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1. High rural poverty. In Cambodia, 85% of the population lives in rural areas, where the main source of livelihood and income is agriculture. About 73.5% of agricultural workers in rural areas are women. The recent robust economic growth reduced the overall poverty rate from 47.0% in 1997 to 27.5% in 2008. However, the incidence of rural poverty is 35% compared with 22% in urban areas. Rural poor have limited access to basic goods and services. Only about 16% of rural households have effective irrigation systems and only about 25% have access to improved water sources.

2. Agriculture is essential to rural development. Employing 70% of the rural population and accounting for about one-third of gross domestic product (GDP), agriculture is an important source of jobs, enterprise formation, and poverty reduction. However, the sector remains vulnerable to external shocks and unfavorable weather conditions. The potential of the agriculture sector needs to be developed, and investment in sector infrastructure is required to improve productivity and reduce the vulnerability of rural populations to the effects of climate change. Cambodia's agriculture is characterized by lower inputs in terms of fertilizers, machinery, irrigation, and extension services than its neighboring countries. This reflects the low level of private and public investment as well as external financing. Despite significant increases since 1993, Cambodia's rice yield remains the lowest in the region. While agriculture accounts for 59% of all employment, agro-industry provides less than 1% of total employment and accounts for only 1.9% of GDP. Cambodia's share of agriculture value added in GDP has declined since 1993 because of the expansion of the industry and service sectors. The global economic crisis is exacerbating the vulnerability of Cambodia's narrow economic base, which relies heavily on the garment industry, tourism services, and construction. Climate change is having a significant impact on agriculture and natural resources. Improvements in water productivity will likely be vital for Cambodia, because rainfall will be more variable and its spatial distribution will be changed. Better water harvesting, storage, and management will be needed.

3. Rural development is a government priority. Growth in rural areas is a key thrust of the government's development strategy. Much more investment in the sector will be needed to raise agriculture productivity, but line ministries are underfunded and institutionally weak. The government's sector-related strategies and programs target implementing the Rectangular Strategy to promote rural development and help achieve the Millennium Development Goals. The three line ministries that support rural development in Cambodia the Ministry of Rural Development (MRD); the Ministry of Agriculture, Forestry and Fisheries (MAFF); and the Ministry of Water Resources and Meteorology (MOWRAM) are among the most underfunded. This hinders the delivery of services to the poor. At about 11.5% of GDP, government revenue is lower than in other developing countries in Asia (16.0% of GDP). Accurately estimating what portion of public resources goes to rural development or the rural population is very difficult. However, about 3.3% of recurrent budget allocations are provided to the three ministries (known as the rural development ministries), an increase from 0.5% in the mid-1990s. While the level of expenditure has increased from the 1990s, the resources allocated to this sector continue to be insufficient. Spending on agriculture by development partners has also been low, generally about $30 million $40 million of a total of $500 million 600 million (or 5% 7%).

4. Underfunded budgets exacerbate public expenditure inefficiencies. The three program ministries use an incremental approach to planning and budgeting that limits their expenditures to new and predominantly investment projects financed by development partners. They suffer from weak coordination mechanisms within and across ministries, and tend to operate within _policy silos". Despite recent initiatives, such as the joint strategic plan for water and agriculture, policies overlap in many areas. Furthermore, the 2003 and the ongoing 2010 integrated fiduciary assessment and public expenditure review, and the 2007 governance risk assessments of the MRD and the MOWRAM, stressed the need for substantial improvements in the institutions, processes, and capabilities relating to PFM.

5. Public financial management and rural development. Reducing poverty requires appropriate policies and institutions, including the identification of poverty-reducing spending in the budget. At the same time, links with PFM as a major crosscutting agenda need to be strengthened. Sustaining rapid economic growth over the long term will require economic diversification and closer links between the agriculture and service sectors. These include (i) reforms in agriculture; (ii) increases in public capital spending; and (iii) PFM reforms. Therefore, the institutional framework supporting rural development requires sustained support in PFM mechanisms. In an effort to establish an effective and efficient PFM system, the government instituted the multistage Public Financial Management Reform Program (PFMRP). The initial activities targeted strengthening budget credibility, including budget comprehensiveness, and aggregate realism, the budget cycle, cash management and predictability of cash releases (platform 1). Later platforms are intended to address financial accountability, policy based budgeting and accountability for performance. With a 10-year planning and implementation horizon, the PFMRP is being supported through a sector-wide approach with financing from a number of development partners, primarily through a multi-donor trust fund. In the three program ministries, it will be important to build commensurate capacity by prioritizing the rollout of the training program and other measures designed under the PFMRP.

6. Public financial management to support good governance. ADB's support for the PFMRP in rural development is consistent with the priorities of the country strategy and program for Cambodia and ADB's Second Governance and Anticorruption Action Plan, which has PFM and procurement as central themes for improving governance. In addition, to maximize harmonization and government ownership, and to minimize transaction costs, ADB and other development partners are using a sector-wide approach to support PFM. This approach is informed by key lessons from implementing complex PFM reforms in a capacity-constrained environment that requires the gradual introduction of PFM changes. Progress will require long time frames for external assistance given the weak starting points.

7. Synergy and close coordination are required between crosscutting public sector management reform initiatives, such as the PFMRP (financial management), decentralization and deconcentration reforms (restructuring of sub-national administrations), and public administrative reforms (personnel management). Public administration reforms, including attractive pay and other incentives for civil servants, have a strong link with PFM that entails probity and higher-level commitments. These reforms could help Cambodia provide significantly better, more cost-effective and more citizen-responsive public services and programs. The PFMRDP is adopting a phased approach, and provides the groundwork for future decentralization and deconcentration programs in Cambodia.