Cambodia Economy

Macro-Economic Development

Growth, Poverty, Reform Priorities

The advancement 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 must 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 sectorial 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 appear to be positive, according to the information in Table below:

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 high scores, that have been lining Cambodia up among the Asian dragons before the recent crisis occurred;

2. A per capita GDP on a continuous development curve, from US$241 in 1994 to US$303 in 1996, with hook decline in 1997 ($290.9);

3. A CPI that broke clear of the soaring boosts of the prior years to stabilize from 1996 onwards at an about 9%;

4. A deficit in the current stability excluding transfers, which can be sustained at 14-15% of GDP, regardless of the. enhance in imports because of investments;

5. Forex reserves that reached over 8 weeks of goods and providers imports;

6. Foreign contributions that protected the gross deficit of the existing stability on an annual typical for 1994-97, in the quantity of 134%, with the surplus assisting to improve the gross forex reserves.

External Elements and the Financing or Deficits

Factors exterior to the development of the economic climate are related to established transfers such as for example donations, capital transfers by means of loans from worldwide agencies and, lastly, to foreign direct investments (FDI). The aggregate of such exterior contributions protected, on an annual typical from 1994-97, the gross deficit of the existing balance in the quantity of 134% (the surplus contributed to the improvement of the gross forex reserves to cover 2.7 months of imports in 1997). However, although established transfers and capital transfers are getting maintained in one year to another, about 8-

1 % and from 2-3 % respectively of GDP, these do drop in 1997 by about 8 % with regards to the original forecasts and by 20% in comparison to 1996. However ‘ FDI that got grown at a very sustained pace since 1093, dropped by 21% in 1997 with relation to the forecasts. There is usually a 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 12 months 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, struggling the consequences of the Asian financial cataclysm, the Riel proceeded to go up to 3,500 for US$I; after that, it has fundamentally maintained itself as of this level.

However, the excellent macroeconomic performance was apparent 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 upon imports and obstacles to exports).

Taxation-an up-to-date tax program, but nonetheless yielding inadequate results

THE FEDERAL GOVERNMENT undertook the renovation and reinforcement of a taxation and duty system that was still in infancy. The united states were slowing getting from a command economic climate. The choice was made for today’s, performing tax program, but through a progressive strategy that could allow for a reasonable period for the new financial structures to adjust and for Condition employees to learn. With the entire year 1998-after the Taxation Code of February 1997, pending enforcement of the VAT on huge commercial enterprises in 1999, and with the Customs Code however to arrive out-the Cambodian strategy will end up being five years old.

The existing nomenclature of é taxes and duties is an excellent reflection of the tax structure since it is found in many countries in the world. An evaluation 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 boost between 1993 (4.32%) and 1994 (5.95%), when the initial tax measures kicked in. Since that time, the tax ratio 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 had been 9.53% in 1984 in the Philippines; 14.34% in Thailand; 1 26.93% in Indonesia; 21.53% in Malaysia. the Philippines is the only country where the rates appear relatively low-, although the rate quickly has risen to 15.5 1 % in 1992. That’s about the same price as in Vietnam (I 5.4% in 1993 for a GDP per capita that’s less than that of Cambodia), while Laos was at 7.4% in 1991.

* 43% to 46% of GDP isn’t subject to taxation because of the rightful exemption of agricultural creation;

* When only the possibly taxable GDP is known as the common tax rate of nationwide production barely reaches,8% (from 7.63-7.95% with respect to the year);

* Internal taxation, apart from customs duties, remains fragile, if not negligible; income- profit taxes carried to the possibly taxable GDP is significantly less than 1% (0.36 – 0.77%, aside from 1998 which is forecast for 1.23 ˜%). Simultaneously, the ratio between household indirect taxes and possibly taxable GDP is hardly above 1% (0.59 – 1.36% with respect to the year);

* The common rate of taxes on imports continues to be at an extremely reasonable level (IO – 13 % on total imports);

* Private intake that supports both household indirect and import taxes is a very little contributor to taxation, between 7 – 8% — whereas in every the country of the globe this is actually the main way to obtain tax receipts.