Macroeconomic Developments
The Cambodian economy is at a critical
pass. To the strains caused by the
transition from central planning to a
market economy, which the country shares
with all economies in transition, the burden
of the war has been added. Its current
macroeconomic developments reflects the
country emergence from almost two decades
of armed conflict and isolation to the
changing world economy. While most of the
former centrally planned economies have had
access to various forms of foreign assistance
to smooth the impact of the reforms on
output and living standards, Cambodia was
cut off from foreign financial support and had
to fend for itself. It has seen an inordinate
proportion of its resources and income
directed toward financing conflict. The
Cambodian economy has until recently also
labored under the constraints imposed by a
centrally planned, command-and-control
approach to economic management.
Although in many respects the progress made
during the past decade in recovering from the
devastation of the 1970s has been impressive,
in effect, a quarter of a century of progress
has been lost.
MACROECONOMIC MANAGEMENT
The improved macroeconomic
management of the country has
brought relative stability to the
economy. A programme for economic and
monetary policy - the Policy Framework
Paper and the Enhanced Structural
Adjustment Facility (ESAF) for 1994-96 - has
been established by the Royal Government in
cooperation with the IMF and World Bank in
order to reinforce the management capacity
of public finances and to increase efficiency in
the management of the State. Accordingly,
macroeconomic stability has been largely
restored through coherent and well-defined
economic, fiscal and monetary policies, while
public sector reforms and the establishment
of a legal and institutional framework
continue. These are intended to create a
favourable environment for the development
of the private sector, and to enable it to
become the driving force for sustained and
balanced economic growth as well as the
springboard for improvement in the well-
being of the population.
THE ECONOMIC AND FINANCIAL SITUATION
The Cambodian economy has
witnessed strong growth since 1989,
which facilitated the signing of the
Paris Peace Accord in 1991 and has assisted
its implementation since. Foreign investment
has flowed in, mainly to construction and
services but, increasingly, to manufacturing
and processing. However, the departure of
UNTAC personnel at the end of 1993, and the
natural disasters that occurred in the second
half of 1994, both served to check earlier
progress. Thus, GDP rose by 3.9 per cent in
real terms in 1993 and by 5.2 per tent in 1994,
after the robust increases of 7.6 per cent in
1991 and 7 per cent in 1992. However.. the
GDP growth in 1994 of 5.2 per cent instead of
the 7-8 per cent expected was a direct result
of calamities in late 1994, and the destruction
of much of the rice crop.
However, the growth that has taken place has
been both uneven and unsustainable. During
the period 1991-94, for instance, the
productive sectors contributed little to
development per se. While population
increase averaged 3 per cent a year, for
example, food production declined by 2 per
cent a year. Similarly, the manufacturing
sector has not exhibited the growth expected
of it, despite the important resumption of
foreign investment in the last two years. The
satisfaction of domestic needs is still largely
dependent on supplies from abroad.
For the next two years, the Royal
Government is targeting stronger growth (6-7
per cent in 1995 and more in 1996), although
this would still be under the NPRD target of
7.5 per cent, and largely due to problems in
rice production. In sectoral terms, while the
rapid increases in services and construction
will be maintained, efforts will be focussed on
the productive sectors, particularly on
agriculture to achieve self-sufficiency in rice
(a goal set by the NPRD for 1994). Initiatives
to develop these productive sectors will be
encouraged and, with a view to rejuvenating
the agricultural sector and to bring security to
the countryside, the National Council for
Rural and Agricultural Development was
established recently by the Government.
Moreover, according to government forecasts
confirmed by visiting experts, a resumption
in agricultural production, particularly in
food production, can be expected in 1995. For
the first time after more than 2 decades of
war, Cambodia is going to resume its exports
of rice in 1996, although with a very modest
figure: 1/2 million tons of rice.
PRICES
Prior to the election of 1993, Cambodia
witnessed three-digit inflation. At
present, inflation is under greater
control, despite the increase in the prices of
foodstuffs attendant upon the drought and
floods of late 1994. During 1994, inflation was
some 30 per cent,. higher than the 18 per cent
originally expected, although it would have
been far more moderate if the Government
had had the means to maintain
stable rice prices. In fact,
according to a Ministry of
Economy and Finance estimate,.
inflation during 1994 would have
been only 7.2 per cent if the price
of rice had not exploded during
late 1994: below the target of
cent fixed jointly by the
Government and IMF. During
1995, the Royal Government is
projecting an increase in retail
prices of 10 per cent. To achieve
this, two priorities have been
identified: first., to maintain
sufficient food stocks in the
market, especially rice; and
secondly,, to reinforce the position
of the national currency vis-�-vis
that of the US dollar in order to
control the domestic prices of
imported products.
MONEY AND BANKING
Success on the inflation front is the
direct result of pursuing tight
monetary and budgetary policies. In
1994, the increase in liquidity and the other
main monetary aggregates was well within
established targets. There was again no net
recourse to the banking system to finance the
budget and, despite certain political events,
meeting monetary targets has helped to allow
the riel to appreciate against the dollar since
mid-1993 and to depreciate just 5 per cent
during 1994. The performance of the balance
of payments has been better than expected.
The reserves of the National Bank of
Cambodia and the Foreign Trade Bank had
reached the equivalent of 3 months of imports
of goods and services by end-1994, compared
with the forecast of 2 months. The worsening
in the trade deficit in 1994 was the net result
of an acceleration in the external
financing of imports exceeding the
increase in. domestic exports.
The Royal Government will
continue to pursue a monetary
policy designed to curb inflation,
by significantly reducing the rate,
of increase in liquidity and net
domestic credit, and continuing to
avoid recourse to the banking
system to finance the budget.
Moreover, in introducing the new
currency denominations., the
Royal Government is very
conscious of the need to limit any
adverse impact on riel liquidity.
Thus, control over the number of
riels in circulation will be
tightened even though the
Government Wants them to play a
more important role in the
economy and in the strengthening of the
effectiveness of domestic monetary policy.
The Royal Government will also introduce
Treasury Bonds by 1996 and, by so doing,
accelerate the "dedollarization" of the
economy and redirect public savings towards
the reconstruction and development of the
country's infrastructure. The Government
will consequently adjust its monetary policy
in fine with these new realities.
PUBLIC FINANCE: THE BUDGET FOR 1994
MOBILIZATION OF DOMESTIC REVENUE
In the area of public finance, the
budgetary and tax policy of the
royal Government was restrictive
during 1994, conforming to the commitments
made by it. Domestic revenue in 1994
amounted to 9 per cent of GDP, against an
initial forecast of 7.2 per cent, due to an
extension in the period for permitted log
exports and the dynamism of customs
collections. In fact, the improvement in the
method of tax collection, an anti-smuggling
drive, and an upward readjustment of
customs duties enabled the Government to
raise its customs receipts to around US$12
million per month compared with US$3
million before the election. With respect to
domestic taxes, collection performance
during 1994 was more modest and will have
to be improved. While improving tax
collection will take time, a modern system
will be put in place gradually and the tax
base widened. The training of personnel is in
progress and the basic database covering
taxable enterprises is being created. A new
accounting system, a necessary tool in any
modern fiscal system, is coming into force
and has been will be implemented since 1995.
EXPENDITURE CONTROL
The management of public expenditure has
been progressing well. For 1994, expenditure
remained stable with the increase in military
expenditure being compensated by a
reduction in non-military expenditure.
Investment expenditure rose slightly to 5 per
cent of GDP, against a forecast of 4.8 per cent,
following progress in the local financing of
investment. The combination of higher
domestic revenue and the stabilization in
current expenditure led to a decline in the
current budget deficit from 1.9 per cent of
GDP to 0.9 per cent, and in the overall budget
deficit from 6.8 per cent of 'GDP to 5.9 per
cent.
FINANCING THE DEFICITS
These deficits were financed by external
assistance, in the form of direct project
assistance and budgetary support. Despite
changes during the year made necessary by
an exceptional military situation for which
the Royal Government had little alternative,
the benchmark determined by the IMF with
respect to bank financing of the budget deficit
was met. Moreover, in spite of a significant
reduction in budgetary support (by -0.8 per
cent of GDP), the Treasury performed well.
With regard to the structure of external
assistance, direct project aid was mostly in
the form of grants although, on the other
hand, a principal part of the assistance for
budgetary support was in the form of loans
since the World Bank played a major role in
the provision of this kind of assistance.
THE BUDGET FOR 1995 AND PERSPECTIVES FOR 1996
The budget for 1995 was approved by
the National Assembly in December
1994. It is a budget of effort and
austerity: effort to increase domestic
resources, austerity in our determination to
contain the current expenditure of the public
sector. This budget will be a key factor in the
Government's macroeconomic stabilization
policies. The current budget deficit will be
maintained at 0.9 per cent of GDP,
notwithstanding the loss of timber revenues
which were the equivalent of 1.2 per cent of
GDP in 1994. To accomplish this, the cur-rent
expenditure/GDP ratio will be reduced by
one percentage point. As in the revised
Budget for .1 994, investment expenditure will
be maintained at 5 per cent of GDP, with the
forecast reduction in the local financing of
investment being offset by an expansion in
direct foreign investment.
MOBILIZATION OF DOMESTIC REVENUE
The forecast of government revenue is based
on the continuation of the fiscal reform
measures undertaken since September 1993,
and efforts to train personnel and to
restructure the fiscal system will be important
priorities. The addition of new measures,
such as higher taxes on gasoline and the
introduction of income tax, should boost
government revenue by 30 per cent in 1995
and, excluding timber revenue, non-tax
receipts should increase by the same
proportion. The Royal Government remains
mindful of its commitment to raise revenue to
9.1 per cent of GDP by 1996.
EXPENDITURE CONTROL
The priority here is to contain expenditure on
civil service salaries to reasonable levels, by
placing a freeze on the size of the civilian
establishment in 1995 and, by 1997, reducing
it by 20 per cent. A further priority is to cut
military expenditure by reducing the number
of servicemen from the present 130,000 to
90,000 by 1997, and to use this reduction to
augment economic and social development
expenditure.
THE STRUCTURE OF THE ECONOMY
PRODUCTION PATTERNS
AGRICULTURE
he main domestic activity on which
most rural households depend is
agriculture and its related sub-sectors.
Agriculture contributes about half of the
country's GDP and employs about 80 percent
of the labor force. Agriculture has been
growing at an average rate of 2 percent over
1991-94. Not only is agriculture the largest
primary sector of the Cambodian economy
(compared with industry and services), but in
the last few years its pace of development has
been satisfactorily in-creasing. Not
surprisingly, however, because of the Iong -
term influence of administered pricing and
output targeting arrangements,. the current
production performance of different
commodities is mixed. In terms of the
recorded current values of both gross and net
output, crops (63 percent), livestock (26
percent), fishing (8 percent), and forestry (3
percent) represent the broad subsector
ranking in order of the importance of their
contribution to agricultural value added.
CROPS AND COMMODITIES
Among crops, rice (representing
approximately 74 and 66 percent,
respectively, of gross and net crop values)
makes by far the most important contribution
to value added. This is followed by
vegetables, including soybean and
mungbean., jute, tobacco, sugar cane, and
maize in current values. Rubber, as a raw
material tree crop, is also important.. but not
as important as it was a generation ago when
organized private plantation production
provided the bulk of the output.
LIVESTOCK
It is unusual for the South East Asia region
that, in Cambodia, cattle is more important
than swine, principally because buffalo and
oxen are valued for the wide scope of their
contributions to output. Cattle are also
exported informally (on the hoof) to both Viet
Nam and Thailand, but there is no clear
measure of the value of these sales. Pork and
poultry, on the other hand, are slaughtered
predominantly for domestic consumption.
FISHING
Value added contributed by fishing is less
than a third of that contributed by livestock.
Commercial fishing operations remain
relatively small scale, but a limited export
potential certainly exists. As the economy
opens up, it can be expected that Cambodia
will take advantage of new opportunities to
exploit both domestic and overseas markets.
The scope of development, however, may be
limited by the traditional fishing methods in
place, particularly where freshwater catches
(which are by far the most important) are
concerned. It is reported, however, that
traditional freshwater fish habitats are
becoming increasingly subject to
environmental degradation and over-fishing.
FORESTRY
Officially, forest products represent only a
small share of value added, but it is well
known that a significant amount of
unreported logging takes place and that logs
are shipped regularly across Cambodia's
borders, both to the west and to the east.
Logging in Cambodia is a rapidly growing
industry, and concerns regarding over-
exploitation are being increasingly expressed.
Forest cover in Cambodia has fallen from 73
percent of land area to less than 50 percent in
the last two decades. While this rate is
considerably slower than Thailand's, it is,
nonetheless proving ecologically harmful. As
has been implied above, deforestation has led
to significant siltation in the Mekong and
Tonle Sap Rivers, and the denudation of
previously wooded hillsides is also believed
to be one of the causes of increasingly severe
flooding in lowland areas, particularly during
the monsoon period. A nationwide campaign
of forestation has been organized by the
Royal Government in order to pressure
Cambodia's natural resources.
INDUSTRY
Industrial value added remains at a relatively
low 17 percent of GDP, although it is growing
at a more rapid pace than agriculture (over 10
percent on. average over the last four years).
MANUFACTURING
Manufacturing output is varied but not very
extensive and is mostly conducted on a very
small-scale and informal basis. Many
prospering local activities such as
brickmaking and ceramics are linked. to the
fortunes and performance of the construction
sector. Among the industrial products made
in Cambodia, agricultural implements
(ploughs) show a steady rise in output, but
the greatest increases in the last year or two
have occurred in building-related products
and bicycle/motorcycle inner tubes (tire
output., on other hand, has fallen -
presumably,, in part because of the recent
large jump in imports of new motorcycles
and cars and the resultant temporarily
reduced demand for tire replacements).
Compared with the mid-1980s, however,
output in this industry is running at a high
level and there is a small, but improving,
export trade the garment industry - thanks to
GSP trade preferences - is booming with
exports growing from $3.8 millions in 1996 to
$26.4 millions in 1995. The electricity and
water sector shows a slightly declining share
of GDP, consistent with the reported
performance in the manufacturing sector and
reflecting, also serious equipment-related
capacity constraints in the electricity
generating industry. A substantial price rise
in electricity was introduced in 1991
designed, in part, to ration demand more
effectively and to provide a margin for
improved maintenance and repair. Almost all
other industries, with the exception of a few
minor goods intended for final domestic
consumption (for example, glassware,,
cigarettes,. vegetable oil, and local wine).,
show a significant decline in output since
1985.
MINING
Mining activities are minimal. In the early
1970s, the following were being mined: clay
(for ceramics), dolomite (for glassmaking),
gold, limestone (for cement), pagodite,,
phosphate, quartz, sapphire, ruby, silica sand,
and other precious stones. Extraction was on
a very small scale. With the exception of
gemstones (Pailin mine) and gold,
exploitation of most of these minerals has
now reverted to artisanal methods and goes
largely unreported. The only mineral
exploration on any significant scale is that of
oil and gas off the Gulf of Thailand and
possibly in the mainland.
SERVICES
The service sector has shown robust growth
over the last four years. It accounts for about
35 percent of GDP., and is heavily
concentrated on trading activities (15 percent
of GDP) and on catering-related services. The
growth has been driven by the expansion in
wholesale and retail trade as the economy has
moved toward a more open market system.
Somewhat surprisingly, the increase in output
of the transport and communications sector
(over 10 percent per year in 1991-93) did not
keep pace with distribution services, tending
instead to develop almost exactly in line with
the trend in real GDP. Physical supply
constraints,, the lack of security, or simply
under-reporting may account for this. The
Government, although a major employer,
contributes comparatively little to GDP
(roughly 4 percent), partly because salaries --
which form a large share of total official
outlays -,- have remained depressed.
Although official statistics do not fully reflect
its status, the hotel and restaurant trade has
shown considerable buoyancy over the past
few years because of the sheer need to deal
with a new urban work force and to
accommodate the large influx of nonresidents
associated with the peace process, the
transitional administration, and development
support in general.