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LESSONS:

Third Financial Sector Program – Subprograms 1-3: Program Completion Report

sector: Finance | country: Cambodia

Institutional coordination capacity. As the scope of the financial sector expands, there is increased need for consultation, coordination, and consensus building between government ministries and agencies, and with the private sector over issues that include financial stability and crisis management, e-commerce (e-banking), consumer protection, and anti-money laundering (AML) and countering the financing of terrorism (CFT). Coordination will require time and strong leadership to plan and execute policy measures.

Technical assistance (TA). Financial sector development should be based on a sequence of well-planned steps, with each step supported by solid technical inputs. TA is essential in this regard; given the limited availability of ADB funding, strong development partner coordination is essential. The Third Financial Sector Program (FSPIII) experienced positive outcomes resulting from close consultation with development partners whose timely technical inputs enabled completion of policy actions. Also, some initiatives developed by ADB have now been implemented by other development partners

Long-term engagement and trust. A long-term engagement establishes understanding and trust, which is vital for any reform program to succeed but indispensable for the finance sector, where policy actions such as those relating to interest rates or foreign exchange may involve significant externalities. Implementation of FSPIII benefited from the strong relationship that ADB built with government counterparts in over a decade of engagement in the sector. The steps taken and progress made under FSPIII should be viewed as building blocks, which will ultimately need to be assessed from a long-term perspective.

Close coordination among development partners. Some of the policy actions under FSPIII have been supported by TA from other development partners, which can help mobilize increased resources for policy reforms. In addition, involvement of several development partners can create momentum in support of proposed policy actions. However, development partners may have differing time frames for completion of specific actions, which may result in delays in implementation of ADB-supported programs.

Sequential development issues in financial sector. Past reform actions mainly took place within a single subsector (e.g., banking and non-banking, including insurance and pensions). The complex interrelationships among subsectors is a new issue that must be resolved. For example, the insurance sector has grown significantly, and life insurance is a new area of activity. But there are few domestic investment opportunities: there is no treasury bond market and a nascent capital market. The insurance industry and pension funds are both service providers and users of the financial market. Without deep and liquid investment markets, insurance and pensions are not sustainable. From a debt management perspective, external borrowing is not reasonable given opportunities for inexpensive financing. Establishment of a treasury bond market could enable the financial sector to support sustainable economic development, and should be considered by the government. The issue should be discussed through high-level policy dialogue.

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