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p. 4 of 11 BACK | NEXT Executive Summary I. Recent Economic Developments A. Growth, Employment, Savings, and Investment B. Fiscal Developments C. Monetary Developments and Prices D. External Trade and Balance of Payments II. Short and Medium-Term Economic Prospects and Policy Issues Appendix

Country Economic Review - Cambodia : I. Recent Economic Developments

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B. Fiscal Developments

29. The Government’s fiscal strategy is to avoid inflationary bank financing of the fiscal deficit, while taking steps to enhance revenues and attract foreign financing for public investment. In the recovery year of 1999, the Government followed a conservative fiscal policy, reducing the fiscal deficit to 4.1 percent of GDP (1.5 percent, including grants) from 5.9 percent (2.7 percent, including grants) in 1998, and beginning to repay credit extended by the National Bank of Cambodia (NBC) in 1998. Although the 2000 budget incorporated an increase in the deficit to 6.1 percent of GDP (1.7 percent, including grants), a further reduction in net credit from NBC was planned because foreign financing was expected to increase from 4.5 percent of GDP in 1999 to 6.7 percent in 2000¹¹.

30. Improved fiscal performance in 1999 was based on progress in revenue mobilization. In 1999, revenues increased by 40.0 percent from 8.9 percent of GDP in 1998 to 11.5 percent in 1999 (Table 8). The boost in revenue came predominantly from the new value-added tax (VAT)—KR181 billion—and exceptional revenues from the sale of US textile import quotas— KR87 billion. The 2000 budget envisioned a 12.0 percent increase in total revenues to KR1,475 billion but recent Government projections indicate an increase of about 7.6 percent to about KR1,416. Because of low inflation, this should still be greater than nominal GDP growth, so that revenues will likely increase as a percent of GDP.

31. Tax revenues were 11.0 percent above the budget target in 1999 because of unexpectedly strong VAT collections on imports. This trend continued in 2000. Tax revenues were about 72.0 percent of total revenues in 1999. The share of direct taxes was 6.3 percent of total revenues, while that of indirect and trade taxes were each about 33.0 percent (Appendix, Table A4). Compared with Viet Nam and Thailand, Cambodia relies relatively less on direct taxes (which are over 20.0 percent of revenues in Viet Nam and over 30.0 percent in Thailand), and more on trade taxes (which are about 25.0 percent in Viet Nam and about 12.0 percent in Thailand).

32. In addition to increasing revenue mobilization, the Government is taking steps to improve revenue composition. Introduction of the VAT reduced dependence on trade taxes, which fell from about 40.0 percent of revenues in 1998 to about 33.0 percent in 1999. This progress will help Cambodia, as the newest member of ASEAN, to meet its commitment (in principle) to eliminate all import duties by 2015. However, trade taxes increased from 3.6 percent of GDP (KR376 billion) in 1998 to 3.8 percent in 1999 (KR433 billion), and about 87.0 percent of VAT revenues were imposed on imported goods. Thus, the dependence on taxes collected at the border is apparent and improvements in revenue composition would facilitate revenue mobilization while minimizing market distortions.

33. Nontax revenue collections increased by over 50.0 percent from 1998 to 1999, mainly because of the sale of US textile import quota rights. Nontax revenues are expected to fall well short of the targeted 18.3 percent increase in 2000. The main two areas in which expectations exceeded performance were forestry exploitation and post and telecommunications. For the former, market conditions appear to partially explain the shortfall, whereas for the latter, collection of arrears is inadequate. Post and telecommunications is the largest component of nontax revenues at about 36.0 percent of the 2000 budget target for nontax revenues.

34. In light of the expected revenue shortfall of KR54 billion (about $14 million) in 2000, total spending limits were not increased despite KR19 billion in emergency spending on flood relief. Total expenditures grew from 14.9 percent of GDP in 1998 to 15.6 percent in 1999, with expansion to 17.9 percent budgeted for 2000. Expenditures on defense and security, which fell from 4.3 percent of GDP in 1998 to 4.2 percent in 1999, were budgeted to fall to 3.6 percent in 2000. At the same time, spending on the priority areas of health, education, and rural development, increased from 1.4 percent of GDP in 1998 to 2.0 percent in 1999, and was budgeted to reach 2.5 percent in 2000. This represents significant progress in budget execution. For several years, budget allocations reducing defense and security spending and increasing social spending have been unrealized, as actual spending would exceed allocations for defense and security while falling short for social sectors.

35. Yet significant weaknesses remain in budget planning and execution. Although social sectors received their full budgets in 1999, most spending occurred in the last quarter. Through nine months, only 43.0 percent of the nonwage current expenditure budget was implemented. About 80.0 percent of 1999 budgeted current spending in the Ministry of Public Health, for example, occurred in the final quarter. Indeed, about 58.0 percent of 1999 spending by the Ministry occurred in November 1999 when the Government made a large purchase of drugs and medical supplies. The same pattern of low implementation of priority sector budgets occurred through the first nine months of 2000, but the Government explained that in many cases, open bidding processes initiated at the beginning of the year would be completed in the fourth quarter. Thus, the Government expects all priority sector budgets to be implemented fully in 2000.

36. A related issue is low budget allocations for recurrent expenditures in economic and social sectors. Revenues are relatively low and defense and security spending relatively high— although falling (35.0 percent of the 2000 current expenditure budget, down from 42.6 percent in 1999). In addition, the Government is committed to providing counterpart funds for aid-financed public investment projects. Thus, limited funds remain to devote to low civil service wages or operating costs (16.6 percent and 28.6 percent of 2000 current expenditure budget, respectively). A particularly difficult issue is inadequate funding for road maintenance, despite large planned investments by aid agencies, particularly the Asian Development Bank, for road rehabilitation.

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