Cambodia: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Cambodia

2019 Article IV consultation; Press Release; Staff Report; and Statement by the Executive Director for Cambodia


2019 Article IV consultation; Press Release; Staff Report; and Statement by the Executive Director for Cambodia

Recent Developments, Outlook and Risks

1. Context. Stable macroeconomic environment, strong growth and ongoing structural reforms have contributed to significant progress towards SDGs. Following general elections last year, the government’s economic strategy is focused on improving governance. At the same time, citing concerns over human and labor rights, the EU—Cambodia’s primary export partner—has initiated a review of its Everything But Arms (EBA) scheme which could lead to a suspension of preferential trade next year.

2. Recent developments. Growth accelerated to 7½ percent in 2018, led by garment-related exports and construction activity, and supported by strong external demand and credit growth. The current account deficit widened to about 12 percent of GDP in 2018. Robust Foreign Direct Investment (FDI) inflows, mostly into real-estate and banking sectors, as well as an increase in other short-term inflows, have helped the accumulation of gross international reserves, which reached about 7 months of prospective imports in August 2019. 1 Inflation remains contained at just above 2 percent in August 2019. Financial conditions have been accommodative and credit has accelerated, leading to a widening of the bank credit-to-GDP gap, estimated at 17 percent —well above the BIS threshold of 10 percent.


Cambodia: Credit to GDP Gap

(In percentage points)

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Note: The gap is computed using a one-sided HP filter with a lambda of 400.00, correspoding to a financial cycle four times as long as the standard business cycle. The bands are constructed using two standard deviations plus/minus the midpointSource:IMF Staff calculation.

Cambodia: Gross Official Reserves

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Sources: Cambodian authorities; and IMF staff calculations.

3. External Sector Assessment. Reflecting higher current account deficits, the external position is assessed to be substantially weaker than implied by fundamentals and desirable policies. To improve the external position, policies should focus on moderating credit growth, as well as on pursuing prudent fiscal policy and accelerating structural reforms to improve diversification and strengthen competitiveness. While reserves appear adequate when measured against traditional metrics, some further accumulation is encouraged given managed exchange rate regime, high dollarization, and elevated financial sector vulnerabilities.

4. Outlook. Deterioration of external conditions is expected to slow down growth in the baseline to 7 percent in 2019 and 6.8 percent in 2020. Export growth is expected to moderate, contributing to a further widening of the current account deficit to 13.5 percent of GDP this year. Over the medium term, growth is projected to converge to its potential as the real-estate and credit cycles mature. Suspension of trade preferences represents a significant downside risk to the baseline outlook and could have a large negative impact on near-term economic activity (Box 1).

EBA Withdrawal Scenario1

The review of EBA could lead to a suspension of Cambodia’s trade preferences by mid-2020. Staff estimates that a full withdrawal could cause a large decline in exports and GDP growth, reduction in employment and increase in poverty. However, these estimates are subject to significant uncertainty. Risks stemming from elevated domestic financial vulnerabilities could exacerbate the impact further, while a partial withdrawal would reduce the impact.

Trade preferences have played an important role in supporting exports, growth and poverty reduction. Cambodia has benefited from EBA, which has eliminated duties on almost all exports to the EU, since 2001. Since then, the EU has become a major trade partner, accounting for 40 percent of total exports in 2018. Exports are concentrated in garment products, footwear, travel goods, rice and bicycles, with garments accounting for three-fourths of exports to the EU. This has contributed to the rapid expansion of Cambodia’s textile industry, which has become a pillar of its economy, and helped elevate a large share of its population out of poverty. The textile industry employs about 750,000 workers, 80 percent of which are women, and is estimated to indirectly support about 3 million Cambodians.

EBA suspension could have a large negative impact on exports and growth in the short-run. The direct impact of the tariff increase on Cambodia exports is estimated using a partial equilibrium approach. In the event of a full EBA suspension, tariffs would rise on average from 0.1 percent to 12.5 percent. Using product-specific price elasticities drawn from the literature, this increase is estimated to cause a decline of exports to the EU of about 13 percent (equal to a 5 percent decline of total exports). The impact of this export shock on consumption, investment and imports, determined using a panel regression approach, is estimated to lead to a 3 percentage point decline in GDP growth in the first year. A caveat is that this approach does not account for indirect effects, such as trade diversion, the reallocation of labor and capital over time and risks stemming from financial sector vulnerabilities.

Suspension would lead to a permanent decline in garment sector output and employment in the long-run. In order to quantify the long-run impact, a Computable General Equilibrium model is employed.2 The model is calibrated to 165 countries and features cross-border trade in intermediate inputs across 17 sectors. This approach allows to estimate second-order effects to tariffs changes linked to exporting sectors domestically and abroad and to predict potential trade diversion effects. The model estimates a permanent level decline of about 10 percent for textile exports, 7 percent for textile industry output and 6 percent for textile employment.

1 David Corvino and Mariya Brussevich.2 Caceres, Cerdeiro, and Mano (2019). “Trade Wars and Trade Deals: Estimated Effects using a Multi-Sector Model.” IMF Working Paper WP/19/143.

5. Downside Risks.

  • Domestic. Suspension of EBA preferences could have a large negative impact. Concerns about credit quality, increasing concentration in the real-estate sector and consumer lending, reliance on external funding, and growing importance of microfinance institutions (MFI) continue to pose risks to financial and macroeconomic stability. Fiscal spending pressures and potential slowdown in revenue growth risk eroding policy space over the medium-term.

  • External. Significant downside risks include spillovers from rise in protectionism, which could hamper exports and dent investors’ confidence. Weaker than expected growth in China would have significant negative spillovers through FDI, banking, and tourism channels, while a further growth slowdown in advanced economies could significantly reduce exports. Extreme weather events could reduce agricultural production.

Authorities’ Views.

6. There was broad agreement on the macroeconomic outlook and risks. The authorities are cognizant of growing downside risks and agreed that a suspension of EBA and weaker than expected growth in major trade partners could have a large negative impact. The authorities are proactively preparing fiscal stimulus to mitigate near-term impact and structural reforms to improve private sector competitiveness, strengthen economic resilience and promote economic diversification.

Safeguarding Fiscal Sustainability and Promoting Inclusion

7. Fiscal developments. Revenue performance in 2018 was much better than anticipated, resulting in a general government fiscal surplus close to one percent of GDP compared to 4 percent deficit in the budget law. 2 Thanks, in part, to strong administrative efforts, tax revenues reached 18.7 percent of GDP. Strong revenue performance has continued and government deposits increased further this year, reaching 16 percent in August 2019. The fiscal position is therefore projected to remain in surplus (at 0.5 percent of GDP) also this year.


Cambodia: Budget Balance and Fiscal Impulse

(In Percent of GDP)

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Sources: National authorities; and IMF staff calculations.

8. 2020 budget. The preliminary budget envisages continued revenue growth and, to mitigate near-term negative impact on growth from potential EBA withdrawal, a significant increase in government spending. This includes about 2.5 percent of GDP in additional spending to support job creation and human capital development, through a cash-for-work program and vocational training, as well as a significant scale-up in infrastructure investment, to be financed in part by a drawdown in government deposits. Staff baseline, which does not include EBA suspension, assumes that only a part of the additional spending (consistent with identified projects) is implemented next year and the rest only if risks materialize.

  • Near-term fiscal policies. Without EBA withdrawal, continued strong revenue mobilization efforts will allow some additional spending to address development needs. However, in staff s view a more gradual increase in spending is desirable. Prudent fiscal stance needs to be supported by restraining non-development current spending and gains in spending efficiency. In order not to crowd out space for development spending, further public wage increases should be carefully targeted to priority functions and good performers and supported by on-going public administration reforms.

  • Addressing downside risks. Should EBA withdrawal risks materialize, to mitigate negative near-term impact, modest additional spending (about 1.5 percent of GDP in the first year) should aim at improving infrastructure, human capital development, health outcomes, as well as providing temporary support to laid-off workers. Accelerating reforms to strengthen the public investment management framework and spreading additional spending over several years will support efficient investment.

9. Debt remains sustainable. Public debt is low at 28.6 percent of GDP in 2018, is expected to increase only gradually over the medium term, and to remain well below the 40 percent of GDP debt ceiling proposed by staff. 3 The Debt Sustainability Framework shows that Cambodia remains at low risk of debt distress, despite an increase in both debt disbursements and Public-Private Partnerships (PPP) to finance needed infrastructure investment. Short-term risks to public debt stem from the materialization of contingent liabilities, including from PPPs, and export and growth shocks.

10. Policy recommendations (Text Table 1).

  • Fiscal policies to support SDGs. Additional spending is needed to meet selected SDGs (Box 2). Orienting spending towards improving access to and quality of education, health, and infrastructure will support progress towards SDGs, in line with national strategic priorities. As the next step, finalizing detailed sectoral strategies will require coordination, improving investment planning, and further developing financing strategies. While keeping public debt well below the proposed debt ceiling, a part of the priority spending needs could be financed by drawing down government deposits, additional concessional borrowing and involvement from the private sector and international donors.

  • Fiscal governance reforms. While progress has been made in revenue administration and PFM, in line with Fund TA recommendations, fiscal governance should be further strengthened to improve revenue collection, increase spending efficiency and reduce opportunities for corruption. 4 Authorities should continue to improve public investment management by addressing weaknesses, especially in the implementation and monitoring of domestically funded projects, as identified in the Public Investment Management Assessment (PIMA) (Box 3).

  • Medium-term fiscal framework (MTFF). Finalizing and publishing the MTFF will move it from pilot to more permanent implementation phase. To preserve debt sustainability, fully integrating the debt ceiling, at 40 percent of GDP as proposed by staff, would help better align spending needs with the budget Further efforts are needed to improve medium-term budget planning in line with Fund TA recommendations.

  • Debt management. The Public Debt Management Strategy 2019–2023 is expected to focus on preserving low risk of debt distress. Making use of concessional financing, strengthening the risk-management framework for contingent liabilities related to PPPs, including continuing to limit public guarantees, and developing domestic government bond markets are central for implementation. The PPP framework should continue to be strengthened with the new PPP law and through completing a PPP database to inform risk assessments.

Text Table 1.

Cambodia: Policy Recommendations to Strengthen Fiscal Sustainability

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SDG Costing1

Cambodia made substantial progress in human development and economic infrastructure, but important challenges persist. Additional spending for selected SDGs is estimated at least 7½ percent of GDP in 2030, with the largest needs in education and health.2 Further public spending based on detailed sectoral strategies, as well as the involvement of development partners and the private sector, are key to progress towards SDG.

Cambodia continues to progress towards SDGs. Public investment and private sector involvement have significantly increased access to physical infrastructure. Public spending on health and education and measures to improve their quality have also been amplified in recent years. As a result, the enrollment rate in primary education reached almost 100 percent, and teachers and medical staff coverage has improved.

Important challenges persist, and additional spending for SDGs is required. The quality and quantity of social services and physical infrastructure should continue to be improved. The estimates indicate that total additional spending for SDGs needs amount to about 7½ percent of GDP in 2030. Education and health account for about two thirds. Spending needs to reach universal basic and safely managed access to water and sanitation seem manageable. Universal access to electricity and road would require an additional annual spending of about 2½ percent of 2030 GDP but could be larger due to rehabilitation and maintenance costs.

Cambodia has included SDGs into its national development plans. Cambodia mapped all SDGs and one additional goal related to de-mining into national priorities and undertook a Voluntary National Review in June 2019. The Cambodia SDGs framework was fitted into the Government ‘Rectangular Strategy’ and is the basis for the National Strategic Development Plan (NSDP) for 2019–23. The NSDP in turn, adopted by line ministries, includes general policy orientations, relevant national targets, and broad estimates of spending needs and their financing sources.


Cambodia: Additional spending needs for SDGs

(in percent of 2030 GDR in 2030)

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Source: IMF staff estimates using Sachs and others (2019); Sustainable Development Reports (2019); SDSN.
1 Aleksandra Zdzienicka.2 IMF staff estimates based on Gaspar and others (2019): “Fiscal Policy and Development: Human, Social, and Physical Investment for the SDGs”. For water and sanitation, electricity, and roads, the estimates show additional annual spending needed to reach targets by 2030. For health and education, they indicate additional spending required to achieve the targeted outcomes by 2030. ‘Total’ refers to public and private spending.

Improving Public Investment Management1

Despite a significant effort to increase public investment over the past few decades, Cambodia still faces important infrastructure needs. Public investment has been steadily on the increase since the early 1990s, gradually catching up with other Asian countries and converging at 8 percent of GDP. Cambodia has also relied on public-private partnership (PPP) arrangements to develop economic infrastructure. As a result, access to electricity, education or clean water have registered substantial progress. Yet, Cambodia still has one of the lowest public capital stocks per capita in the region. Extra investment in infrastructure will be necessary to fully reach SDGs by 2030. Graduation to lower middle-income status, which is expected to trigger a decrease in the share of concessional externally-financed projects (still two thirds of total public investment), will call for greater reliance on the national budget and on private sector participation to develop infrastructure.

Cambodia could get more infrastructure “bang for its buck” through stronger public investment management practices. In an environment with constrained resources, spending better is just as important as spending more on infrastructure. According to Fund staff calculations,2 the impact of Cambodia’s public investment in terms of economic benefits (access and quality of infrastructure) is on average well below that of other countries in the region. This impact could be doubled through enhanced efficiency which can be achieved by strengthening infrastructure governance.

The main shortcomings in infrastructure governance are mostly found downstream in the management cycle for domestically-funded projects. Overall, while institutions to support infrastructure governance processes are in place, their effectiveness is hampered by fragmentation and limited coordination. The preparation of the capital budget is not based on individual projects. Rather, the capital budget is appropriated as lump sums and allocation to individual projects only occurs after the overall budget is approved, preventing coordination with the recurrent budget. Budget documents do not provide a comprehensive picture of all public investment projects. There is a need to improve capacity to appraise and select projects through the development of in-house project quality assurance processes, to effectively measure project delays and cost overruns across the investment portfolio and improve in-year monitoring of individual projects at the level of line ministries.

1 Fabien Gonguet (FAD) based on findings of a recent PIMA mission.2 For more information on the methodology, see IMF (2015): “Making Public Investment More Efficient”.

11. Revenue mobilization. Addressing large spending needs for SDGs requires continued revenue mobilization efforts through implementation of the new Revenue Mobilization Strategy (RMS) 2019–2023.

  • Property taxes. Authorities have recently updated real-estate valuations for tax purposes. Efforts should continue in using updated real-estate valuations to calculate recurrent property taxes, gradually increasing the rate for recurrent property taxes, and further expanding the tax base.

  • Excises. Priorities include developing comprehensive excise tax legislation, reviewing excise base and rates and moving toward specific system of taxation for certain products in line with Fund TA recommendations.

  • Tax incentives. Efficiency of the tax system can be improved by reviewing all tax incentives and exemptions with a view to limiting erosion of the tax base, estimating the costs of tax incentives, and reporting those regularly as part of the annual budget process to inform policy decisions. Using tax policy to support certain sectors or activities could be achieved through incentives related directly to the amount of investment, including accelerated depreciation and investment allowances.

  • Income taxes. There is room for the tax system to better support inclusion, including through preparations for introducing a comprehensive personal income tax regime, including a capital gains tax, over the medium term.

  • Automation. Automation provides an opportunity to re-engineer business processes and strengthen institutional structures. Integrated IT systems and tax databases would help improve efficiency supported by risk-based audits. Simplifying regulatory procedures and staff training, supported by Fund TA, is an integral part of the modernization process.

Authorities’ Views

12. The authorities agreed with staff’s assessment of overall fiscal performance. While they saw scope for a larger increase in spending should risks materialize, the authorities shared staff view that fiscal stimulus needs to be targeted on activities with high social and growth impact and implemented in an efficient manner. The authorities agreed with policy direction of maintaining strong revenue performance, containing re-current spending, and increasing development spending, in particular towards education, health, and infrastructure. They stressed that the implementation of the new RMS 2019–2023 will focus on increasing efficiency of the tax system, while maintaining a role for investment incentives to support growth and diversification. Other planned reforms focused on procurement, public investment management, debt management and PPPs are expected to improve governance, spending efficiency and management of fiscal risks.

Addressing Macro-Financial Risks

13. Recent developments. Monetary policy has been effective at maintaining low inflation and keeping the Cambodian Riel (KHR) broadly stable against the U.S. dollar. Progress on increasing KHR use has been slow despite the National Bank of Cambodia’s (NBC) efforts, including improvements in market operations such as increased use of the liquidity-providing collateralized operations. Publication of the first Financial Stability Review earlier this year is a welcome step to promote the effectiveness and transparency of macroprudential policy decisions. The NBC continues to implement regulations aimed at increasing liquidity and solvency positions and improving loan classification and provisioning.

Cambodia: Evolution of Selected Banking Regulations, 2017–20

(In percent)

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Source: National Bank of Cambodia.Notes: 1/ Minimum capital requirements are set at: (i) KHR 200bn for commercial banks incorporated as foreign branch whose parent bank is rated investment grade; (ii) KHR 300bn for commerical banks locally incorporated as local company or foreign subsidiary (iii) KHR 60bn for specialized banks locally incorporated; (iv) KHR 120bn for microfinance deposit-taking institutions; (v) KHR 6bn for non-deposit-taking microfinance institutions. 2/ Capital conservation buffer must equal 2.5% of the Risk Weighted Assets, unless determined otherwise by the NBC. 3/ The NBC may set the countercyclical buffer requirement between 0 and 2.5 percent of the Risk Weighted Assets. 4/ LCR requirement is being phased in from 2016 to 2020.

14. Elevated financial sector vulnerabilities. The banking system is dominated by commercial banks, most of which are foreign branches or subsidiaries. The number and total assets of financial institutions have grown. While the banking system remains profitable, with sizeable capital buffers and low NPL ratio, vulnerabilities remain elevated. Credit risks could be understated, given high credit concentration, related party lending risks, lack of consolidated cross-border supervision and gaps in implementation of risk-based supervision. Additionally, personal lending, including by MFIs, and mortgage lending have recently picked up. Liquidity risks remain elevated, with financial institutions continuing to draw on funding from abroad, including from parent banks (to banks) and from financial institutions with development purposes (to MFIs). The aggregate loan-to-deposit ratio has remained broadly stable at around 100 percent, while some institutions including deposit-taking MFIs, with higher ratios, are more exposed to liquidity risks.


Cambodia: Shares of MDIs and MFIs Credit by Sector

(In percent)

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Sources: National Bank of Cambodia

Cambodia: Number of Institutions and Assets to GDP

(In percent)

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Sources: National Bank of Cambodia, Annual Supervision Report 2011–2018; and IMF staff calculations.

Cambodia: Selected Financial Soundness Indicators (FSIs), 2012–2019Q2

(In Percent)

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Source: National Bank of Cambodia.


15. Real-estate related risks. Rapid credit expansion over the last few years has been fueled by a surge of real-estate related credit. As a result, the credit-to-GDP gap currently stands at 17 percent—well above the BIS threshold of 10 percent. Lending by real-estate developers remains largely unmonitored and unregulated and official data on real-estate prices are absent. Anecdotal evidence suggests that while high-end condominium prices remain relatively stable, land prices continue to rise supported by strong demand for affordable housing and commercial-use properties. Cash transactions remain prominent, increasing vulnerability to money laundering risks.

16. AML/CFT regime. The Financial Action Task Force (FATF) has placed Cambodia on the list of jurisdictions with strategic anti-money laundering/countering the financing of terrorism (AML/CFT) deficiencies (the “grey list”). While progress has been made, including through a publication of a national AML/CFT strategy and improvements in risk-based AML/CFT supervision of banks, prompt policy action is needed to address remaining shortcomings.

17. Policy recommendations (Text Table 2).

  • Moderating credit growth. Prompt actions are needed to moderate credit growth. Urgent consideration should be given to additional measures such as gradually raising reserve requirements on foreign currency liabilities. Despite progress, significant data gaps that impair effective implementation of macroprudential policies should be promptly addressed.

  • Addressing real-estate sector risks. The authorities should promptly implement broad-based policies to address risks associated with the real-estate sector. Introduction of targeted measures such as higher risk weights and provisioning requirements for real-estate lending as well as a prudent aggregate loan-to-value limit should be prioritized. Lending by real-estate developers should be monitored and regulated in line with other non-bank credit providers and bank exposures contained. While the authorities are making progress in developing a property price index, with support from Fund TA, data collection and sharing across agencies should be accelerated. AML/CFT supervision of the sector should be strengthened to mitigate risks.

  • Enhancing regulation and supervision. In line with Fund TA recommendations, priority should be given to implementing a comprehensive risk-based supervision program, including amending regulations on related party lending and large exposures to align them more closely with international practice, as well as improving supervision of non-banks. With support from Fund TA, the authorities have developed a roadmap to strengthen risk-based supervision, including planned improvements in supervisory reporting and data analysis. The interest rate ceiling on MFIs should be phased out, and regulations between banks and deposit taking MFIs should be fully aligned. A framework for conducting consolidated and cross-border supervision should be established.

  • Comprehensive crisis management framework. A special resolution regime for deposit-taking institutions and deposit protection system should be developed to allow timely intervention and resolution.

  • Financial sector oversight. Further progress is needed in the areas of AML/CFT supervision and implementation of preventive measures, the use of financial intelligence, and ML/TF investigations and prosecutions. The NBC should closely monitor developments in correspondent banking relationships, in line with Fund TA recommendations. The recently established National Financial Stability Committee should improve coordination and promote accountability for macroprudential policy decisions, while safeguarding NBC’s operational independence.

  • Increasing KHR use. The NBC should continue to support financial institutions’ plans to reach the KHR-loan requirement and monitor unhedged exchange rate risk exposures. A gradual increase in KHR use would allow the NBC to move towards a more robust monetary policy framework, with more exchange rate volatility, thus helping to increase resilience to shocks.

Text Table 2.

Cambodia: Policy Recommendations to Manage Macro-Financial Risks

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* Measures: Macro-prudential measures

18. Financial development. Securities trading continues to expand and the first KHR-denominated corporate bonds were successfully issued. However, the level of financial development remains relatively low. Policies should focus on further equity and bond market development, which could also encourage the use of local currency. Proliferation of fintech startups could help accelerate financial development and inclusion, but also poses risks as these technologies operate outside the purview of financial regulation and supervision. Financial inclusion has improved mainly through access to MFI credit and mobile services. The National Financial Inclusion Strategy should be launched expeditiously to support efforts to improve inclusion and financial literacy.


Cambodia: Financial Development index

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Sources; Financial Development index; Rethinking Financial Deepening: Stability and Growth in Emerging Markets; and IMF Staff calculations.

Authorities’ Views

19. The authorities agreed with the need to closely monitor developments in personal and real estate lending, in line with staff recommendations. They emphasized the importance of credit growth in driving economic growth as well as promoting financial inclusion and access to housing. The NBC favors targeted macro-prudential measures addressing risks stemming from sectoral concentration. The authorities agreed on the need for close cooperation across agencies to address risks stemming from credit growth in the real estate sector. They continue to promote the use of local currency through enforcement of the 10 percent KHR loan requirement and further development of the liquidity-providing monetary operations. The authorities are implementing their AML/CFT action plan to address shortcomings, including strengthening capacity of the Financial Intelligence Unit.

Supporting Progress Towards SDGs

20. Addressing structural constraints to growth. Authorities have announced a wide-ranging structural reform plan aimed at improving competitiveness and diversification, including through measures aimed at facilitating trade, lowering the cost of doing business and improving governance, as well as promoting priority sectors (including agriculture and SMEs). Looking forward, trade tensions call for accelerating structural reforms to address long-standing structural constraints, including through diversifying growth drivers, ensuring reliable energy supply, and strengthening anti-corruption efforts.

  • Diversification. Garment production and tourism sectors have driven economic diversification over the past decades. Special Economic Zones, mostly focused on low-wage manufacturing for exports, have helped distribute social gains from export diversification across local economies (Box 4). However, with few exceptions, progress in trade diversification has been slow. Policy priorities include diversifying exports products and destinations, investing in human development, skills and innovation, and enabling growth of SMEs. Improving the regulatory environment and strengthening rule of law would help improve the business environment.

  • Energy supply. With strong economic growth, continuing population growth and fast-paced urbanization, demand for energy could more than double by 2030. While increasing power generation capacity, including from renewable sources, is expected to meet demand, transitional challenges need to be managed carefully to ensure reliable and affordable access to electricity. This could include further expansion of the national grid network to reduce disparities across regions and expanding cross-border linkages.

  • Anti-corruption. Governance and corruption vulnerabilities pose challenges for growth and sustainable development. Reducing corruption is a strategic government priority and steps have been taken to strengthen anti-corruption efforts. However, further advances are needed to improve anti-corruption institutions, strengthen the anti-corruption framework and address shortcomings in the AML/CFT regime. 5 The AML/CFT regime could also be leveraged to support anti-corruption efforts. Strengthening economic governance through capacity development, modernization of government services and improving data transparency will help narrow the space for corruption.

The Role of Special Economic Zones 1

SEZ program is aimed at promoting diversification and generating socio-economic spillovers in local communities. Investment in infrastructure and human capital will help spread the benefits of SEZs across a broader geographic area.

The Special Economic Zones (SEZs) program is a key component of the government’s diversification strategy. The legal framework for the SEZ scheme was established in 2005. The motivation behind the program is to attract investment in the industrial sector, promote export diversification, and establish economic linkages between urban and rural areas. Currently, there are 23 operating SEZs and 7 have been authorized to begin operation. SEZs are concentrated along western and southern borders of Cambodia with convenient access to trade partners and infrastructure.

SEZs are associated with socio-economic spillovers in local communities but bear fiscal costs in terms of forgone tax revenue. Preliminary regression analysis, based on variation in SEZs’ location and timing of entry into Cambodian districts, shows that SEZs’ entry is associated with higher formal employment and wages in host districts, mainly driven by expansion of the manufacturing sector.2 Nevertheless, most activity in SEZs is focused on low-skilled labor-intensive production, with limited impact on skill development and educational attainment in local economies. At the same time, SEZs have fiscal costs associated with tax incentives provided to the firms operating in SEZs.


Cambodia: SEZ Geographic Distribution and Change in Paid

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Source: IMF staff calculations; CSES; CDC.

Investment in human capital and infrastructure, improvements in domestic firms’ productivity, and changes to tax incentives would help enhance the socio-economic gains. Positive spillovers from SEZs are concentrated in border, coastal, and capital regions of Cambodia. Limited infrastructure and lack of skilled labor remain the key obstacles to SEZ growth.3 Improving access to electricity, roads, water and sanitation would help spread the benefits of SEZs. Retainment of youth in the educational system, improving the quality of and access to vocational training will allow SEZs to attract firms in more technologically sophisticated industries.

Facilitating the regulatory and business environment to increase local firms’ productivity will support stronger supply-chain linkages between FDI and domestic economy. Establishing a rules-based approval system for Qualified Investment Projects within SEZs would improve transparency and operation of SEZs. Finally, moving away from tax holidays towards incentives linked to the level of investment could help attract investment from higher value-added industries4

1 Mariya Brussevich. See “The Role of Special Economic Zones in Promoting Inclusive Growth” (forthcoming).2 Follow-up work addresses confounding factors leading to SEZs’ location choices in more advantageous districts.3 WB and ADB (2015). “The Investment Climate Assessment, 2014. Creating Opportunities for Firms in Cambodia.” World Bank.4 Ghazanchyan, Klemm, and Zhou (2018). “Tax Incentives in Cambodia.” IMF Working Paper WP/18/71.

19. Reforms to promote sustainable development. Cambodia has made substantial progress in advancing income growth and reducing poverty. However, meeting the SDGs by 2030 remains a significant challenge and will require further policy efforts in many fronts. For example, while outcomes have improved, Cambodia still lags its regional peers in terms of access to and quality of education, health, and infrastructure. Additional policy challenges relate to improving environmental sustainability and responding to vulnerabilities stemming from natural disasters and climate change. Cambodia is particularly vulnerable to climate change, given the importance of climate-sensitive sectors, especially agriculture and tourism, as well as weak adaptation capacity. The Cambodian Sustainable Development Goals (CSDGs) provide a framework for implementing policies to achieve further progress towards SDGs. Sustained efforts to support implementation, including integration of CSDGs into planning and policy-making processes and continued monitoring, are needed to sustain progress and achieve gains in economic welfare (Box 5).


Cambodia: SDG Performance1

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Source: Sustainable Development Report 20191 Compared to Asian lower-middle income countries (Bangladesh, Bhutan, India, Indonesia, Lao PDR, Mongolia, Myanmar, Philippines, and Vietnam). The box and vertical Lines represent the interquartile range, minimum and maximum; and the blue dots are Cambodian data.

Cambodia: Development Expenditures

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Source: IMF staff estimates, World Bank.1/ Asian lower middle income countries are Bangladesh, Bhutan, India, Indonesia, Lao PDR, Mongolia, Myanmar, Philippines and Vietnam.

Achieving Gains in Economic Welfare1

Despite significant progress, further efforts are needed to meet SDGs and achieve gains in economic welfare. An illustrative calculation shows that economic welfare remains relatively low and is projected to improve only gradually. However, reforms can help accelerate welfare gains.

Despite significant progress, further efforts are needed to achieve gains in economic welfare.

Cambodia has made significant progress in terms of income growth and poverty reduction over the past few decades. However, meeting the SDGs by 2030 and achieving further gains in economic welfare will require policy efforts in many fronts. For example, there is significant room to improve health outcomes, including life expectancy at birth, which is low relative to peers. Benefits of progress can be illustrated using a summary indicator that captures several dimensions of economic welfare, including consumption, income inequality, life expectancy, leisure and environmental factors (through the cost of greenhouse gas emissions).2Despite strong GDP growth over the past decade, per capita income, a key component of economic welfare, remains relatively low. Economic welfare is also weighed down by lower life expectancy, less leisure and higher costs of greenhouse gas emissions. As a result, estimated economic welfare is below the lower-middle income Asian country median.

Economic welfare is projected to improve only gradually, but reforms can help accelerate gains. Projecting past trends forward suggests progress in economic welfare. However, in part owing to significant population growth, per capita income is expected to catch up only gradually and policy efforts that go beyond strong GDP growth are needed to increase economic welfare. An active scenario shows that closing gaps in underlying indicators through reforms could close to double relative welfare.3 Additional challenges to economic welfare relate to ensuring environmental sustainability, such as safeguarding natural resources, and addressing risks related to climate change.



Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Source: IMF staff estimates.Note: The box and vertical lines represent the interquartile range, minimum, median and maximum of Asian lower middle-income countries; the blue barsmediansof Asian upper middle-income countries; and the red (passive scenario) and green (active scenario) dots reoresent Cambodia.
1 Jarkko Turunen, Lisa Uemae, Albe Gjonbalaj and Hibah Khan.2 Bannister and Mourmouras (2017): “Welfare vs. Income Convergence and Environmental Externalities”, IMF Working Paper WP 17/271.3 Active scenario assumes that potential growth increases to seven percent, Cambodia meets its Paris commitments for reductions in greenhouse gas emissions, and other indicators, such as life expectancy and shares of consumption in income, catch up with top performers among Asian upper middle-income countries.

20. Addressing data gaps and improving data quality. Building on the thrust towards greater data dissemination generated by e-GDDS participation, renewed efforts are needed to address data gaps (Box 6). Progress has been made. With support from Fund TA, the Ministry of Economy and Finance (MEF) has implemented a GFSM 2014-based classification for central and local governments, but there is scope for a better presentational alignment between actuals and projections. Similarly, the NBC has adopted the latest methodological standards for external sector statistics, and initiated work on a residential property price index. Better harmonization of statistical concepts and collections within and across agencies would improve consistency. Looking ahead, key priorities to address data gaps include rebasing GDP, strengthening national accounts statistics, enhancing coverage of non-bank financial corporations in monetary and financial statistics, sourcing and publishing data on private sector debt and the stock of PPPs, as well as improving coherence of datasets on direct investment and tourism. Addressing data gaps also requires new and updated datasets, better interagency sharing of source data, improved timeliness, and a stronger institutional base—including ensuring adequate resources and skills for production and dissemination of statistics.

Aligning Macroeconomic Statistics to Emerging Needs1

While Cambodia is making steady progress in adopting international standards for key macroeconomic statistics, capacity and resources constraints continue to limit statistical development. Further efforts are needed to address data gaps and improve data quality in areas of key policy relevance. Fund capacity development programs are playing a role, but a stronger institutional base is required to strengthen interagency efforts in streamlining data collections and assuring data consistency.

National statistical system faces challenges in addressing expanding demand for data and statistics. This demand is driven by the quest for informed policy-making, greater emphasis on transparency and accountability, and heightened user needs including for monitoring implementation of NSDP and CSDGs.

With the support of Fund TA, Cambodia has adopted the latest methodological standards for government finance and external sector statistics and is working—with the support of other development partners—to adopt the System of National Accounts 2008 (SNA 2008). Cambodia’s participation in the e-GDDS is a key step towards greater data dissemination and should be leveraged to advance data quality in the key areas of coverage, frequency and timeliness. Migrating to the Fund’s Special Data Dissemination Standard (SDDS) in the medium-term would help enhance data availability.

Statistical priorities should be aligned to key policy areas. The growth of the real estate sector and the paucity of related indicators to assess its wider impact underlines the need for addressing the data gaps. The NBC is implementing a work program to compile a residential property price index, but broader gaps exist— including in volume measures (for GDP), credit extended to households by real estate developers (for MFS), and related cross-border flows (balance of payments statistics). With the increase in private external debt and PPP, wider statistical coverage of external liabilities would be essential for improving the scope of balance of payments and international investment position statistics. To this end, templates for external debt statistics, public sector debt statistics (PSDS) and the international reserves and foreign currency liquidity also provide relevant statistical frameworks. Prompt completion of the GDP rebasing is pivotal to improving the accuracy of leading economic performance indicators, and to reinforcing work on tracking progress on the SDGs.

Strengthening the institutional setting is key to further progress. Capacity and resources constraints, particularly at the National Institute of Statistics, is impacting progress. Given the myriad statistical collections and databases that exist across agencies and line ministries, a comprehensive inventory of statistical sources is urgently needed to reduce data fragmentation and tap new source data. Better harmonization of statistical concepts across institutions that comprise the national statistical system would also improve data consistency. Interagency coordinative mechanisms—such as the Statistics Coordination Committee mandated by the Statistical Act—also need to be utilized to take full advantage of the growing number of databases and statistical collections.

1 Paul Austin.

Authorities’ Views

The authorities emphasized efforts to improve the business environment through measures aimed at reducing trade costs and regulatory burden and strengthening anti-corruption efforts. The e-commerce law was recently enacted and several laws are being drafted—such as the investment law, SEZ law, law on competition—with a view of further improving the business environment, supporting the private sector and enhancing governance and regulatory frameworks. The authorities noted that the Voluntary National Review of progress towards the CSDGs, completed this summer, concluded that progress has been promising, and to address remaining challenges, are incorporating goals into their National Strategic Development Plan (NSDP) 2019–2023. The authorities broadly concurred with the SGD costing assessment and recommendations and expressed interest in constructing a financing strategy. The authorities agreed with the need to address data gaps and advance the quality of macroeconomic statistics and underscored the importance of continued capacity development support to address staff capacity, data harmonization and consistency.

Staff Appraisal

21. Economic outlook and risks. Following strong growth last year, near-term economic activity is projected to moderate due to a less favorable external environment, despite sustained rapid expansion of the construction sector and domestic consumption. The current account deficit is widening and the external position is assessed to be substantially weaker than the level consistent with fundamentals and desirable policies. The outlook is subject to important downside risks, including a suspension of EBA trade preferences and weaker-than-expected global growth.

22. Fiscal policies. Thanks to strong revenue performance, public debt has remained low and government deposits have reached high levels. Plans to scale up priority social and infrastructure spending are welcome given the large needs to meet the SDG targets by 2030. However, fiscal sustainability needs to be supported by restraining non-development current spending, containing the overall wage bill and continued efforts to strengthen revenue mobilization. Fiscal governance should be further improved to enhance revenue collection, increase spending efficiency, including by strengthening public investment management, and reduce opportunities for corruption. Publishing the Medium-Term Fiscal Framework and implementing a debt-based fiscal anchor would help safeguard fiscal sustainability over the medium term.

23. Macro-financial policies. Credit has accelerated and is increasingly concentrated in real-estate sector and consumer lending. Prompt actions are needed to moderate credit growth. This includes additional macroprudential measures such as raising reserve requirements on foreign currency liabilities. Addressing risks stemming from the real-estate sector calls for a prompt, broad-based policy response, including targeted macroprudential measures and strengthening monitoring and regulation of the real-estate sector. Lower credit growth, coupled with prudent fiscal policy and structural reforms, would help reduce external imbalances. Further progress is needed to strengthen financial sector oversight, including AML/CFT supervision. Data collection, particularly in the real estate sector, should be accelerated. Finally, promoting further financial market development and local currency use would allow the NBC to move towards a more robust and flexible monetary framework.

24. Structural reforms. Cambodia has made significant progress towards the Sustainable Development Goals owing to strong economic growth and structural reforms. The authorities have announced a structural reform plan aimed at improving competitiveness and diversification, including through trade facilitation, lowering cost of doing business and improving governance. However, meeting the SDGs by 2030 will require sustained policy efforts, particularly in improving education and health outcomes, and investing in infrastructure. To improve economic resilience, structural constraints should be addressed, including through diversifying growth drivers, ensuring reliable energy supply, strengthening anti-corruption efforts and enhancing the regulatory environment. Renewed efforts are needed to address data gaps and improve data quality.

25. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

Figure 1.
Figure 1.

Cambodia: Robust Growth and Low Inflation

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Figure 2.
Figure 2.

Cambodia: Elevated Financial Vulnerabilities

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Figure 3.
Figure 3.

Cambodia: Worsening External Position

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Figure 4.
Figure 4.

Cambodia: Robust Revenue Performance Amid Spending Pressures

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Figure 5.
Figure 5.

Cambodia: Moving to More Inclusive and Sustainable Growth

Citation: IMF Staff Country Reports 2019, 387; 10.5089/9781513524313.002.A001

Table 1.

Cambodia: Selected Economic Indicators, 2015–20

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

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

Includes statistical discrepancy.

Includes unrestricted foreign currency deposits 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, RMB holdings are considered part of reserves following inclusion of RMB in the SDR basket.

Table 2.

Cambodia: Medium-Term Macroeconomic Framework, 2015–24

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

Includes nonbudgetary, grant-financed investment, and, from 2011, public-private partnerships in the power sector projects.

Excludes re-exported goods.

Excludes imported goods for re-export; from 2011, includes imports related to public-private power sector projects.

Includes unrestricted foreign currency deposits 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, RMB holdings are considered part of reserves following inclusion of RMB in the SDR basket.

Table 3a.

Cambodia: Balance of Payments, 2015–24 (BPM5)

(In millions of U.S. dollars, unless otherwise indicated)

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

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

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

Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

Includes unrestricted FCDs held at the NBC; starting in 2009, includes the new 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.

Table 3b.

Cambodia: Balance of Payments, 2015–24 (BPM5)

(In percent of GDP, unless otherwise indicated)

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

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

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

Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

Includes unrestricted FCDs held at the NBC; starting in 2009, includes the new 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.

Table 4.

Cambodia: General Government Operations, 2015–24 (GFSM 2014)

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