Kingdom of Cambodia

Nation Religion King

Address by

Sr. Minister KEAT CHHON,
MP Minister of Economy and Finance
First Vice-Chairman of the Council for the Development of Cambodia

at the Conference on

Cambodia Investment, Trade and Infrastructure

Phnom Penh, 30 November 2005

Excellencies, Ladies and Gentlemen!

1. For this year 2005, Cambodia's economic prospects have been viewed to be considerably picking up due to garment exports being higher than originally expected and in part due to the imposition of restrictions on Chinese textile imports in the US and EU markets. Though increased competition after expiry of the MFA is putting downward pressure on garment export prices and higher oil prices are dampening other sectors of the economy, Cambodia's projected growth for 2005 will be around 6.7 percent, mainly due to strong growth in tourism, telecommunications, and the construction sectors. This follows a better than expected performance in 2004, which posted a growth rate of 7.7 percent, the highest since 2001. Growth is expected to continue at about 6 percent in 2006.

2. Tourism and construction, the source of much of Cambodia's non-garment growth, has continued to expand. Visitor arrivals rose by 41 percent in 2004 over 2003, though higher oil prices will likely dampen expansion in 2005. The construction sector contributed 10.4 percent to economic growth in 2004. Growth in the construction sector is projected to remain strong in 2005 at about 11 percent.

3. Overall agricultural growth is expected to be below average in 2005, owing in part to weakness in the fisheries sub-sector. FDI is expected to recover this year after a disappointing performance in 2004. During the first half of 2005, 66 new investment and expansion projects were approved by the Council for Development of Cambodia (CDC); this was the highest number ever approved since 1999 for a 6-month period.

4. Total garment exports during the first half of 2005 reached US$ 820 million, rising by 1.4 percent in nominal terms over the same period in 2004, suggesting significantly slower growth this year compared to prior years. The garment industry, the single largest foreign exchange earner, grew by 25 percent in 2004, with 65 percent shipped to the US, 29 percent to the EU, and 6 percent to other markets.

5. The moderate expansion of Cambodia's garment exports coupled with soaring oil prices in 2004-2005 has led to deterioration in the country's terms-of-trade as the cost of oil imports has risen considerably. Average oil and diesel prices in Cambodia grew by 19.3 percent and 26.8 percent, respectively, in June 2005 as compared to June 2004. Consumers were buffered from the full world market price hike by the Government's intervention, which lowered the base of the petroleum product taxation. By applying taxes and duties to an administrative price (set equal to market prices in January 2004), for example, the Government reduced the effective tax on gasoline by 36 percent to provide relief for consumers. However, Cambodia, a low-income oil importing country, suffered an estimated terms-of-trade loss of 0.8 percent of GDP in 2004. As a result the current account deficit (excluding official transfers) is expected to worsen slightly from 10 percent in 2004 to 11 percent in 2005. The current account deficit is likely to remain at around 10.5 percent of GDP next year as average world oil prices are projected to be slightly higher than this year. External developments have been on track with the continued expansion of international trade, a fairly stable exchange rate, and rising gross foreign reserve (reaching US$ 809 million by end of 2004).

6. Macroeconomic performance has been favorable with prudent monetary and fiscal policies. The 2005 inflation rate is expected to remain at the 2004 level of 5 to 6 percent, while inflation in 2006 will likely to decline to the 3 to 4 percent range as a result of continued prudent macroeconomic policy. The overall fiscal situation looks to remain broadly stable in 2005. The revenue-to-GDP ratio is projected to reach 11.3 percent in 2005. Further gains are expected to raise revenues to 12 percent of GDP in 2006. At the same time the expenditure-to-GDP ratio is projected to increase from 16.3 percent in 2004 to 16.8 percent of GDP in 2005 and to 17.5 percent in 2006.

7. The macroeconomic outlook in the near future appears to be better than earlier anticipated, due partly to brighter prospect for garment exports following the recently signed bilateral US-China trade agreement and oil/gas exploration which ensures economic growth to remain at around 6 to 7 percent during 2006-2008. However, although the uncertainty in the aftermath of the expiry of garment quotas settles and temporary safeguards measures will be enforced until December 2008, the garment sector will face heightened competition from low cost producer countries. Macroeconomic policy will be conducted with a view to maintaining inflation at low level over the medium term. More broad- based growth, including growth in the agriculture sector, is projected to contribute to poverty reduction over the medium term. The government gears its macroeconomic policy toward achieving pro-poor growth, by lowering inflation, which is not only important for growth, but also for safeguarding the incomes of the rural poor.

8. In the medium term, challenges still remain and the economic performance may sluggish due to unfavorable factors such as: (i) growth base for agriculture remains week, after high growth in 2003 and negative growth in 2004, the sector will slightly rebound in 2005; (ii) uncertainties in manufacturing sector, especially the garment sector, increasing price of petroleum and unfavorable international political climate (threats of terrorist acts and wars in a number of regions), as well as still high business transaction costs, could create negative impact and concerns for industry sector in Cambodia in 2005-2006, although tourism sector is expected to increase (for the first 9 months, it was recorded an increase, or 37,42% of visitors, as compared to the same period of 2004) and (iii) the possibility of steady decrease in the flow of official development aid to Cambodia which is linked to the economic, financial and political problems of donor countries and higher requirements to compete for aid.

9. Thus the government’s program and policy measures are now designed and implemented to mitigate all these negative impacts on or shocks to the Cambodian economy that are supportive to further economic stability, with stable prices and low inflation, and concurrent economic growth with stable exchange rate, higher output and exports.

10. In that context, to ensure an enabling business environment, key laws and regulations  have been developed, adopted or drafted including: the Law on Commercial Companies, the Draft law on Government Securities, the Draft Law on Issuance and Trading of Public Securities, the Draft Law on Bankruptcy, the Draft Law on Secured Transactions the Draft Law on Commercial Arbitration, the Draft Sub Decree on State Land Management, the Draft Sub Decree on economic land concession. Subsequently to the adoption of the Amended Law on Investment, its implementing Government Decree has been promulgated and enforced since 27 September 2005. From now on, The Council for the Development of Cambodia, as a One Stop Service, will process all applications for investment projects which capital investment exceeds USD 2 million, by securing all permits and authorization on behalf of the applicant and issue a final registration certificate within 28 days.

11. To encourage the Private participation in the provision of infrastructures, a Law on Concession has been drafted, adopted by the Cabinet and forwarded to the Parliament. Public-private partnerships, including the use of Build-Operate and Transfer (BOT) arrangement or output-based contracting of private providers of public services, is seen as part of a strategy to increase the efficiency of service delivery. To ensure the best outcomes for Cambodia’s citizens and to support service delivery goals, the Government will introduce the principles of transparency, competition, accountability and rational design in all transactions with the private sector.

12. In this globalized economy, characterized by fierce competition between producers, Cambodia realizes that Trade facilitation should be at the forefront of the reform program. The Trade Facilitation and Competitiveness Project initiated by the Royal Government of Cambodia in 2005, incorporates a number of components which collectively define a broad range of reforms to be implemented. These reforms, which impact and require the support of a number of government agencies, will affect numerous stakeholders within the private sector and government.

13. The results of the survey undertook by Emerging Markets Consulting and published in August 2005 show that government agencies have made strong improvements in the eyes of the private sector in terms of, among others, costs, time and information dissemination:

While the survey results show some impressive improvements in private sector perception, it is clear that there are still significant aspects of the trade facilitation process in need of reform. Ultimately, the Single Window and Single Administrative Document for Import-Export activities is our target if we want our share of the regional growth.

14. To promote the competitiveness of Cambodian products, the Government has accelerated its SEZ policy. By the end of year, the Government Decree on the establishment and management of SEZ will be submitted to the Cabinet. Thereafter, SEZ in Sihanoukville, in Baveth at the Vietnamese border, in Poipet and Neang Kok at the Thai border and others planned SEZ will be able to be developed and operated, thus creating new investments and job opportunities.

15. Acknowledging the specific nature of the SMEs and to promote their activities and role in jobs and growth’s creations, the SME Development Framework had been adopted by the Cabinet in September 2005. The SME Development Framework has been developed to improve and coordinate the Government’s efforts in promoting SME activity in a market economy. In doing so, it incorporates and elaborates the Government’s key SME policies including those set out in the July 2004 ‘Rectangular Strategy’.

16. Diversification of the sources of growth is expected as the private sector begins to respond to key structural reforms aimed at facilitating improvements in competitiveness and the business environment.

17. Departing from its still too narrow base of economic opportunity and jobs, some new types of investments have been recently observed including cement plant, hydropower plant, industrial plantations, mining, oil and gas exploration.

18. After the above-mentioned perspectives of hope, I would like to reiterate that our past achievements were possible thank to our strong belief and commitment in a productive tripartite partnership: Government, Private Sector and bi- multilateral and international cooperation community. The participatory approach that the Royal Government has adopted, has proved to be a winning approach.

I am looking forward to cooperating furthermore with our development partners.

Thank you for your attention!