In order to mitigate the risk of high inflation in Cambodia and ensure public spending is dispersed in priority sectors, the government must curb some of its spending on civil service and military wages this year to avoid the budget deficit from rising too high, officials from the International Monetary Fund said this week.
But government and ruling party officials said yesterday that a cap on state wages was not an option under the current economic conditions.
On Wednesday the International Monetary Fund predicted that Cambodia’s budget deficit could climb as high as 6.75 percent of GDP, up from about 2.75 percent last year.
After two weeks of consultations with government officials, representatives from the country’s business community and the development sector, a team of seven economists from the IMF estimated that domestic financing of the deficit would mean the government would have to draw on deposits amounting to about 1.25 percent of GDP, reversing a long trend of deposit accumulation.
“This situation bears close watch, since domestic financing of deficits in the past has contributed to macroeconomic instability, placing pressure on the exchange rate and consumer prices,” the IMF said in a statement on Wednesday.
“Both revenue and spending measures will be needed to mitigate this risk, and to keep the deficit around 5.5 percent, which in our view would be consistent with the objectives of providing space for priority spending and maintaining macroeconomic stability,” John Nelmes, resident representative for the IMF in Cambodia, said yesterday.
Mr Nelmes said: “Freezing the overall wage bill…is one measure we believe the government should consider.”
“An equally important point is that wage increases need to be undertaken in the context of a civil service reform strategy to ensure that higher wage spending is accompanied by better pay incentives based on performance and improved service delivery,” he said. The IMF estimates the government wages will rise to almost 5 percent of GDP this year, up from just over 3 percent last year.
In other words, Mr Nelmes said, the level of government spending on wages for 2009 is set to be more than double the amount of domestically financed capital being spent on overall infrastructure. The IMF predicts Cambodia’s GDP to hit about $10.8 billion in 2009.
Mr Nelmes warned that if growth in the overall government wage bill is not checked, priority areas like health and education could risk being underfinanced.
“In our view, the 2010 budget can indeed make room for spending on priority measures and sectors within a ceiling of 5.5 percent. This can be accomplished through more effort at raising revenues, checking wage growth while a civil service reform strategy is put in place, and restraining spending on non-priority items,” Mr Nelmes said.
But CPP lawmaker Cheam Yeap, who chairs the National Assembly’s finance commission, said the government plans to continue its policy of regularly increasing the wages of government employees.
“We will keep raising the amount allocated for wages as it will help improve people’s living standards,” Mr Yeap said.
Responding to IMF recommendations concerning increased spending on health and education, Mr Yeap said that the 2010 national budget would adjust its priority spending depending on the stability of Cambodia’s economy.
“I have written to Deputy Prime Minister [and Minister of Finance] Keat Chhon to increase the amount of spending on the health and education sectors,” he added.
In The, director general of the finance and administration department at the Ministry of Education, said that current wages for teachers were only just sufficient, with many educators having to clock overtime to support their families.
Mr The said that teachers in the provinces faired better than those in urban areas, though more efforts to raise teachers’ salaries were still needed.
“The government is like our parents, if their revenue increases, they give us more,” he said.