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RECENT
ECONOMIC DEVELOPMENT
BRIEF
FACTS ON THE RECENT
MACRO-ECONOMIC DEVELOPMENT
Growth, Poverty,
Reform Priorities
The
development challenge facing
Cambodia is to sustain
growth, reduce poverty, and
accelerate the completion of
the reform agenda. To
accomplish these medium term
goals will require effective
economic management and
considerable inflows of
external assistance in order
to support the
implementation of public
investment priorities and
raise the pace and
consistency of structural
reform. Moreover, mechanisms
to reduce poverty and
protect vulnerable groups
from accelerated
transformation much be put
in place.
The development needs of
Cambodia have shifted from
survival mode to a medium
term strategic framework for
rapid adjustment and growth
supported by sound macro and
sectoral policies, and
complementary public
investment and technical
assistance programs.
Adjustment
and growth, such are the
objectives pursued by the
MEF. It is important to
strengthen the macroeconomic
balances in order to allow
for the healthy, sustainable
growth of the economy. On
this basis, sector-driven
strategies tended to
increase and diversify
production, parallel with
the budget strategy of
reducing financial
dependence and encouraging
social progress.
The
path covered in five years
(1994-98) albeit one that
shows deficiencies to be
corrected and delays to be
resolved seems satisfactory,
overall. Progress has been
noteworthy and the results
indicators positive mainly
due to a good concurrence of
external factors affecting
economic development, and
also to the clear direction
given by national policies.
Results
Indicators – Positive
Development
The
outcomes of the results
indicators appears to be
positive, according to the
information in Table 9 below
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1- |
A
real average annual growth
rate of 5.2% for the period.
Had it not been for
the
downturn in 1997, which will
continue to make, be felt to
a lesser extent in 1998, the
average annual growth rate
could have reached 6.0%. In
this regard, 1995 and 1996
have clearly very high
scores, which were lining
Cambodia up among the Asian
dragons until the recent
crisis occurred;
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2- |
A
per capita GDP on a constant
growth curve, from US$241 in
1994 to US$303 in 1996, with
a slight decline in 1997
($F290
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3- |
A
CPI that broke free from the
soaring increases of the
previous years to stabilize
from 1996 onwards at a about
9%;
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4- |
A
deficit in the current
balance excluding transfers,
which is sustained at 14-15%
of GDP, despite the increase
in imports due to
investment;
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5- |
For
exchange reserves that
reached over two months of
goods and services imports;
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6- |
Foreign
contributions that covered
the gross deficit of the
current balance on an annual
average for 1994-97, in the
amount of 134%, with the
surplus helping to improve
the gross foreign exchange
reserves.
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factors and the Funding or
Deficits
Factors
external to the evolution of
the economy are related to
official transfers such as
donations, capital transfers
in the form of loans from
international organizations
and, lastly, to foreign
direct investments (FDI).
The aggregate of such
external contributions
covered, on a annual average
from 1994-97, the gross
deficit of the current
balance in the amount of
134% (the surplus
contributed to the
improvement of the gross
foreign exchange reserves to
cover 2.7 months of imports
in 1997). However, although
official transfers and
capital transfers are being
maintained from one year to
the next, about 811% and
from 2-3% respectively of
GDP, these did drop in 1997
by about 8% with relation to
the initial forecasts and by
20% compared to 1996.
On the other hand, FDI that
had grown at a very
sustained pace since 1993,
dropped by 21% in 1997 with
relation to the forecasts.
There is reason to fear
that, in view of the Asian
financial cataclysm, such
investments will not rapidly
pick up the dynamic growth
that they experienced up
till now.
National
Policies and Economic
Development - Budget
and Monetary Policies.
Expansion
of the monetary supply was
strong during the years
1994-97, with an annual
average rate of 35.7%, and
for an average 5.2% of GDP.
However, no monetary
financing of the Treasury
was undertaken with the
National Bank of Cambodia
until late 1997. In reality,
the foreign currency deposit
component explains this
growth; liquidity in Riels
has grown at an annual
average rate of 13.7%.
Still, this development is
especially due to the
exceptional year in 1997
(+33.4%). Nevertheless, the
Riel- US Dollar parity has
remained very stable during
the period, i.e. at the end
of the period 2,593 in 1994;
2,560 in 1995; and 2,720 in
1996. It was only during the
second half of 1997 that,
suffering the effects of the
Asian monetary cataclysm,
the Riel went up to 3,500
for US$1; since that time,
it has basically maintained
itself at this level.
However,
a good macroeconomic
performance was obvious in
the liberalization of the
rate of exchange, the
stabilization of inflation
to a tolerable level, and
the revamping of the
commercial framework
(removal of restrictions on
imports and obstacles to
exports)
Taxation—an
up-to-date tax system, but
yielding inadequate results
The
Government undertook the
renovation and reinforcement
of a taxation and duty
system that was still in
infancy. The country was
slowing getting away from a
command economy. The option
was made for a modern,
performing tax system, but
by means of a progressive
approach that would allow
for reasonable time for the
new economic structures to
adapt and for State
employees to be trained.
With the year 1998—after
the Taxation Code of
February 1997, pending
enforcement of the VAT on
large commercial enterprises
in 1999 and with the Customs
Code yet to come out—the
Cambodian approach will be
five years old.
The
current nomenclature of
taxes and duties is a good
reflection of the tax
structure as it is found in
most countries in the world.
An analysis of the
relationship between tax
revenue and the components
of GDP that are the basis
thereof gives rise to the
following observations:
What is
called the tax ratio and
which means the actual levy
made on GDP, experienced a
rapid increase between 1993
(4.32%) and 1994 (5.95%),
when the initial tax
measures kicked in. Since
that time, the tax radio
continues to be around 6%--
with a peak of 6.46% reached
in 1997 – the lowest rate
in the world, even compared
to the Least Developed
Countries (LDCs). In the
Southeast Asian region, the
tax ratio rate was already
9.53% in 1984 in the
Philippines; 14.34% in
Thailand; 16.93% in
Indonesia; 21.53% in
Malaysia. The Philippines is
the only country where the
rates appear relatively low;
although the rate quickly
increased to 15.51% in 1992.
That is about the same rate
as in Vietnam (15.4% in 1993
for a GDP per capita that is
lower than that of
Cambodia), while Laos .4% in
1991.
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· 43%
to 46% of GDP is not subject
to taxation due to the
rightful exemption of
agricultural production;
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. When
only the potentially taxable
GDP is considered, the
average tax rate of national
production
barely reaches 8% (from
7.63-7.95% depending on the
year);
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Internal taxation, aside
from customs duties, remains
weak, if not negligible;
income- profit taxes carried
over to the potentially
taxable GDP is less
than 1% (0.36 – 0.77%,
except for 1998 which is
forecast for 1.23%). At the
same time, the ratio between
domestic indirect taxes and
potentially taxable GDP is
barely above 1% (0.59 –
1.36% depending on the
year);
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. The
average rate of tax on
imports remains at a very
reasonable level (10 – 13%
on total imports);
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. Private
consumption that supports
both the domestic indirect
and import taxes is only a
very small contributor to
taxation, between 7 – 8%
-- whereas in all the
countries of the world this
is the main source of tax
receipts.
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BRIEF
FACT ON THE INDUSTRIAL
SECTOR
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Growth
and Transformation during
the Transition
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The
objectives of policy will be
to support the emergence of
internationally competitive
industries and complete the
structural reform process.
Major reforms affecting the
industrial sector have been
undertaken and others remain
to be completed. The
Government is committed to
their completion through
efficient sequencing so that
competitive private industry
can fully emerge from the
transition.
As
a result of structural
reform and improved economic
performance the GDP share of
trade and industry has risen
from 11.5 percent in 1990 to
17 percent in 1996. This
growth has been driven
largely by the construction
sector as industry and
manufacturing have not
expanded at the same rate
due to the slower emergence
of private enterprises and
reduced activities of state
owned enterprises. However,
manufacturing is developing
rapidly with a growth rate
of 7.4 percent in 1995 and
7.8 percent in 1996. This
sustained growth is being
largely driven by the
recently established export
oriented garments industry.
Manufacturing establishments
are small in scale with only
6 percent employing more
than 20 persons. Larger
scale establishments are
concentrated in and around
Phnom Penh with limited
manufacturing activities in
rural and provincial areas.
The services share of GDP
has increased from 38
percent in 1990 to 41.1
percent in 1996. The
banking, insurance and real
estate sup-sector largely
non-operational before 1991
have also experienced
significant growth. Trade
has grown approximately 7
percent per year since 1991
and the tourism and hotel
industry continues to expand
rapidly with a growth rate
of 16.9 percent and 25.3
percent for 1995 and 1996
respectively. As a result of
the better availability of
infrastructure in the urban
areas of Phnom Penh and
Sihanoukville the growth of
industry, commerce and
services has occurred
largely in those areas. This
has contributed to the
widening of the income gap
between the urban centers
and centers the rural areas
where 85 percent of the
country population reside.
Of significance is the
prevalence of the informal
sector, small enterprise
trade and services, which
not only employs a large
labor force, but their
family business orientation
provides easier access for
wider participation by
women.
Foreign
Investment
Foreign
investment trends are
encouraging. Joint ventures
and foreign direct
investment totaled over $2.2
billion in commitments from
mid- 1994 to mid-1996 with a
projected employment
potential of 60,000. Main
areas of investment include
the textile and garment
industry, construction and
tourism. More than 60
percent of foreign direct
investment has been in light
industry and services during
the period. These estimates
while indicative show that
the emphasis of foreign
investment is on light
industry and services which
indicates that industry
policy needs to be focused
to the needs of the fastest
growing sectors. More
investments in manufacturing
activities are now taking
advantage of special trading
rights under Most Favored
Nation and the Generalized
System of Preferences now
extended to Cambodia by many
industrialized countries.
Oil
and Gas
Cambodia
is dependent on imports for
all its oil supplies, which
will continue in the
foreseeable future. Initial
results from private sector
exploration which restarted
in 1991 offer promise of
vast untapped off-shore oil
and gas reserves in the
economic zone of the
country. Oil and gas
exploration rights are
currently negotiated on a
case by case basis. The
Government will end this ad
hoc approach and with
external assistance
implement an open tender
system based on a model
contract agreement. Expanded
licensing of blocks of
off-shore exploration areas
using transparent bidding
processes is being
undertaken based on surveys
commissioned to assess the
availability of in-land
fossil fuel deposits in the
Mekong basin and the Tonle
Sap. Agreement have been
designed to provide
incentives and protection to
the investor, while ensuring
that the national benefits
of potential oil and gas
operations is captured for
use in the funding of
Government framework being
developed to achieve a fair
policy governing exploration
and exploitation of
petroleum and mineral
resources along
international standards.
BRIEF
FACT ON THE AGRICULTURAL
SECTOR
The
agriculture sector
contributes about 45 percent
of GDP and provides direct
employment to nearly 80
percent of the labor force.
As 85 percent of the
population live in rural
communities and 75 percent
of the poor are farmer
headed households the key to
sustained economic growth,
poverty alleviation and
development of the rural
economy is agriculture.
In
recent years the sector has
undergone a number of
reforms reflecting the move
from state responsibility
for production to market
based agriculture. The
introduction of economic
reform resulted in the
formal abandonment of
collectivized agriculture
and the redistribution of
land based on private
holdings with farmers given
permanent rights to land use
and inheritance. The 1992
Land Law advanced this
process by prescribing types
of land tenure: private
property for housing plots,
possession for agricultural
land under 5 ha. permitting
inheritance, but not sale;
and concession for larger
agricultural plots with no
legal right to inheritance,
lease and sale. Accompanying
land reform has been price
liberalization and the
adoption of legislation to
permit joint ventures
between the state and
foreign investors.
Rice
Production
Production
of rice contributes 15
percent of GDP and accounts
for nearly 90 percent of the
available cultivated land
area. Yields remain low,
however, at about 1.64
metric tones per hectare
(Mt./ha) which compares
unfavorably with Thailand
(2.1 Mt/ha.), Philippines
(2.7Mt/ha) and Vietnam (3.2
Mt/ha.) . The target is for
and average yield of 2.0
Mt./ha. by the end of the
decade. Government efforts
to increase rice production
is producing beneficial
results in that productio0n
for 1995 was 2,057 million
Mt. The introduction of new
seeds and production for
1996 was more than 3.6
million Mt. The introduction
of new seeds and production
techniques contributed to
› the increase in output.
However, rice yields in
Cambodia will always be
subject to variation due to
the greater reliance of
production systems on a
seasonal monsoon weather
regime in contrast to rice
production based on
irrigation. As such, the
Government will maintain
open access for rice exports
and disseminate proven
technology to improve crop
practices and management of
soil and water resources.
Rubber
The
most importunity for
developing commercial crop
production lies in the
rubber industry. The 1995
level of production and
export of rubber of 40,000
Mt. is only just over a
quarter of the volume in
1967. There is scope for
increasing the cultivated
area from the current area
of 61,000 ha. to about
330,000 ha. without reducing
the planting area for
increasing the cultivated
area from the current area
of 61,000 ha. to about
330,000ha. without reducing
the planting area for other
crops, resulting in
anticipated yields of about
500,000 Mt. of dry rubber
per annum. In the short
term, the rehabilitation of
existing plantations will
increase overall yields.
Privatization of the six
state owned plantations is
being currently prepared,
with valuation of assets
underway, which will raise
private investment and
expertise necessary to
increase coverage and
modernize production. Small
holder and farmer owned and
managed private plantations
will also be encouraged
around nucleus plantations.
Moreover, rubber production
is a labor-intensive crop
and the industry has the
potential to perform a
significant poverty
alleviation role through
rural employment creation.
Fisheries
The
fisheries sub-sector
accounts for 3.4 percent of
GDP relative to livestock
and has the potential to
increase its contribution to
economic growth. The
priorities in the fisheries
sector are to maintain per
capita consumption and to
increase incomes through
greater value added
activities, such as
commercial shrimp farming
for export, while preserving
habitat and maintaining the
absorptive and regenerative
capacities of the marine
environment. Due to resource
limitations and the need to
avoid over-exploitation
anticipated yields by 2000
would rise to only 153 Mt.
(68,000 inland, 35,000
marine, 13,000 aquaculture)
from the current level of
about 142,000 Mt.
Forestry
Management
Forests
constitute a major national
asset with 60 percent of the
land being estimated as
forested. In the last twenty
years, high value evergreen
forest has been reduced by
about 30 percent and
replaced by re-growth or
secondary forest. Forestry
management problems arise
because of an inability to
accurately analyze
applications for
concessions, poor security
and lack of effective
enforcement. The
Government is
currently introducing
measures for more effective
control over illegal logging
activities and for full
market pricing in logging
concessions. At present
investors pay a very low
price for logging
concessions in
Cambodia compared to
the international standard.
Revenues derived from
auctions and normal forest
management (taxes and
royalties collection) will
continue to flow to the
budget. Non tax revenues to
the national budget from
logging operations amounted
to $21.6 million in 1995
$27.5 million in 1996 with a
minimum of $26 million
anticipated for 1997. In
addition, a system for
improved monitoring of
logging practices and the
strict enforcement of more
sustainable harvesting
practices is being
implemented to bring
uncontrolled and illegal
logging into a coherent
policy and institutional
framework.
BRIEF
FACT ON THE
TELECOMMUNICATIONS SECTOR
Reliable
and efficient communications
and regular dissemination of
information is essential for
the working of competitive
markets and to keep the
nation informed to the
fullest extent about
domestic, regional and
international events.
Cambodia has a great need to
maintain and expand
communications and
information services if it
is to achieve its economic
growth The sectoral goal for
telecommunications is to
establish an efficient
commercial low cost
telecommunications network
of adequate capacity and
coverage in line with the
Master Plan together with an
efficient public postal
service and public broadcast
network.
The
medium term objectives are
to:
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Provide
telecommunication network
capacity to cover Phnom
Penh, Sihanoukville and Siem
Reap and to expand services
to the urban cores of
provincial towns
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Establish
national standards for the
design, construction and
operation of all
telecommunications
services
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Strengthen
postal organizational
structure and institutional
capacity to improve services
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Expand
the television and radio
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Accustomed
to having been an
outstanding civilization, a
prosperous, large,
flourishing and glorious
nation, with high prestige
radiating line a diamond
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