Cambodia-Canada Legislative Support Project ROUNDTABLE On THE CAMBODIAN ECONOMY AND NATIONAL BUDGET IN 2005 For Distinguished Members of the National Assembly and Senate December 09, 2004 from 08h30 to 18h00 CAMBODIANA Hotel
Annex 1: Agenda ROUNDTABLE On THE CAMBODIAN ECONOMY AND NATIONAL BUDGET IN 2005 For Distinguished Members of the National Assembly and Senate December 09, 2004 from 08h30 to 18h00 CAMBODIANA Hotel AGENDA Morning 08:30 09:00 Registration 09:00 09:15 Opening remarks by: Mrs. Mom Sokhayouk, Deputy Manager of the Cambodia-Canada Legislative Support Project HE Mrs. Pum Sichan, Vice Chair of the Senate s Second Commission 09:15 09:45 Recent Economic Performance and Medium Term Prospects by Mr. Sok Hach, Director of the Economic Institute of Cambodia 09:45 10:15 Challenges and Prospects of the garment industry in 2005, and afterward by Mr. Michael R. Keller, Economic and Commercial Officer of the Embassy of the United States of America 10:15 11:45 Coffee Break 10:45 12:00 Discussions facilitated by Mr. Sok Hach, Director of the Economic Institute of Cambodia 12:00 13:30 Buffet Lunch Afternoon 14:30 15:00 The Budget and Financial Law for 2005 by Mr. Oum Sothea, Researcher of the Economic Institute of Cambodia 15:00 15:30 Parliamentary Participation in the Budget Process by Dr. Gero Friedel, Senior Advisor to the National Assembly 15:30 15:50 Coffee Break 15:50 16:50 Discussions facilitated by Mr. Sok Hach, Director of the Economic Institute of Cambodia 16:50 17:00 Closing Remarks 1 of 1
Minutes of the Roundtable on The Cambodian Economy and National Budget in 2005 for Distinguished Members of the National Assembly and Senate. Morning of December 9, 2004. The roundtable started at 9am with the sincere thanks of Mrs Mom Sokhayok, deputy manager of the Cambodia-Canada Legislative Support Project, to all the participants and with an apology for some minor changes made to the agenda due to an unexpectedly high turnout. Then HE Mrs Pum Sichan made the opening speech. Panel presentation on the Cambodian economy. After the opening speech, Mr Sok Hach started the presentation on the Recent Economic Performance and Medium Term Prospects of the Cambodian economy. In his presentation, he stressed the impact of high inflation, and particularly the high increase in oil and food prices in 2004. He showed a breakdown structure of interest rates in the micro-finance sector, where the rate of about 10 per cent goes to the Ministry of Economy and Finance and the Rural Development Bank. Based on the current situation of the Cambodian Economy, Mr Sok highlighted five challenges facing Cambodia within the next five years. These are: 1. Protecting remaining forestry; 2. Restoring fish stocks; 3. Distributing land to the poor; 4. Safeguarding the garment industry; 5. Cultivating new sources of growth. He came to the conclusion that it is extremely important for the Cambodian government to carry out reforms. The first priority area should be strengthening the current institutions of public administration and the judicial system. Without effectively enhancing these two institutions, he argued, other reforms (financial, fiscal, natural resource management, decentralization, etc.) would be useless. After the first presentation, Mr Michael R. Keller was invited to provide some information on the evolution of Cambodia s garment industry. He started the presentation with a brief history of the US s involvement in the garment sector in Cambodia since January 1999, when the US and Cambodian governments came to an agreement called the Bilateral Textile Agreement (BTA). This agreement has allowed Cambodia s garment exports free access (without tariffs) to the US market, in exchange for the respect of four core labour conditions: freedom from forced labour, freedom from child labour, freedom from discrimination and the right to assembly. So far, Cambodia has respected the four conditions and Mr Keller suggested that it continues with this model, even thought the BTA would no longer be valid from January 2005. He further stated that urgent reform is a must for Cambodia to lower informal and bureaucracy costs, hence improving 1 of 6
the business environment in the country. According to him, new sources of growth must be diversified, extending to manufacturing-based factories rather than just relying on the garment industry. Discussion Session: Question by HE Ung Bun Ang: Regarding the three types of buyers - those who care about price, those who care about labour conditions and those who care about the two criteria that Mr Michael R. Keller mentioned previously, does Mr Michael R. Keller have any exact number for each group? Answer by Mr Michael R. Keller: There is no doubt that the buyers of Cambodia s garment products are in the second group - those who care more about the labour standard. Therefore, Cambodia should maintain its position to get a competitive advantage from this labor standard. Question by HE Cheam Channy: How can Mr Michael R. Keller explain about the good labour conditions in Cambodia? And why - starting from January 1, 2005, according to him - is it an issue between the buyers and the producers? Why is it not the government s issue? Answer by Mr Michael R. Keller: Cambodia has followed well the International Labour Standard of the ILO. The examples are the existence of strong workers unions and the creation of the Labour Arbitration Council, which is of high value for the workers. Answering the second question, he said: Of course government has a role in the business process, but its power becomes less and less influencing since the buyers are the ones who make decisions with regard to price and labour standard. Question by HE Mrs Mou Sochua: Has the institution (EIC) done research on non-registered exports of agricultural products to the neighbouring countries? Answer by Mr Sok Hach: An estimation has been made based on data from related ministries. According to the estimation, 80 per cent of the Cambodian economy is informal economy. Hence, strong consideration should be turned to the informal economy - not just focus on the formal ones like tourism or the garment industry. Coffee Break Discussion Session (continued). Comment by Princess Sisowath Santa: Besides the five challenges raised by Mr Sok Hach, it is also necessary to diversify activities to rural areas, rather than Phnom Penh. Therefore, it is important to have a good local infrastructure (low cost of bureaucracy, electricity, water etc.) in the rural areas. Question by HE Lam Phu An: There is remarkable growth (30 per cent) in tourism. Where does the revenue go? 2 of 6
Answer by Mr Sok Hach: Tourist arrivals in Cambodia could reach one million in 2004. However, it does not mean that this growth can increase the government s revenue, nor can it reduce poverty in Cambodia. The government can best answer the question where does the money go? Question by HE Son Chhay: Why is the banking system in Cambodia so weak? Is there any research carried out by the institute on the loss of national revenue by sector? And what does the IMF think about the dollarisation in Cambodia? Question by HE Kong Korm: Can the government reduce the interest rate to the appropriate rate? In this case, how much can it help the country s economy? Question by HE Sabu Bacha: Where does the money from the garment exports of about US$2 billion go? And how much do Cambodian people benefit from the garment industry? Question by HE Chao Phally: How can the external assistance of US$504 million contribute to GDP growth? What would happen if Cambodia could not get this amount from the donors? How much do Cambodian people benefit if the gasoline price is reduced to the level of its neighbouring countries? Who controls the inflation - the government or people? Besides this, Mr Phally commented on the unreliable statement of the Ministry of Agriculture saying that Cambodia can replace garments exports with the exports of agricultural products. He said it seems there are some inconsistent explanations between the EIC, the World Bank and the Ministry of Agriculture. Answer by Mr Michael R. Keller: The lack of SME and FDI and the high interest rate is in fact due to high legal risk in Cambodia. This high legal risk includes the fact that there is no arbitration law, no law on bankruptcy and that the enforcement of law is so weak in Cambodia. The simple reason to explain the low FDI in Cambodia is that people do business to make money. Since there is high risk in Cambodia, why do they need to put their money in such a risky country? Regarding the necessity for Cambodia to get external assistance, Mr Keller said: At least donors can create jobs for Cambodians but it is not sustainable for economic development and poverty reduction. The only thing to create enough jobs is the private sector. Here again comes the rule of law, which imposes that parliamentarians have enormous roles to guarantee the rule of law. Answer by Mr Sok Hach: The high interest rate in Cambodia results from the fact that in the micro-finance sector in Cambodia, the banks are still using people-based management. In the developed countries, usually the banks use IT-based management. Concerning the dollarisation of Cambodia, Mr Sok suggested that the Central Bank guarantees the exchange rate, either the official or market rate. Regarding the revenue from garment exports, the EIC estimates that about 20 per cent of the revenue goes to Cambodian people, 70 per cent goes to material imports and 10 per cent is the profit for investors. In order to expand the benefit to Cambodian people, it is necessary to extend domestic Value Added in the country. Responding to the question by HE Chao Phally about the 3 of 6
external assistance, Mr Sok emphasised the importance of external assistance to agricultural development. Question by HE Pou Sothirak: How can we explain the optimism of Cambodia s garment industry? How can WTO membership help Cambodia, in the context of economic development? And what are the roles of parliamentarians in economic development? Answer by Mr Michael R. Keller: Parliamentarians are the key to the rule of law. They have enormous roles to set the rule of law and to enforce its implementation as well as to control the national budget. Regarding the idea that the WTO is beneficial only to rich countries, Mr Michael R. Keller said he would like participants to consider the options of not being a WTO member - in other words not to be involved in trade. He said it seems there is no other better choice for Cambodia. Comment by HE Ung Bun Ang: The comprehensive explanation about dollarisation in Cambodia can be found in a book on Cambodia s macro-economy published by the UNDP. In addition, he asked a question to Mr Keller: What are the average and the lowest tariffs on the import of garment products to the US market? And if Cambodia failed to negotiate with the US, what would be the tariff for Cambodia? Answer by Mr Michael R. Keller: The average tariff rate is 60 per cent and it is impossible to predict the lowest tariff rate approved by the US senate. However, Cambodia should not rely on the low tariff rate. The importance is the rule of law, which can reduce production as well as business cost, to improve its competitiveness. Afternoon of December 9, 2004. Panel presentation on the national budget in 2005. At 2pm, the participants started to discuss the topic of Cambodia s national budget in 2005. Mr Oum Sothea, the first presenter, emphasized the role of the national budget in the country s economic and social development. He mentioned that there is a clear link between policy, national budget and the allocation of the budget. Then he brought the attention of the participants to a few notes on the Budget Law for 2005. Finally, he came to the following conclusions: The Budget Law must be duly implemented to avoid a huge gap in actual implementation; Budget allocation must link with specific development goals; Legislative bodies should actively participate in both budget formulation and oversight; Further reforms must be reinforced to mobilise national revenue and to rationalise public expenditure. National revenue should account for at least 15 to 20 per cent of GDP. Next, Dr Gero Friedel continued the presentation on the roles of parliamentarians in the budget process. His presentation included: Budgetary powers of parliaments; 4 of 6
Analysis of organic law of 1993; Questions on draft budget 2005; Discussions in the National Assembly; Experience in the European Parliament (for details of his speech, please see Annex 7) Discussion Session Question by HE Ung Bun Ang: What are the MEF s answers to the questions asked by the National Assembly s 2 nd Commission during the examination of the draft on the budget law 2005? Answer by Dr Gero Friedel: On the budget revenue side, the government uses the Performance Trimestrial Reporting System. The government will address the non-tax revenues sector. As the examination meeting was currently in process, Dr Friedel could not provide clear answers to the other questions. Question by HE Sam Rainsy: What would be the effect of reforms on the national budget? Would the reforms on fisheries, airports, land concession and corruption help increase the national revenue? Answer by Mr Sok Hach: It is a pity that such research has not been carried out. However, there are some remarks for the budget law 2005. On the revenue side, we see that the government forecasts slow growth of 2 per cent but they still expect to rely on tax collection. Besides, revenue from abroad has decreased compared to previous years and there is no replacement for the revenue from garment exports. Some issues that should be addressed by the MPs to the government are: Will there be any differences between the Budget law this year compared to the previous years, especially on the implementation side? What are the scenarios of the government if they cannot collect revenue as planned? Questions by HE Sok Soty: Is it normal to have a huge amount of reserve credit? And why is there no plan to pay back the debt in 2005? Question by HE Ung Bun Ang: When was the national budget preparation started? Answer by Dr Gero Friedel: The data collection from different ministries started in spring 2004. The council of ministers decided on the draft of the budget law on November 19, 2004 and the preliminary draft reached the National Assembly on December 6, 2004. The reserve credit is usually proposed by the executive body in order that they can use it as they want. Furthermore, he commented that the government should not create new taxes to increase revenue, but should enforce the collection of the existing taxes. Question by HE Mrs Ho Naun: Why there is too much reserve credit, while the revenue collection system is not efficient? Is this reserve for emergency purposes like drought, SARS or HIV? 5 of 6
Answer by Dr Gero Friedel: The reserves are designed for the excessive centralisation of the Ministry of Economy and Finance. For example, the provincial budget must be approved by the Ministry of Economy and Finance and the Ministry of the Interior. After this, Mr Sok Hach made the final remarks. He thanked the attendants and apologised for any problems or mistakes. On behalf of the EIC, he said it would try to estimate the economic effects of social affairs. He also informed the audience about the partnership between the EIC and the World Economic Forum. This partnership enables us to have a view of Cambodia s competitiveness among other countries in the world. The primary data used for this evaluation comes from the Executive Opinion Survey conducted by the EIC. 6 of 6