AND FINANCIAL SECTOR DEVELOPMENT IN 2007
By Dr. Hang Chuon Naron
Secretary
General
Ministry
of Economy and Finance
Supreme
National Economic Council
1. An
Overview of Macroeconomic Developments in 2007
This
paper outlines the major aspects of Cambodia Cambodia Cambodia Cambodia
Economic
performance in 2007 though somewhat diminished compared with 2006 was still
impressive. This underscored the increasing resiliency of the economy and showed
that the performance in 2006 was neither a stray outcome nor a mere statistical
artifact. Important contributions for the strong economic performance in 2007 came
from steady growth in agriculture (4.0 per cent), sustained growth of tourism
receipts (10.2 per cent), the continued growth in garment exports (10 per cent)
and the continued expansion of financial services (22.2 per cent) and construction
activities (4.3 per cent).
Fiscal
policy continued to be prudent in 2007. While the current budget surplus
increased to 3.1 per cent of GDP, the overall budget deficit declined to 1.5 per
cent of GDP reflecting ongoing budget consolidation. As the result of the
Public Financial Management Reform, revenue increased by 1.5 per cent of GDP
during the last two years to reach 11.8 percent of GDP in 2007, while
expenditure was maintained at the previous level. Tax revenue increased by 45%.
As a result, cash in the government coffers increased by 200 times in early 2008,
compared to 2003.
Monetary
developments in 2007 reflected the continued improvement in external position. Credit
to the private sector rose by 71 per cent while M2 increased by 63 per cent.
The key objectives of monetary policy were maintaining price stability and
bolstering international reserves. These were substantially achieved, as Cambodia
The
deficit in the current account of the balance of payments reduced to 7.5 per
cent in 2007. However, overall balance of payments continued to register a larger
surplus of US$264 million or 3 per cent of GDP, mainly due to the strong inflow
of capital receipts.
2. Real
Sector Performance in 2007
Two
key features of economic performance in recent years are the increasing
diversity of the sectors contributing to economic growth and the robust
contribution of the agriculture sector to economic growth.
Figure 1. Economic Growth in 1994-2007
Real
GDP growth has averaged 11 per cent during 2004-2007. The Royal Government of
Cambodia has moved strongly to support agriculture and the garment sector.
However growth has not been centered only on these two sectors. Tourism and
construction are also emerging as important growth centers in the economy.
Overall recent economic performance has been characterized by balanced
contributions from agriculture, manufacturing, construction and services. This
was clearly evident in 2007.
2.1.
Agriculture
After
strong growth in 2005 (15.7%) and 2006 (5.5%) agriculture grew by 4.0 per cent in 2007. Rice production increased by 4.9%, mainly due to measures taken by
the RGC to build irrigation facilities and pumping stations for increasing the
area under irrigation. Cambodia
Livestock grew by 6.7 per cent in 20067. Fisheries grew by 0.8 per cent in 2006. The performance of
fisheries is disappointing since the government has put considerable emphasis
on the revival of this key sub sector which provides livelihoods for the poor
and marginal sections of society.
2.2.
Industry
Industry’s growth continued to be strong at 7.5 per cent. The key
contribution came from the exports of textiles and garments (growth of 10 per
cent). The textile and garment sub
sector, which accounts for nearly half of the value added of the industrial
sector, led this spurt.
In
order to reduce the costs of doing business, the RGC has exempted the garment
industry from the corporate tax. The tax foregone amounts to US$100 million per
annum. As a further incentive to this industry, the government has decided to reduce
the export management fee by 10 per cent in 2007.
The mining sub sector grew by 5.5 per cent. The major activities contributing
to this growth were the exploration of oil and gas in the Gulf
of Thailand , the exploration of
bauxite and gold in the Northeast, and the establishment of an iron ore extracting
company in Preah Vihear
Province , in the northeastern part of Cambodia
Construction activities showed signs of slowing down. Construction
only grew by 4.3 per cent, although the figure is still temporary. In
particular, construction activities in Phnom
Penh Tonle Sap River in Phnom
Penh
2.3.
The Services Sector
Services grew by 10.0 per cent in 2007, at the same rate as in
2006. All the sub sectors of services have shown robust growth. The expansion
of the tourism and hotel industry
continued, with a growth rate of 10.2 per cent. In 2007, a total of 2 million
tourists visited Cambodia
The
RGC has put emphasis on strengthening the linkages between tourism and rural
development in order for the poor to benefit from the expansion of tourism. The
RGC intends to transform the entire Siem Reap region into a green belt so that strong
backward linkages of tourism with agriculture could be established.
The
transport and communication sub
sector grew moderately by 6.6 per cent. After completing the rehabilitation and
reconstruction of the national road network, the RGC has turned its attention
to the rebuilding of provincial and rural road infrastructure in order to bring
the rural areas of Cambodia
The
telecommunications sub sector showed
a robust growth, especially the market of mobile phone services. However, the
telephone tariffs in Cambodia
The
financial sector grew by 22.2 per
cent. The main contributor was the rapid growth of commercial banking services.
Real estate increased by 10.7 per cent reflecting the surge in private sector
construction. Trade grew moderately by 9.4 per cent.
3. External Sector Performance
The
main developments in the external sector in 2007 were the continued shrinking
size of the current account deficit as a proportion of GDP, rapid increase in
service receipts and foreign direct investments (FDI), and the increase in
foreign currency deposits of commercial banks with the National Bank of Cambodia
3.1. Exports and Imports
Exports
increased by only 9 per cent from US$3.7 billion in 2006 to US$3.8 billion in
2007, due to continued increase in garments exports, although the pace of
growth has leveled out. Garment exports increased by 11 per cent from US$2.6
billion in 2006 to US$3 billion in 2007. Garment exports account for nearly 70
per cent of Cambodia
The
US remained the top export
market, accounting for 70 per cent of Cambodia ’s
total exports, followed by the European Union – 21 per cent and Canada Vietnam has become a strong competitor for
Cambodian garment exports to the US Vietnam to the US
have increased rapidly at the expense of China
Figure 14. Garment Exports
Total imports increased by 12
per cent from US$4.7 billion in 2006 to US$5.3 billion in 2007, mainly due to
the growth in the imports of petroleum products and intermediate products for
the production of garments.
2.2. Trade Balance
Cambodia’s
trade deficit in 2007 increased by 20 per cent to US$1.3 billion, due to the
increase in the value of petroleum imports.
3.3. The Balance of Services and
Revenues
Services
account increased by 27 per cent. Net services were estimated at US$644 million
in 2007, compared with US$506 million in 2006. This increase was mainly due to
the growth in tourism receipts (US$1.1 billion).
The
private transfers increased by 5 per cent from US$315 million in 2006 to US$332
million in 2007, while the official transfers in the form of grants, food aid
and project aid, experienced a 7 – per cent decline from US$449 million in 2006
to US$416 million in 2007.
3.4. Current Account
The
current account deficit slightly increased from 1 per cent of GDP in 2006 to 1.8
per cent of GDP in 2007. Excluding official transfers, the current account
deficit decreased from 7.2 per cent of GDP in 2006 to 6.7 per cent in 2007.
3.5. Capital Account
The
financial account increased by 39 per cent from US$324 million in 2006 to
US$451 million in 2007. The capital transfers in the form of medium and long
term loans increased by 41 percent from US$123 million in 2006 to US$173
million in 2007.
The
influx of private capital in the form of FDI increased by 50 percent, from
US$475 million in 2006 to US$711 million in 2007. The increase in investments
reflects the confidence in political and macroeconomic stability in the
country.
3.6. Overall Balance
Overall
the balance of payments in 2007 was in surplus by US$290 million. This good
performance was mainly due to the increase in tourism receipts (US$1.1
billion), the surplus of both private and official transfers (US$748 million),
the increase in concessional loans, and the increase in foreign direct
investment (US$711 million). The overall balance of payments surplus increased
from 2.8 per cent of GDP in 2006 to 3.4 per cent of GDP in 2007.
4. Financial Sector Development in 2007
Table A -Key Macroeconomic Indicators of the Financial Sector
Real
GDP growth has increased annually but the agriculture sector still lags behind
the industry and service sectors. Interest rates for loans in US dollars
(mainly urban commercial) and Riel loans (microfinance rural) have decreased.
Microfinance loan interest not listed in Table 1 has decreased by a net 6% per
annum recently as competition has increased. The main key indicators for
private sector credit and loans have shown strong growth as shown by the number
of loans and the total values in both the commercial bank and the microfinance
sub sectors.
4.1. Financial Sector Development
Strategy 2006–2015
Financial
sector reform is guided by the ten-year sector blueprint “Vision and Financial Sector
Development Plan for 2001-2010”, which was adopted by the Royal
Government of Cambodia on the
24th August 2001 . The blueprint envisages the
development of a sound, market-based financial system in ten years that will
enhance resource mobilization and sustainable economic growth.
The
blueprint was updated with the technical assistance of the ADB and on 7 June
2007, the Prime Minister launched the “Financial Sector Development Strategy
2006–2015”, which will guide the financial sector reform in the next 10
years, designed to increase competitiveness, including adoption of the Law on
Negotiable Instruments and Payment Transactions, which aims to improve payment
transactions, eliminates legal uncertainties, and reduce payment system risks.
A Credit Information Sharing System has been introduced, providing commercial
banks with credit-related information on prospective customers, thus lowering
delinquency rates and loan defaults. The development of a national payment
system and a comprehensive information technology system for banking functions
has become a pressing sectoral challenge.
In promoting integration and soundness
of our financial system, the RGC is committed in policy shift towards openness
and integration with the region and the rest of the world. In this context, the
following key characteristics in pursuing economic and financial policy
strategy towards deepening integration and strengthening financial system
should be emphasized:
·
First, the crucial importance of a sound macroeconomic framework that
can deliver macroeconomic stability and the extent to which that is a
prerequisite for sustainable growth.
·
Second, a competitive, integrated, and efficient banking system that is
properly regulated and supervised and effectively mobilizes savings to provide
financing to support the growth of the private sector, a reliable payment
system and a banking safety net.
·
Third, a viable, pro-poor microfinance system for providing affordable
financial services to enable the poor to enhance rural income and reduce
poverty.
·
Fourth, an insurance sector that protects businesses and individuals
from catastrophic events. We are now developing a life insurance sector in
order to meet the needs of the Cambodian population, as well as act as a
pension system that provides a secure retirement and provide capital for
long-term investment in the real sector.
·
Fifth, an
efficient and transparent capital market with a critical mass of issuers that
mobilizes funds for long-term investment. We are working in partnership with
the Korean Exchange to prepare a study and develop infrastructure in order to
launch the first Cambodian Stock Exchange in 2009.
·
Sixth, legal and
accounting systems that promotes the rule of law in commercial and financial
transactions and support good governance by promoting transparency, accountability,
and predictability. The MEF is training up to 70 Chartered Public Accountants a
year in order to improve the financial statements and disclosure of the
corporate sector. This is crucial for the development of the Stock market.
4.2. Inflation
Inflation
(yearly average) accelerated from 4.7 per cent in 2006 to 5.9 per cent in 2007.
Rapid increase in oil prices, the hike in food prices and US dollars
depreciation contributed to the rising inflation. The retail price of rice
increased by 16.8 percent from 1,410 riel to 1,602 riel per kilo for the high
quality rice, reflecting rising rice exports to neighboring countries. The pump
price of petrol increased by 10 percent compared to 2006, while the prices of
diesel increased by 18 percent.
4.3. Exchange
Rate
Prudent
monetary and fiscal policies of the RGC helped moderate inflation and maintain
a stable exchange rate. In 2007, the riel appreciated by 1.2 per cent against
the US dollar in nominal terms. Through the foreign currency operations, notably
the purchase of US dollars, the National Bank of Cambodia
4.4. Monetary
Developments
The
key monetary developments during 2007 included the following:
·
Domestic credit
grew by 71 per cent.
·
Credit to the
private sector increased by 76 per cent.
·
Liquidity was up
by 63 per cent.
·
Net foreign assets
of the banking system rose by 49 per cent.
The
growth in domestic credit was mainly due to the increase of government deposits
(90%) and expansion of credit to the private sector (76%). The substantial
expansion in liquidity reflected the healthy improvement in Cambodia
Figure. Financial Deepening (M2/GDP)
 |
4.4.1. Gross International Reserves
The
net foreign assets of the banking system increased by 49 percent from US$1.8
billion in December 2006 to US$2.6 billion in December 2007. The gross
international reserves increased from US$1.1 Billion in December 2006 to US$1.7
billion in December 2007 – an increase of US$600 million for the whole year –,
due to continued good export performance, increase in foreign direct
investments and acceleration of capital inflows.
Domestic credit increased by
71 percent from US$659 million in December 2006 to US$1.1 billion in December
2006, reflecting the rapid increase in government deposits (70% to US$527
million) and the acceleration of credits to the economy (76% to US$1.6
billion).
Figure 4. Gross International Reserves,
1994-2007
(in million dollars)
4.4.2. Net Claims on Government
The
net claims on government expanded by 90 per cent, from -US$234 million in
December 2006 to -US$453 million in December 2007, reflecting rapid increase in
government deposits at the National Bank of Cambodia (NBC) from US$305 million
in 2006 to US$527 million in 2007, while government debts to the banking system
increased slightly by 3.6 per cent to US$74 million. Thus, the budget resources
that the government can spend immediately amounted to US$527 million.
4.4.3. Credits to the Economy
Credits
to the private sector accelerated by 76 per cent, after a 52-percent increase in
2006, from US$893 million in December 2006 to US$1.6 billion in 2007 mainly for
financing trade and investment.
Credits
to the economy were granted to the following sectors: services – 29 per cent;
trade – 22 per cent; manufacturing – 10 per cent; construction – 10 per cent;
real estate and public utilities – 8 percent; agriculture – 5 percent; imports
– 4 per cent; and other sectors 12 per cent.
4.4.4. Liquidity
Figure 5. Growth of Board Money: 2000 –
2007
(percent change; end of period)
Liquidity
or money supply increased by 63 per cent from US$1.7 billion in 2006 to US$2.8
billion in 2007, due to the growth in foreign currency deposits and money in circulation.
 |
4.4.5. Deposits
Deposits
with the banking system increased by 45 per cent from US$1.3 million in
December 2006 to US$2.3 billion in December 2007. These deposits are
categorized as foreign currency deposits - US$2.27 billion; time and saving
deposits - US$30.2 million and demand deposits – US$15.53 million. The above
distribution of deposits reflects the increase in dollarization of the economy.
4.4.6. Money in Circulation
Money
in circulation increased by 24 per cent from 1,500 billion riels in 2006 to
1,989 billion of riels in 2007, to keep pace with economic expansion.
4.5. The Commercial Banking Sector
The commercial banking sector
is vibrant, competitive, innovative and is rapidly expanding, playing its part
in a growth economy. The Commercial Banking Sector now consists of 15 fully
licensed and 6 licensed specialised banks. Most banks have established
additional branches in other urban centres and are continuing to plan further
offices in other urban centres. Currently there is one branch providing full
banking services per 120,000 citizens.
Commercial
banking involvement in the Cambodian economy is relatively small but growing
rapidly, the more aggressive and progressive banks attaining a growth rate
ranging from 40 to 100 percent in deposits annually. The Figure shows that bank
credit and deposits experienced a rapid growth during the last seven years.
Figure. Growth of Credit and Deposits
While
underlying cash flows is the first consideration in processing a loan, almost
all will not lend unless registered land is offered as collateral. Banks report
that approximately 90 percent of SMEs do not maintain written financial
records. Banks now encourage customers and SMEs seeking working capital to
compile and maintain financial records. The number of commercial bank loans as
measured as at December 31st from 2002 to 2000 has doubled to total 164,000.
This is the equivalent of 1.2% of Cambodia
The RGC, the economy and the
banking sector will all benefit significantly when land registration is
completed. The banks from having a greater pool of property on which they can
lend, the government from increased taxes from increased banking profits, but
more importantly individual owners who have to pay an average cost of US$2,000
to $3,000 should they wish to quickly register property and raise a loan from
the bank.
The National Bank of Cambodia
(NBC) supervision and regulatory measures and the fear of time and costs of
having to resolve foreclosure in court have ensured most banks have few or no
non- performing loans. Most have expressed support for improvements to the
courts and would welcome the establishment of a commercial court.
Commercial banks eagerly
await the adoption of a number of laws that have been submitted to the NA as
they see business growth opportunities arising from adoption of laws further
underpinning commercial growth and providing a greater degree of certainty of
having law in which to base decisions and future business.
Like all growing industries,
the lack of experienced persons in commercial banking at all levels has
restricted planned growth and caused an increase in salaries in an endeavour to
protect staff from being taken by other banks competing for the available resource.
As
public confidence has grown so that the use of cheques as the preferred means
of payment and transfer of wealth as shown in Table A. Banks have not been idle
and have unofficially established an interbank market between five, as a
consequence there is wide support to officially establish the market. The
commercial banking sub sector would benefit significantly by extending the NBC
cheque clearance system to other urban centres where volume and demand for the
service existed.
While there is growing
support for the establishment of a money market, the
Issue
of bonds and other negotiable short term instruments remains too small to
support a sustainable money market in the short to medium term. A capital
market focused on the trading of company shares is more attainable as the
principal institutions and supporting procedures have been largely implemented.
What remains is the determining the rules and the establishment of a regulatory
body to oversee fair and transparent trading. Like all newly established
capital markets, traders and investors will go through a learning period and
during this time volatility and the risks will be substantial until a level of
maturity is attained.
In conclusion it is apparent
that the commercial banking sector is well established but like a growing young
adult further support will be needed to ensure future sustainability is fully
embedded. The items and areas of additional sector assistance of providing
additional legal infrastructure, electronic automation of NBC processes,
establishment of an interbank and capital (stock exchange) market and further
capacity building have been identified as beneficial.
4.5.1. Assets
The total assets of the banking
system increased from 20% of GDP in 2000 to 27.4% of GDP in 2006, amounting to
1,962 billion riels. The objective of the credit functions is to create value
for the bank. It is therefore important to ensure appropriate and prudent risk
management. The assets of the first five Cambodian commercial banks represented
67% of the total bank assets.
Figure 4.5.1. Commercial Bank Assets
(in million US dollars)
Such rapid expansion of the
banking system can be attributed to the following factors: political stability
has promoted public confidence in the banking system; robust macroeconomic
developments, with average GDP growth of 11 percent during the last four years;
and improvement in bank supervision and control by the National Bank of
Cambodia (NBC). Transparency is crucial for promoting public confidence in the
banking system.
4.5.2. Concentration
Bank concentration is
measured by the proportion of the major commercial banks in banking operations.
The concentration of the first five banks has further accelerated in 2006. The
first five banks accounted for 67% of assets amounting to US$1.26 billion, a 57
– percent increase (or US$439 million) compared to 2001.
The level of deposit and loan
concentration remained high. At the end of 2006, the first three banks
(Canadia, ACLEDA and Cambodia Public Bank) accounted for 49% of all deposits
and 61% of all loans of the banking system. Foreign currency deposits are
dominated by US dollars, which accounted for 95% of all bank deposits.
4.5.3. Deposits and Loans
Loans and deposits increased
at a sustainable rate. Cambodia
Figure 4.5.2. Commercial Bank Deposits
(in billion riels)
Credit to the private sector
has also more than tripled, from US$249 million in 2000 to US$883 in 2006 and
more than US$1 billion in 2007.
Figure 4.5.3. Credit to the Private
Sector
(in million
US dollars)
The number of depositors and
borrowers increased by 16% pour the fully-fledged commercial banks and by 24%
for the Microfinance Institutions (MFIs).
Figure 4.5.4. Sectoral Allocation of
Loans in 2006
The above figure provides
sectoral allocation of loan portfolio to the private sector by the banking
system. The services sector (tourism and hotels) accounted for 33% of all bank
loans; wholesale and retail trade – 23%; manufacturing – 12%; while real estate
– 9%. Construction represented only 8% of all bank loans; and agriculture – 4%.
For all sectors, loan portfolio has accelerated.
During the last five years,
commercial banks have branched out rapidly in the provinces. The number of bank
branches increased to 116 and banking services now cover all urban areas of the
country. However, banking services in the rural areas remained under-developed,
despite the fact that 80% of population lives in the rural areas. Although
microfinance loan increased by 90% in 2006.
Another sigh of commercial
bank expansion is the multiplication of ATM, which increased by 17 to 86 in
2006.
Figure 4.5.5. Personnel of the Banking
Sector
ACLEDA Bank, which was
graduated from a MFI, ranked first in terms of the number of employees. The
bank has 157 branches and employed more than 3,000 people in 2006. This number
increased to around 5,000 in 2007, as ACLEDA Bank has opened more branches.
4.5.4. Profitability
of the Banking System
Two methods can be used to
analyze bank profitability: The Return on Equity (ROE) ratio and the Return on
Assets (ROA) ratio. ROE – the financial profitability ratio – is measured by
dividing net profit by capital. It expresses the return from the shareholders’
point of view by highlighting the profitability of their investments. However,
this ratio can give a false indicator of profitability, as a high profit ratio
can be achieved by possessing a low level of capital.
According to the Figure 4.5.6
the return on assets is still low in Cambodia Cambodia
The profitability can be expressed
by the Return on Equity. The disadvantage of this indicator is that it puts the
whole assets in the same category, while their underlying risks are different.
Moreover, off-balance sheet liabilities of banks also increased during the last
few years. Return on equity increased from 1.7% in 2001 to 14.2% in 2006.
4.5.5. Structure of Resources
The development of the
solvency of the banking system can be drawn from the prudential measures. The
year 2006 can be characterized by the adoption of the new accounting standards.
4.5.5.1. Capital
The solvency ratio of Cambodia
4.5.5.2. Risk Structure
In order to detect credit
risk from the overall bank risks, we can analyze the credit risk, liquidity
risk and the interest rate risk etc. A commercial bank that manages well its
credit risk, everything being equal, can get a very high score. It can
therefore be considered as the most prudent in risk management. Those that
manage poorly their credit risk would have a very low score.
On the other hand, the
banking risk can be detected by using other ratios, such as Risk Covered Ratio
or Cook ratio and the credit risk.
The asset-weighted risk ratio
increased from 40% in 2005 to 56% in 2006, while the prudential funds decreased
from 22.3% in 2005 to 19.4% in 2006. Some 32% of commercial bank assets are
held by the NBC as guarantee. These guarantee funds amounted to US$120 million
in 2006, accounting for 8.6% of bank deposits.
The credit risk can be
calculated by: RC = provisions/ total loans
It is clear that the
difference between the maximum and the minimum of the ratio is large,
indicating that commercial banks do not make their provisions for loan default
in the same manner. The norm for risk division is based on three following
rules:
1. Limiting the risk vis-à-vis the biggest clients or
large exposure: the total risk exposure of all borrowers, with each one
exceeding 5% of the net capital of the bank, should not exceed 10 times of the
net capital;
2. Limiting the risk exposure for each borrower not to
exceed 25% of the net capital of the bank;
3. Limiting the risk exposure for the Executive Officers,
administrators and shareholders to the total amount not exceeding 3 times of
the net capital of the bank;
Attention should also be
given to large exposure loans exceeding the normal limit, but guaranteed by the
mother companies of some international banks.
4.5.5.3. Non-Performing Loans
The evaluation of the risks
for commercial banks should be made based on a number of ratios : capital
to risk assets ratio, the ratio of non-performing loans to risk assets and the
NPL covered ratio.
The NPL increased from 7.5%
in 2005 to 9.8% in 2006, due to the introduction of a new international
accounting standards. The NPL of Cambodia
Figure 4.5.9. Non-Performing Loans
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List of Commercial Banks (as of
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|
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1
|
Advanced Bank of Asia Ltd.
|
|
2
|
Cambodia Asia Bank Ltd.
|
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3
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Canadia Bank Plc
|
|
4
|
Cambodian Commercial Bank Ltd.
|
|
5
|
Cambodia Mekong Bank Ltd.
|
|
6
|
|
|
7
|
First Commercial
Bank Phnom Penh Branch
|
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8
|
Foreign Trade Bank of
|
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9
|
Krung Thai Bank
Public Co. Ltd. Phnom Penh Branch
|
|
10
|
May Bank Phnom Penh
Branch
|
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11
|
Singapore Banking Corporation
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12
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Union Commercial Bank Plc.
|
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13
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Vattanak Bank
|
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14
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ACLEDA Bank Plc.
|
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15
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ANZ Royal Bank
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Specialized Banks
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1
|
Rural Development Bank
|
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2
|
Specialized Bank PENG HENG SME. Ltd.
|
|
3
|
|
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4
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First Investment Specialized Bank
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5
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ANCO Specialized Bank
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6
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CAMCO Bank
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Institutions
de Micro-Finances
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1
|
AMRET Co. Ltd.,
|
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2
|
HATTHAKADSEKAR
|
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3
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TONG FANG Micro finance Ltd.
|
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4
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THANEAKEA PHUM
CAMBODIA
|
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5
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Cambodian
Entrepeneur Building Ltd.
|
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6
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SEILANITHIK
Ltd.
|
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7
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Angkor
Microheranh vatho Kampuchea
|
|
8
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VISION FUND
(Cambodia) Ltd.
|
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9
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CREDIT Co. Ltd.
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10
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PRASAC
MICROFINANCE Institution Ltd.
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12
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FARMER UNION
DEVELOPMENT FUND
|
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13
|
Cambodian Business Integrate in Rural Area
|
|
14
|
Maxima Mikroheranhvatho
|
|
15
|
INTEAN POALROATH RONGROEURNG
|
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16
|
CHC Limited
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17
|
PISETH Akphiwat Sethakech
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Representative Office
|
1
|
STANDARD CHARTERED
|
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2
|
VIETNAM BANK FOR AGRICULTURE AND RURAL DEVELOPMENT
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4.6. Microfinance
The
micro finance sub sector is characterized by high levels of energy, vibrancy,
competition and commercial innovation. Microfinance is expanding rapidly, around
80% last year with some institutions expanding at 200% per annum. The expansion
is allowing microfinance to support and grow the economy, especially in its
target market of the poor and remote rural population.
The
Microfinance Sub Sector now consists of 25 registered Microfinance Institutions
(MFIs) and 60 non-registered MFIs. A number have transitioned from aid focused
NGOs to commercial MFIs and some have been set up as commercial, profit
oriented MFIs from the outset. Most have plans to continue expanding rapidly
with the establishment of more branches and more lending at existing branches.
At
the end of 2006, MFIs have around 471,026 loans outstanding, with the total
amount of 373 billion riels, a 90 – percent increase compared to 2005. Microfinance
deposits increased by 61% to 12 billion riels. This was made by 113,277
depositors. The estimate in the 1998 Cambodian Census was that there were
1,750,930 poor families. While huge positive progress has been made there is
still an enormous portion of the poor and remote rural population that does not
have effective access to financial services. The expansion in net number of
loans is currently around 10% per annum.
However,
the microfinance sub sector lacks funding, due to the demand for loans far
exceeding the supply of loans, due to the lack of deposits and the
under-developed banking system in the rural areas. The microfinance loan
portfolio amounted to US$60 million, which is far behind the demand of US$120
million.
While
the expansion has been extremely rapid, with the cautious and prudent
supervision and regulation by the NBC to date there has been nothing done wrong
as part of the growth and development of the Micro Finance Sub Sector. This
should not be under stated as a very credible achievement by all involved.
The
MFIs have adopted a wide range of business models to deliver their services and
products. All the models observed are consistent with good corporate governance
and orderly market development.
The
strength of governance and transparency of the MFIs was highlighted by the
award to Cambodian MFIs of 4 out of 20 worldwide awards for Financial
Transparency Awards by CGAP (Consultative Group to Assist the Poor).
Rapid
expansion has put pressure on many aspects of the business. The most pressing
is finding adequately trained and skilled people to meet the needs of a growing
industry. Capital funding, both term debt and equity, are a constraint with all
funds that can be raised at prices that allow profitable business growth being
on-lent as quickly as the institutions can raise them. Business systems,
particularly information technology (IT), are under strain to keep up with the
growth.
The
track record of the MFIs in managing their lending and minimising bad debts and
non-performing loans has been exemplary with total losses well below 1 % of the
portfolio. The loan delinquency ratio reduced from 0.8% in 2005 to only 0.3% in
2006.
The RGC, the economy and the
micro finance sub sector will all benefit as land registration expands. The
benefit will not be so much from allowing more lending but to make what lending
is done a little safer and improve the assistance that MFIs provide to
borrowers by reducing the ease that some borrowers have in making multiple
loans against one asset and business proposition.
MFIs
are not contributing to the mobilisation of savings in a significant way. They
are also not really participating in assisting the poor in expanding their
secure saving habits. The poor rate of savings mobilisation and expansion of
formal savings is a major short coming of the current structure of the
financial sector.
Foreign
exchange risk management is an area where the lack of available tools has led
to a number of sub-optimal management practices which could put some MFIs at
risk, especially if they continue to grow without formal and effective foreign
exchange management policies. This is because the bulk of borrowings are in US$
and a major part of lending in Riel.
The
MFIs have a high level of respect for the supervision and regulatory role of
the NBC. The NBC has adopted a firm stance in respect of interpretation and
enforcement of the regulations. This is to be applauded. There are however a
number of regulations that could be reviewed and amended to allow further expansion
of services, products and more rapid savings mobilisation.
While
MFIs are not seeing the lack of access to an inter-finance institution market
or money market as a significant constraint on their operations, if and when
these markets developed the rules and regulations should not exclude MFIs as a
matter of course but give a clear pathway that would allow them to participate
on meeting certain criteria.
The
microfinance sector is well established and growing robustly. As with any
rapidly expanding and developing sector further support is needed to ensure
future sustainability is fully embedded. The items and areas of additional
sector assistance of providing additional regulation, establishment of a
foreign exchange market, additional and accelerated capacity building and
further education or the poor and remote rural population have been identified
as beneficial and needed future assistance.
4.7. Insurance Sector
The
insurance industry is young and small. The insurance industry prior situation
is not well appreciated by some within the sub sector and like the banking
sector there are calls for relaxation of some of the regulatory requirements.
Growth has been steady (11 to
42% pa) from a limited range of insurance products, total gross premiums $17.5
mill for 2007. Oil & Gas Insurance was the main drive for the increase in
2007.
Figure 4.7.1. Gross Insurance Premiums
There are 5 insurance
companies – Forte, Asia Insurance, Caminco, Infinity Insurance, Long Pac
Insurance - and one reinsurance company – Cambodia Re - operating in Cambodia
Figure 4.7.2. Insurance Lines of
Business
The three main products sold
are commercial fire (27%), Motor Vehicle insurance (19%) and miscellaneous
(20%). Other products sold include: hospital and surgical, personal and
accident, marine cargo and travelers insurance. Oil and gas insurance has
emerged as one of the leading insurance business line. The insurance companies
operating in Cambodia
The insurance industry
requires a number of specialist roles that are not required in other
industries. As insurance is young in Cambodia
With banks considering
selling insurance products as they do in other countries there is possibly some
synergy in expanding the Bankers Association to include the Insurance Sub
Sector as well, or at least until it reaches a size that it could support its
own institute.
The
development of the industry will focus on the following areas:
The immediate priorities are:
·
Review of entire
system. A comprehensive review of the regulatory system will be conducted in
light of international best practices;
·
Financial
reporting standards: Financial reporting standards for insurance companies to
be developed; clear rules regarding the establishment of loss reserves for
claims to be developed; and audit requirements for insurance companies to be
clearly defined;
·
Matters relating
to activities of the supervisor: Capacity building for MEF staff, including
comprehensive training; consideration of regional cooperation and resource
sharing; increase reliance on professionals, including adopting a file-and-use
approach to reporting; introduction of MIS and IT support; and obtaining
membership in the IAIS;
·
Privatization of
CAMINCO: The privatization of this company will complete the process of
developing a private insurance sector in Cambodia
·
Inter-Ministerial
Collaboration: MEF personnel, or whatever group is responsible for making
insurance sector policy, will participate in Inter-Ministerial committees with
representatives of the Ministry of Public Works and Transport, Ministry of Land
Management, Urban Planning and Construction, Ministry of Tourism and Ministry
of Interior to examine ways to promote greater compliance with the rules
calling for mandatory insurance of vehicles and of construction sites;
·
Commencing
support for the development of life insurance through feasibility studies and
legal and regulatory development. A study will be undertaken to assess the
potential market for life insurance business in Cambodia
·
Micro-insurance:
Introduce a special system for regulating and supervising the activities of its
microfinance institutions that seek to offer insurance protection to their
members. Rules will be less restrictive than would apply to normal insurance
companies, and include parameters defining the types of institutions that may
offer micro-insurance products and set appropriate bounds on the scope of their
operations.;
·
Life insurance:
Develop appropriate strategy for life insurance development, including
necessary elements of legal framework, the commencing to support for the
development of life insurance through feasibility studies and legal and
regulatory development. A study will be undertaken to assess the potential
market for life insurance business in Cambodia Cambodia
Medium term priorities are:
·
Life insurance:
Authorize life insurance contracts as a funding vehicle for pension and
retirement savings plans;
·
Actuarial
requirements: There are no actuaries residing in Cambodia Cambodia
·
Training institute:
At present, there is no insurance training institution. Capacity-building is
required for staff of the private insurance companies, just as it is for the
supervisory staff. Provided the industry demonstrates robust growth, in the
medium term it will be appropriate to consider the creation of a training
institute based in Cambodia
·
Consumer
protection and customer awareness: As insurance is a business of contracts, for
such a business to be truly effective, both contracting parties should be fully
informed before entering into the contract. Settlement of any claim arising
under the contract should follow the terms of the contract. Any difference of
opinion with respect to that settlement should be resolved through the courts
or some formal alternate dispute resolution system. In order to support
development, Cambodia
·
Tariff requirements
and uniform policy wordings: GAIC will develop and propose a schedule of
minimum prices to be charged for the most common insurance products. Tariffs
proposed should be supported by independent professional assessment to ensure
that they will be adequate to support the claim payments that could arise under
the policies. The insurance supervisor would accept the tariffs and prescribe
that the rates charged by companies should not be less than those specified in
the tariff schedules. Arrangements must be made for enforcement of tariffs.
Uniform policy wordings could be specified such that all companies would be
expected to define coverage and nature of indemnity and loss in the same terms.
The use of these wordings would also have to be enforced;
·
Feasibility study
into the development of a private, voluntary pensions system in Cambodia
Longer term objectives include:
·
Implementing the
social security law, including issuing the appropriate supporting instruments;
·
Developing a
regulatory system to deal with private pensions. It will be necessary to
include vesting rules for employer contributions; funding requirements for
guaranteed benefits; actuarial certification for defined benefit plans;
investment rules that stress yield without sacrificing safety and necessary
liquidity;
·
Examining the
advantages of including a mandatory savings plan for formal sector workers,
perhaps as a part of the social security system. Such a program may not be
necessary in Cambodia
4.8. Legal Infrastructure
An enabling legal framework
for financial and commercial transactions could be achieved by continued
support for Cambodia 's
process of law reform, including the adoption and implementation of the
necessary set of core financial and commercial laws, harmonized and aligned in Cambodia
There
has been significant progress in a relatively short time. Additional draft laws
are now either now before the National Assembly or being prepared by Ministry
officials. These laws will improve business opportunities and provide greater
certainty for financial and commercial transactions. They include the Law on
Secured Transactions, the Law on Financial Leasing and the Law on Insolvency. A
new Law on Commercial Contracts will provide rules for business agreements.
There are others at the conceptual stage of development.
The
diagnostic made key findings made in connection with Cambodia
The
strengthening of Cambodia Commercial Court
The introduction of more innovative
financial products and services in a dynamic financial sector, balanced with a
risk-based approach to supervision, will be assisted by support for a
comprehensive review of the relevant banking and insurance laws. This may
include the key elements of Cambodia
Corporate
governance will be assisted if revision of the law for the handling of conflict
of interest is strengthened, particularly for banks and financial institutions
receiving deposits and other payments from the public. New market conduct rules
for the protection of banks' customers will also help build public confidence.
In
conclusion future assistance would be beneficial to the RGC in drafting laws at
the conceptual stage and revision of those that require updating to reflect
existing business conditions.
4.9. Exchange and Money Changers
The NBC has recently
commenced registration of these businesses throughout Cambodia Phnom Penh
Any
form of supervision would at the most be inspections probably both on a random
spot basis as well as on any participant or participants that generate
complaints or other indications of bad practices.
The
supervision would be focused on consumer protection and the promotion of good
conduct.
To
facilitate such a regime the participants could be registered (as the money
changers are being registered today) with such registration really indicating a
negative assurance to customers that this participant has not been found to
have carried out unacceptable practices.
4.10. Capital Market Development
The
“Financial Sector Development Strategy 2006-2015” envisages the development of
a sound, market-based financial system. Capital market and banks function
complementarily to enhance the efficiency of financial system which is crucial
for stimulating economic growth.
The
vision for financial market sub-sector is to have an efficient and transparent
capital market with a critical mass of issuers that mobilize fund for long term
investment. The markets will appropriately address risks, remove obstacles to
financial development and support risk management and financial resource
accumulation and allocation.
The
development of the securities market will have the following advantages:
·
In addition to
bank lending which basically is on short-term basis, capital market will
increase the mobilization of savings, by providing diverse attractive
instrument, for long term investment which is a source of economic growth. Not
only does capital market increase mobilization of domestic savings but also
attract foreign portfolio investment;
·
People invest
their savings in securities. It will lead to a more rational allocation of
resources because funds, which have been consumed, or kept in idle deposits
with banks, are mobilized and redirected to promote business activities;
·
Not only does
capital market increase the mobilization of domestic savings but also attract
foreign portfolio investment which is another source of fund for long term
productive investment. Currently, Cambodia
·
Investors are
usually reluctant to join long-term investment project, though with high return.
With highly liquid capital market, investors can access their savings easily at
any time. This will induce more savers to invest in long-term productive
investment projects, contributing to higher economic growth;
·
Securities market
exerts corporate control through information disclosure requirements to ensure
their management standards and efficiency;
·
Public companies
tend to have better management records than privately-held companies;
·
Companies view
acquisitions as an opportunity to expand product line, increase distribution
channels, hedge against volatility, increase its market share, or acquire other
necessary business assets;
Securities
exchange has the function of providing a marketplace that:
·
Enhances the
liquidity of securities and helps form fair prices that reflect the relative
strength of supply and demand. With this function, investors can invest in
securities free from anxiety and enterprises can raise fund smoothly by issuing
securities;
·
Publish the
formed prices that serve as a base for assessing the collateral value or asset
value of underlying securities;
For
investors of listed securities, the are the following advantages:
·
Opportunity to buy
and sell securities at fair price;
·
More choices of
investment;
·
Advantages for
listed companies;
·
Smooth and
diverse way of capital raising;
·
Higher trust and
higher name value.
·
The market value
of the securities can be used as an indicator of the corporate value;
·
The securities of
listed companies can be used as currency in Merging and Acquisition dealings;
·
Enhancement of
internal control and morale of corporate staffs.
4.10.1. Phases for Capital Market
Development
The
capital market development plan consists of three sequenced development phases:
Phase 1 (2006-2009):
·
Development of
appropriate regulatory framework relating to insolvency, and the progressive
company framework;
·
Enactment of Law
on Issuance and Trading of Non-Government Securities;
·
Continuing
improvement of accounting / auditing capacity;
·
Implementing the
MOU with the Korean Exchange;
·
Training to raise
public awareness, investor education and human resource development to support
financial market development.
Phase 2 (2009-2012):
·
Implementing
progressive, graduated framework for
companies;
·
Launch of the
Cambodian Securities Exchange;
·
Securities
depository in the CSE for all public companies in operation and public company
registration opened;
·
Implementation of
financial enforcement and regulation;
·
Continuing development
of financial information and company regulation;
·
Public offerings
of securities only permitted through a formal securities exchange;
·
Design of
investor compensation scheme to address risks of failure of securities
intermediaries holding client assets.
Phase 3 (2012-2015):
·
Development of
investment funds;
·
Development of
pensions/provident fund scheme;
·
Development of
securitization framework/institution;
·
Development of
derivatives market;
·
Enactment of Law
on Government Securities on 10
Jan. 2007 . MEF has been preparing sub-decree and Prakas under the
law;
·
Operation of
government securities may start first in order to assist in gaining the public
investor’s confidence and get them into the habits of dealing with securities;
·
Set up some
special incentives to attract investors in government securities (tax incentives);
4.10.2. Key Issues of Capital Market
Development
The
Law on the Issuance and Trading of Non-Government Securities allows for:
·
Establishment of
Cambodian Securities and Exchange Commission – the only regulatory body
regulating and supervising all kind of securities businesses;
·
Primary market
for offering and issuing new securities to public investors;
·
Conduct of
securities exchange, securities intermediaries, clearing and settlement,
securities depository;
·
Regulations for a
fair, efficient and transparent securities market and investor protection.
4.10.2. Implementation of the Cambodian
Securities Market Project
The
Ministry of Finance and Economy of Korea and the Ministry of Economy and
Finance of Cambodia signed a MOU on May 4, 2006 , indicating their intentions of collaboration
in the establishment of a securities exchange in Cambodia
The
purpose of this road map is (i) to define the preparatory role of each party
for establishing a securities exchange in Cambodia and preparing for the
operation of the newly established securities exchange; (ii) to specify the
core tasks to be carried out by each party for the establishment of a
securities exchange; and (iii) to propose a time table for the core tasks. The
activities will be carried out during 36 months following the signing of the
MOU by the KRX and the MEF.
The
appropriate legal framework is essential for the establishment and nurturing of
capital market. The MEF will prepare for and introduce a legal framework
necessary for the establishment of a securities exchange in Cambodia
The
schedule for the establishment of the Cambodian Securities Market has been
agreed as follows:
The
MEF will make efforts to facilitate the legislation of the laws required for the foundation of the securities
market. This effort will entail the followings:
(i)
To formulate and
execute laws and regulations for the establishment of SEC, a securities
exchange and securities firms;
(ii) To formulate and execute laws and regulations for
fostering potential listed companies and investors;
(iii)
To enforce
accounting and auditing standards.
5. Public Finances
Since
1998, the Government has significantly improved the alignment of resources with
its developmental objectives by increasing allocations for priority sectors, notably
education and health. Government-executed spending on the priority sectors
increased from 1.4 percent of GDP in 1998 to 3.2 percent in 2001. Furthermore,
as indicated in the National Poverty Reduction Strategy (NPRS) the Royal
Government of Cambodia (RGC) intends to continue this strategy, presenting
ambitious targets for growth in priority sector spending. The reallocation to
the priority sectors was financed through increased growth and revenues, and
reduced expenditures in defense and security.
Challenges
linking policy and expenditure have resulted in significant sectoral
differences in the effectiveness of expenditures in improving social welfare
outcomes, thus pointing to expenditure management as the key constraint. In
education steady progress has been made since 1999, in expanding educational
opportunities by growing total enrolment. There have also been some significant
achievements in the health sector, including a decline in the level of some
communicable diseases and expansion of physical coverage of the system.
However, the sector needs to improve access to services, which remains low and
uneven, and rectify the imbalance in the incidence of spending. In the roads
sector, though a start has been made on reconstruction and rehabilitation, the
state of the road network remains poor. Significant increases in maintenance
expenditure are required. In the agricultural sector the lack of both clear
sector policy and output information makes evaluation of impact difficult.
Recent
experience suggests that in order to reach stated poverty reduction goals, it
will be necessary to improve the effectiveness of spending by linking it more
closely to priority outcomes. Increased effectiveness can be attained by
improving the pro-poor targeting of resources through more tightly linked
sector plans and budgets. Public expenditure and financial management have thus
emerged as the first priority of the reform program. Without expenditure
management reform, the impact of further improvements in expenditure policy
will be limited.
However,
the RG has recognized that the public financial management system in Cambodia
In
this context, the “Rectangular
Strategies for Growth, Employment, Equity and Efficiency in Cambodia ” which has been set out by Samdech
Prime Minister Hun Sen as an economic policy agenda of the RG within the third
legislature of the National Assembly has reemphasized the necessity to continue
improving the public financial management system in Cambodia
The
Ministry of Economy and Finance has embarked on a systematic evaluation of the
state of the administration’s public financial management system to draw on all
related documents such as assessment reports, analytical and evaluation
reports, as well as other related reports in the area of public financial
management, and experience from RGC’s reform programs, especially the
Strengthening Economic and Financial Management program, which also known as
the Technical Cooperation Assistance Program (TCAP), and the Integrated
Fiduciary Assessment and Public Expenditure Review (IFAPER) which were the technical cooperation programs
supported by many donor agencies and countries. The important goal has been to
develop a comprehensive public financial management reform program with a clear
long-term vision; and a stage-by-stage program with clear and realistic action
plans for each stage toward achieving the vision endorsed by the RGC.
These
efforts have been recognized and strongly supported by our development
partners, including bilateral partners and international agencies, through a
common agreement on adopting a “Sector Wide Approach (SWAp)” as the modality
for the preparation and implementation of this important and comprehensive
public financial management reform program.
With
the strong support of our international development partners, the RGC has
produced a public financial management vision document which will serve as a
guide for the stage by stage implementation of a comprehensive and systematic
public financial reform program envisions being achieved in 2015. The most
important difference of this reform program from other previous programs is
that this program was constructed with a clear structure and a realistic action
plan developed stage by stage with strategies to build institutional capacity
and human resource, including the provision of equipment and other necessary
supports as well as appropriate technology.
5.1. Public Financial Management (PFM)
Reform
In
accord with the NPRS, the RGC has reformulated its public financial management
(PFM) improvement and reform strategy. To give clear direction to the strategy,
the RGC has adopted as a longer term objective that transformation of the
government's PFM to incorporate what are generally accepted as the best
international standards. The reform strategy involves transforming the
traditional cash-based budget system into one which provides for the proper
management of all government assets and resources. This will involve the
eventual introduction of generally accepted standards for accrual accounting.
The
aim is to install much higher standards of management and accountability in the
mobilization of all government current and capital resources and effectiveness
and efficiency in the use of resources in their application to the operation of
the Government’s NPRS and other priority programs. The long term objective is to transform the
RGC’s Public Financial Management (PFM) system into a system featuring what are
generally accepted as the best international standards.
In
order to build a sound public finance system, it must be made up of several
operational sub-systems. These operating
subsystems are the: (a) accounting and transaction processing systems, (b)
budgeting systems, (c) revenue systems, and (d) access systems. All four sub-systems have to be consistent
with each other, and are inter-related. Briefly, these operating subsystems are
described as follows:
·
Accounting and transaction processing systems: Consistent
approach to accounting across Government as a whole based initially on
accounting for cash payments made within the fiscal year. Future considerations may be given to
possible movement to accounting on an accrual basis relating to of the
consumption of resources in a year - staff inputs, goods and services.
Empowerment of budget holders to implement transactions, unhindered, in
accordance with budget (as revised during the year) Greater reliance on post
payment review rather than pre-payment scrutiny. Separate capture and control of information
about commitments entered in to, but not yet liquidated.
·
Budgeting systems: Annual budgets of all budget holders set in context of realistic
multi-year estimates published alongside them.
Roll-over of multi-year estimates so that second year in one cycle
becomes starting point for the budget year in the next. Comprehensive in that all significant
deployments of public resources, however financed, are captured. Encompasses programme based analysis of resource
deployment and monitoring of the use of resources. Decentralized and convey
both authority and responsibility to budget implementers.
·
Resource mobilization systems: (Tax and non tax revenue, external assistance and
debt financing) Effective use of revenue raising capacity in Cambodia through
balanced approach to use of taxation (direct and indirect), charges to the
public and other financing sources available to the public sector (including
external assistance and external and domestic borrowing). Revenue mobilization systems that ensure full
compliance with the prevailing laws and regulations (including the Law on
Taxation, Customs Law and Law on Investment) and prudent and transparent
management of external assistance and debt financing, whilst minimizing cost to
the taxpayer and to the Royal Government, and optimizing the level of revenue
available for the Royal Government to implement its policies through public
expenditure programmes.
·
Access systems:
Common access of all those involved to the same accurate and reliable data on a
timely basis based on integrated use of modern IT. Open to scrutiny by all interested parties,
inside and outside of Government, to view performance compared to budget based
on a clear and transparent data trail. An effective system of both external and
internal audit in which the latter supports management to make effective use of
resources.
The
Royal Government is in the process of developing a monitoring and evaluation
sub-system to enable performance of the public financial management system
being regularly monitored and assessed.
Thus
the key features of the targeted vision shall be identified with indicators
that are consistent with international standards and best practices, which will
cover the following aspects:
·
Budget Realism:
The budget is realistic and implemented as intended in a predictable manner
(e.g. composition of expenditures compared to approved budget, proportion of
funds received by service delivery units etc.).
·
Comprehensive, Policy-based Budget: The budget captures all relevant fiscal
transactions, and is prepared in an orderly, predictable way with due regard to
government policy (e.g. single budget process - calendar and circular - fully
coordinating budgeting for investment and recurrent expenditures, budget
ceilings informed by government relative spending priorities defined at
political level).
·
Fiscal Management: Aggregate fiscal position and risk are monitored and managed (e.g.
few or no expenditure arrears, adequate system for management of domestic and
foreign debt).
·
Information:
Adequate fiscal, revenue and expenditure records and information are produced,
maintained and disseminated to meet decision-making, control and management
purposes (e.g. budget reports, with classification allowing comparison with
budgets, are timely available in government, after the month/ quarter end.
Regular, high quality bank reconciliations).
·
Control:
Effective control and stewardship is exercised in the use of public funds (e.g.
effective internal audit system; public procurement system based on clear,
consistent and enforced rules; payroll records and nominal roll linked through
computerized system to which MEF has access).
·
Accountability and Transparency: Effective external financial accountability and
transparency arrangements are operating (e.g. communities have regular access
to information on budgets allocated to and funds received by service delivery
units; external audit covers all major public sector entities and conducts a
full range of financial audit).
·
Clarity and accountability: Clear legal and institutional framework for
functional and spending responsibilities across government levels, and for
budget holders’ management accountability (e.g. Program managers have maximum
possible flexibility in selection, mobilization and use of resources to achieve
program objectives. Accountability to
national assembly and people for use of resources is transferred to line
ministries, who are also publicly accountable for program performance).
·
Value for money:
in use of public resources (e.g. Decrease in price of items procured regularly
by the government).
·
Responsiveness:
of fiscal and budget management (e.g. institutionalized mid-year review of
budget performance feeding into implementation of second budget year half and
preparation of subsequent budget).
·
Professionalism:
in the civil service and incentive systems (e.g. build a core group of
technical experts).
The
reform program will progress in four stages: Stage One: short term action plans
including all necessary activities for achieving Platform One, plus activities
with long lead times and necessary for later Platforms; Stage Two and Three:
Medium term, planned for towards the end of Stage One, when Platform One
objectives are within sight; and Stage Four: Long term while getting to
achieving the vision.
·
Platform 1 - More credible budget: In the first instance, the Royal Government will
strive to achieve a position in which the budget becomes more credible as an
instrument of strategic and day to day management of public resources, because
it delivers a reliable and predictable resource to individual budget
managers. This entails that the budget
reflects all significant public resources and their deployment. It thereby
enables steps in subsequent stages to hold budget managers more accountable for
the proper, efficient and effective use of resources.
·
Platform 2 – Effective financial accountability: Having removed excuses for non-compliance or
inappropriate practices by budget holders, the Royal Government will turn on
tightening arrangements for bringing budget holders to account and for
rewarding good practice. This will
require initial improvements in internal control and accountability systems at
all levels. It will enable a focus on
what is done with resources by providing better data, effective discipline, and
greater internal transparency.
·
Platform 3 – The RGC’s policy agenda becomes fully
affordable and prioritized: From the
base established in previous stages, by which the budget is now a credible
instrument for policy implementation, the Royal Government will then focus on
developing techniques and capacities for analyzing the budgetary impact of
policies and for connecting policy priorities and service targets to budget
planning and implementation, thereby assuring that government polices are fully
affordable and prioritized. This will
enable greater accountability for program performance.
·
Platform 4 – RGC managers become fully accountable for
program performance: Having
reinforced the stability, soundness and policy orientation of budget planning
and management practices, the Royal Government will start to hold budget
managers accountable and rewarding them for achieving agreed objectives and
standards of performance. Processes of
accountability and review for both financial and performance management will be
fully integrated, resulting in greater external transparency and more effective
feedback from implementation into policy formulation.
Indeed,
a comprehensive and systematic design of the Public Financial Management reform
program with clear long term vision and step by step strategy plus joint
efforts from all stakeholders, we are confident in making positive changes
within the short future in order to contribute to the ultimate goals of
enhancing growth, employment, equity, and efficiency for the nation and its
people.
The
PFM Reform Project has the following components:
·
Budget and Treasury Operations Reform: This component will support the modernization of
Treasury management to improve budget execution and control, including by
assisting the RGC to establish a Financial Management Information System
(FMIS). Sub-components include: (i) mapping existing budget process in detail
(from budget release to commitment to payment) and developing transition plan
to new streamlined processes; (ii) increasing payments to and from Government
through the banking system in terms of tax collections and Government payments
to civil servants and contractors; (iii) designing and implementing measures to
improve budget discipline by limiting accumulation of payment arrears; (iv)
technical guidance on quality assessment of FMIS system framework and
procedures, with an emphasis on streamlining and improving the transparency of
key business processes before computerization commences; (v) technical advice
on appropriate policy, system design, and content, taking into account capacity
and technology constraints and including
a program of phased roll-out; (vi) IT system software and hardware,
including testing and quality assurance; (vii) building sustainable capacity in
the Ministry of Economy and Finance (MEF) to operate the FMIS and use the
reports that it will generate; and (viii) training and capacity development in
line agencies as appropriate to allow use of system generated information. This
component would also require working with line ministries, which are at
different stages of readiness to implement the reforms.
·
Procurement:
This component will support the development of improved arrangements for
processing of procurement actions, in order to improve transparency, economy,
and efficiency, streamline spending processes, and enable greater fiscal
de-concentration. It will also facilitate implementation of the revised
procurement procedures resulting from expected improvements in the legislative
and regulatory framework for procurement, including use of the procurement
manual and harmonized standard bidding documents that are currently under
development. Sub-components include: (i) revising procurement processing
arrangements in light of new budget transaction processes, (ii) assisting with
the drafting of a sovereign procurement law, (iii) decentralizing procurement
to line ministries and provinces, and (iv) appropriate capacity building, which
will also include training of procuring
entities, contractors, and suppliers for implementing the improved procurement
procedures. This component would also require working with line ministries,
which are at different stages of readiness to implement the reforms.
·
Tax Administration Reform: This component will support modernization of the Tax
Department through capacity development based on institutional and
organizational reform. Measures are likely to focus on the headquarters office.
As an initial step the project would review the Tax Department’s reform
program. Such a review would also provide an opportunity to build greater
ownership through staff participation and to consult taxpayers on issues of
concern. Attention would be paid to the incentives faced by staff in the
institutional and organizational milieux in which they operate. Sub-components
include: (i) reform of the organizational structure to a functional structure,
(ii) development and implementation of a capacity development program for the
Tax Department, and (iii) improved service delivery focusing on enhanced taxpayer
registration and taxpayer account management, improved audit and coverage, and
enhanced taxpayer services, and (iv) development of mechanisms to improve
transparency and accountability, including possibly the establishment of a
taxpayer ombudsman function and a private sector oversight board.
·
Merit-based Pay and Employment Initiative (MBPI): An innovative—and necessary—feature of the project
will assist the RGC to pilot a civil service reform in the context of the
PFMRP. Both the RGC and its DPs acknowledge that addressing the incentive
problem, which consists both of the lack of meritocratic management and
extremely low pay levels, is a prerequisite for reform and longer term capacity
development. The lack of adequate incentives, and the lack of a meritocratic
management framework, means that many civil servants do not show up for work,
and, if they do, are ill-motivated to carry out their official duties. Previous
attempts to reform the PFM system have floundered due to the lack of a
mechanism to address the pay and employment problem. The MBPI reflects an
agreement between MEF, the Council for Administrative Reform, and DPs to pilot
a pay and employment reform in MEF. Core elements of the MBPI include: (i)
funding from DPs (on a declining basis) and the RGC (on an increasing basis)
for increased remuneration for selected staff; (ii) selection and management of
staff for the MBPI based on merit and performance; (iii) payment through the
payroll; (iv) parallel work on functional analysis leading to a rightsizing
exercise; (v) complementary work on human resource management reform, including
setting up an establishment register; and (vi) agreement to phase out salary
supplements.
·
Strengthening the Budget Oversight Capacity of the
National Assembly: This component
would assist the Finance and Banking Committee (FBC), including through a more
informed understanding and review of the budget law, to hold the RGC to a
higher standard of accountability. Thus far, the FBC has had very limited
influence on the budget. This component would assist the FBC to better analyze
and monitor the implementation of the budget law, thus playing a greater role
in budget decision making and in overseeing the use of public funds. To this
end, a capacity development program specifically targeting the FBC would be
developed. Such a program would be
tailored to meet the needs of the FBC and its staff members and would
concentrate on a set of activities designed to strengthen the Committee's
oversight capacity, through local, regional, and international budget-related
events and workshops, study tours, and the development of relevant study
guides/tools. The program would address such topics as: (i) the National
Assembly and the budget cycle, (ii) budget review and oversight, (iii) the role
of parliament in measuring the impact of public expenditures, (iv) and
transparency and participation in the budget process. This component is not
included in the PFMRP, which pertains exclusively to the executive branch of
government.
·
Change Management: This component will provide support for education and advocacy about
the project, including for extensive consultation with relevant stakeholders in
MEF and line ministries, capacity development to design and implement a
transparent and participatory change management process, and a communications
strategy. Given the sensitivities likely to be roiled with such a significant
and important overall of key business practices in MEF and eventually the line
ministries, serious attention to a change management strategy will be critical
to the project's success.
·
Capacity development: MEF’s Consolidated Action Plan recognizes, at a broad
level, the need for a combination of technical and capacity building activities
in support of achieving each of the platforms for long-term reform of public
financial management. Activities foreshadowed to support achievement of
Platform 1 (and later platforms) include broadly-described capacity building,
motivational and organization measures. However, much more work needs to be
done, especially regarding the activities needed to support Platform 1. There
is a risk that capacity development activities get sidelined by complex
technical activities. There is also a risk that the Economics and Finance
Institute (EFI) is not able to implement the capacity development program.
Mitigation measures include: the planned motivational and organizational
measures, and rapid movement on both the capacity development plan for Platform
1 and an institutional assessment of EFI.
5.2. Tax Reform Program
To
strengthen tax policy and administration, three areas have been identified to
be the priority areas for implementing the tax reform namely (i) Change
process, (ii) Tax policy, and (iii) Tax administration:
·
Change process
includes establishing a formalized and transparent approach to the change
process through the use of an Organizational Technology Framework and
identifying the essential elements; providing the linkage and balance all the
essential elements as they are dependent on each other; establishing the
Departmental vision and communicate that vision within and outside the
Department; conducting a review of the current Tax Department’s functional
roles and responsibilities and provide advice and assistance in the taking of
appropriate action to establish formal roles and responsibilities of
Headquarters, Regional or Provincial Offices and District Offices, (functional
model);
·
Tax policy reform involves identify anomalies in the laws and make recommendations for
changes based upon the modernization of tax policy and linked to fiscal
direction and policy of the central government with regard to tax regime, tax
on profits for the estimated regime, tax on salaries, local taxation, value
added tax, turnover tax, excise, and tax policy analysis;
·
Tax administration reform involves (1) improving headquarters’ management
capacity; (2) implementing the real regime in the five main regional offices;
(3) establishing a solid management information system with appropriate data to
meet the needs of the MEF, head office, and the field or district offices; (4)
developing an operational procedures and manuals at all level and performance
standards at the divisional and individual staff level;(5) establishing of a
Large Taxpayer Unit (LTU) and Medium-Taxpayer Unit (MTU) in Phnom Penh to
improve administration of the largest taxpayers; (6) establishing a monthly
statistical reports; (7) ensuring the real regime covers all large and medium
sized business; (8) implementing the real regime in all provinces in the medium
term; (9) establishing formal audit manuals and procedures and a modern
management information system within the audit operation; (10) developing an
audit strategy that provides for a broader coverage of taxpayers; (11) utilizes
new selection techniques based on risk analysis; (12) and ensuring information
on importations from registered/non-registered taxpayers is received from the
Customs Department.
In
addition, there are measures to alter and improve the structure of tax and its
administration which will also improve revenue performance. The following are
the various measures which are in the armoury of the MEF to improve tax
performance:
5.2.1.
Broaden Tax Base
The first measure to improve revenue is to broaden
the tax base. As stated above, taxes in Cambodia
5.2.2. Personal
Income Tax
This
tax has yielded relatively little revenue in Cambodia Cambodia
In response to the need to improve equity in taxation, the Department
of Taxation will study and recommend to MEF the scope for effects of reducing
the threshold of annual profit tax and monthly salary. Correspondingly, the
Department will enhance its efforts to collect strictly mandated salary taxes
from schools, NGOs, and Employees of International Institutions.
5.2.3. Corporate
Income Tax
Tax
policy issues relating to the corporate income tax are numerous and complex,
but particularly relevant for developing countries are the issues of multiple
rates based on sectoral differentiation and the incoherent design of the
depreciation system. Therefore the Ministry of Economy and Finance will
simplify the corporate income tax by unifying multiple corporate income tax
rates.
Moreover,
allowable depreciation of physical assets for tax purposes is an important
structural element in determining the cost of capital and the profitability of
investment. Understanding that restructuring the depreciation systems is
important for the revenue performance, the Tax Department will reform the
depreciation allowance as follows:
- Assets will be classified into three or four categories and only one
uniform depreciation rate will be assigned to each category.
- Depreciation rates will generally be set higher than the actual
physical lives of the underlying assets to compensate for the lack of a
comprehensive inflation-compensating mechanism as in most tax systems.
- Depreciation will be computed using the declining-balance method of
rather than the straight-line method, simplifying the administration of
the system. The declining-balance method allows the pooling of all assets
in the same asset category and automatically accounts for capital gains
and losses from asset disposals, thus substantially simplifying
bookkeeping requirements.
5.2.4. Value-Added
Tax (VAT)
Although
the performance of the VAT has been satisfactory there are several concerns
that need to be addressed in the near term, such as the improvement of VAT
registration, VAT refund procedures, compliance with the VAT, and the VAT
threshold. Collection of indirect taxes
through VAT could be improved substantially by streamlining tax exemptions and
incentives. The VAT is considered as a less regressive tax instrument
than the previous consumption (turnover) tax.
In
response to these VAT issues, the Ministry of Economy and Finance will take the
following actions:
a) The VAT threshold[1] will
be reviewed, especially relative to the coverage of the real regime, so that
the base of VAT taxpayers is defined in terms of the ownership structure of
businesses.
b) The VAT
Sub-Decree on electricity and the amendment to the VAT Sub-Decree for reducing
taxpayers threshold in order to increase taxpayers in self assessment system
will be reviewed and modified if necessary to ensure that it is consistent with
mitigating the impact of the tax on low-income households.
c) The VAT refund
system will be reviewed and modified to reduce its complexity and increase its
ease of use by applicants.
5.2.5. Tax Incentives under the Law on Investment
The
provisions under the Law on Investment regarding profit tax and customs duty exemptions severely limit the scope of the tax base and the scope of
dutiable imports in Cambodia
While
granting tax incentives to promote investment is common in most countries
evidence suggests that their effectiveness in attracting incremental
investments—above the level that would have been reached had no incentives been
granted—is often dubious. Those exemptions that do not clearly and
unambiguously increase investment should be deleted. Tax incentives, such as
exempting raw materials and capital goods from the VAT, are prone to abuse and
are of doubtful effectiveness in increasing investment. Furthermore, collection
of the VAT may not improve with elimination of exemptions, if exemptions
removed were at the intermediate stage of production. Exempting raw materials
and capital goods used to produce exports, from import tariffs is somewhat more
justifiable as the exemption would level the playing field for Cambodian
exports in the international markets. Still, the difficulty with this exemption
lies, of course, in ensuring that the exempted purchases will in fact be used
as intended by the incentive. Establishing export production zones whose
perimeters are secured by customs controls is also a useful, though not
entirely foolproof, remedy for this abuse.
Tax
incentives can be justified if they address some form of market failure, most
notably those involving externalities (economic consequences beyond the
specific beneficiary of the tax incentive). For example, incentives targeted to
promote high-technology industries that promise to confer significant positive
externalities through enhanced worker skills or lowering input costs on the
rest of the economy are usually justifiable. By far the most compelling case
for granting targeted incentives is for meeting regional development needs of
these countries. Nevertheless, not all incentives are equally suited for
achieving such objectives and some are less cost-effective than others.
Frequently, the most prevalent forms of incentives found in developing
countries tend to be the least meritorious.
The cost-effectiveness
of providing tax incentives to promote investment is generally questionable.
Not all tax incentives are equally effective, and some are more justifiable and
cost-effective than others in terms of their demonstrable impact on investment.
The best strategy for sustained investment promotion comprises a few simple but
tested elements that are worth highlighting:
·
Provide a stable and transparent legal and regulatory framework;
·
Put in place a tax system in line with international norms;
·
Encourage balanced regional development;
·
Implement a simple but comprehensive system of accelerated depreciation;
·
Limit investment allowances or tax credits;
·
Avoid tax holidays and investment subsidies.
As a
general rule, indirect tax incentives should be avoided, and discretion in
granting incentives should be minimized. Reduction of tax exemptions is also
very important as a measure to enlarge the very narrow tax base, and to reduce
the current dependency on a few number of companies. It is desirable to unify all
exemptions in a single law covering all fiscal incentives. Government will
adopt the above approaches in promoting investments.
The
following Supporting Revenue Policy and Administration Measures will be implemented to address the weaknesses in the
taxation system:
1.
Improving Head
Quarter’s management capacity;
2.
Consolidating the
“real regime” at the provincial office level;
3.
Establishing a
solid management information system with appropriate data to meet the needs of
the MEF, head office and district offices;
4.
Developing
operational procedures and manuals at all levels and performance standards at
the divisional (and later individual) staff level;
5.
Establishing a
system of monthly statistical reports;
6.
Ensuring that the
“real regime” covers all large and medium-size businesses.
7.
Enforce the
collection of gambling taxes;
8. Expand taxation
on unused land;
9. Expand and
strengthen the collection of excise tax;
10.
Prepare Prakas to determine definitions and
components for tax base on excise of cigarettes, beer, and telephones--including
inspection of cigarette stamp affixing and market research of the effectiveness
of the links to payment of excise tax;
11.
Amend Article 7 on Law on Taxation and prepare the
Prakas on Capital Gain Tax;
12.
Conduct research and prepare recommendation to MEF
for amendments to gas and natural resources tax law;
13.
Strengthen
forecasting and tax revenue analysis; due to complexity of analysis and the lack of time
series data, it is important to provide caveats about the dependability and
stability of such forecasts;[2]
14.
Prepare and study tax treaty on DTA and attendace
negotiate with other countries
15.
Prepare Sub-Decree on tax
arbitration;
16.
Expand tax collection
payments through the banking system by medium-income taxpayers in both
provinces and cities outside Phnom Penh;
17.
Implement and strengthen
the accommodation tax;
18.
Strengthen the self-assessment system in provinces
and cities outside Phnom Penh
19.
Improve the audit program and prepare a comprehensive
manual comprising the 54 circulars, bringing the new model statement to an
operational level;
20.
Strengthen the use of taxpayer invoices as indexed by
the Census of Taxpayers at province and cities
outside Phnom Penh;
21.
Implement tax collection enforcement measures to be
applied to tax delinquents debtors/delinquents, creating tax-debtor classes
based on risk, income and debt levels;
22.
Prepare models and improve rules for addressing
administrative protests, policies, strategies, guideline circulars so that
dealing with them is systematized and made transparent;
23.
Prepare, maintain, control and strenthen network
system management in using IT system at tax branches in both in Phnom Penh and cities outside Phnom Penh;
24.
Prepare data system to support taxpayer services,
including return processing, audit, strategic planning, personnel, training,
tax debt, inquiry and cross-checking and transportation;
25.
Design and implement a Tax Department webpage with a
new server supporting a network (Web server, file server, application server,
back-up server) and protection system;
26.
Establish medium-income tax office in Phnom Penh and
tax divisions at Khan Kep and Khan Damnak Changher (Kep city), Sampoeu Lun
District, Phnom Prek District, Kamreang District and Ratanak Mundul (Battam
Bang Province);
27.
Prepare and arrange training programs for staff, both
in-country and abroad;
28.
Prepare all equipments for new department building
with its library, create new divisions and tax branches in provinces and cities outside Phnom Penh;
29.
Improve the incentive system for tax officers based
on performance;
30.
Increase tax on luxury cars and transportation cars;
31.
Expand the Real Regime tax system to other provinces;[3]
32.
Strengthen the enforcement and collection of tax in all cities and
provinces by providing proper notice, and using deterrents against tax evaders
such as blocking the accounts in banks, stopping the import-export documents,
and other appropriate measures;
33.
Strengthen the cross check of tax payer information with other departments,
such Customs Department, CDC and others.
34.
Enforce the flow of tax payments into the TSA (Treasury Single Account) at the National Bank of Cambodia
5.3. Customs Reform
In
spite of declining tariff rates brought about by trade liberalization, revenue
mobilization and control functions of customs still remain substantial, for
several reasons: (i) the fiscal dependency on customs revenues in light of
difficulty in broadening the tax bases; and (ii) imports constitute a major tax
base for levying VAT. Moreover, customs continues to be responsible for
effective and efficient border management to facilitate trade. Customs
administration takes on a larger role in ensuring national security and law
enforcement.
Improving
customs administration, therefore, is crucial for raising revenues, providing
domestic producers with protection, providing supply chain security,
facilitating trade, preventing importation of prohibited or unsafe imports, and
combating the trade of narcotics through the implementation of laws and
regulations that are in line with WTO commitments.
For
customs administration to improved, the following reform measures have been
implemented to underpin the future shape and role of customs:
5.3.1. The New Law of Customs
In
its reform and modernization plan, the Customs and Excise Department (CED)
focuses on development and implementation of a modern Law on Customs and
concerned regulations that are the foundation for customs operations to meet
the international standard and practices. The new law of Customs has been
promulgated by the king on 20th
July 2007 . To implement this new law, the supporting regulations
(37) will be issued soon. The Law and its supporting regulations are compliant
with the international standards and best practices. The Manual on Law on
Customs and Its Related Regulations is being prepared and will be published and
distributed.
5.3.2. Customs
Valuation
As
part of its WTO accession, the RGC requested to delay full implementation of
the provisions of the WTO Valuation Agreement for up to five years (reference
Article 20 of the Valuation Agreement) as elaborated in the transition plan
(Table 7 of Working Party Report). This transition period was intended to allow
the CEO time to develop its internal capacity and to ensure traders were ready
for the new system in order to ensure revenue is protected.
The
implementation of the WTO Valuation Agreement goes side by side with the reform
and modernization of the CED. In preparation for the implementation of the WTO
valuation agreement, progress has been made in respect of the following:
·
The Law on
Customs (LOC) has been promulgated (20 July 2007 ), and the CEO is finalizing implementing
regulations (there are 37 regulations to be prepared in accordance with the
provisions of the LOC);
·
One of the
regulations deals with customs valuation. In preparing this particular
regulation, provisions of the Agreement on the Implementation of Article VII of
GATT 1994 have been taken into account (definitions, valuation methods etc.) As
such, the Cambodian customs valuation regulation is fully consistent with WTO
rules and concept;
·
Imports of large
multinational and local companies with well-established compliance records
hence low-risk and imports by investment companies and other duty exempt
entities, are valued using the WTO methods. These importers would be required
to provide CED with information on the price actually paid, freight, insurance
changes, and to agree to participate in Post-Clearance Audit program and
maintain and make available company records;
·
Cambodia Cambodia
5.3.3.
Decentralization
To
gradually implement WTO Valuation Agreement, the CED has decentralization
policy on Customs Valuation. The decentralization process of customs valuation
is being carried out side by side both manual system and with the
implementation of customs automation project --ASYCUDA. Our strategies are as
follows:
·
WTO Valuation
Agreement has been absorbed approximately 80% of the total duty paid imports
valued by PSI company (BIVAC);
·
Decentralization
process of the Customs Valuation from the HQs (Customs Technique Office -CTO)
to Customs Check-points will be done step by step, and would be fully
implemented in Sihanoukville port at the same time as ASYCUDA system is operational;
·
Valuation
Officers from within the CTO and from other customs offices have been selected
and trained as the specialized customs valuation officers;
·
From 1st January 2008 , a number
of the above specialized customs valuation officers will be sent to work at SHV
port and some other front line checkpoints for the purpose of facilitating a
smooth transition from current system to WTO system.
5.3.4. Risk Management
Risk
Management been set in the 2003-2008 Plan of Action and Modernization of Customs
and Excise Department (CED) to enhance its revenue collection, to expedite
trade, to improve control procedure and to strengthen enforcement activities
through risk based targeting. It is a fourth component of the WCO framework of
standard's objectives that all members shall implement it effectively and Cambodia
Progress
achievement of Risk Management:
·
The Sub-Decree No
21 ANK. BK on Facilitation of Trade through Risk Management was signed on 01 March 2006 . Its
guidelines were in place;
·
The Risk
Management Steering Group was created and consisted of 15 members of Customs
officials. They have been assigned to work with JICA exports to develop the
Risk Management model;
·
The draft
templates of the inter-agency agreement on Risk Management are available for
signature if there is no further discussion or debate. They are written by
experts from Aus-aid through and inter-agency technical seminar held on 6-7 Feb
2007 at CED headquarter;
·
The Office of
Risk Management and Audit in CED has been established by a Prakas No. 607
MEF/CED by the Ministry of Economy and Finance. The assignment of staff has been
finalizing;
·
The Traders'
Credibility Management System (TCMS) has been established and installed under
the technical assistance from JICA;
·
The initial 28
key indicators have been developed as general criteria to assess each trader's
compliance to the relevant laws and regulations. The preliminary scoring and level
of risk including Standard Criteria for the model has also been established.
This will need to be included in a Ministerial Prakas as a legal ground for
implementation.
·
Survey of
selected companies of about 1700 has been done by RMA, Control, Export and PP
municipality Customs Offices. Those 28 risk indicators have been keyed into
TCMS based on the surveyed results, import/export statistics, and source of
VAT-TIN CD Package from the Tax Department. Out of those 1700 surveyed
companies, about 300 were not found, and other 200 are located in other
provinces;
·
JICA has provided
2 overseaS training for the Customs Risk Management Steering Group. In addition
JICA also provided 4 local workshops on Risk Management for Customs Officials.
Aus-aid earlier also provided workshop and training courses on Risk Management
for customs officials and ministries officers about 6 times;
·
Nine selectivity
Criteria namely Rank of Trader, New Importers, Unknown Importers, New Items,
GSP Applicable Goods, High Customs Duty Amount, High Customs Duty Rate, High
Customs Value, and Country of Origin have been developed. Its random ratio has
also been established as basis for calculation in the ASYCUDA Selectivity
Module;
·
Information
exchange b/w the RMA Office and ASYCUDA has been established. It includes
Memorandum of Understanding, Type/Format/and Content of written correspondence,
and time basis of the information exchange. Method of how to come up to the
Selectivity Decision from the given selectivity criteria has also been agreed;
·
Data on the 9
Selectivity Criteria has been delivered to ASYCUDA Team. The data were built
based on the results of TCMS, trade statistics, IL list from ASEAN Department,
and other available sources;
·
Since Tariff Book
2007 version was input into ASYCUDA, some selectivity criteria especially those
relating to HS Codes are not compatible with the system because they were
extracted from import/export statistics of previous years that use tariff 2004
version;
·
The
Inter-Ministerial Committee on Risk Management was established by which
consists of 10 sr. office. Its 1st meeting of Inter-Ministerial Committee on
Risk Management was conducted on 05 Feb 2007 at CED headquarter to speed up the
prohibited / restricted list of high risk goods and solve any other technical
issues;
·
The draft
templates of the inter-agency agreement on Risk Management are available for
signature if there is no further discussion or debate. They are written by
experts from Aus-aid through and inter-agency technical seminar held on 6-7 Feb
2007 at CED headquarter;
·
Regarding the
lists mentioned, CED sent request No 1021 CED dated on 10 November 2006 to all ministries
concerned as specified by the Sub-decree No 21 to send prohibited and
restricted lists of goods to CED. CED received some lists from Ministry of
Industry, Mine, and Energy (MIME), by Ministry of Agriculture, Forestry and
Fishery (MAFF), Ministry of Commerce (CAMCONTROL), Ministry of Health (MOH),
Council for the Development of Cambodia (CDC)/special Economic Zone, and others.
The consolidation and coding have been made. As consequence, it produced about
3,000 lines in tariffs headings/sub-headings. There is too large component that
should be reviewed;
·
During the
meeting of the Inter-Ministerial Committee on Risk Management on 18, 19, and 26 Oct 2007 , the draft of
Prohibited and Restricted Goods have been finalized and agreed to bring its
total tariff lines to 1537. The meeting also decided on authority of each
concern agencies on every product of the list;
·
An annex to the
Prohibited and Restricted List has been developed to explain some
prohibited/restricted items that cannot be included in the list due to some
technical difficulties of the customs tariff. The Annex also explains the
"Treatment Code" of each product and some other technical issues.
5.3.5. Customs Brokers
The
introduction of Interim Customs Broker into customs clearance operation was
advised by the MEF in a letter N° 2664 dated 25 May 2007 :
·
Initial
conditions for Interim Customs Broker have been developed to set qualifications
and criteria of any legal person or individual to become an authorized Declarant/Interim
Customs Broker;
·
A working group
consisted of 5 members has been established to be responsible for the
management of customs brokers. This unit is under the direct guidance of the
Risk Management and Audit Office;
·
The announcement
on the new system of Customs Broker has been publicized and so far there are
more than 100 companies applying for interim customs broker license;
·
To ensure the
sound process of clearance of goods, non customs brokers can also clear goods
from customs (as existing practice) even after the Customs Broker System coming
into effect. Non customs brokers will end at any appropriate time.
5.3.6. Single Administrative Document-SAD
Prakas
on SAD is one of the Prakas under the Law on Customs. This Prakas has been
finalized and ready for approval signature. It is expected that the Minister of
Economy and Finance will sign it next month:
·
The format of the
SAD (UN-Layout key, WCO data model consistent), its Explanatory Notes and
General Declaration Processing Path have been finalized and are Annexes to the
Prakas on SAD;
·
Training courses
on SAD have been given to both customs officers and private sector such as
freight forwarders and interim customs brokers;
·
It is planned
that manual SAD will be put into use from 151 January 2008, \I and the
electronic SAD will probably be started from 2nd quarter of 2008.
5.3.7. ASYCUDA
·
Finalized some
technical requirements for pilot site such as Reference Tables, Procedures for
Decentralized Exemption and Valuation Management;
·
The new Cambodia
Customs Tariff 2007 which is consistent with AHTN 2007 was put into use since
151 July 2007;
·
The Prototype
Version 1.0 was endorsed in May 2007 at the end of phase 1;
·
Training courses
on SAD and AHTN 2007 have been delivered to both customs officers and private
sector during the second phase which started since early June 2007;
·
Training for the
National Project Team (NPT) members has been organized;
·
Translation of
ASYCUDA World into Khmer by NPT members;
·
Sihanoukville Port
·
The procurement
of pilot site computer equipments and communication are being processed;
·
The mechanism of
information exchanges between ASYCUDA and Risk Management Office has been
established.
5.4. Fiscal Performance
The
Ministry of Economy and Finance (MEF), together with its development partners,
has established a best practice performance management framework for the Public
Financial Management Reform Program (PFM). The PFM reform has yielded major
achievements in its three years of implementation, 2005-2007.
Major
reforms measures commenced implementation in 2007 included: streamlining of
budget execution procedures, the introduction of program budgeting, and
adoption of a new chart of accounts. These follow on significant reforms in
2005 and 2006: customs and tax revenues collected through the banking system;
Treasury payments to suppliers by check instead of cash; elimination of the stock
of old expenditure arrears; streamlined procurement process; and strengthening
internal audit departments in the line ministries.
As
a result of the PFM reform, fiscal consolidation continued to progress in 2007.
Revenue collection improved substantially while expenditure was tightly
managed, as outlined below.
Table 5.4.1. Budget Execution in
2006-2007
(in million US dollars)
|
|
2006
|
%GDP
|
2007
|
%GDP
|
Change
|
|
Domestic
revenue
|
794.3
|
10.92%
|
968.7
|
11.30%
|
22.0%
|
|
Current
revenue
|
702.3
|
9.65%
|
942.3
|
10.99%
|
34.2%
|
|
-Tax
revenue
|
553.4
|
7.61%
|
754.9
|
8.81%
|
36.4%
|
|
·
Tax
Dept
|
187.2
|
2.57%
|
261.0
|
3.05%
|
39.4%
|
|
·
Customs
Dept
|
366.2
|
5.03%
|
493.6
|
5.76%
|
34.8%
|
|
-Non tax
revenue
|
148.9
|
2.05%
|
187.4
|
2.19%
|
25.9%
|
|
Capital
revenue
|
92.0
|
1.26%
|
26.4
|
0.31%
|
-71.3%
|
|
Total
expenditure
|
994.0
|
13.66%
|
1,168.7
|
13.64%
|
17.6%
|
|
-Current
expenditure
|
576.8
|
7.93%
|
741.4
|
8.65%
|
28.6%
|
|
-Capital
expenditure
|
417.3
|
5.74%
|
427.2
|
4.98%
|
2.4%
|
5.4.1. Revenues
Figure 5.4.1. Government Revenue
Collection
Domestic
revenue increased by 22 per cent from US$794 million in 2006 to US$969 million
in 2007 (11.3 per cent of GDP). This increase was mainly due to the growth in
tax revenue, which rose from US$553 million in 2006 to US$755 million in 2007,
and the improved collection of non-tax revenue, which increased from US$149
million in 2006 to US$187 million in 2007.
During
the last two years of reform, revenue collected by the Tax Department increased
by 38 per cent (US$187 million) and 39 per cent (US$261 million) respectively
in 2006 and 2007. The revenue collected by the Customs and Excise Department (CED)
increased respectively by 11 per cent (US$366 million) and 35 percent (US$494
million). Non-tax revenue increased by 26 per cent from US$149 million in 2006 to
US$187 million in 2007.
5.4.2. Expenditure
Rising
incomes and gradual improvements in service delivery have started to result in
improved human development indicators. In many areas Cambodia
However,
the health and education ministries have progressed further than most in
developing sector-wide strategies; aligning policy, planning, budgeting and
monitoring and evaluation processes toward these strategies; and gradually
reorienting priorities in a pro-poor direction. These fundamental improvements
in core systems are starting to result in improved outcomes.
Increases
in social spending in recent years seem to have resulted in positive trends in
education and health outcomes. Development of sector strategies and matching
systems for planning, budgeting and M&E have provided a framework within
which investments in physical infrastructure (schools and clinics) and
increasing numbers and to some degree quality of front-line service delivery
staff (teachers, doctors and nurses) have started to shift a number of human
development indicators upward. Primary enrollment has increased significantly.
Net primary enrollment rates improved and net lower secondary enrollment rates
also increased. Similarly in health, there has been remarkable success in controlling
and then reducing the spread of HIV and apparent significant decline in infant
and under-five mortality rates.
Figure 5.4.2. Government Expenditure
The
RGC has committed toward increasing expenditure in the following priority
areas: roads, irrigation, agriculture productivity, education, and health.
Revenue increased gradually to reach 11.5 percent of GDP in 2007, opening up
fiscal space for higher expenditures in agriculture, irrigation, roads, and
energy, as well as growth in social sector spending. The Government has
indicated its intention to significantly increase spending on rural
infrastructure, and is beginning by allocating a large share of the IMF Medium
Term Debt Relief Initiative (MDRI) funds (US$ 33 million) to fund small rural
irrigation projects in eastern provinces from 2006-2008.
Total
expenditure has more than tripled during the last decade. Total expenditure increased by 18 per cent from US$994
million in 2006 to US$1,169 million in 2007.
5.4.2.1. Current expenditure
Current
expenditure increased from US$577 million (7.93 per cent of GDP) in 2006 to
US$741 million (8.66 per cent of GDP) in 2007. The payroll accounted for 34 per
cent of current expenditure (2.8 per cent of GDP).
Budget
execution has very much been improved in 2007, due to the implementation of the
PFM reform program, reflecting improvement in budget disbursement and good
budget preparation.
5.4.2.2. Capital expenditure
Capital
expenditure is divided into two components: locally financed expenditure, i.e.
financed by domestic revenue and externally financed capital expenditure, i.e.
expenditure financed by bilateral and multilateral development partners in the
form of grants and concessional loans.
Capital
expenditure executed through the National Treasury increased from US$417
million (5.74 per cent of GDP) in 2006 to US$427 million (4.98 per cent of GDP).
Externally financed capital expenditure amounted to around US$280 million (3.5
per cent of GDP). The externally financed capital expenditure is incorporated ex post into the budget. It is disbursed
directly by the development partners.
Table 5.4.2. Government capital
expenditure by types
(in billion Riels)
|
|
Capital
Expenditure
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|
|
Road & bridges
|
124.2
|
118.4
|
255.8
|
112.5
|
33.5
|
57.5
|
60.2
|
51.2
|
|
|
Irrigation
|
-
|
-
|
-
|
1.4
|
5.3
|
18
|
38.0
|
51.8
|
|
|
Others
|
239.2
|
221.6
|
98.4
|
132.9
|
15.5
|
6.8
|
8.5
|
16.0
|
|
|
Total commitment
|
363.4
|
340.0
|
354.2
|
246.8
|
59.3
|
82.3
|
106.7
|
119.1
|
|
|
Total disbursement
|
217.8
|
201.6
|
232.9
|
204.8
|
145.1
|
148.1
|
194.6
|
|
The
capital spending concentrated on only three ministries: the Ministry of Public
Works and Transport, the Ministry of Water Resources and Meteorology and the
Ministry of Rural Development.
The
current budget surplus increased from 1.8 per cent of GDP in 2006 to 2.34 per
cent of GDP, due to drastic increase in revenue and restrained budget
expenditure. The overall budget deficit declined to around 1.5 per cent of GDP.
The overall budget deficit was financed by concessionary loans and grants
provided by Cambodia Cambodia
5.4.2.3. Expenditure by sectors
5.4.2.3.1. Education Spending
During
the last decade, starting from 1998 to 2007, spending on education has increased
more than five times in nominal terms, from 102 billion to 546 billion CRs
($134 million) respectively.
Starting
from a low base, the Cambodian education system has made some impressive gains.
Estimated net enrolment rates at the primary level are up significantly from
65% in 2000 to 76% in 2004 (CSES). Lower Secondary (grades 7-9) net enrollment
has more than doubled since 1997, increasing from 7.6% to 16.4%.
Figure 5.4.3. Education Spending
Advances
in important indicators such as literacy, repetition rates and years of
schooling for younger age cohorts are further positive signs that the
rebuilding of the national education system is taking root. Progress has also
tended to be pro-poor. While socioeconomic, rural and gender gaps in
educational attainment exist, these gaps have generally been reduced
significantly in recent years, particularly at the primary level.
5.4.2.3.2. Health Spending
During
the last decade, health spending rose from more than sevenfolds from 44 billion
CRs in 1998 to 337 billion CRs ($82 million) in 2007.
Recently
released data suggests progress on a number of health indicators, reflecting
rising average levels of consumption and falling poverty rates recorded last
year from the household living standards survey. Findings from the 2005
Cambodia Demographic and Health Survey (CDHS) suggest significant progress on a
number of output and outcome measures relative to the previous (2000) CDHS.
Health service delivery has improved in a number of critical respects (notably
rates of childhood immunization and the percentage of births attended by a
trained professional). Health practices are also changing, with a dramatic rise
in exclusive breastfeeding of children aged under six months.
Figure 5.4.4. Health Spending
These
improvements in service delivery and utilization are feeding through into a
number of health outcomes, with falling fertility rates, better (though still
extremely poor) childhood nutrition, and significant improvements in childhood
survival (with infant mortality rates falling from 95 to 65 per 100,000 live
births, and under-five mortality falling from 124 to 83). Maternal mortality
(per 100,000 live births) has also decreased, from over 437 in 2000 to 343 in
2005. While births at home are slowly giving ways to births at a facility (up
from 32% to 44%), progress is starting from an extremely low base, and there is
a long way to go. Although Cambodia
5.4.2.3.3. Spending on Road Infrastructure
The
Government’s Rectangular Strategy places great importance on the rehabilitation
of the country’s existing infrastructure and the construction of new
infrastructure assets to meet the demand of its growing economy. The road
sector continues to be a high priority.
Figure 5.4.5. Infrastructure Spending
Research
found out that decreasing the distance from the village due to good road by one
kilometer will enhance productivity by about 30 thousand Riel per hectare. Land
with access to irrigation facilities during the dry season has 15 percent
greater rental value and 10 percent higher sale value than land without
irrigation. From 2000-2006 the disbursement for infrastructure and its
maintenance amounted to about 1,400 billion riels or US$350 million.
In
addition the RGC has scaled up maintenance expenditures on its road network.
Maintenance spending has been quite low compared to needs, resulting in a
deterioration of the capital stock beyond normal depreciation. The RGC has also
stressed the need to continue to expand funding for health and education, and
would allocate PRGO funds toward those sectors.
Figure 5.4.6. Road Fund
 |
5.4.2.3.4. Spending on the Agriculture
Sector
Agricultural
performance is volatile and yields are strongly correlated with weather
conditions. The growth rate of agriculture averaged 3.3% per annum during 1994
-2004. The average rice yield has increased gradually every year from 1.5 tons
per ha in 1993 to about 2.5 tons per ha in 2005.
Figure 5.4.7. Agriculture Spending
The
use of high-yielding seeds supplied by
the fledgling seed companies, improved disease and pest control, good weather
conditions, the initiatives of the government to provide irrigation facilities
for dry paddy farming and the increasing popularity of the rice intensification
scheme (RIS) have been the main reasons for this performance. However, in absolute terms productivity is
low and far behind other major agricultural producers and exporters in the
region. There is high potential for significant increase in agricultural
incomes through effectively directed investment, and proactive and progressive
policies learning from the experiences of neighboring countries.
Current
spending on agriculture (Ministry of Agriculture, Forestry and Fisheries, the
Ministry of Rural Development and the Ministry of Water Resources and
Meteorology) has doubled from 52.7 billion Riels in 2001 to 118.6 billion Riels
in 2007. This spending has tripled since 2000. However, this figure does not
include capital spending, which was mainly for the construction of rural roads
and irrigation facilities.
Total
spending on agricultural sector (both current and capital expenditure)
increased by more than 10 folds during the last decade from 18.6 billion riels
in 1997 to 200 billion riels (or US$50 million) in 2007.
Government
investment in irrigation increased by annual average of 2% during 2003-2006 and
reached about US$10 million in 2006. Irrigation investment is not attractive
due to its low financial returns even though economic returns may be higher.
From social perspective irrigation investment would not benefit much the
landless poor, households which are nearly landless and farmers practicing
rain-fed framing or located in the tail end of the water distribution systems.
However, commercially oriented farmers might benefit from crop diversification
made possible by assured irrigation.
Figure 5.6.8. Irrigation Expenditure
A
recent sample survey found that less than 20% of the irrigation systems had a
strong organization for water management and maintenance, which resulted in
substantial capacity under utilization. The survey concluded that pumping
stations are more efficient in delivering irrigation in Cambodia Cambodia
High
yielding seeds and correctly applied fertilizers and pesticides in combination
with carefully managed irrigation increase crop yields and financial returns.
Cambodian farmers, particularly those practicing subsistence agriculture, tend
to use their own seeds despite the poor germination rate. Even though farmers
pay for the high quality seeds supplied by the seed producing firms, the crop
yields triple with their use.
6. Merit Based Pay Initiative
However,
the fundamental underlying impediments to further improvement in service
delivery and outcomes are inadequate systems for managing public finances and
public sector human resources. The second fundamental and related cross-cutting
weakness that holds back improvements in service delivery is public sector
human resource management, and particularly the inadequate level of
remuneration for civil servants. The salary of public sector employees at all
levels—including those (such as teachers and health center staff) who are directly
responsible for the delivery of basic services to the population—is not enough
to live on, resulting in absenteeism, the levying of additional, informal fees
which bias against the poor, and low job motivation.
To
address the above problem, under the PFM reform, the MEF piloted since June
2005 a Merit-Based Pay Initiative (MBPI), which helps to identify approaches to
systematically raise salaries in such a way as to reward ability and job
performance. Since then, the key officials of the Ministry of Economy and
Finance responsible for PFM reform program, especially departmental action plan
have benefited the MBPI as incentives in addition to their basic government
salary.
To
systematically address all concerns and ensure the effectiveness and efficiency
of the implementation of MBPI, the MEF has prepared a second-phased MBPI
implementation strategy by proposing to upgrade the MBPI Sub-committee with the
following responsibilities:
(i)
Supervise civil
service reform in MEF including the establishment control and functional
analysis;
(ii)
Provide a framework for regular staff assessment to
ensure that the promotion of officials within the MEF is based on merits;
(iii)
The Sub-committee
in close cooperation with the Department of Personnel and the reform committee
secretariat (RCS) should carry out the following tasks: conduct annual review
of officials including those under MBPI, and other capable officials in order
to reassess or recruit new officials for MBPI and for the MEF;
(iv)
Supervise
departments of MEF to prepare and regularly review its target and annual action
plan. The review is conducted through the guidelines prepared by the RCS
7. Conclusion
According
to the based-line scenario, the Cambodian economy is expected to grow at a
somewhat lower rate of about 8-9 percent per annum over the next several years,
but growth will likely accelerate again thereafter when oil production
commences in 2010 or 2011. A non-trivial
portion of growth over the past decade was due to the post-conflict ‘catch up’
phenomenon, which will likely level off over the next few years. As Cambodia
Beyond
the near term, however, Cambodia
The
continuation of growth supporting policies will be crucial for sustaining high
growth rates. The main policy thrusts would include diversification of the
economy by encouraging investments in new manufacturing activities, supporting
agriculture and agro-business and developing physical, social and economic
infrastructure, particularly the expansion of new tourism sites, which will
have major multiplier effects on the rest of the economy.
Acceleration
of rural economic growth will have a tangible impact on poverty reduction. A key aspect of Cambodia
Looking
to the future, to sustain the improvements made over the last decade, we need
to undertake further measures to reduce and prevent these kinds of structural
inequalities to take root. The Royal Government of Cambodia has been long aware
of the situation as reflected in the priorities of its Rectangular Strategy for
Growth, Equity, Employment and Poverty Reduction, and sought to have a strong
strategy to rectify this trend, by emphasizing the development of rural
economies where 85% of people live. The government is committing itself to the
enhancement and better implementation of pro-poor growth policies. In this
connection I would like to share some of my views to address inequality issues
and help to achieve further growth that is shared well among all Cambodians:
a) Increase connectivity between rural and urban areas.
Inequality rises as the prosperity in cities appears to have limited spill-over
effects on the rural areas suggesting weak rural-urban linkage and poor
connectivity between rural and urban sectors. Moreover the high positive
correlation between poverty incidence and remoteness strongly implies that the
poor in remote rural areas have inadequate access to basic infrastructure and
public services such as roads, education, health facilities and urban markets.
b) Policy shift aiming at accelerating of rural economic
growth which will have a tangible impact on inequality and poverty reduction is
under the government strong focus at the present. A key aspect of Cambodia
c) Reduce the vulnerability of becoming poor – there is a
high risk of non-poor to fall below the poverty line, in particular in rural
areas, which due to poor health and illness they may be forced to sell their
assets, including land during times of health distress and calamities. This may
quickly bring those who are extremely vulnerable to crises below the poverty
line. Thus, the government will look at the possibility to establish social
health insurance and safety nets, in particularly for those who are the most
vulnerable.
d) Provide secure land tenure – Land is the basis of wealth,
especially in an agricultural society such as Cambodia :
patterns of land ownership will have a very great influence on whether Cambodia
e) Broaden the base of economic growth. The significant
economic dependence on the garment industry poses a high risk, which may result
in job losses and could be socially disruptive since garment workers transfer a
substantial part of their wages to their families in rural areas to supplement
farm-based incomes. Phasing out of safeguard restrictions on textiles will be
destabilizing as the “safeguarded” exports constituted 80% of Cambodia Cambodia Cambodia
to pursue industrial restructuring of Cambodia
f) Employment\ generation. The traditional role of
agriculture as the main source of additional employment has diminished. At the
present, the role of the garment industry as a source of employment and income
generation is more pivotal. However, the rapid expansion of employment in the
manufacturing sector could not fully compensate the inadequate employment
absorption in agriculture. A more robust agricultural development can revive
the role of agriculture as a significant contributor to employment and income
generation. However, the volatility of agricultural production is not only a
cause of widening income and asset inequality and immediate obstacle to poverty
reduction, but is also a major constraint to sustainable, broad-based
development of the non-farm economy. The Government has increased investment in
irrigation infrastructure reducing to some extent the vulnerability of
agricultural outputs to weather condition.
[1] The MEF
recognizes that lowering of the VAT registration threshold could increase the
administrative workload for the tax department and adversely affect tax
compliance while department already struggling to control the compliance of
existing large and medium-size taxpayers. In order to cope with this matter,
tax administration capacity will be further strengthened along with
introduction of full automatization of tax administration operations.
[2] Despite these difficulties
which must be explicitly noted, these forecasts must be
developed for each of the different tax categories (conditional on intended
administrative improvements as well as on sectoral forecasts), both as an input
into the general budgeting process and as monitorable performance indicators.
[3] So
far 17 provinces have been integrated into the Real Tax Regime.
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