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IMF Executive Board Concludes 2018 Article IV Consultation with Cambodia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
December 2018
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On November 28, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Cambodia.

Real GDP is projected to grow at 7¼ percent in 2018 due to strong external demand and expansionary fiscal policies, while inflation is expected to remain low. Strong economic performance is broad-based, with garment exports, tourism and the construction sectors growing at robust rates.

Higher imports are expected to contribute to a widening of the current account deficit to around 10 percent of GDP in 2018. Gross international reserves are expected to increase to around US$9.6 billion (around 5 months of prospective imports) at end-2018.

Bank credit is expected to grow by around 20 percent in 2018, with MFI credit expanding at an even higher rate, resulting in a credit-to-GDP gap that is conservatively estimated at close to 10 percentage points.

Fiscal performance in 2017 was considerably stronger than anticipated with tax revenues growing 26 percent in nominal terms, partly due to one-off factors. The fiscal stance has turned expansionary this year. Both current and capital expenditure are expected to increase, while tax revenue is expected to remain broadly stable as a share of GDP, in part reflecting VAT exemptions and import tariff reductions for fuel and basic foods. As a result, the deficit is expected to widen to 2.2 percent of GDP, resulting in lower government deposits.

Executive Board Assessment2

Executive Directors welcomed Cambodia’s continued robust growth performance and low inflation as well as the progress made in poverty reduction. Directors encouraged the authorities to take advantage of the current strong economic environment to intensify policies and structural reforms to enhance the economy’s resilience, safeguard fiscal sustainability and financial stability, address governance vulnerabilities, and support inclusive growth.

Directors welcomed the authorities’ plans to restrain current spending and raise revenues. They supported the new Revenue Mobilization Strategy, which should focus on increasing revenues by modernizing revenue administration and reforming tax policies to improve their efficiency and equity. To help support growth and sustainable development, it will be important to reorient the composition of public spending towards priority infrastructure investment, and health and education spending. Directors considered that public wage increases should better balance pay incentives and fiscal sustainability.

Additionally, institutionalizing the Medium-Term Fiscal Framework would help safeguard infrastructure and development spending over the medium term. While noting that Cambodia remains at low risk of debt distress, they recommended close monitoring of risks stemming from the materialization of contingent liabilities, including from PPPs. In this regard, strengthening the institutional framework for PPPs will be important. Directors generally emphasized the need to continue to foster debt discipline to maintain debt sustainability.

Directors welcomed the policy efforts to safeguard financial sector stability. However, noting the elevated vulnerabilities, they stressed the need for additional targeted macroprudential measures. Directors highlighted that priority should be given to raising risk weights for real-estate lending, introducing a crisis management framework with a deposit insurance scheme, and continued upgrading of regulation and supervision. Addressing risks stemming from the real-estate sector warrants a broad policy response, including strengthening monitoring and regulation and phased increases in property taxes. Directors stressed the importance of addressing gaps in the AML/CFT regime and complying with FATF international standards.

Directors emphasized that steadfast implementation of structural reforms is essential to boost productivity, promote stronger growth, and make further progress on the Sustainable Development Goals. They encouraged the authorities to give priority to increasing competitiveness and promoting diversification. Reform efforts should focus on improving the business environment, reducing energy costs, enhancing transportation links, addressing skills gaps, and enhancing social protection policies. Directors noted that while progress has been made in improving governance, further governance and anti-corruption efforts, including improving fiscal governance and the regulatory environment, as well as strengthening the rule of law, are critical going forward.

Table 1.Cambodia: Selected Economic Indicators 2013–2019
2013201420152016201720182019
Est.Proj.Proj.
Output and prices (annual percent change)
GDP in constant prices7.47.17.06.97.07.37.0
(Excluding agriculture)9.39.39.08.48.38.78.3
Inflation (end-year)4.71.02.83.92.22.62.8
(Annual average)3.03.91.23.02.92.52.7
Saving and investment balance (in percent of GDP)
Gross national saving15.114.713.714.514.213.013.1
Government saving2.14.04.53.74.74.65.1
Private saving13.010.89.210.89.48.38.0
Gross fixed investment23.523.222.422.922.223.123.0
Government investment8.98.27.77.67.78.48.4
Private investment14.615.014.715.314.514.714.6
Money and credit (annual percent change, unless otherwise indicated)
Broad money14.629.914.718.023.816.314.8
Private sector credit17.331.327.122.518.519.016.0
Velocity of money 1/2.01.81.61.61.31.21.2
Public finance (in percent of GDP)
Revenue18.720.119.620.822.122.021.9
Domestic revenue14.617.517.718.420.220.420.7
Of which: Tax revenue12.915.515.615.816.917.017.2
Grants4.12.61.92.51.91.51.3
Expenditure21.421.720.922.223.224.224.0
Expense12.513.513.214.615.515.815.6
Net acquisition of nonfinancial assets8.98.27.77.67.78.48.4
Net lending (+)/borrowing(-)-2.6-1.6-1.3-1.4-1.1-2.2-2.1
Net lending (+)/borrowing(-) excluding grants-6.8-4.2-3.3-3.9-3.0-3.8-3.3
Net acquisition of financial assets0.22.32.21.92.30.00.4
Net incurrence of liabilities 2/2.84.03.53.33.32.32.5
Of which: Domestic financing0.0-1.3-1.4-0.6-1.7-0.6-0.7
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.7,0448,1709,33610,27311,22412,71014,234
(Annual percent change)23.716.014.310.09.313.212.0
------
Imports, f.o.b.10,68012,02213,28514,11915,50217,920-19,962
(Annual percent change)15.912.610.56.39.815.611.4
Current account (including official transfers)-1,274-1,414-1,567-1,687-1,782-2,452-2,617
(In percent of GDP)-8.4-8.5-8.7-8.4-8.0-10.1-9.9
Gross official reserves 3/3,6424,3915,0936,7318,7589,60510,294
(In months of prospective imports)3.13.43.74.45.15.04.9
External debt (in millions of dollars, unless otherwise indicated)
Public external debt4,8715,2795,6485,8616,6697,2467,932
(In percent of GDP)31.731.931.229.130.330.130.3
Public debt service112134137186211260301
(In percent of exports of goods and services)1.11.11.01.31.31.41.5
Memorandum items:
Nominal GDP (in billions of Riels)61,32767,43773,42381,24289,90099,194109,220
(In millions of U.S. dollars)15,22816,70218,08320,04322,14724,17126,324
Exchange rate (Riels per dollar; period average)4,0274,0384,0604,0534,030......
Sources: Cambodian authorities; and IMF staff estimates and projections.

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

Includes statistical discrepancy.

Excludes unrestricted foreign currency deposits (FCDs) held at the National Bank of Cambodia; starting in 2009, includes the new Special Drawing Right (SDR) allocations made by the IMF of SDR 68.4 million; starting 2016, renminbi holdings are considered part of reserves following inclusion of renminbi in the SDR basket.

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

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

Includes statistical discrepancy.

Excludes unrestricted foreign currency deposits (FCDs) held at the National Bank of Cambodia; starting in 2009, includes the new Special Drawing Right (SDR) allocations made by the IMF of SDR 68.4 million; starting 2016, renminbi holdings are considered part of reserves following inclusion of renminbi in the SDR basket.

1

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.

2

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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