No 06 kg

The Royal Government of Cambodia (RGC) has put forth measures aimed at enhancing the efficiency in managing and implementing economic and public finance reform in conjunction with three other reform programs, notably the public administration and judiciary reforms, and military and police demobilization. These reform programs are reflected in the RGC's policy platform, launched at the National Assembly of the Kingdom of Cambodia on 30 November 1998, and the decision made by the Council of Ministers meeting from 2 December 1998 onward. These measures are designed to ensure efficient and durable implementation of the laws and regulations related to economic and public finance reforms.

1. THE ECONOMIC REFORM

The main objectives of the RGC's economic policy are as follows:

1. Accelerate the rate of sustainable economic growth with a view to improving the material wellbeing and create employment for the Cambodian people. Ensure gradual implementation of the poverty alleviation policy;
2. Stabilize prices and the exchange rate, contain the inflation rate to a single digit in order to maintain economic stability, prevent the loss of revenue and private savings caused by exchange rate fluctuations, increase the public's confidence in the national currency, the riel, and move towards cautious dedollarization;
3. Attract both domestic and foreign investment for the development of domestic production and services and to promote exports;
4. Reduce step by step the current account deficits through export promotion, specialization and comparative advantages of factor endowments;
5. Upgrade physical infrastructure through public investment programs.

The following measures were introduced by the RGC in order to achieve the above strategic objectives.

1. Measures With Regard to Private Investment

The Ministry of Economy and Finance (MEF), the Council for the Development of Cambodia (CDC) and relevant ministries, shall take the following measures:

• Ensure macroeconomic and political stability and social order. Establish an adequate legal framework and institutional structures in order to encourage investment and create a save environment for the business;

• Monitor and provide reports, on a regular basis, on the progress of the investment project implementation. Take action against the delays in the implementation of investment projects and the negligent execution of agreements, contracts, permits and licenses;
• Implement the existing Law on Investment in conjunction with the Law on Taxation and the Financial Laws;
• Conduct studies, provide thorough consideration and analysis, and if necessary, propose the amendment of relevant articles of the Implementing Regulations for the Law on Investment;

• Conduct studies and provide thorough consideration and analysis on the amendment of the Law on Investment in order to reduce some incentives and review the list of suggested areas of investment, while maintaining Cambodia's competitiveness vis-a-vis other countries;
• Strengthen the "one stop shop" mechanism in order to ensure that investment projects are approved within the proposed 45 day period;
• Carry out studies and compile necessary data and information to facilitate investors;
• Take precaution and apply strict measures while considering and making decision on granting incentives and customs duty exemptions under the Law on Investment;
• Strengthen and foster cooperation between the tax and customs authorities, on the one hand, and the CDC/Cambodian Investment Board (CIB) and relevant ministries and agencies, on another.
• Enhance the monitoring mechanism through the cooperation between relevant authorities with a view to establishing a regular control and monitoring of investment project implementation and the tax exemptions granted to investors. This is designed to ensuring timely implementation of the investment projects and the use of the tax-free materials, equipment, machinery for the purpose of investment projects. The failure to honor the investment terms and the project implementation schedule shall render the investment license null and void;
• Apply strict penalties for the diversion and the sale of tax exempted goods (i.e. the tax paid by the government) provided within the framework of the Law on Taxation or for the use of these goods for the purposes unrelated to the investment projects;
• Develop and review the private investment policy by weighting the benefits enjoyed by investors and the real value added accrued to the economy;
• In order to prevent tax evasion, in particular the refusal to pay the tax on unused land, the CDC shall require from investment applicants a tax receipt, issued by the Taxation Department of the Ministry of Economy and Finance, which attests that the company concerned had fulfilled its tax obligations, before it grant a license to the company to invest in the land subjected to the law on unused land or any other projects;
• Open a separate counterpart account to record the loss to the government's revenue, caused by customs duty exemptions granted under the Law on Investment in order to determine the actual size of the investment expenditure and the budget;
• Attract more international assistance for the purpose of boosting the investment in physical infrastructure and basic services in order to establish a sound environment for private investment;
• Take measures to assist small and medium enterprises (SME) and handicraft production, including in finding credit sources and developing human resources;
• Speed up the adoption of a set of laws, which underpin private sector development.

The policy for human resources development shall include the following:

• Provide regular, in-service training to upgrade government officials' skills in economics, finance and other subjects, such as information and foreign languages;
• Prepare research programs to establish the variables and factors determining economic and financial policies in Cambodia;
• Develop information and computer science, establish an information exchange network and work out programs for the management of data on economic, financial and budgetary management;
• Establish a Resource and Documentation Center in order to gather materials on economics, finance and budget, documents on international financial institutions, such as the World Bank, the International Monetary Fund, the Asian Development Bank. The Center shall also collect materials about the experiences of economic development in the region and in other parts of the world.

The main objectives of foreign economic policy are to expand and strengthen economic ties and cooperation with the rest of the world through the integration of the Cambodian economy into the regional and world economy. This is designed to utilize the advantages of international division of labor to promote economic development and improve the welfare of the population. To achieve these objectives, the MEF shall cooperate with relevant ministries to take the following measures:

• Continue to develop a program on international trade liberalization and cautious integration of the Cambodian economy into the world economy. Make preparations to obtain economic benefits and face the challenges of the economic globalization in the region and in the world;
• Overhaul the legal, procedural and institutional structures in line with the new standards and the best practices prevailed in the region and the world;
• Make thorough, technical preparations for Cambodia's playing an active role as an ASEAN member and strengthen bilateral relations with all ASEAN countries;
• Promote economic cooperation and take the lead in the enhancement of relationships with regional and international economic institutions;
• Develop research papers on the economic issues facing Cambodia's major trading partners and investors in order to study their markets and identify new market niches for Cambodian products, seek new sources of foreign financing, attract investment and foster the transfer of technology;
• Consider the possibility of establishing formal ties with other economic blocs, such as the European Union (EU), the Asia-Pacific Economic Cooperation Organization (APEC) and the North American Free Trade Area (NAFTA);
• Diversity exports in order to avoid the dependency on a few export products;
• Take an active part in the process of globalization and maximize the benefits from the ASEAN Free Trade Area (AFTA) and enlarge the economies of scale in order to improve Cambodia's competitive edge in regional and world markets and increase the country's attractiveness for investment;
• Prepare for the implementation of the Common Effective Preferential Tariffs (CEPT) Agreement and trade liberalization in ASEAN through the reduction of customs tariffs and non-tariff barriers;
• Assess the implications of the implementation of tariff reduction and the removal of non-tariff barriers;
• Develop the harmonized customs nomenclature, customs valuation and procedures;
• Introduce computerization in the Customs Office and set up a customs database on ASEAN members;
• Upgrade the capacity and adjust the institutional and legal structures and existing procedures of the MEF;
• Build up institutional capacity for the preparation of international trade statistics in order to make regular assessment on Cambodia's foreign trade, in particular trade with ASEAN members;
• Prepare for economic and financial structure overhaul and introduce new structures for domestic enterprises and production in order to adapt to trade liberalization in the region and the world.
• Conduct research on the possibility of creating comparative advantages in the sensitive areas. Identify the potentials to withstand the regional trade;
• Speed up the adoption of the draft Customs Code;
• Encourage the National Assembly to adopt a sixth-digit, harmonized tariff nomenclature.

It is true that countries with higher degree of development, especially Cambodia's neighboring countries, has spent many decades to build up the nation, establish the authorities, educate the people, develop the economy and integrate their country into the world economy. Cambodia however has to accomplish these tasks within a few years. We are conscious that we are not in the position to do it on our own. We have to mobilize the international community and the international development organizations to help Cambodia as we have done since 1992. There are two inseparable realities. First, development cannot be sustainable and the international community and investors will not have confidence in us if we fail to implement the reform programs. Second, in this regard, we cannot accelerate economic growth and foster development if there is no external assistance, for domestic savings are very low. We understand that the better we carry out these reforms, the more assistance we can hope for Cambodia's development. Therefore, the motto to be remembered is external assistance-reform-growth. In order to accomplish these tasks, the MEF, the CDC and other relevant ministries should take the following steps:

• Continue to implement the economic, political, financial, institutional and social reform programs to move towards the market economy, especially speed up the reforms of the public finance, taxation, customs policy, the central bank and privatization etc.
• Pursue structural and management reforms and the transformation of attitudes, including the fight against corruption;
• Deploy efforts to obtain the ownership of the reform programs and implement practical measures to improve the efficiency of aid utilization. The consultation with donors on reform programs should not be regarded as a condition;
• Overcome the shortages of human resources and inadequate absorptive capacity, and crack down on crimes and illegal activities;
• Strengthen and establish close relationships with the international financial institutions, such as the World Bank, the IMF and the ADB;
• Improve public relations with donors;
• Improve the relationships and coordination with international organizations and non-governmental organizations;
• Strengthen the partnership and open a new chapter of relationships to reflect on the improved political and social situation in Cambodia;
• Mobilize more financial and technical assistance to support Cambodia's development;
• Propose to donors to conduct audits on their aid programs in order to eradicate corruption;
• Give priorities to strategic sectors and activities in order to speed up economic growth and achieve balanced development.

In order to ensure the efficient implementation of the reform programs, the RGC has taken decisive measures to strengthen the budgetary discipline, continue fiscal reforms and clean up the public finance. This is designed to accelerate further economic growth, attract both domestic and foreign investors and mobilize more foreign aid. In this regard, it is necessary to reduce the overall budget deficit, especially to generate current budget surplus by taking revenue-enhancing measures, improve the rationalization and efficiency of the expenditure and promote good governance in tax and customs administration. The RGC decided to put forth the following measures:

1. Revenue Enhancement

• "Tax exemption " must not be granted in Cambodia. If necessary it shall be the burden to be shouldered by the government;
• Ensure efficient implementation of the new provisions of the Law on Taxation, with emphasis being placed on the value-added tax, which has been implemented since 1 January 1999. At the same time, efforts should be deployed to improve the collection of the advanced tax on dividend distribution and the withholding tax by speeding up the adoption of the Company Act and upgrading the audit capacity of the Taxation Department. Prevent the revenue loss caused by tax evasion and ensure strict implementation of the tax on turnover charged on first sale after import;
• Expand the tax base. In particular, implement the payroll tax in accordance with the law;
• Take stringent measures to ensure proper collection of the wealth transfer tax levied in all provinces and cities, with attention being accorded to Phnom Penh, where the transfer of ownership in immovable property, the sale of land and houses and ownership transfer have been frequent occurrences;
• The authorities shall not be allowed to approve the transfer of ownership titles or the transfer of ownership on land, which is subject to the tax on unused land prior to tax payment;
• Strengthen tax audit by conducting further research, surveying the tax base and the taxpayers, including businesses, producers and service providers in order to increase fiscal efforts and collect tax to the full amount of tax due. Make proper tax assessment and re-assessment, apply penalties for reducing the tax amount, failing to pay tax, committing tax evasion, obstructing the implementation of the Law on Taxation, and close the loopholes for tax avoidance.
• Apply strictly the recovery measures to the taxpayer or withholding agent. The competent authorities and the local governments at all level shall assist the tax administration to implement the recovery measures, when the taxpayer or the withholding agent fails to pay tax by freezing the taxpayer's bank accounts, stopping export-import operations, nullifying permit and license and confiscating the property. The taxpayer's property held or administered by a third person, as well as the payment derived from financial obligations of the third person shall also be confiscated to ensure tax payment in compliance with the Law on Taxation.
• Avoid repealing taxes and duties during the implementation of the budget for the budget is calculated based on the expected revenue. Otherwise, the budget will collapse.
• Build up the capacity of the Audit Unit of the Taxation Department by providing training in tax audit, accounting and improving public relations with taxpayers.
• Strengthen the discipline of the tax officials and take very strict measures with regard to any person, who has deliberately violated the law, such as colluding with the taxpayer to obtain monetary or any other benefits.
• Avoid the abuse of power by other authorities vis-a-vis the tax administration and encourage the settlement of the taxpayer's protest according to the law;
• Ensure that all issues related to taxation are included in the Law on Taxation with the MEF responsible for legislative drafts, implementation and administration.

• Make efforts to collect customs duty and avoid duty exemptions. If necessary it is the burden to be shouldered by the government;
• Implement measures to check and monitor the activities of the duty free shops;
• Impose import duty on all kinds of vehicles;
• Collect surtax on import duty levied on petrol and diesel;
• Strengthen and re-introduce pre-shipment inspection (PSI) on a number of sensitive and heavily traded goods, that have impacts on revenue but increase the efficiency of tax collection. PSI should be applied to the goods that are likely to be smuggled into Cambodia. Attention should be given to PSI on garment products for this measure can help Cambodia retain its Most Favored Nations (MFN) and Generalized System of Preferences (GSP) statuses.
• Review the following principles with respect to the implementation of PSI:

1. Categories of goods subject to new PSI procedures;
2. Categories of goods to be granted PSI exemptions;
3. Service charges to be paid for PSI by customers. Negotiations should be initiated to reduce the charge;
4. Technical modalities for the efficient implementation of PSI, including the determination of entry-exit gateways;
5. Heavy penalties to be applied to the goods' owner who failed to do PSI;
6. Cash penalties to be applied to SGS in case when the authorities revealed that the company had committed any wrong-doing;
7. Negotiation to be initiated with SGS to re-impose PSI.

• Cooperate with the ministry concerned to re-introduce rubber and timber taxes;
• Ensure very strict implementation of measures aimed at preventing, cracking down and eliminating tax evasion in all forms by applying penalties, confiscating goods and bringing the culprits to justice in accordance with the Law on Import and Export Taxes, through close cooperation between the customs administration and all agencies concerned, particularly official of the Product Quality Control Department, Ministry of Commerce.
• Crack down on all kinds of smuggling, especially the smuggling of oil products and motor vehicles under the protection of illegal armed units;
• Take stringent disciplinary sanctions against the customs officials who had deliberately violated the laws and caused the revenue loss by withholding an amount of duty for his own use, colluding with the payer to submit incorrect reports and engaging in smuggling. The customs official who had committed the above act shall be suspended from his position and relieved from his function, and in case of grave offense shall be dismissed from the civil service and brought to justice according to the law;
• The local authorities, the Royal Cambodian Armed Forces (RCAF), the police shall take appropriate measures to immediately stop these illegal actions committed by offenders and military and police officers, who had been involved in the protection or directly or indirectly involved in the smuggling, and apply very strict disciplinary sanctions;
• The RGC orders to the local authorities at all level, the RCAF, police and agencies concerned to provide active support and ensure cooperation with the customs administration in the duty collection, whenever such request is made to solicit support and cooperation, and shall refrain from interfering with the customs' business. They are required to prevent and crack down on all kinds of smuggling in their territory and at border checkpoint.

• Scrupulously check the inventory of the state property by strengthening MEF's role in state property management in compliance with the existing laws and regulations and determine the rights and responsibilities of each ministry in state property management;
• Speed up the adoption by the National Assembly of the draft Law on State Property Management, to be prepared by the MEF;
• Cooperate with relevant ministries to prepare a list of land, forest and mining concessions and other state property leased or sold out to the private sector;
• The collection of non-tax revenue is the sole responsibility of each minister, who acts as the chief financial officer and ensures a direct transfer of revenue to the Treasury as scheduled. There is therefore a need for each minister or chief of the institution to increase his/her own responsibility before the Council of Ministers. The chief of the administrative institution is required to submit, on a regular basis, a quarterly report on the collection of revenue and expenditure outturn, specifying reasons for achieving or not achieving the budgeted targets. The report should spell out measures aimed at addressing these shortcomings. In addition, the head of the institution is required to submit a report on the state property management for the Council of Ministers' approval;
• Encourage and supervise full transfer of revenues to the national, provincial and municipal Treasuries. Attention should be given to the transfer of revenues generated from the lease, sale and exchange of factories, enterprises or other immovable assets administered by the government ministries, agencies, provincial and municipal governments, tourism receipts, visa fees and revenue from posts and telecommunications, civil aviation and information etc.
• Relevant ministries should take the most stringent and tough measures against private companies and lessees of state-owned factories and enterprises failing to make timely payment of non-tax revenue;
• Line ministries are prohibited to earmark revenue and use it to meet their own expenditures in contravention with the Financial Law;
• Take stringent measures and speed up the transfer of revenue to the Treasury as determined by the financial laws;
• Immediately stop the practices and the lease of state-owned assets in violation of the provisions of the Prime Ministerial Order No 30 dated 25 December 1997 on the Management of State Property;
• The MEF shall cooperate with the Ministry of Agriculture, Forestry and Fisheries to improve the management of revenue generated from the auctions of fishing lots;
• The MEF shall cooperate with relevant ministries to monitor and strictly implement measures aimed at ensuring a proper transfer of revenue from timber, rubber and other kinds of revenues by reviewing timber royalties and studying the pace and efforts of implementing forest concession agreement granted by the RGC. Review forest concession contracts and cancel any contract, which has not been implemented or has been implemented in violation of the terms thereof;
• Consider to increase the visa fees and use stickers for issuing visas in order to avoid fraud committed by the immigration official, who can affix stamp to issue visas at his/her discretion;
• Upgrade the capacity and increase the role of the financial controller, whose responsibility is to approve public expenditure and monitor the collection and transfer of non-tax revenue to the Treasury;
• Cancel any contract on the sale or lease of movable or immovable state assets in case when after receiving the head of the institution's protest, the buyer, the lessee or the stakeholder failed to respect the terms of the contract, notably the provisions regarding rental payment or delayed payment;
• Cancel any charged services agreement, which the government had signed with the private sector or a third party, in case when these agreements have caused the damage to the state revenue or the stakeholder fails to honor the terms of the agreement.

        1.4 Expenditure Rationalization and Efficiency

• Economize on government resources, reign in spending, especially secondary expenditure, such as hospitality, travel allowances, water and electricity charges (disconnect any illegal electricity lines for private lighting), interior improvement and refurbishment, petrol allowance and other sundry expenditures;
• Ensure commitment to an authoritative budget process. The head of administrative institution and the chief financial officer or his nominee are prohibited to take action resulted in the increase of outlay in excess of the reserve budget for this purpose, which was not specified in the Financial Law or laws, sub-decrees or regulations existed before the expenditure commitment;
• Implement and honor the monthly allocation program and the MEF shall ensure a proper implementation of the expenditure program and relevant ministries shall transfer all revenue to the Treasury in accordance with the monthly program;
• Comply with the procedures for financial and administrative management of the state entity;
• The public expenditure, earmarked for the purchase of materials, provision of services, repair or construction, shall be disbursed in accordance with the rules, methodology and procedures of the public procurement;
• Strengthen the public procurement system of all ministries, agencies, provinces, municipalities and public enterprises;
• Proceeds from privatization should be used only for public investment in physical infrastructure or as a counterpart funds for projects financed by the international financial institutions or any other project, and are not allowed to be used for any other purposes;
• Reduce defense spending to an appropriate level in order to transfer the savings to increase outlays for economic and social sectors;
• Gradually increase outlays for Education and Health in order to multiply the productivity conducive to economic development;
• Ensure sustainable development by augmenting allocations to Rural development, namely the construction of irrigation projects, rural road network, agricultural extension services with a view to expanding the market economy to the rural areas and helping the poor to make a livelihood and generate income;
• Determine technical modalities for the implementation of the surtax of customs duty on petrol and diesel to be used for financing the maintenance of national, provincial and rural road network and irrigation systems;
• Increase allocative and technical efficiency by introducing gradual measures on decentralized budget. Budget operations should be transparent;
• Ensure the authoritative process of the budget. Minimize the spending decisions outside of the budget process;
• Enhance the responsibility for performance at the level of the spending units. MEF should establish an In-Service Training in Financial Management Unit to help government ministries and agencies to introduce accounting systems for reporting, analyzing and benchmarking resource use by each of their functional units;
• Separate clearly the roles of the line minister, who is the chief financial officer, and provincial governor, who is the delegated financial officer, in the disbursement of budget funds;
• Strengthen the Public Investment Management System by upgrading the line ministry's capacity in implementing the Public Investment Programs. Ensure effective coordination of technical assistance and provide training to the line ministries;
• Move toward better coordination of foreign assistance by introducing aid distribution plan to ensure that the remote outback areas are being targeted. Prepare for a Sector-Wide Approach (SWAP) -the creation of sector working groups with representation from donors, international organizations, NGOs and relevant ministries and agencies- to build up the capacity and ensure coordination of public investment;
• Increase the efficiency of public investment allocations in response to the priorities envisaged in the RGC's development program, notably re-orient expenditures towards agriculture, education, health and infrastructure;
• The MEF shall cooperate with the National Bank of Cambodia (NBC) to consider and prepare the issue of the riel-denominated T-bills in order to mobilize resources to finance the government's public investment priorities;
• Relevant ministries shall pay due attention to the management of both public and private debt. The total size of the debt shall not exceed the country's capacity to service interests and principal;
• Expand the micro-finance schemes in order to mobilize savings and provide financing facility to the people living in rural areas.

• Speed up the adoption by the National Assembly of the Audit Law in order to inspect and check the public and para-public accounts. This draft law also spelt out the need for the establishment of the National Audit Authority, which is designed to rationalize expenditure and enhance budget revenue. Strengthen ex-post audit;
• Adopt the Law on Budget Discipline, which provides for pecuniary penalties to be determined by the court vis-a-vis government officials or agents, who had committed offenses or are found guilty of public fund embezzlement;
• The chief of the institution, the principal financial officer, the delegated principal financial officer, civil servants, government agents and public entities shall be held responsible for any offense related to the implementation of revenue and expenditure.

Upon the receipt of this circular, all ministers, secretaries of state and heads of institutions, ministries, secretariats of state, relevant ministries, provincial governors and mayors shall pay attention to these measures and do their utmost to ensure strict and efficient implementation. These measures are designed to establish a rule of law in Cambodia, maintain social order, ensure efficient, economic management and enhance the revenue to a maximum extent. Government officials are required to submit to the Council of Ministers a report on the course of implementation of the measures, spelling out the progress and impediments to achieving these objectives.

The RGC is hopeful that all ministers, secretaries of state and heads of institutions, ministries, secretariats of state, relevant ministries, provincial governors and mayors will display a strong commitment and determination and contribute to the timely and efficient implementation of the measures envisaged in this circular.

Done in Phnom Penh, 11 June 1999

HUN SEN