Statement by IMF Staff Mission to CambodiaPress Release No. 06/96
May 11, 2006
The following statement was issued today by the International Monetary Fund's (IMF) staff mission in Phnom Penh:
"An IMF mission from Washington, D.C. visited Cambodia during April 27-May 11, 2006 to conduct the Article IV consultation1, and to update understandings reached last year with the Royal Government of Cambodia (RGC) on an economic program that could possibly be supported by a new Poverty Reduction and Growth Facility (PRGF) arrangement.2 During the visit, the mission took stock of recent economic and financial developments, held policy discussions with the authorities across a wide range of areas, and assessed progress in the implementation of the RGC's structural reform agenda. The mission also met with representatives from the business community, development partners, labor unions, the National Assembly, and NGOs.
"The mission commended the authorities for an excellent macroeconomic performance in 2005. Prudent implementation of monetary and fiscal policies along with steps to implement a number of important structural reforms underpinned much better than expected growth, while inflation was contained to the mid-single digits. The mission also welcomed the commendable success in reducing poverty in recent years, and the authorities' commitment to macroeconomic stability and reform implementation, as this would facilitate further progress in reducing poverty in the years to come.
"Real GDP is now estimated to have grown by about 13 percent in 2005, owing to sharply higher agriculture production as a result of favorable weather conditions and efforts to raise productivity, and continued robust activity in the tourism, garment, and construction sectors (see Table 1). In particular, garment production expanded by more than 12 percent, against earlier fears of a decline on account of the January 2005 lifting of MFA quotas, as Cambodia benefited from restrictions imposed by the U.S. and the E.U. on garment imports from China. Growth in 2006 is expected to moderate to around 5 percent, in large part reflecting a return to more normal levels of agriculture production and weather conditions.
"Inflation rose to 6¾ percent at end-2005 on a year-over-year basis due mainly to higher petroleum and food price increases. Some easing in food price pressures, owing to the bumper harvests, has allowed inflation to subside recently, though further declines will likely be constrained by continued high international oil prices. Higher petroleum prices were also reflected in a higher external current account deficit, which widened to 9¾ percent of GDP in 2005. A surge in foreign direct investment allowed gross international reserves to increase to US$915 million at end-2005 (about 2½ percent of imports).
"Fiscal policy implementation remained cautious in 2005. Expenditure growth was moderate, and both current and capital spending declined in relation to GDP, though social spending was safeguarded, and the government was able to reduce outstanding expenditure arrears. Notwithstanding receipt of Foreign Trade Bank privatization proceeds, however, the revenue-to-GDP ratio remained unchanged at around 11 percent also partly reflecting higher GDP due to the largely untaxed agriculture sector. Expenditure restraint led to a decline in the overall government deficit to 3½ percent of GDP in 2005 from 4¾ percent in 2004.
"The mission concurred with the authorities that a strengthening of revenue collection is central to finance expenditure plans consistent with the National Strategic Development Plan (NSDP) in the context of medium-term fiscal and debt sustainability. The mission welcomed the authorities' goal of raising additional revenues of about ½ percentage point of GDP in 2006 through strengthened tax collection efforts. In particular, the mission supported the RGC's goal to re-double efforts to collect non-tax revenues and implement strengthened customs procedures and anti-smuggling actions, to ensure that these revenue sources contribute their appropriate share to Cambodia's development and social expenditure needs.
"Structural reforms, in particular to enhance governance, are key for sustainable growth and to accelerate poverty reduction over the medium term. In this context, the mission discussed the status of the RGC's public financial management reform program and welcomed the progress made. The mission concurred with the authorities' assessment that remaining actions needed to introduce new budget and treasury accounting systems should be undertaken in the period ahead. Implementation of such systems beginning in 2007 would mark a milestone in the process of strengthening governance of public finances. The mission also reviewed the status of the draft anti-corruption law, and endorsed the emphasis made at the recent Consultative Group meeting on strengthening the existing draft.
Debt relief from the IMF
"Reflecting good policy implementation and a commitment to further reduce poverty, Cambodia received debt relief from the IMF equal to about US$82 million in January 2006 under the Multilateral Debt Relief Initiative (MDRI). The mission discussed the authorities' proposals to use the savings arising from the MDRI to implement new rural irrigation projects. About US$6 million in spending is planned for 2006. The mission supported these plans, and urged the authorities to identify further projects on which debt relief could be used to support poverty reduction.
The status of PRGF discussions
"The mission held productive discussions with the RGC on a program of economic and financial policies, initially agreed in 2005, that could be supported by a new PRGF arrangement. The authorities' program focuses on continued macroeconomic stability and improvements in governance, public financial management, and financial sector supervision. The authorities' request for support for their economic program under the PRGF could be submitted to the IMF's Executive Board once understandings have been reached to reschedule arrears on obligations to its two largest external creditors. Good progress has been made in reaching understandings with the United States, and the mission welcomed the authorities' efforts to reach understandings with the Russian Federation in the period ahead."