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-à-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.