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IMF man maps out strategy for Cambodia

IMF man maps out strategy for Cambodia

THE International Monetary Fund's priorities for Cambodia during the rest of the

year include an expansion of the 10 per cent value-added tax to 2,000

businesses, as well as seeing some progress in the programs to restructure the

civil service and demobilize the military, says the IMF's resident

representative, Mario De Zamaroczy.

Another long awaited project targeted

for completion by the year's end is the creation of a Cambodia "poverty

reduction strategy", he said.

De Zamaroczy, speaking to the Post

following a September review by the IMF mission of Cambodia's three-year, $81

million loan program, said macro-economic and monetary policy indicators such as

inflation and the exchange rate are stable and not of any immediate concern in

Cambodia.

De Zamaroczy said inflation was projected this year to be very

low, at about 1.5 percent annually, and the exchange rate has been stable at

3800 to 3900 riel per US dollar for 18 months.

He said current flooding

in the provinces and high oil prices could lead to higher inflation by the end

of the year, but the effect has not yet been calculated. Food prices, which have

been declining recently, could rise depending on the impact of flooding on the

rice harvest. But he said even so, inflation will not be high.

"Monetary

policy is conservative and fiscal policy is conservative. But it's not yet clear

what the effects of the two external events will be," said De

Zamaroczy.

Inflation was reported at zero during the fourth quarter of

1999 and has been at zero in the past few months, but it is acknowledged that

the current index is slightly out of touch with reality because it is

over-weighted on food and under-weighted on petroleum products. A new index is

being created.

Following the September 15 review, the IMF released a

six-month disbursement of $10 million to Cambodia. The IMF mission will return

in October.

De Zamaroczy said one of the major components of the IMF

program for Cambodia now is fiscal reform and Government spending

reform.

Specifically, the IMF's target is for Government revenues to be

raised from 9 percent of gross domestic product in 1998 to 13 percent of gross

domestic product over three years.

There has been progress. Revenues grew

to 11.5 percent in 1999 with the introduction of the value-added tax, the 10

percent tax initially imposed on 1,000 of Cambodia's biggest

businesses.

In 1999 Cambodia's GDP was $3 billion. According to the

Government, economic growth was 5 percent that year.

The VAT is now being

expanded to 2,000 businesses. Hotels, major restaurants and other big businesses

such as airlines are supposed to pay it.

Regarding the banking system, De

Zamaroczy said three small banks have closed in the wake of a new banking law

requiring them to submit new applications for bank licenses.

The rest of

the banks are being reviewed by the National Bank of Cambodia to determine

whether they meet new capital requirements and other criteria for relicensing.

The National Bank is supposed to make decisions by the end of November on

whether banks should be closed or possibly merged.

De Zamaroczy said

another of the top IMF priorities - demobilization of the military - threatens

to be delayed by administrative problems in receiving donor funding to pay for a

pilot program in June and July that sought to reintegrate 1,500 soldiers into

civilian life.

"This is a major concern to us and to the donor community

because it was agreed with the Government based on the pilot that the full

demobilization exercise would start in November," he said.

The plan calls

for demobilization of 10,000 soldiers a year for three years to reduce the

Government's armed forces to less than 100,000.

"Because of delays in

disbursement of the pilot, authorities are hesitant," he said. "We are getting

very close to November."

Also on the spending side, the IMF wants to see

the Government reduce spending on civil service. A three-step program is under

way. The first step is a census by fingerprinting and photographing all of

Cambodia's 154,000 civil servants. After that the Government is supposed to

analyze the staff requirements of the various ministries, and finally, make

recommendations for cutting the workforce and adjusting

salaries.

Forestry management remains a big issue, but the IMF official

said widespread illegal logging has been halted. He said the IMF is looking

towards a new forestry law that would protect Cambodia's timber resources and

spell out a program for timber sales.

Finally, he said, the Government is

continuing to draft a poverty reduction strategy paper. He said the strategy is

to be submitted soon to the Council of Ministers and then to Washington to the

World Bank and IMF for review by the end of the year.

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