Journal Issue

IMF Executive Board Concludes Article IV Consultation with Cambodia

International Monetary Fund. Asia and Pacific Dept
Published Date:
November 2015
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On October 26, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Cambodia.

Cambodia’s economic growth has been one of the fastest among Asia’s developing economies in recent years. It averaged 7.0 percent in the last five years driven by robust garments exports, real estate, and construction. Economic activity remained strong with growth rate at 7 percent in 2014, notwithstanding appreciation of the real effective exchange rate following U.S. dollar strengthening and growing competition from other low-cost garment producers. Inflation fell in 2014 and through 2015 owing to strong external disinflationary pressures from lower food and oil prices.

The current account deficit (CAD) is estimated at around 12 percent of GDP in 2014, and is largely financed by FDI and official loans. Gross official reserves increased to US$4.7 billion by end-August 2015, nearly 4 months of prospective imports. The fiscal deficit narrowed in 2014 to 1.3 percent of GDP from 2.1 percent in 2013, supported by stronger revenues owing to improved enforcement in tax and customs administration as well as higher-than-planned grants.

Private sector credit has grown by nearly 30 percent (year-on-year) on average in the past three years, and rose to about 33 percent by the second quarter of 2015. The credit-to-GDP ratio doubled over this period to over 50 percent and the loan-to-deposit ratio reached over 100 percent in early 2015. This reflects new foreign bank entry, increased foreign funding of domestic banks and buoyant domestic activity. There is also evidence of increasing credit concentration in the real estate and construction sectors. The National Bank of Cambodia raised the reserve requirements in September 2012 by 0.5 percentage points to 12.5 percent and expanded reserve requirements to banks’ foreign borrowings in March 2015.

The short-term outlook remains broadly favorable. Growth is projected to remain robust at 7 percent in 2015, while inflation is projected to rise gradually to about 2 percent by end-2015. The CAD is projected to narrow to around 11 percent in 2015 due to lower oil prices and some diversification in the exports industry. The fiscal deficit is projected to rise modestly to 2 percent in 2015 (below the budget, which targets a deficit of 4.2 percent) as a result of strong measures to improve revenue administration. However, the spending mix is deteriorating due a higher wage bill, while capital spending declined.

This outlook is subject to substantial downside risks, both domestic and external. Domestic risks include rising financial sector vulnerabilities stemming from rapid credit growth; fiscal pressures and erosion of competitiveness from wage increases and the uncertainty related to wage policy and labor disputes. External risks arise from a stronger U.S. dollar, growth slowdown in Europe constraining garments exports and weaker-than-expected growth in China having negative spillovers through the foreign direct investment, banking and tourism channels.

Executive Board Assessment2

Executive Directors welcomed Cambodia’s robust economic performance, the noteworthy progress made in achieving the Millennium Development Goals, and the ongoing transition to lower middle-income country status. They saw Cambodia as being well placed to take advantage of the transformation of regional trade patterns to expand and diversify its export base and further integrate into global supply chains. At the same time, Directors noted that domestic risks and the evolving external environment underscore the need to act decisively to address financial sector vulnerabilities, safeguard policy buffers, and foster economic diversification.

Directors commended the authorities for the improvements in tax administration, as a result of adoption of the Revenue Mobilization Strategy, which have led to a large increase in revenues and the replenishment of government deposits. They emphasized that going forward continued efforts to mobilize higher revenues will be needed to create fiscal space for social spending and capital expenditure. They also recommended that future increases in public wages should be contingent on fiscal performance and be accompanied by civil service reforms. Directors emphasized that continuing to reform public financial management will be important to ensure spending effectiveness and enhance budget transparency, and underscored the need to continue to improve the monitoring of risks from contingent liabilities.

Directors advocated a pro-active approach to manage and mitigate risks to financial stability while still protecting growth. They welcomed the recent expansion in the coverage of reserve requirements to include banks’ foreign borrowing, but saw a need for additional measures. Directors recommended raising reserve requirements and putting in place well-designed macroprudential measures to moderate the pace of credit growth and guard against excessive risk taking. They also considered that prudential regulations on large deposit-taking micro-finance institutions should be upgraded and aligned with those of banks, and that efforts should be made to better monitor developments in the real estate and construction sectors.

Directors welcomed the introduction of negotiable certificates of deposit and the increased activity in this market. They saw further progress in developing an interbank market as important for laying the groundwork for a more effective monetary framework, promoting de-dollarization and supporting a more flexible exchange rate policy over time.

Directors noted continued progress in implementing the 2010 FSAP recommendations, and encouraged the authorities to expedite the pace of implementation. They recommended, in particular, further efforts to strengthen the crisis management framework and the supervisory capacity of the National Bank of Cambodia, as well as considering a moratorium on offering new bank licenses until supervisory capacity improves.

Directors encouraged the authorities to continue their efforts to promote economic diversification and inclusive growth. Efforts to improve competitiveness should focus on upgrading infrastructure and boosting rural access, strengthening human capital, and improving the investment climate by reducing the overall cost of doing business.

Cambodia: Selected Economic Indicators, 2011–16
GDP in constant prices (annual percent change)
(Excluding agriculture)
Inflation (end-year)
(Annual average)
Saving and investment balance (in percent of GDP)
Gross national saving11.812.511.311.011.412.1
Gross fixed investment22.023.523.523.222.522.7
Private investment 1/
Money and credit (annual percent change)
Broad money21.420.914.629.923.923.1
Private sector credit31.228.026.731.330.234.0
Public finance (in percent of GDP)
Net lending (+)/borrowing(-)−4.1−3.8−2.1−1.3−2.0−2.6
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b.5,0355,6336,5307,4088,2129,116
Imports, f.o.b. 1/−7,730−8,600−9,744−10,991−11,869−12,796
Current account (including official transfers)−1,303−1,547−1,880−2,027−1,971−2,031
(In percent of GDP)−10.2−11.0−12.2−12.2−11.1−10.6
Gross official reserves 2/3,0323,4633,6424,3914,9795,494
(In months of prospective imports)
External debt (in millions of dollars, unless otherwise indicated)
Public external debt 3/3,8334,4745,0375,4835,9496,400
(In percent of GDP)29.731.532.533.433.933.6
Memorandum items:
Nominal GDP (in billions of riels)52,06956,68261,86666,82572,76780,044
(In millions of U.S. dollars)12,81814,05715,36216,551
Exchange rate (riels per dollar; period average)4,0624,0324,0274,038
Sources: Cambodian authorities; and IMF staff estimates and projections.

From 2011, includes large 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.

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 large 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.

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

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:

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