Public Disclosure Authorized CAMBODIA Public Disclosure Authorized ECONOMIC WATCH Public Disclosure Authorized APRIL 2009 Public Disclosure Authorized ECONOMIC INSTITUTE of CAMBODIA This report is made possible by generous support from the World Bank. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the World Bank. President : Sok Hach Team Leader : Neou Seiha English Editors : Sam Campbell & Tyler Marcus Authors : Neou Seiha Chhun Dalin TABLE OF CONTENTS 1. List of Abbreviations and Acronyms iii 2. List of Tables and Figures v 3. Foreword vi 4. Executive Summary vii 5. Part I: Recent Economic Developments and Outlook 1 1. Cambodian Economic Growth 3 1.1. Agriculture 5 1.2. Industry 7 1.3. Service 11 2. Trade, Investment and Productivity 13 2.1. External Trade and Capital Movements 13 2.2. Private Investment and Stocks of Capital 16 2.3. Productivity 17 3. Price and Monetary Development 19 3.1. Inflation 19 3.2. Exchange rate 20 3.3. Money supply 22 3.4. Interest rate 24 4. Fiscal Development and External Debt 27 4.1. Budget Revenue 27 4.2. Budget Expenditure 29 4.3. Budget Financing and External Debt 30 5. Labor Force, Incomes, and Poverty 33 5.1. Employment 33 5.2. Incomes 34 5.3. Poverty 35 EIC - Cambodia Economic Watch – April 2009 i Part II: Structural Reforms: Current Implementation and Prospects 37 6. Banking and Financial Sector Reform 39 6.1. Banking and Non Bank Finance 39 6.2. Microfinance 43 7. Public Financial Management Reform 45 7.1. Key Outputs of the Preparation PFMRP Platform 2 45 7.2. Consolidated Action Plan for Platform 2 46 8. Trade Reform 49 8.1. Economic Integration 49 8.2. Trade Facilitation 51 9. Public Administration Reform 53 9.1. Central Administration Reform 53 9.2. Sub-National Administration Reform 54 10. Legal and Judicial Reform 57 10.1. Progress of Legal Reform 57 10.2. Judicial and Alternative Dispute Resolution (ADR) 58 11. Land and Natural Resource Reform 61 11.1. Land Reform 61 11.2. Forestry Reform 62 11.3. Fisheries Reform 63 Bibliographic References 65 Appendix 1: Key Economic Indicators 67 Appendix 2: Key Structure Reforms 79 ii EIC - Cambodia Economic Watch – April 2009 LIST OF ABBREVIATIONS AND ACRONYMS ADR Alternative Dispute Resolution AEC ASEAN Economic Community ASEAN Association of South East Asian Nation CAMINCO Cambodian National Insurance Company CAMEX Cambodia Stock Exchange Market CAP Consolidated Action Plan CAR Council for Administrative Reform CDC Council for the Development of Cambodia CDCF Cambodia Development Cooperation Forum CDRI Cambodia Development Resource Institute CFs Community Fisheries CIS Credit Information Sharing CLJR Council for Legal and Judicial Reform CMA Cambodia Microfinance Association COBRA Cambodian Offsite Bank Reporting for prompt corrective CoJ Council of Jurist CoM Council of Minister CR Cambodian Riel CSES Cambodia Socio Economic Survey D&D Decentralization and Deconcentration DANIDA Danish International Aid Agency EIC Economic Institute of Cambodia ELC Economic Land Concession EU European Union FiA Fishery Administration FMIS Financial Management Information System FSDS Financial Sector Development Strategy GDCC Government-Donor Coordination Committee GDCE General Department of Custom and Excise GDP Gross Domestic Product HRD Human Resource Development HRM Human Resource Management HRMIS Human Resource Management Information System ILO International Labour Organization JMIs Joint Government-Donors Monitoring Indicators MAFF Ministry of Agriculture, Forestry and Fisheries MBPI Merit Based Pay Initiative EIC - Cambodia Economic Watch – April 2009 iii MDTF Multi-Donor Trust Fund MEF Ministry of Economy and Finance MFI Microfinance Institutions MIS Management Information System MLMUPC Ministry of Land Management, Urban Planning, MoC Ministry of Commerce MoH Ministry of Health MoJ Ministry of Justice MPWT Ministry of Public Works and Transport MRD Ministry of Rural Development NA National Assembly NBC National Bank of Cambodia NCDD National Committee for D&D NCSNDD National Committee for Sub-National Democratic Development NFP National Forest Program NIS National Institute of Statistics NLDA National Authority for Land Dispute Resolution NSDP National Strategic Development Plan OWOs One-Window Offices PFMRP Public Financial Management Reform Program PFMRSC Public Financial Management Reform Steering Committee PMG Priority Mission Group PPD Public Procurement Department RGC Royal Government of Cambodia RSM Royal School of Magistracy SCM Supreme Council of Magistracy TDSP Trade Development Support Program TFCP Trade Facilitation and Competitiveness Project TWG F&E Technical Group on Forestry and Environment TWG-LJR Technical Group on Legal and Judicial Reform TWG-PAR Technical Group on Public Administration Reform UNIDO United Nations Industrial Development Organization VND Vietnam Dong WB World Bank WTO World Trade Organization iv EIC - Cambodia Economic Watch – April 2009 LIST OF TABLES Table 1.1: Cambodia's Real Economic Growth by Sector (%, 2000 prices) Table 1.2: Trends in the Agriculture Sector (% increase, 2000 prices) Table 1.3: Trends of Industry Sectors (% increase, 2000 prices) Table 1.4: Trends of Service Sectors (% increase, 2000 prices) Table 2.1: Cambodia's Balance of Payments (Million of US Dollar) Table 2.2: Approved Private Investment Projects Table 2.3: Productivity of Workers (% Increase, US$2000 price) Table 3.3: Cambodia’s Monetary Survey (Billions of Riel) Table 3.4: Cambodia’s Interest Rate (% per annum, end of period) Table 4.1: Cambodia’s Central Government Revenue (Billion of riel) Table 4.2: Cambodia’s Central Government Expenditure (Billions of Riel) Table 4.3: Cambodia’s Financing Budget (Billion of Riel) Table 5.1: Cambodia's Population and Labor Force (000's) Table 5.2: Daily Average Earnings of Vulnerable Workers (riel) Table 6.1: Loan for Property as of December 31, 2008, in CR millions Table 6.2: Interest Rates as of December 2008 Table 6.3: Overall Achievements in Banking Sector, Insurance Industry, and Financial Market (As of March 2009) Table 7.2: PFM Objectives and Key Indicators Table 8.1: Status of Remaining WTO-related Laws Table 10.1: Progress on the Remaining Fundamental Draft Laws Table 10.2: JMI for 2nd CDCF Meeting, TWG-LJR Table 11. 1, 2&3: JMIs to be Implemented and Monitored between the 2nd and 3rd meeting of the CDCF LIST OF FIGURES Figure 1.1: 2008 Economic Growth by Quarter (%, 2000 prices) Figure 1.2: US garment import for the first two months of 2009 (Percent change) Figure 3.1: Cambodia’s Consumer Price Index (December 2002=100) Figure 3.2: Cambodian riel against US$, Thai baht, and Vietnamese dong (December 2002=100) EIC - Cambodia Economic Watch – April 2009 v FOREWORD With the aim of providing a broad-based economic analysis to policy makers and stakeholders, the Economic Institute of Cambodia (EIC) has great pleasure in presenting the latest issue of “Cambodia Economic Watch”. This EIC series of publications not only serves as a policy-oriented research paper, but also as a reference for all readers who wish to gain a snapshot of the Cambodian economy or monitor its development. As in previous issues, this edition presents the latest economic performance and prospects based on the analysis of current data from many reliable sources. It takes an in-depth look at the trends of the main economic indicators and the progress of reform policies. It also highlights the urgent measures that need to be taken to address any of the problems encountered. In brief, the global crisis seems to show its severe impact on Cambodia since the last quarter of 2008. Thus, Cambodia’s economic growth rate slowed significantly in 2008 due to slower growth of garment industry, construction sector and tourism. These trends are likely to carry over 2009, and thus a lower economic growth rate is also expected accordantly. We would like to thank the World Bank for its generous support. Special thanks to Chea Huot and his team for their invaluable comments, to Dane Hor and EIC research assistants for their excellent assistance, to all EIC staff for their enthusiasm, and to other institutions and individuals too numerous to list. Sok Hach, Director Economic Institute of Cambodia vi EIC - Cambodia Economic Watch – April 2009 EXECUTIVE SUMMARY Economic Growth The global crisis started its severe impact on Cambodia during the last quarter of 2008, especially on the garment industry, tourism and construction. Cambodia economic growth was only about 5.2 percent in 2008, which was down from a growth rate of 10.2 percent in 2007. The 2008 growth gained support from the moderate increase in foreign tourists, garment and banking business during the first half of 2008. The growth rate of the construction and real estate significantly slowed down in 2008. Other sectors kept their moderate growth with a slightly lower pace. Cambodia’s economy still largely depends on foreign trade, tourists and investments. In the US, EU, and Korea the global economic crisis seems to continue its effect in 2009, thus Cambodia’s economic growth rate is also expected to slow down to about 2 percent in 2009. The garment industry would decline because the global demand, especially the US and EU, is declining and the safeguarding measures imposed by the US and EU against Chinese export have expired. The construction and real estate activities would also decline significantly and have a negative growth rate as many residential and mega construction activities are being frozen and the bubble of residential prices is popping. The decline of these activities is likely to affect some commercial banks that invested and provided loans or credit in these sectors. The number of foreign tourist arrivals in Cambodia is also slim for 2009 as global revenue is declining. The agricultural sector appears to be the main source of growth for 2009, but unpredictable and slim as it is still dependent on weather conditions and agro- investment remains moderate.