Cambodia—Letter of Intent, Supplementary Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding

June 21, 2002

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The attached memorandum summarizes key developments under the PRGF-supported program during 2001 and the first half of 2002, and sets forth the economic, financial, and poverty alleviation policies that the Royal Government of Cambodia intends to implement in the remainder of 2002. It also updates the medium-term macroeconomic framework, in light of the recent global downturn.

2. The Government has received broad support from development partners during the Consultative Group Meeting held in Phnom Penh (June 20-21). Cambodia's economic performance through mid-2002 has shown resilience in the face of a weaker global environment. Growth and inflation performance as well as the fiscal outcome in 2001 have been in line with program targets. All quantitative benchmarks for December 2001 and quantitative performance criteria for end-March 2002 were observed. Progress continued to be made in key structural reforms, especially banking sector rehabilitation, trade policy, fiscal restructuring, and dissemination of a governance and anti-corruption agenda. On this basis, the Government requests completion of the fifth review under the PRGF program and a waiver for the nonobservance of a structural performance criterion which required completing an unqualified audit of the 2001 accounts of the Foreign Trade Bank by end-May 2002.

3. The Government believes that the policies and measures described in the attached memorandum are adequate to achieve the objectives of the program for 2002, and stands ready to take additional measures that may become necessary for this purpose. The Government will consult with the Managing Director, at the initiative of either party, and will provide the IMF with such information as it requests on the progress made in policy implementation and the achievement of program objectives. In any event, Cambodia will conduct with the IMF the sixth and final review of the arrangement no later than end-February 2003.

4. In continuing with our policy of transparency, we consent to the publication, including on the IMF's website, of the attached Memorandum of Economic and Financial Policies and the accompanying Executive Board documents prepared by the IMF staff. In addition, as done with the 2000 accounts, we will publish the audited accounts of the NBC for 2001, in compliance with the requirements under the IMF's Safeguards Assessment.

Sincerely yours,

Supplementary Memorandum of Economic and Financial Policies
for 2002

I. INTRODUCTION AND RECENT DEVELOPMENTS

1. The Government's reform program supported by the PRGF aims at sustaining economic growth, reducing poverty, and accelerating development. To this end, the program has successfully achieved macroeconomic stability, with annual GDP growth during 1999-2001 averaging 7 percent and very low inflation.¹ The program continues to focus on reorienting fiscal policy by increasing revenues and reallocating expenditures toward the social sectors. Achieving fiscal objectives will depend on further improvements in tax and customs administration, as well as in public expenditure management. To sustain growth and support poverty reduction the program also aims to promote a sound business environment by enhancing governance and implementing a comprehensive set of structural reforms in the areas of bank restructuring, trade policy, forestry policy, legal and judicial reform, and improving the provision of public services through civil service reform. This memorandum supplements and extends the government's commitments outlined in the December 26, 2001 Memorandum of Economic and Financial Policies.

2. Cambodia's economy has shown resilience in the face of a weaker global environment. Growth in 2001 was driven mainly by a booming tourist sector and strong exports of garments. Inflation has remained low, and for the 12-month period ending March 2002 prices increased by only 3 percent. All quantitative performance criteria for March 2002 were observed. The structural performance criterion (SPC) for end-March on the consolidation of government accounts was observed, but the SPC on completing an unqualified audit of the Foreign Trade Bank (FTB) was only partially observed. Most structural benchmarks were met, some with minor delays, while others were only partially observed.

3. Budgetary performance continued to improve in 2001. The overall fiscal deficit (excluding grants) was limited to 6 percent of GDP, while the current surplus was maintained at 1¼ percent of GDP. Despite shortfalls in customs revenue, government revenue was close to 12 percent of GDP, reflecting improved collection of domestic taxes and nontax revenue. Overall expenditure was contained below budget targets, thus contributing to the avoidance of domestic financing. However, spending rose sharply in December reflecting the need for structural change in budget and cash management.

4. Monetary and external developments were broadly in line with the program. Broad money growth in 2001 was 20½ percent, slightly lower than expected, due to a slowing of private sector credit as some banks reduced large exposures to comply with tightened prudential regulations. The current account deficit was slightly higher than programmed, reaching 9½ percent of GDP (excluding grants). The deterioration of the current account was mainly due to a decline in the growth of garment exports since mid-2001. Gross international reserves were larger than programmed, reaching $551 million (about 3 months of imports of goods and services) at end-2001. The riel continued to be relatively stable in U.S. dollar terms, although it appreciated slightly in nominal and real effective terms.

5. Progress made in the implementation of structural reforms in 2001 has been continued during the first six months of 2002. Bank restructuring is proceeding as envisaged, progress has been made in the restructuring of the FTB despite the delay in the completion of an unqualified audit, and the draft Law on Negotiable Instruments and Payments Transactions has been completed and was submitted to the Council of Ministers on June 4, 2002. On expenditure management, initial steps to ensure a more efficient pattern of expenditure were taken, including the closing of several government accounts held by line ministries at end-March. Revisions to the Law on Investment were completed and submitted to the National Assembly in March 2002. On trade reform, a revised Customs Law, in line with WTO requirements, was completed and will be submitted to the Council of Ministers in July. On forestry reform, the suspension of all logging activity has remained in place, but issues surrounding the transport of logs cut in 2001 require a strengthening of the monitoring system.

II. MACROECONOMIC AND STRUCTURAL POLICIES FOR THE
REMAINDER OF 2002

6. In view of the resilience of Cambodia's economy to the deterioration of the world economic environment in 2001, the forecasts under the program for 2002 remain appropriate. For 2002, the growth in garment production is declining after high growth in earlier years, but continued increases in tourist arrivals and improved agricultural production will sustain growth at 4½ to 5½ percent, accompanied by inflation of about 3 percent. The current budget surplus is expected to remain at about 1¼ percent of GDP, while the overall fiscal deficit (excluding grants) will be contained at less than 6 percent of GDP and financed by external concessional resources. The external current account deficit is projected to remain at about 9 percent of GDP and the increase in gross international reserves is now targeted at $78 million, maintaining gross reserves at about 3½ months of imports of goods and services.

7. Fiscal performance in the first quarter of 2002 was broadly consistent with budget targets. However, revenue performance was boosted by several once-off payments of nontax revenue. The Government is committed to meet the 2002 revenue target through strict implementation of the agreed revenue and administrative measures as shown in Annex 1. Expenditure has been implemented cautiously, in line with financing targets, and actions to strengthen public expenditure management and improve the implementation of the budget throughout the year will be continued as outlined in Annex II.

8. Several tax and administrative measures have been adopted or are underway. Taxes on petroleum and beer have been increased, the real regime is being extended to 5 additional provinces, and some initial success in collecting tax arrears has been achieved. However, the collection of VAT on airport departure fees was not feasible because of exemptions granted under the service contract. Efforts to strengthen the tax department will continue and for the remainder of 2002 will focus on the steady collection of outstanding tax arrears from the 100 largest accounts with performance monitored against collection targets. Additional taxpayer accounts will be added to the project on an ongoing basis as the original 100 accounts are closed or collected. Tax auditing strategy and capabilities will be enhanced by a comprehensive program that over the next 12 months will establish: (i) formal manuals and procedures; (ii) a modern management information system with audit operations; and (iii) modern work descriptions with clear roles and responsibilities. In addition, there will be an expanded coverage of tax payers using modern selection techniques. Further to the above, decisions are to be taken by end-June 2002 regarding proposed vision, mission, and roles and responsibilities linked to a revised tax administration structure. Tax collection efforts will also be enhanced by improved coordination between the tax and customs department. Detailed instructions for implementing the Prakas issued on February 23, 2001 that specifies reporting relationships between CED and the Tax Department was finalized on June 6, 2002. A joint review has been carried out by CED and the Tax Department on the taxation of motorcycles and motorcycle parts, and a full assessment report with policy options will be finalized by June 28, 2002.

9. Strengthening the enforcement capabilities of the Customs and Excise Department (CED) will be key to meeting the 2002 revenue targets and to ensure improvements in revenue over the medium term. Data from CED indicate that revenue improved somewhat during the first quarter of 2002 compared to previous years, owing to higher tax rates on beer and petroleum, and some initial successes in anti-smuggling operations. Efforts for the remainder of 2002 will focus on the following key measures from the government's anti-smuggling strategy: (i) establishing a strengthened anti-smuggling unit in municipal districts around Phnom Penh in May 2002, and extending these to key border provinces by end-June 2002; (ii) creating an Intelligence Unit in CED by end-July 2002 to collect, analyze, and disseminate information to anti-smuggling teams, and prepare statistics for the newly-established Inter-Ministerial Commission (IMC); and (iii) convening regular quarterly meetings of the IMC and monthly meetings of the anti-smuggling working group, and providing regular reports on the results of anti-smuggling operations to the Council of Ministers. Efforts will also be made to strengthen the preshipment inspection program for imports by using reconciliation procedures to resolve valuation differences, and reducing to no more than 10 percent the number of sealed containers subject to re-inspection by any government agency based on principles of risk management.

10. To strengthen the performance of nontax revenue, the following actions will be taken. Contract revisions to increase the share of revenue going to the government from ticket sales at the Angkor temple complex were completed on May 29, 2002. In response to a joint assessment by the Ministry of Economy and Finance and the Ministry of Posts and Telecommunications in December 2001 on the contract for Gateway II, the government has concluded that some aspects of the contract have been implemented inappropriately and is taking steps to recover outstanding revenue and strengthen contract performance. An initial auction of garment quotas for export to the United States was conducted in January 2002, and an additional auction is expected in July in line with the objective of increasing the proportion of quotas subject to auction to at least 20 percent. To support stronger enforcement activities for the use of state assets, a preliminary inventory covering 70-80 percent of all assets held by line ministries will be completed by end-June 2002. Finally, the revenue monitoring and reporting system for forestry will be strengthened as outlined in paragraph 20 below.

11. The expenditure program for 2002 was designed to support the poverty reduction strategy and envisaged reforms in expenditure administration. The government is committed to reorienting expenditure away from defense toward the priority social sectors, and to provide for a more even pattern of expenditure during the year. To meet this goal, the first steps to reform expenditure administration have been taken and further progress in the expenditure reform program will be made during the second semester. In particular, the National Treasury will prepare a report on the stock of outstanding payment orders by mid-July 2002. Based on this report, the cash management committee will ensure the necessary availability of cash. Accordingly, with effect from July 1, 2002 the issuance of government payment orders will be strictly limited to projected cash availability over the subsequent 4 weeks. To support this effort, the centralization of government accounting will be continued as outlined in Annex II. A working group has been established in the National Treasury to prepare a report on standardized accounting procedures and methodology for the public sector in line with international standards by end-October 2002. From January 1, 2002, government procurement was strengthened by applying the provisions of the 1995 decree (No. 60) on Public Procurement to acquisitions of goods, services, and construction activities, except for heavy capital investment in road, bridges, and sewerage construction in four key ministries (Health, Education, Agriculture, and Rural Development). The coverage of procurement procedures will be extended over time to other ministries in line with implementation capacity and cash availability.

12. The 2003 budget, under preparation, envisages a further improvement in social spending while allowing for increased interest payments arising from the prospective completion of outstanding external debt rescheduling agreements. A current surplus of about 1½ percent of GDP will be maintained and the overall deficit limited to available concessional assistance, with no domestic financing of the budget. A further improvement in revenue to about 13¼ percent of GDP will be targeted by extending recent improvements in tax and customs administration. In the context of the preparation of the 2003 budget, the Government will inform the IMF on any revenue enhancing measures that could be needed to meet further expenditure pressures. The expenditure program will target a slight increase in current expenditure to 11¾ percent of GDP, in part to address a significant increase in interest payments. The overall deficit is projected at about 5½ percent of GDP and will be fully financed by concessional resources. The 2003 budget is being formulated within the context of a medium-term expenditure framework that will need to be further developed in the period ahead and linked with the PRSP process.

13. Progress has been made moving forward with military demobilization and civil service reform. After the receipt of financing already committed by the World Bank and other donors, and the completion of the delivery of the reintegration package for the first 15,000 discharged soldiers, the government intends to discharge the second group of 15,000 soldiers by end-2002. Implementation of a new salary system, based on the automated payroll, and initial selections for Priority Mission Groups (PMGs) have recently started. Owing to the implementation of the new system for remuneration and classification, the average salary of civil servants has increased by about 38 percent within the 2002 budget framework for civil administration. PMGs will start to be identified in June 2002, and are expected to include 500 people. These reforms are consistent with the agreed resource constraints provided for in the 2002 budget that provides for a maximum increase in the overall wage bill of 8½ percent, inclusive of contingency funds. In line with the medium term reform program, the size of the civil service will be kept constant with normal attrition used to offset any new hiring of teachers. The government and the World Bank have agreed on steps to be taken during 2002-03 to further articulate the next phases of the National Program of Administrative Reform with a view to improving civil service pay and ensuring that the size and the shape of the civil service are financially sustainable and meet organizational requirements. Future staff reductions will be based on a credible policy on social safety nets, to be developed by December 2002 and supported by donors.

14. The monetary program for 2002 is consistent with growth and inflation objectives. The program provided for money growth of 19 percent and an expansion of private credit of 13 percent. During the first quarter of 2002, the increase in net foreign assets was larger than programmed, reflecting buoyant foreign exchange inflows from the tourist sector. Reflecting these developments, adjustments to the monetary program have been made. Taking into account expected nonproject balance of payments support, the increase in net international reserves is targeted at $67 million, with broad money growth projected at 22 percent, and private credit growth at 15 percent.

15. The Government will maintain a flexible exchange rate policy, with the spread between the official exchange and market rates limited to 1 percent. The NBC will continue adhering to the established intervention policy of using any increased demand for the riel to bolster international reserves and not resisting downward pressure on the exchange rate, except in the event of temporary disorderly market conditions. The NBC will continue to gradually eliminate the spread with the market rate during periods of stability and will proceed gradually toward achieving full unification of the exchange rate.

16. Trade reform is moving forward and progress has been made toward joining the WTO. The Government is moving forward with the next phase of tariff restructuring. Taking into account technical assistance to be provided by the Fund, detailed plans for reducing the unweighted average tariff rate to below 15 percent will be completed by end-October 2002, with implementation in 2003. Regarding accession to WTO, and in line with the Doha declaration, a second working party meeting was held in Geneva in February and a third round of discussions of government's replies to questions raised by other members is expected to take place in July. As part of the Government's poverty reduction strategy, plans for broader trade reform and for improving overall trade facilitation based on the Integrated Framework (IF) for trade are being developed, and will be reflected in the forthcoming Poverty Reduction Strategy Paper (PRSP).

17. The Government has taken steps to advance discussions on outstanding debt issues with the Russian Federation and the United States. In February, an official delegation held discussions with both creditors and the Paris Club secretariat. A technical team was subsequently sent to Washington D.C. to discuss documentation issues with the United States. As a result of these efforts, documentation to verify disbursements was transmitted to the Cambodian embassy in Washington in late March and was received in Cambodia on April 21, 2002, and has been under review. The Government also sent an official letter to Moscow to invite a delegation to Phnom Penh for further negotiations on rescheduling terms as well as verification of the outstanding debt amount. Pending reconciliation, the Government remains fully committed to resolving debt issues with a view to reaching agreement in 2002. The review of the documentation received from the United States is underway, and a report on the preliminary conclusions stemming from this review is expected to be completed by end-June, 2002. The Government will continue maintaining a prudent debt-management policy, and in this regard, will refrain from contracting or guaranteeing any nonconcessional debt. The terms of all external borrowing will be promptly reported to the IMF as outlined in the technical memorandum of understanding.

18. The Government is maintaining the momentum of banking sector reform. The bank relicensing program has been completed, and the liquidation of nonviable banks is proceeding. Guidelines and regulations for specialized banks have been finalized and will be published in the July 2002 quarterly bulletin of the NBC. With the support of technical assistance, bank supervision is being strengthened further as a new uniform chart of accounts for the banking system consistent with IAS will be finalized by end-July 2002 with implementation to begin thereafter; all banks will be using the new chart of accounts from January 2003. The adequacy and effectiveness of the existing prudential regulations have also been reviewed.

19. The FTB reconciled most of the discrepancies in their accounts, but failed to achieve an unqualified audit of the 2001 accounts for technical reasons. The external audit concluded that, notwithstanding the small qualification, FTB's 2001 accounts gave a true and fair view of its financial position. As the qualification was related to historical provisions that will not repeat itself, an unqualified audit of the March 2002 accounts was completed on June 19. As part of the restructuring process, the Ministry of Economy and Finance became the major shareholder in the bank in April 2002 by replacing bridge financing provided by the NBC with its own capital injection. Management assistance is being provided by external consultants and it is intended that a public announcement to privatize the bank will be issued by end-November 2002.

20. The Government has maintained a suspension on logging activity, but continues to experience difficulties in the monitoring of log transportation and overall forest crime monitoring. The Forestry Law is expected to be debated by the National Assembly during the current session, which will end on August 12, 2002. Restructured concession agreements in line with sustainable practice, are still expected to be completed by end-September 2002, but further work will need to be accelerated as concessionaires have made only limited progress toward submitting management plans and inventory assessments that are fully in line with sustainable practice. In view of the need to upgrade the monitoring of previously cut logs, all log transportation by concessions has been suspended from midnight of May 23, 2002, and an internal audit of the transfer of royalties to the budget on logging that took place in 2001 has been conducted, and based on the audit report, remedial actions are being taken. The monitoring of the future transportation of logs by concessions will be improved with the adoption of a new system of log tracking using electronic monitoring through bar code devices expected to be in place by the next logging season (September 2002).

21. The Government continues to pursue a governance and anti-corruption agenda. Enhancing governance is important to meet fiscal objectives and sustain poverty reduction. The Governance Action Plan (GAP) has been broadly disseminated at the national and local levels, and an updated GAP is being prepared. The Consultative Group Meeting to be held in Phnom Penh during June 19-21, 2002 will be used to launch external consultation with stakeholders to finalize the revised GAP. The National Audit Authority is now operational and will complete a full report on the implementation of the 2001 budget by November 2002. In accordance with the IMF's safeguards assessment, an external audit of NBC's 2001 accounts was completed on June 19, 2002. The audit report and financial statements of the NBC for 2001 will be published as required by the IMF's safeguards procedures. NBC will also provide an update on the status of recommendations made by the audit report on the 2000 accounts.

22. Program objectives will continue to be supported by broad-based technical assistance efforts. As part of the annual review of the TCAP program, the Government produced an assessment report noting that the overall objectives of the program remain sound and that progress has been made. Following the recommendations made during the annual review, management of the program has been strengthened and the appointment of a new national program manager on a full time basis has been approved. To improve TCAP team coordination, monthly steering committee meetings will begin from July 2002.

23. The upgrading of Cambodia's statistical framework is underway. A new statistics law will be submitted to the Council of Ministers in the near future. Reflecting the Government's commitment to use the IMF's General Data Dissemination System (GDDS), Cambodia's metadata were posted for the first time on the GDDS site in March 2002. A new CPI for Phnom Penh with updated weights was published in February, and new national accounts estimates through 2001 were released in May. Annual fiscal data are expected to submitted for publication in the Government Finance Statistics Yearbook by August, and the NBC will continue to publish economic and financial data in its monthly bulletin, and will publish banking regulations and other studies in a new quarterly bulletin to be introduced in July. Improvements in social data are also being undertaken in the context of the PRSP process.

24. The Government is committed to finalize the full PRSP by October 2002. A draft outline of the PRSP has been prepared, several workshops with NGOs and civil society have been held, and a national PRSP workshop took place during May 28-29. Under the leadership of the Council for Social Development (CSD), line ministries are now actively engaged in the process.

25. The sixth and final review under the program is expected to be completed by end-February 2003. It will focus primarily on improved revenue mobilization, budget implementation—including military demobilization and civil service reform, forestry and bank reforms, and progress in resolving outstanding external debt issues. Quantitative performance criteria through end-September 2002 for the sixth review include (Table 1): (i) a ceiling on net domestic assets of the NBC; (ii) a ceiling on net bank credit to the government; (iii) a ceiling on net domestic financing of the budget; (iv) a zero ceiling on publicly contracted or guaranteed nonconcessional foreign currency loans; and (v) a floor on net official international reserves of the NBC. Quantitative benchmarks and performance criteria for June-December have been adjusted slightly to take into account revisions to the targets for international reserves, and revised estimates of nonproject balance of payments and budget support. The only structural performance criterion to be evaluated in the sixth review is the issuance of the final report of the working group on standardized accounting procedures and methodology for the public sector by end-October 2002 (Table 2).

ANNEX I

Cambodia: Main Revenue Measures Affecting the 2002 Budget²

I. Revenue Measures Introduced in the First Semester of 2002

A. Tax Measures

• The coverage of the real regime was expanded to five additional provinces.
  
  
• The excise tax on beer was increased from 10 percent to 20 percent.
  
  
• Additional taxes on petroleum products—2 cents per liter for gasoline and 4 cents per liter for diesel—were introduced with effect from January 1, 2002.
  
  
• A joint review was carried out by the Tax Department and the Customs and Excise Department of all aspects of taxation of motorcycles and motorcycle parts. A full assessment report with policy options will be completed by June 28, 2002.

B. Nontax Measures

• In response to a joint assessment by the Ministry of Economy and Finance and the Ministry of Posts and Telecommunications in December 2001 on the contract for international gateway II, the government has concluded that some aspects of the contract have been implemented inappropriately and is taking steps to recover outstanding revenue and strengthen contract performance.
  
  
• A preliminary inventory, covering 70-80 percent of state assets held by line ministries, will be completed by end-June 2002.
  
  
• The share of garment quotas to be auctioned was increased from 10 percent to 20 percent.
  
  
• A contract revision with Sokha Hotel, the managing company for the Angkor monument complex, was signed on May 29, 2002.
  
  
• Royalty fees for casinos were increased based on estimated turnover.

C. Tax and Customs Administration Improvements

• The Tax Department reviewed legislation to ensure that appropriate support for collection action exists.
  
  
• To ensure coordination between the Customs (CED) and Tax Departments, a Protocol for implementation of the Prakas issued on February 23, 2001 has been signed by the relevant department directors on June 6, 2002 to specify reporting relationships.
  
  
• An Inter-Ministerial Commission on anti-smuggling was established. Regular reports are being submitted to the Council of Ministers on the results of anti-smuggling operations with effect from June 2002.
  
  
• Anti-smuggling task forces were strengthened in Phnom Penh, and a comprehensive anti-smuggling strategy targeting key revenue sources, high risk items, and prime locations was endorsed by the government in May 2002.

III. Revenue Measures to be Introduced in the Second Semester of 2002

A. Tax Measures

• In response to an assessment report, changes in the taxation of domestically assembled motorcycles and motorcycle parts will be introduced taking into account provisions of the Law on Taxation and the proposed revisions to the Law on Investment.

B. Tax and Customs Administration Improvements

• Continuing to strengthen tax auditing strategies and capabilities.
  
  
• Collection action on companies with leases of state assets that are on arrears will be strengthened.
  
  
• After having identified the 100 accounts with the largest arrears, the Tax Department will finalize a report on performance on collecting arrears by end-July 2002, including an action plan with collection targets and reports on performance.
  
  
• In-depth examination of dutiable non-PSI consignments, and limiting reinspection of PSI consignments to no more than 10 percent, based on principles of risk management, with effect from July 1, 2002.
  
  
• An Intelligence Unit will be created in CED by end-July to report on anti-smuggling operations.

ANNEX II

Cambodia: Main Government Expenditure and Budget Management Measures in 2002

I. Expenditures Measures Introduced During the First Semester

• A Prakas was issued in January 2002 establishing a new cash management committee and detailing a specific format for cash management procedures to manage cash management and improve the coordination between the National Treasury and other MEF departments.
  
  
• The number of government deposit accounts was reduced in March 2002 by integrating revenue accounts held by line ministries into the Treasury single account.
  
  
• The NBC started reporting to the National Treasury transactions for all government accounts on a monthly basis including the following documents: a statistical statement on monthly transactions; the status of account balances, and an account statement of detailed transactions.
  
  
• Tax payments by transfer or check to the Treasury single account with NBC, especially for the large taxpayers, have been in effect since November 2001.
  
  
• Steps have been taken to strengthen internal auditing capabilities at the Ministry of Economy for key spending ministries.
  
  
• Budget preparation has been enhanced by placing the formulation of the 2003 budget circular within the context of a preliminary medium-term revenue and expenditure framework.
  
  
• Preparation of monthly cash plans consistent with the annual cash plan, and measuring performance against the monthly plans.
  
  
• A provisional report on the amount and composition of domestic debt managed by the National Treasury as of end-2001 was completed in January 2002. An updated version of the debt statement as of end-June 2002 will be completed by mid-July 2002.

II. Expenditures Measures to be Introduced During the Second Semester

• A final report on standardized accounting procedures and methodology for the public sector, in line with international standards will be submitted by end-October 2002. A revised chart of government accounts, based on the actual accounting system and meeting international standards, will be finalized by November, for implementation from January 1, 2003.
  
  
• As a first step toward unifying the public accounting system under the National Treasury, from July 1, 2002 accounting for the 8 U.S. dollar accounts managed by the Foreign Currency Unit of the Ministry of Economy and Finance will be centralized in the National Treasury. As a second step, by end-October this procedure of accounting centralization will be extended to all other government accounts held by ministries and public agencies in close cooperation with the National Treasury. The full consolidation of government accounts into the Treasury Single Account will be pursued in 2003.
  
  
• Devolution of limited budgetary authority for operations and maintenance expenditure for the Health and Education ministries will be introduced by January 1, 2003.
  
  
• Budgetary procedures will be strengthened for the ministries under the Priority Action Program (PAP) to meet the social expenditure targets set forth under the poverty alleviation strategy.
  
  
• A new financial framework for communes with the national and provincial treasuries has been developed. Implementation has started and is expected to be fully effective later in the year.
  
  
• Continued development of a medium-term expenditure framework (MTEF) linked to the national poverty reduction strategy.

Table 2. Cambodia: Structural Benchmarks and Performance Criteria to be Assessed During the Sixth Review
	Policy Action	Program Monitoring
1.	Identify the 100 largest accounts in the tax department that are in arrears, complete an analysis of the arrears, and establish an action plan with collection targets and reports on performance. The first report to be completed by end-July 2002.	Structural benchmark
2.	Pursue further centralization of accounting in the National Treasury by end-October as defined in the technical memorandum of understanding.	Structural benchmark
3.	Finalize a new chart of accounts for fully licensed commercial banks based on international standards and begin implementation by end-July 2002.	Structural benchmark
4.	Issue final report of the working group in the National Treasury on standardized accounting procedures and methodology for the public sector in line with international standards by October 2002.	Structural performance criterion
5.	Taking into account technical assistance recommendations, complete proposal for the next stage of tariff restructuring to reduce the unweighted average rate to below 15 percent by end-October 2002.	Structural benchmark
6.	Initiate privatization of the Foreign Trade Bank by issuing a public notice by end-November 2002.	Structural benchmark

Cambodia: Technical Memorandum of Understanding

This memorandum sets out the understandings between the Cambodian authorities and the IMF staff regarding the definitions of the quantitative performance criteria and benchmarks for the program supported by the Poverty Reduction and Growth Facility (PRGF), and the related reporting system of monetary and financial data.

1. Net official international reserves of the National Bank of Cambodia (NIR*) is defined as the unencumbered (i.e., readily available) gross official reserves of the National Bank of Cambodia (NBC) less foreign liabilities of the NBC. Under the program, the floor for NIR* will be: (i) decreased (increased) by the amount of a shortfall (excess) in external nonproject support from program estimates—any downward adjustment would not exceed $10 million; and (ii) decreased by any foreign-currency costs associated with bank restructuring. For purposes of monitoring performance against the program target for NIR, valuation effects on the stock of gold holdings will be excluded, and gold holdings will be evaluated at the gold price in effect on December 31^st of the previous year³. Similarly, the level of foreign assets and liabilities will be evaluated at the U.S. dollar/SDR exchange rate in effect on December 31^st of the previous year. NIR* data will be transmitted to the IMF weekly with a lag of no more than one week.

2. Net Domestic Assets of the National Bank of Cambodia (NDA*) are defined as reserve money minus net foreign assets of the NBC, adjusted for valuation changes arising from the difference between the program and the actual exchange rates. Reserve money is defined as the sum of notes and coins issued by the NBC, excluding NBC holdings of currency, and deposits of commercial banks and domestic nongovernmental sectors at the NBC. Reserve money excludes all NBC securities. The program ceilings for NDA* will be adjusted upward (downward) for any shortfall (excess) in nonproject external budgetary support from program estimates—any upward adjustment will not exceed $10 million. The ceilings will also be adjusted upward for costs associated with bank restructuring. NDA* data will be transmitted monthly within four weeks.

3. Net credit to the government from the banking system (NCG) is defined as claims on the general government by the banking system less deposits of the general government with the banking system. General government is defined to include central government, provinces, and communes. The program ceilings for NCG will be adjusted upward (downward) for any shortfall (excess) in nonproject external budgetary support from program estimates—any upward adjustment would not exceed $10 million. NCG data (as reflected in the monetary survey) will be transmitted monthly within four weeks.

4. Net domestic financing of the budget (NDF) is defined as the sum of NCG and any nonbank financing of the general government. The program ceilings for NDF will be adjusted upward (downward) for any shortfall (excess) in nonproject external budgetary support from program assumptions—any upward adjustment would not exceed $10 million. For purposes of program monitoring, actual levels of NDF will not include any flows associated with "outstanding operations" (committed spending that has not yet been executed) or any "exchange rate adjustment" (valuation effects on government deposits from exchange rate fluctuations). Details on all transactions associated with outstanding operations and exchange rate adjustment will be reported at all test dates. For purposes of program monitoring, any accumulation of domestic payments arrears will be included as part of NDF. NDF data (as reflected in the consolidated report on government operations (TOFE) table) will be transmitted monthly within four weeks.

5. The contracting or guaranteeing of external debt by the public sector is defined as foreign currency borrowing contracted or guaranteed by the public sector in Cambodia. Public sector is defined to include the Royal Government of Cambodia, the NBC, publicly-owned enterprises, local governments, or any other agency acting on behalf of the government. The program has ceilings for all debt below five years maturity and all nonconcessional debt for maturities beyond five years (both ceilings are set at zero). The coverage of debt includes financial leases and other instruments giving rise to external liabilities on nonconcessional terms.⁴ Details on any such borrowing should be reported within three weeks. Nonconcessional debt is defined as a debt with a grant element (NPV discount relative to face value) of less than 35 percent, based on the currency- and maturity-specific discount rates reported by the OECD (commercial interest reference rates).

6. External payments arrears are defined as the stock of external arrears on loans contracted or guaranteed by the public sector (as defined above), excluding debts subject to rescheduling or debt forgiveness.

7. To adhere to the structural performance criteria for the sixth review, a final report on standardized accounting procedures and methodology for the public sector in line with international standards will be issued by end-October 2002.

8. The structural benchmark on government accounting for end-October 2002 will involve the centralization of accounting in the National Treasury of the 8 U.S. dollar accounts managed by the Foreign Currency Unit, and all other government accounts held by ministries and public agencies.

Summary of data reporting requirements

(i) Data on daily average selling and buying exchange rates (official and market rates) to be transmitted daily.

(ii) NIR* to be transmitted weekly with a lag of one week.

(iii) Monetary survey and consolidated balance sheets of the NBC and commercial banks to be transmitted monthly within four weeks.

(iv) Consolidated report of government operations (TOFE) to be transmitted monthly within four weeks.

(v) CPI data to be transmitted monthly within five weeks.

(vi) Flash report of NBC accounts to be transmitted weekly within one week.

(vii) Trade data to be transmitted monthly within ten weeks.

(viii) Any publicly contracted or guaranteed nonconcessional borrowing to be transmitted within three weeks.

(ix) Any external payments arrears to be transmitted monthly within three weeks.