IMF Executive Board Concludes 2010 Article IV Consultation with Cambodia

Public Information Notice (PIN) No. 10/158
December 14, 2010

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 October 29, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Cambodia.1


Cambodia enjoyed a decade of high growth and relative stability prior to the crisis. Real GDP growth averaged over 9 percent during 2000–07, the highest of any low-income country in Asia, enabling significant improvements in living standards and poverty reduction. Prudent fiscal policies underpinned macroeconomic stability with headline inflation well below Cambodia’s peers.

However, the global crisis resulted in a growth collapse, exposing longstanding structural vulnerabilities. Preliminary estimates suggest that growth fell some 10 percentage points below its pre-crisis average in 2009. Cambodia was hit harder than comparator countries by the global recession, given vulnerabilities that are in part a legacy of a generation lost by civil strife. Fiscal revenues, that remain low regionally, limit the scope to fully address development priority needs, while a shallow and highly dollarized financial system undercuts broad-based growth and complicates macroeconomic management. Growth and exports have remained narrow-based, offering limited benefits to the rural poor, Cambodia’s vast majority. As a result, there are indications that poverty increased after several years of steady declines, setting back the momentum toward achieving the Millennium Development Goals (MDGs).

The authorities’ policy response to the crisis helped limit the impact. The government raised wages and accelerated development spending, allowing the overall fiscal deficit to increase to over 8 percent of GDP in 2009, up by more than 5 percentage points over 2008. While the deficit was mostly financed by concessional loans and grants, there was also significant recourse to domestic financing (nearly 2 percent of GDP) for the first time since 2003. In addition, the National Bank of Cambodia (NBC) took an accommodative stance by reducing reserve requirements (from 16 to 12 percent) and introducing an overdraft facility. However, as a result of banking system weaknesses, the main effect was to offer a cushion against a liquidity shock in addition to banks’ own efforts, including by raising deposit rates that contributed to a significant rise in liquidity in the banking system.

A broadening export-led recovery is under way. Garment exports and tourist arrivals, notably by air, are bouncing back, both growing between 10 to 20 percent (y/y) in the second quarter of 2010. Construction activity, however, appears to remain sluggish with growth of most related imports still negative, while a late start of the rainy season may dent agricultural output growth. Consumer price inflation rose to an average 7 percent in the first quarter of 2010, from about -½ percent on average in 2009, on the back of firmer local food and global commodity prices. Credit growth has turned the corner, reaching 23 percent (y/y) in August, from 6½ percent at end 2009, amid ample liquidity in the banking system. After narrowing somewhat in 2009, the current account deficit is likely to widen to about 7 percent of GDP (including official transfers) in 2010 on strengthening domestic demand. Official reserves have risen modestly (to about 3½ months of import cover), while the riel has depreciated somewhat against the U.S. dollar in recent months.

Near-term risks are tilted to the downside. The fragility of the global recovery exposes Cambodia’s narrow export base with its heavy reliance on the U.S. and European markets––garment exports to these destinations account for 40 percent of total goods and services exports––to significant downside risks, while limited fiscal policy space and financial system weaknesses further undercut the economy’s resilience to shocks. These weaknesses arise from shortcomings in banking supervision, enforcement of regulations and uneven credit risk management and data reporting by banks, combined with a high degree of dollarization, severely constraining the central bank’s ability to act as a lender of last resort. Staff projects growth to reach 4½–5 percent in 2010. Consistent with the recovery, staff projects the headline CPI index to rise 4 percent on average this year.

Over the medium term, addressing longstanding structural weaknesses can improve the balance of risks. Potential setbacks in efforts to strengthen the business environment and enhance public sector revenues and service delivery constitute major downside risks to growth. However, a better-than-expected return on medium-term investments in the power sector and rural infrastructure could offer significant upside potential. Growth is expected to gradually return to potential of about 6–7 percent over the medium term. The current account deficit (excluding official transfers), after rising early in the recovery (to about 13½ percent of GDP in 2010) would gradually decline (to about 8½ percent of GDP in 2015), in part reflecting increasing domestic hydro-power supply, and remain fully financed through grants, official external financing, and foreign direct investment.

Executive Board Assessment

Directors commended the authorities for their timely policy response, which had helped mitigate the impact of the global crisis and supported the nascent recovery. Directors noted, however, that to achieve sustainable broad-based growth, it will be necessary to address the economy’s long-standing structural weaknesses which were exposed by the global crisis. This includes expanding the limited fiscal space; strengthening monetary policy, especially in light of high degree of dollarization; preserving financial system stability; and promoting private sector-led economic diversification.

Directors concurred that prudent fiscal policy remains critical for maintaining macroeconomic stability. They were encouraged that fiscal consolidation was on track to meet the 2010 budget target, and called for further progress to increase fiscal space to address shocks over the medium term. Directors noted that stepped-up efforts on revenue mobilization, including tax administration and prudent borrowing policy, are crucial for achieving fiscal sustainability, while providing resources to meet pressing development needs. At the same time, efforts should also continue to strengthen public financial management to ensure effectiveness of priority social and infrastructure spending.

In light of the large liquidity overhang in the banking system, Directors encouraged the authorities to stand ready to remove the monetary easing bias to preempt potential pressures on financial stability. They agreed that, in the medium term, greater monetary independence will hinge critically on a market-based strategy of de-dollarization and require carefully sequenced measures to strengthen the monetary framework, including through the development of an interbank money market.

Directors considered the findings of a recent Financial Sector Assessment Program (FSAP), including risks to the financial system stability in the absence of significant reforms. They encouraged the authorities to implement high-priority FSAP recommendations, with appropriate technical assistance, to enhance financial system surveillance, improve supervisory and regulatory frameworks, and thus safeguard the hard-won confidence in the banking system. Directors welcomed the steps taken by the authorities to address data weaknesses and acute shortage of human resources, and to enhance technical capacity. They emphasized that upgrading and enforcing the legal framework and developing a safety net are essential to addressing systemic risk and limiting potential fiscal costs.

Directors noted that the authorities’ renewed emphasis on agricultural development and rural infrastructure investment is critical and timely. Greater efforts in this area should help broaden sources of growth and reduce poverty. Strengthening the environment for private-sector led investment and expanding market access will also play an important role in improving Cambodia’s international competitiveness.

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



2006 2007 2008 2009 2010




  Est. Proj.

GDP at constant prices

10.8 10.2 6.7 -2.0 4.8

Inflation (CPI) (annual average)

6.1 7.7 25.0 -0.7 4.0


4.2 14.0 12.5 5.3 4.5

Saving and investment (in percent of GDP)


Gross national saving

19.9 18.3 13.3 10.8 11.5

Gross fixed investment

20.6 20.8 19.5 16.0 18.5

Of which: Government investment

5.7 6.1 5.8 8.4 7.4

Public finances (in percent of GDP)


Revenue 1/

11.5 11.9 12.0 11.5 13.0


14.2 14.7 14.8 19.6 18.8

Overall budget balance (- deficit)

-2.7 -2.9 -2.8 -8.1 -5.9

Foreign financing (net)

4.8 5.0 5.3 6.3 5.5

Domestic financing (net) 2/

-2.0 -2.2 -2.5 1.8 0.4

Broad money

38.2 62.9 4.8 36.8 22.7

Private sector credit

51.6 76.0 55.0 6.5 28.5

Balance of payments


Exports (in millions of U.S. dollars)

3,694 4,083 4,708 4,137 4,563

Imports (in millions of U.S. dollars)

-4,727 -5,474 -6,509 -5,831 -6,679

Current account balance (in percent of GDP)

-0.6 -2.5 -6.2 -5.2 -7.0

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

1,097 1,616 2,164 2,367 2,550

(In months of months of prospective imports)

2.1 2.6 3.8 3.7 3.6

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

2,245 2,555 2,808 3,054 3,514

(In percent of GDP)

30.9 29.4 24.9 28.1 29.9

Memorandum items:


Nominal GDP (in billions of riels)

29,849 35,042 45,583 44,841 47,362

(In millions of U.S. dollars)

7,264 8,691 11,277 10,871

Exchange rate (riels per dollar, period average)

4,109 4,032 4,042 4,125

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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