Cambodia: Selected Issues and Statistical Appendix

This Selected Issues paper analyzes the potential impact of oil on economic growth and policy for Cambodia. It shows that a hypothetical moderately sized oil sector would have a significant, but not overwhelming, impact on macroeconomic prospects; but reaping the benefits while avoiding economic problems would depend, in particular, on sound fiscal policies. The paper looks at the role of wage and employment policies within the broader civil service reform agenda. It also analyzes wage bill developments since the 1990s and proposes steps to accelerate pay and civil service reforms.


This Selected Issues paper analyzes the potential impact of oil on economic growth and policy for Cambodia. It shows that a hypothetical moderately sized oil sector would have a significant, but not overwhelming, impact on macroeconomic prospects; but reaping the benefits while avoiding economic problems would depend, in particular, on sound fiscal policies. The paper looks at the role of wage and employment policies within the broader civil service reform agenda. It also analyzes wage bill developments since the 1990s and proposes steps to accelerate pay and civil service reforms.

II. The Potential Macroeconomic Impact of Oil Production in Cambodia1

1. This chapter illustrates the potential impact of oil production and its implications for macroeconomic policy. In order to do so it models the impact of a hypothetical moderately sized oil sector on the baseline long-term economic scenario utilized in the main staff report (section B). Policy challenges, particularly for fiscal management are outlined in section C and priorities for action proposed in section D. While the discussion focuses on the oil sector, the policy issues are relevant for other non-renewable resources that may be found—exploration has already begun for gems, precious metals and bauxite.

A. Background

2. Offshore oil and gas resources are believed to exist in Cambodian territorial waters and in an overlapping claims area on the maritime border with Thailand. 2 Although there had been previous exploration in Cambodia’s territorial waters, the first indication of commercial reserves was Chevron’s 2004 announcement of possibly substantial finds. 3 They have continued exploration drilling in 2006 while exploration licenses have been issued for 7 other blocks in Cambodian waters. No exploration drilling has taken place in the overlapping claims area—which is thought to have the largest oil and gas reserves—as ongoing negotiations on division of territory and resources have not yet been resolved.

3. Considerable uncertainty still surrounds the scale and timing of oil production. Chevron has yet to announce the results of its latest drilling. Initial indications were of substantial reserves—up to 700 million barrels. However, until Chevron indicates whether and when production will take place it is difficult to place a firm estimate on the likely size of the immediately recoverable reserves. Nevertheless, given that oil is already being produced either side of Cambodia’s waters in the gulf of Thailand it is probable that production will occur in the medium term (Table 1).

Table 1.

Proven Oil Reserves, Daily Oil Production, and Share of Oil Exports of Selected Oil-Exporting Countries

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Sources: U.S. Department of Energy, World Development Indicators, World Economic Outlook.

GDP at market exchange rates.

B. An Illustrative Oil Scenario

4. The scenario illustrates the impact of a moderately sized oil sector. The scenario has been constructed to demonstrate the policy challenges of an oil sector, not as a forecast of the potential Cambodian oil sector. It does not make any assumption as to which of the many exploration licenses will eventually reach the production stage. Nevertheless, care has been taken to be as realistic as possible with respect to the likely size of investments, fiscal regime and macroeconomic environment. The basic assumptions are:

  • Recoverable reserves of 500 million barrels of oil, from 3 separate fields with the first field coming on-stream in 2011. With continued high world oil prices, the net present value of oil wealth would be around $15 billion—115 percent of 2011 GDP.

  • The oil sector is assumed to be a truly offshore operation. Given its moderate size no related onshore investment, for instance in shipping facilities or refineries, is assumed. Exploration and production investment would be fully financed by foreign direct investment (FDI).

  • The state’s take is assumed to come from 3 sources: royalties (12½ percent of total production), the state’s share in the profit oil in line with standard Production Sharing Agreements (PSA), and income tax of 30 percent (in line with the Law on Taxation). 4 The Cambodian government is not assumed to take an equity stake in the operations.

  • Government oil revenue will increase gradually from about US$174 million in 2011 to a maximum of US$1.7 billion in 2021 (about 4 percent of GDP), before dropping rapidly thereafter (Table 2).

Table 2:

Selected Fiscal Indicators

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Sources: Fund staff estimates and illustrative projections.

5. The key macroeconomic policy assumption is how the government manages its share of oil production. Dollarization and the immature banking system constrain monetary and exchange rate policy, leaving fiscal policies as the main method of influencing domestic demand. A rapid, oil-fueled, fiscal stimulus would be likely to fuel inflation which would be difficult to counter as the authorities have currently very few instruments available to sterilize increases in the money supply.

6. The scenario assumes that spending of oil revenues will be gradual, take account of macroeconomic concerns, and be focused on productive investment. Controlling increases in government consumption (current expenditure) will moderate the impact of oil wealth on inflation and the real exchange rate and ensure that oil wealth is transformed into benefits for current and future generations. While there are arguments that oil wealth should be spent up-front to break growth bottlenecks, this scenario assumes that the authorities take a cautious approach to minimize macroeconomic risks. 5 It does so by projecting that the non-oil primary deficit, which measures consumption of oil revenue, remains stable in real terms at sustainable levels from 2011 onward. While oil revenues are used to enhance public investment, their volume does not threaten macroeconomic sustainability and also allows the build-up of financial assets for future investment (around 10 percent of non-oil GDP in 2027).

7. In this illustrative scenario, oil production has a significant but not overwhelming effect on macroeconomic variables (Figure 1). Oil adds significantly to economic growth, by 2020 GDP is 30 percent higher than in the non-oil baseline and 17 percent higher in real terms (reflecting in part the growth enhancing effects of good quality investment in public infrastructure). Private investment in oil production initially increases the external current account deficit; by 2011 the deficit begins to narrow, reaching less than 1 percent of GDP in the early 2020s. Even with appropriate fiscal policies inflation will increase but remain moderate (below 7 percent). Continued dollarization and the enclave nature of the oil sector will limit movements in the nominal exchange rate.

Figure 1.
Figure 1.

An Illustration of the Macroeconomic Impact of Oil (2011-2027)

Citation: IMF Staff Country Reports 2007, 291; 10.5089/9781451821857.002.A002

Source: Fund staff estimates.

C. Risks and Policy Challenges

8. There are however many potential pitfalls for newly oil-rich countries. Experience in other resource-rich countries suggests that the promise of rapid poverty reduction through oil production depends on sound economic management and effective institutions (Box 1). Difficulties in absorbing relatively large increases in money and fiscal revenues are often loosely termed, the “oil curse.” Difficulties, which can be particularly acute in countries, like Cambodia, where capacity and institutions are weak, can be both economic and governance related. 6 Large-scale resource revenues have been shown to accentuate weaknesses in governance and are closely correlated with increases in corruption and instances of internal conflict. This chapter, however, focuses on economic policy challenges.

Oil Sectors in Other Countries


While Nigeria is one of the 10 largest producers of crude oil in the world, its economic performance for many years was disappointing. Real per capita GDP is largely unchanged from the 1970s and the poverty rate stands at 54 percent in 2004. During the oil boom of the 70s, high and wasteful government expenditures not only absorbed the oil revenues but also led to the accumulation of significant debt that became unsustainable once oil prices fell. The manufacturing sector remained weak, and agricultural exports declined substantially as the real exchange rate appreciated. When oil prices collapsed in the early 1980s, real income fell sharply. Today, oil remains a dominant sector and the major source of government revenue although in recent years, oil revenues were managed more prudently. A conservative budget oil price rule constrained the fiscal envelope, and an ambitious structural reform agenda to enhance private-sector led growth was implemented. Aided by debt relief and high oil prices, economic growth and the fiscal and external position have improved significantly.


Azerbaijan is in an early stage of oil production boom, but the economy is showing signs of Dutch Disease. The oil boom has resulted in exceptionally high growth, and the government increased budgetary spending by about 30 percent in 2005 and over 80 percent in 2006. The oil inflows and the massive fiscal expansion has pushed up inflation to double digits and appreciated the currency. While the growth of the non-oil sectors was strong in 2006 (due to construction and services), the tradable sectors are showing sign of strain. Agricultural products, the largest source of non-oil exports, began to lose their competitiveness, despite significant subsidies.

Indonesia and Malaysia

Indonesia and Malaysia are examples of regional economies that are emerging from periods of sustained oil-based growth with strong (non-oil) economic fundamentals. Notwithstanding crises, they have achieved impressive economic gains from their abundance of resources. Both countries are now much less dependent on oil.

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Average over 2004-2006

Source: World Economic Outlook

In the mid-1960s, Indonesia was one of the poorest countries in the world, with large government deficits and hyperinflation. Using resources from oil and gas, the government gave priority to economic growth emphasizing infrastructure, education, and, above all, the agriculture sector, which played a key role in the country’s growth and poverty reduction. When oil prices fell in the early 1980s, the government launched several rounds of wide-ranging reforms, reduced expenditure, and devalued the currency. These were followed by a dramatic increase in the growth of manufacturing exports and a marked improvement in productivity. Growth has since been driven by non-oil-and-gas sectors, which now account for more than ¾ of Indonesia’s total exports.

Malaysia is well-endowed with natural resources. Oil and gas industry took over from tin as a dominant sector in the early 1970s. In addition to its focus on infrastructure and education, the government successfully used oil income to promote economic diversification and export-oriented industrialization through public investment, which laid a foundation for rapid economic development in the 1990s. The economy is now based on manufacturing and electronic industries. Malaysia is expected to become a net oil importer within a few years.

9. Oil revenues complicate fiscal management. 7 Challenges arise from their variable character and the exhaustibility of oil resource endowments:

  • The first challenge is how to avoid pro-cyclical fiscal policy, by ensuring relatively stable spending out of oil revenue, so as to insulate the domestic economy from oil revenue fluctuations. When oil prices are high, governments face strong political pressures to raise expenditures, which, in the absence of adequate absorption capacity and institutions, may lead to waste and ignite inflationary pressures. Expenditure cuts may prove difficult when oil prices fall, which can lead to unsustainable debt accumulation.

  • The second challenge stems from the need to formulate a consumption/saving strategy that ensures a sustainable fiscal position even after the depletion of oil wealth. Key indicators in this regard are the non-oil primary balance—the difference between non-interest public expenditure and non-oil revenue—and the non-oil current balance—the difference between current expenditure and non-oil revenue. These show the extent to which fiscal policy is sustainable once oil resources expire.

  • A third challenge is dealing with the inherent uncertainty surrounding oil investments. Fiscal planning is complicated by the volatility of oil prices, as revenues can fall by proportionately more than declines in oil prices. Pre-spending, or borrowing against, uncertain future oil revenues should therefore be approached with extreme caution due to the risks it poses for fiscal and debt sustainability.

10. More durable industries can be harmed by an enclave oil sector. Although an enclave operation has, by definition, little direct impact on the domestic economy, a direct injection of state revenues, even if relatively modest by international standards, would still cause a substantial shock to the still small and immature Cambodian economy. The most likely avenue is through inflation and a consequent real exchange rate appreciation which would make domestically produced tradable goods, including manufacturing and agricultural goods, less competitive. A rapid pass through of oil receipts into the domestic economy would increase demand for non-tradable goods, increasing pressure on prices and wages. As resources are reallocated away from the tradable sectors and costs increase, existing and prospective export industries that will be needed to underpin non-oil growth would decline.

11. More positive scenarios are also possible. Larger reserve discoveries than envisaged in the moderate sector discussed above are quite possible—particularly if agreement is reached rapidly with regard to the overlapping claims area with Thailand. In this situation, it would be possible to envisage more favorable impacts on growth and fiscal revenues—albeit with concomitant increases in policy challenges.

D. Priorities in Oil-Sector Management

12. The immediate priority is to normalize the revenue regime for the oil sector. Considerable uncertainty still exists as to the taxation regime for the oil sector. Provisions, which are in places contradictory, exist in the 1991 petroleum law, the 1997 law on taxation, PSAs signed with oil operators, and in various supporting regulations. For discoveries to be brought to the production stage, oil companies will require assurances on a fiscal regime that provides an adequate rate of return and has adequate guarantees of stability. The government, that also wants to set a regime that promotes early production, is concerned to ensure that it receives a fair share of the financial proceeds from the nation’s oil wealth. Current provisions—under all possible variants—are broadly in line with regimes in other countries. Priorities are now to set a clear revenue framework that (i) provides a level playing field for all developers, (ii) is set within the broader Law on Taxation, (iii) is progressive (gives the government a larger share of larger profits), and (iv) encourages production in both marginal and major oil fields. 8 Revenue policy discussions should be led by the Ministry of Economy and Finance, but close co-ordination with the Cambodian National Petroleum Authority (CNPA) is essential to ensure that the implications of taxation policy for the oil industry are fully understood by policy makers.

13. Looking forward, addressing macroeconomic policy challenges will require defining fiscal policy parameters and strengthening supporting institutions.

  • Oil funds and fiscal rules can help implementation but they are not substitutes for sound fiscal policy. Rules can be circumvented, and may become irrelevant if they are disconnected from overall development policies. Box 2 discusses the international experience with such mechanisms.

  • A consolidated framework for revenues and expenditures will improve the likelihood of oil revenues being spent in line with national priorities. Earmarking oil revenue to particular uses through extrabudgetary funds leads to budget fragmentation, complicates budget management and reduces efficiency in the allocation of resources. The authorities’ PFM reform program will facilitate the objective of all oil revenues being collected and spent through the national budget, set within a fully-fledged, medium-term fiscal framework that links annual budget plans to longer-term national priorities and policies. These should be consistent with the National Strategic Plan (NSDP) and long-term macroeconomic and fiscal sustainability objectives.

A Note on Oil Funds and Fiscal Rules

Oil funds can play stabilization and saving roles. Stabilization funds aim at insulating the budget and the economy from oil revenue volatility, by smoothing revenues flowing into the budget. Saving funds seek to save part of oil revenue, to constitute financial wealth for future generations and sustain some revenue stream after the depletion of oil reserves. A number of oil funds play both roles.

Their relationship with the budget varies. Some funds are fully integrated within the budget framework (Norway, Timor Leste, São Tomé and Príncipe, Mauritania, Russian Federation). In these countries, the oil fund is a government account. Other funds are not fully integrated in the budget (Libya, Kuwait, Qatar), with financing operations outside the budget process. In Qatar, the Stabilization Fund is an independent government entity. In Chad, the government earmarks part of the oil revenue to specific uses, which has led to the fragmentation of the budget.

Some savings funds operate under specific accumulation rules. In some countries, a predetermined ratio of oil revenue is deposited in the oil fund (Chad, Kuwait, Sudan). Such mechanisms have the potential of transmitting oil revenue volatility into the domestic economy. Moreover, since saving decisions are made outside the budget, there is risk that the government borrow while accumulating resources in the oil fund.

Oil funds are neither a panacea nor a guarantee for sustainable resource management; they cannot substitute for sound fiscal policy. A poorly designed fund will do more harm than good, but a well-designed fund could help the government achieve its policy objectives. In the absence of liquidity constraints, governments can bypass oil funds’ rules (including by borrowing). Moreover, some oil funds can carry out investment spending or lending operations outside the budget process (Iran, Kazakhstan until 2005).

The non-oil deficit has become a key indicator for fiscal policy sustainability in oil-producing countries. Targeting the non-oil deficit has the advantage of decoupling fiscal policy from the vagaries of oil revenue and to limit deficits to levels that can be financed.

Newly established oil funds (Timor Leste, São Tomé, Mauritania) have been inspired by Norway’s experience in the management of petroleum resources. They are financing funds integrated in the budget and are part of government’s financial assets and liabilities; they collect all oil revenue and finance the non-oil deficit that is set in the context of a medium-term fiscal framework, consistent with long-term development policy objectives.

The Norwegian Fund was designed to manage accumulated budgetary surpluses; it does not have specific rules for accumulation or withdrawal of resources, making its operation flexible. The Fund is a government account fully integrated in the budget; it receives all net oil revenues from the budget and, in turn, finances the non-oil deficit of the budget through a reverse transfer. In practice, the Norwegian Fund effectively finances the overall budget balance. Overall budget surpluses are transferred to the Fund; budget deficits are financed by the Fund.

  • Particular attention to fiscal transparency is needed in the context of major oil revenues. Fiscal transparency is a key aspect of a governance environment that promotes macroeconomic stability and high-quality growth. 9 The issues connected with transparency are more complex and important in oil producing countries, calling for enhanced measures to promote transparency and strengthen accountability. The Extractive Industries Transparency Initiative and the IMF’s Guide on Resource Revenue Transparency (IMF 2007) are examples of international efforts to support countries to avoid the governance problems so often associated with natural resource industries. 10 Endorsing these initiatives and adopting their principles will send a valuable signal of the authorities’ strong commitment to using oil resources, when they occur, wisely.

  • Strong institutions are required to regulate the oil industry. The CNPA needs to be strengthened in order to be able to adequately control and monitor an oil sector controlled by large, sophisticated multinational companies. If the government decides to take out equity interests in oil ventures, these decisions need to be taken with great care as they can introduce risks to government revenue without yielding significant developmental benefits to Cambodia.


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  • International Monetary Fund, 2005, Guide on Resource Revenue Transparency (Washington).

  • International Monetary Fund, 2001, Manual on Fiscal Transparency, Fiscal Affairs Department, (Washington).

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  • The World Bank, 2007a, “Oil and Gas: A Blessing or A Curse?” Petroleum Sector Briefing Note No. 2, (Washington).

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Prepared by Matt Davies, Joseph Ntamatungiro and Pipat Luengnaruemitchai.


Initial indications of interest have also been received for onshore licenses.


Chevron is the operator of a joint venture with Mitsui of Japan in offshore Block A.


These assumptions are illustrative and may not reflect the agreements already reached with petroleum companies or what will ultimately be legislated.


Takizawa, Gardner and Ueda (2004).


See Rosser (2006) for a literature survey on the resource curse and Sala-i-Martin and Subramanian (2003) for analysis of the importance of institutional capacity.


See Davis, Ossowski and Fedelino (2003) for background on fiscal policy and Ishi, Takeda and Thomas (2007) for issues relating to macroeconomic management.


The IMF has provided technical assistance that explains the pros and cons of various revenue policy options.


IMF (2001).


IMF (2005).

Cambodia: Selected Issues and Statistical Appendix
Author: International Monetary Fund