T HE Royal Government's 1997 budget projects a $218 million deficit and while foreign

financing will cover an anticipated $230 million shortfall, at least one observer

is concerned the government may still run short of money.

"1997 will be a difficult year because revenues are very optimistic," a

senior Finance Ministry official said, adding the 1997 budget expects a 27.6 percent

increase in tax revenues on 1996 based on a radical reform of tax collecting procedures.

Although the impact will not be felt until 1998, the entire tax system is slated

for reform which includes the imposition of taxes on salary, turnover and luxury

goods.

A value added tax (VAT) is scheduled for introduction in 1998.

However, the Finance Ministry official argued that any tax system would fail if the

government did not put a stop to the widespread practice of "extra-legal"

exemptions.

Another problem was the reliance on duties to raise revenue with taxes from customs

makes up 65 percent of overall tax revenues.

"This is not a good structure," the official said. "Cambodia must

reduce its tariffs when it enters Asean, which means that the entire tax system must

be restructured.

He said Cambodia could simply not afford to offer investors further tax concessions.

The 1997 budget projects domestic revenues to reach 896.4 billion riel ($332 million),

up 12.4 percent from the 1996 budget. "This is an improvement, but still low,"

the official said.

Tax revenues represent 7.3 percent of GDP, up slightly from 7.1 percent in 1996 -

a very low figure when compared to others in the region. Tax revenues range from

15-21 percent of GDP for Asean countries, including Vietnam.

Money from non-tax revenues are projected to total 211 billion riel in 1997, down

from a projected 220 billion riel.

Revenues from forestry concessions are projected to total 25.8 billion riel in 1997.

The official called this "optimistic", considering the dramatic slide in

these revenues since 1994. They totaled 86 billion riel ($35 million) in 1994, 52.9

billion riel ($21 million) in 1995, and an estimated 23.2 billion riel ($8.5 million)

in 1996.

The 1997 budget projects about $450 million in total expenditures - representing

a 6.1 percent increase on 1996 - and allows for a 1.9 percent increase in current

expenditure including salaries.

The budget projects $150 million for defense and security spending, down from about

$180 million in 1996 in the first reduction since 1993, but still representing a

third of all government spending.

The Finance Ministry official explained defense and security spending was not reduced

further in order to cover the expense of integrating Khmer Rouge defectors.

Spending on health and education are both to be increased by 6 percent while agriculture

is slated to receive a boost of 17 percent.

Foreign financing of the Cambodian national budget is up slightly to approximately

$230 million or about 51 percent. Foreign financing provided 43 percent of total

expenditures in 1993, 45 percent in 1995, and 42.5 percent in 1996.

However, the nature of foreign financing is changing - from 1994- 1995, donor funds

covered the operating costs of the government, local small-scale investment financing,

large-scale financing, and interest and the amortization of debt.

But foreign financing in 1997 will cover only direct financing of small-scale and

large-scale projects, prompting a need for the government to be more fiscally disciplined.