Financing

This section captures information on finance streams and modalities that the government has identified and activated to advance SDGs, as well as sources of financial flows from non-governmental sources and policies designed to influence the contributions they make toward the SDGs.

Cambodia is undergoing a period of rapid growth in public and private financing, albeit from a low base. This is creating new opportunities to boost direct and indirect investment in the CSDGs.

The 2014–2018 revenue mobilization strategy included several reforms that have significantly boosted Cambodia’s public revenues, and at 20 percent of GDP, Cambodia is a regional leader in revenue generation. RGC is in the process of implementing a long-term programme of reforms to public finance management, under the Public Finance Management Reform Programme 2005–2025.

The government recognizes the important role that private finance will play in achieving the CSDGs. The financial system overall remains relatively underdeveloped, bond markets are nascent, and dollarization levels, among the highest in the world, constrain financial sector development and limit the development of local bond markets. Public borrowing is low and although private sector credit has grown rapidly, there are concerns around growing indebtedness among small businesses. Cambodia has one of the most generous tax incentive programmes in the region and there is the potential to boost the efficiency and targeting of these incentives. In advance of potential natural resource extraction, it will be important to establish proper governance mechanisms to ensure the effective management and collection and use of revenues.

Achieving the CSDGs will require a diverse mix of public and private investments that contribute to national development priorities according to their characteristics. Cambodia is undergoing a period of rapid growth in public and private financing, albeit from a low base. This is creating new opportunities to boost direct and indirect investment in the CSDGs.

Public finance plays a central role in funding services and public investments across the CDSGs. As in most lower-middle-income countries, public resources are limited. This limits funds available to the RGC to deliver services and make new investments that will drive progress towards the CSDGs. The majority of public capital expenditure, for example, is financed externally through concessional lending from international financial institutions and bilateral partners. However, revenues are rising rapidly, and significant progress was made under the 2014–2018 revenue mobilization strategy, which exceeded its objective of raising revenues by 0.5 percentage points of GDP each year. Revenue rose from 14.9 percent of GDP in 2013 to 20.1 percent in 2017, at an average increase of 1.25 percentage points of GDP a year. This was achieved through improvements to tax and non-tax administration, largely without the need to raise tax rates. Continuing the trend of growing revenues, alongside efforts to improve the efficiency of public investment in the CSDGs, will be crucial.

Cambodia has very low levels of public borrowing and public debt is estimated to be equivalent to 21.4 percent of GDP at the end of 2018, down slightly from 2017 and just over half the 40 percent official limit . There may be scope to raise borrowing levels as a mechanism for increasing public SDG investment.

Alongside public finance, the RGC recognizes the important role that private finance has to play in the achievement of the CSDGs . While many forms of private finance – commercial investments, migrants’ remittances and other private flows – may not be expressly motivated by sustainable development, they have significant direct and indirect impacts on the economic, social and environmental objectives set out in the CSDGs. Commercial investment has been a key driver of Cambodia’s ongoing structural economic transition, and has driven growth and job creation, although concentration in construction and a small number of industries, notably the garment sector, remains high. Foreign Direct Investment (FDI) has increased rapidly, rising from less than US$1 billion a year pre-2010 to US$2.8 billion, or 12.55 percent of GDP, in 2017 . China is the largest source of FDI.

Financial markets are still developing. A variety of reasons lie behind this. Cambodia is one of the most dollarized economies in the world: 93 percent of deposits with deposit money banks are in a foreign currency. This is a major constraint on capital market development and also creates systemic vulnerabilities, by severely limiting the influence of domestic policy on monetary conditions and leaves the economy reliant on access to international currencies. The lack of any domestic government borrowing, and domestic bonds, also contributes to financial market underdevelopment. Governments typically play a key role in expanding, depending and lengthening the maturity of domestic financial markets as they are seen as a safe debtor. Yet government borrowing in Cambodia is low and the majority of public debt is foreign, contributing to underdevelopment in domestic financial markets and the lack of a riel bond market.

Nevertheless there has been rapid growth in lending to the private sector, with total credit-to- GDP ratios rising from 31 percent in 2010 to 73 percent in June 2018. Banks account for the majority of lending, although microfinance has been growing rapidly. Growth in credit has the potential to contribute to the CSDGs by supporting investments in strategically important sectors – microfinance supports SMEs across multiple sectors and 10.3 percent of bank loans are in the agriculture, forestry and fisheries sector, for example. Yet, while non-performing loans are currently low – 1.6 percent among microfinance institutions in 2017 – the speed of growth in the comparatively less regulated microfinance sector has caused concerns about the sustainability of rapidly growing indebtedness among small businesses and households that borrow from microfinance institutions.

Looking ahead there is a need to continue stimulating growth and increasing diversity in commercial investment, by attracting FDI and sustainably unlocking further domestic commercial investment, including through financial market deepening. The government has articulated the need to address challenges to competitiveness in areas spanning policy and institutional capacity, infrastructure, skills, access to finance and industrial relations in order to grow the volumes of private financing . There may also be opportunities to unlock greater CSDG impact from commercial actors through policy reforms and the use of newer innovative financing mechanisms.

Remittances from Cambodians overseas are an important feature of the country’s financing landscape. Formal remittances totalled an estimated US$414 million in 2018, although informal remittances are thought to be substantial. While these person-to-person flows are significant in scale, they typically fund consumption expenditure and currently have limited impact beyond the local communities that receive them and the source of foreign exchange that they provide. Nevertheless, there may be opportunities to leverage these flows to raise additional sources of development finance, adapting models such as future flow securitization to the Cambodian context that have been successful elsewhere.

International public finance plays an important, evolving role in the Cambodian context. ODA is declining relative to national income, despite increasing in volume. ODA fell from 6 percent of GNI in 2012 to 4 percent in 2017, although ODA disbursements grew by over US$100 million in 2017 to US$925 million, largely due to growth in ODA loans. Engagement with emerging providers of development cooperation, notably China, has increased in recent years. Looking ahead, the volume and role that ODA plays is likely to evolve further as Cambodia grows within the middle-income group of countries.

A financial needs assessment or costing has not been conducted for the SDGs at the national or subnational levels.

Financing strategy Within the financing context and trends summarized above, a number of opportunities exist to strengthen public and private financing for the CSDGs. This section outlines steps that can be taken to unlock new forms of finance or mobilize greater CSDG impact from existing investments.

1. Revenue mobilization
Building on the successes of the 2014–2018 revenue mobilization strategy , a number of further reforms are planned over 2019–2023. One target is to grow revenue equivalent to 0.3 percentage points of GDP a year through changes to tax policy and further improvements in administration. An excise law and policy are also planned, property taxes will be updated, and personal income tax policy and regulations will be formulated alongside a number of steps to modernize administration within the general directorates of tax and customs and excise. Tax incentives will also be reformed (see below). There may be a number of opportunities for collaboration and capacity-building in a number of these areas.

This would generate new funds that can be invested in advancing the SDGs. The government is exploring opportunities to increase borrowing from domestic markets or through issuing domestic bonds.

2. Public financial management reform and SDG budgeting
The RGC is in the process of implementing a long-term Public Financial Management Reform Programme (PFMRP 2005–2025). The programme is currently in the third of four five-year consolidated action plans and focuses on a fully affordable policy agenda based on stronger linkages between policy and budget. Previous phases of the programme have established, among other things, programme-based budgeting, which was piloted from 2008 and fully rolled out from 2015. Moving forward, the two objectives of ongoing reforms are to strengthen financial discipline and improve allocative efficiency, including a gradual transformation from input-based budgeting to a more output and outcome-based budget system . One aspect of this is the establishment of medium-term fiscal and budgetary frameworks (MTFF and MTBF).

The MTFF will impose overall deficit ceilings (see more on public debt below) as well as broad and sectoral expenditure ceilings while the MTBF will provide more granular budgetary planning, for example breaking down planned capital and recurrent budgets within ministries and provinces. These will be piloted from 2020.

These reforms will also provide a foundation that may allow stronger integration of development assistance with the budget. The government can continue implementing these reforms, with the ongoing support of development partners’ technical assistance to develop the tools to establish and support the rollout of the systems. UNICEF have a long-standing intervention with the Ministry of Economy and Finance to support the PFMRP. This includes inputs on performance-based budgeting, inclusion of policy codes within the accounting system, and development of an M&E framework for the RS IV.

Building on UNICEF’s work and the RGC’s NSDP proposals to align the BSPs with the CSDGs, there may also be opportunities to take forward further reforms, including the adaptation of more explicit models of SDG budgeting to the Cambodian context, such as incorporating CSDGs into financial management information systems including coding for cross-cutting issues, strengthening alignment of budget strategic plans to the CSDGs, publishing a CSDG citizen’s budget, and integrating specific CSDG targets into budget programmes. UNDP’s SDG budgeting toolkit could be used to identify and develop steps to further integrate the CSDGs within Cambodia’s reformed PFM system.

1. Supporting public infrastructure investment and PPPs
Cambodia has had a number of Private–Public Partnerships, particularly in the power sector, though these have been established on an ad hoc basis. A PPP policy was launched in 2016 and a PPP law was adopted recently which will formalize and structure the previously ad hoc approach to PPPs and expand their scope. An interministerial committee has been established to oversee PPP implementation. The committee is supported by a central PPP unit that acts as a secretariat, with assistance by UNCDF. The initial stages of implementation are focusing on the most economically viable projects, those where user fees will be sufficient to cover investment costs without the need for government payments or guarantees. UNCDF has also adopted an MOU to help the development of individual PPPs. Development partners could support the government as it continues to develop and roll out this programme in several ways, providing support for capacity development in the design, negotiation, management and monitoring of PPPs; support for the development of a pipeline of projects, within an infrastructure investment plan linked to the industrial development plan (see above); or support in attracting private capital to PPPs (potentially including participation by MDBs). Enhancing environmental and social inclusion dimensions of these approaches could be an important point of emphasis.

2. Piloting innovative financing mechanisms
A number of models are available for attracting the participation of private finance in public infrastructure and service delivery that could be adapted for Cambodia, some of which have been supported by Cambodia’s development partners in other countries. They include: Development Impact Bonds (DIBs), that leverage private investment and expertise into public service delivery (such as in education, health, employment and skills development) on an outcome basis. More than 100 DIBs have been launched worldwide in a diverse range of countries including others in the Asia-Pacific such as India and the Republic of Korea and other Least Developed Countries such as Mali and Uganda. In many contexts, pilot programmes have been led by development partners in collaboration with the government and can mobilize funds from abroad so do not necessarily rely on a functioning domestic bond market. Impact investment that has been piloted in Cambodia (with UNDP SDG Impact Finance support on housing in the Special Economic Zones) could be rebooted.

3. Tax incentives
Cambodia has one of the most generous tax incentive programmes in the region. In 2015, incentives were estimated to have cost around 3 percent of GDP in foregone revenue, although the contribution they make in attracting investment is not always clear. The government is planning to reform tax incentives with the introduction of a system that tailors incentives by sector and streamlined administration. Cost-based incentives, which can be more effective for targeting specific types of investment, but are more administratively burdensome, will be used in higher value-added sectors, while profit-based incentives will be used in lower value-added sectors. It will be important to develop systems that effectively monitor and report on the revenue foregone under individual incentives and assess the costs and benefits associated to ensure that schemes remain effective over time. This is a priority area and development partners could offer technical support, in the design of SDG-aligned incentives and with the establishment of monitoring and cost–benefit analysis mechanisms.

4. Extractives and mining
Cambodia is a country rich in natural resources, notably oil and gas, that have the potential to bring significant additional revenues in the future. In advance of these new revenues and reflecting on the historic experience in sectors such as forestry, it will be important for government to develop the appropriate governance mechanisms, to ensure accountability, stabilize revenues against price fluctuations and ensure assets are managed effectively to yield long-term benefits from extractive revenues. Mechanisms such as the creation of a sovereign wealth fund can be considered. Development partners may be able to offer assistance in the design and structure of these systems, bringing in experiences from other resource-rich countries. There may also be opportunities to support the development of linkages between the extractives sector and the domestic economy, and to support non-state actors that scrutinize and ensure accountability over mineral wealth management.

The national financial system overall remains underdeveloped and concerns exist in areas such as growing private sector indebtedness (see above) and a lack of appropriate finance instruments. This may limit future investment by firms in sectors that will play an important role in achieving the CSDGs. The Cambodia Bureau of Credit (CBC) can be supported to increase its reach and to strengthen monitoring and coordination. Enhancing supervision by the Central Bank is also a priority, alongside building the capacity to issue and manage bonds. Development partners may be able to offer technical assistance and support developing tools and systems for more effective financial intermediation.

Cambodia’s highly dollarized economy is a constraint to the development of financial and bond markets, which in turn limits financing for private and public investment that can contribute toward the CSDGs. The Cambodian authorities are implementing a gradual approach to promoting de-dollarization. A requirement has been introduced by the National Bank of Cambodia, for example, that banking and financial institutions must have at least 10 percent of their loan portfolio in riels by the end of 2019. A Prakas, which is a regulation issued by a Minister, or by the Governor of the National Bank of Cambodia concerning banking or financial issues, has been issued requiring businesses to post prices of goods and services in riels. And a transfer system enabling faster, cheaper payment in riel is being developed. The development of riel-denominated bond markets will also be important for de-dollarization and the RGC can consider steps such as requiring government transactions to occur in riels. As the government implements ongoing reforms and considers other measures, there may be opportunities to learn from the experiences of other countries that have successfully implemented de-dollarization strategies and for development partners to provide technical support and assistance.