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Cambodia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
January 2013
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Outlook and Risk

1. Growth and inflation: Despite the global slowdown, Cambodia’s economy has been holding up, driven by resilient exports and tourism and a strong real estate recovery (Figure 1 and Table 1). Although moderating, garment exports continued to expand by 10 percent (y/y) during the first three quarters of 2012, in part thanks to improved access to the European Union. Tourist arrivals have been particularly robust, benefitting from new flight routes. Construction activity is picking up thanks to the real estate rebound, in part fuelled by rapid credit growth, and the 2011 flood impact on agriculture has been much less severe than expected. Real GDP growth is projected at 6½ percent in 2012, a slight moderation from last year, and to reach its potential of about 7½ percent over the medium term (Table 2). This outlook depends on improvements in the global economy and continued reforms to upgrade infrastructure and promote economic diversification, as well as enhance public sector revenue and service delivery. Despite the recent increase in global food prices, headline inflation has decelerated and is expected to average 3–4 percent in 2012–13 amid stable domestic food prices.

Figure 1.Cambodia: Growth Is Holding Up, But Exposure to Risks Is Also High

Sources: Cambodian authorities; IMF’s World Economic Outlook; and IMF staff estimates.

Table 1.Cambodia: Selected Economic Indicators, 2009–13
Est.Proj.
20092010201120122013
Output and prices (annual percent change)
GDP in constant prices0.16.17.16.56.7
(Excluding agriculture)−1.86.98.67.27.4
Real agricultural output5.44.03.14.54.5
GDP deflator2.63.03.43.63.3
Inflation (end-year)5.33.14.93.44.6
(Annual average)−0.74.05.53.13.8
Saving and investment balance (in percent of GDP)
Gross national saving11.514.614.813.913.5
Government saving2.10.51.01.72.2
Private saving9.414.113.812.211.3
Gross fixed investment16.018.522.923.923.4
Government investment8.89.68.78.38.3
Private investment 1/7.28.914.215.615.0
Money and credit (annual percent change, unless otherwise indicated)
Broad money36.820.021.518.6
Net credit to the government 2/6.20.80.00.2
Private sector credit6.526.631.730.0
Velocity of money 3/3.12.62.62.1
Public finance (in percent of GDP)
Revenue15.817.015.616.216.6
Domestic revenue11.512.112.313.213.7
Grants4.24.93.23.02.9
Expenditure20.019.919.619.419.4
Expense11.510.811.311.411.6
Net acquisition of nonfinancial assets8.59.18.38.07.8
Net lending (+)/borrowing(-)−4.2−2.8−4.1−3.2−2.7
Net acquisition of financial assets−1.7−0.30.00.00.1
Net incurrence of liabilities 4/2.52.64.13.22.8
Of which: Domestic financing1.90.90.70.0−0.1
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.2,9963,8845,2195,7766,393
(Annual percent change)−14.229.734.410.710.7
Imports, f.o.b. 5/−4,490−5,466−7,260−8,458−9,262
(Annual percent change)−11.521.732.816.59.5
Current account (including official transfers)−473−441−1,040−1,431−1,548
(In percent of GDP)−4.5−3.9−8.1−10.0−9.9
Gross official reserves 6/2,3672,6533,0323,5633,845
(In months of prospective imports)4.43.73.64.04.0
(In percent of foreign currency deposits)77.467.964.062.1
External debt (in millions of dollars, unless otherwise indicated)
Public external debt 7/2,9403,3373,8414,2814,726
(In percent of GDP)28.428.729.730.130.2
Public debt service667788100120
(In percent of exports of goods and services)1.51.41.21.21.3
Memorandum items:
Nominal GDP (in billions of riels)43,10847,10252,15457,52063,395
(In millions of U.S. dollars)10,41411,25512,890
Exchange rate (riels per dollar; period average)4,1394,1854,046
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.

Table 2.Cambodia: Medium-Term Macroeconomic Framework, 2009–17
200920102011201220132014201520162017
EstProj.
Output and prices (percent change)
GDP at constant prices0.16.17.16.56.77.27.47.47.5
GDP deflator2.63.03.43.63.33.23.23.13.1
Consumer prices (end-year)5.33.14.93.44.64.03.03.03.0
Saving and investment balance (in percent of GDP)
Gross national saving16.813.413.913.513.613.814.915.816.4
Government saving2.10.51.01.72.22.63.13.64.2
Private saving14.712.912.911.711.511.211.812.212.3
Gross fixed investment21.317.322.023.523.521.522.022.022.0
Government investment8.89.68.78.38.38.27.87.47.4
Private investment 1/12.67.713.315.215.213.314.214.614.6
Public finance (in percent of GDP)
Revenue15.817.015.616.216.617.217.417.618.0
Domestic revenue11.512.112.313.213.714.214.715.215.8
Grants4.24.93.23.02.92.92.62.42.2
Total expenditure20.019.919.619.419.419.418.918.618.6
Expense11.510.811.311.411.611.611.611.611.6
Net acquisition of nonfinancial assets8.59.18.38.07.87.87.37.07.0
Net lending (+)/borrowing(-)−4.2−2.8−4.1−3.2−2.7−2.2−1.5−1.0−0.6
Net lending (+)/borrowing(-) excluding grants−8.5−7.8−7.3−6.2−5.7−5.1−4.2−3.3−2.8
Net acquisition of financial assets−1.7−0.30.00.00.10.20.50.71.0
Net incurrence of liabilities2.52.64.13.22.82.52.11.71.5
Domestic financing, net1.90.90.70.0−0.1−0.2−0.5−0.7−1.0
Balance of payments (in percent of GDP, unless otherwise indicated)
Exports (percent change) 2/−16.032.435.911.111.112.612.712.712.0
Imports (percent change) 3/−12.322.733.916.99.67.010.39.710.4
Current account balance (including transfers)−4.5−3.9−8.1−10.0−9.9−7.7−7.1−6.2−5.6
(Excluding transfers)−11.3−10.7−11.9−13.4−12.7−10.2−9.2−8.0−7.1
Foreign direct investment 4/5.06.811.510.510.27.97.37.27.2
Other flows 5/0.5−1.6−1.33.21.42.32.01.61.5
Overall balance0.91.32.23.61.72.52.22.73.1
Gross official reserves (in millions of U.S. dollars) 6/2,3672,6533,0323,5633,8454,2934,7215,3036,044
(In months of next year’s imports)4.43.73.64.04.04.14.14.24.3
Public external debt (in millions of U.S. dollars) 7/2,9403,3373,8414,2814,7265,1575,5625,9346,317
(In percent of GDP)28.428.729.730.130.229.929.228.227.2
Public external debt service (in millions of U.S. dollars) 8/667788100120150165218232
(In percent of exports of goods and services)1.51.41.21.21.31.51.51.71.7
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.

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

Cash basis, excluding the accumulation of arrears on debt owed to the Russian Federation and the United States.

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.

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

Cash basis, excluding the accumulation of arrears on debt owed to the Russian Federation and the United States.

Cambodia: Selected Activity Indicators

(Year-on-year percent change)

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

2. External stability: Notwithstanding a widening current account deficit, Cambodia’s overall external position has remained stable.

  • The current account deficit (including official transfers) is projected to peak at 10 percent of GDP in 2012, reflecting moderating exports and temporarily higher imports related to large infrastructure projects, but the deficit remains fully financed by large foreign direct investment (FDI) and official loans (Figure 2). Over the medium term, the deficit would narrow to 5½ percent of GDP, broadly in line with estimates of Cambodia’s savings-investment norm, driven by robust export growth on improved competitiveness and diversification, and slower import growth reflecting the completion of large projects (Table 3).1

  • Gross official reserves have continued their steady rise to US$3.4 billion in September, about four months of prospective imports. This reserve coverage appears to be adequate considering the high degree of dollarization, with privately held foreign currency deposits at about 1½ times of gross official reserve, and the long-term nature of most of Cambodia’s external debt. On the other hand, the high degree of dollarization is severely limiting the central bank’s lender-of-last-resort capability. Therefore, a higher level of optimal reserves may be warranted, even though the associated confidence effects are difficult to quantify.

  • The real effective exchange rate (REER) has moved sideways since the 2008 global crisis consistent with this overall stable external position and offering little evidence of a fundamental misalignment.

Figure 2.Cambodia: A Stable External Position Despite a Widening Current Account Deficit

Sources: Cambodian authorities; Eurostat, IMF’s World Economic Outlook database, and IMF staff estimates.

Table 3.Cambodia: Balance of Payments, 2009–17(In millions of U.S. dollars, unless otherwise indicated)
200920102011201220132014201520162017
Est.Proj.
Current account (including official transfers)−473−441−1,040−1,431−1,548−1,336−1,355−1,302−1,298
(Excluding official transfers)−1,172−1,203−1,533−1,906−1,998−1,761−1,755−1,682−1,658
Trade balance−1,494−1,582−2,040−2,682−2,870−2,740−2,865−2,933−3,107
Exports, f.o.b.2,9963,8845,2195,7766,3937,1668,0459,02510,074
Of which: Garments2,3632,9953,9284,4574,9875,6546,4227,2698,172
Imports, f.o.b. 1/−4,490−5,466−7,260−8,458−9,262−9,906−10,910−11,958−13,181
Of which: Garments-related−1,050−1,359−1,757−2,006−2,244−2,544−2,890−3,271−3,677
Petroleum−430−485−999−1,220−1,375−1,450−1,533−1,625−1,717
Services and income (net)138168194457558634728830983
Services (net)6166978891,1021,3041,4431,5911,6951,815
Of which: Tourism (credit)1,0821,1801,6161,9372,1042,2712,4502,6432,869
Income (net)−477−530−695−645−745−809−862−865−832
Private transfers (net)184212313319313346382422466
Official transfers (net)699762493475450425400380360
Capital and financial account5695841,3171,9471,8131,7681,7711,8722,026
Medium- and long-term loans (net)194393487420416400380346352
Disbursements229436536476490498489504524
Amortization−36−43−49−56−74−97−110−158−172
Foreign direct investment 2/5207621,4841,4891,5971,3671,3911,5261,674
Net foreign assets of deposit money banks 3/−884−33283186−2000000
Other short-term flows and errors and omissions739−239−738−14800000
Overall balance96143277516265432416570729
Financing−96−143−277−516−265−432−416−570−729
Change in gross official reserves 4/−116−161−294−531−281−449−428−582−741
Use of IMF credit000000000
Debt restructuring000000000
Accumulation of arrears191816151616121212
Memorandum items:
Current account balance (in percent of GDP)
Excluding official transfers−11.3−10.7−11.9−13.4−12.7−10.2−9.2−8.0−7.1
Including official transfers−4.5−3.9−8.1−10.0−9.9−7.7−7.1−6.2−5.6
Trade balance (in percent of GDP)−14.3−14.1−15.8−18.8−18.3−15.8−15.0−13.9−13.3
Gross official reserves 5/2,3672,6533,0323,5633,8454,2934,7215,3036,044
(In months of next year’s imports)4.43.73.64.04.04.14.14.24.3
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.

3. Risks and policy responses: The outlook is subject to considerable risks, stemming from the fragility of the global economy and a range of domestic factors, including potential labor market instabilities and extreme weather. Spillovers from a deepening euro area crisis and severe global financial turbulence could be significant, but the impact so far has been relatively contained given Cambodia’s special zero-tariff access to the European Union, and no signs of an adverse impact on the financial system. Should downside risks materialize, however, the policy space to cushion their impact would be limited. A high degree of dollarization constrains the effectiveness of monetary policy, leaving fiscal policy as the main tool to preserve macroeconomic stability. The slow pace of fiscal consolidation during the past two years means that the fiscal buffers are limited and the room for policy maneuver remains severely curtailed. The authorities shared the views on the main risk factors to the outlook and the limited policy space to address adverse shocks, but expected that this year’s growth would be as strong as last year’s owing to resilient domestic demand.

Cambodia: Risk Assessment Matrix (RAM)1/
LikelihoodPotential Impact
Intensification of the euro area crisis
MediumHigh
Economic recession in Europe and severe financial turbulence could lower Cambodia’s exports, reduce the number of tourists from the European Union, and have contagion effects on the financial system.Cambodia is vulnerable due to its high export dependence and narrow export base (80 percent garments, mostly for the U.S. and EU markets). The adverse impact has been mitigated by preferential access to the European Union, and the growing importance of Asian tourists. Direct financial exposures are small, but the effects are difficult to quantify.
World food price shock
MediumMedium
Rising global food prices could create inflationary pressure in Cambodia.The impact is likely limited because rice prices have been stable and are affected primarily by domestic factors.
Labor disputes
MediumMedium
Intensified labor strikes could disrupt textile production.Lower textile production could create a drag on growth in 2012–13. Prolonged labor disputes and strikes could erode Cambodia’s competitiveness over the medium term.
Extreme weather
MediumHigh
Extreme weather conditions (drought or flood) could lower agricultural production.The shortfall in agricultural production would have a severe impact on growth , and the social impact on farmers and rural population could be serious.
Fiscal risks
MediumHigh
Slowdown in the decision making process and weaker budgetary control during the election years could affect fiscal reforms.Lack of progress in revenue mobilization and potential spending overrun during 2013 election year would hamper the efforts to rebuild fiscal space.
Financial sector risk
MediumHigh
Continued rapid credit growth could jeopardize macroeconomic and financial stability, and increase contingent fiscal liabilities.Excessive risk taking by banks could result in a deterioration of asset quality and a decline in confidence during a downturn. High degree of dollarization limits the lender-of-last resort capacity of the central bank.

It shows events that could materially alter the baseline path. The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities.

It shows events that could materially alter the baseline path. The RAM reflects staff’s views on the source of risks and overall level of concerns as of the time of discussions with the authorities.

Key Issues for the Consultation

A. Creating More Fiscal Space Through Revenue Mobilization

4. Context: Rebuilding fiscal space over the past two years has fallen short of initial budget targets set during previous Article IV consultations.

  • In 2011 revenue collection stayed flat in terms of GDP, compared to a ½ percentage point of GDP increase targeted by the Public Financial Management Reform Program (PFMRP). Although current spending remained under control, the overall fiscal balance deteriorated because foreign-financed capital spending was substantially larger than budgeted, indicating that control of donor-financed capital spending remains fragmented.

  • In 2012, however, tax collection up to August rose by nearly 1 percentage point of GDP over the same period in 2011, thanks to improved revenue administration underpinned by the hiring of some 200 new tax auditors and buoyant domestic demand. Provided that current spending remains in check, the fiscal deficit including grants is projected to narrow to 3¼ percent of GDP while domestic financing would drop by ¾ percentage point of GDP and be nearly eliminated (Figure 3, and Tables 4 and 5).

  • Nevertheless, the stock of government deposits, the only readily available fiscal buffer for Cambodia, is expected to decline to about 4 percent of GDP in 2012, about half its precrisis level and only 1¼ percentage points of GDP above the minimum threshold to sustain financing shocks (IMF CR 12/46, Box 1).

  • Against this background, discussions focused on ensuring that the 2013 budget would lock in gains from improved revenue performance and pave the way for further fiscal consolidation, formulating a comprehensive medium-term revenue mobilization strategy (RMS), and minimizing fiscal risks from contingent liabilities.

Figure 3.Cambodia: Creating Fiscal Space Through Revenue Mobilization

Sources: Cambodian authorities; IMF’s Government Finance Statistics and World Economic Outlook; Globalintegrity.com; and IMF staff estimates.

Table 4.Cambodia: General Government Operations, 2009–13 (GFSM 2001)
20092010201120122013
BudgetActualBudgetActualBudget 1/Jan-Aug

Est.
Est.BudgetJan-Aug

Prel. Est.
Proj.Proj.
(In billions of riels)
Revenue6,0696,8066,8078,0238,0645,1488,1149,0516,1969,31310,554
Of which: Nongrant5,0474,9785,5375,6986,3723,9986,4367,3485,1137,6108,694
Tax4,2624,1564,8244,7515,4623,3465,2896,2634,1906,3207,426
Income, profits, and capital gains7467449688001,0446709601,2789391,2701,488
Good and services2,3932,3482,7442,7923,1921,9223,1233,6242,3963,6104,294
International trade and transactions1,1221,0641,1121,1591,2267541,2061,3618551,4401,645
Grants1,0221,8291,2702,3251,6921,1511,6781,7031,0831,7031,860
Other revenues 2/7868227139479106511,1471,0859221,2911,268
Total expenditure7,2868,6348,1149,3639,5435,85010,23610,4596,18011,16712,297
Expense4,6074,9635,1675,0685,8513,2925,8886,5454,0386,5427,325
Compensation of employees1,7762,1032,1462,1352,3791,4002,2902,7421,7392,7423,126
Purchase of goods and services1,5391,6971,5941,7421,9549121,9622,0381,1532,0382,252
Interest1008612014314091160171107171180
Expense not elsewhere classified1,1931,0771,3071,0501,3798891,4761,5941,0401,5921,767
Net acquisition of nonfinancial assets2,6793,6712,9474,2953,6922,5584,3483,9132,1414,6254,972
Of which: Externally-financed1,7002,7492,0003,4202,6002,0693,4032,8601,6963,5713,705
Net lending (+)/borrowing(-)−1,217−1,827−1,307−1,340−1,479−702−2,122−1,40816−1,854−1,743
Net acquisition of financial assets−664−735−195−125−498−62−3−337292−2540
Net incurrence of liabilities 3/5531,0921,1121,2159816402,1191,0712751,8291,783
Of which: External171,0128809248601,0291,7791,0716241,8291,783
(In percent of GDP)
Revenue14.115.814.517.015.59.915.615.710.816.216.6
Of which: Nongrant11.711.511.812.112.27.712.312.88.913.213.7
Tax9.99.610.210.110.56.410.110.97.311.011.7
Income, profits, and capital gains tax1.71.72.11.72.01.31.82.21.62.22.3
Good and services tax5.65.45.85.96.13.76.06.34.26.36.8
International trade and transactions tax2.62.52.42.52.41.42.32.41.52.52.6
Grants2.44.22.74.93.22.23.23.01.93.02.9
Other revenues 2/1.81.91.52.01.71.22.21.91.62.22.0
Total expenditure16.920.017.219.918.311.219.618.210.719.419.4
Expense10.711.511.010.811.26.311.311.47.011.411.6
Compensation of employees4.14.94.64.54.62.74.44.83.04.84.9
Purchase of goods and services3.63.93.43.73.71.73.83.52.03.53.6
Interest0.20.20.30.30.30.20.30.30.20.30.3
Expense not elsewhere classified2.82.52.82.22.61.72.82.81.82.82.8
Net acquisition of nonfinancial assets6.28.56.39.17.14.98.36.83.78.07.8
Of which: Externally-financed3.96.44.27.35.04.06.55.02.96.25.8
Net lending (+)/borrowing(-)−2.8−4.2−2.8−2.8−2.8−1.3−4.1−2.40.0−3.2−2.7
Net acquisition of financial assets−1.5−1.7−0.4−0.3−1.0−0.10.0−0.60.50.00.1
Net incurrence of liabilities 3/1.32.52.42.61.91.24.11.90.53.22.8
Of which: External0.02.31.92.01.62.03.41.91.13.22.8
Memorandum items:
Priority sector spending 4/3.43.33.73.73.81.83.82.63.83.8
Net lending (+)/borrowing(-) excluding grant−5.2−8.5−5.5−7.8−6.1−3.6−7.3−5.4−1.9−6.2−5.7
Domestic financing 5/2.81.90.90.91.2−0.60.70.6−1.10.0−0.1
Government deposits5.95.14.54.64.74.13.9
GDP (in billions of riels)43,10843,10847,10247,10252,15452,15452,15457,52057,52057,52063,395
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Includes supplementary budget.

Includes provincial tax and nontax revenue.

Includes statistical discrepancy.

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 5 (GFSM 1986) because of differences in classification, in particular for capital revenue.

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

Includes supplementary budget.

Includes provincial tax and nontax revenue.

Includes statistical discrepancy.

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 5 (GFSM 1986) because of differences in classification, in particular for capital revenue.

Table 5.Cambodia: General Government Operations, 2009–13 (GFSM 1986)
20092010201120122013
BudgetActualBudgetActualBudget 1/Jan-Aug

Est.
Est.BudgetJan-Aug

Prel. Est.
Proj.Prel.

Budget
Proj.
(In billions of riels)
Total revenue5,1825,1795,8386,1606,7524,1286,8227,6805,3637,9429,0599,059
Of which: Central government5,0304,8975,6865,8926,4913,9326,4177,3475,0407,5128,6278,628
Tax revenue4,1774,2284,7634,7955,4873,3915,4766,3594,3456,4827,6807,595
Direct taxes7467449688001,0446709601,2789391,2701,5621,488
Indirect taxes3,3003,2183,6643,7454,2042,5394,1324,7713,1044,8035,7095,698
Of which: Trade taxes1,0329641,0221,0631,1366771,0931,2417811,2461,4261,423
Provincial taxes131266131249240182385310303409409409
Nontax revenue8707507749048856069599897671,1291,0181,099
Capital revenue 2/135201300461380131386332250332362365
Total expenditure7,4228,8058,3669,70310,0975,95110,74410,7106,26511,52612,04712,603
Current expenditure4,6635,0195,2455,1645,9123,3265,9976,6304,0696,6277,3287,325
Wages1,7302,0572,0922,0832,3161,3642,2332,6731,7032,6733,0503,050
Nonwage2,5772,6652,8822,9193,3641,8353,5213,6252,2203,6233,8933,890
Provincial expenditure357297271161232127243332145332385385
Capital expenditure2,7593,7873,1214,5313,9552,6244,5484,0802,1534,7914,7195,278
Locally financed1,0591,0371,1211,1111,3555561,1451,2204571,2201,5731,573
Externally financed1,7002,7492,0003,4202,6002,0693,4032,8601,6963,5713,1463,705
Net lending000823001981074310700
Overall balance−2,239−3,627−2,529−3,543−3,344−1,822−3,922−3,031−902−3,584−2,988−3,543
Financing2,2393,6272,5293,5433,3441,8223,9223,0319023,5842,9883,543
Foreign (net)1,0392,8412,1503,2492,5522,1803,4572,7731,7073,5323,0883,643
Grants1,0221,8291,2702,3251,6921,1511,6781,7031,0831,7031,8621,860
Loans1571,1251,0301,0641,0401,1311,9431,3217392,0321,5062,055
Amortization−140−113−150−140−180−101−164−250−115−203−280−272
Domestic (net) 3/1,200786379295792−616465257−80552−100−100
(In percent of GDP)
Total revenue12.012.012.413.112.97.913.113.49.313.814.314.3
Of which: Central government11.711.412.112.512.47.512.312.88.813.113.613.6
Tax revenue9.79.810.110.210.56.510.511.17.611.312.112.0
Direct taxes1.71.72.11.72.01.31.82.21.62.22.52.3
Indirect taxes7.77.57.88.08.14.97.98.35.48.39.09.0
Of which: Trade taxes2.42.22.22.32.21.32.12.21.42.22.22.2
Nontax revenue2.01.71.61.91.71.21.81.71.32.01.61.7
Capital revenue 2/0.30.50.61.00.70.30.70.60.40.60.60.6
Total expenditure and net lending17.220.417.820.619.411.420.618.610.920.019.019.9
Current expenditure10.811.611.111.011.36.411.511.57.111.511.611.6
Wages4.04.84.44.44.42.64.34.63.04.64.84.8
Nonwage6.06.26.16.26.53.56.86.33.96.36.16.1
Provincial expenditure0.80.70.60.30.40.20.50.60.30.60.60.6
Capital expenditure6.48.86.69.67.65.08.77.13.78.37.48.3
Locally financed2.52.42.42.42.61.12.22.10.82.12.52.5
Externally financed3.96.44.27.35.04.06.55.02.96.25.05.8
Net lending0.00.00.00.00.40.00.40.20.10.20.00.0
Overall balance−5.2−8.4−5.4−7.5−6.4−3.5−7.5−5.3−1.6−6.2−4.7−5.6
Financing5.28.45.47.56.43.57.55.31.66.24.75.6
Foreign (net)2.46.64.66.94.94.26.64.83.06.14.95.7
Grants2.44.22.74.93.22.23.23.01.93.02.92.9
Loans0.42.62.22.32.02.23.72.31.33.52.43.2
Amortization−0.3−0.3−0.3−0.3−0.3−0.2−0.3−0.4−0.2−0.4−0.4−0.4
Domestic (net) 3/2.81.80.80.61.5−1.20.90.4−1.40.1−0.2−0.2
Memorandum item:
GDP (in billions of riels)43,10843,10847,10247,10252,15452,15452,15457,52057,52057,52063,39563,395
Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.

Includes supplementary budget.

Includes privatization proceeds.

Includes statistical discrepancy. The figure is different from the domestic financing figure in Table 5 (GFSM 2001) because of differences in classification, in particular for capital revenue.

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

Includes supplementary budget.

Includes privatization proceeds.

Includes statistical discrepancy. The figure is different from the domestic financing figure in Table 5 (GFSM 2001) because of differences in classification, in particular for capital revenue.

5. Striking a careful balance in the 2013 budget: The staff and authorities agreed that in line with past staff’s advise, fiscal policy should remain anchored in rebuilding government deposits and maintaining long-term fiscal debt sustainability, while providing adequate financing for Cambodia’s vast development needs. In particular:

  • Staff welcomed the intention in the 2013 budget proposal to begin rebuilding the deposit buffer by about riel 100 billion through further raising of revenue collection by ½ percentage point of GDP and restraining the overall current expenditures, despite an increase in the public wage bill of about ¼ percentage point of GDP.

  • The authorities concurred with staff on the need to resist further calls for public wage increases in the election year. From a cross-country perspective, Cambodia’s wage bill at about 4¾ percent of GDP (after the increase) is comparable to that in other Asian low-income countries, but as a share of domestic revenue and current expenditure, its burden is higher than for most comparator countries.

  • There was also broad agreement that in light of the limited fiscal space, contingency planning for a potential economic downturn should focus on accelerating high-impact social and infrastructure outlays under existing medium-term development projects and ensuring the effectiveness of this spending.

  • The 2013 budget would also pave the way for implementing the authorities’ commitment to gradual fiscal consolidation over the medium term while maintaining an adequate level of capital spending. Reducing the fiscal deficit (excluding grants) from about 6 percent of GDP in 2012 to less than 3 percent in 2017 would reduce public external debt to the precrisis level of 27 percent of GDP by 2017 and help replenish government deposits to about 5–6 percent of GDP over the medium term. It would thus bolster Cambodia’s low risk of debt distress rating and its ability to absorb future shocks.2

Cambodia: Wage Spending

(In percent of domestic revenue)

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

Cambodia: Wage Spending

(In percent of current expenditure)

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

6. Mobilizing revenue: Greater mobilization of fiscal revenues is imperative to rebuild government deposits in order to avoid undesirable spending cuts in the near term, and to meet Cambodia’s vast development needs and maintain fiscal sustainability in the long term. Staff strongly supported the government’s plan of an RMS and provided inputs to a strategy that prioritized recommendations consistent with various IMF technical assistance (TA) efforts into a set of achievable and well-sequenced measures. To make greater revenue mobilization self sustaining, staff also emphasized that the strategy should rely on an integrated approach of improving revenue administration, implementing fair and efficient tax policies, and strengthening governance (Box 1 and Table 6). The authorities broadly agreed with the three-pronged approach and the policy priorities, and they plan to start with easy, implementable, and low-cost measures. They also plan to build consensus during a participatory process in the coming months and present the RMS to the new government after the 2013 general election.

Table 6.Cambodia: Priorities and Policies for Revenue Mobilization
Priority AreasPolicy Measures
1. Revenue Administration
Debt collection: Start collecting large tax debt. Even a small proportion would generate significant additional revenue.(1) Establish a task force to start addressing the most significant debt cases; (2) Develop protocols to delegate powers from Deputy Prime Minister; (3) Develop tax installment payment arrangements.
Large Taxpayer Department (LTD): It provides about 80 percent of tax collection, but its performance reached a plateau in recent years.(1) Create a team within LTD to develop and maintain understanding of every large taxpayer including their behavior and risks; (2) Include the LTD arrears cases in the debt collection task force coverage; (3) Develop large taxpayer compliance strategy including service initiatives; (4) Locate all large taxpayer risk assessment and audit functions to LTD.
Taxpayer services: A comprehensive strategy is needed to pull together the various elements of service delivery in order to improve taxpayers’ compliance.(1) Draw up action plans to ensure the implementation of the Department for Tax Services and Tax Arrears (DTSTA) operational work plan; (2) Continue seeking development partners to design and roll out a comprehensive taxpayer service strategy and allocate sufficient resources to taxpayer services functions; (3) Provide public information about avenues of appeal available for taxpayers.
Planning: Tax institutions have limited planning capacity and limited progress has been made in implementing action plans.(1) Review the operational plans to prioritize activities and tasks, identify the resource needs, and set realistic targets; (2) Establish central reform office to implement and monitor reform programs.
Human resource and information technology (IT): Staffs are skewed toward low value activities, while important functions like taxpayer services and debt collection are understaffed. The IT systems are inadequate.(1) Reorganize staff allocation by prioritizing revenue mobilization functions; (2) Reform recruitment process to quickly fill vacancies; (3) Establish an IT reform program, including a dedicated full-time team and seek support from development partners.
Revenue forecasting: Weak revenue analysis partly due to limited human resources and absence of automated systems and an integrated database.Strengthen revenue forecasting capacity at the Ministry of Economy and Finance (MEF), General Department of Taxation (GDT), and General Department of Customs and Excise (GDCE) and improve coordination between MEF, GDT, and GDCE in setting and monitoring revenue targets.
2. Tax Policy
Value Added Tax (VAT): Revenue productivity is low due to narrow tax base, weak enforcement, and little information on taxpayers of the estimated regime because they are not registered.(1) Apply one threshold to all types of tax payers; (2) Make registration with Tax ID mandatory for all tax payers; (3) Eliminate exemptions for electricity; (4) Adopt partial exemptions system for financial institutions by establishing rules to define the different kinds of financial services.
Excise tax: The overall level of excise taxation is low due to small amount of tax on standard excisable products. Restructuring the excise system would generate immediate revenue impact.(1) Streamline the list of imported goods taxed; (2) Increase the number of petroleum products taxed; (3) Consolidate the ad valorem and additional taxes on fuels into one specific, indexed tax; (4) Increase excise tax and customs duty on diesel to equal tax on gasoline; (5) Tax tobacco with specific, indexed excise tax.
Direct tax: Continue tax policy reforms on tax incentives, corporate and personal income taxes, and property taxes.(1) Remove or limit tax incentives, particularly on the Qualifying Investment Projects (QIP) because Cambodia’s tax regime is already competitive; (2) Increase tax collection from the estimated regime by improving governance and transparency; (3) Continue the Personal Income Tax (PIT) reforms; (4) Review the implementation of property tax before expanding it across the country to ensure it works effectively.
3. Governance
Oversight: Improve the oversight of the GDT’s and GDCE’s operations and performance.Create the political will to strengthen oversight and accountability, both of the GDT and GDCE, and within the GDT and GDCE.
Transparency: Considerable officials’ discretion in the application of tax laws remains, partly due to weaknesses of management systems, process, and controls, and limited information and assistance to taxpayers.(1) Create systematic programs for taxpayer education, advice and interpretation of the laws; (2) Remove the complex system of tax negotiation, particularly in the estimated tax regime, and abolish informal taxpayer-facing activities; (3) Strengthen management and supervisory controls.
Source: Revenue Mobilization in Cambodia: Challenges and Policy Priorities, staff’s policy paper provided to the Cambodian authorities during the 2012 Article IV Consultation.
Source: Revenue Mobilization in Cambodia: Challenges and Policy Priorities, staff’s policy paper provided to the Cambodian authorities during the 2012 Article IV Consultation.

Box 1.Revenue Mobilization: Challenges and Priorities

Cambodia has made progress in increasing revenue collection but challenges remain. Comprehensive tax policy and administration reforms took place during the past two decades, including the establishment of a Large Taxpayer Department (LTD) and the introduction of an automated customs clearance. As a result, domestic revenue increased from 6½ percent of GDP in 2003 to more than 10 percent in 2008. Since then, however, revenue has stayed flat in terms of GDP, although there have been signs of improvement in 2012.

Greater revenue mobilization will likely only become harder over time. Cambodia’s tax-to-GDP ratio remains low by regional standards, mainly because of weak administration. Moreover, apart from domestic taxes, revenue growth may slow over time with the contribution of trade taxes in total revenue set to decline with ASEAN Free Trade Area implementation.

An integrated approach is needed to make greater revenue mobilization self sustaining. Cambodia’s revenue mobilization should rely on a three-pronged strategy: improving revenue administration, implementing fair and efficient tax policies, and strengthening governance. Simultaneous reforms in these three areas are critical because good progress in one area would create positive feedback to the others, making revenue mobilization more effective and self sustaining. For example, reforming tax administration focusing on good taxpayer services and collecting tax arrears would make the tax system de facto more efficient and fairer while at the same time improve compliance and reduce the incentives for corruption and evasion. Successful tax reforms in many developing countries have relied on an integrated approach where strengthening revenue administration and reforming tax policy, supported by strong political will and technical capacity, play a critical role in enhancing revenue collection.

Tax Collection in Asian LICs

(In percent of GDP)

Sources: Cambodian authorities; and IMF staff estimates.

1/ Average of Bangladesh, Bhutan, Mongolia, Nepal, and Sri Lanka.

To prioritize policy actions, the focus should be on those measures that would generate substantial additional revenue, create strong positive externalities, and can be implemented with low or medium cost. These include:

  • Revenue administration: Collecting tax debt and improving the performance of the LTD would raise additional revenue in the near term. For example, total tax debt is estimated at 4 percent of GDP. Reprioritizing reform plans toward revenue-generating activities, establishing taxpayer services, developing human resources and information technology, and strengthening revenue forecasting would sustain revenue efforts going forward.

  • Tax policy: Reforming value-added tax (VAT) and excise taxes would generate an immediate revenue impact. For example, bringing the VAT productivity to a level comparable with those in other Asian low-income countries would yield additional revenue of 1½ percent of GDP (IMF CR 11/45). Continued rationalization of tax exemptions and incentives, corporate and personal income taxes, and property taxes would help raise revenue over the medium term.

  • Governance: Strengthening oversight and accountability of tax institutions and promoting transparency are critical to improve the performance and credibility of tax institutions.

7. Minimizing fiscal risk: As highlighted in the 2011 Article IV consultation, contingent liabilities related to the development of power generation and transmission projects under public-private partnership (PPP) constitute a substantial fiscal risk (IMF CR 12/46, DSA). The size of the projects (about 50 percent of 2011 GDP) and the difficulty to quantify the liabilities ex ante require continuous and careful monitoring. The authorities indicated that efforts are underway through a subdecree to the recently published public debt management strategy to strengthen the evaluation, contracting, and monitoring of contingent liabilities, including in the preparation for a review of the legal framework for PPPs and the development of a new guarantee policy. However, apparent information gaps remain between government agencies on the size and status of contracts and embedded government guarantees. Staff recommended improving information sharing with a view to setting up a central PPP-monitoring unit with “gateway powers” to evaluate and approve new PPP projects, enhancing fiscal transparency by adopting a ceiling on PPP guarantees, and listing all contingent liabilities and underlying guarantees in annual budget laws. The authorities are committed to further enhancing budget transparency and control and are seeking TA from various donors to bring practices closer in line with staff’s recommendations.

B. Improving Effectiveness and Credibility of Monetary Policy

8. Context: Given a high degree of dollarization and absent an interbank market, the National Bank of Cambodia’s (NBC) control over monetary conditions remains limited with the exchange rate against the U.S. dollar continuing to serve as an important nominal anchor.3 Inflation has moderated and is expected to average about 4 percent in 2013, reflecting stable global commodity prices and domestic food supply, as well as alleviating supply constraints related to infrastructure improvements. However, recent developments suggest that the challenges to monetary policy are shifting. Private credit has continued to grow rapidly, fuelled by easy domestic and, to a lesser extent, global financial conditions (Figure 4 and Table 7). Private sector credit growth in Cambodia—at over 30 percent through September—is among the highest in Asia. At this rate of expansion, the size of private credit relative to GDP, which is already substantially higher than for comparator countries, is quickly deviating from Cambodia’s past trend of financial deepening (Box 2). Meanwhile the coverage of foreign currency deposits by official reserves has steadily fallen, further limiting the NBC’s capacity to act as a lender-of-last resort. In view of this, discussions focused on steps to further improve monetary policy effectiveness and credibility, in particular by addressing macrofinancial risk and developing the interbank market.

Figure 4.Cambodia: Buoyant Credit Conditions amid Ample Liquidity

Sources: Cambodian authorities; and IMF staff estimates.

Table 7.Cambodia: Monetary Survey, 2009–12
2009201020112012
MarJunSepDecMarJunSepDec

Proj.
(In billions of riels)
Net foreign assets14,65516,69817,07918,10017,69517,89418,65218,73018,46419,292
National Bank of Cambodia13,26214,98215,05216,16515,68416,01017,12717,67518,22619,090
Foreign assets13,71015,41015,48816,61616,12116,43517,55118,09818,65319,513
Foreign liabilities448428436452437425424423427423
Deposit money banks1,3931,7152,0271,9352,0111,8841,5261,055238202
Foreign assets2,8043,5084,1364,2984,4464,1825,0825,3315,0845,264
Foreign liabilities1,4111,7922,1092,3632,4352,2983,5564,2774,8465,062
Net domestic assets1,5732,7793,1993,9084,9625,7616,2117,9228,4008,751
Domestic credit8,28011,20611,65813,10814,46115,43016,24717,68618,96120,748
Government (net)−2,252−2,127−2,253−2,184−1,926−2,123−2,542−2,400−2,441−2,071
Private sector10,53213,33113,90915,29116,38617,55318,78920,08121,39822,819
Other items (net)−6,707−8,428−8,459−9,200−9,500−9,669−10,035−9,764−10,561−11,997
Broad money16,22819,47720,27822,00822,65723,65524,86426,65226,86428,043
Narrow money3,1203,2213,4973,5403,6813,9563,9853,8723,8184,112
Currency in circulation3,0023,0993,3833,3383,5313,7723,8113,6323,5913,847
Demand deposits119122114202150185174240227265
Quasi-money13,10816,25616,78118,46818,97619,69820,87922,78023,04623,930
Time deposits359408392430493557896625683771
Foreign currency deposits12,74915,84816,39018,03818,48219,14119,98322,15522,36323,159
(12-month percentage change)
Net foreign assets41.713.910.110.37.47.29.23.54.37.8
Private sector credit6.526.624.828.931.331.735.131.330.630.0
Broad money36.820.017.723.524.021.522.621.118.618.6
Of which: Currency in circulation30.83.211.79.220.021.712.78.81.72.0
Foreign currency deposits37.524.319.126.425.020.821.922.821.021.0
(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets36.312.69.19.56.66.17.82.93.45.9
Net domestic assets0.57.48.614.017.415.314.918.215.212.6
Domestic credit11.618.017.423.827.221.722.620.819.922.5
Government (net)6.20.81.31.92.40.0−1.4−1.0−2.30.2
Private sector5.417.216.021.924.821.724.121.822.122.3
Other items (net)−11.1−10.6−8.8−9.8−9.8−6.4−7.8−2.6−4.7−9.8
Memorandum items:
Foreign currency deposits (in millions of U.S. dollars)3,0583,9104,0874,3794,5264,7395,0025,4505,5295,734
(In percent of broad money)78.681.480.882.081.680.980.483.183.282.6
Riel component of broad money3,4793,6293,8893,9704,1744,5134,8814,4974,5014,883
(In percent of broad money)21.418.619.218.018.419.119.616.916.817.4
Credit to the private sector (in millions of U.S. dollars)2,5263,2893,4693,7124,0124,3464,7034,9405,2905,650
(In percent of GDP)19.625.526.928.731.133.733.034.737.139.7
Loan-to-deposit ratio (in percent) 1/80.181.382.582.686.689.493.189.894.896.1
Velocity 2/3.12.62.82.72.72.62.62.52.52.1
Money multiplier (broad money/reserve money)1.91.92.02.02.12.12.12.12.12.2
Reserve money (12-month percent change)43.317.210.08.43.57.715.515.617.717.7
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.

9. Addressing macrofinancial risk: Staff welcomed the recent rise in the reserve requirement for foreign currency deposits by 50 basis points from its postcrisis low of 12 percent, which is consistent with the robust economic expansion and constitutes a critical step towards safeguarding financial stability. Given rapid credit growth and the still-large excess liquidity in the banking system, further gradual increases may be warranted. At the same time, recent developments also suggest that the transmission from higher reserve requirements to interest rates and credit activity may have been weakened further. Therefore, staff also recommended to consider adopting complementary macroprudential measures that could help curb credit growth and increase banks’ risk buffers, while minimizing any potential distortions (for a preliminary assessment see Box 2). The authorities broadly agreed with staff’s assessment and the potential need for further increases of the reserve requirement. Given their uncertain impact, they prefer to move gradually, allowing continuous monitoring of changes in domestic financing conditions and for signaling effects to take hold. In addition, the authorities are also considering a range of complementary macroprudential measures to safeguard financial stability, without penalizing those banks with relatively strong lending standards. The IMF stands ready to provide TA as the NBC further evaluates its options by striking a careful balance between ease of implementation, effectiveness, and competitive distortions of such measures.4

10. Developing an interbank market: An interbank market is an important first step toward more effective and market-based monetary policy operations. Upon request by the NBC, staff provided a strategy note arguing that the introduction of negotiable riel and U.S. dollar-denominated certificates of deposits (NCDs), issued by the NBC and to be used as collateral to help kick-start an interbank market, should be at a controlled pace, carefully communicated, and accompanied, as needed, by the use of available tools to ensure consistency with the national strategy of promoting the riel.5 The authorities agreed with staff’s recommendations and asked for further TA to operationally launch NCDs, including setting up the auction mechanism and developing the secondary market for them. Staff welcomed the NBC’s efforts to consult with the Bankers’ Association to help ensure the success of the initiative. In addition, there was agreement that a well-functioning foreign exchange market would support the interbank market, with staff welcoming progress made by the NBC in line with IMF TA in encouraging private wholesalers’ participation in the foreign exchange market.6

Box 2.When Is Credit Growth Too Fast and How To Deal With It?

Cambodia’s financial system appears to be shifting from normal deepening to excessive credit growth

  • Cambodia’s financial system is expanding rapidly. With private credit growing at over 30 percent in the past 12 months, the credit-to-GDP ratio has reached 37 percent, well above the median for low-income economies (LICs). If credit growth were to continue at the current pace, by mid-2013 the ratio would exceed even the median for more advanced emerging market economies (EM). These benchmarks suggest that the size of Cambodia’s financial system has already outstripped the level that can be justified by normal financial deepening. 1/

  • Cambodia’s past trend of credit-to-GDP is another simple proxy for the normal pace of financial deepening. To the extent that the actual ratio of credit-to-GDP deviates significantly from its trend, one might interpret it as a sign of overheating in the credit market. This ‘credit gap’ measure has indeed been empirically shown to be a good predictor of financial stress. /2 At 30 percent credit growth, the gap measure would rapidly widen and by early 2013 would surpass a level last seen in 2008, at the height of Cambodia’s real estate boom, which ended in a bust. Projecting this expansion further shows that Cambodia’s credit trajectory is clearly breaking away from the country’s own long-term pace of financial deepening.

Credit to GDP Relative to Peers

(In percent)

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

Credit Gap

(In percent)

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

Macroprudential measures may be needed. In addition to raising the reserve requirement, currently the only tool at the disposal of the National Bank of Cambodia (NBC), consideration should be given to macroprudential measures. At present, the reserve requirement does not automatically mean tighter credit conditions as many Cambodian banks still have excess liquidity, a number of them are lowering interest rate spreads to compete for market share, and some increasingly rely on cheaper external funding from foreign banks. Commercial banks’ foreign liabilities have more than doubled to US$1.2 billion in September 2012.

What measures and trade-offs? In considering macroprudential measures, the NBC must strike a balance between choosing an instrument that is simple to implement, effective in slowing credit growth, and causes the least distortions to the credit market. For example, adopting a capital surcharge would be relatively simple, create few distortions, but may be less effective in an already booming credit market where capital is boosted by profitability. Also, the capital-to-asset ratio of 29 percent reported by Cambodian banks is already much higher than the regional average. On the other hand, tightening the loan-to-value (LTV) cap, while potentially effective, may be less practical due to difficulties in asset valuations and the already low LTV (typically 35 percent) reportedly adopted by many banks. Capping the loan-to-deposit ratio, which has risen to 89 percent from 82 percent at end 2010, can also be effective, but would have a disproportionate impact on foreign bank branches that rely less on their deposit base, potentially causing distortions to competition.

1/ The benchmarks are taken from “Enhancing Financial Sector Surveillance in Low-Income Countries: Financial Deepening and Macro-Stability,” IMF Policy Paper (2012), based on global samples of 35 low-income countries and 108 emerging economies.2/ See C. Borio and M. Drehmann, Assessing the Risk of Banking Crises—Revisited, BIS Quarterly Review, March 2009.

C. Further Strengthening Financial Supervision

11. Context: Important challenges to financial stability remain, even if standard financial soundness indicators suggest some modest improvement in recent years (Table 8). Progress in implementing high-priority 2010 FSAP recommendations has been mixed (Table 9), reflecting in part capacity constraints and the need to forge consensus within the government. The NBC has taken a stricter stance on bank licensing, restructured its banking supervision, and addressed credit risks by introducing a new credit reporting system coinciding with the launching of a credit information bureau. However, a crisis management framework encompassing key financial supervisors is still lacking, while improving the capacity of banking supervision remains a challenge.

Table 8.Cambodia: Core Financial Soundness Indicators (FSIs), 2008–12(In percent)
20082009201020112012
MarJunSepDecMarJunSepDecMarJun
Capital-based FSIs
Regulatory capital to risk-weighted assets27.632.331.531.331.531.431.229.027.526.229.128.8
Regulatory tier 1 capital to risk-weighted assets27.733.032.733.332.632.129.527.726.326.329.328.9
Nonperforming loans net of provisions to capital5.95.35.15.56.03.83.94.65.43.33.83.5
Return on equity 1/12.44.95.96.26.66.59.09.610.59.711.211.0
Net open position in foreign exchange to capital0.91.43.25.05.02.33.13.03.93.92.93.4
Asset-based FSIs
Nonperforming loans to total gross loans2.93.94.14.24.22.92.93.03.02.12.42.2
Return on assets 1/2.71.01.21.21.31.31.91.82.01.82.32.1
Liquid assets to total assets14.219.416.118.017.618.017.917.919.016.217.217.5
Liquid assets to short-term liabilities30.626.822.424.824.525.225.225.327.023.024.324.4
Sectoral distribution of loans to total gross loans
Residents94.495.091.792.191.891.891.090.891.192.388.385.7
Deposit-takers3.86.56.66.14.04.43.94.74.97.78.17.9
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 corporations70.671.168.969.272.472.372.271.371.169.565.863.8
Other domestic sectors20.117.516.216.815.415.114.914.815.115.114.414.0
Nonresidents5.65.08.37.98.28.29.09.28.97.711.714.3
Income- and expense-based FSIs
Interest margin to gross income48.360.868.967.867.962.267.765.363.664.363.165.6
Noninterest expenses to gross income64.264.265.362.961.263.256.857.956.157.553.954.7
Source: National Bank of Cambodia.

Annualized.

Source: National Bank of Cambodia.

Annualized.

Table 9.Cambodia: Key 2010 FSAP Recommendations of High Priority
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, limited progress
• 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 termIn process
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 termIn process
• Reprioritize the work performed by the staff to facilitate forward-looking, risk-based supervision.Short termIn process
• Impose a moratorium on the issuance of new bank licenses as long as supervisory capacity and resources remain inadequate.Short termUnder NBC review
Nonbank 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 process
• Conduct a readiness study prior to the launch of the stock exchange.Short termDone
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 termIn process
Crisis Management Framework
• Revise PCA framework by developing additional triggers for asset quality, liquidity, and earlier intervention based on the solvency ratio.Medium termIn preparation
• 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 termIn process
• 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-termDone
AML/CFT
• Introduce new rules measures for conducting overall AML/CFT risk assessments and risk profiling of financial institutions.Short-termNot Initiated

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

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

12. Coordinated supervision: In the absence of financial safety nets and the lack of the NBC’s lender-of-last-resort capability, strengthening the financial crisis-management framework remains key to reducing systemic risks. Cambodia’s recent economic upswing offers an opportune window to agree on memoranda of understanding (MoUs) between the NBC, the Ministry of Economy and Finance, and the Stock Exchange Commission of Cambodia on establishing a coordinated supervision framework. To help expedite the process, staff proposed a two-step approach: (i) identify areas where cooperation, including information sharing, can be readily achieved for the signing of an initial MoU that focuses on coordinated surveillance and crisis prevention, and (ii) agree on a time-bound process toward a second MoU on crisis resolution in order to complete the crisis management framework. The roles and responsibilities of each supervisory agency would need to be clearly defined for the purpose of responsibility and cost sharing, and further TA could be provided to help review the existing laws and regulations. The authorities agreed in principle with this two-step approach and indicated that a working group has been set up to look into areas of cooperation in information sharing, joint analysis on risk factors, and exploring the introduction of a crisis-resolution framework.

13. Risk-based supervision: The NBC has made progress in transitioning from a compliance-based to risk-based supervision. With IMF TA support, the supervision department has started to conduct risk forecasting on individual banks and on a consolidated basis. Off-site examination teams have begun to compile risk profiles to be used for making on-site inspection plans. A working group was formed to review the compliance with Basel Core Principles and has concluded a detailed assessment.

14. Supervisory capacity: Rapid expansion of the financial system and the shift toward risk-based supervision have placed an additional burden on still-stretched supervisory capacity (Box 3). In this context, staff noted that the 2010 FSAP recommendation of a bank licensing moratorium remains appropriate. To bring policies effectively closer in line with this recommendation, staff supported the NBC’s more cautious stance on bank licensing procedures, which encourages potential applicants to consider mergers with existing banks. Staff also recommended focusing resources on key examination functions and strengthening training for inexperienced supervisors. The authorities concurred with staff’s views and agreed to continue efforts in building supervisory capacity.

Box 3.Recent Trends in Supervisory Capacity

Ensuring adequate human resources in banking supervision has been a long-standing issue for the National Bank of Cambodia (NBC) that featured prominently in the 2010 FSAP. Notwithstanding improvements in the quality of supervision, including investments in training, data collection, and a greater focus on risk-based supervision, the relative shortage of staff, particularly the more experienced and qualified staff, has become a more binding constraint for several reasons.

First, Cambodia’s banking sector has experienced rapid growth over the past years. The number of banks reached 39 by mid-2012, almost double from that in 2006, and seven more since the 2010 FSAP. The balance sheet of the banking sector has increased significantly. From 2010 to mid-2012, total bank assets and loans have both increased by more than 50 percent and total bank deposits by 40 percent.

Development of Banking Sector

(In billions of U.S. dollars)

Source: National Bank of Cambodia.

Second, in quantitative terms, banking supervisory capacity at the NBC has been stretched during the same period especially compared with the growth of the banking system. The total number of bank supervisors in the Banking Supervision General Directorate (BSD) decreased from 68 in 2010 to 54 in mid-2012.1/ Among them, experienced supervisors decreased from 52 to 41. Moreover, the transition from compliance-based supervision to risk-based and forward-looking supervision has increased the demand for experienced and qualified staff to conduct risk-profile assessments, on-site and off-site examinations, analysis of findings, and stress testing.

Supervisory Capacity at the BSD 1/

(Persons)

Source: National Bank of Cambodia.

1/ BSD: Banking Supervision General Directorate of the NBC.

1/ Even accounting for the NBC’s reorganization of its supervision department and the creation of the BSD, whereby staffs on licensing and legal functions are no longer included in the BSD, the number of bank supervisors still recorded a slight decrease.

D. Promoting Diversification and Inclusive Growth

15. Context: Cambodia’s economic base remains concentrated in a few sectors with growth being more volatile than in most other Asian low-income countries. Cambodia’s rank of Doing Business indicators recently moved up five places to 133 in 2012 (between India at 132 and the Philippines at 138) out of 185 countries, thanks in part to easier credit access and better credit information with the opening of the Cambodian credit bureau in March 2012, while other indicators remained low. Infrastructure bottlenecks and skilled-labor shortages continue to hamper investment and rural development. On the other hand, relatively open trade and investment regimes and Cambodia’s strategic location close to the world’s fastest growing markets offer potential in terms of exports markets and inward investment. Recent FDI trends point to early signs of manufacturing diversification which is likely to be reinforced by the increased supply of cheaper electricity and efforts by multinational firms to further diversify their supply chains.7 Meanwhile, Cambodia’s progress in achieving the Millennium Development Goals (MDGs) is broadly comparable to that of neighboring countries. Cambodia is on track in reducing poverty, promoting gender equality, and combating HIV and tuberculosis, but continues to face challenges in other areas (see Table 10 for detailed indicators).

Table 10.Cambodia: Millennium Development Goals (MDG) Indicators
19901995200020052009201020112015
MDG

Target
Goal 1: Eradicate extreme poverty and hunger
Percentage share of income or consumption held by poorest 20 percent8.5811
Population below minimum level of dietary energy consumption (percent)3321
Poverty headcount ratio at $1.25 per day (PPP, percent of population)49402620
Prevalence of underweight in children (under five years of age)4340282926
Goal 2: Achieve universal primary education
Net primary enrollment (percent of relevant age group)67879096100
Primary completion rate, total (percent of relevant age group)4247858487100
Proportion of pupils starting grade 1 who reach grade 5635585100
Youth literacy rate (percent of ages 15–24)73767983100
Goal 3: Promote gender equality and empower women
Proportion of seats held by women in national parliament (percent)81016212130
Ratio of girls to boys in primary and secondary education (percent)73..82..94100
Ratio of young literate females to males (percent ages 15–24)81848990100
Share of women employed in the nonagricultural sector (percent)....41..
Goal 4: Reduce child mortality
Immunization, measles (percent of children ages 12–23 months)34626579929390
Infant mortality rate (per 1,000 live births)87878073464350
Under five mortality rate (per 1,000)11911910796555138
Goal 5: Improve maternal health
Births attended by skilled health staff (percent of total)....32447180
Maternal mortality ratio (modeled estimate, per 100,000 live births)450540206250
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Incidence of tuberculosis (per 100,000 people)585557530505442437
Prevalence of HIV, total (percent of population 15–49)211
Goal 7: Ensure environmental sustainability
Access to an improved water source (percent of population)019386264
Access to improved sanitation (percent of population)08162931
Nationally protected areas (percent of total land area)242626
Goal 8: Develop a global partnership for development
Aid per capita (current U.S. dollars)45031395252
Fixed line and mobile phone subscribers (per 100 people)00184560
Internet users (per 1,000 people)00311
Personal computers (per 1,000 people)013
Total debt service (percent of exports of goods and services)..1111
Goal 9: De-mining, UXO and assistance
Annual numbers of civilian casualties recorded1,6917972442862400
Percentage of suspected contaminated areas cleared1050535956100
Other
Fertility rate, total (births per woman)654333
GNI per capita, Atlas method (current U.S. dollars)..280280450700750830
GNI, Atlas method (current, in billions of U.S. dollars)3.23.66.2101112
Gross capital formation (percent of GDP)81518182117
Life expectancy at birth, total (years)50586263
Literacy rate, adult total (percent of people ages 15 and above)626468
Population, total (millions)10111314141414
Trade (percent of GDP)1978112137105114
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2009); UN Human Development Indicators Report (2003); Cambodia MDG 2011 update; UN MDG Indicators 2011 (http://mdgs.un.org); and IMF staff estimates.
Sources: World Bank database, World Development Indicators, and Poverty Assessment (2009); UN Human Development Indicators Report (2003); Cambodia MDG 2011 update; UN MDG Indicators 2011 (http://mdgs.un.org); and IMF staff estimates.
Millennium Development Goals (MDGs) Progress, 2011/12
GoalCambodiaLao P.D.RMyanmarVietnamSouth Asia (Excl. India)
Poverty reductionUS$1.25 per day poverty
Underweight children
EducationPrimary enrolment
Reaching last grade
Primary completion
Gender equalityGender primary
Gender secondary
Gender tertiary
Child mortalityUnder-5 mortality
Infant mortaliy
Marternal healthMaternal nortality
Skilled birth attendance
Antenatal care (≥ 1 visit)
HealthHIV prevalence
TB incidence
TB prevalence
EnvironmentForest cover
Protected area
CO2 emissions
ODP substance consumption
Safe drinking water
Basic sanitation
Source: Asia-Pacific MDG Report 2011/12.
Source: Asia-Pacific MDG Report 2011/12.

16. Virtuous cycle of growth: Preserving macroeconomic stability and fiscal sustainability will enhance Cambodia’s efforts in achieving the MDGs and long-term growth objectives. However, there was broad agreement that a sound macrofinancial management would stand a better chance of enabling a virtuous cycle of more self-sustaining and inclusive growth if it is complemented by the following structural reforms:

  • Promoting diversification: The ongoing efforts in reducing infrastructure and skills bottlenecks, improving the investment climate by strengthening enforcement of the anti-corruption law and the anti-money laundering and combating the financing of terrorism (AML/CFT) regime, and promoting rural development remain important planks of reforms. The government’s Rice Policy aimed at facilitating agricultural production, downstream processing, and trade, by raising productivity, enabling farmers to use land as collateral, and improving critical infrastructure, would help diversify the economy and achieve the MDGs. A better rural infrastructure would also provide better access to employment, health, and education services in rural areas, thus helping to alleviate Cambodia’s rural-urban income divide and making growth more inclusive.

  • Strengthening public financial management: Improvements in public service delivery depend in part on progress under the PFMRP to ensure greater spending effectiveness and budget transparency. The composition of government spending including on social priority sectors is largely in line with other comparator countries, but, as indicated in a recent World Bank report, spending efficiency could be improved, including by reallocating resources towards agricultural research, scholarships and textbooks, and realizing savings in the provision of medical supplies.8 Meanwhile, budget execution and recording of donor-financed capital spending continue to be fragmented and hamper the alignment of projects with policy priorities and medium-term budget planning. Against this background, staff called for improved coordination with donors and greater efforts by all stakeholders to adhere to new reporting procedures under the Budget Strategic Plans.

  • Improving official data: Providing accurate and timely official economic and financial data would enhance policy formulation and credibility, and facilitate better and informed decisions by the private sector.

Staff Appraisal

17. Economic setting: Despite the global slowdown, Cambodia’s economic performance has been holding up thanks to resilient garment exports and robust domestic demand. The medium-term prospects for growth to reach its potential of about 7½ percent continue to hinge critically on the global economic recovery and ongoing reforms to upgrade the infrastructure and promote economic diversification, as well as enhance public sector revenue and service delivery. Inflation has decelerated despite the recent surge in global food prices, and is expected to remain low in 2012–13. Cambodia’s external position remains stable with an adequate level of international reserves, and the REER appear to remain broadly in line with economic fundamentals.

18. Risks and policy response: Spillovers from a deepening euro area crisis and global financial turbulence continue to expose Cambodia’s narrow economic base to considerable risks. On the domestic side, rapid credit growth and excessive risk taking by banks could threaten financial stability, labor market tensions could disrupt textile exports, and extreme weather conditions could affect agricultural production. Cambodia’s high degree of dollarization leaves fiscal policy as the main tool to absorb shocks, but limited fiscal buffers mean that the room for policy maneuver remains severely curtailed.

19. Fiscal policy: Staff welcomes recent improvements in revenue collection and the 2013 draft budget’s intention to begin replenishing government deposits. Greater revenue mobilization is imperative to rebuild fiscal buffers in the near term if difficult spending cuts are to be avoided, and to meet Cambodia’s vast development needs and maintain fiscal sustainability in the long term. To make revenue mobilization self sustaining, the strategy should rely on an integrated approach of improving revenue administration, implementing fair and efficient tax policies, and strengthening governance. Careful management of fiscal risk by better monitoring of contingent liabilities related to PPPs is also important to safeguarding fiscal space.

20. Monetary policy: Staff welcomes the recent rise in the reserve requirement, which is consistent with the robust economic expansion. The increase in the reserve requirement constitutes a critical step toward safeguarding financial stability, but further gradual increases may be warranted, and additional macroprudential measures may be needed to guard against potential excessive risk taking by banks. Staff also looks forward to the introduction of negotiable certificates of deposits (NCDs) to help develop an interbank market, which remains a necessary first step for a transition to more effective and market-based monetary policy operations.

21. Financial supervision: Progress continues to be made in implementing the 2010 FSAP recommendations, but more decisive actions are needed in establishing an adequate and well-coordinated system of financial supervision. Cambodia’s recent economic upswing offers an opportune window to agree on MoUs between supervisory agencies on information exchange and crisis resolution. The NBC’s overall supervisory capacity has improved, but is still stretched in view of the rapid expansion of the financial system and the shift toward risk-based supervision. In this context, the 2010 FSAP recommendation of a bank licensing moratorium remains appropriate. In addition, the AML/CFT regime needs to be strengthened.

22. Diversification and inclusive growth: A sound macrofinancial management can enable a virtuous cycle of more self-sustaining and inclusive growth if it is complemented by steadfast implementation of structural reforms to facilitate private sector-led diversification and strengthen public finance management, as well as the timely provision of economic data. The ongoing efforts in reducing infrastructure and skills bottlenecks, improving the investment climate by strengthening enforcement of the anti-corruption law, and promoting rural development remain important policy planks of making growth broader based and more inclusive. Continued progress under the PFMRP would improve public service delivery and ensure greater spending effectiveness and budget transparency.

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

In addition to the macroeconomic balance, the equilibrium exchange rate approach does not point to evidence of exchange rate misalignment either with medium-term estimates ranging between −½ percent to less than 4 percent of misalignment. However, firm conclusions from such models cannot be drawn, given Cambodia’s weak data, rapid structural change, and high degree of dollarization.

The accompanying Debt Sustainability Analysis indicates that Cambodia’s debt distress rating remains low. External debt disbursement is projected at about 2–3 percent of GDP per year with key funding parameters, including the degree of concessionality and the lack of a domestic debt market, broadly unchanged from past trends. Under an alternative scenario of limited reform progress, however, there would be less scope for absorbing risks (Supplement 1).

The current IMF classification of the exchange rate regime is “stabilized.”

Sectoral lending guidance, a tool used by the NBC in the past, has also been discussed, but, so far, credit growth has been broad based. While personal mortgages have expanded at a faster-than-average rate, growth has been from a small base and associated risks have been mitigated by the creation of the Cambodia Credit Bureau in March 2012.

The NBC remains committed to this strategy (IMF CR/11/45) through a gradual approach with market-based incentives in favor of the local currency.

Since mid-2011, the NBC has stopped buying riel directly from the Electricité du Cambodge (EDC), the state-owned electricity company, and instead has been facilitating transactions between EDC and money changers and to lesser extent commercial banks.

Data from Japan International Cooperation Agency, for example, suggest that Japanese FDI in Cambodia is rising rapidly, from a commitment of about US$35 million in 2010 to some US$420 million in 2012, with the bulk of it comprising factories relocating from China.

Cambodia: More Efficient Government Spending for Strong and Inclusive Growth, World Bank Report No. 61694-KH, November 2011.

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