Cambodia - Structural Adjustment Credit Project

Report No. PID8403 Project Name Cambodia - Structural Adjustment Credit (@) Region East Asia & Pacific Sector Macroeconomic - structural adjustment Project ID KHPE58544 Borrower(s) Kingdom of Cambodia Implementing Agency Ministry of Economy and Finance Street 92 Sangkat Wat Phnom Khan Daun Penh Phnom Penh, Cambodia Tel: (85) 5-23460159 Fax: (85) 5-23427798 Environment Category C Date PID Prepared February 22, 2000 Projected Board Date February 29, 2000 Background After almost three decades of armed conflict, Cambodia remains one of the poorest countries in Asia. Its 11 million citizens have an average per capita income of US$290, and 36 percent of them live below the poverty line. Poverty is concentrated in the rural areas, and rural poverty is four times higher than the 11 percent poverty incidence in Phnom Penh. Unsettled politics still shapes policy and economic performance. The formation of the Royal Government--a coalition government--in 1993 allowed the country to stabilize the economy, restore economic growth, and begin reforms to transform the economy into a market-oriented one. Since 1996, however, tensions between the two main coalition partners over power sharing escalated, and culminated in July 1997 when the First Prime Minister was ousted by force. The Government's reform efforts weakened, serious fiscal and governance problems again surfaced, and the economy deteriorated. Many donors suspended all but humanitarian assistance. After a long political stalemate, the elections were held in July 1998 for the National Assembly. A new coalition Government emerged in November 1998 and politics has become more stable. The security situation has also improved significantly following the mass defection of the former Khmer Rouge soldiers. The new Government is keenly aware of the need to improve macroeconomic policies, mobilize resources for investment, rationalize expenditures, and address governance problems as a way of starting the country down a path to sustainable growth. At the third CG meeting held in February 1999, Prime Minister Hun Sen reiterated the Government's commitment to such a program. Donors were encouraged with the Government's recent actions and have signaled a willingness to be partners in Cambodia's new development efforts. Project Objectives The Government's recent policy actions have created new momentum for reform. Cambodia is now at a critical juncture in making a transition to sustainable  development. To make a successful transition, the Government must tackle its underlying governance problems in economic management. IDA has provided fast- disbursing support in the form of an Emergency Rehabilitation Credit in 1993 and an Economic Rehabilitation Credit in 1995, but without specific conditionality attached. The SAC program aims to help push forward the Government reform program in the following three areas, in close collaboration with IMF's Poverty Reduction and Growth Facility (PRGF) program. First, the SAC program aims to assist in improving public resource management which includes resource mobilization and forestry management. Second, it would assist in enhancing public sector management which comprises expenditure rationalization and preparatory steps for military demobilization and administrative reform. Third, it would assist in formulating a strategy on enhancing governance and fighting corruption in economic management and implementing it. Project Benefits The SAC would assist the Government in making a successful transition toward sustainable development with significant poverty reduction and broad-based economic growth. With full implementation of the SAC program, per capita income could increase from US$290 in 1999 to US$360 in 2002. In parallel, the level of poverty could fall from 36 percent in 1999 to 27 percent by 2002. Furthermore, aid effectiveness would be enhanced and an environment for private sector development would be improved. Although these potential outcomes would not just stem from the SAC program implementation, the benefit of implementing the SAC program would be significant. Project Risks There are four main risks: (a) deterioration in political stability; (b) insufficient political will; (c) weak institutional capacity; and (d) funds not being used for the purposes intended. First, although armed conflict has ended, and peace has prevailed for more than a year since the last elections, there is lingering friction between the Government and opposition party particularly on issues of governance and accountability. This risk could be mitigated through promotion of activities that foster greater participation and transparency. Second, the reform program could slacken if the reforms encroach on powerful vested interests. This risk could be mitigated through concerted donor/NGO efforts in monitoring the progress of the reforms. Third, implementation of a reform program could be delayed because of weak capacity of public institutions. This risk could be mitigated by: formulating a clear phased strategy in policy actions; focusing on preparatory steps rather than the implementation of institutional reforms per se; focusing on a pilot ministry; increasing flexibility in the timing of reform with a floating tranche; and assuring that institutional capacity is being built up through well targeted technical assistance. Fourth, while tracking the usage of funds will be impracticable, this risk could be mitigated by: monitoring performance indicators; requiring the Government to submit several reports on a regular basis; widely disseminating information on the SAC to the public; and requiring an audit of the Deposit Account to be carried out by independent auditors. These risks are not minor. But they are acceptable when viewed relative to the potential benefits. The next three years constitutes the first serious opportunity in a generation for Cambodia to launch its development. - 2 -  Project Financing The credit amount is SDR 21.9 million (US$30 million equivalent). The credit would be disbursed in three tranches. The first tranche of SDR 7.3 million (US$10 million equivalent) would become available immediately upon effectiveness; the second tranche of SDR 11.0 million (US$15 million equivalent) after a satisfactory review of the implementation of the agreed actions and achievement of the second tranche release conditions; and the floating tranche of SDR 3.6 million (US$5 million equivalent) after the satisfactory review of the implementation of the agreed actions and achievement of the floating tranche release conditions. Project Implementation The Ministry of Economy and Finance will be responsible for monitoring the implementation of the SAC program. Environmental Aspects In accordance with Bank guidelines, the proposed operation has been placed in Category C and will not require an environmental assessment. Poverty Category While the SAC program does not include programs directly targeting the poor, it would contribute to improving the access of poor households to basic social and economic services such as basic education, health facilities, piped water, rural roads through reorientation of expenditures toward basic health, education, and rural development. Project Objective Category The project is a structural adjustment operation. Contact Points: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager Su-Yong Song Telephone: (202) 458-0498 Note: This is an information on an evolving project. Certain activities and/or components may not be included in the final project. - 3 -