Countries and Regions

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p. 1 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Assistance Levels

Country Strategy and Program Update 2003-2005: Cambodia

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. On 3 February 2002, Cambodia held its first ever commune council elections. The elections were held in a relatively peaceful environment. The leading party in the Government coalition, the Cambodian People's Party, won a landslide victory, garnering some 61% of the total vote. The Commune Councils are expected to facilitate a process of decentralization in the country. More than 5 million voters turned out, which is a significant proportion of eligible voters. The opposition Sam Rainsy party came in second place in terms of votes followed by FUNCINPEC. Generally, the political climate remains stable, raising hopes for peaceful National Assembly elections, scheduled for July 2003. The prime ministers of Cambodia, Lao People's Democratic Republic (Lao PDR), and Viet Nam met in January 2002 and confirmed joint commitment to a "development triangle" initiative, which includes seven neighboring provinces in the three countries.¹

2. The United Nations (UN) decided to suspend its support of a tribunal to prosecute surviving Khmer Rouge leaders for crimes against humanity. The UN expressed its concern that the current arrangements for the tribunal do not meet international standards for independence and impartiality. The Government is taking steps to address these concerns. In November 2002, both the Association of Southeast Asian Nations (ASEAN) and the Greater Mekong Subregion (GMS) member countries will hold summits in Phnom Penh, highlighting the country's success in fully integrating itself into the regional and global economies. Negotiations with the World Trade Organization (WTO) are also ongoing, with the possibility of accession to WTO in a few years.

3. The Government prepared the Second Socioeconomic Development Plan, 2001-2005 (SEDP II) through a lengthy and extensive consultation process. The preparation of a nationwide participatory poverty assessment was an important part of this process. The Plan sets out a strategic vision for national economic growth and poverty reduction, and targets (i) economic growth for poverty reduction; (ii) development of the private sector; and (iii) good governance. The Government continued to focus its efforts on improving the governance situation in the country. The Sixth Consultative Group Meeting was held for the first time in country, in June 2002. The Government is now focusing its efforts on formulating the Poverty Reduction Strategy Paper, which will be the implementation plan for SEDP II, including full costings and financing. The Medium-Term Expenditure Framework, being developed with Asian Development Bank (ADB) technical assistance (TA), will form the basis of the financing plan.

B. Economic Assessment and Outlook

4. Despite severe flooding in the last quarter of 2000, Cambodia saw robust growth in 2001. Gross domestic product (GDP) growth was estimated to be 6.3%, slightly ahead of the Government's target of 6.1%. The agriculture sector grew at a rate of 3.9%, in spite of localized flooding and droughts in the north and northwest of the country. The industry sector grew at an impressive rate of 15.5%. The strong growth in industry has been led by the garment subsector, although there are concerns that the subsector will no longer be able to grow as fast as it has in the past. The services sector grew at a rate of 2.9%, with tourism playing an increasingly important role.

5. In 2001, the Government had a primary fiscal surplus of 1.2% of GDP and an overall fiscal deficit of 6.0%. Revenues account for 11.4% of GDP, and total expenditures 17.5%. Virtually the entire deficit was financed through grants and concessionary lending. The Government has taken steps to increase the size of its expenditure on the priority sectors (agriculture, education, health, and rural development); however, as in past years, a disproportionate amount of spending is still being exercised in the final quarter of the fiscal year. The overall share of government spending has continued its upward trend.

6. Cambodia's trade deficit continued to improve, to an estimated $225 million in 2001 compared with $263 million in 2000. Total exports grew from $1.26 billion in 2000 to $1.35 billion in 2001. The current account deficit of 6.4% of GDP is financed through official transfers and capital inflows in the form of concessionary loans and foreign direct investment. The latter was estimated to be $116 million in 2001. For the third year in a row, prices have remained stable and inflation in 2001 was negligible. The dollar circulates widely in Cambodia and is freely used for many domestic transactions. Given the low inflation rate in recent years, the exchange rate against the dollar has remained stable.

7. ADB estimates that the economy will grow at a rate of 4.5% in 2002 and 6.1% in 2003, though the country faces numerous challenges to maintain this rate of growth. Many of the country's highways and rural roads are still in poor condition. Ongoing and proposed infrastructure development projects should substantially improve the situation and help improve access to market for many rural households and increase the country's attractiveness as a tourist destination. The financial sector is weak and is not effectively serving as an intermediary between savers and potential lenders. The lack of access to credit is a commonly cited limitation to growth for the private sector.

C. Implications for the Country Strategy and Program

8. The three priority areas (rural economic development, human resources development, and private sector development) of the country strategy and program (CSP) and the 10 sectors and subsectors² through which to implement the strategy, remain valid in light of the current development situation. The 2001 and 2002 operational programs constituted a first phase of implementing the strategy. The program of lending and nonlending assistance for 2003-2005 constitutes a second phase, substantially completing considerable work in the 10 sectors. The CSP has been further strengthened by the provision of a sharper focus on the implications of the state reform program-especially public sector management and support to decentralization -and by the enhancement of the poverty impact of sector interventions to support the Government's goal of achieving its poverty reduction targets, in light of the projected GDP growth. The stable macroeconomic environment will continue to facilitate the implementation of the CSP.

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