Press Release No. 03/19

Press Release: IMF Completes Sixth Review of Cambodia's PRGF Program and Approves US$12 Million Credit

February 20, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the sixth and final review of Cambodia's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 99/51)¹. This enables the immediate release of a further SDR 8.4 million (about US$12 million) from the arrangement, which would bring total disbursements under the IMF-supported program to SDR 58.5 million (about US$80 million).

After the IMF Executive Board's discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, made the following statement:

"The Cambodian authorities have continued to make good progress in implementing their economic reform program. Performance under the PRGF arrangement was broadly satisfactory, as inflation remained low and sustained economic growth was maintained despite adverse weather conditions. While progress was also made in the implementation of structural reforms, efforts need to be strengthened in key areas, particularly revenue administration, expenditure management, civil service reform, and forestry and agricultural policy. In the area of forestry policy, it is especially important to minimize any possible disruption in forestry monitoring arising from the government's decision to replace the current internationally-recognized independent monitor.

"To ensure broad-based economic growth over the medium term, Cambodia needs to foster the development of private sector activity and attract foreign investment. Moreover, competitiveness will need to be improved through a reduction in costs, including that associated with informal facilitation fees, and enhanced predictability of the business environment. The replacement of the current system of investment incentives by a simple and transparent regime with lower tax rates will help to create such an environment. Further legal and judicial reform and improvements in governance, a key cross-cutting issue in Cambodia, will also be important for minimizing risks to the success of the government's medium-term development strategy.

"Additional increases in fiscal revenue will be needed to strengthen government institutions and upgrade the quality of the civil service. Improvements in revenue will require strong efforts to prevent a further erosion of the revenue base, collect tax and nontax arrears, and strengthen tax and customs administration. At the same time, improved cash management will be crucial for establishing effective budget execution and the continued avoidance of domestic financing of the budget through the banking system, which is essential for macroeconomic stability.

"The momentum of banking sector reform should be maintained, with a view to promoting financial intermediation. Bank supervison and the regulatory framework should continue to be strengthened, and the planned privatization of the Foreign Trade Bank should be carried out without delay.

"The recent completion of the National Poverty Reduction Strategy (NPRS) is a welcomed development. This strategy provides an adequate basis for implementing a broad-based poverty reduction strategy. It is now essential that the Cambodian government demonstrate full ownership of the implementation process.

"Strong and sustained growth over the medium term will continue to depend on the provision of broad-based technical assistance and financial donor support. In the latter regard, it is important for the authorities to step up their efforts to urgently resolve outstanding bilateral debt issues consistent with Cambodia's fiscal constraints. In addition, nonconcessional borrowing should continue to be avoided," Mr. Sugisaki stated.