86521 COPING WITH DOMESTIC PRESSURES AND GAINING FROM A STRENGTHENED GLOBAL ECONOMY C AMBODIA E CONOMIC U PDATE April 2014 @ All rights reserved This Cambodia Economic Update is a product of the World Bank. The findings, interpretations, and conclusions expressed in the Update are those of World Bank staff, and do not necessarily reflect the views of its management, Executive Board, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. Preface and Acknowledgements The Cambodia Economic Update (CEU) is a product of the staff of the World Bank. It was prepared by Sodeth Ly, and reviewed and edited by Enrique Aldaz-Carroll, Poverty Reduction and Economic Management (PREM) Sector Department, Cambodia Country Office, the World Bank. The team worked under the guidance of Mathew A. Verghis, Lead Economist and Sector Manager, PREM Sector Department. The team is grateful for the advice and guidance provided by Ulrich Zachau, Country Director and Alassane Sow, Country Manager. The Update is produced bi-annually to provide up-to-date information on macroeconomic developments in Cambodia. The Update is published and distributed widely to the Cambodian authorities, the development partner community, the private sector, think tanks, civil society organizations, non-government organizations, and academia. The Update is timed to coincide with the six-monthly publication of the East Asia Economic Update by the East Asia PREM Department of the World Bank. We received valuable comments and suggestions from PREM colleagues, namely Deepak K. Mishra, who also provided inputs for the global economic environment section, and Young Hwan Cha. Good comments and suggestions were also received from Alain W. D'Hoore who also kindly provided information and inputs on Lao PDR wage, and Robert Taliercio and Leah April who kindly commented on the selected issue – Increasing wages in the public sector. We are grateful for insightful comments and suggestions provided by Ratchada Anantavrasilpa and Dyna Heng, the Financial and Private Sector Department. We very much appreciate the support of Linna Ky who serves as research assistant, helps update charts and tables, format the CEU, and provides excellent logistical and administrative support for the preparation and the publication of CEU. We are very grateful to the Cambodian authorities, in particular the Ministry of Economy and Finance, and the National Bank of Cambodia for their cooperation and support in the preparation of the Update. For information about the World Bank and its activities in Cambodia, please visit www.worldbank.org/kh. To be included in the email distribution list of the Cambodia Economic Update and related publications, please contact Linna Ky (lky@worldbank.org). For questions on the content of this publication, please contact Saroeun Bou (sbou@worldbank.org). Table of Contents Executive Summary ............................................................................................................................... 1 Recent Economic Developments and Outlook ...................................................................................... 3 Real Sector ......................................................................................................................................... 3 Drivers of growth ........................................................................................................................... 3 Inflation and prices ........................................................................................................................ 4 External position ............................................................................................................................ 5 Monetary sector ................................................................................................................................. 6 Global economic environment and its implications ...................................................................... 9 Fiscal space ...................................................................................................................................... 10 Debt sustainability ....................................................................................................................... 11 Key Messages ...................................................................................................................................... 12 Selected Issue – Increasing Wages in the Public Sector ...................................................................... 13 The size of the Cambodian civil service .......................................................................................... 13 The cost of the Cambodian civil service.......................................................................................... 14 Sectoral allocation of civil servants and of wage expenditure......................................................... 14 Provincial versus central distribution of civil servants and budgets ................................................ 15 The 2014 wage increase................................................................................................................... 17 Conclusions...................................................................................................................................... 17 Appendix: Cambodia: Key Indicators ................................................................................................. 19 Executive Summary Cambodia’s economy has withstood domestic pressures and managed to sustain its high growth driven by its usual engines of growth. Cambodia’s economic growth is estimated to reach a six-year high of 7.4 percent in 2013, despite the adverse effects posed by post-election political uncertainty and labor unrest. This growth has been led by the acceleration of garment exports and continued growth in tourism. Underpinned by a strengthened global economy, garment exports in value terms accelerated increasing 17.6 percent year-on-year in 2013, from 7.0 percent at the end of 2012 despite suffering some losses due to labor market instability. The tourism sector continued its high growth trajectory, with tourist arrivals reaching 4.2 million in 2013, and China overtaking South Korea as the number two source market after Vietnam. Fortuitously, last year’s floods inflicted only limited damage on rice production. The external sector improved as a result of slower imports due to dampened domestic demand. The post-election adverse effects slowed down the demand for imports, while export growth advanced. This contributed to a narrowing of the current account deficit (excluding official transfers) to around 9.4 percent of GDP in 2013, compared with 10.1 percent of GDP in 2012. Inflows of foreign direct investment (FDI) have continued but, given the uncertainty, 2013 inflows are estimated to be well below their 2012 peak. Gross international reserves (GIR) increased marginally, reaching US$3.6 billion or 3.8 months of imports in 2013, compared with US$3.5 billion in 2012. The nominal exchange rate remained stable against the US dollar, leading to some depreciation in the real exchange rate. Inflation is picking up, but remains moderate. While prices of staple food items remain broadly stable, inflationary pressure is steadily rising due to the recent pick-up in prices of some food items. Inflation rose to 4.7 percent year-on-year at the end of 2013, up from 2.5 percent at the end of 2012. Inflation is projected to remain in mid-single-digits over the short term. Financial deepening continues but the gap between credit and deposit growth rates has widened, reducing bank liquidity. Private sector deposit growth has slowed while credit growth has remained elevated. Private sector deposits declined during the post-election period, recovering in November and ending the year with a growth of 14.2 percent year-on-year, from 25.2 percent at end- 2012. In contrast, credit growth remained strong, expanding at 26.6 percent year-on-year in 2013, only slightly below the 2012 growth rate of 28.0 percent. This raises the risk of Cambodia experiencing a squeeze in bank liquidity as the loan-to-deposit ratio continues to rise, reaching 90 percent at the end of 2013 from 80 percent at the end of 2012. Broad money growth also slowed as foreign currency deposits modestly expanded, reaching US$6.7 billion, or a 14.6 percent year-on-year increase in 2013, compared with US$5.9 billion, or 20.9 percent, in 2012. Government revenue growth has moderated, resulting in an increase in the fiscal deficit. The 2013 overall fiscal deficit including grants is estimated to reach 3.9 percent of GDP, slightly higher than the 2012 deficit of 3.3 percent, and continues to be over-financed by external funding. After a sharp increase in 2012, domestic revenue growth moderated, expanding 8 percent year-on-year in 2013, compared with 27 percent in 2012, due largely to lower import tax and non-tax revenue collection. In 2013, domestic revenue is estimated to come in at 14.8 percent of GDP, below the 2012 peak of 15.3 percent. Expenditure was contained at around 21.3 percent of GDP in 2013, broadly similar to the 2012 level. Meanwhile, government reserves rose to US$760 million in 2013, up from US$690 million in 2012. Cambodia’s debt-distress rating remains low. The latest joint World Bank/IMF debt-sustainability analysis (DSA) conducted in 2013 shows that Cambodia’s debt-distress rating remains low, with all debt-burden indicators projected to be below their respective thresholds. Similar to the 2012 1|Page assessment, the results indicate that debt sustainability remains vulnerable to growth, exports, and fiscal shocks, indicating the need for continued structural reforms to diversify growth and to improve revenue collection. The stock of Cambodia’s external debt (including arrears) was US$4.5 billion or 32 percent of GDP, at the end of 2012 and is projected to reach US$ 5.1 billion or 32.8 percent of GDP at the end of 2013. The prospects for sustaining high growth appear favorable, and real growth for 2014 is projected to reach 7.2 percent, given expectations of renewed confidence and political stability, underpinned by the strengthening of the economic recovery in developed economies. Global GDP growth is projected to rise from 2.4 percent in 2013 to 3.2 percent in 2014, reflecting stronger growth in high-income economies. Strengthening demand in high-income countries is helping to expand global trade and boost exports of developing countries including Cambodia. Downside risks, however, include potential continuing labor unrest, and China’s economic slowdown. Appropriately managing domestic pressures in order to gain from the improved global economic environment will help maintain macroeconomic stability. Addressing labor unrest by successfully negotiating wage issues would serve the interests of both workers and firms. Given Cambodia’s highly US-dollarized economy, building up fiscal space by improving revenue collection is necessary for effective macroeconomic policy tools to be in place to mitigate potential shocks. Likewise, improving banking supervision would further strengthen the financial sector. Enhancing regional integration will also enable Cambodia to benefit more from the growth dynamics throughout the ASEAN region. While Cambodia does have some fiscal space to increase wages, a cautious and careful approach to pay raise may work best. The 2014 budget envisages an increase in the total wage bill from 40 percent to 45 percent of total current spending, reflecting a 0.5 percentage point increase in its share of GDP, rising to 5.5 percent in 2014 from about 5.0 percent of GDP in 2013. International experience suggests the importance of three key factors in determining public sector wage increases: 1) fiscal affordability; 2) the need for human resource management policies to improve labor productivity; and 3) striking a right balance between a rising wage bill and other priority spending, like spending on the social sectors and operations and maintenance (O&M). 2|Page Recent Economic Developments and points, compared with only 2.6 percentage Outlook points contributed in 2012.3 Garment sector recovery advances real growth in Garment exports moderated in 2012 is gaining Figure 1. Figure 2. post crisis momemtum since 2013 Contribution to real GDP growth (in percentage point) Garment exports (in value, YTD in US$ million, & Y/Y % change of 16 Agriculture 16 12mma (RHS)) 14 Industry 14 6,000 US market 40 13.2 Services 12 10.4 12 EU market 10.6 Others 5,000 Japan 30 10.6 Real GDP growth 10 10 Others 7.3 7.4 7.2 4,000 20 8 6.7 7.1 8 Y/Y of 12 mma 6.1 6 6 3,000 10 4 4 2,000 0 2 2 0.1 1,000 -10 0 0 -2 -2 0 -20 Jan-13 Feb-13 Oct-13 Nov-13 Mar-13 Jun-13 Jul-13 Aug-13 May-13 Apr-13 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Sep-13 Dec-13 -4 -4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014p Note: e = estimate; p = projection Source: National Institute of Statistics and Bank staff estimates Note: YTD = year to date; RHS = right hand scale; 12 mma = 12-month moving average Source: General Department of Customs and Excises At constant 2000 prices, the industry sector’s Real Sector share reached 28.9 percent of GDP in 2012, Drivers of growth surpassing the agriculture sector’s share of 25.6 percent of GDP (Figure 3). Cambodia’s economic growth has held up The tourism sector continues its high growth well despite the adverse effects of political The industry sector’s share has surpassed that of uncertainty since the July 2013 general Figure 3. the agriculture sector since 2011 election and labor unrest towards the end of 45 % share at constant 2000 prices 45 2013.1 Underpinned by an improving external Agriculture Services Industry economic environment, real growth is estimated 40 40 to reach 7.4 percent in 2013, driven mainly by 35 35 the garment and tourism sectors. Although it suffered some losses due to labor unrest, the 30 30 garment sector managed to grow its exports 25 25 further, increasing 17.6 percent year-on-year in 20 20 2013, from 7.0 percent at the end of 2012, 2013/e 2014/f 2015/f 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 benefiting largely from the EU’s “Everything- Note: e = estimate, f = forecast but-Arms (EBA)” preferential trade treatment, Source: National Institute of Statistics and Bank staff estmates. and a recovery in the US market (Figure 2).2 As a result, the industrial sector’s contribution to real trajectory with tourist arrivals reaching 4.2 GDP growth in 2013 rose to over 3.0 percentage million in 2013, an increase of 17.5 percent year- on-year, compared with 24 percent at the end of 1 2012 (Figure 4). Tourist arrivals by air also Labor unrest during December 2013-early January 2014 demanding for doubling of the monthly minimum wage for the garment and footwear improved, growing at 17.2 percent year-on-year sector from US$80 to US$160 (but finally, it is settled at US$100) forced in 2013, compared with only 16.2 percent in the Garment Manufacturers Association in Cambodia (GMAC) to send two letters on January 2, 2014. One to the Ministry of Economy and 2012.4 Vietnam, China, and South Korea Finance to clarify procedures and to facilitate re-export of fabric, cut fabric pieces, semi-finished products, and unpacked finished product, and factory accessories and equipment to other countries. The other letter 3 Data limitations prevented the analysis of increases in labor sent to the Ministry of Labor informing of continued suspension of productivity. garment factories’ operations. 4 According Cambodia Airports’ newsletter, Issue No 2 of February 10, 2 Garment Manufacture Association in Cambodia (GMAC) reportedly 2014, Cambodia has emerged as one of the fastest growing markets in estimated in early January 2014 that the labor unrest demanding for US$ Southeast Asia, recording 18 percent passenger growth for the second 160 a month minimum wage (instead of US$100 a month offered by the consecutive year in 2013. Phnom Penh International Airport and Siem Association) cost the garment factories US$200 million in sales and 70 Reap International Airport will undergo a terminal extension project to million in revenue. cope with the expected growth. Construction works has started in both 3|Page continue to be the major source markets for demand, and slowed construction and real international tourists coming to Cambodia, estate activity. The decline in approved contributing more than 40 percent of the total construction and real estate investment projects arrivals number. In 2013, China overtook South occurring in 2013 is noticeable (Figure 5). Korea as the number two source market after Vietnam.5 The service sector’s contribution is Figure 5. Declining construction & real estate investments Approved (fixed asset) investments in real estate (YTD in bln of US dollars estimated to account for about 3 percentage and % of total (RHS)) points of real GDP growth in 2013, broadly 35.00 2.50 Real estate similar to the contribution provided in 2012. 30.00 % of total 2.00 Global financial cirsis 25.00 Rainy season floods in 2013 caused some 20.00 1.50 15.00 damage to agriculture production and the 10.00 1.00 agriculture sector is estimated to contribute close 5.00 to 1 percentage point to real growth in 2013.6 0.00 0.50 The positive growth in agriculture mainly -5.00 0.00 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 resulted from increases in productivity as farmers have started to use more fertilizer for Source: Council for the Development of Cambodia their crops and employ modern farming techniques. Cambodia’s real growth for 2014 is projected to achieve 7.2 percent based on the return of Figure 4. Strong tourism although recently moderated due political stability and expectations of to regional impact, political unrest in Thailand Tourist arrivals (YTD in million, & Y/Y % change of 12mma (RHS)) renewed confidence. Underpinned by the strengthening of developed economies, the 4.0 50 3.5 Number of garment sector is back in full swing after the end 3.0 Tourist arrivals Tourist 40 of the labor unrest period, while the tourism arrivals 2.5 growth rate 30 sector remains unaffected and continues to 2.0 1.5 20 expand (arrivals-by-air growth is accelerating) 1.0 with more direct flights being arranged. As 10 0.5 shown in Figure 1 above, during the post-crisis 0.0 0 period, real growth has remained weaker than in Feb-13 Jan-13 Mar-13 Jun-13 Jul-13 Oct-13 Nov-13 May-13 Aug-13 Apr-13 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Sep-13 the pre-crisis years, but appears to be in line with Source: Ministry of Tourism potential (between 7 to 8 percent). Potential further labor unrest and adverse impacts of Meanwhile, the adverse effects on China’s economic slowdown, however, all may confidence have dampened domestic pose downside risks. Inflation and prices terminals. Upon completion, scheduled to be around end-2015/early 2016, the capacity of both airports will double to 5 million passengers each. In 2013, Phnom Penh welcomed 2.39 million passengers while Inflation is picking up marginally. As the Siem Reap received 2.66 million passengers, up by 15 percent and 20 percent, respectively. food component is the main driver of 5 According to the United Nations World Tourism Organization’s press Cambodia’s consumer price index (CPI), release in April 2013, Chinese travelers have grown from 10 million in 2000 to 83 million in 2012. China’s expenditure on travel abroad reached covering 43.3 percent weight in the inflation US$102 billion in 2012, becoming the largest spender in international basket, stable food prices continue to help tourism globally. China leaped to first place, surpassing both top spender Germany and second largest spender the US (both close to US$84 billion contain inflation. Prices of staple food items in 2012). Spending patterns of tourists may be different; however, it is such as rice and fish remain broadly stable. beyond the scope of this Cambodia Economic Update to analyze the impact on the economy of each tourist country group. However, inflationary pressure is steadily 6 MAFF reported in November 2013 that rice crop damage due to the increasing due to the recent pick-up in prices of recent flood was on 128,421 hectares or 5 percent of the total planted areas. However, the most recent preliminary data show that agriculture some foods items, notably for meat, poultry and production growth decelerated to 1.7 percent in 2013, compared to 4.3 fruit. The CPI reached 4.7 percent year-on-year percent in 2012 in constant prices. 4|Page at the end of 2013, compared with only 2.5 deficit is estimated to widen marginally to percent at the end of 2012 (Figure 6). US$1.98 billion in 2013, compared with US$1.94 billion in 2012 (Figure 8). Figure 6. Mainly driven by food prices inflation remains subdued Robust exports and slow imports narrow trade 40.0 Contributions to 12-month Inflation (CPI, Phnom Penh) Figure 8. deficits 35.0 In million of USD Others 30.0 9,000 0 Transportation sub-index 25.0 Food sub-index 8,000 Other exports 20.0 Housing & utilities sub-index -500 7,000 garment export Y/Y 15.0 6,000 Trade deficit (RHS) 10.0 -1,000 5,000 5.0 0.0 4,000 -1,500 -5.0 3,000 -10.0 2,000 -2,000 Jan-06 Jul-06 Oct-06 Jan-07 Jul-07 Oct-07 Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Jul-11 Oct-11 Jan-12 Jul-12 Oct-12 Jan-13 Jul-13 Oct-13 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 1,000 Source: National Institute of Statistics (NIS) 0 -2,500 2007 2008 2009 2010 2011 2012 2013e 2014p Source: National Bank of Cambodia and World Bank staff estimates and projections Inflation is projected to remain in mid- single-digit figures over the short term. An Dampened domestic demand for motor vehicles, appreciating US dollar and the continued gasoline, and construction materials has largely pegging of the Cambodian riel to the US dollar, softened import growth (Figure 9). serve to anchor price levels while the inflation rates of Cambodia’s main import countries Dampened domestic demand slows imports remain stable and contained (Figure 7). Figure 9. Vehicles and petroleum imports (Y/Y % change of 12mma) 200 Passenger car Cambodia's CPI is broadly in line with regional 150 Other vehicles Figure 7. countries Gasoline Regional Inflation (Y/Y % change) Diesel Import 100 25 25 growth Cambodia - PP CPI slowed 50 20 Vietnam 20 Thailand 0 China 15 15 -50 10 10 -100 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 5 5 Source: General Department of Customs and Excises 0 0 Nov-10 Nov-11 Nov-12 Nov-13 Jan-10 Jan-11 Jan-12 Jan-13 Mar-10 Jul-10 Mar-11 Jul-11 Mar-12 Jul-12 Mar-13 Jul-13 May-10 May-11 May-12 May-13 Sep-10 Sep-11 Sep-12 Sep-13 As a result, the current account deficit (excluding Source: Cambodian NIS, Vietnamese GSO, Thai MoC, Chinese NBS, and others. official transfers) is estimated to decline to External position around 9.4 percent of GDP in 2013, compared with 10.1 percent of GDP in 2012.8 Including The external position has improved. Slow official transfers, the current account deficit also import growth, caused mainly by dampened improved, declining to 5.4 percent of GDP in domestic demand, and further acceleration of 2013, from 5.8 percent of GDP in 2012. exports contributed to a narrowing of the trade Financial (capital) account surpluses continue to deficit, which is estimated to decrease to 12.8 cover current account deficits, resulting in a percent of GDP in 2013, from 13.8 percent of GDP in 2012.7 In absolute terms, the trade total export is smaller than total import, trade balance is negative or trade deficit. 7Trade balance equals total export minus total imports. If total export is 8 Current account deficit (excluding official transfers) equals a sum of greater than total import, trade balance is positive or trade surplus. If trade balance, net service, net income, and net private transfers. 5|Page positive balance-of-payments throughout the expanding at 26.6 percent year-on-year in 2013, post-crisis period (Figure 10). only slightly below the end-2012 growth rate of 28.0 percent. Positive overall balance as financial (capital) Figure 10. account surpluses exceed current account deficits Deposit growth slows but high credit growth 14.0 In percent of GDP Figure 12. remains 12.0 10.0 8,000 Credit to the Private sector deposits ($ million) 120.0 8.0 priavate sector 7,000 Credit to private sector ($ million) 6.0 y/y change 100.0 (RHS) 4.0 6,000 Private sector 80.0 2.0 deposits y/y 5,000 change (RHS) 60.0 0.0 4,000 -2.0 40.0 -4.0 3,000 20.0 -6.0 2,000 Financial account Current account (incl. off. transfers) Overall balance -8.0 1,000 Deposit growth slowed 0.0 2007 2008 2009 2010 2011 2012 2013e 2014p 0 -20.0 Source: National Bank of Cambodia and World Bank staff estimates. Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Source: National Bank of Cambodia The current account deficit continues to be largely financed by FDI inflows, although in 2013 the inflows are estimated to be below their This raises the risk of Cambodia experiencing a 2012 peak level (Figure 11). This reflects the vital squeeze in bank liquidity. Loan-to-deposit ratio role of FDI in maintaining Cambodia’s continues to rise, reaching 90 percent by the end macroeconomic stability. of 2013 from 80 percent by end-2012. However, it remains below its peak level of 100 percent Figure 11. Current account deficit is financed largely by occurred prior to the crisis period when the FDI In million of US$ construction and real estate sectors were 2,000 2,000 booming (Figure 13). 1,500 1,500 1,000 1,000 Figure 13. Loan to deposit ratio is rising by remains below during the crisis period 500 500 0 0 110% -500 -500 Global financial crisis 100% -1,000 -1,000 90% -1,500 -1,500 Direct investment, net Current account (excl. official transfers) -2,000 -2,000 80% 2007 2008 2009 2010 2011 2012 2013e 2014p Source: National Bank of Cambodia and World Bank staff estimates 70% 60% Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Monetary sector Source: National Bank of Cambodia Adverse impacts on confidence caused private sector deposit growth to slow Broad money growth has also slowed as foreign considerably, decelerating to 14.2 percent currency deposits only modestly expanded, year-on-year by December 2013 from 25.2 reaching US$6.7 billion or 14.6 percent year-on- percent at end-2012 (Figure 12). Private sector year in 2013, compared with US$5.9 billion or deposit actually declined during the post-election 20.9 percent in 2012 (Figure 14). period, covering July-August 2013, contracting from US$6.5 billion in June to US$5.9 billion in August, but recovered in November 2013. In contrast, credit growth remains elevated, 6|Page Broad money decerelates as foreign current Figure 14. deposit growth slows 70 Contribution to broad money growth (Y/Y % change) Figure 16. Gross international reserves coverage for private sector deposits declines 60 Riel in circulation Riel deposits 110 4.5 50 Global financial crisis Foreign currency deposits 100 4.0 2013 election 40 3.5 90 30 3.0 80 2.5 20 70 2.0 10 60 1.5 0 50 GIR in months of following year's imports (RHS) 1.0 40 GIR in percentage of private sector deposits 0.5 -10 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 30 0.0 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Source: National Bank of Cambodia Source: National Bank of Cambodia and World Bank staff estimates Gross international reserves (GIR) rose marginally to US$3.6 billion, or 3.8 months of imports, by the end of 2013 from US$3.5 billion, The central bank’s role as the lender of last or 3.1 months of imports, at the end of 2012 resort is being increasingly constrained by (Figures 15 and 16). persistently high US dollarization of the economy. The share of foreign currency deposit Figure 15. NBC's NFA rose but those of deposit money in the broad money rose to 82 percent by the banks declined in 2013 due to high credit growth In millions of USD end of 2013 from 71 percent by end-2005 6,000 DMB's Unrestricted FC Deposit ($mln) NBC's GIR gold 800 (Figure 17). NBC's GIR non-gold 700 5,000 DMB's NFA (RHS) 600 500 4,000 Figure 17. Foreign currency deposit share in broad money is 400 rising to 82 precent in 2013 from 71 percent in 3,000 300 200 2005, dollarization increases 2,000 35,000 In billion of Riels 100 1,000 0 30,000 -100 Riel in circulation 0 -200 25,000 Riel deposits Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 20,000 Foreign currency deposits Note: FC: foreign currency, GIR: gross internatinal reserves, NFA: net foreign assets, 15,000 DMB: deposit money bank Source: National Bank of Cambodia (NBC) 10,000 5,000 0 As a percentage of private sector deposits, GIR Jan-05 Nov-05 Feb-07 Jul-07 Oct-08 Jan-10 Nov-10 Feb-12 Jul-12 Oct-13 Jun-05 May-08 Mar-09 Aug-09 Jun-10 May-13 Apr-06 Apr-11 Dec-07 Dec-12 Sep-06 Sep-11 has been declining, reducing its coverage to 53 percent by the end of 2013 from 57 percent Source: National Bank of Cambodia at the end of 2012 (Figure 16). 7|Page Exchange rate targeting has contributed to a stable riel versus US dollar exchange rate. WILL THE RICE POLICY SUCCEED AND THE RICE The exchange rate remains unchanged at EXPORT TARGET BE REACHED? Cambodian riel 3,995 per US dollar at the end of Prior to 2010, Cambodia exported just a few thousand 2013; the same rate was recorded at the end of metric tons of milled rice. The rice policy paper 2012. The riel remains pegged to the US dollar, adopted in July 2010 provided a boost to milled rice and the exchange rate is broadly stable at around production and exports with a target of at least 1 riel 4,000 per dollar. As the US dollar has million metric tons by 2015. strengthened, so the riel has appreciated against The policy helped to mobilize resources and the Vietnamese dong and has also started to technology for rice milling and production. The appreciate against the Thai baht since mid-2013 private sector mainly drove this rice export push, while (Figure 18). the public sector facilitated trade by establishing one- window service facilities, securing export markets, and Riel appreciates against the dong and lately providing some lending. Banks in 2013 provided Figure 18. against the baht also US$700 million credit or 11 percent of the total credit 2005=100 140 140 to the agriculture sector, compared with only a little Riels per Baht 135 130 135 130 more than US$100 million credit received by the 125 125 sector in 2008. Promotion and awareness efforts have 120 120 115 115 paid off and Cambodia consecutively received world 110 105 Riels per USD 110 105 best fragrant rice awards in 2012 and 2013. Milled rice 100 100 exports in 2013 reached 380,000 metric tons, or almost 95 95 90 90 twice as much as exports in 2012. 85 Riels per Dong 85 80 80 75 75 While it remains to be seen whether the rice export 70 70 target will be reached by 2015, successes in mobilizing Jan-06 Nov-06 Feb-08 Oct-09 Jan-11 Nov-11 Feb-13 Jun-06 Jul-08 Mar-10 Jun-11 Jul-13 May-09 Aug-10 Apr-07 Apr-12 Sep-07 Dec-08 Sep-12 Dec-13 resources and technology resulting in recent achievements are encouraging. Source: Central banks (Cambodia, and Thailand) and Vietnam's ministry of finance Rice exports 300 (YTD) 400 Value (in US$ million) 350 Due to the peg, the normal appreciation of the 250 Quantity (in 000' of tons, RHS) 300 Cambodian riel against regional currencies is 200 250 150 200 therefore likely to continue. The real effective 150 100 exchange rate of the riel, however, continues to 100 50 depreciate (Figure 19) as the US dollar has been 50 0 0 depreciating against other major currencies such Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 as EURO and Chinese Yuan which are also main Source: General Department of Customs and Excises trading partners of Cambodia.9 9 Real effective exchange rate (REER) is inflation adjusted weighted average value (the weighs determined by the importance Cambodia places on all other currencies traded) of the local currency relative to all major currencies being traded. REER index rose to 131 (2005=100) in 2013 or 1.8 percent year on year, reflecting a depreciation of Cambodia’s REER. 8|Page Figure 19. Real effective exchange rate (REER) markets, may be potentially affected by the depreciation continues 140 Index 2005 = 100 140 tightening of global financial conditions REER index primarily through trade channels. The 130 130 depreciation that most developing countries face 120 120 will generally render their exports more 110 Index (Riels per 110 competitive (Figure 20). This, however, will USD) work against Cambodia’s exports because of its 100 100 highly US-dollarized economy. 90 90 NEER index 80 80 Depreciation of exchange rates of Cambodia's Figure 20. garment export competitors Jan-06 Nov-06 Feb-08 Oct-09 Jan-11 Nov-11 Feb-13 Jun-06 Jul-08 Mar-10 Aug-10 Jun-11 Jul-13 May-09 Apr-07 Apr-12 Sep-07 Dec-08 Sep-12 Dec-13 (local currencies vs US Dollar, Jan 2012=100) 125.0 125.0 Note: NEER = nominal effective exchange rate; REER = real effective exchange rate 120.0 120.0 Source: IFS 115.0 115.0 110.0 110.0 The central bank continues to strengthen the 105.0 105.0 stability of the banking and financial sectors, and 100.0 100.0 its supervisory and surveillance capacity. 95.0 95.0 Recently, promising initiatives have been 90.0 90.0 undertaken to review the regulatory framework of the banking and financial sectors. Indian Ruppee Mexican Peso Moroccan Dirham Pakistani Ruppee Global economic environment and its Sri Lanka Ruppee Source: Central banks and x-rates.com Dong implications In addition, there is a risk of having an abrupt Growth in high-income countries is projected to unwinding of investment in China, slowing strengthen from 1.3 percent in 2013 to 2.2 down its GDP growth that may result in knock- percent this year, and 2.4 percent in each of 2015 on effects in the region and other economies and 2016. The US economy is projected to grow with close trading linkages.12 While Cambodia's by 2.8 percent this year from 1.8 percent in 2013. main export partners are the EU and US, China Growth in the Euro Area, after two years of is among the largest sources of FDI in contraction, is projected to be 1.1 percent this Cambodia (Figure 21).13 year. In light of the improvement in the Figure 21. China remains one of the top investors but its share is declining economy, the US Fed decided to gradually Approved fixed asset investment from China (in US$ bln, YTD) reduce the pace of its asset purchase program.10 5.0 China % of Total (RHS) 45.0 While strengthening of demand in high income Billions 4.5 40.0 countries will expand global trade, underpinning 4.0 35.0 3.5 export growth from developing countries 3.0 30.0 including Cambodia, normalization of long-term 2.5 25.0 20.0 interest rates is expected to dampen capital flows 2.0 15.0 to developing countries.11 1.5 1.0 10.0 0.5 5.0 Low-income countries like Cambodia, seen as 0.0 0.0 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 being less integrated into global financial Source: Council for the Development of Cambodia 10 The Fed added to its holdings of agency mortgage-backed securities at a pace of only $30 billion in February, against US$35 billion in January 12 Cambodia’s milled rice exports to China are picking up slowly. In 2013, 2014, and US$40 billion a month last year, and to its holdings of longer- Cambodia only exported about 28,000 metric tons of milled rice (or 7.5 term Treasury securities at a pace of US$ 35 billion in February, against percent of the total milled rice exports) to China. $40 billion in January 2014 and US$45 billion per month last year. For 13 The Council for the Development of Cambodia’s data (fixed asset details see FOMC press releases: January 29, 2014 and December 18, investment) which can be used as a proxy of foreign direct investment 2013. shows that China’s direct investment covers at least 10 percent of the 11 Development Prospects Group, the World Bank. total investments in Cambodia 9|Page World petroleum and rice prices are easing. improving the administration and collection of Global oil prices have continued to ease in non-tax revenues. The introduction of a recent months. Crude oil prices averaged US$ standardized non-tax revenue receipting system, 104.8/bbl in February 2014, 0.6 percent lower which was rolled out in 2012, and inter- than December, and 2.6 percent lower than a ministerial Prakases (arrangements) implemented year ago.14 Nominal oil prices are expected to in 2013, rationalizing and harmonizing fee and average US$103.5/bbl this year (down from charge rates across non-tax revenue collecting $104.1/bbl in 2013) and decline to US$99.8/bbl agencies have provided a boost to non-tax in 2015 due to the rapid expansion of revenue collection.16 This task was supported by unconventional oil production while demand is the World Bank under the Government’s Public also picking up.15 Ample supplies along with Financial Management Reform Program stock releases by Thailand have dampened rice (PFMRP).17 prices in the market. Rice prices reached record 3.5-year lows in December 2013. Rice prices Figure 22. Moderate domestic revenue growth resulting in declining revenue to GDP ratio in 2013 and 2014 averaged US$459/ton in February 2014, 1.8 Revenue composition in percent of GDP percent higher than December but 18 percent Direct taxes Indirect taxes Trade taxes Non-taxes Others lower than a year ago and half compared to their 16.0 all-time high of early 2008. Rice prices are 14.0 2.5 2.3 2.0 12.0 expected to average US$460/ton this year (down 10.0 2.3 2.3 1.7 2.2 2.0 from $505.9/ton in 2013) and decline to 8.0 2.1 US$450/ton in 2015. For Cambodia, easing 6.0 6.6 6.7 6.9 petroleum prices are helpful as the country 4.0 4.3 5.1 5.9 5.4 5.7 6.0 imports 100 percent of the petroleum products it 2.0 consumes. Declining rice prices, however, are - 2006 2007 2008 2009 2010 2011 2012 2013e 2014b likely to affect the economy as Cambodia is a net Note: e = estimate, b = budget Source: Ministry of Economy and Finance rice exporter. Fiscal space Expenditure, however, is estimated to expand faster, increasing by 9.8 percent year-on-year in While the fiscal situation remains under 2013, compared with a 3.1 percent increase in control, general government domestic 2012, and are estimated to reach at around 21.3 revenue growth has moderated. After a sharp percent of GDP in 2013, slightly higher than the increase in 2012, domestic revenue growth has 2012 level (Figure 23). moderated, estimated to expand only at 5.0 percent year-on-year in 2013, as opposed to 30.6 percent in 2012. This is due largely to slower import tax collection, and modest non-tax and provincial revenue collection. Import tax revenue did not increase as much as expected because of slower growth of import volumes, despite efforts made by customs authorities to enforce official tariffs. The 2013 revenue is estimated to reach 14.8 percent of GDP, below the 2012 peak of 15.3 percent (Figure 22). However, the authorities were successful in 16 It is estimated that the measures have added about US$25 million 14 Weekly Global Economic Brief, Development Prospect Group, World above the non-tax revenue target in 2012 budget. Non-tax rose to 2.5 Bank, March 7, 2014. percent of GDP in 2012 from 2.0 percent of GDP in 2011. 15 According to the World Bank Commodities Price Forecast, January 17 Under the PFMRP, revenue-to-GDP ratio is targeted to be increased 2014. by 0.5 percent per annum. 10 | P a g e Efforts have been made to contain overall Rising government savings Figure 23. Figure 25. government expenditure Total government deposits in billion of riels Expenditure main components in percent of GDP 3,500 0.9 3,000 0.7 0.7 1.0 1.1 1.0 2,500 11.4 0.8 2,000 0.7 11.0 10.6 11.5 11.9 0.6 12.1 1,500 8.2 9.0 7.9 1,000 9.6 10.7 500 8.8 8.9 8.3 6.1 6.3 7.3 5.7 0 Dec-08 Dec-13 Jan-06 Nov-06 Feb-08 Oct-09 Jan-11 Nov-11 Feb-13 Jun-06 Jul-08 Mar-10 Aug-10 Jun-11 Jul-13 May-09 Apr-07 Apr-12 Sep-07 Sep-12 2006 2007 2008 2009 2010 2011 2012 2013e 2014b Capital Recurrent Provincial expenditures Source: Ministry of Economy and Finance and Bank staff estimates Source: National Bank of Cambodia The 2013 overall fiscal deficit including grants is Since 2012, fiscal consolidation supported by a estimated to reach 3.9 percent of GDP, higher marked improvement in domestic revenue than the 2012 deficit of 3.3 percent (Figure 24). collection has allowed the authorities to rebuild In addition, it continues to be over-financed by fiscal space.19 With the highly US-dollarized external funding. economy, fiscal policy is the main policy tool for macroeconomic management, and fiscal space Figure 24. Slightly higher overall fiscal deficit which built by improved domestic revenue collection is continues to be over-financed by external funds thus necessary to serve as a cushion from any in percent of GDP 22.0 future shocks. Building fiscal space, however, 18.0 will be increasingly difficult due to competing 14.0 demands for spending, including pressures from 10.0 the rising public sector wage bill. In the 2014 6.0 budget, the public sector wage bill is set to 2.0 increase from 40 percent to 45 percent of total -2.0 current spending. The total wage bill in 2014 -6.0 represents more than 5 percent of GDP. Sectoral 2006 2007 2008 2009 2010 2011 2012 2013e 2014b allocations, in particular for the education sector, Revenue Expenditure Deficits (incl grants) Source: Ministry of Economy and Finance and Bank staff estimates also received substantial boosts in budget allocations in 2014, consistent with As a result, government savings rose to riel 2,750 recommendations provided in the 2011 Public billion (or about US$760 million) in 2013 from Expenditure Review.20 riel 2,486 billion (or about US$690 million) in 2012 (Figure 25).18 As share of GDP, Debt sustainability government savings rose slightly, reaching 4.9 percent in 2013 from 4.8 percent in 2012. Cambodia’s debt distress rating remains low. A joint World Bank/IMF debt sustainability analysis (DSA) conducted in 2013 shows that Cambodia’s debt distress rating remains low with all debt burden indicators projected to remain below their respective thresholds. The 18 Government savings or (negative) net credit to the government by the 19 According to Finance and Development, No 2, Volume 42, June 2005, banking system, represent savings obtained from surpluses that the IMF, “fiscal space” is room in a government’s budget that allows it to Government has accumulated as a result of over-financing of annual provide resources for a desired purpose without jeopardizing the budgets’ overall expenditures. In the Government’s annual fiscal sustainability of its financial position or the stability of the economy. reporting, annual government savings are reflected as negative domestic 20 This is part of the 2011 Integrated Fiduciary Assessment and Public financing. Expenditure Review (IFAPER). 11 | P a g e Government’s policy of avoiding non- intermediation underpinning economic growth, concessional borrowings helps sustain debt unsustainable expansion, given the tightening of management. Similar to the assessment in 2012, global financial conditions, can cause instability the results indicate that debt sustainability and negatively impact the real sector of the remains vulnerable to growth, exports, and fiscal economy. Therefore, strengthening the central shocks. This calls for continued structural bank’s supervision, capacity, and early warning reforms to diversify growth and to improve and resolution systems, including good revenue collection and prudent contingent governance, is of the essence. Further enhancing liability management. The size of Cambodia’s the implementation of risk based supervision external debt (including arrears) was US$4.5 using off-site surveillance system and close billion or 32 percent of GDP at the end of 2012 monitoring to ensure compliance with prudential and is projected to reach US$ 5.1 billion or 32.8 regulations are key, enabling effective early percent of GDP at the end of 2013. warning and resolution systems. Good initial steps are being planned. These include Key Messages preparations to establish a crisis management committee and crisis management teams, a Appropriately managing domestic pressures in framework for assessing and supervising order to gain from an improved global economic systemic institutions which entails a mechanism environment while also being prepared to cope for assisting systemic and illiquid or insolvent with potential adverse impacts of US Fed banks, crisis management manuals, contingency tapering and China’s economic slowdown will and communication plans, as well as periodic help to safeguard macroeconomic stability. This crisis simulation exercises. In addition, requires that the downside risks discussed above promoting the use of the local currency, the are adequately addressed so that the drivers of Cambodian riel, would enable the National Bank growth are further strengthened. of Cambodia, the country’s central bank, to play an increasingly important role in managing From the structural side, upgrading job training monetary policy. Given Cambodia’s highly US- and education for workers and students is dollarized economy, improving revenue recommended to increase labor productivity and collection by broadening the tax base, improving compensate for wage increases, and to continue tax administration, and strengthening to attract labor from rural regions into the governance is necessary to build fiscal space for manufacturing sector. Addressing labor unrest effective macroeconomic policy tools to be in by successfully negotiating wage issues would place to mitigate potential shocks. serve the interests of both workers and firms. Meanwhile, enhancing regional integration by deepening structural reforms through trade facilitation related to import and export clearances with simplified and harmonized trade procedures, infrastructure and transport linkages for regional connectivity, and logistics services will enable Cambodia to benefit more from the growth dynamics throughout the ASEAN region. This will also allow Cambodia to diversify growth and become more competitive. It is important to promote a healthy financial sector development. The past years, Cambodia’s financial system has expanded rapidly. While financial deepening improves financial 12 | P a g e Selected Issue – Increasing Wages in the Public Sector SUMMARY 1. The size and overall cost of Cambodia’s (civilian) civil servants are on the lower side of other low -income peers. However, due to its relatively low revenue, Cambodia’s wage expenditure as a share of domestic revenue at 36 percent (2012) is high. 2. The 2014 wage increase is modest and estimated to cost an additional US$42 million a year. This is to increase the civilian civil servant basic pay under Categories B, C, and D (lowest) by riel 80,000 a month and Category A (highest) by riel 40,000 a month. Average basic pay of Category D is now riel 344,371 or US$86 a month. 3. Further wage increases will likely add more pressure to reduce needed spending for maintenance, which is declining as share of the total capital expenditure, and are not a guarantee of improved public service delivery. Improvements in human resource management are needed for wage increases to effectively address performance, deployment, and optimal sectoral allocations. The size of the Cambodian civil service Cambodia’s (civilian) civil service is relatively small in terms of size at around 1.4 civil servants per hundred population. This is lower than most of its regional peers (Figure 1), although the number has nonetheless expanded by 28 percent during the past decade, and by 47 percent during the past two decades (Figure 2). The size of Cambodia’s civilian civil service remains small... although there was a sharp increase in 2008. As a share of GDP, total wage bill remains modest … Minimum pay of Cambodia’s (civilian) civil servants is low. 13 | P a g e The cost of the Cambodian civil service Cambodia’s total wage expenditure as a share of GDP remains modest compared to other low-income countries. The total wage expenditure (civilian, security and defense) of 5.5 percent of GDP as budgeted for 2014 is modest compared to countries with similar GDP per capita (Figure 3).21 Although it is difficult to compare minimum salaries across countries because of differences in salary definitions, a rough regional comparison appears to suggest that minimum salaries of Cambodia’s civil servants may be lower than those of Lao PDR and Myanmar, but may be higher than those of Vietnam’s civil servants (Figure 4). Similar to Cambodia, countries in the region are making efforts to increase minimum salaries for their civil servants. These countries including Cambodia, however, are facing common constraints, namely that the level of domestic revenue collection limits their ability to pay their civil servants more. While Cambodia’s total wage expenditure for 2014 budget appears relatively high in terms of the shares of recurrent spending and domestic revenue compared with its low-income country peers in the region, this is due to its low levels of revenue collection and current spending (Figure 5 and Figure 6). Although revenue performance has recently improved, Cambodia’s (domestic) revenue to GDP ratio remains low. Current spending, in particular non-wage expenditure, continues to be contained. Sectoral allocation of civil servants and of wage expenditure Sectoral prioritization in the deployment of civil servants remains generally appropriate. Aggregate numbers show that the social sector, including health and education, continues to receive the highest share of the total number of civil servants (Figure 7). But the sectoral allocation of the wage budget does not prioritize the social sectors, unlike the deployment of civil servants. While the share of civil servants working in the social sector remains unchanged (or slightly improved) at around three quarters of all civil servants, the share of wage expenditure allocated to the social sector in the total civilian wage bill, in particular for the education sector, has shrunk, reaching only 44 percent in 2013, compared with a peak of 57 percent in 2001 (Figure 8). This implies that average remuneration in the education sector is trending downwards. 21 Wage expenditure discussed in this note covers all staff costs including allowances. 14 | P a g e Total wage bill as share of domestic revenue is high…. Total wage bill as share of current spending is the highest. And the social sector continues to maintain its share... Sectoral breakdown of wage bill shows declining share for education. Provincial versus central distribution of civil servants and budgets Deployment of civil servants has been centrally focused. Aggregate data on the size of the civil service conceals some of the problems surrounding the geographic distribution of civil servants. Anecdotal evidence indicates that low pay and the absence of “moonlighting” opportunities in the provinces encourage civil servants to work in the cities and provincial capitals. Socio-cultural factors also contributed to the centrally driven deployment; including the perceived lack of social appeal to working in rural areas. The result is inadequate service delivery in the rural areas of the provinces, where most Cambodians actually live. The shares of civil servants working at the provincial level for a number of key rural sectors, namely agriculture, rural development, and environment, as well as public works, have generally declined since 2007 (Figure 9).22 The increasing concentration of civil servants at the central level for these rural sectors does not appear positive for an equitable broadening of access to public services. For the rural and social sectors illustrated in Table 2 below, provincial budget as share of total budget declines as it grows at a much slower pace than total budget does. 22Understanding deployment of civil servants within provinces such as those located in the provincial capitals, communes, and districts is not possible because budget data only distinguish between central and provincial civil servants. 15 | P a g e Targeted operational and public expenditure reviews (PER) may be needed. Conducting PERs may help to shed some light on why the share of civil servants working at the provincial level, together with the share of budget allocated to the provincial level, are both contracting. There has been a shift from low- to high-pay-scale categories. The share of civil servants in Categories C and D among total civil servants dropped by about 9 percent, from 55.8 percent in 2009 to 46.9 percent in 2014, while those under Categories A and B rose (Figure 10). This could be a healthy trend, a sign of professionalization of the civil service. But it could also adversely affect efficiency if the ratio of support staff and technical/professional staff is not adequate. A functional review could help to determine if the ratio is appropriate for optimal efficiency. Share of provincial staff in the rural sectorsdeclines… So do the provincial budget shares. Shrinking bottom category share … Outlays for maintenance cannot keep up with investment. It is critical to ensure adequate operations and maintenance (O&M) budgets in order to keep the capital stock in sound condition. Rising public investment in absolute terms and as a percentage of GDP—building infrastructure, irrigation, water supply, and power transmission networks—funded mostly by development partners, have contributed to increasing capital stock. However, budgets for supplies and equipment, as well as for operations and maintenance, as a share of total capital spending, have been shrinking since 2008 (Figure 11).23 This is an issue that merits consideration going forward as it is important to strike a right balance between a rising wage bill and other priority public spending including operations and maintenance (O&M). 23 Supplies, equipment, operations, and maintenance expenses are under the Chapters 60 and 61 of the current budget classification. 16 | P a g e The 2014 wage increase  The 2014 budget Table 3: Estimated cost of additional budget for the wage bill increase in 2014 envisages an increase Basic pay monthly average Estimated permanent Basic pay increase for 2014 Basic pay new monthly average Annual additional budget required in the total wage bill Category Rank in Riel in US$ civilian civil servant in Riel in US$ in Riel in US$ % in Riel in US$ equiv. equiv. equiv. equiv. change from 40 percent to 45 A A1 749,613 187 numbers 345 40,000 10 789,613 197 5 165,800,727 41,450 percent of total A2 648,280 162 1,612 40,000 10 688,280 172 6 773,736,727 193,434 current spending. This A3 561,066 140 36,039 40,000 10 601,066 150 7 17,298,542,545 4,324,636 represents about a 0.5 B B1 B2 530,733 453,568 133 113 2,414 3,673 80,000 80,000 20 20 610,733 533,568 153 133 15 18 2,317,314,712 3,526,348,475 579,329 881,587 percentage point B3 373,269 93 55,834 80,000 20 453,269 113 21 53,600,496,814 13,400,124 increase in its share of C C1 362,520 91 860 80,000 20 442,520 111 22 825,962,127 206,491 GDP, rising to 5.5 C2 309,472 77 765 80,000 20 389,472 97 26 734,188,557 183,547 percent in 2014 from D C3 271,971 264,371 68 66 73,897 16,024 80,000 80,000 20 20 351,971 344,371 88 86 29 70,940,969,316 30 15,383,040,000 17,735,242 3,845,760 about 5.0 percent of Total 191,463 Total 165,566,400,000 41,391,600 GDP in 2013. Source: Ministry of Economy and Finance, Ministry of Civil Service, Bank staff estimates.  An effort to increase base pay for civilian civil servants by CR 80,000 for the wage categories D (lowest), C and B, and by CR 40,000 for the wage category A was made.24 This is estimated to have cost about CR 166 billion, or US$42 million equivalent (Table 3).  The above estimate excludes overtime, which would increase as a result of rising base pay. Overtime mostly paid to teachers is roughly estimated to cover about 5 percent of the total wage bill.25 Including overtime, the total wage bill increase as a result of the approved basic wage increase for 2014 could reach about US$ 44 million.26  The increase in the wage bill budgeted for 2014 consumes all the expected increase in domestic revenue, not leaving room for increases in non-wage expenditures relative to GDP. The wage bill increase captures all the budgeted increase in domestic revenue of about 0.5 percent of GDP in 2014. The budgeted non-wage expenditure as share of GDP remains at around 6.5 percent of GDP, similar to that of 2013, not leaving room to increase the shares of operation & maintenance and social spending relative to GDP. Conclusions  International experience points to the importance of determining public sector wage policy as an integral part of an overall civil service reform, which includes human resource development and management. Important dimensions of such reform could include putting in place robust internal control systems in order to ensure effectiveness and efficiency, and rationalizing public sector remuneration by initially consolidating different types of allowances into basic pay.27 Past annual ‘across the board’ salary increases with limited reform in human resource development and management do not appear to have improved public service delivery. 24 Sub-decree No. 1 dated January 2, 2014. The pay base increase, however, does not cover civil servants employed in legislative, courts, anti-corruption, and national audit entities, agencies, and authorities. The base pay does not include benefits and allowances such as functional allowances which are a few times base pay for upper pay categories. 25 Wage bill also covers benefits and allowances such as functional allowances, which amount to as much as 15 percent of the total wage bill. 26 Assuming an average of 40 hours of overtime a month performed by 80,000 civilian civil servants who are mostly teachers below category A, it is estimated that the total overtime payment increase is US$ 2.4 million a year as a result of the base pay increase approved in 2014. 27 Consolidating the existing plethora of allowances will ensure consistency in competitiveness of total remuneration and greater transparency in the Government’s pay structure. 17 | P a g e  Next steps that may help inform government wage policy might include:  A pay survey that reviews and compares pay practices of the public sector with those of in- country private sector companies, microfinance institutions, multinational companies, and international non-governmental organizations.  A review of existing internal control procedures, human resource functions and performance management practices to provide a more robust analytical framework for the overall civil service reform. 18 | P a g e Appendix: Cambodia: Key Indicators 2011 2012 2013e 2014p 2015f 2016f Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change yoy) 7.1 7.3 7.4 7.2 7.0 7.0 Domestic demand (% change yoy) 1.0 11.9 8.5 9.7 10.2 11.0 Industrial production index (2000=100) 300.8 315.9 341.1 368.4 396.1 420.0 (% change yoy) 14.5 5.0 8.0 8.0 7.5 6.0 Consumer price index (% change yoy) 4.9 2.5 4.7 5.0 5.5 6.0 Public Sector Government revenues (% GDP) 13.2 15.3 14.8 15.0 15.0 15.2 Government expenditures (% GDP) 22.8 21.0 21.3 20.3 20.0 20.0 Government balance excluding grants (% GDP) -9.6 -5.7 -6.5 -5.3 -5.0 -4.8 Government balance including grants (% GDP) -4.6 -3.3 -3.9 -3.2 -3.5 -3.3 Foreign Trade, BOP and External Debt Trade balance (millions US$) -1,490.0 -1,949.2 -1,983.9 -2,096.2 -2,508.9 -2,793.0 Exports of goods (millions US$) 5,219.5 6,015.7 6,777.5 7,979.4 9,229.2 10,705.8 (% change yoy) 34.4 15.3 12.7 17.7 15.7 16.0 Key export (% change yoy) 1/ 31.7 7.0 17.6 17.5 15.5 15.0 Imports of goods (millions US$) 6,709.5 7,964.9 8,761.4 10,075.6 11,738.1 13,498.8 (% change yoy) 22.7 18.7 10.0 15.0 16.5 15.0 Current account balance (millions US$) 2/ -1,014.9 -1,436.6 -1,450.9 -1,620.1 -1,824.9 -2,119.6 (% GDP) -7.9 -10.1 -9.4 -9.7 -10.0 -10.3 Foreign direct investment (millions US$) 785.4 1,410.2 1,200.0 1,230.0 1,450.0 1,520.0 External debt (millions US$) 3,840.8 4,486.0 5,052.0 5,559.4 5,948.7 6,310.9 (% GDP) 29.9 31.6 32.6 33.2 32.5 30.8 Short-term debt (millions US$) - - - - - - Debt service ratio (% exports of goods & services) 1.2 1.1 1.5 1.6 1.5 1.8 Foreign exchange reserves, gross (millions US$) 3,031.6 3,463.0 3,642.5 3,879.3 4,267.2 4,608.6 (months of imports of goods & services) 3.4 3.1 3.8 3.5 3.4 3.3 Financial Markets Domestic credit (% change yoy) 37.3 29.6 28.5 26.0 25.2 24.8 Short-term interest rate (% p.a.) 15.0 13.7 13.0 13.0 12.5 12.2 Exchange rate (Riel/US$, eop) 4,039 3,995 4,000 4,065 4,076 4,100 Real effective exchange rate (2005=100) 124.8 128.6 131.0 132.9 134.7 136.9 (% change yoy) 1.9 3.0 1.8 1.5 1.3 1.7 Memo: Nominal GDP (millions US$) 12,828 14,196 15,491 16,722 18,291 20,486 Sources: National data sources, IMF, and World Bank staff estimates e = estimate f = forecast p = projection 1/ Garments 2/ Excluding official transfers. 19 | P a g e