WORLD TRADE ORGANIZATION
ORGANISATION MONDIALE DU COMMERCE
ORGANIZACIÓN MUNDIAL DEL COMERCIOWT/IFSC/W/12/Add.1
8 August 2002
(02-4270)
Integrated Framework Steering Committee Original:  English/
anglais/
inglés
DIAGNOSTIC TRADE INTEGRATION STUDY FOR CAMBODIA
A Pilot Study prepared under the Integrated Framework for Trade-Related
Technical Assistance to Least-Developed Countries
Part B
CAMBODIA
Addendum
The attached document contains Part B1 (Component Reports - Macro Assessment, Trade Policy, Trade Facilitation,
Poverty Assessment) which was prepared under the Integrated Framework Pilot Scheme.
Part A (Overview) is contained in WT/IFSC/W/12 and Part C (Sector Studies) in WT/IFSC/W/12/Add.2.
Comité directeur du Cadre intégré
ETUDE DIAGNOSTIQUE SUR L'INTEGRATION DU COMMERCE
CONCERNANT LE CAMBODGE
Étude pilote établie au titre du Cadre intégré pour l'assistance technique
liée au commerce en faveur des pays les moins avancés
Partie B
CAMBODGE
Addendum
Le document ci-joint contient la partie B1 (qui présente une évaluation macro-économique, traite de la politique
commerciale et de la facilitation des échanges et contient une évaluation de la pauvreté) de l'étude établie au titre du Progra mme
pilote pour la Cadre intégré.
La partie A (Exposé général) de l'étude est reproduite dans le document WT/IFSC/W/12 et la partie C (Études
sectorielles) dans le document WT/IFSC/W/12/Add.2.
Comité Directivo del Marco Integrado
ESTUDIO DIAGNÓSTICO SOBRE LA INTEGRACIÓN DEL
COMERCIO EN RELACIÓN CON CAMBOYA
Estudio piloto elaborado de conformidad con el Marco Integrado para la Asistencia
Técnica relacionada con el Comercio en apoyo de los Países Menos Adelantados
Parte B
CAMBOYA
Addendum
El documento adjunto contiene la parte B1 (donde figura una evaluación macroeconómica, de la política comercial y la
facilitación del comercio y contiene una evaluación de la pobreza) elaborado en el marco del Programa Piloto del Marco Integrad o.
La parte A (panorama general) figura en el documento WT/IFSC/W/12 y la parte C (estudios sectoriales) en
WT/IFSC/W/12/Add.2.
                                                     
1 In English only./En anglais seulement./En inglés solamente.WT/IFSC/W/12/Add.1
Page 2
TABLE OF CONTENTS
DIAGNOSTIC TRADE INTEGRAT ION STUDY FOR CAMBODI A ...........................................1
PREFACE........................................................................................................................ .......................3
GLOSSARY ....................................................................................................................... ....................4
I. M ACROECONOMIC ASSESSMENT .................................................................................................5
A. Cambodia's key macroeconomic developments and prospects ............................................5
B. Dollarization in Cambodia.................................................................................................... .11
C. Exchange rate arrangements .................................................................................................18
II. D EVELOPMENTS IN TRADE POLICY ...........................................................................................24
A. Introduction................................................................................................................. ............24
B. Measures affect ing imports................................................................................................... .26
C. The ASEAN Free Trade Ar ea Agreement (AFTA) .............................................................40
D. WTO accessi on issues ......................................................................................................... ....41
E. Interface between trade policies, industrial development and poverty alleviation...........45
III. T RADE FACILITATION ................................................................................................................52
A. Preconditions for customs reform .........................................................................................53
B. Review of customs procedures and administration .............................................................60C. Export procedures ............................................................................................................ ......66
D. Monitoring tax and duty free imports ..................................................................................70
E. Camcontrol................................................................................................................... ...........73
F. Trade finance................................................................................................................ ...........75
G. Export processing zones ...................................................................................................... ...76
IV. A
SSESSING POVERTY IMPACTS ..................................................................................................80
ANNEXE S ........................................................................................................................ ....................99
A. Cambodia:  medium term macroeconomic framework ......................................................99
B. Cambodian excise taxes....................................................................................................... .102
C. Effective tariff rates ....................................................................................................... .......103
D. Investment restrictions ...................................................................................................... ...108
E. Cambodia's CEPT schedule.................................................................................................109
F. Documentation processes .....................................................................................................1 10
G. Household expenditures ....................................................................................................... 113
REFERE NCES..................................................................................................................... ..............114WT/IFSC/W/12/Add.1
Page 3
PREFACE
In August 2001, a team of consultants worked with Ministry of Commerce (MOC) officials in
Cambodia conduct a diagnostic study of Cambodia's trade policy issues and technical assistance
needs. The terms of reference for this study were designed to support the Royal Government ofCambodia (RGC) in developing its Pro-Poor Trade Policy Strategy. Ministry of Commerce officials
involved are H.E. Sok Siphana — Secretary of State, In Vothana — Bureau Chief, M Sovichea —
Deputy Bureau Chief, K Keomuny — Deputy Bureau Chief, S Sophann — Director and S Samrath —
Assistant Director. The team members were Kelly Bird, Consultant — Trade Policy, Sandy
Cuthbertson— Consultant, Team leader, Martin Desautels — Consultant WTO Accession, Curtis
Hundley — Consultant sector studies on tourism and fisheries, Hiau Looi Kee — World Bank market
access survey and analysis, Ray Mallon — Consultant sector studies on rice and labour services,Philippe Marciniak — IMF macroeconomic assessm ent, Andrew McNaughton — Consultant sector
studies on diversified agriculture and handicrafts, Maika Oshikawa — WTO sector studies on
diversified agriculture, Sopanha SA — IMF macroeconomic assessment, Isidro Solango —
Consultant poverty assessment, Ieng Sovanarra — Consultant sector study on garments and
Geoff Wright — Consultant trade facilitation. The World Bank Task Manager is Ataman Aksoy.
Following this fieldwork, team members have  prepared drafts of the following reports.
• Part A: Overview.
• Part B: Component reports — macro assessment, trade policy, trade
facilitation, poverty analysis.
• Part C: Sector studies — rice, diversified agriculture, handicrafts, fisheries,
garments, tourism, labour services.
This work in progress will be discussed at a workshop to be held in Cambodia on 19 and
20 November 2001.WT/IFSC/W/12/Add.1
Page 4
GLOSSARY
ADB Asian Development Bank
AFTA ASEAN Free Trade Area Agreement
ASEAN Association of South East Asian NationsCBA Currency board arrangements
CDC Cambodian Development Commission
CED Customs and Excise Department
CEPT Common Effective Preferential Trade
CSES Cambodia Socioeconomic Survey
CP Certificate of processing
ELVIS Electronic visa implementation systemEPZ Export Processing Zone
ERP Effective Rate of Protection
ESCAP Economic and Social Commission for Asia and the Pacific
EU European Union
FDI Foreign Direct InvestmentFMV Fair market value
FTB Foreign Trade Bank
GAP Governance Action Plan
GDP Gross domestic product
GMAC Garment Manufacturer's Association of CambodiaGSP Generalized System of Preference
ICS Inventory control system
IMF International Monetary Fund
LOI Law on Investment
MAFF Ministry of Agriculture, Forestry and FisheriesMEF Ministry of Economy and Finance
MFN Most favoured nation
MIME Ministry of Industry, Mining and Energy
MOH Ministry of Health
NAA National Audit AuthorityNBC National Bank of Cambodia
NGO Non government organizations
PRGF Poverty Reduction and Growth Facility
PSI Pre-Shipment Inspection
RGC Royal Government of Cambodia
ROF Report of Findings
SEDP Socioeconomic Development PlanTEA Temporary Export Authorization
TCAP Technical Cooperation Action Plan
TPD Trade Preference Department
UN United Nations
UNTAC United Nations Transitional Authority in CambodiaVAT Value Added Tax
VSS Valuation Support Service
WB World Bank
WTO World Trade OrganizationWT/IFSC/W/12/Add.1
Page 5
I. MACROECONOMIC ASSESSMENT
1. Since late 1998, when peace was secured and a coalition government formed, Cambodia has
initiated fundamental reforms in many crucial areas and significant progress has been made in
promoting economic recovery, and reducing inflation to low levels.  However, much remains to be
done to rebuild a society and economy shattered by almost three decades of civil strife and to address
the country's areas of vulnerability.  Sustained development, and the alleviation of pervasive poverty,will critically hinge upon continued implementation of broad based actions aimed at strengthening
governance, deepening fiscal and bank restructuring, and establishing a sound legal framework.
Political and financial instability together with sizable capital inflows in the 1990s led to the
polarization of the economy with the US dollar becoming the de facto  legal tender.  While Cambodia
has largely benefited from widespread dollarization of transactions and financial assets, this situation
may not be desirable in the long run, as the lack of a more flexible exchange market could obstruct
further regional integration and affect the country's competitiveness.  However, any reversing ofdollarization is a long-term process and would requ ire continued stabilization and completion of key
structural reforms, especially financial sector reform.  Moreover, it would need to rely on market
based policies rather than administrative measures.
2. This section highlights the key features of Cambodia's macroeconomic environment and the
government's strategy for alleviating poverty in the long run; it also reviews the country's existingexchange rate arrangement and discusses some policy implications of dollarization in Cambodia.  The
second section summarizes key macroeconomic developments and outlines the medium term
macroeconomic framework underlying the government's poverty alleviation strategy, as spelled out in
the Interim Poverty Reduction Strategy Paper (IPRSP) (EBD 2000).  The third section describes the
emergence of dollarization in Cambodia in the last decade and reviews the main benefits and costsassociated with continued dollarization.  The fourth section describes the evolution of the national
currency and highlights some policy implications of dollarization.  The fifth section identifies the core
technical assistance requirements for achieving the government's stabilization and financial reform
objectives.
A. C
AMBODIA 'S KEY MACROECONOMIC DEVELOPMENTS AND PROSPECTS
1. Recent economic and financial developments
3. In the early 1990s, Cambodia first attempted to reconstruct an economy that had been ruined
by almost three decades of civil strife.  This e ffort was supported by a United Nations (UN) sponsored
peace agreement and large inflows of international assistance.  Strides were made toward stabilizing
the economy in 1994-95 under the recovery program supported by the first Enhanced Structural
Adjustment Facility (ESAF) .  However, economic performance deteriorated gradually in 1996-98,
because of political instability.  At that time, growth slowed down and inflation picked up to double
digits, with central bank financing of the budget resuming in 1998 (see chart 1.1).  Reflecting this
period of macroeconomic instability and the large in flow of foreign aid, the ratio of foreign currency
deposits to broad money began to rise steadily.
4. It was not until late 1998 that the political environment stabilized under a coalition
government committed to press ahead with an ambitious reform agenda.  Since late 1999, thegovernment's efforts to restore macroeconomic stability, accelerate economic reconstruction, improve
governance, and reduce poverty have been supported by a three-year Poverty Reduction and Growth
Facility (PRGF) (1999-2002)  in an amount of $81 million.  As a result, crucial measures have been
initiated to address weaknesses in budgetary management, tax and customs administration, banking
system management, economic statistics, the legal framework, and natural resource management.These reforms are also being supported by a comprehensive Technical Cooperation Action
Plan (TCAP) sponsored by various multilateral agencies and donors, and by financial support andWT/IFSC/W/12/Add.1
Page 6
technical assistance by other development partners, including the World Bank (WB) and the Asian
Development Bank (ADB).
5. Macroeconomic performance has strengthened significantly since 1999 (chart 1.1 and
table 1.2).  Economic growth has reached 5–6 per cent annually, despite adverse severe flooding in
2000.  Buoyant garment exports, a recovery in tourism, and a continued increase in agricultural output
have been the chief elements spurring economic growth.  Inflation has been subdued, reflecting fiscaland monetary restraint, improved food supply, and cheaper imports largely stemming from the
depreciation of neighbouring countries' currencies vis-à-vis the US dollar.
6. Cambodia's reform efforts have been hampered by the undeveloped state of basic institutions
necessary to support a market economy.  For example, the fiscal position is severely constrained by an
extremely low ratio of revenue to gross domestic product (GDP) by international standards and a
pressing need to rebuild infrastructure and increase social outlays.  Accordingly, the highest priority
has been granted to strengthening revenue collections, while redirecting military and securityexpenditures toward health, education and rural development.  Cambodia has already increased
revenue by about 3 percentage points of GDP since 1999, but further revenue efforts are needed to
meet expenditure needs over the medium term.  Military expenditure has been reduced in tandem with
increased social expenditure relative to GDP and further reductions are underway under a recently
initiated demobilization program supported by the WB and donors.  Progress in fiscal restructuringhas been achieved while maintaining macroeconomic stability, as current budget surpluses have
remained at about 1½ per cent of GDP; and overall deficits, including development expenditure, have
been contained below 6 per cent of GDP (exclu ding grants).  Cambodia has avoided domestic
financing of the budget since 1999, thus providing room for an expansion in private credit.
7. Since 1999, the authorities have simultaneously pursued a prudent monetary policy aimed at
low inflation and a stable exchange rate.  The increase in broad money has been largely accounted for
by an increase in net foreign assets, while net domestic assets of the banking system declined, owing
to the improved fiscal position.  On the liability side, the bulk of the increase in broad money has
stemmed from foreign currency deposits.  Interest rates have stayed relatively high, reflecting the
perception of a high-risk premia in the lending market.  Mirroring the monetary policy stance, the rielhas been relatively stable in US dollar and real effective terms since late 1998; and official
international reserves have increased to about three months of imports of goods and services.  The
external current account deficit has remained broadly stable at around 10 per cent of GDP (excluding
official transfers), largely due to the strong performance of garment exports and tourism receipts.  The
liberalization of the trade regime is underway in  the context of meeting requirements of the
Association of South East Asian Nations (A SEAN) and the World Trade Organization (WTO).
Cambodia's exchange system is free from restrictions on payments and transfers for current
international transactions.WT/IFSC/W/12/Add.1
Page 7
1.1 Cambodia:  Selected Economic Indicators, 1995-2001
Data source:  Data provided by the Cambodian authorities and IMF staff estimates-40-30-20-10010203040
Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01Percentage changeFood, beverage and
tobacco, CPI
Real GDPTotal CPI
-10-8-6-4-2024
1996 1997 1998 1999 2000Per cent of GDPC urrent balance
Ov erall balance ex cluding grantsOv erall balance including grants
02468101214161820
1993 1994 1995 1996 1997 1998 1999 2000Per cent of GDPTax  rev enue
T r a d e  t a x r e ve n u e
No n  t a x r e ve n u eTotal ex penditure
C urrent ex penditureTotal rev enue
-10010203040506070
Jan-96
Jan-97
Jan-98 Jan-99
Jan-00
Jan-01Per centBroad money
C urrency  in circulationForeign currency  deposits
-30-20-100102030405060
1995 1996 1997 1998 1999 2000Per cent of GDPExports
Current account balance including official transfers
Trade balance
Current account balance excluding official transfersImports
0100200300400500600
Dec-96
Apr-97
Aug-97
Dec-97
Apr-98
Aug-98
Dec-98
Apr-99
Aug-99
Dec-99
Apr-00
Aug-00
Dec-00
Apr-01
Aug-01US$ millionGross international reserves
Foreign currency  deposits
a Annual per cent change.  b 12 months per cent changeWT/IFSC/W/12/Add.1
Page 81.3 Cambodia:  balance of payments, 1997–2006
Unit1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Current account (excluding official transfers) US$m - 246 - 224 - 282 - 331 - 357 - 365 - 375 - 384 - 393 - 429
Current account (including official transfers) - 37 - 30 - 61 - 60 - 83 - 80 - 79 - 75 - 73 - 96
Trade balance a - 263 - 227 - 259 - 338 - 328 - 350 - 377 - 382 - 358 - 389
Exports  786  867  971 1 396 1 498 1 570 1 645 1 746 1 898 2 026
Domestic exports  534  604  709 1 100 1 196 1 262 1 329 1 423 1 569 1 690
Of which : GSP (including garments)  279  392  564 1 012 1 113 1 167 1 221 1 290 1 376 1 482
Forestry  224  178  111  49  43  50  58  78  133  142
Re-exports  252  263  261  296  302  309  315  322  329  337
Imports, f.o.b. -1 050 -1 094 -1 230 -1 734 -1 826 -1 920 -2 021 -2 128 -2 256 -2 416
Retained imports, f.o.b. - 798 - 831 - 968 -1 438 -1 524 -1 611 -1 706 -1 805 -1 927 -2 079
Garments sector - 195 - 275 - 363 - 658 - 724 - 759 - 794 - 838 - 894 - 963Petroleum - 91 - 111 - 121 - 299 - 292 - 283 - 274 - 262 - 251 - 252Other retained imports - 511 - 445 - 484 - 481 - 508 - 570 - 638 - 705 - 781 - 864
Imports for re-export, f.o.b - 252 - 263 - 261 - 296 - 302 - 309 - 315 - 322 - 329 - 337
Services and Income (net) - 43 - 57 - 93 - 63 - 100 - 88 - 74 - 80 - 119 - 125
Services (net)  4 - 9 - 17  19  39  72  93  93  59  58
Of which : tourism  55  59  94  149  182  222  245  257  270  283
Income (net) - 47 - 48 - 76 - 81 - 139 - 160 - 166 - 173 - 178 - 183
Of which : interest
 b - 3 - 2  7  18 - 16 - 15 - 11 - 8 - 2  6
Private transfers (net)  60  60  70  70  70  73  75  79  83  85Official transfers (net)
 c  210  194  220  271  274  285  296  308  321  333
Capital and financial account - 53 - 75 - 33 - 11  88  90  92  77  78  78
Medium and long term loans - 77 - 69 - 63 - 5  101  82  68  37  22 - 4
Disbursements  38  46  56  115  137  118  106  76  77  67Amortization - 115 - 115 - 119 - 119 - 36 - 37 - 38 - 39 - 55 - 71
Foreign direct investment  168  121  146  110  110  116  127  140  154  169Short term flows and errors and omissions - 144 - 126 - 115 - 116 - 123 - 108 - 103 - 100 - 98 - 87
Overall balance - 90 - 105 - 94 - 70  5  10  13  2  5 - 18
Financing  90  105  94  70 - 5 - 10 - 13 - 2 - 5  18
Change in gross official reserves - 28 - 11 - 32 - 62 - 47 - 71 - 59 - 79 - 79 - 85
U s e  o f  F u n d  c r e d i t  0-  1  8  4  9  9-  1-  9-  8-  5
Debt rescheduling
 d  0  0  0  0 1 356  36  35  35  35  32
Change in arrears (- = reduction)  118  117  119  120 -1 320  0  0  0  0  0
Memorandum items :
T r a d e  b a l a n c e ( i n  p e r c e n t  o f  G D P ) -  8-  8-  9 -  1 1 -  1 0-  9-  9-  8-  7-  7Current account balance
Excluding official transfers (in percent of GDP) - 8 - 8 - 9 - 10 - 10 - 10 - 9 - 9 - 8 - 8
I n c l u d i n g  o f f i c i a l  t r a n s f e r s ( i n  p e r c e n t  o f  G D P ) -  1-  1-  2-  2-  2-  2-  2-  2-  1-  2
Gross official reserves
 e  262  390  422  484  531  602  661  740  820  904
In months of imports of goods and services  2  3  3  3  3  3  3  3  3  4In months of core imports of goods and services 
f  4 4 6 5 6 6 6 6 6 7
Net international reserves  197  323  349  411  451  511  571  659  746  836
Nominal GDP US$m 3 105 2 813 3 008 3 172 3 440 3 739 4 102 4 500 4 889 5 311
a Includes estimates for unrecorded forestry exports and unrecorded petroleum imports.b  Variations in interest payments in 2000–01 ar e linked to assumptions on debt restructuring.c  Official aid flows are based on the current trend and the additional
funds mobilized at the Consultative Group meeting (June 2001).d  Assumes the implementation of the 1995 Paris Club flow rescheduling on Naples terms (67% NPV reduction) in 2001.e  Includes $117 million associated with the return of Cambodian
gold holdings by the BIS in 1998.f Imports excluding imports for re-export and imports for garment sector. p Projections.
Sources:  Data provided by the Cambodian authorities and IMF staff estimates and projectionsWT/IFSC/W/12/Add.1
Page 9
8. Cambodia has made substantial progress in implementing key structural reforms since 1999,
although there were delays in some important areas.  In an effort to improve governance and combat
corruption, the government established a National Audit Authority (NAA) and approved a
comprehensive Governance Action Plan (GAP) in early 2001.  Initial steps to improve governance in
the forestry sector have also been taken in recent years, through increased monitoring of illegal
logging and forestry concessions and preparation of a new forestry law.  The authorities have madestrides in restructuring the country's banking system and further efforts are underway to broaden
financial intermediation and establish a modern payments system.  In addition to military
demobilization, Cambodia has also embarked, with WB and donor support, on a broad administrative
reform program.  Following a census of civil servants, the creation of a computerized civil service
payroll, and the design of comprehensive reform strategy for 2002–06, civil service reform is aimed at
providing higher incentives to senior managers and strengthen capacity-building, while maintaining
fiscal sustainability.
2. Medium term macroeconomic framework
9. While initial performance under the reform effort is commendable, there is little room for
complacency given Cambodia's vulnerability and pressing need to alleviate poverty.  Significant
actions will be needed in the period ahead to firm ly establish a basis for promoting sustainable growth
and reducing poverty.  Governance and transparency issues are at the forefront of Cambodia's reformagenda.  In this regard, strict adherence to the actions and timetable set forth in the GAP will be
critical.  As part of the latter, facilitating independent operations of the NAA and establishing a
modern legal and judiciary system that provide for a clear rule of law and modern commercial laws
and regulation are crucial.  In addition, efforts to improve fiscal transparency and establish a reliable
statistical framework will be instrumental in strengthening governance.
10. Further fiscal restructuring will be required in the period ahead and the main challenge to that
end is to improve revenue mobilization and reorient spending away from defence and security toward
social sectors.  The government's medium term framework is centered on maintaining a current
budget surplus of at least 1½ per cent of GDP.  Ov erall, fiscal deficits, inclusive of development
expenditure, are expected to be contained below 6 per cent of GDP and fully financed by concessionalforeign assistance.  Cambodia's external viability will depend on sustained and timely implementation
of reform policies.  The current account deficit (e xcluding transfers) at around 10 per cent of GDP is
expected to decline steadily to 8 per cent by 2006.  Significant official financing on concessional
terms and debt relief will continue to be required over the medium term.
11. The baseline scenario presented below (see Appendix A and tables 1.2 and 1.3) is derived
from an assessment based on the macroeconomic conditions that prevailed in mid 2001.  At this
juncture, it is premature to assess the full impact of the recent events in the US on Cambodia's
economy.  The medium term framework also includes a sensitivity analysis reflecting four alternative
trade related scenarios.  The downside risks stemming from the deterioration of internal security and
political situation and policy implementation slippage s that could thwart the medium term outlook are
not addressed in this exerciseWT/IFSC/W/12/Add.1
Page 101.3 Cambodia:  balance of payments, 1997–2006
Unit1997 1998 1999 2000 2001 2002 2003 2004 2005 2006p
Current account (excluding official transfers) US$m - 246 - 224 - 282 - 331 - 357 - 365 - 375 - 384 - 393 - 429
Current account (including official transfers) - 37 - 30 - 61 - 60 - 83 - 80 - 79 - 75 - 73 - 96
Trade balance a - 263 - 227 - 259 - 338 - 328 - 350 - 377 - 382 - 358 - 389
Exports  786  867  971 1 396 1 498 1 570 1 645 1 746 1 898 2 026
Domestic exports  534  604  709 1 100 1 196 1 262 1 329 1 423 1 569 1 690
Of which : GSP (including garments)  279  392  564 1 012 1 113 1 167 1 221 1 290 1 376 1 482
Forestry  224  178  111  49  43  50  58  78  133  142
Re-exports  252  263  261  296  302  309  315  322  329  337
Imports, f.o.b. -1 050 -1 094 -1 230 -1 734 -1 826 -1 920 -2 021 -2 128 -2 256 -2 416
Retained imports, f.o.b. - 798 - 831 - 968 -1 438 -1 524 -1 611 -1 706 -1 805 -1 927 -2 079
Garments sector - 195 - 275 - 363 - 658 - 724 - 759 - 794 - 838 - 894 - 963Petroleum - 91 - 111 - 121 - 299 - 292 - 283 - 274 - 262 - 251 - 252Other retained imports - 511 - 445 - 484 - 481 - 508 - 570 - 638 - 705 - 781 - 864
Imports for re-export, f.o.b - 252 - 263 - 261 - 296 - 302 - 309 - 315 - 322 - 329 - 337
Services and Income (net) - 43 - 57 - 93 - 63 - 100 - 88 - 74 - 80 - 119 - 125
Services (net)  4 - 9 - 17  19  39  72  93  93  59  58
Of which : tourism  55  59  94  149  182  222  245  257  270  283
Income (net) - 47 - 48 - 76 - 81 - 139 - 160 - 166 - 173 - 178 - 183
Of which : interest
 b - 3 - 2  7  18 - 16 - 15 - 11 - 8 - 2  6
Private transfers (net)  60  60  70  70  70  73  75  79  83  85Official transfers (net)
 c  210  194  220  271  274  285  296  308  321  333
Capital and financial account - 53 - 75 - 33 - 11  88  90  92  77  78  78
Medium and long term loans - 77 - 69 - 63 - 5  101  82  68  37  22 - 4
Disbursements  38  46  56  115  137  118  106  76  77  67Amortization - 115 - 115 - 119 - 119 - 36 - 37 - 38 - 39 - 55 - 71
Foreign direct investment  168  121  146  110  110  116  127  140  154  169Short term flows and errors and omissions - 144 - 126 - 115 - 116 - 123 - 108 - 103 - 100 - 98 - 87
Overall balance - 90 - 105 - 94 - 70  5  10  13  2  5 - 18
Financing  90  105  94  70 - 5 - 10 - 13 - 2 - 5  18
Change in gross official reserves - 28 - 11 - 32 - 62 - 47 - 71 - 59 - 79 - 79 - 85
U s e  o f  F u n d  c r e d i t  0-  1  8  4  9  9-  1-  9-  8-  5
Debt rescheduling
 d  0  0  0  0 1 356  36  35  35  35  32
Change in arrears (- = reduction)  118  117  119  120 -1 320  0  0  0  0  0
Memorandum items :
T r a d e  b a l a n c e ( i n  p e r c e n t  o f  G D P ) -  8-  8-  9 -  1 1 -  1 0-  9-  9-  8-  7-  7Current account balance
Excluding official transfers (in percent of GDP) - 8 - 8 - 9 - 10 - 10 - 10 - 9 - 9 - 8 - 8
I n c l u d i n g  o f f i c i a l  t r a n s f e r s ( i n  p e r c e n t  o f  G D P ) -  1-  1-  2-  2-  2-  2-  2-  2-  1-  2
Gross official reserves
 e  262  390  422  484  531  602  661  740  820  904
In months of imports of goods and services  2  3  3  3  3  3  3  3  3  4In months of core imports of goods and services 
f  4 4 6 5 6 6 6 6 6 7
Net international reserves  197  323  349  411  451  511  571  659  746  836
Nominal GDP US$m 3 105 2 813 3 008 3 172 3 440 3 739 4 102 4 500 4 889 5 311
a Includes estimates for unrecorded forestry exports and unrecorded petroleum imports.b  Variations in interest payments in 2000–01 ar e linked to assumptions on debt restructuring.c  Official aid flows are based on the current trend and the additional
funds mobilized at the Consultative Group meeting (June 2001).d  Assumes the implementation of the 1995 Paris Club flow rescheduling on Naples terms (67% NPV reduction) in 2001.e  Includes $117 million associated with the return of Cambodian
gold holdings by the BIS in 1998.f Imports excluding imports for re-export and imports for garment sector. p Projections.
Sources:  Data provided by the Cambodian authorities and IMF staff estimates and projections.WT/IFSC/W/12/Add.1
Page 11
B. DOLLARIZATION IN CAMBODIA
12. This section describes the historical process underlying the emergence of dollarization in
Cambodia, and assesses the main benefits and costs associated with dollarization.
1. Background
13. Cambodia's monetary system is characterized by a high degree of dollarization.  Dollarization
is a monetary phenomenon whereby foreign currency is used both as medium of exchange and storeof value.  Dollarization is commonly twofold: cu rrency substitution and asset substitution.  Currency
substitution occurs when foreign currency is used as a means of payment.  Asset substitution occurs
when foreign currency denominated assets serve as financial assets (store of value function).  Due to
data limitations, dollarization is traditionally proxied by the ratio of bank foreign currency deposits to
the broad money stock.
14. The share of foreign currency deposits in broad money currently exceeds 70 per cent, making
Cambodia one of the most dollarized economies (table 1.4 and charts 1.5–1.10).  During the decadeended in 2000, foreign currency deposits grew rapidly from $1 million in 1991 to $318 million as of
end 2000, equivalent to 1 and 68 per cent of broad money in 1991 and 2000, respectively.  Foreign
currency deposits at the end of 2000 were equivalent  to about 66 per cent of gross official reserves.
1.4 Cambodia:  Monetary Survey, December 1995–June 2001
1995
Dec.1996
Dec.1997
Dec.1998
Dec.1999
Dec.2000
Dec2001
Jun.
(in billions of riels, end of period)
Net foreign assets 550 878 1 172 1 728 2 019 2 588 2 807
National Bank 304 533 808 1 425 1 649 2 102 2 257Deposit money banks 246 346 363 304 370 486 550
Net domestic assets 99 33 -109 -498 -576 -758 -821
Domestic credit 446 567 697 839 876 904 866
Government (net) 148 128 54 179 103 3 -82
Public enterprises 5 5 6 6 10 3 1Private sector 293 435 637 655 763 898 947
Other items (net) -347 -534 -805 -1 337 -1 453 -1 662 -1 687
Broad money 649 912 1 063 1 230 1 443 1 831 1 985
Narrow money 278 329 385 543 532 540 544
Currency in circulation 251 300 356 509 490 495 510
Demand deposits 27 29 29 34 42 45 35
Quasi-money 371 583 678 687 911 1 291 1 441
Time deposits 5 8 13 20 32 46 52
Foreign currency deposits 366 575 665 667 879 1 245 1 390
(contribution to annual growth of broad money, in per cent)
Broad money 40.5 16.6 15.7 17.3 26.9 8.4
Net foreign assets 50.6 32.2 52.4 23.6 39.5 16.2
Net domestic assets -10.2 -15.6 -36.6 -6.3 -12.6 -7.8
Domestic credit 18.6 14.2 13.4 3.0 2.0 -2.3Government -3.1 -8.1 11.7 -6.1 -6.9 -6.7
Other 21.8 22.3 1.7 9.2 8.9 4.4
Other items (net) -28.8 -29.7 -50.1 -9.4 -14.5 -5.5
Narrow money 7.8 6.1 14.9 -0.9 0.5 0.3
Of which : currency in
circulation 7.5 6.2 14.4 -1.6 0.3 0.8
Quasi-money 32.7 10.5 0.8 18.2 26.4 8.2
Of which : foreign currency
deposits 32.3 9.9 0.2 17.2 25.4 7.9WT/IFSC/W/12/Add.1
Page 12
1995
Dec.1996
Dec.1997
Dec.1998
Dec.1999
Dec.2000
Dec2001
Jun.
(in millions of U.S. dollars)
Memorandum items:
Gross official reserves a182 234 262 390 422 484 530
(in per cent of foreign currency deposits)
125.6 110.3 136.1 221.1 181.4 152.2 149.7
(millions of U.S. dollars)
Net official reserves b110 164 197 323 349 411 441
(in millions of U.S. dollars)
Foreign currency deposits 145 212 193 176 233 318 354
(in per cent of broad money)
56.3 63.1 62.6 54.2 60.9 68.0 70.0
Velocity c14.4 10.7 9.7 9.5 8.5 6.9 6.9
(in percent of GDP)
Seignorage 0.4 1.6 1.0 2.4 1.1 1.9 …
(in per cent of government revenue)
4.8 21.0 12.7 29.2 13.5 17.3 …
(riels/U.S. dollar; end-period)
Exchange rates 2 526 2 713 3 452 3 780 3 775 3 910 3 920
(billions of riel)
Nominal GDP 7 543 8 325 9 149 10 531 11 470 12 225 12 897
a Foreign assets of the National Bank of Cambodia (NBC) less unrestricted foreign currency deposits of commercial banks held at the NBC.
b Gross official reserves, less foreign liabilities of the National Bank of Cambodia. c Nominal GDP divided by average stock of broad
money.
Source:  Data provided by the Cambodian authorities and IMF staff projections.
1.5 Cambodia:  foreign currency deposits, 1991–2000
050100150200250300350400450
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000US$ million
-1001020304050607080
Per centForeign currency deposits as a per
cent of broad money (right scale)Foreign currency deposits (left scale)
Inflation (right scale)
Data source :  Data provided by the Cambodian authorities and IMF staff estimates.WT/IFSC/W/12/Add.1
Page 13
15. Dollarization in Cambodia is the direct legacy of the destruction of economic and financial
institutions after the 1970s, economic mismanagement in the 1980s, and the large inflows of
US dollars in the early 1990s.  After gaining independence in 1953, Cambodia experienced a peaceful
period of steady economic growth for 17 years, with the riel as the main currency used in transactions
and assets.  In contrast, the period 1970–75 was plagued by a civil war that brought the Khmer Rouge
regime to power in April 1975.  The radical economic experiments launched during 1975–79 led tobans on private property, money and banking, and trade.  Monetary transactions resurfaced in 1979, in
the aftermath of a new regime.  As a result, the riel was reintroduced as the domestic currency
in 1980.  A parallel currency, the Khmer riel, was also introduced in March 1993 in areas still under
Khmer Rouge control.
16. The period 1980–92 was still affected by the unsettled political structure and the security
situation.  Substantial monetization of budget deficits during 1988–92 resulted in triple-digit inflation,
leading to deep erosion of public confidence in the domestic currency.  Large foreign exchangeinflows associated with the return of refugees  from abroad in the early 1990s and in 1991-92 with
extensive operations of the United Nations Transitional Authority in Cambodia (UNTAC) largely
fuelled soaring bank foreign currency deposits.  The cumulative cost of UNTAC intervention was
$1.7 billion (that is, about half of estimated GDP in 2001) one of the most costly UN operations.
17. Dollarization has been facilitated by the government's commitment to an open economy and
the existence of an active foreign exchange market managed by licensed moneychangers that ensured
effective access to foreign currency.  There are no restrictions on current international transactions
and virtually no restrictions on capital transactions.
18. Increasing confidence since late 1998 has been reflected in increased bank foreign currency
deposits, with their share in broad money exceeding the pre 1997 level.  Three separate phases inCambodia's dollarization process are highlighted in chart 1.5.  In an initial phase (1991–96), the
steady rise of dollarization largely reflected accelerated monetization and formal financial
intermediation, against the background of increased capital inflows.  In a second phase (1996–97),
increased political uncertainties and economic mismanagement led to capital outflows and a decline in
foreign currency deposits, resulting in a measured decline in dollarization.  In the third phase(1998-2000), dollarization increased again in line with economic recovery.  This development reflects
the permanent background of continued monetization, increased financial intermediation, and sizable
capital inflows.  The acceleration of dollarization in recent years, despite successful stabilization, can
be explained by a traditional 'hysteresis' phenomenon of non-reversibility in the process of
dollarization.  This phenomenon commonly occurs in dollarized economies, because changing thebehaviour of individuals regarding the settlement of transactions and holding of financial assets is
always a slow process involving deep institutional changes.  Moreover, the persistence of capital
inflows and a still fragile banking system lacking financial instruments denominated in riels will
continue to imply a high degree of dollarization in the foreseeable future.
19. The extent of dollarization, as measured by the share of foreign currency deposits in relation
to broad money or total deposits is largely underest imated, owing to the lack of reliable information
on foreign currency in circulation and cross-border deposits.  As a result, it is difficult to ascertainwith precision to what extent dollarization in Cambodia stems from currency or asset substitution
Nevertheless, in Cambodia transactions are predominantly in cash and unrecorded foreign currency in
circulation — US dollar and, to a lesser extent, Thai  baht, is the dominant form of money holding.  It
is estimated that foreign currency cash holdings are in the range of 85–95 per cent of total currency in
circulation, thus implying a money st ock significantly larger than measured broad money.  In contrast,
the domestic currency, the riel, is used only for small cash transactions and mostly in rural areas, and
is injected into circulation primarily through government payments for goods and services, including
civil service salaries (chart 1.7).WT/IFSC/W/12/Add.1
Page 14
1.6 Foreign currency deposits in Cambodia and neighbouring countries
100150200250300350
1995 1996 1997 1998 1999 2000US$ million
505560657075
Per centForeign currency  
deposits (left scale)
Foreign currency  deposits 
as a per cent of broad 
money  (right scale)
1520253035
1995 1996 1997 1998 1999 2000Per cent of GDP
5055606570
Per cent
Tradea as a percentage of GDP 
(left scale)Foreign currency  deposits as a 
percentage of broad money  (right scale)
120180240300360420480540
1995 1996 1997 1998 1999 2000US$ million
100120140160180200220240
Per centRatio of reserves to foreign
currency  deposits (right scale)
Foreign currency 
deposits  (left scale)Gross official 
reserves (left scale)
1020304050607080
1994 1995 1996 1997 1998 1999 2000Per centCa mb od ia
Lao, PDR
Vietnam
a measured as sum of exports and imports
Data source:  Cambodian authorities and staff estimatesWT/IFSC/W/12/Add.1
Page 15
1.7  Cambodia riel circulation
GOVERNMENT
TREASURYPRIVATE SECTOR
(individuals and business)
CENTRAL BANK MONEY CHANGERSAid disbursement and feespaid in dollars Commercial banks
Goods and services
Riel (wages, salaries,
payment for goods and
Sale of riel
Purchase of dollarSale of riel Sale of riel Purchase of dollar Purchase of dollar$ deposits
$ loansWT/IFSC/W/12/Add.1
Page 16
1.8 Ratio of foreign currency deposits to broad money, 1995 and 2000
0% 10% 20% 30% 40% 50% 60% 70% 80%BoliviaLao, PDRU ruguayPeruCamb o diaArgentinaTurkeyRomaniaVietnamYemenPhilippinesRussiaMongoliaUkra in eEgyptPolandCh in aPakistan 1995
2000a
b
a end of June data. b 1998 and 2000 data.
Data source:  International financial statistics and IMF staff estimatesWT/IFSC/W/12/Add.1
Page 17
1.9 Ratio of gross official reserves to foreign currency deposits – 2000
0% 50% 100% 150% 200% 250% 300% 350%YemenMongoliaPolandRussiaRomaniaCa mb od iaPhilippinesChin aPakistanEgyptUkrain ePeruLao, PDRVietnamTurkeyArgentinaU ruguayBolivia
a
b
a 1999.  b end of June data.
Data source:  International financial statistics and IMF staff estimates
2. Benefits and costs of dollarization in Cambodia
20. Dollarization in Cambodia has provided substantial benefits as it has helped cushion the
impact of economic and political shocks and supported economic reconstruction in the aftermath of
several decades of civil strife, economic mismanagement, and political instability.  More specifically,
dollarization has facilitated the re-monetization and financial deepening of Cambodia's banking
system and shielded the economy from the spillover effects of the 1997 Asian crisis, as the impact of
the riel's depreciation remained limited (see figures 1.10 and 1.11).  Dollarization has also provided astrong protection against exchange rate risks, as the bulk of trade related transactions are effected in
US dollars.
21. The costs of high dollarization in Cambodia are both macroeconomic and microeconomic.
Macroeconomic costs stem mostly from both the loss of seignorage for the government, and the
constraints imposed on monetary policy, because National Bank of Cambodia's (NBC) operations inriels have almost no impact on monetary aggregates , and control of liquidity growth by the NBC isWT/IFSC/W/12/Add.1
Page 18
severely hampered by the limitations of policy instruments available.  Currently, in addition to
restraint on credit to government and public enterprises, monetary instruments include flexible use of
foreign exchange market intervention to influence growth in riel liquidity, changes in reserve
requirements, and possible issuance of government or central bank securities.  At the microeconomic
level, banks hold high unremunerated cash US dollar balances, owing to the lack of a lender of last
resort facility in US dollars and Cambodia's highly cash based economy.
22. One of the main costs of dollarization is forgone seignorage.  Seignorage represents the
profits accruing to the monetary authorities from th eir right to issue a legal tender currency, which in
turn gives rise to non-interest bearing debt.  The monetary authorities can use seignorage revenue
either to acquire interest-earning assets (that is, foreign currency reserves, government securities, and
loans to the banking sector) or to finance a fiscal deficit.  The annual flow of seignorage is commonly
measured as the increase in the money base net of any interest payments on bank reserves.
23. Using a foreign currency for domestic transactio ns is equivalent to providing interest-free
credit to the foreign country issuing that currency, in the case of Cambodia to the United States and to
a lesser extent to Thailand.  Forgone seignorage in 2000 is estimated at about 2 per cent of GDP and
17 per cent of total government revenue (table 1.2).  Under a fully de-dollarized situation, seignorage
would accrue to the NBC and would be transferred to the national budget.  However, in the event of
full de-dollarization, net revenue derived from seignorage would be lower than estimated here,because of profits from unremunerated bank's required reserves in foreign currency would also be
forgone.  The loss of an external adjustment mechan ism provided by a flexible exchange regime in a
de-dollarized environment is also a disadvantage of a highly dollarized regime.  However, this
disadvantage is mitigated to the extent that flexible labour and goods markets are maintained.
C. E
XCHANGE RATE ARRANGEMENTS
1. Current exchange rate arrangements
24. Cambodia's exchange rate arrangements have undergone drastic modifications since the
country became independent in 1953.  The country maintained a multiple currency practice
until 1970.  In 1971, a flexible exchange rate system was introduced, while the exchange rate was
unified.  A dual exchange rate system was reinstated in 1973, including a 'basic' rate for mosttransactions and a 'preferential rate' for aid-related imports and services.  Under the Khmer Rouge
regime (1975–79), the Central Bank was closed and the national currency was abolished.  In
March 1980, a new transition government reintroduced the Cambodian riel as the domestic currency,
together with a dual exchange rate system for the of ficial rate.  The official exchange rates, however,
were unified in 1990.  Since March 1994, the NBC has pursued a flexible exchange rate policy,broadly keeping a fixed spread with the parallel market through interventions on the latter.
25. In parallel, since 1989, Cambodia has gradually switched from a monobank to a two-tiered
bank system.  In 1990, treasury operations were transferred to the Ministry of Economy and
Finance (MEF), and the NBC was created as a ministry mainly responsible for ensuring government
budget financing.  Foreign exchange management was centralized within the NBC in late 1995 and
NBC was established as a central bank in 1996 under the Central Banking Law.  The banking system
was further strengthened under the 1999 Financial Institutions Law and associated decrees.  The 1999Law has served as the legal framework for a major restructuring that has entailed bank
recapitalization, a sharp reduction in the number of banks — from 31 in 1999 to 16 as of mid 2001 —
the establishment of sound business plans under close monitoring by the NBC, and a strengthening of
banking supervision.  There is no securities market in Cambodia.  A comprehensive Financial Sector
Blueprint (2001–2010) aimed at deepening the financial system has been prepared with ADB support.A liberal exchange system, precluding restrictions on payments and transfers for current international
transactions has been operating since early 1996.  With full convertibility of the national currencyWT/IFSC/W/12/Add.1
Page 19
achieved, the authorities intend to accept the Inte rnational Monetary Fund's (IMF) obligations under
Article VIII, sections 2, 3, and 4 in the near future.
26. The national currency is the Cambodian riel, although the US dollar circulates freely and is
predominantly used for payments and asset building.  The exchange rate system comprises two rates:
the official rate and the market rate.  Adjustments to the official rate are made daily by the NBC to
limit the spread between the official and parallel market rates to less than 1 per cent.  The officialexchange rate applies mainly to transactions conducted by the government and state owned
enterprises.  The NBC quotes daily official rates, at which the Foreign Trade Bank (FTB) buys and
sells foreign exchange.  Other commercial banks are free to buy and sell foreign exchange at their
own rates.  Exchange transactions take place at the market rate.  Foreign exchange dealers are
permitted to buy and sell banknotes and traveller's checks at the market rate.  The responsibility for
the management of foreign exchange rests with the MEF and the NBC.  The NBC is authorized to
license commercial banks and other agents in foreig n exchange transactions and to regulate current
and capital transactions.  In practice, no restrictions apply.  Exports and imports of foreign banknotes
are not limited but are subject to prior notification beyond $10 000.  There are no limits on resident's
balances of foreign currency accounts held in domestic banks, and the deposits may be used to settle
all types of domestic obligations.  Exporters and importers of goods and services must make payments
for their commercial transactions with the rest of the world through authorized intermediaries.
27. The parallel foreign exchange market is very thin, comprising mostly small moneychangers,
and involving limited amounts of daily transactions.  Some 30 moneychangers handle about 80 per
cent of foreign exchange transactions in the parallel market.  With the exception of the state owned
FTB, commercial banks generally do not participate in the foreign exchange market, because their
assets and deposits are predominantly in foreign currency.  The parallel market has been widelyaccepted by the authorities since the early 1990s as it provides a key benchmark for setting the official
rate.  In November 1992, the NBC began maintaining the official exchange rate within a 5 per cent
margin of the average parallel market rate over  the previous two-week period.  In August 1993, the
maximum spread was limited to 3 per cent.  At the beginning of 1994, the spread was redefined and
applied to the daily parallel market rate and was further reduced to 2 per cent.  From March 1994, theNBC has aimed at setting the daily official rate within a 1 per cent spread of the daily average parallel
market rate based on surveys of the rates quoted by three major money changers in the previous day.
However, the NBC effectively met that objective from early 1999 onwards (see chart 1.10).
Significant deviations from that policy occurred mainly in mid 1997 and mid 1998, largely owing to
the political situation, but were short lived.WT/IFSC/W/12/Add.1
Page 20
1.10 Cambodia:  exchange rate developments
1000
2000
3000
4000
5000
6000
70008000
Jan-94
Aug-94
Mar-95
Oct-95
May-96
Dec-96
Jul-97
Feb-98
Sep-98
Apr-99 Nov-99
Jun-00
Jan-01 Aug-01Riels per US$
-0123456
Market ex change 
rate a (left scale)Official ex change rate a (left scale)
Spread (parallel market/official) (right scale)
708090100110120
Jan-94
May-94
Sep-94
Jan-95
May-95
Sep-95
Jan-96
May-96
Sep-96
Jan-97
May-97
Sep-97
Jan-98
May-98
Sep-98
Jan-99
May-99
Sep-99
Jan-00
May-00
Sep-00
Jan-01
May-011995 = 100Real effectiv e 
ex change rate
(right scale)aN ominal effectiv e 
ex change rate
(left scale) a
a Based on the official exchange rate:  an upward movement indicates an appreciation of the exchange rate.
Data source:  Data provided by the Cambodian authorities and IMF staff estimates.WT/IFSC/W/12/Add.1
Page 21
28. Although the authorities are committed to formally unify the exchange market in the medium
term, they have so far resisted doing so, on the ground that the official exchange rate has an important
signalling effect on a very limited foreign exchange  market.  NBC's intervention policy on the foreign
exchange market is aimed at smoothing exchange rate fluctuations while strengthening the
international reserve position.  Accordingly, the N BC is committed not to intervene in the market to
support the exchange rate, should sustained downwar d or upward pressures on the exchange rate
arise.  However, in the event of a surge in capital inflows, or upward pressure on the exchange rate,
the NBC intends to bolster its international reserve position by providing adequate amounts of riel to
the market rather than let the exchange rate ap preciate excessively.  Conversely, with a surge in
capital outflows, NBC would not intervene by selling reserves to resist a depreciation of the exchange
rate in line with market pressures.  NBC's periodic foreign exchange auctions have generally proven
to be effective in smoothing exchange rate fluctuations.
29. Exchange rate developments in Cambodia sin ce the early 1990s have closely mirrored the
authorities efforts to establish credible economic management and the impact of unsettled domestic
political events.  The riel initially appreciated in the early 1990s relative to the US dollar, as
confidence returned in the aftermath of the transition government but gradually depreciated
during 1994–97.  The riel depreciated sharply in the period mid 1997 to late 1998, reflecting waning
confidence in the political and economic situation, and increasing inflation.  The riel has been broadly
stable since mid 1999 relative to the US dollar, and has appreciated slightly since then, both in
nominal and real effective terms, largely reflecting the dividends of economic and political
stabilization.
2. Policy options for the exchange system
30. While the analysis of costs and benefits of dollarization sheds some light on which country
characteristics would likely make dollarization an appropriate choice, the balance of the analysis is
difficult to draw, since important considerations are hard to quantify.  There is also only limited
historical experience to draw from, as most economies that have adopted a foreign currency are small
and politically-dependent. In addition, given the near irreversibility of dollarization, considerations
must be given to events that may be rare but cannot be ruled out from a long-term perspective, such asextreme terms of trade shocks.
31. There are essentially two monetary and exchange rate options for Cambodia: move to full
dollarization, or proceed with policies expected to promote de-dollarization.  A currency board
arrangement is an obvious option consistent with the government's stated policy of de-dollarization
while maintaining much of the benefits of stability and confidence associated with dollarization.However, any potential choice of monetary and exchange rate regime requires the maintenance of
sound fiscal and monetary policies (and political stability) to be effective.  At present, neither the
fiscal position nor the soundness of the banking syst em in Cambodia would appear to be sufficiently
strong to support a move to full dollarization or a currency board.  Therefore, it is crucial for
Cambodia to continue to strengthen its fiscal position and the banking system before making any
changes in the monetary regime.  In view of these circumstances, the authorities' current policy is to
support non-administrative and gradual de-dollarization through continued strengthening ofmacroeconomic performance.
32. Experiences in other countries have shown that once dollarization has occurred, it usually
takes a long time for market perceptions to change.  In  fact, a return of confidence in the initial stages
of reform often leads to an inflow of foreign currency deposits, therefore an increased  degree of
dollarization, as experienced by several Latin American countries and Cambodia in the 1990s.  Thispoints to some form of 'hysteresis', as changing the uses and practices regarding the settlement of
transactions is a slow process that involves institutional changes. Therefore, direct administrative
measures to reverse dollarization, such as regulatory limits on foreign currency usage, will simply
drive dollars offshore, further reducing financial intermediation, and are ultimately counterproductive.WT/IFSC/W/12/Add.1
Page 22
On the other hand, introducing high quality riel-denominated assets and paying a premium on
domestic currency denominated reserves may play a catalytic role in financial deepening in the
domestic currency.  In addition, increasing economic integration of the rural area may also promote
the use of national currency, as the riel is more wide ly used in the countryside.  These steps, together
with the maintenance of low inflation, would be e xpected to lead to a gradual increase in the
underlying level of seignorage over time as confidence in the local currency is further strengthened.
3. Medium term technical assistance requirements
33. This section outlines the medium term technical assistance requirements for fostering
Cambodia's macroeconomic environment.  Key technical actions in that area would include:
(i) strengthening macroeconomic management capabilities;  (ii) developing sound banking and
payments systems;  and (iii) establishing a financial market relying on government securities and
other riel denominated assets.  Broad technical assistance support aimed at strengthening capacity
building within the MEF and the NBC is already be ing provided by foreign development partners. In
this regard, the MEF will benefit shortly from the support of resident advisors on budget management
and customs and tax administration assigned under the TCAP (2001–03) jointly sponsored by the
IMF, United Nations Development Program (UNDP), ADB and several donors.  The WB is also
supporting administrative reform through an Economic Capacity Building Operation and a Population
and Human Resource Development (PHRD) grant.  The IMF's Monetary Affairs and ExchangeDepartment will continue providing support to bank restructuring and payments system reform in the
medium term.  Further support would be required to establish a government securities market.  The
IMF is also in the process of assigning a resident statistical advisor to the Ministry of Planning to
enhance the statistical framework in the medium term, including data dissemination.  Discussions are
also under way with the ADB to develop the financial market over the medium term through afinancial sector development programme.WT/IFSC/W/12/Add.1
Page 23
1.11 Bilateral exchange rates and infl ation in selected ASEAN countries
Source:  Data provided by the Cambodian authorities and IMF staff estimates.-40-30-20-100102030405060
1994 1995 1996 1997 1998 1999 2000 200112 month percentage change
Nominal exchange rateReal exchange rateInflationCambodia
-60-40-200204060
1994 1995 1996 1997 1998 1999 2000 200112 month percentage changeNominal exchange rate
Real exchange rateInflationThailand
-20-15-10-5051015202530
1994 1995 1996 1997 1998 1999 2000 200112 month percentage changeNominal exchange rateInflation
Real exchange rateVietnam
-100-50050100150200
1994 1995 1996 1997 1998 1999 2000 200112 month percentage changeInflation
Real exchange rate
Nominal exchange rateLaos
-30-20-100102030
1994 1995 1996 1997 1998 1999 2000 200112 month percentage changeInflation
Real exchange rateNominal exchange rateSingapore
-50-40-30-20-1001020304050
1994 1995 1996 1997 1998 1999 2000 200112 month percentage changeInflation
Nominal exchange rateReal exchange rateMalaysiaWT/IFSC/W/12/Add.1
Page 24
II. DEVELOPMENTS IN TRADE POLICY
A. INTRODUCTION
34. Cambodia has made considerable progress in establishing a modern trade regime.  During
the 1960s, it was an exporter of agricultural products (mainly rice, rubber and corn) and the balance of
payments was relatively stable.  However, as the regional conflict spilled over into Cambodia in the
1970s, foreign trade virtually collapsed.  Under the trading system adopted in the early 1980s the leveland composition of trade was effectively controlled through quantitative restrictions and state owned
trading bodies, and tariffs and trade taxes played little or no role other than as a means to collect
revenue.  This has changed with the move to a market economy and the wide range of reforms that
have since been implemented.
35. A process of market-oriented liberalization began in the late 1980s. The state monopoly for
foreign trade was abolished in 1987 and the foreign investment law was promulgated in 1989,
enabling private companies to engage in foreign trade.  In 1993, initiated as part of the UNTACassisted transition, trade policies were greatly liberalized.  Restrictions limiting the ability of firms
and individuals to engage in international trade were largely removed.  There are few binding
quantitative restrictions and the rates of taxes on imports and exports are for the most part not
prohibitive.  Nevertheless, tariff rates and other trade taxes are still high and variable.  This structure
of duties taxes some activities and benefits others, creates obstacles to the growth of efficientindustries, gives rise to pressures for exemptions, hurts revenue and compounds problems of Customs
administration.  The evidence from around the world is that dismantling obstacles to trade is good for
growth and that benefits from this growth as mu ch as anyone (see box 2.1 for a brief summary of this
literature).  These are core issues for this report on the Trade Policy component of this Integrated
Framework Diagnostic Study.  Other important issues cover conditions of restricted access topreferred markets and priorities for WTO accession.WT/IFSC/W/12/Add.1
Page 25
2.1 Trade, growth and poverty: assessments of the evidence
Over the last thirty years or so the trade policies of many countries provide a wide range of experiences for countries such as
Cambodia to learn from. In the 1960s and 1970s many countries adopted an industrialization strategy based on import-
substitution. Tariffs were used to provide incentives (effective protection) for selected industries. In the early stages of th is
strategy, activities engaged in the manufacture of consumer goods were viewed as the easiest targets for industrial
development and the tariffs for these goods were raised relative to those of other goods. The idea was that when these 'infant'
industries matured other final good manufacturers would have their tariff protection raised followed by increased protection
for the domestic production of intermediate goods, processed raw materials and capital goods in subsequent stages, thus,
fostering industrial backward linkages. Experience in the 1970s and 1980s demonstrated this approach had serious flaws.
The first stage of the strategy was implemented and high levels of protection were established for many types of consumer
goods. But in doing this the seeds of failure were sown. Many of these firms remained uncompetitive, which made it
politically difficult to proceed to the second stage where the tariffs for intermediate g oods used by these firms would be
increased. As a result a powerful constituency was created that was able to block further implementation of the import
strategy. For many of these countries, the industrial base remained small in terms of contribution to value added and
employment and relatively high-cost when measured against international competition. As world markets became more
integrated those countries that adopted im port-substitution strategies tended to grow slower than those countries that were
more export-oriented.
This experience led many countries to implement substantial trade policy reforms in the late 1970s and 1980s. Studies of the
trade liberalization episodes in the 1970s support the conclusion that trade creates and sustains higher growth (Srinivasan
and Bhagwati 1999). Similarly, studies of more recent experiences with liberalization reinforce this conclusion. The so-
called list of post 1980 globalizers includes China, India, Indonesia, Thailand, Mexico, Argentina, Uganda, Vietnam,
Bangladesh and Nepal. All these countries cut their tariffs and otherwise streamlined their trade regimes. All have had large
increases in trade and most have had large increases in foreign investment as well. Growth rates have accelerated from an
average of 1.7 per cent per year in the 1970s, to 2.6 per cent in the 1980s to 5.3 per cent in the 1990s (Dollar and
Kray 2000).
So if liberalization of policy and increases in trade are good  for growth, is that growth good for the poor? The answer
appears to be that growth in trade reduces poverty (Dollar a nd Kray 2000). Trade liberalization creates 'winners' and 'losers',
but different 'winners and 'losers' also arise when trade barriers are high. Thus, trade policy, whether it be open or closed
cannot guarantee that nobody will lose. In either case poverty must be addressed by more direct measures such as targeted
investments in education and health. However, some countries have done better out of trade liberalization than others. For
example, the Asian economies have generally done better than comparable Latin American countries in terms of growth,
employment generation, income increases, and poverty reduction. According to a recent Asian Development Bank (ADB)
(2001) review, trade liberalization has been an important factor in Asia's success in reducing poverty over the last decade.
Why did many Asian countries do better than countries in other regions? Part of the answer lies in a combination of factors
including stable macroeconomic policies, such as low inflation and prudent fiscal policies and the fact that product markets
and factor markets (that is, labour and capital) are relatively more flexible than many Latin American and African countries.
Unlike many Latin American countries, most Asian economies have far fewer domestic price controls and few interventions
in the labour and capital markets, which allowed their economies to maximize the gains from greater trade as well as allow
their economies to adjust faster to external shocks.
While these general conclusions are widely endorsed by professional economists and by the preponderance of political
leaders who have opted for liberalization – often unilaterally – in recent years, there is not universal agreement. Some
commentators have criticized the use of cross-country comparis ons to draw such conclusions (Rodriquez and Rodrik 1997,
Rodrick 1998). Skepticism about the pay off to open trade is also sometimes based on theoretical possibilities whereby in
some circumstances trade opening can hurt efficiency and output (Rodrick 1999).
But reviews of these issues generally conclude that while cross-country models do oversimplify the relationships between
openness and growth, the relationship is adequately demonstrated by the in-depth studies of country experiences (Srinivasan
and Bhagwati 1999). On the question of circumstances where trade could theoretically hurt efficiency most proponents of
the benefits of open trade have come to that position, fully aware of the theoretical exceptions and have, after careful
consideration judged them to be insignificant.
Finally, lessons from the recent Asian financial crisis also tells us that in addition to trade and regulatory reforms other
supporting institutional reforms promoting open access to economic opportunities are f undamentally important for achieving
high quality economic growth and therefore poverty alleviation in the long term. These include good governance practices,
and better laws and judicial system to ensure proper, transparent and predictable administration.WT/IFSC/W/12/Add.1
Page 26
B. MEASURES AFFECTING IMPORTS
1. Tariff policy
Recent changes in tariff policy
36. The Cambodian government continues to reform its tariff rate system. In April 2001 the
number of tariff bands was reduced from 12 to 4 with the maximum tariff rate falling from 120 to35 per cent (see table 2.2). Tariff rate reductions covered several major finished goods as well as some
intermediate goods and raw materials.  One of the major tariff decreases under this reform package
covered completely built up passenger cars (from 40 to 120 per cent to 35 per cent) and spare parts
(from 50 to 35 per cent); tobacco products (from 50 to 35 per cent); and alcoholic beverages such as
wines and distilled beverages (from 50 to 35 per cent).  However, these changes have had a minor
impact on the overall tariff structure since only a small percentage (3.8 per cent) of tariff lines had
rates above 35 per cent in 2000.  For example, the percentage of tariff lines duty free or subject to theminimum 7 per cent tariff rate only increased from 44.3 per cent in 2000, to 44.8 per cent in 2001 and
the percentage of tariff lines with tariff rates 15 per cent or less only increased from 71.6 per cent to
73.2 per cent.  Consequently, the average tariff rate fell only slightly from 17.3 per cent to 16.5 per
cent indicating that tariffs, on average, still remain high. A standard deviation of 11.9 per cent
indicates that there is still a large dispersion of tariff rates.  Under a program agreed with the IMF, theGovernment intends to reduce the unweighted average tariff rate to 14 per cent by 2002.  While
achieving a low average tariff is a useful indicator of progress with tariff reform, it is an incomplete
one.  Indeed, it would be possible to reduce the average rate yet leave pockets of highly protected
industries. As a rule of thumb, a the fewer the number of rates, the narrower the range of rates, and the
lower the average rate, the less costly the tariff structure will be to the economy in terms ofmisallocation of resources.
37. Almost half tax revenue is from border taxes.  Tariff rate reductions on the many high
revenue yielding imported excisable (petroleum and petroleum products, autos, motorcycles,
beverages and cigarettes) raised concerns that the tariff changes would have resulted in a drop in
government fiscal revenues.  As a revenue comp ensatory measure for the tariff changes, the
government increased excise tax rates on these major products (see annex B for details of changes).
As result of these tax increases, the average applied rate of taxes on imports (import duty plus excise
tax) virtually remained unchanged at 18 per cent between 2000 and 2001.  The advantage of shifting
away from tariffs to excise taxes as a revenue raising measure is that it avoids the negative effects of
high tariffs on domestic resource allocation, as an excise tax applies equally to domestically producedgoods and imports.WT/IFSC/W/12/Add.1
Page 27
2.2 Cambodia's tariff rate structure
Tariff band 1997 2000 2001
Number Share Number Share Number Share
%%%
0 107 2.1 290 4.3 297 4.4
0.3 7 0.1 9 0.17 2112 40.7 2731 40 2758 40.4
10 14 0.3 14 0.2
15 1184 22.8 1861 27.3 1936 28.420 46 0.9 68 1.030 4 0.135 1575 30.4 1569 23 1832 26.940 8 0.1
50 133 2.6 256 3.8
90 6 0.1120 6 0.1
Total 5 186 100 6 823 100 6 823 100
Average tariff
Unweighted average tariffrate18.4 17.3
(13.6 )16.5
(11.9)
Import weighted averagetariff rate15.9 15.4 14.2
a
Effective tariff rate na 10.8
(12.4 )na
a   Figures in parenthesis are standard deviations, which measure the dispersion of tariff rates. Effective
tariff rate is the ratio of revenue from tariffs over the value of imports. Import weighted average tariffrate for 2001 calculated using year 2000 import data.
Sources:  Customs Department and Ministry of Economy and Finance.
38. Additional information about the structure of tariffs is revealed when we examine the
distribution of imports by tariff lines.  Imports by tariff band are presented in table 2.3.  Firstsemester 2001 import data was not available and so we calculate import weighted average tariff
for 2001 using 2000 import data.  Some caution should be taken with these figures, as many believe
the data on imports are not complete due to several factors such as smuggling activities, weaknesses
in data compilation and customs valuation procedures, which we discuss later.  Bearing this in mind,
one striking feature is that the shares of imports by tariff band are similar to the distribution of tarifflines.  Still, a fifth of all imports are subject to the highest tariff rate of 35 per cent.  The tariff peaks
(tariff rate of 35 per cent) protect several semi processed goods and consumer goods such as
processed meat and dairy sectors, processed vegetables and fruits, wheat flour; beverages and
tobacco; garments and footwear; plywood and jewelry.  All major 'excisable goods' are included in
this band for revenue raising purposes.  Based on import data for 2000, the import weighted average
tariff rate fell from 15.4 per cent in 2000 to 14.2 per cent in 2001.  These statistics do not take into
account the extensive use of tariff concessions in connection with investment and export incentiveschemes.  These exemptions are discussed below.
2.3 Tariff rate structure
Tariff band Tariff lines Imports
%%
04 . 4 8 . 17 40.4 45.6
15 28.4 25.9
35 26.9 20.4
Source:  Calculated from customs data.WT/IFSC/W/12/Add.1
Page 28
39. In addition to the customs duty, two indirect taxes are levied on the value of imports:  excise
tax and value added tax (VAT).  Overall, Cambodia gets almost 80 per cent of its tax revenue from
taxes on imports, of which these two indirect taxes represent approximately 51 per cent of total taxes
on imports in 2000.  As noted earlier, excise taxes are levied on five product groups: beverages
(including mineral water), tobacco, passenger vehicles, motorcycles and petroleum products.  The
VAT is a uniform 10 per cent rate.  With few exceptions, both taxes are levied on imports at the samerates and conditions as on domestic traded goods.
 Exporters are VAT zero rated for imported
materials used for producing exportable goods. There are unofficial taxes on imports and exports,
which can add up to significant amounts.  For example, according to one estimate, informal trade
facilitation taxes can amount to $150 per container of imported or exported goods. These 'hidden'
costs are discussed in detail in the trade facilitation section.
Duty concessions and exemptions
40. Import duty concessions and exemptions are available to certain types of importers.  Items
imported for the purpose of re-exporting (for example, cigarettes) are charged a concessionary duty
rate (see box 2.8). Imports of goods by international donors, NGOs and the Cambodian government
are all exempt from paying import duties.  Invest ors who export more than 80 per cent of their
production are entitled to duty exemption on capital goods, raw materials and intermediate inputsunder the law of investment.  Other investors approved by the Cambodian Development
Commission (CDC) under the Inve stment Law are entitled to duty exemptions on imported goods,
normally for one year, although a one-year extension of duty exemptions is possible.  According to
customs data about half of imports came in duty and tax exempt in 2000 and forgone tax revenue was
estimated at $207 million (see table 2.4).  In the first semester of 2001, forgone revenue amounted to$128 million (or CR501 billion), compared with customs collection of $112 million (or CR436
billion).  Almost 80 per cent of trade tax exemptions arise from imports of raw materials (mainly
fabrics) and capital goods used by garment producers (table 2.5).
2.4 Trade tax revenue collected and forgone in 2000
Dutiable imports Non dutiable imports
US$m US$m
Value of imports 733.3 684.5Type of tax Trade tax revenue
collectedTrade tax revenue
forgone
Customs duty 94.2 124.6Excise tax 24.6 3.3RPP 0.8 0.0Export tax 4.0 0.2
Others 3.1 —
Total 209.4 207.4
Source: Calculated from customs data.
2.5 Value of trade tax exemptions by recipient
Garment
projectsOther
exportersRe-
exportsOther
investorsGrant
aidEmbassies NGOs RGC
$$$ $ $$ $ $
162.9 0.2 16.8 4.7 8.8 3.2 4.8 6.3
Source:  Customs Department, Ministry of Economy and Finance.
41. Given the widespread availability of import duty exemptions, nominal tariff rates applied in
practice are quite different from listed tariff rates. Moreover, there are other trade taxes that tend to be
somewhat less visible, but are often no less important (for example, see implicit surcharges below).WT/IFSC/W/12/Add.1
Page 29
As a result, the average burden of tariffs on traded goods will be quite different from the listed tariff
rates.  Annex B reports estimates of effective tariff rates on trade goods for 2000, defined here as the
ratio of total collected tariff revenue (revenue from tariffs less exemptions) to the value of total
imports, or exports.
42. Of course, there are good economic reasons to have a low effective tariff rate on most
imported goods, but accomplishing this goal through an ad hoc, unsystematic tax exemption schemeis not an effective way of doing this.  In particular, the differential tariff treatment creates
unpredictability and non-transparency for importers and investors. Also, since this system requires an
elaborate customs administration process, this becomes timely and costly for both the government and
the investor with all the negative effects of a discretionary process (see section on trade facilitation).
43. Examining the effective tariff rates on imports, it is apparent that there is a heavy reliance in a
relatively narrow base of imports in these statistics.  The traditional excisable goods petroleum,
alcoholic beverages, tobacco and autos — account for more than 60 per cent of customs tariffrevenue.  According to customs data the ratio of total collected tariff revenue to the total value of
imports is 6.7 per cent. The fact that this ratio includes a large proportion of tariff revenue on a small
number of excisable goods means that the average burden of tariffs is in fact much less.  If the major
excisable goods are eliminated, the ratio is 3 per cent.
44. Reflecting in part the various exemptions along  with preferential rates applied under CEPT,
the average effective tariff rate for all imports is 10.8 per cent, much lower than the average listed
nominal rate of 16.5 per cent.  Nevertheless, the ad hoc nature of the various exemption schemes has
created as much variability or distortions in the tariff structure as implied by the listed nominal rates.
This is indicated by the fact that the dispersion of effective tariff rates (measured by the standard
deviation of 12.8 per cent) is not much smaller than the dispersion of listed rates (13.4 per cent).
45. As indicated above, officially recorded trade taxation of exports (that is, through customs) is
relatively limited.  The average effective trade tax for exports was 5.7 per cent.  Wood, rubber and
fish are the primary goods burdened with significant export taxes (see table 2.6).
2.6 Average effective trade tax on exports, 2 digit HS
HS Product group Export tax
%
01 Live animals 10.0
44 Wood products 9.9
03 Fish 9.840 Rubber 3.2
Source:  Customs Department, Ministry of Economy and Finance.
46. The estimates presented in annex B also indicate a number of cases where the effective tax
rate is less than the listed nominal tariff rate.  For example, the effective tax rate for imports of fabrics
is much less than the nominal tariff rate of 7 per cent.  This undoubtedly reflects significant
exemptions from duty granted to garment manufacturers of exports.  This raises an important tariff
policy issue, which is discussed below in a section on appropriate tariff policy.  Briefly, as indicatedabove garment producers must follow a timely and costly administration process to obtain duty
exemptions.  Given that producers of garments account for about 80 per cent of total value of duty
exemptions, one option for the garment industry could be to reduce tariff rates on all imported
materials and accessories to zero. (The tariff rate on most of these items is currently 7 per cent.)
47. An advantage of a zero tariff policy on fabrics is that garment exporters would not have to
maintain a Master List for imports of materials at CDC.  (This list provides detail information on theWT/IFSC/W/12/Add.1
Page 30
type, volume and value of imported goods, which CDC officials are empowered to modify if they
have grounds to believe that the exporter is inflating material requirements.)  Many producers
complain that the master list involve a time consuming and costly administration process. This change
would help reduce administration costs for both the garment industry and the government.  This
policy would have little effect on customs revenue because most imported fabrics and accessories are
already exempted from duties.
Valuation of imports and implicit surcharges
48. Customs operates two valuation schemes for the purpose of calculating dutiable values for
import and exports of goods. The first scheme refers to fair market value (FMV), whereby the
valuator (SGS under the Pre-Shipment Inspection (PSI) agreement) uses international prices to
determine the dutiable value (see customs chapter).  The second scheme involves the MEF setting
predetermined, minimum or fixed dutiable values for certain products to be used by SGS and customs.
Customs duties, excise and VAT are calculated based on these administered prices.  For some of these
products, SGS is required to use the pre determined minimum values in cases where the pre
determined values are greater than the actual SGS valuations based on FMV or c.i.f. value of imports
(see table 2.7).  For a small number of other products fixed dutiable values are used irrespective of
c.i.f. value of imports (for example, petroleum).  The stated purpose of this scheme is to circumventunder-valuation of imported items and, thus, ensure stability in customs revenue collection.  In cases
where the predetermined minimum value is above the FMV, the amount of the customs duty charged
will therefore be larger than otherwise, indicating that there is a specific duty and, thus, the implicit
ad valorem  tariff rate will be higher than the applied tariff rate.  Where minimum values are set
according to brands (motorcycles, cigarettes) or source country (for example, passenger automobiles)the implicit ad valorem  tariff rate will often vary across brands and countries.  This system gives rise
duties which are not transparent and can give rise to high protection and protection increases
whenever international prices fall below administered minimum dutiable import values.
49. Table 2.7 lists selected products subject to administered dutiable values. In addition, more
then 400 items made in Thailand and Vietnam are also subject to administered minimum dutiablevalues.  While it is not practical to compare all items subject to administered dutiable values with their
corresponding c.i.f. value or FMV of imported goods, selected examples demonstrate the extent to
which these prices deviate.  For some products the current administered prices are roughly in line with
international prices such as for gasoline ($320/ton), although these prices will deviate if international
oil prices suddenly change. For other products, the c.i.f. value or FMV value of imports is below theiradministered prices.  For example, the 'FMV' of  ordinary portland cement exported to Cambodia
between May and July of 2001 ranged between $32–34/ton compared to the minimum administered
price of $40.  With a tariff rate of 10 per cent applied to the administered price of $40, the implicit
ad valorem  tariff rate on imported cement is approximately 12.5 per cent.  Administered dutiable
values for used automobiles are generally set above c.i.f. value of imports.  For example, the
importation of a used, 1999 Toyota Camry (2000cc) in 2001 was subjected to an administered price of
$8500, whereas its FMV was estimated at $4634.  Thus, the implicit  ad valorem  tariff rate on this
imported vehicle was 64 per cent and not the applied tariff rate of 35 per cent.  A recent MEF letter
instructs SGS to use FMV for mercedes passenger ca rs and trucks made in Korea; thus, no implicit
surcharge is imposed on mercedes models produced in Korea and exported to Cambodia.  However,
smuggling of automobiles to Cambodia is prevalent and this activity undermines customs duties
collection.WT/IFSC/W/12/Add.1
Page 31
2.7 Selected products subject to predetermined minimum dutiable value
Automobiles Different minimum values according to brand and source of country
Trucks and buses Different minimum values according to vehicle weight, lower minimum
values for trucks and buses produced in Korea
Motorbikes and spare parts Different minimu m values according to brand and spare parts
Used electronics By productCooking oil $450/ton if canned in 10 liters or more; $480/ton if canned in less than
10 liters
Cement Portland cement US$40/ton, white cement $75/tonUsed clothing $0.80/kg for products originating or having direct consignment from US,
Canada, Singapore and Japan$0.70/kg for products originating or having direct consignment fromcountries other than the above.
Petroleum products Fixed administered price
Gasoline (all types) fixed at $320/tonAviation fuel fixed at $235/tonLamp kerosene fixed at $230/tonDiesel oil fixed at $275/ton
Generator New generator set $120–150/kva
Used generator set $70/kav
Steel and iron By productCigarettes Fixed price by brandMonosodium glutamate $910/ton if packed in bags of more than 1kg;  $940/ton if packed in bags of
glutamate 1kg or less.
Sources:  Customs Department and Ministry of Economy and Finance.
50. For some products, the fixed dutiable value is deliberately set below c.i.f. value of imports.
Two examples are the importation of cigarettes and used motorcycle parts.  Cigarettes are a major re-
export product, whereby as much as 80 per cent of imported cigarettes are informally re-exported
mainly to Vietnam.  To encourage this activity, as well as to capture some customs revenue from it,
Customs applies the normal tariff and excise rate to cigarette imports at a dutiable value set below the
c.i.f. value of imports (see box 2.8).  Similarly, the government predetermines dutiable values for used
motorcycle spare parts, which is set below market  value according to an import substitution strategy
for the industry as three or four firms assemble these components locally.
51. Overall, this minimum dutiable valuation regime creates uncertainty in the tariff structure as it
creates 'hidden' specific duties or concessions that are not explicitly included in the tariff schedule.
Valuation regimes and resulting specific taxes create additional protection and protection increases
whenever international prices fall below administered prices.  Regimes like this one are also often
used as 'back door' ways of protecting certain domestic or foreign producers from competitive
imports.  The implicit specific duty regime is also discriminatory, as it treats some product relatively
differently from each other depending on brand or country of origin.  Another problem with this
regime is that import (c.i.f. or FMV) prices often deviate from administered prices, especially if thelatter are not frequently updated, as appears to be the case (as of December 2000, many administered
prices had not been updated for two years).  In some cases, the fixed administered prices fall below
the market price, in which case the government forgoes revenue to the budget.  Finally, like high
tariffs the imposition of implicit specific duties encourages smuggling of goods across the border.
Ad valorem  tariff rates are preferred to specific taxes as a tariff instrument because they are less costly
to the economy in terms of resource misallocation.  This is because whenever international prices of
imports change, specific taxes create more variability in domestic prices than ad valorem  tariff rates
and, thus, greater domestic resource misallocation.WT/IFSC/W/12/Add.1
Page 32
2. Import restrictions and controls
52. With a few exceptions, all official quantitative restrictions on imports were eliminated in
1994 as part of comprehensive trade reform measures.  The import license system was also eliminatedin 1994, except for selected items such as pharmaceutical products, gold and silver, armaments and
ammunitions and various cultural and medical materials.  Ministerial authorization is required for
importing these items.  A few bans on imported goods remain.  Recent examples of import
prohibitions include pig meat, used motorbike tyres, right hand autos, and used footwear (see
table 2.9).  Otherwise, firms are unrestricted in importing goods as long as the importer is a registered
firm incorporated under Cambodian law.  Foreign trading companies are free to operate in Cambodia,
as long as they are incorporated under Cambodian law and registered with the Ministry of Commerce.
While a few state trading companies continue to oper ate, for most they compete with private trading
companies in the same markets.2.8 Cigarette re-exports and the system of taxes
Re-exports of goods are handled somewhat differently in Cambodia than in most other countries re-export
trade.  In most countries, re-exports enter and leave with little or no transformation and are typicallypermitted to come and go duty free.  It is not unusual for duty rebate or bonded warehouse schemes to be inplace to ensure that the goods are in fact re-exported. In Cambodia, much of the re-export activity is informal
with Vietnam and Thailand as the major destinations for this trade.  Goods are identified as re-export goods
on admittance, and there is no official documentary evidence of their departure.  According to Customsestimates, cigarettes are by far the largest good re-exported, and about 80 per cent of all imported cigarettesare informally re-exported, mainly to Vietnam in response to the latter country's relatively high tariff andexcise taxes on cigarettes.  Because of the informal nature of this trade (which makes a bonded warehousescheme or duty draw back facility inappropriate),  and recognizing this trade as a source of central
government revenue, the Cambodian government admits imported cigarettes at a concessionary tax rate.
Until recently, the system of taxes and duties levied on cigarettes involved the setting of three parameters:i) the dutiable value, ii) the domestic consumption co efficient (20 per cent sold domestically), and iii) the
tariff refund rate, and subjecting imported cigarettes to the same type of tax scheme as regular imports.  In2000 the government simplified the system by abolishing ii) and iii) and an import tariff and excise tax rate
applied uniformly to imported and domestically produced cigarettes.  However, concerned that a uniform
system of taxes may significantly reduce the re-export trade and therefore customs revenue from cigarettes,the government retained and revised the minimum dutiable value for cigarettes.
Whether any further action to simplify the system of taxes on cigarettes is required by policy makers depends
on the extent that the goods are actually re-exported and this is virtually impossible to determine directly.
There are two points to note. First, the amounts of cigarette re-exports are large relative to likely domestic
demand and, thus, leakages are probably under reasonable control.  A second factor to consider is whether re-
exports can be expected to be a major source of revenue for very many years.  It can be expected that asVietnam reduces its trade barriers within the ASEAN Free Trade Area Agreement (AFTA) agreement overthe next 8 years, the long term future for significant re-export generated revenue is limited. Of course, it ispossible to greatly reduce revenues from re-exports if the duties on re-exports are raised sufficiently high.
This would likely move this trade outside formal chan nels.  For example, the introduction of a duty draw
back system could be expected to have a negative impact on re-exports. Given the informal nature of the re-export trade in cigarettes, and the difficult fiscal c onstraints facing the RGC continuation of present policies
without any further major changes to the system of taxes for cigarettes makes sense.WT/IFSC/W/12/Add.1
Page 33
2.9 Selected products subject to import licensing and prohibitions
Commodity Rationale Measures Responsible agency
Live pigs and pig meat Public health Prohibited Ministry of Agriculture
Armaments & ammunitions National security Prohibited, except for military
procurementMinistry of Defence/Internal
Affairs
Illicit drugs Public health ProhibitedFirecrackers Public safety Prohibited, except for special
occasionsMinistry of Defence/Internal
Affairs
Printing material Public morality Prohibited if deemed to have
negative impact on societyMinistry of
Education/Culture
Gold bars Monetary policy License Central bank of CambodiaCultural items Protection of culture License Ministry of Culture
Monetary policy Automatic license as long as
declared items above $10,000Central bank of Cambodia
Pharmaceuticals Public health License Ministry of Health
Artificial sweeteners Public health License Ministry of Health
Right hand drive vehicles Public safety Prohibited
Used motorcycle tyres Environment P rohibited Ministry of Environment
Used footwear and leather bags Environment Prohibited Ministry of Environment
Source:  Customs Department, Ministry of Economy and Finance.
3. Developments in export policy
Export prohibitions, quotas and charges
53. Licensing is used to administer quotas, conditional prohibitions, and absolute prohibitions on
certain exported goods.  These measures are typically in place for public health and security reasonsas well as to implement arrangements with trading partners, concerning notably textiles and clothing
to the US and European Union (EU).  Currently, Cambodia has an absolute ban on exports of logs,
export quota on rice, and garment quotas (as reported in the sector studies some of these bans are
apparently not binding).  Five items are subject to the export licensing requirements: processed wood
products (including furniture, wooden handicrafts et c), garments, weapons, all vehicles and machinery
for military purposes, pharmaceuticals and medical materials.  Ministerial authorization is required for
exporting these items.  A state owned enterprise, KAMFIMEX, has a monopoly on fish exports.  An
export quota on rice has been in place since 1996 as a replacement for a ban on rice exports
before 1995.  The export quota is an element of the government's food security program.  Evidently,
the quota on rice exports is not binding since the actual recorded export volume has never reached theceiling set by the quota.  A special inter ministerial working group decides on the annual ceiling for
the rice export quota.  Individual shipments, which should not exceed 3000 tons, are granted an
Export License from the Ministry of Commerce after approval is obtained from the Ministry of
Agriculture.  However, unofficial (non quota) exports of rice and also padi are apparently substantial,
although estimates are not available (CDRI 2001).
54. An export ban has been imposed on logs and sawn logs since May 1995.  Strong economic
growth recorded in the Asian countries in the early 1990s had created a substantial increase in thedemand for logs.  Meanwhile, neighbouring countries such as Malaysia and Thailand strengthened
their control on log exports; hence, the prices of logs substantially increased.  These elements,
together with limited institutional capacity for proper forestry management, created a strong incentive
for illegal log exports from Cambodia.  This ban on logs, combined with export taxes on semi-
processed wood, is believed to be inefficient as it encourages excessive and costly domesticprocessing of plywood and veneer sheets.  The government intends to review the export log ban in the
future in line with improvements in overall forestry management.WT/IFSC/W/12/Add.1
Page 34
55. An export quota has been in place for garment exports to the US since 1999, in response to
the surge in garment exports from Cambodia.  Quota restrictions were imposed on 12 broad categories
of garments.  The quota agreement is initially for three years ending in December 2001.  Under the
current arrangement the quota restriction will be eased by 6 per cent per annum.  Up to an additional
14 per cent easing of the quota will be provided if Cambodia 'substantially complies with labour
standards' including those set out in Cambodia's labour laws and the four core ILO conventions.Following on from an assessment of Cambodia's labour standards, the US government granted a 9 per
cent quota increase (see garments case study for a discussion of labour standards).  The government
has implemented a flexible quota system whereby about 80 per cent of the quota has been allocated to
firms operating in Cambodia in 1998 based on their past export performance and production capacity
of the producer.  Up to 10 per cent can be allocated to exporters as a reward for current export
performance and compliance with the country's labour laws.  The remaining 10 per cent is auctioned
to garment producers through competitive bidding.  The government charges a specified fee (known
as visa fees) per dozen of garments sold under the quota to US as well as garments exports to Europe.
The fees were introduced when the government introduced the electronic visa implementation
system (ELVIS) to identify fake Cambodian exports to the US, as part of the bilateral agreement with
the US.  The purpose of the fees, however, appears to simply raise revenue (see garments case study
for details).
56. The garment quota arrangement raises several important long-term competitiveness issues.
First, institutional labour arrangements — such as relatively high minimum wages and restrictions on
work shifts as well as compliance costs to these st andards are raising the cost structure of the garment
sector.  While these rigidities may benefit existing workers in the short term, they put expanded
employment in the industry at risk, if preferred markets cease to exist, by creating a cost structure thatis only viable with preferences.  Further, by putting in place these institutional rigidities the
development of other potential export sectors are also at risk as they create a relatively high cost
structure in labour intensive sectors that Cambodia has a comparative advantage (see garments sector
case study for a discussion of labour issues).
57. The second issue relates to the costly export facilitation process arising from preferential
market access to the US and EU.  The export facilitation process is cumbersome compared to many
other exporting countries in the region.  Much of the process involves around ensuring that
Cambodian garment exports meet rules of origin requirements.  For example, garment exporters
require up to 11 documents from three ministries and five departments before their shipments are
permitted to leave the port.  Further, four governme nt agencies are involved in the product inspection
process, essentially duplicating each other's functions.  For example, to export to the US or EU, the
exporter must obtain a Certificate of Processing from the Ministry of Industry, Mines and Energy
(MIME) as proof that the garments are made in Cambodia.  Ministry officials will visit the factory to
verify origin.  In the next step, exporters obtain  a Certificate of Temporary Authorization to export
from the Generalized System of Preference (GSP) division at MOC.  Officials do not carry out
verification of origin at this stage.  Both Camcontrol and Customs carry out a pre shipment
verification of exports at the factory premises and issue a certificate of inspection.  Containers arethen permitted to leave Cambodia.  This process is costly and time consuming for exporters.  As it is
heavily dependent upon the physical inspection of shipments by three agencies, and is thus very much
open to abuse by petty officials.  According to one estimate, these informal taxes can amount to
$150 per container of garment exports valued at $30 000 f.o.b.  One reason for this excessive
licensing procedure was in reaction to EU and US concerns about third country garment exportsarriving at their ports using fake Cambodian labels (see trade facilitation section).
58. As is the case for import duties, export taxes in Cambodia consist of statutory rates, stipulated
in the Customs Tariff Schedule.  In general, the number of products and the level of applied export
taxes (except for re-exports) continued to be very low and their contribution to government revenue
negligible.  However, export taxes on live animals and fish (10 per cent) burden on earnings offarmers and fishermen.  In addition to the export tax, the Ministry of Agriculture, Forestry andWT/IFSC/W/12/Add.1
Page 35
Fisheries (MAFF) has granted a fish export m onopoly to state owned enterprise, KAMFIMEX, which
is under the Ministry's purview.  Evidently, KAMFIMEX does not take physical delivery of fish, but
instead licenses five export distributors to purcha se all the fish and transport them across the Thai
border.  Distributors collect a 4 per cent fee on all fish transported in the province.  Apparently, the
export price is about 35 per cent of the retail price of fish sold in Phnom Penh, indicating that returns
to fishermen are relatively low because of the distribution monopoly (see fisheries chapter).
59. Taxes are imposed on raw hides and skins and semi processed skins These taxes reduce the
export price received by farmers and benefits producers using them as inputs such as processed
(tanned) leather and leather related products.  (Cambodia also imposes maximum tariff rates on semi-
processed hides and tanned leather imports and on several leather based consumer products such as
handbags and footwear).  However, the experiences of several other countries demonstrate that there
are significant costs to such a strategy.  Hides and skins for most part are by products of farmers' main
activity of breeding animals for the food industry.  Table 2.10 summarizes export controls and taxes.
60. An export tax, by reducing the domestic price farmers receive for raw hides, typically reduces
the incentive for farmers to take care of the hides and this in turn reduces the quality of locally
produced tanned leather.  Local producers of leather related goods, especially those who want to
compete in the lucrative international market (for example, manufacturers of footwear, handbags,
travel cases etc) require international quality leather, which the local industry is typically unable tosupply.  While large exporters of footwear are able to source high quality leather at international
prices through the duty exemption scheme, firms (especially SMEs) supplying the domestic market or
who want to export some proportion of their products are restricted to purchasing low quality, higher
priced domestically processed leather.  This reduces the competitiveness of downstream industries.
Other countries such as Indonesia have recognized these adverse consequences on end users and haverecently removed export taxes on local hides and skins as well as reduce tariff rates on imported
processed leather.
61. There is a similar rationale for the export tax on semi processed wood, veneer sheets and
sheets for plywood (there are no corresponding export taxes on finished products such as plywood,
veneer panels and other laminated panels).  Camcontrol, the government's health standards andproduct quality inspection agency, also imposes a fee of 0.1 per cent on the value of all imported and
exported goods.WT/IFSC/W/12/Add.1
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2.10 Selected products subject to export licensing and prohibitions
Commodity Rationale Measures and conditions Responsible agency
Prohibitions and Licensing
For Public health, security
reasons
Logs and unprocessed timber Forestry management Prohibitions Ministry of Agriculture,
Fisheries and Forestry
Sawn timber Forestry management Prohibitions Ministry of Agriculture,
Fisheries and Forestry
Articles of processed wood Forestry management License Ministry of Agriculture,
Fisheries and Forestry
Cambodian antiques Protection of culture Prohibition Ministry of Culture
Sandal wood Protection of rare wood Prohibition Ministry of Agriculture,
Fisheries, Forestry
Weapons National security Prohibition Ministry of Defence/Interior
Vehicles/equipment for military
useNational security Prohibition Ministry of Defence/Interior
Illicit drugs Public health Prohibited Ministry of Health
Printing materials Public morality Prohibited if negative
impact on societyMinistry of Education/Culture
Rice Food security Quota Ministry of Agriculture,
Fisheries and Forestry
Precious stones, raw gold Monetary policy License as long as declare
items above $10 000Central Bank of Cambodia
For economic reasons
Textiles and garments Bilateral agreement
provisionsExport quota to US Ministry of
Industry/Commerce
Bilateral agreement
provisionsExport quota to EU Ministry of
Industry/Commerce
Footwear Bilateral agreement
provisionsExport license to EU Ministry of Commerce
Pharmaceuticals and medical
materialsPublic health Export license Ministry of Health
Fish Export monopoly granted to
state enterpriseMinistry of Agriculture,
Fisheries and Forestry
Live animals Industry policy Export license Ministry of Agriculture,
Fisheries and Forestry
Export taxes and other charges
Garments Visa fees Implementation of garment
visa systemMinistry of Commerce
Live horses and bovine animals 10% export tax Ministry of Economy and
Finance
Fish, live, fresh, chilled, fillet 10% export tax Ministry of Economy and
Finance
Raw hides, skins and semi pro-
cessed skins10% export tax Ministry of Economy and
Finance
Semi processed wood 10% export tax Ministry of Economy and
Finance
Veneer sheets and sheets for
plywood and veneer panels10% export tax Ministry of Economy and
Finance
Wood cases, boxes, casks etc 10% tax Ministry of Economy and
Finance
Used clothing Unspecified export tax Terminated in July 2001 Ministry of Economy and
Finance
Camcontrol Charges an inspection fee
of 0.1% of value of exportsand imports
Source:  Customs Department, Ministry of Economy and Finance.WT/IFSC/W/12/Add.1
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Export promotion and investment incentives
62. Export and investment promotion policies of  the Cambodian government are discussed in
detail in the trade facilitation and investment sections below.  Nevertheless, as these incentives affect
the trade regime, we briefly discuss them in this section.  Export and investment promotion, embodied
in the law on Investment, has been a cornerstone of the government's investment strategy.  Under the
investment law, the CDC provides a wide range of tax incentives to investors approved by the agency.
The law on investment also provides investor guaran tees including: i) free repatriation of capital and
profits derived from operations in Cambodia, ii) the purchase and sale of foreign exchange and
iii) transfers and all other types of international settlements.  These incentives are available to
investors operating in sectors listed in the First Schedule of the Law on investment law.  Available tax
incentives include the following.
• Firms that export 80 per cent or more of their production are entitled to a duty
exemption on the imports of capital goods and materials that are required for the
production of goods for export.
• Non-exporters are entitled to duty exemptions on imported goods up to one year with
a possible one-year extension.
• A concessionary corporate profit tax rate of  9 per cent compared to the normal 20 per
cent corporate tax rate is available to approved firms.
• A corporate tax holiday of up to 8 years can be awarded.
63. Based on a published criterion (in the form of a matrix) the government can offer corporate
tax holidays of up to eight years.  So far, only a handful of investors have been awarded a tax holiday
and none have been awarded for longer than four year s.  According to customs, more than 80 per cent
of total duty and tax exemptions are derived from the Law on Investment.
64. Many countries provide various import duty exemption schemes to exporters, since sourcing
materials at international prices is considered essential for exporters to remain internationallycompetitive.  Fewer countries provide duty exemptions to investors supplying the domestic market
and on imports of capital goods.  Duty exemption schemes may include duty drawback facilities or
duty suspension schemes or a straight duty exemption to exporters as in the case of Cambodia.  All
schemes have strengths and weaknesses.  The advantage of duty exemption scheme or duty
suspension schemes over a duty draw back facility is that they avoid tying up exporters' workingcapital in the scheme as they do not have to prepay duties, which they would have to do in the draw
back facility.  When interest rates are high, the duty drawback facility can be expensive for exporters,
especially if authorities delay the return of prepaid duties, which is a common complaint of exporters
participating in these schemes in other countries.
65. In Cambodia, investors entitled to import duty exemptions must provide the CDC with a
detailed list of import requirements over the next 12 months.  This list, known as the Master List,
provides detail information on the type, volume and value of imported goods.  A producer wishing to
modify the lists must request permission from the CDC.  For most firms, projecting such detailed
information in advance is very difficult to do since demand conditions in their markets change
frequently.  This is particularly the case for garment producers.  Demand conditions in the garmentmarket constantly change from season to season and, thus, orders from overseas vary according to the
season and the buyer's market.  Therefore, to remain competitive it is paramount that garment
producers remain flexible in their production process using the right materials and designs and
delivering on time.  This requires frequent changes in their fabric requirements and often modification
of their sewing machines compatible with the requested designs and patterns.  To overcome the
inflexibility inherent in the Master List, producers need to anticipate all possible material
requirements, thus, inflating their projected import needs in their Master List.  CDC officials areempowered to modify this list if they have grounds  to believe that the exporter is inflating materialWT/IFSC/W/12/Add.1
Page 38
requirements.  This is reported to often result in a 'negotiated' list, with all the attendant problems
associated with discretion in the process.  The CDC will carry out an audit of this list to ensure that
the investor did import the goods as stated.  Investors complain that this is a time consuming and
costly exercise.
66. The RGC is currently considering ways to impr ove the investment process and reviewing the
tax incentive regime in view of improving its ef fectiveness.  Apart from import duty exemptions on
materials required by exporters, and aside from the issue of WTO consistency, the effectiveness of tax
incentives — such as tax holidays — for investment is uncertain.  Proximity to markets, availability
of skilled manpower at relatively low cost, adequacy of essential infrastructure and a stable economic,
political and regulatory environment may be more important determinants than tax breaks on the
investment decision process.  Further, these arrangements come at a cost in terms of foregone
budgetary revenue, impose a greater tax burden on those not entitled to tax breaks, and they cause
distortions in terms of resource allocation (for example, oversupply, bottlenecks) between activitiesthat receive concessions and those that do not.  The Indonesian experience with tax holidays is
recounted in box 2.11.  The same lessons emerge from other countries.  In Bangladesh, open-ended
tax holidays have been used extensively with no demonstrable impact on attracting FDI.
2.11 The Indonesian experience with tax holidays
Incentives for investment, most notably tax holidays, are common in many developing and developed
economies.  The main aim of these incentives is to encourage domestic investment and attract FDI, and
thereby develop a local industry.  While it is difficult to judge the extent to which the incentives haveactually increased investment in Cambodia, there are grounds for doubting their effectiveness, based onevidence for other countries in the region.  Indonesia's own experience with tax holidays provides ampleevidence that a country can attract investment without establishing discriminatory tax arrangements.  In
the 1970s and early 1980s, Indonesia offered foreign investors tax holidays.  However, in 1984 Indonesia
became one of the very few developing economies to eliminate tax holidays.  At the time tax holidayswere eliminated there were concerns that foreign investment to Indonesia would fall and that Indonesia
would be left behind neighbouring countries (whose government's offered tax holidays to investors) asIndonesia was then considered as a 'high cost' economy.  New foreign investment did drop immediately
after tax holidays were removed, but soon recovered and grew rapidly until the crisis in 1997.  The return
of foreign investment is clear from Figure I.
Number of Approved FDI Projects, 1978 to 1996
01002003004005006007008009001000
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996Source:  Indonesian Investment Coordination Board 2001.
Perhaps most striking, Indonesia's share of regional FDI inflows actually increased after the Indonesian
government eliminated tax holidays even though neighbouring governments continued to offer substantial
tax holidays. This is striking because if tax holiday s were a decisive factor in the location decisions of
investors then one would expect foreign investment in Indonesia to have fallen, or at least lagged behindthat in other countries.WT/IFSC/W/12/Add.1
Page 39
67. Such experiences with evaluation of tax holidays suggest that the cost of such measures (in
terms of expenditure or tax revenue foregone) and other taxpayers may exceed the investment
generated by the incentives.  Their high cost is re lated to the difficulty in identifying incremental
investment (that is, investment that would not be  undertaken without the incentive).  There are also
other costs of a discriminatory tax arrangement.  Since tax holidays result in a loss in tax revenues tothe government, this would increase the budget deficit, which in turn put pressure on the government
to cut back on expenditures.  The lost tax revenues could be used for other competing economic and
social priorities such as infrastructure development, education and health.  Thus, where the
government is under pressure to raise revenue for the budget the greater burden of taxation ultimately
falls on those taxpayers subject to normal income taxes.  In other words, other peoples' taxes must pay
for the tax holiday given to selected investors.  Under the Law on Investment, the CDC publishes a
'Negative Investment' list, which specifies sectors closed to foreign and or domestic investors andopen to foreign investors with special conditions (see annex D for full listing of sectors).  There are
four categories:
• sectors closed to all investment
• sectors closed to foreign investment
• sectors open to foreign investment with restriction
• manufacturing related services (see table 2.12).
68. Sectors closed to all investors (12 sectors) are closed on environmental, public health or
national security grounds.  Two sectors (fresh water fishing, small scale mining) are closed to foreigninvestors on the grounds of protecting local, small-scale enterprises.  Sectors open with restrictions to
foreign investors (11 sectors) are restricted for a variety of reasons, including local industry protection
(cigarette production) or protection of small-scale enterprises (food crops and livestock).  New foreign
cigarette producers are prohibited from producing and selling in the domestic market.  Restrictions on
the other sectors mainly include local equity participation and partnerships with farmers and small-scale enterprises.  The list leaves open the percenta ge of local equity participation indicating that this
may be a negotiated outcome.  The final category is called Manufacturing Related Services and only
includes various forms of media and printing.  Foreign participation is restricted to 49 per cent, and
investment is subject to discussions with the Ministries of Information and Culture.
2.12 Sectors included in the negative investment list
Category Number of sectors
Sectors absolutely closed to investments 12
Sectors closed to foreign ownership 3
Sectors open to foreign investment with certain
restriction11
Manufacturing related services 4
TOTAL 30
Source:  Cambodian Development Commission.
69. With the exception of restrictions on foreign investment in cigarettes, alcoholic beverages and
several agricultural sectors, the Investment List does not appear overly restrictive.  Most of the sectors
closed or restricted are done so on public health and security grounds and not to protect domesticproducers.  However there are two areas where clar ity is needed and would improve transparency in
the investment process.  First, category three specifies 11 sectors open to foreign investment with
certain conditions.  This form of specification creates uncertainty for investors, as it does not classify
the status of other sectors not included in the list.  The investors may ask, if a sector is not included in
category three, is it still open to foreign invest ment without restrictions and conditions? One way toWT/IFSC/W/12/Add.1
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reduce this uncertainty would be to replace category three with 'sectors closed to foreign investment
unless certain conditions are met'.  This 'negative list' approach would improve transparency and
predictability in the investment policy environmen t, as investors would know which sectors they were
not permitted to invest in.  A second area where improvement could be made relates to specifying the
amount of required local equity participation in category three.  As it is currently written category
three creates uncertainty and is not transparent.  To improve clarity and transparency in the negativeinvestment list, the negative list should also specify these maximum ownership percentages.
C. T
HE ASEAN F REE TRADE AREA AGREEMENT (AFTA)
70. Cambodia became the 10th member of ASEAN when it joined the regional grouping in
April 1999 and has committed itself to a gradual reduction in almost all of its tariff rates to 0–5 per
cent on imported goods from other ASEAN member s by the year 2010.  The Common Effective
Preferential Trade Area (CEPT) process requires Cambodia to allocate all tariff lines or categories
into one of three lists.
• Inclusion List: that includes goods for which the CEPT rates will be reduced either
along the 'normal' or 'fast' tracks.
• Temporary Exclusion List: to be made up of goods that are viewed as too sensitive to
be subject to immediate rate reductions.
• Sensitive List: products that are declared sensitive and will have a longer time frame
for phase into the Inclusion List.
• General Exclusion List: that is intended to include a relatively small number of goods
for which trade is restricted on the basis of safety or cultural reasons.
71. Annex E summarizes the main features of Cambodia's reduction of tariff rates under the
Agreement on the CEPT.  Several pertinent features stand out.  First, only 46 per cent of all tariff lines
are in the Inclusion List.  The bulk of goods are in the Temporary Exclusion List while the remaining
2.7 per cent of lines remain are in the restricted lists.  The second feature is the very slow pace in
reduction in tariff rates.  Goods in the Inclusion List will not be fully liberalized to the 0–5 per centrange until 2007.  Moreover, goods in the Temporary List will be phased into the Inclusion List only
between 2005 and 2010 with the commitment that their tariff rates will be between 0–5 per cent
by 2010.  In contrast Vietnam intends to reduce all tariff rates in their Inclusion and Temporary
Exclusion lists to the 0-5 per cent range by 2006 and Lao and Myanmar intend to phase in their
reductions by 2008.  It is important to recognize that goods on the Temporary Exclusion List would
not be eligible for the lower CEPT tariff rates if exported to other ASEAN member states.  A second
point to note is that Cambodia can choose to accelerate its tariff reductions anytime.
72. There are good reasons for Cambodia to transfer virtually all goods from the Temporary
Exclusion List to the Inclusion List immediately and accelerate tariff reductions to 0–5 per cent before
2007.  First, by accelerating tariff reductions, this will make Cambodia a viable base for exports toASEAN.  However, Cambodia will only be a potential  site for ASEAN oriented investment only for
those goods that can be exported to member countries at the lower CEPT tariff rates.  For this to
happen, goods must be on the Inclusion List and the transitional CEPT rate must be 20 per cent or
less.  A more effective way to establish Cambodia's place as a potential investment site would be to
ensure that most tariff lines are immediately placed in the Inclusion List, and that the maximum ratesare reduced to no more than 20 per cent, preferably less.
73. A second reason is the strong competition from the other new ASEAN Member States.
Vietnam joined ASEAN in 1995 and Laos and Myanmar joined in 1997.  While there are some
important differences between each of these countrie s, there are also some similarities in their
economies.  It is likely that of the new ASEAN members, one or two will emerge as relatively more
attractive investment centers than the others.  This is because as investors look to locate ASEAN
oriented investment in one of the low wage, new members, there will be a tendency to choose sitesWT/IFSC/W/12/Add.1
Page 41
where other members are starting to grow.  In other words, in this type of endeavour, success breeds
success.  By delaying tariff reductions, Cambodia is not taking the advantage in this process.  For
Cambodia to emerge as one of the more attractive platforms for investment, it will need to include a
rapid and comprehensive integration into AFTA/CEP T framework thereby ensuring the best possible
prospects for ASEAN oriented investment relative to her neighbours.  This suggests the need for
accelerating tariff reductions.
74. A third reason to accelerate the implementation of CEPT tariff rates is the need to establish
predictability in its trade policies.  The RGC gove rnment has foreshadowed that most goods will have
preferential (CEPT) tariff rates between 0–5 per cent by the year 2010.  However, nine years is a long
time and the less clearly defined is this process, the less confidence investors will have.  Stability and
transparency are two essential characteristics of an effective industrialization strategy.  However, the
implementation of the CEPT system entails a large Temporary Exclusion List and this may create
significant instability and uncertainty in the policy framework, especially during the next four to nineyears when these goods would be phased into the Inclusion List.
75. It is important to note that in implementing CEPT tariff rates, there would be benefits if the
difference between Cambodia's CEPT preferential tariff rates and her MFN rates for the rest of the
world remain small.  The reason is that the larger  the difference between the two rates the greater the
probability that the preferential trade area would di vert Cambodia's trade away from the rest of the
world to AFTA rather than create new trade for Cambodia.  Recent analysis suggests that if this
occurs the benefits to Cambodia of joining AFTA would be small.  Indeed, an increasing proportion
of Cambodia's trade is with partners outside ASE AN and this will continue for many more years to
come.  Further, maintaining a big margin betwee n CEPT rates and MFN rates encourages Cambodian
firms to source more expensive materials from ASEAN producers.  Thus, the Cambodian governmentmight consider ways of reducing MFN rates in parallel with CEPT rates to keep the wedge between
the two as small.  This is permissible under AF TA.  Indonesia, for example, has reduced its MFN
rates in tandem with its CEPT rates.  In 1999, Indone sia's simple average CEPT tariff rate was 7 per
cent, while its simple average applied MFN rate was 9.5 per cent.  Since then, Indonesia has reduced
its applied MFN rates to 7.3 per cent.
D. WTO 
ACCESSION ISSUES
1. Existing legislation, new draft legislation and implementation
76. The Council of Ministers has adopted a draft Legislation Action Plan that sets forth the
legislative agenda for the years 2001, 2002, 2003 and 2004.  Under this draft Legislation Action Plan,
around 55 draft laws or regulations are planned to be adopted in order to complete the legalframework of Cambodia.  In preparing, drafting, assessing and adopting these new laws and
regulations, ministries are required to ensure full compliance with requirements under the WTO
Agreements.  Thus, various technical assistance projects are either underway or in preparation to
support Government officials for the drafting and preparation of these laws and regulations and to
ensure compliance with WTO requirements.  The WTO specialist member of the Diagnostic Study
team supported these activities.  In order to cover all questions from Members of the Working Party in
relation to draft laws and implementation, charts were prepared describing:
• Each component of the National Legislation Program
• the Technical Assistance Projects required, and
• needs in training and dissemination to implement fully the laws and regulations in
relation to the WTO Agreements.
77. Because the Cambodian legal framework is being almost entirely rebuilt and many of the new
laws being drafted, will need to notably, implement WTO requirements.  For other accessing
countries, the main emphasis is reforming exis ting legal frameworks to comply with WTOWT/IFSC/W/12/Add.1
Page 42
requirements.  However, for Cambodia, the main emphasis will be to adopt and implement new laws
and regulations to complete the current deficient le gal framework and, at the same time, to implement
the provisions of the various WTO Agreements.
Component 1:    full assessment of the existing laws and regulations
78. That said a number of existing laws and regulatio ns need to be examined in order to ensure
compliance with WTO requirements.  To carry out such an assessment, the Government will need
further technical assistance from experts on WTO matters.  Such a team of experts could then work
closely with Cambodian officials directly im plicated in implementing the WTO requirements
throughout the various ministries.
79. In many cases, for laws and regulations of a general nature (that is, commercial laws), no
specific provisions of the WTO Agreements relate precisely to these issues.  However, the general
rules and principles of the WTO Agreements need to be respected by WTO Members.  The variousWTO Agreements contain general rules, which are likely to affect national legislation where the
impact on international may not be immediately obvious.
80. Based on the assessment of the WTO Agreements, the fields on which WTO requirements
will affect national legislation are likely to be, mainly, the following:
• customs valuation
• intellectual property
• technical barriers to trade, and
• sanitary and phytosanitary measures.
81. Another significant priority area for Cambodia will be the due process requirements under
Article X of the GATT 1994.  Moreover, Cambodian  officials preparing the GATS schedule will have
to ensure that any restrictions in the services domain are properly recorded in that schedule.  This
assessment activity could proceed as follows:  first, identify WTO requirements; second, identify all
relevant laws and regulations; third, analyze those identified laws and regulations to assess their scopeand effect on WTO related matters;  fourth, propose amendments or additions required in offer to be
in full compliance with the WTO agreements;  fifth, assess work being done to endure that the
identified laws and regulations comply with WTO requirements;  and sixth, propose further action
required to amend existing laws and regulations under component 2 hereafter.
82. A TA team could advise governmental entities responsible for the accession of Cambodia to
the WTO.  Such advisory work could cover, notably:
• the preparation of the various detailed documents required by WTO;
• the supervision and coordination of the technical assistance projects in relation to the
drafting of new laws or regulations;  and
• the detailed negotiations with other WTO Members.
83. Moreover, as a least-developed country, the WTO agreements provide for Cambodia a
number of special treatments and exemptions.  These provisions raise technical issues ofimplementation and policy issues as to whether it is in Cambodia's interest to take advantage of them.
Component 2:    detailed plan to adopt new laws and regulations and amend existing laws and
regulations
84. The fields, which WTO requirements will affect in national legislation, shall be, mainly, the
following:WT/IFSC/W/12/Add.1
Page 43
• customs valuation
• intellectual property
• technical barriers to trade, and
• sanitary and phytosanitary measures.
85. Another significant priority area for Cambodia will be the due process requirements under
Article X of the GATT 1994.  In addition, to these priorities areas, the Government intends to create a
sound business environment upon joining the WTO by preparing and adopting a full range of new
laws in order to establish a complete Commercial Code.  The National Legislation Program involves
adoption of laws such as Law on Business Enterprises, Law Establishing the Commercial Court,Commercial Contracts Law, Commercial Arbitration Law and laws on intellectual property.  At a
later stage, the Government will need to consider detailed rules and regulations governing issues such
as Rules of Origin, Anti-Dumping and Count ervailing Measures and Safeguard Measures.
86. National Legislation Programme  - The Cambodian Government has prepared a detailed
program to adopt many laws and regulation to comply with WTO and built up a comprehensive legalframework.  Around 55 legislative instruments have been identified and prepared by the National
Assembly, the Council of Ministers and various mini stries.  Following further research and better
comprehension of the WTO Agreements, the Governme nt will add other laws or regulations to be
adopted under the National Legislation Programme.
87. As part of the Diagnostic Study, that specialist team members has prepared detailed charts for
each law or regulation covering:
• draft law or regulation or contemplated law or regulation and general scope of the
contemplated legislation or regulation;
• planned approval date and ministry/ies involved;  and
• WTO Agreements implicated including a general outline, provisions on developing
countries and least-developed countries and possibilities of technical assistance.
88. Technical Assistance Projects -  In order to implement this National Legislation Program, the
Government and various ministries have proposed various technical assistance projects, financed
multilaterally and bilaterally, implicating foreign experts team.  Some projects have been operatingfor some time, notably with Japanese experts on the Civil Code and the Civil Procedure Code, with
the World Bank on drafting a Commercial Code and with the Asian Development Bank on drafting a
new Land Law.
89. However, Cambodia still requires technical assistance to draft and adopt various legislative
instruments required under the WTO Agreements.  For example, detailed laws and regulationsconcerning sanitary and phytosanitary measures require a high level of expertise to be drafted and
implemented.  Moreover, specific agreements on issues such as safeguard measures, antidumping
measures and countervailing measures raise issues of the policy desirability of such agreements as
well as technical drafting requirements.
Component 3:    Implementation and Training
90. The Working Party has also asked about the effective implementation of the proposed
Legislation Action Plan.  The 'Legal and Judicial Reform Strategy for Cambodia' has been adopted by
the Council of Ministers and aims, notably, at improving the effective adoption of laws and
regulations by the National Assembly and the Government.  It is been presently implemented by theGovernment and is composed notably of a significant component on Law Making Process covering
the following issues.WT/IFSC/W/12/Add.1
Page 44
• Implementation of coordination mechanism - Coordination mechanisms need to cover
coordination within Government and the Legislative Branch; coordination with the
Private Sector; and coordination with the Civil Society.
• Law Making Process as a Continuous Process - Consultations amongst the various
branches and agencies need to be a continuous process. Lack of clear policy-dictated
direction in developing legislation appears to be the main cause of legislative failure.
• Capacity Building in Law Making Process - Capacity building at each of the
institutions involved in the policy formulation, drafting, adoption of Cambodian
legislation lies at the heart of any sustained effort to ensure the full success of thelegal reform, the appreciation of the policies, institutional responsibilities, and the
respect of the rights and the legal obligations arising from the adoption of new
legislation. The shortage of highly skilled Cambodian lawyers means that much of
this legal drafting is being done by international experts. As such, capacity building,
while focusing on long-term needs, must also take into account the urgent priorities.When examining the training and retraining needs of government lawyers and
legislative officers, one must consider the long or medium term objective of the
administration, which is to have competent personnel equipped to deal with the legal
issues confronting the country.
91. In ensuring implementation of new laws and regu lations and training of Government officials,
the Government will first need to do a full evaluation of the technical skills and expertise currentlyavailable in the Cambodian Government and the Cambodian society.  Based on such evaluation, the
technical assistance projects can be tailored to fulfil such formation needs. Moreover, various
international organizations such as WTO, IMF or ITC can provide permanent training and formation
in respect of fields where skills and expertise would need to be developed. Once Cambodia has
accessed WTO, permanent governmental entities responsible for monitoring WTO matters will needto be established.
2. Priorities for implementation
92. Several issues facing the RGC concerning trade policies and the strategy for implementing
WTO trade rules emerged in the course of the diagnostic study.  These were:
• the use of fixed or specific duties to overcome valuation issues;
• devising a strategy for Cambodia's binding tariff offers to other WTO Member
countries;  and
• building institutional capacity to implement WTO rules.
93. An element of Cambodia's trade policy that may not be consistent with WTO rules is the
prevalence of administered minimum or fixed dutiable values from which customs calculates trade
taxes.  This valuation system is clearly inco nsistent with WTO rules.  The WTO agreement on
customs valuation provides for customs valuation based on the transaction value, that is, the priceactually paid or payable for the goods when sold for export to the country of importation.  Cambodia
will need to look at ways of phasing out administered dutiable values currently used for several
product groups.  In this regard, the RGC is seeking assistance from the New Zealand government on
customs valuation. A second area where treatment might offend WTO rules is the differential tax
treatment between imports and domestically produced goods.  The WTO requires that the products ofthe territory of any WTO Member shall not be subject to internal taxes (for example, excise and VAT)
in excess of those applied to like domestic products. In addition, those taxes shall not be applied to
afford protection to domestic production. One example mentioned earlier was the exemption from
VAT on domestically produced motorcycles for the domestic market, whereas imports of motorcycles
are not VAT exempt.WT/IFSC/W/12/Add.1
Page 45
94. A second issue relates to devising a strategy for setting binding tariff offers to other WTO
Member countries.  Binding tariffs are the maximum tariff rates the government commits to when
joining the WTO.  In other words, the government promises other WTO Member countries that it
would not raise tariff rates above these bound levels.  In practice, most countries set and keep applied
tariff rates below these bound rates.  There are two approaches on the level to bind rates.  The first
approach involves setting initially high bound tari ff offers; the second view advocates setting low
binding tariff offers.  Both approaches have advantages and disadvantages.  Setting high bound tariff
rates might calm concerns of domestic interest groups that oppose trade liberalization by assuring
them that the government will not give away the choi ce of raising tariffs in the future.  Setting binding
rates relatively low, say equal to or very close to current applied rates also has advantages.  In
particular low bound rates signal to the internat ional investment community that the country is
committed to an open trade regime and wishes to become a platform for investment.  Crucially
important, low binding tariff rates provide stability and certainty in the country's trade policyframework.  As discussed in the section on AFTA, investors like a policy framework that is
transparent and predictable.  Setting bound rates close to current applied rates would achieve this
predictability.
95. A third issue relates to building institutional capacity to implement WTO rules.  As noted, the
RGC has set out a very ambitious legislative agenda to implement the WTO requirements.  Examplesinclude various intellectual property laws (four laws are proposed in this area); competition law,
bankruptcy law, law on business enterprises, commer cial contracts law, secured transaction law, law
on rules of origin and various laws on antidumping and countervailing duties.  Most of these laws are
complex and will require the establishment of separate agencies to implement them.  For example, a
competition law would require a separate competition commission with its own staff of highly trainedeconomic and legal technical experts.  These laws are in addition to many other laws and institutions
that the RGC has or intends to establish in both the economic and non-economic areas not related to
the government's WTO accession efforts.
96. Given this legislative load, the RGC administrative capacity will be stretched.  It is also
becoming clear that at this time and for some year s to come the RGC may not have the administrative
capacity to implement some of these complex laws.  While the technical assistance canvassed in the
preceding section will help, there may need to be a strategy to reprioritize legislative efforts.  In
particular, those commercial laws that are not fundamental to WTO accession or economic efficiency
may need to be pushed back in time.  Clearly some laws are important for improving economic
governance and reducing the risk of doing business in Cambodia such as a land law, contracts law andbankruptcy law.  Other laws, which though im portant, may be deferrable, include laws on
antidumping and countervailing duties and comp etition.  There are strong arguments against
introducing laws on antidumping duties as many countries often use them as a disguised form of
protection of local industries without considering the economic costs (that is, higher prices) this
instrument has on end users and consumers of the product.  Similarly, it is not clear that a competition
law is appropriate at this stage of Cambodia's in stitutional development.  The implementation of a
competition law requires an independent commissi on with highly trained economic and legal experts
as identifying anti-competitive behaviour requires elaborate economic analysis and is data intensive.
It might be more effective to concentrate limited government and donor resources on the commercial
and economic laws that are key to reducing risk of doing business in Cambodia.  In this regard,
technical assistance would be key to assisting the RGC to reprioritize the legislative agenda
contemplated for WTO admittance.
E. I
NTERFACE BETWEEN TRADE POLICIES , INDUSTRIAL DEVELOPMENT AND POVERTY
ALLEVIATION
97. A notable feature of Cambodia's tariff structure is that the broad tariff bands correspond more
or less, to whether goods are final goods or raw materials.  This is referred as a 'cascading' tariff
structure, since the rates cascade down, with higher rates for finished goods, to lower rates forWT/IFSC/W/12/Add.1
Page 46
intermediate goods and raw materials (see chart 2.13).  This 'cascading' tariff structure has changed
little since 1997.  Chart 2.13 presents average tariffs for raw materials, semi processed manufactures
and fully processed goods at the International Standards Industry Classification (ISIC) two-digit level.
It is apparent from chart 2.14 that several major sectors — food and beverages, textiles and garments,
basic metal products — have very distinct 'cascading' tariff structures.
2.13 Cambodia's cascading tariff structure
0510152025Avergae tariff rate
(%)
Raw  materials Semi processed Fully processed2000 2001WT/IFSC/W/12/Add.1
Page 47
2.14 Cambodia's cascading tariff struct ure by sector in 2001, ISIC two digit
05101520253035Average tariff rate
(%)
Food Garments Wood Paper Chemicals Non-metallic Metal Fabricated
Raw materials Semi processed Fully processedWT/IFSC/W/12/Add.1
Page 48
98. This 'cascading' tariff structure has important implications for the government's export led
economic development and poverty alleviation strategy.  By setting high tariffs on semi processed and
consumer goods, Cambodians are required to pay above international prices for basic needs, unless
smuggling of imported goods circumvents these high prices.  Take the example of locally produced
wheat flour.  The tariff on wheat flour is 35 per cent.  This duty has the effect of protecting the local
wheat flour miller from cheaper imports.  This means that downstream users of wheat flour (bakers,producers of processed foods, restaurants and home i ndustries) must pay a relatively high price for
wheat flour as an important ingredient into production of their goods.  The higher costs of production
are then passed onto consumers through higher retail prices.  Since food makes up a large proportion
of poor household's expenditure, lowering import tariffs on these products would benefit poor
households.
99. The 'cascading' tariff structure  is not consistent  with the Governments broad based industrial
growth and development strategy.  A central platform of the Royal Cambodian Government's First
Socioeconomic Development Plan , 1996–2000  (SEDP) and the second SEDP2 (2001 to 2006) is
reducing poverty by the promotion of rural and labour-intensive industries via an export led
development strategy.  Given Cambodia's small market size and low per capita income, this strategy
seems most appropriate in achieving the RGC goals of high economic growth, employment and
poverty reduction.  In this context, industrial and trade policies are linked.  Trade policies, particularlytariffs, influence domestic prices and these in turn affect investment and production decisions.
Industries, which do not face import competition because of tariffs, subsidies, and quantitative
restrictions, have an incentive to produce for the domestic market and not to export.  It is sometimes
argued that a country can protect designated import competing industries, while at the same time
allow exporters to source imported materials at competitive world prices through various dutyexemption schemes, thus, achieving the dual objective of promoting exports and import competing
industries.  Experience of other countries such as Sri Lanka, New Zealand, Indonesia and the
Philippines that had adopted 'import substitution' strategies in the late 1960s, 1970s and early 1980s
clearly show that protected import competing sectors became inefficient and unable to compete in the
international market and consequently the country's economic growth performance lagged behindthose countries with a more outward orientation.  Moreover, governments in many countries found it
politically difficult to remove protection once it has been granted to industry.  If a broad based export
oriented approach is to be pursued, as in the case of Cambodia, a cascading rate structure inevitably
sends the wrong signals (see chart 2.14 and box 2.15 reports on experiences with import substitution
strategies in other countries).
100. Recently estimated effective rates of protection for a selection of Cambodian industries
indicate that this is likely what is happening now.  Effective rates of protection measure the degree to
which trade policy has artificially increased the profitability of producing for the domestic market
relative to export activities and, thus, signals a disincentive to produce for the export market.
Table 2.16 presents estimates of effective rates of protection for a sample of Cambodian industries.
These are rates prevailing in 1996–97.  Given that the tariff structure has changed little over the last
four years, the estimated ERPs and ranking of these industries will still be relevant.  The weightedaverage ERP for this sample is 111 per cent.  This level of effective protection is quite high if it is
indicative of the entire industrial sector .  These estimates were based on a small sample size of
50 firms surveyed in 1996.  Thus, further analysis would be needed before the wider applicability of
these estimates can be assumed.  Nevertheless, the general picture that emerges is of relatively high
but variable incentives resulting from tariff policies .  Despite the shortcomings in the sample, this is
likely to be a reasonable indicator of the results that would be obtained from a larger, more detailed
analysis.  The implication of these ERP estimates is that Cambodia's tariff policy is structured in such
away that it acts as a disincentive to export a wider range of products than currently being exported.WT/IFSC/W/12/Add.1
Page 49
2.15 Experiences with import substitution strategies
In the 1960s and 1970s, many countries adopted an industrialization strategy based on import
substitution.  Tariffs were used to provide incentives (effective protection) for selected industries.  In the
early stages of this strategy, activities engaged in the manufacture of consumer goods were viewed as theeasiest targets for industrial development and the tariffs for these goods were raised relative to those of
other goods (that is, cascading tariff structure).  The original intention was that when these infant
industries matured more types of final good manufacturers would be targeted and their tariff protection
rose.  These were to be followed by increased protection for the domestic production of intermediate
goods, processed raw materials and capital goods in subsequent stages, thus, fostering industrial
backward linkages.  As experience in the 1970s and 1980s aptly demonstrated, this approach had serious
flaws and the results were not as hoped.  The first stage of the strategy was implemented and high levelsof protection were established for many types of consumer goods.  However, in doing this, the seeds of
failure were sown.  Many of these firms remained uncompetitive, which made it politically difficult to
proceed to the second stage where the tariffs for intermediate goods used by these firms would be
increased.  As a result, a powerful constituency was created that was able to block further implementation
of the import strategy.  Another significant outcome was that for many of these countries, the industrialbase remained small in terms of contribution to value added and employment and relatively high cost
when measured against international competition.  As world markets became more integrated those
countries that adopted import substitution strategies tended to grow slower than those countries that were
more export oriented.
Several Asian countries had followed import substitution strategies in the 1970s and 1980s.  The results
were not as hoped and in response many of these countries implemented substantial trade policy reforms
in the late 1980s and early 1990s.  The experience of Indonesia aptly demonstrates that a more outward
oriented strategy achieves greater results in terms of employment growth and poverty reduction.
Indonesia followed an import substitution strategy in the 1970s and 1980s whereby tariffs followed a'cascading' structure.  However, by the early 1980s the industrial base remained small and inefficient,
accounting for 16 per cent of gross domestic output.  After a period of low economic growth in the
early 1980s and a slump in oil prices in 1986, the government began to reform its trade policies.  In 1986
the government introduced a duty drawback facility on raw materials and intermediate inputs for
exporters and in a series of reform packages from 1986 to 1995 the government eliminated most non tariffbarriers and reduced tariff rates on most goods.  Unweighted average tariffs fell from over 25 per cent in
1986 to 7 per cent by 1999.  As a result, Indonesia's manufacturing sector grew rapidly, with annual
growth in excess of 8 per cent for most years until 1997 when the currency crisis erupted.  By 1995, the
manufacturing sector accounted for 23 per cent of GDP.  The engine of growth was exports of
manufactured goods.  At first, exports were heavily concentrated in garments, textiles and footwear,
which accounted for about 65 per cent of total exports of manufactured goods at the end of the 1980s.
Exports began to diversify in the early 1990s to include toys, electronics, furniture, and jewelry.By 2000, exports of manufactured goods accounted for over 65 per cent of total exports, up from 8 per
cent in 1984.WT/IFSC/W/12/Add.1
Page 50
2.16 Estimates of effective rates of protection, 1997
Activity (ERP)
%
Mfgr of basic chemicals, except fertilizer 2,279Mfgr of wearing apparel 2,268Mfgr of rubber tyres etc 1,007Mfgr of wearing apparel 458
Mfgr of Dairy products 415
Mfgr of Tobacco products 411Mfgr of metal containers etc 365Mfgr of wearing apparel 329Mfgr of other rubber products 273Mfgr of malt liquors (beer) 144
Distilled beverages 142
Mfgr of soft drinks 136Mfgr of structural non refactory clay and ceramic products 59Mfgr of structural non refactory clay and ceramic products 41Mfgr of structural non refactory clay and ceramic products 35
Mfgr of other rubber products 33
Mfgr of other rubber products 25
ERPs calculated from enterprise data.Source:  Cambodia: Strengthening the Foundation for Trade and Industrial Development, Report
presented to the ADB and RGC (ADB TA No. 2570 CAM;  1997)
1. An appropriate tariff policy
101. The RGC's economic goals include higher rates of industrial growth and development based
on an expansion and diversification of exports and improved competitiveness of import competingindustries.  If these goals are to be achieved to any significant degree, resources must be employed in
their most productive uses.  The dominant role of the private sector in allocating resources means that
it is essential that policy based incentives do not di stort their assessment of the returns to alternative
investments.  In other words, the large differences in effective rates of protection noted above need to
be substantially eliminated.  This in turn implies moving away from a cascading tariff structure.  Thisindicates that the primary policy objective for the tariff system should be the adoption of a low,
uniform tariff rate structure.  In other words, a single tariff rate that applies to all or virtually all
imports.  The sole purpose of the tariff system would be as a source of revenue.  The determination of
the appropriate level of tariff rate would be set to achieve the required revenue.  A low uniform rate
on (or virtually) all imported capital goods, raw materials and finished goods would ensure that localproducers are not disadvantaged vis-à-vis  competing imports.  A low uniform tariff rate typically
discourages smuggling of imported goods and a low uniform of say 5 per cent with no exemptions
would produce almost as much revenue as the prev ailing system with probably much less bureaucratic
costs.
102. Largely this is already the government's objective under the AFTA agreement;  that is, to
move to a 0–5 per cent tariff rate for virtually all goods imported from ASEAN member countries.
Thus, the logical extension of this strategy is to reduce MFN rates in tandem with the preferential
CEPT tariff reduction schedule.  By reducing CEPT and MFN tariff rates in parallel with each other,
any trade diversion arising from the ASEAN preferen tial trade agreement is eliminated.  Although as
indicated earlier there are good reasons to accelerate implementation of both CEPT and MFN tariff
reductions.
103. Three important implementation issues need to be considered.  First, what would be the status
of the current duty exemption scheme under a uniform tariff rate policy; second, what is the revenue
implication of such a policy; and third, what would be  the short-term adjustment costs to this strategy.WT/IFSC/W/12/Add.1
Page 51
104. There is a strong economic case for retaining duty exemptions on materials required by
exporters.  Exporters need to be able to source materials at international prices to remain competitive.
Producers of garments account for about 80 per cent of total value of duty exemptions.  One approach
for the garment industry would be to reduce tariff rates on imported materials and accessories to zero.
(The tariff rate on the great majority of these items is currently 7 per cent.)  This treatment would
have little effect on customs revenue for the reason that most imported fabrics and accessories arealready exempted from duties.  Garment exporters would not have to maintain a Master List for
imports of materials at CDC, as they are currently required to do under the duty exemption scheme
and this would help reduce administration costs for both the garment industry and the government.  A
zero tariff policy for garment inputs would also help develop a competitive domestic oriented garment
industry, as these firms would also be able to sour ce materials at international prices.  However, to
avoid a distorted incentive regime, tariffs on finished garments (which are currently 35 per cent)
would also be set to zero (see box 2.17).  This option would only be viable for exporters operating inthe garment (and also footwear) sector where it is possible to identify required imported inputs for
which their demand dominates the demand of general importers.  Rather than a zero tariff a low rate
of 2 or 3 per cent combined with streamlining of procedures cold be an improvement over the existing
state of affairs for exporters (lower costs overall) and the government (more) revenue but perhaps not
for people relying on bureaucratic costs.  In the case of new export industries, some kind of dutyexemption or rebate system needs to be examined.
2.17 Revenue implications of zero tariff rate on imports of textiles and garments
Customs data is used to estimate the lost revenue if the scheduled tariff rate on textile and garments was set
to zero.  Assume that most raw materials imported by exporters fall under the HS Chapter Headings of50-55, 56–58 and semi processed and finished garments fall under Chapter Headings 60–62 of theCambodian tariff schedule.  From the Customs data, we are able to identify the total value of importsexempted from customs duty (that is, imports of materials by garment exporters) and the value of importsthat were subject to custom duties (that is, general importers).  The table below summarizes imports and
revenue by textiles and garments.
Structure of Textile Imports and Customs Duty
(CR 000s, Year 2000)
Exempted imports Dutiable imports Revenue collected
Textiles 1 119 034 502 30 926 780 2 344 220
Garments 588 096 317 3 861 570 1 219 564
Total 1 707 130 820 34 788 350 3 563 785
Notes: textiles refer to HS Chapter Headings 50–55, 56–58; Semi processed and finished garments refer to
HS Chapter Headings 60–62.
As the table demonstrates, for those items imported by exporters of garments, the imports by such exporters
dominate imports by general importers.  In fact they account for 98 per cent of imports of such items andconsequently only some CR3–4 billion of revenue would be lost if the tariff rate on all such items under HSChapters 50–59 and 60–62 were reduced to zero.
Note: First semester 2001 Customs data was not available and 2000 data has been used for this exercise.
There may be some underestimation of revenue loss, but since most imports under these Headings areexempted from duties, this underestimation should be small.  In addition, tariff rates on almost all itemsunder these Chapter Headings remain the same between 2000 and 2001 so no bias arises from the tariffstructure itself.
105. There are good reasons for limiting exemptions to trade taxes for non-exporters and on capital
imports.  First, it is always difficult to admi nister exemptions.  This includes exemptions to
government, donors, international organizations and NGOs.  There are inevitably pressures applied to
officials to expand the scope of imports receiving exemptions or to be flexible in applying regulations.
Second, duty exemptions can distort purchasing decisions.  It may be more efficient to purchase aWT/IFSC/W/12/Add.1
Page 52
good locally but it appears less expensive to import the good duty free.  While it is often difficult to
reduce exemptions for imports by aid and donor agencies, it is straightforward to end exemptions for
government imports.  This reduces distortions in allocating government resources, and sets a proper
example for the private sector.  Moreover, as the tariff structure moves towards a low uniform rate
over time, the need for duty exemptions on imports by non-exporters will diminish.  Finally, in
moving towards a low uniform tariff rate, the administered minimum dutiable valuation system willneed to be abolished to remove implicit surcharges inherent in this system.
106. A final issue relates to the adjustment costs of tariff policy reform.  Countries that have
liberalized their trade policy regimes have experienced to varying degrees short-term adjustment
costs.  In particular, countries that had in the past made extensive use of tariff policy and non tariff
barriers to protect their inefficient industrial bases typically experience the greatest adjustment costs.
Often these costs included temporary, but high unemployment as inefficient sectors restructure and
resources move to uses that are more productive.  However, Cambodia is highly unlikely to face thesame short-term adjustment costs that some other countries experienced when they liberalized their
trade structures.  The reason is that, despite the inherent distortions in Cambodia's tariff structure,
Cambodia does not have an inefficient industrial sector built around high tariffs.  For many activities,
remaining high tariff rates are redundant, either because little domestic activity is undertaken in these
sectors or because smuggling of goods keeps domestic prices close to world prices.
107. As indicated earlier, most of the rapid growth in the industrial sector has been driven by
export-oriented sectors, notably garments and recently footwear.  Instead, further tariff reform will
produce greater benefits in the medium term.  A low, uniform rate would signal to investors that
Cambodia wishes to be a platform for investment in activities where Cambodia has a comparative
advantage.  This should attract new FDI in these sectors.  A low, uniform tariff rate would allow
investors to source raw materials at world prices (or close to them) and this ensures that producers
supplying the domestic market (including SMEs) will not be disadvantaged vis-à-vis  imports; this in
turn encourages development of competitive import competing industries.
III. TRADE FACILITATION
108. This chapter examines constraints and potential improvements to the process of importing and
exporting in Cambodia. Customs activities are discussed in most detail, with some consideration of
trade finance and transportation. The chapter concludes by examining the draft law and strategy of the
government's plan to introduce export processing zones in order to concentrate scarce infrastructure
and trade facilitation resources.
109. The RGC has made significant improvements in processes and procedures for trade
facilitation over recent years. Such improvements include:
• established seven public/private sector consultative working groups and held four
public forums chaired by the Prime Minister over the last two years to discuss issuesraised at the working groups;
• removed most import and export licensing requirements;
• removed the monopoly of Caminco and introduced new legislation facilitating the
entry of foreign insurers;
• entered into a new two year agreement in October 2000 with SGS to conduct Pre-
Shipment Inspections on goods imported into Cambodia;
• required agencies operating at border checkpoints to co-ordinate their activities and
subject traders to only one inspection;
• attempted to streamline procedures for issuing Certificates of Origin to garment
exporters;  andWT/IFSC/W/12/Add.1
Page 53
• established visa issuing facilities to individuals entering Cambodia at the major land
border crossings.
110. The Working Groups are:  Export Processing Industries; Manufacturing and Distribution;
Energy and Infrastructure;  Tourism;  Law, Tax and Governance;  Banking, Financial Services and
Insurance;  and Agro-processing.
111. Despite these achievements significant impediments to trade remain.  These impediments
reflect three themes that run throughout much of Cambodian administration. These themes are:
• procedural interventions by competing government agencies, underpinned by a
general acceptance of activities which supplement very low civil service salaries;
• a lack of transparency and equitable enforcement of the law and a lack of redress
from public decision making; and
• a lack of capacity in the administration of customs and sporadic enforcement of
customs law.
A. PRECONDITIONS FOR CUSTOMS REFORM
112. Strengthening the ability of the Customs and Excise Department (CED) to fulfil its trade
facilitation mandate more efficiently will not be possible until a number of preconditions take place.
These preconditions require giving CED the resources to be accountable and rationalizing the
environment of external agencies with which CED shares the front line.
1. Customs accountability
113. Effective customs reform requires an environment where the interests of customs staff are
allied to the efficiency goals of reform. But under existing conditions there are incentives for staff to
increase rather than decrease the number and duration of human interventions in the processing of
imports and exports in order to maximise their individual 'fee' income. One approach would be to
reduce the number of processing steps and bundle informal payments previously paid at each step into
one general payment. However, individual staff members would resist such a change unless theybelieve their share of the bundled 'fees' would not decline.
114. Cambodia's ratio of average annual civil service salary to GDP per capita was 1.1 per cent
in 2001. This compares very unfavourably to the sub Saharan African average ratio of 5.8 in the
mid 1990s and is well below private sector wages ev en for unskilled workers in Cambodia. (The 2001
annual minimum wage for unskilled garment workers in Cambodia is $600–$45 per month basicsalary and a $5 per month bonus for zero absentees.) The 1997 Socioeconomic Survey of Cambodia
estimated a national poverty income line of $0.50 per day, just $0.10 less than the average civil
service salary. Thus the pressure for Cambodian civil servants to engage in additional income
generating activities just to meet basic household expenditures is substantial.  The RGC is undertaking
a Civil Service Reform strategy to increase civil service remuneration. However, by 2006 averagecompensation including allowances is planned to reach $49 a month and $86 per month for
category A (non education) staff — expected to be about 21 per cent of the total civil service in 2006.
115. Few other government positions provide as much opportunity for accepting informal
payments as the CED.  The CED collected $222 million of revenue from imports in 2000.  With
1,150 employees this represents an amount of $190 000 when averaged over every employee.
Informally extracting even a small fraction of this  sum from importers would significantly increase
employee compensation.
116. Some evidence of the level of extraction is indicated by the size of the informal price
('concession fee') now required to secure a customs border post. It is widely accepted that CEDWT/IFSC/W/12/Add.1
Page 54
employees bid to be appointed to key customs posts. The successful bidder recovers the cost of the
concession fee by subjecting traders to informal fees. The value of the concession fee for a senior post
is rumoured to have increased significantly, from $2 000 a few years ago to $10 000 today.
Therefore, the successful bidder has to recover informal fees worth five times more from traders than
in the past before breaking even. Furthermore, by distributing the informal payments among border
staff and whoever receives the concession fee proceeds, a constituency is formed to oppose anychange to the status quo.
2. Match accountability with reward
117. The recognized challenge is to regularise formal and informal staff remuneration into a
transparent and equitable system. The idea would be to have salaries commensurate with the level of
service expected from them in a modern customs organisation. Income from non-transparent informal
fees could be factored into salaries, and be subj ect to enforcement of significant penalties for any
acceptance of informal fees.
118. Many countries have improved customs accountability and efficiency by establishing revenue
authorities operating independently of other government departments (see box 3.1). In countries
where the civil service is constrained by limited labour and financial resources, revenue authorities
have been able to enhance revenue collections at little additional cost.
119. One option for increasing the autonomy and accountability of the Customs Department,
would be to negotiate performance targets with senior Customs management and revise the salary
structure and level of employment of customs officers.
120. No matter what systems and incentives are in place to ensure that CED officials and traders
act according to the rules, customs administration relies to a large extent upon the voluntary
compliance of participants. A sense of fairness and a common respect for the rule of law encouragesvoluntary compliance. Therefore, enhancing the capacity of CED to achieve its objectives requires
commitment at the most senior levels of Government to universal enforcement of customs laws.
Traders and CED staff would be willing to co- operate and comply with customs policies and
procedures if they knew that their compliance would be respected by all levels of society.
3.1 Customs and revenue authorities
Revenue Authorities are independent legal entities, autonomous from traditional line ministry governance.
They are generally managed by a board of directors co mprising public and private sector representatives
and are accountable to the Minister of Finance or dir ectly accountable to the legislative assembly. They are
independent of the civil service personnel code and may set their own salary structure, often pegged to theprivate sector, as well as recruitment and termination policies. Supporting their greater levels of
accountability and flexibility is their financial autonomy from budget appropriations. The Board contracts
with the Minister to raise an expected level of reve nue and to finance the operations of the authority from
the revenue raised.
RAs generally combine customs and tax services in order to benefit from efficiencies of sharing
administration costs, for example information technology, and joint auditing and intelligence gathering.
Uganda, Tanzania, Rwanda, Zambia, Malawi have recently restructured their customs departments into RAs
in Africa, Latin America and Asia. In general, reve nue evasion has declined while revenue collected per
staff member has increased. In Tanzania revenue collect ed per customs staff member tripled after a revenue
authority was established.
These benefits must be measured against the one-time costs of establishing the RA. Experience in East
Africa shows that it is important to continue to address the underlying structural problems after the RA isestablished, that is, the legal system, procedural issues and information technology.WT/IFSC/W/12/Add.1
Page 55
3. Rationalise the roles of other agencies at border check points
121. The public/private sector consultation working groups have been concerned at the number of
government agencies involved in processing and inspecting imports and exports at Cambodia's
borders. In response, at the fourth Public/Private Sector Forum in August 2001, the Prime Minister
stated that the number of inspections at the border on imports and exports would be halved. How this
is to be achieved is currently being assessed by concerned agencies.  Current legislation permits anyone of ten agencies to be represented at international checkpoints, with at least five always present.
122. A recent regulation, sub-decree number 64 (approved by the Prime Minister in
July 2001), has tried to rationalise the presence of government agencies at border checkpoints. The
Sub decree sets out the roles and responsibilities of certain agencies authorized to work at Cambodia's
border checkpoints. Camcontrol, the Police Fron tier Defence Department and CED are to be
represented at every border checkpoint. Camcontrol is an agency established by the Ministry of
Commerce to monitor the quality of imports and exports (see later in this chapter).  KAMSAB isrepresented at both ports together with the port authority. KAMSAB is the Kampuchea Shipping
Agency and Broker.  KAMSAB is a state owned enterprise authorized to handle shipping agent and
customs brokerage functions within Sihanoukville and Phnom Penh ports. In addition, at the 28 land
and river border check points the 'chief' of the border operations is a representative of either the
provincial governor or the administrator of the nearest provincial city.
123. The central government provides the local authorities significant input into the control of each
border checkpoint. The responsibilities of the 'chief' include the following wide powers:
• take action to prevent harm to national sovereignty and territory, social safety and
public order;  and
• review the activities of each competent authority and report to the relevant ministry.
124. However, despite, the intent of the sub-decree to comprehensively regulate the activities of
agencies at the border, the following agencies are authorized by other legislation and government
agreements to conduct inspections and collect fees from traders.
• The Ministry of Agriculture administers sa nitary and phytosanitary (SPS) controls on
live animals, plants and foodstuffs of plant origin at the border (sub-decree
number 98, 1983). Ministry officials inspect imports of these products and examineSPS certificates issued by the exporting country.
• Sub-decree 64 provides that the Frontier Defence Department be responsible for
check point security and preventing smuggling, particularly of contraband. Another
division of the police force, the economic police, have been inspecting goods entering
and leaving the county. The formal role of the Economic Police is to assist
Camcontrol to suppress fraud; however, they are the subject of numerous complaintsfrom traders for zealously inspecting each shipment.  (See WTO Q&A, July 2001.)
• Finally, it appears that at least one private organisation has been licensed by the
Government to collect certain fees at the border. The Ministry of Economy and
Finance contracted with a company to collect a tax on the export of used clothing at
the Poipet border crossing with Thailand.  However in The Cambodia Daily , page 9,
22 August 2001, the contract was cancelled by the Ministry of Economy and Financein July. Not only does it appear that the tax was not authorized by any law, but the
CED considers that the $75 000 paid for the licence was equivalent to only two days
of revenue collected from traders.WT/IFSC/W/12/Add.1
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125. In addition to rationalising the role of these agencies sub-decree 64 seeks to co-ordinate the
activities of the agencies. In this respect policies are having some effect, at least for agencies covered
by the sub-decree. Article 25 provides that inspections may take place only once and any agency not
present during the inspection cannot inspect the goods a second time.  Both Camcontrol and CED
state they are complying with this provision.
126. This duplication of agency intervention in the trading process raises the uncertainty and cost
of both importing production inputs and exportin g Cambodian products.  The CED has the frontline
responsibility for ensuring goods are properly declared and revenue collected.  The CED could
conduct most, if not all, of the inspection functions being conducted by other agencies. Skilled teams
could be organised by CED to manage a risk based sample selection system for imports affecting
health and safety. These teams may comprise representatives of other agencies Ministry of
Health (MOH), MAFF or Camcontrol officials.
127. Without addressing the activities of other agencies at the borders, strengthening the capacity
of CED will not, on its own, meet the Government's trade facilitation goals.
4. Civil service reform
128. The RGC has formulated a comprehensive strategy for rationalizing the composition and
compensation of government employees. A civil service census began in mid 1999 leading to the
elimination of 5 per cent of the workforce who we re identified as 'ghost' workers.  Between 2002
and 2006 job classification will been simplified into four basic categories based on education levels
and a 'super category A' comprising senior officials. Average base salary and allowances will be
increased to above the current minimum wage reaching about $49 in 2006.  For example, maximum
compensation for category A staff would be $92. Additional functional allowances will be provided
to 2000 priority staff members.  The overall civil service workforce would increase by 4.8 per centreflecting a 16 per cent increase in education staffing and 18 per cent decrease in other sectors.
5. Transport
129. Four container shipping companies compete for the container traffic through Sihanoukville
port. More shipping companies compete for the bulk cargo trade. Most containers are transhipped
through Singapore.
130. The port and all transport related services within the port are government owned except for a
new oil terminal, which was built by a joint venture between Sokimex and Marubeni. Shipping
operators regard the port to be well managed. Import volume handled by the port has increased
significantly from 0.5 million tonnes in 1995 to 1.5 million tonnes in 2000. Most of this volume is
bulk cargo — 0.55 million tonnes of cement and 0.3 million tonnes of fuel. Total exports haveremained more stable at a modest 0.15 million tonnes. Exports are dominated by a rapid growth of
garment containers making up for declining volumes of timber exports.
6. Port charges
131. Shipping profit margins are said to be so fine that the loss of one container can mean the
operator makes a loss on that voyage. Competition has reduced the shipping rate for a container from
Sihanoukville to Singapore by about 20 per cent over the past 12 months. A fee of $200 per container
is charged from Sihanoukville to Singapore (1 000 km), this compares to an approximate fee of $230for the longer distance from Bangkok to Singapore (1 500 km).  Shipping operators blame their small
margins on the high port charges. They argue that port charges are the highest in the region and four
times higher than a comparably sized feeder port such as Songkhla in Thailand. Songkhla has a
maximum annual capacity of 72 000 TEUs. Sihanoukville port handled about 65 000 containers in
2000. Sihanoukville Port provides all services, including stevedoring and cargo storage. The high costWT/IFSC/W/12/Add.1
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of fuel discourages vessels from bunkering at the port. An example of an adverse effect of the high
charges relates to use of the ports two new mobile cranes.  High charges prompt shipping companies
to serve the port with vessels fitted with on-board cranes, even though such vessels have higher
operating costs than vessels without cranes.
132. Cambodian registered vessels are permitted a 20 per cent discount on all charges associated
with navigating through the international channel and a 50 per cent discount on channel dues and20 per cent discount on tonnage dues if involved in domestic cargo transport (proclamation number
53 PR PWT F, 17 January 1997). The treatment is inconsistent with WTO rules on non discrimination
of transport charges.
133. The high port charges have contributed to a pre-tax port income in 2000 of CR 33 billion, or
$5.28 per tonne of cargo handled (WTO Q&A July 2001). By comparison Bangkok port, although
larger and able to spread its fixed costs over more ship visits and cargo earned $1.81 per tonne of
cargo handled in 2000. The pre-tax income of Sihanoukville Port was exactly 50 per cent of itsrevenue in 2000, suggesting that the government is extracting a very rate of high return, given the
port's position as the main international port in the country.
7. Port procedures
134. The pratique committee that greets each vessel comprises about 10 people, representing the
port, CED, Immigration, Police and KAMSAB. KA MSAB is a state owned enterprise that is
appointed by the port to handle shipping agency and customs brokerage functions within
Sihanoukville and Phnom Penh ports. Its operations within both ports earn KAMSAB significant
profits — CR 4 billion ($1 million) pre tax profit in 2000 — representing 68 per cent of its total
revenue.
135. The size of the pratique committee appears to be unnecessarily large and involves agencies
with little interest in the cargo carried or health conditions on board. The size could be explained by
the reported practice of each member of the committee receiving an informal payment of $20.
136. Ten copies of the cargo manifest are given to CED.  This is an unnecessarily high number of
copies. The International Maritime Organisation Convention on Facilitation of International Maritime
Traffic, 1965, recommends that public authorities require no more than four copies of the manifest.Shipping companies comment that it is possible to purchase copies of the cargo manifest of
competitors in order to gain commercial information about rates and customers.
137. Foreign trade participants argue that for goods not being pre inspected only 25 per cent of the
volume of goods shipped to Cambodia are being declared to CED for entry.  This evidence derives
from a comparison of ship's manifests with import declarations.  The CED is apparently unaware ofthe extent of such under declaration. There appears to be no systematic reconciliation of all ship's
manifests with import declarations. This would be an urgent area for change. Before CED becomes
fully computerised, a stand alone manifest and declaration database could be constructed to reconcile
cargo arrival with cargo clearance.
138. Although the port is able to handle vessels 24 hours a day, informal payments are necessary to
encourage customs and immigration services to operate beyond 5pm (suggested to be $200–$300 per
vessel). Also, despite average vessel turn around time of 10–12 hours, customs clearance still takesabout 8 days for imports and 10–14 days for exports.
8. Phnom Penh port
139. Cambodia has traditionally relied upon river transportation. Phnom Penh port has been
rehabilitated and can handle vessels up to 6000 DWT at high water.  Over 95 per cent of cargoWT/IFSC/W/12/Add.1
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handled by the port is international. However, cargo volumes at the port have been declining recently
and are now about 25 per cent of the volume handled by Sihanoukville port down from equality in the
mid 1990s. The port handled about 45 000 tonnes of international trade and 10 000 tonnes of local
trade in 1999 down from 640 000 tonnes and 22 000 tonnes respectively in 1997.
140. There are a number of reasons for this decline.
• The difficult current and variable depth have discouraged shipping.
• Vietnam requires boats transiting to Cambodia to use the Upper Mekong, which is
farther and is becoming increasingly shallow due to salutation.
• Boats transiting through Vietnam are inspected twice by customs and immigration in
each country, upon entry and upon departure.
• Transit documents have to be approved by Vietnamese authorities as much as one
month in advance of arrival of the vessel.
• Transit, port and cargo handling charges imposed by Cambodia and Vietnam are high
compared to road transport costs from Phnom Penh to Sihanoukville.
141. In 2000, transit port and cargo handling charges were estimated to be about $20 per tonne,
including charter costs, by the Mekong River Commission.(Vinning 2001).  It costs about $7 per
tonne to transport by road from Phnom Penh to Sihanoukville.
142. The recent transit trade agreement signed by Vietnam and Cambodia should ease these costs
when ratified by the Government of Vietnam. Both governments have agreed to require only one
inspection for transit trade within their countries. The agreement provides that the border check point
office may approve transit through Vietnam rather than sending the documents to the Ministry of
Transport in Ha Noi for approval. It also provides for transit of goods that are prohibited in one
country being able to be transited through that country. This will permit certain chemicals to be
imported by the Cambodian garment industry via Vietnam, that are prohibited or restricted for import
into Vietnam.
9. Road transport
143. Inland road transportation has increased by an average of 400 000 tonnes each year since
1994 to 3.2 million tonnes in 1999. This is almost double the volume carried by sea or rail
(JICA 2001).
144. The road transport industry in Cambodia is relatively competitive. Forty four land transport
operators are registered with MOC and many more operators are unregistered. The presence of small,
unregistered operators places downward pressure on ro ad freight prices. These operators likely evade
VAT and income tax and use smuggled petroleum.  The 230 kilometre road journey along Cambodia's
best road, NR–4, from Phnom Penh to Sihanoukville costs about $120–$185 for a container, which is
lower than typical rates for an OECD country. However, rates increase on other roads that are subject
to lower driving speeds of 20 to 50 km/hour due to the poor condition of the road. Rates for distances
over 100 kilometres vary from 137 to 467 riel/tonne/km. Roads at the village level are often dirttracks used only by ox carts.
145. Truck operators not only have to contend with poor road quality on provincial roads but
illegal check points have been established by the police around towns and cities. Informal fees
amounting to $10 were reported between Battambang and Phnom Penh, and as high as $60 between
Takeo City and the Vietnamese border in July 2000. The informal fee for a container being truckedfrom Phnom Penh to Sihanoukville is $20 or between 11 per cent and 17 per cent of the formal freight
rate.WT/IFSC/W/12/Add.1
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10. Rail transport
146. Two domestic rail routes connect Phnom Penh with Poipet and Sihanoukville. Rail freight
rates are about 20 per cent lower than road freight rates over these routes, however, the poor condition
of the track limits capacity and speed. Rail only carried 270 000 tonnes of freight in 1999, or 8 per
cent of the volume carried by road. Almost all freight carried by rail was bulk cement and petroleum.
(In 1999 rail freight comprised 78 per cent cement and 10 per cent petroleum.) The RGC hasestimated that track and rolling stock rehabilitation projects will cost $70 million. If rehabilitated and
linked to the Thai rail network, the cost of bilateral trade could be reduced significantly, especially
between provinces outside of Bangkok.
11. Border trade
147. Cambodia has opened more than thirty land and river crossing border checkpoints with its
neighbours – the majority with Thailand and nine with Vietnam. Exports to neighbouring countries
are a small share of total exports that are dominated by the GSP garment trade with Europe and theUS. However, Cambodia imported almost one third of its total reported imports from Thailand and
Vietnam in the first half of this year – mainly petroleum.
148. Cambodia imported $46 million (about 10 per cent of total imports) of goods from Vietnam in
the first six months of 2001, comprising mainly petroleum and some garment inputs.  Cambodia
exported $10 million of goods to Vietnam (about 2 per cent of total exports), comprising naturalrubber and processed rubber trees, soybeans and disassembled motorcycles. Cambodia imported
$93 million of goods (about 20 per cent of total imports) from Thailand over this period, comprising
mainly petroleum and sugar, but also new motorcycles, construction material, garment inputs, rice and
pharmaceuticals.  Cambodia only exported about $2 million of fish, condensed milk and cigarettes to
Thailand over this period. Reported trade with Lao PDR was very small.
149. Border markets have developed on the Thai si de of the border where Cambodian farmers can
sell their produce and purchase from a wide range of household goods. Cambodian residents of the
border area are able to enter into Thailand and Vietnam using day passes authorized by the respective
central governments to be issued locally. The cost of the pass is reported to be a disincentive to small
farmers trading rice in the markets. However, Cambodians are able to return home and enter non-commercial quantities of goods duty and tax-free into Cambodia.
150. Cambodian border residents sell low value home grown produce but purchase much higher
value household goods. Given their relatively low cost access to Thai consumers, border markets are
likely to significantly contribute to the developmen t of border household agricultural production. The
RGC is aware of the potential of border markets and is discussing with the Thai Government ways to
improve the operation of the markets at their Jo int Thai–Cambodian Border Trade meeting scheduled
for late September.
151. The border markets are also contributing to increased smuggling into Cambodia. Petroleum
and beverage producers say that border residents are being organised to smuggle goods across the
border. For example, border residents are reported to purchase portable tanks of nitrogen gas at the
Thai border market carry them into Cambodia without paying duties and taxes and sell them to a local
distributor. The distributor takes the tanks to Phnom Penh for resale.
152. Vietnam has banned the import of cigarettes and second hand goods, including vehicles, spare
parts and electrical appliances (Article 5 of September 2000 Agreement on Transit of Goods between
Cambodia and Vietnam). These goods are, therefore,  at risk of being smuggled into Vietnam from
Cambodia. Eyewitness reports suggest that ware houses exist in no man's land between the two
country's borders. The warehouses are stocked with cigarettes supplied by trucks driven through theCambodian checkpoint. Individual Vi etnamese conceal cartons of cigarettes under their shirts andWT/IFSC/W/12/Add.1
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deliver them over the Vietnamese border. Some observers consider that as much as 80 per cent of the
cigarettes imported into Cambodia are smuggled into Vietnam.
153. The Government of Vietnam recently cracked down on this cigarette trade. One smuggler was
sentenced to death, 22 government officials including 11 Customs officers were dismissed, convicted
and imprisoned for 2 to 14 years. Both governments in August 2001 agreed to set up a working group
to formulate a memorandum of understanding between their customs services. The memorandum isexpected to cover controlling smuggling, simplifying procedures, exchange of information and human
resource development.  The RGC signed a memo randum of understanding (MOU) with Thai Customs
in 1999.  The parties agree to provide assistance when requested within the authority of their domestic
laws.  In particular the parties agree to assist in the research and evaluation of new procedures; train
and exchange personnel; exchange information; co-operate to simplify and harmonize procedures and
prevent and investigate offences.
154. As discussed above, a number of government agencies are involved with regulating foreign
trade at Cambodia's borders. Strengthening the ability of the CED to control border smuggling is not
sufficient. All agencies should be committed to  control smuggling and should co-ordinate their
efforts.
B. R
EVIEW OF CUSTOMS PROCEDURES AND ADMINISTRATION
1. IMF institutional strengthening of CED
155. Following a 1999 IMF review of CED administration after Cambodia joined ASEAN, a long-
term customs advisor began working with the CED in April 2001. A work plan has been agreed with
CED management for the next two years that will seek to strengthen all aspects of CED's operations,
including human resources, organisation structure, legislation, systems and procedures and
infrastructure. Important elements of this review work involve transit control, control of exemptimports, cargo inspection, prepayment, advance rulings, and post clearance audit.
2. Draft Customs Law
156. The plan provides for the draft Customs Law to be reviewed against WTO requirements and
revised as necessary over the next six months. The Government recognises the need to amend the
draft law to comply with the WTO valuation agreement. The law was drafted in 1997 in French andKhmer; however, due to its length (339 articles) no English version yet exists. The draft law has
remained with the Council of Ministers since 1998.
157. Overall, the draft law is a significant improvement upon the existing seven- page, 26 article
Law on Import and Export Duties enacted in 1989, and provides sufficient powers of search and
seizure and appropriate penalties. However, in its current form the draft does not meet the needs of amodern customs administration. There is an urgent need to enact suitable legislation clarifying the
functions and powers of the CED.
158. The IMF advisor and a visiting consultant reviewed the draft law in August 2001. Initial
concerns related to unnecessary repetition of text common to a number of articles and the detailed
codification of administrative and judicial procedure. This detail is partly explained by the French
legal structure of the draft and partly by the intention to reduce reliance on judicial review in
Cambodia.
159. Another issue relates to what seems to be excessive powers provided to the CED. For
example, the draft gives CED the power to seize any goods being transported without CED prior
approval within 20 kilometres of the Thai border. Also, no provision is made for electronic
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160. Until the new Customs Law is enacted no licensing rules exist to regulate the activities of
customs brokers. Lack of common standards and a process to monitor and regulate brokers can raise
CED administration costs. Or to put it another way, the establishment of a professional customs
brokers service would efficiently deliver many of the public relations and education services is now
likely to be inadequately provided by CED.
3. Business registration
161. Cambodian and foreign owned legal entities are free to import and export provided they first
register with the Legal Department of the MOC at a cost of $68. Owners or their authorized
representatives have to personally attest in the presence of Ministry officials the identity, location and
legal form of their enterprise with copies of supporting documents. Every regular trader must also
register for VAT at the Tax Department, regardless of their turnover.
162. The personal presence requirement adds to the cost of establishing a business for SMEs
exporters and importers located in provincial centres and who have not already appointed arepresentative in Phnom Penh. Furthermore, the $68 fee is likely to be relatively high cost for SMEs
while being trivial for large companies. A draft company law is being considered by the Council of
Ministers — it could provide for a new fee scale reflecting the cost of registering and monitoring
different forms of legal entity.
4. Licensing
163. Most import licences were removed in 1993. Import licences are now only required for
pharmaceuticals and for imports of military equipment and gold and silver. Pharmaceutical importers
first register the products to be imported with the Ministry of Health and then apply for an import
licence for each product valid for six months.
164. The RGC does impose ad hoc limits on imports from time to time. Imports of live pigs and
pork were banned last year for a period. Imports of used tires, shoes and handbags have recently been
banned. Imports of any chemical that the Government considers may be used to manufacture narcotics
must be approved by the MOH. The Public/Private Sector Consultative Working Group on export
processing expressed a concern of the shoe industry that receiving approval for each chemical import
from the MOH was expensive and cumbersome.
165. After the third public/private sector forum in February this year, the Council of Ministers
agreed to permit investment enterprises to import chemical raw materials without MOH approval for
individual imports, provided:
• MIME completes an initial technical evaluation for the chemical;  and
• use of the chemical by the enterprise is monitored by a Committee comprising  MOC,
MOH, MIME, MEF, CDC and National Authority for Combating Drugs (Notification
on 3
rd Forum, 7 February 2001, 22 February 2001).
5. Simplified procedures for small volume traders
166. The VAT Law requires all importers and exporters to register for VAT. Importers comprise
the largest group of businesses registered for VAT — 1 507 out of a total 2 747 VAT taxpayers by
February 2001 (data provided by Tax Department to IMF).  However, CED permits small irregular
traders to import or export without registering for VAT, giving CED officials a discretionary power
over traders. Furthermore, a simplified one-page form is used to apply for CED permission to importand export consignments valued at less than $300. This lowers the formal costs of trading for SMEs.
There is a concern among freight forwarders that unless a good is regularly exported, CED and
Camcontrol will delay clearing an uncommon export until they have consulted with all potentiallyWT/IFSC/W/12/Add.1
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interested government agencies. For example, a hotel waited three weeks before a consignment of
fabric, in excess of its furnishing requirements, was cleared for export.
6. Transit control
167. Negligible trade transits through Cambodia en route to its neighbouring countries. Lao PDR
trades through Thailand and Vietnam. For this reason, there has been little incentive to implement
appropriate transit procedures along Cambodia's international frontier. Cambodia is subject to theASEAN Framework Agreement on the Facilitation of  Goods in Transit Agreement. Four of nine
protocols have been signed by each member country (Types and Quantity of Road Vehicles,
Technical Requirements of Vehicles, ASEAN Scheme  of Compulsory Motor Vehicles Insurance, and
Sanitary and Phytosanitary Measures). Countries have been considering the draft protocols dealing
with designation of border posts and the customs transit system over the past year. At the ASEAN
Customs meeting in Manila on 13–4 July 2001, Singapore encouraged members to reduce their list of
prohibited and restricted goods annexed to the protocol in order to facilitate transit trade
168. Most transit cargo in Cambodia comprises goods transported in containers under seal from the
port to be cleared at one of three dry ports in Phnom Penh. About half of all exports are consolidated
into containers within the dry ports before proceeding to Sihanoukville Port. The dry ports are
privately operated under a bond agreement between the operator and CED. The operators provide
transport and storage facilities to owners of goods preparing goods for export or wanting to cleargoods at the dry port rather than Sihanoukville port. Containers are transported under seal between the
seaport and dry port.
7. Computer system
169. CED has a manual system of cargo reporting, declaration processing and revenue accounting.
A small computer network has recently been upgraded to compile statistics from manually completedforms. A fully computerised system is urgently required to improve the efficiency of customs
clearance, revenue accounting and data collection and analysis. In particular, all transactions would be
processed in a consistent manner promoting equity and reducing the opportunity for corruption.
Computerisation also enables more accurate systems of risk assessment, post-clearance auditing and
duty drawback to be implemented.
170. A strategic plan for IT development and implementation was prepared in early 2001.  SGS is
providing limited IT technical assistance under its PSI contract with the Government. CED requires
funding to purchase and implement an off-the-shelf system such as UNCTAD's ASYCUDA or the
French SOFIX system. The cost is likely to be in the range of $2.0 to $2.5 million.
171. The system adopted should be expandable to meet additional functions, as well as complying
with international standards and local condit ions, for example, supporting Khmer language
applications. CED will require sufficient staff training and resources to be able to locally maintain and
upgrade the system.
172. The IMF has recommended that system functions be implemented in the following order:
(i) manifest control;  (ii) tariff and documentation control;  (iii) basic import clearance;  (iv) revenue
accounting;  (v) basic trade statistics;  and (vi) simplified valuation.  Once the system is in place and
is stable these functions can be strengthened in addition to adding export clearance, suspensiveregimes and on-line links with users.
8. Pre-shipment inspection
173. During the planning and implementation phases of the comprehensive program to strengthen
the enforcement capacity of CED, the RGC is relying upon Pre-Shipment Inspection to support theWT/IFSC/W/12/Add.1
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activities of CED and, in particular, to safeguard customs revenue. PSI is used to monitor imports,
conduct physical verification of goods, and provide value and customs classification for revenue
collection.
174. PSI was operating in Cambodia between September 1995 and July 1999.  The RGC directly
awarded the contract to SGS.  However, due to contractual disputes the contract was suspended.  An
open tender for a new PSI service provider was held in 2000 and the tender awarded to SGS again.SGS has been operating under the new PSI contract since October 2000.
175. The new contract revises a number of features of the former contract, including the following:
• the exemption threshold is lowered from $5 000 to $4 000 in order to increase the
coverage of PSI;
• SGS will reconcile all requests for imports (submitted by importers) and import
clearances (issued by CED) against the reports of findings issued by SGS;
• the penalty for circumventing PSI is increased from 5 to 7 per cent of the value of the
goods;
• SGS is providing training and a valuation database (Valuation Support Service (VSS)
to improve the valuation capacity of CED staff members;  and
• a working group of CED and SGS representa tives meet every two weeks to discuss
reconciliation results and other current issues.
Circumvention
176. Revenue is maximised if PSI inspects, classifies and values all assessable imports. However,
for administrative ease, consignments with a value of less than $4 000 are exempt from PSI and may
be declared directly to CED for admission.  Th e RGC has also exempted duty-free imports by CDC
registered exporters and certain dutiable goods from PSI, including cigarettes and government
purchases.
177. Despite the reasonably broad PSI coverage of imports, industry observers suggest that
importers are evading PSI on 60–70 per cent of their total dutiable imports.  The Government isrisking substantial revenue loss. Importers are choosing to clear dutiable goods through CED and pay
the penalty, equal to 7 per cent of c.i.f. value, for not obtaining PSI from SGS.  Importers are able to
misrepresent to CED the quantity or value of their goods but are unable to interfere with the PSI
assessment because inspection occurs in the exporting country.
178. Importers avoid post clearance audit on their under-valuation by classifying the goods as
'other'. In 1999 SGS routinely reported that importers were undervaluing by 50 per cent or more the
goods they requested SGS to inspect.  The resulting payment of duties, taxes and the penalty is lower
than the duties, taxes and 0.8 per cent fee that woul d be payable if assessed by SGS.  Importers also
attempt to avoid PSI by undervaluing and/or splitting consignments into loads worth less than $4 000.
179. In their latest monthly report to CED, SGS state that they have only assessed 63 per cent of
the total revenue collected by CED this year. Adjusting total revenue for export taxes and taxes on
goods exempt from PSI (of which the major class of goods is cigarettes representing about 10 per cent
of total customs revenue) it still indicates that the 60–70 per cent of dutiable imports that are
circumvented only contribute in the order of 30 per cent of total customs revenue. This represents
significant foregone revenue for the Government.
Penalties for circumvention
180. Customs has been considering increasing the curr ent penalty equal to 7 per cent of c.i.f. value
for repeated PSI circumvention offences. SGS would like to see circumvention penalties strengthenedWT/IFSC/W/12/Add.1
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even further. Goods could be seized and auctioned. The auction proceeds could be shared between the
Government and Customs officers responsible for the seizure. The current customs law provides for
CED to reward customs officials and other co-operating agencies from penalties imposed on customs
offenders.
Reconciliation of ROF with duties collected
181. SGS is also concerned that CED is not returning the Report of Findings to SGS after the
goods have been cleared for entry.  For a PSI system to work properly the report of findings (ROF)
needs to be endorsed with the duties and taxes actually collected by CED.  Therefore, SGS has been
unable to reconcile revenue collected by CED against revenue assessed by SGS.  All border post
customs officials are required to collect duties and taxes in line with the assessment made by SGS —
without further approval from CED headquarters.  CED has now agreed to provide SGS with the ROF
endorsed with a breakdown of duty, VAT, excise and fees paid.
Unsealed containers
182. SGS is concerned that CED are opening and inspecting containers that have already been
examined by SGS and carry the SGS seal. Customs says it inspects a small share of containers and
that many SGS inspected containers are arriving w ithout seals and have not been properly inspected
before their departure. (One estimate puts the share of inspected containers arriving without seals at
43 per cent of the total).  SGS point out that some inspected containers may arrive unsealed, mainly
because shipping lines reserve the right to containerize some time after inspection or a consolidator
containerizes different inspected consignments.
183. In order to maximize trade facilitation, CED should only re-inspect containers sealed by SGS
when there is a clear discrepancy.  When practical, SGS could be present during such inspections to
confirm the discrepancy and the findings of the second inspection.
184. CED suggests that SGS inspections are too slow and that valuations and tariff classification
are often incorrect. Delays may encourage importers to avoid PSI.  Freight forwarders estimate that a
PSI consignment takes 2–3 days to be delivered compared to approximately two days if PSI isavoided — this is important for perishable goods. This is a significant problem for urgent containers
arriving unsealed and triggering an  inspection from CED and Camcontrol.
185. Both sides are working through their differences according to the terms of the contract in their
biweekly working groups. The situation could be help ed if RGC puts the role of SGS into perspective
— as part of a capacity building program for cu stoms administration. RGC, the CED and SGS could
agree on a realistic time frame for the CED to take over the functions of SGS.
9. Valuation
186. In order to ease the task of valuing goods and limit under declaration of value by importers,
the CED has established set prices for a range of goods to be used by its officials. (Set prices apply to
400 classes of goods, including petroleum, cigarettes, motor vehicles and motor cycles, used
appliances, cement, cooking oil, used clothing, steel and iron, generators).  In general, CED sets
determined prices at levels lower than market va lues in order to encourage their declaration and
payment of taxes and duties. This is particularly the case for cigarettes and used electrical appliances,
which are at risk of being smuggled into Vietnam.
187. In the past, CED requested SGS to use its dete rmined values rather than the export country
fair market values maintained by SGS's own da tabase. Importers may have complained that SGS
market prices are higher than the determined prices. At their meeting in August, CED and SGS agreedWT/IFSC/W/12/Add.1
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that SGS would use the higher of the two values. The only exception is petroleum, which is valued
according to the determined price.
188. CED uses the Valuation Support Service provided by SGS to value goods that do not have
determined prices and are either exempt from PSI or have evaded PSI. VSS is in place at the airport
and in Phnom Penh. Check points at other borders only have the authority to value goods up to
$1 200, and must seek the approval of CED Head Quarters above this value.
189. The current PSI agreement does not comply w ith the WTO valuation agreement. RGC has
informed WTO Members that SGS will adopt compliant valuation method after Cambodia's
accession.  The New Zealand Customs Service has commenced providing WTO compliant valuation
training to CED staff. Furthermore, the PSI fee (0.8 per cent of the fob value) charged by SGS is not
WTO compliant. Circumvention may increase for low value shipments when SGS adopts a compliant
pricing policy because a new fee structure woul d set a minimum and maximum fee per container
inspected.
10. Under declaration of quantity
190. The recent SGS valuation training appears to have been effective at detecting under
declarations of value. Concern has shifted to under declarations of quantity. Industry observers
consider that only 25 per cent of the true volume of goods shipped to Cambodia is being declared to
CED. Such under declaration of quantity raises two concerns:
• much of this under declaration of quantity is of duty-free imports used to produce
garment exports. Exempt exporters may be smuggling dutiable imports in theircontainers of exempt imports;  and
• other imports are evading PSI and being under-declared to CED.
191. CED could address under declaration of quantity by rigorously reconciling goods listed in
cargo manifests against goods actually declared to CED.
11. Smuggling
192. Cambodia has a number of features that tend to encourage smuggling and result in revenue
loss for the Government.  Firstly, the country has long and remote land borders with three countries.
Many rivers cross into Vietnam and many bays line the coastline.  Secondly, import duties and taxesare relatively high on goods able to be smuggled — consumer goods and petroleum.  Thirdly, as
discussed in the first section of this chapter, CED officials are underpaid not well resourced and are
poorly paid.
193. Fighting smuggling and increasing revenue collection involves a number of policy and
administrative interventions.  Lowering the returns to smuggling, that is, lowering customs duties on
consumer goods, and raising the costs of smuggling, that is, increasing the chances of being caught
and the level of penalties, can actually increase net revenue collection.  Improving the chances of
being caught involves not just increasing the anti smuggling capacity of the CED, but also raising
salaries and co-operating closely with neighbouring customs administrations.
194. The petroleum distribution companies, Nestle, Coca Cola and the Pepsi franchise holder are
very concerned over the level of smuggling of competitor's products and smuggling of their own
brands from Thailand into Cambodia. This lack of expected import protection is driving demands fortax incentives.WT/IFSC/W/12/Add.1
Page 66
195. A study prepared for the Manufacturing and Distribution Working Group estimated that
$35 million was foregone per year from the smuggling of beverages, petroleum and milk products
into Cambodia (see the Minutes of the Working Group on Manufacturing and Distribution,
22 March 2001). These three goods were considered to be the most profitable to smuggle into the
country due to their high rates of import tariff. The group considered that the recently enacted Product
Quality and Safety Law should be rigorously enforced to ensure that domestically produced andlegally imported food products are labelled in Khmer.
196. Armed threats reduce ability of customs to collect revenue from car imports.  Only 10 Toyota
Land Cruisers were assessed for duties and taxes in 2000, despite 149 410 cars being registered with
the Ministry of Transport in 1999 (Tait, Benon and Simard 2001 and National Institute of Statistics
Yearbook 2000).
197. RGC has acted to address these smuggling concerns. A mobile anti-smuggling task force
comprising 100 officers work has been established by CED, with support from a military police unit,to operate on main roads leading from sea and road checkpoints. The task force determines if goods
have circumvented the CED checkpoint upon their entry into Cambodia. In the first quarter of 2001
the task force filed 300 cases of smuggling contributing CR0 0.7 billion. In 2000, 1066 cases of
smuggling were filed. The task force also visits businesses suspected of possessing smuggled goods
and patrols land and river borders.
C. E
XPORT PROCEDURES
198. The Government has lifted most export taxes and non-automatic licensing arrangements. The
majority of exports only require an export declaration to be completed in triplicate accompanied by
the invoice and packing list. However, export licences remain on certain goods in order to conserve
the environment (wood products including furniture  and plywood), food security (rice and fish) and
protect to antiquities being removed from the c ountry (handicrafts). The EU requires licences to
demonstrate Cambodian origin for exports of shoes and garments.
199. Although the fixed quantity licences can be extended for a further 45 days, having to apply
for four licences a year imposes unnecessary transaction costs on exporters. The law on commercial
invoices for garments provides for six-month li cences on garments exported to the EU, although such
licences do not serve to limit exports of garments. Only inspection of the consignments will determine
if the exporter is in breach of any quantitative restrictions imposed upon him.
200. In practice, at least one freight forwarder commented that unless a clear process was in place,
customs officials were unwilling to approve unc ommon exports. Only about a dozen categories of
goods are exported from Cambodia and garments and shoes comprised 92 per cent of total exportsin 2000. Informal payments and uncertain procedures discourage SMEs from exporting low-volume
exports. MOC agreed to an issue raised by the public/private sector export processing working group
that export licences fees were discouraging SMEs exporting handicrafts.
201. Small farmers have expressed concern over obtaining licences to export rice and fish (see
fishing and garment sector chapters). A recent study estimates the costs of exporting one tonne of rice
to comprise $5 of formal fees (for Camcontrol phytosanitary inspection and rice handling) and $9 of
informal fees paid to each of the six agencies involved (CED, Camcontrol, phytosanitary inspector,
economic police, border police, and handling workers). These costs represent 10–15 per cent
reduction in the farmgate price on one tonne of exported paddy (Sik Boreak 2000)
Garment exports
202. In addition to the trade diversion costs, the quantitative restrictions placed on garment imports
by many developed countries impose considerable administration and compliance costs in developingWT/IFSC/W/12/Add.1
Page 67
countries. The Cambodian authorities have entered into textile agreements with the US and EU to
manage quota access to these markets for Cambodian garment producers. It is in the interest of both
producers and the government to facilitate this tr ade. However, the government has to implement a
system to ensure that garment makers comply w ith local content rules and to defend the country's
quota access from third country producers disguising their garment exports as having a Cambodian
origin.
203. Table 3.2 outlines the documentary steps required to export garments to a country requiring
proof of origin.  The following table summaries th ese requirements. The final column shows the total
compliance costs per consignment, these may be highlighted as follows.
• Five different government agencies are involved in the process.
• At least three different inspections are undertaken with the option of a forth
inspection.
• Visa fees paid per dozen pieces dominate formal costs. The example given is for a
consignment to the EU which has the lowest visa fee of 10 cents per dozen. The most
common garment export to the US in 2000 was 347/348, costing $1.28 per dozen
pieces. Using these visa fees in the example would increase the formal cost to $728 or
$6 758 for the consignments of 500 and 5000 dozen pieces respectively.
• Informal fees are modest but can exceed formal fees for low value consignments.
• 10 original and 22 copies of original documents are required.
UN ESCAP alignment of trade documents
204. In 1997–98 the UN Economic and Social Commission for Asia and the Pacific (ESCAP)
funded a project to compare Cambodia's trade doc uments with the 1981 UN Layout Key for Trade
Documents.  The project team recommended a number of changes to Cambodia's trade documents.
• Eliminating application letters by requiring the trader to complete the form being
requested and declaring on the form that the particulars are correct. MOC has so farresisted giving blank forms to traders to complete. Ministry officials are concerned
that non-quota holders or foreign manufacturers will use the forms to gain fraudulentCambodian Certificates of Origin.
• Using the same form when requiring the ap proval of different government agencies.
The project team recommended that the licence forms for importing and exporting be
combined and signed by all relevant agencies. Most import and export licences have
been eliminated, and those that remain are specific to the relevant government
agency. Import licences are now only required for military imports, pharmaceuticals,gold and silver. Export licences are limited to military exports, wood products and
handicrafts, rice and certain garments and shoes. Therefore, there exists less need to
modify the process.
However, the Certificate of Processing and Certificate of Quantity could be combined
into a single site inspection form.  Any inspections that take place could be recordedin different sections of the single form by the relevant agency.  Furthermore, one
general form could be used to replace the Temporary Export Authorization (TEA),
Export License (EL), Certificate of Origin  (CO) and Commercial Invoice (CI)– the
current forms being used are virtually identical.  A final stamp could indicate a
change in the status of the document from being temporary to being a final proof oforigin.
• Various additions and deletions of data fields and changes to field headings to
conform to the UN Layout Key, including: 27 changes to the Customs Declaration
form, 2 changes to the Certificate of Processing form, 6 changes to the TEA form. It
appears that few if any of these recommended changes have been adopted.WT/IFSC/W/12/Add.1
Page 68
The RGC should accept copies of supporting documents rather than the original
document. Although the government is concerned about fraudulent applications, in
practice at least one agency, CED, accepts copies of supporting documents.WT/IFSC/W/12/Add.1
Page 69
3.2 Process to obtain Certificate of Origin for garment export
Certificate of
processingTemporary
ExportAuthorizationCertificate of
quantityExport
declarationExport
LicenceCertificate of
Origin &
commercial
invoiceTotal per consignment
Purpose Verify
productionVerify production Verify loading
Qty and priceRecord
exportsMarket access
to EUCI for US, CO for
other GSP
Agency MIME TP Dept, MOC Camcontrol/
CustomsCustoms FT
Department,
MOCTP Department,
MOC3 Ministries
5 Departments
Inspection Inspect factory Inspect factory Joint visit of
factoryJoint review
of seals at portNA Maximum of 4
inspections
Time to Issue
(days)3 1-2 3 2 2 Minimum of 2 weeks
Formal cost $
per consignment20 Included in EL
and CO/CI cost0.1% FOB 4 4=EL, 30=CI/CO, 50=CO(formA)
0.10–1.28 per doz pieces EU/USfor example $138 or
$8581
Informal cost $ 20-30 ? ? 10-14 90-1202$110-150
No of Copies 1 original
3 copies1 original
3 copies1 original
3 copies3 original 3 original
5 copies1 original
8 copies10 original
22 copies
Authorized Minister of
MIMEDirector TPD Director of
CamcontrolRoyal
DelegateUnder Secretary of State
Supporting
documentsApplication
letter
InvoicePacking list
Contract
Pdn reportApplication form
Draft CO/I, EL
CP
Invoice
Packing list
ContractReceipt of feeNone TEA or EL
Invoice
Packing listTEA,
Certificate of Quantity
Bill of LadingExport Declaration
Certificates of Origin of ASEAN
sourced raw materials6 main documents,
5 supporting
documents.
Application letter
1) Based on two consignments of 500 and 5 000 dozen pieces valued at $30 000 destined for the EU and subject to the minimum vis a fee per
dozen pieces of 10 cents. One of GMAC's questions to MOC states that 200 dozen pieces could be produced in one day. The other f ormal
and informal fees for the $30 000 and the $300 000 consignments are equivalent to tariffs of 0.8% and 0.3% respectively.2) Additional $100 if only 2 or 3 CI applications. These amounts are doubled for urgent cases. (Source GMAC Q&A December 2000)
Source:  Prakas 1437 1999, ESCAP 1998, Conversation with CED, FTD and TPD officials, GMAC 2001 UN ESCAP Alignment of Trade
Documents.
Garment Manufacturer's Association of Cambodia (GMAC) concerns
205. In preparation for the third public/private sector consultative forum held in February 2001, the
Garment Manufacturers Association of Cambodia submitted a set of proposals and concerns to the
MOC concerning garment export procedures.  Some of the questions and the response of Ministry
officials are outlined below.
• Discontinue the inspection by the Trade Preference Department (TPD) prior to issue
of the TEA. The Certificate of Processing should be sufficient to demonstrate the
garments will be produced at the factory.  According to MOC both inspections are
necessary to ensure proof of origin. However, Certificate of Processing is no longer a
prerequisite for the TEA inspection.
• The TEA is unnecessary. MOC respond that the TEA helps eliminate data
discrepancies.
• COs are no longer necessary for all export destinations, for example, Malaysia and
Singapore, yet MOC requires investors to apply for Certificate of Origin.
• Garment manufacturers are required to 'run' all documents through different officials
in different departments. MOC responds that it has set up a window with a 48-hour
turnaround for Certificate of Origin and CI. A closed circuit camera has been
installed to monitor 'running'.WT/IFSC/W/12/Add.1
Page 70
• Officials delay responding to requests and seek higher informal payments when work
is urgent. MOC responds that it has streamlined the process, fixed time limits for
TEA and CO/CI approval, appointed proxies when the authorized signatory is not
available and have made their staff available at night and on public holidays.
• Amendments to the TEA or Commercial Invoice require the exporter to undergo
another factory inspection and retrieve the CO or CI from CED and Camcontrol,adding another week to the approval proces s.  MOC responds that a repeat inspection
is unnecessary and MOC shall inform CED and Camcontrol of the amended CO orCI without need to retrieve documents.
• Quota transfer fees are high, should be a nominal $10–20. According to MOC the
matter is under consideration.
Options for change
206. The Trade Preferences Department has commenced using electronic verification of garment
exports to the US (ELVIS) and to the EU. This pr ovides a chance for the RGC to revise the import
and export documentation process.
207. Currently traders complete an application letter and a draft of the final form, repeating much
of the same information. TPD officials then transcribe data from the draft form on to the final form.
Traders could prepare the forms electronically and email or deliver by diskette to the Ministry of
Commerce. The trader could execute the declarat ion through an electronic signature or physical
signature on the printed form. Such forms could be available on the website under construction by
MOC.
208. The Ministry could keep track of a trader's application by generating a unique code to refer to
the trader and communicating this code only with G SP authorities in the export markets. The Ministry
currently uses a unique code to verify garments shipped to the US. This may simplify the process butit cannot convert the current paper documents into an electronic process. A file is still necessary to
hold the supporting documents.
D. M
ONITORING TAX AND DUTY FREE IMPORTS
209. Currently investors registered with CDC exporting 80 per cent or more of their total output is
exempt from customs duties on all imported inputs, other investors can only be exempted on theirimports of construction material and capital equipment in their first year of operation. In order to
ensure that exempt investors only import goods appropriate to their business activities exporters
negotiate a list of goods and prescribed quantities that may be imported duty and tax-free. This Master
List is negotiated between CDC and the investor each year and more frequently when the investor
requests additional goods. CDC determines the quantities according to the production capacity of thefirm and its previous inventory levels and seek s the approval of the Royal Delegate of CED.
210. Once the Master List is approved the processing of imports subject to the Master List is
relatively straightforward. For each consignment, the broker/importer prepares and submits three
copies of a letter seeking permission to import the goods duty free, noting the description and quantity
of the goods, place of importation, invoice date and number. Copies of the invoice and bill of ladingare attached. The Control Office checks off the volume of each consignment against the allowable
quantity of the commodity in the Master List held by the Control Office.
211. Five Customs officers separately check and sign each document, including the Royal
Delegate of Customs who signs every page of the applicant's file. Customs staff state that this process
only takes one day if all officers are present. The Royal Delegate can delegate his authority to approve
the application during his absence from the office.WT/IFSC/W/12/Add.1
Page 71
1. Problems with Master List system
212. Despite recent improvements in the approval process – the approval of the Minister of
Finance is no longer required — there are a number of problems with this system.
• Unscrupulous exempt investors face both incentive and opportunity to overstate the
variety and volume of goods they require in order to operate their businesses. Thesesurplus duty and tax-free goods are at risk of being sold in the domestic market.
Alternatively excessive volumes of permitted exempt goods can be used to hide thevolume of non-exempt goods being smuggled in the container. Customs can only
become aware that import volumes may be excessive once the volume permitted by
the Master List is exhausted — long after the goods have been admitted. Customs
officers suggest that in practice, CDC does not have the resources to accurately assess
the input requirements of exempt exporters and so the Master List becomes a
negotiated document.  CDC has requested CED to investigate 65 entities currently
registered with the CDC.  These entities appear to be non-operational and may havesold duty free imports in the domestic market.
• The process is bureaucratic. CDC and each exempt investor must agree upon the
Master List as frequently as each calendar quarter. CED must record the volume of
each imported consignment against the Master List and the Royal Delegate must
approve each exempt import. Due to the uncertainty of forecasting potential imports
over a 12-month period investors include a wide range of goods at inflated quantitiesin the Master List. When these quantities of goods are not actually imported CDC
regularly disallows 50 per cent of the quantity investors apply to import in the
subsequent Master List negotiations (Garment Manufacturer's Association of
Cambodia issue raised with MOC in February 2001).
• CED does not have the resources to properly audit exempt investors to determine if
their exempt imports have been used appropriately and such audits are reported to be
rare.
2. Potential revision
213. The exemption system could be rationalised to improve the linkage between the production
requirements of the investor and exempt imports in order to help reduce the scope for abuse of thecurrent system. A revised system could include one or more of the following elements:
• Automatic Exemption of Key Inputs:  existing garment and shoe exporters could
import a small range of production inputs commonly used by such industries free of
taxes and duties using a simplified admission document. The Master List would no
longer be used for such firms. Customs should reconcile exports from such firms with
their imports of duty free inputs, and investigate any irregular trading. Such inputscould include fabric, cotton thread and garment accessories that have a low risk of
being leaked into the domestic Cambodian market.
• Modified Duty Suspension:  Production input coefficients for a range of goods for
each industry could be determined and remain in force for a minimum period of time;that is, at least one year. Upon presentation of proof of the quantity of their export
orders exempt exporters would be permitted to import goods duty and tax free up tothe volume and value provided by the input coefficient for each good.
• This system would link inputs to outputs more accurately than the current Master
List.  Customs would be alerted to request s for exempt import of volumes in excess
of current export order requirements before the goods are cleared, not when Master
List quota is exhausted.  However, there would be a need to ensure such export ordersWT/IFSC/W/12/Add.1
Page 72
were genuine and the system would have to account for changes in the price of inputs
or outputs.  Coefficients would change with changes in production technology.
• Auditing:  Exempt investors willing to be audited by a suitably qualified and reputable
auditor could be automatically exempt on all their eligible imports, without being
subject to the production input coefficient.
• Bank Guarantee: Exporters without a proven track record of good compliance and
exempt importers of goods that are at risk of being sold on to the domestic market,
should provide Customs with a bank guarantee of the foregone duties and taxes ontheir expected imports for the subsequent  12 month period. Exempt goods would not
be able to be imported in excess of the value of the guarantee. Customs should audit
such firms to verify the intended use of the exempt imports.
• Minimum Tariff: Another option would be to abolishing the current duty and tax
exemptions enjoyed by CDC registered investors but at the same time lowering the
tariff rates that all importers face on production inputs. The setting of the tariff ratewould have to carefully balance increasing the cost of doing business in Cambodia
with the net revenue change and expected reduction of compliance and administration
costs.
214. Table 3.3 shows that garment exporters enjoyed about 75 per cent of the total duty and tax
exemptions over the past three years (based on first quarter records). Other CDC investors and
exporters only made up 3 per cent of total exemptions by the first quarter of 2001. Therefore,automatically exempting only the key inputs of garm ent exporters would remove much of the current
workload of monitoring exempt investors.
215. A risk to leakage of duty free imports into the domestic market is posed by imports associated
with foreign grant aid, temporary imports and privileged persons. Temporary imports could be
safeguarded by payment of a bond or arranging bank guarantee.
3.3 Source of customs duty and tax exemptions
NGO EmbassiesGarment
firmsOther CDC
investors ExportersForeign
grant aidTemp.
importsPrivileged
persons Total
million riel
Qtr 1 1999 2 846 2 182 117 649 497 48 1 795 14 294 6 943 156 254Qtr 1 2000 6 204 2 682 125 956 4 032 48 9 086 13 700 6 514 168 222
Qtr 1 2001 3 030 2 944 158 364 6 037 166 18 862 17 688 8 322 215 413
%
Q t r  1  1 9 9 9 21 7 500894 1 0 0Q t r  1  2 0 0 0 42 7 520584 1 0 0
Q t r  1  2 0 0 1 11 7 430984 1 0 0
Sources:  MOEF–CED 2001 and IMF third review under the PRGF.
3. Customs bonded manufacturing warehouse
216. Customs is developing proposals to replac e the Master List with a Customs Bonded
Manufacturing Warehouse to store tax and duty-free imports of exempt investors under these
proposed arrangements. Customs would manage the movement of goods from the port to thewarehouse and from the warehouse to the importer's premises when required by the importer.
217. Such a scheme would impose an additional and significant layer of administration between
the arrival of the goods at the port and their receipt by the importer. The ability of the importer toWT/IFSC/W/12/Add.1
Page 73
quickly access goods in storage would be at risk. Customs would have to invest significant levels of
training and capital and work closely with the private sector to successfully operate such a bonded
warehouse. The scheme would penalise all exempt importers even though a limited number are likely
to be abusing their incentive entitlements.
E. CAMCONTROL
218. Cambodia is in the difficult position of establishing a system of industrial standards and
conformity assessment. This is driven by a combination of factors, including: the need to recognise
the conformity assessment of trading partners, fo r example within ASEAN; the need to comply with
the Technical Barriers to Trade and Sanitary and Phytosanitary Agreements upon accession to the
WTO;  and the need to meet standards set by major trading partners, particularly with respect to
agricultural exports. These requirements are additional to the rules of origin that RGC enforces to gain
preferential market access.
219. MIME sets industrial standards and manages a certification programme for local
manufacturers. The Ministry has drafted a sub-decree to establish a quality assurance system
involving relevant government agencies.
220. Camcontrol's task is to enforce conformity assessment and when necessary, to take samples of
imports and domestically produced goods for testing.  Camcontrol has broad powers to search, seize
and destroy goods and to close a factory permanently for non-compliance with the law. The recentlyenacted Law on the Management of Quality and Safety of Products and Services (21 June 2000)
requires importers and manufacturers to provide proof of appropriate prior examination of their
products upon request by Camcontrol. If any product is harmful to health or to fair trade or is of
benefit to local production then the exporter, importer or manufacturer shall request Camcontrol to
inspect and approve the product before it may enter into commerce. Camcontrol is receiving technicalassistance for training and equipment with respect to sampling and testing. Camcontrol states that it
relies on certificates of quality accompanying imports and only takes a sample for testing an export if
the importing country requires a certificate. About 5 per cent of food imports are sampled at the
government chemical laboratory or the private microbiology laboratory.
Camcontrol about commercial and health services
221. The GSP compliance role of Camcontrol has been to certify that the category and quantity of
garments in an export consignment is reflected in the documentation. Camcontrol sees its role as
complementary to that of CED.  CED investigates smuggling while Camcontrol provides commercial
and health services to the public.
222. Regardless of its conformity assessment function in the wider economy, Camcontrol officials
stop and inspect the visual condition of packaging, the labels and expiry dates of 100 per cent of
imports and exports not subject to PSI.  A fee of 0.1 per cent of the value of the consignment is
charged for each inspection.
223. Inspecting every import and export is a significant waste of resources.  Because of limited
resources frequent inspections and testing tend to be poorly performed and, therefore, do not achieve
their objectives.  Food imports create the greatest risk to health, yet the Food and AgricultureOrganization recommends that only five per cent of all food shipments should be subject to inspection
and control when sufficient confidence exists that the food entries will meet the importing countries'
requirements (Food and Nutrition Papers no. 14, Manual 15 – Food Quality Control: Imported Food
Inspection).  Despite sampling 100 per cent of food imports, Jordan only rejected 0.6–0.9per cent of
food shipments during 1996–1998.WT/IFSC/W/12/Add.1
Page 74
224. Although, Camcontrol admits that it does not have the resources to sample and test more than
5 per cent of food imports, its officials do undertake physical inspections of all non-PSI imports.
225. As discussed at the beginning of this chapter the number of agencies involved in clearing
goods for import and export gives rise to competi tion and overlap. Instead of just dealing with CED,
traders have to deal with Camcontrol and the Economic Police. Sub-decree 64 provides that CED
shall collect revenue and enforce the customs law while Camcontrol shall inspect and certify quantityand quality of goods exported and imported. Camcontrol and CED must perform their inspection
together and only once.
226. CED has 1 150 staff members working at nine provincial branch offices, the ports and
airports and at head quarters. In 1999 Camcontrol had 448 staff at the same border check points
performing similar inspection functions as CED staff.  About 500 people were employed by
Camcontrol in 2001. CED management is conc erned that CED and Camcontrol operate under
conflicting incentives. CED is trying to reduce the time and cost of inspection by adopting a riskbased selection system.
Incentives for risk management
227. However, in order to maximise its revenue Camcontrol has an interest in inspecting every
container.  Camcontrol uses a relatively low cost factor, labour, to conduct visual inspections ofimports and exports, without undertaking more thorough quality assessments. SGS is required to
inspect and assess the quality of goods as well as to value and classify all goods being imported under
PSI.  SGS profiles the risk of misdescription or misclassification of a good submitted for PSI and will
test laboratory results if necessary.  Camcontrol is not required to inspect containers sealed by SGS,
unless there is a discrepancy between the container and the report of finding. If the level of PSIcircumvention is reduced then fewer goods will enter Cambodia requiring intervention from
Camcontrol.
228. In general, quality control of the remaining goods should rest with the importer. Importers
have a contractual responsibility to ensure that their products are fit for the purpose to which they are
intended. Consumers bear the responsibility to check that desired industrial standards have beenattained.  In Cambodia, most of the imports that are exempt from PSI are garment inputs, for which
Camcontrol has little quality control expertise.
229. Most governments do check the quality of imports that potentially affect health and safety, for
example. food, pharmaceuticals, livestock, plants, some electrical and telecommunication equipment.
However, governments try to rely upon certification in the country of export as much as possible.Also, risk based selection systems are used to inspect and test these imports, relieving importers of
unnecessary delays and costs.
230. Thus to sum up:
• the compulsory inspection of all imports and exports is unnecessary. It is the role of
CED to check quantity. Any necessary visual inspections can be conducted by CED
staff;
• skilled teams could be trained to manage a risk based sample selection system for
imports affecting health and safety. These teams may comprise MOH, MAFF or
Camcontrol officials;  and
• it is important that Cambodia puts in place a rigorous system to recognise foreign
standards and evidence of conformity assessment. This will reassure the public andrelieve the trading system of unnecessary administration and compliance costs.WT/IFSC/W/12/Add.1
Page 75
F. TRADE FINANCE
231. Most of the trade in Cambodia is conducted by  multinational enterprises. Parent companies
provide all, or most, of their funding. They use local banks to deposit and transfer funds. Their local
bank is often a branch of their parent company's bank. Furthermore, since most transactions in
Cambodia are undertaken in US dollars, funds are simply telegraphically transferred between
Cambodian and foreign entities.
232. Nineteen commercial banks currently operate in Cambodia, five of which have been re-
licensed with a minimum capital of $13 million unde r the new bank licensing requirements. Banks are
permitted to carry out the whole range of banking functions, but activities in practice tend to be
limited by the small market and lack of enforceability of security. Many Cambodians resist depositing
their savings in a bank after a number of banks closed over the past year following the introduction of
the new licensing provisions.  Some of these banks have yet to refund depositors their money.
233. The Foreign Exchange Law prohibits any restriction on foreign exchange operations,
including transfers and all types of international settlement. However, these transactions must be
performed through a local bank. Fees for telegraphic transfers are high, one bank charges 0.15 per
cent of the amount transferred in addition to a fixed fee of up to $35.
234. Lending rates are high and averaged 17.78 per cent per annum for US dollar loans at the end
of June 2001. Although these loans are secured by land or guarantee the high interest rate reflects thelack of any secured transaction legislation and it is reported that it can take 3 to years to discharge a
mortgage. Despite relatively high interest rates total monthly commercial bank credit has almost
doubled over the past four years, from $125 million in January 1997 to $238 million by March 2001.
One quarter of these funds is lent to the wholesale and retail trade sector indicating that inventory
financing, and hence financing of imports, is an important source of business to banks.
235. At least 50 micro finance organisations provide loans of between $100-$500 to SMEs and
farmers at interest rates of 3–5 per cent per month. Few SMEs meet the lending criteria of commercial
banks; which charge more attractive commercial interest rates (18–24 per cent per annum). At the
fourth Public-Private Sector Forum in August 2001, the Prime Minister encouraged the working
groups to find ways to lower the cost of credit to SMEs.
236. The FTB is one of two state owned banks and is the second largest bank in terms of deposits.
It will provide a letter of credit to a Cambodian importer subject to a 20 per cent deposit, land or
building collateral and a good credit history. Its minimum acceptance fee of 0.1 per cent is
competitive in the region and about 25 per cent less than that charged by commercial banks in
Cambodia. However, due to Cambodia's perceived country risk importers are usually required to paya fee of about 0.2 per cent of the invoice value to a local branch of a foreign bank as a confirming
bank fee.
237. In summary, the banking sector provides a wide range of banking services but at a relatively
high cost to the consumer. Promptly enacting the necessary financial legislation requested by the
private sector and implementing this legislation is essential to lower these costs.
238. The RGC provides no trade finance assistance to the private sector. There are no export credit
insurance or export guarantee schemes. In order to assist SMEs and farmers to finance their exportsthe government could consider guaranteeing export credit provided by commercial banks to SMEs
meeting certain criteria.
239. Trade facilitation will also be enhanced if banks work with CED to provide for improved
means of payment of duties and taxes, for example,  payment by credit card. Currently importers have
to pay by cash or a cheque certified by their bank. This creates delay and increases compliance costs.WT/IFSC/W/12/Add.1
Page 76
In particular, a system permitting pre clearance payment of taxes and duties should be introduced.
CED could also regularise post clearance payment of duties and taxes by qualifying importers.
G. EXPORT PROCESSING ZONES
240. The RGC has been considering establishing one or more industrial zones in Cambodia and
attracting domestic and foreign investment into the zones. Given the poor condition of much of the
country's infrastructure, scarce infrastructure development resources could be focused initially insidethe zones to bring them to an internationally compet itive level. Zone enterprises may also be able to
import raw materials and intermediate products exempt from duties and taxes for consumption within
the zone.
241. In June 2000 the Prime Ministers of Thailand and Cambodia agreed to formulate an
integrated plan for economic co-operation. A centrep iece of the plan is the development of industrial
zones in Cambodia along the Thai border. This year Thailand graduated from receiving GSP market
access for a number of labour intensive products. Thai manufacturers of these products are interestedto relocate their production operations to Cambodia in order to enjoy Cambodia's continuing GSP
market access. The zones would be located close to Thailand in order to take advantage of Thai
infrastructure, in particular, road and rail links to Thai ports. Thai manufacturers would also benefit
from Cambodian labour costs that are approximately half of the level of Thai labour costs in Zone 3.
The Thai Board of Investment has divided Thailand into three areas or zones.  Zone Three is farthestfrom Bangkok and offers the most attractive investment incentives.
242. A Thai developer has already commenced developing a 250 hectare zone at Koh Kong in
anticipation of enactment of the draft Industrial Zone law currently being discussed by the
Government. The site is two kilometres from the Thai border on Cambodia's coastline. A number of
Thai manufacturers are interested to invest. The zone is three hours by road from Laem Chabang port.
243. Considerable progress has been made with the zone, the land has been purchased and roads
have been built to the Thai border and into the nearby town including a bridge over the Prek Khao Pao
River. Telephone and electricity services are being supplied from Thailand and a water reservoir is
completed.
244. The developer is also assisting the RGC to improve the road to connecting Koh Kong with
National Road 4 — connecting Phnom Penh with Sihanoukville.
245. Another site is being considered at Poipet on the Thai border. Poipet is close to Battambang
(population 100 000) in Cambodia and has good road access to both Bangkok and Phnom Penh. Rail
access requires upgrading. The development of this site depends upon the consolidation of a large
number of small privately owned land holdings.
1. Conflicting interests of industrial estate parties
246. As with any commercial undertaking, successful operation of an industrial estate depends
upon balancing the interests the three participating parties – the developer, the enterprise investor and
the government. Box 3.4 below summarises these interests.  The government sets the broad policies
for the establishment and management of the zones in its legislation. Contractual arrangements further
define relationships between the parties. Successful zones reflect a working partnership between the
developer and the government, and recognise investors as clients.WT/IFSC/W/12/Add.1
Page 77
3.4 Relative interests of industrial estate partners
Developer and Investor
• Retain full control over use of land and infrastructure
• Maximise financial returns from land and infrastructure investment
• Minimise risk of cost changes and government interference
Investor
• Obtain inputs exempt from duties and taxes (that is, at world prices)
• Obtain appropriately skilled work force in sufficient quantity
• Receive utility services at appropriate quantity, quality and competitive price
• Minimise transport costs to market and ports, that is, road access to Bangkok and Laem Chabang Port
• Minimise compliance costs with customs and administrative requirements
Government
• Maximise Government's share of the returns earned by Developer and Investors
• Maximise employment (Koh Kong has a small population of 20 000)
• Maximise use of domestic inputs
• Protect the natural environment (Koh Kong has seven national parks and a mountain wildlife
sanctuary)
• Prevent smuggling into domestic territory and use of genuine Certificates of Origin
2. Discussion of draft law
247. Annex F sets out a summary of the draft law.
Relative authority of council and developer
248. The first issue relates to the balance between public and private control of the zones. Given
Cambodia's scarcity of experienced managers and limited financial resources the Government is likely
to rely upon a private developer to create and manage one or more of the zones. This already appears
to be the case in Koh Kong. Such developers would prefer themselves to undertake many of the
policy and management decision making authorities that the law gives to the Council and Secretariat.
249. Ideally, these statutory authorities could be contracted to the developer. In particular, the
developer could register investors and set fees. If the developer is providing the majority of services to
the investor, including leasing land and then fees cannot be regulated by a sub-decree. An extremely
important feature of any zone is the simplicity and efficiency of its administration. Private sector
developers can more often provide these efficiencies than the public sector. Public interests are still
protected through the provisions of government's agreement with the developer and throughlegislation.
250. The Council and Secretariat would remain responsible for those one stop services that should
be undertaken by an entity at arm's length from the developer and investor. In particular, an unrelated
party should perform customs services and tax collection.
Council and Secretariat structure
251. The law envisages a very senior policy making body (Council) that delegates executive power
to a mid-level executive body that further appears to delegate management activities to representatives
in each zone. This structure has the risk of blurring policy and management functions and becoming
unnecessarily bureaucratic. Furthermore, accountability should be clarified. The Council shouldWT/IFSC/W/12/Add.1
Page 78
regularly report to Parliament. The Council appears to be represented by unnecessarily senior
officials, that is, the Prime Minister.
252. However, the intended structure could function well if the Council acts as a policy making
board of directors and the Secretariat as the executive management with line functions in each zone.
Most public sector industrial estate development is undertaken by parastatals with adequate
operational autonomy and their own board of directors to enable them to operate in a business likemanner.  The private sector is often represented on the board of directors reflecting the interests of
enterprise investors and private sector developers.
Management of customs and tax revenue collection
253. The zone customs agency must demonstrate an ability to monitor imports and exports from
the zone with minimum cost to the investor. Ideally, an entirely new agency could be established that
is independent from the public sector — along the lines of a revenue authority discussed above. Orthese functions could be contracted to the private sector.
254. Annex F 1 of the Kyoto Customs Convention sets out model provisions for the customs
requirements of a duty free zone. The interesting customs feature of the proposed zones is the planned
proximity of a duty free processing area with du ty and tax paid accommodation and service areas.
This suggests the following features could be appropriate:
• one customs office could clear all goods imported from Thailand entering the zone
and all exports leaving the duty free area;
• imports destined for the service and accommodation areas would be duty paid before
being cleared;
• goods entering and leaving the duty free area would be recorded in an inventory
control system (ICS) maintained by customs;
• a simplified admission document could be used to enter imports and exit exported
goods. Customs may even decide to rely only on the bill of lading;
• sales from the domestic territory to the duty free area would be recorded in the ICS.
Sales from the duty free area to the domestic territory would be cleared through the
customs office and have tax and duties paid;
• the ICS would monitor the movement of goods into and out of the duty free area and
could be used to confirm that garments were made in the zone pursuant to any
required Certificate of Origin;
• customs would undertake a risk based audit programme of investors to verify their
inventories of duty and tax free goods;
• ideally all goods crossing the border check point into Thailand should be cleared by
the customs office at the zone and transported under seal or escort to and from the
border check point. This would avoid double handling and allow goods to move
quickly over the border;  and
• Article 37 appears to be unnecessary. All imports into the duty free area are duty and
tax-free.  If goods produced in the area are sold into the domestic market then theywill incur duties and taxes at the time of such sale. It is not necessary to know in
advance if an imported input is being used to produce an export or duty-paid sale tothe domestic territory.
Investment incentives
255. Thai manufacturing enterprises relocating to the zones will enjoy:
• GSP access to 26 foreign marketsWT/IFSC/W/12/Add.1
Page 79
• labour costs at least 50 per cent of their current labour costs
• access to Thai electricity and telephone services
• use of Thai road, rail and port services
• duty and tax free imports of all imported inputs, including their current purchases of
Thai inputs, and
• a likely credit against their Thai income tax liability for profit taxes paid to the RGC.
256. For these reasons the RGC should not offer a reduced rate of profit tax to attract Thai
investors. Further work should be undertaken to compare the cost structures of Thai manufacturers in
their current location compared to their likely cost structure in a Cambodian zone. The additional
value of GSP benefits and the current tax treatment of the Thai manufactures should be factored intothe model.
257. Table 3.5 compares the net profit for an exporter selling a product with a CIF cost of $100
into three different markets. The selling price at which the exporter has contracted with the importer is
$120. If the importer is located in the EU then th e good enjoys completely duty free access and the
profit is $20 or 16.7 per cent of the contract price.  The EU average MFN tariff is 7.4 per centtherefore, the exporter's profit rate falls to 10.5 per cent The profit spread on sales to the US and Japan
are smaller than to the EU.
258. Table 3.5 shows that if production costs are conservatively assumed to be the same in
Cambodian zone as they were in Thailand then if  the exporter sells to the EU, they enjoy a gain
equivalent to 7.4 per cent of their cost of sales. If their cost of sales is lower in Cambodia then theirGSP gain would be greater than 7.4 per cent.
3.5 Comparison of export profit under average GSP and MFN tariff rates
Unit EU GSP EU MFN US GSP US MFN Japan
GSPJapan
MFN
CIF cost $ 100 100 100 100 100 100
Duty rate % 0.0 7.4 1.8 5.0 1.7 4.3
Contract rice $ 120 120 120 120 120 120Profit price % 16.7 10.5 15.2 12.5 15.3 13.1
Calculated using 1999 average tariffs across all goods provided by Table 8, Market Access for
Developing Countries' Exports , WB and IMF, April 2001. Current GSP rate for LDCs used rather than 1999
average GSP rate.
259. The zone investment incentives should be aligned with the incentives offered by the Law on
Investment. Consistent incentives will prevent in vestment locations within Cambodia competing with
one another by offering lower rates of profit tax to foreign investors that have already chosen to locate
in Cambodia. The current review of investment ince ntives should consider the tax treatment of Thai
investors in the proposed zones.
Other issues
260. The RGC should clarify that the US and EU will continue to permit GSP access of goods
made in duty free zones in Cambodia. The US generally does not permit duty and tax free entry of
goods made in foreign EPZs.
261. The requirement for a master plan is important. The plan should set out a design concept for
the zone and the process by which investors comply with the design concept. Developers should be
given the opportunity to participate in the formulation of the plan. The plan should be approved by theCouncil. The draft law does not require developers or investors to conduct an environmental impactWT/IFSC/W/12/Add.1
Page 80
assessment (EIA). The Government should ensure that developers and investors meet minimum
environmental standards. An environmental monitoring office could be established in the zones to
evaluate EIAs and monitor compliance. Certificates of Origin could be issued by the zone customs
office using the ELVIS and SEGAL links with the US and EU.
IV. ASSESSING POVERTY IMPACTS
262. The linkages between trade policies and poverty have been addressed recently at length by
several papers (World Bank 2001 and WTO 2001).  There is a consensus that greater openness to
trade can affect an economy in various ways, creating opportunities for the poor as well as risks:  i) by
affecting the prices of goods and services the poor consume and produce, changes in policy will
benefit those who are net consumers of goods that  become cheaper and those who can obtain higher
prices for their products;  ii) by affecting the demand for and returns to factors of production that the
poor have to offer, such as unskilled labour;  iii) it can affect government revenues and the resourcesavailable for antipoverty programs;  iv) it can affe ct the potential for economic growth, which in turns
affects poverty; v) due to likely transition costs and the possible increased volatility of growth coming
from the opening up of markets, properly designed social protection mechanisms are recommended
(G-8 Genoa Summit, July 2001). Following the scope of the document, this chapter will deal mostly
with points i), ii), and iv), considering also scenarios where land is distributed to poor farmers andwhere transaction costs linked to the rice market are reduced.  Besides the assessment of the impact of
trade policy on poverty, this section intends to be a clearinghouse for the assessment of the expected
impact of other, non-trade policy recommendation done in other parts of the study.
263. Lack of information for the Cambodian economy (f or example, input-output table) forbids the
use of any sophisticated economic model (for example, Computable General Equilibrium), and thispoverty assessment is rather conducted in a partial equilibrium setting.  It provides a proxy of the
magnitude of the first order impact on poverty coming from changes in key prices and quantities.  The
setting of the model is flexible enough to capture impacts coming from:
• changes in tariffs of key goods consumed and/or produced by the poor;
• changes in prices and quantities in key markets (for example, rice markets, including
segmentation of them into regional markets);
• a reduction in transaction costs (for example, reduction in unofficial taxes, and/or in
transportation costs);
• some key technological improvements in production (for example, reduction in post
harvested losses, increment in milling yield of paddy);
• cross-effects of some important linked markets (for example, impact of agricultural
prices on agricultural wage income, im pact of urban employment and wages on
remittances); and
• shifts in labour demand (for example, increased demand for labour in garment
industry, labour saving technology in rural areas).
264. This chapter presents in section 1 a summary of the poverty profile of Cambodia, highlighting
some key issues related to the measurement of poverty in Cambodia.  Section 2 identifies who the
poor people are in term of consumption patterns and in term of sources of income.  Section 3 presents
the framework to be used in making the poverty assessment of different policies recommended in the
other chapters of this document.  Section 4 provides the results of the various simulations done, andSection 5 presents some conclusions.WT/IFSC/W/12/Add.1
Page 81
1. Poverty and poverty measurement in Cambodia
265. Current measures of poverty in Cambodia are controversial.  Changes in survey design and in
interview practices make difficult to compare estimates of poverty rates from the 1999 Cambodia
Socioeconomic Survey (CSES) with estimates fro m previous surveys.  The 1999 CSES was done in
two rounds of interviews, one in January–March and the other in June-August, with the intention of
capturing the effect of seasonality in consumption and income.  The detailed analysis of the data doneby Gibson (1999) shows that there are important di screpancies in consumption, inequality and poverty
estimates for the two round of the 1999 CSES that are not consistent with previous evidence of
seasonality in Cambodia.  For instance, the estimated headcount poverty rate for Cambodia in 1999 is
51 per cent if both rounds of interview data from the 1999 CSES are used, but it is 64.4 per cent if the
first round is used and 35.9 per cent if the second round is used.  Because of these discrepancies, it is
difficult to see whether poverty increased since the previous survey in 1997.  From Gibson's report,
(1999, page iii) we have:
If the data from Round 1 of the 1999 survey are used then poverty appears to
have increased, regardless of the methods and adjustments used to ensure
comparability with the 1997 data.  If the data from Round 2 of 1999 are used, poverty
appears to have decreased.  If the discrepancies between survey rounds are ignored
and all data from the 1999 survey are used poverty either increased or decreased since1999 depending on the method used to ensure comparability with the 1997 data.  A
straight comparison of the poverty estimates from the unadjusted  1997 survey data
with the combined-rounds 1999 survey data s hows a small rise in the headcount index
from 47.8 per cent to 51.1 per cent, with large proportionate increases in the depth
and severity of poverty.  An alternative comparison, which avoids using revisedestimates for the headcount poverty rate in 1997, based on a consumption aggregate
which exclude rent and medical expenses (the items adjusted in 1997) and used a
lower poverty line.  Under this comparison, and using the combined rounds data from
1999, there is a small reduction in the headcount index (from 36.1 to 35.4 per cent)
but increases in the depth and severity of poverty.  However, even this comparisondoes not remove the basic ambiguity caused by the variation across survey rounds in
1999; with this restricted consumption aggregate and lowered poverty line, there are
significant increases in poverty recorded for all poverty measures and all regions
from 1997 to Round 1 of 1999 and falls in poverty from 1997 to Round 2 of 1999.
266. Results for 1997 that have been incorporated into public policy in Cambodia (particularly into
the poverty profile) are based on consumption data that were adjusted to correct for possible under-
estimation of certain types of consumption, such as health, house rental values, and education.  The
adjustments made to the data had a big impact in raising the value of mean consumption by almost
one-fifth (Gibson, 1999, p. 14).
267. In spite of its problems, the CSES survey done in 1999 was the first attempt to collect detailed
information on household incomes in Cambodia.  Households' sources of income were collected witha detailed questionnaire, and 1999 data is the only available data that allow an assessment on the
relative importance of each source of households' income.  Thus, it is necessary to rely on the 1999
data to make the type of simulations this chapter on Poverty intends to make.  As measures of poverty
levels using the 1999 data are subject to controversies and this chapter tries to avoid referring to a
particular measurement of poverty, and presents the information by deciles of the per capita adultequivalent expenditure instead.
 Following Deaton (1997), the deciles were formed by computing the
per capita adult equivalent household consumption for each sample household as: total hh
consumption/(0.5*# of children + # of adults).  The reader should infer that improvements in the
consumption level in the first five deciles because of any of the policies suggested by the IF analysis,
has a pro-poor effect.  To follow what seems to be the official data set for poverty analysis inWT/IFSC/W/12/Add.1
Page 82
Cambodia (see for instance, the Second Five Y ear Socioeconomic Development Plan 2001-2005), we
present in this chapter results coming from us ing the second round from the CSES 1999 survey.  All
the computations were also done using the first round and the complete data set for 1999 and are
available from the author upon request.  Although to easy exposition those results are not shown in
the text, an explanatory footnote indicates whenever these results differ qualitatively from those
coming from the second round.  The 1993–94 and 1997 poverty profiles identified many of thecharacteristics of the poor:
• Poverty rates are highest in rural areas and amongst people living in households
headed by farmers.
• Poorer households tend to be larger, younger and have more children and are more
likely to be headed by a male.
• The poor are more likely to live in households where the head is illiterate and has few
years of schooling
268. In turn, and although some of the cross-sectional poverty patterns are not robust across the
two 1999 survey rounds, the 1999 poverty profile indicates that some of them are robust and in
general corroborate the findings of previous poverty profiles.  Amongst the latter:
• poverty is lowest in Phnom Penh;
• poverty has a non linear relationship with the age of the household head, tending to
be highest for those whose household is middle aged;
• poverty rises with the household size and the number of children;
• poverty is lower for those whose household head has a secondary or advanced
education; and
• poverty is highest for those whose household head is engaged in agriculture.
2. Locating the poor
269. Knowledge of how the poor obtain and spend their income is crucial in assessing the impact
of economic policies on poor people.  For the case of trade policies, it is expected that the impact on
the sources of income of the poor will be more important that the impact on their consumption bundle.The reason is that trade reform will affect many relative prices, some of which will move in offsetting
directions creating scope for adjustment of the cons umption bundle.  In contrast, as the poor people
generally have limited assets, the most important of which is low skilled labour and/or small quantity
of low quality agricultural land that do not allow for cushioning the effect of big changes, the impact
on the sources of income (World Bank 2001).  The approach used in this chapter — described below
in section 3 — relies heavily in locating the poor people in terms of patterns of expenditures and of
sources of income.  The rest of this section presents first a description of what are the mainexpenditures of Cambodia's people, ordered by deciles of adult equivalent per capita expenditures,
and then a description of their main sources of income.
3. Consumption patterns
270. Table 4.1 shows by per capita adult equivalent consumption deciles the share of some key
consumption aggregates in total expenditure (see annex G for more detail).  In Cambodia,expenditures on food take about ¾ of total expenditures of the first five deciles, and are lower than
70 per cent only in the highest two deciles.  As expected, expenditures on rice (all varieties) are by far
the most important single item of all expenditures for the poorest deciles: this share is 28.4 in the
poorest decile, about 23 per cent in the second and third deciles, and still above 20 per cent for the
fourth and fifth deciles.  Thus, any policy that has a high impact on rice prices is expected to have ahigh impact in poor households' consumption.  A simple exercise can show that, keeping the other
prices and the sources of income constant, a reduction, say, of 10 per cent in the price of rice wouldWT/IFSC/W/12/Add.1
Page 83
imply an extra 3 per cent of disposable income for people in the poorest decile 10 per cent of 28.7 per
cent) and 0.6 per cent for people in the richest decile (10 per cent of 5.7 per cent). Second in
importance among food items is 'Fish and fish products' that involves between 9.2 and 11.1 per cent
of total household expenditures in deciles 1 to 9 and only 5 per cent in the tenth decile.  Regarding
non-food expenditures, the mayor differences between deciles seem to be concentrated in 'Housing,
fuel and transportation':  this category of expenditure captures 46.7 per cent of the total expendituresin the richest decile and only 15.7 per cent in the poorest one.
4.1 Expenditure shares, by decile of per capita consumption, in per cent
Decile
C o n s u m p t i o n  i t e m 1 2 3456789 1 0 a v g
Food Total 75.7 76.3 76.0 73.7 73.7 72.6 72.0 70.3 64.4 38.6 63.5Rice, all varieties 28.4 23.3 22.7 20.7 20.6 18.9 17.5 15.1 12.5 5.8 15.6
Fish & fish products 9.9 11.1 10.6 10.5 10.9 10.8 10.0 10.0 9.2 5.0 8.9
All other consumptionitems 37.4 41.9 42.7 42.5 42.2 43.0 44.5 45.2 42.7 27.8 39.0
Non Food Total 24.4 23.8 24.1 26.4 26.3 27.5 28.0 29.7 35.6 61.4 36.5
Housing, fuel andtransportation
a15.7 15.5 15.2 17.1 17.3 17.4 17.5 19.4 24.1 46.7 25.5
Clothingb2.9 2.8 3.0 3.0 2.8 3.4 3.4 3.2 2.9 2.3 2.9
Other expendituresc5.8 5.4 5.9 6.2 6.1 6.6 7.1 7.1 8.6 12.4 8.2
a Includes house rent (rental value of subsidized housing, rental value of owner-occupied housing, hotel charges), house mainten ance and
repair, water and fuel, medical care, transportation and communication, and personal care.
b Clothing and footwear (tailored clothes, ready-made clothes, shoes, etc.)
c Includes furniture and household equipment and operation, expenditures in recreation, education, personal effects and miscella neous items.
Source:  CSES Survey 2001.
271. Chart 4.2 shows the share of food expenditures in total expenditures by per capita
consumption decile for households in Phnom Penh, in other urban areas and in rural areas.  In rural aswell as in other urban areas the share of food in total expenditures is higher than 70 per cent for the
first 8 deciles, while in Phnom Penh this share is below 55 per cent for all deciles, and as low as
18 per cent for the 10
th decile.  These different patterns are just another way of observing the
prevalence of relatively higher poverty levels — which are in general associated with a higher share
of expenditures on food — in the rural areas of Cambodia.  Any policy that affects food prices,
everything else constant, will have a greater impact on households' welfare in rural and in other urban
areas, and a smaller impact — albeit still important for people in the poorest deciles — on householdsin Phnom Penh.WT/IFSC/W/12/Add.1
Page 84
4.2 Share of food expenditures in total expenditures: rural and urban areas, in per 
cent by consumption decile
020406080100
123456789 1 0 1 1
DecilePer cent
Phnom PenhOther urbanRural
Data source:  Cambodian authorities and team estimates.
4. Sources of income
272. Table 4.3 shows by per capita adult equivalent consumption decile the contribution to total
income made by different sources.  Earnings from self employment are on average equal to 60.9 per
cent of total income, 2/3 of which are coming from activities related to cultivation (22.4 per cent of
total income), most of which is coming from rice cultivation (16.3 per cent), livestock (9.4 per cent),fish growing (5.6 per cent) and forestry and hunting (5.7 per cent).  Income from wage employment
was on average only 20.5 per cent, slightly higher than the 16.5 per cent coming from sources as
rental income, interest received and imputed value of houses.  Income from remittances represents on
average only about 2.1 per cent of total income.  The table shows also that by decile of per capita
adult equivalent consumption, a similar pattern to that of consumption emerges: the composition ofincome by sources is similar for deciles 1 to 8, and only for the ninth and tenth deciles the shares are
different.  The latter show a higher importance of non-farming activities in self employment sources
of income (above 25 per cent), a higher importance of wage income, and, for the tenth decile, a higher
proportion of income coming from other sources as rental income, interest received and imputed value
of houses, as a reflect of a higher capital stock ownership.WT/IFSC/W/12/Add.1
Page 85
4.3 Contributions to income from different sources
Decile
S o u r c e  o f  I n c o m e : 123456 7 89 1 0 a v g
Self employment 67.8 71.4 71.7 70.3 73.6 68.5 71.2 70.7 63.3 36.3 60.9
- from cultivation 27.8 29.7 31.1 30.3 31.9 32.1 30.6 32.3 19.8 3.2 22.4
- from rice
cultivation 21.4 24.3 25.3 23.6 25.7 25.0 22.7 20.4 9.7 2.1 16.3
- from other crops 6.4 5.4 5.8 6.7 6.2 7.1 7.9 11.9 10.1 1.1 6.1
- from livestock 16.6 14.3 14.2 13.0 12.4 11.9 11.6 12.0 8.3 1.5 9.4
- from fish growing,
etc 6.1 7.1 5.5 8.7 6.9 6.8 8.7 7.1 5.2 2.1 5.6
- from forestry and
hunting 8.3 10.2 9.7 7.3 7.7 7.9 8.1 6.1 4.9 0.6 5.7
- from non farming
activities 8.9 10.0 11.2 10.9 14.7 9.8 12.2 13.2 25.1 29.0 17.7
Other sources 32.2 28.6 28.3 29.7 26.4 31.5 28.8 29.3 36.8 63.9 39.1
- from wages 19.0 15.0 15.9 14.5 14.3 18.5 17.6 16.5 21.0 30.2 20.5
- from remittances 1.2 1.9 1.6 2.8 1.3 2.4 1.6 1.7 2.3 2.6 2.1
- other (rents,
dividends, etc) 12.1 11.7 10.9 12.4 10.8 10.6 9.6 11.1 13.4 31.0 16.5
Total 100 100 100 100 100 100 100 100 100 100 100
Source:  CSES Survey 2001
273. Chart 4.4 shows the relative importance of wages as a source of income in different regions of
the country: for deciles 1 to 8, wages are about 40 per cent of total income in Phnom Penh and about20 per cent in the rest of the country.
4.4 Share of wage income in total income:  Rural and Urban areas, in per cent by
decile
0102030405060
123456789 1 0
DecilePer centPhnom Penh
Other urban
Rural
Data source:  Cambodian authorities and team estimates.
274. Chart 4.5 shows the distribution of employment of the household head by industry and
gender.  75 per cent of Cambodian household heads have 'agriculture, hunting, and forestry' as their
main occupation, with a slightly higher proportion for female headed households (78 per cent).
Employment in the public, education and health sectors is next in importance as a source of mainincome (9 per cent average for the whole country, 11 per cent for males head of households andWT/IFSC/W/12/Add.1
Page 86
3.5 per cent for females) followed by employment in the wholesale and retail trade sectors (7.3 per
cent average for the whole country).  The 'textile' industry as well as the 'hotel and restaurant' industry
is the main source of income for only 0.8 of Cambodia's head of households.
5. Framework for the impact on poverty analysis of different policies
275. It is assumed a model where the household is the unit of analysis.  Total net household
income (savings) is defined as the sum of total income minus the sum of total expenditures.  Each
household has different endowments (for example, land of different qualities, number of skilled and
unskilled labourers) that generate income (for example, from agriculture, from labour) and different
expenditures patterns (for example, allocation of expenditures to food and non food items).  Thegeneral formulation is:
() 1.) 1() 1( ) 1() 1( ) 1() 1( ) 1( ) 1(
. . .
Eq Tt P Xt P X t P Xt W L t W Lt PX t P X t P X NetIncome
pqq
poNonFood
nNonFood
oNonFood
onFood Oth
nFood Oth
nFood Oth
n
mDRice
mRice
mDRice
mUnSkilled
l
lUnShilled
lUnSkilled
lSkilled
k
kSkilled
kSkilled
kjI
jI
jI
j
iO
iO
iSO
i
mSRice
mRice
mSRice
m
/g229/g229/g229/g229 /g229/g229 /g229/g229 /g229 /g229
++ −+ − + −− + − ++ − − + − =
where4.5 Employment, by industry group and gender
0.010.020.030.040.050.060.070.080.090.0
agric,for,hunt
pubsec, educ.&healthsales, trade construct
food industryother services
other industr
textile industry hotels and rest wood and furntPer centtotal male headed female headed
Source:  Cambodian authorities and team estimates.WT/IFSC/W/12/Add.1
Page 87
=SRice
mX Amount of rice of quality m produced by the household
=Rice
mP Selling price of rice of quality m produced by the household (gross price). For
internationally tradable varieties, this price is the border price.
=w
zt ad valorem tax on good z of the w sector. Alternatively, =w
zt  is the tax equivalent of
a distortion that affects good z of sector w.
=SO
iX Output i (other that rice) produced by the household (for example cattle, handicrafts,
services)
=O
iP  Selling price of output i produced by the household (gross price). For an
internationally tradable output, this price is the border price.
=I
jX Amount of input j used by the household to produce goods o (for example, fertilizers,
land rented, hired labour, hired animals).
 =O
iP Before tax (or before a tax equivalent domestic distortion) price of input j used by the
household to produce goods o.
=Skilled
kL Amount of skilled labour sold by the kth member of the household
=Skilled
kW Before tax (or before a tax equivalent transaction cost or domestic distortion) wage of
skilled labour supplied by the household.
=UnSkilled
lL Amount of un-skilled labour sold by the lth member of the household
=UnSkilled
lW Before tax (or before a tax equivalent transaction cost or domestic distortion) wage of
unskilled labour supplied by the household.
=DRice
mX Amount of rice of quality m demanded by the household (including rice produced by
the household and not sold in the market)
=Rice
mP Buying price of rice of quality m demanded by the household (gross price)
=Drice
mt  Import tariff on rice imports
=Food Oth
nX.Amount of non-rice food n demanded by the household
=OthFood
nP  Buying price of non-rice food n demanded by the household (gross price)
=OthFood
nt Import tariff on non-rice food n
=NonFood
oX Amount of non-food good o demanded by the household
=NonFood
oP  Buying price of non-food good o demanded by the household (gross price)
=NonFood
ot Import tariff on non-food good oWT/IFSC/W/12/Add.1
Page 88
=q
pT  Transfer received by household member p from source q (q could be public or
private).
276. In addition, the value of paddy rice output can be expressed as a function of the value of
milled rice, as:
)2.() 1)( 1)( 1() 1() 1(
EqP t phl QP t phl Q Output Riceof Value
Rice
mRice
mPaddyRice
mPaddyRice
mPaddyRice
mRice
mPaddyRice
mPaddyRice
m
λα− − − =− − =
  where,
PaddyRice
mphl  denotes the per cent of post-harvested losses due to improper handling, lack of storage
facilities, rodents, etc., assumed to be currently about 10 per cent; α denotes milling transformation
costs; and λ is the milling yield of paddy-to-rice, assumed to be 0.62 on average (with some regional
variation), by the MAFF.
277. We can consider all quantities in Eq.1 as fixed in the short run and simulate what the impact
of a change in prices, taxes and/or transaction cost may be. The formulation would be:
)3. () 1()] 1( [) 1() 1()] 1( [) 1() 1()] 1( [) 1() 1()] 1( [)) 1()] 1( [) 1() 1()] 1( [) 1() 1()] 1( [) 1() 1()] 1( [) 1(
. .. .
. . .___
Eq Tt Pt PX t Pt Pt PX t Pt Pt PX t Pt Wt WL Wt Wt WL t Wt Pt PXt Pt Pt PX t Pt Pt PX t P
q allNetIncome
pqq
poNonFood
oNonFood
oNonFood
oNonFood
o NonFood
oNonFood
oNonFood
onFood Oth
nFood Oth
nFood Oth
nFood Oth
n Food Oth
nFood Oth
nFood Oth
nmDRice
mRice
mDRice
mRice
m DRice
mDRice
mRice
mlUnShilled
lUnShilled
lUnShilled
lUnShilled
l UnSkilled
lUnShilled
lkSkilled
kShilled
kSkilled
kShilled
k Skilled
kSkilled
kShilled
kjI
jI
jI
jI
j I
jI
jI
jiO
iO
iO
iO
i SO
iO
iO
imSRice
mRice
mSRice
mRice
m SRice
mSRice
mRice
m
/g229/g229/g229/g229/g229/g229/g229/g229/g229/g229
∆ +++ ∆+ −++ ∆+ −++ ∆+ −−− ∆+−− ∆− +++ ∆+ −−− ∆− +−− ∆− = ∆
278. In reality, after changes in prices, producers would switch production to the more valuable
crops, consumers would in general switch to cheap er goods and away from the now relatively more
expensive ones, and the household would adjust its labour supply to changes in wages.  Because Eq. 3
keeps quantities fixed, this formulation provides a lower bound for any estimated gain and an upperbound for any estimated loss.
6. Results from the simulations
279. The following simulations, by adopting strong assumptions on quantities demanded and
consumed, and on the way prices are determined, capture only partial and extremely simplifiedWT/IFSC/W/12/Add.1
Page 89
aspects of the plausible impact of reforms on househo lds.  Nonetheless, the dimension of the impacts
simulated as well as the distribution across consumption deciles allow to have a first approximation
for the potential positive or negative effect of different economic policy scenarios on poor people in
Cambodia. The specification of Eq.1 and Eq.2 above are flexible enough to capture key avenues
identified elsewhere for the improvement in the livelihood of poor households (for example, see
chapter on Agriculture where transaction costs and post harvested losses are described for the ricemarket, and also the chapter on Trade Policy, where it is shown the potential pro-poor effect of some
modifications to the current tariffs structure). For instance, the specification can properly capture the
impact of a variation in the price of rice that is different for net sellers and net buyers or rice.
Moreover, by introducing tax equivalent parameters for different types of transaction costs, and
parameters for milling yield of paddy rice, post harvested losses, and milling costs, the specification
allows to simulate several different impacts that seem appropriate for today's Cambodia.
280. Following common practices in the literature on poverty, we anchor the analysis on
households' expenditures, and express all results as per cent of households' expenditures, ordered by
decile of per capita adult equivalent total household consumption.  That is, the absolute change in net
income of household i that is expected to come from a policy change is divided by total household i
expenditures. The interpretation in terms of poverty is straightforward: a simulation identifies a pro-
poor strategy if the latter provides extra money for the first five deciles.  The size of the impact ismeasure as per cent of household expenditures.
7. The rice sector
281. As stated in the Sector Case Study on Rice, in Cambodia, most efficiency gains are to be
realized from reforming the domestic production, processing and trade systems rather than from
reforms at the border.  This section presents results coming from two simulations in the rice sector.The first simulation assesses the poverty impact of reforms in domestic production coming from the
introduction of better varieties of seeds that improves the paddy-to-rice yield, from reduction in
post-harvesting losses, and from reduction in transaction costs.  The second simulation assesses the
impact on poverty of reforms that take place mainly in rural areas.  It assumes the presence of market
segmentation, where low quality rice is produced and consumed in rural areas and high quality milledrice is imported.  Finally, the third simulation calculates the poverty impact of a rise in the price of
rice.
Simulation 1:  improving key elements in the rice market
282. This simulation implies a reduction in post-harvested losses, improvement in paddy-to-rice
milling yields, and a reduction in broadly defined transaction costs.  The two first elements are key
technical components of the rice production system and are often indicated as the avenues for
improving households' revenues (IRRI 1997 and JICA 2001).  Broadly defined transaction costs were
also identified as impediments for a development of the rice sector (see sector study on rice).  To
assess the impact of a change in these three components, a useful decomposition of the value of the
m quality of paddy rice output is:
Rice
mRice
mPaddyRice
mPaddyRice
mPaddyRice
mRice
mPaddyRice
mPaddyRice
m
P t phl QP t phl Q Output Riceof Value
λα) 1)( 1)( 1() 1() 1(
− − − =− − =
where, PaddyRice
mphl  denotes the per cent of post-harvested losses due to improper handling, lack of
storage facilities, rodents, etc., assumed to be currently about 10 per cent; α denotes milling
transformation costs, assumed fixed; and λ is the milling yield of paddy-to-rice, assumed to be 0.62WT/IFSC/W/12/Add.1
Page 90
on average with some regional variation, by the MAFF.  The term Rice
mt  adopts here the form of a tax
equivalent transaction cost, assumed to be 10 per cent.
283. This simulation assess the impact of a plausible change in: a)PaddyRice
mphl  from its current
level of 10 per cent to 5 per cent, due, for inst ance, to an improvement in handling and packaging;
b) in λ from its current level of 0.62 to 0.64, due, for instance, to a plausible and attainable
improvement in rice variety; and c) in Rice
mt  from its current 10 per cent to 5 per cent, due to, for
instance, to an improvement in infrastructure or to a diminishing in other transaction costs.
284. The impact on total household income would be:
)] 1)( 1( ) 1)( 1([ ) 1(1, 1, 1 2, 2, 2Rice
mPaddyRice
mRice
mPaddyRice
mRice
mPaddyRice
m t phl t phl P Q OutputRiceof Value − − − − − − = ∆ λ λ α
 were the subscripts 1 and 2 denote the current value and the simulated new values, respectively.
0754.0*] 5022.0 5776.0[*)]0101)(10.01(62.0)05.1)(05.01(*64.0[*
0 00 00 0
QPQPQP Output Riceof Value
=− =− − − − − = ∆
285. In words, the combined simulated effect of a 5 percentage points improvement in post-
harvested management, a 2 percentage points improvement in milling yield of paddy, and a
5 percentage points reduction in (broadly defined) transaction costs produced an increment in total
value of production of 15 per cent (=0.5776/0.5022).  The gains are directly linked to the amount of
rice produced.  As there is no effect on the equili brium price of rice, all households gain, and net
seller households gain more.
286. To calculate the impact at the household level by decile, the change in the value of rice output
was divided by total household expenditures.  The average gain in this simulation is 4.5 per cent (see
table 4.6), with net sellers gaining 8.1 per cent and net buyers 1.4 per cent on average.  The average
gain for the first five deciles ranges from 4.7 to 5.8 per cent.
4.6 Effect of a 5 per cent reduction in transaction costs, +3 per cent increase in
milling yield, and +5 per cent reduction in post harvested losses, by decile, as per
cent of total household expenditures
Decile (*)
123456789 1 0 T o t a l
Urban
Net Sellers 7.9 9.3 10.7 10.2 10.0 7.6 5.8 6.4 5.5 15.2 7.7
Net Buyers 2.4 1.7 0.8 1.1 1.0 0.8 0.9 0.7 0.4 0.0 0.4Total Urban 3.7 5.3 3.5 3.3 3.1 2.8 2.8 3.3 1.9 0.8 2.0
Rural
Net Sellers 9.2 8.8 8.5 8.3 9.0 8.7 7.6 7.0 5.5 5.3 8.1Net Buyers 2.4 2.1 2.7 1.9 2.1 1.5 1.2 1.3 0.9 0.2 1.7
Total Rural 4.8 5.2 5.7 5.4 5.9 5.5 5.0 4.9 2.6 0.6 4.9
Net Sellers 9.1 8.9 8.6 8.3 9.0 8.6 7.5 6.9 5.5 10.1 8.1Net Buyers 2.4 2.0 2.6 1.9 2.0 1.5 1.2 1.2 0.7 0.1 1.4
Total 4.7 5.2 5.7 5.3 5.8 5.4 4.8 4.7 2.4 0.7 4.5
(*) Deciles by per capita total equivalent consumption.
Source: Model resultsWT/IFSC/W/12/Add.1
Page 91
Simulation 2:  decreasing transaction costs in rural areas
287. As seen in the Sector Study on Rice, localized areas exist that currently have no opportunities
to access other domestic and international markets.  Under this assumption of rice market
segmentation (due for instance to different rice qualities that are trade only locally), this simulation
assesses the impact on poverty of a decrease of 2.5 percentage points in transaction costs (orequivalently, in producer and consumer taxes) faced by producers and consumers in rural areas.  This
simulation provides a measure by decile of the payoff of any measure that increases the effective price
received by the producer and that reduces the effective price paid by consumers in rural areas (see
table 4.7).  The average impact is 1.6 per cent, higher for net-sellers (2.4 per cent).
4.7 Effect of a 2.5 per cent reduction in transport cost for consumption and
production in rural areas, by deciles, as per cent of total household expenditures
Decile (*)
1 2 3 4 5 6 7 8 9 10 TOTAL
Urban
Net Sellers 0 0 0 0 0 0 0 0 0 0 0
N e t  B u y e r s0 0 0000 0 00 00
T o t a l  U r b a n 0 0 0000 0 00 00RuralNet Sellers 2.9 2.7 2.6 2.6 2.7 2.6 2.4 2.3 2.0 3.0 2.6
Net Buyers 1.5 1.2 1.4 1.2 1.2 1.0 0.9 0.9 0.8 0.6 1.1
Total Rural 2.0 1.9 2.0 1.9 2.1 1.9 1.8 1.8 1.3 0.8 1.8Net Sellers 2.8 2.6 2.5 2.5 2.7 2.6 2.3 2.0 1.4 1.5 2.4Net Buyers 1.4 1.2 1.3 1.1 1.1 1.0 0.8 0.7 0.5 0.2 0.9
Total 1.9 1.8 1.9 1.8 1.9 1.9 1.7 1.5 0.8 0.3 1.6
(*) Deciles by per capita total equivalent consumption. (segmented markets assumption: this effects has an impact only in rural
areas)
Source: Model results
288. For net consumers, the impact is given by:
]
) 1() 1([*) )( 1(DRice
mDRice
m SRice
mDRice
mDeice
mRice
mttX X t P NetIncome
++∆−− + = ∆
 with 0< ∆DRice
mt
For net producers, the impact is given by:
]) 1() 1([*) )( 1(SRice
mSRice
m DRice
mSRice
mSRice
mRice
mttX X t P NetIncome−∆+− − = ∆
with 0> ∆SRice
mt
Simulation 3: changes in the price of rice
289. As pointed out in the Sector Study on Rice, if the quality of rice produced locally is improved,
this could reduce the need to import high quality rice and, if transports costs are also reduced, thiscould result in lower prices of high quality rice in  urban areas, which is the principal market for the
upper quality rice. In the absence of other efficiency gains, the increased domestic production of high
quality rice could result in reduced supply and increased prices of lower quality rice, affecting low
income consumers. This simulation provides a assessment of the distribution by per capita
consumption decile of the impact of an increase in the price of rice. To keep the simulation simple, itWT/IFSC/W/12/Add.1
Page 92
is assumed that the rise in the price of rice of quality m is under no tax and no distortions in the rice
market scenario  (that is 0=w
mt , for w=Srice and Drice).  The change in net income is given by:
Rice
mRice
m DRice
mSRice
mRice
mPPX X P NetIncome] [) (∆− = ∆
290. The sign of the impact on a particular household will be given by sign of ) (DRice
mSRice
m X X − .  For
net rice seller households, the impact will positive, and negative for net rice buyer households.  For a
poverty analysis, it is important to identify where the negatively affected households are located in
terms of per capita consumption.  Are all of them poor?
4.8 Effect of a 10 per cent increase in the price of rice, by decile, as per cent of total
household expenditures, Cambodia
Decile (*)
123456789 1 0 T O T A L
Urban
Net Sellers 1.9 2.8 3.2 3.5 2.9 2.9 1.7 2.2 1.8 5.7 2.5
Net Buyers -2.2 -1.5 -1.7 -1.5 -1.5 -1.3 -1.2 -1.2 -1.0 -0.6 -1
Total Urban -1.3 0.5 -0.4 -0.3 -0.5 -0.1 -0.1 0.3 -0.2 -0.3 -0.2
RuralNet Sellers
2.2 2.6 2.4 2.4 2.9 2.8 2.4 2.3 1.4 1.9 2.4
Net Buyers -1.9 -1.4 -1.1 -1.2 -1.2 -1.2 -1.2 -1.2 -1.0 -0.7 -1.3
Total Rural -0.4 0.5 0.7 0.8 1.1 1.0 0.9 1.0 -0.1 -0.5 0.6
Net Sellers 2.2 2.6 2.4 2.5 2.9 2.8 2.4 2.3 1.5 3.8 2.5
Net Buyers -1.9 -1.4 -1.1 -1.2 -1.2 -1.2 -1.2 -1.2 -1.0 -0.7 -1.2
Total -0.5 0.5 0.7 0.7 1.0 1.0 0.8 0.9 -0.1 -0.4 0.5
(*) Deciles by per capita total consumptionSource: Model results
291. This simulation indicates (see table 4.8) that, everything else constant (including the amount
of rice consumed by each household), a rise of 10 per cent in the price of rice would increase the
income of households that live in the urban area, belong to the first decile and are net sellers of rice,by an average amount equivalent to 1.9 per cent of their total household expenditures. By the same
token, for households that live in the urban area, belong to the first decile and are net buyers of rice,
the higher price of rice implies a loss of an average amount equivalent to 2.2 per cent of their total
household expenditures. The last row of the table indicates that, considering the whole population,
those belonging to the first, ninth and tenth deciles are losing due to the price increase (-0.5, -0.1 and–0.4 per cent of total expenditures, respectively), while people in all the other deciles on average win
an equivalence to 0.5 and 1 per cent of their total expenditures.  On average, as percentage of total
expenditures, net sellers gain 2.5 per cent and net buyers lose 1.2 per cent respectively.  For the whole
country, there is a gain of 0.5 per cent.
8. Trade policy
292. As pointed out in the chapter on trade policy, the tariff structure has important implications
for the government's export led economic development and poverty alleviation strategy. Due to high
tariffs on semi processed and consumer goods, Cambodians are required to pay above international
prices for basic needs, unless smuggling of imported goods circumvents these high prices.  Table 4.9
shows the current tariff structure for the main categories for which detailed information on household
consumption is available.  Although for rice (the main single consumption item in households'
budget) the tariff is only 7 per cent, for the different types of meat, for dairy products and for preparedand preserved vegetables, the tariff is above 30 per cent.  Regarding non-food items, the average un-WT/IFSC/W/12/Add.1
Page 93
weighted tariff for clothing and footwear is 28 per cent. For fish the tariff is 18 per cent, which rises
the domestic price above international level, but at the same time there is an export tax of 10 per cent
that plays in the opposite direction. Since there is no detailed information on consumption of different
types of fish, for this exercise it was assumed that there is no change in the tariff rate for fish and fish
products.
293. This section assesses the impact of a reform th at sets all tariffs to 7 per cent (see the chapter
on trade policy for the rationale of such an uniform and low tariff level).  Following above equation 3,
households' change in net income after the tariff change is given by:
/g229/g229/g229
+− ∆+ ++−− + ++−− + = ∆
oNonFood
oNonFood
oNonFood
oNonFood
oNonFood
o NonFood
oNonFood
oNonFood
onFood Oth
nFood Oth
nFood Oth
nFood Oth
nFood Oth
n Food OthS
nFood OthD
nFood Oth
nFood Oth
nmDRice
mRice
mDRice
mDRice
mRice
m SRice
mDRice
mDRice
mRice
m
t Pt t PX t Pt Pt t PX X t Pt Pt t PX X t P
q allNetIncome
) 1()] ( [) 1() 1()] ( [) )( 1() 1()] ( [) )( 1(
0 1. ..
0.
1.
. . . . . .0 1
___
where, z
ijt is the tariff level i of good z (rice, other food, and non-food consumption items), in moment
j (0= before tariff reform, 1=after tariff reform). Si nce this simulation does not imply a change in the
tariff of rice –it is already at 7 per cent — the first term of the right hand side is zero.  The second
term of the right hand side captures the fact that  although most of the household are net consumer of
the good and benefit from the lowering of tariff, some households could be net producers of the good
and lose from the change in tariff.  As indicated for the simulation of a change in the price of rice, by
keeping quantities consumed and produced constant, the calculated change in net income table 4.9underestimates gains — because demand would increase for those goods that are now relatively
cheaper-- and overestimates loses — because production is expected to diminish after the change in
price.  That is to say, by applying the framework described in equation 3, we are obtaining a lower
bound of favorable changes that may affect poor people, and an upper bound for the negative changes.WT/IFSC/W/12/Add.1
Page 94
4.9 Tariff rates for main consumer items
Consumption itemShare in total
consumption, average
for CambodiaCurrent tariff level
%
Rice (all varieties) 15.6 7
Other cereals and preparations (bread, maize, other grains,
rice/wheat flour, noodles, biscuits, etc.)2.6 19
Fish (fresh fish, shrimp, crab, fermented, salted and dried fish,
canned fish, etc)8.9 18(*)
Meat (pork, beef, buffalo, mutton, dried meat, innards) 5.0 35
Poultry (chicken, duck, and other fresh bird meat) 3.2 35
Eggs (duck egg, chicken egg, quail egg, fermented/salted egg, etc) 1.4 33
Dairy products (condensed milk, powdered milk, fresh milk, icecream, cheese, other dairy products, etc.)0.9 33
Oil and fats (vegetable oil, pork fat, rice bran oil, butter,
margarine, coconut/frying oil. Etc)1.3 7
Fresh vegetables (trakun, cabbage, eggplant, cucumber, tomato,
green gourd, beans, onion, shallot, chilli, etc.)4.3 7
Tuber (cassava, sweet potato, potato, traov, jampada, etc.) 1.4 7
Pulses and legumes (green gram, dhall, cowpea, bean sprout, other
seeds, etc.)1.0 7
Prepared and preserved vegetables (cucumber pickles, other
pickles, tomato paste, etc.)0.8 34
Fruit (banana, mango, orange, pineapple, lemon, watermelon,
papaya, durian, grape, apple, canned and dried fruit, etc.)2.8 7
Other fruits and seeds (coconut, cashew nut, lotus seed, peanut,
gourd seed, other nuts)1.2 12
Sugar, salt (sugar, jaggery, sugar products, including candy, and
salt, etc.)1.4 11
Spices and seasoning (fish sauce, soy sauce, vinegar, garlic,
ginger, coriander, red pepper, monosodium glutamate, etc.)1.7 16
Tea, coffee, cocoa 0.8 24.5
Non alcoholic beverages (drinking water, sugar cane juice, syrupwith ice, bottled soft drink, fruit juice, etc.)0.8 35
Alcoholic beverages (rice wine, other wine, beer, whisky, palm
juice, etc.)1.6 35
Tobacco products (cigarettes, mild tobacco, strong tobacco, etc) 2.2 26
Other food products (fried insects, peanut preparation, flavouredice, ice, other food products)1.0 22
Food taken away from home (meals at work, school, restaurants,
snacks, coffee, soft-drinks purchases outside home)2.9 (**)
Prepared meals bough outside and eaten at home 0.8 (**)
Total food 64.0
Textiles and footwear 2.9 28
(*) There is also an export tax of 10 per cent on fish.
(**) The effect is going to be indirect, through the tradable contents of these mostly non-tradable final goods.Source: MOC 2001
294. Table 4.10 presents the results for this simulation.  The lower prices due to tariff reduction
imply and improvement of 4 percentage points in average household purchasing power.  Most of this
impact is coming from reduced prices in food items (3.5 per cent of per capita household
expenditures) and a smaller part from reduced prices on clothing and footwear (0.5 per cent of per
capita household expenditures).WT/IFSC/W/12/Add.1
Page 95
4.10 Effect of reducing Food and Clothing and Footwear tariffs to 7 per cent
Decile (*)
1234 56 789 1 0 a v g
Urban areas
Effect from Food 2.7 2.9 3.7 3.5 3.6 4.1 4.5 4.8 4.6 3.6 3.9Effect fromClothing &
Footwear 0.2 0.4 0.4 0.5 0.4 0.3 0.4 0.4 0.4 0.4 0.4
Total Urban 2.9 3.3 4.1 4.0 4.0 4.4 4.9 5.2 5.1 4.0 4.3
Rural areasEffect from Food 2.8 3.2 3.4 3.4 3.4 3.6 3.8 3.7 3.9 3.8 3.5Effect fromClothing &
Footwear 0.5 0.4 0.5 0.5 0.5 0.5 0.6 0.5 0.5 0.4 0.5
Total Rural 3.3 3.7 3.9 3.9 3.9 4.1 4.3 4.2 4.3 4.2 4.0
Total Cambodia
Effect from Food 2.8 3.2 3.4 3.4 3.4 3.6 3.8 3.9 4.1 3.7 3.5
Effect from
Clothing &Footwear 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5Total Rural andUrban 3.2 3.7 3.9 3.9 3.9 4.1 4.4 4.4 4.6 4.1 4.0
(*) Deciles of per capita adult equivalent consumption.
Source: Model results
Land distribution
295. Land is the only important productive asset and store of wealth for about 85 per cent of
Cambodia people, whose main income is derived from agricultural activities for subsistence and
marketing (Sik Boreak 2000).  Hence, access to land is one key issue in poverty reduction and rural
development (Figueiredo and Walraven 2001).  This simulation assesses the poverty impact of land
distribution.  We simulated that 0.5 has of land is given free of charge to all households engaged infarming and with an operated land size of less or equal to 0.5 has.  About 265000 households are each
receiving 0.5 has of land.
296. The impact on income of 1 extra hectare of land is calculated as the village average net
income per hectare from cultivation activities.  Thus, the net impact on household ij income of
0.5 additional hectares of land was imputed as:
j ij NYCha NetIncome *5.0= ∆
where ij NetIncome∆ is the increase in Net Income of household i that belongs to village j, and j NYCha
is the Average Net Income per hectare from cultivation activities in village j.
297. Average j NYCha  by region is presented in the table 4.11.  In general, it can be said that the
higher the consumption decile, the higher the impact due most probably to a higher use of capital and
modern inputs in production.  The average net income per hectare is 1126 thousands of 1999 riels
(equivalent to U$S 295).
298. This average seems a bit high if the household is only planting rice.  According to the IRRI
study ('Rice production in Cambodia', H.J. Nesbitt Editor, 1997), the net return to family thehousehold factor is about 80 per cent of total revenue for the case of rice.  This means that, if all landWT/IFSC/W/12/Add.1
Page 96
is devoted to rice production, the gross average income per hectare is about 1407000 riels
(=1126000/0.8).  Considering an average of 1.9 tons of paddy rice/ha, this implies a gate price for
paddy rice of about 740000 riels per ton, which is hi gher to the paddy prices that prevailed in 1999
(about 500 000 riels per ton).  The figure of 1126000 riels per hectare is more plausible if one
consider that on average only 73 per cent of the income from cultivation is coming from rice, the
other 27 per cent is coming from other crops, including vegetables and tubers that have a higherincome of riel per hectare.
4.11 Average net income per hectare, by region, in thousands of riels of 1999(*)
Decile
Region 123456789 1 0 a v g
Phnom Penh,
Rural 751 640 812 705 780 765 761 1464 1821 1425 1192
Plain, Urban 1072 866 996 866 992 687 1411 1340 1508 1360 1363
Plain, Rural 944 880 1125 1252 1366 1490 1521 1598 1651 1811 1295
T.Sap Urban 889 780 564 519 772 1226 635 1067 1207 865 958
T.Sap Rural 835 888 961 938 1035 965 867 880 845 734 918
Coastal, Urban 1063 1137 999 1137 1053 958 989 1013 943 969 1005
Coastal, Rural 678 728 763 688 725 783 930 716 643 525 747
Plateau, Urban 640 1063 1091 1111 1814 2399 1318 2545 1603 1453 1648
Plateau, Rural 593 1119 857 1047 1035 996 1181 1164 902 946 1010
Total 875 878 1017 1067 1155 1248 1274 1343 1281 1331 1126
(*) Average net income of farming households with operating farm size between 0.5 and 1.5 has
(**) Deciles by per capita total equivalent consumption.Source:  Model results
(Agricultural Statistics 1999-2000, Statistics Office,  Department of Planning and International
Cooperation, Ministry of Agriculture, Forestry and Fisheries). Table 4.12 presents the number of
households and the number of people affected by the land distribution.  The number of hectares
distributed is 132600 hectares (=number of households  * 0.5).  Table 4.13 presents the impact of this
simulation as a percentage of total household ij consumption, by decile.  Table 4.14 presents the
impact of this simulation only on those households that received the 0.5 hectares of land.WT/IFSC/W/12/Add.1
Page 97
4.12 Number of families and number of people beneficiated by the land distribution
(0.5 has of agricultural land is given to farming households with less that 0.5 ha),
in 000
Decile
Number of families and number of people beneficiated by the land distribution ( 0.5 has of agricultural land is given to
farming households with less that 0.5 ha), in 000
123456789 1 0 T O T A L
Number of families
affected Urban 1 . 20 . 8 11 . 71 . 50 . 91 . 62 . 7 64 . 7 2 2 . 2
Number of families
affected Rural 32.0 27.1 31.2 30. 7 36.1 17.1 25.0 20.8 16.9 6.0 243.0
Total number offamilies affectedUrban + Rural 33.2 27.9 32.2 32.5 37.7 18.1 26.6 23.5 22.9 10.7 265.2
Total number of
people affected 176.8 150.7 141.7 152.4 184.5 84.8 126.3 100.7 96.1 52.2 1266.2
Source:  Model results
4.13 Effect of a land distribution: 0.5 has of agricultural land is given to farming
households with less that 0.5 ha In per cent of per capita household consumption
Decile
123456789 1 0 a v g
Urban 1.5 2.0 2.1 4.0 2.5 2.3 1.4 1.3 1.6 1.6 1.7
Rural 3.5 1.5 2.0 2.3 2.4 1.3 1.9 2.2 1.3 0.9 2.1Female headed
household 6.2 2.5 3.2 5.4 4.7 4.3 1.4 4.1 3.7 0.6 3.9
Male headed
household 2.8 1.4 1.8 1.5 2.0 0.9 1.9 1.6 1.1 1.2 1.7Total 3.4 1.6 2.0 2.3 2.4 1.3 1.8 2.1 1.4 1.1 2.0
(*) Deciles by per capita total equivalent consumption. 0.5 has of land is given to all households engaged in farming
and with an operated land size of less or equal to 0.5 has. The impact on income is then calculated as ½ of the village
average net income per hectare from cultivation activitiesSource: Model results
299. This simulation indicates that, everything else constant a land distribution of 0.5 has to
farmers that currently operate less than 0.5 has of land, raises households' income by an average
amount equivalent to 2 per cent of total household expenditures.  The highest impact is observed in
those female-headed household in the first decile (6.2 per cent).
300. Table 4.14 shows the impact on those households that actually received land.  The average
impact is equivalent to 16.4 per cent of household expenditures, and is bigger for rural areas (16.8 per
cent).
4.14 Effect on per capita consumption in those households that received land
Decile
123456789 1 0T o t a l
Urban 20.7 17.5 8.6 14.9 11.6 14.2 12.1 14.3 12.3 9.0 12.5
Rural 21.5 12.4 16.9 18.3 14.4 15.8 17.9 22.2 12.9 7.0 16.8
Total 21.5 12.5 16.4 18.1 14.3 15.8 17.5 20.9 12.7 7.9 16.4
Source:  Model resultsWT/IFSC/W/12/Add.1
Page 98
9. What have we learned
301. There are several avenues by which poverty can be reduced (that is, the income of the lowest
decile increased) in Cambodia.  This chapter provid ed an assessment of the likely impact of some of
them.  The assumptions involved in each scenario are,  to say the least, strong, but still results provide
a sense of the direction of the likely impact.  Among all the simulations done, the improvement in two
key elements of rice production technology (paddy-to-rice yield and post-harvested losses) in additionto the lowering of transaction costs is expected to provide a strong improvement in the livelihoods of
poor Cambodians, and can be identified clearly as a pro-poor strategy.  Tariff reform (that is setting
all tariffs to 7 per cent) would have a direct effect on consumption of about the same magnitude as the
previous simulation but, there are going to be income effects that were not accounted for that may
cushion the short-term impact of such a reform. Finally, the scenario of land distribution to about
265 000 Cambodian small farmers produced a high impact on those households directly benefited by
the reform.WT/IFSC/W/12/Add.1
Page 99
ANNEXES
A. CAMBODIA :  MEDIUM TERM MACROECONOMIC FRAMEWORK
1. Baseline scenario
(a) Background
302. Cambodia's macroeconomic framework presented he re is consistent with the framework for
the Third Review Under the PRGF approved by the IMF Board of Directors on 18 July 2001
(IMF 2001).  However, its update is underway in th e context of the Fourth Review under the PRGF.
The updated framework would take into account rece ntly revised national account series and the
short-term impact of the deterioration in the wo rld economic outlook since September 2001.  It would
also reflect the government's medium term fiscal stance and reform agenda on military demobilization
and administrative reform, and the expected normalization of relations with bilateral creditors.
303. The baseline scenario is based on the government's outward looking development strategy,
combining public and private investment aimed at improving infrastructure for service delivery and
broadening the export base of agricultural and manufacturing products.  The main assumptions
underlying the baseline are:  i) maintenance of a stable political and security situation;  ii) sustained
implementation of financial policies aimed at a establishing a sound macroeconomic environment;
and iii) timely implementation of a structural reform agenda aimed at fostering resource efficiency.Key quantitative assumptions are specified in table A1.
(b) Growth and inflation
304. Economic growth  is assumed to remain sustained at an annual rate of 6 per cent through 2003
and increase to 6.5 per cent thereafter, when the implementation of crucial structural reforms,
especially in the fiscal and banking areas, is well advanced.  Inflation  is expected to remain below
5 per cent, owing to appropriately restrained fiscal and monetary policies.
(c) Fiscal sustainability
305. Medium term fiscal sustainability critically  hinges upon raising revenue in relation to GDP
and reallocating expenditure from military and security spending toward social expenditure.  Under
the baseline scenario, revenue would increase from 11.8 to 14.0 per cent of GDP by 2006, a level stillmuch lower than countries with comparable income.  Revenue collection efforts in the period ahead
are expected to focus mainly on a broadening of the tax base, and improved tax administration, while
reduced trade-related taxes in context of trade liberalization would be offset by increased excises.  In
parallel, in-depth administrative reform and military demobilization together with enhanced
expenditure management are expected to play a crucial role toward maintaining sustainable fiscalbalances and reorienting expenditure toward the social sectors.
(d) The external environment
Trade — Exports
306. Total exports are expected to decline slightly from 44 per cent of GDP in 2000 to about
38 per cent of GDP in 2006.  Re-exports, accounting for 21 per cent of total export in 2000, are
assumed to decline gradually in relation to GDP throughout the medium term.  The share oftraditional exports (for example, forestry products, rubber and rice) in total exports is assumed to
increase gradually in the medium term, as exports of forestry products are expected to recover
because of the ongoing forestry reform.  Nontraditional exports are anticipated to grow rapidly,
mostly because of garments.  Unrecorded exports are believed to be large; however, the onlyWT/IFSC/W/12/Add.1
Page 100
estimates for unrecorded exports considered in the baseline scenario are those for unrecorded log and
timber products, and rubber products.
307. Following a sharp increase since 1998 in the range of 50-80 per cent annually, garment
exports are projected to grow by 5-7 per cent a nnually, reflecting the global economic slowdown and
tougher competition from neighbouring countries.  Forestry product exports declined drastically
in 2000, largely owing to government's efforts to st rengthen monitoring of illegal logging activities.
For the medium term, it is assumed that log and sawn timber exports will converge to a sustainable
level of production.  Rubber exports and rice surplus exports are projected to remain marginal.
Trade — Imports
308. Retained imports (that is, excluding imports for re-export) account for about 83 per cent of
total imports in 2000; they are expected to decrease from 45 per cent of GDP in 2000 to 39 per cent
in 2006, reflecting, inter alia, the declining oil price path.  The composition of retained imports wouldchange gradually, with increased imports of invest ment goods in line with projected foreign direct
investment flows.
Services and transfers
309. Under the baseline scenario a conservative growth of tourism receipts has been assumed, due
to bottlenecks to tourism expansion (for example, airport and hotel capacity constraints).
Accordingly, tourism receipts  are assumed to grow by 5 per cent from 2004 onward after some
dramatic increases of 10-20 per cent per annum in 2002-03 .  Net private transfers  are assumed to
remain broadly stable in the medium term, while  continued large inflows of official transfers would
be still required.
(e) External balances
310. The current account deficit  (excluding official transfers) is expected to decline gradually from
about 10 per cent of GDP in 2000 to 8 per cent in 2006.  External financing requirements  are assumed
to be covered through a mix of concessional multilateral and bilateral loans together with
rescheduling of existing debt on favorable terms.  FDI would also cover a significant portion ofCambodia's financing requirement, assuming that effo rts to attract foreign investment are successful.
Based on traditional debt indicators as of end 2000 (debt service ratio of 5 per cent of exports of
goods (excluding re-exports) and services, debt stock of 66 per cent of GDP).  Cambodia does not
meet the qualifying criteria for debt relief arrangements under the Heavily Indebted Poor
Countries (HIPC).  However, taking into account  Cambodia's limited payment capacity, the medium
term scenario assumes the completion of rescheduling agreements for outstanding debt on
concessional terms within the context of the Paris Club.  Gross official reserves would increase
gradually from the equivalent of 2.8 months of imports of goods and services in 2000 to 3.6 months
in 2006.
2. Sensitivity analysis
311. The sensitivity of the baseline scenario to selected changes in key trade assumptions is
highlighted below.  Three alternative trade related scenarios have been considered.  However, thedownside risks stemming from the deterioration of security and political situation and policy
implementation slippages that could thwart the medium term outlook are not addressed in this
exercise.
Alternative scenario I  higher growth rate of garment exportsWT/IFSC/W/12/Add.1
Page 101
312. One percentage point increase over the baseline would lead to an improvement of the current
account deficit by 0.5 percentage points to 7.6 per cent of GDP in 2006.  Another possible way of
improving the garment sector's contribution toward  strengthening the external balance would be to
increase the domestic content of garment production through developing domestic inputs to garment
factories.  Since the import content of the garment industry is currently estimated at 65 per cent, a
5 per cent reduction in the import content would reduce the current account deficit by 1.5 percentagepoints, to 6.6 per cent of GDP in 2006.
Alternative scenario II:  higher growth rate of traditional exports
313. Traditional exports accounted for only 6.1 per cent of total exports in 2000.  Accordingly, a
rapid growth of traditional exports would not affect drastically the balance of payments medium termprospects.  For example, a doubling of the annual  growth of rubber exports would only improve the
current account deficit by 0.7 per cent of GDP in 2006.
Alternative scenario III: faster increase in tourism receipts
314. Addressing the airport and hotel capacity constraints would allow for significant increases in
tourism receipts over the medium term.  Assuming a 20 per cent growth of tourist arrivals over
2001-06, tourism receipts would reach about $500 million by 2006, thus improving the current
account deficit (excluding grants) compared with baseline by about 3.7 percentage points of GDP.
Summary
315. The above scenarios are summarized below:
A.1 Current account deficit (excluding official transfers)
Scenarios 2000 2001 2002 2003 2004 2005 2006
% of GDP
Baseline a
Scenario Ib
Scenario Ic
Scenario Iid
Scenario IIIe
a As presented in the Third Review Under the Poverty Reduction and Growth Facility (PRGF) (IMF 2001)
b Assuming a one percent point increase in the growth rates of garment exports over the baseline scenario.
c Assuming a 5 per cent reduction over the medium term in the import content of garment exports, compared to the
baseline scenario.
d Assuming a doubling of the growth rate of rubber exports compared to the baseline.
e Assuming a faster increase in tourism receipts compared to the baseline scenarios (that is, a 20 per cent annual
growth of tourist arrivals over 2001–06 as against 10–20 per cent up to 2003, and 5 per cent thereafter in the
baseline scenario)Source:  IMF staff estimatesWT/IFSC/W/12/Add.1
Page 102
B. CAMBODIAN EXCISE TAXES
B.1 Excise taxes imposed in Cambodia (2000 and 2001)
Product Import tariff rate Excise tax rate Import tariff rate Excise tax rate
Mineral water with sugar
added35 10 35 10
Distilled spirits (brandy,
whisky etc)50 10 35 33.3
Fermented spirits
Beer 35 10 35 10Wine 50 10 35 33.3
Cider 35 10 35 10
Medicated samsu 50 10 35 10Bitters 50 10 35 10Cigar, cigarillos, cigarettesfrom tobacco and substitutes50 10 35 25
Beedies etc 7 10 7 10
Perfume 50 0 35 10Gasoline 50 20 35 33.3Diesel 20 0 15 4.35Petroleum spirits 20 20 5 4Solvents 20 0 15 5
Lubricating oils 20 20 15 25
Motor vehiclesTransport more than10 persons15 10 15 10
Passenger vehicles:
1000-1500cc 30 20 35 15
1500-3000cc 40 20 35 45
3000-4000cc 90 30 35 80>4000cc 120 30 35 110Transport for goods 15 110 15 10Motorcycles<50cc 20 0 15 5
50-125cc 20 0 15 45
125-800cc 20 10 15 45WT/IFSC/W/12/Add.1
Page 103
C. EFFECTIVE TARIFF RATES
C.1 Average effective tariff rate on imports, 2 digit HS headings
Code Description Unweighted
average
nominal tariff
rateImport
weighted
average tariff
rateEffective
tariff rateShare of total
customs
revenueShare of total
imports
22 Beverages, spirits and
vinegar45 35 35 2.3 0.4
46 Manufactures of straw, or of
other plaiting materials;35 35 35 0.1 0.0
02 Meat and edible meat offal 35 35 35 0.0 0.0
27 Mineral fuels, mineral oils
and products of theirdistillation13 23 23 43.8 12.7
95 Toys, games and sports
requisites; parts and
accessories14 30 29 0.5 0.1
20 Preparations of vegetables,
fruit, nuts or other parts of
plants34 26 26 0.3 0.1
87 Vehicles and other than
railway or tramway rolling-stock, and parts and
accessories thereof28 27 19 14.5 5.1
18 Cocoa and cocoa
preparations33 19 19 0.0 0.0
57 Carpets and other textile
floor coverings35 28 19 0.1 0.0
21 Miscellaneous edible
preparations22 19 18 0.3 0.1
33 Essential oils and resins;
perfumery, cosmetics, soap,
washing preparations, etc28 17 17 0.4 0.2
11 Products of the milling
industry; malt; starches;
wheat gluten32 17 16 0.5 0.2
03 Fish and crustaceans,
molluscs and other aquaticinvertebrates18 15 15 0.0 0.0
24 Tobacco and manufactured
tobacco substitutes34 8 7 5.4 5.4
14 Vegetable plaiting materials;
vegetable products notelsewhere specified or
included15 15 15 0.0 0.0
04 Dairy produce; birds' eggs;
natural honey; edibleproducts of animal origin, not
elsewhere specified or
included33 17 15 0.5 0.2
13 Lac; gums, resins and other
vegetable saps and extracts25 15 14 0.0 0.0
61 Articles of apparel and
clothing accessories, knittedor crocheted30 34 18 0.2 0.1
81 Other base metals 7 13 13 0.0 0.0
12 Oil seeds and oleaginous
fruits; etc13 13 13 0.1 0.1
25 Salt; sulphur; earths and
stone; plastering materials,
lime and cement13 15 13 4.4 2.2WT/IFSC/W/12/Add.1
Page 104
Code Description Unweighted
average
nominal tariff
rateImport
weighted
average tariff
rateEffective
tariff rateShare of total
customs
revenueShare of total
imports
37 Photographic or
cinematographic goods15 14 12 0.1 0.1
36 Explosives; pyrotechnic
products; matches;
pyrophoric alloys; certaincombustible preparations24 10 10 0.0 0.0
09 Coffee, tea, maté and spices 16 12 9 0.0 0.0
19 Preparations of cereals, flour,
starch or milk; etc12 9 8 0.8 0.7
06 Live trees and other plants;
bulbs, roots and the like; cut
flowers and ornamental
foliage15 15 10 0.0 0.0
70 Glass and glassware 17 8 8 0.3 0.2
07 Edible vegetables and certain
roots and tubers7770 . 10 . 0
08 Edible fruit and nuts; peel of
citrus fruit or melons7770 . 20 . 2
63 Other made up textile
articles; sets; worn clothing
and worn textile articles; rags25 7 7 3.5 3.3
82 Tools, implements, cutlery,
of base metal13 12 9 0.1 0.1
68 Articles of stone, plaster,
cement, asbestos, mica orsimilar materials18 8 7 0.2 0.2
69 Ceramic products 8 7 7 0.8 0.7
17 Sugars and sugar
confectionery11 7 7 0.8 0.9
29 Organic chemicals 11 7 7 1.7 1.7
44 Wood and articles of wood;
wood charcoal31 34 9 0.0 0.0
74 Copper and articles thereof 13 9 7 0.0 0.0
79 Zinc and articles thereof 7 8 6 0.1 0.176 Aluminium and articles
thereof9760 . 70 . 8
91 Clocks and watches and parts
thereof18 14 9 0.0 0.0
93 Arms and ammunition; parts
and accessories thereof38 17 7 0.0 0.0
78 Lead and articles thereof 10 8 5 0.0 0.0
40 Rubber and articles thereof 18 23 9 0.9 0.715 Animal or vegetable fats and
oils and their cleavage
products; prepared edible
fats; animal or vegetablewaxes7760 . 40 . 5
51 Wool, fine or coarse animal
hair; horsehair yarn and
woven fabric7760 . 00 . 0
85 Electrical machinery and
equipment, electronics etc23 16 7 4.0 3.8
32 Tanning or dyeing extracts;
tannins and their derivatives;dyes, pigments and othercolouring matter; paints and
varnishes; putty and other
mastics; inks21 16 8 0.2 0.1WT/IFSC/W/12/Add.1
Page 105
Code Description Unweighted
average
nominal tariff
rateImport
weighted
average tariff
rateEffective
tariff rateShare of total
customs
revenueShare of total
imports
94 Furniture; bedding,
mattresses, mattress supports,cushions and similar stuffed
furnishings; lamps and
lighting fittings, notelsewhere specified orincluded; illuminated signs,
illuminated name-plates and
the like; prefabricatedbuildings27 24 8 0.5 0.4
45 Cork and articles of cork 27 13 2 0.0 0.0
80 Tin and articles thereof 11 28 0 0.0 0.0
72 Iron and steel 7 7 5 1.2 1.738 Miscellaneous chemical
products8740 . 20 . 2
28 Inorganic chemicals; organic
or inorganic compounds ofprecious metals, of rare-earthmetals, of radioactive
elements or of isotopes7740 . 10 . 1
85 Electrical machinery and
equipment, electronics etc23 16 7 4.0 3.8
32 Tanning or dyeing extracts;
tannins and their derivatives;
dyes, pigments and othercolouring matter; paints andvarnishes; putty and other
mastics; inks21 16 8 0.2 0.1
94 Furniture; bedding,
mattresses, mattress supports,cushions and similar stuffed
furnishings; lamps and
lighting fittings, notelsewhere specified orincluded; illuminated signs,
illuminated name-plates and
the like; prefabricatedbuildings27 24 8 0.5 0.4
45 Cork and articles of cork 27 13 2 0.0 0.0
73 Articles of iron or steel 15 11 4 0.6 1.0
34 Soap, organic surface-active
agents, washing preparations,lubricating preparations,artificial waxes, prepared
waxes, polishing or scouring
preparations, candles andsimilar articles, modellingpastes, 'dental waxes and
dental preparations with a
basis15 8 5 0.3 0.4
42 Articles of leather; saddlery
and harness; travel goods,
handbags and similar
containers; articles of animalgut (other than silk-wormgut)32 29 7 0.1 0.1
92 Musical instruments; parts
and accessories of sucharticles7740 . 00 . 0WT/IFSC/W/12/Add.1
Page 106
Code Description Unweighted
average
nominal tariff
rateImport
weighted
average tariff
rateEffective
tariff rateShare of total
customs
revenueShare of total
imports
84 Nuclear reactors, boilers,
machinery and mechanicalappliances; parts thereof15 15 4 4.8 7.3
31 Fertilisers 0 0 0 0.0 0.2
30 Pharmaceutical products 0 0 0 0.0 2.839 Plastics and articles thereof 10 17 4 1.0 1.848 Paper and paperboard;
articles of paper pulp, of
paper or of paperboard7731 . 02 . 6
82 Miscellaneous articles of
base metal19 24 3 0.1 0.2
23 Residues and waste from the
food industries; preparedanimal fodder9730 . 00 . 1
43 Furskins and artificial fur;
manufactures thereof25 30 4 0.0 0.0
90 Optical, photographic,
cinematographic, measuring,checking, precision, medical
or surgical instruments and
apparatus; parts andaccessories thereof17 8 3 0.3 0.8
67 Prepared feathers and down
and articles made of feathers
or of down; artificial flowers;articles of human hair35 35 4 0.0 0.0
16 Preparations of meat, of fish
or of crustaceans, molluscs or
other aquatic invertebrates32 7 3 0.1 0.2
35 Albuminoidal substances;
modified starches; glues;
enzymes29 16 1 0.0 0.2
54 Man-made filaments 7 7 2 0.3 1.2
89 Ships, boats and floating
structures20 20 3 0.0 0.1
64 Footwear, gaiters and the
like; parts of such articles21 8 2 0.2 0.6
65 Headgear and parts thereof 35 35 3 0.0 0.0
05 Products of animal origin, not
elsewhere specified or
included14 15 1 0.0 0.0
88 Aircraft, spacecraft, and parts
thereof8910 . 00 . 0
49 Printed books, newspapers,
pictures and other products of
the printing industry;manuscripts, typescripts andplans6110 . 10 . 8
10 Cereals 10 9 0 0.0 0.8
96 Miscellaneous manufactured
articles15 7 0 0.1 1.7
56 Wadding, felt and
nonwovens; special yarns;
twine, cordage, ropes and
cables and articles thereof34 34 0 0.1 0.9
62 Articles of apparel and
clothing accessories, not
knitted or crocheted30 35 1 0.1 1.5
59 Impregnated, coated, covered
or laminated textile fabrics;textile articles of a kind22 20 0 0.0 0.1WT/IFSC/W/12/Add.1
Page 107
Code Description Unweighted
average
nominal tariff
rateImport
weighted
average tariff
rateEffective
tariff rateShare of total
customs
revenueShare of total
imports
suitable for industrial use
86 Railway or tramway
locomotives, rolling-stock and
parts thereof; railway or
tramway track fixtures andfittings etc15 15 0 0.0 0.0
01 Live animals 7 2 0 0.0 0.0
58 Special woven fabrics; tufted
textile fabrics; lace; tapestries;
trimmings; embroidery35 35 0 0.1 1.3
50 Silk 7 7 0 0.0 0.0
71 Natural or cultured pearls,
precious or semi-precious
stones, precious metals,
metals clad with preciousmetal, and articles thereof;imitation jewelry; coin42 0 0 0.1 2.4
52 Cotton 7 7 0 0.0 1.4
97 Works of art, collectors'
pieces and antiques0000 . 00 . 0
55 Man-made staple fibres 7 7 0 0.1 15.9
60 Knitted or crocheted fabrics 18 35 0 0.1 9.141 Raw hides and skins (other
than furskins) and leather29 35 0 0.0 0.8
53 Other vegetable textile fibres;
paper yarn and woven fabricsof paper yarn71 2 0 0 . 0 0 . 0
a Effective tariff rate is the ration of customs revenue to value of imports.WT/IFSC/W/12/Add.1
Page 108
D. INVESTMENT RESTRICTIONS
D.1 Sectors with investment restrictions
Industries closed to both foreign and
national investorsRationale Conditions
Manufacture/processing of cultural items Subject to ministerial approval
Sawn timber, veneer, plywood, wood based
products utilising local logs as raw materialsForestry conservation
Toxic chemicals Public health, international treaty
Manufacture of psychotropic substances Public health
Manufacture and processing of narcotic drugs Public health
Manufacture of weapons and ammunitions National security
Manufacturing of firecrackers and fireworks Public security
Manufacturing related to defen ce and security National security
Plantation of medicinal and traditional herbs Reserved for farmer
Native chicken, cattle, buffalo and duck SME policyEndangered fresh water fish Endangered species
Mining of radioactive minerals National security
Industries closed to foreign investment
Genetic resources (biodiversity) Environment protection
Fresh water fishing Reserved for small scale enterprises
Small scale mining Reserved for local people
Industries open with restrictions to foreign
investment
Manufacture of cigarettes Industry protection Only for 100% export
Alcohol Industry protection Subject to ministerial approval
Movie production Subject to ministerial approval
Exploitation of gemstones Local equity participation
Bricks made of clay and tiles Local equity participation
Rice mill Local equity participation
Manufacture of wood and stone carving Local equity participation
Silk weaving Local equity participation
All types of food, fruit crops, industrial crops and
processing industriesPartnership with local farmers
association
Chicken farms - boiler and layer Partnership with local farmers
association
Livestock farms Partnership with local farmers
association
Manufacturing related services
Publishing including newspaper, journals,
periodicals and recorded mediaSubject to discussions with
Ministry of Information and
Ministry of Culture and Fine
Arts
Printing Foreign equity restricted to
maximum of 49%
Service activities related to printing
Radio and television activities
Source:  Royal Government of Cambodia.WT/IFSC/W/12/Add.1
Page 109
E. CAMBODIA 'S CEPT SCHEDULE
E.1 Cambodia's CEPT schedule 2001
Base rate 0 7 15 35 TotalTotal tariff
lines
%% %%%%
Inclusion List
Tariff lines in NT 139 590 1017 257 2003 29.4%Tariff lines in FT 97 767 63 185 1112 16.3%Total 236 1357 1080 442 3115 45.7%Temporary Exclusion List
Tariff Lines 44 1377 828 1275 3524 51.7%
Sensitive ListTariff Lines 0 23 15 12 50 0.7%General Exclusion ListTariff Lines 17 1 13 103 134 2.0%
NT refers to normal track;  FT refers to fast track.  See text for details.
RCG intends to commence transferring goods from the Temporary List to the Inclusion List beginning January 2005.
Source: Ministry of Economy and Finance.
E.2 Cambodia's tariff reduction schedule for AFTA
Base rate Track Year
2001 2002 2003 2004 2005 2006 2007 2010
% %%%%%%% %
7 F 7 6 0–5
N 7 6 0–5
15 F 15 10 0–5
N 15 10 7 0–5
35 F 20 15 10 7 0–5
N 20 15 10 0–5
Source: Ministry of Economy and Finance.WT/IFSC/W/12/Add.1
Page 110
F. DOCUMENTATION PROCESSES
1. Documentation process for garment exports to country requiring proof of Cambodian
origin
316. Preliminary Step — Registration with the Trade Preference Department of MOC.   E v e r y
12 months each garment exporter must register with  the TPD.  Twelve different documents must be
filed with the TPD in addition to details of individual machine output and a description of garmentsproduced. Required documents include photographs of the goods to be produced, copy of registration
with CDC, and a copy of membership certificate of the Garment Association. Each month registered
garment exporters must provide TPD with details of their inventory and imports of raw materials
together with bills of lading.
317. Step One – For each export consignment the Cambodian manufacturer must apply in writing
to MIME for a Certificate of Processing. Ministry officials will inspect the factory to confirm that the
consignment garments are capable of being manufactured in the factory.
318. Step Two – Within four weeks prior to shipping the garment manufacturer applies to the
Trade Preferences Department of the Ministry of Commerce for the necessary document evidencing
proof of Cambodian origin. Based on the garment manufacturer's history of good compliance,
Department officials shall decide whether to visit the factory to assess if the goods intended to be
exported have been, or are about to be, manufactured at the factory. The TPD provides a TEA  in the
same form as the final proof of origin document. The TEA permits the manufacturer to export the
garments described therein to the stated export destination. If details of the eventual consignment
change then a new TEA must be issued.
319. Garment manufacturers require an Export License  (valid for six months) and Certificate of
Origin  if exporting to the EU. The same application form and supporting documents are used by both
the Foreign Trade Department to issue the Licence and the TPD to issue the Certificate of Origin at
the same time. Garment exports under quota to the US require a Commercial Invoice . Garment
exports enjoying GSP access to other destinations require a Certificate of Origin.
320. If raw materials are sourced in ASEAN or the EU then garment exporters to the EU only
require the Licence and certificates from the countries of origin of the raw materials. In practice, theTPD continues to issue a Certificate of Origin for th e EU in addition to an Export Licence in order to
strengthen its defence of Cambodian origin, even t hough this is no longer required by the EU under
the 1999 textile agreement with RGC.
321. Step Three – Before the garments leave the factory premises the garment manufacturer has to
request CED and Camcontrol to inspect the loading of  the consignment into their containers and the
sealing of the containers. Camcontrol issues a Certificate of Quantity verifying the contents of the
consignment. Camcontrol charges 0.1 per cent of the FOB value of the consignment.
322. Step Four – The garment manufacturer prepares the customs export declaration and transports
the containers to Sihanoukville Port. CED and Camcontrol check the sealed containers against the
export declaration to permit loading of the vessel.
323. Step Five – After shipping, the manufacturer must submit the TEA, Bill of Lading, export
declaration and Certificate of Quantity to the TPD in order to receive the Certificate of Origin,Commercial Invoice and/or Export Licence.WT/IFSC/W/12/Add.1
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2. Summary of Draft Law on Industrial Zone — July 2001
324. The following is a summary of an oral translation of the Khmer text of the draft law. The
translation was dictated by a Ministry of Commerce staff member.
• The law establishes a Council of Industrial Zones that is responsible for the
development and management of zones and for operating a one-stop service forinvestors. The Prime Minister is the Chairman and the Minister of Industry is the
Deputy Chairman. Other relevant ministries shall be represented, including theSecretary of State for Commerce. (Articles 6, 8 and 9.)
• A Secretariat shall be established in Phnom Penh managed by a Secretary General
and reporting to the Council. The Council may delegate its executive functions to theSecretariat. (Articles 10 and 11.)
• Zone branches of the Council shall coordinate one-stop services as delegated by the
Secretary General. (Article 12.)
• The functions of the one-stop service centre shall be: (Article 7)
- providing incentives
- issuing work permits, visas, and other permits
- registering land sales and leases
- collecting revenue
- permitting entry and exit of goods.
• There are two types of zone – a general industrial zone and an export processing
zone. Each zone shall have a free trade area (fenced duty and tax free area forpackaging, warehousing and assembly), commercial area (support services) and
accommodation area for employees.  (Articles 4 and 5.)
• Each zone shall be separately defined by sub-decree. (Article 16.)
• The ownership structure of a zone shall be either public, private or a joint venture.
(Article 17.)
• A zone developer shall apply to the Council for approval to develop a zone in
compliance with criteria established by the Council. (Articles 21 and 22.)
• Every building shall comply with the Master Plan.
• The Council shall register all investors in the zone, except financial services subject
to their own legislation. (Article 23.)
• Zone enterprises may trade with the domestic market subject to customs duties and
taxes. (Article 24.)
• An inspection centre will be established in each zone to inspect imports and exports
as necessary. (Article 26.)WT/IFSC/W/12/Add.1
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• Developers and enterprises shall pay a fee according to a sub-decree for this purpose.
(Article 29.)
• Enterprises may select their own workers domestic or foreign. Workers are subject to
the Labour Law and immigration legislation. (Articles 30 and 38.)
• Officials authorized by the Council may im pose fines (to be determined in the law)
and initiate court proceedings. (Article 32.)
• Land may be leased to developer for 99 years. No land transfer or lease tax. Vehicles
used only to carry construction materials into the zone may be duty-free.(Articles 33-35.)
• The general rate of profit tax for zone enterprises is 9 per cent, with 8 year tax
holiday, 5 year loss carry-forward and exempt profits if reinvested or distributed.
(Article 36.)
• Construction material and raw materials are duty free in first year. (Article 41.)
• Capital equipment is duty free. Raw materials duty free to extent that output is
exported.  (Article 37.)
• All imports into an EPZ are duty free without time limit. (Article 42.)
• The rate of profit tax on enterprises in an EPZ is 15 per cent. (Article 43.)
• Natural water purified in the Zone and consumed or exported is free. (Article 39.)
• Council officials and relevant ministry staff can inspect enterprise premises, people
and goods after working hours. All inspections subject to 24 hours notice in writingunless urgent.  (Articles 44 and 45.)
• Persons may be arrested without a warrant.  (Article 46.)
• Investor disputes can be heard firstly by the Council then referred to the courts or
international arbitration.  (Article 47.)
• Investors already receiving Law on Investment incentives may continue to receive
such incentives if relocating to a zone.  (Article 48.)WT/IFSC/W/12/Add.1
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G. HOUSEHOLD EXPENDITURES
G.1 Household expenditures, in per cent of total expenditures, by decile
Decile
123456789 1 0 A v g
Rice 28.4 23.3 22.7 20.7 20.6 18.9 17.5 15.1 12.5 5.8 15.6
Other cer 2.6 2.7 2.8 2.6 2.7 2.9 2.6 2.9 2.9 2.3 2.6
fish 9.9 11.1 10.6 10.5 10.9 10.8 10.0 10.0 9.2 5.0 8.9meat 4.5 4.6 5.2 5.4 5.2 5.3 5.0 5.6 5.6 4.4 5.0poultry 2.9 3.9 3.8 3.6 3.6 3.2 3.7 4.0 3.4 2.2 3.2
eggs 1.5 1.7 1.7 1.8 1.6 1.6 1.9 1.6 1.3 0.8 1.4
dairy 0.4 0.7 0.7 0.7 0.7 1.0 1.1 1.2 1.2 0.8 0.9oil 1.4 1.5 1.5 1.4 1.5 1.3 1.4 1.5 1.3 0.8 1.3fresh veg 5.8 5.2 5.3 5.2 5.2 4.8 4.9 5.1 4.4 2.1 4.3
tuber 1.4 1.9 2.0 1.9 1.9 1.7 1.8 1.7 1.3 0.5 1.4
pulses 0.7 1.2 1.2 1.3 1.1 1.4 1.4 1.3 1.1 0.5 1.0prep vegt 0.7 0.8 0.7 1.0 0.8 1.1 1.0 1.1 0.9 0.4 0.8fruit 3.2 3.0 3.1 3.1 3.0 2.9 2.9 2.9 3.3 2.1 2.8
other fruit 1.1 1.7 1.5 1.7 1.4 1.7 1.4 1.4 1.2 0.5 1.2
sugar etc 1.8 1.8 1.9 1.7 1.7 1.7 1.7 1.6 1.4 0.6 1.4spices 2.1 2.2 2.2 2.1 2.1 2.1 2.1 1.9 1.8 0.8 1.7tea etc 0.4 0.7 0.7 0.6 0.6 0.8 0.8 0.9 1.0 0.7 0.8
non-alco 0.2 0.6 0.5 0.6 0.6 0.6 0.9 1.0 0.9 0.9 0.8
alcohol 1.2 1.3 1.4 1.3 1.7 1.5 1.6 1.6 1.8 1.6 1.6tobacco 3.0 2.6 2.3 2.6 2.3 2.4 2.6 2.3 2.3 1.4 2.2other food 0.4 0.7 1.0 0.8 1.1 1.2 1.3 1.2 1.1 0.7 1.0
away home 1.8 2.4 2.4 2.6 2.8 3.1 3.5 3.6 3.4 2.6 2.9
Prep meal 0.3 0.7 0.4 0.5 0.5 0.6 0.8 1.0 1.1 1.0 0.8Total food 75.7 76.3 76.0 73.7 73.7 72.6 72.0 70.3 64.4 38.6 63.5Total Housing,fuel and transp. 15.7 15.5 15.2 17.1 17.3 17.4 17.5 19.4 24.1 46.7 25.5
Total Clothing 2.9 2.8 3.0 3.0 2.8 3.4 3.4 3.2 2.9 2.3 2.9
Total Otherexpenditures 5.8 5.4 5.9 6.2 6.1 6.6 7.1 7.1 8.6 12.4 8.2TOTAL
EXPEN-
DITURES 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Source:WT/IFSC/W/12/Add.1
Page 114
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