Since 2004, the Royal Government of Cambodia (RGC) has embarked on a large-scale and sequenced Public Financial Management Reform Program (PFMRP) – in the PFM community known as the platform approach - to modernize and harmonize its public financial management systems and practices. One of the key achievements in recent years is the promulgation of the 2023 Public Financial System Law (PFS law). This new law succeeds the 2008 PFS law and enshrines in law a wide range of reform objectives and processes, aligned with international good practice.
The new PFS law, like its predecessor, provides the legal basis and framework for the preparation and execution of the annual budget. The objective of the new law mirrors the objective of the PFMRP, which is “to achieve budget credibility, financial accountability, budget-policy linkages and performance accountability aiming to ensure the efficiency, transparency, accountability and sustainability of public financial management for the support of macroeconomic stability, economic growth and social equity”.
Key budget reforms addressed by the new PFS law are the following:
- Enshrining program budgeting as the appropriation format of the annual Budget Law. The change from input to program budgeting has been ongoing for some time but will now formalized. The budget will be managed by programs, sub-programs and clusters of activities. However, the economic classification will still be used at the program level as well.
- Introducing a medium-term perspective in budgeting. The law requires development, and in due course publication of a Medium Term Fiscal Framework (MTFF) and a Medium Term Budget Framework (MTBF) to guide the development of the annual budget. Line ministry and provincial three-year budget proposals, the so-called Budget Strategic Plans (BSP), are to be more closely aligned with the annual budget preparation process.
- In line with francophone budget methodology, the annual budget will distinguish both commitment and payment appropriations. This will strengthen planning and execution of capital expenditure.
- Increased financial management autonomy for budget entities. Cambodia’s strong ex-ante budget controls will be relaxed to some extent and line ministries will be given more discretion in their budget management. This is done amongst others by relaxing controls on low-risk expenditure and embedding Ministry of Economy and Finance (MEF) financial controllers in the line ministries, as well as by introducing new virement rules. In exchange for the increased autonomy, accountability for performance will be increased including through line ministry performance plans.
- Enhanced budget transparency and oversight. A number of publication requirements were introduced in the law with more demanding time schedules. The budget settlement law for example now needs to be published 12 months after the budget year. In the past it often took several years before the settlement law was published.
There are other note-worthy reforms in the law. Above the line and below the line transactions in the budget presentation are now (mostly) aligned with international good practice. The review powers of the National Assembly are enhanced. Performance information is explicitly included in budget preparation and review processes.
The law also, interestingly introduces a financial reserve. During normal times the government is required to set aside 2-4 percent of total budget resources in a special account. This account can only be accessed by government in times of economic crisis. This innovation basically means that Cambodia now has a formal “Rainy-Day” or Stability Fund, which is quite unique for a developing country which is not an oil or other resource-exporting country. The practice of accumulating financial reserves in good times already existed and served Cambodia well during the COVID-years. This requirement can be characterized as a fiscal rule and will serve to further enhance Cambodia’s excellent fiscal track record.
Other reforms outside the budget area, include a gradual move to accrual accounting for financial reporting purposes and confirmation of cash-based budgetary accounting. The financial management information system is designated as the core and sole IT system for managing fiscal information to avoid line ministries setting up their own automated systems. Furthermore, the law provides an updated legal basis for internal control, internal audit and general inspection.
The PFSL provides for a transition period until the end of 2025 when the Budget Law for 2026 will be appropriated by parliament for the first time in the program format. This landmark law was drafted under the leadership of the Ministry of Economy and Finances. Line ministries, civil society and NGOs were also consulted ahead of the approval of the contents of the PFS draft law by the National Assembly and the Senate. The enactment of a new PFS law was backed by development partners as the full overhaul of the 2008 PFS law reflected the need for a modernized PFM system in Cambodia and was identified as essential reform in the Budget System Reform Strategy (BSRS) 2018−2025. The French Ministry of Economy and Finance has supported the draft PFS law-related work by providing experts to team up with the working group tasked with drafting the new law. This technical assistance was supported by Expertise France and funded by the French Agency for Development.
Is the new law perfect? By no means. On transparency and line ministry autonomy the law could potentially have gone further. Also, many details of the new law still need to be clarified in implementation regulations. However, the big picture is that this new PFS law is a vast improvement relative to the old law and paves the way for a more robust and accountable PFM system in Cambodia, aligned with international good practice and even best practice in some cases.
