Economist Doubts Minister’s Lofty Forecast

Finance Minister Keat Chhon has predicted strong economic growth for Cambodia in 2005 and re­ported increased tax revenue collection in the first half of 2005 compared to the same period for 2004, according to a letter ob­tain­ed Tues­day. One local economist, however, questioned the finance minister’s optimistic outlook.

In the letter dated July 22 and ad­dressed to National Assembly Pres­ident Norodom Ranariddh, Keat Chhon, predicted 6.3 percent GDP growth for 2005.

Following a 13-percent drop in agricultural production in 2004, Keat Chhon predicted agricultural production would this year grow by 2.4 percent compared to last year. This was due to a 3.3-percent in­crease in overall paddy production in 2005.

Continuing with the upbeat outlook, Keat Chhon also predicted 10.7 percent industrial growth. This was at­tributed to a predicted 13-percent increase in garment exports, 30-to- 35 percent increases in tour­ist arrival and a 13 percent in­crease in the construction industry.

The report forecasts annual in­fla­tion of 3 to 4 percent this year and further predicts 6 percent GDP growth through 2008.

In June, the International Mon­e­tary Fund revised its projection for GDP growth to 6 percent, up from an earlier prediction of 2.3 percent largely based on the predicted negative impact of the end of the Multi-Fiber Agreement. The IMF based its more positive assessment on developments in the in­ternational garment trade, such as the re-imposition of quotas on in­dustry leader China by the US.

“The realization of 6.3-percent eco­nomic growth for 2005 against an initial projection of 2-to-4 percent growth could be considered a success of the Royal Government in man­aging the economy,” the letter states.

Economist Kang Chandararot said that based on his research, the first 6 months of 2005 have not been as strong as previous months. He also predicted 2- to 3-percent GDP growth for 2006 to 2008, citing the possible ef­fects of political instability surrounding the coming three years of elections.

An unfavorable business climate is also causing producers to switch to importing foreign goods, he said.

Through June, the tax and customs departments collected ap­prox­imately $251 million in tax re­ven­ue—28 percent more than collected in the first half of 2004. How­ever, revenue collection in Cambo­dia stands at just 11.3 percent of GDP, far lower than the average 30 percent found in developed countries.

“The level of tax compliance has in­creased due to active supports by the Royal Government including strengthening the quality of ser­vices for taxpayers, enhancing the quality of tax audits and tax ar­rears recovery measures as well as strict tax collection from public pro­curement,” the letter states.

Kang Chandararot said that with a $202-million gap last year be­tween tax revenue and $734 million in budgetary expenditures, the treasury is poor.

“Our economy is donor funded,” he said.

On the expenditure side, 32 percent of the budget was spent as of June 30. The Royal Palace spent 65 percent of its budget, the Na­tional Assembly 55 percent, the In­terior Ministry 29 percent and the De­fense Ministry 35 percent, ac­cording to Keat Chhon.

“However, the four priority min­is­tries still performed at a low le­vel,” the letter notes. The Edu­ca­tion Ministry had spent just 23 percent of its budget, the Health Min­is­try 25 percent, the Agriculture Ministry 29 percent and the Rural Development Ministry 18 percent.