KINGDOM OF CAMBODIA

Nation Religion King

POVERTY REDUCTION STRATEGY

THE SECOND DRAFT PROGRESS REPORT

(updated as of 30 December 2003)

Phnom Penh

Supreme National Economic Council

Ministry of Economy and Finance

Council for Social Development

Note: Soft copy can be downloaded from the website of the Ministry of Economy and

Finance: www.mef.gov.kh

All comments can be sent to the following email addresses:

hangnaron@yahoo.com, or hangnaron@yahoo.com

Table of Contents

1. Introduction 5

2. Macroeconomic Framework 8

2.1. Performance in 2003 10

2.2. Overall Growth Outlook for 2004-2008 12

2.3. Ensuring Broad-Based Growth 14

2.3. Revised Medium Term Fiscal Framework 14

2.4. Ensuring Medium Term Fiscal Sustainability 16

2.5. External Sector Outlook 16

2.6. Alternative Macroeconomic Scenario 17

3. Brief Overview of NPRS Implementation in 2003 18

3.1. Overview of NPRS Implementation 18

3.1.1. NPRS-MDG Nexus 19

3.1.2. Land Reform 21

3.1.3. National Population Policy 21

3.1.4. Food Security and Nutrition 21

3.1.5. Disaster Management 22

3.1.6. Child Rights and the Protection of Children 22

3.1.7. Labor Rights 23

3.1.8. Disability and Rehabilitation 23

3.1.9. Support for Indigenous and Ethnic Community 24

3.1.10. Social Protection 24

3.1.11. Landmine Clearance 25

3.1.12. Sustainable Management and Environment 25

3.2. Systematic Analysis of GAP Implementation 26

3.2.1. Public Finance 26

3.2.1.1. Customs Reform Program 26

3.2.1.2. Tax Reform Program 27

3.2.1.3. Integrated Fiduciary Assessment and Public Expenditure Review 29

3.2.2. Forestry Reform 31

3.2.3. Legal and Judicial Reform 33

3.2.4. Administrative Reform 34

3.2.5. Anti-Corruption 35

3.2.6. Decentralization and Deconcentration 36

3.2.7. Gender Developments 37

3.3. Structural Reforms 43

3.3.1. Private Sector Development 43

3.3.2. Financial Sector Reform 45

3.3.2.1. Banking Reform 45

3.3.2.2. Implementation of Financial Sector Blueprint 46

3.3.2.3. Rural Credit 47

4. Sectoral Priorities 48

4.1. Budget Execution in 2002-2003: Achievements and Challenges 48

4.2. Medium Term Wage Bill Framework 53

4.3. Medium Term Budget Framework 56

4.4. Rural and Agricultural Development 58

4.5. Education 63

4.5.1. Primary Education: Poverty Impact and Main Strategies 63

4.5.2. Secondary Education: Poverty Impact and Main Strategies 64

4.5.3. Education Sector Wide Financing Framework 65

4.6. Health 68

4.6.1. Health Financing Issues 69

4.6.2. Health Sector Outputs and Outcome 72

4.6.3. Planned Expenditure in Health Sector: 2003-2007 74

4.7. Road Infrastructure 75

4.7.1. Road Maintenance Program and Fund 77

4.7.2. Upgrading and Maximizing Regional Links 79

4.7.3. Medium Term Road Rehabilitation Program 80

5. Alignment 81

6. Monitoring 85

6.1. Information System 85

6.2. Monitoring Indicators 85

6.3. Roles and Responsibilities 86

6.3.1. National Institute of Statistics: the Data Administrator 86

6.3.2. Council for Social Development: the User 87

6.3.3. Poverty Monitoring and Analysis Technical Unit 87

6.3.4. Ministry of Economy and Finance 88

6.3.5. Line Ministries and Other Government Agencies 88

6.3.6. The Role of the Joint Technical Working Groups and the Civil Society 88

7. Risks 89

List of Acronyms

BFAD Budget and Financial Affairs Department

CA Civil Administration

CAR Council for Administrative Reform,

CDC Council for the Development of Cambodia

CED Customs and Excise Department

CLJR Council for Legal and Judicial Reform

CMDG Cambodian Millennium Development Goal

COA Chart of Accounts

DS Defense and Security

EFA Education for All

ESP Education Strategic Plan

GAP Governance Action Plan

GSCSD General Secretariat of the Council for Social Development

FDI Foreign Direct Investment

FTB Foreign Trade Bank of Cambodia

HSSP Health Sector Support Project

IFAPER Integrated Fiduciary Assessment and Public Expenditure Review

MAFF Ministry of Agriculture, Forestry and Fisheries

MDG Millennium Development Goal

MEF Ministry of Economy and Finance

MOEYS Ministry of Education, Youth and Sports

MOH Ministry of Health

MOP Ministry of Planning

MOWRAM Ministry of Water Resources and Meteorology

MRD Ministry of Rural Development

MTEF Medium Term Expenditure Framework

MTWF Medium Term Wage Fund

MWVA Ministry of Women's and Veteran's Affairs

NAA National Audit Authority

NBC National Bank of Cambodia

NPRS National Poverty Reduction Strategy

PAP Priority Action Program

PIP Public Investment Program

RGC Royal Government of Cambodia

SNEC Supreme National Economic Council

TOD Taxation Department

TVET Technical and Vocational Training

WTO World Trade Organization

1. Introduction

The year 2003, built upon the progress made in 1999-2002, is witness to Cambodia’s decisive move towards a lasting peace, sustainable development and tangible progress, as manifest in the robust economic growth and continuous efforts to strengthen democratic institutions and alleviate poverty. This allowed Cambodia to pass the sixth PRGF review in February 2003. The Royal Government of Cambodia (RGC) envisions that "before the first decade of this century ends, Cambodia would like to fully reclaim its destiny, be a real partner in regional and global affairs and be well on her way to becoming a truly free nation, free from want and poverty above all."

The Royal Government has achieved some success in 2003 in maintaining macroeconomic stability in the face of external and internal disruptions. Improved security and the prevailed peace in all corners of the country have been crucial to maintaining social and economic stability and ensuring poverty reduction. Moreover, Cambodia has acceded to the World Trade Organization (WTO) in September 2003. This highlights the fact that Cambodia has been on the correct track in modernizing the economy and liberalizing trade and investment in order to integrate the country into the regional and world economy and market.

2003 was the election year. Consequently all political parties had taken serious strides to compete among themselves through various social and economic transfers, in particular to the rural areas. New roads, bridges, schools and hospitals were built in the rural areas, in part financed by politicians, where the majority of the poor live, though it is difficult to gauge the impact of such actions on poverty reduction. The 2003 national elections were conducted in a peaceful environment never seen before, in part due to better law enforcement capability of the Ministry of Interior and the Royal Cambodian Armed Forces (RCAF). Nevertheless, the economic and social fabrics of the country has been adversely disturbed by the following events, such as the Anti-Thai riots, the outbreak of SARS and the political uncertainty in the lead up and in the aftermath of the general elections. Revenue shortfalls resulted from these adverse developments have had serious repercussions on budget execution in general and the implementation of NPRS programs and projects in particular. Moreover, due to the delay in forming a new government, progress on some actionable measures has been limited. Thus, it appears that less private economic opportunities were created in 2003. Most of the investments during the year were in the form of public investment.

Notwithstanding numerous difficulties, the Council for Social Development (CSD) has taken serious strides to disseminate the NPRS among the various social strata of Cambodia. The National Poverty Reduction Strategy (NPRS) was launched in March 2003, with the broad attendance from all stakeholders including government officials, members of Parliament, as well as representatives of donors, NGOs, academia/researchers, private sector, trade unions, and the media. The NPRS was made available both in Khmer and English and free copies were distributed to a large number of policy makers, civil servants, provincial and local authorities, the commune councils, especially the poor themselves. Workshops at national, provincial and district levels were conducted to get the key message across to all stakeholders. A series of workshop were conducted in three provinces, where the level of poverty is high, notably in Banteay Meanchey, Siem Reap, and Prey Veng.

Follow-up actions were conducted to discuss priority activities presented in the NPRS and link them more closely to the public investment programs (PIP). Some 20 strategic policy interventions that could have serious impact on poverty reduction were identified, such as land reforms, the introduction of high-yielded rice seeds, crop diversification, improved animals husbandry, irrigation, road improvement, handicraft production, better access to credit, human resource development, health services, population programs and birth spacing services, nutrition, access to basic and informal education, especially girl education, sanitation, personal safety, rice security, and gender issues. These strategic actions were widely disseminated among district and commune level officials in 13 provinces.

The first Annual NPRS Report is deliberately selective, covering only key priority areas, such as macroeconomic framework, cross-sector issues, i.e. governance and structural reforms, sectoral priorities, namely rural and agricultural development, education, health, road transport and gender. At the same time, the RGC has responded to stakeholders' earlier concerns by focusing on: (i) costing and prioritizing programs in the annual budget and linking to the MTEF; (ii) strengthening centralized budget management; (iii) improving governance and combating corruption; (iv) building national capacity for poverty monitoring as well as evaluation of key programs and policies; and (v) elaborating pro-poor rural and infrastructure development strategies.

The first Annual NPRS Report has made the first attempt to reconcile the MDG and NPRS targets for 2005. But further efforts will be required both at the IFI/UN headquarters and national levels to merge the two processes into one as part of on-going alignment in order to improve monitoring and policy implementation. At the outset, it is so far difficult to set the structure of the report to meet both NPRS and MDG reporting requirements. Future Annual NPRS Report should also provide a review of strengths, weakness, opportunities and threats (SWOT) in a comprehensive manner.

The medium-term objective of the NPRS is to reduce poverty through durable private sector led growth. The latter is to be achieved through (i) sustained macroeconomic stability, (ii) increased competitiveness from lower production costs, and (iii) improved financial intermediation. Parallel efforts are required to directly address poverty through reforms in agriculture and redirecting investment towards rural areas. Strengthening government capacity and improving governance are two cross cutting issues as progress in these areas will influence success of each of these policy fronts.

In 2003, the RGC has adopted a comprehensive reform agenda, called the "Rectangular Strategy" - prioritized actions of NPRS - with good governance at its backbone. This strategy is based on four pillars: (i) creating high economic growth and enhancing Cambodia's competitiveness; (ii) creating employment; (iii) improving social equity; and (iv) increasing the effectiveness of the public sector.

The enabling environment for successful implementation of this strategy includes: (i) peace, political stability and social order; (ii) partnership with development partners; (iii) macroeconomic and financial stability; and (iv) Cambodia's integration into the regional and world economy.

The rectangular strategy identifies the following areas as the priority sectors: (i) strengthening agriculture as a viable sector; (ii) promoting private sector development and employment; (iii) building physical infrastructure; and (iv) stimulating human resource development. Progress in these areas is covered below.

TIMETABLE FOR NPRS PROGRESS REPORT
WEEK DATE	Activity/ event
October 20	1. contributions from MoP, MOEYS, MoH, MRD, MAFF and MoRPW
	2. MOP responsible for revision of matrix
	3. preparation of first draft by MEF
October 22	NPRS Advisory group identified
October 27	Zero draft circulated to advisory group and contributing line agencies
October 27	Work on indicators & indicators; other work revising
November 3
November 4	First meeting of core group on zero draft: hosted by MEF and GSCSD
	Redrafting of zero draft
November 14	Circulation of first draft
December 4	Larger workshop at Cambodiana to discuss first draft, hosted by SNEC & GSCSD, including NPRS advisory group
	Revision of first draft by SNEC, with MOP and line agency inputs as needed
December 24	Circulation of second draft to NPRS advisory group and line agencies
January 20	Second meeting with NPRS Advisory group
	Comments from line agencies due
January 28	Finalization of report
January 30	Submit to Council of Ministers
	Approval by the Council of Ministers
February 16	Dissemination of report begins, and transmission to the World Bank and the IMF

The preparation process of this report is participatory. The RGC has initiated the evaluation and assessment of the NPRS implementation with strong involvement of key actors, such as the SNEC, the Ministry of Economy and Finance (MEF), the General Secretariat of the Council for Social Development (GSCSD), the line ministries, the donor community, NGOs and civil society. The SNEC is responsible for the preparation of the drafts and pulling together the comments of all stakeholders. The GSCSD has played a key role in coordinating with all line ministries and updating the NPRS matrices. The consultation process was conducted with the participation of the core stakeholder groups, represented by various members of the 7 sectoral working groups as well as civil society and academic stakeholders.

In October 2003, the government invited a key group of domestic and external stakeholders to become part of a NPRS Advisory Group[1]. This group met several times during the preparation process of this report. The role of this group is to provide feedbacks and enhance the transparency of the NPRS process. Following is the timetable for the preparation of the NPRS Progress Report, which highlights the participatory process and the involvement of key stakeholders in the consultation and evaluation.

The zero draft was circulated on 27 October 2003 to advisory group and contributing line agencies for comments. The first meeting of core group consisting of NGOs, Donor Working Groups, and key ministries was conducted on November 4 to discuss the zero draft and revised it to be first draft, which was discussed at the larger workshop participated by all stakeholders on 4 December. Based on the discussion at this workshop a second draft was prepared and circulated to all stakeholders on 22 December. On January 19, 2004 the NPRS advisory group meeting was conducted to finalize the APRI and all comments and suggestions from all stakeholders was incorporated in the final draft on January 25. On January 30, the final APR was submitted to COM for approval and dispatched to WB Washington on February 14, 2004 for consideration.

2. Macroeconomic Framework

Cambodia’s economic performance was quite good in 2002 despite the severe drought that significantly reduced agricultural output. Real GDP growth was 5½ percent, reflecting robust construction activities, and a strong rebound in exports and tourism receipts in the last quarter of 2002. The relatively healthy growth in 2002 reflected continuing robust performance in the tourism sector, with tourist arrivals growing by 30 percent,[2] combined with a significant increase in garments exports to the US. Inflation increased slightly to 3.7 percent, partly due to a review of the weights used in the estimation of the Consumer Price Index. The current account deficit (excluding official transfers) increased from -9.6 percent of GDP in 2001 to -10.2 percent of GDP in 2002. Money velocity continued to decline, facilitating further financial deepening. The exchange rate remained stable during 2002 at around CR 3,900-CR 3,940 to the dollar and inflation was below 4 percent. The overall fiscal deficit (excluding grants) increased from 5.5 percent of GDP in 2001 to 6.7 percent of GDP in 2002, as spending accelerated toward the end of the fiscal year. The international reserves were kept at the equivalent of 3 months of imports.

Having realistic forecast of economic growth and budget projection is crucial for poverty reduction planning and program development. Overtly optimistic macroeconomic forecast has resulted in inaccurate budget projection, thus undermining predictable fund disbursements and poverty reduction efforts. As set out in the NPRS, the RGC aimed to achieve a sustainable real rate of inclusive broad based economic growth of 6 to 7 percent per year. This was achieved between 1999-2003. However, external shocks and internal political developments in Cambodia in 2003 clearly showed that steady growth of 6 to 7 percent may not be attainable under the current internal and external circumstances, leading the downwards revision of key macroeconomic parameters. Moreover, the Cambodian economy has become more and more vulnerable to external shocks, such as the outbreak of SARS or the removal of garment quota in 2005. The revised macroeconomic indicators are summarized in Table 2.1.

This subsection on macroeconomic framework reviews the revised projections for growth, debt sustainability, monetary, fiscal and external policy, drawing attention to key challenges and policy response.

Table 2.1: Cambodia: Key Macroeconomic Indicators, 2001-2008

(In percent of GDP, unless otherwise indicated)

	2001	2002	2003	2004	2005	2006	2007	2008
			Projections
Real sector
Real GDP (percent change)	5.7	5.5	4.8	5.8	3.6	5.3	6.2	6.3
Real Per Capita GDP (in riels; percent change)	3.1	2.8	2.8	3.7	0.6	2.2	3.1	3.2
CPI Inflation (end-period; percent change)	0.7	3.7	3.9	2.9	3	3	3	3
Revenue	10.7