## 1khmea2022003

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---

### Private Sector Credit Growth And NGDP Growth (Y-O-Y) — Rising Private Sector Debt and Its Composition
- Private debt recorded double-digit growth rates for many consecutive years, exceeding by far the growth rate of output.
- Credit growth continued to be sustained even during the 2020 recession.
- Private sector debt is now expected to exceed 180 percent of GDP by the end of 2022.
- By the end of 2021:
  - Private debt levels were 170 percent of GDP.
  - 87 percent of private debt was denominated in foreign currency (predominantly USD).
  - 83 percent of deposits were USD-denominated.
  - Commercial banks held 83 percent of the US$ 45 billion outstanding (end-2021).
  - Microfinance institutions held less than 17 percent of all outstanding credit, or US$ 7.8 billion.
- Between 2018 and 2021, the ratio of total credit to output grew by 72 percentage points:
  - Corporate credit increased by 42 percentage points, reaching 107 percent of GDP in 2021.
  - Household liabilities increased by 26 percentage points (including mortgages, personal loans, credit cards, and all MFI borrowing).
- Sectoral composition (2021):
  - Real estate and construction liabilities stood at 27 percent of GDP.
  - Trade (retail and wholesale) liabilities stood at 38 percent of GDP and trade is estimated to account for 8 percent of GDP.
- FX loan-to-deposit ratio has been steadily increasing since 2018.

### Private Sector Credit — Risks from Debt, Restructurings, and NPLs
- Restructured and non-performing loan indicators:
  - The overall volume of loans restructured one or more times reached US$ 3.8 billion by June 2022, equal to 7 percent of total outstanding credit and 13 percent of GDP.
  - The ratio of restructured loans to total outstanding remained overall stable between 2020 and 2021 and decreased in 2022, but remains significant as a share of GDP.
  - Official figures indicate loans classified as non-performing correspond to about 2.8 percent of outstanding loan volume as of June 2022, up from about 2 percent at the end of 2021.
  - NPLs in June 2022 stand at 4.4 percent of projected 2022 GDP.
  - These figures are based on self-reporting data from banks and exclude MFIs, MDIs, and shadow banking (such as real estate developers).
- Risk assessment:
  - Large outstanding amounts are accompanied by rapid and sustained credit growth, somewhat detached from economic fundamentals.
  - Most debt pertains to the corporate sector rather than being concentrated in real estate.
  - Productive sectors across the economy appear heavily indebted, raising the risk that a variety of external and domestic shocks could trigger widespread insolvencies.
  - Insolvency regimes and banking resolution mechanisms are currently limited in scope, increasing the potential for large contingent liabilities to the government in case of a wave of insolvencies.

### Policy Implications and Recommendations (Private Debt)
- Policy constraints and timing:
  - Monetary policy is constrained by dollarization and by the peg.
  - A large amount of macroprudential stimulus deployed during the pandemic is yet to be rolled back.
  - Choosing the appropriate timing for stimulus withdrawal is crucial; untimely tightening may exacerbate liquidity problems in the banking sector.
- Recommended reforms and data improvements:
  - Update and test legislation on bank resolution mechanisms and insolvency regimes during the recovery.
  - Improve collection of statistics on borrowers’ income and collateral for both new originations and outstanding loans.
  - Use enhanced borrower-level data to introduce prudential measures—such as DTI or LTV caps—aimed at curbing excessive credit growth going forward.

*Prepared by Alessia De Stefani and Luisa Zanforlin; source: IMF country report annex.*

---

### Tax-to-GDP Overview and Recent Trends
- Tax-to-GDP ratio in Cambodia averaged 17 percent over the 2013-2021 period, near the emerging market (EM) average ratio of 17.8 percent.
- Time series highlights:
  - Around 13 percent in 2013.
  - Almost 22 percent in 2019.
  - 18.5 percent in 2021 (post Covid-19 shock).
- Drivers and concerns:
  - Rise in tax-to-GDP between 2013 and 2019 supported by administrative reforms and RMS I (2014-2018) and RMS II (2019-2023).
  - Expected GDP rebasing scheduled for March 2023 expected to translate into significantly lower tax-to -GDP ratios.
  - As Cambodia graduates from low-income status, declining grant revenue will need replacement by higher domestic revenue.

### Revenue Composition and Administrative Reforms
- Major revenue changes:
  - Corporate income taxes (CIT) rose by 2.5 percentage points of GDP from 2013 to 2020.
  - Excise on imports increased by 2 percentage points of GDP by 2019 compared to 2016.
  - Property tax revenues rose by about 1 percentage point of GDP after 2017-2018 real-estate revaluations.
- Administrative improvements under RMS II aim at targeting current revenue growth at 0.3 percentage of GDP per year while improving efficiency.

### Excises — Analysis and Recommendations
- Current structure and issues:
  - All excise taxes currently on an ad valorem basis.
  - Tobacco and petroleum taxes recommended for transition to specific excises to correct negative externalities (health and pollution) and reduce price/revenue volatility.
  - Public Lighting Tax (PLT) described as particularly distortionary due to cascading and earmarking; PLT is levied on goods already subject to excises.
  - Specific taxes are easier to administer and incentivize quality improvements.
- Implementation caveats:
  - Balance needed between restoring efficiency (addressing externalities) and raising revenue.
  - Higher excise taxes risk increasing smuggling and illicit production; strong tax administration is crucial.
  - Authorities contemplating a mixed system for certain products; current specific component for petroleum is only a small fraction of the overall excise tax.
- Box 1 — Recommendations on Excises:
  - Tobacco: Replace ad valorem by specific tobacco excises; regularly update in line with inflation; choose a specific excise slightly higher than the current average excise; consider further increases after assessing compliance implications; raise the tax over the medium term toward estimated costs of negative health externalities.
  - Petroleum Products: Replace ad valorem by specific fuel excises; choose a fixed amount slightly higher than the average over the year implied by the current ad valorem rate; over the medium term raise the tax toward estimated costs of negative environmental externality.
  - Alcoholic Beverages: Specific taxes recommended for beer; for wine and spirits a mixed system can be considered.
  - Vehicles: Maintain an ad valorem rate for motor vehicles.
  - Public Lighting Tax: Phase out the PLT; replace local government revenues by higher property taxes and transfers if needed; do not earmark replacement revenues; allow local governments to choose use; raise alcohol excises to maintain on average the same (or a higher) final price to consumers.

### Property Taxes — Analysis and Recommendations
- Rationale and issues:
  - Strengthen recurrent property tax before abolishing unused land tax and reducing property transfer tax.
  - Unused land tax raises minimal revenue and is costly to administer.
  - Property transfer tax raises significant revenue but is distortionary.
  - Basic exemption of KHR100 million excludes a large share of the population; no justification for exempting government and SEZ properties given property tax is a local benefit tax.
- Administrative prerequisites:
  - Raising rates without strengthening valuation, coverage, and collection would raise inequities and reduce compliance.
  - Property market values for tax purposes assessed/updated every five years; last assessment conducted in 2019/2020.
- Box 2 — Recommendations on Property Taxes:
  - Valuation: Require reassessments at least every five years with indexing in interim years; provide clear guidelines to local valuation sub-commissions.
  - Exemptions: Repeal exemption for government properties over the medium term; repeal exemption for property in SEZs over the medium to long term.
  - Recurrent property tax:
    - Short term: start raising the tax rate from its current level of 0.1 percent to strengthen revenue.
    - Medium term: continue raising the rate to 0.5 percent in tandem with administrative progress.
    - Long term: provide local governments the option to set local rates within a modest range set by the central government.
  - Unused land tax: Repeal the tax on unused land over the medium term.
  - Property transfer tax: Reduce the property transfer tax rate over the medium term (only to the extent its revenue can be replaced by increased recurrent property tax revenue).
  - Property tax administration:
    - Establish an independent dispute resolution process for the property tax.
    - Gradually expand geographical coverage of the property tax to the whole country over the medium to long term as administrative capabilities improve.
    - Seek technical assistance to formulate a detailed multi-year roadmap for administrative reform focused on property registration, valuation, tax enforcement, and revenue estimation/simulation capabilities.

### Tax Incentives and VAT Refunds — Analysis and Recommendations
- Key points on incentives and effective rates:
  - Statutory CIT rate maintained at 20 percent.
  - Withholding tax on dividends is 14 percent (10 percent in some future double taxation treaties).
  - Corporate income tax holidays described as a deferral of tax until distribution and should be abolished; grandfather existing QIPs already authorized.
  - Exemptions from customs duties and VAT remain important; better solutions: reliable and timely VAT credits; reducing/abolishing customs duties on intermediate or capital goods preferable to exemptions for selected taxpayers.
  - Minimum tax exemption less relevant now as minimum tax does not apply to companies maintaining strong accounting records.
  - New Law on Investment (promulgated September 2021) retains CIT exemptions while recognizing room to rationalize tax incentives.
- Transparency and administration:
  - All tax incentives should be costed and published regularly (i.e., a tax expenditure budget).
  - Move all tax incentives into the Law on Taxation and assign responsibility for approving and monitoring all tax incentives to MEF.
- VAT refunds:
  - Government improved VAT refund processing via e-VAT refund system, internal crosscheck of invoices between GDT and GDCE, and KPI use to reduce time of VAT refund.
  - All VAT refund requests subject to review and verification of VAT invoices; only a small share of VAT refund requests processed within 30 calendar days.
- Box 3 — Recommendations on Tax Incentives:
  - Corporate income tax holidays: Abolish for new investments; grandfather QIPs already authorized (including those in the “trigger” period).
  - Repatriated dividends withholdings: Reduce the withholding tax rate on repatriated dividends to 10 percent; consider further reduction in medium term.
  - Corporate income tax: Maintain the statutory CIT rate at 20 percent; no need for pre-emptive cuts though pressure may arise.
  - Publish regular estimates of the costs of tax incentives (tax expenditure budget).
  - Move all tax incentives into the Law on Taxation; assign responsibility for approving and monitoring to the MEF.
  - VAT refunds: Ensure timely VAT refunds so VAT functions as a tax on domestic consumption.

*Prepared by Juliana Araujo.*

---

### Macroprudential Policies — Assessment, Toolkit, and Gaps
- Institutional framework and mandate:
  - No legal/regulatory mandate assigned to any institution for macroprudential policy.
  - National Bank of Cambodia (NBC) established a Financial Stability Committee in 2011 (chaired by the Deputy Governor) to monitor financial stability, macroeconomic, and banking risks.
  - A National Financial Stability Committee (NFSC) was established in August 2019, chaired by Prime Ministers, to issue policies and crisis management measures.
  - Given banking system dominance (>80 percent of financial sector assets), macroprudential policy is implicitly mandated to the central bank.
- Toolkit and usage as of June 2022:
  - Toolkit includes: capital conservation buffer (CCB), limits on foreign currency lending, liquidity coverage ratio (LCR), limits on net open foreign exchange positions, and minimum reserve requirements (RR) in FX and local currency.
  - Enabling regulation for the counter-cyclical capital buffer (CCyB) has not been issued.
  - Most measures historically loose; all measures currently set below neutral except LCR.
- Instrumental conflicts and missing tools:
  - Some instruments used for other purposes (e.g., reserve requirements primarily used as a monetary policy tool).
  - Minimum reserve requirements have been the same in foreign and domestic currency since 2020 despite differing liquidity risks.
  - Cap on FX lending set at 90 percent in 2019 to promote de-dollarization.
  - Missing potentially relevant instruments: limits on leverage ratio, stable funding requirements, household sector leverage limits (LTV, DSTI), corporate sector instruments (caps on corporate credit by sector, sectoral risk weights).
  - Authorities have used the CCB as a shock absorber, delaying full implementation (kept at 1.25 percent instead of adopting the 2.5 percent 2020 regulatory target).

### A simple macroprudential policy index (IMPP) — Definition and Findings
- Definition of IMPP:
  - Four macroprudential policies MPPi are included in the index.
  - For each policy i, a neutral policy MPPi* is defined.
  - The neutral values used:
    - Liquidity Coverage Ratio (LCR) neutral = the Basel III recommended ratio of 100 percent.
    - Capital Conservation Buffer (CCB) neutral = the Basel III recommended 2.5 percent of total risk-weighted assets (RWA).
    - Reserve requirements in local currency neutral = 8 percent (median minimum reserve requirement during 2000-2020).
    - Reserve requirements in foreign exchange neutral = 12 percent (median minimum reserve requirement during 2000-2020).
  - IMPP = (∑ I_i) / n, where I_i = MPP_i / MPP_i*.
- Current macroprudential stance and recent history:
  - The macroprudential stance is currently loose.
  - All measures are currently set below the neutral policies, except for the LCR.
  - No bank has made use of the allowance with respect to the CCB.
  - Banks have used forbearance on loan classifications extensively, indicating abundant support relative to need.
  - Past decade summary: Most measures have been loose; reserve requirements in FX were tightened briefly prior to the global financial crisis and moderately tightened prior to the Covid-19 shock.

### Macroprudential Toolkit (selected tools and implementation details)
- Countercyclical capital buffer (CCyB):
  - The NBC may set the CCyB in the range of 0 percent to 2.5 percent of total RWAs.
  - Currently, the CCyB is 0 percent because the regulations on how to calibrate are missing.
- Capital conservation buffer (CCB):
  - The CCB is set to 2.5 percent of total RWAs.
  - A prakas in February 2018 requires commercial banks to add at least 50 percent of the buffer effective January 1, 2019, and fully implement effective January 1, 2020.
  - Effective March 2020, because of Covid-19, the NBC reversed the implementation by requiring banks to hold 50 percent of the buffer (the same as 2019) and wait to see the Covid-19 situation before reimplementing the full measure.
- Limits on foreign currency lending:
  - From December 2019, the NBC has required 10 percent of loans to be in riel.
- Liquidity Coverage Ratio (LCR):
  - Announced December 23, 2015; effective September 1, 2016, for deposit-taking corporations (including foreign branches) and microfinance institutions.
  - LCR definition: LCR = Market value of the stock of eligible liquid assets / Total net cash outflows within 30 days ≥ 100%.
  - Phase-in schedule:
    - Effective September 1, 2016: LCR = 60%.
    - Effective September 1, 2017: LCR = 70%.
    - Effective September 1, 2018: LCR = 80%.
    - Effective June 1, 2019: LCR = 90%.
    - Effective January 1, 2020: LCR = 100%.
- Limits on net foreign exchange positions:
  - Announced August 27, 2007; effective the date of announcement.
  - Banks and financial institutions must maintain net open positions in foreign currencies such that any individual or aggregate net open position may not exceed 20% of banks’ and financial institutions’ net worth.
- Reserve requirements for macroprudential purposes:
  - Effective December 1993, deposit-taking corporations (including foreign branches), banks, and microfinance institutions are subject to reserve requirement regulation.
  - Reserve requirement bases: demand deposits, time deposits, foreign currency deposits, government deposits, and savings deposits.
  - Assets allowed as required reserves include bank reserves denominated in domestic currency, bank reserves denominated in foreign currency, and reserve assets.
  - Levels as of 2016:
    - Reserve requirement applied to local currency liabilities = 8%.
    - Reserve requirement applied to foreign currency (US$) liabilities = 12.5%.
    - Only the difference of 4.5% of reserves in foreign currency liabilities is remunerated.
  - Covid-19 related adjustments:
    - Effective March 17, 2020, and April 1, 2020, the NBC temporarily reduced reserve requirement rate on KHR and foreign currency to 7% (from 8% and 12.5%) until further notice.
    - Effective October 1, 2020, reserve requirement rate on foreign currency and KHR will remain at 7% until further notice.
- Systemically important financial institutions:
  - The NBC can require an increase in the solvency ratio up to 30% for institutions or groups that could represent significant threat to depositors and the financial system as a whole.

_International Monetary Fund: 1khmea2022003 - Section 5 (excerpt)_

### 1. Private Sector Credit Growth And NGDP Growth (Y-O-Y) ___________________________  3

### 1. Private Sector Credit Growth And NGDP Growth (Y-O-Y)

### A. Rising Private Sector Debt and Its Composition
- Private debt recorded double-digit growth rates for many consecutive years, exceeding by far the growth rate of output.
- Credit growth continued to be sustained even during the 2020 recession.
- Private sector debt is now expected to exceed 180 percent of GDP by the end of 2022.
- By the end of 2021:
  - Private debt levels were 170 percent of GDP.
  - 87 percent of private debt was denominated in foreign currency (predominantly USD).
  - 83 percent of deposits were USD-denominated.
  - Commercial banks held 83 percent of the US$ 45 billion outstanding (end-2021).
  - Microfinance institutions held less than 17 percent of all outstanding credit, or US$ 7.8 billion.
- Between 2018 and 2021, the ratio of total credit to output grew by 72 percentage points:
  - Corporate credit increased by 42 percentage points, reaching 107 percent of GDP in 2021.
  - Household liabilities increased by 26 percentage points (including mortgages, personal loans, credit cards, and all MFI borrowing).
- Sectoral composition (2021):
  - Real estate and construction liabilities stood at 27 percent of GDP.
  - Trade (retail and wholesale) liabilities stood at 38 percent of GDP and trade is estimated to account for 8 percent of GDP.
- FX loan-to-deposit ratio has been steadily increasing since 2018.

### B. Assessing Risks from Private Sector Debt
- Restructured and non-performing loan indicators:
  - The overall volume of loans restructured one or more times reached US$ 3.8 billion by June 2022, equal to 7 percent of total outstanding credit and 13 percent of GDP.
  - The ratio of restructured loans to total outstanding remained overall stable between 2020 and 2021 and decreased in 2022, but remains significant as a share of GDP.
  - Official figures indicate loans classified as non-performing correspond to about 2.8 percent of outstanding loan volume as of June 2022, up from about 2 percent at the end of 2021.
  - NPLs in June 2022 stand at 4.4 percent of projected 2022 GDP.
  - These figures are based on self-reporting data from banks and exclude MFIs, MDIs, and shadow banking (such as real estate developers).
- Risk assessment:
  - Large outstanding amounts are accompanied by rapid and sustained credit growth, somewhat detached from economic fundamentals.
  - Most debt pertains to the corporate sector rather than being concentrated in real estate.
  - Productive sectors across the economy appear heavily indebted, raising the risk that a variety of external and domestic shocks could trigger widespread insolvencies.
  - Insolvency regimes and banking resolution mechanisms are currently limited in scope, increasing the potential for large contingent liabilities to the government in case of a wave of insolvencies.

### C. Policy Implications and Recommendations
- Policy constraints and timing:
  - Monetary policy is constrained by dollarization and by the peg.
  - A large amount of macroprudential stimulus deployed during the pandemic is yet to be rolled back.
  - Choosing the appropriate timing for stimulus withdrawal is crucial; untimely tightening may exacerbate liquidity problems in the banking sector.
- Recommended reforms and data improvements:
  - Update and test legislation on bank resolution mechanisms and insolvency regimes during the recovery.
  - Improve collection of statistics on borrowers’ income and collateral for both new originations and outstanding loans.
  - Use enhanced borrower-level data to introduce prudential measures—such as DTI or LTV caps—aimed at curbing excessive credit growth going forward.

*Prepared by Alessia De Stefani and Luisa Zanforlin; source: IMF country report annex.*

### 1.      Over the past decade, the tax-to-GDP

### 1khmea2022003 - 1.      Over the past decade, the tax-to-GDP

### Tax-to-GDP overview and recent trends
- Tax-to-GDP ratio in Cambodia averaged 17 percent over the 2013-2021 period, near the emerging market (EM) average ratio of 17.8 percent.
- Time series highlights:
  - Around 13 percent in 2013.
  - Almost 22 percent in 2019.
  - 18.5 percent in 2021 (post Covid-19 shock).
- Drivers and concerns:
  - Rise in tax-to-GDP between 2013 and 2019 supported by administrative reforms and RMS I (2014-2018) and RMS II (2019-2023).
  - Expected GDP rebasing scheduled for March 2023 expected to translate into significantly lower tax-to -GDP ratios.
  - As Cambodia graduates from low-income status, declining grant revenue will need replacement by higher domestic revenue.

### Revenue composition and administrative reforms
- Major revenue changes noted:
  - Corporate income taxes (CIT) rose by 2.5 percentage points of GDP from 2013 to 2020.
  - Excise on imports increased by 2 percentage points of GDP by 2019 compared to 2016.
  - Property tax revenues rose by about 1 percentage point of GDP after 2017-2018 real-estate revaluations.
- Administrative improvements under RMS II aim at targeting current revenue growth at 0.3 percentage of GDP per year while improving efficiency (rationalization and modernization of tax administration).

### Excises — analysis and recommendations
- Current structure and issues:
  - All excise taxes currently on an ad valorem basis.
  - Tobacco and petroleum taxes recommended for transition to specific excises to correct negative externalities (health and pollution) and reduce price/revenue volatility.
  - Public Lighting Tax (PLT) described as particularly distortionary due to cascading and earmarking; PLT is levied on goods already subject to excises.
  - Specific taxes are easier to administer and incentivize quality improvements.
- Implementation caveats:
  - Balance needed between restoring efficiency (addressing externalities) and raising revenue.
  - Higher excise taxes risk increasing smuggling and illicit production; strong tax administration is crucial.
  - Authorities contemplating a mixed system for certain products; current specific component for petroleum is only a small fraction of the overall excise tax.
- Box 1 — Recommendations on Excises:
  - Tobacco: Replace ad valorem by specific tobacco excises; regularly update in line with inflation; choose a specific excise slightly higher than the current average excise; consider further increases after assessing compliance implications; raise the tax over the medium term toward estimated costs of negative health externalities.
  - Petroleum Products: Replace ad valorem by specific fuel excises; choose a fixed amount slightly higher than the average over the year implied by the current ad valorem rate; over the medium term raise the tax toward estimated costs of negative environmental externality.
  - Alcoholic Beverages: Specific taxes recommended for beer; for wine and spirits a mixed system can be considered.
  - Vehicles: Maintain an ad valorem rate for motor vehicles.
  - Public Lighting Tax: Phase out the PLT; replace local government revenues by higher property taxes and transfers if needed; do not earmark replacement revenues; allow local governments to choose use; raise alcohol excises to maintain on average the same (or a higher) final price to consumers.

### Property taxes — analysis and recommendations
- Rationale and issues:
  - Strengthen recurrent property tax before abolishing unused land tax and reducing property transfer tax.
  - Unused land tax raises minimal revenue and is costly to administer.
  - Property transfer tax raises significant revenue but is distortionary (reduces transactions and labor mobility; may encourage under-declaration of sales values).
  - Basic exemption of KHR100 million excludes a large share of the population; no justification for exempting government and SEZ properties given property tax is a local benefit tax.
- Administrative prerequisites:
  - Raising rates without strengthening valuation, coverage, and collection would raise inequities and reduce compliance.
  - Administrative improvements recommended: property registration, dynamic property valuation, enforcement of tax collection, and revenue estimation capability.
  - Property market values for tax purposes assessed/updated every five years; last assessment conducted in 2019/2020.
- Box 2 — Recommendations on Property Taxes:
  - Valuation: Require reassessments at least every five years with indexing in interim years; provide clear guidelines to local valuation sub-commissions.
  - Exemptions: Repeal exemption for government properties over the medium term; repeal exemption for property in SEZs over the medium to long term.
  - Recurrent property tax:
    - Short term: start raising the tax rate from its current level of 0.1 percent to strengthen revenue.
    - Medium term: continue raising the rate to 0.5 percent in tandem with administrative progress.
    - Long term: provide local governments the option to set local rates within a modest range set by the central government.
  - Unused land tax: Repeal the tax on unused land over the medium term.
  - Property transfer tax: Reduce the property transfer tax rate over the medium term (only to the extent its revenue can be replaced by increased recurrent property tax revenue).
  - Property tax administration:
    - Establish an independent dispute resolution process for the property tax.
    - Gradually expand geographical coverage of the property tax to the whole country over the medium to long term as administrative capabilities improve.
    - Seek technical assistance to formulate a detailed multi-year roadmap for administrative reform focused on property registration, valuation, tax enforcement, and revenue estimation/simulation capabilities.

### Tax incentives and VAT refunds — analysis and recommendations
- Key points on incentives and effective rates:
  - Corporate income tax (statutory CIT) is low (Box 3 later states statutory CIT rate maintained at 20 percent).
  - Withholding tax on dividends is 14 percent (10 percent in some future double taxation treaties), raising effective tax rates for foreign investors above those faced by domestic investors.
  - Corporate income tax holidays are described as a deferral of tax until distribution and should be abolished; grandfather existing QIPs already authorized.
  - Exemptions from customs duties and VAT remain important; better solutions: reliable and timely VAT credits; reducing/abolishing customs duties on intermediate or capital goods preferable to exemptions for selected taxpayers.
  - Minimum tax exemption less relevant now as minimum tax does not apply to companies maintaining strong accounting records.
  - New Law on Investment (promulgated September 2021) retains CIT exemptions while recognizing room to rationalize tax incentives.
- Transparency and administration:
  - All tax incentives should be costed and published regularly (i.e., a tax expenditure budget).
  - Move all tax incentives into the Law on Taxation and assign responsibility for approving and monitoring all tax incentives to MEF.
- VAT refunds:
  - Government improved VAT refund processing via e-VAT refund system, internal crosscheck of invoices between GDT and GDCE, and KPI use to reduce time of VAT refund.
  - All VAT refund requests subject to review and verification of VAT invoices; only a small share of VAT refund requests processed within 30 calendar days.
- Box 3 — Recommendations on Tax Incentives:
  - Corporate income tax holidays: Abolish for new investments; grandfather QIPs already authorized (including those in the “trigger” period).
  - Repatriated dividends withholdings: Reduce the withholding tax rate on repatriated dividends to 10 percent; consider further reduction in medium term.
  - Corporate income tax: Maintain the statutory CIT rate at 20 percent; no need for pre-emptive cuts though pressure may arise.
  - Publish regular estimates of the costs of tax incentives (tax expenditure budget).
  - Move all tax incentives into the Law on Taxation; assign responsibility for approving and monitoring to the MEF.
  - VAT refunds: Ensure timely VAT refunds so VAT functions as a tax on domestic consumption.

### Macroprudential policies — assessment and gaps
- Institutional framework and mandate:
  - No legal/regulatory mandate assigned to any institution for macroprudential policy.
  - National Bank of Cambodia (NBC) established a Financial Stability Committee in 2011 (chaired by the Deputy Governor) to monitor financial stability, macroeconomic, and banking risks.
  - A National Financial Stability Committee (NFSC) was established in August 2019, chaired by Prime Ministers, to issue policies and crisis management measures.
  - Given banking system dominance (>80 percent of financial sector assets), macroprudential policy is implicitly mandated to the central bank.
- Toolkit and usage as of June 2022:
  - Toolkit includes: capital conservation buffer (CCB), limits on foreign currency lending, liquidity coverage ratio (LCR), limits on net open foreign exchange positions, and minimum reserve requirements (RR) in FX and local currency.
  - Enabling regulation for the counter-cyclical capital buffer (CCyB) has not been issued.
  - Most measures historically loose; all measures currently set below neutral except LCR.
- Instrumental conflicts and missing tools:
  - Some instruments used for other purposes (e.g., reserve requirements primarily used as a monetary policy tool).
  - Minimum reserve requirements have been the same in foreign and domestic currency since 2020 despite differing liquidity risks.
  - Cap on FX lending set at 90 percent in 2019 to promote de-dollarization.
  - Missing potentially relevant instruments: limits on leverage ratio, stable funding requirements, household sector leverage limits (LTV, DSTI), corporate sector instruments (caps on corporate credit by sector, sectoral risk weights).
  - Authorities have used the CCB as a shock absorber, delaying full implementation (kept at 1.25 percent instead of adopting the 2.5 percent 2020 regulatory target).

*Prepared by Juliana Araujo.*

### 5.      A simple macroprudential policy index suggests that the macroprudential policy (MPP)

### 1khmea2022003 - 5.      A simple macroprudential policy index suggests that the macroprudential policy (MPP)

### Definition of the macroprudential policy index (IMPP)
- The note proposes a simple index denoted as IMPP to measure the macroprudential policy stance in Cambodia.
- Four macroprudential policies MPPi are included in the index.
- For each policy i, a neutral policy MPPi* is defined.
- The neutral values used:
  - Liquidity Coverage Ratio (LCR) neutral = the Basel III recommended ratio of 100 percent.
  - Capital Conservation Buffer (CCB) neutral = the Basel III recommended 2.5 percent of total risk-weighted assets (RWA).
  - Reserve requirements in local currency neutral = 8 percent (median minimum reserve requirement during 2000-2020).
  - Reserve requirements in foreign exchange neutral = 12 percent (median minimum reserve requirement during 2000-2020).
- Other measures are not included due to limitations in defining a neutral policy.
- The macroprudential policy index IMPP is defined as:
  - IMPP = (∑ I_i) / n, where I_i = MPP_i / MPP_i*.

### Current macroprudential stance and recent history
- The macroprudential stance is currently loose.
  - All measures are currently set below the neutral policies, except for the LCR.
- No bank has made use of the allowance with respect to the CCB.
  - Banks have used forbearance on loan classifications extensively, indicating abundant support relative to need.
- Past decade summary:
  - Most measures have been loose.
  - Reserve requirements in FX were tightened for a brief period prior to the global financial crisis.
  - Reserve requirements in FX were moderately tightened prior to the Covid-19 shock.

### Macroprudential toolkit (selected tools and descriptions)
- Countercyclical capital buffer (CCyB)
  - The NBC may set the CCyB in the range of 0 percent to 2.5 percent of total RWAs.
  - Currently, the CCyB is 0 percent because the regulations on how to calibrate are missing.
- Capital conservation buffer (CCB)
  - The CCB is set to 2.5 percent of total RWAs.
  - A prakas in February 2018 requires commercial banks to add at least 50 percent of the buffer effective January 1, 2019, and fully implement effective January 1, 2020.
  - Effective March 2020, because of Covid-19, the NBC reversed the implementation by requiring banks to hold 50 percent of the buffer (the same as 2019) and wait to see the Covid-19 situation before reimplementing the full measure.
- Limits on foreign currency lending
  - From December 2019, the NBC has required 10 percent of loans to be in riel.
- Liquidity Coverage Ratio (LCR)
  - Announced December 23, 2015; effective September 1, 2016, for deposit-taking corporations (including foreign branches) and microfinance institutions.
  - LCR definition: LCR = Market value of the stock of eligible liquid assets / Total net cash outflows within 30 days ≥ 100%.
  - Phase-in schedule:
    - Effective September 1, 2016: LCR = 60%.
    - Effective September 1, 2017: LCR = 70%.
    - Effective September 1, 2018: LCR = 80%.
    - Effective June 1, 2019: LCR = 90%.
    - Effective January 1, 2020: LCR = 100%.
- Limits on net foreign exchange positions
  - Announced August 27, 2007; effective the date of announcement.
  - Banks and financial institutions must maintain net open positions in foreign currencies such that any individual or aggregate net open position may not exceed 20% of banks’ and financial institutions’ net worth.
- Reserve requirements for macroprudential purposes
  - Effective December 1993, deposit-taking corporations (including foreign branches), banks, and microfinance institutions are subject to reserve requirement regulation.
  - Reserve requirement bases: demand deposits, time deposits, foreign currency deposits, government deposits, and savings deposits.
  - Assets allowed as required reserves include bank reserves denominated in domestic currency, bank reserves denominated in foreign currency, and reserve assets.
  - Levels as of 2016:
    - Reserve requirement applied to local currency liabilities = 8%.
    - Reserve requirement applied to foreign currency (US$) liabilities = 12.5%.
    - Only the difference of 4.5% of reserves in foreign currency liabilities is remunerated.
  - Covid-19 related adjustments:
    - Effective March 17, 2020, and April 1, 2020, the NBC temporarily reduced reserve requirement rate on KHR and foreign currency to 7% (from 8% and 12.5%) until further notice.
    - Effective October 1, 2020, reserve requirement rate on foreign currency and KHR will remain at 7% until further notice.
- Systemically important financial institutions
  - The NBC can require an increase in the solvency ratio up to 30% for institutions or groups that could represent significant threat to depositors and the financial system as a whole.

_International Monetary Fund: 1khmea2022003 - Section 5 (excerpt)_

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1khmea2022003.pdf_