The development challenge facing Cambodia is to sustain growth, reduce
poverty, and accelerate the completion of the reform agenda. To accomplish
these medium term goals will require effective economic management and
considerable inflows of external assistance in order to support the implementation
of public investment priorities and raise the pace and consistency of
structural reform. Moreover, mechanisms to reduce poverty and protect
vulnerable groups from accelerated transformation must be put in place. The
development needs of Cambodia have shifted from survival mode to a medium term
strategic framework for rapid adjustment and growth supported by sound macro
and sectorial policies, and complementary public investment and technical
assistance programs.
Adjustment and growth, such are the objectives pursued by
the MEF. It is important to strengthen the macroeconomic balances in order to
allow for the healthy, sustainable growth of the economy. On this basis, sector-driven
strategies tended to increase and diversify production, parallel with the
budget strategy of reducing financial dependence and encouraging social
progress.
The path covered in five years (1994-98), albeit one that
shows deficiencies to be corrected and delays to be resolved, seems
satisfactory, overall. Progress has been noteworthy and the results indicators
positive mainly due to a good concurrence of external factors affecting
economic development, and also to the clear direction given by national
policies.
Results Indicators - Positive Development
The outcomes of the results indicators appears to be
positive, according to the information in Table below:
1. A real average annual growth rate of 5.2% for the period.
Had it not been for the downturn in 1997 which will continue to make be felt to
a lesser extent in 1998, the average annual growth rate could have reached 6.0%.
In this regard, 1995 and 1996 have clearly very high scores, which were lining
Cambodia up among the Asian dragons until the recent crisis occurred;
2. A per capita GDP on a constant growth curve, from US$241
in 1994 to US$303 in 1996, with a slight decline in 1997 ($290.9);
3. A CPI that broke free from the soaring increases of the
previous years to stabilize from 1996 onwards at a about 9%;
4. A deficit in t he current balance excluding transfers, which
is sustained at 14-15% of GDP, despite the. increase in imports due to
investments;
5. Foreign exchange reserves that reached over two months of
goods and services imports;
6. Foreign contributions that covered the gross deficit of
the current balance on an annual average for 1994-97, in the amount of 134%, with
the surplus helping to improve the gross foreign exchange reserves.
External Factors and the Funding or Deficits
Factors external to the evolution of the economy are related
to official transfers such as donations, capital transfers in the form of loans
from international organizations and, lastly, to foreign direct investments (FDI).
The aggregate of such external contributions covered, on a annual average from 1994-97,
the gross deficit of the current balance in the amount of 134% (the surplus
contributed to the improvement of the gross foreign exchange reserves to cover 2.7
months of imports in 1997). However, although official transfers and capital
transfers are being maintained from one year to the next, about 8-
1 1 % and from 2-3 % respectively of GDP, these did drop in 1997
by about 8 % with relation to the initial forecasts and by 20% compared to 1996.
On the other hand ' FDI that had grown at a very sustained pace since 1093, dropped
by 21% in 1997 with relation to the forecasts. There is reason to fear that, in
view of the Asian financial cataclysm, such investments will not rapidly pick
up the dynamic growth that they experienced up till now.
National Policies and Economic Development - Budget and
Monetary Policies.
Expansion of the monetary supply was strong during the years
1994-97, with an annual average rate of 35.7%, and for an average 5.2% of GDP. However,
no monetary financing of the Treasury was undertaken with -the National Bank of
Cambodia until late 1997. In reality, the foreign currency deposit component
explains this growth; liquidity in Riels has grown at an annual average rate of
13.7%. Still, this development is especially due to the exceptional year in 1997
(+33.4%). Nevertheless, the Riel-US Dollar parity has remained very stable
during the period, i.e. at the end of the period 2,593 in 1994; 2,560 in 1995; and
2,720 in 1996. It was only during the second half of 1997 that, suffering the
effects of the Asian monetary cataclysm, the Riel went up to 3,500 for US$I; since
that time, it has basically maintained itself at this level.
However, a good macroeconomic performance was obvious in the
– liberalization of the rate of exchange, the stabilization of inflation to a
tolerable level, and the revamping of the commercial framework (removal of
restrictions on imports and obstacles to exports).
Taxation-an up-to-date tax system, but still yielding
inadequate results
The Government undertook the renovation and reinforcement of
a taxation and duty system that was still in infancy. The country was slowing
getting away from a command economy. The option was made for a modern, performing
tax system, but by means of a progressive approach that would allow for
reasonable time for the new economic structures to adapt and for State
employees to be trained. With the year 1998-after the Taxation Code of February
1997, pending enforcement of the VAT on large commercial enterprises in 1999, and
with the Customs Code yet to come out-the Cambodian approach will be five years
old.
The current nomenclature of é taxes and duties is a good
reflection of the tax structure as it is found in most countries in the world. An
analysis of the relationship between tax revenue and the components of GDP that
are the basis thereof gives rise to the following observations:
What is called the tax ratio and which means the actual levy
made on GDP, experienced a rapid increase between 1993 (4.32%) and 1994 (5.95%),
when the initial tax measures kicked in. Since that time, the tax ratio
continues to be around 6% -- with a peak of 6.46% reached in 1997 -- the lowest
rate in the world, even compared to the Least Developed Countries (LDCs). In
the Southeast Asian region, the tax ratio rate was already 9.53% in 1984 in the
Philippines; 14.34% in Thailand; 1 26.93% in Indonesia; 21.53% in Malaysia. the
Philippines is the only country where the rates appear relatively low-, although
the rate quickly increased to 15.5 1 % in 1992. That is about the same rate as
in Vietnam (I 5.4% in 1993 for a GDP per capita that is lower than that of
Cambodia), while Laos was at 7.4% in 1991.
* 43% to 46% of GDP is not subject to taxation due to the
rightful exemption of agricultural production;
* When only the potentially taxable GDP is considered, the
average tax rate of national production barely reaches,8% (from 7.63-7.95%
depending on the year);
* Internal taxation, aside from customs duties, remains weak,
if not negligible; income- profit taxes carried over to the potentially taxable
GDP is less than 1% (0.36 - 0.77%, except for 1998 which is forecast for 1.23 ˜%).
At the same time, the ratio between domestic indirect taxes and potentially
taxable GDP is barely above 1% (0.59 - 1.36% depending on the year);
* The average rate of
tax on imports remains at a very reasonable level (IO - 13 % on total imports);
* Private consumption
that supports both the domestic indirect and import taxes is only a very small
contributor to taxation, between 7 - 8% -- whereas in all the countries of the
world this is the main source of tax receipts.
