Logo of Phnom Penh Post newspaper Phnom Penh Post - The blueprint - but will it ever happen?

The blueprint - but will it ever happen?

The blueprint - but will it ever happen?

This is the full text of the Royal Government's Economic and Financial Policy

plan for 1997 produced in consultation with the IMF. The in-house document outlines

key steps upon which the IMF will give additional budgetary support to the government.

Deadlines are highlighted.

Memorandum of Economic and Financial Policies for


Introduction and Performance Under the 1996 Program

1. The Government's (RGC) medium-term economic and structural reform program

is supported by the IMF with a three-year financial arrangement under the Enhanced

Structural Adjustment Facility (ESAF). The objectives and strategies for 1997-99

are described in the accompanying Policy Framework Paper (PFP). This memorandum details

the RGC's specific policy intentions for 1997 as a basis for its request for continued

financial support under the third annual ESAF arrangement.

2. Macroeconomic performance under the 1996 program continued to be broadly

favorable. Economic growth was strong at 6.5 percent. Inflation was contained at

9 percent (final quarter basis) despite a flood-related surge in rice prices in October.

International reserves strengthened to over two months of imports. The exchange rate

remained broadly stable. The balance of payments continued to benefit from large

official financing flows and a further increase in foreign direct investment. Fiscal

discipline was maintained despite persistent difficulties in collecting revenue and

continued strong pressures from spending for defense and security. Domestic bank

financing was avoided, and the overall fiscal deficit of 6.5 percent of GDP was fully

financed through official aid flows. The composition of expenditure remained skewed,

however, with inadequate spending for social services, while capital expenditures

were essentially aid-financed.

3. Progress was made in some areas of structural reform in 1996, though

the pace of implementation with respect to structural benchmarks was slower than

expected. Work on the monitoring system for foreign direct investment and associated

tax exemptions (a structural performance criterion for end-1995) was initiated only

in early 1996 and coverage remains incomplete. The Commercial Bank Law was not submitted

to the National Assembly until August 1996 (a structural benchmark for December 1995)

and has yet to be approved. The privatization of the two state-owned banks fell well

behind schedule, and progress towards privitization of the trading company KAMPEXIM

was thwarted by difficulties in implementing competitive procedures.

4. Acute difficulties emerged in early 1996 with the management of forestry

resources followed by protracted delays in implementing the policy measures spelled

out in a letter to the Managing Director of the Fund and subsequently detailed in

the RGC's Memorandum of Economic and Financial Policies of July 1996. As a result

of these delays, the midterm review under the second annual ESAF arrangement could

not be concluded. Over the past few months, the RGC has taken a series of corrective

measures in the forestry sector and reaffirms its political will and firm determination

to sustained implementation of transparent resource management policies in this and

all other sectors.

Policies for 1997

5. The macroeconomic objectives for 1997 are broadly consistent with the original

medium-term objectives under the ESAF and include output growth of 6.5 percent; annual

inflation of 5 percent (final quarter basis); and an increase in official reserves

to over 2.5 months of import cover. Strict fiscal discipline will continue to provide

the anchor for maintaining financial stability. The budget will thus remain at the

core of the RGC's economic program. The main policy targets are to obtain a small

current budgetary surplus and avoid domestic bank financing. The overall fiscal deficit

of 6.25 percent of GDP is expected to be entirely externally financed through budgetary

support (1.25 percent of GDP) and project assistance (5.25 percent of GDP)

A. Fiscal Policy and Reform

I. Revenue

6. The RGC is keenly aware of the urgent need for a significant and sustained

improvement in revenue mobilization. As recent fiscal developments demonstrate, the

reform efforts over the past three years have improved the revenue structure, but

revenue performance continues to be weak. Cambodia's revenue ratio-at 9 percent of

GDP-remains one of the lowest in the world. Particularly disturbing are shortfalls

in customs revenue in 1996 where the positive impact of preshipment inspections has

been more than offset by a proliferation of duty exemptions. On domestic taxation,

efforts to strengthen the administrative capacity of the Tax Department have run

up against strong resistance to comply with the tax laws. The budgetary coverage

of nontax revenues remains incomplete, with some line ministries and other government

entities continuing to collect revenues without control and supervision by the Ministry

of Economy and Finance.

7. The 1997 budget targets an increase in revenue from 9 percent of GDP

in 1996 to 9.75 percent. In light of the persistent difficulties in collecting revenue,

the RGC will take determined actions to achieve this target and set the stage for

further improvements in revenue performance over the medium term. A comprehensive

tax reform package was adopted with the promulgation in February 1997 of the Law

on Taxation. The RGC will begin implementing the provisions of the key Law by April

1 and will issue all necessary Instructions and Sub-Decrees by end-June. The key

features of the new tax code include:

  • Broadening the coverage of the excise tax;
  • Levying of turnover tax on the (previously exempt) first sale after importation;
  • Introducing a tax on dividends and interest;
  • Reducing significantly the current exemption threshold of the tax on salaries;
  • Introducing the withholding of taxes;
  • Strengthening the provisions on tax rules and procedures, and
  • Introducing a value-added tax, initially focused on the 600 largest taxpayers

    by January 1, 1998.

8. Customs receipts continue to provide the bulk of tax revenues. To address

the persistent shortfalls in trade tax collections by the Customs Department in recent

years, the RGC will take measures to strengthen compliance with the existing trade

taxes and to help curb the widespread abuses of import tax exemptions. In particular,

all remaining exemptions from preshipment import inspections (including those granted

to the 38 garment factories) will be removed by end-May.

9. The recent proliferation of tax and duty exemptions stems in large part

from the failure to clarify rights and responsibilities associated with the liberal

tax incentives granted under the Law on Investment of August 1994. The Council of

Ministers has therefore decided to approve by end-May the Law's long-delayed implementing

regulations, as a prior action under the program. These regulations will sharply

reduce the scope for exemptions in connection with foreign direct investment and

access to the tax incentives offered under the Law will be strictly limited. Profits

including distributions of profit, and domestic transactions of enterprises established

under the Investment Law will be taxable under the provisions set out in the Law

on Taxation.

10. The RGC has also put in place a system for monitoring the implementation

of foreign direct investment projects, based on quarterly surveys of all companies

that have been granted investment approvals, including questions on company output

and exports to permit assessment of eligibility for tax exemptions granted under

the Investment Law. On-site monitoring of project implementation began in May 1996

by the investment monitoring unit of the Council for the Development of Cambodia

(CDC). To strengthen the system and provide for fuller coverage, the RGC will by

end-May (i) add qualified staff to the monitoring unit though a redeployment of existing

civil servants; (ii) apply sanctions against non-reporting enterprises as specified

in the implementing regulations, including revocation of all privileges granted under

the Law on Investment; and (iii) continue a comprehensive follow-up on the accuracy

of data provided in the company surveys, linked to sanctions for falsification. The

RGC will also strengthen its ability to enforce compliance with the tax laws through

the systematic exchange of taxpayer information between the Customs Department, the

Tax Department, the NBC, the CDC and SGS, the firm conducting the pre-shipment import

inspections. Steps will be taken in 1997 to streamline this exchange of taxpayer

information, including the adoption of common taxpayer identification numbers.

11. In order to recover accumulated tax arrears and strengthen compliance,

the Tax Department has conducted on-site tax audits of the 136 largest enterprises

for which there was evidence of underpayment of taxes. These audits, when combined

with desk audits, identified Riels 23.6 billion in unpaid tax. Taking full advantage

of the broad powers provided in the Law on Taxation, the RGC will collect not less

than Riels 5 billion of these outstanding arrears by end-June and Riels 10 billion

by end-December. The next phase of on-site tax audits-targeted at an additional 225

enterprises-has also been initiated. By end-June the audits of the 57 enterprises

that have already received notification will be completed and a total of 150 such

audits will be completed by end-December.

12. To safeguard against a further erosion of the tax base, the RGC will

grant no new tax or duty exemptions not specifically provided for by relevant law

and regulations. This applies across all taxes, including notable import duties on

automobiles and taxation of the rubber sector. In addition, the RGC will closely

monitor the application of financial laws to ensure that no RGC institution grants

tax or duty exemptions that are not clearly specified in existing legislation. Performance

in this regard will be an important focus of the discussions with the Fund staff

for the midterm review of the program.

13. To bring extrabudgetary revenues under budgetary control, the Prime

Ministers will issue by end-April an order giving the Minister of Economy and Finance

(MoEF) control over all negotiations involving the sale, transfer, or use of the

national patrimony, including all resources that have come under the control of the

RGC, and requiring the signature of the Minister of Economy and Finance on all contracts

involving the sale, transfer, of use of the national patrimony. Moreover. the Order

will bring the management of all financial aspects of existing contracts under the

control of the MoEF to ensure the timely transfer of financial resources to the national

budget. In this connection, by end-April the RGC will ensure that the MoEF has been

provided with copies of all existing contracts, including all contracts operating

under the Investment Law and all contracts regarding natural resource exploitation.

The provisions of these contracts will be reviewed, with the assistance of internationally

reputable law firms to ascertain their validity and the performance of the contracting


14. With the enactment of the Order vesting responsibility for public resource

management with the Minister of Economy and Finance, the commercial activities of

the line ministries will effectively end. The RGC has taken steps to monitor closely

compliance with the terms of lease agreements previously entered into by line ministries

to ensure that enterprises are current on their obligations (and to recover arrears

of Riels 16 billion in 1996), these measures will be reinforced by the financial

controllers that were recently assigned to the line ministries. Moreover, the RGC

has transferred all remaining foreign exchange bank accounts of line ministries to

the National Bank, and will ensure the direct payment of all current nontax proceeds

to the budget.

2. Expenditure

15. Although the RGC was successful in containing expenditure during 1996,

the pattern of current spending continued to be unbalanced, reflecting strong pressures

from expenditures for defense and security. Priority social spending was compressed

below the levels required for the proper functioning of line ministries concerned.

The 1997 budget targets a significant shift from defense and security outlays to

social expenditures while holding the expenditure-to-GDP ratio broadly unchanged

at 16 percent. Operational outlays by the civil administration, which include the

bulk of social spending, are targeted to increase by 0.5 percent of GDP. The budget

also includes higher provisions for locally financed investment.

16. The RGC has targeted a decline in spending on security and defense

to Riels 390.8 billion. Strong efforts will made to contain the military wage bill

in light of the need for political re-integration of former Khmer Rouge members.

Operating outlays for security and defense will be strictly contained through strengthened

control procedures. In this connection, purchases made under Sub-decree 81 - which

provides for confidentiality in some military procurement-will be subject to ex-post

audits. For 1997 the overall civil service wage bill will not exceed Riels 132.2

billion. and no general wage increase will be given. Specific measures to contain

expenditures include strengthening the mechanisms of financial control at the MoEF

and the requirement that all purchases of goods and services comply with competitive

bidding procedures, to be monitored by the recently established Public Procurement

Department (DPP). Particular attention will be paid to purchases of goods and services

by the Ministries of Defense and Interior, which are also subject to these procurement

procedures. Furthermore, the capacity to monitor and control budgetary expenditures

will be enhanced through full implementation of the new direct payment system.

17. The public accounting sub-decree will be fully enforced in order to

avoid a repetition of the experience of 1995 and 1996, when large volumes of unpaid

payment orders were carried over into the next fiscal year. The financial controllers

recently assigned to the line ministries will assist their ministries in developing

monthly expenditure programs in line with annual budget allocations.

18. A first Public Investment Program (PIP) was prepared and its core was

presented to the international community at the CG meeting in Tokyo in July 1996.

This three-year rolling program was a good first step toward setting project priorities

and determining the appropriate financial contributions of the RGC. To assist its

efforts to transform the PIP into a comprehensive medium-term expenditure framework,

the RGC has requested Asian Development Bank and UNDP assistance to update and prioritize

the current portfolio of development projects of the 1997-99 PIP prior to the CG

meeting. In order to ensure timely disbursements of external project assistance,

the RGC will make available the requisite local currency counterpart of externally-financed

capital spending on a timely basis.

B. Civil Service and Military Reform

19. The RGC recognizes the urgent need to re-establish control over recruitment

into the civil service after the reform process was set back in 1996 by large-scale

new hiring for political reasons. With additions of 18,062 political recruits to

the civil service, the RGC has now completed the integration process and no further

politically-based recruitment will be made. As of end-1996, the number of individuals

with the right to claim civil service status reached 163,206, well above the program

benchmark of 130,000 for end-1996. However, the payroll at end-1996 was kept below

150,000 reflecting strict controls by the MoEF.

20. The budget for 1997 provides for a maximum payroll of 153,372 civil

servants and the RGC is committed to reduce rapidly the number of individuals with

civil service status to the budget allocation. The RGC will not increase the size

of the payroll beyond the budget ceiling and will make every effort to reduce the

number of civil servants below the budgeted number. To regain control of the situation,

the RGC has already prepared a list of 7,680 names to be removed from the civil rolls

before end-April. Furthermore, in order to ascertain the precise number and status

of civil servants, the RGC will complete an updating of the database of the entire

civil service by end-August, beginning with the Ministries of Education and Interior

(which will be completed by end-May). The RGC is determined to use the results of

the database updating-as they become available-to eliminate ghost workers and personnel

with irregular status. The RGC intends to remove not less than an additional 7,300

individuals from the payroll by end-1997.

21. The RGC will maintain strict controls on new hiring inter alia, through

consistent application of the January 24, 1997 circular governing recruitment. New

recruitment in 1997 will be strictly limited to 5,000 including graduating students

and individuals recruited for technical reasons, which includes the hiring of new

teachers. In assigning new recruits to their jobs, the RGC intends to pay particular

attention to the needs of line ministries, including deployment of additional teachers

in rural areas. The RGC also intends to begin reforming and downsizing the security

personnel under the Ministry of Interior.

22. The RGC attaches high priority to reducing the number of defense personnel.

To this end, a program for military demobilization-the Cambodian Veterans' Assistance

Program (CVAP)-was developed with the assistance of the World Bank. In 1996, the

number of enlisted personnel was initially reduced from 130,000 to approximately

123,000. In 1997, the RGC will endeavor to offset integrations of former Khmer Rouge

with departures of current enlisted personnel to hold the defense wage bill to the

budgeted Riels 184 billion. At the same time, the RGC will press ahead with its military

registration program and proceed with plans to implement the CVAP on a pilot basis.

C. Public Resource Management

23. The RGC recognizes the urgent need to establish an open and transparent

system to manage Cambodia's pubic resources. Policies and procedures to establish

financial control and accountability are outlined in the previous section. The RGC

will engage internationally reputable firms with the requisite expertise to help

alleviate deficiencies in administrative and institutional capacities in other areas-notably

valuation, implementation of competitive bidding procedures, and contract negotiations

in the oil and gas, mineral and gem extraction, and rubber sectors.

I. Forestry

24. The forestry sector is of particular importance for the medium term

sustainability of the RGC's reform program. Cambodia's forests have been severely

degraded because of unsustainable and largely uncontrolled logging while little benefit

has accrued to the budget. After protracted delays in 1996, the RGC has taken decisive

actions to regain control of logging activities and reconfirms its determination

to pursue an environmentally sustainable and fully transparent exploitation of Cambodia's

forest resources.

25. The export ban on logs and sawn timber was re-imposed by Prime Ministerial

Declaration on December 26, 1996, which specified enforcement measures including

the use of military force. On January 8, the RGC issued a directive to provincial

forestry offices to stop measuring and certifying illegal logs to prevent legitimization

of illegal logging activities. The RGC will vigorously enforce its policy to destroy

all equipment and material used in illegal logging activities and to seize illegal

logs. The seized logs will be sold through competitive bidding. In order to minimize

the incentives for further illegal logging this process should be completed by end-April.

On February 19, the RGC issued a clarification of the export ban, specifying what

types of semi-processed products are eligible for export, and by end-April the RGC

will specify the limited number of border checkpoints where-subject to strict controls-forest

products may be legally exported.

26. The Prime Ministers sent a letter on December 26, 1996, to their counterparts

in Thailand, Vietnam, and Lao PDR seeking enhanced cooperation to help enforce the

ban. In this context, the RGC has requested the Thai authorities to cooperate with

its efforts to obtain revenue with respect to logs that were exported illegally in

late 1996 immediately prior to the reimposition of the log export ban and currently

held in secure zones in Thai territory across the border.

27. The RGC has taken steps to put in place an effective monitoring and

control system for the exploitation of forestry resources. The RGC will secure the

services of an independent international firm with particular expertise in the forestry

sector - financed by the World Bank - to assist its efforts to (i) develop and install

a monitoring system for log exports; (ii) determine and monitor logging activities

in Cambodia with respect to logs designated both for export and for domestic use;

(iii) develop an effective system for the collection and analysis of information

relevant to the monitoring of logging activities. Eight companies have already expressed

interest. The RGC expects to sign a contract with a suitable firm by end-April and

the firm should be in place by end-May.

28. The MoEF has recently been provided with copies of existing concession

contracts and is currently reviewing their key financial aspects, which will be communicated

to the Council of Ministers by end-April. A preliminary assessment has revealed the

need for a thorough review of the legal validity of and performance by concessionaires

under existing contracts. In this connection, the RGC will secure the services of

an international firm with the requisite legal and financial expertise-financed by

the World Bank-to assist with the review. Preliminary results should be available

by end-June. Pending completion of the review and decisions regarding follow-up action,

the RGC will not award any new concession contracts, and will limit strictly the

granting of cutting licenses under existing contracts. In order to assist the RGC

with the early implementation of its medium-term program for sustainable exploitation

of forestry resources-as set out in the World Bank/UNDP/FAO study that was adopted

by the Council of Ministers in late 1996-the RGC has also obtained financing from

the World Bank for technical assistance in concession management and for a study

of its forestry policy.

29. To ensure the timely transfer to the budget of all proceeds from forestry,

including concessions, the MoEF will be given full responsibility for the financial

management of forestry contracts, in accordance with the Order on the management

of state assets. In addition, the RGC, notably the Ministry of Agriculture, Forestry,

and Fisheries, will provide the Fund staff with monthly reports on forestry activities

and financial flows arising from forest exploitation, including the activities of

concessionaires. Progress in implementing forestry policy will be a particular focus

of the discussion on the mid-term review of the program.

2. Public enterprises

30. Most of the previously state-owned enterprises have already been transferred

to the private sector. Plans have been developed to sell or liquidate 38 of the 52

remaining mostly small-scale state-owned enterprises over the next three years. The

RGC intends to apply strictly procedures set out in the privatization Sub-Decree

(No.38 ANK April 19, 1995) in these divestitures in particular as regards competitive

bidding. Initial priority will be given to completing by end-1997 the liquidation

of the assets of the trading company KAMPEXIM. Privatizations will not proceed unless

fully transparent procedures can be strictly applied. The enterprises remaining in

the state sector will be subject to the new legal framework promulgated in June 1996,

to ensure their autonomy and end the commercial activities of the line ministries.

D. Monetary and Exchange Rate Policies, and Financial

Sector Reform

31. The policy options of the National Bank are constrained by the high degree

of dollarization of the economy and the lack of effective instruments of monetary

control. In light of the recent slowdown in the growth of riel in circulation, the

monetary program for 1997 targets broads money growth at 20 percent, consistent with

projected nominal GDP growth and a further decline in velocity. Ceilings have been

placed on net domestic assets of the banking system, with subceilings on net credit

to RGC and to nonfinancial public enterprises. Net official reserves of the National

Bank are targeted to increase by $15.8 million to $180 million by end-1997.

32. The National Bank will continue to pursue a market-based exchange rate

policy and will continue to base the official rate on the market rate with a view

to full unification of the rates. The National Bank will limit the spread between

the average official and market rates to no more than 1.0 percent. The National Bank

will use the opportunity offered by the increased demand for domestic currency to

bolster its international reserve position, but would not intervene in order to change

the trend in the exchange rate should strong downward pressures emerge.

33. The RGC recognizes the urgency of strengthening banking supervision

capacity to deal effectively with the large number of recently established commercial

banks. Progress has been made in improving off-site inspections by the National Bank

staff, which revealed a number of irregularities. In June 1996, the National Bank

employed an international audit firm to conduct an on-site inspection. One bank was

inspected and, based on the audit report, that bank closed in August 1996. In 1997,

the National Bank will initiate a thorough review of the activities of the commercial

banks, utilizing in particular the 1996 reports by the commercial banks' own external

auditors. On-site inspections of four commercial banks by internationally reputable

audit firms will be initiated by end-June, to be followed by an additional four inspections

during the remainder of 1997. The National Bank will take swift action, including

closure, against banks found to operate in violation of Cambodian law. The National

Bank will grant new banking licenses only to already established and reputable banks.

The RGC will also make every effort to obtain speedy approval of the pending Commercial

Bank Law to strengthen the legal basis for regulation and supervision.

34. The National Bank has completed the shift to a new plan of accounts

and has formalized its independence through the passage of the National Bank Act

by the National Assembly. In accordance with the provisions of that Act, the National

Bank will commence its first annual audit of its financial records in April, to be

conducted by the Special Committee appointed in accordance with the Act. Following

completion of the external audit by end-June, the National Bank will publish its

first financial report.

35. In order to eliminate a potential conflict of interest, the National

Bank will divest its interests in the three remaining joint venture banks by end-July.

To facilitate the privatization of the Foreign Trade Bank (FTB), studies on the Bank's

financial situation were conducted by an international audit firm financed by the

IFC. A full audit of the FTB is expected to be completed by end-June, and a plan

for privatization will be established within three months after completion of the

audit with a view to completing the privatization of the bank in 1998. In the lead

up to privatization, the FTB will only consider granting new loans on the basis of

strictly commercial criteria.

36. The RGC recognizes that a number of important steps need to be taken

to set the stage for the development of an efficient, transparent, and properly-monitored

securities market. First, the RGC recognizes that the commercial banking law and

the foreign exchange law must be in place prior to consideration of a securities

law. Second, in light of the difficulties experienced by the National Bank in effectively

supervising the existing commercial banks, priority will be given to development

of banking supervision capacity prior to active steps to develop a securities market.

Finally, to ensure appropriate supervision of the securities market as it develops,

the RGC will ensure that it has set up a capable regulatory authority, including

an adequate number of well-trained personnel. Accordingly, the RGC will not proceed

to establish a stock exchange until the full set of necessary complementary laws

and regulations is in place.

37. An effective rural credit system is important for rural development

and poverty alleviation. Plans are under consideration to increase the availability

of credit and other financial services in rural areas, supported by technical assistance

from bilateral and multilateral donors. Policies in this area are coordinated by

the Credit Committee for Rural Development, with the objective to ensure appropriate

credit provision at the village and commune level and to foster the development of

financial institutions in rural areas as they evolve out of existing credit programs.

The National Bank will have regulatory responsibility for these institutions, provide

them with capital, or refinance rural credits, in order to ensure that their operations-including

particularly the volume of lending-remain consistent with the need to safeguard financial


E. External Sector Policies

38. Cambodia has obtained General System of Preferences (GSP) status from

26 countries on selected manufactured goods, particularly garments. It will seize

this opportunity to promote the development of nontraditional exports. The RGC will

also take all necessary steps to ensure that this status is not jeopardized by foreign-produced

products bearing counterfeit marks of origin from Cambodia. In consultation with

the European Commission, the RGC will establish a mechanism through which certificates

of origin will be subject to pre-inspection and punitive measures can be taken in

cases of fraudulent applications.

39. The RGC submitted to the National Assembly in June 1996 a new Foreign

Exchange Law that will formalize and codify the liberal de facto foreign exchange

system. Following adoption of the law, the RGC intends to accept the obligations

of Article VIII Sections 2, 3 and 4 of the IMF's Articles of Agreement as a clear

signal of Cambodia's reintegration into the international financial community.

40. Compared to neighboring countries, Cambodia has a relatively low average

import tariff rate. However, while the five primary tariff bands (0, 7, 15, 35, and

50 percent) cover over 98 percent of the tariff lines, there are a total of 15 normal

tariff bands. To enhance transparency and to simplify Customs operations, and in

the context of joining ASEAN, the RGC will complete by end-June a preliminary assessment

of the scope for rationalizing the tariff structure, with a view to formalizing by

end-September, a comprehensive proposal to collapse the current tariff structures

to a few bands.

41. Given Cambodia's very limited medium-term debt-servicing capacity,

non-concessional borrowing will not be appropriate for some time to come. The RGC

did not contract or guarantee any external debt on non-concessional terms during

1996 and will not do so during 1997. Cambodia has concluded agreements with most

of its Paris Club creditors, and is continuing discussions with the remaining creditor,

while seeking to obtain agreements with all other bilateral creditors that did not

participate in the Paris Club. The Minister of Economy and Finance will continue

to have the sole authority over the contracting or guaranteeing of all public external

borrowing-closely monitored by the recently established external debt monitoring

and management system under the MoEF.

Benchmarks, Prior Actions, and Monitoring

42. The quantitative benchmarks for end-June, end-September, end-December

1997, and end-March 1998 include (i) a ceiling on the cumulative increase from end-December

1996 in the net domestic assets of the banking system, (ii) a ceiling on net bank

credit to finance the budget, (iii) a ceiling on gross bank credit to public enterprises,

(iv) a zero ceiling on new external non-concessional loans contracted or guaranteed

by the public sector; (v) a ceiling on the outstanding short-term debt of the public

sector excluding normal import-related financing; and (vi) a floor on net official

international reserves. All quantitative benchmarks for end-September 1997 will be

performance criteria. Adjusters will be applied to selected benchmarks... The RGC

will not accumulate new external arrears during the program period. Actions to be

taken prior to the Executive Board discussion of this program are:

  • Removal of all exemptions from preshipment import inspections (para.8);
  • Approval of the implementing regulations for the Law on Investment (para.9);
  • Issuance of a Prime Ministerial Order requiring explicit approval of and financial

    control by the MoEF of all contracts involving state assets (para. 13);

  • Implementation of procedures as specified in paragraphs 25 and 27, including

    seizure of illegally felled logs, and transfer of all proceeds from forestry to the

    budget; and

  • Engagement of an international firm to assist in the establishment of a monitoring

    and control system for logging activities (para. 27).

43. The implementation of policies will be subject to a mid-term review

with the Fund, to be completed by end-December 1997. The completion of this review,

together with the observance of end-September 1997 and continuous performance criteria,

will be a condition for the availability of the second disbursement under the third

annual ESAF arrangement. Structural performance criteria for the mid-term review

are listed in the table.

What the Govt's supposed to do

Prior actions

1. Removal of all exemptions from preshipment import exemptions (para. 8)

End May 1997

2. Approval of the implementing regulations for the Law on Investment (para.


End May 1997

3. Issuance of a Prime Ministerial Order requiring explicit approval of and

financial control by the Ministry of Economy and Finance of all contracts involving

state assets (para.27)

End April 1997

4. Implementation of procedures as specified in paragraphs 25 and 27, including

seizure of illegally felled logs, and transfer of all proceeds from forestry to the


End April 1997

5. Engagement of an international firm to assist in the establishment of a

monitoring and control system for logging activities (para. 27)

End May 1997


Structural Performance Criteria

1. Completion of database to ascertain the precise number and status of civil


End Sept 1997

2. Completion of on-site tax audits of 75 additional enterprises

End Sept 1997

3. Completion of on-site inspections of at least four commerical banks by

a reputable international audit firm

End Sept 1997 Continous

4. No ad hoc tax emptions to be granted at any time during the program period


Structural Benchmarks

1. Establishment of an effective monitoring and control system for logging


Sept 1997

2. Establishment of procedures to monitor continued compliance with the sub-decree/order

requiring explicit approval of and control by the MoEF of all contracts involving

state assets

June 1997

3. Approval of the Commerical Bank Law

July 1997

4. Approval of the Foreign Exchange Law

July 1997

5. Divestiture of the National Bank of Cambodia's interests in remaining joint

venture banks

July 1997


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