1. For the first time in recent history, since 1999 the people of Cambodia have enjoyed an environment of peace, political stability, law and order, democracy, respect for human rights and economic stability. A comprehensive reforms agenda is being implemented by the Royal Government in spite of many on-going challenges. The process of making a transition from a centrally planned economy to a market based system that began in the mid-1980s is continuing. Cambodia's accession to the WTO in October 2004 is a testimony of how far along the nation has progressed. The Royal Government's concerted efforts to rehabilitate and develop the nation's social, economic and physical infrastructure are continuing to put the nation back on a holistic path that will achieve the national goals of poverty reduction and sustainable development.
2. The successful implementation of the Royal Government's Triangular Strategy set the stage for a profound transformation of Cambodia from a region of uncertainty, war, internal strife, instability and backwardness into an epicenter of sustained peace, security and social order, respect for democracy, human rights and dignity, cooperation and shared development. The Rectangular Strategy of the Royal Government outlines the economic actions agenda for its current mandate, building on the achievements attained as a result of the implementation of the Triangular Strategy. Over a very short period, relative to the long histories of many developed countries, the Royal Government has demonstrated that Cambodia is fully capable of engagement on an equal footing with all partners, in regional and international affairs.
3. As in any human undertaking, the Royal Government’s efforts and achievements have not been exempt from insufficiency of actions and weaknesses. Indeed, the current national production structure is still far too small and concentrated in a few areas and must be expanded and diversified to ensure sustained economic growth. Although many well conceived and well designed mechanisms have been put in place by the Royal Government to improve the management of the budgetary system they have not become fully functional because of many cross-influences and constraints. Coordination among various ministerial and administrative partners remains weak.
4. To strengthen the rule of law, legislation in various areas are being drafted and enacted. The Royal Government is however concerned that while enactment of the Laws is an important first step, without developing capacities of concerned institutions to rigorously enforce and manage the Laws in a transparent and accountable manner the objective will continue to face many challenges. Reorganizing and restructuring the judicial apparatus remains a challenge for the Royal Government in the short to medium term mainly because of lack of qualified legal professionals. The shortage of Cambodian legal experts has meant that much of Cambodia’s existing legal framework has been heavily influenced by international experts. This has created a range of inconsistencies in the formulation of Laws which makes enforcement difficult. Law enforcement remains a challenge for a range of reasons but especially low salaries. It is difficult to enforce laws transparently and without fear or favor when the salaries of law enforcement officers are lower than a minimum subsistence level.
5. The Royal Government of Cambodia has continued to make significant progress in implementing a macroeconomic framework that is aimed at achieving equitable long-term economic growth and sustainable development. The focus of this framework has been on maintaining macroeconomic stability, strengthening the banking and financial institutions, implementing fiscal reform measures, ensuring a sound management of public property, and increasing public investment to develop the physical and social infrastructure and human resources of the nation. For the Royal Government, growth is the most powerful weapon in combating poverty and it remains committed to pursuing policies that encourage macroeconomic stability, shifting resources to more efficient sectors, and integrating within the global economy. The maintenance of political stability, peace and a greater sense of security among citizens have helped the Royal Government to consolidate, broaden and deepen the reforms that are underway and to maintain the momentum of sustainable social and economic development.
6. Over the past five years, significant progress has been made in implementing pro-poor development policies, achieving macroeconomic stability, implementing public finance management reforms, strengthening democracy, rule of law and good governance, mobilizing technical and financial resources to support planned development, and improving the delivery of public services to meet the needs and expectations of the population. All of these efforts have been focused on reducing poverty and achieving the development goals of Cambodia. At the same time, the Royal Government recognizes that Cambodia still has a long way to go, and has to overcome numerous obstacles to achieve sustainable progress and prosperity for the country and its people. The promotion of harmonized efforts by the Cambodian people to reduce poverty continues to be the most important objective of the Royal Government.
7. Since 1993, overall economic performance has been quite impressive. Between 1993 and 2004, real GDP (in 2000 prices) has grown at an average annual rate of 7.1 percent, and the preliminary estimate indicates that it grew by 7 percent in 2005. There has also been a sharp and noteworthy reduction in poverty levels. The results of the 2004 Cambodia Socio-Economic Survey show that in 56 percent of the rural villages accounting for 65 percent of the rural population and urban areas that were included in same survey in both 1993 and 2004 -- the number of persons living below poverty line declined from an estimated 39 percent to 28 percent or by over 28 percent. The 1993 survey did not cover areas that were inaccessible due to prevailing security conditions.
8. In a recent study on "Cambodia Poverty Assessment 2005", prepared by the World Bank, an attempt was made to develop an estimate of the poverty level in 1993 for the whole country by making backward projections based on data from the 1993 and subsequent surveys. Based on these backward extrapolations the study estimated the proportion of the population living below the poverty line in 1993 to be 47 percent. Based on this estimate of the poverty level in 1993, the study concluded that population living below the poverty line has declined from 47 percent in 1993 to 35 percent in 2004. It found that, "as average household consumption has risen, Cambodians now have more productive assets and consumer durables and live in better houses. The improvement in living standards has been experienced by the poorest quintile (that is, the poorest 20 percent of the population) as well as the richest quintile -- albeit to a much lesser degree. Similarly, poverty has fallen in the countryside as well as the towns, although the fall has been far greater, and the level of poverty is now far lower, in the towns".
9. The development vision of the Royal Government of Cambodia is to have a socially cohesive, educationally advanced and culturally vibrant Cambodia without poverty, illiteracy and disease. Realizing this vision will require continued adherence to the values of social justice, human welfare and empowerment of the people and the formulation and implementation of policies to reduce poverty by promoting sustainable economic growth and better governance.
Progress since the Last CG Meeting
10. The RGC’s focused efforts to strengthen macroeconomic management and the implementation of the fiscal reforms has resulted in robust economic performance in 2004 and 2005, in spite of negative external factors such as higher oil prices, SARS epidemic and concerns about the on-going avian flu, and adverse weather conditions in 2004. In 2004, real GDP grew by 7.7 percent, as compared to the revised GDP growth of 7.0 percent in 2003 and 5.2 percent in 2002. The preliminary estimate indicates that the economy grew by 7 percent in 2005, reflecting stronger growth in the agriculture sector, continued expansion of exports, tourism and construction activities. The estimated nominal GDP for 2004 was 19,630 billion CRs (approximately US$ 4.9 billion).
11. The Royal Government's fiscal policies are designed to ensure a level of spending that is consistent with macroeconomic stability. The expenditure program is being restructured as part of a systemic reform package aimed at promoting domestic savings, productive investment, and efficient resource allocation. The fiscal performance in 2004 and 2005 has been good, with increased domestic revenue collection and public expenditure restraint.
12. Total domestic revenues increased to 11.7 percent of GDP in 2005 from 11.3 and 10.2 percent in 2004 and 2003, respectively. Tax revenues increased to 8.7 percent of GDP in 2005 from 8.4 percent in 2004. The improvement in revenue collection reflects the effectiveness of several revenue collection measures introduced in the last quarter of 2003 and at the beginning of 2004. These included actions by the Ministry of Economy and Finance (MEF) to recover revenue from Posts, Telephone and Telecommunications (PTT), the lease of government assets, as well as some additional measures such as further expansion of the tax base; increased collection of visa fees and tourism income.
13. In both 2004 and 2005, overall, the Royal Government has managed to contain total expenditure below targets, thus minimizing the need for domestic financing. In both years, total current public expenditures were lower than total domestic revenues collected both in nominal terms and as a percent of GDP. Total current expenditures decreased from 10.6 percent of GDP in 2003 to 9.5 and 9.3 percent in 2004 and 2005 (preliminary estimate).
14. Overall, significant progress has been made in achieving the targets of the Joint Monitoring Indicators (JMIs) that were agreed to at the last CG meeting. One issue that has emerged is the lack of correlation between activities that were needed to be carried out to achieve the targets of the JMIs and the resources mobilized to carry out these activities. The periodic reviews of progress during 2005 have revealed that significant progress was being made in areas where a clear linkage between planned activities and the resources needed to implement the activities had been established; as compared to areas where this linkage was either weak or missing, or there was a lack of ownership by concerned institutions.
16. The limited capacities of the legal and judicial system are well known. In spite of these limitations significant progress has been made in drafting the needed Laws in 2005. A total of 45 Laws were approved by the National Assembly in 2005, as compared to a total of 90 Laws over five years from 1993 to 1998. In addition, other Laws have also been submitted to the National Assembly during 2005 that have not yet been approved by the National Assembly.
Implementing the Priorities Set in the NSDP
Building Partnerships to Enhance Aid effectiveness
19. Since the last CG Meeting for Cambodia held in December 2004 there have been significant developments in both the international arena and within Cambodia to address the aid effectiveness issues. In the international arena, the Second High Level Forum meeting was held on 28 February - 2 March 2005 in Paris to review progress in implementing the Rome Declaration's commitments. The Royal Government presented "Cambodia's Report on Progress toward Enhanced Aid Effectiveness" at the Forum. At the close of this meeting, the joint declaration -- issued by Ministers of developed and developing countries responsible for promoting development and Heads of multilateral and bilateral development institutions -- has set new standards for both developed and developing countries to address the aid effectiveness issues. The Paris Declaration's commitments include far-reaching and monitorable actions to reform the ways in which aid is delivered and managed.
20. Since the Paris Declaration, the OECD/DAC Working Party on Aid Effectiveness has established a Joint Venture on Monitoring the Paris Declaration that, for the first time, will be co-chaired by a partner (Vietnam) and a donor country (UK), and will be supported by Austria, Cambodia, Canada, European Commission, France, Germany, Ghana, Mali, Nicaragua, Norway, Senegal, South Africa, UNDP, United States and World Bank. The participation of partner countries in this monitoring work has also been broadened and it will now include 23 partner countries and 23 bilateral donors and several multilateral institutions. This Joint Venture has been tasked to prepare two progress reports on the implementation of the Paris Declaration's commitments before the Third High Level Forum that is scheduled to be held in Ghana in 2008. Work on preparing the first progress report will be carried out in 2006. Cambodia is one of the six partner countries where the field testing of the survey instruments for this monitoring round will be carried out in early 2006.
21. Within the country, in 2005, the Royal Government in close collaboration with development partners has made significant progress in a number of areas that include:
23. Overall, the TWGs have made steady progress in 2005. Some have functioned better than others. The year 2005 has been a year of learning-by-doing for both ministries/agencies, as well as donor members of the TWGs. A significant finding of the assessment of TWGs performance in 2005 is that TWG’s that had linked their activities and identified the resources needed to implement these activities had performed better than those that did not establish these linkages. In areas where there was clear linkage between planned activities and the resources needed to implement the activities -- significantly better progress was made than in those areas where this linkage was either weak, missing or there was lack of ownership by concerned institutions. There is a need for TWG’s to pay special attention to this area. Because of limited budget resources, ODA is the major source for financing of RGC’s development programs. The efficient allocation and utilization of these ODA resources to meet RGC’s development priorities in an environment of mutual accountability is, therefore, of critical importance for the Royal Government.
24. The Royal Government’s Action Plan on Harmonization and Alignment, that was prepared through an extensive consultative process involving both ministries/agencies and development partners, was endorsed by the Council of Ministers on 19 November 2004. The Royal Government and 12 development partners of Cambodia who showed a willingness to support the implementation of RGC’s Action Plan on Harmonization and Alignment also signed a Declaration on 2 December 2004. These development partners are: Australia, Canada, Denmark, France, Germany, Japan, Sweden, United Kingdom, Asian Development Bank, European Commission, UN System, and World Bank.
25. A review of TWGs progress in implementing the existing RGC’s Action Plan on Harmonization and Alignment by the Secretariat of GDCC in December 2005 revealed that while on those activities that required Government action significant progress was made, there had been limited progress in areas where the development partners were to take specific actions. Over the last year, CDC has worked with development partners to prepare an updated Action Plan on Harmonization, Alignment, and Results to implement Paris Declaration’s partnership commitments. The Updated Action plan on Harmonization, Alignment and Results (H-A-R Action Plan) was approved by Samdech Prime Minister on 14 February 2006.
26. In 2005, the RGC’s Strategic Framework for Development Cooperation Management was prepared through an extensive consultative process both within government and with development partners. It was approved by the Council of Ministers on 27 January 2006. It is now being implemented by the Council for the Development of Cambodia. The National Operational Guidelines for grant assistance and the Standard Operating Procedures for loan assistance have now been completed in close consultation with development partners. Additional mechanisms have been put in place to further strengthen Government–Private sector partnership and partnerships with the NGOs and the civil society.
27. The Rome Declaration on Harmonization (2003) and the Paris Declaration on Aid Effectiveness (2005) have placed an emphasis on national ownership of the development processes by ODA recipient countries. The Royal Government is committed to take full ownership not only of its development processes but is also determined to ensure that ODA resources are effectively targeted and utilized to meet the high priority development needs of Cambodia for the benefit of the Cambodian people to reduce poverty and to achieve Cambodia's Millennium Development Goals.
28. However, in spite of these commitments by the international community some donor practices that have roots in the era of the 1990s, a period that various studies have characterized as a period of "donorship", continue. The challenge for the multilateral; and international development cooperation partners of Cambodia and the NGOs is to quickly translate the commitments made in the international arena into concrete operational actions to change their practices to provide room for the Royal Government to assume ownership of its development management processes in an environment of cooperation, mutual trust, and mutual accountability to improve ODA effectiveness in order to maximize its benefits for the people of Cambodia. The challenge for the Royal Government is to continue to put in place management systems and institutional mechanisms that are transparent and accountable to enhance aid effectiveness.
29. There is now an urgent need to leave behind the practices of the 1990s, when development cooperation activities were planned, managed and delivered by development partners with limited ownership of development choices and management process by concerned Cambodian institutions. The Royal Government recognizes that it needs to strengthen the awareness of the Rome and Paris Declarations among officials of the ministries and agencies and has taken concrete steps in 2005. The Royal Government would like to see an equal commitment and political will among the development partners to work towards meeting their commitments of the Rome and Paris Declarations. In the spirit of the Rome and Paris Declarations, there is now an urgent need for development cooperation partners to give a high priority to:
30. The Royal Government is determined to build partnerships with all development partners (multilateral, international development cooperation partners, private sector, non-governmental and civil society organizations) based on principles of cooperation, mutual trust, and mutual accountability. As noted earlier, a new mechanism to strengthen government-donor coordination has been put in place in 2005. This new provides a forum for the participation of multi-lateral, international development cooperation partners and non-governmental organizations (NGOs) at both the technical level (TWGs) as well as at the policy level (GDCC). The mechanisms under the Government-Private Sector Forum are now well organized and provide an elaborate structure for building effective partnerships with the private sector.
31. In terms of priorities for 2006, the Royal Government strongly urges the multilateral, the international development cooperation partners and non-governmental organizations to:
32. The Royal Government recognizes that there are administrative costs that are incurred by development partners to deliver their development assistance that is included in the total amount of ODA that is reported to have been disbursed to Cambodia. At present, there is no readily available information on how much of the reported ODA goes in meeting these costs in-country and outside the country and how much ultimately reaches the poor and the vulnerable.
Financing the NSDP Through PIP 2006-2009
33. The implementation of the strategies and policies outlined in the NSDP will be achieved through a focused and prioritized Public Investment Program (PIP) which is one important instrument to implement these strategies and policies. The PIP, adopted by the Royal Government of Cambodia on 27 January 2006, has been formulated within the framework of a three‑year rolling plan to capture priority proposals and needs on an on-going basis. The programs and projects that constitute the public investment program will be financed both from the National Budget and with assistance from development cooperation partners. From now on, the National Budget will be aligned to support the implementation of NSDP through financing of the PIP. The PIP is comprised of Government’s priority programs that are being implemented and/or are planned to be implemented in various sectors and constitute the basic information for the allocation of national budget resources as well as for the mobilization of development cooperation resources.
34. Based on projections of economic growth and gross investments needed in the public sector, it is estimated that US$ 3,500 million will be needed for public sector investment during 2006-2010 to achieve the goals and targets of the NSDP. The resources to implement the NSDP will come from: (a) surpluses in the current account in the annual national budget: (b) grant aid from traditional development partners; (c) concessional loans from multilateral financial institutions (MFIs); (d) resources from non traditional partners including for very high return and strategic programs and projects using ordinary capital resources (OCR) from MFIs; and (e) funds that could become available from possible debt relief. A high priority of the Royal Government is to direct resources in a meaningful way to "real investments", including through significant reductions in technical assistance projects, and to persuade development partners to fully align their assistance with NSDP priorities. To optimize the benefits of the ODA for the people of Cambodia and to minimize the burden on future generations, the Royal Government encourages development cooperation partners to consider financing through grants to support the implementation of the NSDP priorities and policies. The use of loans will be made only in those cases where it has been established that resources from grant aid are not available and that the proposed program or project will contribute to investments that will ensure a quick return and accelerate economic growth. In all cases, the implications of each new loan will be carefully examined, including its impact on macro-economic stability, before acceptance of the loan.
35. Total financial outlay envisaged for the three year period, 2006-2008 is US$ 1,975 million or about 56.5% of the total outlay of US$ 3,500 million expected to be spent during the NSDP period, 2006-2010. The sector distribution of the planned expenditure on programs and projects in the PIP 2006-2008 is in line with the target sector allocations of the NSDP. Over 80 percent of Royal Government's committed resources are allocated for the social sectors. However, in addition to the resources already committed by the Royal Government and the development partners for these programs and projects, the allocation of new resources to be mobilized, US$ 563.4 million for 2006-2008, would need to be as follows:
36. In terms of the composition of PIP programs and projects, nearly 82 percent of the resources have been allocated to support the on-going and committed programs and projects and only just over 18 percent will be available for new high priority pipeline development programs and projects. Just under 25 percent of the committed resources of development partners for the next three years are planned for technical assistance. However, resources to be mobilized over the next three years will need to focus on reducing the technical assistance component to less than 15 percent of total new resources to be mobilized.
37. In terms of the distribution of on-going and committed and high priority new programs and projects in each sector:
38. The total cost of the Government’s planned
development programs, both on-going and new programs, over the next three
years (2006-2008) is estimated to be around US $ 1,975.0 million. The
Royal Government of Cambodia has committed from its own resources US $
350.0 million for these development programs and projects. Thus,
the total requirements for additional resources over the
next three years will be US$ 1,625 million that averages to US$ 541.7
million per annum.
Some of our multilateral and international development cooperation
partners have already committed to provide US$ 1,117.3 million.
Therefore, a gap of US $ 563.4 million in financing the
planned development programs and projects remains at the present time for
which the RGC is seeking additional support from its traditional and
non-traditional development cooperation partners.