Recommendation of Financial Performance

							National Workshop on Capacity-building
     for External Debt Management




Conclusion and Recommendations
           Cambodia
            February 2006
Summary Status

  Sustainable level of external debt (at present
   favourable external debt ratio, low share of short
   term debt and high share of concessional debt)
   given appropriate macro and financial policies are
   in place
  Down side risks remain-low revenue/GDP ratio
   and thus pressure on the budget
  Lack of a proper mechanism to monitor and
   manage debt is a concern
Particular focus on three areas


   Macroeconomic      performance

   Institutional   development

   External   debt management
Macroeconomic performance
   Area of concern
     Growth performance is not steady. GDP growth
      declined from 5.7 per cent in 2001 to 4.3 per cent in
      2004 although it is expected to increase to 6 per cent
      in 2005.
     The difficulty in achieving broad based growth.


   Policy recommendation
     Improve investment climate,
     Diversify the economy,
     reduce cost of doing business and increase productivity for
      private sector development,
     increase access to land, human capital development,
     Physical infrastructure development,
     develop good governance
Macroeconomic performance cont:
   Area of concern
       Poor public finance. Budget deficit declined from 6.6 per cent in
        2002 to 5.5 per cent in 2005 but still remained high.
       Revenue/GDP ratio is low at 12 per cent in 2005.

   Policy recommendation
       Achieving sound fiscal and monetary policy should be
        recognized as a necessary condition for realizing sound public
        debt management.
            The fiscal policy needs to be strengthened to absorb foreign aid
            Tax reforms-tax policy reforms should be linked to fiscal objectives,
            Improve tax administration (broadening the tax base)
            The government may consider a pooling system so that funds are
             utilized gradually and efficiently by taking into account the
             absorptive capacity of the country
            The fiscal policy could be performed more flexibly in accordance
             with the types of aid (i.e. temporary versus permanent)
       Introduce VAT, rationalize public expenditure, improve public
        expenditure management
       Improve budgetary management, including through improved
        accountability and transparency of financial management
Macroeconomic performance cont:
   Area of concern
      High dependency on
           Exports of garments and wood products and the
            vulnerabilities to external shocks and the slow response
            to policy changes


   Policy recommendation
      Diversify the exports sector
      Continue reforms to enable the private sector to thrive
Macroeconomic performance cont:
   Area of concern
       Trade balance is deteriorating and the current account
        deficit is rising (from 1.5 per cent of GDP in 2002 to 4.9 per
        cent in 2005).

   Policy recommendation
     The trade balance should be improved to a significant
      degree in order to reduce external vulnerability.
     The efforts toward an open trade regime should be
      pursued together with a consideration of an appropriate
      exchange rate regime.
     The impact of foreign aid on the export sector should be
      closely monitored.
     Trade facilitation and rationalizing all agencies involved to
      reduce high costs
Macroeconomic performance cont:
   Area of concern
     Current account balance in 2005 was high at -10.3 per cent
      of GDP
     Nearly the entire current account deficit was attributable to
      the increased trade deficit

   Policy recommendation
     The deteriorating current account balance, mainly caused
      by poor macroeconomic performance needs to be arrested.
      Broadening the base of economic growth driven by private
      investment and trade.
     Remove impediments to the private sector development
      through human resource development;
           Improve the quality of governance,
           Reduce regulatory burden
Macroeconomic performance cont:
   Area of concern
       Given a flexible exchange rate regime, exchange rate
        volatility is one area of concerns

   Policy recommendation
     The flexible exchange rate regime helps cushion the
      external and domestic shocks, but need to manage
      properly
     Foreign reserves could be increased to more comfortable
      levels over the medium term.
         The indicators of foreign reserve adequacy should be
          used regularly and actively.
Institutional Development
   Area of concern
       Government apparatus is weak and overloaded reflecting
        the negative effects of the war. Institutional mechanism is
        yet to be in full gear to facilitate growth and development

   Policy recommendation
       Institutional reforms to make the public sector more
        efficient and the private entrepreneurship emerges and
        thrive
            legislative and regulatory mechanisms.
            court system and legal environment for market competition
Institutional Development
   Area of concern
     A dollarized economic system has both advantages and
      disadvantages
     It deprives the country to make use of domestic monetary
      and fiscal policies for the country’s development

   Policy recommendation
     Need to have a long term mechanism to give the local
      currency a larger role in the economy
     For this steps are needed to build the public confidence on
      the local currency as a store of value and a medium of
      exchange (could start by making all public transactions in
      local currency)
Institutional Development Cont:
   Area of concern
       Slow financial sector development despite reform efforts.
        Legal and institutional reforms are inadequate.

   Policy recommendation
     Achieving a sound banking and financial system
     Further progress made in the regulation and supervision
            NPL of banks should be reduced further
            The active use of global standards for capital adequacy
             requirements, accounting, auditing, disclosure, along with the
             strengthening of prudential supervision and regulations
       Legal frameworks to enforce financial contracts
Institutional Development Cont:
   Area of concern
       Weak bond market

   Policy recommendation
       Domestic bond market development
            Developing domestic bond markets should be regarded as a
             medium- to long-term goal, and thus, improving the
             soundness of the financial sector should be given the highest
             priority
            Private firms should be able to regularly issue corporate
             bonds at relatively low costs
            There is limited demand for long-term bonds, since (mostly
             risk-averse) individual investors tend to hold their assets in
             the form of liquid, safe bank deposits. There are few
             institutional investors in the country in the presence of low
             financial asset accumulation and low per capita income level.
Institutional Development Cont:
   Area of concern
     The absence of a proper mechanism to monitor and
      manage debt could have implications on governance
      and debt sustainability

   Policy recommendation
      Establish urgently
         an institutional framework (DMFAS or similar
          arrangement) to record and manage debt
         Debt management strategy

         Risk management framework
Institutional Development Cont:
   Area of concern
       In the absence of a proper framework, monitoring appears
        to be weak

   Policy recommendation
       Put in place
            well articulated clearly defined role of responsibilities for staff
            Clear monitoring and control policies
            Reporting arrangements

       Assess debt sustainability regularly and take corrective
        measures I terms of macroeconomic policies and changes
        to the borrowing policy
External Debt Management
   Area of concern
     Debt rescheduling may reduce amortization payments, but
      it could increase interest obligations.
     As a result budgetary pressures could be high, particularly
      in view of the low revenue/GDP ratio.

   Policy recommendation
     Negotiations are taking place for rescheduling the
      country’s pre-1993 debt obligations with Russia and the
      United States.
     If debt rescheduling goes ahead as intended, Cambodia’s
      medium term debt stock is sustainable, particularly in view
      of the high concessionality of the debt stock.
     Therefore, Cambodia needs to pursue a strong debt
      management strategy and avoid non-concessional
      borrowing
External Debt Management Cont:
   Area of concern
     Even after rescheduling NPV of public debt would be still
      high at 230 per cent of total revenue as revenue ratios are
      low.
     Debt servicing could be under strain and could have
      negative implications on the country’s investor perception
      and the development process

   Policy recommendation
     Anticorruption rules and regulation and increase
      transparency in both public and private sector
     Take measures to increase revenue thereby reducing the
      pressure on the budget
External Debt Management Cont:

   Area of concern
       Increasing debt/GNI from 75% in 1999 to 77% in 2003


   Policy recommendation
       Improve public expenditure management, in particular
        lending to SOEs and government guarantees, thereby
        contain the growth in debt
External Debt Management cont:
   Area of concern
       Debt mostly in dollars and rubles


   Policy recommendation
       The importance of
            public debt composition in terms of currency (both domestic
             and foreign debt) and
            interest rates (domestic debt), as well as
            the amount of unfunded contingent liabilities
            Management of foreign assets taking into account currency
             composition of debt
External Debt Management cont:

   Area of concern
       Coordination between institutions involved is lacking


   Policy recommendation
       Need to have a good coordination between the fiscal and
        monetary policy advisers and the debt management
        function
Thank you