2007 Article IV Consultation: Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion

This 2007 Article IV Consultation underlies that strong macroeconomic policies have enabled Cambodia to achieve impressive growth and make inroads into poverty. Supported by prudent fiscal and monetary policies that have strengthened the economy’s resilience to shocks, growth has averaged more than 9 percent since 2000, accelerating in recent years. Progress has been made on structural reforms but much remains to be done. Efforts in the fiscal and financial sectors are bearing fruit, with notable achievements being the implementation of new government expenditure and accounting procedures and strengthened prudential regulations for the banking sector.


This 2007 Article IV Consultation underlies that strong macroeconomic policies have enabled Cambodia to achieve impressive growth and make inroads into poverty. Supported by prudent fiscal and monetary policies that have strengthened the economy’s resilience to shocks, growth has averaged more than 9 percent since 2000, accelerating in recent years. Progress has been made on structural reforms but much remains to be done. Efforts in the fiscal and financial sectors are bearing fruit, with notable achievements being the implementation of new government expenditure and accounting procedures and strengthened prudential regulations for the banking sector.

I. Background

1. Since emerging from conflict and political instability in the late 1990s, Cambodia has rapidly attained macroeconomic stability. Supported by prudent fiscal and monetary policies that have strengthened the economy’s resilience to shocks, growth has averaged over 9 percent since 2000 and has accelerated in recent years. Anchored in part by the extraordinarily high degree of dollarization, inflation has remained low and the resulting growth in confidence has encouraged re-monetization.

2. Nevertheless, the country remains poor. Growth has been narrowly based on garment exports and tourism and while the overall poverty rate has declined—from 47 percent in 1993 to 35 percent in 2004—there has been a rise in inequality. Encouragingly, the increase in inequality occurred primarily in the early part of the decade (1994–97) and mostly within rural areas.1 During the second half of the period (1997–2004), the benefits of growth were shared reasonably equally between the rich and the poor but rural poverty remains high. Despite the progress reported in the recently completed Annual Update of the National Strategic Development Plan (NSDP), the authorities’ PRSP, some Cambodian Millennium Development Goals appear beyond reach (Box 1 and Table 6).

Table 1.

Cambodia: Selected Economic Indicators, 2004–08

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

Contribution to broad money growth.

Ratio of nominal GDP to average stock of broad money.

In 2006, includes transfer of MDRI proceeds as capital revenue transfer.

Includes repayment of arrears in 2004 and 2005.

Includes funds in transit and payment orders in excess of cash released.

Dollar deposits in commercial banks net of their unrestricted reserves at NBC.

From January 2006 includes the impact of debt forgiveness from the IMF under the MDRI.

Russian Federation debt is valued at 0.6 USSR Roubles per US$ with the standard 70 percent discount.

Table 2.

Cambodia: General Government Operations, 2004–08

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

For 2005, includes MEF’s share from the privatization of FTB equal to CR 65 billion.

Capital revenue of CR85billion from MDRI proceeds included in the 2007 budget has been classified as bank financing.

Data for 2004 and 2005 have been estimated to be consistent with the definition under the new economic classification used from 2006

Current spending by the ministries of Health, Educ., Rural Dev., Agriculture, and spending on Social Aff., Labor, and Voc. Training.

Excluding garment and adjusted for oil price changes (as Cambodia uses administered prices).

Table 3.

Cambodia: Monetary Survey, 2004–08

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

Changes in 2006 reflect in part the receipt of MDRI debt relief.

Nominal GDP divided by the average stock of broad money.

Table 4.

Cambodia: Balance of Payments, 2004–08

(In millions of U.S. dollars)

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

Debt forgiveness of debt due after 2006, under MDRI.

Excludes unrestricted foreign currency deposits at NBC and valuation changes.

Reflects the impact of MDRI debt forgiveness.

Russian Federation debt is valued at 0.6 USSR Roubles per US$ with the standard 70 percent discount.

Table 5.

Cambodia: Medium-Term Macroeconomic Framework, 2005–12

(In percent of GDP, unless otherwise indicated)

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

From January 2006 includes the impact of debt forgiveness from the IMF under the MDRI.

Net official disbursement, exceptional financing, and official transfers.

Russian Federation debt is valued at 0.6 USSR Roubles per US$ with the standard 70 percent discount.

As percent of domestic exports of goods and services.

Table 6.

Cambodia: Millennium Development Goals

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Sources: World Development Indicators database, UN Human Development Indicators Report (2003) Cambodia MDG 2005 Update and staff estimates.

Revised 1995 baseline for poverty headcount, and latest 2005. Source: World Bank Poverty Assessment, February 2006.

Do not reflect recent revisions to GDP estimates.

Note: Figures in italics refer to periods other than those specified.

World Bank Doing business indicators in 2006

(Ranking among 175 countries in the world)

Citation: IMF Staff Country Reports 2007, 290; 10.5089/9781451821840.002.A001

1/ Average of “starting a business” and “licensing.”2/ Average of “registering property,” “protecting investors,” and “enforcing contract.”

3. Poor governance weakens the environment for broad-based development. Human and institutional capacity remains very weak, constraining the ability of the public sector to contribute to poverty reduction. Cambodia ranks very poorly on indicators of economic governance, hindering gains in external competitiveness. Corruption is endemic and human rights problems continue. Land grabbing and illegal logging with damaging economic, social and environmental effects are widely reported.

4. A proposed PRGF arrangement remains stalled as negotiations on outstanding debt obligations to the United States and Russia continue.2 An in-principle deal has been struck with the United States but is still to be finalized. Russian debt rescheduling negotiations continue. At the authorities’ request, staff is maintaining an intensive policy dialogue until a formal program can be presented to the Board. This dialogue includes monitoring progress against the authorities’ quarterly macroeconomic targets and annual structural reform priorities.

The National Strategic Development Program 2006–10 (NSDP)

The NSDP focuses on broadening growth, particularly in rural areas. Staffs concluded that it provided a good road map for tackling poverty, although some critical elements of the sectoral strategies needed to be finalized and costing improved.*

The recent annual progress report (APR) is positive about achievements in the first year of implementation. Although it reports some progress in aligning objectives and financing, the linkages between NSDP priorities, the budget and the public investment program still would benefit from strengthening. The APR was discussed at the Cambodia Development Cooperation Forum (CDCF) in June 2007 where aid pledges of around US$700 million annually over 2007–09 indicate that the NSDP’s investment framework would be fully financed over this period. Of note, China was included for the first time in the medium-term indicative financing framework.

The authorities stress the importance of aligning aid delivery with NSDP priorities. A recent report on aid effectiveness found that while assistance was broadly aligned with the NSDP, it is too fragmented and excessively focused on technical assistance thus reducing the resources available for much needed capital investment. The authorities and development partners agreed a new set of Joint Monitoring Indicators at the CDCF to assist in monitoring progress against NSDP objectives in a framework of mutual responsibility and accountability. Development partners, particularly the World Bank, are aligning their programs with these indicators.

* IMF Country Reports: 06/267 (the NSDP); and 06/267 (the Joint Staff Advisory Note).

5. Emerging creditors are playing a more prominent role. Officials publicly contrast the ease of official financing from China and Korea with the conditionality applied by donors such as the World Bank—who, amid much publicity and dispute, suspended a number of projects in mid-2006 due to corruption. The projects have since resumed and with a recent agreement on a repayment schedule for the misprocured amounts, the first in a series of Poverty Reduction and Growth Operations (PRGOs) will be considered by the Bank’s Board in mid-July. At the Cambodia Development Cooperation Forum (CDCF) in Phnom Penh in June, aid pledges were of the order of $700 million annually, notwithstanding considerable donor concerns about governance.

II. Recent Economic Developments and Near-Term Outlook

6. Macroeconomic performance in 2006 continued to be impressive and the near-term outlook is favorable (Figure 1). Growth in 2006 was 10¾ percent and, with first quarter growth of 10 percent, is projected to be around 9 percent in 2007.

Figure 1.
Figure 1.

Economic Developments & Outlook 2000-07 1

Citation: IMF Staff Country Reports 2007, 290; 10.5089/9781451821840.002.A001

Sources: Cambodian authorities and Fund staff estimates.1 LIC Asia average refers to 2006 data for the following countries: Bangladesh, Bhutan, Cambodia, Lao P.D.R, Mongolia, Myanmar, Nepal, Vietnam and Sri Lanka.
Figure 1.
Figure 1.

Economic Developments & Outlook 2000-07 (Con’t)

Citation: IMF Staff Country Reports 2007, 290; 10.5089/9781451821840.002.A001

Sources: Cambodian authorities and Fund staff estimates.
  • Buoyant domestic activity is set to continue. Agricultural production has improved on 2005’s record-breaking year, reflecting increases in yields and cultivated land. Construction and services, particularly the financial sector, underpin a vibrant urban economy. Inflation has recently picked up slightly, as a result of rising fish and petroleum prices, but is expected to remain around 4 percent, assuming broadly stable international oil prices for the rest of the year.

  • Exports remain buoyant. Garments and tourism grew by around 20 percent in 2006 and continued growing rapidly in early 2007. Imports are increasing on the back of strong GDP growth and high oil prices—an external current account deficit (excluding official transfers) of around 7 percent of GDP is projected in 2007. External financing comes mainly from aid and FDI focused on garments, tourism, agriculture and construction.

  • Fiscal policy continues to be prudent. The overall fiscal deficit in 2007 is expected to be similar to 2006, at 3¼ percent of GDP (excluding MDRI receipts). Revenue collection in 2007 is again exceeding expectations, with tax department revenues in the year to April up by around 60 percent and customs department revenues also performing strongly. Expenditure restraint in 2006 and slow spending in early 2007 has led to further increases in government bank deposits and significant reductions in domestic arrears—from CR471 billion at end-2004 to CR77 billion at end-March 2007.

  • Money demand is rising. Broad money grew by around 40 percent in 2006, mainly reflecting increases in bank deposits, almost entirely in dollars. Credit to the private sector, also in dollars, grew even more rapidly but the level remains very low (only 12 percent of GDP). These trends continued in early 2007.

  • The exchange rate is stable and reserve growth is healthy. The riel has remained broadly stable in bilateral and real effective terms with some small nominal appreciation in early-2007. Increased demand for riel, in part as a result of improved tax compliance, has allowed the National Bank of Cambodia (NBC) to make greater-than-expected dollar purchases from the market. NBC’s reserves now exceed US$1.2 billion. However, they are not keeping pace with the growth in banks’ foreign currency deposits and there is a continued small build up of external arrears to the United States and Russia.


Quarterly GDP Growth


Citation: IMF Staff Country Reports 2007, 290; 10.5089/9781451821840.002.A001

7. Progress has been made on structural reforms but much remains to be done. Efforts in the fiscal and financial sectors are bearing fruit, boding well for the remaining broad agenda. However, legal and judicial reform progress has been much slower. Efforts to strengthen the draft anti-corruption law halted pending review of the penal code and an anti-corruption unit in the Council of Ministers was created in the interim. The Anti-Money Laundering and Counter Financing of Terrorism Law passed but drafts of the Insolvency Law and the Law on the Status of Judges and Prosecutors are still being debated at Ministry level.

III. Policy Discussions

8. Discussions focused on establishing appropriate policies and institutions to sustain growth and poverty reduction over the medium term in the context of NSDP. Weak institutions continue to limit the authorities’ ability to respond to evolving economic conditions.

  • Fiscal policy is currently the authorities’ main policy lever for adjusting to economic shocks and contributing to poverty reduction.

  • Monetary and exchange rate policy aims to promote confidence in the nascent financial sector. Deepening and strengthening the banking sector are critical for continued modernization of the economy.

  • Broad-based improvement in governance is needed to increase investor confidence and enhance public sector performance. Establishing a comprehensive and independent legal and judicial system will take many years. Policy discussions focused on macroeconomic aspects of governance, especially public financial management, trade facilitation and financial sector supervision.

9. Strengthening economic institutions continues to require substantial technical assistance. The authorities broadly agreed with the Fund’s strategy for future technical assistance. They noted that, resource constraints notwithstanding, in some situations resident advice would continue to be important in designing and implementing policies and monitoring progress through improved statistics.

A. Medium-Term Outlook and Risks


10. Staff and the authorities shared optimism for medium-term prospects for growth and poverty reduction. Continued strong growth in garments and tourism with sustained improvements in agriculural productivity and a rapidly growing working population will be key factors in growth averaging 7½ percent in the medium term. Combined with public financial management (PFM) improvements, this should enable further inroads to be made into poverty.

Macroeconomic Framework

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11. Continued prudent macroeconomic policies underlie the positive outlook. The authorities expressed a strong commitment to maintain prudent policies in the lead up to the 2008 general elections and beyond.

  • Inflation is expected to remain in the low single digits, reflecting prudent fiscal policy even as monetary policy accommodates rapidly rising money demand against the background of high dollarization.

  • The external current account deficit (excluding transfers) will stabilize at around 8 percent of GDP (Table 4) as increased domestic demand increases imports and export diversification gathers momentum. The deficit is admittedly large but financing will come from FDI and, consistent with pledges made at the CDCF and past flows, annual aid of around 6 percent of GDP.

  • Steady accumulation of international reserves remains an important policy objective for the authorities. Import coverage is well below the 3-month benchmark and maintaining adequate coverage of rapidly increasing dollars in the banking system is challenging. The latter is a more relevant indicator in Cambodia’s highly dollarized environment where the NBC would be reliant on its international reserves to provide liquidity to the financial sector.

12. Oil production, should it occur, could significantly increase national income, and the fiscal revenues it yields would provide vital financing for development spending as well as allowing saving for future generations. Given the substantial uncertainty still surrounding the level of reserves and the timing of production, staff agreed with the authorities that the principal macroeconomic framework should not include any estimates of the impact of oil production. The DSA does, however, include an alternative scenario that illustrates the significant but not overwhelming impact of a moderate oil sector—fiscal revenues from oil would peak at around 5 percent of GDP (Chapter II of the Selected Issues paper).

13. Staff stressed the importance of a clear institutional framework for the oil sector in reducing uncertainty and facilitating early commercial production. The authorities agreed and pointed to the comprehensive petroleum law that is currently being drafted. The authorities’ main current priority is to set a taxation regime that promotes exploitation of the resources while maximizing the government’s take. Although covering taxation within the petroleum law was considered, the authorities are now committed to placing taxation provisions within the existing Law on Taxation to ensure transparency and consistency, as the IMF had recommended. The authorities have publicly committed that all future oil revenues will pass through the budget and be directed towards the goals of the NSDP. They are currently considering whether to formally endorse the Extractive Industries Transparency Initiative (EITI) stressing that irrespective of formal adoption, the PFM reform program already embodies the principles of EITI.


14. Narrowly based growth increases the economy’s exposure to shocks.

  • Agricultural growth, vital for the majority of the population, remains vulnerable to weather conditions. The authorities are attempting to counter this through investment in rural irrigation and improvements in extension services.

  • Garments, which dominate exports, are vulnerable to domestic and external developments. Although demand appears to be holding up well in the face of strong regional competition, the recent accession of Vietnam to the WTO and the prospect of safeguards measures on China being lifted threaten future competitiveness. The authorities are therefore seeking improved access in existing (United States) and new (Russia) markets. They have also recently passed legislation that reduces the premium paid to night shift workers. Garment producers see this as important in increasing productivity and potentially bringing upstream garment activities into Cambodia. The move has, however, been strongly opposed by the trade unions.

15. The rapidly growing financial sector continues to be an area of vulnerability. Bank lending would be exposed were recent land price hikes and real estate speculation to reverse, eroding the growing confidence in the banking system. The absence of any state involvement in the banking sector would limit direct the fiscal impact of banking sector weaknesses, but NBC’s international reserves would be at risk.

16. Public debt is sustainable although with moderate risk of distress.3 Public debt, which is almost entirely external, declined to 33 percent of GDP in 2006. The continued strong economic growth anticipated in the medium and long term places debt on a sustainable path and the highly concessional structure of Cambodia’s lending dampens the risk of distress. Nevertheless, moderate risks do remain, particularly given the current low level of government revenues, the continued existence of external arrears and the potential for contingent liabilities. Only the Minister of Finance can issue loan guarantees, which are currently very small.

17. The authorities see the recently acquired sovereign credit ratings as confirmation of their sound polices but do not intend to borrow on commercial terms from capital markets in the near future. The DSA shows that while some borrowing on commercial terms is not necessarily inconsistent with debt sustainability it would significantly increase fiscal debt service costs. Cognizant of this, the authorities stressed that, at least for the foreseeable future, they have no intention of pursuing the offers of commercial bond financing they have received. They are, however, prepared to consider limited borrowing on close to commercial terms (for example, through the AsDB’s non-concessional window) for high-return infrastructure projects. Similarly, the government will avoid providing any substantial guarantees. The staff strongly supported this overall approach.

18. Continued improvements in governance are vital for growth, competitiveness, and poverty reduction. Although external confidence in increased political stability is gaining momentum, disorderly or indecisive national elections in 2008 could damage the investment climate and inhibit domestic policy making. The authorities responded to staff’s concerns, stressing that recent elections, including the indecisive 2003 general election, have not led to any loss in macroeconomic stability and the Prime Minister committed not to allow any loosening of fiscal policy in the coming twelve months. In addition, the NSDP puts governance improvements at the heart of its strategy, with efforts to improve incentives.

  • Increase incentives for good performance. The authorities are concerned about the disparity between the rapid pace of economic change and the weak capacity of the government. However, their plans for civil service reform, which focus on across-the-board increases in salaries, are at odds with the views of its development partners, who stress the need for more fundamental change in staffing structures and pay scales (see Chapter III of the Selected Issues paper).4

  • Increase disincentives for bad performance. The anti-corruption unit established in 2006, is focusing its efforts on sectors with the most economic impact and has made some progress in publicly bringing to account, mostly mid-level, civil servants found to be engaging in corrupt activities. Nevertheless, the authorities acknowledged that passing the proposed Law on Anti-Corruption would provide a more robust institutional framework. Moreover, they recognize that actions to tackle illegal logging, land grabbing and fraud have to be taken.

B. Fiscal Policy

19. Fiscal policy is prudent with the overriding principle to avoid domestic bank financing while improving the level and quality of revenue and expenditure. Staff discussed a medium-term fiscal framework that sees the overall deficit remaining around 3 percent of GDP. Strong economic growth, improved enforcement, and policy measures will see revenue rising to 12 percent of GDP in the longer term, allowing further increases in capital expenditure. The continued build-up of domestic surpluses would also provide room to adjust to economic shocks and enable accumulation of foreign reserves. The authorities agreed with this framework but preferred to be cautious about revenue projections for the 2008 budget.

Fiscal Program

(excluding MDRI transactions)

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20. The Ministry of Economy and Finance (MEF) is intending to accelerate expenditure markedly in the second half of 2007, as teething problems with new budget execution procedures recede. Staff supported the authorities’ intention to use additional revenue available after fully meeting budgets—including the within year wage increase announced in May—to clear up remaining domestic arrears.

21. The authorities are currently developing a medium-term resource mobilization policy. They agree in principle with staff that further policy measures are required to improve the efficiency and equity of the tax system.5 However, with the general elections imminent, for the 2008 budget they intend to rely on continued revenue gains from improved administration rather than introducing measures such as broadening the VAT base and implementing property taxation. They believe that recent improvements in collection from an unchanged tax base reflect returns from previous administration reforms that will continue to accrue in future years. Further gains in customs performance are expected to come from the AYSCUDA-based automation beginning in early 2008 and enhanced risk management. Both of these though are dependent on the passage of the new customs law, now before parliament, and significant capacity building and investment in equipment.

22. Expenditure policy aims to improve public services and increase investment. Increases in revenue will be used in part to finance annual increases in public servants’ base salaries of 20 percent.6 The authorities indicated that non-wage allocations to priority expenditure programs will be increased at a similar rate while increases in other current expenditure will be limited to the rate of inflation, allowing them to devote increasing resources to financing public investment. These resources will include the proceeds of MDRI debt relief from the IMF, which are initially being spent on improving rural irrigation.7 Staff urged the authorities to use realistic revenue estimates for the 2008 budget in order that expenditure increases, particularly in the capital budget, could be effectively programmed and inadvertent savings avoided.

23. The authorities’ PFM reform program is their flagship reform effort. Significant progress has been made in the last twelve months, including through the introduction of the new chart of accounts and program budgets in priority sectors. However, staff and the authorities agreed that initial implementation problems with these procedures need to be addressed urgently with line ministries. Poverty-reducing spending will be identified in the 2008 budget and monitored through the year. The authorities have also begun to advance cash management reforms that should significantly improve expenditure efficiency but much remains to be done, particularly in rationalizing government bank accounts and increasing use of the banking system. The National Treasury computerization program also needs to be completed.

C. Monetary and Exchange Rate Policies

24. The authorities’ monetary policy is accommodating rising money demand. Active monetary policy is currently precluded by the high level of dollarization, lack of indirect instruments, and considerable excess reserves in the banking system. Participation in the foreign currency market is therefore NBC’s main monetary policy tool. Riels are supplied by foreign exchange purchases, largely in response to demand. Avoiding central bank fiscal financing—a broad working rule the government has adopted for nearly a decade—has prevented excess riel liquidity, and thus exchange-rate depreciation and local-currency inflation. More recently, domestic fiscal surpluses have given rise to additional bank deposits in both riel and dollars, matched by increased international reserves.

25. Exchange rate policy targets a stable nominal dollar rate. Formally, NBC conducts a managed float of the exchange rate, intervening only to smooth market fluctuations. Staff noted, however, that the de facto policy is to maintain a stable nominal rate against the dollar. The authorities concurred and stressed its benefits in reinforcing confidence in the nascent financial sector and the national currency. Low inflation and relatively stable nominal exchange rates in neighboring countries enable the real effective exchange rate to support external competitiveness stemming from low dollar wages and continued agricultural productivity improvements.8 Moderate, but increasing, unsterilized intervention supports this policy. Increasing demand for riel has led to marked increases in the level of foreign currency purchases over the last 12 months and there have been sales of only US$½ million in the last 2 years.9

D. Financial Sector

26. The expansion in lending increases the vulnerability of an immature banking sector (see Chapter IV of the selected issues paper). While neither the authorities nor staff believe rapid growth of monetary aggregates is a macroeconomic concern, it could endanger the small and segmented banking sector. The rapid growth in foreign currency deposits is concentrated in a few banks that cater for particular segments of the market. Credit, which is similarly concentrated, is almost entirely collateralized against the booming real estate market and appears to be also financing real estate and construction investment. Reported system-wide non-performing loans remain below 10 percent, but NBC acknowledged there are concerns as to the quality of asset classification. Many banks are exposed to a single sector and, in some cases, a few large customers. Given the dollar denomination of almost all loans and deposits, currency mismatches are not a major concern.

Average Prudential Ratios for Cambodia’s Commercial Banks

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The prudential regulation was amended in November 2006.

27. The expansion reinforces the critical importance of strong banking supervision. The NBC acknowledged that, although enforcement of prudential regulations is improving, compliance with prudential regulations remains patchy. The central bank aims to bring banks into full compliance by the end of 2007, in particular those with systemic importance. Compliance should be improved as transitional exemptions to the new large-exposure regulation expire.

28. The authorities are pursuing a number of initiatives to reduce impediments to financial intermediation. The recently updated blueprint, formatted with the assistance of the AsDB, contains a broad range of reforms. Staff emphasized actions to establish a secure and reliable payments system and develop the recently introduced credit information system. New anti-money laundering legislation will provide a good framework for improving the integrity of the system. The authorities continue to implement the recommendations of the 2004 IMF safeguards assessment and intend, with staff’s support, to request an update to contribute to the ongoing modernization of NBC operations.

E. Trade

29. Trade policy reforms and improvements in facilitation are aimed at reinforcing Cambodia’s strong external competitiveness. With staff’s support, the authorities’ focus is now more on trade facilitation reforms than tax incentives to attract foreign investment. The new customs law will provide the legal framework for streamlining transactions and implementing commitments made under WTO accession. However, many other pieces of legislation required under these commitments remain behind schedule. Under ASEAN agreements, tariff rates under the Common Effective Preferential Tariff Scheme will be reduced to a maximum of 5 percent by 2010, and all items in the temporary exclusion list will be transferred to the inclusion list by 2007. The authorities agreed that tariff reductions should be made on a nonpreferential basis to avoid trade diversion and said that they planned to similarly reduce non-ASEAN tariffs.

IV. Staff Appraisal

30. The Cambodian authorities’ commitment to macroeconomic policies that promote domestic and external stability is commendable and should enable further inroads to be made into poverty. Continued robust growth and growing domestic and international confidence combined with public administration reforms and sustained agricultural improvements should have a marked impact on rural poverty. The staff supports the approach of the authorities’ NSDP to channel more resources to increasing agricultural productivity through rural irrigation, improved land allocation, and rural credit.

31. The lead up to the 2008 elections should be a period of reform not delay. Staff welcomes the authorities’ commitment to maintaining stability through the election period. This is crucial for safeguarding increasing investor confidence in Cambodia’s export sector, which remains concentrated and vulnerable to rapid reversals.

32. Continued improvements in public services as well as tackling governance are crucial. Addressing widespread corruption will enhance the business environment as well as strengthen revenue collection and expenditure quality. Staff continues to support the introduction of an appropriate anti-corruption law which will provide important rigor and transparency. In the meantime, existing institutions and laws should be utilized to guard against misuse of funds and to investigate irregularities as they come to light. Staff encourages further action to improve the transparency of state assets and concessions, which appear to be still assigned through uncompetitive processes.

33. The authorities’ caution with respect to commercial borrowing is welcome. Reflecting the highly concessional structure of external debt, continuation of the current prudent borrowing policy—not using the recently acquired sovereign credit ratings in the short term—should safeguard debt sustainability and minimize risks of distress. Staff welcomes continued efforts to resolve outstanding arrears with official creditors.

34. Oil production would improve prospects but also bring additional challenges and requires a clear legal framework. A key building block is to strengthen the taxation regime for oil, making use of previous IMF technical assistance. Staff strongly supports the Prime Minister’s decision to embed this within the existing law on taxation and encourages the authorities to endorse EITI. Careful consideration of the appropriate balance between saving, investing and consuming future oil revenues will be needed to ensure the benefits of oil wealth add to the hard-won macroeconomic stability.

35. Continued revenue improvements are needed to finance public service improvement and, ultimately, reduce dependence on aid. Recent revenue increases arising from administration improvements are commendable but challenges remain, particularly as the growth of customs department’s tax base is restricted by administered prices and tariff reductions. Although, with sustained reform effort, further enforcement-based increases will be available, policy measures will also be needed to raise revenue and improve the structure of the tax system. Staff encourages the authorities to implement initial measures in the 2008 budget, despite its proximity to the elections.

36. The authorities’ plan to increase and reorient expenditure is welcome but not yet fully developed. Staff supports the government’s policy of steadily raising public sector wages as revenue increases allow. This is needed to improve performance and discourage corruption. However, the impact would be enhanced if it were embedded in a broader civil service reform strategy. Revenue increases need also to finance good quality poverty-reducing spending, including productive capital investment, rather than only to increase domestic savings.

37. Improved fiscal outcomes require continued progress in implementation of the PFM reform program. The recent progress in PFM reforms have made the budget more credible and laid the foundations for more effective spending. Immediate priorities should be to continue to strengthen cash management and to clearly identify spending priorities in the 2008 budget.

38. In the staff’s view, dollarization has been, and will continue to be in the medium term, a valuable foundation for Cambodia’s macroeconomic stability and financial sector growth. These advantages currently outweigh the loss of seignorage and ability to use active monetary policy to adjust to domestic and external developments. The NBC should continue to accommodate increasing money demand without engaging in coercive measures to reduce the use of dollars. Nevertheless, wage and price developments should be carefully monitored for indications of inflation pressures.

39. The exchange rate is broadly in line with medium-term fundamentals, with the underlying current account in equilibrium. Staff supports the current exchange rate policy, which closely resembles a loose peg to the US dollar. The policy has been instrumental in external competitiveness, gradual reserve accumulation and low inflation and is appropriate as long as the expansion in local currency in circulation remains under control. The policy would need to be reviewed if there were significant movement in the exchange rates of neighboring countries. Given the need to supplement international reserves, sustained depreciation pressures, were they to arise, should not be resisted.

40. Further improvements in NBC’s banking supervision are crucial in preventing macroeconomic risks arising from the financial sector. The impact of rapid private sector credit growth on banks’ balance sheets needs to be closely monitored, to ensure that banks are weighing lending risks properly. Staff looks forward to further progress in enforcing prudential regulations and encourages NBC to rigorously enforce corrective actions for those banks that are out of compliance. Priority should be given to assessing asset quality and strengthening banks’ credit risk management through the recently established credit information system. Also important will be implementing the recently passed Law on Anti-Money Laundering and working with the commercial banks to enhance the payments system.

41. The Fund will continue to support the authorities’ reform program. If outstanding debt arrears issues are resolved, staff would support a request for a new PRGF arrangement. Until that point, staff will continue an intensive policy dialogue. Substantial IMF technical assistance will continue to support reforms in the fiscal, financial and statistical areas.

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


World Bank’s Equity and Development Report 2007.


IMF policies prevent lending in the presence of arrears to official creditors, see IMF Country Report 06/265, Chapter V for further details.


Supplement 1 details the latest joint Fund/Bank staff Debt Sustainability Analysis. Stress tests show that less prudent fiscal policies than assumed in the baseline do not significantly threaten debt sustainability.


Basic civil service salaries are so low ($30/month) that a whole system of absentees, ghost workers, multiple jobs, and bribery has unfortunately evolved.


See chapter V of the Selected Issues paper for detail on the structure of the tax system.


Base salaries are only around half of total remuneration with functional and other allowances playing a major role for many public servants. The pay increase will cost less than 0.1 percent of GDP in 2007 and 2008.


The full value of debt relief showed in 2006 revenue. Budgeted spending for 2007 on irrigation is US$11million but may fall short of this target.


The dramatic changes to Cambodia’s economy in recent years preclude estimation of an equilibrium exchange rate.


These small sales took place recently through auctions conducted with the aim of testing market conditions.