IMF Executive Board Concludes 2009 Article IV Consultation with Cambodia

Public Information Notice (PIN) No. 09/131
December 8, 2009

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Cambodia is also available.

On November 18, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cambodia.1


Following a decade of high economic growth (8 percent per year on average) and significant poverty reduction, Cambodia’s economy has been hard hit by the global crisis. Real GDP is contracting as key sectors falter—export and tourism receipts have fallen off sharply, reflecting a narrow production base, high concentration of exports, and softening external demand, while lower foreign inflows have contributed to a contraction in construction activity. Falling agricultural commodity prices have depressed rural incomes. On the other hand, plunging imports have led to a narrowing of the current account deficit, and inflation has declined sharply.

Despite banks having no direct exposure to toxic assets abroad, the slowdown has taken a toll on Cambodia’s banking sector. Contracting economic activity and declining property prices have exacerbated strains caused by weak risk management, earlier supervisory lapses, and excessive credit growth. As in other countries, credit risks and nonperforming loans at banks are rising, while profits are being compressed by a lack of lending opportunities.

In response to the slowdown, policies have been eased significantly. Based on performance to date, the overall fiscal deficit is on path to widen sharply to around 6¾ percent of GDP in 2009, against an official target of 4¼ percent and an estimated outturn of 2¾ percent in 2008, despite revenues remaining on target. On the monetary front, a reduction in the reserve requirement early in the year and strong deposit growth has eased liquidity pressures. However, higher fiscal spending and reduced foreign currency inflows in the context of high dollarization has resulted in downward pressure on the riel.

Despite these measures, growth in 2009 is expected to be negative 2¾ percent, with only a modest bounce back in 2010 to positive 4¼ percent as garment exports, tourism, and construction stage an modest rebound. Notwithstanding a moderate impact from Typhoon Ketsana, good harvests are expected this year. Inflation is expected to rise to around 5 percent (year-on-year) by end-2009 as base effects dissipate, ticking up to about 6 percent by end-2010, due to a mix of higher oil prices and relatively accommodative policies.

The current account deficit is expected to narrow in 2009 to around 5½ percent of GDP as lower import demand and fuel pricesmore than offsetsharply smaller export (led by garments) and tourism receipts. As the recovery starts to kick in, these trends would reverse, raising the deficit to around 11 percent of GDP in 2010 as a recovery in export lags. Gross official reserves (inclusive of the IMF’s allocations of special drawing rights of SDR 68.5 million—about US$109 million) are expected to stay broadly stable in 2009 (around US$2.1 billion, 3.5 months of imports), falling modestly in 2010, as loose fiscal policy and the widening current account deficit more than offset an expected pickup in official and foreign direct investment inflows.

Executive Board Assessment

Executive Directors noted that the global recession has contributed to a sizable contraction in economic activity, after nearly a decade of strong growth and poverty reduction. Together with the sharp decline in property prices, the recession has further weakened bank balance sheets. As the economy recovers, immediate priorities include safeguarding macroeconomic stability and reinforcing the banking system.

Directors noted that, owing to high dollarization, fiscal policy should continue to anchor macroeconomic stability, backed by appropriately supportive monetary conditions. Tightening fiscal policy will be necessary to avoid exerting undue pressure on inflation and the exchange rate. Most directors noted that greater exchange rate flexibility would help facilitate external adjustment and safeguard international reserves. A few Directors noted that, under current conditions, the existing exchange rate arrangements were appropriate for anchoring inflation expectations.

Directors emphasized the need to reduce the domestic financing component of the fiscal deficit, while reprioritizing expenditure to protect vulnerable groups. They praised ongoing efforts to improve revenue performance, and noted that expenditure restraint would also be needed, especially in wage and defense outlays. Directors welcomed the direction of the draft 2010 budget, which should be underpinned by well-identified revenue and expenditure measures. Noting the progress in improving public financial management, they encouraged the authorities to continue their efforts, especially in the areas of budget integration and transparency, as well as the establishment of a Treasury single account.

Directors praised progress in improving liquidity management and noted that monetary conditions remain broadly appropriate. They encouraged the National Bank of Cambodia to monitor closely the large buildup of banks’ excess reserves and be prepared to tighten policy as conditions improve. Directors saw room to strengthen the effectiveness of monetary policy, focusing on developing indirect instruments and fostering an interbank market, which could also contribute to reducing dollarization.

Directors expressed concern over the deterioration in the health of the banking sector and the continued rise of nonperforming loans. They commended the authorities for responding with prioritized onsite inspections and supervisory noncompliance letters, and encouraged them to continue strengthening banking supervision. Immediate priorities should include strict enforcement of the new asset classification regime, prompt implementation of corrective action plans, development of a comprehensive bank restructuring framework, and increased supervision capacity.

Directors noted that a diversified production base and improved competitiveness are key to sustained high growth, with particular focus on improving basic infrastructure, labor skills, and the business climate, as well as expanding market access through trade commitments. Directors encouraged the authorities to continue engaging external creditors to find a solution to the arrears problem.

Cambodia: Selected Economic Indicators, 2006–10
(Annual percent change, unless otherwise indicated)


2006 2007 2008 2009 2010




  Proj. Proj.


GDP at constant prices

10.8 10.2 6.7 -2.7 4.3

Inflation (CPI) (annual average)

6.1 7.7 25.0 -0.5 5.4


4.2 14.0 12.5 5.3 6.0

Saving and investment (in percent of GDP)


Gross national saving

19.9 19.0 9.1 10.5 5.8

Gross fixed investment

20.6 20.8 19.5 16.0 17.0

Of which: Government investment

5.7 6.1 5.8 7.5 7.6

Public finances (in percent of GDP)


Revenue 1/

11.5 11.9 12.0 12.0 12.4


14.2 14.7 14.8 18.8 19.9

Overall budget balance (- deficit)

-2.7 -2.9 -2.8 -6.7 -7.4

Foreign financing (net)

4.8 5.0 5.3 5.5 5.8

Domestic financing (net) 2/

-2.0 -2.2 -2.5 1.2 1.6

Broad money

38.2 62.9 4.8 23.5 12.9

Private sector credit

51.6 76.0 55.0 3.5 17.0

Balance of payments


Exports (in millions of U.S. dollars)

3,694 4,089 4,433 3,892 4,059

Imports (in millions of U.S. dollars)

-4,727 -5,432 -6,679 -5,501 -6,446

Current account balance (in percent of GDP)

-0.6 -1.7 -10.4 -5.5 -11.2

Gross official reserves (in millions of U.S. dollars) 3/

1,097 1,616 2,164 2,199 2,137

(in months of months of prospective imports)

2.1 2.5 4.0 3.5 3.1

Public external debt (in millions of U.S. dollars) 4/

2,254 2,571 2,773 3,170 3,531

(in percent of GDP)

31.0 29.6 24.6 29.2 30.1

Memorandum items:


Nominal GDP (in billions of riels)

29,849 35,042 45,583 44,696 48,843

(in millions of U.S. dollars)

7,264 8,691 11,277

Exchange rate (riels per dollar, period average)

4,109 4,032 4,042

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

1/ In 2006, includes transfer of the Multilateral Debt Relief Initiative (MDRI) proceeds as capital revenue.

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

3/ Excludes unrestricted foreign currency deposits held as reserves at the National Bank of Cambodia; starting in 2009, includes the new SDR allocations made by the IMF of SDR 68.4 million.

4/ Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

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. An explanation of any qualifiers used in summings up can be found here:"


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