IMF Team Completes the 2010 Article IV Consultation Discussions with Cambodia

Press Release No. 10/334
September 10, 2010

An International Monetary Fund (IMF) mission from Washington, D.C. visited Cambodia August 30 to September 10, 2010, to conduct the annual Article IV discussions.1 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.

A broadening export-led recovery is taking hold since the beginning of the year. Real GDP growth is projected to reach 4½–5 percent in 2010, a significant turnaround from 2009. 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.

Amid ample liquidity in the banking system, credit growth has turned the corner and, on current trends, could run well above 20 percent in the second half of the year. Headline CPI inflation is projected to average 4 percent this year.

Significant risks continue to cloud growth prospects. The fragility of the global recovery exposes Cambodia’s narrow export base with its heavy reliance on the U.S. and European markets to significant downside risks. Over the medium term, efforts to strengthen the business environment and enhance public sector revenues and service delivery are important to overcome major downside risks to growth. On the other hand, a better-than-expected return to medium-term investments in the power sector and rural infrastructure could offer significant upside potential.

Against this background, discussions focused on the dual policy challenge to safeguard hard-won gains in macroeconomic stability and policy credibility, and lay the foundations for broader-based and inclusive growth.

With regard to fiscal policies, the mission was encouraged by the fiscal outturn through July suggesting that the budget target of a gradual fiscal consolidation is on track. The rebound in tax revenue is broadening, with both direct and indirect cumulative tax collection through the first seven months rising by 8 and 18 percent (y/y), respectively. However, the mission advised that further fiscal adjustment is needed for 2011 and the medium term. As the economic recovery gains traction, the recourse to domestic financing, and thus the injection of significant additional riel liquidity, should be eliminated to avoid undue external and inflation pressures. Moreover, further consolidation would enable Cambodia to retain its favorable debt sustainability outlook and rebuild its capacity to absorb potential future shocks.

The mission strongly supports the government’s emphasis on further improving revenue administration. Gains in tax collection offer the best hope for Cambodia to meet the dual objective of securing fiscal sustainability and mobilizing resources for its development needs. In addition, further progress along the government’s public financial management reform program will be critical to secure gains from enhanced revenue administration and improve the effectiveness of social priority spending

On monetary policies, the mission discussed ways to enhance Cambodia’s monetary independence, including elements of a strategy to address the high degree of dollarization. To a large extent dollarization reflects Cambodia’s unbalanced and narrow growth over recent decades that was driven by the dollarized urban export and tourism centers. Therefore, a more diversified development with greater emphasis on agriculture and rural areas, where the riel is commonly accepted, could over time produce a significant decline of dollarization. In addition, based on international experience of countries with a successful de-dollarization strategy, the incentives for greater use of riel could be increased.

The mission commended the National Bank of Cambodia for taking actions to safeguard the health of the banking system. Considering the findings of the IMF/World Bank Financial Sector Assessment Program mission in March 2010, the mission and the authorities agreed that robust supervision of banks and strict enforcement of prudential regulations remain key to sustained stability. Moreover, the supervisory framework and resources will also need to keep pace with the development of a broader financial system.

Global economic rebalancing and greater reliance in Asia on domestic sources of growth offer significant opportunities that Cambodia should seize. The government’s recent initiatives to improve the business environment and address infrastructure bottlenecks are timely. The mission looks forward to the implementation of the Anti-Corruption Law which could significantly reduce the cost of doing business, and thereby improve Cambodia’s international competitiveness. Promoting agricultural development and rural infrastructure investment, including by the recently adopted Rice Policy, will broaden Cambodia’s sources of growth and make future development more inclusive and sustainable. Improving the quality and dissemination of key economic statistics will serve to further enhance policy credibility and result in better informed business decisions.


1 Under the Article IV consultation, IMF staff undertake annual surveillance and analysis of economic developments and policies of member countries for discussion by the Executive Board. The last Article IV consultation with Cambodia was concluded in November 2009.



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