Reform measures to sustain growth

The key reform measure was probably the restoration of private property ownership in 1989, which resulted in the abandonment of collective production in non- plantation agriculture organized under 'solidarity" groups. In addition, the role of prices in the economic allocation system has changed and all prices have been brought closer to international prices. The two- tier price system for rice, introduced in 1984, under which farmers were taxed indirectly by being compelled to sell a portion of their output to the state at below market prices, was abolished in 1989. Market prices were formally decontrolled and enforced official procurement came to an end, although the state continued to purchase rice, but at considerably higher prices. Commodity prices are now essentially market determined (although sometimes under monopoly control), and are open to the influence of international prices. Direct subsidies for commodity purchases have been virtually eliminated.


CHANGING ROLE OF THE PUBLIC AND PRIVATE SECTORS

From 1975 to 1979, private property rights were abolished and property records were destroyed; former proprietors were decimated or had been displaced; productive assets had largely been devastated, and urban properties had been laid waste. Faced with the challenge of rebuilding the economy, the administration that inherited this situation in 1979 kept real estate, natural resources, and all substantial enterprises under state ownership. Only slowly did it accept a larger role for private initiative, in particular by relaxing the collective organization of agriculture and by officially recognizing, in 1985, private enterprises beyond -mere household production. In 1989 it launched a broad reform program which gave state enterprises greater autonomy and strict budget constraints; allowed for the privatization of state enterprises and other state assets under close supervision; and encouraged foreign and local private investment. Two subsequent developments affected the course of this reform program first, the breakup of the Council for Mutual Economic Assistance (CMEA) system deprived the country of most of its external trade and financing, and second, the peace process altered the outlook of the country's leadership as well as that of the investor community. As a result, the reform of state enterprises slowed down as fiscal pressures mounted; privatization made gains in speed and scope unprecedented in the region, but this was largely "spontaneous," with limited transparency; and private business began to develop speculatively in commerce, construction, and tourism.

In Phnom Penh and other urban centers the mushrooming of dynamic private business is evident, in particular in construction, commerce, cottage industries, and miscellaneous services. State enterprises have also been withdrawing from downstream activities and are even leaving areas such as the retail distribution of energy (in Phnom Penh) to private wholesalers. Foreign investors have bough- or leased most of the privatized enterprises: most of these are medium-scale industrial ventures.


TRADE REFORM

Until 1987, all foreign trade was under state monopoly and most transactions were governed by annual protocols with CMEA countries. By July 1989 the private sector was free to establish trading companies with a maximum foreign participation of 49 percent. By mid-1993 there were over 500 trading- companies registered with the Ministry of Commerce including five specialized state-owned trading companies. State-owned trading companies continue to be responsible for foreign trade in major commodities, including rubber, timber, rice, and fuel. Until recently, licenses were required for all imports and exports. In September 1993, the general licensing requirement was eliminated for most goods in which trade is undertaken by registered companies.


EXCHANGE RATE REFORM

Since an earlier system of multiple official exchange rates was unified in the 1980s, Cambodia has followed a market-oriented exchange rate policy with the official exchange rate adjusting to movements in the parallel market rate with a lag. The official rate has moved within 5 percent of the market rate and the Government has successfully taken steps to further narrow the spread by just 1 %.

Since September 1993, the Royal Government has been implementing a vast programme of reform in the public sector, and such efforts will continue in order to foster a better environment for macroeconomic stability and the integration of the country into the regional and world economic community.


PUBLIC FINANCE REFORM

The primary reform concerns the management of public finances initiated during the preparation and execution of the 1994 Budget, with technical assistance from the World Bank and in accord with IMF recommendations. The technical nature of this budget expressed a new philosophy in the management of public affairs: transparency and discipline.

The accounting unit responsible for administering government revenue and expenditure is in place, and a new operational classification corresponding to accepted international practice has been adopted. The new budgetary system has optimized the availability of public resources, guaranteed an efficient allocation of resources, and reinforced control over the use of public resources. It has- also become an important instrument for economic and financial policy, in that it supports the proper functioning of public services and the implementation of government programmes on the one hand, and the maintenance of fundamental balance in the country's accounts on the other.

In order to increase domestic receipts and to optimize the reorganization of the country's revenues, reforms in the areas of taxes, customs legislation and duties, and the budget control system have thus been started. Income tax, company profits tax and property tax have been introduced, while customs reforms have included reforms in the customs code and in tariffs. In addition, duties on petroleum products have been reorganized. Moreover, while the reform of the budgetary system was implemented with the 1994 Budget, a programme of follow-up and financial analysis - in order to control credit movements and to allow adjustments in the original budget provisions - has been consolidated since that time. Treasury reform continues with assistance from France, the World Bank and IMF.

From now 'to 1996, the governments objective is to reduce the current budget deficit to zero, which requires a determined revenue mobilization drive and strict expenditure control. The Royal Government is committed to this although it should be recognized that the fiscal reform programme might need more time for a zero current deficit to eventuate. However, investment expenditure will increase, entirely financed by the international community. Fiscal reform measures will be introduced to mobilize a regular and stable base for domestic revenue, and the collection of income tax will be important to this. Legislation to reinforce the fight against fraud - in customs as well as tax evasion - will be proposed. Moreover, the enforcement of the duties on petroleum products will be made effective.

The Royal Government will also take steps by June 1995 to provide a degree of budgetary autonomy to the provinces, and a draft law allowing them appropriate legal status will be proposed to- the National Assembly. The next step will be provincial budgetary reform to allow the provinces control over the use of a proportion of their own resources. This reform would allow the Government to mobilize local resources more effectively. In fact, the provincial authorities should become more assertive in collecting those taxes which will be their direct responsibility.


MONEY AND BANKING REFORM

For money and banking, the key elements of reform pertain to the autonomy of the National Bank of Cambodia. Modern tools allowing the National Bank to intervene in the exchange rate market in order to control fluctuations will be established. Minimum reserve requirements, and rules concerning the determination of interest rates as well as banking supervision, will also be introduced. In order' to protect the public, guidelines to limit banking risks will also be imposed on the private banks.

In the coming years, the Royal Government will continue with its reform processes, aiming at the "dedollarization' of the national economy and at strengthening the development of the banking sector. An autonomous National Bank will be established, and Treasury Bonds as well as other monetary instruments will be introduced. The supervision of private banks will be strengthened by the introduction of mandatory security measures, such as the imposition of maximum lending limits and by maintaining minimum reserve requirements with the central bank.


THE LIMITS TO MACROECONOMIC REFORM

However, these reforms will be effective only if economic -growth can be maintained, with the speedy implementation of assistance programmes to make state institutions more effective instruments of public policy, and in the area of infrastructure projects.

If absorptive capacity constitutes one obstacle to the rapid development of projects, the quality of investment programming is certainly another decisive factor in the acceleration of project execution. This relates to determining the nature of national priorities but, in Cambodia, project choice has also to be exercised by our partners following their own institutional or national mandates. But, since June 1992, while this country has received more than a billion dollars, either in pledges or commitments of international aid, it has nevertheless witnessed extreme difficulty in trying to improve basic living conditions and to provide education and primary health care to the population. Moreover, major infrastructure projects for the transportation of people and goods in the provinces, as well as projects to diversify family employment opportunities, have sometimes been blocked by the local funding limits imposed by the national budget.

Despite these current limitations, the Royal Government remains on track in both its macroeconomic management commitments and in the broader implementation of the NPRD. It is determined to establish the appropriate environment for a flourishing, liberal market economy and, by so doing, to bring major improvements in peace and the living standards of its people.