Report Reveals Gov’t Performance
Cambodia’s economy was stagnant in 1998 as a result of political uncertainty, drought and the regional economic crisis, a recently released report from the World Bank says.
The country’s real gross domestic product (GDP) showed zero percent growth in 1998, the report stated. In 1997, GDP growth slowed to 1 percent after registering an average growth rate of 6 percent for the previous five years.
In December, Finance Minister Keat Chhon told reporters the 1998 GDP was “less than 3 percent” and that the country was aiming for 3.5 percent next year.
Construction and tourism were the sectors hardest hit in the 18 months after factional fighting rocked the capital in July 1997, the report stated.
In 1998, the government experienced serious budgetary problems and had to borrow $21.6 million (82 billion riel) from the National Bank of Cambodia in order to pay about three months of unpaid and overdue salaries, pay for Khmer Rouge integrations and finance July’s national elections, the report stated.
But as of December, the government had fallen behind again in paying two months’ worth of salaries, the report stated.
This is the first time since 1994 that the government has relied on the National Bank to finance the country’s budget.
Inflation in 1998 accelerated to 12 percent, mainly because of an increase in rice prices. Market prices for the staple food shot up because of harvest shortfalls and some hoarding of goods prior to the July elections, the report stated.
Despite the overall slowdown in the economy, an upcoming World Bank report states that poverty levels in Cambodia improved slightly between 1993 to 1997. The number of people living below the poverty line fell from 39 percent to 36 percent in 1997.
The number of people living in urban areas besides Phnom Penh declined significantly, the poverty report states. Cambodia is one of the poorest countries in Asia, with a per capita income of less than $300.
The government will ask for $1.35 billion for Cambodia in the upcoming Consultative Group meeting.
The World Bank report reiterated international donors’ concerns with Cambodia’s low rates of revenue collection, the size of the country’s civil service rolls and illegal logging.
The government is estimated to have lost in excess of $60 million, or 2 percent of GDP, in revenues not collected from illegal logging in 1997.
The amount of revenue Cambodia collected in 1998 fell below what was originally budgeted, even though the budgeted target “was not ambitious,” the report pointed out. The budget revenue collected was estimated at 8.1 percent of GDP, one of the lowest rates in the world, the report said.
The widespread granting of tax exemptions on garment imports as well as timber and rubber exports are identified as the main culprit for the drop in revenue collection.
In the run-up to Cambodia’s donors meeting, officials have been working hard to show they are trying to change. Last week, the government announced it was cancelling at least 10 logging contracts. At the end of December, the Assembly voted in several new taxes that still have to be approved in the Council of Ministers and about 800 companies began gearing up for the value-added tax.
Prime Minister Hun Sen also recently asked Japan for $24 million to help reduce the military and police forces. The government has announced it wants to reduce defense and police forces by at least one-third.
The formation of the new government and the recent defections of Khmer Rouge troops give Cambodia a window of opportunity to accomplish these reforms, the report stated.
“As the political and security situations [have] improved significantly, the government is now in a position to demonstrate clearly strong political will in renewing its efforts to reinforce macroeconomic stability and implement structural reforms,” the World Bank report said.
The report outlined possible scenarios for the country’s economic future. Should Cambodia decide to follow through with reforms, the government could return to 6 or 7 percent growth and inflation could decrease to 5 percent by 2002.
If the government “does not demonstrate the decisive political will to implement a package of far-reaching structural measures,” output growth would hit 2 or 2.5 percent and keep inflation between 16 percent and 20 percent, the report stated.
The wild card in Cambodia’s economic condition will be the ongoing Asian economic crisis. Cambodia‘s dependence on the dollar will continue to help soften the blows of the regional economic crisis, the report states. But the country is still at risk of a continued drop in investment by Asian countries and tourism if the regional economic crisis worsens, the report states.
Foreign investment for the last quarter of 1997 dropped to $135 million, about half 1996’s amount.
The report also examined the way the government puts together and implements its budget. Spending for defense and security “have crowded out resources for spending on development activities,” the report states.
According to Finance Ministry figures, the government in 1998 overran its defense and security budget by 8 percent while health only received about 60 percent of what it was budgeted.