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Cambodia

Author(s):
International Monetary Fund
Published Date:
February 2012
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OUTLOOK AND RISKS

1. Growth. The economy has performed well in 2011, but recent floods add to uncertainty (Figure 1). Garment exports rose more than 30 percent, led by robust retail sales in the United States (still the main market) and improved access into the European Union (with exports up more than 60 percent from 2010). Tourist arrivals have continued to expand at a brisk pace, while various indicators, including rising imports of construction materials and a rapid increase in construction approvals point to a recovery of the battered real estate sector. Agriculture was also strong in the first three quarters—rice exports through September tripled under the new rice policy—but recent severe floods have reportedly destroyed 10 percent of the wet season harvest and could shave 1 percentage point off growth. Staff estimate overall growth at 5¾ percent in 2011, but nonagricultural growth at 7½ percent would be the highest in four years. In 2012, overall GDP growth could reach 6½ percent notwithstanding sluggish growth in advanced economies, boosted by the return of agricultural output to pre-flood trends, the ongoing recovery in the real estate sector and still robust garment exports as Cambodia continues to gain market shares from improving cost competitiveness and privileged access to key advanced economies (Table 1).

Figure 1.Cambodia: A Strong Recovery Amid Rising Inflation and Credit Growth

Sources: Cambodian authorities; Bonna Realty Group; and IMF staff estimates.

Table 1.Cambodia: Selected Economic Indicators, 2008–12
20082009201020112012
Prel.
Est.Proj.
Output and prices (annual percent change)
GDP in constant prices6.70.16.05.86.5
(Excluding agriculture)7.0−1.86.77.66.2
Real agricultural output5.75.44.01.27.5
GDP deflator12.32.63.14.13.8
Inflation (end-year)12.55.33.16.14.1
(Annual average)25.0−0.74.05.64.3
Saving and investment balance (in percent of GDP)
Gross national saving15.012.514.413.513.9
Government saving2.8−0.11.11.01.2
Private saving12.212.613.312.512.8
Gross fixed investment19.516.018.523.024.0
Government investment6.38.89.67.67.6
Private investment 1/13.27.28.915.416.4
Money and credit (annual percent change, unless otherwise indicated)
Broad money4.836.820.023.0
Net credit to the government 2/−10.46.20.82.3
Private sector credit55.06.526.633.0
Velocity of money 3/3.43.12.62.6
Public finance (in percent of GDP)
Revenue15.915.817.015.615.6
Of which: Domestic revenue12.511.512.112.412.7
Expenditure15.720.020.018.418.7
Expense9.611.510.811.311.4
Net acquisition of nonfinancial assets6.18.59.27.17.3
Net lending (+)/borrowing(-)0.2−4.2−3.0−2.8−3.0
Net acquisition of financial assets2.7−1.7−0.3−1.0−0.4
Net incurrence of liabilities 4/2.52.52.71.82.6
Of which: Domestic financing−2.61.91.01.00.4
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.3,4932,9963,8844,8035,251
(Annual percent change)7.6−14.229.723.69.3
Imports, f.o.b. 5/−5,076−4,484−5,515−6,919−7,463
(Annual percent change)12.4−11.723.025.57.9
Current account (including official transfers)−468−360−458−1,216−1,428
(In percent of GDP)−4.5−3.5−4.1−9.5−10.1
Gross official reserves 6/2,1642,3672,6533,0803,449
(In months of prospective imports)4.84.44.04.34.4
(In percent of foreign currency deposits)95.277.467.963.5
External debt (in millions of dollars, unless otherwise indicated)
Public external debt 7/2,7762,9463,2063,6113,992
(In percent of GDP)27.028.527.628.128.1
Public debt service5966788090
(In percent of exports of goods and services)1.21.51.41.21.2
Memorandum items:
Nominal GDP (in billions of riels)41,96843,10847,10251,86757,370
(In millions of U.S. dollars)10,35210,41411,255
Exchange rate (riels per dollar; period average)4,0544,1394,185
Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes FDI related to public-private power sector projects.

Contribution to broad money growth.

Ratio of nominal GDP to the average stock of broad money.

Includes funds in transit and payment orders in excess of cash released.

From 2011, includes imports related to public-private power sector projects.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes FDI related to public-private power sector projects.

Contribution to broad money growth.

Ratio of nominal GDP to the average stock of broad money.

Includes funds in transit and payment orders in excess of cash released.

From 2011, includes imports related to public-private power sector projects.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Contribution to Growth, 2004-12

(In percent)

Citation: 2012, 46; 10.5089/9781463939083.002.A001

* Drought in 2004 and flood in 2011.

2. Inflation and credit. Inflationary pressures have steadily increased in 2011 and headline inflation peaked at 6.7 percent in September, driven by higher food and fuel prices and reinforced by strong credit growth, estimated to exceed 30 percent (y/y). Inflation is expected to level off in line with global commodity prices, and would average about 4½ percent in 2012.

3. External position and stability. The current account deficit (including official transfers) is projected at about 9½ percent of GDP in 2011–12, reflecting initially a higher petroleum import bill and strong imports related to private-public investment, notably large hydropower projects (Table 2). However, the current account deficit remains fully financed through broadening foreign direct investment (FDI) and official loans. Gross official reserves rose to US$3 billion in November (an increase of nearly US$300 million since the beginning of the year), equivalent to about 4¼ months of prospective imports. In the absence of signs of adverse pressures on external competitiveness, the riel has remained close to its post-2008 average in real effective terms and is judged to be broadly in line with fundamentals.1

Table 2.Cambodia: Balance of Payments, 2008–16

(In millions of U.S. dollars, unless otherwise indicated)

200820092010201120122013201420152016
Est.Proj.
Current account (including official transfers)−468−360−458−1,216−1,428−1,451−1,170−1,214−1,195
(Excluding official transfers)−1,150−1,059−1,220−1,709−1,716−1,739−1,459−1,502−1,483
Trade balance−1,583−1,488−1,630−2,116−2,212−2,373−2,245−2,436−2,645
Exports, f.o.b.3,4932,9963,8844,8035,2515,8176,5247,3348,228
Of which: Garments2,9432,3632,9953,7534,1644,6665,2916,0086,801
Imports, f.o.b. 1/−5,076−4,484−5,515−6,919−7,463−8,190−8,770−9,770−10,872
Of which: Garments-related−1,193−1,050−1,359−1,726−1,916−2,147−2,434−2,764−3,129
Petroleum−421−414−466−647−658−674−691−729−773
Services and income (net)153138168138169244324386514
Services (net)6276166976857769041,0381,1571,292
Of which: Tourism (credit)1,1011,0821,1801,3001,4371,5941,7691,9662,185
Income (net)−475−477−530−547−608−660−714−771−778
Private transfers (net)281290243269327390462548647
Official transfers (net)682699762493288288288288288
Capital and financial account9834576011,6271,7811,7731,6391,6311,811
Medium- and long-term loans (net)175200278384362317458393393
Disbursements212236322434418389553408441
Amortization−37−36−44−49−56−72−96−109−159
Foreign direct investment 2/7955257621,3321,3191,4071,1811,2381,418
Net foreign assets of deposit money banks 3/695−884−3326110050000
Other short-term flows and errors and omissions−681615−107−15000000
Overall balance51596143411353322468417616
Financing−515−96−143−411−353−322−468−417−616
Change in gross official reserves 4/−535−116−161−427−368−339−485−429−628
Use of IMF credit000000000
Debt restructuring000000000
Accumulation of arrears211918161516161212
Memorandum items:
Current account balance (in percent of GDP)
Excluding official transfers−11.1−10.2−10.8−13.3−12.1−11.2−8.5−7.9−7.1
Including official transfers−4.5−3.5−4.1−9.5−10.1−9.3−6.8−6.4−5.7
Trade balance (in percent of GDP)−15.3−14.3−14.5−16.5−15.6−15.2−13.1−12.9−12.7
Gross official reserves 5/2,1642,3672,6533,0803,4493,7874,2724,7015,329
(In months of next year’s imports)4.84.44.04.34.44.54.54.54.5
Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes imports related to public-private power sector projects.

From 2011, includes FDI related to public-private power sector projects.

Includes unrestricted foreign currency deposits (FCDs) held as reserves at the National Bank of Cambodia (NBC).

Excludes changes in unrestricted FCDs held as reserves at the NBC, and changes in gold holdings and valuation.

Excludes unrestricted FCDs held at the NBC; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes imports related to public-private power sector projects.

From 2011, includes FDI related to public-private power sector projects.

Includes unrestricted foreign currency deposits (FCDs) held as reserves at the National Bank of Cambodia (NBC).

Excludes changes in unrestricted FCDs held as reserves at the NBC, and changes in gold holdings and valuation.

Excludes unrestricted FCDs held at the NBC; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

4. Risks and spillovers. The authorities broadly agreed with the outlook, but were more optimistic on the resilience of agriculture. They concurred with staff that the fragility of the global recovery exposes Cambodia’s narrow export base to significant downside risks.

  • Cambodia is highly sensitive to economic activity in the U.S. and Europe, which account for 70 percent of its garment exports (60 percent of total exports) and the bulk of high-end tourist arrivals. Garment manufacturing and tourism together are forecast to contribute 3 percentage points, or more than one-third, to growth in 2012. On average, a 1 percentage point decline of growth in the United States and Europe would result in about a 1¼ percentage point drop of growth, making Cambodia a relatively “high beta” economy in the region. But the multiplier from a more severe shock could be substantially larger, as in 2009, mainly on account of adverse confidence effects.

  • Financial spillovers are difficult to predict because of data limitations, but they would likely be limited given Cambodia’s relatively underdeveloped financial system and low degree of financial integration. According to BIS data, claims of euro area banks on Cambodian residents amount to less than 0.8 percent of Cambodia’s GDP, compared with an average exposure of about 5½ percent of GDP for Asian economies. Nevertheless, adverse spillovers from turmoil in major global markets could exacerbate domestic financial risks stemming from rapid credit growth and limited banking supervision.

  • A high degree of dollarization—the ratio of foreign currency deposits to total deposits is 95 percent as of October 2011—constrains the effectiveness of monetary policy in cushioning such shocks, leaving fiscal policy as the main tool for safeguarding macroeconomic stability.

  • Severe flooding in Cambodia and Thailand (the leading rice exporter), constitutes a major upside risk to rice prices and hence CPI inflation. A 10 percent increase in rice prices would push Cambodia’s inflation up by 2 percentage points, more than anywhere else in the region.

  • Under the baseline scenario, growth is expected to return to its potential of about 7½ percent over the medium term (Table 3), provided ongoing reforms to improve the business environment and upgrade physical infrastructure, and enhance public sector revenue and service delivery are steadfastly implemented.

  • Cambodia’s current account deficit (including official transfers) would gradually fall to about 5¾ percent of GDP by 2016, broadly in line with tentative estimates of its savings-investment norm, on the back of robust export growth, reflecting further diversification and improved competitiveness, and lower imports of petroleum and construction materials with the completion of large hydropower projects.

Table 3.Cambodia: Medium-Term Macroeconomic Framework, 2008–16
200820092010201120122013201420152016
Est.Proj.
Output and prices (percent change)
GDP at constant prices6.70.16.05.86.56.46.87.47.4
GDP deflator12.32.63.14.13.83.33.23.13.1
Consumer prices (end-year)12.55.33.16.14.13.43.03.03.0
Saving and investment balance (in percent of GDP)
Gross national saving15.012.514.413.513.914.214.715.616.8
Government saving2.8−0.11.11.01.21.62.12.42.7
Private saving12.212.613.312.512.812.612.613.214.1
Gross fixed investment19.516.018.523.024.023.521.522.022.5
Government investment6.38.89.67.67.67.17.87.37.3
Private investment 1/13.27.28.915.416.416.413.714.715.2
Public finance (in percent of GDP)
Revenue15.915.817.015.615.615.916.416.616.8
Of which: Non-grant12.511.512.112.412.713.113.714.014.4
Total expenditure15.720.020.018.418.717.918.518.118.2
Expense9.611.510.811.311.411.611.511.611.6
Net acquisition of non-financial assets6.18.59.27.17.36.37.06.56.5
Net lending (+)/borrowing(-)0.2−4.2−3.0−2.8−3.0−2.0−2.2−1.6−1.3
Net lending (+)/borrowing(-) exluding grants−3.2−8.5−7.9−6.0−6.0−4.8−4.9−4.1−3.8
Net acquisition of financial assets2.7−1.7−0.3−1.0−0.40.10.50.50.5
Net incurrence of liabilities2.52.52.71.82.62.12.72.11.9
Domestic financing, net−2.61.91.01.00.4−0.1−0.5−0.5−0.5
Balance of payments (in percent of GDP, unless otherwise indicated)
Exports (percent change) 2/5.9−16.032.424.49.811.312.712.912.7
Imports (percent change) 3/11.6−12.524.026.28.09.97.111.611.5
Current account balance (including transfers)−4.5−3.5−4.1−9.5−10.1−9.3−6.8−6.4−5.7
(Excluding transfers)−11.1−10.2−10.8−13.3−12.1−11.2−8.5−7.9−7.1
Foreign direct investment 4/7.75.06.810.49.39.06.96.66.8
Net official capital flows 5/7.69.29.26.54.33.54.23.43.2
Overall balance4.60.91.2−1.5−0.23.44.23.02.4
Gross official reserves (in millions of U.S. dollars) 6/2,1642,3672,6533,0803,4493,7874,2724,7015,329
(In months of next year’s imports)4.84.44.04.34.44.54.54.54.5
Public external debt (in millions of U.S. dollars) 7/2,7762,9463,2063,6113,9924,3364,8235,2405,660
(In percent of GDP)27.028.527.628.128.127.928.227.827.2
Public external debt service (in millions of U.S. dollars) 8/5966788090110141165220
(In percent of exports of goods and services)1.21.51.41.21.21.41.61.62.0
Sources: Cambodian authorities; and IMF staff estimates and projections.

Includes nonbudgetary, grant-financed investment, and, from 2011, public-private partnerships in the power sector projects.

Excludes re-exported goods.

Excludes imported goods for re-export; from 2011, includes imports related to public-private power sector projects.

From 2011, includes FDI related to public-private power sector projects.

Net official disbursements, exceptional financing, and official transfers.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

Sources: Cambodian authorities; and IMF staff estimates and projections.

Includes nonbudgetary, grant-financed investment, and, from 2011, public-private partnerships in the power sector projects.

Excludes re-exported goods.

Excludes imported goods for re-export; from 2011, includes imports related to public-private power sector projects.

From 2011, includes FDI related to public-private power sector projects.

Net official disbursements, exceptional financing, and official transfers.

Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

KEY ISSUES FOR THE CONSULTATION

A. Creating And Safeguarding Fiscal Space

5. Developments. Fiscal easing supported aggregate demand during the global crisis with the deficit (excluding grants) rising to over 8 percent of GDP in 2009 (Tables 4 and 5). In 2010, gains in fiscal consolidation were stronger-than-anticipated on buoyant revenue and more aggressive cutbacks in nonpriority current expenditure, and domestic financing was halved to 1 percent of GDP. However, strengthening the fiscal position in 2011 has proven more difficult than envisaged (Figure 2). Progress in enhancing revenue collection appears to have stalled and the revenue-to-GDP ratio stayed broadly at its 2010 level, with full year revenue expected to fall about ¼ percent of GDP short of the budget. Spending pressures related to the recent floods have been appropriately minimized by re-directing about CR200 billion from existing capital spending plans for reconstruction. Nevertheless, with the supplementary 2011 budget calling for additional spending of about CR250 billion, the government deficit (excluding grants) is expected to exceed 6 percent of GDP, ½ percent of GDP higher than implied by the initial budget, while the need for domestic financing will remain sizable (about 1 percent of GDP).

Table 4.Cambodia: General Government Operations, 2008–12 (GFSM 1986)
20082009201020112012 1/
BudgetActualBudgetJan.-Oct.ActualBudget 2/Jan.-Oct.StaffPrel.Staff
Est.Proj.BudgetProj.
(In billion of riels)
Total revenue5,4635,1825,1795,8374,7996,1606,7525,1746,7927,6427,729
Of which: Central government5,1885,0304,8975,6864,5675,8926,4914,8846,4537,3097,314
Tax revenue4,4944,1774,2284,7633,8304,7955,4874,2855,3656,3205,996
Direct taxes6547467449686828001,0448059881,2781,206
Indirect taxes3,5823,3003,2183,6632,9313,7454,2043,2064,0564,7324,398
Of which: Trade taxes1,0871,0329641,0228431,0631,1368571,0781,2411,123
Provincial taxes259131266131217249240274320310391
Nontax revenue7698707507747269048857491,0479891,268
Capital revenue 3/200135201300243461380140380333464
Total expenditure6,7517,4228,8058,3667,7269,6959,8877,3149,88710,57710,959
Current expenditure4,0974,6635,0195,2453,9085,1645,9124,2815,9126,5906,605
Wages1,4381,7302,0572,0921,6182,0832,3161,6372,3162,609
Nonwage2,3112,5772,6652,8822,1202,9193,3642,3513,3643,664
Provincial expenditure347357297271170161232293232332332
Capital expenditure2,6542,7593,7873,1213,8184,5313,9552,9783,9553,9874,354
Locally financed7111,0591,0371,1218561,1111,3557331,3551,1271,127
Externally financed1,9431,7002,7492,0002,9623,4202,6002,2452,6002,8603,226
Overall balance−1,288−2,239−3,627−2,529−2,927−3,535−3,134−2,140−3,094−2,936−3,229
Financing1,2882,2393,6272,5292,9273,5353,1342,1403,0942,9363,229
Foreign (net)2,4231,0392,8412,1502,8973,2492,5522,3162,6372,7693,185
Grants1,4051,0221,8291,2701,9562,3251,6921,4301,6921,6981,698
Loans1,1211571,1251,0301,0581,0641,0401,0211,1251,3211,687
Amortization−102−140−113−150−117−140−180−135−180−250−200
Domestic (net)−1,1351,20078637930286582−17645716744
Bank financing (net)−1,17166473519542125498−17645744
(In percent of GDP)
Total revenue12.712.012.012.410.213.113.010.013.113.313.5
Of which: Central government12.411.711.412.19.712.512.59.412.412.712.7
Tax revenue10.79.79.810.18.110.210.68.310.311.010.5
Direct taxes1.61.71.72.11.41.72.01.61.92.22.1
Indirect taxes8.57.77.57.86.28.08.16.27.88.27.7
Of which: Trade taxes2.62.42.22.21.82.32.21.72.12.22.0
Provincial taxes0.60.30.60.30.50.50.50.50.60.50.7
Nontax revenue1.82.01.71.61.51.91.71.42.01.72.2
Capital revenue0.50.30.50.60.51.00.70.30.70.60.8
Total expenditure and net lending16.117.220.417.816.420.619.114.119.118.419.1
Current expenditure9.810.811.611.18.311.011.48.311.411.511.5
Wages3.44.04.84.43.44.44.53.24.54.5
Nonwage5.56.06.26.14.56.26.54.56.56.4
Provincial expenditure0.80.80.70.60.40.30.40.60.40.60.6
Capital expenditure6.36.48.86.68.19.67.65.77.67.07.6
Locally financed1.72.52.42.41.82.42.61.42.62.02.0
Externally financed4.63.96.44.26.37.35.04.35.05.05.6
Overall balance−3.1−5.2−8.4−5.4−6.2−7.5−6.0−4.1−6.0−5.1−5.6
Financing3.15.28.45.46.27.56.04.16.05.15.6
Foreign (net)5.82.46.64.66.26.94.94.55.14.85.6
Grants3.32.44.22.74.24.93.32.83.33.03.0
Loans2.70.42.62.22.22.32.02.02.22.32.9
Amortization−0.2−0.3−0.3−0.3−0.2−0.3−0.3−0.3−0.3−0.4−0.3
Domestic (net) 4/−2.72.81.80.80.10.61.1−0.30.90.30.1
Bank financing (net) 4/−2.81.51.70.40.10.31.0−0.30.90.1
Memorandum item:
GDP (in billions of riels)41,96843,10843,10847,10247,10247,10251,86751,86751,86757,37057,370
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Revenue projection based on assumption of further enhancement of revenue collection (PFMRP); expenditure based on indicative 2012 budget plan.

Including a supplementary budget set out by the 2012 budget law.

Including privatization proceeds.

The figure is different from the domestic financing figure in Table 5 (GFSM 2001) because of some difference in revenue coverage.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Revenue projection based on assumption of further enhancement of revenue collection (PFMRP); expenditure based on indicative 2012 budget plan.

Including a supplementary budget set out by the 2012 budget law.

Including privatization proceeds.

The figure is different from the domestic financing figure in Table 5 (GFSM 2001) because of some difference in revenue coverage.

Table 5.Cambodia: General Government Operations, 2008–12 (GFSM 2001)
20082009201020112012 1/
BudgetActualBudgetJan.-Oct.ActualBudget 2/Jan.-Oct.StaffBudgetStaff
Est.Proj.Proj.
(In billion of riels)
Revenue6,6686,0696,8066,8076,5128,0238,0645,3838,1049,0078,962
Of which: Non-grant5,2635,0474,9785,5374,5565,6986,3725,0346,4127,3097,264
Tax4,4174,2624,1564,8243,7854,7515,4624,1805,2716,2645,875
Income, profits, and capital gains6547467449686828001,0448059881,2781,206
Good and services2,5842,3932,3482,7442,1802,7923,1922,4252,8903,6253,385
International trade and transactions1,1801,1221,0641,1129221,1591,2269511,3931,3611,284
Grants1,4051,0221,8291,2701,9562,3251,6923491,6921,6981,698
Other revenues 3/8457868227137719479108531,1411,0451,389
Total expenditure6,5917,2868,6378,1147,5169,4199,5437,0789,54310,32610,707
Expense4,0234,6074,9635,1673,8355,0685,8514,1505,8516,5056,520
Compensation of employees1,4601,7762,1032,1461,6612,1352,3791,6862,3792,678
Purchase of Goods & Services1,5171,5391,6971,5941,2721,7421,9541,2441,9542,125
Interest791008612093143140119140143
Expense not elsewhere classified9681,1931,0771,3078081,0501,3791,1011,3791,573
Net acquisition of non-financial assets2,5682,6793,6742,9473,6824,3503,6922,9283,6923,8214,187
Of which: Externally-financed 4/1,9431,7002,7492,0002,9623,4202,6002,2452,6002,8603,226
Net lending (+)/borrowing(-)76−1,217−1,831−1,307−1,004−1,396−1,479−1,695−1,439−1,319−1,745
Net acquisition of financial assets1,145−664−735−195−42−125−498126−494−248−258
Net incurrence of liabilities 5/1,0695531,0951,1129621,2709811,8219451,0711,487
Of which: External1,019171,0128809419248608869451,0711,487
(In percent of GDP)
Revenue15.914.115.814.513.817.015.510.415.615.715.6
Of which: Non-grant12.511.711.511.89.712.112.39.712.412.712.7
Tax10.59.99.610.28.010.110.58.110.210.910.2
Income, profits, and capital gains tax1.61.71.72.11.41.72.01.61.92.22.1
Good and services tax6.25.65.45.84.65.96.24.75.66.35.9
International trade and transactions tax2.82.62.52.42.02.52.41.82.72.42.2
Grants3.32.44.22.74.24.93.30.73.33.03.0
Other revenues 3/2.01.81.91.51.62.01.81.62.21.82.4
Total expenditure15.716.920.017.216.020.018.413.618.418.018.7
Expense9.610.711.511.08.110.811.38.011.311.311.4
Compensation of employees3.54.14.94.63.54.54.63.24.64.7
Purchase of Goods & Services3.63.63.93.42.73.73.82.43.83.7
Interest0.20.20.20.30.20.30.30.20.30.2
Expense not elsewhere classified2.32.82.52.81.72.22.72.12.72.7
Of which: Provincial expenditure0.80.80.70.60.40.30.40.60.40.5
Net acquisition of non-financial assets6.16.28.56.37.89.27.15.67.16.77.3
Of which: Externally-financed 4/4.63.96.44.26.37.35.04.35.05.05.6
Net lending (+)/borrowing(-)0.2−2.8−4.2−2.8−2.1−3.0−2.9−3.3−2.8−2.3−3.0
Net acquisition of financial assets2.7−1.5−1.7−0.4−0.1−0.3−1.00.2−1.0−0.4−0.4
Net incurrence of liabilities 5/2.51.32.52.42.02.71.93.51.81.92.6
Of which: External2.40.02.31.92.02.01.71.71.81.92.6
Memorandum items:
Priority sector spending 6/3.13.43.33.72.73.73.82.43.83.8
Net lending (+)/borrowing(-) excluding grant−3.2−5.2−8.5−5.5−6.3−7.9−6.1−3.9−6.0−5.3−6.0
Domestic financing 7/−2.62.81.90.90.11.01.21.61.00.40.4
Government deposits7.85.95.13.72.9
GDP (in billions of riels)41,96843,10843,10847,10247,10247,10251,86751,86751,86757,37057,370
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Revenue projection based on assumption of further enhancement of revenue collection (PFMRP); expenditure based on indicative 2012 budget plan.

Including a supplementary budget set out by the 2012 budget law.

Including provincial tax and nontax revenue.

Capital expenditure (externally financed) includes a statistical discrepancy arising from the difference between actual and recorded disbursements.

Net incurrence of liability includes a statistical discrepancy arising from the difference between the financing need and the identified available funding.

Current spending by the ministries of public health; education, youth and sport; agriculture, forestry and fishery; rural development; women’s affairs; justice; urbanization and construction; labor and vocational training.

The figure is different from the domestic financing figure in Table 4 (GFSM 1986) because of some difference in revenue coverage.

Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Revenue projection based on assumption of further enhancement of revenue collection (PFMRP); expenditure based on indicative 2012 budget plan.

Including a supplementary budget set out by the 2012 budget law.

Including provincial tax and nontax revenue.

Capital expenditure (externally financed) includes a statistical discrepancy arising from the difference between actual and recorded disbursements.

Net incurrence of liability includes a statistical discrepancy arising from the difference between the financing need and the identified available funding.

Current spending by the ministries of public health; education, youth and sport; agriculture, forestry and fishery; rural development; women’s affairs; justice; urbanization and construction; labor and vocational training.

The figure is different from the domestic financing figure in Table 4 (GFSM 1986) because of some difference in revenue coverage.

Figure 2.Cambodia: Gains in Fiscal Consolidation Prove More Difficult, Fiscal Space Is Limited

Sources: Cambodian authorities; and IMF staff estimates.

6. Discussion. With Cambodia’s prospects for macroeconomic stability resting on prudent fiscal policies, discussions focused on: (i) the fiscal space available to address near-term downside risks and the budget for 2012; (ii) the need for rebuilding fiscal space over the medium-term through revenue measures and for safeguarding space by enhanced monitoring of contingent liabilities; and (iii) improvements under the public financial management reform program (PFMRP) in support of Cambodia’s development needs and inclusive growth.

7. How much fiscal space is left to address downside risks? The staff team cautioned that the fiscal easing in 2009 already used up a substantial part of the fiscal space. In particular, government deposits in the banking system, which serve as an important anchor for stability given their role as a flexible source to finance fiscal stimulus in the absence of a market for government debt and as a backstop to potential financial system fragilities, are running low. In the event of a severe downturn in 2012, with a growth contraction comparable to 2009, automatic revenue stabilizers (and hence revenue shortfalls) mean that deposits would only be sufficient for a discretionary spending increase of 1 percent of GDP (Box 1). The team and the authorities agreed that in light of very limited fiscal space, any fiscal contingency plan will also need to pay particular attention to the effectiveness of spending. Efforts should focus on accelerating high-impact social priority and infrastructure outlays under medium-term development projects, and maximizing synergies with reconstruction of rural infrastructure after the floods.

Box 1.How Much Fiscal Space Does Cambodia Have?

Fiscal stimulus in 2009 has substantially reduced Cambodia’s fiscal space. While public and external debt-to-GDP ratios are elevated relative to pre-crisis levels, government deposits in the banking system have been drawn down substantially from about 8 percent of GDP in 2008 to 4 percent of GDP in 2011. The government deposit buffer is key to macroeconomic stability in Cambodia given the lack of the lender of last resort capacity of the central bank, still frail public confidence in the banking system implying a higher risk of a sudden stop in deposit flows, and its role as a flexible source of government finance in the absence of a market for government securities. The reduction of the fiscal space has very important bearings on Cambodia’s vulnerability, at a juncture where tail risk scenarios continue to overshadow the precarious path of the global economic recovery. Moreover, Cambodia’s high degree of dollarization implies that the scope for countercyclical use of exchange and interest rates as policy instruments is limited.

This box presents the staff’s assessment of Cambodia’s fiscal space. For the exercise, we consider a downside scenario where low real GDP and export growth in 2009–10 are replicated in 2012–13, resulting in a revenue shortfall (defined as a gap from trend) similar to that in 2009.1 Under this scenario, we quantify what would happen to the fiscal space under different discretionary spending options.

  • The government responds to the downside scenario by boosting discretionary spending by 1 percent of GDP in the year of the shock (2012); thereafter, consolidation is as gradual as after 2009, with the increase in domestic financing removed only in 2015.

  • No discretionary spending stimulus, with only revenue-side automatic stabilizers at work.

We draw two main conclusions. First, with a growth contraction comparable to 2009, automatic revenue stabilizers (and hence revenue shortfalls) mean that a stimulus of more than 1 percent of GDP should be ruled out. Both options A and B will lead to the government deposit-to-GDP ratio sliding to less than two standard deviations of past domestic financing needs in 2012, assuming a revenue shortfall in 2012 of 1.3 percent of GDP.2 A gradual withdrawal of stimulus under option A will exhaust government deposits by 2014. Second, downside risks would significantly worsen Cambodia’s external debt sustainability with debt (in NPV terms) rising above 250 percent of revenue. Moreover, such a deterioration of Cambodia’s external debt sustainability would likely coincide with a tightening of concessional funding supply from advanced economies severely hit in a global downside scenario, thereby placing an additional premium on the need to protect the government deposit buffer in the banking system.

Government Deposit in the Downside 1/

(In percent of GDP)

Citation: 2012, 46; 10.5089/9781463939083.002.A001

Sources: Authorities; and IMF staff estimates.

1/ A revenue shortfall is assumed at 1.3 percent of GDP.

1 We first estimate trend revenue and then define the revenue shortfall as a gap between trend and actual. The estimated revenue shortfalls are in a range between 0.5 to 1.3 percent of GDP, depending on filtering methods.2 The standard deviation (over 1995–2010) represents a simple statistical measure of the level of deposits required to withstand financing shocks based on historical data.

8. 2012 budget. The mission welcomed the consolidation envisaged in the 2012 budget as an important step toward rebuilding fiscal space. The authorities are committed to expenditure restraint by keeping the ratio of current spending to GDP below 11½ percent of GDP and unchanged from 2011, and to plans for significant revenue administration enhancements yielding about ½ percent of GDP. As a result, domestic financing and thus the drain on government deposits will be substantially reduced, while the fiscal deficit (excluding grants) would be reduced to about 5¾ percent of GDP. In the event that revenue collection falls short of budget targets, the authorities indicated they would consider unwinding cuts in petroleum import duties in early 2011 to offset higher global fuel prices, raising “sin taxes,” and speeding up collection of tax arrears.

9. Rebuilding fiscal space through revenue measures. Staff recommended a medium-term consolidation path that would avoid undue external and inflation pressures, and rebuild domestic and external fiscal buffers, which would enable Cambodia to bolster its low risk-of-debt distress rating, and strengthen its ability to absorb future shocks (Joint IMF/World Bank Debt Sustainability Analysis 2011). Under this path, a reduction in the deficit (excluding grants) to slightly under 4 percent of GDP in 2016, replenishment of government deposits in the banking system, and a reduction of public external debt to the pre-crisis level of 27 percent of GDP by 2016 would be achieved mainly by an increase in the ratio of tax revenue to GDP (on average by about ½ percent of GDP per year, consistent with commitments under the public financial management reform program). There was broad agreement that improving the productivity of Cambodia’s tax system was key to this plan. Staff estimate that the gap to potential revenue that could be closed by strengthened tax administration amounts to about 3–5 percent of GDP (Country Report No. 11/45, Box 1). However, the team cautioned that strong and continued efforts will be required by revenue collecting agencies, including enforcement of measures adopted since the previous consultation to enhance taxpayer compliance and education, and improve governance within agencies. Trade liberalization commitments will create additional pressures to generate revenue from domestic taxes. While current plans to strengthen revenue administration are ambitious but realistic, consideration may therefore also need to be given to strengthen direct taxation and enhance buoyancy including by reducing incentives. The IMF stands ready to provide further TA both in the areas of revenue administration and tax policy design.

10. Safeguarding fiscal space through enhanced monitoring of contingent liabilities. The team noted that rapidly growing contingent liabilities, if not managed carefully, could set back efforts at creating fiscal space. The government’s power generation expansion plan envisages completion of 35 projects under public-private partnerships (PPP) by 2020 with a total investment cost outside the government’s capital budget of US$5.4 billion, or about 50 percent of 2011 GDP. Contracts covering about half of the investment plan have already been signed. The risks for the government by providing take-or-pay guarantees may seem small in light of existing electricity shortages and conservative demand forecasting scenarios underlying these projects. However, the sheer size of these projects, and the fact that risks for complex infrastructure projects are difficult to quantify ex ante, call for continuous and careful monitoring, as they could severely curtail the fiscal room for maneuver, in particular in the event of adverse economic shocks when contingent liabilities are also more likely to be triggered (Joint IMF/World Bank Debt Sustainability Analysis 2011). The authorities agreed with this assessment and noted significant progress in designing a public debt strategy and the creation of a high-level government committee on public debt management. They welcomed staff’s suggestions to build on these new institutional arrangements to enhance the monitoring of risks related to PPP projects and close important gaps in the current framework: These include setting up a central PPP monitoring unit to evaluate all planned projects with “gateway powers” to ensure only sound projects and procurement options are chosen consistent with the public investment strategy, promoting greater transparency of contingent liabilities in the budget law, and strengthening the legal framework with respect to competitive bidding and dispute resolution mechanisms.

11. Using fiscal space effectively. There was broad agreement that further progress under the government’s public financial management reform program (PFMRP) will also be important to ensure that greater fiscal space is used effectively. The team welcomed progress in the areas of cash management, budget classification, and technical preparations for the government’s financial management information system (FMIS). Key challenges ahead include a commensurate capacity build-up, interdepartmental coordination, and the provision of adequate funding for the FMIS.

B. Taking Basic Steps Toward Greater Monetary Independence

12. Developments. The NBC’s influence on monetary conditions remains very limited. In the absence of a formal monetary framework, market-based instruments and an interbank market, the NBC continues to use the exchange rate vis-à-vis the U.S. dollar as an effective nominal anchor and has sporadically intervened over the past year, mainly to smooth seasonal demand and supply fluctuations. Official reserves have risen as banks have placed part of foreign currency returning to the system during the recovery with the NBC. But while dollarization has remained stubbornly high, the ratio of official reserves to foreign currency deposits has steadily declined, as credit growth has accelerated and the NBC kept reserve requirements at their post 2009 crisis lows (Table 6 and Figure 3).

Table 6.Cambodia: Monetary Survey, 2008–11
2008200920102011
Dec.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.
Proj.
(In billions of riels)
Net foreign assets10,34614,65515,51516,48216,90316,69817,07918,10017,69518,045
National Bank of Cambodia10,77613,26213,94514,89315,16014,98215,05216,16515,68416,211
Foreign assets10,77613,71014,38015,32115,61115,41015,48816,61616,12116,656
Foreign liabilities0448435428451428436452437446
Deposit money banks−4311,3931,5701,5891,7431,7152,0271,9352,0111,835
Foreign assets2,1102,8042,9903,1673,3833,5084,1364,2984,4464,207
Foreign liabilities2,5401,4111,4201,5781,6411,7922,1092,3632,4352,373
Net domestic assets1,5131,5731,7201,7851,9852,7793,1993,9084,9625,904
Domestic credit6,9078,2808,6629,49810,36111,20611,65813,10814,46116,063
Government (net)−2,987−2,252−2,485−2,363−2,120−2,127−2,253−2,184−1,926−1,670
Private sector9,89310,53211,14711,85912,48013,33113,90915,29116,38617,731
Other items (net)−5,394−6,707−6,942−7,713−8,377−8,428−8,459−9,200−9,500−10,159
Broad money11,85916,22817,23518,26718,88819,47720,27822,00822,65723,949
Narrow money2,4003,1203,1483,1153,0623,2213,4973,5403,6813,794
Currency in circulation2,2953,0023,0282,9422,9173,0993,3833,3383,5313,643
Demand deposits105119121173145122114202150151
Quasi-money9,45913,10814,08615,15215,82616,25616,78118,46818,97620,155
Time deposits185359330365431408392430493572
Foreign currency deposits9,27412,74913,75614,78715,39515,84816,39018,03818,48219,583
(12-month percentage change)
Net foreign assets−3.641.738.330.721.913.910.110.37.48.1
Private sector credit55.06.513.617.123.226.624.828.931.333.0
Broad money4.836.838.031.826.720.017.723.524.023.0
Of which: Currency in circulation15.330.822.813.09.73.211.79.220.017.6
Foreign currency deposits1.537.541.135.430.524.319.126.425.023.6
(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets−3.436.334.427.920.312.69.19.56.66.9
Net domestic assets8.30.53.63.96.37.48.614.017.416.0
Domestic credit20.711.615.216.318.118.017.423.827.224.9
Government (net)−10.46.24.53.82.30.81.31.92.42.3
Private sector31.05.410.712.515.817.216.021.924.822.6
Other items (net)−12.4−11.1−11.5−12.4−11.8−10.6−8.8−9.8−9.8−8.9
Memorandum items:
Foreign currency deposits (in millions of U.S. dollars)2,2733,0733,2863,4993,6393,9104,0874,3794,5264,849
(In percent of broad money)78.278.679.880.981.581.480.882.081.681.8
Riel component of broad money2,5843,4793,4793,4803,4923,6293,8893,9704,1744,366
(In percent of broad money)21.821.420.219.118.518.619.218.018.418.2
Credit to the private sector (in millions of U.S. dollars)2,4242,5382,6632,8062,9503,2893,4693,7124,0124,390
(In percent of GDP)23.619.820.721.923.025.627.028.931.234.2
Loan-to-deposit ratio (in percent) 1/103.580.178.277.278.681.382.582.686.687.5
Velocity 2/3.43.12.82.72.62.62.82.72.72.6
Money multiplier (broad money/reserve money)1.91.91.91.81.81.92.02.02.12.2
Reserve money (12-month percent change)21.643.342.929.622.817.210.08.43.57.5
Sources: Cambodian authorities; and IMF staff estimates and projections.

Foreign currency loans and deposits only.

The ratio of nominal GDP to the year-to-date average stock of broad money.

Sources: Cambodian authorities; and IMF staff estimates and projections.

Foreign currency loans and deposits only.

The ratio of nominal GDP to the year-to-date average stock of broad money.

Figure 3.Cambodia: A Rapidly Growing Financial System

Sources: Cambodian authorities; and IMF staff estimates.

13. Discussion: role of policy normalization. The staff team argued that steps should be taken now to normalize monetary conditions, consistent with the robust economic expansion. Gradually raising reserve requirements amid strong growth would strengthen perceptions about the NBC’s commitment to price stability. Keeping reserve requirements low for too long could also pose financial risks in light of the still sizable liquidity overhang in the banking system by inducing banks to unwind excess liquidity faster and making adjustment more difficult when the stance is changed. In the event of an adverse global economic shock, there is scope to recalibrate the pace and timing of monetary normalization. Reserve requirements on foreign currency deposits should be raised more than on riel deposits consistent with the long-term objective of promoting the use of the local currency. The authorities shared the teams’ assessment of the monetary stance and reiterated their commitment to low inflation by noting that an interministerial working group had been set up earlier in 2011 to monitor inflation developments, but preferred to move more cautiously in normalizing monetary conditions. In the view, potential financial risks were tempered to the extent that rapid credit growth was fueled by lending to agriculture with attendant diversification benefits.

14. Role of enhancing the monetary framework. There was agreement, however, that heightened downside risks also required greater efforts at enhancing the monetary policy framework. In this regard, the team supported the swift completion of technical preparations of securitizing central bank deposits. Used as collateral, such securities could play a critical role in facilitating the creation of an interbank market, allowing banks to more easily manage both riel and dollar liquidity at a time when global financial uncertainty is on the rise. The team encouraged the NBC to publish more frequent and up-to-date data and analysis on monetary and credit developments on its website, which would contribute to better informed decisions by market participants. Regularly sharing information with the National Treasury on government cash flows would be critical for the NBC to enhance its liquidity monitoring. There was agreement that progress in all these areas would not only help reduce uncertainty, but also create space to pursue carefully sequenced steps to enhance Cambodia’s monetary framework consistent with the national strategy of strengthening the free flow of the riel.

C. Managing Financial Deepening

15. Developments. Cambodia’s financial system is rapidly changing, reinforcing old and creating new challenges to safeguarding financial stability. At the same time, progress in implementing high-priority 2010 FSAP recommendations is uneven (Table 7). A higher minimum capital requirement for banks was implemented as scheduled and noncompliant banks are being dealt with, and the NBC has continued to upgrade its supervisory capacity. At the same time, the launch of a credit bureau in early 2012 will enable banks to better manage credit risks. However, work on key elements of a crisis management framework remains to be initiated and agreements on the delineation of responsibilities among different supervisors are still pending. Coordination has become even more critical after the launch of the Cambodian stock exchange in July 2011. Although there are no listings yet and transactions are allowed to be settled in U.S. dollars for a transition period of three years, the stock market will eventually boost foreign exchange transactions and therefore also requires upgrading Cambodia’s shallow foreign exchange market. Finally, based on recent onsite inspections, efforts at enforcing existing standards for reliable data, including for stricter asset classification and provisioning, will only gradually improve the accuracy of standard financial soundness indicators, which may still substantially underestimate credit and solvency risks (Table 8).

Table 7.Cambodia: Key 2010 FSAP Recommendations
RecommendationTimeframe 1/Status
General Stability
  • Improve the quality of data to enable an appropriate assessment of risks, and to enhance the reliability of stress tests, including through strengthening supervision; and collecting additional credit-related information.

Short-termIn process
  • Ensure that banks retain an appropriate level of liquid assets to be able to meet short-term obligations by enforcing existing regulations.

Short-termIn process
  • Upgrade law to formalize delineation of responsibilities among supervisors, and establish procedures, through MOUs, for practical information exchange, coordination and accountability among domestic supervisors (NBC, MEF, SECC), and with foreign supervisors.

Short-termInitiated but

not concluded
  • Upgrade both the number and capacity of staff in the areas of banking, insurance, securities and payment system supervision; develop training programs for financial institutions on accounting, corporate governance, risk management, and for the external audit profession.

Medium-termIn process
  • Develop and implement a strategic plan to address the conflicts and overlaps in the financial sector legal and regulatory framework.

Medium-termNot Initiated
Supervision and Regulation
Banking
  • Develop supervisory strategy to deal with banks that cannot meet the new capital requirement.

Short-termDone
  • Conduct comprehensive upgrades to the legal framework.

Short-termNot Initiated
  • Reprioritize the work performed by the staff to facilitate forward-looking, risk-based supervision.

Short-termIn preparation
  • Impose a moratorium on the issuance of new bank licenses as long as supervisory capacity and resources remain inadequate.

Short-termBeing

considered
Non-Bank Financial Sector
  • Revise capital regulations in concert with liability, investment and accounting rules to better reflect the risks in a growing insurance market.

Short-termDone
  • Enhance powers for intervention, corrective measures and enforcement.

Short-termIn preparation
  • Conduct a readiness study prior to the launch of the stock exchange.

Short-termIn preparation
Access to Finance
  • Enhance supervisory practices to keep pace with the development of microfinance deposit-taking institutions, and impose a moratorium as long as supervisory capacity and resources remain inadequate.

Medium-termNot Initiated
Crisis Management Framework
  • Revise PCA framework by developing additional triggers for asset quality, liquidity, and earlier intervention based on the solvency ratio.

Medium-termIn process
  • Introduce regulation allowing banks to use their fixed deposits at the NBC and any issue of government (including government bodies) or government-guaranteed securities as eligible collateral for interbank and NBC repos.

Short termNot

Implemented
  • Develop a crisis management framework.

Medium-termIn preparation
Transparency of Monetary and Financial Policies
  • Introduce due process for the dismissal of NBC Board members and the Governor by specifying the legal grounds for doing so, and defining an appeal process.

Medium-termNot Initiated
  • Amend the law to reduce the government’s representation on the Board of the NBC; and to reflect the practice of appointing two Deputy Governors.

Short-termNot Initiated
Corporate governance of banks
  • Draft and/or implement banking regulations on internal audit and controls, risk management, and compliance functions at banks.

Short-termIn preparation
AML/CFT
  • Introduce new rules measures for conducting overall AML/CFT risk assessments and risk profiling of financial institutions.

Short-termNot Initiated
Source: IMF staff.

Short term: up to one year; medium term: one–three years.

Source: IMF staff.

Short term: up to one year; medium term: one–three years.

Table 8.Cambodia: Core Financial Soundness Indicators (FSIs), 2008–11

(In percent)

2008200920102011
Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.Dec.Mar.Jun.Sep.
Capital-based FSIs
Regulatory capital to risk-weighted assets27.632.433.134.232.331.531.331.531.431.229.027.5
Regulatory tier 1 capital to risk-weighted assets27.732.837.234.833.032.632.733.332.632.129.527.7
Nonperforming loans net of provisions to capital5.97.97.79.14.74.85.05.33.43.64.24.7
Return on equity 1/12.45.24.52.23.95.15.23.15.48.28.45.0
Net open position in foreign exchange to capital0.90.90.94.21.32.94.64.42.02.92.73.4
Asset-based FSIs
Nonperforming loans to total gross loans2.94.34.95.73.94.14.24.22.92.93.03.0
Return on assets 1/2.71.11.00.50.91.11.10.71.21.81.81.1
Liquid assets to total assets14.215.416.219.819.416.118.017.618.017.917.919.0
Liquid assets to short-term liabilities30.635.042.050.226.822.124.624.525.225.225.327.0
Sectoral distribution of loans to total gross loans
Residents94.495.197.894.795.091.792.191.891.891.090.891.1
Deposit-takers3.83.54.55.96.56.66.14.04.43.94.74.9
Central bank0.00.00.00.00.00.00.00.00.00.00.00.0
Other financial corporations0.00.00.00.00.00.00.00.00.00.00.00.0
General government0.00.00.00.00.00.00.00.00.00.00.00.0
Nonfinancial corporations70.672.474.471.371.168.969.272.472.372.271.371.1
Other domestic sectors20.119.318.917.517.516.216.815.415.114.914.815.1
Nonresidents5.64.92.25.35.08.37.98.28.29.09.28.9
Income- and expense-based FSIs
Interest margin to gross income48.367.066.464.160.868.967.867.962.267.764.963.3
Noninterest expenses to gross income64.265.466.965.464.265.362.961.263.256.857.555.8
Source: National Bank of Cambodia

Annualized.

Source: National Bank of Cambodia

Annualized.

16. Discussion. In coordination with ongoing TA efforts and guided by the FSAP recommendations, discussions led to broad agreement in the way forward to address the key challenges of building a deeper financial system in support of Cambodia’s development while safeguarding financial stability.

  • Moratorium on bank licenses. While the 2010 FSAP recommended a moratorium on new bank licenses for as long as supervisory capacity remains relatively limited, Cambodia continues to witness a rapid influx of new banks (Box 2). In addition to stretching supervisory capacity too thin, the staff team argued that the proliferation of banks has made Cambodia “overbanked.” The current degree of concentration and fragmentation poses risks to financial stability, while not delivering sufficient benefits from competition and innovation. Given the long shadow of Cambodia’s financial history, even a small institution can have a large impact on public confidence in the wider system. The authorities saw merit in the staff’s assessment and are considering ways to impose a moratorium consistent with their commitment to a sound banking system and stable growth.

  • Developing a foreign exchange market. The current foreign exchange market is thin, cash-based, and dominated by money-changers, and even small stock market transactions could lead to disruptive supply and demand imbalances. The transitory settlement option in U.S. dollars addresses this concern without foregoing Cambodia’s long-term objective of de-dollarization. However, there was broad agreement on the need for a roadmap (supported by ongoing TA from the IMF) toward an effective wholesale foreign exchange market that is noncash based and open to banks and major nonbank financial institutions. Staff noted that consistent with enhancing the monetary policy framework, the NBC could gradually step back from the market by dealing less with retail money changers and more with banks, while also allowing some flexibility in the exchange rate to afford the market a chance of clearing itself.

  • Making financial system supervision forward-looking and comprehensive. Given the absence of financial safety nets and the fact that Cambodia’s high degree of dollarization severely curtails the NBC’s lender-of-last-resort capability, staff welcomed progress in enhancing the prompt corrective action framework. However, staff expressed concern about the lack of progress in agreeing on memoranda of understanding (MoUs) between the NBC, the Ministry of Economy and Finance (MEF) and the Securities and Exchange Commission of Cambodia (SECC) on shared responsibilities, and to establish procedures for information exchange and bank resolution. The authorities agreed with the team’s recommendation and since the discussions have begun to set up working groups be established with representatives from all supervisory agencies to jointly prepare MoUs. They welcomed the offer of IMF TA to these working groups.

Box 2.Bank Competition and Financial Stability1

Cambodia’s banking system is liberalized, dollarized, and bimodal—a few large banks and a large number of small banks. The financial system has a large presence of foreign banks, accounting for more than two-thirds of the banks and half of total deposits.

The number of banks in Cambodia has grown rapidly in recent years. doubling since 2005, which has implications for bank competition and financial stability. Notwithstanding the limited financial access, Cambodia appears to be “overbanked” compared to developmental peers and regional neighbors, including countries with substantially higher income levels and much larger and well-developed financial systems.

Share of Deposits by Banks

(In percent of total deposits)

Citation: 2012, 46; 10.5089/9781463939083.002.A001

Number of Banks per $Billion of Credit

An “overbanked” financial system does not necessarily imply a competitive banking system. In Cambodia, for example, it does not seem to have led to any visible decline in interest spreads. The economic literature shows competition in the banking industry, unlike other industries, is less related to the number of banks but more to the quality of supervision and transparency in the banking system. In fact, the proliferation of banks can weaken financial stability, including through encouraging excessive risk-taking behavior by banks, limiting scope for diversification, and overburdening supervisory capacity. A higher number of banks, even after controlling for relevant variables, has been found to be negatively associated with measures of bank competition across countries (Claessens and Laeven, 2004).

Improving the efficiency of the banking sector needs to take account of the local conditions and risks. Since most of the banks in Cambodia operate in urban centers (mostly Phnom Penh) and offer a limited range of products, scope for diversification appears limited for the time being. The presence of a large number of small banks can also complicate the nascent monetary transmission channel in Cambodia, as is common in many developing countries. Any aggressive expansion plans by the large number of banks in an increasingly complex financial system can stretch the supervisory capacity, chiseling away the benefits from supervisory upgrades.

In light of the above, financial stability risk management in Cambodia would particularly benefit from addressing the following structural factors: (i) quality of banking regulation and supervision; (ii) absence of an interbank market, which hampers risk sharing and liquidity management; (iii) high level of dollarization (i.e., limited role of the central bank as a lender of last resort); (iv) limited foreign exchange reserves.

1 The notion of “overbanking” here does not refer to financial penetration (i.e., financial access, currently at 10 percent, is low in Cambodia) but rather to the “density” of banks (i.e., the number of banks for a given level of credit, economic activity or population, as used in the literature, see Claessens and Laeven (2004)).

D. Building Foundations for Stronger Growth

17. Developments. After steadily rising for about 10 years from the mid-1990s, Cambodia’s potential growth appears to be slowing, suggesting that early productivity gains and marginal returns to investment are diminishing (Figure 4). At the same time, Cambodia’s economic base remains narrow. The textile sector dominates manufacturing and accounts for about 80 percent of all exports. Tourism, the second largest source of foreign exchange earnings, is still dominated by increasing visitor numbers to a single destination, Angkor Wat. Cambodia continues to rank low with regard to important determinants of private investment. But it is geographically close to the world’s fastest growing markets, and economic rebalancing in Asia—including China—offers potential for future growth from exports to new markets and inward investment as Cambodia begins to integrate into the Asian supply chain. In fact, recent FDI trends and anecdotal evidence point to a nascent diversification of investors beyond the garment sector.

Figure 4.Cambodia: Drivers of Growth

Sources: Cambodian authorities, International Transparency, UN COMTRADE, the World Bank WDI, and IMF staff estimates.

18. Discussion. Against this background, discussions focused on removing impediments to investment. The staff team noted that recent initiatives to improve the business environment and address infrastructure bottlenecks hold the promise of lifting Cambodia’s relatively low investment rate, and diversifying the investor base (Box 3). However, it will be important that specific measures, such as the Anti Corruption Law and the government’s rice policy to promote rural development be implemented. The authorities concurred that further budget prioritization, in support of critical infrastructure investment, will also be key in crowding in more private investment. They noted that such measures would also help reduce urban-rural imbalances, thus promoting more inclusive growth in line with the Millennium Development Goals (Table 9). Separately, staff emphasized the importance of timely, independent, and accurate economic statistics in improving the investment climate by facilitating informed business decisions and enhancing policy credibility. The authorities welcomed the IMF’s continued TA in the area of national accounts statistics.

Table 9.Cambodia: Millennium Development Goals Indicators
1990199520002005200620072008200920102015
MDG
Target
Goal 1: Eradicate extreme poverty and hunger
Percentage share of income or consumption held by poorest 20 percent8.5611.0
Population below minimum level of dietary energy consumption (percent)3320.5
Poverty headcount ratio at $1.25 per day (PPP, percent of population)49402619.5
Prevalence of underweight in children (under five years of age)4340282926.2
Goal 2: Achieve universal primary education
Net primary enrollment (percent of relevant age group)678790908995100
Primary completion rate, total (percent of relevant age group)424785868583100
Proportion of pupils starting grade 1 who reach grade 563555454100
Youth literacy rate (percent of ages 15-24)737679838687100
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (percent)810101016162130
Ratio of girls to boys in primary and secondary education (percent)73828990100
Ratio of young literate females to males (percent ages 15-24)8184899090100
Share of women employed in the nonagricultural sector (percent)41
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12-23 months)346265797879899290
Infant mortality rate (per 1,000 live births)878780737271696850
Under 5 mortality rate (per 1,000)119119107969391908838.3
Goal 5: Improve maternal health
Births attended by skilled health staff (percent of total)31.84480
Maternal mortality ratio (modeled estimate, per 100,000 live births)450540540250
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Incidence of tuberculosis (per 100,000 people)585557530505500495490442
Prevalence of HIV, total (percent of population 15-49)2111
Goal 7: Ensure environmental sustainability
Access to an improved water source (percent of population)01938656565
Access to improved sanitation (percent of population)0816282828
Nationally protected areas (percent of total land area)242424
Goal 8: Develop a global partnership for development
Aid per capita (current U.S. dollars)450313938475149
Fixed line and mobile phone subscribers (per 100 people)0.030.21.27812182938
Internet users (per 1,000 people)0035551
Personal computers (per 1,000 people)013334
Total debt service (percent of exports of goods and services)1111011
Goal 9: De-mining, UXO and assistance
Annual numbers of civilian casualties recorded1,6917970
Percentage of suspected contaminated areas cleared1050100
Other
Fertility rate, total (births per woman)65433333
GNI per capita, Atlas method (current U.S. dollars)280280450500560640650
GNI, Atlas method (current, in billions of U.S. dollars)3.23.66.27.08.09.210
Gross capital formation (percent of GDP)814.617.51821211921
Life expectancy at birth, total (years)505859596062
Literacy rate, adult total (percent of people ages 15 and above)62646877
Population, total (millions)9.711.412.813.914.114.314.615
Trade (percent of GDP)1977.8112137145138133122
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2008); UN Human Development Indicators Report (2003); Cambodia MDG 2005 update; UN MDG Indicators 2009 (http://mdgs.un.org); and IMF staff estimates.
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2008); UN Human Development Indicators Report (2003); Cambodia MDG 2005 update; UN MDG Indicators 2009 (http://mdgs.un.org); and IMF staff estimates.

19. AML/CFT. There was broad agreement that enhancements to the AML/CFT framework can also support the broader fight against corruption and hence improve Cambodia’s investment climate. In particular, the team welcomed the authorities’ plans to address strategic deficiencies identified by the Financial Action Task Force and the 2010 FSAP, including the adequate criminalization of money laundering and terrorism financing offences, and the strengthening of the Financial Intelligence Unit’s resources.

Box 3.Investment as a Driver of Potential Growth in Cambodia

Cambodia’s near double-digit growth prior to the global financial crisis was a result of a confluence of favorable factors. In addition to the expansion of international trade, sustained investment and improvements in productivity drove potential growth to an estimated peak of 8.7 percent during 2004–2005.1 However, it has declined since. Assuming a sustained investment-to-GDP ratio of 20 percent (close to 2000–10 average) and an absence of further shocks to productivity or labor supply, potential growth could reach 7.6 percent in the medium term. This outlook however will only materialize if a number of binding impediments to investment and total factor productivity are successfully removed.

Contributions to Potential Growth

(Percent)

Citation: 2012, 46; 10.5089/9781463939083.002.A001

Sources: The Cambodian authorities; and IMF staff estimates.

Potential Growth with Investment Boost

(Percent)

Citation: 2012, 46; 10.5089/9781463939083.002.A001

Sources: The Cambodian authorities; and IMF staff estimates.

Investment returns in Cambodia are constrained by a lack of adequate basic infrastructure such as cheap electricity, and difficulties of doing business more generally. As a result, investment relative to GDP in Cambodia remains one of the lowest among low-income countries. Low investment can also inhibit the progress of economic diversification away from Cambodia’s currently narrow export base, and in turn hinders overall manufacturing productivity, creating a vicious cycle of headwinds to growth.

The extent and quality of basic infrastructure in Cambodia at present is lagging behind many other lower income economies (Figure 4). Relatively high electricity cost curbs power consumption and economic activity. Roads and telephone lines are scarcer, while the ease-of-doing business rank is higher in Cambodia. The government is already addressing many of these gaps; for example, substantial investments in hydropower and coal-fired plants should materially lower the electricity costs. If these efforts succeed in bridging the infrastructural gaps relative to peers, Cambodia could lift its investment-to-GDP ratio by about 5 percent, with an associated boost to potential output growth of over 1 percent. A concerted effort by the government to improve the quality of basic infrastructure therefore holds the key to sustaining high potential growth in the years ahead.

Meanwhile, investment in human capital should continue to receive a high priority. Labor productivity remains an integral driver of Cambodia’s long-term growth, and will grow in importance as the economy diversifies and climbs up the value chain of both the manufacturing and the service sectors. At present, public spending on education in Cambodia remains one of the lowest compared to peers. A sustained investment in human capital will ensure that long-term growth is more firmly based, as well as more inclusive.

1 The potential growth is estimated from a dynamic stochastic growth model with a Phillips curve, which combines strengths from the traditional production function and the state space methods. See Rungcharoenkitkul, “Estimating Potential Growth in Cambodia” IMF Working Paper (forthcoming).

STAFF APPRAISAL

20. Economic setting. Cambodia’s economy has performed well in 2011 and recent severe floods constitute only a temporary setback to building stronger foundations for growth. Buoyant garment exports, a strong tourism sector, and an emerging recovery of the battered real estate sector mean that nonagricultural GDP growth likely reached the highest rate in four years. However, depending on replanting efforts and the impact on rice yields, the damage of floods to agriculture could visibly dent overall growth. On the back of strong economic activity, higher global food and fuel prices, and reinforced by strong credit growth, inflation rose through most of 2011 and is expected to ease only gradually. The real effective exchange rate appears to remain broadly in line with economic fundamentals.

21. Outlook and risks. Growth dynamics point to a favorable outlook for 2012, in part boosted by the return of agriculture to pre-flood trends. However, Cambodia’s narrow economic base means that exposure to global downside risks is high while policy buffers are limited, mainly owing to the high degree of dollarization and largely reduced fiscal space after the 2009 global recession. Medium-term growth prospects critically depend on ongoing reforms to improve the business environment and upgrade physical infrastructure, and enhance public sector revenue and service delivery to provide for Cambodia’s vast development needs while safeguarding fiscal sustainability.

22. Fiscal policy. With significantly less fiscal space to counter a potential severe global downturn than in 2009, any fiscal contingency plan would need to focus on accelerating and reprioritizing spending for existing high-impact social sector and infrastructure investment projects. The 2012 budget will help rebuild fiscal space by halving domestic financing, but further revenue mobilization over the medium term is key to strengthening policy buffers, and providing adequate resources for development. Better monitoring of sizable and growing contingent liabilities will be critical to safeguard fiscal space, while steadfast implementation of ongoing public financial management reforms will help to ensure spending effectiveness.

23. Monetary and exchange rate policy. Keeping reserve requirements, the NBC’s main policy tool, at post-crisis lows is inconsistent with Cambodia’s strong recovery and could undermine perceptions about the authorities’ commitment to price stability. With credit growth accelerating, inaction could also contribute to macro-financial risks. There is scope, however, to recalibrate the pace and timing of monetary normalization in the event of an adverse global economic shock. Better liquidity monitoring and the creation of an interbank market are not only important steps to improve monetary operations consistent with Cambodia’s longer-term development strategy, but would also help increase financial system resilience at the current juncture.

24. Financial sector policy. The main challenge ahead is building a deeper financial system while safeguarding financial stability. Amid a rapidly growing banking system, a moratorium on bank licenses would provide a critical window to build adequate supervisory capacity and improve the balance between the degree of competition and health of banks. Formalizing coordinated supervision and crisis management between relevant government agencies is essential to reduce systemic risks and limit potential fiscal costs. Upgrading Cambodia’s shallow foreign exchange market will need to be carefully sequenced with Cambodia’s international financial integration, the growth of the stock market, and the development of the overall monetary policy framework.

25. Investment. The authorities’ medium-term structural policies appropriately focus on infrastructure bottlenecks and improving the investment climate, which would also help alleviate rural-urban imbalances. Further strengthening the AML/CFT framework and better and more timely economic statistics will also help improve Cambodia’s competitiveness by reducing the cost of doing business and facilitating informed decision making.

26. It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

Structural changes, the high degree of dollarization, and weaknesses in macroeconomic data mean that standard equilibrium exchange rate models do not yield statistically significant results in the case of Cambodia. For example, the macroeconomic balance approach is highly sensitive to the age-dependency ratio, which in Cambodia’s case is extremely low due to the genocide under the Khmer Rouge (1975–79). Nevertheless, controlling for this factor, the current account norm is estimated to be about -5 percent of GDP, broadly in line with the medium-term current account projections.

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