## _cr09325

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### Executive summary — background, recent performance, and outlook
- Growth averaged 8 percent over the period 2000–09.
- Poverty level fell to 30 percent of households in 2007 compared to about 50 percent in the mid-1990s.
- Since late 2008 three of the four main drivers of growth have registered sharp contractions; the property bubble has burst under the weight of weaker economic activity and foreign currency inflows.
- The economy is expected to contract in 2009, with only a modest yet still uncertain pickup in 2010.
- Banks’ balance sheets have weakened considerably; inflation has come down rapidly; foreign reserves have remained broadly stable as plunging imports offset sharply declining exports and foreign direct investment.

- Staff growth projections (highlights):
  - Growth in 2009 is projected at negative 2¾ percent.
  - Government’s preliminary estimate for 2008 was positive 6¾ percent.
  - Growth is projected to pick up to 4¼ percent in 2010, but risks are tilted to the downside.

- Key policy issues discussed:
  - Mitigating the impact of the global crisis while preserving macroeconomic stability.
  - Reinforcing the banking system through critical corrective actions.
  - Strengthening policy effectiveness, reducing vulnerabilities, and improving competitiveness.

- Staff fiscal view and recommendations:
  - Given Cambodia’s highly dollarized economy, fiscal policy should continue to anchor macroeconomic stability.
  - Fiscal policy should remain appropriately supportive while avoiding weakening the external position.
  - A sizable domestic financing requirement resulting from the projected sharp widening of the fiscal deficit this year and next could exert pressure on inflation, the exchange rate, and foreign reserves, and should be eliminated through a combination of revenue and expenditure measures.
  - In view of the recession, spending should be targeted at high-impact social and infrastructure outlays.

- Staff monetary and exchange rate recommendations:
  - The monetary stance is broadly appropriate.
  - Allowing greater exchange rate flexibility would help facilitate adjustment and protect international reserves, especially given the accommodative fiscal stance.

- Banking sector recommendations:
  - Strictly enforce corrective action plans in light of deterioration in banks’ balance sheets and rising credit risks.
  - Urge banks to bring forward compliance with new minimum capital requirements ahead of the end-2010 deadline.

### Garments sector — impact, competitiveness constraints, and prospects (Box 1)
- 2008 sector contribution and employment:
  - Accounted for about 15 percent of GDP and 65 percent of exports.
  - Total employment about 350,000.

- Recent performance:
  - Volume growth averaged 11 percent per year over 2005–08.
  - Over the first nine months of 2009, export volumes are down about 16 percent compared to the same period in 2008.
  - Cambodian garment exports to the United States are down some 23 percent in value terms.
  - Around 40 factories (net) have closed so far in 2009, with another 25 or so remaining open but operating under a suspension of activity.
  - As of June 2009, some 40,000 jobs had been lost; retained workers earning about 20 percent less than in 2008 due to reduced overtime.
  - Most large factories operate at 60–70 percent capacity (130 percent previously); less than 5 percent of factories on a 24-hour shift cycle.

- Market positioning and causes of decline:
  - Nearly three-quarters of garment exports in 2008 were destined for the U.S. market.
  - Cambodia has not gained U.S. market share; a sizable fraction of orders is overflow from large ones received by key buyers.
  - Declining orders favor the most cost efficient producers, compressing margins for higher-cost producers.

- Competitiveness constraints (exact cost and logistics comparisons):
  - Total manufacturing cost in Cambodia is about 20 percent higher than in neighboring Vietnam, despite lower hourly wages.
  - Electricity costs: 22 cents per kwh in Cambodia versus 7 cents in Vietnam.
  - Getting a container to port reportedly costs about five times that of Vietnam.
  - Electricity accounts for about 15 percent of total cost.

- Structural market changes and outlook:
  - Global recovery not expected to be consumer-led, dimming prospects for 2010.
  - Consolidation of the garment industry following expiry of quotas and safeguards under China’s WTO accession appears in train.
  - Free trade agreements between other LIC producers and the United States increasingly put Cambodia at a disadvantage.
  - The United States has granted quota-free, duty-free access to 30 of 49 non-Asian LICs; Cambodia is subject to an average 16 percent tariff on garment imports.
  - Japan accounts for merely 1 percent of Cambodian garment exports.

- Trade opportunities and limitations:
  - Potential benefits: ASEAN–USA or ASEAN–EU FTA; passage of the U.S. Trade Act of 2009; shifting sourcing by Japan.
  - Limitations and timing: negotiations likely protracted; Doha Round not imminent; political considerations have stalled key initiatives.

### Exchange rate assessment and external sector
- Exchange rate assessment:
  - The real effective exchange rate appears to be somewhat overvalued relative to its equilibrium level, but assessment subject to considerable uncertainty.
  - Results mixed:
    - Macroeconomic balance approach indicates an overvaluation of around 25 percent.
    - Equilibrium real exchange rate approach points to an undervaluation of about 2 percent.
  - Neither estimate statistically significant; extreme caution warranted given structural changes and data weaknesses.

- External sector and reserves (highlights):
  - Current account deficit (including transfers) expected to narrow in 2009 to around 5½ percent of GDP.
  - Gross official reserves expected broadly stable at around US$2.2 billion (3.5 months of next year’s imports) at end-2009 (including recent SDR allocation).
  - Modest decline in reserves projected for 2010, to around US$2.1 billion by year end.
  - IMF provided new general and specific SDR allocations to Cambodia totaling SDR 68 million in August and September 2009.

### Banking sector vulnerabilities, supervisory actions, and scenarios
- Key vulnerabilities and developments:
  - Banks’ liquidity has improved, but balance sheets have further weakened and credit risks risen sharply over the past year.
  - Contributing factors: weak risk management, earlier supervisory lapses, excessive credit growth, growth slowdown, and property price collapse.
  - Banks reported NPLs rose to 5¼ percent at June 2009 from 3¾ percent in December 2008; actual NPLs likely much higher due to incomplete adherence to classification/provisioning, evergreening, and capitalization of interest.
  - Credit growth fell from 55 percent (y/y) in 2008 to 4 percent in August 2009 (other tables note 5.0 percent and 3.5 percent in different series/timepoints).
  - Property prices in Phnom Penh reportedly down by 50 percent from mid-2008 peak; property-related loans account for 20–30 percent of total credit outstanding.

- Profitability and liquidity mechanics:
  - Negative interest carry and low demand for credit squeezing profits.
  - Interest rates on six-month term deposits in U.S. dollars averaged over 5 percent throughout 2009, contributing to deposit growth.
  - Loan-deposit ratio declined from over 100 percent in late-2008 to around 80 percent.
  - Banks have placed most new deposits at the NBC as excess reserves, remunerated at most at one-half of SIBOR (close to zero percent), generating negative interest spread and driving down banking sector profits.
  - Excess reserves could reverse quickly; overdraft usage represents contingent calls on liquidity.

- Staff sensitivity (top-down) results and scenarios:
  - If average system-wide NPLs rise to around 15 percent (Scenario 1) and require full provisioning:
    - Risk-weighted capital to asset (RWKA) ratio would decline to 20 percent.
    - NPLs would amount to around 37 percent of the banking system’s capital at end-June 2009.
  - Deposit reduction scenarios:
    - A 15 percent deposit reduction (Scenario 1) would reduce the ratio of liquid assets to deposits (LAD) to around 28 percent.
    - A 20 percent deposit reduction would result in a system-wide LAD ratio of 24 percent.
  - These LAD levels are very low for a highly dollarized financial system lacking a functioning interbank market and central bank facilities.

- Supervisory actions taken by NBC since early 2009:
  - Conducted prioritized onsite inspections (with IMF and AsDB assistance).
  - Issued supervisory letters to noncompliant banks and developed corrective action plans.
  - Urged banks to advance compliance with new minimum capital requirements ahead of end-2010 deadline.
  - Increased scrutiny of related party activities and strengthened internal governance (credit committees, more independent directors).

- Remaining gaps and recommended actions:
  - Strict enforcement of new loan classification and provisioning standards; recognition of loan losses and recapitalization where needed.
  - Develop comprehensive bank resolution framework, including procedures to assume administrative control of intervened banks, resolve failed institutions, and provide public financial assistance under transparent regime.
  - Increase qualified staff in banking supervision—particularly for onsite inspection teams—and concentrate supervisory activity on larger banks.
  - Temporary moratorium on granting new bank licenses urged until supervisory capacity can be expanded (authorities noted potential benefits of new entrants).
  - Need closer collaboration between NBC and SECC to avoid regulatory arbitrage; guidelines for securities firms and broker operations issued in anticipation of a new stock exchange.
  - Financial Intelligence Unit requires technical resources to process cash transaction reports.

### Fiscal policy, public debt, and debt sustainability analysis (DSA)
- Fiscal and public debt snapshot:
  - Cambodia assessed at moderate risk of debt distress.
  - At end-2008, total public debt equivalent to around 25 percent of GDP, nearly all external.
  - Joint IMF-World Bank DSA highlights dependence on nondebt creating flows and risks from higher fiscal deficits.
  - Contingent liabilities include banking system dislocations, government guarantees on BOT schemes, and large hydropower-related investments.

- Baseline DSA assumptions and results (selected exact values and projections):
  - Real GDP growth: minus 2.7 percent in 2009; rebound to 4.3 percent in 2010; rise to around 7 percent in 2011; stabilize at 6–7 percent over medium/long term.
  - FDI: sharp projected reduction in 2009 by nearly 30 percent; longer term around 5–6 percent of GDP a year.
  - External current account deficit (including official transfers): projected to improve in 2009 to 5½ percent of GDP, compared to 10½ percent in 2008; longer term settle in range of 5–6 percent of GDP.
  - Gross official reserves: expected around US$2.2 billion (3.5 months of next year’s imports) at end-2009; decline slowly through 2012 to US$1.9 billion (2.4 months of imports); gradually increase to around three months over longer term.
  - Fiscal path: overall fiscal deficit (excluding grants) around 6.7 percent of GDP in 2009, compared to 2.8 percent in 2008; deficit projected to decline gradually to around 3.4 percent by 2014; revenue rise to around 14½ percent of GDP by 2014.

- DSA headline indicators (selected exact values):
  - External PPG (nominal) as percent of GDP: 31.0 (2006), 29.6 (2007), 24.6 (2008), 29.2 (2009), 30.1 (2010).
  - PV of external debt-to-GDP (selected): 24 (2009), 24 (2010), 24 (2011), 24 (2012), 24 (2013), 24 (2014), 23 (2015), 20 (2019), 13 (2029).
  - PV of debt-to-exports ratio (selected): 48 (2009), 51 (2010), 52 (2011), 53 (2012), 53 (2013), 53 (2014), 52 (2015), 47 (2019), 37 (2029).
  - PV of debt-to-revenue ratio (selected): 197 (2009), 185 (2010), 178 (2011), 172 (2012), 167 (2013), 164 (2014), 158 (2015), 131 (2019), 80 (2029).
  - Debt service-to-revenue ratio (selected sequence): 1 (2009), 2 (2010), 2 (2011), 2 (2012), 3 (2013), 4 (2014), 5 (2015), 6 (2019), 7 (2029).

- Stress tests and alternative scenarios:
  - Under baseline: external debt indicators remain below policy-dependent thresholds through 2029.
  - Bound tests breach thresholds:
    - Net nondebt creating flows at historical average minus one standard deviation in 2010–11 breaches thresholds.
    - One-time 30 percent nominal depreciation of the riel vis-à-vis the U.S. dollar in 2010 breaches thresholds.
    - NPV of debt-to-revenue ratio breaches the 200 percent threshold for more than five years under these tests.
  - Alternative scenario: delay in fiscal adjustment (primary balance unchanged from projected 2009 level of minus 4 percent of GDP for 2010–12) leads to reliance on additional external financing; NPV debt-to-GDP ratio would exceed indicative threshold for five years; debt-to-revenue ratio breaches threshold for six years.

- Policy recommendations from DSA and staff appraisal:
  - Ensure appropriate concessionality from new and emerging creditors.
  - Strengthen debt management capacity and ensure new debt contracted on sustainable basis.
  - Monitor and increase transparency of BOTs and concessions; develop and maintain an inventory and capacity to analyze contingent liabilities.
  - Return to a more prudent fiscal stance from 2010 onward to stabilize debt dynamics and limit reserve and exchange rate vulnerabilities.
  - If fiscal adjustment delayed, consider allowing greater exchange rate flexibility to mitigate competitiveness loss from inflationary and exchange rate pressures.

### Macro-fiscal indicators and selected tables (highlights and exact figures)
- Selected GDP, inflation, and fiscal figures (selected exact values):
  - GDP in constant prices: 13.3 (2005), 10.8 (2006), 10.2 (2007), 6.7 (2008), ...,-2.7 (2009), 4.3 (2010).
  - Inflation (end-year): 8.4 (2005), 4.2 (2006), 14.0 (2007), 12.5 (2008), -2.3 (2009), 5.3 (2010), 6.0 (latest).
  - Revenue (percent of GDP): 10.3 (2005), 11.5 (2006), 11.9 (2007), 12.0 (2008), 7.5 (2009), 12.0 (2010), 12.4 (latest).
  - Expenditure (percent of GDP): 12.8 (2005), 14.2 (2006), 14.7 (2007), 14.8 (2008), 10.5 (2009), 18.8 (2010), 19.9 (latest).
  - Overall budget balance (excluding grants, percent of GDP): -2.5 (2005), -2.7 (2006), -2.9 (2007), -2.8 (2008), -3.0 (2009), -6.7 (2010), -7.4 (latest).

- Balance of payments highlights (selected exact values):
  - Exports, f.o.b. (millions of dollars): 2,910 (2005), 3,694 (2006), 4,089 (2007), 4,433 (2008), ... ,3,892 (2009), 4,059 (2010).
  - Imports, f.o.b. (millions of dollars): -3,904 (2005), -4,727 (2006), -5,432 (2007), -6,679 (2008), ... ,-5,501 (2009), -6,446 (2010).
  - Current account (including official transfers, millions of dollars): -240 (2005), -47 (2006), -151 (2007), -1,175 (2008), ... ,-597 (2009), -1,319 (2010).
  - Gross official reserves (millions of dollars): 915 (2005), 1,097 (2006), 1,616 (2007), 2,164 (2008), 2,272 (2009), 2,199 (2010), 2,137 (latest).

- Fiscal accounts (selected exact values in billions of riels):
  - Total revenue: 3,431 (2006), 4,165 (2007), 4,109 (2008), 5,463 (2009).
  - Total expenditure: 4,244 (2006), 5,164 (2007), 5,680 (2008), 6,751 (2009).
  - Capital expenditure: 1,716 (2006), 2,121 (2007), 2,111 (2008), 2,654 (2009).
  - Overall balance (excluding grants): -813 (2006), -999 (2007), -1,571 (2008), -1,288 (2009).

### Public debt management and recommended safeguards (staff guidance)
- Continue pursuing sound public debt management strategy.
- Carefully consider implications of contracting less concessional loans and providing government guarantees.
- Strengthen capacity in debt management as essential prerequisite for less concessional borrowing.
- Produce full accounting of all commitments, including from newly emerging creditors; better monitor contingent liabilities.
- Maintain exchange rate policy consistent with fiscal stance given high dollarization and lack of domestic debt instruments.
- Continue seeking agreements to resolve outstanding arrears.

### Data, statistics, and surveillance issues (Annex IV highlights)
- Data provision broadly adequate for surveillance but shortcomings remain across national accounts, price statistics, government finance statistics, monetary and financial statistics, and external sector statistics.
- CPI: new series introduced January 2009; geographical coverage limited to Phnom Penh.
- NBC reports monthly monetary and financial statistics to STA using Standardized Report Forms since August 2005.
- Customs data suffer coverage and valuation problems; enterprise transactions and FDI reporting gaps noted.
- Cambodia participates in GDDS; no data ROSC available.
- Selected reporting frequencies and latest observations (as of October 26, 2009) included for exchange rates, reserves, monetary aggregates, fiscal data, BOP, and debt.

### Authorities’ views and actions (summary of authorities’ letter and statements)
- Authorities project for 2009:
  - Overall growth: around 2 percent.
  - Agriculture growth: 4.3 percent.
  - Services growth: 3.2 percent.
  - Garment industry contraction: 3.9 percent.
  - Construction contraction: 2.6 percent.
- Authorities’ fiscal stance and projections:
  - Fiscal deficits: overall fiscal deficits expected to increase to 6.08 percent of GDP in 2009; expected about 5.3 percent in 2010.
  - Financing of 2009 deficit: domestic financing will increase to 2.88 percent of GDP; external financing will decrease to 4.18 percent.
  - Committed to compressing the wage bill and strengthening tax administration.
  - Committed to mobilize development partners’ assistance and strengthen public financial management via PFMRP.

- Monetary policy and banking posture:
  - NBC continues prudent monetary policy; maintains reserve requirement given large excess reserves and banking soundness efforts.
  - Credit growth declined sharply in 2009 to 5.0 percent from 55.0 percent in 2008 and 76.0 percent in 2007 (series and dates vary across tables).
  - NBC introduced overdraft facility to address liquidity shortage risk; working on liquidity monitoring framework and repo/Repo Master Agreement.
  - Authorities commit to exchange rate stability as nominal anchor; gross international reserves around USD 2.2 billion as of October 2009.

- Banking supervision and financial stability measures:
  - NBC measures: maintain reserve requirement ratio of 12 percent; lender of last resort role; classify assets and loans by sector and maintain provisions; encourage higher minimum capital; strengthen supervision capacity; monitor liquidity.
  - Authorities welcome FSAP scheduled for early 2010.

- Structural reform priorities:
  - Continue agricultural development, diversify production, promote agro-industry and SME development, strengthen microfinance, develop rural infrastructure, improve business climate, and finalize WTO-related regulatory frameworks.

### IMF/World Bank/Donor relations and program engagement
- Staff urged continued monitoring and program engagement given uncertain external environment, macro imbalances, and systemic financial risks.
- Lack of progress in resolving outstanding arrears to the Russian Federation and the United States remains a major hurdle to formal program engagement; staff urge all parties to demonstrate flexibility.
- IMF technical assistance ongoing in bank supervision, monetary operations, public financial management, customs administration, and macro-financial statistics.
- ANNEX I highlights:
  - Quota: 87.50 SDR Million.
  - SDR net cumulative allocation: 83.92 SDR Million; holdings 68.52 SDR Million.
  - MDRI: IMF Executive Board approved relief on 100 percent of debt incurred before January 1, 2005; forgiving SDR 56.8 million.
  - Membership: Joined 12/31/1969; Article VIII.
  - Last Article IV consultation discussions: October 23–November 7, 2008; Executive Board concluded consultation on January 16, 2009.
  - Resident representative: Mr. John Nelmes, assumed post November 2005.

*Source: Executive Summary and selected sections from IMF staff report content provided in content unit _cr09325.*

### Executive Summary ......................................................................................................

### Executive Summary

### Background and recent performance
- Growth averaged 8 percent over the period 2000–09.
- Poverty level fell to 30 percent of households in 2007 compared to about 50 percent in the mid-1990s.
- Following a decade of high growth, three of the four main drivers of growth have registered sharp contractions since late 2008; the property bubble has burst under the weight of weaker economic activity and foreign currency inflows.
- The economy is expected to contract in 2009, with only a modest yet still uncertain pickup in 2010.
- Banks’ balance sheets have weakened considerably; inflation has come down rapidly; foreign reserves have remained broadly stable as plunging imports offset sharply declining exports and foreign direct investment.

### Key policy issues discussed
- Mitigating the impact of the global crisis while preserving macroeconomic stability.
- Reinforcing the banking system through critical corrective actions.
- Strengthening policy effectiveness, reducing vulnerabilities, and improving competitiveness.

### Staff’s views and recommendations
- Fiscal policy:
  - Given Cambodia’s highly dollarized economy, fiscal policy should continue to anchor macroeconomic stability.
  - Fiscal policy should remain appropriately supportive while avoiding weakening the external position.
  - A sizable domestic financing requirement resulting from the projected sharp widening of the fiscal deficit this year and next could exert pressure on inflation, the exchange rate, and foreign reserves, and should be eliminated through a combination of revenue and expenditure measures.
  - In view of the recession, spending should be targeted at high-impact social and infrastructure outlays.
- Monetary and exchange rate policy:
  - The monetary stance is broadly appropriate.
  - Allowing greater exchange rate flexibility would help facilitate adjustment and protect international reserves, especially given the accommodative fiscal stance.
- Banking sector:
  - In light of the deterioration in banks’ balance sheets and rising credit risks, the authorities should strictly enforce corrective action plans.
  - Banks should be urged to bring forward compliance with new minimum capital requirements ahead of the end-2010 deadline.

### Authorities’ views
- Reiterated commitment to returning to a more prudent fiscal stance and shared concerns related to recent fiscal loosening.
- Selected revenue measures are under consideration; efforts to strengthen tax administration are ongoing; expenditures—especially ballooning functional allowances—are being reviewed.
- On monetary policy, authorities agreed that the large liquidity overhang warranted increased vigilance as the recovery takes hold, but they emphasized seasonal demand and supply factors and the role of exchange rate stability in anchoring inflation expectations.
- Preferred a more gradual approach to dealing with problem banks.
- Appreciated past and present IMF technical assistance and the presence of the resident office.

### Recent economic developments and outlook (highlights)
- Growth:
  - Growth in 2009 is projected at negative 2¾ percent.
  - Government’s preliminary estimate for 2008 was positive 6¾ percent.
  - Growth is projected to pick up to 4¼ percent in 2010, but risks are tilted to the downside.
- Sectoral impacts:
  - Three of the four main drivers of growth—garments, tourism, and construction—registered significant contractions in 2009; private investment slowed and foreign-funded construction activity was put on hold.
  - Retail trade faltered, with steep declines in automobile and motorcycle imports.
  - Good harvests are expected in agriculture in 2009, although rural incomes were depressed by lower agricultural prices.
- Inflation:
  - Headline inflation is expected be around 5 percent (y/y) by end-2009 (compared to negative 2¼ percent in September 2009).
  - Inflation should remain in the mid-single digits in 2010; upside risks include a more expansionary fiscal stance, a sharper depreciation of the U.S. dollar vis-à-vis other major currencies, and/or higher oil prices than currently envisaged.
- External sector and reserves:
  - Current account deficit (including transfers) is expected to narrow in 2009 to around 5½ percent of GDP.
  - Gross official reserves are expected to stay broadly stable at around US$2.2 billion (3.5 months of next year’s imports) at end-2009 (including the recent SDR allocation).
  - A modest decline in reserves is projected for 2010, to around US$2.1 billion by year end.
  - The IMF provided new general and specific SDR allocations to Cambodia totaling SDR 68 million in August and September 2009.
- Banking and financial conditions:
  - Liquidity conditions tightened significantly at the onset of the global financial crisis; banks reported no direct exposure to toxic assets abroad.
  - Banks’ foreign currency deposits (FCDs) rose by 21 percent in the first eight months of 2009.
  - Credit growth fell from 55 percent (y/y) in 2008 to 4 percent in August 2009.
  - Property prices in Phnom Penh are reportedly down by 50 percent from their mid-2008 peak; property-related loans account for 20–30 percent of total credit outstanding.
- Medium-term outlook:
  - Moderate growth expected over the medium term, stabilizing at 6–6½ percent per year, driven by services (including tourism), a pickup in investment—particularly power sector infrastructure—and improved agricultural yields.
  - Garment exports expected to be muted by productivity gaps, high nonwage costs, and structural changes in the global market.
  - Underpinning the medium-term outlook is moderate fiscal adjustment starting in 2010.
  - Diversifying the productive base, strengthening competitiveness, and improving economic governance require stepped-up implementation of structural reforms—especially improving basic infrastructure, enhancing labor skills, and strengthening the business climate.

*Source: Executive Summary, _cr09325.*

### Box 1. Cambodia: Garments Sector—Impact of the Global Slowdown and Prospects

### Box 1. Cambodia: Garments Sector—Impact of the Global Slowdown and Prospects

### Impact on output, exports, and employment
- In 2008, the garment sector accounted for about 15 percent of GDP and 65 percent of exports, with total employment of about 350,000 (the bulk of the manufacturing workforce).  
- Volume growth averaged 11 percent per year over 2005–08.  
- Over the first nine months of 2009, export volumes are down about 16 percent compared to the same period in 2008.  
- Cambodian garment exports to the United States are down some 23 percent in value terms.  
- According to GMAC, around 40 factories (net) have closed so far in 2009, with another 25 or so remaining open but operating under a suspension of activity.  
- As of June 2009, some 40,000 jobs had been lost; retained workers earning about 20 percent less than in 2008 as a result of reduced overtime.  
- Most large factories are operating at 60–70 percent capacity (130 percent previously), with less than 5 percent of factories on a 24-hour shift cycle.

### Market positioning and causes of decline
- Nearly three-quarters of garment exports in 2008 were destined for the U.S. market.  
- Cambodia has not gained U.S. market share in contrast to other Asian lower-income economies; a sizable fraction of its orders is overflow from large ones received by key buyers.  
- Large garment orders received in major hubs (e.g., Hong Kong SAR or Taiwan POC) are allocated regionally beginning with the most cost efficient producers; declining orders have left fewer allocated to manufacturers with relatively high unit costs, compressing profit margins.

### Competitiveness constraints (cost structure and logistics)
- Total manufacturing cost in Cambodia is about 20 percent higher than in neighboring Vietnam, despite lower hourly wages.  
- Major cost disadvantages cited by GMAC: lower productivity; higher electricity costs (22 cents per kwh in Cambodia versus 7 cents in Vietnam); less developed infrastructure (e.g., ports and roads).  
- Getting a container to port reportedly costs about five times that of Vietnam.  
- Electricity accounts for about 15 percent of total cost (noted elsewhere as a major factor).  
- High transport costs, protracted time to market, and lack of vertical integration further hamper competitiveness.

### Structural market changes and outlook
- The global recovery is not expected to be consumer-led, dimming prospects for 2010.  
- Long-anticipated consolidation of the garment industry following the expiry of quotas and safeguards under China’s WTO accession agreement appears to be in train.  
- Free trade agreements between other low-income country (LIC) producers and the United States are increasingly putting Cambodia at a disadvantage.  
- The United States has granted quota-free, duty-free access through various trade agreements to 30 of 49 non-Asian LICs; in contrast, Cambodia is subject to an average 16 percent tariff on garment imports.

### Trade opportunities and limitations
- Potential benefits noted:
  - An ASEAN–USA or ASEAN–EU free trade agreement would benefit Cambodia because Rules of Origin would only require sourcing inputs from ASEAN.  
  - Passage of the U.S. Trade Act of 2009 would eliminate tariffs on garments and textiles from 14 LICs, including Cambodia.  
  - Sourcing by Japan has shifted away from Chinese garment imports and could reduce Cambodia’s dependence on the U.S. market.  
- Limitations and timing:
  - New bilateral trade agreements could expand markets, but negotiations will likely be protracted.  
  - Conclusion of the Doha Round would permanently reduce tariffs, but was not presented as imminent.  
  - Political considerations have stalled the ASEAN–USA, ASEAN–EU, and U.S. Trade Act initiatives.  
  - Japan accounts for merely 1 percent of Cambodian garment exports, so scope to diversify toward Japan is low.

*Source: Box 1. Cambodia: Garments Sector—Impact of the Global Slowdown and Prospects*

### 17.      The real effective exchange rate appears to be somewhat overvalued relative to

### _cr09325 - 17.      The real effective exchange rate appears to be somewhat overvalued relative to

### Exchange rate assessment and external position
- The real effective exchange rate appears to be somewhat overvalued relative to its equilibrium level, but the assessment is subject to considerable uncertainty.
- Results of the exchange rate assessment are mixed:
  - The macroeconomic balance approach indicates an overvaluation of around 25 percent.
  - The equilibrium real exchange rate approach points to an undervaluation of about 2 percent.
  - Neither estimate is statistically significant; extreme caution is warranted given structural changes and weaknesses in macroeconomic data.
- Much of the increase in the current account deficit over the near to medium term is accounted for by imports associated with large FDI and donor-related projects, which are fully financed.
- A continued strengthening of the exchange rate could weaken export prospects and increase external pressures.

### Banking sector vulnerabilities and recent developments
- Banks’ liquidity has improved, but bank balance sheets have further weakened and credit risks have risen sharply over the past year.
- Contributing factors: weak risk management, earlier supervisory lapses, excessive credit growth, the growth slowdown, and property price collapse.
- Nonperforming loans (NPLs) are rising, and officially reported figures likely understate the problem:
  - Banks reported NPLs rose to 5¼ percent at June 2009 from 3¾ percent in December 2008.
  - Actual NPLs are likely much higher due to incomplete adherence to new loan classification and provisioning regulations, evergreening of loans, and capitalization of interest.
- Profitability pressures:
  - Negative interest carry and low demand for credit are squeezing profits.
  - Interest rates on six-month term deposits in U.S. dollars averaged over 5 percent throughout 2009, contributing to deposit growth.
  - Loan-deposit ratio declined from over 100 percent in late-2008 to around 80 percent.
  - Banks have placed most new deposits at the NBC as excess reserves, remunerated at most at one-half of SIBOR (close to zero percent), generating a negative interest spread and driving down banking sector profits.
- Liquidity and contingent risks:
  - Excess reserves could reverse quickly; overdraft usage represents contingent calls on liquidity.
  - Staff sensitivity analysis (top-down) using consolidated banking system data indicates potentially large loan losses and capital deficiencies under adverse scenarios (see Box 3).
  - If average system-wide NPLs were to rise to around 15 percent (Scenario 1) and require full provisioning:
    - The risk-weighted capital to asset (RWKA) ratio would decline to 20 percent.
    - NPLs would amount to around 37 percent of the banking system’s capital at end-June 2009.
  - Deposit reduction scenarios:
    - A 15 percent deposit reduction (Scenario 1) would reduce the ratio of liquid assets to deposits (LAD) to around 28 percent.
    - A 20 percent deposit reduction would result in a system-wide LAD ratio of 24 percent.
  - These LAD levels are very low for a highly dollarized financial system lacking a functioning interbank market and central bank facilities.

### Supervisory actions taken and remaining gaps
- Since early 2009, the NBC has:
  - Conducted prioritized onsite inspections (with IMF and AsDB assistance).
  - Issued supervisory letters to noncompliant banks and developed corrective action plans.
  - Urged banks to advance compliance with new minimum capital requirements ahead of the end-2010 deadline.
  - Increased scrutiny of related party activities and strengthened internal governance (credit committees, more independent directors).
- Staff urged:
  - Strict enforcement of newly-introduced loan classification and provisioning standards.
  - Recognition of loan losses and recapitalization where needed to ensure banks’ solvency and minimize fiscal risks.
  - Development of a comprehensive bank resolution framework, including procedures to assume administrative control of intervened banks, resolve failed institutions, and provide public financial assistance under a transparent regime.
- Capacity and regulatory coordination:
  - NBC supervisory and oversight capacity is stretched by rapid growth in the number of banks (an additional 5 bank licenses issued over the past year, bringing total to 32).
  - Further strains expected from bank restructurings, development of a stock market, and impending consolidated supervision of securities firms.
  - The Financial Intelligence Unit requires technical resources to process cash transaction reports.
  - Authorities were urged to increase qualified staff in banking supervision—particularly for onsite inspection teams—and to concentrate supervisory activity on larger banks.
  - A temporary moratorium on granting new bank licenses was urged until supervisory capacity can be expanded, though authorities noted potential benefits of new entrants raising operating standards and reducing risk concentration.
  - Need for closer collaboration between the NBC and the Securities and Exchange Commission of Cambodia (SECC) to avoid regulatory arbitrage; guidelines for securities firms and broker operations have been issued in anticipation of a new stock exchange.

### Reducing vulnerabilities, competitiveness, and fiscal risks
- Fiscal and public debt position:
  - Cambodia is assessed to be at a moderate risk of debt distress.
  - At end-2008, total public debt was equivalent to around 25 percent of GDP, with nearly all external.
  - The joint IMF-World Bank Debt Sustainability Analysis highlights dependence on nondebt creating flows and risks from higher fiscal deficits.
  - Contingent liabilities that could threaten debt sustainability include banking system dislocations, government guarantees on build-operate-transfer schemes, and large hydropower-related investments.
  - Staff urged a thorough review of existing contracts for potential liabilities and caution when evaluating new investment projects with explicit or implicit government guarantees.
- Competitiveness and structural reforms:
  - Resumption of sustained high growth requires actions to strengthen competitiveness and improve the business climate.
  - Authorities are pursuing full WTO compliance and lowering the cost of doing business, but many laws, amendments, and regulations remain to be addressed across ministries.
  - Current priorities include finalizing the Commercial Contract Law (including Commercial Agency chapter) and establishing the National Arbitration Council by year-end.
  - Implementation of post-clearance audits and simplified valuation and cargo processing procedures has reduced customs clearance time.
  - Reforms should focus on improving basic infrastructure, enhancing labor skills, expanding market access through trade commitments, and streamlining investment approvals and customs procedures.

### Staff appraisal and policy recommendations
- Macro and fiscal stance:
  - A cautious fiscal policy response is required to preserve macroeconomic stability; excessive spending, larger deficits, and domestic financing could place downward pressure on the exchange rate, raise inflation concerns, and weaken the external position amid high dollarization.
  - The current fiscal easing appears overly expansionary and insufficiently targeted; large increases in the wage bill will be difficult to roll back.
  - The domestic financing requirement should be eliminated in 2010 through a combination of revenue and expenditure measures.
  - Spending should be re-prioritized and the deficit placed on a clear consolidation path over the medium term to safeguard debt sustainability in light of potentially rising contingent liabilities.
  - In the absence of policy tightening, the exchange rate would need to be allowed to depreciate to protect international reserves.
  - Continued gains in public financial management (PFM) and publication of comprehensive budget data were recommended to improve effectiveness, accountability, and transparency.
- Monetary policy and liquidity management:
  - The monetary stance is broadly appropriate, but conditions bear close watch due to the liquidity overhang and recovery prospects.
  - A reduction in the reserve requirement is neither warranted nor desirable given relatively loose liquidity conditions and weak bank balance sheets.
  - Further efforts to strengthen liquidity monitoring and introduce new tradable instruments should deepen interbank activity and improve banks’ liquidity management.
  - Effective monetary controls will require greater confidence in and use of the riel, and a more flexible exchange rate arrangement.
  - Exchange market intervention should be limited to smoothing volatility to help protect foreign reserves, deepen the foreign exchange market, and facilitate external adjustment.
- Banking sector measures:
  - Strict enforcement of the new asset classification regime, implementation of corrective action plans, and development of a comprehensive bank restructuring framework are critical to strengthen banking system solvency.
  - Supervision capacity, including staffing, should be increased and complemented by a temporary moratorium on new bank licensing.
  - Care should be taken to ensure new securities regulations are consistent with those governing other segments of the financial system.
- Ongoing monitoring and program engagement:
  - Given uncertain external environment, macroeconomic imbalances, and systemic financial risks, staff will continue to monitor developments closely.
  - Lack of progress in resolving outstanding arrears to the Russian Federation and the United States remains a major hurdle to formal program engagement; staff urge all parties to demonstrate flexibility.
  - Authorities should continue reform efforts, which the IMF will continue to support through intensive technical assistance and policy dialogue.

*Source: IMF staff report content provided in content unit _cr09325 - 17.*

### 30. It is recommended that the next Article IV consultation take place on the standard

### _cr09325 - 30. It is recommended that the next Article IV consultation take place on the standard

### Recommendation
- It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Selected economic indicators (highlights from Table 1)
- GDP in constant prices: 13.3 (2005), 10.8 (2006), 10.2 (2007), 6.7 (2008), ...,-2.7 (2009), 4.3 (2010)
- (Excluding agriculture): 8.1 (2005), 17.3 (2006), 12.3 (2007), 7.0 (2008), ...,-5.4 (2009), 3.9 (2010)
- Real agricultural output: 15.7 (2005), 5.5 (2006), 5.0 (2007), 5.7 (2008), ... ,5.0 (2009), 5.0 (2010)
- GDP deflator: 6.1 (2005), 4.6 (2006), 6.5 (2007), 21.9 (2008), ... ,0.7 (2009), 4.8 (2010)
- Inflation (end-year): 8.4 (2005), 4.2 (2006), 14.0 (2007), 12.5 (2008), -2.3 (2009), 5.3 (2010), 6.0 (latest)
- Broad money (annual percent change): 16.1 (2005), 38.2 (2006), 62.9 (2007), 4.8 (2008), 12.9 (2009), 23.5 (2010), 12.9 (latest)
- Private sector credit (annual percent change): 31.8 (2005), 51.6 (2006), 76.0 (2007), 55.0 (2008), 4.1 (2009), 3.5 (2010), 17.0 (latest)
- Revenue (percent of GDP): 10.3 (2005), 11.5 (2006), 11.9 (2007), 12.0 (2008), 7.5 (2009), 12.0 (2010), 12.4 (latest)
- Expenditure (percent of GDP): 12.8 (2005), 14.2 (2006), 14.7 (2007), 14.8 (2008), 10.5 (2009), 18.8 (2010), 19.9 (latest)
- Overall budget balance (excluding grants, percent of GDP): -2.5 (2005), -2.7 (2006), -2.9 (2007), -2.8 (2008), -3.0 (2009), -6.7 (2010), -7.4 (latest)
- Exports, f.o.b. (millions of dollars): 2,910 (2005), 3,694 (2006), 4,089 (2007), 4,433 (2008), ... ,3,892 (2009), 4,059 (2010)
- Imports, f.o.b. (millions of dollars): -3,904 (2005), -4,727 (2006), -5,432 (2007), -6,679 (2008), ... ,-5,501 (2009), -6,446 (2010)
- Current account (including official transfers, millions of dollars): -240 (2005), -47 (2006), -151 (2007), -1,175 (2008), ... ,-597 (2009), -1,319 (2010)
- Gross official reserves (millions of dollars): 915 (2005), 1,097 (2006), 1,616 (2007), 2,164 (2008), 2,272 (2009), 2,199 (2010), 2,137 (latest)
- Public external debt (millions of dollars): 2,120 (2005), 2,254 (2006), 2,571 (2007), 2,773 (2008), ... ,3,170 (2009), 3,531 (2010)
- Nominal GDP (in billions of riels): 25,754 (2005), 29,849 (2006), 35,042 (2007), 45,583 (2008), ... ,44,696 (2009), 48,843 (2010)
- Exchange rate (riels per dollar; period average): 4,097 (2005), 4,109 (2006), 4,032 (2007), 4,042 (2008), 4,159 (2009), ... (as of October 26)

### Balance of payments and external sector (highlights from Table 2)
- Current account (including official transfers, millions of dollars): -151 (2007), -1,175 (2008), -597 (2009), -1,319 (2010), -1,585 (2011), -1,547 (2012), -1,455 (2013), -1,452 (2014)
- Trade balance (millions of dollars): -1,343 (2007), -2,246 (2008), -1,608 (2009), -2,387 (2010), -2,722 (2011), -2,902 (2012), -3,085 (2013), -3,234 (2014)
- Exports, f.o.b. (millions of dollars): 4,089 (2007), 4,433 (2008), 3,892 (2009), 4,059 (2010), 4,424 (2011), 4,739 (2012), 5,102 (2013), 5,496 (2014)
- Of which: Garments (millions of dollars): 2,840 (2007), 2,899 (2008), 2,445 (2009), 2,522 (2010), 2,743 (2011), 2,905 (2012), 3,080 (2013), 3,263 (2014)
- Imports, f.o.b. (millions of dollars): -5,432 (2007), -6,679 (2008), -5,501 (2009), -6,446 (2010), -7,146 (2011), -7,641 (2012), -8,187 (2013), -8,730 (2014)
- Services and income (net, millions of dollars): 261 (2007), 148 (2008), 169 (2009), 147 (2010), 165 (2011), 224 (2012), 405 (2013), 475 (2014)
- Private transfers (net, millions of dollars): 377 (2007), 365 (2008), 292 (2009), 360 (2010), 400 (2011), 548 (2012), 630 (2013), 700 (2014)
- Capital and financial account (millions of dollars): 567 (2007), 1,690 (2008), 575 (2009), 1,240 (2010), 1,445 (2011), 1,414 (2012), 1,484 (2013), 1,553 (2014)
- Foreign direct investment (millions of dollars): 867 (2007), 815 (2008), 593 (2009), 723 (2010), 803 (2011), 894 (2012), 997 (2013), 1,115 (2014)
- Gross official reserves (millions of dollars): 1,616 (2007), 2,164 (2008), 2,199 (2009), 2,137 (2010), 2,013 (2011), 1,896 (2012), 1,940 (2013), 2,056 (2014)
- Current account balance (in percent of GDP, excluding official transfers): -8.1 (2007), -15.4 (2008), -10.6 (2009), -16.0 (2010), -16.5 (2011), -14.6 (2012), -12.8 (2013), -11.7 (2014)

### Medium-term macroeconomic framework (Table 3 highlights)
- GDP at constant prices (percent change): 10.2 (2007), 6.7 (2008), -2.7 (2009), 4.3 (2010), 6.8 (2011), 6.2 (2012), 6.0 (2013), 6.2 (2014)
- Consumer prices (end-year): 14.0 (2007), 12.5 (2008), 5.3 (2009), 6.0 (2010), 4.9 (2011), 4.0 (2012), 3.4 (2013), 3.0 (2014)
- Gross national saving (percent of GDP): 19.0 (2007), 9.1 (2008), 10.5 (2009), 5.8 (2010), 6.9 (2011), 9.4 (2012), 12.4 (2013), 14.3 (2014)
- Gross fixed investment (percent of GDP): 20.8 (2007), 19.5 (2008), 16.0 (2009), 17.0 (2010), 19.0 (2011), 20.0 (2012), 21.5 (2013), 22.5 (2014)
- Revenue (percent of GDP): 11.9 (2007), 12.0 (2008), 12.0 (2009), 13.2 (2010), 13.7 (2011), 14.0 (2012), 14.4 (2013), 14.5 (2014)
- Tax revenue (percent of GDP): 9.5 (2007), 9.9 (2008), 9.8 (2009), 11.1 (2010), 11.5 (2011), 11.8 (2012), 12.2 (2013), 12.3 (2014)
- Overall balance (excluding grants, percent of GDP): -2.9 (2007), -2.8 (2008), -6.7 (2009), -5.8 (2010), -4.8 (2011), -3.9 (2012), -3.6 (2013), -3.4 (2014)
- Overall balance (including grants, percent of GDP): -0.7 (2007), 0.3 (2008), -4.1 (2009), -3.2 (2010), -2.4 (2011), -1.6 (2012), -1.3 (2013), -1.1 (2014)
- External financing, net (including grants, percent of GDP): 5.0 (2007), 5.3 (2008), 5.5 (2009), 5.8 (2010), 5.2 (2011), 4.7 (2012), 4.6 (2013), 4.3 (2014)
- Foreign direct investment (millions of U.S. dollars): 867 (2007), 815 (2008), 593 (2009), 723 (2010), 803 (2011), 894 (2012), 997 (2013), 1,115 (2014)

### Fiscal accounts (Table 4 highlights)
- Total revenue (in billions of riels): 3,431 (2006), 4,165 (2007), 4,109 (2008), 5,463 (2009), 5,397 (Jan.–Aug. staff est.), 3,332 (staff proj.), 5,380 (proj.), 6,068 (budget)
- Tax revenue (in billions of riels): 2,372 (2006), 3,343 (2007), 3,241 (2008), 4,494 (2009), 4,342 (Jan.–Aug. staff est.), 2,751 (staff proj.), 4,386 (proj.), 5,009 (budget)
- Total expenditure (in billions of riels): 4,244 (2006), 5,164 (2007), 5,680 (2008), 6,751 (2009), 7,417 (Jan.–Aug. staff est.), 4,676 (staff proj.), 8,390 (proj.), 9,697 (budget)
- Capital expenditure (in billions of riels): 1,716 (2006), 2,121 (2007), 2,111 (2008), 2,654 (2009), 2,759 (Jan.–Aug. staff est.), 1,778 (staff proj.), 3,337 (proj.), 3,713 (budget)
- Overall balance (excluding grants, in billions of riels): -813 (2006), -999 (2007), -1,571 (2008), -1,288 (2009), -2,020 (Jan.–Aug. staff est.), -1,344 (staff proj.), -3,010 (proj.), -3,628 (budget)
- Additional measures: overall deficit reduction of 1.6 percent of GDP noted for 2010; additional measures to reduce domestic financing requirement to zero in 2010 are referenced.

### Monetary and financial sector (Tables 5–6 highlights)
- Net foreign assets (in billions of riels): 7,224 (2006), 10,735 (2007), 10,346 (2008), 11,222 (Dec.), 12,611 (Jun.), 13,103 (Jul.), 13,346 (Aug.), 13,251 (Dec.), 12,684 (proj.)
- Broad money (in billions of riels): 6,942 (2006), 11,311 (2007), 11,859 (2008), 12,488 (Dec.), 13,860 (Jun.), 14,111 (Jul.), 14,417 (Aug.), 14,648 (Dec.), 16,537 (proj.)
- Currency in circulation (in billions of riels): 1,600 (2006), 1,990 (2007), 2,295 (2008), 2,465 (Dec.), 2,604 (Jun.), 2,659 (Jul.), 2,637 (Aug.), 2,685 (Dec.), 3,302 (proj.)
- Foreign currency deposits (in millions of U.S. dollars): 1,279 (2006), 2,283 (2007), 2,273 (2008), 2,382 (Dec.), 2,623 (Jun.), 2,639 (Jul.), 2,748 (Aug.), 2,773 (Dec.), 3,050 (proj.)
- Private sector credit (in percent, annual change): 51.6 (2006), 76.0 (2007), 55.0 (2008), 21.9 (2009), 10.0 (2010), 6.5 (2011), 4.1 (2012), 3.5 (2013), 17.0 (2014)
- Financial soundness indicators (2006–09): Regulatory capital to risk-weighted assets around 26.5 (2006), 23.6 (2007), 24.1 (2008), 25.6 (2009), 25.6 (2010); Nonperforming loans to regulatory total loans: 9.9 (2006), 3.4 (2007), 2.5 (2008), 2.6 (2009), 2.7 (2010)
- Number of banks: 20 (2006), 24 (2007), 24 (2008), 25 (2009), 28 (Dec.), 30 (Dec.), 30 (Dec.), 32 (proj.)

### Social and development indicators (Table 7 highlights)
- Poverty headcount, national (percent of population): 47 (1990), ... ,35 (...), 20 (2015 MDG target)
- Net primary enrollment (percent of relevant age group): 67 (1990), ... ,85, 93, ... ,91, ... ,96, 100 (MDG target)
- Infant mortality rate (per 1,000 live births): 84 (1990), 89, 78, ... ,67, 65, 65, 50 (MDG target)
- Life expectancy at birth (years): 50 (1990), ... ,54, 54, 58, 59, 59
- GNI per capita, Atlas method (current U.S. dollars): 280 (1990), 280 (1995), 300 (2000), 340 (2002), 380 (2003), 440 (2004), 490 (2005), 540 (2006)
- Aid per capita (current U.S. dollars): 450 (1990), 313, 738, 353, 937, 37, 37 ...

### Debt sustainability analysis (summary from DSA)
- The joint IMF-World Bank DSA for Cambodia (2009) uses the Debt Sustainability Framework for Low-Income Countries (LIC DSF).
- Findings:
  - External debt burden indicators do not breach the relevant policy-dependent indicative thresholds under the baseline scenario.
  - Debt levels are sensitive to a number of standard bound tests.
  - There are considerable downside risks to the baseline scenario stemming from weak export performance and an expansionary fiscal stance, with possible reserve losses over the medium term.
  - An assessment of the impact of a continued expansionary fiscal stance underscores the importance of fiscal adjustment over the near to medium term.
  - The results show Cambodia faces a moderate risk of debt distress.
- Context and thresholds:
  - Cambodia’s CPIA averaged 3.22 over the past three years, classifying it as a “weak performer.”
  - Indicative thresholds for “weak performer” category: NPV of debt-to-GDP ratio 30 percent; NPV of debt-to-exports ratio 100 percent; NPV of debt-to-revenue ratio 200 percent; debt service-to-exports ratio 15 percent; debt service-to-revenue ratio 25 percent.
- The DSA was prepared jointly by IMF and World Bank staffs, with contributions from the Asian Development Bank; debt data were provided by Cambodian authorities and donor partners.

*Sources: Data provided by the Cambodian authorities; IMF staff estimates and projections; Joint IMF/World Bank Debt Sustainability Analysis 2009.*

### 1. Cambodia’s DSA indicates that the risk of debt distress remains moderate.

### 1. Cambodia’s DSA indicates that the risk of debt distress remains moderate.

### Key findings
- Under the baseline scenario, external debt burden indicators do not breach the relevant indicative thresholds.
- In alternative scenarios and stress tests, the debt indicators breach several indicative thresholds.
- Staffs’ additional scenario of a delay in fiscal adjustment (partial equilibrium) shows that maintaining an accommodative fiscal stance with limits to domestic financing could result in a large external financing requirement and breaches of several indicative thresholds.
- Staffs assess that Cambodia faces a moderate risk of debt distress, taking into account stress tests, the delayed-adjustment scenario, and uncertainty related to implicit contingent liabilities.

### Background and recent stock indicators
- External public and publicly-guaranteed (PPG) debt stock at end-2008:
  - around 25 percent of GDP in nominal terms and 20 percent in net present value (NPV) terms at end-2008.
- Projection for 2009:
  - stock of external PPG projected to rise to 29 percent of GDP by year end.
  - nominal debt stock in PV terms as a share of exports of goods and nonfactor services: 49 percent in 2009.
  - nominal debt stock in PV terms as a share of government revenues: 197 percent in 2009.
- Cambodia: External Public Debt Indicators at End-2008 (Indicative thresholds vs End-2008):
  - NPV of debt, as a percent of GDP: Indicative Thresholds 30; End-2008 19.8
  - NPV of debt, as a percent of Exports: Indicative Thresholds 100; End-2008 36.7
  - NPV of debt, as a percent of Revenue: Indicative Thresholds 200; End-2008 164.9
  - Debt service, as a percent of Exports: Indicative Thresholds 15; End-2008 0.9
  - Debt service, as a percent of Revenue: Indicative Thresholds 25; End-2008 4.2
- Composition of external debt at end-2008:
  - Total = 100 percent of external debt; 25 percent of GDP.
  - Multilateral: 49 percent of total external debt; 13 percent of GDP.
    - Mainly Asian Development Bank (30 percent) and World Bank’s IDA (20 percent).
  - Bilateral: 51 percent of total external debt; 12 percent of GDP.
    - China accounts for about 63 percent of total bilateral disbursement in 2009.
  - Nonrescheduled debt with the United States and Russian Federation: 28 percent share of bilateral (7 percent of GDP).
- Domestic public debt and deposits at end-2008:
  - Recorded domestic public debt slightly less than 1 percent of GDP.
  - Government deposits about 6 percent of GDP.
- Arrears and negotiated amounts:
  - Cambodia remains in arrears to the Russian Federation and the United States.
  - DSA incorporates negotiated debt stock for the Russian Federation: US$457 million.
  - DSA incorporates agreed amount of total principal due for the United States: US$162 million.
  - Staffs apply a standard 70 percent discount to the nominal value of debt owed to the Russian Federation for this DSA.

### Baseline macroeconomic assumptions (Box 1, 2009–29)
- Real GDP growth:
  - minus 2.7 percent in 2009.
  - rebound to 4.3 percent in 2010.
  - rise to around 7 percent in 2011.
  - stabilize at 6–7 percent over the medium and longer term.
  - FDI projected: a sharp projected reduction in 2009 by nearly 30 percent from the previous year’s level; over the longer term FDI expected at around 5–6 percent of GDP a year.
- External current account deficit (including official transfers):
  - projected to improve in 2009 to 5½ percent of GDP, compared to 10½ percent in 2008.
  - over the longer term, expected to settle in the range of 5–6 percent of GDP a year.
- Concessionality and borrowing:
  - average grant element assumed to be some 20 percentage points lower starting in the medium term than in the previous DSA.
- Gross official reserves:
  - expected to be around US$2.2 billion (3.5 months of next year’s imports) at end-2009.
  - decline slowly through 2012 to US$1.9 billion (2.4 months of imports).
  - gradually increase to around three months over the longer term.
- Fiscal path:
  - overall fiscal deficit (excluding grants) around 6.7 percent of GDP in 2009, compared to 2.8 percent in 2008.
  - deficit projected to decline gradually to around 3.4 percent by 2014.
  - revenue rise to around 14½ percent of GDP by 2014.
  - grants projected to decline from around 3 percent of GDP in recent years to 2 percent by 2020.
  - expenditure decline to slightly below 18 percent by 2014 from nearly 19 percent in 2009; capital spending to return to 6‒6½ percent of GDP.

### Contingent liabilities and fiscal risks
- Large contingent liabilities exist, notably related to build-operate-transfer (BOT) projects in the power sector.
- Contingent liabilities from BOTs not incorporated into the DSA due to lack of detailed information.
- Greater transparency and monitoring needed: develop and maintain an inventory of all concessions granted and build capacity to analyze contingent liabilities.
- Potential contingent liabilities could also arise from required government guarantees to mitigate risks in the banking sector.

### External debt sustainability results and stress tests
- Under the baseline:
  - all external debt indicators remain below the policy-dependent debt burden thresholds through 2029.
  - NPV of external debt-to-GDP ratio expected to remain below the 30 percent indicative threshold through 2029.
  - NPV of external debt-to-revenue ratio declines from 197 percent in 2009 to 164 percent by 2014 and further over the long term.
  - debt service-to-exports and debt service-to-revenue ratios stay well below indicative thresholds throughout the projection period.
- Bound tests and shocks breach thresholds:
  - Two bound tests where thresholds are breached for five years or more before declining:
    - net nondebt creating flows at the historical average minus one standard deviation in 2010–11.
    - a one-time 30 percent nominal depreciation of the Cambodian riel vis-à-vis the U.S. dollar relative to the baseline in 2010.
  - NPV of debt-to-revenue ratio breaches the 200 percent threshold for more than five years under the two above bound tests.
  - Thresholds also breached for five years or longer under combinations using one-half standard deviation shocks.
- Alternative scenario: delay in fiscal adjustment (partial equilibrium)
  - primary balance assumed to remain at the projected level in 2009 (minus 4 percent of GDP) for 2010–12, then gradually return to baseline by 2017.
  - limited government deposits and lack of capacity to issue domestic debt would lead to reliance on additional external financing.
  - NPV of debt-to-GDP ratio would exceed the indicative threshold for five years.
  - debt-to-revenue ratio would breach the threshold for six years.

### Public debt sustainability results
- Nominal stock of public debt:
  - equivalent to 26 percent of GDP at end-2008; expected to rise to 30 percent by end-2009.
- NPV of public sector debt-to-GDP ratio:
  - 21 percent at end-2008; would rise to around 25 percent by 2009 and further in 2010; gradually decline to 14 percent by 2029.
- NPV of public debt-to-revenue ratio (inclusive of grants):
  - estimated 138 percent in 2008; decline to 74 percent by 2029.
- Debt service-to-revenue ratio remains low in most scenarios under the baseline.
- Sensitivities:
  - If primary balance unchanged from 2009, public debt share of GDP reaches 54 percent by 2029.
  - If GDP growth permanently lower by one percentage point, public debt share of GDP reaches 39 percent by 2029; debt service-to-revenue ratio would reach nearly 30 percent by 2029.
  - Bound tests show sensitivity to permanently lower growth, a one-time 30 percent real depreciation, and a 10 percent increase in other debt-creating flows.

### Policy implications and recommendations
- Authorities should ensure appropriate concessionality from new and emerging creditors given Cambodia’s development needs and capacity to service new debt.
- Strengthen capacity in debt management and ensure new debt is contracted on a sustainable basis.
- Monitor and increase transparency of BOTs and other concessions; develop and maintain an inventory of concessions and build capacity to analyze contingent liabilities.
- Return to a more prudent fiscal stance from 2010 onward to stabilize debt dynamics and limit reserve and exchange rate vulnerabilities.
- If fiscal adjustment is delayed, consider allowing greater exchange rate flexibility to mitigate competitiveness loss from possible inflationary and exchange rate pressures.

### Conclusion
- Staffs conclude that Cambodia faces a moderate risk of debt distress: no thresholds breached under the baseline, but several breached under standard stress tests and alternative scenarios; delayed fiscal adjustment could cause external debt indicators to exceed indicative thresholds; contingent liabilities—especially from infrastructure concessions—could further weaken the outlook.

*Source: IMF staff report — "1. Cambodia’s DSA indicates that the risk of debt distress remains moderate."*

### 16. Given the uncertainty about near-to medium-term prospects, staffs urge the

### _cr09325 - 16. Given the uncertainty about near-to medium-term prospects, staffs urge the

### Public debt management recommendations
- Continue pursuing a sound strategy for public debt management.
- Carefully consider in advance the implications of contracting less concessional loans and providing direct and indirect government guarantees because they could impair sustainability, in particular if the revenue base remains low and institutions weak.
- Strengthen capacity in debt management as an essential prerequisite for less concessional borrowing.
- Produce a full accounting of all commitments, including from newly emerging creditors, and better monitor contingent liabilities to ensure debt sustainability.
- Maintain an exchange rate policy that is consistent with the fiscal stance, given the high dollarization of the economy and lack of domestic debt instruments.
- Continue seeking agreements to resolve outstanding arrears.

### Debt sustainability analysis (DSA) indicators and scenarios
- Figure 1: Indicators of Public and Publicly-Guaranteed External Debt under Alternative Scenarios, 2009–29 (a–f): includes
  - a. Debt accumulation: Baseline; Most extreme shock 1/; Threshold; Delayed fiscal adjustment.
  - b. PV of debt-to-GDP ratio.
  - c. PV of debt-to-exports ratio.
  - d. PV of debt-to-revenue ratio.
  - e. Debt service-to-export ratio.
  - f. Debt service-to-revenue ratio.
- Figure 2: Indicators of Public Debt Under Alternative Scenarios, 2009–29 (a–c): includes
  - a. PV of debt-to-GDP ratio.
  - b. PV of debt-to-revenue ratio.
  - c. Debt service-to-revenue ratio.
- Stress test notes:
  - 1/ The most extreme stress test is the test that yields the highest ratio in 2011. In figures b to e, it corresponds to net non-debt creating flows at historical average minus one standard deviation in 2010–11; in figure f, a one time 30 percent nominal depreciation relative to baseline in 2010.
  - 1/ (alternate) The most extreme stress test is the test that yields the highest ratio in 2019.
  - 2/ Revenues are defined inclusive of grants.
  - Other footnotes specify scenario constructions (e.g., one-time 30 percent nominal depreciation in 2010).

### Key projections and baseline indicator levels (selected exact values)
- Baseline PV of external debt (in percent of GDP): 24 (2009), 24 (2010), 24 (2011), 24 (2012), 24 (2013), 24 (2014), 23 (2015), 20 (2019), 13 (2029).
- Baseline PV of debt-to-exports ratio: 48 (2009), 51 (2010), 52 (2011), 53 (2012), 53 (2013), 53 (2014), 52 (2015), 47 (2019), 37 (2029).
- Baseline PV of debt-to-revenue ratio: 197 (2009), 185 (2010), 178 (2011), 172 (2012), 167 (2013), 164 (2014), 158 (2015), 131 (2019), 80 (2029).
- Baseline debt service-to-revenue ratio: 1 (2009), 2 (2010), 2 (2011), 2 (2012), 3 (2013), 4 (2014), 5 (2015), 6 (2019), 7 (2029) — table entries use concatenated digits reflecting panel format.
- Public and publically-guaranteed external debt (nominal) PPG: 31.0 (2006), 29.6 (2007), 24.6 (2008), 29.2 (2009), 30.1 (2010), 29.7 (2011), 28.9 (2012), 28.4 (2013), 27.9 (2014), 22.3 (2019), 14.5 (2029).
- Change in external debt (selected): -3.9 (2006), -1.3 (2007), -5.1 (2008), 4.6 (2009), 0.9 (2010), -0.4 (2011), -0.8 (2012), -0.5 (2013), -0.5 (2014), -1.0 (2019), -0.8 (2029).
- Identified net debt-creating flows (selected): -10.7, -13.3, -3.6, 0.7, 3.9, 4.1, 2.8, 1.3, 0.3, -1.3, -0.8 (table sequence).
- Noninterest current account deficit (selected): 0.3, 1.5, 10.2, 2.6, 3.1, 5.3, 10.9, 11.8, 10.3, 8.6, 7.7, 5.2, 4.6, 5.0 (panel sequence).
- Exports (percent of GDP): 68.7, 64.9, 53.8, 48.9, 47.6, 47.0, 45.7, 45.4, 44.9, 41.4, 36.2 (panel sequence).
- Imports (percent of GDP): 75.8, 72.9, 68.3, 59.3, 63.7, 63.7, 61.2, 59.3, 57.8, 51.5, 45.0 (panel sequence).
- Net current transfers (negative = inflow) (selected): -10.9, -10.7, -8.2, -8.9, 3.5, -7.8, -7.9, -7.4, -7.8, -7.6, -7.4, -6.3, -4.9, -5.9 (panel sequence).
- Net FDI (negative = inflow) (selected): -6.7, -10.0, -7.2, -4.5, 3.2, -5.5, -6.2, -6.1, -6.1, -6.2, -6.3, -5.7, -5.2, -5.5.
- Endogenous debt dynamics (selected): -4.3, -4.8, -6.6, 0.9, -0.8, -1.5, -1.3, -1.2, -1.1, -0.7, -0.2.
- Residual (3–4) (selected): 6.8, 12.0, -1.4, 3.9, -3.1, -4.6, -3.6, -1.8, -0.8, 0.4, 0.0.
- Present value (PV) of external debt (selected): 19.8, 23.7, 24.5, 24.5, 24.2, 24.1, 23.9, 19.6, 13.4 (panel sequence).
- PV of PPG external debt (selected): 19.8, 23.7, 24.5, 24.5, 24.2, 24.1, 23.9, 19.6, 13.4.
- PV of PPG external debt in percent of exports (selected): 36.7, 48.5, 51.4, 52.1, 52.9, 53.0, 53.2, 47.3, 36.9.
- PV of PPG external debt in percent of government revenues (selected): 164.9, 196.9, 184.9, 178.4, 172.0, 167.2, 164.3, 131.1, 80.4.
- Debt service-to-exports ratio (in percent) (selected): 1.1, 1.1, 0.9, 0.9, 1.5, 1.5, 1.5, 1.8, 2.2, 3.4, 3.9.
- PPG debt service-to-revenue ratio (in percent) (selected): 6.7, 5.9, 4.2, 3.8, 5.5, 5.3, 5.0, 5.7, 6.9, 9.3, 8.4.
- Total gross financing need (billions of U.S. dollars) (selected): -0.4, -0.7, 0.4, 0.0, 0.6, 0.8, 0.7, 0.5, 0.4, 0.2, 0.7.
- Noninterest current account deficit that stabilizes debt ratio (selected): 4.2, 2.8, 15.3, 0.6, 10.0, 12.2, 11.0, 9.2, 8.2, 6.1, 5.3.

### Key macroeconomic assumptions (selected exact values)
- Real GDP growth (in percent, panel sequence): 10.8, 10.2, 6.7, 9.5, 2.2, -2.7, 4.3, 6.8, 6.2, 6.0, 6.2, 4.5, 6.8, 6.7, 6.8.
- GDP deflator in U.S. dollar terms (change in percent, panel sequence): 4.3, 8.6, 21.6, 5.5, 7.0, -1.2, 3.8, 4.4, 4.9, 4.0, 3.2, 3.2, 3.6, 3.7, 3.6.
- Effective interest rate (percent) (panel sequence): 1.2, 1.1, 0.8, 1.1, 0.1, 0.9, 1.3, 1.3, 1.3, 1.6, 1.9, 1.4, 3.3, 5.1, 3.9.
- Growth of exports of goods and services (U.S. dollar terms, in percent) (panel sequence): 23.9, 13.0, 7.7, 16.6, 7.5, -12.7, 5.4, 9.9, 8.4, 9.6, 8.3, 4.8, 8.8, 9.4, 9.1.
- Growth of imports of G&S (U.S. dollar terms, in percent) (panel sequence): 21.3, 15.1, 21.5, 17.9, 4.3, -16.5, 16.2, 11.4, 7.2, 6.8, 6.9, 5.3, 8.6, 9.5, 8.8.
- Grant element of new public sector borrowing (in percent) (selected): 20.0, 18.8, 19.1, 17.2, 17.8, 18.8, 18.6, 17.4, 9.9, 14.9 (panel sequence).
- Government revenues (excluding grants, in percent of GDP) (selected): 11.5, 11.9, 12.0, 12.0, 13.2, 13.7, 14.0, 14.4, 14.5, 15.0, 16.7, 15.5.
- Aid flows (in billions of U.S. dollars) (selected): 0.3, 0.4, 0.6, 0.3, 0.3, 0.3, 0.3, 0.4, 0.4, 0.6, 1.2.
  - Of which: Grants (selected): 0.2, 0.2, 0.3, 0.3, 0.3, 0.3, 0.3, 0.4, 0.4, 0.6, 1.2.
  - Of which: Concessional loans (selected): 0.1, 0.2, 0.2, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0.
- Grant-equivalent financing (in percent of GDP) (selected): 3.4, 3.2, 3.0, 2.8, 2.7, 2.7, 2.3, 1.6, 2.0 (panel sequence).
- Memorandum: Nominal GDP (billions of U.S. dollars) (selected): 7.3, 8.7, 11.3, 10.8, 11.7, 13.1, 14.6, 16.1, 17.6, 29.2, 80.3.
- PV of PPG external debt (in billions of U.S. dollars) (selected): 2.2, 2.5, 2.9, 3.2, 3.5, 3.9, 4.2, 5.7, 10.8.
- (PVt-PVt-1)/GDPt-1 (in percent) (selected): 3.0, 3.0, 2.8, 2.5, 2.3, 2.1, 2.6, 1.4, 0.8, 1.2.

### Public sector debt baseline and indicators (Table 2a / Table 1a selections)
- Public sector debt (percent of GDP) (selected): 32.8 (2006), 30.5 (2007), 25.5 (2008), 30.2 (2009), 30.7 (2010), 30.2 (2011), 29.4 (2012), 28.9 (2013), 28.3 (2014), 22.6 (2019), 14.6 (2029).
- Of which: Foreign-currency denominated (percent of GDP) (selected): 31.0, 29.6, 24.6, 29.2, 30.1, 29.7, 28.9, 28.4, 27.9, 22.3, 14.5.
- Change in public sector debt (selected): -4.4, -2.3, -5.0, 4.7, 0.5, -0.5, -0.8, -0.5, -0.5, -1.0, -0.8.
- Identified debt-creating flows (selected): -6.3, -4.5, -6.8, 5.1, 0.6, -0.8, -1.5, -1.4, -1.4, -1.1, -1.0.
- Primary deficit (selected): 0.0, 0.5, -0.4, 1.6, 1.6, 3.9, 2.8, 2.0, 1.2, 0.9, 0.6, 1.9, 0.5, -0.2, 0.3 (panel sequence).
- Revenue and grants (percent of GDP) (selected): 14.0, 14.1, 15.1, 14.7, 15.8, 16.1, 16.4, 16.7, 16.8, 16.9, 18.2.
- Primary (noninterest) expenditure (percent of GDP) (selected): 14.0, 14.5, 14.6, 18.5, 18.7, 18.1, 17.6, 17.5, 17.4, 17.4, 18.0.
- Automatic debt dynamics (selected): -5.2, -5.0, -6.4, 1.2, -2.2, -2.8, -2.8, -2.3, -2.0, -1.6, -0.8.
- Contribution from interest rate/growth differential (selected): -4.3, -3.6, -2.4, 0.7, -1.0, -1.8, -1.8, -1.8, -1.7, -1.2, -0.5.
- Residual, including asset changes (selected): 1.9, 2.2, 1.9, -0.4, -0.1, 0.3, 0.7, 0.9, 0.9, 0.1, 0.2.
- PV of public sector debt (selected): 24.8, 23.7, 20.7, 24.6, 25.1, 25.0, 24.6, 24.5, 24.3, 19.9, 13.5.
- PV of public sector debt-to-revenue and grants ratio (in percent) (selected): 176.6, 168.5, 137.5, 167.9, 158.6, 155.0, 150.4, 147.1, 144.9, 117.5, 74.4.
- PV of public sector debt-to-revenue ratio (in percent) (selected): 215.7, 199.4, 172.8, 204.8, 189.5, 182.4, 175.5, 170.5, 167.3, 132.8, 81.0.
- Debt service-to-revenue and grants ratio (in percent) (selected): 4.2, 4.4, 4.0, 3.1, 4.6, 4.5, 4.5, 5.0, 6.0, 8.2, 7.7.
- Debt service-to-revenue ratio (in percent) (selected): 5.1, 5.2, 5.0, 3.8, 5.5, 5.3, 5.3, 5.8, 6.9, 9.3, 8.4.
- Gross financing need (selected): 3.3, 2.8, 0.9, 4.9, 4.1, 3.2, 2.4, 2.1, 2.0, 2.1, 1.3.

### Sensitivity analysis highlights (selected entries)
- Table 1b / Table 2b present sensitivity of PV of Debt-to-GDP, PV of Debt-to-Exports, PV of Debt-to-Revenue, and Debt Service ratios under:
  - A1. Key variables at their historical averages in 2009–29.
  - A2. New public sector loans on less favorable terms in 2009–29 (assumes interest rate on new borrowing is 2 percentage points higher than baseline).
  - A3. Alternative scenario: Delayed fiscal adjustment.
  - B1–B6. Bound tests including one-time 30 percent nominal depreciation relative to baseline in 2010, and combinations of shocks.
- Selected sensitivity outcomes (baseline vs shocks, 2009–2029):
  - PV of Debt-to-GDP Ratio (baseline): 24 (2009) → 13 (2029).
  - PV of Debt-to-GDP Ratio (A2 less favorable terms): 24 (2009), rises to 26–27 in the 2012–2015 period and 19 (2029).
  - PV of Debt-to-Exports Ratio (B4 net nondebt creating flows shock): 48 (2009), 64 (2010), 76 (2011) → 39 (2029) (panel sequence).

### Policy implications emphasized by staff
- Avoid a shift to less concessional borrowing or government guarantees without first strengthening debt management capacity and ensuring a robust revenue base and institutional framework.
- Establish comprehensive monitoring of all commitments and contingent liabilities, including commitments to/from newly emerging creditors.
- Align exchange rate policy with fiscal stance to mitigate risks from high dollarization and the absence of domestic debt instruments.
- Resolve outstanding arrears through continued efforts to reach agreements.

*Sources: Cambodian authorities; and staffs' estimates and projections.*

### ANNEX I. CAMBODIA: FUND RELATIONS

### ANNEX I. CAMBODIA: FUND RELATIONS

### I. Membership Status
- Joined: 12/31/1969
- Article VIII

### II. General Resources Account
- Quota: 87.50 SDR Million — 100.00 percent Quota
- Fund Holdings of Currency: 87.50 SDR Million — 100.00 percent

### III. SDR Department
- Net cumulative allocation: 83.92 SDR Million — 100.00 percent Allocation
- Holdings: 68.52 SDR Million — 81.64 percent

### IV. Outstanding Purchases and Loans
- PRGF arrangements: 0 SDR Million — 0 percent Quota

### V. Financial Arrangements
- ESAF/PRGF arrangements (approval and amounts):
  - ESAF/PRGF: Approval Date 10/22/1999; Expiration Date 03/05/2003; Amount Approved 58.50 (SDR Million); Amount Drawn 58.50 (SDR Million)
  - ESAF: Approval Date 05/06/1994; Expiration Date 08/31/1997; Amount Approved 84.00 (SDR Million); Amount Drawn 42.00 (SDR Million)

### VI. Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming Principal:
  - 2009: 0.00
  - 2010: 0.00
  - 2011: 0.00
  - 2012: 0.00
  - 2013: 0.00
- Charges/Interest:
  - 2009: 0.01
  - 2010: 0.04
  - 2011: 0.04
  - 2012: 0.04
  - 2013: 0.04
- Total:
  - 2009: 0.01
  - 2010: 0.04
  - 2011: 0.04
  - 2012: 0.04
  - 2013: 0.04

### VII. Multilateral Debt Relief Initiative (MDRI)
- IMF Executive Board approved relief on 100 percent of debt incurred by Cambodia to the IMF before January 1, 2005 (decision date: January 5, 2006).
- Result: Forgiving of all of Cambodia’s outstanding debt to the IMF, a total of SDR 56.8 million (about US$82 million).
- Authorities’ intended use: Spend the resources over a number of years, initially on rural irrigation projects.
- Implementation: National Bank of Cambodia (NBC) transferred the full MDRI proceeds to the Ministry of Economy and Finance effective March 2006.

### VIII. Safeguards Assessment
- NBC was subject to a full safeguards assessment with respect to a possible successor PRGF arrangement.
- Assessment completed in March 2004.
- Findings: Identified certain weaknesses, mostly in the area of internal audit and control; made appropriate recommendations.
- A 2009 voluntary update assessment is in progress.

### IX. Exchange Rate Arrangement and Payments System
- Exchange regime classification: floating.
- Official exchange rate: expressed in riels per U.S. dollar; applies to all official external transactions conducted by the central government and state enterprises and is used for accounting purposes by the NBC.
- Determination: By the foreign exchange market, with the official rate adjusted to be within 1 percent of the market rate on a daily basis.
- Article VIII obligations: Cambodia accepted the obligations of Article VIII, Sections 2, 3, and 4 on January 1, 2002.
- Payments system: Cambodia maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

### X. Article IV Consultation
- Consultation cycles: Cambodia is subject to the provisions on consultation cycles approved on July 15, 2002.
- Last Article IV consultation discussions: Held in Phnom Penh during October 23–November 7, 2008.
- Executive Board action: Discussed the staff report (CR/09/47) and concluded the consultation on January 16, 2009.

### XI. Technical Assistance
- Current focus areas: bank supervision, monetary operations, public financial management, customs administration, and macro-financial statistics.
- Delivery modalities: resident advisor at the NBC, peripatetic experts, and short-term visits from headquarters.

### XII. Resident Representative
- Resident representative office: Closed in October 1997 and re-opened in October 1999.
- Current Resident Representative: Mr. John Nelmes, assumed the post in November 2005.

*Source: ANNEX I. CAMBODIA: FUND RELATIONS — As of September 30, 2009*

### 2007. A risk management strategy has been adopted and is being implemented. Some progress

### _cr09325 - 2007. A risk management strategy has been adopted and is being implemented. Some progress

### Private Sector Development (PSD) — findings and Bank role
- Findings:
  - A risk management strategy has been adopted and is being implemented.
  - Some progress has been made on developing Special Economic Zones.
  - The Law on Commercial Arbitration and the Law on Concessions were passed by the National Assembly in March 2006 and September 2007, respectively, but implementation of these laws has lagged.
- Role of the World Bank Group:
  - Focus on supporting investment climate development through trade facilitation and improving the legal framework for investment.
  - Policy reforms supported through the first in the series of Poverty Reduction and Growth Operations (PRGO) approved in July 2007.
  - The 2005 Trade Facilitation and Competitiveness Project is helping streamline import/export formalities and reduce costs of trade-related activities.
  - IFC’s Mekong PSD Facility (MPDF) prepared Provincial Business Environment Scorecards in 10 provinces.
  - Bank Group initiated a new Investment Climate Assessment (ICA) to monitor results since the 2004 ICA, identify new issues, and design future support.
  - Bank Group led the Technical Working Group (TWG) on PSD, supported the Government/Private Sector Forum, and participated actively in RGC–donor–private sector dialogue.

### Natural Resources Management (NRM) — findings and Bank role
- Country progress (satisfactory, with concerns):
  - Subdecrees on State Land Management and on Economic Land Concessions (ELCs) adopted, including provisions to review and cancel nonperforming ELCs and assign land as social land concessions for the poor.
  - RGC has distributed more than 800,000 titles and started dialogue on titling communally-owned land by indigenous people.
  - Actions taken to strengthen forestry management systems, including community-based forest activities.
  - RGC issued a new Protected Areas Law to clarify institutional roles, responsibilities, and obligations.
  - Remaining concerns: transparency in issuance of ELCs needs improvement; social land concessions program needs acceleration; slow implementation of laws governing access and title to natural resources; governance weaknesses in the forestry sector remain a major concern.
- Role of the World Bank Group:
  - Developed an NRM framework to integrate efforts across land, forestry, and biodiversity conservation, summarizing challenges and required actions.
  - Used the framework in engagement with TWGs on land, agriculture, poverty, environment, and water.
  - Supported policy reforms through additional analytical and advisory activities (AAA) including an agrarian structures study and an environment monitor, PRGOs, and investment and technical support operations.
  - Mobilized a Japan Social Development Fund Grant to expand community forestry activities.
  - Adopted the Land Allocation for Social and Economic Development project in 2008 to support RGC’s Social Land Concession strategy implementation.

### Public Financial Management (PFM) — findings and Bank role
- Country progress (satisfactory):
  - Improved arrangements implemented for budget formulation, budget classification, cash and bank account management, financial control, and transaction management.
  - Procurement responsibility increasingly deconcentrated to line agencies.
  - An improved procurement subdecree and implementing rules and regulations adopted to increase competition, transparency, and accountability.
  - Strengthening of overall PFM system: aggregate actual expenditures within 5 percent of the budget; revenues continuing to grow (from 10 percent in FY2009 to an estimated 12 percent of GDP in FY2008); arrears largely eliminated.
  - Innovative merit-based pay initiative (MBPI) implemented in the Ministry of Economy and Finance; being progressively extended to all development partner-financed strategic reforms to eliminate distortionary salary supplement schemes and harmonize incentives.
- Role of the World Bank Group:
  - Coordinated 13 development partners in the TWG on PFM in designing and implementing the RGC’s PFM Reform Program (PFMRP).
  - Supported PFMRP through the PRGO and the PFM Accountability Project; PFMRP recognized as a model of aid effectiveness.
  - Initiated dialogue on oil revenue management, engaged civil society in PFM dialogue, and assisted in adopting/extending the MBPI.
  - Completed AAA on public expenditure tracking surveys (PETS) in education and health and civil service reform for teachers.
  - Grants support strengthened National Assembly oversight of the budget.

### Decentralization and Accountability — findings and Bank role
- Country progress (considerable):
  - Average funds to communes/sangkats projected to double by 2010.
  - Second round of commune/sangkat council elections in 2007 strengthened local-level accountability.
  - Ministry of Interior piloted “One Window Service” and a District Ombudsman’s office.
  - National Assembly adopted the Organic Laws on Decentralization and Deconcentration in April 2008 after some delay.
  - Delays remain on improving access to information, including drafting an access to information law; civil society involvement in policy-making is developing slowly with insufficient constructive engagement with the RGC.
- Role of the World Bank Group:
  - Provided substantial support through the Rural Investment and Local Governance Project.
  - Conducted studies on justice for the poor and village-level dispute resolution.
  - Advised via the TWG on Decentralization Policy and Strategy.
  - Mobilized grant finance to support government–civil society consultations and build civil society capacity on social accountability.

### Pillar 2 — NSDP formulation and implementation, 2006–10
- Country progress (impressive):
  - RGC adopted the NSDP in 2006, creating a single national development strategy replacing donor-driven plans.
  - TWG for Planning and Poverty Reduction provides regular dialogue between RGC, development partners, and civil society on NSDP implementation.
  - Ministry of Planning (MoP), with TWG support, developed a strategic plan to refocus capacity for coordination, implementation, monitoring, and evaluation of the NSDP.
  - External support shifting toward a Ministry-wide, program-based approach coordinated behind the NSDP.
  - Gender equality improvements: female representation in Commune Councils increased from 8 percent to 15 percent following the 2007 elections.
- Role of the World Bank Group:
  - Provided technical and financial support to MoP; Bank and UNDP served as development partner co-facilitators of the TWG.
  - Improved knowledge base through the 2006 Poverty Assessment and the 2007 Sharing Growth: Equity and Development Report.
  - Supported Ministry of Women’s and Veterans’ Affairs via an Institutional Development Fund grant for a Gender Budgeting Project and smaller grants for outreach, training, advocacy, study tours, and workshops.

### Human Development and Infrastructure — findings and Bank role
- Country progress (impressive toward CAS outcomes):
  - Significant progress on government-owned strategies in social and infrastructure sectors for donor coordination.
  - Improvements in infant mortality rate, fertility rate, HIV prevalence rates, and school enrollment rates.
  - Greater access to and utilization of health, education, and infrastructure services; better targeting of health and education subsidies.
  - More resources allocated to priority interventions such as reducing child and maternal mortality.
  - Expanded access to education and health for disadvantaged/vulnerable communities; improved perception of service delivery among users.
  - Lagging indicators include maternal mortality and drop-out rates.
- Role of the World Bank Group:
  - Supported development and implementation of social sector strategies through Health Sector Support and Education Sector Support Projects and TWG participation.
  - In health, supported a sector-wide approach in 2008 with AusAid, DFID, France, UNFPA, and UNICEF.
  - In education, support from the Education For All Fast Track Initiative Catalytic Fund approved in 2008.
  - Undertook PETS in health and education to promote PFM reforms; supported additional analytical work in education.
  - In infrastructure, helped develop sub-sector strategies via AAA (Energy Sector Strategy Review, Transport Sector Update, Implementation Strategy for Urban Water Supply Policy, briefing notes on oil and gas sector policy issues) and engaged in high-impact investment projects.

### Lending operations, fiduciary issues, and portfolio management
- Investigations and remedial actions:
  - Following the 2004–05 Fiduciary Review, World Bank Institutional Integrity Department (INT) investigations in 2005–06 substantiated allegations of corruption, collusion, and fraudulent practices on several contracts under seven projects; “misprocurement” declared in June 2006.
  - Bank temporarily suspended disbursements under three projects; action plans were completed in January 2007 and suspensions were lifted in February 2007.
- Preventive and oversight measures:
  - Adoption of anti-corruption action plans and Good Governance Frameworks (GGFs) for all ongoing and future Bank-financed projects, including measures to strengthen procurement, financial management, staff conduct, complaint mechanisms, disclosure, and internal controls.
  - Early implementation reviews indicate increasing implementation of GGFs.
  - Use of an International Procurement Agent (IPA) since December 2007 for all Bank-financed projects.
  - Bank providing technical support to RGC to reinforce capacity to identify and remedy fraud and corruption.
- Disbursement performance:
  - The disbursement ratio in FY09—at 16.1 percent—was low mainly due to procurement delays as a result of the IPA.

### Active IDA projects and non-lending services — key figures and instruments
- Selected active IDA project commitments and undisbursed balances (As of October 5, 2009):
  - Road Asset Management Project: Committed 30,000,000.00; Undisbursed Balance 28,817,013.52; Approval Date 20-May-08.
  - Cambodia Second Health Sector Support Program: Committed 30,000,000.00; Undisbursed Balance 27,563,123.25; Approval Date 19-Jun-08.
  - Land Allocation for Social and Economic Development: Committed 11,500,000.00; Undisbursed Balance 9,738,909.31; Approval Date 20-May-08.
  - Avian and Human Influenza Control and Preparedness Emergency Project: Committed 6,000,000.00; Undisbursed Balance 5,244,364.51; Approval Date 24-Mar-08.
  - GMS Power Trade (Cambodia) Project: Committed 18,500,000.00; Undisbursed Balance 18,608,165.85; Approval Date 05-Jun-07.
  - Cambodia Public Financial Management and Accountability: Committed 14,000,000.00; Undisbursed Balance 11,602,267.46; Approval Date 27-Jun-06.
  - Cambodia Trade Facilitation and Competitiveness: Committed 10,000,000.00; Undisbursed Balance 6,178,449.75; Approval Date 02-Jun-05.
  - Cambodia Education Sector Support: Committed 28,000,000.00; Undisbursed Balance 8,582,303.75; Approval Date 12-May-05.
  - Rural Electrification and Transmission Project: Committed 40,000,000.00; Undisbursed Balance 23,083,111.90; Approval Date 16-Dec-03.
  - Provincial and Rural Infrastructure Project: Committed 20,000,000.00; Undisbursed Balance 6,520,703.49; Approval Date 11-Sep-03.
  - Provincial and Peri-Urban Water and Sanitation Project: Committed 19,900,000.00; Undisbursed Balance 9,045,791.00; Approval Date 22-Apr-03.
  - Rural Investment And Local Governance Project: Committed 36,250,000.00; Undisbursed Balance 19,289,320.91; Approval Date 26-Jul-07.
  - Health Sector Support Project: Committed 27,000,000.00; Undisbursed Balance 6,571,386.50; Approval Date 19-Dec-02.
  - Demand for Good Governance: Committed 20,000,000; Approval Date 02-Dec-08; Undisbursed Balance 19,602,554.45.
  - Land Management and Administration Project: Committed 24,300,000.00; Undisbursed Balance 8,930,990.59; Approval Date 26-Feb-02.
- Main non-lending services (recent and ongoing instruments) by issue area include:
  - Environment: Cambodia Environment Monitor (2008), Natural Resource Management and Forestry (2008).
  - Gender: Cambodia Gender Assessment (2008), Gender Mainstreaming (2009).
  - Human Development: Demand Side Incentives in Education Impact Evaluation (ongoing), Civil Service Reform for Teachers, Social Protection Policy Note (2006), Child Labor Study (2006), Health Sector Study, Education Fast Track Initiative (2008), Scholarship Program (2009).
  - Infrastructure: Urban Water and Sanitation Strategy (2006); Oil and Gas Sector Policy Notes (2009).
  - Legal and Judicial Reform: Justice for the Poor Phase One Study (2006); Justice for the Poor Phase Two (2008).
  - Poverty Reduction and Economics: Poverty Reduction Strategy Trust Funds (ongoing), Moving Out of Poverty Study (2007), National Poverty Assessment (2006), Cambodia Equity Report (2007), Sources of Growth (2008), Poverty Profile (2009).
  - Private Sector Development and Trade: PPIAF Grant to develop an interim regulatory framework (ongoing). FIAS report on FDI (2001), Integration and Competitiveness Study (2002), Investment Climate Assessment (2008).
  - Public Financial Management: Grant to assist the National Audit Authority (ongoing), Country Procurement Assessment Report (2004), Fiduciary Review (2005), Public Expenditure Tracking Survey—Education (2005), Public Expenditure Tracking Survey—Health (2007), ROSC on private sector accounting (2007).
  - Rural and Agriculture: PSIA on Social Land Concessions (2004), Rural Sector Strategy Note (2005), Land Taxation and Valuation Study (2005), Land Policy and Strategy (2007), Cambodia Agrarian Structure (2008).

*Source: IMF staff summary of World Bank and development partner activities as presented in _cr09325 (2009) document excerpt.*

### ANNEX IV. CAMBODIA: STATISTICAL ISSUES

### ANNEX IV. CAMBODIA: STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General: Data provision is broadly adequate for surveillance. Extensive technical assistance (TA) has been provided by the IMF, UNDP, Asian Development Bank, and World Bank, as well as from bilateral partners (namely Japan and Sweden), leading to substantial capacity improvements in compiling and reporting macroeconomic statistics. However, various shortcomings in macroeconomic data still hamper timely and comprehensive analysis.
- National Accounts:
  - The National Institute of Statistics is leading efforts to improve consistency with the United Nations’ System of National Accounts 1993, to expand the range of annual national account aggregates, and to produce a quarterly national accounts series since June 2005, with IMF TA.
  - Quality of GDP estimates remains hampered by the lack of comprehensive and reliable source data on a production and expenditure basis, in part stemming from the need to address resource constraints and improve data collection techniques.
- Price statistics:
  - A new consumer price index (CPI) series was introduced starting in January 2009.
  - Geographical coverage of the series is limited to Phnom Penh.
  - Statistics Sweden is providing TA on price statistics, including on compiling a production price index (PPI).
- Government finance statistics:
  - Ministry of Finance and Economy began reforms to government accounting system and budgetary nomenclature in 2007 based on GFSM 2001, with IMF TA.
  - IMF TA in April 2008 assisted with establishing a bridge between the government’s new chart of accounts (COA) and the GSFM 2001 classifications so accounting records can be used as source data in compiling GFS.
  - Use and coverage of the COA has been limited and not fully integrated to activities such as disbursement of external loans and grants, the government’s budget reserve fund, and capital expenditures.
- Monetary and financial statistics:
  - The National Bank of Cambodia (NBC) compiles sectoral balance sheet and survey for the central bank and other depository institutions in accordance with the IMF’s Monetary and Financial Statistics Manual.
  - Since August 2005, the NBC has reported monthly monetary and financial statistics to STA using the Standardized Report Forms.
  - The NBC compiles monthly financial soundness indicators, but data are published irregularly.
- External sector statistics:
  - Improvements noted, but more work needed to improve balance of payments statistics.
  - Customs data suffer coverage and valuation problems: use of reference prices, limited recording of nondutiable imports, underreporting of re-exports, and weaknesses in customs controls.
  - Enterprise transactions (payment for imported services, income payments, portfolio investment abroad) are excluded or underreported.
  - Foreign direct investment relies excessively on approvals despite being believed to be large.
  - Gaps exist in external debt statistics, particularly stock of public and publicly-guaranteed debt by maturity, bilateral donor disbursements, and external debt service.

### II. Data Standards and Quality
- Cambodia participates in the IMF’s General Data Dissemination System (GDDS).
- No data ROSC are available.

### III. Reporting to STA
- Cambodia sends regular data reports to STA for publication.

### Table of Common Indicators Required for Surveillance (As of October 26, 2009) — Selected reporting frequencies and latest observations
- Exchange Rates: Date of latest Observation Oct. 2009; Date Received Oct. 2009; Frequency of Data D; Frequency of Reporting D; Frequency of Publication W.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest Observation Sep. 2009; Date Received Sep. 2009; Frequency Biweekly; Frequency of Reporting Biweekly, 4 week lag; Frequency of Publication N/A.
- Reserve/Base Money: Date of latest Observation Aug. 2009; Date Received Sep. 2009; Frequency M; Frequency of Reporting M, 4–6 week delay; Frequency of Publication M.
- Broad Money: Date of latest Observation Aug. 2009; Date Received Sep. 2009; Frequency M; Frequency of Reporting M, 4–6 week delay; Frequency of Publication M.
- Central Bank Balance Sheet: Date of latest Observation Aug. 2009; Date Received Sep. 2009; Frequency M; Frequency of Reporting M, 4–6 week delay; Frequency of Publication M.
- Consolidated Balance Sheet of the Banking System: Date of latest Observation Aug. 2009; Date Received Sep. 2009; Frequency M; Frequency of Reporting M, 4–6 week delay; Frequency of Publication M.
- Interest Rates: Date of latest Observation Sep. 2009; Date Received Oct. 2009; Frequency M; Frequency of Reporting M, 4–6 week lag; Frequency of Publication M.
- Consumer Price Index: Date of latest Observation Sep. 2009; Date Received Oct. 2009; Frequency M; Frequency of Reporting M, 2–4 week lag; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing — General Government: Date of latest Observation Aug. 2009; Date Received Oct. 2009; Frequency M; Frequency of Reporting M, 4–6 week lag; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing — Central Government: Date of latest Observation Aug. 2009; Date Received Oct. 2009; Frequency M; Frequency of Reporting M, 4–6 week lag; Frequency of Publication M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest Observation Dec. 2008; Date Received Sep. 2009; Frequency A; Frequency of Reporting A, 6 month lag; Frequency of Publication A.
- External Current Account Balance: Date of latest Observation Q2, 2009; Date Received Sep. 2009; Frequency Q; Frequency of Reporting Q, 2 month lag; Frequency of Publication Q.
- Exports and Imports of Goods and Services: Date of latest Observation Q2, 2009; Date Received Sep. 2009; Frequency Q; Frequency of Reporting Q, 2 month lag; Frequency of Publication Q.
- GDP/GNP: Date of latest Observation Dec. 2008; Date Received Jun. 2009; Frequency A; Frequency of Reporting A, 6 month lag; Frequency of Publication A.
- Gross External Debt: Date of latest Observation Jun. 2009; Date Received Sep. 2009; Frequency M; Frequency of Reporting M, 4– 6 month lag; Frequency of Publication A.
- International Investment Position: Date of latest Observation Aug. 2009; Date Received Sep. 2009; Frequency M; Frequency of Reporting Q, 2 month lag; Frequency of Publication M.

### Macroeconomic and Policy Developments (staff statement highlights)
- Inflation and prices:
  - Headline inflation at 6 percent (year-to-date) in October.
  - Food prices declined slightly last month due to seasonal factors.
- Reserves and exchange rate:
  - Gross foreign reserves rose slightly in October to around US$2.2 billion at end-month (3.6 months of next year’s imports), due mainly to gold valuation effects.
  - NBC was a small net purchaser of foreign exchange in October (latest available data); riel-U.S. dollar exchange rate stable.
- Fiscal performance through September 2009:
  - Primary and current balances could be slightly less favorable than anticipated for the year as a whole.
  - Value-added tax collections show signs of lagging.
  - Externally-financed capital spending is running below expectations, likely due in part to reporting lags.
- Monetary conditions and credit:
  - Monetary conditions remain lax; pace of credit expansion continues to slow.
  - Broad money growth reached about 19 percent (y/y) in September, driven by a nearly US$100 million increase that month in foreign currency deposits.
  - Credit growth was 3½ percent (y/y) in September.
  - Banks accumulating excess reserves at the NBC—now equivalent to one-third of the deposit base.

### 2010 Budget (draft) — key targets and staff observations
- Draft approved by the Council of Ministers on October 28; overall deficit target equivalent to 5.3 percent of GDP. Final approval expected by the National Assembly in December.
- Under the draft budget, domestic financing requirement is around 0.7 percent of GDP—larger than recommended.
- Summary highlights:
  - Total revenue targeted at 12.3 percent of GDP, below staff’s baseline outlook and compared to an expected outturn of 12.0 percent in 2009. Increases in direct taxes budgeted about 0.3 percent of GDP higher than this year’s expected outcome. Indirect taxes unchanged (as a share of GDP).
  - Total expenditure stands at 17.6 percent of GDP, significantly lower than staff’s baseline, and compared to 18.8 percent projected for 2009. Externally-financed capital spending about one percentage point of GDP lower than expected outturn in 2009. Current spending about 0.2 percentage points of GDP lower; reduction concentrated on wages and allowances, including limits on hiring, promotions, and pay incentive schemes.
- Cambodia: Summary of General Government Operations, 2008–10 (In percent of GDP) — selected rows preserved exactly:
  - Total revenue: 2008 12.0; 2009 Est. 11.1; 2009 Budget 12.0; 2010 Draft Budget 12.3; 2010 Staff Proj. 13.2
  - Tax revenue: 2008 9.9; 2009 Est. 9.0; 2009 Budget 9.8; 2010 Draft Budget 10.0; 2010 Staff Proj. 11.1
  - Nontax revenue: 2008 1.7; 2009 Est. 1.8; 2009 Budget 1.7; 2010 Draft Budget 1.6; 2010 Staff Proj. 1.8
  - Capital revenue 2/: 2008 0.4; 2009 Est. 0.4; 2009 Budget 0.5; 2010 Draft Budget 0.6; 2010 Staff Proj. 0.4
  - Total expenditure: 2008 14.8; 2009 Est. 15.3; 2009 Budget 18.8; 2010 Draft Budget 17.6; 2010 Staff Proj. 19.0
  - Current expenditure: 2008 9.0; 2009 Est. 9.6; 2009 Budget 11.3; 2010 Draft Budget 11.3; 2010 Staff Proj. 11.4
  - Of which: Wages: 2008 3.2; 2009 Est. 3.6; 2009 Budget 4.8; 2010 Draft Budget 4.3; 2010 Staff Proj. ...
  - Capital expenditure 3/: 2008 5.8; 2009 Est. 5.7; 2009 Budget 7.5; 2010 Draft Budget 6.5; 2010 Staff Proj. 7.6
  - Current balance: 2008 2.6; 2009 Est. 1.1; 2009 Budget 0.2; 2010 Draft Budget 0.6; 2010 Staff Proj. 1.4
  - Overall balance: 2008 -2.8; 2009 Est. -4.2; 2009 Budget -6.7; 2010 Draft Budget -5.3; 2010 Staff Proj. -5.8
  - Financing: 2008 2.8; 2009 Est. 4.2; 2009 Budget 6.7; 2010 Draft Budget 5.3; 2010 Staff Proj. 5.8
  - Foreign financing (net): 2008 5.3; 2009 Est. 3.9; 2009 Budget 5.5; 2010 Draft Budget 4.6; 2010 Staff Proj. 5.8
  - Domestic (net): 2008 -2.5; 2009 Est. 0.3; 2009 Budget 1.2; 2010 Draft Budget 0.7; 2010 Staff Proj. 0.0

### IMF Executive Board Assessment — policy priorities and recommendations
- Macroeconomic context:
  - Global recession contributed to a sizable contraction in economic activity after nearly a decade of strong growth and poverty reduction.
  - Recession and decline in property prices have weakened bank balance sheets; nonperforming loans rising; profits compressed.
- Directors' views and recommendations:
  - Fiscal policy should continue to anchor macroeconomic stability, supported by appropriately supportive monetary conditions given high dollarization.
  - Tightening fiscal policy will be necessary to avoid undue pressure on inflation and the exchange rate.
  - Many Directors noted greater exchange rate flexibility would help facilitate external adjustment and safeguard international reserves; a few considered existing arrangements appropriate for anchoring inflation expectations.
  - Need to reduce the domestic financing component of the fiscal deficit while reprioritizing expenditure to protect vulnerable groups.
  - Encourage ongoing efforts to improve revenue performance and expenditure restraint, especially in wage and defense outlays.
  - Continue efforts to improve public financial management: budget integration, transparency, and establishment of a Treasury single account.
  - Monetary policy: monitor large buildup of banks’ excess reserves and be prepared to tighten policy as conditions improve; strengthen effectiveness by developing indirect instruments and fostering an interbank market to help reduce dollarization.
  - Banking sector: immediate priorities include strict enforcement of the new asset classification regime, prompt implementation of corrective action plans, development of a comprehensive bank restructuring framework, and increased supervision capacity.
  - Structural policies: diversify production base and improve competitiveness—focus on basic infrastructure, labor skills, business climate, and expanding market access through trade commitments.
  - Engage external creditors to find a solution to the arrears problem.

### Selected Economic Indicators, 2006–10 — key figures preserved exactly
- GDP at constant prices: 2006 10.8; 2007 10.2; 2008 6.7; 2009 -2.7; 2010 4.3 (Proj.)
- Inflation (CPI) (annual average): 2006 6.1; 2007 7.7; 2008 25.0; 2009 -0.5; 2010 5.4
- Inflation (end-year): 2006 4.2; 2007 14.0; 2008 12.5; 2009 5.3; 2010 6.0
- Gross national saving (in percent of GDP): 2006 19.9; 2007 19.0; 2008 9.1; 2009 10.5; 2010 5.8
- Gross fixed investment (in percent of GDP): 2006 20.6; 2007 20.8; 2008 19.5; 2009 16.0; 2010 17.0
- Government investment (of which): 2006 5.7; 2007 6.1; 2008 5.8; 2009 7.5; 2010 7.6
- Revenue (in percent of GDP)1/: 2006 11.5; 2007 11.9; 2008 12.0; 2009 12.0; 2010 12.4
- Expenditure (in percent of GDP): 2006 14.2; 2007 14.7; 2008 14.8; 2009 18.8; 2010 19.9
- Overall budget balance (- deficit) (in percent of GDP): 2006 -2.7; 2007 -2.9; 2008 -2.8; 2009 -6.7; 2010 -7.4
- Foreign financing (net) (in percent of GDP): 2006 4.8; 2007 5.0; 2008 5.3; 2009 5.5; 2010 5.8
- Domestic financing (net)2/ (in percent of GDP): 2006 -2.0; 2007 -2.2; 2008 -2.5; 2009 1.2; 2010 1.6
- Broad money (annual percent change): 2006 38.2; 2007 62.9; 2008 4.8; 2009 23.5; 2010 12.9
- Private sector credit (annual percent change): 2006 51.6; 2007 76.0; 2008 55.0; 2009 3.5; 2010 17.0
- Exports (millions of U.S. dollars): 2006 3,694; 2007 4,089; 2008 4,433; 2009 3,892; 2010 4,059
- Imports (millions of U.S. dollars): 2006 -4,727; 2007 -5,432; 2008 -6,679; 2009 -5,501; 2010 -6,446
- Current account balance (in percent of GDP): 2006 -0.6; 2007 -1.7; 2008 -10.4; 2009 -5.5; 2010 -11.2
- Gross official reserves (in millions of U.S. dollars)3/: 2006 1,097; 2007 1,616; 2008 2,164; 2009 2,199; 2010 2,137
- Gross official reserves (in months of prospective imports): 2006 2.1; 2007 2.5; 2008 4.0; 2009 3.5; 2010 3.1
- Public external debt (in millions of U.S. dollars)4/: 2006 2,254; 2007 2,571; 2008 2,773; 2009 3,170; 2010 3,531
- Public external debt (in percent of GDP): 2006 31.0; 2007 29.6; 2008 24.6; 2009 29.2; 2010 30.1
- Memorandum items:
  - Nominal GDP (in billions of riels): 2006 29,849; 2007 35,042; 2008 45,583; 2009 44,696; 2010 48,843
  - Nominal GDP (in millions of U.S. dollars): 2006 7,264; 2007 8,691; 2008 11,277; 2009 ...; 2010 ...
  - Exchange rate (riels per dollar, period average): 2006 4,109; 2007 4,032; 2008 4,042; 2009 ...; 2010 ...

*Source: _cr09325 - ANNEX IV. CAMBODIA: STATISTICAL ISSUES (As of October 26, 2009) and accompanying staff statements and PIN (November–December 2009).*

### 1.      On behalf of the Cambodian authorities, we would like to thank the IMF staff team for

### _cr09325 - 1.      On behalf of the Cambodian authorities, we would like to thank the IMF staff team for

### Recent Economic Developments and Outlook
- Global economic crisis hit Cambodia hard due to high openness and concentrated growth base (garments, construction, tourism).
- Agriculture remained supportive of economic growth in 2009.
- Authorities’ projection for 2009:
  - Overall growth: around 2 percent.
  - Agriculture growth: 4.3 percent.
  - Services growth: 3.2 percent.
  - Garment industry contraction: 3.9 percent.
  - Construction industry contraction: 2.6 percent.
- Assessment that economic contraction bottomed out in mid 2009 and growth will bounce back in 2010.
- Outlook for 2010:
  - Economic growth expected to expand modestly about 4.3 percent.
- Inflation and external sector:
  - Inflation declined from 12.5 percent at end-2008 and is expected to stay under 5 percent per annum in 2009.
  - Contributing downward price factors: food and beverage, property, water, gas and electricity, transportation, and entertainment and culture.
  - Riel depreciated slightly against the US dollar during the first eight months of 2009 with a large fluctuation in August.
  - Drivers of riel depreciation: lower demand for riel after harvest season and for tax payments, continued injection of riel into the market, and slowdown of foreign inflow.
  - Current account deficit shrunk as imports decelerated faster than exports in the first half of 2009.
  - International reserves remained somewhat stable in the challenging external situation.

### Fiscal policy
- Authorities demonstrated strong commitment to a prudent fiscal position to maintain macroeconomic stability and sustainability.
- Fiscal stance loosened in response to high oil and food prices in 2008 and global downturn in 2009 to sustain growth and protect vulnerable groups.
- Fiscal deficit projections:
  - Overall fiscal deficits expected to increase to 6.08 percent of GDP in 2009.
  - Overall fiscal deficits expected to be about 5.3 percent in 2010.
- Financing of 2009 deficit:
  - Domestic financing will increase to 2.88 percent of GDP (47.52 percent higher compared to 2008).
  - External financing will decrease to 4.18 percent (2.2 percent lower compared to last year).
- Fiscal stimulus since 2008 had positive effects, particularly on capital spending including infrastructure.
- Authorities’ fiscal measures and commitments:
  - Efforts to compress the wage bill going forward to safeguard fiscal position.
  - Revenue collection could meet targets despite challenging environment; customs and excises taxes slightly higher than target.
  - Stepping up efforts to strengthen tax administration, collection, and broaden the tax base.
  - Expenditures increased in 2009 to mitigate global downturn and high oil and food prices; authorities are compressing and prioritizing expenditures and pulling back interventions where private sector can operate.
  - Committed to mobilize development partners’ financial assistance.
  - Working to strengthen public financial management and implement the Public Finance Management Reform Program (PFMRP) with progress in tax administration, budget formulation, execution and reporting.

### Monetary and exchange rate policies
- National Bank of Cambodia (NBC) continues to pursue prudent monetary policy.
- Authorities agree with staff recommendation to maintain current level of reserve requirement given large excess reserves and efforts to safeguard banking soundness.
- Credit growth:
  - Declined sharply in 2009 to 5.0 percent from 55.0 percent in 2008 and 76.0 percent in 2007.
- NBC measures:
  - Introduced overdraft facility to address liquidity shortage risk.
  - Broad money as of September 2009 was 30.6 percent of GDP, slightly higher than same period in 2008.
  - Keeping close watch on liquidity and ready to mitigate liquidity risk.
- Liquidity management improvements:
  - Implementing an operational liquidity monitoring framework to mitigate risks from reversal of large liquidity overhang.
  - Working on securitization of fixed deposits; draft of Repo Master Agreement finalized and circulated for public consultation.
  - Fund technical assistance on liquidity monitoring provided operational assistance and capacity building to NBC.
- Exchange rate stance:
  - Authorities commit to maintaining exchange rate stability as nominal anchor.
  - Note staff view that “allowing greater exchange rate flexibility would help facilitate adjustment and protect international reserves, especially in view of the accommodative fiscal stance”.
  - Gross international reserves as of October 2009 remained somewhat stable at around USD 2.2 billion.
  - Authorities committed to safeguarding adequacy of international reserves given high dollarization in the economy.

### Financial and banking issues
- Authorities thanked staff for banking sector vulnerabilities analysis and stressed that sensitivity analyses are not forecasts but scenario-based and did not consider collateral value or retained earnings as of August 2009.
- Authorities have taken steps to preclude negative outcomes and welcome the FSAP scheduled for early 2010 to examine banking soundness in greater depth.
- Banking sector expansion has been unprecedented, attracting foreign investors.
- Measures implemented to strengthen the banking system:
  - Maintain current reserve requirement ratio of 12 percent.
  - Continue role as lender of last resort and provide overdraft facilities.
  - Classify banks’ assets and loans into different sectors and maintain appropriate provisions.
  - Encourage banks to increase minimum capital and comply with prudential measures.
  - Strengthen bank supervision capacity.
  - Monitor liquidity condition of the banking system.
- Regulatory enforcement and supervision:
  - Need to move swiftly to strengthen regulatory enforcement, particularly corrective actions and banks’ compliance with new capital requirements.
  - NBC onsite inspections focus on prompt corrective actions, provisioning, loan appraisal and disbursement, and good governance.
  - NBC encouraging strict adherence to regulation on new loan classification and provisioning.
  - Progress on draft MOU between NBC and the Ministry of Economy and Finance as part of bank resolution plan.
- Financial stability priorities:
  - NBC aims to strengthen supervision and oversight capacity, improve operating standards, and reduce risk concentration.
  - NBC and Securities and Exchange Commission of Cambodia (SECC) collaborating to prepare legal and regulatory frameworks for a new stock exchange to avoid regulatory arbitrage.

### Structural Reforms
- Authorities view that resilience to exogenous shocks needs addressing.
- Ongoing and planned structural priorities:
  - Continue development of agricultural sector.
  - Diversify production, increase agricultural productivity and value added, promote agro-industry and SME development.
  - Strengthen microfinance activities.
  - Develop rural physical infrastructure.
  - Improve private sector–led businesses and shore up investor confidence.
  - Improve and finalize regulatory and institutional frameworks related to WTO requirements to promote further integration into regional and world economy.
- Improving business climate and private sector development remains a priority.

### Conclusion
- Significant progress made after decades of political instability, but institutional and infrastructural frameworks remain challenging for effective implementation.
- Peace and political stability remain essential for deeper reforms.
- High food and fuel prices and global downturn required adjustments to reform pace.
- Authorities underscore commitment to reforms supported by technical assistance from development partners.

*Source: Authorities’ letter responding to IMF staff during Article IV consultations (content as provided).*

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