News Brief No. 02/71

News Brief: IMF Completes Fifth Review of Cambodia's PRGF Program and Approves US$11.2 Million Credit

July 22, 2002

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Cambodia's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement. This enables the immediate release of a further SDR 8.4 million (about US$11.2 million) from the arrangement, which would bring total disbursements under the IMF-supported program to SDR 50.1 million (about US$ 67.3 million).

Cambodia's arrangement was approved on October 22, 1999, in a total amount equivalent to SDR 58.5 million (about US$78.5 million-see Press Release 99/51).

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the IMF Executive Board's discussion, Eduardo Aninat, Deputy Managing Director and Acting Chairman, made the following statement:

"The Cambodian authorities have continued to make good progress in implementing their economic reform program. Inflation remains low and economic growth is being sustained despite a weaker external environment. Progress in the implementation of structural reforms has also been broadly satisfactory, but reform efforts need to be strengthened in key areas, particularly revenue administration, public expenditure management, forestry policy, and civil service reform. Further improvements in governance are also key to meeting program objectives. To minimize the program's vulnerability, it is important that technical assistance be adequate, well coordinated, and well used to build capacity in all levels of government.

"The PRGF-supported program continues to concentrate on a reorientation of fiscal policy. To achieve the revenue targets, strong action is needed to improve tax and customs administration and nontax revenue collection. Enhancing cash management and overall budget execution is also required. To maintain overall financial stability, domestic financing of the budget should continue to be avoided and fiscal decentralization implemented gradually to maintain effective control of overall spending.

"Faster progress in several areas of structural reform would help sustain growth and further reduce poverty. Completing the restructuring of the Foreign Trade Bank and enhancing bank supervision will be important for promoting the sound development of the financial system, while completing the military demobilization by end-2002 will facilitate continued shifting of expenditure away from defense. Civil service reform must be accelerated to improve the efficiency of public service delivery, and further legal and judicial reform is required to improve the investment environment. In addition, it will be important to achieve a sustainable forestry policy, including the adoption of community forestry practices to improve the standard of living of the rural poor. Deepening trade reform and reducing trade facilitation costs will enhance growth prospects. In this regard, the PRSP, expected to be completed by end-October 2002, should highlight the links between trade and poverty reduction.

"Donor support and debt relief will continue to be crucial to determine the program's success. Accordingly, it is important that the authorities and Cambodia's main bilateral creditors continue their good faith efforts to complete outstanding debt rescheduling agreements in the near future, on concessional terms consistent with Cambodia's fiscal constraints. Moreover, nonconcessional borrowing should continue to be avoided," Mr. Aninat said.