IMF Executive Board Concludes 2007 Article IV Consultation with Cambodia

Public Information Notice (PIN) No.07/90
July 31, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 25, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cambodia.1


Strong macroeconomic policies have enabled Cambodia to achieve impressive growth and make inroads into poverty. Supported by prudent fiscal and monetary policies that have strengthened the economy's resilience to shocks, growth has averaged over 9 percent since 2000, accelerating in recent years. Anchored in part by the extraordinarily high degree of dollarization, inflation has remained low and confidence increased. Growth, however, has been narrowly based on the garment and tourism sectors, with the agricultural sector only making a sustained contribution in recent years. The overall poverty rate has declined markedly, but with a rise in inequality, and remains uncomfortably high in rural areas. Progress will have to be accelerated if Cambodia is to meet the Millennium Development Goals.

Macroeconomic performance in 2006 was impressive. Growth in 2006 was 10¾ percent, based on continued growth in agriculture, following the record-breaking year of 2005 and buoyant exports. Construction and services, particularly the financial sector, underpin a vibrant urban economy. Inflation has recently picked up slightly as a result of rising fish and petroleum prices, but is expected to remain around 4 percent, assuming broadly stable international oil prices for the rest of the year.

Garments and tourism exports grew by more than 20 percent in 2006 while imports increased on the back of strong GDP growth and high oil prices, leading to an external current account deficit (excluding official transfers) of around 7 percent of GDP. External financing came mainly from aid and foreign direct investment focused on garments, tourism, agriculture, and construction.

Fiscal policy continues to be prudent. The overall fiscal deficit in 2006 remained stable at around 3¼ percent of GDP (excluding the proceeds of debt relief from the Multilateral Debt Relief Initiative). Revenue collections exceeded expectations, particularly from domestic taxes, while expenditure restraint led to further increases in government bank deposits and significant reductions in domestic arrears. These trends continued in early 2007.

Money demand is accelerating, boosting the mainly dollarized financial sector. Broad money is growing at an annual rate of around 40 percent, mainly reflecting increases in bank deposits, almost entirely in dollars. Credit to the private sector, also in dollars, is growing even more rapidly but the level remains very low at only 12 percent of GDP.

The exchange rate is stable and reserve growth is healthy. The riel has remained broadly stable in bilateral and effective terms with some small nominal appreciation in early-2007. Increased demand for riel, in part as a result of improved tax compliance, has allowed the National Bank of Cambodia (NBC) to make larger-than-expected dollar purchases from the market. NBC's reserves now exceed US$1.2 billion, albeit with a continued small build up of external arrears with respect to the old debt outstanding to the United States and Russia.

Progress has been made on structural reforms but much remains to be done. Efforts in the fiscal and financial sectors are bearing fruit, with notable achievements being the implementation of new government expenditure and accounting procedures and strengthened prudential regulations for the banking sector. However, legal and judicial reform progress has been much slower. Efforts to strengthen the draft anti-corruption law halted pending review of the penal code and an anti-corruption unit in the Council of Ministers was created in the interim. The Law on Anti-Money Laundering and Counter Financing of Terrorism and Customs Law passed, but drafts of the Insolvency Law and the Law on the Status of Judges and Prosecutors are still being debated at the Ministry level.

Executive Board Assessment

Executive Directors commended the Cambodian authorities for their sound macroeconomic policies, which have promoted rapid growth with domestic and external stability, and allowed inroads to be made in reducing poverty. Cambodia's fiscal position is strong, public and external debt are sustainable, and inflation has remained low. To promote the diversification of the sources of growth and sustain poverty reduction, Directors encouraged the authorities to continue to make improvements in public services, the financial sector and the business environment, including by strengthening governance.

Directors commended the authorities' commitment to a continued prudent fiscal policy by avoiding domestic bank financing, while improving the level and quality of revenue and expenditure. They welcomed the intentions to reorient public expenditure toward the objectives of the National Strategic Development Plan, including with a view to tackling rural poverty. They encouraged the authorities to increase good quality poverty-reducing spending, including productive capital investment. Directors supported the government's policy of raising public sector wages to improve public services and discourage corruption, while emphasizing the need to embed wage policy in a broad civil service reform strategy.

Directors welcomed the recent progress made in public financial management reforms that have strengthened the budget process and laid the foundations for more effective spending. They noted the importance of enhancing cash management and identifying spending priorities in the 2008 budget.

Directors considered that achieving the expenditure policy objectives would require sustained increases in revenue. The recent impressive tax collection increases arising from administration improvements were acknowledged. Nevertheless, there continues to be a need for policy measures to broaden the tax base and improve the structure of the tax system. Directors encouraged the authorities to implement initial steps as soon as possible.

Directors considered Cambodia's current exchange rate policy to be appropriate. They noted the assessment that the riel is broadly in line with medium-term fundamentals and that the underlying external current account is in equilibrium. Given the need to supplement international reserves, were sustained depreciation pressures to arise, they should not be resisted.

Directors supported the National Bank of Cambodia's accommodative monetary approach, but cautioned that future wage and price developments should be monitored for indications of inflation pressure. They noted that the advantages of dollarization as a foundation for Cambodia's macroeconomic stability and financial sector expansion continue to outweigh the disadvantages from loss of seignorage and constraints on monetary policy. In the long run—and provided the appropriate capacity and policy conditions are in place—greater use of the riel would help strengthen the effectiveness of monetary policy.

Directors called on the authorities to strengthen banking supervision and enforce prudential regulations rigorously, to ensure that the financial sector continues to contribute to macroeconomic stability. They encouraged the authorities to work with the commercial banks to enhance the payments system and facilitate financial intermediation, and welcomed the recent passage of the Anti-Money Laundering Law.

Directors welcomed the authorities' commitment to good governance, as demonstrated by the establishment of an anti-corruption unit in the Council of Ministers. They stressed that continued improvements in governance will be crucial to enhance the business environment, strengthen revenue collection, and promote expenditure effectiveness. Directors encouraged the authorities to introduce appropriate anti-corruption legislation, and to improve the management of state assets and concessions.

Directors observed that oil production would improve Cambodia's economic prospects, but also present challenges to ensure an appropriate balance between saving, investing and consuming future oil revenues. They welcomed the authorities' recognition that a clear legal framework and strengthened taxation regime for the oil sector will be essential. Directors encouraged the authorities to endorse the Extractive Industries Transparency Initiative.

Directors welcomed the authorities' commitment to refrain from contracting nonconcessional loans following Cambodia's recently acquired sovereign credit ratings. They called on the authorities to continue their current prudent borrowing policy, which has ensured a highly concessional external debt structure that should safeguard debt sustainability.

Directors encouraged the authorities to continue efforts to resolve outstanding arrears with official creditors, noting that a successful resolution would pave the way for consideration of a Poverty Reduction and Growth Facility arrangement. They welcomed the Fund's intensive policy engagement with Cambodia, including through the provision of technical assistance.

Cambodia: Selected Economic Indicators, 2004-07

Nominal GDP (2006): $7,254 million


GDP per capita (2006): $512


Population (2006): 14.2 million

  2004 2005 2006 2007
      Est. Proj.

Real economy

(annual growth rates, in percent)

Real GDP

10.0 13.5 10.8 9.1

Real GDP excluding agriculture

15.2 8.7 17.0 11.3

CPI Inflation (end of period)

5.6 6.7 2.8 3.8
  (in percent of GDP)

Domestic investment

17.7 20.1 21.5 21.5

Government investment

6.0 5.6 5.5 5.3

National saving

15.6 15.8 19.5 19.5

Money and credit

(annual growth rates in percent, unless otherwise indicated)

Broad money

30.4 16.1 38.2 42.9

Net credit to the government 1/

-2.4 -4.9 -10.6 -0.6

Private sector credit

35.9 31.8 51.6 44.7

Government operations

(in percent of GDP)

Revenue 2/

10.3 10.3 11.5 10.8


14.9 13.7 13.5 13.9

Overall budget balance 2/

-4.6 -3.4 -2.0 -3.1

Foreign financing, net

4.7 4.8 4.4 3.8

Domestic financing 3/

-0.2 -1.5 -2.5 -0.7

Balance of payments

(in millions of dollars, unless otherwise indicated)


2,589 2,910 3,693 4,313


-3,269 -3,928 -4,749 -5,526

Current account (excl. official transfers)

-436 -591 -525 -587

(in percent of GDP)

-8.2 -9.4 -7.2 -7.0

Overall balance

49 65 193 246

Gross official reserves

809 915 1,097 1,400

(in months of imports of goods and non-factor services)

2.6 2.4 2.4 2.6

(in percent of uncovered dollar deposits in banks) 4/

179 146 113 90

Public external debt 5/

2,043 2,123 2,248 2,464

(in percent of GDP)

38.5 33.9 31.0 29.5

Memorandum items:


Nominal GDP (in billions of riels)

21,343 25,693 29,809 33,822

(in millions of U.S. dollars)

5,308 6,271 7,254 ...

Exchange rate (riels per dollar; end of period)

4,031 4,116 4,046 ...

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

1/ Contribution to broad money growth.


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


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


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


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

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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