Press Release No. 09/325

Press Release No. 09/325
September 24, 2009

The following statement was issued in Phnom Penh on September 23 at the conclusion of an International Monetary Fund (IMF) staff mission to Cambodia:

“An IMF mission visited Cambodia during September 9-23, 2009 to conduct the annual Article IV discussions. During the visit, the mission took stock of recent economic and financial developments and held policy discussions with ministers and senior officials of the Royal Government of Cambodia on their macroeconomic and financial policies. The mission also met a wide range of representatives from the business community and Cambodia’s development partners.

“The global economic crisis is having a larger impact on Cambodia’s economy than previously anticipated, and as a result, real GDP growth is now projected to be negative 2¾ percent in 2009.

• Garment export volumes are projected to decline by 15 percent this year, mainly due to lower consumption in the United States (Cambodia’s key garment export market) and intense competition from regional producers, who have raised their market share by strengthening competitiveness.

• In the tourism sector, air arrivals have fallen by double digits, reflecting the global recession, rising unemployment, and falling incomes in most of Cambodia’s tourism-source countries. As a consequence, overall tourism spending is sharply lower, despite the increase in same-day and land arrivals from neighbor countries.

• With few notable exceptions, work on large construction projects has slowed significantly in the wake of falling property prices. New project approvals are sharply lower, and imports of construction materials are down significantly compared to 2008, with bank lending to the property also down.

• Agricultural production is a bright spot, with a good harvest expected in 2009. Investment in rural roads and irrigation systems should raise productivity and reduce operating costs in the period ahead.

“Looking to 2010, there are some hopeful signs that the global downturn may be bottoming out. A pick-up in external demand is expected to lead to a modest recovery in Cambodia’s economy. Growth in 2010 is projected at about 4¼ percent, though risks remain tilted to the downside, given uncertainties over the strength of the global recovery.

“With lower domestic demand and commodity prices, inflation pressures have eased in 2009, with headline inflation expected to be around 5¼ percent (year-on-year) by end-2009. Inflation should remain in the mid-single digits through 2010. However, vigilance is required to ensure that fiscal stimulus does not lead to renewed inflation pressures.

“Policy discussions focused on how best to provide adequate support targeted at priority sectors, while at the same time maintaining macroeconomic stability and low inflation.

“With respect to fiscal policy, the mission welcomed indications that the 2009 budget’s revenue target would likely be met, largely due to commendable administration efforts. However, on current trends, very large increases in the civil service and military wage bill and higher capital spending are projected to raise the budget deficit to 6¾ percent of GDP in 2009 from around 2¾ percent in 2008. The mission estimated that domestic financing of this deficit would imply a drawdown of government deposits of about 1¼ percent of GDP, reversing a long trend of deposit accumulation. This situation bears close watch, since domestic financing of deficits in the past has contributed to macroeconomic instability, placing pressure on the exchange rate and consumer prices. The mission noted that over the remainder of the year, efforts should focus on ensuring continued strong revenue collection and avoiding non-priority spending.

“For 2010, the mission recommended the budget aim to reduce the deficit to under 5½ percent of GDP. This level of deficit would eliminate the need for further large-scale domestic financing, while at the same time provide adequate fiscal space for spending on priority sectors and pursuing key development objectives. The mission cautioned against allowing significant increases in the wage bill to become entrenched, as this could risk crowding out spending on priority sectors such as health, education, and operations and maintenance, and further increase domestic financing needs if not accompanied by significant revenue gains.

“With respect to monetary policy, the mission noted that ample liquidity now exists in the banking system, and agreed with the authorities that there was no need for a reduction in the reserve requirement. The mission also noted that greater exchange rate flexibility through limiting intervention to smoothing volatility would help protect international reserves, deepen the foreign exchange market, and allow the exchange rate to play a greater role in facilitating external adjustment.

‘The mission commended the National Bank of Cambodia for taking actions to safeguard the health of the banking system. As in many other countries, the downturn in Cambodia’s growth has been accompanied by rising non-performing loans at banks. The mission and the authorities fully agreed that close supervision of banks and strong enforcement of prudential regulations needs to continue, especially proper asset classification and provisioning of non-performing loans.”