16.0 percent in 2008, down from 22.2 percent in 2007. The growth prospected for this sector is also slims as economic activities for 2009 are slowed-down or declining. The real estate sector growth slowed significantly to 5.0 percent in 2008 as a result of declining prices of land and residential construction and credit restrictions imposed by banks. Even though most real estate transactions were completed in cash rather than bank credit, a slowdown in growth in this sector adversely affected growth in other service sectors such as entertainment activities. Other service sectors grew only about 8.2 percent in 2008, on average, down from 12.1 percent in 2007. These downward trends are expected to continue for 2009 and the next few years. 12 EIC - Cambodia Economic Watch – April 2009 Chapter 2 Trade, Investment and Productivity In 2008, Cambodia’s garment external trade slowed down, but the value of imported cars, motorcycles, buses, trucks, tractors, and alcohol increased significantly. That led to a widening of Cambodia’s trade deficit. Trade deficits, as well as income account deficits, could not be totally financed by foreign grants, loans and direct investment. Thus, the overall balance of payments for 2008 was first time for a deficit of about 0.7 percent of GDP. 2.1. External Trade and Capital Movements According to data compiled from the National Bank of Cambodia (NBC), total 2008exports increased by 15.2 percent, compared to a 10.7 percent increase in 2007. The value of garment exports grew slightly in 2008 but it declined sharply as a share of total export value, to about only 67 percent in 2008 from about 80 percent in 2007. Agricultural product export values rose sharply, but their overall volumes remained low as transactions made through informal channels were causing serious leakages in tax revenue. In contrast, imports accelerated 19.6 percent during 2008 and imports of petroleum made up the lion’s share of the increase. The value of imported fabric declined, but the value of imported cars, motorcycles, buses, trucks, tractors, beer and other alcohol increased significantly. Growth in imports is a sign of an emerging middle class whose disposable income has grown as a result of land and housing speculation. The total trade deficit widened in 2008, reaching about US$1.7 billion in nominal terms or about 16.9 percent of GDP, up about 31.3 percent from 2007. Due to a continued increase in the number of foreign tourist arrivals in Cambodia, the income generated from tourist spending (travel) reached about US$1.2 billion in 2008, representing only a 7.6 percent increase from the previous year. Reflecting a slower increase of foreign tourist arrival in Cambodia, this pace was significantly slower than the 17.8 increase from 2007. Additionally, Cambodian travel to abroad decreased by 11.9 percent. Since Cambodia does not have a stake in any of the airlines or other transportation industries serving international markets that are funneling tourists into the country, revenue from tourist transportation remains low and reached only about US$229 million in 2008, a 9.4 percent jump from EIC - Cambodia Economic Watch – April 2009 13 2007.. Nonetheless, the transportation payments of Cambodians visiting abroad kept increasing steadily, about 18.2 percent increase from 2007. In combination with other service receipts and payments, total service receipt increased by only 5.9 percent in 2008, compared to a 19.4 percent increase in 2007, while total service payment increased by 13 percent in 2008. In sum, total service sector surplus decreased slightly by 4.1 percent in 2008 in nominal terms and reached only 6.0 percent of GDP. Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) 2004 2005 2006 2007 2008p 2009p Exports of Goods 2,589 2,910 3,693 4,088 4,708 4,737 Imports of Goods 3,269 3,903 4,727 5,419 6,456 5,969 Trade Balance -681 -993 -1,034 -1,331 -1,748 -1,232 Agriculture 179 350 401 532 851 989 Textiles & Garments 1,068 1,158 1,430 1,566 1,602 1,446 Oil & Gas -610 -842 -1,123 -1,306 -1,555 -805 Other Goods -1,318 -1,660 -1,741 -2,122 -2,646 -2,862 Balance of Services 291 483 516 643 617 633 Transportation -194 -233 -270 -300 -373 -411 Travel 556 743 841 1,012 1,113 1,167 Others -72 -27 -56 -69 -124 -122 Balance of Incomes -221 -304 -319 -385 -468 -526 Balance of Transfers 497 595 790 855 851 863 Private Transfers 176 209 315 377 365 367 Government Transfers 321 385 475 478 486 496 Current Accounts -115 -220 -47 -218 -748 -262 Financial Accounts 219 305 286 677 673 144 Official Loans Net 154 144 122 200 220 184 Foreign Direct Investment 121 375 475 866 806 362 Others -56 -214 -311 -389 -353 -401 Change in Foreign Reserves 105 85 239 459 -75 -118 At the National Bank (NBC) 70 109 182 277 277 259 Outside NBC 35 -24 57 182 -353 -377 Sources: NBC for 2003-2008, EIC projection for 2009 Outflows of income continue to figure prominently in 2008 and largely take the form of dividends and profits from foreign investments in the country, 14 EIC - Cambodia Economic Watch – April 2009 particularly in the garment industry, and payments for foreign technical assistance by donors. The 2008 income account reached a deficit of about US$468 million or about 4.5 percent of GDP, which is an increase of about 21.2 percent from 2007. Net private transfers were expected to reach US$365 million in 2008, relatively the same as 2007. Combined with a large inflow of foreign aid, Cambodia is likely to have a surplus of about US$851 million in its transfers account in 2008, which represents about 8.2 percent of GDP. In total, its current account deficit, including official transfers, increased sharply to US$748 million or about 7.3 percent of GDP. Nevertheless, the financial account was in surplus by only about US$673 million or 6.5 percent of GDP in 2008, which was about a 1.8 percent increase from 2007. There is a slight increase in finance from official loans, but finance through foreign direct investment decreased by 7.0 percent from 2007. To sum up, the overall balance of payments was for the first time in a deficit of about US$75 million in 2008 or about 0.7 percent of the GDP. It is worth noting that since Cambodia is a dollarized economy, with individuals and institutions able to hold foreign currencies, the overall change in the balance of payments reflects not only foreign reserves held by the NBC, but also economic agencies and households. For 2009, growth in external trade (both exports and imports) is expected to slow significantly due to anticipated drops in Cambodian garment exports and decreases in imports of raw material used in the garment and construction industry. The trade deficit is likely to decrease slightly in 2008 because of an expected stabilization in the prices of oil and other construction materials on international markets. Therefore, Cambodia’s trade deficit may reach 12.0 percent of GDP in 2009, a 5.6 percent-point decrease from that of 2008. Despite expected improvement in balance of services due to a recovery of expansion in the tourism sector, the deficit in current accounts is expected to reach 2.4 percent of GDP in 2009, about 4.9 percent-point lower than that in 2008. However, the current crisis may flatten the flow of foreign direct investment into Cambodia for 2009. Thus, the financial account surplus is not likely to be able to finance the current deficit. Overall, the balance of payments for 2009 is expected to be in a deficit of 1.1 percent of GDP. EIC - Cambodia Economic Watch – April 2009 15 2.2. Private Investment and Stocks of Capital During 2008, the Council for the Development of Cambodia (CDC) approved 101 investment projects worth about US$10.9 billion in fixed assets. That represented a 3.8 percent decrease in the number of investment projects, but a five-fold increase in the fixed assets compared to 2007 because most of the projects approved in service sectors in 2008 were mega projects, especially those in tourism. Most of the investment projects involved the garment and tourism sectors, which accounted for 38 and 20, respectively, of the approved investment projects and US$149 million and US$8.8 billion of fixed assets. It is worthy noting that only six investments in agro-industry have been approved for US$108 million, despite increases in agricultural prices and high agricultural production during the year. Table 2.2: Approved Private Investment Projects 2004 2005 2006 2007 2008 Feb 2009 Number of Approved Investment Projects Total 60 104 99 130 101 14 Garments 35 53 49 39 38 3 Hotels 3 4 4 11 20 3 Others 22 47 45 80 43 8 Fixed Assets Approved (Millions of US Dollars) Total 231 695 4,451 2,667 10,891 242 Garments 85 118 212 171 149 7 Hotels 23 65 22 1,101 8,776 94 Others 123 512 2,217 1,395 1,966 141 Source: Compiled from CDC, Cambodian Investment Board During the first two months of 2009, the CDC approved 14 investment projects and US$242 of fixed assets. Most approved projects were in energy, garment, and tourism. No investment project has been seen in agricultural the sector so far. In total, for 2009, together with the global crisis and limited local skills and resources, the expected number of approval projects is slim. Decline in private consumption in the US and EU markets and the expiration of US and 16 EIC - Cambodia Economic Watch – April 2009 EU safeguard measures will limit the investment in garment factories. Investment in the tourism sector is also moderate. Investment in the construction sector is likely to fall in 2009, especially in residential construction, because of a continued decline in sale prices and restrictions on housing loans. Limited infrastructure development and lack of skilled human resources will keep projected growth in the agro-industry to a moderate level. However, the investment outlook remains optimistic for the next few years with the upcoming launch of the Cambodian Stock Market and the oil and gas industry opportunities likely to attract foreign investors and massive injections of foreign investment. 2.3. Productivity Productivity is the key to increased competitiveness and creating the sort of businesses that are attractive to investors. According to an EIC estimate, the total productivity of workers (value-added per worker) in Cambodia increased by about 6.1 percent per annum during the last decade, while real GDP growth rose by 9.3 percent per annum. This growth has allowed Cambodia to remain relatively strong competitively. Nonetheless, as the economic growth has slowed down significantly in 2008, the productivity of workers will also decrease significantly. Table 2.3: Productivity of Workers (% Increase, US$2000 price) 2004 2005 2006 2007 2008p 2009p Agriculture -3.1% 13.0% 3.3% 3.3% 3.3% 2.9% Paddy -14.2% 40.5% 2.2% 5.6% 2.1% 2.8% Industry 7.4% 2.3% 6.2% 2.4% -1.8% -2.9% Textile & Garment 9.4% -0.7% 5.6% 1.7% -5.0% -4.2% Private Services 8.6% 6.5% 4.9% 6.6% 7.2% 3.5% Tourism 8.2% 7.9% 5.1% 3.9% 2.2% 1.5% Total (*) 6.1% 9.8% 7.2% 5.5% 3.4% 0.9% Source: EIC Estimate (*) Excluding Public Administration Growth in agricultural production in 2008 has spurred productivity. Labor productivity in the agricultural sector grew by 3.3 percent in 2008, relatively the same as 2007. Since the agricultural sector remains almost totally dependent on weather conditions, the key to maintaining steady growth in EIC - Cambodia Economic Watch – April 2009 17 productivity is investing in irrigation systems. Based on projections for the performance of the agricultural sector over the next few years, labor productivity is likely to continue to increase at the same pace it did in 2008. In the meantime, as garment exports slow, productivity in the garment industry decreased by about 5.0 percent in 2008, compared to a 1.7 increase in 2007. The drop is expected despite a boost in training opportunities for mid- level factory management. Labor productivity in the construction sector is also expected to decrease, while that of other industrial sectors continues to grow at a very moderate rate. Total labor productivity in the industrial sector decreased by only 1.8 percent in 2008, down from a 2.4 percent increase in 2007. Based on the current performance of the industrial sector, labor productivity growth is likely to remain slim over the next few years as the garment and construction sectors are expected to decline in 2009. In contrast, labor productivity in the service sector (excluding public administration) increased at a faster rate of about 7.2 percent in 2008, up from the 6.6 percent increase in 2007. This is largely due to a significant increase in labor productivity in the real estate and financial sectors and moderate growth in other service sectors. To sum up, total annual worker productivity growth, excluding public administration slowed to 3.4 percent, reaching US$1,118 per worker in real terms. The growth is also expected to continue to slow to only 0.9 percent in 2009. 18 EIC - Cambodia Economic Watch – April 2009 Chapter 3 Price and Monetary Development Yearly average inflation accelerated during 2008 with twice the speed because of soaring international food prices and transportation costs. At the same time, the exchange rate of the riel against the US dollar is relatively stable, whereas the riel in circulation increased significantly compared to that of US dollar. 3.1. Inflation The inflation rate continued its double-digit rise in December 2008 to 13.5 percent from 10.8 percent in December 2007. During 2008 inflation rate jumped to the peak of 25.7 percent in May 2008 and slowed down 13.5 in December 2008. At the same time, the price of food rose 45.8 percent, household goods, 29.6 percent, transportation, 29.4 percent and medical expenses, 17.5 percent in May-June 2008. This all preceded a slow down to 23.2 percent, 26.1 percent, 1.1 percent, and 10.6 percent, respectively, in December 2008. Other consumer prices were relatively stable or increased slightly during this period. Figure 3.1: Cambodia’s Consumer Price Index (December 2002=100) Source: Data compiled from NIS and EIC estimate Yearly average of inflation was 19.7 percent for 2008. The origin of this inflation was mainly caused by external factors such as soaring crude oil and food prices in the international market as Cambodia remained largely depend on import food products and raw material. EIC - Cambodia Economic Watch – April 2009 19 Soaring domestic food prices occurred despite an active agricultural sector, and high capacity local production of crops, livestock and fish. This was because the agro-industry, such as livestock, remained weak while large amounts of some local food products (mainly paddy and fish) were informally exported to neighboring countries where farmers could sell for considerably higher prices. This created the shortage of local supply. Thus, the local market responded to such shortages by importing food, mainly from Thailand, Vietnam and Singapore. This, in turn, pushes the price of food consumed in Cambodia up considerably. Recent spikes in transportation costs, meanwhile, were due to sustained recent jumps in the price of crude oil on the international market. Oil accounts for a significant share of the production cost of food and other consumer items. Sustained increases for oil and food price also pushed up prices for other consumer products such as medical care items and household goods. Inflation’s impacts are different for different groups of people. Detailed figures of 2008’s inflation indicated that prices of food soared faster than other prices. Thus, to some extent, farmers, the main producers of food, benefited from 2008’s inflation, because soaring in prices of agro-products allowed farmers to generate growth of their income with higher revenues than expenses. Inflation slowed to about 6 percent in February 2009. The inflation in Cambodia remains highly connected to international prices such as food products and cruel prices. Large amounts of raw material and consumer products remain highly dependent on imports. Based on the current decline in global demand and local economic linkages, the overall inflation in 2009 is expected to slow down significantly to about 1 or 2 percent. To reduce the global impact on Cambodia’s prices, the promotion of agri-business sectors along with proper natural resource management is the priority. 3.2. Exchange Rate The riel remained relatively stable against the US dollar during 2008 at around CR4,054 per US dollar. The riel depreciated from CR3,993 in January 2008 to CR4,123 in July 2008 for one US dollar. The riel then began to appreciate against the US dollar to about CR4,053 for one US dollar in December 2008. In year average, the exchange rate of riel against the US dollar was relatively the same in 2008 compared to 2007. 20 EIC - Cambodia Economic Watch – April 2009 This relative strength of the riel was due to an economic crisis in the US and increasing demand for the riel in rural areas during the farming season. An impressive increase of riel in the current in circulation compared to that of US dollar during the year was also the main reason to maintain stable exchange rates of the riel against US dollar. However, the US dollar began to re-appreciate against other currencies, including the Cambodian riel, since January of 2009. In addition, a decline in inflow of foreign currency, especially the US dollar, into Cambodia is expected as the garment sector, foreign investors and tourists have slowed down. This will put some pressure on the Cambodian riel against US dollar. As evidence, the Cambodian riel depreciated about 3.3 percent against the US dollar in February 2009. Thus, prudent monetary policy and timely action is crucial to maintaining a stable exchange rate. The average exchange rate for 2009 is expected to be about CR4,100 for one US dollar, a depreciation of about 1.1 percent since 2008. Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100) Source: EIC, Data compiled from the IMF and NBC The riel was also relatively stable against the Vietnamese dong, but moderately fluctuated with Thai baht during 2008. In a year average, the riel appreciated about 0.9 percent against the Vietnamese dong, trading around VND4 for one riel, and depreciated about 3.5 percent against Thai baht, trading around CR122 for one baht during 2008. Compared to Thai products in terms of exports and local consumer products, the depreciation of the riel against the Thai baht generally boosts the competitiveness of Cambodian consumer products, especially agricultural product. However, since the EIC - Cambodia Economic Watch – April 2009 21 capacity of Cambodian producers tends to be static or limited, Cambodian consumers must continue to rely on higher-priced imported products, especially from Thailand. 3.3. Money Supply Total money supply increased slightly during 2008. Total money supply (M2) reached CR11,859 billion in December 2008 or 28.2 percent of GDP. It represented an increase of only 4.8 percent in December 2008 compared to 62.9 in December 2007. This slowing of the growth rate was seen as sharply at the last quarter of 2008 for both local currency in circulation and foreign currency deposit. Growth of foreign currency deposits slowed to only 1.5 percent in December 2008 compared to 75.9 percent in December 2007. The slower growth in foreign currency reflected slower activities in sectors such as tourism and garments, especially those at the last quarter of 2008. And at the same time, a large amount of foreign currency, especially US dollars, was transferred out of the country by foreign investors to their respective countries. The amount of local currency in circulation increased 15.3 percent in December 2008 compared to 24.4 percent in December 2007. The pace of increase of the riel circulation was relatively high compared to that of US dollar thanks to good performance of agricultural activities and an effort from the NBC to keep stable exchange rates between the riel and US dollar in the context of the current global crisis. However, in total, foreign currency continues to dominate money supply in 2008, representing about 78.2 percent of the total money supply and 22.1 percent of GDP, down from 80.8 percent and 26.1 percent in 2007, respectively. Riel liquidity has remained limited, despite that it continued to increase significantly during the year, representing about only 19.4 percent of the total money supply and only 5.5 percent of the GDP, which was about 17.6 percent and 5.7 percent in 2007, respectively. 22 EIC - Cambodia Economic Watch – April 2009 Table 3.3: Cambodia’s Monetary Survey (Billions of Riel) 2004 2005 2006 2007 2008 Feb 2009 Total Money Supply 4,329 5,025 6,942 11,311 11,859 12,088 Local Currency in Circulation 1,115 1,282 1,600 1,990 2,295 2,362 Foreign Currency Deposits 3,079 3,589 5,196 9,138 9,274 9,428 Other Liquidity 135 153 147 183 290 298 Total Money Demand 4,329 5,025 6,942 11,311 11,859 12,088 Credit to Private Sector 1,817 2,394 3,630 6,386 9,894 9,898 Credit to Public Sector (Net) -209 -421 -951 -1,815 -2,986 -2,967 Other Money Demand 2,721 3,052 4,264 6,739 4,951 5,157 Source: Data compiled from the NBC For 2009, the money supply decreased by 0.4 percent in February 2009 compared to February 2008. This was due to a decline of foreign currency deposits of about 3.9 percent. The riel in circulation kept increasing by 9.5 percent during the same period. Based on current trends, the growth of foreign currency deposits are minimal given a negative growth rate of the garment and construction industries and a slower growth rate of the tourism sector. In addition, households may also prefer to keep money in their own hands rather than deposit it in the bank. Thus, as a percentage of GDP, the total money supply is also likely to continue its downward trend in 2009. On the demand side, credit to the public sector continued its increase slightly, together with a sharp increase in Government deposits. At the same time, credit to the private sector kept its sharp increase by 55.0 percent in December 2008 compared to 76.0 percent increase in December 2007. Lower interest rates in 2008 compared to 2007 and a growing demand for credit among trade, services (including real estate), and agricultural and manufacturing sectors has resulted in the expansion of credit. The expanding private banking system, meanwhile, helped push interest rates down. It is worth noting that the credit for the construction sector decreased. As the growth rate of the money supply is expected to be low and lending and deposit risks are increasing in the current economic crisis, available credit to the private sector in 2009 is expected to increase only 9.4 percent from 2008, reaching 24.2 percent of the GDP. EIC - Cambodia Economic Watch – April 2009 23 3.4. Interest Rate The average interest rate on 12-month deposits in riel and US dollars reached 7.65 percent and 6.3 percent in December 2008, respectively. It represented an increase of 8.5 percent and 29.1 percent in December 2008 compared to 10.2 percent and 1.4 percent in December 2007, respectively. This increase reflected an increase of bank reserves required by the National Bank at that time and a shortage of credit for to satisfy a growing demand for credit and debt in the private sector. Also, the impressive increase of the interest rate of deposits in US dollar reflected the slow-down growth of foreign currency deposits; as mentioned before, it was mainly a result of from slower-growth of the garment, construction and tourism sectors. As these sectors are still on their downward trend into 2009, the deposit rate for both riels and US dollars will keep increasing significantly in 2009. Table 3.4: Cambodia’s Interest Rate (% per annum, end of period) 2004 2005 2006 2007 2008 Riel 12-months Deposits Rate 6.6 6.8 6.4 7.1 7.6 US$ 12-months Deposits Rate 3.7 4.0 4.8 4.9 6.3 Riel 12-months Lending Rate 18.7 18.6 23.1 22.3 22.3 US$ 12-months Lending Rate 16.7 16.2 16.7 16.0 15.8 Inflation rate (yearly average, in riel) 3.9 5.8 4.7 5.9 19.7 Inflation rate (yearly average, in US$) 2.9 3.8 4.4 7.1 13.9 Source: Data compiled from NBC and NIS Average interest rates of a 12-month loan in US dollars continued to decline gradually to about 15.8 percent in December 2008, about 1.4 percent- points lower than that of December 2007. This was due to increased competition among the commercial banks that are providing credit and credit infrastructure facilities. Nevertheless, the average interest rate of 12-month loans in riels in December 2008 was about 22.4 percent, relatively the same as that of December 2007. The rigidity of loan interest in riels came in spite of the riels’ significant increase during the period. This was a reflection of good performances from agricultural activities during the year. 24 EIC - Cambodia Economic Watch – April 2009 As the growth projected for money deposits is slim and demand for credit in the private sector keeps increasing to maintain their business and debt, the average interest rate will increase for both riels and US dollars in 2009. In addition, it is worthy noting that interest rates loans have remained high because of a shortage of local deposits, which are required to satisfy the demand for credit resulting from economic expansion and the high risks associated with lending. The informality of businesses, the lack of infrastructure or a legal framework, and poor law enforcement are factors behind this high level of risk and uncertainty that forces banks to charge higher interest rates than they would in other countries. In addition, to avoid the high risk of unpaid loans, a large amount of local deposits have gone overseas and are therefore unavailable for lending to local borrowers. At the same time, most local borrowers derive their credit from overseas. Thus, annual interest rates on loans or deposits in riel and US dollars are quite high compared to neighboring countries. Cambodians, particularly those in rural areas, are mostly short on initial capital and are unable to benefit from the country’s economic growth. Lower interest rates would encourage them to invest, thereby spurring economic growth in rural areas. EIC - Cambodia Economic Watch – April 2009 25 26 EIC - Cambodia Economic Watch – April 2009 Chapter 4 Fiscal Development and External Debt During 2008, the Government also collected more revenue that what was expected. Still, this amount remained relatively stable compared to the level of GDP, as well as that of Government expenditures. The deficit will be mainly financed by foreign assistance. As the current economic crisis keeps affecting some of Cambodia’s economic activities, the projected growth of Government revenue is minimal for 2009. Budget deficits will increase significantly keeping order to maintain promised expenditures. The deficit will be totally financed by foreign assistance. Cambodia’s debt situation remains on a sustainable path with a moderate risk of debt distress. 4.1. Budget Revenue During 2008, the central Government collected CR5,290 billion in revenue, representing an increase of 31.8 percent on 2007 or 32.4 percent higher than the total it had expected to collect for the entire year. Tax revenue and other revenues reached CR4,430 billion and CR806 billion, or 34 percent and 26.5 percent higher than the planned budget, respectively. A high average inflation rate of 19.7 percent during the period was the main factor in the nominal increase. As a percentage of GDP, however, central Government revenue only achieved 12.6 percent in 2008, up from 11.5 percent in 2007. Meanwhile, revenue collected from international trade taxes increased by only 15.7 percent in 2008 from 2007, while other tax revenues increased steadily by more than 33 percent in the same period. This was due to a slower increase of external trade activities. A slower growth in garment exports and a Government subsidy on gasoline import taxes explained the change. Informal exports and petroleum imports from neighboring countries were also to blame for state revenue leakage. Still, international trade tax in 2008 was 24.5 percent higher than the planned budget; but still down to about 2.8 percent of GDP from 2.9 percent in 2007. Assuming Cambodia’s economy grows around 6 percent in 2009, the central Government expects to raise CR5,135 billion in revenue, which would be an increase of 28.8 percent over its planned revenue for 2008. Taxation remains its main source of revenue and is expected to account for 83.3 percent of total revenue or 29.3 percent more than the amount the Government EIC - Cambodia Economic Watch – April 2009 27 planned for taxes in 2008. Other sources of state income, including capital revenue, represent only about 16.7 percent of total revenue. Revenue from the Custom’s Department accounts for 51 percent of total planned revenue; whereas that of domestic tax represents only 27.8 percent. However, the share of domestic tax revenue as a portion of total tax revenue has been increasing gradually, up from 6 percent in 1994 to about 27.8 percent in 2008 of total planned revenue, due to the strong performance of the domestic private sector. Given the pattern of current economic activity so far in 2009 and previous trends, the Government is only expected to meet its budget targets for 2009. Domestic revenue is expected to reach CR5,371 billion in nominal terms, which would be only a 1.5 percent increase over 2007 and 10.2 percent of the GDP for 2009. Table 4.1: Cambodia’s Central Government Revenue (Billion of riel) 2004 2005 2006 2007 2008p 2009p Total Domestic Revenues 2,127 2,626 2,918 4,015 5,290 5,371 Tax Revenues 1,577 1,911 2,271 3,396 4,430 4,573 Profit Taxes 117 172 262 388 519 534 Excise Taxes 304 380 418 731 1,004 1,081 Value Added Taxes 598 730 870 1,143 1,546 1,529 International Trade Taxes 513 573 645 1,020 1,180 1,236 Other Tax Revenues 44 56 76 114 181 193 Non-tax Revenues (1) 549 715 647 619 860 798 Tourism Activity (2) 118 160 190 224 279 303 Quota Auction/Export License 76 123 123 123 123 123 Posts & Telecommunication 94 123 83 77 75 75 Other Non-tax Revenues (1) 261 310 251 196 383 298 Memorandum Items Taxes From Petroleum Products 442 461 592 718 753 764 Tax Department Revenue 405 556 727 1,029 1,431 1,501 Customs Department Revenue 1,173 1,355 1,544 2,367 2,999 3,072 Sources: MEF for 2004-2008, and EIC for 2009 (1) Including Capital Revenue (2) Including Tourism Incomes, Civil Aviation and Visa Fees 28 EIC - Cambodia Economic Watch – April 2009 However, opportunities exist to further improve revenue collection. More effective measures have to be taken to enforce the Law on Taxation, to extend the tax base to the informal sector, and to strengthen tax auditing to reduce the amount of revenues lost by corruption. Large-scale smuggling continues, especially of petroleum, due to the high tax imposed in Cambodia compared to neighboring countries. To combat the illegal trade of petroleum and other products, Cambodia should strengthen its anti-smuggling operations at each border checkpoint. 4.2. Budget Expenditure The Government spent US$6,337 billion in 2008, of which about 58.7 percent and 41.7 percent had been used for current expenditure and capital expenditure, respectively. It represented about 14.0 percent over the total amount it had budgeted for expenditures of 2008. Spending on civil administration and on defense and security were about 16.5 percent and 58.1 percent higher than the planned budget. Compared to what was implemented in 2007, total expenditure increased by 14.4 percent and spending for civil administration and for defense and security increased by 21.1 percent and 17.8 percent. Spending on priority sectors increased by 24.3 percent. Spending on wages increased by 12.3 percent in 2008, about 38.9 percent-point lower than that in 2007. The pace of the wage increase was lower than the average inflation in 2008; this suggested that the standard of living of public civil servants would degrade. The spending for national defense and security may increase significantly during the year due to the current conflict between Thai and Cambodia on border issues. Table 4.2: Cambodia’s Central Government Expenditure (Billions of Riel) 2004 2005 2006 2007p 2008p 2009p Total Expenditure 2,962 3,182 4,112 5,041 6,337 7,252 Current Expenditure 1,769 1,967 2,592 3,091 3,720 4,517 Civil Administration 1,346 1,516 2,072 2,410 2,917 3,420 Priority Sector1 573 644 791 791 983 1,162 Other Civil Ministries 773 872 1,281 1,619 1,934 2,258 Defense & Security 423 451 520 681 802 1,097 1 health, education, agriculture, and rural development EIC - Cambodia Economic Watch – April 2009 29 Defense 272 289 344 505 595 822 Security 151 162 176 176 207 275 Capital Expenditure 1,193 1,215 1,520 1,950 2,617 2,735 Through National Treasury 296 315 379 440 702 887 Direct External Financed 896 900 1,141 1,510 1,915 1,848 Memorandum Items Wages 615 640 711 822 1,397 1,613 Non-Wages Operating Costs 971 1,130 1,256 1,770 2,323 2,904 Sources: MEF for 2004-2008, and EIC for 2009 The Government expects to expand budget expenditures to about CR 7,259 billion in 2009, which an increase of 28.0 percent from the 2008 budget plan, and excess of 14.5 percent from the actual 2008 disbursements. Civil administration disbursements are expected to increase by 25.3 percent, while spending on defense and security is expected to increase slightly by 64.2 percent in 2009. Spending for health, education, agriculture, and rural development is stated to increase by 24.5 percent, 19.4 percent, 16.2 percent, and 32.9 percent, respectively, compared to the 2008 budget plan. It is worth noting that the increase in spending for all of these priority sectors is still planned to be lower than the average increase in spending for other sectors. In addition, the unallocated budget will increase by 11.0 percent in 2009 compared to the 2008 budget plan or by 152.1 percent compared to what was implemented 2008. It is about 19.4 percent of total planned expenditures. Thus, Government funding of priority sectors is not expected to be sufficient to meet Cambodia’s needs in 2009. Based on previous trends and given the modest growth of 2009 expected revenue, total expenditures are expected to meet only what was planned for 2009. However, it is still expected that it will be about 14.4 percent higher than what was implemented in 2008. As a share of GDP, total expenditure for 2009 is likely to increase slightly to 16.2 percent, from 15.1 percent in 2007. Budget disbursement as a share of GDP for priority sectors may reach 2.6 percent, which would include a slight increase in wages. To maintain living standards and achieve poverty reduction, spending on wages for civil administration and priority sectors should at the very least, keep pace with the rate of inflation. 4.3. Budget Financing and External Debt 30 EIC - Cambodia Economic Watch – April 2009 During 2008, the deficit reached CR1,047 billion or only 67.1 percent of what was planned in the budget law. It was only about a 2.1 percent increase from 2007. Restriction in disbursement and impressive increases in tax revenue during the period explain the change. As a percentage of GDP, the deficit in 2008 was about 2.5 percent, down from 2.9 percent in 2007. The budget deficit was financed by international borrowing and foreign assistance, of which external loans accounted for about 60 percent. This allowed Cambodia to avoid domestic debt financing. Table 4.3: Cambodia’s Financing Budget (Billion of Riel) 2004 2005 2006 2007p 2008p 2009p Total Domestic Revenue 2,127 2,626 2,918 4,015 5,290 5,371 Total Expenditure 2,962 3,182 4,112 5,041 6,337 7,252 Total Deficit (cash basis) -835 -556 -1,194 -1,026 -1,047 -1,881 Foreign Financing 894 984 1,584 1,615 2,355 1,881 Grants 372 538 790 730 945 652 Loans (net) 522 446 794 885 1,410 1,228 Domestic Financing -59 -428 -390 -589 -1,308 0 Banks 25 -199 -333 -1,114 -1,060 0 Others -84 -229 -57 525 -248 0 Memorandum Items Net Foreign Reserves at NBC 2,836 3,336 4,388 5,496 6,606 7,643 Sources: MEF for 2003-2008, and EIC for 2008 Nonetheless, the deficit is expected to increase by 79.6 percent for 2009 to about CR1,881 billion, given the expected small increase in budget revenue. The deficit is expected to be financed by foreign financing, of which 65.3 percent are loans. Updated data on the public debt by the IMF revealed that the public debt stock would increase to about US$2.8 billion at the end of 2008, an 8.8 percent increase on 2007. As a percentage of GDP, the public debt accounted for about 26.8 percent in 2008, a slight decrease from 29.7 percent in 2007. The ratio of debt to GDP was expected to slightly decline in 2009. External debt constitutes about 95 percent of public debt and about 35 percent of the external debt was owed to the Russian Federation and United States. Debt is on a sustainable path. However, moderate risks remain, particularly given a slower economic growth rate, low level of current government revenues, the continued existence of external arrears and the potential for contingent liabilities. If Cambodia reaches debt-rescheduling agreements with the two EIC - Cambodia Economic Watch – April 2009 31 creditors and begins servicing debts in 2009, the risk of debt distress will decline further, though low revenue collection will continue to pose risks to debt sustainability. 32 EIC - Cambodia Economic Watch – April 2009 Chapter 5 Labor Force, Incomes, and Poverty 5.1. Employment Updated labor force data is expected with the release of findings from the Cambodia Socio Economic Survey (CSES) of 2007. The 2004 CSES pegged the total labor force at about 7.5 million, or 56 percent of the total population, with an approximated 0.2 million people entering the labor market every year. Based on these figures, Cambodia’s total labor force was an estimated 8.4 million in 2007 and is likely to reach about 8.6 million in 2008 and 8.8 million in 2009, of which about 20 percent are under 18 years old. It should be noted that a very narrow definition of employment was used for the purposes of the CSES. This definition included anyone who had worked at least one hour during the past week. The unemployment rate of those who were employable and aged 15 years and over was about only 1.05 percent in 2004 and only 0.9 percent in 2007, according to the data compiled from CSES 2004-2007. Thus, the rate would have included the under-employed, especially in the agricultural sector. Table 5.1: Cambodia's Population and Labor Force (% increase) 2004 2005 2006 2007 2008p 2009p Total Population 1.7% 2.1% 2.4% 2.0% 1.6% 1.6% Total Labor Force 3.4% 3.4% 3.3% 2.9% 2.6% 2.5% Total Employment 3.2% 3.5% 3.6% 2.8% 1.6% 0.9% Formal Sectors 14.1% 10.7% 12.8% 7.8% 6.6% 2.2% Garment 14.1% 9.9% 14.0% 8.2% 7.4% -0.2% Tourism 14.0% 13.4% 8.2% 6.2% 3.4% 2.3% Public Administration 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Informal Sectors 2.5% 3.0% 2.9% 2.4% 1.1% 0.8% Rural 2.2% 2.2% 2.1% 1.7% 1.4% 1.3% Urban 3.3% 5.3% 5.2% 4.3% 0.3% -0.8% Sources: EIC estimates The pace of job created by the garment sector slowed down significantly in 2008. About 428 thousand garment workers were employed at export-oriented garment factories during 2008, which was a 7.4 percent increase over 2007. At the same time, employment in the tourism sector increased about only 3.4 percent in EIC - Cambodia Economic Watch – April 2009 33 2008, about 3 percent point lower than in 2007. Job growth rates in agriculture remain low due to the significant volume of people who are under-employed in the sector. It was expected to be about 1.4 percent in 2008, relatively the same as that in 2007. Slower growth of 2008 economic activities was to blame for the drop. Total employment grew only about 1.6 percent in 2008, a 1 percent- decrease from 2007. On the other hand, the number of new full-time jobs created in 2008 was expected to be enough to absorb only about 43.9 percent of the new 2008 labor force, down from 71.4 percent in 2007. The overall under-employment rate remains high; especially among those in the countryside. Thus, they are continuing to migrate to Phnom Penh and other urban areas in search of jobs that require low skills in the garment factories, construction and tourism sectors and service sectors at the border. For 2009, based on current economic trends and situations, EIC forecasts that the labor market could absorb only about 25.6 percent of the new 2009 labor force. This is because of an expected decrease in garment and construction industry and a slower growth expected for tourism and other sectors in 2009. Lay-offs of labor in the garment and construction sectors will spread into some service sectors, such as hotels, restaurants, entertainment, etc, and back to the agricultural sector. Underemployment will remain high in the agricultural sector, despite the fact that agricultural activities are expected to continue to increase in 2009. 5.2. Incomes Latest daily earning surveys conducted by the Cambodia Development Research Institute (CDRI) showed that average daily earnings of all surveyed vulnerable workers, except that of waitresses, in 2008 increased in general in nominal terms. In average, it reached CR14,340 in November 2008, a 34.1 percent increase from 2007. Table 5.2: Daily Average Earnings of Vulnerable Workers (riel) Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Feb-09 Cyclo drivers 6,200 9,060 8,902 12,388 19,275 12,525 Porters 5,600 7,550 8,483 11,675 13,744 15,375 Small traders 7,400 9,780 7,375 10,950 15,100 11,175 Scavengers 4,400 5,600 4,700 7,333 7,100 7,588 Waitresses 4,600 4,541 5,417 5,945 6,605 6,285 Rice field workers 4,300 5,535 6,885 8,228 13,300 10,370 Garment workers 10,200 10,100 10785 10,823 11,574 11,404 34 EIC - Cambodia Economic Watch – April 2009 Motor -taxi drivers 9,500 11,250 10,098 15,200 23,900 17,100 Unskilled workers 6,500 7,805 6,338 9,958 13,400 8,975 Construction workers 13,200 13,125 12,300 14,450 19,400 17,275 Total 7,190 8,435 8,128 10,695 14,340 11,807 Source: CDRI However, in real terms, during this period, earnings for porters was relatively stable, while that of scavengers, garment workers, and waitresses decreased by 16.3 percent, 6.7 percent and 4.0 percent, respectively. People in this group were well-off during 2008. Rice field workers enjoyed the greatest increase in earnings of about 57.4 percent in 2008 compared to 2007; followed by Moto, Taxis and Cyclo drivers whose daily earnings increased by about 35 percent in the same period. That reflected the higher price of rice and gasoline during that period. Earnings for small vegetable sellers and construction workers increased by 19.1 percent and 16 percent, respectively. For 2009, daily average earnings of vulnerable workers was only about CR11,807 in nominal terms in February 2009. In real terms, it represented about a 15.7 percent decrease from November 2008. Except scavengers and garment workers whose daily average earning increased by 9.0 percent and 0.5 percent, other surveyed vulnerable workers were well-off. 5.3. Poverty Up-to-date data on income is not officially available for either Cambodia as a whole or region-by-region. Updated poverty rate figures could be expected very soon from the CSES 2007. The poverty rate in Cambodia dropped to 35 percent in 2004 from about 47 percent in 1994. On average, poverty has reduced at a rate of about 1 percent or 30,000 persons per annum. Based on this trend and economic situation, poverty rate of 2007 in Cambodia is expected to be about 31 percent. However, this pace perceived as slow compared to other countries in the region. The slower pace of poverty reduction in Cambodia is reflected in the current pattern of economic growth. Growth has been primarily generated from the garment and tourism sectors mainly in the capital of Phnom Penh and tourist town of Siemreap. Growth of the rural–based economy and the agricultural sector, which is the main income source for the poor, has been sluggish and unless it improves may lead to a slower rate of poverty reduction. EIC - Cambodia Economic Watch – April 2009 35 36 EIC - Cambodia Economic Watch – April 2009 STRUCTURAL REFORMS: Part CURRENT IMPLEMENTATION II AND PROSPECTS EIC - Cambodia Economic Watch – April 2009 37 38 EIC - Cambodia Economic Watch – April 2009 Chapter 6 Banking and Financial Sector Reform The Financial Sector Development Strategy 2006-2015 (FSDS 2006- 2015) is an instrument to accelerate the development of Cambodia’s financial sector. In line with financial sector and banking reform, the blueprint considers poverty alleviation an essential part of overall economic development. This chapter summarizes recent progress in reforming the banking, the non-banking finance, and the microfinance sectors. 6.1. Banking and Non-Bank Finance The global financial crisis that broke during the second semester of 2008 could be of concern to banking operations in Cambodia. In response, the National Bank of Cambodia (NBC) has tried to strengthen policy to prevent risks that could emerge because of the crisis. As of December 2008, there were 30 licensed banks in Cambodia, 24 commercial banks and six specialized banks. The NBC granted a license to five commercial banks2 and one specialized3 bank during the last semester of 2008, so the number of commercial banks and specialized banks has increased under the supervision of the NBC. By the first quarter of 2009, several Prakas 4 had already been issued by the NBC to consolidate regulation framework in the banking sector. After a meeting between the Board of Directors of the Association of Banks on January 23, 2009, the NBC announced the reduction of reserve requirements and cancelled 2 1) Khmer Union Bank, 2) Booyoung Khmer Bank, 3) Phnom Penh Commercial Bank, 4) OSK Indochina Bank, 5) Angkor Capital Bank 3 Best Specialized Bank 4 - Prakas on New Capital Requirement and Criteria for Licensing Approval of Banks dated on September 19, 2008 - Prakas on Check Standard dated on September 10, 2008 - Prakas on Establishment of Bank Identification Number dated on September 10, 2008 - Prakas on Governance in Banks and Financial Institutions dated on November 25, 2008 - Prakas on Fit and Proper Regulatory Requirements for Applying Entities and Licensed Banks and Financial Institutions dated on November 25, 2008 - Prakas on License Fees for Microfinance Deposit Taking Institutions, January 20, 2009 - Prakas on Overdraft Facilities made available by the NBC to Banks and Financial Institutions facing temporary Liquidity, January 20, 2009 - Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings dated on January 26, 2009 - Prakas on Asset Classification and Provisioning in Banking and Financial Institutions, February 25, 2009 - Prakas on the Maintenance of Minimum Reserve Requirement in Banks and Financial Institutions February 25, 2009 EIC - Cambodia Economic Watch – April 2009 39 the 15 percent cap on loans to the real estate sector. The NBC decided to mitigate the requirement in order to ease funds for business as the real estate sector stagnated because of global problems. Commercial banks already had conservative lending procedures on property loans, and have managed risks well on their own (see Table 6.1)5. Table 6.1: Loan for Property as of December 31, 2008, in CR millions 2006 Share 2007 Share 2008 Share Constructions 269,067 7.7% 640,685 10.2% 0.0% Real estate and 298,886 8.6% 495,447 7.9% 0.0% public inutilities Sub Total 567,953 16.4% 1,136,132 18.1% 1,036,989 10.5% Total 3,472,130 6,259,697 9,832,685 Source: Economics Today, Volume 2, Number 33, February 16 - 28, 2009 Three important Prakas, related to the maintenance of reserve requirement, overdraft facilities for banks and a new capital requirement for licensed banks, were also issued in response to the demands of the banking sector. The new Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings reduced the reserve requirement in foreign currencies from 16 percent to only 12 percent, while those in Cambodian riel (CR) remained stable with at 8 percent. Through these Prakas, the NBC gave private banks the opportunity to have more cash on hand and the ability to provide more loans to customers. The NBC has created a short-term loan fund of approximately US$100 million for local banks to support liquidity availability6. Procedures on how to get the overdraft loan are covered by the Prakas on Overdraft Facilities made available by the NBC to Banks and Financial Institutions facing temporary Liquidity. Banks asking for an overdraft facility must be profitable and solvent, and the overdraft loan requested must not exceed 50 percent of the reserve requirement at the NBC. The loan terms range from one week to one month to help banks and financial institutions facing short-term liquidity shortages. New minimum capital requirements for commercial banks and specialized banks have been introduced in the Prakas on New Capital Requirement and Criteria for Licensing Approval of Banks: These stipulate: 5 Economics Today, Volume 2, Number 33, February 16 - 28, 2009, page12 6 The Cambodia Daily, Tuesday, March 24, 2009 40 EIC - Cambodia Economic Watch – April 2009 - A minimum of CR 50 billion for locally commercial banks incorporated as companies with an “investment grade� rating from a reputable rating agency. For commercial banks with shareholders who are individuals or companies, the minimum requirement is CR 150 billion. - A minimum of CR 10 billion for locally special banks incorporated as companies with an “investment grade� rating from a reputable rating agency. For special banks with shareholders who are individuals or companies, the minimum requirement is CR 30 billion. For those banks that already obtained a license or principal letter before the issue dated, the Prakas allow banks to increase their minimum capital as defined until the end of 2010. The NBC continues to monitor the activities of banks through both off-site surveillance and on-site inspection. Off-site inspections include a review of financial statements and COBRA7 reports that focus on adequacy of capital, quality of assets and cash management. Some banks have not yet implemented the regulations due to constraints stemming from deficit net worth, high risk credit, and real estate issues8. Full on-site inspections were conducted in 14 commercial banks and three specialized banks and, according to NBC planning, 12 commercial banks and three specialized banks should have been inspected in 2008. Several banks, meanwhile, are now sharing credit information though the Credit Information Sharing (CIS) system. The system has been under review in order to make it easier for users to find consumers’ information. The NBC signed a Memorandum of Understanding with the World Bank in to study the CIS and examine the possibility of establishing a private credit bureau. Interest rates on loans in Cambodian riel (CR) and in US dollars (US$) fell slightly during the last quarter of 2008, while loans in CR varied between 18.77 percent and 22.36 percent in December depending on the length of the loan, compared to between 19 percent and 22.46 percent in June. Loans in US$ saw interest rate variations of from 0.16 to 0.07 percent points 9. Interest rates on deposits in US$ and CR increased slightly in December compared to June 2008, depending on the length of deposit. For deposits in US$, interest 7 Cambodia Offsite Banking Report for prompt corrective Action. 8 NBC, Annual Report 2008 and Target for 2009 9 NBC (2008), Quarter Bulletin No 26 Quarter 4 NBC (2009) Quarter Bulletin No 27 Quarter 1 EIC - Cambodia Economic Watch – April 2009 41 rates shifted from 0.79 to 1.3 percent point for fixed accounts, and 0.06 percent point for saving accounts. Interest rate on deposit in CR varied from 0.03 to 0.39 percent points for fixed accounts. Table 6.2: Interest Rates as of December 2008 Weighted Average Type of operation CR US$ Other Foreign Currency Loans 18.77% - 22.36% 16.14% - 15.79% 15% - 23.53% 4.48% - 7.65% (Fixed) 3.73% - 6.34% (Fixed) 4.02% -5.73% (Fixed) Deposits 2.05% (Saving) 1.08% (Saving) 2.55% (Saving) Source: NBC, “Quarter Bulletin No 27�, Quarter 1, 20009 The VIP Commercial Bank, licensed only in January 2008, asked for voluntary liquidation, leading the NBC to issue the Prakas and revoke the bank’s license in October 2008. The Finance Industry Department of the Ministry of Economic and Finance (MEF) has continued its effort to be supervisor and regulator of the insurance sector in Cambodia since this industry is seen as part of the non- banking sector. Although the American Insurance Group’s (AIG) near bankruptcy was one of the causes of the current global financial crisis, Cambodian insurance remains stable. In response to the financial blueprint, the Cambodian National Insurance Company (CAMINCO) has been privatized, with the government share reduced to only 25 percent10. To accelerate micro- insurance transactions, however, a Sub-Decree on Micro-Insurance has been drafted and is in the progress. After feasibility studies on life insurance, the MEF issued a Prakas on Life Insurance Business on August 12, 2008 that covers the life insurance operations of companies. Life insurance contracts are made between an insurance company and individuals or their relatives who buy the life insurance. The buyer is obligated to pay an insurance premium to the company on time as per the contract. To further develop the financial market, an establishment of Securities and Exchange Commission of Cambodia (SECC) was approved through Sub- Decree No 97 on the Conduct and Organization of the Securities and Exchange Commission of Cambodia, dated on July 23, 2008. An operation team has been recognized for the SECC through the Prakas issued by the MEF and dated December 15, 2008 to implement the FSDS 2006-2015. Recently, the MEF signed a joint-venture agreement with a South Korean firm on March 23, 2009 10 Statement of H.E. Deputy Prime Minister Keat Chhon on the Occasion of Official Inauguration of the office of the Cambodia-Re company, March 11, 2009 42 EIC - Cambodia Economic Watch – April 2009 that will give the government a 55 percent share in the exchange and the Korea Stock Exchange 45 percent share11. Training on the stock exchange is currently being conducted with assistance from South Korea. A draft sub- decree for the implementation of law on issuance and trading of non- government securities is on the way and is expected to be approved soon. After discussions with the business community and relevant institutions, the Draft Law on Financial Leasing was finalized and approved by the Council of Ministers (CoM) in January 2009. The draft was then forwarded to the National Assembly and is expected to be debated mid-2009. The draft has been under preparation since 2006 with assistance from the Asian Development Bank (ADB). This legislation will help small and medium-sized enterprises (SME) receive some equipment through financing from banks and financial institutions. 6.2. Microfinance Microfinance contributes significantly to Cambodia’s development since it is used primarily to support SMEs and the agricultural sector. Microfinance entities reported an increase in credit volume and customers in the year of 2008. Micro Finance Institutions (MFIs) and Rural Credit Operators provided a total of CR 1,161 billion in credit and the number of borrowers reached about 852,090. The amount of credit has increased 81 percent and the number of borrowers has increased 36 percent if compared to the year of 2007. MFIs and Rural Credit Operators received close to CR 26 billion in deposits from about 155,291 people, an increase of seven percent for deposits and five percent for depositors. A new MFI was licensed in the second semester of 2008 so there are now 18 MFIs licensed from the NBC, while a rural credit operator remains the same 12. Onsite inspections in 2008 were conducted for 10 MFIs and six rural credit operators. Aiming at consolidating MFIs more effectively and gaining more depositors, technical assistance (TA) has been provided by the ADB to: - Provide TA to update a new uniform chart account for licensed MIFs and experts to control implementation; - Provide experienced experts and offer training to officials in conducting inspections; 11 The Cambodia Daily, Tuesday, March 24, 2009 12 26 registered NGOs, and 60 unregistered NGOs. EIC - Cambodia Economic Watch – April 2009 43 - Provide TA to gather information on unregistered NGOs in order to understand the requirements of micro-finance services and their operations. In general, the sector has improved as a result of vigorous supervision and an increase in the number of development partners and investors who are helping to facilitate MFIs and the rural credit operators. Table 6.3: Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of March 2009) Sectors Achievements • September 10, 2008: Two Prakases issued Prakas on Check Standard Prakas on Establishment of Bank Identification Number • September 19, 2008: Prakas on New Capital Requirement and Criteria for Licensing Approval of Banks issued • November 25, 2008: Two Prakases issued Prakas on Governance in Banks and Financial Institutions Prakas on Fit and Financial Institutions Proper Regulatory Requirements for Applying Entities and Licensed Banks • January 20, 2009: Banking Sector Prakas on License Fees for Microfinance Deposit Taking Institutions Prakas on Overdraft Facilities made available by the NBC to Banks and Financial Institutions facing temporary Liquidity • January 26, 2009: Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings issued • February 25, 2009: Two Prakases issued Prakas on Asset Classification and Provisioning in Banking and Financial Institutions Prakas on the Maintenance of Minimum Reserve Requirement in Banks and Financial Institutions • July 30, 2008: Prakas on an Instruction Principle Accounting for General Insurance Business issued Insurance Industry • August 17, 2008: Prakas on Life Insurance Business issued • CAMINCO have privatized with the government shared reduced to only 20 percent • Cooperation with Korea on training human resources • July 23, 2008: Sub-Decree No 97 on the Conduct and Organization of the Securities and Exchange Commission of Cambodia approved Financial Market • December 2008: Prakas on Established Operation Team for the SECC issued • March 23, 2009: the MEF signed joint-venture agreement with South Korea Stock 44 EIC - Cambodia Economic Watch – April 2009 Chapter 7 Public Financial Management Reform Public Financial Management Reform Program (PFMRP) is a 10-year reform program supported by several donors via a Multi-Donor Trust Fund (MDTF) under the supervision of the World Bank (WB) together with other Development Partners (DP) providing assistance to the program via a bilateral agreement. The PFMRP will be therefore carried out based on a sequenced platform approach. - Platform 1: Making the Budget more credible in terms of timely and predictable delivery of funds - Platform 2: Implementing effective financial accountability - Platform 3: Achieving a fully affordable policy agenda through policy- budget linkage - Platform 4: Achieving effective program performance accountability This chapter demonstrates important outputs from the preparation of stage 2 and PFM’s objectives. 7.1. Key Outputs of the Preparation PFMRP Platform 2 Since launching Platform 1 of the PFMRP in December 2004, which has been implemented since February 2005, was completely implemented with the third Annual Review Meeting (ARM) of the PFMRP. Platform 2, implementing effective financial accountability, of the PFMR was launched on December 03, 2008. The RGC introduced the Public Finance Management (PFM) system, which has its own unique set of characteristics13, to facilitate reforms effectively and efficiently. Experiences from Platform 1 confirmed that this is a valid way to guide the system. Although to commence the stage 2 of the reform, extra characteristic needs to be added to support the system: organizational structures, staff management and motivation in relation to the PFM are necessary to deliver the other PFM characteristic in an efficient and integrated way. Lessons learned provide a strong linkage between PFM reform with other reform programs, including decentralization and deconcentration, civil service reform, public service pay reform, and sector-based reform programs. 13 Those characteristics include: - Budget formulation characteristics; - Budget execution characteristics; - Monitoring and review characteristics. EIC - Cambodia Economic Watch – April 2009 45 The preparation of the stage 2 had spent more than one year and has been put for reviewing in the third ARM in May 2008 as well. There are four necessary outputs from this preparation14: - Consolidated Action Plan (CAP) is a fundamental document which defines to guide the implementation including management and monitoring indicator frameworks. - Departmental Action Plans (DAPs) of the MEF which includes activities cluster and detailed actions of each directorates, departments, and entities of the MEF. - Ministry Action Plans (MAPs) of Line Ministries (LMs) and agencies in which LMs and agencies have to develop on CAP and DAPs. - Leadership, management, and monitoring performance frameworks for stage 2 were rearranged including an extension of the Economic Financial Policy Committee (EFPC) role to lead, manage, and coordinate the policy. The Public Financial Management Reform Steering Committee (PFMRSC) was established to administrate with LMs and agencies at the technical level. Sub-committee, commission, and Public Financial Management Reform Working Groups (PFMRWGs) at LMs and agencies were also established to lead, manage, and coordinate within each specific area.   EFPC PFMTWG DPC PFMRSC MEFRC SCS PFMRWGs 7.2. Consolidated Action Plan for Platform 2 Building on improved budget credibility toward achieving better financial accountability is a method of continuing stage 1 and starting stage 2 of the PFMRP. Work plans for the stage 2 have therefore been developed by considering three elements that tasks remaining from stage 1 should be completed, stage 2 14 Statement of H.E. Dr. Aun Porn Moniroth in the Launching Ceremony of the PFMRS-Stage 2, December 03, 2008 46 EIC - Cambodia Economic Watch – April 2009 objectives should be identified and pilot works need to be performed to further the reform program. Progress on platform 1 is continuing in parallel with the launch of platform 2, and brainstorming has determined stage 2 target achievements. Progress was made on pilot projects in stage 1 and this work will continue in stage 2, even though some of the activities are not expected to be carried out until subsequent platforms. Targets have been divided into three main categories; platform 1 objectives, platform 2 objectives and later platform objectives. The total of 14 PFM objectives and 57 activities laid out with each objective are detailed in Table.7.2. Table 7.2: PFM Objectives with Activities and Key Indicators Platform 1 PFM Objectives 4 Objectives 19 Activities Key Performance Indicators 11. Further improvement of Revenue policy used to guide budget measurement and 6 revenue policy and administration. collection process. 12. Further improvement of debt Legal, systems and reporting framework for debt 3 management management implemented 13. Further improvement of cash 4 Implementation of treasury single account mechanisms and bank account management 14. Further improvement of public Implementation of enhanced legal deconcentrated 6 procurement framework and strengthened oversight capacity Platform 2 PFM Objectives 8 Objectives 48 Activities Key Output Required 21. Improved lines of accountability by clarifying roles, MEF, line ministry PFM roles and responsibilities functions and responsibilities 6 defined, regulatory framework established, capacity between levels of government and developed and operationalized within spending institutions 22. Improved instruments for Practical and enforceable set of both sanctions and encouraging responsible financial incentives for managing public funds effectively 3 management and enforcing established and compliance review mechanisms accountability developed 23. Further improve the Classification implemented that is consistent with implementation of new budget GFS/COFOG standards. 4 classification and new chart of Basis accounting progressively incorporates elements of accounts modified accrual accounting 24. Improve budget An ICT-based budget and financial management implementation and financial framework and capacity introduced that improves management systems: 8 reporting, transaction processing, efficiency, integrity, - Improved efficiency of current comprehensiveness, provides the basis for effective systems control and for strengthened resource management - Implementation of the FMIS EIC - Cambodia Economic Watch – April 2009 47 Establishment of accounting and management systems 25. Improve accounting, financial capable of informing effective resource management, 4 reporting and transparency but also acting as a basis for enforcing accountability for how public resources are used 26. Improved auditing/inspection and response to/use of audit findings The introduction of a style of auditing that can identify - Internal audit planning and advise managers of the need to address areas of - Internal audit methodologies 5 financial management weakness, but also bring to the including use of ICT and reporting surface fraudulent or inappropriate action and failures - Internal audit capacity in control systems 27. Strengthen and develop fiscal Momentum and initial steps towards greater 8 decentralization policy and strategy decentralization of service delivery Greater confidence in managing within the improved 28. Implementation of stage two of 10 PFM systems being put in place, base on appropriate the capacity development plan skill and work force motivated to acquire those skills Later Platform PFM Objectives 2 Objectives 5 Activities Key Performance Indicators 31. Improving and expending the Program budget implementation methodology and implementation of program 3 capacity strengthened at both MEF and line ministries budgeting 32. Further improving Progressive implementation of a multi-year fully comprehensiveness and integration 2 integrated budget framework of the budget Source: MEF, PFMRP Stage 2: Building on Improved Budget Credibility Toward Achieving Better Finance Accountability, December 2008 Putting all of the new initiatives into practice will be challenging, and additional work is needed to complete platform 1. To ensure reforms are effectively enforced, the government needs to focus more on building the capacity of government agencies to carry out the new approaches, laws, regulations and procedures. 48 EIC - Cambodia Economic Watch – April 2009 Chapter 8 Trade Reform Cambodia’s accession to the World Trade Organization (WTO) has dominated Cambodia’s trade reform agenda. The government has used various instruments to strengthen trade facilitation and economic integration in order to benefit from its WTO membership and trade liberalization. This chapter summarizes activities related to economic integration, progress in enacting laws related to the WTO and government’s efforts to facilitate trade and improve the investment climate. 8.1. Economic Integration   The ASEAN Charter was ushered into force on December 15, 2008. The charter provides the legal and institutional framework for ASEAN to be a more rule-based, effective and people-centered organization, paving the way for realizing an ASEAN Community by 201515. The ASEAN Economic Community (AEC) Blueprint serves as the roadmap for transforming ASEAN into a single market and production base. It also aims to facilitate trade liberalization and expand intra ASEAN trade in goods and services. The AEC blueprint is underscored the importance of timely integration of ASEAN economies under the theme “Walk together, work together toward AEC�. The RGC has adopted several laws to fulfill its commitments for accession to the WTO, despite lagging behind schedule. By the first quarter of 2009, some activities on the draft regulations of WTO commitments were past the technical stage in the internal ministries, some were being finalized in discussions in the CoM, to then be forwarded to the NA waiting the new session of the legislative. The number of laws passed has remained the same as of the second semester of 200816. Nevertheless Technical Assistance (TA) still tackles for preliminary draft according to interviews with key informants and literature reviews of the WTO work program in February 2009. For instance, the Draft Law on Trade remedies is 15 The Cha-am Hua Hin Declaration on the Roadmap for the ASEAN Community (2009-2015) comprise of 3 pillars: - Political-Security Community - Economic Community - Socio-Cultural Community 16 There are 29 adopted laws by the NA out of 46 regulations for the WTO conforming EIC - Cambodia Economic Watch – April 2009 49 under preparation by the MoC and TA is expected to be provided by USAID. A key informant clarified that anti-dumping rules, safeguards and countervailing measures were categorized as the trade remedies group. In response to commercial demands, the final Draft Law on Commercial Contract has been completed. A chapter on Franchising and a chapter on Commercial Agency were included in the draft. Explanatory Notes have been prepared by experts ready for submitting along with the final draft to the CoM. Since an approval of the Sub-Decree on Special Economic Zones (SEZs) in December 2005 and the issuing of regulations to implement this sub-decree, several SEZs were established and have begun operations in Cambodia. Currently, the preliminary draft law on SEZs has been completed by the Council for the Development of Cambodia and will be submitted to the CoM in this year. Overall, the Government continues to run behind its schedule for meeting WTO-related commitments. Several legal texts are in various stages of design (see Table 8.1 for more details). Table 8.1: Progress of Remaining Law for WTO and Status This draft has to be rearranged in accordance with the new format required by the Council of Ministers (CoM). 1. Law on Establishing the Commercial Court The new draft has to be followed by this format but the contents have been kept without alteration. Draft code at CoM, the draft was ready discussed in the 2. Criminal Code inter-ministerial meeting on January 29, 2009, and it is expected to be submitted for plenary session debate. Draft law at MoC. The final draft is completed and will 3. Law on Geographical Indications submit to the CoM in May 2009, pending the rearrangement of format as required by CoM. Draft law at MIME. The draft is finalized in the 4. Laws on Layout Design of Integrated Circuit Department of Industrial Property and waiting for the internal meeting of the MIME. 5. Law on Protection of Undisclosed Draft law at MoC, it is in the final stage of preparation. Information and Trade Secrets 6. Law on Trade Remedies—anti-dumping Drafting is under preparation by the MoC. Technical Safeguard, and Countervailing Measures Assistance (TA) is expected to be provided by USAID. Draft law at NA. After having posted for comments of business communities and relevant institutions, the draft 7. Law on Financial Leasing has been finalized and adopted by the CoM in January 2009. Then forwarded to NA and expected to be debated in the middle of this year. Draft law at CoM, awaiting approval. The draft had been 8. Law on Clean Water and Hygiene discussed in the joint session of OBSES. Draft law at CoM. After the submitted for an internal discussion of inter-ministerial meeting of the CoM, the draft requires certain reviews and further discussion. Due 9. Law on Telecommunication to time constrains before and after national election, the draft remains under consideration of the technical group at the CoM. The draft law has been approved by the CoM in late 2008. 10. Law on Tourism The draft now has been submitted to National Assembly (NA). 50 EIC - Cambodia Economic Watch – April 2009 Draft law at MPWT. Final draft has been translated into Khmer from the reviewed English draft. MPWT has organized seminar to disseminate this draft for public and 11. Maritime Code interested parties' comments. After consolidating all comments and technical opinion, the draft will be reviewed and is expected to be submitted to the CoM. The final draft has been completed. A chapter on Franchising and a chapter on Commercial Agency were 12. Law on Commercial Contracts included in the draft. Explanatory Notes have been prepared by experts ready to be submitted along with the final draft to the CoM. The draft 1998 version needs to be revised in order to 13. Law on Commercial Agency reflect the economic situation, and it is based on the Financial Blueprint. The final draft is in place, and the planned workshop is an ongoing project. MoC is seeking financial and technical 14. Law on Competition support from UNCTAD to hold workshop, commissioning the same expert who drafted the legislation to host a workshop and give future training. Preliminary draft has been completed by the Council for Development of Cambodia and will be submitted to the 15. Law on Special Economic Zone CoM in this year, pending comments and contributions from relevant institutions. TA is needed for the process of preparing Cambodia's 16. Law on Rules of Origin Rules of Origin to be conformed to WTO Agreement on Rules of Origin. 17. Royal Decree on Cooperative Unidentifiable Source: Base on interview with various government officials, March 2009 and WTO work program updated as of February 2009. 8.2. Trade Facilitation Trade facilitation is a key mechanism to speed up the process of the trade reform so many programs are planned in this area. To manage risk management in trade facilitation, a Risk Management and Audit Office has been created within the General Department of Custom and Excise (GDCE), while the development of other risk management offices in other agencies is ongoing. The risk management unit will focus on the inspection and clearance of import and export trade. The GDCE also has developed risk indicators, selectivity criteria and a system to profile traders, which have all been uploaded to ASYCUDA. ASYCUDA was officially launched in May 2008 at the Sihanoukville international port. From July to September 2008, the Trade Facilitation and Competitiveness Project (TFCP) reported the main activities operation of the ASYCUDA system as below: - User meeting on finding the smooth operation in new environment of electronic processing - User meeting on requirement or any update of the detail declaration processing path EIC - Cambodia Economic Watch – April 2009 51 - The roll out of ASYCUDA office in Phnom Penh International Airport, Dry Port, Export Office, Excise Office The ASYCUDA office has 15 computers linked to the Customs database. Many have praised the computerized system for easing their daily work. However some would like to see the ASYCUDA system available online to enable easier completion of paperwork from their own offices. The enhanced ASYCUDA process should help Cambodia meets its goal to be part of the ASEAN Single Window by 2012. Processing times could be further improved if the MoC were to adopt an automated key permit and license. The automated system and electronic process would allow the submission of applications and registered users. Nevertheless, concerns over whether Cambodian can become part of the Single Window remain, as other institutions are not fully integrated and have yet to automated, still using a manual, paper-based system. Trade Development Support Program (TDSP) officially launched on March 23, 2009 with a budget of US$ 12.6 million. This program is financed by the European Commission, the Danish International Aid Agency (DANIDA), the United Nations Industrial Development Organization (UNIDO), and it will be administered by the World Bank (WB). The program is designed to facilitate trade by improving regulations and internal processes with a focus on legal reforms, trade facilitation and product standards. In supporting the implementation of trade sector-wide approach17 (Trade SWAp), the TDSP comprises of four components as below: - Component 1: Trade policy formulation and implementation Sub-component 1a: Technical Barriers to Trade (TBT) and Sanitary and Phyto-Sanitary (SPS) Sub-component 1b: Trade facilitation Sub-component 1c: Other legal reforms and Royal Government Cambodia (RGC) WTO obligation - Component 2: Performing monitoring - Component 3: Institutional and human capacity - Component 4: Implementation support to the TDSP 17 There are three pillars of Trade SWAp: 1. Legal reform and cross-cutting issues 2. Product and service sector development 3. Capacity development for trade 52 EIC - Cambodia Economic Watch – April 2009 Chapter 9 Public Administration Reform National public administrative reform is considered the heart of the government’s Rectangular Strategy. The government has taken two approaches to its administrative reform agenda. At the central level, reform is aimed at improving civil servant remuneration, human resources capacity and human resources management. At the sub-national level, the reform focuses on decentralization and deconcentration, promoting democracy and good governance. 9.1. Central Administration Reform To continue administrative reform more efficiency and effectively, a national conference for discussion and exchanging perceptions of reform was held in February 2009. Titled “Launching Strategic Direction of National Program for Administration Reform and Preparation of Action Plan (2009-2013)�, the Council for Administrative Reform (CAR), with recommendations from the Prime Minister, included five policies in their action plan: 1. Promoting transparency and improving the quality of public service; 2. Enhancing accountability and the effectiveness of public service; 3. Developing institutional and human capacity; 4. Strengthening the management and allocation of government officials; 5. Strengthening the management framework and deployment. The Merit-Based Performance Incentives (MBPI) program and the Priority Mission Groups (PMGs) are a bid to up the capacity of government officials. On March 25, 2009, Memorandum of Understanding (MOU) between the MoH, MoI, MLMUPC, and the Council for Administrative Reform (CAR) was signed with the development partners (DPs), to implement the MBPI and PMGs. The MOU will totally cover 1,335 officials from the four institutions, of whom 262 officials will receive the MBPI and 1,073 officials the PMGs. Along with the development of these incentives, other ministries or institutions and DPs have been establishing and implement the MBPI in their own ministries such as MoC, MPWT, MRD, MoEYS, Ministry of Information, and Ministry of National Assembly-Senate Relations and Inspection18. 18 Statement of H.E. Deputy Prime Minister Sok An in the Signing Ceremony of the MOU on The Implementation of PMGs program and MBPI EIC - Cambodia Economic Watch – April 2009 53 To enhance the reforms, the CAR has prioritized facilitating the three mechanisms—PMGs, MBPI, and Special Operating Agencies (SOAs)—in 2009. Along with approval of vital policies such as Human Resource Management (HRM), Human Resource Development (HRD), Deployment and Capacity Development, there are Joint Monitoring Indicators (JMIs) on TWG-PAR that refer to the second Cambodia Development Cooperation Forum (CDCF). Following the successful launch of the pilot Window Office (OWO) services in two districts—Siem Reap and Battambang—the RGC has prepared a technical document with support from the WB with plans to establish OWO in other districts. The OWO will be rolled out over three years around the country. This launch is expected in the second semester of 2009, according to the MoI official speaking in March 2009. To sum up, progress has been made on central administrative reform as a result of government efforts to improve motivation, develop policies to strengthen human resources management practices, and enhance service delivery. 9.2. Sub-National Administration Reform It is widely acknowledged that decentralization 19 and deconcentration 20 (D&D) help promote democratization at the sub-national level. During the implementation of decentralization reform at the commune level over two mandates, reforms have boosted local development and improved the efficiency of services for citizens. But further efforts are needed to build the capacity of commune council members. Thus while considerable progress has been made in decentralization efforts at the commune level, capacity building of commune council members must become a higher priority in the government’s work plan. Under the Law on Administrative Management of Capital, Provinces, Municipalities, Districts and Khans, the National Committee for Sub-National Democratic Development (NCSNDD) process has been disseminated since January 2009. The NCSNDD has a general responsibility to ensure the implementation of the organic law. The law permits cooperation at all levels of management, including ministries/institutions and the council of the whole sub- national administration, in order to achieve the shared objectives of building, enhancing and sustaining democratic development. Similarly, the National Program for Sub-National Democratic Development has been under preparation. It is expected to consist of policies and 19 The Government grants commune councils with the function, authority, and resources it needs to respond to local needs. The councils must be accountable to citizens. 20 The Government/ministries/institutions delegate functions, authority and resources in order to respond local needs. The council must be accountable to citizens in those matters. 54 EIC - Cambodia Economic Watch – April 2009 other important procedure. This is one of the JMIs 21 on TWG-D&D. The establishment of sub-national councils 22 , each having a five-year mandate and indirectly elected, is also expected soon. Thanks to the sub-national financial management regime in line with D&D reform, the Law on Public Financial System has been acknowledged as a fundamental law to manage national and sub-national public finances in Cambodia, hence the basic principle of the public financial system law including as a whole system of management for the public financial system, the preparation of a budget law, and an implementation processes of the public financial in the ministries/institutions and sub-national administration. 21 To be implemented and monitored in the period between 2nd and 3rd meeting of the CDCF 22 Capital Council, Province Council, Province Council, District Council, and Khan Council EIC - Cambodia Economic Watch – April 2009 55 56 EIC - Cambodia Economic Watch – April 2009 Chapter 10 Legal and Judicial Reform The RGC has carried out legal and judicial reforms to create the legal frameworks necessary to complete phase I of the Rectangular Strategy. Such reforms are continuing as the government moves to phase II of the strategy. Reforms have modernized the country’s legal structures and judiciary system. This chapter outlines progress in some remaining issues. 10.1. Progress of Legal Reform A vigorous legal framework is an essential component of state legal reforms. To that aim, Cambodia has drafted numerous pieces of regulations with cooperation from relevant institutions and DPs. Until the new mandate of the fourth legislation the NA has not started a new session to debate the legal texts yet. Therefore an achievement of adoption the legislations still stands. Thorough reviews and relevant technical tasks have been performed on eight fundamental laws. Since 2004, five draft laws have been in progress and in various institutions such as CoM, Supreme Council of Magistracy (SCM), and Ministry of Justice (MoJ). After it is reviewed by a technical team from the Council of Jurists (CoJ), the Draft Law on the Organization and Functioning of the Courts will be forwarded to the inter-ministerial session debate. Likewise, the Draft Law on the Statute of Judges and Prosecutors is progressing. The Draft Criminal Code, which was recently discussed in an inter-ministerial meeting at the end of January 2009, is expected to be on the agenda of the plenary session. The adoption of this code should hasten the completion of the Draft Law on Anti-Corruption. The Draft Law on the Amendment of the Organization and Functioning of the SCM is at the MoJ. Table 10.1: Progress on the Remaining Fundamental Draft Laws • Draft Criminal Code is at CoM. This draft has been discussed in the inter-ministerial meeting on January 29, 2009, and it is expected to be submitted for plenary session debate. • Draft Law on organization and functioning of the court is at CoM. The draft has been discussed in the CoJ meeting , and will be forwarded to the inter-ministerial meeting of the CoM. • Draft Law on the Statute of Judges and Prosecutors is at CoM. The draft has been discussed in the CoJ meeting , and will be forwarded to the inter-ministerial meeting of the CoM. EIC - Cambodia Economic Watch – April 2009 57 • Draft Law on Amendment of the Organization and Functioning of the SCM is at Ministry of Justice. • Draft Law on Anti-Corruption has been studying in the CoM. It is expected to pass when the Criminal Code is adopted. Source: Interview with various government officials, March 2009 and WTO work program updated as of February 2009. Meanwhile, the French government and French Cooperation have initiated support and TA for the preparation of two other important drafts: the Administrative Code and Administrative Procedure Code23. The process of drafting both codes is a medium/long-term goal since both need an enforced legal framework and solid judicial system first. Nevertheless, these tasks were indicated as a medium term goal in the strategic plan for reform. Alongside the TWG-LJR, the modernization of the legislative framework has also clearly been taken into consideration, as the JMIs are to be implemented and monitored for the second and third CDCF meetings. Table 10.2: JMI for 2nd CDCF Meeting, TWG-LJR Target Action Needed 1. LJRS Strategic Objective 2. Complete the drafting and approval of the four remaining fundamental laws (Criminal code, Establish a well Law on organization and functioning of the court, Law on the functioning, transparent and Statute of Judges and Prosecutors, Law on Amendment of the accountable legal and Organization and Functioning of the SCM). judicial system that protects 2. Implementation of the framework for legal and judicial reform individual rights as defined through in the Constitution a) Implementation of court registers in all four model courts b) Ongoing training of judicial professionals to improve the supply of judicial services and the functioning of the courts Source: Joint Monitoring Indicators (November 2008) For legislation to be effective, an implementing framework must be established with input from judges, prosecutors, and judicial officials. 10.2. Judicial and Alternative Dispute Resolution (ADR) In the interest of creating a neutral, independent and competent judiciary, the RGC is endeavoring to draft a code of ethics code for legal professionals. The SCM approved an Ethic Code for Judges and Prosecutor on February 05, 2007. A statute for clerks also is being prepared and a Training School for Clerks was established in 2007. To build capacity in legal human resources, training institutions for the professionals were formed, like the Royal Academy for Judicial Professions (RAJP) 23 Statement of H.E. SAM Sokphal in the Legal and Judicial Reform TWG Meeting, June 11, 2008 58 EIC - Cambodia Economic Watch – April 2009 and the Professional Training Center for Lawyers (PTCL). Sub-decree No 130 dated on September 11, 2008 on an Establishment of Professional Training Center for Lawyers (PTCL) abrogates the sub-decree No 93 dated on September 14, 2001. The technical part is under the management and responsibility of PTCL, and the administration part covers by Royal Academy for Judicial Professions. Furthermore, reforms include the establishment of a Royal School of Notaries and Bailiffs24 as a future target. Although to achieve these goals, it is dependent on a readiness of legal frameworks and other relevant mechanisms that lead to hasten the process. The Draft Law on Notaries was finished in December 2007, the Council for Legal and Judicial Reform (CLJR)25 reported in March 2008. Preparations for a specialized commercial court are underway with the Draft Law on Establishing the Commercial Court after comments from the first and second roundtables at the MoC. An elaborate court structure has been stipulated in the draft, which will be sent to Council of Ministers (CoM). Nevertheless, this draft has to be rearranged in accordance with the new format required by the CoM. The new draft must follow this format but the contents have been kept without alteration. Beyond the judicial solution system, ADR is recognized as a quick mechanism in dealing with cases. There are three steps in the ADR process: negotiation, conciliation and arbitration. The ADR was one of seven strategic objectives 26 included in a legal and judicial reform agenda approved in 2003. According to the chart on the status of the implementation, the action plan of the LJR Strategy, from the third quarter of 2008, the goal is to have ADR reach around 50 percent for phase 1, and 30 percent for phase 2 after an adoption and implementation the Law on Commercial Arbitration. A draft Sub-decree on Organizing and Functioning of the National Arbitration Center was submitted to the CoM in May 2008. Presently, the draft is subject to ongoing discussions at the joint session of Member of Economic, Social, Culture Observation Unit (OBSES) and Council of Jurists in the CoM office. Approval of the draft is expected in April 2009. 24 An institution for execution of judgment 25 Workshop of the Dissemination on “Exchange Consultation Programme on Implement Action Plans of Legal and Judicial Reform with Civil Agencies, March 26, 2008� 26 The goal implies seven strategic objectives: 1. Improvement the protection if personal right and freedoms 2. Modernization of the legislative framework 3. Provide better access to legal and judicial information 4. Enhance quality of legal process and related services 5. Strengthen judicial service 6. Introduce alternative dispute resolution methods 7. Strengthen legal and judicial sector institutions to fulfill their mandate EIC - Cambodia Economic Watch – April 2009 59 Although there is a plan for strengthening ADR methodology, as a long term goal, it has only achieved around 70 percent of its directives. For instance, the efficiency outcomes have been confirmed through the labor deputes solution by labor arbitration and a pilot of Center for Justice Service at District (CJSD). In short, the ADR for commercial cases should be accelerated by the alternative resolution of mediation. A national arbitration center would help businessmen save time, thus acting as a significant means to deal with business deputes, especially in the private sector, and improve perceptions of Cambodia. 60 EIC - Cambodia Economic Watch – April 2009 Chapter 11 Land and Natural Resource Reform Land and natural resources such as fisheries and forests are the sources of the livelihood for the majority of rural Cambodians. Improving access to land and natural resources is clearly a main pillar of the government’s reform program and a development strategy that will have direct impact on poverty reduction. This section examines recent land, fisheries and forestry reforms. 11.1. Land Reform Various mechanisms have been developed to resolve land disputes, such as Land Dispute Committees, a Cadastral System and the National Authority for Land Dispute Resolution (NALDA). Land titling is also helping to reduce the number of disputes over land. Recent government decisions about Economic Land Concessions (ELC) will affect how the country’s agriculture and natural resources are managed. The ELCs can be granted at both the national and provincial level. Grants have been non-transparent, with laws and regulations very often not followed. Nine ELC companies have land concessions measuring more than 10,000 ha, so are subject reductions as the maximum legal size of a concession is 10,000 hectares27. To deal with this issue, the MAFF negotiated with five ELC companies as a phase I, with 4 ELC companies agreeing the reduce of their land area to 10,000 hectares, and the remaining firm canceling its contract in 2007. MAFF negotiations with other four ELC companies were ongoing in 200828. Between June and August 2008, the MAFF formed five working groups to review and evaluate exiting 35 ELC companies in 13 provinces. The following are the result of screened 35 companies: - Three companies asked to cancel contracts - Two companies warned - 30 companies pushed to implement the ELCs Together with the above awareness, a revision of the right to give ELC has been issued through sub-decree No 131 dated September 15, 2008 on Adjustment of ELC. According to the statement in the sub-decree, the right to give ELC to Province and Municipal levels has been taken away. 27 According to Sub-Decree No. 146 on ELCs 28 www.elc.maff.gov.kh/overview.html EIC - Cambodia Economic Watch – April 2009 61 Community Land is another area of concern, especially indigenous communities who often live in the areas rich in natural resources and under strong development pressures. The process of registration for indigenous communal land is in progress and it is set as JMI of the TWG-Land. A draft sub-decree on the Registration of Indigenous People’s Community Land should be approved in the 2009 based on the action needed of the CDCF’s meeting. Work continues on various new legal texts related to land reform such as sub-decrees, regulations, and policies. The challenge is enforcing the existing legal provisions and implementing new policies. The RCG should strengthen enforcement of existing laws and do more to implement existing legislations. 11.2. Forestry Reform Cambodia is endowed with forests that could also be used to transform the lives of the country’s poor. Poverty rates among Cambodians who rely on forests for their livelihoods tend to exceed the national average, which means securing local access to forestry resources would help boost the income levels of these rural poor. Since the TWG F&E adopted a four-year Forestry and Environment Action Plan 2006-2010 consistent with the goals of the NSDP. The Forestry Administration is developing a National Forest Program (NFP) which should improve the planning, implementing and monitoring of forestry-related activities and provide a framework for prioritized action and investment. Finalizing and approving the NFP in September this year, with implementation to begin by the end of this year, is set as the JMI for the TWG-E&F. In the same vein, further measures are under consideration related to forest land boundaries, demarcated protected areas, community forest sites and community protected areas. The new mandate policy for the forestry reform is mentioned in the Rectangular Strategy phase II. The government encourages the private sector to plant economically viable private forests with proper and clear technical guidelines, especially on degraded forest land. In spite of these efforts, illegal logging and encroachment of forested land continues in various parts of the country. The government has taken measures to combat illegal encroachment on forest land through the National and Sub- committees for the Prevention, Control and Suppression of Forest Land Encroachment for Private Entitlement, in collaboration with the NLDA. To sum up, the government should consider strict measures to eradicate illegal encroachment and to ensure forest communities have input in how forests are managed. 62 EIC - Cambodia Economic Watch – April 2009 11.3 Fisheries Reform Fisheries are crucial to the country’s development, supporting the livelihoods and food security of millions of Cambodians. Ensuring access rights of local communities is one the target in the fisheries reform program. In order to strengthen the management of Community Fisheries (CFs), CF legal documents, CF boundary demarcation, and fish sanctuaries have been created for 14 CFs in Sihanoukville and 14 CFs in Kampong Cham, according to the Fishery Administration’s (FiA) second quarter report of 2008. To further strengthen the sector, action against illegal encroachment on flooded forests and the use of illegal fishing gear is being seriously considered in phase II of Rectangular Strategy. Additionally, due to the value of fish to both family and state economies; the RGC strives to establish a fishing market mechanism. In the area of policy reform, a Royal Decree on establishment of CFs was signed in May 2005 and a Sub-Decree on CF management was approved in June 2006. These legal texts provide a legal basis for the establishment of the community fisheries. A new Fishery Law took effect in May 2006, which outlines the roles and mandate of the new FiA for sector development. The formulation of a Cambodian Code of Conduct for Responsible Fisheries (CamCode agreed) is another noticeable improvement, and it is expected to provide a framework that will benefit development of rural communities. Thus, there has been considerable progress in the policy reform, but access rights to fisheries resources still lack clarity and the incentives that would ensure fisheries are managed in a sustainable manner are lacking. Table 11. 1, 2&3. JMIs to be Implemented and Monitored between the 2nd and 3rd meeting of the CDCF Concerned Target Action Needed TWG 1. Indigenous communal land: a) A sub-decree on the procedures for registration of lands of indigenous people's communities is adopted in 2009 and a fully financed work and staffing plan is in place for scaling up indigenous communal titling to the communities. b) Interim protective measures to safeguard communal land are evaluated 2. Land tenure-urban poor: Implement the legal framework A housing Policy that includes the provision of secure TWG-Land establish by the Land Law land tenure for the urban poor is drafted with high priority and given as input into the Comprehensive Land Sector Policy (White Paper). 3. Land management: A Spatial Planning Policy that spells-out the hierarchy of land use planning and zoning is drafted and given as input into the Comprehensive Land Sector Policy (White Paper), including a legal framework to support the implementation. EIC - Cambodia Economic Watch – April 2009 63 With the aim of stopping the loss of Cambodia's forest resources responding to CMDG and Rectangular Strategy to 1. Implement all provisions of the applicable laws and support Sustainable Forest regulations, Management for rural poverty including establishing and making public the log book of reduction and climate change ELCs, Mining Concessions and other concession forms mitigation. The legal frameworks under the jurisdiction of MAFF, MoE, MIME. established by the Forestry Law, 2. At least 1,000 km of the forest land boundary and two TWG-F&E Protected Area Law, Land Law, more protected areas demarcated both on map and ground. Mining Law, and in particular the 3. At least 100 community Forest Sites and 10 Community Sub-Decree on ELCs must be Protected Areas officially approved. fully implemented at all levels of 4. Finalize and approve the NFP in September 2009; and government agencies, whilst start its implementation by the end of 2009. prioritizing the finalization of National Forest Program (NFP) and Community Forestry development. Take appropriate action to reflect 1. At least 80 percent the Fishery Administration Annual the Plan funded by priorities of fisheries sector to development partners through Sector Wide Programmatic TWG- improve the livelihoods of rural support by end of 2009. Fisheries communities in commune, district 2. The CamCode agreed approved and operational by end and provincial development plans of 2009. as well as donor funding levels. Source: Joint Monitoring Indicators (November 2008) 64 EIC - Cambodia Economic Watch – April 2009 Bibliographic References April 2009 Data and Information from Various Ministries Economics Today, Volume 2, Number 33, February 16 - 28, 2009 Fishery Administration (FiA) 2008, Second Quarter Report 2008 MAFF (2009), www.elc.maff.gov.kh/overview.html MEF (2008), “Public Financial Management Reform Program Stage 2: Building on Improved Budget Credibility Toward Achieving Better Finance Accountability, December 2008� NBC (2008 & 2009), “Annual Report 2008 and Target 2009� ______“Quarter Bulletin No 26, Quarter 4, 2008� ______“Quarter Bulletin No 27, Quarter 1, 2009� RGC (2008), “Rectangular Strategy� for Growth, Employment, Equity and Efficiency Phase II, September 2008 World Bank (2008), Trade Facilitation and Competitiveness Project (TFCP) Progress Report, third Quarter 2008 EIC - Cambodia Economic Watch – April 2009 65 66 EIC - Cambodia Economic Watch – April 2009 Appendix KEY ECONOMIC I INDICATORS EIC - Cambodia Economic Watch – April 2009 67 68 EIC - Cambodia Economic Watch – April 2009 Table A6.1 : Main Economic Indicators 1960 1990 2000 2006 2007p 2008p 2009p 2010p Nominal GDP 577 1,404 3,649 7,275 8,639 10,318 10,923 11,856 (million US$) Real GDP (% 4.8% 4.5% 8.8% 10.8% 10.2% 5.2% 2.0% 4.0% increase) GDP per Capita (US$) 83 136 288 514 598 703 732 782 GDP per Capita (% - 9.5% 2.4% 12.9% 16.4% 17.5% 4.2% 6.8% increase) Riel/Dollar Parity 35 537 3,859 4,103 4,056 4,068 4,100 4,100 (year average) Inflation in Riel (year 4.0% 141.0% -0.7% 4.7% 5.9% 14.2% 5.4% 5.0% average) Inflation in Dollar 4.0% 0.4% -1.8% 4.4% 7.1% 13.9% 4.6% 5.0% (year average) Budget Revenue (% 19.7% 3.1% 10.2% 9.8% 11.5% 12.6% 12.0% 12.0% GDP) Budget Expenditure 29.2% 15.9% 15.1% 13.8% 14.4% 15.1% 16.2% 16.1% (% GDP) Current Public Deficit -3.8% -11.9% 1.3% 1.0% 2.6% 3.6% 1.9% 1.4% (% GDP) Overall Public Deficit -9.5% -12.8% -4.8% -4.0% -2.9% -2.5% -4.2% -4.1% (% GDP) Export of Goods (% 6.0% 3.4% 38.3% 50.8% 47.3% 45.6% 43.4% 42.4% GDP) Import of Goods (% 20.8% 23.2% 53.0% 65.0% 62.7% 62.6% 54.6% 56.7% GDP) Trade Balance (% -14.8% -19.9% -14.8% -14.2% -15.4% -16.9% -11.3% -14.3% GDP) Current Account -15.8% -21.5% -11.4% -7.2% -8.0% -12.0% -6.9% -10.1% Balance (% GDP) Net Foreign Reserves 57 0 411 1,097 1,374 1,651 1,911 2,187 (million US$) Money - M1 (% GDP) 12.5% 5.3% 3.5% 5.4% 5.7% 5.4% 6.1% 6.3% Money - M2 (% GDP) 23.6% 1.8% 9.4% 17.9% 26.8% 22.6% 24.5% 24.5% Population (million) 6.9 10.3 12.7 14.2 14.4 14.7 14.9 15.2 Labor Force (% 31.6% 47.0% 52.8% 57.6% 58.2% 58.8% 59.3% 59.8% Population) Source: EIC, compiled from government and international organization primary data. EIC - Cambodia Economic Watch – April 2009 69 Table A6.2 : Budget Operations (Billion riels) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Domestic Revenue 4 23 1,442 2,918 4,015 5,290 5,371 5,831 Current Revenue 4 23 1,412 2,882 4,006 5,211 5,353 5,813 Tax Revenue 3 13 1,059 2,271 3,396 4,430 4,573 5,028 Direct Taxes 1 1 136 331 480 654 677 720 Indirect Taxes 2 4 533 1,295 1,895 2,596 2,660 2,991 VAT 1 2 398 870 1,143 1,546 1,529 1,621 Excise duties 0 0 113 418 731 1,004 1,081 1,316 Others 1 2 22 7 21 46 50 54 Int'l Trade Taxes 1 9 391 645 1,020 1,180 1,236 1,318 Imports 1 9 373 617 879 1,064 1,119 1,201 Exports 0 0 16 24 141 23 23 23 Others 0 0 2 4 0 93 94 94 Non tax revenue 1 10 353 611 610 781 780 784 Fishery & Forestry 0 0 51 9 13 20 10 10 Civil Aviation 0 0 25 30 51 55 60 66 Royalties 0 0 12 2 2 2 2 2 PTT 0 0 92 83 77 75 75 74 Other non tax revenue 1 10 174 487 467 628 633 633 Capital Revenue 0 0 29 36 9 79 18 18 Expenditures 6 120 2,120 4,112 5,041 6,337 7,252 7,841 Capital Expenditures 1 7 897 1,520 1,950 2,617 2,735 2,705 Through Nat'l Treasury 1 7 303 379 440 702 887 723 Direct Foreign financed 0 0 594 1,141 1,510 1,915 1,848 1,982 Current Expenditures 5 113 1,223 2,592 3,091 3,720 4,517 5,136 Defense and Security 2 89 438 520 681 802 1,097 1,152 Salaries 1 9 301 327 390 463 538 565 Other 1 80 137 193 291 340 559 587 Civil Administration 3 25 785 2,072 2,410 2,917 3,420 3,984 Salaries 2 12 211 495 853 934 1,075 1,306 Other 1 13 574 1,577 1,556 1,983 2,345 2,677 Current deficit -1 -90 190 290 915 1,491 836 677 Overall deficit -2 -97 -678 -1,194 -1,026 -1,047 -1,881 -2,009 Financing 2 97 678 1,194 1,026 1,047 1,881 2,009 Foreign financing 1 77 707 1,584 1,615 2,355 1,881 2,008 Grants 1 70 384 790 730 945 652 684 Loans (net) 0 7 323 794 885 1,410 1,228 1,324 Domestic financed 1 20 -28 -390 -589 -1,308 0 0 Banks 0 20 -115 -333 -1,114 -1,060 0 0 Others 0 0 86 -57 525 -248 0 0 Source: MEF and EIC model projection 70 EIC - Cambodia Economic Watch – April 2009 Table A6.3 : Balance of Payment (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Exports of Goods 35 47 1,397 3,693 4,088 4,708 4,737 5,027 Imports of Goods 120 326 1,936 4,727 5,419 6,456 5,969 6,720 Trade Balance -85 -279 -539 -1,034 -1,331 -1,748 -1,232 -1,694 Agriculture 26 19 251 401 578 851 989 1,173 Textiles & Garments -11 -18 486 1,430 1,566 1,602 1,446 1,554 Oil & Gas -4 -50 -323 -1,123 -1,306 -1,555 -805 -818 Other Goods -96 -229 -952 -1,741 -2,168 -2,646 -2,862 -3,603 Balance of Services -2 -27 101 516 643 617 633 679 Transportation -1 -8 -99 -270 -300 -373 -411 -460 Travel (Tourism) 1 3 271 841 1,012 1,113 1,167 1,263 Others -2 -21 -71 -56 -69 -124 -122 -123 Balance of Incomes -4 0.4 -123 -319 -385 -468 -526 -558 Balance of Transfers 42 9 461 790 855 851 863 875 Private Transfers 0 3 144 315 377 365 367 369 Government Transfers 42 6 317 475 478 486 496 506 Current Accounts and -49 -296 -100 -47 -218 -748 -262 -697 Capital Account Financial Accounts 35 312 190 282 661 673 144 199 Official Loans 0 130 81 118 184 220 184 198 Foreign Direct 0 0 142 475 866 806 362 432 Investment Others (net) 35 182 -33 -311 -51 -52 -52 -52 Overall Balance -14 16 89 235 444 -75 -118 -498 Source: NBC and EIC model projection EIC - Cambodia Economic Watch – April 2009 71 Table A6.4 : Monetary Survey (Billion riels) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Net Foreign Assets 4 3 2,589 7,224 10,735 10,346 11,724 12,533 Foreign Assets 4 18 3,047 7,650 11,890 12,886 14,182 15,082 Foreign Liabilities 0 -15 -458 -426 -1,156 -2,540 -2,458 -2,549 Net Domestic Assets 3 58 -759 -282 576 1,513 1,970 2,431 Domestic Credit 3 59 904 2,676 4,570 6,907 7,680 8,629 Net Claims on Government 1 41 3 -953 -1,816 -2,987 -3,144 -3,123 Claims on Government 1 42 272 287 297 270 291 311 Deposits of Government 0 -1 -269 -1,240 -2,113 -3,257 -3,434 -3,434 State Enterprises 0 13 3 2 1 1 1 1 Private Sector 2 5 898 3,628 6,385 9,893 10,823 11,751 Other Items (net) 0 -1 -1,663 -2,959 -3,994 -5,394 -5,710 -6,198 Total Liquidity 7 61 1,831 6,942 11,311 11,859 13,694 14,964 Narrow Money 5 61 540 1,658 2,052 2,400 2,873 3,215 Currency outside Banks 3 46 495 1,600 1,990 2,295 2,738 3,055 Demand Deposits 3 15 45 58 62 105 135 161 Quasi-Money 2 0 1,291 5,285 9,259 9,459 10,821 11,749 Times and Savings Deposits 2 0 46 89 121 185 221 239 Foreign Currency Deposits 0 0 1,245 5,196 9,138 9,274 10,601 11,510 Source: NBC and EIC model projection 72 EIC - Cambodia Economic Watch – April 2009 Table A6.5 : Investment and Saving (million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Total Investment 111 131 624 1,375 1,996 2,247 1,979 2,138 Public investment 37 13 233 370 481 643 667 660 Domestic financed 6 13 72 85 108 173 203 163 Foreign financed 31 0 160 285 372 471 464 496 Private investment 74 118 392 1,005 1,515 1,604 1,312 1,478 Domestic financed 74 86 243 522 648 789 950 1,046 Foreign financed 0 32 148 483 868 815 362 432 Total Domestic financed 80 99 315 607 756 961 1,154 1,209 Total Foreign financed 31 32 309 768 1,240 1,286 825 929 Agriculture Products 14 25 32 57 82 118 132 145 Equipment 32 54 213 345 761 865 915 1,161 Construction 65 51 379 972 1,153 1,264 932 832 Total Saving 111 131 624 1,375 1,996 2,247 1,979 2,138 National saving 20 -171 207 853 1,301 1,013 1,221 935 Government -22 -167 49 71 226 367 204 165 Non Government 42 -4 158 782 1,075 647 1,017 770 Foreign saving 91 302 417 522 695 1,234 758 1,203 Grants 42 6 317 475 478 486 496 506 Non Grants 49 296 100 47 218 748 262 697 Source: EIC, compiled from government and international organization primary data. EIC - Cambodia Economic Watch – April 2009 73 Table A6.6 : GDP by Industry Origin at Current Prices (million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Agriculture 302 764 1,329 2,231 2,602 3,417 3,729 4,099 Paddy 126 163 328 561 740 1,179 1,288 1,422 Other Crops 80 156 258 540 601 671 765 880 Livestock 26 102 204 336 377 458 502 557 Fishery 22 327 393 527 600 766 809 855 Rubber & Forestry 47 17 146 267 285 342 365 386 Industry 89 170 780 1,861 2,119 2,271 2,135 2,174 Garment 16 18 336 943 1,044 1,061 1,032 1,055 Food, Beverage & Tobacco 19 70 116 162 187 227 251 276 Other Manufacturing 16 48 114 202 230 258 282 308 Electricity, Gas & Water 5 6 15 40 48 52 60 69 Construction & Mining 33 28 198 514 610 673 510 465 Services 186 470 1,541 3,183 3,919 4,631 5,059 5,583 Transport & Communication 15 64 241 515 597 763 840 923 Trade 485 584 577 1,016 1,363 1,537 1,685 1,897 Hotel & Restaurants 16 3 135 318 375 467 507 554 Other Private Services -408 -212 490 1,208 1,419 1,675 1,820 1,985 Public Administration 77 31 98 126 165 189 207 224 Total GDP 577 1,404 3,649 7,275 8,639 10,318 10,923 11,856 Source: EIC, compiled from government and international organization primary data. 74 EIC - Cambodia Economic Watch – April 2009 Table A6.7 : GDP by Industry Origin at Constant 2000 Prices (million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Agriculture 833 948 1,329 1,784 1,874 1,964 2,048 2,148 Paddy 179 197 328 490 527 546 569 598 Other Crops 289 133 258 409 446 484 525 574 Livestock 64 206 204 280 290 298 311 327 Fishery 219 285 393 459 462 486 490 494 Rubber & Forestry 82 127 146 146 149 151 153 156 Industry 549 221 780 1,794 1,945 2,006 1,939 1,944 Garment 104 5 336 1,004 1,104 1,126 1,102 1,107 Food, Beverage & Tobacco 121 87 117 130 134 142 150 158 Other Manufacturing 100 55 114 164 174 184 192 200 Electricity, Gas & Water 39 5 15 35 39 43 47 52 Construction & Mining 186 69 198 462 493 510 448 427 Services 1,529 712 1,541 2,740 3,144 3,358 3,483 3,674 Transport & Communication 125 100 241 395 423 451 473 497 Trade 480 561 577 850 1,059 1,131 1,174 1,266 Hotel & Restaurants 187 37 135 281 310 327 340 354 Other Private Services 142 -25 490 1,128 1,266 1,359 1,404 1,461 Public Administration 596 40 98 86 86 90 93 96 Total GDP 2,910 1,881 3,650 6,318 6,963 7,327 7,470 7,766 Source: EIC, compiled from government and international organization primary data. EIC - Cambodia Economic Watch – April 2009 75 Table A6.8 : GDP by Expenditure Categories at Current Price (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Private Consumption 211 1,359 3,328 5,966 6,518 8,675 9,183 9,968 Government Expenditure 334 209 191 384 495 545 376 781 Gross Domestic Formation 120 140 596 1,463 2,332 2,247 1,979 2,138 Gross Fixed Capital Formation 111 131 624 1,375 1,996 2,247 1,979 2,138 Public 37 13 233 370 481 643 667 660 Private 74 118 392 1,005 1,515 1,604 1,312 1,478 Changes in Stocks 8 10 -29 88 336 0 0 0 Exports of Goods & NFS 37 49 1,826 4,990 5,636 6,347 6,447 6,856 Goods FOB 35 47 1,397 3,693 4,088 4,708 4,737 5,027 Domestic exports 35 -6 1,279 3,554 3,947 4,565 4,592 4,880 Re-exports 0 53 118 139 141 143 145 147 NFS 2 2 428 1,296 1,548 1,639 1,710 1,830 Imports of Goods & NFS 124 354 2,291 5,527 6,342 7,495 7,063 7,887 Goods FOB 120 326 1,963 4,746 5,437 6,473 5,986 6,737 Retained imports 120 273 1,845 4,607 5,296 6,330 5,841 6,590 Re-exports 0 53 118 139 141 143 145 147 NFS 4 29 328 781 905 1,022 1,077 1,150 Total GDP 577 1,404 3,649 7,275 8,639 10,318 10,923 11,856 Source: EIC, compiled from government and international organization primary data. 76 EIC - Cambodia Economic Watch – April 2009 Table A6.9 : GDP by Expenditure Categories at Constant 2000 Prices (Million US$) 1960 1990 2000 2006 2007p 2008p 2009p 2010p Private Consumption 1,099 1,753 3,328 5,315 5,430 6,294 6,313 6,568 Government Expenditure 1,542 271 191 333 398 438 253 501 Gross Domestic Formation 695 179 596 1,291 1,878 1,669 1,520 1,617 Gross Fixed Capital 647 167 624 1,231 1,653 1,669 1,520 1,617 Formation Public 210 33 233 332 388 487 596 624 Private 436 134 392 899 1,265 1,181 924 993 Changes in Stocks 48 12 -29 61 224 0 0 0 Exports of Goods & NFS 202 54 1,826 4,625 4,882 4,901 4,753 4,845 Goods FOB 190 52 1,397 3,395 3,509 3,595 3,453 3,508 Domestic exports 190 -7 1,279 3,267 3,388 3,486 3,348 3,406 Re-exports 0 58 118 128 121 109 105 102 NFS 12 2 428 1,231 1,372 1,306 1,300 1,337 Imports of Goods & NFS 627 376 2,291 5,247 5,624 5,975 5,369 5,765 Goods FOB 607 346 1,963 4,506 4,822 5,160 4,550 4,924 Retained imports 607 289 1,845 4,373 4,697 5,046 4,440 4,817 Re-exports 0 56 118 132 125 114 110 107 NFS 21 30 328 741 802 815 819 841 Total GDP 2,910 1,881 3,650 6,318 6,963 7,327 7,470 7,766 Source: EIC, compiled from government and international organization primary data. EIC - Cambodia Economic Watch – April 2009 77 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 4,331 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 42 44 45 47 Industry 99 218 473 771 816 856 853 862 Garment 14 37 200 368 398 428 437 447 Food, Beverage & 24 72 80 85 87 90 93 96 Tobacco Other Manufacturing 28 50 55 75 78 81 83 85 Electricity, Gas & Water 2 3 6 10 11 12 12 13 Construction & Mining 30 57 132 233 242 247 229 222 Services 299 752 984 1,170 1,225 1,221 1,225 1,228 Transport & 28 38 55 79 82 85 88 91 Communication Trade 138 270 324 375 399 376 367 369 Hotel & Restaurants 21 5 60 95 101 104 107 109 Other Private Services 54 133 162 286 307 321 329 338 Public Administration 58 306 383 335 335 335 335 321 Total 2,320 3,932 5,082 6,086 6,255 6,353 6,409 6,473 Source: EIC, compiled from government and international organization primary data. 78 EIC - Cambodia Economic Watch – April 2009 Appendix KEY STRUCTURAL REFORMS II EIC - Cambodia Economic Watch – April 2009 79 80 EIC - Cambodia Economic Watch – April 2009 Box A2.1: Cambodia Key Reforms in Trade Openness Policy and Investment (2001–2009) 2001: • Since early 2001 Cambodia has 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 requirements: (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 the 147 th World Trade Organization (WTO) member at Cancun 5 Th WTO Ministerial Conference (September 10-14, 2003) following a successful five rounds of working party negotiations with its multilateral and bilateral market partners. Cambodia achieved full membership of the WTO on October 13, 2004. • Cambodia became a signatory of the ASEAN-China Free Trade Area’s Early Harvest scheme, in July. Under the scheme Cambodia received a Special Preferential Tariff (SPT) treatment for 297 products at 0% tariff rates for Chinese markets, effective from January 1, 2004. Under ASEAN and LDC status, Cambodia also received SPT treatment from a number of other countries including the EU member states, Japan, Korea, Canada, Thailand, etc. 2005: • 1999’s Bilateral Textiles Agreement with the US government expired on January 1, 2005. On May 27, the US Department of Commerce introduced a safeguard to limit the increase of its Chinese textile imports to 7.5% a year. The move was followed on June 10, by the signing of a European Union Memorandum of Understanding with China to limit Chinese textile imports to between eight and 12.5%. This safeguard will expire by the end of 2008. • The Tariff Relief Assistance for a Development Economy (TRADE) bill was introduced in both the US Senate and the House of Representatives. The bill would grant Cambodia, and 14 other developing countries, duty-free access to the US markets. Modeled on the Africa Growth and Opportunity Act (AGOA), it provides special access of textile and clothing EIC - Cambodia Economic Watch – April 2009 81 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. • July 2007, Sr. Minister of Commerce and GMAC embarked on their 4th lobby trip on TRADE Act to 82 EIC - Cambodia Economic Watch – April 2009 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’s 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 Cambodia’s average un- weighted tariff rate from 14.90 percent to 14.38 percent. • October 12, 2007 – Cambodia approved an 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 Japan’s tariff list for Cambodia’s exports to its markets. - China – 380 Items - Korea (Republic) – 78 Items - ASEAN under the AISP – Thailand (340 items), Brunei (8 items), Indonesia (70 items), Malaysia (180 items), Philippines (62 items). • US Congress on October 19, 2007 considered Draft Law on Duty-Free Garment Access. Cambodia, currently the fifth-largest exporter of garments to the US, has lobbied US lawmakers to reduce tariffs on clothing produced here, fearing that unfettered competition from countries such as China could reduce Cambodia's US market share. When US import quotas on garments expired in 2005, the US placed controls on specific imports of clothing from China, but these safeguards are due to expire at the end of 2008. While offering unlimited duty-free access to other least developed countries, the bill would allow Cambodia and Bangladesh to increase the volume of duty-free imports by 15 percent a year if they respect labor rights. GMAC acknowledged that “I think the bill will put us in a better position to compete with Vietnam and China". 2008 • Agreement between Cambodia and Japan on "Liberalization, Promotion and Protection of Investment" which signed in June 2007 was adopted by the NA on January 16, 2008 and was promulgated on February 28, 2008. • ASEAN Charter was adopted by the NA on February 26, 2008 and was promulgated on March 31, 2008. The instrument of ratification signed by H.E Deputy Prime Minister HOR Namhong, Minister of Foreign Affairs and International Cooperation, on April 02 2008, has been forwarded to the Secretary-General of ASEAN for deposit. The charter represents a common vision and commitment to the development of ASEAN community as a region of lasting peace, stability, sustained economic growth, shared prosperity and social progress. • Ministry of Economy and Finance issued Prakas #613 dated August 13, 2008 on a schedule for Reduction and Elimination of Import Tax of Cambodia of Trade Agreement under the Framework Agreement on Economic Cooperation among Governments of ASEAN members and the Republic of Korea. • Ministry of Economy and Finance issued Prakas #645 dated August 22, 2008 on use of schedule for the Reduction and Elimination of Import Taxes of Cambodia of Trade Agreement under the Framework Agreement on Economic Cooperation among Government of ASEAN members and People’s Republic of China. Sources: Various Government Reports, IF Report and DFDL Weekly Law Update. EIC - Cambodia Economic Watch – April 2009 83 Box A2.2: Cambodia Key Policy Reforms in Private Sector Development (2001-2009) 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 was passed by the National Assembly. • In February, the Amended Law on Investment was passed by the National Assembly to make the investment climate more conducive to growth. • Law on the Amendment of the Law on Taxation was passed by the National Assembly. • Law on Patents, Utilities Model, Certificates and Industrial Design was 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 the 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 were 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 the 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 a 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- 84 EIC - Cambodia Economic Watch – April 2009 shipment in 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 – (according to 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 was passed by the National Assembly. • Law on Negotiable Instruments and Payment Transactions was passed by the National Assembly. • On July 15, Law on Concession was 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 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 is 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 EIC - Cambodia Economic Watch – April 2009 85 an arm of the Ministry of Industry, Mines, and Energy, which has already implemented standards for drinking water produced for Cambodia's domestic market. • 22 June 2007, Law on Customs was adopted by the National Assembly and promulgated on July 20, 2007 • The Law on Concession was adopted by the National Assembly on September 10, 2007 and promulgated on October 19, 207. Law details the process by which the government can grant private concessions for state-owned infrastructure fixtures. • August 29, 2007, the Sub-Decree on the Mortgage and Transfer of the Rights over a Long-Term Lease or an Economic Land Concession approved by the Prime Minister. The purpose of this Sub- Decree is to determine principles and terms and conditions for granting rights to investors to put up as security and transfer of rights over a long-term lease or an economic land concession during the period of time not exceeding the period prescribed in the long-term lease agreement or the economic land concession agreement. • Civil Code was adopted by the NA on October 05, 2007 and promulgated on December 08, 2007. • Inter-Ministerial Prakas #679 (MEF) on Administrative Fees for Commercial Registration (August 07, 2007). Administrative fees for commercial registration shall be allowed to be charged. Administrative fees for commercial registration deregistration and issuance of certificates shall be determined as follows: (1) Commercial Company: 420,000 Riel for commercial registration, 200,000 Riel for deregistration and 60,000 Riel for certificate; (2) Sole Proprietorship or trader subject to tax on profit: 120,000 Riel for commercial registration, 60,000 Riel for deregistration and 20,000 Riel for certificate. Payment and receipt of revenue from the administrative fees for commercial registration shall be implemented through the revenue office at the MoC. Prakas #514 SHV.ThH, dated July 17, 2000, on Determination of Fees for Application Form for Commercial Registration, Deregistration or Issuance of Certificates of the MEF and Prakas # 162 MoC/M2004, dated August 23, 2004, on Determination of Fees for Application Form for Commercial Registration shall be repealed. • Ministry of Commerce ruled (Prakas #249 dated November 30, 2007) on Decentralization of Company Registration at the municipality and provincial towns. Decentralize authority was given to municipal and provincial representative offices of the Ministry of Commerce to register “Company Registry� activities. Upon receipt of all proper required documents, the municipal and provincial representative offices of the Ministry of Commerce can issue provisional certificate for opening-up the company (provisional company registry certificate) with 30 days validity. An original certificate to be approved by the central management of the Ministry of Commerce will be sent to the requesters through the municipal and provincial representative offices of the Ministry of Commerce. 2008: • On March 27, 2008, Cambodian government introduced a two-month rice export ban due to concern of local market price volatilities. The Government on May 26, 2008 announced a partial lifting of a two-month-old ban on rice exports, but will continue to limit the amount of rice sold abroad. A 1.6 million tons export quota will be kept, and exports of more than 100 tons must be passed through government administration of the Ministry of Commerce (MOC). This will be in effect until December 31, 2008. Only two exporters, the state-run Green Trade and the Cambodian National Rice Millers Association, have been licensed to export shipments of more than 100 tons. Export shipment with less than 100 tons is not required for administrative permit from the MOC. While Cambodian farmers produced some 6.4 million tons of paddy rice in 2007, domestic consumption is only 4.0 million tons, leaving a sizable surplus for export. The government, through, the Rural Development Bank has provided US$14 million (in the first half of 2008) with 5% annual interest rate (15% market rate) to the Cambodian National Rice Millers Association for use in purchasing rice from farmers during their harvesting seasons. In the meantime, during the first half of 2008, the National Rice Miller Association sold 1,000 tons of rice with lower than the market price rate to urban towns/cities where price validities erupted. This is part of the government intervention in light of soaring rice prices in March-April 2008. The Association is planning to release another 7,000 tons or 10,000 tons in the next three of four months (until October 2008, and subject to market demands). • In May 2008, ASYCUDA has been officially launched at Sihanoukville autonomous port. • September 2008, One Stop Service, administrative office, was implemented in Phnom Penh SEZ. The service aims to simplify application procedure for potential investors in the zone. 86 EIC - Cambodia Economic Watch – April 2009 • The Sub-Decree on Organization and Functioning of Cambodian Standard Institution was adopted on June 04, 2008. • Recent World Bank Group Doing Business survey (DB-2009) showed Cambodia moving up 15 places in the Doing Business Report 2009. In 2007, Cambodia ranked 150 out of 181 economies worldwide; this year Cambodia improved 15 notches to 135 out of 181 economies surveyed. Cambodia’s strong improvements are a result of two reforms. The first was passage of the Law on Secured Transactions in 2007 which makes it possible for a business to use its moveable and intangible assets as security for a loan. Assets include equipment, vehicles, inventory, accounts receivable, and agricultural commodities. The second was the passage of the Law on Bankruptcy in 2007, Cambodia’s first law regulating the closure of private businesses. Cambodia’s environment on trading across borders has also been improved by reducing the time required to exports and imports and its procedures. • Sub decree #142 was issued by the Royal Government of Cambodia, dated September 8, 2008, on “Creation of National Committee Intellectual Property Management� with duties to be the focal point for facilitating both bilateral and multilateral cooperation within the intellectual property sector. • Prakas #3548 was issued by the Ministry of Economy and Finance, dated July 30, 2008, on “Housing Development (Supervise, Control and License)� with the purpose to control housing and real estate developers. 2009: • Trade Development Support Program (TDSP) officially launched in March 2009 with US$ 12.6 million financed by European Commission, DANIDA, UNIDO, and it will be administered by the WB. The program designed to facilitate trade by improving regulations and internal process and its focus on legal reforms, trade facilitation and product standards. Source: Various Government Reports. EIC - Cambodia Economic Watch – April 2009 87 Box A2.3: Cambodia Key Reforms in Public Financial Management and Banking (2001-2009) 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)29. • 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 payment orders without sufficient cash in the national treasury. 29 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. 88 EIC - Cambodia Economic Watch – April 2009 • 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. EIC - Cambodia Economic Watch – April 2009 89 Payments of more than CR 4 million to be paid by cheque; payments of less than CR 4 million to be paid either by cheque or in cash at NBC. • On June 3, creation of Unused Land Appraisal and Valuation Sub-commission. The duties of the Sub-commission are to publicize law on tax collection for unused land, identify unused land and estimate taxes to be paid to the government. • On July 14, Prakas issued to introduce Accommodation Tax. Due to complaints from the Tourism Association of Cambodia, this accommodation tax may not be applied until January 2007. • On September 19, MEF issued Prakas #578, using the Joint Financial Management Procedures. This is for projects sponsored by the WB and ADB and the procedure will also be implemented for financing projects from other donors if agreed. 2006: • On February 3, Governance Action Plan II (2005-2008) approved by OCM. • On March 13, MEF Notice #007 introduced the implementation of special tax on telephone services. All telephone companies in Cambodia operating services inside and outside the country to pay specific 3% tax, commencing April 1. • National Assembly approved the National Strategy Development Plan (NSDP) 2006-2010, in which the main objectives are to reduce the poverty rate to 25% and to lower the unemployment rate to less than 4%. • Establishment of internal audit departments along the government line ministries. • On April 26, OCM Prakas #665 issued to all ministries/institutions specifying that selection of civil servants must be done through a competitive examination. • On June 9, MEF Prakas issued for promulgating the document Code of Ethics for Internal Auditors and Internal Auditing Professional Standards. • On June 16, MEF circulated Prakas relating to the extension of tax exemption on profits, for two more years, for investment enterprises of export-oriented garment, textile and shoe manufacturing sectors. This only applies to investment enterprises which received CDC approval for investment in Cambodia before March 14, 2005. On June 27, The World Bank Board of Executive Directors approved the Public Financial Management and Accountability Project. The project will support the Government’s Public Financial Management Reform Program (PFMRP) in six specific areas: i) revenue management; ii) budget formulation; iii) budget execution; iv) capacity development; v) a Merit Based Pay Initiative (MBPI) – which will help reform the civil service; and vi) building the oversight capacity of Cambodia’s National Audit Authority. The Government-led Public Financial Management Reform program has been underway since 2004 and has already achieved results. Revenues have increased by 20% from 2004 to 2005; the amount of customs revenue collected through the banking system has increased from 0% in 2004 to 36% in 2005, and 86% of all Tax Department revenue is now collected through the banking system; the stock of old expenditure arrears has been reduced by over 40%; the procurement process has been streamlined and tightened; five line ministries have established internal audit departments; and, for the first time in Cambodia, a pilot program has been launched to pay civil servants through commercial banks instead of by cash. The reform program is supported by 11 donors — ADB, IMF, the WB, UNDP, Australia, European Commission, France, Germany, Japan, Sweden and United Kingdom – four of whom are contributing about US$17 million to the WB-managed multi-donor trust fund, set up to co-finance the implementation of this program. • On March 3, Law on the Audit of the Kingdom of Cambodia was promulgated. It requires respective ministries/institutions and public enterprises to create and strengthen Internal Management System and Internal Audit. • On November 27, Sub-decree #129 on Rules and Procedures of Reclassification of Public Property of the State and State-owned Institutions – indicated that the leases on state properties should not be allowed to exceed 15 years. • Sub-decree requiring an establishment of internal audit department at all line ministries 90 EIC - Cambodia Economic Watch – April 2009 issued. Five line ministries have established internal audit departments and two of them are operational. • By end of 2006, 40 % of tax and non tax revenue collected through banking system (both customs and tax departments). In the same time, 29% of customs duties collected through banking system by the end of 2006. Strategy developed for gradually increasing revenue collected through the banking system based on geographical roll-out of requirement. • A booklet format of Macro-Fiscal data is being developed. • Prakas on fees on construction services implemented. • PAP to be replaced by program budgeting PB in 2007. The new initiative to be piloted in seven ministries, including the four PAP ministries. • Good progress made in strengthening debt management. An assessment of the institutional aspects of debt management is completed and progress made with selection of a new software package for debt management and with staff capacity building. Documents on Standard Operating Procedures, Procurement, and Financial Management produced, and staff training conducted. A draft Debt Management Manual for Department of International Cooperation for staff is completed. • A pilot for direct payment of senior officers’ salaries into bank accounts is trialled in MEF and MoH and will be extended to other ministries and two provinces. • Government agreed to contribute to MBPI and incorporate it in the annual budget of MEF. MBPI for government staff involved in the PFMRP introduced. Regular payments for the agreed 263 participants commenced in November 2005 (backdated to July 2005). MBPI was funded from the Multi Donor Trust Fund under the PFMRP. 2007: • The Law on State Securities was passed by the National Assembly on November 30, 2006 and promulgated on January 10, 2007. The purpose of this law is to provide a framework for effectively printing/issuing and managing state securities in order to guarantee obligation of settlement/payments in terms of the state’s financial requirements. The state securities may be printed either in local currency or foreign currency. • On February 26, RGC Sub-decree #14 applied to the Joint Procedures of Implementing Cooperation Financing Project from the WB and ADB: i) Joint Standard Operating Procedures, ii) Joint Financial Management Manual, iii) Joint Procurement Manual. • The Government’s PFMRP is continuing to yield results. Following on from achievements in 2005 and 2006, a second wave of major reform measures was initiated in January 2007, including: i) a far-reaching streamlining of budget execution procedures to speed disbursements to spending agencies, ii) the introduction of program budgeting to better align spending with priority National Strategic Development Plan objectives, and iii) adoption of a new chart of accounts to improve expenditure reporting. All of these measures will improve the efficiency of the PFM system as well as reduce the fiduciary risk inherent in the system by reducing the threat of corruption. • Macroeconomics-model developed and training provided. MEF is discussing with ADB for further assistance to add on features that enable it to integrate the use of this model into the budgetary cycle (macro-fiscal framework model). Meanwhile the Government Financial Statistics classification is being developed and applied in the State Budget Implementation Table (TOFE). • The 2007 Budget Document, for the first time, contained details of donor-financed capital spending by line ministries; payment of taxes through the commercial banks has been trialled (Acleda Bank) and will be extended soon to the ANZ Royal Bank. • 19 line ministries have established internal audit departments of which seven are operational. • These are some progresses of Performance Indicators in the PFMRP: i) revenue out-turn increasingly close to targeted level in approved budget; ii) no accumulation of new arrears 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 EIC - Cambodia Economic Watch – April 2009 91 staff made through the banking system in 2006; v) 45%of total government tax revenue (excluded non tax revenues) collected through banks in 2006; vi) service delivery units (schools, health centers) receive an increasing proportion of funds targeted at their levels; vii) public procurement based on clear rules, consistently enforced and with no major delays in processing and payment; viii) composition of expenditure by type (staff costs, non-staff costs, etc.) close to approved budget; ix) better yield achieved from tax base through improved collection efficiency and planned use of non-tax sources; x) single orderly budget process producing good (and integrated) budget plans, Budget Document for 2007 integrates recurrent, capital and donor-financed expenditure plus data for government-owned agencies; xi) all significant areas of both public revenue and expenditure captured in both the budget and accounts of the Government; xii) clearer/more accurate overview of public finances (TOFE) regularly available based on improvements in the existing system pending introduction of the FMIS. TOFE submitted to senior management within two weeks of end of period. Quarterly review of TOFE by Internal Audit Department found to be accurate; xiii) system in place to ensure that proposals for post-budget supplementary expenditure credits are always accompanied by MEF report on realistic options for financing the expenditure involved. No spending proposals go forward without identification of source of funding/offsetting savings; xiv) institutionalized mid-year budget review feeding into second half-year budget implementation/budget preparation for next year. Clear evidence that the review was conducted, formalized and effective, and results implemented; xv) Annual forecasts of all inflows and outflows prepared and regularly updated (based on accurate revenue forecasts and good budget implementation plans). Cash released to spending agencies within plus or minus 5% of their quarterly cash flow forecasts, to improve fiscal decentralization in a robust, controlled and measured way. • April 2007, Investment risk ratings, by Moody's and Standard & Poor's, put Cambodia’s first ever sovereign debt rating: a B-plus (two notches lower than Vietnam). • Government Prakas in March 7, 2007, Import tax payments in cash are no longer accepted at the port of Phnom Penh and port of Sihanoukville for companies and individuals importing more than $1,000 worth of goods to Cambodia. Effective April 1 2007, tax paid on goods brought in through the two ports must be paid by check to the National Bank of Cambodia or through an account set up at the NBC. • Based on the notice # 010 (MEF) June 6, 2006 on the Management of Tax Collection on Unused Land. Pursuant to new article 30 of the Law on Financial Management 2007 promulgated by Royal Kram #NS/RKM/1206/035 dated December 29, 2006 and Prakas # 452 SHV.Brk.PD dated June 6, 2007 on amendment to the prakas on Tax Collection on Unused Land, the MEF wishes to inform owners of unused land at provinces-municipalities and Phnom Penh as following: 1. The unused land located in provinces/municipalities shall be subject to tax on unused land 2. This tax shall be paid in accordance with the tax rate of 2% on the tax base assessed by the Land Appraisal Committee based on market prices at each municipality and areas to be evaluated in accordance with price per m2 for each year. 3. Each owner of unused land shall be required to apply tax declaration of his land and should he fail to do so would be subject to be fined by additional taxation equivalent to 10%, 25%, and 40% of the amount of unpaid tax plus 2% interest rate for each month • February 9, 2007, the Council of Ministers (RGC) approved the Financial Sector Development Strategy (Financial Blue Print) 2006-2015, and official launched on June 2007 to further strengthen the banking system in Cambodia. • Law on Combating Money Laundering and Terrorist Financing was adopted by the National Assembly on April 30, 2007 and promulgated on June 24, 2007. • Law on the Issuance and Trading Non government Securities was passed by the National Assembly on September 12, 2007 and promulgated on October 19, 2007. Law will set the ground rules for the proposed Cambodian Securities Market and establish the body that will regulate it. Cambodia is planning to introduce its bond markets (Securities Market) by 2009. 92 EIC - Cambodia Economic Watch – April 2009 • Law on Finance for 2008 Management was promulgated on December 21, 2007. • December 26, 2007 Sub-decree Nº 204 on the Division of State’s General Budget by Chapter of Law on Finance for 2008 Management was approved. • Number of ministries using program budgets: 7 ministries in 2007 and targeting 10 ministries by 2009 and as of August 2007, 23 Ministries have established internal audit department in which 13 are operational. 2008: • February 29, 2008, Draft Law on Public Financial System approved by CoM, and passed to NA. • The 2008 Budget Law contains regulations on borrowing, requiring the government to not to borrow money at commercial interest, not guarantee project with commercial interest and not issue state bonds. The government can only borrow SDR 200 million and MEF with approval from NBC is eligible to print 100 billion riels worth of Treasury Bill. • MEF Note #010 (March 19, 2008) Starting from May 2, 2008, “Payment procedures of taxes-duties of medium taxpayers at provincial – municipal tax branches�. All enterprise companies which are subject to medium taxpayer management regime of the real regime system taxpayers at the provinces-municipalities shall be required to pay taxes directly to the NBC in their HQ or provinces- municipalities branches. • MEF Prakas #116 (February 15, 2008) on Customs Bonded Warehouse. The Customs Bonded Warehouses are authorized to store goods and are subject to Customs Control for a specified period. Imported goods or domestic goods for exports can be placed at Customs Bonded Warehouse. Goods in the Customs Bonded Warehouse shall be suspended from application of duties or taxes for which they are liable. • Law on Public Financial System was adopted on April 04, 2008 by NA and promulgated on May 13, 2008. The law has been recognized as fundamental law and its basic principle is a whole management of public financial system, a preparation of budget law, as well an implementation processes of the public financial in the ministries/institutions and sub-national administration. • The National Bank of Cambodia (Central Bank) has increased “Reserve Requirements for commercial banks operating in Cambodia from 8 percent to 16 percent of their deposits, effective in July, 2008�. • July 23, 2008, Sub-Decree No 97 on the Conduct and Organization of the Securities and Exchange Commission of Cambodia was approved. • The National Bank of Cambodia (Central Bank) on September 19, 2008 issued the Prakas on New Capital Requirement and Criteria for Licensing Approval of Banks as directive to require all commercial banks operating in Cambodia to increase their minimum capital requirement (or minimum “capital guarantee deposit�) from 50 billion riels to 150 billion riels with aim to tighten and strengthen the Cambodian banking sector and also to limit number of commercial banks to be in line with the economy and to keep it healthy (quality and well capitalized). Commercial Banks will be allowed to maintain their current capital requirement of 50 billion riels if those commercial banks have an “influential shareholders� that is a bank or financial institution with an “investment grade� rating from a “reputable rating agency�. The country six specialized banks must also increase their minimum capital requirements to 30 billion riels unless those specialized banks have an “influential shareholders� that is a bank or financial institution with an “investment grade� rating from a “reputable rating agency�. All commercial banks have to meet this new requirement by 2010. • Prakas #7.08-211 was issued by the National Bank of Cambodia, dated November 25, 2008, on “Governance in Banks and Financial Institutions� with the purpose strengthening the governance of Banks and Financial Institutions’ like “Independent and Active Boards� or “Executive Boards� and “Specialized Committees�. Terms such as “Decision-Making Body� or Board�, “Executive Body�, “Audit Committee�, “Risk Committee�, “Remuneration and Nomination Committee� and “Senior Management� are defined in the Prakas. • PRAKAS #7-08.212 was issued by the National Bank of Cambodia, dated November 25, 2008, on EIC - Cambodia Economic Watch – April 2009 93 “Fit and Proper Regulatory Requirements for Applying Entities and Licensed Banks and Financial Institutions� with the purpose of determining minimum requirements for persons holding key positions in licensed banks and financial institutions with the objective to 1- safeguard the interests of depositors and stakeholders by ensuring that banks and financial institutions are soundly and prudently managed and directed, 2- set out a minimum framework which can be used by banks and financial institutions themselves when determining whether a person approached about taking a key position is fit and proper, 3-address the risk of serious mismanagement of a banking or a financial institutions and to prevent potential threats to the overall banking system and to protect the interest of depositors. • Ministry of Economy and Finance issued a prakas #1536 (dated December 15, 2008) to create “Operation Team for Securities and Exchange Commission of Cambodia� with responsibilities 1/ the management and publishing of securities for public sale (Equity Securities and Debt Securities), 2/ primary market, disclosure documents of the registered companies, and corporate governance, 3/ granting licenses to securities company, representatives of security companies, investment advisers and participants in other markets, 4/ authorization and control of the collective investment scheme, settlement of disputes in the securities sector, anti-money laundering and terrorism financing, 5/ submission of request for amendment to laws or other regulations which would prevent to the development of the securities sector in Cambodia, 6/ grating authorization to the securities exchange operator, clearance and settlement operator, securities depository operator, secondary market, management of over-the counter trading, to study types of other financial instruments to be published by the register companies. to develop a curriculum for providing training about the securities sector to publishing companies, securities investors including the public and contributors in the securities markets, to establish relations and cooperation with the securities authority of countries in the world, and to develop strategies in order to develop securities sector in Cambodia. • Law on Finance for 2009 Management was adopted on December 09, 2008 and was promulgated on December 27, 2008. • Public Financial Management Reform Program stage 2 �Building on Improved Budget Credibility Toward Achieving Better Financial Accountability� officially launched in December 2008. 2009: • Ministry of Economy and Finance issued a prakas #068 (dated January 8, 2009) to put into use the “Reporting Standard Relating to Cambodia Finance�, requiring all big and medium enterprises to fully comply with the reporting standard of Cambodian Finance in accordance with the notification of the National Council of Accounting. Non-compliant firms will be deemed in violation of article 18 and 19 of the Law on Corporate Accounts, Their Accounts and Accounting Profession promulgated by the Royal Kram #NS/RKM/0702/011 July 8, 2002. • January 26, 2009, a new Prakas on the Maintenance of Reserve Requirements against Commercial Banks’ Deposits and Borrowings issued by the National Bank of Cambodia for reducing the bank reserve requirement from 16 percent to 12 percent and eliminated restrictions on real estate lending effective February 1, 2009 in a bid to boost property prices and stimulate lending. • The National Bank of Cambodia has created an approximately $100 million short-term loan fund for local banks to support availability of its liquidity. The loan fund will help banks that might face short- term shortages in liquidity. The loan fund was approved in a January 20, 2009 offering for up to one month. Banks can borrow up to half (6 percent) of their foreign currency that is held in reserve at the National Bank of Cambodia, and it is covered by the Prakas on the Overdraft Facilities made available by the NBC to Banks and Financial Institutions facing temporary Liquidity Shortages. • February 25, 2009, the NBC issued Prakas on Asset Classification and Provisioning in Banking and Financial Institutions. The Prakas is intended to ensure that all loans and assets of banking and financial institutions are regularly evaluated using an objective and prudential grading system, and that timely and appropriate provisions and write-offs are made to the reserve for loan loss account in order to accurately reflect the true condition and operating results of the institutions. Sources: Various government reports MEF, NBC, DFDL Weekly Law Update. 94 EIC - Cambodia Economic Watch – April 2009 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 EIC - Cambodia Economic Watch – April 2009 95 on sub-decree No 98 of 2005. Its key achievements in 2006 are as followed: implementing of the approved sectoral action plans, establishing Priority Mission Group (PMGs) and PMG/Merit based pay initiatives (PMG/MBIs) in MEF, MOH and at least one other ministry. PMGs covering 170 civil servants have been approved, with consultation ongoing on other possibilities, including in health sector. About 160 central office staffs have been proposed of an MBPI and this proposal has been discussed between HOM, the health partner and CAR. • The medium term strategy and action plan to enhance remuneration and the policy and action plan of redeployment were developed and implemented in order to improve pay and employment condition in the civil service. • Design and Implement HRM policy and action plan to improve merit and performance management by introducing HRM guide and further developing HRM Information Systems (HRMIS) for the civil service. • Enhance service delivery through developing a one window offices (OWOs) policy, legal framework and implementation plan. Five OWOs have been established across Cambodia. 2007: • A meritocratic system has been introduced to encourage both wage reform and human capacity building within government ministries and institutions. These reforms result in public servants’ remuneration increasing by 15 percent per year. The average salary of civil servants has now reached approximately US$46 per month. • The salary of civil servants will be increase by 25% since July 2007 and start from 2008, the salary of civil servant, police and military personnel will be increased by 20% a year. Since January 2002 to July 2007, civil servants’ remuneration raised to US$51.3 per month. • RGC increased index value of civil servant salary from 500 CR to 600 CR under sub-decree Nº 198 dated by December 18, 2007. 2008: • Draft Organic Laws, Law on Administration of Capital, Provinces, Municipalities, Districts and Khans and Law on Election of Council for Capital, Provinces, Municipalities, Districts and Khans, approved by the CoM on February 29, 2008. The both draft laws passed to NA and waiting approval. • Law on Administration of Capital, Provinces, Municipalities, Districts and Khans was adopted on April 01, 2008 by NA, and promulgated on May 22, 2008. The purpose of this law is to administrate the capital, provinces, municipalities, districts and khans through a unified administration in order to promote and sustain the democratic development. • Law on Election of Council for Capital, Provinces, Municipalities, Districts and Khans was adopted on April 02, 2008 by NA, and promulgated on May 22, 2008. The law is cover an establishment of sub-national councils—Capital Council, Province Council, Province Council, District Council, and Khan Council through an indirect election and have its mandate five year. • Sub-Decree Nº 29 on Merit Based Performance Incentive, dated on April 02, 2008 which abrogates the sub-decree No 98 & 38. • Royal Decree on Special Operation Agencies promulgated on March 28, 2008. The purpose of the SOA preparation is to improve the quality and public service delivery reach the place, to strengthen professional ethic of the officials, and to develop capacity in service delivery. 2009: • January 09, National Committee for Sub-National Democratic Development have been established under the Organic Law • March 25, 2009, the four institutions, MoH, MoI, MLMUPC, and CAR, signed the MOU with the development partners to implement the MBPI and PMGs. Source: Various Government Reports, EIC: Cambodia Economic Watch issue 1 to 9 96 EIC - Cambodia Economic Watch – April 2009 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 EIC - Cambodia Economic Watch – April 2009 97 Allocation for Social and Economic Development (LASED). • National committees and sub-national committees at the provincial level were established to implement the Order No.01. 2005: • Sub-decree No. 53 on establishment, classification, and Registration of Permanent Forest Estates issued on April 01, 2005 • Decision No. 28 on establishment of Control and Evaluation Committee to Stop Encroachment on Inundated Sea Forests, Land Leveling and Land Filling along Sea Side issued on August 14, 2005. • Sub-decree on State Land Management, sub-decree on Economic Land Concession, and sub-decree on Managing State Owned Land were passed by Council of Minister in late 2005. • Royal Decree No. 0505/240 on the Establishment of Fishing Community was issued on May 29, 2005. • Sub-Decree No. 80 on management of Fishing Community was issued on June 10, 2005. • The Community Fisheries Sub-Decree was approved by the Council of Ministers on 20 May 2005 2006: • A Royal Decree on the Community Fisheries Establishment was issued in May 2005 followed by an issuance of a sub-decree on the Community Fisheries Management in June 2006 • Fishery Law was adopted by the National Assembly on March 30, 2006 and promulgated in May 21, 2006. • A sub-decree on the transformation of the Department of Fishery (DoF) into Fishery Administration was signed in August 2006. • The National Community Forestry Program Strategic Paper was issued in May 2006, stipulating the Government's Plan to offer formal recognition to the already existing Community Forestry sites of 274 and further creating an additional 200 to 400 formally recognized Community Forestry sites. • Information on the Economic Land Concession was posted available to the public through MAFF website and a technical secretariat was established by decision No 27 dated June 30, 2006. • A Prime Minister's Order on the Prevention of Deforestation was issued in May 2006. • A District State Land Working Group was established to help the provincial committee in State Land Identification and Mapping. • Regarding the issue of land grabbing, a Prime Minister's Order was issued on the Prevention of Deforestation for Land Ownership in May 2006. • A Land Dispute Agency was established with a Royal Decree dated February 26, 2006 with the members from both the Government and the opposition party. 2007: • Marine conservation, a Ten-Year Action Plan for Coral Reefs and Sea-Grass has recently been adopted by Ministry of Agriculture, Fisheries and Forestry. • Law on Water Resource Management was adopted on May 22, 2007 and promulgated on June 29, 2007. • Agricultural Sector Strategic Development Plan, 2006-2010 is presented by MAFF. • Prakas on Guideline of Fisheries Community was approved on July 13. • Law on Natural Protected Area was adopted on December 27, 2007 with the purpose of managing biodiversity conservation and to sustain the utilization of natural resources in the areas. 2008: • Law on Seed Management and Plant Breeder Rights was adopted on April 08, 2008 by NA and 98 EIC - Cambodia Economic Watch – April 2009 Promulgated on May 13, 2008. The law aimed at ensuring the management, motivation, and the development of seed with sustainable in order to benefit social, economic and environment. Together with the law states that providing right protection of new seed is under the territorial of MIME, and managing various seed is under the territorial of MAFF. • Sub-Decree No 131 dated September 15, 2008 on Adjustment of Economic Land Concession/SLC. The statement in the sub-decree states that all rights to give ELC to Province and Municipal have been taken away. Source: Various Government Reports, EIC: Cambodia Economic Watch issue 1 to 9 EIC - Cambodia Economic Watch – April 2009 99 100 EIC - Cambodia Economic Watch – April 2009