## 1khmea2022002

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### Recent developments and recovery
- The Cambodian economy was hit hard by the pandemic; damage was mitigated by policy measures that benefited from buffers built up before the crisis.
- Tourism collapsed and demand for manufactured goods initially fell; the economy fell into recession in 2020 and had relatively slow growth in 2021.
- From the second half of 2021 the economy showed stronger signs of recovery driven mainly by exports of goods (garments, electronics, and vehicle parts), which grew by around 40 percent (yoy, ytd).
- Rapid vaccination during 2021 and reductions in Covid-19 infection rates supported recovery; in March 2022 the country fully relaxed entry restrictions on foreigners.
- New stresses in 2022: slowdown and further lockdowns in China; limited exposure to Ukraine and Russia but weaker demand in Europe; tightening of monetary conditions in advanced economies.
- Inflation developments:
  - Inflation reached 7.8 percent y/y in June 2022, then retreated to 4.4 percent y/y in September.
- Real estate signs of downturn: yields indicate surplus of commercial and high-end residential space; rental and high-end purchase prices appear to be falling after sustained growth.

### Growth outlook and macro projections
- Real GDP growth forecasts and assumptions:
  - Real GDP growth is forecast to be 5 percent in 2022.
  - Real GDP growth is forecast to be nearly 5½ percent in 2023.
  - Growth is assumed to gradually converge to a potential rate of about 6½ percent.
  - Trend growth rate assumption is somewhat below pre-Covid-19 rates of 7 to 7½ percent.
- Inflation expectations:
  - Inflation is expected to peak this year, be lower in 2023, and decline further thereafter, assuming it remains mostly confined to imported goods.
- GDP rebasing:
  - Preliminary results suggest the level of nominal GDP could increase by close to 30 percent when national accounts are rebased in early 2023.
  - Box note: National Institute of Statistics rebased national accounts to 2014; level of Nominal GDP is expected to be revised up by just over 30 percent.

### Public finances, fiscal projections, and debt framework
- Fiscal deficit and public debt projections:
  - Staff expects the fiscal deficit to narrow to 4.1   percent of GDP in 2022 and increase to 5.0 in 2023, before falling thereafter to 3 percent of GDP in the long-run, consistent with public debt at 40 percent of GDP.
  - Staff projects the fiscal deficit to narrow from 7.1 percent of GDP in 2021 to 4.1   percent of GDP in 2022.
- Fiscal packages and spending:
  - The Covid-19 Intervention Package is planned to reach US$ 882 million in 2022 (about 3 percent of GDP), similar to 2020 support though less than in 2021 (when it reached 5 percent of GDP).
- Fiscal framework recommendations:
  - Staff recommends a debt anchor in nominal terms combined with an overall deficit ceiling; an anchor of 40 percent of nominal GDP is recommended.
  - Continue revenue mobilization: diversify tax base away from heavy reliance on imported goods; consider more inelastic taxes (property, “sin” taxes); minimize tax deferrals and exemptions.
- Sovereign bond market:
  - Successful first issuance in September 2022: a fixed coupon bond issued domestically in September 2022, totaling KHR 41.7 billion (around US$10 million), with a 2 percent coupon rate and one year maturity.

### External sector, balance of payments, and reserves
- Current account and BoP developments:
  - The current account deficit widened substantially in 2021, to an estimated 48 percent of GDP.
  - Gold imports accounted for almost half of the total current account deficit in 2021; unexpected imports of gold accounted for half of the deficit.
  - Financial account increased to 47 percent of GDP in 2021.
  - Short-term capital: net inflow of 25 percent of GDP in 2021 (from a net outflow of -8 percent of GDP in 2020).
  - Net foreign asset (NFA) position: decreased from -77 percent of GDP in 2020 to -111 percent of GDP by end-2021.
  - The current account balance is projected to be -30 percent of GDP in 2022, narrowing as the services balance recovers and on the assumption that gold imports are temporary.
- Reserves and exchange rate:
  - FX reserves declined by two percent in 2021 from 2020 levels; gross reserves decreased slightly, by US$0.4 billion in 2021.
  - Reserves at US$ 21 billion cover around 8 months of projected imports.
  - The exchange rate remained steady with some intervention in late 2021, but none in 2022 to September.
- Data and measurement issues:
  - Trade data improvements noted, especially for precious metals and agricultural products, but large discrepancies remain between national and mirror trade data.
  - Short-term unidentified inflows recorded as “Other” complicate BoP assessment.
  - Trade: discrepancies between current account and saving/investment balances averaged around 11 percent of GDP over 2015–2020; newly-rebased GDP data expected to reduce these discrepancies.
  - Recommendations: replace current estimates of short-term inflows with data covering cross-border transactions of non-financial sectors; improve remittance estimation with better data on workers abroad; improve measurement of foreign assets and liabilities of non-financial corporations and households.

### Financial sector, credit growth, and macro-financial risks
- Credit and indebtedness:
  - Credit growth averaged around 24 percent y/y from 2013 to 2019 and slowed only mildly during the pandemic.
  - Outstanding private sector credit reached 170 percent of GDP by end 2021.
  - Around 7 percent of the total stock of outstanding credit has been restructured (amounting to 13 percent of GDP).
  - Restructured loans in June 2022 estimated to be about 7 percent of lending (13 percent of GDP).
  - Non-performing loans rose to 2.8 percent of outstanding loans (nearly 4½ percent of GDP).
  - Nearly 90 percent of lending has been in dollars since the 10 percent riel lending requirement in 2016.
- Monetary and prudential stance:
  - NBC maintained reserve requirements and the capital conservation buffer at current levels, and ended forbearance on new restructurings from July 2022 (forbearance on newly-restructured loans ended June 2022 as noted elsewhere).
  - Capital conservation buffer has remained at 1.25 percent, after having been halved in May 2020.
  - Prudential normalization steps: NBC reintroduced provisioning requirements on restructured loans since December 2021.
- Financial stability concerns and recommendations:
  - Concerns that a small proportion of restructured loans being written off would produce large, concentrated losses across banks.
  - Recommendations include: continue gradual withdrawal of forbearance and return to pre-pandemic prudential practices; intensify supervision with onsite inspections and loan portfolio reviews; collect and centralize financial information on largest borrowers; consider raising minimum paid-in capital and reviewing “fit and proper” requirements; be vigilant on sudden liquidity needs.
- Monetary policy and de-dollarization:
  - Monetary policy constrained by managed peg and extensive dollarization; NBC should gradually restore monetary conditions to pre-crisis levels and consider increasing minimum reserve ratios for foreign currency above local currency to mitigate FX liquidity risks and assist de-dollarization.
  - Market-based tools: develop an Interest Rate Corridor (IRC); NBC has a partial IRC and introduced an overnight Marginal Lending Facility (MLF) in September 2021; Marginal Lending Facility (in riel) introduced and Marginal Deposit Facility in preparation.

### Social protection, health, and the Family Package
- Social assistance and cash transfers:
  - Covid-19 Cash Transfer Program: from June 2020 to May 2022, 687,372 families received benefits; total budget spent approximately US$ 683.6 mill.
  - Cash Transfer for Pregnant Women and Children under 2 (launched 2019): by March 22, 2022, 138,482 beneficiaries (96,949 mothers; 41,533 children).
  - Baby Bonus (January 2018–February 2022): 296,220 new mothers (298,242 children) reached; equivalent to US$29.8 mil.
- Family Package (FP) Framework:
  - Planned start: 2023.
  - FP will integrate four programs: cash transfers to pregnant women and children under 2; scholarships for primary and secondary students; cash transfers to people with disabilities; cash transfers to the elderly.
  - FP objective: life-cycle social assistance from conception to death; targeted at poverty and requires strengthening ID Poor system.
- Universal Health Coverage (UHC) and financing:
  - Existing health coverage collectively covers 4.7 million Cambodians, or 30 percent of the population.
  - HEF covers about 2.6 million individuals.
  - NSSF health insurance schemes cover 0.4 million (civil servants) and 1.7 million (formally employed).
  - OOPE approximately 60 percent of total health expenditure.
  - Coverage gaps: 8.7 million Cambodians (over 53 percent of the population) lack social health protection; nearly 5 million of those are considered vulnerable.
  - Inclusion/exclusion: 36 percent of people under the national poverty line do not hold an Equity card; less than 50 percent of Equity card holders are under the national poverty line.
  - Technical efficiency: public hospitals and health centers can increase service output by 34 and 73 percent respectively.
  - Suggested directions: improve enrollment of vulnerable populations, increase use of public health services, mobilize resources to meet growing health spending needs.

### Dollarization and local currency development
- Dollarization persistence and metrics:
  - Financial dollarization (share of FCDs in total broad money, M2): Cambodia about 36.3% in 1993; 85.6% at end-2018; 83% at end-2021.
  - Dollarization concentrated in urban areas, especially Phnom Penh; rural areas rely more on KHR for small payments.
- Measures and policies to promote KHR:
  - Stabilize KHR exchange rate and purchasing power; promote price quotations and payments in KHR; encourage KHR bank accounts; improve KHR payment infrastructure (ATMs, Bakong); develop local-currency securities and interbank markets.
  - NBC introduced differentiated required reserve rates in 2008 (16% for USD and 8% for KHR), reduced to 7% for both in March 2020; requirement for at least 10% of loan portfolio in KHR by end of 2019 (compliance not strictly enforced).
  - Policy recommendations: reintroduce differentiated reserve requirement rates with higher rates for USD; consider deposit insurance differentiation favoring KHR; formalize money changers; develop wholesale FX market and interbank money markets; continue Bakong and payment system improvements.
- Preconditions for de-dollarization: macroeconomic stability and development of domestic financial markets.

### Climate vulnerability and adaptation needs
- Historical exposure and impacts:
  - Between 1993 and 2020: 20 floods, 5 droughts, 6 tropical storms and 1 famine.
  - Estimated damage from these events: at least US$1.5 billion.
  - Without actions, population exposed to an extreme river flood could grow to around a quarter of total population (i.e., 4 million) by the 2040s.
- Projected impacts:
  - Projected climate change trends indicate more severe floods and droughts that are projected to reduce GDP by 9.8 percent in 2050 relative to its baseline (NCSD, 2019).
  - Under RCP 8.5, Cambodia is projected to warm by 3.1 o C by the 2090s against the 1986-2005 baseline.
- Costs and financing:
  - Public adaptation costs projected between 2-3 percent of GDP.
  - Updated NDC highlighted total funding required for adaptation actions would be over US$2 billion.
  - Majority of identified adaptation projects by 14 ministries have not yet been funded.
- Policy and financing actions:
  - Emphasize green and resilient public investment; upcoming Climate-Public Investment Management Assessment (C-PIMA) to identify improvements; promote sustainable finance and PPPs; NBC encourages banks to adopt green finance and ESG incentives (lower risk weight/provision to ESG loans).

### Governance, rule of law, procurement, and anti-corruption recommendations
- Rule of law and governance indicators:
  - World Justice Project’s Rule of Law Index: total score 0.32 (over 1) in 2021.
  - BTI: overall score of 1.8 over 5 in the rule of law component; BTI score 1.8 out of 10 in 2022, down from 2.0 in 2018 and 2.5 in 2014.
- Procurement reform:
  - New procurement law in process; need to enhance access to information and collect beneficial ownership of offerors.
- Anti-corruption and transparency recommendations (selected):
  - Amend Anti-Corruption Law and asset declaration regime to ensure public access to asset declarations of high-level officials; require asset information on children and spouses; ensure independence of ACI.
  - Introduce technological tools and phased strategic plan for risk-based audits of asset declarations.
  - Reinforce inter-agency cooperation (ACI, CAFIU, NAA) for asset recovery and fiscal oversight.
  - Provide more resources and training for NAA; adopt whistleblower protection law and derogate article 41 of the Anti Corruption Law that deters reporting.
  - Adopt law on transparency and demand disclosure of beneficial ownership in public contracts; ensure publication of legal norms and judicial decisions.
- Judicial and land administration challenges: limited access to judicial information; cadastral system shortcomings; low performance in land administration and dispute resolution.

### Data, statistics, and capacity development
- National accounts and rebasing:
  - NIS is revising national accounts and plans to disseminate rebased GDP with new base year 2014 in 2023; rebasing followed IMF Statistics Department Technical Review.
  - Reliability affected by outdated base year (2000) previously.
- Price statistics and indices:
  - CPI uses outdated weights from 2004 survey; NIS plans to update CPI using 2014 household expenditures.
  - Producer price index (PPI) under development.
  - Residential Property Price Index (RPPI) officially launched in June 2022.
- Government finance and monetary statistics:
  - MEF compiles GFS following GFSM 2014; MEF reported 2019 consolidated general government GFS; PSDS reported semi-annually.
  - NBC reports monthly monetary data using STA’s SRFs; need to improve coverage of other financial corporations and shadow banking sector.
- External sector statistics:
  - Quarterly balance of payments and IIP compiled under BPM6, but coverage gaps persist; trade data discrepancies affect current account estimates.
- Capacity development and TA:
  - Cambodia was the largest recipient of CD resources in FY2022 within Asia and Pacific.
  - CD priorities: fiscal policies, macro-financial and monetary policies, structural diversification; forward-looking CD aims to support transition to next development phase.
  - CD delivered TA on PFM, revenue mobilization, banking supervision, IMF technical assistance on statistics, and support for Bakong and digital payments.

### Staff appraisal, risks, and policy recommendations (selected)
- Staff appraisal:
  - Recovery expected to continue but vulnerable to downside risks; private debt is very high and raises concerns about economic drag if borrowers struggle to meet repayments.
  - The current account remains substantially weaker than implied by fundamentals and desirable policies (based on 2021 data), even after adjustments for temporary factors like gold imports.
- Key risks (selected):
  - Corporate and/or household debt distress: Likelihood Medium-High.
  - Abrupt global slowdown or recession: Likelihood Medium-High.
  - Commodity price shocks and de-anchoring of inflation expectations: Likelihood Medium.
  - Deepening geo-economic fragmentation and geopolitical tensions: Likelihood High.
  - Natural disasters related to climate change: Likelihood Medium.
- Policy priorities and recommendations:
  - Continue targeted fiscal support while normalizing prudential and monetary conditions; ensure fiscal support is well targeted given high inflation and external imbalances.
  - Move social protection from broad cash transfers toward better-targeted systems (Family Package) and protect the most vulnerable.
  - NBC: very conservative supervision; normalize prudential conditions; be prepared to raise provisioning and capital requirements; intensify supervision and loan portfolio reviews.
  - External adjustment: with extensive dollarization, nominal depreciation alone is insufficient; rely on gradual fiscal consolidation, measures to contain credit growth, and reforms to improve productivity (transport, communications, human capital).
  - Adopt a debt anchor in nominal terms combined with an overall deficit ceiling to provide credible framework for sovereign bond market development.
  - Implement corporate insolvency, debt and bank restructuring, and deposit protection frameworks; develop domestic bond market and strengthen PPP and public investment management.
  - Improve governance and transparency: passage of key legislation, digitization of reporting, stronger asset declaration systems, whistleblower protection, and increased resources for investigative agencies.

*International Monetary Fund — Cambodia staff report (excerpts contained in content unit 1khmea2022002).*

### 1. Balance of Payments Data _________________________________________________________________________ 12

### 1. Balance of Payments Data

### Recent developments
- The Cambodian economy was hit hard by the pandemic, but damage was mitigated by policy measures that benefited from buffers built up before the crisis.
- The pandemic caused a collapse of tourism and initially falling demand for manufactured goods. The economy fell into recession in 2020 and had relatively slow growth in 2021.
- A managed exchange rate limited monetary policy scope, but substantial foreign exchange reserves meant the exchange rate did not come under significant pressure.
- Large fiscal buffers provided room for increased spending on health care, employment support, and cash transfers to households; without these measures growth and poverty outcomes would have been worse.
- Spending pressures combined with lower-than-expected tax revenue resulted in a larger fiscal deficit than expected in 2021. Tax revenue from imported goods was weak in 2021.
- Compared to 2020, spending as a share of GDP remained almost unchanged with increased Covid-19 related public spending compensated by reductions in other current and capital spending.

### Recovery dynamics (second half of 2021 onward)
- From the second half of 2021 the economy showed stronger signs of recovery.
- Growth was driven mainly by exports of goods (garments, electronics, and vehicle parts), which grew by around 40 percent (yoy, ytd).
- Recovery in construction and real estate was relatively weak.
- Rapid vaccination during 2021 and reductions in Covid-19 infection rates supported recovery.
- In March 2022 the country fully relaxed entry restrictions on foreigners, boosting the tourism industry.

### New stresses in 2022
- The external environment became more challenging:
  - Slowdown and further lockdowns in China reduced foreign investment (particularly in real estate) and supplies of textiles to the garments industry, and delayed return of Chinese tourists.
  - Limited export and financial exposure to Ukraine and Russia, but the war affected demand in Europe, a major market for manufactures (second only to the US).
  - Tightening of monetary conditions in advanced economies affects Cambodia mainly through external demand; the financial system is mostly reliant on domestic deposit funding.

### Inflation and real estate developments
- Inflation reached 7.8 percent y/y in June 2022, then retreated to 4.4 percent y/y in September.
- Cambodia imports food and fertilizers; reliance on imported fuel is higher than many regional comparators. Recent increases in global fuel, food, and fertilizer prices resulted in historically high inflation rates.
- Contribution of core items to inflation has increased but remains muted so far.
- Signs of a downturn in the domestic real estate market (high-end residential and commercial):
  - Yields indicate a growing surplus of commercial and high-end residential space.
  - Rental prices for commercial developments and purchase prices for high-end residential properties appear to be falling after more than a decade of sustained growth.

### Credit growth and private sector indebtedness
- Credit growth averaged around 24 percent y/y from 2013 to 2019 and slowed only mildly during the pandemic.
- Outstanding private sector credit reached 170 percent of GDP by end 2021, a ratio significantly above regional peers.
- Credit growth has been strong across all sectors. The number of loans has increased but the number of borrowers has increased at a slower pace, suggesting rising leverage among some borrowers.
- In 2020–2021 credit growth was associated with growth in broad money, stronger than nominal GDP growth, driven in part by expansion in the central bank’s balance sheet as the government drew down deposits at the central bank to finance fiscal support.
- Continued steady inflow of FX deposits in commercial banks and a steady increase in the loan-to-deposit ratio supported credit expansion.
- Around 7 percent of the total stock of outstanding credit has been restructured (amounting to 13 percent of GDP).

### Signs of scarring and other real economy indicators
- Lack of unemployment data makes assessment of labor market scarring difficult.
- Test scores indicate lost schooling hours during the pandemic damaged human capital attainment (Grade 6 proficiency levels in Khmer and Maths show deterioration).
- Approvals of large (foreign-financed) projects remain lower than before the pandemic.
- Business registration appears to be recovering gradually, while business liquidations have been on the rise.

### External balances and balance of payments
- The current account deficit widened substantially in 2021, to an estimated 48 percent of GDP.
  - The widening was driven in part by subdued tourism and rebound in imports; unexpected imports of gold accounted for half of the deficit.
  - Gold imports increased substantially from end-2020 through 2021 following increases in the price of gold; the size of inflows is much larger (relative to nominal GDP) than hedging flows observed in other countries.
- The current account at end-2021 remains substantially weaker than the level implied by medium-term fundamentals and desirable policies (Annex I. External Sector Assessment), despite gradual reduction in fiscal deficits.
  - Both CA and REER models support this conclusion, though assessment is uncertain due to BoP data issues.
  - The CA model applied an adjustor for pandemic impact on tourism, for the sharp increase in imports for emergency healthcare spending in 2021, and discounted half of the gold imports as temporary. The assessment would remain the same even with gold flows completely removed from CA data.
  - The gap may partly reflect overstated savings needs because the model does not account for Cambodia’s young population.
- Financial inflows have been steady and crucial for exchange rate and FX reserve stability, and have been associated with continued growth in dollar deposits at banks; a large part is accounted for by a surge in short-term unidentified inflows.
- FX reserves declined by two percent in 2021 from 2020 levels but at US$ 21 billion cover around 8 months of projected imports.
- The exchange rate remained steady with some intervention in late 2021, but none in 2022 to September.

### Policy responses and structural reforms
- Authorities continued crisis policy responses and pursued structural reform:
  - Support measures include loans and guarantees; tax breaks; wage subsidies and retraining; and cash transfers.
  - The Covid-19 Intervention Package is planned to reach US$ 882 million in 2022 (about 3 percent of GDP), similar to 2020 support though less than in 2021 (when it reached 5 percent of GDP) owing to withdrawal of emergency Covid-19-related healthcare spending.
  - The National Bank of Cambodia (NBC) maintained reserve requirements and the capital conservation buffer at current levels, and ended forbearance on new restructurings from July 2022.
  - Structural reforms include establishing new free trade agreements and introducing a “One-Stop” mechanism for investors (e.g., online business registration, a national single window).

### Balance of Payments data issues (Box 1)
- Recent improvements in data collection improved coverage of trade data, especially in precious metals and agricultural products.
- Large and persistent discrepancies between national trade data and mirror data from trade partners complicate assessment of external balances.
- Large amounts of short-term financial inflows labeled “Other” further complicate BoP assessment.
- Improvements needed:
  - Trade: discrepancies between current account and saving/investment balances averaged around 11 percent of GDP over 2015–2020; newly-rebased GDP data is expected to reduce these discrepancies.
  - Short-term financial inflows: replace current estimates with data sources covering cross-border financial transactions of non-financial sectors.
  - Remittances: proposed model changes depend on better data on number of workers abroad (especially in Thailand) and work duration per contract to improve estimation of remittance earnings.
  - Foreign assets and liabilities: better source data required to measure foreign assets and liabilities of non-financial corporations and households; priority given to administrative data, financial statements of enterprises with foreign capital, and data on execution of large infrastructure projects including PPPs.
- The IMF continues to provide technical assistance to improve external sector statistics.

### Authorities’ views
- Authorities agreed external stresses were severe but were less conservative about credit levels:
  - They noted high credit growth had been maintained for many years without problem and claimed credit was evenly distributed across productive sectors; with rebased GDP the private debt ratio would look more benign.
  - They argued current account imbalance estimates should account for high prices of imported intermediates and fuel, falling tourism revenues, and lower remittances during the pandemic.
  - Gold imports were described as driven by wealthy individuals seeking a store of value in uncertain times.

*IMF staff summary of “1. Balance of Payments Data”*

### 10.      Despite the new pressures, the recovery is projected to continue. Real GDP growth is

### 1khmea2022002 - 10.      Despite the new pressures, the recovery is projected to continue. Real GDP growth is

### Growth outlook
- Real GDP growth is forecast to be 5 percent in 2022.
- Real GDP growth is forecast to be nearly 5½ percent in 2023, supported by the continued recovery of tourism and ongoing policy support, although dampened by external pressures and the impact of rising prices on real disposal income.
- Growth is assumed to gradually converge to a potential rate of about 6½ percent.
- The trend growth rate assumption is somewhat below pre-Covid-19 rates of 7 to 7½ percent.
- Inflation is expected to peak this year, be lower in 2023, and decline further thereafter, assuming it remains mostly confined to imported goods.

### Public finances and fiscal projections
- Staff expects the fiscal deficit to narrow to 4.1   percent of GDP in 2022 and increase to 5.0 in 2023, before falling thereafter to 3 percent of GDP in the long-run, consistent with public debt at 40 percent of GDP.
- Staff projects the fiscal deficit to narrow from 7.1 percent of GDP in 2021 to 4.1   percent of GDP in 2022, on the back of broad-based tax revenue rebound and lower spending, increase somewhat in 2023, and decline steadily thereafter.
- The projections assume a reduction in the level of government deposits at the central bank, from around 24 percent in 2020 to around 10 percent of GDP over the medium term.
- Debt-carrying capacity remains vulnerable to further shocks to exports and growth; risks of external and overall debt distress remain low so long as debt is constrained in the future.

### Current account and reserves
- The current account balance is projected to be -30 percent of GDP in 2022, narrowing as the services balance recovers thanks to expected growth in tourism and other exports, and on the assumption that gold imports are temporary.
- Reserves are expected to remain high and stable, at about 8 months of imports throughout the projection period.
- The deficit remains mostly financed in the baseline.

### Credit, private debt, and financial sector risks
- Credit growth would moderate but private sector debt would continue to increase.
- Forces slowing credit growth: revised prudential rules; further competition for funding among commercial banks; reduced pace of drawing down deposits at the central bank; potentially declining collateral values; and rising shares of non-performing loans.
- Credit growth would still outstrip nominal GDP growth.
- Concerns:
  - The level of private debt raises concerns about the drag on the economy if borrowers struggle to meet repayments and large amounts of non-interest-paying assets accumulate in banks’ balance sheets.
  - If a small proportion of restructured loans were written off, losses would likely be large and concentrated across banks.
  - Only 10 percent of total restructured loans were classified as non-performing as of June 2022, whereas under pre-pandemic requirements restructured loans would have been mostly classified as NPLs.
  - Capital conservation buffer has remained at 1.25 percent, after having been halved in May 2020.
  - Nearly 90 percent of lending has been in dollars since the 10 percent riel lending requirement in 2016.
- Prudential history and tools:
  - Interest rates were cut early in 2020 and required reserve ratios were cut, from 12.5 percent for dollars and 8 percent for riel to 7 percent for both currencies, to ease liquidity conditions.

### Uncertainty and downside risks
- Uncertainty is particularly high; risks are tilted to the downside.
- Key risks listed:
  - Credit growth: drag from high private debt and potential accumulation of non-interest-bearing assets in banks.
  - Conditions in key large economies: further lockdowns in China; slowdown affecting inward investment; demand in advanced countries vulnerable to tightening financial conditions and energy risks in Europe.
  - Inflation: global food and fuel price inflation could be more persistent; inflation expectations could de-anchor in advanced countries leading to tighter monetary conditions and higher borrowing costs; imported food and fuel price increases could generate second-round effects in domestic inflation, damaging aggregate demand and accentuated if the currency depreciated given extensive dollarization.
- Over the medium term, risks include resurgence of Covid-19 or other epidemics, and vulnerability to natural disasters (drought, floods, tropical storms).

### Authorities’ views
- Authorities agreed on risks from the external environment but expected somewhat stronger growth.
- They expected positive momentum for exports into 2023, but slowing compared to early 2022.
- They expected construction and real estate to continue to grow, albeit at a slower pace and below pre-pandemic levels.
- Authorities were particularly concerned about fallout from the war on Ukraine and from monetary policy tightening on demand in major export markets.
- Authorities expected inflationary pressures to slightly moderate in 2023 as international food and energy prices are expected to subside significantly, and did not see risks of significant second-round effects on domestic inflation.
- Authorities did not perceive risks from private debt to be as severe as those posed by the external environment.

### GDP rebasing
- Preliminary results suggest the level of nominal GDP could increase by close to 30 percent when national accounts are rebased in early 2023.
- Box 2: National Institute of Statistics rebased national accounts to 2014; level of Nominal GDP is expected to be revised up by just over 30 percent; manufacturing and services will account for slightly larger shares of production GDP and agriculture slightly smaller.
- The rebasing follows international statistical conventions per an IMF Statistics Department Technical Review.
- Anticipated effects: ratio of public and private debt to GDP will decline but so will the revenue-to-GDP ratio; ratio of private debt to GDP would likely remain high in comparison with peer countries in the region; Cambodia would retain lower-middle income status.

### Policy discussions and recommendations
- Policy focus: level and composition of policy support in near term; medium-term policy frameworks to safeguard against imbalances.
- Immediate issues:
  - Credit and debt: need frameworks for resolving insolvencies and restructurings given escalating private debt.
  - Fiscal: careful targeting of fiscal support and frameworks to ensure fiscal credibility; fiscal space exists but resources are not limitless and sovereign access is nascent.
  - External: with extensive dollarization, nominal depreciation alone will not significantly address external imbalances; adjustment should rely on gradual fiscal consolidation, measures to contain credit growth, and reforms to improve long-run productivity.
- Fiscal policy guidance:
  - Current fiscal plans are appropriately balanced under the baseline: Covid-19 fiscal package cut back; expected fiscal consolidation in 2022; some continued stimulus in 2023; steady reductions in the deficit over the medium term.
  - Fiscal support needs to be well targeted given high inflation, wide external imbalances, strong credit growth, and weak monetary transmission.
  - Support to households should gradually move from the Covid-19 Cash Transfer Program for the Poor and Vulnerable to a system that better targets the most vulnerable household members and their needs, as planned.
  - Support to business should be targeted based on viability and long-term growth potential of sectors.
  - Fiscal plans may need recalibration if inflation risks materialize and second-round effects on domestic inflation emerge; fiscal support should be wound back in that case.
  - Social protection to protect the poor is preferable to subsidies, but cash transfers for fuel price scenarios could add as much as 0.8 percentage points of GDP in spending under plausible scenarios for fuel prices alone.
  - Offsetting cuts should preserve fiscal space (examples provided: discontinuing wage subsidies, lowering emergency healthcare spending, partially rolling back tax exemptions).
- Monetary and exchange rate guidance:
  - Exchange rate follows a managed peg; extensive dollarization and dollar invoicing limit monetary policy response.
  - To help rein in credit growth, NBC should gradually restore monetary conditions to pre-crisis levels.
  - Minimum reserve requirements on financial institutions should be increased, prioritizing raising the minimum reserve ratio for foreign currency above that for local currency to mitigate higher liquidity risks in FX and assist de-dollarization.
  - Rectifying real exchange rate imbalances falls to gradual fiscal consolidation, measures to contain credit growth, and reforms to improve productivity (improving transport and communications infrastructure and raising human capital).
- Financial system recommendations:
  - Supervisor has ceased forbearance on newly-restructured loans and reintroduced provisioning requirements on restructured loans since December 2021, but prudential practices have not fully reverted to pre-pandemic standards.
  - NBC should continue to normalize prudential conditions to pre-pandemic settings so the financial system can withstand future shocks.
  - Specific recommendations:
    - Continue gradual calibrated withdrawal of forbearance on all restructured loans, including returning to pre-pandemic prudential practices on restructured loans; instruct lenders with the largest share of restructured loans to proactively increase capital.
    - Intensify supervision with rigorous onsite inspections and extensive loan portfolio reviews; assess extent to which covid-related forbearance supported unviable businesses.
    - Consider collecting and centralizing financial information on the largest borrowers to facilitate debt restructuring policies and avoid uncoordinated evergreening.
    - Be vigilant of sudden liquidity needs and proactively address emerging weaknesses under established safeguards.
    - Consider increasing minimum paid in capital amounts and further review “fit and proper” requirements; questionability of establishment of nine new banks during the pandemic given the economic cycle.

_International Monetary Fund — Cambodia staff report (selected extracts)._

### 29.      Demands on public spending increased during the pandemic and will likely increase

### 29.      Demands on public spending increased during the pandemic and will likely increase further

### Increased demands on public spending and human capital losses
- Previous exercises identified spending needs to reach SDG targets of at least 7½ percent of 2030 GDP, with the largest needs in education and health.  
- Education and health account for about two thirds. Universal access to electricity and road would require an additional annual spending of about 2½ percent of 2030 GDP.  
- Covid-19 emergency spending required a reprioritization of the National Strategic Development Plan (NSDP) 2019–23.  
- The World Bank estimates that Cambodia’s current cohort of students stands to lose 1.5 learning-adjusted years of schooling—15 percent of pre-pandemic expectations.  
- Going forward, demands on both educational and healthcare spending are likely to increase as the country attains middle income status, the authorities have indicated plans to expand social protection, and climate adaptation needs will increase with climate change.

### Comprehensive fiscal framework and debt anchor
- The increased spending demands call for introduction of a comprehensive fiscal framework, including an operational fiscal rule with a numerical target to guide spending and revenue strategy as Cambodia develops access to market financing.  
- The Public Debt Management Strategy (PDMS) 2019-23 currently lays out a total debt ceiling of 55 percent of GDP in NPV terms.  
- Staff recommends a debt anchor in nominal terms, combined with an overall deficit ceiling, over other rules for simplicity, transparency, and a direct link to fiscal balances.  
- An anchor of 40 percent of nominal GDP should provide adequate buffers given structural vulnerabilities (narrow revenue base, volatility of revenues and social protection demands, dollarization and fixed exchange rate) and the need to demonstrate policy continuity.

### Revenue mobilization strategy and tax structure
- On the basis of current GDP data, tax revenues are not low in comparison to peers, but given likely increased spending needs, tax revenues will need to increase.  
- As Cambodia graduates from least developed country status, grant revenue will continue to decline and will need to be replaced.  
- The structure of taxes should be diversified: revenue reliance on imported goods is significant, making tax revenue heavily procyclical. Increasing labor and corporate income taxes is limited by the desire to encourage formal registration of workers and firms. More reliance on inelastic taxes (property, “sin” taxes) should be considered.  
- Tax deferrals and exemptions should be minimized. Tax incentives to the tourism industry have been partially rolled back, but exemptions from customs duties and VAT remain significant, and the long-standing corporate income tax holiday is either not effective or potentially harmful.

### Sovereign bond market development
- The government should continue to develop a sovereign bond market as access to concessional finance and grants will likely subside with continued increases in national income.  
- Long-term government securities will also facilitate development of the nascent Cambodian insurance and private pensions industries.  
- The successful first issuance in September 2022 is noted: a fixed coupon bond was issued domestically in September 2022, totaling KHR 41.7 billion (around US$10 million), with a 2 percent coupon rate and one year maturity. Further small issuances are planned.

### Financial and monetary frameworks and safeguards
- Complete the bank restructuring and deposit insurance legal frameworks and enabling regulations to prepare for potential rapid action on distressed institutions; update capital regulations in line with recent TA recommendations.  
- Improve corporate insolvency regimes and debt restructuring procedures to prevent zombie enterprises from dragging down growth and to support banks’ management of distressed assets.  
- Strengthen the NBC’s oversight of household financial burdens given the growing importance of residential real estate: introduction of a residential real estate price index is an important first step; begin collecting data on income and collateral of borrowers and develop macroprudential tools such as debt-service-to-income, debt-to-income, and loan-to-value limits.  
- Progress has been made in improving the AML/CFT framework; the FATF assesses steps taken, and is considering the authorities’ submission regarding freezing and confiscation to fulfill outstanding items.  
- A modernized monetary policy framework together with de-dollarization would improve monetary transmission and give the NBC more policy options. Although a more flexible exchange rate regime could allow more independent monetary policy, more progress on de-dollarization is needed.  
- Develop market-based monetary policy tools, including an Interest Rate Corridor (IRC); the NBC has in place a partial Interest Rate Corridor, having introduced an overnight Marginal Lending Facility (MLF) in September 2021. Stabilizing short-term money market rates and improving liquidity management would facilitate de-dollarization and preserve an interest rate spread that supports demand for local currency.

### Authorities’ views on fiscal and financial policy
- The authorities considered ongoing fiscal stimulus important but with an eye to debt sustainability; they considered that fiscal stimulus should continue into 2023 to support recovery and counter the impact of inflation shocks.  
- The authorities project the fiscal deficit to be slightly lower in 2023 compared to that in the 2022 budget law.  
- The authorities agreed on the need to resume savings over the medium term in line with the new draft Public Finance System Law. The draft law mandates that, in addition to any annual budget surpluses, 2 to 4 percent of current annual revenue at the national level from the previous year is to be accumulated in a Financial Reserve Fund.  
- The authorities affirmed commitment to maintain debt sustainability and to develop the government bond market in a sustainable manner; they will consider a nominal debt target but highlighted that upcoming GDP rebasing would affect several indicators, including the debt-to-GDP ratio and tax revenues to GDP. To help mobilize domestic resources, the authorities will investigate how to rationalize tax exemptions.  
- The authorities viewed the financial system as sound and resilient: banks remained well capitalized and profitable, with low liquidity risks. They have conducted extensive onsite inspections and are confident in loan classification and provisioning. The authorities agreed to monitor developments closely, adopt a granular approach, and gradually return to pre-pandemic policy settings in reserve and capital requirements in the medium term—starting by raising reserve requirements in foreign currency.

### Governance, anti-corruption, and implementation gaps
- Recent steps include adoption of a renewed anti-corruption action plan (2020-2025), creation of an Anti-Corruption Institution (ACI), measures toward preparation of a National Risk Assessment (NRA), improvements to procurement procedures, and enhanced access to judicial and fiscal information.  
- Vulnerabilities remain: perceptions of substantial weaknesses in rule of law, fair and equal access to administration of justice, and corruption persist despite some progress. Transparency about concession agreements remains limited; asset declarations are verified only when public officials are under investigation rather than monitored permanently; Cambodia does not currently have whistleblower protection and access-to-information laws. Securing sufficient human and technological resources for investigative and monitoring agencies has been challenging.  
- Recommended further improvements include measures and tools to increase transparency and access to information (e.g., improvement and digitization of the asset declaration system and declarations of beneficial ownership of public contracts), whistleblower protection, more resources and training, and reinforced inter-agency cooperation. The authorities noted progress in framework and legislation but acknowledged implementation challenges and resource constraints; full digitalization of asset declarations was judged inappropriate at this stage due to security concerns.

### Staff appraisal and policy recommendations
- The economy had been recovering from the pandemic but faced new 2022 challenges: higher inflation following significant increases in fuel and fertilizer costs; slowdowns in US, Europe, and China; and tighter global financial conditions. Signs of scarring exist and the current account remains substantially weaker than implied by fundamentals and policies (based on 2021 data). Authorities have continued crisis policy responses and reforms.  
- Recovery is expected to continue but is vulnerable to downside risks; baseline projections are for solid growth rates but the recovery is highly susceptible to a worsening external environment. Private debt is very high, raising concerns about a drag on the economy if borrowers struggle to meet repayments.  
- To mitigate external and credit risks, authorities should continue targeted fiscal support balanced by normalizing prudential and monetary conditions; social protection should shield the most vulnerable from inflation and adverse demand shocks. The NBC should take a very conservative approach to supervision and be prepared to raise provisioning and capital requirements for lenders facing solvency problems.  
- Improvements in policy frameworks can bolster medium-term prospects: adopt a debt anchor in nominal terms combined with an overall deficit ceiling to provide a credible framework for sovereign debt market development. Implement corporate insolvency, debt and bank restructuring, and deposit protection frameworks to prevent persistence of high debt levels.  
- Investment environment would benefit from continued governance efforts: passage of key legislation, digitization of reporting and monitoring processes, and securing sufficient human and technological resources for investigative and monitoring agencies.

*International Monetary Fund — Chapter: Demands on public spending increased during the pandemic and will likely increase further*

### 46.      It is proposed that the next Article IV consultation with Cambodia be held on the

### 1khmea2022002 - 46. It is proposed that the next Article IV consultation with Cambodia be held on the

### Article IV scheduling
- It is proposed that the next Article IV consultation with Cambodia be held on the standard 12-month cycle.

### Macroeconomic recovery and activity (key observations)
- In Q2 2022, Covid-19 cases have plummeted as the country fully reopens.
- International arrivals are picking up, while tourism has room to recover further.
- Garment exports have largely recovered, while construction activity remains subdued.

### Public finances: revenues, composition, and spending pressures
- A broad-based recovery in tax revenues began in 2022, after a weak performance in 2021.
- There was some disconnect in import growth and revenues from imported goods in 2021.
- Revenue reliance on imported goods is significant, with VAT and excises on imports almost threefold compared to domestic goods.
- Import duties are concentrated on a few goods, including vehicles and fuel.
- Spending pressures continued in 2021, with higher healthcare measures.
- Covid-19 intervention measures are being slowly waned, but planned interventions in 2022 are still larger than in 2020.

### External balances: deficits, composition, and financing
- The current account deficit widened significantly in 2021, reflecting subdued tourism receipts and, to a larger extent, surging gold imports.
- Gold imports accounted for almost half of the total current account deficit in 2021.
- Remittance income remained relatively low.
- FDI inflows to manufacturing industries recovered somewhat, but inflows to service sectors slowed.
- Short-term capital inflows skyrocketed, partially offsetting the large current account deficit and resulting in a modest decline in reserve coverage.

Key numeric indicators and balances (preserved exactly as reported)
- Current account deficit: 48 percent GDP at the end of 2021 (over five times the deficit in 2020).
- Gold imports accounted for almost half of the total current account deficit in 2021.
- Financial account increased to 47 percent of GDP in 2021.
- Short-term capital: net inflow of 25 percent of GDP in 2021 (from a net outflow of -8 percent of GDP in 2020).
- Net foreign asset (NFA) position: decreased from -77 percent of GDP in 2020 to -111 percent of GDP by end-2021.

### Staff assessment (External Sector Assessment highlights)
- Cambodia’s external position in 2021 is assessed as substantially weaker than the level implied by medium-term fundamentals and desirable policies after adjusting for temporary factors (a surge in gold imports while tourism receipts and remittance income remained sluggish).
- Recent data suggests gold imports in the first three months of 2022 are about 50 percent less than the same period last year; on this basis gold imports are assessed to be partially temporary.
- Adjustment methodology: the current account deficit is adjusted by half of total gold imports, lowering the deficit by 11 percentage points (i.e., partially treating gold imports as temporary).
- After adjustments for temporary gold imports and cyclical factors (weaker terms of trade, larger output gap, Covid-19-related tourism losses and medical imports, and natural disasters), the current account deficit in 2021 is adjusted to -25 percent.
- Comparison to norms and valuation assessments:
  - Current norm: -7.6 percent of GDP.
  - Current account gap: -17.3 percent of GDP (adjusted), equivalent to a real exchange rate overvaluation of about 29 percent.
  - Real exchange rate model estimated gap: -16 percent of GDP.

### Implications and medium-term outlook (staff projections and dynamics)
- Over the medium term, Cambodia’s NFA position is projected to trend downward, in line with recovery of FDI inflows partly offset by reserves accumulation.
- Service-sector FDI (especially hotels and restaurants) continued to see declines in inward foreign investment despite some recovery in manufacturing FDI.
- A large part of the short-term capital inflows was recorded as other investment; the source and nature of these inflows are not clearly identified.

*Source: Cambodia — IMF staff report excerpts (figures, tables, and Annex I: External Sector Assessment) contained in the provided content unit.*

### 4.      The external sector assessment faces large uncertainties. Gold trade has been highly

### 1khmea2022002 - 4.      The external sector assessment faces large uncertainties. Gold trade has been highly

### External sector assessment and gold trade uncertainties
- Gold trade shifted: Cambodian exported gold in 2020, and then switched to importing gold in 2021.
- Gold imports continued, albeit at a slower pace in early 2022, despite increases in the price of gold.
- The estimated current account gap is subject to large uncertainties:
  - The estimated gap can range from -8.4 to -31 percent of GDP assuming gold imports are entirely temporary or permanent respectively.
  - The qualitative assessment (that Cambodia’s external position is substantially weaker than the implied fundamentals and desirable policies) does not change even if the 2021 current account balance completely excludes gold flows.
- Notes on temporary adjustments affecting the current account assessment:
  - Tourism (4.9 percent of GDP) and medical goods (1.8 percernt of GDP) used for additional cyclical adjustment.
  - Medical goods exports are assessed to be negligible.

### Real effective exchange rate (REER) and appreciation trend
- Trend appreciation slowed but resumed:
  - The real exchange rate had appreciated by 4 percent annually over the decade before the pandemic.
  - The appreciation trend was temporarily disrupted by the (nominal) depreciation of the US dollar in 2020.
  - In 2021, the real exchange rate appreciated again, by about 4 precent.
  - The appreciation resumed in 2022 until its third quarter, reflecting capital inflows.
- Elasticity reported: -0.60
- REER Gap reported: 28.8 and 27.0 p (as shown in the model output).

### International reserves and adequacy
- Gross reserves movements and levels:
  - Gross reserves decreased slightly, by US$0.4 billion in 2021.
  - Reserves were 80 percent of estimated 2021   GDP.
  - This corresponds to close to 8 months of prospective imports.
  - The ARA tool optimal level for credit-constrained economies: 4 month of imports.
- Policy implication:
  - Although the current level of reserves is adequate, a high level of international reserves remains advisable given Cambodia is a highly export-dependent economy, operating in a fixed-exchange rate regime with a high degree of dollarization.

### Risk Assessment Matrix — selected risks, likelihood, impact, and policy responses
- Corporate and/or household debt distress
  - Likelihood: Medium-High
  - Impact: Rising private debt questions sustainability; loan books might be less healthy than indicated by statistics.
  - Policies: More intrusive financial supervision; force resolution and write-downs; advance corporate insolvency and bank resolution laws.
- Abrupt global slowdown or recession
  - Likelihood: Medium-High
  - Impact: Reduced external demand from Europe, the US, and China; substantial effect on the economy.
  - Policies: Fiscal policy to support the economy (monetary policy constrained by exchange rate peg).
- Commodity price shocks + de-anchoring of inflation expectations and stagflation +
  - Likelihood: Medium
  - Impact: Cambodia is a net oil importer; rising commodity prices could reduce purchasing power and increase relative poverty.
  - Policies: Limited monetary options; fiscal policy should address distributional consequences while avoiding fueling domestic inflation pressures.
- Local Covid-19 outbreaks
  - Likelihood: Medium
  - Impact: Additional outbreaks could necessitate lockdowns/border closures; health system capacity relatively low.
  - Policies: Continue testing and tracing; distribute boosters for new variants as available.
- Deepening geo-economic fragmentation and geo-political tensions
  - Likelihood: High
  - Impact: Disrupt trade, damage confidence, affect export markets and/or FDI.
  - Policies: Promote export market diversification, relying on regional markets.
- Cyber attacks
  - Likelihood: Medium
  - Impact: Vulnerability of government and private sector information systems.
  - Policies: Enhance guidelines for security in government and private sector information systems.
- Natural disasters related to climate change
  - Likelihood: Medium
  - Impact: Severe threats to agricultural production, exports, industrial production, housing; potential forced migration.
  - Policies: Continue National Adaptation Plan (NAP) and Green Recovery Action Plan (2021-2023); invest in climate-resilient infrastructure, reforestation, and secure agricultural production/food security; budget for support to affected households and firms.

### Implementation of past Article IV recommendations — progress and actions (selected)
- Fiscal policy and support measures
  - Authorities introduced 10 rounds of Covid-19 policy measures and launched the “Strategic Framework and Programs for Economic Recovery in the Context of Living with Covid-19 in a New Normal 2021-2023” in December 2021.
  - Cash transfer system continues for poor and vulnerable households until September 2022; authorities discussing extension to those affected by rising fuel and food prices.
  - Additional funding: US$ 100 million to the SME Bank and ARDB (February 2022); Tourism Recovery Co-Financing Scheme (TRCS) through the SME bank with another US$ 75 million (May 2022).
  - Revenue mobilization: Revenue Mobilization Strategy (RMS) 2019-23 implementation and strengthened administration (E-registration, E-filling, E-payment, E-customs) boosted VAT, customs, and excise tax collection.
  - Postponed introduction of capital gains tax until 2024; efforts on property tax and VAT on e-commerce.
  - Government intends to issue local-currency government bonds in 2022 while building market infrastructure.
  - Progress on fiscal governance: MTBF introduction, PFM reform, FMIS roll out, and draft law on Public Finance System (PFS).
- Macro-financial and monetary policy
  - Prudential normalization steps:
    - NBC issued a circular extending forbearance for new restructured loans until end of June 2022, requiring classification and provisioning for restructured loans and stress testing.
    - NBC considering gradually increasing reserve requirement ratios to pre-Covid-19 levels starting second half of 2022.
  - Supervisory and safety-net reforms:
    - New CAR framework in line with Basel III drafted; expected release in the second half of 2022.
    - Deposit protection law drafted; legislation for Special Bank Resolution under drafting.
  - Non-Bank Financial Services Authority (NBFSA) established in July 2021; six regulators introduced for key non-bank sectors.
  - Digital payments and fintech:
    - Bakong payment system (block-chain technology) launched in 2020 with more than 8 million users as of April 2022.
    - NBC encouraging cashless payments; growth in digital deposit accounts, e-wallets, virtual cards, online transactions.
    - Cambodia’s FinTech Development Policy being developed.
  - Exchange rate flexibility and dollarization:
    - Preconditions for reducing dollarization include development of interbank and money markets.
    - Government expected to issue sovereign debt in 2022Q3.
    - Marginal Lending Facility (in riel) introduced; Marginal Deposit Facility in preparation; feasibility study for interbank transactions on NBC Platform underway.
- AML/CFT regime
  - Ad hoc sub-committee established January 2022 to implement FATF action plan addressing four remaining deficiencies.
  - Progress on Immediate Outcomes: dissemination of financial intelligence (IO-6); trainings for Targeted Financial Sanctions related to proliferation financing (IO-11); increase in money laundering investigations & prosecutions (IO-7); freezing and confiscation (IO-8).
  - Progress report to be submitted to FATF by June 2022 for re-evaluation (result to be available in November 2022).
- Structural policies: diversification, informality, corruption, climate
  - New Investment Law (adopted October 2021) and Garment, Footwear and Travel Goods (GFT) Sector Development Strategy 2022-27 (adopted March 2022).
  - Additional funding to SME Bank and ARDB (February 2022) to support domestic manufacturing and agriculture.
  - Cambodia Digital Economy and Society Policy Framework 2021-35 (adopted May 2021).
  - Measures to address labor informality: tax breaks to encourage formal registration; expansion of Health Equity Fund (HEF) to cover informal workers.
  - Anti-corruption steps: dissolved CAMCONTROL and KAMSAB from border checkpoints and ports; launched Cambodia Data Exchange Platform (CamDX) and online business registration; Anti-Corruption Unit (ACU) activities and draft whistleblower protection legislation submitted to Ministry of Justice.
  - Climate action: National Climate Change Strategic Plan 2014-23; ratified 2015 Paris Accord; first NDC (2015) and updated report (2020); Long-Term Strategy for Carbon Neutrality (LTS4CN) launched December 2021; “3Rs” in Economic Recovery Strategy (December 2021); Cambodia Climate Public Expenditure Review 2020 published March 2022; 14 line ministries prepared Climate Change Action Plans linked to BSP.
- Data quality and transparency
  - Participation in the e-GDDS linked to IMF’s DSBB; National Summary Data Page (NSDP) on Central Bank website.
  - Official launch of a Residential Property Price Index in June 2022 (technical support from IMF).
  - Ongoing GDP rebasing with IMF technical review.
  - Government Finance Statistics progress: full consolidation of general government (covering 2015-2020); COFOG-consistent expenditure compilation; reconciliation of three indicators against External Sector Statistics (ESS).

*Source: CAMBODIA — INTERNATIONAL MONETARY FUND (extracted from provided content).*

### Annex IV . Capacity Development Strategy

### Annex IV . Capacity Development Strategy

### A. Recent CD Activities
- Cambodia was the largest recipient of CD resources in FY2022 within the Asia and Pacific region.
- CD has been integrated with Fund surveillance; 2021 Article IV surveillance priorities were:
  - i) fiscal policies including on safeguarding fiscal sustainability;
  - ii) macro-financial and monetary policies including on addressing macro-financial risks;
  - iii) structural policies including on promoting further diversification.
- CD priorities included safeguarding fiscal sustainability and addressing macro-financial risks, and responded to Covid-19-related needs.

- Fiscal sector (Safeguarding fiscal sustainability)
  - Regular TA on public financial management (PFM) and treasury management coordinated through CDOT regional advisors improved spending efficiency, fiscal reporting and governance.
  - CD supported development of an operational Macroframework to assess the impact of fiscal policies.
  - The MEF has been supported by a resident MTBF advisor.
  - A macro-fiscal semi-structure model was developed by MEF with IMF/CD support to support work on an MTFF.
  - TA on strengthening customs administrations supported the authorities’ revenue mobilization strategy (RMS) (2019–-23).
  - Table 1 (selected TA focus and results):
    - PFM (FMIS, COFOG, IPSAS, and treasury management; MTFF): Supported rolling out Phase II and III of the FMIS; improved fiscal reporting, fiscal management and budgeting, treasury, and accounting issues.
    - Macro-fiscal capacity: Improved MEF’s macroeconomic and revenue models, developed tools to monitor and update macro projections in-year and a MTFF; developed an operational Macroframework to assess the impact on the economy.
    - Revenue mobilization: Supported GDCE in developing enforcement strategy, the ICT strategy, and strategic and operational planning functions; priority areas from tax policy review and tax administration diagnostic are included in the new RMS (2019–23).

- Monetary and financial sector (Addressing macro-financial risks)
  - TA focused on strengthening banking supervision and regulation, with a long-standing resident advisor in banking supervision and regulation.
  - TA addressed regulatory forbearance during Covid-19 and prepared for exit from forbearance.
  - Other TA covered financial stability analysis, stress testing and macroprudential policy; preparations for a bank resolution regime framework and a deposit protection scheme; improving liquidity forecasting/management and interbank market development; strategies to promote local currency use with regular CDOT support.
  - Table 2 (selected TA focus and key results):
    - Upgrading regulation and supervision: Upgraded regulations and supervisory processes for credit risk, provisioning, and reporting requirements; minimum capital requirement; capital buffer; liquidity coverage ratio (LCR) and solvency framework in line with Basel III (including the new Prakas on CAR); prepared a new framework for prompt corrective action (PCA) and Deposit Protection Scheme (DPS).
    - Improve monetary policy framework and FX operations: Improved liquidity management and forecasting; interbank market development; introduced local currency instruments including NCD, LPCO, MLF and established online trading platform; working to establish a fully-fledged Interest Rate Corridor, streamlining OMOs and KHR reserve requirement, and adjusting the monetary policy decision making process.
    - Promote local currency use: A market based, gradual strategy for promoting the use of local currency is prepared.
    - Systematic financial stability analysis: Established a fully dedicated division to systemic financial stability analysis; published the first-ever Financial Stability Report (FSR).
    - Macrofinancial linkages: Built a microframework with linkages from the financial to real, fiscal, and external sectors.

- Statistics and training
  - TA focused on improving data quality and availability in external (ESS), government (GFS), and monetary and financial sector statistics (MFS).
  - Supported development of a residential property price index (RPPI), officially launched in June 2022.
  - TA supported Cambodia’s participation in the e-GDDS and the launch of a National Summary Data page (NSDP) improving data transparency.
  - Macro-financial training resumed face-to-face in April 2022; delivered by CDOT, STI and ICD, included regional ICD courses tailored to Cambodia, Laos and Vietnam on Macroeconomic Diagnostics, Exchange Rate Policy, and Public Sector Debt Dynamics.
  - Training supported the Interagency Economic Core Group (ECG) to develop a Macro-framework and strengthen macroeconomic analysis and forecasting; supported MEF macro-fiscal modeling as input into MTFF.
  - Regional and country-specific training improved quality of statistics (external sector statistics, government financial statistics).

### B. Forward Looking CD Priorities
- IMF CD aims to support Cambodia’s transition to the next phase of development by enhancing institutional capacity for macroeconomic stability and inclusive growth.
- New CD programs are being initiated, including to the NBC to strengthen forecasting for monetary policy.
- Forward-looking priorities are informed by a multi-year surveillance strategy and CD matrix covering traditional macroeconomic issues, enhanced macro-financial focus, SDG-related topics, and emerging Fund issues.

- CD priorities (selected)
  - Safeguarding fiscal sustainability:
    - Manage spending pressures; prioritize growth-enhancing infrastructure and development spending.
    - Sustain revenues by modernizing revenue administration and policies to improve efficiency and equity.
    - Address debt management challenges from potential contingent liabilities from PPPs and introduction of a domestic debt market.
    - Introduce MTFF/MTBF to improve budget planning and fiscal risk management.
    - Focus activities on revenue mobilization and debt management, improving fiscal governance and strengthening capacity.
  - Addressing macro-financial risks:
    - Monitor elevated financial sector vulnerabilities, especially in the real estate sector during gradual exit from forbearances.
    - Implement past measures effectively; consider targeted prudential measures (e.g., raising risk weights for real-estate lending).
    - Introduce a crisis management framework with a deposit protection scheme; continue upgrading regulation and supervision.
    - Promote financial market development and local currency use; address AML/CFT deficiencies.
  - Structural reform issues:
    - Advance reforms to increase competitiveness, encourage diversification, and expand financial inclusion.
    - Reorient fiscal policy to better support inclusion: shift taxes toward progressive sources and prioritize infrastructure, health and education spending.
  - Statistics:
    - Continue broad-based improvements in data availability, quality, frequency and transparency.
    - Expand coverage of existing datasets and develop new datasets for emerging needs.
    - Current shortcomings include: use of TOFE system (based on GFS 1986) rather than GFS 2014; national accounts weaknesses (outdated base year, inadequate GDP expenditure component estimates, limited quarterly national accounts); gaps in real estate statistics; slow implementation of national statistics strategy resulting in segmented, unreliable and inconsistent macroeconomic statistics.
  - Addressing governance vulnerabilities and corruption:
    - Strengthen fiscal governance via reforms to revenue administration, PFM and procurement to increase spending efficiency, improve transparency and reduce corruption opportunities.
    - Improve regulatory environment, strengthen rule of law and advance anti-corruption agenda.

### C. CD Strategy (Delivery and Effectiveness)
- Key caveats to improve CD effectiveness:
  - Tailoring:
    - TA design must consider authorities’ starting point, absorption capacity and time needed for broad-based reform.
    - CD should recognize limited absorptive capacity and resources and follow up past TA recommendations.
    - Better tailoring through careful prioritization, sequencing, and proposing incremental reforms to ensure sustainability.
  - Ownership:
    - Strengthen country ownership at all CD stages (scoping, initiation, execution, implementation).
    - Maintain close dialogue between Cambodian authorities and the Fund to align CD with country priorities and allow mid-course corrections.
  - Human resource management:
    - Modernize authorities’ HR strategy: map key functions and significant business processes in each agency; build staffing plans; identify urgent skill gaps; enhance staff allocation and CD management.
    - Deliver manuals to elaborate TA results (example: CAMFI prepared by ICD) to enhance institutional memory.

### Annex V (excerpt): Social Protection Reform in Cambodia — Overview
- Cambodia’s National Social Protection Policy Framework (NSPPF) structures social protection under two pillars:
  - I. Social Assistance: emergency response, human capital development, vocational training, welfare for vulnerable people.
  - II. Social Security: pension, health insurance, employment injury insurance, the Health Equity Fund (HEF), and a baby bonus.
- Under the NSPPF the authorities plan to introduce unemployment insurance and disability insurance in the future.

- Expansion during the pandemic:
  - The ID Poor system and digital payment method were used in 2020 to deliver the Cash Transfer Program for the Poor and Vulnerable Households.
  - From initiation in June 2020 to May 2022, the government spent around US$ 684 million on the cash transfer program for 687,372 families in both urban and rural areas.
  - On social security, in 2021 there were 3,018,798 payments provided for poor households and 73,164 payments provided for informal workers under the HEF.

- Future developments:
  - The government plans to introduce the “Family Package (FP)” after a gradual phase-out of the Cash Transfer Program for the Poor and Vulnerable Households affected by Covid-19.
  - The government will develop a roadmap for universal health coverage (UHC) and examine feasibility of expanding social protection coverage.

*Source: 1khmea2022002 - Annex IV . Capacity Development Strategy*

### 5. Baby Bonus

### 5. Baby Bonus

### Family Package (FP) Framework
- Government plans to introduce the Family Package Framework in 2023 as a transition from the Covid-19 Cash Transfer Program for the Poor and Vulnerable.
- FP will gradually integrate four programs:
  - cash transfers to pregnant women and children under 2;
  - scholarships for primary and secondary school students;
  - cash transfers to people with disabilities;
  - cash transfers to the elderly.
- FP objective: create a social assistance system responding to needs of poor families and vulnerable members from conception to death.
- Implementation arrangements:
  - Roll-out starting in 2023 with gradual integration of four programs in collaboration among key line ministries.
  - Targeted at poverty; requires continued strengthening of the ID Poor system to identify poor and at-risk households.
  - Envisages streamlining delivery (enrollment, payments, grievance) and establishing monitoring and evaluation managed by the National Social Assistance Fund (NSAF) in collaboration with line ministries.
- FP design features:
  - Life-cycle approach covering pregnant women, children, the elderly, persons with disability (PwD), and persons living with HIV.
  - Intends linkages with existing complementary social protection programs and social services.
  - Provides space for potential expansion of coverage to additional vulnerable populations, particularly for shock-responsive social protection.
- Identified challenges for integration of fragmented social assistance programs:
  - Establish clear institutional arrangement and strong coordination among relevant entities for integration.
  - Ensure full coverage of all age groups under current poverty-targeting model.
  - Expand coverage where appropriate (e.g., near poor, expanded coverage for children, PwD, elderly), particularly for shock-responsive social protection.
  - Strengthen digitalization of the payment system, requiring investment in financial inclusion and financial literacy.
  - Establish adequate value of benefits following the new poverty line and in-depth analysis of additional needs of particular vulnerable groups, including PwD, children and elderly.
  - Develop financing strategy for social assistance schemes.

### Baby Bonus and Social Assistance: current status and evolution
- Emergency and social assistance programs (selected highlights):
  - Cash Transfer for Poor and Vulnerable Households during Covid-19:
    - Between June 2020 and May 2022, 687,372 households or 2.7 million people received benefits with total budget spent at approximately US$683.6 mill.
    - Will be phased-out gradually depending on the development of Covid-19 and inflation (oil and food prices).
  - Cash Transfer for Pregnant Women and Children under 2:
    - Launched in 2019; by March 22, 2022, 138,482 beneficiaries received the cash transfer of which 96,949 mother and 41,533 children.
    - Will be integrated into "Family Package Framework".
  - Scholarship Program for Primary and Secondary Education:
    - Around 261,974 students have received the scholarship.
    - Will be integrated into "Family Package Framework".
  - Cash Allowance for Poor Person with Disabilities:
    - Around 16,807 beneficiaries received these benefits in 16 provinces.
    - Will be integrated into "Family Package Framework".
- Baby Bonus program (summary from Table 1):
  - From January 2018 to February 2022, the baby bonus provides benefits to 296,220 new mothers (298,242 children) with both formal and informal employment equivalent to US$29.8 mil.

### Universal Health Coverage (UHC): coverage, efficiency, and financing challenges
- Coverage of existing schemes:
  - Existing health coverage schemes collectively cover about 4.7 million Cambodians, or 30 percent of the population.
  - HEF covers about 2.6 million individuals.
  - NSSF health insurance schemes cover 0.4 million (civil servants) and 1.7 million (formally employed workers).
- Inclusion and exclusion errors:
  - About 36 percent of people under the national poverty line do not hold an Equity card to access HEF benefits.
  - Less than 50 percent of Equity card holders are under the national poverty line.
- Technical and allocative efficiency issues:
  - Technical efficiency: public hospitals and health centers can achieve higher service output by 34 and 73 percent respectively with current level of resources.
  - Allocative efficiency: resources are concentrated in urban areas while rural areas with higher maternal mortality rates remain underfunded.
  - Public health service underutilization: less than 20 percent of rural patients first sought healthcare among public services, while 76 percent used private sector as their first point of contact.
- Financing issues:
  - High out-of-pocket expenditure (OOPE) and reliance on external financing challenge sustainable financing for UHC.
  - OOPE is estimated to account for approximately 60 percent of total health expenditure in Cambodia.
  - Empirical OOPE estimates:
    - Rural areas OOPE estimated at US$ 18.01 and US$ 24.16 per individual per month for the second and third wealth quintiles respectively.
    - Average monthly OOPE among working-age adults seeking care is estimated at US$ 43.08 and US$ 46.68.
  - Cambodia’s current health expenditure (CHE) appears low compared with regional peers; public health expenditure per capita is the third lowest among regional peers in 2019.
  - Cambodia’s Health Strategic Plan target—government health expenditure as percentage of government total expenditure to reach 9 percent by 2020—has not yet been met.
- Coverage expansion needs and targets:
  - Expansion to the lower three income quintiles would likely mitigate exclusion errors.
  - About 8.7 million Cambodians (over 53 percent of the population), out of which nearly 5 million are considered as vulnerable, do not have a social health protection mechanism yet.
  - About 16 percent of the eligible population who have access to a mechanism are not yet enrolled.
- Suggested policy directions to advance UHC:
  - Improve enrollment of vulnerable populations including informal workers.
  - Address efficiency by increasing use of public health services to reduce unit costs and improve technical efficiency.
  - Consider allocative efficiency and equity-efficiency trade-offs when distributing resources geographically.
  - Mobilize effective resources to meet growing health spending needs and increase public health expenditure.

### Key statistics and program figures (exact values preserved)
- Family Package Framework planned start: 2023.
- Existing health coverage:
  - 4.7 million Cambodians covered collectively.
  - 30 percent of the population covered.
  - HEF covers about 2.6 million individuals.
  - NSSF covers 0.4 million (civil servants) and 1.7 million (formally employed).
- Inclusion/exclusion metrics:
  - 36 percent of people under the national poverty line do not hold an Equity card.
  - Less than 50 percent of Equity card holders are under the national poverty line.
- Efficiency metrics:
  - Public hospitals and health centers can increase service output by 34 and 73 percent respectively.
  - Less than 20 percent of rural patients first seek public services; 76 percent use private sector first.
- Financing and OOPE:
  - OOPE approximately 60 percent of total health expenditure.
  - Rural OOPE estimates: US$ 18.01 and US$ 24.16 per individual per month (second and third wealth quintiles).
  - Average monthly OOPE among working-age adults seeking care: US$ 43.08 and US$ 46.68.
- Coverage gaps:
  - 8.7 million Cambodians (over 53 percent of the population) lack social health protection.
  - Nearly 5 million of those are considered vulnerable.
  - About 16 percent of eligible population with access to a mechanism are not yet enrolled.
- Social assistance program expenditures and reach:
  - Covid-19 Cash Transfer (June 2020–May 2022): 687,372 households or 2.7 million people reached; total budget spent approximately US$683.6 mill.
  - Cash Transfer for Pregnant Women and Children under 2 (launched 2019): by March 22, 2022, 138,482 beneficiaries (96,949 mothers; 41,533 children).
  - Baby Bonus (January 2018–February 2022): 296,220 new mothers (298,242 children) reached; equivalent to US$29.8 mil.

*Source: Ministry of Social Affairs, Veterans and Youth Rehabilitation; National Social Protection Council; Kolesar et al.; WHO; IMF.*

### 2. Dollarization in Cambodia remains persistent in part due to its external sector

### 2. Dollarization in Cambodia remains persistent in part due to its external sector

### Persistence and main drivers
- External sector development:
  - Continued absorption of foreign currency mainly through Foreign Direct Investment (FDI) to sectors such as manufacturing (e.g., garment) and services (e.g., tourism, finance, and real estate).
  - Official aid gradually decreases as the economy develops.
  - Cambodia’s rapid economic growth has been financed by inflows from abroad (i.e., FDI, foreign aids) over the last two decades: substantial current account deficits have been continuously offset by the country’s surplus in the financial account, leading to accumulation of the country’s net foreign assets including NBC’s international reserves.
- Financial deepening:
  - Integration of USD use with financial development as external funding and financial deepening proceeded.
  - Financial dollarization (share of FCDs in total broad money, M2):
    - Vietnam: 10.8% (mid-2010s)
    - Laos: 44.4% (mid-2010s)
    - Cambodia: about 36.3% in 1993; 85.6% at end-2018; 83% at end-2021.
  - Despite macroeconomic and political stability over the last two decades, Cambodia shows very high and persistent dollarization.
- Network externalities:
  - USD dominance for payment (medium of exchange), unit of account, and store of value.
  - Payment and real dollarization act as preconditions for financial dollarization, producing “network externality” where a larger number of currency users increases the currency’s utility.

### Spatial distribution and enterprise patterns
- Dollarization is concentrated mainly in urban areas, especially Phnom Penh, where economic activities are more dynamic and exposed to foreign currency flows.
- Rural areas: KHR dominates in payments, price quotations, and as a store of value; KHR used in small payments (foodstuffs, traditional markets) and some large agricultural transactions.
- USDs used for large payments, imported goods, or in modern markets.
- Degree of dollarization in enterprise activities is not necessarily determined by firm size; it depends on geographic distribution and sources of incomes and borrowings (NBC-JICA survey, 2017).

### Policies and measures implemented to promote the use of local currency
- Enhancing confidence in KHR through exchange rate stabilization:
  - Short term: stabilize KHR exchange rate and purchasing power by moderating inflation.
  - Medium to long term: migrate to a more flexible exchange rate under flexible inflation targeting (further rigorous studies warranted).
- Promoting price quotations and payments in KHR:
  - Short term: encourage firms/sellers to quote prices and payments and salaries/wages in KHR only or alongside USD.
  - Medium to long term: require quoting only in KHR (impact studies needed).
- Promoting opening of bank accounts in KHR:
  - Encourage KHR-denominated bank accounts; long run: gradually require firms to open bank accounts for employees in KHR.
  - Government officials already receive salaries through KHR accounts.
  - Rural areas, with high KHR use and unbanked households, are good targets for promoting KHR accounts.
- Improving KHR payment system and financial instruments:
  - Increase availability of KHR notes in ATMs nationwide.
  - Encourage remittances via formal financial institutions or agents to reduce direct foreign currency use.
- Increasing the cost of retaining foreign currency deposits:
  - NBC introduced differentiated required reserve rates in 2008: 16% for USD and 8% for KHR.
  - Rates were reduced to same level of 7% for both USD and KHR in March 2020 to ease banking liquidity in response to the pandemic; the rates remain the same as of June 2022.
- Increase financial intermediation in KHR:
  - NBC required banks and financial institutions (BFIs) to have at least 10% of their loan portfolio in KHR by end of 2019; no strict measures on non-compliant BFIs and no rigorous impact study yet.
- Introduce mechanisms/tools to encourage interbank market and provide KHR liquidity to BFIs:
  - NBC introduced NCD (in KHR and in USD) to absorb excess liquidity and for BFIs to use in interbank money market.
  - NBC introduced LPCO, and more recently Marginal Lending Facility (MLF) to provide termed KHR liquidity to BFIs with NCD as collateral.
  - An overnight MLF was introduced in Sep 2021.
- Develop securities market for local currency:
  - CSX introduced with quotations in KHR; current transactions limited.
  - Government started to issue government bonds from September 2022 by auctions.
- Requirement of tax payment in KHR:
  - Revenue collection through tax is conducted in KHR, though some revenues are still collected in foreign currency (e.g., electricity bill, entrance fees to tourism sites, airport taxes, visa fees, rents).
- Promoting public awareness:
  - NBC campaigns including annual Riel Day.

### Strengthening domestic financial markets (recommendations)
- Foreign exchange market:
  - Formalize all money changers with bank accounts at commercial banks.
  - Develop an effective wholesale FX market to absorb FX inflows and provide FX when needed.
  - Improve market information for timely NBC measures to promote local currency.
- Money markets:
  - Establish an active interbank money market to better manage KHR liquidity.
  - Introduce a full-fledged interest rate corridor (IRC) to support KHR interbank market development.
  - Continue systemic and timely market monitoring via NBC platform.
- Securities markets:
  - Further develop securities and bond markets; introduce more instruments beyond recent local currency government bonds.
- Payment systems:
  - Clearing house policy to further lower KHR transaction fees to make KHR more attractive to banks and clients.
  - Enhance payment systems (e.g., Bakong) to lower KHR transaction costs.

### Additional supporting measures and conditionality
- Prudential measures:
  - Reintroduce differentiated reserve requirement rates with higher rates for USD to raise the cost of holding USD deposits for BFIs.
  - Future deposit protection scheme could adopt a differentiated approach (e.g., higher insurance coverage for KHR deposits) to incentivize depositors to hold more KHR.
- Public price quotation measures:
  - Consider gradual migration of all other current public revenues to KHR transactions (e.g., entrance fees to tourism sites, airport taxes, visa fees, public building rents).
- Preconditions:
  - Macroeconomic stability is a precondition for successful de-dollarization; development of domestic financial markets would reduce risk, increase fund availability, decrease uncertainty and exchange rate volatility, and enhance public confidence in KHR.

### Evidence-based policymaking and strategy
- NBC introduced a strategy “Promoting the Use of Khmer Riel” in 2017.
- Recommendation to upgrade the strategy to a national policy with robust empirical studies on the impact of de-dollarization measures to achieve stronger stakeholder commitment.

*Source: 1khmea2022002 - 2. Dollarization in Cambodia remains persistent in part due to its external sector.*

### 7. Cambodia remains vulnerable to climate risks, particularly floods, droughts, and

### 7. Cambodia remains vulnerable to climate risks, particularly floods, droughts, and

### Climate risk exposure and historical impacts
- Between 1993 and 2020 Cambodia experienced: 20 floods, 5 droughts, 6 tropical storms and 1 famine.
- Estimated damage from these events: at least US$1.5 billion (Emergency-Events Database [EM-DAT], 2021).
- The drought and floods in 2020 underscored dependence of the large agricultural sector on regular monsoon seasons and showed that fluctuations in Mekong River flows affect traditional irrigation systems, fishing, and transportation for industry and land tourism.
- Without actions, the population exposed to an extreme river flood could grow to around a quarter of total population (i.e., 4 million) by the 2040s.
- Damming of the Mekong River and large-scale dams on tributaries may alter future flood dynamics (World Bank [WB] and Asian Development Bank [ADB], 2021).
- Cambodia scores relatively low on “adaptive capacity4”.

### Projected climate trends and macroeconomic impact
- Projected climate change trends indicate more severe floods and droughts that are projected to reduce GDP by 9.8 percent in 2050 relative to its baseline (NCSD, 2019).
- Under the highest emissions pathway (Representative Concentration Pathways (RCP) 8.5), Cambodia is projected to warm by 3.1 o C 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 (WB and ADB, 2021).

### Policy framework and adaptation planning
- Climate change has been addressed in the National Strategic Development Plan (NSDP) since 2009 and in the Rectangular Strategy Phase IV (2019-2023).
- In 2013 Cambodia adopted the Cambodia Climate Change Strategic Plan (CCCSP) 2014-2023 as its first national climate framework.
- Climate change has been integrated into sectoral planning with 14 ministries adopting respective action plans encompassing adaptation, including sub-national planning (NCSD, 2021).
- The Ministry of Economy and Finance (MEF) prepared a 2020 Climate Public Expenditure Review (CPER) to mainstream adaptation into the national budget process (MEF, 2022).
- The authorities reaffirmed commitment to enhancing resilience in the Economic Recovery Plan 2021-2023.
- A full National Adaptation Plan (NAP) has not yet been adopted; financing and implementation plans for 14 sectors were adopted partially (see NCSD (2017)).

### Costs, financing needs, and fiscal implications
- Public adaptation costs for Cambodia are projected to be between 2-3 percent of GDP (Figures 7 and Figure 8).
- The updated NDC highlighted that the total funding required for adaptation actions would be over US$2 billion (RGC, 2020).
- Majority of the identified climate adaptation projects by the 14 ministries (NCSD, 2017) have not yet been funded.
- Achieving the full NAP will call for fiscal reform (e.g., domestic revenue mobilization, strategic budget planning) and a coordinated approach across government and private sector partners to ensure adequate financing for adaptation-related investments.

### Recent and planned actions to mobilize investment and finance
- Government call for further investment for climate adaptation and financial resources in partnership with the private and financial sectors.
- Green and resilient public investment is emphasized to facilitate a sustainable recovery, including adaptation to climate change; the upcoming Climate-Public Investment Management Assessment (C-PIMA) will help identify potential improvements in public investment management institutions and processes to develop low-carbon and climate-resilient infrastructure.
- The government is promoting sustainable finance, including formulation and implementation of green financing mechanisms and public-private partnership (PPP) arrangements to mobilize additional resources for climate actions.
- The National Bank of Cambodia (NBC) has called for banks and financial institutions (BFIs) to put policies in place to promote green finance and environment-friendly investments; NBC is promoting ESG (Environment, Social, and Governance) by applying lower risk weight/provision to ESG loans.

*International Monetary Fund — Cambodia staff report content excerpt*

### 12.      Finally, the country is in the process of passing a new procurement law, following

### 1khmea2022002 - 12.      Finally, the country is in the process of passing a new procurement law, following

### Procurement reform
- The country is in the process of passing a new procurement law, following the recent introduction of a new procurement platform.
- Deficiencies identified:
  - Access to information must be enhanced to ensure "openness of data by default" while protecting confidential information where needed.
  - Information of beneficial owners of offerors in procurement processes and public contracts should be collected and managed by procurement authorities.
- Reference: http://gdpp.gov.kh

### Rule of Law — weaknesses
- Perceptions and index scores:
  - World Justice Project’s (WJP) Rule of Law Index: total score of 0.32 (over 1) in 2021.
  - Transformation Index (BTI): overall score of 1.8 over 5 in the rule of law component, comprised by:
    - separation of powers: 1 out of five
    - independent judiciary: 2 out of five
    - prosecution of office abuse: 2 out of five
    - civil rights: 2 out of five
  - BTI assessment trend: Cambodia obtained a score of 1.8 out of 10 in 2022, decreasing from 2.0 in 2018 and 2.5 in 2014.
- Perceptions of the judicial sector:
  - Independence and fair and equal access to the administration of justice are perceived as lacking.
  - The judicial system is perceived as not providing assuredness of even-handedness, equal access, efficiency, and fair play.
  - Distrust in the court system to ensure contract enforcement and property rights is widespread.
- Supporting methodological notes:
  - WJP Index is based on global surveys of more than 138,000 households and 4,200 legal practitioners and experts; presents scores and rankings based on eight factors. Last survey for Cambodia (including 1000 individuals) was made in 2014.
  - BTI references: Transformation Atlas 2022; no specific confidence intervals available.

### Rule of Law — frameworks and challenges
- Transparency and access to norms:
  - Legislation, decrees, and some judicial decisions are being published online in the portal of the Ministry of Justice: https://www.moj.gov.kh
  - Not all judicial decisions are accessible; some norms, particularly those adopted by local governments, are difficult to access.
- Land rights and cadastral system:
  - Protection of land rights presents important challenges.
  - Low performance in land administration across: reliability of infrastructure, transparency of information, geographic coverage, land dispute resolution, equal access to property rights.
  - The cadastral system faces numerous shortcomings, particularly regarding different land titles and state agencies involved.
  - The announcement of the government to adopt and implement a Master Plan for State Property Management is welcome.
- Dispute resolution and contract enforcement:
  - Systems for dispute resolution, contract enforcement and dispute settlement are highly vulnerable according to World Bank assessments.
  - Confirmation of vulnerability by development partners and civil society organizations interviewed during the mission.
  - Enhanced efforts needed to upgrade quality and trust in the court system.
- References: Transformation Atlas 2022 (bti-project.org); OECD Investment Policy Reviews: Cambodia 2018.

### Recommendations on anti-corruption, transparency, and judicial trust
1) Amend the Anti-Corruption Law and the Assets Declaration regime to ensure:
   - a) Public access to asset declarations of high-level officials,
   - b) That the declaration form requires information on assets and interests of children and spouses of obligated subjects (instead of just general contact data),
   - c) Independence of ACI commissioners, investigators, and staff

2) Adopt measures and tools to ensure effectiveness of the asset declarations regime, including:
   - a) New technological tools that allow for the collection, management, and risk-based audits over assets declarations.
   - b) A phased strategic plan to run risk-based audits over assets declarations.

3) Reinforce inter-agency cooperation to:
   - a) Strengthen cooperation between ACI and CAFIU, by adopting a joint task force to identify and recuperate assets lost to corruption or illicit enrichment.
   - b) Strengthen cooperation between ACI and the NAA, by adopting a joint task force to identify and recuperate assets lost to corruption or illicit enrichment.

4) Provide more resources and training for the NAA to:
   - a) Provide additional resources to the NAA to improve human capacity and training centers, particularly—but not only—for conducting audits of financial management systems based on current international accounting standards, to help prevent and deter loss of public funds to corruption.
   - b) Develop a strategic plan to ensure fiscal oversight over public spending in areas with corruption vulnerabilities, including—but not limited to—education, land concession agreements, and high-cost infrastructure projects.

5) Adopt measures to protect whistleblowers of acts of corruption, by:
   - a) Enacting a comprehensive whistleblower protection law, consistent with international good practices, that ensures whistleblowers’ protection from any form of retaliation.
   - b) Derogating article 41 of the Anti Corruption Law, which deters individuals from reporting corruption cases, out of fear to being subject of criminal prosecution.

6) Adopt measures to increase transparency and access to information by:
   - a) Adopting a law on transparency, that regulates the matter based in good international practice, including a definition of public information and documents, petition channels, and exceptions.
   - b) Adopting necessary tools to ensure access to big data and documents on public procurement, that may allow for enhanced oversight, accountability, and improved procurement-related policies.
   - c) Demanding disclosure of beneficial ownership in public contracts.
   - d) Ensuring publication of all legal norms, regulations, and judicial decisions, and considering adopting of legal tracking systems for the courts that may contribute to better court management and traceability of legal processes.

### Annex IX — Fiscal Rules in Cambodia: context and key recommendations
- Context:
  - Despite a history of prudent fiscal policy, new challenges suggest Cambodia would benefit from establishing a well-designed fiscal rules framework to further ensure fiscal sustainability.
  - While Cambodian authorities have recently adopted a debt rule, it does not provide sufficient guidance for medium-term fiscal policy.
- Guiding principles:
  - Fiscal frameworks should specify operational limit(s) on fiscal aggregates and a medium-term fiscal anchor linked to the final objective of fiscal policy; natural medium-term anchor: the debt-to-GDP ratio.
  - Effective fiscal rules properties: simplicity, flexibility, enforceability, sustainability, and allowing stabilization.
  - Fiscal rules types: debt, budget balance, expenditure, and revenue rules. About 70 percent of countries with fiscal rules have a debt rule combined with operational limits; most common in EMDCs: debt rule combined with a budget balance rule.
- Current Cambodian framework:
  - Public Debt Management Strategy (PDMS) 2019-23 sets debt ceiling (comprising public domestic debt, public external debt and publicly guaranteed debt) at 55 percent of GDP, with ceilings on present values of external and domestic debt ratios at 40 percent and 15 percent of GDP, respectively.
  - An “implicit” deficit ceiling of 5 percent of GDP (MEF definition) is used as an internal reference during the budget process, but no formal or explicit operational rule is currently implemented.
- Staff recommendations:
  - Adopt a debt rule in percent of GDP in nominal terms, combined with an overall deficit ceiling to ensure sustainability and operational feasibility.
  - Rationale for a nominal gross debt anchor:
    - Simple to compute and monitor, easy to communicate.
    - Pertinent given recent increase in debt and expected change in structure and composition of debt (expected decline in concessional financing, planned issuances of local-currency government securities).
    - Gross debt preferred to net debt because net debt is complicated to measure and could mask below-the-line financing operations.
    - Coverage should continue to include all public and publicly guaranteed debt; all loans or projects guaranteed by the government as well as on-lending to SOEs should be accounted for.
  - Define escape clause and corrective mechanisms with specific triggers and monitoring authority; draft 2023-24 MTFF identifies potential events but requires further specification and safeguards.
  - Monitoring and compliance:
    - Responsibility for rule monitoring should be primarily assigned to GDP.
    - GDP responsible for reporting quarterly to Cabinet on compliance and producing a half-year report to be submitted to Parliament that would be published alongside (or attached to) the MTFF.
    - Reports should flag noncompliance risks and propose corrective measures.
    - Setting up an independent fiscal council would be difficult in the short to medium-term given Cambodia’s small technical cadre.

### Debt Sustainability Analysis — key points
- Risk assessment:
  - Risk of external debt distress: Low
  - Overall risk of debt distress: Low
  - Granularity in the risk rating: Not applicable
  - Application of judgment: Yes: the breach of the export shock stress test is small and temporary.
- Baseline and projections:
  - Baseline scenario assumes steady economic recovery, largely driven by exports of tourism services and, to a lesser extent, manufacturing goods.
  - The total PPG debt-to-GDP ratio is projected to rise by around 4   percentage points during the next decade.
  - The present value of the external debt-to-GDP ratio breaches its threshold in the exports stress test; breaches are small, short-lived (only four periods, the last barely), and driven by exceptional volatility of exports in 2020 that increased sample volatility for the standardized shock.
  - Other debt burden indicators are projected to remain well below their thresholds under the baseline and shock scenarios.
- Debt-carrying capacity and indices:
  - Cambodia’s Composite Indicator (CI) index, based on the April 2022 WEO update and the World Bank’s 2020 CPIA, indicates debt-carrying capacity remains medium (2.968), the same as in the 2021 DSA (2.966).
- Policy implications:
  - Debt sustainability remains vulnerable to shocks in exports and growth.
  - Need to implement reforms to increase resilience to external shocks and facilitate export and economic diversification.
  - Efforts needed to mobilize fiscal revenue, strengthen the Public Investment Management Framework, and further enhance monitoring of Public-Private partnerships (PPP) and financial sector risks.
- Administrative details:
  - Approved By: Anne-Marie Gulde Wolf and Andrea Schaechter (IMF), and Marcello Estevão and Hassan Zaman (IDA).
  - Prepared by Staff of the International Monetary Fund and the International Development Association
  - Date: November 12, 2022

*Source: Excerpts from IMF staff report content in the provided PDF chapter.*

### 1.      The DSA covers central government debt and debt guaranteed by the central

### 1.      The DSA covers central government debt and debt guaranteed by the central

### Public sector debt coverage (scope)
- The 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 borrowing, and SOEs do not contract non-guaranteed 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 (text table 1).
- External debt is defined on a currency basis (consistent with the previous DSA).
- Sub-sectors covered (text table 1):
  - Central government: X
  - Guarantees (to other entities in the public and private sector, including to SOEs): X
  - Central bank (borrowed on behalf of the government): X
  - The country's coverage of public debt: The central government, central bank, government-guaranteed debt, non-guaranteed SOE debt

### Contingent liability stress tests (design and calibration)
- The DSA includes contingent liability stress tests for PPPs and a financial market shock (text table 2).
- Shock calibrations and rationale:
  - SOE debt shock: 0 percent of GDP — because, by law, SOEs do not engage in non-guaranteed external borrowing, and guarantees to SOEs are included in public debt.
  - PPP contingent liability: capital stock of PPPs estimated at 16.5 percent of GDP as end of 2021, corresponding to a contingent liability of 5.8 percent of GDP.
  - Financial market shock: assumed contingent liabilities from financial markets equal to 10 percent of GDP (twice the default value of 5 percent of GDP) to account for risks from private sector debt growing as a share of nominal GDP.
- Additional details (text table 2):
  - Default shock of 2% of GDP is triggered only where government-guaranteed debt is not fully captured under public debt definition (1.).
  - PPP: 35 percent of PPP stock → 5.8 (Staff estimates)
  - Financial market (default minimum is 5 percent of GDP) → 10.0 (giving risks emerging from private external borrowing)
  - Total (2+3+4+5) (in percent of GDP): 15.8

### External public debt (levels, composition, valuation)
- Cambodia’s external public debt amounted to around US$ 9.5 billion (36 percent of GDP) by end 2021.
- The external debt-to-GDP ratio increased slightly in 2021, by 1.5 percentage points.
- Bilateral debt accounts for around 70 percent of total external debt, with more than half owed to China.
- External debt present value: around 24 percent of GDP at end-2021 (accrued on concessional terms).
- Debt stock includes legacy arrears to the Russian Federation and the United States of about 2.4 percent of GDP; status of negotiations unchanged compared to the previous DSA — analysis assumes no debt restructuring.
- Text Table 3 (External Public Debt 2021):
  - Total: 9502.7 (In million of U.S. dollars); 35.7 (In percent of GDP); 100.0 (In percent of external debt)
  - Multilateral: 2892.2; 10.9; 30.4
  - Bilateral: 6,610.5; 24.9; 69.6
  - of which: China: 4,054.1; 15.2; 42.7

### Public domestic debt and government securities
- Public domestic debt remains negligible.
- Outstanding domestic public debt comprised only non-marketable bonds issued by SOEs; outstanding debt about US$ 1.6 million by end 2019, fully repaid in early 2020.
- Authorities started to issue local-currency government bonds in 2022 while strengthening market infrastructure.
- Authorities issued a local-currency bond in September 2022, floating KHR 41.7 billion (around US$ 10 million) at a 2.2 percent yield with a tenor of 1 year.
- Authorities plan further issuances up to US$ 300 million during the rest of 2022.

### PPPs and contingent liabilities
- PPPs assumed to continue to play an important role in financing investment projects amid diminishing access to concessional financing and slow domestic debt market development.
- PPP stock more than doubled between 2010 and 2015, estimated at around 16.5 percent of GDP by end-2021.
- Authorities have been strengthening the PPP framework, including a system for risk assessment and necessary legal, regulatory, and institutional arrangements for PPP management (e.g., central PPP unit; new law on PPP enacted in November 2021).

### Private external debt, credit growth, and financial sector risks
- Private external debt estimated at about 39 percent of GDP in 2021 (excluded from this DSA analysis).
- Risks from excessive private external borrowing could increase government exposure to contingent liabilities.
- Credit growth and indebtedness:
  - Credit growth averaged around 24 percent y/y from 2013 to 2019 and slowed only mildly during the pandemic.
  - Outstanding private sector credit reached 170 percent of GDP by end 2021.
  - Restructured loans in June 2022 estimated to be about 7 percent of lending (13 percent of GDP).
  - Non-performing loans rose to 2.8 percent of outstanding loans (nearly 4½ percent of GDP).
- Credit growth observed across all sectors; retail and wholesale trade account for the largest share of total debt outstanding, followed by commercial real estate and construction.
- Roughly two thirds of loans are corporate; some household-classified loans may be personal borrowing for small businesses.
- Growth in broad money in 2020–2021 was stronger than growth in nominal GDP, supported by expansion in the central bank’s balance sheet and steady inflow of FX deposits in commercial banks; loan-to-deposit ratio increased.

### Macroe forecast baseline and outlook (growth, inflation, fiscal, external)
- Recovery and growth:
  - Growth projected: 5 percent in 2022; nearly 5½ percent in 2023; just over 6 percent in 2024; gradually return to trend growth rates of around 6½ percent over the medium term.
  - Trend growth rate somewhat below pre-COVID-19 rates of 7 to 7½ percent.
- Inflation:
  - Headline inflation hit 7.8 percent y/y in June 2022; subsequently fell to 4.9 percent y/y in August 2022.
  - Baseline: inflation expected to peak this year, be lower in 2023, and then decline further, assuming it remains mostly confined to imported goods.
- Current account and reserves:
  - Current account deficit expected to narrow in 2022 as energy prices and gold imports recede.
  - Gross reserves decreased slightly in 2021, to US$ 21 billion; expected to remain at around 8 months of projected imports over the projection horizon.
- Fiscal sector:
  - Staff projects the fiscal deficit to narrow to 4 percent of GDP in 2022, from 7 percent in 2021.
  - Fiscal deficit expected to increase somewhat in 2023 and then decline steadily; overall deficit expected to stabilize at around 3 percent of GDP over the long run, consistent with debt stabilizing at 40 percent of GDP.
- Text Table 4 (selected baseline macro assumptions snapshot shown in text):
  - Real GDP (%, YOY): 2021: 2.2; 2022: 5.1; 2023: 5.9; 2024-2030: 6.4 (Previous DSA vs Current DSA columns present)
  - Inflation (%, YOY): 2021: 2.9; 2022: 3.0; 2023: 3.0; 2024-2030: 3.2
  - Primary Deficit (% to GDP): 2021: 5.2; 2022: 3.6; 2023: 3.4; 2024-2030: 2.9
  - Current Account Deficit (% to GDP): 2021: 26.9; 2022: 16.7; 2023: 9.2; 2024-2030: 8.8
  - Note: These entries reflect the tabulated baseline vs previous DSA comparisons shown in the source.

### Risks and downside scenarios
- Uncertainty around the outlook is particularly high; risks are tilted to the downside.
- Key risk channels and concerns:
  - Credit: high private debt could drag growth if borrowers struggle with repayments and banks must recognize further losses.
  - Conditions in key large economies: slowdown or lockdowns in China could disrupt foreign investment and supply chains; demand from advanced economies vulnerable to tightening financial conditions and European energy risks.
  - Inflation: global food and fuel price inflation could be more persistent; de-anchoring of inflation expectations could trigger tighter monetary conditions and higher borrowing costs.
  - Imported food and fuel price increases could generate second-round domestic inflation effects, compounded by extensive dollarization if the currency depreciates.
- Over the medium term, ongoing risks include resurgence of COVID-19 or other epidemics and vulnerability to natural disasters (drought, floods, tropical storms).

### Financing assumptions and debt dynamics
- External borrowing assumed around 3.5-4 percent of GDP over the medium term, declining to 2.8 percent of GDP by 2030 as fiscal deficit narrows and domestic financing increases.
- For DSA purposes, new external debt expected to remain largely concessional, with an average maturity of 24 years and a nominal interest rate of less than or equal to 2 percent.
- Domestic issuance assumptions:
  - Authorities start to issue domestic debt from the second half of 2022 onward.
  - Annual domestic issuance increases gradually from 0.4 percent of GDP in 2022 to about 2 percent of GDP in 2042.
  - Outstanding domestic PPG debt estimated to reach around 10 percent of GDP by 2042, accounting for about 25 percent of the total outstanding PPG debt.
- Macroe and fiscal assumptions judged broadly reasonable but subject to uncertainty, especially about external balances and prospects for gold imports and financing.
- Reserves assumed to remain high and stable at about 8 months of imports throughout the projection period.

*IMF staff DSA summary as presented in the source PDF.*

### 18.      Cambodia’s debt-carrying capacity is classified as medium, same as that in the

### 18. Cambodia’s debt-carrying capacity is classified as medium, same as that in the

### Debt-carrying capacity: classification and basis
- Cambodia’s debt-carrying capacity is classified as medium, same as that in the previous DSA.
- The composite indicator (CI) score is based on the 2022 April WEO and 2020 CPIA data corresponds to a medium rating.
- There has not been further deterioration of debt-carrying capacity since the 2021 DSA (text tables 5 and 6).
- The revised LIC-DSF determines the debt sustainability thresholds by calculating a Composite Indicator. The CI is a function of the World Bank’s Country Policy and Institutional Assessment (CPIA) score, international reserves, remittances, individual country and global economic growth. The calculation is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projection.

### Stress tests, climate, and contingent liabilities
- Stress tests include additional tailored stress tests reflecting high vulnerability to climate change (higher temperatures, longer and more intense droughts and flooding).
- Natural disaster scenario calibration:
  - Assumes a significant mitigation cost of 10 percent of GDP (around US$ 2.6 billion).
  - Assumes a fall in GDP growth and exports using interaction coefficients of 1.5 and 3.5, respectively.
- Contingent liability stress test quantifies potential risks from:
  - PPPs: 5.8 percent of GDP.
  - Financial markets: 10 percent of GDP.

### External debt: baseline projections and vulnerabilities
- Baseline projections:
  - External debt projected to increase marginally by 2025, from 36 percent of GDP in 2022, falling to 33 percent by 2032 and 30 percent by 2042 (table 1).
  - In present value terms, external debt-to-GDP ratio falls from 24 percent to 21 percent over the same timeframe (table 1).
  - Large share of concessional loans keeps debt service-to-exports and debt service-to-revenue ratios far below their indicative benchmarks throughout the forecast horizon.
- Vulnerabilities:
  - Stress tests suggest external debt is vulnerable to shocks to exports.
  - Under an exports shock, the present value of the external debt-to-GDP ratio increases sharply from 24 percent of GDP in 2022 to just over the 40 percent threshold of GDP, and gradually falls back to about 35 percent over the medium term.
  - Compared to shocks to real growth, the fiscal balance, exchange rate depreciation, and external flows, the impact of an exports shock is the most severe.

### Public (PPG) debt: projections and stress outcomes
- Baseline projections for public debt:
  - Total PPG debt increases from 36 percent of GDP in 2021 to 41 percent of GDP in 2032, with an increased domestic financing mix.
  - Present value of total debt-to-GDP ratio estimated to reach 30 percent in 2032, remaining well below the 55 percent benchmark.
  - Debt service-to-revenue ratio is estimated to pick up briefly over the long term, along with a rising share of domestic debt.
- Stress test outcomes:
  - Growth shock scenario: present value of total debt-to-GDP ratio rises to 53 percent by 2032, but does not breach the indicative threshold of 55 percent.
  - Contingent liability stress test is the most extreme shock for the debt service-to-revenue ratio, producing a noticeable spike in 2025 as financial market stress (10 percent of GDP) results in temporary borrowing needs and increased debt servicing.

### Risk rating and key vulnerabilities
- Overall assessment:
  - Cambodia remains at low risk of both external and overall debt distress.
  - Public debt is projected to rise by around 4 percentage points during the next decade.
- Export shock caveat:
  - The present value of the external debt-to-GDP ratio breaches its threshold in the exports stress test, which would imply a moderate risk rating.
  - The breaches are small, short-lived (only four periods, the last barely), and driven by exceptional volatility of exports through the COVID-19 pandemic that increased sample volatility for the standardized shock.
  - Other debt burden indicators are projected to remain well below their thresholds under the baseline and shock scenarios.
  - Given the expectation of a steady and solid recovery, coupled with the small and temporary nature of the breaches, judgment has been applied that the external risk of debt distress remains low.
- Main vulnerabilities:
  - Debt sustainability remains vulnerable to shocks in exports and growth.

*Source: 1khmea2022002 - 18. Cambodia’s debt-carrying capacity is classified as medium, same as that in the*

### 24.      Potential vulnerabilities to growth and external shocks highlight the importance of

### 24.      Potential vulnerabilities to growth and external shocks highlight the importance of maintaining fiscal discipline and public debt management while promoting long-term growth

### Stress tests, external shocks, and recent drivers
- Baseline treats the large current account deficit in 2021 as temporary, albeit with some persistence.
- Mechanical breaches of thresholds are driven by transitory factors stemming from the COVID-19 crisis:
  - Cambodia’s exports fell by over 8 percent in 2020.
  - This contrasted with growth of over 15 percent y/y on average from 2011 to 2019.
  - Tourism remained moribund in 2021, but has bounced back with the relaxation of travel restrictions in 2022.
- Specific one-off breach magnitudes cited:
  - The breaches are 1.81 percentage points in 2024, 1.21 in 2025, 0.63 in 2026, and 0.08 in 2027.
- Stress test financing parameters have been customized to reflect domestic public debt issuing conditions and current tighter financing conditions than the DSA default.
- Note on stress-test assumptions:
  - All additional financing needs generated by shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA.
  - Default terms of marginal debt are based on baseline 10-year projections.

### Key quantitative projections and indicators (selected)
- Real GDP growth (in percent): 7.1, -3.1, 3.0, 5.0, 5.4, 6.1, 6.4, 6.5, 6.6, 6.6, 7.1, 5.7, 6.2
- PV of PPG external debt-to-GDP ratio (percent): 23.7, 23.8, 23.9, 24.1, 24.0, 24.0, 23.9, 22.3, 20.9
- Total external debt service-to-exports ratio (percent): 118.6, 111.5, 113.2, 109.6, 106.2, 104.9, 104.5, 95.7, 88.1
- PPG debt service-to-exports ratio (percent): 1.5, 1.8, 1.9, 1.7, 1.6, 1.5, 1.4, 1.3, 1.3, 1.3, 1.5
- PPG debt service-to-revenue ratio (percent): 4.6, 6.3, 7.2, 6.7, 6.6, 6.1, 5.8, 5.5, 5.3, 5.5, 6.0
- Gross external financing need (Million of U.S. dollars): 622.5, -1155.6, 9436.5, 5259.6, 820.5, -416.3, -1397.1, -1550.8, -1584.0, -1109.6, 1571.9
- Nominal GDP (Million of US dollars): 27,087, 25,771, 26,601, 28,647, 30,729, 33,047, 35,673, 38,592, 41,736, 61,743, 141,194
- Memorandum PV of external debt (percent of exports): 31.4, 28.9, 27.4, 26.6, 25.9, 25.6, 25.5, 23.3, 21.9

### Policy recommendations and priorities
- Preserve macroeconomic stability and maintain fiscal discipline.
- Targeted and managed fiscal measures to safeguard near-term recovery in light of heightened global risks.
- Diversify the economy and exports to increase resilience to external shocks.
- Improve spending efficiency and successfully implement the revenue mobilization strategy.
- Further efforts needed to:
  - Implement sound public investment management and PPP frameworks.
  - Strengthen analysis of PPP risks.
- Authorities should focus on closing data gaps, particularly regarding:
  - Data on external private debt.
  - The PPP stock.

### Data, statistics, and institutional capacity issues
- National accounts:
  - Reliability affected by an outdated base year (2000).
  - NIS is revising sources and methods for compiling national accounts and plans to disseminate the rebased GDP with a new base year of 2014 in 2023.
  - IMF statistics department technical review confirmed the rebasing followed internationally accepted practices.
- Price statistics:
  - NBC launched a residential property price index (RPPI) in June 2022.
  - CPI compilation suffers from outdated weights drawn from the 2004 Cambodia Socio-Economic Survey and insufficient geographic coverage; NIS plans to update CPI using 2014 household expenditures.
  - Producer price index (PPI) is under development.
- Government finance statistics (GFS) and public sector debt statistics (PSDS):
  - MEF compiles GFS following GFSM 2014 and disseminates monthly and quarterly series.
  - MEF reported 2019 consolidated general government GFS and started reporting PSDS semi-annually.
  - Work remains on source data for net acquisition of government nonfinancial assets and reconciling coverage of government deposits among MEF, NBC, and NIS.
- Monetary and financial statistics (MFS):
  - NBC reports monthly monetary data using STA’s SRFs for central bank, ODCs, and OFCs.
  - Need to improve counterpart sector information for OFCs and expand coverage to include insurance companies and leasing companies.
  - Limited information on the shadow banking sector (real estate developers, pawn shops, payment service providers).
  - Roadmap proposed for automating regulatory reporting to improve data for MFS and FSI compilation.
- External sector statistics:
  - Quarterly balance of payments and IIP compiled under BPM6, but coverage gaps persist.
  - Trade data discrepancies remain and affect current account estimates.
  - External debt statistics do not cover borrowing by resident nonfinancial corporations.
  - Ongoing technical assistance under the Project on Improvement of External Sector Statistics.

*Source: IMF country material for Cambodia (staff report and informational annex).*

### 1. INTRODUCTION

### 1. INTRODUCTION

### Recent economic developments and outlook
- Cambodia’s economy experienced a relatively slow growth in 2021 due to the pandemic, but has since recovered steadily.
- Rapid vaccination efforts and the reduction of COVID-19 infection rates enabled Cambodia to fully reopen to foreign tourists since November 2021.
- Authorities rolled back some support measures and began gradually building fiscal space for future shocks.
- Staff’s assessment: growth outlook is broadly positive, underpinned by domestic and external stability.
- Growth projections:
  - around 5% in 2022
  - around 6% in 2023
- Risks and external headwinds:
  - conflict in Ukraine
  - slowdown in key trading partners’ economies (China, Europe and the US) in the second half of 2022
- External sector developments:
  - narrowing of current account (CA) deficit
  - tourism and FDI expected to have larger contributions to CA in 2023
- Structural prospects:
  - abundant labor force and stable macroeconomic environment expected to attract relocations of exporting firms from neighboring countries, contributing to medium-term growth
- Inflation and social support:
  - recent surge in inflation has been manageable with limited risk of second-round effects and de-anchoring of inflation expectations
  - government extended cash transfers, targeted using the ID Poor database, to mitigate rising prices on vulnerable households

### Fiscal policy
- Authorities committed to using available fiscal space to mitigate impacts of global slowdown and the conflict in Ukraine on growth and inflation while maintaining debt sustainability.
- Fiscal position has been improving steadily on the back of resumption of economic activities.
- Drivers of improvement:
  - broad-based recovery in tax revenue
  - partial rollback of Covid-related spending
  - targeted measures to mitigate rising prices using the ID Poor database
- Debt and fiscal space:
  - Debt Sustainability Analysis (DSA) indicates Cambodia has fiscal space to cope with further adverse shocks
  - Authorities will continue targeted fiscal measures and pursue initiatives to improve efficiency of targeting different types of vulnerable households
- Domestic financial market development:
  - significant progress in 2022 by issuing domestic government bonds for the first time in local currency
  - auction well-received due to close market consultations and clear communication by the Ministry of Finance
  - authorities will continue to work on long-term policy framework for market development and develop a comprehensive framework for bond issuance up until 2028

### Monetary and financial sector policies
- Monetary stance:
  - monetary policy was accommodative to support recovery at the early stage
  - as recovery gathered momentum in 2022, the National Bank of Cambodia (NBC) began to normalize policy
    - ended regulatory forbearance on new restructured loans in June 2022
    - considering gradually raising reserve requirements to pre-pandemic levels
- Banking sector and credit:
  - share of non-performing loans (NPLs) has naturally risen after end of forbearance but should gradually decline with improving debt servicing ability of borrowers
  - credit growth has been robust, reflecting positive sentiment and sound fundamentals
  - staff’s assessment projects Cambodia’s economic growth to converge to a potential rate of about 6.5 percent
  - recent increase in credit growth largely reflects funding to productive sectors: garments and footwear, agro-processing, automotives, electronics and electrical appliances
  - NBC will ensure banks maintain adequate capital buffers and will closely monitor developments with preemptive measures to safeguard financial stability
- Financial stability risks:
  - overall financial stability remains sound
  - authorities will monitor risks amid global uncertainty, including concerns on buildup of private debt and potential risks in the real estate sector
  - authorities view real estate risks as likely having limited impacts on consumption because they are concentrated in some provinces and certain segments of the housing market

### Structural policies
- Progress and priorities:
  - significant progress in economic diversification and addressing governance weaknesses
  - economic diversification and governance improvements are top medium-term reform priorities
- Investment and industrial policy:
  - new investment law introduced to allow more targeted tax incentives to high-potential sectors and firms
  - Industrial Development Policy (2015-2025) underwent a mid-term review and produced a roadmap to promote investment in higher value-add manufacturing sectors such as automotive, electronics and machinery
  - new investment law provides incentives for qualified investment projects in climate adaptation and mitigation
  - an advisory council established to provide feedback and regular dialogue with firms in key sectors
- Governance and anti-corruption / AML/CFT:
  - commitment to strengthening governance and anti-corruption frameworks and implementing necessary measures
  - improved interagency cooperation among Anti-Corruption Unit (ACU), National Council Against Corruption (NCAC), National Coordination Committee (NCC) on AML/CFT/CPF, and Financial Intelligence Unit (FIU)
  - interagency cooperation has helped identify sectors most prone to corruption risks
  - Cambodia has completed all action plan items imposed by the FATF and is expected to undergo an exit onsite visit in January 2023
  - draft legislation on whistleblower protection submitted to the Ministry of Justice for review
  - authorities have sought further IMF technical assistance to enhance capacity in human and technological resources

*Source: 1khmea2022002 - 1. INTRODUCTION*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1khmea2022002.pdf_