Countries and Regions

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Country Strategy and Program Update 2002-2004: Cambodia

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I. Development Situation

A. Recent Political and Social Developments

1. Cambodia continues to enjoy political stability under the leadership of Prime Minister Samdech Hun Sen, who has been head of a coalition Government since late 1998. The long- term vision of the Government is based on its Triangle Strategy. The first side of the strategic triangle is building peace, restoring stability, and maintaining security for the nation and the people. The second side is Cambodia’s integration into the region, and normalization of relationships with the international community. The third side is to promote economic and social development by implementing an ambitious reform program that was agreed upon after intense discussion and consideration.

2. With the adoption recently of the Commune Election Law and the Commune Administration Law, the country has started preparing for the first commune elections, scheduled for February 2002. These are important steps in the Government’s program to deconcentrate the central administration to the provincial level, and devolve certain powers and functions to the commune level. In February 2001, the Government adopted its Governance Action Plan (GAP). A key aspect of the GAP is the public administration reform program, which is in the preparatory stage. The Land Law was prepared following an extensive consultation process—involving also the nongovernment organization community—and is expected to be approved by the National Assembly by the middle of this year. At the Consultative Group meeting held in Tokyo on 12-13 June 2001, the Government reiterated its strong commitment to continued reforms, including a full and timely implementation of the GAP.

B. Economic Assessment and Outlook

3. The economy continued to expand while macroeconomic stability was maintained. In Riel terms, the gross domestic product (GDP) grew 5.4 percent in 2000, down from 6.9 percent in 1999 (Appendix 1). This decline in growth can be attributed to decreased productivity in the agriculture, forestry, and fisheries sectors, which account for 37.6 percent of the total economy. The country was hit with the worst flood in 70 years in the second half of 2000. Estimated loss due to the floods was around $100 million, with significant damage also to the country’s already weak infrastructure. Industry grew rapidly, led by the textiles and apparel, and construction subsectors. In 2000, the current budget surplus (current tax revenues minus current expenditures) decreased from 2.1 percent of GDP in 1999 to 1.7 percent in 2000. Although revenues were up around 8 percent, current expenditures rose by 12 percent. Both this increase in expenditures and relative decline in revenues were caused by the floods in late 2000. The overall budget deficit increased from 4.1 percent of the GDP in 1999 to approximately 6.0 percent of the GDP (estimated range is 5.5 - 6.9 of the GDP) in 2000. This gap was almost entirely financed by loan and grant support from aid agencies.

4. Prices have remained stable in 1999 and 2000, with inflation of 4.0 percent in 1999 and – 0.8 percent in 2000. The economy is characterized by “dollarization” (the wide circulation of foreign currency in the domestic money supply), which limits the ability of the National Bank of Cambodia (NBC) to influence monetary policy. The exchange rate has remained stable at around KR3,700-3,800 to the dollar for the last three years, leading to a real revaluation of the riel against the Thai baht and the Vietnamese dong. The trade balance and current account deficit remained steady in 2000, at –12.8 percent and –10.5 percent of the GDP, respectively. This was largely financed by loans and grants from aid agencies. The value of textile exports grew by 50 percent for the first semester of 2000 compared with the first semester in 1999. Exports are expected to continue playing a leading role in growth. The number of tourist arrivals also increased by around 40 percent in the first semester of 1999.

5. The Asian Development Bank (ADB) estimates that the economy will grow at a rate of 5 percent in 2001 and 6 percent in 2002. These are in line with the Government’s forecast growth rates of 6.1 percent for 2001 and 2002. The country faces numerous challenges to maintain this rate of growth. Many highways and rural roads are still in poor condition, effectively limiting the access of many rural households to markets. The financial sector is weak and is not effectively serving as an intermediary; likewise access to rural credit is limited. Electrification is limited and many regions of the country have little or no access to electricity. Human capital is also low, and the growing HIV/AIDS¹ infection rate puts future growth at risk.

C. Implication for the CSP

6. The strategic thrust of the country strategy and program, and the three priority areas (rural economic development, human resource and social development, and private sector development) remain valid in the light of the current development situation. The CSP can be further strengthened by providing a sharper focus on the implications of the state reform program—especially decentralization and deconcentration of public administration—and by enhancing the poverty impact of sector interventions to support the Government’s goal of achieving its poverty reduction targets, in the light of the projected GDP growth. The stable macroeconomic environment will continue to facilitate the implementation of the CSP.

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