Cambodia: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Cambodia

International Monetary Fund. Asia and Pacific Dept

doi:10.5089/9798400228520.002.A001

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International Monetary Fund. Asia and Pacific Dept

International Monetary Fund. Asia and Pacific Dept
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Publication Date:: 18 Dec 2022

eISBN:: 9798400228520

Language:: English

Keywords:: credit growth; private sector credit; Cambodia authorities; GDP data; GDP share; Monetary base; Imports; Bank deposits; Global

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1. The Cambodian economy was hit hard by the pandemic, but damage was mitigated by policy measures that benefited from buffers built up before the crisis.

Abstract

1. The Cambodian economy was hit hard by the pandemic, but damage was mitigated by policy measures that benefited from buffers built up before the crisis.

Recent Developments

1. The Cambodian economy was hit hard by the pandemic, but damage was mitigated by policy measures that benefited from buffers built up before the crisis.

The pandemic brought a collapse of tourism and, initially, a falling demand for manufactured goods. In 2021, the economy was set back by community spread of the virus and some lockdowns. As a result, the economy fell into recession in 2020 and had relatively slow growth in 2021.
A managed exchange rate meant limited ability to use monetary policy, but, in part because of substantial foreign exchange reserves, the exchange rate did not come under significant pressure. Large fiscal buffers provided room for increased spending on health care, employment support, and cash transfers to households. Without these measures, growth would have been even worse, as would likely have been the increase in poverty.^¹
Spending pressures combined with lower-than-expected tax revenue resulted in a larger fiscal deficit than expected in 2021. Tax revenue from imported goods was weak in 2021 (Figure 2). Compared to 2020, spending as a share of GDP remained almost unchanged with increased Covid-19 related public spending compensated by reductions in other current and capital spending.

2. From the second half of 2021, the Cambodian economy showed stronger signs of recovery from pandemic stresses (Figure 1). Growth was driven mainly by exports of goods (garments, electronics, and vehicle parts), which grew by around 40 percent (yoy, ytd), while the recovery in construction and real estate—a large contributor to growth before the crisis—was relatively weak. The recovery was boosted by rapid vaccination during 2021 and reductions of Covid-19 infection rates. In March 2022, the country fully relaxed entry restrictions on foreigners, providing a boost to the beleaguered tourism industry.

3. 2022 has brought new stresses. The external environment has become more challenging:

The slowdown and further lockdowns in China have slowed the recovery through lower foreign investment, particularly in real estate, and supplies of textiles to the garments industry. Continued restrictions on movement have also delayed a quick return to precrisis numbers of foreign tourists, given the pre-pandemic importance of Chinese tourists to Cambodia.
Cambodia has limited export and financial exposure to Ukraine and Russia, but the war has affected Cambodia through demand in Europe, which is a major market for manufactures, second only to the US. The tightening of monetary conditions in advanced economies has mainly indirect effects through external demand, as the financial system is mostly reliant on domestic deposit funding.^²

4. These new stresses have been associated with a surge in inflation and a slowdown in growth.

Inflation reached 7.8 percent y/y in June 2022, before retreating to 4.4 percent y/y in September. Cambodia imports food and fertilizers; its reliance on imported fuel is higher than many other regional comparators. Consequently, the recent increases in global fuel, food, and fertilizer prices have resulted in historically high inflation rates, like neighboring countries. The contribution of core items has increased, but remains muted so far.
There are signs that the domestic real estate market (both high-end residential and commercial) is experiencing a downturn. Yields indicate a growing surplus of commercial and high-end residential space. Rental prices for commercial developments, as well as purchase prices for high-end residential properties, appear to be falling after more than a decade of sustained growth. The sector is important in terms of both GDP share and exposure of the rest of the economy.

5. Despite the pressures of the past years, credit growth has continued to be strong, and private sector indebtedness is now significant (Selected Issues Paper).

Credit growth has averaged around 24 percent y/y from 2013 to 2019 and slowed only mildly during the pandemic. Outstanding private sector credit reached 170 percent of GDP by end 2021, a ratio significantly above those of regional peers, suggesting that the level cannot be safely dismissed as driven by financial deepening. Credit growth has been strong across all sectors (text figure).^³ The number of loans has increased but the number of borrowers has increased at a slower pace, suggesting that some borrowers are becoming more leveraged.
Credit growth was associated in 2020 and 2021 with growth in broad money that, although lower than that in 2019, was still stronger than growth in nominal GDP, driven in part by the expansion in the central bank’s balance sheet as the government drew down on deposits at the central bank to finance fiscal support during the pandemic. It was also supported by the steady inflow of FX deposits in commercial banks,^⁴ and a steady increase in the loan-to-deposit ratio.

6. There are some signs of damage from the crisis. Lack of unemployment data makes it difficult to assess scarring effects in the labor market. But test scores indicate that lost schooling hours during the pandemic has damaged human capital attainment. Approvals of large projects (foreign-financed) remain lower than before the pandemic. Business registration appears to be recovering gradually, while business liquidations have been on the rise. Around 7 percent of the total stock of outstanding credit has been restructured (amounting to 13 percent of GDP).

7. The current account deficit has widened significantly and the external position at end-2021 remains substantially weaker than the level implied by medium-term fundamentals and desirable policies. The external sector assessment is complicated by data issues (Box 1), idiosyncratic and highly volatile flows of gold, uncertainty about the recovery, and the difficulty of assessing the appropriate level of imports to sustain growth convergence at this stage of the country’s development.

In 2021, the current account deficit widened substantially, to an estimated 48 percent of GDP. This was driven in part because of subdued tourism and rebound in imports, but unexpected imports of gold accounted for half of the deficit^⁵ The reasons for the inflows of gold—and hence the assessment of whether the flows are temporary or permanent—are debatable: gold imports increased substantially from the end of 2020 through 2021 following the increase in the price of gold, suggesting perhaps purchases in expectation of future increases, but the size of the inflows is much larger (relative to nominal GDP) than would be expected on the basis of hedging flows observed in other countries.
The current account (CA) remains substantially weaker than implied by fundamentals and policies based on 2021 data (Annex I. External Sector Assessment), notwithstanding a gradual reduction in fiscal deficits. This conclusion is supported by both CA and REER models used, though there is uncertainty surrounding the underlying BoP data. The application of the CA model includes an adjustor for the impact of the pandemic on tourism, for the sharp increase in imports for emergency healthcare spending in 2021, and to discount half of the gold imports as temporary. The assessment would remain the same even with gold flows completely removed from the CA data, and would leave a substantial amount to be explained away by other factors. The gap may also be partly due to overstated savings needs, since the model does not take into account Cambodia’s young population.^⁶
Financial inflows have been steady, which has been crucial for the stability of the exchange rate and FX reserves, and has been associated with continued growth in dollar deposits at banks. However, a large part is accounted for by a surge in short-term unidentified inflows.
FX reserves declined by two percent in 2021 from levels in 2020, but, at US$ 21 billion, covers around 8 months of projected imports. The exchange rate has remained steady, with some intervention in late 2021, but none in 2022 to September.

8. The authorities’ have largely continued with crisis policy responses and have pressed on with important reforms.

Support measures include loans and guarantees; tax breaks; wage subsidies and retraining, and cash transfers. The Covid-19 Intervention Package, including public health, social and other economic interventions, is planned to reach US$ 882 million in 2022 (about 3 percent of GDP), providing a similar support than in 2020, although less than in 2021 (when it reached 5 percent of GDP) owing to withdrawal of emergency Covid-19-related healthcare spending. The National Bank of Cambodia (NBC) has maintained reserve requirements and the capital conservation buffer at current levels, has ended forbearance on new restructurings from July this year.
The authorities have sought opportunities for structural reform, including establishing new free trade agreements and introducing a “One-Stop” mechanism for investors (e.g., online business registration, a national single window).

^{Box 1.}

Balance of Payments Data^¹

Recent noticeable improvements in data collection have resulted in improved coverage of trade data, especially in precious metals and in agricultural products. However, large and persistent discrepancies between the trade data from national sources and the mirror data from trade partner countries complicate the assessment of external balances, as does the large amount of short-term financial inflows labelled “Other”. Improvements in data on remittances, foreign direct investment, and foreign assets and liabilities are also needed.

Trade: Discrepancies are the major contributor to inconsistency between national accounts and balance of payments—over the period from 2015 to 2020, discrepancies between the current account and saving/investment balances averaged around 11 percent of GDP. It is expected that these discrepancies will be smaller following the introduction of newly-rebased GDP data in the next year.

Short-term financial inflows: Current estimates are to be replaced with data sources that would cover cross-border financial transactions of non-financial sectors.

Remittances. Proposed changes to the models used to estimate remittances model rest on fastidious research of recent studies and economic indicators in hosting countries, but the potential for significant overvaluation remains. Better data on the number of workers abroad (especially in Thailand) and the work duration per contract will affect the estimation of earnings and, hence, the value of remittances.

Foreign assets and liabilities. Better source data are needed to measure foreign assets and liabilities of non-financial corporations and households. The priority is collecting and processing administrative data, most importantly financial statements of enterprises with foreign capital and data on the execution of large infrastructure projects, including under private-public partnership, where foreign capital is utilized.

The IMF continues to provide technical assistance to improve external sector statistics.

^¹ This box was written by Natalia Ivanyk from the IMF’s Capacity Development Office in Thailand.

COVID-19 Intervention Package: Public Health and Social Intervention

(Percent of GDP)

COVID-19 Intervention Package: Public Health and Social Intervention

(Percent of GDP)

Interventions	Description	2020	2021		2022
Interventions	Description	Disb.	Plan	Disb.	Proj.
Health, Outbreak Prevention and Treatment	Scaling up health response by increasing prevention and detection facilities, clinical management, treatment and coordination and supporting system	0.1	0.1	2.6	0.3
Wage subsidy and skill training	Providing partial wage subsidies of $40 per month and technical/soft skills training for furloughed workers in the tourism and garment industries	0.2	0.2	0.1	0.2
Cash for work	Providing jobs in rural areas through construction, upgrade, and maintenance of rural roads, drainage and small-scale irrigation	0.4	0.6	0.6	0.3
Cash Transfer	Providing monthly cash grants to poor and vulnerable individuals that are registered in the government’s IDPoor database	1.2	0.8	1.1	1.3

COVID-19 Intervention Package: Public Health and Social Intervention

(Percent of GDP)

Interventions	Description	2020	2021		2022
Interventions	Description	Disb.	Plan	Disb.	Proj.
Health, Outbreak Prevention and Treatment	Scaling up health response by increasing prevention and detection facilities, clinical management, treatment and coordination and supporting system	0.1	0.1	2.6	0.3
Wage subsidy and skill training	Providing partial wage subsidies of $40 per month and technical/soft skills training for furloughed workers in the tourism and garment industries	0.2	0.2	0.1	0.2
Cash for work	Providing jobs in rural areas through construction, upgrade, and maintenance of rural roads, drainage and small-scale irrigation	0.4	0.6	0.6	0.3
Cash Transfer	Providing monthly cash grants to poor and vulnerable individuals that are registered in the government’s IDPoor database	1.2	0.8	1.1	1.3

Authorities’ Views

9. The authorities agreed that external stresses were severe, but were less conservative about credit levels. The authorities noted that the economy had maintained high credit growth for many years without problem, and that credit was evenly distributed across productive sectors; moreover, with rebased GDP, the private debt ratio would look more benign. They considered that estimates of current account imbalances should also account for high prices of imported intermediates and fuel, and falling tourism revenues and lower remittances during the pandemic.^⁷ Gold imports were driven by wealthy individuals seeking a store of value in uncertain times.

Outlook and Risks

10. 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. Growth is assumed to gradually converge to a potential rate of about 6V2 percent. The trend growth rate assumption is somewhat below pre-Covid-19 rates of 7 to 7½ percent, but comparable with those seen in neighboring countries at similar stages of development, and reflects a judgment that, although the Covid-19 crisis will have some lingering effects, the authorities’ ongoing reforms (e.g. the investment law that creates a single contact point for investors) and new trade agreements (RCEP, an FTA with China) will support growth over the medium term. Inflation is expected to peak this year, be lower in 2023, and decline further thereafter, assuming it remains mostly confined to imported goods.

11. The public finances are expected to gradually improve. Staff expects the fiscal deficit to narrow to 4.1 percent of GDP in 2022 and increase to 5.0 in 2023, before falling thereafter to 3 percent of GDP in the long-run, consistent with public debt at 40 percent of GDP. 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 debt is constrained in the future.

Staff projects the fiscal deficit to narrow from 7.1 percent of GDP in 2021 to 4.1 percent of GDP in 2022, on the back of broad-based tax revenue rebound (Figure 2) and lower spending, increase somewhat in 2023, and decline steadily thereafter. Staff expects that fiscal support will be contained in 2022 because of winding back emergency Covid-19 healthcare spending. In 2023, current spending is expected to increase slightly, reflecting planned wage increases and some decompression of government operations (e.g. traveling), while social protection and capital spending levels are to be maintained. The projections assume a reduction in the level of government deposits at the central bank, from around 24 percent in 2020 to around 10 percent of GDP over the medium term.
Debt carrying capacity remains vulnerable to further shocks to exports and growth. A test for financial market contingent liabilities reveals an increase in debt servicing to revenues. Overall, however, the increase in the ratio of total public and publicly guaranteed (PPG) debt to GDP is relatively modest, implying that Cambodia remains at low risk of external and overall debt distress (Debt Sustainability Analysis).

12. The current account deficit gradually falls. The balance is projected to be -30 percent of GDP in 2022, narrowing as the services balance recovers thanks to the expected growth in tourism and other exports, and on the assumption that gold imports are temporary. The deficit remains mostly financed in the baseline. As a result, reserves are expected to remain high and stable, at about 8 months of imports throughout the projection period.

13. Credit growth would moderate, but private sector debt would continue to increase. Forces acting to slow credit growth include: revised prudential rules; further competition for funding among commercial banks (mainly deposits, but also higher wholesale costs for some banks); a reduced pace of drawing down deposits at the central bank, and, potentially, declining collateral values and rising shares of non-performing loans. However, credit growth would still outstrip nominal GDP growth.

14. Uncertainty around the outlook is particularly high, but risks are tilted to the downside (Annex II). The most pressing risks are

Credit growth: The level of private debt raises concerns about the drag on the economy if borrowers struggle to meet repayments and large amounts of non-interest-paying assets accumulate in banks’ balance sheets.
Conditions in key large economies: Further lockdowns in China could lead Cambodian manufacturers to suspend production for want of supplies, while a further slowdown could slow inward investment. Demand in advanced countries is vulnerable to tightening financial conditions; vulnerabilities in Europe are accentuated by energy supply risks.
Inflation: Global food and fuel price inflation could prove to be more persistent, and inflation expectations could de-anchor in advanced countries, incurring further and more rapid tightening of monetary conditions and borrowing costs, and lower growth in advanced economies. Imported food and fuel price increases could generate second-round effects in domestic inflation that would damage aggregate demand, which would be accentuated if the currency depreciated, given extensive dollarization.

Over the medium term, the economy faces ongoing risks from a resurgence of Covid-19 or other epidemics, and the country is especially vulnerable to natural disasters arising from drought, floods, and tropical storms.

Authorities’ Views

15. The authorities agreed on risks from the external environment, but expected somewhat stronger growth. They expected positive momentum for exports into 2023, but slowing compared to early 2022. They agreed that the slowdown in China might slow inward investment, but nonetheless expected that construction and real estate would continue to grow, albeit at a slower pace and below pre-pandemic levels. They expressed particular concern about fallout from the war on Ukraine and from monetary policy tightening on demand in major export markets. They also stressed that fiscal support planned for 2023 would prop up domestic demand. The authorities expected inflationary pressures to slightly moderate in 2023, as international food and energy prices are expected to subside significantly, and did not see risks of significant second-round effects on domestic inflation. The authorities did not perceive the risks from private debt were as severe as those posed by the external environment.

Policy Discussions

16. The policy discussions focused on near-term challenges and medium-term policy frameworks. The immediate issue facing the authorities is the level and composition of policy support, given the challenges posed to growth from the external environment on the one hand and the high levels of private indebtedness on the other. The next pressing issue is policy frameworks to guide Cambodia over the medium term. Both items are relevant for thinking about safeguards against imbalances:

Credit and debt: Escalating private debt combined with the risk of further pressures on real incomes raise the question of potential stresses on borrowers and the resilience of lending institutions, and emphasize the importance of frameworks for resolving insolvencies and restructurings.
Fiscal: The Debt Sustainability Analysis indicates that Cambodia has fiscal space to cope with further adverse shocks, but nonetheless fiscal resources are not limitless, especially as sovereign access is only nascent, emphasizing the need for careful targeting of fiscal support and frameworks to ensure fiscal credibility is maintained.
External: Due to extensive dollarization, nominal depreciation alone would not significantly address external imbalances. The burden of external adjustment therefore falls onto gradual fiscal consolidation, on measures to contain credit growth, and on reforms to improve long-run productivity.

17. Prospective changes to GDP data complicate policy recommendations. Preliminary results suggest that the level of nominal GDP could increase by close to 30 percent when national accounts are rebased in early 2023, substantially changing indicators such as public debt to GDP ratios (Box 2).

^{Box 2.}

GDP Rebasing

The National Institute of Statistics has prepared new national accounts data, rebased to 2014. The level of Nominal GDP is expected to be revised up by just over 30 percent, and manufacturing and services (agriculture) will account for slightly larger (smaller) shares of production GDP. A Technical Review by the IMF’s Statistics Department has confirmed that the rebasing exercise follows international statistical conventions.

While a more comprehensive assessment of the implications of GDP rebasing will only be possible upon final data release, expected in early 2023, it is anticipated that the ratio of public and private debt to GDP will decline but so will the revenue-to-GDP ratio. The ratio of private debt to GDP would likely remain high, in comparison with peer countries in the region. Cambodia would retain lower-middle income status.

A. Policies to Manage Near-Term Challenges

18. Policy support will need to be nimble in the face of considerable uncertainties, balancing the need to support demand if downside scenarios to growth materialize, or temper inflation if second-round effects onto domestic inflation emerge, or potentially tighten macro-financial policies.

Fiscal Policy

19. Current fiscal plans are appropriately balanced under the baseline scenario, with (i) the Covid-19 fiscal package cut back and expected fiscal consolidation in 2022, (ii) some continued stimulus in 2023 providing support against new shocks to aggregate demand that hit the economy in 2022 and will continue to unfold in 2023, and (iii) steady reductions in the deficit over the medium term. In terms of composition, the current plans adequately maintain the same heightened capital investment and cash transfer stimulus, while allowing for some needed current spending decompression. However, given high inflation, wide external imbalances, strong credit growth, and weak monetary transmission, fiscal support needs to be well targeted. Support to households should gradually move from the Covid-19 Cash Transfer Program for the Poor and Vulnerable to a system that better targets the most vulnerable household members and their needs, as planned^⁸. Support to business should be targeted based on viability and the long-term growth potential of different sectors.

20. Fiscal plans may need to be recalibrated if risks materialize. If inflation risks materialize and there are signs of significant second-round effects on domestic inflation, fiscal support should be wound back. There is fiscal space to provide targeted support in case of downside risks to growth. The authorities should avoid permanent spending increases that would make a medium-term fiscal deficit reduction challenging.

21. Social protection measures should continue to be used to protect the poor against the effects of inflation, but with some offsetting cuts elsewhere. Fiscal measures to protect the vulnerable from inflation are preferable to subsidies, but costs could escalate rapidly. The government has indicated that it will expand the range of overall social protection (Annex V) and use the system of cash transfers introduced in 2020 to compensate poorer households for increases in fuel and food costs. This approach is better than subsidies, but could add as much as 0.8 percentage points of GDP in spending under plausible scenarios for fuel prices alone (Selected Issues Papers). Making these transfers compatible with preserving fiscal space will require some offsetting cuts—in particular rolling back some Covid-19 support measures no longer needed. Some offsetting fiscal measures already taken, include discontinuing wage subsidies (while maintaining skill training), lowering emergency healthcare spending, and partially rolling back tax exemptions^⁹.

Monetary and Exchange Rate Policy

22. The exchange rate regime and extensive dollarization limit the ability of monetary policy to respond to inflation. The exchange rate follows a managed peg; moreover, the economy is highly dollarized, with a considerable degree of dollar invoicing in the manufacturing sector^¹⁰.

23. Nonetheless, to help rein in credit growth, the NBC should gradually restore monetary conditions to pre-crisis levels. Minimum reserve requirements on financial institutions should be increased, with the priority to raise the minimum reserve ratio for foreign currency above that for local currency, which would also mitigate the higher liquidity risks in FX than in local currency and assist in de-dollarization (Annex VI).^¹¹

24. Rectifying real exchange rate imbalances falls to gradual fiscal consolidation, measures to contain credit growth, and reforms to improve productivity. Priorities for the latter include improving transport and communications infrastructure and raising human capital. Because improvements are likely to be slow, the adjustment should be supported in the near-term by maintaining the steady reduction in fiscal deficits.

Financial System Policies

25. The supervisor has ceased forbearance on newly-restructured loans, but has continued supportive policies for borrowers and banks. In May 2020, the NBC introduced a policy to facilitate restructuring of loans; since December 2021, it has taken the welcome step of reintroducing provisioning requirements on restructured loans. However, prudential practices are yet to revert to pre-pandemic standards: only 10 percent of total restructured loans were classified as non-performing as of June 2022, whereas under pre-pandemic requirements, restructured loans would have been mostly classified as NPLs. The capital conservation buffer has remained at 1.25 percent, after having been halved in May 2020. In addition, capitalization levels, while high, may be overstated as regulators have been lenient in allowing accrued receipts to be included in profits and reserve accounts as capital resources.

26. The ongoing support and previous experience with private debt imply a more conservative approach to supervision is warranted.

Current rates of credit growth are likely driven by lenient prudential requirements—should a small proportion of restructured loans be written off, losses would likely be large and concentrated across banks. Past experience suggests that supervisors should be prepared for increasing levels of NPLs, which, if not addressed, would act as a drag on growth^¹².
While all banks comply with mandatory liquidity coverage ratios, current regulations allow them to include holdings of central bank instruments in local currency, whereas potential liquidity needs are in foreign currency, given the high share of dollar deposits.

27. On this basis, the NBC needs to continue to normalize prudential conditions to pre-pandemic settings, so that the financial system is able to withstand future shocks^¹³.

The authorities should continue the gradual calibrated withdrawal of forbearance on (all) restructured loans, including returning to pre-pandemic prudential practices on restructured loans. At the same time, it should instruct lenders with the largest share of restructured loans to proactively increase capital.
The NBC should intensify supervision, continuing rigorous onsite inspections and including extensive reviews of loan portfolios. It is particularly important to understand to what extent covid-related forbearance policies may have been supporting unviable businesses. Supervisors could also consider collecting and centralizing financial information on the largest borrowers, to facilitating debt restructuring policies and avoid uncoordinated evergreening practices.
The NBC should be vigilant of any sudden liquidity needs. The authorities should proactively address emerging weaknesses under established safeguards to avoid potential distress from spreading across institutions.
The authorities could consider increasing minimum paid in capital amounts and further review “fit and proper” requirements to ensure the financial system remains sound and stable. In particular, the establishment of nine new banks during the pandemic is difficult to square with the economic cycle.

B. Policy Frameworks for a Resilient Economy

28. The recovery is the right moment to advance frameworks for a robust and resilient economy. The authorities announced their economic recovery strategic framework in late 2021, introducing programs to revive key sectors, address structural challenges for diversification and competitiveness, and strengthen preparedness and responsiveness to future crisis^¹⁴. At this juncture, three sets of issues are particularly important: first, the medium-term fiscal strategy, second, securing a safe and inclusive financial system, and improving the framework for governance and anti-corruption.

Fiscal Strategy and Frameworks

29. Demands on public spending increased during the pandemic and will likely increase further.

Previous exercises identified spending needs to reach SDG targets of at least 7½ percent of 2030 GDP, with the largest needs in education and health^¹⁵. The authorities had incorporated those needs in a national plan, but the emergency spending related to the Covid-19 crisis required a reprioritization^¹⁶.
The crisis also highlighted healthcare spending needs, which is below the average of peers. The crisis has also evidently seen damage to educational attainment: the World Bank estimates that Cambodia’s current cohort of students stands to lose 1.5 learning-adjusted years of schooling—15 percent of pre-pandemic expectations^¹⁷.
Going forward, demands on both educational and healthcare spending are likely to increase as the country attains middle income status, the authorities have indicated plans to expand social protection (Annex V), and climate adaptation needs will increase with climate change (Annex VII).

30. The increased demands on public spending call for the introduction of a comprehensive fiscal framework. This would include an operational fiscal rule, with numerical target, to provide guidance on spending and revenue strategy and hence provide a credible framework as Cambodia develops access to market financing. Currently, the Public Debt Management Strategy (PDMS) 2019–23 lays out a total debt ceiling of 55 percent of GDP in NPV terms. Staff recommends a debt anchor in nominal terms, combined with an overall deficit ceiling, over other rules (e.g. expenditure rules), for simplicity, transparency, and direct link to fiscal balances. An anchor of 40 percent of nominal GDP should provide adequate buffers against the risk of debt increases, given the structural vulnerabilities (e.g. narrow revenue base, volatility of revenues and social protection demands, dollarization and fixed exchange rate) and the need to demonstrate policy continuity as the government seeks to establish market access.

31. A strategy for revenue mobilization should consider not only revenue needs but incentives (Selected Issues Papers).

On the basis of current GDP data, tax revenues are not low in comparison to peers. But given the likely increase in spending needs, tax revenues will need to increase. In addition, as Cambodia graduates from least developed country status, grant revenue will continue to decline and will need to be replaced.
The structure of taxes should be diversified. Revenue reliance on imported goods is significant, and consequently tax revenue is heavily procyclical. The ability to increase labor and corporate income taxes is limited by the desire to encourage workers and firms to register formally. Instead, more reliance on inelastic taxes (property, “sin” taxes) should be considered.
Tax deferrals and exemptions should be minimized. Tax incentives to the tourism industry have been partially rolled back, but exemptions from customs duties and VAT remain significant, and the long-standing corporate income tax holiday is either not effective or potentially harmful.

32. The government should continue to develop a sovereign bond market, as access to concessional finance and grants will likely subside with continued increases in national income. Long-term government securities will also facilitate the development of the nascent Cambodian insurance and private pensions industries. The successful first issuance in September 2022 is a welcome step^¹⁸.

Authorities’ Views

33. The authorities considered ongoing fiscal stimulus important, but with an eye to debt sustainability. The authorities considered that the fiscal stimulus should continue into 2023 to help support the recovery and counter the impact of inflation shocks. The authorities project the fiscal deficit to be slightly lower in 2023 compared to that in the 2022 budget law. The authorities agreed with the need to resume savings over the medium term in line with the new draft Public Finance System Law.^¹⁹ The authorities affirmed they are committed to maintain debt sustainability, and to develop the government bond market in a sustainable manner. They will consider a nominal debt target (which would embed a safety margin from the current debt ceiling) but highlighted that the upcoming GDP rebasing would affect several indicators, including not only the debt-to-GDP ratio but also tax revenues to GDP. To help mobilize domestic resources, the authorities will investigate how to rationalize tax exemptions.

Financial and Monetary Frameworks

34. Deeper policy frameworks are needed to safeguard the financial system and protect borrowers:

The authorities should complete the bank restructuring and the deposit insurance legal frameworks and enabling regulations, as the post-pandemic environment might request rapid action on distressed institutions. The authorities should also update the capital regulations in line with recent TA recommendations.
Similarly, improvements of the corporate insolvency regimes and debt restructuring procedures are needed, both to ensure zombie enterprises are not dragging down growth and to support banks’ management of distressed assets.
The growing importance of residential real estate suggests that the NBC needs better oversight of households’ financial burdens. An important first step has been the introduction of a residential real estate price index, following IMF technical assistance (Annex IV). The authorities should begin collecting data on income and collateral of borrowers and macroprudential tools such as debt-service-to-income, debt- to-income, and loan-to-value limits should be developed.

35. Cambodia has made progress in improving its anti-money laundering and combating the financing of terrorism (AML/CFT) framework. Cambodia has been under increased monitoring by the Financial Action Task Force (FATF), which assesses that Cambodia has taken steps towards improving its AML/CFT regime, including by improving the quality and quantity of disseminations by the Cambodian Financial Intelligence Unit and an increase in money laundering investigations. The FATF is now considering the authorities’ submission with respect to the freezing and confiscation of criminal proceeds, instrumentalities, and property of equivalent value, to fulfil the last of the items requested by the FATF.

36. A modernized monetary policy framework together with de-dollarization (Annex VI) would improve monetary transmission, and give the NBC more policy options to respond to future economic cycles. Although a more flexible exchange rate regime would offer the potential for more independent monetary policy, more progress on de-dollarization would be needed.^²⁰ Developing market-based monetary policy tools, including an Interest Rate Corridor (IRC), would support the NBC’s policy agenda to modernize monetary policy framework and enhance the use of the national currency.^²¹ Stabilizing short-term money market rates would more easily preserve an interest rate spread that supports the demand for local currency. An improved liquidity management framework would also facilitate de-dollarization.^²²

Authorities’ Views

37. The authorities viewed the financial system to be sound and resilient. Banks remained well capitalized and profitable, with low liquidity risks. The authorities noted that they have conducted extensive onsite inspections in many systemic and non-systemic banks and were confident that loans had been classified correctly and that provisioning was adequate. Nevertheless, the authorities agreed that it is important to monitor developments closely and to have a granular approach on monitoring specific entities. The authorities considered that accommodative monetary policy is needed to support growth, as Cambodia is still in the process of recovery, but would closely monitor the financial sector developments, and agreed with the need to gradually return to pre-pandemic policy settings in terms of reserve and capital requirements in the medium term—in particular, the authorities would raise reserve requirements, starting with those in foreign currency.

Governance and Anti-Corruption Frameworks

38. The authorities are taking welcome steps to tackle corruption and strengthen the rule of law, yet vulnerabilities remain (Annex VIII).

In recent years, Cambodia has adopted a renewed anti-corruption action plan (2020–2025), created an Anti-Corruption Institution (ACI), and has taken steps to improve its legal anti-corruption framework. It has adopted measures toward the preparation of a National Risk Assessment (NRA). Additionally, it has taken measures to improve procurement procedures, and to enhance access to judicial and fiscal information.
Nonetheless, perceptions remain of substantial weaknesses in rule of law, fair and equal access to the administration of justice, and of corruption (although indicators on the last show some progress). For example, transparency about concessions agreements remains limited, asset declarations are verified when public officials are under investigation rather than being monitored on a permanent basis, and Cambodia does not currently have whistleblower protection and access-to-information laws. Securing sufficient human and technological resources for investigative and monitoring agencies has been challenging.

39. Further improvements to the governance and anti-corruption frameworks would support private investment and national development. To that end, the authorities should, inter alia, adopt measures and tools to increase transparency and access to information (e.g. by improvement and digitization of the asset declaration system and declarations of beneficial ownership of public contracts) and to protect whistleblowers. The authorities should provide more resources and training, and reinforce inter-agency cooperation.

Authorities’ Views

40. The authorities considered that much progress had been made in terms of the overall framework, but acknowledged implementation challenges. The appropriate institutions were in place, backed by legislation and rules. However, they acknowledged the challenges of securing human resources, and sought IMF technical assistance on aspects such as government financial systems. Security concerns meant that full digitalization of the asset declaration system would not be appropriate for the Cambodian environment at this stage.

Staff Appraisal

41. The Cambodian economy had been recovering from the pandemic, but has been hit by new challenges in 2022: higher inflation following significant increases in fuel and fertilizer costs; the slowdowns in the economies of the US, Europe, and China; and tighter global financial conditions. There are some signs of scarring from the pandemic, and Cambodia’s current account remains substantially weaker than implied by fundamentals and policies, based on 2021 data. The authorities have largely continued with crisis policy responses and have carried on with reforms to strengthen the economy.

42. The recovery is expected to continue but is vulnerable to downside risks. Despite the recent pressures, the baseline projections are for solid growth rates, especially in comparison to other countries. But the recovery remains highly susceptible to a worsening external environment. In addition, some domestic vulnerabilities have increased—although the risks from public debt are low, the level of private debt is very high, raising concerns about the drag on the economy if borrowers struggle to meet repayments.

43. To mitigate the risks from both the external environment and credit risks, the authorities should continue with targeted fiscal support, balanced by normalizing prudential and monetary conditions. Social protection should continue to be used to shield the most vulnerable from inflation and adverse demand shocks. The NBC has taken the welcome step of reintroducing provisioning requirements; it should take a very conservative approach to supervision, and be prepared to raise provisioning and capital requirements for those lenders facing solvency problems.

44. Improvements in policy frameworks can bolster prospects over the medium term. A debt anchor in nominal terms, combined with an overall deficit ceiling, would provide a credible framework, especially important as Cambodia seeks to develop a market for sovereign debt. The potential for high debt levels to persist emphasizes the importance of implementing corporate insolvency, debt and bank restructuring, and deposit protection frameworks.

45. The investment environment would benefit from continued efforts on 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.

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

^{Table 1.}

Cambodia: Selected Economic Indicators, 2019 – 23

^{Table 2.}

Cambodia: Medium-Term Macroeconomics Framework, 2019–27

^{Table 3a.}

Cambodia: Balance of Payments, 2019–27 (BPM5)

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

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

^{^1/}From 2011, includes imports related to public-private power sector projects.

^{^2/}From 2011, includes FDI related to public-private power sector projects.

^{^3/}Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

^{^4/}Includes unrestricted FCDs held at the NBC.

^{Table 3a.}

Cambodia: Balance of Payments, 2019–27 (BPM5)

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

					2019	2020	2021	2022	2023	2024	2025	2026	2027
					Est.			Proj.
Current account (including official transfers)					-4,067	-2,182	-12,624	-8,587	-4,318	-3,268	-2,483	-2,537	-2,720
		(Excluding official transfers)			-4,598	-2,629	-13,175	-9,166	-4,924	-3,903	-3,150	-3,221	-3,460
	Trade balance				-7,253	-2,522	-11,257	-7,279	-4,159	-3,781	-3,561	-3,960	-4,332
		Exports, f.o.b.			14,998	18,470	19,469	22,062	24,061	26,263	28,654	31,090	33,733
			Of which: Garments		10,800	9,839	11,390	12,554	13,552	14,622	15,782	16,962	18,231
		Imports, f.o.b. ^1/			-22,251	-20,993	-30,726	-29,340	-28,220	-30,044	-32,215	-35,050	-38,064
			Of which: Garments-related		-4,282	-4,020	-5,049	-6,905	-8,063	-8,992	-9,706	-10,431	-11,212
				Petroleum	-2,426	-2,057	-2,930	-4,847	-4,674	-4,648	-4,740	-4,941	-5,255
	Services and income (net)				1,244	-1,308	-2,874	-2,892	-1,719	-1,124	-641	-366	-288
		Services (net)			2,808	-261	-1,447	-1,441	-213	452	1,013	1,374	1,547
			Of which: Tourism (credit)		4,770	1,015	184	497	1,242	2,236	2,907	3,431	3,774
		Income (net)			-1,564	-1,047	-1,428	-1,450	-1,505	-1,576	-1,654	-1,740	-1,834
	Private transfers (net)				1,411	1,201	957	1,005	954	1,002	1,052	1,105	1,160
	Official transfers (net)				531	447	551	579	606	635	668	684	739
Capital and financial account					6,727	3,258	12,462	7,779	5,859	5,045	4,542	4,813	5,069
	Medium- and long-term loans (net)				613	939	857	789	798	932	938	1,017	1,067
		Disbursements			831	1,213	1,154	1,120	1,142	1,282	1,294	1,376	1,433
		Amortization			-224	-275	-297	-331	-344	-350	-356	-359	-365
	Foreign direct investment ^2/				3,663	3,612	3,484	3,659	3,842	4,034	4,235	4,447	4,669
	Net foreign assets of deposit money banks				1,530	596	1,309	1,000	500	50	-100	-100	-100
	Other short-term flows				566	-2,148	6,568	2,100	500	-180	-720	-720	-720
Errors and omissions					17	-441	-47	0	0	0	0	0	0
Overall balance					2,676	636	-210	-808	1,542	1,777	2,059	2,276	2,349
Financing					-5,360	-4,731	406	808	-1,542	-1,777	-2,059	-2,276	-2,349
	Change in gross official reserves ^3/				-2,676	-635	-636	372	-1,556	-1,793	-2,075	-2,292	-2,366
Memorandum items:
	Current account balance (in percent of GDP)
		Excluding official transfers			-17.0	-10.2	-49.5	-32.0	-16.0	-11.8	-8.8	-8.3	-8.3
		Including official transfers			-15.0	-8.5	-47.5	-30.0	-14.1	-9.9	-7.0	-6.6	-6.5
	Trade balance (in percent of GDP)				-26.8	-9.8	-42.3	-25.4	-13.5	-11.4	-10.0	-10.3	-10.4
	Gross official reserves ^4/				18,763	21,334	20,941	20,747	22,304	24,096	26,171	28,463	30,829
		(In months of next year’s imports)			9.8	7.8	7.8	8.0	8.1	8.1	8.1	8.1	8.1

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

^{^1/}From 2011, includes imports related to public-private power sector projects.

^{^2/}From 2011, includes FDI related to public-private power sector projects.

^{^3/}Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

^{^4/}Includes unrestricted FCDs held at the NBC.

^{Table 3a.}

Cambodia: Balance of Payments, 2019–27 (BPM5)

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

					2019	2020	2021	2022	2023	2024	2025	2026	2027
					Est.			Proj.
Current account (including official transfers)					-4,067	-2,182	-12,624	-8,587	-4,318	-3,268	-2,483	-2,537	-2,720
		(Excluding official transfers)			-4,598	-2,629	-13,175	-9,166	-4,924	-3,903	-3,150	-3,221	-3,460
	Trade balance				-7,253	-2,522	-11,257	-7,279	-4,159	-3,781	-3,561	-3,960	-4,332
		Exports, f.o.b.			14,998	18,470	19,469	22,062	24,061	26,263	28,654	31,090	33,733
			Of which: Garments		10,800	9,839	11,390	12,554	13,552	14,622	15,782	16,962	18,231
		Imports, f.o.b. ^1/			-22,251	-20,993	-30,726	-29,340	-28,220	-30,044	-32,215	-35,050	-38,064
			Of which: Garments-related		-4,282	-4,020	-5,049	-6,905	-8,063	-8,992	-9,706	-10,431	-11,212
				Petroleum	-2,426	-2,057	-2,930	-4,847	-4,674	-4,648	-4,740	-4,941	-5,255
	Services and income (net)				1,244	-1,308	-2,874	-2,892	-1,719	-1,124	-641	-366	-288
		Services (net)			2,808	-261	-1,447	-1,441	-213	452	1,013	1,374	1,547
			Of which: Tourism (credit)		4,770	1,015	184	497	1,242	2,236	2,907	3,431	3,774
		Income (net)			-1,564	-1,047	-1,428	-1,450	-1,505	-1,576	-1,654	-1,740	-1,834
	Private transfers (net)				1,411	1,201	957	1,005	954	1,002	1,052	1,105	1,160
	Official transfers (net)				531	447	551	579	606	635	668	684	739
Capital and financial account					6,727	3,258	12,462	7,779	5,859	5,045	4,542	4,813	5,069
	Medium- and long-term loans (net)				613	939	857	789	798	932	938	1,017	1,067
		Disbursements			831	1,213	1,154	1,120	1,142	1,282	1,294	1,376	1,433
		Amortization			-224	-275	-297	-331	-344	-350	-356	-359	-365
	Foreign direct investment ^2/				3,663	3,612	3,484	3,659	3,842	4,034	4,235	4,447	4,669
	Net foreign assets of deposit money banks				1,530	596	1,309	1,000	500	50	-100	-100	-100
	Other short-term flows				566	-2,148	6,568	2,100	500	-180	-720	-720	-720
Errors and omissions					17	-441	-47	0	0	0	0	0	0
Overall balance					2,676	636	-210	-808	1,542	1,777	2,059	2,276	2,349
Financing					-5,360	-4,731	406	808	-1,542	-1,777	-2,059	-2,276	-2,349
	Change in gross official reserves ^3/				-2,676	-635	-636	372	-1,556	-1,793	-2,075	-2,292	-2,366
Memorandum items:
	Current account balance (in percent of GDP)
		Excluding official transfers			-17.0	-10.2	-49.5	-32.0	-16.0	-11.8	-8.8	-8.3	-8.3
		Including official transfers			-15.0	-8.5	-47.5	-30.0	-14.1	-9.9	-7.0	-6.6	-6.5
	Trade balance (in percent of GDP)				-26.8	-9.8	-42.3	-25.4	-13.5	-11.4	-10.0	-10.3	-10.4
	Gross official reserves ^4/				18,763	21,334	20,941	20,747	22,304	24,096	26,171	28,463	30,829
		(In months of next year’s imports)			9.8	7.8	7.8	8.0	8.1	8.1	8.1	8.1	8.1

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

^{^1/}From 2011, includes imports related to public-private power sector projects.

^{^2/}From 2011, includes FDI related to public-private power sector projects.

^{^3/}Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

^{^4/}Includes unrestricted FCDs held at the NBC.

^{Table 3b.}

Cambodia: Balance of Payments, 2019–27 (BPM5)

(In percent of GDP, unless otherwise indicated)

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

^{^1/}From 2011, includes imports related to public-private power sector projects.

^{^2/}From 2011, includes FDI related to public-private power sector projects.

^{^3/}Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

^{^4/}Includes unrestricted FCDs held at the NBC.

^{Table 3b.}

Cambodia: Balance of Payments, 2019–27 (BPM5)

(In percent of GDP, unless otherwise indicated)

					2019	2020	2021	2022	2023	2024	2025	2026	2027
					Est.			Proj.
Current account (including official transfers)					-15.0	-8.5	-47.5	-30.0	-14.1	-9.9 -7.0	-6.6	-6.5
		(Excluding official transfers)			-17.0	-10.2	-49.5	-32.0	-16.0	-11.8	-8.8	-8.3	-8.3
	Trade balance				-26.8	-9.8	-42.3	-25.4	-13.5	-11.4	-10.0	-10.3	-10.4
		Exports, f.o.b.			55.4	71.7	73.2	77.0	78.3	79.5	80.3	80.6	80.8
			Of which: Garments		39.9	38.2	42.8	43.8	44.1	44.2	44.2	44.0	43.7
		Imports, f.o.b. ^1/			-82.1	-81.5	-115.5	-102.4	-91.8	-90.9	-90.3	-90.8	-91.2
			Of which: Garments-related		-15.8	-15.6	-19.0	-24.1	-26.2	-27.2	-27.2	-27.0	-26.9
				Petroleum	-9.0	-8.0	-11.0	-16.9	-15.2	-14.1	-13.3	-12.8	-12.6
	Services and income (net)				4.6	-5.1	-10.8	-10.1	-5.6	-3.4	-1.8	-0.9	-0.7
		Services (net)			10.4	-1.0	-5.4	-5.0	-0.7	1.4	2.8	3.6	3.7
			Of which: Tourism (credit)		17.6	3.9	0.7	1.7	4.0	6.8	8.2	8.9	9.0
		Income (net)			-5.8	-4.1	-5.4	-5.1	-4.9	-4.8	-4.6	-4.5	-4.4
	Private transfers (net)				5.2	4.7	3.6	3.5	3.1	3.0	2.9	2.9	2.8
	Official transfers (net)				2.0	1.7	2.1	2.0	2.0	1.9	1.9	1.8	1.8
Capital and financial account					24.8	12.6	46.8	27.2	19.1	15.3	12.7	12.5	12.1
	Medium- and long-term loans (net)				2.3	3.6	3.2	2.8	2.6	2.8	2.6	2.6	2.6
		Disbursements			3.1	4.7	4.3	3.9	3.7	3.9	3.6	3.6	3.4
		Amortization			-0.8	-1.1	-1.1	-1.2	-1.1	-1.1	-1.0	-0.9	-0.9
	Foreign direct investment ^2/				13.5	14.0	13.1	12.8	12.5	12.2	11.9	11.5	11.2
	Net foreign assets of deposit money banks				5.6	2.3	4.9	3.5	1.6	0.2	-0.3	-0.3	-0.2
	Other short-term flows				2.1	-8.3	24.7	7.3	1.6	-0.5	-2.0	-1.9	-1.7
Errors and omissions					0.1	-1.7	-0.2	0.0	0.0	0.0	0.0	0.0	0.0
Overall balance					9.9	2.5	-0.8	-2.8	5.0	5.4	5.8	5.9	5.6
Financing					-19.8	-18.4	1.5	2.8	-5.0	-5.4	-5.8	-5.9	-5.6
	Change in gross official reserves ^3/				-9.9	-2.5	-2.4	1.3	-5.1	-5.4	-5.8	-5.9	-5.7
Memorandum items:
	Current account balance (in percent of GDP)
		Excluding official transfers			-17.0	-10.2	-49.5	-32.0	-16.0	-11.8	-8.8	-8.3	-8.3
		Including official transfers			-15.0	-8.5	-47.5	-30.0	-14.1	-9.9	-7.0	-6.6	-6.5
	Trade balance (in percent of GDP)				-26.8	-9.8	-42.3	-25.4	-13.5	-11.4	-10.0	-10.3	-10.4
	Gross official reserves ^4/				69.3	82.8	78.7	72.4	72.6	72.9	73.4	73.8	73.9
		(In months of next year’s imports)			9.8	7.8	7.8	8.0	8.1	8.1	8.1	8.1	8.1

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

^{^1/}From 2011, includes imports related to public-private power sector projects.

^{^2/}From 2011, includes FDI related to public-private power sector projects.

^{^3/}Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

^{^4/}Includes unrestricted FCDs held at the NBC.

^{Table 3b.}

Cambodia: Balance of Payments, 2019–27 (BPM5)

(In percent of GDP, unless otherwise indicated)

					2019	2020	2021	2022	2023	2024	2025	2026	2027
					Est.			Proj.
Current account (including official transfers)					-15.0	-8.5	-47.5	-30.0	-14.1	-9.9 -7.0	-6.6	-6.5
		(Excluding official transfers)			-17.0	-10.2	-49.5	-32.0	-16.0	-11.8	-8.8	-8.3	-8.3
	Trade balance				-26.8	-9.8	-42.3	-25.4	-13.5	-11.4	-10.0	-10.3	-10.4
		Exports, f.o.b.			55.4	71.7	73.2	77.0	78.3	79.5	80.3	80.6	80.8
			Of which: Garments		39.9	38.2	42.8	43.8	44.1	44.2	44.2	44.0	43.7
		Imports, f.o.b. ^1/			-82.1	-81.5	-115.5	-102.4	-91.8	-90.9	-90.3	-90.8	-91.2
			Of which: Garments-related		-15.8	-15.6	-19.0	-24.1	-26.2	-27.2	-27.2	-27.0	-26.9
				Petroleum	-9.0	-8.0	-11.0	-16.9	-15.2	-14.1	-13.3	-12.8	-12.6
	Services and income (net)				4.6	-5.1	-10.8	-10.1	-5.6	-3.4	-1.8	-0.9	-0.7
		Services (net)			10.4	-1.0	-5.4	-5.0	-0.7	1.4	2.8	3.6	3.7
			Of which: Tourism (credit)		17.6	3.9	0.7	1.7	4.0	6.8	8.2	8.9	9.0
		Income (net)			-5.8	-4.1	-5.4	-5.1	-4.9	-4.8	-4.6	-4.5	-4.4
	Private transfers (net)				5.2	4.7	3.6	3.5	3.1	3.0	2.9	2.9	2.8
	Official transfers (net)				2.0	1.7	2.1	2.0	2.0	1.9	1.9	1.8	1.8
Capital and financial account					24.8	12.6	46.8	27.2	19.1	15.3	12.7	12.5	12.1
	Medium- and long-term loans (net)				2.3	3.6	3.2	2.8	2.6	2.8	2.6	2.6	2.6
		Disbursements			3.1	4.7	4.3	3.9	3.7	3.9	3.6	3.6	3.4
		Amortization			-0.8	-1.1	-1.1	-1.2	-1.1	-1.1	-1.0	-0.9	-0.9
	Foreign direct investment ^2/				13.5	14.0	13.1	12.8	12.5	12.2	11.9	11.5	11.2
	Net foreign assets of deposit money banks				5.6	2.3	4.9	3.5	1.6	0.2	-0.3	-0.3	-0.2
	Other short-term flows				2.1	-8.3	24.7	7.3	1.6	-0.5	-2.0	-1.9	-1.7
Errors and omissions					0.1	-1.7	-0.2	0.0	0.0	0.0	0.0	0.0	0.0
Overall balance					9.9	2.5	-0.8	-2.8	5.0	5.4	5.8	5.9	5.6
Financing					-19.8	-18.4	1.5	2.8	-5.0	-5.4	-5.8	-5.9	-5.6
	Change in gross official reserves ^3/				-9.9	-2.5	-2.4	1.3	-5.1	-5.4	-5.8	-5.9	-5.7
Memorandum items:
	Current account balance (in percent of GDP)
		Excluding official transfers			-17.0	-10.2	-49.5	-32.0	-16.0	-11.8	-8.8	-8.3	-8.3
		Including official transfers			-15.0	-8.5	-47.5	-30.0	-14.1	-9.9	-7.0	-6.6	-6.5
	Trade balance (in percent of GDP)				-26.8	-9.8	-42.3	-25.4	-13.5	-11.4	-10.0	-10.3	-10.4
	Gross official reserves ^4/				69.3	82.8	78.7	72.4	72.6	72.9	73.4	73.8	73.9
		(In months of next year’s imports)			9.8	7.8	7.8	8.0	8.1	8.1	8.1	8.1	8.1

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

^{^1/}From 2011, includes imports related to public-private power sector projects.

^{^2/}From 2011, includes FDI related to public-private power sector projects.

^{^3/}Includes changes in unrestricted FCDs held as reserves at the NBC, and excludes changes in gold holdings and valuation.

^{^4/}Includes unrestricted FCDs held at the NBC.

^{Table 4.}

Cambodia: General Government Operations, 2019 – 2027 (GFSM 2014)

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

^{Table 4.}

Cambodia: General Government Operations, 2019 – 2027 (GFSM 2014)

	2019	2020	2021	2022		2023	2024	2025	2026	2027
			Est	Budget	Est.	Proj.
Revenue	29,461	25,335	23,842	24,785	26,552	28,645	32,458	36,157	39,728	43,442
Of which: Nongrant	27,251	23,291	22,112	23,769	25,729	27,575	31,173	35,001	38,688	42,401
Tax	23,822	20,882	19,875	21,493	23,293	24,931	28,298	31,863	35,256	38,649
Income, profits, and capital gains	5,467	6,110	6,219	5,763	7,836	8,498	9,240	10,386	11,360	12,296
Good and services	15,280	12,399	11,343	13,173	12,931	14,023	16,467	18,650	20,806	22,976
International trade and transactions	2,897	2,198	2,131	2,394	2,344	2,389	2,572	2,807	3,070	3,356
Grants	2,210	2,044	1,730	1,016	823	1,070	1,284	1,156	1,040	1,040
Other revenues	3,430	2,409	2,237	2,276	2,436	2,644	2,875	3,138	3,432	3,752
Total expenditure	26,202	28,935	31,649	31,515	31,459	35,128	37,326	40,977	44,588	48,506
Expense	18,040	19,659	21,680	19,882	20,756	23,335	25,212	28,015	30,857	33,814
Compensation of employees	8,355	8,992	8,967	9,957	9,957	11,252	12,234	13,351	14,748	16,125
Purchase of goods and services	4,984	4,199	6,266	4,207	4,207	5,019	5,894	6,432	7,035	7,692
Interest	367	381	403	646	321	363	467	588	713	856
Expense not elsewhere classified	4,335	6,087	6,044	5,071	6,271	6,701	6,617	7,644	8,360	9,141
Net acquisition of nonfinancial assets	8,161	9,277	9,969	11,633	10,703	11,793	12,114	12,962	13,731	14,692
Of which: Externally financed	4,667	5,857	5,250	…	4,099	4,422	5,243	5,184	5,454	5,724
Net lending (+)/borrowing(-)	3,260	-3,601	-7,807	-6,730	-4,907	-6,483	-4,868	-4,820	-4,860	-5,064
Net acquisition of financial assets	9,638	672	-4,461	-212	-1,331	-2,218	225	447	908	1,101
Net incurrence of liabilities	6,378	4,273	3,345	5,947	3,576	4,265	5,093	5,267	5,768	6,165
Of which: External	4,667	5,857	3,520	4,728	3,276	3,352	3,958	4,028	4,413	4,684
Revenue	26.8	23.9	21.6	20.6	22.1	22.0	22.9	23.4	23.5	23.5
Nongrant	24.8	22.0	20.0	19.8	21.4	21.1	22.0	22.6	22.8	22.9
Tax	21.7	19.7	18.0	17.9	19.4	19.1	19.9	20.6	20.8	20.9
Income, profits, and capital gains tax	5.0	5.8	5.6	4.8	6.5	6.5	6.5	6.7	6.7	6.6
Good and services tax	13.9	11.7	10.3	10.9	10.7	10.7	11.6	12.0	12.3	12.4
International trade and transactions tax	2.6	2.1	1.9	2.0	1.9	1.8	1.8	1.8	1.8	1.8
Grants	2.0	1.9	1.6	0.8	0.7	0.8	0.9	0.7	0.6	0.6
Other revenues	3.1	2.3	2.0	1.9	2.0	2.0	2.0	2.0	2.0	2.0
Total expenditure	23.8	27.3	28.6	26.2	26.1	26.9	26.3	26.5	26.3	26.2
Expense	16.4	18.6	19.6	16.5	17.3	17.9	17.8	18.1	18.2	18.3
Compensation of employees	7.6	8.5	8.1	8.3	8.3	8.6	8.6	8.6	8.7	8.7
Purchase of goods and services	4.5	4.0	5.7	3.5	3.5	3.8	4.2	4.2	4.2	4.2
Interest	0.3	0.4	0.4	0.5	0.3	0.3	0.3	0.4	0.4	0.5
Expense not elsewhere classified	3.9	5.7	5.5	4.2	5.2	5.1	4.7	4.9	4.9	4.9
Net acquisition of nonfinancial assets	7.4	8.8	9.0	9.7	8.9	9.0	8.5	8.4	8.1	7.9
Of which: Externally-financed	4.2	5.5	4.8	…	3.4	3.4	3.7	3.3	3.2	3.1
Net lending (+)/borrowing(-)	3.0	-3.4	-7.1	-5.6	-4.1	-5.0	-3.4	-3.1	-2.9	-2.7
Net acquisition of financial assets	8.8	0.6	-4.0	-0.2	-1.1	-1.7	0.2	0.3	0.5	0.6
Net incurrence of liabilities	5.8	4.0	3.0	4.9	3.0	3.3	3.6	3.4	3.4	3.3
Of which: External	4.2	5.5	3.2	3.9	2.7	2.6	2.8	2.6	2.6	2.5
Memorandum items:
Net lending (+)/borrowing(-) excluding grant	1.0	-5.3	-8.6	-6.4	-4.8	-5.8	-4.3	-3.9	-3.5	-3.3
Government deposits	22.2	23.7	17.7	…	15.1	12.3	11.4	10.8	10.4	10.1
GDP (in billions of riels)	110,014	105,892	110,506	…	120,315	130,477	141,863	154,819	169,331	185,140

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

^{Table 4.}

Cambodia: General Government Operations, 2019 – 2027 (GFSM 2014)

	2019	2020	2021	2022		2023	2024	2025	2026	2027
			Est	Budget	Est.	Proj.
Revenue	29,461	25,335	23,842	24,785	26,552	28,645	32,458	36,157	39,728	43,442
Of which: Nongrant	27,251	23,291	22,112	23,769	25,729	27,575	31,173	35,001	38,688	42,401
Tax	23,822	20,882	19,875	21,493	23,293	24,931	28,298	31,863	35,256	38,649
Income, profits, and capital gains	5,467	6,110	6,219	5,763	7,836	8,498	9,240	10,386	11,360	12,296
Good and services	15,280	12,399	11,343	13,173	12,931	14,023	16,467	18,650	20,806	22,976
International trade and transactions	2,897	2,198	2,131	2,394	2,344	2,389	2,572	2,807	3,070	3,356
Grants	2,210	2,044	1,730	1,016	823	1,070	1,284	1,156	1,040	1,040
Other revenues	3,430	2,409	2,237	2,276	2,436	2,644	2,875	3,138	3,432	3,752
Total expenditure	26,202	28,935	31,649	31,515	31,459	35,128	37,326	40,977	44,588	48,506
Expense	18,040	19,659	21,680	19,882	20,756	23,335	25,212	28,015	30,857	33,814
Compensation of employees	8,355	8,992	8,967	9,957	9,957	11,252	12,234	13,351	14,748	16,125
Purchase of goods and services	4,984	4,199	6,266	4,207	4,207	5,019	5,894	6,432	7,035	7,692
Interest	367	381	403	646	321	363	467	588	713	856
Expense not elsewhere classified	4,335	6,087	6,044	5,071	6,271	6,701	6,617	7,644	8,360	9,141
Net acquisition of nonfinancial assets	8,161	9,277	9,969	11,633	10,703	11,793	12,114	12,962	13,731	14,692
Of which: Externally financed	4,667	5,857	5,250	…	4,099	4,422	5,243	5,184	5,454	5,724
Net lending (+)/borrowing(-)	3,260	-3,601	-7,807	-6,730	-4,907	-6,483	-4,868	-4,820	-4,860	-5,064
Net acquisition of financial assets	9,638	672	-4,461	-212	-1,331	-2,218	225	447	908	1,101
Net incurrence of liabilities	6,378	4,273	3,345	5,947	3,576	4,265	5,093	5,267	5,768	6,165
Of which: External	4,667	5,857	3,520	4,728	3,276	3,352	3,958	4,028	4,413	4,684
Revenue	26.8	23.9	21.6	20.6	22.1	22.0	22.9	23.4	23.5	23.5
Nongrant	24.8	22.0	20.0	19.8	21.4	21.1	22.0	22.6	22.8	22.9
Tax	21.7	19.7	18.0	17.9	19.4	19.1	19.9	20.6	20.8	20.9
Income, profits, and capital gains tax	5.0	5.8	5.6	4.8	6.5	6.5	6.5	6.7	6.7	6.6
Good and services tax	13.9	11.7	10.3	10.9	10.7	10.7	11.6	12.0	12.3	12.4
International trade and transactions tax	2.6	2.1	1.9	2.0	1.9	1.8	1.8	1.8	1.8	1.8
Grants	2.0	1.9	1.6	0.8	0.7	0.8	0.9	0.7	0.6	0.6
Other revenues	3.1	2.3	2.0	1.9	2.0	2.0	2.0	2.0	2.0	2.0
Total expenditure	23.8	27.3	28.6	26.2	26.1	26.9	26.3	26.5	26.3	26.2
Expense	16.4	18.6	19.6	16.5	17.3	17.9	17.8	18.1	18.2	18.3
Compensation of employees	7.6	8.5	8.1	8.3	8.3	8.6	8.6	8.6	8.7	8.7
Purchase of goods and services	4.5	4.0	5.7	3.5	3.5	3.8	4.2	4.2	4.2	4.2
Interest	0.3	0.4	0.4	0.5	0.3	0.3	0.3	0.4	0.4	0.5
Expense not elsewhere classified	3.9	5.7	5.5	4.2	5.2	5.1	4.7	4.9	4.9	4.9
Net acquisition of nonfinancial assets	7.4	8.8	9.0	9.7	8.9	9.0	8.5	8.4	8.1	7.9
Of which: Externally-financed	4.2	5.5	4.8	…	3.4	3.4	3.7	3.3	3.2	3.1
Net lending (+)/borrowing(-)	3.0	-3.4	-7.1	-5.6	-4.1	-5.0	-3.4	-3.1	-2.9	-2.7
Net acquisition of financial assets	8.8	0.6	-4.0	-0.2	-1.1	-1.7	0.2	0.3	0.5	0.6
Net incurrence of liabilities	5.8	4.0	3.0	4.9	3.0	3.3	3.6	3.4	3.4	3.3
Of which: External	4.2	5.5	3.2	3.9	2.7	2.6	2.8	2.6	2.6	2.5
Memorandum items:
Net lending (+)/borrowing(-) excluding grant	1.0	-5.3	-8.6	-6.4	-4.8	-5.8	-4.3	-3.9	-3.5	-3.3
Government deposits	22.2	23.7	17.7	…	15.1	12.3	11.4	10.8	10.4	10.1
GDP (in billions of riels)	110,014	105,892	110,506	…	120,315	130,477	141,863	154,819	169,331	185,140

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

^{Table 5.}

Cambodia: Monetary Survey, 2019–23

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

^{^1/}Excludes banks’ credits to nonresident.

^{^2/}Foreign currency loans and deposits only.

^{^3/}The ratio of nominal GDP to the year-to-date average stock of broad money.

^{Table 5.}

Cambodia: Monetary Survey, 2019–23

					2019	2020	2021	2022	2023
								Proj.
					(In billions of Riels)
Net foreign assets					60,182	67,364	57,006	61,678	74,407
	National Bank of Cambodia				76,931	86,782	83,989	90,399	104,766
		Foreign assets			76,457	86,292	82,553	88,963	103,330
		Foreign liabilities			-474	-490	-1,436	-1,436	-1,436
	Deposit money banks				-15,801	-18,439	-24,111	-25,849	-27,487
		Foreign assets			15,339	16,662	17,511	15,479	13,759
		Foreign liabilities			-31,140	-35,100	-41,622	-41,328	-41,247
Net domestic assets					58,254	69,178	101,733	126,451	137,390
		Domestic credit			106,133	127,353	168,496	203,764	238,102
			Government (net)		-23,884	-24,995	-19,540	-18,066	-17,003
			Private sector		130,017	152,347	188,035	221,830	255,104
		Other items (net)			-47,879	-58,175	-66,763	-77,313	-100,712
Broad money					118,436	136,542	158,739	188,128	211,797
	Narrow money				13,513	15,091	16,918	20,863	23,487
		Currency in circulation			11,906	13,474	14,596	18,158	20,442
		Demand deposits			1,607	1,617	2,322	2,705	3,045
	Quasi-money				104,923	121,451	141,821	167,266	188,310
		Time deposits			5,301	6,902	10,133	12,982	14,616
		Foreign currency deposits			99,622	114,549	131,688	154,283	173,694
					(12-month percentage change)
Net foreign assets					23.1	11.9	-15.4	8.2	20.6
Private sector credit					28.0	17.2	23.4	18.0	15.0
Broad money					18.2	15.3	16.3	18.5	12.6
		Of which: Currency in circulation			32.1	13.2	8.3	24.4	12.6
				Foreign currency deposits	16.1	15.0	15.0	17.2	12.6
					(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets					11.3	6.1	-7.6	2.9	6.8
Net domestic assets					6.9	9.2	23.8	15.6	5.8
	Domestic credit ^1/				20.7	17.9	30.1	22.2	18.3
		Government (net)			-7.6	-0.9	4.0	0.9	0.6
		Private sector			28.4	18.9	26.1	21.3	17.7
	Other items (net)				-13.9	-8.7	-6.3	-6.6	-12.4
Memorandum items:
	Foreign currency deposits (in millions of U.S. dollars)				24,378	27,726	31,528	36,535	40,685
		(In percent of broad money)			84.1	83.9	83.0	82.0	82.0
	Riel component of broad money				18,814	21,993	27,051	33,845	38,103
		(In percent of broad money)			15.9	16.1	17.0	18.0	18.0
	Credit to the private sector (in millions of U.S. dollars)				31,816	36,875	45,018	52,531	59,753
		(In percent of GDP)			118.2	143.9	170.2	184.4	195.5
	Foreign currency loans-to-total loans (in percent)				87.9	87.4	87.8	87.8	87.8
	Loan-to-deposit ratio (in percent) ^2/				114.7	116.2	125.4	126.3	129.0
	Velocity ^3/				0.9	0.8	0.7	0.6	0.6
	Money multiplier (broad money/reserve money)				2.7	3.2	3.3	3.2	3.2
	Reserve money (12-month percent change)				0.3	0.0	0.1	0.2	0.1

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

^{^1/}Excludes banks’ credits to nonresident.

^{^2/}Foreign currency loans and deposits only.

^{^3/}The ratio of nominal GDP to the year-to-date average stock of broad money.

^{Table 5.}

Cambodia: Monetary Survey, 2019–23

					2019	2020	2021	2022	2023
								Proj.
					(In billions of Riels)
Net foreign assets					60,182	67,364	57,006	61,678	74,407
	National Bank of Cambodia				76,931	86,782	83,989	90,399	104,766
		Foreign assets			76,457	86,292	82,553	88,963	103,330
		Foreign liabilities			-474	-490	-1,436	-1,436	-1,436
	Deposit money banks				-15,801	-18,439	-24,111	-25,849	-27,487
		Foreign assets			15,339	16,662	17,511	15,479	13,759
		Foreign liabilities			-31,140	-35,100	-41,622	-41,328	-41,247
Net domestic assets					58,254	69,178	101,733	126,451	137,390
		Domestic credit			106,133	127,353	168,496	203,764	238,102
			Government (net)		-23,884	-24,995	-19,540	-18,066	-17,003
			Private sector		130,017	152,347	188,035	221,830	255,104
		Other items (net)			-47,879	-58,175	-66,763	-77,313	-100,712
Broad money					118,436	136,542	158,739	188,128	211,797
	Narrow money				13,513	15,091	16,918	20,863	23,487
		Currency in circulation			11,906	13,474	14,596	18,158	20,442
		Demand deposits			1,607	1,617	2,322	2,705	3,045
	Quasi-money				104,923	121,451	141,821	167,266	188,310
		Time deposits			5,301	6,902	10,133	12,982	14,616
		Foreign currency deposits			99,622	114,549	131,688	154,283	173,694
					(12-month percentage change)
Net foreign assets					23.1	11.9	-15.4	8.2	20.6
Private sector credit					28.0	17.2	23.4	18.0	15.0
Broad money					18.2	15.3	16.3	18.5	12.6
		Of which: Currency in circulation			32.1	13.2	8.3	24.4	12.6
				Foreign currency deposits	16.1	15.0	15.0	17.2	12.6
					(Contribution to year-on-year growth of broad money, in percentage points)
Net foreign assets					11.3	6.1	-7.6	2.9	6.8
Net domestic assets					6.9	9.2	23.8	15.6	5.8
	Domestic credit ^1/				20.7	17.9	30.1	22.2	18.3
		Government (net)			-7.6	-0.9	4.0	0.9	0.6
		Private sector			28.4	18.9	26.1	21.3	17.7
	Other items (net)				-13.9	-8.7	-6.3	-6.6	-12.4
Memorandum items:
	Foreign currency deposits (in millions of U.S. dollars)				24,378	27,726	31,528	36,535	40,685
		(In percent of broad money)			84.1	83.9	83.0	82.0	82.0
	Riel component of broad money				18,814	21,993	27,051	33,845	38,103
		(In percent of broad money)			15.9	16.1	17.0	18.0	18.0
	Credit to the private sector (in millions of U.S. dollars)				31,816	36,875	45,018	52,531	59,753
		(In percent of GDP)			118.2	143.9	170.2	184.4	195.5
	Foreign currency loans-to-total loans (in percent)				87.9	87.4	87.8	87.8	87.8
	Loan-to-deposit ratio (in percent) ^2/				114.7	116.2	125.4	126.3	129.0
	Velocity ^3/				0.9	0.8	0.7	0.6	0.6
	Money multiplier (broad money/reserve money)				2.7	3.2	3.3	3.2	3.2
	Reserve money (12-month percent change)				0.3	0.0	0.1	0.2	0.1

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

^{^1/}Excludes banks’ credits to nonresident.

^{^2/}Foreign currency loans and deposits only.

^{^3/}The ratio of nominal GDP to the year-to-date average stock of broad money.

Annex I. External Sector Assessment

Staff assesses that Cambodia’s external position in 2021 remains substantially weaker than the level implied by medium-term fundamentals and desirable policies after adjusting for temporary factors; a surge in gold imports while tourism receipts and remittance income remained sluggish. Short-term capital inflows soared, bringing the financial balance to historic highs. As a result, reserves coverage declined only modestly despite the sizable current account deficit.

1. The current account deficit widened substantially in 2021, largely reflecting a surge in gold imports. The current account deficit was 48 percent GDP at the end of 2021, over five times of the deficit in 2020. Gold imports accounted for almost half of the total current account deficit. The increase in energy prices also contributed to the deficit, with a large increase in the value of petroleum imports. Trade—both exports and imports—of major manufacturing goods (e.g. textiles, electronics) saw a solid recovery. As a result, the trade balance excluding gold declined only modestly. Service trade remained sluggish because of weak tourism, and remittances and other private transfers continued to decline.

2. The financial account increased significantly (to 47 percent of GDP) in 2021, largely reflecting bank financing and other short-term capital inflows. Short-term capital increased to a net inflow of 25 percent of GDP in 2021 from a net outflow of -8 percent of GDP in 2020. Medium-to-long term loans remained broadly stable. Favorable external financing conditions partly contributed to rising financial inflows through bank borrowings, but a large part of the short-term capital inflows was recorded as other investment, hence the source and nature of the inflows are not clearly identified. Despite some recovery of FDI in manufacturing industries, service sectors (especially hotels and restaurants) continued to see declines in inward foreign investment. The net foreign asset (NFA) position decreased from -77 percent of GDP in 2020 to -111 percent of GDP by end-2021, reflecting increasing FDI liabilities and bank and other short-term liabilities. Over the medium term, Cambodia’s NFA position is projected to trend downward, in line with recovery of FDI inflows partly offset by reserves accumulation.

3. The external position is assessed to be substantially weaker than implied by fundamentals and desirable policies. The current account deficit widened to -48 percent of GDP in 2021, of which 22 percent of GDP was driven by gold imports. Rising fuel prices also contributed to the higher deficit. Recent data suggests that gold imports in the first three months of 2022 are about 50 percent less than the same period last year. On this basis, gold imports are assessed to be partially temporary, and the current account deficit is adjusted by half of total gold imports, lowering the deficit by 11 percentage points. Along with cyclical adjustments to account for weaker terms of trade, the larger output gap, Covid-19-related tourism losses and medical imports, and natural disasters, the current account deficit in 2021 is adjusted to -25 percent. Comparing to the current norm of -7.6 percent of GDP, the current account gap is -17.3 percent of GDP, equivalent to a real exchange rate overvaluation of about 29 percent. The real exchange rate model also points to the same conclusion, with an estimated gap of -16 percent of GDP.

Cambodia: EBA-lite Model Results, 2021

^{^1/}Based on the EBA-lite 3.0 methodology

^{^2/}Additional cyclical adjustment to account for the temporary impact of the tourism (4.9 percent of GDP) and medical goods (1.8 percent of GDP). The latter accounts for the large temporary increase in medical goods imports (medical goods exports are assessed to be negligible).

^{^3/}Cyclically adjusted, including multilateral consistency adjustments.

Cambodia: EBA-lite Model Results, 2021

		CA model ^1/	REER model ^1/
		(in percent of GDP)
CA-Actual		-47.5
	Cyclical contributions (from model) (-)	-3.3
	COVID-19 adjustor (-) ^2/	-6.7
	Additional temporary/statistical factors (-)	-11.1
	Natural disasters and conflicts (-)	-1.3
Adjusted CA		-24.9
CA Norm (from model) ^3/		-7.6
	Adjustments to the norm (-)	0.0
Adjusted CA Norm		-7.6
CA Gap		-17.3	-16.2
	o/w Relative policy gap	1.3
Elasticity		-0.60
REER Gap (in percent)		28.8	27.0

^{^1/}Based on the EBA-lite 3.0 methodology

^{^3/}Cyclically adjusted, including multilateral consistency adjustments.

Cambodia: EBA-lite Model Results, 2021

		CA model ^1/	REER model ^1/
		(in percent of GDP)
CA-Actual		-47.5
	Cyclical contributions (from model) (-)	-3.3
	COVID-19 adjustor (-) ^2/	-6.7
	Additional temporary/statistical factors (-)	-11.1
	Natural disasters and conflicts (-)	-1.3
Adjusted CA		-24.9
CA Norm (from model) ^3/		-7.6
	Adjustments to the norm (-)	0.0
Adjusted CA Norm		-7.6
CA Gap		-17.3	-16.2
	o/w Relative policy gap	1.3
Elasticity		-0.60
REER Gap (in percent)		28.8	27.0

^{^1/}Based on the EBA-lite 3.0 methodology

^{^3/}Cyclically adjusted, including multilateral consistency adjustments.

4. The external sector assessment faces large uncertainties. Gold trade has been highly volatile during the pandemic: Cambodian exported gold in 2020, and then switched to importing gold in 2021. The gold imports have continued, albeit at a slower pace in early 2022, despite increases in the price of gold. Hence the estimated current account gap is subject to large uncertainties. The estimated gap can range from -8.4 to -31 percent of GDP assuming gold imports are entirely temporary or permanent respectively. However, the assumptions do not change the qualitative assessment that Cambodia’s external position is substantially weaker than the implied fundamentals and desirable policies—that is, the same assessment would be reached based on the current account balance in 2021 completely excluding gold flows.

5. The trend appreciation in the real effective exchange rate has slowed down. The real exchange rate had appreciated by 4 percent annually over the decade before the pandemic. The appreciation trend was temporary disrupted by the (nominal) depreciation of the US dollar in 2020. In 2021, the real exchange rate appreciated again, by about 4 precent The appreciation has resumed 2022 until its third quarter, reflecting capital inflows.

6. International reserves are broadly adequate. The current account deficit in 2021 was mostly, but not fully, offset by similar magnitude of capital inflows along with valuation effects stemming from non-US$-denominated assets. Gross reserves therefore decreased slightly, by US$0.4 billion. Reserves were 80 percent of estimated 2021 GDP. This corresponds to close to 8 months of prospective imports, which is higher than the optimal level of 4 month of imports as implied by the ARA tool for credit-constrained economies. Although the current level of reserves is adequate, a high level of international reserves remains advisable, as Cambodia is a highly export-dependent economy, operating in a fixed-exchange rate regime with a high degree of dollarization.

Annex II. Risk Assessment Matrix^¹

Nature/source of the shock	Likelihood	Impact	Policies to minimize impact
Conjunctural risks and scenarios
Corporate and/or household debt distress	Medium-High	Rising private debt questions sustainability and may be causing large amounts of non-interest-bearing assets in banks’ balance sheets. Loan books might be less healthy than indicated by statistics, raising concerns about the potential for corporate debt distress and lenders to fall under severe stress.	More intrusive financial supervision to have early warning of debt distress; active steps to force resolution and write-downs, and advancement of corporate insolvency and bank resolution laws.
Abrupt global slowdown or recession	Medium-High	Reduced external demand, especially from Europe, the US, and China, would have a substantial impact on the economy.	Monetary policy responses are constrained by maintaining the exchange rate peg. Therefore, supporting the economy would fall to fiscal policy.
Commodity price shocks + de-anchoring of inflation expectations and stagflation +	Medium	Cambodia is a net oil importer and stands to lose from rising oil and energy prices. It depends on raw materials imports for much of its manufacturing production. Rising commodity prices could reduce households’ purchasing power and increase relative poverty.	Policies to counteract inflation are limited, in the short run. The monetary policy objective is currency stability; subject to that, there is some limited ability to withdraw liquidity. Fiscal policy should address distributional consequences while avoiding fueling domestic inflation pressures.
Local Covid-19 outbreaks	Medium	The high rate of vaccination and low rates of infection shown through 2022 so far suggest low risk, but the impact would be large—additional outbreaks could necessitate lockdowns and/or closure of borders, and the health system has relatively low capacity.	Continue with testing and tracing, and distribute boosters for new variants as available.
Structural risks
Deepening geo-economic fragmentation and geo-political tensions	High	An increase in geopolitical tensions in the region could disrupt trade and damage confidence, possibly affecting export markets and/or FDI.	Continue to promote export market diversification, relying on the growing importance of the regional markets.
Cyber attacks	Medium	Government and private sector information systems are vulnerable to security breaches.	Enhance guidelines for security in the government and private sector information systems.
Natural disasters related to climate change	Medium	Cambodia is extremely vulnerable to extreme weather events. Floods, droughts and changing monsoon patterns pose a severe threat to agricultural production, a crucial source of income for the most vulnerable segments of the population as well as an important source of exports. Urban areas located close to riverbanks have experienced flooding, which threaten industrial production and housing. Forced migration of large segments of the population may pose social and fiscal challenges.	The National Adaptation Plan (NAP) enacted in 2020 and the Green Recovery Action Plan (2021–2023) signal intention to take action to address climate challenges. Important to keep focusing on adaptation, through investment in climate-resilient infrastructure, reforestation and focus on securing agricultural production/food security. In the long run, it is crucial to budget for support to households and firms affected by extreme weather events.

Nature/source of the shock	Likelihood	Impact	Policies to minimize impact
Conjunctural risks and scenarios
Corporate and/or household debt distress	Medium-High	Rising private debt questions sustainability and may be causing large amounts of non-interest-bearing assets in banks’ balance sheets. Loan books might be less healthy than indicated by statistics, raising concerns about the potential for corporate debt distress and lenders to fall under severe stress.	More intrusive financial supervision to have early warning of debt distress; active steps to force resolution and write-downs, and advancement of corporate insolvency and bank resolution laws.
Abrupt global slowdown or recession	Medium-High	Reduced external demand, especially from Europe, the US, and China, would have a substantial impact on the economy.	Monetary policy responses are constrained by maintaining the exchange rate peg. Therefore, supporting the economy would fall to fiscal policy.
Commodity price shocks + de-anchoring of inflation expectations and stagflation +	Medium	Cambodia is a net oil importer and stands to lose from rising oil and energy prices. It depends on raw materials imports for much of its manufacturing production. Rising commodity prices could reduce households’ purchasing power and increase relative poverty.	Policies to counteract inflation are limited, in the short run. The monetary policy objective is currency stability; subject to that, there is some limited ability to withdraw liquidity. Fiscal policy should address distributional consequences while avoiding fueling domestic inflation pressures.
Local Covid-19 outbreaks	Medium	The high rate of vaccination and low rates of infection shown through 2022 so far suggest low risk, but the impact would be large—additional outbreaks could necessitate lockdowns and/or closure of borders, and the health system has relatively low capacity.	Continue with testing and tracing, and distribute boosters for new variants as available.
Structural risks
Deepening geo-economic fragmentation and geo-political tensions	High	An increase in geopolitical tensions in the region could disrupt trade and damage confidence, possibly affecting export markets and/or FDI.	Continue to promote export market diversification, relying on the growing importance of the regional markets.
Cyber attacks	Medium	Government and private sector information systems are vulnerable to security breaches.	Enhance guidelines for security in the government and private sector information systems.
Natural disasters related to climate change	Medium	Cambodia is extremely vulnerable to extreme weather events. Floods, droughts and changing monsoon patterns pose a severe threat to agricultural production, a crucial source of income for the most vulnerable segments of the population as well as an important source of exports. Urban areas located close to riverbanks have experienced flooding, which threaten industrial production and housing. Forced migration of large segments of the population may pose social and fiscal challenges.	The National Adaptation Plan (NAP) enacted in 2020 and the Green Recovery Action Plan (2021–2023) signal intention to take action to address climate challenges. Important to keep focusing on adaptation, through investment in climate-resilient infrastructure, reforestation and focus on securing agricultural production/food security. In the long run, it is crucial to budget for support to households and firms affected by extreme weather events.

Annex III. Implementation of Past Advice

Policies	2021 Article IV Recommendations	Actions since 2021 Article IV Consultations (As of June 2022)
Fiscal Policy	As the economy recovers, policy can focus on further targeting of support measures, restoring revenues, increasing financing options, and supporting SDG goals.	Targeting of support measures: the authorities have introduced 10 rounds of Covid-19 policy measures and launched the “Strategic Framework and Programs for Economic Recovery in the Context of Living with Covid-19 in a New Normal 2021–2023” in December 2021. On the support to households, the cash transfer system, introduced in 2020, continues to be utilized for the poor and vulnerable households until September 2022. The authorities are currently discussing whether to extend cash transfers to those affected by rising fuel and food prices. On the support to businesses, the current range of interventions includes employment support, tax and fee exemptions, and credit guarantees and subsidies. In February 2022, the Ministry of Economy and Finance (MEF) announced additional funding of US$ 100 million to the SME Bank and the Agriculture and Rural Development Bank (ARDB) to support SMEs in pandemic affected sectors (e.g., tourism, garments). In May 2022, the MEF announced the implementation of the Tourism Recovery Co-Financing Scheme (TRCS) through the SME bank, with another US$ 75 million from the government budget. Fiscal revenues: the authorities have implemented measures to restore revenues to allow more spending on development needs: Strong implementation of the authorities’ Revenue Mobilization Strategy (RMS) 2019–23 has helped to mitigate the damage to tax revenues. There were further gains from VAT, customs, and excise tax collection, through strengthened administration such as E-registration, E-filling, E-payment, and E-customs. With respect to the goal of more stable tax revenues and more progressive taxation, there has been progress on property tax (especially on transfers) and digital taxation (VAT on e-commerce). The introduction of capital gains tax has been postponed until 2024. The authorities have also focused on revenue diversification policies, especially from telecommunication, mine, and oil sources. The authorities have attempted to cost numerous tax policies and fee exemptions as well as assess the progress of tax administration’s modernization, with support from World Bank technical assistance, for proper evaluation the current tax system. The findings from this “Tax System Reform Study” will be inputs for preparing a new RMS 2024–28. Financing options: The government intends to issue, for the first time, local-currency government bonds in 2022, while building market infrastructure to manage issuance, registration, and trading.
	The extensive range of measures (e.g., social assistance, below-the-line support) necessitates attention to safeguards.	The authorities have made progress in improving fiscal governance with the introduction of, medium-term budget framework (MTBF), and PFM reform including drafting the new law on Public Finance System (PFS). There are ongoing efforts to modernize and harmonize public financial systems and practices, including the Financial Management Information System (FMIS) roll out, public procurement system reform 2019–25, budget system reform strategy for sub-national administration 2019–25, and public investment management system reform 2019–25. Some specific safeguarding measures include: The authorities have been closely monitoring the new cash transfer system, the results of which suggest that reassessing ID Poor cardholders’ financial situations could ensure that monies are allocated more in line with needs. Regarding concerns about the authorities’ capacity to quantify risks from government guarantees and other contingent liabilities, the authorities are working with private financial institutions to assess applicants’ credit risks. The authorities intend that support is extended only to viable business in the most affected sectors. To further monitor fiscal risks, especially from public sector entities (including Public Administration Entities (PAEs) and Public Enterprises (Pes)), the government is currently drafting a law on public enterprise management. Law on Public-Private Partnership (PPP) was introduced in 2021. This will be followed by the introduction of three volumes of operating procedures for PPPs. Deficiencies and recommendations set out by the 2021 PEFA (Public Expenditure and Financial Accountability) assessment are expected to be addressed in the next Consolidated Action Plan (CAP) (phase 4) platform of PFM reform.
	Framing Interventions within a well-defined medium-term fiscal framework (MTFF) would help ensure confidence in the public finances over medium term.	Plans are already underway to develop an MTFF. The 2023 budget will set expenditure ceilings for key sectors. The draft MTFF 2023–2025 is expected to be completed in 2022, with on-going TA support from the IMF to calibrate fiscal rules and targets. (Currently, the Public Debt Management Strategy 2019–23 outlines a debt rule on medium-term debt levels as a fiscal anchor.)
Macro-Financial and Monetary Policy	Prudential requirements should be gradually normalized.	The NBC has taken steps to reduce risks from restructured loans and has been monitoring risks in the banking sector. Exit from regulatory forbearance is planned: The NBC issued a circular at the end of 2021 extending the forbearance period for new restructured loans until the end of June 2022, and requiring banks to classify and provision for restructured loans. Banks are also required to conduct stress testing on their restructured loan portfolios and report results to the NBC. Meanwhile, the NBC is considering gradually increasing reserve requirement ratios to pre-Covid-19 levels, starting from the second half of 2022.
Macro-Financial and Monetary Policy	Reforms should continue to close supervisory gaps and bolster financial safety net.	The NBC has been working to reducing supervisory gaps and strengthen the financial safety net. The NBC has been working on new capital adequacy/solvency framework (CAR) in line with Basel III, taking into account local banking conditions. The framework consists of five Prakas, on Regulatory Capital, the Capital Adequacy Ratio (CAR), Credit Risk for CAR Purposes, Market Risk for CAR Purposes, and Operational Risk for CAR Purposes. The new framework has been drafted and is expected to be released in the second half of 2022. Once the new CAR framework is completed, the NBC will review the Prompt Corrective Action (PCA) framework. The Deposit Protection and Bank Resolution Unit at the NBC has been tasked with drafting law and/or regulation and conducting a feasibility study toward the establishment of a deposit protection scheme (DPS) in Cambodia, as well as assist in drafting legislation for bank resolution. The deposit protection law has been drafted and is to be reviewed by NBC management, while the legislation for Special Bank Resolution has been under drafting by NBC working team. The Non-Bank Financial Services Authority (NBFSA), established in July 2021, is responsible for coordinating the formulation and implementation of policies and strategies for the development of the non-banking sector, including financial technology. Six regulators have been introduced, for Insurance, Securities, Social Security, Trusts, Accounting and Audit, and Real Estate and Pawnshop Businesses. The next step for the authority is to secure full staffing and establish a reporting structure and implementation of roles according to the law on the NBFSA. The NBFSA’s first annual report outlining the outcomes in 2021 and targets in 2022 has been drafted. The NBFSA has also been working closely with the Digital Economy and Business Committee to draft Cambodia’s FinTech Development Policy.
	Advances in digital payments could increase efficiency and financial inclusion.	The NBC continues to encourage cashless payments. The use of digital or e-payments has continued to grow, as evidenced by the increasing number of digital deposit accounts, e-wallets, virtual cards, number of online transactions, as well as the modernization of payment infrastructure. Together with digital payment services provided by banks and payment service providers, the NBC’s Bakong payment system using block-chain technology (officially launched in 2020), and with more than 8 million users as of April 2022) facilitates cashless payments and cross-border remittances, reduces risks and costs of transactions, and enables the rural population to access financial services. Cambodia’s FinTech Development Policy is also expected to play an important part in building the country’s fintech infrastructure including the payment system.
	Increasing exchange rate flexibility would boost monetary policy credibility but is contingent on reducing dollarization.	Prerequisites for reducing dollarization include development of financial markets, namely interbank and money markets. The government is expected to issue sovereign debt in 2022Q3. The NBC, with the support from IMF TA, has continued to work on improving banking liquidity management and forecasting and modernizing monetary policy tools to help reduce exchange rate risk and allow more flexibility. A Marginal Lending Facility (in riel) has been introduced and a Marginal Deposit Facility is in preparation. A feasibility study is being conducted to include interbank transactions in NBC’s online trading platform (NBC Platform).
	Addressing deficiencies in the AML/CFT regime	Cambodia has taken steps to address the recommendations of the Financial Action Task Force (FATF), especially for key remaining deficiencies identified in the mutual evaluation report (MER). An ad hoc sub-committee was established in January 2022 to implement an action plan laid out by FATF with the four remaining deficiencies identified in the AML-CFT mutual assessment. The subcommittee involves officials from the Ministry of Justice, Cambodia Financial Intelligence Unit (CAFIU), Ministry of Foreign Affairs and International Cooperation (MOFAIC), Ministry of Commerce, Non-Bank Financial Services Authority (NBFSA), Commercial Gambling Control Commission, and the National Police’s Central Security Department. The authorities have made some progress in the four deficiencies by (i) improving the dissemination of financial intelligence to law enforcement authorities (Immediate Outcome (IO)-6); (ii) the provision of trainings to strengthen the skills of competent authorities to implement Targeted Financial Sanctions (TFS) related to proliferation financing (PF) (IO-11); iii) an increase in money laundering investigations & prosecutions (IO-7) and; (iv) freezing and confiscation of criminal proceeds, instrumentalities, and property (IO-8). A progress report is being prepared and will be submitted to FATF by June 2022 for re-evaluation—the result will be available in November 2022.
Structural policies	Addressing lack of diversification and low value added.	Trade and investment liberalization has helped Cambodia to move from dependence on agriculture toward light manufacturing. A new Investment Law (adopted in October 2021) and the Garment, Footwear and Travel Goods (GFT) Sector Development Strategy 2022–27 (adopted in March 2022) aim to enable a move to a higher value-added economy. The authorities have recently introduced several measures, including additional funding to the SME Bank and ARDB in February 2022, to support domestic manufacturing and agriculture. In the long-run, Cambodia also aims to capture the opportunities and benefits of the digital economy by introducing the Cambodia Digital Economy and Society Policy Framework 2021–35 (adopted in May 2021, English version available in August 2021).
	Addressing labor informality.	The authorities continue to take policy measures for addressing labor informality including: i) tax breaks for encouraging firms, especially small and medium-sized businesses, to formally register their business; and ii) expansion of the Health Equity Fund (HEF) to cover informal workers. Nonetheless, the effectiveness of interventions remain limited as workers can still be employed informally within firms.
	Addressing corruption.	To lower transportation cost, improve trade facilitation, and reduce “informal customs charges”, the authorities dissolved CAMCONTROL (Cambodia Import-Export Inspection and Fraud Repression Directorate-General of the Ministry of Commerce) and KAMSAB (Kampuchea Shipping Agency and Brokers) from all border checkpoints and ports. The authorities also simplified the process for setting up a business, including the launch of the Cambodia Data Exchange Platform (CamDX) and the online business registration platform. The Anti-Corruption Unit (ACU) has been focusing on raising awareness, managing assets and liabilities declarations, and investigating corruption cases. Draft legislation on whistleblower protection has been submitted to the Ministry of Justice for review.
	Addressing climate change vulnerabilities	The government has implemented a national Climate Change Strategic Plan 2014–23 and ratified the 2015 Paris Accord. The government has also provided first National Determined Contribution (NDC) report to the UNFCCC in 2015 and updated report in 2020. The authorities also launched the Long-Term Strategy for Carbon Neutrality (LTS4CN) in December 2021. The importance of a green recovery and climate adaptation was further emphasized in the Economic Recovery Strategy with the introduction of “3Rs” in December 2021. The authorities published the Cambodia Climate Public Expenditure Review 2020 in March 2022 on the website of National Council for Sustainable Development (https://ncsd.moe.gov.kh/node/12800). The authorities plan to keep monitoring climate change expenditure with next round of the Climate Public Expenditure Review. On mainstreaming climate adaptation measures, line ministries have been preparing for their own sectoral Climate Change Action Plans (CCAPs) linked to Budget Strategic Plan (BSP). At this point, 14 line ministries have prepared their CCAPs.
	Data quality and transparency	Cambodia participates in the e-GDDS linked to the IMF’s Dissemination Standards Bulleting Board (DSBB). The National Summary Data Page (NSDP) hosted on the Central Bank website aims to provide access to the national economic statistics. Recent developments include the official launch of a Residential Property Price Index in June 2022, with technical support from IMF. There is also an ongoing effort to rebase GDP, with technical review from IMF. On Government Finance Statistics (GFS), there has been some progress on: i) full consolidation of general government (including Public Administration Entities (PAEs) and National Social Security Fund (NSSF)) covering 2015–2020; ii) compilation of expenditure in line with COFOG (classification of functions of government) on environmental, health, education, and social protection; iii) and reconciliation of 3 indicators (net incurrence of liabilities, interest to nonresidents, and liabilities stock position) against External Sector Statistics (ESS).

Policies	2021 Article IV Recommendations	Actions since 2021 Article IV Consultations (As of June 2022)
Fiscal Policy	As the economy recovers, policy can focus on further targeting of support measures, restoring revenues, increasing financing options, and supporting SDG goals.	Targeting of support measures: the authorities have introduced 10 rounds of Covid-19 policy measures and launched the “Strategic Framework and Programs for Economic Recovery in the Context of Living with Covid-19 in a New Normal 2021–2023” in December 2021. On the support to households, the cash transfer system, introduced in 2020, continues to be utilized for the poor and vulnerable households until September 2022. The authorities are currently discussing whether to extend cash transfers to those affected by rising fuel and food prices. On the support to businesses, the current range of interventions includes employment support, tax and fee exemptions, and credit guarantees and subsidies. In February 2022, the Ministry of Economy and Finance (MEF) announced additional funding of US$ 100 million to the SME Bank and the Agriculture and Rural Development Bank (ARDB) to support SMEs in pandemic affected sectors (e.g., tourism, garments). In May 2022, the MEF announced the implementation of the Tourism Recovery Co-Financing Scheme (TRCS) through the SME bank, with another US$ 75 million from the government budget. Fiscal revenues: the authorities have implemented measures to restore revenues to allow more spending on development needs: Strong implementation of the authorities’ Revenue Mobilization Strategy (RMS) 2019–23 has helped to mitigate the damage to tax revenues. There were further gains from VAT, customs, and excise tax collection, through strengthened administration such as E-registration, E-filling, E-payment, and E-customs. With respect to the goal of more stable tax revenues and more progressive taxation, there has been progress on property tax (especially on transfers) and digital taxation (VAT on e-commerce). The introduction of capital gains tax has been postponed until 2024. The authorities have also focused on revenue diversification policies, especially from telecommunication, mine, and oil sources. The authorities have attempted to cost numerous tax policies and fee exemptions as well as assess the progress of tax administration’s modernization, with support from World Bank technical assistance, for proper evaluation the current tax system. The findings from this “Tax System Reform Study” will be inputs for preparing a new RMS 2024–28. Financing options: The government intends to issue, for the first time, local-currency government bonds in 2022, while building market infrastructure to manage issuance, registration, and trading.
	The extensive range of measures (e.g., social assistance, below-the-line support) necessitates attention to safeguards.	The authorities have made progress in improving fiscal governance with the introduction of, medium-term budget framework (MTBF), and PFM reform including drafting the new law on Public Finance System (PFS). There are ongoing efforts to modernize and harmonize public financial systems and practices, including the Financial Management Information System (FMIS) roll out, public procurement system reform 2019–25, budget system reform strategy for sub-national administration 2019–25, and public investment management system reform 2019–25. Some specific safeguarding measures include: The authorities have been closely monitoring the new cash transfer system, the results of which suggest that reassessing ID Poor cardholders’ financial situations could ensure that monies are allocated more in line with needs. Regarding concerns about the authorities’ capacity to quantify risks from government guarantees and other contingent liabilities, the authorities are working with private financial institutions to assess applicants’ credit risks. The authorities intend that support is extended only to viable business in the most affected sectors. To further monitor fiscal risks, especially from public sector entities (including Public Administration Entities (PAEs) and Public Enterprises (Pes)), the government is currently drafting a law on public enterprise management. Law on Public-Private Partnership (PPP) was introduced in 2021. This will be followed by the introduction of three volumes of operating procedures for PPPs. Deficiencies and recommendations set out by the 2021 PEFA (Public Expenditure and Financial Accountability) assessment are expected to be addressed in the next Consolidated Action Plan (CAP) (phase 4) platform of PFM reform.
	Framing Interventions within a well-defined medium-term fiscal framework (MTFF) would help ensure confidence in the public finances over medium term.	Plans are already underway to develop an MTFF. The 2023 budget will set expenditure ceilings for key sectors. The draft MTFF 2023–2025 is expected to be completed in 2022, with on-going TA support from the IMF to calibrate fiscal rules and targets. (Currently, the Public Debt Management Strategy 2019–23 outlines a debt rule on medium-term debt levels as a fiscal anchor.)
Macro-Financial and Monetary Policy	Prudential requirements should be gradually normalized.	The NBC has taken steps to reduce risks from restructured loans and has been monitoring risks in the banking sector. Exit from regulatory forbearance is planned: The NBC issued a circular at the end of 2021 extending the forbearance period for new restructured loans until the end of June 2022, and requiring banks to classify and provision for restructured loans. Banks are also required to conduct stress testing on their restructured loan portfolios and report results to the NBC. Meanwhile, the NBC is considering gradually increasing reserve requirement ratios to pre-Covid-19 levels, starting from the second half of 2022.
Macro-Financial and Monetary Policy	Reforms should continue to close supervisory gaps and bolster financial safety net.	The NBC has been working to reducing supervisory gaps and strengthen the financial safety net. The NBC has been working on new capital adequacy/solvency framework (CAR) in line with Basel III, taking into account local banking conditions. The framework consists of five Prakas, on Regulatory Capital, the Capital Adequacy Ratio (CAR), Credit Risk for CAR Purposes, Market Risk for CAR Purposes, and Operational Risk for CAR Purposes. The new framework has been drafted and is expected to be released in the second half of 2022. Once the new CAR framework is completed, the NBC will review the Prompt Corrective Action (PCA) framework. The Deposit Protection and Bank Resolution Unit at the NBC has been tasked with drafting law and/or regulation and conducting a feasibility study toward the establishment of a deposit protection scheme (DPS) in Cambodia, as well as assist in drafting legislation for bank resolution. The deposit protection law has been drafted and is to be reviewed by NBC management, while the legislation for Special Bank Resolution has been under drafting by NBC working team. The Non-Bank Financial Services Authority (NBFSA), established in July 2021, is responsible for coordinating the formulation and implementation of policies and strategies for the development of the non-banking sector, including financial technology. Six regulators have been introduced, for Insurance, Securities, Social Security, Trusts, Accounting and Audit, and Real Estate and Pawnshop Businesses. The next step for the authority is to secure full staffing and establish a reporting structure and implementation of roles according to the law on the NBFSA. The NBFSA’s first annual report outlining the outcomes in 2021 and targets in 2022 has been drafted. The NBFSA has also been working closely with the Digital Economy and Business Committee to draft Cambodia’s FinTech Development Policy.
	Advances in digital payments could increase efficiency and financial inclusion.	The NBC continues to encourage cashless payments. The use of digital or e-payments has continued to grow, as evidenced by the increasing number of digital deposit accounts, e-wallets, virtual cards, number of online transactions, as well as the modernization of payment infrastructure. Together with digital payment services provided by banks and payment service providers, the NBC’s Bakong payment system using block-chain technology (officially launched in 2020), and with more than 8 million users as of April 2022) facilitates cashless payments and cross-border remittances, reduces risks and costs of transactions, and enables the rural population to access financial services. Cambodia’s FinTech Development Policy is also expected to play an important part in building the country’s fintech infrastructure including the payment system.
	Increasing exchange rate flexibility would boost monetary policy credibility but is contingent on reducing dollarization.	Prerequisites for reducing dollarization include development of financial markets, namely interbank and money markets. The government is expected to issue sovereign debt in 2022Q3. The NBC, with the support from IMF TA, has continued to work on improving banking liquidity management and forecasting and modernizing monetary policy tools to help reduce exchange rate risk and allow more flexibility. A Marginal Lending Facility (in riel) has been introduced and a Marginal Deposit Facility is in preparation. A feasibility study is being conducted to include interbank transactions in NBC’s online trading platform (NBC Platform).
	Addressing deficiencies in the AML/CFT regime	Cambodia has taken steps to address the recommendations of the Financial Action Task Force (FATF), especially for key remaining deficiencies identified in the mutual evaluation report (MER). An ad hoc sub-committee was established in January 2022 to implement an action plan laid out by FATF with the four remaining deficiencies identified in the AML-CFT mutual assessment. The subcommittee involves officials from the Ministry of Justice, Cambodia Financial Intelligence Unit (CAFIU), Ministry of Foreign Affairs and International Cooperation (MOFAIC), Ministry of Commerce, Non-Bank Financial Services Authority (NBFSA), Commercial Gambling Control Commission, and the National Police’s Central Security Department. The authorities have made some progress in the four deficiencies by (i) improving the dissemination of financial intelligence to law enforcement authorities (Immediate Outcome (IO)-6); (ii) the provision of trainings to strengthen the skills of competent authorities to implement Targeted Financial Sanctions (TFS) related to proliferation financing (PF) (IO-11); iii) an increase in money laundering investigations & prosecutions (IO-7) and; (iv) freezing and confiscation of criminal proceeds, instrumentalities, and property (IO-8). A progress report is being prepared and will be submitted to FATF by June 2022 for re-evaluation—the result will be available in November 2022.
Structural policies	Addressing lack of diversification and low value added.	Trade and investment liberalization has helped Cambodia to move from dependence on agriculture toward light manufacturing. A new Investment Law (adopted in October 2021) and the Garment, Footwear and Travel Goods (GFT) Sector Development Strategy 2022–27 (adopted in March 2022) aim to enable a move to a higher value-added economy. The authorities have recently introduced several measures, including additional funding to the SME Bank and ARDB in February 2022, to support domestic manufacturing and agriculture. In the long-run, Cambodia also aims to capture the opportunities and benefits of the digital economy by introducing the Cambodia Digital Economy and Society Policy Framework 2021–35 (adopted in May 2021, English version available in August 2021).
	Addressing labor informality.	The authorities continue to take policy measures for addressing labor informality including: i) tax breaks for encouraging firms, especially small and medium-sized businesses, to formally register their business; and ii) expansion of the Health Equity Fund (HEF) to cover informal workers. Nonetheless, the effectiveness of interventions remain limited as workers can still be employed informally within firms.
	Addressing corruption.	To lower transportation cost, improve trade facilitation, and reduce “informal customs charges”, the authorities dissolved CAMCONTROL (Cambodia Import-Export Inspection and Fraud Repression Directorate-General of the Ministry of Commerce) and KAMSAB (Kampuchea Shipping Agency and Brokers) from all border checkpoints and ports. The authorities also simplified the process for setting up a business, including the launch of the Cambodia Data Exchange Platform (CamDX) and the online business registration platform. The Anti-Corruption Unit (ACU) has been focusing on raising awareness, managing assets and liabilities declarations, and investigating corruption cases. Draft legislation on whistleblower protection has been submitted to the Ministry of Justice for review.
	Addressing climate change vulnerabilities	The government has implemented a national Climate Change Strategic Plan 2014–23 and ratified the 2015 Paris Accord. The government has also provided first National Determined Contribution (NDC) report to the UNFCCC in 2015 and updated report in 2020. The authorities also launched the Long-Term Strategy for Carbon Neutrality (LTS4CN) in December 2021. The importance of a green recovery and climate adaptation was further emphasized in the Economic Recovery Strategy with the introduction of “3Rs” in December 2021. The authorities published the Cambodia Climate Public Expenditure Review 2020 in March 2022 on the website of National Council for Sustainable Development (https://ncsd.moe.gov.kh/node/12800). The authorities plan to keep monitoring climate change expenditure with next round of the Climate Public Expenditure Review. On mainstreaming climate adaptation measures, line ministries have been preparing for their own sectoral Climate Change Action Plans (CCAPs) linked to Budget Strategic Plan (BSP). At this point, 14 line ministries have prepared their CCAPs.
	Data quality and transparency	Cambodia participates in the e-GDDS linked to the IMF’s Dissemination Standards Bulleting Board (DSBB). The National Summary Data Page (NSDP) hosted on the Central Bank website aims to provide access to the national economic statistics. Recent developments include the official launch of a Residential Property Price Index in June 2022, with technical support from IMF. There is also an ongoing effort to rebase GDP, with technical review from IMF. On Government Finance Statistics (GFS), there has been some progress on: i) full consolidation of general government (including Public Administration Entities (PAEs) and National Social Security Fund (NSSF)) covering 2015–2020; ii) compilation of expenditure in line with COFOG (classification of functions of government) on environmental, health, education, and social protection; iii) and reconciliation of 3 indicators (net incurrence of liabilities, interest to nonresidents, and liabilities stock position) against External Sector Statistics (ESS).

Annex IV. Capacity Development Strategy

1. Cambodia has been an extensive user of the Fund capacity development (CD). Within the Asia and Pacific region, Cambodia was the largest recipient of CD resources in FY2022 (text figure), as the Fund has responded to Cambodia’s significant needs for building institutions toward market economy.

2. While Cambodia had robust economic performance prior to the Covid-19 pandemic, significant challenges remain. Ranked as one of the world’s fastest-growing economies over the two decades prior to the pandemic, Cambodia has made important progress towards SDGs. Amid the pandemic during 2020–21, Cambodia faced many challenges in maintaining macroeconomic stability and further advancing sustainable and inclusive growth. As the economy recovers from the pandemic, the authorities are wrestling with daunting tasks to make the economy more resilient. For instance, the financial sector has grown rapidly over the past decade and vulnerabilities were elevated even during the pandemic; large infrastructure gaps and mounting development spending needs pose challenges for fiscal management; and structural constraints to sustained strong and inclusive growth reflect a narrow economic base, inadequate competitiveness, and underdeveloped business climate.

A. Recent CD Activities

3. The large volume of CD has been well integrated with Fund surveillance. High-quality CD remains central in strengthening the effective implementation of Fund policy advice and bolstering our engagement with the authorities. Reflecting key economic challenges, the main surveillance priorities identified by the 2021 Article IV consultations were: i) fiscal policies including on safeguarding fiscal sustainability; ii) macro-financial and monetary policies including on addressing macro-financial risks; and iii) structural policies including on promoting further diversification. CD is also focused on strengthening institutions, policy frameworks, and technical skills to address these issues.

4. Recent CD activities are consistent with surveillance priorities and cover Covid-19-related issues. The priorities include: (i) safeguarding fiscal sustainability, and (ii) addressing macro-financial risks. At the same time, recent CD activities also responded to the increased demand for Covid-19-related issues.

Safeguarding fiscal sustainability (Table 1). Regular TA on public financial management (PFM) and treasury management coordinated through CDOT regional advisors has helped improve spending efficiency, and fiscal reporting and governance. CD to develop an operational Macroframework helped the authorities assess the impact of fiscal policies. The MEF has also been supported by a resident MTBF (Medium-Term Budget Framework) advisor. Macro-fiscal semi-structure model has been developed by MEF with the support from IMF/CD experts to support work on a MTFF (Medium-Term Fiscal Framework). Reflecting the need to increase revenues under the authorities’ revenue mobilization strategy (RMS), the authorities have received TA on strengthening customs administrations.
Addressing macro-financial risks (Table 2). Supporting efforts to address elevated macro-financial risks, TA has focused on strengthening banking supervision and regulation, including through the presence of a long-standing resident advisor in banking supervision and regulation. This follows up on the pilot exercise for enhanced macro-financial surveillance. This TA covers the issue of regulatory forbearance to soften the impact of the Covid-19 shocks on the financial sectors as well as prepares for the exit from regulatory forbearance. Other TA has included financial stability analysis; stress testing and macroprudential policy; preparations to establish a bank resolution regime framework and a deposit protection scheme; improving liquidity forecasting/management and interbank market development as well as strategy to promote the use of local currency (with regular support from the regional advisor from Capacity Development Office in Thailand (CDOT) on monetary and foreign exchange operations).
Statistics. Recent TA on statistics has focused on improving data quality and availability in external (ESS), government (GFS), and monetary and financial sector statistics (MFS). Fund CD has also supported development of a residential property price index (RPPI) (officially launched in June 2022), while CDOT/STA organized regional webinar on workshop on International Trade in Services Statistics and Webinar on Digital Economy and its Measurement. Consistent with the need for broad improvements in data provision for surveillance, TA on statistics helps compile and disseminate data to support policy analysis and detect economic risks and vulnerabilities. TA to support Cambodia’s participation in the e-GDDS and the launch of a National Summary Data page (NSDP) have improved data transparency.
Training. Macro-financial training (resumed face-to-face in April 2022 after being conducted virtually during the Covid-19 outbreak) It was delivered by CDOT, STI and ICD, and supported the general macroeconomic capacity development needs of Cambodian officials. It involved regional ICD courses for Cambodia, Laos and Vietnam, tailored to their needs, and included courses on Macroeconomic Diagnostics, Exchange Rate Policy, and Public Sector Debt Dynamics. This training supported TA provided to an “Interagency Economic Core Group (ECG)” to develop a Macro-framework and strengthen macroeconomic analysis and forecasting. It has also supported TA to the MEF on macro-fiscal modeling as an input into MTFF. Cambodia has benefitted from several regional and country-specific training aimed at enhancing the quality of statistics (e.g., external sector statistics, government financial statistics) to support decision making.

^{Table 1.}

Cambodia: Recent Surveillance and TA Integration in the Fiscal Sector

^{Table 1.}

Cambodia: Recent Surveillance and TA Integration in the Fiscal Sector

Surveillance Focus: Safeguarding Fiscal Sustainability
Issue	Recent TA Focus	Results
PFM – Improve fiscal reporting and governance	PFM (FMIS^1, COFOG^2, IPSAS^*3, and treasury management); MTFF (Medium Term Fiscal Framework)	Supported rolling out Phase II and III of the FMIS Improved fiscal reporting, fiscal management and budgeting, treasury, and accounting issues.
Macro-fiscal Capacity	Capacity building in macro-fiscal areas	Improved MEF’s macroeconomic and revenue models, developed tools to monitor and update macro projections in-year and a MTFF. Developed an operational Macroframework to assess the impact on the economy.
Ensure sustained revenue improvement	Customs administration Tax administration diagnostic for RMS (2019–-23)	Supported GDCE in developing enforcement strategy, the ICT strategy, and strategic and operational planning functions. Priority areas identified in the tax policy review and tax administration diagnostic are included in the new RMS (2019–23).
^{^1} FMIS (Financial Management Information System), ^{^2} COFOG (Classification of the Functions of Government), ^{^*3} IPSAS (International Public Sector Accounting Standard)

^{Table 1.}

Cambodia: Recent Surveillance and TA Integration in the Fiscal Sector

Surveillance Focus: Safeguarding Fiscal Sustainability
Issue	Recent TA Focus	Results
PFM – Improve fiscal reporting and governance	PFM (FMIS^1, COFOG^2, IPSAS^*3, and treasury management); MTFF (Medium Term Fiscal Framework)	Supported rolling out Phase II and III of the FMIS Improved fiscal reporting, fiscal management and budgeting, treasury, and accounting issues.
Macro-fiscal Capacity	Capacity building in macro-fiscal areas	Improved MEF’s macroeconomic and revenue models, developed tools to monitor and update macro projections in-year and a MTFF. Developed an operational Macroframework to assess the impact on the economy.
Ensure sustained revenue improvement	Customs administration Tax administration diagnostic for RMS (2019–-23)	Supported GDCE in developing enforcement strategy, the ICT strategy, and strategic and operational planning functions. Priority areas identified in the tax policy review and tax administration diagnostic are included in the new RMS (2019–23).
^{^1} FMIS (Financial Management Information System), ^{^2} COFOG (Classification of the Functions of Government), ^{^*3} IPSAS (International Public Sector Accounting Standard)

^{Table 2.}

Cambodia: Recent Surveillance and TA Integration in the Monetary and Financial Sector

^{Table 2.}

Cambodia: Recent Surveillance and TA Integration in the Monetary and Financial Sector

Surveillance Focus: Addressing Macro-Financial Risks
Issue	Recent TA Focus	Key Results
Upgrade regulation and supervision; build liquidity and capital buffers	Upgrading regulation framework of the banking sector	Upgraded regulations and supervisory processes for credit risk, provisioning, and reporting requirements; minimum capital requirement; capital buffer; liquidity coverage ratio (LCR) and solvency framework in line with Basel III (including the new Prakas on CAR), prepared a new framework for prompt corrective action (PCA) and Deposit Protection Scheme (DPS).
Improve monetary policy framework and support gradual shift to market-based monetary and FX Operations	Improving liquidity forecasting and monetary operations and developing interbank and FX markets	Improved liquidity management and forecasting; interbank market development, introduced local currency instruments including NCD^{^1}, LPCO^{^2}, MLF^{^*3} and established online trading platform. Working to establish a fully-fledged Interest Rate Corridor, streamlining of open market operations (OMOs) and KHR reserve requirement, as well as adjusting the monetary policy decision making process.
Promote local currency use	Strategy for promoting the use of local currency	A market based, gradual strategy for promoting the use of local currency is prepared.
Systematic financial stability analysis	Strengthening systemic financial stability analysis at the NBC	Established a fully dedicated division to systemic financial stability analysis; and published the first-ever Financial Stability Report (FSR).
Analysis of macro-financial linkages in a Macroframework	Impact of financial policies on macro economy	Build a microframework with linkages from the financial to real, fiscal, and external sectors that shows the impact of financial shocks.
^{^1} NCD (Negotiable Certificate of Deposit), ^{^2} LPCO (Liquidity-Providing Collateralized Operation), ^{^*3} MLF (Marginal Lending Facility)

^{Table 2.}

Cambodia: Recent Surveillance and TA Integration in the Monetary and Financial Sector

Surveillance Focus: Addressing Macro-Financial Risks
Issue	Recent TA Focus	Key Results
Upgrade regulation and supervision; build liquidity and capital buffers	Upgrading regulation framework of the banking sector	Upgraded regulations and supervisory processes for credit risk, provisioning, and reporting requirements; minimum capital requirement; capital buffer; liquidity coverage ratio (LCR) and solvency framework in line with Basel III (including the new Prakas on CAR), prepared a new framework for prompt corrective action (PCA) and Deposit Protection Scheme (DPS).
Improve monetary policy framework and support gradual shift to market-based monetary and FX Operations	Improving liquidity forecasting and monetary operations and developing interbank and FX markets	Improved liquidity management and forecasting; interbank market development, introduced local currency instruments including NCD^{^1}, LPCO^{^2}, MLF^{^*3} and established online trading platform. Working to establish a fully-fledged Interest Rate Corridor, streamlining of open market operations (OMOs) and KHR reserve requirement, as well as adjusting the monetary policy decision making process.
Promote local currency use	Strategy for promoting the use of local currency	A market based, gradual strategy for promoting the use of local currency is prepared.
Systematic financial stability analysis	Strengthening systemic financial stability analysis at the NBC	Established a fully dedicated division to systemic financial stability analysis; and published the first-ever Financial Stability Report (FSR).
Analysis of macro-financial linkages in a Macroframework	Impact of financial policies on macro economy	Build a microframework with linkages from the financial to real, fiscal, and external sectors that shows the impact of financial shocks.
^{^1} NCD (Negotiable Certificate of Deposit), ^{^2} LPCO (Liquidity-Providing Collateralized Operation), ^{^*3} MLF (Marginal Lending Facility)

B. Forward Looking CD Priorities

5. Looking ahead, IMF CD can play a pivotal role in Cambodia’s transitions to the next phase of its development. Fund CD can contribute to enhancing institutional capacity to effectively design, implement, and monitor policies in securing macroeconomic stability and sustaining strong and inclusive growth. Some new CD programs are being initiated, including to the NBC to strengthen forecasting for monetary policy Forward looking CD priorities are informed by an evolving multi-year surveillance strategy and CD matrix (Table 3). The multi-year strategy covers traditional macroeconomic issues, enhanced focus on macro-financial issues, topics that fall under Fund key commitments to support countries in achieving their Sustainable Development Goals (SDGs) as well as emerging Fund issues.

^{Table 3.}

Cambodia: Multi-Year Strategic Surveillance and CD Matrix

Key:

focus;

= follow up on previous year(s) Notes:

^{^1/}Pilot for enhanced macro-financial surveillance (2016) and mainstreaming macro-financial surveillance (2017).

^{^2/}Pilot for infrastructure investment (2016, 2017).

^{^3/}Pilot for inequality (2018).

^{Table 3.}

Cambodia: Multi-Year Strategic Surveillance and CD Matrix

		Macro-Critical	Traction
Traditional macroeconomic issues Issues for Further Integration		HIGH	HIGH
1. Macro-financial Issues, ^1/
	Capital Inflows and Spillovers	HIGH	HIGH
	Financial Stability, Deepening and Inclusion	MEDIUM	MEDIUM
	Financial Cycle and Macro-implications	HIGH	HIGH
	Balance Sheet Analysis	N/A	N/A
	Macroprudential Policy	HIGH	MEDIUM
	Financial Supervision and Regulation	HIGH	HIGH
	Macroeconomic Shocks and Financial Stress	HIGH	HIGH
2. SDGs/FfD Commitments
	Domestic Revenue Mobilization	HIGH	HIGH
	Infrastructure Investment ^2/	HIGH	HIGH
	Building Policy Space/Economic Resilience	MEDIUM-HIGH	MEDIUM
	Environmental Sustainability, Equity/inclusion	MEDIUM	MEDIUM
	Fragile and Conflict-Affected States	N/A	N/A
	Domestic Financial Market Promotion	HIGH	HIGH
	Data enhancement	HIGH	MEDIUM
3. Emerging Issues
	Gender	LOW	LOW
	Income Inequality, ^3/	MEDIUM-HIGH	MEDIUM
	Climate Change	MEDIUM	LOW
	Governance	HIGH	MEDIUM
	Social Spending	MEDIUM	MEDIUM

Key:

focus;

= follow up on previous year(s) Notes:

^{^1/}Pilot for enhanced macro-financial surveillance (2016) and mainstreaming macro-financial surveillance (2017).

^{^2/}Pilot for infrastructure investment (2016, 2017).

^{^3/}Pilot for inequality (2018).

^{Table 3.}

Cambodia: Multi-Year Strategic Surveillance and CD Matrix

		Macro-Critical	Traction
Traditional macroeconomic issues Issues for Further Integration		HIGH	HIGH
1. Macro-financial Issues, ^1/
	Capital Inflows and Spillovers	HIGH	HIGH
	Financial Stability, Deepening and Inclusion	MEDIUM	MEDIUM
	Financial Cycle and Macro-implications	HIGH	HIGH
	Balance Sheet Analysis	N/A	N/A
	Macroprudential Policy	HIGH	MEDIUM
	Financial Supervision and Regulation	HIGH	HIGH
	Macroeconomic Shocks and Financial Stress	HIGH	HIGH
2. SDGs/FfD Commitments
	Domestic Revenue Mobilization	HIGH	HIGH
	Infrastructure Investment ^2/	HIGH	HIGH
	Building Policy Space/Economic Resilience	MEDIUM-HIGH	MEDIUM
	Environmental Sustainability, Equity/inclusion	MEDIUM	MEDIUM
	Fragile and Conflict-Affected States	N/A	N/A
	Domestic Financial Market Promotion	HIGH	HIGH
	Data enhancement	HIGH	MEDIUM
3. Emerging Issues
	Gender	LOW	LOW
	Income Inequality, ^3/	MEDIUM-HIGH	MEDIUM
	Climate Change	MEDIUM	LOW
	Governance	HIGH	MEDIUM
	Social Spending	MEDIUM	MEDIUM

Key:

focus;

= follow up on previous year(s) Notes:

^{^1/}Pilot for enhanced macro-financial surveillance (2016) and mainstreaming macro-financial surveillance (2017).

^{^2/}Pilot for infrastructure investment (2016, 2017).

^{^3/}Pilot for inequality (2018).

6. CD priorities:

Safeguarding fiscal sustainability. Spending pressures should be well-managed, and priority given to growth-enhancing infrastructure and development spending. Sustaining revenues will require modernizing revenue administration and policies to improve efficiency and equity. Debt management will face new challenges with the increase in potential contingent liabilities from Public Private Partnerships (PPPs) and introduction of a domestic debt market. Introduction of a medium-term fiscal and budget framework (MTFF/MTBF) will help safeguard fiscal sustainability via improved budget planning and fiscal risk management. Improvements in multiple fronts are needed to strengthen fiscal governance. Against this backdrop, activities should focus on supporting revenue mobilization and debt management, improving fiscal governance and strengthening capacity.
Addressing macro-financial risks. Building on progress made, further measures are needed to monitor elevated financial sector vulnerabilities especially in the real estate sector during the gradual exit from forbearances. This includes effective implementation of past measures, further targeted prudential measures, such as raising risk weights for real-estate lending, introducing a crisis management framework with a deposit protection scheme, and continued upgrading of regulation and supervision. Promoting further financial market development and encouraging local currency use would increase resilience. Further TA will be needed to address deficiencies in AML/CFT.
Structural reform issues. Continued structural reforms are needed to increase competitiveness, encourage further diversification, and expand financial inclusion. There is also room for fiscal policies to better support inclusion, through shifting taxes towards progressive revenue sources and re-orienting expenditure towards priority infrastructure, and health and education spending.
Statistics. While activities should continue to support broad-based improvements in data availability, quality, frequency, and transparency, management of macro financial risks, safeguarding fiscal sustainability and inclusive growth also requires expanded coverage of existing datasets as well as new datasets to address emerging needs. Data provision is broadly adequate for surveillance, but shortcomings in terms of coverage, accuracy and timeliness hamper analysis. For example, budget formulation and reporting are still based on the TOFE system (based on GFS 1986) as opposed to the GFS 2014 standard; national accounts statistics suffer from several weaknesses (including outdated base year, inadequate estimates of the GDP expenditure components, and limited quarterly national accounts data); gaps in real estate statistics prohibit more informed assessment of risks in the sector and to undertake respective policy options; and slow implementation of the national statistics strategy lead to segmented, unreliable, and inconsistent macroeconomic statistics that are not keeping pace with a fast growing economy.
Addressing governance vulnerabilities and corruption. Fiscal governance should be further strengthened through reforms to revenue administration, public financial management and procurement focused on increasing spending efficiency, improving transparency and reducing opportunities for corruption. Additional efforts are also needed to improve the regulatory environment, strengthen the rule of law and push ahead with anti-corruption agenda.

C. CD Strategy

7. Going forward, several caveats would be warranted to make CD more effective. With further strengthening forward-looking integration of CD and surveillance as described above, enhancing TA design to instill a broad-based reform agenda, strong commitment from the authorities, overarching HR management to build lasting capacity, and flexibility of CD delivery are crucial for the success of CD:

Tailoring. TA design needs to take full consideration of authorities starting point, absorption capacity and time required to instill a broad-based reform agenda. CD needs to recognize capacity constraints including often limited absorptive capacity and resources. CD also needs to follow up with past TA recommendations if any This should include a better tailoring of CD, based on careful prioritization and sequencing, with proposing incremental reforms to ensure sustainability.
Ownership. Strengthening country ownership at all stages of CD interventions (scoping, initiation, execution, and implementation) would further enhance traction. Country authorities play a leading role throughout the CD process, with due consideration to institutional and capacity constraints. Close ongoing dialogue between Cambodia authorities and the Fund strengthens the scoping of CD needs in line with country priorities, with tailoring the technical and policy advice to local conditions and institutional capacity, while allowing for mid-course corrections where needed, and ultimately results in improved traction and impact.
Human resource management. Overarching human resource management in the counterparts are needed to build lasting capacity. It is important to modernize authorities’ HR strategy to conduct (and update regularly) a mapping of all key functions and significant business processes in each agency, build staffing and identify most needed resources and urgent gaps in skills based on these outcomes, and to enhance the efficiency of staff allocation and associated CD management. If CD can also deliver some manuals to elaborate TA results like CAMFI (Cambodia Macro-Fiscal Model) prepared by ICD, that would help enhance institutional memories.

Annex V. Social Protection Reform in Cambodia^¹

The authorities plan to expand a new system of social protection across life cycles (e.g., family package) and vulnerable groups (e.g., universal health coverage). This annex takes stock of the progress and direction of social protection reform in Cambodia.

A. Overview: Social Protection Scheme in Cambodia

1. Following the National Social Protection Policy Framework (NSPPF), Cambodia has introduced several social protection schemes under the two pillars of: i) social assistance and ii) social security. The social assistance pillar covers emergency responses, human capital development, vocational training, and welfare for vulnerable people. The social security pillar covers pension, health insurance, employment injury insurance, the Health Equity Fund (HEF), and a baby bonus (see Figure 1 for an overview of the social protection schemes and Appendix Table for more details of different schemes.) Under the NSPPF, the authorities plan to introduce unemployment insurance and disability insurance in the future.

2. Social protection was expanded significantly during the pandemic (Figure 2). The existing ID Poor system and digital payment method were deployed in 2020 to facilitate targeting and delivery of the Cash Transfer Program for the Poor and Vulnerable Households during the Covid-19 pandemic. From initiation in June 2020 to May 2022, the government has spent around US$ 684 million on the implementation of the cash transfer program for 687,372 families in both urban and rural areas across the country. On social security, there have been 3,018,798 payments provided for poor households and 73,164 payments provided for informal workers under the HEF in 2021.

3. The government will develop social protection further. The government will introduce the “Family Package (FP)” after a gradual phase-out of the Cash Transfer Program for the Poor and Vulnerable Households affected by Covid-19. In addition, the government will develop a roadmap for universal health coverage (UHC) and examine the feasibility of expanding HEF and social security schemes for healthcare for citizens living near the poverty line and working in the informal economy.

B. The Family Package (FP) Framework

4. The government plans to introduce the Family Package Framework in 2023 as a transition from the Covid-19 Cash Transfer Program for the Poor and Vulnerable. The FP will gradually integrate 4 programs, namely i) cash transfers to pregnant women and children under 2, ii) scholarships for primary and secondary school students, iii) cash transfers to people with disabilities, and iv) cash transfers to the elderly, into a social assistance system that intends to respond to the needs of the poor families and their vulnerable members from conception to death (Figure 3). The government intends to implement the FP starting in 2023, with gradual integration of four programs. in collaboration among key line ministries. The schemes under the FP are targeted at poverty at this point, and require continued strengthening of the ID Poor system to identify poor and at-risk households. The FP roll-out envisages streamlining of the delivery system, including enrollment, payments and grievance, and a monitoring and evaluation system managed by the National Social Assistance Fund (NSAF) in collaboration with line ministries responsible for the delivery of the components of the package.

5. The FP aims to establish a system of structured routine cash transfers delivered through a unified approach to support to the key vulnerable categories of the population: pregnant women, children, the elderly, persons with disability (PwD), and persons living with HIV. The FP generally follows a life-cycle approach, with identified gaps intended to be filled in based on the availability of fiscal space. The integrated social assistance framework (Figure 3) envisages linkages with existing complementary social protection programs, as well as with social services to meet the human development and other objectives of the individual cash transfer programs. The FP creates a space for a potential expansion of coverage to additional vulnerable populations, particularly within the context of the shock-responsive social protection.

6. Integrating the fragmented social assistance programs into one framework remains the key challenge. Although the authorities have been working on program design, there would be some challenges (some of which are under discussion) including:

Having clear institutional arrangement and strong coordination among relevant entities for integrating the core programs into a comprehensive FP;
Ensuring full coverage of all age groups under the current model of poverty targeting of the key vulnerable population groups;
Expanding coverage as appropriate to better cover certain vulnerable groups ((e.g., near poor or more expanded coverage of certain categories of population such as children, PwD or elderly), particularly in the context of the shock-responsive social protection;
Strengthening digitalization of the payment system, with considerable investment in financial inclusion and financial literacy;
Establishing an adequate value of benefits following the new poverty line and the in-depth analysis of additional needs of particular vulnerable groups, including PwD, children and elderly; and
Developing financing strategy for the social assistance schemes.

C. Universal Health Coverage (UHC)

7. The government aims to achieve UHC in Cambodia by expanding the coverage of existing schemes, including HEF and national social security on healthcare. Cambodia’s health service coverage is at the regional average (Figure 4). The existing health coverage schemes collectively cover about 4.7 million Cambodians, or 30 percent of the population (Figure 5), of which HEF covers about 2.6 million individuals and the national social security fund (NSSF)’s health insurance schemes for civil servants and formally employed workers cover 0.4 million and 1.7 million people, respectively (Kolesar et al., 2021).

8. However, coverage issues, including exclusion and inclusion errors, remain. About 36 percent of people under the national poverty line do not hold an Equity card to access HEF benefits, while less than 50 percent of Equity card holders are under the national poverty line (Kolesar et al., 2019; Organization for Economic Cooperation and Development [OECD], 2017).

9. The health service provision system faces other additional challenges in addition to coverage:

Efficiency issues. On technical efficiency (cost effectiveness), it has been estimated that Cambodia’s public hospitals and health centers can achieve higher service output (e.g., outpatient/inpatient case, major/minor surgery, and maternity care) by 34 and 73 percent respectively with current level of resources (Kolesar et al., 2022). On allocative efficiency, resources are concentrated in urban areas, while rural areas with higher maternal mortality rates remain underfunded (Masaki et al., 2021).
Financing issues. High out-of-pocket expenditure (OOPE) and reliance on external financing are challenges for sustainable financing for UHC (Figure 6). OOPE is estimated to account for approximately 60 percent of total health expenditure in Cambodia (WHO, 2019). For instance, some empirical studies (Kolesar et al., 2019) show that OOPE for rural areas would be estimated at US$ 18.01 and US$ 24.16 per individual per month for the second and third wealth quintiles respectively, while the average monthly OOPE among working-age adults seeking care is estimated at US$ 43.08 and US$ 46.68 (Kolesar et al., 2020). Cambodia’s current health expenditure (CHE) appears to be low compared with regional peers (Figure 7).

10. Moving forward, the challenge is to improve coverage with enrollment to vulnerable population including informal workers, while addressing the efficiency and financing challenges.

On coverage, expansion to the lower three income quintiles would likely mitigate exclusion errors (Kolesar et al., 2019). About 8.7 million Cambodians (over 53 percent of the population), out of which nearly 5 million are considered as vulnerable, do not have a social health protection mechanism yet (Kolesar et al., 2020). Moreover, about 16 percent of the eligible population who have access to a mechanism are not yet enrolled (Figure 5). Current expansion efforts focus on the formal employee schemes which primarily benefiting individuals from higher income households.
On efficiency issues, public health facilities’ technical efficiency could be improved by increasing the use of the public health service, given the fact that current public health service is underutilized by healthcare seekers. For instance, less than 20 percent of rural patients first sought healthcare among public services, while 76 percent used private sector as their first point of contact (Kolesar et al., 2019). This would also lead to a decrease of unit costs, given health facilities’ high fixed costs (Jacobs et al., 2019). Allocative efficiency should also be considered from a broader perspective of geographic distribution of resources, while acknowledging equity-efficiency trade-offs (WHO, 2022). Increasing health professionals/resources in rural areas may not be cost efficient, given low population density; however, the geographic location of health services has a direct impact on health outcomes within countries, by affecting how quickly patients can seek care when faced with illness and injuries.
On financing issues, effective resource mobilization is crucial for meeting the growing health spending needs. Cambodia’s public health expenditure per capita is the third lowest among regional peers in 2019 (Figure 8). The Cambodia’s Health Strategic Plan target (i.e., government health expenditure as percentage of government total expenditure to reach 9 percent by 2020) has not yet been met (Figure 9).

^{Table 1.}

Cambodia: Overview of Social Protection Scheme in Cambodia

Source: Ministry of Social Affairs, Veterans and Youth Rehabilitation and General Secretariat of the National Social Protection Council (GS-NSPC).

^{Table 1.}

Cambodia: Overview of Social Protection Scheme in Cambodia

No	Program	Current Progress	Future Direction
I. Social Assistance
1	Emergency Response
1.1	Food Reserve System	Established to provide food to poor households during catastrophic events or emergency.
1.2	Cash Transfer for Poor and Vulnerable Households during Covid-19	Between June 2020 and May 2022, 687,372 households or 2.7 million people received the benefits with total budget spent at approximately US$683.6 mill.	Will be phased-out gradually depending on the development of Covid-19 and inflation (oil and food prices).
1.3	Post-Lockdown Cash Transfer in Phnom Penh, Takmao, and Preah Sihanouk	For those facing difficulties and living in the large lockdown area in Phnom Penh, Takmao, and Preah Sihanouk province.	One-off program.
2	Human Capital Development
2.1	Cash Transfer for Pregnant Women and Children under 2	Launched in 2019, by March 22, 2022, 138,482 beneficiaries received the cash transfer of which 96,949 mother and 41,533 children.	Will be integrated into “Family Package Framework”.
2.2	Home-Grown School Feeding Program	By 2022, cover 290 schools with 74,951 students located in 9 provinces (Battambang, Preah Vihear, Stung Treng, Banteay Meanchey, Siem Reap, Oddar Meanchey, Kampong Cham, Kampong Chhnang, and Pursat).
2.3	Scholarship Program for Primary and Secondary Education	Around 261,974 students have received the scholarship.	Will be integrated into “Family Package Framework”.
3.	Vocational Training
3.1	TVET Program	Provide vocational training to youths from poor households, improving their skills to enable them to be able to find jobs and have good incomes.
4	Welfare for Vulnerable People
4.1	Cash Allowance for Poor Person with Disabilities	Around 16,807 beneficiaries received these benefits in 16 provinces.	Will be integrated into “Family Package Framework”.
II. Social Security
1	Pension
1.1	Pension Scheme for the Civil Servants and Veterans	The government fully subsidies the pension expense.
1.2	Pension Scheme for Workers and Employees	Expect to launch in 2022.
2	Health Insurance
2.1	Health Care Scheme for Civil Servants, Retired Civil Servants, and Veterans	Started in 2018, the government fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
2.2	Health Care Scheme for Workers and Employees	Started in 2016, the employers fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
3	Employment Injury
3.1	Occupational Risks Scheme for Public Officials	Started in 2021, the government fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
3.2	Occupational Risks for Workers	Started in 2008, the employers fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
4	Health Equity Fund
4.1	Health Equity Fund	In 2021, there are 1,331 public health facilities under HEF. There have been 3,018,798 cases provided to poor households which equal to US$2,225,882, and 73,164 cases provided to informal workers which equal to US$419,282.	Will be expanded for “Universal Health Coverage”.
5	Baby Bonus
5.1	Baby Bonus	From January 2018 to February 2022, the baby bonus provides benefits to 296,220 new mothers (298,242 children) with both formal and informal employment equivalent to US$29.8 mil.

Source: Ministry of Social Affairs, Veterans and Youth Rehabilitation and General Secretariat of the National Social Protection Council (GS-NSPC).

^{Table 1.}

Cambodia: Overview of Social Protection Scheme in Cambodia

No	Program	Current Progress	Future Direction
I. Social Assistance
1	Emergency Response
1.1	Food Reserve System	Established to provide food to poor households during catastrophic events or emergency.
1.2	Cash Transfer for Poor and Vulnerable Households during Covid-19	Between June 2020 and May 2022, 687,372 households or 2.7 million people received the benefits with total budget spent at approximately US$683.6 mill.	Will be phased-out gradually depending on the development of Covid-19 and inflation (oil and food prices).
1.3	Post-Lockdown Cash Transfer in Phnom Penh, Takmao, and Preah Sihanouk	For those facing difficulties and living in the large lockdown area in Phnom Penh, Takmao, and Preah Sihanouk province.	One-off program.
2	Human Capital Development
2.1	Cash Transfer for Pregnant Women and Children under 2	Launched in 2019, by March 22, 2022, 138,482 beneficiaries received the cash transfer of which 96,949 mother and 41,533 children.	Will be integrated into “Family Package Framework”.
2.2	Home-Grown School Feeding Program	By 2022, cover 290 schools with 74,951 students located in 9 provinces (Battambang, Preah Vihear, Stung Treng, Banteay Meanchey, Siem Reap, Oddar Meanchey, Kampong Cham, Kampong Chhnang, and Pursat).
2.3	Scholarship Program for Primary and Secondary Education	Around 261,974 students have received the scholarship.	Will be integrated into “Family Package Framework”.
3.	Vocational Training
3.1	TVET Program	Provide vocational training to youths from poor households, improving their skills to enable them to be able to find jobs and have good incomes.
4	Welfare for Vulnerable People
4.1	Cash Allowance for Poor Person with Disabilities	Around 16,807 beneficiaries received these benefits in 16 provinces.	Will be integrated into “Family Package Framework”.
II. Social Security
1	Pension
1.1	Pension Scheme for the Civil Servants and Veterans	The government fully subsidies the pension expense.
1.2	Pension Scheme for Workers and Employees	Expect to launch in 2022.
2	Health Insurance
2.1	Health Care Scheme for Civil Servants, Retired Civil Servants, and Veterans	Started in 2018, the government fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
2.2	Health Care Scheme for Workers and Employees	Started in 2016, the employers fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
3	Employment Injury
3.1	Occupational Risks Scheme for Public Officials	Started in 2021, the government fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
3.2	Occupational Risks for Workers	Started in 2008, the employers fully cover the contribution.	Will be expanded for “Universal Health Coverage”.
4	Health Equity Fund
4.1	Health Equity Fund	In 2021, there are 1,331 public health facilities under HEF. There have been 3,018,798 cases provided to poor households which equal to US$2,225,882, and 73,164 cases provided to informal workers which equal to US$419,282.	Will be expanded for “Universal Health Coverage”.
5	Baby Bonus
5.1	Baby Bonus	From January 2018 to February 2022, the baby bonus provides benefits to 296,220 new mothers (298,242 children) with both formal and informal employment equivalent to US$29.8 mil.

Source: Ministry of Social Affairs, Veterans and Youth Rehabilitation and General Secretariat of the National Social Protection Council (GS-NSPC).

References

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Kolesar, R. J., Pheakdey, S., Jacobs, B., & Ross, R. (2019). Healthcare access among Cambodia’s poor: an econometric examination of rural care-seeking and out-of-pocket expenditure. International Journal of Health Economics and Policy, 4(4), 122–131. https://doi.org/10.11648/j.hep.20190404.12
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Kolesar, R. J., Pheakdey, S., Jacobs, B., Chan, N., Yok, S., & Audibert, M. (2020). Expanding social health protection in Cambodia: an assessment of the current coverage potential and gaps, and social equity considerations. International Social Security Review, 73(1), 35–63. https://doi.org/10.1111/issr.12227
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Kolesar, R. J., Pheakdey, S., Jacobs, B., & Phay, S. (2021). Decision time: cost estimations and policy implications to advance universal health coverage in Cambodia. Journal of Policy Modeling, 43(1), 127–145. https://doi.org/10.1016/j.jpolmod.2020.04.009
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Kolesar, R. J., Bogetoft, P., Chea, V., Erreygers, G., & Pheakdey, S. (2022). Advancing universal health coverage in the COVID-19 era: an assessment of public health services technical efficiency and applied cost allocation in Cambodia. Health Economics Review, 12(10). https://doi.org/10.1186/s13561–021-00354–8
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Masaki, E., Hyder, Z., & Boudjadja, M. (2021) How Cambodia can meet its health system financing and pandemic response challenges. World Bank Blogs. Retrieved from https://blogs.worldbank.org/eastasiapacific/how-cambodia-can-meet-its-health-system-financing-and-pandemic-response-challenges
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Royal Government of Cambodia (RGC). (2017). National social protection policy framework 2016–2025. Retrieved from https://nspc.gov.kh/images/9798400228520_SPFF_English_2019_10_28_12_10_56.pdf
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Annex VI. De-Dollarization Measures in Cambodia^¹

This annex analyzes recent developments in Cambodia’s dollarization and take stock of measures taken by the authorities so far to promote the use of local currency (Khmer Riel or KHR), while listing some additional potential measures toward de-dollarization.

A. Dollarization in Cambodia

1. The most notable characteristic of Cambodian dollarization is that it had continued across the three dimensions of “financial,” “payment,” and “real” dollarization^² in the process of rebuilding the financial system from scratch after its collapse by the Khmer Rouge. As there were essentially no financial assets after the Khmer Rouge regime, Cambodia had no options but to deploy the internationally accepted currency. The U.S. dollars (USD) played key roles in saving (as a store of value) and payment (as a measure of settlement). The widespread use of USD, including display of prices (as a unit of account), began during the United Nations Transitional Authority in Cambodia (UNTAC)’s period after the establishment of peace in 1991, with massive aid inflows of USD to revive its economy. The dollarization process was also reinforced through credit creation with web of USD lending and deposit. From other countries’ experiences (see Garcia-Escribano, Mercedes and Sosa, Sebastian (2011) for the case of Latin America countries), dollarization tends to be reversed when the local currency is stabilized with moderate inflation rate under the process of “de-dollarization” efforts. However, despite price stability both in inflation rate and nominal exchange rate (see Figure 1), “financial dollarization” in Cambodia has continued to expand with growing foreign currency deposits (FCDs). This is exceptional situation compared with neighboring peers like Viet Nam and Laos (see Figure 2).

2. Dollarization in Cambodia remains persistent in part due to its external sector development with continued FX inflows, financial deepening with foreign currency credit creation, and the network externalities. The dollarization has been supported by its external sector development as well as the current pattern of financial sector development. At the same time, dollarization has been reinforced progressively over a long period as the various economic actors have reached a self-restraining Nash equilibrium that stabilizes the system (Greif, 2006).

External sector development. The country continues to absorb foreign currency mainly through Foreign Direct Investment (FDI) to various sectors such as manufacturing (e.g., garment) and services (e.g., tourism, finance, and real estate), while official aid gradually decreases as the economy develops (Figure 3). Similarly, by looking at the country’s balance of payment (Figure 4), Cambodia’s rapid economic growth has been financed by the inflow of funds from abroad (i.e., FDI, foreign aids) over the last two decades: substantial current account deficits have been continuously offset by the country’s surplus in financial account, leading to the accumulation of country’s net foreign assets including NBC’s international reserves.
Financial deepening. Unlike its neighboring countries, the use of USD and financial development were integrated. As the economy stabilized and financial development accelerated mainly with external funding, the use of USD expanded from cash to deposit currency (financial dollarization). In Vietnam and Laos, the financial dollarization, measured by the share of FCDs in total broad money (M2), dropped to 10.8% and 44.4%, respectively, in the mid-2010s (Figure 2) as economic conditions improved and the authority tightened restrictions on the use of foreign currencies. In contrary, in Cambodia, financial dollarization increased from about 36.3% in 1993 to 85.6% as end of 2018 before slightly decreased to 83% as end of 2021. This suggests very high and persistent dollarization in Cambodia, although the country has generally experienced both macroeconomic and political stability over the last two decades.
Network externalities. Given the external development and financial deepening, the USD continue to be dominant for payment (medium of exchange), value measure (unit of account), and savings (store of value). Payment and real dollarization themselves would be served as preconditions for financial dollarization, leading to the situation of “network externality” where the larger number of currency users brings the higher value of its utility (Samreth 2011).

3. Dollarization is concentrated mainly in the urban area, while the degree of dollarization in the activities of an enterprise is not necessarily determined by its size. Evidence from the NBC-JICA survey in 2017 on dollarization of households in Cambodia shows that the degree of dollarization is not homogeneous across the regions in Cambodia. Dollarization is concentrated mainly in urban areas, where economic activities are more dynamic and exposed to foreign currency flows, especially in Phnom Penh. In the rural areas, the KHR dominates in payments, price quotations, and even as a store of value. In general, the USDs are used for large payment transactions and imported goods or in modern markets, while the KHR is essentially used in small payment transactions such as those for foodstuffs or in traditional markets, and some large transactions in the agricultural sector. Moreover, the degree of dollarization in the activities of an enterprise is not necessarily determined by its size, but by other factors such as geographic distribution and sources of incomes and borrowings (NBC-JICA survey in 2017 on dollarization of Cambodia’s enterprises).

B. Measures to Promote the Use of Local Currency

4. The authorities have so far formulated and implemented certain measures towards de-dollarization. The government, together with relevant authorities, have put in place several supportive and market-oriented policies and measures to gradually promote the use of local currency. The table below provides a summary of main policies and measures that have been implemented.

^{Table 1.}

Cambodia: Summary of De-Dollarization Measures Taken so Far

^{Table 1.}

Cambodia: Summary of De-Dollarization Measures Taken so Far

Policies	Description
Enhancing confidence in the local currency through exchange rate stabilization	- In the short term, stabilizing the exchange rate of KHR and its purchasing power by moderating inflation to increase strong enough confidence in KHR. - In the medium to long term, migrating to a more flexible exchange rate under flexible inflation targeting, while more rigorous studies of the impact of flexible inflation targeting with confidence in KHR are warranted.
Promoting price quotations and payments for goods and services in KHR	- In the short term, encouraging firms and sellers to quote the price and payments of goods and services, and the payments of salaries and wages in KHR only or at least alongside USD. - In the medium to long term, requiring quoting only in KHR. More rigorous studies of the impact of price quotations and payments are needed.
Promoting the opening of bank accounts in KHR	- Encouraging the use of bank accounts denominated in KHR. In the long run, gradually requiring all firms to open bank accounts for their employees in KHR is essential. Currently, government officials get their salaries through bank accounts in KHR. - Promoting price quotations and payments for goods and services and salaries and wages in KHR seems to also promote the opening of bank accounts in KHR. - In rural areas, where many households are unbanked and where the use of KHR is high, are a good place to promote the opening of bank accounts in KHR.
Improving the payment system and financial instrument in KHR	- Having more availability of KHRs notes in ATMs across the countries. - Encouraging money transfers or remittances to be carried out within formal financial institutions or using agents to reduce the direct use of foreign currencies.
Increase the cost of retaining foreign currency deposits	- The NBC introduced differentiated rates of required reserves for USD and KHR in 2008 (i.e., 16% for USD and 8% for KHR). However, the rates became reduced to same level of 7% both for USD and KHR in March 2020 to ease banking liquidity in response to the pandemic. The rates remain same as of June 2022 (Figure 5).
Increase financial intermediation in KHR	- The NBC required banks and financial institutions (BFIs) to have at least 10% of their loan portfolio in KHR by end of 2019. However, so far, no strict measures are imposed on the non-compliant BFIs and no rigorous study is done yet to evaluate the impact of this requirement.
Introduce mechanisms and tools to encourage interbank -market and provide liquidity in KHR to BFIs	- The NBC introduced NCD (in KHR and in USD) to absorb excess liquidity and at the same time for BFIs to use in interbank money market. The NCB also introduced LPCO, and more recently Marginal Lending Facility (MLF) to provide termed KHR liquidity to BFIs with NCD as collateral.
Develop securities market for local currency	- It is already started by introducing securities market (CSX) with quotations in KHR to promote KHR although its current transactions are still limited. - The government started to issue government bonds from September 2022 by auctions.
Requirement of tax payment in KHR	- Revenue collection through tax is conducted in KHR. However, there are still some revenues collected in foreign currency, such as electricity bill, entrance fees to tourism sites, airport taxes, visa fees, rents…etc.
Promoting public awareness of the importance of using local currency	- Mainly done by the NBC through various program and campaign including annual Riel Day.

^{Table 1.}

Cambodia: Summary of De-Dollarization Measures Taken so Far

Policies	Description
Enhancing confidence in the local currency through exchange rate stabilization	- In the short term, stabilizing the exchange rate of KHR and its purchasing power by moderating inflation to increase strong enough confidence in KHR. - In the medium to long term, migrating to a more flexible exchange rate under flexible inflation targeting, while more rigorous studies of the impact of flexible inflation targeting with confidence in KHR are warranted.
Promoting price quotations and payments for goods and services in KHR	- In the short term, encouraging firms and sellers to quote the price and payments of goods and services, and the payments of salaries and wages in KHR only or at least alongside USD. - In the medium to long term, requiring quoting only in KHR. More rigorous studies of the impact of price quotations and payments are needed.
Promoting the opening of bank accounts in KHR	- Encouraging the use of bank accounts denominated in KHR. In the long run, gradually requiring all firms to open bank accounts for their employees in KHR is essential. Currently, government officials get their salaries through bank accounts in KHR. - Promoting price quotations and payments for goods and services and salaries and wages in KHR seems to also promote the opening of bank accounts in KHR. - In rural areas, where many households are unbanked and where the use of KHR is high, are a good place to promote the opening of bank accounts in KHR.
Improving the payment system and financial instrument in KHR	- Having more availability of KHRs notes in ATMs across the countries. - Encouraging money transfers or remittances to be carried out within formal financial institutions or using agents to reduce the direct use of foreign currencies.
Increase the cost of retaining foreign currency deposits	- The NBC introduced differentiated rates of required reserves for USD and KHR in 2008 (i.e., 16% for USD and 8% for KHR). However, the rates became reduced to same level of 7% both for USD and KHR in March 2020 to ease banking liquidity in response to the pandemic. The rates remain same as of June 2022 (Figure 5).
Increase financial intermediation in KHR	- The NBC required banks and financial institutions (BFIs) to have at least 10% of their loan portfolio in KHR by end of 2019. However, so far, no strict measures are imposed on the non-compliant BFIs and no rigorous study is done yet to evaluate the impact of this requirement.
Introduce mechanisms and tools to encourage interbank -market and provide liquidity in KHR to BFIs	- The NBC introduced NCD (in KHR and in USD) to absorb excess liquidity and at the same time for BFIs to use in interbank money market. The NCB also introduced LPCO, and more recently Marginal Lending Facility (MLF) to provide termed KHR liquidity to BFIs with NCD as collateral.
Develop securities market for local currency	- It is already started by introducing securities market (CSX) with quotations in KHR to promote KHR although its current transactions are still limited. - The government started to issue government bonds from September 2022 by auctions.
Requirement of tax payment in KHR	- Revenue collection through tax is conducted in KHR. However, there are still some revenues collected in foreign currency, such as electricity bill, entrance fees to tourism sites, airport taxes, visa fees, rents…etc.
Promoting public awareness of the importance of using local currency	- Mainly done by the NBC through various program and campaign including annual Riel Day.

5. Moving forward, domestic financial markets need to be further strengthened towards de-dollarization, while ensuring macroeconomic stability as precondition. The development of domestic financial markets would help to reduce risk, increase availability of funds, decrease uncertainty and volatility of exchange rate, and enhance public confidence in local currency.

Foreign exchange market. An effective and formal wholesale foreign exchange market is essential to absorb foreign currency inflows and provide foreign currency when the market needs. All money changers need to be formalized with having a bank account with commercial banks. With more accurate market information, the NBC could craft measures to promote the use of local currency in a timely fashion.
Money markets. There is currently no active interbank money market in Cambodia. The money markets would allow BFIs to better manage local currency liquidities and use KHR in their operations. The introduction of a full-fledged interest rate corridor (IRC) at the disposable of NBC would support development of KHR interbank markets. An IRC allows banks to predictably place surplus liquidity and obtain short-term funding from each other or NBC at reasonably stable rates. In this connection, the introduction of an overnight Marginal Lending Facility (MLF) in Sep 2021 is a commendable step. A more systemic and timely market monitoring through NBC platform would also be warranted.
Securities markets. Further development is needed to promote securities and bond markets given the limited volume of current transactions in the markets. More instruments need to be introduced in addition to the recent issuance of government bond in local currencies.
Payment systems. The clearing house’s policy on further lowering KHR transaction fee would make KHR more attractive for banks and then for the clients. In addition, further enhanced payment system (e.g., Bakong) would lead to lower KHR transaction costs.

6. Additional supporting measures for de-dollarization could be warranted.

Prudential measures. The differentiated reserve requirement rates for USD and KHR need to be reintroduced with higher rates for USD, raising the cost of holding USD deposits for BFIs (Figure 5). Future deposit protection scheme would also take differentiated approach towards USD and KHR deposits (e.g., higher insurance coverage for KHR deposit), enhancing incentives for depositors to hold more KHR deposits.
Public price quotation measures. The authorities could consider gradual migration to all other current public revenues to be in KHR transaction including entrance fees to tourism sites, airport taxes, visa fees, and public building rents.

7. Evidence-based policy making. NBC introduced a strategy “Promoting the Use of Khmer Riel” in 2017. This strategy could be upgraded to national policy with robust empirical studies on the impact of de-dollarization measures. An evidence-based policy making would lead to stronger commitment by various stakeholders.

References

Duma, Nomblelo (2014), “Asia’s Most Dollarized Economy”, in Cambodia Entering a New Phase of Growth edited by Olaf Unteroberdoerster.
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Garcia-Escribano, Mercedes and Sosa, Sebastian (2011), “What is Driving Financial De-dollarization in Latin America?”, IMF Working Paper (WP/11/10), IMF
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Greif, Avner (2006), Institutions and the Path to the Modern Economy: Lessons from Medieval Trade, Cambridge University Press.
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NBC and JICA (2019), “Empirical Study on the Promotion of Home Currency in Cambodia”, JICA Research Institute
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Nicolo, Gianni de, Patrick Honohan and Alain Ize (2005), “Dollarization and Bank Deposits: Causes and Consequences,” Journal of Banking and Finance, Vol. 29, pp. 1697–1727.
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Samreth, Sovannroeun (2011), “An Empirical Examination on the Hypothesis of Currency Substitution in Cambodia,” Journal of Asian Economies, 22, pp. 518–527.
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Zamaróczy, M. and Sa, S. (2002), “Economic Policy in a Highly Dollarized Economy: The Case of Cambodia”, IMF Working Paper No. 02/92, IMF.
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Annex VII. Fighting Climate Change in Cambodia^¹

Cambodia remains one of the most vulnerable countries to climate risks, while its greenhouse gas emissions remain relatively low. This summarizes the authorities’ climate targets and policy responses across both mitigation and adaptation, after setting out stylized facts about Cambodia’s greenhouse gas emissions and vulnerability to climate risks.

A. Cambodia’s Greenhouse Gas Emissions

1. Cambodia’s Forest and Other Land Use (FOLU) sector has traditionally been the major contributor to greenhouse gas (GHG) emissions, driven primarily by deforestation. GHG emissions have been steadily increasing over the last three decades, with a huge jump in GHG emissions by FOLU sector from 2010 onward (Figure 1). This was due to the differences in the observed loss of forest cover between 2010–2016 (579,280 ha/year in average) and 1994–2009 (132,733 ha/year in average) (National Council for Sustainable Development [NCSD], 2020).

2. At same time, GHG emissions were also accelerated by the agriculture and energy sectors. Agriculture is the second largest contributor, mainly through cultivation of rice. GHG emissions from agriculture increased at an annual average rate of about 2.5 percent between 1994 and 2016 (NCSD, 2020). Energy demand also increased significantly due to growth in the transport sector, due to urbanization and population growth (especially through migration to urban areas).

3. Nonetheless, Cambodia’s GHG emissions remain relatively low. CO2 emission per capita for Cambodia was 0.65 tons in 2018 compared to 4.42 for the world, Asia-Pacific’s 3.89, and ASEAN’s 2.27 (Figure 2). In terms of energy sources, oil accounted for 70 percent of CO2 emissions in 2018, with coal accounting for the remaining in the same year (International Energy Agency [IEA], 2021).

4. Overall GHG emissions are projected to increase. The updated Nationally Determined Contribution (NDC) indicates that overall GHG emissions are projected to increase to 155 million tons of CO2 equivalent in 2030, growing from 2016 estimate by 24 percent (Royal Government of Cambodia [RGC], 2020). Emissions under all Business-As-Usual (BAU) scenarios indicate a steady increase by 2030, with the highest emissions contributor from FOLU sector (49 percent), followed by energy (22 percent) and agricultural sectors (18 percent) (Figure 3). The IMF projects emissions growth for Cambodia under its BAU scenario at more than 30 percent from 2017 to 2030, mainly driven by fast economic growth (Figure 4) (Dabla-Norris et al., 2021).

B. Cambodia’s Mitigation

5. Cambodia has committed to achieving carbon neutrality by 2050. Cambodia submitted an updated NDC in 2020, with a commitment to reduce emissions by 42 percent by 2030 (RGC, 2020). In November 2021, at the UN Climate Change Conference (COP26), the Minister of Environment announced commitments to increase the share of clean energy without developing any new coal power plants and new hydropower dams along the Mekong River. In December 2021, the government submitted a Long-Term Strategy for Carbon Neutrality (LTS4CN), a pathway towards a country-wide carbon neutral economy by 2050, to the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC).

6. Cambodia’s carbon neutrality is largely supported by the FOLU sector. This FOLU sector would provide a total carbon sink of 50 MtCO2e by 2050 (RGC, 2021), consistent with the updated NDC in which GHG emissions from FOLU sector could be halved by 2030. The LTS4CN sets out mitigation targets and actions as follows:

FOLU Sector: During the first decade of the strategy, emission reductions are achieved through the implementation of investment plan on REDD+^² .The FOLU sector is expected to be carbon neutral from 2031, and reforestation and afforestation efforts will ensure that the carbon sink from forests continues to grow.
Agriculture Sector: Major emission reductions will be ensured through i) mitigating methane-intensive rice and livestock production, and ii) promoting the use of biogas in livestock management, organic fertilizer, and deep fertilizer technology.
Transportation Sector: Urban public transportation will be further developed, and electric vehicle penetration will grow in the passenger vehicle fleet. Investments in rail development will start after 2030. Emissions will be further reduced by i) more moderate use of electric vehicles, ii) increased fuel efficiency for internal combustion engine vehicles, and iii) higher penetration of compressed natural gas (CNG) for interregional buses and for trucks. 70 percent of motorcycles and 40 percent of cars and urban buses are expected to be electric vehicles by 2050.
Energy Sector: Emission reductions until 2030 come from energy efficiency and conservation through the implementation of the National Energy Efficiency Policy in buildings, industry, and public services. At the same time, demand side management will be enhanced, for instance, through switching to electricity for cooking and passenger vehicles and to coal alternatives in the industrial sector. After 2030, emission reductions in the energy sector will come from more stringent energy efficiency standards and continued fuel switching to low-carbon sources. Renewable energy in the generation mix is set to reach a share of 35 percent in 2050, of which 12 percent is assumed to come from solar.
Waste Sector: The waste sector will achieve half of its emission reductions in the first decade through mitigation measures in solid waste disposal (e.g., reduced, reuse and recycle). In 2050, the waste sector is expected to realize nationwide waste collection coverage of 85 percent and will be almost fully decarbonized. The recycling rate will increase to 35 percent, and half of organic waste will be composted or treated.
IPPU (Industrial Processes and Product Use) Sector: Key mitigation actions in the sector are using clinker^³ substitution and carbon capture and storage in cement production, recycling of aggregate concrete, increased use of refrigerants with low global warming potential and regular inspection of refrigeration and air-conditioning equipment as well as recovery of spent refrigerants.

C. Climate Change Risks for Cambodia

7. Cambodia remains vulnerable to climate risks, particularly floods, droughts, and storms (Figure 5). During 1993 and 2020, Cambodia has faced many climate-related disaster events including 20 floods, 5 droughts, 6 tropical storms and 1 famine, with at least US$1.5 billion of estimated damage from these events (Emergency-Events Database [EM-DAT], 2021). The drought and floods in 2020 highlighted that the large agricultural sector relies on regular monsoon seasons, while fluctuations in Mekong River flows affect traditional irrigation system, fishing, and transportation for industry and land tourism. Without actions, the population exposed to an extreme river flood could grow to around a quarter of total population (i.e., 4 million) by the 2040s, while the damming of the Mekong River as well as the large-scale dams built on its tributaries may alter future flood dynamics (World Bank [WB] and Asian Development Bank [ADB], 2021). Furthermore, Cambodia scores relatively low on “adaptive capacity^⁴“ (Figure 6).

8. Projected climate change trends indicate more severe floods and droughts that are projected to reduce GDP by 9.8 percent in 2050 relative to its baseline (NCSD, 2019). Cambodia is also projected to experience warming in the future. Under the highest emissions pathway (Representative Concentration Pathways (RCP) 8.5), Cambodia would face the warming of 3.1^oC by the 2090s against the baseline conditions over 1986–2005. In addition, increases in annual maximum and minimum temperatures are expected to be larger than the rise in average temperature, increasing pressures on human health, livelihoods, and ecosystems (WB and ADB, 2021).

D. Cambodia’s Adaptation

9. Cambodia has made efforts to mainstream climate adaptation into policy framework. Climate change has been addressed at the National Strategic Development Plan (NSDP) since 2009 and at the Rectangular Strategy Phase IV (2019–2023). In 2013, Cambodia adopted the first national framework addressing climate change—Cambodia Climate Change Strategic Plan (CCCSP) 2014–2023. Under this framework, climate change has been integrated into sectoral planning as 14 ministries adopted respective action plans encompassing adaptation including sub-national planning (NCSD, 2021). The authorities have also mainstreamed adaptation into national budget process as the Ministry of Economy and Finance (MEF) prepared its 2020 Climate Public Expenditure Review (CPER) (MEF, 2022). The authorities recently reaffirmed its commitment to enhancing resilience to climate change in the Economic Recovery Plan 2021–2023.

10. Nonetheless, there remains substantial work to be done. A full National Adaptation Plan (NAP) has not yet been adopted, while the authorities adopted financing and implementation plan for 14 sectors partially (see NCSD (2017)). Achieving the full NAP will call for fiscal reform (e.g., domestic revenue mobilization, strategic budget planning) and a coordinated approach across government and private sector partners to ensure adequate financing for adaptation-related investments. The public adaptation costs for Cambodia are projected to be between 2–3 percent of GDP (Figures 7 and Figure 8). Moreover, the updated NDC highlighted that the total funding required for adaptation actions would be over US$2 billion (RGC, 2020). However, majority of the identified climate adaptation projects by the 14 ministries (NCSD, 2017) have not yet been funded.

11. Moving forward, the government has called for further investment for climate adaptation and financial resources in partnership with the private and financial sectors.

Green and resilient public investment is seen as important to facilitate a sustainable recovery, including the adaptation to climate change. In this context, the upcoming Climate-Public Investment Management Assessment (C-PIMA) will help the authorities identify potential improvements in public investment management institutions and processes to develop low-carbon and climate-resilient infrastructure.
The government has emphasized the importance of sustainable finance, especially creating a favorable environment to mobilize additional resources to ensure the sustainability of climate actions. This includes the formulation and implementation of green financing mechanism and public-private partnership (PPP).
The National Bank of Cambodia (NBC) has continued to call for banks and financial institutions (BFIs) to put policies in place to promote green finance and environment-friendly investments. On the regulatory side, NBC is promoting ESG (Environment, Social, and Governance) by applying lower risk weight/provision to ESG loans.

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Royal Government of Cambodia (RGC). (2020). Cambodia’s updated nationally determined contribution. Retrieved from: https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/Cambodia%20First/202012_31_NDC_Update_Cambodia.pdf
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Royal Government of Cambodia (RGC). (2021). Long-term strategy for carbon neutrality. Retrieved from: https://unfccc.int/sites/default/files/resource/KHM_LTS_Dec2021.pdf
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World Bank and Asian Development Bank. (2021). Climate risk country profile: Cambodia. Retrieved from: https://www.adb.org/publications/climate-risk-country-profile-cambodia
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Annex VIII. Governance and Anti-Corruption Frameworks^¹

Authorities are taking welcome steps to tackle corruption and strengthen the rule of law, yet key challenges remain. In recent years, Cambodia has adopted a renewed anti-corruption action plan (2020–2025), created an Anti-Corruption Institution (ACI)^², and has taken steps to improve its legal anti-corruption framework. Additionally, it has taken measures to improve procurement procedures, and to enhance access to judicial and fiscal information. Lastly, it has adopted measures toward the preparation of a National Risk Assessment (NRA), consistent with FATF recommendations. However, corruption vulnerabilities and rule of law weaknesses remain substantial in several areas. Whistleblower and transparency laws are still pending, improvement and digitization of the asset declaration system should be pursued, and securing sufficient human and technological resources for investigative and monitoring agencies has been challenging.

1. A special focus was made during the 2022 Article IV consultations on anti-corruption and rule of law. This is consistent with the requirement for assessments in the context of a medium-term surveillance cycle, following the framework for enhanced Fund engagement on governance issues adopted by the IMF Board in 2018. The aim was to analyze key corruption vulnerabilities and rule of law weaknesses, to take stock of progress in related rule of law and anti-corruption policies and frameworks, and assess their implementation. To that end, the IMF team collected and reviewed relevant documents and met with representatives of the key governmental institutions involved in implementing Cambodia’s governance and anti-corruption framework^³. This Annex summarizes conclusions and provides actionable recommendations.

A. Anti-Corruption Corruption Vulnerabilities

2. Petty corruption remains a significant concern in Cambodia, although indicators show some progress, and corruption risks in different sectors remain challenging. Additional preventive steps could be considered. According to the Global Corruption Barometer, a survey conducted by Transparency International, the percentage of respondents reporting having paid bribes lowered, from at least 50 percent in 2013 to 37 percent in 2020. The latter percentage, however, is well above regional and global averages^⁴. Moreover, according to the ACI, some sectors face significant challenges for the prevention of corruption, including education, social, and covid-related spending. Challenges in the education sector are particularly sensitive, due to recent reforms that have granted enhanced autonomy to provinces to manage funds for education.

3. Transparency in the extractive industry remains limited. The extractive industry is one of the sectors with higher risks of corruption in most of the world. Nonetheless, Cambodia has not adopted enhanced risk prevention tools to prevent corruption in the sector. The National Risk Assessment would be expected to provide insights on specific vulnerabilities in the extractive industries and allow for the adoption of improved governance and administration reforms impacting the sector, in line with Articles 10.c. and 61 of the United Nations Convention Against Corruption (UNCAC).

4. Access to information and monitoring of concessions agreements for the use of land and/or development of infrastructure projects, requires further attention. Cambodia has seen significant development and foreign investment in land development-related projects. However, lack of access to information creates public distrust and corruption risks. Moreover, concerns for inadequate monitoring have been raised and investigations have been conducted by the Anticorruption Institution (ACI).

5. The authorities have adopted steps to improve procurement regulation and transparency, yet access to information, statistics, and data remain challenging. The lack of tools to facilitate “big data” management of procurement and public contracts, and insufficient publication of documents of all the phases of public procurement, increases the risk of corruption, conflicts of interest, and influence peddling. Further, lack of access to information increases vulnerabilities to favoritism, tenders with one single offeror, collusion, and manipulation of the tender process. Likewise, decentralization aims of a new draft procurement law generate additional risks for corruption which need to be addressed, particularly in consideration to the reduced oversight of public spending in said regions.

6. Corruption risks in other sectors remain challenging. Additional preventive steps could be considered. According to the ACI, some sectors face significant challenges for the prevention of corruption, including education, social, and Covid-19-related spending. Challenges in the education sector are particularly sensitive, due to recent reforms that have granted enhanced autonomy to provinces to manage funds for education.

Anti-Corruption Frameworks

7. The ACI framework includes safeguards to its independence, which could be further strengthened. The independence of the ACI has benefited from the creation and operation of the National Council Against Anticorruption (NCAC) and from the introduction of Article 40 to the Anti-Corruption Law, which penalizes the threat, obstruction, or interference in the work of the ACI. Nonetheless, concerns for lack of independence remain, and improvements to the selection process of ACI directors and investigators should be adopted. For that purpose, authorities could consider adjusting the composition of the ACI and the NCAC ensuring adequate independence and autonomy, as required by UNCAC (Articles 2.2. and 11) and, by improving the selection process of commissioners, investigators, technical experts, and staff. Further, they should ensure the ACI provides adequate training to staff and has sufficient resources to adopt technological tools that may be needed^⁵ (e.g. Wiretapping, automated review of digital information of assets declarations, or adequate servers needed to save, protect, and analyze digital information in the context of corruption investigations).

8. The current asset disclosure regime for top officials should be improved. Asset declarations (AD) are submitted (according to authorities) by nearly all obligated subjects, amounting to nearly 70,000 per year. However, the ADs are only verified when public officials are under investigation by enforcement authorities, instead of being monitored on a permanent basis for accuracy and for detection of suspicious economic increase by using a risk-based approach. Also, asset declarations are not made public, nor cover information of children and spouses, except for general contact data. Furthermore, ADs are collected manually and stored in closed envelopes, and therefore do not facilitate massive digital assessment and risk detection. Thus, sanctions against obligated subjects are uncommon.

9. Efforts to investigate corruption and confiscate the proceeds generated should be further pursued. The authorities should make better use of AML/CFT tools to support such efforts. While the CAFIU has been disseminating financial intelligence on potential corruption cases, the number of investigations initiated remains low. To date there is no evidence of statistics that can help corroborate the effective collaboration between the Financial Intelligence Unit (CAFIU) and ACI in connection with the recuperation of assets lost to corruption. Further efforts to enhance cooperation should be made. Furthermore, the authorities should prioritize confiscation of the proceeds of corruption, including by continuing enhancing capacity in this area, to prevent the corrupt from enjoying their ill-gotten assets and to help disincentivize future corruption.

10. After its creation in 2002, with support of the Asian Development Bank, Cambodia has been strengthening its National Audit Authority (NAA^⁶). The NAA is an independent authority, with a separate budget, that reports directly to the National Assembly, the Senate, and the government. It is tasked with conducting external audits over the government and to audit accounting records, financial reports, management system, operation controls, and programs of the governmental institutions. The head of the NAA is appointed by a two-thirds majority vote of National Assembly members, at the recommendation of the government, and has the same level as senior minister. Some additional improvements are connected to the adoption of new accounting standards and regulations, and to the recruitment of specialized staff. Going forward, authorities are encouraged to ensure the NAA has adequate resources to undertake its mission and to deliver adequate training to NAA’s officials.

11. Cambodia does not currently have whistleblower protection and access to information laws. More concerning, article 41 of the Anticorruption Law criminalizes individuals filing reports of corruption that may end up being considered groundless by the government, by imposing penalties for the crimes of defamation or disinformation. Such provision, added to the lack of a comprehensive whistleblower protection law, can severely undermine the likelihood of whistleblowers from coming forward, particularly given the apparent low confidence of citizens in judicial institutions in Cambodia. Further, the lack of existence of a law of access to information diminishes the ability of citizens, watchdogs, and the media to assess the effectiveness of government, and to hold public officials involved accountable for wrongdoing. Thus, the adoption of a whistleblower protection law and a transparency and access to information law would be advisable, and would help detect corruption cases, and facilitate public oversight and increased accountability. Doing so would also be consistent with UNCAC requirements under Articles 13.1, 13.2, and 33.

12. Finally, the country is in the process of passing a new procurement law, following the recent introduction of a new procurement platform^⁷. However, some deficiencies need to be addressed. Access to information must be enhanced to ensure openness of data by default while protecting confidential information where needed. Further, information of beneficial owners of offerors in procurement processes and public contracts should be collected and managed by procurement authorities.

B. Rule of Law^⁸

Rule of Law Weaknesses

13. Rule of law weaknesses are perceived to be substantial. The 2021 scores under the World Justice Project’s (WJP) Rule of Law Index are particularly low, with a total score of 0.32 (over 1) in 2021^⁹. In the same line, according to the latest assessment of the Transformation Index (BTI) Cambodia obtained an overall score of 1.8 over 5 in the rule of law component, comprised by measures on separation of powers (1 out of five), independent judiciary (2 out of five), prosecution of office abuse (2 out of five), and civil rights (2 out of five^¹⁰).

14. Independence and fair and equal access to the administration of justice are perceived as lacking in the judicial sector thus jeopardizing contract enforcement and property rights protection. The judicial system is perceived as one that does not provide assuredness of even-handedness, equal access, efficiency, and fair play. (See, for example, the BTI assessment, in which Cambodia obtained a score of 1.8 out of 10 in 2022, decreasing from 2.0 in 2018 and 2.5 in 2014^¹¹). This implies that distrust in the court system to ensure contract enforcement and property rights is widespread.

Rule of Law Frameworks

15. Authorities have made positive reforms toward increased access to information on existing norms and judicial decisions. Legislation, decrees, and some judicial decisions are being published online in the portal of the Ministry of Justice^¹². However, not all judicial decisions are accessible, and some norms, particularly those adopted by local governments, are difficult to access.

16. Protection of land rights presents important challenges. According to different actors of the private sector and the BTI project^¹³, Cambodia has had low performance in connection to land administration, including the reliability of infrastructure, transparency of information, geographic coverage, land dispute resolution, and equal access to property rights. The cadastral system faces numerous shortcomings, particularly in connection with different land titles and state agencies involved^¹⁴. The announcement of the government to adopt and implement a Master Plan for State Property Management is welcome.

17. The reliability of dispute resolution, contract enforcement, and dispute settlement mechanisms should be strengthened. According to rule of law assessments conducted by the World Bank, Cambodia’s systems for dispute resolution, contract enforcement and dispute settlement are highly vulnerable. This was confirmed by different actors interviewed by staff during the mission, including development partners and civil society organizations. Overall, enhanced efforts are needed to upgrade the quality and trust in the court system^¹⁵.

Recommendations:

1) Amend the Anti-Corruption Law and the Assets Declaration regime to ensure:

a) Public access to asset declarations of high-level officials,
b) That the declaration form requires information on assets and interests of children and spouses of obligated subjects (instead of just general contact data),
c) Independence of ACI commissioners, investigators, and staff

2) Adopt measures and tools to ensures effectiveness of the asset declarations regime, including:

a) New technological tools that allow for the collection, management, and risk-based audits over assets declarations.
b) A phased strategic plan to run risk-based audits over assets declarations.

3) Reinforce inter-agency cooperation to:

a) Strengthen cooperation between ACI and CAFIU, by adopting a joint task force to identify and recuperate assets lost to corruption or illicit enrichment.
b) Strengthen cooperation between ACI and the NAA, by adopting a joint task force to identify and recuperate assets lost to corruption or illicit enrichment.

4) Provide more resources and training for the NAA to:

a) Provide additional resources to the NAA to improve human capacity and training centers, particularly—but not only—for conducting audits of financial management systems based on current international accounting standards, to help prevent and deter loss of public funds to corruption.
b) Develop a strategic plan to ensure fiscal oversight over public spending in areas with corruption vulnerabilities, including—but not limited to—education, land concession agreements, and high-cost infrastructure projects.

5) Adopt measures to protect whistleblowers of acts of corruption, by:

a) Enacting a comprehensive whistleblower protection law, consistent with international good practices, that ensures whistleblowers’ protection from any form of retaliation.
b) Derogating article 41 of the Anti Corruption Law, which deters individuals from reporting corruption cases, out of fear to being subject of criminal prosecution.

6) Adopt measures to increase transparency and access to information by:

a) Adopting a law on transparency, that regulates the matter based in good international practice, including a definition of public information and documents, petition channels, and exceptions.
b) Adopting necessary tools to ensure access to big data and documents on public procurement, that may allow for enhanced oversight, accountability, and improved procurement-related policies.
c) Demanding disclosure of beneficial ownership in public contracts.
d) Ensuring publication of all legal norms, regulations, and judicial decisions, and considering adopting of legal tracking systems for the courts that may contribute to better court management and traceability of legal processes.

Annex IX. Fiscal Rules in Cambodia^¹

Despite a history of prudent fiscal policy, new challenges suggest Cambodia would benefit from establishing a well-designed fiscal rules framework to further ensure fiscal sustainability. While Cambodian authorities have recently adopted a debt rule, it does not provide sufficient guidance for medium-term fiscal policy. Staff recommends adopting a debt rule in percent of GDP in nominal terms, combined with an overall deficit ceiling to ensure sustainability and operational feasibility.

A. Context

1. Despite a history of prudent fiscal policy, new challenges suggest Cambodia would benefit from establishing a well-designed fiscal rules framework to further ensure fiscal sustainability. While debt-to-GDP ratios had been relatively low and stable in Cambodia for more than a decade prior to the COVID-19 pandemic, debt has increased due and in response to the pandemic. Going forward, heightened uncertainty and upward pressures on borrowing costs (due to income level graduation and domestic debt market development) increase the need for a careful assessment of fiscal space, to ensure that new ambitious policies (including for social protection or infrastructure) can be implemented while not impeding fiscal sustainability.

B. Guiding Principles and Common Practice

2. Well-designed fiscal frameworks should specify operational limit(s) on fiscal aggregates and a medium-term fiscal anchor linked to the final objective of fiscal policy. A natural medium-term anchor is the debt-to-GDP ratio, which provides a guide for both expectations and nearer term policies, and whose threshold can be calibrated to ensure the long-term fiscal sustainability of public finances. The fiscal rules framework should also include shorter-term operational rule(s), under the direct control of governments, that have close and predictable links to debt dynamics.

3. Effective fiscal rules should display some key properties—simplicity, flexibility, and enforceability while ensuring sustainability and allowing stabilization. These properties are difficult to achieve simultaneously and involve tradeoffs. Countries should find the right balance, according to their individual preferences and characteristics. Compliance with the rule should ensure long-term debt sustainability. Following the rule should not exacerbate economic cycles (stabilization). Simplicity requires the rule to be easily understood by decision makers and the public. Credible rules should be able to withstand negative shocks, highlighting the need to improve flexibility (for example through well-designed escape clauses to account for unexpected events). To be effective, rules should be monitored and enforced, and deviations from targets should have a cost for the government. They should also have a broad institutional and economic coverage as limitations in coverage can open loopholes that encourage circumventing the rule and undermine the credibility of the fiscal framework.

4. Fiscal rules could be categorized into four types: debt, budget balance, expenditure, and revenue rules (the last three are often called operational rules). Debt rules and budget balance rules are by far the most frequent (Figure 1). Yet, expenditure rules are increasingly common, often set as a ceiling on annual expenditure growth. Revenue rules have been less used, partly reflecting the fact that governments have less control over yearly revenues. Countries typically combine debt rules with one or several operational rules: about 70 percent of countries with fiscal rules have a debt rule combined with operational limits on annual budget aggregates, most often a budget balance rule and/or an expenditure rule. The most common rules among EMDCs are a combination of a debt rule with a budget balance rule. However, expenditure rules are far more popular in AEs than EMDCs.

C. A Framework for Cambodia

5. While Cambodian authorities have recently adopted a debt rule, it does not provide sufficient guidance for medium-term fiscal policy. The government established several constraints on government debt in the Public Debt Management Strategy (PDMS) 2019–23. The debt ceiling (comprising public domestic debt, public external debt and publicly guaranteed debt) is set at 55 percent of GDP, of which the ceilings on the present values of external and domestic debt ratios are 40 percent and 15 percent of GDP, respectively. While this qualifies as a debt rule, it doesn’t provide proper medium-term guidance, as the level of this ceiling is equivalent to the DSA threshold, which should not be targeted. Further, while an “implicit” deficit ceiling of 5 percent of GDP (MEF definition) is used as an internal reference during the budget process, no formal or explicit operational rule is currently implemented.

6. Staff recommends adopting a debt rule in percent of GDP in nominal terms, combined with an overall deficit ceiling to ensure sustainability and operational feasibility. A medium-term debt anchor in nominal terms, expressed in percent of GDP, is appropriate for Cambodia because it is simple to compute and monitor and easy to communicate to the public. Furthermore, a rule on debt is pertinent, given the recent increase in debt and the expected change in structure and composition of debt (e.g., expected decline in concessional financing, planned issuances of local-currency governments). The lack of experience with fiscal rules, combined with capacity constraints, make a overall deficit target an appropriate operational rule for Cambodia. Its direct link to debt dynamics also helps to ensure sustainability.

7. The debt anchor should be set in gross terms and continue to cover all public and publicly guaranteed debt. Gross debt constitutes the most appropriate fiscal anchor for several reasons. Net debt is complicated to measure and communicate because it is difficult to define which government assets are truly liquid. In addition, targeting net debt could also mask important below-the-line financing operations (like the recapitalization of a public bank or loans to state-owned enterprises) that would be accounted for under the gross debt concept, concealing the build-up of fiscal risks over time. In terms of coverage, the debt anchor should continue to include all public and publicly guaranteed debt. The fiscal rule should cover all entities that carry significant risks to the budget. All loans or projects guaranteed by the government as well as on-lending to SOEs should continue to be accounted for.

8. Further work is required to define the escape clause and the corrective mechanisms. Currently, Cambodia is considering an escape clause that suspends the fiscal rules for a number of unexpected events. These events are identified in the draft 2023–24 Medium-Term Fiscal Framework (MTFF) document i.e. “such as natural disasters, pandemics, national emergencies or urgent need for national interests, that trigger significant changes in macroeconomic assumptions”. The first three events listed would benefit from further specification, with a specific trigger identified (i.e. the Prime Minister formally declaring a national emergency). However, the last event is too broadly defined, leaving the door open to wide interpretation and possible misuse. GDP should continue to review literature on the international experience with escape clauses to strengthen the concepts of trigger events, trigger and monitoring authority in Cambodia, and the requirements for government to inform Parliament when an escape clause is invoked and provide a specified pathway to return to the rules. In the first instance, these should be further defined as part of the MTFF document. Looking forward, these should be included in a fiscal responsibility law (FRL) when (and if) Cambodia decides to develop one.

9. A number of options could be considered to encourage compliance in Cambodia, once the government has committed to implement the new fiscal rules framework. Currently, there have been no proposals on how to ensure compliance with the fiscal rule, and monitoring arrangements are still to be determined. The PDMS includes a ceiling on the present value of total public debt of 55 percent of GDP and outlines a mechanism for regular monitoring and evaluating progress. The current MTFF document does not specify requirements for compliance with the envisaged fiscal rules, and there is no commitment to publish monitoring reports. In the first instance, responsibility for rule monitoring should be primarily assigned to GDP. GDP would be responsible for reporting quarterly to Cabinet on compliance with the rule and producing a half-year report to be submitted to Parliament that would be published alongside (or attached to) the MTFF. The report on expected compliance with fiscal rules during that fiscal year should flag any noncompliance risks and propose any necessary corrective measures to ensure fiscal rules are met. At this current juncture, in line with Cambodia’s high-quality but small technical cadre, setting up an independent fiscal council would be difficult in the short to medium-term.

See De Stefani, Laws, and Sollaci (2022), IMF WP22/064.

Anecdotal evidence suggests new manufacturing orders to be delayed.

The growth in credit is almost entirely to the private sector—that to government was less than one percent.

The expansion in the central bank’s balance sheet was only partially offset by reductions in FX reserves and liquidity operations.

Note that the current account balance actually improved in 2020, despite the collapse in tourism revenues and remittances, as a result of exports of non-monetary gold and import compression. Gold imports have often been large—as much as 5 percent of imports—but those for 2021 were exceptional.

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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

Keywords
Recent Developments
- Authorities’ Views
Outlook and Risks
- Authorities’ Views
Policy Discussions
- A. Policies to Manage Near-Term Challenges
- B. Policy Frameworks for a Resilient Economy
Staff Appraisal
Annex I. External Sector Assessment
Annex II. Risk Assessment Matrix1
Annex III. Implementation of Past Advice
Annex IV. Capacity Development Strategy
Annex V. Social Protection Reform in Cambodia1
References
Annex VI. De-Dollarization Measures in Cambodia1
- A. Dollarization in Cambodia
- B. Measures to Promote the Use of Local Currency
References
Annex VII. Fighting Climate Change in Cambodia1
References
Annex VIII. Governance and Anti-Corruption Frameworks1
- A. Anti-Corruption Corruption Vulnerabilities
  - Anti-Corruption Frameworks
- B. Rule of Law8
  - Rule of Law Weaknesses
  - Rule of Law Frameworks
Annex IX. Fiscal Rules in Cambodia1

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Contribution to GDP Growth

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Government Deposit and Foreign Reserves.

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Share of households living below 1.9 USD/worker/day

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Net Imports of Oil and Gas

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Contribution to Inflation of Product Groups

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Contribution to Headline Inflation

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Consumer Price Index

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Cambodian Residential Property Price Index

(Jan 2020 – July 2022, y/y)

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Real Estate New Project

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Source of Investment Capital

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Project Origin by Country, 2010–2022M8

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Contribution to Private Credit Growth

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Private Sector Credit

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Private Sector Credit

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Money Growth

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Change in Main Items of NBC Balance Sheet

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Broad Money and (USD) Excess Reserves

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LTD and Deposit Growth

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Investment Approvals

(year-to-date, by number of projects)

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Grade 6 Proficiency Levels in Khmer and Maths, public schools

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Business Liquidation and Registration

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Stock of Restructured Loans

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Export in September 2022

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Contribution to Export Growth

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Import in September 2022

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Contribution to Import Growth

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Real GDP Growth Contributions

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Headline CPI

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Medium-Term Fiscal Outlook

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Fiscal Balance

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Private Sector Credit

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Cambodia 2014 Gross Domestic Product

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Government Expenditure on Health

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Government Expenditure on Education

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^{Figure 1.}

Gradual Recovery of the Cambodian Economy

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^{Figure 2.}

The Public Finances

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External Balances

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Current Account Balance

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Trade Balance and Main Items

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Current Account Financing

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Net Foreign Assets

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Real Effective Exchange Rate, 2000Q1— 2022Q3 (2010=100)

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International Reserves

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IMF TA Delivery by APD Country, FY 2022

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^{Figure 1.}

Overview

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Fiscal Spending on Social Benefit, 2009–2021

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Draft Family Package Program Design – Integrated Social Assistance Framework

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Universal Health Coverage: Service Coverage Index, 2019^¹

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Legal and Effective Coverage Estimates of Health Security Schemes

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Cambodia’s Health Expenditure, 2000–2019

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ASEAN Countries’ Current Health Expenditure, 2000–2019

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ASEAN Countries’ Public Health Expenditure, 2000–2019

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Health Spending Benchmarks versus Cambodia’s MOH Budget^¹

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KHR/USD Exchange Rate, Inflation and Share of FCD to M2 (1960–2021)

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ODA and FDI in Cambodia

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Balance of Payments

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Required Reserve Ratio for KHR and USD

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GHG Emissions in Cambodia, by Sector

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CO2 emissions per capita 1990–2018

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Sectoral Share of GHG Emissions in 2030

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Baseline CO2 Emission Change

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Damage from Climate-related Events, 2010–19

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Adaptive Capacity and Physical Exposure

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Adaptation Costs and Pre-Covid-19 Fiscal Space

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Annual Cost of Upgrading Investments and Retrofitting Existing Assets

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Common Adoption of Fiscal Rules: A Snapshot in 2021

(Number of countries)

Foresee

^{Table 1.}

Cambodia: Summary of De-Dollarization Measures Taken so Far

Policies	Description
Enhancing confidence in the local currency through exchange rate stabilization	- In the short term, stabilizing the exchange rate of KHR and its purchasing power by moderating inflation to increase strong enough confidence in KHR. - In the medium to long term, migrating to a more flexible exchange rate under flexible inflation targeting, while more rigorous studies of the impact of flexible inflation targeting with confidence in KHR are warranted.
Promoting price quotations and payments for goods and services in KHR	- In the short term, encouraging firms and sellers to quote the price and payments of goods and services, and the payments of salaries and wages in KHR only or at least alongside USD. - In the medium to long term, requiring quoting only in KHR. More rigorous studies of the impact of price quotations and payments are needed.
Promoting the opening of bank accounts in KHR	- Encouraging the use of bank accounts denominated in KHR. In the long run, gradually requiring all firms to open bank accounts for their employees in KHR is essential. Currently, government officials get their salaries through bank accounts in KHR. - Promoting price quotations and payments for goods and services and salaries and wages in KHR seems to also promote the opening of bank accounts in KHR. - In rural areas, where many households are unbanked and where the use of KHR is high, are a good place to promote the opening of bank accounts in KHR.
Improving the payment system and financial instrument in KHR	- Having more availability of KHRs notes in ATMs across the countries. - Encouraging money transfers or remittances to be carried out within formal financial institutions or using agents to reduce the direct use of foreign currencies.
Increase the cost of retaining foreign currency deposits	- The NBC introduced differentiated rates of required reserves for USD and KHR in 2008 (i.e., 16% for USD and 8% for KHR). However, the rates became reduced to same level of 7% both for USD and KHR in March 2020 to ease banking liquidity in response to the pandemic. The rates remain same as of June 2022 (Figure 5).
Increase financial intermediation in KHR	- The NBC required banks and financial institutions (BFIs) to have at least 10% of their loan portfolio in KHR by end of 2019. However, so far, no strict measures are imposed on the non-compliant BFIs and no rigorous study is done yet to evaluate the impact of this requirement.
Introduce mechanisms and tools to encourage interbank -market and provide liquidity in KHR to BFIs	- The NBC introduced NCD (in KHR and in USD) to absorb excess liquidity and at the same time for BFIs to use in interbank money market. The NCB also introduced LPCO, and more recently Marginal Lending Facility (MLF) to provide termed KHR liquidity to BFIs with NCD as collateral.
Develop securities market for local currency	- It is already started by introducing securities market (CSX) with quotations in KHR to promote KHR although its current transactions are still limited. - The government started to issue government bonds from September 2022 by auctions.
Requirement of tax payment in KHR	- Revenue collection through tax is conducted in KHR. However, there are still some revenues collected in foreign currency, such as electricity bill, entrance fees to tourism sites, airport taxes, visa fees, rents…etc.
Promoting public awareness of the importance of using local currency	- Mainly done by the NBC through various program and campaign including annual Riel Day.

Topics

Countries

Series

About

Resources

Abstract

Recent Developments

Authorities’ Views

Outlook and Risks

Authorities’ Views

Policy Discussions

A. Policies to Manage Near-Term Challenges

Fiscal Policy

Monetary and Exchange Rate Policy

Financial System Policies

B. Policy Frameworks for a Resilient Economy

Fiscal Strategy and Frameworks

Authorities’ Views

Financial and Monetary Frameworks

Authorities’ Views

Governance and Anti-Corruption Frameworks

Authorities’ Views

Staff Appraisal

Annex I. External Sector Assessment

Annex II. Risk Assessment Matrix1

Annex III. Implementation of Past Advice

Annex IV. Capacity Development Strategy

A. Recent CD Activities

B. Forward Looking CD Priorities

C. CD Strategy

Annex V. Social Protection Reform in Cambodia1

A. Overview: Social Protection Scheme in Cambodia

B. The Family Package (FP) Framework

C. Universal Health Coverage (UHC)

References

Annex VI. De-Dollarization Measures in Cambodia1

A. Dollarization in Cambodia

B. Measures to Promote the Use of Local Currency

References

Annex VII. Fighting Climate Change in Cambodia1

A. Cambodia’s Greenhouse Gas Emissions

B. Cambodia’s Mitigation

C. Climate Change Risks for Cambodia

D. Cambodia’s Adaptation

References

Annex VIII. Governance and Anti-Corruption Frameworks1

A. Anti-Corruption Corruption Vulnerabilities

Anti-Corruption Frameworks

B. Rule of Law8

Rule of Law Weaknesses

Rule of Law Frameworks

Annex IX. Fiscal Rules in Cambodia1

A. Context

B. Guiding Principles and Common Practice

C. A Framework for Cambodia

Other IMF Content

Other Publishers

Asian Development Bank

Inter-American Development Bank

The World Bank

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Table of Contents

Headings

Figures

Metrics

Foresee

Annex II. Risk Assessment Matrix^¹

Annex V. Social Protection Reform in Cambodia^¹

Annex VI. De-Dollarization Measures in Cambodia^¹

Annex VII. Fighting Climate Change in Cambodia^¹

Annex VIII. Governance and Anti-Corruption Frameworks^¹

B. Rule of Law^⁸

Annex IX. Fiscal Rules in Cambodia^¹