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IMF Executive Board Concludes Article IV Consultation with Cambodia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
October 2017
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On September 22, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cambodia.1

Cambodia’s economy is expected to grow by 6.9 percent this year, with moderating private investment offset by higher public spending and robust construction and tourism activities. Headline inflation rose to 3 percent in 2016 and 3.5 in the first half of 2017, mainly driven by higher food and energy prices.

Overall credit growth has slowed, owing in part to policy measures. Real estate sector-related bank credit growth, however, remains strong, supported by demand for housing from Cambodia’s young and growing middle-income population.

The current account deficit narrowed to 8.8 percent of GDP in 2016. Driven by strong FDI inflows, foreign reserves have continued to grow, reaching $7.9 billion in June 2017, about 5.5 months of next year’s imports.

While the authorities again outperformed their revenue target in 2016, higher current spending resulted in an increase of the fiscal deficit to around 2.8 percent of GDP (compared with 1.6 percent in 2015). The fiscal deficit is expected to widen further this year due to higher public sector wages and other election-related current spending.

Looking ahead, the outlook is positive, although challenges remain. Real GDP growth is projected to remain robust over the next few years. Growth is then expected to slow over the medium-term to around 6 percent, due to moderation in the credit and real-estate cycles and ongoing challenges in improving economic diversification and competitiveness.

Executive Board Assessment2

Executive Directors commended the authorities for Cambodia’s impressive economic growth over the past few years, which has benefited from a stable macroeconomic environment and efficiency improvements. Directors were encouraged by the dramatic gains in poverty reduction over the past two decades. They considered that, with a robust external environment and strong domestic fundamentals supporting investment, Cambodia’s economic outlook is positive. Directors noted, however, that the outlook is subject to downside risks stemming from elevated financial sector vulnerabilities, as well as the external outlook, including weaker-than-expected growth in Cambodia’s main trading partners. Against this background, Directors encouraged the authorities to strengthen the fiscal position, safeguard financial sector stability, and implement reforms to boost competitiveness and the business climate.

Directors welcomed policy measures to bolster financial stability, which have helped moderate credit growth, and ongoing efforts to address vulnerabilities. They considered that further targeted prudential policies will be key to containing macro-financial risks. Priorities include strengthening regulations on loan classification to better manage credit risk; introduction of additional targeted macro-prudential policies, including gradually increasing reserve requirements on foreign exchange liabilities to build liquidity buffers; and expediting collection of data on the real-estate sector. Directors considered that the growing systemic relevance of large deposit-taking micro-finance institutions warrants strengthening prudential regulation, and saw merit in the development of a comprehensive crisis management framework. Implementation of the remaining FSAP recommendations was also encouraged.

Directors welcomed efforts to promote financial market development and steps that have been taken to improve financial inclusion. However, they noted that Cambodia’s high level of dollarization contributes to vulnerabilities and limits the scope for monetary policy. Directors underlined the importance of expanding use of the local currency and developing the equity, interbank, government and corporate bond, and foreign exchange markets. Further efforts to promote inclusion should focus on improving financial literacy and consumer protection and introducing a comprehensive financial inclusion strategy, which would help address risks, while at the same time fostering innovation and competition.

Directors commended the improvements in tax administration, which have led to large revenue increases and the accumulation of government deposits, as well as the planned framework for social protection. To ensure that the recent gains are sustained, further improvements in revenue administration and tax policy modernization are needed. Directors emphasized that fiscal deficits should be contained to safeguard fiscal and external sustainability. Further public wage increases should be fiscally sustainable and be accompanied by continued progress in public administration reforms, while spending on education and health should be safeguarded. Directors underscored that developing a medium-term budget framework would improve spending efficiency, while strengthening the framework for public-private partnership would better manage fiscal costs and risks.

Directors encouraged the authorities to accelerate the implementation of structural reforms to promote economic diversification, boost competitiveness, and improve the business climate and inclusiveness. They recommended that efforts should continue to focus on lowering energy costs, accelerating implementation of the Industrial Development Policy, upgrading infrastructure, strengthening the rule of law and transparency, and further investing in human capital. Including the impact of climate change and mitigating measures in policy design would improve resilience.

Table 1.Cambodia: Selected Economic Indicators, 2012–18
2012201320142015201620172018
Est.Proj.
Output and prices (annual percent change)
GDP in constant prices7.37.47.17.27.06.96.8
(Excluding agriculture)8.39.59.29.28.58.38.0
Inflation (end-year)2.54.71.02.83.93.13.4
(Annual average)2.93.03.91.23.03.73.5
Saving and investment balance (in percent of GDP)
Gross national saving15.310.513.413.114.113.613.4
Government saving1.92.23.43.82.81.50.4
Private saving13.48.410.09.311.312.213.0
Gross fixed investment23.523.523.222.422.922.222.0
Government investment9.08.98.06.97.88.28.6
Private investment 1/14.514.615.215.515.114.013.4
Money and credit (annual percent change, unless otherwise indicated)
Broad money20.914.629.914.718.014.412.9
Private sector credit38.317.331.327.122.512.510.0
Velocity of money 2/2.22.01.81.61.61.41.3
Public finance (in percent of GDP)
Revenue16.918.519.818.819.819.519.6
Domestic revenue14.214.616.916.517.918.018.1
Of which: Tax revenue11.311.813.814.515.315.315.3
Grants2.83.93.02.32.01.51.5
Expenditure20.720.721.020.422.723.224.1
Expense12.012.013.113.214.915.015.6
Net acquisition of nonfinancial assets8.78.77.97.17.88.28.5
Net lending (+)/borrowing (-)−3.8−2.1−1.1−1.6−2.8−3.7−4.6
Net lending (+)/borrowing (-) excluding grants 3/−6.3−6.4−4.2−3.2−4.7−5.2−6.0
Net acquisition of financial assets0.60.52.32.82.10.6−0.5
Net incurrence of liabilities 4/4.42.63.54.44.94.24.1
Of which: Domestic financing0.7−0.5−1.5−0.70.20.01.0
Government deposits4.95.06.99.110.19.78.3
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.5,6336,5307,4078,4539,23310,11211,041
(Annual percent change)11.915.913.414.19.29.59.2
Imports, f.o.b.−8,139−9,74910,61311,92012,649−13,71715,053
(Annual percent change)13.419.88.912.36.18.49.7
Current account (including official transfers)−1,150−1,979−1,641−1,694−1,776−1,904−2,098
(In percent of GDP)−8.2−13.0−9.8−9.3−8.8−8.6−8.6
Gross official reserves3,4633,6424,3915,0936,7318,0978,955
(In months of prospective imports)3.63.53.84.25.05.55.6
External debt (in millions of dollars, unless otherwise indicated)
Public external debt4,8525,2695,6106,4577,2678,2169,100
(In percent of GDP)31.631.631.830.831.932.834.0
Public debt service112143172239244192313
(In percent of exports of goods and services)1.31.41.51.91.81.31.9
Memorandum items:
Nominal GDP (in billions of riels)56,65061,41467,48573,69481,70390,32599,753
(In millions of U.S. dollars)14,04915,24916,71418,15020,15722,25224,307
Exchange rate (riels per dollar; period average)4,0324,0274,0384,0604,053
Sources: Cambodian authorities; and IMF staff estimates and projections.

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

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.

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

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

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.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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