## 1khmea2021002 ## Source details **Canonical URL:** [1khmea2021002](https://www.imf.org/-/media/files/publications/cr/2021/english/1khmea2021002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1khmea2021002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1khmea2021002.pdf.json) --- ### Key findings and developments - Pre-COVID growth and structure - Pre-crisis growth: "around 7 percent", concentrated in garments, footwear, and tourism. - Pre-COVID government deposits: "around 20 percent of GDP" (end-2019). - Pre-COVID FX reserves: "around 70 percent of GDP" (end-2019). - Vulnerabilities: concentration in few industries; rapid credit growth (construction and real estate); increased household debt; bank balance sheets concentrated in real estate; persistent current account deficits. - COVID-19 and other shocks - 2020: collapse in external demand and tourism; manufacturing recovered later in 2020 but economy lacked diversity. - 2021: community spread from February; cases surged to "over 118,000"; targeted lockdowns in major metropolitan and factory areas interrupted production. - Other shocks: EU withdrawal of preferential trade access on some exports in August 2020; floods damaged farmland in late 2020 with smaller-than-expected agricultural production loss. - Policy responses - Fiscal: scaled up healthcare, loans and guarantees to small businesses, tax breaks, wage subsidies, cash transfers to vulnerable households; authorities increased interventions from "2 to 4.9 percent of GDP in 2021". - NBC/monetary: liquidity measures, loan restructuring guidance, lowered required reserve ratios, cut interest rates on LPCOs and Negotiable Certificates of Deposit, delay in accumulation of capital conservation buffers, guidance favoring loan restructuring in priority sectors. ### Outlook and risks - Growth projections and output loss - 2020 GDP growth: contraction of "3.1 percent". - 2021 growth projection: "just above 2 percent in 2021" (staff projection). - Medium-term growth projection: recover "to pre-crisis growth of 6½ percent". - Projections imply a permanent loss in output compared to pre-crisis projections. - Inflation and price pressures - Food prices surged in 2020 but receded; energy and gasoline price growth drove inflation in 2020. - Baseline: price pressures to ease in 2022. - Inflation projected "around 3 percent" throughout the medium term with growth below potential. - Fiscal and external outlook - Fiscal deficit projection: "around 5½ percent of GDP in 2021"; subsiding to "around 4 percent in 2022-2023". - Current account: expected to widen in 2021 "to around one quarter of GDP" with gradual narrowing from 2022 as tourism and external demand recover. - FX reserves: estimated to slightly dip in 2021, then accumulate from 2022; reserves expected to remain at "around 9-10 times" projected imports over the medium term. - SDR allocation: Cambodia received "SDR167.7 million (about US$239.07 million)" as part of the general allocation of Special Drawing Rights (equivalent to "US$650 billion") in August 2021; authorities plan to keep allocated SDRs as part of gross international reserves. - Social and financial sector impacts - Households: without new cash transfers, incomes of "17 percent of households" would have fallen below "US$1.9 per day"; with transfers, "12 percent" estimated to earn below "US$1.90 per day". - Firms: increase in bankruptcies; many businesses small and unregistered so official figures likely understate difficulties. - Financial sector: loan growth eased but not collapsed; NPLs remain low but with extensive loan restructuring; banking risks from concentration in real estate persist. - Downside risks (selected) - Pandemic containment uncertainty: faster containment would facilitate tourism resumption; ongoing epidemic risks slower growth. - Financial vulnerability: high exposure to real estate and restructured loans (value of loans restructured in 2020 nearly US$2 billion; over US$2.5 billion in H1 2021); currently 11 percent of outstanding loans have been restructured. - Climate risks: recent droughts and floods highlight vulnerability; projected warming and changes to monsoon patterns could reduce absolute GDP by 9.8% in 2050. - Other risks: rising commodity prices, AML/CFT deficiencies, de-dollarization challenges (92 percent of bank deposits denominated in US dollars), geopolitical tensions, cyber attacks. ### Policy recommendations and priorities - General approach - Continue supportive policies in the near term given high uncertainty; progressively target measures as the economy recovers to free resources for resilience and adaptability. - Fiscal policy - Prioritize healthcare and social assistance. - Cost and regularly evaluate support to firms and workers. - Emphasize revenue mobilization, broadening the tax base, and development of sovereign bonds to increase financing flexibility. - Restore fiscal revenues: cost tax and fee exemptions; implement Revenue Mobilization Strategy; strengthen VAT, customs and excise, and corporate tax administration. - Explore more stable and progressive taxation: property (especially on transfers), capital gains, digital, and carbon taxation. - Establish market access for government financing: government intends to issue local-currency government bonds in 2022 while building market infrastructure for issuance, registration, and trading. - Implement safeguards: use “sunset” clauses and monitoring mechanisms; strengthen procurement and PFM reforms; integrate MTFF into the 2023 budget process. - Macro- and micro-financial policies - Gradually normalize supervisory standards in a carefully calibrated sequence; first step: require full provisioning for loans clearly unviable (e.g., restructured multiple times and not being serviced). - Continue reforms to close supervisory gaps and bolster the financial safety net: establish and operationalize Non-Bank Financial Services Authority; update regulatory framework for prompt corrective action; prioritize legislation for bank resolution and a deposit protection scheme. - Address AML/CFT deficiencies as an urgent challenge to exit FATF enhanced monitoring and restore correspondent banking access. - Structural policies - Improve fundamentals: institutions, education, and technological readiness to boost potential growth and diversify the economy. - Tackle labor informality through registration simplification and information campaigns; recognize informality can persist within formal firms. - Address corruption: increase operational independence and transparency of the Anti-Corruption Unit (ACU); step up investigations using financial intelligence; introduce due diligence for relationships with domestic politically exposed persons. - Invest in climate adaptation: identify and cost adaptation measures; coordinate policies across government; change crop varieties and manage water flows/quality. - Promote de-dollarization prerequisites: macroeconomic stabilization, disinflation, development of domestic financial markets, and ease of use of the domestic currency (Bakong may assist). ### Selected statistics and projections - Growth and inflation - Pre-crisis growth: "around 7 percent". - 2020 GDP growth: contraction of "3.1 percent". - 2021 growth projection: "just above 2 percent in 2021". - Medium-term growth projection: recover "to pre-crisis growth of 6½ percent". - Inflation (end-year): 2020: 2.9; 2021: 3.2; 2022 (Est.): 3.0. - GDP in constant prices (annual percent change): 2017: 7.0; 2018: 7.5; 2019: 7.1; 2020: -3.1; 2021: 2.2; 2022 (Est.): 5.1. - Fiscal and public finance - Fiscal interventions: increased from "2 to 4.9 percent of GDP in 2021". - Fiscal deficit projection: "around 5½ percent of GDP in 2021"; "around 4 percent in 2022-2023". - Net lending (+)/borrowing(-): 2019: 3.0; 2020: -3.5; 2021: -5.6; 2022 (Est.): -4.1. - Revenue (in percent of GDP): 2019: 26.8; 2020: 24.5; 2021: 23.4; 2022 (Est.): 23.6. - Expenditure (in percent of GDP): 2019: 23.8; 2020: 28.0; 2021: 29.0; 2022 (Est.): 27.7. - Government deposits: "around 20 percent of GDP" (end-2019); government deposits were around 24 percent of GDP at end-2020; expected drawdowns (analysis estimates decreases to around 13 percent of GDP by 2026). - External sector and reserves - Gross official reserves (2020): 21,334 (in millions of U.S. dollars). - Current account (2020, including official transfers): -12.1 percent of GDP. - Current account projected to widen "to around one quarter of GDP" in 2021. - FDI inflows: 14.1 percent of GDP in 2020. - Net foreign assets (millions of U.S. dollars): 2019: 60,182; 2020: 67,364; 2021: 64,547; 2022 (Est.): 69,334. - FX reserves coverage: reserves correspond to about 10 months of prospective imports, or nearly 85 percent of estimated 2020 GDP; reserves expected to remain "around 9-10 times" projected imports over the medium term. - Non-monetary gold exports in 2020: 17.3 percent of total 2020 exports, or 12 percent of GDP; staff applied a gold exports statistical adjustment of -6.5 percent of GDP in 2020. - Monetary and financial indicators - Broad money (annual percent change): 2019: 18.2; 2020: 15.3; 2021: 13.3; 2022 (Est.): 17.4. - Private sector credit (annual percent change): 2019: 28.0; 2020: 17.2; 2021: 10.1; 2022 (Est.): 13.6. - Regulatory capital to risk-weighted assets (2020): 22.7 (percent). - Nonperforming loans to total gross loans (2020): 1.8 (percent). - Return on equity (annualized, 2020): 11.7 (percent). - Loan restructuring: value of loans restructured in 2020 nearly US$2 billion (compared with US$30 million in 2019); over US$2.5 billion restructured in first half of 2021; 11 percent of outstanding loans restructured system-wide. - Poverty and social - Per capita GDP (2019, US$): 1,713. - Life expectancy (2019, years): 75.5. - Population (2019, million): 15.6. - Literacy rate (2019, percent): 87.7. - Poverty rate (2012, percent): 17.7. - Gini (2012): 29. - Vaccination rollout: As of October 27, 2021, 13.7 million individuals have been vaccinated, compared to the target of 14 million individuals out of a total population of around 16 million. ### Fiscal governance, debt, and market development - Public domestic debt - Public domestic debt comprised only non-marketable bonds issued by SOEs; outstanding about US$1.6 million as of end-2019 and fully repaid in early 2020. - Authorities plan first local-currency government bond issuance: preliminary framework aims for (i) first securities issuance in 2022; (ii) usage principles for funds; (iii) appointing NBC as fiscal agent. - Analysis assumes more gradual bond issuance than preliminary plan. - PPPs and private external debt - PPP stock estimated around 15 percent of GDP in 2020. - Staff estimates private external debt at about 35 percent of GDP in 2020. - Debt Sustainability Analysis (DSA) key findings - Overall assessment: Cambodia remains at low risk of external and overall debt distress; debt carrying capacity classified as medium. - PPG debt-to-GDP projected to stabilize at just under 40 percent of GDP over the medium term (staff projection). - External public debt (2020): Total 8,810.4 million U.S. dollars; 35.0 percent of GDP. - PV of external debt: Around 24 percent of GDP at end-2020. - Stress tests: standard exports shock could breach PV external debt-to-GDP threshold from 2023 to 2032 by 4 percentage points on average; customized stress scenario (dropping 2020) keeps indicators below thresholds. - Policy implications: maintain fiscal discipline; mobilize revenue; diversify exports; strengthen fiscal governance; close data gaps on external private debt and PPP stock. ### Macrofinancial surveillance and reforms - NBC supervisory and risk-mitigation actions - Instructed banks to suspend dividend payments in 2020 and requested capital increases where buffers appeared low. - Implemented targeted virtual onsite inspections and increased reporting on loan restructurings; requested stress tests on restructured portfolios with results due November 2021. - Guidance to normalize prudential requirements gradually and require full provisioning for unviable loans. - Financial sector reforms and inclusion - Establishment of Non-Bank Financial Service Authority (NBFSA) in January 2021. - Efforts to update capital definitions consistent with Basel III; regulations on capital buffers and LCR in place with emergency adjustments during COVID-19. - Bakong payment system: blockchain-based real-time gross settlement, e-wallets, mobile payments, online banking in single interface—expected to promote cashless payments and rural access to financial services. - AML/CFT - Cambodia remains on FATF’s list of jurisdictions under enhanced monitoring; all FATF deadlines have passed; FATF strongly urges swift action. - Progress made on AML/CFT supervision at banks; authorities should strengthen efforts to pursue high-risk offenses and associated proceeds. ### Structural challenges, data, and climate change - Long-standing structural challenges - Lack of diversification and low value added in exports; high labor informality; perceptions of governance weaknesses and corruption; climate change vulnerabilities. - Data and statistical improvements - Public dissemination of economic statistics advancing under e-GDDS. - Data quality improvements supported by Fund TA; gaps remain (outdated national accounts base year, external debt coverage excluding resident non-financial corporations). - National Institute of Statistics working on GDP rebasing; prototype residential property price index expected in early 2022. - Climate change risks and policy - Climate hazards: 20 floods, 5 droughts, 6 tropical storms and 1 famine between 1993 and 2020; estimated damage at least US$1.5 billion. - Under RCP8.5, warming of 3.1ºC by the 2090s vs 1986-2005 baseline. - Population exposed to extreme river flood could grow by around 4 million by the 2040s. - Projected climate change could reduce absolute GDP by 9.8% in 2050 without action. - Policy steps: CCCSP 2014-2023, updated NDC (Dec 2020) targets and funding needs (mitigation over US$5.8 bil; adaptation US$2 bil), Post-COVID Economic Recovery Plan 2021-23 to include green recovery, National Adaptation Plan and Green recovery Action Plan (2021-2023). - NBC actions: ESG investment guideline; NBC invested in green bond; regulatory encouragement for BFIs to adopt ESG practices. *Source: Cambodia — IMF staff report (discussions took place from September 13 to 27, 2021); content as provided in the supplied PDF.* ### 2.2 percent, slowly recovering to pre-crisis rates of around 6½ percent. ### 1khmea2021002 - 2.2 percent, slowly recovering to pre-crisis rates of around 6½ percent. ### Key findings and developments - Pre-COVID growth had been "around 7 percent" for many years, concentrated in garments, footwear, and tourism. - By end-2019, government deposits were "around 20 percent of GDP" and FX reserves "around 70 percent of GDP". - The pre-COVID economy showed vulnerabilities: concentration in few industries, rapid credit growth (especially construction and real estate), increased household debt, bank balance sheets concentrated in real estate, and persistent current account deficits. - COVID-19 impact: - 2020: collapse in external demand and tourism; manufacturing recovered later in 2020 but economy lacked diversity. - 2021: community spread from February led to tightest movement restrictions; cases surged to "over 118,000"; major metropolitan and factory areas were targeted by lockdowns, interrupting production. - Other shocks: EU withdrawal of preferential trade access on some exports in August 2020; floods damaged farmland in late 2020 with smaller-than-expected agricultural production loss. - Government and central bank responses included scaling up healthcare, loans and guarantees to small businesses, tax breaks, wage subsidies, cash transfers to vulnerable households, and NBC liquidity measures and loan restructuring guidance. ### Outlook and risks - Growth projections: - Growth contracted by "3.1 percent" in 2020. - Staff projects growth of "just above 2 percent in 2021", increasing to pre-crisis growth of "6½ percent" over the medium term. - Projections imply a permanent loss in output compared to pre-crisis projections. - Inflation: - Food prices surged in 2020 but receded; energy and gasoline price growth drove inflation in 2020. - Baseline projects price pressures to ease in 2022. - With growth below potential, overall inflation is projected to continue "around 3 percent" throughout the medium term. - Fiscal and external outlook: - Authorities increased interventions from "2 to 4.9 percent of GDP in 2021". - Staff projects the fiscal deficit to widen to "around 5½ percent of GDP in 2021", and to subside to "around 4 percent in 2022-2023". - External: current account deficit expected to widen in 2021 "to around one quarter of GDP", with gradual narrowing from 2022 as tourism and external demand recover. - FX reserves estimated to slightly dip in 2021, then accumulate from 2022; reserves expected to remain at "around 9-10 times" projected imports over the medium term. - Cambodia received "SDR167.7 million (about US$239.07 million)" as part of the general allocation of Special Drawing Rights (equivalent to "US$650 billion") in August 2021; authorities plan to keep allocated SDRs as part of gross international reserves. - Financial sector and social impacts: - Households: without new cash transfers, incomes of "17 percent of households" would have fallen below "US$1.9 per day"; with transfers, "12 percent" estimated to earn below "US$1.90 per day". - Firms: increase in bankruptcies; many businesses small and unregistered so official figures likely understate difficulties. - Financial sector: loan growth eased but not collapsed; NPLs remain low but with extensive loan restructuring; banking risks from concentration in real estate persist. ### Policy recommendations - General approach: - Continue supportive policies in the near term given high uncertainty, and progressively target measures as the economy recovers to free resources for resilience and adaptability. - Fiscal policy: - Continue to prioritize healthcare and social assistance. - Support to firms and workers should be costed and regularly evaluated. - Emphasize revenue mobilization, broadening the tax base, and development of sovereign bonds to increase financing flexibility. - Macro- and micro-financial policies: - Gradually normalize supervisory standards with a carefully calibrated sequence of steps to return to standard prudential requirements. - Continue reforms to close supervisory gaps and bolster the financial safety net. - Address deficiencies in the AML/CFT regime as an urgent challenge. - Structural policies: - Improve fundamentals such as institutions, education, and technological readiness to boost potential growth and diversity. - Particular focus on tackling labor informality, addressing corruption concerns, and adapting to climate change. ### Selected statistics and projections - Pre-crisis growth: "around 7 percent". - 2020 GDP growth: contraction of "3.1 percent". - 2021 growth projection: "just above 2 percent in 2021". - Medium-term growth projection: recover "to pre-crisis growth of 6½ percent". - Fiscal interventions: increased from "2 to 4.9 percent of GDP in 2021". - Fiscal deficit projection: "around 5½ percent of GDP in 2021"; "around 4 percent in 2022-2023". - Poverty/income impact: "17 percent" of households without transfers would fall below "US$1.9 per day"; "12 percent" with transfers estimated below "US$1.90 per day". - SDR allocation received: "SDR167.7 million (about US$239.07 million)"; global allocation "US$650 billion". - Government deposits: "around 20 percent of GDP" (end-2019). - FX reserves: "around 70 percent of GDP" (end-2019); expected coverage "around 9-10 times" projected imports over the medium term. - Inflation: projected "around 3 percent" through the medium term. - Current account: projected to widen "to around one quarter of GDP" in 2021. *Source: Cambodia — IMF staff report (discussions took place from September 13 to 27, 2021); content as provided in the supplied PDF.* ### 14. Future growth depends heavily on the course of the pandemic; risks appear to remain ### 14. Future growth depends heavily on the course of the pandemic; risks appear to remain ### Outlook and downside risks - Faster containment of the virus in Cambodia and other countries would facilitate resumption of tourism; however, the epidemic still rages at the time of writing, despite lockdowns and progress with vaccinations, carrying the risk of slower-than-projected growth. - Banks’ loan portfolios were already concentrated in real estate; as the crisis has run, loans to tourism, transport, and trade sectors have come under stress, raising the risk of potentially inadequate provisioning and weak capital buffers. - Recent droughts and floods have demonstrated the vulnerability to climate change. - The government’s goal of vaccinating the entire adult population by year’s end is expected to be met, but restrictions on movement and gathering are assumed to remain into 2022, including quarantine and other requirements on foreign visitors. ### Authorities’ views on the outlook - Authorities shared staff's assessment and had only marginal differences in growth projections: slightly higher growth expected in 2021 and slightly lower growth for 2022. - Manufacturing and agriculture expected to boost growth; services would remain sluggish. - Real estate and construction expected to rebound over the medium term. - Authorities expected rapid vaccination to limit risks of further domestic outbreaks and were confident external demand for manufactured goods (such as garments and electronic components) would be a strong boost to growth in the coming years. ### Fiscal policies — response, composition, and medium-term framing - Government reallocated spending to prioritize health care and social assistance; in 2021, compared to budget plans: - purchase of goods and services are estimated to have risen by 1.3 percent of GDP; - subsidies, grants and social benefits are expected to rise by 2.4 percent of GDP. - Capital spending is expected to fall below previous budget plans (while still remaining significant, in terms of share of GDP). - To help finance the deficit: - government deposits are expected to be drawn down by approximately US$1 billion in 2021, and by one half (as a share of GDP) by 2026; - the remainder of financing needs will be largely met with a gradual increase in external public debt, after jumping in 2020. - Staff projection: PPG debt to stabilize at just under 40 percent of GDP over the medium term, consistent with the authorities’ own debt limit. - Policy recommendations and priorities: - Maintain support for households and businesses while avoiding imbalances; healthcare and social assistance remain priorities. - Further target support measures, restore revenues, increase financing options, and support SDG goals (investment in human capital, infrastructure, and climate adaptation). - Replace emergency cash transfers with a broader social protection system allowing finer targeting to vulnerable groups. - Target business support to viable sectors as pandemic clarity improves; assess viability and long-term growth potential when evaluating support. - Restore fiscal revenues: cost tax and fee exemptions; implement Revenue Mobilization Strategy; strengthen VAT, customs and excise, and corporate tax administration. - Explore more stable and progressive taxation (options include property—especially on transfers—capital gains, digital, and carbon taxation). - Establish market access for government financing: government intends to issue local-currency government bonds in 2022 while building market infrastructure for issuance, registration, and trading. - Implement safeguards: monitor health care, job subsidies, social assistance, and below-the-line support (SME Bank and Credit Guarantee Corporation); use “sunset” clauses and monitoring mechanisms; strengthen procurement and PFM reforms. - Develop and integrate a Medium-Term Fiscal Framework (MTFF) into the 2023 budget process; consider a simple, transparent fiscal rule and relate fiscal strategy to a fiscal anchor (Public Debt Management Strategy 2019-2023 describes a fiscal anchor of a limit on public external debt to 40 percent of GDP). ### Fiscal governance and contingent liabilities - Authorities are responding to 2021 PEFA-identified deficiencies with amendments to procurement law and PFM reforms (FMIS roll out; public procurement system reform 2019-25; sub-national budget system reform 2019-25; public investment management system reform). - PEFA report raises concerns about capacity to quantify risks from government guarantees and other contingent liabilities. - Government working with private financial institutions for SME Bank and Credit Guarantee Corporation to utilize capacity to assess applicants’ credit risk. - Authorities have begun a Tax System Reform Study to look at broadening the revenue base; Economic Recovery Plan recognizes boosting the health system and investing in skills and infrastructure (physical, “green”, and digital) while maintaining value for money. ### Macrofinancial and monetary policies — measures, risks, and normalization - NBC measures to soften pandemic impact: - lowered required reserve ratios and cut interest rates (on Liquidity Providing Collateralized Operations and on Negotiable Certificates of Deposit, the collateral for LPCOs); - mandated a delay in the accumulation of capital conservation buffers; - favored loan restructuring in priority sectors by foregoing provisioning requirements for restructured loans, allowing up to three restructurings before classification as a loss. - Loan restructuring data and implications: - value of loans restructured in 2020 was nearly US$2 billion, compared with only US$30 million in 2019, and was over US$2.5 billion for the first half of 2021; - currently 11 percent of outstanding loans have been restructured across the banking system. - System-wide indicators notionally remain robust, but low NPL ratios benefit from forbearance that allowed maintenance of credit risk classifications after restructuring. - NBC risk mitigation and supervisory actions: - instructed banks to suspend dividend payments in 2020 and proactively requested capital increases where buffers appeared low; - implemented targeted virtual onsite inspections and increased reporting on loan restructurings; - requested banks to run stress tests on the restructured portfolio in 2021 to assess provisioning shortfall relative to pre-covid regulatory environment and capital buffers; new stress test results due in November 2021. - Policy guidance: - Gradually normalize prudential requirements based on stress test results and extra reporting; first step: require full provisioning for loans clearly unviable (e.g., restructured multiple times and not being serviced). - Continue reforms to close supervisory gaps and bolster the financial safety net: establish and operationalize Non-Bank Financial Services Authority; update regulatory framework for prompt corrective action; prioritize legislation for bank resolution and a deposit protection scheme. - Financial inclusion and payments innovation: - Bakong payment system (operated by the NBC) uses blockchain technology, provides real-time gross settlement, e-wallets, mobile payments, online banking, and financial applications in a single interface; - expected to promote cashless payment, reduce risks of transmission, and enable rural population access to financial services. - Exchange rate flexibility and de-dollarization: - Increasing exchange rate flexibility would boost monetary policy capability but is contingent on reducing dollarization; - 92 percent of bank deposits are denominated in US dollars; - prerequisites for de-dollarization include macroeconomic stabilization and disinflation; further steps include development of a domestic financial market and increased ease of use of the domestic currency (Bakong may assist). - AML/CFT: - Cambodia remains on FATF’s list of jurisdictions under enhanced monitoring due to strategic AML/CFT deficiencies; - all FATF deadlines for implementation of the action plan have passed; FATF strongly urges Cambodia to address deficiencies swiftly; - exiting the grey list would allow Cambodia banks to access international credit lines and open correspondent banking accounts; - progress has been made on AML/CFT supervision at banks; authorities should strengthen efforts to pursue high-risk offenses and associated proceeds in line with Cambodia’s ML/TF risk profile. ### Authorities’ views on macrofinancial policy - Authorities agreed with staff recommendations: financial system exposed to covid-related distress but remained profitable and well capitalized. - Agreed that build-up of restructured loans required heightened vigilance; depending on stress test results, requiring full loss recognition of unviable loans would be an important first step toward calibrated normalization of prudential requirements. - Legislation for a bank resolution framework was being prepared; draft law for deposit protection scheme finalized by NBC. - Cambodia Financial Intelligence Unit making progress on FATF recommendations and actively pursuing cases. - Authorities view a stable currency as needed for some time to reassure users and de-dollarize the economy, limiting potential to increase exchange rate flexibility. *Source: 1khmea2021002 - 14. Future growth depends heavily on the course of the pandemic; risks appear to remain* ### 30. The quality of the recovery is affected by ### 1khmea2021002 - 30. The quality of the recovery is affected by ### Long-standing structural challenges - Several factors hold back growth potential and make the economy vulnerable to shocks, including: - the lack of diversification and the low value added in exports, - high labor informality, - perceptions of governance weaknesses and corruption, - emerging vulnerabilities from climate change. - Financial Action Task Force (FATF) notes the authorities should: 1. enhance disseminations of financial intelligence to law enforcement authorities in connection with high-risk crimes; 2. demonstrate an increase in ML investigations and prosecutions in line with risk; 3. demonstrate an increase in the freezing and confiscation of criminal proceeds, instrumentalities, and property of equivalent value; 4. provide training to strengthen the skills of competent authorities to implement targeted financial sanctions related to proliferation financing, and enhance the understanding of sanctions evasion. ### Addressing lack of diversification and low value added (paragraph 31) - Trade and investment liberalization helped Cambodia move from dependence on agriculture toward light manufacturing, but this has been limited mainly to relatively low-skill value-added activities. - Diversifying and raising value added requires continued progress on “horizontal” policies to boost fundamentals such as institutions, education, and technological readiness. ### Addressing labor informality (paragraph 32) - Cambodia has one of the highest rates of informality in the region. - Consequences of informality: - Informal firms are usually much less productive than formal firms. - Informality reduces the tax base. - Informal workers are not covered by social protection measures such as pension systems and health insurance. - Policy response and options: - Authorities pursued tax breaks to encourage firms to formally register. - Measures could be bolstered with information campaigns and simplification of registration. - Note: Workers can be employed informally within formal firms, suggesting tax breaks to firms might not be sufficient by themselves to reduce informality. ### Addressing corruption (paragraph 33) - Extensive corruption undermines diversification and moving up value chains by: - increasing “informal customs charges” and other costs, - reducing the net benefits workers and firms see from paying taxes as part of the formal economy. - Recommendations to strengthen anti-corruption efforts: - Increase operational independence and transparency of the Anti-Corruption Unit (ACU). - Step up investigations through better use of financial intelligence. - Legal reforms to introduce due diligence measures for business relationships with domestic politically exposed persons to help detect cases of corruption. ### Addressing climate change vulnerabilities (paragraph 34) - Projections and risks: - Cambodia is projected to experience warming and potentially changes to monsoon patterns, river flows, and water quality (Annex VII: Cambodia and Climate Change). - Priority actions: - Identify and cost adaptation measures. - Extend initial steps on changing crop varieties to include adaptation measures to manage water flows and quality. - Coordinate policies across many branches of government because climate change affects agriculture, fishing, transportation, industry, and tourism. ### Data quality and transparency (paragraph 35) - Public dissemination of economic statistics is gaining momentum, including under the e-GDDS initiative. - Data quality improvements are advancing in several areas, supported by Fund TA. - Further strengthening of statistics—such as on trade—is an important public good to improve the investment climate and policy targeting. - External debt statistics do not cover borrowing by resident non-financial corporations (see Statistical Issues, Informational Annex). ### Authorities’ views (paragraph 36) - Authorities agreed on the importance of reforms to boost growth potential and build a more resilient economy, as emphasized in the Economic Recovery Plan focused on the “three Rs” of recovery, reform, and resilience. - Policy measures and institutions cited: - SME bank and Credit Guarantee Corporation intended to foster diverse small businesses. - ACU focused on raising awareness and investigating corruption cases; draft legislation on whistleblower protection submitted to the Ministry of Justice. - Government implemented a national climate strategy and ratified the 2015 Paris Accord; authorities emphasized the importance of a green recovery. ### Staff appraisal (paragraphs 37–40) - Immediate crisis response: - Authorities responded quickly with measures to contain the virus and support livelihoods. - Government redirected resources to healthcare while rationalizing other current spending. - Implemented cash transfers to vulnerable households. - Provided loans and guarantees, tax breaks, wage subsidies, and retraining support to affected businesses. - NBC introduced measures to improve banking system liquidity and issued guidance to facilitate loan restructuring. - Outlook and policy guidance: - The outlook remains highly uncertain; community spread in 2021 set back recovery. - Reopening would aid recovery in tourism and related sectors, but pandemic uncertainty raises risk of further stresses on households, firms, and financial institutions. - Near-term policy should remain supportive and become more finely targeted as recovery proceeds: - Prioritize healthcare and social assistance. - Recalibrate tax and fee exemptions and credit support to ensure value for money. - Gradually normalize supervisory standards to ensure financial sector health. - Longer-term priorities: - Broaden the tax base and develop a sovereign bond market to allow more countercyclical fiscal policy. - Reform the financial safety net to reduce contagion risks among financial institutions. - Address structural concerns: diversification and value added, informality, governance and corruption. - Increase public spending on infrastructure and education as recovery allows. - Invest in climate change adaptation measures to mitigate vulnerabilities in agriculture, tourism, and manufacturing. - Progress on de-dollarization would facilitate greater exchange rate flexibility and add a policy option to cope with shocks. - Procedural note: - It is proposed that the next Article IV consultation with Cambodia be held on the standard 12-month cycle. ### Box 1. Covid-19 Spread and Mitigation (key points) - Timeline and restrictions: - First confirmed COVID-19 case reported in January 2020. - Government imposed restrictions on movement and gathering; entry requirements and quarantine for foreigners; self-isolation for returning citizens. - Domestic travel restrictions, school closures, and bans on public gathering and various venues (restaurants, casinos, clubs) were employed. - Recorded infections were only 484 before community outbreak in Phnom Penh in February 2021 but have since surged to 118,000 as of October 27. - Government response in 2021 included market, school, venue, and some factory closures, a mask mandate, and stay-in-place orders for specific high-incidence districts. - High schools were allowed to reopen from September 15, 2021. - Vaccination efforts: - Government targeted vaccination of those aged 16-64—around 10 million adults, or nearly 70 percent of the total population. - In August 2021, vaccinations extended to individuals aged 12 to 18. - In September, vaccinations extended to individuals aged 6 to (text ends). *CAMBODIA — INTERNATIONAL MONETARY FUND* ### 12. As of October 27, 2021, 13.7 million individuals have been vaccinated, compared to the target of 14 ### 1khmea2021002 - 12. As of October 27, 2021, 13.7 million individuals have been vaccinated, compared to the target of 14 ### Vaccination rollout and funding - As of October 27, 2021, 13.7 million individuals have been vaccinated, compared to the target of 14 million individuals out of a total population of around 16 million. - Vaccine sources: - COVAX - Donations from China, Australia, India, the US, the UK and Japan. - Program funding: - Budget reallocation - A concessional loan from the ADB - Private domestic donations ### COVID-19 monitoring and mobility (graph sources) - Mobility and activity indicators in figures use: - Google COVID-19 Community Mobility Reports - Our World in Data (COVID-19 Cases and Deaths) - Oxford COVID-19 Government Response Tracker (OxCGRT) ### Pre-COVID economic structure (2019) - Main sectors: light manufacturing, hospitality, construction and real estate, and agriculture. - Real GDP Shares, 2019 (Percent): - Construction: 11.0 - Real Estate: 7.0 - Garments and footwear: 18.1 - Tourism, hotels, restaurants: 13.2 - Agriculture: 16.9 - Other manufacturing: 5.2 - Other: 28.6 ### Macroeconomic impact of the crisis (key trends shown) - Major disruptions: - Collapse in tourism and contraction in garment exports. - Downturn in construction. - Investment approvals picked up at end-2020 but were flat in 2021. - Business creation plummeted. - Sectoral contributions to GDP growth (2019–2020 shown in figures): Agriculture, Garments, Construction & real estate, Tourism, other—aggregate impacts illustrated in Figure 2. ### External balances and reserves (key figures) - Gross official reserves (Table 1): 2020: 21,334 (in millions of U.S. dollars) - Current account (Table 1, in percent of GDP): 2020 (including official transfers): -12.1 percent - FDI and remittances: - FDI inflows by sector and source shown; FDI inflows remained broadly stable in 2020. - Remittances fell as workers abroad lost jobs (figure provided). ### Public finances and fiscal outlook (selected indicators) - Public finance pressures: - Higher-than-anticipated spending on public health measures and social support has led to spending increases alongside falling revenues. - External debt increased (figures and projections shown). - Key fiscal indicators (Table 1 and Table 4): - Net lending (+)/borrowing(-): 2019: 3.0; 2020: -3.5; 2021: -5.6; 2022 (Est.): -4.1 - Revenue (in percent of GDP): 2019: 26.8; 2020: 24.5; 2021: 23.4; 2022 (Est.): 23.6 - Expenditure (in percent of GDP): 2019: 23.8; 2020: 28.0; 2021: 29.0; 2022 (Est.): 27.7 - Public health and social intervention spending (2020 disb., 2021 plan/proj. shown in figure): - Components include Healthcare spending, Wage subsidy and skill training, Cash for work, Cash transfer. ### Key macro and social statistics (from Table 1) - Per capita GDP (2019, US$): 1,713 - Life expectancy (2019, years): 75.5 - Population (2019, million): 15.6 - Literacy rate (2019, percent): 87.7 - Poverty rate (2012, percent): 17.7 - Gini (2012): 29 - GDP in constant prices (annual percent change): - 2017: 7.0 - 2018: 7.5 - 2019: 7.1 - 2020: -3.1 - 2021: 2.2 - 2022 (Est.): 5.1 - Inflation (end-year): - 2020: 2.9 - 2021: 3.2 - 2022 (Est.): 3.0 ### Monetary and financial sector highlights - Broad money (annual percent change): - 2019: 18.2 - 2020: 15.3 - 2021: 13.3 - 2022 (Est.): 17.4 - Private sector credit (annual percent change): - 2019: 28.0 - 2020: 17.2 - 2021: 10.1 - 2022 (Est.): 13.6 - Net foreign assets (in millions of U.S. dollars, Table 5): - 2019: 60,182 - 2020: 67,364 - 2021: 64,547 - 2022 (Est.): 69,334 - Financial soundness indicators (selected, Table 6): - Regulatory capital to risk-weighted assets (2020): 22.7 (percent) - Nonperforming loans to total gross loans (2020): 1.8 (percent) - Return on equity (annualized, 2020): 11.7 (percent) *International Monetary Fund — Cambodia staff report excerpt (figures, tables and sources as presented in the PDF).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall assessment - Tourism and garments receipts plunged in 2020 and remittance income slowed. - Import compression, increased exports in other manufacturing products, and a temporary surge in exports of non-monetary gold left current account balances close to levels observed in 2018 and higher than in 2019. - When corrected for temporary factors (especially for tourism and the exceptional gold exports), staff assesses that the external position of Cambodia in 2020 remains substantially weaker than the level implied by medium-term fundamentals and desirable policies (same classification as in the 2019 Article IV Staff Report). ### Capital and financial account - The financial account was in large surplus in 2020: 15.2 percent of GDP, owing largely to FDI inflows, particularly from China. - Short-term flows deteriorated to –[3.3] percent of GDP. - Medium-term loans remained stable at [2.4] percent of GDP. - Net foreign asset (NFA) position, mainly composed of FDI liabilities, slightly decreased to -85 percent of GDP by end-2020, from -77 percent of GDP in 2019. - Cambodia’s NFA position is projected to trend downward over the medium term, in line with continued FDI inflows partly offset by reserves accumulation. - FDI inflows stood at 14.1 percent of GDP in 2020, increased slightly over 2019 levels; investments concentrated in long-term projects related to real estate, finance, and construction. - Overall balance in 2020 remained positive at 2.5 percent of GDP despite pandemic shocks. - Capital inflows expected to remain broadly stable over the medium term; downside risks include volatility in the real estate sector. ### Current account, trade, and key components - Current account deficit: 12.1 percent of GDP at end-2020 (improvement from 15 percent of GDP deficit in 2019). - Trade balance improved to -14.2 percent of GDP in 2020, up from -26.8 percent in 2019. - Non-monetary gold exports surged, accounting for 17.3 percent of total 2020 exports, or 12 percent of GDP. Staff discounts part of the gold surge as temporary (see Adjustors). - Services balance entered negative territory at -0.5 percent of GDP, driven by sharp downturns in tourism receipts. - Remittances and other private transfers declined from 5.2 to 4.8 percent of GDP. - Net official transfers: 1.8 percent of GDP (down from 2 percent in 2019). - Other manufactured exports (bicycles, rubber, electronic components) partially compensated garment losses. ### Adjustors, CA norm and gap (2020) - Actual current account balance: -12.1 percent of GDP. - Adjustors applied to account for temporary factors and risks: - COVID-19 tourism impact adjustor: 4.2 percent of GDP (automatic calculation of the EBA-lite model based on ratio of net tourism balance to GDP in 2019 (14.4 percent) and a coefficient for scarring). - Gold exports statistical adjustment: -6.5 percent of GDP (55 percent of total gold exports in 2020). Note: Cambodia is not a gold producer; surge assumed temporary and due to private dissaving given rising gold prices. Imports of non-monetary gold not recorded in historical BOP statistics; external position would be even weaker if those imports were accounted for. - Natural disasters and conflicts adjustment: -1.3 percent of GDP. - Sum of adjustors with actual current account → adjusted current account balance: -13.1 percent of GDP for 2020. - Current account norm (balance consistent with long-term fundamentals): -7 percent of GDP. - Current account gap (adjusted CA minus norm): -6.1 percent of GDP in 2020, suggesting REER overvaluation of 10.5 percent. - Elasticity parameter used: 0.58 (REER gap calculated by dividing CA gap by elasticity). - REER Gap reported: 10.5 percent (CA Gap-6.1 leads to REER Gap 10.5 via elasticity 0.58). ### Exchange rate and reserves - National Bank of Cambodia (NBC) intervenes to maintain exchange rate stability with the US dollar. - Since March 2019 agreement reclassified to “crawl-like”; official exchange rate followed a depreciating trend within a 2 percent band against the US dollar, with a realignment in October 2019. - During the pandemic, NBC maintained exchange rate within a 2 percent band; de facto arrangement classified as “stabilized” effective June 2020. - Parallel market rates close to official rates; parallel and official rates moved in synchrony up to February 2021. Later trends show slight pressure towards depreciation, possibly linked to rising infection rates and restrictions. - Gross international reserves increased by US$2.6 billion in 2020, driven by improving current account balance, continued FDI inflows, and valuation effects from non-US$ denominated assets. - Reserves correspond to about 10 months of prospective imports, or nearly 85 percent of estimated 2020 GDP. - Cambodia received approximately US$239 million from the IMF in August 2021 as part of the US$650 billion SDR allocation (equivalent to around 1 percent of Cambodia’s gross international reserves). - Gross reserves include FX currency/deposit, high liquid assets denominated in FX currency, SDR, and gold. ### Risk Assessment — key risks, likelihood, impact, and policy responses - Uncontrolled Covid-19 local outbreaks and global resurgence of the pandemic - Likelihood: Medium. - Impact: Significant threat to recovery across sectors; lower growth abroad could affect exports and remittances and delay return to international travel, affecting GDP and current account balances. FDI largest component of capital account and remained stable; depreciation pressures seem contained. - Policies: Continue vaccination procurement and distribution as planned; ensure resources for monitoring virus transmission and healthcare; potentially enhance fiscal response to protect vulnerable households and firms. - Disorderly transformations (permanent changes in international travel patterns; labor reallocation difficulties; private debt vulnerabilities) - Likelihood: Medium. - Impact: Damage to tourism industry; labor may revert to low-productivity agriculture; risk of debt distress if loan forbearance cut abruptly. - Policies: Maintain support for vulnerable households (e.g., cash transfers); phase exit from loan forbearance gradually; scale up investments in basic and tertiary education and retraining, subject to budget efficiency. - De-anchoring of inflation expectations in the U.S. leading to rising core yields and risk premia - Likelihood: Low. - Impact: Limited given government borrowing patterns and bank funding; microfinance may be vulnerable to foreign funding; funding of property developers not well understood and could pose risk. - Policies: Enhance supervision of microfinance institutions; Non-Bank Financial Services Authority establishment is positive for supervising property developers. - Widespread social discontent and political instability - Likelihood: Low. - Impact: Government has strong control; fiscal measures enacted to protect vulnerable populations during the pandemic. - Policies: Continue fiscal support to vulnerable segments and workers affected by lockdowns/restrictions. - Rising commodity prices and volatility - Likelihood: Medium. - Impact: Cambodia is a net oil importer; higher oil/energy prices and raw material import dependence could reduce purchasing power and increase poverty. - Policies: Short-run options limited; monetary policy focuses on currency stability; inflation distributional effects could be managed by fiscal interventions. - Financial system vulnerability (real estate and construction sector exposures, loan forbearance effects) - Likelihood: High. - Impact: Developers and credit outside NBC supervision create vulnerability; 2020 forbearance may have left weak balance sheets. - Policies: Non-Bank Financial Services Authority establishment is important; timely collection and disclosure of loan performance data crucial; exit from loan forbearance should be timed carefully. - Intensified geopolitical tensions and security risks - Likelihood: Low. - Impact: Could disrupt trade, exports, and FDI. - Policies: Promote export market diversification, leveraging growing regional markets. - Cyber attacks - Likelihood: Medium. - Impact: Vulnerability of government and private information systems. - Policies: Enhance security guidelines for government and private sector information systems. - Higher frequency and severity of natural disasters related to climate change - Likelihood: High. - Impact: Severe threat to agricultural production, urban flooding, industrial production and housing; forced migration with social and fiscal challenges. - Policies: National Adaptation Plan (NAP) and Green recovery Action Plan (2021-2023) enacted; focus on adaptation via climate-resilient infrastructure, reforestation, securing agricultural production/food security; budget for support to households and firms affected by extreme weather. *Source: Annex I. External Sector Assessment (2020 assessment) as provided in the source content.* ### Annex III. Implementation of Past Advice ### Annex III. Implementation of Past Advice ### Safeguarding Fiscal Sustainability and Promoting Inclusion - Authorities have modernized revenue administration and sustained revenues to meet spending needs for infrastructure, health, and education in the context of Cambodian SDGs (CSDGs), but further tax reforms are warranted to improve efficiency and equity. - Gradual improvements in fiscal governance continue mainly through public financial management (PFM) reforms in line with Fund advice. ### Fiscal Policies to Support SDGs - Integrated National Financing Framework (INFF): Work started to develop a best-practice financing framework integrating public, private, and blended financing for CSDGs, with support from UN agencies in Cambodia. ### Improving Public Financial Management - Sub-National Budget System Reform 2019–2025: Strategy adopted to align sub-national budget system with Budget System Reform Strategy 2018–2025; 2019 PIMA assessment will inform implementation. - Managing fiscal risks from PPPs: Law on Public-Private Partnerships being drafted, undergoing public consultations, expected to be adopted in 2021. - Public Procurement System Reform Strategy 2019–2025: Adopted in 2019 to prepare annual procurement plans, increase transparency/accountability/competitiveness through e-procurement and align with FMIS. - Medium-Term Fiscal Framework (MTFF): Developed but not yet finalized; MTFF will be fully integrated into the 2023 budget process by setting expenditure ceilings for key sectors. - Public Debt Management Strategy (PDMS) 2019–2023: Adopted in 2019 to align debt management with MTFF priorities, including assessing/managing PPP risks. - Public Investment Management System Reform Strategy (PIMSRS) 2019-2025: Adopted in 2019 to establish a public investment management system covering all financing sources and administration levels. ### Mobilizing Tax Revenues - Revenue Mobilization Strategy (RMS): Implementation of 2014–18 RMS resulted in significant revenue gains, mostly through improved tax administration (an additional 3 percent of GDP revenue gain in three years). - 2019–2023 RMS launched in 2019 to continue modernization/automation, review tax incentives, and establish Key Performance Indicators (KPIs). - Tax System Reform Study began in July 2021; the first draft of the study is expected to be completed by Q1 2023. The study methodology includes: i) literature review on best practices and peer experience, ii) comprehensive assessment of existing tax system, iii) in-depth analysis of tax policies by key tax types and tax administration, iv) review of related tax laws and regulations, and v) preparation of reform strategy or roadmap of tax system reform. ### Addressing Macrofinancial Risks - Establishment of the Non-Bank Financial Service Authority (NBFSA) in January 2021 via the Law on Organization and Functioning of Non-Bank Financial Service Authority; it will regulate and supervise insurance, securities, social security, accounting and audit, real estate institutions and trusts, and pawnshops. - Authorities promote local currency use and financial market development; efforts to adopt full risk-based supervision continue. - Crisis management framework: Focus on preparing a comprehensive framework consistent with Fund advice. Key regulatory and supervisory measures: - Capital buffers: Regulation on capital buffers issued by the NBC in February 2018; in March 2018 the countercyclical capital buffer (CCyB) was set to 0 percent. Full implementation of capital conservation buffer delayed until further notice as an emergency response to improve BFI liquidity. - Liquidity Coverage Ratio (LCR): Regulation issued in December 2015 requires banks and MFIs to maintain minimum liquidity at 100 percent of projected 30-day net cash outflows by January 1, 2020; during COVID-19 authorities reduced required LCR according to each institution’s conditions. - NBC supervisory reforms in August 2020: New regulation on the structure and function of the Banking Supervision General Department; adoption of liquidity ratio and capital ratio stress testing. - Updating capital definition: With IMF technical assistance, NBC is updating regulation to define BFIs’ capital in accordance with Basel III core principles and international best practice. - Deposit protection and resolution: In December 2020 NBC issued a regulation establishing a DPS and SRR Unit to prepare regulatory framework and tasks related to DPS and SRR implementation. NBC is preparing draft laws on SRR and DPS following IMF technical assistance; these complement existing prompt corrective action (PCA) and emergency liquidity assistance (ELA) mechanisms. - AML/CFT: New law on anti-money laundering and combating the financing of terrorism took immediate effect on June 27, 2020; it replaces the 2007 law and 2013 amendment while regulations under previous laws continue in force. - Local currency liquidity operations: NBC implemented Liquidity Providing Collateralized Operations (LPCOs) with a total injection of 5.9 trillion KHR (around US$1.45 billion) in 2020, or 24.5 percent year on year growth. ### Supporting Progress Towards SDGs, Competitiveness, and Diversification - Competitiveness: Authorities lowered transportation costs and improved trade facilitation (including dissolving KAMSAB and CAMCONTROL). Two draft laws (law on investment and law on special economic zones) expected to be completed and promulgated in 2021. - Diversification: Strategies to diversify exports include National Cassava Policy in 2020 and drafting a five-year development strategy for garment, footwear, and travel goods. - Promoting inclusive growth: Measures include establishing an SME bank, providing tax incentives to SMEs in priority sectors, and establishing a Skill Development Fund and an Entrepreneurship Promotion Fund. - Governance and regulatory reforms: Anti-Corruption Unit (ACU) has not completed a draft law on protection of whistleblowers and witnesses; land registration accelerated with about 80 percent of unofficial deeds registered and the government’s plan to legalize all registered deeds by 2021; work on commercial court legislation is ongoing; Cambodia Data Exchange platform (CamDX) and online business registration platform launched in 2020. ### Addressing Data Gaps and Improving Data Quality - e-GDDS participation and NSDP: Continued development of enhanced General Data Dissemination System (e-GDDS); National Summary Data Page (NSDP) hosted on the Central Bank website aims to provide access to national economic statistics. - Residential property price index: Initiated in 2019; work continues to compile the index to fill a macroeconomic data gap and provide a tool for macroprudential policy. - External sector statistics: IMF technical assistance to improve FDI data quality and investigate international merchandise trade data mismatches. - Monetary and financial statistics (MFS): TA to enhance coverage of non-bank financial corporations, including incorporating insurance sector balance sheet data. - GDP rebasing: National Institute of Statistics working on rebasing GDP to adopt 2014 as base year, but work not yet finalized. - Government finance statistics (GFS): TA provided to MEF to review data gaps and support reconciliation of general government data across GFS, MFS, and balance of payments and IIP statistics. - National strategy for development of statistics (NSDS) 2019-2023: National Institute of Statistics to conduct sectoral assessments and develop NSDS following OECD’s PARIS21 guidelines. ### Capacity Development (Annex IV excerpt) - Cambodia is a large recipient of Fund capacity development (CD) within Asia Pacific; authorities value Fund CD for building institutions and policymaking capacity. - Main surveillance priorities informing CD: addressing macro-financial risks; safeguarding fiscal sustainability and promoting inclusion; supporting progress toward SDGs. - Recent CD activities: - Monetary/financial sector TA focused on upgrading regulation/supervision, liquidity forecasting and monetary operations, promoting local currency use, and strengthening systemic financial stability analysis (including establishment of a dedicated FSR division and publication of the first-ever Financial Stability Report). - Fiscal sector TA supported PFM reforms (FMIS roll-out Phase II), MTFF development, macro-fiscal capacity building, and customs/tax administration improvements to support RMS (2019–23). - Statistics TA focused on external, government, and monetary/financial statistics, development of RPPI, and support for e-GDDS/NSDP. - Training: ICD regional and country training (face-to-face pre-COVID and online post-COVID) supported macroeconomic capacity; CDOT/ICD supported an Interagency Economic Core Group (ECG) for macro-framework development and MEF macro-fiscal modeling inputs to MTFF. - Forward-looking CD priorities (section introduced but details follow beyond provided excerpt). *Annex III. Implementation of Past Advice — 1khmea2021002* ### 5. Looking ahead, Fund CD can play a pivotal role in Cambodia’s transitions to the next ### 5. Looking ahead, Fund CD can play a pivotal role in Cambodia’s transitions to the next ### Role and strategic orientation - Fund CD can contribute to enhancing institutional capacity to effectively design, implement, and monitor policies in securing macroeconomic stability and sustaining strong and inclusive growth. - Forward looking CD priorities are informed by an evolving multi-year surveillance strategy and CD matrix (Table 3). - The multi-year strategy covers traditional macroeconomic issues, enhanced focus on macro-financial issues, topics under Fund key commitments to support countries in achieving their Sustainable Development Goals (SDGs) and emerging Fund issues. ### CD priorities — principal areas of focus and recommended actions - Addressing macro-financial risks - Build on progress made; further measures are needed to address elevated financial sector vulnerabilities, especially in the real estate sector. - Actions include: effective implementation of past measures; further targeted prudential measures, such as raising risk weights for real-estate lending; introducing a crisis management framework with a deposit protection scheme; and continued upgrading of regulation and supervision. - Promote further financial market development and encourage local currency use to increase resilience. - Further TA will be needed to address strategic deficiencies in AML/CFT. - Safeguarding fiscal sustainability - Spending pressures should be well-managed, with priority given to growth-enhancing infrastructure and development spending. - Sustaining revenues will require modernizing revenue administration and policies to improve efficiency and equity. - Debt management will face new challenges with the increase in potential contingent liabilities from Public Private Partnerships (PPPs) and introduction of a domestic debt market. - Introduction of a medium-term fiscal and budget framework (MTFF/MTBF) will help safeguard fiscal sustainability via improved budget planning and fiscal risk management. - Improvements in multiple fronts are needed to strengthen fiscal governance; activities should focus on supporting revenue mobilization and debt management, improving fiscal governance and strengthening capacity. - Supporting progress towards SDGs - Continued structural reforms to increase competitiveness, encourage diversification, and expand financial inclusion. - Fiscal policies could better support inclusion by shifting taxes towards progressive revenue sources and re-orienting expenditure towards priority infrastructure, and health and education spending. - Statistics - Continue support for broad-based improvements in data availability, quality, frequency, and transparency. - Expanded coverage of existing datasets and new datasets needed for macro-financial risk management, fiscal sustainability, and inclusive growth. - Current shortcomings: budget formulation and reporting use the TOFE system (based on GFS 1986) rather than GFS 2014; national accounts statistics weaknesses (including outdated base year, inadequate estimates of the GDP expenditure components, and limited quarterly national accounts data); gaps in real estate statistics; slow implementation of the national statistics strategy leading to segmented, unreliable, and inconsistent macroeconomic statistics. - Addressing governance vulnerabilities and corruption - Strengthen fiscal governance via reforms to revenue administration, public financial management and procurement focused on increasing spending efficiency, improving transparency and reducing opportunities for corruption. - Additional efforts to improve the regulatory environment, strengthen the rule of law and advance the anti-corruption agenda. ### CD Strategy — implementation caveats and modality recommendations - Tailoring - TA design must consider authorities’ starting point, absorption capacity and time required to instill a broad-based reform agenda. - Recognize capacity constraints (limited absorptive capacity, scarcity of resources, possible political concerns); better tailoring through careful prioritization and sequencing and proposing incremental reforms to ensure sustainability. - Ownership - Strengthen country ownership at all stages of CD interventions (scoping, initiation, execution, and implementation). - Close ongoing dialogue between Cambodia authorities and the Fund to tailor technical and policy advice to local conditions and institutional capacity and allow mid-course corrections. - Human resource management - Modernize authorities’ HR strategy: conduct and update regularly a mapping of all key functions and significant business processes in each agency; build staffing, identify most needed resources and urgent gaps in skills; enhance efficiency of staff allocation and CD management. - Flexibility of delivery - Pay attention to flexible delivery of CD including training modules, targeted follow-up TA and workshops; assess systematically training needed to implement TA recommendations. - Integrate training into TA missions to explain major findings and recommendations. - Peer learning and outreach, including by resident representatives, are effective modes of CD delivery. ### Multi-Year Strategic Surveillance and CD Matrix (high-level signals from Table 3) - Traditional macroeconomic issues: HIGH traction across 2019–2022. - Macro-financial issues and related topics (selected signals): - Capital Inflows and Spillovers: HIGH (2019), HIGH (2021), HIGH (2022) - Financial Stability, Deepening and Inclusion: MEDIUM (2019), MEDIUM (2021) - Financial Cycle and Macro-implications: HIGH (2019), HIGH (2021) - Macroprudential Policy: HIGH (2019), MEDIUM (2021) - Financial Supervision and Regulation: HIGH (2019), HIGH (2021) - Macroeconomic Shocks and Financial Stress: HIGH (2019), HIGH (2021) - SDGs/FfD Commitments (selected signals): - Domestic Revenue Mobilization: HIGH (2019), HIGH (2021) - Infrastructure Investment: HIGH (2019), HIGH (2021) - Building Policy Space/Economic Resilience: MEDIUM-HIGH (2019), MEDIUM (2021) - Domestic Financial Market Promotion: HIGH (2019), HIGH (2021) - Data enhancement: HIGH (2019), MEDIUM (2021) - Emerging issues (selected signals): - Governance: HIGH (2019), MEDIUM (2021) - Income Inequality: MEDIUM-HIGH (2019), MEDIUM (2021) - Climate Change: MEDIUM (2019), LOW (2021) - Gender: LOW (2019), LOW (2021) ### Annex V — Crisis policy measures (selected fiscal and monetary/financial measures) - Fiscal Measures (selected actions and allocations) - A package worth US$60 million was allocated for virus testing, containment, and treatment. - Social assistance of more than US$760 million, including US$506 million for monthly cash transfers to poor and vulnerable households and US$260 million cash for job support. - US$123 million has been allocated for wage subsidies and skill training program for suspended workers in the garments and tourism industries. - The transfers launched in June 2021 included one-time only cash assistance to vulnerable individuals and families affected by lockdowns in Phnom Penh, Krong Takhmau, and Krong Preah Sihanouk; and one-time only cash assistance to families whose members have contracted COVID-19 and/or died from COVID-19 nationwide. - In June 2021, the government extended until the end of September i) a subsidy for garment and tourism sectors; ii) tax exemptions for the tourism and aviation sectors; and iii) the cash relief program for poor and vulnerable families. - Several tax-relief measures, collectively worth around US$120 million, were introduced (including measures to businesses in the aviation and hospitality sectors, a stamp tax exemption on housing transactions for units less than US$70,000 in value, and on loan interest repayments). - The government allocated US$200 million to provide credit guarantees for business under the Business Recovery Guarantee Scheme, in addition to packages issued to SMEs in the manufacturing sector (US$50 million) and SMEs in the agricultural sector (US$80 million). US$270 million has been reserved as additional financing facility for these schemes. - Other spending was rationalized in FY2020, yielding savings of roughly US$900 million, of which around US$500 million was from capital spending. - In May 2021, the government announced a revision of FY2021 planned budget expenditure to save money and divert funds to address prioritized issues, including combating COVID-19 and addressing negative socio-economic impact caused by the community outbreak. - Monetary and Financial Measures (selected actions by the National Bank of Cambodia and government) - NBC measures to improve liquidity early in the crisis: - Delaying additional increases in the Capital Conservation Buffer. - Cutting minimum bidding interest rate in its Liquidity Providing Collateralized Operations, decreasing banks’ funding costs in domestic currency. - Cutting the interest rate on Negotiable Certificates of Deposit (the collateral for LPCOs), to encourage banks to disburse loans. - Lowering required reserves that banking and financial institutions must maintain at NBC both for local (riel) and foreign currency (US$) to 7 percent until further notice. - NBC issued guidelines to allow financial institutions to restructure loans to borrowers experiencing financial difficulties (but still performing) in priority sectors and then extended to all sector temporarily by the end of 2021. - In February 2021, NBC called for banks and financial institutions to restrict dividend payment to shareholders for audited profit in 2020. - In April 2021, NBC issued an announcement encouraging the use of electronic payment services instead of bank notes. - In June 2021, NBC issued a circular for banks and financial institutions to review and classify their restructured loans as well as do enough provisioning aiming at preserving financial stability and to further support economic activities sustainably. - Government measures included encouraging financial institutions to ease fees and penalties and calling on real estate developers to ease payment conditions for customers per the Joint Statement of the Ministry of Economy and Finance and the National Bank of Cambodia (meeting on Real Estate Issues of 22 March 2021). ### Annex VI — Evolution of social protection in Cambodia (key facts and measures) - Before the Crisis: limited protections - Cash transfer system for poor pregnant women and children aged 0 to 2 years, covering 78,060 beneficiaries (25,162 children). - Scholarship program covering 122,228 children in primary grades 1 to 6 and 90,784 secondary school pupils in school year 2019/20. - Disability program covering 11,000 beneficiaries, but only in some geographic areas. - Two types of state-backed health insurance schemes targeting specific groups: one directed at the poor, and community-based health insurance schemes (supported by NGOs). - Employment injury insurance extended to workers and employees, but only formal workers. - Social security system provided pensions only to civil servants; only around 7 per cent of the total population received retirement pensions. - Statutory unemployment insurance was not available. - During the Crisis: introduction and delivery of cash transfers - In [July] 2020, the government introduced the Cash Transfer Program for the Poor and Vulnerable Households. - Targeting and coverage: - ID Poor system adapted; households classified as PoorID1 or PoorID2 were approved to receive digital cash transfers. - About 710,000 households (corresponding to 2.8 million people) received the cash transfer in 2020. - Transfers averaged about US$45 per month, corresponding to about 33 percent of monthly household income for those at the 25th percentile of the distribution in 2019/2020. - All told, the transfers were worth [US$502] million. - Delivery: - Upgraded digital cash transfer method used for pregnant women and vulnerable groups; cash transferred from the Ministry of Social Affairs, Veterans and Youth Rehabilitation to recipients via electronic payments. - Recipients notified by SMS and withdraw cash at Wing agent using ID cards and Equity Cards. - Monitoring at central government level focuses on impact and benefits; local monitoring focuses on identifying and solving problems in the cash transfer process. - In 2021, targeting refined to consider both poverty and COVID-related vulnerability. - Beyond the Crisis: toward greater social insurance and the Family Package - In May 2021, cash assistance was extended to low-income families in lockdown areas, families whose members died from COVID-19, and families whose members have COVID-19; eligible families receive a minimum one-time only cash assistance on top of other assistance. - In June 2021, government announced plans for a Family Package of Integrated Social Assistance Program to implement life-cycle social protection: emergency support, health care, social care, child protection, child benefits and feeding, disability and old-age allowances. - Delivery will combine cash transfers, social services, and complementary in-kind services; the Package explicitly cites goals to be sensitive to gender, disability, and HIV/AIDS factors. - Implementation plan over the next five years: build on the ID Poor system (refine identification), registration and enrolment of at-risk groups, development of electronic delivery mechanisms, and monitoring of risks and compliance. [(At this stage, there are no estimates of costs.)] *IMF staff summary of chapter 5 and annexes from the Cambodia report.* ### Annex VII. Cambodia and Climate Change ### Annex VII. Cambodia and Climate Change ### A. Climate Change Risks for Cambodia - Cambodia has a humid tropical climate with high temperature—average of 25-27ºC with maximum of around 38 ºC and minimum of around 17ºC as a baseline. - The annual monsoon season typically begins in mid-May and lasts through the end of October; the dry season stretches from November to April. The monsoons deliver approximately three-fourths of the country’s annual rainfall, especially along the central alluvial plains of the Mekong and Tonle Sap Rivers that comprise roughly 80 percent of the country’s landmass. - Annual rainfall can vary due to El Nino events with warmer and drier conditions. - Between 1993 and 2020, Cambodia faced climate-related disaster events including 20 floods, 5 droughts, 6 tropical storms and 1 famine, with at least US$1.5 billion of estimated damage from these events. - Under the highest emissions pathway—Representative Concentration Pathways (RCP) 8.5, Cambodia would face warming of 3.1ºC by the 2090s against the baseline conditions over 1986-2005. - Increases in annual maximum and minimum temperatures are expected to be larger than the rise in average temperature, increasing pressures on human health, livelihoods, and ecosystems. - Climate change risks agriculture, industry, and tourism: droughts and floods in 2020 highlighted the large agricultural sector’s dependence on regular monsoon seasons; fluctuations in Mekong river flows affect irrigation, fishing, and transportation for industry and land tourism. - Without action, the population exposed to an extreme river flood could grow by around 4 million by the 2040s. - The damming of the Mekong River and large-scale dams on its tributaries may alter future flood dynamics. - Projected climate change trends indicate more severe floods and droughts, which is projected to reduce absolute GDP by 9.8% in 2050. ### B. Carbon Intensity in Cambodia - CO2 emission per capita for Cambodia is 0.65 tons in 2018 compared to World’s 4.42, Asia-Pacific’s 3.89, and ASEAN’s 2.27. - By energy source in 2018, oil contributes to CO2 emission by 70% and coal contributes the remaining share. - By sector, transport is a key driver for CO2 emissions and is projected to play a prominent role in coming years due to increasing urbanization and motorization. - The updated Nationally Determined Contribution (updated NDC in 2020) indicates: - Overall GHG emissions are projected to increase to 155 million tons of CO2 in 2030 (around almost 1 tons of CO2 per capita), growing from 2016 estimate by 24%. - Forestry and other land use (FOLU) are the highest emission contributor in Cambodia. - Emissions from Business-As-Usual (BAU) scenarios are steadily increasing by 2030 with sectoral shares: FOLU 49%, Energy 22%, Agriculture 18%, Industry (IPPU) 9%, Waste 2%. - Adding energy and FOLU puts total BAU emission at almost 160 million ton of CO2 per year by 2030. - IMF projects growth of emissions under its BAU scenario of more than 30% (from 2017 to 2030) for Cambodia, mainly driven by fast economic growth. ### C. Cambodia’s policy steps - National strategy: - Cambodia adopted the Cambodia Climate Change Strategic Plan (CCCSP) 2014-2023 as the first national framework addressing climate change. - Climate change has been integrated into sectoral planning with 14 ministries adopting respective action plans encompassing adaptation and into sub-national planning. - Climate change has been addressed in the National Strategic Development Plan (NSDP) since 2009 and in the Rectangular Strategy Phase IV (2019-2023) as a pillar. - National target and NDC (Updated Dec 2020): - Cambodia ratified the 2015 Paris Agreement and in its original NDC committed to a reduction of GHG emissions by 27% and increased forest cover to 60% by 2030. - The updated NDC estimated that emissions reduction with the FOLU by 2030 under the NDC scenario will be approximately 64.6 million tCO2e/year (42% reduction by 2030, of which around 60% is from the FOLU). - According to the updated NDC, total funding required for mitigation actions would be over US$ 5.8 bil and for adaptation actions would be US$2 bil. - Green recovery and Post-COVID planning: - The authorities plan to craft the Post-COVID Economic Recovery Plan 2021-23 by including green recovery. - Key points shared by the Prime Minister include: - Principle: promote globalization through openness in international trades and multilateralism in addressing climate change. - Green development: strengthen regional and international cooperation and mainstream green development in agriculture, urbanization, transportation infrastructure, circular economy, digital economy, and renewable energy. - Sustainable finance: promote development of sustainable finance, green financing mechanisms, and Public-Private Partnership (PPP) mechanisms to mobilize additional resources. - Incentives: introduce incentives and reforms to encourage start-ups and private sector green investments, including green technologies and renewable energy. - Infrastructure: promote development of green infrastructure, sustainable and responsible investments, and enhance efficiency of utilization and investments through promoting and incentivizing green industry development and the use of green technologies. - Capacity: enhance mitigation and adaptation capacity through conserving natural resources, developing green parks and cities, and building research capacity for climate response and disaster needs. - Financial sector actions: - National Bank of Cambodia (NBC) has set policy on investment guideline related to Environmental, Social and Governance (ESG). - NBC was the first among ASEAN member States to invest in green bond. - The Bank for International Settlements (BIS) launched an open-ended fund for central bank investment in green bond in Sep *Prepared by the IMF Resident Representative Office in Cambodia; sources within the annex include CFE-DM (December 2020), World Bank and Asian Development Bank (August 2021), CRED EM-DAT, NCSD (2018), The National Council for Sustainable Development (2015), Updated NDC (Dec 2020), and IMF (2021).* ### 2019. NBC is a member of the Advisory Committee and one of the first members of ### 1khmea2021002 - 2019. NBC is a member of the Advisory Committee and one of the first members of ### ESG Guideline and NBC actions - NBC calls for banks and financial institutions (BFIs) to put policies in place to promote green finance and environment-friendly investments. - Regulatory measures: NBC is promoting ESG by applying lower risk weight/ provision to ESG loans. - Regional coordination: As part of the ASEAN community, NBC looks at setting some policy along the line of the ASEAN ESG policy especially on sustainable finance. - Industry practices: BFIs have a code of conduct on ESG; loans will be granted to activities with mitigating pollution, climate change, deforestation and so on. ### Fund relations and membership - Membership: Joined December 31, 1969; accepted the obligations under Article VIII, Sections 2, 3, and 4 on January 1, 2002. - General Resources Account: - Quota 175.00 SDR Million 100.00 Percent - Fund holdings of currency (Holdings Rate) 153.13 SDR Million 87.50 Percent - Reserve Tranche Position 21.88 SDR Million 12.50 Percent - SDR Department: - Net cumulative allocation 251.65 SDR Million 100.00 Percent - Holdings 256.69 SDR Million 102.00 Percent - Outstanding Purchases and Loans: None - Latest Financial Arrangements (SDR Million): - ECF 1/ Oct. 22, 1999 – Feb. 28, 2003; Amount Approved 58.50; Amount Drawn 58.50 - ECF 1/ May 06, 1994 – Aug. 31, 1997; Amount Approved 84.00; Amount Drawn 42.00 - 1/ Formerly PRGF. - Multilateral Debt Relief Initiative outcome: relief on 100 percent of debt incurred by Cambodia to the IMF before January 1, 2005; forgiven total SDR 56.8 million (about US$82 million). NBC transferred the full MDRI proceeds to the Ministry of Economy and Finance effective March 2006. - Safeguards Assessment: Voluntary safeguards assessment updated in January 2010 (previous March 2004). Update found steps to strengthen safeguards but important 2004 recommendations still outstanding and new external audit risks. - Exchange rate arrangement: De facto regime classified as stabilized arrangement; de jure managed float. Official exchange rate expressed in Riels per U.S. dollar, adjusted to be within 1 percent of the market rate on a daily basis. - Article IV consultation: Standard 12-month cycle; last discussions held September 30 – October 11, 2019; Executive Board conclusion on December 6, 2019 (IMF Country Report 19/387). - FSAP: Joint IMF-World Bank FSAP mission March 2010; assessment completed October 2010. - Resident Representative: Mr. Yasuhisa Ojima since September 2019. ### Data sources and dissemination - Main websites of data: - National Bank of Cambodia (www.nbc.org.kh) — Exchange rates; Balance of payments - Ministry of Economy and Finance (www.mef.gov.kh) — Government budget; Fiscal revenue, expenditure, and financing; Public Debt Bulletin - National Institute of Statistics (www.nis.gov.kh) — Consumer Price Index; National accounts; Population census; Labor force survey; Socioeconomic survey; Household survey - National Summary Data Page (https://www.nbc.org.kh/english/economic_research/NSDP.html) ### Statistical issues — data adequacy and quality (June 2021) - General: Data provision broadly adequate for surveillance; extensive TA provided by Fund, UNDP, ADB, World Bank and bilateral partners; important shortcomings remain. - National accounts: - Outdated base year (2000) undermines reliability. - Informal sector evolution and lack of volume measures for agriculture and construction; absence of relevant price deflators. - NIS revising sources and methods assisted by SIDA and UNESCAP; urged to complete and disseminate rebased GDP. - Need to implement practices assuring integrity of rebased national accounts (e.g., publicly announcing planned release dates). - Need for high frequency indicators such as quarterly GDP and a production index. - Price statistics: - NBC implementing a work program to compile a residential property price index (RPPI); a prototype RPPI for internal review is expected in early 2022. - CPI uses outdated weights from 2004 Cambodia Socio-Economic Survey; insufficient geographic coverage and dissemination delays. - NIS planning to update CPI using 2014 household expenditures; PPI under development. - Government finance statistics (GFS): - MEF compiling annual GFS for budgetary central and local governments following Government Finance Statistics Manual 2014 (GFSM 2014). - Consolidated general government series not yet available; MEF working on source data for extrabudgetary units. - Prototype financial balance sheet for budgetary central government compiled. - Recommendations: promote use of GFS to improve budget planning and transparency; streamline budget table with GFSM2014; report quarterly PSDS to Joint World Bank-IMF database; actively monitor PPPs for contingent liabilities. - Monetary and financial statistics (MFS): - NBC reports monthly monetary data using STA’s standardized reporting forms (SRFs) for central bank and ODCs; since 2017 reports for OFCs but coverage limited to specialized banks (~1 percent of financial sector). - Need to expand OFC coverage to include insurance companies (ICs), non-deposit taking microfinance institutions (NDTMFIs) and leasing companies. - Shadow banking sector size unclear (includes real estate developers, pawn shops, payment service providers). - MCM diagnostic review proposed a roadmap for NBC IT needs to fully automate regulatory reporting. - Recent remote MFS mission improved SRF framework for ODCs and expanded coverage of SRF for OFCs to include NDTMFIs; NBC, MEF, and Insurance Association of Cambodia agreed on a work plan to collect data from ICs. - Financial sector surveillance/financial access: - NBC reports to the Fund all core and nine encouraged FSIs for deposit takers, two FSIs for OFCs, one FSI for households, and two FSIs for real estate markets on a quarterly frequency and with one quarter timeliness. - Several Financial Access Survey (FAS) indicators disseminated, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults (used to monitor Target 8.10.1 of the SDGs). - External sector statistics: - Quarterly balance of payments and IIP compiled by NBC according to BPM6. - Gaps in coverage due to source data limitations; some components compiled by estimation. - Inward FDI data need improvement; estimations draw heavily on FDI approvals. - Other gaps in financial account for other investment of nonfinancial corporations (trade credits and other debt liabilities). - External debt statistics do not cover borrowing by resident nonfinancial corporations. - GDCE produces monthly and quarterly external trade data; monthly data provided to NBC for goods in the balance of payments. - Ongoing TA under Project on Improvement of External Sector Statistics funded by government of Japan and executed through IMF CDOT. - July 2020 TA from IMF CDOT assisted in improving coverage and estimation methods for trade in goods (addressed persistent mirror discrepancies with major impact on current account). - Recent TA focused on streamlining compilation for inward FDI of banks, microfinance institutions, and nonfinancial corporations; and coverage of gross reserve assets. ### Data standards and reporting - Participation: Cambodia participates in the IMF’s General Data Dissemination System (e-GDDS). - NSDP launched on May 30, 2018 (https://www.nbc.org.kh/english/economic_research/NSDP.html). - No data ROSC available. ### Table of Common Indicators Required for Surveillance (As of October 1, 2021) — selected items (dates preserved exactly) - Exchange Rates: Date of Latest Observation 9/29/2021; Date Received 9/30/2021; Frequency D; Frequency of Reporting D; Frequency of Publication W - International Reserve Assets and Reserve Liabilities of the Monetary Authorities2: Date of Latest Observation 7/2021; Date Received 9/2021; Frequency M; Frequency of Reporting M, 2 month lag; Frequency of Publication M - Reserve/Base Money: 7/2021; 9/2021; M; M, 2 month lag; M - Broad Money: 7/2021; 9/2021; M; M, 2 month lag; M - Central Bank Balance Sheet: 7/2021; 9/2021; M; M, 2 month lag; M - Consolidated Balance Sheet of the Banking System: 7/2021; 9/2021; M; M, 2 month lag; M - Interest Rates (Loan and Deposit rates): 7/2021; 9/2021; M; M, 2 month lag; M - Consumer Price Index: 8/2021; 9/2021; M; M, 1-2 month lag; M - Revenue, Expenditure, Balance and Composition of Financing—General: 7/2021; 9/2021; M; M, 1-2 month lag; M - Stocks of Central Government and Central Government-Guaranteed Debt5: 6/2021; 9/2021; S; S, 3 month lag; S - External Current Account Balance: Q2/2021; 9/2021; Q; Q, 3 month lag; Q - Exports and Imports of Goods and Services: Q2/2021; 9/2021; Q; Q, 3 month lag; Q - GDP/GNP: 2020; 9/2021; A; A, 6 month lag; A - Gross External Debt: Q2/2021; 9/2021; Q; Q, 3 month lag; Q - International Investment Position: Q2/2021; 9/2021; Q; Q, 3 month lag; Q ### Debt Sustainability Analysis — key findings and projections - Overall assessment: The Debt Sustainability Analysis indicates that Cambodia remains at low risk of external and overall debt distress. - Debt carrying capacity: Current debt carrying capacity is consistent with a medium classification. - Cambodia’s Composite Indicator (CI) index based on April 2021 WEO update and the World Bank’s 2019 CPIA is 2.966 (medium). Country classification downgraded from a strong rating (3.075) applied in the 2019 DSA. - Baseline macro scenario: Reflects fallouts from the COVID-19 shock on growth, exports (notably tourism), and revenues. - PPG debt-to-GDP ratio projection: Projected to rise by around 5 percentage points during the next decade. - Stress testing and thresholds: - Under standard settings, one of the debt burden thresholds is breached, implying a moderate risk rating. - On an exceptional basis, 2020 was dropped from calculations of historical average and variances (equivalent to multiplying the calculated standard deviation by a lower factor to align with pre-pandemic stress test parameters) through a customized stress test and application of judgment. - On this basis, the sustainability threshold is not breached in the stress scenario. - Policy implications: Overall risk of debt distress is low, but vulnerability to further shocks to exports and growth remains. Findings reinforce importance of: - Implementing reforms to increase economy’s resilience to external shocks. - Encouraging export and economic diversification. - Mobilizing fiscal revenue. - Further enhancing public financial management. - Methodology: DSA conducted using the Joint Bank-Fund Debt Sustainability Framework for Low-Income Countries (LIC-DSF) approved in 2017. ### Public debt coverage and background on debt - Coverage: DSA covers central government debt and debt guaranteed by the central government to state-owned enterprises (SOEs). By law, state and local governments and the central bank do not engage in external borrowing, and SOEs do not contract non-guaranteed external loans. Currently, there are no extra budgetary funds, and the National Social Security Fund is funded by deposits and does not constitute a liability for the general government. - Contingent liabilities: - PPPs estimated at 15 percent of GDP in 2020 (using IMF’s Investment and Capital Stock Dataset and authorities’ information); contingent liabilities from PPPs (5.3 percent of GDP) and financial market (5 percent of GDP) are included in stress test scenario. - External public debt (2020): - Total 8,810.4 million of U.S. dollars; 35.0 percent of GDP; 100 percent of external debt - Multilateral 2,728.6 million; 10.8 percent of GDP; 31.0 percent of external debt - Bilateral 6,081.8 million; 24.2 percent of GDP; 69.0 percent of external debt - of which: China 3,901.4 million; 15.5 percent of GDP; 44.3 percent of external debt - PV of external debt: Around 24 percent of GDP at end-2020. - Legacy arrears: Debt stock includes legacy arrears to the Russian Federation and the United States of about 2.5 percent of GDP. Status of negotiations unchanged compared to previous DSA; analysis assumes no debt restructuring. *Prepared by Staff of the International Monetary Fund and the International Development Association; November 10, 2021.* ### 3. Public domestic debt remains negligible. Public domestic debt comprised only non-marketable ### 3. Public domestic debt remains negligible. Public domestic debt comprised only non-marketable ### Public domestic debt and market development - Public domestic debt comprised only non-marketable bonds issued by SOEs. - Outstanding public domestic debt was about US$1.6 million as of end-2019 and had been fully repaid in early 2020. - Authorities plan to issue, for the first time, local-currency government bonds over the next few years, while strengthening market infrastructure to manage issuance, registration, and trading. - The authorities drafted the preliminary “Policy Framework of Development on the Government Securities” in September 2021, which aimed at: - (i) the first securities issuance in 2022, - (ii) setting principles for the usage of fund from government securities, - (iii) appointing NBC as a fiscal agent and arranging the issuance operations. - Given the lack of bond market infrastructure and expected drawdowns of the government deposit by 2023, the analysis assumes a more gradual path of government bond issuance than implied by the authorities’ preliminary plan (from 2022). ### PPPs and private external debt - PPP stock grew more than twofold between 2010 and 2015, and was estimated at around 15 percent of GDP in 2020. - Authorities have been taking steps to strengthen the PPP framework, including: - a system for risk assessment, and - necessary legal, regulatory, and institutional arrangements for PPP management (e.g., a central PPP unit under the Ministry of Economy and Finance; a new law on PPP expected to be approved and implemented in 2021). - The stock of private external debt is not published by the authorities and is excluded from this analysis. - Staff estimates private external debt at about 35 percent of GDP in 2020 (CEIC data: total external debt US$17.7 billion in 2020; private debt estimated about US$8.9 billion after deducting PPG external debt). - Risks from excessive external borrowing by the private sector could increase government exposure to contingent liabilities. ### Background on macro forecasts and key baseline projections - Covid-19 contraction: Staff estimates a contraction of -3.1 percent in 2020. - Growth and inflation projections: - Growth expected to pick up to around 2 percent in 2021. - Growth projected to recover its potential of 6.5 percent from 2026 onward. - GDP deflator inflation was 2.9 percent in the prior year and is expected to persist around 3 percent. - External sector: - Current account deficit expected to widen to 27 percent of GDP in 2021. - Gross reserves increased in 2020 to US$21.3 billion (10 months of imports). - Gross reserves stood at 84.7 percent of GDP in 2020 and are projected to rise to around 90 percent of GDP (about US$ 45 billion) at the end of the decade. - External debt projected to reach 38.1 percent of GDP by 2028. - Fiscal sector: - Primary fiscal balance turned into a deficit of 3.1 percent of GDP in 2020. - Projected to widen to 5.2 percent of GDP in 2021. - Fiscal deficit expected to remain at around 3.5 percent through 2022-2023 before easing back. - Government deposits were around 24 percent of GDP at end-2020; analysis estimates government deposit decreases to around 13 percent of GDP by 2026. - Financing assumptions: - External borrowing set at around 4.2-4.4 percent of GDP over the medium term, before declining to 3.9 percent of GDP by 2030. - New external debt expected to have an average maturity of 24 years and a nominal interest rate of around two percent. - Domestic bond issuance assumed from 2024, annual amount increasing from 0.4 percent of GDP in 2024 to about 1 percent of GDP in 2041. - Outstanding PPG domestic debt estimated to reach around 5 percent of GDP by 2041, accounting for about 13 percent of total outstanding PPG debt. ### Debt carrying capacity, stress tests, and debt dynamics - Debt carrying capacity classification: - Cambodia’s debt carrying capacity is classified as medium (changed from strong in previous DSA). - PV of external debt-to-GDP benchmark decreased from 55 to 40 percent. - Stress tests and scenarios included: - Standardized stress tests, a customized stress scenario on exports, contingent liability stress tests, and a tailored natural disaster shock. - Contingent liability stress test quantifies PPPs at 5.3 percent of GDP and financial market risks at 5 percent of GDP. - Natural disaster shock: cost estimated at US$235 million per year; model applies a mitigation cost of 10 percent of GDP (around US$2.7 billion) and falls in GDP growth and exports using interaction coefficients of 1.5 and 3.5, respectively. - External debt under baseline: - External debt projected to rise from 36 percent of GDP in 2021 to 38.1 percent of GDP in 2028, then stabilize around 37 percent in early 2030s. - Present value of external debt-to-GDP remains around 28 percent (below the 40 percent threshold). - Debt service-to-exports and debt service-to-revenue ratios remain far below indicative benchmarks due to large share of concessional loans. - Exports shock findings: - Standard exports shock would breach the 40 percent PV external debt-to-GDP threshold from 2023 to 2032 by 4 percentage points on average. - The 2020 exports decline was 8.3 percent, compared with average growth of 15.3 percent from 2011 to 2019. - Staff used a customized stress scenario dropping 2020 from historical averages (equivalent to multiplying standard deviation by 0.7); in this scenario PV debt-to-GDP remains slightly below the threshold. - Public debt dynamics: - Total PPG debt expected to trend upward from 36 percent of GDP in 2021 to 40.1 percent of GDP in 2030, with increased domestic financing mix (around 2.6 percent of GDP). - PV of total debt-to-GDP estimated to reach 31.1 percent in 2030 (well below 55 percent benchmark). - Under a growth shock, PV of total debt-to-GDP rises to 47 percent by 2030 but does not breach the 55 percent threshold. - Overall risk rating: - Cambodia remains at low risk of external and overall debt distress. - External and total PPG debt levels expected to increase by around 2 percent of GDP over the next 5-year period. - Stress tests indicate vulnerability to shocks to exports and growth; however, in the customized stress scenario, sustainability indicators do not exceed thresholds. ### Policy recommendations and data gaps - Authorities should continue to: - Maintain fiscal discipline and public debt management while promoting long-term growth. - Prioritize targeted and managed fiscal measures to accelerate near-term recovery, given pandemic risks and labor market scarring. - Preserve macroeconomic stability, diversify the economy, maximize spending efficiency, and successfully implement the revenue mobilization strategy. - Authorities should focus on closing data gaps, in particular regarding data on external private debt and the PPP stock. ### Authorities’ views - The authorities broadly agreed with the DSA findings and noted their internal DSA reached the same conclusion of low risk of debt distress. - They viewed medium-term macroeconomic dynamics as more optimistic, citing the Economic Recovery Plan and prospective benefits from the Regional Comprehensive Economic Partnership and bilateral FTAs. - Authorities expressed strong commitment to debt sustainability, prudent debt management, and continued efforts to develop a domestic debt market. *International Monetary Fund — Cambodia DSA chapter excerpt* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1khmea2021002.pdf_