7. EXPENDITURE PROJECTIONS AND POLICIES 

During the second term of office, which spans through the period of 1999-2003, the Government has made significant improvement in strategic efficiency of the budget by aligning the budget with Cambodia's developmental objectives. This reflected in the reduction of expenditure on defense and security and the increase in allocations for priority sectors, notably education and health. Government-executed spending on health and education increased from 1.1% of GDP in 1998 to 3.1% in 2003. At the same time, expenditure on defense and security declined from 3.9% to 2.5% of GDP.  

A key implementation challenge for Cambodia is to align the annual budget and the Medium-Term Expenditure Framework (MTEF) to the policies and strategies identified in the National Poverty Reduction Strategy (NPRS). A critical aspect of linking NPRS to annual budget lies in fact that poverty reduction strategy constitutes a performance-based approach to development, while Cambodia's budget system is an incremental and line-item budgeting. To bridge the mismatch, the Ministry of Economy and Finance (MEF) has introduced some elements of the program-based approach, the PAP and the MTEF. To ensure effective implementation of the NPRS, the RGC will introduce gradually a more program- and performance-based budget system, including the performance-based civil service system. Before reviewing the Medium Term Budget Framework, it is useful to analyze the issues and challenges of the past public expenditure management. 

7.1. Budget Execution in 2002-2003: Achievements and Challenges 

The economic situation in 2002-2003 reflects the strong efforts and commitment of the Royal Government to continuing and accelerating the pace of reforms toward the realization of its socio-economic development agenda. Specifically, the Royal Government has continued with reforms in key sectors, particularly in the strengthening of income administration and public expenditure management reform, despite unfavorable conditions. The RGC has continued its efforts to increase revenue by strengthening tax and customs administration and improving the efficiency of public expenditure.  

Fiscal performance in 2002 has been good, with improved revenue mobilization and expenditure restraint. Total public expenditure increased from 16.3 percent of GDP in 1999 to 17.9 percent of GDP in 2002, reflecting an increase in both locally and externally financed expenditure. Current expenditure was contained to 10.1 percent of GDP.  

The financing of preparations for the 2003 general elections have driven up spending, though efforts were made to keep expenditures under control. Total expenditure increased by 0.2 percent of GDP to 18.1 percent of GDP, due to the growth of wage bills and operation and maintenance expenditure, while revenue declined by 0.4 percent of GDP. Moreover, this substantial increase in expenditure is also attributed to Thai compensation and election-related spending. As a result, arrears have built up, exerting pressure on cash management. Due to revenue shortfalls, cash shortages have become severe during the first half of 2003. To address this problem, the government is committed to implement measures identified in the IFAPER as stated above. 

Table 7.1: Budget Execution for Priority Sectors

(in billion riels)

* 2003 Budget Law; a/Approval-based Implementation in percentage of 2003 Budget Law allocations

Source: Ministry of Economy and Finance 

Table 6.1 shows the adverse impact on budget execution in 2003. As of October 2003, only 56 percent of the budget for health program at the national level and 44 percent of the budget for health program at the provincial level were disbursed. Only 25 percent of the wage bill for health workers was released, while the disbursement of running costs excluding drugs accounted for 33 percent of the annual budget. The most difficult area of budget execution was the implementation of PAP, where only 17 percent of the health PAP budget was released. Such level of cash disbursement makes it difficult to attain the objectives of health service delivery, especially in terms of reducing poverty.

As a result, the 2003 fiscal deficit (excluding grants) is projected to widen to 7.4 percent of GDP. Ensuring disbursement of social and economic spending as budgeted require maximum commitment to collect arrears (CR 53 billion) and containing capital spending. Thus, more actions are required to further improve tax collections and enforcement, combat smuggling, increase ownership of the reform programs by addressing in-depth the problems of tax and customs administration, improve non-tax revenue collection and increase transparency of signed contracts. 

At the sectoral level, the PAP 2002 for education were delayed until a regulatory framework for the proposed spending were agreed in October 2002 to allow for setting rates such as the per school and per student allocation and the guidelines for the use of school operating budgets. The government's decision for re-deployment of staff and performance-based incentive payments for school staff in difficult/ remote areas was also delayed due to the late approval by the Council of Ministers.

 Moreover, the MOEYS experienced difficulties in securing release of funds for PAP 2002 implementation, due to delays in redeployment of teachers, late procurement arrangements and difficulties in establishing decentralized management arrangements at provincial and district levels. In April 2003, the total of cash release from National and Provincial Treasuries amounted to 37.5 billions Riels or 50% of the PAP budget (59% for provincial BMCs and 34% for central Budget Management Centers (BMC). While the Ministry recognized that the overall release rates are somewhat disappointing, the overall volume of PAP spending has increased by 38% compared to PAP 2001.  

Table 7.2: PAP 2002-2003 for Health and Education

Source: Ministry of Economy and Finance 

Difficult implementation of the PAP in 2002 has had serious impact on PAP implementation in 2003. By October 2003, about 20% of the 2002 Education PAP was not released. To address this problem, the RGC established a joint MEF/ MOEYS/ MOH ‘Disbursement Task Force’, which decided as follows: (i) the MEF will release at least 50 billion riels for the education PAPs in the remaining 3 months of the year 2003; (ii) The cash releases should amount to 14 billion riels in October, and 18 billion riels in both November and December 2003; (iii) the Task Force should meet regularly and assess the government cash situation; (iv) to be pragmatic the MOEYS should plan activities for the three months remaining in 2003 based on a total PAP envelope of 50 billions riels as a minimum envelope. Should the cash situation improves, the MOF will release additional tranche to increase the total PAP disbursement to 81 billion riels as revised earlier.  

The health sector continues to be seriously under-financed through public funds especially in comparison against GDP, hampered by low performance in revenue collection and cash management within the national treasury.  At the end of 2002, disbursement of funds for non-drug expenditures was relatively low, affecting day-to-day operations at health facilities.  Serious problems with release of funds were encountered in 2002, for disbursement of both O&M and PAP programs.  Even though the major proportion of funds allocated for 2002 were disbursed at the end of the year, 37% of promised funds for central level institutions through Chapter 13 was withheld. 

The PAP for health has been implemented in 8 provinces and 15 central agencies to support rural activities, such as TB, malaria and HIV/AIDS. In 2003, cash disbursement in the health sector was much worse than in 2002. During the first half of 2003, 60 percent of the health spending was approved, but the cash release accounted for only 4 percent. This is to compare with the 60 percent approval in 2002 and a 13 percent cash release during the first half of 2002. The annualized estimate of health budget execution indicates that for 2003, the commitment of budget will be stand at around 55 percent, with only 50 percent of cash released 

during the year. This performance is much worse than in 2002 when 90 percent of the budget was committed, with the cash release amounting to 80 percent.  

The agriculture and rural development sector is under-funded in terms of the size of its national budget allocation relative to its economic importance and its potential for poverty reduction. Though the budget of the Ministry of Agriculture, Forestry and Fisheries (MAFF) and Ministry of Water Resources and Meteorology (MOWRAM) has increased from 2.22 percent in 1999 to 3.27 percent in 2002 as a share of the Government’s budget (from CR 24.35 billion to 51.51 billion in nominal terms), the size of the allocation is low in view of the relatively large share of the population in the sector. In per capita terms, current spending was merely US$ 0.93.

Wage as a percentage of recurrent expenditures in agriculture has declined from 29 percent in 1999 to 17 percent in 2002. PAP resources do not seem to be directed to high priority services as intended. PAP expenditures on forestry replanting accounted for 28 percent of total PAP spending in 2001 and 54 percent in 2002. Of these funds, MAFF reports that the majority were spent on contract workers and materials. PAP funds were also spent on animal health, community fisheries, and agricultural research (the Cambodian Agriculture Research and Development Institute (CARDI) and the Royal University of Agriculture (RUA), as well as the Institute of Rubber Research (IRR) and animal food for the state zoo.

Spending by program in MAFF appears to have little impact on poverty-reducing priorities. Forestry accounts for fully 21 percent of total recurrent spending and nearly half of total direct service spending. In comparison, agricultural extension accounts for less than one percent of total recurrent spending. Animal health and agronomy also account for relatively low shares. Thus, MAFF should take serious action to align its budget to the priorities at the sectoral level.

Furthermore, an analysis of the regional spending pattern shows that MEF has distributed to the provinces only receive about 39 percent of total MAFF and MOWRAM spending, while the central level consumes the remaining 61 percent. This is a serious problem.

                        Table 7.3: Current and Capital Expenditures, MPWT and MRD, 1997-2001 (CR Millions)

a/ Includes PAP.

Source: IFAPER

Total expenditures on roads have increased significantly in the past several years, and will continue to increase due to resources from the Fund for the Repair and Maintenance of Roads (FRMR). There has been dramatic growth in capital

expenditures for both MPWT (nominally up by a factor of three over the four years to 2001) and MRD (up by a factor of ten from 1997-2002, and much more if PAP allocations from the current budget are included). This reflects the high priority given to road rehabilitation in recent years (though not all MPWT and MRD expenditures are for roads). It is estimated that the total annual government expenditure on road rehabilitation and maintenance (excluding expenditures funded from the FRMR) was on the order of CR 106 million in 2001, equivalent to about US$ 28 million. Of this some US$21 million (76 percent) was for MPWT’s primary and secondary network and US$7 million (24 percent) for MRD’s tertiary network.  

Capital expenditures made up about 77 percent of the total (78 percent if MRD’s PAP expenditures, used almost entirely for road rehabilitation and repair, are included). Expenditures from the FRMR can potentially add another US$ 25 million equivalent per year. Table 3.16 summarizes these estimates of road expenditure in 2001 (assuming that expenditures from the road fund were at the same rate as for 2002).

 7.2. Medium-term Budget Framework 

The RGC is committed to continuing the strategy of increasing expenditure on priority social and economic sectors through increased growth and revenues. In this regard, there are a number of possible avenues for expenditure rationalization: (a) further reduction of expenditures in the low priority sectors; (b) generation of additional savings from institutional rationalization, including consolidation of administrative structures and possibly retrenchment; and (c) rationalization of operating expenditures by cutting administrative overhead while increasing maintenance spending.  Moreover, in order to have real impact on poverty reduction goals, it is necessary to improve the effectiveness of linking spending more closely to sectoral policies.  

Table 6.2 shows the expenditure framework for 2005-07. Total expenditure as a share of GDP is expected to rise slightly. Government's current expenditure is expected to increase from 10.6 percent of GDP in 2004 to 12.3 percent of GDP in 2008, reflecting stringent efforts to reduce the levels of domestic arrears and rescheduling of external debts to Russia and the US. This represents an increase of current expenditure by 1.7 percent of GDP, which partly can be used to finance the priority projects. As a percentage of GDP, total expenditures are expected to increase moderately from 18.4 percent in 2004 to 19 percent in 2008. The planned level of capital expenditures shows the commitment of the RGC to invest in physical infrastructure (see below).  

7.3. Current Expenditure and Its Strategic Priorities 

The strategic priorities for public expenditure under the 2005-07 MTEF remain unchanged and reflect the policy and programme proposals identified in the NPRS. These are: 

·    Increasing the share of GDP allocated to health, education, agriculture, rural development, water resources, gender-related issues and justice, which is is reflected in the poor quality of public services in these sectors; 

·    Maintaining relatively high levels of investment in public infrastructure, especially roads and bridges to link up all parts of Cambodia into a viable market and increasing allocations for the maintenance of infrastructure, particularly in the roads sector; and 

·    to develop policy and programme planning and management capacities by improving costing of programs and projects, recognising the very limited capacities in these areas. 

Over the past 5 years, the government has steadily pursued its policy of reallocating public finances away from defense and security in favor of priority sectors.  significant progress has been made in securing increasing and predictable resource for education.   

Figure 7.1: Government financing shares for priority sectors (2002-07) 

  All four priority sectors continue to benefit from rising recurrent budget allocation shares.  The education share is in accordance with the targets agreed between MOEYS, MoEF and donor partners, except for the year 2003 where it is slightly lower (18.3% instead of 18.5%).   

However, the Ministry has received assurance that shortfalls in 2003 will be covered from contingencies.  As a result of education financing higher priority in government budget, government spending per capita on education has almost tripled over the period 1997-2002 (from 7,856 Riels to 21,620 Riels in 2002).

Table 7.4: Medium Term Budget Framework for Priority Sectors

(As percent of current expenditures)