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International Monetary Fund. Asia and Pacific Dept
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Publication Date:
18 Dec 2022
eISBN:
9798400228520
Language:
English
Keywords:
debt anchor; inflation risk; transparency policy; IMF HQ; managed peg exchange rate regime; Private debt; Institutional View on capital flows; Inflation; Europe; Global
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IMF Country Report No. 22/371

Abstract

IMF Country Report No. 22/371

Copyright Page

IMF Country Report No. 22/371

CAMBODIA

2022 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR CAMBODIA

December 2022

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2022 Article IV consultation with Cambodia, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its November 23, 2022, consideration of the staff report that concluded the Article IV consultation with Cambodia.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 23, 2022, following discussions that ended on September 20, 2022, with the officials of Cambodia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 8, 2022.

  • An Informational Annex prepared by the IMF staff.

  • A Debt Sustainability Analysis prepared by the staffs of the IMF and the World Bank.

  • A Statement by the Executive Director for Cambodia.

The documents listed below have been or will be separately released.

  • Selected Issues – SM/22/254

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2022 International Monetary Fund

Press Release

PR22/439

IMF Executive Board Concludes 2022 Article IV Consultation with Cambodia

FOR IMMEDIATE RELEASE

Washington, DC – December 18, 2022: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Cambodia.

Cambodian GDP growth rebounded in the second half of 2021, driven mainly by exports of goods. But this year the economy has been buffeted by developments in China, the slowdown in consumer demand in advanced countries—the US and Europe are significant markets for Cambodian manufactures—and tighter global financial conditions (mainly via external demand, but also funding costs for some financial institutions). Inflation surged, following significant increases in fuel and fertilizer costs, export orders for the second half of the year have weakened, and the real estate market is slowing.

Despite the new pressures, the recovery is projected to continue. Real GDP growth is forecast to be 5 percent in 2022, after the strong export performance earlier in the year, and nearly 5½ percent in 2023, supported by the continued recovery of tourism and ongoing policy support, although dampened by external pressures and the impact of rising prices on real disposal income. Inflation is expected to peak this year, be lower in 2023, and decline further thereafter, assuming it remains mostly confined to imported goods.

Uncertainty around the outlook is particularly high, and risks are tilted to the downside. The most pressing risks are from rising private debt; conditions in key large economies; and inflation.

The public finances are expected to gradually improve. Spending pressures and lower-than-expected tax revenue resulted in a fiscal deficit of just over 7 percent of GDP in 2021. The deficit is expected to narrow to just over 4 percent of GDP in 2022 with a strong bounce-back in revenues, widen somewhat in 2023, and decrease further thereafter. Public debt-carrying capacity remains vulnerable to further shocks to exports and growth, but risks of external and overall debt distress remain low, so long as public debt is constrained in the future and the increase in private debt is not associated with an increase in contingent liabilities of the sovereign.

Executive Board Assessment2

Executive Directors welcomed Cambodia’s strong economic recovery from the pandemic supported by the country’s strong economic buffers and robust crisis response. Directors agreed that the growth outlook is broadly favorable, notwithstanding downside risks from slower external demand and rising domestic vulnerabilities including elevated levels of private debt. In that context, they encouraged the authorities to calibrate fiscal policy to help support vulnerable households, without compromising price stability, while also taking steps to address financial sector risks and corruption vulnerabilities.

Directors encouraged the National Bank of Cambodia to rein in credit growth by gradually restoring monetary conditions to pre-crisis levels. They saw merit in normalizing prudential conditions to pre-pandemic settings with heightened supervision and readiness to raise provisioning requirements. Directors also underscored the importance of implementing corporate insolvency, debt and bank restructuring, and deposit protection frameworks.

Directors supported the authorities’ current fiscal plans to provide insurance against downside risks to aggregate demand while maintaining steady reduction in fiscal deficits over the medium term. However, given wide external imbalances and strong credit growth, they emphasized that fiscal support should be well targeted. Social protection measures should continue to be used to protect the poor against the effects of inflation, coupled with offsetting cuts elsewhere.

Directors noted the importance of policy frameworks to ensure resilience over the longer term. They encouraged efforts to enhance spending efficiency and strengthen revenue mobilization, including by broadening the tax base and rationalizing exemptions. A debt anchor in nominal terms, combined with an overall deficit ceiling, would provide a credible framework, particularly as Cambodia seeks to develop a market for sovereign debt. The recent issuance of the first domestic government bond is a welcome development.

Directors underscored the importance of complementary structural policies to support strong, inclusive growth. They welcomed the progress made in implementing anti-corruption action plans and encouraged continued efforts to strengthen governance frameworks more broadly. Directors also emphasized the need for structural measures to boost productivity to help raise living standards and to durably restore external balances, given the pegged nominal exchange rate. They also underscored the importance of improving data quality through capacity development and encouraged the authorities to build on recent efforts to strengthen climate adaptation and mitigation.

It is expected that the next Article IV consultation with Cambodia will be held on the standard 12-month cycle.

Table 1.

Cambodia: Selected Economic Indicators, 2019–23

article image
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.

Title page

CAMBODIA

STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION

November 12, 2022

KEY ISSUES

Context: After suffering a recession during the pandemic, the Cambodian economy was on a steady recovery path, but is facing new pressures in 2022 that have buffeted external demand and increased inflation rates. The authorities have largely continued with crisis policy responses and have pressed on with policy reforms. The recovery is projected to continue, notwithstanding external stresses. Risks of public debt distress remain low. However, the level of private debt raises concerns about potential debt overhang.

Recommendations:

  • Financial: The supervisor has taken the welcome step of reintroducing provisioning requirements. It should continue to normalize prudential conditions to pre-pandemic settings, take a highly conservative approach to supervision, and be prepared to further raise provisioning requirements and instruct lenders facing solvency problems to proactively increase capital. High private debt levels combined with large outstanding amounts of restructured loans emphasize the importance of strengthening corporate insolvency regimes and bank resolution frameworks, and the need to introduce deposit protection schemes.

  • Monetary and exchange rate policy: The central bank should complement prudential measures by gradually restoring minimum reserve requirements to pre-crisis levels, to help reign in credit growth and mitigate the risk of domestic inflation risks going forward. Given the managed peg exchange rate regime and extensive dollarization, addressing external imbalances falls to gradual fiscal consolidation and structural reforms.

  • Fiscal: Current fiscal plans appropriately balance some continued stimulus in the near term with steady reductions in the deficit over the medium term. Social protection measures should continue to be used to protect the poor against the effects of the new external shocks, with care to ensure all public spending is well targeted. Revenue mobilization (including rationalizing exemptions) and diversification are paramount over the medium term; simplification of the tax

  • system would encourage compliance. A debt anchor in nominal terms, combined with an overall deficit ceiling, would provide a credible framework.

  • Governance: Notable efforts have been made to improve governance frameworks. However, vulnerabilities remain, which would be ameliorated by passage of key legislation, digitization of reporting and monitoring processes, and securing sufficient human and technological resources for investigative and monitoring agencies.

Approved by

Anne-Marie Gulde-Wolf (APD) and Andrea Schaechter (SPR)

Discussions took place from September 7–20, 2022. The staff team was comprised of Juliana Araujo, Alessia De Stefani, Yasuhisa Ojima (IMF resident representative), Ryoichi Okuma, Alasdair Scott (head) (all APD), Camilo Enciso (LEG), Dyna Heng, and Luisa Zanforlin (both ICD). Kuchsa Dy, Pirun Chan, and Chenda Pich supported the mission from the IMF’s office in Phnom Penh. Hibah Khan and Mariam Souleyman assisted from IMF HQ. Meetings were also attended, variously, by IMF Executive Director Rosemary Lim and Sukjai Wongwaisiriwat (OEDST).

Contents

  • RECENT DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Policies to Manage Near-Term Challenges

  • B. Policy Frameworks for a Resilient Economy

  • STAFF APPRAISAL

  • BOXES

  • 1. Balance of Payments Data

  • 2. GDP Rebasing

  • FIGURES

  • 1. Gradual Recovery of the Cambodian Economy

  • 2. The Public Finances

  • 3. External Balances

  • TABLES

  • 1. Selected Economic Indicators, 2019–23

  • 2. Medium–Term Macroeconomic Framework, 2019–27

  • 3a. Balance of Payments, 2019–27 (BPM5–In Millions of U.S. Dollars)

  • 3b. Balance of Payments, 2019–27 (BPM5– In Percent GDP)

  • 4. General Government Operations, 2019–27 (GFSM 2014)

  • 5. Monetary Survey, 2019–23

  • ANNEXES

  • I. External Sector Assessmemt

  • II. Risk Assessment Matrix

  • III. Implementation of Past Advice

  • IV. Capacity Development Strategy

  • V. Social Protection Reform in Cambodia

  • VI. De-Dollarization Measures in Cambodia

  • VII. Fighting Climate Change in Cambodia

  • VIII. Governance and Anti-Corruption Frameworks

  • IX. Fiscal Rules in Cambodia

1

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2

At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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Cover IMF Staff Country Reports
Cambodia: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Cambodia
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2022: Issue 371
Publisher:
International Monetary Fund
ISBN:
9798400228520
ISSN:
1934-7685
Pages:
122
DOI:
https://doi.org/10.5089/9798400228520.002