Cambodia

Letter of Intent and Memorandum of Economic and Financial Policies, September 29, 1999

Achieving savings on the wage bill for 1999 through removing redundant workers (ghosts, irregular cases, absentee workers, voluntary departures, and technical decentralization) from the civilian payroll (targeted at 3,600); and removing ghost soldiers (12,868 as of June, along with 105,234 ghost children) from the military payroll, in line with the program for demobilization (PFP paragraphs 20-21). New civilian recruitment will be kept below 920.

In order to complete the transition to a two-tier banking system, the NBC will facilitate the privatization of the Foreign Trade Bank (FTB) in which it is still a major shareholder, by implementing a restructuring plan drawn up following the recently completed full audit of the FTB. The FTB will be privatized by end-2001, and in the interim, the FTB will grant new loans only on strictly commercial criteria.

Policy Framework Paper 1999-2002 , October 6, 1999

The government attaches importance to achieving a substantial shift in public expenditure toward priority social areas and economic infrastructure. With recent improvements in the security situation, the government will aim at a significant and durable reduction in defense and security spending from 4.2 percent of GDP in 1998 to 2.5 percent of GDP in 2002. This will require sustained reductions in operational expenditures and in the military wage bill in line with the planned removal of ghost soldiers and the demobilization program. The civilian wage bill (1.7 percent of GDP in 1999) will be contained and any further increases in wages will be tied to progress in implementing civil service reform.

Following increases in the size of the civil service in recent years, the government's objective is to rationalize and downsize the civil service. The precise number and status of civil servants needs to be ascertained and for this purpose, the government will fully implement the computerized payroll and management system. This system is now operational in eight ministries, and will be extended to all ministries by March 2000. On this basis, the government will strictly limit the number of new hires and reduce the number of civil servants in 1999 through elimination of all redundant workers and through normal attrition. Further reductions will be made in 2000-2002 following a functional review of all ministries and adoption of a comprehensive civil service reform program, all aimed at containing the wage bill to within 1.7 percent of GDP while upgrading the civil service.

Building on the progress in defining a strategy and a regulatory framework for public enterprise reform, further steps will be taken to establish a more efficient and streamlined public enterprise sector. The government intends to corporatize the eleven (mainly infrastructure) SOEs to remain in the public sector in accordance with the Law Regulating the Public Enterprises. Furthermore, restructuring plans for seven rubber plantations and a privatization schedule will be prepared, aimed at privatizing at least one selected plantation by December 2001.

The banking system must be strengthened to better meet the development needs of the economy. The new Financial Institutions Law will be adopted by October 1999, under which banks will be subject to relicensing and the provisions of the law. The Foreign Trade Bank, in which the National Bank of Cambodia (NBC) is still a major shareholder, is being restructured and will be privatized by end-2001. On-site inspections of banks through internationally recognized audit firms will be continued and their frequency increased. Further improvements in banking supervision capacity will also be made by increasing and training NBC staff. Credit policy will be geared to reducing inflation through avoiding recourse to bank financing of the budget. Issuance of treasury bills at market determined interest rates will be initiated to promote intermediation and provide the NBC with a monetary policy instrument, thereby contributing to dedollarization.

To commercialize and strengthen the power sector, and attract private sector investment, the government aims to: re-establish an adequate supply of electricity nationwide, through direct support of donors and private participation; enact an Electricity Act and establish a regulatory body (Electricity Authority of Cambodia); commercialize EDC through a performance- based contract; strengthen sector managerial and implementing capability; formulate procedures for the selection and contracting of private generators; and formulate strategy for rural electrification and initiate the first project.

Policy Framework Paper Matrix, 1999-02
Reduce number of civil servants through elimination of redundant workers, normal attrition, a strict limit on new hiring, and further downsizing. 1999-02
Adopt and implement an action program for civil service reform, including targets for downsizing. 2000-02
Privatize first rubber plant. December 2001
Restructure and privatize the Foreign Trade Bank. Sept. 1999-Dec. 2001

Letter of Intent and Memorandum of Economic and Financial Policies for 2000, August 31, 2000

Government expenditure was kept in check and its composition improved. The total wage bill increased marginally in 1999 to 4.6 percent of GDP, despite a 30 percent wage increase granted in May, thanks to the elimination of "ghost" soldiers. Moreover, expenditure for defense and security was close to budgetary appropriations, while spending committed for the social sectors (health, education, and rural development) was allowed to increase by 53 percent, mainly in the latter part of the year. Development expenditure also exceeded program projections owing to an acceleration of locally financed development projects in the last two months of the year, including for the social sectors.

Progress has also been made in key areas of structural reform. In particular, a military census was completed in December 1999, and the discharge of 1,500 soldiers was completed as part of the pilot demobilization program. The census of the civil service was also completed in March 2000, as programmed. The Forest Crime Monitoring Unit (FCMU) has begun to issue quarterly reports on its operations, and a review of forestry concessions was completed in May 2000. New legislation and implementing regulations for the banking system have been approved and the process of re-licensing banks is underway. Finally, negotiations on a new contract for pre-shipment inspection of imports (PSI) were concluded in August 2000.

A reform strategy and targets for rationalizing the civil service will be formulated and agreed with the World Bank by March 2001. No wage increase will be granted until the reform strategy is agreed. The reform strategy will take into account efforts to date, including: (i) the removal of 6,091 irregular cases identified so far by the census, plus other irregular cases as they are identified; (ii) the completion of finger-printing and computerization of the census data base; (iii) sufficient results from a functional analysis of government operations; (iv) the initial experience in the formulation of Priority Mission Groups (in consultation with the World Bank and relevant donors); and (v) World Bank simulations on possible reform scenarios using the initial census results. For the remainder of 2000, government hiring is expected to amount to 4,500, consisting of 4,100 qualified teachers, 300 medical graduates, and 100 other civil servants. In the future, the size of the civil service will be monitored through the use of a central computerized payroll. The wage bill in the 2001 budget will be prepared on the basis of the status quo. Reserve funds (to be agreed in the context of budget formulation) will be included in the budget to reflect potential costs associated with the implementation of the Priority Mission Groups; after the announcement of the reform strategy, the budget will be revised accordingly. Monthly information, in a standardized format, on the implementation of the ongoing reform actions will be available to the IMF and the World Bank starting in September 2000.

In other structural areas, the main components of new commercial legislation have been submitted to the Council of Ministers and are expected to be submitted to the National Assembly by end-2000 as envisaged. All state-owned rubber plantations have been corporatized, and steps will be taken to prepare the first plantation for privatization by end-2001.

Key Policy Actions and Structural Benchmarks
Civil service reform. Removal of 6,091 irregular cases and agreement on next steps as setout in paragraph 13 of the MEFP. Expected to be completed by September 5, 2000.

Interim Poverty Reduction Strategy Paper, October 20, 2000

Restructure and privatize the Foreign Trade Bank. 2000-01
a. Civil service reform Rationalize the civil service through elimination of irregular workers, normal attrition in line with sector personnel management strategies geared towards quality, efficiency and overall performance of the civil service. 2000-02

Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding, December 18, 2000

The government is implementing an administrative reform program aimed at improving the quality of service delivery and strengthening governance. Preparatory efforts for administration reform are being undertaken with a view to designing a strategy by end-March 2001 to rationalize the civil service, in consultation with the World Bank and donors. To validate the recently completed civil service census and ensure the integrity of the payroll, a computerized payroll will be implemented for all central administration employees by end-December 2000 and by end-July 2001 in all provinces. In this context, the computerized payroll has already been used to verify the removal of previously identified "ghost" employees in several ministries, and this process will be continued as the computerized payroll is completed. No additional new hiring will take place until the strategy to rationalize the civil service has been announced, and thereafter all hiring will be monitored through the use of a Human Resource Management Information System (HRMS), as it is developed. To finance potential costs associated with the implementation of civil service rationalization, the 2001 budget provides for specific provisions set under a reserve fund amounting to CR 20 billion. To monitor progress in this area, the government began providing periodical information to the IMF and the World Bank in an agreed format in November 2000.

As part of bank reform, the Foreign Trade Bank (FTB) will be restructured in 2001 and subsequently privatized. A board of directors has been appointed, and based on the outcome of a recent audit, the FTB will be recapitalized in two stages: (i) the NBC has transferred to the FTB real estate to fulfill the initial capital requirement of CR 10 billion; and (ii) the Ministry of Economy and Finance will issue government bonds to bring FTB's capital up to statutory requirements by end-June 2001. Technical assistance from the IMF will be provided to assist in the design and issuance of capitalization bonds. In preparation for future privatization, the FTB will upgrade its management capabilities, including through recruitment of foreign managers, and will seek private shareholders. In addition to ongoing assistance from the IMF, the government will request assistance from IFC and AsDB to complete the restructuring and privatization process in a timely and orderly manner.

Key Structural Policy Actions for 2000-2001
Using the computerized payroll for the central administration, verify that "ghost" employees and other irregular cases were removed as directed by the August 15 subdecree. Implemented. Removal of irregular cases have been verified using the computerized payroll as it is established.