## _cr0947 - Executive Summary

## Source details

**Canonical URL:** [_cr0947 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0947.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0947.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0947.pdf.json)

---

### I. Macroeconomic and Financial Developments
- Growth and vulnerability
  - Real GDP growth is projected at 6½ percent in 2008, compared to 10¼ percent in 2007.
  - Cambodia’s narrow production base, concentration of exports by product and destination, and dependence on external inflows have increased vulnerability to the global financial crisis.
  - Economic activity is slowing across most sectors; liquidity conditions are tightening as funding sources dry up.
  - Rapid credit expansion since 2007 and falling property prices have heightened credit and solvency risk among a number of banks, including a few systemically important ones.

- Inflation and external sector
  - Headline inflation is expected to be around 15½ percent (y/y) in December 2008, compared to a peak of 26 percent in May 2008.
  - The current account deficit (including transfers) is projected at 12 percent in 2008 compared to about 3½ percent in 2007.
  - Gross official reserves are projected at US$2.0 billion (3.5 months of prospective imports) by year-end 2008, compared to US$1.6 billion (2.5 months) at end-2007.
  - Lower commodity prices since May 2008 account for around 80 percent of the decline in headline inflation; a scenario with oil prices remaining at mid-year levels would have raised the oil import bill for Cambodia by around US$210 million (2 percent of GDP) in 2008.

- Fiscal developments
  - The overall deficit is expected at around 1¾ percent of GDP in 2008, against an official target of 4¼ percent and an outturn of around 3 percent in 2007.
  - Revenue continues to rise as a share of GDP, aided by improved tax and customs administration and a pilot of the ASYCUDA system.
  - Current expenditure has been in line with planned allocations; capital expenditure is expected slightly higher than budgeted but precise estimates are hampered by weaknesses in recording payment orders and slow budget integration.
  - Main elements of the mid-year fiscal package included new allowances for military personnel, salary supplements for civil servants, direct subsidies to Electricité du Cambodge, and subsidized loans to rice millers.

- Monetary conditions and exchange rate
  - Broad money growth is expected to decline from 63 percent at end-2007 to around 5 percent by end-2008.
  - The National Bank of Cambodia (NBC) doubled the reserve requirement on foreign currency deposits (FCDs) to 16 percent in June 2008; for riel deposits the reserve requirement was kept at 8 percent.
  - Credit growth, which exceeded 100 percent (y/y) in mid-2008, is expected to fall to around 60 percent by year-end 2008.
  - The riel has remained generally stable against the U.S. dollar since mid-year; lacking an effective interbank market, the NBC continued foreign exchange market intervention to inject riel liquidity.

- Banking sector soundness
  - Liquidity shortages have arisen at some banks; banks have been raising deposit rates, drawing excess reserves, and in few cases borrowing from abroad.
  - As of end-October 2008, banks’ excess reserves were 94 percent of required reserves, down from 227 percent at end-June 2008.
  - The number of licensed banks increased nearly 50 percent to 28 in late 2008, increasing supervisory pressure on the NBC.
  - Financial soundness indicators show banks remain well capitalized, hold sizable liquid assets, and have low NPLs, but these indicators may be misleading due to rapid credit growth masking emerging NPLs and weak compliance with prudential regulations.
  - Mid-year NBC audits revealed NPLs (as a share of loans) higher by two percentage points than previously reported.

- Sector-specific effects
  - Garment sector: employment down 6 percent (y/y) for the year ending July 2008, to 330,000 workers; garment export growth has fallen sharply.
  - Tourism: growth was 3 percent (y/y) in Q3 2008, compared to 17 percent in the same quarter last year; Angkor Wat ticket sales up only ½ percent in the first eight months of 2008, versus 36 percent in same period 2007.
  - Construction: approvals up 38 percent in first nine months of 2008 (compared to 100 percent in same period 2007); property prices reportedly down as much as 25 percent from historic highs in mid-2008 after rising 50–100 percent in the preceding year.

- Sensitivity analysis for the nine largest commercial banks
  - Credit risk scenarios:
    - Scenario 1 (benign): average NPLs would increase by about 4 percentage points to 6.5 percent, bringing RWKA below the regulatory minimum of 15 percent for four banks.
    - Scenario 3 (extreme): average NPLs increase to 13 percent; six banks fall below the RWKA required minimum, with capital deficiency equivalent to 1.2 percent of GDP.
  - Liquidity risk scenarios:
    - Deposit reductions produce average LAD between 38–45 percent.
    - A deposit reduction by 20 percent (Scenario 2) would take the LAD below 15 percent for a few banks; a 25 percent reduction would see four banks’ LAD decline below 20 percent.

### Key statistics (selected exact figures)
- Real GDP growth: 2007 = 10¼ percent; 2008 = 6½ percent (projected).
- Headline inflation (Phnom Penh, end-year): 2008 = 15½ percent (y/y); 2008 peak = 26 percent (May 2008).
- Current account deficit (including transfers): 2008 = 12 percent of GDP.
- Gross official reserves: end-2007 = US$1.6 billion (2.5 months); end-2008 = US$2.0 billion (3.5 months); end-2009 projection = US$1.9 billion (3.1 months).
- Broad money growth: end-2007 = 63 percent; end-2008 = around 5 percent; 2009 projection = around 2½ percent.
- Private sector credit growth: mid-2008 >100 percent (y/y); year-end 2008 = around 60 percent; 2009 projection = 10 percent (y/y).
- Number of licensed banks: nearly 50 percent increase to 28 in late 2008.
- Banks’ excess reserves: end-June 2008 = 227 percent of required reserves; end-October 2008 = 94 percent.

---

### II. Outlook and Risks
- Near-term outlook (2009)
  - Growth is projected at 4.8 percent in 2009.
  - Sectoral dynamics:
    - Agricultural output is expected to pick up.
    - Garments and tourism would act as a significant drag given weak external conditions.
    - Real estate and construction activity is expected to decelerate further.
  - Inflation:
    - Headline inflation is projected to decline to around 7½ percent (y/y) by end-2009.
    - The lagged effects of high inflation in 2008 could still yield upward wage pressures.
  - External sector:
    - The current account deficit is expected to decline to around 7 percent of GDP in 2009.
    - Official inflows should remain strong, but FDI and other private inflows are expected to decline.
    - Gross official reserves would fall to around US$1.9 billion (3.1 months of imports) by end-2009.

- Balance of risks
  - The balance of risks is clearly to the downside due to uncertainty about the length and depth of the global recession and its impact on trade and capital flows.
  - Additional pressures include recent loss in competitiveness from high domestic inflation coupled with U.S. dollar strength, leading to a sizable real appreciation.
  - Adverse scenario risks:
    - A sharper pullback in external demand or reversal in foreign inflows could produce a pronounced liquidity contraction and possible large reserve loss.
    - Such a scenario would tighten private credit availability, increase banking system risks, and raise external vulnerability.

- Medium-term baseline (projections)
  - Growth projected to rise gradually to 7–7½ percent a year.
  - Current account deficit projected to narrow to 5–6 percent of GDP with further export diversification.
  - Reserve cover would settle around 2½–3 months of imports.
  - Overall budget deficit (excluding grants) projected to narrow to less than 2 percent of GDP by 2012.

---

### III. Policy Discussions — Staff Recommendations and Authorities’ Actions
- Fiscal policy
  - Authorities proposed a preliminary 2009 budget with an overall budget deficit of 4¼ percent of GDP.
  - Staff indicated a deficit of around 3¼ percent of GDP in 2009 would provide an adequate fiscal impulse without undermining stabilization efforts.
  - Staff note revenue would only be expected to decline by around ½ percent of GDP absent new measures.
  - Scope for select temporary tax relief and targeted spending if growth slows sharply, but caution urged to avoid domestic financing pressures and external weakening.
  - Box 3: The 2009 draft budget yields a fiscal impulse of 2¼ percentage point of GDP compared to projected 2008 outturn.

- Revenue measures suggested
  - Consider gradual rise in the reference price for petroleum taxation (unchanged since 2004).
  - Select increases in excises (mainly beer and cigarettes).
  - Broaden VAT base, including covering utilities; authorities planned to expand VAT base in 2009 to cover electricity.
  - Adopt a transparent fiscal regime for extractive industries in the context of amending the Law on Taxation.

- Expenditure and PFM
  - Orient large budgeted increase in nonwage recurrent spending toward pro-poor social outlays and locally-financed capital expenditure.
  - Link further wage increases to comprehensive civil service reform.
  - Accelerate Public Financial Management reforms, tackle budget integration, and improve recording of donor-financed capital spending.

- Monetary and exchange rate policy
  - Current monetary stance broadly appropriate; moderate cut in the reserve requirement on FCDs justified as credit growth decreases and inflation pressures subside.
  - Under baseline, broad money expected to increase by around 2½ percent in 2009; private sector credit growth expected to expand by 10 percent (y/y) in 2009.
  - Immediate NBC priorities:
    - Improve liquidity monitoring via more frequent reporting of banks’ liquidity positions.
    - Develop an overdraft facility with regulations on acceptable collateral; staff caution on collateral assessment given lack of government securities.
    - Improve the required reserve system—reduce maintenance period from 28 to 14 days.
  - Staff recommend steps toward greater exchange rate flexibility over the medium term to deepen the FX market and facilitate orderly de-dollarization; authorities favor a heavily managed float for now.

- Banking sector measures
  - Strengthen supervision, enforcement, and fit-and-proper rules; reserve new entry for entities with significant banking background.
  - Revise loan classification standards to reflect borrowers’ ability to repay.
  - Implement closer monitoring of large exposures and attach higher risk weights to riskier lending, including to real estate.
  - Bring forward new minimum capital requirements (scheduled for 2010) for banks facing elevated solvency risk.
  - Prioritize supervisory inspections, coordinate with external auditors, formulate banking resolution plans, and designate NBC’s role as lender of last resort; IMF TA requested.
  - Authorities indicated interest in pursuing an FSAP.

- Competitiveness and structural reforms
  - Exchange rate assessment indicates the riel is overvalued in the range of 11–13 percent.
  - Policy and structural recommendations to restore competitiveness:
    - Improve productivity, infrastructure (roads and electricity), and workforce skills.
    - Reduce burdensome business regulation and improve trade facilitation (customs and ports).
    - Authorities seeking EU dialogue to relax local input content on garments from 45 to 25 percent (could boost EU’s share of garment exports by 10 percentage points by authorities’ estimates).
    - Continue to seek preferential treatment for garment exports to the United States using low income country status.

---

### IV. Staff Appraisal — Summary
- Main appraisal points
  - Credible policy actions are needed to maintain macroeconomic stability, improve bank soundness, and strengthen external competitiveness.
  - Staff recommendations build on earlier consultations and address near-term challenges—particularly weaknesses in monetary operations and banking supervision.
  - Authorities need decisive measures to manage bank risks and reduce vulnerabilities given Cambodia’s openness and dependence on inflows.
  - Executive Board assessment: commended authorities for sound macro policies and strong budget performance amid a difficult external environment; recommended timely and decisive policy response combining supportive fiscal and monetary policies, improved financial oversight, public service delivery, and competitiveness measures.

---

### Debt Sustainability Analysis (DSA) — Key Findings
- Risk assessment
  - Cambodia currently faces a moderate risk of external debt distress.
  - In the DSA, no thresholds are breached under the baseline scenario and standard stress tests and alternative scenarios, except one bound test.
  - The benign outlook is subject to substantial downside risk in the event of a prolonged economic downturn.

- Baseline projections and assumptions
  - Public external debt projected at 27 percent of GDP at end-2008 and should decline steadily over the medium term.
  - Debt service-to-exports ratio expected to stay below 3 percent.
  - Baseline assumes external borrowing gradually moving toward less concessional terms and no resolution of external debt arrears with the Russian Federation or United States.
  - DSA incorporates negotiated debt stock for the Russian Federation (US$457 million) and agreed amount of total principal due for the United States (US$162 million); standard 70 percent discount applied to Russian debt nominal value.

- Indicators and thresholds (policy-dependent indicative thresholds for “weak performer” CPIA)
  - NPV of debt-to-GDP threshold: 30 percent.
  - NPV of debt-to-exports threshold: 100 percent.
  - NPV of debt-to-revenue threshold: 200 percent.
  - Debt service-to-exports threshold: 15 percent.
  - Debt service-to-revenue threshold: 25 percent.
  - DSA summary table (period averages under baseline): NPV debt-to-GDP = 16 (2008–28); NPV debt-to-exports = 33 (2008–28); NPV debt-to-revenue = 111 (2008–28).

- Stress-test and alternative scenario results
  - One-time 30 percent nominal depreciation in 2009 would increase NPV debt-to-GDP by about 7 percentage points to 27 percent by end-2009, remaining below the indicative threshold.
  - The NPV debt-to-revenue ratio would exceed the 200 percent threshold during 2009–11 under that depreciation, then fall below thereafter.
  - Alternative scenarios (lower growth and smaller FDI; smaller FDI and higher borrowing costs) could breach the indicative thresholds, with (ii) keeping the NPV debt-to-GDP well above the threshold at end-period.

- Public debt trajectory and figures (selected exact figures)
  - Public external debt (US$ millions): end-2007 = 2,582; end-2008 = 2,809; end-2009 = 3,087.
  - Public external debt (percent of GDP): 2007 = 29.7; 2008 = 26.8; 2009 = 26.0.
  - PV of external debt (selected values): 30.1; 27.5; 22.7; 20.2; 19.7; 19.5; 19.0; 18.2; 17.4; 15.2; 12.2.
  - PV of PPG external debt (in percent of exports, selected values): 47.0; 40.0; 35.0; 35.5; 40.8; 41.0; 39.7; 38.1; 36.0; 32.1; 25.6.
  - PV of public sector debt (selected percent of GDP): 27.0; 24.8; 23.7; 21.2; 20.5; 20.3; 19.6; 18.8; 17.9; 15.0; 12.2.

- Policy recommendations and monitoring priorities
  - Maintain sound macroeconomic and financial policies and structural reforms to support growth and low external vulnerability.
  - Improve transparency and monitoring of contingent liabilities: develop an inventory of concessions and examine BOT contracts for guarantees.
  - Monitor FDI and private inflows and the cost/terms of new borrowing.
  - Prepare contingency plans for downside risks associated with a prolonged global downturn.

- Conclusion
  - Staffs conclude Cambodia faces a moderate risk of debt distress; no thresholds breached under baseline and standard tests except one bound test.
  - The benign outlook depends on a pickup in economic activity from 2010 onward; prolonged downturns or contingent liabilities could materially worsen debt sustainability.

---

### Annex and Institutional Relations (selected)
- Fund relations
  - Membership: Joined 12/31/1969; Article VIII.
  - Quota: SDR 87.50.
  - PRGF arrangements: none outstanding.
  - Past arrangements: PRGF approved 10/22/1999 (58.50 SDR million drawn).
  - MDRI: IMF Executive Board relief on January 5, 2006 approved relief on 100 percent of debt incurred by Cambodia to the IMF before January 1, 2006.

- MDRI proceeds and use
  - Forgiving of Cambodia’s outstanding debt to the IMF amounted to SDR 56.8 million (about US$82 million).
  - Authorities intend to spend the resources over a number of years, initially on rural irrigation projects.
  - NBC transferred the full MDRI proceeds to the Ministry of Economy and Finance effective March 2006.

- Data provision and statistical capacity
  - Data provision "broadly adequate for surveillance" but national accounts, price indices, government finance, balance of payments statistics, and external debt have shortcomings.
  - CPI issues: new nationwide CPI compiled starting October 2006 then halted; authorities reverted to old CPI series; assistance sought from Statistics Sweden.
  - NBC reports monthly monetary and financial statistics to the IMF since August 2005; financial soundness indicators compiled since 2005 may partly rely on unaudited accounts.

- Technical assistance and cooperation
  - Technical assistance focused on bank supervision, monetary operations, public financial management, customs administration, and macro-financial statistics.
  - Resident representative: Mr. John Nelmes assumed post in November 2005.

---

*Source: IMF staff report excerpt and annexes from _cr0947 (IMF Article IV consultation and DSA material as provided).*

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

### _cr0947 - Executive Summary ......................................................................................................

### I. Macroeconomic and Financial Developments

- Growth and vulnerability
  - Real GDP growth is projected at 6½ percent in 2008, compared to 10¼ percent in 2007.
  - Cambodia’s narrow production base, concentration of exports by product and destination, and dependence on external inflows have increased vulnerability to the global financial crisis.
  - Economic activity is slowing across most sectors; liquidity conditions are tightening as funding sources dry up.
  - Rapid credit expansion since 2007 and falling property prices have heightened credit and solvency risk among a number of banks, including a few systemically important ones.

- Inflation and external sector
  - Headline inflation is expected to be around 15½ percent (y/y) in December 2008, compared to a peak of 26 percent in May 2008.
  - The current account deficit (including transfers) is projected at 12 percent in 2008 compared to about 3½ percent in 2007.
  - Gross official reserves are projected at US$2.0 billion (3.5 months of prospective imports) by year-end 2008, compared to US$1.6 billion (2.5 months) at end-2007.
  - Lower commodity prices since May 2008 account for around 80 percent of the decline in headline inflation; a scenario with oil prices remaining at mid-year levels would have raised the oil import bill for Cambodia by around US$210 million (2 percent of GDP) in 2008.

- Fiscal developments
  - The overall deficit is expected at around 1¾ percent of GDP in 2008, against an official target of 4¼ percent and an outturn of around 3 percent in 2007.
  - Revenue continues to rise as a share of GDP, aided by improved tax and customs administration and a pilot of the ASYCUDA system.
  - Current expenditure has been in line with planned allocations; capital expenditure is expected slightly higher than budgeted but precise estimates are hampered by weaknesses in recording payment orders and slow budget integration.
  - Main elements of the mid-year fiscal package included new allowances for military personnel, salary supplements for civil servants, direct subsidies to Electricité du Cambodge, and subsidized loans to rice millers.

- Monetary conditions and exchange rate
  - Broad money growth is expected to decline from 63 percent at end-2007 to around 5 percent by end-2008.
  - The National Bank of Cambodia (NBC) doubled the reserve requirement on foreign currency deposits (FCDs) to 16 percent in June 2008; for riel deposits the reserve requirement was kept at 8 percent.
  - Credit growth, which exceeded 100 percent (y/y) in mid-2008, is expected to fall to around 60 percent by year-end 2008.
  - The riel has remained generally stable against the U.S. dollar since mid-year; lacking an effective interbank market, the NBC continued foreign exchange market intervention to inject riel liquidity.

- Banking sector soundness
  - Liquidity shortages have arisen at some banks; banks have been raising deposit rates, drawing excess reserves, and in few cases borrowing from abroad.
  - As of end-October 2008, banks’ excess reserves were 94 percent of required reserves, down from 227 percent at end-June 2008.
  - The number of licensed banks increased nearly 50 percent to 28 in late 2008, increasing supervisory pressure on the NBC.
  - Financial soundness indicators show banks remain well capitalized, hold sizable liquid assets, and have low NPLs, but these indicators may be misleading due to rapid credit growth masking emerging NPLs and weak compliance with prudential regulations.
  - Mid-year NBC audits revealed NPLs (as a share of loans) higher by two percentage points than previously reported.

- Sector-specific effects (Box 1 highlights)
  - Garment sector: employment down 6 percent (y/y) for the year ending July 2008, to 330,000 workers; garment export growth has fallen sharply.
  - Tourism: growth was 3 percent (y/y) in Q3 2008, compared to 17 percent in the same quarter last year; Angkor Wat ticket sales up only ½ percent in the first eight months of 2008, versus 36 percent in same period 2007.
  - Construction: approvals up 38 percent in first nine months of 2008 (compared to 100 percent in same period 2007); property prices reportedly down as much as 25 percent from historic highs in mid-2008 after rising 50–100 percent in the preceding year.

- Sensitivity analysis for the nine largest commercial banks (Box 2)
  - Credit risk scenarios: In Scenario 1 (benign), average NPLs would increase by about 4 percentage points to 6.5 percent, bringing RWKA below the regulatory minimum of 15 percent for four banks. In Scenario 3 (extreme) with average NPLs increasing to 13 percent, six banks fall below the RWKA required minimum, with capital deficiency equivalent to 1.2 percent of GDP.
  - Liquidity risk scenarios: Deposit reductions produce average LAD between 38–45 percent. A deposit reduction by 20 percent (Scenario 2) would take the LAD below 15 percent for a few banks; a 25 percent reduction would see four banks’ LAD decline below 20 percent.

### II. Outlook and Risks

- Near-term outlook
  - Growth slowed in 2008 across garments, tourism, agriculture, and construction due to weaker external demand, adverse weather, slowing FDI, and decelerating credit.
  - The near-term prospects for the garment sector are poor for output and employment given U.S. demand concentration and external competition.
  - A prolonged downturn in tourism could have serious fiscal implications given the sector’s VAT contribution.

- Key risks
  - Immediate risks stem from liquidity shortages among banks owing to a sharp slowing in external inflows and deposit growth.
  - Credit and solvency risks could materialize among several banks, depending on the magnitude of the slowdown and policy response.
  - New banks with limited experience and large exposure to the property sector, and existing banks with weak capital bases, are especially vulnerable.
  - External vulnerabilities could be rising given the near-term outlook despite past improvements.

### III. Policy Discussions (summary of staff recommendations and authorities’ actions)

- Fiscal policy
  - Authorities pursued a sound fiscal stance; overall deficit lower than budget target in 2008.
  - Staff recommend maintaining credible policy actions to preserve macroeconomic stability and address near-term challenges.

- Monetary and exchange rate policy
  - NBC actions included raising reserve requirements on FCDs and placing caps on banks’ lending to the real estate sector.
  - Staff emphasize the constraint posed by high financial dollarization and the lack of an operational framework that limits the NBC’s ability to manage domestic liquidity.
  - Continued use of foreign exchange intervention to manage riel liquidity in absence of an effective interbank market.

- Banking sector issues
  - Staff stress the need for decisive measures to manage bank risks and reduce vulnerabilities, including strengthening supervision and enforcement.
  - Weak supervisory oversight and enforcement, combined with dollarization and limited liquidity instruments, have contributed to heightened banking risks.

- Competitiveness and sustainability
  - Competitiveness has eroded due to a sharp real appreciation of the Cambodian riel and U.S. dollar; staff discussions focused on actions to strengthen external competitiveness.

### IV. Staff Appraisal (summary)

- Main appraisal points
  - Credible policy actions are needed to maintain macroeconomic stability, improve bank soundness, and strengthen external competitiveness.
  - Staff recommendations build on earlier consultations and address near-term challenges posed by external conditions and policy weaknesses—particularly in monetary operations and banking supervision.
  - Authorities need to implement decisive measures to manage risks faced by banks and reduce vulnerabilities given Cambodia’s openness and dependence on inflows.

_Executive Summary, _cr0947 - Executive Summary (IMF staff report content provided)._

### 6.      The near-term outlook for Cambodia points to a further slowing in economic

### 6.      The near-term outlook for Cambodia points to a further slowing in economic activity in 2009, as the impact of negative external shocks becomes more pronounced.

### Near-term outlook and key macro projections
- Growth is projected at 4.8 percent in 2009.
- Sectoral dynamics:
  - Agricultural output is expected to pick up.
  - Garments and tourism would act as a significant drag given weak external conditions.
  - Real estate and construction activity is expected to decelerate further, as investment becomes more constrained by inflows and credit.
- Inflation:
  - Inflation should continue to fall, based on the IMF’s latest commodity price outlook and moderating demand pressures.
  - Headline inflation is projected to decline to around 7½ percent (y/y) by end-2009.
  - The lagged effects of high inflation in 2008 could still yield upward wage pressures.
- External sector and reserves:
  - The current account deficit is expected to decline to around 7 percent of GDP in 2009.
  - The overall external position will likely deteriorate because factors that drove the deficit higher in 2008 are expected to reverse and more than offset a sharp drop in export growth.
  - Official inflows should remain strong, but FDI and other private inflows are expected to decline, likely resulting in a moderate deterioration in the overall external position in 2009.
  - Based on this outlook, gross official reserves would fall to around US$1.9 billion (3.1 months of imports) by end-2009.

### Balance of risks
- The balance of risks is clearly to the downside, because of uncertainty about the length and depth of the global recession and its impact on trade and capital flows.
- Additional pressures:
  - Recent loss in competitiveness from high domestic inflation coupled with U.S. dollar strength vis-à-vis most major currencies, leading to a sizable real appreciation.
- Adverse scenario risks:
  - In the event of a sharper pullback in external demand or reversal in foreign inflows, with high dollarization, Cambodia could experience a pronounced liquidity contraction and possible large reserve loss, with limited policy options available to cushion the adjustment.
  - Such a scenario would put an even tighter squeeze on private credit availability, increase risks in the banking system, and raise external vulnerability.

### Medium-term prospects (baseline)
- Growth under the current baseline is projected to rise gradually to 7–7½ percent a year.
- Growth drivers:
  - FDI-promoted export opportunities.
  - Broader tourism development.
  - Higher agricultural yields—each critical to sustained growth and poverty reduction, including meeting the Millennium Development Goals.
- External position:
  - The current account deficit would narrow to 5–6 percent of GDP with further export diversification, even accounting for large investment-related imports.
  - Reserve cover would settle around 2½–3 months of imports.
- Fiscal stance:
  - Underpinning stabilization efforts would be modest fiscal consolidation over the medium term, with the overall budget deficit narrowing to less than 2 percent of GDP by 2012.

### Policy discussions — overview
- Policy focus shifted from excessive inflation to preventing a sharp economic downturn.
- Staff urged quick and decisive action to contain the impact of the global crisis through:
  - Moderate fiscal easing.
  - Improved liquidity management.
  - Measures to protect the banking system.
- Authorities generally concurred with these priorities.

### A. Fiscal policy — recommendations and 2009 stance
- Authorities proposed a preliminary 2009 budget with an overall budget deficit of 4¼ percent of GDP.
- Staff indicated a deficit of around 3¼ percent of GDP in 2009 would provide an adequate fiscal impulse without undermining stabilization efforts.
- Key differences:
  - Main difference is the revenue outlook; authorities argued revenue would decline more sharply (as a share of GDP) than staff envisaged, due mainly to lower expected automobile imports.
  - Staff noted that even taking into account expected weaknesses in import growth and corporate profits, revenue would only be expected to decline by around ½ percent of GDP, absent any new measures.
- Scope for further easing:
  - In the event of a sharper-than-expected growth slowdown, scope could remain for even further easing in the form of select (temporary) tax relief and spending aimed at protecting the most vulnerable groups.
  - Caution urged given limited implementation capacity and to avoid serious recourse to domestic financing or weakening in the external position.
- Box 3 summary (fiscal impulse):
  - The 2009 draft budget yields a fiscal impulse of 2¼ percentage point of GDP compared to the projected outturn for 2008.
  - Staff’s 2009 outlook is expansionary but less so than the draft budget.
  - For the budget, the revenue impulse is more pronounced, mainly because of lower expected trade tax collections.
  - Staff projections yield a slightly larger expenditure impulse than the 2009 budget, due mostly to higher capital spending coming from recently announced loans from China, partially offset by lower recurrent spending.
  - The fiscal impulse measures: for the revenue impulse: (+) contractionary (-) expansionary; for the expenditure impulse: (+) expansionary (-) contractionary.

### Fiscal policy — main policy recommendations
- Revenue:
  - As conditions improve, consider new revenue measures in keeping with the government’s medium-term revenue strategy.
  - Potential revenue sources:
    - Gradual rise in the reference price for petroleum taxation (unchanged since 2004).
    - Select increases in excises (mainly beer and cigarettes).
    - Broadening of the VAT base, including covering utilities.
  - Authorities planned to expand the VAT base in 2009 to cover electricity.
  - Staff urged adoption of a transparent fiscal regime for extractive industries, in the context of amending the Law on Taxation.
- Expenditure:
  - The large budgeted increase in nonwage recurrent spending should be oriented toward pro-poor social outlays (including locally-financed capital expenditure) to mitigate the impact of the projected growth slowdown.
  - Staff noted concerns about rising government wage and administration costs and urged further wage increases be linked to comprehensive civil service reform.
  - Authorities noted the wage bill is lower as a share of GDP than neighboring countries and that cabinet-related expenses are needed to accommodate the political process.
- Public financial management (PFM):
  - In line with IMF TA recommendations, staff urged PFM reforms be accelerated, including tackling budget integration, particularly recording donor-financed capital spending.
  - Authorities agreed reform efforts had been slower than desired due to elections and new procurement procedures and reiterated commitment to renew momentum.

### B. Monetary and exchange rate policy
- Monetary stance:
  - The current monetary stance is seen as broadly appropriate, but conditions have tightened rapidly and bear close watch.
  - Staff recommended that as credit growth decreases and inflation pressures subside, a moderate cut in the reserve requirement on FCDs would be justified.
  - Under the current baseline, broad money is expected to increase by only around 2½ percent in 2009, with weak inflows significantly constraining liquidity growth.
  - Private sector credit growth is expected to expand by only 10 percent (y/y) in 2009.
  - Temporary liquidity shortages could arise in individual banks and would be better handled through improved liquidity operations rather than general policy easing.
- Liquidity management and NBC actions:
  - Immediate priorities agreed by authorities:
    - Improve the liquidity monitoring framework through more frequent reporting of banks’ liquidity position to better understand factors driving their reserves at the NBC.
    - Develop an overdraft facility to address temporary liquidity shortages, with new regulations being formulated, including on acceptable collateral.
  - Staff cautioned careful assessment of any assets banks pledge as collateral, given government securities are nonexistent.
  - Authorities agreed improvements are needed in the required reserve system—mainly reducing the maintenance period from 28 to 14 days, so banks can better manage their own liquidity needs.
- Exchange rate flexibility:
  - Staff recommended steps over the medium term toward greater exchange rate flexibility to deepen the foreign exchange market and facilitate an orderly progression toward de-dollarization, supported by more effective monetary controls.
  - Authorities viewed the heavily managed float vis-à-vis the U.S. dollar as appropriate for now and agreed on a more flexible exchange rate regime as a medium-term objective.
  - Staff urged that intervention be limited to smoothing short-term volatility to maintain adequate reserves in case of further sharp deterioration in external conditions or if the NBC were called to act as lender of last resort.

### C. Banking sector issues and recommended measures
- Emerging risks:
  - Excessive credit growth, regulatory forbearance, and now tighter funding conditions have heightened risks to the banking sector.
- Supervisory and regulatory priorities:
  - Staff urged much closer monitoring by the NBC of banks’ compliance with prudential regulations.
  - NBC plans for 2009 include more intensive on- and off-site monitoring.
  - Enforcement remains weak, particularly on capital adequacy and loan provisioning.
  - Bank licensing procedures need strengthening; new entry should be reserved for entities with significant banking background.
  - Ensure close coordination between the Financial Intelligence Unit and Banking Supervision Department to ensure compliance with anti-money laundering guidelines.
  - Updating of fit-and-proper rules welcomed by staff.
- Specific safeguards recommended:
  - Revise loan classification standards to force banks to take into account borrowers’ ability to repay and underlying risks.
  - Implement closer monitoring of large exposure loans and attach higher risk weights to riskier lending, including to the real estate sector (in place of sector lending caps).
  - Bring forward new minimum capital requirements established to take effect in 2010 for banks facing elevated solvency risk.
  - Prioritize supervisory inspections and coordinate with external auditors, focusing on banks with a history of lax adherence to prudential regulations and large systemically-important banks.
  - Formulate banking resolution plans to facilitate bank consolidation if necessary; designate a clear role for the NBC as lender of last resort; provide a credible settlement mechanism (IMF TA requested).
  - Authorities indicated interest in pursuing a Financial Sector Assessment Program (FSAP).

### D. Competitiveness and sustainability
- Exchange rate assessment:
  - An exchange rate assessment reveals that the riel is overvalued in the range of 11–13 percent.
  - These are broad estimates and should be interpreted cautiously due to structural changes and weak macroeconomic data.
- Competitiveness challenges:
  - For the garment industry, the U.S. dollar-Cambodian riel exchange rate per se may be less of a factor than external demand conditions, given mostly U.S. dollar-denominated costs.
  - An overvalued riel could hurt some producers and the tourism industry, combined with other factors constraining competitiveness.
- Box 4: Exchange rate assessment main findings:
  - Macroeconomic balance approach:
    - The current account (CA) norm is estimated at minus 4 percent of GDP and the underlying CA at minus 7 percent of GDP.
    - This implies that a riel depreciation of about 13 percent is needed to close output gaps with partner countries and allow lagged effects of past exchange rates to be fully realized.
  - Equilibrium REER approach:
    - Cambodia’s equilibrium exchange rate has depreciated in recent years largely due to a deterioration in its terms of trade.
    - However, with the recent REER appreciation, the riel appears overvalued at around 11 percent.
- Policy and structural recommendations to restore competitiveness:
  - Improve productivity, infrastructure (notably roads and electricity), and workforce skills.
  - Reduce burdensome business regulation and maintain a stable macroeconomic environment.
  - Improve trade facilitation: further streamline customs clearance and improve port and border infrastructure.
  - Authorities are seeking dialogue with the European Union to relax the restriction on local input content on garment from 45 to 25 percent, which by their estimates could boost the EU’s share of garment exports by 10 percentage points.
  - Cambodia continues to seek preferential treatment for garment exports to the United States by taking advantage of its low income country status.

*Source: IMF staff report excerpt, “The near-term outlook for Cambodia points to a further slowing in economic activity in 2009.”*

### 5.8 percent and from 29.0 to 34.4 percent, respectively (based U.S. Department of Commerce data).

### _cr0947 - 5.8 percent and from 29.0 to 34.4 percent, respectively (based U.S. Department of Commerce data).

### Debt Sustainability Analysis (DSA)
- Cambodia currently faces a moderate risk of external debt distress.
- In the DSA:
  - No thresholds are breached under the baseline scenario and standard stress tests and alternative scenarios, except one bound test (Appendix I).
  - The benign outlook is subject to substantial downside risk in the event of a prolonged economic downturn, but the likelihood of debt distress remains moderate.
- Baseline projections:
  - Public external debt projected at 27 percent of GDP at end-2008.
  - Public external debt should decline steadily over the medium term.
  - Debt service-to-exports ratio is expected to stay below 3 percent.
- Assumptions:
  - External borrowing would gradually move toward less concessional terms.
  - No resolution of external debt arrears with either the Russian Federation or United States takes place.

### Macroeconomic context and overall appraisal
- Cambodia is facing its most challenging macroeconomic and financial conditions this decade.
- External shocks amplified by:
  - Concentration of economic activity.
  - Dependence on external inflows.
  - Weaknesses in the banking system.
- Authorities recognize the seriousness of challenges and the need for a clear and timely policy response to manage risks and avoid a deeper downturn.

### Fiscal policy findings and recommendations
- Fiscal policy should continue to underpin stabilization efforts, with a more expansionary stance in 2009 appropriate.
- Commendation:
  - Strong budget performance so far in 2008 despite pressures from national elections, border security issues, and a weakening economy.
- Recommended measures:
  - Moderate fiscal easing in 2009, focused on higher pro-poor social and infrastructure outlays.
  - Strengthen revenue administration and, as conditions permit, broaden the tax base.
  - Exercise more control over the government’s wage bill; link future increases to comprehensive civil service reform.
  - Ensure military spending avoids crowding out other essential spending given security concerns.
  - Strengthen Public Financial Management (PFM), particularly Treasury management and budget coordination and integration, including the recording of donor inflows.
  - Guide future oil and mineral production by a transparent fiscal regime to maximize public gain.

### Monetary policy, liquidity management, and central bank operations
- Current monetary stance is broadly appropriate, but close monitoring required to avoid excessive tightening that could aggravate banking system risks.
- As credit growth drops and inflation pressures subside, moderate easing could be justified.
- Need for improved policy effectiveness consistent with longstanding IMF TA recommendations.
- Sound monetary operations at the NBC depend on better internal coordination to ensure policy consistency.
- Development of a more advanced framework is needed, with a new nominal anchor that:
  - Relies more on market-based instruments.
  - Prioritizes greater inflation control.
- Liquidity management recommendations:
  - A clear strategy must be put in place to manage liquidity risk.
  - Upfront action to strengthen the liquidity management framework is required.
  - NBC’s recent move toward an overdraft facility is a critical step, but caution is needed in:
    - Assessing eligible collateral.
    - Distinguishing liquidity from solvency pressures facing banks.
  - In providing liquidity support, NBC should consider potential risks to its own balance sheet if banks are unable to repay (reserve losses could further undermine confidence and increase external vulnerability).
  - Swift measures urged to improve the required reserve system.

### Banking system soundness and supervision
- Need for swift and comprehensive measures to improve banking soundness, including solvency issues.
- While NBC continues to strengthen the prudential framework, more systematic efforts are needed in supervising banks and enforcing regulations given the likelihood nonperforming loans will rise as the economy slows.
- Recommended actions:
  - Develop banking resolution plans in view of solvency risk faced by some banks.
  - Strengthen bank licensing procedures.
  - Bring forward new minimum capital requirements, with banks facing heightened solvency risks required to be in compliance immediately.
  - Consider conducting an FSAP to identify other vulnerabilities and prioritize further policy actions.

### External competitiveness
- Exchange rate assessment points to an overvaluation of the riel.
- Given a highly dollarized economy, exchange rate adjustment would play a limited role in resolving imbalances.
- Alternative measures to gain competitiveness:
  - Maintain a stable macroeconomic environment.
  - Develop a more skilled workforce.
  - Improve public services and infrastructure.
  - Streamline business regulation.

### External debt risk and sovereign financing
- Risk of external debt distress is moderate but could become more pronounced with a prolonged downturn.
- Given a large external borrowing requirement, prudent debt management remains essential.
- Cambodia is expected to continue to borrow on largely concessional terms in the foreseeable future.
- Authorities encouraged to continue seeking agreements to resolve outstanding debt obligations with the Russian Federation and United States.

### Potential IMF engagement and conditions
- If a need arises and understandings could be reached on outstanding debt arrears, staff would support a request for a new PRGF arrangement.
- Any such arrangement would need to be underpinned by a strong reform agenda aimed at:
  - Strengthening competitiveness.
  - Reducing vulnerabilities.
  - Ensuring a viable external position.
- Staff urge the authorities to continue reform efforts, which the IMF will continue to support through intensive TA and policy dialogue.

*Source: IMF staff appraisal and DSA findings as presented in the provided content unit.*

### 27.      It is recommended that Cambodia remain on the 12-month consultation cycle.

### _cr0947 - 27.      It is recommended that Cambodia remain on the 12-month consultation cycle.

### Recommendation
- It is recommended that Cambodia remain on the 12-month consultation cycle.

### Macro performance and outlook (selected indicators, 2005–09; as presented)
- Nominal GDP (2007): $8.69 billion$649
- Population (2007): 13.4 million35 percent
- Main exports (2007): Garments (73.7 percent of total)
- Fund Quota: SDR 87.5 million

Output and prices (annual percent change)
- GDP in constant prices: 13.3 10.8 10.2 ... 6.5 4.8
- (excluding agriculture): 8.1 17.3 12.2 ... 8.1 5.3
- Real agricultural output: 15.7 5.5 5.0 ... 2.0 3.5
- GDP deflator: 6.1 4.6 6.5 ... 15.3 8.0
- CPI Inflation (end-year) - Phnom Penh, old: 6.7 2.8 10.8 15.7 15.5 7.4
- CPI Inflation (Annual average): 5.8 4.7 5.9 19.5 20.0 8.2

Saving and investment balance (in percent of GDP)
- Gross national saving: 14.6 19.9 17.4 ... 9.1 11.9
- Government saving: 1.9 1.8 2.9 ... 3.4 2.7
- Private saving: 12.7 18.1 14.5 ... 5.7 9.2
- Gross fixed investment: 18.5 20.6 20.8 ... 21.0 19.0
- Government investment: 4.9 5.7 6.1 ... 5.6 6.3
- Non-budgetary grant-financed investment: 3.0 3.6 2.4 ... 1.9 1.7
- Private investment: 10.5 11.2 12.3 ... 13.5 11.0

Money and credit (annual percent change, unless otherwise indicated)
- Broad money: 16.1 38.2 62.9 19.5 4.9 2.6
- Net credit to the government 2/: -4.9 -10.6 -12.4 -11.1 -9.5 -5.1
- Private sector credit: 31.8 51.6 76.0 75.5 60.0 10.0
- Velocity of money 3/: 5.4 4.9 3.9 3.5 3.6 4.0

Public finance (in percent of GDP)
- Revenue 4/: 10.3 11.5 11.9 10.5 12.5 12.1
  - Tax revenue: 7.6 7.9 9.5 8.6 10.1 9.9
- Expenditure: 12.8 14.2 14.7 11.1 14.2 15.4
  - Current expenditure: 7.9 8.5 8.7 6.8 8.6 9.1
  - Capital expenditure 5/: 4.9 5.7 6.1 4.3 5.6 6.3
- Overall budget balance (excluding grants): -2.5 -2.7 -2.9 -0.6 -1.7 -3.2
- Foreign financing, net: 4.9 4.8 5.0 3.4 4.3 4.6
- Domestic financing, net 6/: -2.4 -2.0 -2.2 -2.8 -2.6 -1.3

Balance of payments (in millions of dollars, unless otherwise indicated)
- Exports, f.o.b.: 2,910 3,694 4,089 ... 4,363 4,197
  - (Annual percent change): 12.4 26.9 10.7 ... 6.7 -3.8
- Imports, f.o.b.: -3,904 -4,727 -5,419 ... -6,523 -5,798
  - (Annual percent change): 19.4 21.1 14.6 ... 20.4 -11.1
- Current account (including official transfers): -240 -47 -296 ... -1,268 -845
  - (In percent of GDP): -3.8 -0.6 -3.4 ... -11.9 -7.1
- Gross official reserves 7/: 915 1,097 1,616 2,093 2,033 1,933
  - (In months of prospective imports): 2.0 2.1 2.5 3.6 3.5 3.1

External debt (in millions of dollars)
- Public external debt 8/ 9/: 2,120 2,254 2,582 ... 2,809 3,087
  - (In percent of GDP): 35.0 31.0 29.7 ... 26.8 26.0
- Public debt service (cash basis): 28 28 36 ... 28 46
  - (In percent of exports of goods and services): 0.7 0.6 0.6 ... 0.5 0.8

Memorandum items:
- Nominal GDP (in billions of riels): 25,754 29,849 35,039 ... 42,999 48,691
- Nominal GDP (in millions of U.S. dollars): 6,286 7,264 8,690 .........
- Exchange rate (riels per dollar; period average): 4,097 4,109 4,032 4,064 ......

Sources and timing notes (as provided)
- Sources: Data provided by the Cambodian authorities; and IMF staff estimates and projections.
- 1/ CPI is as of November; money and credit is as of end-October; public finance is as of end-October; and gross official reserves are as of December 5, 2008. The exchange rate is the year-to-date average through December 21, 2008.
- 2/ Contribution to broad money growth.
- 3/ Ratio of nominal GDP to the average stock of broad money.
- 4/ In 2006, includes transfer from the IMF of Multilateral Debt Relief Initiative (MDRI) proceeds as capital revenue.
- 5/ In 2005, includes repayment of arrears.
- 6/ Includes funds in transit and payment orders in excess of cash released.
- 7/ Excludes unrestricted foreign currency deposits held as reserves at NBC and valuation changes.
- 8/ From 2006, includes the impact of debt forgiveness from the IMF under the MDRI.
- 9/ Debt owed to the Russian Federation is valued at 0.6 rubles per U.S. dollar with the standard 70 percent discount.

### Balance of payments detail (2005–09; selected items)
- Current account (including official transfers): -240 -47 -296 -1,268 -845
- Current account (excluding official transfers): -606 -522 -694 -1,725 -1,311
- Trade balance: -993 -1,034 -1,330 -2,160 -1,601
- Exports, f.o.b.: 2,910 3,694 4,089 4,363 4,197
  - Of which: Garments: 2,206 2,663 2,840 2,938 2,857
- Imports, f.o.b.: -3,904 -4,727 -5,419 -6,523 -5,798
  - Of which: Garments sector: -1,106 -1,298 -1,376 -1,473 -1,393
  - Petroleum: -841 -1,123 -1,347 -1,981 -1,172
- Services and income (net): 179 197 259 85 -35
  - Services (net): 483 516 644 488 346
    - Tourism (credit): 840 963 1,149 1,212 1,086
  - Income (net): -304 -319 -384 -403 -380
- Private transfers (net): 209 315 377 350 325
- Official transfers (net): 365 475 398 457 466
- Capital and financial account: 305 240 724 1,648 715
  - Medium- and long-term loans (net): 170 118 251 196 253
  - Disbursements: 177 132 269 221 288
  - Amortization: -7 -14 -19 -25 -35
  - Foreign direct investment: 375 483 866 785 488
- Overall balance: 65 193 427 379 130
- Change in gross official reserves 4/: -77 -138 -447 -400 110
- Accumulation of arrears: 2 2 1 2 1

Memorandum items (percent of GDP)
- Current account balance (excluding official transfers): -9.6 -7.2 -8.0 -16.3 -11.0
- Current account balance (including official transfers): -3.8 -0.6 -3.4 -11.9 -7.1
- Trade balance: -15.8 -14.2 -15.3 -20.4 -13.5
- Gross official reserves (in months of prospective imports): 2.0 2.1 2.5 3.5 3.1
- Public external debt: 2,120 2,254 2,582 2,809 3,087
  - (In percent of GDP): 35.0 31.0 29.7 26.8 26.0

### General government operations (2005–09; selected fiscal figures)
- Total revenue (in billions of riels): 2,653 3,431 4,165 4,109 5,377 5,397 5,907
  - Central government: 2,559 3,240 3,962 3,957 5,122 5,105 5,604
  - Tax revenue: 1,948 2,372 3,343 3,241 4,357 4,342 4,834
    - Direct taxes: 222 331 480 486 687 746 797
    - Indirect taxes: 1,647 1,920 2,676 2,624 3,433 3,324 3,755
    - Trade tax: 573 644 903 858 1,082 1,032 1,153
  - Nontax revenue: 578 681 705 710 796 871 889
  - Capital revenue 1/: 127 377 117 157 223 183 183
    - Of which: MDRI capital transfer 2/: 0 34 100 0 0 0 0
- Total expenditure (in billions of riels): 3,303 4,244 5,164 5,680 6,111 7,417 7,487
  - Current expenditure: 2,032 2,527 3,043 3,569 3,699 4,658 4,408
    - Wages: 835 975 1,058 1,242 1,436 1,730 1,730
    - Nonwage: 1,066 1,372 1,766 2,120 2,057 2,572 2,322
    - Interest payments: 55 50 70 75 56 100 100
  - Capital expenditure: 1,272 1,716 2,121 2,111 2,412 2,759 3,079
    - Locally financed: 315 381 436 709 630 966 966
    - From MDRI capital transfer: 0 0 2 2 8 3 9 2 9 2
    - Externally financed 3/: 956 1,336 1,682 1,400 1,699 1,700 2,021
- Current balance: 494 526 1,004 383 1,454 555 1,315
- Overall balance (excluding grants): -650 -813 -1,000 -1,571 -734 -2,020 -1,581
- Financing (net): 650 813 1,000 1,571 734 2,020 1,581
  - Foreign (net): 1,275 1,418 1,768 1,501 1,861 1,895 2,216
  - Domestic (net): -624 -606 -768 70 -1,127 125 -635

Fiscal ratios (percent of GDP)
- Total revenue: 10.3 11.5 11.9 10.9 12.5 11.1 12.1
- Total expenditure: 12.8 14.2 14.7 15.1 14.2 15.3 15.4
- Current expenditure: 7.9 8.5 8.7 9.5 8.6 9.6 9.1
- Capital expenditure: 4.9 5.7 6.1 5.6 5.6 5.7 6.3
- Overall balance (excluding grants): -2.5 -2.7 -2.9 -4.2 -1.7 -4.2 -3.2
- Overall balance (including grants): -0.4 -0.2 -0.7 -1.8 0.7 -1.9 -1.0

Memorandum items:
- Social spending (in percent of GDP): 2.9 2.8 2.4 ... 2.4 ... 2.4
- GDP (in billions of riels): 25,754 29,849 35,039 37,694 42,999 48,446 48,691

### Monetary developments and financial soundness (selected)
Monetary survey highlights (2006–09)
- Net foreign assets (in billions of riels): 7,224 10,735 10,911 11,353 10,809 9,864 9,393 8,942
  - NBC foreign assets: 5,729 8,579 9,706 10,783 11,187 10,385 9,976 9,156
  - Deposit money banks (DMBs) foreign assets: 1,921 3,311 2,597 2,314 2,415 1,989 1,700 1,454
- Net domestic assets: -282 576 1,136 1,345 1,748 2,017 2,473 3,238
- Domestic credit: 2,676 4,570 5,650 6,527 7,128 7,196 7,323 7,738
  - Government (net): -953 -1,816 -2,400 -2,678 -2,653 -2,747 -2,894 -3,500
  - Private sector: 3,628 6,385 8,049 9,205 9,780 9,943 10,216 11,237
- Broad money (in billions of riels): 6,942 11,311 12,047 12,698 12,557 11,881 11,865 12,180
- Foreign currency deposits (in millions of U.S. dollars): 1,279 2,283 2,384 2,461 2,440 2,309 2,254 2,231
  - (In percent of broad money): 74.8 80.8 79.1 79.4 80.0 80.0 77.9 75.1
- Riel component of broad money (in billions of riels): 1,746 2,173 2,515 2,617 2,515 2,379 2,623 3,032
  - (In percent of broad money): 25.2 19.2 20.9 20.6 20.0 20.0 22.1 24.9
- Credit to the private sector (in millions of U.S. dollars): 893 1,595 2,013 2,247 2,376 2,417 2,491 2,741

Financial soundness indicators (2006–08)
- Number of banks: 20 21 24 25 28
  - Commercial banks: 15 16 17 20 22
  - Specialized banks 1/: 5 5 7 5 6
- Capital adequacy (Regulatory capital to risk-weighted assets): 26.5 26.8 23.6 25.6 25.6
- Non-performing loans to regulatory total loans: 9.9 5.9 3.4 2.6 2.7
- Return on assets: 2.8 3.5 2.8 3.4 3.1
- Return on equity: 14.2 19.3 16.6 17.6 15.8
- Liquid assets to total deposits: 56.6 56.9 65.6 55.0 60.9
- Foreign currency deposits to total deposits: 97.2 97.2 97.2 97.8 98.2
- Banks' assets (in percent of GDP): 26.0 31.2 38.4 40.9 43.1

### Medium-term macro framework and projections (2006–14; selected)
Output and prices (percent change, projections)
- GDP in constant prices: 10.8 10.2 6.5 4.8 6.0 6.6 7.1 7.4 7.6
- GDP deflator: 4.6 6.5 15.3 8.0 3.7 4.5 4.6 4.1 4.1
- Consumer prices (end-year): 2.8 10.8 15.5 7.4 4.3 4.3 4.3 4.3 4.3

Saving and investment (percent of GDP, projections)
- Gross national saving: 13.4 12.8 4.7 8.0 9.4 11.1 12.4 13.6 15.4
- Gross fixed investment: 20.6 20.8 21.0 19.0 20.0 20.5 21.0 21.5 22.5
- Private investment: 11.2 12.3 13.5 11.0 12.0 13.1 14.3 15.2 16.5

Public finance (percent of GDP, projections)
- Revenue 1/: 11.5 11.9 12.5 12.1 12.5 12.9 13.4 13.5 13.6
  - Tax revenue: 7.9 9.5 10.1 9.9 10.3 10.7 11.1 11.3 11.3
- Expenditure: 14.2 14.7 14.2 15.4 15.2 15.2 15.2 15.2 15.2
- Overall balance (excluding grants): -2.7 -2.9 -1.7 -3.2 -2.7 -2.3 -1.8 -1.7 -1.6
- Overall balance (including grants): -0.2 -0.7 0.7 -1.0 -0.7 -0.2 0.3 0.4 0.4

Balance of payments projections (percent of GDP)
- Current account balance (including transfers): -0.6 -3.4 -11.9 -7.1 -7.0 -6.1 -5.7 -5.3 -4.7
- Exports (percent change): 27.6 9.5 6.5 -4.0 7.4 9.9 10.4 10.8 10.7
- Imports (percent change): 20.9 14.0 21.8 -11.4 9.7 10.3 10.7 10.5 10.5
- Gross official reserves (in millions of U.S. dollars): 1,097 1,616 2,033 1,933 1,925 1,958 2,074 2,255 2,564
  - (In months of imports): 2.1 2.5 3.5 3.1 2.8 2.5 2.4 2.4 2.5
- External public debt (in millions of U.S. dollars): 2,254 2,582 2,809 3,087 3,379 3,677 3,945 4,211 4,492
  - (In percent of GDP): 31.1 29.7 26.8 26.0 25.9 25.3 24.2 23.2 22.1

### Social and development indicators (selected MDG-related series)
- Population, total (millions): 9.6 11.2 12.7 13.2 13.4 13.6 14.0 14.2 13.4
- Poverty headcount, national (percent of population): ...47............35......19.5
- Net primary enrollment (percent of relevant age group): 67...85 93......91...96 100
- Immunization, measles (percent of children ages 12–23 months): 34 62 65 52 65 80 79 78 78 90
- Fixed line and mobile phone subscribers (per 100 people): 0 2 13 47 81 121 218 ...

### Joint IMF/World Bank Debt Sustainability Analysis (DSA) summary (2008)
- Document: Joint IMF/World Bank Debt Sustainability Analysis 2008 for Cambodia using the Debt Sustainability Framework for Low-Income Countries (LIC).
- Key findings as stated:
  - External debt burden indicators do not breach the relevant policy-dependent indicative thresholds under the baseline scenario.
  - Given recent global developments and Cambodia’s vulnerability to external shocks, there are considerable downside risks to the baseline scenario.
  - An assessment of the impact of various exogenous shocks on the sustainability of external and public sector debt shows Cambodia would face a moderate risk of debt distress.

*Sources: Data provided by the Cambodian authorities; IMF staff estimates and projections; Joint IMF/World Bank Debt Sustainability Analysis 2008.*

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

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

### Key findings and risk assessment
- At end-September 2008, the total value of Cambodia’s external public debt was US$2.8 billion (27 percent of GDP) and domestic debt was US$0.1 billion (¾ percent of GDP), one-third of which was denominated in foreign currency.
- The DSA finds that under the baseline scenario and standard alternative scenarios and stress tests, all debt burden indicators are well below the relevant policy-dependent indicative thresholds with one exception—the net present value (NPV) of debt-to-revenue ratio, which exceeds the threshold over brief periods in the standard tests.
- This represents a modest improvement from the last DSA (IMF’s 2007 Article IV consultation), in which thresholds were breached for two indicators.
- Staffs assess that Cambodia faces a moderate risk of debt distress based on standard alternative scenarios and bound tests, but note substantial downside risks from recent global developments and the possibility of a prolonged economic downturn.
- Additional scenarios indicate that in the event of a prolonged economic downturn, debt burden indicators would breach the indicative thresholds over extended periods.

### Background and baseline assumptions (2008–28)
- Real GDP growth is projected to average slightly under 6 percent a year in 2008–10 compared with an average of 11 percent over the previous five years.
- Growth is expected to rise thereafter to around 7½ percent by 2014.
- Over the longer term, growth is projected to be sustained in the range of 6–7 percent a year.
- FDI: recovery in foreign direct investment (FDI) starting in 2010, following an expected reduction in 2009 by around one-third from the previous year’s level.
- External current account deficit (including official transfers) is projected to decline in 2009 to 8 percent of GDP, compared to 12 percent in 2008.
- Over the medium term, the current account deficit is expected to settle in the range of 5–6 percent of GDP a year.
- Gross official reserves import coverage is projected in the range of 2½–3 months from 2014 onward.
- Fiscal stance: the overall fiscal deficit (excluding grants) expected to rise to around 3¼ percent of GDP in 2009 compared to a projected 1¾ percent in 2008, then decline gradually to under 2 percent by 2012.
- Revenue would rise by about 3/4 percentage point to around 13¼ percent of GDP by 2012.
- Grants projected to decline from around 2¼ percent to 1½ percent of GDP in the outer years.
- Expenditure would stay around 15¼ percent of GDP over the medium term, then rise gradually owing mainly to higher locally-financed capital spending.
- The baseline does not factor development of extractive industries or contingent liabilities from BOT projects; the DSA assumes no restructuring of arrears to the Russian Federation and the United States in baseline, with arrears continuing to build up throughout the projection period.
- The DSA incorporates the negotiated debt stock for the Russian Federation (US$457 million) and the agreed amount of total principal due for the United States (US$162 million).
- For this DSA, staffs continue to apply the standard 70 percent discount to the nominal value of debt owed to the Russian Federation.

### External debt sustainability: indicators, thresholds, and stress tests
- Applicable policy-dependent indicative thresholds for “weak performer” CPIA (3.17 percent average) are:
  - NPV of debt-to-GDP: 30 percent
  - NPV of debt-to-exports: 100 percent
  - NPV of debt-to-revenue: 200 percent
  - Debt service-to-exports: 15 percent
  - Debt service-to-revenue: 25 percent
- DSA summary table (period averages under the baseline scenario):
  - NPV of debt in percent of GDP: 30 (threshold) | 23 (2007) | 16 (2008–28)
  - NPV of debt in percent of Exports: 100 (threshold) | 35 (2007) | 33 (2008–28)
  - NPV of debt in percent of Government revenue: 200 (threshold) | 191 (2007) | 111 (2008–28)
  - Debt service in percent of Exports: 15 (threshold) | 1 (2007) | 1 (2008–28)
  - Debt service in percent of Government revenue: 25 (threshold) | 4 (2007) | 4 (2008–28)
- Under the baseline:
  - The NPV of external debt as a share of GDP is expected to remain below the 30 percent threshold over the period.
  - The NPV of external debt-to-revenue ratio declines from 162 percent in 2008 to 128 percent by 2013, and further decreases over the long term.
  - Debt service stays under 2 percent of exports throughout the projection period.
- Under a one-time 30 percent nominal depreciation of the Cambodian riel vis-à-vis the U.S. dollar relative to the 2008 baseline:
  - The NPV of debt-to-GDP ratio would increase by about 7 percentage points to 27 percent by end-2009, but remain below the indicative threshold over the projection period.
  - The NPV of debt-to-revenue ratio would exceed the 200 percent threshold during 2009–11, then fall below the threshold thereafter.
- Alternative scenarios analyzed by staffs:
  - (i) Lower annual real GDP growth (4½ percent over the medium term) and smaller FDI inflows (the average of 2000–04 level as a share of GDP).
  - (ii) Smaller FDI flows and higher borrowing costs (an average nominal interest rate of 6 percent on new loans).
  - Results: The NPV of external debt as a share of GDP breaches the indicative threshold under both scenarios, and under (ii) remains well above the threshold at the end of the projection period.

### Public debt sustainability
- Most public debt is external; public and external debt dynamics are very similar.
- Nominal stock of public debt: 30½ percent of GDP at end-2007; expected to decline to 27½ percent by end-2008.
- NPV of public sector debt-to-GDP ratio: 21 percent in 2008, falling to 12 percent by 2028.
- NPV of public debt-to-revenue ratio: projected 142 percent in 2008, declining to 70 percent by 2028.
- Debt-service-to-revenue ratio remains low in most scenarios because of concessionality of existing debts.
- A one-time 30 percent riel depreciation relative to the 2008 baseline would raise the NPV of public debt-to-GDP and the public debt-to-revenue ratios by around 8 and 51 percentage points, respectively, by end-2009, before eventual decline over the projection period.
- The DSA does not account for possible contingent liabilities, notably from large infrastructure investment and BOT contracts.

### Policy recommendations and monitoring priorities
- Maintain sound macroeconomic and financial policies and structural reforms to support growth, poverty reduction, and low external vulnerability.
- Improve transparency and monitoring of potential contingent liabilities, including:
  - Develop and maintain an inventory of all concessions granted, in particular for infrastructure.
  - Examine BOT contracts for possible guarantees offered and build capacity to analyze the impact of contingent liabilities on debt sustainability.
- Monitor FDI and other private inflows and the cost/terms of new borrowing, given scenarios where smaller FDI and higher borrowing costs materially worsen debt sustainability.
- Prepare contingency plans for downside risks associated with a prolonged global downturn and weaker external demand.

### Conclusion
- Staffs conclude Cambodia faces a moderate risk of debt distress.
- No thresholds are breached under the baseline scenario and standard stress tests and alternative scenarios, except one bound test.
- The benign outlook depends on a pickup in economic activity from 2010 onward; additional scenarios reflecting a prolonged downturn indicate external debt could exceed indicative thresholds for extended periods.
- Actual liabilities arising from contingent obligations, mainly for infrastructure development, could further weaken the outlook and underscore the rationale for the risk designation.

*Source: IMF/World Bank joint Debt Sustainability Analysis for Cambodia (text as provided).*

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

### _cr0947 - 10.      Given uncertainty about near-to medium-term prospects, staffs urge the Royal

### Debt-management recommendations and policy advice
- Staffs urge the Royal Government of Cambodia to continue pursuing a sound strategy for public debt management.
- Careful consideration is needed in possibly contracting less concessional loans, as they could impair sustainability, in particular if the revenue base remains low and institutions weak.
- Stronger capacity in debt management is an essential pre-requisite for borrowing on less concessional terms.
- A full accounting of all commitments, including from newly emerging creditors, and better monitoring of contingent liabilities will be necessary to ensure debt sustainability.
- Staffs encourage the authorities to continue seeking agreements to resolve outstanding arrears.

### Stress tests and scenario findings (figures summary)
- Figure 1–3 present indicators of Public and Publicly Guaranteed (PPG) External Debt under baseline and alternative scenarios, 2008–28, showing results for:
  - a. Debt accumulation (grant-equivalent financing % of GDP; grant element of new disbursement (percent))
  - 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-exports ratio
  - f. Debt service-to-revenue ratio
- The most extreme stress test is defined as the test that yields the highest ratio in 2018. Specific extreme shocks noted:
  - one-time depreciation shock (figure b, d, f)
  - terms shock (figure c, e)
- Alternative scenarios highlighted include:
  - Lower GDP growth and lower FDI
  - Combined scenario of lower FDI and higher interest rates

### Key projections and indicators (selected exact figures)
- PV of external debt (Table 1a, selected years): 30.1; 27.5; 22.7; 20.2; 19.7; 19.5; 19.0; 18.2; 17.4; 15.2; 12.2
- PV of PPG external debt (in percent of exports, selected years): 47.0; 40.0; 35.0; 35.5; 40.8; 41.0; 39.7; 38.1; 36.0; 32.1; 25.6
- PPG debt service-to-revenue ratio (in percent, selected years): 5.3; 5.3; 4.9; 4.0; 4.4; 4.6; 4.5; 4.2; 4.4; 4.2; 4.3
- Grant element of new public sector borrowing (in percent, selected projection years): 35.6; 37.9; 37.5; 38.1; 39.8; 40.5; 38.2; 36.8; 33.3; 35.7
- Government revenues (excluding grants, in percent of GDP, selected years): 10.3; 11.5; 11.9; 12.5; 12.1; 12.5; 12.9; 13.4; 13.5; 14.3; 16.0; 14.9
- Grant-equivalent financing (in percent of GDP, selected years): 3.1; 3.1; 2.9; 2.9; 2.8; 2.7; 2.5; 1.9; 2.3
- Nominal GDP (billions of U.S. dollars, selected years): 6.3; 7.3; 8.7; 10.6; 11.9; 13.1; 14.5; 16.3; 18.2; 30.4; 76.5
- PV of PPG external debt (in billions of U.S. dollars, selected years): 2.0; 2.1; 2.3; 2.5; 2.8; 3.0; 3.2; 4.5; 9.2

### Public sector debt trajectory and fiscal balances (selected exact figures)
- Public sector debt (percent of GDP, selected years): 37.2; 32.8; 30.6; 27.5; 26.7; 26.6; 25.9; 24.8; 23.7; 19.8; 15.9
- Change in public sector debt (selected years): -5.5; -4.4; -2.2; -3.1; -0.8; -0.1; -0.7; -1.1; -1.1; -0.5; -0.5
- Identified debt-creating flows (selected years): -6.0; -6.3; -4.5; -5.5; -2.1; -1.6; -2.4; -3.0; -2.8; -1.8; -2.0
- Primary deficit (selected years): 0.2; 0.0; 0.5; 1.9; 1.5; -0.8; 0.8; 0.5; 0.1; -0.5; -0.6
- Automatic debt dynamics (selected years): -6.1; -5.2; -4.9; -4.7; -2.9; -2.1; -2.4; -2.5; -2.2; -1.6; -1.2
- PV of public sector debt (selected years): 27.0; 24.8; 23.7; 21.2; 20.5; 20.3; 19.6; 18.8; 17.9; 15.0; 12.2
- PV of public sector debt-to-revenue and grants ratio (in percent, selected years): 217.0; 176.6; 168.5; 142.2; 142.6; 139.7; 131.1; 121.3; 115.0; 93.1; 69.8
- Debt service-to-revenue ratio (in percent, selected years): 4.2; 3.7; 4.1; 2.0; 3.4; 3.5; 3.5; 3.3; 3.5; 3.7; 4.1

### Key macroeconomic assumptions (selected exact figures)
- Real GDP growth (in percent, selected series): 13.3; 10.8; 10.2; 9.6; 2.0; 6.5; 4.8; 6.0; 6.6; 7.1; 7.4; 6.4; 6.7; 6.5; 6.7
- GDP deflator in US dollar terms (change in percent, selected years): 4.1; 4.3; 8.6; 3.2; 2.9; 14.7; 6.7; 3.7; 4.5; 4.6; 4.0; 6.4; 3.0; 3.1; 3.1
- Effective interest rate (percent, selected series): 1.0; 1.2; 1.1; 1.1; 0.1; 1.5; 1.4; 1.4; 1.4; 1.4; 1.4; 1.4; 1.4; 1.7; 1.5
- Growth of exports of G&S (US dollar terms, in percent, selected years): 18.7; 23.9; 12.9; 17.6; 6.5; 7.2; -5.2; 8.6; 11.8; 11.9; 12.6; 7.8; 10.0; 9.6; 10.0
- Growth of imports of G&S (US dollar terms, in percent, selected years): 20.0; 21.3; 14.8; 15.9; 5.3; 22.0; -9.4; 8.8; 9.7; 10.6; 11.4; 8.8; 9.7; 9.4; 9.7

### Sensitivity analysis highlights (Table 1b / Table 2b)
- Alternative and bound-test scenarios include:
  - A1. Key variables at their historical averages in 2008–28
  - A2. New Public Sector loans on less favorable terms in 2008–28 (interest rate on new borrowing 2 percentage points higher than baseline)
  - B1–B6 bound tests including one-time 30 percent nominal depreciation in 2009 and combinations of shocks
- Selected outcomes (PV of debt-to-GDP ratio, PV of debt-to-exports ratio, PV of debt-to-revenue ratio) are reported across scenarios for 2008–28 (tables present year-by-year percent outcomes under baseline and stress scenarios).

*Source: Staffs' projections and simulations as presented in the informational annex tables and figures.*

### ANNEX I. CAMBODIA: FUND RELATIONS

### ANNEX I. CAMBODIA: FUND RELATIONS

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

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

### III. SDR Department
- SDR Million  Percent Allocation
- Net cumulative allocation: 15.42    100.00
- Holdings: 0.07    0.47

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

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

### VI. Projected Obligations to Fund
(SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming Principal by year:
  - 2008 Principal: 0.00
  - 2009 Principal: 0.00
  - 2010 Principal: 0.00
  - 2011 Principal: 0.00
  - 2012 Principal: 0.00
- Charges/Interest by year:
  - 2008 Charges/Interest: 0.00
  - 2009 Charges/Interest: 0.16
  - 2010 Charges/Interest: 0.16
  - 2011 Charges/Interest: 0.16
  - 2012 Charges/Interest: 0.16
- Total by year:
  - 2008 Total: 0.00
  - 2009 Total: 0.16
  - 2010 Total: 0.16
  - 2011 Total: 0.16
  - 2012 Total: 0.16

### VII. Multilateral Debt Relief Initiative
- As part of the Multilateral Debt Relief Initiative (MDRI), the IMF Executive Board on January 5, 2006 approved relief on 100 percent of debt incurred by Cambodia to the IMF before January 1, 2006.

*ANNEX I. CAMBODIA: FUND RELATIONS (As of November 30, 2008).*

### 2005. This resulted in the forgiving of all of Cambodia’s outstanding debt to the IMF, a total of

### _cr0947 - 2005. This resulted in the forgiving of all of Cambodia’s outstanding debt to the IMF, a total of

### Debt relief and MDRI proceeds
- The forgiving of all of Cambodia’s outstanding debt to the IMF amounted to SDR 56.8 million (about US$82 million).
- The authorities intend to spend the resources over a number of years, initially on rural irrigation projects.
- The National Bank of Cambodia (NBC) transferred the full MDRI proceeds to the Ministry of Economy and Finance effective March 2006.

### Safeguards assessment (NBC)
- Under the IMF’s safeguard assessment policy, the NBC was subject to a full safeguard assessment with respect to a possible successor PRGF Arrangement.
- A previous safeguards assessment of the NBC was completed on March 24, 2004; it identified certain weaknesses, mostly in the area of internal audit and control, and made appropriate recommendations.

### Exchange rate arrangement and payments system
- Cambodia officially follows a managed float with no pre-announced exchange rate path.
- The official exchange rate is expressed in riels per U.S. dollar and applies to all official external transactions conducted by the central government and state enterprises and is used for accounting purposes by the NBC.
- The official rate is determined by the foreign exchange market, with the official rate adjusted to be within 1 percent of the market rate on a daily basis.
- Cambodia accepted the obligations of Article VIII, Sections 2, 3, and 4 on January 1, 2002, and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

### Article IV consultation
- Cambodia is subject to the provisions on consultation cycles approved on July 15, 2002.
- The last Article IV consultation discussions were held in Phnom Penh during May 21–June 5, 2007.
- The Executive Board discussed the staff report (Country Report No. 07/290) and concluded the consultation on July 25, 2007.

### Technical assistance
- Technical assistance is currently focused on bank supervision, monetary operations, public financial management, customs administration, and macro-financial statistics.
- Delivery modalities: a resident advisor at the NBC, peripatetic experts, and short-term visits from headquarters.

### Resident representative
- The resident representative office was closed in October 1997 and re-opened in October 1999.
- Mr. John Nelmes, the current Resident Representative, assumed the post in November 2005.

### World Bank Group relations — Overview (as of November 2008)
- The World Bank Group’s 2005–08 Country Assistance Strategy (CAS) stresses the need to improve governance to maximize development impact.
- The CAS activities contribute to six objectives clustered under two overarching pillars.
- In May 2008, the CAS period was extended until 2011 to align support around the National Strategic Development Plan (NSDP); the approach and objectives of the original CAS will be maintained.

### World Bank Pillar 1: Removing governance constraints to attain the CMDGs
- Pillar 1 objectives: (i) promote private sector development for poverty reduction; (ii) improve natural resources management; (iii) improve service delivery and public financial management; and (iv) support decentralization and promote citizens’ partnerships for better governance.

Findings and progress:
- Private Sector Development (PSD)
  - Progress mixed; customs automation (ASYCUDA) piloted in Sihanoukville in May 2008 with nationwide roll-out scheduled in 2009.
  - Law on Customs passed in 2007; Law on Commercial Arbitration (March 2006) and Law on Concessions (September 2007) passed but implementation has lagged.
  - World Bank role: support through PRGO (approved July 2007), Trade Facilitation and Competitiveness Project (2005), IFC MPDF activities, Investment Climate Assessment (ICA).
- Natural Resources Management (NRM)
  - Satisfactory progress with sub-decrees on State Land Management and Economic Land Concessions (ELCs); more than 800,000 titles distributed.
  - Concerns: transparency in issuance of ELCs, slow implementation of laws on access and title, forestry governance weaknesses.
  - World Bank role: natural resources management framework, Land Management and Administration Project (LMAP), Biodiversity and Protected Areas Management Project, Japan Social Development Fund Grant, Land Allocation for Social and Economic Development project (2008).
- Public Financial Management (PFM)
  - Progress satisfactory: improvements in budget formulation, classification, cash and bank account management, financial control, transaction management.
  - Indicators: aggregate actual expenditures within 5 percent of the budget; revenues continuing to grow; arrears largely eliminated.
  - Merit-based pay initiative (MBPI) implemented in the Ministry of Economy and Finance and being extended to development partner–financed strategic reforms.
  - World Bank role: coordination of 13 development partners in the TWG on PFM, support via PRGO and PFM Accountability Project, grants supporting National Assembly oversight, AAA on PETS in education and health.
- Decentralization and Accountability
  - Considerable progress: average funds to commune/sangkats projected to double by 2010; second round of commune/sangkat council elections in 2007.
  - Organic Laws on Decentralization and Deconcentration adopted in April 2008.
  - Remaining issues: delayed access to information law and slow civil society engagement.
  - World Bank role: Rural Investment and Local Governance Project, studies on justice for the poor, support to TWG on decentralization, grant finance for government–civil society consultations and social accountability capacity building.

### World Bank Pillar 2: Supporting strategy and investments to attain the CMDGs
- Pillar 2 objectives: support NSDP 2006–10 formulation and encourage poverty-focused approaches; support investments where gaps in infrastructure and human development exist.

Findings and progress:
- Formulation and Implementation of the NSDP, 2006–10
  - RGC adopted the NSDP in 2006; TWG for Planning and Poverty Reduction established for dialogue and coordination.
  - Ministry of Planning developed a strategic plan with TWG support to coordinate NSDP implementation, monitoring, and evaluation.
  - Women’s representation in commune councils increased from 8 percent to 15 percent after the 2007 elections.
  - World Bank role: technical and financial support to MoP, co-facilitator of the TWG with UNDP, support via Poverty Assessment (2006) and Sharing Growth: Equity and Development Report (2007), Gender Budgeting Project funded by IDF grant.
- Human development and infrastructure
  - Progress impressive: improvements in infant mortality rate, fertility rate, HIV prevalence rates, and school enrollment rates; expanded access and utilization of health, education, and infrastructure services; better targeting of subsidies.
  - Lagging indicators: maternal mortality and drop-out rates.
  - World Bank role: Health Sector Support and Education Sector Support Projects, participation in TWGs, support for sector-wide approach in health (2008), Education For All Fast Track Initiative Catalytic Fund approval (2008), PETS in health and education.

### World Bank lending operations and fiduciary issues
- Institutional Integrity Department (INT) investigations in 2005–06 substantiated allegations of corruption, collusion, and fraudulent practices under seven projects; “misprocurement” declared in June 2006.
- Bank temporarily suspended disbursements under three projects (LMAP, PRIP, PPUWSP); action plans completed in January 2007 and suspensions lifted in February 2007.
- Preventive and oversight measures: anti-corruption action plans known as Good Governance Frameworks (GGFs) adopted for all ongoing and future Bank-financed projects; International Procurement Agent (IPA) used since December 2007 for all ongoing and future Bank-financed projects.
- Disbursement ratio in FY08: 16.1 percent, low mainly due to after-effects of project suspensions and delay in engagement of the IPA.

### Active IDA projects (selected exact figures, as of November 24, 2008)
- Road Asset Management Project: Committed 30,000,000.00; Approval Date 20-May-08; Undisbursed Balance 26,937,600.00
- Cambodia Second Health Sector Support Program: Committed 30,000,000.00; Approval Date 19-Jun-08; Undisbursed Balance 27,232,000.00
- Land Allocation for Social and Economic Development: Committed 11,500,000.00; Approval Date 20-May-08; Undisbursed Balance 9,373,860.00
- Avian and Human Influenza Control and Preparedness Emergency Project: Committed 6,000,000.00; Approval Date 24-Mar-08; Undisbursed Balance 5,072,174.18
- GMS Power Trade (Cambodia) Project: Committed 18,500,000.00; Approval Date 05-Jun-07; Undisbursed Balance 18,105,600.00
- First Poverty Reduction and Growth Operation: Committed 15,000,000.00; Approval Date 17-Jul-07; Undisbursed Balance 0.00
- Cambodia Public Financial Management and Accountability: Committed 14,000,000.00; Approval Date 27-Jun-06; Undisbursed Balance 12,879,938.18
- Cambodia Trade Facilitation and Competitiveness: Committed 10,000,000.00; Approval Date 02-Jun-05; Undisbursed Balance 6,601,368.32
- Cambodia Education Sector Support: Committed 28,000,000.00; Approval Date 12-May-05; Undisbursed Balance 11,429,930.35
- Rural Electrification and Transmission Project: Committed 40,000,000.00; Approval Date 16-Dec-03; Undisbursed Balance 30,872,894.14
- Provincial and Rural Infrastructure Project: Committed 20,000,000.00; Approval Date 11-Sep-03; Undisbursed Balance 6,379,572.93
- Provincial and Peri-Urban Water and Sanitation Project: Committed 19,900,000.00; Approval Date 22-Apr-03; Undisbursed Balance 8,455,017.85
- Rural Investment And Local Governance Project: Committed 36,250,000.00; Approval Date 26-Jul-07; Undisbursed Balance 28,362,619.71
- Rural Investment And Local Governance Project (earlier): Committed 22,000,000.00; Approval Date 22-Apr-03; Undisbursed Balance 360,093.53
- Health Sector Support Project: Committed 27,000,000.00; Approval Date 19-Dec-02; Undisbursed Balance 9,455,659.11
- Economic and Public Sector Capacity Building Project: Committed 5,500,000.00; Approval Date 25-Jun-02; Undisbursed Balance 4,828,908.20
- Land Management and Administration Project: Committed 24,300,000.00; Approval Date 26-Feb-02; Undisbursed Balance 11,080,079.50

### World Bank non-lending services (selected items)
- Environment: Cambodia Environment Monitor (2008), Natural Resource Management and Forestry (2008).
- Gender: Cambodia Gender Assessment (2008).
- Human Development: Demand Side Incentives in Education Impact Evaluation (ongoing), Civil Service Reform for Teachers (ongoing), Social Protection Policy Note (2006), Safeguards Research (2006), Child Labor Study (2006), Health Sector Study, Education Fast Track Initiative (2008).
- Infrastructure: Urban Water and Sanitation Strategy (2006); Oil and Gas Sector Policy (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).

### Asian Development Bank (AsDB) relations (as of September 2008)
- From 1992 through August 31, 2008, AsDB approved $1,032.1 million in low-interest loans (including $86.8 million in grants in 2005, 2006, and 2007) to Cambodia to finance 39 projects and 9 structural reform programs.
- To date, 23 loan projects for a total of $563.9 million have been completed (list of projects and approval years provided in source).
- Remaining active portfolio sector composition and amounts as of August 31, 2008:
  - agriculture and natural resources ($73.6 million);
  - education ($70.1 million);
  - energy ($64.3 million);
  - finance ($0.0 million);
  - health, nutrition, and social protection ($29.0 million);
  - industry and trade ($35.6 million);
  - law, economic management, and public policy ($7.8 million);
  - multi-sector ($63.2 million);
  - transport and communication ($105.0 million);
  - water supply, sanitation, and waste management ($18.0 million).
- AsDB cumulative totals and annual series (1992–2008) reported: TOTAL: 1,210.9 (Loan/Grant Approvals), 849.7 (Contract Awards/Commitment), 778.5 (Disbursements).
- Notes on approvals and projections:
  - 2005: $10 million loans and $42 million grants approved in 2005.
  - 2006: $62 million loans and $7.8 million grants approved in 2006.
  - 2007: $35 million loans (including $8 million to private sector) and $37 million grants approved in 2007.
  - 2008: $46.8 million loans and $31.6 million grants to be approved by end-2008. Projections for 2008 noted.
  - 2009 (Projected): 114.0 (Loan/Grant Approvals) with $63 million loans and $51 million grants expected for approval in 2009.

*Source: IMF country report content and annexes as provided in the supplied document.*

### 1.      Data provision is broadly adequate for surveillance. However, national accounts,

### _cr0947 - 1.      Data provision is broadly adequate for surveillance. However, national accounts,

### Data provision and statistical capacity
- Data provision is described as "broadly adequate for surveillance," but national accounts, price indices, government finance, balance of payments statistics, and external debt have shortcomings that hamper analysis.
- Greater use of direct surveys is needed in the compilation of national accounts, BOP, and employment data, including enterprise surveys.
- Extensive technical assistance from the IMF, UNDP, Asian Development Bank, World Bank, and bilateral partners (Japan and Sweden) contributed to substantial improvements.
- The IMF provided a long-term multisector statistics advisor at the National Institute of Statistics during October 2001–January 2008 (with a one-year interruption).
- Metadata have been posted on the IMF’s Dissemination Standards Bulletin Board since March 2002; Cambodia began participation in the GDDS. GDDS metadata were last updated in August 2007.

### National accounts and price statistics
- Recent efforts to improve consistency with the United Nations’ System of National Accounts 1993, expand annual national account aggregates, and produce a quarterly national accounts series (starting in June 2005).
- Quality of GDP estimates remains hampered by lack of comprehensive and reliable source data on a production and expenditure basis and the need to improve data collection techniques.
- A new CPI series was compiled starting in October 2006; data were published through January 2008, then halted as authorities attributed a much higher level of inflation from the new CPI to methodological weaknesses.
- Authorities reverted to the old CPI series (narrower geographical coverage: limited to Phnom Penh and surrounding areas versus the new series’ all-Cambodia index) and are seeking assistance from Statistics Sweden on a nationwide CPI.
- A quarterly producer price index (PPI) was developed with IMF support and AsDB financing; an experimental PPI was released in April 2005. PPI compilation has been discontinued owing to resource constraints.

### Government finance statistics (GFS)
- Progress made recently in strengthening reporting and compilation of GFS, but gaps remain in coverage under new methodologies.
- In 2007 authorities began implementing a reform of the government accounting system and budgetary nomenclature based on the Government Finance Statistics Manual (GSFM) 2001, supported by an IMF Treasury advisor and the statistical advisor.
- Several recent STA missions assisted with GFS compilation procedures within the GSFM 2001 framework; latest was in April 2008, which assisted in establishing a bridge between the government’s new chart of accounts (COA) and GSFM 2001 classifications.
- The new COA has not been implemented widely, limiting its use and coverage.
- Since 2005, authorities have provided quarterly fiscal data for International Finance Statistics and annual data for the Government Finance Statistics Yearbook.

### Monetary and financial statistics
- The National Bank of Cambodia (NBC) compiles sectoral balance sheet and the survey for central bank and other depository institutions in accordance with the IMF’s Monetary and Financial Statistics Manual.
- Since August 2005, NBC has reported monthly monetary and financial statistics to the IMF using standardized report forms with about five-week lag.
- NBC began compiling and publishing financial soundness indicators in 2005 in its annual supervisory report; these data may partly rely on unaudited financial accounts, so accuracy and reliability can be improved.

### External sector statistics
- Balance of payments statistics have improved but require more work.
- Customs data have substantial coverage and valuation problems due to use of reference prices, limited recording of non-dutiable 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, believed to be large, relies excessively on approvals data.
- Gross external debt data are provided by the Ministry of Economy and Finance, but gaps exist: public and publicly-guaranteed debt by maturity, external debt service schedule, and timely information on disbursements by bilateral donors.

### Article IV consultation — key findings and projections (selected)
- Real GDP growth: 2007 = 10¼ percent; 2008 projected = 6½ percent; 2009 projected = 4¾ percent.
- Headline inflation projections: December 2008 = 15½ percent (y/y); end-2009 = 7½ percent (y/y).
- Gross official reserves projected at US$2.0 billion (3.5 months of prospective imports) and to fall to around US$1.9 billion (3.1 months of imports) by end-2009.
- Overall fiscal deficit expected around 1¾ percent of GDP in 2008; official target for 2009 budget deficit = 4¼ percent of GDP.
- Reserve requirement on foreign currency deposits doubled to 16 percent in June (2008).
- Credit growth: exceeded 100 percent (y/y) in mid-2008; expected to fall to around 60 percent by year-end 2008; likely to be significantly lower in 2009.
- NBC lacks an operational monetary framework; gradual steps are being taken to address this weakness.
- New minimum bank capital requirements approved for 2010.
- Balance of risks: to the downside due to uncertainty about the global recession and declining private inflows; recent loss in competitiveness from high domestic inflation and U.S. dollar strength leading to sharp real appreciation.

### Executive Board assessment — policy recommendations and assessments
- Commended authorities for sound macroeconomic policies and strong budget performance amid a difficult external environment.
- Recommended timely and decisive policy response combining supportive fiscal and monetary policies, improvements in financial sector oversight, public services delivery, and external competitiveness.
- Fiscal policy: modest easing for 2009 considered broadly appropriate; increase in government spending should be focused on pro-poor social and infrastructure outlays; continue strengthening revenue administration and broaden tax base as conditions permit; control wage bill via comprehensive civil service reform; strengthen public financial management, Treasury operations, budget coordination and integration, and establish a transparent fiscal regime for extractive industries.
- Monetary policy: supported current stance; room for moderate easing as credit growth drops and aggregate demand eases; increase policy effectiveness in high-dollarization context; build a more developed monetary framework; adopt a clear strategy to manage liquidity risk; develop a sound, transparent overdraft facility with caution on eligible collateral; continue to improve required reserve system.
- Financial sector: comprehensive measures to improve banking soundness — supervision, enforcement of regulations, bank licensing procedures; commended NBC steps to strengthen prudential framework and capital requirements; formulate banking resolution plans to contain fiscal risk; welcomed intent to participate in the FSAP in early 2010.
- Exchange rate/external competitiveness: staff assessment that the real effective exchange rate appears overvalued; current exchange rate regime continues to provide an appropriate nominal anchor given high dollarization and stage of financial development; medium-term objective is greater exchange rate flexibility; safeguard competitiveness by maintaining stable macroeconomic environment and improving workforce skills, public services, infrastructure, and business regulations.
- Debt management: encourage continued prudent debt management given moderate risk of external debt distress; continue to borrow largely on concessional terms; continue efforts to resolve outstanding arrears with official creditors to pave way for potential PRGF-supported arrangement.

### Selected economic indicators (2005–09, as reported)
- GDP at constant prices: 2005 = 13.3; 2006 = 10.8; 2007 = 10.2; 2008 Est. = 6.5; 2009 Proj. = 4.8 (annual percent change).
- Inflation (CPI, end-year): 2005 = 6.7; 2006 = 2.8; 2007 = 10.8; 2008 = 15.5; 2009 = 7.4.
- Inflation (annual average): 2005 = 5.8; 2006 = 4.7; 2007 = 5.9; 2008 = 20.0; 2009 = 8.2.
- Gross national saving (percent of GDP): 2005 = 14.6; 2006 = 19.9; 2007 = 17.4; 2008 = 9.1; 2009 = 11.9.
- Gross fixed investment (percent of GDP): 2005 = 18.5; 2006 = 20.6; 2007 = 20.8; 2008 = 21.0; 2009 = 19.0.
- Government investment (percent of GDP): 2005 = 4.9; 2006 = 5.7; 2007 = 6.1; 2008 = 5.6; 2009 = 6.3.
- Public finances (percent of GDP): Revenue 2005 = 10.3; 2006 = 11.5; 2007 = 11.9; 2008 = 12.5; 2009 = 12.1. Expenditure 2005 = 12.8; 2006 = 14.2; 2007 = 14.7; 2008 = 14.2; 2009 = 15.4.
- Overall budget balance (- deficit) 2005 = -2.5; 2006 = -2.7; 2007 = -2.9; 2008 = -1.7; 2009 = -3.2.
- Foreign financing (net) 2005 = 4.9; 2006 = 4.8; 2007 = 5.0; 2008 = 4.3; 2009 = 4.6.
- Domestic financing (net) 2005 = -2.4; 2006 = -2.0; 2007 = -2.2; 2008 = -2.6; 2009 = -1.3.
- Broad money growth: 2005 = 16.1; 2006 = 38.2; 2007 = 62.9; 2008 = 4.9; 2009 = 2.6.
- Private sector credit growth: 2005 = 31.8; 2006 = 51.6; 2007 = 76.0; 2008 = 60.0; 2009 = 10.0.
- Exports (US$ millions): 2005 = 2,910; 2006 = 3,694; 2007 = 4,089; 2008 = 4,363; 2009 = 4,197.
- Imports (US$ millions): 2005 = 3,904; 2006 = 4,727; 2007 = 5,419; 2008 = 6,523; 2009 = 5,798.
- Current account balance (percent of GDP, - deficit): 2005 = -3.8; 2006 = -0.6; 2007 = -3.4; 2008 = -11.9; 2009 = -7.1.
- Gross official reserves (US$ millions): 2005 = 915; 2006 = 1,097; 2007 = 1,616; 2008 = 2,033; 2009 = 1,933.
- Reserves (months of prospective imports): 2005 = 2.0; 2006 = 2.1; 2007 = 2.5; 2008 = 3.5; 2009 = 3.1.
- Public external debt (US$ millions): 2005 = 2,120; 2006 = 2,254; 2007 = 2,582; 2008 = 2,809; 2009 = 3,087.
- Public external debt (percent of GDP): 2005 = 35.0; 2006 = 31.0; 2007 = 29.7; 2008 = 26.8; 2009 = 26.0.
- Nominal GDP (in billions of riels): 2005 = 25,754; 2006 = 29,849; 2007 = 35,039; 2008 = 42,999; 2009 = 48,691.
- Nominal GDP (in millions of U.S. dollars): 2005 = 6,286; 2006 = 7,264; 2007 = 8,690.
- Exchange rate (riels per dollar, end of period): 2005 = 4,097; 2006 = 4,109; 2007 = 4,032.

*Source: IMF staff report and Public Information Notice for the 2008 Article IV consultation with Cambodia (as of December 19, 2008).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr0947.pdf_