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IMF Executive Board Concludes Article IV Consultation with Cambodia

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
November 2016
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On October 19, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation with Cambodia.1

Cambodia is a fast-growing, highly open economy, and attained lower-middle income status this year. The Cambodian economy grew at around 7 percent in 2015, supported by strong garments exports, real estate and construction activity as well as the reduction in oil prices. Inflation unexpectedly picked up at end-2015 to 2.8 percent due to higher food prices resulting from extreme weather, but it remains well contained. Private sector credit growth has averaged nearly 30 percent (year-on-year) over the past three years, doubling the credit-to-GDP ratio to 62 percent by end-2015, which exceeds the median emerging market level and is double the median low-income country level.

The current account deficit (CAD) narrowed to 10.6 percent of GDP in 2015, and is largely financed by FDI and official flows. Gross official reserves rose to US$ 5.3 billion at end-2015, more than 4 months of prospective imports. The fiscal deficit narrowed to 1.6 percent of GDP in 2015, below the budget target, as the result of stronger-than-expected revenue growth, owing to improved revenue administration.

The near-term outlook remains broadly favorable. Growth is projected to remain robust at around 7 percent for 2016–17, supported by strong garments exports, real estate and construction activity, notwithstanding weaker agricultural and tourism growth. Medium-term growth is projected to decline to around 6.3 percent by 2021, due to a moderation in the credit cycle and challenges in economic diversification. The current account deficit (CAD) is projected to narrow to 9.7 percent of GDP in 2016, due to reduced imports following the completion of major hydro projects, low commodity prices and growing remittances. Over the medium-term, the CAD is forecast to decline to around 8.5 percent of GDP.

The outlook is subject to substantial downside risks. Rapid credit growth, along with growing concentration in real estate, poses heightened risks to financial and macroeconomic stability. External risks include a significant slowdown in China, U.S. dollar appreciation, structurally weaker growth in Europe coupled with increased uncertainty from the Brexit referendum result, and a sharper-than-anticipated tightening in global financial conditions.

Executive Board Assessment2

Directors welcomed Cambodia’s robust economic growth over the last two decades, which has resulted in an impressive decline in poverty and the country’s successful transition to a lower-middle income status. Directors noted that while the growth outlook remains strong, the economy faces downside risks stemming from rapid credit growth, fiscal pressures, and possible spillovers from an uncertain external environment. They recommended that policies ahead should focus on securing sustained growth and mitigating financial sector vulnerabilities, including by enhancing resilience and building buffers.

Directors considered the current fiscal stance to be appropriate and commended the improvements in tax administration, which helped increase revenue and accumulate government deposits in the banking system. To sustain these gains, they encouraged modernization of tax policy and further efforts to strengthen revenue administration. Directors also advised that future increases in public wages should be fiscally sustainable and accompanied by continued civil service reform. They recommended curtailing non-development current spending and saving excess revenues in the event of overperformance. In addition, Directors encouraged the authorities to develop a medium-term fiscal framework, improve expenditure allocation efficiency, as well as strengthen the monitoring of contingent liabilities, particularly from public-private partnerships.

Directors welcomed the steps being taken to bolster financial stability, noting the recent institution of the liquidity coverage ratio and minimum capital requirements. They highlighted that stronger efforts will be needed to achieve a soft landing of the credit cycle and safeguard macro-financial stability. Directors underscored that well-coordinated policy measures, including raising reserve requirements, putting in place macroprudential measures, and strengthening micro-prudential regulations will help moderate the pace of credit growth and bolster financial stability. In addition, they encouraged upgrading and tightening of prudential regulations on large deposit-taking micro-finance institutions to match those of banks. Developing a crisis management framework will also be important going forward.

Directors welcomed the policies to promote financial market development, particularly improvements in the negotiable certificates of deposits market. They considered that further progress in developing an interbank market is important for laying the groundwork for market-based monetary policy operations. They also recommended policies to promote de-dollarization and accelerate broader financial market development.

Directors encouraged the authorities to step up their efforts to boost competitiveness and promote economic diversification. Reducing the cost of doing business will help enhance competitiveness and foster diversification and inclusiveness. Directors highlighted that lowering energy costs, upgrading infrastructure, addressing skills bottlenecks, as well as strengthening transparency will also contribute to fostering inclusive and sustained growth.

Cambodia: Selected Economic Indicators, 2011–17
2011201220132014201520162017
Est.Proj.Proj.
Output and prices (annual percent change)
GDP in constant prices7.17.37.47.17.07.06.9
(Excluding agriculture)8.68.49.49.29.08.78.4
Inflation (end-year)4.92.54.71.02.83.22.9
(Annual average)5.52.93.03.91.23.12.7
Saving and investment balance (in percent of GDP)
Gross national saving11.812.511.211.111.812.713.6
Government saving0.81.92.23.44.03.42.5
Private saving11.010.69.07.77.89.411.0
Gross fixed investment22.023.523.523.222.422.923.0
Government investment8.79.08.97.97.07.88.1
Private investment 1/13.314.514.615.315.415.114.9
Money and credit (annual percent change, unless otherwise indicated)
Broad money21.420.914.629.914.719.910.2
Private sector credit31.228.026.731.327.126.024.4
Velocity of money 2/2.02.02.02.02.02.02.0
Public finance (in percent of GDP)
Revenue15.616.918.619.618.819.720.5
Domestic revenue12.414.114.616.716.617.817.9
Of which: Tax revenue10.211.311.813.714.614.915.0
Grants3.22.83.92.92.31.92.6
Expenditure19.720.720.720.920.422.323.4
Expense11.312.012.013.013.214.515.4
Net acquisition of nonfinancial assets8.48.78.77.97.27.88.0
Net lending (+)/borrowing (-)−4.1−3.8−2.1−1.3−1.6−2.6−2.9
Net lending (+)/borrowing (-) excluding grants 3/−7.5−6.3−6.4−4.2−2.9−4.3−5.5
Net acquisition of financial assets0.00.60.52.32.81.11.0
Net incurrence of liabilities 4/4.14.42.63.64.43.73.9
Of which: Domestic financing1.40.7−0.6−1.4−0.8−1.1−0.3
Government deposits4.64.95.06.89.19.38.7
Balance of payments (in millions of dollars, unless otherwise indicated)
Exports, f.o.b. 5/5,0355,6336,5307,4088,4619,36310,337
(Annual percent change)28.911.915.913.414.210.710.4
Imports, f.o.b.−7,730−8,600−9,74410,99712,14513,14714,515
(Annual percent change)32.911.313.312.910.48.310.4
Current account (including official transfers)−1,303−1,547−1,880−2,032−1,889−1,969−1,973
(In percent of GDP)−10.2−11.0−12.3−12.1−10.6−10.2−9.4
Gross official reserves 6/3,0323,4633,6424,3915,2716,3227,421
(In months of prospective imports)3.63.63.43.74.14.54.8
External debt (in millions of dollars, unless otherwise indicated)
Public external debt3,8334,4744,8525,2915,6456,1386,726
(In percent of GDP)29.731.531.631.832.132.132.3
Public debt service7785112143172189249
(In percent of exports of goods and services)1.01.01.11.31.41.41.7
Memorandum items:
Nominal GDP (in billions of riels) 7/52,06956,68261,39067,74073,42381,97890,318
(In millions of U.S. dollars)12,81814,05715,24416,77817,78919,36820,937
Exchange rate (riels per dollar; period average)4,0624,0324,0274,0384,127
Sources: Cambodian authorities; and IMF staff estimates and projections.

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

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

Trade data has been revised backward to 2008.

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.

GDP data have been revised backward to 2010.

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

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

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

According to GFS 86 used by Cambodian authorities.

Includes statistical discrepancy.

Trade data has been revised backward to 2008.

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.

GDP data have been revised backward to 2010.

1Under 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.
2At 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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