While handing down its 2014 Cambodia growth forecast of 7.2 per cent yesterday, the World Bank expressed concerns over the government’s $42 million public sector wage increase, saying the money could defer necessary funds from education, health, roads and infrastructure.

At yesterday’s release of the bank’s biannual East Asia Pacific Economic Update in Phnom Penh, the senior country economist for the World Bank in Cambodia, Enrique Aldaz-Carroll, cautioned that more was needed to strengthen tax collection in order to fund civil servants' pay increases without other areas of social spending losing out.

“The government identifies education, health and connectivity as major factors in increasing human capital,” Aldaz-Carroll said presenting the Cambodia Economic Update. “These are important pillars in supporting growth. [But] if you spend the revenue acquired from growth on wages that means you cannot spend it on education, health or maintaining roads.”

In 2014, the government’s wage bill is estimated to be 45 per cent of total spending, with all civil servants said to receive pay increases ranging between 40,000 riel ($10) and 80,000 riel ($20) per month.

Spending on public sector wages now accounts for 5.5 per cent of Cambodia’s total GDP. The wage increase alone covers all the budgeted increase of domestic revenue at about 0.5 per cent of GDP. Similar to the budget last year, non-wage spending remains at about 6.5 per cent of GDP, leaving no room for increases on other social spending relative to GDP the bank report states.

The issue of wages in the public sector came to a head during the July national election last year, when the ruling Cambodian People’s Party announced its blanket salary increase for civil servants of 20 per cent.

Opposition party Cambodian National Rescue Party officials criticised the pay increase as being too little too late, not able to cover inflation and not enough to appease civil servants in the long-run.

Phay Siphan, spokesman for the Council of Ministers, said yesterday that any wage increase within the public sector would not affect funding in other areas such as education and health.

Siphan said that improving the tax collection system should be the primary focus for funding public workers pay increases.

“Firstly, increase transparency. We won’t increase taxes, but instead make sure tax payments to the government are transparent and accountable,” he said.

Siphan said public sector wages are calculated on current inflation figures and the cost of living, naming the price of rice and basic foods and key measures of salary.

The CNRP, who have long been critical of the government’s tax collection record, could not be reached for comment yesterday.

The World Banks’ Aldaz-Carroll praised the government’s crackdown on corruption in customs in November last year which lead to an increase in import tax revenue, however he said more is needed to facilitate such a wage increase without compromising other areas of spending.

“Going forward, it will depend very much on how successful the government is in terms of mobilising revenue and how successful they are in using that revenue.”

Revenue from taxes has seen gradual improvements over the past five years, from $436 million in 2009 to $881 million in 2013, according to figures from the General Department of Tax.

But a blanket approach to wage increases does not mean improved public services.

The World Bank report calls for “robust” internal controls to rationalise public sector remuneration.

International experiences of “across the board” salary increases with limited improvements to human resource development “do not appear to have improved public service delivery”, said the World Bank report.

The average basic pay for a low category government employee in Cambodia is less than in Laos, Myanmar and Thailand with a wage of about $86 per month.

The World Bank yesterday downgraded Cambodia’s projected economic growth to 7.2 from 7.4 per cent last year. The report cited political uncertainty and potential labour unrest, China’s economic slowdown and an increase in agricultural commodity prices as reasons for the downgraded figure.

The bank’s chief economist for the East Asia and Pacific Region, Bert Hofman, commended Cambodia for curtailing economic depreciation amid labor and political uncertainty.

“I am quite impressed with what is happening there despite the political uncertainties,” Hofman said.

“I find also Cambodia is one of the countries that will benefit from some of the structural shifts that are going on and the labor intensive production that seems to be moving out of China. Cambodia seems to be one of the beneficiaries there.”