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p. 17 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam South Asia Central Asia The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Southeast Asia

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Cambodia

Growth slipped in 2002, despite a recovering global economy. Fiscal and monetary policies remained prudent and, on the reform agenda, substantial progress was achieved in terms of expenditure and tax policies, the trade regime, and financial sector restructuring—though further efforts are still needed. Prospects are favorable as the world economy strengthens and as domestic reforms raise economic efficiency.

Macronomic Assessment

GDP growth slowed to 4.5% in 2002 from 6.3% in 2001 (Figure 2.6). Nevertheless, annual growth during 2001-2002 was similar to the average of 5.3% over the previous 4 years. Expansion of agricultural output, which accounts for nearly 40% of GDP, has been hampered in the past by deep-seated structural problems. In 2002, a combination of drought and floods also had an adverse impact as growth slowed to 0.9%. Low soil quality in some areas, unclear land ownership, insufficient irrigation, and high transaction costs contributed to the decline in agricultural growth and low productivity. Industrial expansion, led by garments, also slowed relative to 2001, but the sector still grew by 11.8%. The services sector, led by tourism, grew by 3.9%.

Wages of skilled workers, who are in comparatively short supply, continued to improve while those of unskilled workers declined due to the difficulty of the labor market in absorbing new entrants. Open unemployment does not appear to be significant, but underemployment is. Based on the 2000 Labor Force Survey, 31% of employed respondents indicated that they were available for extra work.

The fiscal deficit in 2002 at 5.9% of GDP, down slightly from the previous year, was fully financed by grants and external borrowings. Revenues accounted for 13.6% of GDP and total expenditures for 19.5%. The share of current expenditures in 2002 for priority sectors (health, education, agriculture, and rural development) was 32.9%, up from 30.3% in 2001.

Inflation rose to 3.0% in 2002 due to price increases early in the year in major food items, housing, and utilities, but still remained below the Government's target ceiling of 5.0%. In a context of low inflation, the nominal exchange rate remained stable. The spread between the official and market exchange rates remained within 1.0%.

The trade deficit widened to an estimated $262 million in 2002 from $240 million in the previous year. At 6.5%, imports rose slightly faster than exports, which increased by 6.0%. The current account deficit of 8.1% of GDP was financed through official transfers and capital inflows in the form of concessional loans and FDI, the latter of which amounted to an estimated $60 million in 2002. Foreign exchange reserves stood at about 3.5 months of imports.

Around 80% of external debt is owed to the Russian Federation and the US, and, pending ongoing negotiations on rescheduling, this is not currently being serviced. Excluding this, external debt is estimated at about 12% of GDP. The debt service ratio, again excluding the debt to the two main creditors, was an estimated 3.3% of goods and services exports in 2002.

Policy Developments

The incidence of poverty remains high. The number of people below the poverty line is in the range of 35-39%. To tackle poverty in a more focused and coordinated manner, the Government finalized its first National Poverty Reduction Strategy in 2002. However, given its limited resources, action plans should be further prioritized and better linked to the budget and the medium-term expenditure framework. Access to health and education for the poor also needs to be further improved. In addition, implementation of the land titling system, to provide the poor with formal land rights, requires acceleration, while the Government should specify and implement its policy on social land concessions, which reallocates underused state land to the poor. Macroeconomic stability is a prerequisite for growth and poverty reduction and, to achieve it, continued fiscal and banking reform is essential. The Government has committed to maintain fiscal stability in the coming years, with an overall fiscal deficit of around 6% of GDP. The share of recurrent expenditures in the budget is expected to rise. Government expenditures on health, education, agriculture, and rural development are also expected to increase, while spending for military and defense purposes is projected to decline. The overall deficit will continue to be financed by foreign borrowings (mostly concessional) and grants.

Reforms in the banking sector started in 2000, following the adoption of the Banking and Financial Institutions Law in 1999. The number of banks fell, due to the closing of nonviable operations. ADB's Financial Sector Blueprint for 2001-2010 for the country proposes a long-term vision and policy reform agenda for all areas in the financial sector over the 10-year period, while its Financial Sector Program Loan supports the implementation of the Blueprint, focusing on banking, insurance, interbank/money markets, and financial infrastructure. Banking supervision procedures and regulations are also being strengthened, with technical assistance from donors.

The restructuring of the Foreign Trade Bank, in preparation for privatization, is also making progress. However, despite recent improvements, banks still cannot fully perform their role as financial intermediaries and the banking system remains underdeveloped. At present, the economy is highly dollarized, with the ratio of foreign currency deposits to broad money amounting to nearly 70%. In addition, the financial system remains quite weak. Therefore, the scope of the central bank to pursue monetary policy is limited.

In the agriculture sector, further reforms are called for, especially in the areas of land, forestry, and fisheries concessions, as well as land ownership. Much good land is tied up in public land concessions, which are not fully utilized and, as a result, small farmers do not have access to enough farmland. Furthermore, access to common forestry and fisheries resources is important to the poor. Therefore, it is crucial to find a balance between granting concessions to use common resources and letting the poor use these resources.

In addition, the Government might consider making more effort in the area of securing land ownership, as only 10% of rural households hold legal land titles. Consequently, farmers have few incentives to make agricultural investment that would improve productivity. Finally, the implementation of forestry sector reforms is slow and needs to be expedited, even though 2002 saw progress made in the areas of legislation, curtailing illegal logging, monitoring forest crime, and reviewing concessions.

The quality of governance is an impediment to reform in Cambodia. Improved governance and greater efforts in combating corruption could make a significant impact on poverty reduction, and political commitment as well as legal and judicial reform are very important elements in this. The Government should therefore do more to ensure successful implementation of the Governance Action Plan, approved in 2001, in which the main commitments are reforms to improve public sector performance, the drafting of key legislation governing public access to land and natural resources, and public finance reform and audit.

In 2002, trade reform made significant progress. On the multilateral front, the Government outlined some measures required before its accession to WTO, including improvements in infrastructure and telecommunications and more open laws and regulations to permit easy access to Cambodian markets. The Government also expressed the hope that the country would join WTO in 2003.

Overall growth in Cambodia has not been broad based, but is concentrated primarily in exports of garments—its main export product line—and tourism. The elimination of garment quotas under WTO rules in 2005 will put part of this growth at risk. A strategy to develop an environment conducive to private investment is therefore needed, and must be matched by concrete actions, such as strengthening capacity in customs administration and enhancing customs efficiency, as well as reducing the cost of transport by improving quality and reducing unofficial fees and charges.

Outlook for 2003-2004

The outlook is favorable, provided that developing Asia as well as the wider global economy continue to recover. In 2003, growth is projected to improve to 5.0%, and further in 2004 to 5.5%, supported mainly by garment exports and tourism.

Exports generally should be buoyed by stronger external demand as the world economy maintains its recovery. Nevertheless, the country will face tougher competition in foreign markets, especially in garments. Exporters are often at a disadvantage, despite low domestic wages, from high nonlabor costs and poor infrastructure. Tourism will continue to be a major source of income, contributing to the current account and the economy generally. Inflation—forecast to remain below 5.0%—and the exchange rate are expected to be stable.

The maintenance of macroeconomic stability and implementation of reforms in various sectors will be the main factors in an improved investment climate and sustainable economic growth.

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